To be sure, this still is far from 99.44 percent pure depreciation but we have been at paper-money finagling only about half as many years as the French. Nonetheless, in that time the cost of living has more than doubled. It has been enough, according to the responsible and authoritative Dr. Walter E. Spahr, to reduce the value of the great pools of American savings 56 percent since 1939. The figures in table 1 are grimly awesome if not utterly frightening.

TABLE 1.-Loss in purchasing power of selected pools of savings—1939 to 1956 [Billions of dollars]

Source: Losses in Purchasing Power Arising From Our Depreciated Dollar, Economists' National Committee on Monetary Policy, 1957.

This is the process which Andrew Dickson White, in his timeless work, Fiat Money in France,' written in 1876 at the time of the upsurge of the American Green-Back Party, characterized in this succinct manner, "So came upon the nation the obligation of thrift."

This referred, of course, to the unlimited issue of the assignats of the French Revolution, 1789-96, but it applies quite as well to the French of today, and, to our sorrow, to us also. In the end, the assignats depreciated to nothing and some 45 billion of them were repudiated when Napoleon Bonaparte took over and set up the government policy of "Pay cash in hard money or don't buy."

This experience of revolutionary France is instructive. Then, as now, the paper money policy was attacked and it was defended by some of the most astute men of the times. The revolutionists were not wanting in brains; the Assembly of the times included such bankers as Necker, du Pont de Nemours, Savarin, and others as able, if not so well known to history. Witness the following defense of paper money irredeemable in gold as described by Dr. White:

"In speeches, newspapers, and pamphlets about this time, we begin to find it declared that, after all, a depreciated currency is a blessing * **the laws of political economy, however applicable to other times, are not applicable to this particular period *** that the ordinary rules are not suited to the free and enlightened inhabitants of France at the close of the 18th century; that the whole state of things (issues of irredeemable paper money), so far from being an evil, is a blessing."

FULFILLING A PROPHECY

As then, so today. For the most recent example, one needs only to read the persuasive case made out by Prof. Sumner Slichter in the September-October 1957 issue of Harvard Business Review.

Says Professor Slichter in part:

"In this article, I shall examine briefly, ** "The economic gains that seem to be beyond our reach unless we accept a limited amount of inflation.' What are the benefits that can be obtained only at the cost of accepting creeping inflation? "1. Creeping inflation is a normal result of many changes of resources from some industries and places to others that are characteristic of a dynamic economy.

"2. Creeping inflation is a necessary cost of achieving a steadier growth of production and employment.

"3. Creeping inflation is almost certain to be part of the cost of success in achieving rapid technological progress.

"4. Creeping inflation is a part of the price that the community must pay for the advantages flowing from a vigorous and dynamic trade union movement." This approach is a part of the process of history repeating itself; as Dr. White described and prophesied long ago, "*** we begin to find it declared that, after all, a depreciated currency so far from being an evil, is a blessing." Professor Slichter fulfills that prophecy.

For a full appreciation of the reasoning behind the noted Harvard economist's views, one must read in full his article, largely a refutation of the (onservative

1 Republished, 1933, D. Appleton Century Co., New York.

fiscal views of Neil H. Jacoby, dean of the University of California Business School and a former member of the Council of Economic Advisers, and C. Canby Balderston, Vice Chairman of the Federal Reserve Board. The war is on between the fiat money proponents and the defenders of the faith in fiscal soundness.

WEIGHT OF HISTORY

The weight of history is against the paper-money advocates. Sooner or later any deliberately depreciated currency must be repudiated and with its repudiation often goes the destruction of the nation. What happened to the Greek owl (Athenian tetradrachma) and to the Greeks? And so also with the Romans. For two and a half centuries before Christ, the Roman silver denarius was the standard of the then known world, its purity and weight unimpaired. And then came Nero, depreciating and mixing it with copper, first 10 percent, then with Trajan, 20 percent and ultimately by the time of the Emperor Elagabalus, the coin was a mere token and was repudiated.

Nor did the Roman goid aureus avoid the same fate for the same reasons. From the time of Nero to that of Constantine its gold content diminished until it would no longer pass except by weight. But long before Constantine, certainly as early as Diocletian, Rome ceased to be the commercial and political pivot of the ancient world.

In desperation, the Romans finally (about 360 A. D.) declared gold to be the only legal tender for the payment of debts. But it was too late; what funnymoney began the barbarians finished at Adrianople when the recently invented saddle stirrup freed the two hands of their mounted bowmen to ride around and shoot down the famous legions.

From then until now, including John Law, the South Sea Bubble, the Tulip Mania, and all the other numerous experiments with irredeemable currency, the end invariably has been disaster. The weight of history is against the inflationists.

POVERTY IN STATESMANSHIP

But the inflationists always have on their side one ally which the statesmen of nations seem unable to vanquish. It is the comparatively long time required for money depreciation to reach the explosive stage; it is the very fact that inflation always proceeds in the growth stage at an apparently creeping speed.

Thus, statesmanship has found no permanent method for preventing creeping inflation. Small wonder that politicians, when the creep has become a canter and then a gallop, have been unable to halt it short of the brink of fiscal collapse. For instance:

The average rate of price advances, 2.4 percent yearly, seems altogether insignificant. Continued for a few years, it appears to bring prosperity, full employment, and gratifying higher values. Its virtues are praised in the highest sources and at times national leaders deliberately set out to bring about price advances. It has been only twenty-odd years since we heard dulcet tones by radio saying. "We intend to raise prices, if not by one means, then by another. But raise them we will."

This was in 1933, when the consumer price index stood at 55 and that of wholesale prices at 50. Today with both indexes far more than doubled, one might possibly hear a ghostly whisper, "My friends, I seem to have overdone the thing." But the time is not yet when the explosive phase of our current inflation can be foreseen. When that stage is reached, then everyone rushes from currency into goods, and prices skyrocket until the system collapses. Germany went through this in 1921-22 and again in 1945-48; the French are now close to the same end. But we, of course, "have built-in stabilizers and it can never happen here."

BUT THESE ARE SIGNS

The valiant and thus far somewhat successful effort of the Federal Reserve authorities to halt inflation probably cannot do much more than limit credit expansion. But credit expansion, we think, may not be sufficient today as once it was. There is at present a huge source of inflationary purchasing media in existence over which neither the Federal Reserve, the banks nor the Treasury have the slightest control.

We refer to the $27 billion in currency outside of banks. Most of it lies unused, hoarded if you like, in sugar bowls and mattresses. Most of it never enters the market, at least as yet; if it did, it would begin to appear in bank statements as cash on hand. Where the banking system in its entirety has in the vault only some $3 billion, the people have at home nine times as much that cannot be reached until they choose to spend it.

What has all this to do with the "explosive stage" of inflation?

Only this, in our opinion, if and when the holders of this huge hoard of cash money believe that it is worth less than goods, some or all of these $27 billion will come to market. As an indication of what can happen to prices, one can refer back to the beginning of the Korean war in 1950-at that time cash outside of banks dropped approximately $3 billion in less than a year and prices soared. Not the only influence on prices then but a significant one. The imagination can picture what would occur if 10, 15, or 20 billions of this great idle hoard were to come suddenly into the market seeking goods. That would be the "explosive stage."

An even greater source of new purchasing power likewise exists. Currently outstanding are some $55 billion of cashable savings bonds. The Government is bound to redeem them in cash, virtually on demand, at the option of the holders. If a guess might be risked as to the approach of the "explosive stage," it would be this: watch for a shrinkage and especially an accelerating shrinkage in these two widely published indicators, "cash outside of banks" and "savings bonds outstanding." For instance, as an experiment, note the changes in these two uncontrollable engines of violent inflation, reported in the Department of Commerce's monthly Survey of Current Business for August 1957; these figures permit a comparison of June this year and last year. And what do we find? The shrinkage in savings bonds (due to the excess of redemptions over sales) in a single 12-month period is $2.9 billions; the shrinkage in "cash outside of banks" was a half-billion dollars. Thus, nearly $3 billion of inflationary purchasing media went to work in the markets in a single 12-month period, an average of just under 300 million a month.

One can do worse than to watch the months ahead to see whether or not this monthly rate accelerates or otherwise. If it does accelerate, it can hardly be less than significant of some flight from the dollar into goods.

At least one economist uses as an indicator of the approach of the "explosive stage," the price of silver per ounce in New York. This indicator has been rising at roughly 3 percent yearly compounded over the past 20 years and is now slightly above 90 cents. The observer cited believes that when silver passes the "melting point" of the dollar, namely $1.30 an ounce, the last stages of the inflation will be upon us. At the 3 percent average rate of advance that critical stage would be reached about 1968–70.

So, we are not without signs that are indicative if they cannot be taken yet as conclusive. They are worth watching.

A SINGLE OMISSION

In the current conflict between the inflationists and the sound-money advocates, the latter have yet to take full advantage of what is going on over most of the world, Russia included. Pick's Yearbook has for years marked the steady deterioration of virtually every currency. Here and there a few leading banks cite the degree by which the currency of this and that nation has been depreciated. The newspapers speak fleetingly of "devaluation" and "readjustments"; virtually none recognize the process for what it is, a continuous expropriation of the accumulated savings of citizens.

And, more's the pity, none of the financial editors took note of the achievement of the French in reaching "99.44 percent pure" depreciation.

It is a singular omission. The American people could learn from it if they but knew it. And Americans do learn when they have the chance, and do not always choose the hard way to do it. Therein lies the hope of a return to fiscal sanity.

The CHAIRMAN. Our next witnesses are Mr. Lentz and Mr. Dohan. Do both of you desire to testify, or just one of you?

Mr. DOHAN. We thought, sir, that we would divide up the work, and I would testify as to subchapter K report and Mr. Lentz as to C and J.

The CHAIRMAN. Will you both, then, identify yourselves for the purposes of the record by giving your names, addresses, and the capacity in which you appear.

STATEMENTS OF BERNARD V. LENTZ AND DAVIS H. W. DOHAN, PHILADELPHIA BAR ASSOCIATION, PHILADELPHIA, PA.

Mr. DOHAN. My name is Davis Dohan, of the Philadelphia bar, and I am appearing here on behalf of the Philadelphia Bar Association. Mr. LENTZ. My name is Bernard V. Lentz, also appearing here on behalf of the Philadelphia Bar Association.

The CHAIRMAN. You gentlemen may have seats if you desire.
Mr. DOHAN. Thank you, sir.

The CHAIRMAN. Mr. Dohan, you will testify first?

Mr. DOHAN. Yes, sir.

The CHAIRMAN. You are recognized.

Do you

committee?

have a statement for the benefit of the members of the

Mr. DOHAN. A statement was filed with the committee secretary this morning, sir.

The CHAIRMAN. You may proceed.

Mr. DOHAN. In reporting on subchapter K, the committee of the Philadelphia Bar Association wants to state that it thinks the advis ory group has done an admirable job. In our reports which we have filed, we make two minor comments. I would like to confine my remarks here this morning to the effective date problem, which the advisory group did not cover in its report.

This problem is a real curve, because it has many ramifications throughout subchapter K. Under the proposed amendments to subchapter K, notably those dealing with section 754, election to adjust basis, the provisions with regard to death or withdrawal of a partner

under section 736, and also in connection with section 751, these considerations raise a number of problems.

Because of the intricacies of this subchapter and the interplay of the various sections upon each other, the committee feels that generally speaking, the proposed amendment should be effective prospectively only, and with respect to taxable years beginning after the date of their enactment. There are, however, two particular features which merit comment.

The first is that under the advisory group proposals, the present section 754 election would be split into two parts, one covering distributions and the other transfers, and a taxpayer could elect one without the other, which is not true under the present law.

The committee of the Philadelphia Bar Association recommends. that this privilege be accorded all partnerships who have elected to adjust basis under section 754 of the present law, and thus put all partnerships on the same footing.

The second situation that merits special comment is that concerned with existing arrangements relating to payments and distributions on death or withdrawal of a partner under section 736.

The effect of the proposed amendments is such that these arrangements would be very seriously affected, and there would be considerable difficulty encountered by partners who have perhaps hammered out a partnership agreement with great difficulty, to renegotiate their partnership agreements.

The committee therefore believes that the amendments to section. 736-and this will carry with it section 751 as amended, also, where section 751 assets are present-should be effective only as to those cases where the partnership agreement is entered into or modified after enactment of these proposed amendments.

The reason for that is this: Under the proposals under section 751, the basis of so-called section 751 assets will carry over to the distributee partner. Under present law, there is a sale or an exchange. But under the proposal there will be a carryover of basis with the income tax consequences going with it. A partner may thus find himself with inventory assets having a zero basis or a very low basis, and all the income tax attributable to those assets, even though part of it really belongs to his partners or former partners.

Partnerships are not aware of this problem, in the committee's opinion, and should be given an ample opportunity to rearrange their partnership agreements to coincide with the proposed changes.

The comments of the committee in connection with the advisory group's report, other than the effective date, deal only with section 705, which is the basis of a partnership interest. Under that proposal, the present alternative and simple rule becomes the general rule, and anyone contending that the more complicated rule should be applied is to have the burden of proof. The committee report so states.

But the proposed statute does not so state, and we recommend that that be made explicitly clear in the statute itself.

The other comment deals with section 751 (b) of the present law and section 751 of the proposed, in which the advisory group recommends that if the parties so desire, they can use the sale and exchange theory of the present section 751 (b). That option is not expressed in the statute, and the committee believes that it is a meritorious sug