TABLE 9.-Camparison of prewar and postwar relations of bond and stock yields

Source: Dividend yields and earnings-price ratios from 1919 to 1938 are from Common Stock Indexes, Cowles Commission, Monograph No. 3. Figures from 1939 on are preliminary estimates.

The CHAIRMAN. Under your own theories, Mr. Secretary, is it not essential to produce incentives for equity investment in advance of the needs?

Secretary HARRIMAN. No, sir; I do not think the present situation is dangerous. I have tried to point out this equity figure for 1947 is going to be adjusted when we know the convertibility of the large telephone issue.

In the first three-quarters of the year, if I remember correctly, the relationship of equity financing to bonded indebtedness was about the same, 32 percent, as the 1919-28 average.

Mr. MEEHAN. That is right.

Secretary HARRIMAN. The large issues, of which telephone is the important one, brought that percentage down in the last quarter. The CHAIRMAN. As a practical matter, you think we should not make a start at restoring incentives as far as tax reduction is concerned for another year?

Secretary HARRIMAN. That would be my judgment, sir.

I want to be perfectly clear that I believe it is essential to keep a dynamic economy. When we get through these inflationary pressures we need to give real incentive for investment in equity financing, not only by total tax figures but also in certain specific taxes.

I was asked by the House Ways and Means Committee regarding the double-taxation feature-that is, the taxing on corporate income and also on dividends. I testified at that time I believed that was a deterrent to equity financing and was one of the adjustments which should be made at the appropriate time.

I was not suggesting it for this year, however. There are other means of encouraging equity financing also, which are very important to give incentive to management itself to give that extra effort which has made for success in the management of our business enterprises.

The CHAIRMAN. I think it follows from what you said that you do not believe we will have an important recession over the next year?

Secretary HARRIMAN. It is not our responsibility, and fortunately, not our obligation to make estimates in advance as it is necessary for this committee and the Treasury to do, but I see nothing in the present situation, from the analyses we have made in the Department, to indicate that inflationary pressures will not continue for the immediate future.

How long that will run, I would not want to hazard a guess.

The CHAIRMAN. I think it follows, I suggest, from your statement that we can postpone this subject for a year, that there would be no need for incentives for a year, which is another way of saying you do not believe our national income will seriously decline for a year.

Secretary HARRIMAN. I take no exception to that statement.

The CHAIRMAN. You are aware of the fact that the Treasury bases its estimates of revenue on a $200,000,000,000 income?

Secretary HARRIMAN. I think that is the figure.

Mr. MEEHAN. Mr. Snyder testified before this committee on that.
The CHAIRMAN. What is the present level of the income figure?
Mr. MEEHAN. The gross national product is about 240.

Secretary HARRIMAN. He was talking about income. What was it? Mr. MEEHAN. $210,000,000,000 for national income, and $206,000,000,000 for personal incomes which I believe is the series used by the Treasury.

The CHAIRMAN. Have you had any occasion to calculate how long it takes a tax bill to really get to working?

Secretary HARRIMAN. It depends upon what date the Congress fixes for the tax reduction, of course.

The CHAIRMAN. I think those who work with this subject usually allow about a year for the full economic effect of tax-reduction bill.

Secretary HARRIMAN. Does it not depend on the date on which you fix the tax reduction? In the past, Congress has dated back taxes in both increases and decreases.

The CHAIRMAN. It would be a year after whatever the effective date

was.

I am saying that many students of the subject say it takes about a year for the full economic effect of tax reduction to take effect. So, obviously, that yould be a year from the effective date of the act. There might be some aid out of a retroactive reduction, of course. Secretary HARRIMAN. Retroactive payment would have probably an immediate effect. Also the individual income-tax reduction has rather a prompt effect.

The CHAIRMAN. In the light of the lag between the effective date of a tax act a year from now and the full economic effect of it, you still believe it would be safe to postpone the matter for a year?

Secretary HARRIMAN. I am frank to say if you reduce your taxes and withholding from employees, as soon as you institute that reduction, I think you will have an immediate effect on the amount of money that is available to be spent.

It is perfectly true some effects of tax reduction probably will not take effect for a considerable period of time, but some of it will have immediate effect.

The CHAIRMAN. I agree that some of it will have immediate effect, I think it is perfectly obvious that a considerable part of it will not have immediate effect just because of the time lags in business between placing orders and making up your mind to place orders, and manu

facturing of goods, and delivery of goods, which take a lot of time. Is that not correct?

Secretary HARRIMAN. That is certainly correct as far as business expansion is concerned, and investment in capital developments.

I have been trying to show that we are on a high level of capital investment at the present time, and therefore at the moment there does not appear to be any danger in that area.

Mr. CHAIRMAN. I would like to say that I, of course, am very strongly of the opinion that we are in an emergency period in this country, both in our relations to the world as a whole and in our inflationary pressures at home.

I do feel this is a very definite year of decision on the part of the American people in terms of whether they will undertake the responsibilities which I believe are in the interests of the American people in the world situation, which will require substantial sums of money. And I do, of course, think it will add to our inflationary pressures. At home, I think we should guard against a boom-and-bust period which would have a serious effect not only upon our own position but upon our position in the world.

So, what I am saying is, in light of my feeling that we are in a very serious year in the history of our country, and therefore, I really must earnestly say I do not think it is a year to reduce taxes. I think, for one, as a taxpayer, it is better for all of us to pay our taxes for this year and to have its attendant effect of giving to the Government the money needed for programs proposed to Congress, and not to add to our inflationary pressures at home.

It will mean the deferment of the fulfillment of the desires of many of our people for many of the things they want, but in relationship to the events in the world that are taking place, I thing it is wise for us to go through that period.

We are in a period that is not quite comparable to war, but we are in a period where there are definite forces at work which may well lead to this country facing a very dangerous situation in the next few years.

So, I say this because I am not dealing entirely with the economic situation in this country. Although part of it is that, the other part is the whole situation. I think we must be strong at home as well in order to face the situation abroad.

The CHAIRMAN. I agree entirely with what you said, except I do not believe you brought tax reduction into relation with it.

The great mass of people in this country, I suggest to you, sir, have homely economic philosophy and homely philosophies as to foreign affairs.

They do not go through these intricate economic minutes with which we concern ourselves with at these hearings.

If

you want to sustain the things you are talking about, I respectfully suggest the best way to do it is by this dramatic way, if you please, of letting the American people know we are solicitous about their pocketbooks as we are about the pocketbooks of people abroad. Secretary HARRIMAN. Sir, I am not interested in the pocketbooks of people abroad per se.

The CHAIRMAN. I understand that.

Secretary HARRIMAN. What I am interested in is world stability and the preservation of the free institutions which we all believe in.

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If country after country gives up those free institutions we will find a situation which will be a most dangerous one.

I earnestly believe that today we can deal with these forces that are at work, but if there is a change in the complexion of the controls of large groups of people in Europe and elsewhere we will face a most dangerous situation which we may not be able to manage in the future.

The CHAIRMAN. I agree with all that, and I suggest the basis of our usefulness as far as our relationships with the world is concerned is in a sound economy, and that the sooner we can let this country know that we are taking steps to make it possible to risk capital, for example, to obtain that kind of economy, the better off we will be.

I also suggest the psychological value of giving some relief to the American people on their own tax burden is a little sign that we are solicitous about the needs of their welfare as we are about the welfare of other people.

Senator HAWKES. Mr. Chairman, may I just say a word there?
The CHAIRMAN. Yes, sir.

Senator HAWKES. It is said by people of experience that you can prove almost anything by figures. It all depends on what you want to prove.

Í do not think anybody knows anything about what we are doing. I think it is pure, unadulterated guesswork on the foreign situation and on the domestic situation.

You will recall that we had a lot of people in here a year ago when we were considering this tax bill who were telling us we could not rely on a national income of $170,000,000,000.

If you will go back to the minutes and see what I said there, I told you if I were going to figure it I would figure on $190,000,000,000 or $200,000,000,000.

The Secretary of the Treasury could not see anything like that at all. I think we are going to have a very high national income for a long time. I do not see how you can help it.

What I mean by a long time, I think we do not need to worry about anything for a year, maybe 2 years, but nobody knows. Nobody knows about all these figures that the Secretary of Commerce has brought in here, and the other Secretaries and Government officials.

They are trying to prove something that is their philosophy of where we ought to go, and some of the rest of us have ideas we are going some other way.

I would just like to say to you that the one thing that is overlooked the most by all of the people who come in here representing the different arms of the executive branch of the Government, and some of our distinguished Senators, is this: If you look at the history of the world, you will find that no nation was ever torn down in 1 year. If you will just look at it and follow it.

There has been an effort to destroy initiative and incentive in the forward for accomplishment little by little by little. I think the most important thing in front of the American people today is to show the American people their represenatives in Congress and their representatives in the executive branch of the Government do not wish to use the power to tax to destroy.

I do not think there is anything so important.

I have talked with little men, and I have talked with big men, and the general import of what they said is this:

"Why should I work the way I am working if we are going to keep war taxes up in peacetime?"

"Why should I work the way I am working if we are going to try to use the funds that are taken through taxation to level the whole world off and to build our competitors up so they will be equal to us?"

Mr. Chairman, that philosophy never built the United States, no matter how kind your heart is. No one I ever knew in any business in the United States ever said, "How can I help my competitor to be as good as I am or a little better?"

I hope the American people will wake up and find out they are crushing initiative.

You take it from me, and I have talked with some very fine men in all walks of life, and they are crushing initiative. And when you get it crushed, you will have what they have on the other side of the water.

I, for one, do not want to do that. I, for one, want to keep this Nation solvent. I want to keep this Nation where it can be supreme in the air; where we do not have to say we cannot vote $12,000,000,000 more for our Air Force to protect ourselves because we have given so many billions of dollars to somebody thinking about we do not know what, and we know not what they are going to use it for.

If I had not lived as long as I have lived in the United States and learned what I have learned about the United States and what made it, I could swing over and become one of the fellows who waves a magic wand and is going to straighten out all of the affairs of all of the people all over the world.

Mr. Chairman, this thing has been going on since long before Christ. There have been starving people all over the world, and I never can get myself to save a starving person over there because there is a million over here yelling for food, just because it is political waste or comes about from a political alliance.

I want to say one more thing and I want to emphasize it.

Mr. Harriman must know this. He is a businessman. If he does not, I will take him with me and let him talk to thousands of business

men.

You are crushing the initiative of the American people. Your are crushing it as sure as you are sitting in this room today. People are living on their principal today.

What difference does it make if a man's income is $100,000 a year if he only keeps $29,000.

The immediate society around him rates him as a $100,000 man. They expect him to contribute to all charities, outside of the charity he is contrtibuting to through taxation for the United States to be the conservator of the world. They expect him again to contribute, and I am telling you they are killing the initiative of the American people and the genius of the people who have made this country.

If Mr. Harriman does not know that, I would like to have him come to dinner some night, and I will invite 500 people and let them tell him. They would not all be rich men. I will let some little fellows

tell him, too.

Secretary HARRIMAN. Senator, I am in touch with businessmen, and our business friends by and large do not agree, many of them, with my testimony.