Full text of Diaries of Henry Morgenthau, Jr. : Volume 429 : Part 1

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

DIARY

Book 429

August 6 and 7, 1941

-Book Page

Defense Savings Bonds
See Financing, Government

-E-

Egger, Rowland (Budget Director, Virginia)

"Financial Planning for the Future - copy of
address sent to HMJr by Gulick (Luther) 8/6/41

429

172

-Financing, Government
Defense Savings Bonds:

Comparative statement: June, July, and
August, 1-5 - 8/6/41

169

-HHochschild, Harold (President, American Metals Company)

Possible service as dollar-a-year man in England

discussed in HMJr's letter to Harriman (Averill) -

8/6/41

161

-TThailand
See War Conditions

-United Kingdom

See War Conditions: Military Planning

Virginia
Egger, Rowland (Budget Director, Virginia):

"Financial Planning for the Future" - copy of
address sent to HMJr by Gulick (Luther) 8/6/41

172

-W-

Book Page

War Conditions

Airplanes:

Forecasts on production - April 20, 1940, through
August 6, 1941
a) Knudsen asked about estimates and actual

429

376

production, which is far below - 8/8/41:
See Book 430, page 103

1) Reply: Book 431, page 272
b) Knox discusses present production 8/11/41: Book 431, page 270

Shipments to British by air and sea - Kamarck
report - 8/7/41
Exchange market resume' - 8/6-7/41

Military Planning:

396

202,412

War Department bulletin: German mountain troops

attack Metaxas Line - 8/6/41
Report from London transmitted by Halifax 8/7/41
Thailand:

Freezing of funds: Discussion of - 8/7/41

203

413

278,279

August 6, 1941
9:00 a.m.

RE TAX STATEMENT

Present:

Mr. Kuhn
Mr. Gaston

Mr. Sullivan

Mr. White
Mr. Eccles
Mr. Foley
Mr. Blough

Mr. Magill
Mr. Currie

Miss Michener

H.M.Jr:

Do you want to start reading, Roy?

Blough:

All right. This is a draft of mine, or revi-

H.M.Jr:

Do you want to read a page and then stop?

Blough:

"Mr. Chairman and members of the Committee:

sions, principally, in organization.

I am here today to discuss the pending tax bill
H. R. 5417. This bill was designed by the House

Committee on Ways and Means to produce $3,500,000,000

annually in additional revenue for the defense
of our country. An amendment adopted in the

House has reduced that amount by $300,000,000.

"When, on April 24, I made my statement before
the House Ways and Means Committee on this Bill
the defense program was about $39 billion includ-

ing the lend-lease appropriation. Since that time

there have been further authorizations and

appropriations so that the total program at the
billion
present time has risen to

dollars. Of course, not all of this amount is
going to be spent during the present fiscal year,

-2but as these appropriations are spent the fiscal

problems of the Government and the economic effects

of the defense program will both increase.

We will get from Mr. Bell the figures on -H.M.Jr:

Where is Mr. Bell?

Blough:

I don't know whether he knew about the meeting

or not. That is a good place to break here.
H.M.Jr:

Anybody want to say anything?

White:

Well, I don't know whether you want any ques-

tions brought up now. If this is the last time
over it, I would think that last sentence in

the second paragraph is unnecessary, and there
is a hiatus between the second paragraph and the

third paragraph that I think needs an introductory
sentence, but I take it there will be an opportunity to smooth that off.
H.M.Jr:

Yes, there will be.

Blough:

"Our great problem in providing for the defense
of the nation is fundamentally the problem of
production; of actually building planes and tanks,
ships and guns with the labor, management, machin-

ery and raw materials which we have in our
country.
11

(Mr. Bell entered the conference).
H.M.Jr:

Wait a minute, for Professor Bell. We have just

covered one page. I don't know where we stopped.

Blough:

It is at the top of page two, the first sentence.
"Although we can and should" --

H.M.Jr:

Wait a minute. Let's give Bell a chance to read
page one.

-3Bell:

It hasn't
has
it? been changed much since yesterday,

Blough:

Page one has been changed very little.

Bell:

O.K., that is all right.

Blough:

"Although we can and should simultaneously

increase the production of civilian goods that

do not compete with the defense program, we shall

find that as we increase defense production it
will be necessary to divert to defense uses more
and more of the resources now engaged in satisfying our civilian needs and wants. The pinch of
scarce resources and plants is already being

felt and may be expected to become more aggravated."

H.M.Jr:
Kuhn:

Just a moment. Yes. Is that perfectly clear?
In a pinch become ag ravated - wouldn't it be
better to say the pinch is already being felt

and may be expected to grow worse or become

tighter?

Currie:

I was just trying to picture a pinch becoming

aggravated.
H.M.Jr:

All right. Go ahead, Roy.

Blough:

"At the same time that this diversion of production is taking place, the amount of purchasing
power in the hands of the people of the country
will continue to increase due to the large
amounts being spent by the Government and to

resultant fuller employment. The result of the

pressure of this increased purchasing power on
the limited amounts of goods and services for which

it may be spent threaten, in the absence of vigorous action, to sweep us into a spiral of rising

prices.' 11

-4White:

It is the large amount of borrowed funds spent
by
the Government, I take it, that you want to
stress.

Blough:

Well, later on the stress is placed on the
deficit financing. Perhaps it should be here.

Gaston:

The word is "threatens", not "threaten". You
are talking about the result threaten.

Blough:

Yes, correct.

White:

And it isn't - all right.

Gaston:

And aren't you really attempting to say that the
pressure threatens to sweep us?

Magill:
Gaston:

Yes, you don't want that "result of".
You don't want "the result of".

Magill:

Why don't you take out "the result of"?

Blough:

All right.
"Apparently we are at the same point in price

history as in 1916 -- on the edge of inflation."
Of course, many of you will recognize most of
these paragraphs having been in previous documents.

"The pattern of price rises during the past

two years roughly resembles" -White:

I am dubious about the inclusion of the next

four pages, three or four pages in this statement, for two reasons. In the first place, you
are going to make a statement on prices which

will cover it. In the second place, I think

much too much emphasis is being placed in this

-whole statement on the defense of your tax bill

on the grounds of inflation. I think much
too little emphasis is placed on the fact that

you are spending a lot of money and it has got

to be paid for, and that out of taxation, and

moreover, Henderson's statement all over the page he is covering this ground pretty adequately, so

it will be necessary either in your statement to

refer to that or to boil all this question

of prices down to one or two paragraphs, in my

opinion.

You should spend more time on taxes and less on
prices.
Magill:

My point comes before that one. After this word

"inflation", shouldn't the Secretary of the
Treasury give us some definition of what he means
by "inflation"?
H.M.Jr:

Well, you are here all day. After we break up

you can take a try at it. We will take a try
at it, with your help. I think that White's
criticism about prices is a very good one. I
think that we could very well afford to either

save that for when I go up - for Mr. Henderson.
when we wrote this, I didn't know that Henderson
wanted me to come up. I only heard about it
twenty-four hours ago.
White:

Not only that, Mr. Secretary, but this was written largely in defense of one part of your
tax program, which was that form of excess pro-

fits, but since this, I take it, is a statement
on the entire tax position, there isn't the

same need to prepare the ground on the basis of--

H.M.Jr:

What do you think, Ferdie?

Kuhn:

It can be shortened or eliminated.

-6H.M.Jr:

I think I would lift it.

Kuhn:

You come down to --

H.M.Jr:

Marriner, you are going to talk, aren't you,
before this Committee tomorrow?

Eccles:

It looks like it. I have been trying to get
out of it but - trying to get them to put it

off. I have been so covered up. Henry Steagall
called me last night and said that he thought he

would get through with Henderson today, and if so,
he wanted me up there tomorrow. But I haven't

any prepared written statement. I am just going
to go up there and let them ask questions, take a
chance at - when are you going up?

H.M.Jr:

I said I couldn't be ready before Tuesday.
We have got to get this into shape.

Eccles:

I think this material here - I don't want to
disagree with Harry on it. I think the material

is very important for the Secretary of the Treasury to say. Now, it is one thing for Henderson

to say it, it is another thing for the Secretary
of the Treasury to say it, and I don't think that
a thing as important as this can be overly emphasized. It is true Henderson is talking about
prices, talking about inflation, but it is in
somewhat of a different way. It isn't - but the

Secretary - I think people are expecting him to
make a statement on this general subject. Now,

I don't - whether this is the time to make it
or not, I don't know, but it is an awfully good
forum, and he will certainly get plenty of headlines on it. I just think the material is good,

and whether it is said now or somewhere else is -

it may be all right to say it next week before

Henderson's Committee.
H.M.Jr:

It is also all right to say it twice.

-7Eccles:

That is right. I just don't think you can over

emphasize this thing.
H.M.Jr:

I lean with Marriner. I think he is right.
I don't think you can say it too often. What
do you think, Ros?

Magill:

As I understand it, Harry is referring to the
next three or four pages that I haven't seen.

H.M.Jr:

Let's run through them. It is easy enough to

lift the thing out. It is a difficult thing to

- go ahead and read it.
Blough:

"The pattern of price rises" --

H.M.Jr:

Where are you?

Blough:

The last sentence on page two.

H.M.Jr:

Thank you.

Blough:

"The pattern of price rises during the past two

years roughly resembles the price movement

during the first two years of World War I -little rise in the cost of living, a moderate rise
in the wholesale price index and a sharp rise
in the prices of basic commodities.
"Since the beginning of the war, September 1939,

the wholesale price index has risen from 65 to
87 or about 16 per cent."
Magill:

How is that, only sixteen per cent? It doesn't
look like sixteen per cent. Maybe it is.

Bell:

Sixteen per cent of sixty-five.

White:

That is wrong.

Gaston:

Something wrong there.

-8Magill:

Thirty-three per cent.

White:

The figures will have to be checked. The figures
may be wrong. But this is wrong as is.

Blough:

"The greater part of this rise has occurred
during the past five months.
"The cost of living index has increased 5} per
cent since September 1940. Half of this increase

has occurred in the past two months.

"The price index of 28 basic commodities has
increased 48 per cent" -H.M.Jr:

Excuse me, I have a telephone call.
(Miss Michener entered the conference).

H.M.Jr:

Just give Miss Michener a copy, please.

Blough:

We are on page three.

H.M.Jr:

I just want to make sure that we are synchronized
on this and the price thing, so your shop knows
what is going on.

Blough:

"The price index of 28 basic commodities has
increased 48 per cent during the same period, des-

pite the fact that the prices of many basic
raw materials have been controlled by the Office
of Price Administration and Civilian Supply.
This increase constitutes a major danger signal
of inflation which must not be ignored. The wholesale price index always lags greatly behind the
index of basic commodities, while the cost
of living index does not show anything like the

full effects of inflation until long after the
seeds of inflation have taken deep root."

H.M.Jr:

Just a minute. Let's see if anybody wants to
say something. All right, go ahead.

-9Blough:

This budget material, I assume, will be all gone

over and revised, but I just put it in as it

was

H.M.Jr:

Couldn't we skip that, unless somebody wants it?
Marriner or Lauch? Where would you skip to?

Blough:

Well, the next paragraph says how much the def-

ense spending will be in forty-two. The following paragraph says how much the deficit will be

in forty-two, without the new tax bill and with
the new tax bill. The paragraph labeled (3)
is the paragraph on expansion of bank credit,
which is the same as in that earlier document.
Likewise, paragraph (4) is the same as in the earlier document. There has been no change.

H.M.Jr:

Anybody want to criticize or comment?

Currie:

On paragraph three, Mr. Secretary, I think you
want to mention that point more toward deposits
than to loans.

Blough:

As I understand the economists, when they were

working on this before, on this particular

paragraph, they wanted to emphasize loans because
the Government spending increased deposits,

but here was another source of deposit increases.

Is that right, Harry?

White:

Yes, we threshed through that. I think we can
add a phrase that will satisfy Lauch on that.

H.M.Jr:

Well, Lauch, could you give them what you -

thresh it out with Harry afterward?

Currie:

Yes.

H.M.Jr:

Will you?

Currie:

Yes.

- 10 H.M.Jr:
Eccles:

Are you all right, Marriner?

Yes. I was just - I don't know just what Lauch

means there.

Currie:

Well, it is a little bit of an academic point.
It is not the expansion alone that creates any
rise in prices. It is the expansion of bank deposits and spending those deposits.

Eccles:

Of course the bank loans create deposits.

Currie:

It may or may not. It depends on what happens
in the other.

Eccles:

The loans create the deposits, and deposits

are spent. If it wasn't for the loans, it

wouldn't be the deposits, except the gold imports.
They have to pay a deposit. The people - when
borrowing is done, they spend. They wouldn't
borrow unless they wanted it to spend. The
Government borrows it because it spends, so I

mean it gets into a question there, a technical
question.

H.M.Jr:

Can we go ahead?

Eccles:

I think it is important to point out this expan-

sion, though, in bank loans. You might also
point out the expansion of deposits.
White:

His point is merely that you - it is a question

as to where the loans come from and I think one
phrase would satisfy both of you.

Eccles:

But you don't disagree, Lauch, do you, that it is
important - here is a point to show that there
is a huge expansion in bank loans. Twenty per

cent in a year is a terrific expansion, and of
course that in itself - there is a contraction
of bank loans in deflation. In an inflation you

- 11 -

always get an expansion. I think that expansion in one year is a measure of the activity
of the use of credit.
Currie:

Yes.

Blough:

Going over to the second full paragraph on page

five, up to that point it is all the same.
In fact it is there but it may be helpful to
read it.

"Although there are some factors in the situation
operating to check the inflationary trend, such
as surplus stocks of some agricultural commodities,
unemployed labor resources and partially employed

production facilities, most of these factors
were present in the fiscal year 1941 in greater
degree and yet did not serve to restrain price
rises even though the forces making for price
rises were then much weaker."

Now, the next section, "Steps already taken to

check inflation" is as it was in the previous

document, except I would cut the sentence on

the tax bill out, since you are talking about
the tax bill here, but the Defense Savings
Bonds, Tax Anticipation Notes, the Office of
Price Administration's cooperation -H.M.Jr:

Just a second. At the top of page six I think
Bell will agree that that first paragraph,
you could say, "Early indications show that the
plan has been very well received." Is that
conservative enough, Dan?

Bell:

Yes. Tax Anticipation Notes, you mean?

H.M.Jr:

Yes.

Bell:

Yes, you might put in a sentence like that.

- 12 H.M.Jr:

That they have been very well received.

Bell:

Yes.

H.M.Jr:

Something like that, because they have been.

Blough:

"These measures to restrain price rises, although
they have unquestionably been helpful, are inadequate to meet the situation confronting us. We
have gone only a small part of the way it will
be necessary to go. We must attack the problem

on all fronts if we are successfully to check
inflation.

"Fiscal policy for inflation control
"One of the most important methods of inflation

control is a strong fiscal policy.

It is at this point that the order has been changed,
putting the tax material and the fiscal material
in first, and the other steps later, as Mr. Kuhn
suggested.

"The tax bill before you is an important step.

When I appeared before the Ways and Means Commit-

tee in April, I recommended a tax bill to yield
$3.5 billion of revenue annually above the yield
of the existing tax structure. If at that time
I could have foreseen the accelerated rise in
prices and the great increase in the defense
program which have since taken place, I should

have asked for more than $3.5 billion.

"The Ways and Means Committee of the House has

labored long and well on this bill and I am not
suggesting that you increase the total amount of
revenue which it provides beyond the original
goal of $3.5 billion. To increase its revenue
yield substantially might result in delay, and

prompt passage of the bill is important. I
deem it imperative, however, that the new

- 13 -

revenue yield of the bill be restored to at
least the $3.5 billion level."
H.M.Jr:

Go ahead, they seem to like it.

Bell:

Do you cut out "provides" -- "total amount of
revenue beyond the original goal"? You say,

"which it provides beyond the original goal".
It doesn't provide the three and a half.

Sullivan:

I may wish to comment on that sentence later in
the day. The remarks of Senator George as
already made indicate that he has in mind things

that will bring it above three and a half billion
dollars. I don't know whether he realizes that
or not.

H.M.Jr:

Well, you say "at least".

White:

Instead of saying "which it provides", I think
you might say, "Which this bill provides.

H.M.Jr:

Well, that is --

White:

Because in the very next sentence you are asking

for more money, but not in this bill.
Bell:

What is the matter with, "I am not suggesting
that you increase the total amount of revenue
beyond the original goal of three and a hal f

billion dollars"?

White:

But he is. He is not suggesting it in this bill,

for this bill, if I read it correctly. I don't
think it matters.

Bell:

O.K.

Sullivan:

Put a question mark opposite that sentence.
We might want to suggest something else for it.

- 14 Blough:

"When this bill has been passed and you and the

members of the Ways and Means Committee" - this

sounds a little corny - "have had an opportunity
to enjoy a well deserved rest from the arduous

labors which it has entailed" - I suggest a

question mark there.
Magill:

What do you want, laughter and applause?

Blough:

I will fix that up.
"I hope that yet this year you will undertake,

as the Treasury has already undertaken, to make

a new survey of our tax system. It is now some
years since a tax bill has been passed making the

many technical changes which from time to time
are found necessary as a result of experience,
new court decisions and other new situations.
?

H.M.Jr:

You are going to fix this up, aren't you?

Blough:

I hope so.

H.M.Jr:

Go ahead.

Blough:

"Both the taxpayers and the Government suffer
as these uncorrected faults accumulate. Such

matters have been kept out of the present bill
in order to expedite its passage and not to
complicate the issues which it involves. In addi-

tion to correcting the faults in our tax structure, it will again be necessary in the light
of the present program for defense expenditures
and the threat of inflation to increase further
the revenue power of the tax system either late

this year or early next year.

Sullivan:

I think that is one question you have got to decide and I think if you are not going to have
another revenue bill this year, it would be

very unwise to have any reference to it because

- 15 -

H.M.Jr:

Sullivan:

that will just create all kinds of uncertainty.
I think John is right.
And if the reference is solely to the technical
amendments, I think that that might better be
in my statement than in yours.

H.M.Jr:

I agree with you again.

White:

I think you ought to have another bill this year

unless you have made up your mind not to.
H.M.Jr:

Why say anything? We can always get the President

to write a letter. (Laughter) Isn't that right,

Lauch? Not that I am inferring that this last
letter - Lauch wasn't responsible for this last
letter.
Eccles:

Not always at the right time, though.

H.M.Jr:

I will give you clearance on this last one.

Currie:

Thank you.

Gaston:

I agree with John decidedly. I think you ought

to let it go at this, that you say that if you

had known how the situation was going to develop,
you would have asked for more, but not now. The
complications -White:

Why be weasel about it? We have got to have more
taxes --

Gaston:

Just to foreshadow it, not make an argument.

White:

The Secretary is the first one that ought to

sound that topic. We have got to have much
more revenue if this rate of expenditure increases
and I don't know why we should be mealy-mouthed

about it.

Gaston:

I wasn't suggesting being mealy-mouthed about it.

- 16 White:

I didn't mean to imply that you were, but you

wanted to avoid the statement.
Gaston:

I don't think that is the place for this state-

ment. I think the foreshadowing and then stop.
White:

This is exactly the place for, it seems to me.

"I would have asked you for more money had I known

the expenditures were going to be what they are,

but I don't want to delay this bill, gentlemen,

go ahead with it, and as soon as you get through

with this bill, start on the next one. (Laughter)
Bell:

You have got to take out that part about the
rest.

Magill:

You have got two propositions here, as I see it.

I think I agree with what I believe is John's

attitude as to the other. If you start talking
technical amendments to them now, I think the

Finance Committee will say, I should think they
would, "Look, we don't want to go right to work
on another tax bill as soon as this one is over.
We will put these technical amendments in right
now, even if it takes another sixty days," and
that is what I believe you don't want.
Now, the foreshadowing additional revenue is
another story.
H.M.Jr:

Well, that I think - I think the place to say

that is, somebody is going to ask me, "Are you

satisfied that this is enough revenue in view

of what has happened?" and my answer is, "No".
Magill:

That is right.

Sullivan:

That is right.

H.M.Jr

And the time to do it is when I get the question,
but not put it in any formal statement.

- 17 Magill:

I wouldn't put the technical amendments in either.

Sullivan:

We held the line a hundred per cent on this.

Blough:

Since Mr. Magill is against one half of this

I think you will get yourself into trouble.

paragraph and Mr. Sullivan against the other,
that means the whole paragraph comes out.

H.M.Jr:

That is right. Now, there is something about
being Secretary - you just can't go up against

these fellows when the two of them get together.

Blough:

Here we come to excess profits again.

Magill:

I think you could say, if you want to, that it

would be a darned good thing if the Committee's
experts and the Treasury would get busy and
start working during the next several months

on a tax bill which will have to be adopted

next year sometime.
H.M.Jr:

Well, Ros, you know they would resent my telling
them that.

Magill:

No, they wouldn't. You know Stamm isn't going
to work anyway, and the Treasury always does
so --

H.M.Jr:

I think I would rather let - leave that out.

Bell:

I would.

H.M.Jr:

I think this, though, I think I ought to go

up there in my vest pocket, certainly, with a

statement as to what this committee is doing.
Supposing they say, "Well, Mr. Morgenthau, what
is this committee doing that you have got down
there?" You know, what is this fellow's name?

Blough:

Gulick.

- 18 H.M.Jr:

Yes. Well, I have got a progress report from
Mr. Gulick. This is what he is doing. I mean,
I think I ought to have a report as to what
Gulick is doing down in the Treasury. I ought
to have it and say, "Well, here is a progress
report."

Sullivan:

Well, that is still another subject.

H.M.Jr:

But supposing they say, "We see by the papers

that Mr. Gulick is down in the Treasury. Now,
what is he doing down there?' " "Well, I have
got a progress report. Here is what he is doing."
And Gulick ought to be up there to explain it in
case he is called on. Check?

Sullivan:

I don't know.

Magill:

No, I doubt that.

Sullivan:

I should think not.

H.M.Jr:

All right, we will just have a progress report.
You fellows have got trust in Gulick, haven't
you?

Sullivan: Yes.
Magill:

Let Mr. John L. Sullivan explain it. He is a
good explainer.

Sullivan:

I would like to get him and find out what he is
doing before I explain what he is doing.

H.M.Jr:

All right.

Sullivan:

Is he in town, Roy?

Blough:

He was yesterday afternoon.

Eccles:

I am concerned a little about it - you start out

- 19 here trying to impress that Committee with the
gravity and your general situation and danger
in this whole situation, and you come along
then and you are laying that as a foundation or

a basis for a tax bill. You say that taxation
is in effect one of the most important - it is
the important fiscal - proper fiscal policy it is the most important factor in getting at

this inflationary danger, and then it seems to me
that if you do some of these things you are

talking about, you are sort of letting the thing
down again. You build it up, and then you
let it down.
I would like - I agree with Harry there that
when you put taxation in the proper fiscal

policy as the most important means at the disposal
of the Government to deal with an inflationary
problem, then I think when you talk about taxes,
I think you have got to say that we need three
and a half billion, much more than that, and

we are spending it, no question about it, but
at this time the thing has gone through the
House and now let's get this three and a half

billion as quickly as we can get it, and this
thing is so urgent that we ought to begin to look
for another tax bill. I would put them on

notice. I think that it is a fine defense for

you to build up for yourself and for the Government here.

H.M.Jr:

Well, let mc think that over. There is no
question about your being right, but it is a
question of whether it is good politics, you
see. I don't know, but I will give it - let me
give it careful thought.

Blough:

We might try our hands at a sentence or two which
would be a good deal vaguer than this, and yet
put them on notice.

H.M.Jr:

No, if I was going to do it, I would come right
out flat foot and say so, say that during these

- 20 few months these appropriations have increased
by so much, and the situation when I made my

estimate of one third and two thirds is changed

by fifteen or twenty or thirty million dollars.

Sullivan:

I think the problem, Mr. Secretary, is whether

it is going to be a tax bill late this fall or

early next winter. The problem is whether there
are going to be additional taxes levied on
calendar forty-one income. That is always the
problem.

H.M.Jr:

Well, I have got it in mind. I would like to

let it simmer a little bit. I think it is
important.

Eccles:

Yes. Of course you are talking about an overhauling here that the --

Sullivan:

That was the technical amendment.

Eccles:

That is right. That would be this year.

Sullivan: Yes.
Eccles:

I agree with you that whether the other tax

bill - it is going to take a little time to get
it through, and therefore, whether you start
it this fall, you will be three or four or five

or six months getting it through, no matter

when you start.
Blough:

What would likely happen would be like the

Revenue Act of thirty-eight. We would start

probably around November when it begins to get

cold, and work until April or May, when it begins
to get hot.

Magill:

well, the ordinary history of a revenue bill,
as all you gentlemen know, is not only to start
in November, you start in July.

- 21 Blough:

The Committee probably won't start until

November.

Magill:

Yes. You have got to let some of these fellows

Eccles:

You could make this point clear, that this
revenue bill covers the revenue for this year,
especially if you get the excess profits taxes

in on the secret before you commence having regular hearings, and so on.

you want. If you get these amendments that you

are proposing, the excess profits tax - that is,
if you get the Senate to accept the modifications
of the House excess profits tax, the Senate will
broaden the base and get the three and a half

billion of revenue here, or more - if you could
get a little more, I certainly would get it.

Then close up your loopholes, get these technical
amendments this year, and start this fall on a

revenue bill for next year with the idea of getting
the revenue measure through by April or May or

June, instead of a year from fall again.
Caston:

Yes. That would be a bill that so far as income
is concerned, and profits, would apply to income

and profits of calendar forty-one.
Blough:

Forty-two.

Gaston:

Calendar forty-two.

Eccles:

Forty-two. That is right.

White:

I am wondering whether the two things aren't being

mixed. I don't think it is necessary for the
Secretary to emphasize when Congress shall or

shall not begin on the bill. That he might it would be a thing to be careful about, but certainly from the fiscal point of view, the overall picture, these taxes are not enough. It
appears to me that cannot be sounded too early
or too often, and he should be the first one to

make that statement

- 22 Gaston:

Don't you think, Harry, that he ought to say

definitely, "This is to be the bill as to income
for the calendar year 1941. We can't start this
agony all over again. This is it. The year is
nearly over. We do need to get to work soon on
a bill. We will probably have to make changes

out of experience, and we need more revenue.
We need to get to work as soon as possible

on a bill applying to income and profits for the
calendar year 1942.

Magill:

On this price control aspect of this message,
I put this as a query to the economists present.
Is taxation the only method of control that you
have?

White:

Oh, no.

Magill:

Then shouldn't you say something about some of
the others?

Kuhn:

They are mentioned.

Eccles:

They are all in here.

Kuhn:

They are all in, Mr. Magill. The taxation comes

first. "I am here to discuss the tax bill, since

taxation is a weapon, a tremendous weapon. Then
when he finishes on taxation, he goes on to say,

"Of course, this isn't the only weapon, and isn't
the only way of doing the job, and I would like

to talk about the others. Originally, the others

were in ahead of taxation, and it seemed logical

to put the tax message in first.

Magill:

Yes, you ought to do the taxes first. I don't
think still, this is as convincing on the tax side
as it should be. It is a good job, and I know you
have done it under difficulties. I don't know
who the Secretary is addressing. I suppose he
is addressing Senator George, but I suppose he is

also addressing a lot of other people, isn't he?

- 23 Eccles:

The public.

Magill:

Is he addressing the public?

Gaston:

Yes.

Eccles:

That is, doesn't this document really have its

significance as it affects the fellow that is

going to pay some of this money?
Gaston:

We have only started to read the tax decision.

Magill:

Maybe I should shut up. But the - I think you
are asking people to pay fifty or a hundred or

three hundred per cent more money than they have

paid before. You have got to give people an
awful good story for that, and this sounds to

me in the realm of the economics department,

and not much in the realm of every day life.

White:

I hadn't thought of that, but now that you say
it Ros, I agree.

Magill:

If I were a student in Roy Blough's class, and
he said this, I would believe it and understand
it, because it doesn't have a damn bit of effect
on me. I am not going to pay a dime of it, so

I don't care. It is good economic theory, as far
as I am concerned, but I think you --

White:

I agree with you now that you say it. I think

there should be a couple of paragraphs, at least,
somewhere earlier --

Blough:

How about the last page?

Kuhn:

The last page is good, Roy.

White:

Well, I wasn't awfully impressed with it when I
read it.

- 24 Blough:

This is a new last page.

Magill:

I think Herbert is probably right. I should keep

my foot in my mouth until you get done reading

the whole thing. I only see this page by page.

Gaston:

I was just remarking that I haven't read any of it

beyond page seven, so I don't know what you are
talking about.
Kuhn:

Do you remember, Harry, in the statement the
Secretary made to the House, he listed the four

objectives of the tax program very concisely.
There were --

White:

I think that can be repeated.

Sullivan:

I think so, Harry, and you can't improve on it.

White:

I think you can repeat that right here.

H.M.Jr:

Do you mean to say that Magill made a suggestion

and you liked it?
Sullivan:

Yes, sir.

Blough:

No, that wasn't Roswell's suggestion.

White:

It was Kuhn's suggestion, following Roswell's.

White:

I think Ferdie has suggested a few paragraphs

that he could write which I think would meet

Magill's point, and I think Magill's point
is very well taken, that there isn't enough
popular justification for increased tax payments,

which you have said from time to time, and have

appeared from time to time, but is not in this
document.

H.M.Jr:

How about simply saying, "This increased tax is
in order to pay for the Lend-Lease for China and
England"; do you think that would be popular?

- 25Currie:

China would be more popular.

White:

China would raise about a nickel.

Currie:

I think, Mr. Secretary, I agree that the most
popular appeal here is the patriotic appeal. It
costs a lot of money to wage a war, but we will

not shrink from it. It is the quality of sacrifice.

H.M.Jr:

We will start the hearing and have a Victor machine
up there and play Irving Berlin's "Any Bonds Today?"

Currie:

I agree this goes a little bit too economic.

Kuhn:

Simply play a record of what you said last time,
Mr. Secretary, those four points of what you think
an equitable tax system ought to be, effective tax
system.

H.M.Jr:

But following Lauch Currie, I think something to

say that we know that everybody wants to make his
contribution.

White:

Ferdie has written some paragraphs like that
some time in the past. Some of it was cut out

because it was too long, but I think that he

can spill it very easily.

H.M.Jr:

All right. Are we all set to go on? How far did

we get?
Gaston:

The top of page eight.

Blough:

We got to the good old excess profits tax, which
reads much as it did, but the first paragraph is

a little different. Do you want that story again?
H.M.Jr:

I don't, but somebody else might.

Blough:

I would like to read page eight. I don't want to

read page nine, but I would like to read page eight.

- 26 H.M.Jr:

Go ahead.

Blough:

"Within the $3.5 billion revenue scope of the
present tax bill there appear to be several pos-

sibilities for discouraging inflationary price
rises. The first of these is in the field of

excess profits taxation. In recent months there

has been a noticeable tendency for various groups
including business men, farmers and laborers,

to endeavor to secure higher rates of return in
profits, prices and wages. Such efforts cannot
be criticized in normal times. At the present
time, however, with the existing pressures for
inflation, widespread efforts to increase profits,
prices, and wages will result not only in larger
purchasing power and thus still greater pressure

on our limited supplies of civilian goods, but

also in higher costs for the defense program and
for goods which civilians purchase. These

higher costs in turn necessitate increases in

prices and these in turn give rise to new demands
for higher wages and higher prices.

H.M.Jr:

Now, before anybody says anything, I like it,
but I don't see why you have got to weaken this
thing, by saying "such efforts cannot be criticized
in normal times, as though you were going to
hit a man and then you pull your punch back.
I would just cut that sentence out. Mr. Roosevelt
ran on a platform of --

White:

Higher profits and higher wages and higher
prices.

H.M.Jr:

Right. (Laughter) So we don't have to make that
remark. I would just leave that sentence out.

Blough:

And you would take care in questions of some-

body pointing out that "How is this consistent
with the administration's previous position?"

27
1

- 27 H.M.Jr:

We are for the capitalistic system, what the
hell, aren't we, Marriner?

Eccles:

I don't think there is anything in our record
that would indicate we are not. Some people

might interpret it that way.
H.M.Jr:

You get in a swing and you lose the swing by
saying that - you know. Don't you agree with

me, Ferdie?
Kuhn:

You can say, "In recent months there has been

a noticeable tendency, and then "with the existing pressures for inflation," and so on.

White:

I like that better.

Kuhn:

Leave out, "At the present time, however" --

H.M.Jr:

I don't like that, "Such efforts cannot be criti-

cized in normal times." We are not talking about

normal times.
Eccles:

There is no such thing any more. We haven't had
a normal time for so long I don't think anybody
would recognize it.

Gaston:

It is editorial, anyway, Ferdie. Cut it out.
(Laughter).

H.M.Jr:

As one newspaper man to another, you smell an

Blough:

"The spiral goes up and up.

editorial, do you? All right.

"If we are to expect to stop or prevent this
spiral we must be able to show those who receive
modest incomes from their labor or their production that excessive profits are not being received
by great corporations."

- 28 White:

I think the last two sentences in the middle paragraph need to be somewhat rewritten. It isn't
larger purchasing power. It may be smaller
purchasing power that may result in higher prices,

but it not only results in more money in circulation - the sentence needs to be broken down
and fixed.

Blough:

"The present excess profits tax places special
heavy taxes on profits which are in excess of the

profits received during the years prior to the
defense program. This is all to the good, -- is
indeed essential. It is, however, not enough.

A corporation may make 50 per cent profits on

its invested capital" -- and then the rest is

all the same.
White:

Lubin had a good suggestion that might be worked

in here. It is implicit in what is said here

that the tax discourages expansion on the part of
those corporations that are not making high pro-

fits, which are a lot of small concerns, and a lot
of other concerns, because - to the extent that
the excess profits applies on their increase are

they discouraged, whereas those concerns that are
making high rates of increase, they have every
encouragement to increase it, because they

won't be subject to the excess profits tax

as formerly conceived. He thought a paragraph
on that might go in.

Blough:

He called me about it and I didn't contend with
him because I wanted to think it over, but it
occurs to me that what he asked for is no excess
profits tax. What he wanted - what he told me he

wanted was that no corporation would be penalized
for expanding in these times.

White:

He didn't tell me that.

Blough:

And the excess profits tax does precisely that.

Defense profits, war profits --

- 29 White:

Did you explain that to him?

Blough:

No, I wanted to think about it and not argue
with him about it. I thought there might be some
way of harmonizing, but I don't see it.

White:

He talked differently to me.

Gaston:

For expanding, Roy? Doesn't that depend on what

you mean by expansion?
Blough:

Not necessarily expanding capital, but increasing

Gaston:

On the same invested capital, yes.

Blough:

Maximum increase in production, and the excess

Gaston:

increase production, it can't help it.
In so far as that will affect increased profits.

Blough:

Yes.

Eccles:

I know, but I can't see that. As long as it
isn't complete confiscation - if it leaves you

its production to the maximum.

profits tax does take away some incentives to

seventy-five per cent, you have got the incentive

- for twenty-five per cent.

In other words, you get up to a certain point
and you then ar subject to an excess profit to an excess profit tax of, say, seventy-five
per cent, and everything above that. Assume

that that was the case. Well, you have still got
an incentive to get twenty-five per cent on the
balance.

White:

I think he was referring to the different types
of excess profits.

Eccles:

That is right. There is a point there.

- 30 White:

That is what he was referring to. I didn't

gather that he was referring to what Roy said.

Blough:

I hope you are right, and that we can harmonize.

White:

That is the way he spoke to me.

Eccles:

He would be perfectly wrong on the other. The

incentive is still there, and with the provision
for the amortization of - special amortization

provision for certain defense expansion, business
is completely protected. They haven't a chance

to take a loss on the expansion. So any profit
they get is a windfall, because they are sure
to get all their money. They get an option to

get the property back if it is in their interest,
and if not, they don't have to get it. They haven't

a chance to lose a thing, and whatever they
make is a windfall.
H.M.Jr:

Right.

Eccles:

I think they are completely protected.

H.M.Jr:

I will say they are, too much so.
I think so.

Eccles:
Gaston:

We are allowing them fifty per cent investment
on their borrowed capital, aren't we?

Eccles:

Which is a - you allow them eight per cent you allow them fifty per cent on their borrowed
capital and a lot of them are borrowing as low as
one and a half per cent, and you alllwing them

on a basis of eight per cent on half of it, which

is four per cent on all of it.

White:

That is why we want to broaden the base and lower
the income tax, so we can reduce the sums.

- 31 Eccles:

I would do both. I mean, I want to broaden the
base and do the other thing, but I certainly

would hit the other first. I mean, hit them
together. I think this. The best argument for
getting your excess profit tax, if you get it,
you broaden the base. That is the thing everybody has been hollering about.

Gaston:

I would broaden the base, Marriner, to stop them
from shouting, broaden the base. I would broaden
it as broad as you can make it.

Eccles:

My point is, if you broaden this base you

Gaston:

They have got to say what they mean then.

Eccles:

Then it seems to me that you can build up the

carry out that provision. that is an argument,
then, against an excise - against a general sales
tax, you see. That is a general tax.

excess profits tax but you will find that it seems
to me impossible, politically, to et the kind
of an excess profit tax you want, maybe to avoid
some of the sales taxes that have not a selective
excise tax, but general taxes, unless you do the
other. I think doing the other is the best

argument you could make for then hitting your excess

profits tax, I mean hitting your excess profits

hard.
H.M.Jr:

Do you mind if I just call up Senator George

and find out when he expects me up there?
No one has told me, have they?
Blough:

Not definitely, that I know of. He may be at the

H.M.Jr:

Were you through, Marriner?

Eccles:

On the excess profits, I think that you can I think it is pretty weak when we say one in ten

Senate Finance Committee now.

and one in thirty. Now, that isn't, I don't think

- 32 -

that is made as significant as it night be made.
I have got here this point. It may be that one

in - the earnings of one in ten have been so much
but that may represent eighty per cent of the
earnings, total earnings. Do you see my point?
Blough:

Eccles:

In other words, what percentage.

Why, that is the important thing. The number
of corporations doesn't mean a thing, in and of
themselves. If one corporation in ten made in
the base period here better than ten per cent,
what does that ten per cent amount to, what
relation does it occupy here to the total earnings?
Now, it is my impression that of the corporations
over a million dollars of assets and the one in
ten that made over ten per cent in that period,
you may well find that those - that those one

in ten corporation represent fifty or eighty
per cent of the income.

Blough:

Eccles:

It is too high.
It will certainly be a lot more than one tenth of the
income. There may be one tenth of the corporations

did that, but if it is twenty-five per cent of
the income, it is twice as strong. Do you see

my point?
Gaston:

Yes, you are right.

H.M.Jr:

Good point.

Eccles:

I think that you can make that very much stronger,

if you can get those figures.

Blough:

It is a little hard to get the figures, but we
will try.

White:

Would you consider adding a paragraph which would

include just what Marriner has said before?

- 33 -

You both agree that he starts his answer, "These

excess profits taxes aren't so very high. They
leave a lot of net earnings that are not taxed.

Maybe the place for that would be right after
that. This constant assumption of taxing the
excess profits, I think the popular notion is
that it amounts to much more than it does.

Blough:

Our tax is now seventy-two per cent at the

highest rate, would be under the bill. Sixty
per cent on excess profits and thirty per cent

on normal, which when you combine the two, is seventytwo percent.

Eccles:

On which bill?

Blough:

The House bill. It really depends on which pro-

fits, but the profits which are subject to the
tax are subject to a total combined tax of
seventy-two per cent.

Eccles:

That is by eliminating the deduction of the normal?

Blough:

Shifting that around. That is the effective
rate of the tax. You deduct the excess profits
tax before you compute the normal.

Gaston:

You mean the maximum effect of the rate?

Blough:

That is right.

Eccles:

I wouldn't say that seventy-two - that it should
be necessarily higher than that. The British
have in effect eighty per cent, but it isn't that.

White:

That is misleading. That is the very point which
is misleading.

Eccles:

That is right, that is the argument they will

use as to why they are up to seventy-two per cent

here, but that doesn't tell the story at all.

- 34 Blough:

Of course, with estate taxes, it is more than
seventy-two, but you mean the story is that they
have twenty-five per cent left?

Eccles:

No, I mean the story is that before they get
un to the seventy-two, especially if you figure

the base period - now, in the base period where they
are making this money that they have made, then

they don't get hit heavily in the excess profits
tax.

Blough:

I thought you were talking about an incentive to
increase. The incentive to increase is knocked
down with a seventy-two per cent tax.

Eccles:

Increase what?

Blough:

Profits beyond their earlier level.

Eccles:

I think you have still not twenty-eight per cent
profit, and I think that is enough of an incentive.
(The Secretary held a telephone conversation with
Senator George).

H.M.Jr:

It is definite that it will be ten o'clock Friday.

Caston:

Roy, I think it depends a great deal on what

kind of incentive you are talking about. If you
have a corporation which is paying up in the

seventy-two per cent level, but is still making
thirty per cent net profits on its invested
capital, certainly there is plenty of incentive
there for them to expand the area of their business
by investing new capital, because there is plenty
of money that would like to make thirty per cent.

Blough:

New capital can't make thirty per cent.

Gaston:

Maybe it can in this particular line of business.

- 35 Blough:

I mean it isn't allowed under the law to make

it. It is about eight per cent, is all you can

make.

Gaston:

But still there is plenty of profitable area or
incentive for profit business. It isn't - new

capital isn't going to be subject to seventy-two

per cent.
Blough:

New capital can make around seven per cent net

H.M.Jr:

That is good.

Blough:

Or a little lower than that if the concern has
over five million dollars.

Gaston:

free of tax under the present bill.

I don't think there is any restraint on the expansion of a concern that is allowed to retain
twenty, twenty-five, thirty per cent on its
invested capital.

Eccles:

Restraint on expansion is the shortage of material.
Now, if we had idle labor and steel and machine
tools, and the things that you need for expansion,
then you could begin to think there - that the
money - lack of money incentive was the deterrent,
but everybody knows that the reason that there

isn't greater expansion in a lot of fields today
is the complete lack of the necessary materials
and labor. It isn't the money supply or the
incentive for profit that is a deterrent. At
least there has been no evidence of it yet.

Blough:

I believe I can do a paragraph on that.

H.M.Jr:

Go ahead.

Blough:

I shortened the next just to talk principle, and
leave for Mr. Sullivan the examples.

- 36 -

"In more normal times excise taxes" -H.M.Jr:

Where are you?

Blough:

I am sorry, bottom of page ten, "Defense excise

taxes." You didn't want this excess profits re-

read.

H.M.Jr:

I don't think so.

Blough:

"In more normal times excise taxes have little
to recommend them except the fact that they pro-

duce revenue. In a period such as this, however,

excise taxes may in certain cases promote a more
positive objective, namely, to reduce the demand
of producers and consumers for scarce commodities
which compete with the defense program and to

absorb wind-fall profits which result from scarcity
of supply relative to demand. "

H.M.Jr:

Just a minute, please. All right.

Blough:

Now, Mr. Lubin thought that should be spelled out
considerably further, that while we may understand

it, that may be a - that it may be a new idea

to many, and probably it should be expanded a

little to explain how that works.
White:

You had a paragraph somewhere in one of your

earlier drafts which took an automobile and
described that.

Blough:

About automobiles, yes.

white:

Didn't you?

Blough:

Yes. It may be that paragraph could be rewritten.

Kuhn:

It isn't a new idea, Roy. It is so obvious, it has

been hammered home by everybody in the last three

months.

- 37 -

Blough:

Well, but most of the things that have been
hammered home have been very general.

Magill:

No, I would agree with Ferdie. Wasn't it the last
issue of Life in which they had a picture of a
kitchen and endeavored to tell the general reader
the different things in a kitchen which compete

with various -Blough:

Granted, but --

White:

That wasn't the idea I thought Lubin had reference to. He had reference to the question of

windfall profits, why it is possible where you
have a curtailed supply for there to be unusual
profits.
Blough:

Bell:

I think it is the idea of how excise taxes fit
into this picture.
I think it is important to point out the excise
tax is supplemental to price control, that you

increase by the excise tax the cost to the consumer and hence you reduce the number of buyers.

That is really the effect. The Government gets
the increase in price, rather than that increased
price going to the middleman.

White:

That is right.

Eccles:

The public is going to pay the same price in
either case.

Magill:

Shouldn't you say also, Marriner, if you are going
to say that, in line with your earlier appearance,
that you need more than a slap on the wrist if
you are going to make the thing work. In other
words, increasing the price of an automobile five
or ten dollars doesn't amount to a row of pins.

- 38 Eccles:

You have got to make it hurt, so that a lot of
people just can't buy them.

Magill:

That is right.

White:

I think you are talking about two different points.
The point I thought Lubin had in mind was this,
that if you restrict the supply of automobiles,
the price of those automobiles will rise, and that
the producer or the middleman will get the full
benefit of that increase, and therefore an excise
tax, though not increasing the price to the consumer in these particular cases, though they may
in other cases, does prevent the middleman and

the producer from getting those windfall profits
that the Government gets.

H.M.Jr:

A better example is the second hand car.

Magill:

I would give them both.

White:

Yes, both.

H.M.Jr:
Blough:

Are you all right?
I think so.

H.M.Jr:

Go ahead.

Blough:

"The achievement of this objective is not a simple
matter. Nevertheless, the further use of excise
taxes to divert consumption and to reduce windfall profits should be seriously considered by

your Committee."

I will try to put a paragraph of illustrations

and so on in there.
Bell:

That sounds something like a recommendation for

additional taxes.

- 39 Eccles:

Well, windfall taxes, you are recommending it.

Bell:

Does this mean over and above, or to take the

place of the three hundred million?
Currie:

I would say these were changes within the preexisting taxes.

H.M.Jr:

It is all right.

Currie:

This paragraph strikes me as a little weak,

Mr. Secretary. It is not a simple matter.

Nevertheless, it should be seriously considered.

H.M.Jr:

You are right.

Magill:

It sounds to me like a recommendation for next
year.

Bell:

Yes, that is theway it hits me.

Magill:

For the record, or something like that.

Eccles:

I think in connection with your price control bill,
that this should be tied right in, it seems to me,

not only as an important revenue measure, but

also as supplemental to this price control thing,
because it is just that. Henderson would stress
this very, very strongly as absolutely an essential
supplemental measure in the question of price

control, and I think that it ought to be brought

in now and they should be substantially increased.
It would be one means of taking un some of this
revenue that you have apparently lost through the

action of the House, and what difference oes it
make if you get three billion seven or eight,
if you can get a hundred or two or three hundred
million from this source, plus what you can get

out of excess profits tax? Fine.

- 40 Blough:

I would like to say this, for just a minute.

We have struggled with this problem for several
months now. We have talked to a great many
people in Washington, including people in your
organization, and this is one of the meanest,
most difficult things we have come across to
try to implement this generalization and really make

it fit. Now, we tried to put a rubber tax into
the bill because of anticipated shortages of rubber, and it is an awfully nasty thing to write
it up in a form that you can really make it work.
This is general because, frankly, I don't know,

outside of automobiles and one or two other things,
how to go about doing this thing and I haven't
found anybody in town, including Mr. Henderson's
shop, that does know how to go about it.
Currie:

Surely Roy, you could, very simply, have increased
taxes on the whole range of consumer durable

goods rather just this five dollar use tax on
automobiles, that applies to the share cropper
as well as the millionaire. There is your
beautiful example of the contrast.
White:

Why is there such difficulty in putting an
excise tax on refrigerators?

H.M.Jr:

Go after him afterward. He made a statement.

He is available, but don't let's work on that now.
Blough:

I am sorry, Mr. Secretary --

H.M.Jr:

No, no, I am glad you did it, but I don't want
to work out a new principle of taxes here this morning. You have said your say, and these fellows
can go in and make your life miserable in your
office.

Blough:

I would be so tickled to have them show me how to

do it that I would be delighted.

- 41 I.M.Jr:
Blough:

Let's keep moving.
"Personal exemptions.

"One feature of the bill before you which has
received less public attention than it deserves
is the fact that the base has been broadened to

add about 2,000,000 new taxpayers. This was

accomplished by beginning the surtax at the first
dollar of surtax net income.

I realize this will have to be re-written to
simplify it.
"The 10 per cent earned income credit in effect
increases the exemption from normal tax. Since

this credit is not applicable in computing the
surtax, the bill has in effect reduced the exemption of single individuals by $88, of married

couples by $222, and of married couples with 2
children by $311.

"In the early stages of this bill the Treasury
Department took the position that in view of

this substantial broadening of the base personal
exemptions should not be further lowered. Equitable taxation requires that taxes be placed on

ability. Small incomes have very little taxpaying ability, and this little is decreased as the
cost of living rises.

"However, the threat of rising prices has become

so great that a change of policy is indicated.

If the cost of living rises substantially the

effect will be to tax small incomes much more than
would an income tax at the rates provided in this

bill. If the direct taxation of these incomes
will help, as we believe it will, in preventing
inflation it will be a great service to the very
groups which would be made newly subject to the
tax. ft

- 42 H.M.Jr:

Before anybody says anything, this is our somer-

White:

I don't like it.

Magill:

No. (Laughter)

sault to get in line with the President.

The way it looks, if I were a fellow with fifteen

hundred or two thousand dollars, I would say,
"Well, the Secretary of the Treasury says, 'What
we are going to do to you is get you both ways.
The prices are going up, and you will get caught

that way, and we will tax the hell out of you,

and that will catch you that way. 1"
White:

And the argument is put on the assumption that
it will reduce consuming power. Supposing you
have got five million new taxpayers. How many are

you contemplating getting, two million?
Blough:
White:

It will be more. In addition to that there will
be several million more.

And how much do you think you will get out of
each one, and what proportion of the total consumption does that make?

Currie:

I think the Secretary had better put this on

patriotic lines.
Magill:

Yes.

Kuhn:

That follows along afterward.

H.M.Jr:

Well, if you want to put it on the patriotic
side, I mean it is patriotism for me to go along
on this because I don't believe in it. Why
not quote from the President's letter?

White:

Why not leave it out, Mr. Secretary?

- 43 H.M.Jr:

Well, you are going to be asked.

Magill:

I think you do much better on your patriotism

White:

I would agree with that.

H.M.Jr:

Why not simply. say that after giving the matter
careful consideration, at the end of six months

than you do on this paragraph.

the President decided that this was what he wanted?

Magill:

Well, but you can do better than that. You can
make yourself sound awfully consistent, I think.

Curric:

Awfully consistent? (Laughter)
You said, "I now wish you had asked for more
and you certainly are going to have to get more
next year." You can repeat the same thing here,

if you want to, that at the beginning you thought
it wasn't necessary to - for such reasons as you
have given here to tap these fellows down at the

bottom of the barrel, but that, my gosh, this

defense business now is pretty terrible, and we

will have to do a little something.
Caston:

If it is necessary.

Magill:

And I don't know why you shouldn't add what is

the fact, that decreasing exemptions will actually

produce more money from the boys up at the top

of the scale than it will from the fellows at the
bottom, that you are not really soaking the little
fellow in the eye as much as the next fellow.

Blough:

That comes on the next page.

Magill:

Excuse me. (Laughter)

Gaston:

I was going to say, if it was necessary for the

man without enough bread to give a loaf of bread
in order to induce the man in the upper brackets

- 44 to accept cheerfully another five per cent taxa-

tion, I think he will be willing to give that
sacrifice.

H.M.Jr:

Herbert is going back to North Dakota days when
he was a non-partisan leader.

Eccles:

What you are talking about here is reducing your
exemptions. Your exemption before with your
earned income has been twenty-two hundred. In
other words, anyone receiving twenty-two hundred

dollars or more paid no income tax. If they had

two children they would have to get twenty-eight
hundred dollars before they paid any income tax.
Blough:

Thirty-one hundred.

Eccles:

Yes, thirty-one hundred. Now, I don't agree with
Herbert at all. I have been very strongly in

favor of reducing the base at this time. If it

was a time when we wanted to stimulate consumption

and increase the standard of living, then I feel
the direct opposite about it. What we are trying
to do now is to reduce consumer buying power,
and the great bulk of consumption comes in the

group below three thousand dollars, we will say,

or if it is a married couple without children,

we will say in the group below twenty-two
hundred dollars.

Now, there are a great many people in that group

that are etting a better income than they ever
got in their lives, which means - if we had the

goods for them, that is fine, I am for it, but
they have got greater purchasing power than we

have got goods available to supply them. Therefore, the net result of that increased buying power

is just purely inflationary, that is all. I

think that it is important to reduce the base
down to fifteen hundred, and I don't think that when

- 45 -

you look at the income of the - of people as a
whole in this country, I doubt if we have got
it up to fifteen hundred yet, the average.
Certainly fifty per cent of our population will
be at fifteen hundred or less.
White:

The way you put it, Marriner, I think it is

a little misleading. It is true that the bulk

of the purchasing power comes in the lower income

groups, but that is not the problem. His problem,
as I understand it, and the solution which you

are recommending is as follows: Shall a man who

gets thirty dollars a week pay in addition to
other forms of indirect taxes, in addition to

increasing costs which his wages rarely catch up
to, shall he pay an income tax? You say he shall.

I gather that if he shall, using the reason that
you have described, it will be pretty small,
will it not? I take it that a man who gets
thirty dollars a week, you are not going to expect
to pay at the very most more than fifty dollars
a year, if that.
Eccles:

Well, if you drop it to five hundred dollars,
I don't know what the rate would figure. It
depends on your normal and your surtax.

White:

I didn't know what you had in mind. All I wanted
to say was that if you follow those tactics
you will find that the amount of purchasing
power that you take away from those men is very

small in proportion to the total amount of purchasing power which is expended on consumers'
goods and elsewhere.

Blough:

Let me give you an example.

Eccles:

Our fellows don't think so.

Blough:

Suppose you go from twenty-two twenty-two, which

is the present, to fifteen hundred dollars, the

- 46 -

tax which that married couple will pay, if it earns
twenty-two twenty-two and is now free from tax,

is sixty-five dollars.

Eccles:

Yes, under your present House bill.

Blough:

With the personal exemptions which the President
has recommended, the tax will be sixty-five
dollars.

Eccles:

How many people will that cover?

Blough:

Well, I don't know. Roughly I would say around

five million people, but not all of them - only
those at the top would pay sixty-five dollars.

They would pay on down to zero.
Eccles:

Well, the way I look at this thing is, you have
got to hit that group. You have got to hit
the excess profits taxes. You have got to
hit the special excise taxes. You have got to
close up the loopholes. You have got to insist on
joint returns. You have got to do all these things.
It isn't a question of being - of discriminating
and penalizing this particular group, as I see
this problem, with a thirty billion dollar or
or forty billion dollar a year defense program
which you are going into. You are going to have
to hit the whole works here.

White:

But I would be inclined to put it on another reason
instead of saying to a man who is getting thirty
dollars a week, "You are getting thirty dollars
a week and you are helping inflation by spending
too much money on consumers' goods, and we are

going to take away some of that money so you can't
spend it on consumers' goods.
If

Eccles:

There may be other reasons.

Magill:

It is not a good argument.

- 47 White:

I don't think so. I think you have got to put
it on the basis of everybody is sacrificing

and we -Gaston:

Yes.

Eccles:

I agree with you that from a standpoint of

public appeal and getting it over, I think that
certainly is the argument that the President put.
The President says everybody --

White:

I think the public appeal is closer to the truth.

H.M.Jr:

My idea was simply this, unless it looks as though

I was trying to duck it. It says here, "In the
early stages the Treasury Department took the
position, If and so forth. August first the President of the United States addressed the Congress

as follows, direct quote.
White:

Sure.

H.M.Jr:

And let it go at that. We were for it, and now
the President is for it, and the inference is - if

they ask me, "Are you for what the President wants?"
I say, "Yes."

Gaston:

I wouldn't make it as bald as that because that
implies the fact you are for it because the President wants it.

H.M.Jr:

That is the truth.

Caston:

I don't believe you want to say that.

H.M.Jr:

There is no question about what we went along
unwillingly from Doughton's answer. We weren't

for it, and now the President wrote such a letter,
O.K. , I am a hired man and I am for it.
Magill:

Haven' t you got some connecting link between the
two?

- 48 H.M.Jr:

None. I can't even blame Lauch this time.

Gaston:

I think you can say that everyone is making
sacrifices.

Eccles:

I am innocent, completely.

Currie:

We are all looking at you, though. (Laughter)

Eccles:

That was just as much a surprise to me as it was

to the rest of you.

Kuhn:

You have always talked in favor of greater participation in - a greater sense of participation
from the little man, haven't you?

H.M.Jr:

No, I don't think so.

White:

Another statement. Small incomes have very little
taxpaying ability. The assumption is that therefore
you shouldn't put income taxes on them. It is implicit you would agree that he also pays a good

deal of indirect taxes already out of that small
income.

H.M.Jr:

That is the trouble. He pays just as much per
cent on his cigarettes as the rich fellow does.

Eccles:

I hate to be put in this position because nobody
is arguing stronger than I am to increase consump-

tion, and it looks like I am reversing my position
but I am certainly for lifting up the - gosh,
the President - if anybody has talked more about
the lower one third of the income group than he

has -White:

Now we want to give it a little implementation.

H.M.Jr:

Marriner, we all agree. We have got to go along

with the President. It is just a question of how
to say it. I think the simplest way is just to

- 49 -

quote from his letter. I am willing to say so
publicly.

Bell:

Suppose you can't say it is a changed situation,
because you opposed this lowering right up to
the last minute, didn't you, Roy?

Blough:

Well, we weren't asked about it in, say, the last

Bell:

You can say that the situation has changed so

month.

fast and the bill is going to be much larger

and bigger than we thought it would be, and everybody has got to contribute.
Magill:

That is the face saving thing to say, I think,

White:

Or you could say, and there is much to be said

something of that sort.

in times of this kind for men displaying their
patriotism for even greater sacrifices than might
be ragarded as reasonable.

Blough:

H.M.Jr:

Or we have to get ready for next year's bill, so

we had better sharpen it up now.

Could you gentlemen excuse me a minute? The Butch-

ers of America are in Mr. Graves' room with a

million and a half dollars they want to invest in
savings stamps.
Gaston:

Union butchers?

H.M.Jr:

Yes. Incidentally, that is the same group that
ran that amazing art exhibit in New York. But
go right ahead. It will only take a minute to
take a million and a half.
(The Secretary left the conference temporarily).

Gaston:

I don't want us in the position of seeming to

- 50 support an idea that we don't want that increased buying

demand that comes from a man buying a pair of

shoes when the child is barefoot.

White:

We have placed Marriner in the position where

Kuhn:

You had a good piece in Fortune in which, as I
remember it, you didn't favor broadening the base.

Eccles:

Oh, yes; yes, sir.

Kuhn:

On what grounds?

Eccles:

I favored broadening the base as just a part of a

he is going to soak the small fellow, but I
think your economic argument is a little bit weak.

comprehensive tax program. Primarily, however,
to get away from this argument for a general

sales tax. I opposed very bitterly a general
sales tax, which would get a lot of people with
less than fifteen hundred dollars, that this was
a substitute for the argument for a general sales
tax, that it did have some relation to ability

to pay where a general sales tax had absolutely none.

Blough:

Kuhn:

Should we go in now and say we want the three hun-

dred million now, but we want to take three
hundred million off these excises?

But you didn't make a lot of suppositions that
people are making, that there is an inexhaustible
amount of revenue to be obtained just from broadening the base?

Eccles:

Oh, no, I didn't do that.

Kuhn:

Would it be any good for the Secretary in this
statement to try to put this in perspective and

show people that in the first place this is not

a maric revenue raising device? You can't get
inexhaustible amounts just by lowering the base

a little bit.

- 51 Eccles:

About two hundred fifty million.

Kuhn:

And you don't do an awful lot to check inflation.

Eccles:

I would say, now I am for - this is a tax that
ought to be put on, everybody get into this thing,
but, you see, I certainly would not favor this
Congress broadening the base here unless they put

Foley:

White:

back the joint returns and unless they - I would
hit them awfully hard on the excess profits.
What this Committee will do is to lower the tax
base so that the little fellow who is bearing
a greater share -They will say, "Well, let's give the Treasury
some of the things it wants, anyway."

Eccles:

But the point is, the President has come out
for this, the Secretary is going to come out

for it. Now, my point is - that if he is going
to come out for this --

Foley:

But it isn't going to come out that way.
(The Secretary returned to the conference).

Eccles:

Then he certainly should justify it. It would only

be on the grounds that these other things are
done. Whether they are done or not is up to Congress, but certainly his record is much more consistent than to merely come out for this tax and

then not tie it in with doing these other things.
I would come out for it only on condition.

H.M.Jr:

Which tax is this, Marriner?

Foley:

Lowering the base.

Eccles:

We are saying here that the lowering of this base if the condition reaches the situation where you

- 52 have got to reach out and touch all these people
and the President takes that position and you are

willing to support it, you think that it is desirable from many standpoints, but it is possibly
much less desirable than it is to hit the excess

profits and put joint returns in. My point is that
you can't favor this without saying that it would
be improper for Congress to hit these little fellows until they do some of these other things.

White:

Is it possible to have a double edged weapon fol-

lowing that line, saying that if we are to ask,
there is something to be said for increasing sacrifices on the part of all segments of the population, but if we are to ask for these additional
sacrifices on the part of those who are less able
to make them, then certainly there can be no

excuse for not - and then go to your joint returns?

H.M.Jr:

If you don't mind, I have got a better way, if I
am going to say it. Why not say this, gentlemen,
"I am appearing here before you people for an
all out tax bill, which means that every citizen

in the United States who has any income from
seven hundred fifty dollars up should make make
a contribution toward an all out defense program
and nobody should escape their proportionate amount,

or a contribution in the form of taxes," you see.

White:

I should think that would be all right if you

follow that way, but, if you are going to demand
the sacrifices of those groups --

H.M.Jr:

"Therefore, in the taxes, in an all out tax

bill, for an all out defense bill, the following
things should be included" --

Magill:

Good.

H.M.Jr:

What do you say, Ros?

Magill:

I say good.

- 53 H.M.Jr:

An all out tax bill for an all out defense bill,

Magill:

State and municipal bond interest?

H.M.Jr:

Yes.

Magill:

Why not?

H.M.Jr:

Now we are getting somewhere and then list the
things that should be included.

Magill:

I don't see how you can say that the fellow with
seven hundred dollars income has got to pay
more. We don't want him to get this loaf of

and in those groups we should include joint tax
returns and this thing and that thing and so forth.

bread Herbert is talking about. But the fellow
down in Texas we want to give a little different
treatment to.

H.M.Jr:

Now we are getting somewhere, an all out tax

bill for an all out defense bill, and in an all

out tax bill you have got to collect from everybody.

Eccles:

I think that is a good way to approach it, but I
think that it is - that you have got a marvelous

chance here of shaming, in a way, the people
with income, the business interests who after
all have got more at stake. The people who have
got property have got more at stake.
Gaston:

The President has asked the people in lower incomes

to set an example in making sacrifices that all
classes should make.

White:

But instead of saying "and"it is the "but" phrase,

but we cannot ask them unless, -Eccles:

That is right.

- 54 White:
Gaston:

And that will put pressure on the joint returns
and put pressure on the excess profits tax.

The President is out definitely against joint

returns.

Currie:

No.

Magill:
White:

No, he isn't.
Lauch claims that he is not.

Currie:

I have got his letter here.

Magill:

No, that is all right.

Gaston:

He just practically killed it but --

Blough:

Is he or is he not?

Bell:

Everybody said he is against it at the Capitol.

Currie:

Doughton reports that "As to mandatory joint
returns, we are pleased to learn that the President
as well as the Treasury approves of the principle."

It is just a question of granting this one condition of substantial relief to earned income.

H.M.Jr:

I will tell you what you do, if you want to know

in this room.

Magill:

Don't put a lot of political gloss around it. He
says, "I am for joint returns."

Gaston:

Yes, but the letter was intended to kill joint
returns, and did.

Magill:

That is what you fellows know, but I don't know
that. I am a citizen of New Yoek and I am not
in Washington, and as far as I can see, the Presi-

dent is for it.

H.M.Jr:

If you want the history, that is neither here

- 55 -

nor there, but the way the letter was written -

well, it speaks for itself.
White:

Does it speak for itself if Mr. Currie in reading
it says he is not against it?

Magill:

He isn't against joint returns.

White:

And Mr. Magill says he is not against it. You are
reading something that you know into it, but that

is his letter.

H.M.Jr:

No, the President took the Treasury position that
husband and wife should file one return provided
they had that slight exemption.

Magill:

That is right.

Eccles:

Definitely he took that. But what I happen to

know about it --

H.M.Jr:

He reversed himself within twenty-four hours

Eccles:

I will tell you, I know that is the position

but that is what he --

because Henderson and I were talking to him
about another matter, and he happened to have

these tax letters before he sent them up on the

Hill and he tried it out on the dog, I guess.
He just said, "What do you" -- We got talking
about taxes and he said, "Now, I think on this

joint return," If you see - and he mentioned the fact

that the joint return was all right but that

the normal tax and the surtaxes took into account
earned income, you see, but the joint return

didn't, and therefore it was inconsistent and
it should be modified in that particular,

that the joint return was perfectly all right,
but it certainly should not - should take into

account earned income as well as the other.
Well --

- 56 Foley:

I don't agree with you. I agree with Herbert.
I don't think he is for joint returns, politically,
and I think the object of that letter was to

kill joint returns in the tax bill, and it did.
Eccles:

I don't know what the object was.

Foley:

You can qualify it any way you want to. You can
say he is for it if there is an earned exemption
or an earned income credit, but the purpose of that

letter was to strike out of that bill compulsory
joint returns, and it did.

White:

For political reasons? Does he know how few
people vote who have to pay joint returns?

Gaston:

Admitting all that, where do we go from here?
In other words, does the record admit of the
Secretary now supporting joint returns? Maybe
it does.

Currie:

With this proviso, yes.

H.M.Jr:

Well, of course --

Gaston:

That is the practical question.

H.M.Jr:

Well, I sent Sullivan up on the Hill and that

is what he said was the Treasury position, and
then the President comes along in a letter and
a hundred per cent takes the same position as
the Treasury. Now, what his object was or what
the deal was, as far as my testimony is concerned,
it is none of my business.

White:

Then there is no disagreement here.

Foley:

That is right.

Blough:

Then you think it is safe to press this particular
idea without the thought that we will get --

- 57 White:

Yes. Now, Ed Foley made a point while you were

H.M.Jr:

On the record, the public record, the President
is taking the same position as the Treasury.

Kagill:

That is right.

H.M.Jr:

Now, what is behind the scenes is none of my

Currie:

And that is recognized by Doughton, that there
is the same position.

hite:

While you were out, Mr. Secretary, Ed Foley took made this comment, which I think is important, that

out which I think is important.

business.

if you don't take the position that you are expecting these sacrifices but only on condition of the

other sacrifices, that the fellows on the Hill
will not - will only accept the lowering the base

and they won't accept the joint returns, and they
won't accept the excess profits tax, and they will
take the position that, well, let's give the Treasury something that it wants.

H.M.Jr:

No, Harry, let's - you can sit here all morning
looking at innuendoes and this thing and that

thing, but what I am trying to do is take the
position that I believe in, morally and ethically

and every other way.
White:

I was merely giving an additional reason why
that position should be taken.

H.M.Jr:

You can - never mind what Ed thinks or anybody

else, I want to go up and be sincere. I am
willing to go along with the President on the

lower thing if it is an all out effort.

White:

Well, you didn't understand what I said but it is
not important, I agree.

- 58 -

H.M.Jr:

Let's go ahead.

Bell:

I wonder if it would be legally possible, Mr.
Secretary, and this would be in line with the

President's suggestion the other day, to have,
say, a minimum amount that everybody must pay

if we take everybody above seven hundred fifty

or five hundred. They must pay ten dollars.
H.M.Jr:

Bell:

We have got something in the works on that which
I will show you.

I see. That will take the place of this exemption you

are talking about.
H.M.Jr:

I have got something in the works but it is

still too crude, but later in the day we will
talk about it. I don't want to explain it now.
I have got an idea that I had at seven this

morning and I am having the boys see if it is

practical. If it is we will show it to you

later in the day.
Bell:

Along the same lines?

H.M.Jr:

Yes, but it is still too crude.

Blough:

May I say, Mr. Secretary, that on the basis of
this discussion I think we can approach this
whole tax section from quite a different and

much superior point of view and get you something

which will stress this all-out tax program idea
with these as elements in it.

H.M.Jr:

I understood what Harry White was saying before.
Harry, I understood what you said.

White:

All right.

Currie:

I was rather sorry, Mr. Secretary, to see you
drop one of the earlier proposals in the tax

- 59 -

bill, which I thought was swell. That is the

heavier estate and gift taxes.
H.M.Jr:

Put them back.

Currie:

Because they cut that very badly, you know.

H.M.Jr:

Put it back and don't forget what Magill said

about state and municipals.
Blough:

Are you prepared to tax them now?

White:

That is what an all-out tax program means.

H.M.Jr:

Sure, I like it, an all-out tax program to go
hand in hand with an all-out defense program.

White:

"And this is what an all-out tax program means,"
one, two three, four.

H.M.Jr:

Right.

Eccles:

You are cutting these exemptions and then you

have got the justification for your all-out
tax program.

H.M.Jr:

Yes. Anybody got any ideas of what he wants

in an all-out tax program, give it to Roy and
the sky is the limit as far as I am concerned.

White:

Yes, elimination of depreciation?

H.M.Jr:

Sure.

White:

Two hundred fifty million.

H.M.Jr:

Ros and I had that in there again and again.

White:

And most of the times it has come out before it

got to the Hill, Mr. Secretary, if I remember
correctly.

- 60 Magill:

No, we got it printed a couple of times.

H.M.Jr:

All right.
I am afraid that the inclusion of all these
points about stopping inflation in the latter
part, several pages in the latter part of this
draft, tends to make it more a speech on inflation, rising prices, than on taxation, and I

Gaston:

(Laughter)

think we will have to find some device to change
that because you are going to have to testify
on that subject again. It seems to make the

principal topic the matter of inflation. I
think the principal topic here wants to be

equitable taxation at a time of emergency.
White:

Particularly with the inclusion of the recent
material that Roy is suggesting now, I think
it makes less necessary a good deal of this
on pricing.

Magill:

I think - isn't the place for your price stuff

this? This has been mentioned before. I agree
with what Harry said. Probably because that
is my background. I would like to see this
all out tax program be your central feature here.

If that is what we are going to do, let's highlight that. But I think it would also be extremely good to bring in the price control business

as something that you are very conscious of,
and that what you are advocating here will con-

tribute to that end, too, and that that is also
a very important end. Probably all of you read
this business of Ernest Lindley's this morning.

H.M.Jr:

I read Ernest Lindley and then I quickly called

up Marriner and said, "Come on over, Marriner,
because I have to consult you."

61
1

- 61 Magill:

White:

The economic experts of the Government are going

in all directions. Why not show them once that
the economic experts are going in the same
direction.

I agree with you, but I think that can be done
in possibly one or two pages, instead of
six or seven.

Magill:

I think so, too. I wouldn't change the focus of

Currie:

Particularly since the Secretary is going up

this.

to testify particularly on inflation.

Eccles:

That of course is absolutely correct here.

H.M.Jr:

You might tell Ernest sometime it comes better
from you than from me.

Eccles:

I will. I hadn't seen the article at all.

In fact, I don't think I have seen him in a

year.
H.M.Jr:

You might tell him sometime. Anyway, where
were you, Ros?

Magill:

At the bottom of page twelve, I think we were.

H.M.Jr:

Ros brought up the Ernest Lindley business, I

Blough:

Shall I read?

H.M.Jr:

Where are we, on twelve?

Blough:

The middle of twelve.

H.M.Jr:

All right.

Blough:

"A further benefit to be derived from reducing

didn't .

- 62 personal exemptions is to make it possible for
a larger number of persons in the country to
feel that they are making direct contributions
to the defense program. During the course
of this tax bill a good deal of evidence has

been noted to the effect that many people want

to make such a direct contribution.

I gather that would be greatly strengthened

under this approach.

"Accordingly, in the light of the developments
of the past few months it is our recommendation
that the personal exemptions of both single and
married persons be substantially reduced so

that the income tax will reach a much larger
percentage of the national income and will
affect a much larger percentage of the persons
of the country than it does at present.

White:

May I make one correction there that it seems
to me is necessary for accuracy? "Will reach
a larger percentage," not "a much larger percentage.

Blough:

All right.
"Too much should not be expected from lowering

personal exemptions. It is not a panacea for

our fiscal problem. Reducing personal exemptions as low as $750 for a single person and
$1,500 for a married couple would bring approximately
additional taxpayers under
the income tax and would produce approximately
$

additional revenue. Of this

, or
amount of revenue, however, $
per cent would come from persons

already subject to tax under the House Bill."
Kuhn:

I am sorry, Roy, isn't it a little more effective to talk of fifteen dollars a week for a
single person and thirty dollars a week for a

- 63 married couple, to show how small these incomes

are and how little revenue you can get from
such people?

Blough:

There are an awful lot of them, though.

Kuhn:

Isn't that a more effective way of stating it?
It is a little less accurate, because this is an

White:

annual rate upon which they pay, but it is more

expressive.
Foley:

I think it ought to be left on the annual basis.

Kuhn:

You do?

H.M.Jr:

That is what the President asked for, he asked

Blough:

Are we trying to stress the small amount of this,
or what are we trying to stress?

Kuhn:

I think we should. You say too much should not

for it that way.

be expected from it. It is not a panacea.
Gaston:

I think I would add to that sentence, "and only
such a percentage or so much to come from new
taxpayers."

Blough:

"Additional measures necessary." Now, there follow
three pages taken out of the earlier document

on things other than taxation. They are subject
to criticism as not being necessary in this state-

ment and desirable in another.
H.M.Jr:

I think I would take them out.

Blough:

How would it be to put a paragraph in in which
you would indicate that other measures are
necessary, but wouldn't spell them out, and would

- 64 -

more or less pave the way for your further testi-

mony in the other committee?
H.M.Jr:

It would be all right.

White:

You could even say, "I intend to discuss some

Eccles:

In taking these out, you take out specific

of these measures.

things, but as I understand it, the first part

of the testimony before you get into the tax

program would stress the imminence of inflation
and the importance of an adequate tax program

to deal with it as possibly the keystone to
getting at the problem. I would like to see
the taxation based upon - that is the only

real justification, it is going to make an
appeal to the country and the people if you first
convince them or demonstrate to them. It seems

to me that there is this danger in taxation,

and taxation is possibly the most important
of all the means at the disposal of the Govern-

ment to deal with it. There are others, but
you will only want to discuss at this time the
question of taxation as it applies.
White:

Well, I may be a minority of one here. I have
a feeling that that should definitely be emphasized, but that it should not be made the central
structure upon which your tax plea rests, but
nobody agrees with me.

Eccles:

Well, I am not saying - it is a question of emphasis. I do think that the important process
of public education to make - you will get much
farther on a tax program, especially if you are
going to get all these people, if the thing is
impressed, and I think the Secretary of the
Treasury ought to say that.

Blough:

Mr. Secretary, I would suggest that the solution

- 65 lies in your Ways and Means Committee statement

which you laid out with three or four principles

of taxation in a period like this. Now, by

putting them out quite near the beginning of
this and then elaborating, one of the points is,

this inflation control, elaborating along the
lines that it is elaborated here, but also
elaborating one or two of the others, that you
do get a bald picture and still get this material
in.

H.M.Jr:

But I think these last pages here --

Blough:

But these will be left out.

H.M.Jr:

The alternatives?

Blough:

Would be left out, except for a paragraph or

so which would show that you recognize the ne-

cessity of alternatives, and that you propose

to talk about them before another Committee in

the near future, something like that.

H.M.Jr:

Yes.

Blough:

Now, that leaves us a little bit at the end.
Page seventeen is next. I am not sure that in
view of what has gone on before anybody wants

this idea, but I would like to at least read it.

Magill:

Oh, this is good.

Blough:

"In closing my remarks, I desire to point out
that although this is a very heavy tax bill,

the alternatives to heavy taxation are much more
onerous. Rising debts and rising prices would
take much more away from our people now and in

the future than higher taxes now will take.

Under the tax bill, as it stands, a married

couple with no dependents having a net income

of $5,000 a year will have its Federal income
tax increased by $198 or 4 percent of its income.

- 66 -

If 1/3 of the family's income is saved or spent

on items not affected by a changing cost of

living, an increase in the cost of living of

5 1/4 per cent would impose as great an additional burden on this family as would the proposed

income tax. The cost of living index"

Magill:

Blough:

Excuse me, Roy, do you want interruptions as you

go along? Wouldn't you be better if you turned
the first part of that around and said "Two thirds
of the family income is spent on so and so"?
"The cost of living index has increased 5 1/2
per cent in less than a year, since September,

1940. It is clear from this simple illustration
that rising prices are taxes just as surely

as income taxes so far as the family is concerned."

White:

Providing the income remains the same, which it

doesn't during a rise in prices.
Blough:

I grant you that is true, that we ought to
put that in there.

White:

I think there needs to be some sentence to pay
your respects to - because these high incomes
are frequently the - the bulk of high incomes
are the ones that probably increase with rising
prices.

Blough:

"If in an attempt to protect the incomes of our

people we hold down taxes and as a result the

cost of living rises, we shall have taxed them
just as surely as if we had levied on them
directly.
"Rising debts may not only increase the tendency

for prices to rise but they increase the burden
in another way by postponing it. That means that
both interest and principal must be paid for
later with higher taxes imposed at a time when

- 67 they may be harder to pay and less willingly

paid then now.

"Our defense program is an absolute necessity.

It must be paid for. In so far as possible,
it should be finally paid for now."
White:

I think that is a good suggestion, but the last
sentence is weak, I think.

H.M.Jr:

Very good.

Magill:

I would leave that even in the revised version.

H.M.Jr:

Yes, I think that is good.

Kuhn:

Is there anything wrong with the comparison of

rising costs of living with taxes? The one is

completely unproductive and unconstructive. Taxes,

after all, enable you to -White:

No, I think his point here is - I thought it

was rather clear, would be clear to everybody,

that in so far as taxes restrain price

rises, do you make the burden on the taxpayer

smaller than it would otherwise be? There is
no assumption here that the alternative is
payment of taxes or no taxes. It may be the

payment of taxes or the payment of hidden burdens through rising income, but the speciousness

of it is that it is only applying to those

people whose incomes do not rise as rapidly as
prices, and the very people whose incomes rise

at least as rapidly as prices or more, are busi-

ness men of one kind or another. They make more.
Gaston:

White:

I don't believe that is quite correct, Harry.
Oh, yes, it is a matter of fact that prices
in - profits rise more rapidly than prices.

- 68 Gaston:

The increased price is a tax, no matter whether
your income is increased or not.

White:

But your income increases because of price in-

Geston:

You are then bringing in additional factors
that have nothing to do with the general proposi-

creases.

tion.

Eccles:

Your income doesn't always rise.

White:

But in the main, business profits rise --

Eccles:

You may find out that it rises as fast --

Currie:

We are going to hit both by rising prices and by
higher taxes.

White:

The people whose incomes don't rise get hit both
ways, but the people whose incomes do rise --

Eccles:

You are going to hit them plenty.

White:

People in high - high incomes from business

profits rise more rapidly than prices, so if
I were a business man I would prefer higher
prices even though it meant higher taxes.

H.M.Jr:

Gentlemen, just a minute. I would just like to

ask you, is there something which you have in mind

which isn't in here that you would like to have
in here?

Currie:

I think you have covered all the points I had in
mind, Mr. Secretary. There is just one point on which
you might guard yourself a little. As you know,
the automobile workers and other people are
getting very agitated about the unemployment

that is going to result from the diversion of

production and from the shortages of essential

- 69 -

materials in civilian supply. You might just pay
your respects to that somewhere, just show that
you are conscious of it, that everybody is not
going to have increasing employment and a rising

standard of living, rising incomes.

H.M.Jr:

Why should I do that?

Currie:

Well, because I think you will be tackled on it,
that is all. It is going to become increasingly
severe from now on. There are going to be an
awful lot of people thrown out because of the
shortage of materials.

H.M.Jr:

How does it help me get a tax bill through?

Currie:

It doesn't, but in the early part of your statement there is a small point I didn't mention

in passing. For instance, on page five you say,
"Although there are some factors in the situation
operating to check the inflationary trend,
such as surplus stocks of some agricultural
commodities, unemployed labor resources and par-

tially employed production facilities," -H.M.Jr:

That is the place, and dislocation of labor.

Currie:

Yes, just put in something to show that you are
aware that everybody is not going to be --

H.M.Jr:

Put it right in there.
And I think - that is the point, I gather, that

White:

you intend to hit harder in the other statement,

make more of it.
H.M.Jr:

Yes.

White:

So that you are aware of that and expect to do
something on it.

H.M.Jr:

Yes.

- 70 White:

Say something on it.

H.M.Jr:

But he can put this just what he said at that
place.

Currie:

Yes.

H.M.Jr:

Without enlarging on it, Harry?

White:

Yes, enlarging on it.

H.M.Jr:

I say not enlarging on it in the tax statement,

but you can in the price statement.
White:

That is right, and then the inclusion of the
estate and gift taxes.

H.M.Jr:

Oh, yes. Marriner, what - do you see anything
that we have left out?

Eccles:

I think the statement as a whole, as revised -

I think it is a very good statement. I like
it. What has been cut out at the last, I agree
that that is sort of dragging - covering an
awful big field in a tax statement. I would
like to have the Secretary say some of those
things somewhere sometime. I think it is -

there are a lot of important things.

H.M.Jr:

I will say it on Tueaday.

Eccles:

That is all right, then.

H.M.Jr:

I will say it on Tuesday.

Eccles:

But I do think it is important that if it is taken
out of the tax statement and used elsewhere,
I think that is all right. I would like to see
this reconstructed along more popular lines,
lines that might bite a little harder and that
would - the public would understand them a little
better. I think it just doesn't bite in places
here that it needs to bite in to be really
effective, and as I understand the discussion,

- 71 -

H.M.Jr:

there is some intention of trying to make it
do just that.
I think so.

Eccles:

The effect of inflation on the cost of defense
has never been mentioned. We talked of inflation
living costs and so forth.

H.M.Jr:

We have got that for our price statement, also
you cover it tomorrow.

Kuhn:

There is a little in here.
It is in this statement.

White:

We expect to expand on that.

Eccles:

But it does seem to me that that in itself is
terribly important to the Government, that if
you don't stop the inflationary cost of defense -Marriner, Lubin is working up a whole original
set of figures for me on that point.

Bell:

H.M.Jr:
Eccles:

Oh, yes.

H.M.J.:

Just what it has cost us in the last six months

and a forecast of what it will cost us if it

continues at the present rate for the next fiscal
year. He is doing a job on that right now. He

said the figures will be original.

Eccles:

Well, if something like that in connection with you talk about a three and a half billion tax
or a four billion tax, and you can show how
perfectly inadequate and how perfectly ridiculous I think you have got to draw the size of this
tax, the size of the revenue, alongside of what how inadequate that is in comparison with the
total expenditures and particularly would that be

- 72 -

true if the defense - if we get - if we get
an inflation in the cost of defense.
H.M.Jr:

That is right. Ros, do you want to say something
at this time or - you are going to stay behind.

Vagill:

Thank you. Why, what I have been thinking of,

it may very well be non-productive. I was just
checking with Ed. I guess you have probably
said it before the Ways and Means. I think

there are two aspects to this thing, one that
Marriner has primarily in mind, and another one
that I have in mind as well. I don't mean to
discount it. This price control business is
terribly important. I don't believe, however,
that that makes the man on the street any happier about paying taxes. Now, maybe you can

dress it up in such a way as I think that Roy
has tried to do on these last two pa es. That
is about as effective a way as you can do it,
because certainly the man on the street would

rather see the country get it for guns than see
General Motors get it or some other such cor-

poration. So what has been running through

my mind is, I wholly agree with your all out tax
approach. I think that certainly ought to be
in here. To me it is just scandalous and nothing

less that you talk about lowering exemptions
and getting two dollars and a half from somebody
that is making thirty dollars a week while what
to me is a scandal of state and municipal securities
untaxed goes on and the scandal of community

property goes on and the scandal of the percen-

tage of ecpreciation goes on, and maybe somebody

could think up a couple more, but those are

certainly the principal ones. I just don't see

how you can say to this taxi driver out here
that, "You have got to come through and pay a lot

of money, but these fellows over here that happened

to invest in the right things, we are not going
to touch at all."

- 73 -

It just doesn't make sense, and I don't think
you can be in the position of making that kind
of a statement.

H.M.Jr:

:gill:

No, I agree with you.

Then secondly, going on from there, what is it
that makes anybody willing or agreeable or

happy, if that can be, to pay fifty or a hundred
or two hundred per cent more taxes?

Well, I expect it is what you said before the

Ways and Means, but I am not sure but you should
say another paragraph or so here, because my own

feeling as a taxpayer is that this - as I look
at it, I feel no confidence whatever in the
skill of this administration to control prices.
I think prices are going up. Mr. what is his
name, Kiplinger, tells me that every week,

that the cost of living is going to be much
higher this year and much higher next year, and
so on. I believe him.
White:

He has inside information.

Magill:

I don't look at this tax business as an alternative.
I look at this as an additional burden I am going
to have to bear. What is going to make me want

to bear it? I don't know anything that makes
me want to bear it other than this saving democracy,
which I guess you spoke of before. But it seems
to me your strongest footing is two-fold, not
this price control which is something that
appeals to a technician like Marriner, but I
don't think appeals very much to the man on the

street. I would put it in, but I wouldn't

make that my main foundation. I would certainly
say that, "I am not kidding you about this tax
program. As far as I am concerned, I want to
go out after all of these untaxed incomes and
here are several that occur to me which you fellows on the Hill haven't acted on, although I

- 74 -

have been talking about it for the last eight

years.

"Secondly, after all, what we really are interested

in is saving this country and saving democ-

racy," and I think it does no harm to wave the flag a bit.

I would wave it a page or two.
H.M.Jr:

Incidentally, talking about prices, the first

hour this morning, commodities, Dow Jones

Futures, jumped three quarters of a point, which

is tremendous, and that shows how much confidence

they have got that Leon is going to be able
to control prices.
White:

He said, "We are on the brink of inflation."

H.M.Jr:

It was just like my statement the day after

election. I said, The debt is going to be

sixty billion dollars" and stocks went up
seven points, and then they left out the fact
that I said, "as long as Roosevelt is here we

won't have inflation, so Leon explained it so

well that everybody has gone in and bought
commodities this morning.
Currie:

That is a little dilenna in the present situation,
the risk you have to take in order to build
up your - you have to talk as though it is right

here, which feeds the flames.
H.M.Jr:

It is true.

Gaston:

Shouting fire to avoid a panic.

Currie:

That is right.

Magill:

Kiplinger says in his letter that canned tomatoes
are going to be scarce. Everybody I know of

that takes his letter told his wife, and his

wife went down and bought a couple of cases of
tomatoes.

- 75 Gaston:

You ought to see the stocking counters, or
have you?

Magill:

The stockings are all gone now.

Blough:

On this state and municipal securities, is this

comment going to include only futures or outstandings?

Magill:

Outstandings.

Bell:

The Secretary has taken a position on that
many times.

H.M.Jr:

Future.

White:

I am very much intrigued by Ros' approach to this
problem and to say that we have come and asked

you for eight years on these things and list them
and all of them, even itit takes two pages to
list them.
H.M.Jr:

I am all for it. It is a breath of fresh air
from the Nutmeg State.

Currie:

Particularly as Bob Doughton talks about his record

for eight years in his letter here.

H.M.Jr:

Did you say you are a citizen of New York State?

Magill:

No, I am Connecticut.

H.M.Jr:

But earlier in the day you said, "as a citizen of

New York State." "

Magill:

Did I get mixed up?

H.M.Jr:

Yes you did and I said, "That is patriotism, by
God, to the last extent if you are."

Magill:

I hasten to inform you, it doesn't make really

much difference, as far as I am concerned.
Blough:

In your income tax?

- 76 Magill:

Yes, because my sources of income are in New

York.

Blough:

And are taxed in New York?

Magill:

Sure, my Columbia salary gets taxed at the source.

H.M.Jr:

I didn't know that.

Magill:

Honestly, it doesn't make any material differ-

H.M.Jr:

I think Ros has given us something and I think
we can very quickly get up the various things
that we have listed during the last ei ght years

ence.

and jam it down their throats. Well, may I say
it has been a tremendous help, and we will

work a day and when we get something on paper

I will send it over to you gentlemen, if you
would like another look, and if you have got the
time.

Eccles:

I may be up on the Hill tomorrow.

H.M.Jr:

Well, I won't bother you, then. I will send it
over anyway.

Eccles:

All right.

H.M.Jr:

If Ros and Kuhn and Blough could stay behind,

please.

2 nd

DRAFT
August 6, 1941
9 A. M.

SUGGESTED STATEMENT OF THE SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON FINANCE

Mr. Chairman and members of the Committee: I am here

today to discuss the pending tax bill H. R. 5417. This bill
was designed by the House Committee on Ways and Means

to produce $3,500,000,000 annually in additional revenue
for the defense of our country. An amendment adopted in
the House has reduced that amount by $300,000,000.

When, on April 24, I made my statement before the
House Ways and Means Committee on this Bill the defense

program was about $39 billion including the lend-lease
appropriation. Since that time there have been further

authorizations and appropriations so that the total
bilprogram at the present time has risen to

lion dollars. Of course, not all of this amount is going
to be spent during the present fiscal year, but as these
appropriations are spent the fiscal problems of the Government and the economic effects of the defense program will
both increase.

Our great problem in providing for the defense of
the nation is fundamentally the problem of production;
of actually building planes and tanks, ships and guns

-with the labor, management, machinery, and raw materials

which we have in our country. Although we can and should

simultaneously increase the production of civilian goods
that do not compete with the defense program, we shall

find that as we increase defense production it will be
necessary to divert to defense uses more and more of the
resources now engaged in satisfying our civilian needs

and wants. The pinch of scarce resources and plants is
already being felt and may be expected to become more
aggravated.

At the same time that this diversion of production is
taking place, the amount of purchasing power in the hands

of the people of the country will continue to increase due
to the large amounts being spent by the Government and to

resultant fuller employment. The result of the pressure
of this increased purchasing power on the limited amounts

of goods and services for which it may be spent threaten,
in the absence of vigorous action, to sweep us into a

spiral of rising prices.
Rising prices.

Apparently we are at the same point in price history

as in 1916 -- on the edge of inflation.
The pattern of price rises during the past two
years roughly resembles the price movement during the

-3-

first two years of World War I -- little rise in the cost
of living, a moderate rise in the wholesale price index
and a sharp rise in the prices of basic commodities.
Since the beginning of the war, September 1939, the

wholesale price index has risen from 65 to 87 or about

16 percent. The greater part of this rise has occurred
during the past five months.

The cost of living index has increased 5 percent
since September 1940. Half of this increase has occurred
in the past two months.

The price index of 28 basic commodities has increased

48 percent during the same period, despite the fact that
the prices of many basic raw materials have been con-

trolled by the Office of Price Administration and Civilian
Supply. This increase constitutes a major danger signal

of inflation which must not be ignored. The wholesale
price index always lags greatly behind the index of basic
commodities, while the cost of living index does not show

anything like the full effects of inflation until long
after the needs of inflation have taken deep root.
Forces making for price rises.

The forces making for further price rises are both
potent and persistent:

(1) The Director of the Budget has estimated that
defense spending during the fiscal year 1942 will be $15

-billion, or two and one-half times as much as in the fiscal
year of 1941. This increased estimate does not take account
of extensions of the defense program made after June 1

and of additional sume needed for lend-lease.

(2) More important in its bearing on the danger of
inflation than the figures for expenditures of the coming year are the estimates of deficit spending. The net
deficit for the fiscal year 1942 as estimated by the
Director of the Budget will be $12.8 billion compared with
$5.1 billion for the previous fiscal year. This assumes

the present tax structure. If the $3.5 billion tax bill
which is before you is passed by Congress at an early date

the deficit will be reduced by about $2 billion (the amount

of revenue yield in the fiscal year 1942 of the $3. billion

total) but it will still be over $10 billion. Again this
estimated deficit does not take account of the expansion
of the defense program after June 1, 1941.

(3) The inflationary force of the Federal deficit
has been supplemented during the past year by an expansion

of bank credit. Total bank loans were expanded by an

estimated $3 billion or about 20 percent during the

fiscal year just past. This rise moreover has been proceeding at an accelerated pace.

(4) Prices will be increasingly stimulated by
(a) the shortage of materials for civilian goods

-5(b) increased absorption of idle capacity in many industries and (c) further increases in wages and agricultural prices.

Also making for further price increases are the
heightened obstacles to imports such as reduced ship
space, higher shipping costs and cutting off of normal
foreign sources of supplies.

Although there are some factors in the situation
operating to check the inflationary trend, such as surplus stocks of some agricultural commodities, unemployed

labor resources and partially employed production fa-

cilities, most of these factors were present in the
fiscal year 1941 in greater degree and yet did not serve
to restrain price rises even though the forces making
for price rises were then much weaker.
Steps already taken to check inflation.
Some important steps have already been taken or

are being taken to check inflation. Congress has made
provision for the Treasury to sell Defense Savings Bonds
and Stamps and so to absorb for the defense program funds

which might otherwise be used for civilian purchase of
goods. This very important program is well under way.

-6-

The Treasury Department has also launched a plan

for selling tax anticipation notes which will facilitate
the prepayment of income taxes and will more promptly
withdraw purchasing power represented by such taxes.

The Office of Price Administration is making every
effort to obtain the cooperation of producers and dis-

tributors in limiting price rises.
These measures to restrain price rises, although
they have unquestionably been helpful, are inadequate
to meet the situation confronting us. We have gone

only a small part of the way it will be necessary to go.
Ye must attack the problem on all fronts if we are suocessfully to check inflation.

Fiscal policy for inflation control
One of the most important methods of inflation

control 18 a strong fiscal policy. The tax bill before
you 18 an important step. When I appeared before the Ways and

Means Committee in April, I recommended a tax bill to yield
$3.5 billion of revenue annually above the yield of the

existing tax structure. If at that time I could have foreseen the accelerated rise in prices and the great increase
in the defense program which have since taken place, I
should have asked for more than $3.5 billion.

7The Ways and Means Committee of the House has la-

bored long and well on this bill and I am not suggesting
that you increase the total amount of revenue which it

provides beyond the original goal of $3.5 billion. To
increase its revenue yield substantially might result
prompt
in delay, and, passage of the bill 18 important. I deem
it imperative, however, that the new revenue yield of the
the

bill be restored to at billion level.
When this bill has been passed and you and the
members of the Ways and Means Committee have had an

opportunity to enjoy a well deserved rest from the
arduous labors which it has entailed, I hope that yet
this year you will undertake, as the Treasury has already
undertaken, to make a new survey of our tax system.

It is now some years since a tax bill has been passed
making the many technical changes which from time to

time are found necessary as a result of experience, new

court decisions and other new situations. Both the
taxpayers and the Government suffer as these uncorrected

faults accumulate. Such matters have been kept out of

the present bill in order to expedite its passage and
not to complicate the issues which it involves. In

addition to correcting the faults in our tax structure,
it will again be necessary in the light of the present
program for defense expenditures and the threat of

inflation to increase further the revenue power of the

-8tax system either late this year or early next year.
Excess profits tax.

Within the $3.5 billion revenue scope of the present

tax bill there appear to be several possibilities for
discouraging inflationary price rises. The first of
these 18 in the field of excess profits taxation. In
recent months there has been a noticeable tendency for
various groups including business men, farmers and

laborers, to endeavor to secure higher rates of return
in profits, prices and wages. ( Such efforts cannot be

criticized in normal times. At the present time, however, with the existing pressures for inflation,
widespread efforts to increase profits, prices, and
wages will result not only in larger purchasing power
and thus still greater pressure on our limited supplies
of civilian goods, but also in higher costs for the
defense program and for goods which civilians purchase.
These higher costs in turmnecessitate increases in

prices and these in turn give rise to new demands for
higher wages and higher prices. The spiral goes up and
up.

If we are to expect to stop or prevent this spiral
we must be able to show those who receive modest in-

comes from their labor or their production that excessive
profits are not being received by great corporations.

-The present excess profits tax places special heavy

taxes on profits which are in excess of the profits received during the years prior to the defense program.

This 18 all to the good, -- is indeed essential. It is,
however, hot enough. A corporation may make 50 percent

profit on its invested capital and not be subject to the

excess profits tax if the profit is not in excess of
95 percent of its average profits during the base period
years 1936 to 1939. This basic weakness is found in the
present law and also in the bill before you.
This is not a matter of minor importance. Substantial numbers of companies are in the high-profit

group. One out of five profit-making corporations with
assets of $1,000,000 and over averaged more than 10 per-

cent net income on their reported equity capital during
the years 1935 to 1938 and one out of twenty-five companies averaged more than 30 percent. These companies

can continue to earn profits at virtually these rates
without paying excess profits tax under either the present law or the Committee's tentative plan.
Failure to apply excess profits taxation to such
excess profits is unfortunate also because of the uneven way in which competing businesses are affected.
Concerns which have been making high returns in the

base period years are given a competitive advantage

- 10 over newly organized concerns or concerns which have

been struggling to establish themselves. They may

receive free from excess profits tax a much higher
rate of return than their new and growing competitors.
The effect is to confirm monopolies in their control
and to protect well established businesses against
competition.

Moreover the capacity of a corporation to pay taxes

is affected by the rate of its return on its investment.
The highly prosperous, well established corporation which
has been making 30, 40, 50 percent or more on its in-

vested capital has a much larger ability to pay taxes
than a corporation which has been earning only 3, 4, or
5 percent on its invested capital even though the dollar incomes of the two companies are the same. Heavy

taxes on high rates of profit will not cause the business receiving them to be liquidated or discontinued
for lack of a minimum necessary profit, which may occur
when heavy taxes are imposed on meager profits. Appli-

cation to corporations of taxation in accordance with

ability to pay calls for higher taxes on the profits of
those corporations which have the higher rates of return.
Defense excise taxes.

In more normal times exoise taxes have little to
recommend them except the fact that they produce revenue.

In a period such as this, however, excise taxes may in

- 11 certain cases promote a more positive objective, namely,
to reduce the demand of producers and consumers for
scarce commodities which compete with the defense pro-

gram and to absorb wind-fall profits which result from
scarcity of supply relative to demand.
The achievement of this objective is not a simple
matter. Nevertheless, the further use of exoise taxes

to divert consumption and to reduce wind-fall profits
should be seriously considered by your Committee.
Personal exemptions.

One feature of the bill before you which has received less public attention than it deserves is the
fact that the base has been broadened to add about
2,000,000 new taxpayers. This was accomplished by be-

ginning the surtax at the first dollar of surtax net
income. The 10 percent earned income credit in effect
increases the exemption from normal tax. Since this

credit is not applicable in computing the surtax, the
bill has in effect reduced the exemption of single individuals by $88, of married couples by $222, and of
married couples with 2 children by $311.

In the early stages of this bill the Treasury
Department took the position that in view of this substantial broadening of the base personal exemptions

- 12 should not be further lowered. Equitable taxation requires that taxes be placed on ability. Small incomes

have very little taxpaying ability, and this little is
decreased as the cost of living rises.
However, the threat of rising prices has become 80

great that a change of policy is indicated. If the
cost of living rises substantially the effect will be
to tax small incomes much more than would an income tax

at the rates provided in this bill. If the direct
taxation of these incomes will help, as we believe it

will, in preventing inflation it will be a great service to the very groups which would be made newly subject
to the tax.

A further benefit to be derived from reducing
personal exemptions is to make it possible for a larger
number of persons in the country to feel that they are
making direct contributions to the defense program.

During the course of this tax bill a good deal of evidence has
been noted to the effect that many people want to make
such a direct contribution.

Accordingly, in the light of the developments of
the past few months it is our recommendation that the
personal exemptions of both single and married persons

be substantially reduced 80 that the income tax will

- 13 reach a much larger percentage of the national income

and will affect a much larger percentage of the persons
of the country than it does at present.
Too much should not be expected from lowering

personal exemptions. It 16 not a panacea for our
fiscal problem. Reducing personal exemptions as low
as $750 for a single person and $1,500 for a married
approximately

additional tax-

couple would bring/about

payers under the income tax and would produce approximately

additional revenue. of this amount of

revenue, however, $

, or

percent

would come from persons already subject to tax under the
House Bill.

Additional measures necessary

While my purpose in talking to you today about

this subject of inflation is primarily to indicate the
ways in which the tax program can be designed to help

minimize the dangers of inflation, it should be pointed

out that tax legislation will not by itself solve the
problem. The control of inflation is too great a load for
fiscal policy alone to carry. There should be additional
action also along the following lines:

- 14 (1) The Office of Price Administration should be
given the statutory power to fix prices where necessary.
The legislation which the President has requested is
essential. Price rises cannot be controlled when in-

flationary forces are at work without effective power
to impose price ceilings enforced by direct penalties.
The mere possession of such power tends to make its
exercise unnecessary.

The attempt to prevent unwanted price increases by

fiat, however, is bound to break down here as it has
elsewhere unless it is accompanied not only by an adequate fiscal program to absorb buying power, but also
by other methods.

(2) Vigorous steps should be taken to increase the
supply of goods required for military and civilian needs.
Increased output is in itself a major objective of our
defense program and the most effective and desirable

method of preventing inflation. There should be fur-

ther exploration of the possibilities of inducing
expansion of production facilities and labor supplies
where such response could not be expected to occur automatically.

(3) There should be authority to provide systematic
priorities of scarce supplies among industries making

civilian goods. In order to obtain a fair distribution

- 15 of scarce supplies among consumers it may later prove

necessary to extend the rationing to ultimate consumers.
(4) Extension of the general controls over bank
credit may be found desirable.

(5) Establishment of controls over the entire field
of consumer credit will undoubtedly be necessary.
(6) Controls over capital expenditures should be
provided.

(7) It may be found desirable to extend the Social
Security Program along lines which would increase the

flow of funds to the Treasury from current incomes during the emergency and would increase the outflow of
funds when needed in the post defense period.

(8) There should be a reduction of the Federal
lending and underwriting program, such as nonemergency
housing expenditures and mortgage guarantees.

(9) Nonessential Federal expenditures should be
reduced. In my statement before the Ways and Means

Committee I pointed out the desirability of reducing
such expenditures by one billion dollars. State and
local governmental nonemergency expenditures and bor-

rowing should be curtailed. Such curtailment would
not only cut down expenditures during this period but

would build up a back log of desirable projects for

- 16 the post-defense period when public works expenditures
may be badly needed to maintain the economy.

From present indications, if the control measures
which I have mentioned are placed in operation and 1f

the tax bill is promptly passed providing not less than
$3.5 billion of new revenue, it is my hope that the
economic situation will remain fairly healthy until the
early date when another tax bill designed to absorb
substantially more purchasing power can be considered
and passed.

- 17 Alternatives to taxation more onerous

In closing my remarks, I desire to point out that
although this is a very heavy tax bill, the alternatives
to heavy taxation are much more onerous. Rising debts
and rising prices would take much more away from our

people now and in the future than higher taxes now will

take. Under the tax bill, as it stands, a married
couple with no dependents having a net income of $5,000

a year will have its Federal income tax increased by

$198 or 4 percent of its income. If 1/3 of the family's
income is saved or spent on items not affected by a

changing cost of living, an increase in the cost of
living of 5 1/4 percent would impose as great an additional burden on this family as would the proposed

income tax. The cost of living index has increased
5 1/2 percent in less than a year, since September,

1940. It is clear from this simple illustration that
rising prices are taxes just as surely as income taxes

80 far as the family is concerned. If in an attempt to
protect the incomes of our people we hold down taxes

and as a result the cost of living rises, we shall have
taxed them just as surely as if we had levied on them
directly.
Rising debts may not only increase the tendency

for prices to rise but they increase the burden in

- 18 another way by postponing it. That means that both

interest and principal must be paid for later with
higher taxes imposed at a time when they may be harder

to pay and less willingly paid than now.
Our defense program is an absolute necessity. It

must be paid for. Insofar as possible, it should be
finally paid for now.

August 6, 1941
9:20 a.m.

Operator: Go ahead.
HMJr:

Henry

Hello.

Stimson:

Hello, Henry.

HMJr:

Good morning.

HMJr:

Henry, it's a long time between drinks.
Right. Too long.

Would you like to come to lunch with me

quietly at Woodley's at one o'clock, say,
today?

HMJr:

HMJr:
S:

Well, I'm terribly sorry, but I have somebody coming today that I couldn't put off.
How about tomorrow?

Well, tomorrow I'm with Wickard. If
Well, that's

HMJr:

What?

That's too bad.

HMJr:

If you wanted to

I'11 get straightened out. I'll call you

next week or sometime.
HMJr:

Yes. I'11 be glad to - how are you fixed
early in the morning?

HMJr:
S:

Why,
as far as I know it's all right. But,
I mean
Yeah, I didn't

there's just - there's nothing formal,

nothing.

-HMJr:
S:

HMJr:
S:

HMJr:

Oh.

nothing in the way of business to talk

with you about
Oh, well

it's just to have a chat together the

way we used to have.

Well, if you'11 - I'd love it if you'11
invite me any time next week. I'11 be

delighted.
S:

HMJr:

HMJr:
S:

Well, I'11 try to - I'11 try it
I've got Admiral Nimitz for lunch today,

and I'm going with Wickard tomorrow, 80
Yes, I see.
and

All right. Well, I'11 have it on my conscience
and I'11

HMJr:

Well, try me - any time, but just if you'd
give me a day or two's notice.

Yes. Yes, I see.

HMJr:

Give me a day or two's notice.

Well, how are you?

HMJr:

I'm fine.

That's good.

HMJr:

Thank you.

97
August 6, 1941
10:02 a.m.

HMJr:

Walter
George:
HMJr:

Hello.
Hello.
Henry Morgenthau.

HMJr:

Yes, Henry. This is Walter George.
Good morning, Walter. I just wondered if

Well, I think - I talked with John a little

you knew yet when you'd want me up there.
yesterday

HMJr:
G:

Yeah.

and he indicated that you'd like to

get - maybe appear on Friday 80 that you'd
be relieved of this next week, because you
had to appear before the price fixing committee.

HMJr:
G:

That's right.
So I think on Friday we'll take the Treasury

people, if it suits you, and just have the
Treasury on Friday.

HMJr:

Well, that's entirely agreeable.

All right.

HMJr:

Thank you 80 much.

At ten o'clock Friday.

HMJr:
G:

HMJr:

I'll be there.
All right.
Thank you so much.

98
August 6, 1941
11:15 a.m.

RE TAX STATEMENT

Present:

Mr. Blough
Mr. Kuhn

Mr. Magill

Mr. Shere
H.M.Jr:

This is what I would like to say. I got
this thing. I would like to go up there and
start right out, "Gentlemen, I have come
up here to recommend to you this state of

national emergency where everybody has to

be willing to make his proportionate sacrifice
in order to make democracy safe, and we have

an all out tax bill to go hand in hand with
an all out defense bill. Now, in order to
accomplish this we ought to include the

following items in this bill," and then list
them.

I wouldn't say, "I have brought this to your
attention for eight years. That never pays.
It is a nice thing to say but I have got to go
back for three years more and the personal

satisfaction isn't worth it.

Magill:

You are right.

H.M.Jr:

These are the things, and then list them.

Then develop those as much as possible,

giving each one its weight. I mean joint
tax returns, oil well depletion, municipal
and state bonds and all the rest of it,
excess profits, and then this is where I
would start. Then I think I would end up
the statement by saying, "Now, even if we

do all of these things, they in themselves
cannot control increased prices," and then
say something at the end.

-2-

Kuhn:

That you are going to go up at another
occasion --

H.M.Jr:

"And I have been invited to appear by
Chairman Steagall and I expect at that
time - at a more appropriate time __"

Magill:

I think that is good. You could put in,
couldn't you, a paragraph just before that
to say that in this all out business one
thing that will be useful will be higher

excise taxes on some of these commodities.

H.M.Jr:

Look, you have worked with me so long.

This is the way the thing has crystallized.

We would go right up in the beginning just
the way I said it and then develop it and

say something on each of these things, why
they are bad, why they should be done away

with. The great advantage is they will say,
"Morgenthau is just up here again talking
about that Treasury plan on excess profits
and he wants it his way and if he can't

have it his way, he won't play." It
becomes one of ten things.

Kuhn:

Because what you do then, Mr. Secretary --

H.M.Jr:

It becomes one of ten things.

Magill:

That is the way to do it.

H.M.Jr:

Isn't that it?

Kuhn:

But you are not, then, advocating this tax

H.M.Jr:

bill. You are wanting a different tax bill.
Well, all right, listen. I have got just as

much right to change as the President of the
United States.

Kuhn:

You are all right.

100

-3-

Magill:
H.M.Jr:

You can say you want this tax bill but you

want this tax bill plus.

"Well, why didn't you say this thing before?"

"Well, I don't have to. I am not going to
think of all the questions they will ask.

This strikes me emotionally and every other

way. Inside it strikes me right. I am not

worrying about whether I am for this particular
lowering the exemption. That is part of the
whole program. Now, if you are going to do
this thing, then every fellow from the bottom
of the stepladder to the top should pay his
proper portion.

Magill:

That is all right.

H.M.Jr:

And unless we do something like this on the
tax front, we are lagging way behind the national

defense front. We are not - we are lagging
way behind the national defense front. They
are way ahead of us. We haven't begun to

keep pace with them in our thinking. And that
is true.

Kuhn:

You said that before and you can say it again.
You said it before the House.

H.M.Jr:

Well, I would say it again.

Kuhn:

Good.

H.M.Jr:

In our thinking we are lagging way behind on
the national defense program.

Kuhn:

And Congress is lagging behind rather than the
Treasury on this thing because you have said
these things.

H.M.Jr:

Now, I didn't want to say it, but this morning
in talking with Roy I got a nifty. What Roy I gave Roy the idea and he gave it to his man

101

-to have it this morning, that instead of
taking this thing so that the fellow with

seven hundred fifty dollars or two thousand
dollars has got to add and subtract about
five times, we have taken the result that
he would arrive at. We are working on a

table. It is in jumps of twenty-five -

dollars. We are going from seven hundred

fifty dollars up to the income high enough so
we include ninety percent of all the income
tax payments and we are going to have - if

you have seven hundred fifty dollars, all
you have got to do is look over the table and
you would pay four dollars.
If you have seven hundred seventy-five

dollars, you would pay four dollars and
twenty-three cents, and so forth and so on.
And the same thing for the married person.
If he has one child he would be in one
column and if two children, in the next
column.

Magill:

Where will it run, seven hundred to what?

H.M.Jr:

So we can stick this in every post office
and every public building in the United States
so a fellow can go in and say --

Magill:

That is absolutely swell.

H.M.Jr:

.he goes in there and, "My income is nine
hundred dollars. How much do I pay?" Six

dollars and forty-eight cents.
Kuhn:

That is the way you sell the Tax Anticipation

Notes too.
H.M.Jr:

That is the way you figure interest payments.

Isn't that a nifty, Ros?

Magill:

That is a good one.

102

-5-

H.M.Jr:

Isn't that a nifty?

Blough:

Personal exemptions will have to be

apportioned. It ought to be a very simple
thing to work out.

Magill:

I was just thinking what your variations -

your variations will be on marriage and
children, I suppose.

Blough:

The length of time during the year you have

Kuhn:

It means filing returns, though, of your

this income.
income.

H.M.Jr:

Yes.

Magill:

Those fellows won't have any serious losses.

Blough:

What if they did, if we get the net income

first. This is after you get the net income.

The big problem, of course, is your tax
exempt interest. Partially exempt interest

will make it difficult but that is the only
one.
Kuhn:

Eliminate the earned income?

Blough:

No.

Magill:

I thought you were going to put it on gross.

H.M.Jr:

I had in mind gross. I wasn't going to

allow any deduction.
Magill:

Why don't you do it on gross?

H.M.Jr:

I wouldn't give any deductions. I was not
going to give them - no, no, I wasn't figuring

on any deductions. This is - you earned seven

103

-6-

hundred fifty dollars. To hell with your
losses. You pay four dollars.
Magill:

I would do it on your gross, Roy, if you

can, because otherwise you get into contribut-

ions to the church and all this estimating

business.
H.M.Jr:

What is this fellow's name, Shere?

Blough:

Shere, S-h-e-r-e.

Magill:

I would do it on gross and base it on his
marital status and children and make it a
lump sum. When are you going to do it, at
the beginning of the year?

Blough:

End of the year.

Kuhn:

And then wipe out the old form of tax payment

for the two to four thousand dollars.

Blough:

In that case I think possibly we ought to
keep it down to around three thousand. It
begins to get complicated.

Magill:

Yes, I would keep it down.

Blough:

In this great mass of people they have only
one source of income and that is their salary
and maybe a roomer or two or something like

that, and it is perfectly simple to apply on
the gross basis and maybe make a little bit

of adjustment in order to take care of that

gross concept.
Magill:
H.M.Jr:

Yes, I thought you meant gross.

I did mean gross and I am just interested to

ask Shere how he was working on it.
Blough:

It doesn't matter. He is working from a figure

104

-7-

of income and whether you call it gross or

net, it won't make a bit of difference. His
schedule will fit either the gross concept
or the net concept.

Magill:

That is a darn good idea and that, I gather,
was the President's idea back of that part of
his letter. You may have forgotten. He
talked to us about that in Hyde Park way
back there.

H.M.Jr:

And we haven't worked it out.

Kuhn:

He has got it in his letter about chipping
in.

Magill:
Kuhn:

But this is a much more advanced thought than

he had.

It says most Americans in the lower income

brackets are willing and proud to chip in
directly, and that is the way he phrases the
whole section of his letter.
Magill:

This is swell for a lot of reasons.

H.M.Jr:

We will just think what it means to Internal
Revenue.

Magill:

Oh, yes. I was just talking about that to
Danny. I don't know how you are going to
administer this tax without something like
that.

Kuhn:

It says the exemption of a single person
should be reduced to seven fifty with a
provision for a straight simple payment of
some small contribution to the national tax
income through some simple agency and on

some simple form. That is what you are now

suggesting.

105

-8-

Blough:

Only the Secretary is making it, I think,
better. If he makes this so you don't even
need to compute it, it seems to me that goes
even further and implements very well the
present tax.

H.M.Jr:

I wasn't there when the President crossexamined Sullivan and I gather Sullivan got
all balled up trying to explain it. The
President said Sullivan subtracted and added

five times trying to arrive at a figure of

how much you had to pay on seven hundred

fifty dollars. It is crazy, ridiculous,

and you hadn't ought to have to do that.
Magill:

That is right.

Blough:

You have to figure surtax and normal tax and
add them up and figure defense tax.

Magill:

I have been saying all the time that it was
just a cut above.
We have a Finnish maid who is a good cook and

just a cut above half-witted. She had to
pay a tax return last year. I know she did,

but gosh, it must have been a honey. (Laughter).

Kuhn:

Magill:
Blough:

Helvering will bless you for this.
I should say he will.
And the committee might get it into their heads

that they could use a little simplification

on their own hook.
H.M.Jr:

Kuhn:

I thought if you did this and gradually raised
the limit it would gradually go on up.
But this would be - you would bring this forward
in your section --

106

-9-

H.M.Jr:

Oh, I am going to have it printed, on
sample sheets to distribute right then and
there.

Kuhn:

In your section on lowered exemptions,
where you are talking about everybody's
contribution?

Magill:

How about with-holding the source, not to
get it too complicated?

Blough:

I would like to talk with you a little at

length on that. I have done a lot of work
on that and I would rather wait for that one

until the next tax bill. I would rather see

it taken in two bites because the collection
source has a lot of very difficult matters.

Magill:

This is a very good idea and I don't see

that - what I am trying to think of is hardship cases but I don't see that you will have

many.

H.M.Jr:

Do we have to show this to Helvering? Is
there anybody over there that could help?

Magill:

It would be a good idea if we could get a
fellow like Tim Mooney to tell you if there
are any bugs in it.

H.M.Jr:

We will have him take a look at the thing.

Blough:

I have two men working on the bugs now and --

H.M.Jr:

Bye on this thing.

Blough:

...on this - let Guy Helvering see this.
How about a fellow with a wife with a security
income filing an individual return? She
has a loss of --

Magill:

107

- 10 -

Blough:

You could permit separate returns at this

Kuhn:

Shouldn't it be just earned income?

Blough:

Well, it is all earned income anyway.

Magill:

But I would make it everybody with incomes

level, as far as that is concerned. It is
almost all joint returns.

if you possibly can.

(Mr. Shere entered the conference).
Blough:

You might exclude from them though, if they
have different sources of income --

H.M.Jr:

Shere, how far have you gotten and were you

taking this on a gross basis?

Shere:

No, we are working on a net income basis.

Blough:

It doesn't matter, though.

Shere:

We are taking it on an income basis. The
man would take out a deduction when he knows
what his net income is.

Magill:

Why don't you put it on a gross?

H.M.Jr:

I don't want it that way.

Blough:

Mr. Secretary, as far as they have gone it
doesn't make a bit of difference.

H.M.Jr:

But for my purpose I want a fellow just to
say, "I earned eight hundred and my tax is
four dollars and a half," " and he just looks

on this wall chart and that is all he has to
do. I don't want him to do any figuring of

any kind. Just like an interest table. If

he has got eight hundred, at two percent he
gets so much.

108

- 11 -

Shere:

Then you have the problem of deductions.

Blough:

No, there will be no deductions.

Magill:

Suppose you find that the average --

H.M.Jr:

You didn't get it.

Shere:

I get what the Secretary says but I am just
raising the point.

H.M.Jr:

I want to know that if the man gets twenty
dollars a week, it is a thousand and forty

dollars. If that is what he earned, his

tax is so much and all he has got to know is

how much his earnings are.
Magill:

That is right. Here is the average fellow

with a thousand dollars. He has so much

interest he has paid and he has made so many

contributions and he may have a little other
exemptions, so his net is what? His tax the
ordinary way would be fifty dollars. Well,
the Secretary wants to say fifty dollars at
a thousand dollars, you see. Now, if you
have got a thousand dollar gross, your tax

is fifty dollars.

Shere:

He wants to work on a gross?

Magill:

Yes. Now, it is obviously true that the
fifty dollars might be too much in some

cases and too little in others if you took
it on the net basis but it is ever so much
simpler and I think it is much more desirable.

You will get some funny cases but the tax

in any event isn't going to be so big that it
is going to --

Blough:

We will have to work out a few because here
you have a single person with dependents, a

109

- 12 -

few cases of that kind which will involve
some complications.

Kuhn:

What would you do there?

Blough:

Oh, well, it needs another column, that is
all.

H.M.Jr:

Let me just say it again. It is going to be
statutory that a man with a thousand dollar

income pays so much and eleven hundred so
much and twelve hundred so much and Friday

morning I am going to have this table and --

Shere:

We expect to be done by the end of the day.

H.M.Jr:

I want a sample table and I want Helvering to
have a chance to look at it but when I go up
at ten o'clock Friday, I want a hundred

copies of this thing.

Magill:

Why can't you do this, Roy? Can't you simply

figure it to this extent, say that a single

person -Shere:

We will have it for you at the end of the day.

Magill:

for a single person, here is what you
are going to pay in this column. If you are
a married person, this column is what you

will pay. If you have children, then you
take off so much and make that a kind of
a round figure.

H.M.Jr:

I want it to say, "Know your income tax."
On one single bill, you see, a big sheet so
these fellows can read it.

Magill:

I think for simplicity I would make you take

off five or ten dollars all along the line.
Blough:

In other words, get away from the present rate

110

- 13 -

schedule SO that you may have up to this up to the point where this goes and then

we don't want it to go too high, under those
circunstances it wouldn't be the rate
schedules now in the law. It would - I
mean in the bill. Would approximate it
but would permit, Ros points out - fix
this up in such numbers that however many
dependents you have you could just deduct
so much for each dependent.

H.M.Jr:

We said that. That would be just another

Magill:

I think you are going to get into an awful
lot of trouble if you try to have enough
columns for all the different kinds of

table. You mean net?

marital status and what not and children
that you may have.
Blough:

His point is that if you are married your

Magill:

If you have two children you can take off
ten dollars.

H.M.Jr:

Irrespective of your income?

Magill:

Yes. Maybe you will have to bracket it but
I would certainly avoid - I had in my mind

tax is fifty dollars but if you have a child
you can take off five dollars.

what you have got here.
H.M.Jr:

Wait a minute. Why couldn't you do it this

way? Supposing your income - you are married.

Your income is two thousand dollars. Well,
you look at the two thousand dollar column

but if you have got one child, you look in
the eighteen hundred dollar column. If you
have got two children, you look in the sixteen

111

- 14 -

hundred dollar column.
Kuhn:

There you get into the computations again,
Mr. Secretary.

Blough:

It is a little harder to compute.

Magill:

We are working at the same thing. What I
was trying to avoid is what Louie forecast

here, that is, having a hell of a lot of

columns for married with one child, married
with three children, single person with
one child and so forth.
Shere:

If you made this after exemptions, you could

get away with one column. Here is a man who

married in the middle of the year.
Blough:

That would take care of that.

H.M.Jr:

Couldn't you just have a footnote, if you are

married with one child, deduct two thousand
from your income and look in the column for
eighteen hundred dollars?
Blough:

You could do that. It means they have to make
one computation.

Magill:

I was thinking of making it even simpler than

that and taking off five dollars a child or
whatever it is.
H.M.Jr:

Well, they have got to play with it today.

Kuhn:

That wouldn't deduct for all incomes.

Magill:

No, it wouldn't.

H.M.Jr:

Well, you have got to make one deduction then
anyway, whether you deduct five dollars on

your tax or whether you simply switch yourself

112
- 15 -

from the two thousand dollar column to the
eighteen hundred dollar column.
Magill:

That is right.

Kuhn:

It is the same thing.

Magill:

Yours will work out more exact justice on

H.M.Jr:

I think it will. I don't mind the extra

the tax, to do it your way.

column because I am going to deal with a lot

of morons.
Kuhn:

I can see the table. "Know your income tax.
If you are a single person with no dependents,
look in the column showing the figure of

your salary. If you are married with no
children" -H.M.Jr:

"Look in column B."

Kuhn:

Either that or take two hundred dollars off

your -Magill:
Kuhn:

H.M.Jr:

If you have any children, take off two hundred

dollars --

from your income.
But remember, gentlemen, when I go up there

Friday morning I want a hundred copies of

this thing or more. A couple of hundred

copies.
Shere:

One thing I think we --

Magill:

It is a good idea.

H.M.Jr:

Sure it is a good idea. Ros, it does what I

113

- 16 -

have been trying to do for eight years. I
have been trying to have something to go

out and sell. Why do you only go to three
thousand, because that is earned income?

Blough:

Because above about three thousand dollars

or even twenty-five hundred you get into
multiple sources of income, capital losses,

securities, partially exempt interest and

that sort of thing.
Magill:

You don't want to run it too high.

Blough:

Furthermore, I would make this tax a little
bit lower than they could get it by computing
it the regular way.

Magill:

Well, it is bound to be lower than what some
of them would get it.

Blough:

I would have it lower than anybody - so that
there would be no kick about being --

H.M.Jr:

Now look, gentlemen, in order to give me a

breathing spell, let me get this thing so I
can fix my schedule. Roy, without killing

yourself, when can you show me another draft

on this thing?

Blough:

I would suggest that we would hardly have a

good draft until nearly the end of the day.
H.M.Jr:

I see. Now, how can we make the best use of
Mr. Magill's time?

Magill:

Well, we were just talking about that, what
we should do. I suggested this, that we can't
write a document in a committee very well.

It has got to be written by some individual
and I suggested that I think that Roy or Ferdie
can write it, that we make the best use of
my time by - if I sat down with them and form-

114

- 17 -

ulated an outline for the thing and got

the thing pretty well organized and then
possibly there would be time for me to
write something if you want me to.
H.M.Jr:

Sure. I am just thinking about getting

you home tonight.
Magill:

I would like to get off - if I can get the

Congressional, that would be very good.
H.M.Jr:

If you can't, how about a plane?

Magill:

Well, I would like a plane, as far as that

H.M.Jr:

Yes.

Magill:

Of course you can't

H.M.Jr:

Where are you going?

Magill:

Westport.

H.M.Jr:

I mean, is it a special hook-up or something?

Magill:

Yes, by running like the dickens I get a State

is concerned.

of Maine Express which leaves a half hour or
twenty-five minutes after the Congressional

gets in from the other station and that gets
to Norwalk at --

Blough:

That would mean you wouldn't be here for the
conference then because that would mean you

would have to catch the train at four and

leave here about three, and I doubt whether
we can have more than a draft by that time.
Magill:

Want me to stay beyond that? Of course, if

I get a plane I can make it later than that.

H.M.Jr:

Well, supposing we - if you say even a five or six

115

- 18 -

o'clock plane and then had a Treasury car

meet you and drive you home.
Magill:

That would be grand.

H.M.Jr:

How would that be?

Magill:

Swell.

Kuhn:

It only takes you an hour from LaGuardia

Magill:

Field, doesn't it?

It is an easy trip across the Whitestone
Bridge. Your only problem is getting a
reservation on a plane.

H.M.Jr:

I will get a reservation.

Kuhn:

That is easy.

H.M.Jr:

I will tell them to take it on the five
o'clock and on the six o'clock planes. Would

you be ready?
Magill:

Fine, yes, that will be swell.

H.M.Jr:

All right on that?
Well, that is excellent for another reason.
I think that Ros ought to give a little time

Blough:

to this plan of yours and we might possibly
yet this afternoon have a conference with
Tim Mooney.

Magill:

I would like very much to do that because

the thing you want to guard on that thing is
that there isn't some bug in it somewhere

that we haven't thought about.
H.M.Jr:

All right.

Magill:

Mooney ought to know that because he has been

116

- 19 -

down there for years.
H.M.Jr:

We will forget about Tuesday's statement
for today.

Kuhn:

Harry is working on that now, anyway.

H.M.Jr:

Don't you get in on it.

Kuhn:

H.M.Jr:

I wasn't in on it yet.
Just stick with this.

Magill:

Am I seeing you some time?

H.M.Jr:

I am putting you fellows down for four o'clock.

Blough:

We ought to have a draft by four.

Magill:

That is fine.

H.M.Jr:

Thank you all.

117
August 6, 1941
4:00 p.m.

RE TAX STATEMENT

Present:

Mr. Sullivan
Mr. Magill
Mr. Blough

Mr. Kuhn

Mr. Bell

Mr. Riefler

Kuhn:

This is in two installments.

Blough:

This is so hot off the griddle I haven't read
what I dictated at all.

H.M.Jr:

That is what this fellow Magill does when he
comes to town. Well, go ahead and read, Roy.

Blough:

All right. The first installment is Ferdie's.

H.M.Jr:

Is what?

Blough:

Ferdie's, the gentleman Mr. Kuhn.

Kuhn:

Shall I read and then Roy take up?

H.M.Jr:

All right.

Kuhn:

"Mr. Chairman and Members of the Committee:

"Two and a half months ago, the President proclaimed the existence of an unlimited national
emergency. At that time he called upon 'all

loyal citizens to place the nation's needs first

in mind and in action, to the end that we may
mobilize and have ready for instant defensive

use all of the physical powers, all of the moral
strength,
and all of the material resources of
this
nation'.

118

-2-

"The people of this country have responded

splendidly to that proclamation. They have
never been more ready to make sacrifices for
the common good. From all parts of the country
there have come encouraging signs, from labor
and industry alike, that American men and

women are willing to subordinate their personal
interests for the sake of the nation's defense.

billions
for defense purposes in the present fiscal
"The Congress has appropriated

year, and the American people understand the
need for those colossal expenditures. The Ways
and Means Committee of the House of Represent-

atives has just completed work on a tax bill
to produce 3à billion dollars in additional

revenue, an amount that would have struck our

people as staggering in former years. They

have not complained. They understand the need

and they are willing to pay the price of making
their country impregnably strong.

"The defense effort, however, has now grown to

such giant proportions that it dominates our
entire economic life.
"

(Mr. Bell entered the conference) .
Sullivan:

Excuse me, Ferdie, "to produce over three billion"

Kuhn:

Right.

Blough:

The Ways and Means Committee did have it three
and a half.

Sullivan:

Well, that is a detail we will fight out later.

H.M.Jr:

Well, you fellows can fight about it. A half

instead of three and a half billion.

billion dollars, what the heck?

119

-3-

Kuhn:

"The defense effort, however, has now grown

to such giant proportions that it dominates
our entire economic life. In these days of

total war, a total defense is called for. Our
economic and fiscal policy must be integrated

for defense, integrated as closely as our

army and navy and our planes that guard the

skies. The bill which I am glad to support
today, H.R. 5417, is a step in this direction,
but it is not enough. Still bolder measures

are needed now. In my opinion, we need an

all-out tax bill as an essential part of all-out
defense. 11

H.M.Jr:
Kuhn:

Hear, hear.

"The time has come for us to act as vigorously

in fields of taxation as we have acted, and

intend to act, against the rising tide of

tyranny abroad.

"When I appeared before the Ways and Means

Committee -Magill:

Still rising? I thought it had kind of started
to slow up.

Kuhn:

We will cut it.

Magill:

Yes, I should think so. It is a little too

much high school oratory, high school, anyhow,

I think.

Kuhn:

Might out the whole sentence.

"In my opinion, we need an all-out tax bill as

an essential part of all-out defense." Stop
there.

Magill:

That is a good idea.

120

-4-

Kuhn:

"When I appeared before the Ways and Means
Committee of the House"

H.M.Jr:

Excuse me, do you let visitors like that say
things and you don't even answer them?

Kuhn:

I agree with them.

"I outlined four principles" -Magill:

I put my ideas so tactfully. (Laughter).

Kuhn:

"I outlined four principles that should govern
a sound tax program in days like these. I should
like to repeat those statements now, as they are

very brief and even more applicable than they

were last Spring. The first is that we should

pay as we go for a reasonable proportion of our
expenditures. Secondly, all sections of the
people should bear their fair share of the
burden. Third, our tax program should help
to mobilize our resources for defense by
reducing the amount of money that the public
can spend for comparatively less important

things. And finally, our taxes should prevent
a general rise in prices by keeping the total

volume of monetary purchasing power from

outrunning production."

H.M.Jr:

Wait a minute. O.K.

Kuhn:

"These principles, as I have just said, are
applicable now, but they are applicable in still
greater degree."

Sullivan:

Are even more applicable now than when I first
stated.

H.M.Jr:

Bell:

Wait a minute, Ferdie.
Do you keep the monetary purchasing power from

outrunning production? It is the use of the

121

-5-

purchasing power that you want to prevent.

Bell:

That is what the Secretary said in April.
Is it?

Kuhn:

Yes.

H.M.Jr:

That makes it so, Bell.

Bell:

I give up. (Laughter).

Magill:

Where did the reduction of non-defense expenditures come in? That was in that Ways and

Kuhn:

Means thing somewhere.

Kuhn:

But not in those four principles of the tax

bill. That is appropriations. That is why
you didn't have it in there.
"For example, even the proposed increase of

31/2 billion dollars in revenue, even our total
goal of 12-2/3 billions from taxes, now
threaten to be inadequate in the light of
vast expansion of defense spending since

last Spring." II
H.M.Jr:

I wouldn't use the word "threaten".

Sullivan:

"Now appear to be."

H.M.Jr:

Yes.

Kuhn:

"In the past month" --

Sullivan:
Kuhn:

"Now appear inadequate", not "to be".
Right.

"In the past month, the Congress has been asked
for
billions in additional expenditures

for the army and navy, on top of the 33 billions

122

-6-

appropriated for all purposes during the

fiscal year just ended. I know that we shall
be able to raise still greater revenues if
necessary -- and it will be necessary after

the present tax bill has been passed. We
Americans can do this job, and any job, if

we but set ourselves to it."

Bell:

I don't like that before a tax committee.

Kuhn:

The point that came up this morning, Dan, was

that we were thinking of appealing to the
public as well as to the tax committee and
with that in view, the statement was re-written.
Bell:

It is a little oratorical, that sentence.

H.M.Jr:

Does it bother you, Ros?

Magill:

Well, I think this is a minor thing. I would
cut out that "but" there, 'if we but set
ourselves to it". I don't like that. Why
don't you cut out that "and any job"? That

goes part way to meet Dan's proposition.
H.M.Jr:

How would this go before the clubs in the

silk stocking district?

Magill:

Jeremiah - what was his name ?

H.M.Jr:

Mahoney. That was the way you spoke of him.

Magill:

I am from Connecticut. I don't know, I don't

think that is too much, Dan.
Bell:

I still think it is flag waving.

H.M.Jr:

Well, that is what we told them. Those were

the orders. All right.

Kuhn:

The reason, Dan -- if you don't want people to
object --

123

-7 H.M.Jr:

Bell:

This is for the man on the street, Dan.
But you are speaking to a committee. I think
you can do a little of both but you are
speaking to the committee and you have got
a comparatively few people present, and it

sounds a little oratorical.

H.M.Jr:

Well, you see, we put on Jack Benny and all
that stuff now.

Bell:

You get used to it, do you?

H.M.Jr:

You have got to keep up with the times. I
might even bring Irving Berlin up there to
sing a song to open the meeting. (Laughter).

Kuhn:

You know where this came from?

H.M.Jr:

Yes, out of one of my talks.

Kuhn:

"Moreover, the price situation has taken an

ominous turn since I appeared before the Ways

and Means Committee in April. I shall have

a more appropriate occasion next week to discuss

these matters in detail" --

Magill:
Bell:

I would cut out that "a more appropriate". Just

make it "another occasion next week".

Are you afraid of hurting the feelings of the
committee?

Sullivan: Yes.
Kuhn:

"I shall have occasion next week to discuss
these matters in detail before the Banking and
Currency Committee of the House. For the
present I would say only that we are no longer

threatened with inflation, we are in the
midst of an inflationary process that will

move faster and faster unless it is checked by

124

-8-

bold action. And taxes, of course, are one
way, one of the most effective ways, of checking
inflationary tendencies.
Sullivan:
Bell:

Isn't "in the early stages" better than "in the

midst"?

I wouldn't think any economist would agree that

we are in the midst of it yet.

Riefler:

We are certainly in the early stages of one.

Blough:

Maybe not too early.

H.M.Jr:

We have got a first class economist here now.
What would you say we are, Win?

Riefler:

I wouldn't be afraid of that statement. You
have certainly got a rising spiral and a lot

of it is due to non-inflationary factors, just
impediments to supply and shipping, but an
awful lot of it is due to a tremendous outlay
of straight wages and income.

H.M.Jr:

Go ahead. You are out-voted, Dan.

Kuhn:

"And taxes, of course, are one way, one of the

most effective ways, of checking inflationary
tendencies.

"A third change since the spring can be found
in the steadily increasing demands now being
made by the defense industries for certain raw

materials needed in civilian production. In

a number of commodities which I do not need to

list in detail, actual shortages for civilian

uses are threatened. It has become more
essential than ever to use the machinery of a

tax bill to prevent delays in defense production
or by the competition of defense and civilian

125

-goods.
Sullivan:

"Between defense and civilian goods," isn't it?

H.M.Jr:

That has got to be fixed up a little bit. If
I just get the feel of it here I am not going
to go over words with you.

Riefler:

Why not say that "the competition of civilian
demands for defense production" - instead of

as "between", making it the positive thing.
H.M.Jr:

Yes.

Kuhn:

Or "prevent civilian demand for defense production

Riefler:

"Prevent the competition of civilian demands

on defense production." "
Kuhn:

"I cite these changes because I am convinced

that our thinking in tax fields has not kept
pace with events. We are still thinking too

much in terms of the burdens to be borne by

this group or that. Many of us are still more

intent upon exemptions than on common sacrifice.
That is why, gentlemen, I have said that we

need an all-out tax bill, just as surely as

we need an all-out military, economic and
psychological defense for our country.

"Now what do I mean by an all-out tax program?

I mean primarily one that will enlist the help
of all our people in accordance with their

ability to pay. I mean, as I said last April,
that no section of our people should be
exempted from sharing the common task.'
Magill:

I think you want to change the wording of

that a little. You have now the help of all
our people in accordance with their ability to

126

- 10 -

pay, from the point of view of an all-out
an "all-out" carries an additional significance
-

of some description. I mean primarily one
that - maybe you should say "that will enlist
additional help from all our people in accord-

ance with their ability to pay. Don't you
think so?

H.M.Jr:

Yes.

Magill:

You are getting a lot of money from the United
States right now.

Riefler:

Well, where are you going to bring in the idea?

I mean, when you get to ability to pay" you
get to the other problem that the big inflationary
tendencies are coming from the rapid expansion

of purchasing power of those with less ability
to pay, of course.

Coming right in on that, "I mean, as I said
last April, that no section of our people should

Kuhn:

be exempted from sharing the common task. We

all want the workingman, the farmer and the
businessman to earn a fair profit, but we
do not want any one of them to profit unreasonably
from the country's needs. My own feeling is
that everyone should contribute, and will be

glad to contribute, for the safety of our

beloved country.

"There has been much public discussion -Jr:
Kuhn:

Did you leave out the word "beloved"?

I crossed it out. (Laughter)
"There has been much public discussion, some

of it ignorant discussion, of those who have
been called 'the untaxed millions,' those in

127

- 11 -

the lowest income groups. It is said, for

example, that these millions of wage-earners
are going scot-free because they pay no

direct income taxes. I do not need to stress

the fallacy of such a statement. It is an

established fact that those with incomes
under $1,500 already pay a larger share of

their incomes in taxes of all kinds, direct

and indirect, than any other group up to the
$10,000 to $15,000 income class.

"Moreover, it is not generally realized that

under the bill now before you the base has
been broadened to add about 2,000,000 new

taxpayers. This was accomplished by beginning

the surtax at the first dollar of surtax net

income. The 10 percent earned income credit"-H.M.Jr:

We will skip that.

Kuhn:

That is the paragraph we had this morning.
"Nevertheless, the"

Sullivan:

Excuse me, is that paragraph out?

Kuhn:

No.

Sullivan:

That should be three million instead of two,
Roy.

Blough:

The bill doesn't add three million, John.

Good business adds the other million.
Kuhn:

"Nevertheless, a further lowering of exemptions
would produce some additional revenue, although
not nearly as much as some commentators would

imagine. It would be some help in cutting down

the purchasing power of the small consumers of
non-essential goods, although again not as
much as might be supposed. And finally, it
would give millions of Americans an opportunity

128

- 12 -

to make a direct contribution through taxes

to the defense of their country." --

H.M.Jr:

Now wait a minute. That is all wrong there.
You are saying why it isn't of any use and

then suddenly go in and find they would give.
Now, you are giving the argument for. Up to
now you have been kind of laughing at the
thing and then suddenly you go in and say

finally, they would give. You have got to say
something in between. You could say the

arguments in favor of doing it are, it would
give something.

Kuhn:

On the other hand, it would give --

H.M.Jr:

Something, because you slip from one right in

Sullivan:

Well, we are for this lowering of exemptions,

to the other there.

aren't we?

H.M.Jr:

Sullivan:

Well, you will see. Wait until you see.
I know, but this doesn't sound as though we

were.
H.M.Jr:
Kuhn:

Yes, we are, as a part of an all-out tax program.
"It would enable them to feel that they were
participating, personally and directly, in the
defense program. It is this last consideration
which appeals strongly to me now. The Treasury
has opposed lower exemptions in the past.
Even now -- and I cannot stress this too emphat-

ically -- a further broadening of the income
tax base should be strictly conditional upon
other new measures if it is not to be grossly
unfair and destructive of the national morale."
Those other measures are the ones we are

putting in later.

129

- 13 -

H.M.Jr:

I think those should come in together. I

don't like this part at all, Ferdie. I mean,

you didn't - I want to get those ten or

whatever those things are right up at the

beginning. I want to get this all-out tax

program, what an all-out tax program is, right

up on the front page, Ferdie. I take it you
have listed those things. Whenever you talk

about an all-out tax program and then immediately go in and describe what we consider an

all-out tax program is - do you agree?

Magill:

Yes. We discussed that. You remember we
spoke about putting them all together and the

consensus was that it was better to do it this

way.
H.M.Jr:

If you don't mind --

Magill:

We discussed --

H.M.Jr:

I disagree. As soon as we say we are for an
all-out tax program, then I want to describe

what it is, right up front, please.
Kuhn:

Well, you say what do I mean by an all-out tax
program, I mean --

H.M.Jr:

And so on.

Kuhn:

"In the past, a very real obstacle to broadening
the base has been the administrative difficulty
imposed upon the Bureau of Internal Revenue

and the individual taxpayer alike."
H.M.Jr:

If you could skip to where the part is - what
this all-out tax program is, then I am going

to list it and I don't think I am going to
apologize for any of it.

Kuhn:

No, this is an introduction, Mr. Secretary, to

130

- 14 -

the new system of small tax returns.
H.M.Jr:
Kuhn:

H.M.Jr:

Oh.

This is the way of leading in to your big chart

with your tables.

Wait until you get this. This was born this

morning. Have you heard about it?

Sullivan:

I have.

H.M.Jr:

Like it?

Sullivan:

It depends on how this works out but let's wait
until we go through it and then I will make

my comments. The basic idea I like a hundred
percent, yes.
Kuhn:

"The Bureau is already bearing a colossal
administrative load because the number of tax
returns has been increased from three million

to fifteen million within a very few years.

The Committee can picture the burden that would

be placed upon our revenue collectors if they
had to check still more millions of complicated
tax returns every year.

"Moreover, the difficulty for the individual
taxpayer has been real and undeserved. No

matter how willing and cheerful a taxpayer
may be in making his annual contribution to
this country, some of his willingness and
cheerfulness is bound to evaporate as he fusses
with the credits and deductions and exemptions
which he is required to compute on his tax

return. In a letter sent on July 31 to the

Chairman of the Ways and Means Committee of the

House, the President wrote that 'some way ought
to be found by which the exemption of a single

person should be reduced to $750'. But the

President added that some provision should be

131

- 15 -

made 'for a straight simple payment of some

small contribution to the national tax income

through some simple agency and on some simple
form'.

"I should like now to submit to the Committee

a proposal which will, firstly, prevent admin-

istrative difficulties at the Bureau of Internal

Revenue, and secondly, will enable millions of

new taxpayers to 'chip in' willingly and
proudly without the burden of filling out a
complicated tax return.

Sullivan:

I would reverse the reasons. I don't think the
administrative difficulty is more important
than the other reasons.

H.M.Jr:

I don't like this at all.

Sullivan:

All right.

H.M.Jr:

I mean, it is too much, Ferdie. You have got
me hanging out on the end of the limb - here
we have been going now two thousand words and

we haven't got to the guts of this thing yet.

Kuhn:

That is what Roy has.

H.M.Jr:

But here is a man coming - no one knows yet what

I want to do. If you don't mind my being a little
emphatic.

Kuhn:

That is right.

Magill:

What would accomplish what you have in mind, I

think, would be --

H.M.Jr:

The newspaper man has got to be right up in

the first page, Ferdie.

Magill:

On page four, at the foot of page four, as you
say, "Now what do I mean by an all-out tax

132
- 16 -

program", well there, to carry out your idea,

you would want to say, I mean, one, two, three,

four, five, six, seven, eight, and I would

suggest you list then and number them and then
in addition give about one sentence of comment,

not more than that, in each case, just a little.
H.M.Jr:

That is what I want.

Magill:

And then put on your next page, five, a subheading, number one, this new form of tax
payment for the small fellow.

H.M.Jr:

I can't give a title to it but - where are the --

Magill:

They are not listed here at all, I think, are
they, Roy?

Blough:

There is no list. They are taken up later but

H.M.Jr:

I want those together, please. Have you given
them all the things you can think of, Ros?

Magill:

I think we have discussed them all.

Blough:

I will tell you the ones that are in here.

there is no list.

Mandatory joint returns with the earned income
allowance, the excess profits tax, defense

excise taxes, the state and local securities,

and percentage depletion, and those are the

only ones that I could think of in the rush
that we were in. There may be others.

Magill:

That is pretty well the list.

H.M.Jr:

Do you think of any others, John?

Sullivan:

Those were the five that were discussed. I had
lunch with Ros and Roy this noon and those were

133
- 17 the five that were discussed at that time.
Blough:

The estate and gift tax as mentioned this

H.M.Jr:

That should be in. Do you get the idea, Win?

Riefler:

I am beginning to.

H.M.Jr:

But you couldn't get it - I would very much like
to have it that way.

Magill:

Well, you are right. They ought to be together.

H.M.Jr:

I want them right up at the beginning.

Kuhn:

Put it in that place where you are talking

Riefler:

morning was another.

about --

It ought to come in almost your first paragraph
because after all, this does sound as though

you are coming before the Committee for the tax

bill that is up before them. What you are
coming in for is really a whole additional
proposal.

H.M.Jr:

Yes.

Kuhn:

Do you want to have all these things in this

year's tax bill?
H.M.Jr:

Sure, I am going to ask for them. It is high
time - in national defense we are just twelve

months ahead in our tax program and we are

just lagging and it is all damned nonsense

that they don't do these things and if they are
certainly going to ask the man with seven

hundred fifty dollars a year to pay five

dollars a year, there is no reason why the
oil well companies year after year should write

off fifty percent depletion. I mean the two

134

- 18 -

things just aren't fair. I mean, the fellow
in cigarettes, he pays his five or six cents

a package, which to him is a hundred percent,

and I am not going to sit here any longer and
not go up and rub their noses in it.
And these fellows with these community property
taxes, the whole Texas and California crowd,

it is just about time that the public knew that
that is to them - there is a loop-hole there

of a half billion to a billion dollars that

we are not collecting, and I am not going to
ask the public, millions of people and workers,

to contribute their five or ten or fifteen

dollars taxes and at the same time let these
fellows escape.

I don't care if they say to me, "Well, why

didn't you suggest it before in the Ways and
Means?" Well, I don't know why, any more than

Mr. Roosevelt didn't ask for fifty billion
dollars last year instead of asking for four.

I mean, he should have asked for fifty billion
dollars instead of four for national defense.

It isn't difficult, Ferdie, to get this thing

the way Ros just said it, to list these things
in just a short explanation. Now, I don't want
to go into a long harangue about this business
of - for instance, this ten percent income
credit and all the rest of that business, add-

ing the two million dollars. That is out, I
think, because that was an apology, why we
didn't - weren't in favor of lowering it. Now

we are coming and lowering the whole thing, so
we don't want to apologize for being opposed

to it before.

Kagill:

I think you can effectively shorten the whole
thing, as a matter of fact.

H.M.Jr:

Well, I know I am tired now. I am not at my

135

-19-

best.
I ammind.
a little bit too critical,
Ferdie,Maybe
if you don't
Kuhn:

You don't think that is necessary about the
two million new taxpayers who have been

brought in? I think it is.
Blough:

It
is, detail.
but you don't need to go too much
into

H.M.Jr:

Could I have at nine o'clock tomorrow morning

this statement rewritten, doing two things for
me, listing these things right at the beginning,
you see, with a little short statement and
then right after that - now, we have listed

this thing. Then I want to go right in and
say, "Now we are going to bring in" -- I don't
know, five million or any figure, "additional
taxpayers, and we already have ten million

people that file tax returns but pay no income
tax." My figures are not far wrong, are they?
Magill:

No.

Sullivan:

You are pretty close.

H.M.Jr:

Well, for argument, ten million people that
file and don't pay. We ask five million more
to file and under the present system they

wouldn't pay. Now, there are fifteen million
people. In order to make it simple for them,
we have devised the following scheme, and I
want to give this to you because you haven't

got it yet.

The scheme is simply this, that we are going
to have a big poster entitled, "Know Your
Taxes" and the man that makes seven hundred

fifty dollars, he can go to any public building
and he is going to find seven hundred fifty
dollars. If he is a single man he will pay
five dollars. Seven hundred seventy-five

136
- 20 -

dollars, twenty-five dollar jump, he will pay
five dollars and a quarter. The whole thing

is worked out. He doesn't have to do any
computation, up to three thousand dollars.
All he has got to do, if he earns gross, two
thousand dollars, he has got no children, it

is one thing. In the next column, if he
has one child, it is that. Two children,

another column. The whole thing is on one
sheet.

By statute it is right there. There is no
addition or subtraction or multiplication.
Anybody that can read the English language -

"Bill, what was your income? "Well, I

earned eight hundred ninety-nine dollars."

Now, just a minute, you pay so much tax and

that is all he has got to do. And then the
fifteen million people will be paying --

Riefler:

Why not have it in one dollar jumps?

Blough:

It would make the table too big.

H.M.Jr:

It is too difficult.

Riefler:

No, I meant one dollar on the tax.

H.M.Jr:

Oh, we are,most likely. But in income it

will be in twenty-five dollar.
Kuhn:

Roy, you worked that out in the next page,
didn't you?

Blough:

Yes.

H.M.Jr:

I have got two things I want to do. There are
only two things I want to get over.

Riefler:

I should think you would come in and say, you

are considering a bill for three billions.

137

- 21 -

"I have come here to ask you for so many

billions more and I propose to do it by one, two and three.

H.M.Jr:

Well, I want to leave it open ended, but
I want to say, "Now, gentlemen, we are

going to do this thing and this is the way
I think it should be done. When we get to
collecting fifteen million dollars worth
of taxes - taxes from fifteen million people,
this is the way we would do it so they will
like it," and that is my story. We could put

in a little bit, Ferdie, about the prices

and so forth and so on, but not very much.
Kuhn:

Well, there isn't much.

H.M.Jr:

Now, Ros, what about it?

Magill:

I think that is all right.

Sullivan:

The only thing that I am concerned with, sir,
is the time element. There are two things
that are going to be fought out here in this
present bill. One of them is the state and

municipal securities. If they are to have
hearings on that, that is going to be --

H.M.Jr:

Now, John, I don't give a darn. Please,
I don't care. You have done that to me
consistently and the answer is I am not getting
my legislation and I am not going to listen
to that argument any more.

Sullivan:

I wish you would permit me to finish it --

H.M.Jr:

All right. But I have been told that again
and again and it is never the right time.

Sullivan:

May I finish the sentence?

138
- 22 -

H.M.Jr:

Sullivan:

Sure.

And this is not just my opinion. I have
talked with several other people. There might
be a possibility of putting in a saving
clause here that if the committee were unwilling to consider that during this bill,
they certainly should in connection with the

H.M.Jr:

technical amendment bill immediately following.
I am sorry --

Bell:

The Senate has had its hearings on this.

H.M.Jr:

You have told me and the committee has told

me I can't get this, I can't get that. I

am going to go up there for once in my life

and say what Henry Morgenthau, Jr. thinks,

and I am going to say it, see.
Sullivan:

Right.

H.M.Jr:

Now, it may keep them here - whether they pay

attention or not, I don't give a damn, but
at least once in my life while I am Secretary
of the Treasury, I am going to tell that
committee what I think.

Sullivan:
H.M.Jr:

All right.
It may be the last time, but at least I will

say it. There has been too much coddling.
The President has got me out on the end of
a limb by talking about reaching these fifteen
million people. Now I have got to support

his position.
Sullivan:

That is right.

H.M.Jr:

So long as I sit here. Now, in order to do that
I am not going to let all this Texas gang
get away with murder and the cities and the

139

- 23 -

states, too. For once in my life I am going
to go up there and really get the thing off

my chest.
Sullivan:

Now, is this the income from future issues?

H.M.Jr:

No.

Sullivan:

The income from those that are now outstanding?

H.M.Jr:

Yes.

Magill:

Good. I think you are right on that.

Bell:

That is reversing your position, isn't it?

H.M.Jr:

No.

Sullivan:

Yes.

Kuhn:

You have taken the public stand that you would
not advocate taxing future issues but - past
issues, but only future ones.

H.M.Jr:

I didn't understand that. I said outstanding
issues.

Sullivan:

The question I asked, was this to be restricted
to taxing the income of future issues of state
and municipals?

N.M.Jr:

And my answer was outstanding issues.

Bell:

Well, that is a reverse.

Kuhn:

You have taken a position opposite.

Sullivan:

Oh yes.

Bell:

You have taken a position heretofore that it
would be on future issues only.

140

- 24 -

H.M.Jr:

Future issues was what I mean. I am being

consistent. Future issues. I really would
like to stop. I am awfully tired. I know

when I am tired. When I am not thinking,

the thing to do is to stop. I would love
it - I don't know how busy you (Riefler) areif you would read this thing. We are going
to meet at nine tomorrow morning. Would you

like to sit in?
Riefler:

Yes.

H.M.Jr:

I know when I am tired and I am very tired now
because I have been sitting on this too long.

Bell:

It is too long, isn't it?

H.M.Jr:
Kuhn:

Oh yes, got to cut it in half.
It is always easy to cut.

H.M.Jr:

I know, I am tired. Can you - what are you
going to do about this?

Kuhn:

Oh, I want to put in that list that you spoke
of and put it up higher, cut what I have
already read to you. Then on what Roy has

written, which is the guts of it, we will have
to do that in the morning, since we haven't
talked about it here.
H.M.Jr:

Well, you (Blough) know what I mean.

Blough:

Frankly, the rather drastic reorganization
since this morning hasn't quite jelled in my
mind. I wanted to work for a while this
evening on it. You want a much shorter

statement, which means that instead of elaborating some of these things to a page and a
page and a half, you want a sentence or two.

..Jr:

I don't want it to go into a long explanation

141

- 25 -

of excess profits tax. We have done it ten
times.

Blough:

We can, I think, turn out a very much better

job which is half as long as this but it will
take a little time and I would like to work
this evening on it myself. I don't know how

we can work together best, Ferdie, but we
can try.
Kuhn:

I would like to get that list and soon, Roy,
if we could sit down on it now.

Blough:

Sit down right now. The evening is yours.

Magill:

Well, if you can get a girl this evening,
which no doubt you can, I think this is at
a point where one fellow needs to do it.

Blough:

I have a girl.

H.M.Jr:

I don't know how you two fellows work together.
Maybe one of you can take half of it and one

take the other half, but I would think the

thing to do would be for Roy to take the whole
thing and turn out a ten or twelve page document

that conforms to what we have discussed here

today
and what is implicit in what we have
discussed.
H.M.Jr:

I think --

Magill:

If Ferdie wants to take it and also turn out
another twelve page document, maybe that would
be a good idea.

Kuhn:

I think it is better. We can work together
this afternoon on the beginning part.

H.M.Jr:

And then let Roy draft the whole statement.

142

- 26 -

Magill:
H.M.Jr:

Kuhn:

I think that would be -I would give him what you want and then let

him draft it.

And then let him work it over if he wishes.

Kuhn:

That is all right.
It is much easier for one to do it.

H.M.Jr:

Give him what you want but let him have it and

H.M.Jr:

he can work tonight and you can have something
for me at nine o' 'clock tomorrow.
Blough:

I will have something for you.

H.M.Jr:

Want to ask me or Magill any questions? I

want to talk to you, Roy, for about five

minutes. If you want anything, come down and
see me.

Blough:

I would like to sit down with him.

Magill:

I would like to see you before I go.

H.M.Jr:

We have worked this way before. I think if you
will give him, Ferdie, what you have and then
I will count on Roy and then you can take and

work it over again after tomorrow, but let's I'll count on you to give me something at

nine o'clock tomorrow.
Blough:

You are not going to ask for more money in

H.M.Jr:

No.

Blough:

But you are going to ask if we are going to

this bill?

have the personal exemptions lowered, are we

143

- 27 -

going to hit ability to pay on these other
things also, is that your position?
Magill:

There is a point there, if you are not too

tired to consider it. I would like to have
you put your thought on it. We have mentioned
this this afternoon and I think it is an

important point, that in a very real sense
this business of lowering the exemptions is
the kind of fulcrum on which this whole
business will be lifted or raised into consideration. Lowering the exemptions, as you
know, there are plenty of people in favor
of that and so forth. These special subsidies,
if I may call them that, of one sort and
another, they have kind of passed unnoticed
through the years.

There are also lots of people who would like
to leave those things the way they are. Now,

I would like to say here for my part that I

want you to be sure whether you want to say

it or not, that you are interested in this

lowering of the exemptions but if the
exemptions are to be lowered, that then in
your judgment these are the things that have
to be done in all fairness.
H.M.Jr:

Yes.

Bell:

I think that is important because as I read

this thing --

Magill:

I put your exemption business in the number

one bracket, that if you are going to do this,
then you have got to do these others.

H.M.Jr:

That is right.

Bell:

This sounds like a new recommendation for a

new tax bill right from the beginning, to me,

144

- 28 -

and I think that is important.
H.M.Jr:

That is the beauty of bringing somebody in

from the outside that isn't here fighting
all the time back and forth, back and forth.

It brings in the fresh viewpoint. That is

why since you are here for this week, Win,
you can sit in and you may have some ideas,

too. I think that that definitely is the

way. I am not too tired to get that. (Laughter).
I think that is the reason, Dan, that is
as good an excuse as any. I am sick and

tired of being pussyfooted about this stuff.

Bell:

I agree with that too but this is not the
place to do that unless you have some good
excuse. You should have done that before
the Ways and Means.

H.M.Jr:

Well, does this make you happy?

Bell:

Absolutely. That doesn't sound so much like

asking them to rewrite the tax bill. That

was the impression I got this morning when I
read the statement.

H.M.Jr:

All right. Well, will everybody so disposed
be here at nine tomorrow morning, bright and
early?

3% hraft aug 6 4 P.M. 145
c

Mr. Chairman and Members of the Committee:

Two and a half
months ago, the President proclaimed the existence of an

unlimited national emergency. At that time he called upon "all loyal

citizens to place the nation's needs first in mind and in action, to
the end that we may mobilize and have ready for instant defensive use

all of the physical powers, all of the moral strength, and all of the
***** material resources of this nation".

In accordance with that proclamation, the people of this country
have responded splendidly

They have never been more ready to make

sacrifices for the common good. From all parts of the country there
have come encouraging signs, from labor and industry alike, that
American men and women are willing to subordinate their personal
the sake of

interests for the nation's defense.
The Congress has appropriated

billions for defense

purposes in the present fiscal year, and the American people understand
the need for those colossal expenditures. The Ways and Means Committee

of the House of Representatives has just completed work on a tax bill

to produce 31 billion dollars in additional revenue, an amount that
would have struck our people as staggering in former years. They have
not complained. They understand the need and they are willing to pay
the price of making their country impregnably strong.
The defense effort, however, has now grown to such giant propor-

tions that it dominates our entire economic life. In these days of

-2-

146

total war, a total defense is called for. Our economic and fiscal
policy must be integrated for defense, integrated as closely as our
army and navy and our planes that guard the skies. The bill which I

am glad to support today, H. R. 5417, is a step in this direction, but
it is not enough. Still bolder measures are needed now. In my opin-

ion, we need an all-out tax bill as an essential part of all-out
defense. The time has come for us to act as vigorously in fields of
taxation as we have acted, and intend to act, against the rising tide
of tyranny abroad.

When I appeared before the Ways and Means Committee of the House

on April 24, I outlined four principles that should govern a sound

tax program in days like these. I should like to repeat those
statethan
even more

ments now, as they are very brief and just as applicable as they were

last Spring. The first is that we should pay as we go for a reasonable
proportion of our expenditures. Secondly, all sections of the people
should bear their fair share of the burden. Third, our tax program
should help to mobilize our resources for defense by reducing the
amount of money that the public can spend for comparatively less

important things. And finally, our taxes should prevent a general
rise in prices by keeping the total volume of monetary purchasing
power from outrunning production. And these principles,

have

just said, are applicable now, but they are applicable in still greater
degree. For example, even the proposed increase of 31 billion dollars

147

in revenue, even out total goal of 12 2/3 billions from taxes, now
threaten to be inadequate in the light of vast expansion of defense
spending since last Spring. In the past month, the Congress has been

billions in additional expenditures for the army and

asked for

navy, on top of the 33 billions appropriated for all purposes during
the fiscal year just ended. I know that we shall be able to raise
still greater revenues if necessary -- and it will be necessary after
the presen t

this tax bill has been passed. We Americans can do this job, and any

job, if we but set ourselves to it.
Moreover, the price situation has taken an ominous turn since
I appeared before the Ways and Means Committee in April. I shall have

( more appropriate occasion next week to discuss these matters in
detail before the Banking and Currency Committee of the House. For

the present I would say only that we are no longer threatened with

inflation, we are in the midst of an inflationary process that will
move faster and faster unless it is checked by bold action. And taxes,
of course, are one way, one of the most effective ways, of checking
inflationary tendencies.
A

smee the spring
third change can be found in the steadily increasing demands
a

now being made by the defense industries for certain raw materials

needed in civilian production. In a number of commodities which I do

not need to list in detail, actual shortages for civilian uses are
threatened. It has become more essential than ever to use the machinery

148

C a tax bill to prevent delays in defense production or by the competition of defense and civilian goods. purchases with defense requirements.
I cite these changes because I am convinced that our thinking

in tax fields has not kept pace with events. We are still thinking
too much in terms of the burdens to be borne by this group or that.
many of us

a, are still more intent upon exemptions than on common sacrifice.

That is why, gentlemen, I have said that we need an all-out tax bill,
just as surely as we need an all-out military, economic and psychological defense for our country.

Now what do I mean by an all-out tax program? I mean primarily

one that will enlist the help of all our people in accordance with

heir ability to pay. I mean, as I said last April, that no section
of our people should be exempted from sharing the common task. We

all want the workingman, the farmer and the businessman to earn a fair

profit, but we do not want any one of them to profit unreasonably from
the country's needs. My own feeling is that every one should contribute,

and will be glad to contribute, for the safety of our beloved country.

-5-

149

There has been much public discussion, some of it ignorant
discussion, of those who have been called "the untaxed millions,"

those in the lowest income groups. It is said, for example, that
these millions of wage-earners are going scot-free because they pay

no direct income taxes. I do not need to stress the fallacy of such
statement; It is an established fact that those with incomes under

$1,500 already pay a larger share of their incomes in taxes of all
kinds, direct and indirect, than any other group up to the $10,000 to
$15,000 income class.

Moreover it is not generally realized that under the bill now
efore you the base has been broadened to add about 2,000,000 new

taxpayers. This was accomplished by beginning the surtax at the first
dollar of surtax net income. The 10 per cent earned income credit in

effect increases the exemption from normal tax. Since this credit is
not applicable in computing the surtax, the bill has in effect reduced
the exemption of single individuals by $88, of married couples by $222,
and of married couples with two children by $311 a year.
Nevertheless, a further lowering of exemptions would produce some
additional revenue, although not nearly as much as some commentators

would imagine. It would be some help in cutting down the purchasing
power of the small consumers of non-essential goods, although again not

as much as might be supposed. And finally, it would give millions of
Americans an opportunity to make a direct contribution through taxes

150

-6-

to the defense of their country. It would enable them to feel that
they were participating, personally and directly, in the defense

program. It is this last consideration which appeals strongly to me
now, A although the Treasury has opposed lower exemptions in the past.

Even now -- and I cannot stress this too emphatically -- a further
broadening of the income tax base should be strictly conditional upon

other new measures if it is not to be grossly unfair and destructive
of the national morale.

In the past, a very real obstacle to broadening the base has
been the administrative difficulty imposed upon the Bureau of Internal
Revenue and the individual taxpayer alike. The Bureau is already
bearing a colossal administrative load because the number of tax re-

turns has been increased from three million to fifteen million within
a very few years. The Committee can picture the burden that would be
placed upon our revenue collectors if they had to check S till more

millions of complicated tax returns every year.

Moreover, the difficulty for the individual taxpayer has been
real and undeserved. No matter how willing and cheerful a taxpayer

may be in making his annual contribution to this country, some of his
willingness and cheerfulness is bound to evaporate as he fusses with
the credits and deductions and exemptions which he is required to

compute on his tax return. In a letter sent on July 31 to the Chairman
of the Ways and Means Committee of the House, the President wrote that

151

"some way ought to be found by which the exemption of a single person
should be reduced to $750. " But the President added that some provision
should be made "for a straight simple payment of some small contribution to the national tax income through some simple agency and on some
simple form." "

I should like now to submit to the Committee a proposal which will,

firstly, prevent administrative difficulties at the Bureau of Internal
Revenue, and secondly, will enable millions of new taxpayers to "chip

in" willingly and proudly without the burden of filling out a complicated
tax return.

(

152
C

-8This proposal is that taxpayers with less than $3,000
of income before deductions be encouraged to file a very
simple income tax return in which income would be shown ,

but no deductions would be taken. The law would provide a
schedule of taxes in which the tax would be the same for

income within narrow blocks of perhaps $25. Thus the single
taxpayer with $1,115 of income would find his tax already
computed for him on a table in which the tax would be shown
for incomes from $1,100 to $1,125. The tax schedules

placed in the law would be computed to give a slightly
lower tax in the typical case than the taxpayer would have
to pay under present methods of computation, a flat allowance
being made to take care of deductions. Because of the cases
where there are large tax payments, interest payments,

capital losses, business losses and other types of deduction,

the taxpayer should be given the option of filing a regular
return and computing his tax in the regular way. The great

majority of the taxpayers, however, would find it to their
advantage from the viewpoint of simplicity to file the
special simplified return.
Further refinements and modifications of this proposal
may be found to be desirable by your Committee, but it is
my feeling that if the personal exemptions are to be lowered

153

some plan of this kind is imperative for the convenience

both of the taxpayer and of the administrative officials.
As I previously said, this is an all-out defense
program and necessitates an all-out tax program. If we
are going to lower the personal exemptions 80 that single
persons with $15 a week income and married couples with

$30 a week income will be subject to the income tax, we

must have an all-out program in other respects also. We
must get at ability to pay taxes wherever it may be found
and we must use taxation for the encouragement of the

defense program wherever it is possible.
The bill submitted to the House by the Committee on
Ways and Means contained a provision for the mandatory

joint returns of husbands and wives, That provision,
which was stricken from the bill by amendment on the floor
of the House, went somewhat too far in my opinion. Where

husband and wife are both contributing through their

labors to the support of the family, they should be given
some special relief from the joint returns requirement.

If this is done, the joint returns provision appears to
be an equitable method of taxation. It will remove the
discrimination now present in favor of the taxpayers of
the community property States as well as the opportunity

154

- 10 to avoid the tax through the distribution of property
by 6 rust and otherwise within the family unit.
We surely cannot look with complacency on the

lowering of the personal exemption as long as these
discriminations remain in the income tax law.
Another vital element in a tax program to accompany
an all-out defense program involves a change in the excess

profits tax. The capacity of a corporation to pay taxes
18 effected by the rate of its return on its investment.
A highly prosperous, well established corporation which
has been making 30, 40, 50 percent or more on its invested

capital has a much larger ability to pay taxes than a
corporation which has been earning only 3, 4, or 5 percent
on its invested capital even though the dollar incomes of
the two companies are the same. Heavy taxes on high returns

of profit will not cause the business receiving them to be
liquidated or discontinued for lack of a minimum necessary
profit which may occur when heavy taxes are imposed on

meager profits. Application to corporations of taxation
in accordance with ability to pay calls for higher taxes on
the profits of those corporations which have the higher
rates of return.

155
C

- 11 The present excess profits tax as well as the bill before
you placed special heavy taxes on profits which are in excess
of the profits received during the years 1936-1939 prior to

the defense program. This is all to the good -- is indeed
essential. It is, however, not enough. A corporation may
make 50 percent profit on its invested capital and not be sub-

ject to the excess profits tax if the profit is not in excess
of 95 percent of its average profits during the base period
years 1936 to 1939.

This is not a matter of minor importance. Substantial
numbers of companies are in the high-profit group. One out

of five profit-making corporations with assets of $1 million
and over averaged more than 10 percent net income on their

reported equity capital during the years 1935 to 1938 and
one out of twenty-five companies earned more than 30 percent.

These companies can continue to earn profits at virtually

these rates without paying excess profits tax under either
the present law or the Committee's tentative plan.

Failure to apply excess profits taxation to such
excess profits is unfortunate also because of the uneven
way in which competing businesses are affected. Concerns
which have been making high returns in the base period
years are given a competitive advantage over newly organized

156
C

- 12 concerns or concerns which have been struggling to establish

themselves. They may receive free from excess profits tax a
much higher rate of return than their new and growing

competitors. The effect is to confirm monopolies in their
control and to protect well established businesses against
competition.

There is another important reason for revising the
excess profits tax. In recent months there has been a
noticeable tendency for various groups including business
men, farmers and laborers, to endeavor to secure higher

rates of return in profits, prices and wages. At the
present time, however, with the existing pressures for

inflation, widespread efforts to increase profits, prices,
and wages will result not only in larger purchasing power

and thus still greater pressure on our limited supplies

of civilian goods, but also in higher costs for the
defense program and for goods which civilians purchase.

These higher costs in turn necessitate increases in
prices and these in turn give rise to new demands for
higher wages and higher prices. The spiral goes up
and up.

If we are to expect to stop or prevent this spiral
we must be able to show those who receive modest incomes

157
- 13 -

from their labor or their production that excessive profits
are not being received by great corporations.

Another element in a tax bill IN for times such as
this involve the excise taxes. In more normal times excise
taxes have little to recommend them except that they produce

revenue. In a period such as this, however, excise taxes
may become a very helpful supplement to price control.
Demand for consumers' goods, especially durable consumers'

goods, may compete with the defense program. In such cases

it becomes necessary to cut off the supplies of these goods.
Excise taxes may serve a valuable purpose either in reducing
the demand of producers and consumers for these scarce

commodities or to absorb the windfall profits resulting
from price rises when supply is scarce relative to demand.
The Government instead of the middleman should receive the

profits due to high prices. Although the achievement of
this objective is by no means a simple matter, adjustments

within the tax bill along this line should be seriously
considered by your Committee.

158

- 14 -

There are other features of the tax system whose
continuance cannot be tolerated if we are going to make

an all-out effort. They are matters which the Treasury
has brought to the attention of the committees from time
to time. I will mention but two of them.
The first is the exemption from income taxation

afforded to the interest on State and municipal securities.
Certainly in an effort to finance national defense in this
emergency, such exemption should not be permitted to
continue. Tax exemption should be removed with respect

to the interest on future issues of State and municipal
securities, even as we have removed it with respect to
Federal securities.

The depletion allowed to extractors of certain

natural resources, for example, oil, are iargalxx larger
than can be justified on any reasonable basis of tax
equity. These percentage depletion changes should be reexamined and adjusted 80 that the equitable tax exemotion
which they now afford will be removed.

It is very important that the tax bill before you
be passed as promptly as possible. Income taxpayers and

excess profits taxpayers should know as quickly as possible

what their taxes on 1941 income and profits are going to
be 80 that they may make intelligent plans for meeting

159

- 15 -

the increases which the law will impose. The excise taxes
and the estate tax cannot be imposed retroactively and

every day's delay in the passage of this tax bill costs
the Treasury several million dollars.
Because of the necessity for promptness, I have not
suggested that all of the recommendations which I have made

can be put in this tax bill. Another bax bill, however,
will be necessary to apply to next year's income and business.

Such a tax bill will be necessary for a number of reasons. I have
Already pointed out the manner in which our defense program
has excanded and is expanding. We need to raise the money

to finance this program. I have pointed out, also, the price
situation and the threat of inflation which confronts us.
A strong fiscal policy is one of the most important methods

of relieving inflationary pressures by taking for the Government
purchasing power that otherwise would be used to try to
purchase non-existent goods.

This tax bill and the next one will be important factors

in controlling the price situation. They will not in themselves,
however, be sufficient. The controll of inflation 1s too
great a load for fiscal policy alone to carry. There should
be additional action also along a number of other lines and

as previously indicated I shall go into this subject at a more
appropriate time and place.

160

- 16 It should be stressed, however, that although this is
an onerous tax bill, the alternatives to heavy taxation
are much more onerous.

161

August 6, 1941

My dear Averill:

I hope to see you soon and hear from you first
hand some of the many interesting things that you must

have learned while in England.

Mr. Harold Hochschild, President of the American
Metals Company, and a very old and intimate friend of
mine, came in to see me today. Mr. Hochschild is in a

position to get out of his business and devote his entire
time at a dollar a year to the Government. He is a
bachelor, about fifty years of age, and would love to
have something to do, possibly in England. It occurred
to me that you might be able to make use of him.

In the early days of this show when I was looking

after strategic materials for the President, one of the

jobs that I had to do was to stop molybdenum from going
to Japan and Russia. I asked Mr. Hochschild, the members
of whose family are the largest stockholders in Climax
Molybdenum, whether they would voluntarily agree to discontinue shipping any molybdenum to Russia and Japan.

They unhesitatingly agreed to do this, notwithstanding
the fact that these two countries were their best customers,
and at the time it meant a considerable financial sacrifice
to the company. I am telling you this merely to give you
an idea of the kind of man you would find Mr. Hochschild
to be.

If you know of a spot where Mr. Hochschild could
be put to work, either in England or in the United States,
I am confident that he can do a good job.
Yours sincerely,
(Signed) E. Morgenthan, 3

Mr. W. Averill Harriman,
The Carlton Hotel,

Washington, D.C.

By Messenger

8/6/41

5.15for

162
August 6, 1941

Dear Harold:

I am sending you herewith a copy

of my letter to W. Averill Harriman.
Yours sincerely,
(Signed) Henry

Mr. Harold Hochschild,
Sixty-one Broadway,
New York, New York.

163
HAROLD K. HOCHSCHILD
SIXTY-ONE BROADWAY
NEW YORK

august 7. 1941.
Dear Heary ,

Thanks ever do much
for

the very about fine letter to

you wrote me

werell Horriman I shall
(wait hopefully untre I
Dear from you or him .

Sincerely

Harold

164

August 6, 1941

Dear Frank:

The other night you made the statement to me
that during the month of July we had produced
2,000 planes in this country. You will remember

that I questioned your figure.

I now have received a confidential, preliminary

report from the Aircraft Section of OPM which shows

that production of all military planes in this

country during the month of July was 1,455, or 449
below their estimates. Of the 1, ,455 planes produced,

I would like to point out that 626 were so-called
tactical planes, and 829 were trainers.

tar

Without wanting to be/argumentative, I repeat
my statement that I think there is something wrong
with our airplane production.
Sincerely yours,
(Signed) Henry
By-Messenger

Honorable Frank Knox,

Secretary of the Navy,
Washington, D.C.

Confidential

By Messenger them
8/7/41
9:30am

missMichen 8/7/41

165

August 6, 1941

Dear Mr. Wouk:

Ever since last Wednesday's Treasury
Hour I have been wanting to send you a line
to tell you how much I enjoyed your tribute
to the Marines.

It will interest you to hear that I
brought a record of your ballad to the White
House the other day and played it for the
President. He was just delighted with it.
I send you my thanks and congratulations. With all good wishes,

Sincerely yours,
(Signed) E. Morgenthan, 32.

Mr. Herman Wouk,

820 West End Avenue,
New York, N. Y.

Copier to Mr. Thompson
FK/hkb

8/6/41

166

August 6, 1941

Dear Mr. Carden:

I am delighted to see that your company
has put a Defense Savings Bond announcement on the

wrapper of each package of Domino cigarettes. This

will be a real help to us in making the American
public conscious of Defense Savings Bonds. I am

most appreciative of this fine contribution of
yours to the defense of the country.
Sincerely yours,
(Signed) E. Morgeathan, w

Mr. R. C. Carden, Jr.
General Sales Manager,

Larus & Brother Company, Inc.
Richmond, Virginia.

File to Mr. Thompson
FK/hkb

8/6/41

167
NATIONAL COUNCIL OF NEGRO WOMEN, INC.

Mrs. Mary McLeod Bethune, Founder and

National President
August 6, 1941

Mr. "illina Pickens
Room 408 - Sloan Building

709 Twelfth Street, N. ..
Washington, D. C.

by dear Mr. Pickens:

I feel that the position you hold, at a time
like this, is of vital importance. The National Council
of Negro Women Incorporated, representing 500,000 women,

joins heartily in your program of selling defense bonds.
Your stirring message to the women of the
National Association of Colored women in Oklahona was

most inspiring. These women represented forty-two states
and through our groups and other activities, we shall
leave no stone unturned in helping you to get those bonds
sold in every home.

As the Director of the Office of Negro Affairs
in the National Youth Administration, I an placing our
whole machinery at your service. I an advising all of our
Administrative Assistants in Charge of Negro Affairs and
through them our project supervisors throughout the states
to give information to the thousands of youth whom they

contact in order that they may share in this part of our

defense program.

Sincerely yours,

Mary McLeod Bathune

PRESIDENT - Director, Division of
Negro Affairs, National Youth Administration

168

Mr. Houghteling

August 12, 1941

William Pickens

I am sending copies of this memorandum to those who my find
an interest in our program. Mr. Gusack and Mr. Paige asked me to
always give them any items that might be good for publicity.

Dr. Glenn T. Settle, President of the "Wings Over Jordan"
singers, has asked MO to speak for their broadcast the last Sunday in
August which is the 31st. I think the program comes on at 9:30 a.m. EST

over the National Broadcasting System. It is a very big hook-up and I
think a few minutes will enable us to get a good message over to a good

many people. So as to get most in the time allowed, I shall write out a
careful statement, and will give a copy of it to Mr. Gusack and one to Mr.
Paige.

CONFIDENT

UNITED STATES WAVINGS BONDS

Comparative Statement of Sales During
First Four Business Days of June, July, and August, 1941
(June 1-5. July 1-5. August 1-5)
On Basis of Issue Price

(Amounts in thousands of dollars)

:
:

:
:
:

$ 7,598

$ 6,825

$ 253

$ 773

Series E - Banks

13,523

13,348

9,277

175

4,071

Series E - Total

21,375
4,708
31,114

20,945
5,082
33,035

16,102
6,528
41,877

430

4,843

374

- 1,921

- 1,446
- 8,842

$57,197

$59,063

$64,507

-$ 1,866

-$ 5,444

Series F - Banks
Series G - Banks
Total

Office of the Secretary of the Treasury, Division of Research and Statistics.

$ 7,851

Series E - Post Offices

July

July
over

: June

over

August
over

July

June

July

August
over

Percentage of Increase
or Decrease (-)
:

:
:

: August

or Decrease (-)

Item

Amount of Increase

Sales

June

3.3%

11.3%

1.3

43.9

2.1
7.4

30.1

- 22.2
- 21.1

- 5.8
-

- 8.4%

3.2%

August 6, 1941.

Source: All figures are deposits with the Treasurer of the United States on account of proceeds of
sales of United States Savings Bonds.

Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.

CONFIDENTIAL
UNITED STATES SAVINGS BONDS

Daily Sales - August 1941
On Basis of Issue Price

(In thousands of dollars)
Post Office
Bond Sales

Date

All Bond Sales

Bank Bond Sales

Series E

Series F

Series G

Total

Series E

Series F

Series G

Total

$ 1,467

$ 3,296

$ 1,163

$ 7,586

$ 12,045

$ 4,763

$ 1,163

$ 7,586

$ 13,512

1,500

3,030

726

6,101

9,857

4,530

726

6,101

11,357

3,606
1,278

4,376
2,822

1,892

16,361
11,084

7,983
4,099

1,892

928

10,092
7,334

928

10,092
7,334

19,967
12,362

$ 7,851

$ 13,523

$ 4,708

$ 31,114

$ 49,346

$ 21,375

$ 4,708

$ 31,114

$ 57,197

August 1941
1

Total

Office of the Secretary of the Treasury, Division of Research and Statistics.

August 6, 1941.

Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of
United States Savings Bonds.

Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.

171

DEFENSE SAVINGS STAFF
ADVANCE NOTICE RADIO PROGRAMS

WEDNESDAY - AUGUST 6, 1941

Program:

3:15 - 3:30 P.M.
Stella Dallas

Station:

WRC and NBC Red Network

Time:

Program:

5:30 - 5:45 P.M.
Paul Sullivan News

Station:

WJSV and CBS Network

Time:

6:30 - 7:00 P.M.

Program:

Meet Mr. Meek

Station:

WJSV and CBS Network

Time:

Program:

7:05 - 7:15 P.M.
Daniel W. Bell, Under Secretary of Treasury Department,
Speaks on Treasury Department Tax Savings Plan.

Station:

WINX - Washington, D. C.

Time:

Program:

7:30 - 8:00 P.M.
Plantation Party

Station:

WRC and NBC Red Network

Time:

Program:

9:00 - 10:00 P.M.
Kay Kyser and His Kolledge of Musical Knowledge

Station:

WRC and NBC Red Network

BULOVA TIME SIGNALS PROMOTE DEFENSE BONDS AND STAMPS REGULARLY

NOW AT THE RATE OF 428 ANNOUNCEMENTS DAILY OVER 134 RADIO STATIONS.

172 TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

FROM

August 6, 1941.

Secretary Morgenthau

Mr. Gulick

I attach an unusually interesting address recently made by
Rowland Egger, Director of the Budget of the Commonwealth of
Virginia.

L.G.

Talk given by Rowland Egger, Director of Budget,
Governor's Office, Richmond, Virginia.
To:
Southern Interstate Assembly
July 19. 1941.

173

Mr. Chairman, Ladies and Gentlemen:

The remarks which I shall have to offer addressed to financial planning for the
future are predicated upon a number of assumptions, with which I think most of us

will find ourselves in substantial agreement. Since we are likely to disagree
about almost everything else, I hasten to try my hand at defining the area of noncombatancy:

(1) Governmental finance is essentially indivisible, and it is no
longer profitable, if indeed it ever has been, to try to think of
local finance, State finance, and national finance in separatist and
compartmentalized terms:

(2) In time of national crisis the Federal government has the complete
right-of-way in matters of taxation;
(3) The State and local governments, under the leadership of the Federal

government, have a joint responsibility for conducting their fiscal and
administrative affairs in such manner as will promote the national defense
and security, implement the national rearmament, and prepare themselves

for as effective participation as possible in readjustment to a peace time

basis of operations.

It follows that financial planning must be simultaneously attacked along two

lines: first, short-term fiscal planning to win the war; second, long-term fiscal
planning to avoid losing the peace.

The July 9th issue of Defense, in its statistical summary of progress in the
defense program, reports that total authorizations to date come to $38,651,000,000,

excluding British purchases but including lease-lend commitments. My private fortune
tellers are now talking about an $80 billion overall defense program cost, and it
occurs to me that many months have passed since I have seen anything in the papers

about the debt limit. Moreover, these figures may, in the main, be regarded as

reflecting a construction program - an investment in capital equipment - if this is

not too great a distortion of the idea of a producers' good. After the ships, planes,

174

tanks, bases, guns, forts and other facilities have been acquired, they must be
operated and maintained. Again the fortune tellers are murmuring of $6, $8 and
$10 billion per annum operating expenditures. Without anyone committing himself

on the details of things to come, let us admit that a tidy sum of money, aggregating
a considerable percentage of the national income, however high the national income
goes, will be required to win the war.

Obviously, if State and local governments are to bring their fiscal programs,
both short - and long-run, into harmony with the imperatives of Federal finance, some

idea of the basis of Federal fiscal policy is necessary. Several months ago, during
the course of an extremely provocative conference on National defense and State finance

at the University of Alabama, Professor Simeon Leland outlined a series of fiscal
policies which he believed applicable to the various stages of the defense effort.
He pointed out that in the early stages of the defense program, before optimum
employment had been reached, defense should be financed in large part by loans secured

to the greatest degree possible from idle funds. Taxes that interfere with consumption
should be avoided, unemployment spread among the labor supply, overtime minimized,

and vage rate increases kept down. Aggregate money wages, he felt, would rise first
from re-employment and later from increased production and increased man-hours. Tax
revenues would increase from the increases in production and employment, without

increases in tax rates or the addition of new taxes.
On reaching optimum employment. he proposed a rapid shift from loan to tax
financing, and suggested that such loans as are necessary should come from current

savings and be so sterilized as not to be available for credit expansion. Punitive
taxes, such as severe taxation of personal income surpluses above living costs,

selective consumption levies, etc., should be levied to curtail individual consumption,
and to prevent individuals from bidding against the government for defense goods and

services. Implicit in this philosophy, of course, is price fixing and, eventually

175

perhaps, rationing. He recognizes the difficulty but does not admit the impossibility
of framing excises which would curtail consumption without affecting production. On
the

part of State and local governments, elimination of all possible construction not

directly related to defense would be called for. Most importantly of all, salaries
and wages would be kept down, and such increases as were permitted would be sterilized
to avoid competition with defense requirements.

It is necessary in preparing for the third stage of our fiscal policy, that the
effects of post-war readjustment be anticipated, and that plans be laid for compensating
their deflationary tendencies. A backlog of consumer demand and, equally important,

of consumer purchasing power, will obviously facilitate the transition to the ways
of peace and reduce both its monetary and social costs. Already a great deal of
consideration has been given to ways and means for curtailing or avoiding increases
in purchasing power now in the hands of private consumers, and of bringing such

deferred purchasing and consuming power into action at the time of national readjustment
John Maynard Keynes has proposed a highly ingenious plan for financing the whole cost

of the war out of deferred wages, with incidental assistance from the taxing power.
Whether the idea of wage deferment on so comprehensive a scale is practicable or not

is irrelevant: the essential analysis of the problem is correct. If grave economic
dislocation is to be avoided, all levels of government must bend their efforts to the
minimizing of activities which, in the present emergency, bring them, or permit private
individuals to come. into conflict with the defense program's needs for men and
materials. Moreover, consumer demand and consumer purchasing power must be stored

If for the future, to be loosed in a planned and purposeful way when defense

activities may with safety and propriety be curtailed.

All this is much easier said than done. It would be difficult enough in a
unified and totalitarian state, and its realization in a political order dominated
by federalism and damned by particularism is a challenge to the highest order of

176

statesmanship which this emergency can evoke. We did not do it in 1933-36, with the
result that many millions of Federal dollars were expended merely in compensating

for state and local withdrawal from public works construction, so that the significant
effects of pump-priming were not only greatly reduced but unconscionably long

delayed. In 1933-36 the cost could be calculated in terms of a billion dollars
or so that might have been saved through sooner recovery if we had worked together.

In 1941-44 the cost for the same failure may well be calculated in terms of the
loss of our national liberty, while reparations and the cost of a German army of
occupation would not be inconsequential.

There are many practical difficulties in the way of coordinating state and
local financial operations within the framework of what appears to be a fairly

accurate outline of federal grand strategy. Most states and localities operate so
close to the margin, and on such a hand-to-mouth fiscal basis, that cyclical financial
policies except on an extended deficit financing basis are wholly impossible. Moreover, their tax bases are subject to very real geographical, administrative and

political limitations. Perhaps the most important single barrier is the general low
level of imaginative powers of fiscal officers; indeed, much of the success or failure
of our attempts to lead our economy along socially productive channels hinges on the

extent to which the vision of public administrators is capable of rising to meet the
challenge of our times.

Some things can be done. The most important immediate problem is a clear and

agreed statement of our objectives and the articulation of those objectives in terms
which can pierce the outer defenses of even congressmen and the Secretary of the

Treasury. I suggest a few for discussion:

1. A ceiling on prices - now. This country is drifting dangerously close
to more price inflation than sound economic policy can tolerate. The spectacle in order

of a national congress which sidetracks the defense price control bill makes
to orate ad nauseam on the subject of daylight saving time is one which
at least a few of Hitler's arguments very hard to answer.

177

2. A ceiling on real wages - now. Please note that there is
objection to increasing the future purchasing power of wage no
increased payments must, in my judgment, be sterilized so that earners; they

do not
purchasing power in the hands of private citizens
until
theput
endincreased
of the emergency.

3. A rapid shift to complete tax financing of the defense program.
In my judgment we are rapidly approaching the end of the initial defense

period, and with it, an end to the time when deficit financing is justifiable. Such additional taxes should aim deliberately at the curtailment of private purchasing power.

4. The institution of a drastic system of compulsory saving and forced
loans, not for revenue but to control private purchasing power.

5. Drastic curtailment of payment in cash or other unsterilized form
of farm parity and other subsidies not in the nature of subsistence guarantees.
6. Development and implementation of effective machinery for continuing
clearance among federal, state and local fiscal agencies which will assist
in keeping the tracks clear for Uncle Sam, but which will permit necessary
state and local freight to move in the interim.

These, obviously, are policies which the federal government alone can put into
operation. In my judgment they are essential to the national defense; although their

short-run effects may be restrictive of certain types of state and local action, and
may require some considerable planning and perhaps no little hardship at the moment,

their more remote effects will be in the interest of sounder and more vital state and
local government.

Under Federal leadership, the states and localities must be prepared to take a
very enlightened and long-term view of their problems. They must be prepared to
surrender many temporary advantages which the defense program has produced, and to

defer to A later date many expansions and improvements which now, for the first time

in many years, are within their power, at least as long as the defense effort is
sustained, to finance from current revenues. Some of the policies which prudence
would seem to demand be adopted by state and local authorities on a nation-wide scale
are:

1. A virtually complete cessation of all non-defense public works;

2. A stiff policy against wage increases in the public service, which is

178

a truly heroic undertaking by a government in times of rising revenues;
3. The establishment and protection of large reserves from current surpluses,
and the avoidance of expansion in recurrent obligations such as those for
maintenance and operation;

4. The extensive use of police and regulatory powers to prevent supply constrictions, 80 that price controls may be more effectively administered with

general public support;

5. The repeal of trade barriers and price maintenance laws;
6. The complete restudy and replanning of taxation and revenue systems, in
collaboration with the Federal government, so that swift action in accommodation
of tax measures to economic readjustment at the end of the defense effort may be
facilitated;
7. The development of a comprehensive reserve of public works and public

service projects, and the pre-planning of such projects to facilitate quick
starting of actual operations when economic conditions require;

8. The development of facilities for a thorough reappraisal of administrative
methods and procedure, administrative organization, and the general fitness of
administrative institutions to perform efficiently and economically the large
tasks which will fall upon them in the post-defense readjustment.
9. The implementation of facilities for state and local physical and social
planning, so that the post-defense program can be devoted to truly productive
and socially desirable programs of public works and public services, and leafraking and muck-raking minimized.

There are many other lines along which federal, state and local government must

develop coordinated policies if the emergency is to be decisively faced, and each of
the proposals I have listed is susceptible to almost limitless embroidering and

embellishment. I will not take the time of this audience in exploring the nooks and
crannies of the highways and by-ways we have encountered. Certainly, it is clear that
cooperation and unified action demanding a high order of administrative skill and integrity at all levels of government is demanded in full and unstinted measure. The
time has come to forget about states' rights and local autonomy, and to remember

states! duties and local responsibilities. The defense of the Anglo-American way
of doing things, and the maintenance of the Americas for those who love liberty and
respect the dignity of man are of vastly greater importance than the preservation
of existing patterns of political power in Raleigh, or Richmond, or anywhere else.

179

-The challenge of our generation is to the imagination of those to whom the
management of our federal, state and local governments are entrusted. Let those

of us called on to serve obscurely in the rear ranks of the public service take
care that our trust is not betrayed in this emergency by small vision, by small
thoughts, or by small actions.

1804
AUG 6 1941

My dear Mr. Chairmans

I propose, subject to your continuing approval,
as provided in the Executive Order establishing the
Economic Defense Board, to designate Mr. Harry D. White,

Assistant to the Secretary, as my alternate on the
Board.

Sincerely yours,

(Signed) 1. Morgenthan, 32.

in phane concernation
with Hallace 8/13/41
Honorable Henry C. Wallace,
Chairman, Economic Defense Board,
Washington, D. C.

Mr. Thompson

Copy to
MNT: da

181
AUG 5 941

My dear Mr. Presidents

Replying to your letter of July 30, I shall be
glad to serve on the Economic Defense Board and to

render all possible assistance and cooperation in

facilitating the work of the Board.
Faithfully yours,

(Signed) E. Morgenthan. Sir

cc- to Mr. Thompson

The President,
The White House.

By Messenger 3:45
8/5/41
WNT: da

dangle

182
THE WHITE HOUSE
WASHINGTON

July 30, 1941

My dear Mr. Secretary:

In order to assure effective coordination of
our economic defense efforts, I have today established
an Economic Defense Board under the Chairmanship of Vice

President Wallace. The Treasury Department is to be
represented on the Board by you or your designated representative. A copy of the Executive Order establishing
this agency is attached.

I anticipate that the Board will prove to be

an effective means of unifying and strengthening our
economic defense plans and policies. I shall be grateful
for the full assistance and cooperation of your Department
in facilitating the work undertaken by the Board.
Very sincerely yours,

The Honorable,

The Secretary of the Treasury.
Washington, D. C.
Enclosure.

183

EXECUTIVE ORDER

ESTABLISHING THE ECONOMIC DEFENSE BOARD

By virtue of the authority vested in me by the Constitution and statutes of the United States, by virtue of the existence of an unlimited national energency, and for the purpose of
developing and coordinating policies, plans, and programs designed

to protect and strengthen the international economic relations of
the United States in the interest of national defense, it is hereby
ordered as follows:

1. The term "economic defense," whenever used in this

Order, means the conduct, in the interest of national defense, of
international economic activities including those relating to
exports, imports, the acquisition and disposition of materials and
commodities from foreign countries including preclusive buying,
transactions in foreign exchange and foreign-owned or foreign-con-

trolled property, international investments and extensions of credit,
shipping and transportation of goods among countries, the international

aspects of patents, international communications pertaining to commerce, and other foreign economic matters.

2. There is hereby established an Economic Defense Board

(hereinafter referred to as the "Board"). The Board shall consist
of the Vice President of the United States, who shall serve as Chairman, the Secretary of State, the Secretary of the Treasury, the Seeretary of War, the Attorney General, the Secretary of the Navy, the
Secretary of Agriculture, and the Secretary of Commerce. The Chair-

ran may, with the approval of the President, appoint additional men-

bers to the Board. Each member of the Board, other than the Chairman,
may designate an alternate from among the officials of his Department,

subject to the continuing approval of the Chairman, and such alternate
may act for such number in all matters relating to the Board.

3. In furtherance of such policios and objectives as the
President nay from time to time determine, the Board shall perform
the following functions and duties:
a. Advise the President as to economic defense mea-

sures to be taken or functions to be performed
which are essential to the effective defense of
the Nation.

b. Coordinate the policies and actions of the several
departments and agencies carrying on activities

relating to economic defense in order to assure
unity and balance in the application of such measures.

C. Develop integrated economic defense plans and programs for coordinated action by the departments and
agencies concerned and use all appropriate means to

assure that such plans and programs are carried into
effect by such departments and agencies.

d. Make investigations and advise the President on the
relationship of economic defense (as defined in
paragraph 1) measures to post-war economic recon-

struction and on the stops to be taken to protect
the trade position of the United States and to expedito the establishment of sound, peace-time international economic relationships.

184

-2e. Review proposed or existing legislation relating
to or affecting economic defense and, with the
approval of the President, recommend such addi-

tional legislation as may be necessary or desir-

able.

4. The administration of the various activities relating

to economic defense shall remain with the several departments and
agencies now charged with such duties but such administration shall
conform to the policies formulated or approved by the Board.

5. In the study of problems and in the formulation of
programs, it shall be the policy of the Board to collaborate with
existing departments and agencies which perform functions and ac-

tivities pertaining to economic defense and to utilize their

services and facilities to the maximum. Such departments and agen-

cies shall cooperate with the Board in clearing proposed policies
and measures involving economic defense considerations and shall
supply such information and data as the Board may require in per-

forming its functions. The Board may arrange for the establishment

of committees or groups of advisers, representing two or more departments and agencies as the case may require, to study and develop
economic defense plans and programs in respect to particular commo-

dities or services, geographical areas, types of measures that might
be exercised, and other related matters.

6. To facilitate unity of action and the maximum use of
existing services and facilities, each of the following departments

and agencies, in addition to the departments and agencies represented

on the Board, shall designate a responsible officer or officers, subjeet to the approval of the Chairnan, to represent the department or
agency in its continuing relationships with the Board: The Departments of the Post Office, the Interior, and Labor, the Federal Loan
Agency, the United States Maritime Commission, the United States
Tariff Commission, the Federal Trade Commission, the Board of Governors of the Federal Reserve System, the Securities and Exchange
Commission, the National Resources Planning Board, the Defense Communications Board, the office of Production Management, the Office

of Price Administration and Civilian Supply, the Office for Coordi-

nation of Commercial and Cultural Relations Between the American
Republics, the Permanent Joint Board on Defense, the Administrator

of Export Control, the Division of Defense Aid Reports, the Coordin-

ator of Information, and such additional departments and agencies
as the Chairman may from time to time determine. The Chairman shall

provide for the systematic conduct of business with the foregoing
departments and agencies.

7. The Chairman is authorized to make all necessary arrangements, with the advice and assistance of the Board, for discharging and performing the responsibilities and duties required to
carry out the functions and authorities set forth in this Order,
and to make final decisions when necessary to expedite the work of

the Board. He is further authorized, within the limits of such

funds as may be allocated to the Board by the President, to employ
necessary personnel and make provision for the necessary supplies,

facilities, and services. The Chairman may, with the approval of
the President, appoint an executive officer.

FRANKLIN D. ROOSEVELT

THE WHITE HOUSE,

July 30, 1941.

185

FROM: MR. GASTON'S OFFICE
TO:

8/6/41

The Secretary

The V-126, a Douglas amphibian piloted by

Stonerock, enlisted pidot, and with a crew
of two, is unreported since 10 a.m., Pacific
time (1 p.m.EST). . She was crussing west of the

Farallones, off San Francisco, when last reported.
Coast Guard boats and planes and two squadrons

of Navy plabes are searching.

mas

186

Ingust 6. 1942
Filee

Mr. Cochres

After talking with Mr. Bell, and after raising the question at the Foreign

Pasts Centrol mosting yesterday afternoon. I telephoned Mr. Acting

Financial Commenler to the French Babasay, is New Test, this morking. I referred
to his inquiry as to how the treasury Department would feel toward the Bask of
Presso investing is Treasury bills w to $800,000,000 of dollar funds which the
lask of France new has on deposit with the Federal Reserve Bank.

I told Mr. laccur-Gayet that Ms. Bell preferred that Mr. Insur- take

his our decision ea this subject. and inficeting that the Present desired to
interpose as objection. Identice Foreign Funds Centrol interposed as objection.
I told Mr. Incour-Guyet that he should got is touch with Mr. Behort Reuse, the
Vice President of the Federal Reserve Bank of New Tests is charge of Government

security and eyes market operations.

August 6. 1941
Files

Mr. Cochran

STRICTLY CONFIDENTIAL
Immediately fellowing the meeting with the British held in the Secretary's
office yesterday afternoon at 3 o'clock, Mesers. Phillips and Bewley stepped in
Under Secretary Bell's office for a few minutes to talk with Messrs. Bell and Cochran,
with reference to the information which Mr. Bewley had given Mr. Coohran on
August 2, 1941, and particularly that set out in Mr. Eden's cablegram of July 25

to Viscount Halifax, which message was attached to Mr. Cochran's nemerandum of

August 2, it was agreed that Mr. Cochran should consult the Foreign Funds Centrol
Committee with respect to limison with the Chinese Government on exchange control.

At the 4:30 meeting in Mr. Foley's office Mr. Cochran reported the information
which the British had submitted and also the conversation with Nesers. Phillips and
Bevley. It was agreed that no immediate decision should be taken as to whether
the United States would welcome the idea of a representative of the Chinese Exchange
Control Committee coming to Washington to act as liaison with our Foreign Funds
Control. It was thought advisable to watch developments a while longer, and parti-

cularly to avait reports from Mr. Fox. in China, and the arrival of Sir Otto Niemeyer

on route from London to Chungking. Mr. Cechran told the Committee that Hiemeyer was
BOY on route and should be in Washington next week. Dr. White reported concerning

his conversations with Dr. Soong. The question is definitely before us as to whether
advice on Chinese freesing questions should be obtained directly from the Chinese
labassy, or from Dr. Seong. or from some representative whom the Chinese Ministry
of Finance might send here in the name of the Chinese Exchange Control.

This morning I received from Mr. Bevley, Financial Counseler of the British
alassy. the attached letter and its enclosures, concerning the Chinese freesing
problem.

At 10:30 this morning I telephoned Sir Frederick Phillips, referring to our
conversation of yesterday, and to Mr. Bevley's letter and enclosures. Sir Frederick

agreed that there was no urgency in our indicating the American position with
respect to limison with the Chinese Central Exchange Committee. particularly in view
of the third paragraph of the attached message from Chunging to London, dated
August 2. 1941.

EMC:1ap-8/6/41

188

THE BRITISH SUPPLY COUNCIL IN NORTH AMERICA

Dex 680

Benjamin Freaklis Station
Washington, D. c.

5th August, 1941.

My dear Cochran,

I enclose the giet of three telegrame from
London about the Ohinese freesing problem.

No doubt you will keep us informed of anything
which would be of interest to us.
Yours sincerely,

/s/ S. I. Bowley
(T.K. Bowley)
H. Merle Cochran, Esq.,

United States Treasury,
Washington, D.O.

COPY:NEW 8/6/41

189
0

My two immediately following telegrame centata Lone of
telegram communicated to us by Chinese
We have told P.W.Kno

1) that the suggestion that United States Government
have unfresen assets of no Chinese Bask except Central Bank

does not agree with our information and should be verified
through Chinese Babasay is Washington.

2) that we think delegation of powers necessary as
working of exchange control system would be impossible with
bottle neek apparently contemplated by Energy

COPY:MEN 8/6/42

190
0

Telegram to Dr. N. N. lung free Dr. P. V. Ine dated
July 29th.
Begins.

Freezing of Chinese assets.

Exemption will be gives forthwith to sterling accounts of
four Chinese Government Banks and say account of National Government or of its organs or agencies ... Chinese Government Purchase
ing Commission, Chinese Babasay etc.

2. What other Chinese accounts (e.g.) of non-Government Banks)
would Chinese Government /_wish/ to be unblocked?

Does Chinese Government contemplate setting up at once
some exchange centrol organ which will assist United Kingdom
Treasury and Bank of England is administering this procedure?
Would 11 not be an adventage to delegate lisses between Chinese
British Exchange Centrol to some appointed person in China
on British side? It is suggested that a Central Exchange Com-

mittee should delegate authority to financial representatives
in say London, Washington, Rangeen and Singapore.

4. will Chinese Government (through its banks) fix and assounce
rates for Chinese National dollar against sterling and United
States dollars as seen as possible? Rates choses should serrespond closely to current market rates adjusted to meet official

sterling dollar rate of 4.3.
Bads.

COPY: NEW 8/6/41

191
0

Telegram free Dr. H. H. Eung to Chinese Benden,
dated August 2nd.
Begine.

Referring to your cablegram of July 29th, I reply as
follows.

I concur but desire only Central Bank of Ohina be given
the power of unfreesing blocked accounts in line with action
taken by the United States.
2. No other Chinese accounts to be unblocked.

3. Chinese Government will enlarge the seepe of existing

Central Exchange Committee appointed by and under Ministry of

Finance and operations /11a conjunction with Central Bank of
Chima. Glad of co-operation of British Treasury and Bank of
England to desired end. /IUnited States/ have representatives
and limison officers abread and Ohina respectively.

4. Am referring the question to Chinese Currency Board for
consultation.

Ends.

COPY:NEW 8/6/42

192

COPY

TELEGRAM RECEIVED

FROM: CHUNGKING via N.R.
DATED:

August 6, 1941

Rec'd: 12:42 p.m. 7th

Secretary of State,
Washington.

336, August 6.
FOLLOWING FROM FOX FOR SECRETARY OF TREASURY.

In further connection with telegram No. 332
August 5, have discovered we have available also
general licenses number 32 and 33 as amended February
1, 1941.
GAUSS

ALC

193
(CO:PIIENTIAL)

PARAPHRASE
A pertinent portion of a telegram (no. 334) of
August 6, 1941 from the American Ambassador at Chungking

reads substantially as follows:

Although the outlook at present for crops is favorable
in unoccupied China only reopened access to supplies in
other markets or bumper crops would solve the problem of
food which, as is the case with most other commodities,
is merely a question of not enough goods to meet the

requirements. Although there was a slight drop in price
of rice, there wes during the month a general rise in the
price level. Inflation brought about by heavy currency

issues to meet the large deficit of the Government is still
a matter of serious concern and experienced observers of

economic end political trends in China have little confidence that in the near future there may be expected any

substantial improvement in the situation although it is
reported that measures of internel fiscal reform are being

instituted. As various interests, including American Leaf
Tobacco, were concerned on account of reports of proposed

tobacco and other monopolies, the Embassy inquired in-

formally but unofficially in regard to the matter and was

informed that the proposels are still being studied. The
American Ambessador took occasion to emphasize our Govern-

ment's disapprobation of monopolies of restrictive nature.

194
-2The difficulties in the way of improving, organizing
and controlling traffic over the Burma Road, which are

political as well as administrative end technical, are
still causing a great deal of concern. Dr. Baker visited
Chungking, talked with various Chinese officials including
General Chieng Kai-shek and obtained a promise of continued

support. The Embassy is of the opinion, however, that it
is likely that in order to make substantial progress and
make certain the efficient organization and maintenance of
the Burma Road as the only remaining line of supply to China
the measures recommended by Dr. Beker and traffic experts

will have to be enforced as military measures by competent

military authority having broad powers to override special

vested interests and provincial authorities. Conditions
on the Burma Road are now being studied by Arnstein and

his party, who visited Chungking about the middle of July.
Mr. Owen Lattimore arrived in Chungking to take over his
duties as adviser to General Chieng Kai-shek.

cgk:copied 8/13/41

195

PARAPHRASE OF TELEGRAM RECEIVED

FROM:

American Consulate General, Shanghai, China

TO:

Secretary of State, Washington

DATED:

August 6, 1941, 9 a.m.

NO.:

1020

STRICTLY CONFIDENTIAL

The New York head offices of American banks here

instructed those banks to consult this Consulate General
before deeling with firms which might be suspected, in

connection with the freezing order. It was apparently
assumed by those banks that the Department already had

or was preparing a list of firms in China to whom

licenses ordinarily would not be granted. The list
requested in the Department's circular telegram of
July 24, 5 p.m. is being prepared and will soon be
forwarded.

LOCKHART

eh:copy
8-21-41

196

PARAPHRASE OF TELEGRAM RECEIVED

FROM: via
American
N.R. Consulate General, Hong Kong, Chima.

DATE: August 6, 1941, 4 p.m.

NO.: 293
New foreign trade commitments are practically at a

standstill as a result from the recent freezing orders and
the placement of Hong Kong in the sterling bloe. The
American banks in Hong Kong are cooperating. However,

because of conflicting telegrams from their head offices,
they are somewhat hampered. Uncertainty and confusion exist

in financial circles, This is accentuated by the slowness
in arrival of official orders from London.
Fairly large sums have been withdrawn from local bank
accounts by the Chinese. However, no pante exists.
A copy of Executive Order No. 8389, as amended by

Nos. 8785 and 8832, plus copies of general licenses Nos.

54 to 69 inclusive issued thereunder, have been received
from Fox who is in Chungking. At his suggestion, copies
have been supplied to the local American banks. Copies
have also been sent to only two Chinese Government banks.

The attitude which the business community salmy takes

in regard to the situation is that it will be darified in
a fortnight or se just as it has become resigned to the
prospective surtailment of trade with Hong Kong because

of the latter's inclusion in the sterling area.
Another confusing factor is the existence of the
British member of the Chinese Currency Stabilization Board
even though

197

even though it is understood that notice of temporary
appointment has been received unofficially by Mall-Patch,
This message was sent to the Department for its
information and repeated to Peiping and Changking.
BRUINS

EAS PAK
10
LECHAIR

840.51/2011
DVI

voc

198
C

DEPARTMENT OF STATE

Washington

In reply refer to
EA 840.51 Frozen Credits/2854

August 6. 1941.

The Secretary of State presents his compliments to
the Honorable the Secretary of the Treasury and encloses

six copies of a paraphrase of telegram No. 199, dated
August 2, 1941, from the American Embassy at Peiping, China,

in regard to travel permits for Americans in North China

and the attitude of the Japanese with respect to the
freezing regulations.

Enclosure:

From Embassy, Peiping,

No. 199. August 2, 1941.
(Six copies.)

Copy:1g 8/6/41

199
0

PARAPHRAS OF TELEGRAM RECEIVED

FROM: American Embassy, Peiping, China

DATE: August 2, 1941, 5 a.m.

NO.: 199
Today a spokesman of the Japanese Embassy here told the press

that if the travel permits for Americans in North China had been
held up it was due to a misunderstanding by the authorities of
Japan. He further said that such a misunderstanding was being corrected by the issuance of new instructions.

According to reliable information which I have received, a
delegation from the Hainmin Hui--Chinese political party in North
China sponsored by Japanese--recently asked a Japanese authority

what attitude they should assume toward Americans as a result of the

United States freezing regulations. In particular, they asked
whether they should assume a hostile attitude. They were informed
by the Japanese that they should not, by any means, assume a hos-

tile attitude at present toward Americans.
All members of the staff here. as well as American businessmen

with whom we have talked, are of the opinion that in spite of the
official Japanese protestations which emanate from Tokyo the
Japanese were not prepared for the action which was taken by the
United States Government in regard to the freezing of Japanese as-

sets. As a matter of fact, the Japanese were taken by surprise.
They were and still are, to a large extent, undecided as to the extent of the counter measures and the manner of applying and enforcing such measures.

200
-2This telegram was sent to the Department; repeated to Shanghai

and Chungking. The code text was sent to Tokyo by air mail sack.
BUTRICK

EA:PAK

Copy:1g 8/6/41