HBP 18 S52 HJ 8117 ·A52 SUPPLEMENTARY BOND LEGISLATION. COMMITTEE ON WAYS AND MEANS, HOUSE OF REPRESENTATIVES, Washington, D. C., September 12, 1918. Pursuant to notice the Committee on Ways and Means met at 10 o'clock a. m., Hon. Claude Kitchin (chairman) presiding. Present: Messrs. Rainey, Dixon, Hull, Garner, Collier, Dickinson, Oldfield, Crisp, Helvering, White, Fordney, Moore, Green, Sloan, Longworth, Sterling, Martin, Hawley, Treadway, and the chairman. The CHAIRMAN. Mr. Secretary, we have asked you down to explain some of the provisions in the proposed new bond bill. I wish you would in a general way explain to the committee the necessity for this legislation at this time. STATEMENT OF HON. R. C. LEFFINGWELL, ASSISTANT SECRETARY OF THE TREASURY. Mr. LEFFINGWELL. Mr. Chairman, may I first read into the record the letter which the Secretary wrote to you explaining the bill in detail. I imagine you have all read it. Mr. GARNER. Just put that in the record. Mr. LEFFINGWELL. I shall then ask to have that put in the record. LETTER FROM SECRETARY M'ADO0. THE SECRETARY OF THE TREASURY, DEAR MR. KITCHIN: In connection with the tax bill now before the Congress, and without awaiting its enactment, I feel constrained to bring to your attention a matter affecting the fourth liberty loan. The delay in the enactment of the tax bill, the fact that the rates of income surtaxes, to which the interest on liberty bonds, except the first liberty loan, is subject, will be higher, and the rate of normal income tax on unearned income will be lower, than I had contemplated, materially affect the prospects of the fourth liberty loan. I do not mention these things critically, for I realize that the Ways and Means Committee have labored faithfully and earnestly during the hot summer months in the consideration and preparation of the tax bill. I have already expressed my acceptance of a normal tax of 12 per cent without a differential against unearned incomes, and in principle I am now agreed with the committee that a substantial increase in surtax rates will be necessary in order to produce the indicated revenue. The market price of liberty bonds, which responded favorably to the suggestion of an increased normal tax, from which the bonds will be exempt by their terms, was depressed by the newspaper reports of a greatly increased surtax, to which the interest on the bonds will be subject. I have been anxious to stabilize the interest rate upon Government bonds, believing that by so doing we should be reducing the cost of the war, not only to-day for ourselves, but. in the future, for ourselves and for our brave men who are fighting in France and who will have little or no opportunity to accumulate and invest in liberty 3 bonds though they must upon their return join the army of taxpayers who must pay this interest. I have sought to avoid the issue of bonds at such a rate and upon such terms as might result ultimately, when the war is won, in the accumulation of great wealth in the hands of a relatively small proportion of our population, carrying interest at a high rate and exempt from taxes. The magnificent patriotisın of our people and the fervor and efficiency of the liberty loan organization have made it possible to place the liberty bonds in the hands of many millions of persons who had never before been investors in securities of any kind. Bonds of the third liberty loan received the widest possible distribution, and I feel that we all owe a duty to the millions of subscribers of small means, not merely to pay them a fair rate of interest, which we are doing, but to take such measures as may be necessary to insure to them a market for the bonds at approximately par in case their necessities are such as to force them to realize upon the investment which they have made in the Government's obligations. The bond-purchase fund, which was provided in the third liberty bond bill, has been very useful in stabilizing the price of liberty bonds, but it has not been, and we could not expect it to be, effective to sustain the price against adverse developments, and in the face of the fact that the Government's recurring demands upon the absorptive power of the investment community are in such proportions and of such frequency as to prevent the development of any important buying power in the investment market between liberty loan campaigns. I have been much impressed by the success of the plan which has been adopted in Canada for the purpose of maintaining the market value of Canada's victory bonds. A careful study of that plan is being made in the Treasury and by the War Finance Corporation, and I am glad to learn that the bankers of the country have been making a similar study. I am not without hope that some such plan may be made effective in the United States, although conditions here are very different and it will not do to depend too much upon the experience of Sur neighbor. In any event, it will not do to proceed in this matter abruptly, nor without the creation of an immense organization country wide in its ramifications. To make such a plan effective, it would be necessary to put an end to dealings in bonds on the exchanges, and accordingly to substitute an active and adequate market through the banking houses of the United States acting in close cooperation with an instrumentality of the Government, probably the War Finance Corporation. At the same time, it would be necessary to put an end to the numerous schemes, many of them actually fraudulent, for inducing inexperienced holders of liberty bonds to exchange them for merchandise or property of less inherent value though carrying the promise of a higher value or a higher income return. In order that the Treasury may be placed in a position to carry such plans as these into effect, if they should be found expedient, I suggest for your consideration the present enactment of appropriate legislation. Last year I had the privilege of explaining to you and your colleagues on the Ways and Means Committee very fully the reasons why I advocated making the income from liberty bonds subject to income surtaxes. I still believe that that course was wise and that the arguments advanced in favor of it were sound. It will not do, however, to press any theory, however sound, to an extremity, and it is obvious that as a practical matter we can not keep the interest rate on Government bonds stationary, or substantially so, and continue indefinitely to increase the surtaxes, to which the income from those bonds is subject, without at the same time limiting the market for liberty bonds to those who have little or no surtaxes to pay. Since the bond and tax legislation which was under discussion in the summer of 1917, and which was enacted in the fall of 1917, the interest on liberty bonds has been increased only one-fourth of 1 per cent, whereas the surtax rates now in contemplation would carry an increase in the taxes to which the interest on the bonds is subject, rising above 150 per cent increase in some classes. Surtaxes on incomes from $5,000 to $200,000 would, under the new tax bill, on the average be doubled. In order to give the numerous small holders of liberty bonds the advantage of a market upon which they may sell their bonds in case of necessity, and also to attract subscriptions from the great number of investors of ample means, but not of gret wealth, it will be necessary immediately either to increase the interest rate or to neutralize the increased surtaxes by freeing the bonds to a limited extent from such taxes. I recommend that a portion of the income of these bonds should be free from surtaxes for the period of the war and for a brief interval thereafter. This course would make it possible to meet the exigencies of the present situation and to counterbalance the adverse effect on the market value of liberty bonds of the increased surtax rates, and at the same time would not be open to the very grave objection which exists against any unlimited or permanent exemption, which would deprive the Government of the United States of the power to meet its necessities in the future by supertaxes on incomes derived from liberty bonds. If the surtax rates should be reduced after the war, the interest which is fixed in the bonds would continue. Having, as I believe in fairness to the patriotic people who will subscribe for the fourth liberty loan, to choose between one of two methods for making the bonds more attractive, neither of which is wholly satisfactory, I am inclined to recommend at this time that the holders of these bonds be given a qualified and limited freedom from surtaxes in respect to their holdings rather than that the interest rate should be increased. I believe that, on the whole, the wise and expedient thing is to grant a limited exemption calculated to counterbalance the increase in surtax rates now contemplated, and which I believe will be only temporary, rather than to increase the interest rate on liberty bonds for the life of the bonds. I am influenced in this determination by the fact that it continues necessary to sell liberty bonds in competition with billions of dollars of bonds of the United States, the various States and municipalities, which are wholly exempt from surtaxes, as well as from all forms of taxation, so that the person whose income is subject to surtaxes is apt to make a comparison of the income return from the liberty bonds which he is asked to subscribe for, not with the income return from corporation and other securities such as carry no exemption from taxation, but with the income return from wholly exempt bonds of the United States and the various States and municipalities. Under the existing state of the Constitution and laws such a comparison can not be avoided. In these circumstances we must find a middle ground between the sound view which would refuse all exemptions from surtaxes and the practical necessity of taking into account the fact that such exemptions will in any event be gained, as surtaxes are steadily increased, by shifting funds into governmental, St te, and municipal bonds, the income from which is exempt from surtaxes as well as from normal taxes. In granting such exemption, I think appropriate provision should be made to the end that those who subscribe for bonds of the fourth liberty loan may, to the extent of a specified portion of their holdings, participate in the exemption in respect to bonds of the first liberty loan converted, the second liberty loan converted and unconverted, and the third liberty loan. Should these views commend themselves to the Congress, I believe that 'mmediate action should be taken, so that the status of the bonds of the fourth liberty loan, in respect to taxation, may be promptly known. It is, in fact, imperative that this status should be quickly known. There are certain other matters to which I desire to call the attention of your committee at this time: The provisions of section 8 of the second liberty bond act, as amended by the third liberty bond act, should be extended so as to authorize the Secretary to deposit the proceeds arising from the payment of war-profits taxes w th qualified depositary banks and trust companies in the United States in the same manner as the proceeds of income and excess-profits taxes. The time has come to make provision for the sale of war savings certificates in 1919. The limit of $1,000 on the amount which may be held by any one person should be made to apply separately to the series which will be issued in 1919, so that one holder may own $1,000 of that series in addition to $1,000 of the series of 1918. At the same time the limit of $2,000,000,000 now imposed on the aggregate amount of the issue should be enlarged, or, better, removed, for the necessary distribution of the war savings stamps among thousands of post offices and other agencies engaged in making sales over the counter may make the limit very embarrassing long before the cash receipts of the Treasury indicate that the limit is about to be reached. In the negotiations which I have had or am having with or in foreign countries in the effort to stabilize foreign exchange I find myself seriously hampered because I am without the freedom of action which is possessed by the finance ministers of European countries. I may only sell bonds or Treasury certificates of indebtedness, which involves often international complications, and may not obtain banking credits nor operate as freely as may be necessary in the effort to stabilize exchange. Notwithstanding these restrictions, the Treasury has been able to make substantial progress in dealing with this difficult problem. I urge upon you, however, the incorporation in the law of the necessary authority to give greater flexibility to the operations of the Treasury in this respect. I believe it is highly desirable at this time that the President should be empowered to investigate, regulate, or prohibit not only the export or earmarking of gold or silver coin or bullion or currency but also the hoarding or melting thereof. Last March I called the attention of the Congress to the importance of amending the provisions of section 5200 of the Revised Statutes limiting the amount of loans which national banks may make to any one borrower. A bill was reported by the Banking and Currency Committee of the House (H. R. 10691), passed by the House, and reported with amendments by the Committee on Banking and Currency of the Senate, but not acted upon by the Senate. The Senate did pass a bill (S. 4099) dealing to a certain extent with the same subject matter prior to the Senate committee report on the House bill, and on the Senate bill no action has been taken by the House. It is essential that this matter be disposed of before the fourth liberty loan is offered. By way of suggestion and in order the better to formulate my views for your consideration, I have taken the liberty of preparing a bill which would deal with the various points I have mentioned in this letter. A draft of this bill is inclosed. May I not ask that the Ways and Means Committee give these points its immediate attention with a view to the enactment of the necessary legislation, if my suggestions commend themselves to the committee, in ample time to become effective before the opening of the fourth liberty loan campaign on September 28? I feel that the success of this loan is deeply involved in this legislation. Mr. Leffingwell is fully informed of my views concerning these matters and is authorized to speak for me in my absence should the committee desire any further information. Cordially, yours, Hon. CLAUDE KITCHIN, Chairman Ways and Means Committee, House of Representatives, Washington, D. C. W. G. McADOO. P. S.-I am sending a copy of this letter and the inclosure to Senator Simmons. Mr. LEFFINGWELL. The situation before us is in some ways the most interesting one the Treasury has had to face since the beginning of the war. Our expenditures during the summer have exceeded our estimate of last May, the expenditures in the month of August being $1,800,000,000. That was about $100,000,000 more than we should have spent in the month of August if we had adhered to Secretary McAdoo's estimate of $100,000,000 a month increase, and we are, of course, waiting to see what the expenditures in September will be. As Secretary McAdoo said when he was before you not long ago, the only fear of the Treasury is that in estimating $24,000,000,000 and relying upon a cessation of the progressive increase in expenditures, beginning some time next winter, say, in December or January, we should be deceived and the expenditures go on increasing. At any rate we have not reached the top of production nor of construction in our great war enterprise. We have to provide for a loan adequate to refund the Treasury certificates which will have been issued up to the time when the loan is placed and to make some reasonable provision for the deferred payment of the loan. There are now outstanding something like $3,400,000,000 of Treasury certificates of indebtedness, issued in anticipation of the fourth Liberty loan, and there will be outstanding probably before October 24, when the subscriptions will close at the Federal reserve banks, some $4,750,000,000 of Treasury certificates of indebtedness, which is upward of two billion more than has been outstanding in anticipation of any previous Liberty loan. The CHAIRMAN. How much outstanding did you say? Mr. GARNER. And you anticipate $4,750,000,000 before you close? Mr. MOORE. Would you mind giving us a word or two about the manner in which these Treasury certificates have been negotiated? The money which you realize from Treasury certificates is in anticipation of the loans, and I ask just how that transaction is effected. Mr. LEFFINGWELL. This is the transaction: It is the same transaction which has characterized the Treasury's operations from the beginning of the war. We issue Treasury certificates of indebtedness with a short maturity. Mr. MOORE. To whom? Mr. LEFFINGWELL. Primarily to the banks and trust companies of the United States. I believe that there is in the record of the hearing on the fourth bond bill a copy of a letter which the Secretary wrote to the banks and trust companies of the United States, asking them to subscribe for Treasury certificates of indebtedness in anticipation of the fourth loan. Mr. MOORE. That is done largely through the auspices of the Federal reserve banks? Mr. LEFFINGWELL. The Federal reserve banks are used, as they have been in connection with the liberty loans, as fiscal agents of the United States in pursuance of law in the sale of those Treasury certificates. Mr. MOORE. The amount is so large that I assume that without the agency of some such instrumentality as the Federal reserve banks you would have difficulty in negotiating this transaction. Mr. LEFFINGWELL. The amount is $3,399,034,500. Mr. MOORE. Those outstanding Treasury certificates amount to $3,400,000,000? Mr. LEFFINGWELL. Those are bond certificates issued in anticipation of bond sales. There are also tax certificates issued in anticipation of tax payments. Mr. MOORE. That is such an enormous amount that unless you had some centralized agency like the Federal reserve system the Government might not have been able to make such a negotiation. Mr. LEFFINGWELL. The Federal reserve system, so far as this particular transaction is concerned, is mechanical. These great institutions provided in the wisdom of Congress were admirably adapted to decentralize the enormous mechanical operations in connection with Treasury loans and certificates. We must clearly differentiate between the financial and physical facilities. The Treasury certificates of indebtedness have been sold to banking institutions other than Federal reserve banks, and they have never been held by the Federal reserve bank except in very moderate amounts and for very brief intervals when approaching maturities or something of that sort made it desirable. The CHAIRMAN. The Federal reserve banks dispose of these to other banks in their districts, whether State or National? Mr. LEFFINGWELL. To the State and National banks; and in order to get the attractiveness of these Treasury certificates before the |