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Washington, D. C. The committee met, pursuant to call, at 10.15 o'clock a. m., in its committee room in the Senate Office Building, Senator Reed Smoot presiding.

Present: Senators Smoot (chairman), Watson, Reed, Shortridge, Couzens, Bingham, La Follette, Thomas of Idaho, Harrison, King, George, Barkley, and Connally.

The CHAIRMAN. Will the committee come to order.

I have asked Mr. Mills of the Treasury Department to come before the committee this morning while we consider H. R. 16111, an act to amend sections 1 and 7 of the second Liberty loan act, as amended. Mr. Mills is here. And, Mr. Mills, we would like to have you proceed with any statement you desire to make in regard to this particular bill. This passed the House on February 20, 1931.

(The bill under consideration is here printed in full, as follows:)

(H. R. 16111, Seventy-first Congress, third session]

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 1 of the second Liberty bond act, as amended (Public, Numbered 43, 120, and 192, Sixty-fifth Congress, September 24, 1917, April 4, 1918, and July 9, 1918, respectively), is hereby amended by striking out the figures “$20,000,000,000” and inserting in lieu thereof the figures “$28,000,000,000."

Sec. 2. That section 7 of the Second Liberty bond act, as amended (Public, Numbered 43, Sixty-fifth Congress, September 24, 1917), is hereby amended by adding thereto the following sentence: “Bonds authorized by section 1, and certificates authorized by section 6, of this act, as amended, hereafter issued, shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations, if and when the Secretary of the Treasury shall so prescribe in connection with the issue thereof."



Undersecretary Mills. Mr. Chairman and gentlemen of the committee, there are two parts to this bill. The first part simply authorizes the amount of long-term bonds to be issued at increases from $20,000,000,000 to $28,000,000,000.

Under the terms of the second Liberty loan act, as amended, the Secretary of the Treasury has authority to issue up to $20,000,000,000 of bonds. That is, all told. That does not mean, necessarily, $20,000,000,000 outstanding at any one time. In the course of the past 40 years, the Treasury Department has issued, by way of direct issue, or refunding operations, approximately $18.500,000,000, so that there is still authority in the Secretary of the Treasury to issue $1,500,000,000 of bonds.

Senator COUZENS. Right there, Mr. Secretary, may I ask you this: That does not refer to these short-term certificates?

Undersecretary Mills. No; because the law provides there shall not be exceeding $20,000,000,000 of bonds.

But there is a certain amount to be issued now, and we are approaching the limit. And as I pointed out to you gentlemen a while ago, we have bonds that are callable to the amount of $2,800,000,000 in the next two years, and it is obvious that the limit of $20,000,000,000 is not sufficient to take care of the needs of the Treasury later.

Senator COUZENS. Will you define the difference, so far as the Government is concerned, between the short-term bills, notes, and certificates, and the bonds?

Undersecretary Mills. The certificates and bills are short-term paper that may be issued for a definite short time by the Treasury. A note is an obligation of the Government that runs for five years, or less. And a bond is an obligation that runs for a period exceeding

five years.

Senator COUZENS. What I would like to know is, what is the difference, so far as the Government is concerned, as to whether you call it a certificate, a note, or a bond. I just want to know the difference.

Undersecretary Mills. It so happens that the law limits us in the amount of bonds that may be issued, Senator. If, in the course of these refunding opreations we should issue, say, $1,500,000,000 of bonds, we should then be obliged to limit ourselves to the issuance of certificates or notes, and that does not seem to me to be a very desirable situation. In other words, the Secretary of the Treasury should have the discretion to issue the most suitable chacter of obligation, to meet the demands. Now he will be limited.

Senator HARRISON. In other words, you want elasticity?
Undersecretary Mills. Yes; we want elasticity, Senator.
The CHAIRMAN. Your paper is mostly certificates and notes?
Undersecretary Mills. Yes; for the most part.

Senator COUZENS. What is the difference between the two kinds of obligations, so far as the Government is concerned?

Undersecretary Mills. I do not know whether there is much difference, Senator. The law defines these various kinds of obligations.

Senator Couzens. You do not know what the purpose was in defining these various obligations? They are all equally valuable, are they not?

Undersecretary Mills. They are all equally valuable. Mr. Hand may know that. Mr. Hand points that certificates were originally issued in anticipation of taxes, and were refunded when the taxes came in.

I do not know why these particular periods of time were mentioned or selected, a note not to run not more than five years, and a bond to run more than five years. I can not tell you why those dates were originally selected.

Senator COUZENS. Then the difference between a bond and a certificate is a difference in maturity?

Undersecretary Mills. Is a difference in maturity.
Senator COUZENS. There is no difference in value?
Undersecretary Mills. No.
Senator WATSON. Is there difference in the rate of interest?

The CHAIRMAN. The only difference is that the certificates may mature at a time when the interest rate is very much less; and, also, much more than when the certificate was issued. And if it were a bond, it would run to the end of the period.

Senator COUZENS. I understand, but sometimes bonds are callable before the end of the period, too.

Undersecretary Mills. Generally speaking, bonds and certificates have a definite term to run.

Senator Watson. Is there any difference in the rate of interest?

Undersecretary Mills. That depends on the market conditions. Just now securities can be sold at a low rate of interest. Three years ago bonds were sold at 342 and 4%. We sold one bond issue at 546. It depends untirely on the conditions of the money market.

Senator COUZENS. As I understand, you want this authority to raise from $20,000,000,000 to $28,000,000,000 in the issuance of bonds only?

Undersecretary Mills. Yes, sir.

Senator Couzens. You do not ask anything for the issuance of certificates or notes?

Undersecretary Mills. No; our authority is ample there.

Senator COUZENS. The only purpose of this is, then, to enable you to issue more bonds and less certificates?

Undersecretary Mills. No; the only difference is, it would put us into a position to issue bonds, rather than notes, in the course of the refunding operations. The situation now, and if you do not do anything with reference to this, after we shall have issued $1,500,000,000 of bonds, the Treasury Department will be in a situation where it can not issue any more bonds and will be required to issue certificates or notes. We will have lost our opportunity to issue bonds, and we want to have the authority ot issue the most desirable securities. That will be the situation.

Senator COUZENS. You will not be confronted with that before the next session of Congress, will you?

Undersecretary Mills. No.

Senator COUZENS. That is the reason I did not understand the occasion for håste.

Undersecretary Mills. There is not any haste, Senator. It is a year

and a half to the time of the refunding that will be necessary. But it was thought better to start in ample time to get the authority, so that in case something should happen next year, we would have the authority to go ahead.

Senator BARKLEY. You feel, whether it is done now or then, it should be done, Mr. Mills?

Undersecterary Mills. Certainly, Senator. There can not be the situation of allowing the matter to run along. You can not have the Government with a necessity for refunding its debt and not make ample provision in time for it. That would not be good business.

Senator Couzens. You do not contemplate increasing the National debt because of this bill?

Undersecretary Mills. Oh, no; not because of this bill; but perhaps as the result of some other bill.

Senator Watson. I want to ask you this question, Mr. Secretary, because it may be asked on the floor. If our debt was $10,000,000,000 greater than it is now, and you have authority to pay that off, why do you want authority to issue bonds to the extent of $28,000,000,0000

Úndersecretary Mills. Because at that time we will very nearly have approached the extent of our authority. This does not represent the amount that may be outstanding at any one time.

Senator Watson. No.

Undersecretary Mills. No; but it does represent the amount that may be issued.

Senator BARKLEY. This is the whole turnover.

Undersecretary Mills. This is the whole turnover. In other words, it is cumulative.

Senator BINGHAM. You do not reach the limit of your authority until you have issued the amount you mentioned?

Undersecretary Mills. No, sir.

Senator GEORGE. Mr. Mils, will you tell us, pelase-I suppose you have told the committee of the House, and we are more or less familiar with the debates. But I would like to ask you why is it necessary to exempt these bonds from the graduated additional income taxes?

Undersecretary Mills. That is the second part of the bill. That is a separate and distinct question and, perhaps, should be submitted in a separate bill. This is the situation to-day: We have authority to issue bills and notes and certificates and bonds clear of taxes and surtaxes.

Senator COUZENS. Is that true so far as the notes are concerned?

Undersecretary Mills. Yes; we have the authority. Now, there is no reason or logic in giving the Treasury authority up to five years to make them exempt, and make them only tax exempt as to the normal tax. But it goes further than the matter of strict logic. As a matter of fact, the Treasury, some years ago, you will remember, took the position, and a very strong position, that under the graduated income situation there should be no such thing as tax-exempt securities, and asked the Congress to pass an amendment which would do away with all tax-exempt securities issued either by the Federal Government, or by the State or municipal governments. I was in the House at the time, and I supported it vigorously, and we managed to carry it there after long and vigorous debate.

It eventually was beaten. I do not know whether it ever came up in the Senate. In any event, it is perfectly clear that such a constitutional amendment is required in order to compete with State and municipal tax-exempt securities. There are to-day outstanding taxexempt securities to the extent of some $19,000,000,000, and they are increasing at the rate of $1,000,000 a year.

Senator WATSON. Of all kinds?

Undersecretary Mills. Of all kinds. Those tax-exempt securities are in existence, and in order to compete with them, we must have an opportunity to issue tax-exempt securities. But we do not think there should be created islands of safety for rich men, enabling them to invest in these securities, and we think it is entirely against the theory of the income tax; it is not open to dispute that it should not

be done, either from the theoretical standpoint or from the standpoint of principle.

Senator BARKLEY. I disagree with you on that, Mr. Secretary.

Undersecretary Mills. Well, I should not have said, Senator, that it is not open to dispute.

Senator BARKLEY. I do not want to open an argument with you on the subject, but I do think it is open to argument.

Undersecretary Mills. I should not have said, Senator, that it is not open to dispute. I did not mean that others might not differ with me on the question. However, from my standpoint, the graduated income tax is wholly inconsistent with the theory of an income tax. If I had my way, and from my way of thinking about it, I would not have a tax-exempt security in the entire country. But it is an academic question to-day. We have some $20,000,000,000 of them. And the only question is whether the Federal Government, from the standpoint of strict principle, is going to issue long-term obligations exempting the same from the income tax, and have higher interest rates by reason of so doing. That is the only question. I do not believe that we can lose anything by it, because it is perfectly obvious that a man who wants to escape the surtax has any number of municipal bonds or State bonds that he can invest in. He does not have to look to Federal bonds to-day.

Senator GEORGE. So it is a matter of parity that you want, to put you on an equality with the State and municipal governments?

Undersecretary Mills. We want to put the Federal Government on a par with the State and municipal governments, and in order to do that, we want to have the same privileges as they have.

Senator Couzens. I think the Secretary is wrong, because the Government bonds have a great many features of advantage, outside of the tax exempt feature.

Undersecretary Mills. You mean they are of greater security? Senator REED. And the opportunity of borrowing money on them.

Under secretary Mills. Yes; borrowing money, and they are better security.

Senator Couzens. And also a better opportunity of sale, if desired.

Undersecretary Mills. Yes; the sale of the security. But, if tax-exempt securities are to be allowed, why should we not have the same advantage as the State or municipal government?

Senator COUZENS. I will say that if the States and municipal governments are allowed to do it, they should all be allowed to do it. Obviously, one State should not do it unless they all have the same privilege, because then those who do not do it would be handicapped in the sale of their securities. One State could not carry it out. It would have to be every State.

Undersecretary Mills. We have a practical situation?
Senator COUZENS. Yes.

Undersecretary Mills. All the States, and the Government itself is issuing tax-exempt securities. Then why should we shy at issuing long-term securities in that way and getting the advantage?

Senator COUZENS. What advantage would it be now?

Undersecretary Mills. I should say the most careful investigation we have been able to make would indicate that it would not amount to less than one-eighth, and might run as high as one-fourth on a 15year bond. My own feeling is-well

, it is more than a feeling. If you gave us the authority, say, before Saturday, we would offer the

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