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BOX 477

Decenber 7, 1957

Hon. Marriner S. Eccles, Governor
Federal Reserve System
Washington, D. 0,
Dear Mr. Ecoles:
Since my very pleasant luncheon with you I have given much
thought to the matters discussed between us at that time.
The first strong impression of the conversation was that in
your mind the undistributed profits tax had been considered
primarily as a means for inducing velocity of circulation.
About this idea two things can be said,it seems to me. First,
little public discussion and no general conception of the
use of this tax for this purpose has appeared in the past or
is now appearing. The second is that the tax in its present
form is poorly adapted to this purpose.
If my memory is not completely faulty on the line of public
discussion taken when this tax was enacted it was understood
to be primarily a means of getting business profits into the
hands of personal recipients for the sake, presumably, of increased tax returns. Of course, that increased tax return
was doubly assured by taxing business profits twice — once
before distribution and again afterwards in the recipients'
Offhand, it would seem more nearly to fit the need of circulation velocity so far as corporate policies are concerned to
remove the limit on tax exemption for corporate capital expenditures, giving full credit above the normal depreciation.
This matter has not been discussed in our Tax Committee, because it is a new idea that there was any influence in the
administration as important as yours which could be counted
upon to be behind it.
I would like further to raise the question as to whether the
simple forcing of distribution gives any assurance of increase of velocity. Under what conditions is the recipient
of corporate income any more likely to spend his receipts
than is the corporation from which the income was derived?
This raises the question which I suggested during our conversation — namely, as to whether.we know what type of deposit


B X 477


Governor Eccles


December 7, 1937

it is in which sluggishness of circulation is particularly
abnormal. Is it in corporate deposits, the deposits of
wealthy individuals, or in the sum total of smaller deposits
or in personal checking accounts, or in the balances of
life insurance companies and savings banks, or where? With
velocity of circulation as the most serious problem facing
us, it would seem that an analysis of the problem is called
for. Perhaps you have it, although I did not feel assured
of that from our conversation.
further thought rather tends to confirm the conviction which
was in my mind before I called on you as to the advisability
of still further expanding deposits even during this period
of temporarily (we hope) declining employment. I cannot convince myself that the present low rate of turnover for the
new conditions is normal. I would expect the normal rate to
be more nearly that for banks outside Hew York Gity for the
period 1936 and 19S7. I am not sure that this is high enough
Perhaps it ought to be more nearly 60 than 40. It seems like
a dubious process to attempt to maintain business activity
and employment by continued further expansion of deposits
without making a determined effort to find the location ofj
causes for and remedies for our present sluggish circulation.
I am particularly anxious to know whether there is anything
in this exemption for capital expenditures on which your body
and the Business Advisory Council could get together. The
next time 1 am in Washington 1 will phone you to see if you
have any thoughts on this matter, unless you feel moved to
write me before that time.
With many thanks for your kindness and hospitality, I remain
Sincerely yours,


'R. S. Flanders