time. I refer to the profits made by the manufacturers of munitions of different kinds that were sold to the allies before we entered the war. We had a vast sum accumulated in the way of war profits-a sum which, I think, was unique in the history of the world.

Mr. LONGWORTH. Do you mean excess profits or war profits? Mr. MARSH. War profits. I said war profits, because since going into the war we have had excess profits, but before going into the war we had war profits.

Mr. LONGWORTH. I simply asked that because awhile ago you indicated a comparison between the amount of war profits and the amount of excess profits taxed here and, of course, there is no real relation between the two things.

Mr. MARSH. They are on a different basis. Now, as I said before, we ought to recognize the danger of inflation. You know how prices are being inflated, because it is inevitable where we have large loans, and that is a serious menace to the working people of this country Have you not felt that the country's situation is very serious? Mr. LONGWORTH. Because of inflation?

Mr. MARSH. Yes, sir. In England they have gone further, as I understand it, although I have not been able to get any final figures or definite statement, but I think they have gone further in England than we have gone with the program that we have initiated for regulating profits.

Mr. LONGWORTH. I was only speaking about the relative proportion of bonds to taxes.

Mr. MARSH. I am speaking of the regulation of prices.

Mr. LONGWORTH. I was speaking of an inflated currency.

Mr. MARSH. That is what I am talking about, because that is connected with the question of the inflation of prices. I think that England intends to make up a program now, and, as I understand it, it is now being initiated, for the regulation of prices right straight through to the consumer. We can not leave any leaks between the consumer and the producer.

Mr. LONGWORTH. Nevertheless, if England can finance the war in the proportion of 75 per cent by bonds and 25 per cent by taxation, it represents a higher relative proportion by taxation than any other European country has ever had.

Mr. MARSH. But England is now suggesting that the English Government should levy a big capital tax at the close of the war. I think that is inevitable in every country that is engaged in the war. I think that private capital is going to be put right into the hopper of public needs at the close of the war and that private property will have what is left after the Government pays its bills. That is the program of the British Labor Party and that is the plank that has been incorporated in their platform. I think that our proposition that we should have a heavy tax on incomes and excess profits is wiser than a system of taxation that would necessarily involve the unscrambling of property. When the Government calls upon you to give something equivalent to 20 per cent of your property it means that you must sell something.

Mr. HAWLEY. I want to read to you an extract from a speech by Mr. Bonar Law upon the German situation and the difficulty that

they have been having in raising revenues to finance the war.

says:

He

But there is something else in connection with their taxation worthy of note. With the exception of the increment war tax, to which I have referred, scarcely any of the additional revenue has been obtained from the wealthier classes in Germany. Taxation has been indirect and on commodities which are paid for by the masses of the people. The lesson to be drawn from these facts is not difficult to see. The rulers of Germany, in spite of their hopes of an indemnity, must recognize that financial stability is one of the elements of national strength. They have not added to their financial stability. The reason, I think, is largely psychological. It is, in the first place, because they do not care to add to the discontent by increased taxation all over the country; but it is still more due to this, that in Germany the classes which have any influence on or control of the Government are the wealthier classes, and the Government has been absolutely afraid to force taxation upon them.

Mr. MARSH. God grant that our Government may profit from their terrible experience.

Mr. GREEN. Mr. Longworth spoke of the percentage of revenues raised in England by taxation. You are aware of the fact that many financial authorities in England think that a great mistake has been made in that regard, are you not?

Mr. MARSH. They say that law should have been on a fifty-fifty basis. That is what the British labor party has been urging. Mr. GREEN. I mean the higher financial authorities.

Mr. MARSH. I know that; yes, sir.

STATEMENT OF MR. A. F. THOMAS, OF LYNCHBURG, VA.

Mr. THOMAS. Mr. Chairman and gentlemen of the committee, my name is A. F. Thomas, and I am a resident of Lynchburg, Va. I am interested in manufacturing.

I

The CHAIRMAN. What kind of manufacturing?

Mr. THOMAS. In the manufacture of wagons. I desire to appear here, however, in a more important rôle than that of manufacturer. am an American citizen, and my remarks, if the committee will be kind enough to follow them, I think, will absolve me from any purpose to appear in behalf of any special interest in this matter. further wish to place before the committee as clearly as I may the statement that I have no purpose in appealing to them on the ground of authority, because in the views I shall express I represent no one but myself. I take it that this committee is composed of loyal patriotic American citizens who want to arrive at the best solution of the difficult matter that it has in hand and that its actions will not be decided by precedent or influenced unduly by authority, and that it will exercise its own good judgment, its common sense, its loyalty and patriotism in arriving at a conclusion and in embracing it as the thing that should be done. It is in that capacity and in that spirit that I appear before your committee to-day. In the discussion of economic questions, the bypaths that lead off are innumerable, and as the experience of the preceding witness will confirm, we may become diverted if we undertake to discuss the matter as between the witness and the committee, and leave aside the gist and of the thing that should be made most prominent. The CHAIRMAN. Do you have your statement prepared?

germ

Mr. THOMAS. Yes, sir; and I want to ask that I be permitted to read it.

The CHAIRMAN. I suggest that you read it through, and if any member desires to ask any questions, he may ask them when you have concluded.

Mr. THOMAS. I thank you very much, Mr. Chairman. You anticipated the request that I was going to make of the committee. I will ask also, Mr. Chairman, that members of the committee make a note as I go along of any particular questions that they may desire to discuss with me further when I have finished my statement. The CHAIRMAN. You may proceed.

Mr. THOMAS (reading):

The highest duty of the American people is to win this war. The death struggle between soul-giving democracy, functioning under and in accord with moral law and autocratic materialistic power, recognizing only the jungle law of the tooth and claw, is now taking place. The result will determine whether mankind shall climb to higher planes as the ages pass or shall descend precipitately into the abysmal depths from which it came in the thousands of years of struggle and suffering that make up the sum of human experience. The time for compromise or accommodation has passed. There is no longer room in the world for these two contending forces. The one must conquer and subjugate the other. We have taken our position. Our lives, our fortunes, and our sacred honor are pledged to the support of the first and to the destruction of the latter. Neither sacrifice of material interest nor dread of loss of life itself must weaken our resolution-that moral law shall be the supreme governing force and that under it the world shall be free. It is in this spirit that we should approach the subject under consideration. We should divest our minds of selfish consideration, and our highest purpose should be to enact revenue legislation that will most fully support the main object in view. The methods adopted should be those that will keep production as near as may be at its maximum efficiency.

PRESENT PRODUCTION ALONE AVAILABLE.

War needs can not be supplied from future production. It is absolutely impossible for the Government to feed its armies on wheat and potatoes that are to be produced in the succeeding years, neither can it clothe them with the wool that is to grow on the sheep that are not yet born. There is no such thing as imposing upon future generations the burden of furnishing the sinews of war. War supplies must be furnished by the people who are living, working, and producing now.

The Government has two principal methods of getting its supplies-the one by taxation, the other by bond issue and both of these sources of support go to the same market to secure the things needed; that is to say, they purchase the things that are in existence now. The difference between the two methods of financing the purchases is that taxation is a final adjustment between the Government and the individual, while the bond-issue method leaves the Government the task of collecting from private debtors and paying the amounts due private creditors when the due date arrives. In other words, the one makes the individual pay as he goes, while the other puts him in debt for the purchase of nonproductive things.

If I may, I would like to develop that further in an explanatory way. A Government bond is not a Government debt. The transaction is one under which the whole people of the Government become debtor to a part of the people of the Government, and the relation of the Government to it is purely that of an intermediary. The Government simply takes money from all the people when the due date arrives to pay the part of the people who hold the obligation. In that connection we will observe that if the tax which the Government collects is properly adjusted every man who buys a bond

is theoretically obliged to remit a part of the bond when he accepts payment for it, because as one of the taxpayers he pays his part of the contribution. [Reading:]

It is manifestly desirable that the war expense should be paid, so far as practicable, from the proceeds of general taxation, apportioned as nearly as may be uniformly, so that the burden will be equitably distributed. The measure of uniform taxation should be the maximum which the weaker classes could reasonably be called upon to pay.

In the imperfect state of social development in which nations find themselves to-day uniform legislation is sometimes impracticable, and even undesirable, since the uniform condition upon which it should rest does not exist. The perfect tax system has not yet been developed, and whether the money is raised by taxation or bond issue the most that can be hoped for is an approximation of the distribution of the burden between individual taxpayers as nearly as may be in accord with the demands of justice, which would seem to require the surrender by every taxpayer of the same percentage of his products for the use of the State in order that it may be enabled to perform a common service. In the matter of taxation, owing to the unequal distribution of wealth, the basic principle may require a graduated scale for individual incomes, while the vital question in the bond-issue method is to preserve a stationary standard by which the public will be required to repay the same amount of products that it borrowed from the bond buyer.

Assuming that capital is entitled to a return for its use the interest paid discharges this part of the obligation, and all that the lender is entitled to receive, as a matter of equity, is the same quantity of products or their equivalents that he originally loaned. A serious objection to bond sales is that the public must borrow in a period of tremendous inflation, while pay day will likely arrive in a period of great deflation. Hence the public may borrow a hundred bushels of wheat, issuing $225 bonds for it, but when they come due these same bonds, owing to decline in the market price of products, will command 100 bushels of wheat, which gives to the lender the interest on his investment, the repayment of the full product that he loaned, and 100 per cent additional. It does not appear unreasonable, in view of the colossal public debt that the nations are piling up, that an adjustment based upon the average price of products both at the times of the contraction of the debts and the times of the payment of them will be not only equitable and advisable but imperative. This phase of the subject is referred to here, not for the purpose of dealing with it constructively at this time, but merely to show that there is real cause for the objection to paying for the war by unlimited bond issues. Due weight should be given this matter and proper consideration shown those who for this reason are insistent that the greater part of the expenditures of the war should be met by taxation. It is well, however, to keep in mind that judgments based on partial facts are unsafe. While, as already pointed out, there are unreasonable objections to bond issues, we must likewise concede that there are also potent objections to excessive taxation. The safer ground will be found in dividing the sources of revenue between taxation and bond issue. It has been suggested that the proportion be 40 per cent taxation and 60 per cent bond issue, and doubtless the Congress will be able to approximate the correct division.

When the part to be raised by taxation is ascertained the methods of accomplishing the purpose with the least possible harm become matters of prime importance, and it is to this phase of the subject that I desire to invite the committee's attention.

THE ECONOMIC SITUATION.

While assessment both of material and liquid values would show that the United States is richer to-day than ever before, this increase is largely imaginary. It partakes of the nature of the limitless wealth of some crazy Monte Cristo, who in his padded cell vainly imagines himself the owner of the universe. The psychology of such periods is always interesting and even ludicrous when the seriousness of the final effect is not considered. Whether this inflation of values comes as the result of rag doll paper money inflation or the general expansion of credit for destructive purposes the results are the samea rise in nominal values and a decrease in actual wealth. In such periods general waste assumes command and disruption of relative values follows,

necessitating incessant readjustments in the attempt to reestablish the proper ratios-the debtor robs the creditor, wages, salaries, and fixed incomes decrease in purchasing power, and general exhilaration on account of a supposed increase of wealth supervenes. The disorganization that results necessarily increases risks and the percentage of profit increases to cover them.

THE INCREASE OF PROFITS.

Once begun, the fever to get as much as possible seizes the public mind, and an era of profiteering is ushered in affecting everybody from the bootblack to the financial magnate. It is as useless as it is unjust to undertake to select a particular class as the horrid example of the conscienceless and unpatriotic profiteer. The humble laborer who does his bit in getting his wage raised from $1 per day to $7, the small corner grocer who keeps busy marking up his goods to the limit, the wayside innkeeper who patriotically follows the advice of Mr. Hoover to conserve food by reducing by half the portion and at the same time doubling the price, the poor farmer upon whose shoulders the burdens of civilization have weighed so heavily in the past imbibes that hope that springs eternal and who proceeds to get all he can for his products, that quintessence of patriotic fervor, the dollar-a-year industrial magnate who offers his valuable services upon the altar of his country with apparently no objections to a few large contracts to be sent to his former associates merely as a token of remembrance, are all doing what they can to avail themselves of the present opportunity, if for no other reason, to provide a surplus against the evil day that even a novice knows must come when the inevitable reaction takes place. The fault is not primarily personal. It is the result of a defective economic system that can not function normally under the severe strain that such conditions produce. The defect is inherent in an economic system that requires individual initiative and private assumption of risk.

Price regulation and taxation may mitigate the evil, but they can only effect a cure by killing the patient. Doubtless large profits have been made during this war, and they will likely continue to be made whenever disturbed conditions exist, but it is not altogether so bad as surface indications would lead us to believe. When we consider that our money in circulation has increased two billions-about 60 per cent in four years-Federal Reserve notes from one hundred and eighty-seven million to one billion five hundred millions, our circulation per capita from $34 to $50, national debts of the world from forty-three billions to one hundred and sixty-one billions, uncovered paper in the principal countries from two billions eight hundred millions to nineteen billions five hundred millions, and money in the principal countries from thirteen billion six hundred millions to thirty-one billion five hundred millions, and compare it with the production of actual wealth expressed in bushels, pounds, etc.-corn from two billion four hundred million bushels to three billion one hundred million bushels, an increase of about 30 per cent; wheat from seven hundred and sixtythree million bushels to six hundred and fifty million, a decrease of about 14 per cent; coal from five hundred and eight thousand tons to five hundred and eighty thousand, an increase of 14 per cent; copper, five hundred and forty-six thousand tons to eight hundred and forty-three thousand, an increase of 35 per cent; iron ore from fifty-nine million tons to seventy five million tons, an increase of 25 per cent; and petroleum about 40 per cent increase in gallons. And when we further consider that the real wealth produced is being largely devoted to destructive purposes, and, therefore, being consumed more wastefully and more rapidly than in normal times, we must conclude that the increase in the nominal amount of credit instruments has been out of reasonable proportion to the amount of increase of actual wealth, and therefore the nations have embarked upn a sea of inflation which is uncharted, and, as the price index shows, the commerce of the world is being done by guess.

Present profits, invested as they must be in inventories at inflated prices, when the bubble bursts, as in time it must do, will shrink to an alarming extent. Measured by the purchasing power of real wealth to-day these nominal profits would be reduced half. Final judgment, if it is to be just, can not be rendered until the cycle is completed and all the evidence is in. The ascending period is now in process, the descending is yet to follow. It might be well to remember that to be punitive the pains of sin must exceed its pleasures. The reasonable supposition is that during the orgy of inflation, with its fool's paradise of apparent prosperity in which the world is now indulging itself, wealth will be dissipated to a large extent, and when the tide turns we will find a