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EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU OF THE BUDGET
WASHINGTON. D. C.
APR 2 8 194Z
My dear Mr. Chairman:
I am enclosing a copy of the memorandum of
April IS.
It is identical with the version which
you have, except for the marginal note added on
page 8 by the Vice President.
Sincerely yours
Honorable Marriner S. Eccles
Chairman
Board of Governors of the Federal
Reserve System
Washington, D. C.
Enclosure
FOE THE
.
WJQ Ah AITI-IMFLATIQH PROGRAM
On harca 17 you directed that ari IwUgNU
BftgMP be I'orKitlated by the Seer tary 01 i
-at:on
.rr-asTiry, UM rice
inistrator, the Chairman of the Board of Governors of the federal
Easerve System, the 5<soret&ry
.
•
tare, and the Lirector I
In accord •v.it".
.sn
i-:!.
of Vt.
ment, has alreac
.
d
following
.
. -ae-
i l l y submitted hla viei?s t o you,
at a rapio. rate.
adding ...ore tii&n £2 ','111ion sen
earners, a
.^inessaen.
Income:~
...
.re now
.r;;ier3, "&*
. , war production i s c u t o l
deeply into the supply of goddfl availtbXt for d i l l l a a m .
and the cost ox l i \
re r i s l n ^ dang«TOTi«l
iias just be^isn to tai-ce siia^:.
•will exceed ,6 billio:.
rices
. WV pro jr.
of this year, war expenditures
., m WSf% than
the present r a t e .
These expenditures are running well ahead of budget estir^ites*
Hfe have exanined the
possibilities DI
r
f«
,
K| riave aiia^vsed the
LVG corae to
that partial progr
111 not work an
on prices, reals, m
roflttj
. conclusion
i A only a sijanltarieous attack
oiid raass purcliasing power m i l suffice,
. a coi-iprehenslve jpagfaa) |g not a«2| ocorioraicalXy and politically
, but tiie
approval.
i l lias ir^dica-i/ed. timt i t T&ll ar, use strong
..
. i«a±n n\•wantii ef the program are discussed
- 2 briefly below, followed by an outline in somewhat greater detail
(see
Price Control
The on^y way to stop the inflationary spiral is to place a
ceiling laaiadiately on all prices — retail, wliolesale, and producers'.
This is a strong ueasure but one which three-fourths of the people are
asking for according to the polls.
Since some retail prices (by no means all) do not fully reflect
tne increased wholesale cost of goods, certain classes of retailers will
be squeezed. However, the Office of Price Administration is now formulating sup;*les&entary orders lowering the prices of wholesalers1 arid
manufacturers* goods. Conferences on these orders are now being scheduled
and substantial relief -will be provided by the time retailers must replace
present stocks. M l this will not be easy. In some esses subsidies will
be necessary to h o M down the cost of goods. These steps are important
because as war production increases, the sales volume of retailers and
wholesalers will decline. This also xaeans a squeeze of profits, especially for retailers who constitute the backbone of small business.
The proposed jeneral ceiling includes most foods arid all
clothing at retail. The Emergency Price Control Act must be stretched
if this broad field is to be covered. If the cost of living is to be
fully stabilised, the 110 percent parity linitafi m isust be stricken from
the prioe law*
i?'ur the nacre, U N prices of feeds srast be held at their
- 3 -
current levels, well below parity, In order to prevent a r i s e in the
prices of meats &r*d dairy products.
that the sale
jreaa mast !..
uaded
MRMD^MMd stocks should not be restricted.
,a,;s Control
M9 propose the proclamation of a policy of stabilisat'on of
wige rates, except those below kQ emits an hour.
fti do not ll^tly propose this action. In the lai\, run, a
sound labor policy cannot permit tsa^e rates to jaove up freely while the
farmers and scsall business are controlled. De&p popular resentment
would follow the exemption of labor fron the general program. On the
basis of thin resentsaeni, the Congress ?*ould sooner or later take
steps not only to redress the balance- but to strike at the very heart
of collective bar:;airdn ...
e hop© lias often *zeen expressed that stabilisation of tne cost
of living would suffice, and that I
foilisaticn
oi' vsa^s rates is
unnecessary. This hope is unfounded. Tarj shortage la labor is alre..
such that wa^e rates in nounilitai'
stries ar.
\ forced upward
by competition.
lage iBCoat is certair to increase even if wage rates are
stabilized. The masker oi
.ojed workers and therefore the family
income of workers, will continue to rise. Nrthcrmore, eKiployees will
work more hours per week at overtiiae presduias and they mdll aove up
continually fron lower to iiijier tmid tiobs. •• do not propose to
stabilise -wa-.os below kQ cents an hour.
Stabilization o£ -wa^e rates eliminates only one important inflationary fattar«
H reduces tlie excess of purchasing power over
shortened supply so that the remahnder of the problem can be isana^ed
through fiscal and price control measure3. Unless isage rates are
controlled, V*B believe that increased labor costs and increased consunaer ctesand will shatter the price ceiling and thereby discredit
price administration and ^ovemraent in general.
Labor leaders may be reluctant at first to accept the policy of
T«age stabilisation. None the less, such a policy basically serves the
best interest of laoor as "well as sound national policy, ffi are convinced that labor Kill accept this policy if it is part of a program
of equal sacrifice. Stabilisation of "srage rates will still leave a
field for constructive union activities.
rroflts
Corporate profits in the year 19hlf after the payment of taxes,
increased at about the same rate as m g e and to incomes,
salaries and bonuses of mana^ment have been blown up out of all
reason, These instances are well known to labor and farmers — they
incite demands for hi^ier isa^es and. higher farm prices.
The proposals for profit taxation in the pending Treasury Bill
will reduce 15&2 profits at the disposal of corporations below the
level of 19kl» But even these stiff tax proposals i&ll permit sosse
corporations and sosae individuals to retain unreasonable
;ijains.
reisedy this situation, the following measures are su^^estedt
To
-
1.
5 -
The excess prolits tax provisions of pending treasury
proposals should bo tightened.
^hiie i t would be ^esir&ole to
raodii^ the bases for deter»2inin& excess pro i t s in order to elcse
a l l loopholes in taxing excessive profits, that fundamental issue
probably shoul*.. not be reopened e t the present time.
2* :inreascmable salaries and. bonuses, and salaries and
^onuses wcich have oeen increased to avoir taxation, should be eliminated by s t r i c t application o, Ike internal revenue laws w\ich prohibit
deductions oi "unreasonable" salaries in coaputin^ net income*
3* A ceiling of
50,OQQ, after taxes, ilffA tai pl&cec on
individual incomes, thereby dramatising the equality oi sacrifice
implicit in the proposed o^ejvall program*
Moreover, that limit
mill s t i f l e the criticisms and questionings wriich
receno disclosures of excessive salaries in war Industriec.
A b s o r p t i o n oi
:•..•
by taxation and saving
Price md wage stabilization are oooraed to failure unless
the explosive pressure o! e: cess purchasing pe»er is reduced through
appropriate Mil snci savings »eas*ores.
the pendin,. tax b i l l o± tiie xre&sury falls i&r tkort of that
requirement,
ivM if'wage rates are stabilised MMi the complete
treasury tioc ja»o*c,r^® i s eaacted iKr^ediately, excess parch&si^ power
this year i&ill s t i l l mount to
ore toan |10 billion*
jfurthersaore^
aach of the excess m i l be in the hands of people who typically spend
- I almost a l l of their income*
i t auat be roMHtbered that about
half of a l l oonsuisption i s \rj people i*,08e income is not materially
affected by the incose tax.
The i'reasuiy voluntary savings prograa is also hopelessly
inadequate to deal -with trjjs problem.
I^ess tiian 10 percent of a l l
savings bonds have been sought by individuals in the lower-income
brackets.
Ov&r 90 percent of the bonds sold represent aserely the
normal savings of the niridlct end higher-income groups.
ATOInn .arj' s a v i n s program will not sufficiently
the consumption of i^ie lover-income groups.
curtail
To do Un ;;oo, i t is
essential to have sosie type o! compulsory universal saving.
We are
convinced that a voluntary program will not be effec ive, that i t will
be extremely inequitable, and that i t n&ll undermine public jaorale and
create i l l -will.
I t ! • doubtful whether voluntary savings even i a t h
coercive pressure can obtain an adequate volume of subscription® irom
the peo^e whose jaircha^in,, power must be reduced.
During the l a s t war* t i e voluntary savings progrsa extended
even to bad^erinv school children, to vicious 'pressures, to odious
personal MqpTlaeMp and to psintirir. ,/ellow the homes an-:-; barns of
those who failed to subscribe to the satisfaction of their neighbors.
•ie coercion i s inevitable in any event, i t snould be placed upon
an orderly and equitable basis,
la analogy i s the universal draft
which ha® proved so superior to a seal-voluntary service system.
e propose a Universal Savings plan, \tith savings invested
in non-negotiable bonds payable after the war when hard t i r e s begin.
Is suggest r a t e s , beginning with 5 pereent, and soon to be
to 10 percent ft! inconss after taxes.
I t would spply to
individuals with incomes over 1500, and to married persons with
incomes ov@r ,&,000,
This program -«ill actually cut oonsumptittb
I t w i l l , i*e are convinced, be popular fend KSXII go far toward d i s pelling fears of post-isar deflation, particularly aiaong the laillions
of men and women who were unemployed not so long &go#
V:,e do not feel that i t wouXi be wise a t t h i s Iftai to increase
the Treasury tax progras beyond the no difications in the excess
pro i t s taxgs suggested above,
•« do propose, however, that ihe
Congress be requested to u&ke the following cha.nge« in the
incoae tax to beoese effective on January 1, 1943J
A reduction of exemptions under the inoivi. u&l income
tax to 1500 for single,
1,000 for married, and S250
fcr ea-sh dependents, with & o erate rate for the lowest
income bracket*
ihis reujction will not greatly burd^i
the individuals brot^jht under the ineora tsx for ths
f i r s t time.> I t s ciiief effect is to increase ttM mirdtea
for persons in the a i ^0.e in^oae orackets already subject
to the tax #
I t isill provitie & oroad base for future
** *°
**@ recoaaend also that the Ooagreas be urged to ^ive early
^ g eonsideration to ttoe proposed ext@nsioa of tin social security program
IS 4*3
as
outlined in me bu-^et eseage*
sfl <® iH
qiw •
t* $g
33 ^
e iiave :?QnsMer©d a t length the r o l e of consuapticn taxes i n
s
mar period*
We have cseneludsil not t o recommend a «ar cossumptloa
^"^ a<^ ^m present tlsie* we believ® that such measures as low-bracket
*} incoiae t a x e s , i n c r e a s e d u n i v e r s a l savings, and s o c i a l seearitjr t a x e s
B
« • ^
are superior t©- s a l e s taxes*
fe t h i a k , however, m a t you sboulci
Ihl
# 1 1
. s^ g
announce to the country and -to the Congress that you are determined
1-15
o fe 5
k° i*e.jo*ri®nd a w&r consunqption tax if the f i s c a l program wr ich you
O
S S'c
S §*"©
o o
£?
o^ %
i
S*5
IiE
suggest should not prove adequate to absorb the excess purchasing
power. DM stabilisatim pg^fTMl must b@ executed under all
wrdeh
urideslrabl©
but to
MN
desirableforms
then ofan i n f l a t i o n e r y
stances^*@
-—i^rmally
:u necessary
by resort
tigflfj—l^i
price rise*
t>» fci J8*.
i s recognise t h a t -iJbie ':;on.-.ress i s l i k e l y to enact a sales tax
P
0 S © with or without your request*
X.f you indie a t e that a war eeuauBptioo
•Hi
§ g_ g tax -may be necessary for fut&re use, as s t a t e d in your recent Bucget
g
fin
KMHiagMb you may cfeter trie Qaiagfss froa enactiag i t am as a Mb*
s t i t u t e for a portion of the i^coa© ejwl pro'-.'its taxes included i n the
present Treasury "i&x bill*
ijj
2>
Only a program as d r a s t i c and broad as that here outlined
^5
O *3
-I stop luil&iion*
very element is essential to the effectiveness
of every other element. Any lesser program mast fajLjL Such
failure will be a jsajor defeat. The progrem we have outlinec is
more than an £nti~inIl&i.Lon program. It is a call to the colors
on the civilian front, a call the nation is waiting to hear in the
present critical hour of our history.
(signed)
Claud* R. Wiokard
Leon Henderson
•
»•
ccles
HaroGLci D, S
H. A, ..allace
April 18, 1942
ADDENDUM
OUTUHK OF TIfe AHTl-IHPIATIQEf PROGRAM
1. Prices should be stabilised at present levels.
A. A maximum price regulation should be issued issaediately
covering retail, wholesale, and producers' prices which
can be frozen under the Saargency Price Control Act of
B. Rents should be stabilised within the limits of the
Emergency Price Control Act.
C. Congress should be requested:
(a) To modify the provision in the x&iergency Price Control
Act which prevents ceilings on agricultural commodities
unless their prices are at or above 110 percent of
parity, to permit ceilings at present prices seasonally
adjusted or at 100 percent of parity, including Government payments, whichever i© higherj
(b) To authorize such payments or price supports as raay
be necessary to assurs desirable voluiaes if agricultural
production^
(c) To remove all restrictions against the sal© of governmentheld coEimodities, and to modify the provision contained
in the House Agricultural Appropriation Bill for full
parity payments on basic commodities.
2. liage rates should be stabilized at present levels.
A« Wage stabilisation should be announced by proclamation of a
national policy for guidance of the National 'Mar Labor Board
and other {jovernmsnt agencies concerned with labor arbitration
and conciliation. Tha Price Administrator and the chiefs of
the procurement agencies should not regard increases in wage
rates as a justification for price increases,
3. The stabilisation should not affect wage rates below kO cents
an hour) increases in wage rates in war plants should be permitted only in exceptional cases,
C. A standard work week of 1*8 hours should be proclaimed with timeand-a-half paid for overtlxae above 1*0 hours.
D« Double time for Sundays and holidays should be abandoned.
Restrictive labor practices should bo eliminated.
• 2 3. Profits and high incomes should be drastically taxed. Congress
should be requested:
A, To adopt Treasury tax proposals ndth minor modifications in the
excess profits tax (top bracket of 100 percentj modify the
optional method for determining excess profits by lowering the
capital ratio from 7 ®n& 8 percent to h and 5 percent)5
1. To adopt Treasury proposals for closing loopholes in income
taxes and for modifying estate and gift taxes;
Q« To put a ceiling of $SO,OOG, after taxation, on individual incomes 1
D. To sake full use of provision in tiie income and profit tax laws
disallowing deduction of "unreasonable" salaries in computing
net income,
ij. Absorb excess purchasing powsr, Excess purchasing power should be
absorbed at an annual rate of about $6 billion during the first half
of the fiscal year 19U3* and above $10 billion during the second
half. Congress should be requested to enact:
A. A Universal Saving Plan should be adopted to start with 5 percent
of income on July 1, and 10 percent on October 1. It would apply
to single persons isith incomes of $500 or more, and to married
persons or persons with dependents with incomes of $1,000 or more.
Basis is the whole economic income after taxes without exemption.
Adjustments are to be made for borderline income• Imediate
redemption of bonds mill be permitted in cases of hardship;
B.
Individual income tax collected at the source under present
exemptions and deductions? withholding of 10 percent of taxable
income starting on July 1, 192*2 •
Lower exemptions to $1,000 for married persons, $500 for single
persons, $250 for each dependent, with tax rate of 12 percent
for first 1500 of taxable income| collect at source at 12 percent
rate beginning January 1, 19^3 •
$. Request the Congress to consider the extension in the social security
program as proposed in the Budget Message.
6. leave the door open for war consumption taxation at a later tine.
?• Ijctand rationing o4"4 scarce life necessities.
8» Tighten credit controls.
April 17, 19fc2
@FedFRASER