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July 19, 1946.

Dear Captain Clifford:
In accordance with your suggestion following the
meeting in the Cabinet Room last weeK, I have prepared an
informal memorandum outlining my own general opinion on
what can most appropriately be done now to deal with the
inflation problem. As you know, I feel that whatever the
future of GPA may be, it cannot do the job and the only
alternative is to present a most vigorous fiscal program
coupled with econoiBy and deferment of all needless expenditures, public and private. I am fully aware that
Congress will be cold to any tax plan, but if the President
should put it up to the Congress, I feel confident that the
leadership would be universally approved and the responsibility for failure to act would not be on his shoulders.
Anyway, 1 have outlined trds general viewpoint
in the informal memorandum which you suggested I send directly to you. Accordingly, enclosed is a brief note to
the President as well as the memorandum.
Sincerely yours,

L S. £ccles,

Captain Clark M. Clifford,
The ihite House.


July 19, 1946,

Uy dear Mr. President:
It was suggested, following a conference in
the Cabinet Room last week among your advisers who are
particularly concerned with the inflation problem,
that I prepare an informal memorandum outlining in a
general way the views I expressed at that time.
Accordingly, I have ventured to do so and I
enclose a memorandum for whatever aid it may possibly
be to you in dealing with this ciost pressing and difficult problem.
Respectfully yours,

M. S. ficcles,

The President,
The White House.


As a result of the nar, the country Is confronted with an
Inflationary danger -which ootild have very grave consequences. War
finance, chiefly beoause of heavy reliance oa borrowing from the
banking system, expanded public holdings of liquid assets frora about
71? billions in the Middle of 19Ul to xaore than 220 billions by the
ead of 19U5» At the sans tine a huge volume of baoklog deaaxtd aooumulated* Inflation was avoided during the war years only because
the economy was harnessed in a system of direct controls*

Since the

war, the pressures of demand have increased s t i l l further* Consumer
income: after taxes are above the wartime peak aad the rate of savings
has fallen sharply* Corporations are in a highly liquid position and
large, amply financed foreign deaands compete with domestic buying*
At the same t i n e , direot allocations, building permits, wage and
price controls, and rationing have been abandoned or greatly weakened,
HO adequate fiscal adjustments have beenraadeto compensate for the;
impairment of direot controls* As a result. Inflation pressures haws
been rising and prise controls have become increasingly unequal to the
task of holding the line*
Conditions have thus been created under which no price
control measure, much less a weakened b i l l , can now be expected to
function effectively*

Direot controls, enumerated above, which are;

necessary t o reinforce price controls cannot be effectively reestablished* The months of uncertainty preoeding the current legislation, the
long delay by Congress in getting the b i l l enacted, aad the drastic

cutting of appropriation* to administer such controls as might be
tended, all compound the difficulties of continuing offoot ire prioe
controls• Unworkable price controls would bo worse than none.
Production is the ultirmte a n e w to the inflation problem*
That takes tine. It is imperative meanwhile that ways be found to
cheek the excessive demand* Since effective direct controls cannot
be reestablished, other scans must be found far dealing with the
problem. The three most important aret
(1) Reduction of public expenditures and
raising of taxes to achieve as large a Federal budget
surplus as possible,
(2) Elimination of unnecessary expenditures*
private* state* and looalj
(5) Curtailment of credit and disposal of
Government surplus*
During t he deflation of the 'thirties, fiscal policy required a budget deficit, putting more purchasing power into the eoonomy
through public expenditures than was taken out through taxation* How,
under reversed conditions of Inflation pressure, a budget policy is
called for which will take more purchasing power out of the eoonomy
through taxation than Is returned through public expenditures* A
fiscal policy which brings about a substantial budget surplus is by
far the most effective means left at our disposal to meet inflation
pressures* Unless the Governawnt sets the example in greatly reducing
its expenditures and increasing Its savings, the people oannot be


expeeted to follow the Government»s admonition to postpone their purohases nod to taaintain thoir savings,
(1) Eeduotioo of Expenditures, the expenditure outlook la
the budget ha« deteriorated during reo«?nt «a©nfch«. Expenditures for the
fiscal /ear 19U7 are now estimated at a l i t t l e over kO billion dollars,
without allowance Itor tfc« terminal leave b i l l .
5 billion over the January budget estimate*

?hls la an Increase of

Jiearly one-half ef the

budget i s for national defense expenditures «hi©h have continued at
a Tery high level, despite the faet that the war ended nearly a year
ago, that large supplies of every kind were left after '/-J Day, and
that the amwd forces have been reduced te about 20 per oent of their
wartine strength* Large sums are s t i l l being spent Star construction
that oould be postponed and farther supplies whleh are not urgently
needed. Searee Material and labor are thus being diverted frwe
acutely pressing civilian needs. To remedy tills situation, a l l pro*
oureswnt and oonstruotion activities under the national defense pro*
gram should be screened* All those which are net of an fcsaedlately
urgent character should be postponed.

To this end, i t is reessusendod

that a committee be appointed, te include proainent representatives
of civilian groups, and that this cosa&itte* be Instructed t e reeonmand reduction* or deferments of national defense expend it ires,
aggregating net loss than 5 billion dollars. These expenditures
should bo deferred for the reminder of ttie current fiscal year or
until dangerous inflation pressures no longer exist.

While It is evident that mjor budgetary savings will have
to coiae la -tii« defence program, other non-urgent Federal expenditures
should also be deferred or reduced, especially those on public works.
The terminal leave b i l l i f framed to provide for cash pay*
raents will bo highly inflationary.

8very effort should bo nude to

provide for payment at suoh tine when deflationary pressures are
developing:. This w i l l Help to stabilise the eoonoa^ and w i l l bo in
the interest of the veterans who will bo able later on to obtain no re
and better goods Jbr their money.
Public agencies, finally, should defer for the tis» being
a l l food purchases for relief purposes. I understand that foods currently purchased will not add to deliveries to foreign countries prior
to their harvest. Accordingly, temporary postponement of purchases
until xoro anple supplies are available in the Aasrloan mrket would
not impair the relief progran.

Inoroase of Taxes, tax reductions provided for in

last year* s legislation have produced a revenue loss of about 5 b i l lion dollars. Had rates boom Maintained and expenditures been kept
within the limits of the January budget estiraate, a budget star plus
possibly of 10 billion dollars oould have boon achieved for the current fisoal year.

Instead, no surplus i s in s i g i t and * deficit i s

in prospeot. To correct this situation, curtailatent of expenditures
will not bo enough. To provide additional revenue, and particularly
as a fiwans of reducing pressures for hi^ier price a and increased wages,

-5the excess profits tax should be reinstated.

In addition, taxation

of capital gains should be tightened.
(a) Excess Profits Tax*

It is now being widely

recognised that repeal of the excess profits tax was premature.

The repeal came at a time when it was expected

that other controls would be continued and when there
was widespread fear of impending unemployment and deflation. Since these assumptions have proved to be unfounded
and present conditions are entirely different from what
was expected, there is every reason for restoring the tax.
The annual rate of corporation profits before tax may in
the course of this year reach the wartime peak, which would
leave profits after tax greatly in excess of the wartime
high. As reconversion is completed and as prices continue
to rise, profits will increase generally.

Since they are

essentially wartime profits, they should be subject to excess profits taxation.

Based on inflation prices, they

are paid for by the publio for whose benefit they should
be recaptured through the budget and used for debt reduction,

the excess profits tax would not only assist in

creating a budgetary surplus but it would exert a powerful influence in discouraging excessive pricing by corporations, and in helping to reduce industrial unrest and
demands for increased wages during the inflationary period.

-6(b) Capital Gains Taxation*

the present tax

treatment of capital gains, under the individual income
tax, encourages speculation. Gains from assets held for
only 6 months are treated as if they were long-term gains,
they are taxed at a preferential rate of 25 per cent instead of at the much higher surtax rates applicable to
other income. The speculation thus engendered is especially harmful in driving up the prices of homes and
farms which are at highly Inflated levels*


it is proposed that long-term gains, taxed at the preferential rate, be redefined to mean gains from the sale of
assets held for two years or more,

the new provision

should be made applicable to gains from the sale of assets purchased after July 1, 19U&.

This would discour-

age speculative purchases for the short-term and would
thus reduce demand. As the new provision would not apply
to assets acquired prior to this date it would not reduce
If inflation pressures continue to increase after curtailment of budget expenditures and application of these tax measures,
an increase in excise and personal income tax rates should be considered.

In making these tax recommendations, I recognize that

there is little likelihood of Congress accepting them at this time,
but it is the responsibility of the Administration to recommend
what is needed.

Having shown the way by carrying out a drastic retrenchment
of its own expenditure program, 12ie Federal Government should appeal
to all other spending units—States and localities, businesses, and
consumers—to follow suit.
State and local governments should be urged to postpone all
possible public works and construction projects until the inflationary danger has passed.

They should also be urged to maintain

State and local taxes at a high level in order to build up a surplus
for a later period of need. After the necessary adjustments in the
Federal budget are made, the President might call a conference of
State Governors to promote cooperative action.
Businesses should be called upon to defer capital expenditures wherever this is practicable and to refrain from building up
unnecessary inventories. Non-residential construction should be
curtailed more vigorously and high-cost residential construction
should be deferred altogether.

Only if construction expenditures

and capital formation are thus curtailed will it be possible to
meet the urgent needs for veterans and low-cost housing.
Finally, e-rery appeal should be made to consumers to
exercise the greatest self-restraint in their purchases, and not
to follow prices up.


Public agencies which extend credit directly, or guarantee
or regulate credit, should be requested to do whatever they can to
bring about curtailment of credit except as it may be essential to
maintain or increase production. At the same time consumer credit
controls should be maintained at full strength.
In addition, the situation would be further helped by
expediting as far as possible disposal of surplus Government
property and inventories, this would not only help to relieve
shortages but would also bring in revenue to the Government and
thus improve the budget situation*

X am aware that the program here proposed is drastic and
difficult to carry out. The alternative, however, may well be an
inflationary spiral which would undermine the basis for prosperity
at home and the foundations we have laid for international reconstruction.