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Th© following is copy of a letter from Secretary McAdoo to
Senator Pittman;
March 30, 1918*
Honorable Key Pittman,
United States Senate,
Washington, D* C*
:.;A ? ';’ a
My dear Senators
f
I
have examined the draft of a bill embodying the ideas which
have been discussed between us for the utilization of the silver now lying /
unused in the Treasury of the United States*
I venture to recapitulate
briefly the purposes to be accomplished by the bill, and the reasons, which,
in my judgment, require its enactment*
The annual production of silver has varied in recent years, having
fluctuated from 160,000,000 ounces to 226,000,000 ounces per annum according
to the estimates of the Director of the Mint*
Production for the year 1916
amounted to 156,600,, 000 ounces, and for the year 1917 is estimated to be
approximately 160,000,000 ounces#
The decline in production during recent
years has been partly due to conditions in Mexico, as the result of which
Mexican mines have not been operated to their full capacity*
The price of
silver has varied from about 48^ cents per fine ounce, at which price it sold
during August, 1915, to $1*18 per fine ounce during September, 1917* Apart
from industrial requirements, estimated at about 100,000,000 ounces per annum,
silver is used by all nations for subsidiary coinage and by India and other
Oriental countries for major coinage*
In China uncoined silver circulates
as money*
The European War has greatly enlarged the demand for silver#
European countries engaged in the conflict have required unusual quantities
of silver coins for their armies and for the civil population.
Buying power
of Oriental countries has been greatly enlarged, and as the importation of
commodities has been limited owing to war needs of the belligerents, that
buying power has been exercised to acquire silver*
China and India are the two oriental c o u n t i e s that absorb the
largest amounts of silver* The products of India are wheat, jute, burlap,
etc# The demand for Indian products has been unusual. Jute bagging is used
for sugar, grain, and fertilizer bags, also as outside wrappers for cotton
and other products*
It is also used for trench bags and for packing many
articles of military necessity# No article has been found that will serve
as a substitute*
The Orient is willing to accept silver in place of gold for com
modities furnished by them, and it is to the interest of the United States
and its allies that foreign trade balances should, as far as possible, be
settled in silver rather than in gold*
The gold in this country and in the
hands of its allies is needed as a base for the enormous credit structure
it is necessary to erect in the process of placing Government loans, and
every ounce of silver that can be used in the settlement of fpreign balances
is so much gained*
It is better to settle trade balances by shipping silver,
than to make arrangements for stabilizing exchange, where these are possible,
as they are not in the Orient, because these exchange arrangements whatever
their form, always mean a deferred demand for gold, while the settlement of
foreign balances in silver is a definitive settlement, calling for no future
adjustments*
Further, the unprecedented business activity in this country
has caused an unusual demand for silver for subsidiary coinage, the needs
of the United States for this purpose during the present year being greater
than ever before, amounting as they do, to approximately 21,250,000 ounces*
There are now in the Treasury of the United State^approximately
TOOCfiTOTof Standard Silver Dollars, containing approxin^Tely 375,000,000 ~
ounces of fine silver* Against these Standard Silver Dollars there are out
standing silver certificates, and so long as these Silver Certificates remain
outstanding, a corresponding amount of Silver Dollars must be held for their
redemption#
-
2
-
The proposal is now made to borrow from the Treasury, for the pur
poses stated above, a portion of the silver so held in the Treasury, hut only
upon the cancellation from time to time of a corresponding amount of out
standing Silver Certificates, The silver having been so borrowed and used,
the Secretary of the Treasury is required to re-purchase from time to time at
the fixed price of $1. per fine ounce, an amount of silver equal to the silver
so borrowed and used, and to recoin that Silver into Standard Silver jDollars,
thus in time replacing in the Treasury the silver so withdrawn. In this way
the large mass of silver, which is serving no useful active purpose, now can
be made available for a direct war purpose.
There is no intention of making
any permanent change in the status of the Silver Certificates,
The proposi
tion is, in brief, to retire Silver Certificates; to borrow from the Treasury
the silver for use for the war purposes above set forth; and then, as silver
from time to time in the future comes on the market, to replace the silver so
borrowed by purchase in the market at the fixed price of $1, per fine ounce
and to replace the borrowed silver ty coining the new silver acquired for that
purpose into Standard Silver Dollars,
There is no limit of time within which
this must be done*
The cost of producing silver, like the cost of producing all other
commodities, has greatly increased. Labor is receiving very much higher
wages than during normal times, Machinery is more expensive, and the chemicals
and other supplies needed in the production of silver are all correspondingly
higher in price* The price at which the silver is to be rebought has been
fixed in the preposed bill at $1* per ounce. This price was arrived at after
an examination ty the Director of the Mint into the cost of producing silver,
in a number of different mines, and the Director of the Mint is of the opinion
that $1, per fine ounce under all the conditions at present prevailing^is a
fair price. The silver released through the retirement of Silver Certificates
will be sold by the Secretary of the Treasury for the war purposes stated, at
a price that will permit him without loss to rebuy at the price of $1. an
ounce, the silver thus sold*
The proposed measure is unquestionably in the interest of the country
as a whole for the prosecution of the war* It proposes no permanent change in
our existing currency arrangements, What is proposed is a temporary change,
consisting of the active use for war purposes of the silver now lying inert in
the Treasury « The bill provides within itself the steps necessary to reverse
that position and to replace and recoin the silver.
The arrangement proposed is purely a temporary arrangement and the
pressing needs of the United States require, in my opinion, its prompt enact
ment into law*
Sections 5, 6, 7, and 8 seem to me the best way of dealing with the
contraction of the circulating medium which would otherwise be bought about
through the cancellation of Silver Certificates, This is accomplished by
authorising an issue of Federal Deserve Bank Notés in small denominations in
order tot fill the void occasioned by the retirement of Silver Certificates
and provides for the prompt retirement of those Federal Deserve Bank Notes as
Silver Certificates are from time to time re-issued,
There may well be
differences of cpinion as to the best method of counteracting such contraction.
If no method of meeting the contraction be provided, the contraction will be
automatically relieved through the issue of legal tender notes in denominations
of 1*8 and 2*s. Federal Deserve Notes taking the place of the legal tender
notes* This would be perhaps the easiest way of meeting the situation were it
not for the fact that Federal Deserve notes are now secured by gold reserve
of over 60$ and the issue of additional Federal Deserve Notes without a
^corresponding addition to the gold reserve would reduce "the percentage of”
“
reserve. Federal Deserve Bank.Notes, on the other hand, require a reserve of
but 5$ and as there is absolutely no reason why a larger reserve for Federal
Deserve Bank Notes should be provided, it seems to me unwise to reduce the
percentage of reserve under Federal Deserve Notes. % reason for stating
that the Federal Deserve Bank Notes, the issue of which is contemplated under
the Bill, require no greater reserve than 5$ is that those Notes in small
denominations will merely take the $lace in the pockets of the people of the
Silver Certificates now carried by them and are thus extremely unlikely to be
-3*-
presented for redemption*
If, and to the extent that they are presented for
redemption, it will be a demonstration that these Notes are not needed in the
circulation and the means for their prompt retirement is furnished by the
deposit as security for these Federal Reserve Bank Notes of short time
Certificates of Indebtedness or the One Year. Conversion Notes of the United
States* Whenever, therefore, these Federal Reserve Bank Notes are presented
for redemption, it will only be necessary to let the maturing obligations held
against them run off*
The popular apd well founded feeling against a bond
secured currency therefore, does not apply to the present issue, because
(l) the issue is strictly temporary in its nature, (2) the security behind
the issue automatically provides for the redemption of the issue, (3) no
artificial value is given to any long time bonds by the circulation privilege
and no vested interest is created in the circulation privilege, which, if
created, it might prove burdensome for- the Government or the banks to abate*
If the method suggested for dealing with the replacement of the
silver certificates that may be retired does not commend itself to you as the
best manner of meeting the situation, I should be glad to discuss any modifica
tions that may be thought advisable*
Cordially yours,
(Signed)
W# G* McAdoo*
3
June 5, 1918*
Dear Tir* Kit chin:
Replying to your letter of June 3d, and referring to our recent con«
forer.ee on the question of new revenue legislation, permit mo to submit the
following for your consideration»
,
Tf the prisent rate of increase in expenditures should continue for
six months, the treasury will actually have to disburse during the fiscal
year ending Juno 30, 1919, approximately §24,000,000,000*
This estimate is not based merely upon appropriations, nor merely
upon estimates made by other Departments as to their probable expenditures*
although they have boon obtained and considered; it is based upon the actual
experience of the Treasury during the past year, which has shorn that actual
expenditures, exclusive of transaqtions in the principal of. the* public debt,
have increased at the average rate of §100,000,000 per month since ¿¿arch, 191,
You will observe from the enclosed statement (Exhibit A) that in
March, 1917, the expenditures wore in round figures §100,000,000* In May,
1916, they were §1,508,195,000* If there should be no further increase
during the coming fiscal year, the. cash expenditures upon the May basis would
bo more than §18,000,000,000. If,as seems inevitable, the increase in
expenditures should continue at the rate of §100,000,000 per month for the
next six months, or until December, 1918, and if thereafter the monthly
expenditures should remain stationary until the 30th of June, 1919, the
Treasury would have to finance expenditures aggregating §24,000,000,000
during the fiscal year ending Juno 30, 1919; or, to put it another way, if
the average monthly expenditure should exceed that for the month of May, 1918,
by 33 1/3%, wo shall spend §24,000,000,000 in the fiscal year 1919*
In the fiscal year ending dune 30, 1918, our cash disbursements will
amount to between §12,500,000,000 and §13,000,000,000« Of this amount, about
one-third will have been raised by taxes and two-thirds by loans, all of which
will bo represented by long-time obligations, that is, bonds of the First
Second and Third Liberty Loans and Mar Savings Certificates* V/o shall thus
havo completed fifteen months of the war with a financial record unequalled,
I believe, by that of any other nation*
Wo cannot wisely contemplate nearly doubling our cash disbursements
in the fiscal year 1919 without providing additional revenue* Wo cannot
afford to roly upon §4,000,000,000 only from taxation, bocauso we shall then
have to rely on raising §20,000,000,000 by loans, This would bo a surrender
to the policy of high interest rates and inflation, with all the evil con
sequences which would flow inevitably therefrom, and which would, I firmly
boliove, bring ultimate disaster to the country* Wo cannot afford to
base our future financing upon tho quicksands of inflation or unhealthy
credit expansion*
If we are to preserve the financial strength of the
Nation, wo must do sound and sale things, no matter whether they hurt our
pockets or involve sacrifices— sacrifices of a relatively insignificant sort
as compared with the sacrifices our soldiers and sailors aro making to save
the life of tho Nation. The sound thing to do is unquestionably to increase
/' /
¡¡Si
i
taxation, and the increases should ho determined upon promptly and made offect-vo
at. the earliest possible moment*
1
doubt seriously if the Government can
000,000 derived from taxation, becauso with a tax bill no
ficient economics will not bo enforced upon the people of
¿such economies., 1 see no way in which the great financial
Government car be safely conducted*
be financed, with only $4,000,
larger chan tnis, suf
America, ane. watnout
one rat ions cf the
On t*ie basis of the present revenue laws, wo should have to raise in ■
tho fiscal year 5.913 #20,000,000,000 by tho sale of Liberty E o M s or by loans of
one sort or“ another. 'l Bolieve that if wo «¡re to prosortc the oountooss an..
stability of our financial
structure,
wo
taxation
J- L X ic t llO X C t a .
a w u v t u a , 0 j
vvw should raise by
e/
o n e
17
...
„
__ ,
TQ1C5 r.-»
.COO-OOOestimated
expenditures
for
the
fiscal
year
1919,
o*
$
?
■
*
s
onc-third of the
000*
There are also certain general considerations bearing upon tne probl )ra
of taxation which I hope I may be permitted to bring to ycur attention*
Tho existing excess profits tax does not always reach ¿¿ar profitsoTho
rates of excess profits taxation are graduated and tho maxxcum is 60 G* In
Great Britain there is a flat rate of 80% oh all war profits<■ The Government
Departments, under great pressure as they are to get necessary wax* materials
and supplies with the utmost expedition, cannot in tho nature of things fix
thoir prices nor guard their contrasts in such a way as to avoid the posci»«
bility of profiteering. The one sure way is to tax away the excessive profits
when they have boon realized» 1 do hot say this in a spirit of criticism of
tho corporations oh business men of tho country who have for the most part
loyally supported the Government* In entering into war contracts they take
grave risks. They are called upon to make vast expenditures of capital m r
purposes which may prove urproduetivo after tho war« The^ are not to bo
blamed, in those circumstances for asking for prices and terms which cover
these risks* On the otherhand, when the risk has been liquidated by proper
allowances, and the contract has proved profitable, the Government should take
back in taxes all profits abovo a reasonable reward* Under existing law, that
does not happen because the tax rates are not high enough and cannot safely
be made' high enough, since tho test now is not how much of the profits are due
to. tho war, but what- relation tho profits bear to the capital invested*
A
company'with a swollen capital and huge war profits escapes.
O f course, no one objects to reasonable profits; on the contrary,
everyone should want, and I am sure does want, business and enterprise to be
rewarded with reasonable, or .even liberal, profits* Prosperity should be
preserved and can bo preserved, I believe, on tho basis of reasonable profits*
The problem of statesmanship is to establish a just relation between necessary
taxation and the earning power of the Nation*
♦
This brings me to another consideration of great moment in the Governmont^s financial plans* 1 hope that it will not be necessary further to in
crease the interest rato on Government bonds. Tho number of subscribers to
the three Liberty Loans aggregated 30,000,000. The people who subscribed
arc impatient of those who have not* Various plans have been urged upon mo
for forcing the people to buy Liberty Bonds* The. man cf small means who buys
a $100 bond wants his neighbor to do so too* Thero is a popular aeraand also
for high taxes upon war profits* Tho re is also a popular demand that al..the
people should contribute to financing tho war. Thero should, thoreforo, bo
a substantial incroaso in tho normal income tax rato and a higher tax should
be levied upon so-called unearned'than on oarnod incomes. Income derived
from Liborty Bonds would bo exempt from this taxation and the relation bo wo on
income from Liberty Bonds and income from other securities would, bo road jus c
without increasing the rato of intorost on Liberty Bonds. It would not ax
tho patriotic purchasers of Liborty Bonds oh their holdings, but it wojtl •
weigh heavily upon the shirkers who have not bought them* It would make the
return from Liborty Bonds comparo favorably with tho return from othor secur
ities# It would givo tho Government *s bonds an essential and necessary advan
tage over thoso of corporato borrowers and would very greatly decrease the
relativa advantage which Stato and municipal bonds now enjoy through the
total exemption which they carry* It would produce a gradual readjustment Of
tho situation in the investment markets instead Of an abrupt one, as would
bo the case if the interest rate on Liberty Bonds should bo increased#
A normal tax falls upon all alike* Therefore, as I pointed out in
my statoment boforo tho Ways and Moans Committee last summor, there is not
the samo objection to tho exemption from normal income taxes as there is to
*
the exemption from surtaxes* A substantial increase in the normal income tax
is the soundest and surest way of stabilizing the price of Government oonds*
If we have to incroaso the interest rate on Government bonds, tho increased
rate may continue for ten to thirty yoars and some of the bonds which wo have
issued will go to great premiums not long after tno war is over. If wo make
tho bonds at the present rate moro attractive by increasing tho normal tax,
then tho decrease in taxation which will follow tho close of tho war will
automatically adjust tho situation* I believe that to stabilizo the price
of Government bonds by first increasing and subsequently reducing the normal
income taxes, from which the holders of these bonds aro exempt, is sound
finance and sound economics*
There is another feature deserving of consideration* Wo arc asking
the people to finance this war and wo aro offering them an investment paying
$ interest# The people have responded wonderfully to this appeal# In the
last Liborty Loan campaign 17,000,000, approximately, subscribed* There is a
widespread fooling that many pcoplo who arc able to do so, especially those
who are making vast profits out of the war, are not doing their part, oithor
in the purchase of Liborty Bonds or in the payment of taxes— that thoy aro
investing in corporate stocks and bonds producing high returns instoad of in
tho Bonds of their own Government producing roasonablo returns, whon tho
first duty of patriotism and solf-protaction demands that they shall buy
Government bonds for the protection cf the ITation in. its hour cf peril*
There is a natural fooling among the masses of the people that taxation upon
incomes and upon war profits should bo high enough to bring tho roturn from
corporate invostmonts moro nearly on a parity with the roturn xrom
Govornmont bonds; that the Government should not be forced to compote for
credit with war industries which are profiting abnormally and which, unics
restrained by tho oxorcise of sound and .just taxation, will constan > ^ ^
to the difficulties of tho people of the United States in their offor
o
to
supply the Govornmont at reasonable interest rates with the crcdi i ncu
fight successfully this war for Liberty*
If I may, without impropriety, offor a suggestion as to the.proposed
revenuo measure, I should recommend}
(1) That one-third of the cash expenditures to bo made during the
fiscal yoar ending June 30, 1919, bo provided by taxation* According o my
estimates, this would involve raising $ 8 ,000 ,000 ,0 0 0 .through taxation.
(2) That a real war profits tax at a high rate be levied upon all
war profits* This tax should bo super-imposed upon the existing oxcess
profits tax in such a way that the taxpayer should bo required to pay which
ever tax is tho greater* Tho existing excess profits tax should be amen o
in certain important particulars so as to romovo inequa.lities*
(3) That thero should bo a substantial increase in the amount of
normal income tax upon so-called unearned incomes* Under existing law
incomos above cortain exemptions are taxed 4% as an income-tax and QJ> as an
excess profits tax, mahing a total of 12%, while unearned incomes, orivo
from securities, etc., are taxed only 4%« The 8% tax should bo recognize
as an income tax and the rate of 12% (4% normal and 8% excess profits)
should be retained in respect to earned incomes, while a higher rato than
12^ should bo imposed, on unearned incomes.
(4) That heavy taxation bo imposed upon all luxuries.
Sinoorcly yours,
(Signed) W# G* Me A do o*
Hon. Claude Kitchin,
Chairman, Ways and Means Committee,
House of Representatives*
-0-
STATEMENT!' SHOWING •CEASSIFJEIb BISBURSOEMENTSd BY MONTHS FROM
MARCH;/. 1917, TO MAY, 1918, AgB PUBLISHED; IN DAILY TREASURY STATEMENTS!?
Ordinary___ _
March, 1917
April, 1917
May, 1917 Time, 1917
7 2 ,7 7 3 ,9 0 3 .2 0
8 1 ,5 9 9 ,5 9 8 * 2 2 "
1 1 4 ,1 0 2 ,8 0 9 * 6 8
•1 3 4 .3 0 4 ,0 4 0 . 3 5
4 0 2 ,7 8 0 ,3 5 1 1 4 5
2 0 8 ,2 9 9 ,0 3 1 .0 5
July, 1917 — --August, 1917 ----- 2 7 7 ,4 3 8 ,0 0 0 .6 4
September-, 1917 -- 3 4 9,01 3,3 05.3 4'October, 1917 ;
-- - 4 6 2 .0 4 5 .3 5 9 .9 4
5 1 2 ,9 5 2 ,0 3 5 .1 7
November, 19IT -6 1 1 * 2 9 7 ,4 2 5 .6 2
Decemberi 1917 -January, 1918 - — - 7 1 5 ,3 0 2 ,0 3 9 .8 3
6 7 5 ,2 0 9 ,0 6 8 * 4 3
Feb ruary, 1918 - —
March, 1 9 1 8 -- - - -- 8 1 9 ,9 5 5 ,3 6 7 i 26
April, 1 9 1 8 ------ 9 1 0 .7 5 6 .7 5 8 .9 5
May, 1 9 1 8 -------- 1 , 068y203,0 2 6 .8 2
F oreign Loa n s _______Other Special _____________ Total
427,176,896,12
8,294,354.78
4 0 7 . 5 0 0 . 0 0 0 . 00
.4,962,746*28
2 7 7 ^ 5 0 0 . 0 0 0,00
9 1 9 .445*78
88 5 . 0 0 0 .
0 0 0 .0 0 41,353.442.96
# 99,950,799.32
289,893,953,00
526.565.555.96
- 412.723.48 6 .13
1,329.133.794,41
4 5 2 . 5 0 0 . 0 0 0 . 00
4 7 8 .0 0 0 .
0 0 0 .0 0
3 9 6 . 0 0 0 . 0 0 0 .0 0
4 8 0 ,7 0 0 ,0 0 0 * 0 0
471 j 9 2 9 ,7 5 0 .0 0
4 9 2 . 0 0 0 . 0 0 0 .0 0
662.310.845.97
757,457,364*14
746,378,285*69
944,368,752*52
986,081,807.53
1,105,211,859*32
1,090,356,045*69''
1,012,686,985*74|
1,155,793,809*24f
1,215,287,779.231
1,508,195,233165
#200,000,000.00
370,200,000*00
3 2 5 . 0 0 0 . 0 0 0 .0 0
3 1 7 . 5 0 0 . 0 0 0 . 00
2 8 7 . 5 0 0 . 0 0 0 . 00
424^000*000.00
1,511,814.92
2,019,363.50
1,364,980.35
1,623,392^58
1,200,022*36
1,914,433.70
4,854,005.86
12,477,917*31?
18,338,441198
17,031,020.28
15^992,206.83
6^ 6307^ ^ 7419^ 05
47495 732*9 7750700
78732*77599767
11,184,128,768*72
Total March 1^ 1917,
to May 31,1918 — 7,013,251,770.50
5,380,329,750.00
•119,681,042.63
12,513,262,563;13
iX-i
If.-0
l B£S£BV£ P A © HI
I
F E D E R A L R E S E R V E B O A ftP
0
— J
W A S H IN G T O N
July 6, 1918;
Dear Sir:
In the Bulletin for April, 1918, the Federal Reserve Board published a
statement setting forth the reasons why, in its opinion, a gradual hut
consistent curtailment of nonessential credits is necessary, and urging the
hanks and trust companies of the country to do whatever they could in the
exercise of a reasonable discretion to restrict credits which are clearly
not needed for the prosecution of the war or for the health and necessary
comfort of the people.
On June 12, the Secretary of the Treasury addressed a letter to all
hanks and trust companies, announcing his financial program for the ensuing
six months which involves the sale to and through hanks of approximately
six billion dollars of Treasury certificates of indebtedness, in install
ments of not less than $750,000,000 every two weeks between June 25 and the
first of November.
In this letter each bank and trust company was requested
to invest in these certificates an amount equal to approximately
per cent
of its gross resources, or a total of 5 per cent for each month. Announce
ment was made at the same time that there was in contemplation an issue of
two billion dollars of certificates of appropriate maturities in anticipa
tion of income and excess profits taxes, for sale more particularly to
taxpayers, and that the amount of the regular semimonthly sales of
certificates of indebtedness would be reduced in proportion to the extent
to which these tax certificates are taken by the public.
The banking institutions have responded most generously to the appeal
of the Secretary of the Treasury.
Throughout the country they have pledged
themselves without hesitation to subscribe to their allotment, and the
result of the initial offering which has just been closed— a subscription of
$838,000,000 in response to a request for not less than $750,000,000— is
evidence of the splendid patriotism of those who direct our national and
State banking institutions.
The Board hopes that succeeding issues will be
subscribed as readily and in the same patriotic spirit.
The Federal Reserve Banks will be prepared to place their facilities.—
directly or indirectly— at the disposal of such subscribing banks as may
legitimately need assistance in taking their allotments;
The Board, how
ever, feels in duty bound to reiterate that the banks can render a greater
service to the country in this connection, not merely by subscribing their
allotments and by using the rediscounting facilities of the Federal Reserve
Banks in making payments, but by providing the necessary funds for meeting
payments for certificates of indebtedness purchased, by employing for this
purpose the accretion of new deposits, and by utilizing the funds that may
be made available by a.judicious curtailment of credits asked for nonessential purposes.
1
2
In order to prosecute the war successfully, the Government is compelled
to issue obligations to provide for its large expenditures which involve
waste and destruction rather than a permanent addition to the national
wealth. This process in itself tends to inflation, and contributes to a
rapid increase in the price of necessities. Abnormal demands by the
Government, unavoidable and necessary in the present circumstances, must be
counteracted by greater economy on the part of the civilian population which
must decrease, by combined effort, the normal waste incident to domestic
life and business pursuits.
There is not an unlimited supply of credit or
of goods, or of man power. Wherever possible all such resources should be
conserved and set aside for the use of the Government.
Credit extended for
nonessential purposes involves the use of labor, of transportation, of
material and reserves which ought to be kept free for the use of the
Government. Unrestricted credit involves unnecessary competition with the
Government, and needlessly advances prices, besides impeding and delaying
Governmental operations.
"Business as usual" and "life as usual" are impossible at a time when
the supreme business of the country is war, and can not be approximated
without interfering with the work of the Government and inflicting serious
harm upon the Nation as a whole.
The staying power of the country in this
emergency depends upon the extent of its resources in men, goods, and gold.
An unnecessary use of credit, a needless recourse to the discounting
facilities of the federal Reserve Banks, weakens proportionately the gold
reserve of the United States— the financial backbone of the entire allied
group. Whoever wastes the raw material and manufactured products of the
country adds to our financial burden by increasing the amount the United
States must import from other countries and by decreasing, at the same time,
the volume of goods that should be available for export purposes— the best
means of paying for the goods acquired from abroad.
Conservation of our commodities and of our gold— preservation of our
economic strength— is of the greatest importance in making provision for the
period of readjustment which will follow the reestablishment of peace. The
country having the largest supply of goods and gold available at the end of
the war will find itself in the best strategic position for controlling the
markets of the world. The Board wishes to point out, also, that by refrain
ing from buying luxuries, and by restricting the use of necessities to the
actual requirements of health and reasonable comfort, we can create a
reserve purchasing power which will be of the greatest value in bridging
over our industries during the period of reaction and reconstruction which
must follow when war industries are transformed into peace industries. An
intelligent and prudent use of credit, therefore, will be an important
factor in strengthening the national resources during the period of the war,
in aiding its successful prosecution, and in maintaining the economic
strength of the country for the time of rapidly changing conditions which
will come when the war has been won and the millions of men in our armies
are returning to the employments of peace.
Thus, by giving your cooperation now in the effort to conserve national
resources by the exercise of discriminating judgment in granting credits, you
will also do your part in averting the danger of unemployment which is apt
3
to follow a treaty of peace.
The Board appreciates the difficulty of
laying down a general rule for defining essentials or the degree in which
any enterprise is essential, and requests that its remarks on this subject
in the April issue of the Bulletin he read again. The Board can not sug
gest specific ways in which credit should he conserved or unnecessary ex
penditures curtailed, as each hanker must determine this for himself after
conferring with the business men of his community and after a careful study
of his local situation. Reasonable discretion should he exercised, and
drastic steps calculated to bring about hardships or embarrassments or
work injustice should be avoided, but the banks should divert the use of
their credit more and more into productive fields, where its employment
will result in augmenting the national resources.
Respectfully yours
To the President
of the Bank or
Trust Company addressed.
I
Washington, D* C,
November 14» 1918*
My dear San».tor;
The collapse of our enemies necessitates instant reconsidera
tion of the financial problems before the Government, the most immedi
ate of which is that presented by the new Revenue Bill now before the
Finance Committee of the Senate*
The prompt enactment of a Revenue
3 ilX is imperative»
The existing law is not satisfactory to the coun
try nor to the Treasury#
On the other hand, the Revenue Bill which
passed the House is more stringent than the changed situation will
justify*
In June, in preparing for a long war and an increasing mil
itary program. X estimated the expenditures for the fiscal year end
ing June 30, ¿¡.919 at $24,000,000,000,
The expenditures for the first
four months of the fiscal year 1919, that is for the months of July*
August, September and October, aggregated, according to the Treasuzy
Daily Statement, $6*635,922,423*72> or within $365,000,000 of the
amount which I anticipated for that period. The saving was apparent
rather than real— due to the fact that the improved arrangements which
the Treasury was able to make for meeting the requirements o f the
ArEy*s disbursing officers abroad released funds which had accumulated
to their credit and made- them available for current expenditures, and
also due to certain other adjustments*
I have little doubt,, there
fore* that had the war continued, the expenditures w ^ l d have reached
the amount estimated*
Now, however, there seems every reason to anticipate a large
reduction in the Government *s expenditures during the balance of the
fiscal year* How greqi that reduction will be, it is impossible at^
the moment to estimate, Existing contracts will, no doubt, be liqui
dated to a considerable extent.
That process of liquidation might
actually result f w a time in acceleration of demands upon the Treas
ury rather than retardation* The pay of the Army and Navy and the
expenditures in salaries and wages of the war establishments must con
tinue without material change for months to come.
It seems reasonable
to suppose tint the decrease in the Government's expenditures cannot
be at a very rapid rate, if a wise policy of readjustment and transfer
of activities from a war to a peace basis is followed#
The United States .will be the fortunate possessor of foodstuffs,
raw materials and manufactured products of which Europe and the rest
of the world are in dire need*
Not all of the Allies can fully pay
us in gold, for some have little and others none to spare; nor in
commodities during the period of reconstruction, for some of them will
not so soon be able to resume normal activities; and the United States
must be prepared to continue, therefore, co enable the governments of
>
the Allies, or some of them, to make purchases on credit ♦
I shall promptly ask the Congress for authority to con
tinue to establish such credits and make loans within
reasonable limits to these Governments for purposes
growing out of the war *
It is of the utmost importance that such foreign
loans should be held down to a minimum and as soon as
may be, discontinued, and that every reasonable argument
should be pressed upon the governments of the Allies to
prepare themselves and their people to make payment for
cneir exports from the United States by imports into the
United States; that is, in effect, to make cash payment
instead of payment by credit*
F*>r the period of recon
struction, however, some of the Allies must have working
capital in the form of credits to enable them to pay for
the imports without which they cannot place themselves
and their* industries on a. peace basis.
This is not only
the policy which is actuated by a proper desire to be
helpful to the governments which, with us, have borne the
burden of the war, and to their peoples, but is also the
policy of enlightened selfishness.
It is to be appre
hended that the sudden cessation of the extraordinary
demands upon our industry and products, consequent upon
the conclusion of the war, may result in sudden reduc
tion of prices and wages and even 'in unemployment, if we
are not prepared to continue to sell on credit to the
extent that may be necessary.
These considerations lead me to believe that
the Government1s expenditures during the fiscal year
ending June 30, 191^, may be in the neighborhood of
<*>18,000,000,000.
I am inclined to recommend a substantial
reduction in the amount sought to be raised by
the House Bill,
Changes.have been made •or are
**3’
-*?*■
i in contempt-. ■ion by tho Senate which, taken together with the anticipated elimi| nation of revenue from liquor taxe3, would reduce the amount to be raised by
the pending Revenue Bill from the $8,000,000,000 or more provided for in the
I House Bill and originally suggested by me to some $6,300,000,000,
Further
changes may, I think, with safety be made in the Bill with a view to reducing
I the amount of taxation to $6,000,000,000 which may be paid in instalments dur—
| ing the calendar year 1919*
The excess profits tax rates applicable to the
calendar year 1916 should not be greater than those provided for in the existing
law of October, 1917) and should be payable only in those cases whore such ex
cess profits tax would yield a larger return than the proposed war profits tax»
The £>$% war profits tax applicable to the calendar year 1918 should be retained.
Contracts have been made during past months in the expectation of a heavy war
■ profits tax»
Everyone is agreed that war profits should be taxed.
They
| must be taxed, now*
j
It is time to look ahead to the future of American business and in*«
dustry*
Our tax measures should be so devised as to encourage and stimulate
rather than to burden and repress them*
X, therefore, recommend the immediate
amendment of the pending bill so as to provide that, with 4*ho collection of the
taxes levied upon war and excess profits for the calendar year 1918 and payable
in the year 1919, the war and excess profits taxes shall come to an end, except
in so far as may be necessary to subject to these ptaxes profits which., though
arising from contracts entered into during the war period, would, under exist
ing regulations, technically bo profits of 1919 and not profits of 1918* X can
think of nothing which would do more to encourage industry and enterprise than,
this measure, carrying with
it would the assurance that with tho cessa
tion of war there will come cessation of taxes ©n so-called war profits and
i war excess profits.
\
^
It seems wise to pijovide^with the elimination for the calendar yean
1919 of the war and excess p r < | f f o r
a sufficient revenue from c ^ p o ration and individual income i;axes yV^ioable to the calendar year 1919 $6
make the total revenue payable durIr. '■ '¿cH-Q calendar year 1920 not less tiian
$4,000,000,000,
It is impossible ¿i t^is time to make a forecast of the ag<gregate amount which tho war cP.ebt will have reached by the time war contracts
have been liquidated and the reduction of ‘
-.pur military forces to a peace basis
has been completed»
what wi^l be the government’s necessities when the
period of readjustment is past and the country has fully reached a peace basis
cannot now be foretold; but having regard to the interest on the then public
debt in excess of the interest to be received from obligations of foreign gov
ernments, the necessity of providing from taxes for the gradual retirement of
the war debt, and the certain permanent increase in the expenditures of the
government over pre-war expenditures.-, the figure of $4.,000,000.,000 suggested
seems a very moderate one#
In connection with the revision downward of the pending Revenue
Bill, I cannot too strongly urge upon you the necessity, so far as
the war and excess profits- tax is concerned, of providing necessary
safeguards in the form of adequate provisions for amortization, con
servative valuation of inventcries, and the ascertainment of the min
imum incomes which shall be exempted from the tax on lines which will
-4«
.
‘.nsore the taxpayer from injustice and avoidable injury.
Nor can X
overemphasize the importance of determining now the basis of taxation
whiol: will apply to the calendar year 1919 as well as to the calendar
year 1918* Business and industry and individual initiative and enter
prise are entitled to Inow in advance the basis of taxation upon which
all the activities of the nation must be conducted* Prosperity cannot
be maintained if business is kept in uncertainty as to taxation*
It is
alv/ays unfortunate to be compelled to enact a tax bill at the end of
the calendar year5 with retreactive effect, instead of in advance of the
calendar year, which would permit contracts and business arrangements
generally to he entered into with certainty as to the burden of taxa
tion to be borne. This is a gross injustice 'to business and to all
forms of enterprise.
It is costly also to the people at large,.as they
a.-.©¿required to |S y higher prices for their necessities, because pro
ducers, 3a order to be fu the safe side, fix prices on the assumption
that taxes map be higher than they subsequently turn out to be*’ Def
initeness and certainty as to the basis of taxation should be given in
tae pending biijl, not alone as to the calendar year .1918, but as to the
calendar year 1919, This will enable business and enterprise to proceed,
with confluence and courage,
Being, reasonably assured of a decreasing rather than an'increasing
scale of expenditure, the Treasury could look forward with composure to
he necessity of temporary borrowing against the expected revenue,.in
addition to such borrowing as may be necessary to meet the excess.of
current expenditures ever revenue. This gives an opportunity in con
nection with the pending Bill to take measures which heretofore have
been impossible because of the increasing scale of expenditures, although
inherently very desirable, for the spreading $f the payments of income
and profics taxes over the entire calendar year instead of requiring them
to be made in the first six months, and I suggest that these taxes be
made payable in four equal instalments, say, March 15, June 15, September
15 and December 15» This will give great additional relief to taxpayers
during the period of readjustment now before us and will initiate a policy
which should be to tie permanent advantage of the Government* For many
years to come the Government’s expenditure for interest and other purposes
^e vastly increased and that expenditure will be spread over the
whole year*
It is of the utmost importance that the Government should be
in receipt of revenues through the calendar year about evenly proportioned
so that it will not be under the necessity of accumulating balances be
forehand or borrowing against anticipated revenue receipts when we reach
again a peace basis.
To summarize, I venture to recommend;
1.
That the pending Revenue Bill be revised w ith a view to
yielding &6 t 000,000,GOO, payable during the calendar
year 1919 and not less than $4,000,000,000 during the
calendar year 1920,
-5-
2%
That income and profits taxes be payable in four equal
quarterly instalments, beginning March 15 in each year*
3«
That the excess profits tax rates in respect to taxes
payable in the year 1919 be not higher than those in
the existing law»
4*
The amelioration of the provisions with reference to the
determination of war and excess profits taxes in respect
to the revenue payable in the year 1919 and the elimination
of these taxes in respect to revenue payable in 1920,
except with respect to profits on contracts negotiated
during t} e war period*
5»
That to compensate for any reduction of revenue beyond
. the desired amounts above indicated, there should be
an increase in the corporation and individual income tax
lev ies.
I am sending a copy of this letter to Mr* Kitchin, Chairman cf
The Way s and Mean s Commi 11 e e »
Cordially yours,
(signed)
Hon* F, M. Simmons,
^Chairman, Committee on Finance,
United States Senate.
W. G-» McAEOO.
Ex -Of f ic io Mem bers
W. P. G. H A R D IN G , GOVERNOR
A L B E R T ST R AU SS, VICE GOVERNOR
A D O LP H C. M I L L E R
C H A R L E S S. H A M L IN
CARTER GLASS
Secretary of the Treasury
Chairman
lio H N SK E LT O N W IL LIA M S
COMPTROLLER OF THE CURRENCY
FED ER A L R ESER V E BOARD
W A S H IN G T O N
J. A . B R O D E R IC K . SECRETARY
W . T . C H A P M A N . ASSISTANT SECRETARY
w . M. IM L A Y , FISCAL A g e n t
address r e p ly
TO
FEDERAL RESERVE BOARD
November 26,1918.
X-1288
SUBJECT: Use of Gold Coin for Christmas Presents:
Dear Sir:
The Board has been asked for an expression of its views as
to the propriety of using gold coin for Christinas presents. About a
year ago the Board issued a statement giving some reasons why, in its
opinion, it was not desirable to use gold coin for such purpose's. There
are still some objections to the use of gold coin for gifts, for we
are not yet through with war financing and the problems which grow
out of the war and reconstruction will be live ones for many years.
There is a world-wide movement to discourage the use of gold coin as
a circulating
in the
medium upon the ground that gold should be concentrated
banks as reserve and used in the settlement of balances grow
ing out of international transactions*
New bills can be obtained readily for use as presents, and
Liberty Bonds, War Savings Certificates, and United States Thrift
Cards can be used in the same way to good advantage* We should continue
to encourage habits of thrift and should frown upon extravagance and
the wasteful employment of anything which can be diverted to a useful
purpose.
Very truly yours,
Governor
Washington, December 5* 1918
Dear Mr* Kitchin:-*
In my annual report on the State of the Finances for the
fiscal year onded June 30, 1918 I called attention to the fact that
until certain of the Allied countries could rosume their normal
activities the United States should be prepared to sell them on oredit
even after the declaration of peace, foodstuffs, raw materials and
manufactured products of which they might be in need, and stated that I
should recommend the enactment of legislation extending the authority to
establish credits in favor of foreign governments for a reasonable period
and within reasonable limits to meet needs growing out of the war*
I enclose herewith the draft of a bill which is designed to
confer such authority and recommend its enactment#
Under the existing law credits may be established by the
Secretary of the Treasury with the approval of the President, only for
the purpose of the National security and defense and the prosecution of
the war in favor of governments engaged in war with the enemies of the
United States and the authority to establish such credits ceases upon
the termination of the war between the Uhitod States and the Imperial
German Government,.
If the Draft bill enclosed herewith should be
enacted the authority to establish such credits would be continued for
the period of one year after the termination of the war, and after
December 15, 1918 credits might be established, with the approval of the
President, for purposes growing out of the war and after the termination
of the war in favor of the governments of such foreign countries as
were previously engaged in war with the enemies of the United States«
The obligations of the Allied Governments which have been
acquired by the United States pursuant to existing law are in form
payable on demand*
Under existing laws the Secretary of the Treasury
is authorized to convert all such obligations acquired under the authority
of the First Liberty Bond Act or of the Second Liberty Bond Act into
"long-time obligations of such foreign governments respectively maturing
not later than the bonds of the United States then last issued under the
authority of this Act or of said Act approved April twenty*-fourth*
nineteen hundred and seventeen as the case may be,”
The bonds of the United States issued under the Act of April 24,
1917, the First Liberty Bond Act, mature Juno 15, 1947 and the bonds last
issued under the Act above quoted, the Second Liberty Bond.Act mature
October 15, 1938*
The provisions of Section 2 of the draft bill herewith
presented are intended to continue the authority at this time vested in the
Secretary of the Treasury in regard to such conversion and to prevent a
limitation of such authority in case bonds of the Edited States should be
hereafter issued under the Second Liberty Bond Act bearing a short date
of maturity.
The present appropriation for loans to foreign governments in
the amount of $10,000,000,000 is not increased in the draft bill presented
to you herewith*
It is very difficult to estimate with any dogrec of
accuracy how much of the present appropriation will be required for loans
*3to moot the war expenditures of the foreign governments, how much will
he available for loans for purposes growing out of the war and what will
be the requirements of the Governments of the Allies for reconstruction
purposes,
The date of the termination of the v/ar and the terms of the
peace treaty are important factors as well as the extent to which such
foreign governments will be able to pay for their requirements in the
United States out of the dollar equivalent of our military expenditures
abroad, by sales of securities or commodities exported or by the use of
private.credits*
The actual cash advanced to the Allied Governments
together vvith credits dedicated and made effective for specific purposes
s
'
aggregate «¿7,608,693,483,70, while credits established but not yet
advanced or made effective for specific purposes amount to,,^611,647,218*30
bringing the total of tho credits out of which advances have been or may
be made up to y8,220,3400702*
After providing say 0279,659,298 additional
for outstanding commitments and tho continuance of purchases— largely of
foodstuffs— for w^r purposes, the amount of the existing appropriation
(OlO,000,000,000) which will be available for use under the draft bill
may be roughly estimated at { l f500,000,000,
I restate the foregoing figures (cents omitted) in tabulated
form;
Appropriation for foreign loans
Cash advances and credits made
effective
$10,000,000,000
07,608,693,483
Credits established but not yet
advanced nor made effective,
611,647,218
Additional requirements for commit
ments and other war requirements say
279,659,299
♦4*0âi5op.MQpOjtm
.Balance available under draft bill
for purposes growing out of war^say
1
$1*500,000,000
ihe gross needs of the Governments of the Allies from the
ttolted States for after the war purposes they have estimated at a
nuoh greateV total than $l,50i,iRK)*000, but I believe investigation
tfiil show a Considerable reduction in such estimates#
A part of their
requirements may be provided by the Treaty of Peace through awards in
their favor for reparation either ih money or materials} a part will bo
provided out of the dollar equivalent of our military expenditures abroad
and a part it should prove possible for these countries to finance through
sales or private credits*
A balance, however, is likely to remain which
it may be impossible to provide other than by the use of loans from the
Government of the united States and the above amount of about $1,500,000,000
should be sufficient for the purpose*
I cannot feel that victory has been really won in the war if at
its conclusion the countries which have side by side with us borne the
stress of the conflict are not supplied by some available means with credits
to the extent that they may be unable to provide their own finances, so
that they may procure in this country the supplies needed for their people
and for the reconstruction of their economic life*
Prom the standpoint
of enlightened policy, the United States should put itself in position to
provide the credits necessary to sell its surplus products until the es
tablishment of normal peace conditions*
The draft bill enclosed merely enlarges the existing powers to
make foreign loans, so that within the limits of the present appropriation
~5~
and if occasion should arise, the Secretary of the Treasury, with the
approval of the President, will bo authorized to establish credits after
the termination of the war, from which, in the light of conditions as
they envelope and if it be clearly in the public interest, foreign :loane
Kay be made for purposes growing out of the war,
1 am sending a copy of this letter to Senator Simmons#
Very truly yours,
(Signed)
V/. G. MOÀE00
Hon# Claude Kit chin,
Chairman, Ways and Moans Committee,
House of Representatives#
Section 1*
That the proviso at the end of Section 2 of
the Second Liberty Bond Act as amended by the Third Liberty Bond
Act and the Fourth Liberty Bond Act be and hereby is amended so as
to read as follows:
provided
That the authority granted by this section to
i
' ■
the Secretary ôf the Treasury to establish with the approval of the
President credits for foreign governments, as aforesaid, shall oeaso
upon the expiration of the period of one year after the termination
of the war between the United Statos and the Imperial German Government;
an<^~Provided further
That after December 15, 1918, such credits may,
with the approval of the President, be established for such purposes
growing out of said war as the Secretary of the Treasury shall determine,
and after the termination of said war, in favor of the governments of
such foreign countries as were previously engaged in war with the onomios
of the United States,'»
Section* 2*
The obligations of foreign governments as-
quired by the Secretary of the Treasury by virtue of the provisions
of the First Liberty Bond Act, the Second Liberty Bond Act, the Third
Liberty Bond Act, or the Fourth Liberty Bond Act shall mature at
such dates as shall be determined by the Secretary of the Treasuryj
Provided
That such obligations acquired by virtue of the provisions
of the First Liberty Bond Act or through the conversion of shorttime obligations acquired under said Act shall mature not later
than June 15, 1947, and all other such obligations of foreign gov
ernments shall mature not later than October 15, 1938,
'■•O'“—
II
Treasury Department.
For Morning papers, February 11, 1919.
Washington, D. C.,
February 10, 1919.
Dear Mr. Kitchin:
Now that the revenue bill has passed the House I desire, in accord
ance with the intimation contained in my letter of January 15th to you
and my talk with you and Mr. Fordney, to ask the attention of the Ways
and Means Committee to the necessity of the immediate enactment of legislationamending the Liberty Bond Acts so as to make possible the funding
by a Victory Liberty Loan in the spring of the floating debt which has
been incurred and will be incurred up to that time.
The Victory Liberty
Loan could not be issued successfully, now that hostilities have ceased,
within the limitations imposed by existing laws.
After most careful consideration of the matter and after receiving
and considering the views of bankers, liberty loan workers anrl others
whose views are most entitled to consideration, very reluctantly I am
constrained to say that I cannot wisely determine now in February the
terms of the bonds or other obligations which it would be wise to offer
for subscription in April when the Liberty Loan campaign should probably
begin.
At the moment we are in a period of readjustment.
To the slacken
ing of industrial and commercial activity incodent to the termination
of active warfare has been added the usual dullness of the winter season.
The necessary and desirable contraction of our credit structure has begun
and will be greatly facilitated by the enactment of appropriate legislation
2
-
to permit the liquidation of claims arising under informal anry contracts,
Steps have been taken to break the deadlock which has arisen growing out
of the maintenance, nominally at least, of war prices in certain basic
industries.
Upon the enactment of appropriate legislation to enable the
Food Administration to protect the guaranties given by the United States,
I am hopeful that it will prove possible to restore the operation of the
law of supply and demand with respect to foodstuffs with, as I believe, a
consequent reduction in the cost of living.
A period of rising prices and
of intense industrial activity such an we have experienced during the past
four years is always a period of great apparent prosperity, and a period
of falling prices and of the contraction of credits is always a period
of depression.
The retardation of the process of readjustment by arti
ficial means can only increase the evile inherent in the situation.
Buy
ing will not begin and activity will not set in until the community at
large is satisfied that prices have reached bedrock.
I am very hopeful
that measures now under discussion may result in the rapid acceleration
of the readjustment and I am firmly convinced that if that be done, America
has before her a new period of great and growing prosperity.
I am even
sanguine enough to believe that it is within the range of the possible
that so much may have been accomplished on the lined above indicated be
fore the expiration of two months from now that the whole situation will
have been changed and that we may look forward to the successful issue
of the Victory Liberty Loan on terms which today would seem quite im
possible.
Furthermore, merely as a matter of the technique of bond selling,
- 3 -
it would be a fatal mistake to fix the terms of the Loan so long in ad
vance of the offering.
The issue would become stale and its attractions
would have been discounted long before the Loan Campaign begins.
It will
be remembered that the Second Liberty Bond Act was approved as late as Sept
ember 24th and the bonds were offered on October 1st, 1917; that the Third
Liberty Bond Act was approved April 4th and the bonds offered on April 6,
1918; and that the supplement to the Fourth Liberty Bond Act was approved
September 24th and the bonds offered on September 28th, 1918.
Therefore and in view of the early expiration of the life of the
present Congress and the apparent impossibility of convening and organizing
the new Congress in time to enact further bond legislation before the Vic
tory Liberty Loan campaign begins, I reluctantly ask greater latitude in
the exercise of a sound discretion as to the terms of the Victory Liberty
Loan than has been conferred by the Congress in respect to previous loans.
I should be only too glad to have the Congress share with me the responsi
bility of this extraordinarily difficult determination, but, believing
that it would be a grave mistake to reach a final determination at this
time, I must ask authority to deal with the matter as the situation may
develop.
Holding these views, I have ventured to have prepared and I submit
to you herewith, a draft of a bill to amend the Liberty Bond Acts and for
other purposes.
This bill would (1) increase the authorized issue of bonds
from twenty billion dollars to twenty-five billion dollars; (2) remove the
limitation as to interest rate so far as regards bonds maturing not more
than ten years from the date of issue; (3) authorize the issue of not to
- 4 exceed ten billion dollars of interest-bearing, non-circulating notes
having maturities from one to five years; (4) authorize the issue of bonds
and notes payable at a premium; (5) exempt war savings certificates from
income surtaxes; (6) confer authority upon the Secretary of the Treasury
to determine the exemptions from taxation in respect to future issues of
bonds and notes and to enlarge the exemptions of existing Liberty Bonds
in the hands of subscribers for new bonds and notes; (7) exempt from in
come surtaxes and profits taxes all issues of Liberty Bonds and bonds of
the War Finance Corporation held abroad; (8) textend the period for con
version of 4$ Liberty Bonds on the lines suggested in my letter of Jan
uary 15th to you; (9) create a 2 ^ cumulative sinking fund for the retire
ment of the war debt; (10) continue the existing authority for the purchase
of obligations of foreign governments after the termination of the war in
accordance with the views expressed by Secretary McAdoo by letter and in
his testimony before the Ways and Means Committee; and (11) extend the au
thority of the War Finance Corporation so as to permit it to make loans in
aid of our commerce, thus supplementing the aid which may be given by the
Treasury on direct loans to foreign governments and in a measure relieving
the Treasury of demands for such loans.
I am sure that your Committee will wish to discuss all of these
matters fully with me and I shall not burden you at this time with a fuller
statement of my views concerning them.
I am sending a copy of this letter to Senator Simmons.
Enclosure.
Hon. Claude Kitchin,
House of Representatives,
Washington, D.C.
Very truly yours,
(Sgd). Carter Glass.
-1- (a)
A bill to amend the Liberty Bond Acts and for other purposes.
Be it enacted by the Senate and House of [Representatives of the United
States of America in Congress assembled. That Section 1 of the Second Liberty
Bond Act as amended in hereby further amended by striking out the figures
$20,000,000,000 and inserting in lieu thereof the figures $25,000,000,000 and
by adding the following clause:
"Any bonds maturing not later than ten years from the date thereof
may bear interest at such rate or r^tes, notwithstanding the limitation here
inbefore contained, and may be made payable at or before maturity at such
premium or premiums as the Secretary of the Treasury may prescribe."
Sec. 2.
That the Second Liberty Bond Act is hereby amended by adding
thereto a new section to read as follows:
"Sec. 18.
That in addition to the bonds and certificates of indebted
ness and war savings certificates authorized by the Second Liberty Bond Act
and amendments thereto, the Secretary of the Treasury is authorized to borrow
from time to time on the credit of the United States for the purposes of said
Act and amendments thereto and to meet public expenditures authorized by law
such sum or sums as in his judgment may be necessary, and to issue therefor
notes of the United States at not less than par in such form or forms and
subject to such terms and conditions and at such rate or rates of interest as
he may prescribe, and each note so issued shall be payable at such time not
less than one year nor more than five years from the date of its issue, and
may be redeemable before maturity upon such terms and conditions, and may
be payable at or before maturity at such premium, and the interest accruing
thereon shall be payable at such time or times as the Secretary of the
Treasury may prescribe.
J
The sum of such notes outstanding hereunder shall
•
not at any one time exceed in the aggregate $10,000,000,000.
None of
~2—
A Q
such notes shall hear the circulation privilege.
The principal and interest
therefore shall he payable in United States gold coin of the present standard
of value.
The word;HbondsH where it appears in Section 8, 9, 10, 14, and 15
of this Act and Section 5200 of the Revised Statutes, but in said sections
only, shall be deemed to include notes issued hereunder.11
Sec. S.
That notwithstanding the provisions of the Second Liberty Bond
Act and of any other Act,
(A)
War Savings certificates of the United States heretofore or here
after issued shall be exempt from taxation as fully and to the same extent
as bonds of the United States issued under Section 1 of the First Liberty
Bond Act.
(B)
Bonds, notes and certificates of indebtedness of the United States
of any series hereafter issued shall be exempt from taxation if,
and to
the extent prescribed by the Secretary of the Treasury in connection with
the issue thereof.
(C)
Subscribers for any subsequent series of bonds or any series of
notes of the United States shall be entitled to additional exemptions from
taxation in respect to bonds of the First Liberty Loan converted, the Second
Liberty Loan converted and unconverted, the Third Liberty Loan and the Fourth
Liberty Loan owned by them if, as and to the extent prescribed by the Secre
tary of the Treasury in connection with the issue of such subsequent series
of bonds or of such series of notes.
(D)
Section 3 of the Fourth Liberty Bond Act is hereby amended to read
as follows:
”Sec. 3.
That, notwithstanding the provisions of the Second Liberty
Bond Act and of the War Finance Corporation Act and of any other Act, bonds,
notes and certificates of indebtedness of the United States and bonds of the
War Finance Corporation shall, while beneficially owned by a non-resident
alien individual, or by a foreign corporation, partnership or association,
not engaged in business in the United States, be exempt both as to princi
pal and interest from any and all taxation now or hereafter in^osed by the
United States, any state or any of the possessions of the United States or
by any local taxing authority.11
Sec. 4.
That the privilege of converting 4$ bonds of the First Liberty
Loan converted and 4$ bonds of the Second Liberty Loan into 4\j> bonds, which
privilege arose on May 9, 1918, and expired on November 9, 1918, may be ex
tended by the Secretary of the Treasury fur such period, upon such terms and
conditions and subject to such rules and regulations as he may prescribe;
P rovided, however, that for the purpose of cumputing the amount of interest
payable, bonds presented for conversion under any such extension shall be
deemed to be converted on the dates for the payment of the semi-annual inter
est on the respective bonds so presented for conversion, next succeeding the
date of such presentation.
Sec. 5.
That at the expiration of one year after the termination of the
war, and annually thereafter until all bonds and notes hereinafter referred
to shall be retired, the Secretary of the Treasury shall set aside, as a cumu
lative sinking fund for the retirement of the war debt, such amount as he
shall deem necessary under the provisions of this section and the amount so
set aside by the Secretary of the Treasury in each such year is hereby appro
priated for the purpose of this section to be available until all such bonds
and notes are retired.
Bonds and notes purchased, redeemed or paid out of the
sinking fund shall be cancelled and retired and shall not be reissued.
The Secretary of the Treasury shall from time to time, beginning one year
— 4—
A.
after the termination of the war and continuing until the war debt is retired,
purchase for thessinking fund bonds and notes issued under authority of the
First Liberty Bond Act, the Second Liberty Bond Act, the Third Liberty Bond
Act, the Fourth Liberty Bond Act and this Act, including converted bonds, at
sach prices and upon such terms and conditions as he may prescribe.
The
aggregate amount of all such bonds and notes purchased in any sinking
fuhd year shall equal as nearly as may be but shall not exceed 2^$ of the
aggregate amount of such bonds and notes outstanding at the expiration of
one year after the termination of the war plau (in the case of any sinking
fund year after the first) any amount herein authorized to be expended for
such purchases not expended in any previous year or years and an amount equal
to the interest on all bonds and notes retired by means of the sinking fund.
The sinking fund may be applied to the payment of bonds or notes at maturity
or to the redemption thereof before maturity as well as to the purchase there
of.
The average cost of the bonds and notes purchased shall not exceed par
and accrued interest.
Sec. 6.
That the proviso at the end of Section 2 of the Second Liberty
Bond Act as amended by the Third Liberty Bond Act and the Fourth Liberty Bond
Act is hereby amended to read as follows:
Provided,That the authority granted by this section to the Secretary
of the Treasury to establish credits for foreign governments, as afores&idi,]
shall cease one year after the termination of the war between the United
States and the Imperial German Government: and, Provided further. That, for
the purpose of promoting commerce with foreigh nations, such credits may,
after February 15, 191S, be established by the Secretary of the Treasury,
with the approval of the President, to provide for purchases in the United
States for export therefrom and for expenditures in the United States in
connection with such purchases and for the payment of interest to the United
-5- (a)
States; and, Provided further, That after the termination of the war such
credits may, with the approval of the President, be established in favor
of the Governments of such foreign countries as were previously engaged in
war with enemies of the United States.”
Sec. 7.
That the obligations of foreign governments acquired by the
Secretary of the Treasury by virtue of the provisions of the First Liberty
Bond Act and the Second Liberty Bond Act and amendments and supplements there
to, shall mature at such dates as shall be determined by the Secretary of the
Treasury: Provided. That such obligations acquires by virtue of the provisions
of the First Liberty Bond Act or through the conversion of short-time obliga
tions acquired under said Act, shall mature not later than June 15, 1924, and
all other such obligations of foreign governments shall mature not later than
October 15, 1938.
Sec. 8 .
That the War Finance Corporation Act is hereby amended by
adding to Title I thereof a new section to read as follows:
”Sec. 21.
That the Corporation shall be empowered and authorized in
order to promote commerce with foreign nations through the extension of
credits to make advances upon such terms, not inconsistent with the provis
ions of this section, for periods not exceeding five years from the respective
dates of such advances to any person, firm, corporation or association en
gaged in the business in the United States ef exporting therefrom domestic
raw materials, agricultural products, manufactured articles and other com
modities to foreign countries or to make advances to any bank, banker or
trust company conducting business in the United States which shall have
made advances to any such person, firm, corporation or association after this
Act shall have taken effect.
"Such advances shall be limited in amount to not more than the market
- 6- (a)
value of the goods to he exported at the port of shipment and at the time
of shipment (as estimated and determined by the Corporation), plus insurance
and carrying or transportation charges to the foreign point of destination
if and to the extent that such insurance and carrying or transportation
charges are payable in the United States to domestic insurers *nri carriers.
P rovided., That any such advances to bank, banker or trust company shall
not exceed the amount remaining unpaid of the advances made by any such bank,
banker or trust company to any such person, firm, corporation or association,
Provided..,further, That the aggregate of the advances made by the Corporationunder this section remaining -unpaid shall never at any time exceed the
sum of one billion dollars.
"Notwithstanding the limitation of Section 1 of this Act, the advances
provided for by this section may be made until the expiration of one year
after the termination of the war, the date of such termination to be fixed
by proclamation of the President o* the United States.
All such advances
shall be made upon the promissory notes of the borrower, secured in
each instance by endorsement, guarantee or otherwise as the Corporation shall
deem adequate.
The Corporation in its discretion may extend the time of re
payment of any such advance through renewals, the substitution of new o b l i g e
tions or otherwise, provided that the time for the repayment of any advance
shall not be extended beyong five years from the date on which the same was
originally made."
Sec. 9 .
That the last sentence but one of Section 15 of the War Finance
Corporation Act be and is hereby amended to read as follows:
"Beginning twelve months after the termination of the war, the date of
such termination to be fixed by a proclamation of the President of the United
States, the directors of the Corporation shall proceed to liquidate its
-7-(a)
assets and to wind up its affairs, but the directors of the Corporation, in
their discretion, may, from time to time, prior to such date, sell and dispose
of any securities or other property acquired by the Corporation.“
Sec. 10.
That the short title of this Act shall be «Fifth Liberty
Bond Act.«
- 0-
February 21, 1919«
Dear Siri
I beg to acknowledge your letter of the 13th instant, enclosing
circulars from the Farm Mortgage Bankers Association, which I return
herewith as you request*
This Association is composed of firms and
corporations engaged in the business;of making farm loans«,
They find
that the profits of their business have been curtailed by the opera
tion of the Federal Farm Loan System, under which money is loaned to
farmers for deserving purposes at a reasonable rate of interest, for
a long period of years, and without the exaction of the ’’bonuses” and
commissi ins which have characterized this business in the pasta
They
have been constant opponents of the System, attacking the security of
the leans made by the Federal Land Banks, and threatening to bring
legal proceedings to test the constitutionality of the tax exemption
feature ef the Act«
Latterly, they have been conducting an extremely
active propaganda looking toward the repeal of the tax exemption«
Their object in this is to make it impossible to sell the Farm Loan
Bonds issued by the Banks, and thus make it impossible for the Banks
to make any Loans*
I should have to write you a very long letter to state and answer
their various arguments. Briefly, I may say 1,
The amount of Farm Loan Bonds outstanding in the hands of the
public is only about l/2 of 1% of the amount of Liberty Loan Bonds*
The total principal sura of these Farm Loan Bonds represents less then
two months’ interest on the outstanding Liberty Loan Bonds.
The dis-
t
parity in amount between the two is so .great as to preclude the idea
of any appreciable competition in sales«
2,
The depreciation in the price of Liberty Loan Bonds is due
primarily to the fact that they have to some extent been subscribed
for by people who were unable to pay f®r them, &r unable to keep them
after they had paid for them, and therefore obliged to sell them#
The
amount offered for sale has been largely in excess of the demand and
in such circumstances depreciation was inevitable.
I think that it
has not been materially affected by any other cause*
3*
Farm Loan Bonds are not* as the Mortgage Bankers imply, the
only tax exempt bonds.
On the contrary, there are billions of dollars
in fully exempt bonds issued by the United States, States and local
subdivisions now outstanding.
The addition to this great volume of
less than $100,000,000 Farm Loan Bonds is negligible.
4.
It is true that every tax exempt bond diminishes the Govern
ment’s revenue from Income tax.
The diminution due to the sale of
Farm Loan Bonds is slight, because they are comparatively small in
amount, and because the assumption of the Mortgage Bankers Association
that they are all sold to persons subject to the maximum surtax is an
absurdity.
As a matter of fact, special precautions are taken to see
that they are sold as far as possible in small lots to persons of
moderate means.
5.
It is true that about $65,000,000 Farm Loan Bonds have been
purchased by the Treasury under the authorization in the amendment of
I paid by the Government on its own bands*
Moreover, the Federal Land Banks
I §ave been purchasers of both Government bonds and Treasury certificates of
| indebtedness, and will be continuous purchasers of bonds«
They have als®
I conaenced the repayment of the capital originally subscribed by the Government
p a t the time of their incorporation.
The first payment of about $125,000 on this
I
; account was made in Novembe'r last, and there will Tbe a further payment in
I May next*
I
Fcr your further information I hand you herewith a copy of a letter
I written by Secretary Mc^doo to Mr. Kitchen on August 20, 19X8.
*
Hoping that this will give you sufficient material for a satis
factory reply to letters that you may receive on this subject* I h ®
Very sincerely yours,
(signed) GARTER GLASS
Enclosures*
.
I
August 2 0 , 1918.
Dear Sirs
I have your letter of Angust 9 asking my views with ref
erence to a proposal to amend the Federal Farm Loan Act of
July 17, 1916, so that any bonds hereafter issued under such
act snail be issued at the same rate and subject to the same
taxation as bonds issued under the Second Liberty Loan Act as
amended by the Third Liberty Loan Act*
The credit of the Federal Land. Banks is high, but does not
equal that of the United States Government, nor is it possible
for Federal Land Banks to make an appeal to the patriotism of
the people which the United States Government makes in offering
its Liberty Bonds*
I have no hesitation in saying that bonds issued under the
Farm Loan Act' could not be issued at the same rate and subject
to the same taxation as bonds issued under the Second Liberty Loan
Act, as amended by the Third Liberty Loan Act.
Uhether bonds could bo issued bearing interest at a higher
rate, but subject to the same taxation as Liberty Bonds, X do not
know.
If the Congress .should direct such an experiment, it would
be necessary to authorize the Treasury, during the period of the
war, to buy and hold such bonds as cannot be sold, so that the
functions of this great Farm Loan System shall not be crippled
at a time when farm production is of major importance*
I do not
undertake at this time to express an opinion as to the bonds-of
the Joint Stock Land Banks which stand on a different footing#
Cordially yours,
(Signed)
17. G. McAdoo#
TREASURY DEPARTMENT»
Washington.
February 22, 1919,
INCOME AND PROFITS TAXES DUE MARCH 15, 1919,
Income and profits taxes due larch 15» 1919, may be paid in Treas
ury certificates of indebtedness, Tax Series of 1919, dated August 20,
1918, maturing July 15, 1919, and in Treasury certificates of indebted
ness, Series T, dated November 7, 1916, maturing March 15, 1919.
other certificates of indebtedness will be accepted in payment cf the
taxes due on said date.
Certificates of the two series mentioned will
be accepted by collectors of internal revenue at par, without interest,
when tendered in amounts not in excess of the amount of such taxes due
March 15, 1919.
They will be so accepted at any time- on or before
March 15, 1919,
If so accepted before March 15, 1919, full interest
to March 15, 1919, will be paid in the ordinary course upon presenta
tion of the coupons for such interest when due.
Coupons maturing on
March 15, 1919, should be detached from certificates of Series T, and
coupons maturing on or before March 15, 1919, should be detached from
©artifiantes ©f tlie Tax Series of 1919, before presentation to the
collector, and should be separately presented i3j?:r payment in the
ordinary course when due.
Coupons maturing after March 15, 1919,
must, however, be attached to certificates of* the Tax Series of
1919 and surrendered to the collector with such oortificates for
cancellation; and collectors will not accept any certificates, *f
the Tax Series ef 1919 whish have not attached thereto the coupons,
No. 4, maturing May 15, 1919, and Ho. 5 maturing July 15, 1919,
The procedure above provided will automatically adjust accrued
interest m
respect of all Treasrjry certifiCates of indebtedness
used in payment of taxes due March 15, 1919, whether presented on
or before said date and no other payment or credit will be allowed
or made on account of interest in connection therewith.
In order to avoid unnecessary dislocation of funds, it is of
the utmost importance that Treasury certificates of indebtedness of
Series T be used by taxpayers to the utmost extent possible in pay
ment of their taxes, in preference to making cash payment of their
taxes, and Federal Reserve Banks and collectors of internal revenue
should use every effort to induce taxpayers who are the holders of
such certificates to make such use of them and to facilitate such
use in every manner in their power.
The instructions to collectors dated December 9, 1918 (T. D,
2778), issued by the Commissioner of Internal Revenue and approved
by the Secretary of the Treasury, and the instructions to Federal
Reserve Banks dated December 9, 1918, issued by the Treasurer of
the United States and approved by the Assistant Secretary of the
Treasury remain in full force and effect.
The amount of Treasury certificates of Series Ty maturing March
15, 1919, now outstanding is nearly $800,000,000, and the amount of
Treasury certificates of the Tax Series of 1919 also available in
payment of taxes due March 15, 1919, is upwards of $ S 0 ,000,000.
In view of this and of the fact that the amount of income and profits
taxes due on March 15, 1919, is only one-fourth of the whole amount
- 3 -
of income and profits taxes payable during the calendar year "by tax
payers who make their returns upon the "basis of the calendar year* there
seems to be no reason to. anticipate that the amount of taxes paid as
of March 15, 1919, will exceed the amount of Treasury certificates’
maturing on that date plus tno current expenditures of the Government
during the period of collection of this tax payment*
It seems that
there will be no unexpended cash proceeds arising from the payment of
income and profits taxes on March 15,. 1919, and therefore no redeposits
will bo made;
nor will payment of income and profits taxes by credit
be permitted*
Collectors of internal revenue will, however, be instructed to
deposit checks received on and after March 10, 1919, to and including
March 22. 1919, in payment of income and profits taxes, with Federal
Reserve Banks, following to that extent substantially the procedure
adopted last June*
As to this procedure detailed instructions will
io1low *
R# C. LEFFINGI/ELL,
Assistant Secretary of the Treasury?
March. 51, 1915
JU'
The War Finance Corporation will,
through its agent,
the Federal
Reserve Banks and their sub-agent banks all over the United States, open a sale
of tneir first bond issue on Wednesday morning, April 2nd.
Under the statute, the War Finance Corporation would be author
ized to-day, on the basis of its paid-in capital stock, to issue bonds in
the amount of $2,100,000,000.
At this time, however, in its first issue of
bonds, it is putting out only $200,000,000.
The bonds will be put out in denominations of $1,000, will be
payable in one year, and bear interest at five per cent, per annum.
They
will be exempt from State taxation and from all local taxation; and will
also be exempt from taxation by the United States, with the exception that
they will be subject to estate or inheritance taxes, and to surtaxes and ex
cess profits taxes now or hereafter imposed by the United States upon the in
come or profits of individuals or corporations.
exemption relating to these bonds is this:
But another important tax
That the interest on $5,000 of
these bonds owned by any person will be entirely exempt from all income
taxes, surtaxes, excess profits or war profits taxes.
The War Finance Corporation is a corporation of which the United
States Government is the sole stockholder and of which the Secretary of the
Treasury is the Chairman.
The final legal details with reference to this
.'.issue were
agreed upon in conference this afternoon between the Attorney General of
the United States and Counsel for the War Finance Corporation.
The War Finance Corporation, through its Managing Director,
Eugene Meyer, Jr., is sending out. the following circular:
$ 200 ,000,000
W A R
F I N A N C E
C O R P O R A T I O N
SERIES "A" 5% GOLD BONDS
Ddted April 1 , 1919,
Dae April 1, 1920.
Coupon bonds in denominations of $ 1 ,000.
Tax Exemptions as described below.
■Offered at- $1,000 per bond
and accrued Interest.
The War Finance Corporation, a Corporation created by Act of Congress, ap
proved April 5, 1918, as amended, offers, beginning at 10 o ’clock a. m. Wednesday,
April 2, 1919, under the authority of said Act, with the approval of the Secretary
of the -reasury, for subscription o,t $1,000 per bond and interest, through the Fed
eral Reserve Banks, as its fiscal agents, coupon bonds, Series "A”, of War Finance
orporation in the aggregate principal amount of $200,000,000.
Bonds will be is
sued in denominations of $1,000 only* in bearer form, will be dated April 1, 1919,
^bd will bear interest from April 1, 1919/ at the rate
of Sjb per annum, payable semi annually on October 1 st and April 1 st. The princi
pal and interest of the bonds will be payable in ttnited States gold coin of the
present standard Of value.
The right is reserved to reject any application; to allot less than the
amount of bonds applied for; and to close the subscription at any time with or
without notice. Payment for bonds allotted may be made at once and must be made
within the period fixed in the notice of allotment whirh will be mailed to the sub
scriber. Upon payment, Federal Reserve Banks will issue interim receipts pending
delivery $f the definitive bonds.
Incorporated banks and trust companies and such dealers in investment secur
ities as sb^ll be approved, by the Federal Reserve Banks will receive a commission
of 1/8 of 1% of the face amount of any bonds cf this issue, when duly paid for,
which shall have been allotted to or through such banks, trust companies or dealers.
his commission is to be payable in each instance within sixty days after the al
lotment has been paid for in full.
legality
Opinions have been
by the General Counsel of
stitute valid and binding
holders to the exemptions
given by the Atvcrney General of the United States and
the War Finance Corporation that these bonds will con
obligations of the Corporation, and will entitle their
from taxation as set forth in this circular.
tax e x e m p t i o n
In accordance with said Act of Congress, the bonds are exempt, both as to
principal and interest, from all taxation now or hereafter imposed by the United
I States, any State, or any of the possessions of the United States, or by any local
taxing authority, except (a) estate or inheritance taxes, and (b) graduated addi
tional income taxes, commonly known as surtaxes, and excess profits and war profits
taxes, now or hereafter imposed by the United States, upon the income or profits .
of individuals, partnerships, corporations or associations- The interest on an
amount of such bonds authorized by said Act, the principal of which does not ex
ceed in the aggregate $5,000, owned by any individual, partnership, corporation
or association, is exempt from the taxes referred to in clause (b).
SECURITY
The Act creating the Corporation provides that all bonds issued by
the Corporation shall have a first and paramount floating charge on all the as
sets of the Corporation and that the Corporation shall not at any time mortgage
or pledge any of its assets.
These assets include not only such as may be ob
tained through the proceeds of sale of these bonds, but also those obtained
from funds raise! through subscriptions to capital stock. The United States
is not liable for the payment of these bonds or the interest upon them,
CAPITALIZATION OE CORPORATION
The total authorized capital stock of the War Finance Corporation is
$500, 000, 000, all of which shall, under said Act of Congress, be subscribed by
I
the United States of America. To date, $350,000,000 of the capital stock has
; been subscribed and paid for, and is now owned by the United States of America;
subscription to the remaining $150,000,000 is subject to call upon the vote of
three-fifths of the Board of Directors of the Corporation, with the approval of
the Secretary of the Treasury, at such time or times as may be deemed advisable.
The Secretary of the Treasury is by law the Chairman of the Board.
■
The object of the Act creating the Corporation was, as expressed in
its title:- ”To provide further for the national security and defense, and, for
the purpose of assisting in the prosecution of the War, to provide credits for
industries and enterprises in the United States necessary or contributory to the
prosecution of the War, *?'*, and for other purposes”,
REPORTS
The first annual report of the War Finance Corporation, covering its
operations from date of organization to November 30, 1918, inclusive, may be had
upon application at the offices of the War Finance Corporation in Washington.
IplThe ^©¿ular quarterly reports as required by said Act of Congress will likewise
R>'be supplied on request.
BALANCE SHEET
The balance sheet of the corporation as of March 19, 1919, is attached
hereto.
WAR FINANCE CORPORATION
by________ CARTER GLASS__________
Chairman.
%
March 31, 1919.
#
by________ EUGENE MEYER JR.______
Managing Director.
Approved.
CARTER GLASS____________
Secretary of the Treasury.
WAR FINANCE CORPORATION
GENERAL BALANCE SHEET, MARCH 19, 1919.
A . P —P - £ - t
0
I Cash depoaHorj
i.h» Treasure!' of the
United States and the Federal Reserve .Banks
$13, 851,406.43
\ LOANS'TO:
Barucs, Bankers, Trust C c w p a n ie s ., and. Savings
B a n k s .................................... -
$3,912,677.61
Railroads „ . (which includes $50, 000, 000. 00);
(to the Director General of
)
(Railroads
)
116,555,270.00
Public Utilities
......................... * *
Industrial Corporations ...........
. . . . . .
Cattle L o a n s ............. ......... ..
26,781,900.00
636,652.00
.... 6 ,790.772,35
154, 677,271.96
INVESTMENTS:
184,584, 518.29
United States of America...Liberty Loan tends .
8,671.04
Office Furniture and Equipment . . . . . . .
3,694,519.62
Accrued interest receivable
Total . . . .
356, 816,387.34
L IABILITIES
CAPITAL STOCK- -AUTHORIZED BY WAR FINANCE
CORPORATION ACT . ............... ..
500, 000, 000. 00
LESS SUBSCRIPTION BY THE UNITED STATES OF
AMERICA, subject to call by the Directors
of the C o r p oration.............
150, 000 ,00 0 .00
$350, 000, 000.00
Earnings .......
.............
.......
Interest collected in advance . . . . . . . . . .
Total .................
6,780,122.77
36.264.57
$356,816,387.34
TREASURY DEPARTMENT
WASHINGTON
May 7, 1919.
INCOME AND PROFITS TAXES DUE JUNE 16, 1919,
Income and profits taxes due June 16, 1919, may "be paid in Treasury cer
tificates of indebtedness of Tax Series of 1919, dated August 20, 1918,
maturing July 15, 1919, Series T 2, dated January 16, 1919, maturing June 17,
1919, and Series T 3, dated March. 15, 1919, maturing June 16, 1919.
No other
certificates of indebtedness wi^l be accepted in payment of the taxes due on
said date.
Certificates of the three series mentioned will be accepted by
collectors of internal revenue at par, without interest, when tendered in
amounts not in excess of the amount of such taxes due June 16, 1919.
will be so accepted at any time on or before June 16, 1919»
They
If so accepted
before June 16, 1919, full interest to June 16, 1919, will be paid as below
stated.
Coupons maturing on June 16, 1919, should be detached from certificates
of Series T 3, and coupons maturing on or before May 15, 1919, should be de
tached from certificates of the Tax Series of 1919, before presentation to
the collector, and should be separately presented for payment in the ordinary
course when due.
Coupons maturing July 15, 1919, must, however, be attached
to certificates of the Tax Series of 1919 and surrendered to the collector
with such certificates for cancellation; and collectors will not accept any
certificates of the Tax Series of 1919 which have not attached thereto the
coupon No, 5 maturing July 15, 1919.
Accrued interest on certificates of Series T 2 (which were issued "with
out coupons attached) from January 16, 1919, to June 16, 1919, and accrued
- 2 -
interest on certificates of tlie Tax Series of 1919 from May 15, 1919 (the
last coupon payment date)* to June 16, 1919, will be remitted to the taxpayer
\
by the Federal Reserve Bank by check and the collector must furnish to the
Federal Reserve Bank the name and address of the taxpayer and the amount and
serial numbers of the certificates presented in each case*
The procedure above provided will automatically adjufet accrued interest
in respect 0 f all Treasury certificates of indebtedness used in payment of
•
• ■
taxes due June 16* 1919, vihether presented on or before said date and no
other payment of credit will be allowed or made on account of interest in
connection therewith.
Interest on Treasury certificates accepted in payment of taxes oeases
to accrue on (a) the date of the maturity of the certificates, or (b) the
date the tax is due - whichever of said dates be earlier*
The provisions
hereof in relation to the payment of interest to June 16, 1919, do not apply
to Treasury certificates of indebtedness accepted in payment of taxes due prior
to that date.
Any Treasury certificates of indebtedness accepted in payment
of taxes becoming due before June 16, 1919, must be dealt with separately,
and accrued interest will be paid only to the date the tax was due and upon
surrender with the certificates of any coupons maturing subsequent to the
date the tax was due.
Collectors must specially notify Federal Reserve Banks
in each case when Treasury certificates are accepted in payment of taxes be
coming due prior to June 16, 1919.
The 15th day of June being a Sunday, the
Bureau of Internal Revenue has ruled that the taxes which by the terms of the
Revenue Bill of 1918 are due on that date become due on June 16th.
In order to avoid unnecessary dislocation of funds, it is of importance
that Treasury certificates of indebtedness of the three series mentioned be
3
used by taxpayers to the utmost extent possible in payment of their taxes,
in preference to making cash payment of their taxes, and Federal Reserve
Banks and collectors of internal revenue should use every effort to induce tax
payers who are the holders of such certificates to make such use of them and to
facilitate such use in every manner in their power.
The instructions to collectors dated December 9, 1918 (T. D. 2778),
issued by the Commissioner of Internal Revenue and approved by the Secretary
of the Treasury, and the instructions to Federal Reserve Banks dated December
9, 1918, issued by the Treasurer of the United States and approved by the
Assistant Secretary of the Treasury, not inconsistent herewith, remain in full
force and effect.
There seems to be no reason to anticipate that the amount of taxes paid
as of June 16, 1919, will exceed the amount of Treasury certificates maturing
on or about that date.
It seems that there will be no unexpended casJi
proceeds arising from the payment of income and profits taxes on June 16, 1919,
and therefore no redeposit's will be made; nor will payment of income and
profits taxes by credit be permitted.
Collectors of internal revenue will, however, be instructed to deposit
checks received on and after June 1, 1919, in payment of income and profits
taxes, with Federal Reserve Banks and branches, following to that extent
substantially the procedure adopted in March*
As to this procedure detailed
instructions will follow,
R. C. LEFFIOTELL
Assistant Secretary of the Treasury
LETTER FROM THE SECRETARY OF THE TREASURY TO THE CHAIRMAN OF THE COM
MITTEE ON WAYS AND MEANS.
T reasury D epartment,
Office of the Secretary,
Washington, July 9, 1919.
My
D ear Congressman :
I take pleasure in handing you herewith for your information and that of the Committee
on Ways and Means the following statements:
,
A. Preliminary financial statement of the United States Government for the period
from April 6, 1917, to June 30, 1919.
B. Preliminary statement of the public debt on June 30, 1919.
C. Statement showing classified receipts, exclusive of the principal of the public debt, by
months, from April 6, 1917, to June 30, 1919, as published in daily Treasury statements.
D. Statement showing classified disbursements, exclusive of the prinicipal of the
public debt, by months, from April 6, 1917, to June 30,1919, as published m daily Treasury
statements.
Expenditures in the month of June just ended amounted in round figures to $809,000,000,
or less than for any month since September, 1917.
Expenditures for the fiscal year just ended amounted to $18,514,000,000.
Expenditures for the war period amounted to $32,427,000,000, and of these more than
$9,384,000,000, or about 29 per cent, were met out of tax receipts and other revenues than
borrowed money, although payment of nearly half of the income and profits taxes for the
fiscal year 1919 has not yet been made, such payment being deferred until the fiscal year 1920.
In this calculation no deduction is made of expenditures for loans to the Allies, which on June
30 amounted to $9,102,000,000, or for other investments, such as ships, stock of the War
Finance Corporation, bonds of the Federal Land Banks, etc.
If we assume that the expenditures of the Government on a peace basis would have been
at the rate of $1,000,000,000 a year, or for the period under discussion of nearly 27 months
would have equaled $2,250,000,000, then we may estimate the gross cost of the war to June
30, 1919, at $30,177,000,000.
The gross public debt (without any deduction for loans to the Allies or other investments)
amounted on June 30, 1919, to $25,484,000,000. Of this sum only $3,634,000,000 was in the
form of Treasury certificates, or floating debt. Of such certificates more than $608,000,000
matured or were redeemed on July 1, 1919, and were paid out of the net balance in the general
fund on June 30, 1919, which amounted to $1,251,000,000. Deducting the certificates last
referred to, the floating debt on June 30, 1919, was little more than $3,000,000,000, which is
roughly the estimated amount of the deferred installments of the income and profits taxes for
the fiscal year 1919 and of the deferred installments of the Victory Loan subscriptions.
In the announcement given to the press on April 14, 1919, of the terms of the Victory
Liberty Loan, I made the following statement with reference to financing the future require
ments of the Government:
This w ill be the last Liberty loan. Although as the remaining war bills are presented further borrowing must
be done, I anticipate that the requirements of. the Government, in excess of the amount of taxes and other income
can, in view of the decreasing scale of expenditure, be readily financed b y the issue of Treasury certificates from time
to time as heretofore, which may be ultimately refunded b y the issue of notes or bonds without the aid of another
great popular campaign such as has characterized the Liberty loans.
I confirm the statement above quoted. The decision then taken has been fully sustained
by the experience of the past three months. The successful flotation of the Victory Loan and
the adjustment of the amount and terms of the issue have resulted, as I hoped they would, in
126544°—19
a strong market at about par for these notes, without the necessity of Government support,
and in an improving market for the bonds of the Second, Third, and Fourth Liberty Loans, evi
denced not only by the firm market quotations, but by strong undercurrents of investment
buying, which give reason for the hope that, with the continuance of favorable general con
ditions, there will be consistent appreciation in the market prices of these bonds.
•I do not now think it will be wise to make any further issues of long-term bonds, before
the maturity or redemption of the Victory Notes, when there will have been such an interval
in Government offerings of all kinds as must inevitably result in marked improvement of the
market prices of the existing issues, with corresponding decreases in the interest bases at which
they are selling, and consequent assurance that the Government will be able to finance itself
for a longer period upon better terms.
It is not possible at this time, when appropriations for the coming year are under consider,
ation by the Congress, when contract claims by and against the United States are still in process
of settlement, when demobilization is still incomplete, when the extent of the liability on the
wheat guaranty is unascertained, and when the business upon which the income and profits
tax receipts in the first half of the calendar year 1920 are to be based is still only half transacted,
to make a formal estimate of the receipts and expenditures of the United States during the
fiscal year 1920. But so large a part of the war expenditures has been paid or provided for
.out of taxes and the issue of bonds or notes already sold and so small a part is unfunded that I
confidently expect that the Government will be able not only to meet its further temporary
requirements for the decreasing scale of expenditure by the sale of Treasury certificates of in
debtedness bearing interest at the rate of 4-| per cent or less, but also to fund as many of these as
it may be desirable to fund, by the issue of short-term notes, in moderate amounts, at convenient
intervals, when market conditions are favorable, and upon terms advantageous to the Govern
ment. It will not be desirable to fund all the certificates of indebtedness, for the issue of cer
tificates of indebtedness in anticipation of income and profits tax installments not only fur
nishes a means of financing the requirements of the Government temporarily upon easy terms,
but constitutes an almost necessary financial expedient, to enable the taxpayer to save and to
prepare gradually for the great tax payments, and to relieve the banking machinery of the
country of the great strain which would be imposed upon it if these tax installments had to be
paid on a single day without such preparation.
I need scarcely say to you that the realization of these sanguine expectations is contingent
upon the practice of the most rigid economy by the Government and the continuance of ample
revenues from taxation. Such a course, accompanied by the practice of sober economy and
wise investment by our people and strict avoidance of waste and speculation, will make it
possible for the American people to respond to the demands to be made upon them privately
for capital and credit by the nations and peoples of Europe— demands which are reinforced by
the strongest and most vital ties of sympathy for the Allies, who fought and won the war with
us, as well as by the most obvious dictates of self-interest.
I am writing a similar letter to the Hon. Boies Penrose, Chairman of the Committee on
I mance.
It has seemed to me only proper at the end of the last fiscal year of the war period to lay
these facts and opinions before the Committee on Ways and Means, and the Finance Committee,
which bear so large a measure of responsibility for the war-loan legislation; and to make them
public also, since they vitally concern the millions of Americans whose purchases of Govern
ment securities, and tax payments, made this record of war finance possible.
Very truly yours,
C A R T E R GLASS,
Hon. Josèph W. F ordney,
Secretary.
Chairman Committee on Ways and Means, House of Representatives.
3
A.
Preliminary financial statement o f the United States Government fo r the 'periodfrom A p r. 6, 1917, to June 30, 1919.
[O n the basis of daily Treasury statements.]
R E C E IP T S A N D D ISB U R SE M E N T S.
Net balance in the general fund A p r. 5,1917.................
$92,317,710.27
Receipts, exclusive of principal of public debt, A pr. 6,
1917, to June 30,1919 ....................................................... 9 ,384,278,708.22
Public debt receipts, Apr. 6,1917, to June 30,1919___ 48,385,572,063.47
Disbursements, exclusive of principal of public debt,
A pr. 6,1917, to June 30,1919........................................$32,427,469,054.72
Public debt disbursements, A pr. 6, 1917, to June 30,
1919............. ...................................................................... 24,183,034,599.70
Net balance in the general fund June 30,1919.............
1,251,664 827 54
Total............................................................................ 57,862,168,481.96
T o t a l ................................. .................................. .
57,86^,168,481.96
P U B L IC D E B T A N D E X P E N D IT U R E S .
Total disbursements for war period, exclusive of prin
cipal of public d e b t........................................................*32,427,469,054.72
Total gross debt June 30,1919............... ......................... $25,484,506,160:05
Total gross d ebt A pr. 5,1917..........................................
1,281,968,696.28
Total receipts for war period, exclusive of principal of
public d e b t.....................................................................
Gross debt increase for war period......................
Net balance in the general fund
June 30, 1919...... .............................$1,251,664,827.54
Net balance in the general fund
A pr. 5,1917......................................
92,317,710.27
9 ,384,278,708.22
Excess of disbursements over receipts, for war
p eriod........................................................ : .......... 23,043,190,346.50
24,202,537 463.77
Net increase in balance in general fu n d.............
1,159,347,117.27
Net debt increase for war period....................... .
23,043,190,346.50
B.
Preliminary statement o f the public debt o f the United States Government, June 30, 1919.
[On the basis of daily Treasury statements.]
Bonds:
Consols of 1930............................................... ......................................... ................................................
L oan o f 1925:.................................. .................................................................................................... .
Panam a’s of 1916-36............................................■....................... .............................................................
Panam a’s of 1918-38..................................................................................................................................
P anam a’s of 1961....................................... ......................................., . ......................... .............. .......
Conversion bonds......................................................................................................................................
Postal savings bon d s............................................ .....................................................................
$599,724,050.00
118,489,900.00
48.954.180.00
25.947.400.00
50,000,000.00
28.894.500.00
11.349.960.00
First Liberty lo a n ................................................. ......................... .............................. ....................
Second Liberty lo a n ....................................................................................... * .......................................
Third Liberty lo a n ...................... ........ .............................. ..........................................................
Fourth Liberty loan.................................................................................................................................
1.984.796.730.00
3.566.464.969.00
3,958,560,357.50
6.794.504.557.00
$883,359,990.00
16,304,326,613.50
T otal b on d s................. ....................
Notes: V ictory Liberty lo a n .........................
Treasury certificates:
L oan and ta x ................................... .........
P ittm a n A c t ........ . . . . . . ....................... .
Special issues........................................ .....
17,187,686,603.50
3,467,840,956.77
*3,273,000,000.00
178,723,000.00
182,494,490.00
3,634,217,490.00
956,023,121.45
2,355,250.26
236,382,738.07
W ar savings certificates (net cash receipts).
Old debt on which interest has ceased........
Noninterest bearing d e b t...............................
Total gross debt
25,484,506,160.05
c.
Statement showing classified receipts o f the United States Government, exclusive o f the principal o f the public debt, by
months, from A p r. 6, 1917, to June SO, 1919, as published in daily Treasury statements.
Customs.
Apr. 6 to 30,1917........ ................................. *17,863,547.22
May, 1917.................................... i .................. 28,660,148.60
June, 1917...... ................................................ 18,686,805.14
Incom e and
profits tax.
Miscellaneous
internal revenue.
Miscellaneous
revenue,
Panama Canal.
$24,075,386.24
50,009,778.45
72,448,261.80
$35,387,512.86
107,601,090.34
179,775,934.55
*5,804,920.33
11,361,950.32
14,120,100.17
$314,793.31
634,421.46
694,056.30
$83,446,159.96
198,267,389.17
285,725,157.96
Total.
Total Apr. 6 to June 30,1917...........
65,210,500.96
146,533,426.49
322,764,537.75
31,286,970.82
1,643,271.07
567,438,707.09
July, 1917........................................................
August, 1917...............................................
September, 1917.............................................
October, i917...................\ ............................
Novem ber, 1917..................... ................ .
December, 1917..............................................
January, 1918........................................ ........
February, 1918........................................... ..
March, 1918................................................. . .
A pril, 1918................................................... R
May, 1918........................................................
June, 1918............... ........................................
15,805,129.91
15.902.255.99
15,201,388.70
13,647,946.24
11,935,389.41
11,247,214.10
12,163,216.06
12,019,441.74
18,106,373.13
16.445.531.99
19,925,706.94
17,598,789.28
9,478,880.98
4,248,091.69
6,026,475.01
5,987.904.91
6,720^898.26
13,725,534.51
11,428,560.88
13,200,936.38
31,424,027.09
83,012,299.95
342,104,796.75
1,786,647,885.43
50,895,959.22
43,922,598.77
41.265.393.95
50,318,414.27
81,536,702.42
61,425,075.62
61.665.347.96
59,115,478.32
89,635,237.66
• 93,113,711.68
135,081,929.01
104,052,171.39
7,575,979.09
9,839,107.31
12,967,317.09
20,226,866.64
39,175,579.26
18,034,677.89
17,796,189.59
14,177,234.29
16,536,309.47
16,111,894.79
97,254,972.78
22,817,686.62
171,687.08
584,477.10
648,787.75
277.158.50
122; 208.09
626,568.30
302,895.38
585,348.96
1,047,330.70
635,705.85
378.705.51
655,481.06
83,927,636.28
74,496,530.86
76,109,362.50
90,458,290.56
139,490,777.44
105,059,070.42
103,356,209.87
99,098,439.69
156,749,278.05
209,319,144.26
594,746,110 99
1,931,772,013.78
Total for fiscal year 1918...................
179,998,383.49
2,314,006,291.84
872,028,020.27
292,513,814.82
6,036,354.28
3,664,582,864.70
4
Statement showing classified receipts o f the United States Government, exclusive o f the principal o f the public debt, by
months, from A p r. 6, 1917, to June SO, 1919, as published in daily Treasury statements— Continued.
Incom e and
profits tax.
Customs.
Miscellaneous
internal revenue.
Miscellaneous
revenue.
Panama Canal.
Total.
July, 1918....................................................... $15,837,889.72
14,175,802.76
August, 1918......................................... ........
12,719,024.43
September, 1918............................................
11,453,096.69
October, 1918................................................
12,583,861.29
November, 1918............................................
9,681,907.59
December, 1918............................................
12,732,514.54
January, 1919................................................
14,979,078.02
February, 1919............. ...............................
17,876,270.46
March, 1919....................................................
April, 1919....................................... .............. 20,141.486.97
20,896' 644.65
May, 1919.......................................................
June, 1919....................................................... 21,380,290.27
$497,496,376.62
30,795,666.13
36,308,166.21
30,136,620.58
28.820.184.49
61,916,648.37
43.141.373.49
30.341.342.50
1,129,821,269.04
107,696,034.35
50,614,139.20
971,695,866.31
$105,948,066.11
83,736,123.50
89,005,937.44
93,327,251.94
99,743,394.83
117,658,483.35
112,287,675.18
94,310,163.04
118,240,897.00
135,059,064.46
115,265,091.71
131,919,143.11
$21,974,810.55
22,645,000.23
13,757,134.67
16,058,975.73
169,112,403.43
14,213,636.93
27,054,788.82
22.361.050.46
31,555,382.12
159,228,529.45
92.026.548.47
56,151,439.19
$619,994.14
899,439.10
94,391.05
604,815.02
734,419.15
431,587.99
626,489.31
767,529.81
355,127.60
427,185.33
459,786.65
353,824.88
$641,877,137.14
152,252,031.72
151,884,653'. 80
151,580,759.96
310,994,263.19
203,902,264.23
195,842,841.34
162,759,163.83
1,297,848,946.22
422,552,300.56
279,262,210.68
1,181,500,563.76
Total for fiscal year 1919................... 184,457,867.39
3,018,783,687.29
1,296.501,291.67
646,139,700.05
6,374,590.03
5,152,257,136.43
R E C A PITU LA TIO N .
April 6 to June 30,1917...............................
Fiscal year 1918.............................................
Fiscal year 1919.............................................
179,998,383.49
184,457,867.39
146,533,426.49
2,314,003,291.84
3,018,783,687.29
322,764,537.75
872,028,020.27
1,298,501,291.67
31,286,970.82
292,513,814.82
646,139,700.05
1,643,271.07
6,036,354.28
6,374,590.03
567,438,707.09
3,664,582,864.70
5,152,257,136.43
Grand to ta ls .......................................
429,666,751.84
5,479,323,405.62
2,491,293,849.69
969,940,485.69
14,054,215.38
9,384,278,708.22
D.
Statement showing classified disbursements o f the United States Government, exclusive o f the principal o f the public debt,
by months, from A p r. 6, 1917, to June SO, 1919, as published in daily Treasury statements.
Ordinary.
Apr. 6 to 30,1917................................................................ ...................
May, 1917...'......... ; .................................................................................
$71,328,006.70
114,102,809.68
131,687,849.61
Total Apr. 6,1917, to June 30.1917.........................................
317,118,665.99
July, 1917................... .............................................................................
208,299,031.05
277,438,000.64
349,013,305.34
462.045.359.94
512,952,035.17
611,297,425.62
715,302,039.83
675,209,068.43
. 819,955,367.26
910.756.758.95
1,068,203,026.82
1,263,914,905. 86
May, 1918............................................................................................
T otal for fiscal year 1918............................................................
May, 1919.............................................................................
June, 1919................................... .................
Total for fiscal year 1919.......................................................
7,874,386,324.91
1,259,782,599' 23
1,524,901,777.74
1,274,505,845.05
1,174,622,406.40
1.655.051.004.19
1,670,890,396.88
1,659,580,520.24
1.035.130.805.19
1,042,182,523.55
1,003,862,122.73
907,492,923.94
727,845,814.48
Foreign loans.
Other special.
Total.
$200,000,000.00
407.500.000. 00
277.500.000. 00
$7,885,770.50
4,982,746.28
919,445.78
$279,213,777.20
526,565,555.96
410,107,295.39
885,000,000.00
13,767,962.56
1,215,885,628.55
452.500.000.
478.000.
000.00
396.000.
000.00
480.700.000.
471,929,750.00
492.000.
000.00
370.200.000.
325.000.
000.00
317.500.000.
287.500.000.
424.000.
000.00
242.700.000.
1,511,814.92
00
2,019,363.50
1,364,980. 35
1,623,392.58
00
1,200,022.36
1,914,433.70
00
4,854,005.86
12,477,917.31
00
18,338,441.98
17,031,020.28
00
15,992,206.83
00
5,958,796.56
662,310,845.97
757,457,364.14
746,378,285.69
944.368.752.52
986.081.807.53
1,105,211,859.32
1,090,356,045.69
1,012,686,985.74
1,155,793,809.24
1,215,287,779.23
1,508,195,233.65
1,512,573,702.42
84,286,396.23
12,696,702,471.14
5,015,055.21
1,361,445.28
00
608,440.22
00
1.139.854.59
1,248,607.04
1.033.458.60
12,519,629.59
9,385,796.13
15,279.261.96
15,457,575.38
9,932,690.50
26,794,135.35
1,608,282,654.44
1,805,513,223.02
1,557,264,285.27
1,664,862,260.99
1,935,249,308.93
2,060,975,855.48
1,962,350,949.83
1,189^ 913,903.62
1,379,811,785.51
1,428,928,306.38
1,112,337,471.73
■ 809,389,949.83
4,738,029,750.00
343.485.000. 00
■279,250,000.00
282.150.000.
489.100.000.
278,949,697.70
389.052.000. 00
290,250,800.00
145,397,302.30
322.350.000. 00
409,608,608.27
194,911,857.29
54,750,000.00
14,935,848,739.62
3,479.255,265.56
99,775,949.85
18,514,879,955.03
317,118,665.99
7,874,388,324.91
14,935,848,739.62
885,000,000.00
4,738,029,750.00
3,479,255,265.56
13,767,962.56
84,286,396.23
99,775,949.85
1,215,886,628.55
12,636,702,471.14
18,514,879,955.03
23,127,353,730.52
9,102,285,015.56
197,830,308.64
32,427,469,054.72
RECA PITU LA TIO N .
Apr. 6, 1917, to June 30,1917........................................................
Fiscal year 1918........... .............................................
Fiscal year 1919.................... ..............................
Grand totals.............................................
WASHINGTON ! GOVERNMENT PRINTING OFFICE : 1919
ex o f f ic io
Me m b e r s
W . P . 6 . H A R D IN G , GOVERNOR
A L B E R T S T R A U S S , V ICE GOVERNOR
A D O LP H C. M IL LE R
C H A R L E S S . H A M L IN
lARTER SU SS
SECRETARY OF THE TREASURY
Chairman
OHN S K E LT O N W I L L I A M S
COMPTROLLER OF THE CU R R EN CY
FED ER A L R ESER VE BOARD
J . A . B R O D E R I C K , SECRETARY
W . T. C H A P M A N , ASSISTANT SECRETARY
W. M. 1MLAY, FISCAL AGENT
WASHINGTON
A D D R E S S R E P L Y TO
FED ERAL RESE R V E B O A R D
c o p y
For release to Monday Morning Papers,
August 8 , 1919-
August 11, 1919.
~
*
Dear sir:
The Federal Reserve Board acknowledges receipt of your letter
,w.ni ¡I
¡)®,3ií.S¡ u t
of the 5 th instant asking for an expression of its views as to the
advisability of legislation providing for the gradual reduction of
the currency in circulation as proposed by Senate Resolution lb-2,,
The Board would suggest that in determining whether or not
legislation is necessary or desirable to regulate the volume of
Ï61SM if :
iSæTîi.
013.363.5! S
3»,«! $
623,ffiSi s |
w,ei ¡E
91UÎ3.10 u f f
. 551.« »
,«7,917.311 ll,
currency in circulation, consideration be given to the various forms
of money which make up the sum total of our volume of currency.
A
distinction should also be drawn between the stock of money in the
338,« l ï B
i)3l g ,;
i®.
.vim §
country and the amount actually in circulation.
,968,1313 lif
,m,*s iff
With respect to gold coin, gold certificates, standard silver
dollars, silver certificates, subsidiary silver and Treasury notes
of I 89O, the Board, assumes that it is recognized that no legislation
is necessary.
The United States notes, or legal tenders, which have remained
at the fixed amount of $3^6,681,016- -V. since March 31, 1878, have
not been a disturbing factor since the passage of the act of March
id, I9.OO.
An adequate gold reserve of more than U-5$ is now held
against these notes, most of which are in the form of small bills
x-l6Us
-
of $1, $2, and $5 denominations.
2
-
Notes of these denominations are
needed in the daily transactions of the public, and were the United
States notes to be retired, the issue of an e<lual volume of small
bills in some other form of currency would be necessary*
To effect
the retirement of the United States notes, funds would have to be
withdrawn from the Treasury to be supplied either by taxation or by
the sale of interest-bearing obligations*
The Board does not believe
that any legislation with respect to United States notes is necessary
or desirable at this time*
The national bank: notes outstanding on August X, 1919» amounted to
$658,118,555*00, a reduction of nearly $60,000,000 since July 1, 191h.
The greater part of these notes is secured by United States 2^ bonds,
and provision has already been made in Section 18 of the Federal Reserve
Act for their gradual retirement*
Federal reserve bank notes, which are secured by United States
obligations and are taxed just as national bank notes are, have been
issued only to replace in part national bank notes retired, and
standard silver dollars melted or broken up and sold as bullion under
authority of the act of April 2 3 , 1918, known as the Pittman Act*
The
issue of these notes has; therefore, brought about no increase in the
circulating medium.
The amount of Federal reserve notes outstanding has increased from
$357»239,000 on April 1, 1917» to $2,50^,753»000 on August 1, 1919*
It appears therefore that those who see in the larger volume of cir
culation in the United States the prime-cause of increased costs of
2 -1 o-
- 3 living and who seek a
remedy by a forced contraction of the
currency must have in mind the Federal reserve note and Section
16 of the Federal Keserve Act as amended June El, 1317, which pro
vides for its issue and redemption*
In analyzing our present monetary situation, and in considering
the causes which have led to the expansion of credits and note issuesduring the war, we should not lose sight of some of the developments
of the pre-war period and of their effect upon credits and prices.
Very heavy purchases of supplies of all kinds were made in this
country by European belligerents during the years 1315 and 133,6 ,
payment for vdiich involved the shipment to us of large amounts of
gold.
The stock of gold in the United States on July l f 1914 , was
$1,830,678,301*.
This amount increased steadily until April, 1 3 1 7 ,
the date of our own entry into the war, when it reached $3,088,904,808,
an increase of about $1,200,000,000.
large increase,
Bank deposits likewise show a
the net deposits of national banks having risen from
$7,^95,1^9,000 on June 30, 1914, to $10,489,217,000 on March 5 , 19 17,
while the net deposits of all banks in the United States increased
from $17,966,150,000 in June, 1914, to $24,891,218,000 in June, 19 17.
Net deposits of national banks had further increased up to May 12, 1319,
to $11,718,095,000, and those of all banks in June, 191s, (the latest
date for which figures are available) to $26,769,5^6 ,000.
Shortly after
April 6, 1917, when the Congress declared war, the Treasury began to sell
bonds, notes and certificates in large amounts resulting in a net increase
in the public debt to August 1, 1919, of $24,518,064,840.
On July 1, 1914,
the total stock of money in the United States,
exclusive of that held by the United States Treasury, was
$3,419,165,368
- 4 -
X-l648
On April 1, 1917 » the stock of money, estimated on the same basis,
was $^, 702 ,130 ,9 ^!» an increase of $1,282?962,573 of which increase
$8S3,^S1,02S was in gold*
On July 1, 191 ^-» there were no Federal reserve notes in existence,
while on April 1, 1917 , there were outstanding $357,239,000*
The amendment to the Federal Ke serve Act approved June 21 p 1917»
changed suostantially the original reserve requirements for member
banks and provided that their entire lawful reserve should be carried
with the Federal reserve banks»
The same amendment authorised the
Federal reserve banks to exchange Federal reserve notes for gold» The
t
se two change s in the law was to transfer immediately
large sums of gold from the vaults of the member and nonmember banks
and from general circulation to the Federal reserve banks, and this
caused a change in the methods of accounting for gold by the Federal
reserve banks and Federal reserve agents.
In order to avoid confusion in determining the volume of money in
actual circulation, it is necessary to distinguish between tables showing
the total stock of money in the country, and tables showing the circula
tion outside of the Treasury and Federal reserve agents* vaults, and to
I
limit our view to amounts held by member and nonmember banks and the
public, which are exclusive of amounts on hand at Federal reserve banks,
held by Federal reserve agents, and held in the Treasury,^
1 -1 6 4 $
-5The reserve money held by or for the federal reser/e banks serves,
of course, as a basis for credit, but it forms no part of the currency
m
circulation,
upon this basis, the amount of money in circulation on
July 1, 1914, (There being no Federal reserve banks in operation at that
time) was $3,4l9,lo8,3b8,
made up as follows:
Gold coin ana certificates
$1,649,775,803; Silver dollars ana silver certificates, including Treasury
notes of 1890, $552,203 .,6 l0 ; all other currency $1,217,188,955, being cir
culation per capita $34*53.
The corresponding amounts of money in circulation on April 1 , 1917 ,
December 1, 1918, ana August 1,. 1913 , are shown in the following table.:
AMOUHT OF MONEY OUTSIDE THE TREASURY AND FEDERAL DESERVE B A M S
;
April 1,
.
Gold coin and certificates
Silver dollars and silver
certificates, (including
Treasury notes of 1890)
Federal Reserve notes
Federal Reserve bank notes
All other currency
Total
Amount per capita outsiae the
Treasury and the Federal
Reserve banks
1917
$1,989,152 ,000
: December 1 ,
:
1918
$
8ol,245,000
:
August 1,
1919
$
728,046.000
532,700,000
372,489.000
241,505,000
3 5 7 .2 3 9 .o co
2 ,6 0 7 ,^4 5 ,0 0 0
2,504,753,000
3*170,000
8 7 ,73 7 .0 0 0
168 ,289 *000
1,218,715.000
1 ,2 0 1 ,0 6 9 ,0 0 0
1, Ipf),PQ7 OOf )
4,100,97 b ,000
5 ,1 2 9 ,9 8 5 ,0 0 0
9,77°, 89 0 ,0 0 0
$37«48
$48.13
$ 4 5 .ib
x-i64s
-
6-
Assuming that the date December 1» 1918, marks the begining of the
post-war period, the table shows change? during this period up
1 , 1919 , as follows;
to August
Gold coin and certificates in circulation decreased
$133»199*000; silver dollars and silver certificates, including Treasury
notes of 1890, decreased $130*984,000; Federal reserve notes decreased
$102,692,000; Federal reserve bank notes increased $78,552,000; all other
currency decreased $44,772>00Q, being a net decrease in circulation for
the post-war period of $3 3 3 »0 9 5 ,0 0 0 , or $2*97 por capita.
In considering the guestion 01 currency in circulation, there should
be taken into account the various factors which have entered into the
demand for currency, among which are;
The gradual enlargement of payrolls,
both as to the number of workers and amount paid to each; the effect of
higher wages upon deposits in banks ana upon the amounts of money carried
by shopkeepers in their tills and by individuals in their pockets; the
amounts of money locked up or carried on their persons by workmen who have
been receiving high wages and who, especially in tne case ox ignorant
foreigners, are unwilling to deposit their savings in banks or to invest
in Government bonds; the ¿mount oi money carried away by workmen return
ing to their homes in foreign countries;
and the fact that tne circu
lating media of the Philippine Islands, Hawaii, Cuba, Porto Rico, Sant0
Domingo, Haiti, Honduras, Panama, and in part, Mexico,/
States paper currency and subsidiary silver.
includes
'
of United
The amounts raquired in
these countries, most of which are very prosperous, have greatly in
creased in the. lasfcfew years. '
X-1648
-7rpb^totcl foreign circulation of United. States currency cannot be stated
accurately, but is estimated to be at least one hundred and fifty million
dollars,
The difficulty, indeed the impossibility, of seeping in circulation
an excessive volume of Federal Reserve notes should be understood.
The
issue of these notes has been carefully safeguarded by the Federal Reserve
Act, and ample provision has been made for their redemption.
Federal
reserve notes are redeemable in gold; they cannot be forced into circu
lation inpayment of the expenses of the Government, or for any.other
purpose, as they can be issued only in exchange for 6ola or against a
deposit of negotiable paper growing out of a legitimate commercial trans
action, plus the required gold reserve of no^ less tuan 40 per centum*
Upon payment of commercial paper Which nas been deposited to secure
Federal Reserve notes, there rasuits either an immediate return of an
equal amount ol notes to the bank., or an automatic increase in the per
centage of gold reserve available for tneir redemption*.
Federal Reserve
not e s a r e not legal tender, nor do they count as reserve money for member
banks.
They are issued- only as a neea for tnei$ develops , and as they
become redundant in any locality they are
returned to the Treasury at
Washington, or to a Federal Reserve bank for redemption.
Thus there can
not at any time be more Federal Reserve notes in circulation than the
needs of the country at thu present level of prices require, and as the
ne^d abates the volume of notes outstanding will be correspondingly re
duced through redemption.
The increased volume of Federal Reserve notes
in circulation during the past three ye¿vrs, in so far as it is not the
result of direct exchanges tor gold and gold certificates which have been
withdrawn irom circulation, is the effect of advancing w a g e s ana prices,
and not their cause.
T H E S ECR ETAR Y OF T H E TR EASU R Y
WASHINGTON
September 8, 1919.
Dear Sir:
The third semimonthly issue of Treasury certificates of indebtedness,
Series C 1920, in pursuance of the program outlined in my letter of duly 25,
1919, was, in accordance with the announcement made on August 25, 1919,
offered without asking the banking institutions of the country to subscribe
for any specified quota.
The Treasury felt confident that these certifi
cates could be sold in amounts more than sufficient to meet the reduced
needs of the Government without assigning the usual quota to individual
banking institutions.
This confidence was amply justified by the event.
The certificates of Series C 1920 were dated September 2 and subscriptions
closed on September 3, the following day.
The aggregate amount of certifi
cates of this series subscribed for and allotted was $573,841,500, a sum
greater by about $40,000,000 than the amount subscribed for either of the
two preceding issues, each of which had definite quota assignments and
remained open a week after the date of issue.
This aggregate was in excess
of the immediate requirements of the Treasury but allotment was nevertheless
made in full upon all subscriptions made on the date of issue and the day
following, in order not to.disappoint those subscribers who had presented
their subscriptions with reasonable promptness; and the opportunity was
taken to redeem on September 15 the certificates of Series V K maturing
October 7, 1919 (the last of the certificates issued in anticipation of the
Victory Loan). The redemption of these certificates should have a bene
ficial effect in connection with the large payments of income and profits
taxes due on September 15.
The aggregate amount of Treasury certificates of indebtedness still
outstanding on August 30 of the several series maturing .or called for re
demption on September 9 and 15, 1919, was $1,799,041,500.
This entire
sum (which has since been reduced by exchanges and cash redemptions) is
provided for from cash in bank and income and p.rofits taxes due September
15, leaving an ample balance in the general fund.
There remain no maturities of certificates to provide for prior to
1920, as the certificates maturing December 15 are more than covered by the
income and profits tax installment due on that date.
In the month of August just past ordinary and special disbursements
exceeded ordinary receipts by less than $500,000,000.
In September, be
cause of the income and profits tax installment payment, ordinary receipts
should exceed ordinary and special disbursements by approximately
$500,000,000.
The success of recent issues of Treasury certificates, the fortunate
cash position of the Treasury at the moment and the reinvestment demand
which will result from the payment of so large an amount of certificates
if
on or before September 15 create a situation which should, be availed of
to make an important step forward in financing the debt growing out of the
war. In my letter of July 25, above referred to, I indicated that the
Treasury certificate program might be varied at opportune times by the sub
stitution of issues of tax certificates.
This obviously is an opportune
time, and accordingly the Treasury is offering two series of so-called tax
certificates, both dated September 15, 1919, Series T 9 maturing March 15,
1920, and bearing interest at the rate of 4 1/4 per cent, and 'Series T 10
maturing September 15, 1920, and bearing interest at the rate of 4 1/2 per
cent, payable semiannually.
It is not possible to say definitely when semi
monthly issues of loan certificates will be resumed nor upon what terms they
will be issued; but such issues will certainly not be resumed before October
15, and the minimum amount offered should not exceed $250,000,000.
In
view of the important fact that now for the first time in over a year
certificates (of Series T 9, maturing March 15) are offered at a lower rate
than 4 1/2 per cent, I deem it proper to say that, if hereafter certificates
maturing on or before March 15, 1920, should be issued bearing interest at
a higher rate than 4 1/4 per cent, certificates of Series T 9 will be
accepted at par with an adjustment of accrued interest in payment for
certificates of such series which may be subscribed for and allotted.
I hope that each and every banking institution in the United States
will not only subscribe liberally for. one or both issues Qf the certificates
now offered but also will use its best endeavors to procure the widest
possible redistribution of such certificates among investors.
The cer
tificates, although acceptable in payment of income and profits taxes
payable at maturity, are, as- you know, payable in cash when they mature,
and should make a wide appeal t o .investors generally because of their
valuable exemptions from taxation and attractive maturities.
The success
of these issues will be an important advance in the process of financing the
war debt in such a way as to avoid the necessity for great refunding opera
tions, by spreading maturities and meeting them, so far as may be, out of
tax receipts.
Incorporated banks and trust companies which are not
qualified depositaries are urged to become such in order that they, like
others, may participate in the temporary deposits growing out of these
issues.
The patriotic, loyal, and enlightened support which the banking insti
tutions of the country gave to the Treasury during the darkest days of the
war and continued through the perhaps more difficult period after the
cessation of hostilities, when war expenditures were at their peak,
justifies the Treasury in addressing to them this confident appeal now
that the turn of the tide has come.
Cordially yours
To
The President
of the Bank or
Trust Company addressed.
STATEMENT BY SECRETARY GLASS OH THE BUD GST
DELIVERED b e f o r e 't e e s e l e c t c o m m i t t e e o n t h e b u d g e t
HOUSE OF REPRESENTATIBSS, OCTOBER 4, 1919.
I am heartily in favor of a budget system*
oe
the
Without effective
control over Governmental expenditures and limitation of them to the
Governments income we shall bring down upon, our heads the* splendid
structure which our fathers have built, and which we have preserved*
The very success (which you will pardon me if I call brilliant) with
which the Treasury has financed the stupendous requirements imposed
upon America by the great war may become a menace#
.seems to have departed from among us>
All sense of \ralue
The departments, bureaus and
boards, all inspired by a laudable enthusiasm for their work, but some
by a less laudable instinct to magnify its importance and incidentally
their own| bombard the Committees of Congress with projects, some
‘
more or less meritorious, some of no merit whatever > but all conceive
in sublimo indifference to'the 'fact'that the great business of Govern
pent is being run at a loss and that each .one of these projects in
creases the deficit of the Government and consequently the burden to
be thrown upon the great body of people, whether the deficit be met
by increasing taxes or by floating additional loans.
For no fallacy
is more grotesque than the assumption that by issuing bonds or notes
or certificates of indebtedness now we may pass on to future genera
tions the burden of our own extravagance,
The burden of th<
will have to be met today, not only in the interest and sinking lund
charges added to an already heavy load but in the expansion of
credit which is inevitable as a result of the issue of such se
curities, constituting as they do a.prime basis for
additional credit in the hands of the holders, whoever they n*y
X shall not elaborate upon that point but I want to say to you in
all solemnity that one hundred million American people will p&y f
the extravagance of the Government, whether that extravagance finds
its incidence in Governmental waste or in the desire to accomplish
real or fancied benefits for a portion of the community*
Let us now get back to bed rock.
Let us remember that there
can be no spending by the Government ■without paying by the Government
and that the Government cannot pay except out of the pockets of t e
people*
Let us remember too that in the last analysis taxes and th
\■ / ;
cost of Government loans are borne by one hundred million people *
The burden of taxation, the burden of credit expansion is inevitably
shifted to the whole people of the United States*
finance are better than others.
Some methods
Some taxes are less readily adap
to-being shifted from the backs of the original taxpayers, presum
ably better able to bear theip, to the backs of the people as a whol ,
but in the long run the burden of Governmental waste and extrav g
falls more heavily upon the poor than upon the well-to-do and
heavily upon the well-to-do than upon the rich*
By graduate
taxes we tend to mitigate this consequence but we cannot wholly
it.
.Let us not fail to remember that the Government of the United
States is simply a name for. the people of the United States and
all of the- people of the United States will, pay m
inverse order to
their ability for extravagances of the Government perpetrated in the
interest of a portion of the people or a section of the country*
|f|
• jt
-3You gentlemen, I am sure, have learned, as well as I by long
service in'Congress that the instincts and enthusiasms of departments,
bureaus and boards find support in the Committees of _Congress a ppclhMd
to.have charge of their particular affairs,
As a result we find that
Governmental expenditure initiated in a department of the Government
charged with the specific business of creating an armyj or of creating
a navy, or of creating a merchant marine, or of stimulating commerce,
or of protecting, labor, or of aiding the development of agriculture,
is submitted to the ^Congress without consultation with or approval by
the finance officer of the Government, the Secretary of the Treasury,
who serves merely as a messenger, and whose office is charged«with the
heavy burden of finding financial means, in loans and taxes to meet ex
penditures;
and when it reaches Congress is referred to the correspon
ing Committees of the Congress whose specific function is also to see
to the development of the army, the navy, the merchant marine, etc,
And the Congress passes upon all of these projects
good, bad and in
different - without a report from the Committee on Ways and Means or
the Committee on Finance,
the Committees of Congress which share with
heavy
the Secretary p£ the Treasury the/burden of financeIt undoubtedly is true that,softener than otherwise,
the sum of
department estimates is greater than allowed by the Committees of Con
gress.
I have, heard it said that this is invariably so<
I suspect
that estimates are frequently contrived with a confident espectation
of such a fate.
Nevertheless, it must be admitted that each jurisdicti onal
committee deals with estimates in a singularly sympathetic spirit* that
would not he manifested by a budgetary official charged with the re
sponsibility of advising the Congress as to the levying of taxes as well
as with the responsibility of collecting the money of which appropria
tions are made*
Moreover* it will not be denied that these various
jurisdictional committees, acting separately and without complete in
formation concerning the activities of one another-* accentuate the im
portance of the departments, bureaus and boards which they respectively
have under their care*
This would not b© Snoif appropriations ware made
by a single committee, any more than would the initial estimates be'
\
allowed so far to exceed the probable revenues if the Finance Minister
of the Government were given power t® assemble, review and alter them
before transmitting them to the Congress,
Extravagance of executive
departments and bureaus would thereby be appreciably restrained-
I
think it amazing that under such a system the Congress has done so
well for so long a time; but I feel constrained to warn you gentle
men, in view of the greatly expanded activities of the government
and the extraordinary financial burdens which the country must endure*
.that it would be hazardous to continue on the old way of transacting
the public business*
The Government of the United States is like a great company whose
operating managers, publicity managers, sales managers, purchasing de
partment* are given carte blanche to make expenditures* conceived by
them to be in the interest of the development of the business, without
I
~5~
consultation with or control by those officers of the company who are
charged with the business of ascertaining its revenues and borrowing
the money to make good their deficiencies*
Or again the Government of the United States is like a private
family in v/hich the wife, having charge of the Spending part of the family's
business, were given carte blanche to buy houses, yachts, automobiles,
clothes, and food, and to employ servants, as she might find wise with
a view to increasing the comfort, improving the education, cultivat
ing the taste and enhancing the prestige and social standing of the
*
family; and the husband’s sole business were to see that there was money
in the bank to meet her checks as they were presented*
That is a most pronounced hyperbole but it is literally true that
the Secretary of the Treasury under existing law and practice is unable
to obtain from any department of the Government an accurate or approximate
ly accurate estimate of its expenditures for a few weg£s in advance,
not to say months or years*
He must be guided not by information furnished
by them but by his own shr®wd guess as a result of putting together an
infinite number of little facts and figures*
That the Treasury has been
able, notwithstanding these intolerable conditions, to finance the Govern
ment through the great war and up to this date without impairing the
credit but, on the contrary, with enhancement of the credit of the Govern
ment of the United States, is due, first, to the loyalty and devotion of t.b
whole American people throughout the period of the war, to the magnificent
efforts of the patriotic Liberty Loan organizations, to the unqualified suj
port given the Treasury by the Congress without regard to party, and, if I
may say so, to the rather exceptional skill and ingenuity with v/hich the
Treasury has "been conducted during this difficult period*
But I say
to you it is an intolerable thing that such conditions should exist
and that the welfare and economic life of the American people should
be at the hazard of such things as these*
As a former colleague ? and in a spirit of frank comradeship
•which such association inspires, I am prompted here to enter .a com
plaint which may not be ascribed to a desire to be critical, but to
a hope that it may be given serious attention in behalf of adminis
trative efficiency*
The Congress votes with a lavish hand stupendous
sums conceived in a magnificent spirit of generosity with a view to.
the enhancement of the prestige of the Nation, o.r for the benefit of
this or that element in the coiimiunity»
This it does upon the advice
of the Committee of Congress charged with the business of caring for
such special interests*
Then, speaking through the great Committee
on Appropriations, it pursues a policy of ¿Restriction with relation
to the expenditures of some of the departments of the Government
which makes it inpossible for those departments to conduct the vast
affairs imposed.upon them with efficiency and economy*
The Government
of the United States today* is spending hundreds of millions of dollars
|
• T
even billions of dollars, for armies, for navies, f o r ‘merchant fleets
and other magnificent activities and at the same time refusing the
payment of a living wage to the faithful clerks and employees in
departments of the Government charged with the stupendous responsibil
ity of transacting these vast affairs honestly, expeditiously and
economically*
Uhile your Gopm.lttee is considering a budget and an audit in
the interest of the Government, the Government of the United States
-7is in danger of losing millions of dollars because some of idle Departments charged with the conduct of its business are undermanned, limited
to the employment of less efficient help than they should have and pro
vided with insufficient space to house those employees,
While you are
considering the reform of the* audit, the work in the office of the
Auditors is months behind because of the failure to provide an ade
quate force or adequate space to transact their business.
While you discuss the budget plans and
audit plans the C o n g r e s s / "
withholds the necessary funds to erect an adequate vault for the pro
tection of the vast gold store of the United States,
It withholds
the necessary appropriation to enable the Treasury of the United.
States to count Federal Reserve Bank notes and National Bank notes
turned in for redemption, with the result that the Treasury is un
able to take credit for those notes and is obliged to borrow cor
responding sums of moneys at interest running at 4-|$ and 4
and this notwithstanding di:.t any appropriation made for this pur
pose will be charged back to the banks and cost not one penny to
the Government of the United States«
Bonds, notes, and gold with
the custody of which the Treasury is charged, are inadequately pro
tected,
There is an insufficient*force to care for them»
vve have is underpaid,
The force
The work in the Treasurers office is behind.,
the work in the Division of Loans and Currency is behind,
the work in
the Division of Public Moneys is behind, the work in the Register’s
office is behind,
the work in the offices of all the Auditors is be
hind, and the securities' ^nd moneys of the United States are inade
quately protected because the Congress withholds the necessary appro
priations,
■ I have spoken of the need of an executive budget covering all
►4*
appropriations asked for by the executive departments *
But let us
be honest with ora-selves and honest xith the American people*,
A
budget which does not cover the initiation or increase of appropria
tions by Congress will be a semblance of the real thing*
I note
that not a little has been said about the Constitutional prerogatives
of Congress, but I know of no clause in our Constitufcfenn that will
prevent the Congress exercising self-control*
The houses of Con
gress can, by amendment of their own rules, surround with proper safe
guards the initiation and the increase of appropriations by Congress*
Today the credit of.the United States is imperiled by projects
initiated and supported on the floor of Congress with a view, to captur
ing the so-called soldier vote*
I- do not believe for a minute there
is any such thing as the soldier vote,
I 'do not believe that that
magnificent body of strong, brave lusty young men who.went out to
Prance, or were ready to go, want to see the people of the United
States exploited in order that each of them may receive a donation,
I do not believe these fine young men, if they realized what it is
that is proposed in their behalf, would accept a gift made at the
expense of their fathers and mothers and sisters and the children that
are to come after them in order to give them a holiday*
Y/hile of
course you cannot commit to terms of money the value of the service
rendered by the Army of America, I call your attention to the fact
that the actual pay of our soldiers was doubled at the outset of the
war, that our soldiers have been paid with liberality never dreamed
cf in the history of this or any other country and that the projects
now advocated so lavishly and with so little regard for the welfare
of the American people are not limited to those heroic men who suffered
injury or death, at the hands of the enemy, not even to those who ac
tually saw the front, not even to those who’were sent to France.
These projects extend to everyone of some fcur and one-half million
men, mostly young men, who were included in the military and naval
forces of the United States, even to those of their number who sought
and obtained employment of a character which would redieve them from
being exposed to personal risk.
It has been the disheartening task of the Treasury to examine
scores and scores of bills drawn and presented with a view to benefit
ing a section of the country or a portion of its citizenship at the
expense ofithe whole»
Many of these bills were apparently devised to
avoid the appearance of an appropriation by requiring the Secretary
of the Treasury to issue bonds, notes or certificates of indebtedness
to meet the expenditure involved, and all of these bills were such as
would not be readhed by a purely executive budget.
I have said the finances of the United States are in excellent
condition*
I have said in substance that X do not anticipate a
deficit
in the current fiscal year in excess of $1,000,000,000 and that that
deficit is covered by deferred installments of the Victory Loan, pay
able within the fiscal year*
Liberty Loans.
I have said that there need be^ no / more
But I say to you in all solemnity that if a prompt
and immediate halt is not’ called to this great peril, there imst
be another Liberty Loan and you gentlemen will have to go out to t-he
' •
'
/
,
;*
. ♦ ■*
\
1
.. .
'
V
i
people of the United States and call upon them to subscribe for bonds,
I
‘
i\’
the proceeds of which are to be given away to the well and1strong
young men who you and I and the American people
know went
out
10'
in a, spirit of unselfishness, not one of self-seeking, to fight for
their country*
You. may ask the old men and the widows, the school
children, the rich and the poor, who responded to the call of their
country to the number of twenty millions during the period of the war
to respond again to this call for a donation*
I hope I shall never
^shrink from the performance of any public duty, yet I do not covet
the task of making such an appeal and I shall not willingly be a party
to offering this, affront to the generous, heroic, unselfish Army and
*
Navy of America that saved the freedom of the world*
The Congress may propose to p ay this gift in bonds themselves},
but that should not fool anyone*
If bonds are given away to the sol
diers the issuance in that manner of those bonds will depress the
prices (Of existing bonds so gravely as to imperil the credit of the
United States and force additional sacrifices from the twenty million
people who participated in* financing the war, in providing the
food,-and munitions which made it possible for our splendid army to
contribute decisively to the great victory*
I have spoken of the initiation of appropriations in Con
gress*
Let me speak also of the increase of appropriations*
As
you all know, and as I know after seventeen years in Congress an
not more than half as many months in the Treasury, the processes employe
in framing and passing public buildings, and rivers and harbors bil s
lead to a great waste of the money of the people*
The continuance
of the; United states Government's activities where they are not neede f
whether those activities be army posts or subtreasuries or hospitals,
would have scant consideration in a real business budget submitted
-
11-
by a Finance Minister, duly empowered by law, and managed through. Con^gress by a single committee under rules of limitation imposed by the
Congress on itself«
In my belief, you cannot make a real budget unless
you face these facts and deal with them*
The Congress of the United
j,
•
• '
States, in attempting, this great reform in the interest of economy and
efficiency, will fail and fail utterly if, while imposing the necessary •
firm control over the expenditures of the executive departments, it
fails to exercise the sublime quality of self-control#
Coming to matters of detail, let me summarize briefly my views
as follows:
First, a budget, to be effective, must cover all appropria
tions and all increases of appropriations, whether initiated in the exec
utive departments or in the Congress#
cW
?he Bureau of the Budget
should be in the office of the Secretary of the Treasury, the Officer of
the Government charged with the heavy burden of finding the means to fi
nance its requirements.
Government.
The division of responsibility is the bane of our
It is intolerable that the Secretary of the Treasury should
have no voice in the determination of the expenditures of the Government,
It is intolerable to think that his function should be merely to go out
and borrow the money when someone else has spent it without consultation
with him or consideration, of the means to raise it.
The preparation of
the budget should be the principal duty of the Finance Minister#
know that the President cannot do this thing.
We all
We all know that a bureau
chief in the office of the President would be helpless to assert his opin
ion in opposition to the members of the President’s cabinet.
Projects of
the Government involving expenditures should be determined in conference
i
between the members of the Cabinet concerned, and the Prdsidentls decision
- 12-
should be final»
So far as concerns the question how much money can
be raised in loans and taxes and to what amount,' therefore , the total
expenditures of the Government should be limited and for all budgetary
work:, the President should obtain his advice from the Secretary—-of theTreasury and not from a bureau chief appointed for the purpose, and par
alleling the work of the Secretary of the Treasury*
The budget plans pre
sented to this Committee generally do not contemplate increasing the voice
of the Secretary of the Treasury in determining the Governments expendi
tures but, on the contrary, contemplate depriving him of such Voice as lie
already has.
I ask you what there is in the record of the Treasury of the
United States from the time of Alexander Hamilton to this present day
which .justifies this distrust?
Which of the departments of the Government
has deserved better of the American people or of this Congress?
What rea
son have you to believe that the Secretary of the Treasury, with the sup
port of the great ins
tut ion over which he presides,
the oldest -of Govern
ment departraents, cannot, if due authority be conferred upon him, undertake
this task so vital to the welfare of the people and so vital to the success
of the administration of his office?
We multiply boards and bureaus, we
multiply clerks and statisticians, and perpetually we attempt to hobble
those great officers of the Government upon whom rest the responsibility
for producing the necessary results.
Why not go back to first principles
and trust these men until they fail you and then get rid of them?
What
good can come of a policy of imposing tremendous responsibility upon the
great officers of the Government and then tying their hands so that they
can accomplish nothing?
r?' ,
13-
Whether the budget service should be in the form of a bureau
in the Treasury is a matter of detail which can be worked out*
What
ever form such a staff of the Secretary of the Treasury should take, I
am inclined to believe that it should be composed of experts whose
tenure of office, with the possible exception of the head, would-be
in the nature of permanence#
If this additional duty should be imposed upon the Secretary of
the Treasury, I think it would be wise to relieve him of activities
which have no relation .to the financial operations of the Government*
The Department'should retain all the fiscal bureaus and divisions,
and the Coast Guard which has to do with the collection and protection
of the revenue, but in a readjustment of this character I think that
it could well dispense with the Bureau of War Risk Insurance, the Bur
eau of Public Health, and perhaps the Supervising Architect*s Office*
Second, when the budget has been received by the Congress it
will be accepted as the President’s program of finance.
If I nlay ven-
ture an opinion as to whether the budget should be considered In one
committee or distributed among the present committees that consider
appropriations, I shotild say that it would be preferable to consider
it as a whole and by one committee#
The forum of consideration, how
ever, is not quite so Important as the question of the disposition of
the budget at the hands of Congress#
essence of an effective budget*
That, in my judgment, is of the
While Congress should retain the
right to reduce the estimates, I believe that it should, as far as
the budget itself is concerned, put some distinct limitation-on the
right to increase any item either in committee or on the floor unless
^
14 -
>
iecommended by the Secretary of the Treasury, or, in the absence of
such recommendation, unless approved by two-thirds of the member
ship of Congress,
The only increase on the floor which should be per
mitted wiiuld be the restoration of *an item reduced by thecommittee
<to the original figure recommended by the ^Secretary,
Under such a scheme the budget would come out of Congress
practically as the President's budget and for which he must stand
definitely responsible before the country*
If the Congress de
sired to propose new expenditures, it should be done in a separate
bill, and if the expenditure w&ich such legislation would entail would make
ithh
i total expenditures exceed the estimated revenues,
the Con
gress should provide in the bill""of appropriation specifically for
the required revenue to make up the deficit,
In this way Congress
wbnld not forfeit any right to initiate appropriations but such right
would be only separated from the budget,
The program would stand before the country with a clear line
of demarcation as t.o the appropriations for which the-President was
responsible and those for which the Congress assumed the principal
responsibility.
f
-15Third, there should* he an audit and an effective audit».
The
audit now provided by law is effective when made to ensure that ex
penditures have “been made in accordance with law«
The first step be
fore Congress is tp appropriate funds sufficient to enable the Auditors
to make the audit which is provided for under existing law*
The second
step is to enlarge the scope of the audit, strengthen the powers and
enlarge the force so that there may be covered also the question
whether expenditures hare been made efficiently, economically and with
out duplication*
For this purpose it is vitally necessary that there
should be only one auditor instead of half a dozen#
It is desirable
that the offices of the comptroller and auditors should be rolled rntoone*
As a step in that direction Secretary McAdoo on October 25 f
1918, issued an order directing the 'Comptroller of the Treasury to
exercise administrative supervision and direction of all the auditing
offices«
This was the first time that the auditors were placed under
the administrative control of the Comptroller, and the order was as
far as it was possible to go without amendment of the law*
In connection with the suggestion that the Comptroller of the
Treasury and the Auditors be divorced from the Treasury
D ep a rtm en t
and
erected as an independent establishment, it is not clearly defined in
any of the proposals just what change is contemplated in the. accounting
system«
It must be remembered that the Comptroller and the Auditors
are not merely auditors of expenditures with respect tc their regularity
and'legality, but they are the accounting officers of the Treasury*
~
They pass upon and
16~
check the accounts in connection with every finan
cial transaction, whether it relates to the receipt of money, to
direct payments out of the Treasury, to repayments to the credit of
appropriations, to credits to disbursing officers, or to payments by
disbursing officers#
In the management of the nation 1s finances the Secretary of the
Treasury must have an effective system of accounting and bookkeeping#
If the Comptroller and Auditors were transferred from the Treasury I
am inclined to think that it would be necessary to duplicate much of
this accounting and bookkeeping in their offices*
If the Comptroller,
as an independent officer, is to be in a position to give information-^
to the Congress, as the suggestions seem to contemplate, unquestion
ably it would be necessary for him to duplicate the bookkeeping oper
ations of the Division of Public Moneys and the Division of Bookkeeping
and Warrants of the Treasury Department, and also some of the book
keeping operations of the office of the Treasurer of the United States»
At the present time, however, I express no definite opinion on this
suggested change because it has not been put forward in such det<^i
as to permit the expression of judgment from the standpoint of the
accounting and bookkeeping requirements of the Treasury*
If tne
auditing department should be vdthout the walls of the Treastiry, it is
vital that the auditor or comptroller, whatever'he may be called, ohould
be as free from interference by the members of the legislature and by
-1 ?
members of the other departments of the Government as he is now in
the Treasury*
It has been the duty and the pleasure of the Treasury
Department to uphold thsr^cmptroiler in his independence as a quasijudicial officer even in cases where his determinations did not com
mend themselves to the Treasury,
It is, of course, only human for the
Comptroller to favor his own personal elevation from a subordinate to
an independent position.
There is nothing blame worthy in that,
present Comptroller has my support and confidence.
right and on the whole wise publ-ic servant,
The
He is a brave, up
Whether any Comptroller
would be able to exercise his functions as effectively and freely, de~
\
p.rived of the support and prestige of the great Treasury Department
and left, to st3nd upon his own feet as the head of an independent
office, I am doubtful*
On the whole, I am inclined to the view that
the best interests of efficiency and economy require that the audit be
conducted under the supervision of the Finance Minister of the Govern
ment, the man upon whose shoulders will fall the consequences of
extravagance
and waste,
- 18-
The Act of March 4, 1909, provides:
"Immediately upon the receipt of the regular annual estimates
of appropriations needed for the various -branches of the Government it
shall be the duty of the Secretary of the Treasury to estimate as
nearly as may be the revenues of the Government for the ensuing f sea
year, and if the estimates for appropriations, including the estim
ated* amount necessary to meet all continuing and permanent appro-^
priations, shall exceed the estimated revenues the Secretary of xiie
Treasury shall transmit the estimates to Congress as heretofore re
quired by law and at once transmit a detailed statement of all
■
said estimates to the President, to the end that he may, in giving
Congress information of the state of the Union and in recommending
their consideration such measures as he may judge necessary, a
the Congress how in his judgment the estimated appropriations cou
with least injury to the public service be reduced so as to bring
the appropriations within the estimated revenues, or, if such re
duction be not in his judgment practicable without undue injury o
the public service, that he may recommend to Congress such loans or
new taxes as may be necessary to cover the deficiency«'*
It has been stated that this section of lav/ already gives the
President power to prepare an adequate booh of estimates*
my judgment, is not the case.
Such, m
In the first place the act states that
in case the estimates for appropriations exceed the estimated revenues,
a detailed statement shall be made to the president by the Secretary
of the Treasury in order that he may advise the Congress how in his
judgment the estimated appropriations could with least injury to the
public service be reduced, or, if they can not be reduced, in order
that he may recommend such loans or new taxes as may be necessary to
cover the deficiency*
I call your particular attention to the fact
that the act states that in the contingency mentioned the President
may recommend how the appropriations may be reduced,
ihat is an iim
plicit sanction by law of the present situation, or at least a recog
nition in the statute that the estimates as now submitted are not
economically compiled*
\7hen the estimates go to Congress under any
proper system, they should represent in the first instance the minimum
requirements of the Government as related to its prospective receip s.
.~19~
In tlio second place I invite attention to the fact that this
law applies only to the regular annual estimates of appropriations,
that is to say, the appropriations which are submitted for the ensu
ing fiscal year*
It does not apply to estimates for deficiencies
and supplemental appropriations*
Ihen the Secretary of the Treas-ury
sends the hook of estimates to the Congress, less than one-half of the
current fiscal year has expired, hat there is no requirement in law
for .any action whatever on the part of the -executive in case of an
estimated deficit in the Treasury at the end of that current fiscal
year as a result of deficiency and supplemental estimates#
In the third place I should point out that this law conpares
estimated receipts and' estimates of appropriations, whereas it snould
compare estimated receipts and estimated expenditures*
At the time
it was drawn, however, it was not customary for the Secretary of the
Treasury to estimate the expenditure for the ensuing fiscal year*
It has been stated that no attention has been paid to the
statute.
The facts are theses
The estimates for the fiscal year 1911 were transmitted to
Congress December 6 , 19$9, and, therefore, were the first regular
annual estimates of appropriations to be transmitted after the pas
sage of the law*
The 1911 estimates showed an estimated excess of ordinary
receipts over ordinary appropriations of $35,931,327*49, but witn
the Panama Canal appropriations added instead of a surplus there would
be shown a deficit of $ll>133#197*21.
As authority existed for the
issue of Panama Canal bonds, undoubtedly it was held that the Act of
March 4, 1909 > did not apply> there "being more than sufficient revenue
to meet the estimated ordinary appropriations for 1911«
This assump
tion is confirmed by the fact that the annual report of Secretary MeVeagh for 1909 refers to the sale of bonds or certificates of indebted
ness to meet anticipated deficit shovftUiin estimates*
For the year 1913 the same condition was presented, it being
estimated that the ordinary receipts would exceed the ordinary appro
priations by approximately $49,500,000, but taking the Panama Canal
appropriation into axicount there would be a deficit of more than
$’7,000,000.
A similar condition existed for 1913*
The estimates for 1914, sent to Congress on December 3, 1923,
were $733^56,023.03 and estimated receipts $710,000,000, showing an
estimated deficit of $22,556,023*03, exclusive of Panama Canal ap
propriations,
President Taft reported this deficiency in his mes
sage to the Congress December 6, 1912, and in his annual report sub
mitted to the Congress in December, 1916, Secretary McVeagh made the
following observation:
nThese estimates of appropriations, of course, are based upon
conditions that now exist and upon the laws which now prevail; ana
between now and the end of the fiscal year 1914 much may occur
through legis2.ative action to change the basis upon which they are
made*
There are also included in these estimates items for project
ed public works the payments for which will not be concluded during
the fiscal year in question«n
Estimates for 1916, transmitted to Congress December 1, 1915,
showed estimated ordinary receipts of $728,000,000 and estimated or
dinary appropriations of $714,684,675*02, the estimated surplus of or
dinary receipts being $13,315,000, exclusive of Panama Canal approx
priations»
When the GovernmentTs revenue was largely decreased by
-
21-
■raason of the European war, President Wilson delivered a special message to
Congress on September 4, 1914, urging that additional revenue of $1 0 0 ,000,OCO
be raised through internal taxation»
Per 1916,
the estimated excess of ordinary receipts over ordinary
appropriations was $21,234,895.20*
The annual report of the Secretary of the Treasury of December 6, 191”,
p-^ges 48 to 52, deals with receipts and disbursements for 1916 and 1^17, an
recommended the, means of obtaining the additional revenue requ^-rw(^ f°r the
fiscal year 1917*
In conformity with the statute, President 'Wilson similar
ly dealt'with the situation in his message * to Congress Devember 7*
The annual: report of the Secretary of the Treasury, sent to Congr„
December, 1916, referred to the estimates for the fiscal ye^r ending Jun
1918.
,
The estimates indicated that there would be a deficit on account of ‘& e
program of preparedness.
The Secretary pointed out th.it on account of the
untried now revenue laws relating to taxation of inheritances and W&T muri
tions, and the uncertainties as to the actual expenditure that might be made
on account of the large program»- for preparedness,
it was very difficult to
estimate with accuracy the receipts a n d :expenditures for thd fiscal year 1917
and particularly for the fiscal year 1918,
He urged, upon th„ attention
•Congress the necessity of passing such m e a s u r e s would provide additional
revenue to moot the'preparedness program.
the declaration of war*
This was only a few months before. ,
liter war was declared,
the Secretary of tin, Tr^asupy
' was in constant tou^h with the Committee on Ways and Means of the House and
the Finance Committee of the Senate, advising them periodically of the needs
of the Government,
As a result of these advices the Congress levied taxes
and authorized issues of securities as the needs of the Government developed.
SUGGESTED DISTRICT WAR SAVINGS ORGANIZATIONS..
^0'
The paid staff of the Savings Organization of each District
shall after January 1, 1920, consist of the headquarters force,
The
various paid state and other divisional workers will he eliminated.
In Districts covering large territories, it may he permissible to main-«
tain one or two branch offices.
Broadly the staff may he arranged as follows:
•
¥
DIRECTOR
SALES DIRECTOR
This Director and his Assistants shall he responsible for the
sale of War Savings securities i
They are to see that the securities are
on sale in all parts of the District and to secure more active and wide
spread cooperation by the hanks and trust companies of the country in
making sales.
A direct field selling force is inadvisable since to ac
complish large results would require a prohibitive expense and the method
tends to diminish the prestige of Government securities.
DIRECTOR OF COOPERAT DIG ORGANIZATIONS »
The Director of Cooperating Organizations and his Assistants
shall make contacts with the school authorities, women*s organizations,
labor bodies, fraternal societies, commercial associations, agricultural
organizations, and foreign speaking groups.
They shall seek to
lish the movement in these bodies in such a way that its continuance
will become automatic and the Savings Organization can therefore relin
quish direct control,
It must never be lost sight of that only those
things which have to do directly with the Treasury Savings Movement
should be promoted.
PUBLICITY
The publicity should be directly supervised by the District
Savings Director#
The publicity writers must interpret the policy of
*
::
the Organization to the public and not attempt to create flash news of
a cheap nature*
The suggestions on Information in the memorandum the '’Treasury
Savings Movement” fairly cover the line of publicity to be issued#
Re
sults obtained from elaborate outdoor advertising* posters* and "stunt
publicity” do not justify the expenditure#
LOCAL ORGrANlZATIORS «
A member of the staff should have as his work the securing
of local volunteer Savings Chairmen and committees wherever possible#
These local organizations can be made of great and lasting value#
October 18, 1919#
T H E SECR ETAR Y OF T H E TR EASU R Y
WASHINGTON
November 24, 1919.
Dear Sir:
In my letter of September 8th I stated that, while it could not he said
definitely whan semimonthly issues of loan certificates would he resumed,
such issues would certainly not he resumed before October 15th. Though
most factors in the general situation since.that letter was written have
been adverse, the position of the Treasury has developed more favorably
than then there seemed any reason to hope.
The great success of the issue
of tax certificates then announced, the reduction in current expenditures
and the increase of receipts, notably from sales of war materials and
supplies, have made it possible to avoid until now the resumption of the
issue of certificates.
On the basis of Treasury daily statements, in the month of October the
net current deficit (excess of disbursements over receipts, exclusive of
transactions in the principal of the public debt) was $319,239,450.35, the
lowest figure for any month since April, 1917, excluding the months in which
income and profits taxes were payable, and for the first half of the month
of November the net current deficit was $118,630,787.30, indicating the
likelihood of a further important reduction for that month.
On the basis of Treasury daily statements, the total gross debt, which
on June 30, 1919, amounted to $25,484,506,160.05 and on August 31, 1919,
had reached the peak at $26,596,701,648.01, had been reduced by September
30th by more than $400,000,000, and, notwithstanding the increase resulting
from the Victory Loan installment payments in October and November, when
the final payment was made, stood on November 15th at $26,210,905,795, a
net reduction of about $385,000,000 from the high mark at the end of August,
and a net increase since June 30th of only $726,399,634.95, although in that
period only one quarterly income and profits tax installment had been
received. The total amount of loan certificates outstanding and unmatured,
which on June 30th was $2,478,317,500 and on August 31st $2,012,387,500,
was reduced in September to $1,634,671,500, at which figure it stands; while
the total amount of tax certificates outstanding and unmatured, which on
June 30th was $789,561,000 and on August 31st was $1,925,837,500, was
reduced in September to $1,827,586,500, at which figure it stands. Of the
latter, certificates to the amount of $746,869,500 mature December 15, 1919,
and are amply provided for by the income and profits tax installment payable
on that date.
Very gratifying progress has been made in the absorption by investors
of Government securities. During the period of five months from June 6th
(when holdings of Victory Notes were first reported separately) to November
7th (the last date for which reports are available) all reporting member
banks (about 783 member banks in leading cities, which are believed to
control about forty per cent of the commercial "bank deposits of the country)
have, according to [Federal Reserve Board reports, reduced their holdings
' Liberty Bonds from.... :------ ---- ---------
$646,-273,000
633,950,000
$12,323,,000
' Victory Rotes from__ 1.......... ... ........
$438,589,000
292,410,000
146,179,,000
‘ United States certificates of indebtedness
f*rnm
$1,514,462,000
847,558,000
666,904 ,000
making a total reduction in all reporting member banks' hold
ings of United States war securities of................ -— -—
$825,406,000
Loans by all reporting member banks secured by United States war securities,
after deducting those rediscounted with [Federal Reserve Banks, are reported
as reduced in the same period by $221,450,000 (from $1,420,581,000 to
$1,199,131,000), this reduction being partly offset, however, by increased
rediscounts of such paper with [Federal Reserve Banks.
The long intermission in the issue of certificates of all kinds makes
it possible, upon resuming, to issue loan certificates, bearing 4 ^
interest, and having only two and one-half months to run, instead of five
months as heretofore, while fixing the maturity one-half month later than
that of the last issue of loan certificates. Along with the issue of-these
loan certificates it has been thought wise, in order to make it possible and
convenient for taxpayers to prepare further for the large tax payments which
Pall due on March 15, 1920, to offer an issue of 4^^ tax certificates of
that maturity.
The Treasury again confidently appeals to the banking institutions of
the United States for their continued support and asks them not only to
subscribe liberally to the certificates of one or both issues now offered
but also to use their best efforts to secure the widest possible distri
bution among investors of the certificates so subscribed for.
Cordially yours,
To
The President
of the Bank or
Trust Company addressed.
IP!
S3
i i
BE B AX
R E S E R V E
B O ARD
STATEMENT FOR THE PRESS.,
X-1747
For immediate release»
Annouhcement was made today that "under arrangement® made
between the Treasury and the Federal Reserve Board, standard silver
dollars that are free in the Treasury will until further notice be
delivered against other forms of money to the Division of Foreign
Exchange of the Federal Reserve Board, which will, through the
Federal Reserve Bank of New York, cooperating with the branches
of American banks in the Orient, employ such dollars in regulating
our exchanges with silver standard countries.
This arrangement does not, of course, affect the redemption
of outstanding silver certificates in standard silver dollars*
December 6, 1919*
IftfffSMiBIB
1
December 18t 1919
; %
dear Congressman:
On October the 9th last, I sent you a copy of a public statement
made by me on the 26th of September, relative to the obligations of foreign
governments hold by the United States Government; and also a copy of a let
ter written by mo on October 9th, to Senator Penrose in reply to a letter
from him, requesting information concerning the extension of the interest
on such loans#
In that statement and in my letter to Senator Penrose, I
explained the policy which the Treasury proposed to adopt in respect to
the funding of the demand obligations of foreign governments now hold by
the United States into long-time obligations, and the funding, during the
reconstruction period of two or three years, of the interest on Such ob
ligations.
Notwithstanding my publié announcement bf September 26 and the
i
controlling reasons vtiich prompted the Treasury to adept this policy, it
appears from statements which have been made lately in Congress and else
where that there still exists a misunderstanding in respect to this
question.
Some of the statements to the effect that it is the duty of our
Government , notwithstanding the present grave derangement of foreign ex
changes, to insist upon immediate payment of interest amounting to about
$ 475 ,000,000 a year, indicate a tendency to overlook certain aspects of the
question and a failure to grasp the meaning of the present position of the
finances of the world,
While the Treasury favors such an arrangement, it
does not favor the cancellation and indeed has no power to cancel any por
tion of the interest or principal.
*
The collection in dollars of this in-
terest, under present circumstances, would be no less disastrous to American
interests than to the interest of our debtors.
The loans to foreign governments were made, as provided by Congress
in April, 1917, for the purpose of ass is ting
war.
Our entry into the war made it necessary for this Government to call
upon the ianerican people for vast sums of money for its own war purposes#
In order to obtain such funds it was necessary substantially to close our
,
— 2—
financial markets to all other borrowings, hut at the same time it became
most important that our associates in the war should bo able to obtain in
greater amounts than theretofore the supplies which they required and which
we alone could furnish»
Except for the purpose of mooting commitments for war purposes pre
viously made with the knowledge of the Treasury, the Treasury has since last
April substantially dlscontinued the establishment of credits in favor of
*
foreign governments. The program authorized by Congress for foroign loans
was therefore substantially ended eight months ago*»
At almost the sains time the foreign governments of their own accord,
but with tho hoarty approval of the Treasury, coased the "pegging" of their
exchanges.
These necessary steps by tho United States Treasury and the Treasur
ies of our associates 4 ih the endeavor td deduce governmental financial ac
tivity and to return trade and finance to normal Channels, have been reflected
in the great drop which has taken place in the foreign exchanges»
With the ending of tho war and of the
program of our loans to
foreign governments, it was considered appropriate, in accordance with the
authority conferred by tho Liberty Bond Acts, to take up with those govern
ments tho funding of the demand obligations now held by the United States
into long-time obligations* and in view of the fact that, as indicated by
the state of tho foreign exchanges, the Reconstruction of Ihropo has not pro
ceeded to a point whore Europe can even yet pay by exports for its necessary
food, it was considered by the Treasuiy most expedient that, as a part of a
general funding arrangement, provision should be made for doforring and
spreading over a later period the payment of interest which would accrue dur
ing the next two or three years *
At tho time of writing, exchanges of the principal Allies are quoted
as follows:
S t e r l i n g .... .. 3 .8 6
Francs . . . » 1 0 . 2 3
Xdre ...... ,..,#12.75
Belgian francs . 9.97
or
or
or
or
at a discount of 20*7$
at a discount of 49*4$
at a discount of 59*4$
at a discount of 48$.
— 3—
Under tlioso circumstances, an impenetrable burrior exists which makes it im
practicable for these governments to pay in dollars the amount of interest duo
from them to the United States.
This involves no question as to the solvency
ear financial responsibility of those governments, nor a failure to raise funds
by loans and taxes from thoir people and a corresponding burdening of our
people, but results from the condition of the foreign exchange market.
If
the governments of the Allies were to raise immediately by taxes and loans the
whole of their dobt to us, those taxes and loans would produce only sterling,
francs and lire, and those foreign currencies woiild not furnish ono additional
dollar of dollar exchange because conditions are not such as to permit thoso
currencios now to bo converted into dollars.
The United States Treasury has no
use at the present.timo for any considerable amounts of these currencies and
could not afford to accumulate largo idle foreign balances.
If tho Troasuxy does not defer the collection of interest and thus
adds to the present difficulties in the financial and economic rehabilitation
of the world by demanding an immediate cash payment of interest before tho in
dustry and trado of Europe has an opportunity to revive, wo should not only
make it impossible for Europe to continue needed purchases here and decrease
their ultima,to capacity to pay thei** dobt to uO, but should hinder father than
help the reconstruction vhich tho world should hasten,
A nation can liqdl&ate
its foreign debts only by the accumulation of foreign credits which may bo ac
complished through an excess trade balance, invisible exchange items, the crea*
tion of oredits by loans, or by tho export of gold,
Until our associates in
the war, whoso manufacture and trade suffered so much more than ours, have had
an opportunity to resume normal industrial and commercial activities, they have
not the exports with which to pay the interest due on our obligations and
¡lake su-oh uavment only by the shiument^o£^g^-ld,^or by obtaining
___
in the United States.
^he loans which the Allied Governments have so
\
far been able tip place in our markets have not been sufficient to correct the
ca n s
situation.
\
I caknot believe that any one would consider it equitable or wise,
|
in the present ciireamstances, for us to r e t i r e payment in gold, of which we
5
already have enough, v\foen the payment
of one year’s interest alone would
exhaust about 50% of the gold reserves of our debtors#
Yvhile I fully realize
the desilability of collecting thiq interest and of decreasing at once by a
corresponding amount the taxes which we must collect, I should be most reluc
tant, without specific instructions from Congress to the contrary, to demand
the immediate payment of interest which would not only seriously retard the
economic restoration of those countries without which they will be unable to
pay the interest and principal of their debt to us, but v#iich would also de
stroy their power to make needed purchases in our market#
My advisers are firmly of the opinion that, in connection with and as
a part of a general funding of the demand obligations into time obligations,
I am duly authorized under the Liberty Loan Acts to spread over subsequent
years the interest which would accrue during the reconstruction period of,
say, two or three years, and to include such amounts in the time obligations*
If, however, the Ways and Means Committee of the House which shared with the
Secretary of the Treasury the initial responsibility for the Liberty Loan
Acts, should question my power so to act, I shall be pleased to have you so
inform me at once in order that I may lay before your Committee a proposal
for further enabling legislation#
Cordially yours,
(Signed) CARTER GLASS.
Honorable Joseph Fordney,
HCufee of Representatives.
FROM THE MUTUAL REPORT OF THE SECRETARY OF THE
TREASURY 1919
Taxation
Though, any appreciable reduction in the amount of the revenues from
taxation is not to he thought of during a fiscal year when the Government's
current disbursements will exceed its current receipts, when its unfunded
debt anounts to upward of $3,736,000,000 (October 31, 1919, on the basis of
daily Treasury statements), and when the Congress is considering various
measures carrying vast additional appropriations, it is, I believe, the duty
of the Congress to give its closest attention to the study of the incidence
of taxation with a view to the revision of the revenue act on lines which will
produce the necessary revenue with the minimum of inconvenience and injustice*
The Treasury's objections to the excess-profits tax even as a war expedient
(in contradistinction to a war-profits tax) have been repeatedly voiced before
the committees of the Congress*
Still more objectionable is the operation of
the excess-profits tax in peace times*
It encourages wasteful expenditure,
puts a premium on overcapitalization and a penalty on brains, energy and
enterprise, discourages new ventures j and confirms old ventures in their
monopolies*
In many instances it acts as a consunption tax, is added to the
cost of production upon which profits are figured in determining prices and
has been, and will, so long as it is maintained upon the statute books,
continue to be, a material factor in the increased cost of living*
The revenue sacrificed by elimination or reduction of this tax must be
sought in an increase of the normal income tax (.from which the income on
Liberty bonds is exempt) and of the lower brackets of the surtax*
The upmost
brackets of the surtax have already passed the point of productivity and the
only consequence of any further increase would be to drive possessors of these
great incomes more and more to place their wealth in the billions of dollars
"of wholly exempt securities heretofore issued and still being 1 ssuedTby'^tafes'
and municipalities, as well as those heretofore issued by the United States*
This process not only destroys a source of revenue to the Federal Government,
but tends to withdraw the capital of very rich men from the development of
new enterprises and place it at the disposal of State and municipal governments upon terms so easy to them (the cost of exemptions from taxation falling
more heavily upon the Federal Government) as to stimulate wasteful and non
productive expenditure by State and municipal governments.*
In that connection I call attention to the urgent necessity of revision
of the revenue law so as to require that, for the purpose of ascertaining
the amount of surtax payable by a taxpayer, his income from State and munici
pal bonds shall be reported and included in his total income, and the portion
of his income which is subject to taxation taxed at the rates specified in
the act in respect to a total income of such amount*
The Treasury's recom
mendations in this respect have been transmitted to the appropriate committees
of Congress in connection with the Revenue Act of 1918, and again in the
present calendar year*
Under the present law a person having an income of,
say, $1,000,000 from taxable securities would, upon the sale of half his
property and the investment of the proceeds of that half in State or municipal
bonds, not only obtain exemption for the income derived from such investment
in State and municipal bonds, but greatly reduce the surtaxes payable in
respect to his other income*
It is intolerable that taxpayers should be
allowed, by purchase of exempt securities, not only to obtain exemption with
respect to the income derived therefrom, but to reduce the supertaxes rpon
their other income, and to have the supertaxes upon their other income deter
mined upon the assumption, contrary to fact, that they are not in possession
of income derived from State and municipal bonds*
taxation than the Federal Government itself confers arr.cn holders of Liberty
—3—
bonds should be reduced, so far as it may be reduced, by the adoption of
appropriate administrative provisions in the Federal revenue law*
A question has been raised concerning the right of the Federal Govern
ment under the Constitution to tax thfc income from State and municipal
bonds, but there can be no doubt of the constitutionality of such an
administrative provision*.
The proposal is not to tax the income derived
from State and municipal securities,, but to prevent evasion of the tax in
respect to. other income*
The principles involved are abundantly established
in the decisions of the Supreme Court sustaining taxes upon corporation^,
bank stock, etc*, computed after taking into account income derived fromGovernment, State and municipal bends*.
I am calling attention to these matters because it is of the utmost
importance that the Congress should follow the wise precedent adopted by
the last Congress In determining in advance of the year’s business the basis
upon which taxes are to be imposed*
tfaicertainty in respect to taxation
during any given business period results in each taxpayer’s setting aside
for taxes an ample margin to cover variations in the tax law which may
affect him onerously and calculating his costs and prices on that basis*
Even a bad law is better than a retroactive law*
It is, therefore, of the
utmost importance, in my judgment, that the Congress should give considera
tion in the calendar year 1920 to the question of revision of the tax law
with a view to making such revision effective well in advance in respect to
'■ ¡¡¡1 .
-r
the incomes and profits of the calendar year 1921*
The administration of the Revenue Act of 1918 is discussed later under
the heading ’’Bureau of Internal Revenue* ”
M O M THE ANNUAL REPORT OF THE SECRETARY OF THE
TREASURY 1919
Economy
Accepting a warning from the innumerable requests that are constantly
being pressed upon the Congress for grants from the general fund» it becomes
the clear duty of this department to point cut that there appears to be
grave danger that the extraordinary success of the Treasury in financing the
stupendous war expenditures may lead to a riot of public expenditure after
the war, the consequences of which could only be disastrous*
It can not
be too often repeated or too strongly urged that the optimistic outlook of
the future of the Government*s finances, as presented in the beginning of
this report, is based upon the practice of the most rigid economy and the
continuance of ample revenues from taxation*
Any other-policy means a
calamitous upsetting of the entire program*
Government expenditure is, I need scarcely say, the most vital, funda
mental factor in increasing the cost of living«
Its evil effect in that
respect is mitigated, but can not be wholly eliminated, by the wisdom and
practical success of the financial measures adopted by the Government to
meet its expenditures*
Roughly speaking, the worst of these methods (which
has been adopted in greater or less degree in the countries of Europe and
not at all in the United States) is currency inflation«
Far less harmful
as a means of financing Government expenditures is the issue of bonds, notes,
and other obligations of the Government, which, to the extent that they find
lodgment in the hands of investors who pay for them from savings, are a means
of meeting expenditures without expansion*
The least harmful of all means of
meeting Government expenditures is taxation, because this enforces a considera
ble measure of saving on the part of the taxpayer, who is not, as in the case
of loans, furnished with a new basis of credit in exchange for the buying
power he transfers to the Government*
Of taxes the least harmful is the
personal-income tax, graduated in accordance with the means of the taxpayer,
since this is a direct tax and is only with great difficulty and to a limited
extent shifted to the consumer*
Indirect taxes, such as protective tariffs,
consunption taxes and the excess-profits tax, though less harmful than
currency inflation or loans, and having a less direct effect in increasing
- 2
the cost of living, nevertheless,- have an appreciable influence in that
direction.
Inevitably,, then, Government expenditure increases the cost of living*
The function of the Treasury, once the expenditure has "been determined upon*
is to devise means of meeting it with the least injurious results. . TThat
increases the general cost of living imposes an indirect tax on the whole
people of the United States which, in the nature of things, "bears more heavily
upon the poor than upon the rich, and upon the needy than upon the poor, "be
cause expenditures, for the necessities of life absorb practically the whole
income of the poor and needy and a negligible portion of the income of the
rich.
Measures for governmental expenditures for the benefit of a portion
of the community at the expense of the whole by adding to the cost of living
and to the burden it imposes upon the community as a whole, will only aggra
vate evils.-which the sentimental supporters of those, measures think, to
mitigate, and the burdens thus imposed invariably fall most heavily upon
those, least able to bear them.
I have ventured thus to recall to mind the general principles of
economics and finance which underlie the present situation and which so
frequently are ignored by the advocates of specific;policies and measures
that, are subversive of sound principles*
I discussed the matter somewhat in
detail before the House Select Committee oh the Budget on October 4, and
_
m y statement to that committee is quoted' elsewhere in this report under the
heading 0A Budget System. "
It is earnestly urged that the Gongress deny every proposal for expen-*
ditures in new fields or the continuance or expansion of old unless they rep
resent imperative and unquestioned need.
This policy is particularly impor
tant in this period when the solution of the.problem of the cost of living
is. to be found in such large measure in the most rigid economy in public
expenditure and in'the firm determination to meet that expenditure from
current taxes.
FROM THE ANNUAL REPORT OF THE SECRETARY OF THE
TREASURY 1919
The international financial situation
The international financial situation is One of great impor
tance and in which we ate seriously interested.
The present position
relative to foreign financing and the general policy of the Treasury
concerning this vital problem should be fully stated.
Since the armistice the United States has advanced to the
Governments of the Allies, as of the close of business October 31, 1919,
the sum of $2,329,257,138.55, and there remained on that date an unex
pended balance of $593,628,111.45, from the total loans of $10,000,000,000
authorized under the Liberty loan acts.
The Treasury asked and obtained power for the War Finance Corpo
ration to make advances up to the amount of $1,000,000,000 for nonwar pur
poses and the War Finance Corporation is prepared to make such advances.
By the act approved September 17, 1919, the Federal Reserve Board
is authorized to permit, until January 1, 1921, national banks to invest
to a limited extent in the stock of American corporations principally en
gaged in such phases of international or foreign financial operations as
may be necessary to facilitate exports.
The Secretary of War is authorized to sell surplus Army stores
on credit.
The United States wheat director is authorized to sell wheat to
Europe on credit.
The power which at present exists in the Government or govern
mental agencies to assist in meeting Europe*s financial needs is, there
fore, considerable.
This power must, of course, be exercised with extreme
caution and with the most careful regard for the urgent needs of our own
— — people for an ample supply of foodstuffs and other necessities^
reasonable prices.
—
2—
The Treasury is considering with representatives of the Govern
ments of the Allies the funding of the demand obligations which the United
States holds into long-time obligations, and at the same time the funding
during the reconstruction period, or say for a period of two or three
years, of the interest on the obligations of foreign Governments acquired
by the United States under the liberty loan acts*
The Treasury believes that the need of Europe for financial as
sistance, very great and very real though it is, has been much exaggerated
both here and abroad.
Oar hearts have been so touched by the suffering
which the war left in its train, and our experience is so recent of the
financial conditions which existed during the war (when men were devoting
themselves to the business of destruction) that we are prone to overlook
the vast recuperative power inherent in any country which, though de
vastated, has not been depopulated, and the
afterwards.
people of which are not starved
We mast all feel deep sympathy for the suffering in Europe
to-day, but we must not allow our sympathy to warp our judgment and, by
exaggerating Europe*s financial needs, make it more difficult to fill them«
Men must go back to work in Europe, must contribute to increase
production.
The industries of Europe, of course, can not be set to work
without raw materials, machinery, etc., and, to the extent that these are
to be secured from the United States, the problem of financing the restora
tion of Europe belongs primarily to our exporters.
Governmental financial
assistance in the past and talk of plans for future Government or banking
aid to finance exports have apparently led our industrial concerns to the
erroneous expectation that their war profits, based so largely on exports,
will continue indefinitely without effort or risk on their part.
To them
will fall the profits of the exports and upon them will fall the conse
quences of failure to make the exports.
So soon as domestic stocks, which
were very low at the time, of the armistice, have been replenished, those
industries which have been developed to meet a demand for great exports,
paid for out of Government war loans, will be forced to close plants and
forego dividends unless they maintain and develop an outlet abroad*
The
industries of the country must be brought to a realization of the gravity
of this problem, must go out and seek markets abroad, must reduce prices
at home and abroad to a reasonable level, and create or cooperate in creating
the means of financial export business.
There is no reason for high commo
dity prices in the specter of European demand nor for high interest rates in
the specter of European credits*
Our fear must be that the cessation of war
exports will result in closed plants, passed dividends, and general depres
sion.
The way to avoid those evils is to stimulate production and encourage
industrial and commercial activity and not to burden them with high interest
rates which are a deterrent to these things, but unfortunately are not a
deterrent, except temporarily, in such times as these to speculation«
Since armistice day, the consistent policy of the Treasury has been,
as far as possible, to restore private initiative and remove governmental
controls and interferences.
It has been the view of the Treasury that only
thus can the prompt restoration of healthy economic life be gained*
The em
bargoes on gold and silver and control of foreign exchange have been removed,
as well as the voluntary and informal control of call money and the stock
exchange loan account*
The control exercised by the Capital Issues Committee
over capital issues has been discontinued.
Thus the financial markets of the
United States have been opened to the whole world and all restrictions removed
that might have hindered America1s capital and credit resources, as well as
its great gold reserve, from being available in aid of the world* s commerce
and Europefs need,
There are those who believe that the dollar should be kept at par —
no more, no less —
in the market of foreign exchange.
If effective action
were taken to carry out such a policy, it could only be done by drawing gold
Cut of the United States when the dollar would otherwise be at a discount and
^ by inflating credit when the dollar would otherwise be at a premium*
~ 4— .
The dollar is now at a premium almost everywhere in the world#
Its artificial reduction and maintenance at the gold par of exchange in all
currencies is quite unthinkable unless we propose to level all differences
in the relative credit of nations and for our gold reserve substitute a re
serve consisting of the promises to pay of any nation that chooses to become
our debtor.
Inequalities of exchange reflect not only the trade and finan
cial balance between two countries, but, particularly after a great war such
as that we have been through, the inequalities of domestic finance#
The
United States has met a greater proportion of the cost of the war from taxes
and bond issues than any other country#
largely as a consequence of this
policy, the buying power of the dollar at home has been better sustained than
has the buying power at 'home of the currency of any European belligerent#
Eor the United States to determine by governmental action to depress the dol
lar as measured in terms of foreign exchange and to inprove the position of
other currencies as measured in terms of dollars would be to shift to the
American people the tax and loan burdens of foreign countries.
This shifted
burden would be measured by the taxes to be imposed and the further loans to
be absorbed by our people as a consequence, and by increased domestic prices#
United States Government action at this time to prevent in respect
to foreign exchange the ordinary operation of the law of supply and demand,
which automatically sets in action corrective causes, and to prevent the dol
lar from going to a premium when its natural tendency is to do so, would ar
tificially stimulate our exports, and, through the competition of export de
mand with domestic demand, maintain or increase domestic prices#
The view of the Governments of the Allies, I take it, is that had
they (after the war control of their inports had been relaxed) attempted to
continue to ‘‘p e g *1 their exchanges here at an artificial level by Government^—
borrowing, the effect would have been to stimulate their inports and dis
courage their exports, thus aggravating their already unfavorable inter
national balances.
— 5~n
It is not, of course, to "be expected that the breach left by the
withdrawal of governmental support of exchange can be filled by private
initiative until the ratification of the treaty of peace has given reasonable
assurance against the political risk which, rather than any commercial or
credit risk, now deters private lenders.
Some progress has already been made
in placing here through private channels the loans of allied and neutral
European countries and municipalities.
The Treasury favors the making, in
our markets, of such loans, which contribute to relieve the exchanges.
I am
sure that when peace is consummated, and the political risk measurably re
moved, American exporters and European importers will lay the basis^ of credit
in sound business transactions, and I know that American bankers will not
fail then to devise means of financing the needs of the situation nor America!
investors to respond to Europe’s demand for capital on a sound investment
basis .
Meanwhile
it is well to remember the invisible factors, which are
always at work toward a solution of the problem.
Immigrants’ remittances to
Europe are, and will continue to be, a very large item in rectifying the ex
changes.
As soon as peace is concluded foreign travel will be a further item*
Another very important factor is the purchase of European securities and pro
perties and repurchase of foreign-held American securities by American in
vestors.
But the principal factor in Europe’s favor is the inevitable cur
tailment of her inports and expansion of her exports.
These processes, of
course, are stimulated by the very position of the exchanges which they tend
to correct«
%
M y dear Congressman::
With, reference to m y letter of December 18 to you, calling
your attention to the desperate situation in certain portions of
Europe where urgent relief is required, and requesting an opportun
ity to lay before your Committee further information and proposals
for legislation which will enable this Government to assist in allevi
ating that situation, I have the honor to submit herewith a summary
of the m any reports and despatches from various reliable sources as
to the situation in those parts of Europe where relief is so Urgent
ly necessary; namely, Poland, Austria and Armenia.
I also have the
honor to submit a proposed legislative authorization which, in my
opinion, would enable this country to give the assistance which is
iimperati\ely required*
POLAND*
According to the "best information obtainable, the
minimum grain requirement necessary to carry Poland until the next ’
harvest, and which cannot be filled any where but in the United States,
is 300,000 tons*
This deficiency is due to a partial failure of the
wheat crop and to a lack of fuel for threshing.
Poland is at present
living under a hand-to-mouth regime, which can be remedied only by a
steady flow of imports from the only available surplus stocks of foodj
namely, those in the United States.
The potato crop, which is the
staple food of the poorer classes, has been destroyed by frosts to
the extent of 50$ in many districts, as it is impossible properly
to care for potatoes in transit due to delays in transportation*
Poland has been unable to procure clothing since the beginning of the
war, and the result is that during the past five years practically
2
all clothing has been worn out and has not yet been replaced,
food situation in Poland is so serious that the European Children's
Relief Fund has felt obliged to loan Poland small quantities of
flour from the stocks intended for child feeding.
The assistance
to the children of Poland rendered through this fund, which feeds
1,300,000 children daily, is claimed by its administrators there
to have been a powerful means of averting revolutions up to this
time, and the failure of the Polish Government properly to ration
its adult population has already caused demonstrations by the Red
in Warsaw.
The cost of supplying the 300,000 ton grain mininum
would be approximately $50,000,000.
It is possible that a portion
of this requirement may be met through private charity, and that
the British Government may be .able to supply some tonnage for the
transportation of this grain from the United States.
In so far as
this outside aid is received, the assistance to b£ furnisned by tl e
United States Would be diminished#
AUSTRIA:
In Austria the acute misery and suffering are
probably greater than in Poland.
Two-tenths only of tne present
Austrian state are self-supporting in food, and the remaining eighttenths, even before the war, produced food to supply themselves for
’ six months of the year at most, and were dependent for the remaining
six months upon importations.
Consequently, the situation today,
especially in Vienna, has become exceedingly grave, due to a short
age of coal and food.
There is every indication that unless some
relief'is afforded immediately, the population cannot withstand
the“©train of conditions that are already well-nigh intolerable.
Coal and food rations for domestic consumption have been reduced
"below a. safety minimum, and it is only a question of days before
existing stocks will be exhausted, when even the present reduced
rations will become impossible -unless new supplies are obtained.
Already the forests in the neighborhood of Vienna are being cut
down for fuel, as are also many of the wooden dwellings.
Famine
riots have broken out in some Austrian towns during the past months»
and although the population of Vienna has shown admirable patience,
this city and large parts of Austria are faced with the danger of
a complete breakdown, which according to the Chancellor, Dr. Renner,
must unavoidably occur by the end of January unless outside assist
ance is obtained*
lhat the effect of a general social breakdown in Austria
would be, can of ccur.se only be conjectured.
That it would be con
fined to Austria, however, seems highly improbable, and if it spread
to Germany, Poland and possibly all of Europe, the result would be
no less than a general disintegration of political cohesion in
Western Europe*
Such an event would be fraught with the most serious
consequences for the United States, and would certainly leave in
its wake severe suffering and thousands of deaths among the poorer
classes of the people*
The British Government has definitely proposed to join, to
the extent of its ability, with the United States Government in fur
nishing relief
Austria.
The British Government has explained,
however, that with the present depreciation in its exchange, it could
not supply dollars for the purchase of food in the United States, but
it can no doubt supply the requisite tonnage and some relief supplies
obtainable in the United Kingdom*
The total estimated requirements
- 4
for Austrian relief are $100,000,000, "but the British participation
should reduce 'the amount of relief to he supplied f r o m the United
States to Austria to about $70,000,000«
ARMENIA:
Although the population of Armenia is small, the
situation there is desperate, and the winter season will so© M a y
deaths unless adequate feed, medical supplies and clothing arc. re
ceived from outside sources»
It has been estimated that a bare xcdn
imum program o f 7,500 tons of flour, together With other necessities
amounting in all to $500,000 monthly, will be required to meet the
|.
situation, and if deliveries are not maintained after the severe winter
weather sets in, orphanages will close and great numbers of deaths
will result#
At present there are 700,000 destitute people being
kept alive by this program and partial aid is being furnished to
many others#
As there are private charitable funds available for Armenia,
it is probable that the amount of relief which.the United States Gov
ernment would be called upon to furnish to Armenia would not exceed
I
$1,000,000*
In addition to the three above-mentioned countries or terri
tories where the requirements are most urgent, it may be necessary
to furnish some supplies to other sections of Europe (outside the
boundaries of Germany) where the situation is not now so desperate*
but where food supplies will be required to carry them through until
the next harvest#
for this purpose#
It is estimated that $25,OCX),000 would suffice
»
In this summary of conditions no attempt has been made to
cover all the ground or even touch on all the aspects of the situation
- 5 7
in the countries mentioned*
Data in the form of consular despatches
and telegrams from various official and unofficial American repre
sentatives abfoad exist in abundance to substantiate the foregoing
summary of the dire need of the people of these countries for im
mediate relief*
In conclusion I may say that while it is impossible now
to estimate definitely just what will be required, I am of the opinion,
from the information so far obtainable, that a minimum of $125,000,000
and a maximum of $ 2 00 ,000,000 would suffice to supply the portion of
relief to be assumed by this Government, provided Congress should
grant the necessary authorization to participate in alleviating this
serious and desperate situation*
liny relief undertaking, so far as concerns the United
States, would be primarily a question of supplying food, and as it
is advisable that the purchases of food for Europe should be handled
and coordinated in such a manner as not to increase the prices of
food in the United States, I am recommending in the proposed legisla
tion that the United States Grain Corporation bo erqpowered to pur
chase, s e l l , i n d deliver food and relief supplies for Europe up
to the amount of $150,000,000, and that for the supplies so furnished
credit may be extended by the Grain Corporation*
If this amount
proves insufficient to meet the minimum requirements, the Treasury
will again submit the matter to Congress for such action as it may
deem expedient*
— 6 *If you desire further information than that contained herein.
Assistant Secretary Davis and Mr* Hoover, who are most conversant
with, this situation, will “
be glad to appear before your Committee
on the 10th instant, at 10530 a*m*
Cordially yours,
(Sgd*)
Honorable Joseph W, Fordney^
Chairman of Ways and Means Commit tee #
House of Representatives*
Carter Glass.
A BILL
Providing for the relief of populations in Europe and in
countries contiguous thereto
Be it enacted “by the Senate and House of Representatives of the
United States of America in Congress Assembled*
That for the partici**
pat ion of the Government of the United States in the furnishing of •
foodstuffs and other relief supplies and for the transportation
thereof to populations in Europe and countries contiguous thereto,
the United States Grain Corporation is authorized, with the approval
of the Secretary of the Treasury and to an .amount not exceeding
$150,000¿000 j to buy or contract for the purchase of wheat of the
crops of 1918 - 1919 and flour produced therefrom and other food
and food products and relief supplies necessary for the purposes
of this Act, and to sell, consign or contract for the sale,-and to
deliver or contract for the delivery, of the same, for cash or on
credit at such prices and on such terms or conditions as may “be
necessary to carry out the purposes of this Act and to relieve,
populations in the countries of Europe or countries contiguous
theretoj
Provided, That an audited itemized report of the receipts
and expenditures of the United States Grain Corporation for the
purposes authorized by this Act shall be submitted to Congress not
later than December 31, 19204
Th© -undersigned individuals beg leave to lay before their Government,
the Reparations Commission, and the Chamber of Commerce of the United
States, the following observations, and to recommend that the Chamber of Com
merce of the United States designate representatives of commerce and finance
to meet forthwith (the matter being of the greatest urgency) With those of
other countries chiefly concerned, which should include the United Kingdom
and the British Dominions, France, Belgium, Italy, Japan, Germany, Austria,
the neutral countries of Europe, the United States, and the chief escorting
countries of South America, for the purpose of examining the situation briefly
set forth below and to recommend upon the basis of authentic information what
action in the various countries is advisable among the peoples interested in
reviving and maintaining international commerce«
They venture to add to the above recommendation the following
observations!
The war has left to conqueror and cohqkered alike the problem bf
finding means effectively to arrest and counteract the continuous growth in
the volume of outstanding money and of Government obligations, and, its
concomitant, the constant increase of prices.
A decrease of excessive
consumption and an increase of production and taxation are recognized-*#©
the most hopeful, - if not the only, - remedies*
Unless they are promptly
applied, the depreciation of money, it is to be feared, will continue, wiping
out the savings of the past and leading to a gradual but persistent spreading
of bankruptcy and anarchy in Europe.
There can be no social or economic future for any country, which adopts
a permanent policy of meeting its current expenditure by a continuous infla
tion of its circulation and by increasing its interest-bearing debts without
a corresponding increase of its tangible assets*
In practice every country
will have to be treated after careful study aid with due regard to its in
dividual conditions and requirements*
No country, however, is deserving
«
y
of credit, nor can it bo considered a solvent debtor, whose obligations we
may treat as items of actual value in formulating our plans for the future,
that will not or cannot bring its current expenditure within the compass of
its receipts from taxation and other regular income«
This principle must bo
— .2 -***
34)
clearly brought home to the peoples of all countries; for it will be impos
35)
sible otherwise to arouse them from a dream of false hopes and illusions to
36)
the recognition of hard facts*
37)
It is evident that Germany and Austria will have to bear a heavier load
38)
than their conquerors, and that, in conformity with the Treaty of Peace,
39)
they must bear the largest possible burden they may safely assume*
40)
will have to be taken that this burden does not exceed the measure of the
41)
highest practicable taxation and that it does not destroy the power of pro
42)
duction, which forms the very source of effective taxation*
43)
their creditors and for the sake of the World, whose future social and econ
44)
omic development is involved, Germany and Austria must not be rendered bank
45)
rupt*
46)
tions finds that, even with the most drastic plan of taxation of property,
47)
income, trade and consumption, the sums that these countries will be able to
48)
contribute immediately towards the current expenses of their creditors will
49)
not reach the obligations now stipulated, then the Commission might be ex
50)
pected to take the view that the scope of the annual contribution must be
51)
brought within the limits within which solvency can be preserved, even
52)
though it might be necessary for that purpose to extend the period of in-
53)
stalments*
54)
But care
For the sake of
If, for instance, upon close examination, the Commission des Repara
The load of the burden and the period during which it is to be
.borne, must not, however, exceed certain bounds; it must not bring about so
55)
drastic a lowering of the standard of living that a willingness to psy a
56)
just debt is converted into a spirit of despair and revolt*
57)
It is also true that amongst the victorious countries there are some whose
58)
economic condition is exceedingly grave, and which will have to reach the
59)
limits of their taxing-powers.
60)
that the position of these countries, too, should.be examined from the same
It appears therefore to the undersigned,
point of view of keeping taxation within the power of endurance, and within
62)
a scope that will not be conducive to financial chaos and social unrest*
63)
When once the expenditure of the various European countries has been
64)
brought within their taxable capacity, (which should be a first condition
65)
of granting them further assistance), and when the burdens of indebtedness,
as between the different nations, have been brought within the limits of
endurance, the problem arises as to how these countries are to be furnished
with the working capital necessary for them to purchase the imports required
for re-starting the circle of exchange, to restore their productivity, and
to reorganise their currencies*
The signatories submit that, while much can be done through normal
banking channels, the working capital needed is too large in amount and Is
required too quickly for such channels to be adequate.
They are of opinion
therefore that a more comprehensive scheme is necessary# It is not a
question of affording aid only to a single country, or even a- single group
of countries which wefe allied in the waf* The interests of the whole of
Europe and Indeed of the whole wotfld are at stake.
It is not our intention to suggest I* detail the method by which such
international co-operation in the grant of credit may be secured* But we
allow ourselves the following observations!
1» The greater part of the funds must necessarily be supplied by those
countries, where the trade balance and the exchanges are
favourable.
2. Long term foreign credit, such as is here contemplated, is only de
sirable in so far as it is absolutely necessary to restore produc
tive processes.
It is not a substitute for those efforts and sac
rifices on the part of each country, by which alone they can solve
their internal problem.
It is only by the real economic conditions
pressing severely, as they must, on the individual that equilibrium
Can. be restored.
3. For this reason, and also because of the great demands on capital
for their own internal purposes in the lending countries themselves,
the credit supplied should be reduced to the minimum absolutely
necessary.
4. Assistance should as far as possible be given in a form which
leaves national and international trade free from the restrictive
control of Governments.
5. Any scheme should encourage to the#greatest extent possible the
98)
1 99)
supply of credit and the development of trade through normal
!too)
channels •
101)
6« In so far as it proves possible to issue loans to the public in
(
1 102)
the lending countries, these loans must be on such terms as will at
] 103)
tract the real savings of the individual; otherwise inflation would
104)
be increased«
7« The borrowing couhtries. would have to provide the best obtainable
§05)
§06)
security»
For this purpose it should be agreed-thati
1107)
a. Such loans shohld rank in front of all other indebtedness
I i08)
whatsoever whether internal debt, reparation payments or
I 109)
interallied governmental debt*
j no)
b* Special security should be set aside by the burrowing countries
, 111)
as a guarantee for the payment of interest 'and amortization,
I 112)
the character of such security varying perhaps from country to
1 113)
country, but including in the case of Germany and the new
States the assignment of import and export duties payable on a
£ > >
gold basis, and in the case of States entitled to receipts from
115)
1
than to devise means by which some measure of hopefulness will reenter*
■ 119)
the minds of the masses*
I 120)
to save, of incentives to the highest individual effort and of opportunities
Germany, a first charge on such receipts*
116)
I 117)
I
U8)
The outlook at present is dark*
No greater task is before us now,
The reestablishment of a willingness to work and
121)
for every one to enjoy a reasonable share of the fruit of his exertions
122)
must be the aim towards which the best minds in all countries should co
1
operate*
Only if we recognize that the time has now come when all
countries must help one another, can we hope to bring about an atmosphere,
123)
I
1 124)
in which we can look forward to the restoration of normal conditions and to
) 125)
the end of our present evils»
(S^ai
6)
In conclusion the signatories desire to reiterate their conviction as
to the very grave urgency of these questions in point of time*
128)
129)
Every month
which passes will aggravate the problem and render its eventual solution
—5—
130)
increasingly difficult*
All the information at their disposal convinces
131)
them that very critical days for Europe are now imminent and that no time
132)
imist he lost if catastrophes are to he averted*
AMERICAN SIGNATORIES:
ALFRED E* MARLING,
EDWIN A* ALDERMAN,
University of Virginia,
FRANK.B, ANDERSEN,
San Francisco#
JULIUS H. BARNES,
Duluth*
ROBERT L, BROOKINGS,
St* Louis#
M O B Y W, CLARK,
Detroit#
CLEVELAND H. DODGE,
New York,
CHARLES W* ELIOT,
Cambridge*
HERBERT FLEISCHHACKER,
San Francisco#
JAMES B. FORGAN,
New York*
A* W, MELLON,
Pittsburgh*
A* L* MILLS,
Portland*
J, P* MORGAN,
New York*
WM* FELLOWES MORGAN,
New York*
Fi H, RAWSON,
Chicago#
SAMUEL REA,
Phi ladelphia.
GEO. M* REYNOLDS,
Chicago.
R* G. RHETT,
Charlestown, S* C.
Chicago*
ELIHU ROOT,
ARTHUR T* HADLEY
Yale College*
R* S. HAWES,
St* Louis*
A* BARTON HEPBURN,
New York#
MYRON T. HERRICK,
Cleveland*
LOUIS W« HILL,
St* Paul«'
HERBERT HOOVER,
San Francisco*
H, B# JUDSON,
University of Chicago*
DARWIN P# KINGSLEY,
New York*
GEORGE H. McFADDEN,
Philadelphia.
New York*
LEVI U RUE,
P h ila d e lp h ia *
CHARLES H. SABIN,
New York,
JACOB H, SCHIFF,
New York*
EDWIN R. A# SELIGMAN,
Columbia College*
JOHN G. SHEDD»
Chicago#
JOHN SHERWIN»
Cleveland.
JAMES A. STI LIMAN,
New York..
HENRY SUZALLO,
University of Washington,
Seattle.
PAUL M. WARBURG,
WM# H* TAFT,
New Haven.
F# W. TAUSSIG,
Harvard University.
FRANK A* »VANDERLIP,
New York#
FESTUS J* WADE,
St• Louis,
New York*
F. 0* WATTS,
St. Louis.
HARRY a . WHEELER,
Chicago*
DANIEL WILLARD,
Baltimore*
t
\
January 15, 1920#
I
Marchi 1920.
Hon* Joseph. W* Fordney,
Chairman | Committeo on Ways and Means ,
House of Representatives*
M y dear I f c * Fotdney*
I am very glad to respond to your threefold request, communicated
through Hr* Adams, for estimates of the loss in revenue which may be expected
to result from the recent decision of the Supreme Court in the stock-dividend
case, for recommendations concerning a new method of dealing with personal
service corporations, and for definite suggestions looking to the fundamental
simplification of the income and profits taxes, brief enough to receive but
thoroughgoing enough to deserve careful consideration at a session of the
Congress crowded with other questions of grave importance*
To facilitate
their presentation I may discuss these subjects in the inverse order in which
they have been mentioned above*
SIMPLIFICATION OF THE INCOME AND PROFITS TAXES*
In dealing with this subject I may go at once to what is, in many re
spects, its most vital aspect — the question of early adtion* Publid opinion
has not yet awakened to the gravity Of the consequences which are likely to
follow a failure to simplify the tax law at this legislative Session* Unless
the necessary amendments be passed now they toill ho delayed in, all probability,
I Understand, until the autumn or Winter of the year 1921, with the result,
unless they are to disrupt the administrative procedure and confuse the neces
sary calculations of the taxpayer by being made retroactive, that income and
profits taxeS must continue to be collected on the basis of the present law
Until the close of the Calendar year 1922, and in the case of some taxpayers
on the so-called fiscal year basis, until the early months of the calendar
year 1923. I can not contemplate such delay without the gravest apprehension*
An imperfect and uncertain tax affects the future even more adversely than the
present, and for similar reasons it is costly and unwise to make a beneficent
modification of the tax law retroactive or even to delay its adoption and an
nouncement until the time at which it is to take effect« It would be mani
festly unsafe, in my opinion, to reduce now the income and profits taxes to be
collected in the calendar years 1920 and 1921, but I can see nothing in the
financial prospects for the calendar year 1922 and thereafter which would make
impossible or unwise the very modest reduction involved in the plan of simpli
fication hereinafter presented; and it should never be forgotten that the tax
system its&lf is one of the most powerful causal factors affecting public ex
penditures* A tax system yielding, or likely to yield in the future a surplus
of revenue over expenditures is an open invitation to public extravagance,
whereas an announced resolution to reduce taxes as the occasion which called
them forth recedes into the past is one of the most potent means of insuring
economy in public expenditures* The people therefore, consumers as well as
producers, indirect as well as direct taxpayers, may fairly ask to be told now
the earliest future date at which the most obsolete features of the tax law
are to be repealed*
Complexity in tax laws violates the most fundamental canon of taxa
that the liability shall be certain and definite* It is not merely a
of ifrit^tion*_labor^-an& espouse to the taxpayer, but when conjoined,
5s"it is in the present law, with the heavy rates of taxation which war exi
gency has forced upon us it becomes a major
threatening enterprise with
heavy out indefinable future obligations, generating a cloud of old claims and
potential back taxes which fill the taxpayer with dread, creating, to be sure,
\ a n attractive source of additional revenue, but clogging the administrative
machinery and threatening, indeed, its possible breakdown*
tion —
1« Final determination and settlement of tax claims and assessments;
I recommend, therefore, sis the most urgent and important of "the measures of
simplification which could advantageously be put into effect at once, an amend
ment authorizing the Commissioner of Internal Revenue, with the consent of the
taxpayer and the approval of the Secretary of the Treasury (or under such other
public safeguards as the Congress may prefer), to make a final determination
and settlement of any tax claim or assessment, which shall not thereafter be
reopened by the Government or modified or sot aside by any officer, employee,
or court of the United States, except upon a shewing of fraud, malfeasance, or
misrepresentation of fact materially affecting the determination thus made»
This recommendation is of major importance« At present the taxpayer
never knows when he is through* Every time an old ruling is changed by court
decision, opinion of the Attorney General* or reconsideration by the department,
the department feels bound to apply the new ruling to past transactions* The
necessity of constantly correcting old returns and settlements is as distressing
to the department as it is obnoxious to the taxpayer». But an oven more serious
situation arises in connection with the assessment of back taxes* The tax
return-of a large corporation is likely to be crowded with debatable points
which the corporation, in the first instance, usually decides in its own favor»
The auditing of these returns has been nocossarily delayed by the unability
of the Bureau of Internal Revenue to engage and hold a sufficient force of
experts to audit promptly the more conplex and difficult returns; but when the
audit comes to be made it ordinarily brings to light a large amount of back
taxes* A prompt determination and collection of such back taxes due would
probably bring in additional revenue exceeding $1,000,000,000* On the other
hand, this situation must fill the taxpayers concerned with the gravest appre
hension*
If present taxes be continued and a period of industrial depression
ensues during which the department finds the time and the men with which to
clear up both current and back taxes within the same year, the result may be
highly disastrous to business*^
The commissioner should be empowered and directed to dispose of these
cases promptly and finally* This procedure would bring in much additional
revenue, relieve business from grave uncertainty, keep out of the courts many
debatablè cases, and help to avert an administrati-ve deadlock»
•
£* Interpretative regulations or Treasury decisions not to be retro
active} A s jx desirable concomitant of the preceding suggestion and for reasons
stated in explaining that suggestion, I recommend the adoption of an amendment
providing in substance that in case a regulation or Treasury decision made by
the commissioner or the Secretary, or by the commissioner with the approval of
the Secretary, is reversed by the subsequent issue of a similar regulation or
decision, and such reversal is not immediately caused by or based upon an opin
ion of the Attorney General or a decision of a court of competent jurisdiction,
such new regulation or decision may be made effective from the date of approval«
3« Five-year limitation on time for bringing suit for collection of
taxes} (Section 250 of the revenue act of 1918 now provides, in sub-division (d),
that no suit or proceeding for the collection of any tax shall be begun after
the expiration of fi\e years after the date when the return was due or was made*
except in -the case of false or fraudulent returns with intent to, eyade the tax#
This subdivision has been héld to apply only to taxes due under the revenue act
of 1918» I recommend that this time limit be extended to all income and
profits taxes due either under present or prior acts of Congress*
4* Simplification of Liberty-bond exemptions The exemptions from in
come surtaxes authorized b y the several Liberty-bond acts are highly complex
and responsible for perhaps the most intricate schedule of the return which the
individual taxpayer is required to fill out* My predecessor in office has re
commended a consolidation of these exemptions which while not breaking faith
*th the holders of Liberty bonds would simplify their tax returns, and operate
to strengthen the market standing of such bonds without in any appreciable
amount reducing the public revenue*, I heartily indorse this, reconmendation,
the detailed provisiohs of which may be found on pages 99 and 100 of the A n
nual Report of the Secretary of thè Treasury for 1919*
Compensiti on for personal Service and gains from sales or dealings
The heàvy surtaxes cause real hardships when income earned over
a period of years is realised or received in one year and taxed as a lump sum
in that year#
t recommend, therefore, that such extraordinary income, when it
constitutes a material part of the gross income for that year, be deemed to
have accrued or been received ratably during the years in which the service was
rendered or the property held, and the amount of the extraordinary income so
assigned to any year be subjected to the surtax rates prescribed by law for
that year#
5«
in property?
7# Excess-profits tax? Provision for the simplification and funda
mental modification or repeal of the _excess-profits tax at the earliest pos
sible future date should, in m y opinion, be made now* In explaining this con
clusion it is unnecessary to enter into a discussion of controversial details*
Two facts impress me as indisputable and conclusive: First, the application
™
excess-profits tax is so complex that it has proved iok°ei>
da^e
administrative work of audit and assessment*
e urns are being made faster than old returns can be audited, resulting
in an accumulation of claims and potential back taxes, the dangers of which
r e /.*^ ^0en described* Second, the profits tax is confined to a small
ion v m number) of the business concerns of the country# Personal-service
? ? S ! ^L o 0nS, Partnerships, sole proprietors, and most forms of trust organ!za~
t e nded^« ! W
fromJ * e * « .
If the principle be sound, it should be excons iderat-in-ne °nmS °^,^'uslnes® organization, a proposal which administrative
period near
SiaB^ ^ impracticable either in the present or any future
period near enough to be worth consideration*
the tax l^ » w ? !w °?'urs! “ Principle which simplification of this part of
featn^
f° ilow
1 Relieve, reasonably clear. The outstanding
o ltim to h S ^ ! 3f
Sy8i® J * inooma taxation in its most important applit e m s o f t a ^ t o n l ^ f “0 i f the faot that we en»loy *« this purpose twosysthe nrofit^ t ^ J ^111
Jnconmons'urate and irreconoihblo. Corporations pay
dividends or distri'hli'aa3'1
^
while their stockholders pay surtaxes on
corporate nrofit» ^rv +i.Pr 0ivt S '
"“ thing in respect of the undistributed
tnershins u a v fill
the other hand, sole proprietors and the members of parof their business wVw.v™? a?** ®?1® al tax, and surtaxes upon the entire profits
tax. The profits ta
81 dl3trifcnted or not, but are exempt from the profits
lent for the s u r t a l U
?“ P °rati°5ls is.evidently meant to, be a rough equivaother forms of business
reinvested or undistributed profits of •
bers of a w e l l - k n ™ »
e 1uivalence is r e aped.
In 1918 the memwould have laid
^ P Padd n6arly $ 1 .125,000 more taxes than they
plioable
^ 01}e system and not two systems of income taxation apor a f i J t H S S L ' S f
ii\iusi™ as- Substantial uniformity of treatment
a variety of wavs the^datlii 0 m 3’^ ® nlijy °f treatment, could be achieved in
X outline beiT! !*
dot?ils of which it is not necessary to discuss here,
i ^ ^ f c ^ . o f whilh r ! L l i a£>Whi0! i?*3 “ “ f attractive features, the detailed
* T ^ ^ ^ ™ i l e “^ffioriin?=^ i a „i,- /
-0 .
r e q u e s t. She tashnieai aeiial thing i s t T S i f t
modifioation- The «seentun© moment to remedv a L e h i v
^ax aittd SrasP a uniquely opporby providing for the -iiiat +n-r^4-*
* defect in our system of income taxation
at a time ^ e n l u ^ t i S t i o ™ ^
the undistributed profits of corporations
complexity and heavier b u r d e n s /
^
relisf* not ^srther
incorporated business can he a
031 °f the tax upon corporate and unthe c l v e r n m e n t T S r L r i e L r l i n ^ i i o
W ^ J 1^ W f i t to the corporations,
may never return. The
We _s^ 0uld S ^ P an opportunity which
follows?
principal features of the plan referred to above are a*
va) This plan is designed,, first, to eliminate from the war-profits and
excess-profits tax law (except as it is applied to profits derived from the soCalled "War contracts*), all reference to or use of ^invested capital*} end,
éecond, to place the taxation of incorporated and unincorporated business con
cerns, s° ^’ar as oay be, on substantially the same basis*
/ (b) The first object is accomplished by substituting for the present
graduated rates of 20 and 40 per cent, a flat tax on profits in excess of the
distributed earnings# A rate of 20 per cent has been used as the basis of cer
tain estimates quoted below, but the adoption of the proper rate is, of course,
a matter which the committee will desire to settle for itself* It would be pos
sible to adopt a declining rate, say, of 25 per cent, for the first year in
suggested amendment is in operation, 20 per cent for the second year,
and 15 per cent thereafter. It is only necessary that the rate should be fixed
at one figure for a particular year*
j
(c)
The second object could bo accomplished (although the plan would be
well worth while without this feature) by making it explicit in the law that
corporations have the right to pay dividends in bonds or promises to pay bearing
a, fair rate 'of interest which are taxable to the stockholders as ordinary divi
dends, or by authorizing corporations to receive back from their stockholders
as paid-in surplus,,* cash, or other dividends recently distributed. Under
these or analogous procedures a corporation could retain its profits for use in
the business and yet convert the profits tax into a genuine income tax*
The
excess-profits tax would thus become a flat tax on undistributed earnings» *in
vested capital* would practically disappear} and the corporation if it desired
could place itself on substantially the same basis as the partnership, the personal-service corporation, and the sole proprietor# The principal object of
this suggested amendment is to sinplify the tax by removing the greatest source
o inequality and complexity now found in the tax laws, i.e«, the use of
invested capital.»
(d)
Revenue needs make it impracticable, in my opinion, to apply the
preceding amendment to profits for the calendar year 1920, the taxes upon which
will be payable in the calendar year 1921. But it should be put into effect as
soon thereafter as the diminishing expenditures of the Government will permit*
It is estimated that with a 20 per cent rate and on the basis of present corpo
rate not income the suggested amendment would reduce the tax revenue by approxi
mately $430,000,000 a year. If, for instance, the amendment were adopted and
made to apply to income received on and after January 1, 1921, the first reduc
tion in the tax Collections would occur in the last half of tho fiscal year
1922, and would amount to $215,000,000 for that fiscal year.
However, present corporate conditions can hardly be maintained,
and if corporate income declines and invested capital increases as rapidly as
ey ave done in the past 12 months the proposed amendment would probably cause
no reduction in the future revenue. Hew schemes are constantly being devised
•PfvosQ of increasing invested capital. It is time to provide for a
modification of tho excess-profits tax, not only to relieve the taxpayer but
because of an approaching decline in its productivity#
■ Reduction of surtaxes on income Saved and reinvested; In connec
tion with tho suggested tax on the undistributed profits of corporations atten
tion »ay ^PPr°Priately bo directed to a possible extension of its application
gejiar to rectify-^ao'of th# EbSb dangerous defects of the present''
t L.
_ aac* Because of possible doubt about the effects of such a change upon
***? jGCaUS! tho details of thQ proposal as they now present them5 ° ^ “ind <
rould not accurately be said to simplify the mere computation
oi tne tax I do not urge its adoption at this session of the Congress, but I
nave no hesitation in expressing my personal opinion that this or some similar
a^ondmont ombodying the same idea Could advantageously be adopted, to take offect at the earliest future date at which, in the opinion of the Congress, re
venue needs and prospects permit#
,. " *
While it is vitally important that saving and reinvestment affected
through the medium of the corporation should not he dealt with more leniently
than similar savings made hy the partnership or individual! it is equally im
portant that the methods of taxation employed should in all cases penalize saving and investment as iittle as possible. Our present surtaxes offend greatly
in this respect» Wq attempt to levy surtaxes» rising to 65 per cent upon or
dinary income| while there are thousands of millions of tax-free securities in
the market the income from which is practically exempt from all taxation» The
result is to make investment by wealthier taxpayers in the expansion of industry
or foreign trade unattractive and unprofitable» It is obvious that this situa
tion should be remedied»
The remedy which most commends itself to my judgment at the present
time is to reduce (e* g«, by one-fourth) surtaxes attributable to that part of
the net income which is saved and reinvested in business or property yielding
taxable income and at the same time to limit the total amount of such reduced
surtaxes to the same per centage (e* g** SO per cent) of the reinvested income
as the rate imposed upon the undistributed profits of corporations« The maxi
mum tax upon such saved income would thus be approximately the same, whether re
invested by the individual, the partnership, or the corporation, and whether re
invested personally by the stockholders of a corporation or by such corporation
for its stockholders* If at any later date the profits of a corporation which
had paid the undistributed profits tax came to be distributed, a credit equal
to the tax already paid by the corporation, could, if it were thought wise, bo
easily granted to the stockholders,
The revenue lost by such an amendment could, if necessary, be made up
by increasing the normal tax or that portion of the surtaxes attributable to in
come spent for purposes of consumption* But the time is fast approaching when
the adoption of such an amendment Would cause little real reduction of the
revenue» We can not long continue to collect surtaxes rising to 65 per cent
upon income from ordinary business and investment while exempt interest at a
remunerative rate can easily be secured from tax-free bonds* We must take some
thing loss^ than 65 per cent or in the end take ndthing • On the other hand, no
reduction is urged in respect of income spent for unnecessary or ostentatious
consumption* Income saved and reinvested in property or business yielding a
taxable income should be taxed at a lower ratej income spent for consumption or
invested in tax-exempt securities should pay at established rates both the nor
mal tax and surtaxes» To the extent that it falls on savings the income tax
should be reduced* to the extent that it is a tax on waste it should be main
tained or even increased»
PERS0NA3>SERVICE CORPORATIONS»
Under the revenue act of 1918 personal-service corporations are treated
substantially as partnerships, i»e*, the corporation as such is exempt from in
come, profits, and capital stock taxes, but stockholders are subject to both
normal income tax and surtaxes upon their full distributive shares in the net
income of the corporation whether such income is actually distributed or not*
The validity of this procedure is involved in the gravest doubt by the doctrine
enunciated in the stock-dividend case, which apparently leads to the conclusion
that a stockholder of a corporation, particularly a minority stockholder, can
not be taxed (without apportionment according to population) ■upon a share of
"‘'ho corporations income which ho has not actually received»
It is possible,
a?oove reasoning, that %he present statutory method of deal
s' with personal-service corporations might be sustained on the ground that it
represents in general, in its effects upon personal-service corporations and
their stockholders as a class, a relief provision imposed in lieu of the excessprofits tax which is unsuited to personal-service corporations» and if applied
to them generalJrwould in many cases work intolerable hardships* But this in
teresting question need not be discussed here» There is a grave possibility, if
not probability, that the stock-dividend decision practically exempts from ail
*
w w g w t.
income and profits taxation a group of approximately 2,500 corporations and
their stock-holders, who would pay under existing law - and should in fairness
pay at least - from five to six million dollars* This possibility with its
consequent uncertainties, should plainly he removed by the passage of amenda
tory legislation*
Fortunately it is possible to place personal-service corporations and
their stockholders in nearly the same position that they now occupy - in a man
ner wholly consistent with the spirit and letter of the ruling of the Supreme
Court - by applying to such corporations on and after January 1, 1918, the tax
on undistributed profits recommended above for all corporations on and after
January 1, 1921* This tax would, of course, be in lieu of the war-profits and
excess-profits tax, which, because of its dependence upon "invested capital,"
can not intelligently be applied to personal-service corporations in which, by
definition, "capital (whether invested or borrowed) is not a material income
producing factor," It is plain also that the law should be so amended as to tax
dividends received by the stockholders of personal-service corporations in the
same manner as other dividends are taxed*
It would be desirable, moreover, in my opinion, to permit personalservice corporations at their option to distribute during the year 1920 cash or
other taxable dividends to the full extent of their profits earned during 1918
and 1919, but not yet distributed} and such retroactive distributions should bex
made taxable by the stockholders at the stirtax rates applicable to the years in
which the profits were accumulated by the corporation* By so doing personalservice corporations could, if they desired, place themselves and their stock
holders in nearly the same position that they now occupy, ,i*e*, they would pay
no profits tax at all, while the entire corporate income (having beon distri
buted) would be taxable in the hands of the stockholders* Indeed, so closely
would the proposed plan resemble in effect the method of taxing personal-service
corporations prescribed in the revenue act of 1918 that it would be eminently
proper - and probably a source of great convenience to the taxpayers concerned to authorize personal-service corporations with the written consent of their
stockholders to select voluntarily to pay taxes for the years 1918 and 1919 on
the basis prescribed in the revenue act of 1918*
ESTIMATES OF PROBABLE LOSS IN BEVENUE RESULTING- FROM THE EEC ISION
IN EISNER AGAINST MACOMBER*
The loss resulting from this decision falls into two principal classes,
that chargeable to the possible exemption of public-service corporations and
their stockholders, and that chargeable to the complete exemption of the stock
dividends*
There are about 2,500 personal-service corporations having net income
of approximately $30,000,000 involved, the taxes-upon which, under existing law,
do not exceed $6,000,000 for the year 1918, and a slightly smaller amount for
the year 1919* The aggregate loss for the two years 1918 and 1919, would probab
ly be between $10,000,000 and $12,000,000# The need for legislation in this con
nection arises not so much from the possible loss of revenue as from the obvious
undesirability of permitting 2,500 corporations and their stockholders to escape
both the taxes upon corporations and those imposed upon individuals*
The loss resulting from the exemption of stock dividends is very diffi-to- ths- f
h
a
v
e
not in the past
been separately shewn cn the returns, while the losses from the exemption of stock
dividends as such will be partially or wholly offset by the heavier taxes result
ing from the decision upon any gains realized from subsequent sale of stock and
by other offsetting factors which need not bo mentioned in detail* After con
sideration of these factors the actuary of the Treasury Department estimates that
the net loss or refund of taxes already paid - i*e*, taxes for the period ending
T
-
with tho year 1918 - will ho in the neighborhood of $35,000,000, and that taxes
for the year 1919 (payable in the calendar year of 1920) will be reduced by ap
proximately $70,000,000 oh this account« These figures may be regarded as maxi
ma, and most of tho experts ©£ tho department are of tho opinion that tho en
tire not lossi resulting from tho exemption of stock dividends will amount to
less than $25,000,000«
The suggestions made above do not comprehend all the changes in the
present law, which, in my opinion, could bo advantageously adopted at the pre
sent session of Congress* I have confined my suggestions to an irreducible
minimum of measures looking largely to the simplification of the income and
profits taxes, for the consideration of which there still remains time and ac
tion upon which at this session of Congress may reasonably be asked by the taxpublic« X shall be glad, upon request, to submit drafts of amendments
em odying the suggestions here presented and to place at your disposal for the
work of tax revision all of the personnel and facilities of the Treasury Depart
ment •
Respectfully,
DAVID F. HOUSTON, Secretary*
T H E SECR ETAR Y OF T H E TR EASU RY
WASHINGTON
March 13, 1920.
Dear Sir:
The prosperity, progress and. welfare of the American people are so
vitally dependent on thrift, economy and saving that I deem it highly
important and appropriate to address an emphatic appeal to you, endorsing
and supporting a recent statement by my predecessor urging the cooperation
of the banks and trust companies of the country in the Treasury's program
for saving and investment in Government securities. An effective and
patriotic service can be rendered by the banking institutions, with many
compensating advantages to themselves, by becoming agents and wholeheartedly
promoting the distribution of Thrift and Savings Stamps and Treasury
Savings Certificates.
The Treasury Savings Movement is on a firm and permanent basis.
The
sale of Savings securities during the last half of the year 1919 showed
encouraging progress, and redemptions were on a lower level.
In view of the
exigencies of the present economic situation it is obvious that the movement
is fundamental, and in order that the fullest measure of success may be ob
tained the movement must be assisted directly and actively by the banks and
trust companies through the agency service.
The war has left us with many financial and economic problems, and the
Treasury Savings program can help.materially in their solution. Aside from
the fact that the proceeds from the sales of the securities will assist in
serving the cash requirements of the Treasury, the movement is of the very
essence of fundamental economics, affording a tangible means of combating
high prices and extravagance and the ills that follow in their train.
Economy must be the watchword of the Government and the people in public
and private finance, and we can not expect the"return of a normal healthy
condition unless the people produce more, save more, and spend less.
That
is the doctrine of the Savings Movement.
It can be vitalized and reduced
to reality only if all agencies of the country which are capable of reaching
the millions of investors, or those who should be investors, however small,
will lend their cooperation.
The unique position which the banking institutions occupy between the
Treasury on the one hand and the people on the other gives them a strategic
advantage of great importance. Even considerations of self interest should
impel the banking institutions to assume their acknowledged and rightful
leadership.with sufficient vigor and force to arouse the American people and
turn them from the perils of heedless extravagance to the habits of saving
and thrift 'made imperative by this- reconstruction pqriod.
With this statement of the situation, it is confidently expected that
every banking institution in the country will qualify AT ONCE to handle
Government Savings securities. In responding nobly and loyally now as they
did during the war, they will serve their country, their community, and
themselves.' Agency provisions and application blanks may be obtained from
the Government Savings Organization of the Eederal Reserve Bank in each
district.
Cordially yours,
Secretary of the Treasury.
To
Thè President
of the Bank or
Trust Company addressed.
TREASURY DEPARTMENT
Office of the Secretary
GOVERNMENT ACTUARY.
WASHINGTON
March 18* 1920.
Sirs
I am in receipt of a request from Assistant Secretary
Davis that I compute the rate of interest which the United States
will receive on the obligations held by it of foreign Governments
upon the following assumptions*
(1) That the total principal amount is
$9*500,000*000.
(2) That $2,114,000,000 mature in the spring
of 1947, and the remainder in the autumn of 1938.
(3) That interest has been paid up to the
spring of 1919.
(4) No interest to be collected until October,
or some other proper date or dates in the autumn of
1922. On such date or dates, there would be payable #>
at the rate of five per cent per annum, interest for the
previous six months on the obligations held by the United
States, and such interest would be then collected and
interest accruing thereafter would be collected as it
matured* By that time the interest accrued and unpaid
for the period from April and May, 1919, to the spring
of 1922 would amount to fifteen per cent of the princi
pal, namely, three years at five per cent* For the
purpose of liquidating these arrears, there would also,
be paid beginning on this date, in addition to the pay
ment of current interest above mentioned, one*-half of
one per. cent of the total principal amount per annum
to and including the spring of 1924. Beginning with
the autumn of 1924, the payments on account of deferred
interest would be increased from one-half of one per cent
to one per cent of the principal per annum to and includ
ing the spring of 1926, and thereafter to payments of one
and one-half per cent of the principal per annum to and
including the spring of 1934* By the payment in the
spring of 1934, the last of the accumulated fifteen per
cent of the principal would thus have been discharged.
1 have the honor to report my computation and conclusions
as follows:
The present worth April 15, 1919, of the six semiSfS*
°f ^ 37*500,000, interest deferred on
^9,500,°00,°00, beginning October 15, 1919, and ending
money at 5 per cent per annum, reinvested
semi-annually, is $1,308,150,000.
The present worth April 15, 1919, of the twenty
tour semi-annual payments of deferred interest, beginning
October 15, 1922, and ending October 15, 1934, as suggested,
upon the same basis is $874,899,000*
The loss to the Government as of April 15, 1919.
is, therefore, $433,281,000*
2 he total interest from April 15, 1919. to
maturity is?
*
1
.
Interest on $9,500,000,000, 4/15/22 to
T . 10A 5/38 @ 3f0---------$7,837,500,000
Interest on $2,114,000,000, 10/15/38 to
T r ^ J / * 47
---- 4----- ----------898,450,000.
Interest, on $9,500,000,000 , 4/15/19 to
4/15/22 deferred------------------1,425,000,000
$10,160,950,000
Total interest — ---Loss as above ------------433,281,000
$ 9,727,669,000
on ¿9
semi-annual payments of interest
17
payments upon
T^,nr^,00? ’00° l which
amount to this $9,727,669,000*
be 2 39? -n?
to this sum the semi-annual rate must
plus per cent or 4*786 plus per cent per annum*
$2
Respectfully,
(Sgd)
The Honorable
The Secretary of the Treasury.
JOS. S. McCOT
to*
ft
••
COPY-
*-1875
FEDERAL RESERVE BOARD .
March 27, 1920.
Subject: Reply to Senate Resolution No. 328,
Sir: On March 8, 1920, the Senate adopted the following resolution
"RESOLVER that the Federal Reserve Board be
and is hereby directed to advise the Senate m a t
is the cause and justification for the usurious
rates of interest on collateral call loans in the
financial centers, under what law authorized, and
■'./hat steps, if any, are required to abate this
condition."
fnl1nr.In
the Board ^ s i r e s first to invite attention to the
oil owing tables showing discount and interest rates prevailing in
-nous^centers in all Federal reserve districts during the two
Ti 1^ tf7dfy 'pGriods cndGd January 15, 1920, and February 15, 1920.
^e^SGGn from these tables that the maximum and minimum rates
t h o ^ f
31S soof od V collateral are approximately the sane as
5, r
lpaper in all cities except Boston and How York.
cria
m
q
o
1
tr'ct R f M ?
1 ° f Iatcrcst in Massachusetts is 6 % , higher cor
rect rates are authorized, and. consequently the 6% limitation is
occasionally encceded.
(Tables referred to appear on pages 286 and 287
of Federal Reserve Bulletin for March 1920.}
M h M lnanCi£l ocntcr ^ this country in which there is
m-int^-incd a c j l money market of national importance is How York
in a’-ccss
^
I? tcs 0hare°d thore on call loans are frequently
m e; cess of the lqgal rates allowed for ccrancrcial paper, they t o 7
not -usurious" under the laws of the State of Hew York R i c h R c e ° fi c a n y exempt collateral call loans from the 6% limitation w h i c T l R d ors must observe on other loans on pain of incurring the penalty nrConsol
i0V that
1* upon
°f ^ advances of
Iaw
(£.1914, C h . R s g’f
Consol. i
L.° rChSU2T'r,r.a0^
Ch, 2) provides
raonev
demand to an amount not loss than $6,000 made upon w a r e w j p g M M .
bills of lading certificates of stock, etc., or other negotiable R ! ’
strunents as collateral, any bank may receive and collect as c o ™ '
tion any sum which may be agreed upon by tho parties’ to such t r ! T
action. The section reads:
rr^ns-
X-1875
" ^ - g l l ^ J n t e r g s t on cpl.lateraljlemand loans of not
f e s p j han five thousand dnlla^,
*“
"Upon advances of money repayable on demand to
an amount not less than five thousand dollars made unon
warehouse receipts, bills of lading, certificates of"
s oc
certificates of deposit, bills of exchange, bonds
or other negotiable instruments, pledged as collateral
security for such repayment, any banjo may receive or
contract to receive and collect as compensation for making
such advances any sum which may be agreed upon by the
parties to such transaction."
Q
,.
201 of the Banking Lav/, identical in language vdtP
la?cr°? II, ar i ° - tt0t0d' m ! * S the saao ?rcvisi°A in tho case of col1 ! 251
»
^
a l ^ o ’charaotL:
itcjon
—
2
0
^
*
*
^
^
th° 69nCral BUSin6SS La'7 .(1.1909.
Provision of
'^’70 r +.
,
t-l sd
_
I"-toro « f : ^ ..? 4 y a assjiB_goilateral socuritv.
In any
-r-o viuon
rm f 3 Cadvances
3l
p----a —
J case rGrcp^-pr' in
of money
and'doliars11
t0 ^
Qm0imt 1101 loss than five thousc o r t i f i c S s nf r ° f Up0n X7arGil0USC rcce*Pts, bills of lading,
rtifiCctos of stock, certificates of deposit, bills of e-~ *
f 5101- n°eo t P ble instruments ¿ le d ^
colccivo^or to ol!? !°* !UOh rc?ajn-ient’ i1: Stoll to l L f u l to ro~
for m-Kinp. suoh h °
° rooeivG and collect, as componsat ion
,
sllcn advances, any sum to be agreed upon in writing
oy the parties to such transact ion«!l
*o>
Hationa.1 Bank Act.
£
sz
a o applicable provision reads."XTr 3
tae banlc 1S looatG<i-
.or■-tef e ^ x s ^ Uai^i_.in£tv be tahon-
reserve
note, biil of
^j. ■ *
7 01 e- cnange, or
at the rate allowed by the
District * e r o the b c i is
where by the laws of Vmr
IF talM*r00eivo*
oS?
d l f c a i t § W ° . or upon any
other evidences of debt i n t m i W
lams of
*.
! lllterest
located
Tcrrit0^
n0 m0r0» except that
tames of issue organized u ^ e r State “
^
shaxx be aX lowed for associations o i a ™
P
- S0 lualted
such State under this ti 11 r.
rn,
S e i z e d or existing in any
of the State or T c d i t o r y
tDi ^ r i c ? ^the
ooive, reserve, or charge a rate n o T ^ - e c d ^ f
’ r°~
and such interest may be
°“ ''ee<il1« seven per centum,
for M U o h the note, bill or othe“ e v i d e n t o f ^ b f f th° ^
And the purchase discount, or sale of a b o n a L i d e b ' m of ^
*1
-3-
X-1875
exchange, payable at another place than the place of
such purchase, discount, or sale, at not more than the
current rate of exchange for sight drafts in addition
to the interest, shall not ho considered as taking or
receiving a greater rate of interest*11
It will he observed that the effect of the foregoing provisions
is to authorize in the State of Hew York on collateral call loans of
not loss than $5,000 rates of interest which may be in excess of those
permitted for loans of other character, and that such higher rates arc
not prohibited as usurious*
As to the "cause and justification1' of the high rates of interest
which it thus appears may legally be charged on collateral call loans in
Hen/ York, and as to the “steps *** required to abate this condition“ ,
there is, as is well .known, a wide difference of opinion among persons
who have given thought and study to the -question.
Indeed, broad and
fundaniental questions of general economic and social policy are involved
in tno last analysis, the whole question of the utility of speculative
dealings in securities and commodities on organized exchanges is in
volved; and^more immediately, the question of the methods and practices
of tne leading speculative markets of the country, margining, stock
manipulation, and kindred matters also susceptible of abuse* As to
these the Board has never had occasion officially to form an opinion;
the Federal Reserve Act specifically precludes the purchase or dis
count by Federal reserve banks of "notes, drafts or~bills covering
merely investments or issued or drawn for the purpose of carrying or
trading in stocks, bonds, or other investment securities, except bonds
and notes of the Government of the United States"•
The Board could
not undertake to form a judgment upon the matters above referred to
without study and investigation of such a comprehensive nature as would
seriously interfere with the conduct of its regular work and which, had
the Board the requisite authority, would require the services of experts
and assistants for the employment of which the Board does not feel au
thorized to expend funds accruing from statutory assessments on the ■
Federal reserve banks for the purpose of defraying the ordinary ex
penses contemplated by the Federal Reserve Act.
ihero is submitted as an appendix hereto a memorandum prepared
or the information of the Board by the Federal Reserve Agent in Hew
Yorx, explaining in general the nature and operation of the Hew York
call money market and causes of high and fluctuating rates for call
money in that center.
Respectfully,
U*P.G.Harding
Governor.
The President of the Senate.
1875
THE HEW YORK CALL MOUSY MhEZET
Definition of Call loans.
Collateral call loans, in the general acceptation of the
tern, are made chiefly in Hew York City, which is practically
the only important call money market in the United states♦
They are loans which are payable on demand of the lender with
out previous notice, secured by the pledge of investment se
curities, i.e* stocks and bonds, generally those which are dealt
in on the Hew York Stock Exchange*
The interest rates on these
loans, as on other classes of loans, are on the basis of a rate
per annum*
The Borrowers.
The loans are made for the most part to houses which are
members of the Stock Exchange and the money so borrowed consti
tutes a portion of the funds employed ordinarily in purchasing
and carrying securities for their customers and sometimes for
themselves*
The Lenders*
The principal supplies of money for collateral call loans
are loanable funds of banks and bankers located both in and out-
2-1875,
- 2
side of Hew York City, including foreign banks and agencies of
foreign banks: and similarly the loanable funds of firms, in
dividuals and corporations seeking temporary investment.
The
proportion of the whole fund loaned by these several interests
varies seasonally and in accordance with the attractiveness of
other opportunities for investment, either locally or in other
markets.
The bulk of call money is lent on the floor of the
Hew York Stock Exchange at "the money post1’ where through various
brokers loanable funds are of fered and bids for funds are received,
Most of the business ic done between the hours of 12 noon and
2:45 p»m.
The important relation to the money market of the
present system of daily settlement of balances resulting from the
purchases and sales of securities on the Stock Exchange will be
discussed more fully hereafter.
Commercial Requirements have the Prior Claim,
In the matter of the supply or attraction of funds to the
call money market, there is generally a definite and. well under
stood obligation on the i^art of banks to a ccomodate first their
own commercial clients, so that it is only the excess of loanable
funds which they may have from time to time that is available for
the collateral call money market or for the purchase of commercial
paper in the open market.
This excess of loanable funds available
for employment in tho securities market varies, therefore, according
to the commercial requirements of the country,
it has long been
a
-1875«,
recognized that for assurance of a sufficient amount of money to
finance the volume of business in securities, reliance cannot be
placed on a rate of interest limited to the rates which obtain or
are permitted in commercial transactions whose prior claim on
banking accommodations is universally conceded*
PAUSES AffEECTMC HIESRET CALL MONEY RATES,
The reference in the resolution to the present high rates
for call money in the financial centers and the inquiry as to
their causes require, it is felt, a survey of the operations
of the money markets and the reflection therein of the underlying economic conditions which govern, in varying degrees, all
money rates,,
including those for call money*
Present Changed Conditions of supply»
In j-ormer times, and specifically prior to the institution
of the Federal Reserve System, bankers, especially in reserve
centers, were accustomed to look upon call loans as their princi
pal secondary reserve on the theory that inasmuch as those loans
were payable upon demand, funds so invested could always be
promptly obtained on short notice to meet withdrawals of deposits
or for other use*
In these circumstances there was ordinarily
available for collateral call loans a supply of funds sufficient
X-1875
»?> 4 >-
for ordinary market requirements and at lev/ rates, although at
times the rates rose to high levels as the supply of funds dimin.ished, or the demands increased*
This attitude of the hanks toward call loans as their chief
secondary reserve has been greatly modified by two causes*
The
first was the closing of the Stock Exchange at the outbreak of
the European War in the summer of 1914, w hen it became practi—
cally impossible to realize on call loans secured by investment
securities, which became, therefore, ’‘frozen loans*’*
This resulted
in a more or less permanent prejudice against dependence upon
call loans as secondary reserves.
The second and more important
factor was the creation of the Federal Reserve System-
Under the
terms of the Federal Reserve Act provision is made for the redis
count of commercial paper, but the rediscount of loans for the
purpose of carrying investment securities, other than United states
Government obligations, is excluded*
Consequently, in order to
maintain maximum liquidity, with suitable provision far secondary
reserves that can be immediately availed of, banks, including
foreign agency banks, now invest a greater proportion of their re
sources in assets'that can be'realized upon at the Federal Reserve
Bank.
Another changed factor in the present situation grows out of
the fact- that the war ard. post-war conditions have rendered unavail
able supplies of money which formerly came from foreign banks, since
the summer of 1914, while total banking resources have largely’in-
X-1875
5 **
creased, the volume of bank money available to the securities market
at low or normal rates has not increased proportionately, but on
the contrary has probably decreased-
All of these circumstances
explain in some measure, the increased rates whicia have often been
required during the past year for money loaned in the securities
market.
Present Changed Conditions of Demand.
Changed conditions are also present in the factors governing
the demand for money.
Prior to the armistice agencies of Govern
ment were employed to restrict the issue of new securities for
purposes other than those which were deemed essential for carrying
on the war.
A t the same time, as tlx Treasury undertook to sell large
amounts of certificates of indebtedness and
Liberty Bonds bearing
low rates of interest, the question arose as to whether the com
petition of the general investment markets might not prejudice the
success of the Government issues.
In these circumstances, with full
understanding on the .part of the Treasury Department, the officers
and menbers of the Hew York Stock Exchange undertook to limit
transactions which would involve the increased use of money for
other purposes in consideration of which the principal banks of Hew
York City endeavored t o provide a stable amount of money for the
requirements of the security market.
After the armistice these restrictions were removed and or.diiary
market forces reasserted themselves*
The issuance of new securities
was resumed in unprecedented volume and consumed a vast amount of
6
X-1875
capital and credit, when hank credit was already expanded by the
necessity of carrying large amounts of Government securities which
the. investment market was not prepared to absorb*
Thus arose a
further cause for the increased cost at times of accommodation on
collateral call loans.
Since the armistice these causes have been augmented bv the
increased volume and velocity of transactions in securities generally.
Before examining the figures,, it should be explained that the amount
of call money employed by the securities market fluctuates according
to the amount, of other funds available for this purpose, i.e. cus~
toners' money invested and time m o n e y ■borrowed, and also as the volume
of business varies.
Volume»
The volume of money outstanding on call is more or less con
stant, fluctuating only ovsr relatively long periods, and the
amount which is loaned from day to day is but a small proportion
of this constant volume.
The constant volume of outstanding call
loans bears a rate of interest which is determined daily and is
known as the renewal rate.
The daily borrowings, either in replace
ment of loans called for payment or representing new money borrowed,
are made at rates which may or may not be the same as the renewal
rate and which frequently vary during the same day.
Turning to the figures, it appears that ever a period of years
during the pre-war period the volume of all money, both time and
call, employed in the securities market was estimated at about
X-1875
$1,000,000,000., of which the average on call was about 60f0 and the
average on time about 40^, or a normal volume of call money, say of
$600,000,000.
The daily turnover in call money, i„e. old loans called
for payment, loans made in replacement thereof, and new money borrowed,
ranged from $15,000,000 to $30,000,000«, and averaged about $20,000,000.
The daily turnover during the year 1919, however, ordinarily ranged
from $25,000,000 to $40,000,000, and averaged about $30,000,000«
More
over it is important to notice there has been a disproportionate in
crease in the amount of call loans, as distinguished from t ime money,
witil the consequence that the former,
it is now estimated, constitute
about 75% of the total money employed in the securities mauket.
At a time of such heavy credit requironents as the present the greater
volume of borrowings, not only in the aggregate but in the day to day
demands, naturally often results in high rates for the money loaned.
Indeed, so reluctant have che banhers been cur ing the past few months
to supply the large demand for credit based on securities that the
occasional loaning of relatively small amoimts of money at very high
r^tes of ten represents a desire not to secure the high rate quoted
Trat to prevent the rate from going very much higher with the consequent
demoralization which might result.
Intermittent Factors.
There are certain other factors,
the influence of which is
principally manifested in intermittent wide fluctuations in the daily
rates or in the rates which apply for brief periods.
The increased
■
X1875.
— 8 —
volume of demand loans called daily for payment noted above,
coupled with the decreased amount of time money loaned on securities,
produces more or less apprehension on the part of borrowers as to
their ability to re-borrow money called for payment.
This appre
hension, quickened by the number of insistent borrowers bidding
at times w h e n momentarily loanable funds are exhausted- or are
offered in small quantify, frequently results ^ c o m p e t i t i v e
bidding for funds which advances the rates for a day or part of
a day beyond the actual necessities of the situation*
-Another active and important influence winch has recently
affected the supply of funds available for collateral loans and
precipitated at times a rise in the rates, has been the periodic
transfers of Government deposits from depositary banks to the
Federal Reserve Banks in connection with the fiscal operations
of the Treasury,
Such withdrawals result in the depositary banks
calling money from the securities m r k e t , which causes sharp
advances in the rate bid for call money in replacement of the
loans called for payment.
BATES ARE DBTuHlIREI) BT THE OPERATION
_QF THE M 7 OF SU P H Y Jim DEMAI3D.
The underlying cause of fluctuations and, especially of
.increases in call money rates is the operation of the law of
supply and demand.
In other words, as the supply of loanable
V.
A 1875.
- 9 -
funds diminishes in proportion to tlie volume of the demand, the
rate for collateral demand loans advances.
of the daily borrowings of call money
However, in the case
to which the abnormal
high and low rates apply and which represent but a comparatively
small proportion of the total out standing loans >
—
other factors,
incidental to the temporary circumstances and conditions of the
market, tend in times of stress to greater fluctuations in rates
than result from the more normal operation of the law which is
reflected in the renewal rate for the greater volume of the out
standing call loans.
The renewal rate is regarded as the real
barometer of market conditions and its fluctuations throughout
the longer periods more nearly reflect the relation between tie
amount of the loanable funds and the amount of the demand.
In
other words, high renewal rates are mainly due to other demands
for credit, resulting in part from the increased requirements of
the commercial community and in part from other temporary factors
such as depletion of bank reserves resulting either or both from
credit espansion or loss of reserves through gold erpert, specula
tion in commodities and real estate, and congestion of commercial
transactions incidental to slow or interrupted transportation.
2-1S75
-If-
Commercial Hates are Similarly and Independently Determined«
The operation of the law of supply and demand is equally
effective in determining the rate for commercial loans and all
other borrowings.
In fact, rates for commercial loans and rates
for collateral call loans have a common root in the law of supply
and demand, and the conditions which affect one, in the main affect
the other, although not in like degree, as is demonstrated by the
far wider fluctuation of call rates and the higher points to which
they go.
The rates for call money do not determine and have not
exerted an important influence on the rates for commercial borrow
ings.
It is the universal custom of the banks, to satisfy first the
commercial needs of their customers.
They feel an obligation to
customers but none to those who borrow in the open market on
securities.
Besio.es as the resources of the banks mainly come
from the commercial customers,
their own self-interest compels a
preference in favor of their commercial borrowers,
since failure
to grant them reasonable accommodation would induce them to withdraw
their deposits and so reduce the ability of the banks to do business.
.Although the money of the banks and trust companies comprises by
far the greater proportion of the money 3.oaned on the securities
markew, an examination of the prevailing rates 021 commercial paper
at times when the call money market is particularly strained indicates
that there is little causal relation between the rates for call money
and those on commercial loans.
Exhibits Nos. 1 and 2 , showing
respectively the rates for call money on the New York Stock Exchange
during the years 1906-1919 and the rates for commercial paper in
New York for the period from 1915 to 1920 , are attached.
X-1SJ5
Tiaw
POSSIBILITIES OF CHANGE IN THE CONDITIONS AND METHODS
OF THE CALL MONEY M A M E T
So long as collateral call
loans are made under prevailing
conditions it is difficult to see how the present situation can be
altered, because of the impracticability of controlling the under
lying cause of high rates, which in the last analysis, is the
excess demand over supply.
An attempt to control the rates for call loans by the establish
ment of an arbitrary limit at a low level, without the ability to
modify the causes above enumerated which operate to increase rates,
would be distinctly hazardous, for the reason that up to the point
where the arbitrary rate would limit the supply of new money,
speculation and expansion might ’■proceed unchecked and the natural
elements of correction or regulation would not obtain.
In other
words, high rates act as a deterrent to over— speculation and undue
expansion of credit*.
On the other hand, should the supply of
money available at a fixed maximum rate become exhausted, liquida
tion might suddenly be forced because the demands for additional
accommodation for the consummation of commitments already made
could not be met*
The effect of such liquidation would be to
embarrass not only investors and dealers in securities, but
frequently might affect dealers and merchants in commodities as
well,
As an example of the latter, the case might be cited
A-287
*11
of
a commitment to purchase a round amount of cotton on a
certain day.
Many of the houses on the Cotton Exchange are
also members of the Stock Exchange and frequently borrow very
largely on the Stock Exchange against investment securities
to provide funds for settling their transactions in cotton.
If, therefore, when an important cotton settlement is imminent,
borrowings on securities could not ue availed of, the cotton
transaction could not be consummated
mad a
drastic liquidation
through sale either of securities or of the cotton might be
required to avoid default.
Similar consequences might obtain
in the cases of transactions by members of other commodity
exchanges who are also members of the Stock Exchange and have
recourse to the call money market*
THE IMPORTANCE OF A nCAbh MON EY* MABKET
Call money in some form is indispensable to every important
financial center.
There must be not only an outlet for the employ
ment of funds temporarily idle, but a large volume of call and
short time money is essential to the successful and economical
conduct of business.
It is particularly essential to the international
.and domestic commercial business but the diversion of the use of the
major portion of such money to the securities markets is not in
accordance with sound banking principles.
It is to be noted that
X-1S75
-13in no great world market, other than New York, is the call money
market so dependent upon investment securities and so susceptible
to speculative influences*
In other markets the reverse is true,
as their call money is based principally on commercial paper upon
which realization can be had at the central bank, at a price, in
case of need*
We have seen that in this country call ' loans on
securities lack this essential quality of liquidity required for
quick and certain realization, and that this fact has now been
more generally taken into consideration by our lenders.
But the
safe and successful divorce in this country of the use of call
money from its dependence upon investment securities as a basis
requires careful study in order that safe and adequate methods
may be substituted for the present mdthods*: of the securities
market.
Term Settlements.
The achievement of this end probably depends upon the
successful development of a plan for term settlements of the
balances resulting from operations on the Stock Exchange,
lieu of the present method of daily settlements.
in
The principal
effect of such a change of the method of settlements would be
to relieve the call money market from the necessities of the
securities market and release funds now used in collateral call
loans based on investment securities for employment in call loans
based on the collateral of more liquid securities, of a commercial
2-1075
-14nature, generally recognised abroad as the preferred bases for
demand loans*
From this change a broader discount market would
naturally develop.
Under term settlements the borrowing required
by the securities market would be on the basis of short tim#
accommodation) i* e, for the term between settlements, whether
they w-e^ eweekly, fortnightly or at other ihtervalsAgitation for the improvement of the present method of
settlement of stock exchange contracts has extended over some
years and as the result of extensive studies and deliberations
of officers and members of the New York Stock Exchange, as well
as bankers, an important step has been taken to provide enlarged
clearing facilities through the organization of a new corporation
known as the Stock Clearing Corporation, which is expected to
begin operations in April, 1920.
A general description of the
purposes and contemplated operations of the corporation is con
tained in the pamphlet attached hereto as Exhibit No. 3*
The
functions of this corporation include providing facilities for
clearing contracts between members, for the receipt and delivery of
securities between members and banks,
trust companies and others,
and for the clearing of collateral call loans*
It is not asserted
or expected that the institution of these operations will materially
affect either the amount of money loaned from one day to another
on the call money market or the rates of such loans, but it is
expected that it will operate materially to decrease the amount of
bank certifications on day loans, which the present practice requires
»
x -1875
-15* in the interval between paying one call loan and replacing it with
another on the same day*
It should be noted that the mechanism
afforded b y the corporation is an indispensable
prerequisite to
the establishment of a system of term settlements.
The more recent and definite development toward the sub
stitution of term settlements for the present system of daily
settlements may be said to have had its inception in the action
of the American Acceptance Council at its annual meeting on
December b-, 1919*
At that time the following resolution was
adopted:
"Whereas, The present method of. daily stock
exchange settlements, with its dominating and often
unsettling effect on the call money market, influences
adversely the development of a wide and healthy discount
market in the United States:
Resolved, That the Chairman of the Executive
Committee be authorized to appoint a committee consist
ing of members of the Executive Committee and other
individuals to study the advisability, ways and means
of modifying the present system of settlements on the
New York Stock Exchange and substituting therefor some
system of periodical settlement, with power to take such
steps as may seem advisable in the case.fl
A copy of the annual report of the American Acceptance
Council is appended hereto as Exhibit No. k ,
in which the
resolution appears on page $, end the report of the Chairman
of the Executive Committee appears on pages l 6 to 2 7 , inclusive.
The Committee thus provided for was appointed and held two
extended conferences in which the problem was fully discussed,
both from the point of view of the banks and of the Stock Exchange.
For illustration of the subject matter of the discussion there
is attached hereto as Exhibit No* 5 , a detailed report compiled
by one of the members of the Coniaittee, Mr. Samuel F, Streit,
Chairman of the Committee on Clearing Hotise of the Stock Exchange
describing the term stttlement operations in London and on the
European continent, which presently will be published by the
American
Acceptance Council.
Through its courtesy an advance
copy of the report has been received.
There are also attached,
as ‘Exhibits Nos. 6 and 7, respectively,two other publications
of the American Acceptance Council,
"Acceptance Corporation'1,
by F„ Abbott Goodhue, Vice President of Hie First National Barik
of Boston, Mass., and "The Acceptance as the Basis of the American
Discount Market11, by John E. Rovensky, Vice President of the
National Burk of Commerce, New York, in which on pages 1 ^- and 22
respectively, the necessity for term settlements as a means of
relieving the call money market from the necessities of the
securities market and as a precedent to a broad and stable dis
count market is discussed.
The members of the committee have unanimously expressed the
opinion that the adoption of a term settlement by the Stock Exchange
would offer advantages in that it would eliminate duplication of
the handling of securities and in payments.
The committee holds,
X-1875
^17however,
that, inasmuch as the adoption of a term settlement
b'£ the Exchange would involve changes of great importance, both
to banks and to members of the Exchange, it will require the most
careful study of the subject by the committee, and in any case
the term settlement can not be put into operation until the new
system of daily Stock Exchange settlements through the Stock
Clearing Corporation, above referred to, has been perfected
and has been in practical operation for a reasonable time».
April 10, 1920.
My dear Senator:
I received your letter of April 6 , 1920, in which you request
a statement of the Treasury^ views as to S. 4119, introduced by you "to
authorize an issue of bonds in exchange for bonds of the first, second,
third, and fourth Liberty loan issues."
I have carefully examined the
bill and note that what you propose is,* in substance, the refunding of
the Liberty Loans into one consolidated loan, maturing in 50 years,
bearing interest at 3 g per cent and carrying substantially complete ex
emption from taxation.
It is m y considered judgment that the Bill which you propose
offers no satisfactory solution of the problem of the present deprecia
tion in the market prices of Liberty bonds, and that it should not be
enacted into Issr *
I should like to call your attention in the first place to
the fact that while the Bill *yould authorize an issue of bonds to the
amount of $30,000,000,000, the total face amount of the bonds of the
First, Second, Third and Fourth Liberty Loans outstanding on March 31,
1920 (on the-basis of daily Treasury statements), was only $15,616,872,038
Inasmuch as the Bill provides that the bond# which it authorizes shall
be issued solely for the purpose of retiring bonds of the First, Second,
Third and Fourth Liberty Loans, it is obvious that the authority which
it proposes to confer ib almost twice as large as would be appropriate
for the purpose.
As to the merits of the Bill, I feel that from the point of
view of the Treasury it is neither necessary nor desirable to attempt
to consolidate the outstanding bonds of the Liberty Loans into one loan*
In this connection I am enclosing for your information a copy of Form
L & C 400, recently issued by the Department* which summarizes in con
venient form the terms of the several issues of Liberty bonds* including
their exemption from taxation*
As you will see upon examining this
summary, the maturities, redemption dates, and interest payment dates
for the several issues were determined by the Treasury with great care,
in order to spread maturities over a considerable period of years and
provide sufficient redemption privileges in the intervals between ma
turities to permit the convenient handling of the retirement or refund
ing of the several issues.
The interest payment dates, moreover, were
carefully fixed with a view to spreading the heavy interest payments
over the several months of the year.
In my opinion, therefore, no con
solidation of the Liberty issai&s is necessary from the point of view of
fiscal convenience; in fact I believe it would be a serious mistake to
attempt to consolidate the maturities of either principal or interest
into one loan.
The Treasury is also definitely opposed to the issue of further
obligations of the United States bearing full exemptions from taxation,
for what it regards as fundamental reasons of social and economic policy*
Its position in this respect was folly set forth in Secretary M c A d o O U
testimony before the Committee on Ways and Means of the House of Representatives on August 28—29, 1917, in connection with the Second Liberty
Bond Act*
I am enclosing, for your information, a copy of an extract
from this testimony*
She chief objection to the total exemption from
taxation is that its value depends largely upon the wealth of the in
dividual investor and is greatest in the case of the wealthiest investor
Such an exemption from taxation, moreover, would materially cut down the
revenues of the Government of the United States at a time when it cannot
afford to dispense with any of the receipts which would otherwise accrue
on account of taxes*
I think that as a practical matter, moreover, the enactment
of the Bill proposed b y you would be without important effect upon the
market prices of 4^ per cent Liberty bonds*
Fully exempt 3s per cent
bonds of the First Liberty Loan are selling in the neighborhood of 97*
I’ully exempt 3f per cent Victory notes are selling in the neighborhood
of the same price, and every 4| per cent Victory note carries with it
the continuing right to convert it into a fully exempt 3§ per cent Vic
tory note; yet on December 31, 1919, of a total issue of about
$4,500,000,000 only $940,000,000 consisted of 3j per cent Victory notes*
I should not expect to see any very large proportion of the 4j per cent
bonds converted into 3g per cent exempt bonds*
I should expect that the
passage of your Bill and the carrying out of the plan would reduce the
market value of the present 3g per cent bonds to about the level now
— A—
established for the 4| per cent bonds rather than bring up the market
price of the
bonds,
per cent bonds to the level of that of the.3^ per cent
©lore are only about a billion and a halt dollars of tax exempt
First 3§*s and there are some fourteen billion dollars of taxable *¿»8.
If all the holders of 4} per cant bonds had an option to convert them
into ig per cent bonds fully exempt, that option would probably have
the effect of depreciating the price of 3|*s rather than appreciating
the price of 4*»s.
The number of persons with wealth sufficient to
make the value of the total exemption from surtaxes- compensate them for
the surrender of an amount equal to 3/4 of one per cent per annum is
limited.
The present market price of the g
per cent bonds is in
no small measure due to their relative scarcity.
This scarcity value
would, of course, disappear the moment an option to convert was given
to the holders of ten times their amount of 4| per cent bonds.
The proviso in Section 1 of the Bill, which would subject
the proposed bonds to the normal income tax in the event that the normal
tax should be reduced to the rate in force on January 1 , 1914, would ef
fect a complete reversal of the Government's established policy.
All the
Liberty bonds and Victory notes are now exempt from the normal Federal in
come tax, and the Treasury believes that this exemption from normal tax
should not be withdrawn, since it is fair to all holders, with no undue ad
vantages to large holders, and is an important factor in maintaining the
market prices of all the issues*
I do not believe, therefore, that your Bill offers any real
solution of the problem of the market prices of Liberty bonds*
As the
Treasury views it, the present depreciation of Liberty bonds on the mar
ket is due chiefly to the fact that of the 20,000,000 Americans who pa
triotically subscribed during the period of the war, large numbers have
not been willing or able to exercise such control over their personal
expenditure as would enable them to retain their bonds after the cessa
tion of hostilities*
Liberty bonds, like other bonds, are subject to
market influences, including the law of supply and demand, and their
market quotations have declined in consequence of the failure of the
great investing public to save in proportion to the enormous expenditure
of capital during and since the war*
Many patriotic people bought Liber
ty bonds under the impulse of patriotism who have been unwilling, since
the war was over, to continue to lend their money to the Government, and
have forced their holdings on the market more rapidly than others could
save funds to invest, with consequent depreciation in market prices*
The remedy for this condition is for the people to work and save, to keep
thoir holdings of Liberty bonds as investments, and to purchase addition
al Government securities with their savings«
The present market prices of Liberty bonds are causing no loss
to real investors who are holding their bonds as permanent investments}
they are not suffering because others see fit to sell their bonds now
for less than they are worth, and neither these investors nor those who
wish to sell their bonds have any ground for expecting a donation from
the United States in the form of additional tax exemptions or other ^
—
privileges#
6- «
the United States is under no obligation to guarantee the
holders of Liberty bonds against variations in money market conditions
or to guarantee a market at par for the bonds#
To make valuable gifts
to the people who subscribed for their bonds on definite terms for a
definite period of time would, in my opinion, be subversive of all de
cent principles of Government#
The Treasury is as much opposed to a
bonus to bondholders as to a bonus to other special classes in the
community#
As you doubtless know, the Government is already doing every
thing in its power to protect the market for Liberty bonds and the inter
ests of Liberty bond holders by means of purchases for the five per cent
Bond Purchase Pund provided by existing law#
These purchases, which
have greatly tended to sustain and strengthen the market for the bonds,
have been made under the authority of Section 15 of the Second Liberty
Bond Act, as amended by Section 6 of the Third Liberty Bond Act, which
authorized the Secretary of the Treasury to purchase annually, until
the expiration of one year after the termination of the war, up to five
per cent of the bonds of each series outstanding, at not exceeding par
and accrued interest.
To November 30th last, as shown by Secretary
Glass*s report tp Congress, a copy of which is enclosed, $1,043,0®0,500
principal amount of Liberty bonds had been purchased, the principal
amount paid therefor being $993,363,526*15.
The authority thus conferred
by Congress has been exercised by the Treasury for the sole purpose of
stabilizing the market, and in ay judgment very important results have
been achieved redounding to the benefit of all holders of Liberty bonds*
The Treasury has not profited by the action of those Liberty bond hold
ers whoiiiave forced their bonds on the market, nor by its purchases of
those bonds*
It has been obliged to borrow at higher rates of interest
the money to make the purchases which
have been forced on it for the
protection of the holders of Liberty bonds and of the Government's credit*
In this connection, and with particular reference to the pro
visions of Section 2 of S# 4119, I feel that I should call your atten
tion to the provisions of Section 6 of the Victory Liberty Loan 4 ct,
approved March 3, 1919, creating a 2g- per cent cumulative sinking fund
which goes into operation on July 1, 1920, and is calculated to retire
the Liberty bonds and Victory notes outstanding on that date within
approximately twenty-five years (except for an amount equivalent to the
obligations of foreign governments held by the United States on said
date)*
This cumulative sinking fund was established pursuant to the
recommendation of Secretary Glass in his letter of February 10, 1919,
to the Committee on Ways and Means, and received the careful considera
tion of the Congress in connection with the Victory Liberty Loan Act*
In view of the provision for the sinking fund which has already been made,
therefore, no necessity exists for the sinking fund proposed in S. 4119
except, of course, in so far as it might be designed to retire the new
bonds proposed to be issued under the Bill.
As to the Liberty bonds and
Victory notes outstanding, the ground has blrôady been covered*
Very truly yours,
Hon. Joseph
Frelinghuysen,
United States Senate,
Washington,
C.
3 enclosures.
(Sgd).
D# F. HOUSTON
Secretary
April 32, 1920«
Dear Sir:
I received your letter of April 17, 1920, as to the market prices
of Liberty bonds.
The Treasury is not contemplating the issue at this
time of any new United States bonds, and you Were misinformed if you
heard that the United States was about to issue new bonds bearing in
terest at a higher rate than the Liberty bonds.
There is at the present
time no outstanding privilege of converting First Liberty Loan 3^- per
cent bonds into bonds bearing a higher rate of interest, although First
4*s and Second 4 fs are still convertible into 4-4 per cent bonds pursuant
to the extended conversion privilege described in Treasury Department
Circular No. 137, dated March 7, 1919, as amended and supplemented June
10 and November 1, 1919, copies of which are enclosed.
Your suggestion that Liberty bonds be made legal tender is, in the
opinion of the Treasury, entirely untenable.
The currency needs of the
country are being amply provided for by the operation of the Federal Re
serve System, and to give Liberty bonds the legal tender quality would
make them so much spending money, produce unprecedented inflation of the
currency, and fundamentally upset prices.
The Treasury is also definitely opposed to the proposal that the
Liberty bonds be exchanges for bonds bearing a higher rate of interest,
and believes that it offers no solution of the problem of the deprecia
tion in the market prices of Liberty bonds.
— 2—
As
the Treasury.views it, the Liberty bond problem is chiefly one
of quantity*
tiifortunately, many holders of Liberty bonds who patrioti
cally subscribed for them and held them during the war, have since re
garded them as so much spending money and thrown them on the market more
rapidly than others could save funds to invest, with consequent deprecia
tion in market prices*
People generally have been spending money freely
and saving relatively little, so that there has not been sufficient
capital saved to overcome the pressure upon the market from those who
bought bonds as patriots but not as investors*
In these circumstances,
to add a fraction to the rate of interest borne by the bonds would have
no important or lasting effect upon their market prices, while it would
have an injurious effect upon the Government’s credit and burden the
Government and the taxpayers with higher interest charges over a long
period of years*
The Government could not, of course, manufacture savings
or create buyers for its securities simply by increasing the interest
rate on the outstanding bonds*
The only effect of such a course would
be to depreciate all other securities automatically and establish a high
interest level for many years which would be burdensome to the develop
ment of the country.
The present market prices of Liberty bonds are causing no loss to
real investors who are holding their bonds as permanent investments}
they are not suffering because others see fit to sell their bonds now
for less than they are worth, and neither these investors nor those who
wish to sell their bonds have any ground for expecting a donation from
th© United States in the form of additional interest on the bonds«
The
United States is "under no obligation to guarantee the holders of Liberty
bonds against variations in '¿coney market conditions or to guarantee a
market at par for the bonds»
To make a gift of a higher rate of interest
to the people who subscribed for their bonds on definite terms for a
definite period of time would» in m y opinion» be subversive of all decent
principles of Government.
would be impracticable;
indefensible*
To limit such a gift to original subscribers
to extend it to market purchasers would be utterly
The Treasury would vigorously oppose any donation of this
character.
Very truly yours,
(Signed) D, F. HOUSTON
Secretary.
3 enclosures.
May 7, 1920.
Dear Potter:
I received your letter of May 6 th*
As you know, the Treasury
has to all practical intents and purposes discontinued market pur
chases for the Bond Purchase Fund.
I send you herewith a copy of
Secretary Houston’s statement upon this subject.
As to the past
practice of the Treasury in this respect, I enclose herewith a copy
of a letter which pretty well stated my views.
As you know, the Bond Purchase Fund was not a fund for the re
tirement of the public debt but a fund for the stabilization of its
market price and its only real purpose was to take up the selling
which resulted from the fact that some of the bonds had been badly
distributed, that is to say, were in the hands of people who could
not or would not keep them in any event.
The operations of the Sinking Fund begin July 1, 1920»
amount of this fund is, to start with,
The
of the bonds and notes
outstanding on July 1, 1920, less the amount of foreign obliga
tions held by the Treasury*
If the bonds and notes outstanding on
July 1 amount to $20,000,000,000 and the foreign obligations held
by the Government amount to, say, $10,000,000,000, then the Sinking
Fund will amount to $260,000,000 or li$ of the total amount of
bonds and notes outstanding.
— 2—
In view of the heavy expenditures which Congress is making and
the delay in salvaging war assets which Congress is enforcing, it seems
to me that the Sinking Fund must be used to retire Victory Notes, which
mature in three years*
I believe this will benefit the market for all
of the Government^ securities most by applying the available funds to
the retirement of the earliest maturities.
This is the more obvious
when Victory Notes are selling at much the highest interest basis.
I
believe nothing will do so much good to the market for all of the
bonds as the retirement of the short-dated debt.
As a practical matter,
therefore, the Treasury^ plan is to apply the Sinking Fund of
$250,000,000 to the purchase and retirement of Victory Notes.
The
discount on the Victory Notes is very small on the present basis and
the application of the Sinking Fund to them ought to greatly reduce
that discount*
In view of this, it seems to me that the advantage
of drawing the Notes for redemption at par would not be sufficiently
great to counterbalance the enormous mechanical labor, expense and
annoyance of the operation*
Furthermore, I question whether, if the Sinking Fund were to be
applied to redemption at par, the Treasury would be justified in
applying it exclusively to Victory Notes*
I dc not have any diffi
culty with the notion of applying it exclusively to any one issue when
purchases are made at the market, and the effect of them will presuma
bly be to benefit all alike, but if a special privilege of turning them
in above the market were to be given I should feel that we would have
to allow all securities alike to participate in it.
This would dis
sipate the Sinking Fund and deprive it of its useful effect in re-
— 3—
deeming the debt which matures so soon.
"For these reasons I am clearly of the opinion that it would be
a mistake to adopt the suggestion of redeeming bonds and notes at
par at the present time*
You may be interested in the enclosed copy of my Academy speech
in which I made some further suggestions for improving the market
position.
My notion is that the one way to put Liberty Bonds up
is to retire the floating debt and reduce the amount of the Victory
Loan materially before maturity, thus relieving the holders of long
time bonds of the apprehension of further financing to refund the
short-dated debt upon terms which would impair the value of the
bonds.
Very truly yours,
(S ig n e d ) R, C. L e f f i n g w e l l .
Clarkson Potter, Esq..,
Chairman, Government Bond Committee,
Investment Bankers Association,
Greenbrier Hotel,
White Sulphur Springs, W. Va*
my
2 2 , 19 20 * FOE IMi'FBIArF RELEASE,
May 10, 1920*
My dear
I received your letter of May 7th*
I think it would be a mistake to accept Liberty Bonds in pay
ment of any part of the Federal taxes for 1921 except estate taxes*
The Government's necessities are so urgent that the whole amount of
its revenues must be applied to meet its current disbursements in
cluding, if possible, the reduction of its floating debt«
To accept
payment of even ten per cent of the taxes in Liberty Bonds would add
to the Government*s financial burdens and the difference would have
to be made up by additions to floating debt, an operation which could
not in the end benefit the outstanding bonds;
After all, the thing
which will most benefit the market for Liberty Bonds is the retire
ment of the floating debt*
The suggestion which has been made to
you would reverse this process and in effect convert funded debt into
floating debt,
I may add that Liberty Bonds are widely distributed among persons
of small means, who are not themselves heavy taxpayers, and are not
so largely held by corporations and persons of great wealth»
A pro
vision at this time permitting them to be accepted inpayment of taxes
would under these circumstances result in making it possible for cor
porations and wealthy persons to reduce the amount of their taxes by
-
2
-
-
buying L iberty Bonds in the market at a discount and turning them
in to the Government at a p ro fit*
It would not correspondingly
ben efit the great m ajority of holders of Liberty Bonds*
The e ffo r t in the L iberty Loan campaigns and since has been
to roach the savings of the people and place the Governments war
debt in the hands of m illion s who would become to-th at extent capi
t a lis t s and permanent investors*
I f we are to reach promptly a
s.ound economic p o s itio n , the p eop les1 taxes and other current outgo
should be mot out of th e ir current income*
To accept the Govern-
ment s funded war debt in payment of current taxes would be a step
towards fu rth er undoing the work of the L iberty Loan Organization
in seeking out funds fo r permanent investment from savings*
This
bju ction does not l i e against the acceptance of Liberty Bonds in
payment of estate taxes which, econom ically speaking, are capital
Xos, but to accept Liberty Bonds which are or should be a ca p ita l'
investment in payment of an income tax would be a mistake*
The present
depreciation of L iberty Bonds is la rg e ly due to the reaction which
our people underwent a ft e r arm istice day and the tendency to treat
them as spending money f o r current purposes.
This is a tendency
which the Government should discourage, not encourage*
1 as a ^ t t e r of the utmost importance fo r our future wel
fare that the Government should exercise the most rig id economy
and r e tir e the war debt with the utmost rapidity*
The proper
onrs^, however, to be pursued in that respect is to r e tire f i r s t
the debt of shortest maturity*
This, in the long run will benefit
most the holders of the Liberty Bonds of longer maturity because
they will be relieved of apprehension of further financing to meet
the floating debt and earlier maturing funded debt#
I hope very
much that as a result of figid e con coy in Government expenditure,
the maintenance of adequate revenue from taxation and the prompt
salvaging of disposable war assets it will be possible within the
next two years to retire the bulk of the floating debt (Treasury
Certificates) and to apply taxes due during the year before their
maturity to the payment of the Victory Notes which mature in May,
1923»
The adoption of such a course will do more to bring Lib
erty Bonds to par or better than any thing else that can be done.
In the long run their holders would only be injured by the reverse
process of retiring the bonds of longer maturity before the fleat
ing debt and the short-dated Victory Notes have been gotten out of
the way#
Bor these rea-sons I believe that the suggestion which has been
made to you would be undesirable in every way#
Sincerely yours,
(Signed)
R 4 C. LEBFINGP.’
ELL
May 14, 1920.
PERSONAL,
Dear Governor Mores*
I received your letter of April 21st.
I have been de
layed in answering it partly b y a brief illness and partly b y the
great pressure of business.
I want again to e g r e s s to you, and through you to the
banks of your district, m y warm appreciation of the subscriptions
noade in the Boston district for certificates of the last issue.
In your letter you describe the difficulties encountered
in selling the certificates, refer to the high rates of interest
borne b y other investment securities and ask whether in the future
you ought to urge certificates upon your commercial banks,
I am very glad that you have written to me so fully and
frankly concerning this subject because it seems to me one of
vital importance.
The rates and terms of the issues of Treasury certificates
dated April 15th were determined by the Secretary after conference
with the Governors of the Federal Reserve Banks, at the time as
sembled in Washington, and were those suggested b y the Governors
by a vote of nine to three.
But only four Federal Reserve Dis
tricts equaled or exceeded their quota and two of these four
—
2—
(BOBton and Atlanta) were districts whose Governors had voted with
the minority for rates of interest higher by one-quartef of one per
cent per annum*
You, of coiirse, recall that the amount of the Victory
Loan issue was limited to $4,500,000,000 after conference with
the Governors of the Federal Reserve Banks and with their hearty
approval and full knowledge that this involved the necessity of
revolving Treasury certificates to a possible amount much in ex
cess of that now outstanding.
The amount of loan and tax certificates outstanding which
on April 30, 1919, was nearly $6,000,000,000 and on August, 31,
1919, was nearly $4,000,000,000, had cn April 30, 1920, been reduc
ed to less than $2,750,000,000,
Of the certificates outstanding
on April 30th only $478,870,000, or considerably less than twenty
per cent, were pledged with the Federal Reserve Banksf notwith
standing the preferential rate maintained by those banks for
loans and discounts so secured*
The Federal Reserve Bank* s combined loans and discounts
secured by Government war obligations were reduced from
$1,863,000,000 on May 16, 1919, (when they were at their highest)
to $1,465,000,000 on April 30, 1920, or about $400,000,000, but
in the same period their other loans and investments increased
from $359,000,000 to $1,477,000,000, or more than four hundred
per cent«
- 3 -
From May 2, ISIS» when all reporting member banks» invest
ments in and loans upon united States war securities were at their
highest, to April 23, 1920, these investments and loans decreased
from $£,083,193,000 to $2,225,272,000,
During the same period
their other loans and investments increased from $10,326,851,000
to $14,286>225,000,
Roughly speaking, for every dollar of credit re
leased by the Government and borrowers on Government securities two
dollars were extracted by other borrowers.
Reporting member banks»
loans on miscellaneous stocks and bonds included in their «other
loans and investments« amount to over $3,000,000,000,'or nearly one
and a half times their investments in and loans upon united States
war securities.
From ty\a.y 2, 1919, to April 23, 1920, the Boston F©3eral
Reserve B&nkts loans and discounts secured by Government war obliga
tions decreased from $158,981,000 to $84,866,000, but its other
loans and investments increased from $17,756,000 to $103,320,000,
in the same period your reporting member banks t holdings of and. loans
■upon united states war securities decreased from $234,708,000 to
$93,613,000, but their other loans and investments increased from
$792,192,000 to $948,857,000,
United states war securities have been forced out of the
Federal Reserve B&nks and membexv banks, not to get liquidation, but
to make room for ever-increasing expansion of commercial loans.
- 4 -
Evidently about 85 per cent of member banksf borrowings
ffom the Federal Reserve Banks today are for commercial and speculative purposes, one-half of their borrowings being collaterally
secured by the pledge of Government securities simply because the
reserve banks maintain differential rates in favor of loans so se
cured,
i think that for their own protection, the Federal Reserve
Banks have done wisely to differentiate between the various kinds
of seourity offered to them.
There is a great deal of nonsense
talked about the liquidness of commercial paper,
thing much less liquid than some commercial paper,
i dontt know any
j should rather
have united States Government short-term certificates of indebted
ness as security for a loan than silk piled up on Fourth Avenue,
or bacon rotting on Thames wharves*
Because of the failure to control expansion in any other
way, x became in January, and am still, a strong advocate of in
creased rates as a necessary evil growing out of the failure to con
trol credit in other ways.
But the credit situation is not one which
will yield to high rates of interest and discount alone.
Rates
cannot function internationally because of the gold embargoes main
tained in Europe and our already excessive export balance to Europe.
They cannot function effectively on the domestic situation until
the Reserve Banks* rates exceed the open market rates.
They cannot
be put above the open market rates except in one big jump — big
enough to create a panic,
otherwise each increase in Reserve Bank
T 5 rates will serve to push the open market rates further up and
above the new Reserve Bank rates.
Increases in rates of interest and discount under these
circumstances may, if they are the sole reliance, far from improv
ing the general situation, actually make it worse.
Money is now
so dear that there is a marked tendency to defer capital issues
seeking investment money and to finance current necessities by bank
loans*
The cost of money is so high as to be almost prohibitive to
railroads, public utilities and other businesses operating on a low
margin of profit and at the same time the high cost offers little
or no obstacle to borrowings by those engaged in speculative and
non-essential enterprises and anticipating a very great profit*
The expansion of commercial credits has proceeded more
rapidly since the Reserve Bank rates were increased in January than
at any other, period, and notwithstanding that, for the most part,
this was a period when normally liquidation might have been expected.
It is at present impossible for the Government to borrow
below the rate maintained by the Federal Reserve Banks for loans
and discounts on the security of such certificates and will continue
to be impossible to do so as long as the open market rate for com
mercial paper is above the Reserve Banks’ rate on cormiercial paper.
I believe that the Treasury should accept the consequences of any
- .6
-
necessary steps taken with a view to controlling commercial credits*
Liquidation of war paper is, however, progressing satisfactorily,
and the holders of it should not be punished, or nagged, separately,
The commercial banks, naturally enough, do not want to
buy Treasury certificates for their own account on any terms when
they are being pressed by the Reserve Banks, unsuccessfully, to re
duce their borrowings and by their customers, successfully, to in
crease their loans.
They do not even want to sell Treasury cer
tificates to customers because that involves loss of deposits.
The
whole plan for the sale of Treasury certificates is predicated upon
iginal purchase Oy the Donks and resale by them to their customers,
the banks acting in a way as underwriters and finding some compensa
tion in the war loan deposit.
a
bank which does not buy Treasury
certificates in the first instance will not try to sell them to its
customers and may even discourage their purchase.
The notion which some of the banks seem to hold that their
st duty is to their commercial customers is, in my opinion, a
mistaken one.
The above figures show that the banks, as a whole,
have very much overdone their duty to their commercial customers.
Furthermore commercial business cannot prosper if the Government is
necessities are not met,
i have been as vigorous in advocacy of
nomy in Government expenditure as anyone,
if those who believe
in economy w ou ld d i r e c t t h e i r a t t e n t i o n t o c o n g r e s s ,
do w e l l *
But th e new spaper t a l k ab ou t r a t io n in g
th e y w ou ld
th e T re a s u ry is
f o o l i s h - as though the Governm ent o f th e u n it e d S ta te s c o u ld s to p
payment a f t e r th e a p p r o p r ia t io n s have b een made and th e e x p e n d i
tu r e s in c u r re d i
The T re a s u ry p ro p o s e s t o be fin a n c e d w ith o u t d i r e c t b o r
row in g fro m th e p e d e r a l R e s e r v e Banks e x c e p t a s h e r e t o f o r e
fo r a
few days a t a tim e on t a x in s t a llm e n t d a te s and to m eet e m erg en c ies *
i
But i f e x o r b i t a n t term s a r e e x t o r t e d from i t
in ju r io u s t o i t s
c r e d it,
s e c u r i t i e s , and t o i t s
and term s w h ich a r e
t o h o ld e r s o f th e Government is
fu tu r e
f in a n c in g ,
o u ts ta n d in g
th e o n ly c ou rse f o r th e
T re a s u ry t o a d o p t w i l l be t o demand an im m ediate in c r e a s e in ta x e s
w i t h a v ie w t o e lim in a t in g
th e f l o a t i n g
d e b t and making a b ig
d u c tio n i n tn e amount o f th e v i c t o r y Loan,
th e p r o p e r c o u rs e t o p u rs u e .
c o u rs e i f
re
i t may be th a t t h is
is
C e r t a in ly i t w i l l become a n e c e s s a r y
the F e d e r a l R e s e r v e Bunks can n ot c o n t r o l com m ercial c r e d i t s
and r e g a in the c o o p e r a t io n o f th e member banks in a i d o f th e 'G o v
ern m en t! s n e c e s s a r y tem p orary b o r r o w in g s ,
i n my o p in io n i t
is
th e im p e r a t iv e d u ty o f th e F e d e r a l
R e s e r v e Ba n k s, us banks o f r e s e r v e and is s u e ,
p e r s is te n t in fla t io n
o f th e u n it e d s t a t e s ,
tr ic t s
t o p u t an end t o th e
o f com m ercial c r e d i t s , an d , a s f i s c a l a g e n ts
to c a l l upon th e banks o f t h e i r r e s p e c t i v e d i s
t o ta k e t h e i r p r o p o r t io n a t e p a r t o f each is s u e o f T re a s u ry
c e r t ific a t e s
o f f e r e d fro m tim e t o tim e t o m eet th e G overn m en t!s
- anecessities and to use their best efforts to redistribute them
among their cus t caners *
Very truly yours,
(Signed)
Chas. A* Morss, Esq.,
Governor, Federal Reserve Bank,
Boston, Mass.
R„ C. LEFFINGTCELL.
EXHIBIT A
TREASURY DEPARTMENT
For release morning papers
Monday, May 17, 1920«
STATEMENT BY THE DIRECTOR OF THE MINT«
The p r o v i s i o n s o f th e p ittm a n A c t a r e m andatory and, in a c cord a n ce
w it h them,
th e S e c r e t a r y o f th e T r e a s u ry has g iv e n s ta n d in g
o rd e rs t o
th e D i r e c t o r o f th e M int t o buy s i l v e r a t $1 p e r ounce, 1000 f i n e , d e
l i v e r e d a t th e o p t io n o f th e D i r e c t o r o f th e M int a t th e A s s a y o f f i c e
m New Y o rk o r th e mints i n P h i l a d e lp h ia ,
D enver and San F r a n c is c o , up
t o th e a g g r e g a t e amount o f 207,u00,000 ounces*
un der th e term s o f
th e A c t th e s i l v e r s o p u rch ased must be th e p ro d u ct b o th o f m ines
s i t u a t e d in th e U n it e d S t a t e s and o f r e d u c t io n w orks s o lo c a t e d , and
c l e a r ana u n e q u iv o c a l p r o o f t o th a t e f f e c t w i l l be r e q u ir e d .
f o r such p r o o f may be o b ta in e d a t s a id a s s a y o f f i c e and m in ts*
Forms
May 18 , 1920.
Dear Mr. Fordney;
I received your letter of May 1st» with the enclosed copies
of Bills H. R. 137981 introduced by Mr. Johnson, and H. R. 13799
introduced by Mr. Rainey, to provide for the payment of adjusted com
pensation to the veterans of the World War.
Both bills impose an 80
per cent war profits tax.
The most serious aspect of this compensation matter, as I
pointed out when I had the honor of appearing before the Committee,
is the proposal greatly to add, especially at this time, to the pres
ent grievous burdens resting upon the people of the nation and upon
the Treasury.
The method of financing the proposal raises grave
problems but is secondaiy.
The very heavy burdens which will rest
upon the Treasury by reason of laws already enacted, including
particularly the recent railroad laws, which it is estimated will en
tail an expenditure of approximately $1,000,000,000, and also by reason
of the delay in making provision to realize upon the Governments
investments in railroads and ships, taken in connection with the exist
ing credit situation, suggest the need of grave consideration of the
question whether, quite aside from and in addition to any taxation
which it might be necessary to impose in order to pay a bonus to the
soldiers, it may not be necessaiy to provide for meeting the necessities
-
2
-
of the Government in larger measure from taxation*
The total indebted
ness of the Government maturing within three years, represented by Treasury
Certificates, War Savings Certificates and Victory Notes, is in the
neighborhood of eight billions of dollars*
it is no longer possible to
finance the current needs of the Government in part by the issue of
Treasury Certificates except on onerous
terms which reflect upon the value
of the Governments long-time bonds and depreciate them in the market*
Furthermore, it would appear to be bad economy and bad finance for the
Government to borrow money on Short-term certificates of indebtedness
(maturing within three to six months) to be invested for a term of years
in railroads and Ships*
It is a matter of serious concern to have the Government appear\
ing in the market every few weeks for loans* Certainly nothing ought to
be done to add to existing credit expansion that can possibly be avoided*
The result would be to increase prices and to make a difficult situation
less satisfactory#
In the circumstances obviously the Government ought
to appear in the market for loans as infrequently as possible and for the
lowest sums*
Additional taxes are also undesirable but they may be less
undesirable than borrowing*
of enforcing economies,
They would at least have the effect in part
The first thing to do, I am sure you will agree,
is to keep Federal expenditures down to the minimum and it is obvious also
that other governmental jurisdictions and private individuals should do
likewise*
I beg to submit to your Committee for its serious consideration
the question whether, all things considered, it would not now be advisable
• gi
to seek out additional sources of revenue to meet the current require
ments of the Government, over and above any additional revenue which
would be necessary if the soldier bonus plan is det e m i n e d upon, in order
to obviate the necessity of continuing in considerable measure to meet
them by borrowing#
Having these things in mind, I hesitate to express
an op inion concerning the bills which you have submitted to me, taken
by themselves*
(There are many grave objections, both to the proposed
new war profits tax and to the alternative measure, a sales tax, vhieh
I understand your Committee is considering#
If, in view of the urgent
needs of thè Government for money to meet its requirements, your Com
mittee concludes that it will be wise to raise a larger amount by tax
ation and desires any suggestions from the Treasury, I shall be glad
to have the experts place themselves at its disposal*
in the mean
time I refrain from making any further comment on either proposal*
For the reasons indicated, and for other reasons, I think
it would be highly unfortunate for any new obligations to be placed
upon the Treasury through the enactment of the bonus proposal in any
form, however financed*
Very truly yours,
(Signed) 3). F* Houston
«
Hon* Joseph W* Fordney,
Chairman, Committee on Ways and Means,
House of Representatives*
YOUR LIBERTY BOND
If you sell your Liberty Bond now, you are cheating yourself*
You
paid fifty dollars for your bond, and now you can only get in the neighborhood
of from $43 to $48 for it*
The Government promised to pay you one hundred
cents for every dollar you put into your bond, but it did not promise to pay it
to you this year«
Read your bond, and you will see the year it comes due.
Uncle Sam will pay you back in full on that date and in the meantime will pay
you every cent of interest he.promised#
Nobody who has lent our government
money has ever lost it, and yoti will not*
Liberty Bonds are selling at low rates now because many people are
not keeping them until the time the Government asked them to but are getting
rid of them*
When many people want to sell a thingandfew want to buy, the
price goes down*
of the wise ones*
£
Foolish men are selling, and wise ones are buying.
Hold on to the bond you have and buy some more#
Be one
If you
buy a Fifty Dollar Liberty Bond for $43 now, you will get the interest on fifty
dollars and when the bond matures, the Government will pay you $50 for it.
Pretty good business, isn’t it?
B v e r y Liberty Bond you buy will help raise
the price of all Liberty Bonds, because when a great many people want to buy a
thing and only a few want to sell, the price goes up*
Help yourself, your friends and your government.
1
Liberty Bond and buy more*
Be a wise one.
Hold on to your
STATEMENT BY SECRETARY HOUSTON
Liberty Bonds and Victory Notes are selling below par partly
because many of the people who bought them in à spirit of patriotism
fOuhd themselves after the war was over tmablé or unwilling to Con^
tinue to saVe ahd treated them as ôpeûdihg ihotaey»
They are selling
below par partly because the war ak& pbii-armistice conditions hare
resulted ih a world^wide shortage bf èapliâl atxd credit which hafe
greatly increased thé pricè of money,
ike e^ahsioh Of credits ahd
increase in pricèë aûd the bbkfcelative decrease in the buying power
of money necessarily carry with Ihem a decrease ih the market value
of the promise to pay a ¿iked sum of money at a future date with
interest at a fixed rate.
This has nothing at all to do with the
question whether the money will be paid at that future date or not,
No one doubt s that it will be.
The obligation of the Government of
the United States carries with it no risk whatever.
of payment.
It is certain
The market price of that obligation is practically an
indication of the pure interest rate at any given time, that is to
say, of the present value of the premise to pay a given sum at a
future date with interest in the meanwhile*
It is sinply an
economic law that the decrease in the buying power of money or, to
put it the other way around, the increase in the prices of conmodities
carries with it necessarily a depreciation in the present value of the
promise to repay money at a future date.
Luring the past year or more Liberty Bonds and Victory Notes have
been gradually shifting from the hands of those who borrowed to buy
them and were unable or unwilling to save ahd pay for them into the
hands of permanent investors whose holdings ard taken out of the baiiks
and put away in safe deposit vadlts*
One evidence of this is the
tremendous decrease in banks* holdings of and loans upon Government
war securities during the past year.
Another indication of the steady
absorption which is proceeding is the fact that the principal of amount
of Liberty Bonds and Victory Notes which are held in registered form in
stead of coupon form has increased 55$ or 60$ since original issue and
is steadily increasing.
From all parts of the country I hear reports from banks that their
customers* purchases of Liberty Bonds and Victory Notes have during
the past few months for the first time exceeded their sales.
This indi
cates that real investors all over the country are absorbing the securi
ties which are being sold, in consequence of strigent credit conditions,
by corporations and others who purchased out of patriotism or as a
secondary reserve against future requirements.
The necessity of those business companies and business men who are
being forced to sell their securities at bargain prices in the present
credit stringency is the opportunity of investors.
Just as expansion is accompanied by a decrease in the buying power
of money and consequently of the value of an obligation to repay money
at a future date, so deflation will be accompanied by an increase in the
buying power of money and consequently of the promise to pay money at a
future date.
Dear money results in part from the effort to prevent fur-
ther expansion.
Naturally enough» its first effect is to force the best
securities in the world on the market because they are the easiest to
realize upon.
As the inevitable deflation takes place and the price of
money approaches normal again the market price of Liberty and Victory
securities will* of course» appreciate in accordance with inexorable
economic laws»
In the long run» therefor» the raising of disoount rates in the
effort to prevent further inflation will help Liberty Bond and Victory
Note values» although the first effect of those steps has been to
some extent to force them on the market out of weak hands*
Deflation
means increased buying power of money and of the present value of the
promise to pay money at a future date,
There can be no doubt that Liberty Bonds and Victory Notes are,
as they always were, the safest investment in the world and that the
present abnormal credit position affords a unique opportunity to those
who have or can save money for investment in these securities,
x-1337
May 24, 1920.
My dear Senator:
Your letter of the 14th instant was duly received, but unusual
pressure of routine business has prevented an earlier reply,
I notice that you renew the suggestion made in your letter of
April 27th that the Federal Reserve Board lower the discount rates
of Federal Reserve Banks as a means of helping to restore Liberty
Bonds to par, and that you take the view that as the Federal Reserve
Banks pay no interest on deposits and that as they made very large
earnings last year on a four per cent rate; that ”3 per cent is a rate
high enough to enable them to make all the money they are. entitled
to make out of the public” , and you say that “ the Federal Reserve
Banks should not be put in the attitude of profiteering or of setting
the example of profiteering to member banks” .
Your suggestion that the discount rates of the Federal Reserve
Banks be fixed with reference to their dividend requirements is cert
ainly a novel one, but before entering into a discussion of the propri
ety of fixing rates from this point of view I wish to say something
regarding your intimation that the Federal Reserve Banks are putting
themselves in the attitude of profiteering,
Section 7 of the Federal Reserve Act provides that “after all
75L
x-1937
-
2
-
necessary expenses of o Federal reserve -attic have been paid or provided
f o r t the stockholders shall be entitled to receive an annual dividend
of six per centum on the paid-in capital stock, which dividend shall be
cumulative".
As
originally enacted this section provided further that
after dividend claims had been fully met "all the net earnings shall be
paid to the United States as a franchise tax, except that one— half of
such net earnings shall be paid into a surplus fund until it shall amount
to forty per centum of the paid-in capital stock of such bank"*
The Act
of March 3, 1919 , which passed the Senate only as a result of your watch
ful care throughout an all-night session near the end of the Sixty-fifth
Congress, amended Section 7 "by providing that "after the aforesaid divi
dend claims have been fully met, the net earnings shall be paid to the
United States as a franchise tax.excej>t that the ’
whole of such net e a m ings, including those for the year ending December thirty-first, nineteen
hundred and eighteen, shall be paid into a surplus fund until it shall
amount to one hundred per centum of the subscribed capital stock of such
bank, and that thereafter ten per centum of such net earnings shall be
paid into the surplus".
Section 7 also provides that in case a Federal Reserve Bank should
be "dissolved or go into liquidation, any surplus remaining after the
payment of all debts, dividend requirements as hereinbefore provided,
and the par value of the stock, shall be paid to and become the property
of the United States*,
On May 21, 1920, the paid-in capital stock of
all the twelve Federal Resei-ve Banks aggregated $93,786,000.
On this
X-1937
- 3 -
"basis of capitalization for the year the member banks can receive divi
dends at the rate of 6$, amounting to $5 >^2 7 ,l60 ; the remainder of the
net earnings, however great, will be r.aia in larger part directly to the
Government as a franchise tax, the balance being carried to the surplus
funds of the Federal Reserve Banks with ultimate reversion to the Govern*ment*
On May 21, 1920, the consolidated statement of the twelve Federal
Reserve Banks shcwsbills discounted secured by Government war obligations,
$1,446,723,000; all other rediscounts for member banks, $ 1 ,0 5 3 >663 ,0 00 ;
bills bought in the open market, $417,368,000; yaking a total of notes
and bills rediscounted of $2,917,754,000*
At the same time the reserve
deposits of member banks were $1 ,833 »665 »0 0 0 ; total reserves held were
$2,079*53^,000, and Federal Reserve notes in actual circulation amounted
to $3 ,0 8 5 ,2 0 2 ,000 ,
The ability of the Federal Reserve Banks to extend so large a volume
of discount acconmcdations is due to the use of Feo.era.1 Reserve notes,
and this fact ought not to be overlooked*
It follows therefore that the
earnings of the Federal Reserve Banks are derived in larger part from the
circulation of Federal Reserve notes, which are obligations of the Govern
ment*
The Federal Reserve Board is- authorized in Section l b of the. Federal
Reserve Act to require the Federal Reserve Banks to pay such rate of interest
as the Board may establish on the amount of Federal Reserve notes outstanding
less the amount of gold or gold certificates held by the Federal Reserve
Agents .as- collateral security*
On Ma./ 21st, after setting aside the reserve
of 35$ against net deposit liabilities, the combined statement of the Federal
Reserve Banks shows a reserve against Federal Reserve notes outstanding of
X-1937
- 4 -
47,1^.
Even though all excess gold were deposited with the Federal Reserve
¿gents there would he 52*9$
the outstanding note issue, or $1,632,071,858;
subject to an interest charge, the imposition of which would very materially
reduce the apparent earnings of the Federal Reserve Banks,
The Act gives
the Board discretion in the matter» however, and no charge has been imposed
for the reason that the excess earnings of tue Federal Reserve Banks go to
the Government in any event.
It seems to me, Senator, that you are disposed in all your discussions
of the money and credit situation to ignore the fundamental law of supply
and demand,
Bet me point out a few statements in your last letter which
appear to be inconsistent.
You state that you are "certainly opposed to
inflation** but you are "strongly in favor of the extension of business,
increasing production and improving distribution by extending credits or. a
stable low interest rate", and you say "The expansion of credit for such
purposes is justified, but, of course, the expansion of credit beyond the
available resources, even for the most important of purposes, is not justi
fied",
You say further that "credits ought to be extended at a low rate to
the extent of the capacity of the Reserve Banks for productive purposes",
and you intimate that as the Federal Reserve Banks pay no interest on de
posits, a three per cent rate is high enough.
While you do not .say in direct
terms that Federal Reserve Banks should stand ready to make loans on Liberty
Bonds and Victory Notes at a three per cent rate your letter admits of this
construction, although you do say that you do not advocate the Reserve Banks
"lending beyond their resources at any rate, or on any securities".
You
say "Assuredly raising the rates of interest will deflate credits, even the
X-1937
- 5 -
credits of the United States, of which I complain, but I am anxious the
Federal Reserve Board shall only deflate those credits that require deflati n and not.deflate credits of the Government and of legitimate
productive business which ought not to be deflated” ♦
You say that "The
only deflation of credit justified is the deflation of credits employed
in speculative loans on inv^strent securities, on real e s t a t e ,
and on
♦
commodities for hoarding oy profiteers” .
From all th is I understand your view to be that the Federal Reserve
Banks should lend at a low stable rate on Government securities ana on
other eligible paper, barring only "speculative loans on investment
securities, on real estate, and on commodities for hoarding by profiteers”
and that in your judgment this stable low rate ought to be three per cent.
You admit the correctness of the observation made in m y letter of
the 3 ^a instant that 0there is a world-wide demand for capital, and the
demend for bank credit in this country for agricultural, commercial and
ever
industrial purposes is heavier than has
been known before; investment
demands for new construction, for the maintenance and equipment of rail
roads, #fcd for the financing of our foreign trade are very great** You
these
ask *Are
just demands to be met by denying the credits, or are they
to be repressed by raising the rates” ,
I cannot escape the conclusion,
Senator, that were the Federal Reserve Banks to establish the stable low
rate proposed b y you they would soon reach the limit of their available
resources, beyond which point, you state, the expansion of credit, "even
for the most important of purposes, is not justified” .
It seems to me that
the adoption of the policy proposed b y you would result in a wild scramble
for discount accommodations at the Federal Reserve Banks with an enforced
denial of all credit after the first few days*
The Board is insisting that all banks use a discriminating judgment
in making loans, giving preference to those which are necessary for the
production and distribution of the basic necessities of life, such as
clothing, food and fuel, but in the exercise of this discretion it is
necessary to have the restraining influence of a rate.
It is idle to
preach against excessive borrowings and then to invite borrowings b y an
artificially low rate less than half the current open market rate*
You have had a good deal to say about the low rates which prevailed
in bygone years, in England, France and Belgium, and I might call your at
tention also to the low rates which prevailed at the Federal Reserve Banks
during the. year 1915 when there was no demand for loans*
But we are
dealing with the pressing problems of the present; changing conditions
must be recognized and dealt with as occasion demands*.
You no doubt
know, although you have never called attention to the fact, that official
discount rates are high everywhere, even in countries where inflation
has been carried to extremes and which are no longer on a gold basis.
The official rate in Italy is 5^^» that of the Bank of France is 6$, and
that of the Bank of England is 7$» having recently been raised from 6$,
The Federal Reserve Board does not take the view that discount rates
should be arbitrarily fixed b y it; it recognizes the fact that there are
certain basic conditions which affect the demand for and the supply of
credit throughout
■*•’ 6 try
throughout the world, and that the formal.
X-1937
establishment of a discount rate is merely an interpretation of these con
ditions.
You call attention to the fact that the open market rate in London
during the war was 3 5$*
ficial bank rate of
'*
It is now 6—3/^ to 6-7/& per cent, against an ofYou do not question the wisdom of the management
of the hank of England, which you say is conducted h y the wisest
merchants
in the world, although I have always had an idea that many of these mer
chants are credit merchants, or private hankers, as they would he called in
this country*
The advances in rates in London are evidently'due to natural
causes and there has been no attempt to maintain artificially the low rates
to which you refer.
Why then is it not just as reasonable to concede to
the directors of the Federal Reserve Banks and to the Federal Reserve Board
some degree of honesty cf purpose and intelligence in making the advances
in rates of which you complain so vigorously!
From your own figures, Senator, it is clearly impossible for the Fed—
|
eral Reserve Banks to carry at any rate which may he fixed the entire volume
of the Government war obligations, and if a stable low rate of 3$ were to
be established no very great volume of additional loans could be made, and
instead of there being a stabilization of the bond market there would be
chaotic conditions*
The obligations of the Government of the United States offer the best
opportunity for investment in the world today*
They are being sold now on
a most attractive investment basis, and as speculative tendencies are curbed,
as the gains of the profiteers are reduced, as commodity prices decline,
and as the business and industry of this country settle down to a more
normal peace basis, the market value of these securities will rise very
v
r apidly.
-8 -
X-1937
This conclusion is justified by the experience of the past*
The six per cent 20-year bonds of the Government during the Civil War
sold at a heavy discount (I think they were down at one time to about
80), but two years from the time of their greatest depression they
premium
reached par and were selling at a
of about 25 $ in 1869 , only
twelve years before their maturity.
I am satisfied that we will have
a similar experience with Liberty Bonds, urovided there are rigid
■economies in Governmental expenditures from this time forth and inflationary tendencies generally are held in check*
I do not know of anything further that I carl say regarding the
call money rates in New York.
You continue to insist that the powers
of the Government should be exercised through the offices of the Federal
Reserve Board, the Federal Reserve Banks and the Controller of the
Currency to remove the causes which lead to fluctuating rates there, .
and I have already pointed out to you that the interest rates in New York
City are regulated by the laws o& the State of New York and that there
is nothing that can be done by the Federal Reserve Board, or by the
Federal Reserve Bank of New York, except, perhaps, to decline to make
loans on Government bonds to ^ariks which in turn lend (»1 Stock Exchange
collateral.
This would result in even higher rates.
It is interesting to note, however, that the high rates of which
vou complain reached their peak in November, 1919 , before the discount
rates of the Federal Reserve Banks had been advanced and that since the
rates were advanced to their present level, on January 23 rd last, call
-9-*
3-1937
money rates have ruied, with, the exception of* on© or two temporary
flurries, quite steadily around their present level of from six to
seven per cent.
Very truly yours,
W, F. G* HIDING,
Governor.
Hon. Robert L. Owen,
United States Senate,
Washing ton, D .C .
On May 17th, 1920, the Senate adopted, the following resolution.■
"Resolved, That the Federal Reserve Board he directed
to advise the Senate what steps it purposes to take or to
recommend to the member hanks of the Federal Reserve System
to meet the existing inflation of currency and credits and
consequent high prices, and what further steps it purposes
to take or recommend to mobilize credits in order to move
the 1920 crop".
In response the Board desires to say that it has recognized for
many months past that the expansion of bank credits in this country
was proceeding at a rate not warranted by the production and consump
tion of goods.
It has repeatedly admonished the Federal Reserve Banks
that influence should be exerted upon the member banks to induce them
to avoid undue expansion of loans and to keep their volume.of out
standing credits within moderate bounds,
Beginning six months ago the rates of discount on various classes
of paper at the Federal Reserve Banks were advanced.
Curing the latter
part of January the present rates were put into effect. These advances,
while undoubtedly checking credit transactions which otherwise would
have been made, have not been entirely effective in bringing about the
reduction in loans desired and which might normally have been excected
during the early months of the year.
Liquidation during these months
is entirely natural and healthy and is necessary in order that the
hanks may he prepared to meet the demands made upon them during the
cron making and harvesting seasons, but there has been no such liquida
tion, and on the contrary commercial loans have steadily increased.
Thus
it appears that the public has anticipated demands for banking credit
which are usually made later on in the year.
The average reserves of
the Federal Reserve Banks are now a little over U 2 g per cent, as
against U 5 per cent at the beginning of the year and about 51 per cent
twelve months ago.
The Federal Advisory Council, which is composed of one member from
each Federal Reserve District, elected annually by the Board of Directors
of the Federal Reserve Bank, is required by Section 12 of the Federal
Reserve Act to meet in Washington at least four times each year.
The
Council is authorized "to confer directly with the Federal Reserve Board
on general business conditions; to make oral or
. written representations
concerning matters within the jurisdiction of said board; to call for
information and to make ree ororenda tions in regard to discount rates,
*
rediscount business, note issues, reserve conditions in the various District
the purchase and sale of gold or securities by reserve banks, open-market
operations by said banks, and the general affairs of the reserve barking
system.ff
Upon receipt of a notice that the Council would hold its regular
meeting on May 17 th, the Board extended an invitation to the three
Class "A" Directors of each Federal Reserve Bank, who are the representa
tives of the stockholding banks,
to come to Washington at the
x -1936
- 3 same time for conference with the Federal Reserve Board and the Federal
Advisory Council.
This conference was held on the ISth instant and
it was developed at the meeting that the present credit expansion is
\
due in great part to the abnormally high prices of goods and commodities
rrov prevailing throughout the country and to the congestion of food
stuffs and essential raw materials at* or near, points of production,
because of lack of transportation facilities.
The Board is convinced that if the unsold portions of last year’s
crops can be brought to market before the new crop matures* the
liquidation of credits which are now tied up in carrying the old crops
will be sufficient to offset to a considerable degree the credit demands
which will be made upon the banks in moving the crop of 1920 .
At the conference above referred to the Board’s views were out
lined by its Governor substantially, as follows t
The member banks
should lean less heavily upon the Federal Reserve Banks and rely more
upon their own resources, unnecessary and h a M t u a l borrowings should
be discouraged and the liquidation of long standing, non-essential
loans should proceed.
Banks were cautioned, however, that drastic
steps should be avoided and that the methods adopted should be orderly,
for gradual liquidation will result in permanent improvement while
too rapid deflation would be injurious and should be avoided.
The
Board pointed out the necessity for extending such credits as may be
necessary to promote essential production, especially of foodstuffs
and that if for any reason it should prove impracticable to increase
essential production, the: *. should be a greater economy in consumption
and more moderation in the use of credit. The problem of the banking
x-1936
- k system of the country is to check further expansion ana to bring about
a normal and healthy liquidation without curtailing essential production
and without shock to industry, and, as far as possible, without disturb
ance of legitimate commerce and business.
In order to effect this it
seems necessary to distinguish between essential and non-essential loans
but the Federal Reserve Board feels it would be a most difficult task,
which it should not undertake,
to attempt by general rule of country-wide
application to make this distinction.
During the war there was a broad
underlying principle that essentials must be "necessary or contributory
to the conduct of the
war", but notwithstanding the sharp outline of
this principle much difficulty was experienced by the various war boards
in defining essentials and non-essentials.
All the more difficult would
it be for the Federal Reserve Board to make such a general definition
in the present circumstances*
Section
j13
of the Federal Reserve -Act defines the eligibility of
paper for discount by the Federal Reserve Banks and lays down a general
rule that any paper maturing within the time prescribed and "issued
or drawn for agricultural, industrial or commercial purposes, or the
proceeds of which have been used, or are to be used, for such purposes"
is eligible.
Mo expressed condition is made regarding the essential or
non-essential character of the transactions giving rise to notes which
may be offered for discount and the Federal Reserve Board is not required, and properly could not tie expected, generally to adopt such a
criterion of eligibility.
It is too much a matter of local conditions
X-1936
- 5<ànd local knowledge to justify at this time any general country-wide
ruling by the Board even if such a ruling were deemed helpful.
On the other hand, there is nothing in the Federal Reserve A c t
which require
a Federal Reserve Bank to make any irvestment or to
rediscount any particular paper or class of paper.
both Sections 13 and lU is permissive only.
Reserve A c t ,
The language of
Section k o f the Federal
however, requires the directors of a Federal Reserve Bank
to administer its affairs "fairly and impartially and without discrimina
tion in favor of or against any member bank", and subject to the pro
visions of law and the orders of the Federal Reserve Board to extend
to each member bank such discounts, advancements and accommodations
as may be safely and reasonably made with due regard for the claims
and demands of other member
banks".
Thus the Directors of a Federal
Reserve Bank have the-power to limit the volume and character of loans
which in their judgment may be safely and reasonably made to any member
bank ■
The recent amendment to paragraph (d) of Section lU distinctly
authorizes each Federal Reserve Bank on its o'vn account, without
reference to action taken by any other Federal Reserve Bank, to
establish a normal discount or credit line for each member bank, and
permits the imposition of graduated rates on discount lines in excess
of the normal line. This amendment, however, does not repeal or modify
Sections U and 13 , and a Federal Reserve Bank is still free to decline
to discount any paper which in its judgment does not constitute a
desirable investment for it or which in its opinion would not constitute
a safe and ^treasonable investment within the meaning of Section U.
-
6
x -1936
-
It is the view of the Board., however, that while Federal Reserve Banks
may properly undertake in their transactions with member banks to dis
criminate between essential and non-essential loans, nevertheless that
discrimination might much better be made at the source b y the member
banks themselves«
The individual banker comes in direct contact with his
customers; he is better qualified than anyone else to advise the customer,
because of his familiarity, not only with the customer's business but with
the general business conditions and needs in his immediate locality.
In
making loans he is bound b y no general rule of law as to the character
of the purpose for which a loan is being asked.
He is entirely free to “
exercise discretion, and can make one loan and decline another as his
judgment may dictate.
He can estimate with a fair degree of accuracy
the legitimate demands for credit which are liable to be made upon him,
as well as the fluctuations in the volume of his deposits.
He knows
what industries sustain his community, and is thus qualified to pass upon «
the essential or non-essential character of loans offered him.
He knows,
or should know, what rediscount line he may reasonably expect of his
Federal Reserve Bank, and he ought not to regard this line as a per
manent addition to his capital.
With knowledge of the limitations or
penalties put upon his borrowings from the Federal Reserve Bmnks the
banker may be depended upon to use a more discriminating judgment in
granting credit accommodations to his customers, and that judgment he
must exercise if the present situation is to be remedied fundamentally.
It is true that under existing conditions the volume of credit
required in any transaction is much greater than was the case in
pre-war times; but it is also true that the resources of the member and non
member banks would
x-1936
-7 be ample to take care o f the essen tial business o f the country and to a
;'Y-
large extent o f non-essentials as v a il i f there were a fre e r flow o f goods
and credit»
I f "frozen loans" were liq u ifie d , and i f commodities which
are held "bach either for speculative purposes o r because o f lack o f trans
portation f a c i l i t i e s should go to the markets, and i f large stocks of
merchandise should be reduced, the resultant release o f cred it would have
a most b e n e ficia l e ffe c t upon the general situ ation .
In the meantime
everything must be done to expedite the release o f these credits and to
r e s t r ic t non-ossential cred its in future.
While the problem o f cred it regulation and control is national and
even international in its scope, yet in the la st analysis i t is merely
an aggregation of individual problems? and the proper working out o f the
situation must depend upon the public and upon the banks which deal with
the p u b lic.
The public must be made to re a lize the necessity o f economy
in expenditures and in consequent demands fo r banking c re d it.
The banks
themselves arc best able to impress the importance of this p o licy upon
the p u b lic.
For the further info m at ion o f the Senate the board quotes from the
report o f the Foderai advisory Council made to it on Hay 18th, signal by
James 3« Forgan, President.
"The Council has given consideration to the natters included
in your communicat ion of April 17th and bogs to reply thereto
in the follow ing manner, fo l io -' ing the order set out by you.
(a)
i,Causes of continued
expansion o f credits and o f Federal
note issues."
There are many contributing causes o f which the follow in g may
be regarded as paramount.
x,i936
-b —
i
.
q recognise, of course,
that the first cense is
the G-reat Bar*
Groat ^extravagance, national, municipal and individual.
Inefficiency and indifference of labor resulting in
lessening production*
A shortage of transxoortation facilities, thus preventing tne normal movement of comme& iti es *
5» ine viciou s c ir c l e o f increasin/ > VJPH>F
■‘b es and prices*
(b)
#How can the reserve position of the Federal Reserve Bailcs
¿J-7a f- ia3-by strengthened before the seasonal demand sets in next
without undue disturbance of the processes of production and
distribution?*
Udon mcTnbor
through tin- Federal Reserve Baades tin
o*. ,, ^ °
borrowers fchd necessity of the curtailment of
AAA.
crodits, and especially for non-ossontial uses, as well as
.continuing to discourage loans for capital and speculative our noses;
HfeQbeegcuç C:Xcssivc G r o w i n g s through the application o f “ higher
. Ci
cannot be tJeen at this time leading to a more
ormal proportion between the volume of cred its and the vc-lume o f
goods, vnen can they be talc on?*
In our opinion steps should bo tolcon now, as outlined in an aver
trie la st question*
i s -.th0 o ffo o t v * o a « » general s ita c tio n of the increased
i.r-.asury borrowings and x*at should be the p o lic y o f the Fedor.'1 ^io! R I B Ba? ; S in, 0Stcl,lislllB« ratos < * discount on » p e r scoured by
c e r t ific a t e s o f indebtedness?*
r f f o r t tr L ° ^ l0H3 thR thc 1 w r w ia ®» o f e»c
t o g tap some
VhnoB,?*
S°ncral credit situation as thoso o f other b o r r o w s ,
t f Council would suggest thc wisdom o f Congressional r e l i e f from
d ° R rmni nt ftoan0“ S by a -p o licy o f r ig id oconony; the
me d i a n *
* f ° r thC sata5 o f a morc
d istribu tion
° Rf T
L i - i t t r° T f ®
'royi-m a the enactment
y s t o n , , thv budget to include provision for thc gradual payment o f the
short time obligations of the Treasury.
nose -mild o f necessity
3^ i ^ L Î f B ^ b F ? ^ r ia t 1i0aSo' d ^ :il as thc
sold ier sl'boaas.
in view oí tac large volume o f Treasury c e r t ific a te s o f indebtedness
earn ed by member banlcs at thc instance o f the Treasury Department, we
believe that rates established by thc Federal Reserve Banks on paper
n0t b°
^
* • rates"" bo me
9-
X-1936
The Board feels assured that the hanks of the country now realize
the necessity of more conservatism in extending credits end of a reason
able reduction in the volume of credits now outstanding.
The Board
will not hesitate* so far as it m a y b e necessary, to bring to bear all
its statutory powers in regulating the volume of credit* but wishes to
point out that the more vital problems relating to the movement of the
1920 crop are physical rather than financial.
This was the unanimous view of those present at the conference
on the 18th instant, at which the following resolution was adcpted:
"The whole country is suffering from inflation of
prices with the consequent inflation of credit. From
reports made.by the members of this conference, repre
senting every section of the country, it is obvious that
great sums are tied up in products which if marketed would
relieve necessity, tend to reduce the price level and
relieve the strain on our credit system.
"This congestion of freight is found in practically
all of the large railroad centers and shipping ports.
It
arises chiefly from inadequate transportation facilities
available at this time and is seriously crippling business.
We are informed that the per ton mile of freight increased
in three years - 1916 , 1917 > and 1918 - 1+7$» while the
freight cars in service during the same period increased
"A striking necessity exists which can only be relieved
through the upbuilding of the credit of the railroads. This
must come through adequate and prompt increase in freight
rates. Any delay means the paying of greater cost directly
and indirectly and places a burden on the credit system which
in the approaching time for seasonal expansion may cause ab
normal strain. Even under the load of war inflation, high
price level, and extravagances the bank reserves would probably
be sufficient if quick transportation could be assured during
the time of the greatest strain.
"Therefore Be It Resolved? That this conference urge as
the most important remedies that the Interstate Commerce Com
mission and the United States Shipping Board give increased
■
10
19 36
'
rates and adequate facilities such immediate effect as may
he \/arranted Linder their authority and that a committee o f
five, representing the various sections of the country, he
a pointed hy the Chairman to present this resolution to the Interstate Commerce Commission and the United States Shipping
hoard v/ith such verbal presentation as may seem appropriate
to the committee.i!
liiicli v/ill depend upon the restoration of the normal efficiency
of railroad and steamship linos.
If adequate transportation facilities
can he provided the Board sees no occasion for apprehension in connection
with the movement of crops nor; being g r o m *
Respectfully,
Governor.
The 'President of the Senate
May 26, 1920.
Before Bond Club, New York.
MR. HOUSTON,
Mr. Chairman and Gentleman:
I am grateful grateful to you for your very cordial welcome.
regret that I am not better prepared to speak to you.
I
As a matter
of fact I am violating one of my most fundamental principles of
action— not to attempt to speak to a body of men without prepar
ation.
I have had no opportunity to prepare anything for you.
plight is even worse than that.
My
I am compelled to dismiss from my
mind the things I had been turning over in it since my departure from
Washington.
Since I came into this room I have discovered that the
object of the gathering is different from what I had been led to
believe.
I must therefore not only attempt to speak without prepara
tion but in the midst of the process of readjusting the direction of
my thoughts.
I am aware that this is very dangerous— dangerous for
you as well as for me.
A very distinguished friend of mine many years
ago issued a warning against the dangers of unpremeditated speech,
a warning which I have always taken to heart.
Still, I am going to
proceed and shall probably victimize you as well as myself by thinking
aloud for a short time.
By the calendar it is approximately six years sine I met
in this city a group of gentlemen whose interests were substantially
similar to yours.
I see near me some gentlemen who were at the hear
ings of the Federal Reserve Organization Committee of which I haphas
pened to be a member. Judging by what/ihappened it seems more
like six generations.
Much water has gone over the dam since then.
The greatest war in the history of mankind has been fought; and, although
-
2-
we were thenn on the verge of it*, none of us had the faintest notion that
such an explosion was about to occur.
Who of you imagined that very
soon the whole world would be in an uproar, that forth millions of men
would be engaged in the deadly work of destruction and especially that
this nation would become involved?
Who of you would have conceived that
in a relatively short time this nation would resort to the draft, would
register more than ten millions of men, and would have more than two
millions of them in France?
But all this happened and a great victory for
civilization was won, although apparently eighty-three committees
of Congress have not yet succeeded in discovering the fact.
At the time of our appearance here there were only a few small clouds
on the horizon.
Domestically we were engaged in working out a great
program of useful and constructive legislation.
The nation’s finances
were in normal condition and its expenses, then regarded as huge, were
by present standards inconsiderable.
It is true, as you will recall,
that there was a certain amount of business depression, a certain sort
of industrial chill, which in spite of the fact that it was world-wide,
was attributed by many here to the tinkering of the tariff; but the
real explanation I now think, is to be found in the activities of the
Central Empires of Europe to finance the war for which they were then
planning and particularly in their successful efforts greatly yo increase
their ¿olf holdings, drawing it from many quarters of the world and
hoarding it by¿hundreds of millions.
These operations attracted little
attention at the time and it was not until the strom burst that their
sinister significance was seen.
This part of the world at least had a
-3-
certain feeling of security.
Men everywhere seemed confident that there
would and could "be no great war.
It was a common assertion that business
men and bankers would not permit it, that the cost could not be borne,
even at a time when nobody dreamed what the actual scale of warfare and
the actual cost would be.
How greatlt were the prophets confounded and
proven once more to be fai sei
When the forces of Germany moved and first Belgium, then France
and Great Britain were drawn in, men everywhere were dazed and held their
breath.
The effects on this nation were immediate and striking.
nation's normal life was altered and disrupted in a moment.
The
The South
was threatened with a financial collapse because of the shutting off of
the market for her principal crop, the greater part of which is normally
exported.
The Government's receipts from customs duties greatly declined;
and the question immediately arose how the half billio# of indebtedness
of business men and bankers to Great Britain, maturing in January, 1915,
could be discharged.
Economically and politically we were in the war
from the moment of the first movement of the German troops.
Ww were in
it years before we entered it formally in military fashion and we sh&il
be in it economically and politically for many years after our last
soldier is withdrawn from Europe.
How idèe it is for men to insist that 'this nation shall live in
isolation!
It can not live apart from the world.
entangled with it.
It is hopelessly
Nothing of great importance either of an economic,
financial or military nature, can happen again anywhere in the world
-4without producing serious disturbances here.
Improvements in transporta
tion and communication have drawn the parts of the world together and
made it relatively small.
Reflect that it takes less time to go from Mount;
New York to Liverpool than it took Washington to go from Mount Vernor
to his national capital and less time to speak to Paris than it took
Washington to speak to his rector at Alexandria.
The problem confornting
us is not how to avoid entanglements,--that is impossible; but how to
control entanglements so that peace may prevail and war with its horrors
be obviated,--so that militarism and what is of equal importance, the
militarist, may be abated.
(Quickly, relatively speaking, this nation became involved in the
war in military fashion.
Almost immediately thereafter, almost before
any of us realized What was happening, some very momentous things were
done.
In particular, the draft law was enacted, more than nine millions
of men were registered, and then in one short session of Congress there
were authorized expenditures of more then twenty-one billions of dollars.
These things men from abroad couldgrasp no more easily than many of us
here.
I remember that in the spring of 1917, when Mr. Balfour was in
Washington, I happened to be sitting near him at dinner.
Suddenly, he
turned to me and said: "Am I dreaming, or is it true that you have
passed a draft act, registered over nine millions of men and authorized
these gignatic expenditures?"
it is true."
I replied: "Unless I too am dreaming
He then said: "I must of course accept what you say, but
I don’t believe it."
The war proceeded and it was fought to a victorious conclusion.
-5We emerged from it having expended more than thirty-eight billions of
dollars, about a third of this amount having been raised by taxation
and the remainder by loans.
Today we have an outstanding indebtedness
of approximately twenty-five billions of dollars, including the foreign
loans, and a scheme of taxation who&e annual receipts have been six
times as great as those of the pre-war period.
These financial opera
tions were on a scale undreamed of before the European war broke out,
and the burden was one which no one before the war would have imagined
this nation could stand without financial disorder and probably without
suspension of specie paymentsl andyet we have gone forward in orderly
fashion and are now in a position where we can continue to proceed
without grave difficulties if the people possess the requisite selfcontrol and wisdom.
Of course, we have grave financial and fiscal
problems confronting us.
It is almost literally true that nearly
every nation in the world has its eyes fixed on the banks and the Treas
ury of the United States.
It is alsontrue, unfortunately, that very many
groups of people in the United States, taught in no small measure to do
so during the war, are looking to Washington for financial salvation
which ought to come in the main through individual, group ,and community
effort, and through the devotion of thought and energy ofi the part of
every individual to hard work and to thrift.
There is no situation
which may confront the people of this nation which they can not meet
if they will show the requisite steadiness, common sense and recognition
of tne part which each individual and each community must play.
-
6-
No one will doubt that it is of the first importance, notwithstanding
the immense industrial strength of this nation, that we carefully hus
band our resources if we are to meet not only pressing domestic needs
but be prepared also to do what we should through practicable business
measures to aid Europe to get on her feet once more and to make her due
economic contribution to the world.
A great deal is being thought and said about the increasing diffi
culty of securing money or credit.
I assume you agree that there has been
very considerable credit expansion and that there is inflation in this coun
try as well as Europe, although in smaller measure here.
I shall not
consume your time discussing in detail the causes for credit expansion
or inflation.
It is a fact.
The moving cause was the war itself,_the
sudden call for commodities on an enormous scale, the bidding for raw
materials and for labor at any price, the abstraction of great numbers
of men from industry, the necessity for resort to borrowing to finance
the industrial operations and the consequent increase in prices.
Unfortunately, the credit expansion did not cease with the war.
It has persisted not only in many nations in Europe but also here.
Accordingly to the best estimate I have seen, loans by all the banks of
the nation have increased since July, 1919, about nine billions of dol
lars, and since the beginning of this year by three and one-half or
four billions of dollars.
More recently there have been signs not only
of a check on this movement but of a return to a lower level, that is,
of a deflation.
I assume that every intelligent man wishes to see a
return as quickly as possible not to the pre-war condition, which I imagine
-7we s h a ll n e v e r s e e , hut tow ard s th a t c o n d it io n ,
s t a b le on e.
It
a t any r a t e tow ard s a
i s u t t e r l y out o f th e q u e s tio n th a t f u r t h e r c r e d i t
expansion?' and i n f l a t i o n
shou ld he p e r m it t e d , and can he p e r m it t e d ,
w ith o u t g r a v e d a n g e r, and i t
seems heyond d is p u t e th a t e v e r y
helpful
agen cy shou ld work s t e a d i l y f o r p ru den t d e f l a t i o n .
The accomplishments of this task, like everything of the kind,
will have as its incidents pains and penalties.
I think the nation
might as well square itself to this fact and proceed accordingly.
accomplishments of the purpose need not alarm anybody.
The
It does call
for calm, intelligent and thoughtful effort, especially for discriminat
ing effort, and particularly for the cooperation not only of every hanker
hut alsoiof every business man with the Federal Reserve Bank, the
Federal Reserve Board and the Treasury.
I say that intelligent effort and discriminating effort must he
put forth and that cooperation must obtain.
We must see to it that the
essential activities of the nation go forward and that those promoting
them;have th^irequisite credit.
a difficult task.
This implies discrimination.
It is
It must obtain not only in respect to domestic
enterprises hut also in respect to those for the relief of Europe.
This nation, through its business men, will desire to do what can
prudently he done to assist Europe to get on its feet, hut those who
wish to assist Europe have a right to expect that she take all possible
steps to put her house in order and that her people practice the same
things which we demand that our people practice, and that the nations
there practice, so far as possible, wh&h this nation is practicing.
-
8-
Some nations in Europe are not pursuing wise financial and fiscal courses,
Some did not do so during the war.
Some of them relied entirely too much
on borrowing, on currency issues with consequent inflation, and too lit
tle taxation.
Some of them are still doing this, while in a few con-
spicious instances action along right lines is being taken.
in Europe are still fighting.
Some nations
Some are not taking the requisite steps
to decrease expenditure and to balance their budgets.
Clearly, it would
be imprudent for the business men of this nation to throw good money
after bad or into a bottomless pit.
I think they will have a right to
require of the people of Europe who ask assistance that they present
as far as possible a sound business scheme for their consideration.
It
will then be incumbent upon those here from whom credit is sought that
theyexamine the proposals carefully and take pains to see that the uses
to which the credit is put are wise from the point of view of European
reconstruction.
The resources of this nation are great but they are not
unlimited and of necessity the business men of the nation must consider
in what directions lie the wisest use of the means at their disposal,
whether it be a foreign or a domestic direetidn.
From every section of the nation itself come demands for money and
credit.
Many are based upon pleas of paramount necessity.
Many are
coupled with representations that nenessential enterprises are securing
credit while essential ones sugger.
There are sufficient means in this
nation to take care of the urgent needs if the practice of discrimination
is exercises and if the people of the nation who can save will save and
make their savings available either for the necessary business enter-
-Siprises or for investment in sound securities, especially Government se
curities.
Clearly, the people of this nation today are not working as
they should or practicing the requisite thrift and saving.
An urgent duty
rests upon them tha&o so— a duty scarcely less urgent than that which com
pelled them during the war.
The problem is still one for the whole people.
It is not solely the problem of the Treasury, or of the Federal Eeserve
System, of the individual banks, or of the three combined.
solve the problem of themselves.
tion of all the people.
They can not
They must have the intelligent coopera
In order to get some indication of the extent to
which it might be possible for the people as a whole throughout the na
tion to assist by saving, by refraining in part at least from extravagant
expenditures on nonessentials, I asked the Treasury experts to canvass
the tax returns and any other sources of information and to give me an approcimate estimate of what the people would expend in twelve months on
what they would class as luxuries.
They reported that this expenditure
would exceed $22,000,000,000} You releaze that this is an amount nearly
equal to the total of our present debt, including what foreign nations owe
us.
I had some misgivings about this estimate, notwithstanding my great
confidence in the Treasury experts.
mate was arrived at.
I did not at first know how the esti
When I found that in large part it was based on the
tax rates and the tax receipts, and examined a few of the items, I con
cluded that perhaps it was not an overestimate.
Let me give you the items:
Chewing gum........................................... $
50,000,000
Candy
............................................
1,000,000,000
Soft d r i n k s .....................................
350,000,000
Ice c r e a m . .....................................
250,000,000
Confections
...............................
.
350,000,000
Cereal beverages
..........................
.
230,000,000
Cigaretts
.
.
.
.
.
.
.
.
800,000,000
Cigars
.
.
.
.
.
.
.
510,000,000
-
10-
Cigar and Cigarette holders
Tobacco and snuff
.
.
.
.
.
Toilet soaps, etc.
.
.
.
.
.
Jewelry, watches, etc.
.
.
.
.
Perfumery and cosmetics
.
.
.
.
Admissions to places of amusement and dues
Pianos, organs, victrolas, etc.
Pur articles
.
.
.
.
.
.
Carpets, rugs, luxurious wearing apparel, etc.
Hunting garments, liveries, firearms & shells
Art works
.
.
.
.
.
.
.
Yachts
-r .
.
. .
Portable electric fans .
Sporting goods
.
. .
Luxurious services
.
.
.
.
Luxuries in hotels and resturants
Luxurious articles of food, etc.
Other luxuries, including joy riding,
pleasure resorts, races, etc.
Automobiles and parts
.
.
.
.
$
1 ,000,000
800,000,000
400.000.
000
500.000.
000
250.000.
000
800.000.
000
250.000.
000
300.000.
000
1.500.000. 000
60,000,000
25.000.
000
,
,
1 000,000
8 000,000
25.000.
000
3.000.
000.000
75.000.
000
5.000.
000.000
3.000.
.
000.000
.
2 000 000.000
Think of it, an expenditure of $50,000,000 for chewing gum!
A
nation that can chew $50,000,000 of chewing gun ought to be able to
do almost anything.
Think of it, $1,000,000,000 for candy, $800,000,000
for cigaretts, $800,000,000 for tobacco and snuff, $800,000,000 for
admissions to places of amusement, $750,000,000rfor perfumery and cos
metics,— any one of these amounts falling not far short of our pre-war
Pederal budget excluding the postal expenditure and receipts!
Opinion will differ as to whether many of these articles should be
classed as luxuries or nonessentials and expenditure on them as unwise
or extravagant.
Expenditure in reasonable measure for many of the arti
cles would hot be regarded as luxurious or wasteful but expenditure in
such volume of any of them and the aggregate expenditure for such things
and services would, I imagine, be regarded as unreasonable and extravagant,
especially in view of present domestic and world conditions.
Of course
we may not expect people to give up all expenditure on what is classed as
luxuries, or even the greater part of it, but of they were to save ah
appreciable fraction, even 10 per cent, and see that it was directed
along more essential lines, or invested for instance inrfiovernment
securities, Liberty bonds and Victory notes, or in part in prudent
charities, what a tremendous relief it would be.
The saving and investing of a part of such amount in Government
bonds would immediately solve a somewhat difficult and serious problem.
Incidentally it wouldgreatly benefit those who did the saving and invest
ing.
Perhaps not again in this generation will the average man have pre
sented to him so good an investment with the best security in the world,
Those who know all the facts I imagine are not doing a great deal of worry
ing over the present prices of Government securities.
situation.
They understand the
They 'understand that Government securities, like many other,
follow the market.
It is nothing new in the history of nations to have the price of
government securities change from time to time.
English consols dropped,
between 1903 and 1913, from 90j per cent to 73 and a fraction, and still
we heard no apprehension expressed that Great Britain was going to the
dogs.
I shall not enter upon a lengthy discussion as to whether the Gov
ernment made a mistake in offering its bonds at the rates of interest
they bear, first 3^ per cent, then at increased rates until finally the
rate of 4^ per cent was reached on Victory notes.
I not infrequently
read things that sound rather strange to rde, such as that the bonds were
issued at an artificial rate.
an artificial rate?
What do gentlemen mean when the speak of
Is there such a thing as an artificial rate, as con
trasted with a natural rate? What dod the Treasury have to guide it?
-
12-
What was the rate before the war?
Have men forgotten that on the average
Government bonds had not borne a rate above 4 per cent since 1890, a rate
above 3 per cent since 1901, or a rate averaging above 2 1/3 per cent since
1908?
When the first issue of bonds was under consideration, of course, the
best advice was sought wherever it could be found.
There were many things
to consider and some of them the gentlemen who are now asserting that the
rate was artificial were among the very ones who advised against different
rates.
Some of them at the outset protested against higher rates, particu
larly because of the effect they would have on outstanding securities.
Or
do the gentlemen contend that the rate was artificial because the people of
the country were patriotic and the bonds were absorbed thefefore at a rate
at which that would
not have been taken if you had not been patriotic?
Would they claim that you ought not to have been patriotic, or that the
Government ought not to have assumed that you were patriotic?
Ought the
Government to have assumed that you were patriotic and would demand an ex
ceptionally high price for your contribution?
I
Has not the Government a
right to assume that its people are patriotic and consider this as one of
the factors which should influence it in fixing the rate of interest on its
securities?
Is not this what some of these gentlemen have in mind when
they represent that the Government ought to refund the bonds and by some
kind of manipulation keep the bonds daily at par so that those who wish
to sell them may temporarily suffer no loss?
Of course they know, as
everyone should know, that the Government will keep its contract, that
it will pay its obligations according to contract at par with interest
in the meantime.
I doubt whether the people of the United States will
wish to be represented as being too patriotic in war time or as being
-13without patriotism and intelligence in peace times.
Do those who
demand the refunding of bonds at a higher rate not know that this
would involve the peopie of the nation in a vast and annually increased
expenditure for interest charges, leading to the assessment of new
taxes or, what is worse, to the floating of new bond issues?
Are
they willing to contend that they made a mistake during the war in
being patriotic and offering the use of their capital for the winning
of the war?
Do they now wish to capitalize their patriotism, to recall
tt so to speak, and to demand a bonus for the capital that fought?
I certainly, who have been objecting not only for financial reasons
but also in principle to a bonue for men who offered their lives, will
not be one bf those who are in the uneasy position of advocating a
bonus for capital and capitalists.
Suggestions like these get us nowhere in dealimg with this
important problem.
matter.
They do not involve sound ways of dealing with the
I am unwilling to entertain the nation that those who lent
their mopey at a good rate of interest and who will receive it back
from the Government according to contract wish a bonus for the use of
their capital any more than I am willing to concede that the great
mass of the fine men who offered their lived for their country do want
a bonus or will want a bonus when they realize what it means to the
people.
If I thought the great masses of our people had such ideals
and standards I should be very pessimistic about the future of the
Republic.
There is only one fundamentally sound way of dealing with
this problem, and that is for the people to hold on to their bonds
and for others to save and to invest in them as they can secure them.
I may add that while history os full of instances of governments refunging bonds at a lower rate of interest I recall no case in which
it has refunded its bonds at a higher rate of interest after the trouble
had passed.
There is this trouble about proposals of this bonus sort and all
other attempts to secure money out of the Federal Treasury.
minority will be very noisy about it.
A small
They will omit nothing to
influence Congress and to convince Congress that the nation wants what
they desire.
The great mass of people will say very little and
naturally the Congressmen will imagine that it is unaminous.
Washington
is full of groups of people who presume to represent all the people of
the nation but who as a matter of fact represent very little that is
worth while.
I frequently hear it said that the Executive Departments
are responsible for increased Government expenditures and that they
are constantly in the game of seeking more money for this or that
purpose.
ment.
Of course there are enthusiasts in every sort of establish-
There are enthusiasts in Government Departments.
They see oppor
tunities to render service to the nation and they desire funds with which
to conduct the services.
Sometimes they get them and sometimes they do
not, and sometimes it is uneconomical for Congress not to grant their
requests; but I think I may safely say from more than seven years
experience in Washington that the average head of a Department spends
many times as much time in resisting demands for appropriations froip.
-15groups of people as he spends in trying to get money to run the Department.
I wish I could get this thought firmly lodged in the minds of the American
people, that they are responsible in the main for increased expenditures.
It is because they, or particular groups of theqi, demand things that the
money is provided.
Sometimes the people as a whole do not desire the
appropriation but avery noisy fraction of them in busy trying to ggfctit.
Like those seeking this bonus, they clamor for appropriations while the
ipass sit quitely and say nothing.
The mass of the people of the nation
in the last analysis are responsible for increased appropriations, as
they are for the expansion of the activities of the Departments in
Washington.
When they want things, instead of looking around to see
if they can not provide them for themselves
qb
to see if their community
of their city of their State cannot provide them, they run to Washington,
because they have learned that it is easier to get things from people
who are not near and do not realize the whole situation and can not
estimate the character and strength of those who are urging them.
In the main, our course of action is clear.
gations left over from the war that we must pay.
run.
Its current bills must be paid.
We have large obli
The, Government must
It is of the first importance
that Congress be economical, that it appropriate the minimum amount
needed to meet existing obligations and to run the Government on a
thoroughly economic basis.
It is highly important that at the earliest
moment the nation have a thorough-going genuine budget system— one which
will not only control the Executive, but, what is of equal importance,
-
the Congress itself.
16-
Not only should the Executive by required to
prppare a carefully considered budget and there be an independent audit
and check, but the Congress should reform its system of dealing with
appropriations.
It should have the budget submitted considered by a
single budget committee, or at any rate iSne for each House, and change
its rules so that after the committee or committees report and present
a budget for action no change shall be made in it except byran unusual
majority, say a majority of two-thirds or three-fourths.
It is equally
important that a thorough-going business-like budgetary arrangement be
adopted in every State of the Union and by municipalities and counties,
and that every Government jurisdiction, as well as every individual,
shall practice economy.
When these things are done, when this old injunction that everybody
work and save finds a fuller lodgment and fuller practice, when the
freight jam under which the nation is now staggering is broken, when the
railroads are permitted to make and do make proper provision for increas
ing their facilities, I shall »have no apprehension as to the financial
condition of this nation.
We must, as I have said, make up our minds to endure some present
pains.
We can endure them and go forward in orderly fashion if we have
the requisite self-control and intelligence.
that we shall are encouraging.
I believe that the signs
®f Congress practices the requisite
economies we can continue to meet the left-over war obligations and carry
on the Government for the immediate future, perhaps without resort to
additional taxation.
I am aware of the fact that our expenditures will
remain on a high level for a number of years.
Usually it has been three
-17or four years after great upheavals before national budgets have settled
down to come thing like their former status.
It would be singular if
ours settled down in a shorter time after such a war as that through which
we have passed.
We not only have heavy pressing bills to meet but we
have a floating indebtedness of nearly $3 ,0 0 0 ,000,000 to pay off, and
now the Victory Loan maturing in a little more than two years, is coming
to the point where we shall by justified in regarding it as in the nature
of a floating indebtedness.
w
There are several things we might do in regard to this floating debt
and to the Victory Loan, but there is in my judgment only one sound
course to pursue.
The floating debt now represented by short-time cer
tificates, in considerable volume tax certificates, we should pay off.
We should not fund them, and we should place ourselves in a position
where we can also extinguish a very considerable part of the Victory
notes.
These things we can do if tre practice economy, if we save, and
if we keep the aggregate receipts from taxation at least up to the nresent
I
point and if necessary increase them.
ruto
long^be the least expensive way.
very large debt.
To follow this course will in the
We do not want to perpetuate our
We must prevent this by paying off the floeating indebt
edness and by the orderly application of the sinking fund to the bonded
indebtedness.
Let us avoid the mistake go frequently made in the past,
of beginning to tamper with the sinking fund.
History proves that when a
nation once begins tampering with its sinking fund it is likely to recog
nize its mistake and to retrace its steps as a very late date.
\
-18Of course you will all agree with ipe that taxes should not be kept
at a high point unless it is necessary, and most of you will agree that
our present tax system should be modified and that some of the taxes
should be abolished.
few
I know very students of taxation who are en
thusiastic admirers of the excess profits tax.
In my judgment, while
it has some advantages, it has many disadvantages.
small degree to extravagance.
businesses.
It conduces in no
It works unjustly and inequitably as among
It depends in too great measure on the accident of organi
zation; but it can no be abolished and have nothing substituted unless
businesses to which it now attached are placed in a position of advantage
over parterships, sole proprietors, and some forms of trusts.
There
are administrative changes also which it is urgently imperative should
be made.
These administrative changes I have been urging for some time,
but up to the present moment without success.
I have expecially urged
that the Treasury of the United States should be given power to make a
final settlement with taxpayers.
It is one of the fundamental requisites
of a good tax system that the taxpayer know his liability, that bthere be
certainity.
Some of you know that your liabilities are uncertain; some of
you have thought that you paid your 1918 or 1917 taxes in full and had
little reminders from time to time that you were mistaken.
I have been
told that one corporation was informed that it owed $ 1 0 ,0 0 0 ,0 00 , that
with great difficulty it arranged to make payment, that after straining
itself nearly to the limit it was then informed that it owed a half million
more.
I think you will agree with me that ot would be better for the
Treasury occasionally to lose money than to have this outstanding uncer
tainty and menace to industry and possible ruin to many businesses.
Difficult as are our present problems, as much trouble as you here are
those throughout the nation are having, by working in the directions I have
indicated, we can come through this trying period of the next nine or twelve
months, and this nation not only will move forward in orderly fashion but
Europe as well ,will move upward.
and moving upward.
I am confident that Europe is slowly moving
For more than a year I have felt and said, that after
another crop year with reasonably favorable harvests there would be no little
improvement for that reason alone in Europe and throughout the world.
The
indications now are that many of the European nations are going to have reason
ably good crops and be very much better circumstanced in respect to food
than they have been since the beginning of the European war.
I think
with all the grounds for discouragement, also, the people of Europe slowly
and painfully will work upward industrially and within a reasonable time
will begin to get on their feet.
Of course none of you are pessimistic, not only as to the recovery
of this nation but also as to the ultimate and not distant rapid progress
of this nation.
as you know.
It takes a very alert man to keep up with this nation,
How many of you realize that in twenty years, that is, since
1900, we gained 30,000,000 people; that our banking resources even between
1900 and 1915, when conditions were still normal, rose from 10j to 27
billions of dollars; and that the wealth of the nation rose from 89 bil
lion to perhaos 200 billions of dollars?
What the figures are today
I do not undertake to say, because we are on an abnormal value basis,
but the bank resources are reported to be 48 billions of dollars, and
I am told that we have gained in excess of 8 ,000,000 people since the
European warvbroke out.
-
20-
Industry is readjusting itself, is struggling to recover itself,
add, in a reasonably short time, in two or three years perhaps, will move
forward as before the war.
I 'em confident that that great basic industry with which I have
had to deal so recently, and about which so many pessimistic statements
are made from time to time, namely, agriculture, will continue to move
forward as it ha® moved forward for the last two or three generations,
There is more nonsense talked about agriculture and rural life by urban
u
people and by some real people than about almost any other phase of our
national economy, and I realize that I am making a pretty strong state
ment when I make this comparison.
statements
I had been troubled so much with false
in this field that I took some trouble a short time ago to
get the facts.
I found these things to be true.
I found that in the
period since 1870 the yields of leading cereals increased 16 .per cent;
that the production per capita, in spite of the enormous growth in popu
lation, had increased; and that production p e r farm worker was steadily
&
k
upward.
Fifty years ago the production of the six. leading cereals per
capita was 28 bushels, while in 1914-1915 it was fifty two bushels; that of
cotton increased from 36^ pounds to 60 pounds; and milk from 84 gallons
in 1889 to 96 in 1919.
There was another very significane advance, ¿mri
that is in the variety of our production and in the rise of minor crops
to large proportions.
This is evidenced by the gain in the canning
industry from 20,000,000 cases in 1889 to 52,000,000 in 1914, and of dried
fruits from 85,000,000 pounds to 521,000,000 pounds.
Hot only did the
production per farm worker increase from 266 bushels in the decase of
to 70’s to 418 in the five years 1915-1919, but the number of farm
workers increased from 5.9 million in 1870 to 12.7 million in 1910.
-
21-
So that, taking the three principal tests, it is clear that the agricul
ture! of the nation is progressing; and, in my judgment, it will continue
to progress in fuller measure because more things are being done by this
nation to aid the farmers than by any other three or four nations in the
world combined. When you bear these things in mind and realize that we
about
still have onl^ 40 per cent of our arable land under cultivation,
and that only about 15 per cent of that is yielding what it should, you
can realize the possibilities, you can see the distance the nation ahs
to go in developing its foundations, to bring 60 per cent of it under
cultivation and 85 per cent of its land up to the level of the best
yeiids.
I have said more than enough to convey my thought to you.
Each
of us has his part to play to carry the nation through this difficult
period.
What we need now particularly is a little more devotion of
thought by each individual as to what he can do and not as to what he
can avoid doing or how he can call upon somebody else to assist him and
do his task for him.
We must prevent further credit expansion.
must bring about a prudent deflation.
We
We must bear the necessary pay
ments and penalties involved in the progress.
We must work and save,
We must practice discrimination in projecting our enterprises and in
extending credit either for domestic or foreign purposes.
Economy must
be practiced by every Government jurisdiction and every individual.
spirit of thrift and saving must prevail and presist.
must be taught wisely to invest.
about the future of the nation.
A
Those who .save
These things done, I have no douibtt
I have no doubt about the present
-
22-
material greatness of the nation, and in spite of some evidences to the
contrary, as to the present spiritual greatness of the nation.
It does
look at times as if there had been a demobilization of patriotism, as
Mr. George said there had been in England, but I trust that it is only
in appearance.
I believe the people are still patriotic and that they
will manifest it.
You will agree with me that if the liberties of the
nation were worth fighting for, the opportunity that victory has given
us to pursue the paths of j;eace and to lead the kind of national life
we desire to lead, should call forth our best impulses and efforts to
maintain and practice the same standards of conduct and thinking that
made us victorious in the war.
I wish it were possible for every
individual in the nation to be less partisan, for the people to demand
that their leaders be less partisan, that their leaders, whether of the
press or in public station, reveal a greater regard for the facts and
ability and desire to get the facts, to interpret them impartially and
then show the courage to follow their.conculsions and to apply them no
matter where they lead.
I believe in parties.
I believe if such a
policy were pursued there would still be ample room for differences of
opinion and for parties.
I know that the application of such a standard
would eliminate many leaders from the field, but I think the nation
would suffer no great detailment from their retirement.
Democracy in
this country, with its growing complexity, its increase in population,
and its ultricate relations, will have sufficiently hard sledding if
such a standard is applied.
Democracy .without it, democracy by misrep
resentation, may result in failure.
-23The Chairman:
I think Secretary Houston has told us some things
that we perhaps appreciated to a certain extent before, told us a great
many things that we perhaps did not know about; and the way to appre
ciate and to show our appreciation for his visit is to practice some of
the things that he has convinced me we should practice.
\
n
T H E SECR ETAR Y OF T H E TR EASU RY
WASHINGTON
June 10, 1920.
Treasury certificates to the amount of nearly $1,000,000,000 mature
on or before July 15.
The greater part of these are provided for by the
income and profits tax installment payable in June.
To refund the balance
and provide for current requirements up to July 15tft, according to the
best estimates now available, it seems desirable at tfyis time to issue
Treasury certificates to the amount of $400,000,000 or thereabouts; and
accordingly the Treasury is offering certificates in two series, both dated
June 15th, Series A 1921, bearing interest at 5 3-4$ and maturing January
3, 1921, and Series T J-1921, bearing interest at 6$ and maturing June 15,
1921, particulars concerning which will be furnished by the Federal Reserve
Banks.
On the basis of Treasury daily statements, and excluding transactions
in the principal of the public debt, though the first quarter, ended
September 30, 1919, of the present fiscal year ending June 30, 1920, was
marked by a deficit of about $770,000,000, in the second quarter, ended
December 31, 1919; there was a surplus of over $150,000,000, in the third
quarter, ended March 31, 1920, there was a surplus of nearly $400,000,000,
and the fourth quarter, ending June 30th next, should also show a surplus.
The completed fiscal year’s operations should show little, if any,
deficit--the Government having about balanced its budget, current receipts
against current disbursements, for the first full fiscal year after
fighting stopped.
The total gross debt of the United States, which, on June 30, 1919, on
the basis of Treasury daily statements, amounted to nearly $25,500,000,000
and on August 31, 1919, to nearly $26,600,000,000, had been reduced on May
31, 1920, to less than $25,000,000,000.
The floating debt outstanding
(loan and tax certificates), which on June 30, 1919, amounted to over
$3,250,000,000, and on August 31, 1919, to nearly $4,000,000,000, had been
reduced on May 31, 1920, to less than $2,850,000,000.
The reduced ordinary
2—9996
and public debt disbursements have made possible a very important reduction,
in the amount of the net balance in the general fund, which has been applied
to the reduction of debt.
Both- gross debt and floating debt will be further
greatly reduced by the operations outlined in the first paragraph of this
letter. •
During the coming fiscal year, beginning July 1, 1920, the Treasury
expects, though it is impossible to speak positively, that there will be a
further reduction of both gross debt and floating debt' in t h e ;first two
quarters, and, unless additional burdens should be imposed by future
legislation, that there will be a very important reduction in the last two
quarters.
The-period of upwards of twelve months since the -flotation of the
Victory Liberty Loan has witnessed great expansion of commercial credits,
but steady liquidation of United States Government war securities.
The
Federal Reserve Banks' -combined loans and discounts secured by United States
Government war securities have been reduced by more than $400,000,000,
though they have increased their other loans and investments by about
$1,200,000,000.
All reporting member banks (about 800 member banks in
leading cities which are believed to control about 40^ of the commercial
bank deposits of the country) have reduced their holdings of and loans upon
United States Government war securities by about $2,000,000,000, but have
increased their other loans and investments by about $4,000,000,000.
The Treasury confidently asks the banking institutions of the country
for their continued support and, in particular, to subscribe liberally
for the certificates now offered and use their best efforts to obtain
the widest•possible distribution of them among investors.
Cordially yours,
To
The President
of the Bank or
Trust Company a d d re sse d .
2— §996
71
June 11, 1920.
Gentlemen 1
I have your note of June 7th, referring to a reported
statement from me to the effect that a canvass of the tax returns
for 1919 show that there has been expended in this country at least
$22,000,000,000 for luxuries.
You ask that I advise you as to the
accuracy of the report and the basis for the figures.
My statement on which the report seems to have been based
was that I had asked the Treasury experts to canvass the tax returns
and any other sources of information and give me an approximate esti
mate of what the people would expend in twelve months on what, for
the purpose of taxation, Congress seemed to regard as luxuries, or
what they would class as luxuries.
They handed me the following
estimate of expenditure on the items indicated.
The estimates -under
1 and 2 are based on the tax rates and the tax receipts.
Those under
3 are based on such information as the experts could gather.
1.
ESTIMATED EXPENDITURES FOR CERTAIN ARTICLES UPON WHICH FEDERAL TAXES
____________________________ARE NOW LEVIED.__________________
Chewing gum * ............. \ ........ .......... $ 50,000,000
1,000,000,000
Candy.... ............................ .
Cigarettes,.............. *.. «............ .... 800,000,000
000
Soft drinks, including ice cream & soda,.,,., 350.000.
000
Perfumery and c o s m e t i c s , • 750.000.
800.000.
000
Admissions and dues *
500.000.
000
Jewelry..... ........... .
230.000.
000
Cereal beverages...................
510.000. 000
Cigars........... .................. .
Tobacco and snuff.... ........... .......... .. 800,000,000
25.000.
000
Sporting goods................ .
50.000.
000
Firearms and shells................ ....... .. •
v
Cigar and cigarette h
o
l
d
e
r
s
.
1,000,000
Hunting and shooting garments..*».**#
*
7,000,000
Pur a r t i c l e s * .................... 300,000,000
Yachts.
1,000,000
Carpets, rugs and wearing apparel (on ex~
cesses overstated prices),
.
1,500.000.000
Total of above,......................
.7,674,000,000
2«
Liveries,
m * 4 ft* H *.
3,000,000
Pianos, organs, victrolas, etc...*,* *,,*,**** 250,000,000
Electric fans» portable***«*«i
*
*4 »
8,000,000
Art works«»4 ..«••*«..«**«*»1.*.*«..»».,*,*»
15,000 ,000
Toilet soaps, etc*+ « 4 « * * * * * * , 4 0 0 , 0 0 0 , 0 0 0
Automobiles and parts*..* * . . . , , . * 2,000,000.000
Total*,
,
,
.
*.2,676,000,000
3.
ADDITIONAL ARTICLES*
Ice c
r
e
a
m
.
....
Cakes, confections, etc*,,,.,,,«.,..,....,
Luxurious services,............
Luxuries in hotels and restaurants,*......
Luxurious food, etc,... *.... .
Other luxuries— j oy riding, pleasure re
ports , races, e
t
c
*
.
«»,*,».«,
Total, ....................
250.000.
000
350.000.
000
. 3,000,000,000
,♦ 750,000,000
* 5,000,000,000
, 3,000,000*000
.12,350,000,000
Total estimated expenditures*..»...,$22,700,000,000
Opinion will differ as to whether many of these articles
should be classed as luxuries or nonessentials and expenditure on
them as unwise or extravagant.
Expenditure in reasonable measure
for many of the articles would not be regarded as luxurious or
wasteful, but expenditure in such volume on any of them and the
aggregate expenditure for such things and services would, I imagine
be regarded as unreasonable and extravagant, especially in view of
¿resent domestic and world conditions.
I am aware of the fact
that no one would ask the public to eliminate all such expenditure
or expect the public to make more than a reasonable reduction of
it.
As bearing on the clamor about the shortage of sugar,. I
would call your attention to the expenditure, outside of the house
hold,. that is, on things prepared or sold outside of the household,
in which sugar is a large ingredient, of $1,000,000,000 for candy,
$350,000,000 for soft drinks, $330,000,000 for cereal beverages,
$350,000,000-for ice cream, and-$350,000,000 for cakes, confections,
etc, ,, a total of over $2,000,000,000, .
Very truly yours,....
(Signed) B* F, Houston
EXHIBIT B
TREASURY DEPARTMENT
FOR RELEASE, MORNING PAPERS,
Friday, June 18, 1920.
STATEMENT BY THE DIRECTOR OF THE MINT.
Under the express terms of the Pittman Act, silver purchased by
the Director of the Mint under the Act at the fixed price of $1 per
ounce one thousand fine must he the product both of mines situated
in the United States and of reduction works so located.
As previously
announced, the Director of the Mint las received standing orders from
the Secretary of the Treasury to purchase silver under the Act up to an
aggregate amount of 207,000,000 ounces, delivered at the option of the
Director of the Mint at the Assay Office in New York, or at the Mints
in Philadelphia, Denver, or San Francisco, and is making such purchases
when satisfied by clear and unequivocal proof that the silver is the
product of mines situated in the United States and of reduction works
so located.
Forms for such proof, appropriate for use in case of silver
wholly produced and reduced in the United States, without admixture of
foreign silver, were furnished to said Assay Office and Mints under date
of May lo, 1920.
In order to cover the practical situation presented by the fact
that a large proportion of the domestic production of silver is smelted
and refined in conjunction with foreign silver and comes from the refin
eries as part of a mixed product of domestic and foreign silver, the
Director of the Mint is further prepared to purchase under the Act silver
which forms part of a mixture of foreign silver and domestic silver up
to the proportionate part of such mixed product which represents the
product of mines located within the United States arid of reduction works
so located, upon clear and unequivocal! proof as to the proportionate
mixed product which represents domestic production,
Forms
for such proof, appropriate for use in case of mixed silver, will "be
available at said Assay Office and Mints, and in addition to a general
affidavit from the vendor in each case will include supporting affidavits
fro m
the miner, smelter, and refiner, together with such sworn statements
ana exhibits from their books of account as may be required by the Directc
of the Mint.
The form of general affidavit from the vendor, and of sup
porting affidavit from the miner are appended hereto for the information
of all concerned, full information as to the additional supporting affi
davits and proof will be available at said Assay Office and Mints*
Deliveries of mixed silver under the Act will be accepted upon the
filing
of a satisfactory general affidavit by the vendor, subject to the later
filing of the necessary supporting proof.
It will be noted that as to
mixed silver already produced and refined, it will be necessary to show
that the silver mined in the United States which enters into the mixed
product, was delivered to .reduction works located in the United States
since January 17, 19^0,
It will be noted further that in order to have
assurance that the benefits of the Pittman Act go to American producers,
for whom they were intended, the Director of the Mint will require in
connection with the purchases supporting affidavits from the miners to
the effect that settlement has been made with them on the basis of the
fixed price of $1 per ounce, adjusted to the equivalent price for silver
999 fine and to the cost of delivery refinery to
Affidavits by Vendor, Miner, Smelter and Refiner in
Connection with Sale of unmixud Silver under Pittman Act*
STATE OF
COUNTY OF
)
)
)
ss.
In order to make a sale of silver to the Director of the Mint, in
accordance with the provisions of the pittman Act, approved April 23,
1918, the undersigned hereby represents and certifies, under oath,, that
he is the ______
of
, owner of said silver, that said silver
to the amount of______ fine ounces, delivered to the United States
Mint at_______________ this_______ day of________ , 192___ , for sale to
the Director of the Mint under said Act, was produced in the united'State
at the__________________ ,situated in
__________ j___________ between
(Name of Mine)
(County)
(State)
_________________________and__________________, and was the product of redv
(insert dates)
tion works situated in_______ _____________ , ______________ j that no
(County)
(State)
part of said silver was mined outside of the United States of America
or at any time treated by reduction works or refineries located outside
of the United States; and that payment has been made to the aforesaid
miner for said silver at the rate of not less than $1*00 per ounce,
adjusted to the equivalent price for silver 999 fine and to the cost
of delivery refinery to mint.
(Signature of Vendor or of duly authorized officer
Subscribed to and sworn to before me thls
day —
Notary public.
,192__
I STATE p F
COUNTY OF
)
) ss.
)
The 'undersigned, being duly sworn, deposes and says that he has read
the foregoing affidavit of _____________
ta n d is the _ _ ______________
t 192
, dated
________________
, owner of the
mine described in said affidavitj that the silver described in said
affidavit, in the amount of ________ fine ounces, was produced in the
t situated in
United States at tho said
(Nam© of Mins)
(County)
______
______ between _____ _____________ _
and
(State)
(Insert dates)
and that said silver was paid for at the rate of not less than $1.00 per
ounce, adjusted to the equivalent price for silver 999 fine and to the cost
of delivery refinery to mint.
(Signature of owner of Mine or duly authoriz
ed officer) e.
Subscribed to and sworn to before me this
______
day of
2.92__.
Notary public.
»
STATE OF
COUNTY OF
)
) ss *
)
The undersigned, being duly sworn, deposes and says that he has read
the foregoing
*ne
affidavit of ____________
____________
d a t e d ______ _____ , 192__ , and is
__________________» owner of the reduction works
described in said affidavit! and that the silver described in said affidavit,
in the amount o f _______ fine ounces, was the product of the said reduction
works situated i n _________
, _________________ ___, in the United States, and
(County)
(State)
not the product of any reduction works located outside of the United
States.
(Signature of owner of reduction works or
duly authorized officer.)
Subscribed, t o and sworn to before me t h i s
day of
192
N o ta r y P u b lic *
Note:
Affidavits must be presented in the above form from the vendor,
the mine-owner, the smelter and the refiner.
The Act approved April 23,
1918, requires that the silver to be purchased thereunder shall be
«the product of mines situated in the United states and of reduction
works so located”.
EXTRACT FROM "ANNUAL REPORT OF THE SECRETARY OF THE TREASURY ON THE
STATE OF THE FINANCES FOR THE FISCAL YEAR ENDED JUNE 30, 1920. n
RETIREMENTS OF LIBERTY BONDS AND VICTORY NOTES*
Five per cent "bond purchase fund.
Purchases of Liberty bonds and Victory notes for the bond-purchase
fund were continued during the fiscal year 1920, but coased on June 30,
1920. Section 15 of the second Liberty bond act, as amended by section 6
of the third Liberty bond act and the Victory Liberty loan act, authorized
the Secretary of the Treasury, until the expiration of one year after the
termination of the war, to buy annually bonds and notes issued under authority
of the second Liberty bond act, as amended, including bonds issued upon con
version of bonds issued under the first Liberty bond act or the second Liber
ty bond act, as amended, at such prices and upon such terms and conditions as
he might prescribe, up to 5 per cent of the par amount of bonds or notes of
any series outstanding at the beginning of the bond-purchase fund year» The
Treasury^ purchases under this authorization have been made from time to
time, at average cost, through the Federal reserve bank of New York, and
from the War Finance Corporation. These agencies in turn made purchases in
the open market, when it was deemed necessary to stabilize market prices and
te protect the Government^ credit* These operations undoubtedly sustained
and strengthened the market for Liberty bonds and Victory notes aid so re
dounded to the benefit of all holders of these issues. The securities bought
have been canceled and retired. On April 18, 1920, the following statement
was issued by the Secretary with reference to purchases for the bond-purchase
fund to June 30, 1920, and thereafter for the cumulative sinking funds
The authorization conferred upon the Secretary of the Treasury by
Congress to make purchases of Liberty bonds and Victory notes for the
5 per cent bond-purchase fund expires one year after the termination
of the war. The continuance of a technical state of war beyond the
period contemplated at the time the authority was conferred has pre
sented to the Secretary of the Treasury the practical problem of de
termining what his future course should be with respect to the bondpurchase fund.
Secretary Glass, in his annual report, said, ^Purchases of bonds under authority of section 6 of the act of April 4,
1918 (bond-purchase fund), are not included as an item of estimated
expenditure (for the fiscal year beginning July 1, 1920); this
authority expires one year after the termination of the war, and the
Secretary reserves decision with respect to such purchases after
July 1 , 1920«n Congress created in the Victory Liberty Loan act a
2& per cent sinking fund to commence July 1, 1920« In view of the
fact that on July 1 more than a year will have elapsed since the flo
tation of the last Liberty loan and of the further fact that unless
Government expenditures should be greatly decreased or taxes increas
ed, continued purchases for the bond-purchase fund could only be
financed by the issue of additional certificates of indebtedness,
thus increasing the floating debt while decreasing the funded debt,
my present intention is not to treat the two funds as cumulative,
but to discontinue purchases for the bond-purchase fund on and after
July 1 , 1920, and to make purchases thereafter only for the sinking
fund created under the Victory,Liberty loan act. The approximate
amount of the bend-purchase fund quota for the period ending June
30, 1920, will be taken over from the War Finance Corporation or,
to a limited extent, purchased in the market, and in either case
canceled and retired.
«to -3 4M
Hereafter such purchases as the Treasury may have to make for the
"bond-purchase fund or the sinking fund under the general program above
announced will he occasional and not habitual*
I am confirmed $n the determinations above set forth by the fact
that the natural market in liberty bonds and Victory notes has now
reached such dimensions that the purchases for the bond-pur chase fund
have ceased to be a dominating factor* The recent liquidation which
has brought the bonds and notes to new low levels seems to find its
chief source In sellings by industrial and jother corporations which
were large purchasers during the ¡Liberty loan Campaigns and which are
now under pressure-to find funds fdr their current business, in a period
when necessary measures of credit control make further expansion of bank
loans both difficult and expensive* This offers a unique opportunity
to investors, large and small, the quotations for the bonds and notes
being extremely attractive to investing institutions and private invest
ors* 1 believe that the time has come when the disappearance of the
Government from the market, except as an occasional purchaser within
the limitations above outlined, will have a beneficial effect upon the
market for the bonds and notes, both by reducing the Treasury^ current
borrowings on Treasury certificates, and stimulating the interest of
investment bankers and the public in the market for Liberty and Victory
securities*
Pursuant to this announcement, no purchases for the 5 per cent bondpurchase fund have been made since June 30, 1920, and those made prior to that
date, after April 18, 1920, represented chiefly accumulations taken over from
the War Finance Corporation.
The aggregate par value of Liberty bonds and Victory notes retired b y the
bond-purchase fund between April 15, 3918, and June 30, 1920, when purchase
ceased, was $1,764,896,150, and the aggregate paid therefor was
$1,677,566,210*26, or, on an average, slightly more than 95 per cent of the par
value. The following is a summary of the purchases:
Summary statement of bond purchases to June 30, 1920.
Loan
First Liberty loan converted 4
per cent and 4* per cent bonds
1933-1947....... .............
Second Liberty loan 4 per cent
and 4£ per cent bonds,
1937-1942,--- ------------- ---Third Liberty loan 4® per cent
bonds, 1928........ ...........
Fourth Liberty loan 4 5 per cent
bonds, 1933-1938...............
Victory loan, 4| per cent and 3f
per cent notes, 1922-1923.....
Total.
Par amount
purchased*
M o u n t pai d
♦
Accrued int
erest paid»
$532,112.62
$36,912,000
$3*,722,342.29
478.688.000 ;
«
452,358,913.01 *
6,896,021*63
it
*33,308,100 :
414,067,698.57 i
3,679 1 62*.35
566,987,050 5
530,548,515*45 i
♦
2*5,868,740,94 :
6,523,811.37
349.001.000 #
1,764,896,150
3,500,393*93
1,677,566,310*26 ; 21,131,963*90
-3~
|n accordance with the requirements of section 6 of the third Liberty
bond act, a detailed statement of the complete operations will be submitted to
the Congress in a separate report* Now that operations have been completed,
attention may b3 called to the reasons which actuated the Treasury in making
its purchases. The bond-purchase fund was discussed at length by the Secretary
of the Treasury in connection with the third Liberty loan and subsequent Liberty
loans and was an important factor in the success of those loans* Of late, how
ever, there seams to have been some misapprehension on the subject* The
considerations which moved the Treasury in recommending that the bond-purchase
fund authority be granted* and which guided it in the exercise bf the authority,
are set forth in the testimony of the Secretary of the Treasury before the Com
mittee On Ways and Means of the House of Representatives in connection with the
third Liberty bond bill, on March 27, 1&L8, as follows:
7ery careful and earnest attention to the situation which has developed
Sihde the fast Liberty loan has convinced me that the United States must
do what each of the warring countries in one form or another does, and
prepare itself to support the market for its bonds* No measure of this
sort, however, can be of any value unless the fund provided for the puipose
is a large one. Every effort must be made to reach the people who have
money to invest or those who will have and who can be induced to save and
pay for the bonds for which they subscribe.
In connection with every issue,
however, it will be found that the patriotism of seme has outrun their
ability to pay for the bonds, so that either those who buy them and get
tired of holding them do not want to hold them, or those who from necessity
or for other reasons are obliged to sell them, will offer their bonds in
the market; and it puts the Government at a very great disadvantage if
there is no means of sustaining the market to a reasonable extent so as to
steady it * * *, Inevitably during the period of the war, after each
Liberty loan has been closed, we have been forced to face the facts that
there will be more sellers than buyers of the bonds* The present bill
would authorize the Treasury to retire the excess* That is, it would
authorize through the sinking fund a repurchase of such an amount of the
bonds as the sinking fund would permit and would take up the surplus
offerings, and the amount provided, I think, would be sufficient for the
purpose.
With such a sinking fund and the secondary distribution which
the War Finance Corporation can bring about, there will not be such a
desire to sell the bonds, because the very fact tnat they can sell them
will make people feel more confident about holding them. There is a
curious feeling in the breast of the average man that if he buys a
Government bond, even though ho contracts to lend his money to the Govern
ment, nevertheless if he gets tired of his investment and wants to get his
money back, that he ought to be able to sell the bond at par regardless of
the fact that the Government is not under any obligation to redeem that
bond before maturity.
It is extraordinary the extent co which that feel
ing exists. People would not have that feeling about a corporation which
sold its bonds, or about any individual who gave his note. They would not
expect them to be redeemed at par before maturity. It is a perfectly
unreasonable feeling, but one of the tnings we have got to reckon with* I
believe that the provision for this sinking fund will relieve the situation
somewhat. This sinking fund, by the way, ought n°b to be a mandatory
sinking fund but discretionary; that is, the Secretary ought to be per
mitted within the limits of 5 per cent of the bonds issued to buy back
bonds.
i
- 4 -
“
iii
S S L 'S ?
” .*s
.*»■••
s^srsLlssrsr.s/sssisI~Li‘£ - ■
W ^ - T O « . ,!sSLraSSa?
... w,StTiss.nss.i» “i.*s;s^tK'“' *i»*"the bonds, * * * »p m «
the war only. * * ,.
k
» any. wo arc just taking back seme of
P * COnt ®aoh yaar is intended to apply during
purchases*
^
r i m of the widespread contention that
b a rS » 5
*?'«sve:larrs«.:*:
>. 4 wri.'JSLiS.’S 1.? .: 2': —v « ~“ *“«•* •»*>
«4.«*-, Tu !
^ w c n a s s the bonds at par — because I think if we were te
bonds a t ^ a ? 6 for ^ G° ’0C0'G^ that the Government would invest in these
people toP seil t h e i r
w? u l i sin® 1Jr ba an invitation to the
the fund in s h o n ordo“
the S^ernment at par and you would exhaust
Bonds purchased from repayments of foreign loans.
provision*of section 3, of the first
merits on account of the n r ? l ? V 5 ^ , bQnd act# reP a3®ents fey foreign Governof these
aoo“ e f ¿ 01 v th8lr f i c t i o n s bought under authority
Th6 face value of tha«« ?P
* b0
Piu-chase and retirement of Liberty bonds,
we? e b ^ g h ffo rI lS S a
*° N°r?m?ef “ • 1920< was $119,109,050. They
of all expenditures m
as follows:
S
l
b
J
? esL than 95 p e r c m t o f th s w
* 6 t *°*th in th® separate detailed statement
ibertybond acts. The purchases may be summarized
ends purchased as the result of payment of foreign loans to Nov. 15, 1920.
Loan
Third Liberty Loan 4* per cent
coupon bonds
Third Liberty loan 4i per cent
registered bonds.
Fourth Liberty loan 4i per cent*
coupon bonds.........
Total...........
*
Principal
amount
-.L purchase^
«
.1 $80,758,750
i
i
•
Amount paid
♦ Amount of
♦
accrued
♦interest paid
/♦
$76,472,985,84 l
vf
8,407,550
8,407,550.00 I
.•
29,942,750 i 29,658,282,32 S
*
*
$927,529.20
6,909.52
553,567.76
; 119,109,050 * 114*538,818.16 * 1,488,006.48
*
?
5
Bends purchased with franchise tax paid b y Federal reserve hanks*
Section 7 of the Federal reserve act provides that the net eamihgs derived by
I'the United States from the Federal reserve banks, as franchise tax, shall in the
lidiscretion of the Secretary be used to -supplement the gold reserve hold against
I outstanding United States notes, or applied to tho reduction of the outstanding
Ibonded indebtedness. These earnings for the calendar year 1919 have been applied
I to t h ^ purchase, at the market
*
of $2,923,450 par amount of second Liberty
|‘Loan 41 per cent bonds, at a cost of $3,703,850*74, with accrued interest of
|$20,814*43, the latter amount being chargeable as interest on the public debt*
These bonds have been canceled and retired*
Bonds retired on account of gifts.
From timo to time various persons, for patriotic or other reasons, present
Liberty bends and Victory notes to tho Government* These are redeemed at par and
retired, and the proceeds are covered into the Treasury as miscellaneous receipts*
The aggregate amount presented and retired to November 15, 1920, is $12,850, as
follows:
Bonds retired account of gifts, November 15, 1920.
Loan
Par
Amount
.Accrued Accrued.
1 ntensst interest
matured unmatured
Second Liber tv lnan 4 Dei? p.^nt c m m n n bend ft. .**.*.*.**•
Second Liberty loan 4 per cent registered bend.........
Second Liberty loan 4* per cent coupon bonds.......... .
Third Libertv loan 4dr tier neni. rtonnnn hfinda. ,...... .
Tbird Lib art v Ln«n 4,/T nm* ennt r»nod at at*Ad brvnd a *........
Fmift.h Liberty loar^ 4^ per c®nt CrOT?p<*sn b^nd-St
$350,00
700.00 $51,00
7,000.00
2,150*00 42.49
800.00 40.10
500.00
1,350*00 35 *24
$6*22
2.35
44*59
2.93
5*71
9.81
7*02
Tot.a.1 r*m m on ft.......... .
..............
Toi.a.l rAcn atfirai........... ............ . .
5.350.00 168.83
7.500.00
24.23
54.40
12,850.00 168.83
-■-—^78.63
Grand i.o+.al ................ .
Bonds retired on account of forfeitures to the United States.
Whenever Liberty bonds or Victory notes are forfeited to the United States for
any reason and deposited in the Treasury, they are canceled and retired. Up to
November 15, 1930, there have been retired on this account $3,550 of bonds and
notes,,as follows!
Bonds retired aacount of forfeitures to the United Statos to Nov. 15, 1920.
"Tar
Amount
Loan
First Liberty loan 31 per cont coupon bond..................
I
First Liberty loan 4y per cent converted coupon bond....................j
Third Liberty loan 44 per cent coupon bonds................
;
Fourt 1 Liberty loan 4ï per cent coupoh bonds........................
:
Victory Liberty loan 4§ per cont coupon notes...... ............ .......;
......... v *4 ............... ••••.................... .
$50
50
700
2 650
*100
3,550
Bonds retired on account of estate and inheritance taxes*
Under Section 14 of the second Liberty bond act, as amended by the third Liber
ty oond act and the Victory Liberty loan act, 4^ per cent Liberty bonds And 4 § per
cent Victory notes are receivable by the United States at par and accrued interest
p in payment of any estate or inheritance taxes. Such securities are canceled and
f retired, and the faco amount, with any accrued interest, is covered into the
Treasury as receipts on account of Federal estate (or inheritance) taxes. The
j value of those received to November 15, 1920, is $9,781,750, as follows:
Acceptance of Liberty bonds and Victory notes in payment of estate or inheri
tance taxes to Nov. 15, 1920.
Loan
: ^ ar
' of bonds
*
J
•
*
First Liberty loan converted 4dr per cont coupon bonds.. .** $159,400.00:
First Liberty loan converted 4^ per cent registered bends:
3,800.00:
Second Liberty loan converted 4* per cent coupon bonds..: 2,120,950.00:
Second Liberty loan converted 4i per cent registered
*
%
bonds.... ... ........................
*
a
a 1 7t v
îj0
? Vs W
v t. on
v v •»
•
¡Third Liberty loan 4* per cent coupon bonds........ ...
3,477,600.00:
Third Liberty loan 4^ per cent registered bonds. . . . . . . . , •
613,650.00:
Fourth Liberty loan 4^ per cont coupon bonds......... ... • 2,799,950.00:
Fourty Liberty loan 44 por cent registered bonds,,...,. *
131,600.00:
Victory Liberty loan 44 por cent coupon notes* .......... ►•¥
18,100.00:
Total coupon........................ ... ........ * 8,576,000.00*
Total registered. .... ........... ... ............... 1 * 1,205,750.00*
Grand total. ............ ... ................ ....
Interest
paid
$1,839.57
3i,85
23 , 144 * 63
‘¿xl p ii Oa wn ♦ o k
38,512.74
5,676.59
25,633.92
865.27
197.29
0*7 y w w O t JLkJ
10,753.96
Î*9,781,750.00:♦100,082.11
♦Subject to adjustment because of items in transit.
I Summary of retirements to Nov. 15, 1920 — par amount of bonds or notes (including
cumulative sinking fund).
5 per cent bond purchase fund (to June 30, 1920)...... ......... $1,764,896,150
Purchases on account of sinking fund............
15,040,250
Purchases wi th payments on foreign loans........... ...... ......
119,1Q9,050
Purchases with earnings of Federal reserve banks................
2,922,450
Sifts............. ........ ................................
12,850
Forfeited.....,.,.... .................,............. ........
3,550
Estate or inheritances taxes......... ....... .........
9,781,750
Total,,.... ...... ................ ..........$1,911,766,050
EXTRACT FROM ANNUAL REPORT OF THE SECRETARY OF THE T'RTPA^ttdv nvr
STATE OF THE FINANCES FOB THE
CUMULATIVE SINKING FUNDr -v
cumulative sinking fund established by section 6 of th«
Liberty loan act approved March. 3 IQIQ k
Victory
The law permanently a o ^ ^ e « '
affaotiva July 1, 1 9 » .
fiscal year thsrsafts? u S i l tha’d-bt
i i80al yaar and f0r aaoh
the Sian of «(i)
,
ls discharged, an amount equal to
outstanding o n j 3 y l
1920 1 S
3 aggregata araoant °f such bonds and notes
obligation! of f ! r L ! n
’ 1 ! a" fmount ® 9 «al to the par amount of any
f2) the i
l
t
^
t
^
h
l
T
S
^
“ July * ’ * * > .
for which the appropriation is
j
fan Psysble during the fiscal year
redeemed. M m i d
® the t,0nds and notes purchased,
years."
ths sinking fund during such year or in previous
*
purposes
Ts8^ X % tT 7 ^ tZ T t^ ^ lr
f °r
tending ^
^
S ln k in s - f u n d
notes out.
^ s f r v ^ ' ^ t h “1’11^ 10“ 3 °f foraiS n ' G ^ ^ ^ p ^ : $19,681’2O1’45O-0°
tte
n n i ^ ' Several Liberty loan acts and held by
the United States on Julv 1 icjpn^.
*
7
----------------- ---- 9,*©5,006,855.13
Difference— ■__ _____ „
per cent thereof--
____ __
-
. ——---- — ____ ___
— — —
. 10,136,194k,59^, 82
253,404,864.8V
been payable <m*any9bonds1 orbnot<idSd
yaar tn“ intar3St which would have
fund account d S r t ™ i T l J l ™
pald* r3d9e“ ed> » pnrchased for sinkinguni uuring the year or in previous fiscal years.
war d!!t °o“
^Iculaoed, will retire tne funded
obligations held by the United « * ! tlW “ ?ount ^presenting the foreign
Under other p r o v i s l o ^ o ! !!! rf! T
{** July h 1920' in about 25 yeirs.
principal of the f 0 r e i J ? QhliJ>t*t*ty l0an aCtS any
the
Liberty bonds. The floating ^ h t ° ^ S ”°USt bS appli9d t0 the retirement of
to be retired out of ^ n t
not = ° ™ r e d by the sinking fund, but is
but the only important it.m« *9V9nuas> The prewar debt also is not covered,
specified datesn °which ~ v L
*5* ? indeterminate maturities after
the condition of the Treasury may A r r a n t ? 1 SU°h
fr°“ tims t0 tima as
funded war d e b t ^ n ^ h e ^ j d f r * af4 -t^ °faated for the retirement of the
long run benefit most the h o l d e r s * ^ , a course which should in the
tendency to provide for the earliest i^t ^
Llderty bonbsF because of its
refunding operations and the fact that t h n ^ obli®ations without undue
most likely to sell on the hieh!.t * ! th a“rllar maturing obligations are
year the operation of t h ^ w S S ^ V ^ ” ** .baSiBtija current fiscal
by the extraordinary payments r!!uired t!°b!S^ d !
be9“ S9ri0usly l i f t e d
squired to b© mad© on account of the railroads.
-
2-
which, as sat forth alsawhara in this report, hava likewise limited the
« i S i n v V f r0grO!S ln *hS rotiramant of tha floating debt. Substantial
sinking-fund purchases during the first part of the fiscal year would
w m f i f t h T h^V3 1?°r!ar f tha floatinS <iebt or prevented its reduction, and
would thus have tended to substitute floating debt for funded debt. The
market for liberty DOnds and Victory notes, moreover, has been in a state
L ria??r£fTn‘a ':® equilibrium since tne sinking-fund provisions became operative,
and it has not been necessary to give support by Government purchases.
Up to November 15, 1920, sinking-iund purchases have accordingly been
moderate in amount, as appears from the following cable:
July * ---- —
August----- September—
October— ---November 1-15
T otal
-$5,261,250
<-7-- »*?•-3.425.000
6.354.000
15,040,250
h0i)8^» however, that with some relief from the heaviest railroad
y*1
rQm ° ^ 8r ax^racrdinary payments, the Treasury will,
balanca
fiscal year, and at least after the beginning of
9ndar.yfar 1921>
a^le to proceed to apply the remainder of the
^
¿ V0 sinking fund for the current fiscal year to the retirement of the
f °r til9 sinkin£ fund are made in the open market at the
•market prices, chiefly through the Federal reserve bank of New
i r^, as iiscal agent, and are therefore reflected in the controlling
5 rr- ? ri 8S an<i redound to the benefit of all holders of Liberty bonds
and Victory notes.
during
the^cal
[Extract from “ Annual R eport of the Secretary of the Treasury on the State of the Finances for the
Fiscal Year Ended June 30, 1920.” ]
T A X A T IO N .
Fiscal and business conditions indicate the imperative need o f
a thorough revision o f the tax law, in order that the more
important changes may, without important retroactive applica
tion, be made effective with respect to income and profits for the
calendar year 1921. The business interests o f the country have a
right to know in advance the rate o f taxation they will be called
upon to pay. The purchaser and consumer have an equally vital
interest in the early determination o f the tax burden, and unless
the making o f returns and the prompt payment of the tax are to
be obstructed the Bureau o f Internal Revenue must be given a con
siderable period o f time before the first installment payment in
which to interpret the new law, to study, prepare, and issue regu
lations, print the requisite forms, and create any new administra
tive machinery which may be necessary. For more than 18 months—
since the opening o f the special session of the Congress which began
May 19, 1919—the President and his chief financial advisers have
repeatedly urged revision o f the internal-tax laws. There is press
ing need for expedition in this matter by the Congress. Unless the
principal amendments to the incorqe and excess-profits tax law be
adopted in the early months o f 1921 they can not, without wide
spread confusion, be made to apply to income for the calendar
year 1921.
Revision without reduction of revenues.
While it is highly desirable that the tax law should be revised at
the earliest possible date, it is imperative, in my opinion, that the
revenue from taxation be maintained after this fiscal year on 'a level
of not less than four billions a year, to the end at least o f the fiscal
year 1923. The internal-revenue receipts may not greatly exceed
$4,000,000,000 even in the fiscal year 1921, on the basis o f existing
law. We now have a floating debt (tax and loan certificates matur
ing within 12 months) of approximately $2,350,000,000. This short £ -
28126—21------1
2
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
time debt should not be funded, but should be retired, if possible,
by the end of the fiscal year 1922. On January 1, 1923, war-savings
certificates now amounting to about $800,000,000 fall due, and on
May 20, 1923, Victory notes now amounting to about $4,250,000,000
mature. The retirement o f the tax and loan certificates, the reduc
tion o f the volume o f obligations maturing in 1923, to some extent
by the operations o f the sinking fund, and the successful refunding
o f the balance of those obligations constitute a colossal task to the
accomplishment of which the whole financial policy o f the Govern
ment must be shaped. With obligations o f approximately $7,500,000,000 maturing in the next two and a half years, it would be unwise,
unless compelled by the severest form of industrial depression, to plan
for aggregate tax receipts after this fiscal year and till at least the
end o f the fiscal year 1923, of less than four billions a year. But this,
o f course, does not mean that the public will have to pay as large
a tax amount in the aggregate in that period as in the current or the
preceding fiscal year.
Future relations between expenditures and receipts are beset with
great uncertainty. The estimated receipts and expenditures for the
fiscal years 1921 and 1922 are recited on pages 273 to 278 of this re
port. These estimates o f expenditures were prepared by the several
departments and independent establishments and not by the Treasury,
except for the Treasury Department. I f rigid economy is practiced
and the estimates reduced wherever possible, there is some hope that
by the close o f the fiscal year 1922 the floating debt may be ex
tinguished, provided, o f course, that adequate revenues from taxation
are maintained. There is no certain means, however, of predicting
the course o f business or o f incomes and profits, and it is a certainty
that tax receipts even under existing law will not keep up to the 1920
level. There are also frequent efforts by extraordinary measures, like
the soldiers’ bonus, to bring about a radical increase in expenditures.
In these circumstances— as was suggested in my letter o f May 18,
1920, to the chairman o f the Committee on Ways and Means of the
House o f Representatives—the only question which should be con
sidered is whether a due regard for the protection of the Treasury
does not impose upon the Congress a real duty to seek out additional
sources o f tax revenue for the next two years. The country at times
is being encouraged to expect a “ reduction of taxes.” Revision of
taxes should be effected. There can and should be a better dis
tribution of the tax burden. Unwise taxes should be eliminated.
But any scheme which would after this fiscal year yield for several
years to come less than four billions o f dollars would be incompatible
with safety and sound finance. And the country should face the fact
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
3
that present taxes even may not in the future be relied upon to yield
the needed revenue. The letter o f May 18, 1920, referred to, reads
as iollow s:
„
Of bm?H V m q S Y: t ~
tv
Washington, M a y 18 1920
y°Ur l6tter °f May lf With the inCl0Sal c°pies
Afrb -Rn H ‘ R ' / 3798, m troduced by M r- Johnson, and B . ft. 13799, introduced by
lr. Rainey, to provide fo r the payment o f adjusted compensation to the vet
erans ° f the W orld W ar. Both «1Ù imp„se an 80 per cent w a ™
^
had w f f w SenpUS aSPeCt ° f thiS com pensaüon matter, as I pointed out when I
esneciailv f f f v J appearing before the committee, is the proposal greatly to add,
y \ h time’ t0 the present grievous burdens resting upon the people
o f the Nation and upon the Treasury. The method o f financing the proposal
i m m » *X I H
P
very heavy b o r d a s which w m
rest upon the Treasury by reason o f laws already enacted, including particu
larly the recent railroad law, which it is estimated w ill entail an expenditure
o f approxim ately $1,000,000,000, and also by reason o f the delay in making pro
vision to realize upon the Government’s investments in railroads and ships,
taken m connection w ith the existing crédit situation, suggest the need o f grave
consideration o f the question whether, quite aside from and in addition to any
axation which it might be necessary to impose in order to pay a bonus to the
soldiers, it may not be necessary to provide fo r meeting the necessities o f the
Government in larger measure from taxation. The total indebtedness o f the
Government maturing within three years, represented by Treasury cer
tificates, war-savings certificates and Victory notes, is in the neighborhood o f
$8,000,000,000. It is no longer possible to finance the current needs o f the Gov
ernment in part by the issue o f Treasury certificates except on onerous terms
which reflect upon the value o f the Government’s long-time bonds and depreci
ate them m the market. Furthermore, it would appear to be bad economy and
bad finance fo r the Government to borrow money on short-term certificates o f
indebtedness (m aturing within three to six months) to be invested for a term
o f years in railroads and ships.
d Ê B k &
It is a m atter o f serious concern to have the Government appearing in the
market every few weeks fo r loans. Certainly nothing ought to be done to add
to existing credit expansion that can possibly be avoided. The result would be
to increase prices and to make a difficult situation less satisfactory. In the
circum stances obviously the Government ought to appear in the market for loans
as infrequently as possible and fo r the lowest sums. Additional taxes are also
undesirable, but they may be less undesirable than borrowing. They would at
least have the effect in part o f enforcing economies. The first thing to do, I am
sure you w ill agree, is to keep Federal expenditures down to the minimum and
it is obvious also that other governmental jurisdictions and private individuals
should do likewise.
. v
I beg to submit to your committee fo r its serious consideration the question
whether, all things considered, it would not now be advisable to seek out addi
tional sources o f revenue to meet the current requirements o f the Government,
over and above any additional revenue w hich would be necessary if the soldier
bonus plan is determined upon, in order to obviate the necessity o f continuing
in considerable measure to meet them by borrowing. H aving these things in
mind, I hestitate to express an opinion concerning the bills which you have
submitted to me, taken by themselves. There are many grave objections, both
to the proposed new war-profits tax and to the alternative measure, a sales tax,
4
EXTRACT EKOM REPORT OF THE SECRETARY OF THE TREASURY..
which I understand your committee is considering. I f, in view o f the urgent
needs o f the Government for taoney to meet its requirements, your committee
concludes that it w ill be wise to raise a larger amount by taxation and desires
any suggestions from the Treasury,' I shall be glad to have the experts place
themselves at its disposal. In the meantime I refrain from making any further
comment on either proposal.
F or the reasons indicated, and fo r other reasons, I think it w ould be highly
unfortunate fo r any new obligations to be placed upon the Treasury through the
enactment o f the bonus proposal in any form , however financed.
Very truly yours,
D. F. Houston.
Hon. Joseph W . Fobdney,
Chairm an C o m m ittee on W a y s and M eans,
H o u se o f R ep resen ta tives.
This letter voices my deliberate conviction that “ it would be
highly unfortunate for any new obligations to be placed upon the
Treasury through the enactment o f the bonus proposal in any form,
however financed.” I repeat the statement with a renewed feeling
o f its soundness. In the form in which it passed the House o f Repre
sentatives, the bill providing for the soldiers’ bonus would involve
new cash expenditures o f not less than $1,250,000,000, to be made
during the period in which the Treasury will be most severely tried
by the burden o f meeting heavy maturing obligations. It would
increase the present tax burden, delay the lightening o f that burden,
and dismay taxpayers with its promise or threat of future drafts o f
like character upon the public purse. It would, in short, dominate
the entire program of tax legislation during the next two years or
more. It seems plain that the bonus question must be definitely set
tled before the larger outlines of the tax program for the next year
can be intelligently determined and that the bonus bill must be dis
posed o f before the general revision of the tax law can proceed. The
Treasury’s views with respect to the bonus proposal are set forth
more in detail elsewhere in this report on pages 102%and 103 under the
heading “ Soldiers’ bonus.”
From this letter it will be noted that, in the Treasury’s opinion,
there are many grave objections to a sales tax. Further considera
tion o f the subject has convinced me that a general sales or turnover
tax is altogether inexpedient. It would apply not only to the abso
lute necessities of life—the food and clothing o f the very poor—but
it would similarly raise the prices of the materials and equipment
used in agriculture and manufactures. It would confer, in effect, a
substantial bounty upon large corporate combinations and place at
corresponding disadvantage the smaller or disassociated industries
which carry on separately the business operations that in many com
binations and trusts are united under one ownership. The group of
\
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
5
Independent producers would pay several taxes, the combination only
one tax. Finally, it would add a heavy administrative load to the
-Bureau o f Internal Revenue which—burdened as it is with the re
sponsibility o f enforcing the child-labor tax law, the national pro
hibition act, the narcotic-drug law, the adulterated butter and mixed
flour tax laws—is already near the limit o f its capacity. Simplifica
tion o f the tax law and restriction rather than extension o f its scope
are as important from the standpoint o f successful administration as
from that o f the taxpayers’ interests. Consumption taxes, i f used at
all, should be laid upon other than absolute necessaries and restricted
to a few articles o f widespread use, so that the administration o f the
tax may be concentrated and made relatively simple.
As early as March o f this year I pointed out in a letter to the
chairman o f the Committee on TV^ays and Means the necessity o f a
simplification of the tax system and the repeal o f the excess-profits
tax, a modification o f the income supertaxes, and certain fundamental
administrative changes such as the giving to the Treasury the power
to make final settlement o f tax claims and to issue regulations which
should be effective from the date o f their approval. The letter in
question is as follow s:
&
H on.
¡1
_
Joseph W . Fordney,
Washington, M a rch
I t , 1920.
Chairm an C o m m ittee on W a y s and M eans,
H o u se o f R ep resen ta tives.
My Dear Mr. Fordney:
j
I am very glad to respond to your threefold request,
■communicated through Dr. Adams, for estimates o f the loss in revenue which
may be expected to result from the recent decision o f the Supreme Court in the
stock-dividend case, fo r recommendations concerning a new method o f dealing
w ith personal service corporation s; and fo r definite suggestions looking to the
fundamental simplification o f the income and profits taxes, b rief enough to re
ceive, but thoroughgoing enough to deserve, careful consideration at a session
o f the Congress crowded with other questions o f grave importance. To facilitate
their presentation, I may discuss these subjects in the inverse order in which
they have been mentioned above.
Simplification of the Income and Profits Taxes.
In dealing with this subject I may go at once to w hat is, in many respects,
its most vital aspect— the question o f early action. Public opinion has not yet
awakened to the gravity o f the consequences which are likely to follow a failure
to sim plify the tax law at this legislative session. Unless the necessary amend
ments be passed now, they w ill be delayed in all probability, I understand,
until the autum or winter o f the year 1921, w ith the result, unless they are
to disrupt the administrative procedure and confuse the necessary calculations
o f the taxpayer by being made retroactive, that income and profits taxes must
continue to be collected on the basis o f the present law until the close o f the
calendar year 1922, and, in the case o f some taxpayers on the so-called fiscal
year basis, until the early months o f the calendar year 1923. I can not contem. plate such delay w ithout the gravest apprehension. An im perfect and uncertain
6
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
tax affects the future even more adversely than the present, and for sim ilar
reasons it is costly and unwise to make a beneficent modification o f the tax law
retroactive or even to delay its adoption and announcement until the time
at which it is to take effect.
It would be manifestly unsafe, in my opinion, to reduce now the incom e and
profits taxes to be collected in the calendar years 1920 and 1921, but I can see
nothing in the financial prospects for the calendar year 1922 and thereafter
which would make impossible or unwise the very modest reduction involved in
the plan o f simplification hereinafter presen ted; and it should never be forgotten
that the tax system itself is one o f the most pow erful causal factors affecting
public expenditures. A tax system yielding, or likely to yield in the future, a
surplus o f revenue over expenditures is an open invitation to public extrava
gance, whereas an announced resolution to reduce taxes as the occasion which
called them forth recedes into the past is one o f the most potent means o f in
suring economy in public expenditures. The people, therefore, consumers as well
as producers, indirect as well as direct taxpayers, may fairly ask to be told
now the earliest future date at which the most obsolete features o f the tax law
are to be repealed.
Com plexity in tax laws violates the most fundamental canon o f taxation—
that the liability shall be certain and definite. It is not merely a source o f
irritation, labor, and expense to the taxpayer; but when conjoined, as it is in
the present law, with the heavy rates o f taxation which w ar exigency has forced
upon us, it becomes a m ajor menace, threatening enterprise w ith heavy but
indefinable future obligations, generating a cloud o f old claim s and potential
back taxes w hich fill the taxpayer w ith dread, creating, to be sure, an attractive
source o f additional revenue, but clogging the adm inistrative m achinery and
threatening, indeed, its possible breakdown.
F IN A L D E T E R M IN A T IO N A N D S E TTL E M E N T OF T A X C L A IM S A N D A S S E S S M E N T S .
1.
I recommend, therefore, as the most urgent and important o f the measures
o f simplification w hich could advantageously be put into effect at once, an
amendment authorizing the Commissioner o f Internal Revenue, with the con
sent o f the taxpayer and the approval o f the Secretary o f the Treasury (o r
under such other public safeguards as the Congress may p re fe r), to make a
final determination and settlement o f any tax claim or assessment, which shall
not thereafter be reopened by the Government or modified or set aside by any
officer, employee, or court o f the United States,' except upon a showing o f fraud,
malfeasance, or misrepresentation o f fact m aterially affecting the determina
tion thus made.
This recommendation is o f m ajor importance. A t present the taxpayer never
knows when he is through. E very time an old ruling is changed by court deci
sion, opinion o f the Attorney General, or reconsideration by the department, the
department feels bound to apply the new ruling to past transactions. The
necessity o f constantly correcting old returns and settlements is as distressing
to the department as it is obnoxious to the taxpayer. B ut an even more serious
situation arises in connection w ith the assessment o f back taxes. The tax re
turn o f a large corporation is likely to be crow ded w ith debatable points which
the corporation, in the first instance, usually decides in its own favor. The
auditing o f these returns has been necessarily delayed by the inability o f the
Bureau o f Internal Revenue to engage and hold a sufficient force o f experts
to audit prom ptly the m ore com plex and difficult returns; but when the audit
comes to be made it ordinarily b rin gs.to light a large amount o f back taxes.
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
7
A prompt determination and collection o f such back taxes due would probably
bring in additional revenue exceeding $1,000,000,000. On the other hand, this
situation must fill the taxpayers concerned w ith the gravest apprehension. I f
present taxes be continued and a period o f industrial depression ensues during
which the department finds the time and the men w ith which to clear up both
current and back taxes within the same year the result may be highly disastrous
to business.
The commissioner should be empowered and directed to dispose o f these
cases prom ptly and finally. This procedure would bring in much additional
revenue, relieve business from grave uncertainty, keep out o f the courts many
iebatable cases, and help to avert an administrative deadlock.
IN T E R PR E TA TIV E RE G U LA TIO N S OR T R E A SU R Y D ECISIO N S N OT TO BE RETROACTIVE.
2. As a desirable concomitant o f the preceding suggestion and for reasons
stated in explaining that suggestion, I recommend the adoption o f an amend
ment providing in substance that in case a regulation or Treasury decision made
by the commissioner or the Secretary, or by the commissioner with the approval
o f the Secretary, is reversed by the subsequent issue o f a similar regulation or
decision, and such reversal is not immediately caused by or based upon an
opinion o f the Attorney General or a decision o f a court o f competent juris• diction, such new regulation or decision may be made effective frofn the date
o f approval.
F IV E -Y E A R L IM IT A T IO N ON T IM E FOR BR IN G IN G S U IT FOR COLLECTION OF T A X E S .
3. Section 250 o f the revenue act o f 1918 now provides, in subdivision ( d ) ,
that no suit or proceeding for the collection o f any tax shall be begun after the
expiration o f five years after the date when the return was due or was made,
except in the case o f false or fraudulent returns with intent to evade the tax.
This subdivision has been held to apply only to taxes due under the revenue
act o f 1918. I recommend that this time lim it be extended to all income and
profits taxes due either under present or prior acts o f Congress.
S IM P L IF IC A T IO N OF L IB E R T Y BOND E X E M P T IO N .
4. The exemptions from income surtaxes authorized by the several Liberty
bond acts are highly com plex and responsible fo r perhaps the most intricate
schedule o f the return which the individual taxpayer is required to fill out. My
predecessor in office has recommended a consolidation o f these exemptions which,
while not breaking faith with the holders o f Liberty bonds, would sim plify their
tax returns and operate to strengthen the market standing o f such bonds without
in any appreciable amount reducing the public revenue. I heartily indorse this
recommendation, the detailed provisions o f w hich may be found on pages 99
and 100 o f the Annual Report o f the Secretary o f the Treasury fo r 1919.
C O M P E N S A T IO N FOR PE R S O N A L SERVICE A N D G A IN S FROM SA LE S OR D EALIN G S IN
PROPERTY.
5. The heavy surtaxes cause real hardships when income earned over a period
o f years is realized or received in one year and taxed as a lump sum' in that
year. I recommend, therefore, that such extraordinary income, when it consti
tutes a material part o f the gross income for that year, be deemed to have ac-
8
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
crued or been received ratably during the years in which the service was ren
dered or the property held, and the amount o f the extraordinary income so
assigned to any year be subjected to the surtax rates prescribed by law fo r that
year.
E X CE SS-PK O F ITS
TAX.
6.
Provision fo r the simplification and fundamental modification or repeal o f
the excess-profits tax at the earliest possible future date should, in my opinion,,
be made now. In explaining this conclusion it is unnecessary to enter into a
discussion o f controversial details. T w o facts impress me as indisputable and
conclu sive: First, the application or calculation o f the excess-profits tax is so
com plex that it has proved impossible to keep up to date the administrative
work o f audit and assessment. New returns are being made faster than old
returns can be audited, resulting in an accumulation o f claim s and potential
back taxes, the dangers o f w hich have already been described. Second, the
profits tax is confined to a small fraction (in number) o f the business concerns
o f the country. Personal-service corporations, partnerships, sole proprietors,
apd most form s o f trust organizations are exempt from the tax. I f the principle
be sound, it should be extended to all form s o f business organization, a p ro
posal which adm inistrative considerations alone stamp as im practicable either
in the present or any future period near enough to be worth consideration.
The general course or principle which simplification o f this part o f the tax
law should follow is, I believe, reasonably clear. The outstanding feature o f
the present system o f income taxation in its most important application to
business income is the fact that w e employ for this purpose tw o systems o f
taxation w hich are incommensurate and irreconcilable. Corporations pay the
profits tax and norm al income tax while their stockholders pay surtaxes on
dividends or distributed profits, but nothing in respect o f the undistributed cor
porate profits. On the other hand, sole proprietors and the members o f part
nerships pay full income tax, norm al tax, and surtaxes upon the entire profits
o f their business whether distributed or not, but are exempt from the profits
tax. The profits tax on corporations is evidently meant to be a rough equiva
lent fo r the surtaxes levied upon the reinvested or undistributed profits o f other
form s o f business. But no true equivalence is reached. In 1918 the members
o f a well-known partnership paid nearly $1,125,000 more taxes than they would
have paid had their business been organized as a corporation. And the con
trary is quite as frequently true.
There should be one system and not tw o systems o f income taxation appli
cable to persons engaged in business. Substantial uniform ity o f treatment, or
a t least a nearer approach to uniform ity o f treatment, could be achieved in a
variety o f ways, the details o f which it is not necessary to discuss here. I out
line below one such plan which has many attractive features, the detailed pro
visions o f w hich I shall be glad to supply upon request. The technical details,
w hile important, are elastic and susceptible o f modification. The j essential
thing is to sim plify the excess-profits tax and grasp a uniquely opportune
moment to remedy a deeply rooted defect in our system o f income taxation by
providing for the ju st taxation o f the undistributed profits o f corporations at a
tim e when such taxation represents simplification and relief, npt further com
plexity and heavier burdens. Equalization o f the tax upon corporate and unin
corporated business can be accomplished now with benefit to the corporations,
the Government, and the general public. W e should grasp an opportunity
w hich may never return. The principal features o f the plan referred to above
are as fo llo w s :
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
9
(tt) This plan is designed, first, to eliminate from the war-profits and
excess-profits tax law (except as it is applied to profits derived from the socalled “ w ar contracts ” ) all reference to or use o f “ invested capital,” and,
second, to place the taxation o f incorporated and unincorporated business con
cerns, so fa r as may be, on substantially the same basis.
( b ) The first object is accomplished by substituting for the present graduated
rates o f 20 and 40 per cent, a flat tax on profits in excess o f the distributed earn
ings. A rate o f 20 per cent has been used as the basis o f certain estimates
quoted below, but the adoption o f the proper rate is, o f course, a matter which the
committee w ill desire to settle fo r itself. It w ould be possible to adopt a declining
rate, say, o f 25 per cent for the fiscal year in which the suggested amendment is
n operation, 20 per cent fo r the second year, and 15 per cent thereafter. It is
only necessary that the rate should be fixed at .one figure fo r a particular year.
(c ) The second object could be accomplished (although the plan would be
well worth while without this feature) by making it explicit in the law that
corporations have the right to pay dividends in bonds or promises to pay bear
ing a fa ir rate o f interest which are taxable to the stockholders as ordinary
dividends, or by authorizing corporations to receive back from their stock
holders as “ paid-in su rplu s” cash or other dividends recently distributed.
Under these or analogous procedures a corporation could retain its profits for
use in the business and yet convert the profits tax into a genuine income tax.
The excess-profits tax would thus become a flat tax on undistributed earnings;
“ invested c a p ita l” would practically disappear; and the corporation, if it dch
sired, could place itself on substantially the same basis as the partnership, the
personal-sers ice Corporation, and the sole proprietor. The principal object o f
this suggested amendment is to sim plify the tax by removing the greatest source'
o f inequality and com plexity now found in the tax laws, i. e., the use o f
“ invested capital.”
{d ) Revenue needs make it im practicable, in my opinion, to apply the pre
ceding amendment to profits fo r the calendar year 1920, the taxes upon which
w ill be payable in the calendar year 1921. But it should be put into effect as
soon thereafter as the diminishing expenditures o f the Government w ill permit.
It is estimated that w ith a 20 per cent rate &ti(L on the basis o f pvesent corporate
n et in com e the suggested amendment would reduce the tax revenue by approxi
mately $430,000,000 a year. If, fo r instance, the amendment were adopted and
made to apply to income received on and after January 1, 1921, the first reduc
tion in the tax collections w ould occur in the last h a lf o f the fiscal year 1922, and
w ould amount to $215,000,000 for that fiscal year.
(e ) However, present corporate conditions can hardly be maintained, and i f
corporate income declines and invested capital increases as rapidly as they
have done in the past 12 months the proposed amendment would, probably cause
no reduction in the future revenue. New schemes are constantly being devised
fo r the purpose o f increasing invested capital. It is time to provide fo r a modi
fication o f the excess-profits tax, not only to relieve the taxpayer, but because o f
an approaching decline in its productivity.
SE DU CTION
OF SU R T A X E S
ON
IN C O M E
SAVED A N D
REINVESTED,
.7. In connection w ith the suggested tax on the undistributed profits o f cor
porations, attention may appropriately be directed to a possible extension o f its
application w hich w ould go fa r to rectify one o f the most dangerous defects o f
the present income tax. Because o f possible doubt about the effects o f such a
change upon the revenue, and because the details o f the proposal, as they now
28126—21------ 2
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EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
present themselves to my mind could not accurately be said to sim plify the
mere computation o f the tax, I do not urge its adoption at this session o f the
C ongress; but I have no hesitation in expressing my personal opinion that this
or some similar amendment embodying the same idea could advantageously be
adopted, to take effect at the earliest future date at which, in the opinion o f the
Congress, revenue needs and prospects permit.
W hile it is vitally im portant that saving and reinvestment effected through
the medium o f the corporation should not be dealt w ith more leniently than
sim ilar savings made by the partnership or individual, it is equally important
that the methods o f taxation employed should in all cases penalize saving and
investment u s little as possible. Our present surtaxes offend greatly in this
respect. W e attempt to levy surtaxes, rising to 65 per cent upon ordinary
income, w hile there are thousands o f m illions o f tax-free securities in the
market, the income from which is practically exempt from all taxation. The
result is to make investment by-w ealthier taxpayers in the expansion o f industry
or foreign trade unattractive and unprofitable. It is obvious that this situation
should be remedied.
f
The remedy which most commends itself to my judgment at the present time
is to reduce (e. g., by one-fourth) surtaxes attributable to that part o f the net
incom e which is saved and reinvested in business or property yielding taxable
income and at the same time to lim it the total amount o f such reduced sur
taxes to the same percentage (e. g., 20 per cent) o f the reinvested incom e as
the rate imposed upon the undistributed profits o f corporations. The maximum
tax upon such saved income would thus be approxim ately the same, whether
reinvested by the individual, the partnership, or the corporation, and whether
reinvested personally by the stock h old ers o f a corporation or by such corpora
tion fo r its stockholders. I f at any later date the profits o f a corporation which
had paid the undistributed profits tax came to be distributed, a credit equal
to the tax already paid by the corporation could, i f it were thought wise, be
easily granted to the stockholders.
The revenue lost by such an amendment could, if necessary, be made up by
increasing the norm al tax or that portion o f the surtaxes attributable to income
spent fo r purposes o f consumption. But the time is fast approaching when the
adoption o f such an amendment would cause little real reduction o f the revenue.
W e can not long continue to collect surtaxes rising to 65 per cent upon income
from ordinary business and investment while exempt interest at a remunerative
rate can easily be secured from tax-free bonds. W e must take something less
than 65 per cent or in the end take nothing. On the other hand, no reduction
is urged in respect o f incom e spent for unnecessary or ostentatious consump
tion. Incom e saved and reinvested in property or business yielding a taxable
incom e should be taxed at a low er r a te ; income spent for consumption or in
vested in tax-exempt securities should pay at established rates both the normal
tax and surtaxes. T o the extent that it falls on savings the income tax should
be redu ced; to the extent that it is a tax on waste it should be maintained or
even increased.
Personal-Service Corporations.
Under the revenue act o f 1918 personal-service corporations are treated sub
stantially as partnerships; i. e., the corporation as such is exempt from income,
profits, and capital-stock taxes, but stockholders are subject to both norm al
income tax and surtaxes upon their fu ll distributive shares in the net income
o f the corporation whether such income is actually distributed or not. The
validity o f this procedure is involved in the gravest doubt by the doctrine enun
ciated in the stock-dividend case, which apparently leads to the conclusion that
EXTRACT FROM REPORT,OF, THE SECRETARY OF THE TREASURY.
11
a stockholder o f a corporation, particularly a m inority stockholder, can not be
taxed (w ithout apportionment according to population) upon a.share o f the cor
poration’s incom e w hich he has not actually received. It is possible, notw ith
standing the above reasoning, that the present statutory method o f dealing with
personal-service corporations might be sustained on the ground that it represents
in general, in its effects upon personal-service corporations and their stock
holders as a class, a relief provision imposed in lieu o f the excess-profits tax
which is unsuited to personal-service corporations and if applied to them gen
erally would in many cases work intolerable hardships. But this interesting
question need not be discussed here. There is a grave possibility, i f not prob
ability, that the stock-dividend decision practically exempts from all income
and profits taxation a group o f approximately 2,500 corporations and their stock
holders, w ho w ould pay under existing law— and should in fairness pay at
least— from five to six m illion dollars. This possibility with its consequent un
certainties should plainly be removed by the passage o f amendatory legislation.
Fortunately it is possible to place personal-service corporations and their
stockholders in nearly the same position that they now occupy— in a manner
w holly consistent with the spirit and letter o f the ruling o f the Supreme Court—
by applying to such corporation and after January 1, 1918, the tax on undis
tributed profits recommended above for all corporations on and after January
1, 1921. This tax would, o f course, be in lieu o f the war-profits and excessprofits tax which, because o f its dependence upon invested capital,” can not in
telligently be applied to personal-service corporations in which, by definition,
“ capital (w hether invested or borrow ed) is not a material income-producing
factor.” It is plain also that the law should be so amended as to tax dividends
received by the stockholders o f personal-service corporations in the same manner
as other dividends are taxed.
It would be desirable, moreover, in my opinion, to permit personal-service
corporations at their option to distribute during the year 1920 cash or other
taxable dividends to the fu ll extent o f their profits earned during 1918 and 1919,
but not yet distribu ted; and such retroactive distributions should be made tax
able by the stockholders at the surtax rates applicable to the years in w hich the
profits were accumulated by the corporation. By so dding personal-service cor
porations could, if they desired, place themselves and their stockholders in
nearly the same position that they now occupy, i. e., they w ould pay no profits
tax at all, w hile the entire corporate income (having been distributed) would
be taxable in the hands o f the stockholders. Indeed, so closely would the pro
posed plan resemble in effect the method o f taxing personal-service corporations
prescribed in the revenue act o f 1918 that it would be eminently proper— and
probably a source o f great convenience to the taxpayers concerned— to authorize
personal-service corporations with the written consent o f their stockholders to
elect voluntarily to pay taxes for the years 1918 and 1919 on the basis pre
scribed in the revenue act o f 1918.
Estimates of Probable Loss in Revenue Resulting from the Decision in
Eisner v. Macomber.
The loss resulting from this decision falls into tw o principal classes, that
chargeable to tlie possible exemption o f public-service corporations and their
stockholders, and that chargeable to the complete exemption o f stock dividends.
There are about 2,500 personal-service corporations having net income o f
approxim ately $30,000,000 involved, the taxes upon which, under existing law,
do not exceed $6,000,000 for the year 1918, and a slightly smaller amount for
the year 1919. The aggregate loss for the tw o years, 1918 and 1919, would
12
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
probably be between $10,000,000 and $12,000,000. The need fo r legislation in
this connection arises not so much from the possible loss o f revenue as from
the obvious undesirability o f permitting 2,500 corporations and their stock
holders to escape both the taxes upon corporations and those imposed upon
individuals.
The loss resulting from the exemption o f stock dividends is very difficult
to estimate, ow ing to the fact that such dividends have not in the past been
separately shown on the returns, while the losses from the exemption o f stock
dividends as such w ill be partially or wholly offset by the heavier taxes result
ing from the decision upon any gains realized from subsequent sale o f the stock,
and by other offsetting factors which need not be mentioned in detail. A fter
consideration o f these factors the Actuary o f the Treasury Department esti
mates that the net loss or refund o f taxes already paid— i. e., taxes fo r thé
period ending with the year 1918 w ill be in the neighborhood o f $35,000,000—
and that taxes for the year 1919 (payable in the calendar year o f 1920) w ill be
reduced by approximately $70,000,000 on this account. These figures may be
regarded as maxima, and most o f the experts o f the department are o f the
opinion that the entire net loss resulting from the exemption o f stock dividends
w ill amount to less than $25,000,000.
The suggestions made above do not comprehend all the changes in the present
law which, in my opinion, could be advantageously adopted at the present ses
sion o f Congress. I have confined my suggestions to an irreducible minimum
o f measures, looking largely to the simplification o f the income and profits
taxes, for the consideration o f w hich there still remains time and action upon
which at this session o f Congress may reasonably be asked by the taxpaying
public. I shall be glad, upon request, to submit drafts o f amendments embody
ing the suggestions here presented, and to place* at your disposal for the work
o f tax revision all o f the personnel and facilities of the Treasury Department.
Respectfully,
D. F. Houston, S ecreta ry.
Income surtaxes.
Since the adoption o f the heavy war surtaxes in the revenue act
o f 1917, the Treasury has repeatedly called attention to the fact that
these surtaxes are excessive ; that they have passed the point o f maxi
mum productivity and are rapidly driving the wealthier taxpayers
to transfer their investments into the thousands o f millions of taxfree securities which compete so disastrously with the industrial and
railroad securities upon the ready purchase of which the develop
ment o f industry and the expansion o f foreign trade intimately
depend.
It seems idle to speculate in the abstract as to whether or not à
progressive income-tax schedule rising to rates in excess of 70 per cent
is justifiable. We are confronted with a condition, not a theory.
The fact is that such rates can not be successfully collected. Tax re
turns and statistics are demonstrating what it should require no
statistical evidence to prove. For the year 1916 net income amount
ing to $992,972,985 was included in the returns o f taxpayers having
net income over $300,000 a year. This aggregate fell to $731,372,153
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
13
for the year 1917 and to $392,247,329 for the year 1918. There is little
reason to believe that the actual income o f the richer taxpayers of the
country had fallen in that interval. It is the taxable income which
has been reduced and almost certainly through investment by the
richer taxpayers in tax-exempt properties. Whatever one may be
lieve, therefore, about the abstract propriety of projecting incometax rates to a point above 70 per cent, when the taxpayers affected
are subject also to State and local taxation, the fact remains that
to retain such rates in the tax law is to cling to a shadow while
relinquishing the substance. The effective way to tax the rich is to
adopt rates that do not force investment in tax-exempt securities.
The simplest remedy for this situation would be a general reduc
tion o f the higher surtaxes, accompanied by increases in the
lower surtax rates. It is suggested that the Congress consider
such a general revision, with a reduction to a maximum rate lower
than that contained in the present law, provided acceptable new
taxes of equal yield can be found. But if for the immediate
future it is found impracticable to reduce the higher surtaxes to a
level which would induce or make it profitable for wealthier tax
payers to select taxable rather than tax-exempt investments, an
effective remedy might be found in limiting the surtax rates pos
sibly to about 20 per cent on that part of the taxpayer’s income which
is. saved and reinvested in property or business yielding taxable in
come (hereinafter referred to as “ saved ” income), leaving higher
rates— perhaps the present rates—upon income which is spent or
wasted or invested in tax-free securities.
By adopting this partial abatement, the yield of the surtaxes would
not be as greatly reduced as if the general level of the surtaxes
were lowered, a premium would be placed upon saving and a penalty
upon spending, and a legitimate check would be imposed upon invest
ment in nontaxables. This policy could be applied in a number o f
different ways, which the proper committees o f the Congress may
desire to consider in detail. Thus, a reduction on all saved income
could be given by including it in the taxable income at 80 per cent of
the full amount; or the proportionate amount o f surtax attributable
to that part o f the income which is saved could, for example, be re
duced one-fifth, with a provision that such surtax should never exceed
20 per cent o f the saved income. But the simplest plan would be to
treat saved income as “ at the top ” o f the taxable income, or, in other
words, as subject to the highest surtax rates, and then limit the tax
on saved income to 20 per cent or whatever other rate was selected
as the proper limit. The last plan would work as follows in the case
o f a head o f a family with no dependents having an income of
$300,000, o f which $100,000 is “ saved” and $200,000 spent. Under
the present law he would pay $23,680 normal tax and $137,510 surtax*
14
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
or $161,190 in all. With the limited tax on saved income in the third
form suggested above, the surtax on $200,000 o f spent income would
be $77,510; the 20 per cent surtax on $100,000 o f saved income would
be $20,000; and the total tax would be $121,190, a reduction o f $40,000
from the present tax. It is important to note not only that the limited
rate o f 20 per cent would make a “ taxable ” investment at 74 per cent
approximately as attractive, so far as Federal taxation is concerned, as
a tax-free investment at 6 per cent, but the taxpayer would have the
tax abatement o f $40,000 to use or invest as additional capital, a con
sideration which would throw the balance in favor o f investment in
industrial or other taxable fields. The maximum loss of revenue
which would result from the limitation o f surtaxes on saved income
to 20 per cent is estimated at $230,000,000. This could be made up
by increasing the lower surtaxes, or, if it is thought wise, the normal
tax, or by adopting some o f the new taxes later indicated.
In any revision o f the surtaxes, attention should be given to the
serious direct loss involved in our present treatment o f income de
rived from tax-free securities. The Annual Report o f the Secretary
o f the Treasury for the year 1919 called attention to the apparent
injustice and unwisdom of the bounty or privilege now accorded
to this class of income. I heartily indorse the remedial recommenda
tions alluded to in the following excerpt from that report:
In that connection I call attention to the urgent necessity o f revision o f the
revenue law so as to require that, fo r the purpose o f ascertaining the amount
o f surtax payable by a taxpayer, his incom e from State and municipal bonds
shall be reported and included in his total income, and the portion o f his incom e
which is subject to taxation taxed at the rates specified in the act in respect
to a total income o f such amount. The Treasury’s recommendations in this
respect have been transmitted to the appropriate committees o f Congress in
connection with the revenue act o f 1918, and again in the present calendar year.
Under the present law a person having an incom e of, say, $1,000,000 from tax
able securities would, upon the sale o f h alf his property and the investment o f
the proceeds o f that h alf in State or municipal bonds, not only obtain exemption
for the income derived from such investment in State and municipal bonds, but
greatly reduce the surtaxes payablfe in respect to his other income. It is in
tolerable that taxpayers should be allowed, by purchase o f exempt securities,
not only to obtain exemption with respect to the income derived therefrom, but
to reduce the supertaxes upon their other income, and to have the supertaxes
upon their other income determined upon the assumption, contrary to fact,
that they are not in possession o f income derived from State and municipal
bonds.
Excess-profits tax.
The reasons for the repeal of the excess-profits tax should be con
vincing even to those who on grounds of theory or general political
philosophy are in favor of taxes of this nature. The tax does
not attain in practice the theoretical end at which it aims. It
discriminates against conservatively financed corporations and in
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY-
15
favor o f those whose capitalization is exaggerated; indeed, many
overcapitalized corporations escape with unduly small contributions.
It is exceedingly complex in its application and difficult of adminis
tration, despite the fact that it is limited to one class of business con
cerns—corporations. Moreover, it is rapidly losing its productivity.
The invested capital of the average corporation, earning profits high
. enough to subject it to the excess-profit tax, is now estimated to be
increasing at the approximate rate of 12 per cent a year, while the
income o f the average corporation is almost certainly declining at
as great a rate. Both movements cut into the productivity of the tax.
I f the present changes in capital and income continue for some time
in the future, as now seems probable, large reduction may be ex
pected in the yield o f the excess-profits tax. For the present fiscal
year, the profits tax, with collections of back taxes, is estimated to
yield about $1,250,000,000, and for the fiscal year 1922 about $800,000,000, as against an estimated yield for the fiscal year 1920 of
slightly over $2,000,000,000.
The excess-profits tax, however, must be replaced, not merely
repealed, and I believe that it should be replaced in large part by
some form o f corporation profits tax. This conclusion is based not
only upon the Government’s need for revenue but upon grounds of
equality and justice. So long as taxpayers other than corporations
are subject to a progressive income tax rising now to over 70 per cent,
corporation profits should not be allowed to escape with a single tax
o f only 10 per cent. Individuals (and partnerships in effect) pay
normal taxes and surtaxes upon all net income, whether spent, saved,
or retained in the business of the taxpayer. Corporations pay only
normal tax on such income, although their stockholders pay in addi
tion surtaxes on the profits of the corporation which are distributed
as dividends. But no surtaxes are paid on or with respect to the
profits not distributed. It seems plain, therefore, that when the
excess-profits tax is repealed some equivalent or compensatory tax
should be placed upon the corporation in lieu o f the surtax upon re
invested income paid by other taxpayers. Unless this be done, a
heavy premium would be given to the corporate form o f business.
•If, for example, three equal partners in a business invest capital o f
$2,000,000 and make net profits o f $600,000, draw out $75,000 as salary
and $75,000 as profits, leaving $450,000 in the business, these part
ners would together pay income taxes o f approximately $279,570.
But if they should incorporate the business, the total income1 and
capital-stock taxes on the corporation and its three stockholders
would, in case the excess-profits tax were repealed, be only $75,865.
One partial substitute for the excess-profits tax would be a tax on
the undistributed profits o f corporations as nearly as possible equal to
the surtax imposed upon the saved income o f the individual. I f
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EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
individuals doing business in partnership pay 20 per cent on un
distributed profits, individuals doing business through the medium
o f the corporation should pay 20 per cent. This plan could be
applied in many different ways: (1) The distributed profits o f the
corporation could be substituted for the so-called excess-profits
credit o f the excess-profits tax and the remaining or taxable profits
be taxed at 20 per cent; or (2) a 20 per cent tax on undistributed
profits could be applied as a corporation surtax under Title I I of
the revenue act; or (3) corporations could in form be subjected to
the same progressive surtaxes as individuals—-a proposal which
would prove very advantageous to all corporations with small in
comes—with a proviso that the total surtax should never exceed an
amount equal to 20 per cent o f the undistributed profits. None of
these plans presents any grave administrative difficulty or involves
any particular complexity o f operation.
I f an undistributed profits tax be adopted, it should contain provi
sions expressly recognizing the various devices by which many cor
porations find it possible to distribute statutory “ dividends,” while
actually retaining the profits in the business. The object should be
to subject stockholders of corporations to the same tax burdens im
posed upon the members of a partnership, and any procedure which
facilitates the attainment o f this object should be welcomed. The
stockholders of any corporation should be permitted, for example,
by a unanimous vote to elect to be taxed as the members o f a partner
ship or as the stockholders o f a personal-service corporation are now
taxed under existing law. It would be advisable seriously to consider
the propriety o f requiring every corporation, 95 per cent or more o f
the stock o f which is held by one individual, to be treated as a part
nership or personal-service corporation. This would go far toward
solving the problem whose solution is now vainly sought in section
220 o f the revenue act o f 1918.
The object o f these suggestions is to establish so far as possible an
exact equivalence between the taxation of corporation stockholders
and other taxpayers. The undistributed-profits tax appears to be
one practical means of obtaining approximate equality of treatment.
This is not only to satisfy a theoretical sense o f justice. It is, I be- <
lieve, the course of practical wisdom. At some points the revenue law
as now formulated discriminates unjustifiably against the individual
in favor o f the corporation. At others it discriminates unduly against
corporations in favor o f the individual.
These discriminations operate to force many business enterprises
into forms o f organization not intrinsically the best suited to their
needs. Furthermore, the most troublesome problem o f income taxa
tion is the same in case of both corporations and unincorporated
taxpayers, i. e., the repressive effects o f heavy rates when applied
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
17
to income which is saved and reinvested. That and many other
problems of personal and corporation income taxation will best be
decided when linked together. We are now taxing reinvested in
come o f individuals at rates which may exceed 70 per cent. The
error o f this treatment appears plainly when we attempt to apply
such rates in the case o f corporations. It would be unthinkable to
tax the saved income o f corporations at 70 per cent. On the other
hand the stockholders o f corporations are forced to pay through
the corporation a higher normal tax than individuals. They re
ceive no credit against this normal tax for the personal exemptions,
and—under existing law—profits which have paid both the corpora
tion income tax and the heavy excess-profits tax are again subjected,
when distributed as dividends to stockholders, to surtaxes rising in
some cases to 65 per cent. In the latter instances the discrimination
is against the corporation and its stockholders. Like treatment
should prove in the long run the surest means o f obtaining just and
wholesome treatment. Separate treatment will in the long run con
duce to corporation baiting. I f corporations insist upon different
treatment, they are in the long run likely to receive worse treatment.
The next revision of the tax law should place the income tax upon
an enduring foundation o f sound principle. Lasting solutions and
not temporary makeshifts should be sought.
The tax on undistributed profits has certain obvious disadvantages,
as, in fact, have all tax proposals. It is widely opposed because it
would, in form, fall on reinvested profits, although the personalincome tax falls also on reinvested profits. It is believed also by
many honest and able men that, notwithstanding thei fact that it
would reduce the tax burden upon corporations, it would tend to
cause an undue dissemination o f corporation profits and subject direc
tors o f corporations to a strong temptation to pay out as dividends
profits actually needed in extending or maintaining the business itself.
I f, in the opinion o f the Congress, these or other difficulties make
the undistributed-profits tax unavailable, the excess-profits tax might
be replaced, in part at least, by a compensatory corporation tax, or
“ corporation surtax,” at a flat rate. Such a tax, at any practicable
rate, can not be made the equivalent of the individual or personal
surtaxes on reinvested income. It would leave the corporation tax
less burdensome than the personal tax on some business concerns and
more burdensome than the personal tax on others. The undistributedprofits plan would tax income saved by corporations at the maximum
rate paid by individuals on saved income, while leaving the corpora
tion an option to distribute the profits—either constructively or ac
tually— and thus subject such profits to taxation in the hands o f the
stockholders. But the. “ corporation surtax ” has the great merit o f
18
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
simplicity, and such a tax has recently been adopted in the United
Kingdom for precisely the purposes here set forth; that is, to secure
from corporations some contribution in lieu o f the surtax collected
from individuals on reinvested income. The discussion o f this tax
by the chancellor o f the exchequer in his financial statement of April
19, 1920, is enlightening, and it is quoted in part below. The italics
are mine:
COBPORATIO N -PBO FITS T A X .
I propose therefore to introduce this year a new tax which, fo r the time being,
w ill be levied concurrently with the excess-profits duty, but which, either in the
form in which I propose it or in an amended form , may in the future prove a
substitute fo r it. The character o f the new tax, a perm anent tax, has been the sub
ject o f most anxious consideration by the Government and m yself and, as I have
previously mentioned, I think, in the House last year, I sent out a mission to Can
ada and the United States to investigate and to study the schemes o f profits taxa
tion in force in those countries, and to see whether w e could derive any lessons
o f use to us from their practice and experience. The results o f the inquiry
and o f independent investigation in this country have not served to remove th e
difficulties which presented themselves to our first consideration o f the proposal
fo r a taxation o f profits in excess o f a certain return upon invested capital, and
have not enabled us to see our w ay to adjust such a tax to existing business
conditions and customs in this country. W e, therefore, abandoned the idea o f
creating a tax on profits in excess o f a fixed standard and w e propose to have
recourse to a different measure. I may describe our proposal as a corporation tax
levied at the rate o f 1 shilling in the pound on the profits and incom e o f concerns
w ith limited liability, engaged in trade or similar transactions. This tax w ill
run concurrently with excess-profits duty until that duty is repealed. W h ere a
concern is liable to both taxes, any excess-profits duty payable w ill be treated
as a w orking expense in arriving at the profits fo r the purpose o f the new tax.
Both excess-profits duty and corporation tax w ill be deducted before the
assessment o f profits fo r income tax, and to prevent the new tax constituting too
severe a burden on the ordinary shareholder o f existing concerns in which
there are large issues o f debenture and preference shares, where a considerable
proportion o f the profit hqs to be allocated to the payment o f interest and fixed
dividends thereon, we propose that in no case shall the duty exceed 2 shillings
to the pound on the profits which remain after the payment o f such interest and
dividends on existing issues o f debentures and preference shares. I w ould re
m ind the com m ittee that under the p rovision s o f th e excess-profits d u ty pros
perou s concerns w ith a large p rew a r profit standard m a y escape liability fo r
the ta x because th eir p resen t profits, though high, are n ot in ex c ess o f th eir
standard, and, at an y rate, th e y p a y a ta x on w h a t all o f us think an unduly low
scale.
In cid en ta lly, th e n ew ta x w ill do som ething to correct this anom aly.
But I
ju s tify it on m uch broader grounds.
Com panies incorporated w ith a
lim ited liability e n jo y privileges and conven ien ces b y v irtu e o f the law fo r w h ich
th e y m a y w ell be asked to p a y som e acknow ledgm ent.
B u t, m o re than th at ,
partn ers in a p riva te partnership p a y su p erta x n ot m e r e ly on the profits w hich
th e y divide, but also on the undivided profits w h ich th e y place to r es er v e .
N o such charge fa lls upon th e undivided profits o f lim ited liability com panies.
T h e corporation ta x is ju stified b y this distin ction o f the existin g law in fa v o r o f
such corporations, and it m a y be regarded as a com position in lieu o f th e
liability to su perta x.
•
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
19
A flat corporation surtax o f adequate rate could probably be sub
stituted for the excess-profits tax without serious loss in revenue.
Whether any loss would result by the substitution o f an undistributedprofits tax is problematical. The shrinkage in the tax collected from
corporations as the result of distributed profits would be partially
counterbalanced by an increase in the taxation of the stockholders of
the corporations involved. Furthermore, the yield o f the excessprofits tax is declining and may decline rapidly in the near future.
Two hundred million dollars is probably a maximum allowance for
the loss o f revenue that would result in 1922 if the excess-profits tax
were replaced (as o f January 1,1921) by an undistributed-profits tax
o f 20 per cent. New taxes capable of yielding approximately this
amount should be selected from the additional taxes suggested below
or from other sources in case the undistributed-profits tax is adopted.
Excise and luxury taxes.
In the case o f individuals who pay income tax, particularly surtax,
the income tax operates as a general and perhaps the best form of
luxury taxation. But there is luxurious or wasteful consumption
among those persons who do not ordinarily pay income tax, and to
reach this class o f surplus income of taxable capacity excise or sales
taxes—here briefly referred to as “ consumption taxes ”—must be
employed.
It is not necessary, however, to tax every luxury. Consumption is
elastic. I f the tax is laid upon tobacco and the particular consumer
prefers tobacco to candy he will reduce his consumption of candy in
order to secure his accustomed supply o f tobacco. It is desirable to*
avoid absolute necessaries of life, however, because some individuals
have little or no waste income to be tapped either directly or in
directly. But if the absolute necessaries are avoided, the selection of
other articles o f taxation should be controlled by practical considera
tions o f simplicity and convenience. In appearance consumption
taxes do not conform to the theory of “ ability to pay.” But when
used as supplementary to a highly progressive income tax they do not
necessarily—if moderate in amount and properly selected—violate
this principle. The system o f taxation may conform to this principle,
though each tax may not. The continued use o f consumption taxes
in the budgets o f the most advanced countries seems to prove that
they have a legitimate though restricted place.
Consumption taxes must be largely justified, if at all, by the prac
tical virtues of certainty, convenience, productivity, and efficient col
lection. Some of the excise or consumption taxes at present imposed
by the revenue act of 1918 do not meet these tests. On this account
I recommend the repeal o f the taxes upon fountain drinks, ice cream,
and other “ similar articles o f food and drink” imposed by section
20
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
630; the excess price or so-called “ luxury ” taxes imposed by section
904; and the taxes imposed upon medicinal articles by section 907 of
the revenue act o f 1918. These taxes are not highly productive
(yielding in the aggregate less than $50,000,000 in the fiscal year
1920); they are ill defined and uncertain; they are vexatious and
expensive to the dealers who pay them; and I am informed by those
in charge of their administration that they are widely evaded and
that such evasion Can not be stopped without the employment o f a
larger number of agents and measures more drastic than the potential
importance o f these taxes would justify. To this last statement there
is one possible exception: The taxes imposed by section 907 apply
not only to patent or proprietary medicinal preparations but to per
fumes, toilet waters, cosmetics, and a long list of allied luxuries. The
most striking defects of the present tax affecting these articles would
be remedied by collecting the tax not on the individual sale but from
the manufacturer, producer, or importer; and if the tax seems im
portant enough to retain, it should be changed from the present basis
to that suggested. It may be added that Canada has just changed
the method o f collecting stamp duties on patent and proprietary
medicines and perfumery by having the stamps affixed by the manu
facturer or importer and not by the retailer.
< Additional sources of revenue.
The loss o f revenue which would result from the adoption o f the
preceding recommendations, together with the loss to result even
under existing law from the shrinkage o f business, would have to
be made up from new sources. For the convenience o f the committees
o f the Congress which will be directly responsible for tax revision, I
set out below a number o f new or additional taxes capable o f yield
ing in the aggregate as much as $2,000,000,000 a year. These esti
mates are. based upon conditions in the midsummer o f 1920, and
changes in the future may affect the revenue yield o f the taxes men
tioned.
Source.
Norm al incom e ta x ....................................................
T a x rate.
Increase the 4 and 8 per cent rates to
6 and 12 per cent.
Readjusted surtax rates............................................ (2).........................................
Corporation incom e ta x .............................................
"Do........................................................................... A bolish $2,000 exem ption.......................
Estimated ad
ditional yield
for a 12-month
period.
i $150,940,000
2 230,000,000
»465,000,000
58,000,000
1It is estimated that an increase of the 4 and 8 per cent normal incom e-tax rates to 5 and 10 per cent,
respectively, w ould yield during a 12-month period additional revenue amounting to #75,470,000. It is also
estimated that if only the 8 per cent normal incom e-tax rate is increased to 12 per cent, the additional
revenue to be derived therefrom during a 12-month period would amount to 8103,090,000.
* The surtax rates, shown on page 45, it is estimated, w ould yield the same amount, $990,000,000, as
the present surtax rates. Inasmuch as the loss o f revenue resulting from the abatement o f surtaxes on
saved or reinvested income has been estimated at $230,000,000, on ly this amount has been included in
the table of suggestions.
* It is estimated that an increase in the corporation incom e tax from 10 to 12 per cent would yield during
a 12-month period an additional revenue of $118,800,000.
EXTRACT EROM REPORT OE THE SECRETARY OF THE TREASURY.
Source.
Estimated ad
ditional yield
for a 12-month
period.
T ax rate.
Corporation undistributed profits tax:
Increase in corporation incom e tax, esti- 20 p e rce n t.................................................
mated at $190,000,000.
A dditional revenue from the application ofthe Individual surtax rate............................
surtax rates to dividends distributed b y cor
porations to avoid the 20 per cent undistrib
uted profits tax, estimated at $500,000,000.
Stamp taxes, Title X I , act of 1918.......................... D ouble rates in subdivision 10 and
quadruple rates in subdivisions 1-9
11, and 12.
Cigarettes, weighing not more than 3 pounds per
1,000.
Gasoline........................................................................
Admissions to theaters..............................................
Increase rates on following articles specified in
section 900 of the revenue act of 1918: Autom o
biles (other than automobile trucks and wag
ons) and m otor cycles, including automobiles
and motor-cycle tires, inner tubes, parts, and
accessories (subdivisions 2 and 3).
Musical instruments (subdivision 4)......................
Chewing gum (subdivision 6 )........ ........................
Candy (subdivision 9)......... .’....................................
Toilet soap and toilét-soap powders (subdivision 21).
Jewelry and articles of precious m etal (sec. 905,
revenue act of 1918).
Motion-picture films (sec. 906, revenue act of
1918).
Perfumes, cosmetics, and medicinal articles, a
tax upon the sale -by the manufacturer, pro
ducer, or importer in lieu of the tax imposed
under section 907, revenue act of 1918, of.
21
$690,000,000
» 134,000,000
$2 per 1,000 additional.............................
100,000,000
5,000,000
70,000,000
5 per cent additional...............................
8,000,000
90.000.
000
70.000.
000
100,000,000
7 per cent additional...............................
13.000.
2,000,000
20.000.
4,000,000
5 per cent additional...............................
25,000,000
....... do..........................................................
4,000,000
10 per cen t.................................................
16,000,000
1 I f the stain*) taxes imposed b y Title X I o f the revenue act of 1918 were doubled the additional yield for
a 12-month period would, it is estimated, be 890,000,000.
The following surtax rates, limited to 20 per cent on saved or
reinvested income, would yield, it is estimated, as much as the present
surtax rates:
'
Surtax rates.
Incom es
$5,000-$6,000.........................
$6,000-$8,000.........................
$8,000-810,000........................
$10,000-815,000......................
$15,000-820,000......................
$20,000-830,000......................
Surtax rates.
Incomes.
Saved
income.
Remainder
of income.
P e r cent.
P e r cent.
2
5
10
12
15
20
2
5
10
12
15
20
$30,000-840,000....................
$40,000-850,000....................
$50,000-875,000....................
$75,000-8100,000..................
Over 8100,000......................
Saved
income.
Remainder
of income.
P e r cent.
P e r cent.
20
20
20
20
20
25
30
35
40
50
These possible sources of revenue are mentipned for the infor
mation o f the Congress. While I shall not attempt to discuss them in
detail, attention should be called to the new or. additional consump
tion taxes included. Eeasons have been given above for the belief
that no valid objection exists against the employment of a moderate
number o f consumption taxes properly selected; but it would, in my
opinion, be neither wise nor expedient to increase radically the
000
000
. 22
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
volume o f consumption taxation. During the last fiscal year the
taxes on transportation and insurance, beverages, tobacco products,
admissions, and dues, together with the excise or sales taxes imposed
by Title I X o f the revenue act—taxes which may be roughly grouped
as consumption taxes—yielded $1,150,386,743, or 21 per cent o f the
total internal taxes. I f necessary this amount could be moderately
increased to perhaps 25 or 30 per cent o f the total. But I can
see no justification for a general-sales tax designed to substitute in
direct taxes falling on the consumer for the income tax which now
furnishes the backbone o f the Federal fiscal system, nor even for an
increase in specific sales or consumption taxes which would yield
perhaps two billions in place of the one billion, approximatelyj now
collected from the consumer.
The particular articles included in the suggested list o f additional
consumption taxes have not been selected because their use is par
ticularly harmful or in any sense less legitimate than the use o f
articles not so included. Consumption taxes must be judged by
practical standards. What should be sought are a few consumption
taxes which will tap the surplus income which is being wasted, not a
conglomerate multiplication o f petty taxes upon every article of
luxurious or unnecessary consumption, which can neither be clearly
defined, cheaply collected, nor administered without widespread
evasion.
Administrative amendments.
A number o f important technical and administrative amendments
were recommended in my letter o f March 17, 1920, to the chairman
o f the Committee on Ways and Means, previously quoted. These
recommendations have been substantially embodied in H. R. 14197
and H. R. 14198, both o f which have already passed the House of
Representatives. I earnestly hope that these bills may be promptly
enacted into law.
Tax exemptions of Liberty bonds and Victory notes.
The attention o f the Congress is again invited to the recommenda
tion made in the Annual Report o f the Secretary o f the Treasury for
1919, on pages 96-100, that legislation be enacted to simplify and
consolidate the limited exemptions o f 4 and 4£ per cent Liberty bonds
from surtaxes and profits taxes. The existing situation with respect
to these exemptions, which were conferred upon Liberty bond hold
ers by legislation enacted from time to time during the war, is fully
set forth in the annual report for 1919. A provision embodying the
Treasury’s suggestions as to the simplification o f these exemptions
was incorporated in H. R. 13355, introduced in the House o f Repre-
EXTRACT FROM REPORT OF THE SECRETARY OF THE TREASURY.
23
sentatives on March 30, 1920, and referred to the Committee on
Ways and Means, and again in section 6 o f H. R. 14198, which passed
the House o f Representatives on May 27, 1920, and has been referred
to the Committee on Finance o f the Senate. I believe that these
simplified exemptions should be enacted into law and that any slight
loss o f revenue which may result will be more than counterbalanced
by the gain to the Treasury which will result from the increased
attractiveness o f the taxable issues o f Liberty bonds and the conse
quent benefit to the Government’s credit, as well as from the simplifi
cation o f administration in the Bureau o f Internal Revenue.
WASHINGTON : GOVERNMENT PRINTING OFFICE : 1921
REGULATIONS GOVERNING SALES OF SILVER TO THE D I R E C T ® OF THE MINT
UNDER THE PITTMAN ACT. .
Under authority of the Pittman Act, approved April 23, 1918, and
pursuant to the public statements of the Director of the Mint of May 1 7 ,
1930, and June 18, 1920, copies of which, marked Exhibit A and Exhibit B,
respectively, are hereto attached, the following regulations are pre
scribed with reference to the proof required to be submitted to the Directo
of the Mint in connection with purchases of silver under said act:
UNMIXED SILVER»
(1)
In the case of silver delivered for sale to the Director of
the Mint, which is wholly the product of mines situated within the United
States and of reduction works so located, without admixture of foreign
silver, the vendor will be required to file at the time of such delivery
a vendor's affidavit and affidavits by the miner, smelter and refiner
substantially in the forms prescribed by the Director of the Mint under
date of Kay 17, 1920, revised copies of which are attached.
MIXED SILVER.
(3) . In the case of silver delivered for sale to the Director of
the Mint which forms part of a mixture of foreign silver and domestic
silver, the vendor will be required to file at the time of such delivery
a vendor's affidavit substantially in the form prescribed by the Director
of the Mint under date of June 18, 1920, a revised copy of which is
attached,
(3)
7
In addition to the affidavit prescribed by paragraph 2 above *
and in accordance with the stipulations of the vendor*s affidavit therein
referred to, every vendor delivering for sale to the Director of the
Mint silver which forms a part of a mixture of foreign silver and
domestic silver will also be required to file with the Director of
the Mint a n affidavit by the miner from, whom the domestic silver was
purchased substantially in the form prescribed by the Director of the
Mint under date of June 18* 1920, a revised copy of which is attached.
Such vendor will also be required to file with the Director of the
Mint sworn copies of the liquidation sheets of the smelters to which
the domestic silver covered by the miners* affidavits was delivered
by said miners.
Such liquidation sheets must cover all deliveries
of silver to said smelters from January 1?, 1920, for the entire period
within which such silver is delivered for sale to the Director of the
Mint.
Said copies of liquidation sheets must be filed with the
Director of the Mint monthly and must be accompanied by sworn abstracts
showing total deliveries of foreign silver and domestic silver to said
smelters during the month, as shown by said liquidation sheets.
(4)
In addition to the sworn copies of the liquidation sheets,
referred to in paragraph 3 above, the vendor will also be required to
file with the Director of the Mint not less frequently than quarterly
sworn abstracts from the books of account of the respective smeltbrs
and refineries by which said silver was treated showing;
(a )
The amount of silver on hand at such smelter or refinery
at the beginning of the period covered by said abstract;
-
-3(b) The amounts of silver received at said smelter or re- •
finery for smelting or refining during said period, and sources
from which received;
(c) The amount of silver smelted or refined at said smelter
bf refinery during said period;
(d) The amounts and consignees of all silver delivered from
said smelter, or refinery during said period; and
(e) The amount of silver remaining on hand at said smelter
or refinery at the end of said period.
Such abstracts must form a continuous record of receipts, production
and deliveries of silver at each said smelter or refinery from January 17, 1920, for the entire period within which silver is delivered
for sale to the Director of the Mint under the Pittman Act,
(5)
The Director of the Mint will purchase under the Pittman Act
silver which forms a part of a mixture of domestic and foreign silver
up to the proportion of such mixed product which represents silver
wholly produced from mines situated in the United States and reduc
tion works so located; provided, however, that the aggregate amount
of silver purchased hereunder shall not exceed the amount of silver
actually produced from mines situated in the united States and delivered
to reduction works so located since January 17, 1920, as shown by the
liquidation sheets of said reduction works, filed with the Direct or of
the Mint as above required, and the supporting affidavits of the miners
who delivered said silver to said reduction works; and provided further,
that the aggregate amount of the total refined mixed product purchasable
by the Director of the Mint under the Pittman Act shall not exceed the
proportionate part thereof corresponding to the proportion in which
silver actually produced from mines located within the United States
entered into the aggregate amount of domestic and foreign silver
—
4
—
received by thfe smelters concerned since January 17, 1920, as shown
by the liquidation sheets of such smelters, filed with the Director
of the Mint as above required*
AU
sales of mixed silver by the
vendor prior to May 15, 1920, and all sales of mixed silver by the
vendor after that date at a price exceeding $1 per ounce, 1,000 fine,
shall be deemed to be made out of domestic and foreign silver in the
same proportion in which domestic and foreign silver are found to
have entered into the mixed product pursuant to these regulations,
(6 )
AH
copies of liquidation sheets and abstracts from books
of account filed as aforesaid with the Director of the Mint must be
certified under oath by a duly authorized officer of the smelter or
refinery rendering such statements to be true and correct copies or
abstracts from the books of account of said smelter or refinery,
(7 )
Silver which has at any time been in the form of coined sil
ver or sycee, will not be deemed to be domestic silver for the purpose
of purchases by the Director of the Mint under the provisions of the
Pittman Act and the regulations prescribed hereunder*
(8 )
The Director of the Mint may withdraw or amend at any time or
from time to time any or all of the regulations herein prescribed*
R, T. BAKER
Director of the Mint,
August 30, 1920,
APPROVED;
S. P* GILBERT* JR,
Assistant Secretary of the Treasury,
treasury department
Por immediate release,
September 28, 1920.
Secretary Houston today gave to the press the following copies
of his two letters of September 38, 1920, to James W. McCarter, ExAssistant Register of the Treasury.
September 28, 1920.
Sir:
Senator Carter Glass has referred to the Treasury Departmane for reply your letter of September 3 , 1920, inquiring concern
ing figures given in the Annual Report of the Secretary of the
Treasury for 1919, as to the outstanding interest-bearing public
debt on July 1 , 1919.
The Treasury does ndt, of course, recognize
any right on the part of the so-called»McCarter Corporation”, or
on your part as its President, to attack the correctness of the
published figures as to the public debt, particularly in view of
the fact that the inquiries which you make relate directly to the
work under your charge as Assistant Register of the Treasury from
before the beginning of the war until July 31, 1920 (when your
resignation was accepted), and if any irregularities such as #ou
suggest did exist you would presumably have taken steps to correct
them and report them to the Secretary of the Treasury during your
term of office.
The facts are, however, entirely clear and in
accordance with the figures published in the Annual Report, and I
am glad to have this opportunity to correct the misapprehensions
upon which your comments are obviously based.
You inquire particularly as to an item appearing on page
610 of the report for the fiscal year 1919, which states the total
-
2
-
interest-tearing debt of the United States on July 1 , 1919, & s
$35,234,496,273.54, and you imply that because of certain bonds
issued with duplicate numbers, the public debt was in reality in
excess of the amount stated.
The figure given is correct, and your
fears as to a possible overissue of the debt because of duplicate
serial numoers have no basis whatever.
If you had taken the pains
during your term as Assistant Register to acquaint yourself with
the facts as to the numbering of the bonds, you would know that such
duplications in serial numbers as have occasionally appeared result
simply from aberrations in the numbering machinery used by the
Bureau of Engraving and Printing, and do not in any respect amount
to a duplication or overissue of the public debt.
Most of the sup-
lications in serial numbers have been caught before iBsue, as the
result of checks in the Bureau of Engraving and Printing, the Divi
sion of Loans and Currency, and the Office of the Register of the
Treasury, but evennthe bonds which have been passed with duplicate
numbers have been issued only after full payment therefor has been
received by the Treasury, as required by law, in respect to both
bonds issued with duplicate numbers.
No Liberty bonds, Victory
notes, or Treasury certificates of indebtedness have been issued by
the United States except against full payment therefor to the
Treasurer at par and accrued interest pursuant to law and the
-3regulations of the Treasury Department, and the amounts of cash shown
to have been received by the Treasurer of the United States on ac
count of the principal of the bonds, notes and certificates fully
cover, therefore, the amounts issued and outstanding.
In fact, by
reason of partial payments and even full payments, against which se
curities have not been actually issued, the amount of such cash re
ceipts more than covers the amount of securities actually issued and
outstanding.
In order that the situation as to the item you question
may be plain to you, I call your attention particularly to the de
tailed figures set forth in the Financial Statement of the United
States Government for June 30, 1919, appearing on pages 320 and fol
lowing of the Annual Eeport for 1919; the footnotes to this statement
explain that certain items, as therein stated, represent receipts of
the Treasurer of the United States on account of principal.
The fig
ures so reported include all bonds, notes and certificates delivered
against full paid subscriptions, and as indicated, necessarily include
also certain partial payments against which securities are not deliv
erable and even the full paid subscriptions against which securities
are deliverable but not yet physically delivered.
According to the
records of tne Department, no duplicate issues of certificates have been
made, though, as already indicated, it is a matter of common knowledge
that some securities imperfect as to serial numbers have reached the
public; these imperfections are of little or no consequence inasmuch
as they do not indicate duplicate issues.
You refer specifically in
this connection to bond Ho. 7979985 of the Second Liberty Loan in the
denomination of $50.
The bond bearing this number was a"make-up bond"
-4issued to replace a bond apoiled in printing; the spoiled bond was can
celled and destroyed and never became an obligation of the United States,
and the erroneous number, therefore, does not represent any duplication
whatever of the public debt.
You ask further whether the amount shown as outstanding on July
1, 1919, includes Mblotted or defective bonds substituted by star or
other perfect bonds at issue" or "uncancelled surrendered certificates,
bonds or coupons if any were back in circulation."
The statement, of
course, does not include blotted or defective bonds substituted by star
or other perfect bonds, for the reason that such imperfect or mutilated
bonds are cancelled and destroyed and not issued.
Your inquiry as to
uncancelled securities is not quite clear, but apparently you refer to
retired securities delivered to the Register, which in ordinary course
are already cancelled, and if not cancelled when delivered to the Regis
ter are required to be cancelled immediately by him, pursuant to stand
ing instructions from the office of the Secretary of the Treasury.
Re
tired securities have ceased to be obligations of the United States and
I
are not included in the public debt statements; after examination by the
Register they are destroyed.
According to the records of the Department, not retired secur
ities are now outstanding uncancelled, though, as you know, during
your term of office as Assistant Register, $30,000 face amount of un
cancelled bonds were abstracted from the files by a thief and were later
recovered by the Department over a year ago.
If you have knowl
edge or information of any ather abstractions of^ securities, can
celled or uncancelled, during your term of office or since its ex
piration, I have to request that you promptly advise the Treasury
in order that appropriate action may be taken.
In this connection,
I need scarcely remind you that while you were Assistant Register
of the Treasury you were in immediate charge of the custody and
cancellation of retired securities, and were responsible therefor
as an officer of the United States.
Respectfully,
(Signed)
D. F. HOUSTON
Secretary.
James W. McCarter, Esq.,
The McCarter Corporation
Ipswich, South Dakota.
September 28, 1920/ '
James W. McCarter, Esq.,
c/o The McCarter Corporation,
Ipswich, South Dakota.
Sir:
I received your letter of September 3 , 1920, making inquire
regarding the outstanding public debt of the United States, with par
ticular reference to the cancellation and destruction of retired secur
ities received by the Register of the Treasury during your incumbency of
office as Assistant Register, I notice that you promptly took the liberty
of publishing your letter in the Ipswich, South Dakota, Tribune, and
that you have since circulated it widely throughout the country, not
withstanding the fact that the insinuations in your letter, if they
have any basis in fact, are primarily areflection upon your own con
duct as Assistant Register of the Treasury.
In this connection I should
like to remind you that serious charges were brought against yOu in
1919 and your removal approved by the President, and that you were re
tained in office only by special action of Secretary Glass, out of con
sideration for your family and after you had given promises of good
behavior for the future.
The Treasury does not, of course, recognize
any right on the part of the so-called "McCarter Corporation", or on
your part as its President, to institute any inquiry into the adminis
tration of the Treasury, particularly in view of the fact that the
inquiries which you make relate directly to the work under your charge
- 2-
as Assistant Register of the Treasury from before the beginning of
the war until July 31, 1920 (when your resignation was accepted), and
if any irregularities such as you suggest did exist you would presum
ably have taken steps to correct them andreport them to the Secretary
of the Treasury during your term of office.
The facts as to the matters
which trouble you are, however, entirely clear, and I am glad to have
this opportunity to correct the misapprehensions upon which your com
ments are obviously based.
With this in view, I have caused careful
inquiry to be made touching the allegations which you make, and, in
order that the record may be clear, answer them categorically and at
length, as follows:
1.
It is not true that "billions of dollars worth of payable
to bearer surrendered certificates of indebtedness, bonds and coupons,
known as unused, interchanges, exchanges and replacements, uncancelled
and with no mark of ‘paid or surrendered» on same but in the original
state of issue ready for circulation, have passed through the hands
of numerous un-bonded officials and clerks" to final ,file.
The Treas
ury Departments standing instructions require that all paid or sur
rendered bearer securities shall be canceled by the paying agency,
e. g., the Federal Reserve Bank, the Treasurer of the United States,
some cases, the Division of Loans and Currency, though it is
unquestionably true that, during the war period and sunsequentlt, ow
ing to the enormous volume of retired securities handled, some retired
-3securities have reached the Register’s office uncanceled.
It is the
duty of the Register's office, however, pursuant to long standing in
structions from the Secretary of the Treasury, to make careful examina
tion of all retired securities which it received, and, among other
things, to detect uncanceled securities and cancelethem before filing.
After examination and filing, the canceled retired securities are re
quired to be kept under proper surveillance in the Register*s office,
and are later destroyed under the supervision of the Destruction Coatmittee of the Department.
If, as ÿou allege, any securities were de
livered during your incumbency of office to the Vaults and Files Divi
sion of the Register's office for final file uncanceled, pending de
livery to the Destruction Committee, the responsibility therefore rests
primarily upon you, and you should have reported the facts to the Secre
tary of the Treasury for appropriate action.
2.
Investigation discloses that the certificates of indebtedness
numbering 474 pieces and aggregating $1,376,000 cited by you as being
uncanceled when filed, were canceled in the Register's office before
filing.
Cancellation had been purposely omitted by the Federal Reserve
Bank which returned these unused certificates in order that they might
by used to supply other Federal Reserve Banks, if necessary.
The
anticipated necessity did not arise, however, and the certificates were
duly canceled before being placed in the Vaults and Files Division.
It also appears that the three lots of Liberty Loan bonds which you
named (Lots 2232, 1927 and 1942) were canceled before filing and re-
4.
verified in each case after cancellation.
The fact that cancellation
had been omitted by the Federal Reserve Banks was properly discovered
by the Register's office in these particular cases, which was one of
the objects of the examination.
3.
Your statement that paid coupons are occasionally found un
canceled when examined by the Coupon Audit Section in the Register's
o^^ice os not news to the Department.
The object of the examination
by the Coupon Audit Section is to determine, among other things, if
uncanceled coupons are present, and to see that all uncanceled coupons
are canceled effectively before filing.
Out of more than 100,00Qp00
coupons paid annually and sent in by Federal Reserve Banks and other
paying agencies, it is natural that a few should be found uncanceled,
notwithstanding the strict instructions requiring cancellation before
shipment to the Department, and one of the reasons for maintaining the
Register's office is to insure a final check upon the cancellation of
paid coupons.
4.
Withereference to your statement as to the recovery of $30,000
of bonds (not $31,000 as stated by you) stolen from the Department in
October, 1919, or thereabouts, the records show that the colored taxi
cab driver whom you mention had every opportunity to locate and identify
the towhite man" who, it was alleged, left the bonds in his vehicle, but
failed to do so.
The bonds in question were missing from a package of
securities delivered to the Register's office on August 25, 1919, but
not examined as to character and amount until about five weeks thereafter.
-5-
During this interval the package was stored in the control of a division
in the Register's office which was under your immediate supervision as
Assistant Register of the Treasury.
If these bonds were abstracted
prior to delivery to your custody, that fact should have been establish
ed by an immediate count thereof upon receipt, and, if not, the presence
of the uncanceled bonds "in the center of this package" should have been
discovered and cancellation effected by your office.
Your statement is
noted "that the bonds on both top and bottom of this package were can
celled and this $31,000 in bonds were left in center of package uncan—
celed and were from there taken".
This statement appears to he made
on the basis of special information in £our hands, and it is the first
time that this circumstance has been brought to the attention of the
Department, though if substantiated, it might have an important bearing
on the investigation of the case.
Your letter in this respect, there
fore, means simply that you have withheld from the Department material
facts within your knowledge, during your term of office.
There is
no record in the Department of a shortage of $34,000 bonds which you
state were stolen October 25, 1919, and if you have any specific in
formation as to such a theft, I presume you will transmit it to the
Treasury.
5.
It is true that the Secret Service Division assisted the local
police is locating the thief who stole $3000 in Government bonds, which
were the personal property of an employee in the Register's office.
These bonds were in a desk in the office and the thief, another employee,
- 6-
was apprehended.
Following his confession, the thief was dismissed
from the service, after which the case was turned wholly over to the
police department.
It is obvious that the participation of the Secret
Service in this case was not primarily to assist the employee who was
robbed but to detect the guilty person in the Department, who other
wise might have stolen securities in the custody of the Department
belonging to the Government.
6.
There is no evidence that "millions of dollars worth of dup
licate numbered Liberty Loan bonds and coupons were issued and put in
circulation" as alleged by you.
Nor is there and basis whatever for
the statement that "the Government lost the face value of each of the
duplicate numbered bonds and coupons".
If you had taken the pains
during your term as Assistant Eegister to acquaint yourself with the
facts as to the numbering of bonds, you would know that such duplica
tions is serial numbers as have occasionally appeared result simply
from aberrations in the numbering machinery used by the Bureau of En
graving and Printing, and do not in any respect represent duplications
or overissues of the public debt.
Most of the duplications in serial
numbers have been caught before issue, as the result of checks in the
%
Bureau of Engraving and Printing, the Division of Loans and Currency,
and the office of the Register of the Treasury, but. even the bonds
which have been passed with duplicate numbers have been issued only
after full payment thereforhas been received by the Treasury, as re
quired by law, in respect to both bonds issued with duplicate numbers.
-7-
The fact amount of bonds actually issued is correct and in agreement
with the cash paid in by subscribers, notwithstanding the occasional
errors in numbering.
The total number of bonds with duplicate serial
numbers which have been issued and returned to the Department up to
this time is less than fifty pieces, with the aggregate face value of
less than $10,000.
is slightly larger.
The number of duplicate numbered interest coupons
Notwithstanding your statement to the cnntrary,
a record is and has been maintained of all duplicate numbered bonds
or coupons received in the Register's office.
7.
With reference to bond No. 7979985 of the Second Liberty
Loan, denomination of $50, which you state reached the Department
through the federal Reserve Bank of New York though the Treasury records
showed the last number issued to be 7869000, it appears that this was
an error in numbering and not an over-issue as you would imply.
You
state that the employee who reported this high number on February
2nd was asked to resign on February 5th, 1920. You are aware, probably,
that this employee was under charges of misconduct prejudicial to the
good of the service for five or six days before this bond was reported,
and that resignation was permitted in lieu of the recommendation for
dismissal which had been decided upon.
Ordinarily your letter would have received the brief atten
tion and the short reply which by reason of its scurrilous character
-
it deserved.
8-
Coming, however, from a man whose official position
of trust and responsibility during the past few years should have achim fully with the facts and with the stupendous taxkis per
formed by the Treasury Department, it has been deemed proper to answer
at some length your artfully phrased questions in order that their
absurdity may be clearly apparent.
A critical examination of your
letter and a careful consideration of its inquiries in^els me to the
conclusion that the Department's principal error, if any, in the ad
ministration of the Register's office was in heeding your earnest
appeal and carrying you on the rolls after the charges of unfitness
for office brought against you in 1919 had been substantiated and your
removal from office officially approved.
Respectfully,
(Signed)
D. F. HOUSTON
Secretary.
SUPPLEMENTAL REGULATIONS GOVERNING SALES OF SILVER TO THE
DIRECTOR OF THE MINT UNDER THE PITTMAN ACT
The regulations of the Director of the Mint, approved August 30,
1920, with reference to the proof required to be submitted in connection
with purchases of silver Under authority of the Pittman Act, approved
April 23, 1918, are hereby amended as follows:
Paragraph (3) of said regulations now requires that sworn
copies of liquidation sheets be filed with the Director of the
Mint, as follows Such vendor will also be required to file with the Director
of the Mint sworn copies of the liquidation sheets of the
smelters to which the domestic silver covered by the miners*
affidavits was delivered by said miners*
Such liquidation
sheets must cover all deliveries of silver to said smelters
from January 17, 1920, for the entire period within which
such silver is delivered for sale to the Director of the Mint*
Said copies of liquidation sheets must be filed with the
Director of the Mint monthly and must be accompanied by sworn
abstracts showing total deliveries of foreign silver and
domestic silver to said smelters during the month, as shown
by said liquidation sheets.
In lieu of the filing of sworn copies of the liquidation sheets,
pursuant to this requirement, the vendor may file with the Direc
tor of the Mint, not less frequently than quarterly, a sworn state
ment by the superintendent of each smelter receiving deliveries of
domestic or foreign silver, covering each month during the period
subsequent to January 17, 1920, and showing for each month the
total deliveries of foreign silver and domestic silver to the smel
ter during the month and the names of the miners or other depositors
from whom such deliveries of silver were received, with the amounts
received from each such miner or other depositor.
Such sworn state-
-
2«
ments from the superintendent of the smelter must state expressly
that the information contained therein is based upon examination
of liquidation sheets filed with the smelter, that such liquidation
sheets are in the custody of the smelter and constitute part of its
records, and that the names and figures given cover all deliveries
of silver, both foreign and domestic, to the smelter during the
month*
R. T* BAKER
Director of the mint*
Approved, October 6 , 1920«
S» P. GILBERT, JR.,
Assistant Secretary of the Treasury.
WASHINGTON
October 6 , 1920,
The following are copies of letters which Secretary Houston re
cently wrote in response to inquiries:
September 29, 1920
Dear Sir:
Referring to your visit to my office Monday and to our discussion
of the problems of agricultural finance and marketing, I désire to
repeat what I said to you,
I am in full accord with the policies of
the Federal Reserve Board as announced by it from time to time, with
the views recently expressed by the. Governor of the Federal Reserve
Board in his addresses in Cleveland and those of Mr, Platt, a member
of the Board, as expressed in his address in West Virginia,
I take
pleasure in sending you herewith copies of these three addresses.
The problems confronting the banks of the nation are complex
and difficult.
They will not be solved to the satisfaction of
everybody but I think to those who know the facts and think fairly
it will appear that the banks of the country as a whole are function
ing very effectively in handling the problems confronting them and
in extending accommodations to meet the needs of industry and agri
culture,
I am sure that you have in mind the extent to which
credits have been extended.
You know it became necessary to take
steps to see that the banks were in position to meet the seasonal
demands resulting especially from the marketing of our large crops.
As a result of these steps I believe that the banks of the country will
succeed in assisting in financing the crop movements and in taking care
- 2 -
of industrial needs, altnough of course not without difficulty.
is not true that there has been a contraction of credits.
It
On the
contrary there was an expansion of credits during the twelve months
from the end of August, 1919, to the end of August, 1920, and there,
has been an upward tendency since the crop movement began.
Between
the end of August, 1919,and the end of August, 1920, the loans and
investments of about 800 reporting member banks increased approximately
one and three-quarter billions of dollars*
As these reporting banks
represent about 40 per cent of the resources of all the banks, it is
estimated that the total increase in loans and investments for the
twelve months indicated was over four and one-quarter billions of
dollars*
Even from January 23, 1920, when the increase in discount
rates went into effect, to August 27, 1920, the loans of about 800
reporting member tanks, exclusive of loans secured by Government obli
gations and other stocks and bonds, increased about one and a quarter
billions of dollars.
This would reflect a total increase of commercial
loans in all banks, it is estimated, of perhaps three billions of dol
lars*
Since the crop-moving demands came on the bills discounted and
purchased by the Federal Reserve Banks have increased at the average rate
of nearly twenty—two millions a week, and the Federal Reserve notes at the
average rate of twenty millions a week*
The increase in the volume of
Federal Reserve notes from January 23, 1920, to August 27, 1920, was
$360,000,000*
I need scarcely say to you that I am in favor of every legitimate
effort to promote the orderly marketing of all commodities*
I have
labored many years to stimulate legitimate cooperative enterprise oft
•3the part ef farmers not only for better production but also for better
marketing of crops and for the more satisfactory financing of them*
In such cooperation lies much of the future prosperity of agriculture*
Farming must pay and rural life must be made comfortable and attractive*
Only through the attainment of these objectives can we hope to have a
sufficient number of efficient and contented farmers*
I sinceieLy hope
that cooperative movements of a legitimate and lawful kind will make
even more rapid and satisfactory headway in the future*
During the
entire time I was Secretary o f ‘Agriculture one of my chief concerns
was the matter of better marketing and better rural finance; and to
this end I labored earnestly to promote the development of the Bureau
of Markets and the Farm Loan System.
These agencies have rendered
vast service to the farmers and will render increasing service if
their activities are not crippled*
Referring to the suggestion that the Treasury at this time deposit
money in banks in certain sections of the country in order to ease the
credit situation, I can only say that this is not feasible.
The Treas
ury has no money to deposit for such a purpose and could in nc event
make deposits in the circumstances except to meet Government require
ments,
As a matter of fact the Treasury is itself borrowing money at a
cost somewhat in excess of 6 per cent to meet current bills*
The
Treasury has no control over appropriations and must meet* the bills
that are presented under the law.
It is true that the tax receipts
for the twelve months will meet the ordinary expenditures of the Gov-
- 4 -
eminent, including the sinking-fund charges t*nd interest on the public
debt, and make possible a net reduction in considerable volume of
floating indebtednessj but much of the taxes is received in (Quarterly
installments and bills come in regularly and, therefore, the Treasury
is under the necessity of borrowing temporarily to tide over the
intervals,
The Treasury should not be in the banking business*
The
banks of the country, under existing law, can and will, I believe,
meet the situation, as far as it can be met, to the satisfaction of
the mass of the people#
It may be interesting to you to know that
the rediscounts for Federal Reserve Banks in crop-moving sections with
several of the Reserve Banks in other sections of the country at pres
ent are about six times the amount formerly deposited by the Secre
tary of the Treasury in banks in crop-moving seasons to assist in the
market ing of crops•
The other suggestion that the activities of the War Finance Cor
poration, which were suspended last spring, be resumed and that it
indicate its willingness to lend money to corporations or persons
desiring to finance exports, is likewise unacceptable*
Corporation was a war agency*
The Finance
So far as the financing of exports is
concerned, the provision authorizing it was passed at a time when
there was apprehension, caused by the chaotic condition after the
armistice, that exports might not go forward#
As a matter of fact,
exports have gone forward in unprecedented volume.
While in 1918,
the last year of the war, the exports aggregated $6 ,0 0 0 ,0 0 0 ,0 0 0 , in
1919 they were valued at $7,900,000,000 and in this year, 1920, on
- 5 the basis of the i irst seven months, they are going forward at the
rate of $8,400,000l000*
Clearly, exports are being financed,
They
are being financed b y private business agencies, as they should be#
aggregate value of exports for these three years will greatly
exceed the value of imports, perhaps by more than $ 10 ,000 ,000 ,0 0 0 #
I think it will be clearly recognized that the condition contemplated
by Congress does not exist and that there is no need for the Gov
ernment through the War Finance Corporation to intervene to stimu
late exports#
Furthermore, the War Finance Corporation could get-the
money only from the Treasury and the Treasury would have to borrow
the money from the people at a cost exceeding 6 per cent#
If the
activities of the War Finance Corporation were resumed it could not
discriminate as among classes of commodities, and, unquestionably,
because of the possibility that applicants might think they could
secure money from the Treasury at a lower rate than they could secure
it from private sources, the amounts requested would be of tremendous
volume*
It would be unwise for the Treasury to undertake this burden
in addition to its large current obligations#
The officers of the Federal Reserve Board have pointed out facts
which many people overlook, namely, that the Federal Reserve Board
has no discretion in the matter of loans which a member or non-member
bank may wish to make or decline; that the Federal Reserve Board has
** to **
no le n d in g p ow er;
and a ls o th a t a F e d e r a l R e s e rv e Bank has no d i s
c r e t i o n in th e m a tte r o f a lo a n w h ic h a member o r non-member bank
may w is h t o make o r d e c l i n e .
The F e d e r a l R e s e rv e Board and th e
F e d e r a l R e s e rv e Bank a r e c o n c e rn e d w it h th e k e e p in g o f th e a s s e t s o f
th e R e s e rv e Banks i n
sound c o n d it io n and in h a v in g a la r g e mass o f
l i q u i d p a p er so th a t when u rg e n t n eed s a r i s e t h e r e may be r e s e r v e s
w it h w h ich t o m eet them .
com*
The v a s t mass o f th e r e s o u r c e s o f th e
t r y a r e in th e member and non-member ban ks»
The R e s e rv e Banks them
s e l v e s have l e s s than 10 p e r c e n t o f th e b an kin g r e s o u r c e s o f th e
c o u n tr y and th e y do th e b u s in e s s o f r e d is c o u n t in g and shou ld be in
p o s itio n
t o use t h i s pow er i n e m e r g e n c ie s , a s th e y a r e d o in g .
th e r e s e r v e s sh ou ld n o t
If
th e y w e re ,
tio n s ,
O b v io u s ly
be ta x e d t o th e l i m i t s t e a d i l y and c o n s t a n t ly .
th e banks w ou ld n ot
be a b le t o m eet e x c e p t io n a l c o n d i
such as now o b t a in .
F u rth erm o re,
as th e G o ve rn o r o f th e B o ard has p o in t e d o u t,
w it h h is v ie w and th a t o f th e B o ard I am in e n t i r e a c c o r d ,
and
th e Board
i t s e l f cannot d is c r im in a t e b etw een e s s e n t i a l and n o n - e s s e n t ia l lo a n s .
T h is i s
a duty th a t must r e s t on th e banks w h ich make th e lo a n s .
B o »r d can s u g g e s t t o th e b a n k e rs ,
e ve ryw h e re r e c o g n iz e ,
th a t i t
is
c a r e o f th e fu n d a m en tal n eed s o f
The
h o w ever, a th in g w h ich g o o d b a n k ers
t h e i r p rim e d u ty t o a tte m p t t o
ta k e
t h e i r r e s p e c t i v e s e c t io n s and t h a t ,
w h ere th e demands f o r c r e d i t can n ot be met i n f u l l and d is c r im in a t io n
becomes n e c e s s a r y ,
th e y see t o
it
th a t th e
more e s s e n t i a l a c t i v i t i e s
a r e su p p o rted even th ou gh some o f a l e s s e s s e n t i a l n a tu r e have to
s u f f e r a t l e a s t t e m p o r a r ily , f o r
th e tim e b e in g .
I
th o r o u g h ly
- 7 -
endorse the view of the Board and good hankers generally that legiti
mate enterprise everywhere shall he first considered and encouraged
and that speculative enterprises he aiscoxiraged; and the facts clearly
demonstrate that there has been a very large decrease in the amount
of speculative and non-essential loans,
I need not say to you that, after all, the supply of wealth at
any one time is limited, and that necessarily credit extensions cannot
he infinite or always be extended on terms satisfactory to every in- *
dividual.
We are still in the midst of abnormal conditions*
The sad
thing about war is not only that it is horrible while it lasts, but
that it is not over when the fighting ceases*
It leaves behind it con
ditions which in the nature of things cause hardships and sufferings
for many years,
It is gratifying that we have been able to proceed
under the exceptionally difficult conditions as well as we have.
Our
people must face the fact that conditions will be difficult for some
time to come.
But with steadiness of purpose and intelligence we can
meet the problems as they arise and in time bring the nation back to an
orderly and sound basis,
This nation does not live to itself.
The
whole world is in an abnormal state but it seems obvious that things
are beginning to right themselves and I believe that there is light
immediately ahead,
We have doubtless passed the crest of high prices*
I am no prophet
-
8
-
but I imagine prices will recede and that the process will take several
years.
No one will wish to have the prices of what he produces lowered,
hut the consumer has evidently made up his mind not to continue to pay
high prices, and much trouble which is attributed to the banks of the
country and credit conditions unguestionably arise from fundamental
conditions over which the banks have no control.
Matters are further
complicated for this nation by reason of the fact that it has not yet
concluded peace with its enemies and has not yet «joined the other great
nations of the world in a cooperative effort to hastén the return of
sound conditions and to allay the fears of the world as to the recurrence
of other wars*
Very sincerely yours,
(Sgd.) D. F, HOUSTON,
£
October 4, 1920*
Dear Siri
X was very glad to get your letter of September 29th.
Apparently it
is impossible to make any statement which everybody will interpret in the
same way*
The statement to which probably the report you have seen refers
was made by me in reference to certain requests that the Treasury either
deposit money in crop-moving sections or lend money to producers*
In con
nection with some of the requests it was distinctly stated that the pro
ducers intended to hold their commodities until they could get substantially
the prices prevailing during the war*
I stated very specifically that the
Treasury had no money to deposit or to lend, that the Treasury itself was
borrowing money to meet current bills and that it could not be in the bank
ing business*
y
My statement had no reference to the operations of the Federal
\
Eeserve ^System or to the banks of the country, whether member or nonrmember
/>
banks y /
,
y
■ H H |
/ /
//I stated distinctly that so far as I was concerned, I was very
^finitely in favor of the orderly marketing of all commodities
that
obviously the Government^ that is, the Treasury, »could not be a party to
an undertaking on the part of any sort of producers to hold their
commodities artificially for speculative purposes to secure war prices or
higher than war prices.»
This statement, seems to me to contain such an
obvious truth that there is no room for debate*
I did not, of course, say
that individuals who own commodities could not keep them as long as they
\
please and as long as they were able to keep them, if they desired to keep
them.
What I said was that the Treasury could not assist in any speculative
movement of any sort and that it had no money in any event to deposit or to
loan.
For many years I have been working to promote the orderly and gradual
marketing of agricultural crops especially.
I labored for many years to build
■qp the Bureau of Markets to assist the farmers with information and guidance»
I labored maqy years to promote cooperation among farmers, not only for better
production but for better marketing and for better financing of their
activities»
This movement has made considerable headway but not the headway
it should have made and the imperfection of existing methods and machineiy for
such purposes, through the failure of the farmers to take the necessary action
is in part responsible for the difficulties in which they find themselves»
I think there are other difficulties*
that prices have passed the high point*
recede*
I am no prophet but I believe
I believe that they have begun to
They may never go bade to the pre-war prices but I think they will
return towards a stable condition, and this process may cover several years.
The consumer evidently has balked at the payment of war prices*
ing more economical*
He is becom
Conditions throughout the world are tending towards a
better state of things, and all these things are resulting in a downward
movement of prices*
I do not know how it can be helped by artificial methods
and I imagine that you would probably agree that the public would not look
upon artificial efforts for speculative purposes to maintain war prices as
either legal or justifiable.
I recognize existing difficulties and with the thought of promoting
the orderly and gradual marketing of all commodities I have colaborated with
-3-
the other members of the Federal Reserve Board in evejjfy legitimate effort
that the Board can reasonably make to assist producers#
O f course* you
understand that the Federal Reserve Board has no money to lend#
You under
stand that the Federal Reserve Banks themselves cannot lend money to individ
uals*
The money is loaned by the member or non-member banks#
Neither the
Federal Reserve Board or the Federal Reserve Bank has any discretion as to
loans which member banks may make or decline to make#
The Federal Reserve
banks do rediscount eligible paper for member banks and as a matter of
fact the member and non-member banks of the country are making larger loans
to producers th$c ever/bef ore ih. the history of the nation#
Between the
end of August* 1919* and the end of August, 1920* the loans and investments
of the banks of the country increased over four billions of dollars and
between the 23rd of January, 1920, and the end of August they increased
about three billions of dollafea*' In the first period the Federal Reserve
notes increased $320,000,000 and in the second period they increased
$360,000,000*
Since the crop-moving season bagah the accommodations of
the banks in the form of bills discounted and purchased have increased at
the average rate of about twenty-two millions a week and the Federal Reserve
notes at the average rate of about twenty millions a week#
You will, of
course, realize, therefore, that there has been no contraction*
On the
other hand, there has been an expansion of credit to meet the demands^
While the Federal Reserve Board has no power to make loans, and no
discretion as bo what loans the member banks may make or decline, it has
used its influence in two directions especially: First, to urge the dis
couragement of loans for any sort of speculative purposes; and, Secondly,
- 4
where discrimination must be practiced because all demands cannot be met,
that the banks see to it first that the fundamental needs of thbir commu
nities are satisfied as fully as possible and before the non-essential or
I
less essential things are met; and the banks have cooperated along both
these lines.
It is demonstrated that there has been a marked curtailment
of funds for speculative purposes.
You may be interested to know also
that the banks in certain industrial sections of the nation are rediscount
ing in very large sums for banks in crop-moving sections in this emergency
and that the sum total of such rediscounts for crop-moving sections is
about six times the amount that the Secretary of the Treasury deposited in
crop-moving sections to assist producers at the time when the Treasury had
a surplus and before the Federal Eeserve System was inaugurated.
Hoping that this statement covers the points you are troubled about,
I am,
Very truly yours,
1
(Signed) D. F.
SUPPLEMENTAL REGULATIONS GOVERNING SALES OF SILVER TO THE
DIRECTOR OF THE MINT UNDER THE PITTMAN ACT
The regulations of the Director of the Mint, approved August 30,
1920, with reference to the proof required to be submitted in connection
with purchases of silver under authority of the Pittman Act, approved
April 23, 1918, are hereby amended as follows:
paragraph (3) of said regulations now requires that sworn
copies of liquidation sheets be filed with the Director of the
Mint, as follows Such vendor will also be required to file with the Director
of the Mint sworn copies of the liquidation sheets of the
smelters to which the domestic silver covered by the miners1
affidavits was delivered by said miners*
Such liquidation
sheets must cover all deliveries of silver to said smelters
from January 17, 1920, for the entire period within which
such silver is delivered for sale to the Director of the Mint*
Said copies of liquidation sheets must be filed with the
Director of the Mint monthly and must be accompanied by sworn
abstracts showing total deliveries of foreign silver and
domestic silver to said smelters during the month, as shown
by said liquidation sheets.
In lieu of the filing of sworn copies of the liquidation sheets,
pursuant to this requirement, the vendor may file with the Direc
tor of the Mint, not less frequently than quarterly, a sworn state
ment by the superintendent of each smelter receiving deliveries of
domestic or foreign silver, covering each month during the period
subsequent to January 17, 1920, and showing for each month the
total deliveries of foreign silver and domestic silver to the smel
ter during the month and the cames of the miners or other depositors
from whom such deliveries of silver were received, with the amounts
received from each such miner or other depositor.
Such sworn state-
-
2-
merits from tile superintendent of the smelter must state expressly
that the information contained therein is based upon examination
of liquidation sheets filed with the smelter, that such liquidation
sheets are in the custody of the smelter and constitute part of its
records, and that the names and figures given cover all deliveries
of silver, both foreign and domestic, to the smelter during the
month*
R. T. BAKER
Director of the mint,
Approved, October 6, 1920.
S. P. GILBERT, JR?,
Assistant Secretary of the Treasury.
WASHINGTON»
Oc tob er 20, 19 20 *
In response to inquiries made concerning the amounts of money which
have been advanced to carriers under Section 209, Transportation Act, 1920,
and loaned under Section 210 of the same Act, the Treasury Department has is~
sued the following statement, showing advances and loans to date pursuant to
certificate of the Interstate Commerce Commissions
Total advances to carriers under Section 209,
Transportation Act, 1920..................
«$233,719,974«
Total loans to carriers under Section 210,
Transportation A c t , 1920.... •....... *......... . ••
56,190,325«
The carriers to whom loans have been made, and the amount of each of
the loans, are as followe:
Boston & Maine Railroad*.............. $5,000,000
Salt Lake & Utah Railroad C o ....................
Carolina, Clinchfield & Ohio Railway*.*»*♦•.....
300,000
3,000,000
Bangor & Aroostook Railroad C o « .... . • **.... . * •
20,000
Atlanta, Birmingham & Atlantic R* R* Co*...... .
200,000
Great Northern Railway C o .... *........ .
Western Maryland Railway Co....... *»*...... .
15,900,000
300,000
Chicago & Western Indiana R. R. Go..............
8,000,000
Erie Railroad Co. ..*................. ...........
8,000,000
Terminal R. R. Association of St. Louis........
896,925
Seaboard Air Line Railway Co*......... ..........
6,073,400
Chicago, Rock Island & Pacific R* R. C o ........
2,000,000
Baltimore & Ohio Railroad C o ....................
3,000,000
Virginian Railway C o ......... *....... ........ * •
Kansas City, Mexico and Orient Railroad Company,
W. T. K emPer> Receiver...................
1,000,000
2,500,000
SAVINGS DIVISION
of the
TREASURY DEPARTMENT
FUNCTIONS AND ORGANIZATION.
October 23, 1920*
/
The work of the Savings Division Of the Treasury Department
with its District Organizations is directed to the following ends!
a)
To develop and protect the secondary market for
all war issues of Government Securities}
(2)
To sell Treasury Savings Securities;
(3)
To make permanent the habits of regular savings
and investment in United States Government
Securities*
In accomplishing this work, the Savings Organizations
will continue in 1921 the policy pursued during the year 1920 in in
dustrial plants and schools*
As to the schools, however, it is
hoped that before the end of the year the active direction of the
school
savings work can be turned over very largely to the school
authorities*
Beginning January 1, 1921, the work with women,s organiza
tions will be centralized*
Contact will be made by the Savings
Division in Washington with the heads of national women's organizations
The office of District Director of Women's Activities will be discon
tinued*
In order that all publicity matter issued by the Savings
Organization may be in accord with the policies of the Treasury
Department, any material involving questions of the general policy
of the organization should either originate with or be vised by the
-
2
-
Savings Division in Washington, with due allowance for changes in wording
and subject-matter to meet local conditions in the several Districts*
The greatest care should be taken; to assure the accuracy and correctness
of all publicity material*
In this connection, the attention of the
District Directors is called to the following statement in the memorandum
of October 18, 19193 - "The publicity should be directly supervised by
the District Savings Director,
The publicity writers must interpret
the policy of the organization to the public and not attempt to create
flash news of a cheap nature"*
District Directors should familiarize themselves with the
provisions of the Postal Laws and Regulations governing the exercise
of the franking privilege and the use of so-called penalty envelopes*
These provisions are as follows!
Sec* 496 (l)
It shall be lawful (for all officers of the United
States Government...».*»*,**) to transmit through the mail, free of
postage, any letters, packages, or other matters relating exclusively
to the business of the Government of the United tStates .«.«»«*3
PROVIDED, That every such letter or package to entitle it to pass free
shall bear over the words "Official business" an endorsement showing
also the name of the department, and, if from a bureau or office, or
officer, as the case may he, whence transmitted, with a statement
of the penalty for their misuse.
Sec, 496 (5)
A n y department or officer authorized to use the
penalty envelope may enclose them with return address to any person
or persons from or through whom official information is desired, the
same to be used only to cover such official information and indorsemen s
relating thereto«,
Sec, 496 (7)
Whoever shall maxe use of any official envelope, label,
or indorsement authorized by law, to avoid the payment of postage or
registry fee on his private letter, packet, or package or other ma er
in the mail shall be fined not more than three hundred dollars.
Sec* 497* No report, document, or publication of any kind distributed
by or from an executive department or bureau of the Government shall
contain any notice that the same is sent with "the compliments o an
officer of the Government, or with any special notice that it U $ o
except that notice that it has been sent, with a request for an acknowledg
ment of its receipt, may be given*
* 3 U ;
Sec»500«
Persons nbt officers writing to the executive departments or
to officers of the United States concerning the business of the writers with
the Government may not use the penalty envelope to transmit their corres
pondence« Officers authorized to use such envelopes shall not fufnish
tnem for use to contractors with the Government br to enable private persons
or concerns to send free reports, etc., which they are required by law to
make«
Officers desiring official information from or through persons
not officers may furnish penalty envelopes or labels to Cbver the same
only with return address printed or written thereon* Where the information
is to be forwarded periodically or on more than one occasion the envelopes
or labels bearing printed return address may be furnished in quantities fbr
the transmission of such information«
The right of an officer of the United States to use the penalty
envelope ceases immediately upon his going out of office; and he may not
use such envelopes in transmitting papers connected with the settlement
of hi s accounts or other business pertaining to the office he has vacated
except as he may receive them with requests for official information, with
return address thereon, from a department or officer of the Government«
Sec« 495»
It shall be unlawful for any person entitled under the law
to the use of a frank to lend said frank or permit its use by any committee,
organization, or association, or permit its use by any person for the
benefit or use of any committee, organization, or association: PROVIDED»
that this provision shall not apply to any committee composed of Members
of Congress«
During the war, certain latitude in regard to the franking
privilege was permitted by the Postal authorities, but it is now absolutely
necessary to live up to the letter of the law«
All matter sent under
frank must relate exclusively to government business#
With the small personnel in the District Organizations, it is
more than ever important that the District Director actively supervise the
#
campaign for the sale of securities and the educational program in the
field and that he spend a reasonable amount of time in making personal
contact in various parts of the District and in stimulating the interest
of postmasters, bankers, educators and others whose active cooperation is
essential«
H
i
TREASURY DEPARTMENT
WASHINGTON
O F F I C E OF
Ieasurer
,1
of th e united states
IN REPLYING QUOTE INITIALS
October 25, 1920.
To Barks, Trust Companies and Others Concerned:
Bince tho beginning of the war i t has been the p o licy of the Treasury
to conserve gold and discourage it s circu la tio n , and th is p olicy has not
changed with the cessation of h o s t ilit ie s or the removal of the embargo on
the exportation of gold; I t is ju st as important as ever that gold, which
is the foundation of our reserves and +he backbone of a l l cred it transac
tion s, should be concentrated in the Federal Reserve Banks as reserve and
for use in the settlement of balances growing out of international transac
tion s. and i t is the desire of the Treasury that the conservation of gold
should continue and that there should be no revival of the use of gold
coin or gold c e r t ific a te s fo r payrolls and everyday transactions genera lly , in which i t serves no useful purpose. The circu la tio n of gold coin
and gold c e r t ific a te s tends to dissipate the reserves, and the cir cu la
tion of go *d coin involves a considerable lo s s - due to abrasion which is
avoided by having the gold carried in the vaults of the Federal Reserve
Banks and the Treasury.
In accordance with this policy persons requesting gold are invited to
accept other currency instead, but gold has not been and will not -be,^re
fused to persons who, after giving consideration to tie Treasury *s policy,
demand it and are entitled to receive it by reason of the presentation and
surrender of gold obligations. Wherever gold is demanded it is furthernore the Treasury’s policy to pay out available, but not new, gold coin in
the denomination of $20 and gold certificates of large denominations, and
to avoid so far as possible the use of gold coin in denominations of $5
and $10 and gold certificates in the denomination of $1 0 , though such
denominations will not be refused if demanded.
Payments of $2.50 gold
pieces, however, will not be made, inasmuch as no gold has been coined
in this denomination for many years and there is no available supply in
Treasury o f f ic e s .
In view of the foregoing, and the fa ct that there has been re la tiv e ly
l i t t l e coinage of gold for several years past, the Mints being taxed to
their capacity to supply subsidiary s ilv e r and minor coins for ordinary
business purposes, there w ill be no distrib u tion of gold coins this year
fo r holiday purposes.
JOHN BORKE
Treasurer.
II
il (t
T H E SECR ETAR Y OF T H E TR EASU RY
WASHINGTON. D. C.
December 8 , 1920.
Dear Sir:
About $700,000,000 of Treasury certificates of indebtedness mature on
December 15, 1920, about $175,000,000 on January 3, 1921, and about
$125,000,000 additional on January 15, 1921.
On December 15, 1920, there
will also become payable the semi-annual interest on the First Liberty
Loan and the Victory Liberty Loan, aggregating about $140,000,000.
The
greater part of the $700,000,000 of tax certificates maturing on December
15th will be covered by the installment of income and profits taxes
payable on that date.
In order to meet the remainder of these heavy
maturities of principal and interest, and at the same time provide for the
.current requirements of the Government, the Treasury has decided, on the
basis of the best estimates available at this time, to offer Treasury
certificates of indebtedness in the amount of $500,000,000, or there
abouts, in two series dated December 15, 1920, one series designated
TJ 2-1921, bearing 5% per cent interest, maturing* June 15, 1921, and the
other series designated TD-1921, bearing 6 per cent interest and maturing
December 15, 1921. Applications for Treasury certificates of these
series will be received through the several Federal Reserve Banks, from
which full particulars concerning the offering may be obtained.
Treasury certificates of the series maturing December 15, 1920, January
3, 1921, and January 15, 1921, will be accepted at par with an adjustment
of accrued interest in payment for any certificates of the two series now
'offered which may be subscribed for and allotted.
As indicated in the circular letter of September 7, 1920, to the
banking institutions of the country, the operations of the Treasury for
the first quarter of the present fiscal year, ended September 30, 1920,
showed a surplus of ordinary receipts over ordinary expenditures amount
ing to $289,224,706.29, notwithstanding actual cash payments to railroads
during the quarter of some $275,000,000 under the provisions of the
Transportation Act,, in connection with the return of the railroads to
private control.
The Treasury’s current operations during the 5months of
October and November show a net current deficit (excess of ordinary dis
bursements over ordinary receipts) amounting to $357,134,068.15, of which
about $112,000,000 represents payments to the railroads under the Trans
portation Act. The Treasury•confidently expects, however, that the
current quarter, ending December 31, 1920, will still show a substantial
surplus as the result of the quarterly payment of income and profits
taxes in December.
In consequence of the operations incident to the retirement of the
Treasury certificates which matured on September 15 and October 15,
1920, and the quarterly payment of income and profits taxes on September
15th, the gross debt of the Government on October 31, 1920, on the basis
of daily Treasury statements, was reduced to $24,062,509,672-. 96 , of
which about $ 2 ,3 3 7 ,0 0 0 ,0 0 0 consisted of loan and tax certificates un
matured.
On September 30, 1920, the gross debt had been $24,087,356,128.65, of which about $ 2 ,347,0 0 0 ,000 .viere loan and tax certificates
unmatured. \ On November 30, 1920, after the issue of $232,000,000 of
Treasury certificates on November 15th and the retirement on the same
date of about $ 1 0 0 ,0 0 0 ,0 0 0 of maturing certificates, the gross debt, on
the basis of daily Treasury statements, amounted to $24,175,156,244.14,
of which about $2,475,000,000 represented floating debt (loan and tax
certificates unmatured). These temporary increases in both gross debt
and floating debt will-,' it is expected, be more than overcome by December
,31, 1920v in consequence of the December operations, and both gross debt
and floating debt should, on December 31st, be reduced below the amounts
outstanding on September 30th.
The Government's further progress in
retiring the gross debt and the floating debt will depend, of course,
upon the relation between current receipts and current expenditures
during the coming calendar year, but there is good reason to hope th>9,t
unless new burdens are imposed by legislation, there should be important
further reductions in the last two quarters of the current fiscal year,
provided always that tax receipts are maintained at a sufficiently high
level, salvage operations vigorously pressed, and the strictest economy
practiced in Government expenditure.
The three months which have passed since the last quarterly tax pay
ment period have been marked by a still further distribution of Treasury
certificates among investors and a further reduction of holdings of
Treasury certificates by the banks.
The reporting member banks of the
Federal Reserve System (about 823 member banks in leading cities, which
are believed to control about 40 per cent of the commercial bank deposits
of the country and to have subscribed in the first instance for perhaps
75 per cent of the Treasury certificates of indebtedness now outstanding)
held on November 26-, 1920, only about $313,000,000 of Treasury certifi
cates, as compared with reported holdings on August 27, 1920, of about
$430,000,000, and on November 28, 1919, of ab.out $816,000,000.
On
December 3, 1920, the Federal Reserve Banks reported that there were
pledged with Federal Reserve Banks only about $214,000,000 of Treasury
certificates to secure loans and discounts, notwithstanding the prefer
ential rates still maintained in many of the Federal Reserve Districts
and the probability that borrowing banks would use Treasury certificates
as convenient collateral to secure loans for commercial purposes.
The Treasury certificates of the two series now offered are exempt,
like other Treasury certificates outstanding, from all State and local
taxes (except estate and inheritance taxes), and .from the normal Federal
income tax and the corporation income tax, and are admissible assets for
the purpose of calculating profits taxes. The certificates now offered
are also acceptable in payment of Federal income and profits taxes pay
able at their respective maturities, and the United States reserves no
option to call them for redemption before maturity. With these features,
the attractive rates of interest, and absolute security of principal and
interest, these certificates are extremely desirable investments and
should prove particularly attractive to taxpayers having taxes to pay in
the calendar year 1921, as well as to persons having idle funds awaiting
investment.
In these circumstances, the Treasury believes that banking
institutions generally should feel free to enter subscriptions for the
two issues now offered with the confident expectation of prompt resale
for investment, and urges them, as in the past, to subscribe liberally
for the certificates and devote their best efforts to obtain the widest
possible distribution among investors.
Cordially yours,
Secretary.
To
The President
of the Bank or
Trust Company addressed.
Washington, Dec* 27, 1920*
•SOMMAfcr OF I^OMMENiiATlQNS UPON TAXATION
MADE Bt SECRETARY HOUSTON BEFORE THE
SENATE COMMITTEE ON FINANCE» DECe MBEB 27, 1920.
1. I have rec «amended that the revenue from taxation be maintained
after this fiscal year and "until the close of the fiscal year 1923, on a
level of at least $4,000,000,000* This represents a substantial reduction
of aggregate taxes collected from the people* During the fiscal year 1920
the internal tax receipts amounted to $5,400,000,000; aid it is estimated
that for the fiscal year 1921 they will amount to $4,700,000,000.
The
proposed $4,000,000,000 levy, therefore, represents a reduction of
$1,400,000,000 from the level of 1919, and a reduction of $700,000,000
from the level of 3921What it means in brief is that a system of tax
ation based upon the income tax - adjusted to ability to pay, - bears
less heavily upon the taxpayer and yields less revenue,, as it must, when
the income of the country declines*
2v I recommend the reduction of the extreme income surtaxes, not
to exempt the rich but to tax the rich* At present, by investing in
taxfree securities and by the use of other-devices the very wealthy^ can
and do avoid taxation. The taxable income of taxpayers having net incomes
over $300,000 a year fell from $992^972,935 in 1916 to $392,247,329 in 191 *
This condition, I have suggested, may be met either by reducing the upper
surtaxes to a lower general level, or by reducing the upper surtaxes with
respect to that part cf the income which is saved and reinvested in taxable
property or business, leaving the present rates, if necessary, upon income
which is wasted or used in ostentatious and unnecessary consumption*
3* The excess-profits tax should be replaced, primarily because it
is losing its productivity, and premises in the near future to become a
statute of exemptions rather than an effective tax. Moreover, the tax s
so complicated that it imposes upon both taxpayers and administrative
authorities burdens too difficult to be permanently carried* I recommen
that it be replaced - not merely repealed - with a simpler and more cer a
tax upon corporation income or profits. I suggest in this connection
the consideration of the Congress either a flat additional tax on corp
tion profits, such as has recently been adopted in the United^Kingacm,
a tax upon the undistributed profits of corporations under which, .
,
adopted, corporations should be expressly authorised to pay
^
their stockholders, as partnerships are now taxed through their m
By either of these proposals the income tax on corporations co
a fair equivalent for the income tax as now applied in effect o
partnerships and personal service corporations#
4. I recommend the retention of a simple system of specificities
or consumption taxes designed to collect a moderate proportion
aggregate tax le'fry from a few highly productive taxes (®,ncn“ _
Miscellaneous sales or excise taxes shifted in main
the 0
taxes
supplied in the last fiscal year about 20 per cent of the o
taxes,
or about 25 per cent if customs duties a?f counted as consumption
*+ 2 **
In view of the financial needs of the Government these proportions may
properly he maintained or even increased to perhaps 30 or 35 per cent;
hut no radical increase such as doubling the consumption taxes would
in my opinion he justified. There must he a fair balance in the tax
system as a whole between taxes on the consumption of the masses and
taxes on wealth, inccme and business* It would he especially unfortuna e
to substitute sales taxes, of any variety, for taxes upon corporation
prefits required both to balance the tax system and to equalize taxes
on corporations with the progressive income tax as applied to unincor
porated business concerns* To place such an unfair load cn the masses^
would violate all the recognized principles of justice as to the divisi
or distribution of the total tax burden» I do not oppose all salestaxes,
but I have reccmmended the repeal of those sales taxes which are dimouit
to enforce, unduly vexatious and of ine°nsideraole yield.
. _i*
tax system including the existing specific sales taxes s
»«naral
fled, not further complicated by the adoption of a turnover or general
sales tax which would require a huge additional administrative force n
administered properly and would result in widespread evasion it no
thoroughly administered*
5 . The excess-profits and other taxes
opixiiow ^oul
be replaced would yield in the future less than $
»
»
merely
In order to meet this reduction or deficit I nave mentioned-merely
for the convenience of the comiittees of Congress whic
_
actional
responsible for tax revision - a large number of possiblesnew
g
taxes including higher incane taxes and additional speci
000,000
upon luxuries and non-essentials, capable of yielding over
■à-year, Obviously all of these taxes are not reccnmended* They are
mentioned as possible new sources from which to make a s
6 * Except for newspaper misunderstanding it would
to repeat what is so emphatically stated in my recent annua
Unless
sound policy demands the exercise of the most drastic ec
_ ¿or t^e
every unnecessary expenditure such as the proposed aPP
. ■■ Q^ er
payment of soldiers* bonus be avoided; unless every
0 s0Ua&
estimate or request for appropriations be reduced to a ml_ financial
plan of tax revision can be carried out and the successf
seriously
conduct of the Government during the next three years \
imperilled*
m
1
TREASURY DEPARTMENT
WASHINGTON
O F F I C E OF
2Î0&. •REASURER
OF THE UNITED STATES
IN REPLYING QUOTE INITIALS
INSTRUCTIONS RELATIVE TO HANDLING UNITED STATES CERTIFICATES OE
INDEBTEDNESS RECEIVED BY EEDERAL RESERVE BANKS
* (AND BRANCHES) EROM COLLECTORS OE
INTERNAL REVENUE
•
;
¿ÎUp •’lv
Swji'"
January 7, 1921,
1. Collectors of Internal Revenue Have "been authorized and directed
to receive at par United States Treasury certificates of indehtedness of
Series TM-1921, dated March 15, 1920, Series TM2-1921, dated July 15,
1920, Series TM3-1921, dated Septemher 15, 1920, and Series TM4-1921,
dated Octoher 15, 1920, all maturing March 15, 1921, in payment of
income and profits taxes payahle on March 15, 1921.
Collectors have
also "been authorized and directed to receive at par Treasury certifi
cates of indehtedness of Series TJ-1921, dated June 15, 1920, maturing
June 15, 1921, and Series TJ2-1921, dated December 15, 1920, in payment
of income and profits taxes payahle on June 15, 1921; Treasury certifi
cates of indehtedness of Series TS-1921, dated Septemher 15, 1920,
maturing Septemher 15, 1921, in payment of income and profits taxes
payahle on Septemher 15, 1921; and Treasury certificates of indehtedness
of Series TD-1921, dated December 15, 1920, maturing December 15, 1921,
in payment of income and profits taxes payahle on December 15, 1921.
Collectors have been further authorized and directed to receive at par,
in payment of income and profits taxes payahle at the maturity of the
certificates, respectively, Treasury certificates of indehtedness of any
other s.eries which may he issued maturing on March 15, June 15, Septem
her 15, or December 15, 1921, respectively, and expressed to he accept
able in payment of income and profits taxes.
Collectors are not author^
ized to receive in payment of income or profits taxes any Treasury cer
tificates of indehtedness not expressed to he acceptable in payment of
income and profits taxes, nor any Treasury certificates maturing on a
date other than the date on which the taxes are payahle.
Collectors
have been authorized to receive Treasury certificates of indehtedness
which are acceptable as herein provided in payment of income and profits
taxes, in advance of the respective dates on which the certificates
mature.
Treasury certificates acceptable in payment of.income and
profits taxes have one or more interest coupons attached, including as
to each series a coupon payahle at the maturity of the certificates, hut
all interes.t coupons must in each case he detached by the taxpayer
before presentation to the collector, and collected in ordinary course
when due. The amount, at par, of the Treasury certificates of indebted
ness presented by any taxpayer in payment of income and profits taxes
must not exceed the amount of the taxes to he paid by him, and collectors
are not authorized in any case to pay interest on the certificates or
accept them for an amount other or greater than their face value.
2
2. Deposits of Treasury certificates of indebtedness received
in payment of income and profits taxes must be made by collectors,
unless otherwise specifically instructed Tjy the Secretary of the
Treasury, with the Federal Reserve Bank of the district in whi-ch.the
collector's head office is located, or in case such head office, is
located in the same city with a branch Federal Reserve Bank, with
such branch Federal Reserve Bank.
Specific instructions may be given
for the deposit of..the certificates with Federal Reserve Banks of
other districts and branch Federal Reserve Banks.
The term "Federal
Reserve Bank," where it appears herein, unless otherwise indicated
by the context, includes branch Federal Reserve Banks-. Treasury cer
tificates accepted by the collector prior to the dates when the cer
tificates respectively mature, should be forwarded by the collector
to the Federal Reserve Bank to be held for account of the collector
until the date of maturity, and for deposit on such date.
I
jfllit
M
R
I aatt
II
11
softhe
I Upo:
in pa;
1 1
lie par
Lyredi
K 21,
3. Collectors have "been instructed to stamp certificates of
indebtedness accepted by them with an indelible stamp on the face
thereof as follows, and when so stamped to deliver them to the ¡Federal Reserve Bank in person if the Collector is located in the same
city and in all other cases to transmit them to the Federal Reserve
Bank by registered mail,uninsured:
. «toss
ialcer
192.
Modale
«o, the
"This certificate has been accepted in payment of income
and profits taxes and will not be redeemed by the United States
except forcredit of the undersigned.
Mtsiist
...— -.. — ---- ----- —
1!----- -— -----..... — --- ------- "Collector of Internal Revenue
for the ........ District of ____ ___ _____ »
pit sei
MinHeyei
A&L
iiteofdi
M oddis
. . . . .
4. For the purpose of saving taxpayers the expense of transmitting
such certificates as are held in Federal Reserve cities or Federal
Réserve branch bank cities to the office of the collector in whose dis
trict the taxes are payable, collectors have been instructed that tax
payers desiring to pay income and profits taxes by Treasury certificates
of indebtedness acceptable in payment of such taxes should communicate
with the collector of the district in which the taxes are payable and
request from him authority to deposit such certificates with the Federal
Reserve Bank or branch in the city in which the certificates are held.
Collectors have been authorized to permit deposits of Treasury certifi
cates of indebtedness in any Federal Reserve Bank or branch“with the
* distinct understanding that the Federal Reserve Bank or branch is to
issue a certificate of deposit in the collector's name, covering the
amount of the certificates of indebtedness at par, and to state on the
fa,ce of the certificate of deposit that the amount represented thereby
is in payment of income and profits taxes. The Federal Reserve Bank or
branch should forward the original certificate of deposit to the
Treasurer of the United States with its daily transcript, and transmit
to the collector the duplicate and triplicate, accompanied by a state-
for
i%s,
iVove^
i ’^Gl
3
ment giving the name of the taxpayer for whom the payment is made, in
order that the collector may make the necessary record and forward the
duplicate to the office of the Commissioner of Internal Revenue.
5. Collectors of Internal Revenue have /been instructed that they
are not authorized, unless otherwise notified by the Secretary of the
Treasury, to receive in payment of income and profits taxes interim
receipts issued by Federal Reserve Banks in lieu of definitive certifi
cates of the series herein described.
6 .- Upon deposit of Treasury certificates of indebtedness received in payment of income and profits taxes by collectors as herein
provided, the Federal Reserve Bank will charge the Treasurer's account
with the par value thereof and will handle the certificates as an
ordinary redemption, as provided in Sections 1 and 5 of the ins tructions
of April 21, 1919, with the exceptions noted below:
(a)
The total amount of the principal of the certificates of
indebtedness must be credited in the Treasurer's account as In
ternal Revenue receipts, classified in accordance with the schedule
of transmittal forwarded by the Collector, and the bank will issue
the usual certificate of deposit therefor on "Rational Bank Form 15."
The schedule of transmittal must show the serial number of each cer
tificate, the date of issue and maturity, and face value.
Certifi
cates of indebtedness accepted by collectors prior to the date of
maturity must be scheduled separately.
Such income and profits tax
deposits must in all cases be shown on the face of the certificate
of deposit separate and distinct from the item of Miscellaneous
Internal Revenue Collections (formerly called Ordinary). The cer
tificate of deposit must also show the number and location of the
collection district.
(b)
The certificates of indebtedness when deposited should be
listed on Form 912 under the caption "Certificates received from
Collectors of Internal Revenue." Such certificates must not be
reported on the same sheet as certificates that have been received
from other sources for redemption.
In the column "For Whom Re
deemed," the Federal Reserve Bank must indicate the collector from
whom each lot of certificates was received. Form 912 and the cer
tificates described thereon must be forwarded promptly to the Treas
urer of the United States, Division of Securities.
The certificates
must be canceled in accordance with Section 1 of the instructions of
April 21, 1919.
certificates
except those
(c)
Care must be taken to see that
no
receivable for income and profits taxes are accepted under these instructions.
G. F. ABLER,
Acting Treasurer.
Approved:
S.' P. GILBERT, Jr. ,
Assistant Secretary of the Treasury.
January 23, 1921.
M y dear Congressman?
I have received the invitation of the CGarnittee on
Interstate and Foreign Commerce of the House of Representatives to
appear before it on the 14th instant to express my views concerning
Bill H. R. 15551 to amend and reenact subdivision (g) of section 204
and subdivision (g) of section 209 of the Transportation Act, 1920.
I have analyzed the Bill with care and, in order to spare the time
of the Committee
at
th e
hearing on Friday, I take the liberty of
setting forth my views 'below*
In section 209 of the Transportation Act the United
States guarantees that the railway operating income of certain carriers
for the six months following the return of the roads to private control
shall be equal to or shall not be less than amounts computed as provided
in the section.
The amount necessary to make good the guaranty is to
be paid to the railroads cut of the public Treasury.
This section als
provides that if for the guaranty period as a whole the railway cpe-at
ing income of any one of certain carriers entitled to a guaranty is in
excess of a certain « C u n t , the carrier shall f orthwith pay the excess .
into the Treasury of the United States;. In response to a request of the
Treasury for an estimate, the Interstate Commerce Commission has stated
that, in its opinion, based upon the sworn monthly reports of Class 1
carriers, the total amount necessary to make good the guaranty provided
by section 209 will aggregate approximately $600,000,000.
In order
that the carriers might have the benefit of the guaranty at once upon
** Z
T
return of the roads to private ovmership, paragraph (h) provided
for the p a r e n t to the roads of advances on account of. the guaranty
upon giving of security as follows:
*Upon application cf any carrier to the C Omni a si on,
asking that during the guaranty period there may be
advanced to it from time to time such sums, not in
excess of the estimated amount necessary to make good
the guaranty, as are necessary to enable it to meet
its fixed charges and operating expenses, the Commission
may certify to the Secretary of the Treasury the amount
of, and times at which, such advances, if any, shall be
made. The Secretary of the Treasury, on receipt of
such certificate, is authorized and directed to make
the advances in the amounts and at the times specified
in the certificate, upon the execution by the carrier of
a contract, secured in such manner as the Secretary may
determine, that upon final determination of the amount
of the guaranty provided for by this section such
carrier will repay t o the United States any amounts which
it has received from such advances in excess of the
guaranty, with interest at the rate of 6 per centum per annum
from the time such excess was paid* There is hereby
appropriated, out of any money in the Treasury not
otherwise appropriated, a sum sufficient to enable the
Secretary cf the Treasury to make the advances referred
to i n this subdivision.
Under this paragraph advances have been made in the
amount of $260,431,874. A list of these by dates and amounts is
enclosed*
These payments were made in accordance with the
Treasury's usual procedure which has been in effect for many years
under statutes of long standing.
That is to say, the certificate
of the Interstate Commerce Commission, together with the other
papers required b y paragraph (h), were sent to the proper auditor
who thereupon issued a settlement in favor of the carrier named in
the certificate for the amount certified.
Thereupon the Secretary
cf the Treasury issued a warrant and the Comptroller of the Treasury
countersigned it and registered it*
Thereafter the warrant was
signed "by the Treasurer of the United States, entered and delivered*
The Treasury has not received from the Commission any certificate
certifying the total amount necessary to make good to a carrier
the guaranty provided b y section 209*
The Commission did, however,
certify a partial payment to a carrier which had not, during the
guaranty period, applied for an advance under paragraph (h).
The
Comptroller of the Treasury decided that section 209 did not authorize
•the Interstate Commerce Commission except in accordance with the pro
visions of paragraph (h), to certify partial payment and that, there
fore, the Secretary of the Treasury had net authority t® issue a
warrant for such a payment.
Copies of the decisions, dated October 7,
1920, and November 27, 1920, are enclosed.
A copy of the first may
also be found cn page 162 of the Annual Report of the Secretary of the
Treasury for the fiscal year 1920*
Pursuant to these decisions,
the proper auditor made a settlement finding nothing due to the
carrier.
The Secretary of the Treasury, under statutes of long
standing, was, therefore, powerless to issue a warrant.
immediately
The carrier
sued in the Supreme Court of the District of Columbia
for a writ of mandamus directing the Secretary of the Treasury to
issue a warrant.
The Court ruled that the Comptroller*3 construc
tion of section 209 was correct and it denied the writ.
opinion cf the Chief Jus tic® is enclosed.
A copy «£ the
The Comptroller of the
Treasury has also decided that the Treasury is not authorized to issue
- 4 -
a W&rrahi pursuant to a certificate of the Commission f6r an
advance under paragraph (h) whfetfe the Certificate was not made
pursuant to an application filed before the end of the guaranty
period.
The Treasury understands that up to thsi présent time
few, if any, cf the carriers have presented their final claitns
on account of the guaranty.
In these circumstances, the hill pro
poses to amend paragraph (g) of section 209 so that it shall
read as follows:
* n(g) The Commission shall, as socn as practicable
after the expiration of the guaranty period, ascertain
and certify to the Secretary of the Treasury the
several amounts necessary to make good the fore
going guaranty to each carrier. The Secretary
of the Treasury is hereby authorized and directed
thereupon to draw warrants in favor of each such
carrier upon the Treasury of the United States for
the amount shown in such certificate as necessary
to make good such guaranty, it being the true intent
and meaning hereof that whenever, and as often as,
the commission shall certify to the Secretary of
the Treasury an amount as certainly due and necessary
to make good the foregoing guaranty to any such carrier,
the Secretary of the Treasury is hereby authorized
and directed, upon receipt of such certificate, t®
draw a warrant in favor of such carrier upon the
Treasury of the United States for the amount shown
in such certificate as an amount necessary to make
good the foregoing guaranty, whether such amount
is in final settlement or in partial payment, and
the Comptroller of the Treasury is hereby directed
to countersign the same forthwith. The Secretary
cf the Treasury shall thereupon deliver the said
warrant to such carrier, and the Treasurer of the
United States is hereby directed to pay the same,
upon presentation, out of the appropriation made
therefor in this subdivision. An amount sufficient
to pay such warrants is hereby appropriated out of
any mcney in the Treasury not otherwise appropriated«
wIn ascertaining the several amounts necessary
to make good the foregoing guaranty to each carrier
the commission is further authorized, in the case
of debits and credits to railway operating income
- 5 - •
which can not at the time be definitely determined,
to make, whenever in its judgment practicable, a
reasonable estimate of the net effect of any such
items, and, when agreed to by the carrier interested,
to use such estimate as a definitely ascertained
amount in certifying the amounts due under the
said guaranty, and such estimates so agreed to shall
be binding in final sett lement %w
Upon the policy of authorizing to be made to a class
of claimants who announce their claims as being vast but have not
as yet committed themselves as to the amount, partial payments cf
public money to sustain them while they expend effort and money in
the preparation and support of claims against the Government for
losses sustained in their own management of their own property, I
do not venture to express an opinion.
This is a matter for Congress*
If Congress shall decide that it is advisable to authorise relief of
the carriers out of the public Treasury pending a further period of
formulation by them of claims against the Treasury under section 209,
I believe the Government should receive protection not contained in the
present draft cf the bill, and that the end apparently sought by the
bill can be accomplished without making in sound Treasury procedure
which rests upon old and well known statutes the changes which would
result from the passage of the bill in its present form.
At the cutset, I wish to make it clear that the Treasury
is now and at all times has been prepared promptly to disburse, so far
as authorized b y law, the funds necessary to meet the Government's Obli
gation under the Transportation Act, 1920.
In order to accommodate the
carriers other pressing matters in the Treasury have been deferred and
the administrative detail necessary to accomplishing payments to the
roads hastened and given preference.
by telegraphic transfer*
Many payments have been made
At great sacrifice of personal convenience,
the offices of the Solicitor of the Treasury, the Comptroller of the
Treasury, the Treasurer of the United States, the Auditor for the
State and other Departments, the Division of Bookkeeping and Warrants
and my own office have frequently been kept "©pen long past business
hours and sometimes far into the night in order that a particular
payment much desired b y a railroad might be put through*
I,t is, how
ever, the belief of the Treasury that the amount of the Government *s
obligation to the Carriers should be ascertained at the earliest
possible moment in order that the Treasury may know its problem and
dispose of it*
The Treasury has understood it to be the intention
of Congress as indicated by the Transportation Act, 1920, that a prompt
disposal be made of all questions arising out of Federal control of the
railroads and the guaranty, and the Treasury believes that it is
obviously to the interest of the public and the carriers .themselves,
as well as of the Treasury, that these matters be brought to an early
and a final close*
.1 have many times reiterated my belief that every
effort should be made to secure final determination of the amounts
payable under the guaranty as promptly as may be necessary to meet the
exigencies of the carriers.
I should suppose it to be to the interest
of the carriers, particularly those claiming to be in urgent need of
funds, to present to the interstate Commerce Commission their final
claim f or thè remaining amounts necessary to make good the guaranty in
order that the Commission may f orthwith make a final determination as
7
to suoh amounts, and that the Treasury may pay them.
If, hcwever,
.
Congress shall think it wise that payments out of the Treasury be
made before the amounts of the final claims are determined, I should
venture to suggest that this may be accomplished b y one or the other
of the two following methods:
(a)
The operation of paragraph (h) of section 209 might be
extended by striking out the words in the first sentence, "during the
guaranty period", and substituting therefor the words, "prior to the
first day of July, 1921," or suoh other day as Congress may deem wise.
The employment of this method for the relief of the carriers, in case
Oongress believes such relief necessary, would have the advantage of
extending, for such period as may be determined, a procedure which is
already established.'
It would give the Government the benefit of
security for repayment with interest of any part of the advances found
«
final determination of the amount of the guaranty to have been in
excess of the amount necessary to make the guaranty good.
The provi
of Section (h) limit the advances to such sums as are necessary to enable
the carrier to meet its fixed charges and operating expenses.
Prior to
the ascertaining of the final amount necessary to make good the guaranty,
there is no reason why there should be paid to the carriers out of the
public Treasury funds for the purpose of enabling them to make dividends.
Perhaps the greatest advantage of following this method would be that there
would, as to each carrier, as is n ow the law, remain to be made under
paragraph (g) cnly one certificate which would necessarily be final and
which would, therefore, terminate the proceedings between the carrier and
^he government concerning the guaranty*
f* 8
(b)
Section (g) might be amended by. inserting a provision
authorizing certificates to be made from time to time for partial pay
ments on account of the amount due upon the guaranty,
if this method
is followed there should also be inserted a provision similar to that
in paragraph (h) for an agreement and security to be given by any
carrier receiving a partial payment, that in case the amount of the
partial payment together with all advances received b y the carrier
under paragraph (h) shall exceed the amount necessary to make good
the guaranty as finally determined, the carrier will repay to the
Secretary of the Treasury such excess with interest from the time of
the over-payment«
Should either of the methods above suggested be adopted there
should be inserted in paragraph (g) a provision that all claims by
the carrier for any amount necessary to make good the guaranty must
on or before such date as Congress may deem proper be filed with the
Interstate Commerce Commission tcgether with all supporting accounts
upon which the carrier proposes to rely» or be forever completely
barred.
I venture to suggest that such date be September t f 1921»
This provides a period o£ 18 months from the return of the roads to
private control and of one year from the end of the guaranty period,
and affords ample time within which all reasonable claims should be
made.
The nature and purposes of the guaranty are not such as to
require its final adjustment to be held open longer for the purpose
-9-
of meticulously «Adjusting it, to all private claims which may con
ceivably later, be made upon the carriers, even though such, claims might
theoretically affect the railway operating income o f the carriers
during the guaranty period*
The Transportation Act. in its present
form is unusual in omitting such a provision of limitation*.
If either
of the methods above suggested, is adopted f or permitting payments on
account, to be made to the carriers and a provision of limitation is
not inserted the result is likely to be an indefinite delay i,n making
the final, certificate provided in paragraph (g),; in c»sa the method
of amending paragraph (h) is adopted,
or the continuing into an
indefinite future of the presenting by the carriers of claims under
the guaranty if the method is adopted of amending paragraph (g)*
This last would render it impossible for the Interstate Commerce
Commission ever to make a certificate which would be final*
The direction contained in the proposed amendment that the
Comptroller of the Treasury countersign a warrant without exercise by
him of discretion is at variance with the present structure of the
accounting system of the United, States and the nature of tke duties
of the Comptroller as provided by statutes of long standing*
The pro
posed provision would constitute a most undesiraole precedent leading
toward the disruption of the present accounting system under which
warrants are issued by the Secretary of the Treasury and countersigned
by the Comptroller only upon tne A u d i t o r s certificate*
It cannot
be supposed that the proposed amendment is intended to direct the
-
10-
Secretary of the Treasuiy to issue and the Comptroller of tha Treasury
to countersign, a warrant pursuant to a certificate issued by the
Interstate Commerce Commission if not issued in accordance with law*
The Secretary of the Treasuzy has not hitherto failed to issue a
warrant pursuant to a certificate legally made by the Interstate
Commerce Commission, nor has the Comptroller of the Treasury failed to
countersign a warrant issued under such a certificate*
There is no
reason to suppose that they will fail to do so in the future*
The
guaranty provided in Section 209 for the six months following the
return of the roads to private control is not a compensation for any
services rendered by the carriers to the Government or people of the
United States which the carriers would not have been bound to render
without the guaranty*
The compensation to which the carriers may be
entitled for the use of their property during the period of Federal
control is adequately provided for elsewhere*
I can think of no reason
why the claims of the carriers in respect to this bountiful act of the
Government should be relieved from the application of the safeguards
erected for tha benefit of the Government in its accounting system and
its usual and orderly procedure for' payment of claims in the same
manner as such safeguards and procedure are applied to claimants for
compensation for property or services rendered the Government*
I do
not understand that the Interstate Commerce Commission suggests that
its acts in connection with the guaranty should not be subjected to the
usual scrutiny of the accounting officers of the Government a|i to
-Il
legality in the same manner as the acts of the Secretary of the Treasury
and all other officers of'the Government*
XX the method is followed of
amending paragraph (g) as suggested on page 8 of this letter, the mere .
insertion in that paragraph of authority to make partial certificates will
result in the issue by the Secretary of the Treasury and countersignature
by the Comptroller of the Treasury of warrants pursuant to every certi
ficate for a partial payment issued in accordance with law*
The pro
posed mandatory provision directed at the Comptroller of the Treasury
appears to be analagcus to the futile but world old endeavor of de
feated litigants to devise a statutory direction to the judicial officer^
to decide all cases in tneir favor*
The provision contained in the proposed amendment for per
mitting, as the basis of making with the public moneys partial pay
ments to the railroads, the use of mere estimates which shall nevertherless be binding in final settlement deprives the Government of any
element of certainty or safety*
The estimates can bo used only when
agreed to by the carrier interested*
The carrier can be expected to
agree only when the doubt in the estimate is against the Government.
For such estimate, although ultimately it might be found to bw disadvan
tageous to the Government, is made binding in final settlement.
On the
other hand, should the estimate ultimately be found to be less than
the amount properly due the carrier, the carrier need only apply for
an additional partial payment sufficient to-make up to it the difference*
In the absence of a limit on the time within which claims may be made by
-13-
the carrier, the proposed amendment permitting the Commission to
make more than one certificate on account of payment renders it
impossible for the Commission to make a certificate which snail be
final as against a subsequent claim of the carrier*
The reference to
final settlement in the last line of the proposed amendment has only the
effect of preventing the Commission from setting off against such a n *
additional claim by the carrier the amount of any previous overpayment
made pursuant to an erroneous estimate.
It will be seen that this
provision taken together with the first paragraph of the proposed amend
ment is wholly disadvantageous to the Government and is effective only
as a n instrument to be used against the Government*
It should, therefore,
be eliminated*
It has been my understanding of paragraph 209 that by sub
division (3) of paragraph (f) Congress delegated to the Commission
complete power to determine the amount to be included in operating- expenses
for maintenance of way and structures or for maintenance of equipment;
that the adjustments, restatements and eliminations of account provided
for in Section 209 are necessary and usual safeguards properly required by
the Government in guaranteeing the results of the operation by the rail
roads of their business and are for the benefit of the Government and not
of the roads; that these provisions do not amount to a mandatory audit by
the Commission and that the Commission may satisfy itself by any method
which it sees fit as to the correctness of claims by a carrier for the
guaranty*
In these circumstances, I believe the Commission has wide
powers enabling it rapidly to reach final settlement with tne carriers*
-13—
If I am not correct in this understanding of the Act, I am strongly
of the opinion that bread powers should be conferred upon the Commission
to make with apy carrier such settlement of its claim under Section 309
as the Commission may in its discretion approve provided there may be
made with any carrier only one such settlement and provided further
that such settlement shall be a complete bar to any further claim by
the carrier under Section 209*
I assume such grant of power can bo
drawn without limiting the great pavers already reposed in the
Commission or investing the carriers with additional claims*
In case in the opinion of the Commission final settlement with
the carriers can be expedited if the appropriations available *to it
and the staff which it is authorized to employ in the performance of its
administrative duties are increased, I should warmly support a request
of the Commission for the necessary increases of appropriation and staff*
I am convinced that if all questions between the carriers and the Govern
ment growing out of Federal control and the guaranty can De settled
promptly, the necessary payments made, and that chapter of our history
finally closed, it will ultimately be an economy for the Government and
people of the United States, even though for the sake of accomplishing
it somewhat increased expenditures have to be made now in defraying the
cost of the administrative work involved and in making liberal settlements*
Section 204 provides for tne reimbursement out of the public
money to railroads of deficits incurred by them during the period of
Federal control while they were not themselves under Federal control.
It is my understanding that the purpose of this section was to benefit
th.3 short linos which were not ti^on over by the Director General of
Railroads or which' ware. surrendered by him before the end of Federal
control*
Paragraph-.(g) as it now stands provides that the Interstate
Commerce Commission shall promptly certify to the Secretary of the
Treasury the several-amounts playable to carriers under section 204*
Under this authority the Commission had power to make certificates
immediately after March 1, 1920«
The Commission estimated tnat the
amount required would not greatly exceed $10*000,000*
Although more
than ten months have now elapsed .since March 1, 1920, the Treasury has
received from the Commission unqualified certificates for payments to
only two carriers in a total amount of less than $60,000«
The Com
mission has, however, made a number of qualified certificates for par
tial payments»
When one of these was brought to the attention of the
Comptroller of the Treasury he decided that under the terms of section
204 the Secretary of the Treasury was not authorized to draw a warrant
in favof of the carrier mentioned in the certificate on the ground that
section 204 contained no provision for qualified certificates or par
tial payments but only for a single final certificate*
I enclose for
the information of the Committee a copy of the decision of the Comptroller
of the Treasury dated October 22, 1920«
A copy will also be found at
page 156 of the Annual Report of the Secretary of the Treasury for the
fiscal year 1920*
I understand from the Commission that it has been
its practice before making even a qualified certificate for a partial
payment to require, the carrier to present the amount, together with the
supporting facts and figures,
of its entire claim*
It would appear,
therefore, that such obstacles as there may bo to the immediate issue
of final certificates lie in the difficulties encountered by the
Commission in making the audits deemed by it necessary to satisfy
itself as to the correctness of -the respective claims*
In these circum
stances, the bill proposes to amend paragraph (g) so that it shall
read as follows?
n(g) The commission shall promptly certify to the
Secretary of the Treasury the several amounts payable to
carriers under paragraph (f). tfhe Secretary of the Treasury
is hereby authorised and directed thereupon to draw warrants
in favor of each such carrier upon the Treasury of the
United states for the amount shown in such certificates as
payable thereto, it being the true intent and meaning hereof
that whenever, and as often as, the commission shall certify
to the Secretary of the Treasury an amount payable hereunder
to any carrier, the Secretary of the Treasury is hereby author
ized and directed, upon receipt of such certificate, to draw
a warrant in favor of such carrier upon the Treasury of the
United States for the amount shown in such certificate as^
payable to it under this section, whether such amount is m
final settlement or in partial payment, and the Comptroller
of the Treasury is hereby directed to countersign the same
forthwith. The Secretary of the Treasury shall thereupon ^
deliver the said warrant to such carrier, and the Treasurer
of the United States is hereby directed to pay the same,
upon presentation, out of the appropriation made in this sub
division therefor. A n amount sufficient to pay such warrants
is hereby appropriated out of any money in the Treasury not
otherwise appropriated.
HIn ascertaining the several amounts payable Jjaaeunder,
the commission is further authorized, in the case o d*3® ®
the nature m
v**» %***«**?--- * --------
under this section, I do not understand how it can make partial
certificates except by the use of estimates as provided by the second
paragraph of the
I
-16
amendment*
Since, however, in reaching a determination of the deficit
to be reimbursed to any carrier all the items for the entire period
involved must be taken together and since it is proposed that the estimate is to be binding in final settlement, I see no object to be gained
by authorizing certificates for partial payment and suggest that the result
apparently desired c<*n better be obtained by conferring upon the Commission
broad power (if it does not already have it) to make with each carrier
a final settlement provided only one such settlement may be made with
any carrier and provided further that a settlement thus made shall be a
complete bar to all further claims of the carrier under section 204*
If
I am not correct in my understanding that all claims under section 204
have been presented, I venture to suggest that Congress fix an early
date before which all claims must be presented or be forever barred*
The
views expressed as to the provisions concerning the Comptroller of the
Treasury in the proposed amendment to section 209 apply also to the pr
posed amendment to section 204*
The views expressed as to the author
izing of the use of estimates also apply in part*
Yours cordially,
(Signed).
D* F* HOUSTON*
Honorable John J. Esch,
Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives*
SPECIAL INSTRUCTIONS TO COLLECTORS OF INTERNAL REVENUE
IN THE STATES OF
ARIZONA» CALIFORNIA 9 IDAHO; NEVADA 9 OPELON; UTAH an<i WASHINGTON,
January 17, 1921»
Under the provisions of Treasury Decision 3115, collectors of
internal revenue are instructed, unless otherwise notified oy the Secre
tary of the Treasury, not to accept in payment of income and profits
taxes payable in the calendar year 1921 interim receipts issued by
Federal Reserve Banks in lieu of definitive Treasury certificates of
indebtedness acceptable in payment for such taxes#
In order to make
provision for special conditions prevailing in the San Francisco Federal
Reserve District, however, collectors of internal revenue in the States
of Arizona, California, Idaho, Nevada, Oregon, Utah and Washington are
hereby specifically authorized to accept during the calendar year 1921,
subject to verification by the Federal Reserve Bank of San Francisco,
in payment of income and profits taxes payable at the respective dates
of maturity of the certificates which they represent, interim receipts
issued by the Federal Reserve Bank of San Francisco for Treasury cer
tificates of indebtedness by their terms acceptable in payment of in
come and profits taxes at maturity.
Except as herein otherwise provided
such interim receipts will be accepted on the same terms and conditions
as definitive certificates under the provisions of said T, D. 3115.
Inasmuch as interim receipts have no interest coupons attached, accrued
interest to the respective dates of maturity of the certificates will
in every case be remitted by check to the taxpayer by the Federal Re
serve Bank or branch bank with which the collector deposits the interim
receipts.
Separate schedules to accompany deposits of interim receipts
must be prepared in duplicate by collectors, so as to show in each case
-
2
-
the name ana address of the taxpayer,
the face amount and serial
numbers of the interim receipts deposited, and the serial desig
nation and dates of issue and maturity of the Treasury certificates
represented thereby.
Interim receipts accepted b y collectors
hereunder must be forwarded with the original schedule to the
Federal Heserve Bank or branch with which the collector deposits
definitive certificates, with the request that the Federal Heserve
Bank or branch make remittances to taxpayers by check for the amount
of accrued interest due at the maturity cf the certificates.
Col
lectors shall in no case pay interest on interim receipts, nor ac
cept them for amounts other or greater than their face value.
Tax
receipts given by collectors to taxpayers should describe the amounts
of interim receipts, if any, accepted in payment of the taxes.
Collectors of internal revenue in the above-mentioned districts
are not authorised hereunder to accept in payment of income or pro,
fits taxes interim receipts issued by Federal Reserve Banks other
than the Federal Reserve Bank of San Francisco, and collectors Of
internal revenue in other districts than those mentioned are not
authorised hereunder to accept, interim receipts issued by the Federal
Reserve Bank of San Francisco.«
By direction of the Secretary?
m
’
S. P. GILBERT,'.JR.
Assistant Secretary of the Treasury*
TREASURY DEPARTMENT
For release, morning papers,
Thursday, February 10, 1921 .
The Secretary of the Treasury, under the authority of the act approved
September 24* 1917» as amended, offers for subscription, at par and axjaxrued
interest,
through the Federal Reserve Banks, Treasury certificates of
indebtedness, Series 0 1921, dated and bearing interest from February
15, 1921, payable July 15, 1921» with interest at the rate of five and
one-half per cent per annum*
Applications will be received at the Federal Reserve Banks*
Bearer certificates will be issued in denominations of $500, $1,000,
$5,000, $10,000, and $100,000,
The certificates will have one interest
coupon attached, payable July 15, 1921*
The certificates of said series shall be exempt, both as to principal
and interest, from all taxation now or hereafter imposed by the United
States, any State, or any of the possessions of the United States, 0t
by any local taxing authority, except (a) estate or inheritance taxes,
and (b) graduated additional income taxes, commonly known as surtaxes,
and
excess-profits and war-profits taxes, now or hereafter imposed ty the
United States, upon the income or profits of individuals, partnerships,
associations, or corporations*
The interest on an amount of bonds and
certificates authorized by said act approved September 24, 1917» &&&
amendments thereto, the principal of which does not exceed in the aggre
gate $5,000, owned by any individual, partnership, association, or cor
poration, shall be exempt from the taxes provided for in clause (b)
above
-
2-
The certificates of this series do not hear the circulation privilege
and will not he accepted in payment of taxes.
The right is reserved to reject any subscription and to allot le^s
than the amount of certificates applied for and to close the subscriptions
at any time without notice*
Payment at par and accrued interest for
certificates allotted must be made on or before February 15, 1921, or
on later allotment*
After allotment and upon payment Federal Reserve
Banks may issue interim receipts pending delivery of the definitive
certificates»
A n y qualified depositary will he permitted to make payment
by credit for certificates allotted to it for itself
and its oustcmers
up to any amount for which it shall be qualified in excess of existing
deposits, when so notified by the Federal Reserve Bank of its district*.
As fiscal agents of the United States, Federal Reserve Banks are
authorized and requested to receive subscriptions and to make allotment
in full in the order of the receipt of applications up to amounts indi-v
cated by the Secretary of the Treasury to the Federal Reserve Banks of
the respective districts*
The issue will be for $100,000,000, or thereabouts*
TREASURY DEPARTMENT
FOR RELEASE, MORNING PAPERS,
Wednesday, March 9, 1921*
In connection with the March 15th offering of Treasury
Certificates, Secretary Mellon is sending to
$ banking institutions
throughout the country the following letter:
"March 9, 1921*
Dear Sir!
At the outset of my administration of the Treasury I am addressing
this letter to the banking institutions of the country to inform them
of the state of the I&tion* s finances, the probable requirements of the
Treasury for the coming months, and its financial plans for the immediate
future.
About $500,000,000 of Treasury certificates* of indebtedness mature on
March 15, 1921, and about $118,000,000 additional on April 15, 1921* On
March 15, 1921, there will become payable the semiannual interest on the
Third Liberty Loan, amounting to about $75,000,000* The Treasury must
also make large payments under the recent legislation authorizing partial
payments on account of the railroad guaranty, which may amount to as much
as $200,000,000 during the course of the next month* In order to meet
these heavy requirements and at the same time provide for the current
expenses of the Government, the Treasury relies in large part upon the
quarterly installment of income and profits taxes due March 15, 1921*
Advance payments of March taxes have been up to expectations, and though
it is impossible to forecast the results with certainty, the Treasury has
good reason to hope that income and profits tax payments during March will
about balance the March 15 maturities of principal and interest* To
provide for its further requirements, the Treasury has decided, ^on the
basis of the best available estimates, to offer Treasury certificates of
indebtedness in the amount of $400,000,000, or thereabouts, in two
series, both dated March 15, 1921, one series designated T S 2-1921,
bearing 5 l/2 per cent interest, maturing September 15, 1921, and the o er
series designated T M-1922, bearing 5 3/4 per cent interest and maturing
March 15, 1922. Applications for Treasury certificates of these series
will be received in regular course through the several Federal Reserve
Banks, as fiscal agents of the United States, from which full particulars
concerning the offering may be obtained* Treasury certificates of
e
series which mature on March 15, 1921, and April 15, 1921, will be ac
cepted at par with an adjustment of accrued interest in payment for ary
certificates of the two series now offered which may be subscribed or
and allotted*
On the basis of the Treasury Daily statements, the current, operations
of the Government during the first eight months of the ^fiscal year
through February 28, 1921, show a net current surplus (excess of orainaiy
receipts over ordinary disbursements) amounting to $186,115,505*53*
This showing is particularly encouraging in view of the fact that during
these eight months there have been extraordinarily heavy expenditures but
only two quarterly payments of income and profits taxes*
Ordinary
receipts up to February 38, 1921, have amounted to $3,4331411,141*36, as
against ordinary disbursements during the same period of $3,247,235,635*83
(or at the rate of almost 5 billions a year)* Of these disburse
ments about $750,000,000 h»ve represented expenditures of the War
Department, about $450,000,000 expenditures of the Navy Department,
about $475,000,000 payments to the railroads under the Transportation
Act, 1920, and about $550,OGo,000 payments of interest on the public
debt — a total of aoout $2,225,000,000 under these four main headings*
In the four months which remain of the fiscal year there will be two
further quarterly payments of income and profits taxes, both based
on the business of the calendar year 1920* While it is impossiDle to
estimate these tax payments with accuracy, and the prospects are that
expenditures will continue heavy for some time to come, the Treasury
expects that the operations of the first three quarters of the year,
through March 31, 1921, as well as the completed yearns operations, will
show some surplus of receipts over expenditures*
The gross debt of the Government on February 28, 1321, amounted to
$24,051,684,728*28, on the basis of Treasury Daily Statements, while on
the same date the floating debt (loan and tax certificates uhmatured)
amounted to $2,484,032,000* These, figures contrast with a gross debt
on December 31, 1920, of $23,982,224,168*16, and a floating debt
on the same date of $2,300,656,000. As a result of the Treasury*s
operations on March 15, 1321, these increases in gross debt and floating
debt (which are to be e j e c t e d in the odd months when no quarterly income
and profits tax payments are made) should be largely offset and perhaps
overcome* The progress to be made during the balance of the current year
in the retirement of gross debt and floating debt will depend, of course,
upon the extent of the demands made upon the Treasury and the volume
of its receipts from taxes and salvage* This progress is likely to be
seriously limited by reason of the heavy railroad payments to be expected
during the next two or three months*
These figures as to the public debt and the current operations of the
Treasury show that the country’s finances are sound, but that the situa
tion calls for the utmost economy* The Nation can not afford extrava
gance, and so far as possible it must avoid entering upon new fields of
expenditure* The heavy requirements of the Government on account of
necessary expenditures, including interest and sinking fund on the pu i c
debt, and the maturity of
billions of short-dated debt within the next
two years or thereabouts make it imperative that the greatest care an
economy be exercised in matters affecting Government expenditure.
people generally must become more interested in saving the Government s
money than in spending it* A thoroughgoing National budget system mus
be established,*and the Government’s expenses brought into relation to
its income*
— o—
Tlie period which has elapsed since the last quarterly installment of
income and profits taxes has been marked by important developments in the
market for Treasury certificates of indebtedness* On January 15* 1921,
the Treasury successfully sold an offering of three-months 5 1/2 per cent
certificates and nine-months 5 3/4 per cent certificates* On February 15,
1921, an offering of five-months 5 l/2 per cent certificates was likewise
promptly oversubscribed* Treasury certificates of indebtedness now enjoy
a broad and active market, on a straight investment basis, and all issues
now outstanding are quoted in the open market either at par or at a
premium. The last three months have also been marked by still further
distribution of Treasury certificates among investors and a reduction in
holdings of Treasury certificates by banks* The reporting member banks
of the Federal Reserve System (about 825 banks in leading cities, which
are believed to control about 40 per cent of the commercial bank re
sources of the country and to have subscribed in the first instance for
about 75 per cent of the Treasury certificates of indebtedness now out
standing) held on February 25, 1921, only about $235,000,000 of Treasury
certificates as compared with reported holdings on November 26, 1920, of
about $313,000,005, and on February 27, 1920, of about $673,000,000*
On
March 4, 1321, the Federal Reserve Board reported that there were pledged
with the Federal Reserve Banks only about $110,000,000 of Treasury cer
tificates to secure loans and discounts, or less than 5 per cent o
e
aggregate amount of loan and tax certificates then outstanding* These
figures strikingly show the success of the efforts which have been
for the past year or more to secure distribution of Treasury certi ica es
among real investors, and to keep them out of the banks*
The two series of six months and twelve months certificates now
offered are both acceptable in payment of income and profits taxes,
and should prove peculiarly attractive to taxpayers as well as to
persons having idle funds awaiting investment* 1 know that I can coun ,
like my predecessors in office, on your hearty cooperation in the ^
distribution and sale of Treasury certificates, and hope that, as
the past, you will subscribe liberally in the first instance for the
certificates and use your test erforts to resell them to investors*
Cordially yours,
A. W. MELLON
Secretary of the Treasury.
To the President
of the Bank or Trust Company addressed*"
TREASURY DEPARTMENT*’
For release, morning papers,
Wednesday, March 9, 1921*
The Secretary of the Treasury, under the autnority of the act ap
proved September 24, 1917, as amended, offars for subscription, at par
and accrued interest, tnrough the Federal Reserve Banks, Treasury cer
tificates of indebtedness, in two series, both dated and bearing interest
from March 15, 1921, tha certificates of Series T S 2-1921 being payable
on September 15* 1921, with interest at tha rate of five and one-half
per cent per annum semiannually, and the certificates of Series 1? M-1922
being payable on March 15, 1922, and bearing interest at the rate of
five and three-quarters per cent per annum, payable semiannually*
Applications will be received at the Federal Reserve Banks*
Bearer certificates will be issued in denominations of $500, $1,000,
$5,000, $10,000, and $100,000*
The certificates of Series T S2-1921
will have one interest coupon attached payable September 15, 1921, and
the certificates of Series T M-1922 two interest coupons attached, payable
September 15, 1921, and March 15, 1222«
The certificates of both said series shall be exempt, both as to
principal and interest, from all taxation now or nereafter imposed by the
United States, any State, or any of tne possessions of tne United States,
or by any local taxing authority, except (a) estate or inheritance taxes,
and (b) graduated additional income taxes, commonly known as surtaxes, and
excess—prof its and war profits taxes, now or nereafter imposed by the United
States, upon the income or profits of individuals, partnerships, associa
tions,
or corporations«
The interest on. an amount of bonds and certificates
authorized by said act approved September 24, 1917, and amendments thereto,
the principal of which does not exceed in the aggregate $5,000, owned by any
individual, partnership, association, or corporation, shall be exempt from
the taxes provided for in clause (b) above.
Cert if iCcttes of these series will be accepted at par, with an adjust*
ment of accrued interest, during such time and under such rules and regu
lations as snail be prescribed or approved by the Secretary of the Treasury,
in payment of income and profits taxes payable at the maturity of the cer
tificates, respectively*
The certificates of these series do not bear the
circulation privilege*
The right is reserved to reject acy subscription and to allot less thari
the amount of certificates of either or both series applied for and' to d o s e
the subscriptions as t^ either or both series at any timo without notice*
Payment at par and accrued interest for certificates allotted must be made on
or before March 15, lèsi, or on later allotment*
After allotment and upon
payment Foderai Reserve Banks may issue interim receipts pending delivery of
the definitive certificates*
Any qualified depositary will be permitted to
make payment by credit for certificates allotted to it for itself and its
customers up to ary amount for which it shall be qualified in excess of
existing deposits when so notified by the Federal Reserve Bank of its district
Treasury certificates of indebtedness of Series T M—1921, Series T ¿V12-1321,
Series T M3-1921, and Series T M4*192l, all maturing March 15, 1921, and of
Series E 1921, maturing April 15, 1921, with any unmatured interest coupons
attached, will be accepted at par, with a n adjustment of accrued interest, in
payment for ary certificates of the Series T S2-1921 or T M-1922 now offered
which shall be subscribed for and allotted#
■3-
As fiscal agents of the United States, Federal Reserve Banks are
authorized and requested to receive subscriptions and to make allotment
in full in the order of the receipt of applications up to amounts indi
cated by |he Secretary of the Treasuiy to the Federal ReservevBanks of
the respective districts«
The combined issue will be for $400,000,000, or thereabouts*
1
\
March 31, 1931*
In connection with the March 15th issue of Treasury cer
tificates it is interesting to note that Treasury certificates
of indebtedness cf all issues now oiitstanding are quoted in
the open market at par or at a premium.
Quotations cn Treas
u r y certificates now appear daily in the leading newspapers,
and the certificates enjry a broad and active investment mar
ket*
Oat of two and cne-half billions cf Treasury certificates
outstanding less than $100,000,000 are pledged with the Federal
Reserve hanks to secure loans and discounts.
Oniy $94;500,000
of certificates were so pledged at the close of business .Friday,
March 25, 1921, according to the latest statement of the Federal
Reserve Board.
TREASURY DEPARTMENT
Eor release, morning papers,
Monday, April 11, 1921.
The Secretary of the Treasury, -under the authority of the act
approved September 24, 1917, as amended,
offers for subscription,
at par and accrued interest, through the Eederal Reserve Banks,
Treasury certificates cf indebtedness, Series H 1921, dated and bearing
interest from April 15, 1921, payable October 15, 1921, with semiannual
interest at the rate of five and one-half per cent per annum*
Applications will be received at the Eederal Reserve Banks*
Bearer certificates will be issued in denominations of 4500, $1,000,
$5,000, $10,000, and $100,000*
The certificates will have one interest
coupon attached, payable October 15, 1921»
The certificates of said series shall be exempt, both as to principal
and interest, from all taxation new or hereafter imposed b y the Xfeiteg.
States, any State, or any of the possessions of the I M t e d States, Q t
b y any local taxing authority, except (a) estate or inheritance taxes,
and (b) graduated additional income taxes, coranonly known as surtaxes,
and excess-profits and war-profits taxes, now or hereafter imposed by
the United States, upon the income or profits of individuals, partnerships
associations, or corporations.
The interest on an amount of bends
and certificates authorized by said act approved September 24, 1917,
and amendments thereto, the principal of which does not exoeed in the
aggregate $5,000, owned b y any individual, partnership, association, or
corporation, shall be exempt from the taxes provided for in clause (b)
above.
-
2
-
The certificates of this series do not hear the circulation privilege
and will not be accepted in payment of taxes,
/
The right is reserved to reject any subscription and to allot less than
the amount of certificates applied for and to close the subscriptions at
any time without notice#
Payment at par and accrued interest for cer
tificates allotted must be made on or before
allotment*
April 15» 1921, or on later
After allotment and upon payment Federal Reserve Banks may
issue interim receipts pending delivery of the definitive certificates*
Any qualified depositary will be permitted to make payment by credit
for certificates allotted to it for itself and its customers up to any
amount for which it shall be qualified in excess of existing deposits,
when so notified b y the Federal Reserve Bank of its district*
Treasury
certificates of indebtedness of Series F 1921» maturing April 15» 1921,
and of Series D 1921, maturing May 16, 1921 (with any unmatured interest
coupons attached), will be accepted at par, with an adjustment of accrued
interest, in payment for any certificates of the Series H 1921 now offered
which shall be subscribed for and allotted*
As fiscal agents of the United States, Federal Reserve Banks are
authorized and requested to receive subscriptions and to make allotment
in full in the order of the receipt of applications up to amounts indicated
b y the Secretary of the Treasury to the Federal Reserve Banks of the
respective districts*
The issue will be for $150,000,000, or thereabouts*
LETTER FROM THE SECRETARY OF THE TREASURY TO THE CHAIRMAN OF THE COMMITTEE ON
WAYS AND MEANS.
«m V
in accordance with your request, as communicated m your letter of April 25, 1921,1 am
glad to present for your consideration and that of the Committee on Ways and Means, revis<
estimates of receipts and expenditures for the fiscal years 1921 and 1922, and to indicate
that connection what revenues must be provided for the fiscal years 1922 and 1923 in order
carry on the Government’s business and meet its current requirements and fixed debt charge
including
interest
and-----sinking
------ o -------------------o fund.
In order that the Congress may have the latest available information before it, I hand you
vith the following statements:
herewith
(A) Statement giving revised estimates of receipts and disbursements for the fiscal years ‘
1921 and 1922, with a supplemental statement classifying the estimated disbursements. This vVJ
statement is made up on the basis of actual receipts and disbursements for the first three ^
quarters of the fiscal year 1921, and the best estimates of the Treasury and the spending depart
ments as to receipts and disbursements during the last quarter of 1921 and the fiscal year 1922.
It supersedes the estimates of receipts and expenditures for the fiscal years 1921 and 1922 which
appear on pages 273 to 278 of the Annual Report of the Secretary of the Treasury for 1920.
(B) Preliminary statement showing classified expenditures of the Government for the
period from July 1, 1920, to March 31, 1921, with comparative figures and total expenditures
for the fiscal year 1920, on the basis of daily Treasury statements (exclusive of postal expendi
tures, except postal deficiencies, etc.).
(C) Preliminary statement showing ordinary receipts of the Government for the period
from July 1, 1920, to March 31, 1921, with comparative figures and total ordinary receipts for
the fiscal year 1920, on the basis of daily Treasury statements (exclusive of postal revenues) .
(D) Preliminary statement of the public debt on March 31, 1921, on the basis of daily
Treasury statements, with a quarterly comparative public debt statement which shows the
figures for August 31, 1919, when the war debt was at its peak.
(E) Statement showing comparative figures as to the outstanding short-dated public debt,
on the basis of daily Treasury statements, from August 31, 1919, to March 31, 1921.
Ordinary expenditures for the first three quarters of the fiscal year 1921 have been
$3,783,771,996.74, or at the rate of about $5,000,000,000 for the year. Of these expenditures
about $850,000,000 have been expenditures of the War Department, about $500,000,000
expenditures of the Navy Department, about $600,000,000 payments to the railroads, and about
$650,000,000 interest on the public debt, an aggregate of $2,600,000,000 under these four
headings in nine months, or at the rate of about $3,500,000,000 for the year. According to the
latest estimates of the spending departments, as set forth in Statement A—Supplemental,
ordinary expenditures during the fiscal year 1922, including interest on the public debt, will be
over $4,000,000,000.
The Nation can not continue to spend at this shocking rate. As the President said in his
message, the burden is unbearable, and there are two avenues of relief. u One is rigid resistance
in appropriation and the other is the utmost economy in administration.” This is no time
for extravagance or for entering upon new fields of expenditure. The Nation’s finances are
sound and its credit is the best in the world, but it can not afford reckless or wasteful expendi
ture. New or enlarged expenditures can not be financed without increased taxes or new loans.
Expenditures should not even be permitted to continue at the present rate. The country is stag
gering under the existing burden of taxation and debt and clamoring for gradual relief from the
war taxation. It may be counted upon not only to exert effective pressure against increased
expenditures but also to give its whole-hearted support to all sincere efforts to reduce expenditures.
44144—21
9**
\p$**
2
The last Congress made a creditable record in reducing appropriations, and it effected sub
stantial economies. Notwithstanding the reduced appropriations, however, expenditures have
continued unexpectedly high, and the reduction in expenditures has barely kept pace with the
shrinkage in receipts. Reduction of appropriations, moreover, will not of itself be effective to
reduce expenditures unless at the same time the Congress avoids or controls measures which
result in expenditure without an apparent appropriation. Reappropriations of unexpended
balances, revolving-fund appropriations and appropriations of receipts, and other indefinite
authorizations of expenditure have in the past been responsible for hundreds of millions of
dollars of actual cash outgo.
_
The estimates for the fiscal year 1922 are subject to great uncertainty as to both receipts
and expenditures. The estimated collections of $3,700,000,000 of internal taxes are based
on the provisions of existing law, and are $850,000,000 less than the estimated collections for
1921, chiefly because of the shrinkage in business. They are liable to be somewhat further
reduced from the same cause. The estimated ordinary expenditures of $4,014,000,000 will on
their part be affected by appropriations which are still to be made. The estimated expenditures
of the War Department and the Navy Department, aggregating over $1,100,000,000 for 1922,
will depend largely upon the military and naval policy adopted by the Congress at the present
session. The estimate of about $545,000,000 for payments to the railroads in 1922 is made
necessary by the provisions of the Transportation Act, 1920, and increased estimates from the
Director General of Railroads. In the absence of drastic cuts in military and naval expendi
tures, there is almost no prospect, according to the estimates, of any substantial available surplus even in the fiscal year 1922.
The estimates of receipts and expenditures for both 1921 and 1922 show clearly that while
this Government has definitely balanced its budget, the surplus of current receipts over current
expenditures will not quite provide for what may be termed the fixed public debt redemptions,
and that unless expenditures are sharply reduced there will be practically no funds available
in these years for the retirement of the floating debt represented by loan and tax certificates
outstanding. The estimated current surplus in both 1921 and 1922 will be absorbed (1) by
current redemptions of War-Savings securities, redeemable substantially on demand, (2) by
purchases for the cumulative sinking fund, (3) by acceptance of Liberty bonds and Victory
notes for estate taxes, and (4) by miscellaneous other debt retirements which must be made
each year in order to comply with existing law or with the terms of outstanding securities.
This means that the Treasury’s earlier expectations as to the retirement of the floating debt
have been upset by the continuance of unexpectedly heavy current expenditures during the
past 12 months, particularly on account of the Army and Navy and the railroads, and that the
Government can not now expect to retire any material portion of the two and one-half billions
of floating debt now outstanding during the fiscal years 1921 and 1922 out of current revenues.
It means also that the country can not look to any plan for funding the floating debt to reduce
the burden of internal taxes during the next two years. Substantial cuts in current expenditures offer the only hope of effective relief from the tax burden.
Within the next two years, or thereabouts, there will mature about seven and one-half
billions of short-dated debt (including the outstanding floating debt), and it is to the gradual
retirement of this debt that the bulk of the current surplus is necessarily applied, in large part
through the miscellaneous debt retirements described in the preceding paragraph. Substantial
progress has already been made in the retirement of the short-dated debt. Statement E, for
example, shows that the short-dated debt aggregated $7,578,954,141.89 on March 31, 1921, as
against $9,248,188,921.12 on August 31, 1919, when the war debt was at its peak, a reduction
of about one and two-thirds billions in the 19 months’ period. This reduction was due in
large part to the reduced balance in the general fund and the application of receipts from war
salvage, and only in small measure to surplus tax receipts. In view of its early maturity, the
Treasury must regard the short-dated debt as a whole, and within the next two years may expect
to reduce it by perhaps one billion dollars through the continued operation of the sinking fund
and the miscellaneous annual debt retirements. The remainder of this short-dated debt, amounting to over six billions, will have to be refunded. It will therefore be the Treasury’s policy to
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vary its monthly offerings of Treasury certificates of indebtedness from time to time when
market conditions are favorable with issues of short-term notes in moderate amounts with
maturities of from three to five years, with a view to the gradual distribution of the shortdated debt through successive issues of notes in convenient maturities extending over the
period from 1923 to 1928, when the Third Liberty Loan matures. Treasury certificate offerings
will continue to be made from time to time as in the past, in order to meet the Treasury’s
current requirements. This program will make the short-dated debt more manageable and
facilitate the refunding operations which will be necessary in connection with the maturity
of the Victory Liberty Loan.
This analysis of the condition of the Treasury and of the burdens which it must face within
the next two fiscal years shows clearly, as the President stated in his message, that—
unless there are striking cuts in the important fields of expenditure, receipts from internal taxes can not safely he per
mitted to fall below four billions in the fiscal years 1922 and 1923. This would mean total internal tax collections of
about one billion less than in 1920, and one-half billion less than in 1921.
The most substantial relief from the tax burden must come for the present from the readjustment of internal taxes,
and the revision or repeal of those taxes which have become unproductive and are so artificial and burdensome as to
defeat their own purpose. A prompt and thoroughgoing revision of the internal tax laws, made with due regard to
the protection of the revenues, is, in m y judgment, a requisite to the revival of business activity in this country. . It is
earnestly hoped, therefore, that the Congress will be able to enact without delay a revision of the revenue laws and such
emergency tariff measures as are necessary to protect American trade and industry.
Now that the House of Representatives has passed the emergency tariff legislation, I
hope that the Congress will soon undertake the revision of the revenue laws, with due regard
to the protection of the revenues and at the same time with a view to “ the readjustment of
internal taxes and the revision or repeal of those taxes which have become unproductive and
are so artificial and burdensome as to defeat their own purpose. ” The higher rates of income
surtaxes put constant pressure on taxpayers to reduce their taxable income, interfere with
the transaction of business and the free flow of capital into productive enterprise, and are
rapidly becoming unproductive. The excess-profits tax is artificial and troublesome. Taxes
of this extreme character are clogs upon productive business and should be replaced by other
and more equitable taxes upon incomes and profits. An intelligent revision of these taxes
should encourage production and in the long run increase rather than diminish the revenues.
Early action is necessary, for unless a revision is adopted within a few months it could not in
fairness apply to income and profits arising from the business of the present calendar year.
With these considerations in mind, I venture to make the following principal suggestions
with regard to the revision of the internal tax laws:
1. Repeal the excess-profits tax, and make good the loss of revenue by means of a modified
tax on corporate profits or a flat additional income tax upon corporations, and the repeal of
the existing $2,000 exemption applicable to corporations, to yield an aggregate revenue of
between $400,000,000 and $500,000,000. The excess-profits tax is complex and difficult of
administration, and is losing its productivity. It is estimated that for the taxable year 1921
it will yield about $450,000,000, as against $2,500,000,000 in profits taxes for the taxable year
1918, $1,320,000,000 for the taxable year 1919, and $750,000,000 for the taxable year 1920.
In fairness to other taxpayers, and in order to protect the revenues, however, the excess-profits
tax must be replaced, not merely repealed, and should be replaced by some other tax upon
corporate profits. A flat additional tax on corporate income would avoid determination of
invested capital, would be simple of administration, and would be roughly adjusted to ability
to pay. It is estimated that the combined yield to accrue during the taxable year 1921 from
a tax of this character at the rate of 5 per cent and the repeal of the $2,000 exemption would
be about $400,000,000.
2. Readjust the income-tax rates to a maximum combined normal tax and surtax of 40 per
cent for the taxable year 1921, and of about 33 per cent thereafter, with a view to producing
aggregate revenues substantially equivalent to the estimated receipts from the income tax under
existing law. This readjustment is recommended not because it will relieve the rich, but
because the higher surtax rates have already passed the collection point. The higher rates
constitute a bar to transactions involving turnovers of securities and property, which with
4
lower surtax rates would be accomplished and thus yield substantal new revenue to the
Government. The total net income subject to the higher rates israpidly dwindling, and
funds which would
otherwise be invested in productive enterprise are being driven into
fields which do not yield taxable income. The total estimated revenue from the surtaxes
under existing law is about $500,000,000 for the taxable year 1921. The estimated yield for
the year from the surtax rates above 32 per cent would be about $100,000,000. The imme
diate loss in revenue that would result from the repeal of the higher surtax brackets would
be relatively small, and the ultimate effect should be an increase in the revenues.
3. Retain the miscellaneous specific-sales taxes and excise taxes, including the transporta
tion tax, the tobacco taxes, the tax on admissions, and the capital-stock tax, but repeal the
minor “ nuisance” taxes, such as the taxes on fountain drinks and the miscellaneous taxes
levied under section 904 of the Revenue Act, which are difficult to enforce, relatively unproductive, and unnecessarily vexatious. The repeal of these miscellaneous special taxes would,
it is estimated, result in a loss of about $50,000,000 in revenue. The transportation tax
is objectionable and I wish it were possible to recommend its repeal, but this tax produces
revenue in the amount of about $330,000,000 a year and could not safely be repealed or re
duced unless Congress is prepared to provide an acceptable substitute. The Treasury is not
prepared to recommend at this time any general sales tax, particularly if a general sales tax
were designed to supersede the highly productive special sales taxes now in effect on many
relatively nonessential articles.
4. Impose sufficient new or additional taxes of wide application, such as increased stamp
taxes or a license tax'on the use of automobiles, to bring the total revenues from internal taxes
after making the changes above suggested, to about $4,000,000,000 in the fiscal years 1922
and 1923. The only way to escape these additional internal taxes, to an aggregate amount
of between $250,000,000 and $350,000,000, will be to make immediate cuts in that amount
in current expenditures. In the event that this should prove impossible, it might be feasible
to provide perhaps as much as $100,000,000 or $150,000,000 of the necessary revenue from
new duties on staple articles of import, and the balance by taking more effective steps to
realize on back taxes, surplus war supplies, and other salvageable assets of the Government.
5. Adopt necessary administrative amendments to the Revenue Act in order to simplify
its administration and make it possible, among other things, for the Commissioner of Internal
Revenue, with the approval of the Secretary of the Treasury and the consent of the taxpayer,
to make final determination and settlement of tax cases. In this connection it would be well,
in the interest of fairness and in order to simplify the administrative problem, to provide,
under proper safeguards, for carrying forward net losses of one year as a deduction from the
income of succeeding years.
I suggest for the consideration of Congress that it may also be advisable to take action by
statute or by constitutional amendment, where necessary, to restrict further issues of tax-exempt
securities. It is now the policy of the Federal Government not to issue its own obligations
with exemptions from Federal surtaxes and profits taxes, but States and municipalities are
issuing fully tax-exempt securities in great volume. It is estimated that there are outstanding
perhaps $10,000,000,000 of fully tax-exempt securities. The existence of this mass of exempt
securities constitutes an economic evil of the first magnitude. The continued issue of taxexempt securities encourages the growth of public indebtedness and tends to divert capital
from productive enterprise. Even though the exemptions of outstanding securities can not
be disturbed, it is important that future issues be controlled or prohibited by mutual consent
of the State and Federal Governments.
I am sending a copv of this letter to Senator Penrose as Chairman of the Committee on
Finance.
.
.
I shall, of course, be glad to hold myself and the Treasury experts in readiness to answer
any call from the committee and to supply such further information with regard to the condìtion of the Treasury and the Treasury’s revenue recommendations as the committee may desire.
Very truly yours,
A. W. MELLON,
Hon. Joseph W . F ordney,
Secretary.
Chairman, Committee on Ways and Means, House of Representatives.
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Statement o f Estimated Receipts and Disbursements fo r Fiscal Years 1921 and 1922.
{Revised A p ril 27, 1921.)
Fiscal year 1921.
Fiscal year 1922.
RECEIPTS.
1300,000,000
Customs.................. ........................... .................... ................
Internal revenue:
Incom e and profit t a x e s ................................................
Miscellaneous internal revenue_______ _. . . ________
$800,000,000
$3,150,000,000
1,400,000,000
$2,350,000,000
1,350,000,000
4,550,000,000
Miscellaneous revenue:
Sales of public lands------ ---------------------- --- ---------- -Federal Reserve Bank franchise tax___________ _____
Interest on foreign obligations......... ..............................
Repayments of foreign obligations...............................
Sales o f surplus war supplies....... ....... . . . . . . . . . . . . . . .
Panama C an al...............................................................
Other miscellaneous.................. ......................................
3,700,000,000
1,500,000
60,724,500
28.331.000
1,500,000
60,000,000
225.026.000
30.500.000
60,000,000
14.830.000
156,087,000
,
100 000,000
200, 000,000
11.800.000
174,711,500
T o ta l..................... ...................................... ......... .....
637,067,000
547,643,000
5,487,007,000
4,547,643,000
D ISBU RSEM EN TS.
Ordinary.................................. ................................................
Public debt:
Sinking fund_________ . . . ........................ .....................
War-Savings securities (n e t ) ___ ______ _______ ____
Miscellaneous debt redemptions................. ...................
Purchases of Liberty bonds from foreign repayments.
Redemptions of bonds and notes from estate fa x es ...
Retirement of Pittm an A ct certificates___ ________
Retirement of Treasury certificates from Federal
Reserve Bank franchise tax receipts____________ _
5,005,545,496
253,404,865
140,000,000
850,000
85.000.
20.000.
4,014,522,168
265,754,865
100,000,000
100,000
30,500,000
25,000,000
000
000
421,354,865
498,754,865
37,000,000
60,724,500
70.000.
000
60.000.
000
130,000,000
97,724,500
596,479,365
551,354,865
5,602,024,861
4,565,877,033
114,957,861
18,234,033
Total debt retirem ents............. ......... .......................
Total disbursements..........................................
Excess of disbursements over receipts...............................
A -iS u pplem en tal).
Classification o f Estimated Disbursements fo r Fiscal Years 1921 and 1922.
Fiscal year 1922.
Fiscal year 1921.
Postal deficiency.................................
Treasury Department:
Bureau of War RiskTnsurance.
Public Health Service_______ _
Collecting the revenue........ ........
All o t h e r .._____ ____________ _
$723,231,937
Retirement of Pittm an A ct certificates--------- ---------Retirement of Treasury certificates from Federal
Reserve Bank franchise ta x receip ts....................... .
43,512,000
66,097,796
$233,074,884
50,000,000
51,944,134
112,565,886
W ar Departm ent............................................................
N a vy Department.......................................................
Shipping B oard..............................................................
Railroads (transportation a cta n d Federal control).
Interest on public d eb t...... ...................................... .
Panama Canal.............. .......................... ...................
Purchase of foreign obligations............. ......................
Purchase of farm loan b on d s..............................
T otal ordinary.. . . . . . . . . . . . . . . ........................ .. — .
Public debt:
Sinking fu n d ...... .................................................. .. — ..
War-savings securities (n e t)-------- --------------------------Miscellaneous debt redem ptions....... ........ ...................
Purchases of Liberty bonds from foreign repayments
Redemptions of bonds and notes from estate taxes..
$17, 2 13,813
i;897,751
10, 344.000
17, 1300.000
2 200.000
322, 000,000
123 000,000
923,000
252,887
133, 391,516
22, 187,663
60, 407,500
—
$734,818,130
$16,833,723
2,094,256
10.320.000
17.800.000
2,097,200
323,500,000
107,000;000
23,333,300
5,281,621
112,459,569
21,510,938
81,501,330
Legislative....................................... ................. ........................
E xecu tive.................. .................... ................. ........ ........ . . . .
State Departm ent.......................................... ........................
Department of Justice...... ...................... ...............................
Post Office Departm ent................................... ..................... .
Interior Department (including pensions an d Indians.)—
Department of A gricu ltu re..................................................
Department of Commerce........................ ............................
Department of L a b o r . . . . . . . ........... ....... ........ .
Independent offices........... ............ .......... ..........— ..........
District of Colum bia.............. ............................................
Miscellaneous........... ........ .............................. . . . . . . . . . . . . . . .
$262,917,900
51 325,000
53,110,139
99,457,795
466,810,834
569.750.000
545.225.000
124.200.000
545,206,204
975,000,000
447,584,904
1,027,750,000
697.500.000
103.345.000
803,551,212
975,000,000
13,000,000
132,703,326
16,781,321
10, 000,000
4,282,313,559
3,279,704,038
5,005,545,496
4,014,522,168
.265,754,865
100 000,000
100,000
30,500,000
25,000,000
253,404,865
140,000,000
350,000
.85,000,000
,
,
20 000,000
421,354,865
498,754,865
37,000,000
60,724,500
97,724,500
70.000.
000
60.000.
000
130,000,000
Total debt retirements.................................................
596,479,365
551,354,865
Aggregate........................................................... ............
5,602,024,861
4,565,877,033
B,
Prelim inary Statement Showing Classified Expenditures o f the Government from July 1, 1920, to Mar. S I, 1921; with Comparative Figures and Total Expenditures fo r
the Fiscal Year 1920.
[On basis of daily Treasury statements.]
Total July 1,
1919, to
June 30, 1920.
Total July 1,
1919, to
Mar. 31, 1920.
July 1 to
Sept. 30, 1920.
O ct. 1, to
Dec. 31, 1920.
Jan. 1 to
Mar. 31,1921.
Total July 1,
1920, to
Mar. 31,1921.
July 1 to
Sept. 30,1919.
Oct. 1 to
Dec. 31,1919.
Jan. 1 to
Mar. 31, 1920.
$4,930,391.02
1542,757.71
2,322,749.39
96,098,410.19
274,367,808.97
4,183,089.23
1,407,168.05
161,294,823.36
87,118,246.55
33,993,228.76
10,788,625.62
2,153,590.97
33,986,454.67
$4,908,522.01
587,421.88
1,827,909.99
82,724,413.76
268,000,064.23
3,958,629.16
10,602,201.47
166,805,503.61
82,244,026.35
28,975,392.46
7,150,954.20
2,783,299.26
61,402,975.86
$4,806,483.14
248,846.64
2,242,127.40
181,790,477.00
307,518,350.95
4,425,703.15
25,956,317.37
177,462,791.62
82,520,943.00
32,494,508.75
6,966,718.38
1,977,469.34
2,225,335.06
$14,645,396.17
293,510.81
6,392,786.78
360,613,300.95
849,886,224.15
12,567,421.54
37,965,686.89
505,563,118.59
251,883,215.90
95,463,129.97
24,886,298.20
6,914,359.57
97,614,765.59
$5,116,000.53
52,260.98
4,085,594.80
102,695,955.91
653,552,919.09
4,178,182.91
813,691.33
286,496,326.16
70,176,555.60
12,362,197.17
4,775,580.53
1,494,698.48
234,702,016.82
$5,216,888.01
5,532,641.73
3,776,718.74
41,329,800.46
397,718,762.29
4,529,518.97
18,397,559.58
174,495,117. 79
70,726,075,22
19,508,039.63
5,021,360.10
* 1,169,488.51
106,028,170.88
$15,039,743.52
$4,706,854.98
6,177,959.59
593,056.90
11,111,961.49
3,249,647.95
264,504,050.77
120,478,294.40
250,334,207.14 1,301,605,888.52
12,988,368.93
4,280,667.05
28,674,736.47
9,463,485.56
621,364,450. 58
160,373,006.63
210,276,665.80
69,374,034.98
50,408,613.00
18,538,376.20
18,669,740.50
8,872,799.87
1,985,647.11
4,649,834.10
433,100,634.10
92,370,446.40
$19,327,708.72
6,675,517.58
13,586,024.42
322,315,627.43
1,610,587,380.86
17,814,398.18
50,049,295.07
736,021,456.43
279,244,660.87
65,546,293.14
30,010,737.75
5,415,358.40
530,565,649.61
193,583,743.50
22,238,355.21
90,353,411.42
185,186,288.24
123,510,031.64
214,217,272.44
16,367,886.74
592,987,304.18
i 7,639,563.17
90,353,411.42
431,756,376.71
19,475,735.42
204,062,450.80
82,036,307.93
158,043,854.33
1 95,356,575.54
262,797,518.56
1 3,605,406.26
1 91,002,300.12
776,590,203.20
144,962,712.65
17,703,575.14
1,036,672,157.53
1228,472,186.61
350,328,494.70
20,458,185.12
5,015,212.98
136,351,254.07
24,678,628.71
5,899,200.33
342,087,610.37
34,138,426.34
5,226,871.18
171,908,101.93
79,275,240.17
16,141,284.49
650,324,966.37
12,345,102.35
5,778,521.84
136,902,789.29
8,756,299.05
4,933,274.01
330,048,776.70
20,213,867.98
4,804,866.59
197,971,746.28
41,315,269.38
15,516,622.44
664,923,312.27
59,469,305.17
19,987,898.41
1,020,251,622.28
1,180,081,991.37 1,256,293,010.25 1,249,756,856.95 3,686,131,858.57 2,161,871,485.88 1,341,912,078.39 1,135,800,818.20 4,639,584,382.45
» 5,189,657.34
7,795,784.52
4,970,611.11
8,014,830.75
4,988,292.34
2 2,571,299.54
8,457,743.63
2 898,151.75
5,945,397,399.94
4,399,847.00
1,180,980,143.12 1,247,835,266.62 1,252,328,156.49 3,681,143,566.23 2,153,856,655.11 1,347,101,735.73 1,130,830,207. 09 4,631,788,597.93
3,461,482.71
8,667,286.92
3,701,460.35
1,504,343.86
5,921,480.58
11,950,412.28
3,063,590.56
2,965,341.14
5,940,997,552.94
11,365,714.01
387,720,914.09
421,337,028.09
29,643,546.17
Total ordinary...................................... 1,250,849,556.65 1,257,164,776.40 1,275,757,663.69 3,783,771,996.74 2,409,292,944.96 1,437,592,164.18 1,181,291,689.80 5,028,176,798.94
6,403,343,841.21
Ordinary:
Department of Agriculture....................
Federal control o f transportation sys
tems and transportation act, 1920___
Other independent offices and comInterest on public debt...........................
Deduct unclassified repayments, e tc..
Purchase of obligations of foreign
57,201,633.53
16,695,063.91
812,962.71
73,896,697.44
16,781,320.79
253,931,945.99
86,788,968.10
47,000,000.00
Public debt:
Certificates of indebtedness redeem ed.. 2,290,363,000.00 2,498,094,500.00 1,447,722,500.00 6,236,180,000.00 5,715,445,820.00 2,104,387,882.97 4,548,931,700.00 12,368,765,402.97 15,589,117,458.53
151,222,460.13 ■ 200,982,934.62
48,180,569.48
50,391,557.58
126,031,753.08 : 52,650,333.07
46,103,171.32
41,757,783.44
38,170,798.30
509,165.97
462,698.47
258,940.28
47,608.19
156,150.00
18,368.69
130,711. 09
43,760.59
68,581.81
32,336,700. 00
24,491,550.00
4,015,450.00
20,463,100.00
13,000.00
41,750.00
146,300.00
49,500.00
55,050.00
241,144,200.00
162,732,400.00
22,731,500.00
40,030,000.00
99,940.900. 00
3,583,800.00
1.410.450.00
1.102.450.00
1,070,900.00
296,300,800.00
239,022,750.00
150,117,850.00
61,009,350; 00
27,895,550.00
17.666.900.00
1.789.800.00
12,782,950.00
3.094.150.00
405.222.800.00
266,732,800.00
41,061,400.00
105,666,300.00
120,005,100.00
34,008,000.00
3.369.200.00
28,110,450.00
2.528.950.00
Fourth Liberty bonds retired...............
249.001.500.00
72,500,000.00
72,500,000.00
145,934,150.00
5,268 450.00
125,488,350.00
15.177.350.00
National-bank notes and Federal re
23,424,164.50
17,227,041.75
6,530,034.25
4,615,535.00
6,081,472.50
6.616.060.00
14.154.801.00
3,923,636.00
3.615.105.00
serve bank notes retired.................... .
2,379,808,266.11 2,565,469,099.03 1,632,559,650.01 6,577,837,015.15 5,962,307,425.57 2,535,545,576.98 4,805,304,100.77 13,303,157,103.32 17,038,039,723.62
.
1 Deduct excess of credits.
m-
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o.
Preliminary Statement Showing Classified Receipts o f the Government, from July 1, 1920, to Mar. 8 1 ,1 9 2 1 ; with Com
parative Figures and Total Receipts fo r the Fiscal Year 1920.
[On the basis of daily Treasury statements.]
July 1 to
Sept. 30, 1920.
Receipts.
$84,058,024.90
Internal revenue:
Income and profits ta x ............ $...................................................
Miscellaneous.........................................- ................................... - •
Miscellaneous revenue.......................................................... — —
Panama Canal tolls, etc.......................... J........................................
July 1 to
Sept. 30,1919.
Receipts.
$66,276,122.37
Customs...........................................................
Internal revenue:
Income and profits ta x ......................... ..
Miscellaneous..............................................
Miscellaneous revenue......................................
Panama Canal tolls, etc..................................
1,017,556,092.72
364,612,848.61
189,401,006.28
1,029,909.17
T otal................................... - ...................
1,638, S75,979.15
Total, July 1, 1920,
to Mar. 31,1921.
Jan. 1 to
Mar. 31,1921.
Oct. 1 to
Dec. 31, 1920.
$66,039,240.83
$67,842,176.13
$217,939,441.86
840,653,320.81
399,726,191.93
214,542,816.77
1,093,908.53
787,550,609.73
370,338,119.27200,909,310.39
2,607,734.32
852,277,918.48
318,900,145.87
142,840,438.1$
5,658,787.99
2,480, 481,849.02
1,088,964,457.07
558,292,565.29
9,360,430.84
1,540,074,262.94
1,427,445,014.54
1,387,519,466.60
4,355,038,744.08
Total, Julv 1,1919,
to Mar. 31,1920.
Total, July 1,1919,
to June 30,1920.
Oct. 1 to
Dec. 31,1919.
J a n .1 to
Mar. 31,1920.
$89,785,412.17
$231,553,886.47
$322,902,650.39
985,767,736.31
379,027,175.30
149,171,837.94
1,728,013.29
1,014,882,285.08
372,004,615.02
106,017,662.41
1,216,016.52
3,018,206,114.11
1,115,644,638.93
444,590,506.63
3,973,938.98
3,944,949,287.75
1,460,082,286.91
960,966,422.38
5,664,741.45
1,591,187,114.77
1,583,905,991.20
4,813,969,085.12
6,694,565,388.88
$75,492,351.93
D.
Preliminary statement o f the public debt Mar. 3 1 ,1 9 2 1 .
[On the basis of daily Treasury statements.]
Total gross debt Feb. 28, 1921 — ....... - .................................... - - - - .................
Public-debt receipts Mar. 1 to 3 1 , 1 9 2 1 . . . . . . . . . . ----- - — ...............................
Public-debt disbursements Mar. 1 to 31, 1921..................... ....................
$24,051, 684,728.28
$891,017,911. 58
962,598,242.03
71,580,330.45
Decrease lor period
Total gross debt Mar. 31,1921............................................................................................................ 23’ 980>104>397> 83
N ote .—Total gross debt before deduction of the balance held b y the Treasurer free of current obligations, and
without any deduction on account of obligations of foreign Governments or other investments, was as follows:
Bonds:
Consols of 1930............ .
Loan of 1925................ .
Panama’s of 1916-1936
Panama’s of 1918-1938
Panama’s of 1961........
Conversion bonds.-----Postal savings bonds..
First Liberty loan.......
Second Liberty lo a n ..
Third Liberty loan___
Fourth Liberty loan...
Total bonds.............................'..........
Notes: Victory Liberty loan.................
Treasury certificates:
T a x ................ .......................- ................
Loan........................................................
Pittman A c t......................................... .
Special issues....... .................................
War savings securities (net cash receipts)
Total interest-bearing debt.
Debt on which interest has ceased
Noninterest-bearing debt...............
Total gross debt.
$599,724,050.00
118,489,900.00
48.954.180.00
25.947.400.00
50,000,000.00
28,894,500. 00
11.718.240.00
------------------ ------1,952,313,700. 00
3.321.731.300.00
3.645.081.350.00
6,360,364,000.00
____ ____________
$883,728,270.00
15,279,490,350.00
16,163,218,620.00
4,100,453,105.00
1, 643,886,000. 00
830, 726,000. 00
247,375,000.00
32,854,450.00
2,754,841,450. 00
723, 659,586. 89
23,742,172,761. 89
10, 537,310. 26
227,394,325. 68
23,980,104,397.83
8
Quarterly Comparative P ublic D eb t Statement, Showing also Figures fo r A u g. S I, 1919, when War Debt was at its Peak.
[On the basis of daily Treasury statements.]
Net balance in general
Gross debt less
net balance in
general fu n d ...
♦Includes
Treasury
certificate^ (unma
tured):
Loan and tax___ __
Pittman Act and
T o ta l...............
Mar. 31,1921.
Aug. 31,1919.
Mar. 31, 1920.
June 30, 1920.
Sept. 30, 1920.
Dec. 31,1920.
$26,596,701,648.01
$24,698,671,584.52
$24,299,321,467.07
$24,087,356,128.65
$23,982,224,168.16
$23,980,104,397.83
1,118,109,534.76
251,622,538.19
357,701,682.23
434,961,050.10
504,951,394.20
614,593,426.78
25,478,592,113.25
24,447,049.046.33
23,941,619,784.84
23,652,395,078.55
23,477,272,773.96
23,365,510,971.05
3,938,225,000.00
2,278,259,000.00
2,485,552,500.00
2,347,791,000.00
2,300,656,000.00
2,474,612,000.00
262,914,050.39
388,961,055.56
283,375,000.00
292,229,450.00
292,229,450.00
280,229,450.00
4,201,139,050.39
2,667,220,055.56
2,768,927,500.00
2,640,020,450.00
2,592,885,450.00
2,754,841,450.00
JE .
Statement Showing Comparative Figures as to Short-dated P u blic D ebt, A u g . S I, 1919, to Mar. S I, 1921.
IOn the basis of daily Treasury statements.
June 30, 1920.
Dec. 31, 1920.
Mar. 31, 1921.
Aug. 31, 1919.
Dec. 31,1919.
Victory notes.....................................................
Treasury certificates:
Loan and ta x ..............................................
Pittm an Act and special issues........... .
War-Savings securities (net cash receipts)..
$4,113,402,679.65
54,494,114,007.07
$4,246,385,530. 00
$4,225,970,755.00
$4,100,453,105.00
5,938,225,000.00
262,914,050.39
933,647,191.08
t, 262,184.500.00
316,301,300.37
897,143,389.27
2,485,552,500.00
283,375,000.00
828,739,702.09
',300,656,000.00
292,229,450.00
760,953,780.53
',474,612,000.00
280,229,450.00
723,659,586.89
Total................... ....................................
9,248,188,921.12
8,969,743,196.71
7,844,052,732.09
7,579,809,985. 53
7,578,954,141.89
W A S H IN G T O N : GO VERN M EN T P R IN T IN G O I F iC B : 1921
SUPPLEMENTAL EMULATIONS GOVERNING SALES OF SILVER TO THE
DIRECTOR OF THE MINT UNDER THE PITTMAN ACT,
Paragraph 5 of the Regulations of the Director of the Mint, ap
proved August 30» 1920 1 as amended under date of October 6, 1920, with
reference to the proof required to be submitted in connection with
purchases of silver under the authority cf the Pittman Act, approved
April 23, 1918, is hereby amended to read as followst
» (5)
The Director Of the Mint will purchase under the
Pittman Act silver which forms a part of a mixture of domestic
and foreign silver up to the proportion of such mixed product
which represents silver wholly produced fron mines situated in
the United States and reduction work so located;
provided,
however, that no mixed silver which was refined cn or before
June 17, 1920, shall be purchased unless, and to the extent that,
the domestic silver contained therein was delivered to reduction
works located in the United States since January 17, 1920, as
shown by the liquidation sheets of said reduction works, filed
with the Director of the Mint as above required, and the support
ing affidavits of the miners who delivered said silver to said
reduction works;
and provided further, that the aggregate amount
cf the total refined mixed product purchasable by the Director of
the Mint under the Pittman Act shall not exceed the proportionate
part thereof correspending to the proportion in which silver actual
ly produced iron mines located within the United States entered into
the aggregate amount of domestic and foreign silver received b y thv
smelters concerned since January 17, 1920, as shewn b y the liquidation
-2
sheets of such smelters, filed with the Director of the Mint as
aboye required*
All sales of mixed silver by the vendor prior
to May 15, 1920, and all sales of mixed silver b y the vender after
that date at a price exceeding $1 per ounce, 1,000 fine, shall
be deemed to be made out of domestic and foreign silver in the
same proportion
which domestic and foreign silver are found
to have entered into the mixed product pur suait to these regula
tions*n
Devised form of v e n d o r ^ affidavit is attached hereto and marked
Exhibit A*
(Signed)
R* T* BAKER
Director of the Mint *
Approved*
(Signed)
May 14,>1921
S* P* GILBERT
Assistant Secretary of the Treasury*
Exhibit
A.
VENDOR *S AFFIDAVIT (Mixed Silver)
State of
C ounty of
)
) ss
)
In order to make a sale of silver to the Director of the Mint
in
accordance with the provisions of the Pittman Act approved April 23,
1918, the "undersigned hereby represents and certifies -under oath that
he is the
.
.. ! .
■
' • of ______ .
_________ » owner of
(Title of office)
(Name of vendor)
certain silver to the amount of
, fine ounces more or less,
forwarded to the United States Mint at ____________________
on the
...________
day of ________________________ , 192.___, and delivered f or
sale to the Director of the Mint under the provisions of said Act for
account of said vender;
and that said silver is the produce of mines
situated in the United States and of reduction works so located, being
either* (l) -wholly without admixture of the product of foreign mines or
reduction works, £5? (2) part of a mixture of foreign silver and domestic
silver delivered to domestic reduction works s i n c e ----------------- -* 19—
and within the proportionate part of such mixed product which represents
the product of mines located within the United States and of reduction
works so located, delivered b y such mines to such reduction works since
January 17, 1920, after taking into account sales heretofore made to the
Director of the Mint under said act.
Payment for said silver was made
to the mindrs at the fixed price of $1.00 per ounce, adjusted to the
equivalent price for silver 999 fine and to the cost of delivery, refinery
* Strike Cut whichever clause is. inapplicable.
“3’
to mint»
The vendor will forthwith file with the Superintendent of
said mint such statements and exhibits from its books of account and
also such supporting affidavits and sworn statements or exhibits by
itself and b y the miner, smelter, and refiner, as may ha demanded by
the Director of the Mint under said Act»
(Signature of vendor or duly authorized office^)
Subscribed and swofcn to before me this
Notary
_ day of
Public»
193.
FEDERAL
RESERVE
BOARD
X -3133
STATEMENT FOR THE PRESS
For releas© in morning papers,
Monday, June 6, 1921.
Governor Harding, of the Federal Reserve Board, left Sunday
night for a two weeks* trip through the cattle producing sections
of the country.
Stopping enroute at Des Moines, Iowa, he will
visit Cheyenne, Wyoning; Denver, Colorado; Albuquerque, New Mexico;
El Paso, San Angelo, San Antonio and Dallas, Texas; returning thence
direct to Washington.
Before leaving, Governor Harding gave out the following
authorized statement from the Federal Reserve Board:
*It is the opinion of the Federal Reserve Board that the
country is approaching a new crop season with underlying conditions
far sounder than they were a year ago. While there are still large •
amounts of staple products being carried over, financed partly on
bank credit, the reserves of the twelve Federal Reserve Banks com
bined are nearly 40% higher than they were at this time last year,
standing at about 57*5% as against 42%.
There is no ground for
apprehension regarding the ability of the banks to meet the require
ments of both agriculture and industry.
The Federal Reserve System now holds the largest amount of
gold in its entire history, more than $2,400,000,000, and the inflow
from other countries still continues. While the loans and invested
assets of the Federal Reserve Banks have been reduced since the peak
on November 5ih last by more than $1,000,000,000, most of this
liquidation has come about in a n orderly and natural way. Liquidation
has been most pronounced in financial and industrial centers rather
than in agricultural sections, as is evidenced by the fact tnat while
the rediscounts held by the Federal Reserve Banks are materially less
than at this time a year ago, these banks are now carrying more than
twice as much agricultural and live stock paper (maturities from ninety
days to six months) as they had on hand a year ago.
n It should be understood that until there is a broadening of
the market for agricultural products many farmers will have to be
granted extensions on loans already made them and will, in many cases,
require additional credits pending the making and marketing of the new
crops. The Federal Reserve Board is gratified to know that the
Federal Reserve Banks are prepared to extend liberal credits to member
banks, and through them to non-member banks, for these and other pro
ductive requirements of their customers,#and the Board urges all banks
to aid in easing along the situation in the agricultural districts
until normal and regular processes of production and distribution can
be further developed.
The Board feels that the financial emergency
which menaced the country during the year 1920 has definitely passed.
X -3133
"There is, however, in some sections a situation which affects serious*
ly producers of some highly essential products»
In the stock raising in
dustry particularly, additional credit facilities are urgently needed.
Live stock paper running not longer than six months is eligible for re scount at Federal Beserve Ranks and loans for the purpose of feeding and
fattening cattle are, therefore, more easily obtained than the longer time
loans for breeding cattle and young calves. The banks of the country are
urged to bear in mind the needs of the live stock industry and to extend
as liberal accommodations to those engaged in the industry as circumstances
will permit.
"The Board does not believe that it would be advisable to amend the
law by making one and two year paper e lig ib le fo r rediscount at the Fed?ral
reserve Banks but in view of the emergency which threatens the entire liv e
stock industry recommends, with the concurrence o f the Secretary 0
e
Treasury, that Congress authorize the Secretary of the Treasury 0
e
available to the War Finance Corporation $50,000,000 and that said Corpora
tion be empowered to make advances up to this amount on liv e stock paper.
These loans could be made through the Federal teserve Banks as fis c a l
agents o f the ^ a r Finance Corporation rather than as balks of discount.
This recommendation is made in order to meet the peculiar emergency ex^
isting in the live stock industry, where the process of production is
unusually long and requires longer term credit facilities than can e
afforded by means of paper with six months maturity. The Boar wo
suggest, however, that the time for making such loans be limited o
three years from the passage of the necessary legislation, with a view
of having the funds thus advanced ultimately returned to the Treasury.
"This legislation, in the Board» s opinion, will meet the present
emergency and should give ample time for the development of permanent
plans for the financing of the live stock industry.
It would also
tend to stabilize the credits affecting this industry and serve to
demonstrate the value, to those desiring short time investments, of
Cattle rjaper running longer than six months.11
T H E S ECR ETAR Y OF T H E TR EA SU R Y
WASHINGTON. D. C.
June 8, 1921.
Dear Sir:
In accordance with the Treasury's practice to advise the hanking
institutions of the country from time to time of its plans and policies,
I am addressing this letter to you in order to inform you of the state of
the National finances and indicate the Treasury's financial program for
the immediate future. The condition of the Treasury, its estimates of
receipts and expenditures for the fiscal years 1921 and 1922, and its
recommendations as to the revision of the internal tax laws have recently
been set forth at some length in my letter of April 30, 1921, to the
Chairman of the Committee on Ways and Means, a copy of which has been
sent you.
In that letter I announced also that it would be the
Treasury's policy to vary its monthly offerings of Treasury certificates
of. indebtedness from time to time with issues of short-term notes in
moderate amounts with maturities of from three to five years * with a view
to the gradual distribution of the short-dated debt through successive
issues of notes in convenient maturities extending over the period from
1923 to 1928.
Pursuant to this program, the Treasury is announcing to-day a
combined offering of three-year 5£ per cent Treasury notes, dated June
•15, 1921, due June 15, 1924, and one-year 5£ per cent Treasury certifi
cates of indebtedness, dated June 15, 1921, due June 15, 1922.
The com
bined offering will be for $500,000,000, or thereabouts.
The Treasury
notes thus offered will be straight three-year notes, designated Treasury
Notes of Series A--1924, will not be subject to call for redemption
before maturity, and will be acceptable in payment of income and profits
taxes payable at- or within six months before maturity.
The notes are
exempt from the normal Pederal income tax and the corporation income tax
and from all State and local taxation (except estate and inheritance
taxes), but not from Pederal income surtaxes or profits taxes,^ The
Treasury certificates will be tax certificates, designated Series
T J--1922, and will be acceptable in payment of income and profits taxes
payable at maturity. Definitive notes- and certificates will, it is ex
pected, be available for delivery on or about June 15th, but wherever
necessary Pederal Reserve Banks will be prepared to issue interim
receipts pending delivery of the definitive securities.
Applications for the notes and certificates will be receiyed in
regular course through the several Pederal Reserve Banks, as fiscal
agents of the United States, from which full particulars concerning^the
offering may be obtained. Banking institutions which are duly qualified
as special depositaries of public moneys will be permitted to make
payment by credit upon the usual terms for notes and certificates allot
ted to them for themselves and their customers. Treasury certificates of
indebtedness of the series which mature on June 15, 1921, July 15, 1921,
and August 16, 1921, will be accepted at par with an adjustment of ac—
52201°—21
crued interest in payment for any notes or certificates of the series now
offered which may he subscribed for and allotted.
Treasury certificates of indebtedness to the amount of about
$430,000,000 mature on June' 15,'1921, and on the same date there will
become payable the semiannual interest on the First Liberty Loan and the
Victory Liberty Loan, amounting in the aggregate to about $130,000,000.
On July 15, 1921, there will mature about $132,000,000, and on August 16,
1921, about $156,000,000 of additional Treasury certificates. Against
these heavy maturities of principal and interest the Treasury expects to
receive during June about $575,000,000 on account of the quarterly pay
ment of _income and profits taxes.
To provide for its- further require
ments, including current disbursements and increased payments incident
to the close of the fiscal'year, the Treasury will need in the neighbor
hood of $500,000,000, and has therefore decided to make the combined
offering of notes and certificates above described.
In consequence of the issue of Treasury notes and Treasury cer
tificates on June 15th, and the retirement of maturing Treasury cer
tificates, the Treasury expects to show important progress in the
execution of its plan to make the short-dated debt more manageable and
gradually distribute it over the period from 1923 to 1928.
The Victory
Liberty Loan, which matures on May 20, 1923, amounted when originally
issued to $4,495,374,300.
Through the operation of the bond purchase
fund and the cumulative sinking fund, and the miscellaneous retirements
of the public debt, the amount of Victory notes outstanding on May 31,
1921, had been reduced to $4,022,116,555, according to the preliminary
statement of the public debt for that date.
This means a total reduction
to date in the amount of the Victory Loan of about half a billion
dollars. As similar retirements of Victory notes are effected from time
to time pursuant to the Treasury's program, there should be important
further reductions in the Victory Loan maturity.
The result of this and
succeeding issues of short-term notes, and of the debt retirements which
the Treasury expects to make from time to time out of its current sur
plus,, should be to spread the 7^- billions of short-dated debt, which is
now concentrated in relatively few maturities, into a progressively
smaller aggregate amount of better diversified maturities extending over
the period from 1923 to 1928.
The current operations of the Government during the first eleven
months of the fiscal year, through May 31, 1921, show a net current sur
plus (excess of ordinary receipts over ordinary disbursements) amounting
to $228,602,077.55. During June there will be paid the second quarterly
installment of income and profits taxes for the calendar year.
The re
sult of the completed fiscal year-'s operations, according to the bes;t
information now available, should be a net current surplus of about
$500,000,000, substantially in accordance with the estimates set forth
in the letter of April 30th to the Chairman of the Committee on Ways
and Means.
This current surplus will have been applied for the most part
to the retirement of the short-dated debt, chiefly through the opera
tion of the cumulative sinking fund, the current redemptions of WarSavings securities, and the miscellaneous retirements of the public debt
required to be made by law.
, The gross debt of the Government on May 31, 1921, on the basis of
daily Treasury statements, amounted to $23,952,741,592.43, of which about
$7,558,447,589.40 represents short-dated debt. These figures contrast
with a gross debt at the beginning of the fiscal year 1921 of
$24,299,321,467.07, of which $7,844,052,732.09 constituted short-dated
det>t. This means that in the first eleven months of the fiscal year
there has been a reduction in the gross debt of about $350,000,000, of
which substantially the whole amount represents retirement_of short-dated
debt. When the operations incident to the June 15th offering of notes
and certificates and the quarterly payment of income and profits taxes on
the same date shall have been completed, there should be important further
reductions in the gross debt and the short-dated debt, as well as better
distribution of the short-dated debt.
The progress of thes'e operations and the development of the Treas
ury's program for dealing with the short-dated debt should mean im
proved market conditions for Government securities.
Treasury certi
ficates of indebtedness already enjoy a countrywide investment market,
and the last three month have been marked by continued improvement m
their distribution.
The past three offerings of Treasury certificates
have been promptly oversubscribed.
On March 15, 1921, the Treasury
successfully sold an offering of six months 5£ per cent certificates and
one vear 5-f: per cent certificates.
On April 15, 1921, an offering of
six months 5-1 per cent certificates was quickly absorbed.
On May 15,^
1921 the Treasury sold an offering of nine-months 51 per cent certifi
cates, with the largest oversubscription yet received.
The market for
outstanding Treasury certificates has continued strong and active, and
all issues now outstanding are quoted in the open market at a premium.
The wide distribution of the certificates among investors is particu
larly noteworthy.
On May 25, 1921, according to the latest report from
the federal Reserve Board, the reporting member banks of the federal
Reserve System held only about $203,000,000 of Treasury certificates as
against $235,000,000 on February 25, 1921, and $609,000,000 on May 28,
1920.
On May 25, 1921, only about $55,000,000 of Treasury certificates
were pledged with the Federal Reserve Banks to secure loans and discounts.
Substantial progross has also been made in the distribution of
Victory notes among investors. According to the latest figures, the
reporting member tanks of the Federal Reserve System held on May 25
1921 only $188,000,000 of Victory notes out of about $4,000,000,000
outstanding.
The market position of Victory notes has correspondingly
improved, and should show further improvement as the maturity of the
notes approaches and is gradually distributed.
The fortunate position of the market for Treasury certificates is
due in no small measure to the constant cooperation which the Treasury
has had from the banking institutions of the country
the distribution
of certificates among investors. Upon this first offering of short-term
notes in pursuance of the Treasury's new program I look forward with
confidence to your continued cooperation and support, and hope that, as
with Treasury certificates, you will subscribe liberally for the new
Treasury n o t « and devote your best efforts to their resale to ultimate
investors.
Cordially yours,
Secretary of the Treasury.
To the President
of the Bank or Trust Company addressed.
TREASURY DEPARTMENT
For release morning papers,
Monday, July 11, 1921«
The Secretary cf the Treasury announces that the first
fiscal yearts operations under the cumulative sinking fund estab«*
lished by the Act approved March 3, 1919, were completed June 30,
1921, and that $261,250,250 face amount of Victory notes were
purchased and retired for account of the sinking fund during the
fiscal year#
The total principal cost cf the notes purchased was
$254,844,576*50*
C O P Y
STOCK GROWERS* FINANCE CORPORATION
1054 Continental & Gemmerei al Bank Building
Chicago, 111*
Executive Committee
M* A« Traylor,
John R* Washburn,
John Fletcher,
F* H. Connor
M* L* McClure
S. T, Kiddoo
Officers
M* L. McClure, President,
F* Hi Connor, Vice President,
John R* Washburn, Treasurer,
John Fletcher, Secretary,
July 12, 1921
Gentlemen:
We are pleased to announce that this organization is ready to
receive applications for rediscount frcm banks and cattle loan companies
who file with the corporation a satisfactory financial statement*
Loans offered must be secured by mortgage on live stock, shew
ing a substantial equity in value over the amount advanced, and all loans
must be accompanied by the following:
Report of an inspector shewing num
ber and quality and his estimate of the value of the security, original
chattel mortgage or certified copy shewing recorder's certificate; office
copy of the chattel mortgage (need not be certified); financial statement
of the maker of the paper and abstract of the records*
All leans must be
eligible for rediscount with the Federal Reserve Banks, and the papers should
be prepared accordingly*
||
On all notes, the last as well as all previous endorsements,
must waive demand notice and protest*
Loans will be accepted with date of maturity running six
menths or less, and if found satisfactory will be extended or renewed faperiods cf six months or less, not exceeding a total length of time of
thirty menths from date cf loan, at which time payment will be required.
Please submit applications for loans a few days in advance
of the need for the money» giving sufficient time for cur fcrganizaticn to
act cn applications intelligently»
Not having the organization to proper**
ly inspect and investigate loans, and recognizing that the situation re**
quires that the funds be made available promptly, the policy c£ making no
direct loans has been adopted«
The rate of discount to be charged for the
present is fixed by the Executive Committee at seven per cent#
Many banks who have never handled live stock loans are par
ticipating in this movement to assist the live stock interests and not just
to relieve the banks and loan companies} therefore, it is expected that
the banks and loan companies will use the privileges of the organization
freely, and having been provided a method to carry this class of loans, they
will continue their efforts to svpport the industry by making new loans#
We
feel if this policy is faithfully carried out, satisfactory results will
immediately follow, and to that end we ask the co-operation of the friends
of the live stock industry*
All correspondence should be addressed to the Stock Growers*
Finance Corporation, Room 1054» Continental & Commercial Bank Building,
Chicago, Illinois#
Yours truly,
STOCK GROWERS* FINANCE CORPORATION
M* L* McCLURE, President#
The accomplishments of the la st four months by various branches o f the
government, in the .direction of relievin g financial conditions, in making
provision for the government’ s short-dated debt, in a ssistin g both industry
and agriculture to better markets, and in providing for the financial neces
s it ie s of the ra ilroa d s, constitu te in the aggregate an achievement of the
largest importance to the country.
Perhaps the most important development has been the action taken by the
Federal Reserve Banks in reducing discount rates«
This action is calculated
to relieve the stagnation of business, and at the same time i t gives authori
ta tive recognition of the improvement in cred it conditions ju stify in g the
p o licy of reduced rates,
During the la tt e r part of 1919, and from time to
time in the year 1920, increases of rates of discount had been made by the
Federal Reserve Banks in order to meet then existin g conditions*
There had
also been introduced in several reserve d is t r ic t s s o -ca lle d progressive dis
count rates, under which, a fte r the member bank had discounted it s paper with
it s Federal Reserve Bank up to a certain point, i t was then required to pay
p rogressively.higher rates fo r futther discounts in order to check excessive
borrowings*
These rates have recently been en tirely abolished, again in d i
c a tin g improved credit conditions*
The f i r s t of tht5 successive reductioi..j in discount rates came on April
15 when the Boston Federal Reserve Bank reduced it s rate on commercial paper
from 7 to 6 per cent, and made a lik e reduction on agricultural paper*
•
A reduction from 7 per cent to
per cent on commercial paper
was made by the New York Bank on May 5,, while that on agricultural paper
was likewise reduced frm 7 to §2 per cent*
On May 6 the Atlanta Bank reduced the commercial paper rate and also
the rate on agricultural paper from 7 to 6 per cent.
,0n.May 7 the Chicago Bank reduced the commercial paper rate from 7 to
6^ per cent, and the rate of agricultural paper from 7 to 6if per cent*
On May 10 the Minneapolis Bank reduced the commercial paper rate from
7 to 61T per cent, and the rate on agricultural paper from 7^to 6ir per cent.
On May 16 the Dallas JBank reduced the commercial paper rate., and also the
rate on agricultu ral paper from 7 to 62 per cent.
On June 16/the New York Bank again reduced the rate on commercial paper
from 6‘g- to 6 per cent, and the rate on agricultural paper from 62“ to 6 per cent.
On June 25 the Dallas Bank made it s second reduction, lowering the rate
on bqtfi commercial paper 7/id agricultural peper from 6-g- to 6 per cent.
On July 21, or thereabouts, the Boston, New York, Philadelphia and San
Francisco Banks reduced the commercial paper rate from 6 to 5ir per cent*
At
the same time these banks made a lik e reduction in the rate on agricultural
pQ^h.
It is unsafe to prophesy concerning conditions in the future, but it may be
expected that recogn ition w ill be given to further improvements in conditions
in accordance with the dictates of sound hacking prcatice*
It w ill not have escaped attention that the rates of discount of the Bank
of,, England have also been su ccessively reduced and that these reductions have
'en substantially xxxx coincident with the reductions in Federal Reserve Rates
1 th is country*
This would app ear to be a frank recognition of the intimate
ela tion between the money markets in th is country and of Europe, and a recog
n ition as well of the improvement in world cred it conditions.
The importance
of coincident reduction by these two leading banking systems l i e s c h ie fly in
mhe fact that it indicates a mutual d.esire to reopen the international channels
-of -credit upon which international trade depends*
N£he Treasury on it s part has, during the past four rmonths, successfu lly
inaugurated it s new p o licy pf-'refunding the short-dated debt of the government
and distribu tin g the early m aturities over the period between the maturity of
the V ictory Loan in 1923 and the Third Liberty Loan inil92B. The f i r s t o ffe rin g
of Treasury notes pursuant to th is p o lic y met with a most enthusiastic response,
and the further development of the program should bring about a better d is t r i
bution of the public debt and much improved market conditions fo r government
■securities*
There has already been a marked improvement in the market prices
of Liberty bonds and V ictory notes, and the market for a ll outstanding issues
of short-term government secu ritie s is in better r-Jiape than at any time since .
the depression.
2*
¿long with these accomplishments must be mentioned t h e r e s u m p t ^
“ n
operations by the War Finance Corporation“ which tasxsx* had eeas d OPq
May- 1930.
Since i t s active resumption of
nearly
agreed to make advances to finance large quantities o f cotton aggrega. ing
^ m illio n h a le s ; while the Federal Reserve System
is
financing through it s banking f a c i l i t i e s .
General assi '
the pur also being extended through the War Finance Corporation,
y
h
y ’
pose of moving generalagrieultural products to foreign markets i o r w h « cornoLtion
m illions have been a llo ca te d .
The renewed a c tiv ity o f th% w^
is not to be measured simply by the resultant r « t o « t a c n ^ m a d e n o e ^ b y the
amount of i t s advances.
Its in tervetiti o n in aid o.. ^
J?,.
. „waiting -export
making advances to carry American
heartening
has b e e < according to many evidences re ce iv e d ,
undertaken
factor in the whole agricu ltu ral situation « . .®®s~
e^u i^ a products are under
many important transactions involving
Ameri .. o
Finance Corimmediate consideration.
An enlargement o f he p
* .
congress in connect
poration has g e n t l y been r e o c ^ n d e d b y ^ e
^ U e ^ d that th " adoption
•tion with financing o f agricultural p r o d u o ~
- iue new crop for
of these recommendations w ill mean that adequate *
* be reasonably expected*
purposes of foreign trade and also in domestic business may be reasonably «1
on the in it ia t iv e o f the S e o re te p o f t
h
e
'
K
n
e
e
s
up
, been organised; which w ill afford re, ie*
u «bout ft5 “ 000,v000 has already been
to $50‘; 000;000 may be made i n the aggregate.
About ¡»o.oqp,uup nas .
advanced,
The F ederal' f * m Loan Banks have been enabled to resume lending
as a re su lt o f the successfu l sale o f Federal Dado.
nks^o* fa c ilit a t e th eir
authority for temporary Government a * ™ > c e s J g i U ;
ch L d e th is operaoperations has also been granted«
™e,~ u5 *
wex&on o
,
tion possible," became a- law on July 1, *921*
!
The fin a n cia l n ecessities of ^ J * ^ ° ^ y^ ^ ^ e m c i ^ r ^ M p o r t * t i b n
imminent concern to the entire country« 1
a resumption of industrial
i s v it a l ly pecessary,' but also because tnere
the va3t
a c t iv ity when the railroads are put in fd
n^is possible," the adquantities of material which they need. . '* , emtCates the early and rapid s e t t le m inistration has put forth a P " g^ ^ * ^ adg ^ th ^ G O v e r n n e n ti growing out o f the
ment o f the accounts between .he ra ilro a s _n_ „ t+lement should enable the roads
period of Federal con trol and operation.
TWS S-ttlement s
industr ia l
,
to become extensive _purchasers of
„commended to Congress that the
conditions.
In th is connection the
««-chase railroad secu ritie s from
War Finance Corporation should be g i v e n r f ^ L V m n c e the settlements by the R a i l - .
the D ire cto r General of Railroads in order to
™ Y f the war-time powers of
road Adm inistration,
This proposal is e “ y
»bout 3205 OOO.'OOO to the D irector»
the corporation,' under which i t » d n advances^f about
atout
General of Railroads and the railroad companx .
^
previously made the
S160;000;000 has been « P l 4 V . / ' “ f ‘ , e r i i w assistance to the general ra x lWar Finance Corporation was
“ .S1. tervention and the cooperation i t was able
road cred it situation by means of i t s i
intervehtioh at th is time w ill
to secure from bankers.
It i s expected that i t s ^ ¿ ^ „ ^ I s o that the Coragain have a ben eficia l ef fect
_h3arted Cooperation o f the bankers
o f e ° c o u n t r y ; 8 in ”deve 1 oping°the°market fo r ra ilroa d s e c u r itie s .
4+ is felt that the series of measures; of which
Speaking in the
» truly^coni h e foregoing is a*..« by anj
\ business and financial conditions, and
struct! ve effort for the amelioration c f o u a x
^
with a generally excellent
there are already many evidences of
’ season^ there is every reason *or conagricultural production now assured for
busirJ,ss conditions may be anticipated,
fTdence that a steady improvement of genera.
August 4, 1921*
REVISION O F INTEHtfAL TAXES*
Summary of Statement by the Secretary cf the Treasury for the
0 cnmi tt ee on Ways and Means.
m v m m HEEDS.
Taxation and tax revision depend upon public expenditures*
According to the
latest advices received iron the spending departments and after taking into ac
count all estimated reductions in expenditure reported to date» the Treasury esti
mates that the total expenditure for the fiscal year 1922 for which provision
should he made cut of the current revenues of the Government will be about
$4,550,OCX),000.
This in itself would mean a substantial reduction in current
revenues and expenditures below the fiscal year 1921*
The total ordinary revenues
for 1921 amounted to about $5,625,000,000, or over $1,000,000,000 in excess of the
revenues estimated to be necessary for 1932*
The estimate for 1922, moreover,
dees not mean that $4,550,000,000 must be provided by taxation*
It is estimated
that there will be miscellaneous revenues during the year froca salvage and
sources other than taxation amounting to about $350,000,000*
This wdild leave
$4,200,000,000 to be provided from oustems and internal revalue.
It is estimated
that the revenues frOn oustems under existing law would be about $300,000,000 for
the year, and that these might be increased by abcut $70,000,000 if a revised
tariff law should become effective about December 31, 1921*
The balance, about
$3,830,000,000 (as against estimated internal revenue yield for the year under
existing law of $3,570,000,000) should be provided cut of internal revenue.
This
revenue cun be safely reduced oaly if and to the extent that further reductions
are enf orced in the spending departments cf the Government.
This means that if
additional taxes are to be avcidau, there must be additional effective cuts in
ordinary expenditure of over $250,000,000, and that even if such outs were assur
ed the internal revenue yield fer the year could not safely be permitted to fall
below $3,570,000,000, the estimated yield under existing law.
The reductions in
expenditure reported up to date have been taken into account in framing the esti
mates *
s
Table I, which follows, shews the estimated receipts end expenditures for
the fiscal year 1923 under existing lawi
TABLE I.
STATEMENT O F ESTIMATED RECEIPTS ASP EXPENDITURES FOR FISCAL YEAR 1923. •
ON BASIS OF EXISTING LAW. (Revised August 3?' 1921).
RECEIPTS (Existing Law).
............
Customs . . . . . . . .
Internal revenue:
Income and profits taxes * . * . . . $2,235,000,000
. Miscellaneous internal revenue , . . 1,335,000,000
$
300,000,000
3,570,000,000
Miscellaneous revenue:
Sales of public lands « . . .
Federal Reserve Bank franchise
tax . . ........ » . * . .
. .
Interest on foreign obligations
.
Repayments of foreign obligations.
Sales of surplus war supplies. * .
Panama Canal
Other m i s c e l l a n e o u s ............
1,500,000
60,000,000
25.026.000
30.500.000
60,000,000
14.530.000
156,087,000
347,643,000
To tal
» . » « •
$4,217,643,000
Ordinary............ .
.
$4,002,657,952
EXPENDITURES*
Public Debt Expenditures required by law*
Sinking f u n d ...................... $ 265,754,865
War-Savings securities (net). . . *
100,000,000
Miscellaneous debt redemptions. . *
purchases of Liberty bonds
from foreign repayments. . . . . .
Redemptions of bonds and notes
from estate t a x e s ........ ...
Retirement of Pittman Act
certificates . . . . .
. . . . #
Retirement from Federal Reserve Bank
franchise tax receipts
...
. .
Total debt expenditures
100,0C0
30,500,000
25.000.
000
70.000.
000
60.000.
000
551,354,865
. .
Grand total ordinary expenditures (including
striking fund and miscellaneous debt retirements)
Excess of expenditures over receipts
* See page 3 for classification of expenditures*
$4,554,012,817
$
336,369,81?
CLASSIFICATION O F ESTIMATED EXP M D ITUHES FOB FISCAL YEAR 1922.
(Baaed
latest estimates f rcm the spending offices, with allowances for all
reductions reported to date).
Legislative * ..................... ..
Executive
State Department.....................
Department of Justice . . . . . . . .
Post Office Department. . . . . . . .
Interior Department ( i n - ..........
eluding pen si ens and Indians) . . .
Department of A g r i c u l t u r e ...........
Department of Cemmerce .............
Department of Labor .................
Independent offices ............. » .
District of Columbia. . . .
Miscellaneous . . . . . . .
Postal deficiency . . . . .
Treasury Department:
Bureau of War Bisk Ins..
Public Health Service .
Collecting revenue . . •
All other . . . . . . .
$ 17,313,813
1,897,751
10.344.000
17,000,000
3,200,000
322.000.
000
133.000.
000
19.933.000
5,252,887
13,484,516
22,187,663
63.500.000
70,000,000
$ 617,003#630
$286,000,000
47,000,000
53,110,139
99,457,795
$485,567,934
162,655,184
450.000.
000
487,225,000
200 0 0 0
000
Federal Board for Voca
tional Educatifs
War Department
. . . . .
Navy Department . . . . .
Shipping B e a r d ........
Railroads (Transportation.
Act and Federal C entr ol)
. .
545,206,204
975,000,000
Interest on public debt .
Panama C a n a l ...........
10 ,000,000
3,385,654,323
Total ordinary
$ 4,002,657,952
• ........... . . . »
Public debt expenditures required
by law:
Sinking fund . ........... .. . . .
War-Savings securities
(net)
..........................
Miseel, debt redemptions
Purchases of Liberty Bends
frQa foreign repayments. . . . .
Redemptions of bonds and
notes iron estate taxes . . . .
Retirement of Pittman Act
certificates . . ...............
Retirement frem F . R . B.
franchise tax receipts . . . . .
Total retirements* . ............
,754,865
100,000,000
100,000
30,500,000
25.000.
000
70.000.
000
60.000.
000
551,354,865
Grand total ordinary expenditures (including sinking fund and
miscellaneous debt retirements).
$4,554,012#817
* ¡Sjpg.gl
-4~
* No allowance is made for possible cash e.^eidituras resulting frern
withdrawals by the War Finance Corporation, which has a credit balance
Of about $400,000,000 with the Treasurer and may draw devm its balance,
at least temporarily, in gennoction with the railroad financing pro
posed under pending legislation.
m vm m
yield
of bbvisfd l a w
.
Estimates cf the expert3& revenue under the suggested revised
law (with comparative figures for the present law) are furnished in
Table II below.
The changes upon which the estimates f or the revised
law are based are briefly summarized on page 7 hereof, and further corjment will be found cn pages 8 if.
The grounds on which the more import
ant reccuaancUitiais are based, were presented in my letter of April 30,
1901, to the Chairman cf the C o ¿.¡ittoe cn Ways and Means, and need not
be repeated in detail here*
For the fiscal year 1922 the present law,
it is estimated, would yield $3,870,000,000 in internal revenue and
custerns*
tinder the revised law the estimated collections from these
sources would amount to $3,935,000,000, assuming that the revision Of
the corporation income and excess-prof its taxes is made effective as cf*
Jan. I, 1921.
These figures do not include the estimated proceeds of
the suggested one cent tax cn first class amil matter and the suggested
2 cent tax cn bank checks.
These taxes, it is estimated, jfould yield
about $117,000,000 a year, or about $68,500,000 for the fiscal year
1922.
Table II follows, on pages 5, 6 and 7
hereof?
ïè&wj&x
KSTXï'lATED RECEIPTS F ffltA Î N T E Ü U L REVENUE AND G U S T O S
UNDER PRESENT M D REVISED LAWS,
(Figures in parentheses shew results if the revisi Qti cf the corpor&ticn income
and excess-profits tax is made effective as of Jan. 1» 1932)*
Fi seal Year
Source of
Revenue
Oust ctus
Income Tax:
Individual
Corporation
Profits tax
Bevi sed
Present Law
$
300,OCX),000
875.000.
456.000.
:
Back taxes - In
come and Profits :
669.000.
235.000.
Miscellaneous
Internal Revenue i lt535,QQQ*QPQ.
ÎCtal
$3,870,000,000
¡$
Pi seal Year
1933
Revised
:¡Present Law
37C»000,000” :$
300,000,000
$
875.000.
000 :850,000,000 :
657.000.
000 î415,000,000 î
(456,000,000)*
000 :485,000,000 t
000 413.000.
(669,000,000)*
000
000
000
235.000.
000 i335,000,000
1933
450,000,000
850,000,000
748,000,000
(562,000,000)*
0
(292,500,000)*
î 335,000,000
♦ 1>385,000.OOP î 1,349,000^000 ; 1 , 345. 000400^
$3,935,000,000$3,734,000,000 $3,728,000,000
( 3,734,500,000)*
(3,990,000,000)*
♦Revision as of January 1, 1922*
Note: 1* The revision upen which the estimates Wider revised law are based
is outlined on Page 7* For detail of miscellaneous revenue, see
Page 6*
îote: 2. A n additional revenue tax of If on first class mail would
is estimated, atout $73,000,000 annually ($ 36 ,0 00 ,0 0 0 for iiscal
year 1922)*
Note: 3* A stamp tax of 3(i on each tank check would yield, it is estimated,
about $45,000,000 annually ($23,500,000 for fiscal year 1933».
ESTIMATED MISCEI£Ai®OUS URffiffittl, EOTEHUE
Source cf
Revenue
*
:
V
9
9
Fiscal Year 1922
i Present Law
:
Revi sed
Estate Tax
$ 150,000,000 $ 150*000,000
Transportation
262,000,000
200,000,000
Tel« and telegraph
28,000,000
28,000*000
Insurance
19,000,000
19,000,000
Alcoholic spirits
etc*
75*000*000
75,000,000
Beverages* Sec *628
35,000,000
35,000,000
Soft drinks* etc«
Section 630
25,000,000
12*000,000
Tobacc cj
Cigarettes
136,000,000
155,000,000
Cracking and chewing
66,000,000
60,000*000
.All v-ther
59,000*000
59*000*000
Admissions and Hies
96*000,000
96*000,000
Autom chiles:
Present tax
115,000,000
115,000,000
Federal License
Tax
»«•*<«* +
85*000,000
Pianos, Organs, etc
50,000,000
50*000,000
Motion Picture
Films
6,000,000
6,000,000
Sculptures, Paintings, etc
1*200,000
1,200,000
Carpets* etc«,
Section 904
5,000,000
20,500,000
Jewelry, Watches,
26,000,000
etc«
25,000*000
Perfumery, Cosmet6*000,000
6,000,000
ics, Medicines, etc«
Corporation Capital
80,000,000
Stock
80,000*000
Issues and Convey
ances* of capital
80,000,000
55,000,000
stock* bends* etc*
Capital stock
13*000,000
8*800,000
transfer
Sales of Produce
10,000,000
7,600,000
cn Exchanges
15*590,000
15,590,000
Miscellaneous Taxes
$1,335,690,O00 $1,385,790,000
Total
1
:
$
Fiscal Year
Present Law
1923
j
Revised
150*000,000
265,000,000
29.000.
20.000.
$ 150,000,000
85*000,000
00029,000,000
00020,000,000
75,000,000
35,000,000
75*000,000
35*000,000
25,000,000
Iff
138,000,000
180,000,000
60,000,000
60,000,000
100,000,000
75,000,000
60,000,000
100,000,000
116,000,000
116,000,000
**•♦*••*«♦«
50,000*000
100*000,000
50,000,000
6,000,000
6*000,000
1,250,000
1,250,000
20,500,000
9 9-999
1#ft*
25,000,000
25,000,000
6,000,000
6,000,000
80,000,000
80,000,000
55,000,000
105,000,000
9,000,000
17,000,000
15,000,000
8,000,000
15.590.000
15.590.000
$1,349,340,000 $1,345,840,000
■ if.
*■*fm*
B
NOTE;
Ihe revisicn upon which the above estimates are based assumes
the foliowing changes i
1*
A new tariff law in effect about December 31, 1921*
2« The increase cf the corporation income tax to 15^, as cf
January 1, 1921 ( cr January 1, 1922), and the repeal of the
$2,000 exemption«
3. The repeal of the excess profits tax, as cf January 1,
1921 ( cr January 1, 1932)*
4.
Increased collections of back income and profits taxes«
5. An increase in the tax Or cigarettes and sacking and chew
ing tobacco*
6. The repeal of the transportation tax upon freight and
passengers; the tax to be reduced cne-half January 1, 1922,
and entirely repealed January 1, 1923,
7* Certain of the stamp taxes, as carried in Title XI cf the
Revenue Act cf 1918, $o be materially increased.
8. An annual Federal license tax upon motor vehicles, averag
ing about $10 apiece, and to be graded according to power*
9, The repeal cf Section 630 cf the Revenue Act cf 1918, as
cf January 1, 1922 (the tax <n ice cream and fountain drinks,
etc»),
10. The repeal of miscellaneous taxes levied wider Section
904 cf the Revenue Act of 1918, as cf January 1, 1922.
11* A revisicn of the income tax rates, with the maximum sur
tax rate reduced to 32$«
commm v
1, Customs*
u>*
scoesstes revisions.
The estimates of revenue under the revised law assumes
that a more productive tariff law will be adopted, capable of yielding
about $70,000,000 additional revenue for the fiscal year 1923, and
$150,000,000 additional for the fiscal year 1923«
2.
Individual income tax»
The total ne£ income subject to the
higher surtax ¿rates is rapidly dwindling, and funds which would other
wise be invested In productive enterprise are being driven into fields
which do not yield taxable income*
The total estimated revenue from
the surtaxes under existing law is about $500,000,000 for the taxable
year 1921.
The estimated yield for the year from the surtax rates
above 32 per cent would be less than $100,000,000*
The immediate loss
in revenue that would result from the repeal of the higher surtax
brackets would be r^^tively small, and the ultimate effect should be
an increase in the revenues.
It is suggested that the normal and
surtax rates be limited to a combined maximum rate not exceeding 40
per cent for the taxable year 1921 and 33 per cent thereafter«
I
am confident that in a short time the Treasury would actually collect
*
more under the lower rates than under the higher rates if continued.
3>
Corporation taxes*
I approve the repeal of the excess-profits
tax, which is rapidly becoming unproductive.
I suggest as a substitute
an increase of 5 per cent in the rate of the corporation income tax, and
the repeal of the specific exemption of $2,000 now accorded to corpora
tions*
This would greatly simplify the problem of administration
collection, without substantial loss of revenue*
-9-
4*
Back taxes.
Collections of back taxes are estimated to yield
net about $235,000,000 in the year 1922, and. about $335,000,000 in the
year 1923.
It may be possible to secure some additional revenue frons
this source, perhaps as much as $100,000,000 additional in the year 1932.
5«
Miscellaneous taxes
-
Suggested reductions.
It is suggested that
the following miscellaneous taxes be repealed or reduced:
(a) The transportation tax on freight and passengers, it is
suggested, might be reduced one-half by January 1, 1922, and repealed
entirely at the close of the calendar year 1922*
The resulting loss of
revenue would be approximately $62,000,000 for the fiscal year 1922, and
$180,000,000 for the fiscal year 1923.
(b) The taxes on ice cream and fountain drinks imposed by
Section 630, now collected from consumers in such a way as to cause
unnecessary irritation and material evasion, should be repealed*
For
similar reasons the excess-price taxes now imposed by Section 904 upon
articles of wearing apparel should be repealed, and the other articles
included under Section 904 should be taxed at appropriate rates to the
producer or importer under the general provisions of Section 900#
The
maximum loss in revenue estimated to result from these changes would
be less than $25,000,000 in the fiscal year 3922.
(c) The tax on perfumes, cosmetics and proprietary medicines
(Section 90?) also results in unnecessary irritation and is widely
evaded.
I suggest that this tax be imposed upon the pi-oducer or
importer as are most of the sales or excise taxes now imposed by the
Revenue Act of 1918.
This could be done without any loss in revenue-
*K>I
taxes.
Shrinkage in the yield of existing
taxes, the gaps resulting from the suggested reduction and repeal o t the
!l
transportation tax and the changes in other taxes, and the pressure of
expenditures upon the Treasury, make necessary the consideration of additional
taxes*
These taxes are, of course, not suggested as desirable in themselves;
but in ny opinion they are less objectionable then some other new or
additional taxes which have been proposed,
(a) Increase the documentary stamp taxes, by approximately doubling the
present rates, so as to increase the revenue from this source by
approximately $30,000,000 for the fiscal year 1922 and $70,000,000 for the
fiscal year 1923*
These estimated additional proceeds are included in
Table II.
(b)
The proposed stamp tax of 2 cents on each check (payable on sight
or on demand) would yield, it is believed, about $45,000,000 a year.
The
estimated proceeds of this tax have not been included in the main totals of
Table IX,
(c) I suggest also as a convenient method of taxation an increase of
one cent in the rate of postage cn first class mail matter, to 3 cents per
ounce or fraction thereof on all except drop letters and to 2 cents per.ounce
or fraction thereof on postal cards*
Such a tax would yield, it is estimated,
about $72,000,000 a year (not included in Table II)»
(4)
An annual federal license tar upon motor vehicle©, averaging about
$10 per vehicle, and to be graded according to power, would yield approximately
$100,000,000 a year, or about $85,000,000 the first year (1932) 6f its
imposition.
(e)
The estimated proceeds of this tax are included in Table 11«
A n increase in the tax on cigarettes from $3 to $5 per M, and a
slight increase in the other taxes on tobacco products would yield additional
revenue of $25,000,000 in the fiscal year 1922 and approximately $57,000,COO
in the fiscal year 1923, (included in Table II).
The £ creg oing rocomuundaticns take into account probable reduc
tions in current expenditure t or the fiscal year 1923, when, for ex
ample, it is expected that there will be relatively small payments fc
make to the railroads as against estimated payments in the fiscal year
1922 of $6^0,000,000*
against these reducticns, however, it is expected
that there will he slirinkages in receipts.
The suggest!cn. that the trans
portât! cn tax bn repealed, effective in part January 1, 1922, and in its
entirety January 1, 1923, would alcne involve a loss of revenue of about
$300 1000,000 f/T a full year.
It is also necessary to bear in mind that
the estimated, income and profits tax receipts for t no i i sc ai year 1922 in
clude two quarterly installments of income and profits taxes based on tne
business of the calendar year 1920, and that a substantial shrinkage be
low the 1923 figures to* these receipts is to ue expected during the fis
cal year 1933 as a result at' the shrinkage in incomes and the depression
in business in 1931«
In the fisoul year 192o, moreover, the Victory
Liberty Loan and the 191$ series of War Savings certificates bee erne duo.
With these extraordinary maturities of the public debt to meet, it is
important that the Treasury have sQxio margin of current revenue over
current expenditure for the year, in oruer that the vast refunding
operations which will have to be carried cn during the year in any event
may not be complicated or embarrassed by additional borrowings to meet
current expenditures which ought to be provided for cut cf current
revenues.
SHE WHITE HOUSE
FOR RELEASE EVENING PAPERS. SATURDAY, AUGUST 13. 1321.
During the consideration of the revenue revision program of which an outline
has heretofore been given to the public, the effort was to devise a measure of
practicablet workable tax reform» The aim was to establish methods that would
raise the needed revenue within reasonable certainty, that would make collection
sure and inexpensive, and that would properly adjust the burden among all
classes of the community* It is felt that highly important progress has been
made along these lines*
The social and economic bearings of the new proposals are significant*
There has been no effort to relieve the rich of their share of burdens, but
rather to insure that no class will be left an avenue of eees^e from these* A
casual analysis of the proposal shows that what may be described as "the rich
m a n ts taxes" will produce about $1,800,000,000, while the balance will be dis
tributed over the entire community, rich and poor; the rich being certain, be
cause they are proportionately the greatest consumers, to pay a proportionately
much greater share*
for example, the reduction to 32 per cent of the highest income and surtax
brackets is expected by the experts to produce actually more revenue from these
sources than do the present much higher rates. The present rates prevent trans
actions which would involve application of the high rates, and tins keep taxes
away from the government. Also, they drive money into tax-free securities, to
the distress of business; and they lead to fraud and evasions. It has been
calculated that aside from customs, half the Treasury personnel is engaged in
collection of these taxes, and that their readjustment will pexmit the reduc
tion of this force by several thousand*
The basis of the program of course is economy in expenditure* The tax bur
den is to be reduced $550,000,000 by cutting that amount off the government^
requirements* To do this requires rigid and rapidly executed economies, which
the government departments have undertaken to effect.
Experience has shown, in dealing with the excess profits taxes, that where
there is periodic selling, this tax is pyramided, multiplying the burden of the
consumer, and inducing speculation and waste. It has been largely responsible
for the intense speculation that followed the war* It is an unsatisfactory tax
on which to base revenue estimates because its product of revenue is so extremely variable, and in the present epoch of reduced earnings it would utterly
fail to produce the amount needed*
The alternative to this tax is the increase of the direct tax on all corpora
tion earnings, rather than on excess profits* The present corporation tax is
10 per cent* It is proposed to increase this to 12b or 15 per cent, and
through this increase to produce $222,500,000 zoore»In increasing the tax on corporation earnings, an exemption is made of
those having earnings of $2,000 or less - the poor man*s corporations* The
number that would thus be exempted would exceed 300,000,
The redaction, and ultimate wiping out, of the transportation tax will
bring relief to both producer and consumer. The farmer, as a producer, finds
this tax deducted from the value of what he produces;
the consumer, as to
other articles finds it added to the price of what he buys. It reaches both,
and its abolition would be a great relief to both.
The so-called ’’nuisance taxes” are to be done away with. They are a source
of constant annoyance to the public, of expense to dealers who must make minute
change over their counters, and are easily and Constantly evaded* It is pro
posed to substitute for these an increase in the imposition through a taxation
mechanism already established, functioning efficiently, and sure to produce
what is demanded.
In short, the whole tax reform program contemplates freeing business from
what have been found paralyzing and exasperating restrictions, encouraging to
the utmost the resumption of enterprise and business, removing every possible
incentive to evasion and fraud, and distributing the tax burden with the greatest
possible equity among all classes of people, keeping in mind the purpose to im
pose the larger share on those best able to pay. It is believed that as the
proposals are studied and it is increasingly realized to what extent they are
adapted to these ends, they will be recognized as a long step toward restoration
of improved conditions of general business*
T H E S EC R ETA R Y OF T H E TR EA SU R Y
WASHINGTON. D. C.
September 9, 1921.
With the announcement of the second issue of short-term Treasury
notes pursuant to the program for handling the short-dated debt outlined
in my letter'of April 30, 1921, to the chairman of the Committee on
Ways and Means, I am writing to inform you of the state of the finances
and the development of the Treasury's financial program. •
Treasury certificates of indebtedness to the amount of about
$535,000,000 will mature on September 15, 1921, and about $382,000,000
additional certificates
On September
/ will mature on October 15, 1921.
15, 1921, there will also become payable the semiannual interest on the
Third Liberty Loan, which with other interest maturing on that date will
amount to about $100,000,000, while on October 15, 1921, there will
become payable semiannual interest on the Fourth Liberty Loan and other
interest aggregating about $145,000,000.
These maturities of principal
and interest amount to over $1,150,000,000.
Against these payments the
Treasury expects to receive during September about $525,000,000 on
account of the quarterly payment of income and profits taxes, in addition
to ordinary revenues from other sources.
The current operations of the
Government for the first two months of the current fiscal year through
August 31, 1921, on the basis of the Treasury daily statements, show a
net current deficit (excess of ordinary disbursements over ordinary
receipts) of $161,464,774*. 96. With the payment of income and profits
taxes in September, however, there should be, according to the best
information now available, a small net current surplus for the quarter.
To provide for its further requirements, including current dis
bursements, and in furtherance of its announced plan for dealing with
the short-dated debt, the Treasury is announcing to-day an offering of
three-year 5-g- per cent Treasury notes dated September 15, 1921, due
September 15, 1924, and of one-year 5\ per cent Treasury certificates of
indebtedness dated September 15, 1921, due September 15, 1922, and
six months 5 per cent Treasury certificates dated September 15, 1921,
due March 15, 1922.
The combined offering is for $600,000,000, or there
abouts.
The Treasury notes will be designated Treasury notes of Series
B-1924, and like those of Series- A-1924, offered in June, will be
straight three-year notes, will not be subject to call for redemption
before maturity, and will be acceptable in payment of income and profits
taxes payable at or within six months before maturity.
The notes will be
exempt from the normal Federal income tax and the corporation income tax
and from all State and local taxation (except estate and inheritance
taxes), but not from Federal income surtaxes or profits taxes.
The
Treasury certificates will be tax certificates, designated Series
TS-1922 and Series TM3-1922, respectively, and will be acceptable in
payment of income and profits taxes payable at maturity. Definitive
notes and certificates will, it is expected, be available for delivery
on or about September 15th, but wherever necessary Federal Reserve Banks
will be prepared to issue interim receipts pending delivery of the
definitive securities.
66287°—21
Applications for the notes and certificates will "be received in
regular course through the several Federal Reserve Banks, as fiscal
agents of the United States, from which full particulars concerning the
offering may he obtained. Banking institutions which are duly qualified
as special depositaries of public moneys will be permitted to make
payment by credit upon the usual terms for notes and certificates
allotted to them for themselves and their customers.
Treasury certifi
cates of indebtedness of the series which mature September 15, 1921,
and October 15, 1921, will be accepted at par, with an adjustment of
accrued interest, in payment for any notes or certificates of the series
now offered which may be subscribed for and allotted.
With the completion of the September 15th operations, the Treasury
expects to show further substantial progress in the execution of its
plans for distributing the short-dated debt over the period from 1923
to 1928.
This program was successfully launched with the first offering
of Treasury notes in June, and is more fully described in my letter of
June 8th to the banking institutions of the 'country. The notes then
offered immediately proved attractive to investors, and from the outset
have enjoyed a broad and active market, which has greatly facilitated
their secondary distribution by subscribing banks. According to the
latest reports of the Federal Reserve Board, only $52,019,000 of the
$311,191,600 of Treasury notes issued on June 15th were held by the
reporting member banks of the Federal Reserve system on August 24, 1921,
and on August 31, 1921, only $3,200,000 were pledged with the Federal
Reserve Banks to secure loans and discounts.
The market for Treasury
certificates has likewise continued to develop.
The latest reports from
the Federal Reserve Board show that on August 24, 1921, reporting
member banks held only $171,383,000 of Treasury certificates, as against
$203,000,000 on May 25, 1921, and $235,000,000 on February 25, 1921, and
that on August 31, 1921, only $26,800,000 of the $2,542,000,000 loan
and tax certificates outstanding were pledged with Federal Reserve Banks
to secure loans and discounts, as against $53,400,000 on May 25, 1921.
Important progress has also been made in the distribution of the
Victory Liberty Loan maturity.
The amount of Victory notes outstanding
has been reduced from $4,022,116,555 on May 31, 1921, to $3,806,172,250
on August 31, 1921, on the basis of Treasury daily statements.
The
amount of Victory notes originally issued was $4,495,374,300, so that
this represents a total reduction of about $689,000,000.
These satisfactory results have been due in no small measure to the
effective cooperation of the banking institutions of the country in the
distribution of short-term Treasury securities among investors.
I am
confident that the Treasury can count on your continued cooperation and
support in the furtherance of its plans for dealing with the short-dated
debt, and hope that you will subscribe liberally for the new issues and
continue your successful efforts to distribute them among investors.
Cordially yours,
Secretary of the Treasury.
To the President
of the Bank or Trust Company addressed.
September ¿33, 1921«
My dear Mr* Chairman:
I received your letter of August 2?, 1921, enclosing a copy
of H, J* Resolution 102, which proposes an amendment to the Constitu
tion of the tJhited States restricting the issue of tax-exempt securi
ties by the Federal Government and States and municipalities, and have
noted your request for m y opinion with respect to this resolution and
the subject in general*
- As you know-, in m y letter of April 30, 1921, to the Chairman
of the Committee on Ways and Means, a copy of which X enclose, I recom
mended to Congress that it consider the advisability of taking action
by statute, or constitutional amendment where necessary, to restrict
further issues of tax-exempt securities#
The ever-increasing volume
of tax-exempt securities (issued for the most part by States and
municipalities) represents a grave economic evil, not only by reason
of the loss of revenue which it entails to the Federal Government
but also because of its tendency to encourage the growth of public
indebtedness and to divert capital from productive enterpriser The
issue of tax-exempt securities has a direct tendency to make the
graduated Federal surtaxes ineffective and nonproductive because it
enables taxpayers subject to surtaxes to reduce the amount of their
taxable income by investing it in such securities;
and at the same
time the result is that a very large class of capital investments
-
2-
escape their just share of taxation*
Of course, the voluntary withdrawal of the tax exemptions
from securities to be issued by or under the authority of the Federal
Government would require no constitutional amendment, but to do this
as to Federal securities alone would unjustly discriminate against the
National Government and leave a clear field fof the State and local
governments*
In general, moreover, the policy of the Federal Govern
ment has been not to issue its own obligations with exemptions from
Federal surtaxes and excess-profits taxes, and the great bulk of the
Liberty Loans and other war debt have no such exemption.
As to State
and municipal securities, I assume it is clear, since the decision in
Evans
v. Gore (253 U. S. 245), that the Sixteenth Amendment does not
permit the Federal Government to tax income derived from State or
municipal securities and that the only effective means of restricting
the further issue of tax-exempt securities by State or municipal
governments would be by constitutional amendment •
Such an amendment
would doubtless meet with considerable opposition on the part of the
States, and for that reason, as well as from considerations of equality
fairness, it is the better view, I should say, that any restric
tions on the further issue of tax-exempt securities should be mutual
and should apply as well to securities issued by the Federal Govern
ment as to State and municipal securities.
It is important, however,
not to lose sight of the real basis for the existing constitutional
principle under which securities issued by the State and municipal
governments are now held free from taxation b y the Federal Government,
and Federal securities from taxation, by State and local authorities,
-3-
and at the same time to provide proper safeguards against any possible
discrimination in taxation by the Federal Government against State and
municipal securities or by the State governments against Federal securi
ties*
It is also important, in order to avoid any question of bad
faith, that the amendment should not apply to outstanding issues which
now enjoy tax exemptions.
For these reasons, I think that some modifi
cations of H. J. Resolution 102 are desirable.
In the first place, I think that the resolution should be so
modified as to make it perfectly clear that the right of the Federal
Government to tax the income derived from State and municipal securi
ties and of any State to tax the income derived from Federal securities,
shall exist only to the same extent that each government taxes the in
come derived from its own securities*
This would prevent any discrimina
tion by either government against the securities issued by the other«
In the second place, it is noted that while the first part of the resolu
tion subjecting the income from securities issued by State and municipal
governments to taxation by the United States applies only to securities
issued after the ratification of the amendment, the proviso subjecting
the income from securities issued by the United States, its possessions
and territories, to taxation by the States is not similarly limited*
Such a limitation is, of course, necessary.
Furthermore, the language
of the proviso subjecting income from issues of Federal securities to
taxation by the several States is not expressly limited to the income
derived from securities held by residents of the State and should be
modified so as to avoid any possible interpretation which would allow
a State to tax the income derived from Federal securities not held
ggl-5
-4~
within the State.
I might also suggest that the language of the amendment be
made broad enough to include all securities issued by or under the
authority of the Federal Government or of any State.
for example, to securities issued by Federal
This would apply,
Land Banks and other so-
called instrumentalities of the Federal and State governments, which
might not be considered as coming within the terms of the resolution
as it now stands»
in this connection I am taking the liberty of enclosing a
draft of a proposed amendment to the Constitution along the lines of
H# J» Resolution 102, modified as I have suggested.
Very truly yours,
(Signed)
A« W» Mellon
Secretary.
Louis T» McFaddep,
Chairman, Committee on Banking and Currency,
House of Representatives.
2 enclosures.
JOINT RESOLUTION*
Proposing an amendment to the Constitution o f the United. States*
la
Resolved by the Senate and House o f Representatives
2*
o f the United States o f America in Congress assembled (two-
3,
thirds o f each House concurring th erein ), That the follow ing
4,
a r t ic le be submitted to the leg isla tu res o f the several
5,
States, which, when r a t ifie d by the legislatu res o f three-
6,
fourths of the States, shall be v a lid and binding as a part
?,
o f the Constitution o f the United States;
8*
9.
«ARTICLE XX*
«The United States shall have power to tax incomes
10 .
derived from secu rities issued a fter the r a t ific a t io n o f
11*
th is a r tic le by or under the authority o f the several States
12 .
to the same extent that incomes derived from secu rities
13»
issued a fter the r a t ific a t io n o f this a r t ic le by or under
14.
the authority o f the United States are taxed by .the United
15.
States.
16»
by residents thereof from secu rities issued after the
17.
r a t ific a t io n o f this a r t ic le by or under the authority of
18.
the United States to the same extent that incomes derived
19*
by residents o f such State from s e cu ritie s issued after
20 .
the r a t ific a t io n o f this a r t ic le by or under the authority
21.
o f such State are taxed by such S ta te.»
Any State shall have power to tax incomes derived
Comparative Prices of Liberty Bonds and Victory Notes.
(Cl csing Quotations)
Dec.15
1920
May 16
1931
Sept.15
1921
Oct.15
1921
Issue
May 15
1920
Sept.15
1920
First 3g»s
90» 90
90.00
90.12
88.28
88.03
90.82
First 4*s
84.60
85.70
86.02
87.72
88.28
92*66
First 4^*s
85.74
85.76
86.12
87*62
88.42
93.14
Second 4*s
84,10
84.90
85*10
87*30
88.28
92.40
Second 4j*s
84.40
84.98
85.36
87.36
88.44
92.72
Third 4^>s,
87.98
88.38
8*7.90
90.72
92.42
94.82
Fourth 4l*s
85*04
85.18
85.90
87.40
88.62
93.02
Victory 4|*s 95.52
95.46
95.00
97,90
99.04
99.44
Victory 3f*s 95*50
95,42
95.00
97.92
99.04
99.40
Treasury Department,
October 17, 1921
treasury department
For release, Morning Papers,
Thursday, October 27, 1921»
The Secretary of the Treasury, under the authority of the act ap
proved September 24, 191?, as amended, offers for subscription, at par
and accrued interest, through the Federal Reserve Ranks, Treasury cer
tificates of indebtedness, in two series, both dated and bearing interest
from November 1, 1921, the certificates of Series C-1922 being payable
on April 1, 1922, with interest at the rate of four and one-quarter per
cent per annum, and the certificates of Series TS2-1922 being payable on
September 15, 1922, with semiannual interest at the rate of four and
one-half per cent per annum*
A p p lic a t io n s w i l l be received at the Federal Reserve Banks.
Bearer certificates will be issued in denominations of $500, $1,000,
$5,000, $10,000, and $100,000.
The certificates of Series C-1922 will
have one interest coupon attached, payable April 1, 1922, and the cer
tificates of Series TS2-1922 two interest coupons attached, payable
May 1, 1922, and September 15, 1922,
The certificates of said series shall he exempt, both as to principal
and interest, from all taxation now or hereafter imposed by the Uhited
States, any State, or any of the possessions of the United States, or by
any local taxing authority, except (a) estate or inheritance taxes, and
(b) graduated additional income taxes, commonly known as surtaxes, and
excess-profits and war—profits taxes, now or hereafter imposed by the
United States, upon the income or profits of individuals, partnerships,
associations, or corporations.
The interest on an amount of bonds and
certificates authorised by said act approved September 24, 1917, and
amendments thereto, the principal of which does not exceed in the aggre
gate $5,000, owned by any individual, partnership, association, or
-2-
ccrporation, shall he exempt from the taxes provided for in clause (h)
above*
The certificates of these series do not bear the circulation privi
lege! and the certificates of Series C-1922 will not be accepted in pay
ment of taxes.
The certificates of Series TS2-1922 will be accepted
at par, with an adjustment of accrued interest* during such time and under
sudh rules and regulations as shall be prescribed or approved by the
Secretary of the Treasury, in payment of income and profits taxes payable
at the maturity of the certificates.
The right is reserved to reject any subscription and to allot less
than the amount of certificates of either or both series applied for and
to close the subscriptions as to either or both series at any time without
notice.
Payment at par and accrued interest for certificates allotted
must he made on or before November 1, 1921, or on later allotment.
After
allotment and upon, payment Federal Reserve Banks may issue interim re
ceipts pending delivery of the definitive certificates.
Any qualified
depositary will be permitted to make payment by credit for certificates
allotted to it for itself and its customers up to any amount for which
it shall be qualified in excess of existing deposits when so notified
by the Federal Reserve Bank of its district.
As fiscal agents of the United States, Federal Reserve Banks are
authorized and requested to receive subscriptions and to make allotments
in full in the order of the receipt of applications up to amounts indi
cated by the Secretary of the Treasury to the Federal Reserve Banks of
the respective districts.
The combined offering will be for $200,000,000, or thereabouts.
' Extract from Commerce Reports, November 7, 1921.
SPECULATION IN SECURITIES PAYABLE IN DEPRECIATED CUREENCY.
Prepared in the Eastern European Division.
Certain concerns in the United States are at present advertising for
sale various foreign bonds, which are payable in currencies that are at
present greatly depreciated. National, municipal, and industrial issues
are included* The present exchange value of the currency in which, some of
them are payable represents a very small fraction of its normal exchange
value. This is, for example, the case with the currency of Germany, Austria,
Poland, Czechoslovakia, Rumanisu Jugoslavia, and Hungary. Bonds thus ex
pressed in depreciated currency are, in some of the advertising literature
of these concerns, listed side by side with the bonds expressed in currency
which is much less depreciated.
Concerns offering such securities for sale hold forth to prospective
investors the possibility, if hot probability, of enormous profits on the
ground that the currency in which the securities are expressed may rise
greatly in value and approach, if not equal, the normal exchange value* It
is, of course, impossible to forsee what will take place with respect to
the currency of the countries in question, but it is only proper that
American investors should carefully study the facts as regard the changes in
the rate of exchange, the quantity of paper money in circulation, and the
recent changes in that quantity before, they judge the probable future value
of any security given in that currency.
SECURITIES OFFERED AT UNDULY HIGH PRICES.
The attention of American investors should also be called to the fact
that in some cases the prices at which these securities are offered are
unduly high, in view of the actual exchange rate of the given currency.
It
is evident that for a bond promising to pay 1,000 units in a given kind
of money at some future time, and bearing a normal rate of interest, the
investor ought not to pay much more, and possibly should pay less, than
the current equivalent in dollars of 1,000 units of that money. If $10
in the actual exchange market will buy 1,000 such units, it is not necessary
for the investor to pay $20 for the bond. In some cases which have come
to the attention of the Bureau the disparity between the sale price of the
advertised securities, in terms of dollars, and the price at which they
could bo purchased with American money in the foreign country itself is
much greater than that indicated in this hypothetical illustration.
To put the matter in another way, the purchase of bonds expressed in
depreciated currency is virtually a speculation, not in bonds, but in
currency* If the investor is counting on his profit from the advance in
the value of the currency in which the bonds are payable, it is evident
that he can ordinarily expect to obtain the same profit by buying currency
itself, instead of bonds. If the investor pays $20 for a bond of 1,000
units, when he could buy 2,000 of those units in the form of currency for
$20, it is clear that he is making an unwise choice* Any steps which may
~
2~
hereafter be taken by countries with depreciated currency to
volume of their paper money, to convert it to the new basis,
its value in any other way, will probably, if not certainly,
value of the currency itself equally with the value of bonds
the currency*
reduce the
or to enhance
affect the^
expressed in
FOREIGN-CURRENCY INFORMATION,
The essence of the matter is that the American investor buying any
security expressed in depreciated currency should know exactly what^the
exchange rate of that currency is in dollars at the time he makes his
purchase*
Otherwise, he *uay pay a price which involves an unreasonable
margin to the agency offering the security for sale*
It iuay be added that it is decidedly against the interest of any
foreign country, municipality, or corporation that its securities should
be offered for sale in the United States at prices widely out of line with
the current rate of exchange*
The disappointment which the purchaser is
likely to suffer later on will tend to injure the credit of the issuing
country or municipality*
It is probable that in most cases where an
American concern offers securities of the character discussed at unreason
ably high prices it is not being done on the initiative of the country,
municipality, or concern issuing the security*
The Department of Commerce has always refrained from expressing
opinions with regard to the future of the currency of any country, an in
the nature of things it can not advise the American public with regar o
any particular investment#
The Department publishes froii time to tim^,
however, information regarding the volume of currency in the principa
countries and also the rate of exchange and its fluctuations#
TnQ$yi
.
will also find similar information in current publications of the Federal
Reserve Board, as well as in reliable financial periodicals and o er
sources,
Comparative Prices of Liberty Bonds and Victory Notes*
(Closing Quotations)
Oct.15
1921
Nov«15
1921
88.08
90.82
95.10
87.72
88.28
92.66
94*30
86*12
87.62
88.42
93.14
94.20
84*90
85.10
87*30
88.28
92.40
94.20
84*40
84.98
85.36
87.36
88.44
92.72
94.22
Third 4|*s
87.98
88.38
87.90
90.72
92.42
94.82
96.20
Fburth 4|*s
85*04
85.18
85.90
87*40
88.62
93.02
94.34
Victory 4 § fs
95*52
95.46
95.00
97.90
99.04
99.44
99.68
Victory 3 § fs
95.50
95,42
95*00
97.92
99.04
99.40
99.68
Issue
May 15
1920
First 3j!s
90*90
90.00
90.12
88.28
First 4*s
84*60
85.70
86.02
First 4 ^ 3
85*74
85.76
Second 4*s
84.10
Second 4 | fs
Sept.15
1920
Dec.15
1920
May 16
1921
Sept.15
1921
Treasury Department,
November 16, 1921*
SYNOPSIS OF THE ANNUAL REPORT OF THÉ
SECRETARY OF THE TREASURY ON FINANCES
FOR THE FISCAL YEAR 1921,
•TREASURY DEPARTMENT,
Washington, November 28, 1921,
"From the point of view of the Treasury the past year has been
marked by important developments*
It has been, first of all, a period
of pronounced economy and retrenchment in Government expenditure»
The
war brought with it a new scale of expenditure, and for some time afteraoiiia3
hostilities ceased the Treasury had heavy obligations to meet on account
of the war,
Expenditures in the fiscal year ended June 30, 1920,
amounted to almost $6,500,000,000, while for the fiscal year ended June
30, 1921, ordinary expenditures, including sinking fund and miscellaneous
fixed~Asbt charges, still ran over $5,500,000,000*
This cash outgo it
has been the constant endeavor of the administration to reduce, and it
now expects to hold expenditures on the same basis for the fiscal year
1922 down to $4,000,000,000, or thereabouts, a reduction of about
$1,500,000,000 below the year 1921»
In soma measure this reduction
reflects the liquidation of war liabilities, but to an important extent
it represents a reduction in the cost of Government*
it means a reduction in the tax burden»
From either aspect
On June 10, 1921, the act to
create a Budget system became a law, and by the end of the fisca« year
1921 the Bureau of the Budget was organized and established*
It has
already proved to be a most effective arm of the Executive to' enforce
the determination to bring about a reduction in Government expenditures,
Through the Bureau of the Budget and the heads of the several departments
and establishments it has been possible to exert continued pressure for
economies in administration, and by this means as well as through the
-2.
coordination of Government activities under the general supervision of fh®
Bureau of the Budget important savings have been accomplished*
For the first
time in its history the Government has an agency equipped to put pressure
upon the spending offices to reduce expenditures, and the results already
accomplished constitute one of the most encouraging developments of the year.
Another effective force which has made for continued reduction in Govern
ment expenditures has been the shrinkage 'in current revenues, coupled with the
necessity of a thoroughgoing revision of the internal—tax. laws 20 as to reduce
the burden of taxation on the community.
At the outset it appeared from the
estimates that additional taxes might b9 necessary to supply deficiencies in
the revenues unless there were striking cuts in expenditure.
The determined
efforts for economy, however, have resulted in cutting expenditures for the
current fiscal year over $400,000,000 below the amount originally estimated-to
be necessary by the spending departments, and this in turn has made it possible
to proceed with the revision of internal taxes on the basis of a substantial
cut in revenues.
The result is that the revenue act of 1921, approved November
23, 1921, has made a substantial reduction in the tax burden, running over
$800,000,000 for the fiscal year 1923, as compared with the old law, and at
the same time has provided for the repeal or reduction of several of the most
vexatious and burdensome taxes and for the simplification of the taxes that
remain in force.
During the past year, furthermore, th3 Treasury has made substantial
progress in the refunding of the short-dated debt and has already succeeded
in bringing about a better distribution of the early maturities of the debt,
which should greatly facilitate the refunding operations incident to idle
maturity of the Victory Liberty loa,n.
-3-
\i
| The Treasury announced in April that it v/ouid he the policy to vary its issues
|of Txeasury certificates from time to time with issues of short-term notes in
moderate amounts, and two issues of Treasury notes have already heen successfully
[floated, on June 15 and September 15, 1931«
In consequence of these operations
■Lt has been possible to refund about $700,000,000 of the short-dated debt into
■later maturities, to reduce the Victory notes outstanding to about $3,600,000,000,
land at the same time to bring the outstanding amount of Treasury certificates
Epjwn to about $3,300,000,000.
With this better distribution of the debt and with
flower rates for money, the market- prices of outstanding Liberty bonds and Victory
Inotes have shown marked improvament during the last six months«
Victory notes
nave touched par said are consistently quoted at about par, while the several isisues of Liberty bonds are now selling at prices ranging from about 95 to about
1^97, or on an average about 10 points higher than a year ago.
Treasury certifi
cates of indebtedness which a year ago the Government »was selling at interest
irates of 5? and 6 per cent, have recently been sold for 4
rail issues outstanding are quoted at par or above.
and 4^ per cent, and
These developments in respect
the public debt are most encouraging and indicate that the Treasury should be
[able to proceed in an orderly way and without undue disturbance to business with
the great refunding operations that will be needed in connection with Victory
Liberty loan and other short-dated debt outstanding.
The maturity within the
next 18 months of almost $6,750; 000,000 of short-dated debt still dominates the
situation, however, and makes it imperative that the Government pursue a policy
I of the utmost economy and avoid new undertakings that would throw additional burdens
I en the Treasury and embarrass the refunding operations.
The 1918 series of war-
savings certificates matures on January 1, 1933, and the Victory Liberty loan on
May 30, 1933.
Treasury certificates of various series, aggregating about
$3,300,000,000, will also mature within the year.
The greater part of this debt
-4-
will have to he refunded, and the orderly conduct of the refunding operations
will require the Treasuryts best attention for some time to come.
At the cutset of the present administration of the Treasury steps were taken
toward making the short-dated debt more manageable*
Earlier plans for the
gradual retirement of loan and tax certificates had been disarranged because of
continued heavy current expenditures, particularly on account of the Army and
Navy,and the railroads*
The Treasury, therefore, announced the policy of issuir
from time to time short-term notes in moderate amounts with maturities of from
P
three to five years, in order to distribute the short-dated debt over a series
of years ranging from 1923 to 1928. * * * *
The first offering of Treasury notes was made on June 15,. 1921, coincident
with an offering of Treasury certificates, and met with a hearty response. * * *
With the program thus successfully launched the Treasury was able on September
15, 1921, to make a second offering of short-term notes at a lower rate in con
nection with the offering of Treasury certificates on that date. * * *
The
total Treasury notes outstanding now amount to $701,897,700, and with the pro
ceeds of sale the Treasury has already been able to effect a material improve
ment in the distribution of the short-dated debt.
The Victory Liberty loan
maturity has been substantially reduced and the outstanding loan and tax certi
ficates are at the lowest figure in several years. * * *
ESVENUB REVISION
One of the most important developments of the year, both from the point of
view of the business and industry of the country and from the point of view
of the administration of the Treasury, has been the revision of the internal
tax laws, which has engaged the attention of the Treasury and of Congress almost
continuously since the beginning of the present admini strati on «
The result
of
bean at revision of taxes which .not only~ grant's .an important measure
relief to business but also accomplishes a substantial reduction in test
total tax burden for all classes of the community,
The earlier plans submit
ted by the Treasury were founded, itpon estimated, expenditures of about
$4,500»000,000 for the fiscal year 1923 and about $4,000,000,000 for the fis
cal year 1933, but as time went on and the results of the executive pressure
to reduce expenditures became apparent it proved possible to proceed with the
revision on a basis of about $4,000,000,000 of expenditures for the present
fiscal year
and
about $3,500,000,000 for the fiscal year 1923,
This change
in the revenue requirements has made it possible, to dismiss from considera
tion some Of the additional taxes suggested by the Treasury at the outset*
but has not affected the main outlines of the Treasuryrs recommendations,
particularly as regards tfife income surtaxes and profits taxes. * * *
Real progress along the lines of this program has been made by the re
venue act of 1921, as finally enacted and approved November 33, 1931.
The
surtaxes have been reduced to a maximum of £0 per cent, effective January
1, 1922, and at the same time have been readjusted In the lower brackets.
The excess-profits tax has been repealed, effective at the close of the cal
endar year 1921, and a flat additional tax of 2k per cent on the net income
of corporations has been substituted;with the repeal of th6 $2,000 exemption
for corporations with incomes of over $35,000»
The new law also limits the
tax upon capital gains and embodies administrative provisions which permit
business reorganizations and readjustments to go forward without premature
taxation of paper profits or deduction for unreal losses.
It allows net
losses sustained by trade or business in one year to be deducted from the pro
fits of the two succeeding years, and authorizes final settlement of tax claims
and assessments.
It contains many other provisions, which are designed to
simplify the law and improve its administration.
Taken all in all, the effect of these.changes is to give substantial relief
to business and industry and to restore in some measure the freedom of
business transactions.
It is estimated, moreover, that the result is a net
reduction of the tax burden on account of income and profits taxes alone of
about $410,000,000 a year.
Reductions in other taxes, amounting to about
$425,000,000, are also made by the revenue act of 1921.
The transportation
and insurance taxes imposed by Title V of the old law, the nuisance tax on
toilet and medicinal articles, and the specific sales taxes on musical instru
ments, sporting goods, motion-picture films, articles made of fur, toilet
soaps, and other articles, are repealed, while the taxes on soft drinks, candy,
so-called luxuries and works of art are markedly reduced or restricted.
On
this basis it is estimated the new law reduces the aggregate tax burden by
about $835,000,000 for the first full fiscal year of its operation, the
year 1923,***
TAXATION AND REVENUE.
The sudden and great increase in the governmental expenditures, due to
the World War, made it necessary that the revenues raised by taxation should
be increased as quickly and to as great an extent as possible, and the methods
adopted for this purpose were necessarily of an emergency character*
Now
that the war has ended and sufficient time has elapsed to enable us to forecast
with reasonable accuracy the probable need3 of the Government in the way of
revenue for some years to come, it is of primary importance that careful
consideration be given to the permanent methods of taxation to be adopted, so
that our revenue needs may be met with as little interference as possible with
the prosperity and the well-being of the people of the whole country.
As already shown much has been accomplished in the passage of the revenue
act of 1921, but our system of taxation still requires careful and thoughtful
consideration. * * *
We mast now face the ~ f t h a t the--ordinary disbursements of the Govern**
ment, by reason of the war, increased from approximately $700,000*000 per
year for the prefer years to over $6,000,000,000 for the year 1920, and while
we have been able to reduce the expenditures for the fiscal year 1923, as now
estimated, to approximately $3,500,000,000, for many years to come Government
expenditures must continue at an extraordinarily high rate* *
The matter is of exceptional importance at this time*
*
*
In the past year
we have suffered an industrial and business depression that has affected every
cla$s of our people and reached into every part of the country*
How far-
reaching the consequences may be, no one can as yet safely predict*
ment in all classes has been very great*
Unemploy
If these conditions continue, our
*
present burden of taxation must seriously increase the troubles of our people*
The hardship and suffering resulting from business depression and unemployment
inevitably fall most severely not upon those paying high income taxes, but
upon the great body of the people of small incomes*
Under our form of
,
government there is, and very rightly so, little danger of any undue burden
from the taxes imposed directly upon those of small means, but there is
danger of serious hardship and suffering to them because of high prices,
unemployment, and high living costs resulting from unjust or unwise tax laws*
Our very best thought, therefore, should be directed to seeing that our
system of taxation shall interfere to the least possible extent with the
return of the country at least to such normal conditions and reasonable
business activity as will prevent hardship to those least able to bear it*
-8v> '
There,are certain features of crux present taxation to which attention
should be directed; principally the high surtaxes, the taxation of business
profits and the estate taxes#
SURTAXES
The usual argument in favor of high surtaxes is that taxation should be
according to % b i l i t y to p a y . T h e
theory of taxation according to "ability
to pay," like all other general statements, has its limitations and its quali
fications*
In the first place, the tax must be productive, otherwise the
whole purpose of the tax is lost.
Again, it must not be unreasonable or op
pressive, for in that case it will be avoided or evaded and thereby cease to
be productive.
Again, the tax must not be one the result of which is to inter
fere with productive industry;
it must not dry up the very source out of
which revenue is expected to come.
If it does, not only will the tax cease to
be productive but it will also result in lessened production, unemployment,
arrest of the countryTs growth and serious injury to the people least able to
bear these consequences.
That the higher surtax rates are rapidly ceasing to be productive of revenue
is apparent from a study of the statistics published by the Bureau of Internal
Revenue.
That these taxes are being evaded or avoided, no
perience doubts*
exempt securities.
one of any ex
It is usual to put the blame for this upon the so-called taxThere is no doubt that a large and steadily increasing
amount of money formerly invested in productive industry is now going into
tax-exempt securities.
* * *
The amount of such tax-exempt securities now outstanding is estimated by
the Treasury at approximately $10,000,000,000*
The exact figures seem diffi
cult to ascertain and much higher estimates are made*
The amount of new se
curities of this character issued during the first eight months of thd present
year is said to be $800,000,000*
Of the total amount of tax-exempt securities
now outstanding, approximately $2,500,000,000 have "been issued by the United
States
or under its authority, including such securities as Federal farm-loan
bonds . * * *
While tax-exempt securities afford an easy means to a large class of inves
tors of avoiding payment of the high surtax rates, they constitute only one of
many ways that can be and are availed of to avoid such taxation. * * *
There are, however, other results flowing directly from these high rates
of taxation which are still more serious in their consequences to the people of
the country.
The tremendous development of the resources and of the industries of our
country, resulting in our present wealth, has been brought about within a com
paratively brief period of time, measured in the life of nations, and has been
primarily due to three things:
(l) The industry of our people and the opportu
nity and incentive afforded to everyone, whatever his place, to acquire in a
greater or less degree some share or portion £0r himself of that which we call
wealth;
(2 ) the steady accumulation of capital resulting from the industry and
thrift of our people, whereby productive industry in every line on a constan&ly expanding scale was made possible; ('¿) the very moderate Federal taxa
tion, whereby the free flow of capital, wherever it was neéded, and freedom of
legitimate commercial transactions vías not interfered with, the natural laws of
trade being allowed full play.
The result has been a prosperity general throughout the whole people of the
comtry, and unexampled elsewhere.
We have a standard of living higher than
that prevailing in any other country, and are proud to speak of ourselves as
the wealthiest nation in the world.
«*
10-
Doqs anyone believe that if our policy in the past a s respects taxation had
been for the Government to take away from successful effort one-third, one-half,
or three-fourths of the gains resulting therefrom we would have accumulated the
wealth which we now possess, or have achieved our present position?
believe
Does anyone
for a moment that without this wealth when drawn into the World War wo
could have so quickly put forth the marvelous strength which we did and thereby
have enabled the bringing of the war to a speedy and successful conclusion? * * *
In the past we were proud of the opportunities enjoyed by our people because
we were free from high taxation, as compared with the peoples of Surope, who,
even before the war, were struggling under a burden of taxation which in our
wildest fancy it never occurred to us that we would approach*
THE DESTRUCTION OE INCENTIVE.
Another serious effect of these high tax rates is the destruction of incen
tive - the drying up of the activities of individuals in trade operations - with
consequent lessening of business transactions, the slowing down of production,
and ultimately a loss of revenue to the Government*
There is not much incentive to men to take risks in any line of industry when
all the risk must be borne by the individual, and, if ultimately success comes,
a large part of the gain is taken away by the Government in taxes.
In business life, success and profit are not always the result of individual
effort; in many cases the result is loss*
All great success - especially in new
productive enterprise - when ultimately gained, is most frequently built upon
many previous failures and ccanes only after a considerable period of time during
which there was no profit.
So that, when success comes, the profit or gain to be
real must be such as to compensate for these previous failures and losses, and
without this incentive there is no inducement to anyone to incur the risks in
volved.
Then, toe, in productive enterprise, the merchant, the manufacturer, the
farmer, profits vary from year to year, and periods of lean years follow good
years*
High taxation which seizes upon gains as quickly as realized, taking a
large part thereof, and making no allowance for the previous failures and losses
u~
which have had to he endured he£&he success *ame, or for lean years, la
utterly destructive of individual incentive.
In speaking of individual incentive, it should be clearly understood that
reference is not made only to individuals of large incomes*
On the contrary,
regard for successful effort must be held out to those of moderate incomes,
because it is upon the younger men of strength and courage and vision that a
great deal of the burden must fall in the way of initiating and carrying on
the productive industries of the country»
large incomes, and the individuals
receiving them, play a very important part, but only a part, in the whole
general scheme of maintaining and carrying forward the productive industries
Upon which the prosperity of the country depends*
Successful taxation after
all rests upon a prosperous people, not any one class, but the people as a
whole*
f
THE NEED FOR NEW CAPITAL,
There are three things which may be noticed as bringing immediately to
mind how essential new capital is in order that the country may be prosperous,
1,
We have a steadily increasing population, and that means an increased
need of everything that enters into human consumption»
3*
Our standard of living steadily rises*
This is no new thing; it
seems always to have been true of every people of whom we know*
of to-day Is soon a necessity.
The luxury
To provide for these added needs requires
more capital,
3*
The waste and loss which goes on all the time must be made good*
There is the destruction of property by fire and other casualty*
Buildings,
machinery, houses, furniture, everything that man makes for his own use,
I
wear out and disappear#
Year by year this amounts to a vast sum and must
constantly be made good, otherwise the world goes backward*
The accumulation of this necessary additional capital from year to year
can come about only through the savings of the people, and the amount which
any individual can save and add to the capital of the Nation» of course»
increases progressivel y with the amount of his income.
The larger the in
come the larger the possibility of saving, because of the larger riargin
over reasonable living expenditures.
When it is sought to justify very high surtaxes on the ground of ability
to p a y the tax, we should remember that ability to pay the tax also means
ability to save and to add to the needed capital of the country, so that
the theory of ability to pay, when carried to such limits, destroys the
ability to save, and thereby diminishes the capital available for productive
industry.
The nation has no wealth other than that owned by its citizens.
productive wealth is owned by individuals and managed by them.
All
So, whoa
we speak of the wealth of the country, we are in fact referring to the ag
gregate wealth of the people of the country»
The amount held oy each indi
vidual does vary, but the statement is true from the smallest amount in a
child's savings bank to the largest fortune.
The idea seems prevalent that in taxing large incomes, only the person
receiving the income, and who is to pay the tax, is really concerned.
is a mistake.
This
For whatever the Government takes, in the way of tax, out of
any income, which would otherwise be saved and invested, and thereby be
come a part of the capital and of the wealth of the nation, affects not so
much the individual from whom it is taken as it does the whole people of
the country, in the direct loss of productive capital. So that in consid
ing
the
effect
-13-
of high taxes u^on incomes, particularly on very large incomes, it is not m
mach a question of the effect on the individual who is called upon to pay the
tax as it is the effect upon the whole conmunity.
The man receiving a large in
come may not himself suffer any hardship) because a great part of it is seised
and taken for taxes, but the effect upon the community - upon the people of the
whole country - is serious indeed»
* * *
THE DIVEBSION OF CAPITAL
It must be perfectly clear to anyone who gives serious thought to tne sub
ject that the theory that high income taxes put the burden of taxation on the
rich and relieve the poor is a fallacy»
housing situation.
Take as an illustration the present
The capital for building operations has come from people
having incomes large enough to provide a surplus for investment.
Beal-estata
mortgages were always considered a sound investment for this class, and capital
usually was available at a moderate rate of interest.
Since the policy of high
surtaxes this class of loans has largely disappeared.
The investors who formerly
put their money in such loans now find it more profitable to go elsewhere.
The
result is that capital has been diverted from building operations, there has been
a great shortage of houses, rents have enormously increased, and people of small
or moderate means living in rented houses have oeen compelled to pay greatly in
creased rents, so that in the end the burden has fallen upon the very class
sought to be relieved.
Of course, it is not meant that* the whole blame for this
situation rests upon the diversion of capital due to high income taxes.
factors contributed.
Other
But after making allowance for these the fact remains that
a very substantial part of the difficulty has been brought about by the diversion
of capital into other channels, and the situation is mentioned only to bring
home in a specific way how directly the diversion of capital affects the people
of small incomes.
-14The cons-equence of this diversion of capital is at once greatly te
increase interest rates upon the capital which productive industry is able
to obtain, and this in time means lessened production and increased costs*
The leas capital there is available the greater the struggle to get it and
the higher the price paid therefor, which means, of course, increased cost of
pr oduction*
At the same time the less capital there is available the more
production is prevented
or diminished, and lessened production in itself
means increased cost,
fthile everything that increases the cost of production naturally and
inevitably increases the cost to the consumer, yet it does not seem reasonable
to believe that all taxes are necessarily passed to the consumer in the form of
increased prices, for naturally there comes a place where the price is such
that the consumer can no longer afford to buy, or must buy less,» a^d in the
end both the producer and the consumer share in the disastrous consequences of
such taxation*
The point now emphasized is that, the evil effects of high surtaxes fall
not upon the individual whose income is seised and taken, hut ultimately almost
entirely upon the mass of the people who are thereby deprived of the benefits
which would result from the free flow of commercial transactions and the use of
the additional, capital which would be available for productive enterprise,
FREEDOM OF BUSINESS TRANSACTIONS ESSIUTIAL,
The revenue to be obtained by the Government from tills class of taxes
depends uf>on transactions in trade and commerce which bring about income
available for payment of taxes.
It is highly desirable, in the interest of the
production of revenue, that the volume of business transactions giving rise to
gain shall be as great as possible, and to this end it is essential that the
natural laws of trade and commerce and the free flow of business shall not be
interfered with or prevented*
-15-
But the direct effect of these very high taxes is to hinder and prevent
business transactions which would otherwise take place*
A man may have
property which he has held for years and which has greatly increased in
value, and he would like to sell it, hut if he does a large part of the gain
would have to he paid out in taxes*
He' would rather keep the property than
sell it, pay the tax, and invest what is left in something else*
At the same
time the party desiring to buy this.property, if he obtained it, would improve
it with buildings*
$hat is the result?
The transaction does not take place,
and the community loses the advantage which would come in the stimulation that
would arise from the transactions resulting from the buyer*s improvement of
the property, and it also loses the advantage of the sellers putting his
money into some other form of investment, which in turn would give rise to
business transactions*
The same thing on a much greater scale is true in
manufacturing and mercantile lines*
Men have built up enterprises to the
point where they are highly successful*
They would like to take their profit
and turn the business over to younger men to carry on.
These transactions
are highly desirable not only for the parties but for the community, yet
they are absolutely stopped, because it made the seller would have to pay in
one year a tax on a gain which has been the result of perhaps the better part
Of a lifetime of effort.
And in all such cases the Government gets no tax,
whereas if the rates were reasonable the transactions would take $lace and the
Governments revenues would benefit accordingly*
The free interchange of property in business transactions is essential
to the normal prosperity of the country, and each such transaction has a
direct tendency to bring about others of like character with the result of
increasing the amount of gain or income available for taxation,* but when i* e
tax is so high as to act as a deterrent against usual and desirable business
transactions, and the volume of such transactions is thereby lessoned, the
inevitable result is for the tax to become less and less productive*
It is for these reasons that, particularly in the higher brackets, a
lower tax rate will produce more revenue in the long run than excessive rates*
So long as the high rate stands in the way of accomplishing bargains and sales,
the Government receives no taxj but at a lower rate the transactions proceed
and the Government shares in the profits*
THE P ^ TTRjpiiR EFFECT 0F HIGH HATES ON THE REVENUES
The actual affect of the high surtaxes can readily be seen in the statistics
published b y the Bureau of Internal Revenue*
The following table shows in comparative form, for the
years 1916 to 1919, in
clusive, the total number of returns of all classes and the returns of incomes over
$300,000; the total net income in the same way, and also the investment income*
Table showing decline of taxable incomes over $300,000*
Number of returns.,
Net incomes.
I
All
1Incomes
classes j over
*All classes.
$300,000
1916^.
1917.**
1918**.
) 1919..*
Incomes
over
$300,000
Income from di vidends, in
tercst, and in vestments ,
All classes. .
Incomes
over
$300,000
.$992,972,986 $3,217,348,030, $706,945,738
437;Q36* 1,296 $6,298,577,620
3,785,557,955 616,119,892
3¿472,890 1,015 13,652,383,207 731,372,153
3,872,234,935 344,111,461
627 15,924,639,355 401,107,868
4,^25,11*
3,954,553,925 314,984,884
679- 19,859,491,448 440,011,589
5,333,760
:
—
The years under consideration. 19X6 to 1919, inclusive, were, on the whole,
years of unexampled prosperity, and of earnings and profits beyond those ever
[ before in any like period in the history of the country.
| ile
Notwithstanding this, and
the total income of all classes increased, at the same time there was a strik.
[ ipg decrease in taxable incomes of $300,000 and over - the drop being from
$992,973,986 in 1916 to $440,011,589 in 1919.
I
The effect of the high surtaxes in the other brackets is apparent from a
brief study of the statistics regarding taxable investment income.
I
In the bracket "Incomes of $300,000 and over," the taxable investment income
declined from $746.614,591 in 1916 to $338,360,613 in 1919;
in tbe bracket
I «$100,000 to $300,000," the decline was from $603,853,543 in 1916 to $427,910,905
in 1919;
and in the b rack et"$60,000 to $100,000," the decline was from
$366,614, 917 in 1916 to $323,743,874 in 1919.
~ v tr
If we take the- taxable income from interest*, exclusive of interest on
Government obligations, the decline is still more striking, the figures
being as follows;
Incomes, $300,000 and over
1916-------- — — —
1917*-*—
-----« M 1918— —
—
—
1919**----------- —
$165,733,900
111,468,127
• 74,610,507
. 60,087,093
Incomes, $100,000 to $300,000;
" 1916*—
—
—
--1917- — ---------------1918- ---- -------------1919- ---- --------- -----
158,870,428
119,533,786
91,030,392
91,467,182
Incomes, $60,000 to $100,000;
93,280,583
75,375,484
65,784,062
68,814,933
1916— — — -------------19X7------------- ------1918---------- *---------- 1919— ,--------------- -
The.foregoing brackets represent the incomes subject to surtaxes under
the revenue act of 1918, respectively, at 63 to 65 per cent, 52 to 63 par cent,
and 29 to 48 per cent.
To these figures should be added the normal-tax of 8
per cent in order to find the total tax obligation*
In view of these figures, is it not clear that theae high surtax rates
are rapidly ceasing to be productive of revenue to the Government?
And is
it not equally olear that their effect has been to divert into unproductive
channels not merely the income on the old investments, but to force a large
part of the old in v e s tm e n t capital into unproductive channels?
BUSINESS PROFITS.
The revenue act of 1921 has repealed the excess-profits tax law,
effective December 31, 1921,
While this law was justified as a war
measure, ite continuance in time of peace, and particularly
under
r iö r
present conditions, would have been indefensible*
During the war period» when
every line of industry was running at full capacity and prices and profits were
highly inflated, the act served to produce a large revenue for the government
and its inequalities were not so much felt by the taxpayers.
Its burden, however,
fell very unequally upon the business interests of the country.
The higher rates
of tax were imposed, generally speaking, upon the small or moderate-sized corpo
rations rather than upon the large ones.
Owing to the difficulty of determining
the capital actually used to carry on any industry, it was impossible to apply
the act without very great hardship in many cases.
The administration of the
act also was extremely difficult, and the department even yet has hot been able
to dispose of all the cases arising under the law for the year 1917, the first
year of its operation.
The repeal of the excess-profits tax has made necessary a very considerable
increase in the flat tax on net corporate income, the rate under the new law be
ing 12É per cent.
In addition there is the capital-stock tax, which amounts,
roughly speaking, to about 2 per cent of the net income.
This makes a total tax
I equivalent to nearly 15 per cent on corporate net income; and when we remember
that the great bulk of the business of the country, both large and small, is
carried on under corporate form and that the net income must largely be distri
buted in dividends, and that these dividends are then in turn subject to surtax
in the hands of persons receiving them, it is at once seen that the resulting
taxation to persons engaged in productive business is very heavy.
For instance,
a stockholder subject to surtax at 10 per cent really pays about 25 per cent,
15 per cent through the corporation and 10 per cent as surtax on his dividends;
■ while a stockholder subject to 50 per cent surtax would be taxed about 65 per
cent oh such profits.
-19-
ESTATS TAX.
Much of what has been said respecting the high surtaxes applies-equally to
the high rates of taxation upon estates.
The continuance in time of peace of
the very high estate taxes imposed during the emergency ox war should receive
serious consideration.
* * *
The first objection is that taxes at such rates, which seize upon and take
away so much of the capital of the country, are fundamentally wrong.
The Nation,
just as the individual, should not use up its capital in payment of its ordinary
expenses.
The money which is taken b y way of such taxes is, to a large extent,
the capital which is in use and necessary in carrying on the business of the
country, and just to the extent that the Government seises upon and takes this
capital for its own income its loss must be made good out of the thrift and
savings of th© people of the country.
The more serious difficulty, however, in this respect is with.the high
rates.
Where, the rates are moderate and thereby are widely spread and take bui
a moderate amount of capital from each estate, their effect is not so grea ;
but when the rate is high and falls heavily in a few places, and the amount of
capital seized and taken away from certain lines of industry, or certain particu
lar industries, is large, the evil effects are very harmful.
In the second place, there is the destructive effect upon values.
If all
the wealth of an estate consisted of money, the evil results of such taxes would
be much less.
But the wealth of estates does not consist of money, nor, in fact,
in most cases, of property readily convertible into money. Jin estate consisting
principally of Government bonds or municipal securities is of less real value to
the community than is the estate that is invested in property in any l i n e o f j r o ductive industry giving useful employment to large numbers of people.
And yet
the estate invested in tax-free securities would be much less affected by t ®
than the estate invested in real estate, in manufacturing plants, in merclan
ing, in farming, or in any line of productive industry.
Ugain, when a nan actively engaged in business dies, leaving an estate of
considerable size, his family is called upon to provide for the pajh&en't not
merely of the Federal estate tax, but, in many cases, an inheritance tax to
the State in which he lived*
There is also frequently a tax to be paid to the
State where some part of the property is located, and often a tax must be paid
upon the value of shares of stock to the State where the company is incorporated*
So that, there may be as many as four different taxes to be paid upon the same
property*
In addition,, there is usually a greater or less amount of indebted
ness existing which must be met*
in money*
These obligations Can be met only by.payment
The estate can not take its property and Simply divide it up, giving
to the Nation, to the State, and to ihe creditors a proportionate share of the
actual property*
Those ultimately entitled to share in the distribution may
take their portions in property, but, before that can be done, actual cash must
be found for the. payment of the taxes and the debts; and the larger these are in
proportion to the amount of the estate, the more difficult the task becomes#
In the ordinary course of business, there is just a certain amount of
property that changes hands from year to year*
amount and no more*
There is a market for a certain
The extent of this market, that is, the buyers who are
willing to buy at fair prices,' is dependent largely upon the amount and
character of the property coming upon the market*
There may be a ready market
at a reasonable price for a limited amount of the share* of an Indus trial
company, or for a medium-size manufacturing property, or far residence or
business property of moderate price»
But the larger the amount of. property that
must be sold, the more difficult it becomes to find buyers for it; and if the
sellers are under some absolute need to sell, as is the case where the money
must be provided within a limited time to pay taxes and debts, then just that
much lead ready and willing are bidders to buy, and just so much greater is the
sacrif ice that the sailers must make in order to obtain cash»
is seen constantly in the commercial world*
The sam© thing
If a large amount of any of the
staple commodities, even such as cotton, wheat, or any article of consumption,
is suddenly pressed upon the market, and the holder*s needs force him to sell,
there is an immediate and great decline in the price which he is able to
obtain*
What is true of articles of daily consumption is very much more true
as respects investments in property, such as largely makes up the estates
called upon to pay these taxes*
It has become notorious in recent years, whenever a man of means dies,
leaving his estate obligated to pay a large amount by way of taxes or debts,
or both, that there is an immediate decline in all classes of securities in
which he is known to be interested.
And when, under these conditions, the
estate is required to make a sale of its property, of whatever class it may
be, there is not merely a large loss to the estate-a large shrinkage in the
value of the property below its real worth-but there is also a loss inflicted
upon everyone else who is interested in these properties, especially if at
the same time they desire to, or must, sell*
The extent of the shrinkage of values and the losses caused by the
forced liquidation of many estates is hot generally realised, for the present
high rates have been in existence but a short time and their evil effects,
which will naturally increase if these rates continue, are only gradually
coming to be recognised*
The effect of this breaking down of values tends directly toward making
the tax lees productive of revenue, and the longer these rates continue with
the successive coming upon the market of estates, the more their effect will
be felt in the revenues, for each forced liquidation tends to make a new and
lower value upon which ail taxes must be based.
-23-
A large part of the revenue now derived from the estate tax comes from
the more moderate rates*
Taxation which is destructive of that basis 0f
value on which all taxes rest is neither logical nor wise in principle, and
in any revision of our tax laws serious attention should be given to this
subject*
THE REMEDY*
It would not seem either wise or necessary suddenly to change from our
present system of taxation to new and untried plans; and the evils which have
been discussed can be corrected without doing anything of this sort.
The
necessary adjustments can readily be made by retaining most of the present
taxes, but substantially reducing the rates, and supplementing the revenues
by some additional taxes.
The income tax is firmly embedded in our system of taxation and the'
objections made are not to the principle of the tax but only to the excessively
high rates.
We hear much of the need of simplifying our tax laws and there
is room for this*
The greatest simplification that can be made is in the
reduction of the rates*
So long as the rates were low, there was not much
difficulty in the administration of the law, even though the system was
entirely new and the organization administering it unfamiliar with the
operation of such a law.
The complexity of the law, so far as concerns the
income tax itself, has arisen largely out of the high rates which make every
point that arises involve substantial amounts of money, and which means that
each possible question is contested by the taxpayer and by the Government,
with resulting delay in the collection of the revenue, irritation and
annoyance and expense on the part of the taxpayer, and costly litigation*
With
moderate rates, very much of this difficulty would disappear*
The amount of revenue involved in any such reform is not nearly so great
as is generally supposed*
-23*-
To reduce the surtax rates to a maximum of 25 per cent;, and grading;
the reductions through all the ."brackets, would mean an apparent loss a t
about $130,000,000 in revenue*
A 20 per cent maximum rate on the same
basis would involve a revenue loss of about $200,000,000*
Other adjustments
which should be made would probably involve an amount equal to that made in
the surtax rates*
This loss of revenue, however, would not be permanent^
for the reduced rates would ultimately be productive of more revenue than
higher rates, due to the increase in taxable transactions*
If this loss of revenue could not be met by rigid economy in expendi
tures, the revenue required could be raised either by placing a tax on
certain specific articles, or by a low-x-ate general tax on a broad class of
articles or transactions*
Such taxes as those now imposed on automobiles
and tires have been found simple and inexpensive of administration, and. the
collection is always substantially current] they have been steadily productive
of revenue, and have been without injurious effects upon the country*
In
view of past experience, a general tax either of this or like character upon
a broad class of articles or transactions could be readily administered] and
th8 rate could be made sufficiently low as not to bear unduly upon any class
-and at the same time produce a large amount of additional revenue*
By
retaining the income tax with reasonable surtax rates, which in peace times,
ultimately should not rise above 10 per cent, taxpayers would still be
required to contribute in proportion to their ability to pay; while by
placing a certain amount of tax on specific articles, or classes
articles,
or transactions, at so low a rate that they could readily be borne without
injury, the income tax could be materially simplified, the tax laws could
be more readily administered, and svt the same time-the needed revenues would .
be raised without the evil effects now resulting from the present excessive
rates of taxation.
BUREAU OS’ INTERNAL REVENUE.
Progress has been made in the audit and settlement of income and profits
tax returns for past years, but there is still a vast amount of accumulated
cases to be disposed of before the work can be brought to a current basis.
She magnitude of the task placed upon the bureau b y the income, war profits,
and excess profits taxes can hardly be exaggerated.
Under these laws it became
necessary, beginning with the returns for the year 1917, to make a careful ex
amination, and in most cases an audit, of the returns for every financial, trad
ing, and industrial c o n o e m in the Ifcited States, with the result that, whereas
prior to 1917 the bureau had been able to keep reasonably abreast of its wo
since that time it has fallen further and further behind.
,
The most difficult
problems were those arising in connection with the excess profits tax, and par
cularly the question of invested capital as applied to the widely varying condi
tions in which different corporations were placed.
She rule prescribed
th
act for ascertaining invested capital was necessarily an arbitrary one, involving
in many cases great hardship and serious discrimination between corporations in
similar lines of business.
As a result the work of the bureau bas become more
and more congested, the expense to the taxpayers of handling the cases has been
enormous, while the cost to the Government has steadily increased.
The repeal of the excess profits tax, effective at the end of the present
calendar year, will, of course, afford great relief in this respect and makes
it easier to formulate practical plans for disposing of the -cumulated work.
The condition of the work in the bureau has been the subject of much thought
and consideration and a careful study has been in progress for several months,
and is still going on. for the purpose of determining the amount of the accumu
lated work, the progress being made, and what steps it is practicable to take for
the purpose of cleaning up'this accumulation and bringing the work of the bureau
to a current basis.
•25 -
As a result of this study it was found that for the years 1917 to 1930, in
clusive, there remained undisposed of at August 31, 1921, the audit of
1,488,950 personal returns and of 689,425 corporation returns.
The following table indicate« approximately the condition of the work in the
bureau on August 31, 1921;
Statement of condition of work» income-tax unit, Aug* 31» 1921*
;(
Total
filed or
to be han
dled
Personali
1917 ..........
1918 ..........
1919 ... .......
1920 ...... ....
,
830,000 «
660,000
850.,.000
890,000
Balance t o be
audité d
Total returns
audited
Number
827,702
627,227
285,953
168
Per
cent
Number
2,298
32,773
564,047
889,832
99.7
95
34
54
1,488,950
Per
cent.
0.3
5
66
100
46
3,230,000
1,7^1,050
323,138
368,290
363.323
349,500
305,417
278,323
133,351
2,734
94.5
75*6
36.2
»8
17,721
89,967
234,971
346,766
5.5
24*4
63 #8
99.2
719,825
51.1
689,425
48*9
Total ...... . 1,409,250
Tot a l ..... .
Corporation:
1917 ..... .
1918 .......... «
1919 ............
1920 ........ ....
NOTE.— The personal returns do not include the smaller returns roc
audited1'
largely in the collectors' offices. Many of the returns snown as "to he audited
were in various stages of progress.
Generally speaking, of course, the tax shown by the face of these accumulated
returns has been collected currently when due, and there remains only such addi
tional tax as may be developed by the audit and investigation.
The cases remain
ing are largely the ones less productive of revenue aid more difficult to handle,
dae to the fact that heretofore, in order to get as much revenue as possible, the
oases most easily handled and yielding the largest revenue, were, to a great extent jgi ven earli est att ent ion»
- 26-
It was found that the work of the bureau had been much interfered with bywar conditions, by lack of adequate office space, b y the fact that such space
I
as could be had was widely scattered, and b y the difficulty of obtaining and
keeping an efficient personnel*,
that there were now engaged in the work making
audits, examinations, assessments, and settlements a total force of approxi
mately 8,000 persons* that the work on the cases in hand was in all stages of
progress, and that assessments for additional taxes were being made at an
average rate of over $30,000,000 per month.
It was apparent that no sudden or
radical changes in plans or methods of handling work were either practicable
or advisable, since it was important to maintain a steady progress of work.
m
As
a result, the study and plan being pursued are on the lines of the gradual in
troduction of such changes in methods as can be introduced without interfering
with or breaking down the existing organization and at the same time bring
about greater efficiency in the work and increased expedition in the disposition
of cases.
This is being done with the cooperation of those engaged in the work,
and has already resulted in very considerable improvement and increased produc
tion.
The situation as regards claims made by taxpayers by way of abatement, or for
L
credit, or for refund in respect of taxes claimed to have been erroneously or
F
illegally assessed may be taken as typical, although this presented one of the
greatest points of congestion and accumulation t f work*
A thorough and careful
investigation of the pending claims showed that on October 21, 1921, there were
pending claims filed, by taxpayers as follows?
Number of
claims.
Abatement of taxes assessed but not p a i d ......
Credit claimed on account of alleged previous over
payments ............ ....... ................
Refund of taxes paid ... *...... ......... *.........
Total .................... . ■»• ■
57,619.
26,146
79.612
163.277
\
Amount
$615,181,744
138,097,506
253,689.606
1.006.968.856
Many of these claims have been pending for a considerable period of time and
it is manifestly unfair to the taxpayers and to the Government that this condi
tion should continue.
-2 7 Aa a result of the study that has been made, plans have been formulated
and put into effect for the handling and disposition of these claims which it
is expected will enable the pending claims substantially to be disposed of
by the end of the present fiscal year*
The prompt disposition of the
abatement claims will result in tlie collection of a large amount of taxes now
being held up by the pendency of these claims*
As rapidly as it can be done, consistently with the proper consideration
of the cases, both from the standpoint of the taxpayer and of the Government,
it is proposed to expedite the disposition of the work which has accumulated
from past years, but the progress which can be made in this respect can only
be determined by actual experience in the future*
The work involved is of a complicated and difficult character, particularly
in the cases involving large amounts of money, and requires special training
and skill, so that additions.! personnel is not readily or quickly available*
In addition to this the bureau must keep within the limit of its appropriation
for this work, and it does not seem advisable greatly to expand the permanent
organization to any greater extent than is absolutely required, especially as
the excess profits tax-ends with the present year*
However, the problem will
continue to receive the very best thought of the department to the end that
taxpayers may know as promptly as possible their tax liability, and that the
work shall be handled with expedition and promptness and be as nearly current
as this class of work can be mad3* * -* *
‘ECONOMY IN GOVERNMENT EXPENDITURES:
BUDGET SYSTEM*
In connection with the revision of the internal-tax laws and on other
occasions the Treasury has frequently emphasized the vital importance of
reductions in Government expenditures*
-23-
The year ■under review has shown extraordinary pro
gress toward the reduction of Government expenditure,
and striking cuts in expenditure have been made for
the current fiscal year.
The estimates for the fis
cal year 1923, as presented in the budget and indi-*
cated
elsewhere
in
this
-28-
report,
show
a
-29-
tentative excess of expenditures over receipts in the amount of about
$167,000,000, due in large part to the reduction in estimated revenues* . It
is confidently expected, however, that with continued economy and effective
pressure for reduced expenditures in all quarters it will be possible
to
overcome this threatened excess of expenditure and go through the year with
a balanced budget* *
*
*
The progress which has been made in the reduction of Government
expenditures is shown by the following table:
: Actual, fiscal
:
year 1920*
:
:
Actual, fiscal
year 1921»
Estimated,
fiscal year
1922*
Estimated,
fiscal year
1923,
J Ordinary
;
;
Expenditures*:$6,403,343,841*21:$5,115,927,689, 30 $3,604,980,166 $3,143,4*5,937
Public debt ex- :
i
penditures charge
:
able against
:
*
369.338,800
; ordinary receipts
78,733*400.00:
422*113.000,00
387,942*200
Total ordinary :
*
Hr expenditures (in*
;
( eluding public
:
•
debt expenditures
;
chargeable
;
•
against ordinary:'
» •
receipts)..... .: 6,482,077,241*21: 5,538,040,689,30
*
9
* * * * * * * * * $ $ * * * **
3, 992,922,366
3,512,754,727
* * * * * * * * * * **
THE INTERNATIONAL FINANCIAL SITUATION*
The values of foreign currencies as measured in dollars have shown great
fluctuations during the year, and this instability, taken in connection with the
A
recession in general business, has been unfavorable to the development of the
foreign and domestic trade of this country*
It is not necessary to discuss the
many factors which have contributed to this situation*
The interdependence of
-30r
th© industry of all nations has been brought out very clearly by the develop
ments since the war«
It is fully understood to-day that the business of the
United States depends in part upon the business activity of other nations.
The foreign obligations held by the United States, nearly all payable on
demand, add to the uncertainty in international trade, particularly between
the United States and its debtor nations* and increase the difficulty of a re
sumption of credit operations by these nations in the investment markets of the
world*
Many of them need capital for reconstruction, the purchase of raw ma
terial, and the rehabilitation of their railways and factories*
Until their
financial position is made clear, their ability to place loans will be affected,
their industrial recovery will be retarded, and our own prosperity will suffer*
The funding of these demand obligations and placing.them in a businesslike form
is one of the outstanding needs of the present economic situation*
It is es
sential that some definite arrangement should be made as to the terms of pay
ment both of the principal and interest*
This is a problem which the country
must face and must deal with in a broad, far-sighted way. * * *
WAR FINANCE CORPORATION.
The Agricultural Credits Act, approved August 2^, 1931, broadened the
powers of the War Finance Corporation and gave it authority to make advances
not only to exporters and banking institutions but also to dealers in, and
handlers of, agricultural products, including cooperative associations, ior
the purpose of advancing the carrying o f such products until they can be ex
ported or sold for export in an orderly manner. * * * *
At the time of this report the macninery for the administration of tne ag
ricultural credits act is in full operation.
The agricultural lo<^i committees
in the various sections of the country are functioning actively and large n u m - .
bers of applications are being received.
Many lomcs already have been announc
ed and there is every indication that, with the whole-hearted cooperation of
public-spirited citizens and business men which the corporation is receiving
everywhere, it will accomplish a great deal toward bringing about more sta
bilized conditions in the agricultural industry.
-31-
Ths following table shows the advances approved by the corporation from
January 4, 1921, to November 15, 1921î
1,
Export advances approved by War Finance Corporation:
COtton------*-------- -— —
Tobacco-------------------Wheat— -------------------Condensed Milk— — — ------Canned fruit and vegetablesDried fruit--------- ------ Meat' products---------- —
Railroad equipment— — — --Copper---------------------Sugar-mill machinery------Agricultural machinery— —
$47,527,598*00
2,399,369*00
11,500, 000,00
1,000,000,00
400,000*00
1.250.000. 00
..
1 000
Total
2,
000.00
2, 925,000,00
145.600.00
317.140.00
500,000.00
68,964,707.00
Advances for agriculturai purposes approved by
war Finance Corporation:
Wheat------------------------------------------- 15,000,000.00
Cotton--------13,025,214.50
Live stock--------------------------------------5,920,016*89
Cenerai agricultural purposes-------------- .--- 16,172,844.82
Total------------------------------ ------ 50,118,076.21
Grand total------------ ------ -------------119,082,783*21
Of the total amount, $6,052,882.53 represents advances to exporters,
$63,700,000 to cooperative associations, and $49,329,900*68 to banking
institutions*
These ¿figures, of course, represent only advances approved
by the corporation and do not include many transactions now in the process of
negotiation*
Furthermore, it must be remembered that the agricultural credits
act did not become law until August 24*
As the act is nation-wide in its
application, some time necessarily was required to set up the machinery for
its administration*
With the completion of the task of organization, it is to
be expected that there will be a large and steady increase in the usefulness of
the corporation, especially in connection with advances for agricultural
purposes under section 24. * * *
TREASURY SAVINGS SECURITIES FOR 1932.
Daring the calendar year 1922 the Treasury Department will
continue to issue Treasury savings certificates in the denomi
nations of $25» $100, and $1,000, maturity value, hut on a new
basis, with a fixed issue price at the rate of $80 for a $100
certificate, or at the rate of
annually*
per cent compounded semi
The $1 Treasury savings stamp, first issued in 1G21
’will be continued.
For some time past the Secretary of the Treasury and the
Postmaster General have been developing means of coordinating
the savings operations of the Treasury and of the Post Office
Departments,
Through these conferences a unified Government
savings program has been effected, with the result that during
1923 postal savings will be advanced for the deposit of sav
ings and Treasury savings securities for investment.
This
program will be promoted jointly by the saving» organizations
of both departments.
Pursuant to this plan, the Treasury De-
¿>artment will discontinue, at the close of the calendar year
1931, the issuance of the 25-cent thrift stamp and the $5 war
savings stamp, on the ground that the 10-cent postal savings'
stamp, the $1 Treasury savings stamp, and postal savings de
posits will provide adequate means of saving money in small
installments, while the Treasury savings certificates above
referred to will provide means of investment.
-33-
The new $25 Treasury savings certificate .Till bear the portrait
1
of Roosevelt; the $100 certificate that of Washington; and the $1,000
certificate that of Lincoln«
These certificates will be issued at a flat
price, instead of at prices varying monthly as in previous years#
mature five years from date of issue»
They will
The terms of the issues for 1922
will appear in detail in formal Treasury Department announcements to be
issued at a later date,
*
*
*
THE FEDERAL FARM LOAN SYSTEM,
In the last annual report allusion was made to the litigation then
pending which challenged the constitutionality of the farm loan act#
On
February 28 of the present year the Supreme Court of the United States
rendered a decision in the case upholding the constitutionality of the act
in every respect#
The effect of this decision was to establish the Federal
Farm Loan Sys tern firmly as a part of our
financial system and to -cl.ear away
the legal difficulties which had impeded the operation of the system and the
sale of land-bank bonds.
Shortly after the decision of the Supreme Court,
Congress further amended the Federal farm loan act and changed the optional
call period so that the banks might issue bonds which could not be callable
•until 10 years from the date of issue»
This amendment was deemed desirable
in order to add to the attractiveness of the bonds to investors, and it is
believed that it has proven exceedingly helpful in the sale of Federal
land-bank bonds#
*
*
*
The Federal Farm Loan System seems now to have become thoroughly
established in the confidence of investors and in the minds of agricultural
borrowers.
Indeed, the demand for loans, owing to the general stress among
the agricultural interests, has been for the time being in excess of the
supply of funds and in excess of the physical capacity of the Federal land
i34e~,
banks.
The system is functioning smoothly, however, and loaning funds to
American farmers on very favorable terms at a rate exceeding $150,000,000
per year, which, no doubt, exceeds any anticipations as to its service, and
would in normal times fully respond to the calls upon it*
*
*
HOSPITALIZATION.
The Sixty-sixth Congress of the United States passed Public Act 384,
appropriating $18,600,000 for the provision of hospitals for the veterans of
the World War.
This was signed by the President on the 4th of March, and
made the Secretary of the Treasury responsible for the provision of these
hospitals.
On the 16th of March the Secretary appointed a small group of
consultants, composed of Dr. William Charles White, chairman, representing
the National Tuberculosis Association; Dr* George H* Kirby, representing
the National Mental Hygiene Association; Dr. Frank Billings, representing
the American Medical Association; and Mr* John G* Bowman, who, as executive
officer of the American College of Surgeons, had visited and inspected most
of the hospital institutions in the United States,
These consultants met immediately and made a careful study of the
hospital needs of the Bureau of War Risk Insurance.
They took into their
counsel an advisory committee of expert men loaned to them by the Natio
Tuberculosis Association, the National Mental Hygiene Association, the
Public Health Service, the National Home ior Disabled Volunteer Soldiers,
and the Bureau of War Risk Insurance.
from different parts of the country.
They heard all claims for hospitals
They secured advice from members of
the Army medical service, the Navy medical service, the Catholic Hospital
Association, and numerous other interested bodies and individuals.
While these hearings were proceeding, a corps of workers was busy
-35-
plotting the various existing hospitals and other institutions beir^g used
for the care of ©x-ssrvice men throughout tha Unitad States"?
v/era also made of lines of transportation*
Careful studies
distribution of ex~service men*
special climates* ebb and flow of the sick population* tj^pas of disease
represented among the beneficiary group* and other factors of importance*
and these were carefully prepared in chart and map form as a basis for
location of new hospitals* *
*
*
It was an early conclusion of the consultants* approved by the Secretary*
that in the face of the emergency need for hospitals no delay should be
tolerated* and that therefore each project as it was decided upon should
go ahead with the utmost possible speed* *
*
*
Standard plans of nine types were prepared*
tuberculous* with three types of buildings*
(l) sanatoria for the
infirmaries for advanced cases
and buildings for ambulant and semiambulant groups; and (2) hospitals for
mental diseases* with six types* diagnostic units* buildings for continued
treatment* disturbed cases* reeducation* tuberculous mental and convalescent
cases*
Forty per cent working drawings for 'each of these with preliminary
specifications were prepared to serve as models.
In this way a great
saving of time was secured* and when institutions were decided upon and
sites chosen these standard plans were used with such modifications as
were necessary for otatnur of ground* preexisting utilities where these
already existed* etc«* and thus speed in advertising and securing
contracts of building and final erection was obtained*
In the study which lias been made of tha whole problem of hospitals
a great deal o f information has naturally been gatnered,
This is now be
ing prepared as a guide in shaping any future hospital program o f the
Government. .
**36*r
FINANCES
ESTIMATED RECEIPTS AND EXPENDITURES, FISCAL YEAR 1922
4
Receipts:
Ordinary*—
C u s t o m s .... ................... $275,000,000
Internal revenue **
Income and profits taxes*,
$ 2,110,000,000
Miscellaneous*,..... ............ .
1,104,500, 000
------------- 5,23.4,500,000
MiscellaneousSales of public lands*..............
Federal reserve bank franchise tax* *
Interest on foreign obligations** *.*
Repayments of foreign obligations#.*
Sales of surplus war supplies..*.*,♦
United States Grain Corporation# *•••
Panama Canal,
Other*miscellaneous*................
1,500,000
60,000,000
25.000.
30,5=00,000
141,200,000
25.000.
11,760,000
183,993,663
-----------
000
000
478,953,663
3,968 >453,663
Total#*
Expenditures?
Ordinary* ...................... .
Public debt expenditure^ chargeable against
ordinary receiptsSinking fund#............... ..... . •*
Purchases of Liberty bonds from
foreign repayments*
Redemptions of bonds and notes from
estate taxes#
Retirements from Federal reserve
bank franchise tax receipts* **«.««
3,604,980,166
272,442,200
30,500,000
,
25 000,000
60,000,000
-----------
387,942,200
Total ordinary expenditures (including sinking
fund and other debt expenditures chargeable
against ordinary receipts)..**•**..*..«.«*.... * 3,992,922,366
Excess of expenditures over r e c e i p t s # •
*
*
4c
*
*
#
24,468,703
-37-
ESTIMATEL RECEIPTS M L EXPENDITURES, FISCAL YEAR 1923.
Receipts;
Ordinary—
Customs
Internal revenue —
Income and profits taxes
Miscellaneous
$ 330,000,000
$ 1,715,000,000
896,000,000
2,611,000,000
Miscellaneous revenue —
Sales of public lands ♦..... .
Federal reserve bank franchise tax
Interest on foreign obligations..
Repayments of foreign obligations
Sale of surplus war supplies ...
Unitea States Graih Corporation
Panama Canal ....... ...........
Other miscellaneous ............
1,500,000
30.000.
25.000.
30.500.000
ICO,500,000
7,000,000
13.315.000
196,367,750
000
000
*0*,182,750
Total ordinary receipts
3,345,182,750
Expenditures;
Ordinary ................ ..................
Public debt expenditures chargeable «against
ordinary receipts Sinking fund, ..........................
Purchases of Liberty bonds from
foreign repayments... *.... ...... .
Redemption of braids and notes from
estate taxes .............. ..........
Retirements from Federal reserve bank
franchise tax receipts ............. .
1.
3,143,415,927
283,838,800
30,500,000
25.000.
000
30.000.
000
369,338,800
Total ordinary expenditures (including sinking fund
and other debt redemptions chargeable against orp.
dinar y receipts)
........ ................. .......... 3,513,754.727
Excess of expenditures over receipts
167,571,977
1/ This amount does not include $125,000,000 of accumulated interest cn warsavings certificates, representing discount accrued on certificates of the
series of 1918, which mature Jan# 1, 1923.
•
SUPPLEMENTAL REGULATIONS GOVERNING SALES
OF SILVER TO THE DIRECTOR OF THE MINT
UNDER THE PITTMAN ACT.
~
^
J
p
\
h
h '
<r
Paragraph 5 of the Regulations of the Director of the Mint,
approval August 30, 1920, as amended under data of October 6, 1920,
and May 14, 1921, with reference to the proof required to be submitted
.In connection with purchases of silver under the authority of the
Pittman Act, approved April 23, 1918, is hereby amended to read as
follows:
"(5)
Subject to the limitations of law as to the amount
of silver purchaseable under the Pittman Act to replace silver
dollars broken up and melted thereunder, the Director of the
Mint will purchase under the Pittman Act silver which forms a
part of a mixture of domestic and foreign silver produced by
reduction works located in the United States up to the amount
of such mixed product which represents the amount of silver
wholly produced from mines situated in the United States and
reduced in reduction works so located; provided, however, that
the aggregate amount of refined mixed silver purchased hereunder
as domestic silver shall not exceed the amount of silver actually
produced from mines situated in the United States and delivered
to reduction works so located, for which settlement was made with
the miner, as shown by the liquidation sheets of said reduction
works and the vendors1 affidavits and supporting affidavits of
the miners who delivered said silver to said reduction works,
filed with the Director of the Mint as herein required; and
provided further that no amount of mixed silver which was
refined on or before June 17, 1920., shall be purchased unless
and to the extent that the domestic silver contained therein
was delivered to reduction works located in the United States
since January 17, 1920, as shown by such liquidation sheets and
affidavits#
An
sales of refined mixed silver by the vendor
prior to May 15, 1920, and all sales of refined mixed silver by
the vendor after that date at a price exceeding $1 per ounce,
1,000
«
fine, and all silver lost in process, must be apportioned
between domestic and foreign silver for the purposes of settle
ments on account of silver purchased hereunder according to the
amounts of domestic.and foreign silver received for reduction as
shown by the records filed under paragraphs (3) and (4) of these
regulations.,T
Revised forms of vendor*s and miner1a affidavits are attached
hereto and marked Exhibit A and Exhibit B> respectively.
ft. T. BAKER
Director of the Mint,
Approved:
December 2, 1921»
8. P. GILBERT, Jr.,
Under Secretary of the Treasury.
EXHIBIT A*
VEfSÒpTs AFFIDAVIT (MIXED SILVER).
State of
\(
f
\
County of
)
In order to make a sale of silver to the Director of the Mint under
the provisions of the Pittman Act, approved April 23, 1913, and the regulations
of the Director of the Mint issued thereunder, the undersigned hereby represents
and certifies under oath that he is the_________ ________ ___________
(Title of office)
y . ------- ----- --------- --------------------------------------------------------------
of
owner of certain silver to the
(Name of Vendor)
amount of__________________________ fine ounces more or lass, forwarded to the
United States Mint at_______ ______________________'
___________ ______, on the
______________ day of________________________ , 192__ , and delivered for sale to the
Director of the Mint under the provisions of said Act for account of said vendor;
and that said silver is the product of mines situated in the United States and
of reduction works so located; being either * (l) wholly without admixture of
the product of foreign mines or reduction works, or (2) part of a mixture of
foreign silver and domestic silver delivered to domestic reduction works since
____________ , 19_____, and that the amount of such mixed product
tendered for sale as domestic silver does not exceed the amount which represents
the product of mines located within the United States and of reduction works so
located (after taking into account sales heretofore made to the Director of
the Mint under said Act, and excluding from the account silver refined on or
before June 17, 1920, which was<.delivered to such reduction works on or before
January 17, 1920).
the amount of
Settlement has been made for said silver with the miners to
fine ounces on the basis of $1.00 per ounce,
1000 fine, adjusted to the equivalent price for silver 999 fine and to the cost
*
Strike out clause (l) or (2), whichever is inapplicable.
of delivery, refinery to mint*
The vendor will promptly file with the
Superintendent of said mint such statements and exhibits from its books of
account and such supporting affidavits and sworn statements or exhibits by
itself and by the miner, smelter, and refiner, as may be demanded by the
Director of the Mint from time to time*
(Signature of vendor or duly authorized officer)
Subscribed and sworn to before me this_________ day of^
(Notary Public)
s 19
EXHIBIT B
MINER1S SUPPORTING- AFFIDAVIT (MIXED SILVER),
STATE OF
COUNTY OF
'........... '
The undersigned, being duly sworn, deposes and sayst
of
That ha is the
(Title of officer)
(Name of mine owner)
. .T
mine, situated in the County of
owner of the
........ * a » ±
(Name of mine)
State of
has sold and delivered to
that the said
(Name of mine owner)
on the
_________ ____________ j
_____ _
day of
192__, at its smelting plant known as the.
Smelter, situated in the County of__________ _______ / State of —
fine ounces of silver, which v/as produced at the said
mine located as aforesaid and contained in certain parcels .of ore as
described in settlement or liquidation sheet No* ------- ------- 6a-dd
__________________________________ > and that settlement has been made' for.
said silver to the amount of_________________ fine ounces on the basis, of not
less than $1,00 per ounce, adjusted to theequivalent price for silver 999 -fine
and to the cost of delivery refinery to mint*
Subscribed and sworn to before me this.
day of
Notary Public*
192.
CONFIDENTIAL
The attached synopsis, containing important extracts
*
from the Annual. Report of the Secretary of the Treasury, is
handed you for your convenience and accepted with the under
standing that it shall not be published, given out, or used
in any way, in whole or in part, until the Annual Report
shall have been presented to the Congress of the United States,
which probably will be at 13 o'clock noon (Washington time) of
WEDNESDAY, DECEMBER 7 (seven), 1921.
A. W. MELLON
Secretary of the Treasury»
TREASURY DEPARTMENT
For release, c o m i n g papers,
Monday, December 12, 1921*
The Secretary of the Treasury, under the authority of the act
approved September 24, 3917, as amended, offers for subscription, at par
and accrued interest, through the Federal Reserve Banks, Treasury certifi
cates of indebtedness, in two series, both dated and bearing interest from
December 15, 1921, the certificates of Series T J2-X922 being payable on
June 15, 1922, with interest at the rate of four and one-quarter per cent
per annum semiannually, and the certificates of Series T D-1922 being
payable on December 15, 1922, with interest at the rate of four and onehalf per cent per annum, payable semiannually«
Applications will be received at the Federal Reserve Banks*
Bearer certificates will be issued in denominations of $500, $3.,000,
$5,000, $10,000, and $100,000.
The certificates of Series T J2-1922 will
have one interest coupon attached, payable June 15, 1922, and the certifi
cates of Series T D-1922 two interest coupons attached, payable June 15,
1922, and December 15, 1922*
The certificates of said series shall be exempt, both as to principal
and interest, from all taxation now or hereafter imposed by the United
States, any State, or any of the possessions of the United States, or by
any local taxing authority, except (a) estate or inheritance taxes, and
(b) graduated additional income taxes, commonly known as surtaxes, and
excess—prof its and war-profits taxes, now or hereafter imposed by the
United States, upon the income or profits of individuals, partnerships,
associations, or corporations*
The interest on an amount of bonds and
certificates authorized by said act approved September 24, 1917, and
amendments thereto, the principal of which does not exceed in the aggregat
$5,000, owned by any individual, partnership, association, or corporation,
-2~
shall be Exempt from the taxes provided for in clause (b) above«
The certificates of these series will be accepted at par, with ah
adjustment of accrued interest, during such time and under such rules and
regulations as shall be prescribed or approved by the Secretary of the
Treasury, in payment of income and profits taxes payable at the maturity
of the certificates*
circulation
The certificates of these series do not bear the
privilege*
The right is reserved to reject any subscription and to allot less
than the amount of certificates of either or both series applied for and to
close the subscriptions as to either or both series at any time without
notice*
Payment at par and accrued interest for certificates allotted
must be made on or before December 15, 1921, or on later allotment#
After
allotment and upon payment Federal Reserve Banks may issue interim receipts
pending delivery of the definitive certificateSs
Any qualified depositary
will be permitted to make payment by credit for certificates allotted to it
for itself and its customers up to any amount for which it shall be
qualified in excess of existing deposits, when so notified by the Federal
Reserve Bank of its district*
Treasury certificates of indebtedness of
Series T D-1921, maturing December 15, 1921, will be accepted at par,
with an adjustment of accrued interest,
in payment for any certificates .
of the Series ? J2-1922 or T D-1922 now offered which shall be subscribed
for and allotted*
As fiscal agents of the United States, Federal Reserve Banks are
authorized, and requested to receive subscriptions and to make allotments
on the basis and up to the amounts indicated by the Secretary of the
Treasury to the Federal Reserve Banks of the respective districts*
The combined offering will be for $250/000,000, or thereabouts*
December 15, 1921
My dear Mr» Chairman?
I received your letter of December 10, 1921, and in ac
cordance with your request have been glad to examine the provisions
of the enclosed bill H. R. 8905, introduced by Mr. Strong, of
Kansas, to set aside the earnings of the Federal Deserve Banks as
a special fund for agricultural loans.
X have already expressed
m y general views as to additional credits for agricultural purposes
in my other letter of this date as to H. R, 8906, and believe that
most of the observations mode in that letter apply equally to H. R.
8905.
The Treasury has a special objection to H, R, 8905, in
that it would take public funds out of the Treasury indirectly
without an appropriation, by withholding them for special purposes
before they are covered into the Treasury.
If the public funds are
to be used for direct agricultural loans, I think it is of the ut
most importance that Congress make direct and specific appropriation
of such public funds as may be needed for the purpose and avoid
measures which do not appear to be appropriations but nevertheless
effectively take money out of the Treasury.
The Federal Reserve
Act now provides, as you know, that the net earnings derived by the
United States from the operations of the Federal Reserve Banks
shall be applied in the discretion of the Secretary to the outstand
ing indebtedness of the United States or the increase of the gold
reserve behind United States notes,
It is the policy of the Treasury
-2-
to apply the amounts so received from the Federal Reserve Banks to
the retirement of outstanding indebtedness» and all amounts re
ceived by the Treasury to date on this account have already been
applied to the reduction of debt.
The next payments of the Federal
Reserve Bank franchise taxes will be made at the end of the present
calendar year» and the Treasury has already made arrangements for
the application of these payments when received to the retirement of
bonds and notes,
These items have been incorporated on this basis
in the Budget for the fiscal years 1922 and 1923, as submitted to
Congress by the President December 5» 1921«
Very truly yours,
(Signed)
A* W. Mellon
Secretary*
Hon, Louis T„ McFadden,
Chairman, Committee on Banking and Currency,
House of Representatives,
Washington, D. C*
December 15, 1921,
My dear Mr, Chairman:
I received your letters of November 16, and December 10,
1921, and have been glad, in accordance with your request, to ex
amine the enclosed copy of H, R, 8906, to amend Section 14 of the
Federal Reserve Act so as to enlarge the open market powers of the
Federal Reserve Banks by permitting them on certain terms and con
ditions to purchase agricultural and live-stock paper running be
yond the six months1 limitation imposed by existing law in respect
to paper eligible for discount at the Federal Reserve Banks*
I
have studied the bill with particular reference to the question of
the wisdom of such legislation at this time*
All things considered
I believe that it is not necessary to meet existing conditions and
that it would be unwise to enact it into lav? as a means of permanent
relief*
The bill is apparently designed as a temporary measure, and
is necessarily so limited and restricted in its operation that I
douot whether it would be helpful in the present situation or give
any important additional relief in the future*
To the extent that emergency relief is necessary, more
comprehensive legislation has already been provided by means of
the so-called Agricultural Credits Act, approved August 24, 1921,
which took the form of amendments to the War Finance Corporation
Act*
Pursuant to this enlarged authority, the War Finance Cor
poration is actively engaged in making loans on live stock and
staple agricultural products upon the terms and conditions set
~2~
forth in the amended act, and there is no doubt that ita activitiea
will go far to relieve the situation.
The Federal Reserve Banks
and commercial banks in many sections, moreover, are now in a
better position to extend credits for agricultural purposes, and
should be able more and mors to provide for the financing of
commodity and short-term livestock paper on their own resources,
without recourse even to the additional facilities which the War
Finance Corporation offers*
I realize that there is some gap between the six months*
agricultural credit provided for under the Federal Reserve Act and
the long-time agricultural credits provided for under the Federal
Farm Loan Act on the security of farm lands, and that by reason
of the temporary nature of the War Finance Corporation’s activities
it may be necessary to provide by legislation for soma additional
credit facilities to fill this gap»
I believe, however, that it
should be possible to work out whatever legislation is necessary
for this purpose on a basis that will be both sound and permanent*
The general lines which such legislation might take have been ex
pressed in the statement issued by the Chairman of the Joint Com
mission of Agricultural Inquiry under date of September 1, 1921,
a copy of which is enclosed for your ready reference*
I understand
that a bill which will embody the substance of these recommenda
tions is now in course of preparation and that it has already
had consideration by the Commission*
Conditions are still so
abnormal that it is difficult for anyone to say what additional
legislation is necessary to provide for agricultural credits
-3<
in normal times.
As a matter of fact, I am inclined to believe
that when the existing situation has passed it will be found that
the need is not so much for further financial relief as for bet
ter machinery for distribution and marketing, and that in more
normal times the ordinary banking facilities of the country will
provide for the necessary financing*
The next six months will see
the situation further developed and should give a better indica
tion as to what permanent measures of relief ought to be adopted.
In the meantime the situation is covered not only by the activities
of the War Finance Corporation but also to a large extent by the
credits which the Federal Reserve Banks are already authorized
and prepared to extend*
I suggest that in these circumstances the best course
of procedure would be for the Treasury, the Federal Reserve System
and the Federal Farm Loan Board, and others interested in provid
ing better machinery for agricultural credits of the intermediate
character, to keep in close touch with both the Joint Commission
of Agricultural Inquiry and the Committees on Banking and Currency,
and for all concerned to endeavour to work out together a satis
factory measure that may be expected to develop along sound lines
and to fill whatever gap there may be in the existing system*
I think it would be a mistake, with the temporary situation
.
covered by the activities of the War Finance Corporation, to adopt"
as a measure of relief a bill like H# R* 8906, which is necessarily
limited in its scope and operation and at the same time calculated
-4*to endanger the liquidity of the Federal Reserve System if ever
0
extended to cover the general situation*
The need appears to he
for longer time credits for some agricultural purposes, and this
need should he met so far as possible on an investment basis, to
the extent that it cannot be covered by ordinary banking facilities#
Very truly yours,
(Signed)
A* W* MELLON
Secretary*
Hon* Louis T* McFadden,
Chairman, Committee on Banking and Currency,
House of Representatives,
Washington, D« C*
1 enclosure*
i
T H E SECRETARY OF TH E TREASURY
WASHINGTON, D. C.
December 15, 1921,
Dear Sir:
In transmitting to you herewith Treasury Department Circular No. 270,
dated December 15, 1921, which states the terms and methods of distribution
of the new Treasury Savings Certificates, offered for sale beginning Decem
ber 15, 1921, I invite your attention particularly to the following features
of the new issue which are described more at length in the circular:
Treasury Savings Certificates, New Issue, are offered for sale at
a flat issue price, which until further notice will be $20 for the $25
certificate, $80 for the $100 certificate, and $800 for the $1,000
certificate.
The certificates will mature five years from the date of
issue in each case, and will be redeemable before maturity at the
redemption values stated thereon, upon presentation and surrender to
the Treasury Department, Washington.
The certificates are issued only
in registered form, and the name and address of the owner and date of
issue will be inscribed on each certificate by the issuing agent at the
time of issue.
The new certificates at the price offered yield about 4-g- per cent
per annum compounded semiannually if held to maturity, and about 3-£
per cent compounded semiannually if redeemed before maturity.
The limit of holdings has been increased by the Act of Congress
approved November 23, 1921, from $1,000 to $5,000, and it is now
possible therefore to hold Treasury (War) Savings Certificates of any
one series up to an aggregate maturity value not exceeding $5,000.
Incorporated banks and trust companies and such other agencies
as may be designated for the purpose may qualify as collateral agents
for the sale of Treasury Savings Certificates, New Issue, upon appli
cation to the Federal Reserve Bank of the district and the deposit of
collateral.
Collateral agents will be required to render a monthly
account and to remit the proceeds of sales made during each calendar
month by the 20th day of the succeeding month.
There will be no cash
agencies or sales stations for the sale of the new certificates.
Treasury Savings Stamps in the $1 denomination, noninterest
bearing, will continue on sale until further notice in order to provide
facilities for the accumulation, on Treasury Savings Cards, of the
purchase price of the new certificates.
The sale of Treasury Savings Certificates of the old series and
of all War Savings Stamps and Thrift Stamps will cease absolutely on
December 31, 1921.
The new certificates are issued in attractive form and in convenient
denominations.
The $25 denomination will bear the portrait head of
Roosevelt, the $100 denomination the portrait head of Washington, and the
$1,000 denomination the portrait head of Lincoln.
The terms of the certi
ficates have been much simplified as compared with previous issues, and the
offering is on a basis which should prove particularly attractive to small
investors.
The certificates now offered will be sold at post offices and at banks
and trust companies and such other agencies as may qualify for the purpose
in accordance with the provisions of the enclosed circular. Upon applica
tion to the Federal Reserve Bank of your district, and deposit of the
requisite collateral, you may obtain on consignment the desired quantity
of certificates to sell to your customers.
Cordially yours,
Secretary of the Treasury.
To the President
of the Bank or Trust Company Addressed.
Enclosure: Treasury Department Circular
No. 270, dated December 15, 1921.
December 19, 1921•
Dear Mr. Chairman:
I received your letter of December 10, 1921, and have
been glad, in view of your request, to give consideration to
H. R. 9381, the bill to provide for the extension to July 1,
1923, of the time within which loans may be made by the War Fi
nance Corporation, and the time when the Corporation shall pro
ceed to liquidate its aésets and wind up its affairs.
The situa
tion at the present time is so abnormal that it is almost impos
sible to say what should be done with regard to this bill, and
in my judgment the best course would be to wait for two or three
months before taking any definite action.
By that time condi
tions will have had a better opportunity to adjust themselves
and it should be possible to form a more intelligent judgment as
to what, if any, further provision should be made for agricul
tural credits,
The general Views of the Treasury as to further credits
for agricultural purposes have already been outlined in my two
letters of December 16, 1921 ^ with regard to H. R. 8905 and 8906,
and I should say that consideration ought to be given to the pro
blem along the lines there indicated.
The War Finance Corporation,
of course, I regard as a temporary agency, designed to meet emer
gency conditions, and I believe it would be a grave mistake to con
vert it into anything like a permanent institution, through suc
cessive renewals, or otherwise.
It now constitutes, in effect, a
■2-
special Government bank to provide credit for agriculture, and is
clearly on a temporary or emergency basis.
more normal, the
As conditions become
ordinary banking facilities of the country, with
the help of the Federal Land Banks and other established agencies,
ought to provide the necessary credit machinery for agriculture
without the necessity of this special Government assistance,
No
man can tell, of course, how long it will take to work out of the
existing situation, but I am hopeful that with the additional re
lief that will be afforded between now and July 1, 1922, through
the War Finance Corporation and other agencies, and with the
liberal provisions carried in the War Finance Corporation Act,
as amended August 24, 1921, for the renewal and extension of
outstanding loans and advances, it will not be necessary to ex
tend again the power of the Corporation to make new advances or
purchases for agricultural purposes.
The next few months should
give a better index to the situation and the remedy, and in the
meantime I should say that it was desirable to leave as they stand
the existing limitations of law on the life of the Corporation.
Very truly yours,
(Signed)
Hon. Louis T. McFadden,
Chairman, Committee on Banking and Currency,
House of Representatives,
Washington, D. C*
A, W. Mellon
Secretary.
I
Extract from CoLmeroe Reports, December 26, 1921.
SALE OP SECURITIES PAYABLE IN DEPRECIATED CURRENCY.
Prepared in the Eastern European Division.
In an article in COMMERCE REPORTS of November 7, 1921, caution was
advised in the purchase of national, municipal, and industrial bonds and
other securities, the principal and interest of which are payable in
greatly depreciated currency. Numerous inquiries received by the Bureau
indicate that this matter is not yet fully understood, and misleading ad
vertisements of such Securities arc still being widely circulated.
The main point in that article isi If a foreign bond - whether of a
nation, a city or other local government, or of a corporation — merely
premises to pay a given ¿mount of foreign currency, with interest in the
same currency, its value is necessarily dependent upon the present ex
change value of this currency. Speculation in such®socurity is virtual
ly speculation in the currency itself.
The question is not as to the solvency and reliability of the Govern
ment, municipality, or corporation issuing the security. It is as to
the value of what it promises to pay. Often there is little doubt that
the principal and interest will be paid promptly. Payment may be ade
quately secured by a mortgage on valuable physical assets. But the buyi*i£> power, in terms of American money, of the currency thus paid back
may prove to be much less than the investor has put in»
ELEMENTS GOVERNING PRICES OF BONDS.
The price one *s J^^SYied i» paying for a bond promising the payment
of foreign paper money at some future time does not depend even on the
probability of a future rise in the exchange value of that currency* It
depends rather on its exchange value at the time the bond is purchased*
If one wishes to speculate on the future rise in a foreign currency he
would be hardly wise to pay for such currency to-day far more than the
market price. A bond - a promise to pay money in the future - (unless
with an abnormally high annual interest) can hardly have a materially
greater value than the same amount of the same kind of money actually in
hand to-day* The actual money in hand has the same likelihood of rising
(or failing) in value in the future as the bond has. In numerous cases
which have come to the attention of the Bureau concerns in the United
States are offering for sale foreign bonds at prices several times higher
than the same amounts of the given paper money could be bought for ii&iediately. Por example, a certain bond is being offered at nearly $20, al
though the same amount of the currency in which it is payable can be
bought for about $3.
a-
Putting tii© matter another way, the prices at which certain of these
securities are being offered in the Uhited States are several hundred per
cent more than the prices at which they could be bought in the country
where they are issued* There is no reason to suppose that the bond of a
given city, for example, promising to pay 1,000 units of currency at seme
future time, would cost to-day, in the country where issued, much more
than par - that is, more than 1,000 of such units* A small premium on
such bonds is possible, but a discount is not uncommon* The would-be
.American buyer, by using his dollars to buy the foreign money itself,
could with it buy the bonds in the foreign country'* If the amount of the
foreign currency which he would obtain for, say, $100, is several times
greater than the par value of the bonds offered in the United States for
$100, he is evidently being mulcted fn buying them in this country*
GROUP OFFERS SHOULD BE SCRUTINIZED*
Of course, the above considerations would not apply to a bond promis
ing to pay gold, or dollars, or some other stable currency, or to a'bond
containing special provisions which would assure payment in a currency
having a greater value than the paper money of the country now possesses.
They would also apply with somewhat less force to a bond containing spe
cial provisions to protect the investor against a fall in the value of the
money, but without assuring an increase* Such special provisions are not,
in fact, found in most of the foreign securities, expressed in terms of
paper money, which are offered in this country*
■^11 the leading financial periodicals and many of the daily newspapers
publish from day to day the exchange value of foreign currencies, and the
American investor need not be in ignorance as to how many units of any
foreign money a dollar will buy.
Certain concerns, in offering to the public securities payable in
greatly depreciated currency, have adopted the practice of combining these
in groups with other foreign securities payable in gold, or in entirely
sound currency, or at least in currency which is little depreciated* Agroup of several different securities is made up and offered at a I m p sum*
The only way in which the significance of such a group offer can be under
stood, is by carefully figuring the dollar exchange value of the amount of
paper money of 8ach of the different countries which the par of the bonds
represents* It vail sometimes be found that while several of the securi
ties offeree in a group may have a high value one or more of theca have a
very low value, as judged by the .current rates of exchange.
RECENT CABLE-TRANSFER RATES*
To sum up, the price of a bond or other security promising to p ay a
given amount of paper money ought not, normally,- to be much more - and
sometimes ought to be less *■ than the cost of that, amount of paper money
itself, at current rates of exchange, unless some special provision, writ
ten. into the bond itself * positively assures it a higher value* . The Bureau
of Foreign and Domestic Commerce in making this suggestion does not express
any opinion,.favorable or unfavorable, regarding the desirability of buying
such securities at reasonable prides or the desirability of- buying foreign
currency itself' .as a speculation.
JW
•"3"*
f?16
£oT July and Member, 1921, the cost in
f ^»000 units of the principal European currencies which are
greatly depreciated, and the amount of each which $100 would buy.
It
i? remembered, however, that rates of exchange are constantly
. ^ rre“t rates should be be consulted, if purchase of
f .,g securities is contemplated* For comparison, the exchange value
of the pound sterling and the French franc, which are much l e ^ d e ^ e ciated, is shown in the table,
* ■
doll^
Prices of certain foreign currencies (cable transfers at New York).
Prices per 1,000
in dollars.
Currency ♦
July 1,
1921
Pound Sterling....
French francs ,...,
I
y
German m a r k ......
Austrian crown «...
Czecho-Slovak crown
Hungarian crown *..
Eoumanian leu......
Bulgarian l e v ....
Jugo-Slav (Siberian
Polish mark
Finnish m a r k .....
••*«♦•••♦« l $3,733,50
82.30
13.44
1.64
13.44
3,80
15,10
10.80
dinar .«.
27,20
.45
16,50
Dec. 1,
1921
$4,037,50
72.30
5,45
,37
11,07
1,79
7,34
6,89
14,73
.29
17,34
Amount $100 v/ould
buy
July 1,
1921
26,8
1.215
7.440
60,837
7.440
26,316
6,622
9,259
3,676
322,223
6,034
Dec, 1,
1921
24,8
1.383
18,365
368,096
9,034
55,897
13,628
14,510
6,789
342,466
5,765
