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B.A.M., October 25, 19143.

FINANCIAL POSITION OP CGRPOB&HONS IH POST-WAH PERIOD
I.

The Facts.

Notwithstanding current a r g f b r tax relief, indications are that
corporations will emerge from the war in a strong financial position. The
following figures support this positions
Corporate net income in 19^3 i« three times that of
19^0, ~ §22 billion dollars as against $7 billion dollars* After
taxes corporate net income is still twice that of 191*0, — $3.7
billion as against #lu8 billion, — and higher than it has ever
been before. (See Sable I.)
(b) Retained corporate Income is similarly at a record level.
Cumulative retained income since 1939 exceeds $12 billion dollars
and is now running about $5 billion a year. (See Table II.)
(0) Depreciation reserves are now being accumulated at a
rate much in excess of total investment (including plant and inventory ). TSiile investment exceeded depreciation allowances for
I9I4.O and 19kl, the excess of depreciation allowances over invest*
sent in 19i|2 was $2.2 billion dollars and for the current year is
estimated t9 billion. If the war continues for several years, the
current rate of reserve accumulation will grow into a very large
total. (See liable III).
(d) Provisions under the present tax law will help corporations
to strengthen their financial position in the post-war period.
(1) Under the Excess Profits Tax, corporations
are accumulating reserves in the f o m of a 10 per cent
refund of tax* amounting to about $1 billion a year.
(2) Under the Corporation Income Tax, corpora*
tions are permitted a two-year carry-back and two year
carry-forward of net operating losses and under the
Excess Profits Tax, the same holds for unused excess
profits credit. This relief will, of course, be available only to corporations idiich suffer a drop in income
after the war and which pay taxes during the war, but
the total refunds that may be obtained might be very
substantial due to the enormous war-time income against
which the carry-backs can be made.
On the whole, it appears that the combined effects of the very extensive retention of earnings, accumulation of reserves and possible refunds
tinder present tax provisions will be adequate to provide a very substantial
base for post-war expansion and growth.




- 2 -

October 25, 1943

II Policy Conclusions«
If war contracts are settled promptly, particularly if corporations receive liberal advance payments on outstanding contracts, corporations
by and large trill have sufficient funds to take care of reconversion to
divilian production* ?/hile this applies to the bulk of corporations, there
are likely to be some marginal concerns which did not have large profits
during the war period and thus do not benefit from tax carrybacks* Special
provisions might be necessaxy to help such businesses through reconversion
loans*
So$e corporations will have adequate reserves to take care of reconversion costs, but these reserves may not be in liquid form. Also,
claims for tax refunds will not be immediately available* Steps may thus
be needed to facilitate rapid liquidation of assets for reconversion purposes*
There is no good case for permitting corporations to accumulate
large tax-free reserves for purposes of expansion after the -war. Any such
provision would simply mean a reduction in corporate tax rates. It would
amount to a subsidy paid particularly to high-profit corporations which would
be less in need of funds after the war. If corporations want to undertake
large and new capital developments in the postwar period, and do not have
sufficient funds, it is altogether desirable that they should go to the
capital market to obtain funds. This is the more desirable, since investors
will have plenty of liquid funds to invest*
A reasonable case can be made for permitting certain costs — which
are incurred in the postwar period but which are really a reflection of wartime production — to be carried back against wartime income for purposes of
computing the final tax burden upon wartime incomes. Costs of this type
would be dismissal wages and a part of reconversion costs. It may be con©
sidered whether the tax law should be amended to provide for the carryback
of such costs*




R.A.M., 10-25-1*3*

Financial Resources of Corporations j/
(All corporationsi billion dollars)
I. Corporate Hot Income Before and After Taxes.
19h0

191*1

191*2

191*3

Net income before taxes
Inoome a n d profits taxes

7.3
2.5

14.3
7.2

20.1
11.8

22.2
13.5

Net income after taxes

U.8

7.1

8.3

8.7

II.

Corporate Net Income Before and After Dividends.

Net inoome after taxes
Net dividends paid
Retained „ inoone
Cumulative sinoe 19l;0

III.

191*0

19lfl

191*2

191*3

ii.8
ii.l

7.1
h.5

8.1*
h.l

8.7
l*.o

.7
.7

2.6
3.3

k.3
7.6

1*.7
12.3

Estimates Business Investment and Depreciation.

Net investment^/
Depreciation and related reserves
Excess of depreciation on investment

1f Sourcei

0. S. Treasury Department.

2 j In plant and inventory.




19U0

191*1

191)2

191*3

11.1
8.2

18.1
9.1*

8.1
10.3

1.1*
10.1*

- 2.9

* 8.7

2.2

9*0

R.JUH., Oct. 25, 19h3

LIQUIDITY AW IHFLAliON IB THE FOSTwAR PBBIOD

I. Inorease in liquidity —» the facts
Partly as an inevitable consequence of w
finance, but also partly
due to loose fiscal policy during the war* there will be an enormously high
level of liquidity in the postwar period*
(1) The interest bearing debt of the TU S. Government*
$55 billion in 19^1$ is close to §170 billion now, and will be
over $200 billion at the end of this fiscal year. If the war
continues for another fiscal year, it -will be around $270
billion by June 19^5* (See Table 1.)
(2) So far* much of the increase in the public debt has been
taken by banks* — from June 19Ul to June 19^3# cornereial banks
and Federal Reserve Banks took $37 billion out of a total increase
of |35 billion. Recently, the record in this respect has been
somewhat better. Nevertheless* bank purchases have resulted in
a vast increase in the total sioney supply* and will result in
substantial further increases. The total money supply in June
19U1 was $73 billion and now is $102 billion] by the end of this
fiscal year, it will exoeed §120 billion* and* if the war continues
for another year* may exceed §ll*0 billion by June 19ij5» (See
Table II.)
(3) Tb© increase in liquidity is not only in the form of
cash and deposits* but also in the form of security holdings. A
substantial part of the securities held by the public are* in
fact, demand obligations which may be redeemed at fixed prices
at any time. Other obligations which are no&inally not demand
obligations actually come close to being so* since under present
conditions the Federal Reserve System will probably have to
maintain the security market should it threaten to break. Total
liquid assets in the hands of the public (deposits* currency and
U# S. securities) amounted to §139 billion in June of this year
as against §60 billion in 1930. (Excluding commercial banks and
life insurance companies). Ihe total will be |190 billion by the
end of this fiscal year and nay be close to $250 billion by June
19k5p should the war continue that long. Of the total* about onethird is held by business, two-thirds by individuals, (See Table III.)




-2-

(1;) It is exceedingly difficult to estimate the distribution
liquid holdings by individuals between different income groups *
Very roughly* it appears that about one-third to one-half of the
total is held by people with incomes of under $5#000, constituting
about 80^ of income receivers. If this ratio is correct, these
people will hold about 150 billion by June
out of the estimated
total of $122 billion. (See Table IT.)
II*

Increase in liquidity — the consequences

The consequences may be for the good or for the bad, but on balance,
the increase in liquidity is more likely to prove a liability.
Desirable consequencesi
People will have sifteable funds with which to buy and to finance
their backlog demand for semi-durables and durables after the war. Also, the
fact that they have accumulated some savings may mean that future net savings
out of current income may be less (however, the opposite may happen* people
may have acquired a savings habit and continue to save more).
Undesirable consequencest
(1) There is a danger that people will decide to liquidate their
holdings at the wrong time, that is, when insufficient civilian supplies are
available. Particularly, there is some danger in this respect in the transition period after the war. If this should happen, people will lose their
savings in higher prices and considerable inflation might result#
(2) M t h a huge volume of public debt outstanding, public policy,
most likely, will have to assure that the security market will be maintained*
If public holders of securities decide to sell on the net, the Federal Reserve
System will have to take up the slack* — and this might happen at a time iki en
a tightening of the money market would otherwise be desirable.
(3) On the whole, it appears that the large volume of liquid holdings by the publio will make the whole economic mechanism more delicate and
sensitive to fluctuations* It will be more difficult to maintain a high level
of employment since we must be moro careful hot to risk an inflationary development* We shall be less able to afford making mistakes«




R.A.H., 10-25-1+3

POST WAR LIQUID!TT

Ownership of U. S. Government Securities

I.

(In illlions of dollars)
Estimates

Total Interest-bearing Securities
If. S. Government Agencies
Federal Reserve Banks
Commercial Banks
Mutual Savings Banks
Insurance Companies
Other Investors
Marketable Securities
Nonmarketable Securities

19i+l

191+3

191+U

191+5

5U.8
s.5"
2.2
20.1
3.1+
7.0

139.5
11+.2
7.2
52.1
5.3
12.8

206.1
IS.7
11.2
68.1
6.8
17.3

270.6
21+.S
15.2
814.1
8.3
21.8

9.1+
1+.2

19.1+
28.U

31+.2
1+9.7

1+7.5
69.1

Total Money Supply

II.

(In W-llions of dollars)

All Banks
Deposits
Demand 3/
Time
Total
Currency Outside Banks

Total Honey Supply

June 30,
19hl

June 30,
19*43

June 30,
1914;

37,317
27.879
65,196

55.952
30,328

( 68,000)

86,280

( 3U.300)
(102,300)

8,201*

15,800

( 19,800) ( 23,800)

73,1400

102,080

(122,100)

June 30,
19U5

( 80,000)

( 38,300)
(118,300)

(1142,100)

1/

Estimates by Mr. Piser. Purchases by the Federal Beserve Banks are estimated at
billion dollars eaoh fbr the fiscal years I9I4I4 and I9I45,

2{

Purchases of 0. 8* securities by the commercial banks and the Federal
Reserve System are estimated at $20 billion dollars each for the fiscal
years I9IJ+ and I9I45.

3/

Excludes float. Government deposits,-and interbank deposits.




EiA.M., 10-25-l|3
- 2

III.

-

y

Liquid Holdings of Individuals and Businesses
(In billions of dollars)
Dec.l,
1930

Businesses (except insurance) * total
Demand deposits and currency
Time deposits
U. S. Government securities

15
TJ
1
1

Individuals - total
Demand deposits and currency
Time deposits
0* S. Government securities

"10
26
8

IV.

June 3£V June 30, June 30#
19U3
1914*
19U5
53

(71)

(90)

(122)

(158)

1
20
86
2B
28
30

Distribution of Liquid Holdings by Income Groups

2/

(In billions of dollars)

All groups

Total Individual holdings
Demand deposits
Currency
Government securities
Time deposits

86.0
Ik. 5
13.5
30.0
28.0

Estimated Range of Holdings
by people with incomes of
under $5,000 uver. 15,000
33 - hi
3 6
7-11
8-10
(15 - 20)

39 8.52.520.0(8.0-

53.0
11.5
6.5
22.0
13.0)

Choosing
billion as the estimated holdings by people with incomes
under $5#°00, their share would amount to 1*3 per cent*

l/

Estimates for I9I4I1 and 19^5 assume §55 billion dollars borrowed each
fiscal year from individuals, non*insurance businesses and banks. On the
basis of the past year's experience* one-third of the resulting gross in
liquid assets is allocated to businesses and two-thirds to individuals.

2/

The estimates in this table are extremely speculative and should only be
taken as an indication of the general magnitudes of holdings by people
with incomes below and above I5#000. With respect to time deposits, there
are no indications at all upon which to base an estimate, so that the figures
given in the table are not much more than a guess.




KM
October 25, 1943
POSTWAR MANPOWER

At the end of the war, we will have a total labor force of 66
million, 9 million more than in mid-1940.
The labor force increases normally by 700,000 a year, or over 1
per cent.
About 6 million of the,increase are extras not normally in the
labor force. If these are forcea back to school, kitchens, aad retirement,
we will have 60 million left.
Armed forces will be demobilised fast after Japan is defeated.
Probably have about 2.0 in the services one year after victory.
About 2C# million will bo unemployed for frictional and seasonal
reasons, even with full employment.
war,

This leaves a minimum of 56 million jobs to be provided after the
more than were employed in July I940.

8 million

Output per xaanhour for all employed increases 2-3 per cent a year.
War stimulus to productivity has been tremendous. Return to peace will find
productivity about 20 per cent above 1940.
A return to 1940 production ($97 billion gross national product)
at 1940 hours of work (about 39 for nonagriculture as a whole) with a 20 per
cent war stimulated increase in productivity, aid 3 million normal increase
in labor force would leave 20 million unemployed at end of war.
To obtain full employment, it would require a gross national product of around $140 billion (at 1940 prices, $165 billion at 1942 prices) at
the end of the war.
The employment pattern indicates the great difficulty of providing
full employment by increasing industrial jobs. Service jobs must increase.
Prewar
End of War
July 1940
July 1945
(In millions)
Civil Employment
48
54
12
Agriculture
11
16
Industry
23
Manufacturing
10
17
Mining
1
1
2
Construction
1
Transportation & Public Utilities
3
4
21
Service
19
Government
6
4
Trade, Finance, Etc.
11
9
Self-Employed & Doaestics
6
4




- 2 -

October 25, 1943

Agriculture trill end the war with a labor surplus. Manufacturing
will hare to decline substantially^ Automobiles will not employ as
as
aircraft^ Mining will not increase. Transportation and public utilities
are likely to contract. Construction is only industry which will increase
materially.
Government will contract substantially^ trade, finance, and service
will increase and must* Self-employed and domestics will increase.




R. A. If.
October 26, 1943

POSTWAR BUSINESS AND FISCAL POLICY

For the Duration of the War,
Present taxes are estimated to yield $40 billion in the current
fiscal year, as against $104 billion of expenditures. Higher taxes are
imperative in order to (1) assure continued success of the stabilization
program (the excess of income payments after personal taxes over available
consumer goods is estimated at &40 billion for the present fiscal year), and
(2) to assure a sound postwar economy (if present methods of finance continue, liquid assets in the hands of the public may amount to $200 billion
at the end of the present fiscal year and f250 billion by June 1945) •
?/hereas Britain covers one-half of its expenditures by taxes, we
cover only about one-third] while the United Kingdom and Canada respectively
collect 42 per cent and 36 per cent of their -national income in taxes, we
are collecting but 32 per cent*
Host of the additional taxes must be collected ?&ere the bulk of
the purchasing power is found, that is, from taxpayers with incomes of less
than $5* 000, and much of it must be collected from taxpayers with incomes
of under $3,000. But this does not establish a case for a general sales tax.
(Ratter, a sales tax now *ouLd induce a tremendous pressure for wage increases*) On the contrary, equity in taxation becomes the more important the
lower are the income groups which have to be reached* Exemptions, to be
sure, should be lowered, but the principle of granting exemptions should not
be discarded. Hence, the general approach must be along the line of the
income tax, together with higher excises on non-essential products.
A good part of the additional taxes should be refundable. This is
desirable (l) as a matter of equity (refunds should be applied particularly
to the lower in cone groups), arid (2) because refundable taxes (or compulsory
savings) are much safer from the point of view of inflation control, particularly in the postwar period, than the bonds purchased under the voluntary
plan* The latter point is vexy important* TTe must begin to place more
enqphasis on the postwar implications of current war finance* (See special
statement on postwar liquidity*)
It goes without saying that the Government should make the utmost
effort to avoid wasteful expenditures* At this point, however, it is better
to have an all-out war effort, even though this may involve a billion or two
of outlays not absolutely essential, than to cut war expenditures drastically
and to operate on a, say, $75 billion — or 75$I— war effort!
The Transition Period.
The problem will depend altogether on hoer gradually the war terminates, that is, on the length of the Pacific war after Germany is defeated*




Demobilisation of military personnel should be gradual if possible# But
industrial reconversion to peace time production should be as rapid as
possible. Contract cancellation should be speedy, and should be left in
the hands of the contracting agencies.
$hore necessary, financial assistance trill have to be given to
expedite reconversion, but by and large, the financial position of corporations will bo strong. (See special statement.)
It will be to everyone's interest in the transition period to
maintain wartime controls* For industry, a prematura relaxation of controls
and sharply rising prices would clean an enormous increase in reconversion
costs. For labor, a rapid increase in living costs would be equally disastrous. However, industry should not attoiapt to break wage scales in this
period; ~ the active support of labor is needed to avoid postwar inflation
and industry itself will need high wage rates after reconversion to be able
to produce to capacity.
The role of fiscal policy in the transition period will be to cut
expenditures rather than taxes. Every effort will have to be made to reduce
the deficit to a minimum, so as not to aggravate the inflationary pressure.
Postwar Period.
In the postwar period, industry will be faced with a tremendous
task. It will have to employ at least 56 million people, that is, 3 million
more than were employed in July 1940. As a result of the enormous increase
in productivity during the war years, this will mean a gross national product of at leastf 160 billion at 1942 prices.
The future of private enterprise will depend on its success in
meeting this goal. Policies will be required which in many respects will
differ drastically from those accepted in thef2Qfs and f30fs:
(1) Industry must show an aggressive spirit of expansion.
Individual savings at the indicated level of income are estimated at about $20 billion, and corporate savings may amount to
010 to tl2 billion. Depending upon the level of corporate
savings, industry will thus have to make investments amounting
to $20 or $30 billion per year — a volume vastly in excess of
anything experienced in previous peace years. Certainly,
industry will not succeed in this task should it continue to
retain large portions of its income. More reliance must be
placed on equity financing and the bulk of funds not actually
spent for investment must be distributed to the stockholders.




If full employment is to be achieved , there trill also
have to be a vast increase in consumption — say, $110 billion as
against $70 billion in 1939 — much of which will be directed to
the services, health, education, etc*
(2) Industry must be flexible and competitive. The technological advance umich has been so enormous during the past years
must be reflected promptly either in higher wages or lower prices.
Vigorous competition must assure the expansion of our economic
frontiers and the development of now products. Only if industry
lives up to these basic mores of our economic system can it hope
to succeed to provide full employment at a level of peacetime production of §160 billion or more.
(3) The role of fiscal policy in the postwar period will be
to encourage full employment under private enterprise.




(a) Taxes will have to be revised to encourage consumer speeding and not to discourage enterprise. In particular, we shall have to cut consumption taxes and income
taxes paid by the 1cmer income groups which are the bulk
of business* customers. We shall have to raise exemptions
and again reduce the number of income taxpayers to a
smaller group. The corporation income tax should be
abolished (with the exception, perhaps, of a small franchise tax) and corporate income should be taxed to the
owners of the corporation. However, provision should be
made to make it impossible for stockholders to evade
individual income taxes through non-dis tribution of corporate income.
(b) Jnablic expenditures should be economical. If
industry does the Job of providing full employment, the
Government should limit itself to essential expenditures
which do not interfere with but strengthen the activity
of enterprise. Even under these considerations, however,
the Federal Budget in the postwar period may well approach $20 billion.
(c) Economic freedom requires that no citizen should
suffer unnecessary want. To assure this freedom, Social
Security should be expanded greatly as proposed under the
Wagner Bill. Also, an expansion of Social Security will
make it possible for individuals to accumulate less
savings and to consume more, thereby assuring a higher
level of employment and income.
(d) If industry and government work hand in hand
in the task of providing full employment under private

- u -

enterprise, they will jointly develop a flexible fiscal
policy which in times of need will take up the temporary
slack in business activity and at other times apply
curbs against inflationary spirals. For such a policy
to succeed, it is absolutely essential that the business
community should participate and have full confidence in
the formulation of fiscal policy.
International Trade.
To take its place in world commerce> the basic task confronting
the United States is the maintenance of full employment and a high level of
income at home. If this condition is met, Americans will be able to buy
abroad, and African industry will be in a position to compete with other
countries.