View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.


March 23, 19U5Honorable Jennings Randolph,
House of Bepresentatives,
Washington 25, D. C.
Dear Mr. Handolph:
Mr. Parry, Director of our Division of Security Loans,
referred to me your letter of March 20, and I am venturing to reply inasmuch as both points you raise came up as a result of
questions which were asked of me when I testified before the Banking and Currency Committees of the Senate and House on the gold
reserve requirement bill. In both instances I was expressing a
personal and not necessarily a Board viewpoint.
There is no justification for concern with regard to the
first point. If the stock market were on a cash basis as, incidentally, it is in London, the banks would not be prohibited from
lending on listed securities for purposes other than stock market
trading; that is, you could borrow on securities to buy a house, pay
taxes, or any other purpose except margin trading on the security exchanges. I agree with you that the point is important and if any
action were to be taken, it should be made as clear as possible that
this hardship would not be involved.
With regard to my own suggestion for a penalty rate on
speculative capital gains, I am taking the liberty of enclosing &
copy of an explanatory statement on this subject which I issued
after appearing before the Senate Committee. Senator Taft and others
unexpectedly asked me what I felt could be done to curb rising prices
of farms, homes, etc., and naturally I replied by expressing my own
best judgment, which is that such a tax would be the most effective
expedient, much as I dislike direct controls that deal with effects
now that we have failed as a Bation to deal adequately with the causes
of the huge inflation potential confronting us.
The more I look at this question, the more I am convinced
that the brokerage community has succeeded rather well in pulling the
wool over the eyes of the people generally about the deterrent effects
of a capital gains tax on venture capital. Here again, I agree with
you thoroughly that everything within reason should be done to stimulate postwar investment that will furnish production and employment,
and I would oppose any tax or other needless impediment. In wartime,

Honorable Jennings Randolph - (2)

March 23, 19U5

of course, when we have a scarcity of manpower and materials, there
is no reason to encourage venture capital. What I am suggesting is
a wartime capital gains tax, for there is every reason in wartime to
discourage the speculative activity not merely in the stock market,
but particularly in homes and farms. People donft have to buy
stocks. They do have to live in houses, and to let the prices of
these essentials be driven out of reach, particularly of the veteran's
purse, by speculators taking advantage of the capital gains loophole
cannot be justified.
In the postwar, however, what would really give encouragement to investments that result in production and employment would be
to put a tax premium on productive investment and a penalty on mere
speculation that furnishes neither production nor employment, but results only in economic instability. In order to induce venture capital to take risks in enterprise that furnishes production and employment, I would reduce the excess profits tax from the present 95 per
cent maximum to, say, 70 per cent, and make the normal corporation tax
23 per cent without the corporate surtax. I would then exempt from
the normal 25 per cent tax profits paid out in dividands. since they
would be taxed in the hands of the recipients. This would avoid the
double taxation that is a real deterrent to the investor in productive
enterprise. At the same time, I would grant an exemption of $25,000
to all corporations under the excess profits tax. This would not
matter so much so far as the large corporation is concerned, but it
would be a tremendous boon to the smaller and medium-sized concerns.
/ With such positive inducement to real investment, the capital
gains tax would be insignificant and, in fact, there is much to be said
for retaining a capital gains tax that would penalise the speculator
looking for a quick turnover and hence further encourage the bona fide
investor seeking income or longer-range appreciation. The low capital
gains tax of the late 20*s, far from encouraging venture capital to go
into new production, was a positive incentive for luring capital into
stock market speculation to make money the easy way. V
I have not undertaken to say whether stocks or other capital
values were too high or too low. So long as they reflect underlying
conditions and prospects, there can be no objection to these prices adjusting accordingly. I am, however,
opposed to the unproductive,
unstabilizing activity in any of these markets, and that is what the
penalty rate I suggested would effectively curb.

Honorable Jennings Bandolph -


Maroh 23, 19U5

I know of your interest in this broad subject, and should
the matter of suoh a tax come before the Congress, I am sure you
•would want to iseigh all the pros and cons before coming to any conclusion.
Sincerely yours,

M. S. Boeles,


/ /EfTb