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STANDARD 8
3 4 5

CHARLES A.

H U D S O N

POORS

S T R E E T

CORPORATION
N E W

Y O R K

1 4 ,

N-

Y.

SCHMUTZ

EXECUTIVE VICE

PRESIDENT

April 23, 1945

Mr. Marriner Eccles, Chairman
Federal Reserve Board
Yfashington, D* C.
Dear Mr. Eccles*
I am sorry to have missed you when I was in
Washington a few weeks ago, but I had a very pleasant and
profitable chat with Mr* Thurston, who outlined your position
with respect to a tax on speculation profits.
I am enclosing a copy of todays "Outlook", which
contains a condensation of the statement you were kind
enough to prepare (page 805). We tried to do your statement
as full justice as possible in abbreviating it, and hope that
the impression it conveys is the one you intended.
I hope that I may have the pleasure of meeting
you the next time I am in Washington.
Sincerely yours,

Marfeg^fig Editor,
Stock Advisory Services
Lewis Schellbach
pm







April 25, 1945•

Mr. Lewis Schellbach,
Managing Editor,
Stock Advisory Services,
Standard & Poor's Corporation,
345 Hudson Street,
Hew York 14, New YorkDear Mr. Schellbach:
Your letter of April 23 and the copy of
the "Outlook*1 are very much appreciated. I realize
that your space was very limited and this highly
controversial subject of the capital gains tax cannot be disposed of adequately without taking far
more space than most publications have available
these days.
I shall look forward to seeing you the
next time you come to Washington»
Sincerely yours,

M. S. Eccles,
Chairman.

ET:b

(..

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•Oka r^A^Cjuocd.

All the objections so far advanced against putting a curb on speculation in homes, farms and srooks through a wartime capital gains tax narrow
down to threet

First, that it deals with the effects and not the causes of

inflation; second, that it would deter selling and thus cause prices to rise;
and third, that it would disoourage risk capital in the postwar.

These ob-

jections emanate almost entirely from the stock brokerage community and are
quite understandable sinoe the stock broker thrives on volume and instability
in the market.
As to one, all price, rationing and other direct measures of control
deal with effects and not with causes.

The cause of the vast inflationary forces

that confront the economy is the huge deficit financing of the war.

The only

way to deal with causes would be by far higher taxation and by far greater
economy and efficiency in war expenditures.

Since we, as a Nation, have failed

to deal adequately with the causes, there is no alternative except to deal with
the effects by direct measures of control if we are to hold the line so long as
inflationary dangers exist.

After reconversion, demand, which has so greatly

exceeded supply in wartime, can and should be met by fully employing our manpower and material resources in peacetime production, and creation of further
inflationary forces should be avoided by greatly reducing public expenditures
and by maintaining such taxation as is necessary to bring about a balanced
budget.
As to two, the outcry from speculators hardly substantiates their
claim that the wartime capital gains tax would make prioes go still higher.
It would hardly deter those who now own oapital assets, sinoe Congress is
not likely to make the tax retroactive and it thus would not apply except to
future buyers.




They are the ones who would be deterred, rather than the

-2 sellers, unless they were buying for income or long-range appreciation. The
speculator looking for tne quick turnover would be put on notice that he would
have to pay a stiff tax if his speculative venture yielded the relatively
quiok profit he seeks. That is exactly what the tax is intended to do — to
curb this speculative activity which never adds anything to real wealth by
furnishing employment and production, but leads only to market gyrations and
instability. It is the speculator operating on cash rather than credit who is
a principal fadtor in bidding up today the prices of farms, homes and business
properties as well as securities. People don*t have to buy stocks, but they do
have to live in houses. Evidence is rapidly accumulating that the returning
war veteran, despite the 0.1. Bill of Rights, is being thwarted in his hopes
of being able to obtain a home or to set himself up in business, because his
purse, in which there are no war profits, cannot match the rising prices.
As to three, the tax, like any other inflation control, can be removed when the inflation danger is past and the need for the control no longer
exists. The solicitude for new enterprise seems strange coming from certain
financial quarters and publications. If they faced the matter realistically,
they would favor putting a premium on venture capital invested in enterprise
that furnishes production and employment and a penalty on speculative capital
concerned only with -the quick turnover and profit, either on the upside or
downside of the narket. What would really encourage risk capital in the postwar would be to reduce the excess profits tax from the present 95 per cent
maximum to, possibly, 65 per cent, and to make the corporation tax 25 per cent
instead of l O per cent as it is now. I would then exempt from the 25 per cent
i
corporate tax all profits paid out in dividends, which would be taxed in the




1.

-3 hands of the recipients.

This would avoid the double taxation that is so great

a deterrent to the investor in productive enterprise.

At the same time, I

would give an exemption of $25,000 to all corporations under the excess profits
tax.

This would not matter much in the case of a large corporation, but it

would be of tremendous benefit to the smaller and medium-sized concerns.

To-

day, when interest rates on fixed income bearing obligations are low and seourity
yields relatively high, there is every inducement for the speculator to take advantage of the capital gains loophole, which is the most serious breach in the
line of defense against inflation.
In the late 20*s, the capital gains tax was relatively low, as were
corporate and individual income taxes, while interest rates were high and
security yields comparatively low.

Yet, in that period venture capital was

lured more and more into buying and bidding up the prices of existing securities of established corporations instead of being drawn, as it should have been,
into productive new enterprise.

In other words, there was a premium on specu-

lation in existing securities instead of a penalty.
real venture capital instead of a premium.

There was a penalty on

The capital gains tax has had an

effect exactly the opposite of that alleged by the speculative ooassunity.

I

have not undertaken to say whether stocks or other capital values were too high
or too low.

So long as they reflect underlying economic conditions and prospeots,

there can be no objection to prices adjusting accordingly.

What I am against is

the unproductive, unstabilising activity of the speculator in any of these markets.
And that is exactly what the wartime oapital gains tax which I have suggested
would curb.




STANDARD 8
3 4 5

H U D S O N

POORS

S T R E E T

-

CORPORATION
N E W

Y O R K

1 4 ,

N.

Y.

March 19, 1945

Hon, Marriner Eccles, Chairman
Federal Reserve Board
Washington, D. C.
Dear Mr. Eccles
I am enclosing a copy of this week1 s ttOutlook,lt which
includes a discussion of the pros and cons of controls on speculation. Our views may interest you and, certainly, your reactions would interest us. I wonder if it would be possible to
discuss this with you on my next trip to Washington, tentatively
scheduled for March 29-31.
Sincerely,

Managing Editor,
Stock Advisory Services
Lewis L. Schellbach
iam
enc*