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Address of
Chairman of the Board of Governors
of the Federal Reserve System
before the luncheon meeting
of the
National Tax Association
at the
University of Minnesota
Tuesday, October 14, 1941

For immediate release


It has not been ny privilege heretofore to speak before an
audience of tax authorities.

While T. am grateful to the National Tax

Association for inviting me, I am merely a banker and business man
and I stand in awe of the tax expert.

I have glanced over the record

of some of your past proceedings and I an impressed by the breadth and
scope of your deliberations and by the learning displayed by your

Tfiihile I cannot hope to add to your technical enlightenment,

I am venturing to outline to you some of the broader national aspects
of taxation in relation to fiscal and monetary action that, in my judgment,
are of the greatest importance to this country now and in the future.


what I have to say I am, of course, speaking only for myself.
For a long time I have been interested in making fiscal pol­
icy play its proper part in a broad program for maintaining that orderly
economic progress that ought to go step by step with the steady growth
in our human resources and in our technical knowledge.

Except during

major wars, our State and local governments have until recently been
much more important from the financial' point of view than the Federal

Although Federal revenues and expenditures have greatly

expanded during the past decade, it is only since the beginning of the
defense program that Federal expenditures have begun to exceed aggre­
gate State and local expenditures.

It Is only in the current fiscal

year that Federal taxes will exceed aggregate State and local taxes.
No one who is interested in a more intelligently planned fiscal policy

-2 -


for the nation ss a whole can fail to take account of the financial
problems of oar State and local units of Government, and of the vast
complex of taxirg jurisdictions numbering more than

175 ,0 0 0 .

The principles that should govern present policy are simple.
If we are to attain the broad objectives of our present national policy,
expenditures for defense must absorb an increasingly large proportion
of our national income.

This general policy is, of course, easy to

state, but difficult to apply.

Our people— business men, labor, farm­

ers— arc still thinking mainly in terms of the profits they hope to
make rather than of the sacrifices >*hich will be required of all groups
of our population.

As yet our standard of living has net suffered and

relatively few dislocations have resulted.

In some localities where

there have teen sudden large increases in population due to the expan­
sion in defense industry, the strain of providing adequate public serv­
ices is severe, but in general State and local revenues are exceeding
budgetary expectations and relief rolls are diminishing.

The tempta­

tion is strong to expand Government services and get rid of unpopular

Sound public policy requires that both of these temptations be


Public works not directly connected with defense, no matter

how meritorious on general grounds, should be postponed until after the
emergency has passed and we can once more afford to devote our men and
materials to raising the standard of living of our citizens.

I cannot

agree with the superficially logical view that State and local taxes
should be reduced in order to make it easier for taxpayers to bear the


-3burden of increased Federal taxes.

It is natural for taxpayers to at­

tempt to avoid a reduction in their standard of living, but taxes will
not serve the essential purpose of helping to divert resources to de­
fense production unless consumer expenditures are sharply reduced.
State and local government should decrease expenditures. Th^y
should not reduce existing tax rates and they should devote surplus rev­
enue to the repayment of debt.

This would be anti-inflationary, in

harmony with governmental policy.

In commenting upon the regulation

recently issued by the Board of Governors to dampen consumer instalment
credit, I emphasised the importance of the repayment of debt by individ­
"When incomes are at high levels, that is the
time when people should reduce their debts or get
out of debt. Our people cannot spend their in­
creased incomes and go into debt for more and more
things today without precipitating a price infla­
tion that would recoil ruinously upon all of us...
By deferring civilian demand at this time, we can
help avoid inflation, we can aid in defense, and
7/e can store up a backlog of buying power that will
help offset a post-defense slump.”
Repayment of debt by State and local governments is equally important
at this time.
Looking ahead, however, to the post-defense period, the prob­
lems that we will then be facing will be the same in their essential
nature as those that confronted us during the

3 0 's

and for which we suc­

ceeded in finding only a partial solution until the beginning of largescale expenditures under the defense program.

They are the problems of



U -

poverty in the midst of plenty; of the capacity to produce outrunning
the power to purchase and consume; of millions of able-bodied and
skilled workers without employment; of idle plants and factories.
if we have the will, we know the way to raeet those problems.


We have

before our eyes a conclusive demonstration of the way in which vigorous
and determined action by Government can transform a situation of general
overabundance to a situation of general scarcity within the space of
a few months.
The general problem of finding a market for the products of
farms and mines and factories that is large enough and atable enough to
provide steady employment for all who wish to work is one that confronts
all the industrial countries of the modem world.

In the United States

this problem is complicated by the great size of our country and the di­
versity of our economic activities.

In those parts of the country that

were settled earliest, wealth has accumulated and from the very begin­
ning of our economic history accynulated wealth in those areas has sought
and found an outlet for investment in the development of the resources
of the frontier regions that were one by one opened up to settlement.
Tear after year this process continued.

The result has been a vast ag­

gregation of obligations which the citizens r.f areas that offered oppor­
tunity for investment owed to citizens cf areas that had capital seeking in­

Those obligations took various ferns:

mortgages on urban residen­

tial and business properties and on farms, the securities, both stocks
and bonds, of mines, public utilities, and othor business enterprises, and
the obligations of State and local governments.

As tho loans and invest-


ments grew, the volume of interest, dividends, rents and amortization
payments also grew.

Debt payments had to bo maintained both in times

when prices for the produce of debtor areas were high and markets were
l$.rge and in titles vfom. prices were low and markets were restricted.
In general, the creditor areas are also centers of manufactur­
ing, that must look for a market not only to their own citizens but to
the country as a whole.

The maintenance of economic balance in the

country as a «hole requires that citizens of debtor areas have enough
money income both tc .*iaintain interest, amortization and other payments
on their obligations to investors in the creditor areas and to maintain
at a high level their purchases of the output of the factories of the
credit, r areas.

They must maintain their standing both as good credit

risks and as good customers.

This healthy state of national economic

balance is continually being upset by forces that are entirely outside
the control of the States or of the individual businessman and the indi­
vidual worker.

The result is recurrent periods of breakdown and distress,

bankruptcy in debtor areas, idle factories in creditor areas and wide­
spread unemployment and hardship in the country as a whole.

There is no

essential difference between this situation and that resulting from in­
ternational debts.

Both are, in essence, exchange problems.

By tariffs,

quotas, exchange restrictions, or even by resort to more punitive steps
of a military or ecr.nora.ic nature, including expropriation, nations
attempt to redress the situation.

The Federal Government alone can

remedy this condition among the States— and taxation is one of the most
effective Beans.

Through that medium



funds which the creditor areas drain out of debtor areas through in­
terest, dividends and rents, as well as payments on debt, can be kept
flowing back to sustain employment, to keep mines and factories in the
debtor areas operating and continuing to yield returns to the creditor

I realize that the creditor States complain about paying more

in taxes in proportion to what they get back from
ment than do the debtor States.

the Federal Govern­

Bat that is a short-sighted attitude

which fails to comprehend that in no other way can the debtor areas
continue to yield returns to the creditor areas.

I recognize also

that the Federal form of government does not adapt itself easily to
a centralized and coordinated attack upon problems that must be dealt
with as national problems if they are to be dealt with at all.
The problem of maintaining the standing of our citizens as
both good credit risks and good customers is basically one of maintain­
ing the national income at levels which represent the fullest possible
utilization of our labor supply and other economic resources.


which can be easily carried and paid off when the national income is
stable or steadily growing become insupportable when income falls.
Defaults and bankruptcies used to be the accepted methods of dealing
with these difficulties.

But such methods are crude and unsatisfactory

both in terms of economic values and human values.

During the depres­

sion we developed better methods fcy attacking the problem from both
ends, ty seeking to restore incomes and fcy adjusting debts of farmers
and home owners through the Farm Credit Administration and the Home
Owners* Loan Corporation.



In the future, the most important safeguard against the
danger of a relapse into the intolerable conditions of the early

3 0 's

will be a long-run plan for public investment, adapted to the differ­
ing needs and conditions-of our different geographical areas.

So far

as possible, this should take the form of productive public works and
expenditures not only to improve the basic conditions which are re­
sponsible for keeping the standards of living in some of our States
lower than in others, but also to raise the standard of living par­
ticularly in the lower income groups wherever they may be.


public investment, which should be noncompetitive with private enter­
prise, means not only roads, public buildings, subsidized housing,
bridges, dams and irrigation projectsj it also means better education
and a higher level of public health and nutrition.

The fact that so

many of our young men called up for military service were shown on
medical examination to be physically unfit is a shameful revelation
of our neglect, as a democracy, to deal with national health and nutri­
tion problems.
We will also need to extend and to make more uniform as
between citizens living in different States the system of social se­
curity benefits.

This mechanism is ideally suited to use as an anti-

inflationary measure in times like the present and an anti-deflationary
measure in periods such as we may have when the defense effort is over.
This is the time to build up a reserve fcy increasing the taxes both for
old age and unemployment, decreasing the taxes and drawing on the

-8 reserve as unemployment develops.

And to insure that increased current

revenues will be followed by an appropriate flow of outpayments xhen
they are needed to combat the deflationary forces cf the p:;st-defonse
period,, the old-age insurance system should be converted from its
present contributory basis to a system that frankly recognizes and
moots the national obligation to provide a minimum of support for all
of our needy aged.
minimum of


to the system.

We should give everyone reaching the age of 65 a

a month, regardless of the amount of his contribution
Variations in payments to meet local conditions should

be Dade possible by Federal grants matching additional payments made by
the States up to $10 a month, thus enabling maximum payments of $50 a

The Federal Government should recapture, by means of the income

tax, payments of this tyx-e in excess of amounts needed by the aged to
bring their total income up to a level representing a minimm? standard
of comfort.

Such a revision would do away with the present complicated

set of rules governing benefits; it would completely remove the cost
of old-age pensions from the budgets of our loss wealthy States; and it
would make the support of the aged a national responsibility, as it
should be.

I also think it essential to nationalise the unemployment

insurance program extending the coverage to all workers and increasing
the benefits both as to amount and time, increasing the rates and pro­
viding that employees contribute
as to industries.


of the tax and that it be uniform

-shIf we are to be successful in the objective of creating a high
and steadily increasing demand for the products of industry after the
defense period, we must adopt a progressive tax system bearing heavily
upon savings concentrated in creditor areas and lightly upon the great
mass of fanilies of the low income groups.

This means that we must

get rid of, or at least check the growth of the sort of taxes to
which our States have unfortunately been forced to resort more and
more in recent years.

I am referring to the general sales taxes and

the taxes on gasoline, tobacco, and other articles of mass ccnsurjption.
These have taken on increasing importance in State tax structures in
recent years as a consequence of the


inadequacy of the general property tax and the pressure to find funds
to finance relief and other welfare expenditures.

Although those

taxes were enacted with the commendable motive of preserving the sol­
vency and credit standing of our State and local governments, they
had an unfortunate effect upon the level of activity in the economy
as a ’vhole and were among the factors that made national recovery
slow and incomplete until the beginning of the dsfense program.


effectiveness as revenue producers is largely attributable to the fact
that toe Federal Government continued on a deficit basis throughout
almost the whole of this period and thereby provided the stimulus for
expansion of the consumer expenditures upon which these taxos were levied.
If we are to make progressive taxes the major element of our
national tax structure, however, it will not be possible to continue
the present system of having both the States and the Federal Government
levy taxes on corporate and individual incomes and transfers at death.
Increases in the rates of these taxes sufficient to make them contribute a
major share of total governmental revenues over the long run would so
intensify the existing difficulties that some change in the present chaotic
system would be unavoidable.

Citizens and corporations in some jurisdic­

tions are lightly taxed because of a fixed policy in their States to com­
pete for the domicile of corporations and persons of wealth.

In other

States they are heavily taxed because their States have taken the

-10leadership in the use of progressive taxes.

It has long been rec­

ognized that uniformity and equity can be attained only by making
the total tax levied on income and on gifts and bequests a matter
for Federal control.

This might be done along the lines suggest­

ed to you by Mayor LaGuardia at your conference last year, by the
device of allowing a limited tax credit against Federal taxes for
State taxes of similar type.

We have already adopted this device

for purposes of the Federal estate tax and the Federal unemploy­
ment compensation tax and wo havo seen that it. does give a power­
ful incentive to the several States to enact and collect a tax of
a particular type, when they are led to do so by the knowledge
that the revenue will go to the Federal Government unless they
take appropriate action.

However, while this device creates a

presumption that a State will levy taxe3 only up to the amount of
the Federal tax crcdit allowed, it does not guarantee the taxpay­
er against the possibility that a State government hard pressed
for revenue may not go considerably beyond this limit and it does
not eliminate the possibility that, the same incomo or the same
transfer of property at death will be tax-id by more than one State.
In the orxd the only thoroughgoing cure for these difficulties lies
in a drastic reallocation of taxing powers between the States and
the Federal Government.

Sxich an allocation would involve restrict­

ing the right to levy taxes on income, gifts and bequests wholly



to the Federal Government with redistribution of a share of the
revenue from these sources to the States.

I know how controver­

sial this subject is but I think we will have to face, quite
frankly, the implication that State revenues will tend to consist
more and more of taxes shared with the Federal Government and of
grants from the Federal Government, which already make up about
14 per cent of State revenues.

The real question is how bo re­

tain the valuable elements of local initiative, local control
over governmental services and adaptation of services to the dif­
fering needs and conditions of differing areas.

Vve have had enough

experience with Federal grants and with Federal direct expenditure
programs during tha depression to know that this problem is not in­

We should continue to follow the broad policy that has

grovsi out of these activities of leaving responsibility for initi­
ative as to the typo of activity to be undertaken in the hands of
Stats and local government, to leave, whorovar possible, the de­
tailed administration in their hones and to provide for Federal
supervision only to the extent necessary to insure that funds are
wisely, prudently and honestly used.

In a program of the magni­

tude and novelty that characterised Federal spending for recovery,
it is not surprising that there were mistakes but the failures as
well as the successes of this period of experiment provide a valu­
able basis x'or the wise planning of the future.

-12I have outl ined in a general way some of the main considera­
tions that I think should apply in shaping taxation policy to the needs
of the defense and post-defense periods.

Let me add, however, that all

I have said is based upon my profound conviction that we must make de­
mocracy function more effectively in the future than in the past— and
that this can be done by democratic processes and methods, primarily by
use of the Government1s broad functional powers of control.

Fiscal and

monetary action, properly used, can go far towards correcting the basic
causes of economic breakdown.

Those over-all, functional powers— of

which taxation is the most potent single instrument— need to be supple­
mented by some direct controls at all tiroes, particularly in a time like
the present when we have acute shortages of strategic materials.


ever, the more wisely and effectively over-all controls are applied, the
less will be the area in which there will be need for direct measures.
In the past, we have been slow, often too slow, to recognize
changed conditions and to adapt our system to them.

We have too often

tolerated poverty while we failed to recognize that the proper function of
the democratic system is dynamic, not static.

Too often what we have

thought of as our rights were wrongs for great numbers of our fellow citi­

Vie can— we must preserve our Constitutions! guarantees— freedom of

enterprise and initiative, subject only to such limitations and restraints
as are necessary to protect the* public interest.

But we must recognize

that the right to work must be c .upled with the opportunity to work.
Freedom of speech, freedom to worship as we will, freedom of the press,



all of our cherished liberties are of cold comfort to the destitute.
There is no reason, except wilful blindness, why we cannot make our
system function far better than it ever has before by guaranteeing
that no willing, able-bodied worker shall lack for employment and that
the aged shall not be in abject want.
I grow impatient— for events move swiftly in the vrorld today—
with those in your field and mine who say that fiscal and monetary pol­
icies suitable for the past are necessarily appropriate today.

It is

surprising how many who should know better, who should have learned from
the experience of the past decade, still hold that taxation should be
based exclusively on considerations of the need for raising revenue,
without rogard for the social and economic necessities that only the
tax instrument can be adapted to meet, if intelligently used by Govern­
I recognize fully that in the day when we had a scarcity of
capital, when new capital accumulations more or less automatically
flowed into new production, it was vise public policy to have taxation
contribute so far as possible to capital formation.

All that we could

amass at home and billions more that we borrowed from abroad went into
the rapid expansion of the nation across the face of this continent.
But I deny that in a day when capital is over-abundant in relation to
the outlets for its private investment it is still wise public policy
to encourage its accumulation in stagnant pools.
during the decade of the

3 0 *s

Rather I have favored

tax policies that tended to maintain the

flow of purchasing power in the economy by forcing idle funds back
into the circulation stream.

That 5s a departure from the older ortho­

doxy, to be sure, but it Involves no loss of fundamental liberties. It
is no threat tc democratic institutions.

Rather, it is absolutely es­

sential for their preservation.

Similarly, I have favored the appropriate

¿.ccompanying monetary policies.

Thus during the depression, I favored

making the supply of money abundant and interest rates low in order to
create an anti-deflationary climate which would be favorable for recovery
provided positive action were taken at the same time in the fiscal field.
By the same reasoning, I favor such anti-inflationary fiscal and monetary
policies as are possible at this time, when the economy has moved rapidly
towards full production and employment, under the stimulus of large de­
fense expenditures.
In the day of capital scarcity, in the day when the gold stand­
ard prevailed for most of the world, even though it was never the unmanaged mechanism pictured by its most ardent champions, there may have been
logic in relegating taxation to the role of revenue only, and in putting
some reliance upon the interest rate as a regulator of economic excesses.
But the late 20* s disabused our minds of the notion that a high interest
rate could curb speculation.

The early 30's should have taught us that

a negative fiscal policy was both economically and politically untenable.
The later 30’s should have demonstrated to us convincingly that a more
positive policy, even though halting and hampered by widespread resist­
ance, can have the most powerful effect in economic restoration.

And the

-15presest period is giving us irrefutable proof of the degree to which a
vastly expanded, positive policy called forth by national peril rather
than by deliberate choice, can swiftly transform the economy from under­
employment to boom conditions.

Unhappily, the boom conditions are

largely concentrated in the industrial sectors of the econoray in the
production of the things of war instead of the things of peace that im­
prove our standards of living.

The logic of having taxation play a pas­

sive, neutral role in times past, and of having monetary policy responsive
to international gold movements, rather than subject to national direc­
tion and control, is no longer valid in the world of today.

Rather, the

respective spheres of fiscal and monetary policy are reversed.


policy has assumed the greatest importance as a democratic instrument
of economic action, while monetary policy assumes a secondary place.
Both must be coordinated by deliberate action.
Even a cursory review of the economic history of the last
dozen years indicates not only that democratic nations must and can
vnthout sacrifice of any fundamental principles use the functional
Government controls of fiscal and monetary action, but that no other
rational choice is open to those who profess to be in favor of preserv­
ing our institutions.

The question is no longer whether such functional

powers should be turned deliberatly to helping us solve our economic pro­
blems, but whether we can so organize and coordinate our democratic proc­
esses, that the necessary flexibility and administrative discretion will

-1 6 -

be afforded to achieve the best results.

I am aware of the difficulties.

They are inherent in established legislative processes, and the division
of powers.

They are present, particularly, in the relationship between

the Federal Government and the States.
We have not made much progress towards simplification so far,
but the time has come when we can no longer continue to tolerate this
chaos. For the fact is that with the increasing assumption by modem
governments of 3ociaL and economic responsibilities, in the light of the
increasingly important role that governments play in affecting economic
conditions, what may have been an endurable conflict in the highly im­
portant fields of taxation is now too serious, too much of a limitation
upon necessary democratic action, to ignore.
It is not necessary, before this audience, to stress the point
that there can be no consistency or continuity of national economic pol­
icy, it can have no adequate flexibility, if it must be exercised in con­
flict- rather than in harmony with the States.

Manifestly if the Federal

Government is to be effective in using its powers to dampen inflation­
ary tendencies, State policies must, on the whole, be aimed in the sa:ue

In the post-defense era, Federal action to offset a slump

will be ineffective to the extent that the States are not prepared to act
in concert with Government policy.
In brief, monetary policy should be the servant, not the master,
in the economy.

We shbuld rely heavily upon fiscal policy, its timing

-17and application, as a stabilizing factor and as a motivating force without
which monetary policy alone is ineffective.

We should utilize and co­

ordinate these over-all instruments of public policy, not only because
of their demonstrated effectiveness, but because they are the only logical
alternatives to a no longer possible laissez faire, on the one hand, and
a regimented, policed economy, of- fascist character, on the other.


is no reason why we cannot learn to use them more intelligently in the
future than we have in the past, recognizing always that these and other
functional controls are at best supplemental to the main driving force
of private enterprise.

There is no reason why democratic processes cannot

be adapted, and every reason why they should be adapted to using these
instruments cf economic influence to the fullest, not only In the defense
period but in the future when the economic problems of a world at peace
will ironically be even more difficult to deal with than the economic
problems of a world at war.