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bonds which we are going to offer next Monday, at one-eighth less than we would without it. That is the best way I can answer it.

Senator BARKLEY. What portion of the bonds now will be refunded?

Undersecretary Mills. The first ones will be the first 37's. They are the only ones that are tax-exempt. They amount to $1,300,000,000. And they become callable after June, 1932.

The CHAIRMAN. You said the first 3%'s are the only tax-exempt bonds?

Undersecretary Mills. No; the first 3 's are the first long-term bonds.

Senator Couzens. You had authority, before we recently gave you authority, to sell discount notes and to issue 5-year notes tax exempt?

Undersecretary Mills. Yes; we did. And then you recently gave us authority to issue bills, and so on.

Senator Couzens. Yes; and prior to that time you had authority to issue notes all tax exempt?

Undersecretary Mills. We did, Senator; but the Treasury did not avail itself of that authority, because it rather had the feeling that it was the policy of Congress that it should not be done.

Senator COUZENS. So, as a matter of fact, there are no 5-year bonds out now that are tax exempt?

Undersecretary Mills. No.

Senator REED. Have you mentioned the difference, Mr. Secretary, between the tax-exempt features to the corporations and to individuals in the matter of these bonds?

Undersecretary Mills. No, I have not, Senator Reed. There is the situation where corporations are large investors in the bonds, and those bonds are tax exempt as to the normal tax. Since the corporations are only paying a nominal tax, they are entirely tax exempt to them. Therefore, the corporations can afford to pay a higher amount than individuals can afford to pay:

Senator REED. It seems to me the result of that has been to squeeze the public out of the Government bond market almost entirely.

Undersecretary Mills. That is true, Senator. The dealers in Government securities in New York estimate that 90 per cent of the 4}'s are held by corporations, whereas as high as 20 per cent of the First 3'4's are held by individuals. The First 34's being entirely tax exempt, so they buy on a par with the corporations. They estimate that 90 per cent of the 414's which are only exempt as to the normal tax, are held by corporations. To-day the corporation can afford to pay higher for Government bonds, so it means that we have a restricted market and can not distribute the bonds as widely as they should be distributed. The ideal situation would be to distribute them as widely as possible among all classes, and not give the corporations the advantage in that manner. But to-day, owing to the tax-exempt feature, the corporation has a distinct advantage over the individual.

Senator REED. That is what I meant. When you boil it down to the last analysis, the corporation holding bonds gets a larger yield than the individual?

Undersecretary Mills. Most decidedly, because they are completely tax exempt to the corporations.

Senator King. Mr. Secretary, do the investment trusts, or the banks, buy them, mostly?

Undersecretary Mills. The banks, mostly.

The CHAIRMAN. Are there any other questions you desire to ask?

Senator COUZENS. Did the Treasury Department approve before the House Ways and Means Committee the legislation being in such shape as to give the Secretary of the Treasury the right to issue them tax exempt or not, as he chose?

Undersecretary Mills. That is the form the bill is drawn in. I do not know whether we gave that any particular thought. I suppose Congress could make it mandatory. But it seems to me it is better not to. In other words, when we refund the 32's tax exempt, it would be better to be able to offer them another tax-exempt bond. And it might be decided that it would be better not to. I do not want to insist on that. If you want to tell us that all future issues shall be tax exempt, there can be no real objection. But I think it would be a little better to leave it to the Secretary of the Treasury. But I do not think it would be unwise, Senator Couzens, from the standpoint of principle, to insist that the Government must issue a bond that shall be taxed with surtax when you consider the great amount of tax-exempt securities already outstanding; and when you consider that that necessarily means a discrimination between the corporation and the individual. I think it is too high a price to pay for the principle.

Senator COUZENS. I think that is too great an authority to give to a Cabinet officer, no matter who he is.

The CHAIRMAN. We have already given it to him.

Undersecretary Mills. You have already given it to him in the short-term stuff. If you want to say, for this new $8,000,000,000 it shall be mandatory and tax exempt, there is no possible objection to that.

The CHAIRMAN. I do not think there would be any advantage to that.

Senator Connally. Do not you believe that all long-term securities should be tax exempt? Would not the Government get back more in interest than it gets in the taxes?

Undersecretary Mills. You mean, the Government should avail itself of the tax-exempt privilege?

Senator CONNALLY. Of the tax-exempt privilege.

Undersecretary Mills. There was a time when there was an advantage to the Government not to issue securities tax exempt. But the volume of tax-exempt securities was not so great then as it is now. I think if we could issue them in that manner now it would save at least one-eighth of 1 per cent, and it might run as high as one-fourth.

Senator CONNALLY. You want to get that back. Everybody takes them, and they are exempt in the hands of the corporations.

Undersecretary Mills. I think that one-eighth represents very nearly net gain to the Government.

Senator CONNALLY. Is it not a fact that when tax-exempt bonds were selling away above par, that the 4'2's and the 47's were selling away below par?

Undersecretary Mills. I do not know that there was so great a spread as that.

Senator CONNALLY. Were not some selling at 4% when the First 3's were made all tax-exempt.

The Chairman. I think they went down during that period.

Senator CONNALLY. They did not go down as low as 34. The statistics of the Treasury showed you only got back about one-fifth as much income taxes as we were paying increased interest on those issues.

The CHAIRMAN. That was before the other issues.

Senator CONNALLY. The same principle obtains now, only a difference in amount.

The Chairman. No; I think if you will look at the quotations, you will find very little difference.

Senator CONNALLY. The Secretary says there is one-eighth.

The CHAIRMAN. The reason for that is explained because of the exceeding high taxes.

Undersecretary Mills. I have got a table here which shows the difference between the First 3%'s, which are completely tax-exempt, and the other period, which I would be glad to put in the record, if you care for it.

The CHAIRMAN. Yes; you may put that in.

(The table furnished by Undersecretary Mills is printed in full, as follows:)


Price asked


Corporation tax equiva




3. 40

3. 56
3. 99

First 314
First 414
Open-Inarket valuation of tax-exempt feature Dec. 31, 1927,


June 30, 1928
First 316
First 414
Open-market valuation of tax-exempt feature June 30, 1928,




3. 47

3. 95
4. 40

Dec. 31, 1998
First 314
First 414
Open-market valuation of tax-exempt feature Dec. 31, 1929,




3. 51 4. 18

3. 99

June 30, 1929
First 312
First 414
Open-market valuation of tax-exempt feature June 30, 1929,




4. 26

3. 78

* 6-15-47-32
6-15 47-32


3. 71

3. 97
4. 23

Dec. 31, 1929
First 312
First 414
Open-market valuation of tax-exempt feature Dec. 31, 1929,

June 30, 1930
First 342
First 444
Open-market valuation of tax-exempt feature June 30, 1930,

First 312
First 414
Open-market valuation of tax-exempt feature Dec. 31, 1930,


5 6-15-47-32


101232 102432

2. 93 3. 10

3. 41 3. 68

6 6-15-47-32



2. 16
2. 19

2. B4 2. 77

1 Selling at premium yield computed to first call date June 15, 1932.

2 First 3la's selling at discount under par, therefore yield computed to June 15, 1947, but first 4}i's still at premium-yield still computed to June 15, 1932.

Both now selling at discount-therefore, both yields computed to June 15, 1932. * First 312's at discount, yield computed to June 15, 1917. First 4lí's at premium, yield computed to June 15, 1932. Competition of two new issues of totally tax free certificates which were issued Sept. 15, 1929, (June, 1930, 474's, $550,000,000) and Dec. 15, 1929 (September, 1930, 3!8, $350,000,000) now apparently reducing the attractiveness of First 314's fully tax-exempt feature.

3 Both at premium, both yields computed to June 15, 1932. Competition of $1,400,000,000 (Treasury certificates and bills) now appearing to lower the spread.

& Easy money conditions plus competion of $1,300,000,000 totally tax-free certificates and bills plus strong possibility of both being called and selling on money basis has narrowed the spread between totally tax free and partially tax free to 0.13 points only.

Senator REED. That is about one-eighth difference?

Undersecretary Mills. It is one-eighth now. It has been as high as one and a quarter. To-day it is one-eighth. I honestly think that for the good of the Government—I do not want to exaggerate it-I think on the next issue it would make a difference of one-eighth of 1 per cent.

Senator Couzens. Because of the great expansion of bonds issued by State and municipal governments, the difference is becoming less?

Undersecretary Mills. Yes, sir.
The CHAIRMAN. That is the reason.

Senator COUZENS. So that there is not now so much advantage in the tax-exempt Government bonds as in the past.

Undersecretary Mills. No, sir.

Senator CONNALLY. Mr. Secretary, is it not a fact that it is just in the State of the issue where they are tax free?

Undersecretary Mills. Yes, sir.

Senator CONNALLY. Any one State may tax the bonds issued in another State?

Undersecretary Mills. Yes, sir.

Senator CONNALLY. So the Federal Government is the only one that can issue completely tax-exempt bonds.

Undersecretary Mills. Yes, sir.
Senator CONNALLY. And they infringe on each other.

Undersecretary Mills. They do. The city of New York is offering next week $100,000,000 worth of securities with a fairly long maturity. I should assume they would have to sell them to yield either 4.10 or 4.15, whereas the bonds which we will offer at the same time will be at a rate considerably lower than that, tax-exempt privilege, or no tax-exempt privilege.

Senator COUZENS. Senator Connally overlooked the great value of the bond outside of the tax-exempt feature.

Senator CONNALLY. No; that is in it, at but the same time the only tax-free bond there is is a Federal bond, because New York can tax a Michigan bond.

Senator REED. I think the desirable thing to do is to give them very wide distribution. If you can scatter them as widely as possible among individuals, it would be most desirable.

The CHAIRMAN. Is there any amendment any member desires to offer to the bill? If not, a motion to report it out would be in order.

Senator COUZENS. I would like to offer an amendment to cut out section 2, Mr. Chairman.

Senator REED. To make it compulsory, Senator?
Senator CouZENS. To leave it as it is now.

Senator SHORTRIDGE. Are you opposed to that because of the discretionary power given to the Secretary?

Senator COUZENS. I am opposed to it.

Senator HARRISON. If you eliminate that, does that make it mandatory?

Undersecretary Mills. No; it leaves it just where it is now.
Senator COUZENS. It does not change the present law.
Undersecretary Mills. No; it leaves the law as is.

Senator COUZENS. I am not opposed to the extension from $20,000,000,000 to $28,000,000,000, but I am opposed to section 2. And I want to leave the law as it is now, and I see no reason for changing it. That is the reason I move to cut out section 2.

Senator REED. I hope that will not be done. If it makes oneeighth of 1 per cent difference, it seems to me we should take advantage of it.

Senator SHORTRIDGE. What is the reason for section 2, Mr. Secretary?

Undersecretary Mills. To save interest to the Government of from one-eighth to one-fourth.

Senator SHORTRIDGE. Is that well established as a result of experience?

Undersecretary Mills. So well established that the bonds we will issue next week will be offered one-eighth lower if this bill becomes law.

The CHAIRMAN. And without that section we would lose that one-eighth.

Senator King. Mr. Secretary, without further legislation than that contemplated in this bill, how could we facilitate a greater and wider distribution of bonds among individuals, and take them out of the portfolios of the corporations?

Undersecretary Mills. This is the best way.

Senator King. I was wondering whether there was any other way in which we could facilitate that.

The CHAIRMAN. Section 2 covers it.
Undersecretary Mills. That is the most effective way.
Senator KING. That is the only effective way you have?

Undersecretary Mills. Yes; because this being the law, it puts them on a parity.

Senator Couzens. If the Secretary of the Treasury wants to.
Undersecretary Mills. It is not obligatory.
Senator REED. Let us make it obligatory.

Undersecretary Mills. If you make it obligatory, Senator, the Treasury would not object.

Senator SHORTRIDGE. If the corporations have an advantage over individuals, I think the Secretary should have discretion to issue securities in such a way that the corporations would not have the advantage over the private individual.

Senator REED. Mr. Chairman, I move that we eliminate

Senator COUZENS (interposing). I call for a vote on my motion, Mr. Chairman.

Senator REED. I think my motion would come before yours, Senator, and that is the reason I would like to make my motion now. I move that on page 2, line 7, that we strike out the word "if”, and all of lines 8 and 9, so as to make it compulsory on the Treasury to issue the bonds tax exempt.

Senator King. Personally, I should like to vote, if we could control the States, to have no tax-exempt bonds.

Senator COUZENS. So would I.
Senator REED. That would take a constitutional amendment.

The CHAIRMAN. If we make that amendment, it seems to me this bill would have to go to conference, and whether we could get it back in time to get it passed at this session is the only question I have.

Senator COUZENS. There will be no great harm done if it is not passed at this time, Mr. Chairman.

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