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BOARD O FGOVERNORS O F THE FEDERAL RESERVE SYSTEM April 12, 1948 Miss Egbert: Here are copies of the tax and housing letters of March 31 a&d April 5, respectively, for Chairman Eccles1 folio — in accordance with his request to Mr. Young* BDARD DF GDVERNDRS OF THE FEDERAL RESERVE SYSTEM WAS HIN GTD N March 31, Mr. Elm^r B. Staats, Assistant Director, Legislative Reference, Bureau of the Budget, Washington 25, D. C. Dear Mr. Staats: Thi6 letter is in response to yours of March 25, 19^8, asking for the comments of the Board of Governors on H. E. Vf9O, a bill to reduce individual incoaae tax payments and for other purposes. The Board of Governor8 feels that there should be no net reduction in tax revenues at this time, A Total effective demand for goods and services is now greater than jje supply which can be produced by the nation1« productive c a j p & ^ p ^ m d labor force. That is the essence of inflation. A net JwSffitioir in tax revenue in this situation would either create a wjyfmnent deficit or reduce the amount of funds that o t h e r v i M ' y n M . "be available for reduction in the Government debt. In eilfKrjWtknce the result would be an increase in prices of confmwA^gBffflrc as well as capital goods. The resulting price rises i m l a .LiS&Ly lead to additional borrowing by businesses from banks, \4jd/pch expansion of bank credit would further add to inflationary prescares. In view of the costs of carrying out the Governmental policies in the international field and, in addition, in view of the recent program calling for a large incineas© in military expenditures, it becomes more urgent than ever that tax revenue be maintained so as to avoid a Government deficit and, if possible, have some surplus to apply against the public debt. This is imperative under present conditions of full production and employment if further dangerous inflationary developments are to be avoided. For the reasons stated above, the Board feels that the enactment of H. B. ^790 is undesirable at this time, especially the reduction in taxes provided in section 101 of the bill. Mr. Elmer B. Staats -2- Nevertheless H.K. ^790 contains some provisions which the Board believes to be desirable because they recognize and correct certain gross inequities. One such provision is that for the splitting of incomes in order to bring about a more equitable situation as between taxpayers in a considerable number of States which have community property lavs and those in States which at present do not have such laws. Since this provision gives benefits chiefly to persons in the middle and higher income brackets, it is necessary that the lower income groups, both because of need and for reasons ofequity, have their personal exemptions increased along the lines provided in the bill. It would be desirable under the present economic conditions to limit the benefits of increased exemptions to the persons who would get little or no benefit from the split income provisions because of their low incomes. It is believed, however, that if provisions such as those mentioned above were to be enacted, with a resulting reduction in revenue, there also should be such changes in the tax laws as would provide an offsetting increase in receipts. The Board would be glad, if called upon to do so, to make suggestions as to some of the changes it believes would be most desirable. Yery truly yours, (Signed) Merritt Sherman Merritt Sherman, Assistant Secretary. 2-2258 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR THE PRESS April 6, 19U8 Attached i s the t e x t of a l e t t e r from the Board of Governors t o Senator Charles W. Tobey, Chairman of the Senate Committee on Banking and Currency, concerning general housing l e g i s l a t i o n , p a r t i c u l a r l y S» 2317 and amendments to S. 866, f o r r e l e a s e in morning newspapers of Friday, April 9 , & BQAHP OF GOVERNORS OF THE FEPERAL RESERVE SYSTEM A p r i l 5 , 19U8. Senator Charles W# Tabey Chairman, Committee on Banking and Currency Senate Office Building Washington, D# C. Dear Mr* Chairman: The Boar4 has been advised that your committee is considering general housing legislation, particularly S# 2317, introduced by Senator McCarthy, and amendments to S. 866 proposed by Senator Flanders • The Board is in sympathy, of course, with the major objectives of such legislation, and is in accord with some of the provisions of thess bills* We feel, however, that in view of the broad responsibilities of the Federal Reserve System in the field of credit, we should call attention to several undesirable features of the proposed legislation, some of which we have had occasion to comment on previously. In this connection I am enclosing a copy of our statement of November 25, 191+7 on Housing Finance to the Joint Committee on the Economic Report* The prospect for inflation is even greater now than it was last November. There is still a shortage of many goods in relation to the level of income, and, because of the imminent reduction in taxes, coupled with our commitments under the European Recovery Program and the recent program, calling for a large increase in military expenditures, the Government must anticipate a deficit rather than a surplus. There is thus additional reason for the Government to take all steps possible to reduce inflationary pressures, particularly those generated by an excess of credit. For these reasons the Board is opposed to some of the provisions of the bills before your committee which would intensify inflationary pressures by making additional credit available and thus increasing the demand for building labor and materials• In addition, some of their provisions would reduce the capacity of the fiscal and credit agencies of the Government to cope with either further inflation or future deflation. The Board is particularly concerned about three proposals contained in these bills: first, creation of a Government-financed secondary market for mortgages already underwritten by the Government; second, continuation of the undesirable mortgage-insurance program under Title VI of the National Housing Act; and third, addition to Title II of the National Housing Act of a permanent program of excessively easy mortgage credit. Creation of a Government-financed secondary market would be directly inflationary at this time, because, by making available $500,000,000 for the purchase of mortgages, it would represent added Government spending Senator Charles W. Tobey - 2 - April 5, and increased demand for new housing which is already excessive, considering the available supply of labor and material^. Furthermore, one of the objectives at the time the Government mortgage insurance and guaranty programs were instituted was to eliminate the need for direct mortgage lending by the Government, partly by removing some of the risks to lenders and increasing the negotiability of mortgages. If private lenders are unwilling to hold or buy guaranteed and insured mortgages, perhaps the solution is to improve the quality of the mortgages or increase the return to levels which make mortgages attractive compared with other investments. Title VI of the National Housing Act, by making credit available on excessively easy terms, has contributed to the large rise in house prices and building costs, and has encouraged buyers to go too deeply into debt. We believe that both builders and buyers should have larger equities in their properties in an inflationary period like the present, and that it is both feasible and desirable to return to the terms offered under Title II as far as mortgages on houses for owner-occupancy are concerned. The Board has no objection to the continuation of Title VJ for rental housing, provided safeguards are maintained against excessive loans in relation to value. Several of the proposed changes in Title II of the National Housing Act are subject to the same criticism as the present Title VI program* Mortgages on small houses for 95 P e r cent of value and running for 30 years are excessive and so also are 1+0-year mortgages of 90 and 95 per cent of value for rental housing. Basically, these three proposals are of a type which would be appropriate for combating a serious deflation, and are the opposite of those appropriate in an inflationary situation such as we face today. Measures such as these should be reserved to cushion deflation should it later developi Otherwise, the only measures available would be direct Government lending or subsidies, on a large enough scale to protect the real estate and housing market from a serious collapse such as developed in the early thirties. Sincerely yours, (Signed) M. S. Eccles. M. S. Eccles, Chairman pro tern.
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