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TAX PROGRAM TO CURB FOREIGN PURCHASES
OF AMERICAN SECURITIES

Movement of capital and gold to the United States
The table below brings out the fact that the movement of gold to the
United States since revaluation of the dollar has been predominantly a
reflection of the movement of capital. At the outset this movement took
chiefly the form of a return of American funds and a building up of foreign short-term balances in the United States. Beginning in May 19S5
foreign investments in American securities assumed increasing importance.
Since the new currency arrangement went into effect, foreign investment
in American securities has been the leading factor.

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The proposal to increase the tax burden on foreign investments in
the United States, therefore, is aimed at the type of capital movement
which is currently^responsible for the gold flow.
MOVEMENT OF GOLD AND CAPITAL
TO THE UNITED STATES
(In millions of dollars)
Inward movement of capital
Gold
imports

1934
1935
1936
Total
Sept. 30, 1936 Feb. 3, 1937

Net foreign purchases
in United States
Total

1,134
1,739
1.117

Short-term balances

Return of
Increase American
in foreign balances
American
Foreign
securities securities \ balances
from
here
abroad

386
1,381
1.195
3,990 2,962

- 25
320
601
896

219
131*
151*
501

86
566*
350*
1,002

106
364
93
563

429

330

150*

- 22*

- 29

491

* Funds set aside for redemption of securities are assumed to have been
already applied to redemption.


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Tax program and the international currency arrangement
The current gold flow is a threat to the international currency
arrangement.

It is true that for the last three months our takings abroad

have been less than the output of foreign gold mines; but during October
and the first two weeks of November we absorbed foreign gold at the rate
of nearly $2,750,000,000 a year and might do so again. It would greatly
help to ease the foreign situation if reserves abroad could be built up
by the full output of foreign mines for a period of years. Furthermore
the foreign capital which is bringing gold to this country is needed at
home.

That the British consider this to be the case is evident from the

Treasury's tean on new foreign issues in England, Thio ban io only partially
effective so long as British investors are free to buy outstanding foreign
issues. The French Treasury has tried time and again to persuade French
capital to seek investment at home. If an American program is developed
for discouraging European capital from seeking investment here, it should
be possible to present this program to the British and French authorities
as a move which will assist them in solving their problems and which will
strengthen to an important degree the international currency arrangement
for which all three countries are responsible.
The Board's interest in the program
Federal Reserve interest in the program arises chiefly from the fact
that (l) foreign investments in this country affect the stock market, and
(2) the incoming gold may ultimately affect member bank reserves to an
important extent.




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The stock market is always one of the chief problems of a period of
recovery.

Since it anticipates the future, it inevitably runs ahead of

the current business situation. At a time when the current business situation may still need the support of an easy-money policy, the stock market
may be developing speculative characteristics that require control. Yet
control of the stock market is extremely difficult when the public is amply
supplied with funds and business is being successfully stimulated. The
Board has twice raised margin requirements to curb the use of borrowed funds
to purchase securities. It would now be greatly assisted in meeting its
problem if the hundreds of millions of fresh money being poured into the
stock market by foreigners could be eliminated.
At some future date the problem may be reversed. Foreign selling
might start or accentuate a decline in the stock market. The greater the
volume of foreign holdings at that time, the more difficult such a selling
move would be to handle. It is possible that such selling might be started
by the outbreak of a European war and would not only create financial
problems but might also embarrass the neutrality policy of the United States.
Member bank reserves are not at present being enlarged by the steady
inflow of gold.

Under its new gold policy the Treasury is adding the gold

to an inactive stock at the expense of maintaining a larger public debt.
This policy is working smoothly at the present time; but should the Treasury
have to acquire several billion dollars of gold in the now few years, and
should money rates rise above their present abnormally low levels, Congress
might well grow restive at the sight of the Treasury holding an enormous




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stock of unused gold and paying interest on it to the banks at increasingly
burdensome rates. It is easily conceivable that Congress might insist
upon liquidation of the whole policy.

Should this occur, the inactive

stock would be thrown bodily into member bank reserves and would upset
Federal Reserve policy completely until drastic new powers for the System
were obtained through legislation.

The $1,800,000,000 of gold now held

unused by the Stabilization Fund is problem enough to handle in the future
without possible billions of additional inactive gold thrown in with it.
Scope of tax program
Since the current inward gold movement is largely the result of foreign investments in the stock market, measures to curb these investments
would achieve both objectives of the Board, i.e., restraining stock speculation and the growth of inactive gold which may later be thrown into member bank reserves. To curb investments in stocks it appears necessary
not only to raise the existing 10 percent tax on dividends paid to foreigners,
but in addition to reestablish the capital gains tax on foreigners which
was dropped in the Revenue Act of 1936. The tax was dropped because of the
difficulties of imposing a graduated tax on foreigners based upon reports
of their income. The proposal below suggests that the capital gains tax
be reestablished as a flat rate tax paid at the time the capital gains
are realized, without any reference whatsoever to the foreigners income.
Such a tax appears to be feasible. Its necessity arises from the fact that,
to a great extent, investment in stocks is in anticipation of future capital

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gains•