Secretary McADOO. Yes.

Mr. SLOAN. Then although it might be regarded by the Congress as absolutely necessary to make these loans, yet the Secretary could refuse to lend a single dollar-I am now simply talking about your jurisdiction, and not what you would or would not do.

Secretary McADOO. He has the power, with the approval of the President, to determine whether a loan within the limit imposed by Congress shall or shall not be made or whether it shall be made in part or in full.

Mr. SLOAN. I am now talking about the jurisdiction of the Secretary, and the point I want to emphasize is that although this Congress should authorize the $5,000,000,000, $4,000,000,000 now and $1,000,000,000 already authorized, and although it was deemed by the Congress as an absolutely necessary war measure, yet it depends upon the discretion of the Secretary, no matter how many applications are made, whether one dollar of the money shall enter into the processes of the war or not?

Secretary McADOO. Yes; as to whether it shall be lent or not and how it shall be apportioned among the powers is left with the Secretary of the Treasury.

Mr. O'SHAUNESSY. So you could withhold it entirely?

Secretary MCADOO. Yes.

Mr. O'SHAUNESSY. And let the allies be defeated?

Secretary McADOO. The Secretary can withhold it or lend it, but it must always be with the approval of the President.

Mr. HELVERING. Mr. Secretary, how long will these obligations be carried as demand paper in the Treasury?

Secretary MCADOO. Only until such time as we can prepare the definitive obligations, as we call them, fixing the maturity. The obligations of the foreign governments thus far taken, gentlemen, must ultimately have the same maturities and be in substance, in their terms, etc., like the obligations the United States has issued to its own people. Now, with respect to future obligations, I think we ought to have more latitude for the reasons I have already explained to you. Up to the present time we have not converted the short-time demand obligations of these governments into the definitive obligations of substantially the same character as the liberty bonds we have just issued. That is due solely to the fact that there has been so much else to do that we have not had time to think out the denominations, etc., we should like to have these foreign obligations bear; but at any moment they are prepared to convert these demand obligations into the definitive bonds of substantially the same character as the liberty loan bonds.

Mr. HELVERING. You will not wait for that until the close of the war?

Secretary MCADOO. No; it will be done in due course. I have a copy of the obligation here. It is signed for the government by its duly authorized representative in this country.

Mr. MOORE. That answers the question of yesterday.

Mr. GREEN. With reference to the privilege of sale, I do not quite understand the necessity of it at this particular time. It seems to me that it would not be practicable at all to make any sales of these securities during the continuation of the war, and it looks like

making a provision very far ahead to make provision for the sale of the bonds after the war. That can be done then by an act of Congress as well as now?

Secretary MCADOO. Of course, there would be no desire to sell the bond while the war is gcing on. I think it would be unwise not to give the Secretary of the Treasury, whoever he may be-after he has secured the approval of the President-the power to take that action when desirable.

Mr. MOORE. Mr. Secretary, unless some gentleman wants to discuss section 4, I should like to call your attention to section 5, where the question of discretion again arises in the matter of the interest rate to be fixed for the certificates of indebtedness. It is left in the bill for the Secretary to prescribe the rates of interest for these certificates of indebtedness the new proposed issue of $2,000,000,000. May I inquire about that?

Secretary McADOO. I explained that. I went into that with considerable detail yesterday, but let me repeat what I said then.

Mr. MOORE. For the purposes of the record, and in answer to the question, I think it would be desirable for you to make a brief state

ment now.

Secretary McADOO. In answer to that question I should like to refer to my discussion of the subject in the record yesterday and to repeat what I then said. It is very necessary for the Secretary to have the power to borrow on these short-time certificates at such rate of interest as may be certain to guarantee the sale of the certificates in the intervals between bond issues or until taxes are paid in. The present certificates can only be sold on a 3 per cent basis. I can conceive that a condition might arise in the money market-we sometimes have tight money, due to crop moving or other cause, and it might not be possible to borrow money at 3 per cent on the shorttime Government obligations-a transient condition. It seems to me that we are taking a great risk in tying the hands of the Secretary in carrying forward these colossal operations if he has not some latitude as to the rate of interest on the short-term certificates.

Mr. MOORE. I brought that question forward again merely to ask this question: Suppose a general bond issue is authorized at a 4 per cent rate and you offer to pay or are willing to pay within your discretion a higher rate on these certificates of indebtedness, what effect will that rate on these certificates have upon the bonds?

Secretary McADoo. I do not think it would have any. Of course, it would require explanation. We should have to explain it. The average man would understand that for temporary loans you are always committed to the condition prevailing at the time you make the loan, the Government as well as an individual.

If you fixed an arbitrary rate on these short-time loans, and the condition of the money market should happen to be such that you could not place them at that rate, the operations of the Treasury Department would absolutely stop. We could not meet the situation. The amount of the certificates that I have suggested here, to increase them from $2,000,000,000 to $4,000,000,000, is made necessary by the fact that we are now reaching a point where the expenditures of our Government are going to be increased very largely

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monthly, and in order to time the intervals of these successive installments of the liberty loan so as to get the most favorable conditions for offering them, we have got to carry over the interval with temporary borrowing, and the $2,000,000,000 would not be sufficient. We should have to have a larger amount, but you understand, of course, that these certificates are always retired, where they are issued in anticipation of bonds or the return of taxes, when the bonds are sold or the taxes are paid in. They do not remain outstanding. They are only a temporary means of facilitating the permanent operations.

Mr. MOORE. I desire to get your view principally as to the effect upon the sale of the general bonds at a higher rate of interest.

Secretary McADOO. That is a question of policy for the Congress to determine.

Mr. MOORE. But we put that discretion in the Secretary of the Treasury?

Secretary McADOO. It is for you gentlemen to determine whether you want to give the Secretary of the Treasury that power or not.

Mr. MOORE. If we had made the rate of interest for the liberty loan 4 per cent or had made it a less rate than 3 per cent, would there have been an opportunity for the large holders to reserve their funds with the full expectation that a higher rate would have been paid eventually; that the country would have come to it; and might not the same combination be effected with respect to the 4 per cent rate if it is understood that you have in reserve $2,000,000,000 of certificates of indebtedness-short time, to be sure-which you contemplate issuing at 4 or 5 per cent?

Secretary McADOO. I do not think so. Private concerns constantly finance their requirements at a higher rate in short-time obligations and refund them at a lower rate in long-time bonds. One of the most important reasons for asking the authorization of a larger amount of Treasury certificates, and for greater latitude as to the interest rate, is to enable the Secretary of the Treasury to finance the requirements of the Government temporarily when conditions happen to be unfavorable for the sale of long-time bonds. I offer the certificates in installments about every two weeks. I have offered them with reference to the money market. The best guide is the experience of the past. I sold $50,000,000 at 2 per cent when I began. The market conditions were such that the Federal reserve banks at that time could take $50,000,000 without impairing their liquidity, and they took those certificates, $50,000,000. I subsequently sold $200,000,000 of certificates at 3 per cent. I sold some at 34 per cent, and I am selling them now at 3 per cent, because money happens to be a little closer than it was before. Of course, it is a matter for the Congress to determine; that is, as to whether it wants to give the Secretary that power. Personally, with all I know of these gigantic financial operations in front of us and the risks involved, I think it would be a very serious mistake if the Secretary of the Treasury were limited to the rate on these certificates, because it might make it impossible for him to finance the necessities of the Government.

Mr. MOORE. I will not press you any further, Mr. Secretary.

Secretary McADOO. I just want to say that no minister of finance of any nation of Europe to-day has any limitation upon his power

to borrow upon short-time certificates. So far as the bonds are concerned, as I say, I favor a limitation upon the rate for the present at least. We might have to face a condition-I hope neverwhere more latitude will be required. As to these certificates, I do think it would be taking risks to tie the hands of the Treasury Department so that if we were confronted with a temporary situation where we could not borrow money at the rate you fixed, we could not carry on the operations of the Government. We can not jeopardize the interests of the Government by an inability of the Government to finance these operations.

Mr. MOORE. The existing law, the law of April 24, 1917, provides that in the case of the $2.000.000,000 of certificates authorized. they shall be tax free, except for State or inheritance taxes, to be exempt generally. In this bill that exemption provision is stricken out. Is it intended that these certificates shall be tax free?

Secretary McADOO. Not at all. In section 7 there is an express provision that all of these certificates of indebtedness and bonds shall be exempt only from the normal income tax; that they shall be subject to graduated additional excess profits and war-profit taxes. The exemption is the same as to bonds as to the certificates of indebted

ness.

Mr. MOORE. You have simply carried it over and it is all incorporated in one section. You have simply transferred it to a subsequent paragraph of the bill?

Secretary MCADOO. That is intended for better construction.

Mr. STERLING. I can not see how it is possible to get any excessprofit taxes from the income derived from these bonds. It seems to me it simply complicates the whole proposition to put that in the bill.

Secretary MCADOO. Suppose a corporation should buy a large number of these bonds and put them in its reserve or carry them as a part of its surplus or undivided profits, of course they would not get an exemption from the excess profits on those bonds after they had reached

Mr. STERLING (interposing). Eight per cent.

Secretary McADOO. The exemption, whatever it is.

Mr. STERLING. Suppose a man has $10,000 invested in a business on which he makes 20 per cent. That is $2,000. He is entitled to an exemption of $800 under the House plan. Take the $800 from the $2,000 and you can only base the excess-profit tax on $1,200. Suppose he invests another $10,000 in Government bonds, the income from which is $400, his total income is $2,400 and he is entitled to an exemption of 8 per cent of the $20,000, which is $1,600, and deducting that from the $2,400, he only has to pay excess-profit tax on $800 instead of $1,200.

The CHAIRMAN. And unless you make him pay the excess-profit tax, which is stated specifically, he will come in and say, "Give me another deduction of $400." Suppose I had $500,000—that is, my own investment-and I invest that money in these bonds, that would give me $20,000 income. I am entitled under the proposed excessprofit tax to 8 per cent, and if all my investment is in bonds; that is, my total income is from the bonds, I never pay any excess-profit tax, because the 8 per cent absorbs it. Mr. Secretary, your proposition bothered me for two or three days.

Mr. STERLING. Would it not be advisable to insert:

Provided, The income from these bonds shall not be computed in estimating the excess-profit tax?

The CHAIRMAN. Only as to the normal income?

Mr. STERLING. I think that is all right. I at first thought that it was a mistake to put even the surtax on these bonds, but the Secretary's statement on yesterday entirely convinced me that it is all right, provided he can sell the bonds.

Secretary McADOO. I think I can sell them. If I did not think so, I should not advocate it. We have already had inquiries about the 31 per cent bonds, as to whether or not corporations which invest their surplus in the liberty-loan bonds would be exempt from taxation as to the income derived from those bonds. A good many of the corporations of the country have asked us this question: If we buy liberty bonds and distribute them as dividends, will such dividends be exempt from tax? We could not, of course, construe the law that way. I should like to have it made very explicit in this act. I think you should make it very explicit as to what the exemptions are and what the terms of the bonds are. I should rather be protected by an explicit provision than to leave it merely to administration.

Mr. STERLING. I do not think the bill sets forth your idea now.
Secretary MCADOO. You do not?

Mr. STERLING. No.

Secretary McADOO. If you would be good enough to give us your suggestions in phraseology, we should be happy to consider them and to tell you what we think about the proposition.

Mr. MOORE. Mr. Secretary, have you given any further consideration to the suggestion I made yesterday about the inclusion of the income tax in section 7-that it should be held subject to the tax?

Secretary MCADOO. You wanted to alter that language. I did not get the full import of your suggestion.

Mr. MOORE. It was that, inasmuch as this proposed supertax on incomes begins above $5,000, or it is proposed to begin above $5,000, that a person who had $100,000 or $125,000 invested in liberty bonds or in these bonds would escape taxation unless subject to the normal income tax.

Secretary MCADOO. As I understand your suggestion, it is not to exempt these bonds from the normal tax; that is what it really amounts to.

Mr. MOORE. They would be exempt up to the amount of $125,000 of holdings.

Secretary McADOO. You mean the income would be?

Mr. MOORE. Yes.

Secretary McADOO. Frankly, I should hesitate to undertake to sell a 4 per cent bond that did not carry an exemption from the normal tax. There is a broad question of policy there, gentlemen, which, again, you in the ultimate have got to determine. I shall simply give you my views for what they may be worth, and that is, as to whether or not the Government shall adopt a policy of selling its bonds subject altogether to all Federal taxes and pay a higher rate of interest by way of compensation for the destroyed exemption, or whether or not we shall sell at a lower rate of interest