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    "title": "Volume 429, August 6 – August 7, 1941",
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    "ocrText": "DIARY\nBook 429\nAugust 6 and 7, 1941\nRegraded Unclassified\n- D -\nBook Page\nDefense Savinge Bonds\nSee Financing, Government\n- 1- E -\nEgger, Rowland (Budget Director, Virginia)\n\"Financial Planning for the Future\" - copy of\naddress sent to HMJr by Gulick (Luther) -\n8/6/41\n429 172\n- / -\nFinancing, Government\nDefense Savings Bonds:\nComparative statement: June, July, and\nAugust, 1-5 - 8/6/41\n169\n- H - -\nHochschild, Harold (President, American Metals Company)\nPossible service 88 dollar-a-year man in England\ndiscussed in HMJr's letter to Harriman (Averill) -\n8/6/41\n161\n- T -\nThailand\nSee War Conditions\n- U - -\nUnited Kingdom\nSee War Conditions: Military Planning\n- V -\nVirginia\nBeger, Rowland (Budget Director, Virginia):\n\"Financial Planning for the Future\" - copy of\naddress sent to HMJr by Gulick (Luther) -\n8/6/41\n172\nRegraded Unclassified\n- W -\nBook Page\nWar Conditions\nAirplanee:\nForecasts on production - April 20, 1940, through\nAugust 6, 1941\n429\n376\na) Knudsen asked about estimates and actual\nproduction, which is far below - 8/8/41:\nSee Book 430, page 103\n1) Reply: Book 431, page 272\nb) Knox discusses present production -\n8/11/41: Book 431, page 270\nShipments to British by air and sea - Kamarck\nreport - 8/7/41\n396\nExchange market resume' - 8/6-7/41\n202,412\nMilitary Planning:\nWar Department bulletin: German mountain troops\nattack Metaras Line - 8/6/41\n203\nReport from London transmitted by Halifax -\n8/7/41\n413\nThailand:\nFreezing of funds: Discussion of - 8/7/41\n278,279\nRegraded Unclassified\n1\nAugust 6, 1941\n9:00 a.m.\nRE TAX STATEMENT\nPresent:\nMr. Kuhn\nMr. Gaston\nMr. Sullivan\nMr. White\nMr. Eccles\nMr. Foley\nMr. Blough\nMr. Magill\nMr. Currie\nMiss Michener\nII.M.Jr:\nDo you want to start reading, Roy?\nBlough:\nAll right. This is a draft of mine, or revi-\nsions, principally, in organization.\nH.M.Jr:\nDo you want to read a page and then stop?\nBlough:\n\"Mr. Chairman and members of the Committee:\nI am here today to discuss the pending tax bill\nH. R. 5417. This bill was designed by the House\nCommittee on Ways and Means to produce $3,500,000,000\nannually in additional revenue for the defense\nof our country. An amendment adopted in the\nHouse has reduced that amount by $300,000,000.\n\"When, on April 24, I made my statement before\nthe House Ways and Means Committee on this Bill\nthe defense program was about $39 billion includ-\nin the lend-lease appropriation. Since that time\nthere have been further authorizations and\nappropriations 30 that the total program at the\npresent time has risen to\nbillion\ndollars. Of course, not all of this amount is\ngoing to be spent during the present fiscal year,\nRegraded Unclassified\n03\n- 2 -\nbut as these appropriations are spent the fiscal\nproblems of the Government and the economic effects\nof the defense program will both increase.\nWe will met from Mr. Bell the figures on --\nH.M.Jr:\nwhere is Mr. Bell?\nBlourh:\nI don't know whether he knew about the meeting\nor not. That is a -ood place to break here.\nH.M.J.:\nAnybody want to say anything?\nWhite:\nWell, I don't know whether you want any ques-\ntions brought un now. If this is the last time\nover it, I would think that last sentence in\nthe second paragraph is unnecessary, and there\nis a hiatus between the second paravraph and the\nthird paragraph that I think needs an introductory\nsentence, but I take it there will be an oppor-\ntunity to smooth that off.\nM.M.Jr:\nYes, there will be.\nBlough:\n\"Our reat problem in providing for the defense\nof the nation is fundamentally the problem of\nproduction; of actually building planes and tanks,\nships and runs with the labor, management, machin-\nery and raw materials which we have in our\ncountry.\"\n(Mr. Bell entered the conference).\nS.H.Jr:\nWait B minute, for Professor Bell. We have just\ncovered one pare. I don't know where we stopped.\nBlough:\nIt is at the ton of gage two, the first sentence.\n\"Althourh We can and should\" --\nWait a minute. Let's *ive Bell e chance to read\npage one.\nRegraded Unclassified\n3\n- 3 -\nBell:\nIt hasn't been changed much since yesterday,\nhas it?\nBlough:\nPage one has been changed very little.\nBell:\nO.K., that is all right.\nBlough:\n\"Although we can and should simultaneously\nincrease the production of civilian goods that\ndo not compete with the defense program, we shall\nfind that as we increase defense production it\nwill be necessary to divert to defense uses more\nand more of the resources now engaged in satisfy-\ning our civilian needs and wants. The pinch of\nscarce resources and plants is already being\nfelt and may be expected to become more agrravated.\"\nH.M.Jr:\nJust a moment. Yes. Is that perfectly clear?\nKuhnz\nIn & pinch become ag ravated - wouldn't it be\nbetter to say the pinch is already being felt\nand may be expected to TOW worse or become\ntighter?\nCurrie:\nI was just trying to picture 8. pinch becoming\naggravated.\nH.M.Jr:\nAll right. Go ahead, Roy.\nBlough:\n\"At the same time that this diversion of produc-\ntion is taking place, the emount of purchasing\npower in the hands of the people of the country\nwill continue to increase due to the large\namounts being spent by the Government and to\nresultant fuller employment. The result of the\npressure of this increased purchasing power on\nthe limited amounts of goods and services for which\nit may be spent threaten, in the absence of vigor-\nous action, to sweep us into a spiral of rising\nprices.\"\nRegraded Unclassified\n- 1 -\nWhite:\nIt is the large amount of borrowed funds spent\nby the Government, I take it, that you want to\nstress.\nBlough:\nWell, later on the stress is placed on the\ndeficit financing. Perhaps it should be here.\nGaston:\nThe word is \"threatens\", not \"threaten\". You\nare talking about the result threaten.\nMough:\nYes, correct.\nWhite:\nAnd it isn't - all right.\nInston:\nAnd aren't you really attempting to say that the\npressure threatens to sweep us?\nMagill:\nYes, you don't ant that \"result of\".\nGaston:\nYou don't want \"the result of\".\nMarill:\nWhy don't you take out \"the result of\"?\nBlough:\nAll right.\n\"A parently we are at the same point in price\nhistory as in 1916 -- on the edge of inflation.\"\nOf course, many of you will recognize most of\nthese para raphs having been in previous docu-\nments.\n\"The pattern of price rises during the past\ntwo years roughly resembles\" --\nWhite:\nI am dubious about the inclusion of the next\nfour pages, three or four pages in this state-\nment, for two reasons. In the first place, you\nare going to make a statement on prices which\nwill cover it. In the second place, I think\nmuch too much emphasis is being placed in this\nRegraded Unclassified\n5\n5\nwhole statement on the defense of your tax bill\non the grounds of inflation. I think much\ntoo little emphasis is placed on the fact that\nyou are spending a lot of money and it has got\nto be paid for, and that out of taxation, and\nmoreover, Henderson's statement all over the page -\nhe is covering this ground pretty adequately, so\nit will be necessary either in your statement to\nrefer to that or to boil all this question\nof prices down to one or two paragraphs, in my\nopinion.\nYou should spend more time on taxes and less on\nprices.\nMarill:\nMy point comes before that one. After this word\n\"inflation\", shouldn't the Secretary of the\nreasury give us some definition of what he means\nby \"inflation\"?\nH.R.Jr:\nWell, you are here all day. After we break up\nyou can take a try at it. lie will take a try\nat it, with your help. I think that White's\ncriticism about prices is 11, very good one. I\nthink that we could very well afford to either\nsave that for when I go up - for Mr. Henderson.\n/hen we wrote this, I didn't know that Henderson\nwanted me to come up. I only heard about it\ntwenty-four hours ago.\nWhite:\nNot only that, Mr. Secretury, but this was writ-\nten largely in defense of one part of your\ntax program, which Was that form of excess pro-\nfits, but since this, I take it, is a statement\non the entire tax position, there isn't the\nsame need to prepare the ground on the hnsis of--\nR.M.Jr:\nWhat do you think, Ferdie?\nKuhn:\nIt can be shortened or eliminated.\nRegraded Unclassified\n6\n- 6 -\nH.M.Jr:\nI think I would lift it.\nKuhn:\nYou come down to --\nH.M.Jr:\nMarriner, you are going to talk, aren't you,\nbefore this Committee tomorrow?\nEccles:\nIt looks like it. I have been trying to get\nout of it but - trying to et them to put it\noff. I have been so covered up. Henry Steagall\ncalled me last night and said that he thought he\nwould get through with Henderson today, and if so,\nhe wanted me up there tomorrow. But I haven't\nany prepared written statement. I am just going\nto go up there and let them ask questions, take a\nchance at - when are you going up?\nH.M.Jr:\nI said I couldn't be ready before Tuesday.\nWe have got to set this into shape.\nEcoles:\nI think this material here - I don't want to\ndisagree with Harry on it. I think the material\nis very important for the Secretary of the Treas-\nury to say. Now, it is one thing for llenderson\nto say it, it is another thing for the Secretary\nof the Treasury to say it, and I don't think that\na thing as important as this can be overly empha-\nsized. It is true Henderson is talking about\nprices, talking about inflation, but it is in\nsomewhat of a different way. It isn't - but the\nSecretary - I think people are expecting him to\nmake B. statement on this veneral subject. Now,\nI don't - whether this is the time to make it\nor not, I don't know, but it is an awfully good\nforum, and he will certainly met plenty of head-\nlines on it. I just think the material is good,\nand whether it is said now or somewhere else is -\nit may be all right to say it next week before\nHenderson's Committee.\nH.M.Jr:\nIt is also all right to say it twice.\nRegraded Unclassified\n>\n- 7 -\nEccles:\nThat is right. I just don't think you can over\nemphasize this thing.\nH.M.Jr:\nI lean with Marriner. I think he is right.\nI don't think you can say it too often. What\ndo you think, Ros?\nMagill:\nAs I understand it, Harry is referring to the\nnext three or four pages that I haven't seen.\nH.M.Jr:\nLet's run through them. It is easy enough to\nlift the thing out. It is a difficult thing to\n- go ahead and read it.\nBlough:\n\"The pattern of price rises\" --\nH.M.Jr:\nWhere are you?\nBlough:\nThe last sentence on page two.\nH.M.Jr:\nThank you.\nBlough:\n\"The pattern of price rises during the past two\nyears roughly resembles the price movement\nduring the first two years of World War I --\nlittle rise in the cost of living, a moderate rise\nin the wholesale price index and a sharp rise\nin the prices of basic commodities.\n\"Since the beginning of the war, September 1939,\nthe wholesale price index has risen from 65 to\n87 or about 16 per cent.\"\nMagill:\nHow is that, only sixteen per cent? It doesn't\nlook like sixteen per cent. Maybe it is.\nBell:\nSixteen per cent of sixty-five.\nWhite:\nThat is wrong.\nGaston:\nSomething wrong there.\nRegraded Unclassified\n8\n- 8 -\nMagill:\nThirty-three per cent.\nWhite:\nThe figures will have to be checked. The figures\nmay be wrong. But this is wrong as is.\nBlough:\n\"The greater part of this rise has occurred\nduring the past five months.\n\"The cost of living index has increased 51, per\ncent since September 1940. Half of this increase\nhas occurred in the past two months.\n\"The price index of 28 basic commodities has\nincreased 48 per cent\" --\nH.M.Jr:\nExcuse me, I have a telephone call.\n(Miss Michener entered the conference).\nM.M.Jr:\nJust give Miss Michener a copy, please.\nBlough:\nWe are on page three.\nH.M.Jr:\nI just want to make sure that we are synchronized\non this and the price thing, so your shop knows\nwhat is going on.\nBlough:\n\"The price index of 28 basic commodities has\nincre sed 48 per cent during the same period, des-\npite the fact that the prices of many basic\nraw materials have been controlled by the Office\nof Price Administration and Civilian Supply.\nThis increase constitutes a major danger signal\nof inflation which must not be ignored. The whole-\nsale price index always lags greatly behind the\nindex of basic commodities, while the cost\nof living index does not show anything like the\nfull effects of inflation until long after the\nseeds of inflation have taken deep root.\"\nB.M.Jr:\nJust S. minute. Let's see if anybody wants to\nsay something. All right, go ahead.\nRegraded Unclassified\n9\n- 9 -\nBlought\nThis budget material, I assume, will be all gone\nover and revised, but I just put it in as it\nwas.\nH.K.Jr:\nCouldn't we skip that, unless somebody wants it?\nMarriner or Lauch? Where would you skip to?\nBlough:\nWell, the next paragraph says how much the def-\nense spending will be in forty-two. The follow-\ning paragraph says how much the deficit will be\nin forty-two, without the new tax bill and with\nthe new tax bill. The paragraph labeled (3)\nis the paragraph on expansion of bank credit,\nwhich is the same as in that earlier document.\nLikewise, paragraph (4) is the same as in the ear-\nlier document. There has been no change.\n11.M.Jr:\nAnybody want to criticize or comment?\nCurrie:\nOn para raph three, Mr. Secretary, I think you\nwant to mention that point more toward deposits\nthan to loans.\nBlough:\nAs I understand the economists, when they were\nworking on this before, on this particular\nparagraph, they wanted to emphasize loans because\nthe Government spending increased deposits,\nbut here was another source of deposit increases.\nIs that right, Harry?\nWhite:\nYes, we threshed through that. I think we can\nadd a phrase that will satisfy Lauch on that.\nH.M.Jr:\nWell, Lauch, could you give them what you -\nthresh it out with Harry afterward?\nCurrie:\nYes.\nH.M.Jr:\nWill you?\nCurrier\nYes.\nRegraded Unclassified\n- 10 -\nH.M.Jr:\nAre you all right, Ma riner?\nEccles:\nYes. I was just - I don't know just what Lauch\nmeans there.\nCurrie:\nWell, it is a little bit of an academic point.\nIt is not the expansion alone that creates any\nrise in prices. It is the expansion of bank de-\nposits and spending those deposits.\nEncles:\nOf course the bank loans create deposits.\nCurrie:\nIt may or may not. It depends on what happens\nin the other.\nEccles:\nThe loans create the deposits, and deposits\nare spent. If it wasn't for the loans, it\nwouldn't be the deposits, except the -old imports.\nThey have to pay a deposit. The people - when\nborrowing is lone, they spend. They wouldn't\nborrow unless they wanted it to spend. The\nGovernment borrows it because it spends, so I\nmean it -ets into & question there, a technical\nquestion.\nH.M.Jr:\nCan we 20 ahead?\nEcoles:\n1 think it is important to point out this expan-\nsion, though, in bank loans. You micht also\npoint out the expansion of deposits.\n.hite:\nHis point is merely that you - it is a question\nas to where the loans come from and I think one\nthrase would satisfy both of you.\naccles:\nBut you don't disagree, Lauch, do you, that it is\nimportant - here is E point to show that there\nis El huge expansion in bank loans. Twenty per\ncent in a ye r is a terrific expansion, and of\ncourse that in itself - there is a contraction\nof bank loans in deflation. In an inflation you\nRegraded Unclassified\n- 11 -\nalways zet an expansion. I think that expan-\nsion in one year is a measure of the activity\nof the use of credit.\nCurrie:\nYes.\nBlough:\nGoing over to the second full paragraph on page\nfive, un to that point it is all the same.\nIn fact it is there but it may be helpful to\nread it.\n\"Although there are some factors in the situation\noperating to check the inflationary trend, such\nas surplus stocks of some agricultural commodities,\nunemployed labor resources and partially employed\nproduction facilities, most of these factors\nwere present in the fiscal year 1941 in greater\nderree and yet aid not serve to restrain price\nrises even though the forces making for price\nrises were then much weaker.\"\nNow, the next section, \"Steps already taken to\ncheck inflation\" is as it was in the previous\ndocument, except I would cut the sentence on\nthe tax bill out, since you are talking about\nthe tax bill here, but the Defense Sevings\nBonds, Tax Anticipation Notes, the Office of\nPrice Administration's cooperation --\nJust a second. At the top of pare six I think\nBell will agree that that first paragraph,\nyou could say, \"Early indications show that the\nplan has been very well received.\" Is that\nconservative enough, Dan?\nBoll:\nYes. Tex Anticipation Notes, you mean?\nE.K.Jr:\nYes.\nBell:\nYes, you might put in of sentence like that.\nRegraded Unclassified\n12\n- 12 -\n5.M.Jr:\nThat they have been very well received.\nBell:\nYes.\nH.N.Jr:\nsomething like that, because they have been.\nJlough:\n\"These measures to restrain price rises, although\nthey have unquestionably been helpful, are inade-\ncuate to meet the situation confronting us. We\nhave gone only a small part of the way it will\nbe necessary to go. To must attack the problem\non all fronts if We are successfully to check\ninflation.\n\"Fiscal policy for inflation control\n\"One of the most important methods of inflation\ncontrol is a strong fiscal policy.\"\nIt is at this point that the order has been changed,\nputting the tax material and the fiscal material\nin first, and the other steps later, AS Mr. Kuhn\nsu rested.\n\"The tax bill before you is an important step.\nChen I appeared before the Ways and Means Commit-\ntee in April, I recommended at tax bill to yield\n3.5 billion of revenue annually above the yield\nof the existing tax structure. If at that time\nI could have foreseen the accelerated rise in\nprices and the reat increase in the defense\nprogram which have since taken place, I should\nhave asked for more than $3.5 billion.\n\"The Tays and Means Committee of the House has\nlabored long end well on this bill and I am not\nsur esting that you increase the total amount of\nrevenue which it provides beyond the original\ngoal of 83.5 billion. To increase its revenue\nyield substantially micht result in delay, and\nprompt passage of the bill is important. I\ndeem it imperative, however, that the new\nRegraded Unclassified\n13\n- 13 -\nrevenue yield of the bill be restored to at\nleast the $3.5 billion level.\"\nU.V.Jr:\nGo ahead, they seem to like it.\nBell:\nDo you cut out \"provides\" -- \"total amount of\nrevenue beyond the original goal\"? You say,\n\"which it provides beyond the original goal\".\nIt doesn't provide the three and a half.\nSullivan:\nI may wish to comment on that sentence later in\nthe day. The remarks of Senator George as\nalready made indicate that he has in mind things\nthat will bring it above three and a half billion\ndollars. I don't know whether he realizes that\nor not.\nVell, you say \"at least\".\nWhite:\nInstead of saying \"which it provides\", I think\nyou might say, \"Which this bill provides\".\n11.12.Jr:\nWell, that is --\nWhite:\nBecause in the very next sentence you are asking\nfor more money, but not in this bill.\nBell:\nWhat is the matter with, \"I am not suggesting\nthat you increase the total amount of revenue\nbeyond the original goal of three and a half\nbillion dollars\"?\nWhite:\nBut he is. He is not suggesting it in this bill,\nfor this bill, if I read it correctly. I don't\nthink it matters.\nBell:\nO.K.\nSullivan:\nPut a question mark opposite that sentence.\nWe might want to suggest something else for it.\nRegraded Unclassified\n14\n- 14 -\nBlough:\n\"When this bill has been passed and you and the\nmembers of the Ways and Means Committee\" - this\nsounds a little corny - \"have had an opportunity\nto enjoy a well deserved rest from the arduous\nlabors which it has entailed\" - I suggest 8\nquestion mark there.\nMagill;\nWhat do you want, laughter and applause?\nBlough:\nI will fix that up.\n\"I hope that yet this year you will undertake,\nas the Treasury has already undertaken, to make\na new survey of our tax system. It is now some\nyears since a tax bill has been passed making the\nmany technical changes which from time to time\nare found necessary as a result of experience,\nnew court decisions and other new situations.\nH.M.Jr:\nYou are going to fix this up, aren't you?\nBlough:\nI hope SO,\nH.M.Jrz\nGo shead.\nBlough:\n\"Both the taxpayers and the Government suffer\nas these uncorrected faults accumulate. Such\nmatters have been kept out of the present bill\nin order to expedite its passage and not to\ncomplicate the issues which it involves. In addi-\ntion to correcting the faults in our tax struc-\nture, it will again be necessary in the light\nof the present program for defense expenditures\nand the threat of inflation to increase further\nthe revenue power of the tax system either late\nthis year or early next year.\nSullivan:\nI think that is one question you have got to de-\ncide and I think if you are not going to have\nanother revenue bill this year, it would be\nvery unwise to have any reference to it because\nRegraded Unclassified\n15\n- 15 -\nthat will just create all kinds of uncertainty.\nH.M.Jr:\nI think John is right.\nSullivan:\nAnd if the reference is solely to the technical\namendments, I think that that might better be\nin my statement than in yours.\nH.M.Jr:\nI agree with you again.\nWhite:\nI think you ought to have another bill this year\nunless you have made up your mind not to.\nH.M.Jr:\nWhy say anything? We can always get the President\nto write a letter. (Laughter) Isn't that right,\nLauch? Not that I am inferring that this last\nletter - Lauch wasn't responsible for this last\nletter.\nEccles:\nNot always at the right time, though.\nH.M.Jr:\nI will give you clearance on this last one.\nCurrie:\nThank you.\nGaston:\nI agree with John decidedly. I think you ought\nto let it go at this, that you say that if you\nhad known how the situation was going to develop,\nyou would have asked for more, but not now. The\ncomplications --\nWhite:\nWhy be weasel about it? We have got to have more\ntaxes --\nGaston:\nJust to foreshadow it, not make an argument.\nWhite:\nThe Secretary is the first one that ought to\nsound that topic. We have got to have much\nmore revenue if this rate of expenditure increases\nand I don't know why we should be mealy-mouthed\nabout it.\nGaston:\nI wasn't suggesting being mealy-mouthed about it.\nRegraded Unclassified\n16\n- 16 -\nWhite:\nI didn't mean to imply that you were, but you\nwanted to avoid the statement.\nlaston:\nI don't think that is the place for this state-\nment. I think the foreshadowing and then stop.\nhite:\nThis is exactly the place for, it seems to me.\n\"I would have asked you for more money had I known\nthe expenditures were going to be what they are,\nbut I don't want to delay this bill, gentlemen,\ngo ahead with it, and as soon as you get through\nwith this bill, start on the next one.\" (Laughter)\nBell:\nYou have got to take out that part about the\nrest.\nYou have got two propositions here, as I see it.\nI think I a ree with what I believe is John's\nattitude as to the other. If you start talking\ntechnical amendments to them now, I think the\nFinance Committee will say, I should think they\nwould, \"Look, we don't want to go right to work\non another tax bill as soon as this one is over.\nWe will put those technical amendments in ri -ht\nnow, even if it takes another sixty days,\" and\nthat is what I believe you don't want.\nNow, the foreshadowing additional revenue is\nanother story.\nH.M.Jr:\nWell, that I think - I think the place to say\nthat is, somebody is roing to ask me, \"Are you\nsatisfied that this is enough revenue in view\nof what has happened?\" and my answer is, \"No\".\nlagill:\nThat is richt.\nSullivan:\nThat is right.\nU.S.Jr:\nAnd the time to do it is when I get the question,\nbut not out it in any formal statement.\nRegraded Unclassified\n17\n- 17 -\nMagill:\nI wouldn't out the technical amendments in either.\nI think you will get yourself into trouble.\nSullivan:\nWe held the line n hundred per cent on this.\nBlough:\nSince Mr. Magill is against one half of this\nparagraph and Mr. Sullivan against the other,\nthat means the whole paragraph comes out.\nH.M.Jr:\nthat is right. How, there is something about\nbeing Secretary - you just can't go un against\nthese fellows when the two of them get together.\nBlough:\nliere we come to excess profits again.\nUnrill:\nI think you could say, if you want to, that it\nwould be a darned good thing if the Committee's\nexperts and the Treasury would get busy and\nstart working during the next several months\non a tax bill which will have to be adopted\nnext year sometime.\nM.M.Jr:\nWell, Ros, you know they would resent my telling\nthem that.\nMagill:\nNo, they wouldn't. You know Stamm isn't going\nto work anyway, and the Treasury always does\nso --\nL.M.Jr:\nI think I would rather let - leave that out.\nBell:\nI would.\nI.M.Jr:\nI think this, though, I think I ought to go\nup there in my vest pocket, certainly, with a\nstatement AS to what this committee is doing.\nSupposing they say, \"Well, Mr. Morgenthau, what\nis this committee doing that you have got down\nthere?\" You know, what is this fellow's name?\nBlough:\nGulick.\nRegraded Unclassified\n18\n- 18 -\nM.M.Jr:\nYes. Well, I have got a progress report from\nMr. Gulick. This is what he is doing. I mean,\nI think I ought to have a report as to what\nGulick is doing down in the Treasury. I ought\nto have it and say, \"Well, here is a progress\nreport.'\nSullivan:\nWell, that is still another subject.\nU.S.Jr:\nBut supposing they say, \"We see by the papers\nthat Mr. Gulick is down in the Treasury. Now,\nwhat is he doing down there?\" \"Tell, I have\ngot a progress report. Here is what he is doing.\"\nAnd Gulick ought to be up there to explain it in\ncase he is called on. Check?\nSullivan:\nI don't know.\nVarill:\nNo, I doubt that.\nSullivan:\nI should think not.\nH.M.Jr:\nAll right, we will just have a progress report.\nYou fellows have got trust in Gulick, haven't\nyou?\nSullivan:\nYes.\nMaril:\nLet Mr. John L. Sullivan explain it. lie is a\ngood explainer.\nSullivan:\nI would like to ret him and find out what he is\ndoing before I explain what he is doing.\nH.K.Jr:\nAll right.\nSullivan:\nIs he in town, Roy?\nBlough:\nHe was yesterday afternoon.\nEccles:\nI am concerned a little about it - you start out\nRegraded Unclassified\n19\n- 19 -\nhere tryin- to impress that Committee with the\ngravity and your general situation and danger\nin this whole situation, and you come along\nthen and you are laying that as a foundation or\na basis for a tax bill. You say that taxation\nis in effect one of the most important - it is\nthe important fiscal - proper fiscal policy -\nit is the most important factor in getting at\nthis inflationary danger, and then it seems to me\nthat if you do some of these things you are\ntelking about, you are sort of letting the thing\ndown again. You build it up, and then you\nlet it down.\nI would like - I agree with Harry there that\nwhen you put taxation in the proper fiscal\npolicy as the most important means at the disposal\nof the Government to leal with an inflationary\nproblem, then I think when you talk about taxes,\nI think you have zot to say that we need three\nend a half billion, much more than that, and\nwe are spending it, no question about it, but\nat this time the thing has gone through the\nHouse and now let's met this three and 2 half\nbillion as quickly as we can ret it, and this\nthing is 50 urgent that we ought to begin to look\nfor another tax bill. I would put them on\nnotice. I think that it is a fine defense for\nyou to build up for yourself and for the Govern-\nment here.\nE.F.Jr:\nTell, let me think that over. There is no\ncuestion bout your being right, but it is D.\nquestion of whether it is good politics, you\nsee. I don't know, but I will give it - let me\ngive It careful thought.\nPlough:\nWe might try our hends at a sentence or two which\nwould be a good deal varuer than this, and yet\nput them on notice.\nM.M.Jr:\nNo, if I was going to do it, I would come -ht\nout flot foot and say so, say that during these\nRegraded Unclassified\n20\n- 20 -\nfew months these appropriations have increased\nby 50 much, and the situation when I made my\nestimate of one third and two thirds is changed\nby fifteen or twenty or thirty million dollars.\nSullivan:\nI think the problem, Mr. Secretary, is whether\nit is going to be a tax bill late this fall or\nearly next winter. The problem is whether there\nare going to be additional taxes levied on\ncalendar forty-one income. That is always the\nproblem.\nE.S.Jr:\nWell, I have got it in mind. I would like to\nlet it simmer B. little bit. I think it is\nimportant.\nScoles:\nYes. Of course you are talking about an over-\nhauling here that the --\nSullivan:\nThat was the technical amendment.\nRooles:\nThat is right. That would be this year.\nSullivan:\nYes.\nEccles:\nI agree with you that whether the other tax\nbill - it is going to take a little time to get\nit through, and therefore, whether you start\nit this fall, you will be three or four or five\nor six months getting it through, no matter\nwhen you start.\nBlough:\nWhat would likely happen would be like the\nRevenue Act of thirty-eight. We would start\nprobably around November when it begins to get\ncold, and work until April or May, when it begins\nto get hot.\nEagill:\nnell, the ordinary history of 8. revenue bill,\nas all you gentlemen know, is not only to start\nin November, you start in July.\nRegraded Unclassified\n21\n- 21 -\nBlough:\nThe Committee probably won't start until\nNovember.\nMorill:\nYes. You have got to let some of these fellows\nin on the secret before you commence having res-\nular hearings, and so on.\nNooles:\nYou could make this point clear, that this\nrevenue bill covers the revenue for this year,\nespecially if you get the excess profits taxes\nyou want. If you get these amendments that you\nare proposing, the excess profits tax - that is,\nif you ret the Senate to accept the modifications\nof the House excess profits tax, the Senate will\nbroaden the base and get the three and 8 half\nbillion of rovenue here, or more - if you could\nget a little more, I certainly would get it.\nThen close un your loopholes, net these technical\namendments this year, and S tart this fall on a\nrevenue bill for next year with the ides of getting\nthe revenue measure through by April or May or\nJune, instead of a year from fall again.\nreston:\nYes. That would be 11 bill that so far as income\nis concerned, and profits, would apply to income\nand profits of calendar forty-one.\nBlowdit\nForty-two.\nGaston:\nCalendar forty-two.\nPecles:\nForty-two. That is right.\nWhite:\nI am wondering whether the two things aren't being\nmixed. I don't think it is necessary for the\nSecretary to emphasize when Congress shall or\nshall not begin on the bill. That he might -\nit would be a thing to be careful about, but cer-\ntainly from the fiscal point of view, the over-\nall picture, these taxes are not enough. It\nappears to me that cannot be sounded too early\nor too often, and he should be the first one to\nmake that statement\nRegraded Unclassified\n- 22 -\nGaston:\nDon't you think, Harry, that he oucht to say\ndefinitely, \"This is to be the bill as to income\nfor the calendar year 1941. We can't start this\nagony all over again. This is it. The year is\nnearly over. We do need to get to work soon on\na bill. We will prob bly have to make changes\nout of experience, and we need more revenue.\nThe need to get to work as soon as possible\non a bill applying to income and profits for the\ncalendar year 1942.\nOn this price control aspect of this message,\nI put this as a query to the economists present.\nIs taxation the only method of control that you\nhave?\nWhite:\nOh, no.\nMagill:\nThen shouldn't you say something about some of\nthe others?\nKulm:\nThey are mentioned.\nEccles:\nThey are all in here.\nTain:\nThey are all in, Mr. Marill. The taxation comes\nfirst. \"I am here to discuss the tax bill, since\ntaxation is a weapon, a tremendous weapon. Then\nwhen he finishes on taxation, he roes on to say,\n\"Of course, this isn't the only weapon, and isn't\nthe only way of doing the job, and I would like\nto talk about the others. Cinally, the others\nwere in chead of taxation, and it seemed lo ical\nto put the tax message in Tirst.\nMill:\nYes, you oucht to do the exes first. I don't\nthink still, this is as convincing on the tax side\nas it should be. It is El good job, and I know you\nhave done it under difficulties. I don't know\nwho the Secretary is addressing. I suppose he\nis addressing Senator George, but I suppose he is\nalso addressing a lot of other people, isn't he?\nRegraded Unclassified\n23\n- 23 -\nEceles:\nThe public.\nMarill:\nIs he addressing the public?\nGaston:\nYes.\nRocles:\nThat is, doesn't this document really have its\nsignificance as it affects the fellow that is\ngoing to pay some of this money?\nCaston:\nWe have only started to read the tex decision.\nInvill:\nMaybe I should shut up. But the - I think you\nare asking people to pay \"ifty or a hundred or\nthree hundred per cent more money than they have\npaid before. You have got to rive people an\nawful good story for that, and this sounds to\nme in the realm of the economics department,\nand not much in the realm of every day life.\n.hite:\nI hadn't thought of that, but now that you say\nit Ros, I agree.\nMagill:\nIf I were a student in Roy Blough's class, and\nhe said this, I would believe it and understand\nit, because it doesn't have & damn bit of effect\non me. I an not going to pay a dime of it, so\nI don't care. It is rood economic theory, as far\nas I am concerned, but I think you --\n,,hite:\nI agree with you now that you say it. I think\nthere should be a couple of para graphs, at least,\nsomewhere earlier --\nBlough:\nHow about the last page?\nKuhn:\nThe last page is good, Roy.\nWhite:\nWell, I wasn't awfully impressed with it when I\nread it.\nRegraded Unclassified\n24\n- 24 -\n_lough:\nThis is $ new last page.\nMagill:\nI think Herbert is probably right. I should keep\nmy foot in my mouth until you et done reading\nthe whole thing. I only see this page by page.\nlaston:\nI was just remarking that I haven't read any of it\nbeyond page seven, so I don't know what you are\ntalking about.\nKuhn:\nDo you remember, Harry, in the statement the\nSecretary made to the House, he listed the four\nobjectives of the tax program very concisely.\nThere were --\nWhite:\nI think that can be repeated.\nSullivan:\nI think so, Harry, and you can't improve on it.\nWhite:\nI think you can repeat that ri ht here.\nDo you mean to say that Magill made 2 suggestion\nand you liked it?\nSulliven:\nYes, sir.\nBlough:\nNo, that wasn't Roswell's sur estion.\nWhite:\nIt was Kuhn's sug estion, following Roswell's.\nWhite:\nI think Ferdie has suggested 2 few para raphs\nthat he could write which I think would meet\nMagill's point, and I think Magill's point\nis very well taken, that there isn't enough\npopular justification for increased tax payments,\nwhich you have said from time to time, and have\nappeared from time to time, but is not in this\ndocument.\nM.M.Jr:\n[low about simply saying, \"This increased tax is\nin order to pay for the Lend-Lease for China and\nEngland\"; do you think that would be popular?\nRegraded Unclassified\n25\n- 25-\nCurrie:\nChina would be more popular.\n\"hite:\nChina would raise about a nickel.\nCurrie:\nI think, Mr. Secretary, I a Tee that the most\npopular appeal here is the patriotic appeal. It\ncosts a lot of money to wage B. war, but we will\nnot shrink from it. It is the quality of sacri-\nfice.\nE.X.Jr:\nWe will start the hearing and have a Victor machine\nun there and play Irving Berlin's \"Any Bonds Today?\"\nCurrie:\nI arree this goes a little bit too economic.\nKuhn:\nSimply play E record of what you said last time,\nMr. Secretary, those four points of what you think\nan equitable tex system ought to be, effective tax\nsystem.\nH.M.Jr:\nBut following Lauch Currie, I think something to\nsay that we know that everybody wants to make his\ncontribution.\nMite:\nFerdie has writ en some paragraphs like that\nsome time in the past. Some of it was cut out\nbecause it was too long, but I think that he\ncan spill it very easily.\nU.M.Jr:\nAll ri ht. Are we all set to go on? How far did\nwe get?\nGaston:\nThe top of pare ei -ht.\nBlough:\nTe ot to the rood old excess profits tax, which\nreads much as it did, but the first paragraph is\ne little different. Do you went that story again?\nN.M.Jr:\nI don't, but somebody else might.\nClough:\nI would like to read page eight. I don't want to\nDE di page nine, but I would like to read page eight.\nRegraded Unclassified\n26\n- 26 -\nN.K.Jr:\nGo ahead.\nlough:\n\"Within the $3.5 billion revenue scope of the\npresent tax bill there appear to be several pos-\nsibilities for discouracing inflationary price\nrises. The first of these is in the field of\nexcess profits taxation. In recent months there\nhas been a noticeable tendency for various groups\nincluding business men, farmers and laborers,\nto endeavor to secure higher rates of return in\nprofits, prices and wares. Such efforts cannot\nbe criticized in normal times. At the present\ntime, however, with the existing pressures for\ninflation, widespread efforts to increase profits,\nprices, and wages will result not only in larger\npurchasing power and thus still greater pressure\non our limited supplies of civilian goods, but\nalso in higher costs for the defense program and\nfor goods which civilians purchase. These\nhigher costs in turn necessitate increases in\nprices and these in turn vive rise to new demands\nfor higher wages and higher prices.\"\n11.2.Jr:\nNow, before anybody says anything, I like it,\nbut I don't see why you have got to weaken this\nthing, by saying \"such efforts cannot be criticized\nin normal times,\" as though you were going to\nhit a man and then you pull your punch back.\nI would just cut that sentence out. Mr. Roosevelt\nran on a platform of --\nAlte:\nHigher pro its and higher wages and higher\nprices.\nH.k.Jr:\nRight. (Laughter) So me don't have to make that\nremark. I would just leave that sentence out.\nBlought\nAnd you would take care in questions of some-\nbody pointing out that \"How is this consistent\nwith the administration's previous position?\"\nRegraded Unclassified\n27\n- 27 -\nH.M.Jr:\nWe are for the capitalistic system, what the\nhell, aren't we, Marriner?\nSccles:\nI don't think there is anything in our record\nthat would indicate we are not. Some people\nmight interpret it that way.\nR.M.Jr:\nYou get in a swing and you lose the swing by\nsaying that - you know. Don't you agree with\nme, Ferdie?\nKuhn:\nYou can say, \"In recent months there has been\na noticeable tendency, and then \"with the exist-\ning pressures for inflation, If and so on.\n.hite:\nI like that better.\nKuhn:\nLeave out, \"At the present time, however\" --\nE.K.Jr:\nI don't like that, \"Such efforts cannot be criti-\ncized in normal times. \" We are not talking about\nnormal times.\nEcoles:\nThere is no such thing any more. We haven't had\na normal time for so long I don't think anybody\nwould recognize it.\nGaston:\nIt is editorial, anyway, Ferdie. Cut it out.\n(Laughter).\nH.M.Jr:\nAs one newspaper man to another, you smell an\neditorial, do you? All right.\nBlough:\n\"The spiral goes up and up.\n\"If we are to expect to stop or prevent this\nspiral we must be able to show those who receive\nmodest incomes from their labor or their produc-\ntion that excessive profits are not being received\nby great corporations.'\nRegraded Unclassified\n28\n- 28 -\nWhite:\nI think the last two sentences in the middle para-\nraph need to be somewhat rewritten. It isn't\nlarger purchasing power. It may be smaller\npurchasing power that may result in higher prices,\nbut it not only results in more money in circula-\ntion - the sentence needs to be broken down\nand fixed.\nBlough:\n\"The present excess profits tax places special\nheavy taxes on profits which are in excess of the\nprofits received during the years prior to the\ndefense pro ram. This is all to the good, -- is\nindeed essential. It is, however, not enough.\nA corporation may make 50 per cent profits on\nits invested capital\" -- and then the rest is\nall the same.\nmite:\nLubin had a cood suggestion that might be worked\nin here. It is implicit in what is said here\nthat the tax discoura es expansion on the part of\nthose corporations that are not making high pro-\nfits, which are a lot of small concerns, and a lot\nof other concerns, because - to the extent that\nthe excess profits applies on their increase are\nthey discoura ed, whereas those concerns that are\nmaking high rates of increase, they have every\nencouragement to increase it, because they\nwon't be subject to the excess profits tax\nas formerly conceived. lle thought B. para raph\non that ht 20 in.\nSlough:\nlie called ne about it and I didn't contend with\nhim because I wanted to think it over, but it\noccurs to me that what he asked for is no excess\nprofits tax. What lie anted - what he toll me he\nwanted was that no corporation would be penalized\nfor expanding in these times.\nWhite:\nHe didn't tell me that.\nHlough:\nAnd the excess profits t X does precisely that.\nDefense profits, ar profits --\nRegraded Unclassified\n29\n- 29 -\nWhite:\nDid you explain that to him?\nBlough:\nNo, I wanted to think about it and not argue\nwith him about it. I thought there might be some\nway of harmonizing, but I don't see it.\nWhite:\nlle talked differently to me.\nGaston:\nFor expanding, Roy? Doesn't that depend on what\nyou mean by expansion?\nBlough:\nNot necessarily expanding capital, but increasing\nits production to the maximum.\nGaston:\nOn the same invested capital, yes.\nBlough:\nMaximum increase in production, and the excess\nprofits tax does take & ay some incentives to\nincrease production, it can't help it.\nGaston:\nIn so far as that will affect increased profits.\nBlough:\nYes,\nEccles:\nI know, but I can't see that. As long as it\nisn't complete confiscation - if it leaves you\nseventy-five per cent, you have got the incentive\n- for twenty-five per cent.\nIn other words, you et up to a certain point\nand you then ar subject to an excess profit -\nto an excess profit tax of, say, seventy-five\nper cent, and everything above that. Assume\nthat that was the case. Well, you have still got\nan incentive to get twenty-five per cent on the\nbalance.\nWhite:\nI think he was referring to the different types\nof excess profits.\nEceles:\nThat is right. There is a point there.\nRegraded Unclassified\n30\n- 30 -\nWhiter\nThat is what he was referring to. I didn't\ngather that he was referring to what Roy said.\nBlough:\nI hope you are right, and that we can harmonize.\nWhite:\nThat is the way he spoke to me.\nEcoles:\nHe would be perfectly wrong on the other. The\nincentive is still there, and with the provision\nfor the amortization of - special amortization\nprovision for certain defense expansion, business\nis completely protected. They haven't a chance\nto take a loss on the expansion. So any profit\nthey met is a windfall, because they are sure\nto get all their money. They get an option to\nget the property back if it is in their interest,\nand if not, they don't have to get it. They haven't\n8 chance to lose a thing, and whatever they\nmake is a windfall.\nH.M.Jr:\nRight.\nEccles:\nI think they are completely protected.\nH.M.Jr:\nI will say they are, too much SO.\nEccles:\nI think SO.\nGaston:\nWe are allowing them fifty per cent investment\non their borrowed capital, aren't we?\nRocles:\nWhich is a - you allow them eight per cent -\nyou allow them fifty per cent on their borrowed\ncapital anda lot of them are borrowing as low as\none and a half per cent, and you alllwing them\non a basis of eight per cent on half of it, which\nis four per cent on all of it.\nWhite:\nthat is why we want to broaden the base and lower\nthe income tax, so we can reduce the sums.\nRegraded Unclassified\n- 31 -\nHooles:\nI would do both. I mean, I want to broaden the\nbase and do the other thing, but I certainly\nwould hit the other first. I mean, hit them\ntogether. I think this. The best argument for\ngetting your excess profit tax, if you get it,\nyou broaden the base. That is the thing every-\nbody has been hollering about.\nInston:\nI would broaden the base, Marriner, to stop them\nfrom shouting, broaden the base. I would broaden\nit as broad as you can make it.\nHonles:\nMy point is, if you broaden this base you\ncarry out that provision. that is an argument,\nthen, against an excise - against a general sales\ntax, you see. That is a general tax.\nPaston:\nThey have got to say what they mean then.\nFoeles:\nThen it seems to me that you can build up the\nexcess profits tax but you will find that it seems\nto me impossible, politically, to et the kind\nof an excess profit tax you want, maybe to avoid\nsome of the sales taxes that have not a selective\nexcise tax, but veneral taxes, unless you do the\nother. I think doing the other is the best\nargument you could make for then hitting your excess\nprofits tax, I mean hitting your excess profits\nhard.\nR.M.Jr:\nDo you mind if I just call up Senator George\nand find out when he expects me up there?\nNo one has told me, have they?\nBlough:\nNot definitely, that I know of. lie may be at the\nSonate Finance Committee now.\nM.M.Jr:\nWere you through, Marriner?\nNocles:\nOn the excess profits, I think that you can -\nI think it is pretty weak when we say one in ten\nand one in thirty. How, that isn't, I don't think\nRegraded Unclassified\n32\n- 32 -\nthat is made 8.5 significant as it might be made.\nI have got here this point. It may be that one\nin - the earnings of one in ten have been so much\nbut that may represent eighty per cent of the\nearnings, total earnings. Do you see my point?\nBlough:\nIn other words, what percentage.\nIcoles:\nWhy, that is the important thing. The number\nof corporations doesn't mean a thing, in and of\nthemselves. If one corporation in ten made in\nthe base period here better than ten per cent,\nwhat does that ten per cent amount to, what\nrelation does it occupy here to the total earnings?\nNow, it is my impression that of the corporations\nover a million dollars of assets and the one in\nten that made over ten per cent in that period,\nyou may well find that those - that those one\nin ten corporation represent fifty or eighty\nper cent of the income.\nBlough:\nIt is too high.\nEccles:\nIt will certainly be B lot more than one tenth of the\nincome. There may be one tenth of the corporations\ndid that, but if it is twenty-five per cent of\nthe income, it is twice as strong. Do you see\nmy point?\nGaston:\nYes, you are right.\nGood boint.\nEccles:\nI think that you can make that very much stronger,\nif you can set those figures.\nBlough:\nIt is a little hard to got the figures, but we\nwill try.\n\"hite:\nCould you consider adding B. paragraph which would\ninclude just what Marriner has sald before?\nRegraded Unclassified\n33\n- 33 -\nYou both agree that he starts his answer, \"These\nexcess profits taxes aren't 50 very high. They\nleave & lot of net earnings that are not taxed.'\nMaybe the place for that would be right after\nthat. This constant assumption of taxing the\nexcess profits, I think the popular notion is\nthat it amounts to much more than it does.\nMough:\nOur tax is now seventy-two per cent at the\nhighest rate, would be under the bill. Sixty\nper cent on excess profits and thirty per cent\non normal, which when you cambine the two, is seventy-\ntwo percent.\nScoles:\nOn which bill?\nBlough:\nThe House bill. It really depends on which pro-\nfits, but the profits which are subject to the\ntax are subject to a total combined tax of\nseventy-two per cent.\nIccles:\nThat is by eliminating the deduction of the normal?\nBlough:\nShifting that around. That is the effective\nrate of the tax. You deduct the excess profits\ntax before you compute the normal.\nGaston:\nYou mean the maximum effect of the rate?\nBlough:\nThat is right.\nLocles:\nI wouldn't say that seventy-two - that it should\nbe necessarily higher than that. The British\nhave in effect eighty per cent, but it isn't that.\nSite:\nThat is misleading. That is the very point which\nis misleading.\nScoles:\nThat is right, that is the argument they will\nuse as to why they are up to seventy-two per cent\nhere, but that doesn't tell the story at all.\nRegraded Unclassified\n34\n- 34 -\nSlough:\nOf course, with estate taxes, it is more than\nseventy-two, but you mean the story is that they\nhave twenty-five per cent left?\nEcoles:\nNo, I mean the story is that before they get\nun to the seventy-two, especially if you figure\nthe base period - now, in the base period where they\nare making this money that they have made, then\nthey don't ret hit heavily in the excess profits\ntax.\nMouth:\nI thought you were talking about an incentive to\nincrease. The incentive to increase is knocked\ndown with e venty-two ner cent tax.\nsccles:\nIncrease what?\nBlough:\nProfits beyond their carlier level.\nScoles:\nI think you have still ot twenty-eight ner cent\nprofit, and I think that is enough of an incentive.\n(The Secretary held 1 telephone conversation ith\nSenstor George).\n1.1.Jr:\nIt is lefinite that it will be ten o'clock Friday.\nChaton:\nnoy, I think it lepends a rest eal on what\nkind of incentive you are talking about. If you\nhave & corporation which is paying up in the\nseventy-two per cent level, but is still making\nthirty per cent net profits on its invested\ncapital, certainly there is plenty of incentive\nthere for them to expand the area of their business\nby Investing new capital, because there is plenty\nof money that would like to make thirty per cent.\nBlough:\nNew capital can't make thirty per cent.\nGaston:\nMaybe it can in this particular line of business.\nRegraded Unclassified\n35\n- 35 -\nBlough:\nI mean it isn't allowed under the law to make\nit. It is about eight per cent, is all you can\nmake.\nTaston:\nBut still there is plenty of profitable area or\nincentive for profit business. It isn't - new\ncapital isn't moing to be subject to seventy-two\nper cent.\nBlough:\nNew capital can make around seven per cent net\nfree of tax under the present bill.\nThat is good.\nBlough:\nOr a little lower than that if the concern has\nover five million dollars.\nSaston:\nI don't think there is any restraint on the ex=\nnansion of at concern that is allowed to retain\ntwenty, twenty-five, thirty per cent on its\ninvested capital.\nFooles:\nRestraint on expension is the shortage of material.\nNow, if we had idle labor and steel and machine\ntools, and the things that you need for expansion,\nthen you could begin to think there - that the\nmoney - lack of money incentive was the deterrent,\nbut everybody knows that the reason that there\nisn't greater expansion in & lot of fields today\nis the complete lack of the necessary materials\nand labor. It isn't the money supply or the\nincentive for profit that is of deterrent. At\nleast there has been no evidence of it yet,\nPlough:\nI believe I can do & par graph on that.\nR.M.Jr:\nGo ahead.\nBlough:\nI shortened the next just to talk principle, and\nleave for Mr. Sullivan the examples.\nRegraded Unclassified\n36\n- 36 -\n\"In more normal times excise taxes\" --\nIMM.Jr:\nWhere are you?\nBlough:\nI am sorry, bottom of page ten, \"Defense excise\ntaxes.\" You didn't want this excess profits re-\nread.\nM.V.Jr:\nI don't think SO.\nlough:\n\"In more normal times excise taxes have little\nto recommend them except the fact that they pro-\nduce revenue. In a period such as this, however,\nexcise taxes may in certain cases promote a more\npositive objective, namely, to reduce the demand\nof producers and consumers for scarce commodities\nwhich compete with the defense program and to\nabsorb wind-fall profits which result from scarcity\nof supply relative to demand.\"\nH.M.Jr:\nJust a minute, please. All right.\nFlough:\nNow, Mr. Lubin thought that should be spelled out\nconsiderably further, that while we may understand\nit, that may be a - that it may be a new idea\nto many, and probably it should be expanded 8.\nlittle to explain how that works.\nThite:\nYou had a paragraph somewhere in one of your\nearlier drafts which took an automobile and\ndescribed that.\nBlough:\nAbout automobiles, yes.\nhite:\nDidn't you?\nBlough:\nYes. It may be that paragraph could be re-\nwritten.\nRuhn:\nIt isn't a new idea, Roy. It is 50 obvious, it has\nbeen hammered home by everybody in the last three\nmonths.\nRegraded Unclassified\n37\n- 37 -\nBlough:\nWell, but most of the things that have been\nhammered home have been very general.\nMagill:\nNo, I would agree with Ferdie. Wasn't it the last\nissue of Life in which they had a picture of a\nkitchen and endeavored to tell the general reader\nthe different things in a kitchen which compete\nwith various --\nTlough:\nGranted, but --\nThite:\nThat wasn't the idea I thought Lubin had refer-\nence to. He had reference to the question of\nwindfall profits, why it is possible where you\nhave & curtailed supply for there to be unusual\nprofits.\nBlough:\nI think it is the idea of how excise taxes fit\ninto this picture.\nBell:\nI think it is important to point out the excise\ntax is supplemental to price control, that you\nincrease by the excise tax the cost to the consum-\ner and hence you reduce the number of buyers.\nThat is really the effect. The Government gets\nthe increase in price, rather than that increased\nprice going to the middleman.\nWhite:\nThat is right.\nScoles:\nThe public is going to pay the same price in\neither case.\nVagill:\nShouldn't you say also, Marriner, If you are going\nto say that, in line with your earlier appearance,\nthat you need more than n slap on the wrist if\nyou are going to make the thing work. In other\nwords, increasing the price of an automobile five\nor ten dollars doesn't amount to & row of pins.\nRegraded Unclassified\n38\n- 38 -\nSecles:\nYou have rot to make it hurt, so that a lot of\npeople just can't buy them.\nMugill:\nThat is right.\nwhite:\nI think you are talking about two different points.\nThe point I thought Lubin had in mind was this,\nthat if you restrict the supply of automobiles,\nthe price of those automobiles will rise, and that\nthe producer or the middleman will get the full\nbenefit of that increase, and therefore an excise\ntex, though not increasing the price to the con-\nsumer in these particular cases, though they may\nin other cases, does prevent the middleman and\nthe producer from getting those windfall profits\nthat the Government gets.\nH.M.Jr:\nA better example is the second hand car.\nMagill:\nI would give them both.\nwhite:\nYes, both.\nI.V.Jr:\nAre you all right?\nFlough:\nI think so.\nE.M.Jr:\nto ahead.\nBlough:\n\"The achievement of this objective is not a simple\nmatter. Nevertheless, the further use of excise\ntaxes to divert consumption and to reduce wind-\nfall profits should be seriously considered by\nyour Committee.'\nI will try to put of paragraph of illustrations\nand 30 on in there.\nBell:\nThat sounds something like a recommendation for\nadditional taxes.\nRegraded Unclassified\n39\n- 39 -\nEcoles:\nWell, wind'all texes, you are recommending it.\nRell:\nDoes this mean over and above, or to take the\nplace of the three hundred million?\nCurrie:\nI would say these Were changes within the pre-\nexisting taxes.\nH.M.Jr:\nIt is all right.\nCurrie:\nThis paracraph strikes ne as a little weak,\nMr. Secretary. It is not a simple matter.\nNevertholess, it should be seriously considered.\nH.M.Jr:\nYou are right.\nMill:\nIt sounds to me like a recommendation for next\nyear.\nDell:\nYes, that is the ray it hits me.\nMagill:\nFor the record, or something like that.\nEccles:\nI think in connection with your price control bill,\nthat this should be tied right in, it seems to me,\nnot only as an important revenue measure, but\nalso as supplemental to this price control thing,\nbecause it is just that. Henderson would stress\nthis very, very strongly as absolutely an essential\nsupplemental measure in the question of price\ncontrol, and I think that it ou ht to be brought\nin now and they should be substantially incroased.\nIt would be one means of taking un some o.) this\nrevenue that you have apparently lost through the\naction of the House, an. what difference oes it\nmake if you net three billion seven or eight,\nif you can ret a hundred 02 two or three hundred\nmillion from this source, plus what you can et\nout of excess profits tax? Fine.\nRegraded Unclassified\n10\n- 40 -\nBlough:\nI would like to say this, for just a minute.\nWe have strug with this problem for several\nmonths now. We have talked to a great many\npeople in Washington, including people in your\norganization, and this is one of the meanest,\nmost difficult things we have come across to\ntry to implement this generalization and really make\nit fit. Now, we tried to put a rubber tax into\nthe bill because of anticipated shortages of rub-\nber, and it is an awfully nasty thing to write\nit up in a form that you can really make it work.\nThis is reneral because, frankly, I don't know,\noutside of automobiles and one or two other things,\nhow to 70 about doing this thing and I haven't\nfound anybody in town, including Mr. Henderson's\nshop, that does know how to TO about it.\nCurrier\nSurely Roy, you could, very simply, have increased\ntaxes on the whole renge of consumer durable\ngoods rather just this five dollar use tax on\nautomobiles, that applies to the share cropper\nas well as the millionaire. There is your\nbeautiful example of the contrast.\n(lite:\nWhy is there such difficulty in putting an\nexcise tax on refrigerators?\nM.Dr:\nGo after him afterward. He made a statement.\nHe is available, but don't let's work on that now.\nBlough:\nI am sorry, Mr. Secretary --\nNo, no, I am zlač you did it, but I don't want\nto ork out a new principle of t xes here this morn-\ning. You have said your say, and these fellows\ncan \"O in and make your life miserable in your\noffice.\nBlough:\nI would be SQ tickled to have them show me how to\ndo it that I would be delighted.\nRegraded Unclassified\n11\n- 41 -\nLet's keep moving.\nlou-\n\"Personal exemptions.\n\"One feature of the bill before you which has\nreceived less public attention than it deserves\nis the fhot that the base has been broadened to\nadd about 2,000,000 new taxpayers. This was\naccomplished by beginning the surtex at the first\ndollar of surtax net income.\nI realize this will have to be re-written to\nsimplify it.\n\"The 10 per cent earned income credit in effect\nincreases the exemption from normal tex. Since\nthis credit is not applicable in computing the\nsurtax, the bill has in effect reduced the examp-\ntion of sin-le individuals by 288, of married\ncounles by $222, and of married couples with 2\nchildren by $311.\n\"In the early stages of this bill the Treasury\nDepartment took the position that in view of\nthis substantial broadening of the base personal\nexemptions should not be further lowered. Equit-\nable texation requires that taxes be placed on\nability. Small incomes have very little texpay-\nint ability, and this little is decreased as the\ncost of living rises.\n\"However, the threat of rising prices has become\n30 great that a change of policy is indicated.\nIf the cost of living rises substantially the\neffect will be to tax small incomes much more than\nwould an income tax at the rates provided in this\nbill. If the direct taxation of these incomes\nwill help, as we believe it will, in proventing\ninflation it will be 2. reat service to the very\nTOUDS which would be made newly subject to the\ntex.'\nRegraded Unclassified\n42\n- 42 -\nH.M.Jr:\nBefore anybody says anything, this is our somer-\nsault to get in line with the President.\nWhite:\nI don't like it.\nMill:\nNo. (Laughter)\nThe way it looks, if I were a fellow with fifteen\nhundred or two thousand dollars, I would say,\n\"Well, the Secretary of the Treasury says, What\nWe are going to do to you is get you both ways.\nThe prices are going up, and you will get caught\nthat way, and we will tax the hell out of you,\nand that will catch you that way.\nThite:\nAnd the argument is put on the assumption that\nit will reduce consuming power. Supposing you\nhave got five million new taxpayers. How many are\nyou contemplating getting, two million?\nBlough:\nIt will be more. In addition to that there will\nbe several million more.\n.hite:\nAnd how much do you think you will get out of\neach one, and what proportion of the total con-\nsumption does that make?\nCurrie:\nI think the Secretary had better put this on\npatriotic lines.\nlh-111:\nYes.\nKuhn:\nThat follows along afterward.\nH.C.Jr:\nWell, if you want to out it on the patriotic\nside, I mean it is patriotism for me to Zo along\non this because I don't believe in it. Why\nnot quote from the President's letter?\nMaitor\nWhy not leave it out, Mr. Secretary?\nRegraded Unclassified\n43\n- 13 -\nH.W.Jr:\nWell, you are going to be asked.\nMagill:\nI think you do much better on your patriotism\nthan you do on this paragraph.\nThite:\nI would agree with that.\n5.M.Jr:\nWhy not simply. say that after giving the matter\ncareful consideration, at the end of six months\nthe Prosident decided that this was what he wanted?\nMarill:\nWell, but you can do better than that. You can\nmake yourself sound awfully consistent, I think.\nCurrie:\nAwfully consistent? (Laughter)\nYou said, \"I now wish you had asked for more\nand you certainly are going to have to get more\nnext year. If You can repeat the same thing hero,\nif you vant to, that at the beginning you thought\nit wasn't necessary to - for such reasons as you\nhave given here to tap these fellows down at the\nbottom of the barrel, but that, my gosh, this\ndefense business now is pretty terrible, and we\nwill have to do a little something.\nCaston:\nIf it is necessary.\nMagill:\nAnd I don't know why you shouldn't add what is\nthe fact, that decreasing exemptions will actually\nproduce more money from the boys up at the top\nof the scale than it will from the fellows at the\nbottom, that you are not really soaking the little\nfellow in the eye as much as the next fellow.\nBlough:\nThat comes on the next page.\nMarill:\nExcuse me. (Laughter)\nGauton:\nI was going to say, if it was necessary for the\nman without enough bread to zive n loaf of bread\nin order to induce the man in the upper brackets\nRegraded Unclassified\n44\n- 44 -\nto accept cheerfully another five per cent taxa-\ntion, I think he will be willing to give that\nsacrifice.\nE.U.Jr:\nHerbert is going back to North Dakota days when\nhe WS A non-partisan leader.\nHocles:\nWhat you are talking about here is reducing your\nexemptions. Your exemption before with your\nearned income has been twenty-two hundred. In\nother words, anyone receiving twenty-two hundred\ndollars or more paid no income tax. If they had\ntwo children they would have to get twenty-eight\nhundred dollars before they paid any income tax.\nBlough:\nThirty-one hundred.\nEccles:\nYes, thirty-one hundred. Now, I don't agree with\nHarbert at all. I have been very strongly in\nfavor of reducing the base at this time. If it\nwas a time when we wanted to stimulate consumption\nand increase the standard of living, then I feel\nthe direct opposite about it. What we are trying\nto do now is to reduce consumer buying power,\nand the great bulk of consumption comes in the\ngroup below three thousand dollars, we will say,\nor if it is a married couple without children,\nwe will say in the group below twenty-two\nhundred dollars.\nNow, there are a great many people in that group\nthat are etting a better income than they ever\nrot in their lives, which means - if we had the\ngoods for them, that is fine, I am for it, but\nthey have got greater purchasing power than we\nhave got goods available to supply them. There-\nfore, the net result of that increased buying power\nis just purely inflationary, that is all. I\nthink that it is important to reduce the base\ndown to fifteen hundred, and I don't think that when\nRegraded Unclassified\n45\n15 .\nyou look at the income of the - of people as a\nwhole in this country, I doubt if we have got\nit up to fifteen hundred yot, the average.\nCertainly fifty per cent of our population will\nbe at fifteen hundred or less.\nhite:\nThe way you put it, Marriner, I think it is\na little misleading. It is true that the bulk\nof the purchasing power comes in the lower income\ngroups, but that is not the problem. His problem,\nas I understand it, and the solution which you\nare recommending is as follows: Shall & man who\ngets thirty dollars a week pay in addition to\nother forms of indirect taxes, in addition to\nincreasin costs which his wages rarely catch up\nto, shall he pay an income tax? You say he shall.\nI gather that if he shall, using the reason that\nyou have described, it will be pretty small,\nwill it not? I take It that a man who gets\nthirty dollars a week, you are not going to expect\nto pay at the very most more than fifty dollars\na year, if that.\nPubles:\nTell, if you drop it to five hundred dollars,\nI don't know what the rate would figure. It\ndepends on your normal and your surtax.\nMite:\nI diân't know what you had in mind. All I wanted\nto say was that if you follow those tactics\nyou will find that the amount of purchasing\nower that you take away from those men is very\nsmall in proportion to the total amount of pur-\nchasing power which is expended on consumers'\ngoods and elsewhere.\nBlough:\nLet me give you an example.\nEccles:\nOur fellows don't think SO.\nSlouch:\nSuppose you go from twenty-two twenty-tho, which\nis the present, to fifteen hundred dollars, the\nRegraded Unclassified\n46\n- 46 -\ntax which that married couple will pay, if it earns\nt enty-two twenty-two and is now free from tax,\nis sixty-five dollars.\ndocles:\nYes, under your present House bill.\nMough:\nTith the personal exemptions which the President\nhas recommended, the tax will be sixty-five\ndollars.\nceles:\nHow many people will that cover?\nBlough:\nWell, I don't know. Roughly I would say around\nfive million people, but not all of them - only\nthose at the top would pay sixty-five dollars.\nThey would pay on down to zero.\nScales:\nWell, the way I look et this thing is, you have\nnot to hit that group. You have not to hit\nthe oxcess profits taxes. You have got to\nhit the special excise taxes. You have got to\nclose un the loopholes. You have got to insist on\njoint returns. You have got to do all these things.\nIt isn't a cuestion of being - of discriminating\nand penalizing this particular group, 85 I see\nthis problem, with a thirty billion dollar or\nor forty billion dollar a year defense program\nwhich you are going into. You are going to have\nto hit the whole works here.\nShite:\nBut I would be inclined to put it on another reason\ninstead of aying to a man who is getting thirty\ndollars & week, \"You a e getting thirty dollars\na week and you are helping inflation by spending\ntoo much money on consumers' goods, and we are\ngoing to take a, ay some of that money SO you can't\nspend it on consumers' goods.\"\nScale:\nThere may be other reasons.\nIt is not = rood argument.\nRegraded Unclassified\n47\n- 47 -\nI don't think SO, I think you have got to put\nit on the basis of everybody is sacrificing\nand we --\ninston:\nYes.\nEccles:\nI agree with you that from a standpoint of\npublic appeal and getting it over, I think that\ncertainly is the argument that the President put.\nThe President says everybody --\nMito:\nI think the public appeal is closer to the truth.\nH.M.Jr:\nMy idea S simply this, unless it looks as though\nI was trying to duck it. It says here, \"In the\nearly stares the Treasury Department took the\nposition, If and so forth. August first the Presi-\nSent of the United States addressed the Contress\nas follows, direct quote.\nThite:\nSure.\nH.M.Jr:\nAnd let it 70 at that. The were for it, and now\nthe President is for it, and the inference is - if\nthey ask me, \"Are you for what the President wants?\"\nI say, \"Yes.\"\ninston:\nI wouldn't make it as bald as that because that\nimplies the fact you are for it because the Presi-\ndent wants it.\nH.M.Jr:\nThat is the truth.\nTaston:\nI don't believe you want to say that.\n1.M.Jr:\nThere is no question about what we went along\nunwillingly from Doughton's answer. We weren't\nfor it, and now the President wrote such a letter,\nO.K., I am a hired man and I am for it.\nlatill:\nHaven't you not some connecting link between the\ntwo?\nRegraded Unclassified\n48\n- 48 -\nH.M.Jr:\nNone. I can't even blame Lauch this time.\nGaston:\nI think you can say that everyone is making\nsacrifices.\nEccles:\nI am innocent, completely.\nCurrie:\nWe are all looking at you, though. (Laughter)\nEccles:\nThat was just as much a surprise to me as it was\nto the rest of you.\nKuhn:\nYou have always talked in favor of greater parti-\ncipation in - a greater sense of participation\nfrom the little man, haven't you?\nH.M.Jr:\nNo, I don't think SO.\nWhite:\nAnother statement. Small incomes have very little\ntaxpaying ability. The assumption is that therefore\nyou shouldn't put income taxes on them. It is im-\nplicit you would agree that he also pays a good\ndeal of indirect taxes already out of that small\nincome.\nH.M.Jr:\nThat is the trouble. He pays just as much per\ncent on his cigarettes as the rich fellow does.\nEccles:\nI hate to be put in this position because nobody\nis arguing stronger than I am to increase consump-\ntion, and it looks like I am reversing my position\nbut I am certainly for lifting up the - gosh,\nthe President - if anybody has talked more about\nthe lower one third of the income group than he\nhas --\nWhite:\nNow we want to give it a little implementation.\nH.M.Jr:\nMarriner, we all agree. We have got to go along\nwith the President. It is just 8 question of how\nto say it. I think the simplest way is just to\nRegraded Unclassified\n49\n- 49 -\nquote from his letter. I am willing to say so\npublicly.\nDell:\nSuppose you can't say it is a changed situation,\nbecause you opposed this lowering right up to\nthe last minute, didn't you, Roy?\nBlough:\nWell, we weren't asked about it in, say, the last\nmonth.\nBell:\nYou can say that the situation has changed so\nfast and the bill is going to be much larger\nand bigger than we thought it would be, and every-\nbody has got to contribute.\nMagill:\nThat is the face saving thing to say, I think,\nsomething of that sort.\nWhite:\nOr you could say, and there is much to be said\nin times of this kind for men displaying their\npatriotism for even greater sacrifices than might\nbe ragarded as reasonable.\nBlough:\nOr we have to get ready for next year's bill, so\nwe had better sharpen it up now.\nH.M.Jr:\nCould you gentlemen excuse me & minute? The Butch-\ners of America are in Mr. Graves' room with a\nmillion and a half dollars they want to invest in\nsavings stamps.\nSaston:\nUnion butchers?\nM.M.Jr:\nYes. Incidentally, that is the same croup that\nran that amazing art exhibit in New York. But\ngo right ahead. It will only take a minute to\ntake a million and a half.\n(The Secretary left the conference temporarily).\nGaston:\nI don't want us in the position of seeming to\nRegraded Unclassified\n50\n- 50 -\nsupport an idea that we don't want that increased buying\ndemand that comes from a man buying 2 pair of\nshoes when the child is barefoot.\nWhite:\nWe have placed Marriner in the position where\nhe is moing to soak the small fellow, but I\nthink your economic argument is 8. little bit week.\nKuhn:\nYou had 8, rood piece in Fortune in which, as I\nremember it, you didn't favor broadening the base.\nZeeles:\nOh, yes; yes, sir.\nKuhn:\nOn what grounds?\nSceles:\nI fevored broadening the base as just a part of a\ncomprehensive tax arotam. Primarily, however,\nto -ot away from this argument for a general\nsales tax. I opposed very bitterly a general\nsales tax, which would ret a lot of people with\nless than fifteen hundred dollars, that this was\na substitute for the argument for a general sales\ntex, that it did have some relation to ability\nto pay where a general sales tax had absolutely none.\nlough:\nShould e go in now and say We want the three hun-\ndred million now, but We want to take three\nhundred million off these excises?\nBuhn:\nBut on diûn't make B. lot of suppositions that\npeople are making, that there is an inexhaustible\namount of revenue to be obtained just from broad-\noning the base?\nEccles:\nOh, no, I didn't do that.\nkuhn:\nwould it be any rood for the Secretary in this\nstatement to try to nut this in perspective and\nshow people that in the first place this is not\n2. magic revenue raising device? You can't ret\ninexhaustible amounts just by lowering the base\na little bit.\nRegraded Unclassified\n51\n- 51 -\nEccles:\nAbout two hundred fifty million.\nKuhn:\nAnd you don't do an awful lot to check inflation.\nEccles:\nI would say, now I am for - this is a tax that\nought to be put on, everybody get into this thing,\nbut, you see, I certainly would not favor this\nCongress broadening the base here unless they put\nback the joint returns and unless they - I would\nhit them awfully hard on the excess profits.\nFoley:\nWhat this Committee will do is to lower the tax\nbase so that the little fellow who is bearing\na greater share --\nWhite:\nThey will say, \"Well, let's give the Treasury\nsome of the things it wants, anyway.\"\nIcoles:\nBut the point is, the President has come out\nfor this, the Secretary is going to come out\nfor it. Now, my point is - that if he is going\nto come out for this --\nFoley:\nBut it isn't going to come out that way.\n(The Secretary returned to the conference).\nEcoles:\nThen he certainly should justify it. It would only\nbe on the grounds that these other things are\ndone. Whether they are doneor not is up to Cong-\nress, but certainly his record is much more con-\nsistent than to merely come out for this tax and\nthen not tie it in with doing these other things.\nI would come out for it only on condition.\nH.M.Jrs\nWhich tax is this, Marriner?\nFoley:\nLowering the base.\nEceles:\nWe are saying here that the lowering of this base -\nif the condition renches the situation where you\nRegraded Unclassified\n52\n- 52 -\nhave got to reach out and touch all these people\nand the President takes that position and you are\nwilling to support it, you think that it is desir-\nable from many standpoints, but it is possibly\nmuch less desirable than it is to hit the excess\nprofits and put joint returns in. My point is that\nyou can't favor this without saying that it would\nbe improper for Congress to hit these little fel-\nlows until they do some of these other things.\nWhite:\nIs it possible to have a double edged weapon fol-\nlowing that line, saying that if we are to ask,\nthere is something to be said for increasing sac-\nrifices on the part of all segments of the popula-\ntion, but if we are to ask for these additional\nsacrifices on the part of those who are less able\nto make them, then certainly there can be no\nexcuse for not - and then go to your joint returns?\nH.M.Jr:\nIf you don't mind, I have got 8. better way, if I\nam going to say it. Why not say this, gentlemen,\n\"I Am appearing here before you people for an\nall out tax bill, which means that every citizen\nin the United States who has any income from\nseven hundred fifty dollars up should make make\na contribution toward an all out defense program\nand nobody should escape their proportionate amount,\nor a contribution in the form of taxes,\" you see.\nWhite:\nI should think that would be all right if you\nfollow that way, but, if you are going to demand\nthe sacrifices of those groups --\nM.M.Jr:\n\"Therefore, in the taxes, in an all out tax\nbill, for an all out defense bill, the following\nthings should be included\" --\nliagill:\nGood.\nH.K.Jr:\nWhat do you say, Ros?\nMagill:\nI say good.\nRegraded Unclassified\n53\n- 53 -\nU.S.Jr:\nAn all out tax bill for an all out defense bill,\nand in those groups we should include joint tax\nreturns and this thing and that thing and so forth.\ningill:\nState and municipal bond interest?\nH.M.Jr:\nYes.\nVacill:\nWhy not?\nNow we are getting somewhere and then list the\nthings that should be included.\nVacill:\nI don't see how you can say that the fellow with\nseven\nhundred dollars income has got to pay\nmore. We don't want him to get this loaf of\nbread llerbert is talking about. But the fellow\ndown in Texas we want to give a little different\ntreatment to.\nE.M.Jrs\nNow we are getting somewhere, an all out tax\nbill for an all out defense bill, and in en all\nout tax bill you have got to collect from every-\nbody.\nEccles:\nI think that is a good way to approach it, but I\nthink that it is- that you have got a marvelous\nchance here of shaming, in & way, the people\nwith income, the business interests who after\nall have got more at stake. The people who have\ngot property have got more at stake.\nCaston:\nThe President has asked the people in lower incomes\nto set an example in making sacrifices that all\nclasses should make.\nWhite:\nBut instend of saying \"and\"itis the \"but\" phrase,\nbut we cannot ask them unless, --\nBooles:\nThat is right.\nRegraded Unclassified\n54\n- 54 -\nWhite:\nAnd that will put pressure on the joint returns\nand put pressure on the excess profits tax.\nGaston:\nThe President is out definitely against joint\nreturns.\nCurrie:\nNo.\nMagill:\nNo, he isn't.\nWhite:\nLauch claims that he is not.\nCurrie:\nI have got his letter here.\nMagill:\nNo, that is all right.\nGaston:\nHe just practically killed it but --\nBlough:\nIs he or is he not?\nBell:\nEverybody said he is against it at the Capitol.\nCurrie:\nDoughton reports that \"As to mandatory joint\nreturns, we are pleased to learn that the President\nas well as the Treasury approves of the principle.\"\nIt is just a question of granting this one condi-\ntion of substantial relief to earned income.\nH.M.Jr:\nI will tell you what you do, if you want to know\nin this room.\nMagill:\nDon't put a lot of political gloss around it. He\nsays, \"I am for joint returns.\"\nGaston:\nYes, but the letter was intended to kill joint\nreturns, and did.\nMagill:\nThat is what you fellows know, but I don't know\nthat. I am a citizen of New Yoek and I am not\nin Washington, and as far as I can see, the Presi-\ndent is for it.\nH.M.Jr:\nIf you want the history, that is neither here\nRegraded Unclassified\n55\n- 55 -\nnor there, but the way the letter was written -\nwell, it speaks for itself.\nWhite:\nDoes it speak for itself if Mr. Currie in reading\nit says he is not against it?\nMagill:\nHe isn't against joint returns.\nWhite:\nAnd Mr. Magill says he is not against it. You are\nreading something that you know into it, but that\nis his letter.\nM.M.Jr:\nNo, the President took the Treasury position that\nhusband and wife should file one return provided\nthey had that slight exemption.\nMagill:\nThat is richt.\nEccles:\nDefinitely he took that. But what I happen to\nknow about it --\nH.M.Jr:\nHe reversed himself within twenty-four hours\nbut that is what he --\nEccles:\nI will tell you, I know that is the position\nbecause Henderson and I were talking to him\nabout another matter, and he happened to have\nthese tax letters before he sent them up on the\nmill and he tried it out on the dog, I guess.\nHe just said, \"What do you\" -- We got talking\nabout taxes and he said, \"Now, I think on this\njoint return,\" you see - and he mentioned the fact\nthat the joint return was all right but that\nthe normal tax and the surtaxes took into account\nearned income, you see, but the joint return\ndidn't, and therefore it was inconsistent and\nit should be modified in that particular,\nthat the joint return was perfectly all right,\nbut it certainly should not - should take into\naccount earned income as well as the other.\nWell --\nRegraded Unclassified\n56\n- 56 -\nFoley:\nI don't agree with you. I agree with Herbert.\nI don't think he is for joint returns, politically,\nand I think the object of that letter was to\nkill joint returns in the tax bill, and it did.\nEccles:\nI don't know what the object was.\nFoley:\nYou can qualify it any way you want to. You can\nsay he is for it if there is an earned exemption\nor an earned income credit, but the purpose of that\nletter was to strike out of that bill compulsory\njoint returns, and it did.\nWhite:\nFor political reasons? Does he know how few\npeople vote who have to pay joint returns?\nGaston:\nAdmitting all that, where do we go from here?\nIn other words, does the record admit of the\nSecretary now supporting joint returns? Maybe\nit does.\nCurrie:\nWith this proviso, yes.\nH.M.Jr:\nWell, of course --\nGaston:\nThat is the practical question.\nH.M.Jr:\nWell, I sent Sullivan up on the Hill and that\nis what he said was the Treasury position, and\nthen the President comes along in a letter and\na hundred per cent takes the same position as\nthe Treasury. Now, what his object was or what\nthe deal was, as far as my testimony is concerned,\nit is none of my business.\nWhite:\nThen there is no disagreement here.\nFoley:\nThat is right.\nBlough:\nThen you think it is safe to press this particular\nidea without the thought that we will get --\nRegraded Unclassified\n- 57 -\nYes. Now, Ed Foley made B. point while you were\nout which I think is important.\nOn the record, the public record, the President\nis taking the same mosition as the Treasury.\nAdll:\nThat is right.\nHow, what is behind the scenes is none of my\nbusiness.\nAnd that is recognized by Doughton, that there\nis the same position.\nMilet\n.hile you were out, Mr. Secretary, Ed roley took -\nmade this comment, which I think is importent, that\nif you don't take the position that you are expec-\nting these secrifices but only on condition of the\nother sacrifices, that the fellows on the Hill\nwill not - will only accept the lowering the base\nand they won't accept the joint returns, and they\nwon't accept the excess profits tax, and they will\ntake the position that, well, let's give the Treas-\nury something that it vents.\nNo, Herry, let's - you can sit here all morning\nlooking at innuendoes and this thing and that\nthing, but what I am trying to do is take the\nposition that I believe in, morally and ethically\nand every other way.\nhite:\nI was merely riving an additional reason why\nthat position should be taken.\nJr:\nYou can - never mind what Ed thinks or anybody\nclse, I want to 70 up and be sincere. I am\nwilling to go along with the President on the\nlower thing if it is an all out effort.\nRAte:\nWell, you diin't understand what I said but it is\nnot important, I arree.\nRegraded Unclassified\n58\n- 58 .\nH.K.Jr:\nLet's go ahead.\nBell:\nI wonder if it would be legally possible, Mr.\nSecretary, and this would be in line with the\nPresident's suggestion the other day, to have,\nsay, a minimum amount that everybody must pay\nif we take everybody above seven hundred fifty\nor five hundred. They must pay ten dollars.\nWe have got something in the works on that which\nI will show you.\nBell:\nI see. That will take the place of this exemption you\nare talking about.\nH.M.Jr:\nI have got something in the works but it is\nstill too crude, but later in the day we will\ntalk about it. I don't want to explain it now.\nI have got an idea that I had at seven this\nmorning and I am having the boys see if it is\npractical. If it is we will show it to you\nlater in the day.\nBell:\nAlong the same lines?\nH.M.Jr:\nYes, but it is still too crude.\nBlough:\nMay I say, Mr. Secretary, that on the basis of\nthis discussion I think we can approach this\nwhole tax section from quite a different and\nmuch superior point of view and get you something\nwhich will stress this all-out tax program idea\nwith these as elements in it.\nC.M.Jr:\nI understood what Harry White was saying before.\nHarry, I understood what you said.\nWhite:\nAll right.\nCurrie:\nI was rather sorry, Mr. Secretary, to see you\ndrop one of the earlier proposals in the tax\nRegraded Unclassified\n59\n- 59 -\nbill, which I thought was swell. That is the\nheavier estate and gift taxes.\nH.M.Jr:\nPut them back.\nCurrie:\nBecause they cut that very badly, you know.\nH.M.Jr:\nPut it back and don't forget what Magill said\nabout state and municipals.\nBlough:\nAre you prepared to tax them now?\nWhite:\nThat is what an all-out tax program means.\nH.M.Jr:\nSure, I like it, an all-out tax program to go\nhand in hand with an all-out defense program.\nWhite:\n\"And this is what an all-out tax program means,\"\none, two three, four.\nH.M.Jr:\nRight.\nSccles:\nYou are cutting these exemptions and then you\nhave got the justification for your all-out\ntax program.\n2,2,Jr:\nYes, Anybody got any ideas of what he wants\nin an all-out tax program, give it to Roy and\nthe sky is the limit as far as I am concerned.\nWhite:\nYes, elimination of depreciation?\nH.V.Jr:\nSure.\nWhite:\nTwo hundred fifty million.\nM.M.Jr:\nRos and I had that in there again and again.\nWhite:\nAnd most of the times it has come out before it\ngot to the Hill, Mr. Secretary, if I remember\ncorrectly.\nRegraded Unclassified\n60\n- 60 -\nmgill:\nNo, we cot it printed B. couple of times.\n(Laughter)\nINV.Jr:\nAll right.\ninston:\nI am afraid that the inclusion of all these\npoints about stopping inflation in the latter\npart, several pages in the latter part of this\ndraft, tends to make it more a speech on infla-\ntion, rising prices, than on taxation, and I\nthink we will have to find some device to change\nthat because you are going to have to testify\non that subject again. It seems to make the\nprincipal topic the matter of inflation. I\nthink the principal topic here wants to be\nequitable texation at a time of emergency.\n(hite:\nParticularly with the inclusion of the recent\nmaterial that Roy is suggesting now, I think\nit makes less necessary 8 good deal of this\non pricing.\nVagill+\nI think - isn't the place for your price stuff\nthis? This has been mentioned before. I agree\nwith what Harry said. Probably because that\nis my background. I would like to see this\nall out tax program be your central feature here.\nIf that is what we are going to do, let's high-\nlight that. But I think it would also be extreme-\nly good to bring in the price control business\nas something that you are very conscious of,\nand that what you are advocating here will con-\ntribute to that end, too, and that that is also\na very important end. Probably all of you read\nthis business of Ernest Lindley's this morning.\nH.M.Jr:\nI read Ernest Lindley and then I quickly called\nup Marriner and said, \"Come on over, Marriner,\nbecause I have to consult you.\"\nRegraded Unclassified\n6!\n- 61 -\nAnzill:\nThe economic experts of the Government are going\nin all directions. Why not show them once that\nthe economic experts are going in the same\ndirection.\nWhite:\nI agree with you, but I think that can be done\nin possibly one or two pages, instead of\nsix or seven.\nMagill:\nI think so, too. I wouldn't chance the focus of\nthis.\nCurrie:\nParticularly since the Secretary is going up\nto testify particularly on inflation.\nSceles:\nThat of course is absolutely correct here.\nH.N.Jr:\nYou might tell Ernest sometime it comes better\nfrom you than from me,\nEccles:\nI will. I hadn't seen the article at all.\nIn fact, I don't t think I have seen him in a\nyear.\nH.M.Jr:\nYou mi ht tell him sometime. Anyway, where\nwere you, Roa?\nMyill:\nAt the bottom of page twelve, I think we were.\nH.M.Jr:\nRos brought up the Ernest Lindley business, I\ndidn't -\nBlough:\nShall I read?\nH.M.Jr:\nWhere are we, on twelve?\nBlought\nThe middle of twelve.\nH.M.Jr:\nAll right.\nMought\n\"A further benefit to be derived from reducing\nRegraded Unclassified\n62\n- 82 -\npersonal exemptions is to make it possible for\n8. larger number of persons in the country to\nfeel that they are making direct contributions\nto the defense program. During the course\nof this tax bill a good deal of evidence has\nbeen noted to the effect that many people want\nto make such & direct contribution.'\nI rather that would be reatly strengthened\nunder this approach.\n\"Accordingly, in the light of the developments\nof the past few months it is our recommendation\nthat the personal exemptions of both single and\nmarried persons be substantially reduced so\nthat the income tax will reach a much larger\npercenta of the national income and will\naffect a much larger percentage of the persons\nof the country than it does at present.'\nMite:\nMay I make one correction there that it seems\nto me is necessary for accuracy? \"Will reach\nA larger percentage,' not \"a much larger percen-\ntage.\nBlough:\nAll right.\n\"Too much should not be expected from lowering\npersonal exemptions. It is not a panacea for\nour fiscal problem. Reducing personal exemp-\ntions as low as $750 for a single person and\n$1,500 for a married couple would bring approx-\nimately\nadditional taxpayers under\nthe income tax and would produce approximately\n$\nadditional revenue. or this\namount of revenue, however, $\nI or\nper cent would come from persons\nalready subject to tax under the House Bill.\nIf\nKuhn:\nI am sorry, Roy, isn't it & little more effec-\ntive to talk of fifteen dollars A week for a\nsingle person and thirty dollars a week for 8\nRegraded Unclassified\n63\n- 63 -\nmarried couple, to show how small these incomes\nare and how little revenue you can get from\nsuch people?\nBlough:\nThere are an awful lot of them, though.\nKuhn:\nIsn't that a more effective way of stating it?\nWhiter\nIt is a little less accurate, because this is an\nannual rate upon which they pay, but it is more\nexpressive.\nFoley:\nI think it ought to be left on the annual basis.\nKuhn:\nYou do?\nM.M.Jr:\nThat is what the President asked for, he asked\nfor it that way.\nBlough:\nAre we trying to stress the small amount of this,\nor what are we trying to stress?\nKuhn:\nI think we should. You say too much should not\nbe expected from it. It is not a panacea.\nGaston:\nI think I would add to that sentence, \"and only\nsuch a percentage or so much to come from new\ntaxpayers.'\nBlough:\n\"Additional measures necessary.\" Now, there follow\nthree pages taken out of the arlier document\non things other than taxation. They are subject\nto criticism as not being necessary in this state-\nment and desirable in another.\nH.M.Jr:\nI think I would take them out.\nBlough:\nHow would it be to put a paragraph in in which\nyou would indicate that other measures are\nnecessary, but wouldn't spell them out, and would\nRegraded Unclassified\n6-1\n- 64 -\nmore or less pave the way for your further testi-\nmony in the other conmittee?\n11.11.Jr:\nIt would be all right.\nWhite:\nYou could even say, \"I intend to discuss some\nof these measures.\nFacles:\nIn taking these out, you take out specific\nthings, but as I understand it, the first part\nof the testimony before you get into the tax\nprogram would stress the imminence of inflation\nand the importance of an adequate tax program\nto deal with it as possibly the keystone to\ngetting at the problem. I would like to see\nthe taxation based upon - that is the only\nreal justification, it is going to make an\nappeal to the country and the people if you first\nconvince them or demonstrate to them. It seems\nto me that there is this danger in taxation,\nand taxation is possibly the most important\nof all the means at the disposal of the Govern-\nment to deal with it. There are others, but\nyou will only want to discuss at this time the\nquestion of taxation as it applies.\nWhite:\nWell, I may be a minority of one here. I have\nfl feeling that that should definitely be empha-\nsized, but that it should not be made the central\nstructure upon which your tax plea rests, but\nnobody agrees with me.\nEceles:\nWell, I am not saying - it is a question of em-\nphasis. I do think that the important process\nof public education to make - you will get much\nfarther on 8. tax program, especially if you are\ngoing to get all these people, if the thing is\nimpressed, and I think the Secretary of the\nTreasury ought to say that.\nBlough:\nMr. Secretary, I would suggest that the solution\nRegraded Unclassified\n65\n- 65 -\nlies in your Ways and Means Committee statement\nwhich you laid out with three or four principles\nof taxation in a period like this. Now, by\nputting them out quite near the beginning of\nthis and then elaborating, one of the points is,\nthis inflation control, elaborating along the\nlines that it is elaborated here, but also\nelaborating one or two of the others, that you\ndo get a bald picture and still get this material\nin.\nH.M.Jr:\nBut I think these last pages here --\nBlough:\nBut these will be left out.\nII.M.Jr:\nThe alternatives?\nBlough:\nWould be left out, except for a paragraph or\nso which would show that you recognize the ne-\ncessity of alternatives, and that you propose\nto talk about them before another Committee in\nthe near future, something like that.\nH.M.Jr:\nYes.\nBlough:\nNow, that leaves us a little bit at the end.\nPage seventeen is next. I am not sure that in\nview of what has gone on before anybody wants\nthis idea, but I would like to at least read it.\nMagill:\nOh, this is good.\nBlough:\n\"In closing my remarks, I desire to point out\nthat although this is a very heavy tax bill,\nthe alternatives to heavy texation are much more\nonerous. Rising debts and rising prices would\ntake much more away from our people now and in\nthe future than higher taxes now will take.\nUnder the tax bill, as it stands, a married\ncouple with no dependents having a net income\nof $5,000 a year will have its Federal income\ntax increased by $198 or 4 percent of its income.\nRegraded Unclassified\n66\n- 66 -\nIf 1/3 of the family's income is saved or spent\non items not affected by a changing cost of\nliving, an increase in the cost of living of\n5 1/4 per cent would impose as great an addition-\nal burden on this family as would the proposed\nincome tax. The cost of living index\" --\nMigill:\nExcuse me, Roy, do you want interruptions as you\ngo along? Wouldn't you be better if you turned\nthe first part of that around and said \"Two thirds\nof the family income is spent on so and 30\"?\nBlough:\n\"The cost of living index has increased 5 1/2\nper cent in less than 8. year, since September,\n1940. It is clear from this simple illustration\nthat rising prices are taxes just as surely\nas income taxes so far as the family is concerned.\"\nShite:\nProviding the income remains the same, which it\ndoesn't during a rise in prices.\nBlough:\nI grant you that is true, that we ought to\nput that in there.\nWhite:\nI think there needs to be some sentence to pay\nyour respects to - because these high incomes\nare frequently the - the bulk of high incomes\nare the ones that probably increase with rising\nprices.\nBlough:\n\"If in en attempt to protect the incomes of our\npeople we hold down taxes and as 8 result the\ncost of living rises, we shall have taxed them\njust as surely as if we had levied on them\ndirectly.\n\"Rising debts may not only increase the tendency\nfor prices to rise but they increase the burden\nin another way by postponing it. That means that\nboth interest and principal must be paid for\nlater with higher texes imposed at a time when\nRegraded Unclassified\n67\n- 67 -\nthey may be harder to pay and less willingly\npaid then now.\n\"Our defense program is an absolute necessity.\nIt must be paid for. In so far as possible,\nit should be finally paid for now.\nMite:\nI think that is a good sugrestion, but the last\nsentence is weak, I think.\nD.M.Jr:\nVery good.\nMagill:\nI would le ve that even in the revised version.\nH.M.Jr:\nYes, I think that is good.\nRuhn:\nIs there anything wrong with the comparison of\nrising costs of living with taxes? The one is\ncompletely unproductive and unconstructive. Taxes,\nafter all, enable you to --\nwhite:\nNo, I think his point here is - I thought it\nwas rather clear, would be clear to everybody,\nthat in so far as taxes restrain price\nrises, do you make the burden on the taxpayer\nsmaller than it would otherwise be? There is\nno assumption hore that the alternative is\npayment of taxes or no taxes. It may be the\npayment of taxes or the payment of hidden bur-\ndens through rising income, but the speciousness\nof it is that it is only applying to those\npeople whose incomes do not rise as rapidly as\nprices, and the very people whose incomes rise\nat least as rapidly as prices or move, are busi-\nness men of one kind or another. They make more.\nGaston:\nI don't believe that is quite correct, liarry.\nWhiter\nOh, yes, it is a matter of fact that prices\nin - profits rise more rapidly than prices.\nRegraded Unclassified\n68\n- 68 -\nlaston:\nThe increased price is a tax, no matter whether\nyour income is increased or not.\nWhite:\nBut your income increases because of price in-\ncreases.\nTeston:\nYou are then bringing in additional factors\nthat have nothing to do with the general proposi-\ntion.\nEccles:\nYour income doesn't always rise.\nWhite:\nBut in the main, business profits rise --\nEccles:\nYou may find out that it rises as fast --\nCurrier\nWe are going to hit both by rising prices and by\nhigher taxes.\nWhite:\nThe people whose incomes don't rise get hit both\nways, but the people whose incomes do rise --\nEccles:\nYou are going to hit them plenty.\nWhite:\nPeople in high - high incomes from business\nprofits rise more rapidly than prices, so if\nI were a business man I would prefer higher\nprices even though it meant higher taxes.\nM.M.Jr:\nGentlemen, just a minute. I would just like to\nask you, is there something which you have in mind\nwhich isn't in here that you would like to have\nin here?\nCurrie:\nI think you have covered all the points I had in\nmind, Mr. Secretary. There is just one point on which\nyou might guard yourself a little. As you know,\nthe automobile workers and other people are\ngetting very agitated about the unemployment\nthat is going to result from the diversion of\nproduction and from the shortages of essential\nRegraded Unclassified\n69\n- 69 -\nmaterials in civilian supply. You might just pay\nyour respects to that somewhere, just show that\nyou are conscious of it, that everybody is not\ngoing to have increasing employment and a rising\nstandard of living, rising incomes.\nH.M.Jri\nWhy should I do that?\nCurrie:\nWell, because I think you will be tackled on it,\nthat is all. It is going to become increasingly\nsevere from now on. There are going to be an\nawful lot of people thrown out because of the\nshortage of materials.\nH.M.Jr:\nHow does it help me get a tax bill through?\nCurrie:\nIt doesn't, but in the early part of your state-\nment there is a small point I didn't mention\nin passing. For instance, on page five you say,\n\"Although there are some factors in the situation\noperating to check the inflationary trend,\nsuch as surplus stocks of some agricultural\ncommodities, unemployed labor resources and par-\ntially employed production facilities,\" --\nM.M.Jr:\nThat is the place, and dislocation of labor.\nCurrie:\nYes, just put in something to show that you are\naware that everybody is not going to be --\nn.M.Jr:\nPut it right in there.\nWhites\nAnd I think - that is the point, I gather, that\nyou intend to hit harder in the other statement,\nmake more of it.\nH.M.Jr:\nYes.\nShitor\nSo that you are aware of that and expect to do\nsomething on it.\nH.M.Jrs\nYes,\nRegraded Unclassified\n70\n- 70 -\nM.ite:\nSay something on it.\nH.M.Jr:\nBut he can out this just what he said at that\nplace.\nCurrie:\nYes.\nK.V.Jr:\nWithout enlarging on it, Harry?\nYes, enlarging on it.\nH.M.Jr:\nI say not enlarging on it in the tax statement,\nbut you can in the price statement.\nwhite:\nThat is right, and then the inclusion of the\nestate and rift taxes.\nI.E.Jr:\nOh, yes. Marriner, what - do you see anything\nthat we have left out?\nEccles:\nI think the statement as & whole, RS revised -\nI think it is a very good statement. I like\nit. What has been cut out at the last, I agree\nthat that is sort of dragoing - covering an\nawful big field in a tax statement. I would\nlike to have the Secretary say some of those\nthings somewhere sometime. I think it is -\nthere are a lot of important things.\n3.2.Jr:\nI will say it on Tueaday.\nScoles:\nThat is all right, then.\nM.M.Jr:\nI will say it on Tuesday.\nEccles:\nBut I do think it is important that if it is taken\nout of the tax statement and used elsewhere,\nI think that is all right. I would like to see\nthis reconstructed along more popular lines,\nlines that might bite a little harder and that\nwould - the public would understand them 2 little\nbetter. I think it just doesn't bite in places\nhere that it needs to bite in to be really\neffective, and 8.5 I understand the discussion,\nRegraded Unclassified\n71\n- 71 -\nthere is some intention of trying to make it\ndo just that.\nH.M.Jr:\nI think SO.\nEcoles:\nThe effect of inflation on the cost of defense\nhas never been mentioned. We talked of inflation\nliving costs and so forth.\nM.M.Jr:\nWe have got that for our price statement, also\nyou cover it tomorrow.\nBell:\nThere is a little in here.\nKuhn:\nIt is in this statement.\nWhite:\nWe expect to expand on that.\nEccles:\nBut it does seem to me that that in itself is\nterribly important to the Government, that if\nyou don't stop the inflationary cost of defense --\nH.M.Jr:\nMarriner, Lubin is working uu 8. whole original\nset of figures for me on that point.\nEccles:\nOh, yes.\nH.M.Jr:\nJust what it has cost us in the last six months\nand a forecast of what it will cost us if it\ncontinues at the present rate for the next fiscal\nyear. He is doing a job on that right now. He\nsaid the figures will be original.\nEcoles:\nWell, if something like that in connection with -\nyou talk about a three and a half billion tax\nor a four billion tax, and you can show how\nperfectly inadequate and how perfectly ridiculous -\nI think you have got to draw the size of this\ntax, the size of the revenue, alongside of what -\nhow inadequate that is in comparison with the\ntotal expenditures and particularly would that be\nRegraded Unclassified\n72\n- 72 -\ntrue if the defense - if we zet - if we zet\nan inflation in the cost of defense.\nThat is right. Ros, do you want to say something\nat this time or - you are going to stay behind.\nThank you. Why, what I have been thinking of,\nit may very well be non-productive. I was just\nchecking with Ed. I \"uess you have probably\nsaid it before the ways and Means. I think\nthere are two aspects to this thing, one that\nMarrinor has primarily in mind, and another one\nthat I have in mind ns well. I don't mean to\ndiscount it. This price control business is\nterribly important. I don't believe, however,\nthat that makes the man on the street any hap-\npier about payin taxes. Now, maybe you can\ntress it un in such a way as I think that Roy\nhas tried to do on these last two pa es. That\nis about as effective 2 ay as you an do it,\nbecause certainly the man on the street would\nrather see the country et it for runs than see\nGeneral Motors get it or some other such cor-\nporation. So what has been running through\nmy mind is, I wholly agree with your all out tax\napproach. I think that certainly ought to be\nin here. To me it is just SC ndalous and nothing\nless that you talk about lowering exemptions\nand getting two dollers and & half from somebody\nthat is making thirty dollars a week while what\nto me is a scandal of state and municipal securities\nuntexed zoes on and the scandal of community\nproperty roes on and the scandal of the percen-\ntage of ecpreciation FOES on, and maybe somebody\ncould think un e couple more, but those are\ncertainly the principal ones. I just don't see\nhow you can say to this taxi driver out here\nthat, \"You have got to come through and pay & lot\nof money, but these fellows over here that happened\nto invest in the right things, We are not going\nto touch at all.\"\nRegraded Unclassified\n73\n- 73 -\nIt just doesn't make sense, and I don't think\nyou can be in the position of making that kind\nof a statement.\nH.M.Jr:\nNo, I agree with you.\nMill:\nThen secondly, going on from there, what is it\nthat makes anybody willing or agreeable or\nhappy, if that can be, to pay fifty or a hundred\nor two hundred per cent more taxes?\nWell, I expect it is what you said before the\nWays and Means, but I am not sure but you should\nsay another paragraph or so here, because my own\nfeeling as a taxpayer is that this - as I look\nat it, I feel no confidence whatever in the\nskill of this administration to control prices.\nI think prices are going up. Mr. what is his\nname, Kiplinger, tells me that every week,\nthat the cost of living is going to be much\nhigher this year and much higher next year, and\nso on. I believe him.\nMite:\nHe has inside information.\nVagill:\nI don't look at this tax business as an alternative,\nI look at this as an additional burden I am going\nto have to bear. What is going to make me want\nto bear it? I don't know anything that makes\nme want to bear it other than this saving democracy,\nwhich I guess you spoke of before. But it seems\nto me your strongest footing is two-fold, not\nthis price control which is something that\nappeals to a technician like Marriner, but I\ndon't think appeals very much to the man on the\nstreet. I would put it in, but I wouldn't\nmake that my main foundation. I would certainly\nsay that, \"I am not kidding you about this tax\nprogram. As far as I am concerned, I want to\ngo out after all of these untaxed incomes and\nhere are several that occur to me which you fel-\nlows on the Hill haven't acted on, although I\nRegraded Unclassified\n74\n- 74 -\nhave been talking about it for the last eight\nyears.\n\"Secondly, after all, what we really are interested\nin is saving this country and saving democ-\nracy,\" and I think it does no harm to wave the flag a bit.\nI would wave it a page or two.\nH.W.Jr:\nIncidentally, talking about prices, the first\nhour this morning, commodities, Dow Jones\nFutures, jumped three quarters of a point, which\nis tremendous, and that shows how much confidence\nthey have got that Leon is going to be able\nto control prices.\nWhites\nHe said, \"We are on the brink of inflation.\"\nn.B.Jr:\nIt was just like my statement the day after\nelection. I said, \"The debt is going to be\nsixty billion dollars\" and stocks went up\nseven points, and then they left out the fact\nthat I said, \"as long as Roosevelt is here we\nwon't have inflation,\" so Leon explained it so\nwell that everybody has gone in and bought\ncommodities this morning.\nCurrie:\nThat is a little dilemma in the present situation,\nthe risk you have to take in order to build\nup your - you have to talk as though it is right\nhere, which feeds the flames.\nIt is true.\nInston:\nShouting fire to avoid c panic.\nCurrie:\nThat is right.\nMarill:\nKiplinger says in his letter that canned tomatoes\nare going to be scarce. Everybody I know of\nthat takes his letter told his wife, and his\nwife went down and bought a couple of cases of\ntomatoes.\nRegraded Unclassified\n75\n- 75 -\nGaston:\nYou ought to see the stocking counters, or\nhave you?\nMagill:\nThe stockings are all gone now.\nBlought\nOn this state and municipal securities, is this\ncomment going to include only futures or outstand-\nings?\nMarill:\nOutstandings.\nBell:\nThe Secretary has taken a position on that\nmany times.\nM.M.Jr:\nFuture.\nWite:\nI am very much intrigued by Ros' approach to this\nproblem and to say that we have come and asked\nyou for eight years on these things and list them\nand all of them, even itit takes two pares to\nlist them.\nP.S.Jr:\nI am all for it. It is & breath of fresh air\nfrom the Ihutmeg State.\nCurrie:\nParticularly as Bob Doughton talks about his record\nfor eight years in his letter here.\nS.N.Jr:\nDid you say you are 8. citizen of New York State?\nMarill:\nNo, I an Connecticut.\n.I.V.Jr:\nBut earlier in the day you said, \"as a citizen of\nNew York State.\"\nMagill:\nDid I get mixed up?\n1.2.Jr:\nYes you did and I said, \"That is patriotism, by\nGod, to the last extent if you are.\"\nMacill:\nI hasten to inform you, it doesn't make really\nmuch difference, as far as I am concerned.\nBlough:\nIn your income tax?\nRegraded Unclassified\n76\n- 76 -\nMagill:\nYes, because my sources of income are in New\nYork.\nBlough:\nAnd are taxed in New York?\nMagill:\nSure, my Columbia salary gets taxed at the source.\nH.M.Jr:\nI didn't know that.\nMagill:\nHonestly, it doesn't make any material differ-\nence.\nE.M.Jr:\nI think Ros has given us something and I think\nwe can very quickly get up the various things\nthat we have listed during the last ei eht years\nand jam it down their throats. Well, may I say\nit has been a tremendous help, and we will\nwork a day and when we get something on paper\nI will send it over to you gentlemen, if you\nwould like another look, and if you have got the\ntime.\nEccles:\nI may be up on the Hill tomorrow.\nH.M.Jr:\nWell, I won't bother you, then. I will send it\nover anyway.\nEccles:\nAll right.\nH.M.Jr:\nIf Ros and Kuhn and Blough could stay behind,\nplease.\nRegraded Unclassified\n2nd\n77\nDRAFT\nAugust 6, 1941\n9 A. M.\nSUGGESTED STATEMENT OF THE SECRETARY OF THE TREASURY\nBEFORE THE SENATE COMMITTEE ON FINANCE\nMr. Chairman and members of the Committee: I am here\ntoday to discuss the pending tax bill H. R. 5417. This bill\nwas designed by the House Committee on Ways and Means\nto produce $3,500,000,000 annually in additional revenue\nfor the defense of our country. An amendment adopted in\nthe House has reduced that amount by $300,000,000.\nWhen, on April 24, I made my statement before the\nHouse Ways and Means Committee on this Bill the defense\nprogram was about #39 billion including the lend-lease\nappropriation. Since that time there have been further\nauthorizations and appropriations BO that the total\nprogram at the present time has risen to\nbil-\nIion dollars. or course, not all of this amount is going\nto be spent during the present fiscal year, but as these\nappropriations are spent the fiscal problems of the Govern-\nment and the economic effects of the defense program will\nboth increase.\nOur great problem in providing for the defense of\nthe nation 18 fundamentally the problem of production;\nof actually building planes and tanks, ships and guns\nRegraded Unclassified\n78\n- 2 -\nwith the labor, management, machinery, and raw materials\nwhich we have in our country. Although we can and should\nsimultaneously increase the production of civilian goods\nthat do not compete with the defense program, we shall\nfind that 8.8 we increase defense production it will be\nnecessary to divert to defense uses more and more of the\nresources now engaged in satisfying our civilian needs\nand wants. The pinch of scarce resources and plants 18\nalready being felt and may be expected to become more\naggravated.\nAt the same time that this diversion of production 16\ntaking place, the amount of purchasing power in the hands\nof the people of the country will continue to increase due\nto the large amounts being spent by the Government and to\nresultant fuller employment. The result of the pressure\nof this increased purchasing power on the limited amounts\nof goods and services for which it may be spent threaten,\nin the absence of vigorous action, to sweep us into a\nspiral of rising prices.\nRising prices.\nApparently we are at the same point in price history\nas in 1916 -- on the edge of inflation.\nThe pattern of price rises during the past two\nyears roughly resembles the price movement during the\nRegraded Unclassified\n79\n- 3 -\nfirst two years of World War I -- little rise in the cost\nof living, & moderate rise in the wholesale price index\nand a sharp rise in the prices of basic commodities.\nSince the beginning of the war, September 1939, the\nwholesale price index has risen from 65 to 87 or about\n16 percent. The greater part of this rise has occurred\nduring the past five months.\nThe cost of living index has increased 5th percent\nsince September 1940. Half of this increase has occurred\nin the past two months.\nThe price index of 28 basic commodities has increased\n48 percent during the same period, despite the fact that\nthe prices of many basic raw materials have been con-\ntrolled by the Office of Price Administration and Civilian\nSupply. This increase constitutes B. major danger signal\nof inflation which must not be ignored. The wholesale\nprice index always lage greatly behind the index of basic\ncommodities, while the cost of living index does not show\nanything like the full effects of inflation until long\nafter the seeds of inflation have taken deep root.\nForces meking for price rises.\nThe forces making for further price rises are both\npotent and persistent:\n(1) The Director of the Budget has estimated that\ndefense spending during the fiscal year 1942 will be $15\nRegraded Unclassified\n80\n- 4 -\nbillion, or two and one-half times as much as in the fiscal\nyear of 1941. This increased estimate does not take account\nof extensions of the defense program made after June 1\nand of additional sume needed for lend-lease,\n(2) More important in its bearing on the danger of\ninflation than the figures for expenditures of the com-\ning year are the estimates of deficit spending. The net\ndeficit for the fiscal year 1942 ae estimated by the\nDirector of the Budget will be $12.8 billion compared with\n$5.1 billion for the previous fiscal year. This assumes\nthe present tax structure. If the $3.5 billion tax bill\nwhich is before you 18 passed by Congress at an early date\nthe deficit will be reduced by about $2 billion (the amount\nof revenue yield in the fiscal year 1942 of the #3# billion\ntotal) but it will still be over $101 billion. Again this\nestimated deficit does not take account of the expansion\nof the defense program after June 1, 1941.\n(3) The inflationary force of the Federal deficit\nhas been supplemented during the past year by an expansion\nof bank credit. Total bank loans were expanded by an\nestimated $3 billion or about 20 percent during the\nfiscal year just past. This rise moreover has been pro-\nceeding at an accelerated pace.\n(4) Prices will be increasingly stimulated by\n(a) the shortage of materials for civilian goods\nRegraded Unclassified\n- 5 -\nS1\n(b) increased absorption of idle capacity in many in-\ndustries and (c) further increases in wages and agri-\ncultural prices.\nAlso making for further price increases are the\nheightened obstacles to imports such 8.8 reduced ship\nspace, higher shipping costs and cutting off of normal\nforeign sources of supplies.\nAlthough there are some factors in the situation\noperating to check the inflationary trend, such as sur-\nplus stocks of some agricultural commodities, unemployed\nlabor resources and partially employed production fa-\ncilities, most of these factors were present in the\nfiscal year 1941 in greater degree and yet did not serve\nto restrain price rises even though the forces making\nfor price rises were then much weaker.\nSteps already taken to check inflation.\nSome important steps have already been taken or\nare being taken to check inflation. Congress has made\nprovision for the Treasury to sell Defense Savings Bonds\nand Stamps and 80 to absorb for the defense program funds\nwhich might otherwise be used for civilian purchase of\ngoods. This very important program 18 well under way.\nRegraded Unclassified\n- 6 -\n82\nThe Treasury Department has also launched & plan\nfor selling tax anticipation notes which will facilitate\nthe prepayment of income taxes and will more promptly\nwithdraw purchasing power represented by such taxes.\nThe Office of Price Administration 18 making every\neffort to obtain the cooperation of producers and dis-\ntributore in limiting price rises.\nThese measures to restrain price rises, although\nthey have unquestionably been helpful, are inadequate\nto meet the situation confronting us. We have gone\nonly a small part of the way it will be necessary to go.\nNo must attack the problem on all fronts if we are suo-\ncessfully to check inflation.\nFiscal policy for inflation control\nOne of the most important methods of inflation\ncontrol 1s a strong fiscal policy. The tax bill before\nyou 1s an important step. When I appeared before the Ways and\nMeans Committee in April, I recommended a tax bill to yield\n$3.5 billion of revenue annually above the yield of the\nexisting tax structure. If at that time I could have fore-\nseen the accelerated rise in prices and the great increase\nin the defense program which have since taken place, I\nshould have asked for more than $3.5 billion.\nRegraded Unclassified\n83\n- 7 -\nThe Ways and Means Committee of the House has la-\nbored long and well on this bill and I am not suggesting\nthat you increase the total amount of revenue which it\nprovides beyond the original goal of $3.5 billion. To\nincrease its revenue yield substantially might result\nprompt\nin delay, and passage of the bill is important. I deem\nit imperative, however, that the new revenue yield of the\nthe\nbill be restored to at least/$3.5 billion level.\nWhen this bill has been passed and you and the\nmembers of the Ways and Means Committee have had an\nopportunity to enjoy a well deserved rest from the\narduous labora which it has entailed, I hope that yet\nthis year you will undertake, as the Treasury has already\nundertaken, to make a new survey of our tax system.\nIt 1s now some years since a. tax bill has been passed\nmaking the many technical changes which from time to\ntime are found necessary as a result of experience, new\ncourt decisions and other new situations. Both the\ntaxpayers and the Government suffer 8.8 these uncorrected\nfaults accumulate. Such matters have been kept out of\nthe present bill in order to expedite its passage and\nnot to complicate the issues which it involves. In\naddition to correcting the faults in our tax structure,\nit will again be necessary in the light of the preseht\nprogram for defense expenditures and the threat or\ninflation to increase further the revenue power of the\nRegraded Unclassified\n8-1\n- 8 -\ntax system either late this year or early next year.\nExcess profite tax.\nWithin the $3.5 billion revenue scope of the present\ntax bill there appear to be several possibilities for\ndiscouraging inflationary price rises. The first of\nthese 1e in the field of excess profite taxation. In\nrecent months there has been 9. noticeable tendency for\nvarious groups including business men, farmers and\nlaborers, to endeavor to secure higher rates of return\nin profits, prices and wages. Such efforts cannot be\ncriticized in normal times. At the present time, how-\naver, with the existing pressures for inflation,\nwidespread efforts to increase profite, prices, and\nwages will result not only in larger purchasing power\nand thus still greater pressure on our limited supplies\nof civilian goods, but also in higher costs for the\ndefense program and for goods which civilians purchase.\nThese higher costs in tumnecessitate increases in\nprices and these in turn give rise to new demands for\nhigher wages and higher prices. The spiral goes up and\nup.\nIf we are to expect to stop or prevent this spiral\nwe must be able to show those who receive modest in-\ncomes from their labor or their production that excessive\nprofits are not being received by great corporations.\nRegraded Unclassified\n85\n- 9 -\nThe present excess profits tax places special heavy\ntaxes on profits which are in excess of the profits re-\nceived during the years prior to the defense program.\nThis 18 all to the good, -- 18 indeed essential. It 1s,\nhowever, hot enough. A corporation may make 50 percent\nprofit on its invested capital and not be subject to the\nexcess profits tax if the profit is not in excess of\n95 percent of its average profits during the base period\nyears 1936 to 1939. This basic weakness is found in the\npresent law and also in the bill before you.\nThis 18 not & matter of minor importance. Sub-\nstantial numbers of companies are in the high-profit\ngroup. One out of five profit-making corporations with\nassets of $1,000,000 and over averaged more than 10 per-\ncent net income on their reported equity capital during\nthe years 1935 to 1938 and one out of twenty-five 008-\npanies averaged more than 30 percent. These companies\ncan continue to earn profits at Artually these rates\nwithout paying excess profits tax under either the pres-\nent law or the Committee's tentative plan.\nFailure to apply excess profits taxation to such\nexcess profits is unfortunate also because of the un-\neven way in which competing businesses are affected.\nConcerns which have been making high returns in the\nbase period years are given a competitive advantage\nRegraded Unclassified\n86\n- 10 -\nover newly organized concerns or concerns which have\nbeen struggling to establish themselves. They may\nreceive free from excess profits tax a much higher\nrate of return than their new and growing competitors.\nThe effect is to confirm monopolies in their control\nand to protect well established businesses against\ncompetition.\nMoreover the capacity of a corporation to pay taxes\nis affected by the rate of its return on its investment.\nThe highly prosperous, well established corporation which\nhas been making 30, 40, 50 percent or more on its in-\nvested capital has & much larger ability to pay taxes\nthan & corporation which has been earning only 3, 4, or\n5 percent on its invested capital even though the dol-\nlar incomes of the two companies are the same. Heavy\ntaxes on high rates of profit will not cause the busi-\nness receiving them to be liquidated or discontinued\nfor lack of & minimum necessary profit, which say occur\nwhen heavy taxes are imposed on meager profits. Appli-\ncation to corporations of taxation in accordance with\nability to pay oalls for higher taxes on the profits of\nthose corporations which have the higher rates of return.\nDefense excise taxes.\nIn more normal times excise taxes have little to\nrecommend them except the fact that they produce revenue.\nIn a period such as this, however, excise taxes may in\nRegraded Unclassified\n87\n- 11 -\ncertain cases promote & more positive objective, namely,\nto reduce the demand of producers and consumers for\nsoarce commodities which compete with the defense pro-\ngram and to absorb wind-fall profite which result from\nscarcity of supply relative to demand.\nThe achievement of this objective is not & simple\nmatter. Nevertheless, the further use of exoise taxes\nto divert consumption and to reduce wind-fall profite\nshould be seriously considered by your Committee.\nPersonal exemptions.\nOne feature of the bill before you which has re-\nceived less public attention than it deserves 19 the\nfact that the base has been broadened to add about\n2,000,000 new taxpayers. This was accomplished by be-\nginning the surtax at the first dollar of surtax net\nincome. The 10 percent earned income credit in effect\nincreases the exemption from normal tax. Since this\ncredit 1s not applicable in computing the surtax, the\nbill has in effect reduced the exemption of single in-\ndividuals by $88, of married couples by $222, and of\nmarried couples with 2 children by 8311.\nIn the early stages of this bill the Treasury\nDepartment took the position that in view of this sub-\nstantial broadening of the base personal exemptions\nRegraded Unclassified\n88\n- 12 -\nshould not be further lowered. Equitable taxation re-\nquiree that taxes be placed on ability. Small incomes\nhave very little taxpaying ability, and this little 1a\ndecreased as the cost of living rises.\nHowever, the threat of rising prices has become 80\ngreat that a change of policy 18 indicated. If the\ncost of living rises substantially the effect will be\nto tax small incomes much more than would an income tax\nat the rates provided in this bill. If the direct\ntaxation of these incomes will help, as we believe it\nwill, in preventing inflation it will be a great ser-\nvice to the very groups which would be made newly subject\nto the tax.\n& further benefit to be derived from reducing\npersonal exemptions is to make it possible for a larger\nnumber of persons in the country to feel that they are\nmaking direct contributions to the defense program.\nDuring the course of this tax bill a good deal of evidence has\nbeen noted to the effect that many people want to make\nsuch & direct contribution.\nAccordingly, in the light of the developments of\nthe past few months it 18 our recommendation that the\npersonal exemptions of both single and married persons\nbe substantially reduced 80 that the income tax will\nRegraded Unclassified\n89\n13 I I\nreach & much larger percentage of the national income\nand will affect a much larger percentage of the persons\nof the country than it does at present.\nToo much should not be expected from lowering\npersonal exemptions. It is not a panacea for our\nfiscal problem. Reducing personal exemptions as low\n8.8 $750 for a single person and $1,500 for B. married\napproximately\ncouple would bring/mbout\nadditional tax-\npayers under the income tax and would produce approximately\n$\nadditional revenue. or this amount of\nrevenue, however, $\n, or\npercent\nwould come from persons already subject to tax under the\nHouse Bill.\nAdditional measures necessary\nWhile my purpose in talking to you today about\nthis subject of inflation 16 primarily to indicate the\nways in which the tax program can be designed to help\nminimize the dangers of inflation, it should be pointed\nout that tax legislation will not by itself solve the\nproblem. The control of inflation 18 too great a load for\nfiscal policy alone to carry. There should be additional\naction also along the following lines:\nRegraded Unclassified\n90\n- 14 -\n(1) The Office of Price Administration should be\ngiven the statutory power to fix prices where necessary.\nThe legislation which the President has requested is\nessential. Price rises cannot be controlled when in-\nflationary forces are at work without effective power\nto impose price ceilings enforced by direct penalties.\nThe mere possession of such power tends to make its\nexercise unnecessary.\nThe attempt to prevent unwanted price increases by\nfiat, however, 1s bound to break down here as it hae\nelsewhere unless it 18 accompanied not only by an ade-\nquate fiscal program to absorb buying power, but also\nby other methods.\n(2) Vigorous steps should be taken to increase the\nsupply of goods required for military and civilian needs.\nIncreased output is in itself a major objective of our\ndefense program and the most effective and desirable\nmethod of preventing inflation. There should be fur-\nther exploration of the possibilities of inducing\nexpansion of production facilities and labor supplies\nwhere such response could not be expected to occur auto-\nmatically.\n(3) There should be authority to provide systematic\npriorities of scarce supplies among industries making\ncivilian goods. In order to obtain a fair distribution\nRegraded Unclassified\n91\n- 15 -\nof scarce supplies among consumere it may later prove\nnecessary to extend the rationing to ultimate consumers.\n(4) Extension of the general controls over bank\ncredit may be found desirable.\n(5) Establishment of controls over the entire field\nof consumer credit will undoubtedly be necessary.\n(6) Controls over capital expenditures should be\nprovided.\n(7) It may be found desirable to extend the Social\nSecurity Program along lines which would increase the\nflow of funds to the Treasury from current incomes dur-\ning the emergency and would increase the outflow of\nfunds when needed in the post defense period.\n(8) There should be a reduction of the Federal\nlending and underwriting program, such as nonemergency\nhousing expenditures and mortgage guarantees.\n(9) Nonessential Federal expenditures should be\nreduced. In my statement before the Ways and Means\nCommittee I pointed out the desirability of reducing\nsuch expenditures by one billion dollars. State and\nlocal governmental nonemergency expenditures and bor-\nrowing should be curtailed. Such curtailment would\nnot only out down expenditures during this period but\nwould build up a back log of desirable projects for\nRegraded Unclassified\n92\n- 16 -\nthe post-defense period when public works expenditures\nmay be badly needed to maintain the economy.\nFrom present indications, if the control measures\nwhich I have mentioned are placed in operation and if\nthe tax bill 1e promptly passed providing not less than\n$3.5 billion of new revenue, it is my hope that the\neconomic situation will remain fairly healthy until the\nearly date when another tax bill designed to absorb\nsubstantially more purchasing power can be considered\nand passed.\nRegraded Unclassified\n93\n- 17 -\nAlternatives to taxation more onerous\nIn closing my remarks, I desire to point out that\nalthough this is B. very heavy tax bill, the alternatives\nto heavy taxation are much more onerous. Rising debta\nand rising prices would take much more away from our\npeople now and in the future than higher taxes now will\ntake. Under the tax bill, as it stands, a married\ncouple with no dependents having a net income of $5,000\n8. year will have its Federal income tax increased by\n$198 or 4 percent of its income. If 1/3 of the family's\nincome is saved or spent on items not affected by &\nchanging cost of living, an increase in the cost of\nliving of 5 1/4 percent would impose as great an ad-\nditional burden on this family as would the proposed\nincome tax. The cost of living index has increased\n5 1/2 percent in less than BL year, since September,\n1940. It is clear from this simple illustration that\nrising prices are taxes Just as surely as income taxes\n80 far 88 the family is concerned. If in an attempt to\nprotect the incomes of our people we hold down taxes\nand as 8. result the cost of living rises, we shall have\ntaxed them just as surely 8.8 if we had levied on them\ndirectly.\nRising debts may not only increase the tendency\nfor prices to rise but they increase the burden in\nRegraded Unclassified\n- 18 -\n94\nanother way by postponing it. That means that both\ninterest and principal must be paid for later with\nhigher taxes imposed at a time when they may be harder\nto pay and less willingly paid than now.\nOur defense program 18 an absolute necessity. It\nmust be paid for. Insofar as possible, it should be\nfinally paid for now.\nRegraded Unclassified\n95\nAugust 6, 1941\n9:20 a.m.\nOperator:\nGo ahead.\nHMJr:\nHello.\nHenry\nStimson:\nHello, Henry.\nHMJr:\nGood morning.\n8:\nHenry, it's a long time between drinks.\nHMJr:\nRight. Too long.\nS:\nWould you like to come to lunch with me\nquietly at Woodley's at one o'clock, say,\ntoday?\nHMJr:\nWell, I'm terribly sorry, but I have some-\nbody coming today that I couldn't put off.\nS:\nHow about tomorrow?\nHMJr:\nWell, tomorrow I'm with Wickard. If\nS:\nWell, that's\nHMJr:\nWhat?\nS:\nThat's too bad.\nHMJr:\nIf you wanted to\n8:\nI'll get straightened out. I'll call you\nnext week or sometime.\nHMJr:\nYes. I'll be glad to - how are you fixed\nearly in the morning?\n8:\nWhy, 8.8 far as I know it's all right. But,\nI mean\nHMJr:\nYeah, I didn't\n8:\nthere's just - there's nothing formal,\nnothing\nRegraded Unclassified\n96\n- 2 -\nHMJr:\nOh.\n8:\nnothing in the way of business to talk\nwith you about\nHMJr:\noh, well\nS:\n.....it's just to have & chat together the\nway we used to have.\nHMJr:\nWell, if you'll - I'd love it if you'll\ninvite me any time next week. I'll be\ndelighted.\nS:\nWell, I'll try to - I'll try it\nHMJr:\nI've got Admiral Nimitz for lunch today,\nand I'm going with Wickard tomorrow, 80.....\n8:\nYes, I see.\nHMJr:\nand\nS:\nAll right. Well, I'll have it on my conscience\nand I'll\nHMJr:\nWell, try me - any time, but just if you'd\ngive me a day or two's notice.\n8:\nYes. Yes, I see.\nHMJr:\nGive me a day or two's notice.\nS:\nWell, how are you?\nHMJr:\nI'm fine.\nS:\nThat's good.\nHMJr:\nThank you.\nRegraded Unclassified\n97\nAugust 6, 1941\n10:02 a.m.\nHMJr:\nHello.\nWalter\nGeorge:\nHello.\nHMJr:\nHenry Morgenthau.\nG:\nYes, Henry. This 18 Walter George.\nHMJr:\nGood morning, Walter. I just wondered if\nyou knew yet when you'd want me up there.\nG:\nWell, I think - I talked with John a little\nyesterday\nHMJr:\nYeah.\nG:\nand he indicated that you'd like to\nget - maybe appear on Friday 80 that you'd\nbe relieved of this next week, because you\nhad to appear before the price fixing com-\nmittee.\nHMJr:\nThat's right.\nG:\nBo I think on Friday we'll take the Treasury\npeople, if it suite you, and Just have the\nTreasury on Friday.\nHMJr:\nWell, that's entirely agreeable.\nG:\nAll right.\nHMJr:\nThank you 80 much.\nG:\nAt ten o'clock Friday.\nHMJr:\nI'll be there.\nG:\nAll right.\nHMJr:\nThank you 80 much.\nRegraded Unclassified\n98\nAugust 6, 1941\n11:15 a.m.\nRE TAX STATEMENT\nPresent:\nMr. Blough\nMr. Kuhn\nMr. Magill\nMr. Shere\nH.M.Jr:\nThis is what I would like to say. I got\nthis thing. I would like to go up there and\nstart right out, \"Gentlemen, I have come\nup here to recommend to you this state of\nnational emergency where everybody has to\nbe willing to make his proportionate sacrifice\nin order to make democracy safe, and we have\nan all out tax bill to go hand in hand with\nan all out defense bill. Now, in order to\naccomplish this we ought to include the\nfollowing items in this bill,\" and then list\nthem.\nI wouldn't say, \"I have brought this to your\nattention for eight years.' That never pays.\nIt is a nice thing to say but I have got to go\nback for three years more and the personal\nsatisfaction isn't worth it.\nMagill:\nYou are right.\nH.M.Jr:\nThese are the things, and then list them.\nThen develop those as much as possible,\ngiving each one its weight. I mean joint\ntax returns, oil well depletion, municipal\nand state bonds and all the rest of it,\nexcess profits, and then this is where I\nwould start. Then I think I would end up\nthe statement by saying, \"Now, even if we\ndo all of these things, they in themselves\ncannot control increased prices,\" and then\nsay something at the end.\nRegraded Unclassified\n99\n- 2 -\nKulin:\nThat you are going to go up at another\noccasion --\nH.M.Jr:\n\"And I have been invited to appear by\nChairman Steagall and I expect at that\ntime - at a more appropriate time --\"\nMagill:\nI think that is good. You could put in,\ncouldn't you, 8. paragraph just before that\nto say that in this all out business one\nthing that will be useful will be higher\nexcise taxes on some of these commodities.\nH.M.Jr:\nLook, you have worked with me so long.\nThis is the way the thing has crystallized.\nWe would go right up in the beginning just\nthe way I said it and then develop it and\nsay something on each of these things, why\nthey are bad, why they should be done away\nwith. The great advantage is they will say,\n\"Morgenthau is just up here again talking\nabout that Treasury plan on excess profits\nand he wants it his way and if he can't\nhave it his way, he won't play.\" It\nbecomes one of ten things.\nHuhn:\nBecause what you do then, Mr. Secretary --\nH.M.Jr:\nIt becomes one of ten things.\nMagill:\nThat is the way to do it.\nH.M.Jr:\nIsn't that it?\nKuhn:\nBut you are not, then, advocating this tax\nbill. You are wanting 8. different tax bill.\nH.M.Jr:\nWell, all right, listen. I have got just as\nmuch right to change as the President of the\nUnited States.\nKulm:\nYou are all right.\nRegraded Unclassified\n100\n- 3 -\nMagill:\nYou can say you want this tax bill but you\nwant this tax bill plus.\nH.M.Jr:\n\"Well, why didn't you say this thing before?\"\n\"Well, I don't have to. I am not going to\nthink of all the questions they will ask.\nThis strikes me emotionally and every other\nway. Inside it strikes me right. I am not\nworrying about whether I am for this particular\nlowering the exemption. That is part of the\nwhole program. Now, if you are going to do\nthis thing, then every fellow from the bottom\nof the stepladder to the top should pay his\nproper portion.\nVagill:\nThat is all right.\nS.M.Jr:\nAnd unless we do something like this on the\ntax front, we are lagging way behind the national\ndefense front. We are not - we are lagging\nway behind the national defense front. They\nare way ahead of us. We haven't begun to\nkeep pace with them in our thinking. And that\nis true.\nKuhn:\nYou said that before and you can say it again.\nYou said it before the House.\nH.K.Jr:\nWell, I would say It again.\nKuhn:\nGood.\nIn our thinking we are lagging way behind on\nthe national defense program.\nsubmit\nAnd Congress is lagging behind rather than the\nTreasury on this thing because you have said\nthese things.\nNow, I didn't want to say it, but this morning\nin talking with Roy I got a nifty. What Roy -\nI gave Roy the idea and he gave it to his man\nRegraded Unclassified\n101\n- 4 -\nto have it this morning, that instead of\ntaking this thing so that the fellow with\nseven hundred fifty dollars or two thousand\ndollars has got to add and subtract about\nfive times, we have taken the result that\nhe would arrive at. We are working on a\ntable. It is in jumps of twenty-five\ndollars. We are going from seven hundred\nfifty dollars up to the income high enough 50\nwe include ninety percent of all the income\ntax payments and we are going to have - if\nyou have seven hundred fifty dollars, all\nyou have got to do is look over the table and\nyou would pay four dollars.\nIf you have seven hundred seventy-five\ndollars, you would pay four dollars and\ntwenty-three cents, and so forth and SO on.\nAnd the same thing for the married person.\nIf he has one child he would be in one\ncolumn and if two children, in the next\ncolumn.\nmarill:\nwhere will it run, seven hundred to what?\nNAME\nSo we can stick this in every post office\nand every public building in the United States\nso & fellow can go in and say --\nMarill:\nThat is absolutely swell.\nH.W.Jrs\nhe goes in there and, \"My income is nine\nhundred dollars. How much do I pay?\" Six\ndollars and forty-eight cents.\nJulin:\nThat is the way you sell the Tax Anticipation\nNotes too.\n4.C.Jr:\nThat is the way you figure interest payments.\nIsn't that a nifty, Ros?\nLagill:\nThat is 8 good one.\nRegraded Unclassified\n102\n- 5 -\nH.M.Jr:\nIsn't that a nifty?\nBlough:\nPersonal exemptions will have to be\napportioned. It ought to be a very simple\nthing to work out.\nMagill:\nI was just thinking what your variations -\nyour variations will be on marriage and\nchildren, I suppose.\nBlough:\nThe length of time during the year you have\nthis income.\nEuhn:\nIt means filing returns, though, of your\nincome.\nH.M.Jr:\nYes.\nMagill:\nThose fellows won't have any serious losses.\nBlough:\nWhat if they did, if we get the net income\nfirst. This is after you get the net income.\nThe big problem, of course, is your tax\nexempt interest. Partially exempt interest\nwill make it difficult but that is the only\none.\nKuhn:\nEliminate the earned income?\nBlough:\nNo.\nMagill:\nI thought you were going to put it on gross.\nH.M.Jr:\nI had in mind gross. I wasn't going to\nallow any deduction.\nMagill:\nWhy don't you do it on gross?\nH.M.Jr:\nI wouldn't give any deductions. I was not\ngoing to give them - no, no, I wasn't figuring\non any deductions. This is - you earned seven\nRegraded Unclassified\n103\n- 6 -\nhundred fifty dollars. To hell with your\nlosses. You pay four dollars.\nParill:\nI would do it on your gross, Roy, if you\ncan, because otherwise you get into contribut-\nions to the church and all this estimating\nbusiness.\nII.M.Jr:\nWhat is this fellow's name, Shere?\nBlough:\nShere, S-h-e-r-e.\nMagill:\nI would do it on gross and base it on his\nmarital status and children and make it a\nlump sum. When are you going to do it, at\nthe beginning of the year?\nBlough:\nEnd of the year.\nKurkirr:\nAnd then wipe out the old form of tax payment\nfor the two to four thousand dollars.\nBlough:\nIn that case I think possibly we ought to\nkeep it down to around three thousand. It\nbegins to get complicated.\nMagill:\nYes, I would keep it down.\nBlough:\nIn this great mass of people they have only\none source of income and that is their salary\nand maybe a roomer or two or something like\nthat, and it is perfectly simple to apply on\nthe gross basis and maybe make a little bit\nof adjustment in order to take care of that\ngross concept.\nlagill:\nYes, I thought you meant gross.\nM.M.Jr:\nI did mean gross and I am just interested to\nask Shere how he was working on it.\nBlough:\nIt doesn't matter. He is working from & figure\nRegraded Unclassified\n104\n- 7 -\nof income and whether you call it gross or\nnet, it won't make & bit of difference. His\nschedule will fit either the gross concept\nor the net concept.\nMagill:\nThat is a darn good idea and that, I gather,\nwas the President's idea back of that part of\nhis letter. You may have forgotten. He\ntalked to us about that in llyde Park way\nback there.\nH.M.Jr:\nAnd We haven't worked it out.\nKuhn:\nHe has got it in his letter about chipping\nin.\nMagill:\nBut this is B. much more advanced thought than\nhe had.\nKuhn:\nIt says most Americans in the lower income\nbrackets are willing and proud to chip in\ndirectly, and that is the way he phrases the\nwhole section of his letter.\nMagill:\nThis is swell for a lot of reasons.\nH.M.Jr:\nWe will just think what it means to Internal\nRevenue.\nMagill:\nOh, yes. I was just talking about that to\nDanny. I don't know how you are going to\nadminister this tax without something like\nthat.\nKuhn:\nIt says the exemption of a single person\nshould be reduced to seven fifty with 8.\nprovision for a straight simple payment of\nsome small contribution to the national tax\nincome through some simple agency and on\nsome simple form. That is what you are now\nsuggesting.\nRegraded Unclassified\n105\n- 8 -\nBlough:\nOnly the Secretary is making it, I think,\nbetter. If he makes this so you don't even\nneed to compute it, it seems to me that goes\neven further and implements very well the\npresent tax.\nH.M.Jr:\nI wasn't there when the President cross-\nexamined Sullivan and I gather Sullivan got\nall balled up trying to explain it. The\nPresident said Sullivan subtracted and added\nfive times trying to arrive at a figure of\nhow much you had to pay on seven hundred\nfifty dollars. It is crazy, ridiculous,\nand you hadn't ought to have to do that.\nMagill:\nThat is right.\nBlough:\nYou have to figure surtax and normal tax and\nadd them up and figure defense tax.\nMagill:\nI have been saying all the time that it was\njust & cut above.\nWe have a Finnish maid who is 8. good cook and\njust a cut above half-witted. She had to\npay a tax return last year. I know she did,\nbut gosh, it must have been a honey. (Laughter).\nKuhn:\nHelvering will bless you for this.\nMagill:\nI should say he will.\nBlough:\nAnd the committee might get it into their heads\nthat they could use a little simplification\non their own hook.\nH.M.Jr:\nI thought if you did this and gradually raised\nthe limit it would gradually go on up.\nKuhn:\nBut this would be - you would bring this forward\nin your section --\nRegraded Unclassified\n106\n- 9 -\nH.M.Jr:\nOh, I am going to have it printed, on\nsample sheets to distribute right then and\nthere.\nKuhn:\nIn your section on lowered exemptions,\nwhere you are talking about everybody's\ncontribution?\nMagill:\nHow about with-holding the source, not to\nget it too complicated?\nBlough:\nI would like to talk with you 8 little at\nlength on that. I have done & lot of work\non that and I would rather wait for that one\nuntil the next tax bill. I would rather see\nit taken in two bites because the collection\nsource has a lot of very difficult matters.\nMagill:\nThis is a very good idea and I don't see\nthat - what I am trying to think of is hard-\nship cases but I don't see that you will have\nmany.\nH.M.Jr:\nDo we have to show this to Helvering? Is\nthere anybody over there that could help?\nMagill:\nIt would be a good idea if we could get a\nfellow like Tim Mooney to tell you if there\nare any bugs in it.\nH.M.Jr:\nWe will have him take a look at the thing.\nBlough:\nI have two men working on the bugs now and --\nH.M.Jr:\nBye on this thing.\nBlough:\n...on this - let Guy Helvering see this.\nMagill:\nHow about 8. fellow with a wife with a security\nincome filing an individual return? She\nhas a loss of --\nRegraded Unclassified\n10?\n- 10 -\nBlough:\nYou could permit separate returns at this\nlevel, as far as that is concerned. It is\nalmost all joint returns.\nKuhn:\nShouldn't it be just earned income?\nBlough:\nWell, it is all earned income anyway.\nMagill:\nBut I would make it everybody with incomes\nif you possibly can.\n(Mr. Shere entered the conference).\nBlough:\nYou might exclude from them though, if they\nhave different sources of income --\nH.M.Jr:\nShere, how far have you gotten and were you\ntaking this on a gross basis?\nShere:\nNo, we are working on a net income basis.\nBlough:\nIt doesn't matter, though.\nShere:\nWe are taking it on an income basis. The\nman would take out & deduction when he knows\nwhat his net income is.\nMagill:\nWhy don't you put it on a gross?\nH.M.Jr:\nI don't want it that way.\nBlough:\nMr. Secretary, as far as they have gone it\ndoesn't make a bit of difference.\nH.M.Jr:\nBut for my purpose I want a fellow just to\nsay, \"I earned eight hundred and my tax is\nfour dollars and a half, IT and he just looks\non this wall chart and that is all he has to\ndo. I don't want him to do any figuring of\nany kind. Just like an interest table. If\nhe has got eight hundred, at two percent he\ngets so much.\nRegraded Unclassified\n108\n- 11 -\nShere:\nThen you have the problem of deductions.\nBlough:\nNo, there will be no deductions,\nMagill:\nSuppose you find that the average --\nH.V.Jr:\nYou didn't get it.\nShere:\nI get what the Secretary says but I am just\nraising the point,\nH.W.Jr:\nI want to know that if the man gets twenty\ndollars a week, it is 8 thousand and forty\ndollars. If that is what he earned, his\ntax is 80 much and all he has got to know is\nhow much his earnings are.\nl'agill:\nThat is right. Here is the average fellow\nwith a thousand dollars. He has SQ much\ninterest he has paid and he has made so many\ncontributions and he may have 8. little other\nexemptions, 80 his net is what? His tax the\nordinary way would be fifty dollars. Well,\nthe Secretary wants to say fifty dollars at\na thousand dollars, you see. Now, if you\nhave got a thousand dollar gross, your tax\nis fifty dollars.\nShere:\nHe wants to work on a gross?\nMagill:\nYes. Now, it is obviously true that the\nfifty dollars might be too much in some\ncases and too little in others if you took\nit on the net basis but it is ever so much\nsimpler and I think it is much more desirable.\nYou will get some funny cases but the tax\nin any event isn't going to be so big that it\nis going to --\nBlough:\nWe will have to work out a few because here\nyou have a single person with dependents, B.\nRegraded Unclassified\n109\n- 12 -\nfew cases of that kind which will involve\nsome complications.\nFahn:\nWhat would you do there?\nBlought\nOh, well, it needs another column, that is\nall.\nH.W.Jr:\nLet me just say it again. It is going to be\nstatutory that a man with a thousand dollar\nincome pays 80 much and eleven hundred so\nmuch and twelve hundred so much and Friday\nmorning I am going to have this table and --\nShere:\nWe expect to be done by the end of the day.\nH.M.Jr:\nI want a sample table and I want Helvering to\nhave a chance to look at it but when I go up\nat ten o'clock Friday, I want a hundred\ncopies of this thing.\nMagill:\nWhy can't you do this, Roy? Can't you simply\nfigure it to this extent, say that a single\nperson --\nShere:\nWe will have it for you at the end of the day.\nMagill:\nfor a single person, here is what you\nare going to pay in this column. If you are\na married person, this column is what you\nwill pay. If you have children, then you\ntake off SO much and make that a kind of\n8. round figure.\nI want it to say, \"Know your income tax.\"\nOn one single bill, you see, 8. big sheet so\nthese fellows can read it.\nligill:\nI think for simplicity I would make you take\noff five or ten dollars all along the line.\nBlough:\nIn other words, get away from the present rate\nRegraded Unclassified\n110\n- 13 -\nschedule so that you may have up to this .\nup to the point where this goes and then\nwe don't want it to go too high, under those\ncircumstances it wouldn't be the rate\nschedules now in the law. It would - I\nmean in the bill. Would approximate it\nbut would permit, Ros points out - fix\nthis up in such numbers that however many\ndependents you have you could junt deduct\nSO much for each dependent.\nWe said that. That would be just another\ntable. You mean net?\nFagill:\nI think you are going to get into an awful\nlot of trouble if you try to have enough\ncolumns for all the different kinds of\nmarital status and what not and children\nthat you may have.\nBlough:\nHis point is that if you are married your\ntax is fifty dollars but if you have & child\nyou can take off five dollars.\nMagill:\nIf you have two children you can take off\nten dollars.\nH.E.Jr:\nIrrespective of your income?\nEagill:\nYes, Maybe you will have to bracket it but\nI would certainly avoid - I had in my mind\nwhat you have got here.\nH.D.Jr:\nwait a minute. Why couldn't you do it this\nway? Supposing your income - you are married.\nYour income is two thousand dollars. Well,\nyou look at the two thousand dollar column\nbut if you have got one child, you look in\nthe eighteen hundred dollar column. If you\nhave got two children, you look in the sixteen\nRegraded Unclassified\n111\n- 14 -\nhundred dollar column.\nKuhn:\nThere you get into the computations again,\nMr. Secretary.\nBlough:\nIt is a little harder to compute.\nMagill:\nWe are working at the same thing. What I\nwas trying to avoid is what Louie forecast\nhere, that is, having 8. hell of a lot of\ncolumns for married with one child, married\nwith three children, single person with\none child and 50 forth.\nShere:\nIf you made this after exemptions, you could\nget away with one column. Here is a man who\nmarried in the middle of the year.\nBlough:\nThat would take care of that.\nH.K.Jr:\nCouldn't you just have a footnote, if you are\nmarried with one child, deduct two thousand\nfrom your income and look in the column for\neighteen hundred dollars?\nBlough:\nYou could do that. It means they have to make\none computation.\nMagill:\nI was thinking of making it even simpler than\nthat and taking off five dollars a child or\nwhatever it is.\nH.M.Jr:\nWell, they have got to play with it today.\nKuhn:\nThat wouldn't deduct for all incomes.\nKagill:\nNo, it wouldn't.\nM.M.Jr:\nWell, you have got to make one deduction then\nanyway, whether you deduct five dollars on\nyour tax or whether you simply switch yourself\nRegraded Unclassified\n112\n- 15 -\nfrom the two thousand dollar column to the\neighteen hundred dollar column.\nMagill:\nThat is right.\nKuhn:\nIt is the same thing.\nMagill:\nYours will work out more exact justice on\nthe tax, to do it your way.\nH.M.Jr:\nI think it will. I don't mind the extra\ncolumn because I am going to deal with a lot\nof morons.\nKuhn:\nI can see the table. \"Know your income tax.\nIf you are a single person with no dependents,\nlook in the column showing the figure of\nyour salary. If you are married with no\nchildren\" --\nH.M.Jr:\n\"Look in column B.\"\nKuhn:\nEither that or take two hundred dollars off\nyour --\nMagill:\nIf you have any children, take off two hundred\ndollars --\nKuhn:\nfrom your income.\nH.M.Jr:\nBut remember, gentlemen, when I go up there\nFriday morning I want a hundred copies of\nthis thing or more. A couple of hundred\ncopies.\nShere:\nOne thing I think we --\nMagill:\nIt is 8. good idea.\nH.M.Jr:\nSure it is a good idea. Ros, it does what I\nRegraded Unclassified\n113\n- 16 -\nhave been trying to do for eight years. I\nhave been trying to have something to go\nout and sell. Why do you only go to three\nthousand, because that is earned income?\nBlough:\nBecause above about three thousand dollars\nor even twenty-five hundred you get into\nmultiple sources of income, capital losses,\nsecurities, partially exempt interest and\nthat sort of thing.\nVagill:\nYou don't want to run it too high.\nBlough:\nFurthermore, I would make this tax a little\nbit lower than they could get it by computing\nit the regular way.\nMagill:\nWell, it is bound to be lower than what some\nof them would get it.\nBlough:\nI would have it lower than anybody - so that\nthere would be no kick about being --\nH.M.Jr:\nNow look, gentlemen, in order to give me a\nbreathing spell, let me get this thing so I\ncan fix my schedule. Roy, without killing\nyourself, when can you show me another draft\non this thing?\nBlough:\nI would suggest that we would hardly have 8\ngood draft until nearly the end of the day.\nH.V.Jr:\nI see. Now, how can we make the best use of\nMr. Magill's time?\nMagill:\nWell, we were just talking about that, what\nWe should do. I suggested this, that we can't\nwrite a document in a committee very well.\nIt has got to be written by some individual\nand I suggested that I think that Roy or Ferdie\ncan write it, that we make the best use of\nmy time by - if I sat down with them and form-\nRegraded Unclassified\n111\n- 17 -\nulated an outline for the thing and got\nthe thing pretty well organized and then\npossibly there would be time for me to\nwrite something if you want ne to.\nH.M.Jr:\nSure. I an just thinking about getting\nyou home tonight.\nMagill:\nI would like to get off - if I can get the\nCongressional, that would be very good.\nH.M.Jr:\nIf you can't, how about a plane?\nMagill:\nWell, I would like a plane, as far as that\nis concerned.\nH.M.Jr:\nYes.\nMagill:\nOf course you can't--\nH.M.Jr:\nWhere are you going?\nMagill:\nWestport.\nH.M.Jr:\nI mean, is it 8. special hook-up or something?\nNagill:\nYes, by running like the dickens I get a State\nof Maine Express which leaves a half hour or\ntwenty-five minutes after the Congressional\ngets in from the other station and that gets\nto Norwalk at --\nBlough:\nThat would mean you wouldn't be here for the\nconference then because that would mean you\nwould have to catch the train at four and\nleave here about three, and I doubt whether\nwe can have more than a draft by that time.\nMagill:\nWant me to stay beyond that? Of course, if\nI get a plane I can make it later than that.\nH.M.Jr:\nWell, supposing we - if you say even 8. five or six\nRegraded Unclassified\n115\n- 18 -\no'clock plane and then had a Treasury car\nmeet you and drive you home.\nMagill:\nThat would be grand.\nH.M.Jr:\nHow would that be?\nMagill:\nSwell.\nKulunz\nIt only takes you an hour from LaGuardia\nField, doesn't it?\nMagill:\nIt is an easy trip across the Whitestone\nBridge. Your only problem is getting a\nreservation on a plane.\nH.M.Jr:\nI will get a reservation.\nKuhn:\nThat is easy.\nB.K.Jr:\nI will tell them to take it on the five\no'clock and on the six o'clock planes. Would\nyou be ready?\nMagill:\nFine, yes, that will be swell.\nH.S.Jr:\nAll right on that?\nBlough:\nWell, that is excellent for another reason.\nI think that Ros ought to give a little time\nto this plan of yours and we might possibly\nyet this afternoon have a conference with\nTim Mooney.\nMarill:\nI would like very much to do that because\nthe thing you want to guard on that thing is\nthat there isn't some bug in it somewhere\nthat we haven't thought about.\n2.U.Jr:\nAll right.\nMagill:\nMooney ought to know that because he has been\nRegraded Unclassified\n116\n- 19 -\ndown there for years.\nH.M.Jr:\nWe will forget about Tuesday's statement\nfor today.\nKuhn:\nHarry is working on that now, anyway.\nH.M.Jr:\nDon't you get in on it.\nKuhn:\nI wasn't in on it yet.\nH.M.Jr:\nJust stick with this.\nMagill:\nAm I seeing you some time?\nH.M.Jr:\nI am putting you fellows down for four o'clock.\nBlough:\nWe ought to have a draft by four.\nMagill:\nThat is fine.\nH.M.Jr:\nThank you all.\nRegraded Unclassified\n117\nAugust 6, 1941\n4:00 p.m.\nRE TAX STATEMENT\nPresent:\nMr. Sullivan\nMr. Magill\nMr. Blough\nMr. Kuhn\nMr. Bell\nMr. Riefler\nKuhn:\nThis is in two installments.\nBlough:\nThis is 80 hot off the griddle I haven't read\nwhat I dictated at all.\nH.M.Jr:\nThat is what this fellow Magill does when he\ncomes to town. Well, go ahead and read, Roy.\nBlough:\nAll right. The first installment is Ferdie's.\nH.M.Jr:\nIs what?\nBlough:\nFerdie's, the gentleman Mr. Kuhn.\nKulan:\nShall I read and then Roy take up?\n11.11.Jr:\nAll right.\nBuhn:\n\"Mr. Chairman and Members of the Committee:\n\"Two and a half months ago, the President pro-\nclaimed the existence of an unlimited national\nemergency. At that time he called upon 'all\nloyal citizens to place the nation's needs first\nin mind and in action, to the end that we may\nmobilize and have ready for instant defensive\nuse all of the physical powers, all of the moral\nstrength, and all of the material resources of\nthis nation'.\nRegraded Unclassified\n118\n- 2 -\nThe people of this country have responded\nsplendidly to that proclamation. They have\nnever been more ready to make sacrifices for\nthe common good. From all parts of the country\nthere have come encouraging signs, from labor\nand industry alike, that American men and\nwomen are willing to subordinate their personal\ninterests for the sake of the nation's defense.\n\"The Congress has appropriated\nbillions\nfor defense purposes in the present fiscal\nyear, and the American people understand the\nneed for those colossal expenditures. The Ways\nand Means Committee of the House of Represent-\natives has just completed work on a tax bill\nto produce 31 billion dollars in additional\nrevenue, an amount that would have struck our\npeople as staggering in former years. They\nhave not complained. They understand the need\nand they are willing to pay the price of making\ntheir country impregnably strong.\n\"The defense effort, however, has now grown to\nsuch giant proportions that it dominates our\nentire economic life.'\n(Mr. Bell entered the conference).\nBilling:\nExcuse me, Ferdie, to produce over three billion\"\ninstead of three and a half billion.\n32a:\nRight.\nThe Ways and Means Committee did have It three\nand a half.\nAllivan:\nWell, that is a detail we will fight out later.\nWell, you fellows can fight about it. A half\nbillion dollars, what the heck?\nRegraded Unclassified\n119\n- 3 -\nKulin\n\"The defense effort, however, has now grown\nto such giant proportions that it dominates\nour entire economic life. In these days of\ntotal war, & total defense is called for. Our\neconomic and fiscal policy must be integrated\nfor defense, integrated as closely as our\narmy and navy and our planes that guard the\nskies. The bill which I am glad to support\ntoday, H.R. 5417, is a step in this direction,\nbut it is not enough. Still bolder measures\nare needed now. In my opinion, we need an\nall-out tax bill as an essential part of all-out\ndefense.'\nE.E.Jr:\nHear, hear.\nKulin:\n\"The time has come for us to act as vigorously\nin fields of taxation as we have acted, and\nintend to act, against the rising tide of\ntyranny abroad.\n\"When I appeared before the Ways and Means\nCommittee --\nTagill:\nStill rising? I thought it had kind of started\nto slow up.\nWhen:\nWe will cut it.\n2611:\nYes, I should think SO. It is 8 little too\nmuch high school oratory, high school, anyhow,\nI think.\nEntry:\nLight cut the whole sentence.\n\"In my opinion, we need an all-out tax bill as\nan essential part of all-out defense.\" Stop\nthore.\nThat is a good idea.\nRegraded Unclassified\n120\n- 4 -\nKuhn:\n\"When I appeared before the Ways and Means\nCommittee of the House\" --\nH.M.Jr:\nExcuse me, do you let visitors like that say\nthings and you don't even answer them?\nKuhn:\nI agree with them.\n\"I outlined four principles\" --\nEngill:\nI put my ideas so tactfully. (Laughter).\nKuhn:\n\"I outlined four principles that should govern\na sound tax program in days like these, I should\nlike to repeat those statements now, as they are\nvery brief and even more applicable than they\nwere last Spring. The first is that we should\npay as we go for a reasonable proportion of our\nexpenditures. Secondly, all sections of the\npeople should bear their fair share of the\nburden. Third, our tax program should help\nto mobilize our resources for defense by\nreducing the amount of money that the public\ncan spend for comparatively less important\nthings. And finally, our taxes should prevent\na general rise in prices by keeping the total\nvolume of monetary purchasing power from\noutrunning production.\"\nH.M.Jr:\nWait a minute. O.K.\nKuhn:\n\"These principles, as I have just said, are\napplicable now, but they are applicable in still\ngreater degree.\"\nSullivan:\nAre even more applicable now than when I first\nstated.\nH.K.Jr:\nWait a minute, Ferdie.\nBell:\nDo you keep the monetary purchasing power from\noutrunning production? It is the use of the\nRegraded Unclassified\n121\n- 5 -\npurchasing power that you want to prevent.\nRuhn:\nThat is what the Secretary said in April.\nBell:\nIs it?\nKuhn:\nYes.\nH.K.Jr:\nThat makes it so, Bell.\nBell:\nI give up. (Laughter).\nMagill:\nWhere did the reduction of non-defense expend-\nitures come in? That was in that Ways and\nMeans thing somewhere.\nKuhn:\nBut not in those four principles of the tax\nbill. That is appropriations. That is why\nyou didn't have it in there.\n\"For example, even the proposed increase of\n3½ billion dollars in revenue, even our total\ngoal of 12-2/3 billions from taxes, now\nthreaten to be inadequate in the light of\nvast expansion of defense spending since\nlast Spring.\"\nH.K.Jr:\nI wouldn't use the word \"threaten\".\nSullivan:\n\"Now appear to be.\"\nH.M.Jr:\nYes.\nKuhn:\n\"In the past month\" --\nSullivan:\n\"Now appear inadequate\", not \"to be\".\nKuhn:\nRight.\n\"In the past month, the Congress has been asked\nfor\nbillions in additional expenditures\nfor the army and navy, on top of the 33 billions\nRegraded Unclassified\n122\n- 6 -\nappropriated for all purposes during the\nfiscal year just ended. I know that we shall\nbe able to raise still greater revenues if\nnecessary -- and it will be necessary after\nthe present tax bill has been passed. We\nAmericans can do this job, and any job, if\nwe but set ourselves to it.\"\nBell:\nI don't like that before a tax committee.\nSubn:\nThe point that came up this morning, Dan, was\nthat we were thinking of appealing to the\npublic as well as to the tax committee and\nwith that in view, the statement was re-written.\nHell:\nIt is a little oratorical, that sentence.\nW.S.Jp:\nDoes it bother you, Ros?\nDagill:\nWell, I think this is a minor thing. I would\nout out that \"but\" there, \"if we but set\nourselves to it\". I don't like that. Why\ndon't you cut out that \"and any job\"? That\ngoes part way to meet Dan's proposition.\nE.E.Jre\nHow would this go before the clubs in the\nsilk stocking district?\nEngill:\nJeremiah - what was his name ?\nR.V.Jr:\nMahoney. That was the way you spoke of him.\nMagill:\nI am from Connecticut. I don't know, I don't\nthink that is too much, Dan.\nBell:\nI still think it is flag waving.\nH.S.Jr:\nWell, that is what we told them. Those were\nthe orders. All right.\nRuhn:\nThe reason, Dan -- if you don't want people to\nobject\n:\nRegraded Unclassified\n123\n- 7 -\nS.2.Jr:\nThis is for the man on the street, Dan.\nCell:\nBut you are speaking to a committee. I think\nyou can do a little of both but you are\nspeaking to the committee and you have got\na comparatively few people present, and it\nsounds a little oratorical.\n521.24\nWell, you see, we put on Jack Benny and all\nthat stuff now.\nJell:\nYou get used to it, do you?\nYou have got to keep up with the times. I\nmight even bring Irving Berlin up there to\nsing a song to open the meeting. (Laughter).\nYou know where this came from?'\nR.F.Jr:\nYes, out of one of my talks.\nRUE\n\"Moreover, the price situation has taken an\nominous turn since I appeared before the Ways\nand Means Committee in April. I shall have\na more appropriate occasion next week to discuss\nthese matters in detail\" --\nCapill:\nI would cut out that \"a more appropriate\". Just\nmake it \"another occasion next week\".\nball:\nAre you afraid of hurting the feelings of the\ncommittee?\nSullivant\nYes.\nRubn:\n\"I shall have occasion next week to discuss\nthese matters in detail before the Banking and\nCurrency Committee of the llouse. For the\npresent I would say only that we are no longer\nthreatened with inflation, we are in the\nmidst of an inflationary process that will\nmove faster and faster unless it is checked by\nRegraded Unclassified\n124\n- B -\nbold action. And taxes, of course, are one\nway, one of the most effective ways, of checking\ninflationary tendencies.'\nSullivan:\nIsn't \"in the early stages\" better than \"in the\nmidst\"?\nFell:\nI wouldn't think any economist would agree that\nwe are in the midst of it yet.\nRiefler:\nWe are certainly in the early stages of one.\nBlough:\nMaybe not too early.\nE.E.Jr:\nWe have got a first class economist here now.\nthat would you say we are, Win?\nRiefler:\nI wouldn't be afraid of that statement. You\nhave certainly got a rising spiral and a lot\nof it is due to non-inflationary factors, just\nimpediments to supply and shipping, but an\nawful lot of it is due to a tremendous outlay\nof straight wages and income.\nGo ahead. You are out-voted, Dan.\nKahns\n\"And taxes, of course, are one may, one of the\nmost effective ways, of checking inflationary\ntendencies.\n\"A third change since the spring can be found\nin the steadily increasing demands now being\nmade by the defense industries for certain raw\nmaterials needed in civilian production. In\na number of commodities which I do not need to\nlist in detail, actual shortages for civilian\nuses are threatened. It has become more\nessential than ever to use the machinery of a\ntax bill to prevent delays in defense production\nor by the competition of defense and civilian\nRegraded Unclassified\n105\ngoods.\"\nallivan:\n\"Between defense and civilian goods,\" isn't it?\nThat has got to be fixed up a little bit. If\nI just get the feel of it here I am not going\nto no over words with you.\nWhy not say that \"the competition of civilian\ndemands for defense production\" - instead of\nas \"between\", making it the positive thing.\nYes.\nOr \"prevent civilian demand for defense product-\nion\"\nMefler:\n\"Prevent the competition of civilian demands\non defense production.\"\n\"I cite these changes because I am convinced\nthat our thinking In tax fields has not kept\npace with events. We are still thinking too\nmuch in terms of the burdens to be borne by\nthis group or that. Many of us are still more\nintent upon exemptions than on common sacrifice.\nThat is why, gentlemen, I have said that we\nneed an all-out tax bill, just as surely as\nwe need an all-out military, economic and\npsychological defense for our country.\n\"Now what do I mean by an all-out tax program?\nI mean primarily one that will enlist the helt\nof all our people in accordance with their\nability to pay. I mean, as I said last April,\nthat no section of our people should be\nexempted from sharing the common task,\nI think you want to change the wording of\nthat & little. You have now the help of all\nour people in accordance with their ability to\nRegraded Unclassified\n126\n- 10 -\npay from the point of view of an all-out -\nan 'all-out\" carries an additional significance\nof some description. I mean primarily one\nthat - maybe you should say \"that will enlist\nadditional help from all our people in accord-\nance with their ability to pay. Don't you\nthink so?\nYes.\nTarilli\nYou are getting a lot of money from the United\nStates right now.\nliefler:\nWell, where are you going to bring in the idea?\nI mean, when you get to \"ability to pay\", you\nget to the other problem that the big inflationary\ntendencies are coming from the rapid expansion\nof purchasing power of those with less ability\nto pay, of course.\nComing right in on that, \"I mean, as I said\nlast April, that no section of our people should\nbe exempted from sharing the common task. We\nall want the workingman, the farmer and the\nbusinessman to earn 8 fair profit, but we\ndo not want any one of them to profit unreasonably\nfrom the country's needs. My ovni feeling is\nthat everyone should contribute, and will be\nglad to contribute, for the safety of our\nbeloved country.\n\"There has been much public discussion\" --\nDid you leave out the word \"beloved\"?\nTale:\nI crossed it out. (Laughter)\n\"There has been much public discussion, some\nof it ignorant discussion, of those who have\nbeen called 'the untaxed millions,' those in\nRegraded Unclassified\n12?\n- 11\nthe lowest income groups. It is said, for\nexample, that these millions of wage-earners\nare going scot-free because they pay no\ndirect income taxes. I do not need to stress\nthe fallacy of such a statement. It is an\nestablished fact that those with incomes\nunder $1,500 already pay a larger share of\ntheir incomes in taxes of all kinds, direct\nand indirect, than any other group up to the\n$10,000 to $15,000 income class.\n\"Moreover, it is not generally realized that\nunder the bill now before you the base has\nbeen broadened to add about 2,000,000 new\ntaxpayers. This was accomplished by beginning\nthe surtax at the first dollar of surtax net\nincome. The 10 percent earned income credit\"--\nWe will skip that.\nKuhn:\nThat is the paragraph we had this morning.\n\"Wevertheless, the\" --\nSullivan:\nExcuse me, is that paragraph out?\nKulary:\nNo.\nSullivan:\nThat should be three million instead of two,\nRoy.\n\"longh:\nThe bill doesn't add three million, John.\nGood business adds the other million.\nsubsi\n\"Nevertheless, a further lowering of exemptions\nwould produce some additional revenue, although\nnot nearly as much as some commentators would\nimagine. It would be some help in cutting down\nthe purchasing power of the small consumers of\nnon-essential goods, although again not as\nmuch as might be supposed. And finally, it\nwould give millions of Americans an opportunity\nRegraded Unclassified\n128\n- 12 -\nto make a direct contribution through taxes\nto the defense of their country.\" --\nH.Z.Jr:\nNow wait a minute. That is all wrong there.\nYou are saying why it isn't of any use and\nthen suddenly go in and find they would give.\nNow, you are giving the argument for. Up to\nnow you have been kind of laughing at the\nthing and then suddenly you go in and say\nfinally, they would give. You have got to say\nsomething in between. You could say the\narguments in favor of doing it are, it would\ngive something.\nRuhn:\nOn the other hand, it would give --\nH.M.Jr:\nSomething, because you slip from one right in\nto the other there.\nSullivan:\nWell, we are for this lowering of exemptions,\naren't we?\nH.M.Jr:\nWell, you will see. Wait until you see.\nSullivan:\nI know, but this doesn't sound as though we\nwere.\nH.M.Jr:\nYes, we are, as a part of an all-out tax program.\nKuhn:\n\"It would enable them to feel that they were\nparticipating, personally and directly, in the\ndefense program. It is this last consideration\nwhich appeals strongly to me now. The Treasury\nhas opposed lower exemptions in the past.\nEven now -- and I cannot stress this too emphat-\nically -- & further broadening of the income\ntax base should be strictly conditional upon\nother new measures if it is not to be grossly\nunfair and destructive of the national morale.\"\nThose other measures are the ones we are\nputting in later.\nRegraded Unclassified\n129\n- 13 -\nH.M.Jr:\nI think those should come in together. I\ndon't like this part at all, Ferdie. I mean,\nyou didn't - I want to get those ten or\nwhatever those things are right up at the\nbeginning. I want to get this all-out tax\nprogram, what an all-out tax program is, right\nup on the front page, Ferdie. I take it you\nhave listed those things. Whenever you talk\nabout an all-out tax program and then immed-\niately go in and describe what we consider an\nall-out tax program is - do you agree?\nMagill:\nYes. We discussed that. You remember we\nspoke about putting them all together and the\nconsensus was that it was better to do it this\nway.\nH.M.Jr:\nIf you don't mind --\nMagill:\nWe discussed --\nH.M.Jr:\nI disagree. As soon as we say we are for an\nall-out tax program, then I want to describe\nwhat it is, right up front, please.\nKuhn:\nWell, you say what do I mean by an all-out tax\nprogram, I mean --\nH.M.Jr:\nAnd so on.\nKulin:\n\"In the past, a very real obstacle to broadening\nthe base has been the administrative difficulty\nimposed upon the Bureau of Internal Revenue\nand the individual taxpayer alike.\"\nE.M.Jr:\nIf you could skip to where the part is - what\nthis all-out tax program is, then I am going\nto list it and I don't think I am going to\napologize for any of it.\nRuan:\nNo, this is an introduction, Mr. Secretary, to\nRegraded Unclassified\n130\n- 14 -\nthe new system of small tax returns.\n5.2.Jrs\nOh.\nPulm:\nThis is the way of leading in to your big chart\nwith your tables.\nWait until you get this. This was born this\nmorning. Have you heard about it?\nBullivan:\nI have.\nH.M.Jr:\nLike it?\nSullivan:\nIt depends on how this works out but let's wait\nuntil we go through it and then I will make\nmy comments. The basic idea I like a hundred\npercent, yes.\nHuhn:\n\"The Bureau is already bearing a colossal\nadministrative load because the number of tax\nreturns has been increased from three million\nto fifteen million within a very few years.\nThe Committee can picture the burden that would\nbe placed upon our revenue collectors if they\nhad to check still more millions of complicated\ntax returns every year.\n\"Moreover, the difficulty for the individual\ntaxpayer has been real and undeserved. No\nmatter how willing and cheerful a taxpayer\nmay be in making his annual contribution to\nthis country, some of his willingness and\ncheerfulness is bound to evaporate as he fusses\nwith the credits and deductions and exemptions\nwhich he is required to compute on his tax\nreturn. In a letter sent on July 31 to the\nChairman of the Ways and Means Committee of the\nHouse, the President wrote that 'some way ought\nto be found by which the exemption of a single\nperson should be reduced to $750'. But the\nPresident added that some provision should be\nRegraded Unclassified\n131\n- 15 -\nmade 'for 8. straight simple payment of some\nsmall contribution to the national tax income\nthrough some simple agency and on some simple\nform'.\n\"I should like now to submit to the Committee\na proposal which will, firstly, prevent admin-\nistrative difficulties at the Bureau of Internal\nRevenue, and secondly, will enable millions of\nnew taxpayers to 'chip in' willingly and\nproudly without the burden of filling out a\ncomplicated tax return.\nSullivan:\nI would reverse the reasons. I don't think the\nadministrative difficulty is more important\nthan the other reasons.\nH.M.Jr:\nI don't like this at all.\nSullivan:\nAll right.\nH.M.Jr:\nI mean, it is too much, Ferdie. You have got\nme hanging out on the end of the limb - here\nwe have been going now two thousand words and\nwe haven't got to the guts of this thing yet.\nKuhn:\nThat is what Roy has.\nH.M.Jr:\nBut here is a man coming - no one knows yet what\nI want to do. If you don't mind my being a little\nemphatic.\nKuhn:\nThat is right.\nMagill:\nWhat would accomplish what you have in mind, I\nthink, would be --\nH.M.Jr:\nThe newspaper man has got to be right up in\nthe first page, Ferdie.\nMagill:\nOn page four, at the foot of page four, as you\nsay, Now what do I mean by an all-out tax\nRegraded Unclassified\n132\n- 16 -\nprogram\", well there, to carry out your idea,\nyou would want to say, I mean, one, two, three,\nfour, five, six, seven, eight, and I would\nsuggest you list them and number them and then\nin addition give about one sentence of comment,\nnot more than that, in each case, just a little.\nH.W.Jr:\nThat is what I want.\nMagill:\nAnd then put on your next page, five, a sub-\nheading, number one, this new form of tax\npayment for the small fellow.\nH.M.Jr:\nI can't give a title to it but - where are the --\nMagill:\nThey are not listed here at all, I think, are\nthey, Roy?\nBlough:\nThere is no list. They are taken up later but\nthere is no list.\n1.1.Jr:\nI want those together, please. Have you given\nthem all the things you can think of, Ros?\nMagill:\nI think we have discussed them all.\nBlough:\nI will tell you the ones that are in here.\nMandatory joint returns with the earned income\nallowance, the excess profits tax, defense\nexcise taxes, the state and local securities,\nand percentage depletion, and those are the\nonly ones that I could think of in the rush\nthat we were in. There may be others.\nMagill:\nThat is pretty well the list.\nH.A.Jr:\nDo you think of any others, John?\nSullivan:\nThose were the five that were discussed. I had\nlunch with Ros and Roy this noon and those were\nRegraded Unclassified\n133\n- 17 -\nthe five that were discussed at that time.\nBlough:\nThe estate and gift tax as mentioned this\nmorning was another.\nH.M.Jr:\nThat should be in. Do you get the idea, Win?\nRiefler:\nI am beginning to.\nE.M.Jr:\nBut you couldn't get it - I would very much like\nto have it that way.\nMagill:\nWell, you are right. They ought to be together.\nH.M.Jr:\nI want them right up at the beginning.\nKuhn:\nPut it in that place where you are talking\nabout --\nRiefler:\nIt ought to come in almost your first paragraph\nbecause after all, this does sound as though\nyou are coming before the Committee for the tax\nbill that is up before them. What you are\ncoming in for is really a whole additional\nproposal.\nH.M.Jr:\nYes.\nKuhn:\nDo you want to have all these things in this\nyear's tax bill?\nH.M.Jr:\nSure, I am going to ask for them. It is high\ntime - in national defense we are just twelve\nmonths ahead in our tax program and we are\njust lagging and it is all damned nonsense\nthat they don't do these things and if they are\ncertainly going to ask the man with seven\nhundred fifty dollars & year to pay five\ndollars 8. year, there is no reason why the\noil well companies year after year should write\noff fifty percent depletion. I mean the two\nRegraded Unclassified\n134\n. 18 .\nthings just aren't fair. I mean, the fellow\nin cigarettes, he pays his five or six cents\nB. package, which to him is 8 hundred percent\nand I am not going to sit here any longer and\nnot go up and rub their noses in it.\nAnd these fellows with these community property\ntaxes, the whole Texas and California crowd,\nit is just about time that the public knew that\nthat is to them - there is a loop-hole there\nof a half billion to B billion dollars that\nwe are not collecting, and I am not going to\nask the public, millions of people and workers,\nto contribute their five or ten or fifteen\ndollars taxes and at the same time let these\nfellows escape.\nI don't care if they say to me, \"Well, why\ndidn't you suggest it before in the Ways and\nMeans?\" Well, I don't know why, any more than\nMr. Roosevelt didn't ask for fifty billion\ndollars last year instead of asking for four.\nI mean, he should have asked for fifty billion\ndollars instead of four for national defense.\nIt isn't difficult, Ferdie, to get this thing\nthe way Ros just said it, to list these things\nin just a short explanation. Now, I don't want\nto go into a long harangue about this business\nof . for instance, this ten percent income\ncredit and all the rest of that business, add-\ning the two million dollars. That is out, I\nthink, because that was an apology, why we\ndidn't - weren't in favor of lowering it. Now\nwe are coming and lowering the whole thing, so\nWe don't want to apologize for being opposed\nto it before,\nMagill:\nI think you can effectively shorten the whole\nthing, as a matter of fact.\nH.W.Jr:\nWell, I know I am tired now. I am not at my\nRegraded Unclassified\n135\n-19-\nbest. Maybe I am n. little bit too oritical,\nFerdie, if you don't mind.\nKuhn:\nYou don't think that is necessary about the\ntwo million new taxpayers who have been\nbrought in? I think it is.\nBlough:\nIt is, but you don't need to go too much\ninto detail.\nM.M.Jr:\nCould I have at nine o'clock tomorrow morning\nthis statement rewritten, doing two things for\nme, listing these things right at the beginning,\nyou see, with a little short statement and\nthen right after that - now, we have listed\nthis thing. Then I want to go right in and\nsay, \"Now we are going to bring in\" -- I don't\nknow, five million or any figure, \"additional\ntaxpayers, and we already have ten million\npeople that file tax returns but pay no income\ntax.\" My figures are not far wrong, are they?\nMagill:\nNo.\nSullivan:\nYou are pretty close.\n11.2.Jr:\nWell, for argument, ten million people that\nfile and don't pay. We ask five million more\nto file and under the present system they\nwouldn't pay. Now, there are fifteen million\npeople. In order to make it simple for them,\nwe have devised the following scheme, and I\nwant to give this to you because you haven't\ngot it yet.\nThe scheme is simply this, that we are going\nto have 8 big poster entitled, \"Know Your\nTaxes\" and the man that makes seven hundred\nfifty dollars, he can go to any public building\nand he is going to find seven hundred fifty\ndollars. If he is & single man he will pay\nfive dollars. Seven hundred seventy-five\nRegraded Unclassified\n136\n- 20 .\ndollars, twenty-five dollar jump, he will pay\nfive dollars and & quarter. The whole thing\nis worked out. He doesn't have to do any\ncomputation, up to three thousand dollars.\nAll he has got to do, if he earns gross, two\nthousand dollars, he has got no children, it\nis one thing. In the next column, if he\nhas one child, it is that. Two children,\nanother column. The whole thing is on one\nsheet.\nBy statute it is right there. There is no\naddition or subtraction or multiplication.\nAnybody that can read the English language\n\"Bill, what was your income? \"Well, I\nearned eight hundred ninety-nine dollars.\"\nNow, just 8. minute, you pay so much tax and\nthat is all he has got to do. And then the\nfifteen million people will be paying --\nMiefler:\nWhy not have it in one dollar jumps?\nBlough:\nIt would make the table too big.\nB.S.Jr:\nIt is too difficult.\nRiefler:\nNo, I meant one dollar on the tax.\nE.C.Jp:\nOh, we are, most likely. But in income it\nwill be in twenty-five dollar.\nKuhn:\nRoy, you worked that out in the next page,\ndidn't you?\nBlough:\nYes.\nI have got two things I want to do. There are\nonly two things I want to get over.\nRicfler:\nI should think you would come in and say, you\nare considering a bill for three billions.\nRegraded Unclassified\n137\n. 21 -\n\"I have come here to ask you for so many\nbillions more and I propose to do it by\" -\none, two and three.\nWell, I want to leave it open ended, but\nI want to say, \"Now, gentlemen, we are\ngoing to do this thing and this is the way\nI think it should be done. When we get to\ncollecting fifteen million dollars worth\nof taxes - taxes from fifteen million people,\nthis is the way we would do it so they will\nlike it,\" and that is my story. We could put\nin a little bit, Ferdie, about the prices\nand so forth and so on, but not very much.\nKuhnt\nWell, there isn't much.\nNow, Ros, what about it?\nI think that is all right.\nBulllyan:\nThe only thing that I am concerned with, sir,\nis the time element. There are two things\nthat are going to be fought out here in this\npresent bill. One of them is the state and\nmunicipal securities. If they are to have\nhearings on that, that is going to be --\nNow, John, I don't give a darn. Please,\nI don't care. You have done that to ne\nconsistently and the answer is I an not getting\nmy legislation and I am not going to listen\nto that argument any more.\nSullivan:\nI wish you would permit me to finish it --\nP.K.Jr:\nAll right. But I have been told that again\nand again and it is never the right time.\nDellivant\nMay I finish the sentence?\nRegraded Unclassified\n138\n- 22 -\nB.M.Jr:\nSure.\nSullivan:\n...And this is not just my opinion. I have\ntalked with several other people. There might\nbe a possibility of putting in a saving\nclause here that if the committee were un-\nwilling to consider that during this bill,\nthey certainly should in connection with the\ntechnical amendment bill immediately following.\nU.K.Jr:\nI am sorry --\nBell:\nThe Senate has had its hearings on this.\nH.M.Jr:\nYou have told me and the committee has told\nme I can't get this, I can't get that. I\nam going to go up there for once in my life\nand say what Henry Morgenthau, Jr. thinks,\nand I am going to say it, see.\nSullivan:\nRight.\nH.M.Jr:\nNow, it may keep them here - whether they pay\nattention or not, I don't give a damn, but\nat least once in my life while I am Secretary\nof the Treasury, I am going to tell that\ncommittee what I think.\nSullivan:\nAll right.\nH.E.Jr:\nIt may be the last time, but at least I will\nsay it. There has been too much coddling.\nThe President has got me out on the end of\na limb by talking about reaching these fifteen\nmillion people. Now I have got to support\nhis position.\nSullivan:\nThat is right.\nH.K.Jr:\nSo long as I sit here. Now, in order to do that\nI am not going to let all this Texas gang\nget away with murder and the cities and the\nRegraded Unclassified\n139\n- 23 -\nstates, too. For once in my life I an going\nto go up there and really get the thing off\nmy chest.\nJullivan:\nNow, is this the income from future issues?\n.....Jr:\nNo.\nEnlivan:\nThe income from those that are now outstanding?\nM..Jr:\nYes,\nGood. I think you are right on that.\n2011:\nThat is reversing your position, isn't it?\n.....Jr:\nNo.\nAullivan:\nYes.\nwho:\nYou have taken the public stand that you would\nnot advocate taxing future issues but - past\nissues, but only future ones.\nI didn't understand that. I said outstanding\nissues.\nSullivan:\nThe question I asked, was this to be restricted\nto taxing the income of future issues of state\nand municipals?\nmear:\nAnd my answer was outstanding issues.\nBell:\nWell, that is PT reverse.\nKuha:\nYou have taken a position opposite.\nBullivan:\nOh yes.\nSoll;\nYou have taken a position heretofore that it\nwould be on future issues only.\nRegraded Unclassified\n140\n- 24 -\nFuture issues was what I mean. I am being\nconsistent. Future issues. I really would\nlike to stop. I am awfully tired. I know\nwhen I am tired. When I am not thinking,\nthe thing to do is to stop. I would love\nit - I don't know how busy you (Riefler) are-\nif you would read this thing. We are going\nto meet at nine tomorrow morning. Would you\nlike to sit in?\nRiefler:\nYes.\nH.R.Jr:\nI know when I am tired and I am very tired now\nbecause I have been sitting on this too long.\nBell:\nIt is too long, isn't it?\nH.M.Jr:\nOh yes, got to cut it in half.\nKuhn:\nIt is always easy to cut.\nH.S.Jr:\nI know, I am tired. Can you - what are you\ngoing to do about this?\nKuhn:\nOh, I want to put in that list that you spoke\nof and put it up higher, cut what I have\nalready read to you. Then on what Roy has\nwritten, which is the guts of it, we will have\nto do that in the morning, since we haven't\ntalked about it here.\n11.2.00;\nWell, you (Blough) know what I mean.\nHough:\nFrankly, the rather drastic reorganization\nsince this morning hasn't quite jelled in my\nmind. I wanted to work for a while this\nevening on it. You want a much shorter\nstatement, which means that instead of elabor-\nating some of these things to a page and a\npage and a half, you want a sentence or two.\nI don't want it to go into a long explanation\nRegraded Unclassified\n141\n- 25 -\nof excess profits tax. We have done it ten\ntimes.\nBlough:\nWe can, I think, turn out a very much better\njob which is half as long as this but it will\ntake a little time and I would like to work\nthis evening on it myself. I don't know how\nwe can work together best, Ferdie, but we\ncan try.\nKuhn:\nI would like to get that list and soon, Roy,\nif we could sit down on it now.\nBlough:\nSit down right now. The evening is yours.\nMagill:\nWell, if you can get a girl this evening,\nwhich no doubt you can, I think this is at\na point where one fellow needs to do it.\nBlough:\nI have & girl.\nH.M.Jr:\nI don't know how you two fellows work together.\nMaybe one of you can take half of it and one\ntake the other half, but I would think the\nthing to do would be for Roy to take the whole\nthing and turn out a ten or twelve page document\nthat conforms to what we have discussed here\ntoday and what is implicit in what we have\ndiscussed.\nH.V.Jr:\nI think --\nMagill:\nIf Ferdie wants to take it and also turn out\nanother twelve page document, maybe that would\nbe a good idea.\nKuhn:\nI think it is better. We can work together\nthis afternoon on the beginning part.\nH.Z.Jr:\nAnd then let Roy draft the whole statement.\nRegraded Unclassified\n142\n- 26 -\nMagill:\nI think that would be --\nM.M.Jr:\nI would give him what you want and then let\nhim draft it.\nMuhri:\nAnd then let him work it over if he wishes.\nH.M.Jr:\nThat is all right.\nKubn:\nIt is much easier for one to do it.\nH.M.Jr:\nGive him what you want but let him have it and\nhe can work tonight and you can have something\nfor me at nine o'clock tomorrow.\nBlough:\nI will have something for you.\nE.U.Jr:\nWant to ask me or Magill any questions? I\nwant to talk to you, Roy, for about five\nminutes. If you want anything, come down and\nsee me.\nBlough:\nI would like to sit down with him.\nMagill:\nI would like to see you before I go.\n2.2.Jr:\nWe have worked this way before. I think if you\nwill give him, Ferdie, what you have and then\nI will count on Roy and then you can take and\nwork it over again after tomorrow, but let's -\nI'll count on you to give me something at\nnine o'clock tomorrow.\nBlough:\nYou are not going to ask for more money in\nthis bill?\nH.M.Jr:\nNo.\nFlough:\nBut you are going to ask if we are going to\nhave the personal exemptions lowered, are we\nRegraded Unclassified\n143\n- 27 -\ngoing to hit ability to pay on these other\nthings also, is that your position?\nThere is a point there, if you are not too\ntired to consider it. I would like to have\nyou put your thought on it. We have mentioned\nthis this afternoon and I think it is an\nimportant point, that in & very real sense\nthis business of lowering the exemptions is\nthe kind of fulcrum on which this whole\nbusiness will be lifted or raised into consider-\nation. Lowering the exemptions, 85 you\nknow, there are plenty of people in favor\nof that and so forth. These special subsidies,\nif I may call them that, of one sort and\nanother, they have kind of passed unnoticed\nthrough the years.\nThere are also lots of people who would like\nto leave those things the way they are. Now,\nI would like to say here for my part that I\nwant you to be sure whether you want to say\nit or not, that you are interested in this\nlowering of the exemptions but if the\nexemptions are to be lowered, that then in\nyour judgment these are the things that have\nto be done in all fairness.\nYes.\nSell:\nI think that is important because as 1 read\nthis thing --\nDell:\nI nut your exemption business in the number\none bracket, that if you are going to do this,\nthen you have got to do these others.\nR.M.Jrs\nThat is right.\nSell:\nThis sounds like a new recommendation for 8.\nnew tax bill right from the beginning, to me,\nRegraded Unclassified\n144\n- 28 -\nand I think that is important.\nThat is the beauty of bringing somebody in\nfrom the outside that isn't here fighting\nall the time back and forth, back and forth.\nIt brings in the fresh viewpoint. That is\nwhy since you are here for this week, Win,\nyou can sit in and you may have some ideas,\ntoo. I think that that definitely is the\nway. I am not too tired to get that. (Laughter).\nI think that is the reason, Dan, that is\nas good an excuse as any. I am sick and\ntired of being pussyfooted about this stuff.\nSell:\nI agree with that too but this is not the\nplace to do that unless you have some good\nexcuse. You should have done that before\nthe Ways and Means.\nWell, does this make you happy?\nPoll:\nAbsolutely. That doesn't sound so much like\nasking them to rewrite the tax bill. That\nwas the impression I got this morning when I\nread the statement.\nJr:\nAll right. Well, will everybody so disposed\nbe here at nine tomorrow morning, bright and\nearly?\nRegraded Unclassified\n30/ Khoft aug 6. 6. 4.P.M. 145\nMr. Chairman and Members of the Committee:\nJI\nTwo and A helf\nmonths ago, the President proclaimed the existence of an\nunlimited national emergency. At that time he called upon \"all loyal\ncitizens to place the nation's needs first in mind and in action, to\nthe end that we may mobilize and have ready for instand defensive use\nall of the physical powers, all of the moral strength, and all of the\nzzzzł material resources of this nation\".\nto\nIn accordance with that proclamation, the people of this country\nhave responded splendidly They have never been more ready to make\nsacrifices for the common good. From all parts of the country there\nhave come encouraging signs, from labor and industry alike, that\nAmerican men and women are willing to subordinate their personal\nthe sake\nInterests for the nation's defense.\nThe Congress has appropriated\nbillions for defense\npurposes in the present fiscal year, and the American people understand\nthe need for those colossal expenditures. The Ways and Means Committee\nof the House of Representatives has just completed work on 8 tax bill\nto produce 3½ billion dollars in additional revenue, an amount that\nwould have struck our people as staggering in former years. They have\nnot complained. They understand the need and they are willing to pay\nthe price of making their country impregnably strong.\nThe defense effort, however, has now grown to such giant propor-\ntions that it dominates our entire economic life. In these days of\nRegraded Unclassified\n146\n- 2 -\nC\ntotal war, B. total defense is called for. Our economic and fiscal\npolicy must be integrated for defense, integrated as closely as our\narmy and navy and our planes that guard the skies. The bill which I\nat glad to support today, H. R. 5417, is 8. step in this direction, but\nIt is not enough. Still bolder measures are needed now. In my opin-\nion, we need an all-out tax bill as an essential part of all-out\ndefense. The time has come for us to act as vigorously in fields of\ntaxation as we have acted, and intend to act, against the rising tide\nof tyranny abroad.\nWhen I appeared before the Ways and Means Committee of the House\non April 24, I outlined four principles that should govern & sound\n(tax program in days like these. I should like to repeat those state-\nthan\nments now, as they are very brief and just 00 applicable as they were\nlast Spring. The first is that we should pay as we go for a reasonable\nproportion of our expenditures. Secondly, all sections of the people\nshould bear their fair share of the burden. Third, our tax program\nshould help to mobilize our resources for defense by reducing the\namount of money that the public can spend for comparatively less\nimportant things. And finally, our taxes should prevent B. general\nrise in prices by keeping the total volume of monetary purchasing\npower from outrunning production. And H these principles, as I have\njust said, are applicable now, but they are applicable in still greater\ndegree. For example, even the proposed increase of 31 billion dollars\nRegraded Unclassified\n147\nJ\n- 3 a\nIn revenue, even out total goal of 12 2/3 billions from taxes, now\nthreaten to be inadequate in the light of vast expansion of defense\nspending since last Spring. In the past month, the Congress has been\nasked for\nbillions in additional expenditures for the army and\nnavy, on top of the 33 billions appropriated for all purposes during\nthe fiscal year just ended. I know that we shall be able to raise\nstill greater revenues if necessary -- and it will be necessary after\ntax bill has been passed. We Americans can do this job, and any\njob, if we but set ourselves to it.\nMoreover, the price situation has taken an ominous turn since\nI appeared before the Ways and Means Committee in April. I shall have\n( more appropriate occasion next week to discuss these matters in\ndetail before the Banking and Currency Committee of the House. For\nthe present I would say only that we are no longer threatened with\ninflation, we are in the midst of an inflationary process that will\nzove faster and faster unless it is checked by bold action. And taxes,\nof course, are one way, one of the most effective ways, of checking\ninflationary tendencies.\nsmee the spring\nA third change can be found in the steadily increasing demands\nA\nCow being made by the defense industries for certain raw materials\nneeded in civilian production. In 8 number of commodities which I do\nnot need to list in detail, actual shortages for civilian uses are\nthreatened. It has become more essential than ever to use the machinery\nRegraded Unclassified\n148\n- 4 -\nC\nC B tax bill to prevent delays in defense production or by the competi-\ntion of defense and civilian goods purchases with defense requirements.\nI cite these changes because I am convinced that our thinking\nin tax fields has not kept pace with events. We are still thinking\ntoo such in terms of the burdens to be borne by this group or that.\nare still more intent upon exemptions than on common sacrifice.\nof us\nThat is why, gentlemen, I have said that we need an all-out tax bill,\njust as surely as we need an all-out military, economic and psycho-\nlogical defense for our country.\nNow what do I mean by an all-out tax program? I mean primarily\none that will enlist the help of all our people in accordance with\n(heir ability to pay. I mean, as I said last April, that no section\nof our people should be exempted from sharing the common task. We\nall want the workingman, the farmer and the businessman to earn a fair\nprofit, but we do not want any one of them to profit unreasonably from\nthe country's needs. My own feeling is that every one should contribute,\nand will be glad to contribute, for the safety of our beloved country.\nRegraded Unclassified\n149\nC\n- 5 -\nThere has been much public discussion, some of it ignorant\ndiscussion, of those who have been called \"the untaxed millions,\"\nthose in the lowest income groups. It is said, for example, that\nthese millions of wage-earners are going scot-free because they pay\nno direct income taxes. I do not need to stress the fallacy of such\n& statement; It is an established fact that those with incomes under\n$1,500 already pay 8. larger share of their incomes in taxes of all\nkinds, direct and indirect, than any other group up to the $10,000 to\n15,000 income class.\nMoreover it is not generally realized that under the bill now\n( efore you the base has been broadened to add about 2,000,000 new\ninxpayers. This was accomplished by beginning the surtax at the first\ndollar of surtax net income. The 10 per cent earned income credit in\neffect increases the exemption from normal tax. Since this credit is\nnot applicable in computing the surtax, the bill has in effect reduced\nthe exemption of single individuals by $88, of married couples by $222,\nand of married couples with two children by $311 a year.\nNevertheless, 8 further lowering of exemptions would produce some\nadditional revenue, although not nearly 9.5 much as some commentators\nsould imagine. It would be some help in cutting down the purchasing\npower of the small consumers of non-essential goods, although again not\n(\n55 much as might be supposed. And finally, it would give millions of\nAmericans an opportunity to make & direct contribution through taxes\nRegraded Unclassified\n150\nJ\n- 6 -\nto the defense of their country. It would enable them to feel that\nthey were participating, personally and directly, in the defense\nprogram. It is this last consideration which appeals strongly to me\nnown although The Treasury has opposed lower exemptions in the past.\nIven now -- and I cannot stress this too emphatically -- a further\nbroadening of the income tax base should be strictly conditional upon\nother new measures if it is not to be grossly unfair and destructive\nof the national morale.\nIn the past, 8 very real obstacle to broadening the base has\nbeen the administrative difficulty imposed upon the Bureau of Internal\n(Revenue and the individual taxpayer alike. The Bureau is already\nbearing 3 colossal administrative load because the number of tax re-\nturns has been increased from three million to fifteen million within\n5 very few years. The Committee can picture the burden that would be\nlaced upon our revenue collectors if they had to check S till more\nallions of complicated tax returns every year.\nMoreover, the difficulty for the individual taxpayer has been\nreal and undeserved. No matter how willing and cheerful a taxpayer\n29) be in making his annual contribution to this country, some of his\nwillingness and cheerfulness is bound to evaporate as he fusses with\nthe credits and deductions and examptions which he is required to\ncompute on his tax return. In B. letter sent on July 31 to the Chairman\n39 the Ways and Means Committee of the House, the President wrote that\nRegraded Unclassified\n151\n- 7 -\nJ\n\"some way ought to be found by which the exemption of 8 single person\nshould be reduced to $750.\" But the President added that some provision\nshould be made \"for a straight simple payment of some small contribu-\ntion to the national tax income through some simple agency and on some\nsimple form.\"\n1 should like now to submit to the Committee a proposal which will,\nfirstly, prevent administrative difficulties at the Bureau of Internal\nevenue, and secondly, will enable millions of new taxpayers to \"chip\n(5\" willingly and proudly without the burden of filling out a complicated\nfax return.\nRegraded Unclassified\n152\nV\n- 8 -\nThis proposal is that taxpayers with less than $3,000\nof income before deductions be encouraged to file a very\nsimple income tax return in which income would be shown 2\nbut no deductions would be taken. The law would provide &\nschedule of taxes in which the tax would be the same for\nIncome within narrow blocks of perhaps $25. Thus the single\ntaxpayer with $1,115 of income would find his tax already\ncomputed for him on 8. table in which the tax would be shown\nfor incomes from $1,100 to $1,125. The tax schedules\nplaced in the law would be computed to give & slightly\nlower tax in the typical case than the taxpayer would have\nto pay under present methods of computation, a flat allowance\nbeing made to take care of deductions. Because of the cases\nwhere there are large tax payments, interest payments,\ncapital losses, business losses and other types of deduction,\nthe taxpayer should be given the option of filing a regular\nreturn and computing his tax in the regular way. The great\nmajority of the taxpayers, however, would find it to their\nadvantage from the viewpoint of simplicity to file the\nspecial simplified return.\nFurther refinements and modifications of this proposal\nmay be found to be desirable by your Committee, but it is\nmy feeling that if the personal exemptions are to be lowered\nRegraded Unclassified\n153\n- 9 -\nsome plan of this kind 1s imperative for the convenience\nboth of the taxpayer and of the administrative officials.\nAs I previously said, this 18 an all-out defense\nprogram and necessitates an all-out tax program. If we\nare going to lower the personal exemptions 80 that single\npersons with #15 a week income and married couples with\n$30 a week income will be subject to the income tax, we\nmust have an all-out program in other respects also, We\nmust get at ability to pay taxes wherever it may be found\nand we must use taxation for the encouragement of the\ndefense program wherever it is possible.\nThe bill submitted to the House by the Committee on\nWays and Means contained & provision for the mandatory\njoint returns of husbands and wives. That provision,\nwhich was stricken from the bill by amendment on the floor\nof the House, went somewhat too far in my opinion. Where\nhusband and wife are both contributing through their\nlabors to the support of the family, they should be given\nsome special relief from the Joint returns requirement.\nIf this is done, the joint returns provision appears to\nbe an equitable method of taxation. It will remove the\ndiscrimination now present in favor of the taxpayers of\nthe community property States as well as the opportunity\nRegraded Unclassified\n154\n- 10 -\nto avoid the tax through the distribution of property\nby rust and otherwise within the family unit,\nWe surely cannot look with complacency on the\nlowering of the personal exemption 8.6 long as these\ndiscriminations remain in the income tax law.\nAnother vital element in a tax program to accompany\nan all-out defense program involves a change in the excess\nprofits tax. The capacity of a corporation to pay taxes\n16 effected by the rate of ite return on its investment.\nA highly prosperous, well established corporation which\nhas been making 30, 40, 50 percent or more on its invested\ncapital has a much larger ability to pay taxes than a\ncorporation which has been earning only 3, 4, or 5 percent\non its invested capital even though the dollar incomes of\nthe two companies are the same. Heavy taxes on high returns\nof profit will not cause the business receiving them to be\nliquidated or discontinued for lack of a minimum necessary\nprofit which may occur when heavy taxes are imposed on\nmeager profits. Application to corporations of taxation\nin accordance with ability to pay calls for higher taxes on\nthe profite of those corporations which have the higher\nrates of return.\nRegraded Unclassified\n155\n11 - #\nThe present excess profits tax 8.8 well as the bill before\nyou placed special heavy taxes on profite which are in excess\nof the profits received during the years 1936-1939 prior to\nthe defense program. This 18 all to the good -- is indeed\nessential. It 18, however, not enough. A corporation may\nmake 50 percent profit on its invested capital and not be sub-\nject to the excess profits tax if the profit 18 not in excess\nof 95 percent of its average profits during the base period\nyears 1936 to 1939.\nThis 18 not B matter of minor importance. Substantial\nnumbers of companies are in the high-profit group. One out\nof five profit-making corporations with assete of $1 million\nand over averaged more than 10 percent net income on their\nreported equity capital during the years 1935 to 1938 and\none out of twenty-five companies earned more than 30 percent.\nThese companies can continue to earn profits at virtually\nthese rates without paying excess profits tax under either\nthe present law or the Committee's tentative plan.\nFailure to apply excess profits taxation to such\nexcess profite is unfortunate also because of the uneven\nway in which competing businesses are affected. Concerns\nwhich have been making high returns in the base period\nyears are given a competitive advantage over newly organized\nRegraded Unclassified\n156\n- 12 -\nconcerns or concerns which have been struggling to establish\nthemselves. They may receive free from excess profite tax &\nmuch higher rate of return than their new and growing\ncompetitors. The effect 1s to confirm monopolies in their\ncontrol and to protect well established businesses against\ncompetition.\nThere 1e another important reason for revising the\nexcess profite tax. In recent months there has been a\nnoticeable tendency for various groups including business\nmen, farmers and laborers, to endeavor to secure higher\nrates of return in profits, prices and wages. At the\npresent time, however, with the existing pressures for\ninflation, widespread efforts to increase profits, prices,\nand wages will result not only in larger purchasing power\nand thus still greater pressure on our limited supplies\nof civilian goode, but also in higher costs for the\ndefense program and for goods which civilians purchase.\nThese higher costa in turn necessitate increases in\nprices and these in turn give rise to new demands for\nhigher wages and higher prices. The spiral goes up\nand up.\nIf we are to expect to stop or prevent this spiral\nwe must be able to show those who receive modest incomes\nRegraded Unclassified\n157\n- 13 -\nfrom their labor or their production that excessive profite\nare not being received by great corporations.\nAnother element in B. tax bill to for times such as\nthis involve the excise taxes, In more normal times excise\ntaxes have little to recommend them except that they produce\nrevenue. In 8. period such as this, however, excise taxes\nmay become 8. very helpful supplement to price control.\nDemand for consumers' goods, especially durable consumers'\ngoods, may compete with the defense program. In such cases\nit becomes necessary to cut off the supplies of these goods.\nExcise taxes may serve a valuable purpose either in reducing\nthe demand of producers and consumers for these scarce\ncommodities or to absorb the windfall profite resulting\nfrom price rises when supply is scarce relative to demand.\nThe Government instead of the middleman should receive the\nprofite due to high prices. Although the achievement of\nthis objective is by no means a simple matter, adjustments\nwithin the tax bill along this line should be seriously\nconsidered by your Committee.\nRegraded Unclassified\n158\n- 14 -\nC\nThere are other features of the tax system whose\ncontinuance cannot be tolerated if we are going to make\nan all-out effort. They are matters which the Treasury\nhas brought to the attention of the committees from time\nto time. I will mention but two of them.\nThe first 18 the exemption from income taxation\nafforded to the interest on State and municipal securities.\nCertainly in meffort to finance national defense in this\nemergency, such exemption should not be permitted to\ncontinue. Tax exemption should be removed with respect\nto the interest on future issues of State and municipal\nsecurities, even as we have removed it with respect to\nFederal securities.\nThe depletion allowed to extractors of certain\nnatural resources, for example, oil, are targelyx larger\nthan can be justified on any reasonable basis of tax\nequity. These percentage depletion changes should be re-\nexamined and adjusted BO that the equitable tax exemption\nwhich they now afford will be removed.\nIt is very important that the tax bill before you\nbe passed as promptly 8.8 possible. Income taxpayers and\nexcess profits taxpayers should know as quickly as possible\nwhat their taxes on 1941 income and profits are going to\nbe 80 that they may make intelligent plans for meeting\nRegraded Unclassified\n159\n<\n- 15 -\nthe increases which the law will impose. The excise taxes\nand the estate tax cannot be imposed retroactively and\nevery day's delay in the passage of this tax bill costs\nthe Treasury several million dollars.\nBecause of the necessity for promptness, I have not\nsuggested that all of the recommendations which I have made\ncan be put in this tax bill. Another bax bill, however,\nwill be necessary to apply to next year's income and business.\nSuch a tax bill will be necessary for 8. number of reasons. I have\nAlready pointed out the manner in which our defense program\nhas expanded and is expanding. We need to raise the money\nto finance this program. I have pointed out, also, the price\nsituation and the threat of inflation which confronts us.\nA strong fiscal policy 18 one of the most important methods\nof relieving inflationary pressures by taking for the Government\npurchasing power that otherwise would be used to try to\npurchase non-existent goods.\nThis tax bill and the next one will be important factors\nin controlling the price situation. They will not in themselves,\nhowever, be sufficient. The controll of inflation is too\ngreat B. load for fiscal policy alone to carry. There should\nbe additional action also along a number of other lines and\nas previously indicated I shall go into this subject at & more\nappropriate time and place.\nRegraded Unclassified\n160\n- 16 -\nC\nIt should be stressed, however, that although this 1s\nan onerous tax bill, the alternatives to heavy taxation\nare much more onerous.\nRegraded Unclassified\n161\nAugust 6, 1941\nMy dear Averill:\nI hope to see you soon and hear from you first\nhand some of the many interesting things that you must\nhave learned while in England.\nMr. Harold Hochschild, President of the American\nMetals Company, and a very old and intimate friend of\nwine, came in to see me today. Mr. Hochschild is in G.\nposition to get out of his business and devote his entire\ntime at B. dollar B year to the Government. Be is a\nbachelor, about fifty years of age, and would love to\nhave something to do, possibly in England. It occurred\nto no that you might be able to make use of him.\nIn the early days of this show when I was looking\nafter strategic materials for the President, one of the\njobs that I had to do was to stop molybdenum from going\nto Japan and Russia. I asked Mr. Hochschild, the members\nof whose family are the largest stockholders in Climax\nMolybdenum, whether they would voluntarily agree to dis-\ncontinue shipping any molybdenum to Russia and Japan.\nThey unhesitatingly agreed to do this, notwithstending\nthe faot that these two countries were their best customers,\nand at the time it meant a considerable financial sacrifice\nto the company. I am telling you this merely to give you\nan idea of the kind of man you would find Mr. Hochsohild\nto be.\nIf you know of a spot where Mr. Hochschild could\nbe put to work, either in England or in the United States,\nI an confident that he can do 8. good job.\nYours sincerely,\n(Signed) I. in\nMr. W. Averill Harriman,\nThe Carlton Hotel,\nBy Mossonger 8/6/41\nWashington, D.C.\nRegraded Unclassified\n162\nAugust 6, 1941\nDear Harold:\nI am sending you herewith a copy\nof my letter to W. Averill Harriman.\nYours sincerely,\n(Signed) Henry\nMr. Harold Hochschild,\nSixty-one Broadway,\nNew York, New York.\nRegraded Unclassified\n163\nHAROLD K. HOCHSCHILD\nSIXTY-ONE BROADWAY\nNEW YORK\naugust 7. 1941.\nhear Heary\nThanks ever so much\nfor the very fine letter\nyou wrote about me to\naverill Harriman I shall\nwait hopefully until cl\nnear from you or him\nSincerely\nHarold\n164\nAugust 6, 1941\nDear Frank:\nThe other night you made the statement to no\nthat during the month of July we had produced\n2,000 planes in this country. You will remember\nthat I questioned your figure.\nI now have received a. confidential, preliminary\nreport from the Aircraft Section of OPM which shows\nthat production of all military planes in this\ncountry during the month of July was 1, 455, or 449\nbelow their estimates. Of the 1,455 planes produced,\nI would like to point out that 626 were so-called\ntactical planes, and 829 were trainers.\ntax\n61\nWithout wanting to be/argumentative, I repeat\nmy statement that I think there is something wrong\nwith our airplane production.\nSincerely yours,\n(Signed) Henry\nBy-Messenger\nHonorable Frank Knox,\nSecretary of the Navy,\nWashington, D.C.\nConfidential Photostats and\nBy Momenger them\n8/7/41\n9:30pm\n5/7/41\nRegraded Unclassified\n165\nAugust 6, 1941\nDear Mr. Wouk:\nEver since last Wednesday's Treasury\nHour I have been wanting to send you & line\nto tell you how much I enjoyed your tribute\nto the Marines.\nIt will interest you to hear that I\nbrought & record of your ballad to the White\nHouse the other day and played it for the\nPresident. He was just delighted with it.\nI send you my thanks and congratula-\ntions. with all good wishes,\nSincerely yours,\n(Signed) 1. Norgenthan, 380\nMr. Herman Wouk,\n820 West End Avenue,\nNew York, N. Y.\nCapies to Mr. Thompson\nFK/hkb\n8/6/41\nRegraded Unclassified\n166\nAugust 6, 1941\nDear Mr. Carden:\nI an delighted to see that your company\nhas put & Defense Savings Bond announcement on the\nwrapper of each package of Domino cigarettes. This\nwill be 1 real help to us in making the American\npublic conscious of Defense Savings Bonds. I as\nmost appreciative of this fine contribution of\nyours to the defense of the country.\nSincerely yours,\n(Signed) 1. Norgenthes, as:\nMr. R. C. Carden, Jr.\nGeneral Sales Manager,\nLarus & Brother Company, Inc.\nRichmond, Virginia.\nFile to Mr. Thompson\nFK/hkb\n8/6/41\nRegraded Unclassified\n167°\nNATIONAL CONNOIL 07 NOGRO MOMEN, INC.\nMrs. NATE McLood Bethune, Founder and\nNational President\nAugust 6, 1941\n1. -illian lickins\n102 - Sloon Building\nNo Twelfth Street, IF.\nwishington, D. C.\nis dont I. Pickens:\n1 feil that the position you hold, at a time\n11:00 this, is of vital importance. The Rational Council\nof Wegro vonon Incorporated, representing 500,000 women,\njoins heartily in your program of selling defense bonds.\nYour stirring message to the NUMBER = the\nInternal Annociation of Colored voman in Exlahoma was\n100% impiring. These women represented Porty-two stotes\nD' through our croups and other activities, WG shall\nleave no chone anturned in helying you to got those bonds\nsold In avery home.\nAs the Director of the Office of Begro Affairs\nin the %=1onal Youth Administration, I on placing our\nnachinery at your service. I fun advising all of our\n/dulidstrative Aguistants in Charge of lingro Affairs and\nthrough them our project supervisors throughout the states\nto (ve information to the thousands of youth when the\ncontact in order that they may share in this part of our\ndefense program.\nSincerely yours,\nLary McDood\nPRESIDENT - Director, Division of\nMagro Affairs, National Youth Administration\nRegraded Unclassified\n168\nMr. Houghteling\nAugust 12, 1941\nWilliam Pickens\nI as sending copies of this memorandes to those who may find\nas interest in our program. Mr. Gusack and Mr. Paige saked se to\nalways give them any items that might be good for publicity.\nDr. Glenn T. dettle, President of the \"Wings Over Jordan\"\nsingers, has asked us to speak for their breadcast the last Sunday is\nAugust which is the 31st. I think the program COMES on at 9:30 a.m. EST\nover the National Broadcasting System. It is a very big hook-up and I\nthink & few minutes will enable us to get a good manage over to a good\nmany people. So as to get most in the time allowed, I shall write out &\ncareful statement, and will give a copy of it to Ir. Cussck and one to Mr.\nPaige.\nRegraded Unclassified\nUNITED STATES VINGS BONDS\nComparative Statement of Sales During\nFirst Four Business Days of June, July, and August, 1941\n(June 1-5, July 1-5, August 1-5)\nOn Basis of Issue Price\n(Amounts in thousands of dollars)\n:\n:\nAmount of Increase\n: Percentage of Increase\nSales\n:\n:\nor Decrease (-)\n:\nor Decrease (-)\nItem\n:\n:\n:\n:\nAugust\n:\nJuly\n:\nAugust\n:\nJuly\n#\nAugust\n: July\n:\nJune\n:\nover\n:\nover\n:\nover\n:\nover\n:\n:\n:\n:\nJuly\nI\nJune\n:\nJuly\n:\nJune\nSeries 1- Post Offices\n$ 7,851\n$ 7,598\n$ 6,825\n$ 253\n$ 773\n3.3%\n11.3%\nSeries I- Banks\n13,523\n13,348\n9,277\n175\n4,071\n1.3\n43.9\nSeriee I - M Total\n21,375\n20,945\n16,102\n430\n4,843\n2.1\n30.1\nSeries 1- Banks\n4,708\n5,082\n6,528\n374\n- 1,446\n1\n7.4\n- 22.2\n-\nSeries G - Banks\n31,114\n33,035\n41,877\n- 1,921\n- 8,842\n- 5.8\n- 21.1\nTotal\n$57,197\n$59,063\n$64,507\n-$ 1,866\n-$ $ 5,444\n- 3.26\n- 8.45\nOffice of the Secretary of the Treasury, Division of Research and Statistics.\nAugust 6, 1941.\nSource: All figures are deposits with the Treasurer of the United States on account of proceeds of\nsales of United States Savings Bonds.\nNote: Figures have been rounded to nearest thousand and will not necessarily add to totals.\n691\nRegraded Unclassified\nCONT IDENTIVE\nUNITED STATES SAVINGS BONDS\nDaily Sales - August 1941\nOn Brain of Issue Price\n(In thousands of dollars)\nPost Office\nBank Bond Sales\nAll Bond Sales\nDate\nBond Sales\nSeries E\nSeries El\nSeries F\nSeries G\nTotal\nSeries 3\nSeries F\nSeries G\nTotal\nAugust 1941\n1\n$ 1,467\n$ 3,296\n$ 1,163\n$ 7,586\n$ 12,045\n$ 4,763\n$ 1,163\n$ 7.586\n$ 13,512\n1,500\n3,030\n726\n6,101\n9,857\n4,530\n726\n6,101\n11,357\n2\n4\n3,606\n4,376\n1,892\n10,092\n16,361\n7,983\n1,892\n10,092\n19,967\n1,278\n2,822\n928\n7,334\n11,084\n4,099\n928\n7.334\n12,362\n5\nTotal\n$ 7,851\n$ 13,523\n$ 4,708\n$ 31,114\n$ 49,346\n$ 21,375\n$ 4,708\n$ 31,114\n$ 57,197\nOffice of the Secretary of the Treasury, Division of Research and Statistics.\nAugust 6, 1941.\nSource: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of\nUnited States Savings Bonds.\nNote: Figures have been rounded to nearest thousand and will not necessarily add to totals.\n170\nRegraded Unclassified\n171\nDEFENSE SAVINGS STAFF\nADVANCE NOTICE RADIO PROGRAMS\nWEDNESDAY - AUGUST 6, 1941\nTime:\n3:15 - 3:30 P.M.\nProgram:\nStella Dallas\nStation:\nWPC and NBC Red Network\nTime:\n5:30 - 5:45 P.M.\nProgram:\nPaul Sullivan News\nStation:\nWJSV and CBS Network\nTime:\n5:30 - 7:00 P.M.\nProgram:\nMeet Mr. Meek\nStation:\nWJSV and CBS Network\nTime:\n7:05 - 7:15 P.M.\nProgram:\nDaniel W. Bell, Under Secretary of Treasury Department,\nSpeaks on Treasury Department Tax Savings Plan.\nStation:\nWINX - Washington, D. C.\nTime:\n7:30 - 8:00 P.M.\nProgram:\nPlantation Party\nStation:\nVRC and NBC Red Network\nTime:\n9:00 - 10:00 P.M.\nProgram:\nKAY Kyser and His Kolledge of Musical Knowledge\nStation:\nWRC and NBC Red Network\nBULOVA TIME SIGNALS PROMOTE DEFENSE BOWDS AND STAMPS REGULARLY\nNOW AT THE RATE OF 428 ANNOUNCEMENTS DAILY OVER 134 RADIO STATIONS.\nRegraded Unclassified\n172L\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE August 6, 1941.\nSecretary Morgenthau\nTO\nFROM\nMr. Gulick\nI attach an unusually interesting address recently made by\nRowland Egger, Director of the Budget of the Commonwealth of\nVirginia.\nL.G.\nTalk given by Rowland Egger, Director of Budget,\n173\nGovernor's Office, Richmond, Virginia.\nTo: Southern Interstate Assembly\nJuly 19, 1941.\n\"T. Chairson. Ladies and Gentlemen:\nThe reserve which I shell have to offer addressed to financial planning for the\n:voure Are predicated upon a number of assumptions, with which I think most of us\nwill find nurselvos in substantial agreement. Since we are likely to disagree\naccut almost everything else, I hasten to try my hand at defining the area of non-\ncontainey:\n(1) Governmental finance 18 essentially indivisible, and it is no\nlonger profitable, if indeed it ever has been, to try to think of\nlocal finance, State finance, and national finance in separatist and\ncommertmentalized terms;\n(2) In time of national crisis the Federal government has the complete\nright-of-way in matters of taxation;\n(3) The State and local governments, under the lendership of the Federal\ngovernment. have a joint responsibility for conducting their fiscal and\nadministrative affairs in such menner 88 will promote the national defense\nand security, implement the national rearmament, and prepare themselves\nfor no effective participation AS possible in readjustment to a beace time\nbasis of operations.\nIt follows that financial planning must be simultaneously attacked along two\nlines; first, short-term fiscal planning to win the war; second, long-term fiscal\nclanning to nvoid losing the peace,\nThe July 9th issue of Defense, in its statistical summary of progress in the\nlefense program. reports that total authorizations to date come to $38,651,000,000,\nexcluding British purchases but including lease-lend commitments. My private fortune\ntellare are now talking about an $80 billion overall defense program cost, and it\noccurs to me that many months have passed since I have seen anything in the papers\nAbout the debt limit. Moreover. these figures may, in the main, be regarded as\nreflecting E. construction program - an investment in capital equipment - if this is\nnot too great a distortion of the idea of a producers' good. After the ships, planes,\nRegraded Unclassified\n174\n- 2 -\ntanks, bases, guns, forte and other facilities have been acquired, they must be\noperated and maintained. Again the fortune tellere are murmuring of $6, $8 and\n$10 billion per annum operating expenditures. Without anyone committing himself\non the details of things to come, let us admit that a tidy sum of money, aggregating\nA considerable percentage of the national income, however high the national income\ngoes, will be required to win the war.\nObviously, if State and local governments are to bring their fiscal programs,\nboth short - and long-run, into harmony with the imperatives of Federal finance. some\n1dea of the basis of Federal fiscal policy 18 necessary. Several months ago, during\nthe course of an extremely provocative conference on National defense and State finance\nat the University of Alabama, Professor Simeon Leland outlined a series of fiscal\npolicies which he believed applicable to the various stages of the defense effort.\n3e pointed out that in the early stages of the defense program, before optimum\nemployment had been reached, defense should be financed in large part by loans secured\nto the greatest degree possible from idle funds. Taxes that interfere with consumption\nshould be avoided, unemployment spread among the labor supply, overtime minimized,\nand vage rate increases kept down. Aggregate money wages, he felt, would rise first\nfrom re-employment and later from increased production and increased man-houre. Tax\nrevenues would increase from the increases in production and employment, without\nincreases in tax rates or the addition of new taxes.\nOn reaching optimum employment. he proposed a rapid shift from loan to tax\nfinancing, and suggested that such loans as are necessary should come from current\nsavings and be 60 sterilized as not to be available for credit expansion. Punitive\ntaxes, such as severe taxation of personal income surpluses above living costs,\nselective consumption levies, etc., should be levied to curtail individual consumption,\nand to prevent individuals from bidding against the government for defense goods and\nservices. Implicit in this philosophy, of course, is price fixing and, eventually\nRegraded Unclassified\n175\n3\nperhaps. rationing. He recognizes the difficulty but does not admit the impossibility\nof (raning excises which would curtail consumption without affecting production. On\nthe part of State and local governments, elimination of all possible construction not\ndirectly related to defense would be called for, Most importantly of all, salaries\nand would be kept down, and such increases as were permitted would be sterilized\nto evoid competition with defense requirements.\nIt is necessary in preparing for the third stage of our fiscal policy, that the\nidvects of post-war readjustment be anticipated, and that plane be laid for compensating\nDet deflationary tendencies. A backlog of consumer demand and, equally important,\nof consumer purchasing power, will obviously facilitate the transition to the ways\nof pance end reduce both its monetary and social costs. Already a. great deal of\nconsideration has been given to ways and means for curtailing or avoiding increases\nin purchasing power now in the hands of private consumers, and of bringing such\ndeferred purchasing and consuming power into action at the time of national readjustment\nJohn Maynard Eeynes has proposed a. highly ingenious plan for financing the whole cost\nof the var out of deferred wages, with incidental assistance from the texing power.\nWorther the liea of wege deferment on so comprehensive a scale is practicable or not\nLa irrelevant; the essential analysis of the problem is correct. If grave economic\nMelocation is to be avoided. all levels of government must bend their efforts to the\nof activities which, in the present emergency, bring them, or permit private\nIndividuals to come, into conflict with the defense program's needs for men and\nMierinle. Moreover, consumer demand and consumer purchasing power must be stored\nBY for the future, to be loosed in a planned and purposeful way when defense\nactivities my with safety and propriety be curtailed.\nAll this is much easier said than done. It would be difficult enough in a\ntotalitarian state, and its realization in B. political order dominated\nby federallen and damned by particularism is 8 challenge to the highest order of\nRegraded Unclassified\n176\nstatesmanship which this emergency can evoke. We did not do it in 1933-36, with the\nresult that many millions of Federal dollars were expended merely in compensating\nfor state and local withdrawal from public works' construction, BO that the significant\neffects of pump-priming were not only greatly reduced but unconscionably long\ndelayed. In 1933-36 the cost could be calculated in terms of a billion dollars\nor so that might have been saved through sooner recovery if we had worked together.\nIn 1941-44 the cost for the same failure may well be calculated in terms of the\nloss of our national liberty, while reparations and the cost of B. German army of\noccupation would not be inconsequential.\nThere are many practical difficulties in the way of coordinating state and\nlocal financial operations within the framework of what appears to be a fairly\naccurate outline of federal grand strategy. Most states and localities operate 60\nclose to the margin, and on such 8 hand-to-mouth fiscal basis, that cyclical financial\npolicies except on an extended deficit financing basis are wholly impossible. More-\nover, their tax bases are subject to very real geographical, administrative and\npolitical limitations. Perhaps the most important single barrier is the general low\nlevel of imaginative powers of fiscal officers; indeed, much of the success or failure\nof our attempts to lead our economy along socially productive channels hinges on the\nextent to which the vision of public administrators is capable of rising to meet the\nchallenge of our times.\nSome things can be done. The most important immediate problem is a clear and\nagreed statement of our objectives and the articulation of those objectives in terms\nwhich can pierce the outer defenses of even congressmen and the Secretary of the\nTreasury. I suggest & few for discussion:\n1. & ceiling on prices - now. This country is drifting dangerously close\nto more price inflation than sound economic policy can tolerate. The spectacle\nof a national congress which sidetracks the defense price control bill in order\nto orate ad nauseam on the subject of daylight saving time is one which makes\nat least a few of Hitler's arguments very hard to answer.\nRegraded Unclassified\n177\n5\n2. A ceiling on real wages - now. Please note that there is no\nobjection to increasing the future purchasing power of wage earners;\nincreased payments must, in my judgment, be sterilized 80 that they\ndo not out increased purchasing power in the hands of private citizens\nuntil the end of the emergency.\n3. A rapid shift to complete tax financing of the defense program.\nIn my julgment we are rapidly approaching the end of the initial defense\nperiod, and with it, an end to the time when deficit financing is justi-\nfinble. Such additional taxes should aim deliberately at the curtail-\nment of private purchasing power.\nH. The institution of a drastic system of compulsory saving and forced\nloans, not for revenue but to control private purchasing power,\n5. Drastic curtailment of payment in cash or other unsterilized form\nof farm parity and other subsidies not in the nature of subsistence guarantees.\n6. Development and implementation of effective machinery for continuing\nclearance among federal, state and local fiscal agencies which will assist\nin keeping the tracks clear for Uncle Sam, but which will permit necessary\nstate and local freight to move in the interim.\nShore, obviously. are policies which the federal government alone can put into\noperation. In my judgment they are essential to the national defense: although their\nshort-run effects may be restrictive of certain types of state and local action, and\nBy require some considerable planning and perhaps no little hardship at the moment,\ntheir more remote effects will be in the interest of sounder and more vital state and\nlocal government.\nUnder Federal leadership, the states and localities must be prepared to take o\nvery enlightened and long-term view of their problems. They must be precared to\nsurrender many temporary advantages which the defense program has produced, and to\ndefer to n. later date many expansions and improvements which now, for the first time\nin many years. are within their power, et least as long as the defense effort is\nsustained, to finance from current revenues. Some of the policies which prudence\nwould seem to demand be adopted by state and local authorities on a nation-wide scale\nare:\n1. ^ virtually complete cessation of all non-defense public works:\n2. A stiff policy against wage increases in the public service, which 1s\nRegraded Unclassified\n178\n- 6\nB truly heroic undertaking by a government in times of rising revenues;\n3. The establishment and protection of large reserves from current surpluses,\nand the avoidance of expansion in recurrent obligations such as those for\nmaintenance and operation:\n4. The extensive use of police and regulatory powers to prevent supply con-\nstrictions, 60 that price controle may be more effectively administered with\ngeneral public support;\n5. The repeal of trade barriers and price maintenance lawe;\n6. The complete restudy and replanning of texation and revenue systems, in\ncollaboration with the Federal government, BO that swift action in accommodation\nof tax measures to economic readjustment at the end of the defense effort may be\nfacilitated;\n7. The development of a comprehensive reserve of public works and public\nservice projects, and the pre-planning of such projects to facilitate quick\nstarting of actual operations when economic conditions require;\n8. The development of facilities for a thorough reappraisal of administrative\nmethods and procedure. administrative organisation, and the general fitness of\nadministrative institutions to perform efficiently and economically the large\ntasks which will fall upon them in the post-defense readjustment.\n9. The implementation of facilities for state and local physical and social\nplanning. 80 that the post-defense program can be devoted to truly productive\nand socially desirable programs of public works and public services, and leaf-\nraking and muck-raking minimized.\nThere are many other lines along which federal, state and local government must\ndevelop coordinated policies if the emergency ie to be decisively faced, and each of\nthe proposals I have listed is susceptible to almost limitless embroidering and\nembellishment. I will not take the time of this audience in exploring the nooks and\ncrannies of the highways and by-ways we have encountered. Certainly, it is clear that\ncooperation and unified action demanding a high order of administrative skill and in-\ntegrity at All levels of government is demanded in full and unstinted measure. The\ntime has come to forget about states' rights and local autonomy, and to remember\nstates' duties and local responsibilities. The defense of the Anglo-American way\nof doing things, and the maintenance of the Americas for those who love liberty and\nrespect the dignity of man are of vastly greater importance than the preservation\nof sxisting patterns of political power in Raleigh, or Richmond, or anywhere else.\nRegraded Unclassified\n179\n- 7 -\nThe challenge of our generation is to the imagination of those to whom the\nmanagement of our federal, state and local governments are entrusted. Let those\nof us called on to serve obscurely in the rear ranks of the public service take\ncare that our trust is not betrayed in this emergency by small vision, by small\nthoughts, or by small actions.\nRegraded Unclassified\n180\nAUG 6 1941\nMy dear Mr. Chairmans\nI propose, subject to your continuing approval,\nas provided in the Executive Order establishing the\nEconomic Defense Board, to designate Mr. Harry D. White,\nAssistant to the Secretary, as my alternate on the\nBoard.\nSincerely yours,\n(Signed) 1. Morganthan, 21.\nShame\nnich Wallace 8/12/41\nHomerable Honry C. Ballace,\nChairman, Defense Board,\nWashington, D. c.\nCopy to Mr. Thompson\nWNTide\nRegraded Unclassified\n181\nAUG 5 741\nMy dear Mr. President:\nReplying to your letter of July 30, I shall be\nglad to serve on the Economic Defense Board and to\nrender all possible assistance and cooperation in\nfacilitating the work of the Board.\nFaithfully yours,\n(ligned) E. Norgenthaw. In.\ncc- 3 Mr. Thompson\nThe President,\nThe White House.\nBy Messonger 8/5/H 3:45\nsangle\nWWT:dm\nRegraded Unclassified\n182\nTHE WHITE HOUSE\nWASHINGTON\nJuly 30, 1941\nMy dear Mr. Secretary:\nIn order to ascure effective coordination of\nour sconomic defense efforts, I have today established\nan Economic Defense Board under the Chairmanship of Vice\nPresident Wallace. The Treasury Department is to be\nrepresented on the Board by you or your designated repre-\nsentative. A copy of the Executive Order establishing\nthis agency is attached.\nI anticipate that the Board will prove to be\nAA effective zeans of unifying and strengthening our\neconomic defense plans and policies. I shall be grateful\nfor the full assistance and cooperation of your Department\nin facilitating the work undertaken by the Board.\nVery sincerely yours,\nThe Honorable,\nThe Secretary of the Treasury,\nWashington, D. C.\nEnclosure.\nRegraded Unclassified\n183\nEXECUTIVE ORDER\nESTARLISHING THE ECONOMIC DRFEMSE BOARD\nBy virtue of the authority vested in me by the Consti-\ntution and statutes of the United States, by virtue of the exist-\nonce of an unlimited national energency, and for the purpose of\ndeveloping and coordinating policies, plans, and programs designed\nto protect and strengthen the international economic relations of\nthe United States in the interest of national dufense, it is hereby\nordered as follows:\n1. The term \"economic defende, whenever used in this\nOrder, neens the conduct, in the interest of national defense, of\ninternational economic activities including those relating to\n_jorts, imports, the acquisition and disposition of materials and\ncompatities from foreign countries including preelusive buying,\ntransactions in foreign exclusive and foruign-owned or foreign-con-\ntrilled proporty, international investments and extensions of credit,\nshipping sud transportation of goods among countries, the international\nAssocts of patents, international communications porteining to bom-\nmirce, and other foreign economic matters.\n2. There is hereby established an Economic Defense Board\n(unteinafter referred to 15 the \"Board\"). The Board shall consist\nit Tive Vice President of the United States, who shall serve as Chair-\na, the Secretary of State, the Secretary of the Treasury, the Soc-\nretary of 72, the Attorney General, the Secretary of the liavy, the\nSecretary of Agriculture, and the Secretary of Comperte. The Chair-\nM psy, with the approval of the Prosident, appoint Additional men-\nDATA to the Board. Each member of the Board, other than the Chairman,\n-AY designato the alternato from among the officials of his Department,\n=bject to the continuing suproval of the Chairman, unit such alternate\n027 set for SUCA mumber in di natters relating to the Board.\n3. In furtherance of such policies und objectives 55 the\nProstient may from time 20 time 0 termini, the Boord shall wirform\n% fuctions and dution:\nas Anile the President as to economic delerise nus-\nsures to be taken or functions to be performed\nenden are essential to the effective defense of\nMIB Nation.\nb. the policies B::/ actions of the several\ndapartments AND agencies carrying on activities\nrelating to geonamic defense in order to spsure\nunity and Salance in the application of such neas-\nures.\nC, Develop integrated economic defense plans and pro-\npart for convitinated action by the donstments and\nagyncies concerned and use 11 appropriate pears to\nthat zuch plans and programs are curried into\naffect by such departments and agencios.\nd. Cake investigations and advise the Prestdent on the\nrelationship of économic defense (as defined in\nparterson 1) measures to past-war economic rocon-\nstruction und N the stops to bd taken to protect\nthe trute position -5 the United States and to ex-\nthe of suand, proce-time Antar-\nmissi\nRegraded Unclassified\n184\n- 2 -\nC. Roviaw proposed or existing legislation relating\nto or affecting aconomic defense and, with the\napproval of the President, recommend such addi-\ntional logislation AS my to necessary or desir-\nable.\n4. The administration of the various activities relating\nto voonomic defense shall ramain with the several departments and\nagundies now charged with such duties but such administration shall\nconform to the policios formulated or approved by the Board.\n5. In the study of problems and in the formulation of\nprograms, it shall be the policy of the Board to collaborate with\nexisting departments and agencies which perform functions and no-\ntivities portaining to oconomic defense and to utilize their\nsurvices and facilities to the maximum. Such departments and agen-\ncios shall cooperate with the Board in clearing proposed policies\nand mensures involving economic defense considerations and shall\nsupply such information and data 10 the Board may require in per-\nforming its functions. The Hourd my arrange for the establishment\nof committees or groups of advisere, representing two or more de-\npartments and agencies as the case may require, to study and develop\ngoonomic defense plans and programs in respect to particular commo-\ndities or services, geographical areas, types of measures that might\nbe exercised, and other related matters.\n6. To facilitate unity of action and the maximum use of\noxisting services and facilities, each of the following departments\nund agencies, in addition to the departments and agencies represented\non the Board, shall designate & responsible officer or officers, sub-\njust to the approval of the Chairman, to represent the department or\nagency in its continuing relationships with the Board: The Depart-\nsents of the Post Office, the Interior, and Labor, the Federal Loan\nAgency, the United States Maritime Commission, the United States\nTariff Commision, the Federal Trade Commission, the Board of Gov-\nernors of the Federal Reserve System, the Securities and Exchange\nCommission, the National Resources Planning Board, the Defense Com-\nmuniestions Board, the Office of Production Management, the Office\nof Price Administration and Civilian Supply, the Office for Coordi-\nnation of Commercial and Cultural Relations Betwo in the American\nSepublica, the Permanent Joint Board on Defense, the \\dministrator\n:[ Export Control, the Division of Defense Aid Reports, the Coordin-\nstop of Information, and ouch additional departments and agencies\nas the Chuirman may from time to time determine. The Chairman shell\nprovide for the systematic conduct of business with the foregoing\ndepartments and agencios.\n7. The Chairman is authorised to make all necessary ar-\nrangements, with the advice and assistance of the Board, for dis-\ncharging and performing the responsibilities and dutios required to\ncarry out the functions and authoritins set forth in this Order,\nand to make final decisions when necessary to expedite the work of\nthe Soard, Me is further authorized, within the limits of such\nfunds as may be allocited to the Board by the President, to employ\nnecessary personnel and make provision for the necessary suppliss,\nfacilitiva, and services. The Chairman may, with the approval of\nthe Prosident, appoint in exccutive officer.\nTRANKLIN D. ECOSEVELY\nX Vatra HOUSE,\nRegraded Unclassified\n327 35, 1241,\n185\n8/6/41-\nFROM: MR. GASTON'S OFFICE\nTO:\nThe Secretary\nThe V-126, a Douglas amphibian piloted by\nStonerock, enlisted pibot, and with a crew\nof two, is unreported since 10 a.m., Pacific\ntime (1 p.m.EST). She was cruiting west of the\nFarallones, off San Francisco, when last reported.\nCoast Guard boats and planes and two squadrons\nof Navy plabes are searching.\nmg\nRegraded Unclassified\n186\n- 6. 1942\nFiles\nb. Cockree\nIfter talking with Mr. Bell, and after reising the question at the Foreign\nhale Centrol meeting yesterday afternes, I telephoned lb. Assing\nFinancial Commesler to the French Roberty, is New Terk, this merking. I referred\nto his inquiry as to hav the Treasury Department would feel tomod the Thank of\nProbee Luresting is Treasury bills W to $200,000,000 of dollar funds which the\nfast of Prance MV has on deposit with the Federal Reserve lask.\nI teld Mr. Incour-Inget that Mr. Dell proferred that Mr. take\nhis - docision as this subject, and indicating that the Pressury decived to\ninterpose w objection. Liberice Foreign Punis Centrel interposed as objection.\nI teld Mr. Incour-Gayer that be should on is touch with Mr. Robert Rouse, the\nTice President of the Federal Reserve Dask of Bev Ters is charge of devernment\nsecurity and upon market operations.\nM\nEMC:lap-5/6/41\nRegraded Unclassified\nAugust 6, 1941\nFiles\nMr. Coohran\nImediately felleving the meeting with the British held in the Secretary's\noffice yesterday afternoon at 3 o'cleck, Messrs. Phillips and Revley stepped 1a\nUnder Secretary Bell's office for a few minutes to talk with Mossrs. Bell and Cochran.\nwith reference to the information which Mr. Bowley had given Mr. Cochram on\nAugust 2. 1941, and particularly that set out in Mr. Men's cablegram of July 25\nto Viscount Halifax, which assuage vse attached to Mr. Cochrea's memorandus of\nAugust 2, 1% vas agreed that Mr. Cechran should consult the Foreign Funds Control\nCommittee with respect to limison with the Chinese Devernment 60 exchange control.\nAS the 4130 meeting in Mr. Foley's effice Mr. Cechren reported the information\nwhich the British had submitted and also the conversation with Messrs. Phillips and\nDewley, It vas agreed that no immediate decision should be taken as to whether\nthe United States would welcome the idea of a representative of the Chinese Exchange\nCentrol Commitee coming to Washington to act as limisen wish our Fereign Funds\nControl. It was thought advisable to watch developments a while lenger, and parti-\ncularly to swait reports from Mr. Fox, in China, and the arrival of Sir Otto Niemeyer\non route from Lendon to Chungking. Mr. Cechran told the Committee that Niemeyer vas\nnow en route and should be is Vashington next week. Dr. White reported concerning\nhis conversations with Dr. Soons. The question is definitely before us as to whether\nadvice on Chinese freezing questions chould be obtained directly from the Chinese\nEmbassy, or from Dr. Seong. or from some representative whom the Chinese Ministry\nof Tinance nicht send here is the name of the Chinese Exchange Centrol,\nThis morning I received from Mr. Devley. Financial Counseler of the British\ninlussy. the attached letter and its enclosures. concerning the Chimese freezing\nmiles.\nAN 10:30 this morning I telephened Sir Frederick Phillips. referring to our\nconversation of yesterday. and to Mr. Bevley's letter and anclosures. Sir Frederick\nagreed that there was be urgency in our indicating the American position with\nrespect to linison with the Chimese Central Exchange Committee. particularly in view\nof the third paragraph of the attached mossage from Chunghing to Lendon, dated\nAugust 2, 1941.\naMC:lap-8/6/41\nRegraded Unclassified\no\n188\no\nP\nT\nTXT MRITISH SUPPLY COURCIL IN NORTH AMERICA\nDes 680\nBenjamin Fresklis Station\nVashington, D. c.\n5th August, 1941.\nMy dear Cochran,\nI enclose the gist of three telegrame from\nLendon about the Ohinese freesing problem.\nNo doubt you will keep us inferest of anything\nwhich would be of interest to us.\nTears sincerely,\n101 9. E. Bowley\n(T.K. Bewley)\n1. Merle Cookren, 304.,\nUnited States Treasury,\nVashington, D.O.\nCOPT:NEW 8/6/41\nRegraded Unclassified\n189\n0\n0\n?\nT\nRy two imediately following telegrame contain Lears w\ntelegram communicated to as w Chinase\nWe have told P.V.Rus\n1) that the suggestion that United States Deverament\nhave unfressa assets of no Chinese Bank except Contral Bank\ndoes not agree with our information and should be verified\nthrough Chinese Habancy in Vashington.\n2) that vo think delegation of powers accessary as\nvorking of exchange centrol system would be impossible with\nbettle assk apparently contemplated w Lang.\nCOPT:NEW 8/6/41\nRegraded Unclassified\n190\n0\n0\nP\nI\nTelegrom 10 Dr. I. I. Rung from Dr. P. W. Eue dated\nJuly 29th.\nSegine.\nPressing of Chinese morets.\nTremption will be given forthwith so sterling accounts of\nfour Chisese Deverment Banks and my account of National Gevern-\nnost of of its organs or agencies o.g. Chinese Overanent Purchase\nlag Commission, Chinces Rubesay etc.\n2. What other Chinsee accounts (e.s.) of non-Government Desire)\nvould Chinese Devernment /_wish/ to be unkleshed?\nDoes Oklasse Revernment contemplate setting up at case\ncome exchange centrol organ which will assist Datted Kingdes\nTreasury and Bank of England is administering this procedure?\nVeuld 11 not be all adventage to delagate liscon between Ohinese\nBritish Exchange Centrol to - appointed person is China\non British side? It is magnied that a Central Exchange 00m\nmittes should delegate eatherity to financial representatives\nis say Leader, Washington, Bangoon and Singapore.\n4. Vill Chincee Deverament (through 198 banks) fix and measures\nrates for Chinese National dollar against sterling and United\nStates dellars as **** as pessible? Rates chooom should 207-\nrespend elesely se surrent market rates adjusted to most efficial\nsterling dollar rate of 4.3.\nInde.\nCOPT:REW 8/6/41\nRegraded Unclassified\n191\n0\n0\n7\nI\nTelegrem free Dr. 1. 1. Kung to Chinces Rubeer, benden,\ndated August Inc.\nBegins.\nReferring to your cablegram of July 29th, I reply as\nfollows.\nI consur but desire saly Central Bank of China be given\nthe perer of unfreesing blocked accounts is line with notion\ntaken by the United States.\n2. No other Chinese accounts to be unblecked.\n3. Chinsee Deverment will calarge the scope of existing\nCentral Exchange Counities appointed n at under Ninistry of\nFinance and operations /110/ conjumstion with Central Test of\nChina. Glad of co-speration of British Treasury end Bank of\nRegland to desired mL. /IUnited states/ have representatives\nand linison officers abroad and Ohina respectively.\n4. is referring the question 14 Chinese Ourrency Beard for\nconsultation.\nInis.\nCOPT:HEW 8/6/41\nRegraded Unclassified\n192\nCOPY\nTELEGRAM RECEIVED\nFROM: CHUNGKING via N.R.\nDATED: August 6, 1941\nRec'd: 12:42 p.m. 7th\nSecretary of State,\nWashington.\n336, August 6.\nFOLLOWING FROM FOX FOR SECRETARY OF TREASURY.\nIn further connection with telegram No. 332\nAugust 5, have discovered we have available also\ngeneral licenses number 32 and 33 as amended February\n1, 1941.\nGAUSS\nALC\nRegraded Unclassified\n193\nPARAPHRASE\nA pertinent portion of e telegram (no. 334) of\nAu_ust 6, 1941 from the American Ambessedor at Chungicing\nrenes substentially as follows:\nAlthough the outlook at present for crops is favorable\nin unoccupied Chine only recpened access to supplies in\nother merkets or bumper crops would solve the problem of\nfood which, as is the case with most other commodities,\nis merely a question of not enough goods to meet the\nrequirements. Although there was e, slight drop in price\nof rice, there was during the month a _eneral rise in the\nprice level. Inflation brought about by heavy currency\nissues to meet the large deficit of the Government is still\na matter of serious concern and experienced observers of\necono de end political trends in Chine have little con-\nfidence that in the near future there may be expected any\nsubstantial improvement in the situation >1though it is\nreported that messures of internal fiscal reform are being\ninstituted. As various interests, includin American Leaf\nTobacco, were concerned on account of reports of proposed\ntobacco end other monopolies, the Embassy inquired in-\nformally but unofficially in regard to the matter end W&B\ninformed that the propossle are still being studied. The\nimerican Ambessador took occasion to emphasize our Govern-\nment's disapprobetion of monopolies of restrictive nature.\nRegraded Unclassified\n194\n- 2 -\nThe difficulties in the way of improving, organizing\nend controlling traffic over the Burma Road, which are\npolitical PS well as administrative and technical, ere\nstill causing 2. great deal of concern. Dr. Baker visited\nChungking. talked with verious Chinese officials including\nGeneral Chieng Kai-shek and obtained a promise of contimued\nsupport. The Embassy is of the opinion, however, that it\nis likely that in order to make substantial progress and\nmake certain the efficient organization and maintenance of\nthe Burne Road 88 the only remaining line of supply to China\nthe measures recommended by Dr. Beker and traffic experts\nwill have to be enforced as military measures by competent\nmilitary authority having broad powers to overrice special\nvested interests and provincial authorities. Conditions\non the Burne Road are now being studied by Arnstein and\nhis party, who visited Cinngking about the middle of July.\nMr. Owen Lattimore arrived in Chungking to take over his\nduties as adviser to General Chieng Ksi-shek.\ncgk:copied 8/13/41\nRegraded Unclassified\n195\nPARAPHRASE OF TELEGRAM RECEIVED\nFROM:\nAmerican Consulate General, Shanghai, China\nTO:\nSecretary of State, Washington\nDATED:\nAugust 6, 1941, 9 a.m.\nNO.:\n1020\nSTRICTLY CONFIDENTIAL\nThe New York head offices of American banks here\ninstructed those banks to consult this Consulate General\nbefore deeling with firms which might be suspected, in\nconnection with the freezing order. It was apparently\nassumed by those banks that the Department already had\nor WES preparing a list of firms in China to whom\nlicenses ordinarily would not be granted. The list\nrequested in the Department's circular telegram of\nJuly 24, 5 p.m. is being prepared and will soon be\nforwarded.\nLOCKHART\nchicopy\n8-21-41\nRegraded Unclassified\n196\nparaphrase or TELEGRAM RECEIVED\nFROM: American Consulate General, Hong Kong, China.\nvia N.R.\nDATE: August 6, 1941, 4 P.E.\nNO.: 295\nNew foreign trade commitments are practically at a\nstandstill as a result from the recent freesing orders and\nthe placement of Hong Kong in the sterling bloe. The\nAmerican banks in Hong Keng are cooperating. Novever,\nbecause of conflicting telegrame from their head offices,\nthey are somewhat hampered. Uncertainty and confusion exist\nin financial sireles. This is accontuated by the slowness\nin arrival of official orders from London.\nFairly large sum have been withdrawa from local bank\naccounts by the Chinese. However, no pante exists.\nA copy of Executive Order No. 8389, as amended by\nNos. 8785 and ease, plus copies of general licenses Noo.\n54 to 69 inclusive insued thereunder, have been reselved\nfrom Fox who is in Chungking. AS his suggestion, copies\nhave been supplied to the local American banks. Copies\nhave also been sent to only two Chinese Government banks.\nThe attitude which the business consunity salmy takes\nin regard to the situation is that it will be darified in\na fortaight or se just as it has become resigned to the\nprospective ourtailment of trade with Hong Long because\nof the latter's inclusion in the sterling area.\nAnother confusing factor is the existence of the\nBritish member of the Ghinese Currency Stabilization Beard\neven though\nRegraded Unclassified\n197\neven though it is understood that notice of temporary\nappointment has been received unefficially by Hall-Patch.\nThis message was sent to the Department for its\ninformation and repeated to Peiping and Chungking.\nBRUINS\nEAIPAK\n10 -\nLEON,\nVISA\n840.51/2911\nDVI vne is VW 1.20\n10E%\nRegraded Unclassified\n198\nC\n0\nP\nY\nDEPARTMENT OF STATE\nWashington\nIn reply refer to\nEA 840.5 Frozen Credits/2854\nAugust 6. 1941.\nThe Secretary of State presente his compliments to\nthe Honorable the Secretary of the Treasury and encloses\nsix copies of & paraphrase of telegram No. 199, dated\nAugust 2, 1941, from the American Embassy at Peiping, China,\nin regard to travel permits for Americans in North China\nand the attitude of the Japanese with respect to the\nfreezing regulations.\nEnclosure:\nFrom Embassy. Peiping,\nNo. 199, August 2, 1941.\n(Six copies.)\nCopy:lg 8/6/41\nRegraded Unclassified\n199\n0\n0\nP\nY\nPARAPHRASE OF TELEGRAM RECEIVED\nFROM: American Embassy, Peiping. China\nME: August 2, 1941, 5 a.m.\nNO.: 199\nToday & spokesman of the Japanese Embassy here told the press\nthat if the travel permits for Americane in North China had been\nheld up it was due to a misunderstanding by the authorities of\nJapan. Be further said that such a misunderstanding W3S being cor-\nrected by the issuance of new instructions.\nAccording to reliable information which I have received, a\ndelegation from the Heinmin Hui-Chinese political party in North\nChina sponsored by Japanese--recently asked a Japanese authority\nwhat attitude they should assume toward Americans as a result of the\nUnited States freezing regulations. In particular, they asked\nwhether they should assume a hostile attitude. They were informed\nby the Japanese that they should not, by any means, assume a hos-\ntile attitude at present toward Americans.\nAll members of the staff here, B.B. well a.6 American businessmen\nwith whom we have talked, are of the opinion that in spite of the\nofficial Japanese protestations which emanate from Tokyo the\nJapanese were not prepared for the action which was taken by the\nUnited States Government in regard to the freezing of Japanese as-\ngets. As a matter of fact, the Japanese were taken by surprise.\nThey were and still are, to 8. large extent, undecided as to the ex-\ntent of the counter measures and the manner of applying and enforc-\nInc mich measures.\nRegraded Unclassified\n200\n- 2 -\nThis telegram was sent to the Department; repeated to Shanghai\nand Chungking. The code text was sent to Tokyo by air mail sack.\nBUTRICK\nEA:PAK\nCopy:1g 8/6/41\nRegraded Unclassified"
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