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Ire a tUS
' u t 9- a
SEHABKB OF
S. P, GILBERT, JR.,
UNBEE SECRETARY OF THE TREASURY,
AT THE ANNUAL NESTING OF THE
PHILADELPHIA BANKERS, JANUARY 12 , 1922.
THE TEEASte*S CUEKSNT PHOBtfflf
Mr* Chairman and Gentleman*
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Th^ f liidamedtais of the Treasury.^ problem are not d iffic u lt to
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understand, ¿aid i t would he helpful if people generally understobd them
b e tte r.
Like everyone else, the Government has the problem of living
within i t s income, and as you a ll know th is Government is now doihg i t .
The Governments income arises ch iefly from taxation, with important addi*
tions from customs revenue and salvage, and the problem there is to pro-»
vide sufficient revenue to meet the needs of the Treasury and a t the same
time to adjust the system of taxation in such a way as to avoid imposing
undue burdens on the country, p a rtic u la rly on productive industry.
Then
the Government has debte, chiefly as the resu lt of the war, and these
debts mature from time to time*
I t is the problem of the Treasury to
finance these m aturities and to provide for the funding of such as have to
be refunded. And at the same time i t is the Treasury's business to frame
a program, with regard to both receip ts and expenditures and the debt, that
w ill provide in orderly course fo r the retirement of the public debt, fo r
i t is the trad itio n al policy of th is Government to set about paying i t s
debts.
To be more specific, the Treasury's ever-present problem, of
course, i s the public debt, which now amounts to almost 33» b illio n dollars.
Of th is great debt, about fig b illio n dollars f a lls due within the next 17
months, over
b illio n s of i t in the form ot Victory notes, which mature
May 30, 1933, about $2,200,000,000 in the form of Treasury c e rtific a te s,
which mature a t various dates within a year, and nearly $700,000,000 in the
form of War-Savings C ertificates, which mature January 1, 1923, or may be
redeemed before that time* Within but l i t t l e more than a year la te r there
w ill mature about $800,000,00U adaiticnal of debt, of which short-term
Treasury notes make up about $700,000,000 and War-Savings C ertificates about
$100, 000, 000* This summary of the early m aturities of the debt shows that
the Treasury has i t s work to do for the neKt few years, ana that with these
vast operations to dondhct i t is of more than ordinary importance that the
budget should balance year by year, ordinary receipts against ordinary ex*
pena it urea, and leave no d e fic it to be covered by new borrowings*
The essence of the Government’s policy with rCspect to the shortdated debt, as eKprossed by the President in his f i r s t address to Congress,
is Horderly funding and gradual liquidation”* I t is clear that the greater
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part of the 63 b illio n s of debt which is about to mature w ill have to be
refunded, and the Treasury’s effo rt is to fund i t in such a way as to d is
tribute the debt in the most convenient m aturities and at the same time avoid
spectacular refunding operations that would disturb business end upset the
financial markets*
I t is easier to appreciate what a task th is is i f one
recalls that the U rs t and Second Liberty Loans together amounted to only
about $5,80U,00y,0U0, that these loans were floated through stirrin g ct«apaigns of about one month each, under the stimulus of war enthusiasm, and
that several million people us a matter of p a trio tic duty devoted the best
part of thoir time fo r several months to assure the successful flo ta tio n
of the offerings* Mow the war is over, the la s t Liberty Lorn campaign is
almost three years behind us, and we could not revive the Liberty Loan or
ganization or reproduce the Liberty Loan campaigns if we would. Nor would
i t be advisable in peace time, if i t can possibly be avoided, to carry on
country-wide popular drives to se ll Government securities that would in te r
fere with the normal a c tiv itie s of the people and disturb the financial
markets.
The Government is of necessity the larg est borrower in the. country,
and i t s operations in the course of a year run into many b illio n s of dol
la rs.
I t is accordingly a matter of the f i r s t importance to the general
welfare that the Treasury conduct those operations with the minimum of fin
ancial strain , and, so fa r a6 possible, without interfering with the noma!
demands of business and industry»
At the same time i t is. important that the
Treasury appear in the market as infrequently as possible and that i t s bor
rowings of a l l kinds be at the lowest rate consistent with the distribution
of its securities among investors, not tally because of the necessity of
economy in Government expenditure, but also because ok the delation betweeh
the Treasury ra te and the general level of in te re st rates on other obliga
tions and securities throughout the country*
With these considerations in mind, the Treasury has developed dur
ing the years which have followed the Liberty Loan campaigns a system of
distribution of i t s short-term notes and c e rtific a te s through the Federal
Reserve Banks which depends in large measure upon the purchase of the se
cu rities in the f i r s t instance by banks throughout the country and th e ir
resale to intending investors.
From small beginnings th is system has de
veloped into a most effective agency fo r the orderly distribution of Gov
ernment securities among investors, and i t has proved .quite as adaptable to
the sale of short-term Treasury notes as to Treasury c e rtific a te s.
At the
same time i t is a system of nice adjustments, which requires the Treasury
to gauge market conditions accurately, as to time, ra te and amount.
The
Treasury has squarely adopted the policy of selling i t s securities on an in
vestment basis, at rates to meet the market and without a r tif ic ia l assistance
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from Federal Reserve Bank discount rate s or otherwise,
In th is connection
there has developed an active open market for short-term Treasury notes and
c e rtificates and a ll outstanding issues are now quoted and actively bought
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and sold on the markets* In ^¿e remote sections of the country the Federal
ReserVè Banks themselves act as the chief markets, but generally speaking
the Treasury and thé Fédéral Reserve Banks have endeavored to encourage
transactions in the open maiffcet* The result has been to make the short
term obligations of the Treasury in stan tly salable anywhere in the country
and to establish than as the safest and most liqa&id of short-term invest
ments, particularly available for the investment of id le funds on the part
of individuals and corporations.
The resu lt has also been in the course of
a year and a half, or thereabouts, to relieve the banks of an important
part of their holdings of Government securities and to free the funds pre
viously absorbed for the ordinary purposes of business and industry*
Thus
on December 28, 1921, the holdings of Treasury c e rtific a te s by the report
ing member banks of the Federal Reserve System amounted to only about 223
millions, as compared with about 420 millions a year and a half ago* Dur
ing the same period Treasury c e rtific a te s pledged with the Federal Reserve
Banks to secure loans and discounts have fallen from 356 millions to 49
m illions, a reduction of over 307 m illions, while Victory notes sim ilarly
pledged have fa lle n from about 304 m illions to about 67 m illions, with
Treasury notes to the amount of 26 m illions likewise pledged a t the same
time.
Interest rates on the Treasury c e rtific a te s have falle n during
th is same period of a year and a half from 5§ and 6 per cent fo r six
months and one year m aturities in June, 1920, to 4* and 4-g per cent for
sim ilar m aturities in December, 1921* This has been due fo r the most part
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to easier money conditions toad the accumulation of funds as a ree^Lt e$
business conditions» but to a large extent also i t ccaaes from the improved
distribution of the debt among investors as well as improved distribution
as to maturity*
I t i s important in th is connection to note one special facto r in
the treasury’s public debt operations since August 31, 1919, when the gross
debt reached i t s peak, namely, that with re la tiv e ly small fluctuations the
operations have been accompanied by gradual debt retirement * Generally
speaking, the Treasury has been flo atin g a constantly decreasing to ta l
volume of se cu ritie s, and i t s operations have accordingly not taken new
money or absorbed funds that would otherwise go into business* On the
contrary, a considerable volume of funds has been freed for ordinary com
mercial uses, and the Treasury has been slowly but surely paying i t s debts*
This makes an enormous difference in the character of the operations,
which i t is easy but dangerous to overlook*
I f the tables were reversed
and the Treasury were each month putting out increasing amounts of securi
tie s, quite differen t probl&ns would arise* Treasury offerings would then
take up new money, and there would be danger of in fla tio n and of strain on
the investment markets, with consequent pltejjudice to other Operations*
Fortunately, the prospects are that the process of orderly pajment of the
war debt w ill continue, but i t is none the less important to keep in mind
what the other course means*
At. the same time i t is necessary to avoid misunderstanding of the
debt reduction that has occurred since the high point was reached on
August 31 , 1919* The decrease is substantial, but i t is worth while to
notice how i t was accomplished*
In the aggregate the reductions up to
December 31, 1921, amounts to about $3,150,OQQ,OQ.O,that is to say, from
$26,696,000,000 on August 31, 1919, to $23,439,OCX),000 on December 31*
1921« ®ae debt on August 31, 1919, however, was unnaturally in fla te d , p a rt
ly because of temporary borrowings incident to heavy m aturities of loan cer
tific a te s and p artly because no important payment of income and p ro fits tax
for that fis c a l year had been received up to th at date, leaving a large de
f ic it in the f i r s t two months which was la te r overcome in the ordinary course
of operations for the same f is c a l year* This clearly appears from the fact
that though the current surplus of receipts over expenditures fo r the whole
fisc a l year 1920 was only $291,000,000, the apparent surplus fo r the 10
months from August 31, 1919, to June 30, 1920, was $1,536,000,000.
makes up nearly half of the to ta l reduction*
This
Of the remainder, a large p art
comes from the net reduction of $630,000,000 which i t has been possible to
make in the Treasury *s general fund balances between August 31, 1919, and
December 31, 1921, and the rest comes from a current surplus of $509,000,000
in the fis c a l year 1921, and of $476,000,000 in the f i r s t six months of the
present fisc a l year.
In other words, out of the to ta l reduction of about
$3,150,000,000 in gross debt, about $1,875,000,000 represents decrease in
Treasury balances and the elimination of temporary i t cans, while about
$1,275,000,000 represents actual retirements through surplus receipts* Even
these retirements from surplus receipts have resulted fo r the most part
from the application of the proceeds of war salvage (which probably aggre
gated at least as much during th is period) and have not meant retirem ents
out of tax receipts.
The reduction is none the less re a l, and i t s effect
on Treasury operations and on the general situation none the less helpful,
but these figures make i t clear that i t has been an entirely natural re
duction and not of a character calculated to throw undue burdens upon the
taxpayer or upon the country* To sta te the matter in another way, beginning
-7 v?ith the tis c u l year 1921, the sinking fund.and various miscellaneous re
ceipts which have to be applied each yeah to ddbt retirement account, for the
principal reductions in the debt,
The retirements on th is account are pro
perly chargeable against ordinary receipts, and w ill in thetas el vfea provide
for further gradual reduction a t the rate of between $300,000,000 and
$^00, 000,000 a year a t le a s t.
The Treasury's estimates and the Budget for
the current year and the ensuing year contemplate that these retirements w ill
be made, of course, out of current receipts, and as the program develops the
orderly retirement of the debt should continue from year to year*
I t became clear early in th is Administration, however, that the
gradual reduction of the debt which might come about by th is means in the
next few years could not be expected to provide before the maturity of the
Victory Liberty Loan for the retirement oi much of the short-dated debt, and
that accordingly most of the 7 t b illio n s of the debt maturing within two
years which was then outstanding would have to be ref unded.
Immediate steps
accordingly hu.d to be taken to make the short-dated debt more manageable,
and to f a c ilita te the refunding operations incident to the maturity
of the Victory notes.
thought of.
Long-term operations
then were not to be
Over 15 b illio n s of Liberty bonds were outstanding, a ll
for relativ ely long terms, in terest rates were high anct obviously
undergoing readjustment, and Liberty bond prices
It was clear, therefore,
that the f i r s t
refunding operations
undertaken should be for a f a ir ly short term,
the Secretary announced that i t
to vary its offerings
with offerings
were fa r below par«
to be
and on April 30, 1921,
would be the Treasury’s policy
of c e rtific a te s of indebtedness frem time to time
of short-term notes
in moderate amounts at
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convenient intervals* with M aturities of from three to five years.
The ob
ject was to d istrib u te thk short-dated dibt bver a longer*period of years
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and to ¿>roVi<y more convenient m aturities. Two public offerings of notes
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have been made, with kboui 310 m illions issued on the f i r s t , and about 390
millions on the second,
through these operations the Treasury has been
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able to transfer about 700 millions of the short-dalted debt to somewhat
la ter m aturities, and with the help of the sinking fund has mad6 stu d rd*
auctions in the short-dated debt and improved the d istribution of that
which remains*
Victory notes outstanding have been reduced from about
$4,100,000,000 on March 31, 1921, before the refunding program began .to
operate, to about $3,550,000,000 on December 31, 1921, a reduction of about
550 m illions, and Treasury c e rtific a te s of a ll classes outstanding from
about $2,750,000,000 on March 31, 1921, to about. $2,200,000,000 on December
31, 1931, a reduction of about 550 millions«
The greater part of the ordi
nary receipts available for debt reduction during the current fis c a l year
accrued, however, during the f i r s t six months owing to the heavier tax re
ceipts in that period, and fo r the re st of the year i t is lik e ly to be chief
ly a refunding proposition.
The problem thus remains of providing for the 3& b illio n s of Vic
tory notes, the $3,200,000,000 of Treasury c e rtific a te s and the $700,000,000
of War-Savings C ertificates which are s t i l l outstanding and w ill mature with
in a year and a h a lf « To refund th is 6§ b illio n s of debt w ill not take new
money, but i t w ill involve operations of a magnitude unparalleled in time of
peace, which w ill have to be carried on with the greatest sk ill in order to
avoid financial strain or disturbance to the security markets*
Treasury cer-
tiiie a te s lave established a place fo r themselves, and a substantial part of
the amount now outstanding can undoubtedly be carried along to good advantage
in the form of Treasury certificates*
As a matter pf |'a c t, i t is almost
necessary to do th is while Government operations are so large and tax pay«
merits so heavy, in order to carry on current operations without money
strain .
The maturity ex’ War-Savings C ertificates the Treasury has already
begun to provide
fo r through the new issue of Treasury Savings C e rtifi
cates, placed on sale a few weeks ago in convent a it denominations in terms
which should make them p articu larly a ttra c tiv e to small investors throughout
the coufatfyi
The new Savings C ertificates are finding a ready sale, and the
Treasury hopes, as the program develops, tb s e ll a substantial amount to
help finance the iuaturity on January 1 , 1&&3.
In the most favorable circua-
stances, however, new sales w ill probably iaot provide for the whole maturity
and the balance would then have to be refunded, at le a st temporarily, into
other obligations.
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The 3& b illio n s of Victory notes present the greatest problem.
By
reason of th eir early maturity the notes have now taken on almost the duali
ty of short-term c e rtific a te s and for some time to come w ill compete directly
with Treasury c e rtific a te s for th is class of investment money* Three and
one-half b illio n s of debt, moreover, is too much to have to pay off or refund
in one day, and i t w ill not do to wait u n til maturity before taking steps to
reduce s t i l l further the Victory notes outstanding.
I t is accordingly the
Treasury's policy to re tire Victory notes from time to time whenever the
opportunity offers, through the sinking fund and other sim ilar operations,
through successive sales of short-term notes, and perhaps through longerterm operations, i f market conditions should prove favorable.
In th is way
the Treasury plans to spread the 6a b illio n s of short-dated debt, which is
now concentrated in rela tiv ely few m aturities within the next year and a
half, into Ha progressively smaller aggregate amount of better distributed
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m aturitiesn extending over a longer period*
These rerun ding operation# w ill
necessarily be in active progress daring tiid next year and a half, and w ill
present a constant problem, but if not complicated with other bbrrowings,
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should assure the gfadual. refunding of the short-dated debt without gpectacuM ' ' **
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3.ar refunding louhs and without disturbance to the business of the country#
Inevitably related to the public debt is the problem of taxation.
The Revenue Act of 1921 became a law on November 23, 1921, and with i t cones
a greater reduction in revenue than is generally appreciated.
The shrinkage
in business would of its e li have resulted in a m aterial shrinkage in revenue,
but i t is estimated th at under the new law the in tern al revenue collections
for the fisc a l year 1923, the f i r s t f u ll year of i t s operation, w ill be about
$800,000,000 less than would have been collected under the old law# The com
bined resu lt is an important reduction in the to ta l tax burden, with to ta l
estimated internal revenue collections for th is fis c a l year of $3,214,000,000,
%
and for the next year of $2,611,000,000, as compared with $4,596,000,000
actually collected in the fis c a l year 1921* These reductions in*taxation
have been made possible by corresponding reductions in expenditure, and if
there are to be fu rth er reductions in taxation there w ill have to be further
reductions in expenditure.
The revision of the tax laws w ill no doubt receive renewed con
sideration in the near future, and the Treasury has already suggested the
more important matters that should be kept in mind in that connection.
The
Government^ current financing, however, is necessarily based on the Revenue
Act recently enacted, and for th is purpose i t is necessary to keep in mind
that even under the law as i t now stands there w ill be a reduction of about
600 millions in tax collections in 1923 as compared with the present fisc a l
year*
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In round nuabers the Government^ budget fo r the current year is
on about a 4 b illio n dollar basis» and for the next fis c a l year is expect
ed to be on about a 3g b illio n dollar basis*
She estimates already sub-
m ittei to Congress indicate to ta l receipt!» f of the current yeah of about
$3,968,OQQ,QO0 as agaihst to ta l expend!iuhes, including siiikihg fund and
other debt retirements chargeable against ordinary receipts, of about
$3,993,000,000.
On th is basis there would be a d e fic it fo r the year of
about 3% m illion d o llars.
$or the next fis c a l year to ta l receipts are es
timated at about $>3,345,000,000, as against to ta l expenditures on the same
basis of ubout $3,513,000,000, leaving an apparent d e fic it of about 167
millions*
I t is s t i l l too early to t e l l how these estimates w ill work out,
though the indications from the f i r s t six months of the present fis c a l year
are that the estimates for 1923 are substantially correct.
I t is hoped,
however, that os the situation develops the estimated d eficits for both
years can be avoided, and that the budget can be made to balance or to show
perhaps a small surplus • To accomplish th is w ill require the concerted ef
forts of both Congress and the executive, and a constantly resistan t a t t i
tude on a l l sides against appropriation and expenditure.
The Bureau of the
Budget is now well established, and fo r the f i r s t time in its history the
Government has an organisation equipped to bring effective executive pres
sure to bear upon a ll the spending departments and establishments to reduce
expenditure.
The Budget, i t has been said, %as made economy popular and
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extravagance d a n g e ro u sa n d i t can be counted upon to produce resu lts. It
is d iffic u lt, in fa c t, to overemphasise the importance of its accomplishment
up to date, p articu larly in respect
to the expenditures of the present
fiscal year, which i t is already clear w ill be about $500,000,000 less than
was originally estimated by the spending departments six or eight months ago.
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ihe Appropriations Committees of Congress, on th e ir p art, are doing
splendid work to reduce expenditures and are exercising extraordinary
vigilance against new expenditure«
The Committee in the House of Hepre-
eentatives i s organised as a central committee to handle a ll appropria
tions and through appropriate sub-committees prepares the h ills fo r the
several departments and establishments.
This year the appropriation b ills
w ill be divided according to departments, as recommended in the Alternative
Budget submitted by the President, and i t w ill thus bo possible for the
f ir s t time to get a clear view from each b i l l of the a c tiv itie s of each
department and of i t s to ta l appropriations and expenditures*
Steps are
also being taken to repeal or r e s tr ic t the use of indirect and in d efin ite
appropriations and revolving funds, which have in the past been respon
sible fo r much expenditure without the appearance of an appropriation»
All
things considered, i t is an encouraging outlook, unless new expenditures
are to be imposed by extraordinary leg islatio n .
I t may be interesting in th is connection to indicate the main
items of expenditure fo r the present fis c a l year, which absorb almost 90
per cent of the to ta l.
Out of estimated to ta l expenditures of
$3,992,OCX),000, i t appears that about 3b* b illio n s f a l l under eight main
heads, as follows*
In terest on the public debt, 975 millions; sinking fund
and other fixed debt charges, 388 m illions; Navy, **79 m illions; Veterans 1
re lie f, d5Q m illions; War Department, 389 m illions; Bail roads, 338 millions;
Interior Department, consisting chiefly of payments on account of pensions
and Indians, 327 m illions; and Department of Agriculture, 15* m illions, for
the most part for good roads.
3?his outline of the Grovemoment's expenditures is enough to shew
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that important items of war overhang s t i l l remain and that su fficien t re
ductions ought to be possible in these items, as for estample, in the ex
penditures for the railro ad s, army end navy, to make up for most of the cer
tain shrinkage of revenue and balance the budget fo r tiie fis c a l year 1923%
iihe greatest d iffic u lty w ill be with measures which do not originate in the
Budget and which do not go through the committees on appropriations.
Even
these, however, can be effectively controlled i f once the people recognise
that expenditures for which provision is not made in the Budget, if of any
substance, should be accompanied by simultaneous provision for the taxes
necessary to meet the expenditure and must ih any event ultim ately be borne
by the taxpayer*
TREASURY DEPARTMENT
WASHINGTON
January 16, 1932#
Dear Mr* Chairman;
I
am glad, in accordance with the reqdeai of the Committee,
to present the Treasury *8 views as to the issuance of iatfmexempi
se cu ritie s and the la te s t available information as to the amounts
nov» outstanding and th e ir effects upon the revenues and the
investment markets#
The problem presented by these issues of
tax-free secu rities is of growing importance and I think that i t
deserves the most serious attention*
The views of the Treasury on the subject, and i ts suggestions
as to possible remedies, have already been set forth in my le tte r
to you of April 30, 1921, and in my le tte r of September 23, 1921,
to the Chairman of the Committee on Banking and Currency of the
House of Representatives, a copy of which I sent to you with my
le tte r of September 23, 1921« Copies of these le tte r s are
attached for ready reference.
The further views of the Treasury
have been indicated to some extent in my le tte r of November 4,
1921, to you, and in the Under Secretary*s le tte r of November
10th to the Chairman of the Committee on Banking and Currency,
copies
of which are enclosed*
Since these le tte r s the President, in his address to Congress
on December 6, 1921, has ercphasised the importance of action in
the matter in the following words;
nThere are a f u ll score of topics concerning which
i t would be becoming, to address you, and on which I hope
to make report a t a la te r time. I have alluded to the
things requiring your ea rlier atten tio n . However, I can
not end th is lim ited address without a suggested amend
ment to the organic law*
"Many of us belong to that school of thought which
is hesitant about alterin g the fundamental law. X think
our tax problems, the tendency of wealth to seek nontaxable investment, and the menacing increase of public debt,
Federal, State and municipal - a l l ju stify a proposal to
change the Constitution so as to end the issue of nontaxable bonds * No action can change the status of the many
b illio n s outstanding, but we can guard against future en
couragement of c a p ita l^ paralysis, while a h alt in the
growth of public indebtedness would be beneficial through
out our whole land.
"Such a change in the Constitution must be thoroughly
considered before submission. There ought to be known
what influence i t w ill have on the inevitable refunding
of our vast national debt, how i t w ill operate on the nec
essary refunding of State and municipal debt, how the
advantages of Nation over State and muhioipality, or the
contrary, may be avoided. Clearly the States would not
ra tify to th eir own apparent disadvantage. I suggest the
consideration because the d r ift of wealth into nontaxable
securities is hindering the flow of large capital to our
industries, manufacturing, agricultural, and carrying, un til
we are discouraging the very a c tiv itie s which make our wealth. w
I should also lik e to call to your attention the statement as to
the decline in taxable income, particu larly from investments, which
appeared in my Annual Report for 1921, on pages 20 - 21, as follows}
The Injurious Effect of High Rates on the Revenues.
The actual effect of the high surtaxes can readily be
aèen in the s ta tis tic s published by the Bureau of Internal
Revenue.
The following table shows in comparative form, for the
years 1916 to 1919, inclusive, the to ta l number of returns of
a ll classes and the returns of incomes over $300,000; the to tal
net income in the same way, and also the investment income#
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Table showing decline of taxable incomes over $300,000*
j
Number
!
Income from dividends, in
:
of
j
Net income*
te re st, and investments*
:
Returns*
:
All
Incomes
: All
*Incomes:
All
: Incomes
over
olasses
: classes*: over ; Claeses
:
over
$300* 000*
:
: $300,0(30
: . $300; 000*
s
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m i - : 437,036: 1*296)$6,298*577*620)$992;97B;986 $3,217*348*030 $706,945,738
1917- :3 ,473,890: 1*016:13,652*383*207) 731*372,153 9,785,557,955 616,119,892
1918- :4,425,114:
627:15,924,639,355 : 401,107,868 3,873,234,935 344,111,461
1919- S5,332,760 :
679:19,859*491,448 : 440,OU,589 3,954,553,925 314, 984,884
:
:
:
:
The year© under consideration! 1916 to 1919,, inclusive! were* on the
whole, years of unexampled prosperity, and of earnings and p ro fits beyond
those ever knovm before in any like period in the history of the country*
Notwithstanding th is, and while the to ta l income of a l l classes increased,
a t the same time there was a strik in g decrease in taxable incomes of $300,000
and over - the drop being from $992,972,986 in 1916 to $440,011,589 in 1919*
The effect of the high surtaxes in the other brackets is apparent from
a brief study of the s ta tis tic s regarding taxable investment income*
In the bracket ^Incomes of $300,000 and over,” the taxable investment
income declined from $746,614,591 in 1916 to $328,360,613 in 1919; in the
bracket "$100,000 to $300,000," the decline was from $602,853,543 in 1916
to $427,910,905 in 1919; and in the bracket "$60,000 to $100,000," the
decline was from $366,614,917 in 1916 to $333,743,874 in 1919.
If we take the taxable income from in te re st, exclusive of in te re st on
Government obligations, the decline is s t i l l more striking, the figures
being as follows:
Incomes, $300,000 and over:
1916 -------------------$165,733,900
1917 ------------------------------------------------------------'¡111,468,127
1918 ---------------74,610,507
1919 ---- — --------------------------------------------------- 60,087,093
Incomes, $100,000 to $300,000*
1916 ---- ----- - ---------------- *------------------------ ----- 158,870,428
1917 ------------------------------------------------------------ 119,539,786
1918-«*----------------------------------------------------------- 91,030,392
1919----91,467,182
Incomes, $60,000 to $100, 000:
1916——--------------------------------93,280,583
1917 ---------------------------------------------------75,375,484
1918 ----65,784,062
1919 ----------------------------------------------------68,814,933
The foregoing brackets represent the incomes subject to surtaxes under
the revenue act of 1918, respectively, a t 63 to 65 per cent, 52 to 63 per
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 to ta l tax obligation*
In view of these figures, is i t not clear that these high surtax rates
are rapidly ceasing to be productive of revenue to the Government? And is
i t not equally clear that th e ir effect has been to divert into unproductive
channels not merely the income on the old investments, but to force a large
p art of the old investment capital into unproductive channelst
-4J attach for the further information of the Committee in th is
connection the following tables which have been prepared by the
Government Actuary!
1« Estimate of the to ta l amount of wholly tax-exempt
secu rities outstanding January 1, 1922*
2* Table showing advantage of investing in tax-free
securities as compared with a like investment in taxable
securities*
3* Estimate of revenue loss to Federal Government
through wholly tax-exempt secu rities outstanding January
1, 1922.
According to reports, there were issued during the calendar year
1921 fully tax-exempt secu rities of States and municipalities to the
aggregate amount of about $1 , 100, 000, 000, and the indications are
that further issues w ill follow during
the current year in substantial
volume* Fully tax-exempt land bank bonds, Federal and Joint Stock,
to an amount exceeding $100, 000, 000, were also issued during 1921, and
further issues are in prospect.
The Federal Government, on the other
hand, has adopted the policy of not issuing fully tax-exempt obligations
of its own, and its current offerings must be sold in competition
with the fully tax-exempt offerings of States and cities*
The most important consideration is that the existence of the
growing mass of tax-exempt secu rities, coupled with the extremely high
surtax rates s t i l l imposed by law, tends to drive persons of large
income more and more to invest in wholly exempt secu rities issued and
s t i l l being issued by States and m unicipalities and heretofore issued
by the Federal Government*
The re su lt is to impair the revenues of the
Federal Government and to pervert the surtaxes, so that instead of
raising revenue they frequently operate rather to encourage investment
in wholly tax-exempt secu rities, and even to encourage the issue of such
securities by States and municipalities*
This procase tends to
divert investment funds from the development of productive enterprises,
transportation, housing, and the lik e, into non-productive or wasteful
State or municipal expenditures, and forces both the Federal Government
and those engaged in business and industry to compete with wholly taxexempt issues and on that account to pay higher rates of interest*
The greatest value of the fu ll exemption from taxation arises, of
course, from the exemption i t confers in respect to Federal income
surtaxes, and the constantly increasing volume of tax-free securities
therefore constitutes a real menace to the revenues of the Federal Govern
ment* At the same time i t makes the high surtaxes operate as inducements
to investment in non-productive public indebtedness and is gradually
destroying them as revenue producers*
As a consequence, the yield of the
surtaxes is dwindling and there is a premium on the issue of bonds of
States and c itie s.
In the la s t analysis th is is a t the expense of the
Federal Government, and i t is having a most unfortunate and far-reaching
effect upon the development of the whole country, because of the diversion
of wealth from productive enterprise*
The problem is one of exceptional d ifficu lty , and i t is not easy
to point to a practicable remedy* But the problem is none the less
real, and i t is important to do whatever ban be done to meet it*
One
angle of approach is through the proposed Constitutional amendment;
another i 6 through the revision of the surtax rates to remove the heavy
premium on tax-free securities*
I t w ill be helpful to the whole
situation if the matter may have early consideration by the Committee,
- 6with a vi avi to appropriate action#
Sincerely yours,
(Signed) A. W. Mellon,
Secretary#
Hon# Joseph ¥. Fordney,
Chairman, Coiuoditee on Ways and Means,
House of Representatives,
Washington, D, C#
7 enclosures#
TREASURY DEPARTMENT
WASHINGTON
November 10, 1921*
My dear Congressman:
I
received your le tte r of November 2, 1921, with the enclosed,
copy of the Joint Resolution (H* J* Res* 211), which you introduced
on October 25th, proposing an amendment to the Constitution of the
United States to r e s tr ic t further issues of tax-exempt securities*
I
had already noted that th is Joint Resolution followed the draft sub
mitted with the Secretary’s le tte r of September 23rd*
In response to
the request of the Chairman of the Committee on 3foys and Means, to
which the Joint Resolution was referred, the Secretary has now expressed
his further views in the matter in a le tte r to the Committee dated Novecfrber 4, 1921, a copy of which is enclosed for your information.
I
have examined the suggested substitute resolution enclosed
with your le tte r of November 2nd, and have several comments*
I should
say that the chief objection to the substitute was a p ractical one,
namely, that i t includes provisions with respect to the taxation of
salaries of public o ffic ia ls of the several States and of the p o litic a l
subdivisions thereof which would tend to create opposition to the
Constitutional amendment as a whole, entirely out of proportion to the
benefits to be derived from th is particu lar change*
I t may be th at the
salaries of such o ffic ia ls ought to be subject to the Federal income tax,
and undoubtedly th 3 present situ atio n resu lts in Some discrimination
in favor of State and municipal o ffic ia ls as against Federal o ffic ia ls
and other individuals*
I t w ill be exceedingly d iffic u lt in any circum
stances, however, to get three-fourths of the States to ra tify a
ÎÇ. v '
Constitutional amendment to r e s tr ic t the further issue of tax-exempt
secu rities, and to add to these d iffio u ltie s by giving the State and
local o ffic ia ls who are lik ely to he most active in the several States
a definite personal in te re st against the amendment might easily defeat
the whole proposition*
Xt may also he said that notwithstanding the
present discrimination in favor of State and local o ffic ia ls, the taxexempt status of th eir salaries re su lts, a fte r a l l, in only a slig h t
increase in th eir compensation, and that for the moat p art the State
and local o ffic ia ls are not so highly paid as to make th is extra
compensation any crying evil*
In other 'words, while the proposed
substitute may he entirely rig h t in theory as to salaries of State and
local o ffic ia ls, and conversely as to Federal o ffic ia ls in respect of
State and local taxation, as a p ractical matter th is feature of i t
would probably endanger the really important part of the amendment*
The sub stitu te also in serts in the form of a proviso the condition
th at incomes derived from secu rities issued by or under the authority
of the United States must be taxed by the United States before the
United States has power to tax incomes from secu rities issued by or
under the authority of the several States, and makes the same change
with respect to the taxation by the States of incomes derived from
secu rities issued by or under the authority of the United States*
The
provision as to taxation by the States has been altered , moreover,, so
as to remove the lim itation to "residents thereof" in the two places
where i t appeared in the Secretary1a d raft, and under both provisos
Nincomes derived from a l l se c u ritie s* issued by themselves a fte r the
ra tific a tio n of the amendment would have to be taxed before there would
-3be power on tha part of tha Federal taxing au th o rities, or State and
local taxing au th o rities, as the case might be* to tax incomes derived
from secu rities issued by the other.
The word "all" would seem to be
unnecessarily re s tric tiv e , and the omission of tha lim itation of the
taxing power of the States to incomes derived by "residents thereof"
might open up secu rities issued by or under the authority of the Federal
Government to double taxation by the States*
I am therefore inclined
to believe that the phraseology of the amendment proposed by H# J, Res*
211 is better, in th at i t makes more clear the reciprocal character of
the change and gives b etter protection against discrimination*
The intent
of the conditions is to insure th at there w ill be mutuality, and th is
is provided for best by words lik e "if, when and as" or "in the same
manner and to the same extent that*" As a matter of fact there is much
to be said for making even H* J. Res* 211 more clear in th is respect
and using the words " if, when and as" or "in the same manner and to the
same extent that" or other sim ilar words*
If the condition is stated
simply in the form of a proviso, the power to tax might arise In favor
of the Federal or State Governments from the mere fact of taxation of
their own secu rities, though the taxation were not in any proper sense
mutual, or were even discriminatory*
It might thus be said, for example,
that incomes from 4 and 4J per cent Liberty bonds are now "taxed by the
United States," in that the Federal income surtaxes and p ro fits taxes
apply to such incomes, subject to certain limited exemptions#
Very tru ly yours,
(Signed)S* ?♦ G ilbert, #r*
Hon. Louis T, McFadden,
Chairman, Committee on Baulking and Currency,
House of Representatives,
Washington, D* C*
1 enclosure*
TREASURY DEPARTMENT
WASHINGTON
September 23, 1921*
My dear Mr. Chairman:
I am enclosing herewith a copy of my le tte r of th is date
to Congressman McFadden in reply to his le tte r of August 27, 1921,
requesting my opinion with respect to H* J* Resolution 102*
I
understand that th is resolution is pending before the Committee on
Ways and Means and I am, therefore, sending you the enclosed copy
of my le tte r to Congressman McFadden for your informations
Very truly yours,
(Signed) A* W* Mellon,
Secretary.
Hon# Joseph W* Fordney,
Chairman, Committee on Ways and Means,
House of Representatives.
1 enclosure.
Indosure to Memo
'
J dated
LETTER F&OM THE SECRETARY OF THÉ TÈEASÛRŸ TO THE CHAIRMAN OF THE COMMITTEE ON
Wa y s a n d m e a n s .
T h éasürÿ D epartm ent ,
O pfîoe ô p th e S ecretary ,
Washington, April 30,1921 .D ear M r . C h airm an :
In accordance with your request, as communicated in your letter of April 25, 1021* I Ató
glad to present for your consideration and that of the Committee on Ways and Means, revised
estimates of receipts and expenditures for the fiscal years 1921 atid 1922, and to indicate in
that connection what revenues must be provided for the fiscal years 1922 and 1020 in orde* to
carry on the Government’s business and meet its ctírrent requirements and fixed debt Charges*
including interest And sinking fundi
In order that the Congress may have the latest available information before it* I hand you!
herewith thé following statements:
(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
statement is made üp 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«
ît supersedes the estimates of receipts ana expenditures for the fiscal years 1921 and Í922 which
appear on pages 273 to 278 of the Annual Report of the Secretary of the' Treasury for 1920.
(B) Preliminary statement shoving 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 yéat 1920, oñ the basis of daily Treasury statements (exclusive of postal expendi
tures, except postal deficiencies, etc.),.
(Ç) Preliminary statement showing ordinary receipts of the Government for the period
from July l, 1920,. to March 3Ì, 1921. With comparative figures Afidi total ordinary receipts fof
the fiscal year 1920, on the hásis of daily Treasury statements (exclusive 6f postal revenues).
(D) rrelimmaiy statement of the public debt on March 01, 1921* on the basis of daily
Treasury statements* with a quarterly comparative public debt statement which shows the
figures for August 31, 1919, when thè war debt was at its peak*
#
(È) Statem ent showing comparative figures as to the outstanding short-dated public deht,
on the basis of daily Treasury statements, m>m August 01, 1019* 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* trill 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 fere tWo avenues of relief. “ Oné is rigid resistance
in appropriation and the other is the Utmost economy in administration.” This is no time
for extravagance or for entering upoii 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 tinder the existing burden of taxation and debt fetid clamoring for gradual relief from the
War taxation. I t may be counted upon not only to exert effective pressure against increased
expenditures but also to give its whole-hearted support to fell sincere efforts to reducé expenditures.
4414*—21
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 sur
plus 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 expendi
tures 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, amount
ing to over six billions, will have to be refunded. It will therefore be the Treasury’s policy to
3
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 short-»
dated 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 be 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 my judgment, a requisite to the revival of business activity in this country. I t 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 u 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. I t 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 substantial new revenue to the
Government. The total net income subject to the higher rates is rapidly 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 effeet 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 u nuisance,} taxes, such as the taxes on fountain drinks and the miscellaneous taxes
levied under section 904 of the Reyenue Act, which are difficult to enforce, relatively unpro
ductive, and unnecessarily vexatious. The repeal of these miscellaneous special taxes would,
it is estimated, result in $ lose °f abopt $50,0Q0jP00 in revenue. The transportation tax
je pbj.ection$bie and I wish it were possible to recommend its repeal, but this tax produces
revenue in the amount of about $33Q,pQp,Q0Q a year aud could opt safely be repealed pr 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 $4,000,0QQ,Q00 in the fiscal years 1923
and 1023, The only way to escape these additional internal taxes, to an aggregate amount
pf between $250,000,00Q and $350,000,000, will he to make immediate cuts in that amount
in current expenditures. In the event that this should prove impossible, it might he feasible
tp provide perhaps as much as $100,OO0;QQQ or $150,000,poo of the necessary revenue from
new duties on staple articles pf 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
jts 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 tp 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 pf Congress that it may also be advisable to take action by
statute or by constitutional amendment, where necessary, tp restrict further issues of tax-exempt
seeuritms. ft js npw the policy pf the Federal Government not to issue its own obligations
with exemptions from Federal surtaxes and profits taxes, hut States and municipalities are
issuing fujiy tax-exempt securities in great volume* It is estimated that there are outstanding
perhaps $io,pqq,ooo,qoo pf fully tax-exempt securities. The existence pf this mass of exempt
securities constitutes an economic evfi pf the first magnitude. The continued issue of tax*
exempt securities encourages the growth of public indebtedness and tends to divert capital
from productive enterprise* Even though the exemptions of outstanding securities can not
be disturbed, it is important that future issues he controlled or prohibited by mutual consent
pf the State and Federal Governments*
I am sending a copy of this letter to Senator Penrose as Chairman of the Committee on
finance*
I shall» °f course, be glad tp hold myself and th® Treasury experts in readiness to answer
any call from the committee and to supply such further information with regard tp the conditipp pf the Treasury and the Treasury’s revenue recommendations as the committee may dosha
Very truly yours,
A. W , MELLOST,
Hon. J oseph W. F ordney,
Secretary*
Chairman, Committee on Ways and Means, House of Representatives.
A.
Statement of E s tim a i Receipts and Disbursements for Riscal Years 1921 and 1922.
(Revised April 27119$J.)
Fiscal year 1921.
Fiscal year 1922.
R EC E IPT S.
Customs........................................................
Internal revenue:
Income and profit taxes................ ........................... .
Miscellaneous intgj-na} r e v e n u e . ; , . . , ,
Miscellaneous revenue:
Sales of public lands....... ............. ........................
Federal Reserve Bank franchise tax ................... .......
Interest on foreign obligations....... , ................... ’. . . .
Repayments of foreign obligations...........1 ...........
Sales of surplus war supplies.. . . . . . . . . . . . J. . . . . ; i . . . .
Panama Canal................. .i ....................
Other miscellaneous.....................................................
$300,000,000
$300,000,000
$3,150, QPO, 000
1,400,600,0QQ
—
4,550, OOQ, 000
$2,350,000,000
1,350,000,000
»— — -------- 3,700,000,000
i,
1,500,000
60,7g4,gpO
28.331.000
100,060,000
260 000,060
11.800.000
174,711,500
Total..........................................................................
1,500,000
60,000,000
225,026,000
30. 500.000
60,000,000
14.530.000
156,087,000
—r----- 1--------
637,067,000
5,487,067,000
547,643,000
4,547,643,000
D ISBURSEM EN TS.
Ordinary....... .............................. ............................ ............
Public debt:
Sinking fund...... ................ ......................................
War-Savings securities ( n e t ) . I . i . . . . . . . . ’ __ _____
Miscellaneous debt redemptions.
.
^ .........
Purchases of Liberty bonds iropi foreign repayments.
Redemptions of bonds end notes from estate ta x e s ...
Retirement of P ittm an Act certificates.......................
Retirement of Treasury certificates from Federal
Reserve flank franchise tax receipts............... ........
5,005,545,496
253,404,865
140,000,000
*350,000
85,000,000
20,qOQ,000
=■ .-,-,11.--J ----
498,754,865
37, OOP, m
-—
4,014,522,168
265,754,865
100,000,000
100,000
30,500,000
25.000.
000
--------------n—
421,354,865
70.000.
60,724,500
000
60.000.
----- ærrs-----,—
9?, 724,500
000
130,000,000
Total debt retirem ent^.,............................................
596,479,365
551,354,865
Total disbursements............................. ...................
5,602,024,861
4,565,877,033
Excess of disbursements over receipts.......... r ....................
"114,957'861
18,234,033
K-(Sv.pplemental),
Classification o f Estimated Disbursements fo r Riscal Years 1921 and 1922,
Fiscal year 1922.
Fiscal year 1921.
$16,883,723
2,094,256
10.320.000
17.300.000
2,007,200
523,600,000
107, 000,000
25,333,300
5,2S1,6?I
112.459,569
21,510,938
81,501,330
L e g isla tiv e ...,,,,.............. ........................................ , ........
Executive___
State Departm ent.'.......
Department of J u s t i c é . . . ^ , I . . . , . . . , , , , , ; , . , ^ , . . . . , . , . J .
Post Office pep artm en t.......................
Interior Department (including pensiona and Indians)-..
Department of Agriculture,......................................, ...... ..
Department of C o m i n e r c e I .. i . . . . . . J, . . . i . i . ...f.
Department of L a h q r . l i '.. j . , ^ . . . . . ¿ i A J . , . . .
Independent offices.. . ;
.
v** n - «
District of C olum bj^.,i...'r.'..'iA .s..,. . i . t'. . . . . !,..,^ .>. . ...
Miscellaneous-...
...........
Postal deficiency........................................... ...........
Treasury Department:
Bureau of w ar Risk Insurance. . . . . . . . . . . . . . . .
Public Health Seryice.'.
Collecting the reyenuo...
All other.........
War D epartm ent................................. .
Navy Departm ent -. , ................ ............. .
Shipping B oard...........................
Railroads (transportation act and Federal control).
Interest on p u b lie d e b t..
Panama C a n a l . . . . . . . . . . . . . i . . . , . , , ............ .
Purchase of foreign obligations....]..
Purchase of farm 1oan bonds. ..
.......
Total ordinary.,....... ..................................
Public debt:
Sinking f u n d . . . . . . . , . , . ,
.............
War-savings securities ( n e t ) ....... J ,,;
Miscellaneous d e b t redem ptions.
Purchases of Liberty bonds from foreign repayments
Redemptions of bpnds and notes from estate taxes,.
Retirement of P ittm an Act certificates.......... .
Retirement of Treasury certificates from Federal
Reserve Bank franchise tax receipts............1..........
$17.?13,813
' 1,897,751
10.344.000
17,000,000
2 , 000,000
322,000,000
123,000,000
19.923.000
5,252,887
133,391,516
22,187,663
60,407,500
$723,231,937
65,097,796
$233,074,884
50,000,000
51,944,134
112,565,886
. - . » a .
$262,917,900
51325,000
53,110,139
99,457,795
447,684,904
1,027,750,000
697.500.000
103.345.000
803,551,212
975,000,000
13,000,000
132,703,3.26
16,781,321
20.000.
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
0
00
498,754,865
37,000,000
60,724,600
466,810,834
569.750.000
545.225.000
124.200.000
545,206,204
975,000,000
10,000,000
253,404,865
140,000,000
350,000
85.000.
000
-------- —
$734,818,139
43,512,000
97,724,500
421,354,865
70.000.
000
60.000.
---- *— !—
000
130,000,000
Total debt retirements.
596,479,365
561,354,865
Aggregate......................
5,602,024,861
4,565,877,033
(5)
B,
Preliminary Statement Showing Classified Expenditures o f the Government from July 1,1920, to Mar. 51,1921; with Comparative Figures and Total Expenditures for
the Fiscal Year 1920.
[On basis of daily Treasury statements.]
Total July 1,
1919, to
Mar. 31,1920.
Total July 1,
1919, to
June 30,1920.
July 1 to
Sept. 30, 1920.
Oct. 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
1 542,757.71
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
10,768,625.62
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
$4,706,854.98 $15,039,743.52
6,177,959.59
593,056.90
11, 111, 961.49
3,249,647.95
120,478,294.40 264,504,050.77
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
160,373,006.63 621,364,450.58
69.374.034.98 210,276,665.80
18,538,376.20
50,408,613.00
18,669,740.50
8,872,799.87
4,649,834.10
1,985,647.11
92,370,446.40 433,100,634.10
$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
17.639.563.17
90,353,4J1.42
431,756,376.71
19,475,735.42
204,062,450.80
82,036,307.93
158,043,854.33
195,356,575.54
262,797,518.56
1 3,605,406.26
191,002,300.12
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
342,067,610.37
34,138,426.34
5,226,871.18
171,906,101.93
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
Total................................................... 1,180,081,991.37 1,256,293,010.25 1,249,756,856.95 3,686,131,858.57 2,161,871,485. 86 1,341,912,078.39 1,135,800,818.20 4,639,584,382.45
7,795,784.52
*5,189,657.34
4,970,611.11
*2,571,299.54
8,014,830.75
4,988,292.34
*898,151.75
8,457,743.63
Deduct unclassified repayments, etc..
5,945,397,399.94
4,399,847.00
Total.................................................... 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
2,965,341.14
11,950,412.28
3,063,590.56
Panama Canal.......................................
Purchase of obligations of foreign
86,788,968.10
47,000,000.00 387,720,914.09
73,896,697.44 253,931,945.99
16,695,063.91
57,201,633.53
Governments......................................
812,962.71
9,702,438.86
16,781,320.79
6,265,9Î9.22
Purchase of Federal farm-loan bonds..
5,940,997,552.94
11,365,714.01
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:
Legislative establishment.....................
Executive proper..................................
State Department..................................
Treasury Department..........................
War Department...................................
Department of Justice.........................
Post Office Department........................
Navy Department................................
Interior Department.............................
Department of Agriculture...................
Department of Commerce....................
Department- of Labor............................
United States Shipping Board.............
Federal control of transportation sys
tems and transportation act, 1920__
War Finance Corporation.....................
Grain Corporation.................................
Other independent offices and com
missions...............................................
District of Columbia.............................
Interest on public debt.........................
421,337,028.09
29,643,546.17
Public debt:
Certificates of indebtedness redeemed.. 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
200,982,934.62
52,650,333.07
48,180,569.48
50,391,557.58 151,222,460.13
46,103,171.32 • 126,031,753.06
41,757,783.44
38,170,798.30
War-savings securities redeemed..........
509,165.97
; 156,150.00
258,940.28
462,698.47
47,608.19
18,368.69
68,581.81
130,711.09
43,760.59
Old debt items retired..........................
32,336,700.00
24,491,550.00
: 13,000.00
20.463.100.00
49,500.00
146,300.00
4.015.450.00
41,750.00
55,050.00
First Liberty bonds retired..................
241,144,,200.00
40,060,000.00
99.940.900.00
1.070.900.00
22.731.500.00 162.732.400.00
1.102.450.00
3,583,800.00
1.410.450.00
Second Liberty bonds retired..............
296.300.800.00
27,895,550.00
150.117.850.00
61.009.350.00 239.022.750.00
12.782.950.00
17.666.900.00
1.789.800.00
3.094.150.00
Third Liberty bonds retired.................
405.222.800.00
41.061.400.00 266.732.800.00
28.110.450.00
105.666.300.00
34.008.600.00 120,005,100.00
3.369.200.00
2.528.950.00
Fourth Liberty bonds retired..............
249.001.500.00
72,500,000.00
^5,268,450.00
72,500,000.00
125,488,350.00
15.177.350.00
Victory notes retired............................
145,934,150.00
National-bank notes and Federal re
6,530,034.25
23,424,164.50
17,227,041.75
6,081,472.50
4.615.535.00
6.616.060.00
3.923.636.00
3.615.105.00
serve bank notes retired....................
14.154.801.00
Total public debt.-................ .
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
1Deduct excess of credits.
*Add.
7
o.
Preliminary Statement Showing Classified Receipts o f the Government, from July 1,1920, to Mar. SI, 1921; with Com
parative Figures and Total Receipts fo r the Fiscal Year 1920.
[On the basis of daily Treasury statements.]
July 1to
Sept. 30, 1920.
Receipts.
Customs................... j................................. ..................................
Internal revenue:
Income and profits tax................ .............................................
Miscellaneous. . . 1...............................I................................. ..
Miscellaneous revenue......................................................................
Panama Canal tolls, etc............................ I................................. ¡..
Total.......... ........................................... ................... .............
July 1to
. Sept. 30, 1919.
Receipts.
Customs...........................................................
Internal revenue:
Income and profits tax..........................
Miscellaneous........................... ............ .
Miscellaneous revenue....................................
Panama Canal tolls, etc.................................
Total....".................... .
$66, 276, 122.37
1, 017, 556, 092.72
364, 612, 848.61
189, 401, 006.28
1, 029, 909.17
1, 638, 875, 979.15
$84, 058, 024.90
Oct. 1to
Dec. 31, 1920.
$66, 039, 240.83 ’
840, 653, 320.81
399, 726, 191.93
214, 542, 816.77
1, 093, 908.53
1, 540, 074, 262.94
787, 550, 609.73
370, 338, 119.27
200, 909, 310.39
2, 607, 734.32
1, 427, 445, 014.54
Oct. 1to
Dee. 31, 1919.
Jan. 1to
Mar. 31* 1920.
$75, 492, 351.93
985, 767, 736.31
379, 027, 175.30
149, 171, 837.94
1, 728, 013.29
1, 591, 187, 114.77
$89, 785, 412.17
1, 014, 882, 285.08
372, 004, 615.02
1(B, 017, 662.41
1, 216, 016.52
1, 583, 905, 991.20
Jan. 1to
Mar. 31, 1921.
Total, July 1, 1920,
to Mar. 31, 1921.
$67, 842, 176.13
852, 277, 918.48
318, 900, 145.87
142, 840, 438.13
5, 658, 787.99
1, 387, 519, 466.60
$217, 939, 441.86
2, 480, 481, 849.02
1, 088, 984, 457.07
558, 292, 565.29
9, 360, 430.84
4, 355, 038, 744.08
Total. Julv 1, 1919, Total, July 1, 1919,
i to Mar. 31, 1920.
to June 30, 1920.
$231, 553, 886.47
3, 018, 206, 114.11
1, 115, 644, 638.93
444, 590, 506.63
3, 973, 938.98
4, 813, 969, 085.12
$322, 902, 650.39
3, 944, 949, 287.75
1, 460, 082, 286.91
960, 966, 422.38
5, 664, 741.45
6, 694, 565, 388.88
D.
Preliminary statement o f the public debt Mar. SI, 1921.
[On the basis of daily Treasury statements.]
Total gross debt Feb. 28,
. . . . j ___ ................................................ 4...................... $24,051, 684, 728. 28
Public-debt receipts Mar. 1 to 31, 1921 r .
___ . . . . . . $ 8 9 1 , 0 1 7 , 9 1 1 . 58
Public-debt disbursements Mar. 1 to 31, 1921........................................................... 962,598,242. 03
Decrease for period
71,580,330.45
Total gross debt Mar. 31,1921
23, 980,104,397. 83
N ote.—Total gross debt before deduction of the balance held by 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............
$599, 724,050.00
Loan of 1925................
118,489,900. 00
Panama’s of 1916-1936
48,954,180.00
Panama’s of 1918-1938
25,947,400. 00
Panama’s of 1961........
50,000,000.00
Conversion bonds____
28,894, 500. 00
Postal savings bonds..
11, 718,240. 00
$883, 728,270. 00
First Liberty loan.......
1,952, 313,700. 00
Second Liberty loan. .
3, 321,731,300.00
Third Liberty loan__ _
3, 645,081,350.00
Fourth Liberty loan...
6, 360, 364,000. 00
15,279*490,350. 00
Total bonds.......................................
Notes: Victory Liberty loan. . .................
Treasury certificates:
T ax.......................................................
Loan......................................................
Pittman A ct...... ................................. .
Special issues........................................
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
War savings securities (net cash receipts)
Total interest-bearing d e b t............ ...............................................................................................
Debt on which interest has ceased.......................................................................................... ..................
Noninterest-bearing debt..................................................................... ..................................................
2,754, 841,450. 00
. 723, 659, 586. 89
23,742,172,761. 89
10, 537,310. 26
227,394,325. 68
Quarterly Comparative Public D ebt Statement, Showing also Figures fo r A ug. 81, 1919, when War Debt was at its Peak.
[On the basis at daily Treasury statements.]
Aug. 31,1919.
♦Gross debt................... $26,596,701,648.01
Net balance in general
1,118,109,534.76
fund...........................
Gross debt less
net balance ih
general fund...
Mar. 31,1920.
June 30, 1920.
Sept. 30, 1920.
Dec. 31, 1920.
Mar. 31,1921.
$24,698,671,584.02
$24,299,321,467. ( f t
$24,087,356,128.65
$23,982,224,168.16
$23,980,104,397.83
25l, 622,538.19
357,701,082. ¿3
434,961,050.10
504,951,394.20
614,593,426.78
25,478,592,113.25
24,447,049.046.33
23,941,619,784.34
23,652,395,078.55
23,477,272,773.96
23,365,510,971.05
♦Includes
Treasury
certificates (unma
tured):
Loan and tax........
Pittman Act and
special................
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
Total...............
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
E.
Statement Shorting Comparative Figrtrei as to Short-dated Publit Debt, Aiig. 81, 1919, to Mat. ¿1, 1921.
[On tiie basis 6f daily Treasury statements.
Aug. 3i, ii)i9.
Dec. 31,1919.
June 30, 1920.
Dec. 31, 1920.
Victory notes..................................................
Treasury certificates:
Loan and tax...........................................
Pittman Act and special issues..............
War-Savings securities (net cash receipts)..
$4,113,402,679.65
$4,494,114,007.07
$4,246,385,530.00
$4,225,970,755.00
$4,100,453,105.00
3,938,225,000.00
262,914,050.39
933,647,191.08
!, 262,184.500.00
316,301,300.37
897,143,389.27
2,485,552,500.00
283,315,006.00
828,739,702.09
2,300,656,000.00
292,229,450.00
760,953,780.53
2, 474,612,00a 00
Total...............».....................................
9,248,188,921.12
8,969,743, i96.71
7,844,052,732.09
7,579,809,985.53
7,578,954,141.89
Mar. 31,1921.
280,229,450.00
723,659,586.89
W A SH IN G T O N ! GOVERNM ENT P R IN T IN G O T R iC * J 19*1
TREASURY DS?AftTMESffi
m m im io ®
November 4, 1921.
Dear Mr« Chairman:
X received your le tte r of October 27^ 1921, with the enclosed
copy of tile Joint Resolution introduced by Mr. McFadden (H*J«Res.
211), proposing an amendment to the Constitution of the United
States to r e s tr ic t the further issuance of tax-exempt securities»
This amendment is in the form suggested by the Treasury in my
le tte r of September 23, 1921, to Congressman McFaddeh* h copy of
vtfhich is enclosed for your information»
This le tte r outlines the
Treasury1s general views with regard to the proposed Constitu
tional amendment.
X think i t would be helpful if the present Congress, as a part
of the tax revision program, would take some action to propose to
the States a Constitutional amendment to r e s tr ic t future issues
of tax-exempt secu rities, and that the amendment in the form in*
troduced by Mr. McFadden merits the serious consideration of the
Committee on Ways and Means* At the le a st, i t offers the basis
for a thoroughgoing treatment of the tax-exempt security problem*
The existence of the present great mass of about $10,000,000,000
of fu lly tax-exempt secu rities, with the prospect of continued
issues of tax-exempt secu rities unless some re s tric tiv e amendment
is adopted, necessarily tends to defeat the surtaxes imposed by
the revenue laws, while the combined effect of the high surtaxes and
the unlimited volume of tax-exempt secu rities is inevitably to
divert capital which would otherwise he employed la productive
enterprise into relativ ely unproductive public expenditure#
I
believe that there would be nothing in the long run more helpful
to the recovery of business and industry in the country* and a t
the same time nothing b etter calculated to protect the Government*
own revenues* than a revised system of taxation which not only
moderates the surtaxes but also tabes steps to stop the diversion
of investment funds into tax-exeapt securities#
Very truly yours,
(Signed) A, w# MSLTjON
Secretary*
Hon* Joseph W
# Fordney*
Chairman* Committee on Ways and Means*
House of Representatives*
Washington* D# 0«
1 enclosure
! Inr'osure to memo s
;
September 23, 1931.
My dear Mr.. Chairman:
I received your le tte r of August 37, 1921, enclosing a copy
of H. J . Resolution 103, which proposes an amendment to the Constitu
tion of the Tfoited States re stric tin g the issue of tax-exempt securi
tie s by the Federal Government and States and m unicipalities, and have
noted your request fo r my opinion with respect to th is resolution and
the subject in general.
As you know, in my le tte r of April 30, 1921, to the Chairman
of the Committee on Ways and Means, a copy of which I enclose, I recom
mended to Congress that i t consider the advisability of taking action
by sta tu te , or constitutional amendment where necessary, to r e s tr ic t
further issues of tax-exempt se cu ritie s.
The ever-increasing volume
of tax-exempt secu rities (issued for the most part by States and
m unicipalities) represents a grave economic evil, not only by reason
of the loss of revenue which i t en tails to the Federal Government
but also because of i t s tendency to encourage the growth of public
indebtedness and to divert capital from productive enterprise,
The
issue of tax-exempt securities has a direct tendency to make the
graduated Federal surtaxes ineffective and nonproductive because i t
enables taxpayers subject to surtaxes to reduce the amount of th e ir
taxable income by investing i t in such securities;
and at the same
time the resu lt is that a very large class of cap ital investments
-3 -
escape their ju s t 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 th is
as to Federal securities alone would unjustly discriminate against the
National Government and leave a clear fie ld fo r the State and local
governments*
In general, moreover, the policy of the Federal Govern
ment has been not to issue i ts 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 secu rities, I assume i t is clear, since the decision in
Fvans v. Gore (353 U. S. 3^5), th at 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 re stric tin g
the further issue of tax-exempt secu rities by State or municipal
governments would be by constitutional amendment.
Such an amendment
would doubtless meet with considerable opposition on the p art of the
States, and for that reason, as well as' from considerations of equality
and fairness, i t is the b etter view, I should say, that any r e s tr ic
tions on the further issue of tax-exempt securities should be mutual
and should apply as well to secu rities issued by the Federal Govern
ment as to State and municipal se cu ritie s.
I t is important, however,
not to lose sight of the real basis for the existing constitutional
principle under which secu rities issued by the State and municipal
governments are now held free from taxation by the Federal Government,
and Federal secu rities *rom taxation by State and local au th o rities,
-3and a t the same time to provide proper safeguards against any possible
discrimination in taxation by the Federal Government against State and
municipal secu rities 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 afe desirable*
In the f i r s t place, I think that tile resolution should be so
modified as to make i t perfectly clear that the rig h t of the Federal
Government to tax the income derived from State and municipal securi
tie s and of any State to tax the income derived from Federal secu rities,
shall ex ist only to the same extent that each government taxes the in
come derived from its own secu rities.
This would prevent any discrimina
tion by either government against the secu rities issued by the other*
In the second place, i t is noted that while the f i r s t part of the resolu
tion subjecting the income from secu rities issued by State and municipal
governments to taxation by thé United States applies only to secu rities
issued a fte r the ra tific a tio n of the amendment, the proviso subjecting
the income from secu rities issued by the United States, its possessions
and te rrito rie s , to taxation by the States is not sim ilarly limited*
Such a lim itation 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 lim ited to the income
derived from securities held by residents of the State and should be
modified so as to avoid any possible in terpretation which would allow
a State to tax the income derived from Federal securities not held
-4within the State.
I might also suggest that the language of the amendment be
made broad enough to include a ll secu rities issued by or under the
authority of the Federal Government or of any State.
This would apply,
for example, to secu rities issued by Federal land Banks and other socalled instrum entalities of the Federal and State governments* which
might not be considered as coming within the terms of the resolution
as i t now stands.
In th is connection I am taking the lib erty 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.
Hon. Louis T» McFaddep,
Chairman, Committee on Ranking and Currency,
House of Representatives♦
2 enclosures*
JOINT RESOLUTION.
Proposing an amendment to the Constitution of the United States.
1*
Resolved by the Senate and House of Representatives
3.
of the United States of America in Congress assembled ^two-
3.
thirds of each House concurring therein), That the following
4.
a rtic le be submitted to the leg islatu res of the several
5.
States, which, when ra tifie d by the leg islatu res of three-
6.
fourths of the States, shall be valid and binding as a part
7.
of the Constitution of the united States;
8*
M
ARTICLE XX.
nThe United States shall have power to tax incomes
10.
derived from secu rities issued a fte r the ra tific a tio n of
11.
th is a rtic le by or under the authority of the several States
12.
to the same extent that incomes derived from secu rities
13» issued a fte r the ra tific a tio n of th is a rtic le by or under
14.
the authority of the United States are taxed by the United
15.
States.
16.
by residents thereof from secu rities issued afte r the
17.
ra tific a tio n of th is a rtic le by or under the authority of
18.
the United States to the same extent that incomes derived
19.
by residents of such State from secu rities issued after
20.
the ra tific a tio n of this a rtic le by or under the authority
21.
of such State are taxed by such State.«
Any State shall have power to tax incomes derived
! Inclosure to Memo
j dated
January 12, 1923.
MEMORANDUM FOR SECRETARY:
(in re tax-exempt s e c u ritie s )*
She Bureau of the Census reports that for the years 19X3 and 1919,
the to ta l indebtedness of the States was as follows:
1913---------------------------- $422,796,525
1919 --------- - ---------------- 744,582,933
This would indicate a to ta l indebtedness of the States, as of January
1, 1920, of about $775,000,000#
The Bureau of the Census reported the to ta l indebtedness of County
and minor c iv il divisions of the States, which includes a l l c itie s ,
towns, e tc ,, as of 1913, a t $4,075,152,904, This included $3,475,954,353
exclusive of Sinking Fund assets* This indebtedness probably increased
by January 1, 1920 to about $5,595,000,000* That is , the to ta l indebted
ness of the States and th e ir minor c iv il divisions as of January 1, 1920,
was about $6,370,000,000*
According to the financial press, about $672,000,000 of new indebted
ness was added during the year 1920, and about $1,100,000,000 for the
year 1921, This would make the to ta l indebtedness of the States and minor
p o litic a l subdivisions thereof as of January 1, 1922, $8,142,000,000#
From th is the estimated to ta l tax-free securities outstanding, as of
January 1, 1922, may be tabulated as follows:
S tate, County and minor p o litic a l
subdivisions of the S tates, - - - - - - - ------ $8,142,000,000
U. S* tax-free bonds (net outstanding) — - - * 2,184,000,000
Federal Farm Loan Bonds (net outstanding) - - - 284,000,000
• Bonds of Insular possessions (net outstanding) - 50,000,000
T o t a l : ..................................... - ..................... $10,660,000,000
This estimate may be fa irly taken as a maximum, as no allowance is
made in the computation fo r any debt maturing since July 1 st, 1919*
(♦Philippine Islands, Hawaii and Porto Rico.)
(Sgd#)
Jos# 5* McCoy
Government Actuary#
January 14, 1933
Inciosure to Mem«
dated 1/L(l
MEMORANDUM FOR SECRETARY;
LOSS TO GOVERNMENT THROUGH TAX-FREE SECURITIES.
Estimated to ta l of a l l tax-free securities issued in the United States,
outstanding January 1, 1932,
$10,660,000,000
Of th is amount i t is probable that say $5,660,000,000 is held by Cor
porations, such as Insurance, Surety and Bonding companies, Banks and
Trust companies, etc*, which are required to retain oertain reserves*
Many States require these reserves held by concerns doing business therein
to be in the form of local state and municipal securities * A taxable se
curity to yield the same revenue, a fte r paying a tax of 12^$, as does a
5$ tax-exempt security, must yield 5.714$. That is , on an investment of
$100,000 by a corporation, the advantage of a tax-free investment would
be $714.00 per year, as compared with a taxable investment. As a large
percentage of insurance, banking and surety companies are required to in
vest in these tax-free secu rities, they would s t i l l be obliged to invest
in them i f they were taxable, so i t would seem safe to say th a t, i f they
were a ll made taxable, the gain to the Federal Government in tax from
corporation-held tax-exempt securities would be not in excess of
$35,000,000 per annum. We must also remember that a l l commercial stocks
are now tax-exempt in the hands of corporations, without m aterially re
ducing th e ir taxes. Of the remaining $5,000,000,000 in tax-exempt se
cu rities, held by individuals, partnerships and abroad, i t is safe to
say that upon about $2,500,000,000 the gain in tax would be n il, and
that upon the remaining $2,500,000,000, about $85,000,000* That is , i f
a ll tax-exempt securities outstanding January 1, 1922 were made taxable,
the gross increase in revenue to the Government would be approximately
$120 , 000 , 0 0 0 *
There ie l i t t l e doubt that under these conditions the future investor
in what are now tax-exempt secu rities, would demand that they bear a
higher rate of interest or be sold at a discount, sufficient at least to
meet th is tax*
(Sgd.)
Jos. S. McCoy
Government Actuary*
^
January 14, 1923.
ADVANTAGE OP INVESTING IN TAX-FREE SECURITIES AS COMPARED WITH A LIKE INVEST*
MENT IN TAXABLE SECURITIES,
In each c&se $40,000 is assumed to be invested in a tax-free 5$ security
and by comparison in a taxable stock bearing the necessary rate of in te re st so
ad to yield the same income, a fte r paying the income tax of the existing law.
Net income Net income of inof investor vestor from the
TAX,
exclusive
above investment,
Sur-tax or
Of that
a fte r paying individends*
from the
above in
With
With
:
vestment,
tax-free taxable ;
security stock. ;
f Income from
i
taxable
t stock before
i paying tax*
t
i
Ì
t
Ì
i
Necessary
rate of
in terest of
taxable
security.
•
$4,000
16,000
28,000
40,000
60,000
80,000
100,000
200,000
500,000
1,000,000
B.
$2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
$2, 000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
:
:
$0*00
105,26
t
378.73
: 439*02
t
777.78
: 1,225.81
i 1,846*15
* 2,000* 00
: 2,000*00
i 2,000.00
$2,000.00
2,105.2$
2,273.73
2,439*02
2,777,79
3,225*81
3,846.15»
4.000. 00
4.000. 00
4.000.
!
i
!
3*0CS $
5*26- $
5.68 $
!
6,10 $
6.94 j>
!
j
:
8.06 $
9,62 $
!
8
10.00 jt
10.00 $
8
00
10,00 <5
Advantage of investing in a tax-free security, as compared with any other
form of investment when the income is subject to both normal and sur-tax, such
as a mortgage, commercial bond, etc.!
In each case $40,000 is assumed to be invested in a tax-free security, and
by comparison, the same amount in the other form of investment, yielding the
necessary rate of p ro fit, so as to give the same income a fte r paying the income
tax of the existing law. The investor is assumed to be married, without
dependents*
~2~
Net income
of investor
exclusive
of that
from the
above in
vestment«
$500
4,000
16,000
28,000
.40,000
60,000
80,000
100,000
300,000
500,000
1,000,000
Net income of in
vestor from the
above investment,
a fte r paying in_C0me tax on same.
With
With
tax-free
taxable
security
security
$2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
3,000
2,000
$2,000
2,000
2,000
2,000
2,o60
2,000
2,000
2,000
2,000
2,000
2,000
Total tax
on re
ceipts
from above
investment
$0.00
80# 00
265*26
432*73
599*02
937,78
1,385*81
2,006*15
2,160.00
2,160.00
2,160.00
Income from
taxable
security before
paying tax*
$2,000*00
2,080.00
2,265*26
2,432.73
2^599; 02
2,937*78
3,385.81
4,006*15
4,160.00
4,160,00
4,160*00
Necessary
rate of
in terest of
taxable
security.
5.00
5.20
5.66
6*08
6.50
7.34
5,46
Id .02
10.40
10.40
10,40
$
$
$
$
$
$
4
i
i
£
j>
Prom those tables i t is observed that there is an advantage to the investor
in tax-exempt secu rities yielding a 5$ income, as compared with an investment
of the same sum in the stock of a corporation where the return from that stock
is less than from 5$ to 10$, depending upon the taxable net income of the
investor* In case of an investment of the same sum in a mortgage, corporate
bond, or other completely taxable form of investment the advantage ex ists,
unless th is la tte r investment yields from 5$ to 10*40$, depending upon the
net income*
Where the amount invested is greater than $40,000, the upper lim it w ill be
the same, but the advantage w ill be somewhat extended where the net inoome from
other sources is small or comparatively small, as is shown in the table below«
INVESTMENT OP $1,000,000 IN A 5$ TAX-EXEMPT SECURITY AS COMPARED WITH
THE INVESTMENT OF THE SAME SUM IN COMMERCIAL STOCKS*
Net inoome
of investor
exclusive
of that
from the
above investment
$4,000
16,000
28,000
40,000
60,000
80,000
100,000
200,000
500,000
1,000.000
Net income of in
vestor from the
above investment
a fte r paying income tax on same.
With
With
tax-free
taxable
security
stock
$50,000 $50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50.000
50.000
:
:
:
:
:
:
:
♦
:
:
:
:
TAX.
Sur-tax on
dividends
Income from
taxable
stock before
paying tax#
$7,611*11
13,111.11
20,037*74
28,923.08
38,076*92
44,509.80
47,058.82
50,000.00
50,000.00
50.000.00
$57,611.11
63.111.11
70,037,74
78,923.08
88,076,93
94,509.80
97,058.82
100,000.00
100,000*00
100.000,00
Necessary
rate of
in terest of
taxable
security#
5.76
6.31
7.00
7.89
8.81
9.45
9.71
10.00
10.00
10.00
£
£
$
$
$
£
$
$
$
$
LETTER FROM THE SECRETARY OF THE TREASURY TO THE CHAIRMAN OF THE COMMITTEE ON
WAYS AND MEANS.
Treasury D epartment,
Office of the S ecretary,
,
Washington January 21¡., 1922. ^
D ear Mr . Chairman :
.1 received your letter of January 21, 1922, and am glad, in accordance with your request,
to present the latest figures as to the probable receipts and expenditures of the Government
for the fiscal years 1922 and 1923, and to indicate in that connection what public debt opera
tions the Treasury will have to carry on between now and June 30, 1923, in order to finance
its current requirements and provide for maturing obligations. I am at the same time trans
mitting for your information the. four attached statements as to receipts and expenditures and
the public debt.
It appears from these statements that for 1922 the budget estimates indicate a deficit
of over 24 million dollars, and for 1923 a deficit of over 167 million dollars. These figures
make no allowance for expenditures not covered by the budget, as, for example, 50 million
dollars already requested by the United States Shipping Board for the settlement of claims,
7 million dollars to be spent by the United States Grain Corporation on account of Russian
relief under the act approved December 22, 1921, $5,000,000 to be paid as the 1923 installment
under the treaty with Colombia, and a possible 50 millions on account of additional compen
sation to Government employees, a total of 112 millions, chiefly for 1923. The results of
the first half of the fiscal year 1922, after making due allowance for extraordinary items,
indicate that the budget estimates for the year are substantially correct. It is still too early
to say whether deficits can be avoided, but it is almost certain that in neither 1922 nor 1923
will there be any surplus. At any rate, it is clear that in order to balance the budget, expendi
tures must be still further reduced, rather than increased, and that the net reductions below
the budget figures within the two years must aggregate about 300 million dollars in order
to overcome the indicated deficits. At the same time the Government faces a heavy shrinkage
in receipts, and internal-revenue collections in particular are subject to great uncertainty.
As a matter of fact, in view of the depression in business, there is grave doubt whether the
estimates of receipts which appear in the budget can be realized, and up to date the shrinkage
has rather more than kept pace with the shrinkage in expenditures. It is clear that under
these conditions there is no room for new or extraordinary expenditures, and that if new items
should be added which are not included in the budget, it would be necessary to make simul
taneous provision for the taxes to meet them.
One of the chief factors in the gradual return to normal conditions throughout the country
has been the marked reduction in Federal expenditures which has already occurred, and this has
in turn permitted the lightening of the burden of taxation. What has been accomplished
along these lines within less than a year, through the cooperation of the Congress and the Ex
ecutive, makes a concrete record of achievement in economy which is worthy of our highest
efforts to maintain. The economies effected, moreover, have been made without stinting in
any way the relief of disabled veterans of the late war, for the figures show that the Federal
Government spent for this purpose in the fiscal year 1921 about 380 million dollars and will
spend for the same purpose in the fiscal year 1922, and again in the fiscal year 1923, about
450 millions a year, or more than will be spent for any other one purpose except interest on the
public debt.
83841—22-----1
2
The overshadowing problem of the Treasury at this time, of course, is the handling of the
public debt, and particularly the conduct of the refunding operations which will be necessary
within the next year and a half on a scale unprecedented in times of peace. Some progress has
been made in these operations, but the great bulk of the refunding still remains to be done.
The gross public debt of the Government on December 31, 1921, on the basis of daily Treasury
statements, amounted to $23,438,984,351, of which almost
billion dollars falls due within
the next 16 months, over 3^ billions of it in the form of Victory notes, which mature May 20,
1923, about $2,200,000,000 in the form of Treasury certificates, which mature at various dates
within a year, and nearly 700 millions in the form of war savings certificates, which mature
January 1, 1923, or may be redeemed before that time. The refunding of this vast maturity
will require the Treasury’s constant attention from now on. Altogether it makes up an amount
almost as large as the Fourth Liberty Loan, and considerably more than the First and Second
Liberty Loans combined. The Liberty Loans were floated during the stress of war, through
great popular drives and with the help of a country-wide Liberty Loan organization that com
prised perhaps 2 million persons. To conduct refunding operations on a similar scale in time
of peace, to the amount of 6^ billions of dollars, is a task of unparalleled magnitude, and it is of
the utmost importance to the general welfare that it be accomplished without disturbance to
business or interference with the normal activities of the people. This can not be done if the
refunding is embarrassed by other operations.
The greatest problem is the Victory Liberty Loan, which amounted to $3,548,000,000
on December 31, 1921. A maturity of this size is too large to pay off or refund at one time,
and it is accordingly necessary that the Treasury should adopt every means at its command
to reduce the outstanding amount in advance of maturity. To this end it will be the Treasury’s
policy to continue to issue short-term notes from time to time when market conditions are
favorable and to use the proceeds to effect the retirement of Victory notes, accomplishing this,
if they can not be had otherwise, through the redemption of part of the notes before maturity.
It will likewise be the policy, so far as possible, to apply the sinking fund and other special,
funds available for the retirement of debt to the purchase or redemption of Victory notes.
The $2,200,000,000 of Treasury certificates outstanding and the $700,000,000, or thereabouts,
of war savings certificates raise similar problems and will likewise require refunding operations
on a large scale during the next year and a half. The Treasury has already placed on sale, on
December 15, 1921, a new issue of Treasury savings certificates, which is designed to provide
in part for the outstanding savings certificates to be redeemed. It is clear, however, that an
important part of the maturity on January 1, 1923, will have to be refuiided, at least tempo
rarily, into other obligations. The bulk of the Treasury certificates of indebtedness will also
have to be Refunded, probably into other Treasury certificates, for it is almost necessary, while
Government expenditures are so large and tax payments so heavy, to float a substantial amount
of Treasury certificates in order to carry on current operations without money strain.
If the situation continues to develop in an orderly way, and no complications are intro
duced in the form of extraordinary expenditure which would force new borrowings, the Treasury
expects to be able to proceed with the program already outlined, and such other refunding
operations as may prove to be advisable, within the limits of its existing authority and with
out interference with the business of the country or disturbance to the investment markets.
The time is coming, perhaps in the near future, when it will be possible to undertake refimding
operations for a longer term with a view to the distribution of the debt among investors on a
more permanent basis. It is important in this connection, however, not to overlook one special
characteristic of the Treasury’s public debt operations since August 31, 1919, when the gross
debt reached its peak, namely, that the operations since that date have been accompanied by
gradual but steady debt retirement and that even the refunding operations now in prospect will
not increase the public debt. Generally speaking, the Treasury has been floating a constantly
decreasing total volume of securities and its borrowings have accordingly not taken new money
or absorbed funds that would otherwise go into business. If the Government, on the other
hand, were increasing the public debt, quite different problems would arise. Treasury offerings
3
| would then take up new money and there would be danger of inflation, of higher rates for money,
| and of strain on the investment markets, with consequent prejudice to the Government’s own
J inevitable refunding operations and to business and industry generally. The whole character
| of the operations would be altered.
The estimates which have been given as to the prospects for the fiscal years 1922 and 1923
and the program which has been outlined for the refunding of the short-dated debt do not
make allowance for any extraordinary expenditures within the next few years for a soldiers’
bonus or so-called adjusted compensation for veterans of the World War. The figures show
that there will be no available surplus, but more probably a deficit, and that with the enormous
refunding operations which the Treasury has to conduct it would be dangerous in the extreme
to attempt to finance the expenditures involved in the bonus through new borrowings. The
position of the Treasury remains unchanged, but if there is to be a soldiers’ bonus, it is clear
that it must be provided for through taxation, and through taxation in addition to the taxes
imposed by existing law.
I t is difficult to estimate how much additional taxation would be necessary, for the last
bonus bill considered was S. 506, reported by the Committee on Finance of the Senate on June
20, 1921. Frpm the report of the committee and the estimates of the Government Actuary it
would appear thqt the total cost of the bonus under this bill would be about $3,330,000,000, of
which at least1$850,000,000 would fall in the first two years of its operation, with varying
amounts over intervening years and an ultimate payment in the twentieth year of over $2,114,000,000. ^hp minimum cost would apparently be about $1,560,000,000, in case substan
tially all the vejiep^ns should take the cash plan, and the maximum cost about $5,250,000,000,
in case substantially all of the veterans should elect to take the certificate plan in lieu of
cash. If an qnqjpectedly large proportion of the veterans should choose cash, the
cost within the first two years might run well over $1,000,000,000. It would seem
reasonably certain, however, that at least one-half would elect the cash-payment plan, in
which event the cost in the first two years would be about $850,000,000 and the total cost
would fall between the two extremes, or at about $3,330,000,000. These estimates take no
account of expenses of administration or the possible cost of vocational training aid, farm
or home aid, or land settlement aid to veterans who elect such benefits, which would involve
substantial additional cost. The expenditures involved, moreover, would be in addition to
already substantial expenditures on account of veterans of the World War, chiefly for relief
to disabled veterans, which amount to about $450,000,000 a year according to the estimates
for 1922 and 1923. The Government’s obligation to the disabled veterans is continuing and
paramount, and heavy expenditures for their relief will be necessary for many years to come.
On the most conservative estimates, therefore, the cost of a soldiers’ bonus in the first
two years would probably be not less than $850,000,000. This would necessitate additional
tax levies to a corresponding amount during the same period. The taxes already in force
are too onerous for the country’s good and are having an unfortunate effect on business and
industry. The field of taxation, moreover, has already been so thoroughly covered, owing
to the extraordinary revenue needs growing out of the war, that it is exceedingly difficult to
discover new taxes that could properly be levied to yield as much as 850 millions within two
years. In these circumstances, should Congress determine to adopt the policy of paying a
soldiers’ bonus, it would become necessary to impose general taxes on broad classes >of articles
or transactions in order to pay it. For such taxes, in their nature of wide application, much
might be said as substitutes for existing taxes, but the Treasury would hesitate to recommend
them as additional taxes, except to meet some extraordinary purpose.
Whatever additional taxes might be levied, provision for them would have to be made
in the same bill with the bonus. The budget system is now firmly established, and the budget
already submitted has pointed out the relation between receipts and expenditures for this year
and next year. If the Congress decides to authorize large expenditures outside of the budget,
it is fundamental that it should make simultaneous provision for the additional taxes necessary
to meet them.
4
It is also well to keep in mind that no indirect means of financing the bonus could make it
any less an expense that will have to be borne in the long run by the taxpayer. Thus it would be
futile, as well as unwise, to attempt to provide for the bonus through the use of the principal or
interest of the foreign obligations held by the United States or through the sale of any such
obligations to the public. For the most part, the foreign obligations are still in the form of
demand obligations and it is impossible in the present state of international finance and in
advance of funding arrangements to estimate what may be collected on them in the near future
by way of principal or interest. The obligations are not in shape, moreover, to sell to the public,
and to offer them to investors with the guaranty of this Government would seriously interfere
with our own refunding operations, upset the security markets, and in the long run prove more
expensive to this Government than would the sale of its own direct obligations. At the same
time, it would enormously complicate the international situation and certainly embarrass the
funding negotiations. Even if enough could be realized on the foreign debt in time to pay the
bonus, it would accomplish nothing to set it aside for that purpose. As the law now stands,
and in justice to the millions of Liberty bond holders, the Government is bound to apply any
principal payments by foreign Governments, as well as any proceeds of sale, to the retirement
of outstanding Liberty bonds, about 10 billions of which were issued in the first instance to
provide for the advances to foreign Governments. Interest collected on the foreign obligations
should likewise go to provide for the interest on Liberty bonds, and it has been the Treasury’s
plan in the funding to adjust the dates and amounts of the interest payments as nearly as may
be to the interest payments on our own bonds. In any event, it is clear that if the proceeds
of the foreign obligations should be applied to different purposes, the Government of the United
States to that extent would have to provide for payment of the principal and interest of the j
Liberty bonds from other sources, which means that the people would have to pay taxes for
this purpose that would otherwise be unnecessary. The plan to use the foreign obligations to
pay a soldiers’ bonus, therefore, would still leave the burden on the shoulders of the American
taxpayer.
I have made this extended analysis of the country’s financial position and of the Treasury’s
plans and prospects for 1922 and 1923 in order that the Congress may have before it in definite
form the facts as to what financial consequences the soldiers’ bonus would entail and what
added burdens it would inevitably place upon the country.
I am sending a copy of this letter to Senator McCumber, for the information of the Com
mittee on Finance of the Senate.
Very truly yours,
A. W. MELLON,
*
Hon. J. W. F ordney,
Chairman, Committee on Ways and Means,
House o f Representatives.
Secretary of the Treasury.
E
x h ib it
P r e l i m i n a r y s t a te m e n t s h o w in g c la s s ifie d r e c e ip ts a n d e x p e n d i t u r e s o f th e G o v e r n m e n t f r o m
J u ly
1, 1921,
to D e c . 3 1 , 1 9 2 1 , w it h
c o m p a r a tiv e f i g u r e s f o r th e f i s c a l y e a r 1 9 2 1 ..
[O n t h e b a s is o f d a ily T re a s u ry s ta te m e n ts .]
J u ly 1 to S e p t.
3 0 , 1921.
O c t. 1 t o D e c .
3 1 , 1921.
T o ta l J u ly 1 to
D e c . 3 1 ,1 9 2 1 .
J u l y 1 to S e p t.
3 0 , 1920.
O c t. 1 t o D e c .
3 1 ,1 9 2 0 .
T o ta l J u ly 1 to
D e c . 3 1 ,1 9 2 0 .
J a n . 1 to M a r.
3 1 , 1921.
A p r. 1 to J u n e
3 0 , 1921.
T o t a l J u l y 1 ,1 9 2 0 ,
t o J u n e 3 0 ,1 9 2 1 .
R EC E IPT S.
O r d in a ry :
C u s t o m s ............................................................................
In te r n a l re v e n u e —
I n c o m e a n d p r o f i t s t a x ................................
M i s c e l l a n e o u s i n t e r n a l r e v e n u e ..............
M i s c e l l a n e o u s r e v e n u e ...........................................
P a n a m a C a n a l t o l l s , e t c ........................................
$ 6 9 ,6 0 2 ,0 4 4 .7 3
$ 7 7 ,4 0 6 ,3 1 6 .5 7
$ 1 4 7 ,0 0 8 ,3 6 1 .3 0
$ 8 4 ,0 5 8 ,0 2 4 .9 0
$ 6 6 ,0 3 9 ,2 4 0 .8 3
$ 1 5 0 ,0 9 7 ,2 6 5 .7 3
$ 6 7 ,8 4 2 ,1 7 6 .1 3
$ 9 0 ,6 2 4 ,9 4 9 .1 4
$ 3 0 8 ,5 6 4 ,3 9 1 .0 0
6 3 2 ,0 8 9 ,0 2 7 .5 2
3 6 4 ,4 0 1 ,9 4 3 .9 6
7 1 ,9 0 2 ,6 8 1 .1 2
2 ,8 4 4 ,2 0 4 .3 7
6 0 7 ,3 2 7 ,1 0 4 .0 3
3 2 4 ,3 4 3 ,6 5 8 .6 3
1 6 1 ,3 5 2 ,7 5 0 .5 2
3 ,1 9 3 ,3 2 5 .9 2
1 ,2 3 9 ,4 1 6 ,1 3 1 .5 5
6 8 8 ,7 4 5 ,6 0 2 .5 9
2 3 3 ,2 5 5 ,4 3 1 .6 4
6 ,0 3 7 ,5 3 0 .2 9
8 4 0 ,6 5 3 ,3 2 0 .8 1
3 9 9 ,7 2 6 ,1 9 1 .9 3
2 1 4 ,5 4 2 ,8 1 6 . 77
1 ,0 9 3 ,9 0 8 .5 3
7 8 7 ,5 5 0 ,6 0 9 . 73
3 7 0 ,3 3 8 ,1 1 9 .2 7
2 0 0 ,9 0 9 ,3 1 0 .3 9
2 ,6 0 7 ,7 3 4 .3 2
1 ,6 2 8 ,2 0 3 ,9 3 0 .5 4
7 7 0 ,0 6 4 ,3 1 1 .2 0
4 1 5 ,4 5 2 ,1 2 7 .1 6
3 ,7 0 1 ,6 4 2 . 85
8 5 2 ,2 7 7 ,9 1 8 .4 8
3 1 8 ,9 0 0 ,1 4 5 .8 7
1 4 2 ,8 4 0 ,4 3 8 .1 3
5 ,6 5 8 ,7 8 7 .9 9
7 2 5 ,5 6 4 ,3 0 8 .7 2
3 0 1 ,4 1 6 ,3 6 6 .2 1
1 4 9 ,3 6 8 ,2 8 1 .8 1
2 ,9 2 0 ,3 1 0 .9 5
3 ,2 0 6 ,0 4 6 ,1 5 7 .7 4
1 ,3 9 0 ,3 8 0 ,8 2 3 .2 8
7 0 7 ,6 6 0 ,8 4 7 .1 0
1 2 ,2 8 0 ,7 4 1 .7 9
T o t a l ..............................................................................
1 ,1 4 0 ,8 3 9 ,9 0 1 .7 0
1 ,1 7 3 ,6 2 3 ,1 5 5 .6 7
2 ,3 1 4 ,4 6 3 ,0 5 7 .3 7
1 ,5 4 0 ,0 7 4 ,2 6 2 .9 4
1 ,4 2 7 ,4 4 5 ,0 1 4 .5 4
2 ,9 6 7 ,5 1 9 ,2 7 7 .4 8
1 ,3 8 7 ,5 1 9 ,4 6 6 .6 0
1 ,2 6 9 ,8 9 4 ,2 1 6 .8 3
5 ,6 2 4 ,9 3 2 ,9 6 0 .9 1
2 6 1 ,3 3 9 ,5 5 2 .3 3
2 1 5 ,2 1 6 ,0 7 2 .2 4
4 7 6 ,5 5 5 ,6 2 4 .5 7
2 8 9 ,2 2 4 ,7 0 6 .2 9
1 7 0 ,2 8 0 ,2 3 8 .1 4
4 5 9 ,5 0 4 ,9 4 4 .4 3
1 1 1 ,7 6 1 ,8 0 2 .9 1
E x c e ss of o rd in a r y re c e ip ts o v e r o rd in a ry
e x p e n d i t u r e s .....................................................................
E x c e s s o f o r d i n a r y e x p e n d itu r e s o v e r o rd iii a r y r e c e i p t s ___
E x c e ss of o rd in a r y re c e ip ts o v e r to ta l e x p e n
d itu re s (p u b lic d e b t a n d o rd in a ry ) c h a rg e
a b l e a g a i n s t o r d i n a r y r e c e i p t s ...............................
E x c e s s o f t o ta l e x p e n d itu r e s (p u b lic d e b t
a n d o rd in a r y ) c h a rg e a b le a g a in s t o r d in a r y
r e c e i p t s o v e r o r d i n a r y r e c e i p t s . ............ .............
5 0 9 ,0 0 5 ,2 7 1 .6 1
6 2 ^ 2 6 1 ,4 7 5 .7 3
1 7 3 ,7 5 3 ,4 5 2 ,3 3
4 3 ,6 5 0 ,4 7 2 .2 4
2 1 7 ,4 0 3 ,9 2 4 .5 7
2 4 1 ,9 4 2 ,4 5 6 .2 9
1 4 8 ,3 2 2 ,2 8 8 .1 4
3 9 0 ,2 6 4 ,7 4 4 .4 3
8 6 ,7 2 3 ,7 7 1 .6 1
8 1 ,0 5 2 ,2 4 7 .0 9
2 2 2 ,4 7 8 ,7 2 5 .7 3
4 .8 0 3 .4 8 3 .1 4
4 9 ,2 6 0 .7 6
2 ,2 4 2 ,1 2 7 .4 0
1 8 1 ,7 9 0 ,4 7 7 .0 0
3 0 7 ,5 1 8 ,3 5 0 .9 5
4 .4 2 5 .7 0 3 .1 5
2 5 ,9 5 6 ,3 1 7 .3 7
1 7 7 ,4 6 2 ,7 9 1 .6 2
8 2 ,5 2 0 ,9 4 3 .0 0
3 2 ,4 9 4 ,5 0 8 .7 5
6 ,9 6 6 ,7 1 8 .3 8
1 ,9 7 7 ,4 6 9 .3 4
4 ,3 4 6 ,1 6 9 .0 0
5 5 ,0 2 8 .4 9
2 ,3 8 8 ,0 1 0 .0 6
1 2 8 ,0 2 3 ,5 3 2 .1 5
2 5 1 ,7 2 8 ,7 8 9 .1 7
4 ,6 3 8 ,9 9 6 .4 9
9 7 ,3 9 3 ,4 2 1 .2 8
1 4 4 ,8 1 0 ,7 1 6 .9 9
1 0 5 ,9 3 1 ,6 7 7 .1 1
2 4 ,3 7 4 ,6 2 9 .4 4
5 ,9 4 2 ,4 6 3 .3 5
1 ,5 8 8 ,1 4 9 .9 8
1 8 ,9 8 2 ,5 6 5 .1 7
2 1 0 ,0 5 6 .7 9
8 ,7 8 0 ,7 9 6 .8 4
4 8 8 ,6 3 6 ,8 3 3 .1 0
1 ,1 0 1 ,6 1 5 ,0 1 3 .3 2
1 7 ,2 0 6 ,4 1 8 .0 3
1 3 5 ,3 5 9 ,1 0 8 .1 7
6 5 0 ,3 7 3 ,8 3 5 .5 8
3 5 7 ,8 1 4 ,8 9 3 .0 1
1 1 9 ,8 3 7 ,7 5 9 .4 1
‘ 3 0 ,8 2 8 ,7 6 1 .5 5
8 ,5 0 2 ,5 0 9 .5 5
E X P E N D IT U R E S .
O r d in a ry :
L e g i s l a t i v e e s t a b l i s h m e n t ...................................
E x e c u t i v e p r o p e r ............ ..........................................
S t a t e D e p a r t m e n t ....................................................
T r e a s u r y D e p a r t m e n t ...........................................
W a r D e p a r t m e n t ............................................. ..
D e p a r t m e n t o f J u s t i c e ...........................................
P o s t O f fic e D e p a r t m e n t ....................
N a v y D e p a r t m e n t ........................................ ...........
I n t e r i o r D e p a r t m e n t ...............................................
D e p a r t m e n t o f A g r i c u l t u r e ........................... ....
D e p a r t m e n t o f C o m m e r c e ...................................
D e p a r t m e n t o f L a b o r ................................... .........
V e t e r a n s ’ B u r e a u * ..................................................
U n i t e d S t a t e s S h i p p i n g B o a r d ...................
F e d e r a l c o n tro l of tr a n s p o r ta tio n s y s te m s
a n d t r a n s p o r t a t i o n a c t , 1 9 2 0 ........................
W a r F i n a n c e C o r p o r a t i o n ...................................
G r a i n C o r p o r a t i o n ....................................................
O t h e r i n d e p e n d e n t o ff ic e s a n d c o m m i s
s i o n s * ......................................... .........................
D i s t r i c t o f C o l u m b i a ...................................... ........
I h t e r e s t o n p u b l i c d e b t .........................................
9 ,8 3 2 ,9 1 3 .0 3
1 0 5 ,7 6 7 .5 4
4 ,1 5 0 ,6 5 9 .3 8
1 7 8 ,8 2 2 ,8 2 3 .9 5
5 4 2 ,3 6 7 ,8 7 3 .2 0
8 ,1 4 1 , .7 1 8 .3 9
1 2 ,0 0 9 ,3 6 9 .5 2
3 2 8 ,1 0 0 ,3 2 6 .9 7
1 6 9 ,3 6 2 ,2 7 2 .9 0
6 2 ,9 6 8 ,6 2 1 .2 2
1 7 ,9 1 9 ,5 7 9 .8 2
4 ,9 3 6 ,8 9 0 .2 3
4 ,4 2 2 ,1 8 6 .9 4
5 7 ,0 0 2 .4 2
2 ,0 4 8 ,1 3 3 .0 3
8 0 ,6 5 3 ,1 6 8 .4 6
1 4 2 ,4 1 2 ,8 2 8 .1 4
3 ,9 2 8 ,9 8 0 .2 0
2 3 , '8 7 6 ,0 7 7 .4 3
1 4 8 ,2 9 0 ,2 4 8 .4 5
8 5 ,8 8 9 ,6 0 0 .8 3
4 0 ,2 8 1 ,3 8 8 .9 7
6 ,3 0 6 ,0 7 3 .5 9
1 ,5 2 5 ,8 8 2 .1 7
6 1 ,3 5 3 ,7 4 9 .1 7
5 1 ,7 8 4 ,1 3 1 .2 8
4 ,5 2 4 ,8 3 0 .9 3
5 6 ,3 0 2 .4 5
2 .3 1 4 .0 7 7 .4 3
6 2 ,9 2 7 ,8 7 5 .0 5
1 0 2 .0 8 2 .5 7 0 .1 4
4 ,5 9 7 ,8 5 9 .6 2
1 0 ,7 0 7 ,2 8 9 :9 0
1 2 2 ,4 5 3 ,7 3 6 .6 5
8 5 ,2 8 9 ,4 1 6 .6 7
4 3 ,9 0 1 ,5 2 3 .2 4
5 .1 4 0 .3 7 2 .4 3
1 ,4 9 9 ,4 2 0 . 75
1 1 3 ,3 3 1 ,3 6 1 .8 0
2 8 ,3 6 2 ,0 8 6 .9 5
8 ,9 4 7 ,0 1 7 .8 7
1 1 3 ,3 0 4 .8 7
4 ,3 6 2 ,2 1 0 .4 6
1 4 3 ,5 8 1 ,0 4 3 .5 1
2 4 4 ,4 9 5 ,3 9 8 ,2 8
8 ,5 2 6 ,8 3 9 .8 2
3 4 ,5 8 3 /3 6 7 .3 3
2 7 0 ,7 4 3 ,9 8 5 .1 0
1 7 1 ,1 7 9 ,0 1 7 .5 0
8 4 ,1 8 2 ,9 1 2 .2 1
1 1 ,4 4 6 ,4 4 6 .0 2
3 ,0 2 5 ,3 0 2 .9 2
1 7 4 ,6 8 5 ,1 1 0 .9 7
8 0 ,1 4 6 ,2 1 8 .2 3
4 ,9 2 7 ,3 9 1 .0 2
5 4 ,8 5 3 .7 0
2 ,3 2 2 ,7 4 9 .3 9
9 6 ,0 9 8 ,4 1 0 .1 9
2 7 4 ,3 6 7 ,8 0 8 .9 7
4 ,1 8 3 ,0 8 9 . 23
1 ,4 0 7 ,1 6 8 .0 5
1 6 1 ,2 9 4 ,8 2 3 .3 6
8 7 ,1 1 8 ,2 4 6 .5 5
3 3 ,9 9 3 ,2 2 8 . 76
1 0 ,7 6 8 ,6 2 5 .6 2
2 ,1 5 3 ,5 9 0 .9 7
3 3 ,9 8 6 ,4 5 4 .6 7
6 1 ,4 0 2 ,9 7 5 .8 6
9 5 ,3 8 9 ,4 3 0 .5 3
2 ,2 2 5 ,3 3 5 .0 6
3 3 ,1 0 8 ,5 0 2 .6 7
1 3 0 ,7 2 3 ,2 6 8 .2 6
$ 2 ,6 1 5 ,6 1 7 .3 8
1 3 2 ,9 7 4 ,2 3 8 .6 1
1 8 0 ,7 1 0 ,5 2 7 .1 5
5 2 ,3 1 7 ,6 S 0 .61
2 5 ,0 0 0 ,0 0 0 . CO
a l,9 0 5 ,0 9 0 .2 3
1 9 ,3 4 3 ,4 5 2 .0 0
6 2 5 ,0 0 0 ,0 0 0 .0 0
1 9 3 ,5 8 3 ,7 4 3 .5 0
2 2 ,2 3 8 ,3 5 5 .2 1
9 0 ,3 5 3 ,4 1 1 .4 2
1 8 5 ,1 8 6 ,2 8 8 .2 4
1 2 3 ,5 1 0 ,0 3 1 .6 4
3 7 8 ,7 7 0 ,0 3 1 .7 4
1 1 ,2 7 1 ,6 7 6 .4 3
9 0 ,3 5 3 ,4 1 1 .4 2
2 1 4 ,2 1 7 ,2 7 2 .4 4
1 6 ,3 6 7 ,8 8 6 .7 4
1 3 7 ,7 2 4 ,3 8 5 .8 0
1 1 4 ,3 8 8 ,8 8 8 .9 5
7 3 0 ,7 1 -1 ,6 6 9 .9 8
1 2 2 ,0 2 8 ,4 5 2 .1 2
9 0 ,3 5 3 ,4 1 1 .4 2
2 2 ,6 6 5 ,8 2 3 .0 8
5 ,6 5 1 ,5 8 2 .6 0
1 4 7 ,3 2 4 ,1 0 8 .6 8
6 ,2 1 4 ,3 3 3 .4 1
6 .3 5 0 .0 5 1 .4 4
3 6 0 .9 1 5 .1 9 9 .1 5
2 8 ,8 8 0 ,1 8 6 .4 9
1 2 ,0 0 1 ,6 3 4 .0 4
5 0 8 ,2 3 9 ,3 0 7 .8 3
1 9 ,8 6 3 ,5 7 3 .7 1
5 ,0 1 5 ,2 1 2 .9 8
1 3 6 ,3 5 1 ,2 5 4 .0 7
2 5 ,2 1 8 ,1 3 6 .7 5
5 ,8 9 9 ,2 0 0 .3 3 ,
3 4 2 ,0 6 7 ,6 1 0 .3 7
4 5 ,0 8 1 ,7 1 0 .4 6
1 0 ,9 1 4 ,4 1 3 .3 1
4 7 8 ,4 1 8 ,8 6 4 .4 4
3 4 ,3 4 1 ,0 1 2 .2 2
5 ,2 2 6 ,8 7 1 .1 8
1 7 1 ,9 0 6 ,1 0 1 .9 3
4 0 ,5 1 9 ,7 9 4 .0 5
6 ,5 7 3 ,8 7 4 .1 1
3 4 8 ,8 1 9 ,7 6 4 .9 8
1 1 9 ,9 4 2 ,5 1 6 .7 3
2 2 ,7 1 5 ,1 5 8 .6 0
9 9 9 ,1 4 4 ,7 3 1 .3 5
T o t a l .....................................................................
D e d u c t u n c l a s s i f i e d r e p a y m e n t s , e t c ..........
8 7 8 ,1 1 2 ,3 1 4 .2 1
2 6 0 ,9 7 7 .0 3
9 5 7 ,2 7 5 ,5 0 1 .4 7
2 4 1 9 ,3 0 0 .2 4
l , 8 3 5 ,3 8 7 ,8 4 5 .6 8
2 4 8 0 ,2 7 7 .3 0
1 ,1 8 0 ,0 8 1 ,9 9 1 .3 7
2 8 9 8 ,1 5 1 .7 5
1 ,2 5 6 ,2 9 3 ,0 1 0 .2 5
8 ,4 5 7 ,7 4 3 .6 3
2 ,4 3 6 ,3 7 5 ,0 0 1 .6 2
7 ,5 5 9 ,5 9 1 .8 8
1 ,2 4 9 ,7 5 6 ,8 5 6 .9 5
2 2 ,5 7 1 ,2 9 9 .5 4
1 ,3 2 3 ,5 7 8 ,9 9 6 .1 7
2 4 ,0 6 5 ,6 9 9 . 20
5 ,0 0 9 ,7 1 0 ,8 5 4 .7 4
9 2 2 ,5 9 3 .1 4
T o t a l .....................................................................
P a n a m a C a n a l ......................................................... ....
P u r c h a s e o f o b lig a tio n s o f fo r e ig n G o v
e r n m e n t s .....................................................................
P u rc h a s e of F e d e r a l F a r m L o a n B o n d s ..
8 7 8 ,1 7 3 ,3 2 1 .2 7
1 ,3 2 7 ,0 2 8 .1 0
9 5 7 ,6 9 4 ,8 0 1 .7 1
7 1 2 ,2 8 1 .7 2
1 ,8 3 5 ,8 3 8 ,1 2 2 ,9 8
2 ,0 3 9 ,3 0 9 .8 2
1 ,1 8 0 ,9 8 0 ,1 4 3 .1 2
2 ,9 6 5 ,3 4 1 .1 4
1 ,2 4 7 ,8 3 5 ,2 6 6 .6 2
3 ,0 6 3 ,5 9 0 .5 6
2 ,4 2 8 ,8 1 5 ,4 0 9 .7 4
6 ,0 2 8 ,9 3 1 .7 0
1 ,2 5 2 ,3 2 8 ,1 5 6 .4 9
5 ,9 2 1 ,4 8 0 .5 8
1 ,3 2 7 ,6 4 4 ,6 9 5 .3 7
4 ,5 1 0 ,9 9 7 .1 9
5 ,0 0 8 ,7 8 8 ,2 6 1 : 6 0
1 6 ,4 6 1 ,4 0 9 .4 7
5 7 ,2 0 1 ,6 3 3 .5 3
9 ,7 0 2 ,4 3 8 .8 6
6 ,2 6 5 ,9 1 9 .2 2
5 7 ,2 0 1 ,6 3 3 .5 3
1 5 ,9 6 8 ,3 5 8 .0 8
1 6 ,6 9 5 ,0 6 3 .9 1
8 1 2 ,9 6 2 .7 1
T o t a l o r d i n a r y ...............................................
8 7 9 ,5 0 0 ,3 4 9 .3 7
1, 250, $ 4 9 ,5 5 6 .6 5
1 ,2 5 7 ,1 6 4 ,7 7 6 .4 0
2 ,5 0 8 ,0 1 4 ,3 3 3 .0 5
1 ,2 7 5 ,7 5 7 ,6 6 3 .6 9
9 5 8 ,4 0 7 ,0 8 3 .4 3
1 ,8 3 7 ,9 0 7 ,4 3 2 . 80
4 ,9 0 5 ,5 2 2 .0 1
5 0 ,9 1 3 .8 4
1 ,8 2 7 ,9 0 9 .9 9
8 2 ,7 2 4 ,4 1 3 .7 6
2 6 8 ,0 0 0 ,0 6 4 .2 3
3 ,9 5 8 ,6 2 9 .1 6
1 0 ,6 0 2 ,2 0 1 .4 7
1 6 3 ,8 0 5 ,5 0 3 .6 1
8 2 ,2 4 4 ,0 2 6 .3 5
2 8 ,9 7 5 ,3 9 2 .4 6
7 ,1 5 0 ,9 5 4 .2 0
2 ,7 8 3 ,2 9 9 .2 6
7 3 ,8 9 6 ,6 9 7 .4 4
1 6 ,7 8 1 ,3 2 0 .7 9
1 ,3 3 2 ,1 5 5 ,6 9 2 .5 6
5 ,1 1 5 ,9 2 7 ,6 8 9 .3 0
P u b lic d e b t e x p e n d itu r e s ch a r g e a b le a g a in s t
o r d in a r y r e ceip ts:
S in k in g f u n d ...................... ................. .............. . .
P u r c h a se s o f L ib e r ty b o n d s fro m fo reig n
r e p a y m e n t s ................................................... S
R e d e m p tio n s o f b o n d s a n d n o te s fro m
e s ta te t a x e s ............................................................
R e tir e m e n ts fro m F é d é r a i r e se r v e b a n k
fr a n c h ise t a x r e c e ip ts ............................... ..
R e tir e m e n ts fro m g ifts, fo rfeitures, a n d
o th e r m is c e lla n e o u s r e c e ip t s .............. ..
8 1 ,0 6 6 ,0 0 0 .0 0
14 6 ,9 8 0 ,7 0 0 .0 0
2 2 8 ,0 4 6 ,7 0 0 .0 0
5 .2 6 1 .2 5 0 .0 0
1 5 ,1 2 9 ,0 0 0 .0 0
20.3 9 0 .2 5 0 .0 0
12 4 ,9 5 6 ,0 0 0 .0 0
1 1 5 ,7 5 4 ,0 0 0 .0 0
518,7 0 0 .0 0
1 5 .6 2 8 .6 5 0 .0 0
1 6 .1 4 7 .3 5 0 .0 0
3 8 ,0 0 2 ,0 5 0 .0 0
2 .0 2 8 .2 5 0 .0 0
4 0 .0 3 0 .3 0 0 .0 0
47 5 ,0 0 0 .0 0
3 3 ,4 3 4 ,0 0 0 .0 0
7 3 .9 3 9 .3 0 0 .0 0
5 ,9 8 8 ,4 0 0 .0 0
6 .3 2 8 .2 5 0 .0 0
1 2 .3 1 6 .6 5 0 .0 0
4 .0 1 7 .9 0 0 .0 0
4 .6 6 6 .7 0 0 .0 0
8 ,6 8 4 ,6 0 0 .0 0
6 ,6 5 7 ,6 5 0 .0 0
1 1 ,0 0 6 ,7 0 0 .0 0
2 6 .3 4 8 .9 5 0 .0 0
2 ,6 1 9 ,0 0 0 .0 0
2 ,6 1 9 ,0 0 0 .0 0
13,0 0 0 .0 0
9 ,0 0 0 .0 0
2 2 ,0 0 0 .0 0
1 ,0 5 0 .0 0
134,000.00
T o ta l
p u b lic d e b t e x p e n d itu r e s
ch a r g e a b le a g a in s t o r d in a r y r e c e ip ts .
8 7 ,5 8 6 ,1 0 0 .0 0
1 7 1 ,5 6 5 ,6 0 0 .0 0
2 5 9 ,1 5 1 ,7 0 0 .0 0
4 7 ,2 g 2 ,250.00
T o ta l e x p e n d itu r e s (p u b lic d e b t a n d
o r d in a r y ) ch a r g e a b le a g a in s t o rd i
n a r y r e c e ip t s ...........................................
967,0 8 6 ,4 4 9 .3 7
1 ,1 2 9 ,9 7 2 ,6 8 3 .4 3
2 ,097, b 5 9 ,132.80
1 ,2 9 8 ,1 3 1 ,8 0 6 .6 5
1 Deduct excess of credits.
6 0 ,7 2 4 ,5 0 0 .0 0
*
261,1 0 0 ,2 5 0 .0 0
6 0 .7 2 4 .5 0 0 .0 0
135,050.00
10 ,9 0 0 .0 0
2 2 ,5 5 0 .0 0
168,500.00
2 1 ,9 5 7 ,9 5 0 .0 0
6 9 ,2 4 0 ,2 0 0 .0 0
192,824,050.00
1 6 0 ,217,250.00
422,2 8 1 ,5 0 0 .0 0
1 ,2 7 9 ,1 2 2 ,7 2 6 .4 0
2 ,5 7 7 ,2 5 4 ,5 3 3 .0 5
1 ,4 6 8 ,5 8 1 ,7 1 3 .6 9
1 ,4 9 2 ,3 7 2 ,9 4 2 ,5 6
5 ,5 3 8 ,2 0 9 ,1 8 9 .3 0
* Add.
ma.de Pri,or^to
fey t3he 3 G g Risk Insurance Bureau are included under “ Treasury Department,” while similar payments made prior to that date by
1 £2eral ■»oara.for Vocational Education are included under f Other independent offices and commissions.”
.>v
■
b Represents reduction in capital stock of United States Grain Corporation effected Oct. 17, 1921, and reflected ii 'Miscellaneous receipts” in an equal amount. (See note 2, page 2, of daily Treasury statement for Oct. 18,1921.)
’
’
Congre:
8
E x h ib it
C.
Preliminary statement o f the public debt on Dec. SI, 1921.
[On the basis of daily Treasury statements.]
Total gross debt before deduction of the balance held by 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...................................... ; ......................................................... $599, 724, 050. 00
Loan of 1925...................................... .......... . . , ......................................... .
118,489, 900. 00
Panama’s of 1916-1936.
48, 954,180. 00
Panama’s of 1918-1938.
25, 947, 400. 00
Panama’s of 1961_____
50, 000, 000. 00
Conversion bonds.........
28, 894, 500. 00
Postal savings bonds...
11, 774, 020. 00
$883, 784, 050.00
First Liberty loan................... ..........................................................................I, 952,123,150. 00
Second Liberty loan.......................................................................... . . . ___ 3,313, 261,100. 00
Third Liberty loan-----................................................................ ................... 3, 592, 593, 750. 00
Fourth Liberty loan............. .............................................................................. 6, 349,411, 400. 00
15, 207,389,400.00
Total b o n d s.............................................................................. ..............................................
Notes:
Victory Liberty loan........................................................................................................................
Treasury notes—
Series A-1924.................................................. .................................. .
311,191,600.00
Series B-1924.................................................................................... . . . .
390, 706,100.00
16, 091,173,450.00
3, 548,289, 500.00
701, 897, 700.00
Treasury certificates:
T ax............................................................. ......................................................... 1,515,157,500.00
Loan...... ............... .................. ........................................................... ..............
567,437, 500. 00
Pittman A ct............................. . .................................................. ......... . . . . . . .
113, 000,000.00
Treasury (war) savings securities (net cash receipts)..................... ...... .................... | ................. . . .
Total interest-bearing deb t........................................................................................................
Debt on which interest has ceased............................................ - - i#- - ...........i f ___ . . . . . . . . . . . .
Noninterest-bearing debt.................... .................... .................. ................ ............. ................. ............
2,195, 595, 000. 00
651, 844, 374.27
23,188 800 024.27
’•fifjj 867* 14o! 26
238,317^ 186! 83
Total gross debt.......... ......................................................23,438, 984,351.36
E x h ib it
D.
S t a t e m e n t s h o w in g c o m p a r a tiv e f i g u r e s a s to s h o r t- d a te d p u b l i c d e b t, J u n e SO , 1 9 2 0 , to D e c . 3 1 , 1 9 2 1 .
[On the basis of daily Treasury statements, adjusted to include accrued discount on Treasury (war) savings securities].
June 30, 1920.
Dec. 31, 1920.
June 30, 1921.
I. Maturities before June 30,1923:
Victory notes (mature May 20,1923).................................................... $4,246,385,530.00 $4,225,970,755.00 $3,913,933^350.00
Treasury certificates (maturing within a year)—
Loan and tax.............................................................. .'.................. 2,485,552,500.00 2,300,656,000.00 2,450,843,500.00
Pittman Act and special issues......................................................
283,375,000.00
292,229,450.00
248,729,450.00
Treasury (war) savings securities, series of 1918 (net cash receipts
plus accrued discount to respective dates)...................................... .
758,996,409.08
702,520,765.18
675,449,577.13
II. Maturities after June 30, 1923:
Treasury notes........................................................................................
Treasury (war) savings securities (net cash receipts plus accrued
discount to respective dates) series of 1919,1920, and 1921, matur
ing, respectively, on Jan. 1, 1924, Jan. 1, 1925, Jan. 1, 1926, and
later dates.............................................................................................
Total..... ................................................................................
7,774,309,439.08
7,521,376,970.18
7,288,955,877.13
Dec. 3l, 1921.
$3,548,289,500.00
2,082,595,000.00
113,000,000.00
1644,090,608.33
6,387,975,108.33
311,191,600.00
143,172,726.64
143,524,053.78
120,570,010.85
1 118,662,982.07
7,917,482,165,72
7,664,901,023.96
7,720,717,487.98
7,208,535,790.40
1 Partly estimated. The estimated additional discount to accrue on Treasury (war) savings securities of the series of 1918 to Jan 1 1923 is
about $19,000,000, which should be added in computing the amount of the maturity.
■>
>
W A S H IN G T O N : G O V E R N M E N T P R I N T I N G O F F I C E : 1922
SPECIAL INSTRUCTIONS TO COLLECTORS OF INTERNAL REVENUE
IN THE STATES OF
ARIZONA, CALIFORNIA, IDAHO, NEVADA, OREGON, UTAH and WASrilNGiON.
February 7, 1922*
tfoder the provisions of Treasury Decision 3280, collectors of internal
revenue are instructed, unless otherwise n o tified by the Secretary of the
Treasury, not to accept in payment of income and p ro fits taxes payable in
the calendar year 1922 interim receipts issued by Federal Reserve Banks in
lieu of definitive Treasury c e rtific a te s of indebtedness acceptable in pay
ment for such taxes.
In order to make provision for special conditions pre
vailing in the San Francisco Federal Reserve D istric t, 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 1922, subject to v erificatio n by the Federal Reserve
Bank of San Francisco, in payment of income and p ro fits taxes payable at the
respective dates of maturity of the c e rtific a te s which they represent, in
terim receipts issued by the Federal Reserve Bank of San Francisco for
Treasury c e rtific a te s of indebtedness by th e ir terns acceptable in payment
of income and p ro fits taxes at m aturity.
Except as herein otherwise pro
vided, such interim receipts w ill be accepted on the same terms and condi
tions as definitive c e rtific a te s under the provisions of said T. D. 3280.
Inasmuch as interim receipts have no in terest coupons attached, accrued
interest to the respective dates of maturity of the ce rtificates w ill in
every case be remitted by check to the taxpayer by the Federal Reserve Bank
or branch bank with which the collector deposits the interim receipts*
Separate schedules to accompany deposits of interim receipts must be preP ed in duplicate by collectors, so as to show in each case the name and
dress of the taxpayer, the face amount and se ria l numbers of the interim
AA
**2receipts deposited, and the se ria l designation and dates of issue and ma
tu rity of the Treasury c e rtific a te s represented thereby.
Interim receipts
accepted by collectors hereunder must be forwarded with the original sche
dule to the Federal Reserve Bank or branch with which the collector de
posits definitive c e rtific a te s) with the request that the Federal Reserve
Bank or branch bank make remittances to taxpayers by check for the amount
of accrued in terest due at the maturity of the c e rtific a te s .
Collectors
shall in no case pay in terest on interim receipts, nor accept them for
amounts other or greater than th e ir face value*
Tax receipts given by col
lectors to taxpayers should describe the amounts of interim receipts, i f
any, accepted in payment of the taxes*
Collectors of internal revenue in the above-mentioned d is tric ts are not
authorized hereunder to accept in payment of income or p ro 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 d is tric ts than
those mentioned are not authorized hereunder to accept interim receipts is
sued by the Federal Reserve Bank of San Francisco*
By direction of the Secretary?
S. P. GILBERT, JR.
Under Secretary*
THE TREASURY DEPARTMENT OF THE UNITED STATES.
Address by E liot Wadsworth, Assistant Secretary of the Treasury
before the National Civic Federation, Women's Department,
a t the Waldorf-Astoria, New York City,
February 8, 1922.
Since Congress created the Treasury Department on September 2,
1789, many and various functions of the federal Government have been plac
ed in i ts charge.
By reason of his position, the Secretary of the Treasury
is Chairman of the ¿federal Reserve Board; Chairman of the Farm Loan Board,
and Chairman of the War Finance Corporation. As the presiding o fficer of
these Boards, h is influence is f e lt in every financial relationship be
tween the Government and the people, a long lin e of distinguished men be
ginning with Alexander Hamilton have served as Secretary of the Treasury,
and by th e ir upright, p a trio tic service have established a trad itio n
which makes th is position one of great d istin ctio n and tr u s t.
The seal now in use by the Treasury was devised by a committee
appointed by the Continental Congress in 1778, made up of John Witherspoon,
Gouvemeur Morris, and R. H. le e .
What the proceedings of th is committee
were is not related , but the Continental seal may be found on documents
dated 1782, and when the Treasury Department was organized in 1789, the
seal of the Confederation was continued in use.
I t bears the inscription
in la tin , "Seal of the Treasury of North America".
The Treasury of the United States is ju st a great family exchequer.
Whether i t is prosperous, or in debt, we are a ll interested and involved.
The Treasury, bandies the fis c a l a ffa irs of the nation for a l l of us ju st
as the Treasurer of the Rational Civic Federation handles i t s financial af
fa irs for a l l the members. A report of finances is often dry reading, but
i t always gives facts which are v ita l to an organization and i t s members.
nr2*FI NANCES.
So we w ill begin by looking at our financial position and operations
I *n a br°a<i way> and as is a lways well, take the debts f i r s t .
The United
States owes to-day as a public debt almost $23,500,000,000, of which
I $6,500,000,000 fa lls due within the next sixteen months.
The largest maturity
11 is the Victory notes, over $3,300,000,000, which mature on Jtay 20, 1923; next,
I
Treasury C ertificates of $2,200,000,000 payable a t various dates within a
I ^®ar* an<* then, nearly $700,000,000 in the form of Uar Savings C ertificates due
! on January 1, 1923.
L ittle more than a year la te r $700,000,000 additional debt
jI f a lls due* The promise of the United States to pay its debt3 when due has n ev er
II
broken and these bonds and notes are considered to-day the premier security
of the world.
They must be taken care of and this is a problem of f i r s t impor-
| tance to the Treasury*
F ir o m
The policy has been adopted of renewing these debts, from time to time,
j always
e ffo rt of getting the due dates separated so th at there w ill be
| no large maturity a t any one time.
Already $700,000,000 notes have been sold
I maturing a year la te r than the Victory Loan. A few days ago, $600,000,000 threeI year notes were sold to pay of f $200,000,000 Victory bonds and extend an immediate
j lia b ility of $400,000,000 u n til 1925.
This plan w ill be followed, from time to
j time, in the future,- but to have such a great floating debt is not satisfactory
land some day i t must be funded.
I t is easier to appreciate what a task th is will
I be if you reca ll the F irst and Second Liberty Loan Campaigns, which together
,j raised $5,800,000,000.
Try to remember the stimulus of war enthusiasm; the two
I campaigns running each for a month; and then realize th at even if they were both
repeated with equal success, the resu lts would ¡not pay off the short-time debts
■
■ „
..
j of the nation*
-3INCOMg AND EXPENSE (THE BUDGET)
As to the income collected and the expenses of the Government to he
paid, here again the Treasury represents a l l the people and ac ts as th e ir
agent under the orders of Congress in collecting the taxes and in paying the
h ills .
Actual figures for the fis c a l year ended June 30, 1921, and estimated
figures for the next two years are as follows:
Actual
Estimated
Fiscal Year 1921 Fiscal Year 1922 Fiscal Tear 1923
Income
E xoenditure........................
i S
o H e c e x p t s '' ‘ "
over expenditures. . . .
Excess of expenditures
over receip ts.............
^ ’^ t ’93! * 960' 91
5 ’5 3 8 -0 4 0 -6 8 9 -3°
$ 3 ,9 6 8 ,4 5 3 ,6 6 3
3 ,9 9 3 ,9 3 2 ,3 6 6
$3 ,3 4 5 ,1 8 3 ,7 5 0
3 ,5 1 2 ,7 5 4 ,7 3 7
34,468,703
167,571,977
8$, 892,271.61
Income which means taxes is down nearly $3,300,000,000, a great saving to the tax payer.
The reduction in expenses looks like good housekeeping and i t is .
fhe greatest e ffo rt has been made hy the present Administration in that d ire c
tio n .
Tet, in spite of a reduction between 1921 and 1923 of over
$3,000,000,000, or nearly 40$, we are facing in 1933 a d e fic it of $167,000,000.
Ton might say i f there is a d e fic it, cut the expenses some more.
That w ill
be done i f possible, but where? study the figures and you find a large pro
portion of our expenditures are fixed by definite commitments and can not be
reduced.
The largest items are these:
Interest on public debt.......................... $975,000,000
Sinking Fund and other debt charges... 369,000 000
Veterans * H elief................... ................ . 455,000!oOO
Pensions ............. ................................. 252.000.OOP
T otal ......... * ........- ............ $3,051,000,000
—
4Here we have nearly 58$ of our 1923 budget which can not go down*
|5he war Department, Navy Department and Good Roads account for nearly 27$ more*
| The other 15$ carry on the, work of the State, Treasury, Justice, Interior,
Agriculture and Commerce Departments, together with %X independent establishments —
such as the Shipping Board, In tersta te Commerce Commission, Railway Labor Board
land others«
If we did away with them a l l , the saving would be l i t t l e more than
¡15$ of our annual expenditures#
I t has been said that the budget tthas made
1economy popular and extravagance dangerousfl* I can assure you that with these
facts staring us in the face, economy is popular in the Treasury to-day*
One special point about our federal budget is interesting? 64 widows of
the War of 1812 are s t i l l receiving pensions; 109 survivors and 2,135 widows of
the Mexican war are on the pension r o ll.
If the to ta l cost of the lifer of 1812
is not yet known, who would dare to 3&timate the ultimate cost to th is country
of the great World lifer*
Already, we are spending 450,000;000 a year to faeei a debt of honor to
disabled soldiers and sailors and th is w ill continue for many years and probably
©row# No one grudges a cent of expense to make lif e possible and happy to those
men, or would consider trying to save on th is item.
We now face a bonus b ill , of which the minimum cost, if a ll veterans
take the cash payment, is estimated a t $1,560,000,000; the maximum cost may be
$5,250,000,000 in the next twenty years#
If that bonus is paid with a d efic it
already in sight, the cost should be provided by the tax payers now, not later*
There should be a tax which w ill bring the money in as fast as i t goes out«
We
must pay as we go* Unbalanced national budgets are seriously menacing the
financial structure of many nations*
This nation with a l l its riches need not
and must not d r if t into such a position and allow i ts debt to r o ll up*
borrowed enough against the future*
We have
*
~5-
One Other question of general in terest in connection with
our expenses, namely, the rate of pay received by Goverment employees.
She Civil Service recorded on November 11, 1918, 917,000 employees,
the highest figure ever reached, and on July 31, 1921, 597,000 - a re
duction of 320,000.
Is there a chance of saving money here, e ith e r in
the rate of pay or the «ember of employees? Perhaps a l i t t l e , but not
much,
-he rate of pay to-day is too low.
Of the 63,000 employees in
Washington, the average salary is $1360 a year or $113 a month. More
than one-half of the Treasury employees receive less than $100 a month.
She war bonus of $240 a year now added to salaries of less than $2500,
cause of the high cost of riving, w ill be in force u n til June 30 of
this year unless leg islatio n be passed extending i t .
You know well from experience that $113 a_month.can not be con
sidered excessive fo r almost any type of employment.
Government employes
are allowed th irty days» annual leave with pay, which is rather more than
13
lif9> ^
»owehameht employment has Some other attra ctiv e
features, but in general the Government is not a lib e ra l employer. Aa
attempt to reduce pay would be unfair and unwise, and in my Judgment
the pay should he raised rath er than lowered in many classes.
As to numbers, there has been a tremendous cutting in the
la st year, in some cases perhaps, more than is safe in view of the
work t i a t must be done. S t i l l , there may be a l i t t l e room for improvemeat here»
*
To sum up our expense account, i t would appear that the Feaeral Government had been ordered by the Acts of Congress to carry on
certain services for the people and that the services must be discon
tinued or be paid for from the one possible source of income, namely,
t£LS68 «
-6FOREIGN LOANS
During the war, the United States made advances to foreign govern
ments under the Liberty Bond Acts and holds th e ir notes for
$9,434,774,829*24. Udder the Relief Act and under the Act authorizing the
sale of surplus wai* Materials by the Secretary of War and the Secretary of
the Navy, notes of foreign governments amounting to approximately
$658,000,000 have been received by the Treasury*
A large proportion of these notes are payable on demand with iriterest oyer due.
The United States is in the position of a creditor holding
over-due paper, while the European nations, debtors to the United States,
owe each other large amounts and together owe England nearly as much as
England owes the United States*
Germany, through the reparation agreement,
is a large debtor to a ll of the debtor countries•
This is a tangled situation and such international lia b ilitie s ,
particularly in th e ir present unbusinesslike form, create uncertainty and
make the resumption of normal business impossible.
There is no o fficer in the government with adequate authority to
deal with th is asset, and the Treasury recommended leg islatio n to cover
th is need which has now been passed* A commission of five to be known as
the World War Foreign Debt Commission with the Secretary of the Treasury as
chairman w ill take up the question of refunding these debts*
The work of
the Commission w ill involve perhaps the most in tric ate and far-reaching fin
ancial negotiations that have ever been undertaken and the duties devolving
«
upon the Secretary of the Treasury w ill be added to in no small measure*
ADVANCES AND LOANS TO RAILROADS.
Under the Transportation Act of 1920
Upon receipt of c e rtific a te s from the In terstate Commerce Commission,
the Treasury pays out funds to the railroads under the Transportation Act, and
acts as custodian fo r the notes and co llateral received.
Securities costing over $300,000,000 are now held.
OPERATIONS
in general, the Treasury Department is charged with the collection
of the Federal income, the disbursing of a l l Federal funis in accordance with
the appropriations toads by Congress and the issue and retirement of Government
secu rities, Currency, paper money, and savings c e rtific a te s .
The custody of
the securities and money held by the Government is in the hands of the Treasury
and, under i ts supervision, the manufacture of currency, bank notes, lib erty
bonds, and other bonds is carried on with a l l the usual business problems of
a manufacturing operation.
The office of the Sxqpervising Architect, the Coast Guard, and the
Public Health Service - none of which can in any way be considered as connect
ed with finance - are also in the Treasury organization*
Their transfer to
other departments has been much discussed and there can be no doubt that th is
should be done.
TREASURY ORGANIZATION.
Under the supervision of the Secretary, the detailed work is divided
between an Under Secretary and three Assistant Secretaries.
The Bureaus and
Divisions of the Department are allocated to these four men, who direct some
70,000 employees, 20,000 in Washington and 50,000 scattered throughout the
country.
-8BUREAUS AND DIVISION'S
A Brief description of the bureaus and divisions of the Treasury fo l|| lows, and to give sot» idea of the relativ e size of the operation, the approJ ximate number of employees is shown. The bureaus which carry on our national
financial operations are grouped together, followed by the collecting bureaus.
|j The a o tiv itie s whl<*
not financial are the la s t three described.
PUBLIC DEBT SERVICE
The Commissioner of Public Debt has under h is supervision certain
fisc a l offices which form one group:
the Division of Loans and Currency; the
g iste r of the Treasury; Division of Public Debt Accounts and Audit; Division
Paper Custody, and Savings Division* All transactions in the public debt
I and paper currency of the United States are handled through these offices with
2,900 employees a t an annual cost of about $4,000,000.
DIVISION OF LOANS AND CURRENCY
Employees - 1678
I
^
iSSU88 0f bonds» notes and c e rtific a te s of the Uhited States, with
| a ll subsequent transactions in such secu rities, including exchanges, transfers,
conversions and fin al payment, are handled in th is Bivision.
This includes
1 PUbUC d°U ia8UaS °f th9 Philippines, Porto Eico, and the B ietrict of Columbia.
II
Baring the la st fisc a l year the turn-over in the public debt amounted
. to $19,400,000,000 of issues and $19,700,000,000 of retirem ents.
Excluding war
savings secu rities, th is included the issue of 33,315,735 pieces and the re tire !
of 41,034,297«
l
She Bivision maintains approximately 3,500,000 individual accounts
«ith holders of registered bonds and notes, aggregating more than $4,100,000,000.
Interest cheeks were made out to these holders in number, 6,700,407, in amount
$164,489,816. Changes of address numbered 111,951.
-9This Division also is charged with certain matters relatin g to the
issue and redemption of United States paper currency, handling several hundred
m illion pieces each year* The notes u n fit fo r further circulation are de
stroyed, and a circulation statement issued monthly* On January 1, 19¿2,
there was in circulation $5,775,400,315, equivalent to $53*03 per capita*
REGISTER OF THE TREASURY
Employees - 962
This office acts as security auditor and receives every public debt
security retired or canceled.
The Register receives and examines not only the
securities evidencing the public debt, but in terest coupons which have been
paid by the Treasurer of the United States* During the past year 107,921,393
security pieces were handled and 119,929,574 in terest coupons*
DIVISION OF PUBLIC DEBT - ACCOUNTS AND AUDIT
Employees - 144
On the books of th is Division a l l transactions as reported by the
various agencies are aggregated and the necessary controls are maintained over
public debt transactions*
DIVISIONS OF PARER CUSTODY
Enployees - 34
The distin ctiv e paper used in printing the public debt obligations
and the paper currency of the Uhited States, revenue stamps, and other securi
tie s is in the custody of th is Division from the time i t is received from the
various contractors u n til i t becomes a finished product*
SAVINGS DIVISION
Employees - 17
This is the organization covering the country with a sub-division in
each Federal Reserve d is tr ic t, which se lls Treasury savings c e rtific a te s.
Re
cently the a c tiv itie s of the Post Office and the Treasury Departments have
been, in effect, consolidated.
T hrift stamps and war savings stamps have been
ao-
withdrawn and in co-operation with the Post Office, a campaign for th r if t and
saving by the purchase of the new baby bonds in denominations of $25, $100
and $1,000 is being carried on*
DIVISION OF ACCOUNTS AND DEPOSITS
Employees - 103
(Division of Deposits, Division of Bookkeeping & Warrants)
Hhe Commissioner of Accounts and Deposits is a comparatively new of
fice created in 1920 because of the large increase in the accounting transactions of the Treasury. He has administrative supervision over the Division of
Bookkeeping and Warrants and the Division of Deposits.
The Commissioner is charged with the duty of preparing estimates as
to the future cash position of the Treasury; estimates in connection with the
income and p ro fits tax payments; and general supervision over balances in the
Federal Reserve Banks and the requisite daily inter-bank transfers of funds.
The Commissioner also handles the investment and re-investment of
tru st funds, such as the deposits with the Treasury of the Alien Property Cus
todian, premiums on converted insurance and on account of Civil Service Re
tirement and D isability Fund.
The Commissioner is charged with keeping the individual accounts with
the railroads under the various railroad acts and the sending out of notices
of interest and principal due*
DIVISION OF DEPOSITS.
Through the Division of Deposits the administrative work is carried
out in connection with the designation of Government depositaries under many
different accounts,' over 10,000 in number, and amounting to something over
$500,000,000, and the duty of seeing that proper security is obtained for
such deposits.
o iDIVISION Q? BOOKKEEPING- AND WARRANTS
This division carries on the Treasury analysis of a l l the
appropriation acts of Congress; the issuing of warrants to Disbursing Offi
cers; bookkeeping in connection with the appropriation, disbursement and
receipt accounts, and the preparation of regular estimates of appropriations
for the service of the Treasury Department*
The compiling of the annual digest and appropriations made by
Congress for the Various Departments; the preparation of the annual statement
of receipts; disbursements and unexpended balances required by Congress for
its Committees; and many s ta tis tic s relatin g to such receipts and disburse
ments are taken care of by th is division*
In th is Division a ll warrants for the payment of money into or out
of the Treasury, the setting up of appropriation accounts; and the transfer
of accounts are prepared*
In a word, th is Division is the o ffic ia l bookkeeping organization
of the Government so far as i t rela tes to appropriation accounts*
TREASURER OP THE UNITED STATES
Employees - 1250
This office acts as custodian for a ll secu rities and currency
belonging to the United States held in Washington*
The Treasurer1s office
pays Treasury•warrants and a l l checks drawn by the disbursing officers of
the Government and keeps an account with each disbursing officer*
The Treasurer holds in tru st United States bonds and ce rtificates
of indebtedness pledged to secure bank circulation and public deposits
amounting together to about $1,000,000,000*
National bank notes and Federal Reserve notes are received,
assorted, counted and, when f i t for use, returned to banks of issue f^r
-3L2further circulation.
This work involves handling about $3,227,000,000 of
currency during the year*
COMPTROLLER OF THE CURRENCY^
Employees - 827
The Comptroller of the Currency receives reports froia 8,154 banks
with aggregate resources on June 30, 1921 of $19,638,446,000.
The work of
the Comptroller’s office requires regular examinations of the national banks
of the country, and he is required to report to Congress, in addition to
data rela tiv e to the national banking system, information regarding State
banking institutions*
BUREAU OF THE BUDGET.
The Director of the Budget is in charge of th is Bureau* He is
appointed directly by the President and reports to the President, but for
the purposes of organization his office is connected with the Treasury Depart
ment,
I t is the duty of th is Bureau to assemble and revise the estimates
of the Departments and Establishments of the Government and transmit them to
the President in a form of a consolidated statement with supporting schedules*
Concurrently with the transmission of the estimates by the Bureau
of the Budget, the Secretary of the Treasury transmits a statement for the
information of the President showing, from the point of view of the Treasury,
the relatio n between the estimated appropriations and expenditures and the
estimated receipts of the Government*
The Cabinet head of each Department appoints a Budget Officer to co
operate with the Bureau of the Budget in obtaining information and present
ing the views of the Department.
The establishment of th is Bureau is one of
the greatest steps that has been taken for many years*
Through its effo rts,
«^13—
the President may pr ©sent to Congress and the people a complete statement
in advance of the estimated income and expenditures of the Federal Govern*
meat*
MINT BUREAU»
Employees - 1000
The manufacture of gold, silv er and minor coins for the United
States, and a number of South American countries, is carried on in the plants
of this Bureau#
The f i r s t Mint was erected in Philadelphia in 1792, and is now the
largest mint in the world*
Other mints are located in Denver and San
Francisco#
The stock of gold in the world is estimated to be approximately
$9,000,000,000; the Mint and Assay Service are custodian for approximately
$3,037,120,000 of this*
In 1806, the coinage produced was 1,111,000 pieces, in 1919, the
production amounted to 738,642,000 pieces, the largest ever executed in the
world in any one year*
The weight of silv er contained in th is coinage was
304 tons; of nickel 421 tons, and of bronze 2,020 tons*
In 1921, 553,868,000 domestic coins were produced*
In addition to
th is amount 91,448,000 pieces were coined for South American countries*
The p ro fit made by seigniorage on domestic coinage totaled
$12,257,447.
Seigniorage represents the difference between the face value of
coins and the cost value of the metal content.
The seigniorage on nickel
and bronze coins alone amounted to over $5,340,000.
During the war, to assist foreign countries to obtain silv er,
Act was passed permitting the melting of $350,000,000 standard silv er dollars
and over 270,000,000 standard silv e r dollars were melted*
recoining of these dollars mandatory.
The b i l l made the
To recoin the dollars destroyed w ill
require 209,000,000 ounces of silv er of which to date approximately 90,000,000
have been purchased*
there had been no change in the design of the standard silv er dollar
since 1878 u n til in December 1921 the new Peace Dollar was adopted to coiaaettorate the signing by President Harding of Peace tre a tie s with Germany, Austria
and Hungary,
The dollar coins destroyed for war purposes w ill be replaced by
Peace Dollars,
The establishments of the United States Mint Service include eight
Assay Offices, established to purchase bullion in the various mining sections
for shipment to the Mints,
In the Assay Office a t New York, there is now in
storage gold amounting to over $1,890,000,000,
The expense of the Mint Service during the fisc a l year 1921 amounted
to $2,240,000; the income totaled $13,355,000, of which $12,257,000 was
seigniorage*
SECRET SERVICE DIVISION*
The sta ff of th is Division is charged with the duty of preventing
counterfeiting of note issues, Government bonds, and revenue stamps.
One
thousand and twenty-five a rre sts were made by agents of th is Service, or under
th eir direction, during the past year, of whom 325 were note raisers and 259
check forgers.
Counterfeit notes amounting to $196,993 were captured or
seized; counterfeit coins, or equipment for making the same, were taken
possession of in large quantities; 3,500 forged check cases were investigated*
BUREAU OF ENGRAVING AND PRINTING,
Employees - 6,300*
In th is Bureau are manufactured a ll notes and ce rtific a te s, Liberty
Bonds, Treasury Notes, National Bank Currency, Federal Reserve Bank Notes,
Internal Revenue stamps, Customs stamps, and postage stamps.
I t is a manu
facturing plant with a ll the problems of a productionrwhich must be maintained
-15a t the highest standard,
CHIEF CLERK*S OFFICE
Employees - 1042,
The Chief Clerk is charged with carrying on the general routine
a ffa irs of the Department, including the management and guarding of a ll
Treasury Buildings in Washington,
GENERAL SUPPLY COMMITTEE.
Employees - 121.
The Committee^ members, comprising representatives of a l l other
Departments in Washington, constitute a central organization through which
the Government prepares the specifications and contracts for a large propor
tion of its standard supplies and equipment«
APPOINTMENT DIVISIONEmployees - 34.
In th is office is kept a l i s t of every employee of the Treasury with
a history of his entire connection with the Government*
Under this Division is the Section of Surety Bonds, which keeps a
record of a l l indemnity bonds in which the Government is interested.
As
such bonds are required in connection with a ll positions of tru st and the
making of contracts in which the Government is interested, th is record i 3 of
great importance*
Approximately 500,000 bonds were on record on December 31,
1921.
DIVISION OF MILS AND FILES
Employees - 13.
Is responsible for a ll incoming and outgoing mail,
DIVISION OF PRINTING-AND STATIONER?.
Employees - 42.
*
Controls the distribution of a l l printed matter and office supplies
to every branch of the Treasury,
-16DISBURSINGr CLERK
Employees 29
Through th is office the Treasury pay ro ll and expense accounts are
liquidated, the to ta l sum checked out la s t year amounting to $109,704,518.72.
BUREAU OF INTERNAL REVENUE
Employees - 20,000.
This Bureau collects the income and p ro fits tax which provide the
largest part of our income as shown by these figures:
Eiscal year
1921
Estimates for
Fiscal year
Fiscal year
1923
1922
$ 308,564,391.00 $ 275,000,000.00
Customs
Internal Revenue
Income and p ro fit taxes 5,206,046,157-74 2,110,000,000.00
Miscellaneous internal
revenue. .
$ 330,000,000.00
1,715,000,000.00
The income account is being reduced as well as the expense account, but
we know that our tax b i l l is s t i l l a heavy burden;
The bureau received 8,582,90$ tax returns la s t year of which 2,287,932
showed no ¿axes due.
Incomes under $5,000 were 5,248,819; over 5,000 were
702,056. The number of corporations taxable was 144,096; non-taxable 224,827.
The auditing and the settlement of claims constitute an enormous piece of work
and involve most in tric ate problems of accounting and lawThe greatest effo rt has been made to simplify the new tax return forms
which you are now f illin g out and i t is
to be hoped that the aggregate saving
of time to the tax payer, not to speak of mental wear and tear* w ill resu lt in
a great saving for the nation.
B*rt of the work of th is Bureau is the enforcement of prohibition and
narcotic laws, which cost la s t year $6,700,000. You read of th is work every day
There can be no question th at i t is not a fis c a l a c tiv ity and should be trans
ferred out of the Treasury.
DIVISION OF CUSTOMS«
Employees - 6743
Hhe D iv is io n o f Customs needs l i t t l e e x p la n a tio n « Those who have
been abroad may w e ll b e lie v e th a t th e e n tir e o p era tio n o f t h is D iv is io n i s
co n fin ed to th e exam ination o f retu rn in g t o u r is t s but t h is i s a sm all part*
The main work l i e s in the c o lle c t i o n o f customs d u tie s on imported a r t i c l e s
which fo r the l a s t year were valued a t $ 3 ,6 5 4 ,0 0 0 ,0 0 0 , and the year b efore to
over 5 ,0 0 0 ,0 0 0 ,0 0 0 *
BUREAU OF THE PUBLIC HEALTH SERVICE
Employees - 17,639;
Under King George, th e 3rd , the system o f marine h o s p it a l r e l i e f o f
th e B r itis h Umpire was extended to. in clu d e the American C o lo n ie s.
In 1798,
Congress e s ta b lis h e d the Marine H o sp ita l S erv ice in the Treasury Department*
In 1800, th e f i r s t h o s p ita l was au th orized a t N o rfo lk , Va* and in 1803
another a t Boston where the b u ild in g s t i l l stand s in the Charlestown Navy
Yard.
Early in i t s development, public health duties were imposed upon
th is service, in connection with maritime quarantine« Later, i t was used to
control epidemics and, at the present, exercises p ractically a l l of the
health functions of the Federal Government. With a corps of Experts, inves
tig atio n s are being carried on in tuberculosis, influenza, pneumonia,
anthrox, hookworm, leprosy, m alaria, pellagra, typhoid fever and many other
diseases*
In March, 1919, Congress imposed upon t h i s bureau the a d d itio n a l
duty o f op eratin g h o s p it a ls fo r th e s ic k and d isa b le d v etera n s o f th e world
war.
At th at tim e, i t s f a c i l i t i e s in 21 marine h o s p it a ls provided 1500 b ed s.
I t now has 67 h o s p it a ls w ith a t o t a l o f 21^300 b ed s, and i s g iv in g out
p a tie n t treatm ent to 10,000 c a se s a week*
H 8-
The Public Health Service has played a great part in our national de
velopment.
Its o fficers are constantly on the move to help meet local epidem
ics and have contributed largely to the elimination or control of yellow fever,
smallpox, cholera, bubonic plague and typhoid fever.
UNITED STATES COAST GUARD
Bnpicyees - 4500
The Revenue-Cutter Service was established by an Act of Congress on
August 4, 1790« Ten vessels were b u ilt and placed in commission on November 1,
1791 and, as we had no Navy u n til 1797, i t was our only sea force during that
t ime •
The Life Saving Service, established as a separate organization in
1878, was .Joined in 1915 with the Revenue-Cutter Service as the United States
Coast Guard* The Revenue ^Cutters, together with 375 Coast Guard Stations, ren
der assistance to vessels in d istre ss.
cued.
In the past year, 631 people were res
Tassels with th e ir cargoes, having a value of $66,000,000, were given
assistance and 19 d erelicts removed or destroyed.
During the war, the Revenue-Cutters became part of the Navy whose la r
gest individual lo ss, except for the U. S* S. CYCLOPS, which met an unknown
fa te , was in the sinking of the Coast Guard Cutter TAMPA by an enemy sub
marine, September 36, 1918. All on board, 115 o fficers and men, lo st th e ir
lives«
A new c u tte r has Just been placed in commission named the TAMPA to per
petuate the name of the gallant l i t t l e vessel that went down with a l l her
Crew, in defense of the country.
The motto of th is service
Semper Paratus* - Always Ready - has been
lived up to in peace and war through more than a century and a quarter.
*19SUPERVISING ARCHITECT
Employees - 5,900
In th is o ffice, a l l plans for public buildings are prepared and the
work of construction is supervised*
This office is further charged with the
duty of furnishing, equipping, heating, lighting, repairing, cleaning and
generally caring for Government buildings outside of Washington, some 1300 in
number* The Treasury would appear to act as a national janitor*
Since the war, th is office has been unusually busy in handling the
construction of hospitals fo r disabled soldiers, 41 projects involving an ex
penditure of over $18,000,000 of which 20 of the larger ones w ill provide
6,000 beds*
February 16, 1922.
My dear Mr* Fordney;
In accordance with the promise made to yourself and your asso
ciates on the Senate and House Committees, charged with the responsibi
lity of formulating the proposed bonus leg islatio n , I have carefully
looked into the program of taxation which has been suggested. In addi
tion thereto I have made inquiry into the fe a s ib ility of issuing eith er
short-tim e.treasury notes or long-time bonds to meet the financial obli
gations which the proposed legislation w ill impose* It is not possible
to commend to you eith er of the plans suggested.
I t continues to be my best judgment that any compensation leg is
la tio n enacted at th is time ought to carry with i t the provisions for
raising the needed revenues, and I find myself unable to suggest any com
mendable plan other than that of a general sales tax. Such a tax w ill
distribute the cost of rewarding the ex-service men in such a manner that
i t w ill be borne by a ll the people whom they served, and does not coamit
the Government to class imposition of taxes or the resumption of the bur
dens recently repealed, the maintenance of which can be ju stifie d only by
a great war emergency*
It is fully realized how great is the d ifficu lty which confronts
the Congress in solving th is d iffic u lt problem. I am aware of the strong
sentiment in Congress in favor of th is adjusted compensation. I have
4ipoken approvingly myself, always with the reservation that the bestowal
shall be made when i t may be done without such injury to the country as
w ill n ullify the benefits to the ex-service men themselves which th is ex
pression of gratitude is designed to bestow.
It is not an agreeable thing to suggest that action be postponed
again, but, frankly, I do not find myself favorable to the piece-meal pay
ment plan, which is manifestly designed to avoid embarrassment to the
Treasury. The long drawn out payments w ill not afford an effective help
fulness to the service men.
We have no serious problem in beginning the allogments of public
lands and the immediate issue of paid-up insurance. The real d iffic u lty
lie s in the payment of the cash bonus. Rather than provide that the
maximum cash payments shall extend over a period of two and one-half
years, i t would be a vastly b etter bestowal if we could await the day
when we may safely undertake to pay at once in fu ll, so that the award
may be turned to real advantage•
Inasmuch as the Treasury is to be called upon to meet more than
six b illio n dollars of maturing obligations in the sixteen months imme
diately before us, i t is not possible to recommend the issue of several
hundred m illions of additional short-time notes. Further excessive bor
rowing would lik ely undo a ll that has been accomplished in readjusting
interest rates and stabilizing the financial world, both v ita lly essential
to the resumption of industrial and commercial a c tiv itie s .
Granting that i t is riot f a ir to oppose any proposed plan with—
out offering a substitute, le t me repeat that I believe the American "
people w ill accept the levy of a general sales tax tc meet the proposed
bonus payments, and we should contribute thereby no added d iffic u ltie s
to the problems of readjustment* If Congress w ill not adopt such a
plan, i t would be wise to le t the leg islatio n go over u n til there is a
situation which w ill ju stify the large outlay. We are driving for
large economies, we are pushing the disposition of surplus war property
and have other transactions under consideration which ought to prove a
great re lie f to the Federal Treasury, It is not consistent to enact
leg islation in anticipation of these things, but it would be a prudent
plan to await the developments, and I can see in such a postponement
no lack of regard for the service men in whom a ll the American people
aye so genuinely interested» I take i t that the ex-service men them
selves are no less concerned than others about the restoration of busi
ness and the return to abundant employment. Those of th e ir wounded or
sick comrades, who were impaired by th e ir war service, are being cared
for with the most lib eral generosity the nation can bestow. There are
here and there exceptional cases of neglect, and attending complaint,
but we are seeking them out and correcting with a l l possible speed.
It has not been possible to meet a l l the demands for special h ospitali
zation but we are building to that end, without counting the cost, We
are expending $400,000,000 a year in compensation, hospitalization and
rehabilitatio n . These things are recited to reassure you that such
delay as w ill enable Congress to act in prudence for the common good,
w ill have no suggestion o f unmindfulness or ingratitude»
Very truly yours,
WARRFN G. HANDING,
Hon, Joseph W. Fordney,
House of Bepresentatives,
Washington, D. C,
February 21, 1922,
STATEMENT OF THE SECRETARY OF THE TREASURY BEFORE THE COMMITTEE
ON WAYS AND MEANS*
If Congress decides to impose a general sales tax in order to pay a
soldiers* bonus, i t w ill be necessary to determine f i r s t of a ll what
kind of a general sales tax is to be adopted*
Any general sales tax,
in order to yield the revenue desired, w ill have to have broad appli
cation and the minimum of exemptions*
The term "general sales tax" suggests a t le a st four classes of taxes
which are widely different in th eir operation and effects, as follows:
F irst. - A general turnover tax, imposed upon every business transaction whether i t involves a transfer of commodities or capital assets,
a wholesale or r e ta il sale or a sale by the manufacturer or producer*
The rate most often suggested for such a tax has been 1 per cent, and
i t has been estimated that a t that rate i t would yield approximately
1 b illio n dollars a year*
A general sales tax of th is character would
apply not only to a ll turnover of goods, wares, and merchandise, but
also to a ll transfers of real estate, secu rities, and other capital as
sets,
Since i t would f a ll upon every business transaction, i t would in
evitably be pyramided upon successive turnovers.
All in a ll, a general
sales tax of th is character would seem to be very d iffic u lt of applica
tion*
Second. - A lim ited turnover tax, which would apply to goods, wares,
and merchandise, but not to capital assets.
This tax would impose less
den upon business and industry, and i t has been estimated that
a t 1 per oent i t would yield about $700,000,000.
Like the general turnover
tax, however, i t would be pyramided.
If a tax of th is character is to be
imposed i t would seem necessary to provide exemptions su fficien t to cover
the smaller operations, such as the corner grocery, the newsboy, and the
like*
The allowance of exemptions would, of course, correspondingly re
duce the yield.
Third. —A manufacturers and producers sales tax, to apply at the time
of sale by the manufacturer or producer.
i t is estimated, about $250,000,000.
At one per cent i t would yield,
This tax would probably be the sim
plest to administer, inasmuch as i t would f a ll a t the le a st number of col
lection points, and i t would correspond in a general way to some of the
specific sales taxes now imposed*
A tax of th is character would also tend
to eliminate pyramiding since i t would be collected but once.
The tax
might be either a general tax on a ll a rtic le s a t a level ra te , in which
event i t would f a ll as heavily upon food and a ll the necessities of lif e
as i t would upon luxuries, or i t might be imposed under a schedule of
specific or ad valorem rates applicable to lis te d articles*
In order to
avoid throwing too great a burden upon the consumption of necessities and,
at the same time, in order to simplify administration, i t would probably
be advisable to adopt a definite schedule of a rtic le s and rates if any
such tax is to be imposed.
fourth* - A r e ta il sales tax upon so-called fin al 3ales of a rtic le s
for consumption*
I t is estimated that a t a rate of 1 per cent such a tax
would yield about $350,000,000.
A tax of th is character would present two
main problems, f ir s t, that i t would have to be collected a t the
number of collection points which would make its administration d iffic u lt,
and second, th at i t is almost impossible to make a satisfactory definition
3or fin a l r e ta il sales except oa an arb itrary basis,
ft such a tax is to be
imposed the specific sales taxes now imposed upon so-oalled luxuries might
be extended to a more inclusive class of commodities sold a t r e ta il, or i t
might take the form of a general sales tax imposed on a ll a rtic le s of con
sumption, including food and necessities.
A tax on a lim ited class of ar-
would not, of course, produce the revenue desired except a t higher
rates*
The sales tax in any form would require a large increase in force in the
Bureau of Internal Revenue.
The problem of administration would, of course,
turn largely on the kind of sale® tax adopted, but even in i t s simplest
form I should say that i t would require a force almost equivalent to the
force now required for the income tax in order to administer a general sales
tax effectively«
There is one other observation which I should like to make as to a gen
eral sales tax. The Treasury did not, as you know, recommend any general
sales tax in connection with the revenue revision which was made in 1931,
though the sales tax was suggested by others and considered by Congress,
There was
one important difference, however, between the sales taxes
then considered and the general sales tax now under consideration as a msans
«i raising revsnus for a soldiers* bonus, namely, that sales taxes then were
suggested as substitutes for existing taxes, and not as additional taxes.
Not knowing what kind of a general sales tax the Congress might wish tfi
imposs in order to pay a bonus, the Treasury has not worked out any one of
forma of general sales taxes in a ll i ts implications.
Any form of a
general sale# tax presents complications with respect to both the incident
ot the tax and i ts administration.
I t the Committee w ill indicate what form
i t has in mind to propose, the Treasury w ill be glad to give further
study to a general sales tax along the lin es desired and to work out what
would seem to be the most feasible provisions for the purpose*
March 6, 1923«
Lear W+ Erdasurcri
In order to reestablish the u n restricted circulation of gold
within the United States and restore payments by the Government to
the basis which existed before the war, yon w ill u n til flirther notice
make payments of United States paper currency without distinction as
between United States notes» silv er certificates and gold c e rtific a te s,
except for the following restric tio n s as to denominations;
(1)
Payments in denominations of $1 and $2 shall be made, so far
as possible, in silv e r c e rtific a te s, and i f no silv er certificates
are available, then in United States notes, or, when available, Fed
eral Reserve Lank notes*
(2) Payments in denominations of $5 and $10 shall be made, so
far as possible, in United States notes and, whan available, in s i l
ver certificates*
I f United States notes and silv er certificates are
not available in su fficien t quantities, i t w ill be the policy in the
future as in the past to purchase Federal Reserve notes from the Fed
eral Reserve Banks in the desired amounts, Nothing herein contained,
however, shall be deemed to prohibit the payment of $10 gold c e r tif i
cates on demand, or i f no other kinds of currency in that denomina
tion arc available#
(3) Payments in denominations of $30 and upwards shall be made,
so fa r as possible, in gold c e rtificates, or, when available, in
United States notes and silv er certificates*
Federal Reserve notes
**2r
already* on band in these denominations may be paid out, but without
specific authority therefor in w riting Federal Reserve notes w ill
not any longer be purchased from the Federal Reserve Banks for the
purpose of making payments in denominations of $30 and upwards*
I t w ill continue to bo the policy of the Treasury to deposit to
the credit of the Federal’ Reserve Banks in the G-old Fond with the
Federal Reserve Board the free gold which from time to time becomes
available to the Treasury and is not required to make current pay
ments •
The instructions heretofore given under date of June 20, 1920,
.
as modified by the instructions of January 7, 1921, and the general
instructions of August 30, 1920, as amended, as to Exchanges, Replace
ment and Redemption of United States paper- currency are modified in
accordance herewith.
The Treasury is notifying the Federal Reserve Board of these in
structions and requesting that the Federal Reserve Banks follow
similar- procedure with respect to payments for account of the United
States, whether on current payments or on exchange or redemption of
United States paper currency«
Veiy tru ly yours,
(Signed)
•
A« W* iÆELLQh
Secretary.
The Honorable,
The Treasurer of the United States.
—..
March 6, 1922,
% dear Governor Harding?
I am transm itting herewith, for the information and attention of the
Federal Seaenre Board, a copy of ny le tte r of th is date to the Treasurer
of the United States which gives instructions as to payments of United
States currency, with p articu lar reference to the payment of gold c e r tif i
cates and the kinds of currency in which pim ents shall he made in the
different denominations.
The payments made hy the Treasurer of the United
States in teshlngton are relativ ely small, p articu larly since the system
of distributing new currency through the Federal Reserve Banks was adopted
under the general regulations governing Exchanges, Replacement and Redemp
tion of ISiited States paper airrency, issued under date of August 30, 1930.
In order that the policy embodied in the-,attached le tte r of instructions
=ay be carried into effect throughout the countiy i t is desirable th at the
Federal Rose™ Banks should observe substantially the same instiuctions,
and X accordingly have to request that the Federal Reserve Bahks follow
sim ilar procedure with respect to payments for account of the United States,
whether on ourrent payments or on exchange or redemption of United States
paper currency.
I t would be helpful i f the Federal Reserve Banks would ex
tend the same general policy to a ll payments, with such modifications as
nay be thought necessary with respect to payments fo r th eir own account.
The question of resuming payments of gold c e rtific a te s was, as you
w ill re c a ll, j e s t e d fo r consideration at the jo in t conference of the '
Governors and Chairmen of the Federal Reserve Banks held in ïfeshington in
October, 1921, and the Treasury's views in the matter were outlined in my
la tte r to you of October 4, 1921.
The jo in t conference of Governors and
-2Federal Reserve -Agents did not at the time favo* jtedeapti&i of payments
of gold ce rtific a te s, but in the option of the Treasury the objections
which were then raised to gold payments have been met by the developments
which have occurred since October, 1921.
(The. to ta l gold holdings of the
Federal Reserve Banks as at the close of business on Itech 1, 1923,
amounted, according to the statement issued by the Federal Reserve Board,
to $2,951,434,000, as compared with to ta l gold holdings of $2,163,090,000
on Marsh 4, 1921,
This increase of almost $800,000,000 within the year
is due for the most p art to inports of gold into the United States, sub
sta n tia lly a ll of which have been absorbed into the reserves of the Fed
eral Reserve System,
Within the same period the ra tio of to ta l reserves
to deposit and Federal Reserve note lia b ilitie s has risen from 50,8 to
76*7, and Federal Reserve Bank discount rates have been m aterially reduced
u n til now the rate of 4& per cent prevails in such D istricts as New York,
Boston, Philadelphia, Cleveland, and San Francisco, and 5 per cent in all
of the other D istric ts,
The low rate policy which has been put into ef
fect by the Federal Reserve Banks was adopted in large part as a resu lt of
the October conference, and gives a complete answer, i t seems to me, to
any criticism that might be raised against payments of gold certificates
on the theory that these payments were intended to reduce the reserves of
the Federal Reserve System and furnish an excuse for high discount rates.)
On the other hand, the vase accumulation of gold in the Federal Reserve
System, though i t may not yet have caused any in flatio n , offers a constant
temptation to the adept ion of unsound and inflationary credit policies,
and unless some corrective action is taken may lead the country into another
period of inflatio n and speculation.
The Federal Reserve Board its e lf ,
in the February issue of the Federal Reserve B ulletin, has recognized
the dangers of our swollen gold reserves in the following comment which
appears on page 128 of the Bulletin*
"At present, furthermore, the abnormal concentration of
gold in this country is a source of danger, because i t is a
false guide in matters of credit policy W* no longer an index
of the outside lim it of legitim ate credit expansion* Consid
erations of national in terest alone are, therefore, a s u ffi
cient reason for a Carefhl weighing of proposals looking to a
redistribution of the gold supplies of the world and involving
a return of some p art of. the gold held by the United States for
use elsewhere# Uo proposals of any sort should, however, be
entertained u n til far-reaching guaranties of fisc a l reform have
been secured from the countries that require aid* Otherwise
the assistance would be detrimental to the extent that i t would
lead to the postponement of the necessary fisc a l reforms which
xausi be made preliminary to the rehabilitation of currency sys
tems and the reestablishment of stabilized exchange relationships"*
For the present at le ast, there seems to be l i t t l e prospect that there
w ill bo any effective demand from the rest of the world for large amounts
of the gold accumulated in our reserves.
I t has been suggested th at
loans to Europe or heavy investment in foreign obligations by citizens
of th is country might result in substantial exports of gold to other
countries, but for some time to come it would seem that such loans as
Bircpean governments may be able to offer in this country would have to
be used for reconstruction and for the purchase of necessities rather
than for the accumulation of gold reserves, and unless conditions should
markedly change, I doubt whether there is nuch likelihood of inportant
gold exports in the near future#
Even though gold certificates are re
stored to circulation the accumulated reserves in this country are suf*fic ie n tly strong to provide for substantial exports, and i f i t should
ever become necessary to accumulate gold for th is purpose, i t w ill un
doubtedly be feasible to do so through the bank? and the Federal
Reserve Banks, in view of the system of currency distribution that has
now become established*
As a matter of fact, the restoration of gold
c e rtific a te s to circulation w ill b u ild up again a secondary gold re
serve which can be dravoi upon in case of need*
I t is interesting in this connection to boar in mind that in the
present condition of the Federal Reserve Banks there can be substantial
losses of gold without material effect upon the reserve position of the
System.
I t has been estimated, for example, that about $150,000,000
of gold certificates could be paid out without affecting the Federal
Reserve combined ra tio more than one fu ll point, on the assumption, of
course, that the gold c e rtificates paid out would in due course replace
a corresponding amount of Federal Reserve notes.
In these circumstances, I think that the sound and courageous
thing to do is to reestablish the u n restricted circulation of gold which
existed in this country before the war and to pay out gold c e rtificates
as a matter of course on payments which call for denominations of $20
and upwards.
This does not mean, of course, that Federal Reserve notes
in denominations of $20 and upwards w ill disappear from circulation*
The statement of paper currency outstanding, on December 31, 1921, issued
by the Treasurer of the United States, shows th at there were outstanding
on that date about $970,000,000 of Federal Reserve notes in the denomi
nation of $20, about $245,000,000 of Federal Reserve notes in the de
nomination of $50, and about $259,000,000 of Federal Reserve notes in
the denomination of $100, and somewhat smaller amounts, aggregating
nearly $200,000,000, were outstanding in the other high denominations•
resumption of payments of gold ce rtificates should not, of cours8,
displace more than a fraction of th is great volume of Federal Reserve
notes*
Very tru ly yours,
(Signed) A. W. MELLON
Secretary*
Hon* W# P# Gr#.Handing,
Governor, Federal Reserve Board,
Washington, D, C*
1 enclosure.
&c*o*p~lr
C-441.
Washington, April 4. - Reports received by Lew Wallace,
J r ., Director of Savings, Treasury Department, show that Treasury
Savings C ertificates to the amount of $13,377,424 were sold during
the month of March.
This is the largest sale of any month since
the c e rtific a te s were offered, and Director Wallace attributed the
increased demand to the fact that the people are beginning to re
alize that the c e rtific a te s are such a very good investment.
It
has been figured out At the Treasury Department that these c e r tif i
cates, with th e ir tax exemption and in terest rate of 4^ per cent,
compounded semi-annually, are b etter paying securities than almost
any of the bonds now on the market.
These c e rtific a te s werë de
signed for the small investor, and issued in denominations of $25,
$100 and $1,000 and sold for $20, $80 and $800.
Many investors are
buying the lim it allowed which os $5000 of any one issue.
.April 14, 1932
Dear Mr« Warburg?
I received your le tte r of March 21, 1922, with respect to payments
of gold c e rtificates by the Treasury, and am glad to te ll you how the
matter stands«
I assume that you have already seen the Secretary^
formal announcement on the subject, issued under date of March 18, 1922,
but I am enclosing a copy herewith fo r your ready reference*
Prom th is
you w ill see that i t is a definite policy, but I think i t is too early
to say what proportions the payments of gold c e rtific a te s may reach«
The f ir s t thing th at the Treasury wanted to accomplish through the
announcement was to make i t clear that in so fa r as the Treasury is con
cerned there are no longer any restric tio n s on the free circulation of
gold and that gold certificates would henceforth be available at the
Treasury in the ordinary course of business without demand« To a large
extent th is object has already been achieved by the announcement i t
se lf, and the Treasury is its e lf making payments of gold ce rtificates
over the counter at Treasury offices without discrimination«
The other
consideration I had in mind was that the time had come for both the
Treasury and the Federal Reserve Banks to drop the a r tif ic ia l policy
of impounding a ll gold ce rtificates and refusing to pay them out in
any circumstances without specific demand« In other words, the Federal
Reserve Banks were s t i l l mobilizing gold as enthusiastically as they
did during the war, apparently without regard to the changes that have
occurred in the general situation, and were s t i l l endeavoring to concen
tra te in th eir reserves a ll of the gold in the country*
The policy of
mobilizing gold in the Federal Reserve Banks was adopted as a war
-3mQa^[irQt and with the wax* over and the pressure on the Federal Beserve
Banks relieved there would seem to he no good reason fo r continuing
what amounts to discrimination against gold c e rtific a te s and in favor
of other forms of currency in making current payments*
This does not
to ny mind involve any attack on the amendment to the Federal Reserve
Act which permits the issue of Federal Beserve notes against gold*
To a lim ited extent the Treasury has heen through a somewhat sim ilar
situation with respect to legal tender notes and silv e r certificates#
These were for a long time accumulated in the Federal Reserve Banks in
substantial amounts and cainted as reserve against deposit lia b ilitie s *
The situ atio n with respect to silv e r and legals, of course* is differ*»
ent# because after a ll they do not possess the peculiar characteristics
of gold* and i t was easier to handle because with the Federal Beserve
Bank notes almost out of the way . the country necessarily relies on these
two classes of paper currency for its s-qpply of one-dollar and twodollar notes* % to about a year ago, however* many of the Federal Re
serve Banks were s t i l l reluctant to pay out even silv e r and legals be- .
cause of their quality as reserve money, and i t took something of a
struggle for the Treasury to get them to release th e ir hold*
With gold ce rtificates the Treasury feels that i t would be good policy
for the Federal Beserve Banks to pay out gold c e rtific a te s normally and
in the ordinary course of business, to some extent a t le a st, and without
making any more discrimination with respect to gold ce rtific a te s than i t
is the custom to make with respect to other forum of paper cur ran oy*. ex
cept possibly on the question of denomination*
This does not mean that
there should be any e ffo rt to fore© a given ©meant of gold oat of the
Federal Reserve System or to redace the reserves of the System or the
Federal Reserve note circulation to any arbitrary figures*
On the other
hand, the Federal Reserve note, of course, is the flex ib le element in
the paper currency circulation, and i t is inevitable th at increased c ir
culation of other forms of currency, as, for example, silv er c e r tif i
cates, United States notes, and gold c e rtific a te s, w ill, in the long run
reduce the circulation of Federal Reserve notes.
The question of the
extent to uihich the Federal Reserve Banks w ill pay out gold c e rtific a te s
in the ordinary course of business in making payments on their own ac
count, is primarily a question of Federal Reserve policy, and th is ques
tion the Treasury has only undertaken to suggest to the Federal Reserve
Banks fo r th eir consideration*
I am personally of the opinion that without inpairing the gold posi
tion of the Federal Reserve Sjystem and without any special effort to
force gold ce rtificates into circulation in place of Federal Reserve
notes, i t would be possible to restore to circulation enough gold cer
tific a te s to constitute a valuable secondary reserve and that i t would
be helpful a ll around to put an end to the a r tif ic ia l impounding in the
Federal Reserve Banks of a ll the monetary gold in the country*
I do not
believe that this involves, properly speaking, any dissipation of the
gold reserves*
The gold in circulation could again be mobilized, if
necessary, and i t could not properly be called lo st or fritte re d away*
(h, the other hand, i f gold is to be exported or specifically loaned to
Europe or other countries, i t w ill go out in any event, whether or not
gold c e rtific a te s circulate, presumably in consequence of loans floated
in this market.
The chief difference is that i f gold ce rtificates circu
late freely and without demand there w ill gradually be b u ilt up some'
secondary reserve both in the banking in stitu tio n s of the country and in
the pockets of the people, while i f i t is not permitted to circulate, i t
w ill necessarily accumulate in the Federal Beserve Banks and give a
swollen aspect to th e ir reserves*
Our experience during and since the war
has shown that a secondary gold reserve is an important resource and that
i t can be made available in case of emergency* Without-a war emergency
i t is d iffic u lt to see what is to be gained either by the Federal Beserve
Siystem or by the country through the inpounding of a ll. the monetary gold,
in the Federal Beserve Banks unless i t is desired to use the gold as a
basis for an unhealthful and a r tif ic ia l expansion of credit and currency*
It creates an abnormal situation, and has many elements of danger* The
vast accumulation of gold in the Federal Beserve System, with the increase
of about $800,000,000 within the past year, offers a constant temptation
to unsound credit p o licies, and unless some corrective action is taken i t
might easily lead the country into another period of inflation.
No one, of course, can t e l l what may develop, and i t is always well
to be prepared for a ll eventualities, but for the present at least there
seer® to bo l i t t l e prospect of any effective demand from the rest of the
world for large amounts of our gold,
I know i t is frequently suggested
that loans to Europe or heavy investments in foreign obligations, or per
haps some international bank or sim ilar project, might result in substan
tia l exports of gold to other countries, but for some time to come i t
would soon that such loans as European Governments may: ho ¿¿ble to placo
in th is country would havo to ho used for reconstruction and tho purchase
of necessities, rather than for tho accumulation of gold reserves*
Our
accumulated reserves, moreover, are su fficien tly strong to provide for
substantial exports, even with gold certificates in circulation, and i f
i t should ever become necessary to accumulate gold again for th is purpose,
i t should be possible to do so through the banks and tho Federal Reserve
System, particu larly in view of tho procedure for currency distribution
that, has now become established#
I t is an absorbing question, and one that is worth a good deal of
thought#
I should like some time to havo the opportunity of talking i t
a ll over with you, and hope that when you áre next in Washington you w ill
stop in to see me and lo t me havo the benefit of your ftirther views#
Sincerely yours,
(Signed)
Paul M, Warburg, Es q#,
31 Pino Street,
New York, N# Y,
1 enclosure#
S# P# G ilbert, Jr#
(T . D . 3322)
I n s t r u c t i o n s a s to a c c e p ta n c e o f V i c t o r y n o t e s in coupon form f o r income
and p r o f i t s t a x e s p a y a b le June 15 , Septem ber 1 5 , and December 15 ,
O ffic e
TREASURY DEPARTMENT
o f Com m issioner o f I n t e r n a l Revenue
Wa s h in g t on , D. C„
TO COLLECTORS OE INTERNAL REVENUE AND OTHERS CONCERNED:
1 . C o l l e c t o r s o f I n t e r n a l Revenue a r e a u t h o r iz e d and d i r e c t e d to
r e c e i v e a t p a r , V i c t o r y n o t e s o f e i t h e r th e
p er c e n t or th e 3 i P e r c e n t
s e r i e s , i n coupon form , i n paym ent o f income and p r o f i t s t a x e s p a y a b le on
June 1 5 , 1922 , and V i c t o r y n ^ te s o f t h e
p e r c e n t s e r i e s , i n coupon form ,
i n paym ent o f income and p r o f i t s t a x e s p a y a b le Septem ber 1 5 , and December 15 ,
19 2 2 .
V i c t o r y n o t e s o f th e J'4 p e r c e n t s e r i e s w i l l n o t b e a c c e p ta b le in
paym ent o f income and p r o f i t s t a x e s p a y a b le September 15 or December 15 , 1922,
and r e g is t e r e d . V i c t o r y n o t e s a r e n o t a c c e p t a b le on any paym ent.
Coupon
i c t o r y n o t e s te n d e r e d i n paym ent o f income and p r o f i t s t a x e s p a y a b le June
15 1 Septem ber 1 5 , and December 1 5 , 1 9 2 2 , must have a l l unmatured i n t e r e s t
coupons a t t a c h e d ( t h a t i s t o s a y , n o t e s ten d e red i n paym ent o f income and
p r o f i t s t a x e s p a y a b le June 1 5 and Septem ber 1 5 , 19 2 2 , coupons atta ch ed , f o r
ecember 1 5 , 19 2 2 , and May 20 , 1923 ; n o t e s te n d e r e d in paym ent o f incom e and
p r o f i t s t a x e s p a y a b le December 1 5 , 1 9 2 2 , coupon a t t a c h e d f o r May 20 , I.923),
u t a l l m atured coupons m ust b e d e ta c h e d and c o l l e c t e d in o r d in a r y co u rs e
when d u e.
The amount, a t p a r , o f th e V i c t o r y n o te s p r e s e n te d b y any t a x
p a y e r i n paym ent o f income and p r o f i t s t a x e s must n o t e x ce e d th e amount o f
th e t a x e s to b e p a id oy him , and c o l l e c t o r s s h a l l in no c a s e pay i n t e r e s t on
th e n o te s or a c c e p t them f o r an amount o th e r or g r e a t e r than t h e i r f a c e
v a lu e .
A ccru ed i n t e r e s t on th e n o t e s a c c e p te d in paym ent o f income and
p r o f i t s t a x e s p a y a b le Septem ber 1 5 , 19 2 2 , from June 1 5 , 19 2 2 , to September
15 , 1922 , w i l l be r e m it te d t o th e ta x p a y e r by th e F e d e r a l R e s e rv e Bank w it h
w h ich th e c o l l e c t o r makes h i s d e p o s i t s , on th e b a s i s o f th e s c h e d u le s f u r
n is h e d b y th e c o l l e c t o r .
R e c e ip t s g iv e n b y c o l l e c t o r s to ta x p a y e r s sh ou ld
show th e amount o f n o t e s o f ea ch s e r i e s r e c e i v e d i n payment o f ta x e s *
2 * D e p o s its o f V i c t o r y n o te s r e c e i v e d i n paym ent o f income and p r o f i t s
t a x e s h ereunder must b e made by c o l l e c t o r s , u n le s s o th e r w is e s p e c i f i c a l l y
i n s t r u c t e d b y th e S e c r e t a r y o f th e T r e a s u r y , w i t h th e F e d e r a l R e se rv e Bank
o f th e d i s t r i c t in w h ich th e c o l l e c t o r 1 s head o f f i c e i s l o c a t e d , or in c a s e
su ch h ead o f f i c e i s l o c a t e d i n th e same c i t y w it h a b ra n c h F e d e r a l R ese rv e
ank, w it h such b ran ch F e d e r a l R ese rv e Bank.
S p e c i f i c i n s t r u c t i o n s may
be g iv e n t o c o l l e c t o r s b y th e S e c r e t a r y o f th e T r e a su r y i n c e r t a i n in s t a n c e s
f o r th e d e p o s i t o f th e n o t e s w i t h F e d e r a l R e se rv e Banks o f o th e r d i s t r i c t s
and b r a n c h F e d e r a l R e s e r v e B anks.
The term MF e d e r a l R ese rv e Bank” , where
i t a p p e a r s h e r e in , u n l e s s o th e r w is e i n d i c a t e d b y th e c o n t e x t , in c lu d e s b ran ch
e d e r a l R es e rv e B an ks.
V i c t o r y n o t e s may be a c c e p te d hereunder b y th e
c o l l e c t o r p r i o r t o t a x paym ent d a t e s , and i n t h a t c a s e sh ou ld be fo rw ard ed
y th e c o l l e c t o r to th e F e d e r a l R e s e r v e Bank or b ra n c h F e d e r a l R e s e rv e Bank
t o be h e ld f o r a c c o u n t o f th e c o l l e c t o r u n t i l th e t a x paym ent d a t e , and
f o r d e p o s i t on such d a t e .
T.D. 3322
-2-
. „ J * \ v l c *ory n otes accepted hereunder should in a l l c a se s be in d e lib ly
by. t ? f c c lle c t o r 0X1 th s f ace th er e o f as fo llo w s , and when so stamped
s uld be d e liv e r e d to the Federal Reserve Sank in person i f the c o lle c t o r
f . , 0 ca , e '
the same c i t y , and in a l l other ca ses forwarded by r e g is te r e d
m ail uninsured:
e .
"....................., 192_4
This n ote has been accepted in payment of income and p r o f it s
taxes^ and w i l l n ot be red.eemed by the U nited S ta te s excep t fo r
c r e d it of the undersigned*
C o lle cto r of In tern a l Revenue
fo r the
d i s t r i c t of
?'a c h x’unraa^u red coupon a t t a c h e d t o e a c h such V ictory n o te must be in «
l y ®vamP®d a c r o s s t h e f a c e b y th e c o l l e c t o r w it h th e word: tr? a i i flt
1 o ilo w e d oy h i s name and t i t l e ,
«
4 ^ °^ T ectO i s sh o u ld make in t a b u la r form a s c h e d u le in d u p l ic a t e
ot th e v i c t o r y n o te s to b e fo rw ard ed to th e F e d e r a l R e se rv e Bank, showing
th e f a c e amount t r a n s m it t e d , th e s e r i a l number o f e a c h n o te , th e s e r i e s ,
?
©nom ination* and th e name and a d d r e s s o f the ta x p a y e r p r e s e n t in g th e
__a f *,
° ^ e s a c c e p te d p r i o r to th e t a x payment d a te m ust be s c h e d u le d sep~
m
^
V l c t o y y i n o t e s sh o u ld i n a l l c a s e s be sc h e d u le d s e p a r a t e l y
«
r e a s u r y c e r t i f i c a t e s o f in d e b te d n e s s «
A t th e b o ttom o f e a ch sch e d u le
here shouxd be w r i t t e n or stam ped, "Incom e and F r o f i t s T axes $
w
w ic h amount must a g r e e w it h th e t o t a l shown on th e s c h e d u le .
One copy
d
.!
J;
S.?i6du?‘0 must accomPa^y n o te s s e n t to th e F e d e r a l R e s e rv e Bank,
°
er
f r e t'a ined. b y th e c o l l e c t o r .
The income and p r o f i t s t a x
S Le s ^ t l n g f r ° m th e deP o s i t s o f such n o te s must in a l l c a s e s be
t h ® { a c f . o f tiie c e r t i f i c a t e o f d e p o s i t ( N a tio n a l Bank Form 1 5 )
a
an
d i s t i n c t from th e ite m o f m is c e lla n e o u s i n t e r n a l reven ue
S C j l ° n s ( orme»^ly c a l l e d O r d in a r y ) *
U n til c e r t i f i c a t e s of d e p o s it
,
th
,
.
i e d e r a i B© serve B a n k s, th e amounts r e p r e s e n te d by
! y n o t e s fo rw ard ed f o r d e p o s i t m ust b e c a r r i e d b y c o l l e c t o r s as
Of
andi n o t c r e d i t e d a© c o l l e c t i o n s ,
o f d e p o s it d eterm in e th e d a t e s o f c o l l e c t i o n s .
a s th e d a t e s o f c e r t i f i c a t e s
<a,ir>^ * ^ 0r
PurPOse o f s a v in g t a x p a y e r s th e ex p en se o f t r a n s m it t i n g
su ch n o t e s a s a r e h e ld in F e d e r a l R e s e r v e c i t i e s or F e d e r a l R e s e rv e b ra n c h
v, P1 1 3 s
0
c i'^ ic e o f th e c o l l e c t o r in whose d i s t r i c t th e t a x e s m e
p a y a b le , ta x p a y e r s d e s i r i n g to p a y income and p r o f i t s t a x e s b y V i c t o r y n o te s
sh ou ld communicate w it h th e c o l l e c t o r o f th e d i s t r i c t in w h ich th e t i e s
a r e p a y a b le and r e q u e s t from him a u t h o r i t y to d e p o s i t such n o te s w it h th e
e d e r a l R e s e rv e Bank in t h e c i t y i n w h ic h th e n o te s are h e ld ,
C o lle c to r s
a r e a u t h o r iz e d to p e r m it d e p o s i t s o f V i c t o r y n o te s i n any F e d e r a l R e s e rv e
T.D. 3322
3-
• tür wi un the ¿^.st^nct ‘u nderstanding th a t the Federal R eserve hank i s
o^n1^+Ue-pCU4.iCerír^ ^ Cate 01 deP °s;i-B Tn the c o lle c t o r 's name covering the
..
0
ic to r y n o te s a t par and to s ta te on the fa ce o f the cer~
l i i c a t e of d e p o sit th at the amount rep resen ted thereby i s in payment of
n«?°^ie ?n
^a x e s *
The-Federal Reserve Bank should forward the
. . gi na c ®rt'if ic a t e o f d e p o sit to the Treasurer o f the United S ta te s w ith
J r e s c r i p t , and transm it to the c o lle c to r the d u p lica te and
t l accomRa n if £T By a statem ent g iv in g the name of the taxpayer
■nor>o
m 6 Payment i s made in order th at the c o lle c to r may make the
forward, the d u p lic a te to the o f f ic e o f the Commissioner
^ fotory n otes in r e g is te r e d form are not a ccep ta b le in payment
m tp "100’138
•proí>its Maíces under t h is d e c is io n .
Holders of r e g is te r e d
owever, may exchange them through the Federa] Reserve Banks fo r
Denar^np-+es ^ accordance vvith th ® general r e g u la tio n s o f the Treasury
n o te« * tw
« accordance w ith t h is d e c is io n , p resen t the coupon
provided >,neCeiVeá+¿n excnan§e in Payment of income and p ro fits taxes,
b e fo rp t í h°wever’ th a t such exchange i s completed and tender made on or
o eio re the ta x payment d a te .
APPROVED:
A p ril IS, 1^22.
A* W. IvELLON,
Secretary of th e Treasury.
D. K. BLAIR,
Commissioner o f In tern a l Revenue,
April 35, 1932#
X>ear Hr. Treasurer^
The instructions given to you under data of March, 3, 1922, with
respect to p a re n ts of United State» paper currency, are hereby
modified so that paragraphs 2 and 3 thereof shall read as follows:
(2)
Psyments in denominations of $5 and $10 shall he made in
United States notes and silver c e rtific a te s, when available, or i f
United States notes and silver ce rtific a te s are not available in suf
ficie n t quantities, in Federal Reserve notes or gold certificates in
the denominations of $10, without discrimination.
Preference shall
be given to United States notes and silv er ce rtific a te s in making
payments in denominations of $5 and $10, but when United States notes
and silv er c e rtificates are not available in sufficient quantities,
you are authorised to pay cut gold ce rtificates in the denomination
of $10, and v&erevor necessary to purchase Federal Reserve notes
from the Federal Reserve Banks in the usual manner in the desired
amounts and denominations.
(3 ) Payments in denominations of $30 and upwards shall bo made
in gold c e rtificates, except that payments in denominations of over
$1,000 shall be made, so far as possible, in Federal Reserve notes*
l&iited States notes, silver c e rtific a te s and Federal Reserve notes
on hand in Treasury cash in these denominations may bo paid out as
in the past, but you w ill not henceforth requisition any Uhited
States notes or silv e r certificates in denominations of $30 and up
ward without express authority therefor from th is office.
You are
r3
authorized wherever necessary, to purchase Federal Reserve notes
from the Federal Reserve Banks in the usual manner for the purpose
of making payments in denominations of over $1 , 000*
The Federal Reserve Board is being notified of these modifica
tions in the instructions, and i t is expected that the Board w ill
notify the Federal Reserve Banks*
Very tiu ly yours,
(Signed)
A* W* WtMXt
Secretary*
The Honorable,
The Treasurer of the Ifeited States.
i p r i l 35, 1923
% dear Governor2
in view of ny le tte r of March 6, 1922, with, respect to payments
of United States paper currency, and oar subsequent correspondence
with respect to payments of gold c e rtific a te s, I am enclosing fo r the
information of the federal Reserve Board and the Federal Reserve
Banks, a copy of a supplemental le tte r of instructions which I am
sending.under th is date to the Treasurer of the United States as to
payments of United States paper currency«
I should like at the same time to clear up the misunderstanding
which has apparently arisen in some of the Federal Reserve Banks as
to the application of the Treasury*s policy with respect to gold pay
ments*
I refer p articu larly to the le tte r of March 20th from the
Governor of the Federal Reserve Bank of Boston and the le tte r of
March 3d, 1922, from the Governor of the Federal Reserve Bank of Kew
York, copies of which you have sent to the Treasury*
The Treasury
has made a formal announcement of i t s policy in the statement of March
18, 1933, a copy of which was transm itted at the time to the Federal
Reserve Board, and, I presume, to the Federal Reserve Banks.
This
announcement has made i t clear that in so fa r as the Treasury is con
cerned there are no longer any restric tio n s on the free circulation of
gold, and that gold c e rtificates w ill henceforth be available at the
Treasury in the ordinary course of business without demand* The
Treasury is accordingly making payments of gold ce rtificates over the
counter at Treasury offices, and I am advised th at several of the Fed
eral Reserve Banks, in accordance with the Treasury's request, are
~3r
following a sim ilar policy*
Th© Treasury has also fe lt that the time has com© fo r both th©
Treasury and th© Federal Reserve Banks to drop the a r tif ic ia l policy of
attractin g a ll gold and gold c e rtific a te s into th© reserves.
Th© policy
of mobilizing gold in the Federal Reserve Banks was adopted as a war
measure, hut vdth the war over and the pressure on the Federal Reserve
Banks relieved there remained no good reason for continuing an a r t i f i
c ia l situation and making what amounted to a discrimination against gold
c e rtific a te s and in favor of other forms of currency in handling a ll
current payments.
The Treasury's general views in th is regard were set
out in my le tte r of March 6th to the Board, in which p articu lar atten
tion was also called to the tremendous increase in the gold reserves
during the past year or more, chiefly as a resu lt of gold imports*
The
Treasury has not had any thought that i t was its function to attempt to
force a given amount of gold out of the Federal Reserve System or to re
duce the reserves of the System or the Federal Reserve note circulation
to any arbitrary figures.
The responsibility fo r such matters rests upon
the governing authorities of the Federal Reserve System, though i t was to
be expected, of course, that payments of gold ce rtific a te s for Government
account would somewhat reduce th© absolute reserves and perhaps affect
the reserve ratio of the System« The question of th© extent to which the
Federal Reserve Banks w ill pay out gold certificates in the ordinary
course of business on th eir own account is , however, a question of Feder
al Reserve policy, and this question the Treasury has only undertaken
to suggest to the Federal Reserve Board and the Federal Reserve Banks
«•g»?
for th e ir consideration,
In this connection, I think therte is some tendency
on the part of the Federal Reserve Banks to overlook the fact that the
Treasury now lodes to the Federal Reserve Banks to perform the functions
formerly performed by the Subtreasuries, and that in handling redemptions
and replacements of Tfeited States currency and coin the Federal Reserve
Banks act under regulations prescribed by the Secretary of the Treasury,
under authority of the Federal Reserve Act and the Act approved kay 29, 1920,
providing for the discontinuance of the Sub treasuries#
I understand that at a ll Federal Reserve Banks i t is now definitely
understood th at whenever gold is demanded, whether in the form of gold
coin or in gold c e rtific a te s, i t w i l l be paid out promptly as a matter of
course, without inquiry and without hesitation.
X understand also that
consideration is being given at th is time to the discontinuance of various
a r tif ic ia l measures designed to encourage the accumulation of gold in the
Federal Reserve Banks, as, for example, the offer which was made during
the war to absorb the abrasion on gold coins deposited with Sbderal Reserve
Banks#
Some Federal Reserve Banks have already revdked th is offer, and I
assume that the question of making th is change apply to a ll Federal Reserve
Banks w ill be up for consideration at the forthcoming meeting of the Gov
ernors of the Federal Reserve Banks#
Very truly yours,
(Signed) A# W# ItELLOT
Secretary#
Hon# W# P. .G, t Harding,
Governor, Federal Reserve Board,
T&shington, D# C#
1 enclosure.
TREASURY DEPARTMENT
EOR RELEASE Morning Papers,
Thursday, June 8, 1922*
STATEMENT BY SECRETARY MELLON,
The Treasury is to-day announcing, in pursuance of its plans
for refunding the short-dated debt, an offering of three and onehalf year 4-3/8 per cent Treasury notes, designated Series B-1925,
dated June 15, 1922, due December 15, 1925, which can he obtained
only in exchange for 4 | per cent Victory notes«
Applications
w ill he received through the Federal Reserve Banks, and exchanges
w ill he mad© as of June 15, 1922, a t par without adjustments of
accrued interest«
Payment for the new notes cannot he made in,
cash or hy credit, nor w ill either Treasury ce rtificates or 3f
per cent Victory notes he accepted in exchange#
The Treasury is not announcing any fixed amount for the
offering of notes, hut the Secretary of the Treasury reserves
the rig h t to re je c t any applications and to close the subscrip
tions a t any time without notice»
The 4^ per cent Victory notes
which w ill he received in exchange for the new notes mature on
May 20, 1923, hut may he called for redemption in whole or in
part, a t the option of the United States, on December 15, 1922,
and i t is the Treasury'* intention to call a substantial amount
for redemption on that date#
t t i s offering of Treasury notes,
therefore, affords an opportunity to holders of 4f per cent
-2Victory notes to acquire by exchange a new obligation of the
United States running fo r 3|- years a t an attractiv e rate of
in terest, in place of Victory notes which w ill be payable
either December 15, 1922, or May 20, 1923, depending upon the
c a ll for redemption*
The Treasury is announcing a t the same time an offering
of one-year 3f per cent Treasury c e rtific a te s of indebtedness
in the amount of $250,000,000, or thereabouts, on the usual
terns*
The ce rtific a te s are designated Series TJ-1923, are
dated June 15, 1922, and w ill be payable June 15, 1923* On
June 15, 1922, there w ill become payable about $380,000,000
of maturing Treasury c e rtific a te s of indebtedness, about
$250,000,000 of 3j per cent Victory notes called for redemption
on that date, and about $125,000,000 of in te re st on the public
debt* Against these payments the Treasury expects to receive
during June about $300,000,000 on account of income and
p ro fits tax collections, and according to the best estimates
now available, i t w ill need about $250,000,000 additional,
over and above existing balances with depositaries, to
meet its current requirements*
The o ffic ia l texts of the offerings are as follows:
-3OFFERING OF TREASURY NOTES
Series B-1925.
The Secretary of the Treasury offers for subscription, a t par, through
the Federal Reserve Banks, in exchange for 4f per cent Victory notes, a
lim ited amount of Treasury notes of Series B-i925, of an issue of gold
notes of the United States authorized by the act of Congress improved
September 24, 1917, as amended.
The notes w ill be dated and bear in ter
est from June 15, 1922, w ill be payable December 15, 1925, and w ill bear
in te re st at the rate of four and three-eighths per cent per annum payable
semiannually on December 15 and June 15 in each year.
.Applications w ill bo received at the Federal Reserve Banks.
Bearer notes with in terest coupons attached w ill be issued in denomi
nations of $100, $500, $1,000, $5,000, $10,000, and $100,000.
The notes
are not subject to call for redemption before maturity, and w ill not be
issued in registered form*
The principal and in te re st of the notes w ill
be payable in United States gold coin of the present standard of value.
The notes of said series shall be exempt, both as to principal and
in te re st, from a l l 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 knovn as surtaxes, and excess-profits
and war-profits taxes, now or hereafter imposed by the United States, upon
the income or p ro fits of individuals, partnerships, associations, or cor
porations.
-4Notos of this series w ill bo accepted at par, with an adjustment of
accrued in terest, 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 p ro fits taxes payable a t or within six months before
the maturity of the notes.
.Any of the notes which have been owned by any
person continuously fo r at least six months p rio r to the date of his death,
and which upon such date constitute p art of his estate, shall, under rules
and regulations prescribed by the Secretary of the Treasury, be receivable
by the United States at par and accrued in terest in payment of any estate
or inheritance taxes imposed by the United States, under or by virtue of
any present or future law upon such estate or the inheritance thereof»
The notes of th is series w ill be acceptable to secure deposits of public
moneys, but do not boar the circulation privilege.
The right is reserved to reje ct ary subscription and to a llp t less than
the amount of notes applied for and to close the subscriptions at ary time
without notice»
Payment for notes allo tte d must be made on or before June
15, 1922, or on la te r allotment, in Victory notes of the 44 per cent series,
which w ill be accepted at the Federal Reserve 3ahks at par, without adjust
ments of accrued in te re st, as of Juno 15, 1922*
Victory notes in coupon
form must have in te re st colons attached maturing December 15, 1922, aid
May 20, 1923, but in terest coupons maturing June 15, 1922, must be detached
and collected in ordinary course when duo» Victory notes in registered
form must bo duly assigned to the Secretary of the Treasury for redemption,'
in accordance with the general regulations of the Treasury Department govern1
ing assignments. A fter allotment and upon payment Federal Reserve Banks may
issue interim reoeipts pending delivery of the definitive notes.
Payment
-5for the notes now offered can not be made in cash or by credit , nor w ill
Treasury ce rtificates of indebtedness of any series be accepted in payment.
As fisca l agents of the United States, Federal Reserve Banks are
authorized and requested to receive subscriptions and to make allotments in
fu ll in tho order of the receipt of applications up to the amounts indicated
by tho Secretary of the Treasury to the Federal Reserve Banks of the re
spective d is tric ts .
OFFERING OF TREASURY CERTIFICATES OF MDEBTEDHESS
Series TJ-1923.
The Secretary of the Treasury, under the authority of the act approved
September 24, 1917, as amended, offers for subscription, at par and accrued
in te re st, through the Federal Reserve Barits, Treasury ce rtific a te s of in
debtedness, Series TJ-1923, dated and bearing in te re st from June 15, 1922,
payable June 15, 1923, with in te re st at the rate of three and three-quarters
per cent per annum, payable semiannually.
.Applications m i l be received at the Federal Reserve Banks.
Bearer ce rtific a te s w ill be issued in denominations of $500, $1,000,
$5,000, $10, 000, and $100,000.
The c e rtificates w ill have two in te re st
coupons attached, payable December 15, 1922, and June 15, 1923.
The ce rtificates of said series shall be exempt, both as to principal and
in te re st, from a ll taxation now or hereafter imposed by tho 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-profits and
war-profits taxes, now or hereafter imposed by the United States, upon the
- 6-
income or p ro fits of individuals, partnerships, associations, or corporations*
Tho in terest on an- amount of bonds and c e rtific a te s authorized by said act
approved September 34, 1917, and amendments thereto, the principal of #iich
does not exceed in the aggregate $5,000, owned by any individual, partner**
ship, association, or corporation, shall be exempt from the taxes provided
for in clause (b) above#
The ce rtificates of this series w ill be accepted at par, with an adjust
ment of accrued in te re st, during such time and under such rules and regula
tions as shall be prescribed or approved by the Secretary of the Treasury,
in payment of income and p ro fits taxes payable at the maturity of tho c e rti
ficates*
The c e rtific a te s do not bear the circulation privilege#
The right is reserved to reject any subscription and to a llo t less than
the amount of c e rtific a te s applied for and to close the subscriptions at any
time without notice.
Payment at par and accrued in terest for ce rtificates
a llo tte d must be made on or before June 15, 1922, or on la te r allotment*
After allotment and upon payment Federal Reserve Banks may issue interim
receipts ponding delivery of the definitive c e rtific a te s,
jtoy qualified de
positary w ill be permitted to make payment by credit for c e rtific a te s a llo t
ted to i t for its e lf and its customers up to any amount for which i t shall
be qualified in excess of existing deposits, when so notified by the Federal
Reserve Bank of i t s d is tric t.
Treasury c e rtific a te s of indebtedness of
Series TJ-1922 and Series TJ2-1922, both maturing June 15, 1923, and Series
B 1922, maturing August 1, 1922, with any unmatured in terest coupons attached,
and Victory notes of the 3f per cent series (which have been called for re
demption on June 15, 1922), w ill be accepted a t par, with an adjustment of
accrued in te re st, in payment for any c e rtific a te s of tho Series TJ-1823 now
-7offered which shall ho subscribed for and allotted#
Victory notes of the
34 per cent series in coupon form must have a ll unmaturod coupons attached,
and i f in registered form must be duly assigned to the Secretary of the
Treasury for redemption, in accordance with the general regulations of the
Treasury Department governing assignments.
As fiscal agents of the United States, Federal Reserve Banks are authoriz
ed 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 d istric ts*
<*
TH E SEC R ETA R Y OF TH E TR E A SU R Y
WASHINGTON
June 8, 1922.
isar Sir:
As a holder of 4f- per cent Victory notes, you will, I believe, be interested in
ae inclosed Treasury Department Circular No. 292, dated June 8, 1922, announcing an
jIssue -of United States Treasury notes of Series B-1925, which are offered only in
|¿change for 4f per cent Victory notes.' Treasury notes of Series B-1925 will be
jkted June 15, 1922, will be payable December 15, 1925, and will bear interest at
ae rate of 4-f- per cent per annum, payable semiannually on December 15 and June 15'
a each year.
The new notes^are issued only in coupon form, in denominations of
LOO and upwards. As you know, 4f per cent Victory notes mature on May 20, 1923,
lit may be called for redemption in whole or in part, at the option of the United
tates, on December 15, 1922, and it is the Treasury's intention to call a substanial amount for redemption on that date.
This offering of Treasury notes, thereDre, affords an opportunity to holders of 4f per cent Victory notes to acquire by
Kchange a new obligation of the United States running for three and a half yearsk
t an attractive rate of interest, in place of Victory notes which will be payable
ither December 15, 1922, or May 20, 1923, depending upon the call for redemption.
Almost any banking institution in the United States will handle the exchange
or you, or you may make application direct to the Federal Reserve Bank of your
istrict. Victory notes tendered in exchange, if in registered form, must be duly
ssigned to "The Secretary of the Treasury for redemption," befQre some officer
uthorized to witness assignments of United States registered bonds and notes, in
ccordance with the general regulations of the Treasury Department governing assigntents. Coupon Victory notes must have the Decemb-er 15, 1922, and May 20, 1923,
joupons attached, but the Jqne 15, 1922, coupons should be detached and collected
I ordinary course. No adjustments of interest will be necessary in any case, since
^changes will be made as of June 15, 1922, and interest due on that date will be
laid in ordinary course.
As you will notice from the circular, the right is reserved to reject any subcription and to allot less than the amount of notes applied for and to close the
ubscriptions at any time without notice. You should therefore, if you desire to
jake the exchange, make prompt application for the new notes through your own bank,
r direct to the Federal Reserve Bank of your district, and make arrangements,
treferably through your own bank, for the surrender to the Federal Reserve Bank
f the 4f per cent Victory notes tendered in exchange.
Very truly yours,
Secretary of the Treasury.
o the Holder of
4f- per- cent Victory Notes addressed.
nclosure:
Treasury Department Circular No. 292, dated June 8, 1922.
»—1207»
ADDRESS OE
HOW. S. P, GILBERT, JR.
UNDER SECRETARY OE THE TREASURY .,
BEEORE THE
MAINE BANKERS1 ASSOCIATION,
JUNE 17, 1923*
TH5 REFUNDING- 0F THE WAR TiKiST
I ccrne to you from the Treasuiy at a time when the vast- financial
operations incident to June 15th are drawing to a close*
The m aturities of
principal and in te re st on the public debt amounting to three quarters of a
o illio n dollars, which f e ll due on that date, have now been met, a new offer
ing of one year Treasury ce rtific a te s at 34 per cent hq& been closed with an
over-subscription of almost one hundred per cent, and the Treasury has an
nounced that i t s offering of the new 4 3/8 per cent Treasury notes which was
made at the same time in exchange only for 4i| per cent Victory notes is pro»
ceeding sa tisfa c to rily and w ill i t s e l f close on next Thursday, June 22nd*
This means tnat the Governments financial operations for the fisc a l year
ending June 30, 1922,. are substantially completed and with a ll but two weeks
of the financial year behind us i t is now possible to estimate the results of
the year*
It is accordingly an appropriate time to take stock of what has been
accomplished and to indicate in what direction the Treasury's program is lead
ing.
F irst and foremost, i t is now clear that the Government w ill balance
its budget this fis c a l year, and th at there w ill even be a small surplus over
and above current expenditures.
,1
That this has been accomplished in the face
of the unfavorable prospects that confronted us at the beginning of the year
is due to the unremitting effo rts of the Government departments and establish
ments under the firm leadership of the President to reduce current expendi
tures to the utmost lim its consistent with proper administration*
-And i t is
no mean accomplishment, for according to the present outlook to ta l current
expenditures for the year w ill be less than $3,900,000,000, or a t
least 500 million dollars less
themselves estimated
than the spending departments
would be necessary at the
outset of the year.
*~2*»
Included within these current expenditures, which in the fisc a l year 1921
by the way, had amounted to about $5,500,000,000 on the same basis, are
about $425,000,000 of public debt expenditures on account of the cumulative sinking fund and other debt retirements chargeable against ordinary
receipts*
In other words, the Government has during the year now
closing made that much progress in the gradual liquidation of *its war
debt and with i t s budget d efin itely established oh th is basis i t should
look forward to substantially sim ilar progress each year in the years
to come*
As for the fisc a l year 1923, which opens on July 1, 1922, the
prospects are not good, and according to the best estimates now available
there w ill be a budget d e fic it of perhaps as much as $360,000,000, or
rather $485,000,000 if , as properly should be, the $125,000,000 of
accumulated in terest on War Savings C ertificates of the Series of 1918
is taken into account*
The appropriation b ills for next year have not
yet a ll been passed, and many measures are pending in Congress which would
greatly swell expenditures and s t i l l further increase the indicated
deficit*
Nothing can be clearer, however, than that th is Government owes
i t to its e lf and to the re s t of the world to keep i t s finances clean and
balance i t s budget in 1923 as in the three previous fis c a l years,
and
that the only way to accomplish this is to reduce expenditures already
estimated, and avoid new avenues of expenditure to such an extent as may
be necessary to wipe out the indicated deficit*
I t would be a national
calamity to impose additional taxes, and yet i f there were persistence in
any program of expenditures beyond the lim its of the Governments income
there would be no other course open than the introduction of new taxes to
■3restore the balance»
During the past year the record has been rather one
of reduction of the tax burden, and there are s t i l l larger reductions
for the fisc a l year 1923, amounting to about $800,000,000 as compared
with, what would have been levied under the previous law, but i t w ill not be
possible to hold to these reductions, and certainly not to make the further
reductions that are so necessary to the restoration of normal conditions
in business and industry, unless a ll hands unite to keep Government ex
penditures down to the minimum and to avoid a ll manner of useless and
extravagant expenditure.
Ihe fundamental condition of this Government^ program with
respect to the public deot has thus been a sound policy with respect to
current receipts and expenditures, and having been able for the three f u ll
fisc a l years since the cessation of h o s tilitie s to balance its budget the
Government has been in a position to make important progress within that
period in the handling of the public debt.
The keynote of i t s policy in
that regard, as the President stated in h is f i r s t address to Congress, has
been orderly funding and gradual liquidation.
I t has been the traditional
policy of th is Government since i t s very foundation to set about paying its
debts, and that policy i t has consistently followed since the ending of the
World War, with resu lts that have a far-reaching significance in the develop
ment of our economic and financial situation.
This country came through the war with a gross public debt a t the
high point, on August 31, 1919, of $26,596, 000', 000, an increase of almost
35| b illio n dollars during the war period.
This war debt, however, stood in
quite a different position than the debt which resulted from the Civil war,
and from the outset i t had been arranged, as to both m aturities and redemp
tion privileges, in such a way as to assure adequate control to the Treasury
-4*
over the refunding and liquidation of the debt*
The war debt a t this stage
included over 4 b illio n s of Victory notes maturing within about 4 years and
:redeemable a t the end of 3 years; over 4 b illio n dollars of Treasury c e r tif i
cates of indebtedness, a l l maturing within a year; almost a b illio n dollars of
¡War Savings c e rtific a te s maturing within 5 years; and over 16 b illio n dollars
of Liberty bonds maturing a t various dates from 1928 to 1947, and redeemable at
various dates from 1927 to 1933* With the debt in th is shape the Treasury was
[ in a position to apply to the retirement of early maturing debt any surplus
i revenues that might accrue to i t , whether from salvago or taxation, as well as
any surplus funds that i t might be able
to make available through economies
in the conduct of the Treasury* s balances*
On August 31, 1919, as i t
| happened, the balance in the general fund of the Treasury had been a t a high
I figure in order to prepare for early m aturities of ce rtific a te s of indebtedness
| and with the gradual reduction in the amount of loan c e rtific a te s outstanding •
[ and the fa llin g off in Government expend!tunes i t became possible within the
| ensuing year to reduce the average balances in the general fund and to run the
Treasury on a balance averaging about 400 m illion dollars, as compared with the
average balance of a b illio n dollars or more that had been necessary during
the preceding period*
By th is factor alone the public debt was reduced within
[ a year by as much as 800 m illion dollars, while the to tal net reduction in the
Treasury balance between August 31, 1919,and June 15, 1922,amounted to about 1
!, b illio n dollars, which accounts for a corresponding reduction in the principal
\ of the public debt within that period*
On June 15, 1922, a fte r taking into
account the operations which f e l l on that date, the to tal gross debt of the
; United States was about $22,950,000,000, a to ta l reduction since the peak of
over $3,600,000,000*
The balance of th is reduction a fte r allowing for 1he 1
> b illio n dollar item on account of the reduced balance in the general fund,
-5represents f i r s t this application of about $200,000,000 of repayments by*
foreign governments to the retirement of lib erty bonds in accordance with
the requirements of the lib erty bond acts*
second, the receipt of funds
from salvage and other realization on assets remaining over from the war,
aggregating about $1,400,000,000, and fin ally the application to debt re
tirement of about 1 b illio n dollars of surplus tax receipts during the
fis c a l years-1920, 1921, and 1922, chiefly through the sinking fund and
other debt redemptions vdiich are chargeable against ordinary receipts*
From now on the liquidation of the debt w ill have to be accom
plished chiefly from surplus revenue receipts, and p articu larly through
th© sinking fund and other sim ilar accounts*
The treasury balance has a l
ready been reduced to about as low a figure as is consistent with the
proper conduct of the Governments business, and there is l i t t l e expecta
tion of being able to accomplish further debt reduction by cutting down
the working balancesin depositaries.
Some fu rth er realization on war •
assets may be expected to a lim ited extent through the sale of surplus sup
p lie s and equipment s t i l l held by the War Department, the Navy Department
and the Shipping Board, but for the most p art from realization on the Gov
ernment* s investments in war emergency corporations, such as the War Fin
ance Corporation,and in secu rities of various classes, p articu larly those
of Federal Land Banks and the obligations of carriers acquired under the
Bail road Control Act and the Transportation Act*
Of the war emergency cor
porations, the War Finance Corporation is now the most substantial and
since i t is due to expire by lim itation on Hay 31, 1923, the Treasury
should be able to count on receiving within the next year or t\vo the bulk
of i ts remaining investment in th is corporation, amounting to about
- 6-
j $250,000,000.
A good part of this sum is already taken up in the estimated
ordinary receipts for 1923 *out much of i t ought to be applied in ordinary
course to the reduction of the public debt since i t is now reflected in the
I Treasury*s borrowings.
The sinking fund and other similar accounts must be
relied on,however, to accomplish the most substantial retirements of debt in the
I years to come, and as to tnem, the Treasury has already established the proposi
tion in the f i r s t Budget which was submitted to Congress by the President in the
I f a ll of 1921 that expenditures on this account must be made cut of ordinary
; receipts and be included in the ordinary budget on that basis.
This means that
I provision must be made for these items of expenditure before the budget can
I balance, and a balanced budget each year thus means a reasonable amount of debt.
{; retirement out of current revenues.
To do otherwise, of course,, would make a
I farce of the sinking fund, for on any other basis purchases of obligations for reI tirement on tn is account would accomplish no debt retirement whatever and would
!: simplymean a shifting of borrowings from one form to another.
So much for the liquidation of the public debt which the Treasury is
I accomplishing.
I t became clear early in this administration, however, that the
I gradual retirement of the debt from year to year would not suffice to provide
| for the m aturities which f e ll due within the next two years, and that some proI gram of orderly funding had to be adopted in order to put the short-dated debt in
| manageable shape and protect both the Treasury and the financial markets of the
I country against undue concentration of public debt m aturities.
On Itoch 31, 1921,
I for example, the Treasury faced m aturities of debt within the next two years, or
l thereabouts, aggregating over $7,500,000,000 and of this amount over $4,000,000,
I 000 was concentrated in the Victory Liberty Loan maturing on May 20, 1923*
The
j remainder consisted of about $2,750,000,000 in Treasury C ertificates of Indebtedj ness maturing within a year and about $750,000,000 in War Savings C ertificates.
I I t was clear that the great bulk of this early maturing debt would have to be
refunded) and the Secretary accordingly announced on April 30, 1921, that i t
would he the Treasury’s policy thereafter to vary i ts offerings of ce rtificates
of indebtedness from time to time with offerings of short-term notes at con
venient intervals, with m aturities of from three to five years«
The object of this policy was to d istrib u te the short-dated debt
over a longer period of years, chiefly between the m aturity of the Victory loan
in 1923 and the m aturity of the Third Liberty Loan in 1928, and to do this in
such a way as to spread the m aturities of debt over the period in manageable
amounts that might be taken up to some extent a t least out of surplus revenue
receipts accruing to the Government in those years.
Pursuant to this program,
five public offerings of Treasury notes have now been made, two for cash, in
June and September, 1921, one for cash and in exchange for 4 3/4 percent
Victory notes in February, 1922,and the other two only in exchange for 4 3/4
per cent Victory notes, in March and June,1922. Every offering of notes has
met with a hearty response and the Treasury has been able by this means to
place about $2,200,000,000 of the early maturing debt into more convenient
maturities, and to reduce the Victory loan to manageable proportions.
At the
same time i t has taken advantage of i t s rig h t to c a ll Victory notes for re
demption before maturity, and by calling a l l the 3 3/4 percent notes for re
demption on June 15 i t has en tirely eliminated th at tax-exempt series.
In
connection with the June 15 offering of Treasury notes, moreover, the Secretary
has announced h is intention of calling for redemption on December 15, 1922,a
substantial amount of the 4 3/4 percent Victory notes s t i l l outstanding.
In fact
enough has already been accomplished to assure the success of the Treasury's
plans for the refunding of the short-dated debt and to relieve the country of the
fear of disturbance from spectacular refunding operations, unless by the imposi
tion of new burdens on the Treasury, present plans and policies should be
disarranged.
The refunding already effected, a fte r taking into account in round
figures the resu lts of the June 15 operations, shows remarkable progress as
compared with the situ atio n on .April 30, 1921, when the reminding program
was f i r s t announced.
Victory notes now outstanding amount to only about 3
b illio n dollars as compared with over 4 b illio n dollars at that time*
Treasury ce rtific a te s aggregate about $1,830,000,000 as compared with about
1 $2,750,000,000 and Wan Savings C ertificates maturing or to be redeemed within the year amount to about $650,000,000 as compared with ahfiut
when the program began to operate.
$750,000,000
There are now outstanding, of course,
E 9 ^°^ $2,200,000,000 of entirely new obligations in the form of Treasury
notes, but these mature at various dates in the years 1924, 1925 and 1926,
and the Treasury should, accordingly, be able to frame its plans so as to
take care of them at maturity out of surplus revenues or through secondary
refunding operations i f necessary, without undue stra in to the financial
markets«
There s t i l l remains outstanding, however, about $4,500,000,000 of
obligations maturing within less than a year, $2,000,000,000 of which is in
the form of Victory notes, and th e ir refunding presents a problem' that w ill
require the best attention of the Treasury for p ractica lly the whole of the
next fisca l year*
Eclated to th is general refunding program is the problem of re
finding the large maturity of War Savings C ertificates which f a lls on
January 1, 1923.
In th is connection the Treasury has already offered to the
public a new issue of Treasury Savings C ertificates in convenient form and
denominations and yielding an a ttra c tiv e in te re st return, and i t is hoped
that by th is means among others i t w ill be possible to refund a large p art
-9°f the War Savings maturity into obligations of the same general character
and with the same appeal to the needs of the small investor.
Shis sketch of the Governments refunding operations shows the
course of the Treasury*s program and the general direction in which its
policy of orderly funding and gradual liquidation is leading.
It has been the firm policy of th is Government from i t s very be
ginning to provide for the gradual liquidation of the public debt, and
thoughtful people, I believe, are coming more and more to realize that a
sound policy in th is regard is fundamental not only to the economic de
velopment of the country but also to its preparedness for future emergencies.
Ever since the days of Alexander Hamilton, successive Secretaries of the
Treasury, p articu larly those Secretaries who have had the responsibilities
of office during the periods following great wars, have been concerned
largely with the problem of the funding and liquidation of the public debt,
and in his la s t report to Congress on the public credit, Alexander Hamilton
stated the guiding policy.
f,I t w ill be the*truest policy of the United
States,» he said, «to give a ll possible energy to public credit, by a firm
adherence to its s tric te s t maxims; and yet to avoid the i l l s of an excessive
employment of i t by true economy and system in the public expenditures; by
steadily cultivating peace; and by using sincere, efficien t and perseveringendeavors to diminish present debts, prevent the accumulation of new, and
secure the discharge, within a reasonable period, of such as i t may be at
any time matter of necessity to contract."
In the same report Hamilton had
said what is even today too frequently overlooked, that »Public and private
credit are closely allied , i f not inseparable.
There is, perhaps, no example
of the one being in a flourishing, where the other was in a bad state.
A shock to public credit would, therefore, not only take away the additional
means which i t has furnished, but by the derangements, disorders, d istru sts,
and false principles which i t would engender and disseminate, would diminish
the antecedent resources of private cred it #n
In an ea rlier report, Hamilton, in opposition to a plan which
involved Government borrowing for some emergency purpose, had said,
Nothing can more in te re st the national credit and prosperity than a
constant and systematic atten tio n to husband a ll the means previously
possessed for extinguishing the present debt, and to avoid, as much as
possible, the incurring any new debt«11 Probably never before has the world
furnished so many examples of the soundness of these principles, and sound
financial policy on the part of the Government has proved more than ever to
be perhaps the most essential condition of healthy economic development
and progress*
The budgets of many of the countries of Europe are s t i l l in
chaos, and th is has led to corresponding disturbance in international
financial relations and in sta b ility in the foreign exchanges.
Ihis, in
turn, has proved one of the greatest obstacles to the reestablishment of
normal relationships and the reconstruction of international commerce.
As for this Government, i t s effo rt since the beginning of the
war has been to keep i t s own house in order, to maintain the gold standard
unimpaired and unrestricted, to finance the war on sound lines throng
taxation and through the absorption of Government obligations out of
savings, and a fte r the cessation of h o s tilitie s to balance its budget,
current expenses against current income, and, a t the same time to carry out
a reasonable program for the gradual liquidation and orderly funding of the
-
war debt*
11 -
This policy the Government has p ersisten tly followed from the
beginning of the war to this date, and as a resu lt i t has come through the
greatest war in history and through the exceedingly difficu lt-p erio d of re
adjustment which follbwed the war, with its credit not only Unimpaired but
greatly improved, with the dollar recognized as a standard of value through
out the world and with its banking system in sound condition to meet the '
peace-time demands of business and industry*
This there has been laid the
foundation for a healthful revival of business in th is country on normal levels*
I t the same time i t is , I think, becoming more and more recognized that the
best hope for the gradual restoration of business and industry in Europe
lie s not only in the maintenance of sound financial conditions in this country,
but also in the gradual
adoption of sim ilar principles by the Governments of
Europe, many of which s t i l l p e rsist in the policy of budgetary d efic its and
currency in flatio n ,
m th the financial markets in th is country able to absorb
new issues of securities on reasonable terms, the countries of Europe which
are willing and able to put th eir own finances in order are gradually finding
themselves in a position to get the necessary capital for th eir rehabilitation
through the sale of obligations to investors in th is country.
tro u g h this
means rather than by spectacular gold loans or far-reaching intergovernmental
operations, this country may be expected to contribute its share to the re
construction of Europe, Just as in the days a fte r cur Civil war, European
investors through th e ir investments in our railroads and industries, contri
buted th eir share to the reconstruction of th is country after that war and
stimulated the great development of its resources which has followed,
THE SECRETARY OF THE TREASURY
W A S H IN G T O N
*
July 26, 1922.
Dear Sir:
The Treasury is announcing to-day a call for the redemption on
December 15, 1922, of about half of the 4f- per cent Victory notes which
remain outstanding, and at the same time is offering on the usual terms
a new issue of $300,000,000, or thereabouts, of short-term Treasury notes
bearing interest at 4^ per cent, with provision for additional allotments
up to a limited amount in exchange for 4f per cent Victory notes.
These two operations mark an important further step in the development
of the Treasury's refunding program, and I am sending this letter to the
president of every banking institution in the country in order to draw
attention to the significance of the announcements and ask the cooperation
of the banks in affording to their customers ample facilities for
investing in the new notes.
The call for the partial redemption of 4^ per
cent Victory notes affects about $1,000,000,000 face amount of notes, and
makes the notes thus called for redemption payable on December 15, 1922,
leaving the balance of the Victory Liberty Loan to mature on May 20, 1923,
according to its terms.
The notes called for redemption bear the distin
guishing letters A, B, C, D, E, or E prefixed to their serial numbers, and
can^ thus be readily distinguished from the notes not affected by the call.
Copies of the official circulars will come to you from the Federal Reserv®
Bank of your district and additional copies may be obtained upon appli
cation .
The notes now offered for subscription are designated Treasury notes
of Series B-1926, are dated August 1, 1922, will mature September 15, 1926,
and will not be subject to call for redemption before maturity.
The
amount of the offering is $300,000,000, or thereabouts, but the Secretary
of- the Treasury reserves the right to allot additional notes up to a
limited amount to the extent that 4f- per cent Victory notes are tendered
in payment.
Subscriptions may be closed at any time without notice, and
the right is reserved to reject any subscription and to allot less than
the amount applied for. Holders of outstanding 4f- per cent Victory notes,
whether or not called for redemption, thus have an opportunity now,
within the limitations of the offering, to exchange their notes for new
securities of the Government bearing interest at 4^ per cent and running
for a -period of over three years after Victory notes would mature or be
redeemed. Applications for the Treasury notes now offered will be received
in regular course through the several Federal Reserve Banks, as fiscal
agents of the United States, from which further particulars concerning
the offering may be obtained.
This is the fourth exchange offering
which the Treasury has made in order to facilitate the refunding of the
Victory Liberty Loan, and on this offering, as on previous offerings,
I hope that banks and trust companies throughout the country will extend
to their customers every possible assistance in effecting exchanges.
The Treasury's program for dealing with the short-dated debt of the
Government has now progressed to such a point that I believe it is worth
while to recite what has already been accomplished and call attention to
what remains to be done within the current fiscal year.
On April 30, 1921,
when the situation was first outlined in my letter of .that date to the
Chairman of the Committee on Ways and Means, the gross public debt, on the
basis of daily Treasury Statements, amounted to about $23,995,000,000, of
which over $7,500,000,000 was shsri-dated dsbt maturing within about two
years, made up of over $4,050,000,000 in Victory notes, over $2,800 000 000
in Treasury certificates of indebtedness, and about $650,000,000 in’w a r ’
S a v m g s Certificates. By June 30, 1922, the gross public debt had been
reduced to about $22,963,000,000, a reduction of about $1,032,000 000
during the period of 14 months.
This reduction has taken place, for the
most part, in the short-dated debt, and has been accomplished through the
operation of the sinking fund and other public debt expenditures chargeable
against ordinary receipts, the application of surplus revenues to the
retirement of debt, and the reduction of the balance in the general fund.
At the same time the Treasury has been engaged, through its refunding
operations, in distributing substantial amounts of the remaining short-dated
m °;T® c°nven2-en'b maturities, and in this manner has refunded about
$2 250,000,000 of early maturing debt into Treasury notes of various series
maturing in 1924> 4925, and 1926. As a result of these operations the
amount of outstanding Victory notes has been reduced from over
000,000 °n April 30: 1921. to about $1,990,000,000 on June 30 1922
and the amount of outstanding Treasury certificates from over $2,800 000 000
to about $1,825,000,000: In addition there are about $625,000,000 of War
Savings Certificates of the Series of 1918 which become payable on J a n u a r v
1; ^ n 3nnn°ninat^0rlvJUieJ32 ’J1922’ there still remained outstanding about
$4,440,000,000 of short-dated debt, all of which matures in the current
fiscal year.
.
refunding of this debt, most of which will have to be accomplished
within the next ten months, presents a problem of first importance.
The
$300,000,000, or thereabouts, of Treasury notes offered for subscription
on the usual terms will provide for the Treasury certificates maturing
August; I an<^ ^or
Treasury's remaining cash requirements between now
and September 15, 1922, while the offering to allot additional notes in
exchange for 4^ per cent Victory notes should accomplish the refunding of
some more of the Victory Liberty Loan and correspondingly reduce the amount
ox Victory notes to be provided for upon redemption or maturity.
At the
same time the call for the redemption of about half of the outstanding
Victory notes before maturity will make that much of the Victory Loan pavable on December 15 of this year, and enable the Treasury to deal with it
before maturity by appropriate refunding loans.
This will mean that by
January 1, 1923, the outstanding Victory notes will have been reduced to
about $1 000,000,000, or, in other words, a manageable maturity which can be
dealt with as opportunity offers without spectacular refunding operations
that would upset the security markets and disturb the course of business and
industry.
;
“L
The current offering of notes is thus an essential part of the refunding program on which the Treasury is engaged, and the banking institutions
of the country by extending their facilities for the exchange of out
standing 4f per cent Victory notes for the new notes will be performing an
important service for the country as well as for their customers.
Cordially yours,
to
To the President
of the Bank or Trust Company addressed.
__
Secretary,
2— 12183
THE WHITE HOUSE
Washington
September 19, 1922*
ISTO THE HOUSE OF REPRESENTATIVES?
Herewith is returned, without approval H.R, 10874, a b i l l ,fto provide
| adjusted compensation for the veterans of the World War, and for other purposes*»
With the avowed purpose of the b i l l to gUre expression of a n atio n ’s
I; gratitude to those who served in i t s defense i n the world war, I am in accord,
I but to i t s provisions I do not subscribe* The United States never w ill cease
to be grateful, i t cannot and never w ill cease giving eg ressio n to that
gratitude*
II
Ih legislatin g for what: is called adjusted compensation Congress f a ils ,
I firs t of all* to provide the revenue from whidli the bestoiàal is to be paid*
! Moreover, i t establishes the very dangerous precedent of creating a treasury
^ convenant to pay which puts a burden, variously estimated between four and five
I billions, upon the American people, not to diéôharge an obligation, which the
I government always must pay, but to bestow a bonus which the soldiers them*
selves, while serving in the world war, did not expect*
It is not to be denied that the nation has certain very binding obligations
j to those of i t s defenders who made re a l sacrifices in the world war, and who
left the armies,Injured, disabled or diseased, so th at they could not resume
I their places in the normal a c tiv itie s of life* These obligations are being
gladly and generously met* Perhaps there are here and there in efficien cies and
J injustices, and some d istressin g instances of neglect, but they are a l l unin- •
I tentional, and every energy is being directed to th eir
e a rlie st possible corI rection* In meeting th is obligation there is no complaint about the heavy
| cost* In the current fis c a l year we are expending $510,000,000 on hospitaliza! tion and care of sick and wounded,, on compensation and vocational train in g for
the disabled, and for insurance. The figures do not include the more than
! $35,000,000, in process of expenditure on hospital construction* The estimates
j for the year to follow are approximately $470,000,000, and the figures may
need to be made larger* Though the peak in hospitalisation may have passed,
there is a growth in domicilization, and the discharge in f u ll of our obliga
tions to the diseased, disabled, or dependent who have a right to the govern; ment’s care, with in su ran ce-liab ility added, w ill probably reaqh a to ta l sum
in excess of $25,000,000, 000* t
More than 99,000 veterans are now enrolled in some of the 445 different
courses in vocational training* F ifty-four thousand of them are in schools or
colleges, more tlmn 38,000 are in in d u strial establishments, end a few more
than 6,000 are being trained in schools operated by the Veterans* Bureau*
Approximately nineteen thousand have completed th e ir courses, and have
employment in a l l cases where they desire i t , and 53,000 have deferred for the
present time their acceptance of training* The number eligible under the law
may reach close to 400,000, and f a c ilitie s w ill continue to be afforded,
unmindful of the necessary cost, u n til every obligation is fu lfille d .
Two Hundred and seventy-six thousand patients have been hospitalized,
_j» r e than a quarter of a m illion discharged, and 25,678 patients are in our
Who spit aXs today.
Four hundred and sixteen thousand awards of compensation have been made on
account of death or d isa b ility , and $480,000,000 have bean paid to disabled men
^ r th e ir dependent relatives* One hundred and seventy-five thousand disabled
^x-service men are now receiving compensât ion. along with medical or hospital
oar© where needed, and a quarter of a m illion checks go out monthly in dis
tributing the eight-m illion dollar payment on indisputable obligations*
**2«*
I re c ite the figures to remind the Congress how generously and how
properly i t has opened the treasury doors to discharge the obligations o i
the nation to those to whom i t indisputably owes compensation and care*
Enough undying gratitude is the need of every one who served, i t is not to
, ;? said
* tm terial bestowal is an obligation to those who emerged from
liCt riot only ^nharme^» but physically, mentally and sp iritu a lly
I
great experience* If an obligation were to be admitted, i t
I
e J 9 charge the adjusted compensation b i l l with inadequacy and stinginess
b e c o m in g our republics* Such a bestowal, to be worth while, must be
andwithout
Clearly the b ill returned herewith takes
in a b ility of the government wisely to bestow, and says, in
[ tho a-t*-Ce+4 WS do
have the cash, we do not believe in a tax levy to meet
L ith i
' here U our not0> y°u “»y have our credit for half i t s
- * his is not compensation, but rather a pledge by the Congress, while
m ? executive Branch of the government is le f t to provide for payments fa llin g
aue in ever increasing amounts.
I
t9hen the b i l l was under consideration in the House I expressed the con
viction that any grant of bonus ought to provide the means of paying i t , and
1 was unable to suggest any plan other than that of a general sales tax* Such
apian was unacceptable to the Congress, ;|md the b i l l has been enacted without
even a suggested means of meeting the cost. Indeed, the cost is not definitely
jsaown, e ith e r for the immediate future, or in the ultim ate settlement* The
reasury estimates, based on what seems the-janst lik ely exercise of the options,
ligures the direct cost at approximately $145,000,000, for 1923, $225,000,000
^ L ^ ' J i 1! ' 000»'000 for X925* $312,000,000.for 1526, making a to ta l of
730,000,000 for the f i r s t four years of i t s operation, and a to ta l cost in
excess of $4,000,000,000. No estimate of the.large indirect cost ever had
, 14
9* jj® c e rtific a te plan sets up no reserve against the ultim ate .
|K r
.?* The plan avoids any considerable direct outlay by the government
f . . - 9af XX3r <^0ar8 of the b i l l 's proposed operations, but the loans on
Br*£k I I * aiea vrouXd
floated on the credit of the nation. This is borrowing
v * CL4dit ¿u st as tr n l? aa though the leans .were made by direct
oval* ‘♦Via
Snd l 1170!7“03 a dangerous abude of public cred it. Moreof
plan of P0
1® l i t t l e less than c e rtifie d in ab ility
I* cannot,
ftan«nf0V!sanction*
r Uaf?t to pay* 021(1 invites a practice on sa
* c rific ia l b arter which
r .4.
i
fr in g that the public credit is ’founded on the popular
ability
efen aib ility of public expenditure, as well as the government's
reach’ a iL if T l hoans^come from every rank in lif e , and our heavy, tax burdens
sixth; of
indXr®°Hy, every element in our citizenship* To add one'five
i 0® oi cm* Public debt for a d istrib u tio n among less than
santiaianfc m*
hundred and ten millions, v^ether inspired by grateful
credit I« v^4??l i tiCaX 9^ 9di8ncy» would undermine the confidence on which our
whenever
*?d df ta5iish thQ Precedent of d istrib u tin g public funds
to do so ^ P° saX and
niimbers affected make i t seem p o litic a lly appeal-
b e s t o ^ l $a^ L apPrai8ed th@ dan^er of borrowing directly to finance a
problems
obligation, and manifestly recognized- the financial
w
i t h
i ?
at i 0n U confront9d. Our maturing promises to pay
Of which ur?
* f i95a l year amount t0 approximately $4,000,000,000, most
«
be 3ref^ d0d- Within the next six years more than
1
*
.
, da^
and w&ll have to be financed* These
wfng^S^ ijia^i^ih g ^lig atio n s are d iffic u lt enough to meet without the
,. tation. of added borrowings, every one of which threatens higher in terest,
.slays the adjustment to stable government financing and the diminution
federal
a to the defensible cost of government*
■^
«
V I t is sometimes thoughtlessly urged that i t is a staple thing fo r the rich
republic to add four b illio n s to i t s indebtedness* This impression comes from
^ ^ ..^ o d in e ss of the public response to the government's appeal fo r funds amid
«o stress of war* I t is to be remembered that in the war everybody was ready
*3to give his ail* ta t us not recall the comparatively few exceptions* Citizens
of every degree of competence loaned and sacrificed, precisely in the earns
sp irit that our armed forces went out for service. The war s p irit impelled* To
a war necessity there was but one answer, but a peace bestowal on the ex-service
men, as though the supreme offering could be paid for with cash, is a perversion
of public funds, a reversal of the policy which exalted p a trio tic service in the
past, and suggests that future defense is to be inspired by compensation rather
than consciousness of duty to flag and country.
The pressing problem of the government is that of diminishing our burdens,
rather than adding thereto* It is the problem of the world. War in flatio n s and
war expenditures have unbalanced budgets and added to indebtedness u n til the
whole world is staggering under the load* We have been driving in every direc
tion to cu rta il our expenditures and establish economies without impairing the
essentials of governmental a c tiv itie s, it has beén a d iffic u lt and unpopular
task. It is vastly more applauded to expend than to deny* After nearly a year
and a quarter of insistence and persuasion, with a concerted drive to reduce
government expenditures in every quarter possible, i t would /wipe out everything
thus far accomplished to add how th is proposed burden, and i t would rend the
commitment to economy and saving so essential to our future welfare*
The financial problems of the government are too l i t t l e heeded u n til we. are
face to face with a great emergency. The diminishing income of the government*
due to the receding tides of business and attending incomes, has been overlook!
momentarily, but cannot be long ignored* The la test budget figures for the cur
rent fisc a l year show an est to te d d efic it of more than $650,000,000, and a
further d eficit for the year succeeding, even after counting upon a l l interest
collections on foreign indebtedness Which the government is likely to receive*
To add to our pledges to pay, except as necessity compels, must seem no lesa
than governmental folly* Inevitably i t means increased taxation, which Congress
was unwilling to levy for the purposes of th is b ill , and w ill turn us from the
course toward economy so essential to promote the a c tiv itie s which contribute
to common welfare*
It is to be remembered that the United States played no self-seeking part
in the world war, and pursued an unselfish policy a fte r the cause was won* We
demanded no reparation for the cost involved, no payments out of which obligaI tions to our soldiers could be mst. I have not magnified the willing outlay in
* behalf of those to whom we have a sacred obligation* I t ,is essential to remem
ber that a more than four-billion-dollar pledge to the able-bodied ex-service
wen now w ill not diminish the later obligation which w ill have to be met when
the younger veterans of today shall contribute to the r o lls of the aged, indigent
and dependent. It is as inevitable as that the years w ill pass, that pension
provision for world war veterans w ill be made, as i t has been made for those who
served in previous war* It will cost wore b illio n s than I venture to suggest*
There w ill be Justification when the need is apparent, and a ©ational
^
policy today is necessary to make the nation ready for. the expenditure vouch is
certain to be Required in the cowing years. The contemplation of such a policy
is in accord with the established practice of the nation, and puts the service
men of the world war on the same plane as the millions of men who fought the
previous b attles of the republic.
•
*
_
I confess'a regret that I mast sound a note of disappointment to the
service men who have the impression that i t is as simple a natter for tne go
ment te bestow Millions in peace as i t was to expend b illio n s in war. i regret
I to stand between them and the pitiably small compensation proposed.^ 1va i* 7?
. to be out of accord with the majority of Congress which has voted the bestowal.
The siaple t r u th is that th is b ill proposes a government obligation e t j m n w m
fou r billions without a provision of funds for the extraordinary expenditure,
.
nkich the Executive Branch of the government must finance in the face of d iiii
Ï financial problems* and the complete defeat of our commitment to effect
appeal, there f o r e , to the candid reflectio n s of Congress
country, and to the ex-service men in p articu lar, as to tth e course
L1
further the welfare of our country. These ex-soldiers who served so
*
war, and who are to be so conspicuous in the progress of the republic in the halt
century before us. must know that nations can only survive where taxation is reStrained fro» the lim its of oppression, where the public treasury is locked against
*i*$* legislation, but ever open to public necessity and prepared to meet aix
essential obligations* Such a policy makes a b etter country for which to Xignt,
or to have fought, and affords a surer abiding place in which to live a n d attain .
WARREN G* HARPING.
Reprinted from the Nation’s Business for October, 1922
A Report to U. S. Stockholders
B y S. P . G I L B E R T , J r.
Undersecretary of the Treasury
H E T R E A S U R Y began the current
fiscal year, on July i, 1922, facing on
the one hand an estimated deficit for
[the year, on the basis of the latest Budget
¡[figures, amounting to well over $600,000,000,
ijand on the other hand the necessity of re
financing about $4 ,450,000,000 of short-dated
¡(debt m aturing within the year, in the form
¡of Victory notes, W a r Savings certificates
land T reasury certificates of indebtedness.
¡W ith these vast refunding operations to
¡carry on, it is, of course, of the first imjjportance that the Budget should balance for
¡the year, making provision at the same time
[for meeting regular annual charges like the
| «inking fund and leaving no deficit to be
pnaTnced by new borrowings. T h e primary
H p r J oblem of the year, therefore, has been to re
jo ic e expenditures to such an extent as to bring
line Budget into balance, and to this problem
Fthe whole administration, under the leaderII ship of the President, is addressing itself.
1 1 These efforts, under the Budget system, are
I concentrated and coordinated through the
I Bureau of the Budget, which has now be
ll come established as the arm of the Executive
| to enforce economies in the administrative
[¡ expenditures of the Government.
The table on the next page, giving the latest
I Budget estimates of receipts and expenditures
I for the present fiscal year, shows the dimen| | sions of the problem.
T
h e
b u s in e s s
m a n
w ho,
looking ahead for th e year, sees
an alm ost certain deficit facing his
concern, calls in his associates and
begins to plan radical measures. T h e
U n ite d States G overnm ent, already
heavily in debt, is looking ahead to
an estim ated deficit fo r th e c u rre n t
fiscal year.
W h a t is the G o v ern m en t doing
about it? T h a t is w h at th e public
w an ts to k n o w ; and in this article
by a T re a s u ry official you are given
a com plete financial statem ent, to
gether w ith a fran k discussion of
the cou n try ’s position and w h a t the
adm inistratio n hopes to accomplish.
T
— T he E ditor.
the IHTfiky Departm ent, $284,453,847 for the
railroads, and $ 137 ,031,765 estimated expen
ditures of the Shipping Board and Emergency
Fleet Corporation, leaving only a relatively
small amount for all other departments and
establishments subject to executive control.
T he deficit, however, m ust be overcome, for
nothing can be clearer than th at this Gov
Eliminating the Deficit
ernment owes it to itself and to the rest of
the w orld to keep its finances clean and to
H ESE estimates, it w ill be noted, include
make every effort to balance its Budget in
among the receipts, payments of about
1923 and in 1924 as successfully as in the
Bfc'225,000,000 as interest on foreign obligations,
three previous fiscal years. T h e sound way
B b o u t $200,000,000 of which represents into accomplish this is to reduce expenditures
"^terest on the British debt to the United
and to avoid new avenues of expenditure to
States, and also $ 100,000,000 of expected re
such an extent as may be necessary to wipe
turns to the T reasury as a result of the
out the indicated deficits. I t would be a
gradual liquidation of the W a r Finance
national calamity to impose additional taxes,
Corporation. O n the other hand, the esti
and yet if there were persistence in any pro
mates of expenditures, which are bhsed on the
gram of expenditure beyond the limits of the
figures received from the several spending
Governm ent’s income there would be no other
departments and establishments, make no
course open than the introduction of new
allowance for extraordinary expenditures not
taxes to restore the balance. D uring the
already provided for by legislation, as, for
fiscal year 1922 the Government made a
example, a soldiers’ bonus, and the indicated
record of reduction in the tax burden, and
déficit of $ 672,000,000 is entirely w ithout
there are still larger reductions for the fiscal
regard to any charges of this character.
T o reduce the deficit, and if possible elimi year 1923, amounting to about $ 800,OOO,OOO
as compared w ith w hat would have been
nate it by the end of the year, is the end
levied under the old law, but it will not
toward which the whole adm inistration is
be possible to hold to these reductions, and
striving, and the best hope of accomplishing
certainly not to make the further reductions
it will be through increased revenues from
that are so necessary to the restoration of
realization on securities and surplus prop
normal conditions in business and industry,
erty, and more particularly in further reducunless all hands unite to keep government
tions in expenditure.
expenditures down to the minimum and to
An analysis of the figures given in the
avoid all manner of useless and extravagant
accompanying statem ent shows which direc
expenditure.
tion these efforts can take and how difficult
T he fundamental condition of the T re a s
it is to deal w ith many items of expenditure.
ury’s program since the w ar has been a sound
To a large extent, for example, expenditures
policy w ith respect to current receipts and
are not subject to modification by executive
expenditures, and having been able for the
control, particularly such items as interest on
three full fiscal years since the cessation of
the public debt, $975 ,000,000; tru st fund in_vgstnprts; $ 34,362,000; pensions, $271 ,850,- hostilities to balance its Budget, the T reasury
has been in a position to make_ important
Indians, $32,487,682 ; custom sr and to
progress within the same period in the han
urnai revenue refunds, $ 52,962, 1 9 '; good
dling of the public debt. T h e keynote of
roads, $ 125 ,684,000; and, for the most part,
veterans’ relief, amounting to $ 532, 168, 160. its policy in that regard, as the President
stated in his first address to Congress, has
O f the remainder, $349,706,000 represents
been orderly funding and gradual liquida
estimated expenditures of theH tâ^T D epartr
tion. I t has been the traditional policy of
¡¡pent, $ 305,236,200 estimated expenditures of
T
this Government since its very foundation
to set about paying its debts, and thatf policy
it has consistently followed since the lending
of the W orld W a r, w ith results that have a
far-reaching significance in the development
of our economic and financial situation.
T his country came through the w at with
a gross public debt at the high point, on
August 31 , 1919 , "of $ 26,596,000,000, fan in
crease of over twenty-five billion [dollars
during the w ar period. On August 3 1922,
the total gross debt stood at $23,042,000,000,
a reduction since the peak of about $3 ,554»"
000,000. T h e greater p art of this reduction
has been accomplished through ( 1 ) thelreduction in the balance in the general fund of
the T reasury, ( 2 ) the operation of the sink
ing fund and other debt retirements charge
able to ordinary receipts, and ( 3 ) the' appli
cation to debt retirem ent of receipts from
salvage and other liquidation of war, assets
and, to a much smaller extent, through the
use of ordinary revenues.
From now on the liquidation of tile debt
will have to be accomplished largely from
surplus revenue receipts, through the {opera
tion of the sinking fund and other feimilar
accounts. T he T reasu ry balance has already
been reduced to about as low a figure as is
consistent with the proper conduct Jof the
G overnm ent’s business, and there -is little
hope of being able to accomplish further debt
reduction by cutting down ,the workimg bal
ances in depositaries ._Some further Realiza
tion on w ar assets may be expected, to a
limited extent, through the sale of surplus
supplies and equipment still held by thre W a r
D epartm ent, the Navy D epartm ent and the
Shipping Board, and to a much la ra er ex
tent through realization on the Government's
investment in w ar emergency corporations,
such as the W a r Finance Corporation, and
in securities of various classes, particularly
those of the Federal Land Banks alid the
obligations of carriers acquired under the
Federal Control Act and the T ra n sp o rta
tion Act.
The Nation’s Debt
H E sinking fund and other similar ac
counts must be relied on, however] to ac
complish most of the debt retirementPin the
years to come, and the T reasu ry has jjlready
established the proposition, in the first ¡Budget
submitted to Congress by the President in
the fall of 1921 , th at expenditures 0» these
accounts must be made out of ordinary re
ceipts and be included in the ordinary [Budget
on that basis. T his means that provision
has to be made for these items of expenditure
before the Budget can balance, and a bal
anced Budget each year thus means a reason
able amount of debt retirem ent out
cur
rent revenues.
T he most immediate problem affecting the
debt has been, of course, the refinancing of
the short-dated debt, and the T reasujy’s re
funding program has now progressed Jo such
a point th at I believe it is w o rth w h ile to
recite w hat has alreadyfice«“a£coifi,p jffk'fe:33iir
call attention to w hat remains to Iff done
within the current fiscal year.
O n A pril 30, 1921 , when the si aation
was first outlined in the Secretary’s fitter of
that date to the chairman of the Committee
on W ays and Means, the gross public debt,
T
THE
N A T I O N ’S BUS I NES
October, Ì922
kets of the fear of spectacular refunding
liquidation is leading. Thoughtful people I
on thej .basis of daily T reasury statements,
loans and perm it necessary financing of busi
believe, are coming more and more to realize
amounted to about $23,995,000,000, of which
ness and industry to proceed w ithout undue
that a- sound policy in this regard is ¿daover $ 7 ,50b,t)00,oo0 * was short-dated debt
interference from government operations.
mental not only to the economic development
m aturing within about two years. By August
Related to this refunding is the problem
of the country but also to its preparedness
31 , 1922, the gross public debt had been re
of " refunding the large m aturity of W a r
for future emergencies, and probably never
duced ¿0 about $23,042,000,000, a reduction of
Savings certificates which falls on January 1 ,
before has the world furnished so many
about $953,0,00,000 during the period of 16
1923. In this connection the T reasu ry is
examples of its importance. The budgets and
month!! T his,/eduction; has taken place, for
Dear
offering to the public a new issue of T reasu ry
currencies of many of the countries of Europe
the most fa rt, in the short-dated debt, and
savings certificates in convenient form and
are still in chaos, and this has led to cor
has been accomplished in the manner already
denominations and yielding an attractive in
responding disturbance in international
G iren
outlinedcial relations and instability in the 1
terest return, and hopes that by this means
At the same time, the T reasury has been
fo r w
it will be possible to refund a large p art of
exchanges. This, in turn, has proved one of
engaged, through its refunding operations, in
the W a r Savings m aturity into obligations of
the greatest obstacles to the reestablishment
distributing substantial amounts of the re
of th
the same general character and w ith the
of norm al relationships and rehabilitation of!
maining short-dated debt into more convenient
V ic to
international trade.
same appeal to the needs of the small investor.
m aturities, land in this manner has refunded
tende
T his sketch of the G overnm ent’s refunding
I t has been the constant effort of thirl
about t$2,742,000,000 of early m aturing debt
government,
on
the
other
hand,
to
operations
shows
the
course
of
the
T
re
a
su
ry
’s
into Treasury- notes of various series m atu r
¡natur
its own house in order, to maintain the
program and the general direction in which
ing in 1
1924j 1925 and 1926. As a result of
State
its policy of orderly funding and gradual
standard unimpaired and unrestricted, to
these operations the amount of outstanding
coupo
finance the war on sound lines
V ictor/ notes has been re
through taxation and through .Appli
duced from over $4 ,050,000,. _______
the absorption of government
Treas'
000 op A pril 30, 5 1921 , to
obligations out of savings,
about ($ 1 ,838,000,000 on A u
payme:
Estimated
Government
Receipts
and
Expenditures,
Fiscal
Year
1923
after the cessation of host’
gust JfJ 1922, and the amount
a llo t]
ties to balance its Budg
(On Budget Basis, Revised)
of outstanding T reasury cer
upon
current
expenses
against
cu
tificate'^ from oyer $2 ,800,000,RECEIPTS
s c rib
rent income, and, at the samf
$375,000,000
000 t«|> about $ 1 ,551 ,000,000.
Customs ...................... ................................. .........................
notes
Internal revenue:
time to carry out a reasonable
In addition there are about
$1,300,000,000
Income and profits taxes ..................................
payme]
program for the gradual li
$625,000,000 of W a r Savings
900,000,000 2 ,200,000,000
Miscellaneous internal revenue ......................
subsc:
quidation and orderly funding
Certificates of the series of
Miscellaneous revenue:
of the w ar debt. This policy
1918 *which become payable
Sales of public lands ................. ................................. $ 1,500,000
the Treasury has persistently
oppor
Federal Reserve Bank franchise tax receipts . . . .
10,000,000
-on Jan u ary | 1 , I 923> s0 th at
Interest on foreign obligations ............................... .
225,000,000
followed from the beginning
Goveri
on August 31 , 1922, there
31.300.000
Repayments of foreign obligations
of the w ar to this date, and ffiaturr
still \ remained outstanding
60,000,000
Sale of surplus war supplies
as a result this country has
12.315.000
Panama Canal ......................
about *$4 ,000,000,000 of shortaddrei
523,825,311
183,710,311
Other miscellaneous ........
come through the greatest
dated I debt, all m aturing in
count]
w ar in history and through the
the cm rent fiscal year, as com
in the
$3,098,825,311
Total
receipts
exceedingly
difficult
period
o
f
pared w ith about $4 ,450,000,b rin g
readjustment
which
fo
llo
w
ed
EXPENDITURES
000 outstanding when the
the w ar, with its credit notl fo r i1
Ordinary expenditures not subject to Executive
fiscal year began.
only
unimpaired but greatly b utior
control
:
As—a result of short-term
$13,643,626
Legislative ................................ .............. ........ ............
improved, with the dollar
]
refunoing operations already
Ordinary expenditures for operation of the routine
recognized as the standard alreac
business of government generally subject to
undertaken for September 15 ,
Executive control:
throughout the world ami. what e
in cor nection w ith the quar
334,645
Executive office ............................................................ $
w ith its banking system ij f i r s t
16,207,193
State
Department
terly t ax payment and T re a s
132,356,986
sound condition to meet th| b a sis
Treasury Department ................................................ |
ury certificate m aturities fall
305,236,200
War Department, exclusive of Panama Canal . ..
peace-time demands of buss
7,147,673
ing or th at date, about $ 227,Panama Canal ........................................................
ness and industry. Thus then of whi
349,706,000
Navy Department ................. ...................................
000 ,0 o of this amount will
42,911,429
Interior Department proper .................................... .
- has been laid the foundatioa Septen
be refunded into one year
32,487,682
Indian Service ....... .......................................................
|22,8C
for a healthful revival of bus
Department of Agriculture, exclusive of “Good
T reasu ry certificates m aturing
alread
60,023,100
Roads” ........................... .......................... .
ness
on
normal
levels.
September 15 , 1923, at 3
19,200,360
Department of Commerce ...........................................
with ir
A t the same time it is,
7,192,558
per cent, so th at , on Septem
Department of Labor ...................... ...................
think, becoming more wj due th
4,834,450
Department of Justice .................................................
ber 3| £ 1922 , the gross public
14,979,891
Judicial ........................................... ...................................
more recognized that the bcS indebt
d e b tjiu g h t to stand at about
Independent i offices :
hope for the gradual Restora cates
532,168,160
United States Veterans’ Bureau ........................
$22,810,000,000,
of
which
Shipping Board and Emergency Fleet Cor
tion of business and indusB! Of the
$3 ,59^,000,000 w ould be debt
poration ..........
137,031,765
in Europe lies not only m
maturing w ithin the fiscal
Federal Board for Vocational Education .......
5,711,042
c e rtif
maintenance of sound fin^0
All other ..............................................
16,825,989
year, $ 1 ,805,000,000 of it in
1,708,263,135
District of Columbia . . . . . ................................
23,908,012
conditions in the United statu silv er
the form of Victory notes,
but
also in the gradual a op Obtobe
36,004,566
Deficiencies in postal revenue ....... .................................
$ i , i 6< ,000,000 in the form of
ment o
tion
of similar principles
Operations in special funds :
T reatury
certificates,
and
Railroad administration and transportation act .. $284,453,847
and i t
the
governments
of
Eu
tr°
I?
184,453,847
$625,1100,000 in the form of
War Finance Corporation ........................................... (a) 100,000,000
profit
many
of
which
still
P
er*®
fj
Expenditures
not
subject
to
modification
by
ExecuW a r ’¿Savings certificates.
tive control:
policies of budgetary de
O f ; the Victory notes still
52,962,195
Customs and internal revenue refunds ..............
and currency inflation.
271.850.000
Pensions ....... ................. ..........................................
outstanding, about $ 900,000,125.684.000
Good roads ....... ................................ .
the
financial markets here
000 fill due on December 15 ,
489,231,368
38,735,173
Increase of compensation ......................................
of seed!
to absorb new issues <
1922, having been called for
ties
on
reasonable
term
s,!
Reduction
in
principal
of
public
debt,
chargeable
to
redemption on th at date, while
ordinary receipts:
countries
of
Europe
w
h
ic
the 1alance becomes payable
284,000,000
Sinking fund ..................................................................
willing and able to Put
Purchase of Liberty bonds from foreign repay
at maturity on M ay 26, 1923.
31,300,000
own finances in order J|
ments .................... ........................:..................... .
T h e ’ refinancing of these
5,000,000
Redemption of bonds and notes from estate taxes
gradually finding t^ems .
Redemption of securities from Federal Reserve
obligations w ill require im
in a position to get the n
10,000,000
330,300,000
Bank franchise tax receipts ...................................
ports it
further
refunding
sary capital for their re
operations by the T reasury
Investment of trust funds:
tation through the sae■
26,162,000
Government life insurance fund ............... . . . . . .......
durirfc the year, but enough
Civil Service retirement fund and District of
obligations to investors^
rosuP&g*. has - already heen
-8,200,000
----Colombia teachers’- -retirement fund--c.. . e.-r ■ country.
.
oAJ
the handling of the
Through this mea^ rath
975,000,00
Interest on the public debt
y Liberty Loan to show
than by spectacular gold ^
the T re asu ry ’s refundTotal expenditures chargeable to ordinary
$3,771,258,542
or far-reaching intR.r~S
receipts ............ ..........
ing program is w ell adapted
m ental operations, this coim«)
$672,433,231
Excess of expenditures
t the needs of the situamay be expected to c o o t* !
(a) Excess of credits, deduct.
Its successful developto the rebuilding of Euro
should relieve the m ar-
THE SECRETARY OF THE TREASURY
WASHINGTON
October 9, 1922.
Dear Sir:
I am sending you herewith a copy of the official Treasury Department
Circular announcing the offering of 4^ per cent Treasury bonds of 1947-52
for which subscription books open to-day.
The offering is for
$500,000,000, or thereabouts, with the right reserved to the Secretary
of the Treasury to allot additional bonds to the extent that 4f- per cent
Victory notes or Treasury certificates maturing December 15th are
tendered in payment.
The new bonds will be 25/30 year bonds, dated October 16, 1922,
maturing October 15, 1952, and redeemable at the option of the United
States on and after October 15, 1947.
The bonds will be issued in both
coupon and registered form, in denominations of $100 and upwards.
Applications will be received through the Federal Reserve Banks, and the
Treasury is prepared to make deliveries promptly upon allotment_and
payment.
Subject to the limitations on the amount of the offering,
allotments will be made in full, in the order of receipt of application,
upon subscriptions for amounts not exceeding $10,000 for any one sub
scriber, and upon subscriptions for which either 4f per cent Victory
notes or Treasury certificates maturing December 15th are tendered in
payment.
Other applications for amounts exceeding $10,000 for any one
subscriber will be received subject to allotment.
This is a refunding issue, and it affords a particularly favorable
opportunity to holders of 4f- per cent Victory notes to acquire a long-time
Government bond on attractive terms in place of Victory notes which will
mature or be redeemed within the next few months.
X am, therefore,
addressing this letter to the heads of all banking institutions in the
country, and asking you to provide every possible facility for investing
in the new bonds.
I hope that you will also make a special effort to
bring the offering to the attention of your customers, large and. small,
for it is the Treasury's desire to secure the widest possible distri
bution of the bonds among investors.
I think you will be interested in this connection to know what has
already been accomplished in the refunding of the short-dated debt, and
what still remains to be done. On April 30, 1921, when the Treasury
first announced its refunding program, the gross public debt, on the
basis of daily Treasury statements, amounted to about $24,000,000,000,
of which over $7,500,000,000 was maturing within about two years.
On
September 30, 1922, the total gross debt on the same basis stood at about
$22 800,000,000, and of the early maturing debt about $4,000,000,000 had
already been retired or refunded, chiefly into short-term Treasury notes
with maturities spread over the next four fiscal years.
There will fall
due this fiscal year about $1,100,000,000 of Treasury certificates of_
indebtedness, about $625,000,000 maturity value of War-Savings Certifi
cates of the Series of 1918, and about $1,800,000,000 of Victory notes.
Of the Treasury certificates, about $48,000,000 represents Pittman Act
certificates which will be retired this year through the recoinage of
silver bullion, while about $100,000,000 of loan certificates maturing
October 16, 1922, will be paid out of funds already in hand. The retire
ment of these certificates will leave only tax certificates outstanding,
and it will in any event continue to be desirable, with income and
profits tax: payments as large as they are, for the Treasury to have
14071°—22
outstanding at least $1,000,000,000 of tax certificates in amounts and
with maturities conforming to the quarterly tax payments.
This corre
spondingly reduces the amount of necessary refunding into other securi
ties .
After October 16, 1922, the next maturities fall on December 15th,
and include about $870,000,000 face amount of 4f per cent Victory notes
called for redemption, and about $420,000,000 of maturing tax certifi
cates of Series TD and TD2-1922, against which the Treasury will receive
in December about $250,000,000 of income and profits taxes. On January
1, 1925, the $625,000,000 of War-Savings Certificates become payable,
but the Treasury has already announced, as you know, a new offering of
Treasury Savings Certificates with a view to refunding as much as pos
sible of the maturity into obligations of the same general character and
with the same appeal to the needs of the small investor.
The Treasury
will shortly announce special facilities for the exchange of maturing
War-Savings Certificates for the new Treasury Savings Certificates, and
plans in this manner to provide for a substantial part of the War-Savings
maturity. The only Treasury certificates maturing in the second half of
the fiscal year 1923 are about $266,000,000 on March 15, 1923, and about
$273,000,000 on June 15, 1923, both of which are covered by the income
and profits tax payments estimated for those dates. On May 20, 1923, the
remaining $930,000,000 of 4f per cent Victory notes will mature according
to their terms.
The maturities which remain and have to be refunded the Treasury will
meet through issues of refunding securities, properly adjusted to market
conditions, and I believe it will be able to meet them, as it has in the
past, without disturbance to the markets and without strain on the finan
cial' machinery. During the course of the refunding operations which
have been in progress the Treasury has issued from time to time Treasury
certificates of indebtedness, Treasury notes and Treasury Savings Certi
ficates, all relatively short-term.
These operations have been success
ful and'have been accomplished without disturbance to the market for
outstanding securities. With the announcement of the bonds now offered,
the Treasury is adding to its list a refunding issue of long-time bonds ,
on a basis which should prove particularly attractive to investors.
These bonds will provide, through exchanges and otherwise, for a sub
stantial part of the heavy maturities falling on December 15th, and the
success of the offering will leave only a normal amount of financing to
be placed on that date.
It is four years since the Treasury has offered to the people of the
United States an issue of long-time Government bonds. During that period
it has been financing itself on a short-term basis, and it has succeeded,
with your cooperation, in placing with investors throughout the country
a great volume of Treasury certificates and Treasury notes. Now that the
time has come for a longer-term operation, I am looking forward with con
fidence to your continued support, and hope that, as with previous
offerings of Government securities, you will give your best efforts to
the distribution of the new Treasury bonds among investors.
Cordially yours,
Secretary of the Treasury.
1 enclosure.
To the
President of the
Banking institution addressed,.
W A S H IN G T O N : G O V E R N M E N T P R I N T IN G O F F I C E : 1022
/
THE SECRETARY GF THE TREASURY
WASHINGTON
October 9, 1922,
Dear Sir:
I am sending you herewith, a copy of the official Treasury Depart
ment Circular announcing the■new offering of-4| per cent Treasury bends
of 1947-1952:
The subscription books open to-day; and 4f- per cent
Victory notes, whether or not called for redemption, and Treasury
Certificates of the series maturing December 15, 1922, will be accepted
in payment, on the terms stated in the circular.
The new bonds
will be 25/30 year bonds, dated October 16, 1922, maturing October 15,
1952, and redeemable at the option of the United States on and
after October 15, 1947. The bonds will be issued in both coupon and
registered form, in denominations of $100 and upwards , The Treasury
is prepared to make deliveries promptly upon allotment and payment.
Thd/s offering of Treasury bonds affords a particularly favorable
opportunity to holders of 4fr per cent Victory notes to acquire a long- ,
time Government bond on attractive terms in place of Victory notes
which will mature or be redeemed within the next few months: All 4f
per cent Victory notes bearing the distinguishing letters A, B, C, D,
E, or E prefixed to their serial numbers have, as you know, been called
for redemption on Decembe'r 15, 1922, and will cease to. bear interest on
that date, while the remaining 4f per cent Victory notes mature on May
20, 1923, according to their terms. Victory notes tendered in payment,
if in registered form, must be duly assigned to "The Secretary of the
Treasury for redemption," before some officer authorized to witness
assignments of United States registered bonds, in accordance with the
the general regulations of the Treasury Department governing assignments
Coupon Victory notes must have the December 15, 1922, and May 20,, 1923, .
coupons attached.
Holders of Victory notes who wish to invest in the new bonds should
make prompt application through their own banks, or, if desired, direct
to the Federal Reserve Bank of the district.
Very truly yours,
To the Holder of
Victory notes addressed.
Secretary of the Treasury.
Inclosure: Treasury Department Circular No. 307, dated October 9, 1922.
TREASURY DEPARTMENT *
FOR RELEASE, Morning pap ers,
Monday, November 2 0 , 1922.
Washington, Nov. 19 - S ecreta ry M ellon wants the s p i r i t o f t h r i f t
developed during the World War to co n tin u e,
“War-Savings Stamps so ld to
help fin an ce th e .w a r ,“ s a id the S e c re ta r y , “s ta r te d a savin gs movement
which the Treasury Department hopes to see contin ue and expand,
The f i r s t
issu e o f th ese stamps, the S e r ie s o f 191.8, amounting to about $ 6 2 5 ,0 0 0 ,0 0 0 ,
w i l l be due January 1 , 1923.
The Treasury Department could refund th is part
o f the war debt in to s e c u r it ie s o f a d if fe r e n t ch a ra cter, but in ste a d , i t
is o ffe r in g in exchange a new is su e o f Treasury Savings C e r t if ic a t e s , w ith
the same gen eral c h a r a c t e r is tic s but in more .convenient form, in the b e l i e f
th at large numbers o f people who saved t h e ir money during the war by in v e s t
ing* in War-Savings Stamps w i l l w ish to continue t h e ir investm ent and ex
change th e ir stamps fo r Treasury Savings C e r t if ic a t e s .
These c e r t if ic a t e s
are even more a t t r a c t iv e than th e War-Savings Stamps which they superseded,
and s e l l a t a s l i g h t l y lower p r ic e , w ith m aturity in each case 5 years, from
the date o f is s u e .
I t i s the d e sir e o f the Department to have as many
people as p o s s ib le in te r e s te d in the Government’s fin a n c e s , and p a r tic u la r ly
to share in the b e n e fits o f investm ent in i t s s e c u r it ie s .
Like good
m orals, h on esty, and c o rr e ct deportment, t h r i f t takes i t s p la ce among the
standards which make fo r good liv in g and contentm ent.
The Government i s
endeavoring to carry i t s campaign o f education along th ese lin e s to every
household in the country, and the Treasury Department i s urging the owners
o f War-Savings Stamps to r e in v e s t the o r ig in a l p r in c ip a l and the in te r e s t
which i t has earned in another g ilt-e d g e d Government s e c u r ity , y ie ld in g
a good in t e r e s t retu rn .
For th at reason s p e c ia l arrangements have been
rmade fo r the exchange o f War-Savings Stamps fo r the new Treasury Savings
C e r t if ic a t e s , inform ation as to which i s a v a ila b le a t banks and p o s to f f ic e s throughout the country
CO NTROLLER G3H3EL4L OP THS UNI C T ) STATSS
A.
W a s h in g t o n
D. 72 4 3 .
N ovem ber 2 9 ,
The
192 2 .
H o n o r a b le
The S e c r e t a r y
o f th e
T reasu ry.
S ir ;
I have your le t t e r
t o w h e th e r y o u a r e
m ade p u r s u a n t
535,
fo r
to
th e
th e U n ite d
to
and fo r
th e
th e
of
th e n o r
S e c tio n
s a le
T reasu ry
S ta te s,
th e
o f A p r il
to
th e a c t ,
S ta te s;
th e
o f b u llio n
d ir e c t
of
th e
23,
o f s ilv e r
40 S t a t . ,
to
o f tra d e b a l
to p r o v id e
s ilv e r
fo r
t im e
in
t im e
D ir e c to r
to m e lt
$1 p e r
th e
an am ount o f
of
s ilv e r
m illio n
th e
one th o u s a n d
sta n d a rd
s ilv e r
t h in g s , upon e v e ry
S e c re ta ry
in
t h e U n ite d
s ilv e r
S ecre
o f th e U n ite d S t a t e s .
to p u rch a se
in
th e
or b re a k up and s e l l
am ong o t h e r
s itu a te d
to
of s ilv e r " .
a u th o r iz e d
oun ce
th a t
w ar
th e aoove p u rp o se s
T reasu ry
tim e ,
s u b s id ia r y
f o r e i g n g o v e rn m e n ts a t
and f o r
o f t h e M in t
o f m in e s
so lo c a t e d ,
to
s u p p ly o f
s ilv e r
th e p r o d u c tio n
th a n
th e g o ld
in
th r e e h u n d red an d f i f t y
fr o m
19 18 ,
as
g e n e r a l l y know n a s
co n serve
to a s s i s t
a c t p r o v id e d ,
th e p r o d u c t
r e d u c tio n w o rks
t im e
t h e r e a fte r h e ld
2 of
d e c is io n
a llo c a tio n s
am ong o t h e r t h i n g s ,
not le s s
of
535,
s e ttle m e n t
and en co u ra g e
a t p r ic e s
r e q u e s tin g
c e r ta in
40 S t a t . ,
"A n A c t
c o m m e r c ia l u s e ;
n o t in e x c e s s
d o lla r s
su ch
th e U n ite d
T r e a s u r y fr o m
a s b u llio n ,
fin e ,
th e a c t
19 18 ,
t o p e r m it
th e p r i c e
S e c tio n 1
of
revo k e
e n e m ie s o f t h e U n i t e d S t a t e s ;
s ta b iliz e
ta ry
19 3 2 ,
c o in a g e .
e n title d
S ta te s;
ances ad verse
w ith
s ilv e r
is
to
te rm s o f
o f A p r il 23,
t h e P ittm a n A c t ,
c o in a g e
a u th o r iz e d
s u b s id ia r y
The a c t
o f N ovem ber 2 ,
o f th e
th e U n ite d
S ta te s
eq u a l to
and o f
t h r e e h u n d re d
and s e v e n ty -o n e
and t w e n t y - fiv e h u n d re d th s g r a in s
rosp o ct
to
s o ld a s
b u llio n ,
per
oun ce
every
age
3 of
fo r
th e
T reasu rer
or fa c e
of
to
th e
of
of a ll
sta n d a rd
and th e v a lu e
o f th e
s ilv e r
r e s u ltin g
s ilv e r
In th e
am ong o t h e r
fo r
th e
s ilv e r
b u llio n ,
fin e
19 18 ,
th e re fo r
lo s s
fo r
is
sta te d
s u b s id ia r y
th e r a t e
v a lu e
of
th e
s ilv e r
s ilv e r .
o c c a s io n e d by
or fa c e
p r ic e
at
of
of
d o lla r s
c u la tio n )
sta n d a rd
t h e 1 ,0 0 0 ,0 0 0
s e c tio n 4 o f
at
th e a l l o
s u b s id ia r y
to
s a le
c o in
or r e s a le ,
r e im b u r s e
th e
b e t w e e n t h e n o m in a l
so m e lte d o r b r o k e n u p
$1 p e r
oun ce
of s ilv e r
one
su ch
19 19 ,
d o lla r s
d o lla r s
th a t
a n a l l o c a t i o n w a s m ade o n
of
th e
s ilv e r
s ilv e r
b u llio n
d o lla r s .
to
The
t h u s a l l o c a t e d p r o d u c e d 7 7 3 ,9 9 7 .8 9
fin e
s ilv e r
oun ce,
a c c o u n t w as ch a rg e d '
to ta l
$ 7 7 2 ,9 9 7 .8 9 ,
th e d if f e r e n c e
sta n d a rd s i l v e r
b e tw e e n
and th e
t h e n o m in a l
d o lla r s
and th e s a le
s i l v e r p ro d u ce d th e re fr o m ,
$ 3 2 7 ,0 0 2 .1 1 ,
c h a r g e a b le u n d er
th e a p p r o p r ia t io n
th e a c t .
an a l l o c a t i o n
(th e se
a n d o n H o v em b er 5 ,
s ilv e r
d iffe r e n c e
sta n d a rd
tr a n s a c tio n ,
oun ces o f fin e
s ilv e r
th a t
he re g a rd e d a s a
d o lla r s
The s u b s i d i a r y
o f $1 p e r
th e
On N o v e m b er 2 8 ,
sta n d a rd
t h e M in t f o r
c o in a g e ,
w as a c c o u n te d f o r a s an e x p e n d itu r e
c o n ta in e d in
o f $1
d o lla r s .
sta n d a rd
oun ces
t h in g s ,
th e m e lt in g .o r b r e a k in g up o f
b e o b t a i n e d fr o m m e l t i n g 1 ,0 0 0 ,0 0 0
1 , 0 0 0 ,0 0 0
of
th e a c t ,
fr o m
s u b m is s io n i t
S e p te m b e r 7 ,
th e f i x e d p r i c e
th e a c t p r o v id e d an a p p r o p r ia tio n
v a lu e
sta n d a rd
in
a s m o l t e d o r "b ro k en u p a n d
h o m ade a t
D ir e c to r
th e U n ite d S t a t e s
th o u sa n d f i n e ,
to
a c t p r o v id e d ,
th e p u rp o s e s
S e c tio n 4 o f
d o lla r
s ilv e r
0:10 t h o u s a n d f i n e .
o f any s i l v e r
s h a ll,
s ilv e r
su ch p u rc h a s e s
of s ilv e r
S e c tio n
c a tio n
sta n d a rd
o f. p u r e
w ere
1920 ,
(th e se
w ere
w a s m ade o f 1 0 ,0 0 0 ,0 0 0
c o i n s w h ic h h a d n o t b o o n in
an a l l o c a t i o n
c ir
w a s m ado o f l l l , l o 8
o ld c o in s w h ic h h a d b o on in
c ir -
c u là tiô n ).
fin e
B o th a l l o c a t i o n s
oun ce o r
la r ,
th e
e q u iv a le n t
In m e lt in g
s ilv e r
d o lla r s
m o ltin g
a ttr ib u te d
fin e
th e
to
a b r a s io n
v a lu e
t h e n o m in a l o r f a c e
fin e
o f th e
oun ce.
T h is
ounces a t
s id ia r y
sta n d a rd
$ 1 .2 9 4 -
p er fin e
a c c o u n t* .
m ent D i v i s i o n w i l l
th e
oun ce,
at
A s s is ta n t
fo r
S e c re ta ry
w ere a c t u a l l y
2 ,5 4 1 ,7 5 3 .6 1
th e
sta n d a rd
s ilv e r
th is
th e r a t e
c h a r g in g
am ount t o
th e
Th e
s u b s id ia r y
o f th e
o f $ 1 .2 9 *
o f th e v a lu e
le g a l
p er fin e
o f 3 ,6 2 4 .2 6 . f i n o
a g a in s t
th o
su b
th e T r e a s u r y D e p a rt
th e
th e
lo s s
o f $ 4 ,6 8 5 .9 1 ,
c o n t a in e d i n
s u b s id ia r y
f o r m a k in g , t h e
is ,
c o in a g e
of
s e c tio n
s ilv e r
tra n s fe r
6 ,0 0 0 ,0 0 0 f i n e
o u n c e w a s m ade p u r s u a n t
o f th e
th e re to
fin e
th a t
ch a rg ed to
a p p r o p r ia tio n
e t c ,.,
s u b s id ia r y
ch a rg ed to
abeyan ce;
of
d e ta ils ,
$1 p e r f in e
P u rsu an t
c ir c u la tio n .
to be
T r e a s u r y D e p a r tm e n t.;,
An a l l o c a t i o n
s ilv e r
th e ir
t h is m a tte r
a s e ttle m e n t
and c r e d it in g a l i k e
fu r n is h e d b y th e
o u n c e s , w h ic h l o s s w as
t o t a l $ 4 ,6 8 5 ,9 1 ,
To a d j u s t
sta te
a c c o u n t, , th e n e c e s s a r y
b a la n c e
d o lla r a t
fr o m a b r a s i o n , u n d e r
act
duo t o
w h ic h
o u n ces w as n o t
c h a r g e d w a s on t h e b a s i s
s ilv e r
d o l
sta n d a rd
d o lla r s ,
fin e
o f 3 ,6 2 4 .3 6 f i n e
c o n s t it u t e d an o v e r c h a rg e
s ilv e r
r e s u ltin g
sta n d a rd s i l v e r
c o in s
th e
o u n ce s w as p ro d u c e d h u t in
th u s p ro d u c e d w ore
th e v a lu e
of
1 0 ,0 0 0 ,0 0 0 u n c i r c u l a t e d
l e g a l w e ig h t i n
o f th e
oun ces o f s i l v e r
w e ig h t
19 2 0 .
th e
b e in g a l o s s
accoun t but
of
of
l e g a l w e ig h t i n
c ir c u la tio n ,
s ilv e r
of
o f $ 1 .2 9 + p e r
o r b r e a k in g up th e
p r o d u c e d ,, t h e r e
4
w e r e m ads on t h e h a s i s
o r b r e a k i n g u$> t h e 1 1 1 , 1 6 8
h ad b een in
net
3 -
T reasu ry
sta n d a rd
fin e
s ilv e r
a c c o u n t and. th e b a la n c e ,
w as h e ld
th e b a la n c e w as n o t a c t u a l l y
a llo c a tio n ,
o f th e
o u n c e s a n d $ 3 , 4 5 8 ,2 4 6 .3 9
o u n ces an d $ 2 ,5 4 1 ,7 5 3 .5 1 ,
d o lla r b u llio n
le tte r s
o f O c to b e r 18 an d D ecem ber 1 8 ,
3 ,.4 5 8 ,2 4 6 * 3 9
th e
to
oun ces
a cco u n t.
2 ,5 4 1 ,7 5 3 .5 1
te m p o r a r ily
c h a rg e d o u t o f th o
On B e b r u a r y 1 1 ,
oun ces,
in
192 2 ,
th e
and $ 2 ,5 4 1 ,7 5 3 .5 1 ,
_ 4 n ot a c tu a lly
1 ,8 0 0 ,0 0 0
s id ia r y
fin e
fin e
a c co u n t,
s u b s id ia r y
w ere r e v o k e d .
o u n c e s a n d $ 1 ,8 0 0 ,0 0 0 w e r e
and a l i k e
sta n d a rd
am ount i n
s ilv e r
T he f o l l o w i n g
7/18
is
a
a cco u n t,
to
th e
th e re to
th e
su b
1 ,8 0 0 ,0 0 0
s u b s id ia r y
s ilv e r
o u n ces and d o l l a r s w as c h a rg e d to
a cco u n t.
o f th e a l l o c a t i o n s ,
sta te m e n t
—
1 ,6 5 8 ,2 4 5 .3 9
e tc .:
D in e
O u ic e s
P ro d u ced
R a te
per
O u n ce
—————
—
to g e th e r w ith
ch a rg ed to
P u rsu an t
7 7 2 ,9 9 7 .8 9
$ 1 .0 0
1 1 1 ,1 6 8 )
10 /18 /2 0 )
12 /18 /2 0 )
fin e
R e t O un ces
o f B u llio n
A llo c a te d
10,0 0 0 ,0 0 0 )
11/2 8 /19 )
11/ 6 / 2 0 )
s ilv e r
c r e d ite d
d o lla r b u llio n
S ta n d a rd
S ilv e r
D o lla r s
A llo c a te d
1 ,0 0 0 ,0 0 0
D a te o f
A llo c a tio n
9/
th e
o u n c e s a n d $ 1 ,8 0 0 ,0 0 0 a c t u a l l y
s ilv e r
a c c o u it
th e
ch a rg ed , to
V a lu e
C h arg ed
$
7 7 2 ,9 9 7 .8 9
1 .2 9 4 )
1 .2 9 ^ )
.7 ,8 1 5 ,7 3 2 .2 4
1.00
1 .5 5 8 .2 4 6 .3 9
1 ,6 5 8 ,2 4 5 .3 9 :
. dh o CULO A l 0 Oft
L o s s r e s u l t i n g fr o m m e l t i n g
b r e a k in g u p , to b e a d ju s te d
«
1 0 ,1 1 1 ,1 6 8 .0 0
or
4 ,6 8 5 .9 1
1 0 ,3 4 7 ,9 7 6 ,5 2 ;$ 1 5 ,5 3 7 ,7 9 5 .5 7
The p r e c i s e
a u th o r iz e d
q u e s tio n s
to re v o k e
th e
1 0 ,2 4 7 ,9 7 6 .5 2
fin e
c r e d it
s u b s id ia r y
to
th e
r e v o c a tio n
fo r
d o lla r
o rd er
oun ces,
a c c o u it.
if
so
s ilv e r
is
th e b u l li o n
b u llio n
th e
s u b m is s io n a r e
r e m a in in g b a la n c e
o f th e b a la n c e
r e c o in in g
of
of a ll
a cco u n t,
and (3 )
th e re
tra n s fe rre d
to
The m a t t e r s w i l l b e
w h e th e r y o u a r e
a llo c a tio n s ,
( 2 ) w h a t am o u n t i s
a u th o r iz e d ,
th u s
( l)
p r o p e r ly , f o r
w h e th e r,
if
is
a u th o r ity
th e
sta n d a rd
c o n s id e r e d in
th e
o f la w
s ilv e r
th e
sta te d :
(1)
F rom i n f o r m a t i o n r e c e i v e d fr o m
o f t h e M in t
1 2 ,9 4 4 ,7 8 5
sta te :
th e
fin e
s u b s id ia r y
o u ic e s
s ilv e r
o f s ilv e r
th e
accoun t
on h a n d ,
o ffic e
sh o w s a
and in
o f th e
o a la n c e
th e
D ir e c to r
of
s u o m is s io n y o u
-
5 -
*
•»In t h o s e c i r c u m s t a n c e s t o c a r r y o v e r 1 0 ,0 0 0 ,0 0 0 f i n e o u n c e s
o f s i l v e r " b u llio n i n t h e s u b s i d i a r y s i l v e r a c c o u n t m eans th e c a r r y
i n g i n t h e g e n e r a l fu n d o f th e T r e a s u r y o f a d e a d a s s e t w h ic h h a s
n o v a l u e f o r t h e p u r p o s e o f m a k in g G o v e rn m e n t p a y m e n t s , w i t h t h e
r e s u l t t h a t t h e T r e a s u r y i s o b l i g e d t o "borrow c o r r e s p o n d i n g l y l a r g e r
a m o u n ts t o m e e t i t s c u r r e n t r e q u i r e m e n t s , a t a n i n t e r e s t c o s t r a n g i n g
fr o m 3-| t o 4^ p e r c e n t .
A s s u m in g f o r t h e p u r p o s e s o f i l l u s t r a t i o n
a n a v e r a g e i n t e r e s t r a t e o n G o v e rn m e n t b o r r o w i n g s o f a b o u t 4 p e r
c e n t a n d t h a t t h i s am ount o f s i l v e r b u l l i o n w o re h o ld a s a d e a d a s
s e t f o r a p e r i o d o f o v e n tw o y e a r s , t h e r e s u l t w o u ld b e a l o s s t o
t h e G o v e r n m e n t i n i n t e r e s t c h a r g e s a m o u n t in g t o a b o u t $ 8 0 0 ,0 0 0 f o r t h o
tw o y e a r p e r i o d .
uI n t h e s e c i r c u m s t a n c e s , a n d i n o r d e r t o a v o i d t h i s l o s s i n i t s
c u r r e n t o p e r a t i o n s , t h e T r e a s u r y w o u ld l i k e , i f p o s s i b l e u n d e r t h e l a w ,
to r e v o k e th o a l l o c a t i o n o f th e r e m a in in g 1 0 ,2 4 7 ,9 7 6 .5 2 f i n e o u n ce s
o f s i l v e r a n d r e s t o r e t h i s am ount o f s i l v e r b u l l i o n t o th e s t a n d a r d
s il v e r d o lla r a cco u n t.
T h e e f f e c t o f t h i s a c t i o n w o u ld b e t o p e r m i t
t h e T r e a s u r y t o p r o c e e d w i t h t h e c o i n a g e o f t h i s am o u n t o f s i l v e r
b u l l i o n i n t o s t a n d a r d s i l v e r d o l l a r s , a g a i n s t w h ic h s i l v e r c e r t i f i
c a t e s c o u ld b e i s s u e d a n d p a i d c u t i n th e o r d i n a r y c o u r s e o f G o ve rn
m ent p a y m e n ts ,
S e c tio n
* * * .H
2 of
th e a c t p r o v id e s :
it* * * S u c h s i l v e r s o p u r c h a s e d n a y b e r e s o l d f o r a n y o f t h e
p u rp o se s h e r e in a f t e r s p e c if ie d in s e c t io n th re e o f t h is A c t, under
r u l e s an d r e g u l a t i o n s to b e e s t a b l i s h e d b y th e S e c r e t a r y o f th e
T r e a s u r y , an d a n y e x c e s s o f su ch s i l v e r so p u r c h a s e d o v e r an d a b o ve
th e r e q u ir e m e n ts f o r su ch p u r p o s e s , s h a l l be c o in e d in t o s ta n d a r d s i l
v e r d o l l a r s h e l d f o r th o p u r p o s e o f su ch c o in a g e , a n d s i l v e r c e r
t i f i c a t e s s h a l l b e i s s u e d t o t h e am ount o f s u c h c o i n a g e .
Th e n e t
a m o u n t o f s i l v e r s o p u r c h a s e d , a f t e r m a k in g a l l o w a n c e f o r a l l r e s a l e s ,
s h a l l n o t e x c e e d * a t a n y o n e t im e t h e am o u n t n e e d e d t o c o i n a n a g g r e g a t e
n u m b er o f s t a n d a r d s i l v e r d o l l a r s e q u a l t o t h e a g g r e g a t e n u m b er o f
s ta n d a r d s i l v e r d o l l a r s t h c r o t o f o r e m e lte d o r b ro k e n up an d s o ld a s
b u llio n u n d er th e p r o v is io n s o f t h is A c t , b u t su ch p u rc h a s e s o f s i l
v e r s h a l l c o n t i n u e u n t i l t h e n e t am o u n t o f s i l v e r s o p u r c h a s e d , a f t e r
•m akin g a l l o w a n c e f o r a l l r e s a l e s , s h a l l b e s u f f i c i e n t t o c o i n t h e r e
fr o m a n a g g r e g a t e n u m b er o f s t a n d a r d s i l v e r d o l l a r s e q u a l t o t h e a g g r e
g a t e n u m b er o f s t a n d a r d s i l v e r d o l l a r s t h e r e t o f o r e s o m e l t e d o r b r o k e n
up and s o ld a s b u llio n
/
n o t h in g a p p e a r s why th e b a la n c e
revo ked i f
th o
n e e d e d fo r
th a t p u rp ose*
a lo n e
s ilv e r
r e lie v e s
q u o ta o f
d u cers,
a g a in s t
s ilv e r
e tc .,
a llo c a te d
th e
fo r
o f th e
s u b s id ia r y
The r e v o c a t io n
c a r r y in g
a l l o c a t i o n s m ay n o t b e
th a t
is
n o t now
o f th e a llo c a t io n s
not
o f a dead a s s e t b u t re d u ce s
to b e p u r c h a s e d u n d e r th e a c t
th e a c t p r o v id in g
c o in a g e
fr o m
th e
t h e d o m e s tic p r o -
th e n e c e s s a r y p u r c h a s e s
to
re
U
in s ta te
th e
a fig u r e
s o ld to
b e m ade a t
a p p r o x im a t e ly 50 p e r
(2 )
oun ces
am o u n t
The c o s t v a l u e
of
s ilv e r
th e
s u b s id ia r y
T h is
c o s t v a lu e
o f $ 4 ,6 8 5 .9 1 ,
lo s s
duo t o a b r a s i o n ,
v a lu e
th a n
th e
a llo c a tio n s
w e re m ade, h e n c e
a llo c a tio n s
to
tra n s fe r r e d
th e re fro m
average
fin e
in
to
oun ce v a lu e
and th e
s u b s id ia r y
it
1 0 ,2 4 7 ,9 7 6 .5 2
fin e
s ilv e r
th e
ounces
th e
th e
fin e
o u n ces w ith a v a lu e
by m e ltin g
su ch o f
average
th e
th e
in
th e
o f c o in in g
of
s ilv e r
ounces a t
of
th e r a te
s ilv e r
fo r
of
e q u a l to
sta n d a rd s i l v e r
an
d o lla r s
of
p rod u ced
d o l l a r s , w h ic h w as a l l o
to b e r e v o k e d an d r e c h a r g e d to
is
th e
th e p r e s e n t m ark o t v a l u e .
tio n s
d o lla r b u llio n a c c o u n t,
at
oun ce*
a llo c a tio n s
th e
s ilv e r
Tne p r e s e n t
p u rc h a s e d u n d er th e a c t an d o f b u llio n
s u b s id ia r y
th e
sam e v a l u e
a c c o u n t a b a la n c e
o r b r e a k in g up s ta n d a rd s i l v e r
a u th o r iz e d
several
s i l v e r a s w as
o f $ 1 ,7 4 1 ,5 6 2 ,0 9
in to
or
oun ce
r e v o k in g
a cco u n t.
c a te d and ch a rg ed to
a re
fin e
in
co st p er fin e
o f th e
oun ce r a t e , o f a p p r o x im a te ly
th e b u l l i o n
$ 4 ,6 8 5 .9 1 ,
th e a c q u i s i t io n
t h a t m any f i n e
2 ,6 9 6 ,8 1 0
su ch o f
o f t h e am ount
an a v e ra g e
s ilv e r
fin e
g iv e n a s
s i l v e r m ay b e m ade b y c r e d i t i n g
a c c o u n t w ith
The m a t t e r
th e re to
d o lla r accou n t
out o f
oun ce th u s l e a v i n g
(3 )
accoun t is
im p r a c tic a b le
th e r e v o c a t i o n
of
o f 1 2 ,9 4 4 ,7 8 6
$ 1 1 ,9 9 4 ,2 2 4 l e s s
r e fle c ts
oun ce,
th e p r e s e n t m ark et p r i c e
c r e d it
r e s u l t e d fro m
fin e
fin e
is
fin e
o u n ce v a l u e a t w h ic h t h e
o f $1 p e r
average
th e
w ill be
c h a r g in g
to
th a n
s ilv e r
s u b s id ia r y
c o in a g e a t
The t r a n s f e r p u r s u a n t
s u b s id ia r y
fin e
t r a n s fe r b a ck to
v a r y in g p r ic e s
u sed
a fte r
The p r e s e n t b a la n c e
so m ew h a t l e s s
o f $1 p e r
r e p o r t e d " b a la n c e
1 1 ,9 9 4 ,2 2 4 ,
$ 1 1 ,9 8 9 ,5 3 8 .0 9 .
th e r a t e
c e n t h ig h e r
o f th e
now i n
ü -
a c c o u n t a n d w h ic h a l l o c a
a d m in is tr a tiv e
th e
sta n d a rd
c o n s id e r a tio n .
, - 7 T h ere a p p e a rs
s u ffic ie n t
c o n c lu d e
t h i s h e done*
th a t
a u th o r ity
t h e r e fo r u n d er th e a c t
if
you
R e s p e c tfu lly ,
( S ig n e d ).
J ..R ,
M c C a r l,
C o m p tr o lle r G e n e r a l,
December
D e a r H r*
21 , 1S22 ,
G ro om
I r e c e i v e d your l e t t e r
314 ,
H* J*
U n ite d S t a t e s
o f December 2 0 , 1 S 2 2 , W ith r e s p e c t t o
p r o p o s in g a n amendment t o th e C o n s t i t u t i o n o f th e
to r e s t r i c t f u r t h e r
i s s u e s o f ta x -e x e m p t s e c u r i t i e s , and
n o te yo u r sta te m e n t t h a t an amendment h a s b een p r o p o s e d b y Mr, G a rn er,
o f T e x a s , w h ich w o u ld s t r i k e
th e f o l l o w i n g w ords:
fic a tio n
out i n S e c t i o n 1 ,
" d e r iv e d fro m s e c u r i t i e s
of th is a r t i c l e ,
a fte r
th e word "in co m e",
is s u e d ,
a f t e r th e r a t i
b y or u n d er th e a u t h o r i t y o f th e U n ite d
S t a t e s or an y o th e r S t a t e " ,
and i n S e c t i o n 2 , a f t e r
the, words " d e r iv e s from s e c u r i t i e s
is s u e d , a f t e r
th e word "in co m e",
th e r a t i f i c a t i o n o f
t h i s a r t i c l e , b y or u n d er th e a u t h o r i t y o f su ch S t a t e ” ,
words tn u s s t r i c k e n ou t th e G arner amendment w o u ld ,
s titu te
F o r th e
I u n d e r s ta n d ,
th e words "fro m a n y so u rc e " i n b o th S e c t i o n s ,
sub
I n o te f u r t h e r
t h a t i n su p p o rt o f h i s p ro p o sed amendment Hr, G arner h a s s t a t e d
th a t
u n d er th e r e s o l u t i o n a s r e p o r te d b y th e Com m ittee on Ways and Means
th e U n ite d S t a t e s m igh t d i s c r im i n a t e a g a i n s t
in f a v o r o f th e bonds o f a r a i l r o a d
th e bonds o f a S t a t e and
or i n d u s t r i a l c o r p o r a t io n ,
h i s amendment i s p r o p o s e d i n o rd er to p r e v e n t su ch a r e s u l t ,
t o be a b le
to w r i t e y o u , f i r s t ,
and t h a t
I am g l a d
t h a t i n th e ju d gm en t o f th e T r e a s u r y
th e r e s o l u t i o n i n t h e form r e p o r te d b y th e Com m ittee w euld n o t o f
£
i t s e l f p r e v e n t d is c r im in a tio n
o f th is
c h a ra cte r,
and,
so t h a t
p r o p o s e d b y Mr* G a r n e r i s
u n n ecessary,
secon d ,
th a t
a m en d m en t p r o p o s e d b y H r*
G a r n e r w o u ld p r o b a b l y n u l l i f y
a n d m ake t h e w h o le C o n s t i t u t i o n a l am en d m en t i n e f f e c t i v e .
t h e am en d m en t
to a d ep t
th e
b o th S e c tio n s
-
W hatever
o p p o sitio n
2-
th e re i s
to
th e p r o p o sed amendment t o r e
s t r i c t f u r t h e r i s s u e s o f ta x -e x e m p t s e c u r i t i e s r e s t s ,
I t h i n k , upon a
m is u n d e r sta n d in g o f th e o b j e c t and e f f e c t o f t h e amendment, and t h i s ,
i n t u r n , h a r k s b a c k t o th e o ld c o n t r o v e r s i e s ab o u t S t a t e s ’ r i g h t s and
th e pow ers o f th e ¿fed era l Governm ent.
th a t,
I c a n s a y w ith o u t h e s i t a t i o n
s e p a r a te d fro m t h e s e o ld p r e j u d i c e s and ta k e n fro m th e p o in t o f
v i e w o f t h e f a c t s a s we h a ve t o f a c e
them t o - d a y ,
th e p ro p o sed C o n s t i
t u t i o n a l amendment i n v o l v e s no Q u e s tio n w h a tev e r o f S t a t e s '
makes no a t t a c k w h a te v e r on th e c r e d i t
or t h e i r p o l i t i c a l
lu te
s u b d iv i s i o n s .
e q u a l i t y to th e F e d e r a l
S t a t e s and t h e i r p o l i t i c a l
e sts
r i g h t s and
or b o rro w in g pow er o f th e S t a t e s
The amendment w ould a p p ly w it h ab so
Government,
on "the one h a r d , and th e
s u b d iv i s i o n s on th e o t h e r , and i n t h e i n t e r
o f t h e g e n e r a l w e lf a r e w ould p u t e x a c t l y th e same r e s t r i c t i o n s
Upon f u t u r e b o rr o w in g s b y th e F e d e r a l Government a s upon f u t u r e borrow
in g s b y th e S t a t e s and t h e i r p o l i t i c a l
gro w in g mass o f ta x -e x e m p t s e c u r i t i e s
o n ly o f t h e F e d e r a l
Government,
r e a c h in g su ch p r o p o r t io n s as. to
s u b d iv is io n s .
The c o n s t a n t l y
t h r e a te n s th e p u b l i c r e v e n u e s , n o t
b u t o f th e S t a t e s a s w e l l ,
undermine
and i t
is
th e d evelopm en t o f b u s in e s s
and in d u s t r y .
The F e d e r a l Governm ent, f o r
th e m ost p a r t , h a s r e f u s e d t o h a ve
r e c o u r s e t o ta x -e x e m p t i s s u e s i n f i n a n c i n g i t s
own o p e r a t io n s , b u t th e
volum e o f ta x -e x e m p t s e c u r i t i e s o f th e S t a t e s and t h e i r p o l i t i c a l
d iv is io n s ,
su e d ,
is
sub
and o f o th e r a g e n c ie s , a l r e a d y o u t s t a n d in g and c u r r e n t l y i s
so l a r g e
t h a t th e v a l u e
o f th e ex em p tion t o th e borrow er i s s u i n g
th e s e c u r i t i e s h a s become r e l a t i v e l y
and t h e i r p o l i t i c a l
s u b d iv is io n s ,
in s ig n ific a n t.
E ven now th e S t a t e s
n o tw ith s ta n d in g th e f u l l
t a x exem p tion s
-3 on th e ir s e c u r i t i e s , are ob lig ed to pay s u b s ta n tia lly the same r a te s
on th e ir task-exempt borrowings as the Federal Government pays on se
c u r it ie s w ith out exem ption from F ederal income su rta x es,
The f a c t s
are th at under our system of graduated Federal income surtaxes the
is s u e of tax-exempt s e c u r i t i e s , w h ile o f c o n sta n tly dim inishin g ad
vantage to the borrowing S ta te or c i t y , p rovid es a p e r fe c t refuge fo r
w ealthy in v e s to r s , b ein g most v a lu a b le to the w e a lth ie s t taxpayer,
v■
.
-i
The
a c tu a r ia l fig u r e s show th a t to taxpapers paying su rta x es in the high
e s t b rack ets s e c u r it ie s su b ject to F ederal income su rta x es would have
to y ie ld about 1 0 ,4 per cen t in order to be as a t t r a c t iv e a s a 5 per
c en t tax-exem pt s e c u r ity .
For t h is g rea t advantage the S ta te which i s
sues the s e c u r it ie s g e ts but very l i t t l e compensating return*, and cer
t a in ly no g rea ter retu rn from the w e a lth ie s t in v e sto r than from the
sm a lle st in v e sto r (to whom the exem ption i s r e l a t i v e l y w o r th le s s ),
w h ile the U nited S t a t e s , which imposes the su r ta x e s, lo s e s i t s revenue
w ithout any compensating advantage whatever.
I t i s the graduated sur
ta x , of co u rse, th a t g iv e s the g r e a te s t valu e to the tax exem ption,
and view ed from t h is a sp e ct the tax exem ption, in su b sta n ce, c o n s titu te s
a subsidy from the Federal Government, the c o s t of which in the long
run must f a l l on th ose taxpapers who do not or cannot take refuge in
tax-exen p t s e c u r it ie s ,
JiVen from the p o in t of v iew o f the S ta te s
th em selves, I b e lie v e i t i s c le a r th a t the continued issu ance of ta x exenpt s e c u r it ie s saves nothing to the tox -p a y ers in the S ta te s and
th a t in the long run i t b rin g s h ea v ier ta x e s,
The tax-exempt p r iv ile g e ,
w ith the f a c i l i t y th a t i t g iv e s to borrow ing, le a d s in many c a se s to un
n ecessary or w a ste fu l p u b lic exp en d itu re, and t h is in turn i s b rin g in g
a b o u t a m e n a c in g i n c r e a s e
d e b ts c o n s titu te
in
th e
d e b ts
of S ta te s
a c o n s t a n t l y g r o w in g c h a r g e u p o n th e
se v e ra l S ta te s,
and w i l l u lt im a t e ly h a v e
te re st,
ta x le v ie s upon th e se v e r y
th ro u g h
o v e r lo o k
t h i s w hen th e d e b t s a r e
p o s s ib le
to
a ls o
escape
n ecessary
th e f a c t s
w hen t h e
im p o s e d t o m e e t t h e m , f a l l
a p p a re n t a d v a n ta g e
o b ta in e d w i l l h a v e
p en se u ltim a te ly
is
to
of
is
s in c e
th e
th e
ta x a tio n fo r
c e r t a in c la s s e s
th e r e s t
in
th e
none th e l e s s
th e ir
th e se p u b lic
at
and th a t
or
T h is
is
th e
th e e x p e n se , o f
te m p o ra ry a d v a n ta g e s
e ffe c t
is
s u b d iv is io n s
ta x p a y e rs,
and c i t i e s
ary
of
It
im
t a x e s w h ic h m u st b e
g re a t body o f ta x p a y e rs,
fo r
in
e a s y to
b e p a i d f o r b y th e F e d e r a l G o ve rn m e n t a t
fr o m
is
th u s
th e e x
p a r tic u la r ly
to p r o v id e a r e fu g e
o f t a x p a y e r s , w it h c o r r e s p o n d in g ly
o r d e r t o m ahe u p t h e r e s u l t i n g
d e fic ie n c y
th e r e v e n u e s .
O n ce i t
tio n
to
is
u n d e rsto o d
any v a lid
o b je c
t h e . p r o p o s e d C o n s t i t u t i o n a l am en d m en t r e s t r i c t i n g , f u r t h e r
is s u e s
o f ta x -e x e m p t s e c u r i t i e s ,
to. p e r m i t
on th e
com e s u r t a x e s
and on th e
t h in k no one c a n r a i s e
As a m a tte r
one h a n d a
of fa c t,
s y s te m
it
is
a lm o s t g r o t e s q u e
to c o n tin u e , f o r a s
t h in g s now
o f h ig h ly g ra d u a te d F e d e ra l in
o t h e r a c o n s t a n d l y g r o w i n g v o lu m e o f s e c u r i t i e s
is s u e d b y S t a t e s and c i t i e s
th a t
I
t h e p r e s e n t a n o m a lo u s s i t u a t i o n
s ta n d we h a v e
so
is
It
th e lo n g ru n a l l
a s w e ll a s
illu s o r y ,
o f ta x -e x e m p t s e c u r i t i e s ,
in
in
u p on b u t one b o d y o f
tru e
on a l l
ta x p a y e rs.
t im e c o m e s f o r p a y m e n t .
o f b o r r o w in g b y S t a t e s
th e F e d e r a l r e v e n u e s
ta x p a y e rs
o f S t a te s and t h e ir p o l i t i c a l
o f t h e F e d e r a l G o vern m en t " i t s e l f ,
T h ese
to be p a id , p r in c ip a l and in
in c u r r e d , b u t i t
t o b e a r i n m in d t h a t
d e b t s , w h e th e r th e d e b ts
h ig h e r ta x e s
and c i t i e s ,
w h ic h a r e f u l l y
e x e n p t fr o m
ta x p a y e r s h a v e o n ly to b u y ta x -e x e m p t
s e c u r itie s
th e se
su rta x e s,
t o m ake t h e
s u r ta x e s
in e ffe c tiv e .
The o n ly way t o c o r r e c t t h i s c o n d it io n i s “by
C o n s t i t u t i o n a l amendment, acco m p an ied , i f
p o s s i b l e , b y a r e d u c t io n in
th e r a t e s .
To ta k e up th e G a m e r amendment more s p e c i f i c a l l y ,
th a t
th e ch a n g e s i t
w ould make a r e v e r y c l e a r l y u n n e c e s s a r y .
I b e lie v e
The r e s o
l u t i o n r e p o r te d b y t h e Com m ittee on Ways and Means e x p r e s s l y p r o v id e s
i n S e c t i o n 1 t h a t F e d e r a l t a x e s on income d e r iv e d fro m s e c u r i t i e s ,
sued a f t e r th e r a t i f i c a t i o n
o f th e a r t i c l e ,
is
b y or u n d er th e a u t h o r i t y
o f an y S t a t e , must be w ith o u t d i s c r i m i n a t i o n a g a i n s t income d e r iv e d
fro m such, s e c u r i t i e s and in f a v o r o f income d e r iv e d fro m s e c u r i t i e s
sued a f t e r
th e r a t i f i c a t i o n
o f th e a r t i c l e
th e U n ite d S t a t e s or an y o th e r S t a t e ,
e r a l Government i s
b y or u n d er th e a u t h o r i t y o f
The same p r o t e c t i o n f o r th e Fed
a c c o r d e d b y th e secon d S e c t i o n ,
th e S t a t e s t o l a y and c o l l e c t
ta x e s
is s u e d a f t e r
o f th e a r t i c l e
of
th e r a t i f i c a t i o n
th e U n ite d S t a t e s .
is
c o n f e r r i n g power on
on income d e r iv e d fro m s e c u r i t i e s
b y or under th e a u t h o r i t y
Under S e c t i o n 1 a s i t
s ta n d s i t
w ould b e im
p o s s i b l e f o r th e F e d e r a l Government to impose an income t a x on income
fro m f u t u r e
is s u e s of S ta te
or m u n ic ip a l bonds w ith o u t im p osin g th e
same t a x on income d e r iv e d from f u t u r e
a s p r a c t i c a l m a tte r i t
w illin g
is
is s u e s o f i t s
a lm o st in c o n c e iv a b le
own bo n d s, and a s
t h a t C o n g ress w ould be
t o impose such a t a x upon th e income fro m b o th S t a t e and F e d e r a l
s e c u r i t i e s and a t
s e c u r itie s
th e same t i n e exempt from th e t a x income d e r iv e d from
is s u e d b y p r i v a t e c o r p o r a t io n s .
p u gn an t t o e v e r y C o n s t i t u t i o n a l p r i n c i p l e .
p r a c tic a l
in p o s s ib ility
Such a c o u rs e w ould be r e
E n t i r e l y a p a r t from the
ox such a s i t u a t i o n , h o w e v e r, I t h in k i t
c le a r
t h a t th e amendment i n i t s p r e s e n t form w ould p r o h i b i t d i s c r im i n a t io n
*
a g a in s t
6—
th e bonds o f a S t a t e and i n f a v o r o f a r a i l r o a d or i n d u s t r i a l
c o r p o r a t io n .
A l l c o r p o r a t io n s i n t h i s c o u n tr y a r e o r g a n iz e d u n d er
e ith e r S ta te
or F e d e r a l la w and d e r i v e t h e i r p o w ers,
power t o borrow money, from c h a r t e r s
G overnm ents, a s th e c a s e may b e .
r a tio n s ,
is s u e d b y th e S t a t e
S e c u r itie s
t h e r e f o r e , may be s a id t o be is s u e d
th e U n ite d S t a t e s ,
o f i n c o r p o r a t io n ,
in th e c a s e
in
i n c lu d in g th e
or F e d e r a l
is s u e d b y p r i v a t e corp o
"under th e a u t h o r i t y o f ”
o f a F e d e r a l c o r p o r a t io n ,
or th e S t a t e
th e c a s e o f a S t a t e c o r p o r a t io n .
S e c tio n
1
of
th e C o n s t i t u t i o n a l amendment a s r e p o r te d b y th e Com m ittee e x p r e s s l y p ro
h ib its
d i s c r im i n a t io n i n f a v o r o f s e c u r i t i e s i s s u e d a f t e r r a t i f i c a t i o n
o f th e a r t i c l e u n d er th e a u t h o r i t y o f th e U n ite d S t a t e s or any o th e r
S ta te ,
T h is i n term s w ould p r e v e n t d i s c r im i n a t io n i n f a v o r o f any
bonds is s u e d b y a r a i l r o a d
or i n d u s t r i a l c o r p o r a t io n in c o r p o r a te d under
th e law s o f th e U n ite d S t a t e s
or o f an y o th e r S t a t e , and l i k e w i s e ,
it
seems t o me, b y a c o r p o r a t io n o r g a n iz e d u n d er th e law s o f th e S t a t e con
cern ed , fo r
i t w ould be C o n s t i t u t i o n a l l y im p o s s ib le f o r
Government t o s i n g l e o u t c o r p o r a t io n s o f one S t a t e
t a x ex em p tio n s.
If
th e F e d e r a l
i n th e g r a n t in g o f
th e r e wex’ e an y d a n ger h e r e h o w e v e r , i t
r e a d i l y be c o r r e c t e d b y s t r i k i n g o u t in th e l a s t
lin e
c o u ld
of S e c tio n
1
th e
word no t h e r ” , and I s u g g e s t t h a t t h i s be done t o remove a n y q u e s t io n
i n th e m a tte r .
The G arner amendment i s
n o t o n ly u n n e c e s s a r y , —
it
w ould de
f e a t th e e n t i r e C o n s t i t u t i o n a l amendment and make i t p r a c t i c a l l y im
p o s s ib le f o r e ith e r
f e c t i v e l y u n d er i t .
th e S t a t e s or th e F e d e r a l Government to p r o c e e d e f
The G arner amendment b y i t s
term s f o r b i d s d i s
c r im in a t io n b y e i t h e r th e F e d e r a l Government or th e S t a t e s ,
in fa v o r of
nincome d e r iv e d fro m an y so u r c e ” ,
T h is a p p a r e n t ly c o v e r s a l l
o f in com e, i n c l u d i n g , f o r exam p le,
income from s e c u r i t i e s a lr e a d y i s
su ed and o u t s t a n d in g , and incom e fro m s a l a r i e s
o ffic e r s .
Sven a f t e r
sou rces
o f S t a t e .and F e d e r a l
th e a d o p tio n o f th e p ro p o sed C o n s t i t u t i o n a l
amendment, n e i t h e r th e U n ite d S t a t e s nor an y S t a t e w ould h a ve power
to t a x s e c u r i t i e s o f th e o th e r a l r e a d y is s u e d and o u t s t a n d in g , and
u n d er g e n e r a l l y a c c e p te d C o n s t i t u t i o n a l p r i n c i p l e s , w h ich h a ve "been
a f f ir m e d b y th e Supreme ^ C ou rt, th e F e d e r a l Government ca n n o t l e v y i n
come t a x e s upon th e s a l a r i e s o f S t a t e
or m u n ic ip a l o f f i c e r s , n o r c a n
th e S t a t e s l e v y income t a x e s upon th e s a l a r i e s
of Federal o ffic e r s .
To f i r b i d d i s c r im i n a t io n i n f a v o r o f th e s e n o n -t a x a b le
so u rces of in
come w o u ld , i n e f f e c t , made th e C o n s t i t u t i o n a l amendment i n o p e r a t i v e .
There a r e a l s o
o th e r g e n e r a l l y r e c o g n iz e d d i s t i n c t i o n s , .as, f o r e x
am ple, b e tw e e n e a rn e d and u n earn ed incom e, and m is c e lla n e o u s s p e c i a l
exem p tion s w h ich i t m igh t b e im p o s s ib le to mahe u n d er th e form o f
w o rd in g p ro p o sed .
Governm ents,
T h ese d i f f i c u l t i e s w ould em barrass th e S t a t e
i n p r o c e e d in g under th e C o n s t i t u t i o n a l amendment, q u it e
a s much a s th e y w ou ld t h e F e d e r a l G overnm ent, and w ould made i t
p o s s ib le fo r
th e S t a t e s t o l e v y a n y income t a x upon f u t u r e i s s u e s o f
F e d e r a l s e c u r i t i e s w ith o u t a t th e
on a l l
o u ts ta n d in g i s s u e s o f t h e i r
g e n e r a l income t a x upon a l l
tio n .
im
mven i f
it
same tim e im p o sin g an income t a x
own s e c u r i t i e s , a n d , i n f a c t , a
s o u r c e s o f income s u b j e c t t o S t a t e
c o u ld b e C o n s t i t u t i o n a l l y do n e, t o l e v y income t a x e s
upon s e c u r i t i e s a l r e a d y is s u e d a s taXi-exempt w ould c o n s t i t u t e
breach of f a i t h ,
ta x a
w h ile
a gross
t o r e q u ir e a g e n e r a l and u n ifo rm income t a x ,
w i t h e x a c t l y t h e same t a x a t i o n o f income fro m s e c u r i t i e s a s o f a l l
,T Br
other sources of income, wjuld in v o lv e almost insuperable p r a c tic a l
d i f f i c u l t i e s and probably prove im p o ssib le,
I b e lie v e ,
th e re fo re ,
t h a t th e G arner amendment w ould accom
p l i s h n o th in g b u t t o d e f e a t what i s p r o b a b ly th e most n e c e s s a r y refo rm
in
our s y s te m o f t a x a t i o n ,
m ents a s t o th e e f f e c t
and I hope t h a t i n th e l i g h t
o f th e s e com
o f th e C o n s t i t u t i o n a l amendment a s r e p o r te d b y
th e Com m ittee and th e ch a n g es p r o p o s e d ,
e i t h e r be w ithdraw n or r e j e c t e d ,
th e G arner amendment w i l l
The C o n s t i t u t i o n a l amendment a s r e
p o r t e d p u t s th e F e d e r a l Government and th e S t a t e s
on a b s o l u t e l y th e
same b a s i s , and th e v e r y f a c t t h a t th e F e d e r a l Government i s
w illin g , fo r
tn e sal-ie o f th e g e n e r a l w e l f a r e ,
th e s e r e s t r i c t i o n s a s t o f u t u r e
w it h s t a n d in g i t s
to p la c e
i t s e l f under
i s s u e s o f ta x -e x e m p t s e c u r i t i e s , n o t
own h e a v y d e b t and th e p r a c t i c a l c e r t a i n t y t h a t i t
w i l l a lw a y s h ave o b l i g a t i o n s o u t s t a n d in g and to be f in a n c e d ,
b e s t p o s s i b l e a s s u r a n c e t h a t th e S t a t e s and t h e i r p o l i t i c a l
s io n s can p l a c e
th e m s e lv e s under l i h e
in g t h e i r c r e d i t
r e a d y and
g iv e s
s u b d iv i
r e s t r i c t i o n s w ith o u t en d an ger
or e m b a rra ssin g t h e i r n e c e s s a r y b o rr o w in g s .
V ery t r u ly y o u rs,
(Signed) A. 17. .MELLON
S ecreta ry o f the Treasury,
Hon* W illia m H, G reen ,
A c o in g C hairm an, t Com m ittee on Ways and M eans,
House o f R e p r e s e n t a t i v e s ,
W a sh in g to n , D* C,
*
th e
TAXATION AND REVENUE
BEING AN EXTRACT FROM THE REPORT
OF THE SECRETARY OF THE TREASURY
ON THE STATE OF THE FINANCES FOR
THE FISCAL YEAR 1922
WASHINGTON
GOVERNMENT PRINTING OFFICE
1922
TAXATION AND REVENUE.
The revenue act of 1921 was approved November 23, 1921, and did
not become effective as to its most important changes until January 1,
1922. I t repealed the old excess-profits tax as of that date and as a
substitute imposed a 2\ per cent additional tax on the net income of
corporations. It likewise repealed most of the transportation tax
and some of the nuisance taxes, and made some adjustments in the
income tax, including revisions of the rates and of the exemptions.
These changes have been operating during the calendar year 1922, and
the Treasury is able now to form some judgment as to their reaction
upon the revenues and their relations to the Federal tax system as a
whole. The changes are still so recent, however, that their full effect
will not be apparent until the income-tax returns based on the
business of the present calendar year are filed and examined, and in
these circumstances the Treasury is not prepared at the present
time to recommend any general revision of the internal-revenue
laws. Nor will it be necessary at this time to consider any addi
tional taxes, for the Treasury hopes to overcome any déficiences in
the revenue without recourse to new taxes.
The Treasury has already expressed its views, in the annual report
for 1921, as to the direction which further tax revision should take,
and in line with those general recommendations and in the light of its
experience up to date with the revenue act of 1921, has some specific
recommendations for revision to make at this time, particularly as
to changes designed to close gaps in existing law which are causing
substantial loss of revenue to the Government. These recommenda
tions relate chiefly to the rates of surtax and the avenues of escape
now open under the law. The higher surtax rates, which still
run to 50 per cent, or a combined 58 per cent after including the
normal tax, put such heavy pressure on the larger taxpayers to
reduce their taxable income that these taxpayers inevitably seek
every permissible means of avoiding the realization of income subject
to surtax. The result is to create an artificial situation, which is
not wholesome from the point of view of business or industrial develop
ment. At the same time it is impairing the revenues of the Govern
ment, for under existing conditions the higher surtax rates are
undoubtedly operating to reduce rather than increase the revenues.
This presents a problem which calls for solution, and I believe it
can be solved only by relieving on the one hand the pressure for
23760°—2?
J
2
EXTRACT FROM REPORT OE SECRETARY OF THE TREASURY.
reducing taxable income, by making further readjustments of the
surtax rates, and on the other hand by closing, so far as possible,
the existing avenues of escape. To attempt to close the gaps alone
will not be enough, for the existing rates of surtax cause such heavy
pressure for avoidance that new gaps would surely be found. The
high rates sound productive, but the fact remains that they are
becoming increasingly ineffective and are yielding less and less
revenue every year. The time has come to face the facts squarely
and to correct the artificial conditions which now prevail.
j
Revision o f the surtaxes.
The higher rates of income surtaxes, as I have previously stated
in the letter of April 30, 1921, to the chairman of the Committee on
Ways and Means, “ 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.” Developments since that time have more
than confirmed these statements. Under the revenue act of 1921
the surtaxes rise to a maximum of 50 per cent, which applies to all
net incomes over $200,000, with rates on intermediate incomes grad
uated on this basis. According to the best estimates available, the
total yield of all surtaxes in respect to the business of the taxable
year 1922 will not exceed $350,000,000, and the returns for several
years have been steadily declining, from about $800,000,000 for 1919,
to about $590,000,000 for 1920, and about $450,000,000 for 1921
(estimated). The statistics of income for recent years likewise show
that there has been a remarkable decline in the larger taxable
incomes, at the very time that net incomes generally have been
increasing. This appears most clearly from the following table:
Table showing decline o f taxable incomes over $300,000.
Number of returns.
Year.
All
classes.
1916...........................
1917. ............ ...........
1918....... ...................
1919...........................
1920...........................
437,036
3,472,890
4,425,114
5,332,760
7,259,944
Incomes
over
$300,000.
1,296
1,015
627
679
395
Net income.
All classes.
Incomes
over
$300,000.
Dividends and interest
on investments.
All classes.
$6,298,577,620 $992,972,986 $3,217,348,030
13,652,383,207 731,372,153 3,785,557,955
15,924,639,355 401,107,868 3,872,234,935
19,859,491,448 440, Oil, 589 3,954,553,925
23,735,629,183 246,354,585 4,445,145,223
Incomes
over
$300,000.
$706,945,738
616,119,892
344,111,461
314,984,884
229,052,039
L_— |------ —
These figures show that while net incomes of all classes during the
period from 1916 to 1920 increased from $6,298,577,620 in 1916, to
$23,735,629,183 in 1920, and the number of returns from 437,036 in
1916 to 7,259,944 in 1920, the number of returns of incomes over
$300,000 decreased during the same period from 1,296 in 1916, to
395 in 1920, and the amount of incomes over $300,000 from
$992,972,986 in 1916' to $246,354,585 in 1920. During this same
ex tr a c t e r o m r e p o r t oe sec r eta r y oe t h e t r e a s u r y .
3
period investment income of all classes increased, while in incomes
over $300,000 investment income shrank from $706,945,738 in 1916
to $229,052,039 in 1920. This indicates an astounding decline in
taxable incomes over $300,000 and clearly reflects the tendency of
the high surtaxes to reduce taxable income. In this way the surtaxes
are gradually defeating their own purpose and the high rates are
becoming ineffective because of the steady disappearance of the tax
able incomes to which they were intended to apply. The pressure
operates in different ways, but among the means frequently used to
reduce the amounts of income subject to taxation are the following:
1. Deductions of losses on sales of capital assets, with the failure
to realize on capital gains;
2. Exchanges of property and securities so as to avoid taxable
gains;
3. Tax-exempt securities; and
4. Other avenues of escape, such as the division of property, the
creation of trusts, and the like.
Not all these things cap be controlled by law or by regulation, and
most of them lead to unnatural and frequently harmful economic
results. To reach the evil the thing most necessary is the reduction
of the surtax rates themselves, in order to reduce the pressure for
avoidance and maintain the re'venues derived from the surtax. I
believe, therefore, that it would be sound policy, and at the same
time most helpful to the general situation, to reduce the surtaxes to a
maximum of not over 25 per cent, which would mean a combined
maximum, including normal tax and surtax, of not over 33 per cent.
Readjusted to this basis, the surtax rates would, in my judgment,
accomplish their purpose and yield as large, or larger, revenues to the
Government without the unwholesome consequences of the existing
rates. The lower rates would at the same time broaden the market
for Government securities, and otherwise encourage the development
of productive enterprise.
Until some such readjustment is made the yield of the higher sur
taxes will tend, in the ordinary course of events, to drop toward the
vanishing point. The wise course is to reform the surtaxes now
while the system still functions and at the same time to close, so
far as possible, the gaps which now exist. On this basis the revi
sion can be made without loss of revenue, and, in the long run, with
material benefit to the revenues.
Capital gains and losses. ■
A most serious gap in the existing revenue laws arises from the
treatment of capital transactions. The law taxes capital gains and
recognizes capital losses, but the taxpayer retains the initiative and
refrains from realizing taxable gains while taking deductible losses.
The situation is particularly serious under the revenue act of 1921,
4
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
which limits the tax on capital gains to 12£ per cent but puts no limit
on the deduction of capital losses. This means that capital losses may
entirely canc-1 real income, while capital gains will not be realized at
all, or, if realized, are taxed at only 12£ per cent. Under the present
system the Government is being whipsawed, and the Treasury there
fore strongly urges that the existing provision as to capital gains be
made to apply conversely to capital losses and that the amount by
which the tax may be reduced on account of losses from the sale of
capital assets should not exceed 12^ per cent of the amount of the
loss. This would; to a large extent, check one of the methods widely
used by taxpayers at the present time for decreasing their yearly
income. The alternative is to refuse to recognize either capital gams
or capital losses for income-tax purposes, and if the present situation
were allowed, to continue there is no doubt that it would save rev
enue to adopt this course. This is, in fact, the practice which has
been followed in England for many years.
Exchanges o f securities.
The revenue act of 1921 provides, in section 202, for the exchange of
property held for investment for other property of a like kind without
the realization of taxable income. Under this section a taxpayer who
purchases a bond of SI,000 which appreciates in value may exchange
that bond for another bond of the value of $1,000, together with $100
in cash (the $100 in cash representing the increase in the value of the
bond while held by the taxpayer), without the realization of taxable
income. This provision of the act is being widely abused. Many
brokers, investment houses, and bond houses have established ex
change departments and are advertising that they will exchange
securities for their customers in such a manner as to result in no tax
able gain. Under this section, therefore, taxpayers owning securities
which have appreciated in value are exchanging them for other
securities and at the same time receiving a cash consideration, with
out the realization of taxable income, but if the securities have
fallen in value since acquisition will sell them and in computing net
income deduct the amount of the loss on the sale. This result is
manifestly unfair and destructive of the revenues. The Treasury
accordingly urges that the law be amended so as to limit the cases
in which securities may be exchanged for other securities, without
the realization of taxable income, to those cases where the exchange
is in connection with the reorganization, consolidation, or merger of
one or more corporations.
Tax-exempt securities.
The most outstanding avenue of escape from the surtax exists in
the form of tax-exempt securities, which under our constitutional
system may be issued without restriction by the States and their
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
5
political subdivisions and agencies. The Federal Government may
likewise issue securities wholly exempt from taxation, State and
Federal, but since the first Liberty loan has followed the policy of
issuing its bonds, notes, and certificates without exemptions from
Federal surtaxes, except in minor amounts and for limited periods.
Under the provisions of the Federal farm loan act, however, the
Federal land banks and joint stock land banks are still authorized
to issue, and are issuing in large blocks, bonds exempt from all Fed
eral, State, and local taxation, and the State and muncipal govern
ments are constantly adding to the outstanding volume of their securi
ties, all on a tax-exempt basis. The exemption which gives value
to these securities is, of course, the exemption from the Federal in
come surtax, and as matters now stand, the Federal Government,
while denying itself the advantage of the exemption from the sur
taxes in selling its own securities, in effect provides a subsidy, at its
own expense, to the State and municipal governments, the Federal
and joint stock land banks and other agencies issuing tax-exempt
securities, through the exemption from Federal income surtaxes which
these tax-exempt securities enjoy. For this exemption the Federal
Government gets no compensating advantage, and the effect of the
exemption is to provide a perfect means of escape from Federal sur
taxes which is naturally most valuable to the wealthiest investor, and
especially to one who is not engaged in business and is, therefore,
free to convert his investments into tax-exempt securities and thus
avoid paying income tax.
The volume of fully tax-exempt securities, according to the best
estimates available, is now approaching $11,000,000,000 and has
recently been increasing at the rate of about $1,000,000,000 a year.
With these securities available for investment, fully exempt as they
are from Federal income surtaxes, investors who would normally put
their surplus funds into productive enterprise, are automatically
driven under the pressure of high surtax rates into investment in
tax-exempt securities, with the result that the Federal Government
loses the revenue, business and industry lose the capital, and funds
badly needed for productive purposes are diverted into unproduc
tive and frequently wasteful public expenditure. This is a situation
which can not be permitted to continue without grave danger to our
economic structure, as well as to our system of taxation, and the
Treasury has accordingly been urging for some time the adoption of
a constitutional amendment restricting further issues of tax-exempt
securities as the only practicable means of correcting the evil.
(See exhibit 87, page 8, for letter of January 16, 1922, from the
Secretary of the Treasury to the Chairman of the Committee on Ways
and Means, with accompanying papers.) Even a constitutional
amendment would apply only to future issues of securities, but once
6
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
the amendment is adopted outstanding issues of tax-exempt securities
will gradually eliminate themselves, and as they become scarcer should
so increase in market value as to destroy or at least impair their
value for tax-exempt purposes. An analysis of outstanding issues of
State and municipal bonds indicates that 50 per cent, or thereabouts,
will mature within the next 20 years, so that within a measurable
period after the adoption of a constitutional amendment restricting
further issues of tax-exempt securities the situation would, to a large
extent, be under control.
A constitutional amendment, satisfactory to the Treasury and ap
proved by the Attorney General, has already been proposed by joint
resolution favorably reported to the last session of Congress by the
Committee, on Ways and Means. This amendment would apply
equally, and without discrimination, to the Federal Government, on
the one hand, and the State and municipal governments, on the other
hand, and would in effect put an end to future issues of tax-exempt
securities, making it possible for the Federal Government, to tax in
come from future issues by or under authority of the several States
if, as, and to the extent that it taxes future issues of Federal securi
ties, and for the State governments, to tax income from future issues
of Federal securities if, as, and to the extent that they tax future
issues of their own securities. The amendment, which appears in
H. J. Res. 314, reads as follows:
A r t ic l e — .
S e c t i o n 1. The United States shall have power to lay and collect taxes on income
derived from securities issued, after the ratification of this article, b y or under the
authority of any State, bu t without discrimination against income derived from such
securities and in favor of income derived from securities issued, after the ratification
of this article, by or under the authority of the United States or any other State.
S e c . 2. Each State shall have power to lay and collect taxes on income derived
by its residents from securities issued, after the ratification of this article, by or under
the authority of the United States; b u t without discrimination against income derived
from such securities and in favor of income derived from securities issued, after the
ratification of this article, by or under the authority of such State.
The Treasury most earnestly urges that this amendment be
promptly adopted and submitted to the States for their approval.
Adm inistrative changes.
*•
Other administrative changes should be made in the law with a
view to closing up miscellaneous avenues of escape and improving
the collection of the revenues. There should also be an indefinite
appropriation for refunds of taxes illegally or erroneously collected, in
order to facilitate the adjustment and payment of claims. Appro
priations of this character already exist for the payment of customs
refunds and drawbacks, and similar provisions for internal revenue
would avoid the necessity for frequent deficiency appropriations, and
EXTRACT .FROM REPORT OF SECRETARY OF THE TREASURY.
7
incidentally save the interest which now accumulates from the allow
ance of the refunds in cases where no appropriation is available for
payment.
No additional taxes.
The changes herein recommended will not decrease the revenues,
and in the long run should bring larger returns to the Treasury. No
additional taxes, therefore, are necessary on this account, and the
Treasury is not recommending any new taxes at this time to meet
indicated deficiencies in the revenue. It is still impossible to tell
with certainty whether the present year will close without a deficit,
but enough has already been accomplished to reduce materially the
deficit appearing from the estimates presented at the beginning of
the year. The latest figures show increased receipts from all sources,
including particularly customs and internal taxes, aggregating about
$350,000,000, and, on the other hand,, decreased expenditures of
about $200,000,000, making a net gain for Budget purposes of about
$550,000,000. The present year, moreover, presents extraordinary
circumstances, including, as it does, many overhanging items, both
of receipts and expenditure, which are not subject to administrative
control and, since they depend upon extraneous conditions, are
difficult, and sometimes almost impossible, to forecast. Under such
conditions and with the progress that has already been made in bring
ing the Budget for the year into balance, the Treasury does not
believe it necessary to impose at this time any additional taxes for
the purpose of supplementing the revenues.
The probabilities are that reductions in expenditure will not over
come all of the deficit indicated by the estimates. The Treasury
believes, however, that given relatively stable conditions in the
markets and in the business world it will be possible to meet the rest
of the deficit by increased receipts, arising, on the one hand, from
further realization on securities and other surplus assets of the Gov
ernment and, on the other, from increased collections of income and
profits taxes in respect to prior years. To this end the Treasury is
making exceptional efforts this year to dispose of the accumulation
of income and profits tax returns covering 1917 and subsequent years,
in the hope that by this means it will be able to make substantial
further collections of back taxes. There are also indications, which
have so far as possible been taken into account in the estimates already
submitted, of increased collections of income taxes as a result of the
improvement in business during the calendar year 1922. The extent
of this improvement, and its effect on the revenues, will not, of
course, be disclosed until March 15, 1923, when the first installment
of income taxes for the taxable year 1922 becomes payable, but any
additional receipts on that account will help to reduce any deficit
that may still remain in the current revenues.
8
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
E xhibit 87.
L E T T E R OF THE SE C R E T A R Y OF THE T R E A S U R Y R E L A T IV E TO
T A X -E X E M P T S E C U R IT IE S , J A N U A R Y 1 6 , 1 9 2 2 .
J anuary 16, 1922.
D ear Mr . Chairman : I am glad, in accordance with the request
of the Committee, to present the Treasure’s views as to the issuance
of tax-exempt securities and the latest available information as to the
amounts now outstanding and their effects upon the revenues and the
investment markets. The problem presented by these issues of taxfree securities is of growing importance and I think that it deserves
the most serious attention.
The views of the Treasury on the subject, and its suggestions as to
possible remedies, have already been set forth in my letter to you of
April 30, 1921,1 and in my letter of September 23, 1921,1 to the Chair
man of the Committee on Banking and Currency of the House of
Representatives, a copy of which I sent to you with my letter of
September 23, 1921. Copies of these letters are attached for ready
reference. The further views of the Treasury have been indicated
to some extent in my letter of November 4, 1921, to you, and in the
Under Secretary’s letter of November 10th to the Chairman of the
Committee on Banking and Currency, copies of which are enclosed.
Since these letters the President, in his address to Congress on
December 6, 1921, has emphasized the importance of action in the
matter in the following words:
There are a full score of topics concerning which it would be becoming to address
you, and on which I hope to make report at a later time. I have alluded to the things
requiring your earlier attention. However, I can not end this limited address without
a suggested amendment to the organic law.
Many of us belong to that school of thought which is hesitant about altering the funda
mental law. I think our tax problems, the tendency of wealth to seek nontaxable
investment, and the menacing increase of public debt, Federal, State, and municipal—
all justify a proposal to change the Constitution so as to end the issue of nontaxable
bonds. No action can change the status of the many billions outstanding, b u t we
can guard against future encouragement of capital’s paralysis, while a halt in the
growth of public indebtedness would be beneficial throughout our whole land.
Such a change in the Constitution must be thoroughly considered before submission.
There ought to be known what influence it will have on the inevitable refunding of our
vast national debt, how it will operate on the necessary refunding of State and municipal
debt, how the advantages of Nation over State and municipality, or the contrary, may
be avoided. Clearly the States would not ratify to their own apparent disadvantage.
I suggest the consideration because the drift of wealth into nontaxable securities is
hindering the flow of large capital to our industries, manufacturing, agricultural, and
carrying, until we are discouraging the very activities which make our wealth.
I should also like to call to your attention the statement as to the
decline in taxable income, particularly from investments, which
appeared in my Annual Report for 1921, on pages 20-21, as follows:
The Injurious Effect of High Rates on the Revenues.
The actual effect of the high surtaxes can readily be seen in the statistics published
by the Bureau of Internal Revenue.
The following table shows in comparative form, for the years 1916 to 1919, inclusive,
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:
1 S e e A n n u a l R e p o r t o f t h e S e c r e ta r y o f t h e T r e a su r y , 1921, p p . 349 a n d 379.
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
9
T a b l e s h o w i n g d e c l i n e o f t a x a b l e i n c o m e s o v e r ¡ ¡ > 3 0 0 ,0 0 0 .
N um ber of returns.
A ll
classes.
1916................................
1917................................
1913................................
1919........................ .
437,036
3,472,890
4,425,114
5,332,760
Incom es
over
$300,000.
1,296
1,015
627
679
N et incom e.
Incom e from dividends,
interest, and in v estm en ts.
A ll classes.
Incom es
over
$300,000.
A ll classes.
$6,298,577,620
13,652,383,207
15,924,639,355
19,859,491,448
$992,972,986
731,372,153
401,107,868
440,011,589
$3,217,348,030
3,785,557,955
3,872,234,935
3,954,553,925
Incom es
over
$300,000.
$706,945,738
616,119,892
344,111,461
314,984,884
The years under consideration, 1916 to 1919, inclusive, were, on the whole, years
of unexampled prosperity, and of earnings and profits beyond those ever known
before in any like period in the history of the country. Notwithstanding this, and
while the total income of all classes increased, at the same time there was a striking
decrease in taxable incomes of 1300,000 and over—the drop being from $992,972,986
in 1916 to $440,011,589 in 1919.
The effect of the high surtaxes in the other brackets is apparent from a brief study
of the statistics regarding taxable investment income.
In the bracket ‘‘Incomes of $300,000 and over,” the taxable investment income de
clined from $746,614,591 in 1916 to $328,360,613 in 1919; in the bracket “ $100,000 to
$300,000,” the decline was from $602,853,543 in 1916 to $427,910,905 in 1919; and in
the bracket “ $60,000 to $100,000,” the decline was from $366,614,917 in 1916 to
$323,743,874 in 1919.
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:
$165, 733, 900
1916.. . . . . . . . . .............. .
111, 468, 127
1917.. . . . . . . . . . . . . . . . .....
74, 610, 507
1918.. . . . .....
.:...
60, 087, 093
1919.. . . . . ...... ............... .
Incomes, $100,000 to $300,000:
158, 870, 428
1916....... .....................
119, 539, 786
1917.. . . . . . . . . . . . . . . . . . . . .
91, 030, 392
1918.. . . . . . . . . . . . . . . . . . . . .
91, 467, 182
1919.......... . . . . . . . . . ..........
Incomes, $60,000 to $100,000:
93, 280, 583
1916.. . . . . . .......... . . . . . . ;
75, 375, 484
1917.. __ . . . . . . . . . . . . . . .
65, 784, 062
1918 .................................
68, 814, 933
1919 .........................
The foregoing brackets represent the incomes subject to surtaxes under the reve
nue act of 1918, respectively, at 63 to 65 per cent, 52 to 63 per cent, and 29 to 48 per
cent. To these figures should be added the nprmal tax of 8 per cent in order to find
the total tax obligation.
In view of these figures, is it not clear that these high surtax rates are rapidly ceas
ing to be productive of revenue to the Government? And is it not equally clear
that their effect has been to divert into unproductive channels not merely the I n
come on the old investments, but to force a large part of the old investment capital
into unproductive channels?
I attach for the further information of the Committee in this con
nection the following tables which have been prepared by the Govern
ment Actuary:
1. Estimate of the total amount of wholly tax-exempt securities outstanding
January 1, 1922.
.
.
. .
2. Table showing advantage of investing in tax-free securities as compared with
a like investment in taxable securities.
3. Estimate of revenue loss to Federal Government through wholly tax-exempt
securities outstanding January 1, 1922.
\
10
EXTRACT FROM REPORT OP SECRETARY OP THE TREASURY.
According to reports, there were issued during the calendar
year 1921 rally tax-exempt securities of States and municipalities
to the aggregate amount of about $1,100,000,000, and the indi
cations are that further issues will follow during the current year in
substantial volume. Fully tax-exempt land bank bonds, Federal
and Joint Stock, to an amount exceeding $100,000,000, were also
issued during 1921, and further issues are in prospect. The Federal
Government, on the other hand, has adopted the policy of not
issuing fully tax-exempt obligations of its own, and its current
offerings must be sold in competition with the fully tax-exempt
offerings of States and cities.
The most important consideration is that the existence of the
growing mass of tax-exempt securities, coupled with the extremely
high surtax rates still imposed by law, tends to drive persons of
large income more and more to invest in wholly exempt securities
issued and still being issued by States and municipalities and hereto
fore issued by the Federal Government. The result is to impair
the revenues of the Federal Government and to pervert the sur-,
taxes, so that instead of raising revenue they frequently operate rather
to encourage investment in wholly tax-exempt securities, and even
to encourage the issue of such securities by States and munici
palities. This process tends to divert investment funds from the
development of productive enterprises, transportation, housing,
and the like, into non-productive or wasteful State or municipal
expenditures, and forces both the Federal Government and those
engaged in business and industry to compete with wholly taxexempt issues and on that account to pay higher rates of interest.
The greatest value of the full exemption from taxation arises,
of course, from the exemption it confers in respect to Federal income
surtaxes, and the constantly increasing volume of tax-free securities
therefore constitutes a real menace to the revenues of the Federal
Government. At the same time it makes the high surtaxes operate
as inducements to investment in non-productive public indebted
ness and is gradually destroying them as revenue producers. As a
consequence, the yield of the surtaxes is dwindling and there is a
premium on the issue of bonds of States and cities. In the last
analysis this is at the expense of the Federal Government, and
it is having a most unfortunate and far-reaching effect upon the
development of the whole country, because of the diversion of
wealth from productive enterprise.
The problem is one of exceptional difficulty, and it is not easy to
point to a practicable remedy. But the problem is none the less
real, and it is important to do whatever can be done to meet it.
One angle of approach is through the proposed Constitutional amend
ment; another is through the revision of the surtax rates to remove
the heavy premium on tax-free securities. It will be helpful to the
whole situation if the matter may have early consideration by the
Committee, with a view to appropriate action.
Sincerely yours,
(Signed)
A. W. Mellon, Secretary.
Hon. Joseph W. F ordney,
Chairman, Committee on Ways and Means,
House o f Representatives, Washington, D . C.
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
11
/
J a n u a r y 12, 1922.
Memorandum for Secretary:
(In re tax-exempt securities.)
The Bureau of the Census reports that for the years 1913 and 1919, the total indebted
ness of the States was as follows:
1913...................M ........ H .........- - - - - ...........- ____ - - - - - ................
$422, 796, 525
1919.......... l p t 1 ................. - - . . . . i - - ___- - - - - .........744, 582, 933
This would indicate a total indebtedness of the States, as of January 1, 1920, of about
$775,000,000.
The Bureau of the Census reported the total indebtedness of County and minor civil
divisions of the States, which includes all cities, towns, etc., as of 1913, at $4,075,152,904. This included $3,475,954,353 exclusive of Sinking Fund assets. This indebted
ness probably increased by January 1,1920, to about $5,595,000,000. That is, the total
indebtedness of the States and their minor civil divisions as of January 1,. 1920, was
about $6,370,000,000.
According to the financial press, about $672,000,000 of new indebtedness was added
during the year 1920, and about $1,100,000,000 for the year 1921. 1 his would make
the total indebtedness of the States and minor political subdivisions thereof as of
January 1, 1922, $8,142,000,000.
From this the estimated total tax-free securities outstanding, as of January 1, 1922,
may be tabulated as follows:
State, County, and minor political subdivisions of the States............ $8,142, 000,000
U. S. tax-free bonds (net outstanding)......................... .r,'.................
2,184,000,000 .
Federal Farm Loan Bonds (net outstanding)................... .................
284,000, 000
Bonds of Insular possessions (net outstanding)1...................................
50, 000, 000
Total.................. ....................................... ................... .
10, 660, 000, 000
This estimate may be fairly taken as a maximum, as no allowance is made in the
computation for any debt maturing since July 1st, 1919.
(Sgd.)
Jos. S. McCoy
G overnm ent A ctu ary i
J a n u a r y 14, 1922.
Memorandum for Secretary:
Loss to Government through tax-free securities.
Estimated total of all tax-free securities issued in the United States,
outstanding January 1, 1922........... .................................................... $10, 660,000, 000
Of this amount it is probable that say $5,660,000,000 is held by Corporations, such
as Insurance, Surety and Bonding companies, Banks and Trust companies, etc., which
are required to retain certain reserves. Many States require these reserves held by
concerns doing business therein to be in the form of local state and municipal securities.
A taxable security to yield the same revenue, after paying a tax of 12|%, as does a
5% tax-exempt security, must yield 5.714%. That is, on an investment of $100,000
by a corporation, the advantage of a tax-free investment would be $714.00 per year,
as compared with a taxable investment. As a large percentage of insurance, banking
and surety companies are required to invest in these tax-free securities, they would
still be obliged to invest in them if they were taxable, so it would seem safe to say that,
if they were all made taxable, the gain to the Federal Government in tax from corpora
tion-held tax-exempt securities would be not in excess of $35,000,000 per annum. We
must also remember th at all commercial stocks are now tax-exempt in the hands of
corporations, without materially reducing their taxes. Of the remaining $5,000,000,000 in tax-exempt securities, held by individuals, partnerships and abroad, it is safe to
say th at upon about $2,500,000,000 the gain in tax would be nil, and th at upon the
remaining $2,500,000,000, abbut $85,000,000. That is, if all tax-exempt securities out
standing January 1,1922, were made taxable, the gross increase in revenue to the Gov
ernment would be approximately $120,000,000.
There is little doubt th at under these conditions the future investor in what are now
tax-exempt securities, would demand th at they bear a higher rate of interest or be sold
at a discount, sufficient at least to meet this tax.
(Sgd.)
Jos. S. McCoy
G overnm ent A ctu a ry.
1 P h ilip p in e Islan d s, H aw aii an d Porto R ico.
12
EXTRACT FROM REPORT OF SECRETARY OF TH E TREASURY.
January
14, 1922.
ADVANTAGE OF INVESTING IN TAX-FREE SECURITIES AS COMPARED WITH A LIKE INVEST
MENT IN TAXABLE SECURITIES.
I. In each case $40,000 is assumed to be invested in a tax-free 5% security and by
comparison in a taxable stock bearing the necessary rate of interest so as to yield the
same income, after paying the income tax of the existing law.
Net income
of investor
exclusive
of that
from the
above in
vestment.
$4,000
16,000
28,000
40.000
60.000
80,000
100,000
200,000
500,000
1,000,000
Net income of investor
from the above in
vestment, after pay
ing income tax on
same.
With
tax-free
security.
$2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2.000
2,000
Tax—Sur
tax on
dividends.
With
taxable
stock.
$2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
$0.00
105.26
272.73
439.02
777.78
1,225.81
1,846.15
2,000.00
2,000.00
2,000.00
Income
from
taxable
stock
before
paying
tax.
Necessary
rate of
interest of
taxable
security.
$2,000.00
2,105.26
2,272.73
2,439.02
2,777.78
3,225.81
3,846.15
4.000.
4.000.
4.000.
5.00%
5.26%
5.68%
6.10%
6.94%
8.06%
9.62%
10.00%
00
10.00%
00
00
10.00%
II. Advantage of investing in a tax-free security, as compared with any other form
of investment when the income is subject to both normal and surtax, such as a mort
gage, commercial bond, e tc .:
In each case $40,000 is assumed to be invested in a tax-free security, and by com
parison, the same amount in the other form of investment, yielding the necessary rate
of profit, so as to give the same income after paying the income tax of the existing law.
The investor is assumed to be married, without dependents.
Net income
of investor
exclusive
of that
from the
above in
vestment.
$500
4,000
16,000
28,000
40.000
60.000
80,000
100,000
200,000
500,000
1,000,000
Net income of investor
from the above invest
Income
ment, after paying in
Necessary
Total tax
from
come tax on same.
rate of
on receipts taxable
interest
of
from above security
taxable
investment. before pay security.
With
With
ing tax.
tax-free
taxable
security.
security.
$2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
$2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
$0.00
80.00
265.26
432.73
599.02
937.78
1,385.81
2,006.15
2,160.00
2,160.00
2,160.00
$2,000.00
2,080.00
2,265.26
2,432.73
2,599.02
2,937.78
3,385.81
4,006.15
4.160.00
4.160.00
4.160.00
5.00%
5.20%
5.66%
6.08%
6.50%
7.34%
8.46%
10.02%
10.40%
10.40%
10.40%
From these tables it is observed that there is an advantage to the investor in taxexempt securities yielding a 5% income, as compared with an investment of the
same sum in the stock of a corporation where the return from that stock is less than
from 5% to 10%, depending upon the taxable net income of the investor. In case
of an investment of the same sum in a mortgage, corporate bond, or other completely
taxable form of investment the'advantage exists, unless this latter investment yields
from 5% to 10.40%, depending upon the net income.
Where the amount invested is greater than $40,000, the upper lim it will be the
same, but the advantage will be somewhat extended where the net income from other
sources is small or comparatively small, as is shown in the table following.
EXTRACT FROM-REPORT OF SECRETARY OF TH E TREASURY.
13
Investment of $1,000,000 in a 5 per cent tax-exempt security as compared with the invest
ment of the same sum in commercial stocks.
Net income
of investor
exclusive
of that
from the
above in
vestment.
*4,000
16,000
28,000
40.000
60.000
80,000
100,000
200,000
500,000
1,000,000
Net income of investor
from the above invest
ment, after paying in
Income
Necessary
come tax on same.
Tax—Sur from tax
rate of
tax on
able stock interest of
dividends. before pay taxable
With
With
ing tax.
security.
tax-free
taxable
security.
stock.
*50,000
50.000
50.000
50.000
50.000
50.000
50.000
50.000
50.000
50.000
*50,000
50.000
50.000
50.000
50.000
50.000
50.000
50.000
50.000
50.000
*7,61-1.11
13, 111. 11
20,037. 74
28,923.08
38,076.92
44,509.80
47,058.82
50.000
50.000
50.000
o
*57,611.11
63, 111. 11
70,037.74
78,923.08
88,076.92
94,509.80
97,058.82
100,000.00
100,000.00
100,000.00
5.76%
6.31%
7.00%
7.89%
8.81%
9.45%
9.71%
10.00%
10.00%
10.00%
OBLIGATIONS
OF
FOREIGN GOVERNMENTS
BEING AN EXTRACT FROM THE REPORT
OF THE SECRETARY OF THE TREASURY
ON THE STATE OF THE FINANCES FOR
THE FISCAL YEAR 1922
WASHINGTON
GOVERNMENT PRINTING OFFICE
1922
a onam
OBLIGATIONS OF FOREIGN GOVERNMENTS.
The obligations of various foreign governments held by the Treas
ury on November 15, 1922, aggregated $10,045,282,026.60, principal
amount, and may be classified as follows :
(1) $9,386,311,178.10 representing loans made by the Secretary
of the Treasury, with the approval of the President, under the
Liberty bonds acts.
(2) $574,876,884.95 received from the Secretary of War and the
Secretary of the Navy on account of sales of surplus war material
under the act of July 9, 1918.
(3) $84,093,963.55 received from the American Relief Adminis
tration on account of relief supplies furnished under the act of
February 25, 1919.
In addition to the above, the United States Grain Corporation, the
entire stock of which is owned by this Government, holds obligations
of various foreign governments amounting to $56,858,802.49. It is
expected that these obligations, which were acquired by the Grain
Corporation on account of sales of flour for relief purposes under the
act of March 30, 1920, will also be turned over to the Treasury
Department for custody upon the completion of the pending liquida
tion of that corporation. Notes of the Polish Government amounting
to about $24,000,000 are also held by the War Department and the
United States Shipping Board. It is understood that these obliga
tions were received on account of sales of surplus war material by
the former and transportation services by the latter, and that the
amounts may be subject to further adjustment.
A detailed statement of the foreign obligations now held by the
Treasury and by the United States Grain Corporation, showing also
the interest accrued and remaining unpaid as of the last interest
payment dates, is given as Exhibit 77, page 281.
The following statement shows the credits established under the
Liberty bond acts (after deducting credits withdrawn), as at the
close of business on November 15, 1922:
22933—22
3
4
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
Credits estab
lished.
Country.
Cash advanced.
Other charges
against credits.
Balance under
established
credits.
Belgium..................... ................ $349,214,467.89 $349,214,467.89
10,000,000.00
10,000,000.00
Cuba.......... .................................
61,974,041.10
67.329.041., ip
Czechoslovakia............................
2,997,477,800.00
2,997,477,800.00
France......... ...............................
Great Britain.............................. 4,277,000,000.00 4,277,000,000.00
15.000. 000.00 $33,236,629.05
48,236,629.05
Greece..........................................
Italy.............. ......... - .................. 1,648,034,050.90 1,648,034,050.90
26,000.00
26,000.00
Liberia........................................
25.000.
000.00 25.000. 000.00
Rumania....................................
187,729,750.00
187,729,750.00
Russia.........................................
26,780,465.56
26,780,465.56
Serbia..........................................
33,236,629.05
9,598,236,575.45
9,636,828,204.50
Total............. ...................
$5,355,000.00
5,355,000.00
The balance of the credit which was granted to the Czecho-Slovak
Republic to assist that Government in the repatriation of its troops
from Siberia was $6,072,834.36 at the beginning of the fiscal year 1922.
The movement of these troops was carried out by the War Depart
ment and the Shipping Board, and on May 29, 1922, the Czecho
slovak Republic used $717,834.36 out of this credit to reimburse
the Shipping Board for its services. The balance to the credit of
that Republic is now $5,355,000, and whatever may remain after
all payments to the War Department have been completed will be
withdrawn.
I t is not contemplated that any further advances will be made by
the Treasury against the credits in favor of Greece. The nature of
these credits was described in last year’s annual report.
The following statement shows the amount of advances which have
been repaid up to November 15, 1922:
Country.
To Nov. 16,
1921.
Nov. 16,1921, to
Nov. 15, 1922.
Total.
$1,522,901.66
1,425,000.00
46,714,861.81
110,681,641.56
1,794,180.48
605,326.34
$440,552.83
834,500.00
17,357,868.04
30,500,000.00
48,564.63
$1,963,454.49
2,259,500.00
64,072,729.85
141,181,641.56
1 794,180.48
653,890.97
162,743,911.85
49,181,485.50
211,925,397.35
The $30,500,000 repaid by the British Government during the past
year was on account of the obligations of that Government given for
purchases of silver under the Pittman Act, according to the special
arrangement made regarding these obligations.
The repayments made by the Governments of Belgium and Serbia
and substantially all of those made by France during the past year
represent the unused balances of advances made by the Treasury to
those Governments and turned over by them to the Commission for
Relief in Belgium and to the American Relief Commission to be ex
pended for relief purposes. These unused balances were returned to
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
5
the Treasury to be applied as payments on account of the principal
of the obligations of the respective Governments.
No repayments of principal have been made on any of the obliga
tions acquired under the acts of July 9, 1918, February 25, 1919, or
March 30, 1920.
The following table shows the amount of interest paid on foreign
obligations acquired by the Treasury under the Liberty bond acts:
Country.
To Nov. 15,
1921.
Belgium................................................................................. $10,907,281.55
Cuba......................................................................................
1,442,922.91
Czechoslovakia.....................................................................
304,178.09
France................................................................................... 129,570,376.13
Great Britain........................................................................ 247,844,685.50
Greece....................................................................................
1,159,153.34
Italy....................................................................................... 57,598,852.62
Liberia.....................................................*............. ............
861.10
Rumania............................... ...............................................
263,313.74
Russia.......... ;....................................................................
4,872,811.50
Serbia....................................................................................
636,059.14
Total............................................................................ 454,600,495.62
Nov. 16,1921, to
Nov. 15, 1922.
$416,810.23
103,812,500.00
2,612,744.46
106,842,054.69
Total.
$10,907,281.55
1,859,733.14
304,178.09
129,570,376.13
351,657,185.50
1,159,153.34
57,598,852.62
861.10
263,313.74
7,485,555.96
636,059.14
561,442,550.31
Great Britain’s interest payments during the past year were made
as follows :
Date of payment.
Apr. 15, 1922............................... ......... ...................
May 15, 1922.................................. .............. .......................
Oct. 16, 1922..........................................................................
Nov. 15, 1922........................................................................
Total............................................................................
Interest on
obligations
given for
Pittman silver
advances.
Interest on
other obligar
tions.
$1,372,500.00
915.000.
00
915.000.
00
$50,000,000.00
610.000.
0050,000,000.00
3,812,500.00
100,000,000.00
Total.
$1,372,500.00
915,000.00
50.915.000. 00
50.610.000. 00
103,812,500.00
On page 58 of the Annual Report of the Secretary of the Treasury
for the fiscal year 1920, reference was made to two special funds aris
ing out of the liquidation of certain property of the Russian Govern
ment and held for Russia by the Secretary of the Treasury, aggre
gating $2,143,601.07. On August 3, 1922, these funds were applied
(1) to cancel the unpaid balance of the interest, amounting to $1,808,506, which became due on Russian obligations, May 15, 1918; and
(2) as part payment of the unpaid balance of the interest due Novem
ber 15, 1918. Most of the funds which the Treasury has received in
payment of interest on Russian obligations represent the proceeds of
liquidation of the financial affairs of the Russian Government in this
country. Copies of a letter dated May 23, 1922, from the Secretary
of State and the reply of the Secretary of the Treasury, dated June
2, 1922, in regard to the loans of this Government to Russia and the
liquidation of the affairs of the Russian Government in this country,
are attached as Exhibit 79, page 283.
6
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
The following statement shows the amount of interest paid by
each foreign government on obligations acquired under the act of
July 9, 1918, on account of sales of surplus war material:
Country.
Bel gin™
France
.................................................................
r............ .................................................
Russia.......................................... ........................................
Total
...................... ..............................-
To Nov. 15,
1921.
Nov. 16,1921,
to Nov. 15,
1922.
Total.
$2,797,351.40
20,038,719.13
126,266.19
1,290,620.78
10,179.87
$1,379,429.06
20,859,564.43
40,580.43
$4,176,780.46
40,898,283.56
126,266.19
1,290,620.78
50,760.30
24,263,137.37
22,279,573.92
46,542,711.29
The only interest payment received to date on foreign obligations
acquired under the act of February 25, 1919, was one of $181,017.17
on Russian obligations, which was paid on August 5, 1922.
The Treasury understands that no interest has been paid on the
obligations held by the United States Grain Corporation, acquired
under the act of March 30, 1920.
The following statement by the Secretary of the Treasury, regard
ing the status of the obligations of foreign governments held by the
United States, and particularly the origin of the indebtedness of the
British Government to the United States, was made public on
August 24, 1922:
A number of inquiries have been received, as a result of statements recently pub
lished, with respect to the exact status of the obligations of foreign governments
held by the United States. Especial attention has been directed to the origin of
the indebtedness of the British Government amounting to about $4,135,000,000.
I t has been said that this liability was not incurred for the British Government, b ut for
the other allies, and that the United States, in making the original arrangements, had
insisted in substance that though the other allies were to use the money borrowed,
it was only on British security that the United States was prepared to lend it. I t is
apparent from the inquiries which have reached the Treasury Department that it is
supposed that this, in substance, is the explanation of the existing indebtedness of
Great Britain.
In answer to these inquiries, it should be said that the obligations of foreign govern
ments, in question, had their origin almost entirely in purchases made in the United
States, and the advances by the United States Government were for the purpose of
covering payments for these purchases by the Allies.
The statement that the United States Government virtually insisted upon a guaranty
by the British Government of amounts advanced to the other allies is evidently
based upon a misapprehension. Instead of insisting upon a guaranty, or any trans
action of that nature, the United States Government took the position that it would
make advances to each Government to cover the purchases made by that Govern
ment and would not require any Government to give obligations for advances made to
cover the purchases of any other Government. Thus, the advances to the British
Government, evidenced by its obligations, were made to cover its own purchases,
and advances were made to the other allies to cover their purchases.
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
7
The nature of the arrangements is shown by a memorandum which the Secretary of
the Treasury, in June, 1918, handed to the British ambassador, as follows:
So far as the purchases of the allied Governments for war purposes w ithin the United
States and its Territories and insular possessions are concerned it is th e expectation of
the Secretary of the Treasury to continue as heretofore the advances necessary to enable
the financing of such approved purchases. The Secretary of the Treasury quite agrees
w ith what he understands to be the views of the Chancellor of thé Exchequer th at
advances shall be made to each allied Government for the commodities purchased in
the United States by or for it and th a t no allied Government should be required to give
its obligations for such purposes when merely serving as a conduit for the supply of the
materials so purchased to another allied Government. Any other course would indeed
be incompatible with what the Secretary of th e Treasury deems a cardinal principle
which should be followed in respect to such advances, namely, th at the allied Govern
ment for the use of which the commodity is purchased must give its own obligation
therefor and the obligation of any other allied Government can not be accepted by the
United States as an equivalent.
I t is well to further quote from a memorandum handed to the British ambassador in
June, 1920, by the Secretary of the Treasury, in regard to these loans as follows:
I t has been at all times the view of the United States Treasury th a t questions re
garding the indebtedness of the Government of the United Kingdom of Great Britain
and Ireland to the United States Government and the funding of such indebtedness
had no relation either to questions arising concerning the war loans of the United States
and of the United Kingdom to other Governments or to questions regarding the repa
ration payments of the central Empires of Europe. These views were expressed to the
representatives of the British Treasury constantly during the period when the United
States Government was making loans to the Government of the United Kingdom and
since th at time in Washington, in Paris, and in London.
From these two statements it appears to be quite clear th a t the respective borrowing
nations each gave their own obligations for the money advanced by the United States
and th at no guaranty of the obligations of one borrowing nation was asked from any
other nation. This is the understanding of th e Treasury as to the status of the foreign
obligations growing out of the war now held by the United States.
Austrian relief.—The United States Government holds one of a
series of Austrian Government bonds designated as “ Relief Series B
of 1920/’ which was issued by that Government in connection with
food purchased on credit from the United States Grain Corporation
for relief purposes. The face value of this obligation is $24,055,708.92. A copy is attached as Exhibit 78, page 282. The other
bonds of “ Relief Series B of 1920” outstanding are held by various
European nations. This series of bonds, according to the express
terms thereof, is a first lien upon all the assets and revenues of
Austria. Her assets and revenues are also subject to claims of cer
tain foreign governments on account of reparations and costs of
armies of occupation. Measures for the financial and economic
reconstruction of Austria have for some time been the subject of
considerable discussion between the principal governments inter
ested in the Austrian situation. The proposed plan of Austrian
rehabilitation contemplates that all Governments having claims
against Austria on account of relief, reparation, or costs of
armies of occupation shall extend the time of payment thereof and
suspend their liens on Austrian assets for a period of 20 years, so
that such assets may be available as security for new external credits.
In order that this Government might cooperate in this respect with
8
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
the other governments having claims against Austria, the following
joint resolution was passed by the Congress and approved by the
President on April 6, 1922:
Whereas the economic structure of Austria is approaching collapse and great num
bers of the people of Austria are, in consequence, in imm inent danger of starvation
and threatened by diseases growing out of extreme privation and starvation; and
Whereas this Government wishes to cooperate in relieving Austria from the imme
diate burden created by her outstanding debts: Therefore be it
Resolved by the Senate and House o f Representatives o f the United States o f América in
Congress assembled, T hat the Secretary of the Treasury is hereby authorized to extend,
for a period not to exceed twenty-five years, the time of paym ent of the principal and
interest of the debt incurred by Austria for the purchase of flour from the United
States Grain Corporation, and to release Austrian assets pledged for the paym ent of
such loan, in whole or in part, as may in the judgment of the Secretary of the Treas
ury be necessary for the accomplishment of the purposes of this resolution: Provided,
however, T hat substantially all the other creditor nations, to wit, Czechoslovakia,
Denmark, France, Great Britain, Greece, Holland, Italy, Norway, Rumania, Sweden,
Switzerland, and Yugoslavia shall take action w ith regard to their respective claims
against Austria similar to that herein set forth. The Secretary of the Treasury shall
be authorized to decide when this proviso has been substantially complied with.
The Secretary of the Treasury has not yet been requested to take
formal-action under the above resolution, but stands ready to act
when occasion arises and its conditions are met. On August 7,
1922, the Reparation Commission released from reparation claims
for a period of 20 years certain revenues of the Austrian Govern
ment in order that they might be used as security for a new Austrian
bank of issue. In this connection the United States Government
informed the Austrian Government that it was prepared, within the
limits of the resolution of April 6, 1922, to suspend its priority in
respect to Austrian assets and revenues to the extent necessary for
this purpose.
WORLD WAR FOREIGN DEBT COMMISSION.
The World War Foreign Debt Commission was created by the act
of February 9, 1922, entitled “An act to create a commission author
ized under certain conditions to refund or convert obligations of
foreign Governments held by the United States of America, and for
other purposes,” the text of which is as follows:
Be it enacted by the Senate and House o f Representatives o f the United States o f America
in Congress assembled, That a World War Foreign Debt Commission is hereby created
consisting of five members, one of whom shall be the Secretary of the Treasury, who
shall serve as chairman, and four of whom shall be appointed by the President,' by
and with the advice and consent of the Senate.
S ec . 2. That, subject to the approval of the President, the commission created by
section 1 is hereby authorized to refund or convert, and to extend the time of pay
m ent of the principal or the interest, or both, of any obligation of any foreign Govern
ment now held by the United States of America, or any obligation of any foreign
Government hereafter received by the United States of America (including obligations
held by the United States Grain Corporation, the War Department, the Navy Depart-
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
9
üùênt, of thé American Relief Administration), arising ont of the World War, into
bond® or other obligations of such foreign Government in substitution for the bonds
or other obligations of such Government now or hereafter held by the United Stafeá
of America, in such fórni and of such terms* conditions, date Of dates of m aturity,
ánd fate or fates of interest, arid with such security, if any, as Shall be deemed for th è
b'ést interests of the United States of América: P t à t i d è ê , That nothing contained in
this act shall be construed to authorize or empower the commission to extend the
tim e of m aturity of any such bonds or other obligations due the United States of
America by any foreign Government beyond June 15>, 1947, or to fix the rate of interest
at less than 4£ per centum per annum: P r o v i d e d f v r i h e t , That whèn the bond or Other
obligation of any such Government, has been refunded of Converted as herein pro
vided the authority of thè commission over stìch refunded òr converted bond of other
obligation shall cease.
S ec. 3, That this aet shall not be construed to authorize the exchange of bond® or
other obligations of any foreign Government for those of any other foreign Govern
ment, or cancellation of any part of such indebtedness except through paym ent
thereof.
S ec. 4. That the authority granted by this act shall cease and determine at thé
end Of three years from the date of the passage of this act.
S ec . 5. That the arinual report of this commission shall be included in tbe annual
report of the Secretary of the Treasury on the: state of the finances, b ut said commission
shall immediately transmit to the Congress copies of any refunding âgréèménts
entered into, with the approval of the President; by each foreign Government ûpon
thé completion of th e authority granted under this act.
Approved, February 9', 1922;
The act provides that the Secretary of the1Treasury shall he ohe
óf the members of thé commission and serve as" fts chàirtìian. As
the other four members of the commission, thé President appointed
on February 21, 1922, Chafles E. Hughes, Secretary of State; Herbert
C. Hoover, Secretary of Commerce; îteéd Smoot, United States
Senator; and Theodore E. Burton, MemheT of the House of Repre
sentatives. On February 28, 1Ò22, the Sedate1confirmed the appoint»merits of Secretary Hughes and Secretary Hòòvér, and ótí April f f |
1922, confirmed the appointments of Senator SìAoòt and Congressman
Burton.
The organization and first meeting of thé commission wàs held on
April 18, 1922. Eliot Wadsworth, Assistant Secretary of the Treas
ury, was appointed secretary of the commission, and the following
resolution was adopted :
R e s o l v e d , T hat the Secretary of State bé requested to inform each of the Govern
ments whose obligations, arising, out of the World War, aré held by the United States,
including obligations held by the United 1 States Gtain Corporation, the War D epart
ment, the Navy Department", or the American Relief Administration, of the organizan
tion of the World War Foreign D ebt Commission pursuant to the act of Congress ap
proved February 9, 1922, and that the commission desires to receive.any proposals
o r representations which the said Government may wish to make fbr the settlem ent
or refunding of ite obligations under the pròvisiòris of the act.
In accordance with this resolution the Secretary of State instructed
the diplomatic representatives of this Government at the capitals of
22933—22----- 2
10
EXTRACT FROM REPORT OE SECRETARY OF T H E ÎREASURY.
each of the foreign Governments indebted to the United States, with
the exception of Armenia, Austria, Cuba, Greece, Liberia, Nicaragua,
and Russia, to communicate to the respective Governments to which
they were accredited the text of the resolution and of the act. This
action was not taken in respect to the Governments above named
for the following reasons :
Armenia, Greece, and Russia; In none of these countries is there
a Government recognized by the United States.
Austria: Congress passed on April 6, 1922, a joint resolution giv
ing the Secretary of the Treasury special authority to deal with the
Austrian debt.
Cuba: Interest and installments of principal are being regularly
paid and no refunding is required.
*
Liberia: An act authorizing a new loan, from the proceeds of which
the existing loan will be repaid in full, has already been passed by the
House of Representatives pursuant to request of the Department of
State, and is now pending before the Senate.
Nicaragua: This debt is regarded as already in funded form.
In response to the invitation of this Government the following
countries have designated representatives to negotiate with the
commission: Belgium,Czechoslovakia, Finland, France, Great Britain,
Hungary, Poland, Rumania, and Serbia.
.
The commission held further meetings on June 1 and 30, July 27,
August 10, and September 29, 1922.
In July, 1922, the French Government sent a special mission,
headed by Mr. Jean V. Parmentier, director of the movement of
funds of the French treasury, to the United States to discuss with the
commission the French debt to this Government. Mr. Parmentier,
upon his arrival, placed in the hands of the commission certain data
relating to the financial and economic situation of France. He ex
plained to the commission the position of his Government in respect
to the funding of its debt to the United States, stating that he had
been designated by the French Government to afford the commis
sion complete information as to the financial condition of his Govern
ment, but that the latter did not consider it possible at the present
time to enter into any definite engagements for a funding or settle
ment of its debt. He further stated that it was his Government’s
desire to postpone for an indefinite period consideration of this
matter, until the financial situation of France should become more
clear, particularly as to reparation receipts from Germany. The
commission’s position on the subject was explained to Mr. Parmentier,
and especially its desire that a funding of the French debt should
take place in the near future. On August 17, 1922, Mr. Parmentier
informed the chairman of the commission that he had been keeping
11
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
Ms Government informed of the progress made in the negotiations
and that he had received a cable instructing Mm to return for a full
discussion with Ms Government of the situation as it had developed.
The chairman replied that in Ms view it could only be beneficial if
Mr. Parmentier should in person discuss with Ms Government the
negotiations which had taken place between him and the commis
sion. Mr. Parmentier returned to France shortly after this conference.
Announcement was made by the Government of Great Britain on
July 17, 1922, that a special delegation would proceed to the United
States early in September to negotiate terms for the funding of the
British debt to the United States. The British Embassy in Wash
ington subsequently reported that the delegation would sail on Octo
ber 18 for New York, headed by Sir Robert Horne, Chancellor of the
Exchequer, who would be accompanied by Mr. Montagu Collet
Norman, Governor of the Bank of England, as second delegate. With
the recent change of government in England, however, the departure
of a delegation has been postponed pending the holding of the elec
tions in that country.
Great Britain has paid $100,000,000 as interest on her obligations
to the United States during the current fiscal year, $50,000,000 on
October 16,1922, and $50,000,000 on November 15, 1922, in addition
to the payments under the special agreement as to silver advances.
The Italian Government has stated that it is prepared to send a .
special commission to this country to negotiate with the commission.
The Rumanian Government has sent a special delegation to the
United States to negotiate with the commission.
The commission has had discussions of a preliminary nature with a
few of the other debtor governments, but no definite funding agree
ments have yet been entered into.
Statistical information has been and is being compiled and analyzed
with a view to ascertaining the financial and economic conditions of
the various debtor nations. The commission is hopeful that after
the British debt to the United States has been refunded, which is
expected to take place shortly, substantial progress will be made in
concluding refunding arrangements with the other debtor nations.
//
12
E xhibit 77.
O BLIG ATIO NS OF F O R E IG N G O V E R N M E N T S H E L D B Y TH E U N IT E D ST A T E S, TO G ETH ER W ITH IN T E R E S T A C C R U ED
A N D R E M A IN IN G U N P A ID T H E R E O N A S OF TH E L A S T IN T E R E S T P E R IO D P R IO R TO OR E N D IN G W ITH
N O V E M B E R 15, 1 9 2 2 .
acquired from
Obligations acquired under Lib Obligations
sales of surplus war ma
erty bond acts.
terial,(actaf.July 9,1918).
Country.
Principal.
Interest (includ
ing interest due
Nov. 15, 1922).
Principal.
Interest.
Obligations acquired by
American reliefadmin
istration on account of
relief (act of Feb T25,
1919).
Principal.
Interest.
Obligations held by
United States, Grain
Corporation on ac
count of sales of flour
(act of Mar. 30, 1920).
Principal-.
Interest.
Total.
Total indebted
ness.
Principal.
B, 028,412.15 $1,204,261.83 $3,931,505.34 $472)995.05 $11,959,917.
Armenia..........
. . . . . . . . . . ¡24,.055,708.92 2,886,686; 08 24,055,708.
Austria...........
377,123,745.
Belgium.......... $347,251,012 40 {60,073,383.65 9,872,732.54
7,740,500.
7,740,500.00
Cuba................
61,974,041.10
10,136,141.81 20,612,300.11 (2,959,392.88 6,428,089.19 964,213.38 2,873,238.25 344,788.60 91,887,668.
Czechoslovakia
13,999,145.
' Esthonia..........
12,213,377.88 1,832,006.70 1,785,767.72 257,818.96'
8,281,926.
8,281,926.17 1,012,'436.10!
Finland...........
3,340,746,215.
France............. 2,933,405,070.15 503,388,035.61 407,341,145.01
34,135,818,358.
Great Britain.. 34,135,818,358.44 <611,044,201.85
15,000,000.
15,000,000.00
750,000.00
Greece.............
1,685,835.
1,685,835.61 202,300.28
Hungary.........
1,648,034,050.
Ita ly ................ 1,648,034,050.90 284,681,43461
5,132,287.
391,562.67
2,521,869.32 252,014.20 2,610,417.82
L atvia............
26,000.
3,518.85
Liberia............
4,981,628.
822,136.07
623,923.80
123,320.40
4,159,491.96
Lithuania___
170,585.35
170,585Nicaragua.......
59,678,604.07 7,042,817.10 51,671,749.36 7*75Ôj762.'Ü 24,312,514.37 2,825,229.50 135,662,867Poland............
36,128,494.
23,205,819.52
3,925,703.00 12,922,675.42 1,938,401.34
Rumania.........
192,601,297.
187,729,750.00 39,214326.16
10,152,06 4,465,465.07 " 488,"Ì92.56
406,082.30
Russia............
51,104,595.
4,611,738.14 24,978,020.99 3,382,349.78
26,126,574.59
Serbia.............
■m -
(*) (2):
0
T otal...
Interest.
677,256.
2, 886,685.
‘ 60, 073,383.
0
14 404,536.
089,625.
012,436.
503, 386,035.
<611 044,201.
750,000.
202,300.
284 681,434
643,576.
3,518.
747,244.
2!
T
6)
618,809.
864,104
712,670.
994,087.
$13, 687,174.37
26, 942,394 00
487, 197,129.59
7, 740.500.00
106, 292,205.32
16, 088.771.26
9, 294.362.27
3,844, 132,250. 77
4,746, 862,560.29
15, 750,000.00
, 888,135.89
1,932, 715,485.51
5, 775.864.01
29,518.85
728,872.23
170,585.35
153 281, 676. 81
41! 992.599.28
232!313,968.15
59! 098,683.50
1
9,386,311,178.10 1,517,82,6,483.68 574,876,884.95 18,041,057.86 84,Q93,963.55 12,192,368.31 56)858,802,49 6,731,998.51 IQ,102,140,829.03 1,554,791,908.36 11,656,932,737.45
1 No interest due on Nicaraguan notes until maturity, as is also the case of certain Belgian obligations aggregating $2,284,161.40.
2 Interest has been paid as it became due.
‘
~!
3 Includes $61,000,000 of British obligations which were given for Pittman silver advances and for which an agreement for payment has been made.
< Great Britain paid $50,000,000 on October 16,'1922, and $50,000,000 on November 15, 1922, on account of intejest on other than Pittman silver obligations.
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
'
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
E
x h ib it
13
78.
S P E C IM E N OF O BLIG ATIO N OF A U S T R IA .
O b l i g a t i o n o f t h e G o v e r n m e n t o f A u s t r i a — T w e n t y F o u r M i l l io n S i x t y S i x
T h o u s a n d S e v e n H u n d r e d N in e t y E ig h t D o l l a r s a n d F if t y S ix C e n t s
($24,066,798.56).— R e l i e f S e r i e s B o e N i n e t e e n H u n d r e d a n d T w e n t y —
No. I.
The Government of Austria for value received, promises to pay
to the Government of the United States of America, or assigns, on
the First Day of January, Nineteen Hundred and Twenty-Five, the
principal sum of Twenty Four Million Sixty-Six Thousand Seven
Hundred Ninety Eight Dollars and Fifty-Six Cents ($24,066,798.56),
on which interest will be paid half yearly at the rate of six per cent
(6%) per annum from date of this obligation to the date of payment.
Both the principal and the interest of this obligation will be paid in
gold coin of the United States of America, of the standard weight
and fineness existing at the date of this obligation at the Treasury
-of the United States of America in the city of Washington, District
-of Columbia, or at the option of the holder, at the Sub-Treasury of
the United States of America in the City of New York.
The principal and interest of this obligation will be paid without
•deduction for and will be exempt from any and all tax and/or charge,
present and future, imposed by authority of the Government of
Austria or its possessions, or by any political or taxing authority
within Austria.
This obligation is one of a series of obligations of similar tenor but
in different amounts and payable in different currencies, all maturing
on the first day of January Nineteen Hundred and Twenty-Five,
designated as “ Relief Series B of 1920” .
The Government of Austria agrees that no payment will be made
upon or in respect of any of the obligations of said Series issued by
the Government of Austria before, at or after, maturity, whether for
principal or for interest, unless a similar payment shall simultaneously
be made upon all obligations of the said Series issued by the Govern
ment of Austria in proportion to the respective obligations of said
Series.
Pursuant to the powers conferred upon it, the Reparation Com
mission has authorized the Austrian Government, under the control
of the Austrian Section of the Reparation Commission, to issue the
present series of bonds, which shall be a first charge upon all the
assets and revenues of Austria, and shall have a priority over costs
of reparation under the Treaty of Saint-Germain, or under any treaty
or agreement supplementary thereto, or under arrangements con
cluded between Austria and the Allied and Associated Powers during
the Armistice signed on November 3rd, 1918, without prejudice to
the obligations of Austria to pay the expenses of the Armies of
Occupation, of the Reparation Commission and of restitution, and
to make deliveries and payments in kind under the Treaty of Saint
-Germain (except under .Article 181, and Paragraph 19 of Annex II
of Part VIII) and under any protocols or agreements in force to the
extent to which such deliveries may be required by the Reparation
■Commission or, in accordance with the provision of the said Treaty,
protocols or agreements, by an interested Power.
14
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
I n W i t n e s s W h e r e o f the Government of Austria has caused this
obligation to be executed and its official seal attached by Dr. Richard
Reisch, Secretary of State for Finances duly authorized and empow
ered for that purpose.
Dated September 4, 1920.
Signed for the Government of Austria
W
it n e s s
:
(Sgd)
Dr.
S im
(Sgd)
Dr.
S
(Sgd)
on
R
(Sgd)
chuller
e is c h
Secretary o f State fo r Finances.
Dr.
W
l a d im e r
B
eck
President o f the A u d it Office.
(s e a l )
Countersigned for the Austrian Section of the Reparation Com
mission.
(Sgd)
H. K l o b u k o w s k i
(Sgd)
S caram anga
(Notation on back of obligation:)
The aforegoing obligation has been taken from the Government of
Austria in payment of food commodities sold by the United States
Grain Corporation to the Government of Austria.
The United States Grain Corporation finds that the Government
of Austria is entitled to an allowance amounting to Eleven Thousand
and Eighty-nine Dollars Sixty-Four Cents ($11,089.64) for damaged
flour on the steamship “ Gudvun”, and that the aforegoing obligation
should be credited in the said amount.
(Signed)
U
E
n it e d
d w
.
States G
F lesh
M.
r a in
Co rpo
r a t io n
Vice-President and Treasurer.
Dated at New York, N. Y., November 4th, 1920.
E
x h ib it
79.
L E T T E R FRO M T H E SE C R E T A R Y OF ST A T E C O N CERN IN G T H E
L IQ U ID A T IO N OF R U S S IA N O BL IG A T IO N S I N TH E U N IT E D
ST A T E S, A N D TH E R E P L Y OF T H E S E C R E T A R Y OF T H E T R E A S U R Y .
D
epartm ent
of
Stat$,
Washington, M ay 28, 1922.
M y D e a r M r . S e c r e t a r y : I desire to refer to the arrangements
made toward the close of 1917 for the liquidation of the financial
business of Russia in this country, following the fall of the last
recognized Russian Government.
I t appears from the files of the State Department, and from pub
lished records, that the extraordinarily difficult task of dealing with
the Russian financial situation in this country under the circumstances
indicated was undertaken jointly by the State and Treasury Depart
ments in cooperation with Mr. Boris Bakhmeteff, representing the last
recognized Russian Government, and that contracts then outstanding
with American manufacturers to the value of more than $102,000,000
were successfully liquidated with funds of the Russian Government
amounting to much less than that sum. I t is the understanding of
the State Department that this process of liquidation has now been
brought to a practical conclusion, and that such business as remains
is in process of orderly settlement.
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
lfi
Having regard to recent public discussion of the subject, may I ask
that you confirm these facts and furnish any additional information
from the records of the Treasury Department which you may consider
helpful to a public understanding of the matter ?
I am, my dear Mr. Mellon,
Very sincerely yours,
(Sgd)
C h a r l e s E. H u g h e s .
T
reasury
D
epartm ent
,
Washington, June 2, 1922.
M y D e a r M r . S e c r e t a r y : I received your letter of May 23, 1922,.
regarding the liquidation of the Russian Government’s financial obli
gations in this country after the fall of the last recognized Russian
Government.
The facts set forth in your letter are in accord with the information
possessed by the Treasury on the subject, and I am glad to avail
myself of your suggestion to furnish any additional information from
the Treasury’s records that may be considered helpful to a public
understanding of the matter.
I t appears that under the authority of the Liberty Bond Acts the
Secretary of the Treasury, with the approval of the President, made
certain loans to the Provisional Government of Russia for the purpose
of more effectually providing for the national security and defense
and prosecuting the war. The net amount of the loans so made is
$187,729,750. Although a credit of $100,000,000 was established by
the Treasury in favor of the Russian Government on May 16, 1917,
the first loan to that Government was not actually made until July
6, 1917, and was in the amount of $35,000,000. No loans were made
by the Treasury to the Russian Government after the fall of the
Provisional Government early in November, 1917, with the exception
of an advance of $1,329,750 on November 15, 1917, the proceeds of
which were simultaneously applied by the Russians to the payment
of interest to the Government of the United States.
The funds advanced by the Treasury in making the above loans
were used solely for the purchase of obligations of the Russian Govern
ment in accordance with the Liberty Bond Acts, in the same manner
as with other foreign governments, and the funds so paid for these
obligations became the funds of the Russian Government. All of
the obligations thus purchased are signed in the name of the Pro
visional Government of Russia by Mr. Boris Bakhmeteff who was the
representative of that Government designated to the Treasury by the
Department of State as being authorized to sign them in the name and
on behalf of that Government.
In connection with the loans so made to the Russian Government,
the latter rendered reports to the Treasury of its expenditures. These
reports cover the period from April 6, 1917, the date of the United
States Government’s entry into the war, to March 4, 1921, and show
total expenditures for that period of about $231,000,000. The princi
pal items of such expenditures appear to have been munitions, includ
ing remounts; exchange and cotton purchases, and other supplies.
It would seem clear that only a comparatively small portion of the
total expenditures of the Russian Government in this country during
16
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
the period referred to was made from funds advanced by the United
States Treasury, in view of the fact that it appears from the reports
filed by the Russian representatives with this Department that of the
$187,729,750 so loaned about $125,000,000 was transferred by the
Russian Ambassador to the account of the Russian Ministry of
Finance at Petrograd and only the balance of about $62,000,000 was
retained by the Russian Ambassador for expenditure in this country.
According to information shown by the Treasury records, the Rus
sian Government’s financial situation in this country at the time of
the fall of the Provisional Government in November, 1917, was, in a
general way, as follows :
Its bank balances then on hand amounted to about $56,000,000.
The Russian Ambassador has estimated that about $10,000,000
thereof represented the balance remaining from this Government’s
loans to Russia, and that the rest of such funds consisted of moneys
derived from other sources, such as British credits and loans made by
private bankers in this country. At this time the Russian Govern
ment also had a large amount of property in the United States, con
sisting mainly of war supplies. Apart from its indebtedness to the
United States Government on account of the loans above mentioned,
the Russian Government’s financial obligations in the United States
arose principally out of contracts for supplies and certain private loans
issued in this country. The contractual liabilities amounted to
about $102,000,000, and the total principal amount of such private
loans was $86,000,000. In these circumstances, the Department
of State and the Treasury considered it advisable to enter into arrange
ments with the Russian Ambassador with a view to effecting such an
application of the Russian Government’s available assets in this
country that the interests of the American manufacturers and con
tractors and of the United States Government would be protected.
In accordance with these arrangements, the Russian Ambassador
deposited about $47,000,000 of the $56,000,000 cash above referred
to with the National City Bank of New York in a so-called liquidation
account, subject to his disposition. This money was to be devoted to
the general liquidation of Russian obligations in this country. The
balance of approximately $9,000,000 was placed in special accounts
with that bank to be used for certain specific purposes. These funds
also were subject to the Ambassador’s disposition. Pursuant to an
understanding had with the National City Bank, however, no with
drawals were to be made from the liquidation account without the
bank’s first notifying the Treasury and ascertaining whether it
■objected to the particular disbursement proposed.
It further appears that from December 1,1917, when the liquidation
account was opened, to March 4, 1921, when the account was closed,
additional deposits were made therein, aggregating a total amount of
about $29,000,000. The funds so deposited resulted chiefly from the
sale of Russian property in this country and the charter hire from
•certain Russian ships. This made the total deposits in the liquida
tion account aggregate about $76,000,000, and the total disburse
ments from this account for the period in question also amounted to
about $76,000,000. From the reports of the Russian representatives,
•it appears that these disbursements were made for supplies, transporta
tion, storage, inspection, interest on loans made by the United States
Government and on private loans floated in this country, salaries and
im i.i'i
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
17
upkeep of the Russian Embassy and consulates and other Russian
institutions in the United States, and various miscellaneous pur
poses. I t is further shown by such reports that payments on con
tracts for supplies amounted to approximately $36,000,000, and that
about $10,000,000 was expended for interest on said loans. It will
be noted that these two items alone are greatly in excess of the portion
of the liquidation funds estimated by the Russian Ambassador to
have been derived from American Government loans.
From the pertinent records, it appears that the settlement of the
contracts outstanding in this country at the time of the fall of the
Provisional Government was effected by the Russian Ambassador in
cooperation with representatives of the Department of State, of the
Treasury, and of the War Industries Board, with the result that the
outstanding contracts were settled by payment, cancellation, and
other means, without loss to American contractors. This settlement,
I should say, may well be regarded as a noteworthy achievement in
view of the extent of the liabilities involved in such contracts and the
comparatively limited amount of cash available here to the Russian
Government for use in respect thereto.
On February 14, 1921, the Treasury was informed by the Russian
representatives that the liquidation of the outstanding liabilities of
the Provisional Government of Russia in regard to contracts placed
in the United States had been for the most part completed, and an
arrangement was thereupon entered into whereby the liquidation ac
count as such was closed out March 4, 1921, and the balance therein,
amounting to $70,426.34, paid to the Treasurer of the United States
and applied on account of interest due and payable on Russian
obligations held by the United States. It was agreed by the Russian
representatives, however, that sums which might still accrue to them
from the remaining business of liquidation which would, prior to the
closing out of the liquidation account, have been payable into that
account, should likewise be applied on interest due on said obliga
tions. Such sums to the aggregate amount of $337,766.73 have actu
ally been paid since March 4, 1921, by the Russian representatives
to the Treasurer of the United States and applied on interest due
on the Russian obligations. It is the understanding of the Treasury
that the funds so paid were realized chiefly from further sales of the
Russian Government’s property.
As you are aware, all of the information above given with respect
to loans made by this Government to Russia, and the greater part of
the data set forth in regard to the liquidation of the Russian Govern
ment’s financial obligations in this country after the fall of the Pro
visional Government, have heretofore been made public in various
reports and other documents. Attention is particularly called to the
Annual Report of the Secretary of the Treasury for the fiscal year
1920; the testimony of Mr. Polk, then the Under Secretary of State,
and of Mr. Leffingwell, a former Assistant Secretary of the Treasury,
before the House Committee on Expenditures in the State Depart
ment on June 26 to September 8, 1919, in connection with House
Resolution 132; the correspondence between the Russian Ambassador
and the Department of State read before the subcommittee of the
Senate Committee on Foreign Relations during the second session of
the 66th Congress at the hearing on Senate Resolution 263 and printed
18
5XTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
on pages 501—504 of Senate Report 526, dated April 14, 1920, the
hearings on House Resolution 635 before the Committee on Foreign
Affairs of the House, 66th Congress, third session; Senate Document
No. 86, 67th Congress, second session, entitled “ Loans to Foreign
Governments” ; the testimony of former Secretary of the Treasury
Houston and former Assistant Secretary of the Treasury Kelley
before the Senate Committee on the Judiciary on February 2 to
February 7, 1921; and the letter dated February 25, 1921, from Sec
retary Houston in response to Senate Resolution 417, printed in the
Congressional Record for February 26, 1921.
.
In addition to reports showing the Russian Government s expendi
tures since the entry of the United States Government into the war,
the Russian Embassy has filed with the Treasury Department de
tailed reports and statements, with explanatory memoranda, m
respect to the liquidation by such Embassy, after the fall of the
Provisional Government, of the Russian Government s obligations
in the United States out of that Government’s assets in this country,
and I understand that the Russian representatives have shown every
disposition to make all possible information available to the Treasury.
Sincerely yours,
(Signed)
A. W . M e l l o n , Secretary.
Honorable C h a r l e s E. H u g h e s ,
Secretary of State.
o
o r l d " a r F o r e ig n D ebt Commission*
Immediate r e l e a s e
January 8 ,
192.3*
The f i r s t m eetin g o f the D eb t F u n d in g Com m issions o f th e U n ite d S t a t e s
snd G-reat B r i t a i n to o k p la c e a t th e o f f i c e o f th e S e b r e ta r y o f th e T r e a su r y
a t 10 o ’ c l o c k to d a y .
The r e p r e s e n t a t i v e s o f th e U n ite d S t a t e s in a tte n d a n c e com prised S e c r e ta r y
o f th e T r e a s u r y Andrew T. M e llo n , chairm an , S e c r e t a r y o f S t a t e C h a r le s E .
Hughes, S e c r e t a r y o f Commerce H e r b e r t C. Hoover, S e n a to r Reed Smoot and
R e p r e s e n ta tiv e Theodore E . Bur toil.
G r e a t B r i t a i n was r e p r e s e n te d by th e Hon. S t a n l e y B ald w in , M .P *, C h a n c e llo r
o f th e E xch eq u er, and Mr* Montagu C* Norman, G overnor o f the Bank o f E n glan d .
S e c r e t a r y M ello n e x te n d e d o f f i c i a l g r e e t i n g in m ost c o r d i a l term s and
e x p r e sse d p a r t i c u l a r a p p r e c i a t io n o f th e c o u r t e s y o f th e B r i t i s h Government i n
h a v in g d e s ig n a t e d as i t s d e l e g a t e s gen tlem en so n o t a b ly d is t in g u is h e d *
I t was
th e f i r s t tim e, h e b e lie v e d , t h a t a C h a n c e llo r o f the E xch equer had l e f t h i s
c o u n try to p a r t i c i p a t e i n a m is s io n o f t h i s n a t u r e I t i n d i c a t e d c l e a r l y to h i s mind a r e a l i z a t i o n o f the m agnitude o f a
n e g o t i a t i o n o r t r a n s a c t i o n , n o t m erely ox the u tm o st im p ortance in i t s e l f b u t
b e a r in g w it h i t p o s s i b l e con seq u en ces so f a r - r e a c h i n g t h a t th e y c o u ld h a r d ly
be computed.
He b egged to a s s u r e the d i s t i n g u i s h e d v i s i t o r s /th at th e U n ite d
Com m ission, o f w h ich he had the honor o f b e in g the chairm an, was no
t h a n 'th e m s e lv e s o f the extrem e d e s i r a b i l i t y , am ounting to a v i r t u a l
o f e f f e c t i n g a d e f i n i t e s e t tle m e n t o f the f i n a n c i a l r e l a t i o n s h i p o f
c o u n t r ie s upon a b a s is e n t i r e l y j u s t to both*
S ta te s
l e s s s e n s ib le
n e c e s s ity ,
th e two
The p u rp o se s o f the c o n fe r e n c e s and the c o n d it io n s b e a r in g upon them wars
so w e l l u n d e r s to o d t h a t he saw no n e c e s s i t y o f s t a t i n g them in d e t a i l *
He
w ish e d a t th e moment o n ly to s a y th a t th e prompt paym ent by G r e a t B r i t a i n o f
$ 100 , 000,000 o f i n t e r e s t d u rin g th e p a s t th r e e months, p en d in g a d e f i n i t e
arrangem ent, was to h i s mind c o n c lu s iv e p r o o f o f the r i g h t s p i r i t o f f i n a n c i a l
i n t e g r i t y w h ich he was proud and g l a d t o say had a lw a ys an im ated b o th o f th e
two g r e a t E n g lis h sp e a k in g n a t i o n s .
The Chairman a ls o c a l l e d a t t e n t i o n to th e f a c t t h a t th e Commission had a
l i m i t e d a u t h o r i t y under th e a p p l i c a b l e s t a t u t e .
The C h a n c e llo r 1 s r e p ly
is
a t ta c h e d *
A f t e r an in fo r m a l d i s c u s s i o n th e B r i t i s h M issio n r e t i r e d and th e A m erican
Commission c o n tin u e d i t s c o n s id e r a t io n o f th e g e n e r a l s i t u a t i o n .
I t was s t a t e d a f t e r the m e e tin g t h a t the B r i t i s h M is s io n h a s in c o u rs e o f
p r e p a r a t io n f u r t h e r d a ta w i t h r e f e r e n c e to th e g e n e r a l ■ s ta te m e n t su b m itte d .
FCR RELEASE ON DELIVERY
EXPECTED TO BE RELEASED OIT MONDAY 3th. JANUARY
SPEECH
I B Ï I HE M QHT HOÎI. SHE CHAi'TCELLOE OP ÏHE EXCHEQtEK A Ï SHE
OPENING- MEETING* OF THE /JIG-LO-AI-ISPJCAN DEBT COMMISSION ON
i e n d a y s t h J a n u a r y 1923 ,
On b eh a lx
o f th e B r i t i s h D e l e g a t i o n , I
ta k e t h i s o p p o r t u n it y o f e x
p r e s s i n g t o th e A m erican Government a n ! p e o p le our h e a r t f e l t a p p r e c i a t io n
o f th e "warmth and c o u r t e s y o f our r e c e p t i o n tic
o f tn e g en ero u s h o s p i t a l i t y
a r e c e p t i o n so c h a r a c t e r i s
o f t h i s g r e a t n a t io n ,
b e n ave ^ome w i t h th e e x p r e s s i n t e n t i o n o f r e p a y in g our d e b t ,
is
ow ing to tn e p r a c u i c a l d i f f i c u l t i e s
and i t
p f m aking i n t e r n a t i o n a l paym ents
t n a t we a r e ab o u t t o c o n s u l t w ith y o u i n o rd er t o a c c o m p lis h th e end w h ich
we b o th h a v e i n v ie w .
vfe meet to d a y u n d er e x t r a o r d in a r y c ir c u m s ta n c e s .
tlu. l a r g e s t S i n g l e f i n a n c i a l
n a tio n s ,
in
tr a n s a c tio n ,
une n i s t o r y ox th e w o rld .
He m eet t o s e t t l e
I b e l i e v e , b e tw e e n two f r i e n d l y
Ne a r e h e r e t o a rra n g e th e term s
o f tn e paym ent o f th e B r i t i s h d e b t t o th e U n ite d S t a t e s .
c o n t r a c t e d i n a common c a u s e .
T h a t d e b t was
I t was th e f i r s t c o n t r i b u t i o n made b y th e
U n ite d o u a te s to s a v e c i v i l i z a t i o n
from b e in g e n g u lf e d and f r e e p e o p le s
b e in g b r o u g h t u n d er th e d e s t r u c t i v e r u l e
o f a m i l i t a r y a u to c ra c y ;
was f o llo w e d b y t h e c o n t r i b u t i o n o f th e man-power o f
it
th e U n ite d S t a t e s ,
wnose s o ld x e r s fo u g h t so g a l l a n t l y w it h ours, and th o s e o f our A l l i e s
th e same p u r p o s e .
fo r
I
• & 8n we were e n l i s t e d
in te r e s ts .
i n a common c a u s e ;
we s t i l l h a v e co rd o n econom ic
She paym ent o f our d e b t t o y o u i n v o l v e s much more th an the t r a n s -
I , f e r O f huge sums from London t o V /ashington.
I t m ust a f f e c t th e f u t u r e w e l l
' b e in g Of b o th c o u n t r i e s and on t h e i r p r o s p e r i t y depends t o a l a r g e e x t e n t
j
th a t o f
the e n t i r e w o rld ,
lire s e t t l e d
c o n d it io n and m a t e r i a l w e lf a r e
we make h e re w i l l determ in e th e
o f the g r e a t mass o f wage e a r n e r s i n G reat
(
B r ita in
thS * * * * * S t a t e s -
j
e x a g g e ra te .
X sta te
and c h i l d r e n .
I do n o t , I b e l i e v e ,
t h i s a s my d e l i b e r a t e o p in io n a f t e r h a v in g g iv e n th e
s u b j e c t xoatured c o n s id e r a t io n ,
®he paym ent o f our d e b t t o you. w i l l
impose upon u s th e n e c e s s i t y o f
l e v y i n g h e a v y t a x e s to m eet th o s e p a ym e n ts.
we were th e h e a v i e s t t a x e d n a t io n i n
Prom th e ' b e g in n in g o f th e war
the w o rld .
Te f in a n c e d our m i l i t a r y
; o p e r a tio n s to a g r e a t e r d e g r e e th a n a n y 'o t h e r n a t io n b y making th e p r e s e n t
[ g ° n e r a tio n
I* is
ocr W
t o p a y a s we go so f a r a s we ca n .
j f i x e d p r i n c i p l e we h a ve n c i n t e n t i o n now to d e p a r t .
o a E ita ta x a tio n in G roat B r it a in i s
o th e r p e o p le .
8»
to d a y s t i l l g r e a t e r
Prom t h a t
t o t a l an n u al p e r
th an t h a t o f any
I t amounts t o more th a n ¿100 p e r h ead o f th e p o p u la t io n .
1 i n v i t e yo u t o c o n s id e r my v ie w s a s t o what t h i s means and how I f e a r
i c w i l l a f f e c t y o u r own w age e a r n e r s no l e s s th a n o u rs.
F u r th e r t a x a t i o n
would d e c r e a s e th e p u r c h a s in g power o f th e B r i t i s h w o r m i n g and red u ce our
consum ption o f J ^ * 'i * * m
an p r o d u c t s ,
i o r . d n e ric a n c e r e a l <?
m in e, and th e f a c t o r y .
>
capo.
__
j
,,
o tu on , i_ecots ana o th e r p r o d u c ts o f th e s o i l ,
the
D e s ir o u s a s we a r e t o m a in ta in th e s o c i a l s c a l e o f
our own w o rk e r , th e e f f e c t
press i t ,
n
r,
~nere w ould be a d i m i n i s h e d e x p o r t d e -
o f a d d i t i o n a l t a x a t i o n w ould be i n e v i t a b l y to de
From th e co n seq u en ces o f t h a t I do n o t s e e 'h o w A m erican ca n e s -
■ Che s o c i a l c o n d i t i o n o f th e f e e r i o a i i workingm an, r a i s e d t o i t s p r e s e n t
3le v e l
i n some n ea eu re a s a r e s u l t o f th e w a r, i s now th e h i g h e s t i n th e
I
W0^1a' , b llt i f we 3X6 u n a > le *«>
|
s t e r n n e c e s s i t y t o econom ise s t i l l f u r t h e r ,
|
t h in g s we must h a v e , h u t e v e n th e s e
I
Jte6riC aa f a r E e r > a *> » 1 1
P ^ o t o s e fro m y o u ,
if
are fo r c e d by
t o b u y fro m y o u o n ly th o s e
i n g r e a t l y r e d u ce d q u a n t i t i e s ,
a s th e A m erica n w orkingm an, w i l l f e e l th e p in c h .
He l i k e w i s e w i l l he c o m p e lle d t o econom ise;
he w i l l have t o do w it h l e s s ;
^ he w i l l he b r o u g h t down t o a lo w er s ta n d a r d o f l i v i n g .
t i o n d o e s n o t p e r m it o f econom ic i s o l a t i o n .
i
c l o s e l y in te r w o v e n f o r
s u ffe r in g .
If
if
I
^
u s e th e p h rase>
ns p o U e a p r o ^ e r i t j r „
t h a t sp o t w i l l n o t sp rea d t o b r in g h e a l t h b u t
w i l l be w iped o u t b y th e .p o v e r t y
In t h is
Econom ic r e l a t i o n s a r e to o
on th e econom ic map o f th e w o rld th e r e i s a s p o t o f p r o s
p e r i t y surrounded b y d i s t r e s s ,
it
Our' m odem c i v i l i z e
one n a t i o n t o he p r o s p e r o u s when o th e r n a t i o n s are
S p e a k in g b r o a d ly ,
rs “ » o s o ib le .
th e
and
m is e r y t h a t surround i t . •
s p i r i t I a d d r e s s m y s e lf t o th e t a s k b e f o r e u s .
I
V
s h a l l now c o n
s i d e r th e s u b j e c t more i n d e t a i l .
Had i t
b een p o s s i b l e
to fin d
in th e w o rld a n u g g e t o f g o ld w o rth 4
o f d o l l a r s , we w ould h ave sp a red no s a c r i f i c e
w ould have b r o u g h t i t
to
se c u re i t
w it h u s , b u t -u n fo r tu n a te ly th e l i m i t a t i o n s
and we
o f n a tu re
p u t su ch a sim p le method o f paym ent o u t o f th e q u e s tio n and we .have t o e x
p lo r e
o th e r means.
l e t u s exam ine how th e d e b t came i n t o b e in g and se e i f
us to a
t h a t w i l l h e lp
s o lu t io n ,
I h is debt i s n ot a debt fo r d o lla r s
s e n t t o E u ro p e ,
th e money was a l l
e s * o a .e d h e r e , m ost o f i t f o r c o t t o n , w h e a t, f o o d p r o d u c ts and m u n itio n s o f
war.
^ very cen t u sed f o r
th e p u rch a se o f th e s e goods was s p e n t i n A m erica;
A m erican la b o u r r e c e i v e d th e w ages: A m erican c a p i t a l i s t s
th e p r o f i t s :
th e
'
U n ite d S t a t e s T r e a s u r y th e t a x a t i o n im posed on th o s e p r o f i t s . .
A t th e tim e t h e s e goo d s were ï o u g h t , we w ere a s s o c i a t e s
in a g r é â t wax.
Out o f 7 b i l l i o n d o l l a r s w o rth o f go o d s b ough t a f t e r th e U n ite d S t a t e s came
i n t o th e w a r, we p a i d f o r 3 b i l l i o n
were s u p p lie d on c r e d i t .
s u p p l ie d , i t
d o l l a r s w o r th , l e a v i n g 4 b i l l i o n s w h ich
How s e e in g t h a t th e d e b t i s a d e b t f o r goods
w ould be n a t u r a l t o a s k , wny n o t r e p a y w it h goo d s?
A moment s c o n s id e r a t io n i s
s u ffic ie n t
t o answ er t h a t q u e s tio n ,
ïh e s e goods w ere s u p p lie d i n w ar tim e a t war p r i c e s .
so f a r t h a t th u s t o r e p a y 4 b i l l i o n s
P r i c e s have f a l l e n
o f d o l l a r s , G r e a t B r i t a i n w ould h a ve to
send t o A m e r ic a a f a r g r e a t e r b u lk o f goods th a n she o r i g i n a l l y p u r ch a se d
wiuh th e money lo a n e d , and l a y i n g a s id e a l l c o n s id e r a t io n o f th e t a r i f f b a r - ,
r i e r , w ould i t be p o s s i b l e f o r A m erica t o a c c e p t repaym ent in c o a l ,
m an u factu red c o t t o n goo d s and so f o r t h , a method o f
a ffe c t
repayment
s t e e l , iron
w h ich w ould
th e employment o f h e r p e o p le f o r y e a r s t o c o n e ?
•fe h a ve now se e n t h a t
im m ediate repaym ent b y g o l d i s
im p o s s ib le and
t h a t a n e q u i v a le n t t r a n s a c t i o n i n d i r e c t repaym ent b y goods i s f u l l o f d i f
fic u ltie s
so we s h a l l h a ve t o e x p lo r e w hat r e m a in in g m ethods o f i n t e r n a
t i o n a l paym ent a r e p r e s e n t e d b y th e m ark ets o f th e w o rld .
Here a t t e n t i o n w i l l have t o be p a i d t o s e v e r a l c o n s id e r a t io n s .
le n t la r g e
A llie s ,
sums t o and e s t a b l i s h e d l a r g e c r e d i t s f o r .our European
so t h a t w h ile we a r e d e a li n g w it h our l i a b i l i t i e s
p r o p o r t io n o f our a s s e t s
we f i n d a la r g e .
t e m p o r a r ily f r o z e n .
Œo b a la n c e our an n ual a c c o u n ts i n tim e s o f unexam pled d i f f i c u l t y , we
h a ve made g r e a t s a c r i f i c e s .
,7e a r e a f f e c t e d b y th e t e r r i b l e
econom ic s i t
u a t io n i n Europe and a r e p a s s i n g th ro u g h t h e w o r s t p e r io d o f unemployment
i n our h i s t o r y .
I h a ve a lr e a d y r e f e r r e d
t o th e w eight' o f our t a x a t i o n w h ich
-!>•
w it h th e p r o lo n g e d unemployment i s a l r e a d y h e a r in g c r u e l l y
on our women
and C h ild r e n *
So f a r fro m t h e war h a v in g l e f t u s r i c h e r b y th e a c q u i s i t i o n o f raw
te r r ito r y ,
th e a c c e p ta n c e o f M andates i n some o f th e m ost d is t u r b e d p a r t s
o f th e w o r ld h a s in v o lv e d u s i n v a s t u n p r o d u c tiv e e x p e n d itu r e i n p o l i c i n g
and p a t r o l l i n g t e r r i t o r i e s
i n w hich we h a v e no econom ic r i g h t s w h ich a r e '
n o t open e q u a l l y to o th e r r a t io n s *
Having r e g a r d t o a l l
t h e s e c ir c u m s ta n c e s ,
th e B r i t i s h Government h as
t o c o n s id e r v e r y c a r e f u l l y th e term s o f th e l i q u i d a t i o n o f th e d e b t ,
le s t
an an n u a l o b l i g a t i o n b e assumed w h ich i t e i g h t b e im p o s s ib le to meet i n
y e a r s o f had tr a d e a n d f a l l i n g
r e v en u e .
I n common w it h th e r e s t o f t a e w o r ld , we h a v e w a tch ed w i t h a d m ir a tio n
th e op en-handed c l a r i t y o f A m erica to
th e s t r i c k e n c o u n t r i e s o f E u ro p e,
th e p e o p le s o f B e lg iu m , o f F r a n c e , o f E u s s ia .
to
The g e n e r o s i t y o f A m e rica i s
p r o v e r b i a l , b u t we a r e n o t h e r e to a s h f o r fa vo u rs, or to impose on g e n e r o s i t y .
We. w a n t,
on su ch term s a s w i l l p r o d u ce th e l e a s e p o s s i b l e d is t u r b a n c e
i n th e t r a d e r e l a t i o n s
of
th e two c o u n t r i e s a f a i r b u s in e s s , s e t t le m e n t , a
sq u a re d e a l , a s e t t le m e n t t h a t w i l l
s e c u r e f o r A m erica th e repaym ent to
th e
l a s t c e n t o f th o s e c r e d i t s w h ich th e U n ite d S t a t e s Government e s t a b l i s h e d
in -w m e r ic a f o r u s
Our W i s h i s
ness
th e ir a s s o c ia te s in
t o a p p ro a ch t h e
s o l u t i o n o f w hat i s
4ay I put i t
t h e war.
d is c u s s io n a s
f u n d a m e n ta lly a
i n t h i s way?
b u s in e s s
men s e e k i n g a b u s i
b u s i n e s s p rob lem .
,
He in te n d t o p a y b u t how b e s t ca n i n t e r
n a t i o n a l c r e d i t s b e made l i q u i d when t h e c r e d i t o r n a t io n i s u n w i l l i n g to p e r
m it l i q u i d a t i o n
th ro u gh th e d i r e c t d e l i v e r y o f goo d s and i s a l s o u n w i l l i n g
tn e c u r r e n t s a l e
o f h e r p r o d u c ts t o
th e d e b to r n a t io n in t e r r u p t e d ,
-6and. when th e d e b to r n a t i o n i s u n w i l l i n g to be p u t i n th e p o s i t i o n o f b e in g
n n a b le to b u y th e produc t s o f th e c r e d i t o r n a t io n ?
-n e c o r d i a l and prom pt agreem en t o f th e
th e w o r ld on a q u e s tio n , o f t h i s
two g r e a t e s t d e m o cra cie s o f
i n t r i c a c y and m agnitude w i l l be an e x a n p le
t o th e n a t io n s and a lo n g s t e p fo r w a r d i n e f f e c t i n g a s o l u t i o n o f th e
econom ic t r o u b l e s o f E u ro p e.
are
s o lv e d ,
L e t u s n e v e r f o r g e t t h a t u n t i l t h e s e ' tr o u b le s
th e r e c a n be no g e n e r a l r e v i v a l o f :i n t e r n a t i o n a l t r a d e .
I ’o r m y s e lf I lo o k fo r w a r d to th e m e e tin g s o f th e ‘Commission w ith ' .
hope and c o n f id e n c e .
I b e lie v e
t h a t I s h a l l n e t be d is a p p o in te d .'
SC1IASY
ssitish
y S S m e m BT
0 ? CSBTAIK 3 I S C & . »
EHSS :assioiT TO wort® wss jo k e ® debt c q m s s ia i,
'GIVEN OUT OH
JM.mAST
11,
10 23.
iODGEt OS’ 1922/33 (FIS&U, TEAR HKDS IDffiCH 3 1 s t)
EBH0E75ASH OF BS7 3 TDE esc HIVED FBOH VARIOUS SOURCES
s g T r o iis g
Income Tax ana Super-Tax
#
'
36 x
D uties on Consumption o f Beverages and Liquors
1 7 .5
Tobacco
_ •
5 .2
“00d
5 .5
I .Death D u ties
¡~
5 .2
Excess P r o f it s and Corporation P r o fit s D u ties
5 .2
■ Special n o n -recu rrin g R e ce ip ts due to th e war
(S a les o f War S u p p lies e t c .)
9 .9
^ P ests and Telegraphs and m iscella n eo u s
1 5 .4
TiZ 3URDM
H t
, ^ s c u s s in g . the burden o f ta x a tio n w hich has been imposed upon the
B r itis h p e o p le , amounting an n u ally to approxim ately $100 per c a p ita , c e r ta in
I item s were p a r tic u la r ly emphasized a s showing the d r a s tic s te p s which had been
ta:en to m x e the B r itis h Budget b alan ce.
P leasu re motor v e h ic le s pay an annual ta x o f L 1 (Approximately $5) per
morse power. The ta x on trade v e h ic le s i s n e t so heavy.
The ouyer o f a p in t c f beer pays 7 c e n ts as a ta x and 7 cen ts for the
beer, ^a t o t a l c o s t of 14 c e n ts as a g a in st 6 c en ts b efo re th e war. On a g la s s
1 o f s p i r i t s , tne ta x r ep re sen ts 2 /3 o f th e c o s t - t o the consumer. Sugar in Englana c o s t s a t r e t a i l about 1 1 c e n ts a pound, c f which approxim ately 50$ i s in
the ta x taken by the Government. Both the beer ta x and th e sugar ta x are
th irtee n or fou rteen t in e s what th ey were b efo re the war.
Topacco, p r a c t ic a lly a l l c f which i s imported, c a r r ie s an import duty o f
?2 per pound.
in h e r ita n c e taxes fo r d ir e c t in h er ita n c e from parent to c h ild run from
l/o to over 4Q> depending upon th e s iz e o f the e s t a te . Heavy a d d itio n a l d u tie s
are payable fo r in d ir e c t in h er ita n c e.
The income ta x Dears e s p e c ia lly hardly upon moderate incomes. A s in g le
person tn@ whole o f whose income i s earned pays in income ta x (in clu d in g super
tax wnare a p p lic a b le ) a s fo llo w s :
finnSH
T otal income .
$1,250
2,500
5,000
10 ,0 0 0
20,000
Tax
$56
253
815
1,9405,500
Where th e »income i s d erived from investm ents the tax i s a t a high er r a te ,
m e maximum r n te o f ta x on th e h ig h est incomes i s about 54$ ,
Tabing
p le t e d year
a 'com parison o f th e l a s t p r e -w a r f i n a n c i a l y e a r and th e l a s t
th e N a t io n a l t a x a t i o n p e r h ead o f p o p u la tio n i s a s f o l l o w s :
19 13 -14
1 9 2 1 - 22
1 9 2 2 - 33 N s tfix a te d
corn-
1» 3 . 1 1 , 2
1 ,1 7 .1 7 .5
L 1 7 .1 .2
To g e t th e t o t a l bu rd en t h e r e must he added l o c a l t a x a t io n *
T h is w i l l
in c r e a s e t h e ab o ve f i g u r e s fo r 1S 13>-1914 and 1 9 2 1 -2 2 , r e s p e c t i v e l y , t o a p p r o x im a te ly L 5 . 1 0 .0 and L 2 2 .1 0 .0 .
The p o s t-w a r hurden i s th u s o v e r fo u r
tim es th e p r e -w a r .
ggysm iE FBQM NATIONAL TAXATION BY YEARS.
Year en d in g 2 1 s t March
19 13
19 14
19 15
19 16
19 1 7
19 18
19 19
1920
19 2 1
19 2 2
In M i l l i o n s
<
15 5
16 3
18 S
290
514
613
784
929
1025
845
7 IS
’
19 2 3 E s tim a te d
BUDGET OF 1$ 2 2 /2 3 '(FISCAL YOAR ENDS
PSBCENTAGS OF TOTAL
rf‘T':w
A P P L I L B
3 1 st)
C E R T A I N
t o
P U F F O
8 S S
FPTN-1ATED.
I n t e r e s t on Deht
F ig h t in g F o r c e s
(Army, tTavy and. A i r F o r c e s )
1 6 .7
War P en sio n s
10.2
S o c ia l S e r v i c e s ( in c lu d in g e d u c a tio n , P u b lic h e a lt h ,
o l d a g e .p e n sio n s and unemployment)
F o r e ig n ’ an d C o lo n ia l S e r v i c e s o th e r th an D e fe n se
0 .6
A d m in is t r a tio n i n c lu d in g c o s t c f c o l l e c t i n g Devonue
A l l o th e r
1 3 ,4
.
1 1 .5
c^g
To t a l
100.0
PERCENTAGE QF TOTAL AFFJAL L'XPFADITUPP ¡ALT FP.QM BWSUUE.
Show ing e f f e c t o f war on B r i t i s h Budget and r e t u r n to B a la n c e d Budget in 1 9 2 1 .
Year en d in g 3 1 March
19lo
19 14
1 2 1 5 ,
19 16 \
19 17
19 18
19 19
1920
19 21
19 2 219 2 3 (E s tim a te d )
100
:
100
-38.6
2 1 .6
26,0
26, 2
3 4 .4
§ 0 .4
10 0 .
10 0 .
10 0 .
*
x
P r o v is io n f o r th e re d e m p tio n o f deh t ( S in k in g Funds) was o m itte d from th e
B udget f o r 19 2 2 / 2 3 , a s t e p w ith o u t p r e c e d e n t e x ce p t in tim e o f war.
StMIARY OF INFQH1ATION
AS TO BBITISH DEBTS, LOANS, AND T W lH O T M ffiT B E L IE S' E&0JDITOHES
FHFSENSED BY TE «1
“
B E IT IS E DEBT MISSION .TO THp'woBLD WiLB FOREIGN DEBT COMMISSION
Oiven out January 13th, 1S23
NATIONAL
ANT) I M P E S T ,QHABG5S BY TRAPS IN POUND STRPTJWI
F in a n c ia l Y e a r.
Tota^. amount o f th e
Bead. W eight D ebt on
th e 1 s t A p r il o f
ea ch y e a r .
Payment i n th e y e a r
to m eet i n t e r e s t on
d e b t.
L
1 9 1 3 - 14
1 9 1 4 - 15
1 9 1 5 - 16
1 9 1 6 - 17
1 9 1 7 - 18
1 9 1 8 - 19
1 9 1 9 - 20
1 9 2 0 - 21
1 9 2 1 - 22
6 61, 4 7 3 ,7 6 5
6 5 1 , 270 ,0 9 1
1 , 1 0 8 , 8 1 7 ,0 7 6
2 ,1 4 0 , 7 4 8 ,6 4 4
4 , 0 1 1 , 445,908
5 , 8 7 1 , 850,637
7 ,4 3 4 , 949,429
1 6 ,8 9 4 ,1 2 0
1 9 ,5 1 2 ,5 3 9
5 8 ,0 8 0 ,10 5
1 2 5 ,0 6 8 ,9 7 7
1 8 7 ,6 6 5 ,5 5 4
2 6 7 ,9 6 9 ,2 0 4
32 6 ,6 0 3,4 9 8
3 2 8 ,3 .3 1,7 5 7
3 0 7 ,2 8 3 ,7 3 7
335,000,000 E s t im a t e
7,331, 744,30 0
7 ,5 8 5 , 409,690
7 ,6 7 6 , 2 9 5 ,10 9
1 9 2 2 - 23
BBITISH DEBT
A p p roxim ate C l a s s i f i c a t i o n a c c o r d in g to P e r i o d o f M a t u r i t i e s .
( F i g u r e s a r e in m i l l i o n s o f pounds)
at
F lo a t i n g D e b t,
31 March
19 19
at
31 March
1920
a t 31 Marc]
i n c lu d in g
War S a v in g s C e r t i f i c a t e s
(P a y a b le on dercand or
w it h in s i x m onths)
Bonded D ebt, m aturin g
w it h in f i v e y e a r s
Bonded D ebt, m a tu rin g
fc fc ;r ■ f i v e y e a r s
Debt to U n ite d S t a t e s
Government a t par o f e x
change
1 ,6 7 4
1 ,5 9 5
1 ,5 3 2
1 ,3 6 4
1,0 3 0
1 ,1 2 3
1 ,0 3 7
712
3 ,9 2 3
4 ,2 7 2
4 ,1 8 8
4 ,7 6 3
841
838
838
8 17
{
T o ta l
a t 31 M arch
19 21
•
7 ,4 3 4
7 ,8 3 1
7 ,5 8 5
7 ,6 7 6
EEBTS DUE BY ALLIES TO GREAT BRITAIN (EXCLUDING- BELIEF LOADS)
C o u n try
Cash A d van ces
- e x c lu d in g a l l
On 3 1 March 1 9 1 7
L
F ra n ce
R u s s ia
Ita ly
B elgiu m
B e l g i a n Congo
S e r b ia
Roumania
P o rtu g a l
G reece
in te r e s t
On 30 S ept«
1922
h
1 7 .8 ,6 3 5 ,7 9 5
3 6 4 ,6 5 4 ,0 1 5
1 4 6 ,8 7 2 ,1 2 5
4 9 ,9 2 5 ,0 4 5
900,000
1 2 ,1 2 9 ,1 2 2
1 1 ,5 7 4 ,0 9 3
1 ,8 3 2 ,9 7 3
1 ,4 4 8 ,4 2 1
4 5 3 ,0 0 0 ,2 5 5
4 9 4 ,5 9 4 ,6 4 7
3 8 0 ,7 0 8 ,1 1 6
9 7,3 0 8 ,6 9 8
3 ,4 9 9 ,5 8 1
2 2 ,4 5 3 ,0 2 0
1 6 ,5 8 5 ,3 6 4
1 5 ,0 1 2 ,3 7 7
2 0 ,4 7 9 ,9 5 8
7 6 7 ,9 7 1 ,5 8 9
1 ,5 0 3 ,6 4 2 ,0 1 6 x
7 6 7 ,9 7 1 .5 8 9
In cre a se
7 3 5 ,6 7 0 ,4 2 7
x I n t e r e s t a c c r u e d and u n p a id a p p r o x im a te ly *
£, 500,000,000.
E x p e n d itu r e in c u r r e d in r e s p e c t o f th e R e l i e f o f
Unemployment and in R e - s e t t l i n g D e m o b ilize d S o l d i e r s i n C i v i l * L i f e
( i n pounds s t e r l i n g )
From th e A r m is t ic e
to 3 1 M arch, 19 2 3 ,
X.
E s tim a te f o r y e a r
en d in g 3 1 M arch , 1923
From th e N a t io n a l E xch eq u er
Out o f work d o n a tio n i . e , ,
th e s o - c a l l e d d o le
S t a t e C o n t r ib u t io n s t o th e
Unemployment In s u ra n ce Fund
G ran ts to L o c a l A u t h o r i t i e s
f o r u n c l a s s i f i e d r e l i e f w orks
G ran ts f o r R oads, Land, D r a in
a g e , & c.
T o ta l
63,000,000
.2 8 ,0 0 0 ,0 0 0
24,50 0 ,0 0 0
1,5 0 0 ,0 0 0
2 , 000,000
2 ,5 0 0 ,0 0 0
9 5,0 0 0 ,0 0 0
4,000 ,000
30 ,50 0 ,0 0 0
ffrorn t h e A r m is t ic e
t o 3 1 M arch. 19 2 2
II.
E s t im a t e f o r y e a r
ending; 31 M arch. 19 2 3
By L o c a l A u t h o r i t i e s
E x p e n d itu r e b y Board o f
G u ard ian s
10 4 ,6 0 0 ,0 0 0
B e l i e f w orks in c lu d in g Boads
T o ta l
III
6 ,5 0 0 .QCO
1 1 1 , 000,000
4 0 .0 0 0 .
5,00 0 .0 0 0
4 5 .0 0 0 .
- C o n t r ib u t io n s from B n u lo v e rs
and Em ployed to t h e unem ploy
ment In s u r a n c e Fund
»
Barolo yer s
19 ,5 0 0 ,0 0 0
18 .5 0 0 .0 0 0
Employed
18 .0 0 0 ,0 0 0
16 .5 0 0 .0 0 0
37,5 0 0 ,0 0 0
35,000,000
T r a in in g and E d u c a tio n o f
e x - s e r v i c e men an d women
2 6,50 0 ,0 0 0
7,5 0 0 ,0 0 0
B e - s e t t l a ù e n t on th e la n d
& i n c i v i l o c c u p a tio n s
23,000,000
1 ,7 5 0 ,0 0 0
In a d d i t i o n e x p e n d itu r e has
b een in c u r r e d upon su ch o b j e c t s
a s t h e t r a i n i n g o f d e m o b ilis e d
s o l d i e r s and s a i l e r s and in r e
s e t t l i n g them in c i v i l l i f e a s
fo llo w s :
A s s i s t a n c e to e m ig r a n ts
,
2 000,000
000
750,000
000
TH E SEC R E T A R Y OF TH E T R E A SU R Y
WASHINGTON
January 9, 1923.
Dear Sir:
I am sending you herewith a copy of the official Treasury Department
Circular announcing an offering of 4-§- per cent Treasury notes, of Series.*
A-19£7, dated January 15, 1923, and maturing in a little less than 5 years,
on December 15, 1927. Subscription books open to-day, and 4-f per cent
Victory notes, whether or not called for redemption, and unregistered 1918
War—Savings certificates, which matured on January 1, 1923, will be accepted
in payment, on the terms stated in the circular. The new notes will be
issued in coupon form, in denominations of $100 and upwards, and the
Treasury is prepared to make deliveries promptly upon allotment and payment.
This offering of Treasury notes affords a good opportunity to holders
of 4-f per cent Victory notes and 1918 War—Savings certificates to renew
their investment in a Government security running for about 5 years and
yielding an attractive interest return. As already announced, all 4f per
cent Victory notes bearing the distinguishing letters A, B, C, D, E, or F,
prefixed to their serial numbers, were called for redemption on December 15,
1922, and interest on such notes stopped absolutely on that date, while the
remaining 4f per cent Victory notes, bearing the distinguishing letters G,
H, I, J, K, or L, prefixed to their serial numbers, will mature on May 20,
1923, according to their terms, and will cease to bear interest on that
date. Victory notes tendered in payment, if in registered form, must be
duly assigned to "The Secretary of the Treasury for redemption," before some
officer authorized to,witness assignments of United States registered bonds,
in accordance with the general regulations of the Treasury Department gov
erning assignments.
War-Savings Certificates, Series of 1918, if unregistered, will also be
accepted in payment for the new notes, and must be duly receipted in the
name inscribed thereon.
These certificates matured on January 1, 1923, and
do not carry interest after that date.
Holders of Victory notes or of unregistered War-Savings Certificates,
Series of 1918, who wish to invest in the new notes should make prompt
application through their own banks, or, if desired, direct to the Federal
Reserve Bank of the district.
Very truly yours
Secretary of the Treasury.
To the Holder of
Victory notes addressed.
Inclosure: Treasury Department Circular No. 318, dated January 9, 1923.
January 20, 1923,
The President
of the Senate.
My dear Mr. President:
I have received the resolution of the Senate, No. 409,
passed January 17, 1923, which the Secretary of the Senate trans
mitted to me with his le tte r dated January 16, 1923« This resolu
tion, a fte r referring; to a report from the Federal Trade Commis
sion that ’’three hundred and twenty—eight corporations have re
leased surpluses hy the stock dividend plan during the calendar
year 1922, reaching more than $2,149,151,425, *r quotes in part the
provisions of section 220 Of the Revenue Act of 1921, and requests
the Secretary of the Treasury to furnish the Senate ’’the names of
companies, amounts, and dates of penalties, if any, imposed hy the
Commissioner of Internal Revenue during said year of 1922, pur
suant to the provisions of section 220, Internal Revenue Laws of
1921. "
Section 220 of the Revenue Act of 1921, approved November
23, 1921, provides that if any corporation, however created or or
ganized, is formed or availed of for the purpose of preventing the
imposition of the surtax upon its stockholders through the medium
of permitting i t s gains and p ro fits to accumulate instead of being
divided or distributed, there sh all be levied upon the net income
of the corporation a tax of 25 per cent, in addition to the other
taxes imposed upon corporations, but that the fact that the gains
2-
-
and profits are permitted to accumulate and become surplus shall
not be construed as evidence of a purpose to escape the surtax
unless the Commissioner of In tern al Revenue c e rtifie s that in his
opinion such accumulation is unreasonable for the purposes of the
business.
The R even ue A c t o f
19 2 1,
o f w h ich s e c t i o n 220 i s a p a r t ,
became e f f e c t i v e f o r t h e t a x a b l e y e a r 1 9 2 1 ,
The f i r s t
and f o r su b seq u en t y e a r s *
r e tu r n s f i l e d under t h e Revenue A c t o f 19 2 1 were n o t re~
c e i v e d b y t h e B u reau o f I n t e r n a l R evenue u n t i l March,
19 2 2 , and th o
r e t u r n s h a v e n o t y e t b e e n exam in ed b e c a u se o f t h e h e a v y p r e s s u r e t o
d is p o s e o f t h e e x t r a o r d in a r y a c c u m u la tio n o f r e tu r n s f o r t h e y e a r s
19 17,
1918 and 1 9 1 9 ,
It is
lik e ly
to b e s e v e r a l months b e f o r e t h e
a u d i t and e x a m in a tio n o f t h e s e
1 9 2 1 r e tu r n s c a n b e p u t u n d er way.
The r e tu r n s f o r t h e y e a r 19 2 2 ,
t h e y e a r t o w h ich S , Res*
t o have p a r t i c u l a r r e fe r e n c e ,
B u reau o f I n t e r n a l R evenue,
S in c e th e p e n a l t y
409 seems
h ave n ot a s y e t b een r e d e iv e d b y th e
and a r e not due u n t i l March 1 5 ,
1923*
imposed b y s e c t i o n 22Q may b e a s s e s s e d o n ly a f t e r
t h e C om n ission er o f
I n t e r n a l R evenue c e r t i f i e s ,
o b ta in e d from t h e income t a x r e t u r n ,
in th e l i g h t
th a t in h is
o f d a ta
o p in io n t h e accumu
l a t i o n o f g a in s and p r o f i t s b y t h e c o r p o r a t io n i s u n r e a s o n a b le f o r
t h e p u rp o ses o f th e b u s in e s s ,
o c c a s io n has y e t a r i s e n t o
it
w i l l b e r e a d i l y u n d e r sto o d t h a t no
in v o k e a g a in s t any c o r p o r a t io n th e
p e n a l t y im posed b y s e c t i o n 220 o f t h e R evenue A c t o f 19 2 1*
In t h i s
c o n n e c tio n i t
is
prop er t o p o in t ou t t h a t t h e r e
seems to b e much m isa p p re h e n sio n a s to th e e f f e c t
o f t h e Revenue A c t o f 1921*
o f s e c t i o n 220
I t a p p l i e s t o c o r p o r a t io n s form ed or
a v a i l e d o f f o r t h e purpose o f p r e v e n t in g th e im p o s it io n o f th e
•3<
s u r t a x upon t h e s t o c k h o ld e r s th r o u g h t h e medium o f p e r m it t i n g g a in s
o r p r o f i t s t o a c c u m u la te i n s t e a d o f b e in g d i s t r i b u t e d *
p r o v id e s ,
h o w ever,
t h a t th e f a c t
* I t e x p r e s s ly
t h a t th e g a in s and p r o f i t s a r e i n
a n y c a s e p e r m it te d t o a ccu m u la te and become s u r p lu s s h a l l n ot be
c o n s id e r e d a s e v id e n c e o f a p u rp o se t o e s c a p e t h e t a x u n le s s th e
Com m issioner o f I n t e r n a l R evenue c e r t i f i e s
a c c u m u la tio n i s u n r e a s o n a b le f o r
th a t
i n h i s o p in io n su c h
t h e p u rp o se s o f th e b u s in e s s *
The
s e c t i o n does n o t im pose a t a x on u n d i s t r i b u t e d p r o f i t s or on a c
cu m u lated s u r p lu s ,
b u t p u ts a p e n a l t y on t h e a c cu m u la tio n o f g a in s
and p r o f i t s beyond t h e r e a s o n a b le n eed s o f t h e b u s in e s s when made
f o r t h e p u rp o se o f e s c a p in g t h e s u r ta x *
T h ere i s a t t h e same tim e much c o n f u s io n a s to t h e r e l a t i o n
o f th e d e c l a r a t i o n o f a s t o c k d iv id e n d t o t h e a p p l i c a t i o n o f s e c t i o n
220 .
S. B e s.
409 r e f e r s i n th e pream ble to
th e r e p o r t o f t h e F e d e r a l
T rad e Commission t h a t th r e e hundred and tw e n ty —e i g h t c o r p o r a t io n s
h ave d e c la r e d s t o c k d iv id e n d s d u r in g t h e c a le n d a r y e a r 1922*
The
d e c l a r a t i o n o f a s t o c k d iv id e n d has no s i g n i f i c a n c e under s e c t i o n 220,
an d i n any c a s e where t h e s e c t i o n a p p l i e s t h e Department can p r o c e e d
w ith i t s
en forcem en t q u it e a s w e l l a f t e r a s b e f o r e t h e d e c l a r a t i o n
o f a s t o c k d iv id e n d .
The d e c l a r a t i o n o f a s t o c k d iv id e n d does n o t
r e l i e v e c o r p o r a t io n s from S e c t i o n 220 , n o r ,
on t h e
o th e r hand does i t
i n d i c a t e t h a t a c o r p o r a t io n has a ccu m u la te d g a in s or p r o f i t s beyon d
th e r e a s o n a b le n e e d s o f th e b u s in e s s , f o r t h e e n t i r e amount o f th e
s u r p lu s c a p i t a l i z e d b y t h e d e c l a r a t i o n o f t h e s t o c k d iv id e n d may be
i n v e s t e d in p l a n t ,
c a p ita l,
or i t
equipm ent and in v e n t o r y ,
or be needed a s w o rk in g
may have b een a ccu m u la te d b e f o r e t h e h ig h s u r t a x e s
became e f f e c t i v e
and q u i t e w ith o u t r e g a r d to
t h e i r p o s s i b l e a p p lic a t io n »
Fu rth erm o re,
t h e r e c e i p t o f a s t o c k d iv id e n d b y i t s e l f has no e f f e c t
upon th e t a x
l i a b i l i t y o f th e r e c ip ie n t,
s i n c e th e h o ld e r o f s t o c k
i n a c o r p o r a t io n a f t e r th e r e c e i p t o f a s t o c k d iv id e n d has a l t o g e t h e r
no more th a n he had b e fo r e *
Supreme C ou rt in E is n e r v*
T h is was a p t l y e x p r e s s e d b y t h e
Macomber. 252 U.
S.
18 9 , a s f o l l o w s :
j ’ T h is , how ever, ( d e c l a r a t i o n o f a s t o c k d iv id e n d ) i s m e r e ly
b o o k k ee p in g t h a t d oes n o t a f f e c t th e a g g r e g a t e a s s e t s o f th e
c o r p o r a t io n o r i t s o u t s t a n d in g l i a b i l i t i e s ; * * * i t does
n o t a l t e r t h e p r e e x i s t i n g p r o p o r tio n a te i n t e r e s t o f a n y
s to c k h o ld e r or in cr e a se , t h e i n t r i n s i c v a lu e o f h is h o ld in g
or o f th e a g g r e g a t e h o ld in g s o f th e o th e r s t o c k h o ld e r s a s
t h e y s to o d b e f o r e .
The new c e r t i f i c a t e s s im p ly in c r e a s e t h e
number o f t h e s h a r e s , w it h con seq u en t d i l u t i o n o f th e v a lu e
o f each s h a r e » *
As I have a lr e a d y s t a t e d ,
ca se s as y e t
th e r e h a ve n e c e s s a r i l y b een no
i n w h ich t h e ‘ p e n a l t y imposed b y s e c t i o n 220 o f th e
R evenue A c t o f
1 9 2 1 has b een in v o k e d ,
n o th in g t o r e p o r t a t
and t h e r e
is ,
th e re fo re ,
t h i s tim e .
V ery t r u l y y o u r s ,
(S ign ed )
A,
W. MELLON
S e c r e ta ry o f th e T reasu ry.
Feb r u a ry 3,
1923»
The P r e s id e n t?
The World War F o r e ig n D ebt Commission c r e a t e d u n d er th e A ct o f
C o n gress approved F e b r u a ry 9,
19 2 2 ,
h a v in g r e c e i v e d
th e M is s io n a p p o in te d
b y th e B r i t i s h Government to c o n s id e r th e fu n d in g o f th e demand o b l i g a t i o n s
o f th a t
Government h e ld b y th e U n ite d S t a t e s ,
The B r i t i s h
Government d e s ig n a t e d a s
R ig h t Honorable S t a n l e y B ald w in ,
Montagu Norman,
th e
r e p o r t s a s f o llo w s ?
its
r e p r e s e n t a t i v e s The
C h a n c e llo r o f t h e E xch equer,
Governor o f th e Bank o f E n gla n d ,
and Mr*
who have c o n fe r r e d
w ith th e Commission in W ashington and p r e s e n t e d f a c t s r e l a t i n g to
p o s i t i o n o f th e B r i t i s h
Government»
The Com m ission has a l s o met f r e q u e n t ly
in s e p a r a te s e s s io n s and has g iv e n th e f u l l e s t
c o n s id e r a t io n to
in v o lv e d in th e fu n d in g o f th e B r i t i s h d eb t to
t h e U n ite d S t a t e s .
became m a n ife s t a t t h e o u t s e t
th a t
agreem ent f o r f i n d i n g w it h in t h e
and th e Commission h a s,
s e t tle m e n t on some o th e r b a s i s ,
a b s e n ce o f a u t h o r i t y under th e
recommends f o r
ment,
it
would n o t be p o s s i b l e
lim its
th e re fo re ,
to
th e problem s
It
e ffe c t
an
o f th e A c t ap p roved F e b r u a ry 9,
1922,
c o n s id e r e d th e p r a c t i c a b i l i t y o f a
and th ou gh i t
law ,
th e
to
has n ot been a b l e ,
c o n c lu d e n e g o t i a t i o n s ,
su b m issio n to C o n g re ss a s e t t le m e n t
in th e
i t un an im ou sly
w ith th e B r i t i s h Govern
a s f o llo w s ?
P r i n c i p a l o f n o te s to be r e fu n d e d — I n t e r e s t a c c r u e d and u n p a id up to December 1 5 ,
a t th e r a t e o f 4 ^ - -
$ 4 ,0 7 4 ,8 1 8 ,3 5 8 ,4 4
19 2 2,
D educt paym ents made O cto b er 15 , 19 2 2, and November 1 5 ,
1922, w ith i n t e r e s t a t 4x% th e r e o n to December
1 5 , 19 2 2 - ---------------------------------------------------------------------------To be p a id in c a s h T o t a l p r i n c i p a l o f in d e b te d n e s s a s o f December 15 , 1922
t o r which B r i t i s h Government Bonds a r e to be is s u e d
to th e U n ite d S t a t e s Government a t par
'
629,, 8 3 6 ,10 6 , 99
$ 4 ,7 0 4 ,6 5 4 ,4 6 5 » 43
10 0 ,5 2 6 ,3 7 9 » 6 9
$4* 6 0 4 ,12 8 ,0 8 5 * 7 4
4 ,1 2 8 ,0 8 5 .7 4
$4,600,000,000*00
The p r i n c i p a l o f th e b o n d s s h a l l b e p a id
a fix e d
s c h e d u le ^
t h e s e p a y m e n ts
s t a lm e n t
am ount o f t h e
b e in g
in
w ill be
due r e g u la r it y
e q u a l to
s u b je c t
to
th e
r ig h t
th r e e -y e a r p e r io d s ,
$ 2 3 ,0 0 0 ,0 0 0 a n d
d u r in g
th e
life
o f th e B r i t i s h
The am ount o f
th e se
of
th e bonds u n t i l ,
th e t o t a l p r in c ip a l o f
G o v e rn m e n t t o
th e f i r s t
th e
in
m ake
in c r e a s e w ith
th e 62nd y e a r ,
a g g re g a te
on
y e a r fs in
a n n u a l in s ta lm e n ts w i l l
i n s t a l m e n t w i l l b e $ 1 7 5 ,0 0 0 ,0 0 0 ,
The B r i t i s h
in a n n u a l in s ta lm e n ts
th e
in s ta lm e n ts
t h e d e b t*
G o v e rn m e n t s h a l l h a v e t h e
r ig h t
a m o u n ts o f t h e p r i n c i p a l o f t h e b o n d s o n a n y i n t e r e s t
to pay o f f a d d itio n a l
d a t e u p o n 90 d a y s
p r e v io u s n o tic e .
In te re s t
ra te s,
is
on D ecem ber
to
be p a y a b le
15 and June
_ ?f s ^ ' - ^ u a l l y ,
^
"
F or tiie f i r s t
added
th e
to
th e p r i n c i p a l,
15
of
June 15*
"
"
fiv e
years
bonds
to b e
th e
fo llo w in g
each y e a r :
1923 - t o December 15, 19 32, i n c l u s i v e ,
1933 - u n t i l f i n a l payment* *
o n e - h a lf th e
i n t e r e s t m ay b e d e f e r r e d
is s u e d t h e r e f o r
s im ila r
to
an d
th o se o f
o r ig in a l is s u e .
Any paym en t o f i n t e r e s t
S ta te s
at
u p o n th e u n p a id b a la n c e s a t
G o v e rn m e n t b o n d s
p a r and a c c ru e d
is s u e d
or
s in c e
th a t
its
A p r il 6,
19 17,
on t h i s b a s i s
th a t
is
fa ir
a s e ttle m e n t
and j u s t
to
p ro m p t a d o p t i o n w i l l m ake a m o s t i m p o r t a n t
tio n a l s t a b ilit y .
The e x te n s io n
o f paym ent b o th
over a
w i l l m ake f o r
s ta b ility
lo n g p e r io d
com m erwe b e t w e e n t h e
tw o c o u n t r i e s .
ta b lis h e d
o f p o s itiv e
on a b a s i s
e s ta b lis h in g
su ch bonds
to b e ta k e n
in te r e s t.
T h e C o m m is s io n b e l i e v e s
th e U n ite d S t a t e s
o f p r i n c i p a l m ay b e m ade i n a n y U n i t e d
th e p r in c ip le
in
o f th e B r i t i s h
d eb t to
b o th g o v e rn m e n ts and
c o n tr ib u tio n
to
in te r n a
o f th e p r i n c i p a l and i n t e r e s t
e x c h a n g e and p r o m o tio n o f
The p aym en t o f p r i n c i p a l h a s b e e n e s
in s ta lm e n ts
of
o f rep aym en t o f th e
in c r e a s in g
e n tir e
v o lu m e ,
c a p ita l
su m .
fir m ly
The
payment o f i n t e r e s t has been e s t a b l i s h e d a t th e a p p r o x im a te ly norm al r a t e s
p a y a b le b y s tr o n g governm ents o v e r
lo n g terms o f yea rs»
th e th o u g h t o f th e Commission t h a t
it
p e r io d t h e h ig h r a t e
r e c o n s t r u c t io n ,
ment*
would be j u s t
to demand o v e r a long
o f i n t e r e s t n a t u r a l l y m a in ta in e d d u r in g th e war and
and t h a t su ch an a tte m p t would d e f e a t our e f f o r t s
Beyond t h i s ,
th e
Commission h a s f e l t
o f unemployment and h ig h t a x a t i o n
th a t
th e p r e s e n t
at
s e ttle
d iffic u ltie s
in th e U n ite d Kingdom sh o u ld be met w ith
s u i t a b l e , c o n s id e r a t io n d u r in g th e e a r l y y e a r s ,
c o n s id e r s i t
I t has n o t been
e c p iit a o le and d e s i r a b l e
and,
th e re fo re ,
t h e Commission
t h a t paym ents d u r in g th e n e x t fe w y e a r s
sh ou ld be made on su c h b a s is and w ith such f l e x i b i l i t y
econom ic r e c u p e r a t io n n o t o n ly in th e c o u n t r ie s
as w i l l
en cou rage
im m e d ia te ly co n ce rn e d but
th ro u g h o u t th e w orld*
T h is s e t t le m e n t betw een th e B r i t i s h
has th e utm ost s i g n i f i c a n c e «
th e
It
i n t e g r i t y o f th e o b l i g a t i o n s ,
th e re a d ju stm e n t o f th e
is
a b u s in e s s
and i t
Government and th e U n ite d S t a t e s
s e t t le m e n t ,
fu lly
r e p r e s e n ts t h e f i r s t
in te r g o v e r n m e n ta l o b l i g a t i o n s
A.
great
s t e p in
grow in g ou t o f th e war*
R e s p e c t f u l l y s u b m itte d :
’ S/
p r e s e r v in g
W. MELLON
Chairman
S/
CHARLES E,
HUGHES
S/
HERBERT HOOVER
S/
REED SMOOT
S/
THEODORE E* BURTON.
r;—iar-
F eb ru ary- 16 ,
19 2 3 ,
D ear Mr* Chairm an;
I r e c e iv e d your l e t t e r o f F e b r u a r y 1 3 th ,
r e q u e s t in g c e r t a i n in *'
fo r m a tio n f o r t h e u se o f th e su b c o im iitte e o f th e Com m ittee on th e J u d i»
c i a r y i n c o n n e c tio n w it h
its
c o n s id e r a t io n o f House J o in t R e s o lu tio n Ho*
3 1 4 , p r o p o s in g a C o n s t i t u t i o n a l amendment r e s t r i c t i n g f u r t h e r is s u e s o f
ta x -e x e m p t s e c u r i t i e s ,
I h a ve n o te d th e b r i e f and t a b l e s p r e s e n te d by
th e G overnor o f th e S t a t e o f V i r g i n i a ,
th ro u gh Mr, E* Warren H a l l ,
Second A s s i s t a n t o f th e S t a t e T a x B o a rd , and h a ve exam ined th e s t a t e s
m ents and f i g u r e s em bodied i n th e argum ent p r e s e n te d i n b e h a l f o f th e
S ta te ,
Many o f th e argum ents and f i g u r e s a r e e i t h e r i r r e l e v e n t o r m is»
c o n c e iv e d , and i n l a r g e m easure t h e y a r e a lr e a d y answ ered b y my l e t t e r o f
December 2 1 ,
1922,
to th e A c t i n g Chairman o f th e Com m ittee on Ways and
M eans, and o f J a n u a ry 3 1 ,
19 2 3 ,
to Mr,- C la r e n c e H. K e l s e y , Chairman o f
t h e Com m ittee on T a x a t io n o f t h e Chamber o f Commerce o f th e S t a t e o f New
Y o rk , c o p ie s o f w h ich a r e h e r e w ith e n c lo s e d .
The argument p r e s e n te d f o r
th e S t a t e o f V i r g i n i a may be answ ered more s p e c i f i c a l l y in t a k in g up th e
s e v e r a l q u e s tio n s r a is e d b y ^our l e t t e r , b u t I ¡Say s a y a t th e o u t s e t
t h a t no amount o f a r b i t r a r i l y assum ed f i g u r e s
s io n s such a s a p p e a r i n i t s
o b scu re th e m ain f a c t s
or l o o s e l y drawn c o n c lu
b r i e f and accom panying t a b l e s can s e r v e to
i n t h e s i t u a t i o n upon w h ich th e T r e a s u r y re3.ies
in u r g in g su p p o rt f o r th e p r o p o sed C o n s t i t u t i o n a l amendment, n am ely,
t h a t t h e c o n tin u e d is s u a n c e o f t a x »exempt s e c u r i t i e s
is
b u i ld i n g up a
c o n s t a n t l y gro w in g mass o f p r i v a t e l y h e l d p r o p e r t y exempt from a l l t a x a »
tio n ;
t h a t ta x -e x e m p tio n i n a dem ocracy such a s ours i s
repugnant to
e very C o n s titu tio n a l p r in c ip le ,
s in c e i t
te n d s to c r e a t e a c l a s s
in th e
community w h ich can n o t he r e a c h e d f o r t a x p u r p o se s and n e c e s s a r i l y in**
c r e a s e s th e b u rd en o f t a x a t i o n on p r o p e r t y and incom es t h a t rem ain t a x
a b l e ; and t h a t
it
i s a b s o l u t e l y i n c o n s i s t e n t w it h a n y syste m o f g ra d u a te d
income s u r ta x e s
t o p r o v id e a t
exempt from a l l
ta x a tio n ,
th e same tim e s e c u r i t i e s w h ich a r e f u l l y
s in c e th e exem p tion s w i l l so o n er o r l a t e r d e f e a t
a t l e a s t a l l th e h ig h e r g r a d u a tio n s and w i l l a lw a y s be w orth f a r more to
th e w e a l t h i e r t a x p a y e r s th a n to th e s m a ll on es*
g e ts
T ax "exem p tion , o f c o u r s e ,
q u it e a d is p r o p o r t io n a t e v a lu e when t a x e s a r e n o t a t a l e v e l r a t e b u t
a r e l e v i e d a t g r a d u a te d r a t e s , and th e F e d e r a l s u r ta x e s a r e a lm o st w h o lly
r e s p o n s ib le ¿ o r th e e x t r a o r d in a r y v a lu e w h ich ta x -e x em p t s e c u r i t i e s e n jo y
to -d a y ,
It
i s nonsense t o r e f e r to t h i s v a lu e a s som ething w h ich th e
S t a t e s h a v e th e r i g h t t o e n jo y i n s e l l i n g
depends i n l a r g e measure on th e r e l a t i v e
th e ir s e c u r itie s ,
f o r th e v a lu e
s c a r c i t y o f tax-'exem pt s e c u r i t i e s
and th e F e d e r a l Government c o u ld s e r i o u s l y im p a ir , and n e a r l y d e s t r o y ,
b y is s u in g a l l
its
own s e c u r i t i e s exempt from s u r t a x e s .
it
C o n t r a r iw is e ,
s in c e th e v a lu e o f th e exem p tion tu r n s l a r g e l y on th e e x is t e n c e o f g r a d u a t
ed s u r t a x e s ,
th e F e d e r a l Government c o u ld c e r t a i n l y reduce and p r o b a b ly
d e s t r o y th e p r e s e n t premium on ta x -e x e m p t s e c u r i t i e s b y c h a n g in g i t s
own
t a x syste m and s u b s t i t u t i n g f o r t h e income s u r ta x e s some o th e r form o f t a x
w h ich w ould n o t be a f f e c t e d b y th e p r e s e n c e o f ta x -e x em p t s e c u r i t i e s ,
f o r exam ple, a t a x on s a l e s o r e x p e n d it u r e s .
t o some su ch ch an ge b y f o r c e o f n e c e s s i t y i f
I t may, in f a c t ,
as,
be d r iv e n
th e p r e s e n t s i t u a t i o n c o n -
%
t in u e s and enough o f th e S t a t e s c l i n g t o th e p r i v i l e g e f o r w h ich th e G over
nor o f V i r g i n i a c o n te n d s ,
o f is s u in g s e c u r it ie s th a t g iv e r ic h in v e s to r s
th e pow er, a t th e exp en se o f th e r e s t o f th e com m unity, t o e s c a p e from th e
common burdens o f t a x a t i o n ,
~o “
I n p r o p o s i n g t h e C o n s t i t u t i o n a l am end m ent now b e f o r e y o u r C om "
m itte e
it
t h e F e d e r a l G o ve rn m e n t i s
is w illin g
p e n d in g
fr e e
to
y ie ld
n o t a s k i n g fr o m t h e S t a t e s a n y m o r e t h a n
x o r i t s e i i , and i
r e s o l u t i o n y o u r C o m m it te e w i l l
1.
It
is
is
so fr e q u e n t ly
th e q u e s tio n s
im p o s s ib le
to
a ll
o b l i g a t i o n s w e r e w h o l l y e x e m p t fr o m t a x e s ,
in d ic a te d ,
i n ray l e t t e r
o f J a n u a r y ¿ 1 s t * t o M r, K e l s e y ,
a b o u t $ 1 ,5 0 0 ,0 0 0 ,0 0 0 o f i t s
is
in te r e s t
w o u ld d e p e n d o n
I h ave a lr e a d y
th a t
i n my ju d g m e n t
t h e U n ite d S t a t e s w e re
in s te a d o f
now o u t s t a n d i n g
( le a v in g
t h a t t a x “e x e m p t i o n w o u ld
w o u ld b e i m p o s s i b l e
t o m ake a n y m a t e r i a l s a v
e x e m p tio n fro m t a x a t i o n .
is
o f V ic to r y n o te s , a s
T h is c o n c lu
its
its
w ar o b lig a t io n s ,
w a r b o r r o w in g s
c e n t b o n d s , a n d t h e 3-§ p e r c e n t
r e t i r e d ) , w ith o u t r e c o u r s e
in s te a d
se t fo rth
in
th e
le tte r
f u r t h e r su p p o rte d b y th e g e n e r a l e x p e r ie n c e
in d e a lin g w ith
fin a n c e d a l l
if
if
bonds h e ld b y N a tio n a l b a n k s ) , th e m arket
b y g r a n tin g f u l l
s c r ie s
K e ls e y , and i t
th a t
if
to
b o rn e o u t b y th e a c t u a l e x p e r ie n c e o f th e U n ite d S t a t e s w it h th e
ta x -e x e m p t
S ta te s
it
ta x -e x e m p t s e c u r i t i e s
ta x -e x e m p t s e c u r i t i e s
i t s m ark et v a lu e and i t
in g o f
s io n
so flo o d e d w ith
s in c e
ta x -e x e m p t s e c u r i t i e s
o u t o f a cco u n t th e c ir c u la t io n
lo s e
fo r
l a r g e l y a m a t t e r o f ju d g m e n t.
i s s u e a b o u t $ 2 2 ,0 0 0 ,0 0 0 ,0 0 0 o f f u l l y
w o u ld b e
sta te m e n t a s
i n t e r e s t c h a r g e s p a id b y t h e U n ite d S t a t e s
t h e d i f f e r e n c e w o u ld n o t b o s u b s t a n t i a l ,
to
m e r its ,
in v o lv e d *
g iv e a d e f in it e
t h e r e w o u ld b e i n
a num ber o f f a c t o r s a n d i s
tn e
r a is e d b y you r l e t t e r :
fe r e n c e
its
in c o n s id e r in g
e x a m in e t h e q u e s t i o n o n i t s
fr o m t h e p r e j u d i c e s w i t h w h i c h i t
T o t a k e up s p e c i f i c a l l y
am s u r e t h a t
except fo r
o f fo llo w in g
th e F i r s t
( a ll
e x e m p t i o n fr o m
th is p o lic y
o f th e U n ite d
t h e F e d e r a l G o v e rn m e n t h a v i n g
V ic to r y n o te s
to f u l l
t o Mr*
L i b e r t y L o a n 3g- p e r
o f w h i c h h a v e now b e e n
ta x a tio n .
I am s a t i s f i e d
th e U n ite d S t a t e s h a d is s u e d a l l
th e d i f
of its
w ar o b lig a tio n s
on a f u l l y
on th e
t a x - e x e m p t o b l i g a t i o n s w o u ld h a v e b e c o m e p r a c t i c a l l y
r a t e s a c t u a l l y p a id on th e
is
n o t p o s s ib le ,
th is
s in c e
ta x -e x e m p t b a s is
th e c o n t r a r y p o l i c y w as p u rsu e d ,
it
m u st b e o b v io u s t h a t
$ 3 2 ,0 0 0 ,0 0 0 ,0 0 0 f a c e a m o u n t i n s t e a d
ta x -e x e m p t s e c u r i t i e s
ra te s,
F ro m t h e p o i n t
th a t
th re e
tim e s a s
and a v a ila b le
p r o b a b ility
la r g e
in
th e se
if
th e re
and m u n ic ip a lit ie s
th a t
s e c u r itie s
e n tir e ly
is s u in g
on i t s
of
o f th e
th a n a t p r e s e n t ,
in e ffe c tiv e »
ta x -e x e m p t
t h e r e w e r e now
f a c e am o u n t
little
e ffe c t
h o w ever,
on
th e
f o r t h e r e w o u ld b e
s e c u r itie s
It
to
in s te a d
is
a v a ila b le ,
o f su rta x e s
a ls o
n e c e s s a ry to
in te r e s t
o f ta x a b le
th e b e n e fit
ta x a b le
in c o m e f o r
to S t a t e s
s e c u r itie s ,
o f th e F e d e r a l G o vern
re v e n u e th ro u g h th e p u rc h a s e o f th e
ta x -e x e m p t
su rta x p u rp o ses,
fo ,lls
o n t h e F e d e r a l G o v e rn m e n t.
is
n o t p o s s ib le
t o g i v e a n y c o m p le t e
c o lle c te d by th e U n ite d S t a t e s
t h e t a x a b l e y e a r 1 9 2 0 , a n d sh o w t o t a l
re tu rn e d a s
sta te m e n t
s h o w in g t h e
u p o n in c o m e r e c e i v e d a s
o b l i g a t i o n s n o t w h o l l y e x e m p t fr o m t a x *
th o se f o r
r e v e n u e .,
now a n y m a t e r i a l s a v i n g o f
in o rd e r to red u ce
2» I t
su rta x e s
lo s s
if
c ir c u m s ta n c e s th e g ra d u a te d r a t e s
s a v in g d o es n o t a t a l l a c c r u e
m e n t, w h e re a s t h e
tio n s
in
is
W h i le i t
f o r p u rc h a s e b y w e a lth y in v e s t o r s , w ith th e
w o u ld h a v e b e c o m e a l m o s t c o m p l e t e l y
re m e m b e r t h a t
th e
th e v a lu e o f th e t a x -
a v o lu m e o f t a x - e x e m p t
a t h ig h e r y ie l d s ,
th a t
a s h ig h a s
to d e m o n stra te
i t w o u ld h a v e b u t
o f v ie w
s i t u a t i o n w o u ld b e v a s t l y m o re s e r i o u s
n e a r ly
o f in te r e s t
o f a b o u t $ 1 1 ,0 0 0 ,0 0 0 ,0 0 0
o u ts ta n d in g ,
e x e m p t i o n w o u ld b e s o m u ch d i l u t e d
in te r e s t
ra te s
o b l i g a t i o n s w h ic h h a v e b e e n i s s u e d .
c o n c lu s io n m a th e m a tic a lly
o f flo lly
th e
The l a t e s t
in te r e s t
fig u r e s a re
on su en o b lig a
in c o m e f o r t h a t y e a r a s $ 6 1 , 5 4 9 , 5 7 2 , a c c o r d i n g
2 on p a g e s 40*47 o f The S t a t i s t i c s
in te r e s t
to
ta b le
o f In co m e f o r 1 9 2 0 , a c o p y o f w h ic h i s
'5 *
e n c lo s e d *
T h ere
is
a ls o
e n c l o s e d a t a b l e , m ade u p f r o m t h e s e S t a t i s t i c s
o f I n c o m e , w h i c h s h o w s , b y in c o m e c l a s s e s ,
S ta te s
it
is
s u r ta x a b le
o b l i g a t i o n s a g g r e g a t i n g $ 6 0 ,4 2 1,3 0 2 f o r
e s tim a te d th a t
$ 9 ,6 9 3 ,1 1 2 f o r
th e
su rta x e s c o lle c te d
t h e y e a r 19 2 0 , f r o m w h ic h
t h e r e o n a m o u n te d t o a b o u t
th a t year*
T h is
o f th e g e n e ra l s it u a t io n ,
fo r a
F e d e ra l o b lig a tio n s
th e h an d s o f s m a ll h o ld e r s
s u b je c t
in g t h i s
to
is
in
s u rta x , and a s
p e r io d
to
s u b s ta n tia l p a rt
th e r e w e re c e r t a i n
w h ic h h a v e b e e n l a r g e l y a v a i l e d
p a rt
d oes n o t, h o w ever,
th e b a la n c e
th e f ig u r e s a s
n e c e s s a r ily
to
th e
s u r ta x a b le
on t a x a b le
g e n e r a l c o n c lu s io n s
as
of
to
under
a cop y o f a
to
o r c o r p o r a tio n s n o t
ta x a b le
in c o m e »
e x p ir e b y lim it a t io n
in te r e s t
In
In g r e a te r
o n J u l y 2 , 19 2 2 ,
t h e m e a n t im e , h o w e v e r ,
on U n ite d S t a t e s
o b lig a tio n s a re
t e m p o r a r y e x e m p t i o n s , a n d do n o t sh o w e n o u g h
o b lig a tio n s
in c r e a s in g
The a n sw er to
(2 ) , b u t
red u ce
t o m ake i t
to w h a t m ig h t b e th e e f f e c t
s t i t u t i o n a l am endm ent i n
3»
o f th e o u ts ta n d in g
m u st b e re m e m b e re d t h a t d u r
r e s t b y J u l y 2 , 1926»
red u ced b y t h e s e
about c o lle c tio n s
it
g iv e a c o r r e c t p ic tu r e
l i m i t e d e x e m p t i o n s fr o m s u r t a x e s ,
t h e s e l i m i t e d e x e m p tio n s w i l l
and p r a c t i c a l l y a l l
i n t e r e s t on U n ite d
th e
th e
p o s s ib le
to d ra w a n y
o f th e p ro p o se d C on
r e v e n u e s fr o m
ta x a tio n ,
t h ir d p o in t h a s a lr e a d y b ee n g iv e n
s u p p le m e n t t h a t
in fo r m a tio n th e r e
is
e n c lo s e d h e r e w ith
sta te m e n t p r e p a r e d b y th e S t a t i s t i c a l D iv is io n o f th e
T a x U n i t s h o w in g w h o l l y t a x 'e x e m p t
in p a rt
In co m e
in c o m e r e p o r t e d b y i n d i v i d u a l s h a v i n g
co m e s o f $5,0 0 0 a n d o v e r f o r
t h e c a l e n d a r y e a r 19 2 0 , s e p a r a r i n g i n t e r e s t
on U n ite d S t a t e s
fr o m i n t e r e s t
o b lig a tio n s
t i o n s , a n d s h o w in g t h e
T h is
ta b le
c o m p ile s
th e
f o r 1920 p u r s u a n t
to
ra te
goes
so f a r a s
it
ta x -e x e m p t
re p o rts
in c o m e o f b o t h k i n d s
o f ta x -e x e m p t
th e p r o v is io n s
it
is
on S t a t e and m u n ic ip a l o b l i g a
o f th e
b y in co m e c l a s s e s »
in co m e m ade o n t h e
r e t u r n s , and w h ile
u n d o u b te d ly n o t
c o m p le t e s i n c e
it
th e se
re tu rn s
is
accu
re p o rts
in
■6w ere required , t o "be made o n ly a s a m a tte r o f in fo r m a tio n and th e b u r e a u
In u e r n a l ^Revenue h a s n o t had o c c a s io n to checlc them up f o r t a x p u r * poses•
i±*
The T r e a s u r y h a s s t r o n g l y recommended t h a t
red u ced to a maximum o f 25 p e r c e n t ,
norm al and s u r ta x o f 53 p e r c e n t»
t a x e s on s u b s t a n t i a l l y t h i s b a s i s
se n t i n t e r n a l reven ue system i s
th a t
t o s a y , a maximum combined
I t b e lie v e s
is
t h a t a r e v i s i o n o f th e s u r -
fu n d a m e n ta lly n e c e s s a r y i f
to b e s u c c e s s f u l l y a d m in is te r e d .
seems to be no p r o s p e c t , h o w ever,
our p r e —
There
o f a c t i o n b y t h i s C on gress upon th e s e
recomm endations and f o r th e tim e b e in g ,
f a c e th e f a c t o f
is
th e s u r ta x e s he
th e re fo re ,
it
i s n e c e s s a r y to
s u r ta x e s ru n n in g to a maximum o f 50 p e r c e n t , o r a com
b in e d maximum o f 53 p e r c e n t ,
A
r e v i s i o n t o s u b s t a n t i a l l y th e b a s i s r e
commended b y th e T r e a s u r y w ou ld, no d o u b t, c o r r e c t t o some e x t e n t th e e v i l
o f ta x -e x em p t s e c u r i t i e s ,
t a x a b le
s in c e
i t would red u ce th e p r e s s u r e to e sca p e
incom e, b u t th e e v i l w ould none th e l e s s
be s e r io u s , a t l e a s t
ta x r a te s .
so lo n g a s
rem ain and would s t i l l
th e r e wore an y m a t e r ia l g r a d u a tio n o f s u r
For exam ple, e v e n w it h a maximum s u r ta x o f 25 p e r c e n t th e r e
w ould s t i l l be a m a t e r i a l inducem ent f o r la r g e i n v e s t o r s to red u ce t a x a b le
incom e, and to an i n v e s t o r p a y in g s u r ta x e s a t th e r a t e o f 25 p e r c e n t a
f u l l y ta x -e x em p t s e c u r i t y w ould o f f e r s u b s t a n t i a l a d v a n ta g e s a s compared
w ith a s u r ta x a b le
s e c u r i t y , w h ile th e ta x -e x em p t s e c u r i t y w ould, o f
c o u r s e , be f a r more v a lu a b le to
or,
Lower s u r t a x e s ,
such an i n v e s t o r th an to a sm a ll i n v e s t
i n o th e r w o rd s, w ould m i t i g a t e
n o t go the h e a r t o f th e s i t u a t i o n ,
the e v i l but would
f o r ta x -e x e m p tio n s would s t i l l
p e r s i s t and ten d t o d e f e a t a n y t a x e s l e v i e d a t
th e r e v is e d r a t e s .
$ 1 8 5 ,0 0 0 ,0 0 0 ,
s u b m i t t e d “b y t h e G o v e r n o r o f V i r g i n i a a s t i l e a d d i t i o n a l a n
n u a l i n t e r e s t c h a r g e u p o n t h e G o v e rn m e n t o f t h e U n i t e d S t a t e s
of
is s u in g
o b l i g a t i o n s n o t w h o l l y e x e m p t fr o m
and g r o s s ly
m
in a c c u r a te .
la r g e m easu re i n
th e fig u r e
She re a so n s f o r
th e d is c u s s io n under
p r o c e e d s l a r g e l y fro m t h e f a c t
t i o n s w h ic h a ssu m e t h a t a l l
it
a b o v e , and th e in a c c u r a c y o f
th a t
it
r e s u lts
on th ro u g h th e
is s u e
had p la c e d
fr o m c a l c u l a
o f ta x -e x e m p t o b li g a
o f i n t e r e s t a p p r o x im a te ly 1 p e r c e n t l e s s
p a i d T^>on s u r t a x a b l e
if
v ie w h a v e a lr e a d y b ee n g iv e n
o f t h e w a r b o r r o w in g o f th e F e d e r a l G o v e rn
m en t c o u l d h a v e b e e n c a r r i e d
tio n s a t a r a te
t a x e s , a s w h o l ly u n fo u n d e d
th is
( l)
on a cco u n t
o b lig a tio n s .
It
is
th e w h o le w a r d e b t on a
th a n th e
ra te
th e o p in io n o f th e T r e a s u r y th a t
ta x -e x e m p t b a s is
t h e r e w o u ld
h a v e b e e n p r a c t i c a l l y n o d i f f e r e n t i a l b e t w e e n t a x - e x e m p t a rid s u r t a x a b l e
o b lig a tio n s .
On t h i s
p r o x im a te ly th e
>
t h e U n i t e d S t a t e s w o u ld b e p a y i n g
sam e a n n u a l i n t e r e s t
now p a y in g on i t s
i n g m ore i n
b a s is
it
is
reven u e.
s u b m itte d b y t h e G o v e rn o r o f V i r g i n i a a s
m axim um a m o u n t o f s u r t a x e s c o l l e c t e d
to
th a t
o u t s t a n d in g d e b t n o t w h o l ly exem p t fro m t a x e s , a n d l o s
I * The e s t im a t e s
19 2 2 r a t e s ,
on ta x -e x e m p t o b lig a t io n s
to -d a y a p
on th e i n t e r e s t
su rta x e s a re
th e
u n d e r th e 1920 r a t e s , a n d u n d er th e
o n G o v e rn m e n t o b l i g a t i o n s
s u b s ta n tia lly c o r r e c t,
d is c u s s io n u nd er p o in ts
to
re tu rn e d a s s u b je c t
b u t, a s p o in te d o ut ab o ve in
2 and 6 t th e f ig u r e s
fo r
th e se y e a rs
th e
are v itia te d
b y te m p o ra ry f a c t o r s an d h a v e no b e a r in g a t a l l upon th e m e r it s
o f th e
p e n d i n g C o n s t i t u t i o n a l am en d m en t*
T h e b r i e f s u b m i t t e d b y t h e G o v e r n o r o f V i r g i n i a c o n t a i n s a n u m b er
o f in a c c u r a c ie s
tio n .
r e la te d
On p a g e 1 4 ,
fo r
to
th is
e x a m p le ,
d i s c u s s i o n w h ic h im p a ir i t s
th e b r i e f s t a t e s
th a t
w h o le p o s i
t h e p r o p o s e d a m en d
ment would be u n f a i r
to t h e S t a t e s
sued about t w e n t y - t h r e e b i l l i o n s
fu r th e r la r g e
It
is
««The F e d e r a l Government, h as i s
o f bonds.
It
does n ot c o n te m p la te any
T h ese bonds can n o t be ta x e d b y th e S t a t e s ..
th u s p r o b a b le t h a t
be no F e d e r a l
th e
is s u e s .
s in c e
s e c u r itie s
d u r in g th e n ex t f i f t y
lia b le
to
years,
at
S in c e
each y e a r .
A l l o f t h e s e w i l l be l i a b l e
th e p r o v i s i o n a g a i n s t d i s c r im i n a t io n w i l l
and m is le a d in g .
d o lla r s
be n il.« «
th e t a x ,
th e v a lu e o f
i s s u i n g each
and f o r many y e a r s to
be i s s u i n g new s e c u r i t i e s e v e r y y e a r , p r o b a b ly in amounts l a r g e r
a g g r e g a t e o f S t a t e and m u n ic ip a l i s s u e s d u r in g th e y e a r ,
its
o b lig a t io n s p r e v io u s ly is s u e d .
se
T h ese s ta te m e n ts are
The F e d e r a l Government i s
y e a r s u b s t a n t i a l amounts o f new s e c u r i t i e s
in
to th e F e d e r a l t a x a t i o n .
th e r e w i l l be no F e d e r a l s e c u r i t i e s l i a b l e t o
m a n ife s tly f a l s e
th e r e w i l l
S t a t e t a x a t i o n , but on th e o th e r hand,
S t a t e s and r m i n i c i p a l i t i e s a r e i s s u i n g about a b i l l i o n
c u r itie s
le a s t,
come w i l l
than th e
in o rd e r to refu n d
B etw een now and th e end o f 19 2 8 , f o r
exam ple, ab o u t $9 ,0 0 0 ,0 0 0 ,0 0 0 o f b o n d B , n o te s and c e r t i f i c a t e s
is s u e d by
th e F e d e r a l Government w i l l m ature and in l a r g e m easure th e s e m atu rin g ob
l i g a t i o n s w i l l have to be r e fu n d e d .
Any o f t h e s e r e fu n d in g o b l i g a t i o n s
is s u e d a f t e r t h e r a t i f i c a t i o n
o f t h e C o n s t i t u t i o n a l amendment would be sub
je c t
same manner as S t a t e
to i t s
is s u e d a f t e r
o b lig a tio n s
p r o v i s i o n s in
its
r a tific a tio n .
or m u n ic ip a l o b l i g a t i o n s
The same would b e tr u e o f o th e r r e fu n d in g
is s u e d b y t h e F e d e r a l Government i n s u c c e e d in g y e a r s .
how c o m p le t e ly f a l s e
enough to
th e
is
c a l l a tte n tio n
th e argument made b y th e G overnor o f V i r g i n i a i t
to
th e f a c t
is
t h a t th e whole war d eb t o f th e F e d e r a l
Government a c t u a l l y m a tu res w i t h i n th e n e x t
m a tu r itie s f a l l i n g
To show
at fre q u e n t i n t e r v a l s .
t h i r t y y e a r s , w it h s u b s t a n t i a l
These m a tu rin g o b l i g a t i o n s w i l l
e i t h e r be redeem ed,, in w h ich e v e n t th e t a x exem p tion s t h e y now c a r r y w i l l
c e a s e t o fee o f a n y im p o rta n ce ,
or w i l l fee refu n d ed i n t o o th e r o b l i g a t i o n s ;
and t h e s e r e fu n d in g o f e l i g a t i o n s ,
if
is s u e d a f t e r
C o n s t i t u t i o n a l amendment, w i l l fee s u b j e c t to
th e r a t i f i c a t i o n o f th e
i t s p r o v is io n s .
The fe r ie f s u b m itte d fey th e G overnor o f V i r g i n i a i s
f i l l e d w ith
in a c c u r a c ie s and lo o s e s ta te m e n ts o f t h i s n a t u r e , and c o n t a in s a l s o numerous m is -q u o ta tio n s o f my te s tim o n y b e f o r e th e Ways and Means Committee and
unw arranted and i r r e l e v a n t c o n c lu s io n s from sta te m e n ts made i n l e t t e r s and
te s tim o n y b e f o r e th e C om m ittee.
It
i s h a r d ly w orth w h ile to ta k e th e s e
i n a c c u r a c ie s up i n d e t a i l i n a l e t t e r o f t h i s c h a r a c t e r b u t i f
m it t e e w ould l i k e
to h a ve me a p p e a r p e r s o n a l l y b e fo r e
it,
th e subcoin**
e i t h e r in r e p ly
to th e argum ents made fey th e G overnor o f V i r g i n i a o r in su p p ort o f th e p o s i t io n w h ich th e T r e a s u r y h a s ta k e n w it h r e s p e c t t o th e C o n s t i t u t i o n a l
amendment, I s h a l l fee g l a d t o a p p ea r a t
such tim e as th e subcom m ittee may
d e s ir e .
x ie e i
cihaii
j.
sh o u ld now Cj.oso
w—uiiOUw
gc&m
-g
t h e hope
t h a t th e Com m ittee w i l l t a k e a c t i o n on t h i s m easure a t a d a te e a ,rly
enough to a s s u r e f a v o r a b l e a c t i o n fey th e S e n a te a t t h i s
gress.
It
s e s s io n o f Con
i s a m a tte r o f th e utm ost im p ortan ce to our economic and f in a n
c i a l d e ve lo p m e n t, and I v ie w w i t h r e a l co n ce rn th e p o s s i b i l i t y t h a t a c t i o n
on t h i s amendment, w h ich was f i r s t
s u g g e s te d fey th e T r e a s u r y i n A p r i l ,
1 9 2 1 , may a g a in fee d e f e r r e d to some l a t e r d a t e .
The r e s o l u t io n h as a lr e a d y
p a s s e d th e House o f R e p r e s e n t a t iv e s fey a d e c i s i v e v o t e , and w i t h i n th e
n e x t y e a r o r two th e r e a r e s e s s io n s o f most o f th e S t a t e l e g i s l a t u r e s ,
so t h a t th e tim e to p ro p o se th e amendment i s now, when th e r e i s
a fa v o r"
a b l e o p p o r tu n ity f o r a c t i o n upon i t . , b e f o r e th e volume o f ta x -e x em p t
-io ~
s e c u r itie s
g ro w s t o u n c o n t r o l l a b le p r o p o r tio n s *
C o r d ia lly y o u rs,
(S ig n e d )
A * W. M e l l o n
S e c r e t a r y o f t h e 'T r e a s u r y
Hon* K n u t e I T e ls o n ,
C h a i im a n , C o n a n it t e e o n t h e J u d i c i a r y ,
U n ite d S t a t e s S e n a t e ,
W a s h i n g t o n , D„ C ,
e n c lo s u r e s
Inclosure
to Memo
FOR EEIiSASE, M orning P a p e rs
T h u r s d a y , F e b r u a r y .!., 1923
TEEA.SURY DEPARTMENT
The f o l l o w i n g i s a co p y o f a l e t t e r from S e c r e t a r y M e llo n t o Mr*
C la r e n c e H, K e l s e y , Chairm an o f th e Com m ittee on T a x a t io n o f th e Chamber o f
Commerce o f th e S t a t e o f Hew Y o r k , w it h r e s p e c t t o th e q u e s tio n o f ta x -e x em p t
s e c u r itie s :
J a n u a ry 3 1 ,
19 2 3 .
My d e a r Mr. K e l s e y :
I
r e c e iv e d y o u r l e t t e r o f J a n u a ry 3 2 ,
19 2 3 , w it h f u r t h e r r e fe r e n c e t o th e
q u e s tio n o f tax-"exem pt s e c u r i t i e s , and h a ve s in c e had o p p o r tu n ity t o examine
t h e r e p o r t o f y o u r Com m ittee on t h i s
s u b j e c t t o th e Chamber o f Commerce o f th e
S t a t e o f Few Y o r k , w h ich I n o t i c e was p u b lis h e d y e s t e r d a y m orning and i s e x
p e c t e d t o come up f o r a c t i o n a t
th e m e e tin g Of th e Chamber on T h u rsd ay,
can n o t e s c a p e th e f e e l i n g a f t e r r e a d in g t h i s
it
ta k es
r e p o r t t h a t th e p o s i t i o n w hich
i s fou n d ed upon s e v e r a l s e r io u s m is c o n c e p tio n s , and I am s a t i s f i e d
t h a t on many p o i n t s t h e r e p o r t
duced to
I
its
so lo n g a s
lo w e s t te r m s,
i s d i r e c t l y a t v a r ia n c e w it h th e f a c t s .
th e m ain c o n t e n t io n o f th e r e p o r t seems t o be t h a t
th e r e a r e h ig h s u r t a x e s t h e r e ought t o b e ta x -e x em p t s e c u r i t i e s to
p r o v id e r e l i e f from th o s e s u r t a x e s .
g a r d t o t h e e x c e s s iv e r a t e s o f '
T reasu ry^
Re
T h is v ie w i s n ot u n n a tu r a l, h a v in g r e
s u r ta x
w h ich now p r e v a i l , b u t
it
i s th e
v ie w t h a t t o s a n c t i o n th e c o n tin u e d is s u a n c e o f s e c u r i t i e s c a r r y
in g f u l l exem p tio n s from t a x a t i o n and a t
th e same tim e a tte m p t t o l e v y
F e d e r a l income s u r t a x e s ru n n in g a s h ig h a s 5.8 p e r c e n t , when combined w it h
th e norm al t a x ,
c r e a t e s an im p o s s ib le s i t u a t i o n ,
th e s e c u r i t i e s w i l l te n d t o d e f e a t
th e c o l l e c t i o n o f th e t a x e s .
c o r d i n g l y u rg ed t h a t a c t i o n be ta k e n , f i r s t ,
t a x -exem pt s e c u r i t i e s ,
s in c e t h e ta x -e x e m p tio n s o f
I h a ve a c
t o r e s t r i c t f u r t h e r is s u e s o f
in o r d e r t o b l o c k t h i s avenue o f escap e from th e
^ p _
su rta x e s,
3 .e v e l ,
and,
secon d ,
w ith th e n orm al ta x *
a w o r k a b le
p resen t
s y s te m and i n
oí
th e
The h ig h
ro o t o f th e
su rta x e s
ta x -e x e m p t
in
tr o u b le
d a te
fr o m
s e c u r itie s
r e a s o n a b le
33 p e r c e n t
as
w as r o u g h l y m ade u p b y t h e
fla t
ra te s
as a n o th e r,
th e
lie s
in
w hen
p r o v id e
th e
in you r re p o rt,
s a v in g
in
is s u e d
y ie ld
enough to
p u rch asers
p r o b le m .
now a t t a c h e s
th is
is
th e
ch an ged a l l
as
th e
co sts.
to
ta x
th e
th is
w o u ld
w h ic n t h e
upon th e
or a
ta x p a y er,
lo w s u r t a x t h e
one ta x p a y e r
th a t
it
w h ile
w i ll be
to
if
th e
w h ic h t h e y
on a n i n t e r e s t
The
an e n t ir e ly d i f
g re a te st
in c o m e
S t a te and
in s is t
le v ie d »
and c r e a te d
o f ta x e s
W ith t a x e s
th e s e c u r i t i e s
ta x e s
c o u ld
lo s s
c o n flic tin g
s e c u r itie s
th a t
s m a l l m a g n i
it
w i t h som e f o r c e
G e n e r a lly s p e a k in g ,
o f th e w e a lt h ie s t
o n ly a n orm al t a x
and
e x e m p t i o n fr o m F e d e r a l s u r t a x e s
e x e m p t io n d e p e n d s e n t i r e l y
d i v i d u a l ta x p a y e r»
case
of
T he e x e m p tio n t o
tn e
and u n t i l
w o r t h a b o u t a s m u ch t o
co m p e n sa te f o r
F e d e ra l su rta x e s have
19 17,
th a t
in te r e s t
c o u ld b e s a i d
th e
in c o m e s u r t a x e s »
le v e l ra te s
o r F e d e r a l G o v e r n m e n ts w e re t o
th e m s e lv e s
F ed eral
le v ie d
at
o v e r lo o k s
s e c u r i t y p r o b le m , n a m e ly 3
th e
and b a r r i n g a n y q u e s t io n s
it
s e e m s t o m e,
a p r o b le m o f b u t
e x e m p tio n i s
F ed era l ju r is d ic tio n
h ig h
it
p re se n te d
s ta te d
fe re n t
a
i n my j u d g m e n t ,
th e R even u e A ct o f
g e n e r a lly b e s a id ,
th e
w o u ld ,
tn e ta x -e x e m p t
w ere
of
T h is
to
a m o u n tin g . t o
C o m in itt e e ,
t u d e s i n c e m ost t a x e s
S ta te
su rta x ra te s
t h e l o n g r u n p r o d u c e m o re r e v e n u e t h a n
your
m ost im p o r ta n t f a c t o r
at
th e
ra te s*
The r e p o r t
t im e
red u ce
w i t h a m axim um o f 2 5 p e r c e n t ,
c o m b in e d
th a t
to
im p o r t a n c e
an d th e v a lu e
of
th e
in
g re a te st
in
th e p e r s o n p a y in g
e x e m p tio n w i l l b e r e l a t i v e l y
I
-3°f
little
v a lu e .
T h is m akes i t
fo r
th e
fo r
t h e e x e m p tio n c a r r i e d b y t h e
th in g s
b o r r o w in g S t a t e
th e
s e c u r itie s ,
s o ld
in
sam e p r i c e ,
o b ta in f u l l v a lu e
fo r
in
th o u g h t o
one p u rc h a se r th e
o r n o th in g an d to a n o th e r p u r c h a s e r ,
ta x a b le
d i f f e r e n c e , w h ic h y o u r r e p o r t
s e c u r ity .
A n o th e r fu n d a m e n ta l
c o m p le te ly o v e r lo o k s ,
su rta x e s a re le v ie d
b y t h e F e d e r a l G o v e rn m e n t w h i l e
s e c u r itie s
th e m ost p a r t ,
fo r
c i p a l g o v e rn m e n ts.
is s u e d
is
to
t h e t a x “e x e m p t p r i v i l e g e ,
is
in
b y t h e S t a t e a n d m u n i
fa c t
th e S t a te
so t h a t
th e
t a x " e x e m p t io n f r o m F e d e r a l
an in v o lu n t a r y s u b s id y c o n fe r r e d upon S t a t e and
Your re p o rt,
I n o tic e ,
g ro u n d t h a t w h e th e r t h e S t a t e
it
is
v a lid
a ll
one b o d y o f
a rg u m e n t
in
in te r e s t
o r m u n ic ip a l g o v ern m en t th r o u g h
m u n ic ip a l g o v e rn m e n ts b y t h e F e d e r a l G o vern m en t a t
own r e v e n u e s *
th e
I n o t h e r w o r d s t h e F e d e r a l G o v e rn m e n t g e t s n o
t h a t m ay a c c r u e
su rta x e s
th a t
th e ta x -e x e m p t
c o m p e n s a tin g a d v a n t a g e s w h a t e v e r fro m a n y r e d u c t i o n i n
ra te s
q u o te d
t h e e x e m p tio n m ay b e w o r th t h e e q u i v a l e n t
o f 10 o r 1 1 p e r c e n t on a
are,
th e n a tu re o f
th e open m arket a t
to m arket c o n d it io n s ,
e x e m p t i o n m ay b e w o r t h l i t t l e
who p a y s t h e
im p o s s ib le , a s a p r a c t i c a l m a tte r ,
o r F e d e r a l G o ve rn m e n t to
s e c u r it ie s w i l l be
p r ic e s a d ju s te d
q u ite
a tte m p ts
th e exp en se o f
to m eet t h is
o r F e d e r a l G o v e rn m e n ts a r e
t a x p a y e r s , but; w h i l e
th is
is
its
on th e
in v o lv e d
u n d o u b te d ly a
su p p o rt o f u n ifo r m it y o f tr e a tm e n t a s b e tw e e n th e
S t a t e a n d F e d e r a l G o v e rn m e n ts
s y s te m w h ic h p e r m it s
ta x p a y ers
it
to a v o id
F e d e r a l G o v e rn m e n t b y p u r c h a s i n g
a u t h o r it y o f th e S t a t e s .
can n ot be advan ced in
th e ir
s e c u r itie s
ta x e s
to
su p p ort o f a
th e
is s u e d b y o r u n d er
4
The a rg u m e n t i n y o u r
c a lc u la tio n s
in te r e s t
th a t
fu lly
a ra te
about
s e c u r itie s ,
and a t
th e
Jan u ary,
of
th is
19 2 3 ,
b e fo re
a s s u m p tio n .
m e n t, b u t
s e c u r itie s
th e
That
fu ll
an y s u b s ta n tia l
a n y th in g
th a t
th e
t a x exem p tion
w o u ld h a v e t o
v o lu m e o f
th e re
I h ave a lr e a d y
is
and o n c e t h i s
be b u t
b e tw e e n th e y i e l d s
sta te d
to
little
ta x -e x e m p t
o f ta x -e x e m p t
i n my l e t t e r
su p p o rt
under
th e
G o v e rn m e n t
I do n o t b e l i e v e
1
secu
t h a t on
or •
p er cen t d iffe r e n c e ,
s e c u r itie s ,
in
is
d e stro y e d
w ith b o rro w e rs
and t a x a b le
o f February 9 ,
The v a l u e
l a r g e m ea su re on th e
s c a r c i t y v a lu e
d iffe r e n c e ,
t h e C o m m it te e o n W ays a n d M ean s my g e n e r a l
a.s f o l l o w s t
s e ll
of s e c u r itie s d ep en d s
a v a ila b le ,
bear
p a y m o re t h a n 3 § p e r c e n t ,
ta x a tio n ,
th e re
its
in v o lv e any su ch s t a t e
ta x -e x e m p t and t a x a b le
s a le
w o u ld i n my ju d g m e n t
eq u a l c r e d it,
of
b e tw e e n
s e c u r itie s
fu lly
a ll
q u o t e my testimony i n .
in o rd e r
e x e m p t i o n s fr o m
th e
to
F e d e r a l G o v e r n m e n t,
v o lu m e o f s e c u r i t i e s
lik e - th a t
to
t e s t im o n y d id n o t
th e n p r e v a i li n g ,
w ith o u t
w o u ld h a v e
fo r
C o m m it te e o n W ays a n d M eans i n
a n d p r o b a b l y m o re t h a n 4 p e r c e n t ,
r itie s
a b a s is
1 p e r c e n t h ig h e r th a n
o u ts e t p u rp o rts
s im p ly a d m itte d
c o n d itio n s
r e p o r t assu m es a s
ta x a b le
at
-
192 2 ,
to
v ie w s on t h i s
of
s e c u r itie s ,
th e
C h a irm a n
s u b je c t,
“O"
" B u t t h e c a s e i n f a v o r o f t h e p r o p o s e d a m en d m en t fr o m a
.r e v e n u e s t a n d p o in t i s e v e n s t r o n g e r , b e c a u s e i t 'w o u l d be q u i t e
i m p o s s i b l e f o r t h e G o v e r n m e n t t o f l o a t $ 2 0 ,0 0 0 ,0 0 0 ,0 0 0 o f t a x "
exem pt b o n d s a t a r a t e o f i n t e r e s t t h r e e " fo u r th s p e r c e n t l e s s
• th a n t h a t o f t a x a b l e b o n d s .
T h e r e 'i s o n ly a lim it e d c l a s s o f
p e o p l e i n t h e U n i t e d S t a t e s t o whom t h e e x e m p t i o n f r o m s u r t a x i s
w o r t h a s m uch a s t h r e e - f o u r t h s o f 1 p e r c e n t »
On N o v e m b e r »50,
1 9 2 1 , t h e am ount o f L i b e r t y
ovr’ s o u t s t a n d i n g . w a s $ 1 , 4 1 0 , 0 7 4 , 4 5 0 ,
a n d o f V i c t o r y S f ’- s , $ 4 9 7 , 9 1 5 , 1 0 0 »
T h e s e tw o i s s u e s i n c l u d e th e..-,
g r e a t b u l k o f w h o l l y t a x "exem p t U n it e d S t a t e s o b l i g a t i o n s w h ic h
a r e h e l d b y i n v e s t o r s ( a s d i s t i n g u i s h e d ’ fr o m c i r c u l a t i o n b o n d s ,
h e l d b y n a t i o n a l b a n k s ) » I f i n s t e a d o f l e s s t h a n $ 2 ,0 0 0 ,0 0 0 ,0 0 0
t h e r e w e r e $ 2 0 ,0 0 0 ,0 0 0 ,0 0 0 o f t h e s e b o n d s , t h e v a l u e o f t h e e x
e m p t i o n w o u ld p r o b a b l y b e a l m o s t i m p e r c e p t i b l e i n t h e m a r k e t
q u o ta tio n s .
T h e r e s u l t o f s u c h a n e x t e n s i o n w o u ld b e t h a t t h e
Government w o u ld h a v e t o p a y a l m o s t t h e sam e- a m o u n t i n i n t e r e s t
c h a r g e s a s b e f o r e a n d w o u ld b e ' w h o l l y d e p r i v e d o f t h e s u r t a x e s
w h i c h i t m ig h t o t h e r w i s e c o l l e c t " ♦
The e x p e r ie n c e
of
t h e F e d e r a l G o vern m en t i n
e s p e rh a p s th e b e s t p r a c t i c a l a n sw er to
your re p o rt.
S in c e
ent p o lic y
t h e F e d e r a l G o ve rn m e n t
of
i t s e l f w ith o u t
and g e n e r a lly
a ll
t h e c o n c l u s i o n s e m b o d ie d i n
th e F ir s t L ib e r t y Loan i t
cen t V ic to r y n o te s , a l l
th e se m a tte rs fu r n is h
h a s b e e n th e c o n s i s t
(e x c e p t f o r th e
ox w h i c h ' h a v e n o w b e e n r e t i r e d ) ,
r e ly in g upon th e
s p e a k in g a l l
is s u e
o f fu lly
f r o m F e d e r a l in c o m e
tS^Us o u t s t a n d i n g
is
to
of
per
fin a n c e
t a x -exem p t s e c u r i t i e s ,
o f th e L ib e r ty bonds
( e x c e p t t h e F i r s t G g-^ s),
o u ts ta n d in g V ic t o r y n o te s an d T r e a s u r y n o t e s ,
T reasu ry c e r t ific a t e s
is s u e
T re a s u ry bonds and
o f i n d e b t e d n e s s , h a v e b e e n d e n ie d e x e m p tio n
su rta x e s.
T h e t o t a l am ount o f
th e F i r s t
o n l y a b o u t $ 1 ,5 0 0 ,0 0 0 ,0 0 0 , W h ile t h e p r e - w a r d e b t
o f t h e F e d e r a l G o v e rn m e n t
is
a lm o s t e n t i r e l y
h e ld b y n a tio n a l b a n k s to
secu re c ir c u la tio n ,
in
so
t h e fo r m o f b o n d s
th a t p r a c tic a lly a l l
th e . r e m a in d e r o f t h e F e d e r a l d e b t h a s b e e n f l o a t e d w it h o u t
reco u rse
*6 "
to
t h e e x e m p tio n fr o m F e d e r a l s u r t a x e s w h ic h h a s c r e a t e d
e x e m p t s e c u r i t y p r o b le m .
h a s f u r t h e r sh o w n t h h t
1 p er cen t
le s s
The e x p e r ie n c e
t h e F e d e r a l G o v e rn m e n t
ta x -e x e m p t s e c u r i t i e s
th a n t h a t p a id
tic u la r ly a ttr a c tiv e
of
to
on t a x a b le
at a
ra te
s e c u r itie s
ta x -e x e m p t
s e c u r itie s
1 p er cen t
s e c u r itie s
is
th a n t a x a b le
L ib e r t y Loan w as o ffe r e d
are not p a r
in
tw o s e r i e s ,
c o u ld b e s o ld a t
fa lla c io u s *
one f u l l y
in te r c o n v e r tib le
d u r in g
lo a n w as a b o u t 4 § b i l l i o n
p a sse d beyond
1 b illio n
th e ir
d o lla r s ,
d o lla r s ,
liv e s *
and y e t
b o th
s e r ie s
T h e t o t a l am o u n t o f t h e
th e
ta x -e x e m p t
and had a c t u a lly
$ 3 7 5 ,0 0 0 ,0 0 0 w h e n i t w a s c a l l e d , f o r
The V ic t o r y
ta x -e x e m p t and th e
o t h e r e n t i r e l y w i t h o u t e x e m p t i o n fr o m F e d e r a l s u r t a x e s ,
b e in g
o f in te r e s t
i n v e s t o r s , a n d t h a t y o u r a s s u m p tio n t h a t a n y
s u b s t a n t i a l a m o u n ts o f f u l l y
le s s
th e t a x -
s e r ie s n ever
d w i n d le d t o a b o u t
r e d e m p tio n l a s t
year.
The com -
p a r a tiv e
y ie ld s
in g f u l l
t a x e x e m p t io n s , a n d F e d e r a l s e c u r i t i e s w it h o u t t h e e x e m p tio n s
fr o m
su rta x e s,
o f h ig h - g r a d e S t a t e a n d m u n ic ip a l s e c u r i t i e s ,
a ls o
in d ic a te
th e u n d e r ly in g
fa lla c y
carry
in y o u r fig u r e s *
T h e T r e a s u r y b o n d s o f 1 9 4 7 ~52 o f f e r e d b y t h e F e d e r a l G o v e rn m e n t l a s t
O c to b e r a r e ,
q u o te d i n
c ip a l
g e n e r a lly
th e m arket to
s e c u r itie s
ta x e s a re
s p e a k in g ,
y ie ld
about
o f th e h ig h e s t
q u o te d to y i e l d
a s can be th a t
w ith
ta x -e x e m p t
th e
s e c u r itie s
p e r c e n t , w h ile S t a t e and
g ra d e s h a v in g f u l l
o f not
and even h ig h e r ,
o w in g t o
to F e d e r a l s u r t a x e s , an d a r e
about 4 p er cen t
S t a t e a n d m u n ic ip a l o b li g a t i o n s
y ie ld 4§ p er c e n t,
s u b je c t
su ch good c r e d it a r e
T h is a l l
of
e x e m p t io n s fr o m
th e
su r
to 4 * 15 p e r c e n t, and o th e r
g ra d u a l d ilu tio n
th e v a lu e
m u n i
q u o te d to
in d ic a te s a s c o n c lu s iv e ly
of
th e s e c u r it y m arket
t a x e x e m p tio n to
th e
- 7 borrowing State or Federal Government is gradually dwindling, while
the ta.x-exar.ption still retains its value to the wealthy taxpayer.
I can p erh ap s
e n c lo s in g fo r
19-^c,
in fo r m a tio n
w n iw h I s e n t
a n d M e a n s..
pc^ er
to
b y th e
S ta te s,
a re th a t
th e
now l e v i e s
on th e h ig h e r
m u n ic ip a litie s
tie s ,
th e
ta x e s,
s titu tio n a l
in
c o u ld
o rd er
o:
w ith f u l l
its e lf
to p r o t e c t
ta x
v o lu m e o f t a x - e x e m p t
s e c u r itie s ,
cann ot
De e f f e c t i v e
tic a lly
u n lim ite d
a b le
to
d e fe a t
sto p
t h e c o n tin u e d
G o v e rn m e n t m u st
q u a n titie s
th e m ,
and
is s u a n c e
fin d
years,
to a
e ith e r
r e la tiv e ly
and th e p e r s is t e n c e
th e
is s u in g
th is
s id e
its
su r
su ch se
en d a n g er th e r e v e n u e s ,
by s id e
in c o m e t a x e s
w i t h th em p r a c
som e w a y m u st b e fo u n d
fo r
th e
v a lu e
w o u ld m e r e l y s w e l l . t h e
ta x -e x e m p t s e c u r i t i e s
y ie ld
Con
own s e c u r i
th e a r t i f i c i a l
o f ta x -e x e m p t s e c u r i t i e s
fo r
and
r e v e n u e s . ' The F e d e r a l
fu rth e r
fu lly
som e s u b s t i t u t e
im m e d ia t e a n d s e r i o u s ,
been red u ced
but
e x is t
of
th a t
fr o m
g ra d u a te d a d d itio n a l
when t h e r e
S ta te s
th e se v e ry
and by is s u in g
is s u e s and s t i l l
I t m u st b e c l e a r t h a t
th e
ta x -e x e m p t s e c u r i t i e s ,
r e fr a in e d
e x e m p t i o n s c a n c e l m uch o f
S t a t e an a m u n ic ip a l
and
th o u g h u n d e r o u r p r e s e n t
is s u e f u l l y
p o lic y ,
in c o m e s ,
ta x -e x e m p t s e c u r i
e x e m p t fr o m
th e p u b lic
th is
o f th e
co m m o n ly know n a s
t h e sam e t im e
w h o lly
c o n s is te n tly
G o v e rn m e n t m ig h t c h a n g e
tie s
At
t h e F e d e r a l G o v e r n m e n t,
it
C o m m itte e o n Ways
on i n d i v i d u a l
i s s u i n g a g r o w i n g v o lu m e o f
sy s te m
by
o f D e ce m b e r 3 1
th e C o n s t i t u t i o n
in c o m e t a x e s ,
in c o m e s .
som e y^c^rs p a & t
c u r itie s
to
in c o m e t a x e s
in c o m e fr o m w h i c h i s
w h ile
has f o .
are
th e
p o s itio n
F e d e r a l G o v e r n m e n t, u n d e r t h e
1 6 t h am end m ent
im p o s in g g r a d u a t e d a d d i t i o n a l
su rta x e s,
is
a copy o f a le t t e r
t h e A c t i n g C h a ir m a n o f
The f a c t s
g ra n te d
U n ite d
is
your
b e s t s u m m a r is e t h e T r e a s u r y ' s
to
o r th e F e d e r a l
su rta x e s.
o f th e
a v a il
The i s s u e
s u r ta x e s has a lr e a d y
s m a ll su n a s co m p ared w it h th e e a r l y
o f th e p r e s e n t
sy s te m
is
d is to r tin g
our
8
w h o le e co n o m ic, s t r u c t u r e a n d h a m p e r i n g t h e d e v e l o p m e n t o f b u s i n e s s
and in d u s t r y th ro u g h o u t
th e c o u n try *
A C o n s t i t u t i o n a l am en d m en t a l o n g t h e l i n e s p r o p o s e d i n t h e
p e n d in g r e s o l u t i o n
w o u ld c o r r e c t
th e
a n d F e d e r a l G o v e r n m e n ts o n a n e x a c t
a C o n s t i t u t i o n a l am endm ent i s . s a f e
th e
C h a m b er o f C o m m erce o f t h e
p o s itio n
ad verse
to.its
s itu a tio n
e q u a lity »
and
I b e lie v e
and p r a c t ic a b le
S ta te
w o u ld p u t
and
th a t
S ta te
su ch
I hope th a t
o f New Y o r k w i l l n o t t a k e a
a d o p t io n »
V ery t r u ly y o u rs,
A,
W, MELLON,
S e c r e t a r y o f th e T reasu ry#
C l a r e n c e H, K e l s e y , E s q t ,
P r e s id e n t , T i t l e G u a ra n te e and T r u s t
17 6 B road w ay,
New Y o r k , N*Y#
Co*,
December 2 1 , 19 2 2 .
Dear Mr. G reen :
I r e c e iv e d your l e t t e r
o f December 2 0 , 19 2 2 , w it h r e s p e c t to
H. J . R e s . 3 1 4 , p r o p o s in g an amendment t o t h e C o n s t i t u t io n o f th e
U n ite d S t a t e s t o r e s t r i c t f u r t h e r
n o te y o u r sta te m e n t t h a t
fic a tio n of th is
out i n S e c t i o n 1 ,
’» d e riv e d from s e c u r i t i e s
a r tic le ,
and
an amendment has b een p rop osed b y Mr. G arn er,
o f T e x a s , w h ich w ould s t r i k e
th e f o l l o w i n g w ords:
is s u e s o f ta x -e x e m p t s e c u r i t i e s ,
a f t e r th e word "incom e” ,
is s u e d ,
a f t e r th e r a t i
b y o r u n d er t h e a u t h o r i t y o f t h e U n ite d
S t a t e s or any o th e r S t a t e ” , and in S e c t io n 2 , a f t e r th e word ” incom e” ,
th e words » d e r iv e d from s e c u r i t i e s
th is a r tic le ,
is s u e d , a f t e r
b y or under t h e a u t h o r i t y o f
th e r a t i f i c a t i o n
such S t a t e ” .
words th u s s t r i c k e n out t h e Garner amendment w o u ld ,
s titu te
th a t
F or th e
I u n d e r s ta n d ,
t h e words »from any s o u r c e ” in b o th S e c t i o n s .
of
sub
I n o te f u r t h e r
i n su p p ort o f h i s p ro p o sed amendment Mr. G arner has s t a t e d t h a t
under th e r e s o l u t i o n a s r e p o r te d b y th e Com m ittee on Ways and Means
th e U n ite d S t a t e s m ight d i s c r im i n a t e a g a i n s t th e bonds o f a S t a t e and
i n f a v o r o f t h e bonds o f a r a i l r o a d o r i n d u s t r i a l c o r p o r a t io n , and t h a t
h i s amendment i s p ro p o sed i n o rd e r t o p r e v e n t
t o be a b le t o w r i t e y o u , f i r s t ,
such a r e s u l t .
I am g l a d
t h a t i n th e judgment o f t h e T re a su ry
th e r e s o l u t i o n i n th e form r e p o r te d b y th e Committee w ould n o t o f
i t s e l f preven t
p ro p o sed b y Mr.
d is c r im in a t io n
of t h i s c h a r a c te r ,
Garner i s u n n e c e s s a r y , an d ,
amendment p ro p o sed b y Mr.
so th a t
th e amendment
se c o n d , t h a t t o
adopt th e
Garner w ould p r o b a b ly n u l l i f y b o th S e c t io n s
and make th e whole C o n s t i t u t i o n a l amendment i n e f f e c t i v e .
-
W hatever o p p o s it io n
s tr ic t
fu r th e r is s u e s o f
2
-
th e r e i s
to t h e p rop osed amendment t o
ta x -e x e m p t s e c u r i t i e s
m is u n d e r sta n d in g o f th e o b j e c t
and e f f e c t
r e s ts ,
I t h i n k , upon a
o f th e amendment, and t h i s ,
m t u r n , h a rk s b a c k to t h e o l d c o n t r o v e r s ie s about S ta te s «
th e pow ers o f th e f e d e r a l Governm ent.
th a t,
re
r i g h t s and
I can sa y w ith o u t h e s i t a t i o n
s e p a r a te d from t h e s e o l d p r e j u d i c e s and ta k e n from th e p o in t
v ie w o f t h e f a c t s a s we h ave t o f a c e them t o - d a y ,
of
th e p rop osed C o n s ti
t u t i o n a l amendment i n v o l v e s no q u e s tio n w h a tev e r o f S ta te s^
r i g h t s and
makes no a t t a c k w h a tev e r on th e c r e d i t o r b o rro w in g power o f t h e S t a t e s
or t h e i r p o l i t i c a l
lu te e q u a lity
s u b d iv i s i o n s .
The amendment w ould a p p ly w it h abso
to th e f e d e r a l Governm ent, on th e one hand, and th e
S t a t e s and t h e i r p o l i t i c a l
s u b d iv is io n s on t h e o t h e r , and i n . t h e
e s t s o f th e g e n e r a l w e l f a r e w ould p u t
in te r
e x a c t l y th e same r e s t r i c t i o n s
upon f u t u r e b o rro w in g s b y th e f e d e r a l Government a s upon f u t u r e borrow
in g s b y th e S t a t e s and t h e i r p o l i t i c a l
s u b d iv i s i o n s .
The c o n s t a n t l y
gro w in g mass o f ta x -e x e m p t s e c u r i t i e s t h r e a t e n s th e p u b l i c r e v e n u e s , n o t
o n ly o f th e f e d e r a l Governm ent, b u t o f th e S t a t e s a s w e l l ,
and i t
is
r e a c h in g su ch p r o p o r tio n s a s to underm ine th e developm ent o f b u s in e s s
and in d u s t r y .
The f e d e r a l Governm ent, f o r th e most p a r t , has r e fu s e d t o have
reco u rse to
ta x -e x e m p t
volume o f ta x -e x e m p t
d iv is io n s ,
su e d , i s
th e
is s u e s in fin a n c in g i t s
s e c u r itie s
o f th e S t a t e s and t h e i r p o l i t i c a l
and o f o th e r a g e n c i e s ,
so l a r g e
th a t
own o p e r a t i o n s , b u t th e
a lr e a d y o u ts ta n d in g and c u r r e n t l y i s
th e v a l u e o f th e exem p tion to th e b o rrow er i s s u i n g
s e c u r i t i e s h as become r e l a t i v e l y i n s i g n i f i c a n t .
and t h e i r p o l i t i c a l
sub
Even now th e S t a t e s
s u b d i v i s i o n s , n o tw ith s ta n d in g th e f u l l t a x exem p tion s
- 3 on th e ir s e c u r i t i e s , are o b lig ed to pay s u b s ta n tia lly the same r a te s
on th e ir tax-exempt borrowings as the Federal Government pays on se
c u r it ie s without exemption from Federal income su rta x es.
The f a c t s
are th at under our system o f graduated Federal income su rtaxes the.
is s u e of tax-exempt s e c u r i t i e s , w hile o f c o n sta n tly dim inishing ad
vantage to th e borrowing S ta te or c i t y , p rovid es a p e r fe c t refuge fo r
w ealthy in v e s to r s , b ein g most v a lu a b le to th e w e a lth ie st taxpayer.
a c tu a r ia l fig u r e s show that
t o
The
taxpapers paying su rtaxes in the high
e s t b rackets s e c u r it ie s su b ject to Federal income su rta x es would have
to y ie ld about 10 .4 per cen t in order to be as a tt r a c tiv e as a 5 per
cent tax-exempt s e c u r ity .
For t h i s g reat advantage the S ta te which i s
sues the s e c u r it ie s g e ts but very l i t t l e compensating retu rn ,
cer
t a in ly no g r ea ter return from th e w e a lth ie s t in v e sto r than from the
sm allest in v e sto r (to whom the exemption i s r e la t iv e ly w o r th le s s),
w hile the U nited S t a te s , which imposes th e su r ta x e s, lo s e s i t s revenue
w ithout any compensating advantage whatever.
It i s the graduated sur
ta x , or co u r se , th at g iv e s the g r e a te s t valu e to the ta x exemption,
and viewed from t h is aspect th e ta x exem ption, in su b stan ce, c o n s titu te s
a subsidy from the Federal Government, the co st o f which in the long
run must f a l l on th ose taxpapers who do not or cannot take refuge in
tax-exem pt s e c u r it ie s .
Even from the p o in t o f view o f th e S ta te s
th em selv es, I b e lie v e i t i s c le a r th at th e continued issu a n ce o f ta x exempt s e c u r it ie s saves nothing to the ta x -p a y ers in the S ta te s and
that in th e long run i t b rin g s h ea v ier ta x e s .
The tax-exempt p r iv ile g e ,
w ith the f a c i l i t y th at i t g iv e s to borrowing, lea d s in many c a se s to un
n ecessary or w a stefu l p u b lic exp en d itu re, and t h is in turn i s b ringing
-
4 -
about a menacing in c r ea se in the debts o f S ta te s and c i t i e s .
These
debts c o n s titu te a c o n sta n tly growing charge upon the taxpayers in the
sev era l S t a t e s , and w i l l u ltim a te ly have to be p a id , p r in c ip a l said in
t e r e s t , through ta x l e v i e s upon th ese very taxpayers.
I t i s easy to
overlook t h is when th e debts are in cu rred , but i t i s none th e l e s s im
p o s s ib le to escape the f a c t s when the time comes fo r payment.
It i s
a lso n ecessary to bear in mind th a t in th e long run a l l o f th ese p u b lic
d e b ts, whether th e debts o f S ta te s and th e ir p o l i t i c a l su b d iv isio n s or
o f th e Federal Government i t s e l f , as w e ll as the ta x e s which must be
imposed to meet them, f a l l upon but one body o f ta x p a y ers, and th at the
apparent advantage o f borrowing by S ta te s and c i t i e s a t th e expense of
the Federal revenues i s illu s o r y , sin c e any temporary advantages thus
obtained w i l l have to be p aid fo r by the Federal Government at the ex
pense u ltim a te ly o f th e great body o f taxp ayers.
T h is /p a r tic u la r ly
true o f tax-exempt s e c u r it ie s , fo r th e ir e f f e c t i s to provide a refuge
from ta x a tio n fo r c e r ta in c la s s e s of ta x p a y ers, w ith correspondingly
higher ta x e s on a l l the r e s t in order to make up the r e s u lt in g d e fic ie n c y
in th e revenue.
Once i t i s understood I th in k no one can r a ise any v a lid objec
t io n to th e proposed C o n stitu tio n a l amendment r e s t r ic t in g fu rth er is s u e s
o f tax—exesipt s e c u r it ie s .
As a m atter of f a c t , i t i s almost grotesque
to permit the p resent anomalous s itu a t io n to con tin u e, fo r as th in g s now
stand we have on the one hand a system o f h ig h ly graduated Federal in
come su rtaxes and on th e other a c o n sta n tly growing volume o f s e c u r it ie s
issu ed by S ta te s and c i t i e s which are f u l l y exempt from th ese su rta x es,
so th at taxpayers have only to buy tax-exempt s e c u r it ie s to make the
- 5 su rtaxes in e f f e c t iv e .
The o n ly way to co rrect t h is c o n d itio n i s hy
C o n stitu tio n a l amendment, accompanied., i f p o s s ib le , by a red uction in
th e r a te s .
To take up the Garner amendment more s p e c i f i c a l l y , I b e lie v e
th at the changes i t would make are very c le a r ly unnecessary.
The reso
lu t io n reported by th e Conmittee on Ways and Means ex p r essly provides
in S ection 1 th a t F ederal ta x e s on income derived from s e c u r it ie s , i s
sued a ft e r th e r a t if ic a t io n o f th e a r t i c l e , by or under th e a u th o rity
o f any S ta te , must be w ithout d isc rim in a tio n a g a in st income derived
from such s e c u r it ie s and in favor o f income
VxC' X* v ó cL i x OIL LOG iXJCjl b X G 3
LL3*
sued a fte r th e r a t i f i c a t i o n o f th e a r t i c l e by or under the a u th o rity of
the U nited S ta te s or any oth er S ta te .
The same p r o te c tio n fo r the Fed
e ra l Government i s accorded by th e second S e c tio n , co n ferrin g power on
the S ta te s to la y and c o l l e c t ta x e s on income derived from s e c u r it ie s
issu e d a ft e r the r a t i f i c a t i o n o f the a r t i c l e by or under th e a u th o rity
o f the U nited S ta te s .
Under S e c tio n 1 as i t stands i t would be im
p o s s ib le fo r the Federal Government to inpose an income ta x on income
from fu tu re is s u e s of S ta te or m unicipal bonds without imposing the
same ta x on income d erived from fu tu re is s u e s o f i t s own bonds, and as a
p r a c tic a l m atter i t i s almost in co n ceiv a b le th at Congress would be
w illin g to impose such a ta x upon th e income from both S ta te and Federal
s e c u r it ie s and at th e same time exempt from the ta x income derived from
s e c u r it ie s issu ed by p r iv a te corp o ra tio n s.
Such a course would be re
pugnant to every C o n stitu tio n a l p r in c ip le .
E n tir e ly apart from the
p r a c tic a l im p o s s ib ility o f such a s it u a t io n , however, I think i t c le a r
that th e amendment in i t s presen t form would p r o h ib it d iscrim in a tio n
-
û 4
a g a in st th e "bonds of a S ta te and in favor o f a r a ilr o a d or in d u s tr ia l
corp oration.
A ll corp oration s in t h i s country are organized under
e ith e r S ta te or Federal law and derive t h e ir powers, in clu d in g the
power to borrow money, from ch a rters issu ed by the S ta te or Federal
Governments, as th e case may be.
S e c u r itie s issu ed by p r iv a te corpo
r a tio n s , th erefore,m ay be sa id to be issu e d ,?under th e a u th o rity of»'
th e U nited S t a te s , in th e case o f a Federal corp oration , or the S ta te
o f in co rp o ra tio n , in th e case o f a S tate corp oration.
S e c tio n 1 o f
th e C o n stitu tio n a l amendment as rep orted by the Committee e x p r e ssly pro
h i b i t s d iscrim in a tio n in favor of s e c u r it ie s issu ed a ft e r r a t if ic a t io n
o f th e a r t i c l e under the a u th o r ity o f th e U nited S ta te s or any other
S ta te .
This in terms would prevent d iscrim in a tio n in favor o f any
bonds issu ed by a r a ilr o a d or in d u s tr ia l corp oration incorporated under
th e laws o f th e U nited S ta te s or o f any other State,, and lik e w is e ,_ i t
seems to me, by a corp oration organized under the laws o f the S ta te con
cerned, fo r i t would be C o n s titu tio n a lly im p ossib le fo r the Federal
Government to s in g le out corp oration s o f one S ta te in th e grantin g of
ta x exem ptions.
I f th ere were any danger h ere, however, i t could
r e a d ily be corrected by s tr ik in g out in the l a s t lin e o f S ectio n 1 the
word »»other»», and I suggest th a t t h i s be done to remove any question
in the m atter.
The Garner amendment i s not only un necessary, — i t would, de
fe a t the e n tir e C o n stitu tio n a l amendment and make i t p r a c t ic a lly inw
p o s s ib le fo r e ith e r th e S ta te s or the Federal Government to proceed e f
f e c t iv e ly under i t .
The Garner amendment by i t s terms fo r b id s d is
crim in ation by e ith e r the Federal Government or the S ta te s , in favor o f
~ 7 -
uincome derived from any source11.
This apparently covers a l l sources
o f income, in c lu d in g , fo r example, income from s e c u r it ie s already i s
sued and o u tsta n d in g , and income from s a la r ie s o f S ta te and Federal
o f f ic e r s .
Even a ft e r the adoption o f th e proposed C o n stitu tio n a l
amendment, n e ith e r th e U nited S ta te s nor any S ta te would have power
to ta x s e c u r it ie s o f th e other alread y is su e d and ou tsta n d in g , and
under g e n e r a lly accepted C o n stitu tio n a l p r in c ip le s , which have been
affirm ed hy the Supreme C ourt, the Federal Government cannot le v y in
come ta x e s upon the s a la r ie s o f S ta te or m unicipal o f f i c e r s , nor can
th e S ta te s le v y income ta x e s upon th e s a la r ie s o f Federal o f f ic e r s .
To fo r b id d isc rim in a tio n in fa v o r o f th ese non—t axab1e sources o f in
come would, i n - e f f e c t , make the C o n stitu tio n a l amendment in o p e r a tiv e .
There are a lso oth er g e n e r a lly recognized d is t in c t io n s , a s , fo r ex
ample, between earned and unearned income, and m iscella n eo u s s p e c ia l
exemptions which i t might be im p ossib le to make under the form o f
wording proposed.
These d i f f i c u l t i e s would embarrass the S tate
Governments, in proceeding under the C on stitu tion al, amendment, quite
as much as th ey would the F ederal Government, and would make i t im
p o s s ib le for the S ta te s to le v y any income ta x upon fu tu re is s u e s o f
Federal s e c u r it ie s w ithout at th e same time imposing an income ta x
on a l l outstan din g is s u e s o f th e ir own s e c u r it ie s , and, in f a c t , a
general income tax upon a l l sources o f income subject to S ta te taxa
tio n .
Even i f i t could be C o n stitu tio n a lly done, to le v y income ta x e s
upon s e c u r it ie s alread y is su e d as tax-exempt would c o n s titu te a gross
breach o f f a i t h , w h ile to req u ire a gen eral and uniform income ta x ,
w ith e x a c tly the same ta x a tio n o f income from s e c u r it ie s a s of a l l
- 8other sources o f income, would in v o lv e almost insuperable p r a c tic a l
d i f f i c u l t i e s and probably prove im p o ssib le.
I b e lie v e , th e r e fo r e , th at th e Garner amendment would accom
p li s h nothing but to d efea t what i s probably th e most n ecessary reform
in our system of ta x a tio n , and I hope th a t in the lig h t o f th ese com
ments as to the e f f e c t o f th e C o n stitu tio n a l amendment a s reported by
th e Committee and the changes proposed, the Garner amendment w ill
e ith e r be withdrawn or r e je c te d .
The C o n stitu tio n a l amendment as re
ported p u ts th e fe d e r a l Government and the S ta te s on" a b s o lu te ly the
same b a sis,a n d th e very fa c t th a t the Federal Government i s ready and
w illin g , fo r th e sake o f th e general w e lfa r e , to p lace i t s e l f under
th ese r e s t r ic t io n s as to fu tu r e is s u e s o f tax-exempt s e c u r it ie s , not
w ith stan din g i t s own heavy debt and the p r a c tic a l c e r ta in ty th at i t
w i l l always have o b lig a tio n s: outstanding and to be fin a n c ed , g iv e s the
b est p o s s ib le assurance th a t the S ta te s and t h e ir p o l i t i c a l subd ivi
sio n s can p la c e them selves under lik e r e s t r ic t io n s without endanger
ing th e ir c r e d it or em barrassing th e ir n ecessa ry borrowings.
Very tr u ly yours,
(Signed)
A. W. MELLON
Secretary o f the Treasury.
Hon. W illiam R. Green,
A cting Chairman, Committee on Ways and Means,
House ©f R e p r esen ta tiv e s,
Washington,, D. C.
Vincome re tu rn e d f o r
income c l a s s .
$1,000
to $ 2,000
$1,000
$2,000
$2,000
to $ 2,000
.............
to $ 3,000 2 .............
Number o f
r e tu r n s .
Net
income
E xem ption s from norm al ta x
P e rso n a l
In te re st
exem p tion s
D iv id e n d s
on G overn
ment o b l i
g a tio n s . 1
761.995 $ 1 , 2 0 1 , 296 ,2 6 1 $1,561,053,719
1»909,955 2 , 31+3 , 770 ,357 1,920,895,165
930,659 2,129,193,720 2,346,669,224
t o $ 3,000
............. 1 , 632,657 4,055,349,64s
2,390,213,91+1+
$3,0.00 to $4,00 0 2 ............ \
37,56!+
125,593,720
93,504,684
$3,000 to $ 4 ,000 ............. 356.995 2,941,487,294 1,753,21+1,903
$4,0C0 to $ 5,000 2 .............
11, 1+16
50,581,107
£0,703,781
$4,ooo t o $5,000 ............... 1+31,11+1 1,921,940,118
839,737.327
$5,000 to $5,0 0 0 . . * » . * . * 177,11+7
361,206,31+2
969.5C4.603
$ 6,000 to $ 7,000
112,1+1+1+
726,361,550
£23,585.811
$7,000 to $ 8,000 .............
74,511
557,103,372
149,965,534
$8,000 t o $ 9,000 ..............
51,211
434,462,407
101,737,772
$9,000 to $ 10,000 ..............
1+0,129
380,893,531
79,624,590
$ 10,000 to $ 11,0 0 0 .............
29,931+
314,400,337
58,790,816
$11,000 t o $ 12,0 0 0 ..............
24,370
230,196,629
47,971,393
$12,000 t o $ 13,0 0 0 .............
19,333
21+2 , 527,549
37,797,463
$13,000 to $ 1 4 , 0 0 0 * . * ___
16,039
217,085,265
31,379,422
$14,000 to $ 15,0 0 0 ........... ..
13,739
1 9 9 , 123,0 79
26,489,941
$15,000 to $20,000 ..............
44,531
765,354,264
85,699,368
$20,000 to $25,000 ..............
£3,729
529 , 2 12 ,66 3
45,050,205
$25,000 to $30,000 ..............
14,471
395,307,952
27,164,221
$30,000 t o $140,000..............
15,303 • 543,792,249
£9,308,578
$4o,ooo t o $ 50,000 ..............
3,269
368,184,912
15,117,152
$50,000 to $ 60,000 ..............
4,735
261,433,828
8,613,544
$60,000 to $ 70 , 000. . . . , * .
3,006
194,506,539
5,410,897
$70,000 to $80,000..............
1,969
147,021+, 770
3,536,853
$go,000 to $ 90 , 000* . * . . . .
1,356
114,813,467
£.385,283
$90,000 to $ 100,000 ...........
977
1,755.639
92 , 602,729
1.
I n t e r e s t on Government o b l i g a t i o n s not v.h o l l y
th e c a le n d a r y e a r ended Dec*
exempt from t a x .
$3S,SS9,3S1
15,31S»566
52,757,292
3S,S02,446
50,217,921
57,239,135
39,154,600
72, 935,503
25,6^2,089
25,334,736
76,163,995
71,694,936
66,061,095
61,234,473
57,665,639
54,459,354
51,288,059
47,995,870
204,945,101
169,984,02*+
133,778,337
201,836,226
152,860,997
116,74o,720
90,936,869
70,146,319
55,581,429
44,380,282
31, 1920*)
Normal
S u r ta x
T o ta l Tax
A v erage
A v era g e
ra te o f
amount o f ta x ta x p er
p er iu tiv id u a l
c e n t.
$118,145 $36,859,732..... ................
$36,859,732.
$19,30.
I .29
153,115 45,507,821 ....................
45,507,821
27.77
1.12
280,956 45,166,537
45,166,537
52.70
565,453
4,780,958
3,542,047
3,168,739
£.052,173
2,646,518
1,761,879
2,721,163
2,036,482
2,079,973
1.307,255
6,566,926
3,780,318
£,942,660
4,201,978
3,075,861
£.057,036
1,705,928
1,067,066
1,020,858
569,887
N o n ta x a b le .
38,329,579
22,031,171
18,534,425
16,617,190
14,347,134
13,695,156
11,874,098
11,087,241
91847,146
9,011,825
38,329,579
$692,383 ! 22,723,554
2,023,158 20,557.583
2,886,839 19,504,029
3,274,111 17,621,245
3,784,466 17,479,622
3,872,596 15,746,694
4,119,372 15,206,613
4,168,823 14,015,969
4,244,561 13,256,386
8 , 447,705
12,824,442
4,376,737
33,495,37« 2 2 , 0 1 3 ,1 0 1
55,508,479
23,828,602 2 1 , 3 7 2 ,13 6 45,700,738
17,894,313 21,310,372 39,204,685
24,282,793 38 , 9 11,8 6 5 63,194,658
16,224,352 35,641,581 51,865,933
11,315,900 31,875,512 43,191,412
8,277,842 28,589,460 36,867,302
6,340,791 25,269,838 31,610,679
4,843,015 2 2 , 607,109 27,450,124
4,017,531 \ 20,580,671 ! 24,598,202
P e r so n a l exem ption^
.impds e x ce e d
n®t
88.90
128. 28
182,83
261.76
344.09
435*59
525U7
623*99
722.92
823.94
953*43
1,246*51
1.925*95
2, 709*19
3,997*64
6,272.33
9,026*42
12,264*57
1 6 , 054 , 1 s
20 , 243.45
2 5 , 1 7 7 . 28
income.
û/â
\
1*99
2.34
2.83
3*5o
4.06
4*59
5*01
5*43
5*78
6.11
6*44/
7*£5
,8*64
9*90
¿1.62
14.09
16.52
lg.95
21*50
23.91
26* 56
r
TABLE 2 .
$ 100,000 to $ 150 ,0 0 0 .................... •
$ 15 0 ,0 0 0 t o $200,000....................
$200,000 to $ 250,000 ....................
$ 250,000 to $ 300,000 ....................
$300,000 to $’4 00,000....................
$400,000 to $ 500,000 ....................
$ 500,000 to $ 750,000 ....................
$ 750,000 to $ 1,0 0 0 ,0 0 0 ...............
$1,0 0 0 ,0 0 0 to $ 1 , 500,000 ...........
$ 1 , 500,000 to $ 2 ,0 0 0 ,0 0 0 * » .. . .
$2,0 0 0 ,0 0 0 to $.3,000,000...........
$3,000*000 to $ 4 ,0 0 0 ,0 0 0 ...........
$4 000,000 to $ 5 , 0 0 0 , 0 0 0 . . . . . .
$5,0 0 0 ,0 0 0 and o v e r ......................
-
PERSONAL RETURNS - DISTRIBUTION,
„
¡¿,191«
590
307
166
I 69
70
98
25
19
3
4
¿ 65 , 5 1 1 , 505 10 0 ,9 6 6 ,28 0
6s , 507 , l i a
1+5 , 865,252
5 s . 252.657
3 1 , 060,895
5 3 ,8 9 0 ,8 1 8
2 1 , 072,076
2 1 ,9 8 8 ,6 4 2
5 , 087,594
10 , 863,868
BY INCOME CLASSES, FOR THE UNITED STATES;
3 , 724 , 543 .
966,808
5 1 4 ,8 7 4
279,200
2 6 5 ,10 0
1 0 7 ,9 7 5
13 6,4 0 0
38,600
16,900
3
.9 ,2 1 8 ,0 5 3
3,2 0 0
5,000
3,2 0 0
4
2 9 , 9 19 ,9 7 7
6,600
1 4 3 , 1 5 8 ,7 7 4 .
5 5 ,6 1 9 ,1 2 3
4 6 ,8 2 8 ,1 9 5
2 7 ,2 8 2 ,3 5 1
3 9 ,150 ,9 118
2 2 ,0 9 9 ,9 9 b
4 4 , 3 4 7,14 9
1 1 , 954,254
1 4 , 797,95 6
7 ,9 8 9 ,2 2 0
6 , 50s, 744
3 7 ,0 2 1 ,6 2 8
8 , 336,392
T o t a l . ................ * 7 ,2 5 9 ,9 4 4 2 3 ,7 3 5 ,6 2 9 ,1 8 3 12, 8 3 4 ,6 8 4 ,5 2 9 £ ,7 3 5 ,3 4 5 ,7 9 5
(cont*;dt)
2 , 8 2 1 , 861 . 1 0 ,9 5 0 , 766 * 7 5 , 636 , 92 s 1
3 ,9 2 3 ,0 4 6
3 6 , 13 7 ,7 2 4
2 9 2 ,3 15
6 8 7 ,7 2 5
3 7 5 ,4 0 7
496,264
334,297
927,325
2 ,4 4 9 , 725
1 ,8 8 8 ,7 1 6
2 ,1 4 7 ,7 2 4
2 7 ,9 3 0 ,1 8 0
20 , 275,032
2 7 ,8 7 5 ,2 9 8
3 0 ,3 79 ,9 0 5
¿ 2 ,1 6 3 ,7 4 8
30 , 023,022
1 ,3 1 1 ,3 0 3
1 ,4 9 7 ,0 7 4
1 5 , 70 9,136 .
3 1 , 267,938 1
17 ,0 2 0 ,4 3 9
32 , 765,012
1 2 ,0 7 3 ,8 7 8
1 3 , 030 , 05 b
3 ,0 4 6 ,3 5 0
6 , 732 ,2 13
5, 792,268
1 2 ,8 7 5 ,9 9 3
1 3 , 753,350
3 , 0 55,576
7 , 152 ,4 2 6
6 , 037,349
...............
72 ,9 6 9
14 4 ,8 5 3
5 8 ,68 8
802,115
723,294
9 4 ,12 3
420,213
1 7 2 ,0 7 1
2 4 5 ,0 8 1
9 ,2 2 6
.
20 8 ,18 0
86,+587,694 *
40, q 6 0 ,770
4,359
1 9 ,1 8 ^ ,0 2 1
Ì
32 . 6l
39*68
9 8 ,9 5 7 *3 5
1 3 3 ,5 1 6 * 5 5
1 7 7 , 651.0 2
243 , 1 4 9 .13
334 , 336.86
4 4 .4 7
5 1 5 , 039.72
723 , 860.53
1 , 0 18 , 525.33
1 . 7 S 8, 106.50
2 , 0 12 , 449.67
61*10
48.32
51*54
5 4 .8 0
5 5 *6 4
62*53
60.06
65* 84
¿5*49
............. ..
1 9 .1 8 6 .5 8 4 4 ,7 9 6 ,5 9 6 .0 0
6 4 .1 3
148*08
4 .5 3
6 1 , 549,572 478 , 249,919 596 , 803,767 1 ,0 7 5 ,0 5 3 ,6 8 6
i
3 9 ,5 1 9 - 7 1 6 7 .S 9 9 -6 1
ESTIMATED SÜRTA■ X, DUE ON INCOMES FROM. GOVEINMENT
OBLIGATIONS NOT ïïH■OILY EXEMPT FROM TAX - 1 9 2 0 RETURNS,
I n t e r e s t on
Government
o b lig a tio n s
n o t w h o lly
exempt from
ta x
Income C la s s
$5,00 0 t o
fi
6,000
w
8 ,0 0 0
tt
10,000
n
12,0 0 0
ii
14,0 0 0
it
20,000
K
30,000
ir
40,000
ft
50,000
rt
60,000
n
70,000
n
80,000
it
90,000
it
100,000
n
150,000
tr
200,000
»
300,000
ti
500,000
Over
TOTAL
$0,000
6,0 0 0
10,000
12 ,0 0 0
14 ,0 0 0
20,000
30,000
40,000
50,000
60,000
70,000
60,000
o n
n f)Q
100," 000
150 ,0 0 0
200,000
3.00,000
500,000
1,0 0 0 ,0 0 0
1,0 0 0 ,0 0 0
$ 4 ,7 8 0 ,9 5 6
5 ,7 1 0 ,7 8 6
4 ,6 9 6 ,5 9 1
4 ,4 3 3 ,0 4 2
4 ,1 1 6 ,4 5 5
7 ,6 7 4 ,1 6 1
6 ,7 2 2 ,9 7 8
4 ,2 0 1 ,9 7 6
3 ,0 7 5 ,8 6 1
2 ,0 5 7 ,0 3 6
1 ,7 0 5 ,9 2 8
1 ,0 6 7 ,0 6 6
1,0 2 0 ,8 5 8
5 6 9 ,6 8 7
2 ,8 2 1 , 8 6 1
8 9 2 ,3 1 5
1 ,0 6 3 , 1 9 2
8 3 0 ,5 6 1
1 ,0 6 0 ,3 5 4
6 7 7 .9 1 5
$ 6 0 ,4 3 1 ,9 0 3
R a te o f
s u r ta x
-1.
2
3
4
5
7
11
16
21
26
31
36
41
46
52
56
60
63
64
65
p er cent
Amount o f
S-urtax
$
47,.8 09,58
1 5 4 ,2 1 5 .7 2
1 4 0 .9 6 0 .7 5
17 9 ,6 2 1,6 .8
205 ,.8 22,75
5 5 1 ,1 9 2 . 6 7
7 6 9 ,5 2 7 .5 8
6 7 2 ,6 1 6 .4 6
6 4 5 ,9 6 0 .6 1
5 5 4 .6 2 9 .5 6
528,.8 57.68
3 8 4 .1 4 5 .7 6
ï *7 p .
rrn i
O
I wk/i.
« *2
/ „Q
2 6 2 ,1 4 8 ,0 2
1 ,4 6 7 ,3 6 7 .7 2
4 9 9 ,6 9 6 .4 0
6 3 7 ,9 1 5 .2 0
5 2 3 ,2 5 3 .4 3
6 7 6 .6 2 6 .5 6
___44 0 ,6 4 4 .7 5
$ 9 ,6 9 6 ,1 1 2 ,6 6
Y /h olly Tax'•Exempt Income r e p o r te d b y I n d iv i d u a l s h a v in g Hot Income o f
$5,00 0 and o v e r
ñ e c a le n d a r y e a r 19 2 0 .
Income C l a s s e s .
:
:
H H Di tO
5 , '-JuO GO .
o , 000
6,000 tt
7,000
7,000 n
.8,000
.8,000 tr
9 , COO
9,000 it
10,0 00
i.a“J. 9avA/w
AA
10,0 00 ii
J
t!
1 1,0 0 0
12 ,0 0 0
12 ,0 0 0 If
15 ,0 0 0
13 ,0 0 0 ft
14 ,0 0 0
14 ,0 0 0 JT
15 ,0 0 0
15 ,0 0 0 Tf
20,000
20,000 ff
25,0 0 0
25,000 Tf
30,000 11
30,000 TT
40,000
40,000 !T
50,000
50,000 ft
60,000
60,000 ff
70,000
70,000 It
.80,000
j80,000 tf
90,000
90,000 IT
100,000
100,000 n
150 ,0 0 0
150,00 0 ft
200,000
200,000 ff
250,000
250,000 tf
300,000
300,000 tf
400,000
400,000 ft
500,000
500,000 t!
750,000
750,000 tf
1,0 0 0 ,0 0 0
,000,000 tf
1,5 0 0 ,0 0 0
500,000 «
3,000,000
000,000 « '3 ,0 0 0 ,0 0 0
000,000 "
4 ,0 0 0 ,0 0 0
000,000 ft
5.000.000
000’ 000 and o v e r
T o t a l , . . ............. ..
:
S t a t e s and
T e r r ito r ie s .
I n t e r e s t and
S a la r ie s *
U n ite d S t a t e s
o b lig a tio n s .
In te r e s t.
.OOo ^o *^V
.881,404
6 9 5 ,6 5 7
539 ,0 4 2
569,990
4 3 3 ,7 7 1
4 1 1 ,0 0 7
3 9 3 ,2 6 3
3 5 7 ,3 1 7
3 1 7 ,1 6 4
1 ,6 2 8 ,6 9 7
1 ,2 0 0 ,3 2 5
1 ,0 0 1 ,6 0 4
1 ,7 0 7 ,6 8 1
1,6 5 .8 ,7 9 2
1 ,3 0 5 ,3 0 6
1 , 1 3 o ,10 6
1 ,0 2 4 ,2 3 7
7 9 7 ,5 2 6
1 ,0 1 6 ,5 3 4
3 ,6 4 3 ,7 5 9
2 ,6 7 1 ,9 6 9
1 ,7 0 3 ,2 5 0
1 ,0 3 2 ,4 6 7
1 ,2 1 4 ,5 2 6
1 ,0 0 6 ,1 1 4
1 ,7 0 5 ,5 1 S
1 ,3 4 6 ,0 1 6
.863,360
35.8,536
2.82,497
1 ,1 6 0 ,3 9 2
$ 3 ,2 6 0 ,0 7 2
3 ,5 7 9 ,0 1 2
2 ,7 5 1 ,9 1 4
2,36.8,929
2 ,0 2 5 ,2 4 6
**
-f p cro
-*•} ( vi. p
1 ,5 5 .8 ,1 0 1
1,456,60 .8
1 ,1 1 4 ,6 9 0
1 ,0 6 6 ,7 6 2
4,.80.8,573
3,2.84,.812
3,00.8,205
4 ,5 5 6 ,7 5 9
3 ,2 7 .8 ,2 1 1
2,454,.8Q5
2 ,1 7 4 ,1 9 7
1 ,9 4 6 ,2 3 5
1 ,4 2 4 ,9 0 0
1 ,5 0 0 ,2 4 1
4 ,6 3 9 ,3 2 3
2 ,5 4 5 ,7 2 3
1 ,5 4 0 ,6 3 6
1 ,0 7 7 ,0 1 2
1 , 3 4 1 , Inti
1 ,2 7 1 ,4 1 4
1,69.8,0.87
1 ,5 3 7 ,7 5 2
6 2 7 ,0 9 5
19 5 ,8 3 0
3.8,216
4 3 2 ,0 1 8
2 ,7 3 1 ,6 3 6
3 7 ,5 5 9 ,4 6 0
T o ta l.
$
1 ,6 3 9 ,5 2 9
:
5 7 ,9 2 5 ,7 1 2
4 ,0 6 6 ,4 6 9
4 ,4 6 0 ,4 1 6
3 ,4 4 7 ,5 7 1
2 ,9 0 7 ,9 7 1
2 ,5 9 5 ,2 3 6
««i.*/o ji
1,9 69 ,10 .8
1 ,2 4 9 ,2 7 1
1 ,4 7 2 ,0 0 7
1 ,4 0 3 ,9 2 6
6 ,4 3 7 ,2 7 0
4 ,4 .8 5 ,73 7
4 ,0 10 ,4 0 9
6 ,2 6 4 ,4 4 0
4 ,9 3 7 ,0 0 3
3 ,7 6 0 ,1 1 1
3 ,3 0 7 ,3 0 3
2 ,9 7 1 ,0 7 2
2 ,2 3 2 ,4 2 6
2 ,5 1 7 ,3 7 5
.8 ,2 33,0 22
5 ,2 1 7 ,6 9 2
ó p¿ó^xó,.3d6
2 ,1 0 9 ,4 7 9
2 ,5 5 5 ,6 6 7
2 ,2 77 ,5 2 .8
3 ,4 0 3 ,6 0 5
2 ,7 .8 3 ,7 74
1 ,4 9 0 ,4 5 5
5 5 4 ,3 6 6
3 2 0 ,7 1 3
1 ,5 9 2 ,4 1 0
4 ,3 7 1 ,1 6 5
:
10 5 ,4 .8 5 ,17 2
February
19,
19 2 3 *
% d.Sci,r ^ongressmkui iVicFaddenl
I re c e iv e d your l e t t e r
my o p i n i o n o n t h e b i l l
(S.
4287),
th e a g r i c u l t u r a l and l i v e s t o c k
and i s
« to p r o v i d e
in d u strie s
am end t h e F e d e r a l F a r m L o a n A c t ;
and f o r o t h e r p u r p o s e s ” ,
o f F e b r u a r y 1? ,.
to
of
c r e d it
see w hether
p rin c ip le s
its
and w h eth er
th e b i l l
a d m in is tra tiv e
fa c ilitie s
fo r
to
F ed era l R eserve A ct;
ap p roved by th e
now u n d e r c o n s i d e r a t i o n b y y o u r C o m m itte e ,
t i c u l a r l y concern ed to
re q u e stin g
th e U n ite d S t a t e s ;
am end t h e
w h ic h was r e c e n t l y
1923,
S e n ate
X have b e e n p a r
conform s to
fea tu res
sound b a n k in g
a r e w o rk a b le #
I h a v e h a d p r e p a r e d a n d s e n d y o u h e r e w i t h a d e t a i l e d memo
ran d u m a n a l y s i n g
th e
b ill
fro m t h e s e p o i n t s
a l s o u p o n some o t h e r f e a t u r e s
memorandum p o i n t s
out
grave
o f d ra ftsm a n s h ip ,
but
in
It
s e e m s t o me. t h a t
th is
its
I re a lize
v d it
th at
its
it
th at
w ill
am ounts
s im ila r
th e
to
to
o u tlin e s
to
and p o l i c i e s
in the
th e c o n c lu s io n
T h is
o n ly in m atters
th at
a r e unsound and d a n g ero u s,
som e s u p p o r t h a s b e e n
a s s is t
a v o id th e
th e
fa rm e rs
g iv e n
as
w e ll,
lig h t
its
cf
fin a n
and th a t
to th e b i l l
o f th e co u n try in
th e needs o f a g r ic u lt u r e ,
d is a stro u s
one th ro u g h w h ich t h i s
With t h i s o b je c t
im p o rtan t#
not
an d co m m e n tin g
a r e u n w o rk a b le ,
a c c o u m so d a tio n ,a d ap te d t o
su ffic ie n t
be
s t u d y o f th e m easure
n e c e ssa rily
fea tu res
view ,
in th e b i l l ,
la rg e r
a s no w d r a w n ,
a d m in istra tiv e
th e b e l i e f
d efects
a ca re fu l
memorandum l e a d s
c ia l p ro v isio n s,
w h i c h se em t o
of
e ffe ct
in
o b ta in in g
and in
of a c r e d it
strin g e n cy
co u n try has r e c e n tly p assed .
I am in th e h e a r t i e s t a c c o r d ,
I f e & l t h a t th e stu d e n ts
o f our b a n k in g s t r u c t u r e have g iv e n to o much a t t e n t i o n in th e p a s t
to
th e com m ercial and i n d u s t r i a l n eed s
a t t e n t i o n to
th e v i t a l problem o f f i t t i n g
the n eed s o f a g r i c u l t u r e .
w i l l enure to
o f th e c o u n tr y ,
I am c o n v in c e d ,
and n o t
enough
our b a n k in g s t r u c t u r e t o
how ever,
th e farm er from a system w hich i s
th a t no b e n e f i t s
f i n a n c i a l l y unsound.
The farm er has s u f f e r e d enough in th e p a s t from u n s a fe b a n k in g system s*
Let us n ot now add t o
th is
so u rce o f danger t o
th e s a n c t io n o f th e U n ite d S t a t e s
ev^ ry canon o f sound b an kin g t o
th e farm er by g i v i n g
Government t o a system w h ich v i o l a t e s
w h ich t h i s
Government has b een com m itted
s in c e th e e s ta b lis h m e n t o f th e n a t i o n a l b a n k in g sy ste m .
Some su p p o rt has a l s o b een g iv e n upon t h e assum p tion t h a t
t h i s b i l l was in d o r s e d b y th e J o in t
w hich co n d u cted an e la b o r a te
v a lu a b le
i n v e s t i g a t i o n and has p u b lis h e d a
r e p o r t upon a g r i c u l t u r a l c o n d it io n s .
m isap p reh en sio n ,
fo r
th e b i l l
from th e b i l l w h ich th e J o in t
e s p e c ia lly c r i t i c iz e d
in th e
Commission o f A g r i c u l t u r a l I n q u ir y ,
in i t s
th e re fo re ,
Com m ission in d o r s e d .
are n o t a p p l i c a b l e
Many o f th e f e a t u r e s
to t h e b i l l a s i t
law a t
in
its
o r i g i n a l form,
p a s s e d th e S e n a te ,
s e r v ic e c o u ld be re n d ered to
th e p r e s e n t
s e s s io n th e Capper b i l l
and w ith h o ld in g a c t i o n upon th e L en ro o t b i l l u n t i l
s i t u a t i o n can be more th o r o u g h ly i n v e s t i g a t e d .
endorsement o f th e
a
b u t were added in su bseq u en
The in dorsem en ts g iv e n t o th e b i l l
a g r i c u l t u r e b y e n a c t in g in to
4 230 ),
is
in th e accom pan yin g memorandum were n o t c o n ta in e d
In my o p in io n th e g r e a t e s t
(S,
however,
p r e s e n t form d i f f e r s r a d i c a l l y
D i l l in d o r s e d b y th e J o in t Commission,
r e v is io h s .
T h is ,
li v e s t o c k in d u s tr y ,
th e
The Capper b i l l has th e
and o f th e
g r e a t c o o p e r a t iv e
-3-
marketing movement*
I t w ill go fa r , in my op in ion , in s a t is f y in g the
needs o f tnose s e c tio n s of the country
past from inadequate c r e d it f a c i l i t i e s *
which have su ffe r ed in the
At the same time i t i s
f in a n c ia lly sound, arid in i t s a d m in istra tiv e fe a tu r e s avoids the
e x c e ssiv e c e n tr a liz a t io n which, in my opinion, c o n s titu te s a ser io u s
d efect in the Lenroot b i l l .
The Capper b i l l c a r r ie s w ith i t important
amendments to the Federal Reserve Act.
It a ls o in clu d es a p r o v isio n
extending for nin e months the time during which the War Finance Corporation
can make loans fo r a g r ic u ltu r a l purposes, thus b rin g in g
assurance that
any unforeseen c r e d it needs w ill be amply taken care o f during the
coming crop season*
U n til the r e s u lt s of fu rth er in v e s tig a tio n and
experience are a v a ila b le , i t seems to me th at t h is i s a complete and
adequate program o f a g r ic u ltu r a l c r e d its le g is la t io n .
There are c e r ta in fe a tu re s o f the Lenroot b i l l which have great
merit and should, in my opinion, be incorporated in the Capper b i l l by
your Committee.
The farm c r e d its departments contemplated in the
Lenroot b i l l are, fo r in sta n ce, authorized to make, loans d ir e c t to
coop erative m arketing a s s o c ia tio n s upon warehouse r e c e ip t s e c u r ity ,
It seems to me th at sim ila r powers could w ell be given to the rediscount
corp orations contem plated in the Capper b i l l .
The Lenroot b i l l a ls o
renders e lig ib le for rediscount w ith Federal R eserve Banks the paper o f
fa c to r s based upon a g r ic u ltu r a l products in th e ir raw s ta te .
It seems
to me th at t h is p r o v isio n i s sound, and I recommend i t s in s e r tio n in the
Capper b i l l ,
I
should a lso su ggest in clu d in g in the Capper b i l l the
s e c tio n of the Lenroot b i l l which rep ea ls the amendment to th e Federal
Reserve Act a u th o rizin g p ro g ressiv e rediscount r a te s .
I f I may sum up b r ie f ly the reason why, in my o p in ion , the
-4Capper b i l l i s p r e f e r a b l e
b i l l a tte m p ts t o
a g r ic u ltu r e ,
n e c e s s a r ily th is
is
th is !
w i l l be a se c o n d a r y and,
sy ste m .
th e a g r i c u l t u r a l i n t e r e s t s
th e b e n e f i t , upon sound l i n e s ,
It
The L en root
F e d e r a l R eserve System ,
seems t o me,
in a l l p r o b a b i l i t y ,
on th e o th e r hand,
can p r o p e r ly demand t h a t t h e y be g iv e n
o f th e b e s t and most ad equ ate r e d is c o u n t
system w hich th e c o u n tr y can f u r n i s h ,
Capper b i l l .
it
c r e a t e a s e p a r a te and indepen dent r e d is c o u n t syste m f o r
an in a d e q u a te r e d is c o u n t
th a t
t o th e L en root b i l l ,
and t h a t ,
i n my o p in io n ,
is
th e
l i b e r a l i z e d and e x te n d e d a s prop osed in th e
The Capper b i l l aim s a t
s t r e n g t h e n in g and d e v e lo p in g th e
e x i s t i n g b an k in g s t r u c t u r e and t h e F e d e r a l R e s e r v e System , and r e n d e r in g
them more u s e f u l and more s u i t e d t o th e needs o f a g r i c u l t u r e .
V ery t r u l y y o u r s ,
(S ign ed )
A,
W* MELLON
S e c r e ta r y o f th e T re a su ry *
Hon,
L,
T, McFadden,
Chairman, Committee on Banking and C urren cy,
House o f R e p r e s e n t a t iv e s ,
W ashington, D* C.
1 e n c lo su r e *
F e b r u a r y 19 ,
MEMOBANHJM ON S,
S e c t io n s
g
4287,
1 t o 6 o f t h e L en ro o t-A n d erso n b i l l
i z a t i o n and o p e r a tio n o f farm c r e d i t s
Banks th ro u gh ou t
th e U n ite d S t a t e s .
o f t h e Capper-M cFadden b i l l .
s e c tio n s
It
S e c t io n s
is
7 to
d ep artm en ts,
13 ,
in c lu s iv e ,
th o s e em bodied i n P a rt 3
t h e p u rp ose of t h i s memorandum t o d i s
ap p ears t o
fo r c e r ta in ty p e s
p r o v id e s
c o n ta in
to t h e o r g a n i-
d ep artm en ts,
The purpose o f t h e s e s e c t i o n s
The b i l l
4387 ) p r o v id e f o r th e
o f th e L e n ro o t-A n d erso n b i l l w h ich r e l a t e
z a t io n o f farm c r e d i t s
d is c o u n t f a c i l i t y
(S.
d ep artm en ts in th e F e d e r a l Land
amendments t o t h e F e d e r a l He s e r v e A c t s im ila r t o
f
1933*
in e f f e c t f o r
be t o
of a g r ic u ltu r a l
of
and l i v e
s t o c k paper,
t w e lv e a g r i c u l t u r a l r e d is c o u n t b an kin g
one in e a ch o f t h e e x i s t i n g F e d e r a l
partm ent would have a c a p i t a l
e s t a b l i s h a s e p a r a te
$5,00 0,000
Land Banks.
Each su ch d e
( t o w h ich an a d d i t i o n a l
$10 ,000,0 00 m ight b e added w it h t h e a p p r o v a l of t h e P r e s id e n t )
to
be s u b s c r ib e d and p a id in b y t h e U n ite d S t a t e s
g a te c a p i t a l
of a ll
th e Farm C r e d it s
Government.
The a g g r e
D epartm ents m ight t h e r e f o r e r e a c h
$120,000,000*
To a c o n s id e r a b le e x t e n t ,
p erfo rm f u n c t io n s
Banks.
th e p rop osed new r e d is c o u n t sy s te m would
w hicn a r e a l r e a d y b e in g p erform ed b y th e F e d e r a l R eserve
F e d e r a l R e s e r v e Banks a r e now a u t h o r iz e d t o r e d is c o u n t f o r member
banks a g r i c u l t u r a l paper w it h a m a t u r it y up to
p e n d in g l e g i s l a t i o n
of
Under o th er
t h i s maximum m a t u r it y w i l l be exten d ed to n in e months,
Under th e L en ro o t-A n d erso n
p a rtm en ts
s i x months.
F ederal
B ill,
Land
however,
Banks
t h e farm c r e d i t s
c o u ld
d is c o u n t,
de
NJ
-2-
fo r n a tio n a l banks,
erated
s t a t e banks,
k in d s o f c r e d i t
not le s s
tru st
in stitu tio n s,
co m p an ies,
th ree
- y e a r s . - As f a r a s
a g r i c u l t u r a l p a p e r h a v in g a m a t u r it y fro m s i x
D e s e r v e S ystem ,
t h e tw o
system s
banks
w o u ld ,
I h e m ain p u r p o s e o f t h e b i l l ,
re d isco u n t
system fo r
does n o t
carry
th e
to
» d iic h a r e
th ere fo re,
how ever,
S ystem ,
e ith e r
endorsem ent
because
of
o f a member b a n k .
b a sis
tru st
th e
manner t h a t
fr o m a l l
w h i c h w o u ld be
Farm l o a n
ta x a tio n ,
Bonds a r e
S ta te
so ld
in
now s o l d .
or F e d e ra l,
by t h e a g r i c u l t u r a l p a p e r d is c o u n t e d
enum
concern s
in c lu siv e ,
m em bers o f t h e
F ederal
be o v e r l a p p i n g ,
appears to
s u c h l o n g e r t e r m p a p e r s h a l l b e m ade t h e
d eb en tu res,
n i n e m on ths,
a g r i c u l t u r a l p a p e r w h ich i s
in th e F e d e r a l R e s e r v e
o th er
a g r i c u lt u r a l p a p er w ith a m a tu r ity o f
t h a n s i x m on ths n o r m ore t h a n
o ffe r e d by n a tio n a l banks o r s t a t e
and c e r t a in
be to
e sta b lish a
not e lig ib le
maturity,
its
It
fo r
is
th e
fo r
re d isc o u n t
or because i t
co n te m p la te d th a t
iss u a n c e
in v e stm e n t m arket
of c o lla te ra l
in
th e
sam e
T h e s e d e b e n t u r e s w o u ld b e exem pt
in clu d in g
su rtaxes,
a n d w o u ld b e
o r p u rch a se d b y th e farm c r e d i t s
secured
de-
p artm ent»
The c a p i t a l
u p p lie d b y th e
of
th e
U n ited
S ta te s
be o p e r a t e d b y d i r e c t o r s
e,
th e
fa rm c r e d i t s
d ep artm en ts
G overnm ent,
a p p o in te d b y th e
system c o n te m p la te s a p o l i c y
of
w o u ld b e c o m p l e t e l y
and t h e s e
d e p a r t m e n t s w o u ld
G overnm ent*
G overnm ent
In e f f e c t ,
th ere-
•
o w n e rsh ip a n d o p e r a t io n
of
an a g r i c u l t u r a l b a n k in g sy s te m ,
th rou gh th e medium o f s u b s id ia r y c o r p o r a tio n s
owned and o p e r a te d b y t h e U n ite d S t a t e s ,
th a t th e U n ite d S t a t e s
s h a l l be l e g a l l y
ob li^ atiO ixS Ox farm c r e d i t s
str o n g on e, f o r
it
It
does n ot ap p ear to b e c o n tem p la ted
l i a b l e upon th e d e b e n tu r e s o r o th e r
departm ents#
Y e t th e m oral o b l i g a t i o n w ould be a
i s h a r d ly c o n c e iv a b le t h a t th e U n ite d S t a t e s ' Government
co u ld p e r m it a c o r p o r a te s u b s id ia r y owned and o p e r a te d b y i t
its ju s t
d e o ts .
I n e s t im a t in g tile l i a b i l i t y
assume i n e n a c t in g th e b i l l ,
to doan[L*t/ uipoil
w hich th e Government w ould
we must t h e r e f o r e c o n s id e r n o t o n ly th e t e c h n i c a l
l i a b i l i t y w n ich under th e o i l l m igh t r e a c h $ 12 0 ,0 0 0 ,0 0 0 , bu t a l s o
moral l i a b i l i t y ,
th e p o t e n t i a l
w h ich m i,h t be in any amount up to $ 1,2 0 0 ,0 0 0 ,0 0 0 .
B e fo r e la U n c h in j th e U n ite d S t a t e s Government i n a b u s in e s s v e n tu r e w hich
in v o lv e s an in vestm en t o f $120 ,0 0 0 ,0 0 0 i n c a s h and a p o s s i b l e m oral o b l i g a t i o n
o f v l , 200,000,000,
tn e p ro p o sed p la n sh o u ld be s t u d ie d n o t o n ly w it h a v ie w
to a s c e r t a i n i n g w h eth er i t
guards s u i x i c i e n t to
it
is
e ffe c tiv e
is
drawn upon sound l i n e s ,
in su r e i t s
fin a n c ia l in t e g r it y ,
and w it h p r o p e r s a f e
but a ls o
i n a c c o m p lis h in g th e p u rp o se s w h ich i t s
to
see w h eth er
a u th o r s h a ve in
mind.
1*
The System i s F i n a n c i a l l y Unsound,
The farm c r e d i t s
d ep artm en ts o r g a n iz e d under th e A c t a r e e x p e c te d to
o p era te p r i n c i p a l l y upon box-rowed c a p i t a l .
It
i s p r o v id e d t h a t t h e y may
is s u e c o l l a t e r a l t r u s t d e b e n tu res up to t e n tim es
c a p i t a l and s u r p lu s .
th e amount o f ijh e ir p a id in
These d e b e n tu r e s w ould be se c u r e d b y a t
le a s t a lik e
fa c e amount o f a g r i c u l t u r a l p a p e r b e a r in g th e endorsem ent o f the d is c o u n t in g
bank or o th e r
in s titu tio n .
The f i n a n c i a l i n t e g r i t y o f th e system w ould depend,
t h e r e f o r e , upon th ro e f a c t o r s :
( l)
th e f in a n c ic .l s t r e n g t h o f th e farm c r e d i t s
departm ents p r i m a r i l y and s e c o n d a r ily l i a b l e
upon th e d e b e n t u r e s ; '( 2 )
f i n a n c i a l s t r e n g t h o f th e bank o r o t h e r r e d is c o u n t in g i n s t i t u t i o n ;
(a)
th e
th e
nature and v a lu e
o f th e p rim ary p a p er p le d g e d as c o l l a t e r a l »
c r e d it s departm ent s *
U n ite d S t a t e s Government i s
e x p e c te d to
t e c t h o ld e r s o f d e b e n tu res*
The c a p i t a l
stan d a s a g u a r a n ty fund to pro
In e s t im a t i n g th e v a lu e o f
t a in e le m e n ts ox w eakn ess must be co n sid ered »
th a t any p a r t o f t h i s
c a p i t a l b e m a in ta in e d
r e s e r v e be m a in ta in ed *
A ll
l i q u i d a g r i c u l t u r a l paper*
There
ox
There i s
no l i m i t
to
in pap er b e a r in g
agency«
C o n s id e r in g
may b e a s h ig h a s
the v a lu e
the
in non-
the amount o f p a p er
in r e l a t i o n
so f a r as l e g a l
to
the c a p i
l i m i t a t i o n s a r e con
endorsem ent o f one bank ox’ o th e r d is c o u n t in g
t h a t th e l i a b i l i t i e s
o f th e farm c r e d i t s d ep artm en ts
ten tim e s th e c a p i t a l ana s u r p lu s ,
it
is
a p p a re n t t h a t
ox the g u a ra n ty of th e farm c r e d i t s departm ent w ould depend to
la r g e e x te n t upon th e
a s s e t s are
It
or t h a t a cash
th e w hole c a p i t a l or e v e n more th a n the w hole c a p i t a l c o u ld be
in v e s te d
a very
is no reau irem en t
th e c a p i t a l m ig h t be i n v e s t e d
the faxm c r e d i t s d ep artm en tj
cerned,
t h i s g u a r a n ty c e r -
in l i q u i d form ,
which may be ta k e n from any one d is c o u n t in g agen cy
ta l
s u p p lie d by the
va lu e of th e a g r i c u l t u r a l paper in w h ich i t s
in v e s te d *
is tr u e t h a t the d e b e n tu r e s o f each faxm c r e d i t s dep artm en t would
De p r o t e c te d by a pro r a t a g u a r a n ty o f a l l o th e r
The v a lu e
o f t h i s g u a r a n ty ,
not a j o i n t g u a r a n ty .
prove i n s u f f i c i e n t
If
farm c r e d i t s dep artm ents*
how ever,
ap p ea rs to be o v e r e s tim a te d *
th e a s s e t s
o f a farm c r e d i t s departm ent
to pay a l l
its
o u ts ta n d in g d e b e n tu r e s ,
It
is
should
th e d e f i c i e n c y
may be a s s e s s e d a g a i n s t o th e r “ s o lv e n t farm c r e d i t s d e p a r tm e n ts ,” but o n ly
in p r o p o r tio n to
o u tsta n d in g a t
the amount o f deb e n tu r e s w h ich ea ch such departm ent h a s
th e tim e ox th e a ssessm en t*
has is s u e d no d e b e n tu res,
A farm c r e d i t s departm ent w h ich
b u t has o p e r a te d s o l e l y upon i t s
c a p ita l,
a lth o u g h
- 5-
to a. h ig h d egree s o l v e n t , w ould assume no l i a b i l i t y
any o th e r d ep artm en t.
department upon i t s
On th e o th e r hand,
own d e b e n tu r e s ,
guarantor o f o th e r d e b e n tu r e s ,
th e l a r g e r
m oreover i t
is
o b v io u s th a t
of a fa m
I t s p le d g e d a s s e t s would go p r i m a r i l y t o
.itfnicn tn e y s e c u r e .
If,
th e re fo re ,
the l i a b i l i t y
the l a r g e r would be i t s
be en fo rced o n ly a g a i n s t th e u n p led ged a s s e t s
ment.
f o r th e d e b e n tu res o f
a fa m
s a tis fy
o f any
lia b ility
as
the g u a ra n ty c o u ld
c r e d its d e p a rt
th e d eb en tu res
c r e d i t s departm ent had is s u e d
its f u l l l i m i t o f te n d o l l a r s o f d eb en tu res f o r Bach d o l l a r o f c a p i t a l and
surplus, and mad p le d g e d ,
account or
(a s would no doubt g e n e r a l l y be r e q u ir e d on
th is ve ry l i a b i l i t y )
a g r i c u l t u r a l p a p e r o f a f a c e v a lu e
cent in e x c e s s o f th e f a c e amount o f i t s
assets a g a in s t w hich i t s
d e b e n tu r e s ,
it
g u a r a n ty c o u ld be e n fo r c e d .
department becomes more e x te n d e d , and as i t s
would have no u n p led ged
I n g e n e r a l,
u n p led ged a s s e t s
a u to m a tic a lly assume a l a r g e r sh are o f l i a b i l i t y
te n p e r
a s a farm c r e d i t s
d im ish ,
as g u a r a n to r .
It
it
would
does n o t seem
that much r e li a n c e can be p la c e d upon such a g u a r a n ty .
2*
Tne d is c o u n t in g x n s t i t u t i o n .
Ithat u n le s s th e p a p er in w hich th e a s s e t s
are in v e s te d
is
-.fin a n c ia lly sound,
little
i.t
the d is c o u n t in g
the v a lu e o f t h i s
in s t it u t io n ^ ,ancb the
th e r e fo r e ,
o f th e fa u n c r e d i t s departm ents
r e li a n c e can be p la c e d upon the
p l i a b i l i t y or g u a ra n ty o f th e s e d e p a rtm e n ts.
R
i s a p p a r e n t,
The p a p e r w i l l b e a r th eein d orsem en t
next- s t e p i n our a n a l y s i s
is
to determ ine
indorsem ent#
In th e o r i g i n a l L e n r o o t “A n derson b i l l , w h ich had th e a p p r o v a l o f th e
Joint Commission o f A g r i c u l t u r a l I n q u ir y ,
national or s t a t e bank o r a t r u s t company,
l iv e s t o c k lo a n company.
credit c o r p o r a t io n s ,
coop erative c r e d i t
In th e b i l l
th e d is c o u n t in g i n s t i t u t i o n c o u ld be a
s a v in g s
i n s t i t u t i o n or in c o r p o r a te d
as i t p a s s e d th e S e n a te
th e re a r e added r u r a l
in c o r p o r a te d farm c r e d i t com pan ies, c o o p e r a t iv e b a n k s, and
or m ark e tin g a s s o c i a t i o n s .
The a d d it io n s a r e im p o r ta n t.
—6—
!
N a t io n a l b a n k s,
and t o a l a r g e
s t i t u t i o n s and t r u s t com pan ies,
j
or n a t i o n a l law ,
I
in e r s .
and t o p e r i o d i c
are
d egree,
s t a t e b a n k s,
s u b je c t to
s a v in g s in
l i m i t a t i o n s under s t a t e
i n s p e c t io n s b y s t a t e o r n a t i o n a l exam-
Th „y a r e r e q u ir e d t o keep a minimum c a s h r e s e r v e ;
ments a r e f r e q u e n t l y li m i t e d ;
p a rt o f s t o c k h o ld e r s ;
th e re
is
th e ir
in v e s t
u s u a l l y d o u b le l i a b i l i t y on th e
and an y te n d e n c y toward unsound p r a c t i c e s c a n be
q u ic k ly ch ecked by s t a t e o r n a t i o n a l b an k in g a u t h o r i t i e s .
In c o r p o r a te d
l i v e s t o c k lo a n com panies a r e g e n e r a l l y form ed on a s u b s t a n t i a l s c a l e ,
y Swcurwd p a p e r .
f C0“ U
In th e o r i g i n a l b i l l ,
h a ïê b8en P l a ° 3d ° n th e V e r s e m e n t o f
th e re fo re ,
and
some r e li a n c e
th e d is c o u n t in g i n s t i t u t i o n .
No such s a fe g u a r d s surround t h e o p e r a tio n s o f t h e i n s t i t u t i o n s
i added b y th e r e v i s e d L e n r o o t-to d e r s o n b i l l .
in c o r p o r a te d farm c r e d i t
com panies,
R ural c r e d it
c o o p e r a t iv e ban ks o r c o o p e r a t iv e c r e d i t
or m a rk e tin g a s s o c i a t i o n s a r e enum erated, but n o t d e fin e d ,
is
im p o s s ib le
c o r p o r a t io n s ,
t o a s c e r t a i n under what
lim ita tio n s th e y w ill
o p e r a te .
There i s
s p e c tio n ,
s t a t e o r n a t i o n a l . There i s no requ irem en t t h a t t h e y m a in ta in
a c a sh r e s e r v e ,
li m i t a t i o n
no re q u irem en t t h a t
in th e new b i l l ,
th e y h e s u b j e c t t o p e r i o d i c
o r m a in ta in t h e i r c a p i t a l in l i q u i d
on th e amount which s u c h an i n s t i t u t i o n
a l i m i t a t i o n e s s e n t i a l t o sound b a n k in g .
i t a l be p a id i n
m
cash .
T h ere i s
may len d t o
no
one borrower-
no requirem ent t h a t cap
In th e c a s e o f c o o p e r a t iv e c r e d i t a s s o c i a t i o n s
(o, vague and und e f i n ^
~a term ;
c a p ita l a t a l l .
There i s
fo rm .
in
th e r e
is
no req u irem en t t h a t t h e r e b e any
-7 A s amended in the S e n a te ,
o t paper
th e amount
upon e x a m in a tio n i t
tiv e .
th e b i l l c o n t a in s c e r t a i n l i m i t a t i o n s on
w h ich may be d is c o u n t e d f o r any one
a p p e a r s t h a t t h e s e l i m i t a t i o n s c o u ld h a r d ly be e f f e c
No p a p er may be d is c o u n t e d f o r any a g r i c u l t u r a l c r e d i t c o r p o r a t io n ,
in c o r p o r a te d l i v e s t o c k
lo a n company,
r e d is c o u n te d p a p er eq u a l to
su rp lu s o f su ch com pany,"
or farm c r e d i t
company,
"w hich h a s
o r e x c e e d in g t e n tim e s th e p a id -u p c a p i t a l and
I t w i l l be o b s e r v e d ,
t io n r e f e r s o n ly to r e d is c o u n te d p a p e r .
its
in s titu tio n ,
how ever,
t h a t th e l i m i t a
A company may b e in d e b te d upon
own p ro m isso ry n o te s or bonds or o th e r prim ary o b l i g a t i o n s
c e iv a b le amount,
and y e t
i t would not be d e b a r r e d from d is c o u n t in g pap er
w ith th e farm c r e d i t s d ep artm en t.
M oreover,
th e re
to p r e v e n t a company from in c u r r in g l i a b i l i t i e s
sound f in a n c e m igh t d i c t a t e a f t e r
farm c r e d i t s d ep artm en t.
in any con
i s n o th in g
in th e
b ill
in any amount w hich un
i t h a s d is c o u n te d
its
l i m i t w ith
the
A company w it h $10 ,0 0 0 c a p i t a l c o u ld d is c o u n t
$100,000 o f p a p e r w it h a farm c r e d i t s d ep artm en t, and th e n e x t day borrow
$100,000 more from some o t h e r source*
As fa r
as " c o o p e r a t iv e c r e d i t
a s s o c ia t i o n s " a r e con cern ed ,
th e r e
is
no l i m i t w h a te v e r upon the amount w h ich th e y may d is c o u n t .
E ven i f
th e
they w ould be f a r
l i m i t s w h ich th e b i l l a tte m p ts to p la c e were e f f e c t i v e ,
to o h i g h to a f f o r d ad e q u a te p r o te c tio n »
ing the b e s t q u a l i t y o f r e a l
e s t a t e m o rtg a g e s,
sto c k or com m od ities w i t h a s a f e m argin,
ten tim e s
its
c a p ita l*
The d is c o u n tin g
c e lla n e o u s a g r i c u l t u r a l b u s in e s s ,
or upon q u e s tio n a b le s e c u r i t y
m ortgages on land *
too h igh *
A company t a k
or p a p er se cu re d by l i v e
can p r o p e r ly
a g e n c ie s may,
borrow a maximum o f
how ever,
and may ucake. lo a n s w ith o u t
do a m is
s e c u r ity ,
such a s cro p m o rtgages o r second or t h i r d
For su ch com panies the l i m i t
For banks th e l i m i t
o f te n to one
i s much
( u n le s s f u r t h e r r e s t r i c t e d b y s t a t e
or
but
s~
fe d e ra l
law)
is
fiv e
to
one*
A bank a lr e a d y h as demand o r
sh o r t tim e d e p o s i t l i a b i l i t i e s w h ich o f t e n
and s u r p lu s *
r e d is c o u n t
ex ceed te n tim e s
A law w h ich e n c o u ra g e s such banks,
lia b ilitie s
e q u a l to
fiv e
th e re fo re ,
s in c e
they a r e n o t
The a g r i c u l t u r a l p a p e r *
in s titu tio n s ,
may be in v e s t e d
unsound*
in t h i s
sound banking#
th e n , upon t h e
sy ste m i s
th e whole c a p i t a l
b u ilt«
Not
reserve of
th e
a s w e l l as o f th e farm c r e d i t s dep artm en ts,
paper*
If
th e paper i s unsound,
One m ight e x p e c t to f in d ,
thrown about
the p u b l i c w e lfa r e *
We a r e throw n b a c k ,
the p r o c e e d s of d e b e n tu r e s , b u t
d is c o u n tin g
th e re fo re ,
such pap er com parable to
th e
system
No such l i m i t a t i o n s or
th e s a fe g u a r d s
thrown around th e farm
s a fe g u a r d s a r e p r o v id e d .
s e c u r ity .
and must n e t
v a lu e .
are n o t a p p l i c a b l e
banks,
ie s ,
could
r u r a l c r e d it
c o r p o r a t io n s ,
or c o o p e r a t iv e c r e d i t
i n v e s t te n
tim es
its
h azard s and u n c e r t a in t ie s #
is
Such d i r e c t lo a n s must be upon
l i v e s t o c k or com m od ities,
These l i m i t a t i o n s
based*
Only in the c a s e
c o o p e r a t iv e p ro d u cin g or m a rk e tin g a s s o c i a t i o n s
th e re any requirem en t a s to
is
s a fe g u a r d s and l i m i t a t i o n s
m ortgage paper upon w h ich th e e x i s t i n g F e d e r a l Farm Loan S ystem i s
of d i r e c t lo a n s t o
is
surrounded by the r e s t r i c t i o n s and s a fe g u a r d s
prim ary a g r i c u l t u r a l pap er upon w h ich th e whole
on ly
in cu r
i n s t i t u t i o n s c o n te m p la te d by th e
w hich e x p e r ie n c e has shown to b e e s s e n t i a l t o
3«
to
t h a t no g r e a t r e l i a n c e can be p la c e d upon
the endorsem ent o f th e d is c o u n t in g
b ill,
in a d d i t i o n ,
tim e s t h e ir c a p i t a l and s u r p lu s ,
an i n v i t a t i o n to unsound b a n k in g and a menace to
I t fo llo w s ,
its c a p ita l
exceed 75 Pe r centum o f
liv e s to c k
a s s o c ia tio n s *
th e ir
to pap er r e d is c o u n te d fo r
lo a n or farm c r e d i t
A farm c r e d i t
compan
c o r p o r a tio n
c a p i t a l in cro p m ortgage p ap er,
w it h a l l
A c o o p e r a tiv e c r e d i t a s s o c i a t i o n ,
its
w ith o u t a
-9 d o lla r o f c a p i t a l ,
c o u ld make u n lim it e d loan s to
s e c u r i t y w h atever.
ment,
And su ch p a p e r ,
its
members w ith o u t any
d is c o u n te d w it h a farm c r e d i t
d e p a r t
c o u ld form th e s e c u r i t y f o r d eb en tu res i s s u e d under Government
a u s p ic e s and s o ld to
It
i s a p p a r e n t,
in v e s t o r s *
th e re fo re ,
t h a t th e most e le m e n ta r y p r i n c i p l e s
o f sound fin a n c e have been o v e r lo o k e d in d r a f t i n g
a l b an k in g law s th e U n ite d S t a t e s
sound b an kin g w h ich i s
F e d e r a l R eserve
B oard,
th e b i l l .
Through th e
en d eavors t o prom ote sound b an kin g p r a c t i c e s on
the p a r t o f s t a t e banks which a r e members o f th e system .
Farm Loan System i t
n a t io n
Government has s e t up a s ta n d a r d o f
re ga rd ed as a model among th e s t a t e s .
it
In i t s
In i t s
F ederal
has s e t a s ta n d a r d o f c o n s e r v a tis m and soundness which
has won th e c o n fid e n c e o f i n v e s t o r s .
It
is
d iffic u lt
to c o n c e iv e th a t
Congress should now s ta n d sponsor f o r a system w h ich v i o l a t e s
banking p r i n c i p l e and c o n ta in s not
e v e r y sound
even th e rudim ents o f s a f e t y .
Ih e_ A d m in is t r a t iv e F e a tu r e s of th e B i l l Unw orkable.
The d is c u s s io n h e r e to fo r e nas been o f th e f i n a n c i a l f e a t u r e s
the b i l l ,
Even t h e
a d m in is tr a tio n f o r
a d m in is t r a tiv e
soundest f i n a n c i a l p la n ,
its
su ccess.
It
is
however, must depend upon good
im portant to exam ine,
s t r u c t u r e which th e b i l l c o n te m p la te s ,
tho management o f th e farm c r e d i t s
of
d ep artm en ts,
th e r e fo r e ,
b o th w ith r e s p e c t
th e
to
and w ith r e s p e c t to t h e ir
s u p e r v is io n b y th e F e d e r a l Farm Loan Board.
N o m in ally,
th e new powers c o n f e r r e d b y th e b i l l are v e s t e d in th e
F e d e ra l Land Banks,
These a re c o r p o r a tio n s o r g a n iz e d under t h e Farm Loan
-10le t,
fo r th e e x c lu s iv a
The l a s t
purpose o f m aking m ortgage
ann ual r e p o r t o f
Government on O c to b e r 3 1 ,
the S e c r e t a r y o f th e
1922,
lo a n s upon farm la n d s*
T r e a s u r y showed t h a t
th e
owned somewhat o v e r $4,000,000 o u t o f a
t o t a l o f a p p r o x im a te ly $35,000,0 00 o f
the c a p i t a l
s t o c k o f t h e s e ban ks,
th e rem ainder b e in g owned b y l o c a l farm lo a n a s s o c i a t i o n s and t o a sm a ll
e x te n t b y i n d i v i d u a l borrow ers«
Under th e Farm Loan Act»
th e tem p orary
management o f t h e s e banks i s p l a c e d i n th e hands o f f i v e d i r e c t o r s ap
p o in te d b y th e F e d e r a l Farm Loan B o ard *
be in a board o f n in e d i r e c t o r s ,
ware t o
be s e l e c t e d b y th e
known a s 11d i s t r i c t
o f which s i x ,
known as " l o c a l d i r e c t o r s " ,
s to c k h o ld in g farm lo a n a s s o c i a t i o n s ,
d ir e c to r s ”,
how ever,
The perm anent management was to
and th r e e ,
were t o be a p p o in te d by th e Farm Loan
Board»
In f a c t ,
th e perm anent o r g a n i z a t i o n has n ever been e f
fe cte d ,
a J o in t R e s o lu t io n ap p ro ved J a n u a ry 18 ,
19 18 ,
a u t h o r iz in g th e
S e c r e ta r y o f th e T r e a s u r y t o p u r c h a s e Farm Loan Bonds from th e F e d e r a l
Land Banks, and c o n t in u in g th e tem p o ra ry o r g a n i z a t i o n as lo n g a s any
such bonds a r e h e l d .
The S tro n g b i l l ,
Banking and C u rren cy Com m ittee,
r e c e n t l y r e p o r te d b y t h e House
p r o v id e s f o r t e r m in a tio n o f t h e tem porary
management, and s u b s t i t u t i o n o f a permanent b o ard composed o f t h r e e
d ir e c t o r s
chosen by th e farm lo a n a s s o c i a t i o n s ,
a p p o in te d by th e Farm Loan Board,
th re e d i s t r i c t
lo c a l
d ir e c to r s
and a s e v e n th d i r e c t o r a p p o in te d b y
the Farm Loan Board out o f t h r e e nom inees s e l e c t e d b y th e farm lo a n a s
s o c i a t io n s i
These b oard s o f d i r e c t o r s
a u th o r iz e d t o
e le c t
(w h eth er permanent
th e p r e s id e n t ,
v ic e -p r e s id e n t,
or tem porary)
s e c r e t a r y and tr e a s u r e r
and o th e r o f f i c e r s and em ployees o f t h e F e d e r a l Land Banks,
t n e ir d u t i e s ,
and t o
d is m is s them a t
p le a s u r e *
are
to
d e f in e
-11Upon t h i s
e x is tin g stru c tu r e ,
th e L e n ro o t-A n d e rso n h i l l
superim poses
an a u x i l i a r y o r g a n is a t io n d e s ig n e d to e x e r c i s e th e pow ers c o n fe r r e d i n th e
h ill?
It
i s p r o v id e d t h a t ea ch F e d e r a l Land Bank s h a l l e s t a b l i s h
su p e r v isio n o f i t s
tem p orary d i r e c t o r s an d , a f t e r
permanent o r g a n is a t io n s
farm c r e d i t s d ep artm en t.
"under th e
th e e s ta b lis h m e n t o f th e
under th e s u p e r v is io n o f i t s
d is tr ic t d ir e c to r s " , a
D u rin g th e tem p orary o r g a n i s a t i o n ,
th e re fo re ,
th e
f iv e d i r e c t o r s a p p o in te d b y th e Government to c a r r y on th e farm lo a n b u s in e s s
w ill a ls o o p e r a te th e farm c r e d i t s
departm ent*
Under th e permanent o r g a n i s a t i o n ,
the th re e d i r e c t o r s a p p o in te d b y th e Government w i l l a c t , a p p a r e n t ly , a s a
separate bo ard o f d i r e c t o r s i n c h a r g e o f farm c r e d i t s *
be one c o r p o r a t io n w it h two b o ard s o f d i r e c t o r s .
promote e f f i c i e n t a d m in is t r a t io n ,
There w i l l ,
th e re fo re ,
Such a s i t u a t i o n c a n h a r d ly
s in c e th e same s e t o f o f f i c i a l s
and em ployees
w ill be s u b j e c t to th e o rd e rs o f two bo ard s o f d i r e c t o r s *
The most s e r io u s o b j e c t i o n to th e p l a n , h o w ever,
event th e o p e r a tio n o f th e farm c r e d i t
r e d is c o u n t
is
th a t
in e ith e r
system w i l l be p la c e d in th e
hands o f men who h a ve no s p e c i a l q u a l i f i c a t i o n s f o r th e p o s i t i o n s *
The tem
porary d i r e c t o r s o f th e F e d e r a l Land Banks h ave a l r e a d y been s e l e c t e d and a r e
now in o f f i c e *
They were s e l e c t e d ,
i t may b e assum ed, b e c a u se o f t h e i r e x p e r i
ence in p a s s in g upon r e a l e s t a t e m ortgage lo a n s , and not b ecau se o f t h e i r fa m i
l i a r i t y w it h lo a n s upon l i v e s t o c k ,
a g r ic u lt u r a l p ro d u cts,
o r grow ing crops#
These d i r e c t o r s a r e to be r e q u ir e d to u n d erta k e th e a d m in is t r a t io n o f a n e n t i r e l y
new b u s in e s s ,
enormous in s c o p e , t e c h n i c a l and d i f f i c u l t
in i t s
d e ta ils ,
and v e r y
much more h a zard o u s th an th e m ortgage lo a n b u s in e s s w h ich t h e y a r e now
c a rr y in g on,
If
th e S tr o n g b i l l
i s a d o p te d a t t h i s
s e s s io n ,
( i t h a s n ot y e t p a s s e d
the House, and h as n o t e v e n been c o n s id e r e d b y th e S e n a te B an kin g and C u rren cy
Committee)
i t w i l l be p o s s i b l e t o o r g a n iz e th e system under th e d i r e c t i o n o f th e
three " d i s t r i c t d ix -e c to r s " to b e a p p o in te d b y th e Farm Loan B o ard ,
d i s t r i c t d i r e c t o r s , how ever, w i l l c o n s t i t u t e
These same
th e Government r e p r e s e n t a t iv e s upon
the hoard o f d i r e c t o r s i n c o n n e c tio n w it h farm m ortgage loans# U n le ss an e n t i r e l y
-
n«iw s e t o f d i s t r i c t
d ir e c to r s
12-
sh o u ld be a p p o in te d ,
to f i n d among the e x i s t i n g d i r e c t o r s
it
would be n e c e s s a r y
o f th e F e d e r a l la n d banks men who
combine th e q u a l i f i c a t i o n s n e c e s s a r y f o r b o th p o s i t i o n s . I t
c e r t a i n t h a t su ch iron can
is
b y no means
be found«
The same d i f f i c u l t y o f a d a p tin g an e x i s t i n g
in s titu tio n
t o new and
u n f a m ilia r u ses w i l l be en co u n tered when we c o n s id e r t h e p r o v i s i o n made
fo r
s u p e r v is io n of th e farm c r e d i t s d e p a r tm e n ts ,
p la c e d
in th e hands o f
The s u p e r v is io n
the F e d e r a l Farm Loan Board»
It
is
has power to make
r u le s and r e g u la t io n s g o v e r n in g t h e e x e c u t io n o f t h e A c t,
and has v i r t u a l
c o n t r o l over th e o p e r a tio n s o f th e fa rm c r e d i t s d ep artm en ts, and t h e i r
»
d eb en tu re i s s u e s .
The e x e c u t iv e o f f i c e r o f th e Board has s t a t e d a t a pub
lic
h e a r in g t h a t th e Board does not want to a d m in is t e r th e A ct»
its
members were a p p o in te d
w ith a v ie w t o t h e i r q u a l i f i c a t i o n s
i s t e r i n g a r e d is c o u n t b an k in g s y s te m ,
p resen t
d r a ft o f t h e b i l l ,
Nor i s
it
c o n te m p la te d ,
None o f
i n admin
in th e
th a t a n y new members be a p p o in te d f o r
t h e pur
p o se .
A p art from th e d i f f i c u l t y
o f p e r s o m e l,
t h e b i l l c o n t a in s ad m in is
t r a t i v e f e a t u r e s w h ich even w ith th e b e s t p o s s i b l e p e r so n n e l would appear
to
be u n w orkab le,
in g to
The p r o v is io n s o f T i t l e
th e p r e p a r a t io n
so f a r a s a p p l i c a b l e " ,
fir s t,
th e Farm Loan A c t,
th e p r e p a r a tio n and is s u e
Under T i t l e
o f d e b e n tu res is s u e d b y
I th e f o l l o w i n g p roced u re i s
i n c o n n e c tio n w ith is s u a n c e o f farm lo a n b o n d s:
th ro u gh th e
r e la t
and i s s u e o f farm lo a n b on d s, a r e mads to govern ,
farm c r e d i t s d e p a rtm e n ts.
s c r ib e d
I of
" r e g is tr a r "
o f th e d i s t r i c t ,
pre
Land Banks must
(an o f f i c i a l a p p o in te d b y
th e Board) make w r i t t e n a p p l i c a t i o n f o r a p p r o v a l o f a n i s s u e ,
w ith th e a p p l i c a t i o n t h e c o l l a t e r a l s e c u r i t y t o b e o f f e r e d .
t e n d e r in g
W ith th e
-In
s e c u r i t y t h e r e m ast be a sc h e d u le and d e s c r i p t i o n t h e r e o f .
I t must b e
checked b y th e ’» re g istra r « *, and fo rw ard ed to th e F e d e r a l F a m Loan B o a rd .
The B oard i s
r e q u ir e d to
"ca u s e t o b e made such i n v e s t i g a t i o n an d ap
praisem en t o f th e s e c u r i t i e s
I or r e j e c t
te n d e r e d a s
it
s h a l l deem w i s e " , and to g r a n t
th e a p p l i c a t i o n i n w h ole o r i n p a r t .
The R e g i s t r a r th e n a t t e n d s
[; to th e is s u a n c e and e x e c u t io n o f th e b o n d s, and assum es c u s to d y o f th e
I c o lla te r a l.
The bonds a r e e n g ra v e d b y th e T r e a s u r y D epartm ent, a c c o r d in g
to p r e s c r ib e d fo rm s.
It
is
a p p a re n t t h a t t h i s m a c h in e ry , w h ile p erh ap s a p p r o p r ia te i n th e
| case o f fa im lo a n b o n d s,
J t e r m c d ia t e 1’ f a m
its e lf,
i s n o t a d a p te d t o th e n eed s o f s h o r t t e r n o r " i n -
c r e d its .
I t c o n te m p la te s t h a t
th ro u gh a g e n ts and i n s p e c t o r s ,
adequacy o f a l l c o l l a t e r a l .
th e Farm Loan B oard s h a l l
s a t i s f y i t s e l f a s to th e s a f e t y and
A ban k i n Id a h o , o r a lo a n company i n O regon,
may d e s ir e to d is c o u n t a b l o c k o f p a p e r w it h t h e l o c a l Land B an k.
Bank, f o r f e a r o f t y i n g up i t s
jpore fa r m e r s ,
Land
c a p i t a l i n u n a c c e p ta b le lo a n s , w i l l g e n e r a lly
be u n w illin g to d is c o u n t t h e p a p e r u n t i l i t
F a m Loan B o a rd .
The
r e c e i v e s th e a p p r o v a l o f th e
The p a p e r , c o m p r is in g p erh a p s th e n o te s o f a hundred o r
is p u t in to
sh ap e,
f i n a n c i a l s ta te m e n ts a r e e x e c u te d , c h a t t e l
m ortgages and cro p m o rtga ges a r e a n a ly z e d and d e s c r ib e d , and th e m t e r i a l
d e liv e r e d to
i i t h h is
th e Land B ank.
r e p o r t,
It
t o W ash in gton .
■ the hundred or more s ta te m e n ts ,
is
ch e ck e d b y t h e r e g i s t r a r , and sh ip p e d ,
The B oard sends ou t i t s
in s p e c t s th e c h a t t e l s and c r o p s , h a s th e
deben tures p rep a red ,.an d s h ip s th e m a t e r i a l b a c k w it h i t s
lim e th e lo a n i s ap p roved and th e d e b e n tu r e s is s u e d ,
e x p ire d .
a p p r a is e r s , a n a ly ze s
Such an amount o f c e n t r a l i z a t i o n
a p p r o v a l.
B y th e
s e v e r a l m onths may h a ve
i s n o t i n th e lo n g run w o rk a b le
in a b u s in e s s i n w h ich p ro m p tn ess, f l e x i b i l i t y and a d a p t a t io n to l o c a l needs
are as e s s e n t i a l a s t h e y a r e i n th e b u s in e s s o f r e d is c o u n t b a n k in g .
It
is
Y%¿
-1 4 -
d o u b tf u l w hether t h e sp o n so rs o f t h e b i l l r e a l i z e ,
m oreover,
th a t
it
n e c e s s i t a t e a perm anent c r e d i t and c l e r i c a l
i n W ashington,
of
s e v e r a l hundred men.
The War F in a n c e C o r p o r a tio n ,
n e ss on a s m a lle r s c a l e
o r g a n iz a t io n ,
th an i s
r e q u ir e d a s t a f f
doin g a s i m i l a r b u s i
c o n te m p la te d and w it h an e f f e c t i v e f i e l d
o f o v e r 300 em ployees i n W ashington»
tw e lv e la n d Banks may do a b u s in e s s
im p r a c t ic a b le
sta ff,
w ill
cf mofe th a n a b i l l i o n
The
d o lla r s .
It
is
t o o p e r a te su ch a c e n t r a l i z e d sy s te m upon sound l i n e s and y e t
t
g iv e s a t i s f a c t i o n
to t h e a g r i c u l t u r a l com m unities«
III.
_The System W il l Be I n e l a s t i c .
A fundam ental d e f e c t
in th e
v ie w o f th e fa r m e r s whom i t
is
The F e d e r a l R e s e r v e System i s
L e n ro o t-A n d e rso n b i l l ,
in te n d e d t o b e n e f i t ,
n eed s.
ever,
i s r e q u ir e d f o r
The farm c r e d i t s
'by
p o s its .
Tet i t
o f loan s
in 19 2 1,
is
no s u c h i n c e n t i v e .
The i n v e s t o r s h o ld in g farm c r e d i t
i n p e r io d s o f
D uring th e c o l
cu sto m ers in a
d e b e n tu r e s w i l l have
T hey w i l l e x p e c t t h a t th e d e b e n tu r e s be p a id when due,
Banks w i l l be c o m p e lle d t o
liq u id a te
To p r o t e c t t h e i r d e b e n tu r e s ,
t h e ir p a p e r ,
r e g a r d le s s <f t h e h a r d s h ip s to th e farm er.
h e r e fo r e ,
of c r e d it .
In a
on th e p a r t o f th e banks due t o r e d u ce d de
r e g a r d le s s o f t h e n eed s o f th e fa rm e r.
i n tim e s o f
how
th e s i t u a t i o n was g r e a t l y a g g r a v a te d
A b an k has a s tr o n g i n c e n t i v e to accommodate i t s
time o f s t r in g e n c y .
c ility
in vestm en t m arket.
t h a t th e fa rm e r i s g e n e r a l l y most in n eed o f c r e d i t .
a gen eral c a l l i n g
curren cy.
L en ro o t-A n d erso n b i l l ,
o f d e b e n tu res i n th e
la p s e i n a g r i c u l t u r a l p r i c e s
in e la s tic ity .
l e g i t i m a t e com m ercial or a g r i c u l t u r a l
tim e o f d i f f i c u l t y d e b e n tu r e s may b e u n s a le a b le .
stre ss
its
th e F e d e r a l R ese rv e Banks can is s u e
sy ste m c r e a t e d b y t h e
depends upon th e s a le
w i l l be
b a s e d upon t h e t h e o r y o f an e l a s t i c
As lo n g a s r e s e r v e re q u ire m e n ts a r e met,
a l l th e curren cy th a t
from th e p o in t o f
fo r
c o lle c tio n ,
F ar from s u p p ly in g a r e s e r v e f a
d e f l a t i o n and s t r in g e n c y ,
ten d t o a c c e n tu a t e
to p r e s s i t
th e Land
t h e L en ro o t-A n d erso n b i l l
w ill,
th e s t r i n g e n c y and a c c e l e r a t e t h e c o n t r a c t io n
"15"
1?.
S y s t e m r e s t s upon Tax Ex em ption.
In i t s
p rom ise o f cheap money to th e fa r m e r ,
th e b i l l
upon exem p tion o f d e b e n tu r e s from f e d e r a l and s t a t e
r e l i e s m a in ly
ta x e s,
le t
th e House
I has r e c e n t l y p a s s e d a r e s o l u t i o n f o r a C o n s t i t u t i o n a l amendment p r o h i b i t in g tlie 1S£ruance o f t a x exempt o b l i g a t i o n s ,
A p r o v is o
bonds from th e p r o h i b i t i o n m s r e j e c t e d ,
is
It
exem p tin g farm lo a n
d iffic u lt
RHouse c o u ld c o n s i s t e n t l y , w it h in a fe w w eek s, a u t h o r iz e
I la r g e amount o f new t a x exempt s e c u r i t i e s ,
I b i l l i o n o f t a x exempt s e c u r i t i e s
to s e e ho?/ th e
th e is s u a n c e o f a
nor i s a p o s s i b l e a d d i t i o n a l
to be c o n te m p la te d w ith o u t g r a v e c o n ce rn ,
V,
O th er d e f e c t s „
Tnere a r e o t h e r d e f e c t s
i n th e L en ro o t -Anderson b i l l ,
l a r g e l y due to
§ f a u l t y d r a fts m a n s h ip , -which w i l l be a llu d e d to o n ly b r i e f l y ,
(a )
B y p r o v id in g t h a t d e b e n tu res s h a l l be p a y a b le o n ly o u t o f th e a s s e t s
j p f farm c r e d i t s
d e p a rtm e n ts,
th e b i l l m igh t ren d er them n o n - n e g o t ia b le ,
view o f th e p r o v i s i o n s o f th e N e g o t ia b le
b)
h iu b i l l p r o v id e s
th a t d is c o u n t
in
In stru m en ts Law.
r a te s
s h a l l n o t e x ce e d b y more than
| 1 p e r c e n t th e r a t e borne b y th e l a s t p r e c e d in g i s s u e o f d e b e n tu res
K t a ls o c o n te m p la te s t h a t c o l l a t e r a l may be s e g r e g a t e d ,
so t h a t
h iji
( S e c , 2 0 2 ),
gra d e p a p e r ,
e, g , warehouse r e c e i p t p a p e r , may be made th e b a s i s o f a s e p a r a te i s s u e , and
thus o b t a in
jp n title s
it*
grade p a p e r ,
th e b e n e f i t o f
th e lo w er i n t e r e s t r a t e
( S e c , 201 ( b ) . ) , I f
th is
to w hich i t s
c r e d it
s ta n d in g
th e l a s t p r e v io u s i s s u e was b a se d on such h ig h
would s e t a s ta n d a rd f o r d is c o u n t r a t e s f o r a l l p a p e r ,
¡.-whether h ig h grad e o r o t h e r w is e .
In a p e r io d o f r i s i n g
fin d t h e i r o p e r a tio n s p a r a ly z e d b y t h i s
lim ita tio n .
r a te s ,
th e banks m ig h t'
- 16
(c).
M oreover,
th e m akers o f th e h i Ja gra d e p a p e r w ould n o t g e t th e
b e n e f i t o f th e lo w e r r a t e t o w h ich t h e i r p a p e r i s
e n title d ,
s in c e d is c o u n t
r a t e s must a p p a r e n t ly be u n ifo rm to a l l »
(d )
*
The p r o v i s i o n w h ich p u r p o r ts
to l i m i t
.which a d is c o u n t in g i n s t i t u t i o n may c h a rg e f o r i t s
drawn.
to Ifr p e r c e n t th e amount
indorsem ent i s
in e p tly
A ny p a p er upon w hich th e borrow er ’’h as b een c h a r g e d 1’ more th a n I f
per c e n t i n e x c e s s o f th e d is c o u n t r a te
^ p e n a l l y i o r any e / a s i o n o f th e A c t *
is
in e lig ib le .
There i s no c r im in a l
M o reover, a bank w h ich h as p a p e r upon
which a g r e a t e r r a t e has b een c h a rg e d can n o t make su ch p a p er e l i g i b l e
r e b a tin g th e e x c e s s
w ill,
to th e b o rro w er.
by
U n le ss th e d is c o u n t r a t e i s h i g h ,
t n e r e f o r e , p r o b a b ly be bu t l i t t l e
th e r e
e l i g i b l e p a p e r i n th e W estern and
Sou th ern a g r i c u l t u r a l S t a t e s , where i n t e r e s t
r a t e s a r e o f t e n a s h ig h as 10
and 12 p e r c e n t .
(e)
The p r o v i s i o n r e l a t i n g
No d i s p o s i t i o n
i s made o f e a r n in g s above d iv id e n d s and above th e 25 p e r c e n t
to be u sed to r e t i r e
(f)
to d i s t r i o u t i o n o f e a r n in g s a r e in co m p le te*
There i s
sto ck .
no p r o v i s i o n f o r l i q u i d a t i o n o f farm c r e d i t s d ep a rtm en ts,
or a d m in is t r â t io n i n th e e v e n t o f i n s o l v e n c y .
(e>) *
p r o v i s i o n i s made x o r s u i t s
b y or a g a i n s t farm c r e d i t s
d ep artm en ts.
(h ).
A g r i c u l t u r a l p a p e r i s n o t c o r r e c t l y d e f in e d .
O n ly p a p e r th e
p ro ce e d s o f w hich h ave b een u sed f o r an a g r i c u l t u r a l p u rp o se i s
Paper " is s u e d 1' f o r an a g r i c u l t u r a l p u r p o s e ,
such
as
f e r t i l i z e r n o te s ,
n o te s e v id o x icin g p u r ch a se o f l i v e s t o c k o r farm s u p p l i e s ,
e l i g i b l e , s in c e
e lig ib le .
or
i s a p p a r e n t ly n o t
"p ro c e e d s" o f su ch n o te s a r e n o t g e n e r a l l y u sed r o r an
a g r i c u l t u r a l p u r p o se .
The c o r r e s p o n d in g d e f i n i t i o n i n th e F e d e r a l B e s e r v e
A ct c o v e r s b o th t y p e s o f p a p e r .
■ —!. ¡HP mmÊm
CEDERAI
ß S â 'E R Y 1
B O A R D
>1-36 lk
STATEMENT FOR THE PRESS.
For im m ediate r e l e a s e .
0
The F e d e r a l R ese rv e Board to d a y has r e c e iv e d numerous
te le g r a m s r e f e r r i n g to rumors a s to i t s
In r e p l y ,
if
th e Board h a s s a i d ,
you and o th e r s who have
w ith th e so u rce
w ish es
co n tem p lated a c t i o n s .
t o s a y w ith a l l p o s s i b l e
The F e d e r a l R es e rv e Board
em phasis
t h a t so f a r a s
or a c t i o n s .
r e sp e c t to
the c r e d i t c o n d it io n s or p o l i c i e s o f
one e l s e
is
t o deny a l l
March 2 7 ,
is
its
When the Board h a s a n y th in g to s a y w ith
th e F e d e r a l
i t s e l f make th e announcem ent, and no
a u tn o r iz e d to sp eak f o r
it.
i d l e rumors n o r sh o u ld i t be
I 9 23 .
it
f o r any rumors w ith r e s p e c t t o
in te n tio n s
R eserve S ystem i t w i l l
o b lig e d
te le g r a p h e d w ould su p p ly th e Board
o f yo u r in fo r m a tio n .
con cern ed th e r e i s no b a s i s
"Should be g r e a t l y
Board cannot u n d e rta k e
ch arged w ith
them ."
TO COLLECTORS OF INTERNAL REVENUE:
P le a s e
send trie f o l l o w i n g
sto ry
to each d a i l y paper i n your d i s t r i c t f o r
r e le a s e March 2 6 .
Time t r a n s m is s io n so t h a t s t o r y w i l l r e a c h p a p e rs a day
or so i n a d v a n ce o f
th e r e l e a s e d a te .
The f o l l o w i n g
sta te m e n t i s
___________
of
is s u e d by C o l l e c t o r o f I n t e r n a l Revenue
th e
d is tr ic t of
A d m in i s t r a t i v e m easures h a ve b een ta k e n b y th e Bureau o f I n t e r n a l Revenue
to c a r r y i n t o
e ffe c t
two im p o r ta n t amendments to
ad op ted d u r in g th e c l o s i n g
days o f the s e s s i o n ,
p r o p e r ty and income ta x o f n o n -r e s id e n t a l i e n s l
amended b y e l i m i n a t i n g
s t o c x s , b o n d s, n o t e s ,
i n t e r e s t , and l i m i t s
the p r o v i s i o n a llo w in g
c h o se s in a c t i o n ,
S e c t io n 202 o f the a c t i s
th e exch ange f r e e from ta x o f
c e r tific a te s
of
tr u s e or b e n e f i c i a l
of
t a x a b le income to th o se c a s e s wnere the
i n c o n n e c tio n vvith th e r e o r g a n is a t i o n o f one or more c o r p o r a t io n s ,
As a con sequen ce o f
seq u en t to
in r e s p e c t to exch an ges o f
th e c a s e s where s e c u r i t i e s may be exch an ged fo r o th e r
s e c u r i t i e s w ith o u t the r e a l i z a t i o n
exchange i s
th e Revenue A.ct o f 1 9 2 1 ,
t h i s amendment, any exch an ge o f s e c u r i t i e s
J a n u a ry
1,
e ffe c te d
sub
1923 , may r e s u l t i n t a x a b le income or d e d u c t ib le l o s s ,
I
the amount o f w h ich sh ou ld b e com puted a s i f
an amount o f c a s h e q u iv a le n t
in exch an ge.
of
iz a tio n
exam p le,
to i t s
in v e stm e n t f o r
t a x a b le
S e c t i o n 202 i s
ch an ges; f o r
th e f a i r m arket v a lu e o f th e p r o p e r t y r e c e iv e d
S e c t io n 2 0 2 , p r i o r
o f p r o p e r t y h e ld f o r
r e a liz a tio n
to
th e s e c u r i t i e s had been s o ld fo r
amendment, p r o v id e d fo r
o th er p r o p e r t y o f a l i k e
the exchange
k in d w ith o u t the
income.
amended a l s o
to p r o v id e
t h a t i n the c a s e o f ta x f r e e
e x ch a n g e s o f s e c u r i t i e s ,
o f a c o r p o r a t io n ,
ex
in c o n n e c tio n w it h the r e o r g a n
where money i s r e c e i v e d " t o b o o t ” , the amount o f
g a in r e a l i z e d from th e exch an ge i s
th e e x c e s s
o f th e sum o f
the money and th e
f a i r m arket v a lu e o f th e p r o p e r t y r e c e i v e d i n exch an ge o ver
th e f a i r m arket v a lu e a s o f March 1 ,
a p p lic a b le
changed, p r o v i d e d , h o w ever,
th a t
th e amount o f
1913)
of
to th e en actm en t o f
t h i s amendment, a
th e p r o p e r t y e x
t a x a b le g a i n r e s u l t i n g from the
exchange s h a l l n o t e x c e e d th e amount o f money r e d e iv e d .
p r io r
th e c o s t (where
For exam ple, i f ,
ta x p a y e r ex ch a n g e d , i n c o n n e c tio n
w ith the r e o r g a n i z a t i o n o f a c o r p o r a t io n , s t o c k w h ich c o s t him $1,000 f o r o th e r
s to c k o f a f a i r m arket v a lu e o f $ 1 , 1 0 0 ,
Ik
^nconle r e s u l t e d
therefrom »
to g e th e r w i t h $400 i n c a s h , no t a x a b le
Under t h i s amendment,
th e amount o f g a in r e s u l t i n g
from t h is - exch an ge w ould b e $ 500 , b u t th e t a x a b le g a in w ould b e o n ly $400,
the amount o f money r e c e i v e d i n e x ch a n g e .
The e f f e c t o f the amendment i n r e s p e c t to income ta x o f n o n -r e s id e n t
a lie n s
is
to g i v e n o n - r e s id e n t a l i e n s
country ( f o r e x a m p le , Canada)
who a r e r e s id e n t s
o f a c o n tig u o u s
th e b e n e f i t o f th e 4 p e r c e n t r a t e o f norm al
tax on the f i r s t $4,000 o f n e t income i n e x c e s s
o f a p e r s o n a l exem p tion o f
$1,000 r e c e i v e d a s com p en sation f o r
la b o r or s e r v i c e s p erform ed i n
S ta te s ,
t n is amendment th e e n t i r e n e t income o f
P r io r
to th e en actm en t o f
the U n ite d
every n o n - r e s id e n t a l i e n from s o u r c e s r e c e i v e d w i t h i n th e U n ite d S t a t e s , i n
■
excess o f a p e r s o n a l exem p tion o f $ 1 ,0 0 0 , was s u b j e c t
S p er c e n t .
The amendment e x te n d s a l s o
r e s id e n ts o f a c o n tig u o u s c o u n t r y ,
dependent.
The amendment i s
to a norm al ta x r a t e
to n o n -r e s id e n t ' a l i e n s , who a r e
the b e n e f i t o f th e $400 c r e d i t f o r each
r e tr o a c tiv e
to
ta k e e f f e c t Jan uary 1 ,
1^ 22 .
of
May 9 ,
19 2 3 .
My d e a r S e n a to r :
I r e c e i v e d yo u r l e t t e r o f A p r i l 2 3 ,
t
19 2 3 , w i t h r e s p e c t t o
th e c a n -
c o l l a t i o n u n d er t h e P ittm a n A o t o f a l l o c a t i o n s o f s i l v e r f o r s u b s id ia r y
c o in a g e ,
i n w h ich y o u s u g g e s t t h a t , w ith o u t r e g a r d to th e q u e s t i o n 'o f
th e l e g a l a u t h o r i t y o f th e T r e a s u r y Departm ent t o c a n c e l t h e s e a l l o c a
tio n s ,
it
i s m o r a lly o b l i g a t e d t o t r e a t su ch a l l o c a t i o n s a s s a l e s under
th e A c t and t o ad d th e amount o f su ch a l l o c a t i o n s t o th e p u r c h a s e s t o
be made under th e A c t*
ment is s u e d
iÿ
I n o te t h a t y o u r e f e r p a r t i c u l a r l y to th e s t a t e
t h e D i r e c t o r O f t h e M int on March
36,
19 2 3 , s t a t i n g t h a t
t h e r e w ere th e n o n ly ab o u t 20,000*000 ounces o f s i l v e r rem a in ih g t o be
p u rch a se d under t h e P ittm a n A c t ,
and im p ly t n a t ■ ¿he d i f f e r e n c e betw een
t h i s f i g u r e and p r e v i o u s l y p u b lis h e d f i g u r e s was due to c a n c e l l a t i o n o f
th e a l l o c a t i o n s f o r s u b s i d i a r y c o in a g e .
se t,
is
T h is ,
I sh o u ld s a y a t th e o u t
i n e r r o r , f o r th e S e c r e t a r y o f th e T r e a s u r y had a l r e a d y announced
on December 3 1 , 1 9 2 2 , t h a t t h e amount o f s i l v e r b u l l i o n rem a in in g to be
p u rch a se d under th e P ittm a n A c t was th e n abou t 4 9 ,6 6 7 ,4 7 2 f i n e o u n ce s.
A co p y o f t h i s
s ta te m e n t i s
e n c lo s e d f o r y o u r in fo r m a tio n .
T h is f i g u r e
to o k i n t o a c co u n t th e c a n c e l l a t i o n o f th e a l l o c a t i o n s o f s i l v e r f o r s u b
s i d i a r y c o in a g e , and r e c e i v e d w id e p u b l i c n o t i c e a t th e tim e .
The r e
d u c tio n i n t h e amount rem a in in g t o b e p u r ch a se d w h ich o c c u r r e d b etw een
December 3 1 , 1 9 2 2 , and March 3 0 , 1 9 2 3 , was due to w h o lly d i f f e r e n t c a u s e s ,
e n t i r e l y beyo n d th e c o n t r o l o f th e T r e a s u r y , n a m ely, f i r s t ,
in c r e a s e d p r o d u c t io n o f s i l v e r ,
th e g r e a t l y
p a r t i c u l a r l y a s a b y -p r o d u c t o f o t h e r
m e t a ls , a n d , se c o n d , u n u s u a lly h e a v y t e n d e r s o f s i l v e r b y l a r g e v e n d o r s ,
representing silv er actu ally received a t reduction works for smelting or
refining, for which settlement had already been made with American miners
on the basis of $1 per ounce, 1000 fin e, pursuant to the Act.
As to the allocations of silv e r fo r subsidiary coinage, i t is necessary
. to distinguish between the allocations of silv e r resulting from the melting
down of silv e r d o llars, and the allocations of silv e r bullion purchased
under the provisions of the Pittman Act. By le tte r dated February 11, 1922,
a copy of which is enclosed, the Director of the Mint was authorised and
directed to restore to the Pittman silv e r bullion account 4,341,753.61
ounces of silv e r, th is amount representing a p art of an allocation of
6,000,000 ounces of silver4 for subsidiary coinage which had been previously
authorized out of silv er bullion purchased under the Act, but which had not
in fact ever been used for subsidiary coinage and much of which had never even
been transferred on the books from the Pittman silv e r bullion account to the
subsidiary silv er bullion account. As to th is 4,341,753.61 fin e ounces, there
can be no doubt about the authority of the Secretary of the Treasury to r e
voke the allocation, for under the express terms of Section 3 of the socalled Pittman Act i t is provided, as to silv er purchased under the Act,
that "any excess of such silv e r so purchased over and above the requirements"
for the purposes specified in Section 3 of the Act, "shall be coined into
standard silv e r dollars or held fo r the purpose of such coinage".
Notwith
standing the authority previously given to the Director of the Mint to use
«
to 6,000,000 of the silv e r purchased under the Act for subsidiary coinage,
It had become evident that the amount in question was not needed for the pur
pose, and tho 4,341,753.61 ounces being "excess of such silv er so purchased
over and above the requirements for such purposes", i t was clearly within the
~3^
authority of the Treasury to declare th is silv er excess silv er and put i t
tack into the Pittman silv er bullion account, thus making i t available for
the recoinage of standard silv er dollars under the Act* The provision of
Section 3 of the Act, to which you refer, stating that ,fThe allocation of
any silv er to the Director of the Mint for subsidiary coinage sh all, for
the purposes of th is Act, be regarded as a sale or resale’1, manifestly does
not have any bearing on the question, for the reason th at, u n til carried
out by the Director of the Mint, the authorization to use the silv er for
subsidiary coinage would be merely an authorization, and, i t appearing that
there was no necessity for i t , could be revoked by the same authority which
gave the original authorization*
Certainly the Mint would not be expected,
on account of what would be at the most a bookkeeping transaction* to go
out and buy more silv er to replace silv er which had never le ft the Mint and
at the most had only been transferred from one account to another on the
books of the Mint*
The remainder of the silv er as to which the allocation for subsidiary
coinage was revoked involved silv er resulting from the melting of standard
silver dollars, and the question of the authority to revoke th is allocation,
since i t raised questions both of law and accounting, was presented to the
Comptroller General of the United States for consideration*
The Comptroller
General gave h is decision in the matter under date of November 29, 1922, a
copy of which is herewith enclosed for your ready reference*
This decision
held that the Secretary of the Treasury was authorized, as a matter of law,
to revoke allocations of silv er amounting to 10,247,976*52 fine ounces and
to restore th is amount of silv er to the standard silv er dollar account, thus
making i t available for recoinage»
This decision speaks for its e lf and shows,
*4
mans other things, that in making i t the Comptroller General had before
him the provisions of the la s t sentence of Section 3 of the Act, as to a llo
cations of silv er for subsidiary coinage, which you p articu larly emphasise
in your le tte r .
Under the laws governing the Executive Departments the
Comptroller General’s decision is conclusive and binding on the Secretary of
the Treasury, and the questions of law and accounting having thus been d is
posed of, the Treasury proceeded forthwith to revoke the allocations of s i l
ver for subsidiary coinage covered by the decision, amounting in the aggregate
to 10,247,976.53 fine ounces, and instructions accordingly were given to the
Dirocte r of the Mint*
On the question of moral obligation as distinguished from legal authority,
I think you w ill agree upon further consideration that there is no basis for
questioning these revocations of allocations of silv er for subsidiary coinage.
Ihe purpose of the repurchase provisions of the Pittman Act, as generally
understood, was to assure to American producers the fixed price of $1 per
ounce, 1000 fine, for silv e r produced by mines situated within the United
. States and reduction works so located, up to such amounts as might be neces
sary to coin "an aggregate number of standard silv e r dollars equal to the
liggregate number of standard s ilv e r dollars theretofore melted or broken tip
and sold as bullion" under the provisions of the Act.
The whole object, in
other words, was to replace silv e r which had been sold as bullion out of the
Treasury's holdings, and there would certain ly be no equity whatever in ex
pecting the Mint to purchase a t the a r tif ic ia l prioe of $1 per ounce, 1000
fine, a further amount of silv e r representing an amount allocated for subsi
diary coinage but which had never in fact le f t the Treasury and was s t i l l be
ing held as bullion in the vaults of the Mint.
The silv er thus held in the
1
-5 -
v a u l t s , n e v e r h a v in g l e f t
t h e M in t, m a n i f e s t l y w ould n o t h a v e t o he r e
p la c e d , and o r d in a r y common se n s e w ould r e q u ir e th e T r e a s u r y ,
a d m in is t r a tio n o f th e D ep artm en t,
to
r e s t o r e th e b u l l i o n b a c k t o t h e sta n d a rd
s i l v e r d o l l a r b u l l i o n a c c o u n t a s soon a s i t
be needed f o r s u b s i d i a r y s i l v e r c o i n a g e ,
fo r r e c o in a g e in t o
way been p r e j u d i c e d
became e v id e n t t h a t
th u s m aking i t
i t w ould n o t
im m e d ia te ly a v a i l a b l e
s ta n d a r d s i l v e r d o l l a r s and r e d u c in g th e amount o f s i l v e r
to be p u r ch a se d i n th e m arket a t
f c t o f th e n a t t e r
i n t h e 'p r o p e r
is ,
th e a r t i f i c i a l p r i c e o f $ 1 p e r ou n ce,
th e re fo re ,
The
t h a t .American p r o d u c e r s h ave n o t i n any
b y t h e r e v o c a t i o n o f t h e s e a l l o c a t i o n s and h a ve no
sta n d in g i n e q u i t y to a s k t h a t th e T r e a s u r y bu y t h e s e a d d i t i o n a l amounts o f
s i l v e r , beyond w hat i s
n eed ed to c o v e r th e r e c o in a g e o f s ta n d a r d s i l v e r d o l
la r s under th e p r o v i s i o n s o f th e A c t ,
E n t i r e l y a p a r t from th e f a c t
t h a t p r o d u c e r s o f s i l v e r h a v e no s p e c i a l
e q u ity i n th e m a t te r , y o u w i l l a p p r e c i a t e t h a t i n a d m in is t e r in g th e p r o v i
sion s o f th e A c t th e T r e a s u r y o f th e U n ite d S t a t e s must k eep i n mind th e
b e st i n t e r e s t s o f th e c o u n tr y a s a w h o le , and n o t m e r e ly th e s p e c i a l i n t e r
e s ts o f t h e s i l v e r p r o d u c e r s .
The r e v o c a t i o n o f t h e s e a l l o c a t i o n s
fo r s u b s id ia r y c o in a g e means a s a v in g t o
of s ilv e r
th e p e o p le o f th e U n ite d S t a t e s ,
or, in o t h e r w o rd s, to t h e w hole b o d y o f t a x p a y e r s ,
o f o v e r $ 5 ,0 0 0 ,0 0 0 ,
r e p r e s e n tin g i n p a r t th e s a v in g r e a l i z e d th ro u g h n o t h a v in g t o p u r ch a se o v e r
14,500,000
ounces o f s i l v e r a t a p r i c e a v e r a g in g ab o u t 30 c e n t s an ounce
over th e r e g u l a r m arket p r i c e , an d i n p a r t a s a v in g o f i n t e r e s t r e s u l t i n g
from making a v a i l a b l e f o r im m ediate c o in a g e in t o
s ta n d a r d s i l v e r d o l l a r s
b u llio n w h ich w o u ld o th e r w is e be k e p t a s a dead a s s e t
b u llio n a c c o u n t u n t i l such l a t e r
s u b s id ia r y c o i n a g e .
in th e s u b s id ia r y s i l v e r
tim e a s f u r t h e r s i l v e r m igh t b e n eeded f o r
The C o m p tr o lle r G e n e ra l o f th e U n ite d S t a t e s ,
th e h i g h e s t
authority in talese m atters, having decided that the course was authorized,
the Treasury 1s duty was clear and the allocations in question were accord*
ingly revoked,
Tnis action has saved the people of the United States
about $5,000,000, without depriving the silv e r producers of anything to
which they were properly en title d under the law* To reverse th is action
now and make the additional purchases, would mean a g if t of about
$5,000,000 of the public funds to the producers of silv e r, and throw rpon
the Treasury of the United States the burden of carrying, a t an a r tif ic ia l
price, over 14,500,000 ounces of silv e r not needed for any purpose.
Very tru ly yours,
S, P. GILBERT, J r . ,
Under Secretary.
Hon. Key Pittman,
Vice'Chairman, Senate Commission of
Gold and Silver Inquiry,
United States Senate,
Washington, D* C,
3 enclosures.
May 31| 1933,
My dear Senator!
X received your la tte r of ¡fay 14, 1333, with further reference
to the allocation of silv e r for subsidiary coinage under the Act approved
April S3, 19X8,
X have already stated the Treasury's position with re
spect to the cancellation of these allocations in ay le tte r of May 9,
1233, and have called your p artic u lar atten tio n to the decision of the
Comptroller-General of the United States in the matter, given under date
of November 39, 1933,
!Th© Coctpt ro lle r "General’s decision is conclusive and binding tg>cn
the Secretary of the Treasury, and the Treasury Department accordingly
proceeded forthwith to revel® the allocations covered by the decision,
amounting in the aggregate to 10,347,976.63 fine ounces,
four le tte r , I
notice, seems to involve stase misunderstanding of the decision, fo r i t
states toward the end that "the opinion of the Comptroller-General tç»on
«tolch the Treasury Department depends expressly states that the matter of
revocation or non-revocation is en tirely within the discretion of the
Treasury Department."
What the Comptroller-General said was th at:
"ths matter of coinage into standard silv e r dollars of
bullion
which, was allocated and charged to the subsidiaty silv er accourt and which allocations are authoriz
ed to be revoked and recharged to the standard silv er dol
la r bullion account, is fo r adm inistrative consideration,n
Oils clearly means that the revocation of the allocations is authorized,
and that the question of reeolnage into dollars would be one fo r adminis
trative determination by the Secretary.
That determination has been
reached, and the reeolnage of the silv e r into standard silv e r dollars is
Proceeding in accordance with tho decision.
What you say about p ro fit to the Government through revoking the
allocations of silv er for subsidiary coin shows a further misunderstand
ing of the situatio n .
Take, fo r example, the 10,247,976.52 ounces of
bullion once allocated and since revoked.
This bullion, or its equivalent,
has been in the vaults a l l along and is not needed fo r subsidiaiy coinage,
Pestering i t to the standard silv er dollar bullion account does not make a
cent of p ro fit to the Government.
I t simply puts the silv er back where i t
was before, and when i t has been recoined into standard silv er dollars the
Government w ill be «restored to i t s former position, the recoined standard
silver dollars f illin g the place of the standard silv er dollars originally
broken up and melted. To do as you recommend, on the other hand, would in
volve a serious loss.
In the f i r s t place i t would mean buying silv er at the
a rtific ia l price of $1 per ounce 1,000 fine to take the place of silv er
which never le f t the Government's own vaults and does not in any proper
sense need to be replaced.
This of its e lf would be a fu tile thing, and i t
would be a most unusual construction of the law to require it#
If It were
done, moreover, the resu lt would be that the Government would have
10,247,976.52 ounces of silv er bullion on hand that i t would not be able
to use, and th is bullion would have been purchased a t a price exceeding by
nore than 30 cents an ounce the regular market price for silv e r.
I t would
not be needed for any purpose for a long time to come, and i t would, there
fore, have to lie idle in the vaults of the Treasury a t a constant expense
to the Government*
A sim ilar misunderstanding apparently underlies your comments
about the purchase of silv e r fo r subsidiary*coinage.
There is nothing in
the Pittman Act that requires the Treasury a t any time to boy silv e r for
subsidiary coinage a t the a r tif ic ia l price of $1 per ounce. The Act
simply requires the purchase of silv e r a t the fixed price to replace the
standard silv e r dollars broken up and actually used, and th is w ill be
done in accordance with the terns, of the law and the regulations of the
Director of the Mint prescribed thereunder.
The purchase of silv e r for
subsidiary coinage, on the other hand, depends en tirely upon the
of business, and i t is perfectly well se ttle d that in making purchases of
Ijl
silver for subsidiary coinage the Government pays only the market price.
I
The difference between the price paid and the face value of the subsidiary
silver coined therefrom constitutes seigniorage, and th is, as you know,
j|
I
aooruss t0 tha Government by virtue of i ts sovereign power to coin money
and maintain i t s circu la tio n .
I t does not result from any in trin sic merit
of silver, and there is no reason why the Government, in buying silv er for
purposes of coinage, should pay any more for the silv e r than anyone else
would have to pay in the markets of the world. S ilver, as you know, is
I not the standard of value.
I t is a commodity, and like other commodities
I must respond to market conditions.
Silver producers stand in th is respect
I on the same basis as producers of other oomoodities and have no ju st cause
for complaint against the Government, if th e ir product f a lls in the market
to a price lower than the cost of production*
The fact is , of course, that the Pittman Act has had the effect
for about three years of giving American producers of silv e r a bonus
equivalent to the difference between the world market price and the fixed
price of $1*00 per ounce, 1,000 fin e,
This has amounted, on an average, to
over 30 cents an ounce, and the effect has been to give an a r tif ic ia l
stimulus to the production of silv e r.
The teraination of purchases under
the Act w ill doubtless causo some -disturbance to the silv er industry,
but that is always the resu lt of maintaining an a r tif ic ia l condition and
the hardships incident to returning to normal are inherent in the situ a
tion and cannot ho overcome hy any action of the Government*
The
Treasury, on its p a rt, has been doing everything possible to assure
equitable treatment to American producers in making fin a l purchases under
the Act, and has promulgated appropriate regulations to that end, but
beyond that i t cannot go*
The Treasury, of course, has to consider the
interests of the people as a whole, and not merely the special in te r
ests of the silv er producers, and i t would be manifestly improper fo r i t
to throw an additional burden of $5,000,000 or more on the taxpayers of
the country in order to help producers of silv e r by making purchases of
silver a t the a r tif ic ia l price of $1*00 per ounce, 1,000 fine, beyond
what is needed under the Act*
Very tru ly yours,
S* P. GILBERT, J r .
Under Secretary.
Hon, Key Pittman,
Vice '■Chairman, Senate Commission
of Gold and Silver Inquiry,
United States Senate,
.Washington, L. C,
’
]
P r o h ib itio n -
H 2 -^
|T . D . 3US4)
L iq u o r s on Uni ta d S t a t e s and F o r e ig n ^ V e s s e ls .
O ffic e
■
TREASURY DEPARTMENT,
o f Com m issioner o f I n t e r n a l Revenue
W ash in gton #D * C .
TO FEDERAL PROHIBITION DIRECTORS AND OTHERS CONCERNED:
.1» The Supreme C o u r t .o f the U n ite d S t a t e s h a v in g d e c id e d t h a t th e N a tio n a l
P roh ib itio n A c t e x te n d s to a l l m erchant v e s s e l s , b o th d o m e stic and f o r e i g n , when
within the t e r r i t o r i a l w a te r s o f th e U n ite d S t a t e s and a l l i t s p o s s e s s io n s to
which such A c t a p p l i e s ( s e e th e - c a s e o f Cunard S team sh ip Company, L t d . , v M ello n ,
decided A p r i l 30, 1923# &&& r e p o r te d in T«D. 3^7^)» th e f o l l o w i n g r e g u la t i o n s are
promulgated, r e l a t i v e t o l i q u o r on v e s s e l s , e f f e c t i v e a t 1 2 - 0 1 A ,M ., Sunday,
June 10, 1923 *
DEFINITIONS*
S e c* 1 *
The t e r r i t o r i a l w a te r s o f the U n ite d S t a t e s Com prise a l l w a ters
over w h ich the U n ite d S t a t e s c la im s and e x e r c i s e s dom inion and c o n t r o l as a
s o v e r e ig n pow er, i n c lu d in g p o r t s ,
h a r b o r s , b ays and o th e r e n c lo s e d arms o f the
sea a lo n g th e c o a s t o f the U n ite d S t a t e s and o f th e is l a n d and o th e r p o s s e s
sion s t h e r e o f , t o g e th e r w it h a m a r g in a l b e l t o f the s e a e x te n d in g from low
water mark outward a m arine l e a g u e , or th r e e g e o g r a p h ic a l m ile s , th e seaward
boundary t h e r e o f f o l l o w i n g a c o a s t o f la n d b e lo n g in g t o the U n ite d S t a t e s ;
bays, such a s the C heasapeake B ay and th e D elaw are B ay, w h ich , e x c e p t a t t h e i r
e n tra n ce , are so surrounded b y th e la n d s of the U n ite d S t a t e s as to be reason
a b ly r e g a rd e d a s g e o g r a p h i c a l l y a
p a r t t h e r e o f , r e g a r d le s s of th e d is t a n c e
between th e op en in g h e a d la n d s ; and as to th e G reat L a k e s , P u get Sound, and the
St* Lawrence R iv e r , th e w a te r s on th e U n ite d S t a t e s s id e o f th e boundary f i x e d
pursuant to the C o n v e n tio n r e l a t i n g to th e C anadian I n t e r n a t io n a l Boundary*
concluded betw een th e U n ite d S t a t e s and G reat B r i t a i n on A p r i l 1 1 , 19 0 S .
The
words " t e r r i t o r i a l w a te r s o f the U n ite d S t a t e s " , a s u sed in th e s e r e g u la t i o n s ,
s h a l l be ta k en to be th e above d e s c r ib e d w a te r s w it h the e x c e p tio n t h a t th e se
worda s h a l l n o t in c lu d e the t e r r i t o r i a l w a te r s of th e P h il i p p in e I s la n d s and
of the Panama C a n a l Zone.
The words "m ed ic a l o f f i c e r o f th e P u b lic H e a lth S e r v i c e ” in c lu d e an y m edical
o f f i c e r o f the U n ite d S t a t e s P u b lic H e a lth S e r v ic e o f th e T r e a su r y Department
perm an en tly or te m p o r a r ily in ch a rg e o f e i t h e r a h o s p i t a l or r e l i e f s t a t i o n
of th e s a id P u b li c H e a lth S e r v i c e , or an y s u b o rd in a te m e d ica l o f f i c e r o f s a id
P u b lic H e a lth S e r v ic e d e s ig n a t e d b y su ch m e d ic a l o f f i c e r in c h a r g e .
The word " v e s s e l " s h a l l be ta k e n to I n c lu d e eirarJr d e s c r i p t i o n o f w a ter c r a f t
o i o th e r c o n t r iv a n c e u s e d ,, or c a p a b le o f b e in g u s e d , as a means o f tr a n sp o rta t
i o n on or in w a te r , or th ro u gh th e a i r .
By "war v e s s e l s " i s meant a l l v e s s e l s o ver w h ich th e governm ent o f the v e s
s e l ' s f l a g e x e r c i s e s c o n t r o l and f o r th e co n d u ct o f w h ich i t assumes f u l l
r e s p o n s ib ility *
The term "m erchant v e s s e l s " in c lu d e s a l l v e s s e l s o th e r than
war v e s s e ls #
As u sed in th e se r e g u l a t i o n s , the word "m a ster" o f a v e s s e l s h a l l be taken
to mean th e p e r so n h a v in g th e command o f th e v e s s e l , and, in a d d i t i o n , such
other a p p r o p r ia te o f f i c e r or o f f i c e r s o f &he v e s s e l whose d u t ie s in c lu d e a c t s
a u th o r iz e d or r e q u ir e d by th e s e r e g u l a t i o n s ,
By " ca rg o l i q u o r " i s meant l i q u o r , e i t h e r b e v e ra g e or n on b everage in c h a r a c
te r , on b o ard a v e s s e l , n o t f o r u s e on the v e s s e l , b u t to be c a r r i e d to a
d e s t in a t io n c e r t a i n , and th e r e la n d e d .
"Sea s t o r e s " o f l i q u o r in c lu d e a l l l i q u o r s c a r r i e d b y a v e s s e l f o r u se on
board su ch v e s s e l ; b u t a s u se d in t h e s e r e g u l a t i o n s such term means a l l such
liq u o r s e x c e p t th o s e h e ld f o r u se f o r n o n b everage ( i n c l u d i n g m e d ic in a l) pur
poses and w in es h e ld f o r s a c r a m e n ta l p u rp o se s or l i k e r e l i g i o u s r i t e s *
T.D.
- 2-
APPLICABILITY CF NATIONAL PROHIBITION ACT
AND OF THESE REGULATIONS.
S e c* 2* The p r o v i s i o n s o f th e N a t io n a l P r o h i b i t i o n A c t , a s amended and
»Supplemented, a p p ly t o th e r e g i o n a l a r e a s o f la n d and t e r r i t o r i a l w a te r s of
iv?e
^ a ^0S an<^
i s l a n d and o th e r p o s s e s s io n s t h e r e o f e x c e p t
the P h i l i p p i n e I s la n d s ; t h e y t h e r e f o r e a p p ly and e x te n d to U n ite d S t a t e s and
f o r e ig n m erchant v e s s e l s w h ile such v e s s e l s a r e w i t h i n th e t e r r i t o r i a l w a te rs
oi the U n ite d S t a t e s , e x c e p t in th e t e r r i t o r i a l w a te r s o f the P h ili p p in e
I s la n d s .
The N a t io n a l P r o h i b i t i o n A c t p r o v id e s t h a t the p r o h ib it io n s o f the
Act w h ich r e l a t e t o th e C a n a l Zone, b e in g s e c t i o n 20 o f T i t l e I I I , s h a l l be
e n fo r c e d under r e g u l a t i o n s to be made b y the P r e s i d e n t , and su ch p r o h ib it io n s
s a
n o t a p p ly to l i q u o r i n t r a n s i t th ro u g h th e Panama C a n a l or on the Panama
l road *
Thewe r e g u l a t i o n s do n o t , t h e r e f o r e , a p p ly e i t h e r to th e P h ilip p in e
Is la n d s and th e t e r r i t o r i a l w a te r s t h e r e o f , or to th e Panama C a n a l, the
Panama C a n a l Zone, and th e t e r r i t o r i a l w a te r s t h e r e o f .
WAR VESSELS.
S e c . 3» The N a t io n a l P r o h i b i t i o n A c t a p p l i e s to p e rso n s on bo ard war
v e s s e l s o f th e U n ite d ^ S t a t e s , and th e N avy D epartm ent h as a u t h o r i t y to take
a p p r o p r ia te m easures f o r i t s e n fo rcem en t th e r e o n , t h i s b e in g in a d d i t i o n to
the m easures ta k en b y custom s o f f i c e r s under th e custom s law s and r e g u la t io n s
in c o n n e c tio n w it h su ch v e s s e l s *
S ec* d* In a c c o r d a n c e w i t h th e la w o f n a t i o n s , th e war v e s s e l s of f o r e ig n
n a t io n s , e ven when w i t h i n th e t e r r i t o r i a l w a te r s o f th e U n ite d S t a t e s , a r e to
be r e g a rd e d a s exempt fro m th e o p e r a t io n o f th e l o c a l la w s o f the U n ite d S ta te s
The p r o v i s i o n s o f th e N a t io n a l P r o h i b i t i o n A c t do n o t , t h e r e f o r e , a p p ly to
f o r e ig n v e s s e l s o f w a r.
INVOLUNTARY ENTRANCE OF MERCHANT VESSELS
INTO TERRITORIAL WATERS OF THE UNITED STATES.
S e c . 5» The N a t io n a l P r o h i b i t i o n A c t d oes n o t a p p ly to m erchant v e s s e l s
which a r e f o r c e d i n t o p o r t b y s t r e s s o f w e a th e r , or b y i n e v i t a b l e n e c e s s i t y .
The i n v o lu n t a r y e n tr a n c e f u r n i s h e s a ground o f e x e m p tio n , and , under in te r n a
t i o n a l la w , i t i s im proper t o impose f i n e s upon v e s s e l s c o m p e lle d to put in to
p o rt f o r su ch re a so n *
T h is r u l e a l s o a p p l i e s t o goods on board v e s s e l s so
circu m sta n ced *
T h ese exem p tio n s d ep en d , h o w ever, upon p r o o f o f th e f a c t of
the u r g e n c y o f th e d i s t r e s s *
The n e c e s s i t y m ust be g r a v e and th e p r o o f con
v in c in g .
B e f o r e c le a r a n c e p a p e r s a r e g r a n t e d , su ch v e s s e l s m u st, in a l l c a s e s
comply w it h the p r o v i s i o n s o f custom s T .D . 39»^+2, r e q u i r i n g a bond f o r lan&in?
of l i q u o r s on board a t a f o r e i g n d e s t i n a t i o n and f u r n i s h i n g p r o o f t h e r e o f , as
p ro v id e d in S e c t i o n
o f th e T a r i f f A c t ap p ro v e d Septem ber 2 1 , 19 2 2 .
DIPLOMATIC EXEMPTIONS.
S ec* 6 .
No s e i z u r e s h a l l be made o f l i q u o r i n th e p o s s e s s io n o f an y perse?
in the f o l l o w i n g c l a s s e s ( s e e l e t t e r o f F e b r u a r y 1 0 , 1923» from the S e c r e t a r y
of S t a t e to th e Chairm an o f th e Com m ittee on th e J u d i c i a r y o f the House o f
R e p r e s e n t a t i v e s , a s p u b lis h e d i n th e C o n g r e s s io n a l R eco rd o f F e b r u a r y l 6 , 19 2 3 /;
(a) D ip lo m a tic o f f i c e r s d u ly a c c r e d i t e d b y a f o r e i g n Government to th e Govern*
ment o f th e U n ite d S t a t e s .
(b) D ip lo m a tic o f f i c e r s o f a f o r e i g n Government d u l y a c c r e d i t e d to a n o th er
f o r e ig n Governm ent and t e m p o r a r ily w i t h i n th e U n ite d S t a t e s or i t s p o s s e s s io n s .
(c) P e rso n s a t t a c h e d to or em ployed by a n y d ip lo m a t ic m is s io n , whose names
have been r e g i s t e r e d w it h th e D epartm en t o f S t a t e in a c co r d a n c e w it h th e p ro
v is io n s o f s e c t i o n ^065 o f th e R e v is e d S t a t u t e s o f th e U n ite d S t a t e s *
T.D. 3^8)4
.................................
-. 3-
S ec* 7* The D i v i s i o n o f Customs and th e B u reau o f I n t e r n a l Revenue w i l l ,
froni tim e to tim e , r e p o r t to th e D epartm ent o f S t a t e su ch in fo r m a tio n and
re co rd s r e g a r d in g im p o r ta tio n s i n t o th e U n ite d S t a t e s , w ith d r a w a ls from bonded
w a reh o u ses, and sh ip m e n ts, o f l i q u o r b e lo n g in g t o p e rso n s in th e c l a s s e s men,tio n e d i n th e l a s t s e c t i o n a s come to th e know ledge o f su ch D i v i s i o n or B ursat
cargo liquor...
S e c* 8 . No m erchant v e s s e l , d o m e stic or f o r e i g n , n ay l a w f u l l y c a r r y as
cargo w i t h i n th e t e r r i t o r i a l w a te r s o f th e U n ite d S t a t e s a n y l i q u o r f o r use
fo r beverage p u rp o ses.
S ec* 9* L iq u o r f o r n o n b evera ge p u rp o se s may be tr a n s p o r te d on v e s s e l s
w it h in th e t e r r i t o r i a l ’W aters o f th e U n ite d S p a te s under p e r m it in acco rd an ce
w ith th e p r o v i s i o n s o f S e c t io n 93 o f R e g u la t io n s 60, as amended b y T .D . 3350.
SEA STORES.
S e c . 10* I t i s u n la w fu l f o r a n y U n ite d S t a t e s
w it h in th e t e r r i t o r i a l w a te r s of th e U n ite d S t a t e s
s t o r e s an y l i q u o r w h a te v e r f o r b e v e r a g e u se *
or f o r e i g n m erchant v e s s e l
to c a r r y or p o s s e s s a s se a
LIQUOR FOR NONBEVERAGE PURPOSES.
S ec* 1 1 . Any m erchant v e s s e l a r r i v i n g in p o r t w it h li q u o r n o t c l a s s e d , in
th e se r e g u l a t i o n s , e i t h e r a s c a r g o or s e a s t o r e s , b u t c la im e d by the m aster to
be h e ld f o r n o n b evera ge p u r p o s e s , or w it h w ine c la im e d to be h e ld f o r s a c r a m antal p u r p o s e s , b u t w ith o u t a p e r m it o r c e r t i f i c a t e a u t h o r iz in g i t s p o s s e s
s io n under th e N a t io n a l P r o h i b i t i o n A c t , may be a llo w e d to r e t a i n a r e a so n a b le
q u a n t i t y f o r su ch p u rp o se s u n t i l th e m a ster h a s had f a i r o p p o r tu n ity to o b ta in
e i t h e r a p e r m it or a c e r t i f i c a t e o f m e d ic in a l n e e d , or o th e r w is e s a t i s f y th e
re q u ire m e n ts o f the p r o h i b i t i o n la w and r e g u l a t i o n s .
L iq u o r removed a s b e in g
in e x c e s s o f su ch r e a s o n a b le q u a n t i t y may be r e tu r n e d to such v e s s e l i f a
p e rm it o r c e r t i f i c a t e o f m e d ic in a l n eed w h ich w ould a u t h o r iz e i t s p o s s e s s io n
be s u b s e q u e n tly o b ta in e d .
O th erw ise su ch l i q u o r w i l l be d e a l t w it h in acco rd
ance w i t h s e c t i o n s 1 9 , 20 and 21 h e r e o f .
S e c* 12 * L iq u o r f o r n o n b evera ge p u rp o ses and w ine f o r sa cra m e n ta l purpose*
or l i k e r e l i g i o u s r i t e s may be o b ta in e d , p o s s e s s e d , t r a n s p o r t e d , p r e s c r ib e d ,
s o ld and u se d on an y U n ite d S t a t e s or f o r e i g n v e s s e l w i t h i n th e t e r r i t o r i a l
w a te rs o f th e U n ite d S t a t e s , i n th e sam^ w ay, to th e same e x t e n t , and w it h the
same l i m i t a t i o n s a s on la n d .
The p r o v i s i o n s o f R e g u la t io n s 60 o f th e Bureau Oi
I n t e r n a l Revenue (b e in g r e g u l a t i o n s r e l a t i n g to th e t r a f f i c in l i q u o r under
T i t l e I I o f th e N a t io n a l P r o h i b i t i o n A c t ) , and o f ¿ 1 1 o th e r r e g u la t i o n s made'
under th e N a t io n a l P r o h i b i t i o n A c t , a s amended and supp lem en ted , s h a l l e x te n d
to a l l su ch v e s s e l s so f a r a s a p p l i c a b l e .
U n ite d S t a t e s and f o r e i g n v e s s e l s
may o b t a in su ch l i q u o r and w ine under R e g u la t io n s 60 or o th e r r e g u la t io n s
a p p l i c a b l e to t h e i r n eed s i n so f a r a s t h e i r re q u ire m e n ts may th e r e b y be m et.
In a d d i t i o n t h e r e t o , or i n l i e u t h e r e o f , v e s s e l s may o b t a in , p o s s e s s and tran s*
p o r t l i q u o r f o r m e d ic in a l p u rp o se s i n th e manner s e t f o r t h in the f o l l o w i n g
s e c tio n s *
S e c . 13 * When th e m aster o f a n y v e s s e l d e s i r e s to p o s s e s s or p ro cu re
liq u o r f o r m e d ic in a l p u r p o se s f o r u se on su ch v e s s e l , he may a p p ly in p erso n
to a m e d ic a l o f f i c e r o f th e P u b l i c H e a lth S e r v i c e , l o c a t e d a t th e p a r t , where
the v e s s e l l i e s , o r , i f th e r e i s no su ch m e d ic a l o f f i c e r a t such p o r t , then
to a n y m e d ic a l o f f i c e r o f th e P u b l i c H e a lth S e r v i c e , and f i l e w it h su ch o f f ic e .,
in f i v e i d e n t i c a l c o p i e s , a p p l i c a t i o n f o r m e d ic in a l l i q u o r f o r v e s s e l , Form
15 3 9 . g i v i n g th e in fo r m a tio n c a l l e d f o r on su ch form and such a d d i t i o n a l in
fo r m a tio n a s such o f f i c e r may r e q u e s t .
I f . t h e m aster s h a l l k n o w in g ly make
sta te m e n ts on su ch form w h ich a r e u n tru e in a n y m a t e r i a l a verm en t, th e c e r t i f i
c a t e o f m e d ic in a l n e e d , on su ch .form , s ig n e d b y th e m e d ic a l o f f i c e r o f the
T«B*
Jk& k
-k -
I f bi i L n r a l t h Sa£v i c e ’ 3h a11 be and c o n s t i t u t e no p r o t e c t i o n f o r th e p o s s e s s io n
of liq u o r on su c h v e s s e l *
*
S ec. 3.1*. The m edical o f f ic e r of the P u blic H ealth S erv ice to whom, under
these r e g u la tio n s , an a p p lic a tio n fo r m edicin al liq u o r fo r v e s s e l, on Form 1 5 3 9 ,
I* w bat
of
( i f an y) i s n eed ed f o r m e d ic in a l
^ I eS ? ? 1 i and w l U dA te and 1 1 1 1 011t s a i d form a c c o r d in g to such
d e c is io n . P r o v id e d , t h a t i f i t be shown t h a t su ch v e s s e l i s , or d u r in g i t s n e x t
voyage w i l l b e , r e q u ir e d b y th e la w s o f « „ f o r e i g n c o u n t r y ‘ to c a r r y m e d ic in a l
^ y 3 p ®0 l f l ®d > * * . 31111 a m o u n t , t h e c e r t i f i c a t e o f m e d i c i n a l n e e d , o n
Form 15 3 9 , w i l l b e m ade t o c o v e r s u c h k i n d a n d n o t l e s s t h a n s u c h a m o u n t o f
SUCh
o f f i c e r wi l 1 a l s o d e c id e w h at p u rch a se o f l i q u o r sh o u ld
f P ^ e h a s e
i s to be made under th e c e r t i f i c a t e , the word
Tf e
shoy dd be f a i d e d m a f t e r th e word " T o t a l" in th e a u t h o r i t y t o p u r c h a s e .
1 3 “ '® g a l l o n s or more a r e r e q u ir e d , th e a u t h o r i t y t o p u r ch a se sh o u ld be cro sse d
,,
,
.
3 123,3 e r be i n s t r u c t e d t o a p p ly to th e F e d e r a l P r o h ib i t io n D ir e c t o r of
f i t / w t ™ i ° ? 1 p erm -t i ° p u r s h a 3 e ’ i'orm 11+10A.
I f th e p u r ch a se o f l e s s than
of t h l d r u f v i ^
n , i
a u t h o r i z e d , th e am ount, k in d and t o t a l , w it h the name
|L !~
d ???
1 1 be f l l l e d 111 a s p r o v id e d in s e c t i o n 1 6 . Such m e d ica l
1 bher®upon S1sn in infc the m a ster's and the vendor's c o p ie s o f the
no
8 °f m®d lG laal n eed > on Form 1 5 3 9 , as thus made o u t, except th a t when
^
b® a a d e < the
dor's copy should be d estro y ed .
ven
,
V ° e s l Snad, but t h is s ig n in g may be by fa c s im ile rubber stamp or
^ an agent whose a u tn o r ity to sig n such m edical o f f i c e r ' s name fo r th is purpose
,,
i i l e d w ith the F ederal P r o h ib itio n D irecto r of the s ta te and w ith
? Commissioner a t Washington.
Such c e r t i f i c a t e of m edicinal need,
th or wiunout the a u th o r ity to purchase, s h a ll c o n s titu te a permit under the
Pr°b lb it lo n A° t fo r e x e r c is in g the p r iv ile g e s a tta c h in g to such c e r t i f i ,
888 ^®§tila>tions^. u n le ss sooner surrendered or otherw ise made void*
, ?
e x p i r e on th e 3 1 s t d a y o f December f o l l o w i n g the is s u a n c e of
. n 8 A
u n le s s is s u e d a f t e r A u gu st 3^s $ o f a n y y e a r , in w h ich c a s e such
I' j .
d e x p ir e on th e 3 ^ s t d a y o f December o f th e f o l l o w i n g ye a r«
The
1Cj * 8 ^ ca1, ° f the ^Public H e a lth S e r v i c e w i l l c a n c e l a n y form er c e r t i f i c a t e
or m e d ic in a l n eed th a t may have been is s u e d to th e v e s s e l and su rre n d e re d by the
master and w i l l send same to th e P r o h i b i t i o n Com m issioner a s p r o v id e d b elo w .
He
w ill d i s t r i b u t e th e f i v e c o p ie s o f s u c h form b y r e t a i n i n g one c o p y , h a n d in g one
0
m aster ad th e v e s s e l ! s a u t h o r i t y to p u r c h a s e , t r a n s p o r t and p o s s e s s l iq u o r ,
n ng the v e n d o r 1s c o p y to th e m a ste r t o be g i v e n to th e ven d or or a t t a c h e d to
app i c a t i o n f o r p e r m it to p u r c h a s e , Form 1^-10, i n c a s e a p u rch a se o f f i v e g a llo n s
or more i s a u t h o r iz e d (o r su ch c o p y w i l l be d e s t r o y e d i f no p u rch a se i s to be
q) , s e n d in g a f o u r t h t o th e F e d e r a l P r o h i b i t i o n D i r e c t o r o f the s t a t e in which
the r e t a i l d r u g g i s t named in th e c e r t i f i c a t e has h is p l a c e o f b u s in e s s , o r , i f no
sa e in q u a n t i t y o f l e s s than f i v e w in e g a l l o n s i s a u t h o r i z e d , to the F e d e r a l
r o h ib it* c n D i r e c t o r o f th e S t a t e i n th e w a te r s o f w h ich th e v e s s e l l i e s , and
sending the f i f t h , w it h th e c a n c e le d c e r t i f i c a t e ¿ o f m e d ic in a l n e e d , i f a n y , to t i e
ederal P r o h i b i t i o n C om m ission er, W ashiington, D .C *
The c o p ie s f o r th e D ir e c t o r
and Commissioner w i l l be m a ile d to them on th e d a y o f is s u e or w i t h i n n o t to
exceed 2^ hours a f t e r th e m a ste r r e c e i v e s h i s c o p y *
The c o p y r e t a i n e d by the
medical o f f i c e r o f th e P u b l i c H e a lt h S e r v i c e w i l l be k e p t by him u n t i l th e t e n t h ,
and n ot l a t e r th an the f i f t e e n t h , d a y o f th e n e x t c a le n d a r month, when a l l c o p ie s
of such a p p l i c a t i o n s and c e r t i f i c a t e s is s u e d d u r in g the p r e c e d in g month w i l l be
forwarded to th e P r o h i b i t i o n C om m ission er, Y /a sh in g to n ,D .C .
Hm
T*D, 3*4-S4
-5-,
Sec* 15» Xf» in the op in ion of the m edical o f f ic e r of the P u b lic Health
Service, the v e s s e l should ob tain a perm it under R egulations 60 fo r a l l or part
of i t s supply of m edicinal liq u o r , such o f f ic e r should so s ta te in the c e r t i f
cate of m edicinal need, w ith h is reason fo r such statement* I f , pending the
granting of such a p erm it, such v e s s e l should be allow ed to p o sse ss liq u o r fo r
medicinal purposes, or i f the perm it granted w i l l not m eei the m edicinal require
ments of such v e s s e l, the m e d ic a l..o ffice r should so s t a t e in the c e r t if ic a t e *
"If the v e s s e l has no need fo r m edicinal liq u o r , in the opinion of the. medical
o ffic e r , such statem ent should be made in the c e r t if ic a t e of m edicinal need*
n
no case should a c e r t i f i c a t e of m edicinal need, on Form 1539*
refu sed by t e
medical o f f ic e r , but should be given when a p p lied fo r and lim ite d as h erein pro
vided*
;
.
.
Sec* l6* At the time a medical officer of the Public Health Service gives
the master of a vessel a certificate of medicinal need, on Form 1539»
w ^- *
if proper under the circumstances, include in such certificate authority to pur
chase in a quantity less than five wine gallons, and will name therein a retail
druggist who holds a permit to sell under the National Prohibition Act, irom^
whom such purchase may be made*
Such authority to purchase will authorize au^h
master to purchase from the retail druggist therein named, and will authorize^
such druggist to sell, the kind and amount of liquor therein named. The ^s^er
will deliver the vendor's copy of such certificate of medicinal need, Form 539»
to the retail druggist named, at the same time exhibiting to such druggist tne
master's copy of such c e r t if ic a t e *
. .
i
Sec* 1 7 * When the r e t a i l d r u g g ist named th erein r e c e iv e s any c e r t if ic a t e of
medicinal need, on Form 1539» a u th o rizin g a purchase, and haa been shown tf&jg
master{s copy th ereo f, such r e t a i l d r u g g ist s h a ll s a t i s f y h im self f u l l y of t e
a u th e n tic ity th er e o f, e ith e r by reco g n izin g the handw riting and signature 0
e
medical o f f ic e r of the P ublic H ealth S erv ice or by c a llin g upon such medical
o ffic e r , p e r so n a lly , by telep h on e, or oth erw ise, to s ta te whether such cer 1
cate of m ed icin al need w ith au th ority tb o purchase^ was duly issu ed , and sue
druggist s h a ll a ls o make c e r ta in of the id e n t it y of the master of the v esse *
If such c e r t i f i c a t e of m edicinal need and a u th o rity to purchase i s authen i c ,
the master named th erein may purchase and the r e t a i l d ru g g ist named th er e in may
s e l l , and e ith e r the master or the r e t a i l d ru g g ist may transport to the v e sse ,
the liq u o r authorized to be purchased. Upon d e liv e r y , the master s
sign^
receipt endorsed on the vendor's copy of Form 1539 in order that the ruggis
may prove d e liv e r y and ob tain c r e d it on h is records under h is b a sic permi * . n
Sec. 12« In case th e m aster, under a c e r t i f i c a t e o f m edicinal need, de 1
to purchase liq u o r in an amount of f i v e wine, g a llo n s or more, such m s er wi
apply on Form i k l O to the Federal P r o h ib itio n D irecto r to whom, under tn ese ic g - >
la tio n s , the d ir e c t o r 's copy of Form 1539 is s e n t, fo r a permit to FjJ* 0
illlB
Form lhlOA, in accordance w ith the p r o v isio n s of R egulation s bO*
T 0 e
^
of m edicinal need, Form 1539» « h a ll be the b a sic perm it fo r sydh P^X^ 6
vendor's copy of Form.1533. s h a ll be a tta ch ed to such a p p lic a tio n an , ^
in the D ir e c to r 's f i l e s * The p r o v isio n s of R egulation s 60 s h a ll be 0
the purchase and d e liv e r y of such liq u or* In every such case the ir e c or,
fore is su in g such perm it to purchase, s h a ll make c e r ta in of the genu neness ^
c e r t if ic a t e of m edicin al need, Form 1539» and
id e n t it y of t e max Q *
The d ir e c to r w i l l a ls o make such in v e s tig a tio n of the v e s s e l a s , m h is op
may be n e c essa ry .
-
6-
LIQUOR SURRENDERED BY:' OR SEIZED FROM VESSELS *
See» 1 9 , A l l l i q u o r s foun d "by custom s o f f i c e r s on board an y v e s s e l , e i t h e r
■ foreign or Airierican, i n p o r t s or t e r r i t o r i a l w a te r s of th e U n ite d S t a t e s , and
¡w hich s h a l l be t r a n s p o r t e d , s o ld dr p o s s e s s e d i n v i o l a t i o n o f th e N a t io n a l P r o I h i b i t i o n A c t , a s amended and su p p lem en ted , and th e r e g u l a t i o n s th e r e u n d e r , a s
I d is t in g u is h e d from the custom s la w s , s h a l l be s e i z e d b y th e s a id custom s o f f i c e r s
funder the p r o h i b i t i o n law s and a r e c e i p t g iv e n th e m a ste r or o th e r p e r so n in
I charge o f th e v e s s e l , showing the .name o f th e v e s s e l and m s t e r , th e d a t e , the
[number of c a s e s , b o t t l e s or o th e r c o n t a i n e r s , w i t h t h e i r u n i t c a p a c i t y , and
[w hether th e li q u o r s were c a r r i e d a s c a r g o or s e a s t o r e s .
T h is r e c e i p t s h a l l be
Imade in d u p l ic a t e and a co p y r e t a i n e d b y th e c o l l e c t o r o f cu sto m s.
S e c . 2 0 . A l l l i q u o r s coming in to the p o s s e s s io n o f custom s o f f i c e r s as
■ provided i n the p r e c e d in g s e c t i o n s h a l l , a s soon a s p r a c t i c a b l e , be tu rn ed over
I to the F e d e r a l P r o h i b i t i o n D i r e c t o r o f th e s t a t e or h i s a u t h o r iz e d r e p r e s e n t a t i v e
f a t the p o r t , to be l i s t e d , s e g r e g a te d and l a b e l e d f o r i d e n t i f i c a t i o n , and s a f e l y
I sto red f o r d i s p o s a l a c c o r d in g to law *
The a c t u a l e x p e n ses in c u r r e d b y custom s
[ o f f i c e r s i n u n lo a d in g su ch l i q u o r s fro m v e s s e l s and c o n v e y in g the same to a ware*
I house or o th e r s t o r a g e p l a c e w i l l be p a id -fr o m the a p p r o p r ia tio n f o r enforcem ent
I of n a t i o n a l p r o h i b i t i o n .
The P r o h i b i t i o n D i r e c t o r , or h i s r e p r e s e n t a t i v e re
c e iv in g such l i q u o r s , s h a l l make ackaow ledgm ent t h e r e o f by s ig n in g th e c o l l e c t o r ’ s
I copy o f r e c e i p t t h e r e f o r g iv e n b y him to th e m aster o f th e v e s s e l .
The P r o h io itio n D ir e c t o r s h a l l a l s o c a u se to be made a c a r e f u l l i s t by c l a s s e s o f ea ch l o t
r e c e iv e d , showing th e name o f the s h ip p in g c o n c e rn ,
th e name o f th e v e s s e l and
| m aster, th e q u a n t i t i e s o f the r e s p e c t i v e k in d s o f l i q u o r s ta k e n and th e d a te
I th e re o f.
These l i s t s s h a l l be in q u a d r u p lic a t e ; one t o be h e ld in the o f i i c e o f
■ the p r o h i b i t i o n o f f i c e r r e c e i v i n g the. l i q u o r , one to be fo rw ard ed to the F e d e r a l
P r o h ib it io n D ir e c t o r o f th e s t a t e , one to be fo rw ard ed to th e F e d e r a l P r o h ib i t io n
I Pom nissioner a t W ash in gton , D . C . , and one to the c o l l e c t o r o f i n t e r n a l reven ue o f
I the d i s t r i c t .
S e c . 2 1 . A l l l i q u o r s found b y custom s o f f i c e r s on b oard any v e s s e l , e i t h e r
fo r e ig n or A m erican, in v i o l a t i o n o f fche custom s law s and r e g u l a t i o n s , a s d i s I tin g u is h e d from the p r o h i b i t i o n la w s , s h a l l be s e i z e d b y custom s o f i i c e r s , r e | c e ip t s g iv e n t h e r e f o r a s r e q u ir e d i n s e c t i o n 19 h e r e o f , and s h a l l be d e a l t w it h
I under th e custom s la w s .
When b o th th e p r o h i b i t i o n law s and the custom s law s
■ 'appear to have been b ro k e n , the o f f i c e r s o f th e custom s s e r v i c e s h a l l f i r s t p ro*
I ceed under th e custom s law s u n l e s s , i n th e p a r t i c u l a r c a s e , th e y e l e c t to turn^
1 the c a s e o ver to th e p r o h i b i t i o n o f f i c e r s f o r p r i o r p r o c e e d in g s under th e p r o h ir
I b i t ion law s*
2* S u b s e c tio n (q) o f S e c t i o n 93
R e g u la t io n s 60, a s amended by T .D . 335^»
■ h ereby r e p e a le d ,
3* A lth o u g h t h i s T r e a s u r y D e c is io n w i l l n o t be in m andatory f o r c e u n t i l June
P, 1923 j a s s e t f o r t h i n th e fiasfct p a ra g ra p h a b o v e , y e t a n y d o m e stic or f o r e i g n
p s e l may, a t any tim e a f t e r th e a p p r o v a l o f t h i s T r e a s u r y D e c is io n , v o l u n t a r i l y
Ike ad van tage o f any o f th e b e n e f i t s t h e r e o f ; P r o v id e d , t h a t i f Form 1539
r&m
t ir e d f o r s u c h p u r p o se , t h i s p a ra g ra p h s h a l l n o t a p p ly u n t i l a s u p p ly o f su ch form
f
a v a i l a b le *
h , I f an y f o r e i g n v e s s e l l e a v e s a f o r e i g n p o r t b e fo r e June 1 0 , 19^3» f ° r 311
t e r ic a n p o r t , h a v in g l i q u o r on b oard f o r b e v e r a g e purposes,flB ich l i q u o r s h a l l n o t ge
s ize d under th e above r e g u l a t i o n s w h ile k e p t under custom s s e a l in A m erican t e r r u o r ia l w a te r s on su ch v o y a g e *
Ip ro ved : June 2 ,
13 2 3 .
■ A. W* MELLON >
S e c r e ta r y of
D. H. BLAIR,
Com m issioner of I n t e r n a l Revenue*
>
the T r e a s u r y .
♦
TREASURY DEPARTMENT
FOR RELEASE, AFTERNOON PAPERS,
Monday, J u ly 9, 1923*
Attached h ereto are co p ies of the formal Proposal of
the B r itis h Government fo r the funding o f the B r itis h debt to
the U nited S t a te s , as executed on the 18th of June, 1923, by
the B r itis h .Ambassador, and the A cceptan ce-thereof dated June
1 9 , 1923, executed in b eh a lf of the U nited S ta te s by the Secre
ta r y o f the Treasury, as Chairman of the World War Foreign Debt
Commission, with th e approval o f the P r e sid en t, togeth er with
the form of bond a c tu a lly executed and d e liv e r ed on J u ly 5 ,
1923, by the C ou n sello r of the B r itis h Embassy a t Washington#
Proposal,
Dated the eighteenth day of June, 1923, by His Britannic
Majesty’s Government (hereinafter called GREAT
BRITAIN) to the Government of the United States
of America (hereinafter called the UNITED STATES)
regarding the funding of the debt of Great Britain to
the United States.
Whereas Great Britain is indebted to the United States
as of 15th December, 1922, upon demand obligations in the
principal amount of $4,074,818,358.44, not including obli
gations in the principal amount of $61,000,000, representing
advances deemed to have been made to cover purchases of
silver under the Act of Congress approved 23rd April, 1918,
of which $30,500,000 has been repaid in April and May,
1923, and the balance is to be repaid in 1924, pursuant to
an agreement already made between the parties, and Great
Britain is further indebted to the United States, as of 15th
December, 1922, on account of interest accrued from 15th
April and 15th May, 1919, on said $4,074,818,358.44, prin
cipal amount of demand obligations:
And whereas Great Britain has power under the War
Loan Act, 1919 (9 and 10 Geo. 5, cap 37) to issue securities
in exchange for maturing securities issued under the War
Loan Acts, 1914 to 1918:
And whereas the demand obligations now held by the
United States Treasury were so issued, and will become
payable upon the request of the United States Treasury
for their payment:
Now therefore Great Britain proposes, in the exercise of
the powers above recited and in consideration and in faith
54277—23
(1)
of the statements, conditions, premises and mutual covenants
herein contained, to issue to the United States, in exchange
for the demand obligations now held by the United States
Treasury, securities which shall be in their terms and con
ditions in accordance with the following provisions:
1. Amount of Indebtedness.
The total amount of indebtedness to be funded is
$4,600,000,000, which has been computed as follows:
Principal amount of demand obligations to be fu n d ed ...» , $4,074,818, 358. 44
Interest accrued thereon from 15th April
and 15th May, 1919, respectively, to
15th December, 1922, a t the rate of 4£
per cent per annum .................................$629,836,106. 99
Less—Payments made by Great
Britain on 16th October and 15th
November, 1922, on account of inter
est, with interest thereon at 4J per
cent per annum from said dates, re
spectively, to 15th December, 1922. 100,526,379. 69
--------------------— 529, 309, 727.30
Total principal and interest, accrued and unpaid,
as of 15th Deceinber, 1922...................................... 4,604,128,085. 74
Paid in cash by Great Britain, 15th March, 1923..
4,128,085. 74
Total indebtedness to be funded into bonds of Great B ritain. 4, 600,000,000.00
2. Issue of Long-Time Obligations.
The securities, which it is proposed to issue at par as
promptly as possible, shall be obligations in the principal
amount of $4,600,000,000, in the form of bonds to be dated
15th December, 1922, maturing 15th December, 1984, with
interest payable semi-annually on 15th June and 15th
December in each year at the rate of 3 per cent per annum
from 15th December, 1922, to 15th December, 1932, and
thereafter at the rate of 3J per cent per annum until the
principal thereof shall have been repaid.
3. Method of Payment.
The bonds shall be payable as to both principal and
interest in United States gold coin of the present standard
of weight and fineness, or its equivalent in gold bullion, or,
3
at the option of Great Britain, upon not less than thirty
days’ advance notice indicating the minimum amount which
it is contemplated to pay at next due date in gold, cash or
available funds, in any bonds of the United States issued or
to be issued after 6th April, 1917, to be taken at par and
accrued interest to the date of payment hereunder: provided,
however, that Great Britain may at its option, upon not less
than ninety days’ advance notice, pay up to one-half of any
interest accruing between 15th December, 1922, and 15th
December, 1927, on any British bonds proposed to be
issued hereunder, in bonds of Great Britain, maturing 15th
December, 1984, dated and bearing interest from the re
spective dates when the interest to be paid thereby becomes
due and substantially similar in other respects to the
original bonds proposed to be issued hereunder.
All payments to be made by Great Britain on account of
the principal or interest of any bonds proposed to be issued
hereunder shall be made at the Treasury of the United
States in Washington or, at the option of the Secretary of
the Treasury of the United States, at the Federal Reserve
Bank of New York and, if in cash, shall be made at the option
of Great Britain in gold coin of the United States or in gold
bullion or in immediately available funds (or, if in bonds of
the United States, shall be in form acceptable to the Secre
tary of the Treasury of the United States). Appropriate
notation of all payments on account of principal shall be
made on the bonds proposed to be issued hereunder which
may be held by the United States: provided, however, that all
payments in respect of any marketable obligations issued
under paragraph 9 of this proposal shall be made at the office
of the fiscal agents of the British Government in the City of
New York.
4
A. E xem ption fr o m Taxation.
The principal and interest of all bonds issued or to be
issued hereunder shall be exempt from all British taxation,
present or future, so long as they are in the beneficial owner
ship of the United States or of a person, firm, association,
or corporation neither domiciled nor ordinarily resident in
the United Kingdom.
5. F orm o f B onds.
All bonds proposed to be issued hereunder to the United
States shall be payable to the United States of America, or
order, shall be issued, so far as possible, in denominations
of $4,600,000 each, and shall be substantially in the form set
forth in the exhibit annexed hereto, and marked “Exhibit
A.” The bonds shall be signed for Great Britain by the
Counsellor of His Britannic Majesty’s Embassy at Wash
ington.
6. R epaym en t o f P rin c ip a l.
To provide for the repayment of the total principal of the
debt before maturity of the $4,600,000,000 priucipal amount
of bonds to be issued, it is proposed that the bonds shall con
tain provisions the effect of which shall be that Great Britain
shall make to the United States payments, on account of the
original principal amount of the bonds to be issued, in the
amounts and on the dates named in the following table:
Date.
15th December:
1 9 2 3 ............
1924
..’.
1925
...
1926
....
1927
...
1928
....
1 9 2 9 ............
1930.............
1 9 3 1 ..........
1 9 3 2 ............
1933.......... :.
1 9 3 4 ............
1 9 3 5 .1 ........
A n n u a l instal
Date
ments to be paid
'
on account of
15th Decem ber—Contd.
principal.
1936............... ...............
.
$23,000, 000
1937.
23.000, 000
1938.
24.000. 000
1939.
25.000. 000
1940.
25.000. 000
1941.
27.000. 000
1942.
27.000. 000
1943.
28.000. 000
1944.
28,000,000
1945.
30.000. 000
1946.
32, 000,000
1947.
32.000. 000
1948.
32, 000,000
A n n u a l instalments to be paid
on account of
principal.
$32,000,000
37.000. 000
37.000. 000
37.000. 000
42.000. 000
42.000. 000
42.000. 000
42.000. 000
46.000. 000
46.000. 000
46.000. 000
51.000. 000
51.000. 000
5
Annual
D at e
,
15th December—Contd.
1949 ...........................
1950 ...........................
1951 ......................
1952 ...................
1953 .................... . . .
1954.. . . . ...................
1955 .......
1956 ...........................
1957 ...........................
1958 .....................
1959 ...........................
1960..........
1961 ...........................
1962 ...........................
1963.. . ....
1964.. . . .......
1965..............
1966........
1967.. . . . . . ...............
instal-
m e n t s t o b e p a id
on accou n t of
p r in c ip a l.
$51,000,000
53, 000,000
55,000,000
57,000,000
60,000,000
64,000,000
64,000,000
64,000,000
67, 000, 000
70,000,000
72, 000,000
74,000,000
78,000,000
78,000,000
83,000,000
85,000,000
89,000,000
94,000,000
96,000,000
Annual
tw a
‘
.
~
,
instal-
ments to be paid
on account of
principal.
15th December— Contd.
1968 ..................' . . . . $100,000,000
1969 ....
105,000,000
1970.. ..................
110,000,000
1971 .........................
114,000,000
1972 .........................
119,000,000
1973 ........................
123,000,000
1974 .........
127,000,000
1975 .........................
132,000,000
1976 ...... .
136,000,000
1977.. ......................
141,000,000
1978 .......................
146,000,000
1979 .....
151,000,000
1980 .........................
156,000,000
1981............
162,000,000
1982.. . ....................... v
167,000,000
1983 .............. . .........
175,000,000
1984 .......
175,000,000
Total........................ 4,600,000,000
that Great Britain may at its option,
upon not less than ninety days’ advance notice, postpone
any payment of principal falling due as hereinabove pro
vided to any subsequent 15th June or 15th December, not
more than two years distant from its due date, but only on
condition that, if Great Britain shall at any time exercise
this option as to any payment of principal, the payment
falling due in the next succeeding year cannot be postponed
to any date more than one year distant from the date when
it becomes due, unless and until the payment previously
postponed shall actually have been made, and the payment
falling due in the second succeeding year cannot be post
poned at all unless and until the payment of principal due
two years previous thereto shall actually have been made.
In the event of Great Britain issuing bonds to the United
States in payment of interest accruing between 15th De
cember, 1922, and 15th December, 1927, as proposed in
paragraph 3 above, the bonds so issued shall contain pro
vision for the payment of their principal before maturity
through annual instalments on account of principal correP rovided, however,
6
sponding substantially to the schedule of payments on ac
count of principal appearing in the table hereinabove set
forth.
7. Payments before Maturity.
Great Britain may at its option, on any interest date or
dates upon not less than ninety days’ advance notice, make
advance payments of principal, in addition to the payments
required to be made by the provisions of the bonds in ac
cordance with paragraph 6 of this proposal. Any such
additional payments shall first be applied to the principal
of any bonds which shall have been issued hereunder on
account of interest accruing between 15th December, 1922,
and 15th December, 1927, and then to the principal of any
other bonds which shall have been issued hereunder. Any
payments made to the United States under this pro
vision shall be in amounts of $1,000,000 or multiples
thereof.
8. Calculation of Interest.
Notwithstanding anything herein contained, the interest
payable from time to time on the bonds proposed to be
issued shall be computed on the amount of the principal out
standing on the previous interest date, with adjustments in
respect of any payment on account of principal which may
have been made since the previous interest date.
9. Exchange for Marketable Obligations.
Great Britain will issue to the United States at any time
.or from time to time, at the request of the Secretary of the
Treasury of the United States, in exchange for any or all
of the bonds proposed to be issued hereunder and held by
the United States, definitive engraved bonds in form
suitable for sale to the public, in such amounts and denomi
nations as the Secretary of the Treasury of the United
States may request, in bearer form, with provision for
7
•
registration as to principal, and/or in fully registered form,
and otherwise on the same terms and conditions, as to
dates of issue and maturity, rate or rates of interest, exemp
tion from taxation, payment in bonds of the United States
issued or to be issued after 6th April, 1917, payment before
maturity, and the like, as the bonds surrendered on such
exchange, except that the bonds shall carry such provision
for repayment of principal as shall be agreed upon; pro
vided that, if no agreement to the contrary is arrived at,
any such bonds shall contain separate provision for pay
ments before maturity, conforming substantially to the
table of repayments of principal prescribed by paragraph 6
of this proposal and in form satisfactory to the Secretary
of the Treasury of the United States, such payments to be
computed on a basis to accomplish the retirement of any
such bonds by 15th December, 1984, and to be made through
annual drawings for redemption at par and accrued interest.
Any payments of principal thus made before maturity on
any such bonds shall be deducted from the payments re
quired to be made by Great Britain to the United States in
the corresponding years under the terms of the table of re
payments of principal prescribed in paragraph 6 of this
proposal.
Great Britain will deliver definitive engraved bonds to the
United States in accordance herewith within six months of
receiving notice of any such request from the Secretary of
the Treasury of the United States, and pending the delivery
of the definitive engraved bonds will, at the request of the
Secretary of the Treasury of the United States, deliver
temporary bonds or interim receipts in a form to be agreed
upon within three months of the receipt of such request.
The United States, before offering any such bonds or interim
receipts for sale in Great Britain, will first offer them to Great
Britain for purchase at par and accrued interest and Great
8
Britain shall likewise have the option, in lieu of issuing to
the United States any such bonds or interim receipts, to
make advance redemption, at psar and accrued interest, of a
corresponding amount of bonds issued hereunder and held
by the United States.
10. Cancellation and Surrender of Demand Obligations.
Upon the delivery to the United States of the $4,600,000,000
principal amount of bonds proposed to be issued hereunder,
the United States will cancel and surrender to Great Britain,
through the British Ambassador at Washington, or his repre
sentative, at the Treasury of the United States in Washing
ton, the demand obligations of Great Britain in the principal
amount of $4,074,818,358.44 described in the preamble to
this proposal.
11. Notices.
Any notice, request or consent under the hand of the
Secretary of the Treasury of the United States shall be
deemed and taken as the notice, request, or consent of the
United States, and shall be sufficient if delivered at the
British Embassy at Washington or at the office of the Per
manent Secretary of the British Treasury in London; and
any notice, request, or election from or by Great Britain
shall be sufficient if delivered to the American Embassy in
London or to the Secretary of the Treasury of the United
States at the Treasury of the United States in Washington.
The United States in its discretion may waive any notice
required hereunder, but any such waiver shall be in writing
and shall not extend to or affect any subsequent notice or
impair any right of the United States to require, notice
hereunder.
Signed on behalf of the Lords Commissioners of His
Majesty’s Treasury, this eighteenth day of June, 1923.
Washington.
A. G e d d e s ,
His Brittanic Majesty’s Ambassador
Extraordinary and Plenipotentiary.
9
E
xhibit
“A.”
(Form of Bond.)
The G
overnment
of the
U
nited
K
ingdom.
Sixty-two year 3-3 § per cent Gold Bond
Dated 15th December, 1922. Maturing 15th December, 1984.
$
No.
The Government of the United Kingdom, hereinafter
called Great Britain, for value received, promises to pay
to the United States of America, hereinafter called the
United States, or order, on the 15th day of December, 1984,
the sum of Four Million Six Hundred Thousand Dollars
($4,600,000), less any amount which may have been paid
upon the principal hereof as endorsed upon the back hereof,
and to pay interest upon said principal sum semiannually
on the fifteenth day of June and December in each year at
the rate of three per cent per annum from 15th Decem
ber, 1922, to i5th December, 1932, and at the rate of three
and one-half per cent per annum thereafter until the prin
cipal hereof shall have been paid. All payments on account
of principal and/or interest shall be made at the Treasury
of the United States in Washington, or, at the option of
the Secretary of the Treasury of the United States, at the
Federal Reserve Bank of New York. This bond is payable
as to both principal and interest in gold coin of the United
States of America of the present standard of weight and
fineness or in its equivalent in gold bullion, or, at the option
of Great Britain, upon not less than thirty days’ notice
indicating the minimum amount which it is contemplated
to pay at next due date in gold, cash or available funds,
in any bonds of the United States issued or to be issued
after 6th April, 1917, to be taken at par and accrued interest
to the date of payment hereunder; provided, however, that
10
Great Britain may at its option, upon not less than ninety
days’ advance notice, pay up to one-half of any interest
accruing hereon between 15th December, 1922, and 15th
December, 1927, in bonds of Great Britain dated and bear
ing interest from the respective dates when the interest to
be paid thereby becomes due, and substantially similar in
maturity and other respects to this bond.
The principal and interest of this bond shall be exempt
from all British taxation, present or future, so long as it is in
the beneficial ownership of the United States, or of a person,
firm, association or corporation neither domiciled nor ordi
narily resident in the Umted Kingdom..
In order to provide for the repayment of the principal
of this bond before maturity, Great Britain will make to
the United States payments of principal in the amounts,
and on the dates shown in the following table:
j)a^e
15th
'
A n n u a l instalments to be paid
' o n account of
principal.
December:
1923............ . ......................
1924.
1925.
1926.
1927.
1928.
1929.
1930.
1931.
1932.
1933.
1934.
1935.
1936.
1937.
1938.
1939.
1940.
1941.
1942.
1943.
1944.
1945.
$23,000
23.000
24.000
25.000
25.000
27.000
27.000
28.000
28,000
30.000
32.000
32.000
32.000
32.000
37, 000
37.000
37.000
42.000
42.000
42.000
42.000
46.000
46.000
Date.
A n n u a l instal
ments to be paid
on account of
principal.
15th December—Contd.
1946.......................... ........
$46,000
1947................ .......... ........
51,000
1948.
.................. . . . . .
51,000
1949.
.................. . . . . .
51,000
1950.
..................................
........
53,000
1951.
..................
55.000
1 9 5 2 .. . ............ ........
57,000
1 9 5 3 .. : ____ . . . . . .
60.000
1954.
.....................................................................................
........
64,000
1955.
...................................................
........
64,000
1956
................ . ........
64,000
1957................. . . . . . ........a
67,000
1958.
...................................................
........
70,000
1959.
...................................................
........
72,000
1960
.............. ____
74,000
1961
... .............. . . . . .
78,000
1962................. ......... ........
78,000
1963.....................
........
83,000
1 9 6 4 .. ..... ........... . . . . .
85,000
1965.
...................................................
........
89,000
1966. ......................... . . ; . .
94,000
1967.
________ I ..............
........
96,000
1 9 6 8 ..................................
100,000
11
Date.
(
A n n u a l instalments to be paid
15th December—Contd.
princ1pa?Unt
1969........................... . . ! . . $105,000
1970 ....................................... 110,000
1971 ............ | ..........
114,000
1972 .................
119,000
1973........................... : . . . .
123,000
1974 ............................
127,000
1975 .................................
132,000
1976.....................
136,000
1977.....................................
141,000
Annual
D a te .
in stal-
m e n t s t o b e p a id
15th December—Contd.
principal!1111 °f
1978........
$146,000
1 9 7 9 .. . . . . . . . . .......
151,000
1980 ....
156,000
1981 ...........
162,000
1982....................................
167,000
1983..............................
175,000
1 9 8 4 .. ...................
175,000
T o ta l..................................... 4,600,000
that Great Britain may, at its option,
upon not less than ninety days’ advance notice, postpone
any payment of principal falling due, as hereinabove pro
vided, to any subsequent 15th June or 15th December, not
more than two years distant from its due date, but only on
condition that if Great Britain shall at any time exercise
this option as to any payment of principal, the payment
falling due in the next succeeding year cannot be postponed
to any date more than one year distant from the date when
it becomes due unless and until the payment previously
postponed shall actually have been made, and the payment
falling due in the second succeeding year cannot be post
poned at all unless and until the payment of principal due
two years previous thereto shall actually have been made.
This bond may be paid on any interest date before ma
turity in whole or in part, in amounts of $1,000,000, or
multiples thereof, at the option of Great Britain, on not
less than ninety days’ advance notice.
This bond is issued by Great Britain pursuant to the
proposal, dated the 18th day of June, 1923, and to the
Acceptance of proposal, dated the 19th day of June, 1923.
P rovided, however,
In Witness Whereof, Great Britain has caused this bond
to be executed in its behalf by the Counsellor of His Britan
nic Majesty’s Embassy at Washington, thereunto duly
authorized.
For the United Kingdom:
Dated 15th December, 1922.
(Back.)
The following amounts have been paid upon the principal
amount of this bond:
Date.
Amount paid.
Arct'pianri'.
Ju n e
19, 1923.
The Right Honorable,
Sir A u c k l a n d G e d d e s , G. C. M. G., K. C. B.,
Ambassador Extraordinary and Plenipotentiary,
The British Embassy,
Washington, D. C.
M y d e a r M r . A m b a s s a d o r : I have the honor to acknowl
edge the receipt of your note of June 18, 1923, transmitting
the proposal dated the 18th day of June, 1923, by His
Britannic Majesty’s Government to the Government of the
United States of America regarding the funding of the
debt of Great Britain to the United States. This proposal is
agreeable to the World War Foreign Debt Commission, and
I am writing for the Commission and by its authority to
advise you that the proposal is hereby accepted on behalf of
the United States of America, pursuant to the authority
conferred by the Act of Congress approved February 9, 1922,
as amended by the Act of Congress approved February 28,
1923. In accordance therewith I am writing to ask that the
bonds as contemplated thereby may be delivered as soon as
possible to the Secretary of the Treasury of the United
States in exchange for the demand obligations amounting
to $4,074,818,358.44 now held by him which are otherwise
now payable.
Very truly yours,
A. W . M
ellon,
Secretary of the Treasury, and Chairman of
the World War Foreign Debt Commission.
Approved :
W
arren
G. H
arding,
President.
Ju n e
19, 1923.
(13)
W A S H IN G T O N : G O V E R N M E N T P R I N T I N G O F F I C E : 1923
THEAStJRY DEPAHTMENT
Washington«
July 13, 1923.
My dear Senator^
X received on July 11 your le tte r of July 9, 1923, requesting
the Treasury to p e titio n the Comptroller General of the United States
for a re-hearing upon the question of authority to revoke allocations
of silv er *for subsidiary coinage under the terms of the act approved
April 23, 1918, sometimes known as the Pittman Act« I have read your
le tte r and i t s enclosures, and find therein no new facts that would
ju stify the Treasury in asking the Comptroller General fo r a re-hearing.
I am, however, sending a copy of your le tte r and of th is reply to the
Comptroller General fo r h is information*
The statement of facts contained in my le tte r of November 2,
1922, f i r s t submitting the case to the Comptroller General, was pre
pared hy the Bureau of the Mint on the basis of i t s records and ac
counts, and is correct.
The Comptroller General, furthermore, as the
chief accounting officer of the Government, had f u ll access at a ll
times to the records and accounts of the Bureau of the Mint, and of
the several coinage mints, and at the Treasury’s request made independ
ent investigation into the facts before rendering h is decision on
November 299 1922. There is no question but that the standard silv er
dollars involved in the allocations were actually broken up and melted,
and th is is expressly stated às one of the facts in the Comptroller
General1s decision.: I t was also expressly stated in my le tte r of Nov
ember 2t 1922, to the Comptroller General that the nallocations of
—20-
silver for subsidiary coinage under the act were made in p art to make up
shortages a t the individual, coinage mints, rather than for the Mint
Service as a whole, and in p art tp supply refined silv er immediately
available for coinage, where the silv er already o.n hand was unrefined
As to the coinage into subsidiary silv er, i t most be clear that once
melted into bullion the silv er could not be earmarked and treated
separately from other silv er in the mints* She silv er bullion carried by
the mints is held fo r p ractical purposes in one mass, separate accounts
being kept on the books of the Bureau of the Mint showing the bullion
carried in the subsidiary silv er bullion account and the standard silv er
dollar bullion account. Adjustments between these accounts are made
from time to time, without physically affecting the silv er bullion, in
order to reflec t the operations of the mints, but i t is always impossible
to earmark the silv er bullion in the several accounts or to identify any
coins as having been made from a p articu lar lo t of silv e r.
In general^ I notice that your le tte r deals solely with the
technical points relating to. the melting of standard silv er dollars and
the coinage of bullion into, subsidiary silv e r. These points are covered
by the Comptroller General’ s decision, and i t is unnecessary further to
discuss them.' I do not find it.anywhere disputed th a t the action which
tiie. Treasury has.taken in respect to the reversal of the allocations fo r
subsidiary coinage' and th e .subsequent recoinage of th is silv er into
standard silv er d o llars, have merely restored the situation to what i t
TOUld have been had the allocations never been made. This f u l f i l l s the
primary purpose of the ac t, which was to relieve an emergency and restore
-3~
(y ^\
the silv er currency to what i t was when the act was passed, i t has
“been done without purchasing silv er under the act a t the price of $1 per
ounce by transferring back to the standard silv er dollar account an
amount of silv er carried in the subsidiary silv er bullion account which
bad been lying in the mints at a l l times since the original allocations
were made* To do otherwise, and follow the course which you recommend,
would mean purchasing over 10, 000,000 ounces of unnecessary silv er a t the
a rtific al price of $1 per ounce, a t a loss of over 35 cents an ounce as
compared with the oldinary market price, and carrying an equivalent amount
of silver as a dead asset in the Treasury a t a heavy loss for in te re st and
other carrying charges*
The Treasury*s action in adjusting the accounts
of the mints has thus saved the people of the United States at least
$5, 000, 000, th at would otherwise have gone to subsidize the silv er indus
try* The action taken was clearly in the public in te re st, and though ap
parently not acceptable to the silv er in te re sts of Uevada should commend
its e lf, I believe, to the Commission of Gold and Silver Inquiry, a com
mittee of the Senate of the United States which was appointed to serve
the in te re sts of the people as a whole rather than the special in te re sts
of a single class*'
Very tru ly yours,
(Signed)
S* P* G ilbert, Jr*
Acting Secretary of the Treasury*
Hon* Key Pittman,
Vice-Chairman, Commission
of Gold and S ilver Inquiry,
United States Senate,
Washington, D, C*
(T.d .3^97)
Income Tax.
Ownership
C e rtific a te s: Articles, 365» 3^7» 3^9 »370» 107^« 107°» 1077» 1078 .and
1079, .of Regulations. 62, amended«
...
TREASURY DEPARTMENT
O ffic e of Commissioner of In tern a l Revenue
W ashington, D. C.
| 10 COLLECTORS OF INTERNAL REVENUE AND OTHERS CONCERNED:
A r tic les 3 6 5 , 3 6 7 , 369, 370, 107^, 1076, 1077» 1078 and 1079*
I&2, are hereby amended .to read as f o l l o w s ’*.
II
I
J
II
IR
11
of
R egulations
ART* 365. Ownership c e rtific a te s for in te re st coupons. - The owners,
except domestic and resident corporations, of bonds or other obligations
containing a tax-free covenant clause, issued by a domestic or resident
foreign corporation, when presenting in te re st coupons for payment, shall,
file a c e rtific a te of ownership for each issue of bonds, showing the name
and address of the debtor corporation, the name, and address of the owner
ox the bonds, the nature of the obligations, the amount of in te re st and
its due date, and the amount of any tax withheld* In case of bends not
containing a tax-free covenant clause, no ownership c e rtific a te s are re
quired unless the owner of such bonds is a nonresident alien individual,
fiduciary, partnership or corporation, No ownership c e rtific a te s need be
filed in the case of in terest payments on bonds, the income from which is
not required to be included in gross income, nor in the case of any obiigations of the United States. *Sse section 213(b) of the statu te and a rt cles 7 ^ - * Where in connection with the sale of its property payment of
the bonds or other obligations of a corporation is assumed by the assignee,
such assignee, whether an individual, partnership, corporation, or a State
or political subdivision thereof, must deduct and withhold such taxes as
would have been required to be withheld by the assignor had no such sale
and transfer been made. As to ownership c e rtific a te s in the case of bon s
of foreign countries, or bonds of nonresident foreign corporations, see
article 1077*
_
..
ART. 367. Form of c e r t i f i c a t e where no w ith h old in g req u ired , - F o r the
purposes of a r t i c l e 365, Form 1001 s h a ll be used by c it iz e n s or r e sid e n ts o £ |
the United S ta te s when personal exemption i s claim ed a g a in st in t e r e s t cn
bonds con tain in g a ta x -fr e e covenant clause*, In ca se a c i t i z e n or r e sia e n
alien in d ivid u al r e c e iv e s in t e r e s t on bonds co n ta in in g a ta x -fr e e covenant
clause in excess of the amount of p erson al exemption which the in d iv id u a l
nay claim , any such ex cess must be reported on Form 1000.
ART. 369* I n te r e s t coupons w ithout ownership c e r t i f i c a t e s . -W hen in
terest coupons are r ec e iv ed unaccompanied by c e r t i f i c a t e s of ownership, un
less the f ir s t' bank be s a t i s f i e d th at the. owner i s a c it iz e n of the United
States or a r e s id e n t in d iv id u a l, fid u c ia r y , p artn ersh ip or corp o ra tio n , . e
fir s t bank s h a ll req uire of the payee a statem ent showing the name and
dress of the payee, the name and address of the debtor co rp o ra tio n , the a-e
of the m aturity of the in t e r e s t , the name and address of the person from
whom the coupons were r e c e iv e d , the amount of the in t e r e s t , and a statsmen
that the owner of the bonds i s unknown to the payee, Such statem ent s h a ll
be forwarded to the Commissioner w ith the monthly retu rn cn rorm 1012» The
fir s t bank r e c e iv in g such coupons s h a ll a ls o prepare a c e r t i f i c a t e on Form
1000, cro ssin g out »owner» and in s e r tin g »payee» and en terin g the amount of
interest on lin e 6, and s h a ll stamp or w rite a cro ss the fa c e of the c e r t i f i
cate »Statement fu rn ish ed ," adding the name o f the ban&»
r
lp-7
-
AHI» 3?0. Interest on registered ’bonds» - Ownership c e rtific a te s are
required in connection with in te re st upon registered bonds, as in the^ease
of coupon bonds, if such bonds contain a tax-free covenant clause or if
such bonds are owned by a nonresident alien individual, fiduciary, partnership or corporation«- If ownership c e rtific a te s are not. furnished by the
owner of the bonds, such c e rtific a te s must be prepared by the debtor corpor
ation or its withholding agent« (a) If the bonds contain a tax-free cove
nant clause, ownership c e rtific a te s roust"be prepared on Form 1000 for the
following classes of bondholders’- Citizens or residents of the United States,
nonresident alien individuals, partnerships, whether foreign, or domestic,
foreign corporations having no office or place of business Within the United
States, (b) If the bonds do not contain a tax-free covenant clause, Form
1000 shall be prepared in the case of nonresident alien individuals, part
nerships composed in whole or in p art of nonresident aliens and not having
an office or place of business within the United States, or in case the
owner is a foreign corporation not engaged in trade or business within the
United States and not having an office or place of business therein.
Regardlftgs of whether the registered bonds do or do not contain a
tax-free covenant clause, no ownership c e rtific a te is required in connection
with such bonds owned by a domestic or resident corporations.
ART* 107*+, Beturn of information as to in te re st on corporate bonds. In the case of paymentsdof in te re st, regardless of amount, upon bonds and
similar obligations of domestic or resident foreign corporations, the ori
ginal ownership c e rtific a te s, when duly file d , shall constitute and be
treated as returns of information. If a bondholder f ile s no ownership
certificate in the case of payments of in terest on registered bonds, if
such bonds contain a tax-free covenant clause, or if such bonds are owne
by a nonresident alien Individual, fiduciary, partnership or corporation,
%e withholding agent shall make out such a c e rtific a te in each instance
and file i t with the monthly return. See sections 221 and 237 of
s a u
and articles 3^~375 anû 60l .
ART. 1076. Foreign items. - The term "foreign item," as here used,
I means any dividend upon the stock cf a nonresident foreign corporation or
any item of in terest upon the bonds of foreign countries or nonresiden
foreign corporations, whether or not such dividend or in terest is pa
in
the United States or by check drawn on a domestic bank, (a) Wherever a
foreign country or nonresident foreign corporation issuing bonds has ap
pointed a paying agent in this country, charged with the duty of paying^
the interest upon such bonds, such paying agent, shall be the source oi in
formation. If such foreign country or foreign corporation has no such
agent, then the la s t bank or collecting agent in this country shall be the
source of information, (b) In the case of dividends on the stock of a non
resident foreign corporation, however, the f i r s t bank or collecting agen
accepting such item for collection shall be the source of information*
0
return of information. is required'with respect to foreign items unless the .
amount thereof is $1,000 or more in any taxable year, not is any return of
information required with respect to such items owned by a nonresident^
alien individual» a foreign partnership or a foreign corporation, provine
the f ir s t bank or collecting agent is sa tisfied as to such ownership. n
the ta tte r case the foreign item may be stamped "foreign owner ♦
3i*37
->
¿HI. 1077- Ownership certificates for foreign it9® ® v “
of foreign countries or of nonresident foreign corporations con'tain a
tax-free covenant clause and are owned by citizen, or resadents of the
United States, the foreign country or nonresident foreign
P
having a fiscal or paying agent in the United States, sue ag
bonis<
auired to withhold a tax of 2. percent from the interest on s
Ownership certificate Form 1000, modified to show the name and add
of the fiscal agent or the paying agent, snould he u, e
F
1001 sho-uid
(if so entitled.) desires to claim exemption, m whxcn ca e
be f iled. See article
bv
AHT, 107 S* Foreign items presented for collection nna
^
n
ownership certificates. - If the foreign item is an intere
d fy a
tached from bonds containing a tax-free covenant “I f 1*®'
United States,
foreign country or corporation having ajpaying^agen ^ ^ th
^
a statement and ownership certificate, form 1000, snai
provided in a r t ic le 369 »
.
4.
_ Tn the case
ART. 1079. Return of inform ation 4» to fo r e ig n i t e m .
te s when
of c o lle c tio n s of fo r e ig n item s, the n r tg in a l ownership
t
of in_
required and duly f i l e d s h a ll c o n s titu te and be tr e a te d
^
id en t
formation, (a) In the case of d ivid en d s on the s to c k o f a
S ta tes aforeign corp oration paid to c it iz e n s or r e s id e n ts of the Unit J *
return of inform ation on Forms 1096 and 109§ sh a l
e r q
amount th ereof i s $1,000 or more in any t e f e U * year. ™
of in te r e s t item s on bonds co n ta in in g a ta x -fr e e cove
ti
which the paying agent in th is country i s the source of inform atio ,
the ownership c e r t i f i c a t e s h a ll accompany the coupon to such age t
source of ittform atIon, who s h a ll forward the ownership =e ^ i f ic a t
the Commissioner accompanied by a monthly return on o
annual return on Form 1096 B s h a ll be forwarded to the
not later than March ljth of each year, on which shall be g i v e ^ ^
itary of the monthly returns. Where ownership cer 1
annual return
used, a monthly return shall be made on Form 1012 and a"
on Form 1013, as provided in articles 30l-375< Forms 10
when so used, should be m odified to show the name f *
paying agen t. The use of s u b s titu te c e r t i f i c a t e s is not per
the c o lle c t io n of fo r e ig n item s.
D. H. BLAIR,
^
\
Commissioner of Internal Revenue.
APPROVED* July I d , 1923*
mckenzie moss,
Acting Secretary of the Treasury*
TREASURY DEPARTMENT
WASHINGTON
July 17, 1923*
My dear Senator:
I received your le tte r of July 14, 1923, with further refer
ence to the cfuestion of authority to revoke allocations of silv e r for
subsidiary coinage under.the Act approved April 23, 1918, sometimes
knorn as the Pittman Act* Your le tte r is lim ited to the technical
question of authority, which is fo lly covered by the Comptroller Gen
e r a l i decision of November 29, 1922* This decision m s made upon a
fu ll statement of the case* and was rendered by the chief accounting
officer of the Government, who has access to a ll the accounts and
records in question. You have presented no new evidence, and I qurte
agree with you that i t would be a waste of time to discuss the matter
further.
X take i t that the Treasury 1s position in the matter is
clear and beyond question* Sha action i t has taken sa tisfie s a l l the
equities in the case, and the highest constituted authority has held .
that i t was fu lly authorized as.a matter of law* Xn these circumstan
X should not feel warranted, as a public officefi, in taking any di
action, p articu larly when that would mean a loss of a t least $ ,
to the people of the United States*
.
I had already seen the resolution o f the Board o f Governors
of the Western Division of the American Mining Congress
re fe r, and enclose for your information a copy of my le tte r
30, 1923, in reply to that resolution*
Very tru ly yours,
(Signed)
Hon* Hey Pittman,
Vice Chairman of the Senate Commission
of Gold and Silver Inquiry,
United States Senate,
Washington, D* C*
1 enclosure*
S.; F.' GIEBEEI, J r .
Acting Secretary
the Treasury*
Inclosure to Memo
aSEASUaT DWARTimE
nm m w fio's
dated
JHme 30. 1923.
Dean Sir:
I have received your le tte r of June 26» 1923, enclos
ing a copy of a resolution adopted by the Board Of Governors of
the Western Division of th© Aneridan Mining Congress at th e ir
annual meeting held at San DranOisco, California, Jtme 12, 13
and 14, 1923, with respect to the administration of the Act of
Congress approved April 23, 1918, sometimes known as the Pittman
Act# I note that the resolution urges the executive officers of
the .American Mining Congress, in conjunction with silv er producers
of the Western States, to take immediate steps to bring before the
proper courts the “le g a lity and propriety** of the cancellation by
the Treasury Department of allocations of silv er for subsidiary
coinage under the Act, to the end that the question may be settled
“regardless of the action of a department that is wrongfully en
deavoring through widespread propaganda to deceive the people into
believing th at producers seek an unfair interpretation of the act.**
This resolution is quite obviously part of the campaign of misrep
resentation that various interested parties have been carrying on for
the past two or three months in an effo rt to make silv er producers
believe that they have been unfairly treated, and 1 am surprised
that i t would be adopted by the Board of Governors of the .American
Mining Congress without the slig h test effort to ascertain the facts*
The Treasury*s action in respect to the allocations of silv er for
subsidiary coinage is clear and beyond dispute*
I t re sts upon the
decision rendered November 20, 1922, by the Comptroller-General
of the United S tates, which is conclusive and binding upon the Depart
ment,, and is supported by every consideration of equity and common
sense*
The Treasury* s position in the matter is set forth in my
le tte rs of May 9 and May 31, 1923, to Senator Pittman of Nevada,
copies of vfoich, with, a copy of the Comptroller-General*s decision,
are enclosed herewith.
The Treasury Department is not engaging in any propaganda
in th is matter, and has no occasion to do so.
I t has taken action
under the law, upon the advice of the highest constituted authority,
and has staged i t s position in the clearest possible terms*
I ts
action fu lly s a tisfie s the purchase provisions of the Pittman Act
and saves to the people of the United States at least $5,000,000*
I t would be more becoming, i t seems to
m e,
if those who are trying
to have this sum diverted out of the public Treasury to promote tne
special interests of the silver industry, would te ll the truth iu
the propaganda which they are carrying on and present the case on
its merits, without persistently misrepresenting the Treasury*s
attitude*
Very truly yours,
(Signed) S# P* GlIîBKRT, Jr*
Acting Seoretary of the Treasury,
J* P* CaUbreath* Esq>,
Secretary, American Mining Congress,
Washington, D* C*
D i s t r i b u t i o n o u t o f e a r n in g s or p r o f i t s accu m u la te d p r i o r to Marcii 1 ,
A r t i c l e 15^3
a ffir m e d .
19 13
R e g u la t io n s 62 amended; T .D . 3^7^ re v o k e d and T.D * 3^75
O ffic e
TREASURY DEPARTMENT
o f Com m issioner o f I n t e r n a l Revenue
W ash in gton , D. C .
TO COLLECTORS OF INTERNAL REVENUE AND OTHERS CONCERNED:
Article 15^3 of Regulations 62 is hereby amended to read as follows
(the underlining is not a part of the amended Article, but is used to
indicate the additions and changes made by the amendment):
ART. 15^ 3* D i s t r i b u t i o n o u t o f e a r n in g s or p r o f i t s
accu m u lated p r i o r to March 1 , 1 9 1 3 * * Any d i s t r i b u t i o n b y
a c o r p o r a t io n o u t o f e a r n in g s or p r o f i t s a ccu m u la te d p r io r
to March 1 , 19 13» or o u t ° f in c r e a s e i n v a lu e o f p r o p e r t y
a c c r u e d p r i o r t o March 1 , 1 9 1 3 (w hether or n o t r e a l i z e d b y
s a l e or o th e r d i s p o s i t i o n p r i o r to I/Iarch 1« 1 9 1 3 ) , i s n o t
a d iv id e n d w i t h i n th e m eaning o f th e A c t .
The p r o v is io n s
o f th e p r e c e d in g se n te n c e s h a l l be a p p li e d u n ifo r m ly to
c a s e s a r i s i n g under th e Revenue A c t o f 1916» th e Revenue
A c t o f 1917> and th e Revenue A c t o f 1 9 1 8 , a s w e l l as th e
Revenue A c t o f 1 9 2 1*
A c o r p o r a t io n ca n n o t d i s t r i b u t e
e a r n in g s or p r o f i t s a ccu m u la te d or in c r e a s e in v a lu e o f
p r o p e r t y a c c r u e d p r i o r to March 1 , 1913» u n le s s and u n t i l
a l l e a r n in g s or p r o f i t s accu m u la te d s in c e F e b r u a r y 28, 1913»
h ave been d i s t r i b u t e d .
Whenever one c o r p o r a t io n r e c e i v e s
from a n o th e r c o r p o r a t io n d i s t r i b u t i o n s out o f e a r n in g s or
p r o f i t s accu m u lated b y s u c h o th e r c o r p o r a t io n p r i o r to
March 1 , 1 9 1 3 . or ou t o f in c r e a s e in v a lu e o f i t s p r o p e r ty
a c cr u e d p r i o r to March 1 , 1 9 1 3 . and th e “ r e c e i v i n g ” co rp o ra
t i o n , a f t e r h a v in g f i r s t d i s t r i b u t e d a l l o f i t s e a r n in g s ,
and p r o f i t s a ccu m u la ted s in c e F e b r u a ry 28 , 1913» d i s t r i
b u te s t o i t s s t o c k h o ld e r s th e amount so r e c e i v e d by i t
from such o th e r c o r p o r a tio n ^ , th e d i s t r i b u t i o n b y the
“ r e c e i v i n g ” c o r p o r a t io n to i t s s to c k h o ld e r s i s n o t a
d iv id e n d w i t h i n th e m eaning o f th e A c t and i s exempt
from t a x .
In d e te rm in in g w h eth er a d iv id e n d i s out o f e a r n in g s
or p r o f i t s accu m u lated s in c e F e b r u a ry 2 8 , 1913> or p r io r
to March 1 , 1913» due c o n s id e r a t io n must be g iv e n to the
f a c t s , and mere b o ok k eep in g e n t r i e s in c r e a s in g or d e c r e a s
in g s u r p lu s w i l l n o t be c o n c l u s i v e .
W '
T.D. 3^99
-2 -
A d i s t r i b u t i o n made b y a c o r p o r a t io n ou t o f e a r n in g s
or p r o f i t s accu m u la te d or in c r e a s e i n v a lu e o f p r o p e r ty
a ccru e d p r i o r to March 1 , 1913» i s exempt from t a x , even
i f in e x c e s s o f the c o s t or o th e r b a s i s p r o v id e d in a r t i c l e s
I 56 I - I 563 and I 56 S, o f th e s t o c k on w h ich d e c la r e d .
However,
where a n y t a x - f r e e d i s t r i b u t i o n out o f e a r n in g s or p r o f i t s
accu m u lated or in c r e a s e in v a lu e o f p r o p e r t y a c cr u e d p r io r
to March 1 , 19 13 ,. h a s b een made, th e d i s t r i b u t e e i .c a n n o t
d ed u ct an y l o s s from th e s a l e or o th e r d i s p o s i t i o n o f th e
s t o c k u n le s s ^ and th en o n ly to th e e x t e n t t h a t j. th e c o s t ,
or o th e r b a s i s , e x ce e d s th e sum o f ( l ) th e amount r e a l i z e d
from th e s a le or o th e r d i s p o s i t i o n o i the s t o c k , and ( 2 )
the a g g r e g a t e amount o f su ch d i s t r i b u t i o n s r e c e i v e d b y him
th e re o n .
The p r o v is io n s o f t h i s p a ra g ra p h are a l s o a p p l i c a b l e
to a d i s t r i b u t i o n b y a ''r e c e i v i n g ” c o r p o r a tio n made under th e
c o n d itio n s s e t f o r t h in th e f i r s t p a ra g ra p h o f t h i s a r t i c le ^
and to th e d i s t r i b u t e e s in d e d u c tin g an y l o ss from the ,saj.e
or o th e r d i s p o s i t i o n o f s t q c k in the 11r e c e i v i n g ” co rp o ratio n « .
Exam ple. -
A p u rch ased c e r t a i n s t o c k su b seq u en t to March 1 ,
1 9 1 3 , f o r $10,000 and r e c e i v e d . i n 1921 a d i s t r i b u t i o n th e re o n of
$ 2 , 000 , p a id out o f th e e a r n in g s or p r o f i t s o f the c o r p o r a tio n
accum ulated p r i o r t o March 1 , 19 13 *
T h is d i s t r i b u t i o n does n o t
c o n s t i t u t e t a x a b le income t o A .
I f A s u b s e q u e n tly s e l l s th e
s t o c k f o r $6,000 a d e d u c t ib le l o s s o f $ 2,000 i s s u s t a in e d .
If
he s e l l s th e s t o c k f o r $ 1 2 , 000 , a t a x a b le g a in o f $ 2,000 i s
r e a liz e d .
Ho g a in or l o s s i s r e c o g n iz e d i f he s e l l s th e s t o c k
f o r an amount r a n g in g betw een $ 8,000 and $ 1 0 , 000 .
Under d a te o f May 9, 1923. T.D. 3^75 was a p p ro ved , amending A r t i c l e
of R e g u la tio n s 62 to p r o v id e s u b s t a n t i a l l y as above s e t f o r t h .
n
May 1*+, 19 2 3 , no c a s e s h a v in g b een c l o s e d on th e b a s is o f T *D.
4 *
3U7 S was is s u e d r e v o k in g T .D . 3 ^ 75 . and the q u e s tio n in v o lv e d i n the amend
ment was r e f e r r e d to the A t t o r n e y G e n e ra l f o r opin ion#
H is o p in io n ,
June 21, 19 2 3 ,
I 5W3
has now been received, and is in entire accord with tne
originally effected by T .D . 3^75* Accordingly • • 3 7 ® ^ i
3U75 is approved! and Article 15^3 o f Regulations 62 is amended
amendment
yoked; T .D .
to read as h e r e in a b o v e p r o v id e d .
D. H. BLAIR,
Com m issioner o f I n t e r n a l Revenue.
APPROVED: J u ly 20, 1923*
S . P . GILBERT, J R .,
A c t in g S e c r e t a r y o f th e T r e a s u r y .
THE SECRETARY'OF THE TREASURY
WASHINGTON
August I lf 1923*
SUPPLEMENTAL INSTRUCTIONS WITH RESPECT TO EXCHANGES,
REPLACEMENT, AND REDEMPTION OF UNITED STATES PAPER CURRENCY.
To the Treasurer o f the United S t a te s ,
Federal Reserve Banks and Others Concerned$
S ection 17 of th e S ecreta ry ’ s c o n fid e n tia l in s tr u c tio n s
of August 30, 1920, w ith r e sp e c t to exchanges, replacem ent, and
redemption of United S ta te s paper currency, as amended February
7, 1921, i s hereby fu rther amended so as to read as fo llo w ss
PAYMENTS OF CURRENCY AND COIN UPON EXCHANGE, REPLACEMENT OR
REDEMPTION. United S ta te s n otes are redeemable in gold coin* Treasury
notes o f 1890 are redeemable in gold co in or standard s ilv e r d o lla r s )
gold c e r t if ic a t e s are redeemable in gold coin} and s i l v e r c e r t i f i c a t e s
are redeemable in standard s i l v e r d o lla r s . Under the p ro v isio n s of
the a c t approved March 1 4, 1900, as amended, sometimes known as the
Gold P a rity A ct, i t i s , however, the duty o f the S ecretary o f the
Treasury to m aintain a i l forms o f money issu ed or coined by the United
S tates a t a r a r ity of valu e w ith th e gold standard d efin ed by th e a c t ,
and the Treasury’ s general p o lic y i s to make payments o f gold not only
in cases where i t i s demanded a g a in st United S ta te s paper currency or
other o b lig a tio n s redeemable in g o ld , but a ls o when demanded a g a in st
other forms of currency as w e ll as in the ordinary course o f Government
payments. The Treasurer of the U nited S ta te s i s a c tin g under general
in str u c tio n s to pay out gold c e r t i f i c a t e s w ith other forms o f money
in the ordinary course of b u sin e ss, w ithout demand, p a r tic u la r ly in
denominations ranging from $10 to $1000, and i t i s d esired th a t so fa r
as p o s sib le the Federal Reserve Banks s h a ll fo llo w a sim ila r p o lic y ,
p a r tic u la r ly in making payments on Government account or on exchange,
replacement or redemption of United S ta te s paper currency. I t i s not
the p o lic y to encourage the c ir c u la tio n of gold c o in , fo r t h is in v o lv es
a considerab le lo s s due to abrasion and i t i s not g e n e ra lly needed to
meet the demands of b u sin e ss. S p e c ific demands fo r the redemption of
United S ta te s paper currency in co in must, however, be honored, and no
o b sta cle should be in terp osed to th e c ir c u la tio n o f gold coin i f de
manded« Whenever gold coin i s demanded Federal Reserve Banks should
pay out th e r e fo r a v a ila b le (b u t, so fa r as p o s s ib le , NOT new) gold ooin
in the denomination of $20, avoiding the use o f gold co in in the
denominations of $2.50, $5, and $10 unless specifically demanded.
Payments of standard silv er dollars should be freely made whenever
desired, whether or not silv er c e rtific a te s or Treasury notes of
1890 are presented for redemption, for the circulation of standard
silver dollars in many sections of the country is desirable in order
to meet the needs of business and reduce the demands upon the Treasury
for paper currency in the $1 denomination. In general, i t is the
policy of the Treasury to provide for payments of currency and coin
at the Federal Reserve Banks on the same basis as a t Treasury offices,
and where the Federal Reserve Banks make payments in coin the Treasurer
of the United States w ill make redemption in appropriate coin on re
quest therefor by Federal Reserve Banksf upon surrender by them of
United States notes, Treasury notes of 1890, gold c e rtific a te s,o r
silver c e rtific a te s. The expense of transportation of such coin w ill
be paid from the appropriation "Contingent Expenses, Public Moneys",
or such other appropriation as may be available, without application
on the part of the Federal Reserve Banks. Where gold ce rtific a te s
are surrendered to the Treasurer of the United States the Treasurer
w ill give appropriate credit therefor, upon request, in the Gold
Settlement Fund. In cases where coin shipments are made, or where
credit is given in the Gold Settlement Fund for gold c e rtific a te s,
Federal Reserve Banks w ill give corresponding credits for such amounts
in the Treasurer’s account as a transfer of funds.
S.
P.
GILBERT, J r . ,
Acting Secretary of the Treasury.
\
August 25, 1923*
My dear Senators
I have recently received from the Secretary to the Com
mission the printed copies of the proceedings before your Subcommittee
\7ith respect to silv e r purchases under the Act approved April 23* 1918,
sometimes known as the Pittman Act* In so fa r as these proceedings
cover the question of allocations fo r subsidiary coinage, the Treasury's
attitude has already been stated in my several le tte rs to you* There
are other questions, however, which you have raised in course of the
proceedings and in your correspondence which should also be fin a lly disposed of, and I am accordingly writing at this time to state the position
which the Department takes with respect to these matters#
I take i t from your le tte rs and the hearings that you contend,
in substance, that in making purchases of silver under the Pittman Act
the Director of the Mint has not insisted upon sufficient deductions
for metallurgical losses, and has thus, in effect, purchased a certain
percentage of foreign silver#
This is not true, as is clear both from
the hearingss and from the records and accounts of the Bureau of the
Mint*
To consider th is matter in te llig en tly i t is necessary to be
gin with the discussions which took place in May and June, 1920, when
the market price of silv e r f e ll below $1 an ounce and purchases of
silver f i r s t had to be made under the Act* Under the f i r s t announce
ment of the Director of the Mint, dated May 17, 1920, and the a f f i
davits prescribed thereunder, only unmixed silv er could be purchased,
«2f
and silv er into which any admixture of foreign silv er entered would
; .y
have to he rejected*
/
This immediately led to p ro tests, in which, as
I recall you joined, on the ground that fo r m etallurgical reasons most
of the domestic production of silv er had to he smelted and refined in
conjunction with foreign silv er and would come from the refineries as
¥
part of a mixed product of domestic and foreign silv er, so that i t
would he harred from purchase under the Act i f the Mint would only
purchase unmixed silver#
The inherent d ifficu lty with accepting mixed
silver in any form was, as you know, that i t is always perfectly im
possible to prove that any given piece of mixed silv er is either
domestic or foreign in origin, and the legal question, therefore, was
whether a proportionate part of the mixed product could he regarded as
silver ?hich was the product of mines located in the United States and
of reduction works so located, within the terns of the Act# This
question was accordingly presented to the Comptroller of the Treasury
r
y
y
for decision, hy le tte r dated June 10, 1920, from the Secretary of the
Treasury, of which a copy is enclosed for your ready reference# The
Comptroller rendered h is decision under date of June 12, 1920, holding
that mixed silv er could he purchased up to the proportionate part of the
mixed product representing domestic silv er and prescribing in general
the nature of the proof that should he required and the method of account»
ing to he followed* On June 18th the Director of the Mint accordingly
issued a further statement to the effect that he was prepared to “purchase
under the Act silv er which foims part of a mixture of foreign silv er and
domestic silv er up to the proportionate part of such mixed product which
represents the product of mines located within the United States and of
y
reduction works so located, upon clear and unequivocal proof as to the
m
3
«■ *
proportionate part of the mixed product which represents domestic
,
y
production11» Forms fo r such proof were provided, and subsequently
more detailed regulations were issued, under date of August 30, 1920,
carrying out the decision of the Comptroller of the Treasury and the
method of accounting prescribed thereunder* Copies of the Comptrollers
decision of June 12th and of the regulations of August 30, 1920, with
exhibits, including forms of affid av its and the public statements of
May 17 and June 18, 1920, are enclosed herewith fo r your ready reference«
Supplemental regulations governing purchases of silv er on th is basis
have been promulgated, from time to time, and are already included in
£he record of proceedings before your Subcommittee*
I
v
V
I
In other words, the acceptance of mixed silv er, up to the
y
proportionate part of the mixed product representing domestic silv er,
was necessary to meet the p ractical situation in the silver industry
y
the purchase provisions of the Act were to be made effective, and
i t was authorized by the decision of the highest constitued authority*
The decision having been made, regulations had to be promulgated to
carry i t out, and th is meant establishing a practical plan fo r deter
mining That proportionate p$rt of the mixed product should be regarded
V'
as representing domestic production* Obviously, no given piece of mixed
silver could, s tr ic tly speaking, be proven to be of either domestic or
foreign origin, and i t was therefore necessary to. provide by regulation
for apportioning the mixed product as between domestic and foreign con
tent, f i r s t determining the proportion in which domestic silv er entered
into the mixture and then applying that proportion to the mixed product*
®iis was done by regulations of the Director of the'M int, issued pursuant
to the express authority of the law, which provides that a ll purchases
shall he made in accordance with the regulations of the Director of the
y
Mint* These regulations have the force and effect of law, and are
■binding upon a ll concerned*
The regulations thus prescribed provided in d etail fo r accept
ing the amounts of foreign and domestic silv er entering into the mixed
product, in accordance with the accounting methods prescribed by the
Couptroller of the Treasury, and on the question of metallurgical losses
i provided expressly that ffa ll silv er lo st in process must be apportioned
between domestic and foreign silv er for the purposes of settlement on ac
count of silver purchased hereunder according to the amounts of domestic
and foreign silv er received fo r reduction as shown by the records0 re
quired to be file d by the vendors*
In other words, exactly the same pro
portion has been applied in determining the deductions for metallurgical
losses as in determining the part of the mixed product representing domes
tic silver* Metallurgical losses accordingly are required to be shown in
y
the periodical reports rendered to the Director of the Mint, and are re
quired to be deducted in the established proportion in determining the
amount of silver purchasable;as domestic silver under the Act* This
followed necessarily from the-principles involved in the acceptance of
*
*
Y
mixed silver, and, as "the testimony before your own Subcommittee shows,
is regarded by the silver industry as f a ir and reasonable#
The contention which you advance, that the Director of the Mint,
instead of following the plan actually adopted, should have made an ar
bitrary deduction of 5 per cent in a ll Cases in order to cover metallur
gical losses, and that not having made such an arb itrary deduction the
Mint has, in effect, purchased 5 per cent in foreign rather than domestic
silver, is entirely without merit* As already stated, the silv er in
«5*
question is a mixture, so th at i t is quite as impossible to prove that
any given piece is foreign silv er as i t is impossible to prove that any
given piece is domestic silver*
There had to be an apportionment of
the mixed product, and the same method of apportionment has been consis
tently applied throughout, in determining what metallurgical losses are
allocable to domestic silver as well as in determining what portion of
the mixed product represents domestic silver»
The proportionate part of
the mixture ascertained to represent domestic silv e r, on th is b asis, is
a ll domestic silv e r, under the regulations, for the purposes of purchases
under the Act, These regulations of the Director of the Mint, moreover,
have stood for over three years, during substantially the whole period
of purchases under the Act, and have the force and effect of law* I t is
not material that another, and admittedly arb itrary , method of enforcing
deductions for metallurgical losses might have been applied*
The regu-*
lations of the Mint have a ll along prescribed a fa ir and consistent method
of apportionment, and certainly no one has any standing to attack the
regulations on th at ground nearly three years afte r th eir issuance, when
the silver industry generally had adjusted its e lf to the requirements of
the Mint and nearly a ll purchases under the Act had been completed on that
basis* For the same reason, i t is entirely out of the question to adopt
the proposal of the Anaconda Copper Mining Company, which was transmitted
in your le tte r of June 18, 1923, th at purchases now be reopened and an
arbitrary deduction of 5 per cent made in a ll cases* The regulations of
the Director of the Mint do not provide for any such 5 per cent deduction,
and there is no b asis, therefore, for making it*
Such a deduction, more-»
over, at th is time might operate most unfairly against some companies,
■6—
making l i t t l e d iffe r e n c e to companies lik e th e Anaconda Copper Mining
Company which deal alm ost e x c lu s iv e ly in the product o f th e ir own m ines,
and operating very much to the p reju d ice o f companies which do "business
as customs sm elters and d e a l c h ie f ly w ith the product o f mines owned "by
others.
Apart from th is , there is no reason in equity for making the 5
per cent deduction which you suggest.
I t is admitted on a ll sides that
it has "been the usual course of “business for years “before purchases under
the Pittman Act "began for smelters to make a 5 per cent treatment charge»
The Treasury is not concerned with the equity of th is charge, but only
with the fact.
The resu lt to the miner is exactly the same whether this
treatment charge is assessed as a separate charge and settlement made on
.the basis of 100 per cent of the silver content of his ore, or whether the
charge is deducted and settlement made on the basis of 95 per cent of the
ore* Apparently, the practice “before purchases began under the Act was to
make settlements on the basis of 95 per cent, and since that time to make
settlements on the basis of 100 per cent, subject to a 5 per cent tre a t
ment charge.
The miner gets the same result in either case, and the
smelter, whatever the method of settlement, has admittedly “bought 100 per
cent of the ore, and not merely 95 per cent* The smelter is clearly the
owner of a ll the ore thus purchased, and of a ll i t s silver content, and i t
is equally clear that with domestic ore a ll of the silver content is do
mestic silv e r, no matter what the basis on which settlement was made with
the miner* Furthermore, under the method adopted after purchases ."began
under the Act,-the smelter has ju st as surely paid the miner on the basis
of $1 per ounce for the silver taken in payment of treatment charge as if
it had paid 100 per cent for the silv er and exacted a cash payment for the
treatment charge-
In other words, the 5 per cent o f s ilv e r I s accepted in
payment of the charge, and th at s ilv e r i s ju s t as tr u ly paid fo r as any o f
the rest*
Under e ith e r system th e s ilv e r content o f the ore purchased i s
clearly dom estic s i l v e r , and m a n ife stly i t must he taken in to accou nt, sub
ject to such m e ta llu r g ic a l lo s s e s as may d evelop , in determ ining the amount
of domestic s ilv e r en terin g in to th e mixed product.
Since both dom estic
and foreign s ilv e r en ter in to th e m ixture, i t i s im p o ssib le, o f co u rse, to
make an exact sep aration between m e ta llu r g ic a l lo s s e s on dom estic s ilv e r and
m etallu rgical lo s s e s on fo r e ig n s i l v e r , and th ese lo s s e s a r e , a cco rd in g ly ,
apportioned between dom estic and fo r e ig n s ilv e r according to th e r e la t iv e
amounts of each en terin g in to th e m ixture.
Subcommittee
The testim ony b efore your own
shows th a t m e ta llu rg ica l lo s s e s w ith some companies are ex
tremely low , averaging l e s s than 1 per c e n t, w hile w ith other companies
m etallu rgical lo s s e s freq u en tly average as high as two or th ree per cent or
even more.
Whatever the lo s s e s may prove to b e , deduction i s required to be
made for them, in the proper p rop ortio n , in the settlem en ts w ith the Mint
for purchases under the A ct.
I t i s not fo r the Mint to sa y , o f cou rse, whether a low r a te o f
lo sses in d ic a te s that the treatm ent charge c o lle c te d by th e sm elter i s too
high.
That i s a m atter between th e sm elter and the m iner, and the Mint can
not properly in te r fe r e w ith the course o f b u sin ess between them.
In th is
connection i t i s worth w h ile to p o in t out fu rth er th at th ere i s no req uire
ment whatever in the Act to the e f f e c t th at settlem en t has to be made w ith
the miner on the b a s is o f $1 per ounce.
subject.
The Act i s p e r fe c tly s ile n t on the
This requirement was made by th e Treasury, and has throughout
been enforced in an e f f o r t to see th a t th e b e n e fit s o f the Act go to the
-8 American miner, for whom they were supposedly intended#
The r égalât ions
which the Director of the Mint adopted are reasonably calculated to accom
plish this purpose, and a ll purchases of silver under the Act are support
ed "by at least IOC per cent of affid av its from American miners certifying
that settlement has been made with them for th eir silver at the rate of $1
per ounce, 1000 fine.
Miners* affid av its to th is effect are also on hand,
or before purchases are completed w ill have to be file d with the Mint, in
an amount sufficient to cover a ll metallurgical losses which have to be de
ducted* "Where metallurgical losses are relativ ely small, as with the
.American Smelting & Refining Company, th is means only a small amount of
affidavits over and above the actual sales of silver to the Director of the
Mint, while with other companies which have relativ ely large metallurgical
losses there w ill have to be a correspondingly larger amount of miners*
affidavits for th is purpose* This explains the variations in the amounts
of affidavits to which you refer.
So much for the question of metallurgical losses*
As to ore bear
ing what is called fc °trace of silv er1*, I do not understand that any seri
ous question arises.
The amount involved is relativ ely insignificant in any
event, and in a ll cases where i t does not sa tisfac to rily appear to the Mint
that this silver resu lts from domestic ore, with settlement therefor on the
usual b asis, the silv er is treated as foreign silv e r, and therefore operates
to the prejudice of the vendor in settlements with the Mint* This I under
stand from the records is what actually happens with the Anaconda Copper
Mining Company, the United States Smelting, Refining and Mining Company, and
other companies selling silver to the Mint, silver recovered from ore bear
ing a trace of silver being treated as foreign silv er for purposes of ac
counts with the Mint* Apart from th is , assuming the ore to be domestic ore
even the trace of silver would be domestic silver and properly tenderable
under the Act#
‘The other question which you have raised from time to time, name
ly» as to the policy of accepting tenders of silv er for future delivery»
I have already covered in my le tte r of May 9 , 1923, a copy of which is en
closed herewith for your ready reference* I have not understood from any
of your statements that you 'ever had any other policy to suggest in th is
regard in any event.
I t would not have been possible to do business under
the Act on any other b asis, and i f the Mint had not at a ll times been pre
pared to accept tenders for future delivery, miners generally would have
had to wait for months before getting settlements for th eir silver on the
basis of the fixed price of $1 per ounce. This would have operated most un
fairly to the prejudice of small miners, except possibly those in Nevada
whose ore could readily be reduced to dore bullion, and i t would certainly
have been an arbitrary policy to pursue, since the Mint has always been able
to protect its e lf on acceptance for future delivery by not making payment
without actual delivery of the bullion, supported by the necessary affidavits
as to domestic origin from both vendors and miners*
As to the winding up of purchases, the Director of the Mint, by
public statement dated May 29, 1923, of which a copy is enclosed for your
ready reference, announced that in order to avoid any p o ssib ility of accept
ing excessive tenders and at the same time to assure the most equitable
treatment to the American producers of silver* the Mint would not accept any
further tenders of silv er under the Act u n til a sufficient examination had
been made of the tenders already received to indicate the precise amount of
silver remaining to be purchased* At the same time the Director of the
Mint announced that the Mint would continue to receive tenders under the Act
until the close of business June 15, 1923, filin g such tenders in the order
of th e ir receip t, and that as soon as the amount remaining to be purchased
had "been definitely determined the Mint would accept a ll tenders up to
such amount in the order of th e ir rece ip t, in accordance with the general
regulations governing purchases, a ll tenders in excess of th at amount to
he rejected.
This procedure made i t possible for the Bureau of the Mint
to check up a ll tenders received and accept them in proper order, thus
avoiding any d iffic u ltie s in winding up purchases under the Act. Pursuant
to this announcement the Mint stopped receiving tenders under the Act at
the close of "business June 145» 1923.
I t has since accepted tenders which
were received before that date and temporarily held in suspense up to the
amount necessary to meet the requirements of the Act* Unaccepted tenders
to the amount of 3,072,267 ounces are s t i l l held in suspense by the Mint,
thus giving an adequate margin to take care of such further adjustments as
may prove to be necessary as deliveries are received and fin a l check is
made of the proofs tendered in support of the purchases.
Actual deliveries
of silver up to July 31, 1923, have been made in the amount of 190,314,579
ounces, leaving approximately 10,257,000 ounces of additional deliveries
to be made before purchases are completed.
Purchases of silver by the Mint under the Act receive an inde
pendent audit by the accounting officers of the Government, and as soon as
deliveries are complete th is audit can be concluded and operations under
the Act fin a lly determined.
All purchases have to be supported by the
proof required by the regulations and a ll affidavits and other supporting
papers presented in connection with sales of silv er to the Mint are f i r s t
given an administrative examination by the Bureau of the Mint and then
transmitted in the regular course to the General Accounting Office, where
they receive a fin a l audit to make sure that the purchases conform to the
law and the regulations.
Any tenders which are found not to be supported
“by the necessary proof are rejected in the f i r s t instance, and i f a
subsequent audit shows th at any of the proof is defective the Mint
is, of course, in a position to require the transaction to be re
versed and i f there is any evidence of fraudulent dealing to take
steps looking toward the prosecution of the fraudulent parties*
As I understand the resu lts of the audit which has been had up to
date there has not yet been discovered any evidence of fraud, but
there has been every indication that vendors of silv er to the Mint
have been careful to support a ll th e ir transactions with the required
proof*
If your Subcommittee have any evidence of improper dealings
in connection with sales of silv e r to the Mint under the Act, the
y
Treasury would be glad i f you would present i t , in order that any
tenders which may be in su fficien tly supported may be rejected and
the proper United States Attorney advised of any fraudulent misrep
resentations that may have been made*1 I f , on the other hand, you
have no evidence of fraud to present but are suspicious of the com
panies, I suggest that the way is open to the Commission to bring the
representatives of the various companies before i t under regular sub
poenas and get th e ir direct testimony as to th eir transactions under
the Act;*
After reviewing a ll the testimony before your Subcommittee,
a-nfl your le tte rs in th is matter,
I cannot help but feel that much of
the same misunderstanding runs through the whole discussion as under
lie s the original resolution designating the Subcommittee and de
scribing you as **the author** of the Act*
The facts are that the b ill
was originallly prepared by the Treasury and the Federal Reserve Board
that i t was drawn to meet an emergency situation which had arisen in
\
m 12 -
India, th at i t m s not i n any sen se a h i l l to r e lie v e the s ilv e r indus
try, and th at i t was passed through both Houses of Congress as a war
y
measure, "by the p ractica lly unanimous action of both p arties and signed
by the President a ll within about a week of i t s introduction«' I t was
presented before the Banking and Currency Committees of both the Senate
and the House of Representatives by the officers of the Treasury and the
y
Federal Reserve Board who had drawn the b i l l , and throughout i t s course
was handled as a nonpartisan measure, designed to meet a war emergency*
y
y
y
As i t happened, the b i l l , as fin a lly drawn, was handed to you by the
y
fermer Director of the Mint to be introduced in the Senate, and in ac
cordance with the usual custom in such matters is sometimes given your
name* Even the provision requiring silver, purchased under the Act to
be the product of mines situated in the United States and of reduce
V
.
tion works so located, was not inserted at your instance but was added
to the b ill on the flo o r of the Senate by amendment proposed by Senator
y
Fall of Hew Mexico* Aside from th is the b ill was a Treasury b i l l , and
the Treasury, which is also charged with i t s administration, through the
y
Bureau of the Mint, may therefore speak with peculiar authority as to
both i t s purpose and administration*
The Treasury has administered the Act throughout with the
utmost fairness and im partiality, and with every regard fo r the proper
interests of the silv e r industry as well as the in te re sts of the United
States* Operations under the Act have now ceased and except fo r the
#
f in a l d e liv e r ie s and th e f in a l check o f the accounts t h is chapter in
our m r h is to r y i s closed*
Very tr u ly yours,
S . P* GILBERT, J r .
Under S ecreta ry -
Hon* Key Pittm an,
Vice-Chainnan of the Senate Commission
of Gold and S ilv e r yInqu iry,
United S ta te s Senate,
Washington,
D* C*
Address of Win# S» Moorhead, Chairman of
the Tax Simplification Board, “before the .American Bar
Association at Minneapolis, August 31, 1923*
nWhat is the matter with the Income Tax Unit?11* is a question
that is being asked from the Atlantic to the Pacific and from the Mexi
can Border to Canada* The answers vary from a disclaimer that anything
is the matter, on the part of sortie of the insiders, to the assertion
that the present organization can never carry on i ts work in a s a tis
factory manner or complete i t within a reasonable time, on the part of
an aggrieved taxpayer*
nSpeed up the audit of returns”, says one;
“Decentralize the Unit”, suggests another;
”Amend the Act”, in sists a
third*
In attempting to say what is the matter with the Income Tax Unit,
I would not have you consider me a representative of the Government, or
attribute my remarks to the Treasury Department, The Tax Simplification
Board is composed of three persons appointed by the President to represent
the public, of whom I am one, and three persons appointed by the Secre
tary of the Treasury from the Bureau of Internal Revenue* Those of us
representing the public conceive i t to be our duty to maintain the view
point of the taxpayers and since they constitute less than seven percent
of the public, the attitu d e of the people at large.
The primary trouble
is with the Revenue Act, or rath er, the Revenue Acts; for the Bureau is
now administering the Acts of 1917, 1918, and 1921,
The yoke imposed by
previous revenue laws was easy and its burden comparatively light#
Our'
Government entered the World War in the Spring of 1917 - ”and i t came to
pass in those days, that there went out a decree from Caesar Augustus,
that a ll the world should be taxed#”
Congress was concerned in securing revenue, getting i t quickly and tak
ing it where i t could "be found* Being engaged in a colossal war, our repre
sentatives did not philosophize upon the theory of taxation, gave l i t t l e
consideration to administrative d iffic u ltie s and considered not the vexation
of the public*
The public its e lf in those days paid th e ir taxes cheerfully
and without stint*
Our present tax laws are the inheritance of those days,
A few evenings ago, in considering - not without qualms - what I should say
to this enlightened association, I went hack to
ed down Mam Smith*s ‘'Wealth of nations".
f i r s t principles and pull
That classic was completed about
the year "the embattled farmers fire d the shot heard *round the world." Bor
t
the last
century and a h alf i t has been the foundation on which economists
have builded.
He lays down four maxims applicable to tax legislation, which
may be paraphrased as follows:
1* Taxpayers should contribute as nearly as possible in proportion to
their respective a b ilitie s ,
2.
The tax ought to be certain and not arbitrary,
3.
The tax ought to be levied at a time and in a manner most lik ely to
be convenient for the contributor to pay it*
4.
Every, tax ought to be so contrived as to take out and keep out of
the pockets of the people as l i t t l e as possible over and above what i t
brings into the public treasury.
Let us see how the Revenue Act of 1921 squares with these maxims.
As
the result of exemptions and delinquencies, only about 6$ of the population
pay income taxes.
Some citizens well able to contribute to the expense of ......
the Government escape a large measure of taxation by investment in tax exempt
-
2-
securities*
This i s , of course, largely attrib u tab le to our form of
Government*
I t is possible, however, in my opinion, that the Act
could have been so drawn as to eliminate a considerable measure of the
preference incident to tax exempt securities*
Deductions from income
being allowed by Congress as a matter of grace, some of them, particu
larly losses and in te re st, could be lim ited to the amount whereby those
items exceed the income received from tax exempt securities#
The
iniquity of these secu rities consists in th e ir tendency to create a tax
exempt class of persons who are able to buy and hold them and to with
draw th e ir capital from business enterprises which would produce income
liable to taxation*
Generally speaking, earned incomes pay a proportionately higher
rate of tax than unearned incomes due largely to deductions that are
available to persons whose income is derived from the ownership of prop
erty*
This statement is subject to some' qualification, but I believe it
is generally true*
I t is a question, however, en tirely too large even
to touch upon here and now# The ju stice of a measure of re lie f in favor
of earned incomes seems to be generally admitted*
The d ifficu lty would
arise in the administration of the r e lie f , involving as i t would a de
termination of what is earned income.
S alaries, wages, and fees mani
festly constitute earned income* What is to be done in the case of the
corner grocer, whose income is due p artly to capital and p artly to per
sonal services? Many other instances of the d iffic u lty in allocating
income either to capital or labor w ill occur to you.
Of course, the cor
ner grocer may solve h is d iffic u ltie s by incorporation, but th is is
an unsatisfactory answer* Theoretically, the line should be drawn between
-3i
real earned and real unearned income, but p ractically i t is impossible.
It is my view that any r e lie f in favor of earned income mast be con
fined to earnings which are not derived in whole or in part from capi
ta l or in which the employment of capital is not necessary and is only
incidental.
Otherwise, such a provision would be impossible of s a tis
factory administration*
The fact that absolute ju stice can not be ob
tained should not stand in the way of affording re lie f which w ill reach
the great majority of cases and which may be availed of in others with
l i t t l e trouble,
I do not believe that th eir most ardent defender would assert that
the income and p ro fits tax laws are certain.
So many matters are le ft
within the discretion of the Commissioner of Internal Revenue, which
mast of necessity be exercised through h is subordinates*
I t seems just
to provide that a reasonable allowance shall be made for the exhaustion,
wear, and tear of property;
that a reasonable deduction shall be allow
ed for the amortization of war fa c ilitie s ;
that a reasonable allowance
shall be made for depletion, and that the tax imposed in Section 220
shall not be incident unless the Commissioner c e rtifie s that in his
opinion the accumulation of gains and p ro fits is unreasonable for the
purposes of the business.
I t appears to be f a ir to assess a tax on the
excess p ro fits of a corporation based upon its invested capital;
to
allow a paid-in surplus when i t is shown to the satisfaction of the Com
missioner that tangible assets have been transferred to a corporation
substantially in excess of the par value of the stock issued therefor, and
to provide in exceptional cases that the tax paid by a corporation shall
bear the same ratio, to i t s net income that the average tax of representa-
ti\ e corporations “bears to th e ir average net incomes* When we come to
a(^n'*n-Stration of these apparently ju st provisions, what do we en
counter?
What reasonable allowance shall be made for depreciation is a mat
ter of judgment and i s , therefore uncertain*
Honest differences of
opinion are bound to arise among the taxpayer and the Government o f fi
c ia ls , and, indeed, between those o ffic ia ls themselves*
The reasonable
ueduction for the amortization of war f a c ilitie s involves questions as
to tfhat are war f a c ilitie s and as to what extent they are used in postwar activities*
The reasonable allowance for depletion requires the
valuation as of March 1, 1913, of a ll the coal, ore, o il, gas and other
natural deposits in the United States acquired before that date and
perated for profit*
Most of these resources are under the ground,
The
luation of the railroads by the In terstate Commerce Commission has been
going on for years and yet that problem is easy compared with the valuaof property which can not be seen* The Excess P rofits tax law was
repealed by the Revenue Act of 1921,
I ts administration, however, is
stil^. going on with respect to unaudited returns for the years 1917 to
1921 inclusive*
The determination of invested capital and paid-in surplus
has not only proved to he complex, hut has resulted in discriminations
hetreen taxpayers situated substantially alike.
Old and conservatively
managed companies have w ritten off items against current earnings, which
wider management less conservative would have been added to the property
account, thus increasing the invested cap ital.
The discrimination which
esults from the imposition of the tax in such cases is manifest,
Of the
four divisions of the Income Tax Unit dealing with the audit of returns,
-5-
namely, the Personnal Audit, the Corporation Audit, the Special Audit and
the Natural Resources Divisions, the la tte r two are engaged prim arily in
f-
the solution of the complex problems .arising out of these reasonable,
but uncertain, provisions of the Act* As may well be imagined, while the
Personal Audit Division w ill probably become reasonably current with the
work in the not too d istan t future, and while the Corporation Audit Divi
sion is f a ir ly well in hand, the Specail Audit and the Natural Resources
Divisions are staggering under an apparently ever-increasing burden*
There is a ray of hope for them, however, in the fact that when the prob
lems of valuation and of invested capital are determined for the earlier
years, the computations for the la te r years is greatly facilitated *
The
Commissioner has gathered together in these divisions groups of able men,
but their task is an herculean one*
The inclusion in taxable income of p ro fit realized from the sale of
capital assets and the allowance as a deduction of the loss sustained on
y
their sale requires the valuation as of March 1, 1913 of capital assets
acquired before that date and upon which a p ro fit has been realized or
loss sustained,
manifest,
The administrative d iffic u ltie s of such a computation are
Capital gains are not taxed as income in England# The imagi
nation is stretched in considering them a recurring flow of income upon
wiich an income tax should be levied, just as i t is in considering capital
losses a recurring outgo, which should be allowed as deductions.
The Su
preme Court of the United States has held that Congress may tax such gains
under the Sixteenth Amendment,
Congress, however, is not obliged to tax
this species of income and could, of course, eliminate capital losses as
¿eductions* The Government actuary has expressed the opinion, that i f capi-
tal gains had been eliminated as income and capital losses as deductions*
at the outset* the revenue of the Government would have been considera
bly increased* By th is time the supply of old losses has been considera
bly diminished and there is a question as to whether or not both capital
gains and capital losses could be eliminated without impairing the public
revenues*
law,
Such a step would greatly simplify the administration of the
A provision of th is kind would not* and should not relieve the
trader or dealer in capital assets from including in capital income the
profits made by him or deprive him of the right to deduce his business
losses.
The proximate cause of the d iffic u ltie s with which the Bureau is now
confronted is that in drafting and enacting tax leg islatio n , too l i t t l e
attention has been given to tax administration*
The Income Tax is certainly not levied at a time when i t is convenient
to pay it*
The tax according to the computation of the taxpayer on his
return of income is payable, generally speaking, a year after he receives
the income upon which the tax is levied* Would that I might stop here.
Additional taxes are assessed upon the Governments investigation of the
taxpayer1s income and its computation of the tax, after applying the v ari
ous rules of reason already mentioned, at any time or times from a year to
five years after the income is earned*
These additional assessments fre
quently come when the taxpayer has spent or lost the income upon which the
tax is assesoed*As I have said* the main trouble is with the provisions of
a law which of necessity require time for the computation of the tax with
a reasonable degree of accurary,
The Bureau, however, can not escape en
tire responsibility for the delay, heavy as its burden may be* Before I
-7 -
was a p p o in te d a member o f th e T ax S i m p l i f i c a t i o n B oard I h ad o f t e n e x p r e s s
ed th e o p in io n t h a t t h e Government was e n d e a v o r in g to a t t a i n to o h i g h a
degree o f a c c u r a c y i n
su ch c a s e s , f o r i n s t a n c e , a s i n v o lv e f i x i n g
oi p r o p e r t y or d e te r m in in g th e amount o f d e p r e c ia t io n *
I t r e q u ir e s no
argument t o d em o n strate t h a t 100$ o f a c c u r a c y i s u n a t t a in a b le *
ox a c c u r a c y i s
th e v a lu e
P erh ap s 90$
o b t a in a b le b y an a u d it w i t h i n a g iv e n l e n g t h o f tim e and w it h
a c e r t a i n amount o f work*
The a d d i t i o n a l 10 $ o f a c c u r a c y r e q u ir e s n o t o n ly
the same l e n g t h o f tim e and th e same e f f o r t , b u t a f a r g r e a t e r le n g t h o f
time and e f f o r t
|!
as th e ap p roach i s made tow ard s a b s o lu t e a c c u r a c y *
E v e n tu -
la*7 o f d im in is h in g r e tu r n comes in t o p l a y and th e a d d i t i o n a l p e r
centage o f a c c u r a c y i s
tio n to t h i s ,
n o t w o rth th e tim e and e f f o r t
th e Government l o s e s
to a t t a i n i t .
In a d d i
th e i n t e r e s t upon t h e reven ue w hich i t
would r e c e i v e i n th e e v e n t o f prompt a d d i t i o n a l a sse ssm e n ts w h ich must f u r
ther and c o n s id e r a b ly l e s s e n th e a d v a n ta g e s o f n ear a b s o lu te a c c u r a c y *
The
I
in co n ven ien ce t o t h e ta x p a y e r i n p a y in g th e t a x in c r e a s e s i n som ething l i k e
g e o m e tr ic a l p r o g r e s s io n t o t h e d e la y i n a s s e s s in g i t .
T a x p a y e rs a re r e q u ir e d
to m a in ta in u n p r o d u c tiv e r e s e r v a t i o n s o f c a p i t a l u n t i l th e end o f th e p e r io d
III
°* I m i t a t i o n s and th e l o s s o f income r e s u l t i n g from t h i s so u rce a lo n e must
be enormous*
To my mind a c o n s id e r a b le p e r c e n ta g e o f a c c u r a c y can be s a c
r i f i c e d on th e a l t a r o f p rom p titu d e*
Adam Sm ith s a y s t h a t a t a x may t a k e ou t or k eep o u t o f th e p o c k e ts o f
people more th an i t b r in g s i n t o
the exp en ses i n c id e n t
in te r n a l reven ue i s
to
its
th e p u b l i c t r e a s u r y in fo u r wayss F i r s t , b y
c o lle c tio n ,
TThile th e c o s t o f c o l l e c t i n g th e
l a r g e i n am ount, a g g r e g a t in g f o r th e y e a r 1922 about
$35,000,000, th e c o s t was a l i t t l e
o v e r one p e r c e n t o f th e amount c o l l e c t e d .
I t must be remembered, h o w e v e r, that, much o f t h i s t a x i s
a s s e s s e d b y th e t a x
payer upon h im s e lf i n h i s r e t u r n and p a id b y him a t th e tim e o f th e f i l i n g
thereof, or in quarterly installm ents thereafter*
I t would he in te re st
ing to know how much i t costs to collect the additional taxes assessed
less the credits and refunds allowed#
I have never seen any s ta tis tic s
on th is point.
The second way mentioned is hy taking from productive industry the
persons engaged in collecting the tax*
The to ta l personnel in the Income
Tax Unit proper, not counting the employees in the Collectors* offices,
amounts to 8,318,
There are 6477 persons employed in the various Collec
tors* offices, making a to ta l of 14,795 employed in the assessment and
collection of the income and p ro fits taxes*
The th ird way in which a tax may he unproductive is hy the imposition
of penalties ruinous to the taxpayer.
Speaking of such penalties Adam
Smith says;
.
nThe law, contrary to a ll the ordinary principles of ju s
tic e , f i r s t creates the temptation, and then punishes those
who yield to it;- and i t commonly enhances the punishment too
in proportion to the very circumstance which ought certainly
to alleviate i t , the temptation to commit the crime#,,
I am firmly of the b elief that penalties should he imposed in cases of in
tentional evasions and fraudulent returns, hut only in clear cases.
The
presumption of innocence should obtain and there should he absence of
reasonable doubt before the penalty is imposed# This, I believe, is the
attitude of the Bureau# While ignorance of the law does not excuse, i t
should certainly p a llia te .
Penalties for neglect should only be imposed
where there is absence of ordinary care under the circumstances and i t is
my experience, generally, that ordinary care is rather a low degree of care.
-9i
L astly| a tax may "be objectionable by subjecting the people to frequent
visits and odious examinations of tax-gatherers#
A new provision in the
Revenue Act of 1921 reads as follows:
.
11That no t a x p a y e r s h a l l b e s u b j e c t e d to u n n e c e s s a r y exam ina
t i o n s or i n v e s t i g a t i o n s ,
and o n ly one i n s p e c t io n o f a ta x p a y e r ^ s
books o f a cco u n t s h a l l be made f o r ea ch t a x a b le y e a r u n le s s th e
t a x p a y e r r e q u e s t s o th e r w is e o r u n le s s th e Com m issioner, a f t e r in
v e s tig a tio n »
n o tifie s
th e ta x p a y e r i n w r i t i n g t h a t an a d d i t i o n a l
in s p e c t io n i s n e c e s s a r y * 1*
It is important both from the standpoint of the taxpayer and the Govern
ment that th is provision should be carried out in sp irit as well as in letter#
So much for the d iffic u ltie s inherent in the administration of the In
come Tax Laws#
The work of the Income Tax Unit is seribusly impeded by to ta lly inade
quate housing conditions*
I t is quartered in five buildings*
The Commis
sioner of Internal Revenue has his office in the Treasury Building#
The
Deputy Commissioner in charge of the Unit and various other administrative
officers have th eir offices in Annex Ho# 1» at Pennsylvania Avenue and Madi
son Place;
the Personal Audit» Corporation Unit and Special Audit Divisions
are quartered in Annex Ho* 2, at Fourteenth and B Streets;
The Sorting .Sec
tion is located at Sixth and B Streets; thfc Rules and Regulations Sections
at Twentieth and B Streets;
the Natural Resources Division, the Solicitor
of Internal Revenue and the Committee on Appeals and Review are housed in the
Interior Department Building at Eighteenth and F Streets*
The close personal
contact so much to be desired in an organization of th is kind is almost im
possible when the various divisions and sections are so widely scattered*
- 10 -
Several floors of the Arlington Building at Vermont Avenue and H Street were
originally intended for the Internal Revenue Bureau# This Building is su fficient in size to accomodate the entire Bureau,. I t is occupied at present hy
the Veterans* Bureau#
I t would he a measure of the f i r s t magnitude if Con
gress should provide an adequate building for the Income Tax Unit or make
other provisions for the Veterans* Bureau and turn over the Arlington Building
to the Bureau of Internal Revenue#
I t requires no demonstration to show that the administration of the Income
and Profits tax laws is a man-size job#
In the fisc a l year 1922, the receipts
of revenue from those taxes amounted to over $2,000,000,000#
The complex
character of the Act to be administered has already been discussed*
The to ta l
personnel in the Income Tax Unit and the Collectors* offices is over 15,000*
In view of th is situation i t is absurd to burden the Commissioner with the en
forcement of the liquor and narcotic laws;
yet so i t is .
If the Department of
/
Justice is not the proper arm of the Government to enforce these laws, they
should be put under a separate Bureau#
Figures show the size of the task that was suddenly dumped on the Commis
I
sioner of Internal Revenue in 1917# Prior to that year the burden had been
light* In 1866 the receipts from the income tax law of 1861 amounted to
$72,982,159. This was the largest amount collected in any year under that law#.
In the fiscal year 1914, the receipts from the income tax law of 1913 amounted
to $71,381,275#
In the year 1917, receipts from th is tax amounted to
$359,681,228# In the year 1918, the receipts from the income and p ro fits tax
law of 1917 amounted to $2,838,999,894,_.In the year 1920, the receipts under
foe income and p ro fits tax law of 1918 amounted to $3,956,936,004.
ceipts from the revenue law of 1921 amounted to $2,086,918,465.
•11-
In 1922, re
The amount of
internal revenue received from a ll other sources during the fisc a l year 1922
amounted to $1, 121 *239,843* Many provisions of the Revenue Law of 1917 were
aew and the force had to he educated in the law and trained in i ts adminis
tration,
In order to secure uniformity of decisions under and application of
the law, i t was necessary to employ a considerable force at Washington*
This
was the original plan in th is establishment, rather than the collection of
the tax*
I t was contemplated at that time that as soon as the interpretation
of the law Should be se ttle d , the work of administering i t and collecting
the tax would be carried out largely through the Collectors* offices*
Not only have the receipts grown, but the number of returns on which tax
able income is reported has increased almost twenty fold from 1916 to 1920,
due largely to the lowering of the personal exemptions* There were 437,036
income returns file d in the year 1916; in the year 1917 they increased to
3,473,890, and in 1920 they amounted to 7,259,944.
Exact figures are not available showing the increase in personnel in the
income tax unit and th eir d istrib u tio n in Washington or in the fie ld during
the period we are discussing*
In 1913 the administrative force in the entire
Internal Revenue Bureau at Washington consisted of 277 persons, while the
field force numbered 3723* The to ta l force in that year engaged in income tax
administration, both in Washington and in the fie ld , with the exception of
employees in Collectors* o ffices, amounted to under 400 persons*
In 1918, the
entire personnel in the Bureau at Washington numbered 2245, and the fie ld force
7257, In th is year i t is estimated that the to ta l personnel at Washington and
in the fie ld employed in the income tax u n it alone amounted to something over
2100 persons, of whom about 585 were at Washington and approximately 1540 in
the field.
The to ta l number of persons employed in the income tax unit now
amounts to about 8318 persons, of whom 3064 are in the fie ld and 5254 are in
- 12-
Washington* In addition
to
those employed in the income tax "unit, probably
atout 6500 persons are employed in the various Collectors* offices*
These figures not only show the great increase in the number of persons
employed in the administration of income and p ro fits tax laws, but show, also,
that the increase in the force at Washington has been, actually and compara
tively, much greater than in the field*
The process was one of centralization*
Personal income tax returns showing a net income of $5,000 or less are
left in the various Collectors* offices and are audited there.
class of returns is p ractically current*
Work on th is
Personal income tax returns disclos
ing net income of more than $5,000, and a ll corporation returns, are sent to
Washington# in a resu lt of th is procedure, approximately 1,200,000 income tax
returns are forwarded to Washington each year# The completion of the audit of
these returns is discouragingly in arrears.
Only about 63,000 returns for the
year 1921 have been audited, and those for 1922 are p ractically untouched# The
audit of 674,642 returns for the years 1917 to 1920 inclusive, has not been
completed* These returns are distributed over the four years as follows*....
Year
Returns
1917
28,916
1918
84,324
1919
103,198
1920
458,205
These figures are taken from the Statement of Progress for the three months
ending June 30, 1923# Although a considerable amount of work has been done in
the audit of these returns, they involve very large amounts of tax and ques
tions so d iffic u lt of solution that they have not been solved in a ll th is
time,
13-
At the instance of our Board, an investigation is now "being conducted
by a man trained in "business organisation for the purpose of expediting the
audit of returns, the disposition of claims, the elimination of unnecessary
steps, and the fixing of responsibility.
I t is hoped that the resu lt of his
recommendations w ill m aterially increase the production of the Unit*
The very size of the task and the spread of the work over the entire
country forces upon our consideration the advisability of decentralization.
In the year 1863, when the Income Tax Law of 1861 was being administered, the
Field Service personnel amounted to 3832, and the force at Washington to 60.
Astriking feature of th is division compared with that at the present time is
the smallness of the force at Washington.
At the present time there are 34
Internal Revenue offices in various sections of the United States, each under
a Revenue Agent in Charge, who reports directly to the Income Tax Unit at
Washington, While th is fie ld force makes examinations when instructed so to
do from Washington, they have no power to se ttle and determine cases and can
only report th eir findings to the Income Tax Unit at Washington, where the tax
is settled.
There seems to be no reason to believe that the audit of returns
by accountants could not be carried on in a number of different offices just
as well as i t is being done at Washington, Personal contact with the taxpayer
would eliminate lengthy and unsatisfactory correspondence.
Valuations could
be arrived at with far greater expedition where the object of the valuation
could be seen than by the application of formulae and rules of thumb at a
great distance.
While a collection of experts located at one place has some
advantages and may in some instances insure a greater degree of accuracy, the
examination in the fie ld would prevent the Government from being imposed upon
and. in many instances would result in more reasonable valuations*
-14-
As I have
f
already said, th is attempt to arrive at absolute accuracy is one of the
causes of the Bureau being so fa r behind in the audit of returns*
The great
majority of taxpayers are honest, but in doubtful cases, they naturally in
terpret the laws in th q ir favor*
The investigation by the Bureau should be
designed to protect the Government, not to squeeze out the la st dollar of tax#
To accomplish the la tte r is impossible, and to attempt to do so is unprofit
able.
If decentralization of the work of the Bureau were attempted i t is pre
sumed that D istrict offices under the control of the Commissioner of Internal
Revenue and under the supervision of h is appointees would be established in
various parts of the country.
I t would seem to be practicable that an Assist
ant S olicitor of Internal Revenue be connected with each D istrict office to
advise on points of law arising during the audit of returns#
New questions of
law could he referred to the Solicitor himself at Washington# Groups of the
Committee on Appeals and Review could go on circu its of the D istrict offices
and hear appeals arising in those lo c a litie s .
Recommendations of the Committee
should clear through the Chairman at Washington and be referred to the Com
missioner for approval in the ordinary course#
Such a practice would secure
uniformity of decisions#
During the war, the War Department at f i r s t attempted to handle a ll of
its a c tiv itie s in Washington, The resu lt was such an accumulation of work and
slowing up of progress that the Department was forced to decentralize i ts ac
tivities#
work,
This action was accompanied by marked expedition in the handling of
In commenting upon the situation the Ordnance Department said, nAll
circumstances call for decentralization - the indicated solution for any prob
lem, be i t p o litic a l, commercial, or in d u strial, in which size is the predomi
nant factor1*#
-15-
The advantage to the taxpayer in decentralization is manifest#
His
taxes would he se ttle d at or reasonably near to h is place of business#
Trips to Washington and the employment of counsel there would be unneces
sary* Decentralization w ill require no amendment to the Act, should i t be
decided upon*
Such a movef however, w ill meet with strenuous opposition in
many quarters*
While complete and immediate decentralization is quite out of the ques
tion, the advantages which might accrue certainly warrant an experiment
along that line*
I t could f i r s t be applied in respect of personal returns
and if. successful could be extended to corporation returns#
I t might be
found advisable to continue the audit of consolidated returns of corpora
tions at Washington#
Objection is often raised to decentralization on the ground that i t
would throw the administration of the Income Tax Laws into politics#
This
might be true if decentralization were carried out through the Collectors*
offices# Such procedure, however, is entirely unnecessary and, in my opinion,
inadvisable unless Collectors* offices are placed under the Civil Service
laws* The various d is tric t offices could be placed directly under the Com
missioner ju st as the Internal Revenue Agents in Charge are under him at
this time*
The problem of decentralization is one that'h.as been considered by our
Board for some time.
The f i r s t experiment therein was made by sending a
group of the Committee on Appeals and Review to hear cases-arising in this
locality*
That Committee is now in Los Angeles*
In pursuance of i ts statutory duties, the Tax Simplification Board has
made a number of recommendations looking to the .sim plification of the pro-
16-
cedure followed and forms used in the Bureau, most of which have been
adopted and put in force.
I t would he tedious to describe them in d etail.
The following recommendations made th is year may be noted b riefly .
F irst:
The c la rific a tio n and sim plification of the procedure on ap
peals to the Committee on Appeals and Review.
Second;
The abolishing of ownership ce rtific a te s in connection with
bond in te re st, except in respect of bonds containing tax free covenant
clauses.
These c e rtific a te s were found to be productive of l i t t l e addi
tional tax and to be a source of annoyance to the public.
I t is impossible
under the law and in ju stice to the obligor to abolish them in connection
with bonds containing tax free covenant clauses.
Third;
The adoption of a simple form of return on one sheet for tax
payers whose net income is less than $5,000 and is derived chiefly from one
source,
This return w ill be of benefit to the great majority of taxpayers
next year.
Fourth;
The s tr ic t requirement that cases once closed be not reopened
except in cases of fraud or gross error.
Fifth;
The examination by a man trained in business organization of
the processes in the audit of returns and the adoption of his recommenda
tions designed to speed up the work, eliminate unnecessary steps and fix
responsibility.
Sixth:
Experiments in decentralization.
The most effective way of simplifying the income tax law and procedure
is by reducing the rates.
Vihere the rate of taxation is high, every ques
tion becomes one of importance, is strenuously insisted upon by the tax
payer, and requires careful, and frequently minute, examination by the
-17 -
Government
Acting within the scope of my appointment, I have dealt with some
of the problems arising out of the administration of the tax laws#
These
are the troubles of the income tax unit#
The economic aspects of taxa
tion I have discussed only incidentally*
Presumably, Congress w ill have
before i t the question of taxation at i t s next session*
This Association
and i t s members w ill be in flu en tial in the course of future legislation*
May I , therefore, again impress on you the importance of giving careful
consideration to tax administration in any future tax legislation*
18.
•
(COPY)
DEPARTMENT OP JUSTICE
Washington*
October 3, 1923#
S ir:I have your le tte r of August 30# 1923, requesting my opinion on
the power of national hanking associations to open and operate offices
at places other than th eir hanking houses for the performance of such
routine services as the receipt of deposits and cashing of checks for
their customers* You request to he advised whether:
•
(l) Assuming that a national hanking association is
without power to establish and maintain a branch hank for
carrying on a general hanking business, has i t the corporate
power to open and operate an office or offices at a place
or places other than i t s hanking house, for the performance
of such routine services as the collection of deposits and
cashing of checks for i ts customers?
(2) If a national hanking association has the corpo
rate power to open and operate such an office or offices,
must they he located within the city lim its of the place
designated in the organization c e rtific a te of the associa
tion as the place where i t s operations of discount and de
posit would he carried on?
The statutes relating to national hanking associations, so far as
they are material to our present inquiry, are Sections 5133, 5134
(Par* 2), 5136 (Par. 6 and 7 ), and 5190, R.S.
The material parts of
said statu tes read as follows:
,
nSec* 5133* Associations for carrying on the business
of hanking under th is t i t l e may he formed by any number of
natural persons, not less in any case than five. They shall
enter into a rtic le s of association, which shall specify in
general terms the object for which the association is formed,
and may contain any other provisions, not inconsistent with
law, which the association may see f i t to adopt for the re
gulation of its/business and the conduct of i t s a f f a ir s ,11
nSec* 5134, The persons uniting to form such an asso
ciation sh all, under th e ir hands, make an organization cer
tif ic a te , which shall specifically state;
***
***
Second* The place where i t s operation of discount and
deposit are to be carried on, designating the State, Terri
tory, or d is tr ic t, and the p articu lar county and c ity , town,
or village*H
HSec* 5136, Upon duly making and filin g a r tic l es o f __
association and an organization c e rtific a te , the association
shall become, as from the date of the execution of .i ts organization c e rtific a te , a body corporate, and as such* and in
the name designated in the organization c e rtific a te , i t shall
have power * * *
* **
** *
Sixth* To prescribe, by i t s board of directors, by-laws.
not inconsistent with law, regulating the manner in which the
stock shall be transferred* i t s directors elected orappoint
ed, i t s officers appointed, i t s property transferred, its
general business conducted, and the privileges granted to i t
by law exercised and enjoyed*
Seventh* To exercise by i t s board of directors, or duly
authorized officers or agents, subject to law, a ll such in c i- ._.
dental powers as shall be necessary to carry on the business
of banking; by discounting and negotiating promissory notes,
d rafts, b ills of exchange, and other evidence of debt; by re
ceiving deposits; by buying and selling exchange, coin, and
bullion; by loaning money on personal security; and by obtain
ing, issuing, and circulating notes, according to the provi
sions of th is T itle*w
t
ttSec* 5190# The usual business of such national banking
associations shall be transacted at an office or banking
house located in the place specified in its organization cer
t i f icate*B __
The provisions of Section 5190 R#S*, as to the place at which the
usual business of the bank shall be transacted refers to the c ity or
town in which the bank is located and not the p articu lar place within
the city*
McCormick v* Market Nat*l Bank, 165 U. S# 538,549.
>3«
National banks have only those powers specified in the National
Banking Acts, and such other powers as are necessarily incidental there
to,
McBoyle v, Union Nat* 1.Bank, 122 Pa, 458; F irs t Nat*l Bank v,
Natfl Exchange Bank, 92 U,S* 122,127;
Logan Co, Nat*l Bank v, Townsend,
139 U,S, 67,73; Bullard v, Bank, 18 Wall, 589,593,
In Bullard v. Bank, supra, the Supreme Court said;
M
The extent of the powers of national banking associa
tions is to be measured by the Act of Congress under which
such associations are organized,”
In Logan Co; Nat*l Bank v, Townsend, supra, the court said,
”I t is undoubtedly tru e, as contended by the defendant,
that the National Banking Act is an enabling act for a ll as
sociations organized under i t , and that a national bank
cannot rig h tfu lly exercise any.powers except those expressly
granted by that act, or such incidental powers as are neces
sary to carry on the business of banking for which i t was
established,”
I t is to be observed that section 5190 R*S*, relates to the ”usual
business” which, in my opinion, is to be construed the general banking
business usually conducted by national banks.
There is no statutory re
quirement that a ll the business of a national bank shall be transacted
at the general office or banking-house of the association,
In ray opinion, a national banking association may establish in the
city or place designated in i t s c e rtific a te of organization an office or
offices for the transaction of business of a routine character, which
does not require the exercise of discretion, and which maybe legally
transacted by the bank its e lf .
I t may not, however, establish a branch
bank to do a general banking business such as is usually done by national
banks.
The establishment of such a branch would be ille g a l, and subject
the offending bank to the fo rfeitu re of i t s charter,
29 Op* 81,
~4~
I t seems to “be the intent of the national banking act that the
business of banking ordinarily transacted by a national banking asso*
ciation shall be performed in the city or place designated in i t s
organization certificate*
I t has been held that a national bark cannot make a valid con»*
tra c t for the cashing of checks upon i t , at a different place from
that of i t s residence, through the agency of another bank* Armstrong
v* Second Nat*l Bank, 38 Fed. 883,886,
While national banking associations may exercise a l l the powers ex
pressly given them by the sta tu te , and such additional powers as may be
necessary to carry on the business of banking, the manner in which the
powers may be exercised are subject to the supervision of the Comptroller
of the Currency*
Should the Comptroller, in the exercise of h is super
visory powers over national banks, ascertain that the directors or o ffi
cers have knowingly violated, or are violating the National Banking laws,
he may proceed against such association, its officers and directors as
provided by Section 5339, JUS*, which reads as follows}
.
f,If the directors of any national banking association
shall knowingly v io late, or knowingly permit any of the of
fic e rs, agents, or servants of the association to violate
any of the provisions of th is T itle , a ll the rig h ts,
privileges and franchises of the association shall be there
by forfeited* Sach violation sh all, however, be determined
and adjudged by a proper c irc u it, d is tric t or te rrito ria l
court of the United States, in a su it brought for that pur
pose by the Comptroller of the Currency, in h is own name,
before the association shall be declared dissolved* And in
cases of such violation, every director who participated in
or assented to the same shall be held liab le in his personal
and individual capacity for a ll damages which the associa
tion, i ts shareholders, or any other person, shall have sus
tained in consequence of such v io latio n ,M
Answering your specific questions I have the honor to advise you
as follows:
First*
National harking associations have the power to open and
operate offices at places other than th eir banking-houses, within the
place specified in th eir organization c e rtific a te , for the performance
of such routine services as the receipt of deposits and the cashing of
checks for th eir customers.
Second:
National hanking associations have no authority to open
offices for the purpose of receiving deposits, paying checks, etc*, out'
side of the lim its of the city or place designated in the organization
certificate as the place of its operations of discount and, deposit*
Bespectfully,
H* M, Daugherty
Attorney General*
The Honorable,
The Secretary of the Treasury,
Address before
Investment Bankers Association
by Garrard B# Winston
A ssistant Secretary of the Treasury
Washington, October 30, 1923.
The story of Government finance* ihe science involved, the methods
y
f.
used, and the constantly recurring money questions, would be the history
of the country# I can but give you a rough outline of what the United
States owes, and how i t expects to pay i t s debts and conduct i t s current
business, with a few suggestions as to the direct effect of governmental
policies on investment bankers#
y
• Like most anything else in the present world, the war brought a com
plete new set of problems to Government finance# Without going into the
history of war financing, i t may be stated b riefly that at the commencement
of the war the public debt of the United States aggregated something over
r
y
one b illio n dollars, consisting principally of the 2$ Consols of 1930,
4$ loan of 1925, and certain Panama Canal bonds# During the war and "until
expenditures could be cut in the period succeeding i t , the debt of the .
y
United States was raised to 251* b illio n dollars as of June 30, 1919#
The
peak of the debt was somewhat in excess of 26^ b illio n in August of that
•i
.
. '
,
year, but fo r comparison I have used the end of a fisca l year since i t gives
a clearer view to use a date somewhere near a quarterly tax payment date,
when the temporary borrowings of the Government are not excessive#
During the war, expenditures were so large that i t was necessary that
the Government have always available a working cash balance of substantially
l i ^i.lllo^jiQÎjlars«
Shis ’balance was obviously rauch...tç>9^iarge for peace
time operations, ..and. one of the^ f i r s t and most natural things for the
Government to do afte r the war was to use the balance in the reduction
of debt*
During the fisc a l year 1920 the debt of the Government, as
appears from the Treasury Daily Statement, was reduced by $1,185,000,000,
of which three-fourths came from reduction in the working cash balance*
In 1921 there was a further reduction of debt of $322,000,000, in 1922 of
$1,014,000,000, and la s t year of $614,000,000 — a to ta l reduction up to
July 1, 1923, of $3,135,000,000, and a reduction from the peak of August
1919 of over 4 b illio n .
Up to September 30, 1923, there has been a fur
ther reduction of the debt by $225,000,000,
Truly a remarkable record
for four years, but realizatio n of war assets and reduction of balances
had a very material effect and hereafter these factors w ill be of l i t t l e
importance.
The present funded debt of the United States consists of approximately
the original one b illio n dollars of pre-war debt, nearly $15,000,000,000
of the four lib e rty Loans, $760,000,000 of the 4
Treasury bonds of
1947-52, $4,000,000,000 of Treasury notes maturing in the next four years,
about $1,000,000,000 of Treasury c e rtific a te s maturing in less than a year,
and a third of a b illio n dollars of Treasury savings securities — a to ta l
debt, as shown by the Daily Treasury Statement, of $22,100,000,000*
It
is in the handling of th is debt and in the current operations of the
Treasury that the problems of Government finance are presented.
The influences which affect the amount of debt are of f ir s t importance.
r
?
Prior to 1920 there was no consistent policy in the reduction of public
debt«
I t is true there was a sinking fund but i t was only available i f
appropriations were specifically made therefor, and practically l i t t l e
was done prior to the war.
Of course, during the war there could be no
thought of debt payment.
In the Victory Loan Act, however, Congress established the present
cumulative sinking fund. This fund was calculated to re tire the war debt,
less the amount of foreign government obligations held by the United States
on July 1, 1920, in about 25 years.
In other words, the sinking fund was
so figured that i t would re tira about 10 b illio n dollars of debt within
the period, and i t was expected that foreign governments would repay our
loans to them and thus extinguish the balance of the debt.
The sinking
fund consists of an in it ia l credit of 2j$, or approximately $250,000,000,
and a secondary credit equal to the in terest which would have been paid
on bonds or notes which have been re tire d from the sinking fund i f these
bonds or notes had been outstanding during the year.
The fund for the
current fisc a l year is $300,000,000; for £925 i t w ill be $311,000,000,
and by 1937 i t w ill exceed $500,000,000 yearly.
very rapidly.
You can see that i t mounts
Of course, th is means no increase in the to ta l amount de
voted to debt service, since the larger sinking fund represents in te re st
saved.
The settlement of the foreign debt has progressed only to th e point
of an accomplished refunding agreement with the B ritish 0-overnment.
4Cuba has repaid her debt and Finland1s agreement is before Congress*
ihe B ritish agreement fixed the debt and accumulated in terest a t
V.
r
V
y
$4v600,000,000,
and
provided
.y
fo r payments of approximately $160*000,000
per year for the f i r s t ten years and $180,000,000 for the next 52 years,
Then the debt Trill be extinguished* These sums represent both principal
y
and in te re st, principal payments increasing as the in terest payments de
crease*
The B ritish Government may make i t s payments in United States
securities a t par* So long, therefore, as any obligations of the United
States can be acquired in the market below par, we may expect to receive
our own securities and not cash.
This is an advantage in expediting pay
ment of the public debt, because under'the law the United States securi
tie s received are cancelled.
Under the Act of March 3, 1881, any surplus revenues in the Treasury
at the end of a fis c a l year are applied to the reduction of the public
debt*
I t is fo r th is reason that, whereas you may hear of surpluses in
Government operation, there is actually no increase in Government cash,
but the money goes into the capital account and is not in the Governments
pocket to use as income*
y"
y
In addition, th e.rig h t to pay estate taxes in Government securities
under certain conditions has a small influence on debt reduction* During
. i*
V
t
the year 1923 about $6,000,000 worth were turned in and cancelled, and in
V-
V
r
the same year $10,000,000 franchise taxes from Federal Reserve Banks, as
required by law, were also used in making retirements*
Of course, as
other foreign nations make agreements requiring actual payment of what
they owe us they w ill hasten the extinguishment of our debt*
Eliminating, however, the question of general foreign debt pay
ment and not relying on surplus revenues, which are uncertain, but
based solely on the sinking fund as at present constituted and the
B ritish refunding scheme as executed, i t is believed that the public
debt should be substantially retired by 1952, which year happens to
be the maturity date of the la s t maturing funded obligation of the
United States, the Treasury 4^*s« There are many contingencies
j/
W
which affect th is estimate, but i t is safe to assume that a plan of
refunding that p art of the maturing debt, which cannot be presently
met, to maturity dates within the next th irty years is a sound policy
to be pursued«
By relying on the Treasury*s a b ility to control securities pur
chased fo r the sinking fund, i t is possible to reduce the e a rlie r ma
tu r itie s and to make them more manageable« The Treasury, however,
cannot affect the selection of securities by the B ritish Government,
and obviously during the present state of the market, the e a rlie r ma
tu ritie s — being highor priced — w ill not be used by the B ritish
Government in making i t s payments«
To take the problem presented by the next five years, there mature
in that period $4,000,000,000 of notes and $3,400,000,000 of Third
Liberties — a to ta l of $7,400,000,000« The sinking fund w ill take
cate of $1,620,000,000«
There is , therefore, nearly $6,000,000,000 of
Government refunding to be done in the next five years, not in one lo t,
but during the period« ’What form these offerings m il take cannot bo
determined now, but w ill depend on the condition of the money market
at the time the offerings are made* I t is to be remembered th at these
w ill be purely refunding operations, and do not mean th at the Govern
ment w ill need new money from the investment market*
The other phase of Treasury financing is the current quarterly i s
suance of Treasury c e rtific a te s.
These normally aggregate'about
$1,000,000,000, and at present there are outstanding $370,000,000 ma
turing December 15, next, and $570,000,000 maturing March 15, next*
Treasury c e rtific a te s are short-term securities having a year or less
to run and becoming payable on the different quarterly income tax
payment dates*
These c e rtific a te s are sold quite generally to the
banks upon a basis of payment by c re d it. For example, i f a bank should
Y V
purchase fo r its e lf or fo r i t s customers $1,000,000 in Treasury c e rti
fic a te s, i t would make no immediate payment of cash but would credit the
s'
V
••
Government on i t s books with $1,000,000. Prom time to time, as the Gov
ernment requires funds in i t s checking account with the Federal Reserve
Banks, i t draws on th is c re d it. This means the acquisition of Govern
ment deposits by the banks a t a cost of simply 2$ in te re st and, depend
ing upon the length of time within which the deposit remains with the
bank, is sometimes a very valuable privilege.
■ ■ ■ ■ H H IH H H H IlH Ii
Again the m r can be given as the origin of this type of
financing* During sales of Liberty bond issues, disbursements
sometimes ran about $2,000,000,000 a month, Temporary financ
ing rats continuous and issues came out as frequently as once
every two weeks* Besides furnishing temporary re lie f ro the
Government, these c e rtific a te s were d e s ire d to anticipate Lib
erty Loan issues and also to enable the taxpayer to have easy
means of accumulating funds to meet the large tax payments, for
which purpose they were generally used.
fact that
Owing pexhaps to the
taxes are not now so high, th is tax use seems
to be diminishing and gradually the c e rtific a te s have taken on
a somewhat different character.
With a more evenly balanced income and outgo, the
Treasury might reduce the amount of Treasury c e rtific a te s con
tin u ally outstanding. While the cost of short-time financing
varies, being sometimes above and sometimes below funded
debt, 1 do not suppose, on the whole, the c e rtific a te s w ill
cost the Government more than an equivalent amount of bonds.
However by having some c e rtific a te s mature on every tax
payment date,
udien large sums of money are pouring
into the Treasury from the public, and by redemption fo r cash
and resale of c e rtific a te s on credit* the Treasury has been able to make
use of simple machinery to prevent any stringency in the money market#
Eie tax payments might he handled without the c e rtific a te s, hut not easily#
Treasury c e rtific a te s, and to them are added from time to time notes
and bonds as they approach th eir maturity, play a most important p art in
the -American financial structure#
The ce rtificates are in large amounts
of short m aturities and have a very wide market# No continuing decline
in price need be anticipated, for the holder has but to wait a short
period and he is paid at par# These ce rtificates now constitute for the
banks a secondary reserve, and they arcv and properly so, treated as
current assets p ractically on the same basis as cash# When a bank needs
money, i t se lls ce rtific a te s and reacquires them as i t s condition changes.
They constitute co llateral for borrowings from the Federal Reserve Banks#
Corporations use them generally for th e ir idle funds before dividend or tax
payment dates* They are the best to st of the price of money* So long as they
serve th is need of the banking world, the Treasury w ill be slow to eliminate
them from i t s plans#
Ih ile effort has been made to place these c e rtific a te s with small pur
chasers and preference is always given to subscribers in small amounts in
allotments, X do not believe the c e rtific a te s compete in any serious degree
witu bond offerings.
Their term is too short and th e ir value for other purposes
taan straight investment constitutes too great a part of th e ir market price#
#*9#*
1 have brought before you these elements of Treasury operation, refunding
of debt, short-term financing, and payment of debt#
With the f i r s t you are
only concerned in that our offerings do not disturb the market*
should take from you no customers#
Kefunding
With the second, again, i t is only
collaterally you are affected, for the c e rtific a te s are. a banking and not an
investment subject* But in the th ird
debt payment
you are v ita lly
interested,
For i t s influence on the prosperity of your business, the question you
ask, is : Will the Treasury in i t s operations contribute to or take from the
supply of money which, like a great irrig a tio n reservoir, exists here in
America and from which you draw your customers?
Wo cannot guarantee the future*
If new extraordinary expenditures are authorized, new financing may be necessary
or debt reduction slowed up or stopped, but under conditions as they now exist
I see no future drain by the Treasury.
We have drawn, and drawn deeply, from
that reservoir in the p ast, but only during the war#
To be able ourselves to
draw, we have had to increase ithe drainage area of the reservoir by the education
of the small investor*
During this fisca l year the United States w ill spend $300,000,000 in pur
chasing for cash i t s own securities for retirement*
Ih is means that each month
holders of $25,000,000 of securities w ill have paid back to them th e ir principal
and w ill be looking to you for new investments*
In lik e manner, $160,000,000 a
year of United States securities w ill be purchased by the B ritish Government from
holders here and turned in for retirement#
The effect of pouring nearly half a
billion dollars every year back into th is reservoir for you to use must be en
couraging to you# I t is tru ly bread upon the water returned to you* During the
PM
war you sacrificed your own p ro fits to so il Goverameat. securities»
n o rm a l
How with
conditions permitting* you w ill receive tho ultimate reward fo r your
labors in the available investment funds you yourselves have helped to create
LETTER FROM THE SECRETARY OF THE TREASURY TO THE ACTING CHAIRMAN OF THE
COMMITTEE ON WAYS AND MEANS.
T r e a su r y D e pa r tm en t ,
O f f ic e of t h e S ec re ta r y ,
Washington, November 10, 1923.
D
ea r
M
r
. G
r e e n
:
In accordance with the request which you made shortly after the adjournment of Con
gress, the Treasury has been engaged for the past few months in considering the possibilities
of tax revision and in developing recommendations for the simplification of the law. The
situation has developed more favorably than was anticipated, and I am now presenting to
you a comprehensive program to which I hope the Committee on Ways and Means will be
able to give consideration at the outset of the legislative session.
The fiscal years 1922 and 1923 have each closed with a surplus of about $310,000,000 over
and above all expenditures chargeable against ordinary reoeipts, including the sinking fund
and other similar retirements of the debt. This has been possible only through the utmost
cooperation between the Executive and Congress, as well as among the executive departments
and establishments, all of whom have united in a sincere effort to reduce the expenditures of
the Government. At the same time there has been a substantial amount of realization upon
securities and other assets remaining over from the war, and the Treasury has succeeded in
collecting customs and internal revenue taxes in amounts somewhat exceeding original expecta
tions. The result is that the Government of the United States is firmly established on the
basis of having balanced its budget each year since the cessation of hostilities, with a reason
able surplus each year after providing for fixed debt charges like the sinking fund, and stands
squarely committed to the policy of including these fixed charges on account of the public
debt in its ordinary budget each year, thus assuring an orderly reduction of the war debt out
of current revenues.
What has been done during the two years since the establishment of the budget system
shows clearly what united effort can accomplish, and gives every reason for hope that the task
to which the Administration has set itself for this fiscal year can be successfully performed,
namely, the reduction of the ordinary expenditures of the Government to a total of not more
than $3,500,000,000, of which about $500,000,000 will be fixed charges on account of the
«inking fund and other retirements of the debt. To do this means reductions of about
$170,000,000 in the estimates of expenditures submitted by the spending departments and
establishments and the exercise of continued pressure all along the line for the utmost economy
and efficiency in the operations of the Government.
Having these things in mind, the Treasury has been canvassing the estimates for the
present fiscal year and for the succeeding fiscal years with a view to determining on the one
hand what further reductions in expenditure it would be safe to count on in developing a taxrevision program, and on the other hand what receipts might reasonably be expected on the
basis of existing law, assuming that no changes were to be made in internal taxes. In doing
this it has had to keep in mind that under present conditions receipts from customs are
abnormally high and that surplus war supplies have now been for the most part liquidated,
leaving relatively little to expect on this account in the years to come. It has also had to
keep in mind that many of the internal revenue taxes, as, for example, the higher brackets
of the surtax, are so rapidly becoming unproductive that it is unsafe to assume that even
with no changes in the law the revenues from internal taxes would be maintained. After
taking into account all these considerations, and making the most conservative estimates about
the yield of existing taxes and the possibilities of further reductions in expenditure, it
appears that for this year, and for the next four or five years, there should be a surplus of
70648*—33
something over $300,000,000 a year over and above all expenditures chargeable to the ordinary
budget, including the fixed debt charges payable out of current revenues. This gives a
reasonable margin not merely for tax revision but also for tax reduction.
On this basis the Treasury has the following recommendations to make:
1. Make a 25 per cent reduction in the tax on earned income.—The fairness of taxing
more lightly income from wages, salaries and professional services than the income from a
business or from investment is beyond question. In the first case, the income is uncertain
and limited in duration; sickness or death destroys it and old age diminishes it. In the other,
the source of the income continues; it may be disposed of during a man’s life and it descends
to his heirs. It is estimated that this «amendment will mean a loss in revenue of about
$97,500,000 a year, the greater part of which falls in the lower income brackets.
2. W here the present normal tax is If. per cent reduce it to 3 per cent, and where the
present normal tax is 8 per cent reduce it to 6 per cent.—This affects all personal incomes and
the loss of revenue comes largely from the lower brackets. I t is estimated that this will mean
a loss in revenue of $91,600,000 a year.
1
3. Reduce the surtax rates by commencing th eir application at $10,000 instead of $6,000,
and scaling them progressively upw ards to 25 per cent at $100,000.—This will readjust the
surtax rates all along the line, and the Treasury recommends the readjustment not in order
to reduce the revenues but as a means of saving the productivity of the surtaxes. In the long
run it will mean higher rather than lower revenues from the surtaxes.. At the outset it may
involve a temporary loss in revenue, but the Government Actuary estimates that even during
the first year, if the revision is made early enough, the net loss in revenue from all the
changes in the surtaxes would be only about $100,000,000, and that in all probability the
revenue from the reduced rates will soon equal or exceed what would accrue at the present
rates, because of the encouragement which the changes will give to productive business.
The readjustment of the surtaxes, moreover, is not in any sense a partisan measure. It
has been recommended, on substantially this basis, by «every Secretary of the Treasury since
the end of the war, irrespective of party. The present system is a failure. It was an
emergency measure, adopted under the pressure of war necessity and not to be counted upon
as a permanent part of our revenue structure. For a short period the surtaxes yielded much
revenue, but their productivity has been constantly shrinking and the Treasury’s experience
shows that the high rates now in effect are progressively becoming less productive of revenue.
See Table II, hereto attached. The high rates put pressure on taxpayers to reduce their
taxable income, tend to destroy individual initiative and enterprise, and seriously impede the
development of productive business. Taxpayers subject to the higher rates can not afford,
for example, to invest in American railroads or industries or embark upon new enterprises in
the face of taxes that will take 50 per cent or more of any return that may be realized.
These taxpayers are withdrawing their capital from productive business and investing it
- instead in tax-exempt securities and adopting other lawful methods of avoiding the realization
of taxable income. The result is to stop business transactions that would normally go
through, and to discourage men of wealth from taking the risks which are incidental to the
development of new business. Ways will always be found to avoid taxes so destructive in
their nature, and the only way to save the situation is to put the taxes on a reasonable basis
that will permit business to go on and industry to develop. This, I believe, the readjustment
herein recommended will accomplish, and it will not only produce larger revenues but at the
same time establish industry and trade on a healthier basis throughout the country. The
alternative is a gradual breakdown in the system, and a perversion of industry that stifles
our progress as a nation.
The growth of tax-exempt securities, which has resulted directly from the high rates
of surtax, is at the same time encouraging extravagance and reckless expenditure on the part
of local authorities. These State and local securities will ultimately have to be paid,
principal and interest, out of taxes, thus contributing directly to the heavy local taxation
s which bears so hard on the farmers and small property owners. There is no immediate
remedy for this within the power of Congress except the readjustment of the surtaxes on a
3
basis that will permit capital to seek productive employment and keep it from exhausting
itself in tax-exempt securities. The productive use of capital in our railroads and industries
will also tend to bring lower costs for transportation and manufactured products, thus helping
to relieve the farmer from the maladjustment from which he now suffers.
4. L im it the deduction of capital losses to 12% per cent of the loss.—The present revenue
law limits the tax on capital gains to 12% per cent but puts no limit on the capital losses.
I t is believed it would be sounder taxation policy generally not to recognize either capital
gain or capital loss for purposes of income tax. This is the policy adopted in practically
all other countries having income tax laws, but it has not been the policy in the United States.
In all probability, more revenue has been lost to the Government by permitting the deduc
tion of capital losses than has been realized by including capital gains as income. So long,
however, as our law recognizes capital gains and capital losses for income tax purposes, gain
and loss should be placed upon the same basis, and the provision of the 1921 Act taxing
capital gains at 12J per cent should be extended to capital losses, so that the amount by which
the tax may be reduced by the capital loss will not exceed 12J per cent of the loss. I t is esti
mated that this will increase the revenues by about $25,000,000.
5. L im it the deductions from gross income for interest paid during the year and fo r
losses not of a business character to the amount the sum of these item s exceeds tax-exem pt
income of the ta x p a y e r—The 1921 Act provides that interest on indebtedness to acquire or
carry tax-exempt securities is not deductible. This provision is ineffective because a taxpayer
may purchase tax-exempt securities for cash and borrow money for other purposes. I t is felt
also that so long as a taxpayer has income which is not reached for taxation, he should not be
permitted to deduct his non-business losses from the income which is taxable, but should be
restricted in the first instance to a deduction of these losses from his non-taxable income. The
estimated increase of revenue from this source is $35,000,000.
6. Tax com m unity pro p erty income to the spouse having control of the income.—In some
States the income of the husband is a joint income of the husband and wife, and each, there
fore, is permitted to file a return for one-half of the income. This gives an unfair advantage
to the citizens of those States over the citizens of the other States of this country, and this
amendment seeks to restore the equality. I t is estimated that it will increase revenues by
$ 8 ,000,000.
So much for'the income tax recommendations, which should become effective January 1,
1924. In order that you may have before you a clear view of the effect of these recommenda
tions as applied to incomes in the various brackets, I am attaching a table, prepared by the
Government Actuary, showing the estimated results of the proposed changes in the calendar
year 1925, on the basis of the taxable year 1924. The schedule shows a loss of revenue of
about $92,000,000 in the brackets under $6,000, and a further loss of revenue of about
$52,000,000 in the next bracket of $6,000 to $10,000. In short, about 70 per cent of the reduc
tion would be in the brackets of $10,000 or less, and less than 5 per cent would fall in the
brackets over $100,000.
To show the effect of the proposed changes on the income of a typical salaried taxpayer,
married and having two children, I call your attention to the following comparative figures:
Income
$4,
5,
6,
7,
8,
9,
10,
000
000
000
000
000
000
000
Present tax
$28.
68.
128.
186.
276.
366.
456.
00
00
00
00
00
00
00
Proposed tax
$15. 75
38. 25
72. 00
99. 00
1 4 4 .0 0
1 8 9 .0 0
234. 00
Saving
to taxpayer
$12. 25
29. 75
56. 00
87. 00
132. 00
177. 00
222. 00
\
4
7. Repeal the tax on telegrams, telephones, and leased wires.—This is the last of the trans
portation taxes established during the war, is a source of inconvenience to every person using
the telephone or telegraph, and should now be eliminated from the tax system. This would
mean a loss in revenue of about $80,000,000 a year.
8. Repeal the tax on admissions.—The greater part of this revenue is derived from the
admissions charged by neighborhood moving picture theaters. The tax is, therefore, paid by
the great bulk of the people whose main source of recreation is attending the movies in the
neighborhood of their homes. This would mean a loss in revenue of about $70,000,000.
9. Miscellaneous nuisance taxes.—Your Committee may wish to consider the elimination
of various small miscellaneous taxes which have an inconsiderable bearing on the general
revenue of the Government, but which are a source of inconvenience to taxpayers and diffi
cult to collect; and possibly there are some articles of jewelry which according to our standard
of living can not properly be denominated luxuries, such as, for instance, ordinary table
silver or watches, which you may wish to exempt from the general tax on jewelry. There
is not enough margin of revenue available to permit the repeal of the special taxes which are
proving productive, but the law could be revised to good advantage and some of the nuisance
taxes repealed without material loss of revenue.
10. In addition to the specific recommendations which directly affect Government revenues,
there should be amendments to strengthen the Act and eliminate methods heretofore used by
taxpayers to avoid imposition of the tax. The exact amount of additional revenue to the
Government which will be brought in by these amendments can not be estimated, but certainly
the amendments will reach much income that heretofore has escaped taxation.
11. Establish a Board of Tax Appeals in the Treasury hut independent of the Bureau of
Internal Revenue, to hear and determine cases involving the assessment of internal revenue
taxes.—This will give an independent administrative tribunal equipped to hear both sides
of the controversy, which will sit on appeal from the Bureau of Internal Revenue and whose
decision will be conclusive on both the Bureau and the taxpayer on the question of assessment.
The taxpayer, in the event that decision is against him, will have to pay the tax according
to the assessment and have recourse to the courts, while the Government, in case decision
should be against it, will likewise have to have recourse to the courts, in order to enforce
collection of the tax.
12. Changes should be made in the present law to simplify administration, make the law
more easily understood, and permit a prompt determination of liability in a manner more
satisfactory to the taxpayer.
In order that you may see the effect on Government revenues of the above recommenda
tions, I submit the following figures as to the estimated result of these changes:
Decrease
(in millions of
dollars)
Reduction of 25%‘in tax on earned income__
97
Reduction in normal tax____ ____________
92
Readjustment of surtax ra te s ____________
102
Capital loss limited to 12$ % ..... ...................................
Interest and capital loss deductions limited_________
Community property amendment_________________
Repeal of telegraph and telephone ta x __ ___
30
Repeal of admissions tax_________________
70
T
o t a l
______________________________________
391
68
N bt L o ss__________________ _______
323
Increase
(in mil
lions of
dollars)
25
35
8
68
5
The benefits of the reduction will be distributed among all classes of taxpayers, and the
revision generally will help to free business and industry of vexatious interference and encour
age in all lines a more healthy development of productive enterprise.
The present burden of taxation is heavy. The revenues of the Government are sufficient
to justify substantial reductions and the people of the country should receive the bene ts.
No program, however, is feasible if the Government is to be committed to new and extraor
dinary expenditures. The recommendations for tax reduction set forth in this letter are
only possible if the Government keeps within the program of expenditure which the Bureau
of the Budget has laid down at the direction of the President. New or enlarged expen
ditures would quickly eat up the margin of revenue which now appears to be available
for reducing the burden of taxation, and to embark on any soldiers’ bonus such as was con
sidered in the last Congress or any other program calling for similarly large, expenditure
would make it necessary to drop all consideration of tax reduction and consider instead ways
and means for providing additional revenue. A soldiers’ bonus would postpone tax reduction
not for one but for many years to come. It would mean an increase rather than a decrease
in taxes, for in the long run it could be paid only out of moneys collected by the Government
from the people in the form of taxes. Throughout its consideration of the problem the
Treasury has proceeded on the theory that the country would prefer a substantial reduction
of taxation to the increased taxes that would necessarily follow from a soldiers bonus, and I
have faith to believe that it is justified in that understanding. Certainly there is nothing
better calculated to promote the well-being and happiness of the whole country than a
measure that will lift, in some degree, the burden of taxation that now weighs so heavily
on all.
Very truly yours,
A w . M ELLON,
Secretary of the Treasury.
Hon. W i l l i a m It. G r e e n ,
Acting Chairman, Committee on Ways and Means,
House of Representatives,
Washington, D. 0.
6
T able
I. — E s t i m
a te d
e ffe c t u p o n
th e r e v e n u e
o f th e
p roposed
changes
in
th e i n d i v i d u a l
in c o m e
ta x
la w .
Loss in tax when all changes are in full effect. On income for calendar year 1924; tax collected 1925.
Income tax brackets.
Number
paying
tax in
each
bracket.
Normal tax.
Surtax.
Earned
income at
75 per cent
of rates.
Capital
losses
provision.
Certain
deductions
limited ta
nontaxable
income.
Community
property
provision.
(Loss.)
(Loss.)
(Loss.)
(Gain.)
(Gain.)
(Gain.)
$1,000,000
$2,000,000
$l,000-$2,000 ______ ____
7,308,200
$2,000-14,000 ____
4,658,200 i $64,500,000
S4,000-$6,000_______ __
1,158,200
$31,250,000
Net
reduction
in tax
collected.
$92,750,000
$6,000-$10,000 ____ .
558,200
16,100,000
17,500,000
20,000,000
500,000
1,000,000
$10,000-120,000 _____
228,200
2,000,000
4,400,000
14,000,000
500,000
Jf500,000
$140,000
18,260,000
$20,000-$50,000 ___
80,200
1,300,000
10,100,000
25,000,000
1,000,000
2,500,000
2,520,000
30,380,000
$50,000-1100,000 ___
23,645,000
52,100,000
16,600
4,500,000
21,100,000
6,875,000
2,000,000
3,000,000
3,830,000
$100,000-$150,000 ___
3,620
1,300,000
11,100,000
106,000
4,000,000
6,000,000
1,510,000
$150,000-$200,000 __
1,430
550,000
6,600,000
69,000
3,000,000
3,500,000
$200,000-$300,000 _
996,000
719,000
840
450,000
7,400,000
56,000
3,000,000
3,500,000
1,406,000
$300,000-$500,000
380
400,000
8,100,000
50,000
3,500,000
3,500,000
1,550,000
$500,000-81,000,000
150
300,000
7,200,000
44,000
3,000,000
4,000,000
544,000
Over $1,000,000__
30
200,000
8,300,000
50,000
3,500,000
4,500,000
550,000
$25,000,000
$35,000,000
$91,600,000
$101,800,000
$97,500,000
/'
Gain
Loss
$8,000,000
$222,900,000
This table shows the estimated gain or loss in revenue over that estimated under the
present law, due to the proposed changes in the Revenue Act of 1921, and allows for the
estimated increase in incomes by reason of the readjustment of taxes.
The figures opposite each income tax bracket cover the total estimated receipts within
that bracket.
Table
II.—
T a b le s h o w in g d e c lin e o f ta x a b le in c o m e s o v e r $ 3 0 0 ,0 0 0
Number of returns.
Year.
All classes.
1916.
1917
1918............
1919 ..........
1920
1021
t
437,036
3,472,890
4,425,114
5,832,760
7,259,944
6,662,176
Incomes
over
$300,000
1,296
1,015
627
679
395
246
$6,298,577,620
13,652,383,207
15,924,639,355
19,859,491,448
23,735,629,183
19,577,212,528
•
Dividends and interest on
investments.
Net income.
All classes.
.
Incomes over
$300,000.
$992,972,986
731,372,153
401,107,868
440,011,589
246,364,585
153,534,305
All classes.
$3,217,348,030
3,785,557,955
3,872,234,935
3,964,553,925
4,445,145,223
4,167,291,294
Incomes over .
$300,000.
$706,945,738
616,119,892
344,111,461
314,984,884
229,052,039
155,370,228
S e c r e t a r y M e llo n Vs l e t t e r -t cmR epre sen t a b iv e Andrew
on th e c o s t o f "the Bonus B i l l v e to e d b y P r e s id e n t H ard in g.
December 18» 1923*
My dear Congressman:
I have your letter of December 10, 1923, in which you submit as them.__
cost of a bonus three tables which appeared in the report of April 20, 1922
from Senator McCumber, of the Committee on Finance of the Senate. A fair
representation should, of course, include the fourth year, when the Govern
ment is required to take over its burden which under the b ill is placed
for three years upon the ..banks.of the country* These figures are not esti
mates of the Treasury Department. The Government Actuary, at the request
of Senator McCumber. did the mechanical work of calculating the cost based
upon the assumptions given him for that-qmrpose by Senator McCumber*
The
b ill in the form submitted never passed the Congress, and, therefore, non
necessity for correction of,or comment upon the tables arose.
The figures
you quote from the veto message of President Harding'were made by the Gov
ernment Actuary based u£on the same assumptions as those given him by
jl Senator McCumber applied to the b ill in the form it was submitted to the
President.
♦
In his message President Harding said:
nThe Treasury estimates, based on what seems the most like
ly exercise of the options, figures the direct cost at approxi-
for the firs t four years of its operation and a total cost in ex
cess of $4,000,000*000, Ho estimate of the large indirect cost
ever has been made,. The certificate pim sets up no reserve
against the ultiraabe liability* The-plan, avoids any considerable
direct outlay by the Government during the earlier years of the
bilica proposed operations, but the loans on the certificates
would be floated on the credit of the Pati on. This is borrowing
on the Hation4s credit just as truly as though the loans were
made by direct Government borrowing, and involves a dangerous
abuso of public credit. Moreover, the certificate plan of pay
ment is little less than certified inability of the Government to
pay, and invites a practice in sacrificial barter which I can
not sanction.
-2«
.
,!It is worth remembering that the public credit is founded
on the popular belief in the defensibility of public expenditure
as well as the Government* s ability to pay. Loans come from
e v e r y rank in life , and our heavy tax burdens reach, directly or
indirectly* every element in our citizenship. To add one-sixth
of the total sum of our public debt for a distribution among
less than 5,000,000 out of 110,000,000, whether inspired by grate
ful sentiment or political expediency, would undermine the con
fidence on which our credit is builded and establish the precedent
of distributing public funds whenever the proposal and the num
bers affected make it seem politically appealing to do so.n
In order that I may answer your ouestion, the Treasury Department has
considered the soldiers* bonus b ill in the form in which i t was vetoed by
President
H a rd in g .
Talcing
up each of the three options, the total direct
cost i f 100$? of those entitled to the benefits of the bonus accept farm and
home aid, would be
$ 2 ,068,662 >303,
years would be $475,000,000 a year.
and the average cost for the firs t four
If 100^ should take the Vocational
training aid, the total cost would be $2,318,022,451, of which
$1,300,000,000 would be in the firs t year and $1,000,000,000 in the second
year.
If 100$ should choose the certificate plan, the total direct cost
(including an estimate of $23,000,000 a year for the firs t twenty years for
administration), would be $5,400,526,444, and the average for the firs t
four years would be about $225,000,000 a year.
Senator McCumber assumed
that 75$ would take the certificate 'plan, 22|r$ the farm loan and home aid
plan, and 2 - | t h e vocational training plan.
He also assumed that a certain
amount would be. borrowed on the certificates. Pith the passage of almost
two years since the -original assumptions vers 'made* it is believed-^that a Xj__
more probable estimate now is that there would be
certificate plan,
training.
9f>
90%
who should choose the^
the farm loan and home aid plan, and 1fi> vocational
Since the obvious purpose of the b ill is to permit borrow/ing, i t
is clear ’that greater recourse would be had by the certificate holders to
this privilege.
Account has also been taken of the savings to the Govern-
r?
m sn t b y p r o b a b l e f a i l u r e
re d e e m t h e i r
on th e p a r t o f a t
c e r tific a te s *
B ased on th e s e
o f t h e b o n u s w o u ld b e $ 5 , 0 8 5 , 8 3 3 , 6 8 7 ,
y e a r s o f o V e r $ 2 5 0 * 0 0 0 ,0 0 0 a y e a r .
to b e p a i d
le a s t
10 0 *0 0 0 men t o
e s tim a te s ,
is
a tta d h e d
l a r g e p r i n c i p a l p a y m e n t s c o m in g d u e a t
s in k in g fu n d ,
a n d no o t h e r p o l i c y
c o n tin u e d ,
it
th e f o u r t h
and f i f t h
is
is
e s tim a te d th a t w ith
fo u r
s h o w in g t h e a m o u n ts
a p e r io d in
sou n d .
th e fu tu r e b y u s e o f a
The tw e n tie th
If
th is
y e a r o f th e bonus
sou n d p o l i c y b e
som e b o r r o w i n g b y t h e G o v e rn m e n t d u r i n g
y e a r s , ' t w e n ty - o n e p a y m e n ts o f $ 2 1 1 ,4 7 6 ,3 5 7
19 4 4 , b o th in c lu s iv e ,
bonus up to
19 4 4 , le a v in g
if
e a c h fr o m
p a i d a n n u a l l y , w o u ld m e e t t h e c o s t o f t h e
a b a l a n c e o f a b o u t $ 6 5 0 ,0 0 0 ,0 0 0 c o m in g d u e i n
th e
y e a r s t o b e m e t b y n ew l e g i s l a t i o n ,
Your le t t e r
i n g i n my l e t t e r
d ie r s *
o f D ecem ber 1 0 , 1 9 2 3 , c a l l s
o f N ovem ber 1 0 t h t o
a tte n tio n
Mr* G r e e n , t o
to
a sta te m e n t a p p e a r
th e e f f e c t
th a t
UA s o l
b o n u s w o u ld p o s t p o n e t a x r e d u c t i o n , n o t f o r o n e , b u t f o r m any y e a r s
to com e.
I t w o u ld m ean a n i n c r e a s e
is w e ll ju s t if ie d *
fo r th e
fir s t
year fo r
m e n t,
cost
t o m ake p r e p a r a t i o n t o m e e t
w o u ld s e e r e q u i r e m e n t s o f n e a r l y $ 3 ,0 0 0 ,0 0 0 ,0 0 0 •
la te r
th e f i r s t
or
each y e a r.
I t h a s b e e n t h e p o l i c y o f th e U n ite d S t a t e s
132 4 t o
th e t o t a l d ir e c t
and an a v e ra g e f o r
A ta b le
r e c e iv e
r a t h e r th a n a d e c re a s e in t a x e s . n
Y ou m u st ad d to
T h is
t h e d i r e c t c o s t o f $ 2 5 0 ,0 0 0 ,0 0 0 a y e a r
f o u r y e a r s o f t h e b o n u s a n d t h e a v e r a g e o f $ 2 1 1 ,0 0 0 ,0 0 0 p e r
th e f i r s t
tw e n ty y e a r s , th e
The b i l l g i v e s
th e r ig h t
in
e n o rm o u s i n d i r e c t
t h e ?f i r s t
c o s t to
t h e G o vern
t h r e e y e a r s t o b o r r o w fr o m t h e
J
banks o f th e
c o u n try and th a t
th is
r i g h t w o u ld b e e x e r c i s e d b y t h e g r e a t
m a jo r ity o f th e c e r t i f i c a t e h o ld e r s none d e n ie s .
c r e d i t w o u ld r a i s e
th e
T h e c o n s e q u e n t d em an d f o r
i n t e r e s t r a t e s w h i c h t h e G o v e rn m e n t a s w e l l a s t h e
■
g e n e ra l p u b lic w i l l h a ve to
p assage o f th e b i l l
p a y on b o rro w e d m oney,
A t th e
sam e t i m e 't h e m e r e
w o u ld d e p r e s s t h e " p r i c e - o f G o v e r n m e n t b o n d s a n d i n c r e a s e
t h e i r " b a s is o f r e t u r n »
I n su c h a m oney m a rk e t t h e
ta k e c a r e
o f t h e $ 8 ,0 0 0 ,0 0 0 ,0 0 0 o f i t s
next f i v e
years,
of in te r e s t.
and to
s e c u r i t i e s w h ic h m a tu re w i t h i n t h e
do so w o u ld , o f c o u r s e , h a v e t o m e e t t h e h i g h e r r a t e
T h e c o n t i n u i n g " c o s t o f an. i n c r e a s e , i n
v o lu m e o f r e f u n d i n g w o u ld b e v e r y l a r g e »
p erso n in
g r e a tly
t h e U n i t e d S t a t e s , w o u ld a l s o
in c r e a s e d
e x p e n se due to
/■
w o u ld i n e v i t a b l y f o l l o w
V
on b y t h e b o n u s l a v »
f a c t o r s w o u ld r e d u c e
reven u e,
T he G o v e rn m e n t, l i k e
h a v e to
cond u ct i t s
th e h ig h e r p r ic e
U n it e d S t a t e s m ade i n
l e v e l g e n e r a l l y w h ic h
in c o m e o f t h e p e o p l e a n d t h u s - th e G o v e r n m e n t1 s
s ri r p l u s w o u ld n o l o n g e r e x i s t
and r e c o u r s e
a d d itio n a l ta x e s .
to
a n y i m p a r t i a l m in d t h a t a n ew o b l i g a t i o n
th e f i r s t
fo u r
y e a r a n d
o f th e
a n a v e r a g e d r a i n o n t h e „ r . 7*
t w e n t y y e a r s o f $ 2 1 1 ,0 0 0 ,0 0 0 a y e a r , w h i c h i s
o n e - fifth
o f G o v e rn m e n t, c a n n o t b e u n d e r ta k e n w it h o u t
e c o n o m ic c o n s e q u e n c e s .
and o th e r
t i m e o f p e a c e t o p a y o v e r $ 5 ,0 0 0 ,0 0 0 ,0 0 0 , o f w h i c h
$ 1 ,0 0 0 ,0 0 0 ,0 0 0 c o m e s i n
to ta l p re-w a r c o s t
e v e ry o th e r
t h e c r e d i t e x p a n s io n and d e c r e a s e p r o d u c t io n b r o u g h t
th e
I t m u st b e 'o b v i o u s
on su ch a
b u s in e s s a t
Soon th e d is tu r b a n c e to b u s in e s s b y t h i s
w ou ld h a v e t o b e h a d t o
■
in te r e s t r a te s
%
so t h a t a n y e s t i m a t e d
T reasu ry fo r
G o v e rn m e n t w o u ld have*, t o
If
s e r io u s
s u c h a co m m itm e n t i s m a d e , a n y r e d u c t i o n o f F e d e r a l
ta x e s u p o n a c o m p r e h e n s iv e p l a n w i l l p r o b a b l y n o t b e s e e n i n - t h i s
g e n e r a tio n .
V ery t r u ly y o u rs,
( S ig n e d )
•-
Hon. A . P i a t t
A n d rew .,
A . t t. MELI01TS e c r e t a r y o f t h e T r e a s u r y ,* ’
___
H o u se o f R e p r e s e n t a t i v e s .
1 e n c lo s u r e
o f th e
'
.ESTIMATED ANNUAL DIRECT COST 0F THE'BONUS TO TEE GOTEEEMEET.
9Op CHOOSING THE CERTIFICAiTB
% THE FARM AND HOME AID
PLAN, AND lf0 VOCATIONAL TRAINING»
UPON BASIS OP GOING INTO
EORCE JALfUAET 1 , 19 2 4 .
YEAR
CERTIFICATE
PLA N
1924
1925
,1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
5 2 ,9 0 4 ,4 0 7
2 6 ,9 6 5 ,9 8 5
1 0 ,1 2 9 ,4 0 4
(~) 2 4 ,4 9 1 ,3 1 9 *
(~ ) 6 7 ,8 4 6 ,3 7 0 *
} 1 5 1 ,4 9 2 ,2 0 6 *
2 ,8 8 5 ,7 8 6 ,8 1 6
Total
to 1945
4 ,2 1 5 ,6 4 3 ,6 0 2
1945 to
1966
6 44,8 30 ,20 0
Total
6 1966
4 ,8 6 0 ,4 7 3 ,8 0 2
(I)
*
$ 6 5 ,2 2 9 ,0 0 2
5 6 ,3 3 6 ,3 7 8
5 6 ,4 9 5 ,7 8 1
6 3 9 ,0 4 5 ,1 8 3
1 2 4 v3?_2,372
3 4 ,5 3 0 ,2 5 7
1 2 0 ,3 4 2 ,6 0 7
FARM AND
HOME AID
$6 7,5 0 0 ,0 0 0
4 5 .0 0 0 .
3 6 .0 0 0 . 000
2 2 ,50 0 ,0 0 0
9,000,0 00
6 ,1 7 9 ,6 6 1
VOCATIONAL
TRAINING
$13*000,000
000
io ,000,000
18 0 ,2 2 4
$ 1 6 1 ,7 2 9 ,0 0 2 ( 1 )
1 1 1 ,3 3 6 ,3 7 8 ‘
9 2 ,6 7 6 ,0 0 5 . ...
. ^61 ,545^183
1 3 3 ,3 1 2 ,3 7 2
4 0 ,7 5 9 ,9 1 8
12 0 ,3 4 2 ,6 0 7
8 4 ,7 1 4 ,5 4 8
5 8 ,0 8 5 ,3 8 1
5 8 ,5 6 3 ,5 8 9
50 ,0 4 2 ,9 0 4
5 0 ,6 2 1,8 4 6
4 2 ,2 6 0 ,5 6 5
4 3 ,0 5 6 ,4 7 2
5 2 ,9 0 4 ,4 0 7
2 6 ,9 6 5 ,9 8 5
1 0 ,1 2 9 ,4 0 4
( - ) .2 4 ,4 9 1 ,3 1 9 *
( - ) 6 7 ,8 4 6 ,3 7 0 *
( - ) 1 5 1 * 4 9 2 ,2 0 6 *
.2 ,8 8 5 ,7 8 6 ,8 1 6
8 4 ,7 1 4 ,5 4 8
5 8 ,0 8 5 ,3 8 1
58 j 563¿589
5 0 ,0 4 2 ,9 0 4
5 0 ,6 2 1 ,8 4 6
4 2 ,2 6 0 ,5 6 5
4 3 ,0 5 6 ,4 7 2
1 8 6 ,1 7 9 ,6 6 1
TOTAL
2 3 ,1 8 0 ,2 2 4 5
4 ,4 4 1 ,0 0 3 ,4 8 7
( l)
644,8 30,200
1 8 6 ,1 7 9 ,6 6 1
2 3 ,1 3 0 ,2 2 4 :
5 ,0 8 5 *8 3 3 ,6 8 7 ( i )
I n c lu d e s $ 16 ,0 0 0 ,0 0 0 p a id i n cash. to v e t e r a n s whose bonus i s $50 or l e s s .
E x c e s s o f r e c e i p t s o v e r paym ents.
No. a llo w a n c e i s made f o r c o s t o f a d m in is te r in g Farm and Home o r...V o ca tio n al
T r a in in g p l a n s , which, w ould be $3,0 0 0 ,0 0 0 a y e a n * a s a minimum, f o r some
s ix years*
TREASURY DEPARTMENT.
December 22, 1923.
Por immediate release.
The Secretary of the Treasury announces th at W, G* P la tt,
Chief Clerk of the Treasury Department, has been transferred at the
same salary to the position of Special Assistant in the Office of
the Commissioner of Internal Revenue and assigned to act as Secre
tary of the Committee on Enrollment and Disbarment of the Treasury*
3?« A. Birgfeld, Superintendent, Accounts Division, Office of
the Supervising A rchitect, has been transferred and appointed Chief
Clerk of the Treasury Department,
Both of these tran sfers take effect on January 1, 1924#
L ette r from S ecretary M ellon to The Outlook, dated December &2, 19^3*
D ecem b er 2 2 , 19 2 3 #
My dear S ir:
At
your r e q u e st, I am glad to g iv e The Outlook some observavions r e
la te d to my recommendations fo r a comprehensive p lan o f ta x red u ctio n , on
a su b ject which seems not to he f u l l y understood "by th e general public*
Adam Smith, in h is great work h e a l t h o f n a tio n s5*, l a id down as th e
f i r s t rna-rim o f ta x a tio n th a t »The su b jects o f every s ta te ought to con
tr ib u te toward th e support of th e government, as nearly as p o s s ib le , in
proportion to th e ir r e s p e c tiv e a b i l i t i e s » , and i n M s fou rth and la s t
maxim, th a t »Every ta x ought to he so co n triv ed as both to take out and to
keep out o f th e pockets o f the people as l i t t l e as p o s s ib le over and above
what i t b rin g s in to th e p u b lic trea su ry oi tn e s ta te » , c it in g as one o f
the ways by which t h is la s t maxim i s v io la t e d a ta x which »may ob stru ct
th e in d u stry o f th e p e o p le , and discourage them from applying to c e r ta in
branches c f b u sin ess which might g iv e maintenance ana employment uo g reat
m u ltitu d es.
* * * TJfaile i t o b lig e s th e people to pay, i t may thus dim inish
or perhaps d estroy some o f the funds, which might enable them more e a s ily
to do so».
The fu rth er experience o f one hundred and f i f t y years sin c e
t h is was w r itte n has emphasized the tru th o f th ese maxims, but th ose who
argue a g a in st a red u ction o f su rtaxes to more nearly peace-tim e fig u r e s
c i t e o n ly th e f i r s t maxim, and ignore th e fourth#
With th e p r in c ip le th at
a man should pay ta x e s in accordance w ith h is a b i l i t y , I thoroughly agree,
but when, a s a r e s u lt o f an unsound b a sis o f ta x a tio n , i t becomes evident
th at th e source o f ta x a tio n i s drying up and w ealth i s being d iv erted in to
unproductive chann els, y ie ld in g n e ith er revenue to th e -Government nor
-2 p r o fit to th e p e o p le , then i t i s time to readjust; our b a s is o f ta x a tio n upon
sound p r in c ip le s .
I t seems d i f f i c u l t fo r some to understand th a t h igh r a te s o f ta x do not
n e c e s s a r ily mean la rg e revenue to the Government, and th a t more revenue may
o ften he obtained hy lon er r a te s ,
There was an o ld saying th at a r a ilr o a d
fr e ig h t r a te should he ifwhat the t r a f f i c w ill bear1*, th at i s , a combination
of the h ig h e st r a te at which th e la r g e s t quantity o f fr e ig h t would move.
The same r u le a p p lie s to a l l p r iv a te b u sin e sse s.
h igh , s a le s drop o f f and w ith them p r o f it s ;
I f a p r ic e i s fix e d too
i f a p r ic e i s fix e d too low,
s a le s may in c r e a se , but again p r o f it s d e c lin e .
The most outstanding recent
example of t h is p r in c ip le i s the s a le s p o lic y o f the Ford Motor Car Company,
Does any one q u estion th a t Mr, Ford has made more money by reducing the
p rice o f h i s car and in c r e a sin g h is s a le s than he would have made by main
ta in in g a h igh p r ic e and a greater p r o f it per ca r, but s e llin g le s s cars?
Tour Government i s Just a b u sin e ss, and can and should be run on b u sin ess
p r in c ip le s .
Mi income ta x i s the p r ic e .the Government charges i t s people
fo r the r ig h t to make a taxab le p r o f it .
Experience has shown that the
present h igh r a te s o f surtax are b r i b i n g in each year p r o g r e ssiv e ly l e s s
revenue to the Government.
This means th a t the p r ic e i s too high to th e
large taxpayer and he i s avoiding a taxab le income by the many ways which
are a v a ila b le to him.
flhat r a te s w ill bring in th e la r g e s t revenue to th e
Government- experience--has not yet-^deve-loped,. but 41*’I s -e s tim a te d t-iat by
c u ttin g the surtaxes in h a lf , the Government^ v?hen the f u l l e f f e c t of the
reduction i s f e l t , w i l l r e c e iv e more revenue: from the owners of la rg e in
comes at the lower r a te s o f tax than i t would have receiv ed a t the higher
r a te s .
This i l .sim ply an a p p lic a tio n o f th e same b u sin ess p r in c ip le . J u st
as Mr* Ford makes more money out o f p r ic in g M s cars a t $300 than at
$3,000*
Looking; a t th e su b ject » .th e r e fo r e , s o le l y from the standpoint o f
Government revenues,, loiter surtax r a te s are e ss e n tia l*
I f we c o n sid er, -
however, th e fa r more important su b ject o f the e f f e c t o f the present
high surtax r a te s on th e development and p ro sp erity o f our country»
then th e n e c e s s ity fo r a change i s more apparent*
The most noteworthy
c h a r a c t e r is tic o f th e American people i s th e ir in itia tiv e * .
I t i s t h is
s p ir it which has developed America, and i t was the same s p ir it in our
s o ld ie r s which made our armies s u c c e s sfu l abroad*
i f the s p ir it o f
b u sin ess adventure i s k i l l e d , t h is country w i l l cease to hold the fo r e
most p o s itio n in the v/orld,
c e s s iv e
And y e t i t i s t h is very s p ir it which ex
su rtaxes are now destroying*
Any one a t a l l in touch w ith
a f f a ir s knows o f h i s own knowledge o f b u ild in g s which have-not been
b u i l t , o f b u sin esses which have not been s ta r te d , and o f new p r o je c ts
which have been abandoned, a l l fo r the one reason, high, su rta x es,
If
fa ilu r e a tte n d s, the lo s s i s borne e x c lu s iv e ly by th e adventurer, but
i f su ccess ensues, th e Government tak es more than h a lf o f the p r o fit s ,
People argue the r is k i s not worth the return*
T/ith th e open in v it a t io n to a l l men who have w ealth to be r e lie v e d
from ta x a tio n by the simple expedient o f in v e stin g in the more than
$11,000,000,000 o f tax-exem pt s e c u r it ie s now a v a ila b le , and which would
be u n a ffe c ted by any C o n stitu tio n a l amendment, the r ic h need not pay
ta x e s .
We v io la t e Adam Sm ith1s- fir s t- maxim,
Where th e se h igh surtaxes
do b e a r , i s not on th e man who has acquired and hold s a v a ila b le w ea lth ,
but on th e man who, through h is own in i t ia t iv e *
id le man i s r e lie v e d ;
maxim.
the producer i s p en a lized ,
Tie v io la t e the fo u rth
Tie do not reach th e people in proportion to tn e ir aOirxty to
pay and we d estroy the i n i t i a t i v e which produces the w ealth in which
the whole country should sh are, and which i s the source o f revenue to
th e Government,
Yours s in c e r e ly ,
(Signed)
A, W. MELL02T
Secretary o f the Treasury*
Ernest Hamlin Abbott, Esq«,
E d itor, The Outlook Company,
381 Eourth Avenue,
Hew York, 2ff* Y*
IKCOME TAX OH SABKKD IflOOMBS EBQM $1200 TO $6*000
Married person with^.
two dependent children.
Single person*
Uet
income.
Present law: Proposed
Proposed
Present law,
$1,200
1,400
1,600
1,800
2,000
$8
16
24
32
40
§4.50
9,00
13.50
18.00
22,50
M
- - --- -- - - -* - '
2,200
2,400
2,600
2,800
3,000
48
56
64
72
80
27,00
31,50
36.00
40.50
45,00
* m «•
«r
- ■* —
■** ** **
3,200
3,400
3,600
3,800
4,000
88
96
104
112
120
49,50
54.00
58,50
63,00
67.50
«ft 4*
20
28
- --2.25
6.75
11.25
15.75
4,200
4,400
4,600
4,800
5,000
128
136
144
152
160
72.00
76.50
81.00
85*50
90,00
36
44
52
60
68
20,25
24.75
29.25
33.75
38.25
5,200
5,400
5,600
5,800
6,000
176
192
208
224
240
99,00
108*00
117.00
126.00
135,00
96
104
112
120
126
54.00
58,50
63.00
67.50
72.00
l
l
4
12
•
••
—- **
- - ~ **»•** **
~—
- « - «* ** ** **
INCQMg m
OH BARKED XHCOMSS PROM $1300 to $6000.
Married person with
out dependent children.
Single Person.
&«*
income*
Present law.
\
Present law.
proposed.
,
.
r
....
-
---
Proposed
...
m
m
$1,200
1,400
1,600
1,800
2,000
$8
IS
24
32
40
$4.50
9.00
13.50
18.00
22.50
2,200
2,400
2,600
2,800
3,000
48
56
64
72
80
27.00
31.50
36.00
40.50
45.00
«, „ —
$4
13
20
$2.25
6.75
11.25
3,200
3,400
3,600
3,800
4,000
88
96
104
112
120
49.50
54,00
58.50
63.00
67.50
28
36
52
60
15.75
20.25
24.75
29.25
33.75
4,200
4,400
4,600
4,800
5,000
128
136
144
152
160
72.00
76.50
81.00
85,50
90.00
68
76
84
93
100
38.25
42.75
47.25
51.75
56,25
5,200
5,400
5,600
5,800
6,000
176
192
208
324
240
99,00
108,00
117.00
125.00
135.00
i2a
136
144
153
160
72.00
76*50
31.00
85.50
90,00
• -
- - -
-
- - 0m m
mm
m
- - -
~ - -
AA.
mm
jQICOME TAX PAYABLE UPOff 0M3TAXH E-ABM) M S IHCOMEg.
5 Head of family with two
* dependent children*
Single person,
Net
income.
Proposed
i Present law
t
s
$0.00
$0,00
22.50
45.00
67.50
90.00
0.00
0,00
3.000
4*b00
5#000
i
$0*00
40*00
80.00
|
120*00
t
160,00
6 *006
i
135.00 1
180*00 2
225.00
270.00
315.00
128.00
186.00
276.00
366.00
456.00
367.50
420.00
480.00
540.00
607.50
556.00
656.00
766.00
876.00
996.00
675.00
750,00
825,00
907.50
990,00
1 , 116*00
1,080.00
1,170.00
1,267.50
1,365,00
1,470.00
1.816.00
1.976.00
2.146.00
2.316.00
2.496.00
$ 1*000
2*000
9,000
:
10,000
S
240*00
330.00
420.00
510*00
600*00
11,000
2
:
:
700.00
800*00
910.00
:
1 ,020.00
S
1,140.00
7.000
1
6.000
S
12,000
13.000
14.000
15.000
16.000
17.000
18.000
19.000
20.000
21,000
22,000
23,000
24.000
25.000
2
:
2
:
!
4
4
2
1
t
2
j
t
1,230.00 2
1,390.00 t
1,520,00 2
1,660.00 :
1,800.00 2
♦
m
1,960*00
2,130.00
3,290,00
2,460.00
2,640.00
i
:
:
;
:
proposed
Present lav;
28.00
1.246.00
1.376.00
1.516.00
1.656.00
$0.00
;
5
2
:
*
1
:
2
2
0 .0 0
0.00
15.75
38.25
72*00
99,00
144.00
189.00
234.00
2 286.50
2 339.00
: 399.00
2 *459,00
2 526,50
;
2
2
:
2
2
594.00
669,00
744.00
826*50
909.00
999,00
2 1,089,00
: 1,186.50
2 1,284.00
; 1,389.00
TAXATION
AN EXTRACT FROM THE REPORT OF
THE SECRETARY OF THE TREASURY
ON THE STATE OF THE FINANCES FOR
THE FISCAL YEAR 1923
WASHINGTON
GOVERNMENT PRINTING OFFICE
1923
TAXATION.
The question of reduction of taxation is one which should have
the serious consideration of Congress. Before the period of the war
taxes as high as those now in effect would have been thought fantastic
and impossible of payment. As a result of the patriotic desire of the
people to contribute to the limit to the successful prosecution of the
war, high taxes were assessed and ungrudgingly paid. Upon the
conclusion of peace and the gradual removal of war-time conditions
of business, the opportunity is presented to Congress to make the tax
structure of the United States conform more closely to normal con
ditions and to remove the inequalities in that structure which directly
injure our prosperity and cause strains upon our economic fabric.
In considering /any reduction the Government must always be
assured that taxes will not be so far reduced as to deprive the Treas
ury of sufficient revenue with which properly to run its business with
the manifold activities now a part of the Federal Government and
to take care of the public debt. Tax reduction must come out of
surplus revenue. In determining the amount of surplus available
these factors control: The revenue remaining the same, an increase
in expenditures reduces the surplus, and expenditures remaining the
same, anything which reduces the revenue reduces the surplus. The
reaction, therefore, of the authorization of extraordinary or unsound
expenditures is twofold—it serves, first, to raise the expenditures and
so narrow the margin of available surplus; and, second, to decrease
further or obliterate entirely this margin by a reduction of the
Treasury's revenues through the disturbance of general business,
which is promptly reflected in the country's income. On the other
hand, a decrease of taxes causes an inspiration to trade and commerce
which increases the prosperity of the country so that the revenues
of the Government, even on a lower basis of tax, are increased.
Taxation can be reduced to a point apparently in excess of the esti
mated surplus because by the cumulative effect of such reduction,
expenses remaining the same, a greater revenue is obtained.
High taxation, even if levied upon an economic basis, affects the
prosperity of the country because in its ultimate analysis the burden
of all taxes rests only in part upon the individual or property taxed.
I t is borne by the ultimate consumer. High taxation means a high
price level and high cost of living. A reduction in taxes, therefore,
75488—23
1
2
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
results not only in an immediate saving to the individual or property
directly affected, but an ultimate saving to all people in the country.
I t can safely be said, that a reduction in the income tax reduces
expenses not only of the 7,000,000 income taxpayers but of the entire
110,000,000 people in the United States.
The results which flow from an economically unsound policy of
taxation are not as easily visualized as the results of high taxation
taken alone because the effects are indirect. These effects are a
most insiduous menace to a continued prosperity. In my previous
reports I forecasted that high surtaxes were driving capital out of
business productive of revenue to the Government. An examination
nf Table II, page 12, shows the progressive diminution in the number
.of taxpayers with incomes in excess of $300,000, and confirms my
forecast. The returns of 1921, which have recently been made
available, give this figure as 246, as compared with 395 the year
before.
V
;' • - ' U;!;
While it is the policy of the Treasury not to make public information
with respect to the incomes of particular individuals, still the publication
in the newspapers of the probate of the estates of several wealthy
men who have recently died permits comment on the type of invest
ment into which the decedents appear to have been driven by the
high surtaxes. These cases are remarkable for the way they show
how men noted for their business ability and initiative have with
drawn their capital from productive business and placed it in munici
pal and other tax-free bonds. (For detailed statements of the
Treasury’s position with reference to tax-exempt securities see Ex
hibits 71-73, pages 376:to 392 of this report.) This is but one phase
of the income-tax avoidance. Tax-exempt securities are not the only
means by which the wealthy taxpayer, within his strictly legal rights,
avoids a burden which appears to him to be confiscatory. I t has been
the history of taxation throughout the world that means have always
been found by the ingenuity of the citizen to avoid taxes inherently
excessive. If the present unsound basis of high surtaxes is main
tained, they will continue to become progressively less productive.
On the other hand, a decrease in the surtaxes to a more reasonable
amount would result not only in a more economically sound struc
ture, but would utimately yield more in revenue to the Government
out of the lower taxes than the Government receives out of the
higher taxes. The Government actuary has estimated that if the
recommendations on tax reduction contained in my letter to Mr.
Green arei adopted, in the second year after operation, any loss in
.revenue on incomes in brackets in excess of $100,000 will not
only be overcome but additional revenue from these brackets will
flow into the Government. His detailed estimate is as follows, and
should be read in connection with the table appearing at the end of
my letter to Mr. Green (p. 12):
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
E s t i m a t e d e ffe c t u p o n th e r e v e n u e o f th e p r o p o s e d c h a n g e s i n
In com e ta x b rack ets.
3
th e i n d i v i d u a l i n c o m e ta x l a w
N e t reduction in ta x w h en all
changes h a v e b een in full
e ffe c t— O n in co m e for calen
dar year—
1924. collected
1925.
1925, collected
1926.
$92,750,000
52,100,000
18,260,000
30.380.000
23.645.000
$81,363,000
49.485.000
16.507.000
26.866.000
20/809,000
.
N e t increase in
ta x collected,
1926 over 1925.
$11,387,000
2.615.000
1.753.000
3.514.000
2.836.000
N e t in crea se.
996.000
719.000
1.406.000
1.550.000
544.000
550.000
142,000
8,000
8,000
8,000
85.000
20.000
1 222,900,000
»194,759,000
1.414.000
11558.000
629.000
570.000
28,141,000
' Loss.
I have considered this problem in the first instance solely from e
standpoint of the Government’s revenue and it is clear that irom tins
standpoint alone a reduction in surtaxes is necessary. The other
viewpoint, however, is much more important. High surtaxes drive
capital from productive business to tax-exempt securities or other law
ful methods of avoiding a taxable profit equally destructive of business
advancement. The farmer is now complaining, and rightly, oi the
high freight rates and the high cost to him of that which he has to
buy The railroads of this country require a billion dollars a year
of new capital in order that they may properly maintain their service
and at the same time in keeping with the country’s growth conduct
the business of transportation upon such an economical basis as will
permit the reduction of rates. The cost of capital is, therefore one
of the largest items of expense in the conduct of railroads. Nothing
has so contributed to this additional cost of capital as the high sur
taxes which have driven the large investors from railroad to taxexempt securities. In like manner, the demands of capital for a
higher return by reason of the high surtax rates have raised the cost
of all manufactured products.
, , .
- .
The constitutional amendment removing m the future the taxexempt features of municipal bonds, which was mtroduced at the
last session of Congress, would bring about a most desirable readjust
ment of the relation between the States and the Nation. Such a
amendment, however, would not affect the already existing mass of
tax-exempt securities aggregating about $11,000,000,000, and these
would continue during their life to be a means of escape from taxation.
Such an amendment has yet to pass Congress and be ratified by the
States. Its effect will not be immediate. A reduction of surtaxe
destroys much of the desirability of the tax-exempt feature of these
4
EXTRACT FROM REPORT OF SECRETARY OF T H E TREASURY.
securities, is within the sole power of Congress, and would promptly
divert capital to productive investment, such as railroad securities,
which tend to the reduction of costs, thus giving relief to the farmer
and consumers generally.
On November 10, 1923,1 addressed to the Hon. William R. Green,
acting chairman of the Committee on Ways and Means of the House
of Representatives, a communication which expressed the considered
recommendations of the Treasury for a reduction of taxes and for a
reestablishment of a more sound economic policy for the country.
The letter is as follows:
T r ea su ry D epa r tm en t,
O f f ic e o f t h e S e c r e t a r y ,
W a s h in g to n , N o v e m b e r 1 0 , 1 9 2 3 .
In accordance with the request which you made shortly after
the adjournment of Congress, the Treasury has been engaged for the past few months
in considering the possibilities of tax revision and in developing recommendations
for the simplification of the law. The situation has developed more favorably than
was anticipated, and I am now presenting to you a comprehensive program, to which
I hope the Committee on Ways and Means will be able to give consideration at th e
outset of the legislative session.
The fiscal years 1922 and 1923 have each closed w ith a surplus of about $310,000,000
over and above all expenditures chargeable against ordinary receipts, including the
sinking fund and other similar retirements of the debt. This has been possible only
through the utmost cooperation between the Executive and Congress, as well as among
the executive departments and establishments, all of whom have united in a sincere
effort to reduce the expenditures of the Government. At the same time there has been
a substantial amount of realization upon securities and other assets remaining over
from the war, and the Treasury has succeeded in collecting customs and internalrevenue taxes in amounts somewhat exceeding original expectations. The result is
th a t the Government of the United States is firmly established on the basis of having
balanced its budget each year since the cessation of hostilities w ith a reasonable
surplus each year after providing for fixed-debt charges like the sinking fund, and
stands squarely committed to the policy of including these fixed charges on account
of the public debt in its ordinary budget each year, thus assuring an orderly reduction
of the war debt out of current revenues.
What has been done during the two years since the establishment of the Budget
system shows clearly what united effort can accomplish, and gives every reason for
hope th at the task to which the administration has set itself for this fiscal year can
be successfully performed, namely, the reduction of the ordinary expenditures of the
Government to a total of not more than $3,500,000,000, of which about $500,000,000
will be fixed charges on account of the sinking fund and other retirements of th e
debt. To do this means reductions of about $170,000,000 in the estimates of expendi
tures submitted by the spending departments and establishments and the exercise of
continued pressure all along the line for the utmost economy and efficiency in the
operations of the Government.
Having these things in mind, the Treasury has been canvassing the estimates for
the present fiscal year and for the succeeding fiscal years with a view to determining
on the one hand what further reductions in expenditure it would be safe to count on
in developing a tax-revision program, and on the other, hand what receipts might
reasonably he expected on the basis of existing law, assuming th at no changes were
to be made in internal taxes. In doing this it has had to keep in mind th at under
present conditions receipts from customs are abnormally high and th at surplus war
D ear Mr . G r e e n :
EXTRACT1 FROM REPORT OF SECRETARY OF THE TREASURY*
5
supplies have now been for the most part liquidated, leaving relatively little to
expect on t.hi« account in the years to come. It has also had to keep in mind that
many of the internal-revenue taxes, as, for example, the higher brackets of the surtax
are so rapidly becoming unproductive that it is unsafe to assume that even with no
changes in the law the revenues from internal taxes would be maintained. After
taking into account all these considerations, and making the most conservative esti
mates about the yield of existing taxes and the possibilities of further reductions ffi
expenditure, it appears that for this year, and for the next four or five years, there
should be a surplus of something over $300,000,000 a year over and above all expendi
tures chargeable to the ordinary budget, including the fixed-debt charges payable
out of current revenues. This gives a reasonable margin not merely for tax revision
but also for tax reduction.
’
On this basis the Treasury has the following recommendations to make.
1. Make a 25 per cent reduction in the tax on earned incom e.— The fairness of taxing
more lightly income from wages, salaries, and professional services than the income
from a business or from investm ent is beyond question. In the first case, the income
is uncertain and lim ited in duration] sickness or death destroys it and old age dimin
ishes it. In the other the source of the income continues; it may be disposed of dur
in g a man’s life and it descends to his heirs. It is estimated that this amendment
w ill mean a loss in revenue of about $97,500,000 a year, the greater part of which falls
in the lower income brackets.
, ,
.
,
2. Where the presen t n o rm a l tax is 4 p er cent reduce i t to S per cent, a n d where the presen t
n orm al tax is 8 per cent reduce i t to 6 per cent.— This affects all personal incomes and
the loss of revenue comes largely from the lower brackets. It is estimated that this
will mean a loss in revenue of $91,600,000 a year.
. a
3.
Reduce the su rtax rates by com m encing their a p p lic a tio n a t $10,000 in stea d o f $ 6,000,
a n d scalin g them progressively u p w a rd s to 25 per cent a t $100,000.— T hisw ill readjust t e
surtax rates all along the line, and the Treasury recommends the readjustment not m
order to reduce the revenues but as a means of saving the productivity of the surtaxes.
In the long run it w ill mean higher rather than lower revenues from the surtaxes. At
the outset it may involve a temporary loss in revenue, but the Government Actuary
estimates that even during the first year, if the revision is madeiearly e^ ^ ’ t^ en^ t
loss in revenue from all the changes in the surtaxes would be only about $100,000,000,
and that in all probability the revenue from the reduced rates w ill soon equal «r exceed
what would accrue at the present rates, because of the encouragement which the
changes w ill give to productive business.
> ‘ .
The readjustment of the surtaxes, moreover, is not in any sense a partisan measure.
It has been recommended, on substantially this basis, b y every Secretary of th e
Treasury since the end of the war, irrespective of party. The present system is a
failure. It was an emergency measure, adopted under the pressure of war necessity,
and not to be counted upon as a permanent part of our revenue structure. For a
short period the surtaxes yielded much revenue, but their productivity has been
constantly shrinking and the Treasury’s experience shows that the high rates now
in effect are progressively becoming less productive of revenue. See Table 11, heretp
attached. The high rates put pressure on taxpayers to reduce their taxable income,
tend to destroy individual initiative and enterprise, and seriously impede the development of productive business. Taxpayers subject to the higher rates can not afford,
for example, to invest in American railroads or industries or embark u p onnew enter
prises in the face of taxes that will take 50 per cent or more of any retuto that may be
realized. These taxpayers are withdrawing their capital from Productive bmnness
and investing it instead in tax-exempt securities and adopting other lawful metho s
of avoiding the realization of taxable income. The result is to stop ^ n e s s J r a ^
tions that would normally go through, and to discourage men of wealth from taking
the risks which are incidental to the development of new business. Ways will always
6
extract from
repo rt of secretary of t h e
treasury
.
be found to avoid taxes so destructive in their nature, and the only way to save th e
situation is to p u t the taxes on a reasonable basis th at will perm it business to go on
and industry to develop. This, I believe, the readjustment herein recommended
will accomplish, and it will not only produce larger revenues b u t a t the same tim e
establish industry and trade on a healthier basis throughout the country. The alterna
tive is a gradual breakdown in the system and a perversion of industry th a t stifles our
progress as a nation.
The growth of tax-exempt securities, which has resulted directly from the high
rates of surtax, is at the same time encouraging extravagance and reckless expendi
ture on the part of local authorities. These State and local securities will ultimately
have to be paid, principal and interest, out of taxes, thus contributing directly to the
heavy local taxation which bears so hard on the farmers and small property owners.
There is no immediate remedy for this within the power of Congress except the read
justment of the surtaxes on a basis that will permit capital to seek productive em
ployment and keep it from exhausting itself in tax-exempt securities. The produc
tive use of capital in our railroads and industries will also tend to bring lower costs for
transportation and manufactured products, thus helping to relieve the farmer ,from
the maladjustment from which he now suffers.
4.
L i m i t th e d e d u c tio n o f c a p ita l lo s s e s to 1 2 $ p e r c e n t o f th e lo s s .
The present revenue
law limits the tax on capital gains to 1 2 $ per cent but puts no lim it on the capital
losses. I t is believed it would be sounder taxation policy generally not to recognize
either capital gain or capital loss for purposes of income tax. This is the policy adopted
in practically all other countries having income-tax laws, b u t it has not been the
policy in the United States. In all probability, more revenue has been lost to the
Government by permitting the deduction of capital losses than has been realized
by including capital gains as income. So long, however, as our law recognizes capital
gains and capital losses for income-tax purposes, gain and loss should be placed upon
the same basis, and the provision of the 1921 act taxing capital gains at 1 2 $ per cent
should be extended to capital losses, so that the amount by which the tax may be
reduced by the capital loss will not exceed 1 2 $ per cent of the loss. It is estimated
that this will increase the revenues by about $25,000,000.
5. L i m i t t h e d e d u c t i o n s f r o m g r o s s i n c o m e f o r i n t e r e s t p a i d d u r i n g t h e y e a r a n d f o r
lo s s e s n o t o f a b u s i n e s s c h a r a c te r to th e a m o u n t th e s u m
o f th e s e i t e m s e x c e e d s
ta x -e x e m p t
.—The 1921 act provides th at interest on indebtedness to
acquire or carry tax-exempt securities is not deductible. This provision is ineffec
tive because a taxpayer may purchase tax-exempt securities for cash and borrow
money for other purposes. I t is felt also th at so long as a taxpayer has income which
is not reached for taxation, he should not be permitted to deduct his non-business
losses from the income which is taxable, but should be restricted in the first instance
to a deduction of these losses from his non-taxable income. The estimated increase
of revenue from this source is $35,000,000.
6. T a x c o m m u n i t y p r o p e r t y i n c o m e t o t h e s p o u s e h a v i n g c o n t r o l o f t h e i n c o m e . In
some States the income of the husband is a joint income of the husband and wife,
and each, therefore, is permitted to file a return for one-half of the income. This
gives an unfair advantage to the citizens of those States over the citizens of the other
States of this country, and this amendment seeks to restore the equality. I t is esti
mated that it will increase revenues by $8,000,000.
So much for the income-tax recommendations, which should become effective
January 1, 1924. In order th at you may have before you a clear view of the effect
of these recommendations as applied to incomes in the various brackets, I am attach
ing a table, prepared by the Government Actuary, showing the estimated results of
the proposed changes in the calendar year 1925, on the basis of the taxable year 1924.
The schedule shows a loss of revenue of about $92,000,000 in the brackets under $6,000,
and a further loss of revenue of about $52,000,000 in the nex t bracket of $6,000 to
in c o m e
o f
th e
ta x p a y e r
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
7
$10,000. In short, about 70 per cent of the reduction would be in the brackets of
$10,000 or less, and less than 5 per cent would fall in the brackets over $100,000.
To show the effect of the proposed changes on the income of a typical salaried tax
payer, married and having two children, I call your attention to the following com
parative figures:
_______ _______________ ______ __ __
Income.
Present
tax.
Proposed
tax.
Saving to
taxpayer.
$4,000
5.000
6.000
7.000
8.000
9,000
10,000
$28.00
68.00
128.00
186.00
276.00
366.00
456.00
$15.75
38.25
72.00
99.00
144.00
189.00
234.00
$12.25
29.75
56.00
87.00
132.00
177.00
222.00
7. Repeal the tax on telegrams, telephones, and leased wires.—-This is the last of the
transportation taxes established during the war, is a source of inconyenience to every
person using the telephone or telegraph, and should now be eliminated from the tax
system. This would mean a loss in revenue of about $30,000,000 a year.
8. Repeal the tax on admissions.—The greater part of this revenue is derived from
the admissions charged by neighborhood moving picture theaters. The tax is, there
fore, paid by the great bulk of the people whose main source of recreation is attending,
the movies in the neighborhood of their homes. This would mean a loss in revenue
of about $70,000,000.
' 9. Miscellaneous nuisance taxes.— Your committee may wish to consider the elimina
tion of various small miscellaneous taxes which have an inconsiderable bearing on
the general revenue of the Government, b u t which are a source of inconvenience to
taxpayers and difficult to collect; and possibly there are some articles of jewelry
which according to our standard of living can not properly be denominated luxuries,
such as, for instance, ordinary table silver or watches, which you may wish to exempt
from the general tax on jewelry. There is not enough margin of revenue available,
to permit the repeal of the special taxes which are. proving productive, b u t the law
could be revised to good advantage and some of the nuisance taxes repealed without
material loss of revenue.
,
,
¡4
10. In addition to the specific recommendations which directly affect Government
revenues, there should be amendments to strengthen the act and eliminate methods
heretofore used by taxpayers to avoid imposition of the tax. The exact amount of
additional revenue to the Government which will be brought in b y these amend
ments can not be estimated, b u t certainly the amendments will reach much income
th a t heretofore has escaped taxation.
11. Establish a Board o f Tax Appeals in the Treasury but independent o f the Bureau o f
Internal Revenue, to hear and determine cases involving the assessment o f internal-revenue
taxes.—This will give an independent administrative tribunal equipped to hear
both sides of the controversy, which will sit on appeal from the Bureau of Internal
Revenue and whose decision will be conclusive on both the bureau and the taxpayer
on the question of assessment. The taxpayer, in the event th at decision is against
him, will have to pay the tax according to the assessment and have recourse to the
courts, while the Government, in case decision should be against it, will likewise
have to have recourse to the courts in order to enforce collection of the tax.
12. Changes should be made in the present law to simplify administration, make
the law more easily understood, and permit a prompt determination of liability in
a manner more satisfactory to the taxpayer.
75488—23----- 2
8
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY,
In order th a t you may see the effect on Government revenues of the above recom
mendations, I submit the following figures as to the estimated result of these changes:
Decrease
(in mil
lions of
dollars).
Increase
(in mil
lions of
dollars).
97
92
Reduction of 25 per cent in tax on earned income.
Reduction in normal tax.........................................
Readjustment of surtax rates..........................
Capital loss limited to 12) per cent.. . . . .........
Interest and capital loss deductions limited.........
Community property amendment. . ......................
Repeal of telegraph and telephone tax............
Repeal of admissions tax.......... ..............................
102
25
35
68
391
Total.
68
Net loss.
The benefits of the reduction will be distributed among all classes of taxpayers, and
the revision generally will help to free business and industry of vexatious interferenc
and encourage in all lines a more healthy development of productive enterprise.
T h T p ^ e n t burden of N a tio n is heavy. The revenues of the Government are
sufficient to justify substantial reductions and the people of the country shoulu receive
íh é bmefite No program, however, is feasible if the Government is to be committed
to new and extraordinary expenditures. The recommendations for tax reduction set
forth in this letter are only possible if the Government keeps w ithin the programof
expenditure which the Bureau of the Budget has laid down at the direction of t
President. New or enlarged expenditures would quickly eat up the margin o re e
which now appears to be available for reducing the burden of taxation, and to embark
o n any soldiers’ bonus such as was considered in the last Congress or any other progra
for similarly large expenditure would make it necessary to drop all consider tion of tax reduction and consider instead ways and means for^ providing ad.iitiona
revenue. A soldiers’ bonus would postpone tax reduction not for one b ut for m y
years to come. I t would mean an increase rather than a decrease m taxes, for m t
fong run it could be paid only out of moneys collected by the Government from t
people in the form of taxes. Throughout its consideration of the problem the Treasury
has ^proceeded on the theory th at the country would prefer a substantial reductio
of taxation to the increased taxes that would necessarily follow from a soldiers bonus,
and I have faith to believe th at it is justified in th at understanding. Certainly there
is nothing better calculated to promote the well-being and happiness of the whole
country than a measure th at will lift, in some degree, the burden of taxation th at now
weighs so heavily on all.
Very truly yours,
'
A. W, Mellon ,
S e c r e ta r y o f th e
Hon. W illiam R. G r e e n ,
A c t i n g C h a ir m a n , C o m m itte e
on
W ays a n d
T reasury.
M eans,
H o u s e o f R e p r e s e n ta tiv e s ,
W a s h in g to n , D . C .
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
T able
9
I.—Estimated effect upon the revenue of the proposed changes in the individual
incojne tax law.
Loss in tax when all changes are in full effect. On income for calendar
year 1924; tax collected 1925.
Income tax
brackets.
Number
paying
tax in
each
bracket.
Normal
tax
(loss).
Surtax
(loss).
Earned
income
at 75 per
cent of
rates
(loss).'
Capital
losses
pro
vision
(gain).
Certain
Com
déduc
• Net ,
munity
tions
limited property reduction
in tax
pro
to nontaxable vision collected.
income (gain).
(gain).
$1,000-82,000............ 7.308.200
$92,750,000
$2,000-84,000............ 4.658.200 l$64,500,000
831,250,000 $1,000,000 $2,000,000
Rg
$4,000-16,000............ 1.158.200
52.100.000
$6,000-810,000..........
558.200 16,100,000 $17,500,000 20,000,000 500.000 1,000,000
500.000 1.500.000 $140,000 18.260.000
000
228.200 2,000,000 4.400.000 14.000.
$10,000-820,000........
2.500.000 2.520.000 30.380.000
1,000,000
000
$20,000-850,000.........
80,200 1.300.000 10,1.00,000 25.000.
000
3.830.000
$50,000-8100,000.......
23.645.000
16,500 4.500.000 21,100,000 6,875,000 2,000,000 3.000.
996.000
1.510.000
6.000.
000
000
3,620 1.300.000 11,100,000 106,000 4.000.
$100,000-8150,000....
3.500.000
69.000 3.000.
$150,000-8200,000....
000
550.000 6.600.000
719.000
1,430
3.500.000
1.406.000
56.000 3.000.
$200,000 -8300,000 . . .
000
450.000 7.400.000
840
8300.000- 8500,000....
1.550.000
50.000 3.500.000 3.500.000
400.000 8.100.000
380
4,000,000
000
300.000 7.200.000
544.000
44.000 3.000.
8500.000- 81,000,000..
150
200.000 8.300.000
550.000
50.000 3.500.000 4.500.000
30
Over $1,000,000.......
91,600,000 101,800,000 97,500,000
1
25,000,000 35,000,000 8,000,000
222,900,000
This table shows the estimated gain or loss in revenue over th at estimated under
th e present law, due to the proposed changes in the revenue act of 1921, and allows
for the estimated increase in incomes by reason of the readjustment of taxes.
The figures opposite each income tax bracket cover the total estimated receipts
within th at bracket.
T a b l e II. —
Table showing decline of taxable incomes over $300,000.
Number of returns.
Year.
1916............................
1917...........................
1918................
1919............................
1920............................
1921........................
All classes.
Incomes
over
$300,000.
437,036
3,472,890
4,425,114
5,332,760
7,259,944
6,662,176
1,296
1,015
627
679
395
246
Net income.
Dividends and interest on
investments.
All classes.
Incomes over
$300,000.
All classes.
$6,298,577,620
13,652,383,207
15,924,639,355
19,859,491,448
23,735,629,183
19,577,212,528
$992,972,986
731,372,153
401,107,868
440,011,589
246,354,585
153,534,305
$3,217,348,030
3,785,557,955
3,872,234,935
3,954,553,925
4,445,145,223
4,167,291,294
Incomes over
$300,000.
$706,945,738
616,119,892
344,111,461
314,984,884
229,052,089
155,370,228
While the foregoing letter does not cover estate taxes, attention
should ultimately be given to reductions in these taxes also. Every
estate now pays tribute to at least two governmental authorities, the
Federal Government and the State of the domicile of the decedent.
I t often happens that a particular asset is taxed also in one or more
other States. The cumulative effect is confiscatory. Such taxes
usually have to be paid in cash and a man’s life work in the building
up of a business is often lost to his heirs. It should be remembered
also that estate taxes come not out of income but out of capital. In
pending such taxes the Federal G ovemment and the States are living
on the country’s capital, and by just so much are reducing the coun-
10
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
try’s future earning power. While the States should do their share
in the reduction of these taxes, the Federal tax is very heavy and
could be lightened with benefit to our people.
>
There is one feature connected with such taxation which is not
commonly understood. Values of property in our economic structure
are intricately interwoven, and on these values is b ased credit. When
one of these values is struck down it drags with it many other values.
The facts that inheritance taxes are capital taxes and can not be paid
in kind require a forced realization of a particular property, which
greatly destroys its value and collaterally affects the value of all other
properties. In time this feature may become a serious menace to
our prosperity.
E
x h ib it
71.
L E T T E R FRO M T H E S E C R E T A R Y OF T H E T R E A S U R Y TO T H E ACTIN G C H A IR M A N OF T H E COM M ITTEE ON W A Y S A N D M E A N S , D A T E D
D E C E M B E R 2 1 ,1 9 2 2 , W ITH R E S P E C T TO H O U SE JO IN T R E SOLUTION
3 1 4 , P R O P O SIN G A C O N STITU T IO N A L A M E N D M E N T R E S T R IC T IN G
F U R T H E R I S S U E S OF T A X -E X E M P T S E C U R IT IE S .
December 21, 1922.
Dear Mr. Green: I received your letter of December 20, 1922,
with respect to H. J. Res. 314, proposing an amendment to the Con
stitution of the United States to restrict further issues of tax-exempt
securities; and note your statement that an amendment has been pro
posed by Mr. Garner, of Texas, which would strike out in Section 1,
after the word “ income”,- the following words: “ derived from se
curities issued, after the ratification of this article, by or under the
authority of the United States or any other State”; and in Section 2r
after the word “ income”, the words “ derived from securities issued,,
after the ratification of this article, by or under the authority of such.
State”. For the words thus stricken out the Garner amendment
would, I understand, substitute the words “ from any source” in
both Sections. I note further that in support of his proposed
amendment Mr. Garner has stated that under the resolution as re
ported by the Committee on Ways and Means the United States
might discriminate against the bonds of a State and in favor of the
bonds of a railroad or industrial corporation, and that his amendment
is proposed in order to prevent such a result. I am glad to be able
to write you, first, that in the judgment of the Treasury the resolu
tion in the form reported by the Committee would not of itself prevent
discrimination of this character, so that the amendment proposed by
Mr. Garner is unnecessary, and, second, that to adopt the amendment
proposed bv Mr. Garner would probably nullify both Sections and
make the whole Constitutional amendment ineffective.
Whatever opposition there is to the proposed amendment to re
strict further issues of tax-exempt securities rests, I think, upon a
misunderstanding of the object and effect of the amendment, and
this, in turn, harks back to the old controversies about States’
rights and the powers of the Federal Government. I can say without
hesitation that, separated from these old prejudices and taken from
the point of view of the facts as we have to face them to-day, the
proposed Constitutional amendment involves no question whatever
of States’ rights and makes no attack whatever on the credit or
borrowing power of the States or their political subdivisions. The
amendment would apply with absolute equality to the Federal Gov
ernment, on the one hand, and the States and their political subdi
visions on the other, and the interests of the general welfare would
ut exactly the same restrictions upon future borrowings by the
'ederal Government as upon future borrowings by the States and
their political subdivisions. The constantly growing mass of taxexempt securities threatens the public revenues, not only of the
Federal Government, but of the States as well, and it is reaching
such proportions as to undermine the development of business and
industry.
f
12
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
The Federal Government, for the most part, has refused to have
recourse to tax-exempt issues in financing its own operations, but
the volume of tax-exempt securities of the States and their political
subdivisions, and of other agencies, already outstanding and currently
issued, is so large that the value of the exemption to the borrower
issuing the securities has become relatively insignificant. Even now
the States and their political subdivisions, notwithstanding the full
tax exemptions on their securities, are obliged to pay substantially
the same rates on their tax-exempt borrowings as the Federal Gov
ernment pays on securities without exemption from Federal income
surtaxes. The facts are that under our system of graduated Federal
income surtaxes the issue of tax-exempt securities, while of Con
stantly d im in is h in g advantage to the borrowing State or city, pro
vides a perfect refuge for wealthy investors, being most valuable to the
wealthiest taxpayer. The actuarial figures show that to taxpayers
p a y in g surtaxes in the highest brackets securities subject t>o Federal
income surtaxes would have to yield about 10.4 per cent in order to
be as attractive as a 5 per cent tax-exempt security. For this great
advantage the State which issues the securities gets but very little
compensating return, and certainly no greater return from the
wealthiest investor than from the smallest investor (to whom the
exemption is relatively worthless), while the United States, which
imposes thè surtaxes, loses its revenue without any compensating
advantage whatever. It is the graduated surtax, of course, that gives
the greatest value to the tax exemption, and viewed from this aspect
the tax exemption, in substance, constitutes a subsidy from the
Federal Government, the cost of which in the long run must fall on
those taxpayers who do not or can not take refuge in tax-exempt
securities. Even from the point of view of the States themselves, I
believe it is clear that the continued issuance of tax-exempt securities
saves nothing to the tax-payers in the States and that in the long run
it brings heavier taxes. Tne tax-exempt privilege, with the facility
that it gives to borrowing, leads in many cases to unnecessary or
wasteful public expenditure, and this in turn is bringing about a
menacing increase in the debts of States and cities. These debts
constitute à constantly growing charge upon the taxpayers in the
several States, and wul ultimately have to be paid, principal and
interest, through tax levies upon these very taxpayers. It is easy to
overlook, this when the debts are incurred, but it is none the less im
possible to escape the facts when the time comes for payment. I t is
also necessary to bear m mind that in the long run all of these public
debts, whether the debts of States and their political subdivisions
or of the Federal Government itself, as well as the taxes which must be
imposed to meet them, fall upon but one body of taxpayers, and that
the apparent advantage of borrowing by States and cities at the ex
pense of-the Federal revenues is illusory, since any temporary ad
vantages thus obtained will have to be paid for by the Federal Govr
ernment at the expense ultimately of the great body of taxpayers.
This is particularly true of tax-exempt securities, for their effect is to
provide a refuge from taxation for certain classes of taxpayers, with
correspondingly higher taxes on all the rest in order tò make up the
resulting deficiency in the revenues.
H - g ; !: *
Once it is understood I think no one can raise any valid objection
to the proposed Constitutional amendment restricting further issues
of tax-exempt securities. As a matter of fact, it is almost grotesque
EXTRACT FROM &ÈPORT OF SECRETARY OF THE TREASURY.
13
to permit thè present anomalous situation to continue, for as things
now stand we nave on the one hand a system of highly graduated
Federal income surtaxes and on the other a constantly growing volume
of securities issued by States and cities which are fully exempt from
these surtaxes, so that taxpayers have only to buy tax-exempt
securities to make the surtaxes ineffective. The only way to correct
this condition is by Constitutional amendment, accompanied, if
possible, by a reduction in the rates.
To take up the Gamer amendment more specifically, I believe
that the changes it would make are very clearly unnecessary. The
resolution reported by the Committee on Ways and Means expressly
provides in Section 1 that Federal taxes on income derived from
securities, issued after the ratification of the article, by or under the
authority of any State, must be without discrimination against
income derived nom such securities and in favor of income derived
from securities issued after thè ratification of the article by or under
the authority of the United Statës or any other State. The same
protection for the Federal Government is accorded by the second
Section, conferring power on the States to lay and collect taxes on
income derived from securities issued after the ratification of the
article by or under the authority of the United States. Under Section 1
as it stands it would be impossible for the Federal Government to
impose an income tax on income from future issues of State or munici
p a l bonds without imposing the same tax on income derived from
future issues of its own bonds, and as a practical matter it is almost
inconceivable that Congress would be willing to impose such a tax
upon the income from both State and Federal securities and at the
same time exempt from the tax income derived from securities issued
by private corporations. Such a course would be repugnant to
every Constitutional principle. Entirely apart from the practical
impossibility of such a situation, however, 1 think it clear that the
amendment in its present form would prohibit discrimination against
the bonds of a State and in favor of a railroad or industrial corporation.
All corporations in this country are organized under either State or
Federal law and derive their powers, including the power to borrow
money, from charters issued 1by the State òr Fedéral GoYeEniuMits
as the case may be. Securities issued by private corporations, there
fore, may be said to be issued u under the authority of the united
States, in the case of a Federal corporation, or the State of incorpora
tion, in the case of a State corporation. Section 1 of the Constitu
tional amendment as reported by the Committee expressly prohibits
discrimination in favor of securities issued after ratification of the
article under the authority of the United States or any other State.
This in terms would prevent discrimination in favor of any bonds
issued by a railroad or industrial corporation incorporated under
the laws of the United States or of any other State, and likewise, it
seems to me, by a corporation organized under the laws of the State
concerned, for it would be Constitutionally impossible to r the Federal
Government to single out corporations of one State in the granting
of tax exemptions. If there were any danger here, however, it
could readily be corrected by striking out in the last fine of Section 1
the word “ other,” and I suggest that this be done to remove any
question in the mattèr.
‘
,
,, , , ,
The Gamer amendment is not only unnecessary —it would deleat
the entire Constitutional amendment and make it practically un-
14
EXTRACT FROM REPORT OF SECRETARY OF TH E TREASURY.
possible for either the States or the Federal Government to proceed
effectively under it. The Gamer amendment by its terms forbids
discrimination by either the Federal Government or the States, in
favor of “ income derived from any source” . This apparently covers
all sources of income, including, for example, income from securities
already issued and outstanding, and income from salaries of State
and Federal officers, Even after the adoption of the proposed
Constitutional amendment, neither the United States nor any State
would have power to tax securities of the other already issued and
outstanding, and under generally accepted Constitutional principles,
which have been affirmed by the Supreme Court, the Federal Govern
ment cannot levy income taxes Upon the salaries of State or municipal
officers, nor can the States levy income taxes upon the salaries of
Federal officers. To forbid discrimination in favor of these nontaxable sources of income would, in effect, make the Constitutional
amendment inoperative. There are also other generally recognized
distinctions, as, for example, between earned and unearned income,,
and miscellaneous special exemptions which it might be impossible
to make under the form of wording proposed. These difficulties
would ¡embarrass the State Governments, in proceeding under the
Constitutional amendment, quite as much as they would the Federal
Government, and would make it impossible for the States to levy
any income tax upon future issues of Federal securities without at the
same time imposing an income tax on all outstanding issues of their
own securities, and, in fact, a general income tax upon all sources of
income subject to State taxation. Even if it could be Constitution
ally done, to levy income taxes upon securities already issued as
tax-exempt would constitute a gross breach of faith, while to require
a general and uniform income tax, with exactly the same taxation
of income from securities as of all other sources of income, would
involve almost insuperable practical difficulties and probably prove
impossible.
I believe, therefore, that the Garner amendment would accomplish
nothing but to defeat what is probably the most necessary reform in
our system of taxation, and I hope that in the light of these comments
as to the effect of the Constitutional amendment as reported by the
Committee and the changes proposed, the Garner amendment will
either be withdrawn or rejected. The Constitutional amendment
as reported puts the Federal Government and the States on abso
lutely the same basis, and the very fact that the Federal Government
is ready and willing, for the sake of the general welfare, to place itself
under these restrictions as to future issues of tax-exempt securities,
notwithstanding its own heavy debt and the practical certainty
that it will always have obligations outstanding and to be financed,
gives the best possible assurance that the States and their political
subdivisions can place themselves under like restrictions without
endangering their credit or embarrassing their necessary borrowingsVery truly yours,
(Signed)
A. W. M e l l o n ,
Secretary of the Treasury.
Hon. W il l ia m R. G r e e n ,
Acting Chairman, Committee on Ways and Means,
House of Representatives,
Washington, D. C.
KÌ
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i ^ o tm c m M th e m w tx ro fn lu m .M tiM o m e ,
-T— «
Number of
returns.
Income class.
Net income.
Personal
exemptions.
DWtodB.
761,995
$1,000 to $2,000 *........................... 1 909,955
2 129,193,720 1 2 346,669,224
$1 ,0 0 0 to *2,000
................... I ’ 930,659
2 890,213,944
4 ’ 0 5 5 ,349,648 i
$2 ,0 0 0 to »3,000 *............................ 1 638,657
93,504,684
125,598,720 !
$2 ,0 0 0 to $3,000..................1.........
37,564
1 758,241,908
$3,000 to $4,000 2............................
856,995 2 941,487,294
20,703,781
50,581,107
$3,000 to »4,000.
11,416
889,737,327
921,940,118
$4,000 to $5,000 2 ...........
431,141 1’969,504,603
361 206,842
$4 ,0 0 0 to $5 ,0 0 0 ............
177,147
228,585,811 i
$5,000 to $6,000............
112,444 I 726,361,550
149,965,534
557,103,872
$6 ,0 0 0 to $7 ,0 0 0 ...........
101,737,772
74,511
434,462,407
$7 ,0 0 0 to $8 ,0 0 0 ...........
79,624,590
51,211
380,898,531
$8 ,0 0 0 to $9,000...........
40,129
58,790,816
314,400,337
$9 ,0 0 0 to $1 0 ,0 0 0 .........
29,984
47,971,393
280,196,629
$1 0 ,0 0 0 to $1 1 ,0 0 0 ........
24,370
37 797,463
242,527,549
$11 ,0 0 0 to $1 2 ,0 0 0 ........
19,388
31,379,422
217,085,265
$1 2 ,0 0 0 to $1 3 ,0 0 0 .......
16,089
26,489,941
199,128,079
$13,000 to $1 4 ,0 0 0 .......
13,739
85,699,368
765,354,264
$1 4 ,0 0 0 to $1 5 ,0 0 0 .......
45,050,205
44,531
529,212,663
$15,000 to $20,000----23,729
27,164,221
395,807,952
$2 0 ,0 0 0 to $25,000---14,471
29,308,578
$25,000 to $30,000---15,808 I 543,792,249
15,117,152
368,184,912
$30,000 to $40,000---8,269 !
8,613,544
261,433,828
$40,000 to $50,000---4,785
5,410,897
194,506,539
$50,000 to $60,000---3,006
3,536,853
147,024,770
$60,000 to $70,000---1,969
2,385,288
114,818,467
$7 0 ,0 0 0 to $80,000---1,356
1 755,689
* 92,602,729
$80,000 to $90,000. -977
3,724,543
265,511,505
$9 0 ,0 0 0 to $1 0 0 ,0 0 0 -.
966,808
2,191
100,966,280
$1 0 0 ,0 0 0 to $150,000590
514,874
68,307,141
$1 5 0 ,0 0 0 to $2 0 0 ,0 0 0 .
307
279,200
45,865,252
$2 0 0 ,0 0 0 to $250,000166
265,100
58,252,657
$250,000 to $300,000.
169
$300,000 to $400 ,0 0 0 .
Interest on
o w « t oMgrti*not
\
WB
I
Interest on
|
Normal.
Surtax.
Total tax.
Average
amount of
tax per
individual.
‘$36*859*732
$38,889,381
‘$ÌÌ8*Ì45 '$36,'859,'732
15 318,566
**45,*5Ó7*82Ì*
58 757,898
"Ì53,*ÌÌ5 **45,’507,*821*
38,802,446
45,166,537
50,217,981
45, Ì6 6 , 537
‘■'280,956
57,889,135
38,329,579
39,154,600 |.
22,723,554
’ ■‘565*453 "38,*329,*579
$692,383
72,935,508
22,031,171
20,557,583
4,780,958
2,023,158
85,642,089
18,534,425
19,504,029 L
3,542,047
2,886,839
85,334,736
16,617,190
17,621,245
3
168,739
3,274,111
76,168,995
14,347,134
17,479,622
2,052,173
3,784,466
71,694,936
13,695,156
15,746,694
2,646,518
3,872,596
66,061,095
11,874,098
15,206,613
1,761,879
4.119.372
61,234,473
11,087,241
14,015,969
2,721,163
4 168,823
57,665,639
9,847,146
13 256,386
2,036,482
4,244,561
54,459,354
9,011,825
12,824,442
2,079,973
I
4,376,737
51,288,659
8,447,705
55 508,479
1,307,255
I
2
2
013,101
47,995,870
33 495,378
45,700,738
6,566,926
21,872,136
204,945,101
23,828,602
39,204,685
3,780,318
21.310.372
169,984,024
17,894,313
63,194,658
2,942,660
38,911,865
133,778.337
24,282,793
51,865,933
4,201,978
35,641,581
201,886,226
16,224,352
43,191,412
3 075,861
31 875,512
152,860,997
11,315,900
36 867,302
2,057,036
28,589,460
116,740,720
8,277,842
31 610,679
1,705,928
25,269,888
90,936,869
6,340,791
27,450,124
1,067,066
22,607,109
70 145,319 1
4,843,015
24,598,202
1
020,858
20,580,671
55,581,429
4,017,531
8 6 587,694
569,887
75
636,928
44,380,282
10 950,766
40 060,770
2,821,861
36,137,724
143,158,774
3,923,046
30,379,905
892,315
27,930,180
55,619,123
2,449,725
22,163,748
687,785
20 275,032 1
46,828,195
1,888,716
30,023,022
375,407
27,282,351
2,147,724
2,147,724' 27 875,298
~
496,264
39,150,948
parsomi « o o p tio m » 4 « d . » ® 0S« . 4 «
s Nontaxable.
rate of
tax (per
cent).
$19.30
1.29
**27*77
■*52*70
88.90 1
128.28
182.83
261.76
344.09
435.59
525.17
623.99
722.92
823.94 !
933.43
1,246.51
1,925.95
2,709 19
3,997.64
6,272.33
9,026.42 I
12,264.57
16,054.18
20,243.45
25,177.28
39,519.71
67,899.61
98,957.35
133,516.55
177,651.02
income,
extract pr o m repo rt
------------------;----------i
Average
I.
2.34
2.83
3.50
4.06
4.59
5.01
5 .«
5.78
99
6.11
6.44
7.25
8.64
9.90
II.
14.09
16.52
18.95
21.50
23.91
26.56
32.61
39.68
44.47
48.32
51.54
62
Income class.
Number of
returns.
Net income
m / 1 ■; •',
Exemptions from normal tax.
Personal
exemptions.
Dividends.
Interest on
Government
obligations.1
Normal.
Surtax.
Total tax.
$17,020,439
$15,709,136
$1,311,303
$334,297
$22,099,996
$107,975
$31,060,895
70
$400,000 t o $500 ,000...,...,.
32,765,012
31,267,938
1,497,074
987,385
44,347,149
136,400
58,890,818
98
$500,000 to $750.000........... ...........
12,875,993
12,073,878
802,115
72,969
11,954,254
38,600
21,072,076
25
$750,000 to $1,000,000....................
13,753,350
13,030,056
723,294
144,853
14,797,956
16,900
21,988,642
19
$1,000,000 to $1,500,000.................
3,055,576
3,046,350
9,226
58,688
7,989,220
3.200
5,087,594
3
$1,500,000 to $2,000,000....... .........
7,152,426
6,732,213
420,213
94,123
6,508,744
5,000
10,863,868
4
$2,000,000 to $3,000,000.................
6,037,349
5,792,268
245,081
172,071
8,336,392
3.200
9,218,058
3
$3,000,000 to $4,000,000.................
$4,000,000 to $5,000,000.................
.......
i9,‘i86,’384"
'"
i9
’i82,'025‘
.........208,"ièÔ" ............ 4*359'
$5,000,000 and over...................... .............. " k ....... 29,919,’977* .........' ” ‘6,600" ....... 37,’02i‘628’
1,075,053,686
61,549,572 478,249,919 596,803,767
2,735,845,795
12,834,684,529
23,735,629,183
7,259,944
..
Total...................................
i I nterest on Government obligations not wholly exempt from tax.
Average __ Average
amount of,
tax (per.
tax per
cent).
individual.
$243,149.1$
334,336.86
515,039.72
723,860.53
1,018,525.33
1,788,106.50
2,012,449.67
54 80
55.64
61.10
62.55
60.06
65.84
65; 49
‘4,"796,596."ÔÔ‘ ....... 64*Î3
148.08
4»
EXTRACT FROM REPORT OF 'SECRETARY OF THE TREASURY.
'
Ï6
T a b l e 2 .- P e r s o n a l r e tu r n s - D is ir ib u tio n , by incom e classes, for the U n ited S ta te s ; sh ow in g f o r each class o f in com e the n u m ber o f retu rn s, n e tin c o m e ,
■
person al ex em p tio n , d ividen ds, ta x p a id , a n d percentages —Continued.
EXTRACT' FROM REPORT OF SECRETARY OF THE TREASURY. •
E s tim a te d s u r ta x
due o n
in c o m e s f r o m
G o v e r n m e n t o b lig a tio n s
17
n o t w h o lly e x e m p t f r o m
ta x — 1 9 2 0 r e tu r n s .
Interest on
Government
obligations Rate of
not wholly surtax.
exempt from
tax.
Income class.
Amount of
surtax.
P ercent.
45,000 to $6,000.
$6,000 tp $8,000......................... .....................................---------:-i J
$8 ,0 0 0 to $1 0 ,0 0 0 ...........................................................................
$10,000 to $12,000....-.-------------------- I»n6466
$12,000 to $14,000.
............ ..................................................
.......|
,uw....................................
............
$14,000 to $20,000....................................................... .......................
$20,000 to $30,000...
.......................................................... .
$30,000 to $40,000
$40,000 to $50,000----$50,000 to $60,000----$60,000 to $70,000----$70,000 to $80,000----$80,000 to $90,000....,
$90,000 to $100,000...
$100,000 to $150,000..
$150,000 to $2 0 0 ,0 0 0 ..
$200,000 to $300,000..
$300,000 to $500,000..
$500,000 to $1,000,000
Over $1,000,000........
$4,780,958
6,710,786
4 698'691
PIgo’Sla
^874.181
jg j
»
g
4*201*978
3.075.861
2,057,036
1,705,928
1,067,066
1,020,858
569,887
2.821.861
892,315
1,063,192
830,561
1,060,354
677,915
12
34
5
7
11
16
21
26
31
36
41
46
52
56
60
63
64
65
9,693,112.66
60,431,903
Total.
$47,809.58
134.215.72
140.960.73
179,321.68
205.822.75
551.192.67
739,527.58
672,316.48
645,930.81
534,829.36
528.837.68
384.143.76
418,551.78
262,148.02
1,467,367.72
499,696.40
637,915.20
523,253.43
678,626.56
440,644.75
h a v i n g n e t in c o m e o f $ 5 ,0 0 0 a n d o v e r , f o r th e c a le n d a r y e a r 1 9 2 0 .
Income class.
$5,000 to $6,000........... .
$6,000 to $7,000___- ....!
$7,000 to $8,000........... ...
$8,000 to $9,000....'. )§S9
$9,000 to $10,000............. .
$10,000 to $11,000.......... .
$11,000 to $12,000......... .
$12,000 to $13,000...........
$13,000 to $14,000...:...
$14,000 to $15,000...:— v
$15,000 to $20,000...........
$20,000 to $25,000.......
$25,000 to $30,000..........
$30,000 to $40,000...........
$40,000 to $50,000..........
$50,000 to $60,000...___
$60,000 to $70,000...........
$70,000 to $80,000...........
$80,000 to $90,000.......
$90,000 to $100,000----- 1
$100,000 to $150,000.......
$150,000 to $200,000.....
$200,000 to $250,000.......
$250,000 to $300,000.. .'..
*$300,000 to $400,000... ..
$400,000 to $500,000.......
$500 000 to $750,000.......
$7 5 0 ,0 0 0 to $1,000,000...
$1,000,000 tò $1,500,000.
$1,500,000 to $2,000,000.
$2,000,000 to $3,000,000.
‘$3,000,000 to $4,000,000 .
$4,000,000 to $5,000,000.
$5,000,000 and over......
Total.
States and
United States Territories—
obligations— Interest and
Interest.
Salaries.
Total.
$4,066,469
4,460,416
3,447,571
2,907,971
2,595,236
2,195,629
1,969,108
1,849,871
1,472,007
1,403,926
6,437,270
4,485,737
4,010,409
6,264,440
4,937,003
3,760,111
3,307,303
2,971,072
2,222,426
2,517,375
8,283,082
5,217,692
3,243,886
2,109,479
2,555,667
2,277,528
3,403,605
2,783,774
1,*490j455
554,366
320,713
1,592,410
$806,397
881,404
695,657
t 539,042
569,990
493,771
.411,007
393,263
357,317
317,164
1,628,697
1,200,925
1,001,604
1,707,681
1,658,792
1,305,306
l ; 133,106
1,024,237
797,526
1,016,534
3,643,759
2,671,969
1,703,250
1,032,467
1,214,526
1,006,114
1,705,518
1,246,016
863,360
358,536
282,497
1,160,392
$3,260,072
3.579.012
2,751,914
2,368,929
2,025,246
1,701 858
1,558,101
1,456,608
1,114,690
1,086,762
4,808,573
3,284,812
3.008.805
4,556,759
3,278,211
2.454.805
2,174,197
1,946,835
1,424,900
1,500,841
4,639,323
2,545,723
1,540,636
1.077.012
1,341,141
1,271,414
1,698,087
1,537,758
627,095
195,830
38,216
432,018
2,731,636
1,639,529
4,371,165
67,925,712
105,485,172
37,559,460
E xhibit 72.
T
F T T FR FROM T H E SECR ET A H Y OF TH E T R E A S U R Y TO T H E C H A IR *
1?AN OF T
^
^ M M I T T E E ON T A X A T IO N OF T H E C H A M BE R O F
r*rvM"M1F ‘R.C‘F OF T H E ST A T E OF N EW Y O R K , D A T E D J A N U A R Y 3 1 ,
fg jg 1¡ w S ? ¿ S k S o t t o m q u e s t i o n o f t a x -e x e m p t s e c u r i -
< TIES.
January 31, 1923.
MY dear Mr . K elsey : I received your letter of January 22,1923r
with further reference to the question of tax-exempt securities, and
have since had opportunity to examine the report of your Committee
on this subject to the Chamber of Commerce of the State of New
York, which I notice was published yesterday morning and is expected
to come up for action at the meeting of the Chamber on Thursday.
I cannot escape the feeling after reading this report that the position
which it takes is founded upon several serious misconceptions, and i
am satisfied that on many points the report is directly at variance
with the facts. Reduced to its lowest terms, the mam contention ol
the report seems to be that so long as there are lugh surtaxes there
ought to be tax-exempt securities to provide relief from those surtaxes.
Tins view is not unnatural, having regard to the excessive rates of
surtax which now prevail, but it is the Treasury s view that o
sanction the continued issuance of securities carrying full exemptions
from taxation and at the same time attempt to levy Federal n^°ine
surtaxes running as high as 58 per cent, when combined with the
normal tax, creates an impossible situation, since the tax-exemptions
of the securities will tend to defeat the collection of the taxes. 1
have accordingly urged that action be taken, first, to restrict further
issues of tax-exempt securities, in order to block this avenue of escape
from the surtaxes, and, second, to reduce the surtax rates to a reason
able level, with a maximum of 25 per cent, amounting, to 33 per cent
when combined with the normal tax. This would, in my judgment,
provide a workable system and in the long run produce more revenue
than the present rates.
.
, i
The report of your Committee, it seems to me, overlooks the most
important factor in the tax-exempt security problem, namely, that
the root of the trouble lies in the Federal income surtaxes, lhe high
surtaxes date from the Revenue Act of 1917, and until that time taxexempt securities presented a problem of but small magnitude since
most taxes were levied at level rates and it could generally be said,
as stated in your report, that the loss of taxes was roughly made up
by the saving in interest costs. With taxes at flat rates the exemption
is worth about as much to one taxpayer as another, and barring any
questions as to conflicting State and Federal jurisdiction it could be
said with some force that if the States or Federal Governments were
to tax the securities which they themselves issued purchasers of the
securities would insist on an interest yield high enough to compensate
for the taxes levied. The Federal surtaxes have changed all this
(HAIR
IER 01
IRY 3 1
ECTJRI
2,1923
ies, any
nmitte \
of Net
ixpecte
lursda]
position
is, a n d r
varian<!
sntion t
ies the:'
surtaxe
i rates s
■that
emptiols
ii income
with tn e
[emptic
taxes, j:
ctfurtljer
¡of esc«
¡areasf
3per c«
judgme
rerevet u e
sthe m
mely, J
The t
t tim© t
itude s:i ic e
tarring m y
it couli b e
¡neats yrere
asers of t h e
comp®®a t e
irftdil* t h is
SM
NNttafe;
¡
extract fr o m
J
E
jAJLaV
(x v x
repo rt
of
secreta ry
of t h e
treashry
.
19
——
.and c r e a te d a n e n tire ly d i f f e r e n t¿ h e s 'S ’th e e x e m p t b ^ T m 1 F e d e ra l
th e
h
d le n ^ e ly # ® * «
s u rta x e s a n d th e v a lu e o
G e n e ra lly sp eak in g , i t w ill b e
in c o m e of th e in d iv id u a l
P 1+v.inai tn x o a v e r w hile to th e p e rso n
g r e a te s t in th e case of th e w ea
s u r ta x th e e x e m p tio n w ill b e
p a y in g o n ly a n o rm a l t a x
eg ^
*te im p o ssib le, as a p ra c tic a l
re la tiv e ly of l ittle v a lu e .
„ ,
F e d e ra l G o v e rn m e n t to o b ta in
m a tte r , fo r th e b o rro w in g
; o r i v»v th e se cu rities, fo r in th e n a tu r e
fu ll v a lu e f o r th e e x e m p tio n c a r n e d y
m a r k e t a t q u o te d
of things th e , ^ m
p
M
on e p u rc h a s e r th e
p rices a d ju s te d to m a r k
n o th in g a n d to a n o th e r p u rc h a se r,
e x e m p tio n m a y b e w o rth little o r n o th in g a n
^ ^
th e eq m v w h o p a y s th e sa m e p rice,
se c u rity . A n o th e r fu n d a m e n a le n t of 10 o r 11 .
^ ^ ^ r c o W e t e l ^ o verlooks, is t h a t th e
t a l difference, w h ic y
| ^
Q o v e rn m e n t w h ile th e ta x -e x e m p t
s u rta x e s a re le v ie d b y th e * ®d e ra id b y t h e S ta te a n d m u n ic ip a l
se c u ritie s are, fo r th e m o P
| tb e F e d e ra l G o v e rn m e n t g e ts no
g o v e rn m e n ts. I n o th e r w
fro m a n v re d u c tio n m in te re s t
c o m p e n sa tin g a d v a n t a g e s ^ &
m u n ic ip a l g o v e rn m e n t th ro u g h
r a te s t h a t m a y a ccru e to th e » ta te
fro m F e d e ra l
th e ta x -e x e m p t priv ileg e,,
,
su b sid y co n ferred u p o n S ta te a n d
s u rta x e s is in f a c t a n m v
i eq er a l G o v e rn m e n t a t th e ex p en se
m u n ic ip a l g o v e rn m e n ts y
j n o tic e , a tte m p ts to m e e t th is
of its ow n re v e n u e s. I o u r re p
>
F e d e ra l G o v e rn m e n ts are
o n th e g ro u n d t h a t ^ t h e r th e S W e » ^ X t h i s is u n d o u b te d ly
in v o lv e d i t is all o n e b o d y ”
P P ifo rm ity of tr e a tm e n t as b e tw e e n th e
a v a lid a rg u m e n t in s u p p o r t of u n
1 , a d v a n c e d in s u p p o r t of
S ta te a n d F e d e ra l
f f t S ta x e s to th e F e d e ra l
G o ^e —
^t b y ^ b a s i u g ’ se c u ritie s issu ed b y o r u n d e r a u th o rity
° f £ : S e n t m your
la tio n s t h a t fu lly ta.xaW e s e c u n tie s w ou
secu rities, a n d a t
r a te a b o u t 1 p e r c e u h « hy ‘^ S o n y ^ T ^ u a r y , 1922, b efo re
th e o u ts e t p u r p o r ts to 9 u o te , ^ *®s t in s u p p o rt of th is assu m p tio n ,
th e C o m m itte e o n W a y s ^
“ ^ n y s u T s t a t e m e n t , h u t sim p ly
T h a t te s tim o n y d id n o t
t m id e r th e c o n d itio n s th e n
a d m itte d t h a t
F ed e ra l G o w M e n t ^ i m
^
^
p ro b a b ly
p re v a ilm g . w o u ld h av e, 1
m o re t h a n
p
y
g j G o v e rn m e n t s e c u ritie s w ith o u t
| o se^
v e t J i a t, o n a n y s u b s t a n t i a !
ipe r c e n t , m o rd
full e x e m p tio n s from ta x a tio n . 1 do n o
diflerenoe> o r a n y th m g lik e
v o lu m e of se c u ritie s th e re - £ J J s ay e secu rities. T h e v a lu e of t a x
t h a t b e tw e e n ta x -e x e m p t a
H enends in la rg e m e a su re on th e
-ex em p tio n in th e sale of s e c u ri
th is sc a rc ity v a lu e is
v o lu m e of se c u ritie s
b e b u t little difference, w ith
d e s tro y e d th e re w o u ld m m y ju d g
ta x -e x e m p t a n d ta x b o rro w e rs of
l l t f e of f e b r u a r y 9,
Ways and Means my
than that of taxable bonds. There is omy a ^
20
EXTRACT FROM REPORT OF SÉORETÁRY OF THE TREÁátJÍÍY.
to whom the exemption from surtax is worth as much as threeYourths of ^ per cent;
On November 30, 1921, the amount of Liberty
s outstanding was $1,410,074 450,
and of Victory 3 |’s, $497,915,100. These two issues include the great bulk ot wholly
tax-exempt United States obligations which ¡re
from circulation bonds held by national banks). If instead of less than $2,000,000,000
there were $20,000,000,000 of these bonds, the value of the exemption would probably
be almost imperceptible in the market quotations. The result of such an extension
would be that the Government would have to pay almost the same amount in interest
charges as before and would be wholly deprived of the surtaxes which it might other
wise collect.”
The experience of the Federal Government in these matters
furnishes perhaps the best practical answer to the conclusions
embodied m your report. Since the First Liberty Loan it has been
the consistent policy of the Federal Government (except for the issue
of 3 f per cent Victory notes, all of which have now been retired), to
.finance itself without relying upon the issue of fully tax-exempt
securities, arid generally speaking all of the Liberty bonds (except
the First 3Vs), all outstanding Victory notes and Treasury notes,
Treasury bonds and Treasury certificates of indebtedness, have been
denied exemption from Federal income surtaxes. The total amount
of the First 3Vs outstanding is only about $1,500,000,000, while the
pre-war debt of the Federal Government is almost entirely in the
form of bonds held by national banks to secure circulation, so that
practically all the remainder of the Federal debt has been floated
without recourse to the exemption from Federal surtaxes which has
created the tax-exempt security problem. The experience of the
Federal Government has further shown that tax-exempt securities at
a rate of interest 1 per cent less than that paid on taxable securities
are not particularly attractive to investors, and that your assumption
that any substantial amounts of fully tax-exempt securities could_be
sold at 1 per cent less than taxable securities is fallacious, lfie
Victory Liberty Loan was offered in two series, one fully tax-exempt
and the other entirely without exemption from Federal surtaxes,
both series being interconvertible during their lives. The total
amount of the loan was about 4^ billion dollars, and yet the taxexempt series never passed beyond 1 billion dollars, sum had actually
dwindled to about $375,000,000 when it was called for redemption
last year. The comparative yields of high-grade State and municipal
securities, carrying full tax exemptions, and Federal securities vuthout
the exemptions from surtaxes, also indicate the underlying fallacy
in your figures. The Treasury bonds of 1947—52 offered by the
Federal Government last October are, generally speaking, subject to
Federal surtaxes, and are quoted in the market to yield about 4 i
per cent, while State and municipal securities of the highest grades
having full exemptions from surtaxes are quoted to yield about 4
per cent to 4.15 per cent, and other State and municipal obligations
of not such good credit are quoted^ to yield 4^ per cent, and even
higher. This all indicates as conclusively as can be that owing to the
gradual dilution of the security market with tax-exempt securities
the value of the tax exemotion to the borrowing State or Federal
Government is gradually dwindling, while the tax-exemption still
retains its value to the wealthy taxpayer.
..
.
I can perhaps best summarize the Treasury’s position by enclosmg
for your information a copy of a le tte r1 of December 21, 1922,
i See Exhibit 71, page 11.
21
E X T R A C T F R O M R E P O R T O F SEC RETA R Y O F T H E T R E A SU R Y .
h io h I s e n t to th e A c t^
¿¿M eans.
T h e fa c ts
X
$
£
£
5
, C j a ™ p “ df r a l1 G o v e ^ e n t , u n d e r t h e
th e C o n s titu tio n o f th e
in c o m e ta x e s «
“ m p o s ta g ¿ a d n a t e d
a d d itio n a l “ « » X
as
sS
u rta x e s , o n th e h ig h e r
tto “
h e ^ ta te s and
ta x -e x e m p t s e c u r e s
n u n ic ip a litie s a re is s u in g
£
e x e m p t fro m th e s e v e ry s u r a x ' ,
, u in c o m e f r o m w h ic h is w h o lly
P u n d e r o u r p re s e n t C o n s titu w h ile t h e F e d e r a l
^ m fy e S rp ^
t
f o llfta x -e x e m p t s e c u r itie s ,^ W o r
c " n
t l y
re fra in e d
in o ? d S to p e c t th e W
W
S
m ig h t c h a n g e th is p o lic y , a n d b v
“ J
W
~
«
^
J ^
S
o
. f r n
^
n
t
g
w ith fu ll
T a lu e o f S t a t e a n d
th e v o lu m e o f ta x -
m u n ic ip a l se c u ritie s , b u
- o n riflT iffe r t h e r e v e n u e s .
.
e x e m p t is s u e s a n d s tiff f u r t h e r e n
in c o m e ta x e s c a n n o t h e
I t m u s t b e c le a r t h a t
th e m P o e t i c a l l y u n lim ite d
e f fe c tiv e w h e n t h e r e e x is t s id
. ^ pr u r itie s a v a ila b le to d e f e a t th e m ,
q u a n titie s o f fu lly ta x -e x e m p
f o u n d to s to p th e c o n tm u e d
a n d th a t e ith e r so m e w a y m u s t b t w p ea e ra l G o v e rn m e n t m u s t
is s u a n c e o f ta x - e x e m p t s e c u ritie s o r
ig s U 0 j s i m m e d i a t e a n d
tfi
irdsr-ST-tiTbis.
« maM
fin d s o m e s u b s titu te
S
y
%
ing
h a s a lre a d y b e e n e d u c e d
to
a
rs m a U
CS o n s S u t i o n a l
r e s o lu tio n w o u ld c o rre c t th e s
F e d e r a l G o v e rn m e n ts o n
a
^
b e lie v ^
p ra c tic a b le
3
t h e ' ’s t a t e g
p o s itio n a d v e rs e to its a d o p tio n .
V e ry tr u ly y o u rs,
and
H
th a t su ch
I
N ew Y o rk w d l n o t ta k e
^
pL
M
ello n
,
S ecreta ry o f the T re a su ry .
176 B ro a d w a y ,
New
m
Y o r k , ¿V-
a
,
e
IH H
E
x h ib it
73.
L E T T E R FROM T H E SE C R E T A R Y OF T H E T R E A S U R Y TO T H E C H A IR
M A N OF T H E COMMITTEE ON TH E J U D IC IA R Y , U N IT E D S T A T E S
S E N A T E , D A T E D F E B R U A R Y 1 6 , 1 9 2 3 , W ITH R E S P E C T TO H O U SE
JO INT R E SO L U T IO N N o . 3 1 4 , P R O PO SIN G A C O N STITU T IO N A L
A M E N D M E N T R E ST R IC T IN G F U R T H E R IS S U E S OF T A X -E X E M P T
SE C U R IT IE S .
F e b r u a r y 16, 1923.
I received your letter of February 13th,
requesting certain information for the use of the subcommittee of
the Committee on the Judiciary in connection with its consideration
of House Joint Resolution No. 314, proposing a Constitutional amend
ment restricting further issues of tax-exempt securities.. I have noted
the brief and tables presented by the Governor of the State of Vir
ginia, through Mr. E. Warren Hall, Second Assistant of the State
Tax Board, and have examined the statements and figures embodied
in the argument presented in behalf of the State. Many of the
arguments and figures are either irrelevent or misconceived, and in
large measure they are already answered by my letter of December
21, 1922,1 to the Acting Chairman of the Committee on Ways and
Means, and of January 31, 1923,2 to Mr. Clarence H. Kelsey, Chairman
of the Committee on Taxation of the Chamber of Commerce of the
State of New York, copies of which are herewith enclosed. The
argument presented for the State of Virginia may be answered more
specifically in taking up the several questions raised by your letter,
but I may say at the outset that no amount of arbitrarily assumed
figures or loosely drawn conclusions such as appear in its brief and
accompanying tables can serve to obscure the main facts in the situa
tion upon wmch the Treasury relies in urging support for the pro
posed Constitutional amendment, namely, that the continued issuance
of tax-exempt securities is building up a constantly growing mass of
privately held property exempt from all taxation; that tax-exemp
tion in a democracy such as ours is repugnant to every Constitutional
principle, since it tends to create a class in the community which
cannot be reached for tax purposes and necessarily increases the bur
den of taxation on property and incomes that remain taxable; and
that it is absolutely inconsistent with any system of graduated
income surtaxes to provide at the same time securities which are fully
exempt from all taxation, since the exemptions will sooner or later
defeat at least all the higher graduations and will always be worth
far more to the wealthier taxpayers than to the small ones. Taxexemption, of course, gets quite a disproportionate value when taxes
are not at a level rate but are levied at graduated rates, and the Fed
eral surtaxes are almost wholly responsible for the extraordinary
value which tax-exempt securities enioy to-day. It is nonsense to
refer to this value as something which the States have the right to
D
ear
M
r
. Ch
a ir m a n
:
1See Exhibit 71, page 11.
22
* See Exhibit 72, page 18.
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
23
enjoy in selling their securities, for the value depends in large measure
on the relative scarcity of tax-exempt securities and the Federal
Government could seriously impair, and nearly destroy, it by issuing
all its own securities exempt from surtaxes. Contrariwise, smce the
value of the exemption turns largely on the existence of graduated
surtaxes, the Federal Government could certainly reduce and probably
destroy the present premium on tax-exempt securities by changing
its own tax system and substituting for the income surtaxes some
other form of tax which would not be affected by the presence of
tax-exempt securities, as, for example, a tax on sales or expenditures.
I t may, in fact, be driven to some such change by force of necessity
if the present situation continues and enough of the States cling to
the privilege for which the Governor of Virginia contends, of issuing
securities that give rich investors the power, at the expense of the
rest of the community, to escape from the common burdens of taxation.
In proposing the Constitutional amendment now before your Com
mittee the Federal Government is not asking from the States any
more than it is willing to yield for itself, and I am sure that m con
sidering the pending resolution your Committee will examine the
question on its merits, free from the prejudices with which it is so
frequently, involved.
.
.
To take up specifically the questions raised by your letter:
1.
It is impossible to give a definite statement as to the difference
there would he in interest charges paid by the United States if all
its obligations were wholly exempt from taxes, for it would depend
on a number of factors and is largely a matter of judgment. I have
already indicated, in my letter of January 31st to Mr. Kelsey, that
in my judgment the difference would not be substantial, smce if the
United States were to issue about $22,000,000,000 of fully tax-exempt
securities instead of about $1,500,000,000 of its tax-exempt securities
now outstanding (leaving out of account the circulation bonds held
by National banks), the market would be so flooded with tax-exempt
securities th&t tax-exemption would, lose its market value and it
would be impossible to make any material saving of interest by
granting full exemption from taxation. This conclusion is borne
out by the actual experience of the United States with the taxexempt series of Victory notes, as set forth in the letter to Mr.
Kelsey, and it is further supported by the general experience of the
United States in dealing with its war obligations, the Federal Govern
ment having financed all its war borrowings except for the hirst
Liberty Loan 3£ per cent bonds, and the 3 | per cent Victory notes
(all of which have now been retired), without recourse to full exemp
tion from taxation. J8 I am satisfied that if instead of following this
policy the United States had issued all of its war obligations on a
fully tax-exempt basis the rates of interest on the tax-exempt
obligations would have become ^practically as high as the rates
actually paid on the obligations which have been issued. While it
is not possible, since the contrary policy was pursued, to demonstrate
this conclusion mathematically it must be obvious that if there were
now $32,000,000,000 face amount instead of about $11,000,000,000
face amount of fully tax-exempt securities outstanding, the value of
the tax-exemption would be so much diluted that it would have but
little effect on interest rates. From the point of view of the revenue,
however, the situation would be vastly more serious than at present,
for there would be nearly three times as large a volume of tax-
24
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
exempt securities available, and available at higher yields, for pur
chase by wealthy investors, with the probability that in these cir
cumstances the graduated rates of surtaxes- would have become
almost completely ineffective. It is also necessary to remember that
if there is now any material saving of interest to States and munici
palities in issuing tax-exempt instead of taxable securities, that
having does not at all accrue to the benefit of the Federal Govern
ment, whereas the loss of revenue through the purchase of the
tax-exempt securities in order to reduce taxable income for surtax
purposes, falls entirely on the Federal Government.
2. It is not possible to give any complete statement showing the
-surtaxes collected *by the United States upon income received as
interest on its obligations not wholly exempt from tax. The latest
figures are those for the taxable year 1920, and show total interest
on such obligations returned as income for that year as $61,549,572,
according to table 2 on pages 46—
47 of The Statistics of Income for
1920, a copy of which is enclosed. There is also enclosed a table,
made up from these Statistics of Income, which shows, by income
classes, surtaxable interest on United States obligations aggregating
$60,431,903 for the year 1920, from which it is estimated that the
surtaxes collected thereon amounted to about $9,693,112 for that
year. This does not, however, give a correct picture of the general
-situation, for a substantial part of the outstanding Federal obliga
tions is in the hands of small holders or corporations not subject to
surtax, and as to the balance it must be remembered that during
this period there were certain limited exemptions from surtaxes,
which have been largely availed of to reduce taxable income. In
greater part these limited exemptions will expire by limitation on
July 2, 1923,: and practically all the rest by July 2, 1926. In the
meantime, however, the figures as to surtaxable interest on United
States obligations are necessarily reduced by these temporary exemp
tions, and do not show enough about collections on taxable obliga
tions to make it possible to draw any general conclusions as to what
might be the effect of the proposed Constitutional amendment in
increasing the revenues from taxation.
v
3. The answer to the third point has already been given m part
under (2), but to supplement that information there is enclosed here
with a copy of a statement prepared by the Statistical Division of the
Income Tax Unit showing wholly tax-exempt income reported by
individuals having incomes of $5,000 and over for the calendar year
1920, separating interest on United States obligations from interest
on State and municipal obligations, and showing the tax-exempt
income of both kinds by income classes. This table compiles the
reports of tax-exempt income made on the returns for 1920 pursuant
to the provisions of the returns, and while it is accurate so far as it
goes it is undoubtedly not complete since these reports were required
to be made only as a matter of information and the Bureau of Internal
Revenue has not had occasion to check them up for tax purposes.
4. The Treasury has strongly recommended that the surtaxes be
reduced to a maximum of 25 per cent, that is to say, a maximum
combined normal and surtax of 33 per cent. I t believes that a revision
of the surtaxes on substantially this basis is fundamentally necessary
if our present internal revenue system is to be, successfully adminis
tered. There seems to be no prospect, however, of action by this
-Congress upon these recommendations and for the time being,
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
25
therefore, it is necessary to face the fact of surtaxes running to a
maximum of 50 per cent, or a combined maximum of 58 per cent.
A revision to substantially the basis recommended by the Treasury
would, no doubt, correct to some extent the evil of tax-exempt
-securities, since it would reduce the pressure to escape taxable
income, but the evil would none the less remain and would still be
serious, at least so long as there were any material graduation of
surtax rates. For example, even with a maximum surtax of 25 per
cent there would still be a material inducement for large investors
to reduce taxable income, and to an investor paying surtaxes at
the rate of 25 per cent a fully tax-exempt security would offer sub
stantial advantages as compared with a surtaxable security, while
the tax-exempt security would, of course, be far more valuable to
such an investor than to a small investor. Lower surtaxes, in ether
words, would mitigate the evil but would not go to the heart of the
situation, for tax-exemptions would still persist and tend to defeat
anv taxes levied at the revised rates.
5. The Treasury regards the estimate of approximately $18o,000,000, submitted by the Governor of Virginia as the additional
annual interest charge upon the Government of the United States on
account of issuing obligations not wholly exempt from taxes* as
wholly unfounded and grossly inaccurate. The reasons for this view
have already been given in large measure in the discussion under (1)
above, and the inaccuracy of the figure proceeds largely from the tact
that it results from calculations which assume that all of the war bor
rowing of the Federal Government could have been carried on through
the issue of tax-exempt obligations at a rate of interest approximately
1 per cent less than the rate paid upon surtaxable obligations. It is
the opinion of the Treasury that if it had placed the whole war debt
on a tax-exempt basis there would have been practically no differential
between tax-exempt and surtaxable obligations. On this basis the
United States would be paying to-day approximately the same
annual interest on tax-exempt obligations that it is now paying on
its outstanding debt not wholly exempt from taxes, and losing more
in revenue.
J
. TT. . .
, ,,
6. The estimates submitted by the Governor of Virginia as to the
maximum amount of surtaxes collected under the 1920 rates,^ and
under the 1922 rates, on the interest on' Government obligations
returned as subject to surtaxes are substantially correct, but, as
pointed out above in the discussion under points 2 and 3, the figures
for. these years are vitiated by temporary factors and have no bearing
a t all upon the merits of the pending Constitutional amendment.
The brief submitted by the Governor of Virginia contains a number
of inaccuracies related to this discussion which impair its whole posi
tion. On page 14, for example, the brief states that the proposed
amendment would be unfair to the States since “ The Federal Govern
ment has issued about twenty-three billions of bonds. It does not
contemplate any further large issues. These bonds cannot be taxed
by the States. It is thus probable that during the next fifty years,
at least there will be no Federal securities liable to State taxation,
but on the other hand, the States and municipalities are issuing
about a billion dollars in securities.each year. All of these will be
liable to the Federal taxation. Since there will be no Federal securi
ties liable to the tax, the value of the provision against discrimination
will be nil.” These statements are manifestly false and misleading.
26
EXTRACT FROM REPORT OF SECRETARY OF THE TREASURY.
The Federal Government is issuing each year substantial amounts of
new securities and for many years to come will be issuing new securi
ties every year, probably in amounts larger than the aggregate of
State and municipal issues during the year, in order to refund its
obligations previously issued. Between now and the end of 1928, for
example, about $9,000,000,000 of bonds, notes and certificates issued
by the Federal Government will mature and in large measure these
maturing obligations will have to be refunded. Any of these refund
ing obligations issued after the ratification of the Constitutional
amendment would be subject to its provisions in the same manner a»
State or municipal obligations issued after its ratification. The same
would be true of other refunding obligations issued by the Federal
Government in succeeding years. To show how completely false is
the argument made by the Governor of Virginia it is enough to call
attention to the fact that the whole war debt of the Federal Govern
ment actually matures within the next thirty years, with substantial
maturities falling at frequent intervals. These maturing obligations
will either be redeemed, in which event the tax-exemptions they now
carry will cease to be of any importance, or will be refunded into other
obligations; and these refunding obligations, if issued after the
ratification of the Constitutional amendment, will be subject to its
provisions.
.
. „
.
The brief submitted by the Governor of Virginia is filled with
inaccuracies and loose statements of this nature, and contains also
numerous misquotations of my testimony before the Ways and
Means Committee and unwarranted and irrelevant conclusions from
statements made in letters and testimony before the Committee. It
is hardly worth while to take these inaccuracies up in detail in a
letter of this character but if the subcommittee would like to have
me appear personally before it, either in reply to the arguments made
by the Governor of Virginia or in support ot the position which the
Treasury has taken with respect to the Constitutional amendment, I
shall be glad to appear at such time as the subcommittee may desire.
I feel that I should not close without again expressing the hope
that the Committee will take action on this measure at a date early
enough to assure favorable action by the Senate at this session of
Congress. It is a matter of the utmost importance to our economic
and financial development, and I view with real concern the possibil
ity that action on this amendment, which was first suggested by the*
Treasury in April, 1921, may again be deferred to some later date.
The resolution has already passed the House of Representatives by a
decisive vote, and within the next year or two there are sessions
of most of the State legislatures, so that the time to propose the
amendment is now, when there is a favorable opportunity for action
upon it, before the volume of tax-exempt securities grows to uncon
trollable proportions.
Cordially yours,
(Signed)
A. W. M e l l o n ,
Secretary of the Treasury..
Hon. K n u t e N e l s o n ,
Chairman, Committee on the Judiciary,
United States Senate,
Washington, D. C.
Enclosures.
o
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