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March 8, 19U5Mr. Louis Guenther,
President and Publisher,
Financial World,
86 Trinity Place,
New York 6, Hew York.
Dear Mr. Guenther:
Enclosed is a copy of
seen, outlining the reasons why
wartime capital gains tax as an
ment appearing in your issue of

a statement, which you ©ay not have
I renewed my suggestion for a special
inflation control expedient. The comMarch 7 appears to be based on a mis-

I am not, as you say, concerned about curbing security
transactions as such, but I am very much concerned about curbing price
inflation in these unprotected sectors of the domestic economy. Then
you say that I am a "changeable personality" because in the severe deflation I advooated different policies from those I advocate to deal
with dangers of a severe inflation. What I should like to see most of
all is stability of economic progress, but «hen the economic climate
changes, economic policies should be changed to deal with changed conditions. That seems to me so obvious that it scarcely requires discussion.
You say that I cite figures of my own to show that stock
prices already have advanced more than 80 per cent. They are not my
figures. They are the figures of Standard and Poor's industrial index covering ii02 stocks. This index stood at 60.8 on April 29, 19U2,
which was the low point. It had reached llU-8 on February 28, 19U5This is a rise of 88.8 per cent. You cite, instead, the Dow-Jones
industrial stock average which is based on only JQ industrials. Even
this index, however, shows a rise of 72 per cent from the low of 191*2
up to March 3* Their index of rails in the same period shows a rise
of 123 per cent. Therefore, when you state that "Bccles seems all wet
in the use of his figures", you are not speaking from the facts.
Finally, you briefly refer to the familiar but fallacious brokerage house argument that such a tax would dry up the "supply side of the
equation". I have alluded to thie in the «.closed statement. If a.

Mr. Louis Guenther


March 8, 19U5


effective as I think and hope it would be, the proposed tax vould
deter speculators fro® buying with a view to taking advantage of
the present capital gains tax loophole, but would not deter the investor who is not proposing to get in and out of the narket in order
to take advantage of the loophole* That is the purpose of the
special tax — to deter the speculative buyer. The more buying and
selling there is, the more profits there sore for the brokers, but unfortunately at a time like this that process serves only to force
prices to higher and higher levels until the bubble finally bursts,
as it did in 1929« That is what concerns me, as it must anyone who
is interested in general economic stabilization.
Very truly yours 5

M. S. See168





NEW Y O R K 6, N. Y .

L o u i s GVENTHER


March 15, 1945

Hon* M. S. Eccles, Chairman
Federal Reserve System
Washington 25, D* C*
Dear Mr* Eccles:
Tha&k you so much for sending me your views on the need of a
special wartime capital gains tax as an inflation control expedient*
While I did not have this in my possession when I wrote my
editorial, having based this on extracts appearing in the press,
I note that there is little difference between the press reports
and your official release of March 5*
If there is any differenee in our views on this subject I cannot
attribute it to any misunderstanding, but only to the difference
in our viewpoints* However, I appreciate your having written me
so frankly on the subject*
We both agree on the desire to stabilize our economic progress,
but I cannot see where this can be successfully accomplished on
the basis of your proposals. It is true that changes in the
economic climate call for different economic policies, but such
changes should be approached with care in order to avoid creating
more harm than good* A cure cannot be effected by treating the
symptoms, but only by getting at the root of the maladjustment.
I do not think it is a sound procedure to attempt to measure the
amount of "inflation* in security prices by talcing April 29, 1942
as a base, for that marks the low point in a 5-year bear market.
Much of the subsequent improvement constitutes merely recovery from
a decline that had gone too far, and much of the remainder can
justly be regarded as reflecting such factors as the assurance of
victory, further ease in the money markets, indications of a period
of postwar prosperity, knowledge that the next change in corporate
taxes will be downward, etc.
In 1957, a peace year with no artificial business stimulation, the
Dow Jones industrial stock average rose above 195, and if we were
to make comparisons with that level we could not help but come to
the conclusion that no inflation whatever has occurred in stock price?.


Looking at this picture from a different angle - from the standpoint
of attainment of the 60 million job goal the Government has set for
the postwar period, the volume of business that will be necessary to
maintain such an employment level and the earnings that should result
therefrom - security values as yet have hardly begun to discount this
rosy prospect.
Let me point out that the collapse of 1929 occurred from an entirely
different situation from what you visualize might happen if speculation
is not now curbed.
That period culminated in a speculative orgy
fanned by the ability of a person to purchase securities on a 10 or
20 per cent margin. Now, most of the buying is on a cash basis. In
1929, in addition to the ease with which people could buy securities,
there was also a mental barrier which restrained them from selling when
they had a good profit because they wanted to avoid what they then regarded the heavy tax involved. I know this to be a fact for in that
period contrary to my advice I had a great many investors tell me
that they did not wish to sell because they wanted to escape this impost.
In one instance a very prominent man had a paper profit of nearly $1
million, but he hesitated to sell in order to avoid paying $250,000 in
taxes. The tragic result was that when the "bust" came the banks com^
pelled him to liquidate, and not only did he lose all of his paper
profits but in the end found himself in debt.
I fear now that if the tax you suggest were imposed it would lead to
similar results,, and the after-effects would be even more serious than
if some other approach were made to correct any speculative excesses.
Once having bought securities and should they show a slight increase
in market value, there would be the same disinclination to sell as in
the 1929 period. Even more so, because the tax would be so substantially
higher than it was then.
My views are not the result of wishful thinking, but are based on the
experience I have gained from living through every bear market and panic
this country has experienced since /1893. However, in order that my
readers may know just what your thoughts are along these lines I am
taking the liberty of publishing yf$ur letter in a forthcoming issue of


March 16, 1945*

Mr. Louis Guenther, Publisher,
Financial toorld,
86 Trinity Place,
New York 6, New York.
Dear Mr*


This is to thank you for your letter of
March 13 and for your suggestion about printing
my letter of March 8 in a forthcoming issue of
the Financial ifrorld.
As that letter was not written with a
view to publication and seems to me a very inadequate statement, it would be more appropriate
for me, I think, to v*rite another one for the
specific purpose of publication. Accordingly, I
am enclosing a letter which you are at liberty
to print if you wish to do so.
Sincerely yours,

M. S. Secies,




March 16, 191*5The Editor,
The Financial World,
86 Trinity Place,
Hew York 6, Hew York.
Dear Sir:
In your issue of liaroh 7 you commented unfavorably on my
suggestion for a special wartime capital gains tax as an inflation
control expedient.
I am not concerned, as you stated, about curbing security
transactions as such, but I am very much concerned about curbing
price inflation in the unprotected sectors of the domestic economy,
particularly the prices of farms and homes. I am not undertaking
to say whether the stock market, with which your editorial dealt,
is either hi^i or low in relation to long-term prospects and -values.
Nor would the tax I have in mind seriously deter the bona fide investor in a farm, a home, or, for that matter, in securities who ia
interested in income and long-range appreciation. Such a tax would,
I am convinced, deter the speculative buyer seeking a relatively
quick turnover.
While wartime rates of 91 por cent and 95 P«r cent, respectively, have been applied to individual and corporate incomes,
the capital gains tax has remained at prewar levels and is an open
invitation to the speculator in farms, homes and stocks. I am
sure you do not want to see another 1929 orgy of speculative whipping
up of prices. The ruin that would follow just as surely as it did
then would be infinitely more disastrous to the entire Hation this
time, for the inflation potential is infinitely greater. Liquid
assets in the hands of individuals and businesses today are nearly
#200 billions, or more than four times what they were in the 20*s.
The oriticism that such a tax treats the symptoms instead
of providing a cure is particularly unrealistic. That is true of
all price controls. They all deal with effects, not causes, but
having failed to deal with causes there is no alternative except to
deal with the effects if we are to hold this line. I took care to
point this out in my public statement, in which I emphasized that
if the public and hence the Congress had been willing to deal with
inflationary causes, deficit-financing would have been held to a

The Bditor
The Financial World


March 16, 19U5

minimum by far higher taxes and by far greater economy and efficiency
in war expenditure». It is the huge deficit-financing of the war
that has created the gigantic inflation potential and will keep on
adding to it as long as the war lasts*
Likewise, the argument that people will not sell in face
of the tax will not stand up under analysis. The case which you
cited, not in your editorial but in your letter to me of March 13,
of the man mho had a paper profit of nearly a million dollars in
the late 20fs but hesitated to sell because he wished to avoid paying |250,000 in taxes cannot be correct. The capital gains tax
then in effect was only 12-1/2 per cent. So his tax would have been
#125,000, not |250,000, or just half what you figured.
In any oase, this line of reasoning that people will hold
on and therefore prices will go up is fallacious. If the speculative
fever is so bad that this tax would not stop it, where would the
market go without the tax? Judging by the opposition coming from
certain financial quarters, the speculators think the tax would be
all too effective in putting the brakes on rising prices. If the
owner of stocks thinks the market is going to go up, he will hold on
for a bigger profit, hoping always to get out at the top. That's
human nature. I am satisfied from a number of instances that have
been brought to my attention that if a stiff capital gains tax were
enacted, those who have a speculative profit are far more likely to
sell, fearing that the tax will keep the market from going higher.
And, conversely, if they thought there was to be no such tax, they
would not sell but would continue the speculative operations which
are a principle factor in rising prices now.
Those who make this "free*, meaning untaxed, market argument seem to forget 1929 and talk as if there were only sellers. The
proposed tax, while not interfering with the bona fide investor buying for income and longer-range appreciation, would be a real deterrent to speculative buying rather than to selling. It would not
apply at all to capital assets purchased prior to January 1, 19U5The most that can be said for the free market argument is that it
would reduce the volume of both buying and selling. The dislike of
the brokerage community for such a result is understandable, since
the brokers thrive on volume. In any event, however, there could be
no dangerous speculative inflationary upswing cm reduce volume.
That, in turn, would make for more stability in the market, and that
would not only be in the long-run interest of legitimate investors

The Bditor
The Financial World

March 16, 19U5


and business, but of the entire Hation.
If there is any better way than through this tax of putting
a stop to the speculative and unstabilizing operations in capital assets, it has not been suggested by your editorial or by any of the
other critics in the financial district*

Very truly yours.

M. S. Eccles,
Chai rraan.

Fii^AKciAii W O R L D




March 22, 1945*

Mr. Elliott Thurston
Federal Reserve System
Washington 25, D. C.
Dear Mr. Thurston:
We are in receipt of Mr. Eccles letter dated March 16,
which is a revision of his original communication of
March 8.
We would like very much to be able to print this in
full, but even normally our magazine is a comparatively small one, and because of the paper limitation we
have had to reduce it to a still smaller size.
Would it be agreeable to Mr. Eccles if we used our
own judgment in editing his letter, reducing it so
that it would fit into one column? Or would he
prefer to do this himself.
Very truly yours,


March 26, 1945*

Mr. Richard J. Anderson,
Managing Editor,
Financial **orld,
86 Trinity Place,
New York 6, New York.
Dear Mr. Anderson:
This is to thank you for your letter of
March 22 in regard to publishing Mr. Eecles1 letter.
He is temporarily out of the city, and
I would suggest, therefore, that you use your own
good judgment in fitting the letter in with such
editorial pruning as space considerations necessitate.
Sincerely yours,

Elliott Thurston,
assistant to the Chairman.