This matter of steel capacity was mentioned. I do not know whether the failure of steel capacity to increase was a matter of not enough equity capital or the feeling that steel capacity is enough and that any further expansion would be simply unused capacity in a few years to come. That is the general explanation that I have had, that it is the unwillingness of steel to increase capacity because they feel that what plants they have under way will be enough.

Another point on this equity capital, I know that I have seen statements, in fact I believe it is in the President's economic reporthow much weight you want to give to that-but I have also heard businessmen say that the postwar expansion of plant and equipment, in a number of cases, is nearing an end. I am not sure as to whether or not there is need for equity capital to continue so greatly in the future. Certainly it would be much better to spread it out over a number of years to help maintain a stable economy.

That concludes my testimony.

The CHAIRMAN. Senator George?
Senator GEORGE. No questions.

The CHAIRMAN. How would you assure spreading the venture capital out over a number of years?

Mr. HALVORSON. I think that if, as is argued, lower taxes would bring back greater capital expansions next year, one way to prevent it would be to keep taxes where they are. That would probably spread it out over a longer period. And then reduce taxes a little

later on.

The CHAIRMAN. That is your thought as to the way to spread venture capital out?

Mr. HALVORSON. Into the future. Well, I am using the argument of the people who argue for tax reduction, in saying that reduction in taxes would encourage capital formation at this time. I would say, just following that same argument, let us leave the taxes where they are, and then as we reduce taxes in the future that would encourage capital formation.

The CHAIRMAN. Do you or do you not accept that theory?
Mr. HALVORSON. Yes, I do. I accept it.

The CHAIRMAN. It is a question of time, as far as you are concerned?
Mr. HALVORSON. Yes. It is a question of time.

The CHAIRMAN. How much time do you anticipate between the date of the tax reduction and it full effects on our economy? How much time do you figure elapses?

Mr. HALVORSON. As far as purchasing power, that I think is rather direct, because there are a lot of people now whose taxes are withheld and if reduced taxes go into effect tomorrow they would get more money in their pay checks this week, or in 2 weeks, or in a month or how they are paid.

In terms of capital formation I think it would be slower. It might probably take 6 months before the businessmen would feel that they could go ahead and feel more sure of a promising outlook for business. The CHAIRMAN. As far as the relation of reduction to things other than immediate consumption of consumption goods is concerned, there definitely is a time lag, is there not?

Mr. HALVORSON. Yes, sir. I would say there is definitely a time lag between business deciding to go ahead and expand the plant from an impetus of lower taxes.

The CHAIRMAN. You cannot turn it off and on like a light switch, for example.

Mr. HALVORSON. No.

The CHAIRMAN. You cannot wait until the need is on you, and then pass a tax-reduction bill and expect the benefits to flow immediately. Mr. HALVORSON. No. But on that point I do not think there is any indication that within 6 months or a year, or even a year and a half, that there will be an appreciable dropping off in capital formation. We think we could wait. Eventually we would favor a tax reduction. The CHAIRMAN. In my personal opinion I think the evidence here makes it very clear that there is no private contribution to equity capital at the present time. So your theory necessarily bases itself on the proposition that the corporations have enough reserves to keep the thing going, and that it is desirable that they continue to finance themselves by incurring indebtedness rather than by equity operations.

Mr. HALVERSON. They do have a tremendous volume of liquid assets, and from year to year they build up funds for new capital through the depreciation reserves and retained earnings, and, of course, they can borrow, too.

The CHAIRMAN. The borrowing of money for plant expansion, whether by indebtedness financing or by raising equity money does not make any difference as far as inflation is concerned.

Mr. HALVORSON. Yes. Credit expansion is inflationary, but we say that if you want to fight inflation let us keep taxes where they are.

The CHAIRMAN. I understand that. If I borrow a thousand dollars to add a piece of capital equipment to my plant, I am going to market and buy that capital equipment. The effect on inflation is just exactly the same as if I issued a thousand dollars' worth of stock and spent the thousand dollars for the same purpose, is it not?

Mr. HALVORSON. If I saved the money in order to invest in capital stock, that kind of an investment is not as inflationary as if the businessman goes to the bank and borrows, which creates new money. The CHAIRMAN. That creates new money?

Mr. HALVORSON. Yes.

The CHAIRMAN. So that is an inflationary process?

Mr. HALVORSON. Yes, sir.

The CHAIRMAN. And that is the way business is getting its money, is it not?

Mr. HALVORSON. To a considerable extent.

The CHAIRMAN. Where it is now providing out of its own reserves? Mr. HALVORSON. Yes. It is inflationary. We agree with that and we agree with measures to prevent credit expansion as one way of fighting inflation and also maintaining present tax rates to fight inflation.

The CHAIRMAN. Has it come to your attention that the bankers of the country and the debtors of the bankers are already very much disturbed over the possibilities of credit contraction?

Mr. HALVORSON. I thought that a lot of them feel that credit contraction would be a good way of fighting inflation. I know that the housing fields, for example, they say that there is some shortage of money there, but that might be a good thing, a good way to get the prices of housing materials down, which are too high.

The CHAIRMAN. Maybe I misunderstood you. Do you believe that credit contraction is a method of fighting inflation or is it not? Mr. HALVORSON. I believe it is a method of fighting it, yes. I believe that credit contraction is a way of fighting inflation.

The CHAIRMAN. Do you remember what happened in the 1920's as far as agriculture was concerned, as to unwise credit contraction?

Mr. HALVORSON. Yes. It was not only due to credit, however. I studied that. It was also due to the falling off in the export demand of farm products.

The CHAIRMAN. You know what the immediate result was as far as credit operations were concerned?

Mr. HALVORSON. The farmers could hardly get any credit. We have improved that considerably since that time with the Federal land banks, and other institutions.

The CHAIRMAN. But if you take out the credit base for these credit institutions they necessarily must contract the credit.

Mr. HALVORSON. I do not know how you would take out the credit base. The Federal Reserve System creates excess reserves by going into the security markets and buying Government securities or in some other way to increase excess reserves to the bank.

The CHAIRMAN. There are other ways of contracting the credit of banks. You can regulate their credit margins. Another is that you can take indebtedness, Government bonds, out of the Federal Reserve System.

Mr. HALVORSON. Yes. It is within the scope of the powers of the Federal Reserve to increase excess reserves of member banks thus giving them more base to expand credit.

The CHAIRMAN. Do you believe that they can do that?

Mr. HALVORSON. Yes.

The CHAIRMAN. Assuming that they can, do you think they should? Mr. HALVORSON. In the event of a depression or any indication of a downward spiral, I would say "Yes."

The CHAIRMAN. I suspect that we are talking of two different things. Mr. HALVORSON. We have studied this considerably, the farm organizations. We have given considerable thought to it because of the importance, as our members realize, of fiscal policy to national economic stability to their own welfare.

The CHAIRMAN. I may say that I have seen results of a poll taken among farmers by one of our Senators, which showed that the farmers in his State, assuming that the poll is representative, are 3 to 1 for tax reduction.

Mr. HALVORSON. We have a lot of farmers in our organization, over 800,000 of them, members, Grange members, and in our convention there was not a single bit of sentiment expressed on the floor for tax reduction.

The CHAIRMAN. Do you feel that you are competent to say right now how much debt retirement we should have every year?

Mr. HALVORSON. I would say that we should have as much as we can, without causing a deflation to such an extent that production and employment falls off.

The CHAIRMAN. Are you prepared to say, for example, that the Government could put its entire surplus of 1948, of seven and a half or eight billion dollars, into a debt retirement between now and the

end of the year, without severely contracting the credit base of the country?

Mr. HALVORSON. There would be some contraction. We think it would be a good thing, while inflation is our problem rather than deflation. At the appropriate time when indications are definite that prices were stabilized, or any indication of falling off in the demand of production or employment, that would be the time to come in with a tax reduction. In our testimony here we do favor a tax program which would go into effect, when and if conditions, as we indicate, would develop.

The CHAIRMAN. I suggest to you that our fiscal experts in the Government are wondering right now as to whether they have not been retiring too much debt too rapidly.

Mr. HALVORSON. I did hear part of Secretary Harriman's testimony and he still felt that inflation was our major problem, if I understood his testimony right.

The CHAIRMAN. As I understand it, among Treasury officials there is a definite feeling that perhaps greater caution should be used in the rate of retirement of public debt.

Mr. HALVORSON. That may be the Treasury's viewpoint.

The CHAIRMAN. As far as your governmental expenditures are concerned, what is the difference, as far as inflation is concerned, between when the Government spends money and when the citizen spends it? Mr. HALVORSON. I would say it might be more inflationary if the income goes to the Government to spend than if it goes to the citizen to spend. That is for Government expenditures I am talking about

now.

Taxes that go to budgetary surplus are an entirely different thing than taxes that go into governmental expenditures as I pointed out in my testimony.

The CHAIRMAN. Are you suggesting to the committee that we should maintain the present rate of taxes and apply all surplus to the reduction of debt?

Mr. HALVORSON. That is right. And we favor as much governmental economy as possible to make that surplus as big as possible.

The CHAIRMAN. Would you take the debt out of the hands of the citizen, out of the hands of the bank, or out of the hands of the Federal Reserve System?

Mr. HALVORSON. I would take them particularly out of the hands of the commercial banks to reduce the volume of money. If there was an actual shortage of equity capital, as I have heard said, not only this morning but other places, it might be wise to pay off some of the bonds held by the people who might use it to good advantage for equity investment.

But as I have indicated before, I think it is more important to fight inflation than to get a lot of people bidding for scarce supply of this producers equipment.

The CHAIRMAN. What happens when the Government takes a bond out of the portfolio of a bank?

Mr. HALVORSON. There is a reduction in the demand deposits.
The CHAIRMAN. Does the Government pay for it?

Mr. HALVORSON. Yes. It pays for it out of taxes.

The CHAIRMAN. Does that not put that much money in the bank? Mr. HALVORSON. What happens, if the Government taxes me $100, it transfers that $100 from my checking account to the Government's checking account, and the Government in turn says now we will call it even, write off a hundred-dollar bond that that bank has, and cancel the deposit that is credited to the United States Treasury.

The CHAIRMAN. But if the Government taxes John Doe $100 and buys a hundred-dollar bond from Richard Roe, private citizen, what is the net effect?

Mr. HALVORSON. I did not get all that. I am sorry.

The CHAIRMAN. If the Government taxes John Doe $100 by income taxes, and then the Government buys a bond from Richard Doe for $100, thus it has retired $100 of bonded indebtedness. But what is the net effect so far as inflation is concerned?

Mr. HALVORSON. If it pays off a bond held by an individual it would be a very slight effect on the inflationary situation. It would only mean that the first individual does not have the bond to insure his security, and he might be a little bit more careful about his expenditures. It would be very slight. It would be an effect on his rate of savings, individuals who were taxed, you might say.

But the fellow who got the bond might go out and increase his consumer expenditures, or he might go out and invest in equities.

The CHAIRMAN. By taxing John Doe you take a hundred dollars out of his pocket, and you have decreased his savings to that extent. When you buy from Richard Roe you increase his saving or spending capacity by $100.

Mr. HALVORSON. That is right. You have converted his Government bond into cash.

The CHAIRMAN. Now, let us go to the bank. The Government buys a $100 bond out of the portfolio of a bank. The bank gets $100, and the Government gets the bond. Right?

Mr. HALVORSON. It amounts to a transaction where the $100 deposit of the Treasury is just canceled against the bond on the asset side held by the bank.

The CHAIRMAN. The bank has $100 in cash which it did not have before. Is that not right?

Mr. HALVORSON. No. It is simply a cancellation procedure. The bank has actually less deposits, demands deposits, after the transaction than it did before.

The CHAIRMAN. It has a $100 bond in its portfolio to start with, in its investment portfolio.

Mr. HALVORSON. Yes. But in the first place you have to remember that you tax the individual who has a deposit in the bank by $100, transferring that to the Government checking account, which is then just simply a cancellation across the board of the bond on the asset side of the bank, and the deposit side held by the Treasury on the other side in the bank ledger.

The CHAIRMAN. And the money that the bank receives for the bond is thus a base for additional credit, is it not?

Mr. HALVORSON. The bank does not really receive any money because it simply was a transfer in the first place from one of the depositors of the bank to the Government, and after the Government has it, it is simply a cancellation across the board. It is just a trans