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THE SECRETARY OF THE TREASURY WASHI NGTON July 15, 1941. Dear Chairman Eccles: In confidence I am enclosing a copy of the memorandum which we discussed this morning and which was submitted to the President today. Sincerely yours, Secretary of the Treasury. Honorable Marriner S, Eccles, Chairman, Board of Governors of the Federal Reserve System, Federal Reserve Building, Washington, D« C. m !• fht Prssent I riot SltmaUaa Apparently w@ ar* at th* saa* point la pries hLater/ as In 1016 «*" <m ih« tdge &f inflation. Ths patttra of frim ittii aunnzsarist^ below r«s«^lt$ tk« priot Bovtmexiti auriaf th« first two of i w l d iar 1 •• little rise la tL« eo»t of llYlng^ a moitratt rlid In th« whol«iil* flit iB basic WNtttttlafe ; o f th# prle# indai has riita fraa ?& to 67, or about f f Tlit graattr part of thii rise kat during tiit past five mmtka* Tb« cost of livin l&dti lias i&er«as«4 0-I/2 since Septaiabsrt 1^40. Hair if tkls iaor«as« has im th# past tiro n^aths. flit IttHi of - batlo ci«a041tles has laereasai 48 duriag the same p#rioa# despite tL# faet MMi th# s of m&$ basio raw materials hats ths Offles of rriss ia§rtast ^oastitnits a aajor daagsr si£jatl of inflttioa which mist not be Igaorsd* The «hol«sal« pries index always lafs grsatlj behlad ths indei of basic l l th* eott if living ln&«x doti got «ho« *£grthia& like vatll lem ifttf thl ###ii 11} Tk# Bm4f#l llMli jmr t m will | i U5 MlliMi ®r %m mi half limit m m®h m t l tU f l t t t l f i t i 1M1* This Ikt L 0m ih« dniftr of th« H l p l i will hi US*! billions, eomsmrte with IH for tiit fr#?i0ut flMil fjtii IMi 4«iUKt» tax time turf • If ikt prt««nt t « bill is mm$ MM Ittltli win it retaml If btilim t»x bill) M It will ntlll bt #v#i* $10 Agaim tkis aatlaatad ceficit do«d not taka aoeomt of H M expansion of tk* btfaaaa Program aftar Ju&a 1, (3) MM liflilliiiij NPM if Ita Mwil k&g b««a iappl«a*at«d during tht fait ytar bj of baak ertdit* Total bank loims #xpaaa«d by an H billlous, or about 20 parent iarliif ika Jmst paat* fkls riaaf m©rti>?*rf kas batm proeaadiag at am aeoalaratad paea* (4} Frlata will 01 lieraaalngl/ atlaalat«& bj (a) tk« abortsg# of raw aaUrials for ifeft&Stt gooda# (b) iacra^seu absorption if idl# eapaeit/ in tri«s, U ) further ineraaaai la agricultural frUas and isaking for fmrtfeat jrtil iEtreataa art tht obstaalat to imports* auch at raitioad ahip , hl^har ikippla^ ooats» t^i mittlag off of ga iourees of aappllac* tiag to eaaok inflationary trm&*§ *mh as surplus atoaka of aoisft agricultural co^^sditiss, uaeafloyed labor r*» toarcas, m d partially aaplojrtci production faoilitiasf » a t of tiiaat f^®^0|ll» • • presaiit ia tba fiaoal jear 1941 in grtttif I t f m &s4 jrot I I I mt $tr?# lei | i t i i r i s t t oroa though tho fopoot asaklag for pri#t Fii#t w#rt tlita mmh itktm i# %kmk Imllatiea* Coagrtts is«i Mlt fffftftitt mi m i t tbfort»» t$» t i t B»ftMH VNflPMt f^Mi vhlth aiglit otli«f«lt« bi i f i l I#F tlvUiM fbit ppigmi l l w#ll tax anticipation aotoo vbioh will faotlltato tho i tul itans C#^iltt#t la bol4lsi flMlf to ©f H#l klUlw frtm tht I M HUU Off It* ©I Pritt i i t i l l l l l i i H t i tad Cifiliam l i afeking ®mry effort I t d%tala tlui ^@f f iiit#r» ami ttitrttttlfi l i ilsitlaf prlet Th«s« »iisiir*t to roitrftia pri«® r l i t ® though thojr hate uaquostioaabli1 tittm htlff'-nl art tMiiipMll to m#et fart of the m y it trill bo me*****? to go* lo suit attaok iho pfftlM oa all fronts if wo are suoooasfully to ehusk iaflatloa* Certain tat matter* M l * H l l to tho p-robloa of t r« ai«euis«d later. fk# probltm, iionever, bo iet b^ t&i f&e&tmrea alont* Th«r« should bo aotios slong thi? fallowlni; liuos: (1) QF1CI should be j-iven the »t£t\itorj p^wor to fit Lprioos whofo ^oooMSFZ* P^ioo risos o&jaaot bo eomtrolltt whoa- laflatlo&ft*? fiPOOl art nt work witbstit p#wor to i»poso prioo oollings witk diroot Th# sort patstsiioa of st*oh tamtr toads to mako its exercise unaooossarjr. tho attos^t to pPiPMrt \iawajit#d prieo iaorotsos b|fiat, however, in baund to break £$w& horo9 as it baa elsowhere, ualoss It is aooom^aaiod aot only by «a adequate f£*toA program to absorb buyia^ powor9 but also by tho aMitioaal methods listoi below, (i) Increaie tht supplies of i;ooda requlrttd for military aai civiiinn nooda* Xa©r§*»*4 output is la itsolf a major objootiTo af our Dofonso Program &n& tho «lf*ctiye *&& deairable mtani of prt?«mtiag i&flstioa, There should bt further exploration if tbt poasibllitiei of isduoisg s*$>an«ioa of production fa«lliti#s tad L&feor supply wkif« 0^«k MtMtttl eo^li not b# (3) J>#l*gfttloa to BtMi ot yriwitf mth^rltj tanlBg Q£ »«*re# l l | | i t i t to t r l t * ^iklag ei?ili&a goods* la $rd#? to abUin « distribution of soaret a^p^ilti aaoni; ecmsumeFS i t I to txtoad tlif rmtiomimg to (4) .-:st«&tio& of tht goaer^l eoatrol* iftV bank credit. (i) tataUlsbMiit of control* mm tht islt9i Croatioa of eoatrol* 9Hi otplttl (7) t i «xt«r*iioa of tho S Itali w^iiah would iaertaaa the flow af fund* to tht from currtut iMiM tatllf the *®%rg*mf aa4 would dtftntt m writing program* snob «s (9) tiintlii if til *spo*l for mm®m in S l i n t s It sttsss ?rofe*felt to us tlitt nom wiibo&s Mil b« tongfet to control It* tho oriMipal Ami iftflfttioimrj #ntltts Is ttxfctiott* It is tko tfjfootiTO ol a l l tbo br^fti povors at UM ooawuid Mi (OVttaMtit* H i tax IfHiH -skouli 'It 4oslgHt«l th« su^^ly is tftado^uato, Vs II* Coaroeata a ?h« fax Bill It it important that the amm&l iiHtiti to the Treasury retinues provided by tfe* new tax bill shall not fell tttil ike | M billion Ulfi In fact, it ti If* parent from Ike si*# of the appropriations and th«r pree* •uree of eos«u»er purehetiag pemr oa frlees that further in ratts or eiteneloas of taxes art neeeseary. fansulntlaf the exeiee %*x prognm as important should be to r#dim« the defend af produeere and eoneuaere for &@&t®% ednmoMtlts whieh compete ulth the Defenee Progww ft»^ ^^ &bt^r¥ windfall profIti reeultlng from ittfelty of supply rtlative to deiaand* thms the tax on pateeager automobiles mifht well be istde ameh higher than the 7 pereent aiopt®d by the Co««ittee» The produetlon of passemger automobiles will undoubtedly have to be greatly reetrleted* It would be extremely difficult Is pretext prie# ri$e§ aa etrt eeld by tcnte retailers ©r the setting up of a *felaek mrket* in new and slightly us#i ears* It is probable that a asiffieieatly h i ^ sieise t&* will preheat laertaael prises from resulting is wind* fall profits for dealers end middleisan amd will mot p-riots of autoaebllee to *9&su*«r* beyoaA &tttoaH>bllee art i§mmti0 beea*ee tJwgr are tht m*% important ttasflt* Cth«r bo la tk« ttaut tategary A n i l fe# wh*t&tr &m •*«!•« tltottld b# Is^ostd anl i f sot i l A i i l l bt @a tlwi f j l i i pyti^rt ^F 0a & «®*r#t m t t r i t i •attrl&g into th# pr#im«t« Tbroi^h tnah. ftf ilit tgft §&*!•*• MMMiittti aa4 th« largt w i n l f t l l | M f l t i wkiek sty bt salt bj H M i tstuplmg b«sle liftllKHl of tlit #if#s§ profits t«x plaa is »#titi. flit $i#tss profits tax plua t i i i i t l i i l f 1 tb* Coamlttto is in somt important rospeota aa i t full® to 0 Off Oil out fu&daaofttal iroakaooa of tho gpitMl law* I t l#^T#i «Etmft fr#» tho tax fftfita la oxooaa of a rta80»ll® rotun m Imvoatti oapltal to H OStattl ttil tho00 f M f l l i art alto ia oxooaa if tht ®t MM baao period f i f H , • 10 • Substantial auiab»r» of oospanlea are im this category* Q&a out of fire proflt*maki&£ corporations with aeseta of $1 million and ©?er ayaragad aaore than 10 pereent mat om HMAi reported acuity oapiUl during the /eara to 1938 and one out of S§ ooopaftiea araragad mora tha& 30 pcrcgn.1, ?haaa eompaiilaa eaa aentUuia to #aim prollti at virtually thtst rataa without y&yinr profits tax uadtr aithar tht ^raaamt law or tk# tamtatira plaa* ( Tha wajf 1m wkioh the |>r«aant law aad tha Co«dttea 9 $ t#ntatlY« plan Itave #x«apt large amotmtft of excess proflta la illustrated b/ tha following actual examplet. Ai lifter faylsf all taxea aa automobile aade during the baae period jreara of IBM- through approxisattlj 26 percent, ractictllj all (95 paraant). of this amount earn be earned and jet be free from exoeaa profits tax ws&*# the preaeat law aad mtkw tha C^tmittee plan* In 1940 tha earnings of tide eonoern, after the mmt of taxaaf will ba approxinatalj 3S peroemt of ita imiraated aapltal# under tha present law* • II B* Tfcs eajmingi of ft gaaufaeturer of tractors with atarly ISO million of inveatee oapital avaragta, after all taxeef approximately IS percent of laveated capital clmrlag l&S6<»1989f which amount will ba tfcM of excess frefit* tax andar th« praaaat Ian asid tha Ceaoittaa^ taatatiYa plaa* i Similarly a CMnpaagr which has praotlaally a on oaa of tha important yafaaae mattrlala had aftar taxaa taftag tha baaa period ystrs mfproii®at#ly 19 p#j?0aEt of ita 1S40 lftvaat«d capital, vidoh it can continue to © a m fraa of GXC«SS D« A larga manufaoturar of bararagaa o&n coatisiua to #ara fraa of excess profits tax orar 25 ptreaat of its 1040 raportad aqultj oapital. « larga M i H A i of tha kind of prof Ita whioh Itftui as exctss profits aad w@ra taxed aa auoh uml®r tha 1^10 Aot are fret from aatoaaa profita tax under tha present law mi. the Coaaittaa plan* Failure to apply excess profit* taxation to aueh profita ia uafortmaate for a nuabar of reaao&as U) The highly prosperous, well established | | H wbiofc has beea making $0 f 40 t 50 p Its invested eikpitftl has a m o h larger ability to than a corporation which has bt#a enrmiEg mlf 4 f tr § f*f$#mt on its Iay#itt4 caritnl, iaooaes of th« two eomp^ni^s tr# the il c^rporatioiaa in t^oordmae* with ability to pty for hightr taxti #a tti frofltt of thett eor|Hirft ^ i « h hav# the higher rates of return. (2) The MpNNftttt w^ieh h&i been tanking high retur&e im the kite period /ears is given a aive^tage over aewl^ org&niiei €oacera» O P coaeera* which h&ve beta siru..; iiaj to tst&blish themeel^et. fhe latter tjpea are limited to a much tm&ller rate of return free of exeeei profits tax than art the former• The effect it to oonfim menopoliee In their eontrol an4 to protect well established proeper&us bmsiaesses agti&si coapetitioB* vS) If we are to expect all classes of society, including laborers and faraers# to aoeept the saerifioes of the t^ti^tna|r period ani not to frees for «ver| possible dollar of advantage, they lanst be oostvincedthat saorifloes are being distributed aoooriinf ic abilitj ami that no one It a&kl&g unrtftaeaablj l i f f t profits. The pr«v«ation of hrflatlTt It thus to m «onftld«rabl« t i t t u t ^a tlur Imposition i M «afert#si«at of & tfu« «xcesa
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