the first 2 days, in which the conversion privilege could be exercised. During the first 2 days, 10 percent was converted?

Secretary HARRIMAN. So that would have changed it. The first three quarters was about the same as the average of 1919-28.

The CHAIRMAN. The risk of a public utility security, generally speaking, is less than that of an ordinary industrial security, is it not? Secretary HARRIMAN. Yes, sir.

The CHAIRMAN. That would have pertinent bearing, I suggest.
Secretary HARRIMAN. That does.

That debenture issue was included as a debt. This will change the situation for the year, if the conversion is included.

This is certainly a year in which there is a high percentage of corporate financing on indebtedness, and a low percentage in equity financing.

There is no question about that.

The CHAIRMAN. Let us look at these net purchases by various groups. You have an item for commercial banks. Commercial banks do not buy high-risk securities, do they?

Secretary HARRIMAN. No. They undoubtedly would be high-grade securities.

The CHAIRMAN. You have mutual savings banks. Mutual savings banks do not buy high-risk securities, do they?

Secretary HARRIMAN. That is correct.

The CHAIRMAN. And you have life insurance companies, which is the largest item of all, $2,000,000,000 in 1946 and $3,000,000,000 in 1947.

Life insurance companies do not engage in high-risk securities, do they?

Secretary HARRIMAN. That is correct.

The CHAIRMAN. I have no idea what the foreigners are investing in, but in any event, they did not invest anything in 1947.

Secretary HARRIMAN. That is right. They reduced their investment by $200,000,000 in 1946 and added nothing in 1947.

The CHAIRMAN. And domestic individuals acquired nothing in terms of net purchases in 1946 and $700,000,000 in 1947. Secretary HARRIMAN. That is correct.

The CHAIRMAN. Turning to table 8, to which you referred, 193041 was a very depressed period.

I wonder if there is any prophecy between that figure of 25 percent and the figure in 1947 of 26 percent?

Secretary HARRIMAN. There was very little risk expansion in that period.

The CHAIRMAN. I doubt whether you could make a full scale argument from the figures but it is significant.

Secretary HARRIMAN. Have we got the figures of total indebtedness with us?

Mr. MEEHAN. Yes.

Secretary HARRIMAN. The corporations, of course, paid off a considerable amount of their debt during the war, if I remember correctly. May I read these figures? I think they are important.

I want to make it perfectly plain I do not believe in a high percentage of debt for corporations, but I do not believe that to date it is dangerous.

The CHAIRMAN. Would you agree, Mr. Secretary, it is dangerous tendency? Obviously, if it is a dangerous tendency, it has to be stopped or it will become dangerous.

Secretary HARRIMAN. It is a natural tendency for corporations to borrow when they can borrow very cheaply, and certainly if it continues, if there is an unbalance between debt and income, it becomes a dangerous situation.

I pointed out earlier that at the present time only 8 percent of the income of corporations is taken by interest payments, today, whereas in 1929 it was 23 percent.

The totals on debt: Taking 1930, which was the peak, $61,000,000,000 of long term debt of all corporations whereas in 1947 it is $53,000,000,000.

In total indebtedness of all kinds, it is about 112 as against 107. The corporations reduced their debt from $110,000,000,000 in 1943 to $99,000,000,000 in 1945.

The CHAIRMAN. Let us have the income levels for the years you are comparing.

Secretary HARRIMAN. I have not got the income levels.

Mr. MEEHAN. Here they are.

The CHAIRMAN. Would it bother you unduly if they were supplied, and in connection with reading that, you read us the income levels? Mr. MEEHAN. Do you want the national income, Mr. Chairman? The CHAIRMAN. That will be all right.

Secretary HARRIMAN. In 1929, when our national income was $87,000,000,000, the total debt was $107,000,000,000, whereas in 1946 our national income was $178,000,000,000 and our corporate debt was $102,800,000,000.

The CHAIRMAN. What relevancy does that leave to your figures? Secretary HARRIMAN. I thought you asked for the national income. At a time when we are on a very much higher basis of business activity, our debt situation is not substantially different than it was in the period of very much lower business activity.

The price levels, also, of course, were quite different.

The CHAIRMAN. I believe this would be a good tme to ask you to bring your theories in relation to what may happen around here in the way of a tax reduction bill.

I think we agreed earlier in the day, at least it would be implied from what we discussed, as far as the reduction going to the lower income brackets is concerned, we cannot count on that as a source for risk capital.

Is that correct?

Secretary HARRIMAN. I did not quite get that.

The CHAIRMAN. As to the effect of any reduction tax bill passed here, the reduction that goes to the lower brackets would not constitute a source for risk investment capital, would it?

Secretary HARRIMAN. No.

The CHAIRMAN. So it follows, then, we have to look to the middle and upper income brackets for that.

Secretary HARRIMAN. And to corporate savings.

The CHAIRMAN. It has been predicted, and I am not taking the liberty of setting any figure, when finished we will have a tax-reduction bill somewhere, say, in the order of $4,500,000,000, something like that.

Assuming that the percentage of distribution is the same as under the Knutson bill, that would put $1,114,000,000 into the middle and upper income brackets.

Now, it is perfectly obvious, is it not, that that whole sum would not be immediately rushed into risk capital? You agree with me on that? Secretary HARRIMAN. I would think so; yes.

The CHAIRMAN. In other words, many people are now living on capital. This might help them come up to an even standpoint.

Many people have many things they could use that money for without putting it in risk capital. Is that not correct?

Secretary HARRIMAN. That is correct.

The CHAIRMAN. When you finish those calculations of that nature, you can see that at most what we do here, if what we do is in the order that I have mentioned, is only a step and a short step toward restoring the money pool for risk investment by tax reduction.

Do you think, putting any figure on it you want to, that the remaining amount of money which would be left to those in the middle and upper brackets as the result of tax reduction in the order I have memtioned would conflict seriously with your own theories?

Secretary HARRIMAN. I think that any tax reduction will add to inflationary pressures, sir, and if I am right in feeling we are still in a period of danger from inflation, it will add to inflationary pres

sures.

The people who get the money will either spend or save it.

As you have indicated, they are apt to spend it under present conditions, and there will be a greater demand for goods and services which are not adequate today to meet the present demand.

The CHAIRMAN. Mr. Secretary, we have already discussed the consumer angle of the business. I am now talking solely about a tax reduction as a source for investment capital, risk capital.

Can you conceive of what we are doing here, if what we do approaches a figure such as I have mentioned, as interfering seriously with your own theories as to the present inadvisability of increasing risk investment?

Secretary HARRIMAN. I do not think I can divorce its effect upon the economy as a whole, which has been dealt with in this paper. I think you will add to inflationary pressures, and the people will attempt to spend more and will tend to increase the excess demand over supply.

I think it will have further repercussions which will make it more difficult when the adjustment period comes.

From the standpoint of increase of equity capital, probably some of it will go into equity capital funds, certainly on a net basis.

As you say, many people in the higher-income brackets have had to live on capital, and presumably they have sold securities if they did not have savings in cash. So that it will reduce the sales of securities held by individuals, and I would think it would add to investment in equity to some extent.

How much, I would not want to estimate.

The CHAIRMAN. The burden of your argument, if I understand it, has been this is not the time to increase the pool of available risk capital by tax reduction.

I am asking you on that limited angle: Do you consider that what would be done by this tax-reduction bill would seriously upset even your own theory as to that?

Secretary HARRIMAN. May I say, Mr. Chairman, I have dealt with two phases. One is the excess demand for goods over available goods and services, and the other was dealing with this argument as to funds available for capital expenditures.

I have not studied in detail the various tax proposals, but I do believe it will add to our inflationary pressures, and I cannot divorce that from the equity-capital situation.

It will make some more money available for equity financing which I do not think is needed at the present time. So I do not think the effect of it will be useful to our economy at the present time.

The CHAIRMAN. Let us take the effect of it so far as risk investment is concerned.

It presents simply an alternative between so much more money available for equities or financing necessary through indebtedness.

A corporation gets money by incurring indebtedness and it buys the scarce materials you are referring to just as it does if it gets it by equity, does it not?

Secretary HARRIMAN. That is correct.

The CHAIRMAN. So the inflationary interest is there, whether financed through indebtedness or by equity, which leaves the problem, so far as risk capital is concerned, for us to estimate the good or bad effects from what would be left for risk investment out of $1,114,000,000 of reduction in the middle and upper brackets.

Secretary HARRIMAN. Of course, I have no way to estimate how receivers of that tax reduction will spend it.

The CHAIRMAN. I wish we had more cause for concern over that. I wish we would reduce it a lot deeper.

Secretary HARRIMAN. I have been very frank in saying I earnestly believe at the proper time there should be a full recognition of the fact this country has been developed by risk capital, and if we are to attain the dynamic economy which we have developed over the years we must encourage risk capital.

I am only saying I do not believe this is the year to do it. And if we do it, we will go into more of a business boom than we have today. We already have a substantial one. It will add to the difficulties when the adjustment comes.

The CHAIRMAN. Mr. Secretary, you have drawn a good audience, and there are some complaints that you are not speaking loud enough. Secretary HARRIMAN. I am sorry, sir.

Senator LUCAS. May I make one inquiry on this point?

The CHAIRMAN. Senator Lucas.

Senator LUCAS. Is there any speculative guess as to what amount. of this $1,000,000,000 you have been discussing will go into risk capital?

The CHAIRMAN. I beg your pardon, Senator Lucas.

Senator LUCAS. We have been discussing all through these hearings in questions and answers equity capital, and the chairman a moment ago estimated there would be 1.1 billion available for equity capital in the event they wanted to put it into that.

The CHAIRMAN. It would not all be available.

Senator LUCAS. I was wondering whether anybody made a speculative guess as to what portion of that amount would go into equity capital.

The CHAIRMAN. I am trying to get the Secretary's opinion. I think it is hard to figure out, but certainly in my judgment it will be less than $1,000,000,000.

Senator LUCAS. It certainly will, in my opinion.

In my judgment, there will be very little of this money going into equity investment, but through all these hearings, the impression, as I got it, has gone out that this is a tax bill to have a lot of capital to flow into equity investment.

As I see it, this is just a plain cut of the tax bill for the taxpayers of this country, and those who are interested in equity capital are not going to get very much relief out of this tax bill.

The CHAIRMAN. Senator Lucas, I think everyone who has studied this matter, as you have, realizes the value of what we are doing here, if it has value, is as a first step, and the people that I have talked to who are acquainted with equity markets tell me it would have a tremendously valuable and constructive effect psychologically to know the Congress had taken that first step.

Senator LUCAS. I hope that is true if the tax bill is passed. I am only stating the facts as they have been presented to us.

It may be a shot in the arm for these fellows to get more equity capital in the market, but the only way they can really get any relief is to have a real tax cut and not one like we have at the present time. Senator BYRD. I understand the Secretary conceded the fact the reduction of taxes would provide additional equity capital.

Secretary HARRIMAN. I am assuming so, and would not want to hazard a guess as to what effect it would have-as to how much would be saved in the middle and higher income brackets.

But certainly I agreed with the chairman that many people are living on their capital in some of those categories, and that it might have some net effect on investment in equity during the course of the

year.

I would not want to hazard a guess as to how much. It might prevent certain people from selling who are now selling securities.

May I finish my statement?

The CHAIRMAN. Go ahead.

Secretary HARRIMAN. At the end of 1947 the liquid position of corporations as a whole was still favorable by prewar standards. The ratio of liquid assets to sales or to current liabilities was generally higher than it had been just prior to our entry into the war or in the twenties.

Since there is a particular interest at present in the relative importance of equity and other capital financing, it may be noted that the 1946 ratio of new stock issues to total new money issues was generally above the prewar ratios with the notable exception of 1929 (table 8). In 1947, the relative importance of stock issues dropped to a ratio somewhat below the 1919-28 period and slightly higher than in the 1930-41 period.

In connection with the market valuation of equity capital table 9 is of interest. This shows the current dividend yield on common stocks and the ratio of earnings to price. The present relationship between market price of common and dividends and earnings per share is almost identical with that in the mid-twenties, though considerably less than in the bull market which occurred from 1927 to 1929.