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'ADOO.

THE SECRETARY OF THE TREASURY,
Washington, September 5, 1918.

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 patriotism 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 vur 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