I 
 
 W 
 
 THE BEVENUE BILL 
 
 SPEECH 
 
 HON. JOHN W. WEEKS 
 
 OK’ MASSACHUS ET'i’.S 
 
 IN THE 
 
 SENATE OF THE UNITED STATES 
 
 THURSDAY, FEBRUARY 22, 1917 
 
 
 WASHINGTON 
 
 GOVERNMENT* PRINTING OFFICE 
 1917 
 
 82945—1705G 
 
 BOSTON COLLEGE LIBRARY 
 
 ^ CHESTNUT HILL, MASS. 
 
 4 
 
f 
 
 SPEECH 
 
 OF 
 
 HON. JOHN W. WEEKS. 
 
 The Senate, as in Committee of the Whole, had under consideration 
 the bill (II. II. 20573) to provide increased revenue to defray the ex¬ 
 penses of the increased appropriations for the Army and Navy and the 
 extensions of fortifications, and for other purposes. 
 
 Mr. WEEKS. Mr. President, under ordinary circumstances 
 I should not take the time of the Senate to discuss this bill, 
 for I presume that the action taken by the majority in their 
 caucus is to be carried out on the floor, and that, in a sense, it 
 may be a waste of effort; but I have proposed a substitute for 
 the bill, which I think is so preferable from the standpoint of 
 the taxpayer that I do not only want to explain why I am op¬ 
 posed to the pending legislation, but I wish also to state my 
 reasons for suggesting what I consider to be a better method 
 of procedure. 
 
 Mr. President, this is a period of preparedness—military pre¬ 
 paredness. We have appropriated, are appropriating this year, 
 and will continue to appropriate large sums of money for this 
 purpose. In order to raise the necessary revenue to pay for 
 these unusual expenditures, unusual methods must be adopted; 
 and the majority party, very largely at least, must be responsi¬ 
 ble for those methods. In the pending bill we find the pos¬ 
 sibility of raising revenue, but it is done at the expense of 
 efficiency, of fairness, and is almost entirely a sectional measure. 
 
 This is the last period in our history when we should under¬ 
 take any course which is going to penalize efficiency. The 
 reports from Europe are unanimous that there has been an 
 enormous increase in the industrial efficiency of those coun¬ 
 tries. Of course, it is impossible to determine this accurately, 
 but we have evidence as to what is being done in Great Britain 
 and in some other sections of Europe. The substance of this 
 evidence is that the increase in efficiency in Great Britain, for 
 instance, has been GO per cent since the beginning of the war, 
 notwithstanding the fact that men have practically been elimi¬ 
 nated from manufacturing establishments and their places 
 taken by old men, boys, and women. 
 
 If an examination of the industrial conditions of Europe had 
 not been made, we might have reached the conclusion—due 
 partially to the fact that our exports are tremendous—that the 
 manufacturing industries of Europe were much more seriously 
 crippled than they are. As a matter of fact, there has not been 
 any invasion of Great Britain. Her industries are intact; in 
 fact, have greatly increased in volume of production since the 
 beginning of the war. There has been no enemy on German 
 soil. Therefore, the same thing is undoubtedly true of Germany. 
 Practically speaking, this is the situation in every manufactur¬ 
 ing European country, with the exception of northern France, 
 2 ~ 82045—17056 
 
« 
 
 39158 
 
 Q 
 
 O 
 
 Belgium. nml a very small area in Italy ami Austria, and even 
 In these invaded countries the greater part of their manufac¬ 
 turing interests are intact and have increased in etlicieucy and 
 capacity. Although these nations are our important customers, 
 they have always been our rivals and are going to he far more 
 serious rivals in the future than they have been in the past. 
 
 In order to demonstrate the correctness of the statement I 
 have made as to the increased manufacturing capacity of other 
 countries, I want to bring these facts to the attention of the 
 Senate: 
 
 England has produced and sold to the world during the 12 
 mouths of 191G goods to the value of .$2,405,107,140 as com¬ 
 pared with $2,006,100,017 in 1914, a gain of $309,000,000. Of 
 this enormous production and shipment, manufactured articles 
 comprise practically two-thirds of the total. 
 
 I ask unanimous consent, Mr. President, to insert herewith 
 a table showing the export from Great Britain in 1914 and in 
 1910 of articles wholly or partly manufactured. 
 
 The VICE PRESIDENT. Without objection, it is so ordered. 
 
 The table referred to is as follows: 
 
 Export of articles wholly or mainly manufactured. 
 
 1914 
 
 1916 
 
 Iron and steel, and manufacturers thereof. 
 
 Other metals, and manufactures thereof. 
 
 Cutlery, hardware, implements (except machine tools) 
 
 and instruments.. 
 
 Electrical goods and apparatus.. 
 
 Machinery.. 
 
 Ships (new). 
 
 Manufactures of wood and timber.. 
 
 Yarns and textile fabrics; 
 
 Cotton.:.. 
 
 Wool. 
 
 Silk.. 
 
 Other materials.. 
 
 Apparel.. 
 
 Chemicals, drugs, dyes, and colors. 
 
 Leather and manufactures thoreof, including gloves, 
 
 but not boots and shoes. 
 
 Earthenware and glass. 
 
 Paper. 
 
 Railway carriages and trucks (not of iron), motor cars, 
 
 cycles, etc. 
 
 Miscellaneous. 
 
 Total export of articles. 
 
 $202,776,494 
 60,043,596 
 
 $275,841,833 
 
 61,905,072 
 
 31,691,708 
 
 14,690,016 
 
 152,028,492 
 
 33,737,274 
 
 7,613,094 
 
 31,298,504 
 19,987,814 
 98,455,981 
 6,280,583 
 6,222,709 
 
 502,546,007 
 153,234,189 
 9,078,810 
 03,178,173 
 70,718,391 
 94,935,978 
 
 570,401,594 
 228,243,350 
 11,100,769 
 76,973,439 
 81,440,510 
 134,083,283 
 
 22,799,024 
 
 20,184,48) 
 
 15,504,371 
 
 23,820,081 
 
 19,063,603 
 
 25,300,651 
 
 54,048,043 
 147,890,277 
 
 39,128,056 
 
 198,035,569 
 
 1,047,960,238 
 
 1,915,795,570 
 
 Wholly or mainly manufactured—Gain in 1916 over 1914, $267,835,332. 
 
 Mr. WEEKS. Mr. President, it will be seen that the gain in 
 1916 over 1914 in these manufactured products is nearly 
 $26S,000,000 and includes most of the staple products, especially 
 many of those articles in which Great Britain is in active com¬ 
 petition with this country. For example, it shows an increase 
 of $74,000,000 in cotton fabrics, $75,000,000 in woolen fabrics, 
 $11,000,(XXI in wearing apparel, $40,000,000 in chemicals, and 
 $73,000,000 in iron and steel and manufactures thereof. 
 
 Of course, it is fair to state that the difference in the prices 
 of these goods at the manufacturer’s door partially makes up 
 for the increase; and comparing the British foreign trade of 
 1910 with 1915, which shows a gain of £21S,000,000, and 
 82945—17050 
 
# 
 
 4 
 
 reducing the cost to the 1913 price snows that in many articles 
 the volume of production has not materially increased. Sub¬ 
 stantially speaking, however, production in England is now at 
 its highest level, notwithstanding the handicap under which 
 that country has been laboring in fitting itself for its military 
 necessities. 
 
 To illustrate the kind of competition we are likely to meet 
 in the future, let us take another country. During the first 
 11 months of 191G Japan exported $300,000,000 of her products 
 and imported $330,000,000, showing a trade balance of prac¬ 
 tically $150,000,000. During this period exports of cotton yarns 
 and fabrics showed an increase from $50,000,000 in 1915 to 
 $71,000,000 in 1916. Matches increased two and a half million 
 dollars; copper, eight millions; and there were very large in¬ 
 creases in the Japanese exports of hosiery, much of it finding 
 a place in the American market. In 1916, during these 11 
 months, Japan sent to the United States goods to the value of 
 $164,822,000 as compared with $97,080,000 the year before, an 
 increase of $67,000,000, or something like 70 per cent. 
 
 That, Mr. President, it seems to me, is a fair indication of 
 the kind of competition we will receive from a nation which is 
 expanding tremendously, which is producing at very much less 
 cost than we can produce, and which is going to be an im¬ 
 portant rival of our industries in the future. 
 
 Since the beginning of the European war we have demon¬ 
 strated how easy it is to transfer American industrial estab¬ 
 lishments intended for manufacturing commercial products into 
 plants for the manufacture of war munitions. The same de¬ 
 velopment has taken place in all European countries and at 
 the termination of hostilities these war industries will be trans¬ 
 ferred to peace purposes with equal facility. This, in fact, is 
 the great question which Congress should be considering at 
 this time, and it is especially important that Congress give 
 serious consideration to this question when passing legislation 
 to raise revenue. Instead of wasting time and energy in enact¬ 
 ing makeshift legislation of a most haphazard character in¬ 
 tended to tide the Government over until another year, it 
 should be working out a definite financial scheme to fit this 
 country to cope with the commercial activities which will occur 
 immediately hostilities cease. 
 
 Protectionists—and protectionists include a great majority of 
 the people of this country, I believe—would prepare through the 
 adoption of a protective tariff to meet this emergency. Even if 
 it were not paramount for us to follow such a course, what 
 folly it is for us to adopt such an untried policy and one which 
 is going to be a tax on efficiency and necessitate enormous pro¬ 
 portional expenditures in collecting the revenue required. What 
 we should be doing is studying every phase of the European 
 situation and determining the character of the protective policy 
 we should adopt. There must be a restoration of many of the 
 tariff rates which obtained in the past if we are going to have 
 reasonable protection. Those rates must be determined some¬ 
 what by the conditions developing as a result of the European 
 conflict and by the character of the commercial conflict which is 
 to follow. No time should be lost in beginning a study of these 
 problems. 
 
 We need not only to develop our efficiency and provide reason¬ 
 able protection to enable us to meet the competition of our for- 
 82945—17056 
 
5 
 
 eign commercial rivals at the end of the war, but we must pre¬ 
 pare ourselves to face new conditions when this "rent European 
 sfrmrirlo is over. For example, we have several millions of men 
 in tin* United States engaged in the manufacture of munitions. 
 The minute the war is over their employment will cease and 
 they will come into competition with the other workmen in the 
 United States. It is probable that more than 30,000,000—pos¬ 
 sibly 40,000,000—of men are in the armies of the European 
 countries at war or engaged in tlie manufacture of munitions 
 of war. They have been taken from their normal pursuits. As 
 soon as the war is over they will return to their employments; 
 they will find their places occupied to some degree by a new 
 element in industrial life, and this element will materially in¬ 
 crease the competition for employment which will exist in those 
 countries. As a result of this competition during the readjust¬ 
 ment ]>eriod, it is almost certain that the average wage paid in 
 European countries will he even lower than before the Avar. 
 
 Exactly the opposite condition obtains in the United States. 
 Wages are abnormally high. A reduction in wage and adjust¬ 
 ment to new conditions always means that some interest is 
 pinched and that many difficulties must he met during the re¬ 
 adjustment period. Moreover, European countries are going to 
 he poor. Poverty docs not promote tlie purchase of products. 
 You can only sell to those who have money to buy; and we 
 should not for a moment be deceived by the specious story that 
 European nations are going to need many of our products to 
 rehabilitate themselves because of the destruction which has 
 taken place. As I have suggested, this destruction has been 
 confined to a very limited area. It will take a long time to re¬ 
 place it, but the replacement is going to be carried on by the 
 people at home. In any event, they will not have the ready 
 money to rehabilitate themselves immediately, and I predict 
 that the purchasing power of Europe will be found to be ma¬ 
 terially lower than it was before the war. 
 
 We are going to find ourselves the great rich Nation of the 
 world. We are going to be able to buy the products of others; 
 they can not buy ours, and unless we erect an artificial barrier 
 to protect our interests we arc going to face enormous importa¬ 
 tions of goods. 
 
 Then there is another phase of this question which we must 
 not overlook. Whatever the final action taken may be, it is be¬ 
 yond question that the countries of Europe are seriously con¬ 
 sidering trade alliances which will make scraps of paper of our 
 commercial treaties and will place a further handicap on our 
 export trade to them. Last year there was held in Paris what 
 was known as the Paris Economic Conference. At this con¬ 
 ference a scheme was proposed, seriously discussed, and re¬ 
 ported to the allied nations which, in effect, substantially meant 
 free trade between the allied countries, a rate of duty of con¬ 
 siderable magnitude between tlie allies and countries which are 
 now neutral, and a higher rate of duty imposed against the 
 central powers. It has been reported that a similar arrange¬ 
 ment was being considered by the central powers. 
 
 Moreover, the Scandinavian countries, including Holland and 
 Denmark, have recently had a conference to consider this gen¬ 
 eral question, and especially a proposal to protect the interests 
 of the neutral powers after the Avar. It is worth noting that 
 82045—17050 
 
6 
 
 the United States was not invited to take part in the Paris 
 economic conference. It was, however, invited to join the con¬ 
 ference of the neutral powers. Whatever may be the final out¬ 
 come of these proposed trade alliances, trade conditions after 
 the war are going to differ from those of the past. 
 
 Our greatest export market has been in Great Britain. It 
 has substantially been a free-trade market. There is no doubt 
 about the adoption of a protective policy by Great Britain, to 
 some degree at least, and this fact is demonstrated by instances 
 rather than settled action. Not long ago the trade-unions of 
 Great Britain in an annual convention or conference of first 
 importance voted practically unanimously in favor of the adop¬ 
 tion of a protective policy, and that represents the sentiment of 
 substantially two and a half millions trade-union laborers. 
 There is also a very large element in Parliament favorable to 
 this action. 
 
 The point I wish to particularly emphasize is that we are 
 going to face unusual conditions after the war; the solution of 
 the problems arising at that time will require the wisest states¬ 
 manship, and we should now be preparing ourselves to meet 
 them. Notwithstanding these probabilities—almost certainties— 
 no action has been taken by the Democratic Party to indicate it 
 has given the subject the slightest consideration. No tax levied 
 or law proposed since the beginning of the European war would 
 lead to the conclusion that those who compose the majority 
 have any thought for this phase of the future. 
 
 On the other hand, just before the war a law was enacted 
 lowering the tariff to one-lialf the average rate imposed under 
 the lowest tariff law we have ever had on our statute books, and 
 under which nearly 70 per cent of our imports come in free. 
 Few people stop to consider that we are enjoying at this time 
 in the war the benefits of a protection as important in its oper¬ 
 ation as any law we have ever passed. We are unable to obtain 
 any importations from the central powers, or material importa¬ 
 tions from many other countries, and yet we are importing a 
 larger volume of goods than ever before. People should not be 
 deceived in the slightest degree by our large foreign trade, for 
 the most cursory investigation shows that this trade is incident 
 to the war and originates in those sections producing war mate¬ 
 rials. Of course these exports are not entirely confined to war 
 materials; they include very many fabrics and articles used 
 during war and for which there will be no demand when the 
 war is over. Without going into detail, it is difficult to compre¬ 
 hend the enormous supplies of such articles as woolen blankets, 
 material for uniforms, shoes, cotton fabrics, and incidentally 
 almost every kind of manufacture in which our people are en¬ 
 gaged which go to make up the immense volume of exports we 
 are now shipping abroad and which will cease when the war 
 terminates. 
 
 On September 4, 1914, the President called the attention of 
 Congress to the fact that the customs receipts for the month of 
 August were ten millions less than the month of August, 1913, 
 saying that the loss was almost entirely due to the war in 
 Europe and not to a change in our tariff law. Customs receipts 
 for August, 1914, were about $19,000,000. In August, 1913, under 
 a Republican tariff law they had exceeded $30,000,000. This 
 falling off in revenues commenced earlier in the year of 1914. 
 
 82045—17056 
 
7 
 
 In February, for example, tlio customs receipts were about 
 $17,000,000, or $2,000,000 less than the month of August. For 
 the eight months prior to the war customs receipts averaged 
 $22,200,000 a month, while for the corresponding months in 
 1913 they averaged $30,934,000. or a difference of $8,700,000 a 
 month. It is not denied that this falling off in customs receipts 
 was due to the decrease in rates of duty and not to a lessening 
 in the importations. 
 
 During the calendar year ending December 31, 1916, our im¬ 
 ports aggregated $2,391,716,000. If the rates of duty which 
 obtained under the Payne-Aldrich law had been in operation in 
 1910—during the life of that law the average ad valorem duty 
 was 19$ per cent—there would have been added to the Treasury 
 through customs receipts $467,940,000 since the Underwood- 
 Siminons law took effect, which would have practically paid for 
 the extraordinary expenditures which have been made up to 
 this time. 
 
 At this time if we would enact a reasonable protective-tariff 
 law and issue bonds to provide for our military preparations we 
 could repeal the war-revenue tax, the income tax, the corpora¬ 
 tion tax, the inheritance tax, and not pass this proposed excess- 
 profits tax, and still have sufficient revenue to meet the actual 
 needs of Government, imposing such taxes as those to which I 
 have just referred in time of unusual need and reserve them 
 for that purpose. In the meantime we should leave to the 
 States these means untrammeled in providing for their own 
 revenue; in other words, if you ask how the Republican Party 
 would provide for this situation we would reply, we would im¬ 
 pose a suitably protective tariff law and provide for unusual 
 demands on the Government through a bond issue, with stringent 
 provisions for its elimination within a reasonable period of time. 
 
 This brief summary I have given of the probable situation 
 which will confront us at the end of the war, it seems to me, is 
 sufficient to show the desirability and necessity of adopting a 
 permanent and systematic policy of taxation rather than levy¬ 
 ing special direct taxes. 
 
 There can be no difference of opinion as to the necessity of ad¬ 
 ditional legislation to finance the Government. Notwithstanding 
 the imposition of corporation taxes, income taxes, inheritance 
 taxes, and war-revenue taxes, we find the ready resources of the 
 Government at a lower ebb than they have ever been since the 
 Civil War; in fact, if the condition of the Treasury were fully 
 appreciated and we were not in the midst of a period of business 
 activity in many lines which has been reflected in most direc¬ 
 tions, it would produce a financial panic. This is due to ineffec¬ 
 tive tariff legislation, unusual appropriations for military pur¬ 
 poses, and an accumulation of harebrained schemes which the 
 majority party have foisted on the country. 
 
 Recent discussions in the Senate, even those of yesterday, 
 illustrate the condition in which we find ourselves. It is re¬ 
 grettable to have to say that there seems to be no concerted 
 action to promote reasonable economy or conserve the best 
 interests of our people, and I want to demonstrate to the 
 Senate the deplorable condition of the Treasury. 
 
 The daily Treasury statement of Saturday, February 17, 1917, 
 shows a working balance in the general fund of $70,736,613.82. 
 
 82045—17050 
 
8 
 
 There 1ms been deposited to that date in this fund the sum of 
 $48,128,727 for the retirement of outstanding national bank 
 and Federal reserve bank notes that have been assumed by the 
 United States. If that sum be deducted the amount remaining 
 is $22,607,8S6.5S. The sum of $6G,485,461.85 has been placed to 
 the credit of disbursing officers and was subject to their checks 
 to the full amount, so that instead of a general fund in the 
 Treasury of $70,736,613.82 on February 17, 1917, there was in 
 reality a deficit of $43,877,575.27. 
 
 It is hard to take the view of the Secretary of the Treasury 
 that this forty-odd millions paid in by banks to take care of 
 retiring circulation, constituting a demand obligation on the 
 general fund, is not a liability but considered as available funds 
 to meet any other general expense. It is especially difficult to 
 become reconciled to this position of the Secretary in this mat¬ 
 ter, when in his annual report for the year ending June 30, 
 1916, in his statement of the condition of the general fund, the 
 item of money deposited by banks to retire circulation—aside 
 from the 5 per cent—is neither carried as a liability nor is there 
 anything to show it as being included in the balance of the gen¬ 
 eral fund; but, on the other hand, it is found as an item in the 
 statement of “ Public debt.” 
 
 The Secretary, in referring to the deposits to the credit of 
 disbursing officers, states: 
 
 These disbursing officers' balances consist of amounts placed by the 
 Secretary of the Treasury to the credit of disbursing officers, against 
 which they are authorized to draw checks in payment of public obliga¬ 
 tions. * * * As a matter of fact, money in many instances is not 
 
 spent for months, and sometimes not at all, being returned to the Sec¬ 
 retary’s account. * * * Funds are placed to the credit oT disburs¬ 
 
 ing officers practically as a bookkeeping arrangement. 
 
 The “ public obligations ” referred to by the Secretary are, of 
 course, already incurred and due, or are maturing, and it would 
 seem unreasonable to take for granted that deposits would be 
 made with disbursing agents without immediate or near demand 
 for such funds to cover these obligations. Should the Secretary 
 for any reason after making these deposits conclude to order 
 balances with disbursing officers remitted to the Treasury—say, 
 30, 60, or 90 days after the date of such deposits—the probabili¬ 
 ties are strong that such order would be complied with by dis¬ 
 bursing officers by filing statements, accompanied with vouchers 
 and other evidence of payments, instead of transferring actual 
 money. It would be true also that the longer disbursing officers 
 withhold statements covering expenditures, the greater would 
 be the fictitious portion of the balance represented by these 
 credits in the general funds apparently available, as shown by 
 published statement. 
 
 The condition of the Treasury and the expenditures of the 
 Government are more clearly demonstrated, perhaps, by making 
 comparisons with the past than in any other way. We look 
 back to the Civil War period with the feeling that at the time 
 our armies were the largest in our history, when probably we 
 had a million men in the field, this country had to face enor¬ 
 mous expenditures. That is true; and yet, compared with the 
 expenditures of to-day, with the exception of one year, they 
 were almost trivial. I think it fair to say that the appropria¬ 
 tions for this year will aggregate as much as $1,750,(XX),000. I 
 have not the exact figures before me. 
 
 82945—17056 
 
9 
 
 I wish to direct your attention to the expenditures during the 
 Civil Wnr period. Exclusive of postal deficiencies, as there 
 wore in those years, the total expenditures of the Government in 
 1861 were $(51,000,000; in 1S62. $466,000,000; in 18(33, $717,000- 
 000; in 1864, $863,000,000; in I 860 . $1,294,000,000; and in 1SG6, 
 $519,000,000. Even in the year I 860 , when the expenditures 
 were 60 j>er cent more than in any other year of the Civil War 
 and provision was being made for at least a million men In the 
 field, we were not spending very much more than two-thirds of 
 the expenditures for the fiscal year. 
 
 The highest expenditures made for our Navy, when we were 
 blockading the whole coast of the Confederacy, during any one 
 year was $ 122 , 000 , 000 , and yet the naval appropriation bill 
 which is about to be taken up will appropriate in the aggre¬ 
 gate $531,000,000—more than four times as much as we spent 
 for naval purposes in any year during the Civil War. 
 
 No annual expenditure of the Government before 1S90, exclu¬ 
 sive of expenditures for postal purposes, exceeded $400,000,000. 
 At that time, you will remember, there was a great cry against 
 the large expenditures of the Government, and Mr. Speaker 
 Itecd, when criticized for his leadership of a Congress which 
 had appropriated a billion dollars, or $500,000,000 a year, re¬ 
 plied that it was a billion-dollar country. Yet we are appro¬ 
 priating very nearly four times as much as we did 26 years ago. 
 
 The expenditures during the Spanish War, when we had a 
 considerable Army in the field and bought a great amount of 
 new material, did not aggregate in any one year one-half the 
 amount we are appropriating this year for general expenses. 
 
 EXCESS-ritOFlTS TAX. 
 
 The excess-profits tax proposed in this bill is unique in the 
 history of taxation. I can not find any record of the imposi¬ 
 tion of such a tax in time of peace or war. It is a tax upon 
 business; and yet, it does not tax all business, only that con¬ 
 ducted by corporations and partnerships. It is not a tax upon 
 the magnitude but essentially upon the economy of operation. 
 It is not a tax on large capital; it may apply with equal force 
 to men of small capital. As its provisions would tax the cor¬ 
 poration and partnership differently, it will tend to drive the 
 partnerships into a corporation. As it taxes partnerships or cor¬ 
 porations and does not tax the individual conducting the same 
 kind of business, it will have a tendency to prevent the suc¬ 
 cessful individual giving those who have been his employees an 
 opportunity to become interested in the direct profits of the 
 business which their industry and capacity have helped to de¬ 
 velop. 
 
 This provision of the bill seems to imply that the Democratic 
 Party believes S per cent is a sufficient profit and that anyone 
 receiving more than 8 per cent should be taxed—no, not ex¬ 
 actly taxed, but should have some part of his profit confiscated 
 for the purposes of government. Perhaps if we were entering 
 upon a policy of controlling industrial action, including the 
 rates of returns paid to those furnishing the capital, we might 
 conclude that 8 per cent would be a sufficient average return; 
 but anyoue who knows anything about business will testify 
 to the great irregularity resulting in every industry. There 
 82945—1705G-2 
 
10 
 
 are years of plenty and years of almost complete failure. 
 In the years of plenty, the frugal and prudent producer lays 
 aside a part of his earnings for the development of his plant, 
 the improvement of his machinery, for any other purpose which 
 will promote the efficiency of his undertaking, in order to en¬ 
 able him to maintain some payment on the capital invested in 
 years when a return is not earned. It is of vital importance 
 to an industry to be able to pay regular dividends. There 
 have become a great number of investors in this country who 
 depend partially or wholly on the income they receive. They 
 will not put their money into an industry w T liicli pays large 
 dividends one year and does not pay any for three or four 
 years, as would be the result if the manager, lacking in pru¬ 
 dence, were to pay out all of his earnings one year; but if he 
 does provide for the condition I have described the Govern¬ 
 ment comes along and seizes a part of the money which really 
 belongs to the investors in the enterprise in bad years and ap¬ 
 plies it to governmental purposes. It is a short-sighted and 
 unfair method of procedure. 
 
 If you can take 8 per cent, why not take 10 per cent, or 20 
 or 30? Is that going to be the policy of the Democratic Party? 
 Are we going to have continued the extravagance of the past 
 three or four years—appropriations for purposes like the Ship¬ 
 ping Board, the nitrate plant, the armor-making plant, and 
 other similar schemes which every trained and prudent business 
 man knows should not be made, and then seize by actual confis¬ 
 cation the property of our citizens to supply such facilities and 
 go into competition with them? Is that going to be the policy 
 of the Democratic Party? If so, as soon as it penetrates the 
 public understanding there will be a revulsion of feeling which 
 will destroy the ascendancy of a party inaugurating it. 
 
 You have already established an income tax, so unfairly 
 levied that it imposes a very large burden on a comparatively 
 few citizens. You have increased the income tax once since the 
 original law T was passed. You have imposed an inheritance tax 
 in competition with our own States, which have depended on 
 both of these forms of taxation to obtain necessary revenue. 
 In this bill you propose to increase the inheritance tax. You 
 are now establishing this excess-profits tax. Are you going to 
 increase it if you need more revenue? That is a question of 
 vital importance to the American business man and will deter¬ 
 mine the kind of business he does and the manner of conducting 
 it. If you are going to establish an 8 per cent limit as a fair 
 profit resulting from the conduct of business, why not insist 
 that any concern earning more than 8 per cent shall contribute 
 to the losses of some other industry not making 8 per cent? 
 Why not provide that no man shall, through his energy and 
 brains, develop a better business than a less efficient competi¬ 
 tor? There can be no other result if such a policy as is con¬ 
 tained in this bill is adopted. The whole course of this legisla¬ 
 tion is going to adversely affect American progress, discourage 
 efficiency, and in the long run reduce American wages. 
 
 I am going to give a few illustrations of the effect of the 
 application of this proposed law, and I think they will fairly 
 demonstrate the contention I make that the bill is unfair; that 
 it is sectional; that it does not apply with the same force to the 
 82945—17056 
 
11 
 
 wealth of the country as it does to the efficiency of the country; 
 ami that from every standpoint it will he vicious in its results. 
 
 (1) The bill is objectionable because it is class legislation. 
 The incomes derived from agriculture and from personal service 
 are to be exempt. Thus, a wealthy farmer or a professional 
 man who may be a lawyer receiving large fees escapes alto¬ 
 gether. 
 
 (2) Although there is a flat exemption of $0,000, there would 
 still be many partnerships or close corporations upon which this 
 tax would be a burden, for in many cases the capital invested 
 may be small, the business having been built up entirely by 
 personal effort. 
 
 (3) Capital investment is defined as actual money paid in and 
 actual property owned, together with undivided surplus. To 
 ascertain this would involve great difficulty in some cases and 
 would probably necessitate governmental inspection. The latter 
 would be another step toward centralization. In short, the 
 doctrine of “ the less government the better ” under Democratic 
 rule is being thrown to the winds. 
 
 (4) The legislation is punitive in effect. It is leveled at the 
 profits of business, at the effective results of capital ami sur¬ 
 plus. It is a tax upon the efficiency of the Nation. 
 
 (5) In theory an income tax is an ideal one, because the 
 fundamental idea upon which it is founded is that taxation 
 should be imposed according to ability to pay. But there should 
 be as nearly as practicable equality of sacrifice among the tax¬ 
 payers, and a tax levied at a uniform rate can not produce 
 equality of sacrifice. 
 
 The proposed law is in effect an income tax possessing some 
 of the vices and few of the merits which that form of direct tax 
 contains. The only sound income tax is one which reaches 
 everyone in a proportionate degree. 
 
 The basis upon which the 8 per cent of excess profits is pro¬ 
 posed to be allowed is unfair. That basis is not the present 
 value of the property of a partnership or a corporation, but the 
 value of the property at the time it was transferred to tlio part¬ 
 nership or corporation. If, for example, two men became 
 partners 20 years ago and contributed to the partnership 
 $10,000 each, making a total original contribution of $20,000, 
 by the ability and industry of those two partners that business 
 might to-day be worth $1,000,000. They would not be allowed 
 8 per cent upon the present value of their business or plant of 
 $1,000,000, but only 8 per cent upon the money originally con¬ 
 tributed, or on the property at its value when originally trans¬ 
 ferred to the partnership; in the case I have supposed that 
 would be 8 per cent upon $20,000. 
 
 In a word, the excess-profit feature of this bill is unfair for 
 the following reasons: 
 
 1. It is discriminatory. 
 
 2. It is unfair. 
 
 3. It will discourage initiative; it will prevent development 
 of resources and industries. 
 
 4. It will favor certain classes or groups. 
 
 5. It will cause great confusion in its interpretation. 
 
 G. It fixes an arbitrary cash basis of value which, under the 
 capital-stock tax rulings, is unsound and unreasonable. 
 
 82945—1705G 
 
12 
 
 NATIONAL INDUSTRIAL CONFERENCE. 
 
 A conference of industrial managers of some of the largest 
 and most important enterprises in the United States has re¬ 
 cently been established. This conference was originated and 
 meetings held for the purpose of discussing trade relationships 
 and the best and most effective means of developing our effi¬ 
 ciency and capacity to successfully compete with the industries 
 of the world. A short time ago this industrial conference board 
 wrote to the Finance Committee of the Senate making some 
 comments on the bill under consideration, and I wish to put 
 this communication in the Record in its entirety, because it is a 
 calm, dispassionate discussion of this question. 
 
 The PRESIDING OFFICER (Mr. Hughes in the chair). 
 Without objection it is so ordered. 
 
 The matter referred to is as follows: 
 
 Februart 10, 1017. 
 
 To the honorabie the Finance Committee of the United States Senate, 
 
 Washington, D. C. 
 
 Gentlemen : The National Industrial Conference Board, composed 
 of 14 national associations of industrial employers who are jointly 
 studying and investigating important questions which have a hearing 
 on industrial development and the conduct of business, to wit: Ameri¬ 
 can Cotton Manufacturers’ Association, American Paper and Puip 
 Association, Electrical Manufacturers Club, National Association of Cot¬ 
 ton Manufacturers, National Association of Manufacturers, National 
 Association of Wool Manufacturers, National Boot and Shoe Manufac¬ 
 turers’ Association, National Founders’ Association, National Metal 
 Erectors’ Association, National Founders’ Association, National Metal 
 Trades Association, Rubber Club of America, Silk Association of 
 America, and United Typothet® and Franklin Clubs of America, begs 
 leave to submit herewith the following observations and criticisms in 
 regard to the excess-profit tax feature of the pending revenue bill, 
 H. R. 20573: 
 
 The board realizes the propriety of taxing corporate income. It ad¬ 
 mits the necessity of largely increased national revenues if the Nation 
 is to be placed in condition for national defense. It believes that rep¬ 
 resentatives of national business interests should not and will not ob¬ 
 ject to any fair tax, however heavy, which is necessary for national 
 defense, but it believes it to be a duty not less than a right to object 
 to the impractical, arbitrary, and discriminating form in which the 
 proposed measure is cast. The pending proposal represents a growing 
 tendency to exempt a great mass of citizens who arc well able to 
 contribute, from the pecuniary burden of government. When the na¬ 
 tions of the world are demanding universal service, our own country 
 ought not to inaugurate a system in which nine-tenths of the popula¬ 
 tion are deliberately relieved from any direct and proportionate con¬ 
 tribution to the national revenue. The larger the revenue required, the 
 broader should be the base of taxation. 
 
 The excess-profits tax appears to us seriously objectionable, because— 
 
 1. It is discriminatory. It arbitrarily and invidiously discriminates 
 against all forms of business done in corporate as distinguished from 
 individual capacity, although individuals come into competition with 
 corporations. It also deliberately exempts partnership profits derived 
 from the great industry of agriculture. 
 
 2. It is a disproportionate burden upon business done in corporate 
 form. The present State taxes upon corporate property average for 
 the several States not less than 21 per cent. With the enactment of 
 this measure the Federal tax upon income from this same property will 
 approximate 2 per cent. It will also twice tax corporate income de¬ 
 rived from holdings in other corporations. 
 
 3. It will operate unfairly and against the principles of good busi¬ 
 ness in that it is levied upon nominal present profit without regard to 
 the losses of past lean years or the prospective losses of lean years to 
 come. Good business requires that unusual profits of cne period be 
 used to equalize the losses of others. When thus equalized, the excess 
 profit of a certain period which has been taxed may be wiped out alto¬ 
 gether and the business even show a loss. 
 
 4. It invades the legitimate field of State taxation. The continued 
 use of direct taxation and the ignoring of its exclusive field of indirect 
 
 82945—17050 
 
13 
 
 taxation by thr Federal Government steadily increases the difficulty of the 
 States In raising necessary revenue. The report of the New York State 
 Tax Commission for 1915 shows that there have been but 5 years in the 
 preceding 25-y< ar period when It was not necessary for the State to 
 levy direct taxes. A proposal is now pending before its legislature 
 to levy an income tax upon eeneral corporations. Such a tax is now 
 in force in Wisconsin. West Virginia, Connecticut, and Massachusetts. 
 The Tax Commission of California has presented to the legislature a 
 joint resolution calling for a congress of States to define a plan for the 
 separation of Slate and Federal fields of taxation, to avoid the increas¬ 
 ing friction. 
 
 5. It will constitute a direct and discriminatory tax upon onr most 
 valuable natior.nl assets—invention, initiative, and energy. The In¬ 
 ventor properly looks to a high rate of profit during the* life of his 
 patent for his incentive and reward. The pioneer in -’hipping or for¬ 
 eign trade enterprise or new and untried fields of industry likewis* 
 looks to a high return during the period while high risk obtains for 
 his inducement to risk his capital and effort. Unusual energy and 
 ability with a small capital may produce much larger returns than 
 moderate energy and ability with a much larger capital, and so may 
 perform valuable public service. All these valuable public assets— 
 invention, initiative, energy, and ability—are penalized by the proposed 
 tax. 
 
 0. It constitutes an unwise and unfair discrimination against good 
 will, which is not included in the bill under the heading of actual capi¬ 
 tal. Good will is property. It can be bought and sold. A corporation 
 which has built up a valuable good will has added to its surplus prop¬ 
 erty, its invested capital, just as truly as lias a corporation with un¬ 
 divided profits employed in the business. To count the undivided 
 profits, but not the good will, as capital, lays an unfair burden upon 
 the good will and also penalizes the elements which enter into and pro¬ 
 mote good will, such as honesty, integrity, special ability, or service, 
 which public interest requires should be encouraged. 
 
 7. Its collection will involve many serious practical difficulties, 
 necessitating extensive and inquisitorial machinery, and lay an unduly 
 large Charge upon all corporate enterprises, successful or unsuccessful. 
 In the shape of extra reporting and accounting. The widest variance 
 exists in Slate corporation laws regarding the different elements in¬ 
 volved by the proposed tax. The Federal Trade Commission has said 
 that the great bulk of business in this country is conducted without a 
 proper cost-accounting system, and without proper cost accounting 
 profits can not be ascertained. Multiplicity of reports, increased and 
 
 f irobably extensive revision of bookleeping, complicated and extensive 
 nquisitorial machinery, and wide latitude for inequity, fraud, ahd 
 evasion are all necessary parts of the actual collection of the proposed 
 tax. 
 
 All of which is respectfully submitted. 
 
 National Industrial Conference Board, 
 
 By Frederick P. Fisn, Chairman. 
 
 By Magnus W. Alexander, Executive Secretary. 
 
 Mr. WEEKS. Now, Mr. President, I am going to state a few 
 examples which I think will demonstrate some of the criticisms 
 I have made against this legislation. Corporations have been 
 singled out as a fair prey for the imposition of taxes. Who 
 compose the corporations? Under the present system very 
 largely they are the people themselves. There are more than 
 100,(X>0 stockholders, for example, in the Pennsylvania Railroad 
 Co., and more than 100,000 stockholders in the United States 
 Steel Co. You can no longer say because a corporation is large 
 or important it only represents one or two or a half-dozen in¬ 
 terests. It is a means, when large aDd important enough, 
 through which prudent people trying to save something for their 
 old age may safely invest their savings. It should be our pur¬ 
 pose to encourage such organizations if they furnish safe invest¬ 
 ment facilities for those who generally have not had experience 
 in investing their money with safety, and who are frequently 
 led to put their savings in wild-cat enterprises and lose them. 
 82945—1705G 
 
14 
 
 Combination of the capital of small stockholders is necessary 
 for the promotion and continuance of business on a large and 
 economical scale for the production of the necessaries of life. 
 
 In order to make great business enterprises attractive for in¬ 
 vestors they must be stable and profitable. 
 
 The greater the risk, the larger the profit ought to be. The 
 continued addition of new taxes to the burden of corporations is 
 bound and has begun to lessen the value of the investment in 
 industrial enterprises. 
 
 Twenty years ago investment in railroad stocks was con¬ 
 sidered most conservative. To-day such investments are invest¬ 
 ments to be avoided. The trend of legislation, if followed, will 
 bring the same results to industrial corporations. 
 
 Incomes of partnerships derived from agriculture or personal 
 services are exempt hereunder. This certainly is not for the pro¬ 
 tection of the small farmer. It rather encourages combinations 
 of investors to control large agricultural interests. 
 
 If such an excess-profits tax is to be imposed, why should it 
 not fall upon partnerships controlling large areas and making 
 profits in excess of 8 per cent? There are many such examples. 
 
 It is very frequently the practice for corporations located in 
 other New England States to maintain offices in Boston. It is 
 almost essential for them to do so in order to maintain their 
 own selling departments. Such a corporation located in Maine 
 would be taxed the local city taxes and the Maine franchise tax, 
 the Massachusetts franchise tax, the city of Boston tax, the 
 Federal income tax, and the Federal capital-stock tax. 
 
 Almost exactly that same condition would obtain in other 
 States. Senators forget that we raise a very much greater 
 amount of revenue in all States for local purposes than the 
 proportion of the contribution which those States make for 
 the support of the General Government. We go on levying 
 ta^es in Washington as if they were the only taxes imposed 
 against our citizens, when as a matter of fact we are fre¬ 
 quently taking from the States the only sources of revenue, or at 
 least the main sources, they have, and are piling up taxation 
 and indebtedness in a way which is going to bring us serious 
 trouble unless we face the situation and stop some of the ex¬ 
 travagance. We should adopt the budget system of government. 
 
 We can not avoid enormous expenditures in any other way, 
 and it is up to Congress to consider that question without de¬ 
 lay ; stop this trend of unparalleled expenditures and the im¬ 
 position of taxes not justified and in competition with the taxes 
 imposed by our own States. 
 
 PARTNERSHIPS. 
 
 Take two cases: A and B have $50,000 each which they in¬ 
 vest in manufacturing raincoats—capital, $100,000. They make 
 $20,000. Under this bill their exemptions would be $5,000 plus 8 
 per cent of $100,000, or $8,000, a total of $13,000. They would 
 pay a tax of 8 per cent upon the excess $7,000, or $560. 
 
 C having $100,000 establishes the same kind of a business 
 next door, makes $20,000, and is not taxed under this bill be¬ 
 cause he is operating as an individual. The smaller investors, 
 82045—1705G 
 
15 
 
 who arc obliged to join forces in order to do business, are 
 taxed while the wealthier man pays nothing upon excess profits. 
 
 A brokerage concern having a large capital and making large 
 profits would be exempt under the “ personal-service ** clause. 
 
 The success of corporations depends to a great degree upon 
 the personal services of their managers, and there are many 
 instances where a small capital plus valuable personal services 
 yields largo returns on the capital invested. These concerns 
 would lx? unfairly and excessively taxed under this bill. Per¬ 
 sonal services in a partnership are free from tax. Personal 
 services in a corporation with perhaps less capital involved are 
 taxed. 
 
 For the purpose of fixing the income tax of corporations cer¬ 
 tain returns of financial condition are demanded by the Gov¬ 
 ernment. 
 
 Also under the new capital-stock tax other returns arc re¬ 
 quired. 
 
 From these the Government determines the value of the 
 capital stock of corporations. 
 
 Section 202 of this bill fixes another standard of value upon 
 which excess profits may be determined. 
 
 If the Government determines the value under the capital- 
 stock tax for purposes of taxation-*-and it is presumed that 
 value thus determined is fair—it should accept its own valua¬ 
 tion for the purpose of determining what constitutes excess 
 profits. 
 
 Government appraisals of value fixed for determining one 
 tax should be accepted as decisive and should not vary in the 
 same year. 
 
 Business concerns to-day are hampered by the numerous re¬ 
 quirements for returns and by the arbitrary demand of Gov¬ 
 ernment officials demanding changes in accounting and differ¬ 
 ing methods of fixing valuations. Uniformity would tend to 
 economy both in the private and the public service. 
 
 Following the same methods of determining value in the 
 capital-stock and excess-profits taxes would remedy the dis¬ 
 crepancy and discrimination which this bill raises and would 
 allow a consideration of good will—the most valuable asset of 
 many partnerships and corporations. 
 
 Take the case of a newspaper with $200,000 originally in¬ 
 vested. For 10 years dividends are not paid. As a part of 
 expenses large sums are paid out of earnings in advertising, in 
 increasing circulation, in paying special writers. A strong per¬ 
 sonality controls the editorial policy. The paper gains a repu¬ 
 tation, a circulation, and at the end of 10 years is worth 
 $400,000, a value built on personal service and the foregoing of 
 dividends. Its presses and physical assets for which cash was 
 paid may be worth not more than $150,000, though the total 
 value of the business may be worth two or three times that sum. 
 The money earned and spent for circulation, advertising, spe¬ 
 cial writers, and so forth, has built up a value which the Gov¬ 
 ernment taxes under the capital-stock tax, but would decline to 
 consider under this act. 
 
 It will thus be seen that the bill operates to exempt personal 
 services ii. one case, but refuses to make allowance for them 
 in another. 
 
 82945—17036 
 
1G 
 
 To show i ho difference, take the ease of a corporation, a part¬ 
 nership, and an individual, each having a capital of $100,000, 
 which makes an annual net profit of $50,000 : 
 
 Actual capital invested-$100, 000 
 
 Net profit_ 50, 000 
 
 Exemptions allowable under proposed law : 
 
 Eight per cent net protit on actual capital_$8, 000 
 
 Additional exemption_ 5, 000 
 
 - 13,000 
 
 Sum on which “ excess-profits ” tax will be levied_ 37, 000 
 
 “ Excess-profits ” tax of 8 per cent_ 2, 900 
 
 In the case of a corporation there would be an additional tax 
 of 2 per cent on net profits in excess of $5,000, amounting 
 in the above case to_ 900 
 
 Total tax_ 3, SCO 
 
 Ill addition each partner in a partnership or each stockholder 
 in a corporation must pay an income tax on all income in excess 
 of $4,000. This income tax was greatly increased last October, 
 and yet an individual conducting that business would only have 
 to pay the income tax which is now a part of the law. 
 
 Take the case of a partnership or corporation in which the 
 principal owner has secured a patent on an invention and has 
 from time to. time made improvements upon it. In the course 
 of many years it has acquired great value through his personal 
 efforts. Comparatively little cash has been paid in. This value 
 is taxed under the income tax and. capital-stock tax laws, but 
 no credit is given to it under the proposed bill, because the 
 greater part of its value does not rest upon paragraphs (1), (2), 
 or (3) of the proposed section 202. No allowance for losses in 
 years immediately preceding is made. If it is impracticable to 
 go back beyond one year, why not accept, for the purpose of 
 determining the exemption, the fair average value of capital 
 assets for the preceding year? 
 
 Mr. President, there was called to my attention the other day 
 a case of a corporation which has not earned and has not paid 
 dividends for seven years, and yet during the past year, having 
 developed a quality and class of goods for which there was 
 great demand, it made 40 per cent on its capital. That is only 
 an average for the eight years of 5 per cent. Five per cent is 
 certainly not an excessive profit for stockholders going into a 
 manufacturing concern; and yet under this bill that corpora¬ 
 tion and its stockholders are going to be taxed on their propor¬ 
 tion of the 40 per cent, which really belongs to them, and 
 which should and would be reserved by any prudent concern to 
 try to continue dividends during a term of years. 
 
 The States have depended upon direct corporation taxes for 
 their revenue. 
 
 The United States Government is steadily encroaching upon 
 this field with its income, inheritance, and capital-stock taxes. 
 
 The logical result of this Government exaction of taxes and 
 control of accounting and valuations will be national incorpora¬ 
 tion laws, to which so many States object. 
 
 Let me take other examples showing the unfairness and in¬ 
 adequacy of this law. 
 
 The Massachusetts franchise tax is about 1.94 per cent of the 
 value of the capital stock less real estate and taxable property, 
 82945—17056 
 
IT 
 
 l>oth within and without the State, and the minimum of one- 
 tenth of 1 per cent less local tax. 
 
 Now, take the three cases of corporations having, respectively, 
 a capital of $500,000, $1,000,000, and $2,000,000. 
 
 Cases. 
 
 Capital, 
 $500,000; 
 property 
 valued at 
 $300,000. 
 
 Capital, 
 $1,000,000; 
 property 
 valued at 
 $300,000. 
 
 Capital, 
 $2,000,000; 
 property 
 valued at 
 $300,000. 
 
 Property lax (local), about SIS per thous¬ 
 and . 
 
 15,400 
 
 3,S80 
 
 2,000 
 
 4,800 
 
 $5,400 
 
 13,510 
 
 2,000 
 
 1,600 
 
 $5,400 
 
 32,910 
 
 2,000 
 
 Massachusetts franchise, tax 1.94 per 
 cent. 
 
 Federal income tax of 2 per cent. 
 
 Eight per cent excess-profits tax. 
 
 Total. 
 
 16,080 
 
 16.08 
 
 20 
 
 22,510 
 
 22.51 
 
 10 
 
 40,310 
 
 40.31 
 
 5 
 
 Tax to profits, per cent. 
 
 Earnings to capital, per cent. 
 
 The above is based on the assumption that the capital stock 
 is worth par. Of course, in the first case with 20 per cent earn¬ 
 ings it would be worth more, just as in the third case with 5 
 I>cr cent earnings it would be worth less. 
 
 Now, there are three concerns earning exactly tlie same amount 
 of money, operating in the same kind of business,, having dif¬ 
 ferent amounts of capital, and yet all will be taxed differently 
 under this proposed law. That condition applies to New Jersey 
 as well as to Massachusetts. 
 
 Taking a New York corporation, making net profits of $100,000, 
 the New' York franchise tax is based on the capital stock em¬ 
 ployed within the State. If dividends of 0 per cent or over are 
 paid, the tax is one-fourth of a mill for each 1 per cent of 
 dividends levied on each dollar of stock. If dividends are less 
 than G per cent, or assets do not exceed liabilities, or stock 
 averages to sell below par, then tliree-fourths of a mill for each 
 dollar of capital. With dividends less than G per cent and 
 assets exceed liabilities, or stock averages above par, then 11 
 mills is the tax. 
 
 Taking the corporations to which I have referred in the case 
 of Massachusetts, one having $500,000 capital, another $1,000,000, 
 an'd the third $2,000,000 capital, and earning profits of $100,000, 
 the results are indicated in the following table: 
 
 
 Capital 
 
 $.500,000, 
 
 dividend 
 
 7 per cent. 
 
 Capital 
 
 $1,000,000, 
 
 dividend 
 
 5 per cent. 
 
 Capital 
 
 $2,000,000, 
 
 dividend 
 
 2 per cent. 
 
 New Ynrlr State franchise tax. 
 
 $2,625 
 5,100 
 2,000 
 4, S00 
 
 $3,750 
 
 5,100 
 
 2,000 
 
 1,600 
 
 $3,000 
 
 5,100 
 
 2,000 
 
 Local tax about $17 (property $300,000).. 
 Federal income tax. 
 
 Excess-profits tax. 
 
 Total. 
 
 
 14,525 
 
 12,450 
 
 10,101 
 
 
 In other words, under this excess-profits tax the smaller con¬ 
 cern would pay three times as much as the one twice as large, 
 82045—17050 
 
18 
 
 and the concern four times as large would pay no tax at all. 
 You are not getting at the kind of people you think you are 
 going to reach by enacting this legislation. To a great extent 
 the very rich man is going to escape this taxation, but you are 
 taxing the small stockholder in all of these corporations. 
 
 One of the features about this that will cause a great deal of 
 difficulty and cause a great deal of unfairness, and has caused a 
 great deal of difficulty and is not remedied in the old income 
 tax, is the question of the valuation of the depreciation that 
 may be allowed. 
 
 In the cotton industry in Massachusetts there has been much 
 difficulty in this respect relating to determining valuation. 
 Many corporations, such as cotton mills, some of which have 
 been in operation for nearly a hundred years, under the old 
 method of bookkeeping would carry perhaps a building worth 
 ,$200,000 or $300,000 on their books at $100,000. Then the ques¬ 
 tion came up as to how, when the income tax came along, they 
 could determine their valuation for the purpose of making their 
 depreciation, and an inspector from the Treasury Department 
 would come along and say they must change their bookkeeping 
 methods. 
 
 Another year another inspector would come along and find 
 something wrong in their bookkeeping methods. Several of 
 the New Bedford cotton mills, for example, are now endeav¬ 
 oring to work out with the Treasury Department certain defi¬ 
 nite forms of valuation; but the difficulty resulting from this 
 question of what is a fair valuation of property can easily be 
 seen. A mill which is in successful operation is worth a great 
 deal of money; but, if it is not profitable or if it is closed down, 
 its real estate is worth substantially nothing. In New Eng¬ 
 land, one of the favorite loans is on real estate; in fact, a con¬ 
 siderable portion of savings banks’ deposits is loaned on real 
 estate in Massachusetts; but loans are seldom made on manu¬ 
 facturing plants, because their success depends so largely upon 
 the intelligence and ability of the management; and yet in this 
 bill we are giving no credit at all to such intelligence and 
 ability. 
 
 Incidentally, to show the scope of this proposed law and the 
 army of people that will be required to enforce it, producing, in 
 my judgment, a cost of collection out of all proportion to the 
 amount of money collected, there are 306,443 corporations mak¬ 
 ing returns to the Internal Revenue Bureau now, of which 
 190,911 were found to be subject to the income tax. Quite 
 likely they will also be subject to the excess-profits tax. The 
 Finance Committee of the Senate estimates, I understand, that 
 there will be 50,000 partnerships that will come within the 
 scope of this law. I should think, if the committee’s estimate 
 had been 500,000 partnerships they would have been a great 
 deal nearer right. I doubt if even that will represent the num¬ 
 ber ; but if any one can imagine the expense, the time, and the 
 difficulty of examining all these concerns, he will readily under¬ 
 stand that the cost of carrying into effect this law is going to 
 be unreasonably large. 
 
 Here are more examples to show the unfairness and the un¬ 
 evenness of the application of the law. 
 
 Another instance which will show the unfairness of this 
 excess-profits tax is that of John Wanamaker, who is conduct- 
 82945—17050 
 
19 
 
 ing an enormous business in Philadelphia and New York as a 
 private individual. He will not be taxed under the provisions 
 of this bill, and yet it is probable that he has one of the most 
 profitable businesses in the United States. 
 
 In immediate competition with him are many concerns in 
 every city in the country, the names of which will come readily 
 to the minds of any Senator, and they are partnerships or 
 stock companies, and they will be taxed either as partnerships 
 or as corporations. 
 
 Take another more extreme example: A New York broker re¬ 
 ported to be close to the administration stated recently to the 
 “ leak ” committee that he made $470,000 because an English 
 statesman used the word “ but ” in a recent statement. Not a 
 cent of that $470,000 will be taxed under this proposed law. If 
 the man who profited by his own cleverness in taking advan¬ 
 tage of the situation which he foresaw had had a partner, he 
 would have been taxed. No broker operating as an individual 
 will be taxed under this law. 
 
 If legislation must be passed along the proposed lines, then 
 I submit that the tax of 8 per cent should be based on net sales 
 and not on capital, as this latter method would be inequitable. 
 Owing to the varying nature of business the capital requisite for 
 a stated volume of sales varies widely. For example, it might 
 require a capital of $100,000 to produce sales of $100,000 in one 
 line, and in another line the same capital might be sufficient to 
 produce a very much larger volume of sales, say, for instance, 
 $S00,000. 
 
 With a tax of 8 per cent on capital as proposed the first-named 
 company would be allowed 8 per cent profit on sales before the 
 tax would apply, whereas the latter company would be allowed 
 only 1 per cent profit on sales. Is this fair? This is no fanci¬ 
 ful illustration, and I submit that it clearly shows that net sales 
 and not capital is the only fair basis. 
 
 The bill bears with particular severity upon partnerships, be¬ 
 cause the net income of such is arrived at before distributing 
 any remuneration to the partners for their services, whereas 
 corporations are entitled to charge as expense the salaries paid 
 to the general officers. Moreover, the fact that a tax is laid 
 upon an income over 8 per cent on actual cash investment bears 
 heavily upon a partnership as compared with a corporation, 
 because the corporation may have issued stock against intan¬ 
 gible assets, such as good will, patents, and so forth, and the 
 age of the corporation may be such that it will not be practicable 
 to determine the actual cash invested in the business except to 
 take book values. In the case of a partnership not having 
 issued stock, no value has been given to the good will or pay¬ 
 able assets which they have declared as a result of the growth 
 of its business. Their capital invested will, therefore, stand 
 at the actual amount invested in the business or at the current 
 cash value of tangible assets. 
 
 Take, for example, two corporations engaged in cotton and 
 woolen manufacturing. A corporation owns its real estate and 
 machinery and is capitalized at $S0,000. B corporation rents 
 its real estate and machinery and is valued at only $50,000, and 
 yet it may be a third or a half larger in its manufacturing 
 capacity. Suppose their profits are equal and that they make 
 62045—17056 
 
20 
 
 $20,000, of which $5,000 is exempt; omitting the corporation tax, 
 their taxes would be as follows: 
 
 A corporation, having a taxable profit of $15,000—$G,400, being 8 
 per cent of capital or actual cash and assets paid in, would have left 
 a taxable amount of $8,600, which, at 8 per cent, would be $688. 
 
 11 coi’poralion, having a taxable profit of $15,000—$1,200, being 8 
 per cent of its capital or actual cash and assets paid in, would have left 
 $13,800, which, at 8 per cent, would require $1,104 for taxes. 
 
 One of the unfortunate developments connected with this leg¬ 
 islation, it seems to me, has been the palpable sectional empha¬ 
 sis given it by those responsible for its promotion. The leader 
 of the majority party in the House of Representatives, who is 
 an old friend, and whom I should hesitate to criticize even if the 
 rules and propriety did not forbid it, in discussing the bill 
 called to the attention of the country a rather unfortunate ex¬ 
 pression, which emphasizes quite forcibly the attitude of the 
 Democratic Party. He is said to have made this statement: 
 
 I think most or the greater part will be levied north of Mason and 
 Dixon’s line. All these fellows who live in States that will pay a 
 large part of this tax can get rid of the location argument by remov¬ 
 ing down to my town of Scotland Neck and pay the tax from there. 
 
 I do not know that he made that remark, but such state¬ 
 ments, coming from a responsible source, create a feeling which, 
 I contend, is bad for the country. 
 
 During the debate in the House it was suggested by those re¬ 
 sponsible for the legislation in defending the unfair distribution 
 of the taxation iuqxosed that certain of the Northern States 
 should be willing to pay a majority part of the tax because a 
 large portion of the money thus collected would be expended in 
 those States, and Mr. Kitciiin used this language: 
 
 Take the Fore River Co. in the city of Boston— 
 
 Meaning, I suppose, the Fore River Co. located in Quincy, 
 Mass.— 
 
 that will get more of these appropriations than the entire South and 
 15 Western States. 
 
 That seems on its face a reasonable statement, and yet let us 
 examine it from another viewpoint The last first-class battle¬ 
 ship constructed by the Fore River plant was the Nevada. This 
 vessel cost approximately $11,000,000, and required three years 
 and four months to construct. Under the existing corporation- 
 tax law the industries of Massachusetts paid an income tax of 
 $2,858,713 during the fiscal year 1916. In three years and four 
 months, the time required to build the Nevada, those industries 
 under the present law will have paid approximately $10,000,000 
 in income taxes, an amount practically equivalent to the total 
 cost of the Nevada. In other words, the industries of Massa¬ 
 chusetts—and if the personal income tax of that State were 
 included the figures would be very much larger—will have paid 
 the National Government in one form of taxes nearly enough 
 to pay the cost of a battleship for the privilege of having it 
 constructed in a Massachusetts shipyard. I think it entirely 
 possible that the State of Massachusetts, if it could be relieved 
 of this tax, would be willing to have the next battleship con¬ 
 structed in Mr. Kitceiin’s State or any other State which is 
 not bearing a fair share of the burdens of government. 
 
 Indeed it is not unreasonable to call to the attention of the 
 Senate the fact that there is no hesitation on the part of States 
 in other sections of the country, and especially in the South, in 
 which section the dominant party now obtains its political power, 
 82045—17056 
 
21 
 
 to spend money collected in the northern part of the country. 
 The slightest investigation—and I will not go into it because I 
 do not believe in making sectional arguments—will demonstrate 
 the fact that the North is paying on every dollar of its wealth 
 five or six times as much as our Southern States and that a 
 much larger percentage of the appropriations made by the Gov¬ 
 ernment in proportion to the wealth of the States goes to the 
 sections paying the lesser tax. 
 
 As I have stated, the State of Massachusetts paid $2,S5S,713 
 in corporation taxes during the fiscal year 191G, an amount 
 which exceeds by a considerable figure the entire tax paid by 
 the nine Southern States of Alabama, Florida, Georgia, Louisi¬ 
 ana, Mississippi, North Carolina, South Carolina, Tennessee, 
 and Virginia. It is estimated by the Democratic leaders that 
 90 to 95 per cent of the new excess-profits tax will be levied 
 upon the Northern States, so that it is entirely probable that 
 the State of Massachusetts, under the proposed law, will pay 
 more toward the proper protection of the country and general 
 rehabilitation of the Federal Treasury than the entire South. 
 The States of New York and Pennsylvania already pay many 
 times more in Democratic direct taxes than the entire South, 
 and under the new law the proportionate difference will be 
 even more marked. 
 
 I would not raise this argument, Mr. President, if it had not 
 been made in another House and in public discussions. I simply 
 want to point out the facts as*tliey bear on the case. 
 
 The Democratic leader in the House contends that the North 
 should be willing to pay this great proportion of the prepared¬ 
 ness expenditures because the demand for protection comes 
 from that locality. But he does not suggest that a sufficient 
 tax should be imposed upon the industries of the States of 
 Texas, New Mexico, and Arizona to defray the expenditure of 
 .$102,000,000 .n protecting those States from incursion by Villa; 
 nor does he suggest that a tax of $11,000,000 should be laid 
 upon the industries of the State in which will be located the 
 armor-making plant; nor that $21,000,000 shall be imposed 
 against the State in which the nitrate plant will be situated. 
 Those expenses are to be met by the issuance of bonds which 
 the administration, no doubt, will expect the North to purchase 
 out of any funds remaining after it has paid all of the other 
 Democratic taxes. 
 
 No fair-minded man would contend that it would be fair to 
 impose a tax of $162,000,000 upon the industries of Texas 
 merely because the United States was threatened with attack 
 at that particular point, and yet we have found a great many 
 prominent Democrats ready to champion the theory that the 
 North should be made to pay practically the entire cost of 
 national preparedness because it is from there that the country 
 would most probably be attacked. No foreign enemy will ever 
 declare war against the State of New York or the State of 
 Pennsylvania or the State of Massachusetts. Such a declara¬ 
 tion, if it should ever come, would be against the entire United 
 States, and no section of the country should be exempt from 
 paying its proper share of the cost of preparedness against such 
 a day. 
 
 The four States of New York, Massachusetts, Pennsylvania, 
 and Illinois pay $30,000,000 of corporation taxes, which is over 
 82945—17056 
 
22 
 
 one-half of the total corporation tax of the country. The same 
 States pay $45,000,000 of individual income taxes, which is 
 about two-thirds of the total income tax, and it is undoubtedly 
 true that the same States will pay a proportional amount of this 
 proposed tax. The net result of this form of taxation is 
 extremely harmful. Only 330,000 people directly pay an income 
 tax, which is less than one-tliird of 1 per cent of our population, 
 and a comparatively small proportion of the people pay the cor¬ 
 poration tax and will pay this excess-profits tax directly. As 
 long as one-tliird of 1 per cent of our population are paying this 
 tax there is nothing to prevent the other 99§ per cent clamor¬ 
 ing for additional appropriations, and the average politician is 
 going to listen with approval to that clamor. If those who insist 
 on following such a course were honest enough to explain to the 
 people that they are- not standing their share of this taxation, 
 quite likely this clamor would cease. 
 
 In the section of the country which I in part represent there 
 has developed a frugality in saving money, and this has been pro¬ 
 moted by the mutual savings bank system, which is one of the 
 prides of Massachusetts and contiguous States. In Massachu¬ 
 setts there are $928,000,000 deposited in savings banks, which 
 represents deposits made by 2,349,207 depositors; in other words, 
 substantially two-tliirds as many depositors as there are people 
 in the State. Necessarily there are some diplications among 
 these depositors; that is, a depositor may have accounts in more 
 than one bank—sometimes in several banks—but I think it is 
 fair to assume that from one-third to one-half the people of 
 Massachusetts have deposits in the savings banks. Those banks 
 invest in real estate mortgages and in certain classes of securi¬ 
 ties, like railroad bonds and other profit-making corporations. 
 In many States the laws surrounding the investment of savings 
 funds are not as stringent as in Massachusetts. The money of 
 some of these banks may be invested in securities directly af¬ 
 fected by this 8 per cent excess-profits tax. Does anyone think 
 that if these frugal people, who have saved between three and 
 four hundred dollars each, were told they were to be taxed 
 in this imprudent and unfair way in order to maintain the 
 Government, that they would not make a protest? The trouble 
 is that the tax does not fall directly on them, and they do 
 not understand it. Instead of the clamor being against the 
 so-called rich corporation it would be to protect the investments 
 of those who, to a large extent, are the wage earners and savers 
 of money and who by their ow r n efficiency are demonstrating the 
 course the Government should follow. 
 
 I ought to add, in the case of the Massachusetts savings 
 banks, that deposits are not taken in amounts larger than $1,000; 
 and when the deposits with accrued interest amount to $1,600 
 the interest stops, which indicates the comparatively small 
 amounts that can be deposited by any one person. 
 
 BOND ISSUES. 
 
 Mr. President, it should be a fundamental rule in govern¬ 
 mental financial operations that all current expenses should 
 be paid from the proceeds of the annual tax levy, and that if 
 loans are issued their duration should be within the life of 
 the object for which the appropriation is expended. The ex- 
 82945—17056 
 
23 
 
 penditures provided for in this bill are very largely of a con¬ 
 trary character to ordinary expenses of government, and it is 
 unfair to the taxpayer of to-day to require him to provide for 
 Improvements which are going to be equally beneficial to the 
 taxpayers of future years. Therefore I have provided in the 
 proposed bond issue I have introduced that it shall extend over 
 a period of 20 years, which is quite within the life of most of 
 the objects for which the expenditures are made. I do not 
 wish it to be understood, Mr. President, that I at all approve 
 all of these expenditures. I voted against most of them—the 
 bill to establish a nitrate plant, the shipping bill, and others— 
 but I assume that money is going to be appropriated to provide 
 for the purposes for which legislation has been adopted, and 
 therefore, if that is to be done, I want it done in this way. 
 
 The Alaskan Railway, with ordinary annual appropriations 
 for maintenance of way, will be in quite as good condition 20 
 years from now as to-day. The life of any ship which may be 
 purchased under the existing law will easily be from 20 to 30 
 years, and ships are now performing good service which are 
 much older than the maximum limit I have suggested. Even 
 battleships are kept on the rolls as first-class ships for a period 
 of about 20 years. Therefore substantially all of the purposes 
 for which we are making provision will be equally material to 
 the people for at least 20 years, which is the life of the bonds I 
 propose. 
 
 Having reached that conclusion, another important question 
 is to determine the character of bond. The United States Gov¬ 
 ernment has uever issued a serial bond. Its bonds issued after 
 the Civil War were intended to be retired by sinking-fund pro¬ 
 visions. For many years this policy was carried out by using 
 surplus revenues for that purpose, and as early as 1800 the debt 
 hud been reduced from about two and a half billions to sub¬ 
 stantially a billion dollars. No appropriations for the sinking 
 fund, however, have been made in recent years. I presume one 
 reason for this has been that the estimated revenues were not 
 sufficient to provide for these appropriations. Then another 
 problem has entered into the question in recent years of enough 
 importance to prevent the operations of the sinking fund. I 
 refer to the necessity for bond-secured circulation issued by 
 the national banks. 
 
 As time lias gone on practically all of our national debt has 
 been used as a basis for circulation and is being used for that 
 purpose to-day. The passage of the Federal Reserve act has 
 removed the necessity for the continuance of issuing that kind 
 of circulation. There is no reason, therefore. In times of ample 
 revenues, provided reasonable economy Ls used, why the entire 
 national debt should not be paid, and I hope when the present 
 difficulties have been passed that such a course will be con¬ 
 sistently followed. It is not an element of strength to a coun¬ 
 try to have a considerable outstanding indebtedness; it is an 
 element of financial and physical weakness. A country without 
 debt is in much better position to defend itself or wage active 
 hostilities than a country which will be embarrassed by out¬ 
 standing indebtedness, and in this respect alone the United 
 States will be in a position of great strength as compared with 
 other first-class nations at the end of the present war. 
 
 82945—17050 
 
24 
 
 Tlie finances of a municipality, a State, or a nation do not 
 materially differ from those of the private citizen. No private 
 citizen could acquire a good financial reputation if he con- 
 , stantly renewed his indebtedness when it matured. In other 
 words, if the individual or copartnership repeatedly renews in¬ 
 debtedness, it is taken as an indication that they have not 
 sufficient capital to conduct their business operations and their 
 credit is greatly impaired. The sound business concern is the 
 one which borrows temporarily and goes out of debt at some 
 time during its annual operations. The only indebtedness of 
 a relatively permanent character which is .justifiable is that 
 required in the large extension of a plant, which might be cov¬ 
 ered by a mortgage, but that mortgage should be gradually 
 liquidated. Even that kind of indebtedness is an embarrass¬ 
 ment to corporations if they wish to go into the market to 
 borrow for temporary purposes. This argument is equally ap¬ 
 plicable to municipalities, States, or nations, and most local 
 communities in recent years have recognized the necessity of 
 extinguishing indebtedness by establishing sinking-fund provi¬ 
 sions, which have generally operated to carry out this purpose; 
 but, as in the case of our National Government, there have been 
 frequent deliberate violations of sinking-fund requirements. 
 
 A few instances will illustrate how possible it is to operate 
 sinking funds honestly and yet not obtain the statistical results 
 which seem probable. As late as 1869, in England, a committee 
 of Parliament made an investigation of sinking funds and made 
 a report to this effect: Between 1785 and 1829 England bor¬ 
 rowed £330,000,000 at about 5 per cent interest in order to pay 
 the same magnitude of indebtedness at per cent interest. 
 This policy by which a debt of per cent was converted into 
 one of 5 per cent meant an annual loss of interest of £1,627,765, 
 extending over a period of 43 years, or a total of nearly $340,- 
 000,000. 
 
 During our Civil War, the issue of legal-tender notes made 
 under the act of Congress of 1862 was fortified with a sinking 
 fund of 1 per cent. During the war no attempt was made to 
 fulfill this pledge, as the Government was continually borrowing 
 and adding to its total indebtedness. 
 
 For many years the State of Massachusetts outranked every 
 State in the Union in the magnitude of its State debt. Septem¬ 
 ber 30, 1913, its funded debt was $117,838,412, and its sinking 
 funds at that time were $34,674,498. -Incidentally, the very 
 statement of the magnitude of that sinking fund shows the im¬ 
 portance of its being well handled and the difficulty of its be¬ 
 ing entirely invested all of the time. At this time the gross 
 debt of the State, counties, municiaplities, and metropolitan dis¬ 
 trict is practically $400,000,000. This debt became so startling 
 that among other phases of it carefully investigated and studied 
 the question of the operation of sinking funds was taken up. 
 Although it has been optional in Massachusetts since 1882 to 
 issue serial bonds, this study of sinking funds and their opera¬ 
 tion was sufficient to bring about the passage of an act in 1913 
 prohibiting sinking funds for municipal loans, making the serial 
 bond compulsory for all such loans and requiring all such in¬ 
 debtedness to be issued on the same basis as had been adopted 
 by the Commonwealth in an act passed in 1906. 
 
 82045—17056 
 
In this respect, as in most others, Massachusetts has demon¬ 
 strated that it is one of the most progressive States. The sink¬ 
 ing-fund provision, as far as Massachusetts is concerned, has 
 become a dead letter. 
 
 At the constitutional convention in New York year before last 
 this question of a serial bond issue was given consideration. At 
 that time there was an indebtedness. State and municipal, in 
 New York of something like $2,000,000,000 gross. Tho constitu¬ 
 tional convention unanimously adopted the proposed change in 
 the matter of issuing serial for sinking-fund bonds, and it 
 would have become the basis of procedure in that State if the 
 constitution had not been defeated. 1 think I should say, how¬ 
 ever, that during the consideration of this constitution and the 
 arguments relating to it no objection was made to this provision. 
 
 Mr. NORItlS. Mr. President- 
 
 Mr. WEEKS. I yield to the Senator. 
 
 Mr. NORRIS. I am exceedingly interested in what the Sen¬ 
 ator is now stating in regard to the issue of bonds. It may be 
 that in some part of his address he is going to answer the ques¬ 
 tion I wish to ask. If he is, I hope he will not be diverted by 
 answering it now, but I should like to ask him to give us this 
 information. In a comparison between serial bonds and the 
 other kind, what has been the result in the way they have been 
 sold on the market? I mean, has there been any loss in the 
 sale of serial bonds as compared to other long-time bonds? 
 
 Mr. WEEKS. I think I refer to that briefly later on; but I 
 will say now that when serial bonds were first issued there was 
 some prejudice against them because they matured at different 
 periods, and some of them were too short to be considered a 
 good permanent investment. In these days, however, when 
 bonds are required to be deposited for the protection of postal 
 savings banks deposits, when so many banks invest money in 
 short-term bonds and short-time notes, when the Federal re¬ 
 serve banks could and would buy them, I am told by very many 
 bond men whom I have consulted that a serial bond sells as 
 readily as a sinking-fund bond. 
 
 Recently the Hon. Charles F. Gettemy, director of the bureau 
 of statistics in Massachusetts, made an investigation involving 
 calculations of some twelve hundred municipal sinking funds. 
 This investigation revealed net apparent deficiencies in 40 cities 
 and towns aggregating $1,794,391.5S, and net apparent surpluses 
 in 47 cities and towns aggregating $2,855,192.47. This was fol¬ 
 lowed by the legislation to which I have referred. 
 
 Within a year an investigation in New Y'ork has demonstrated 
 the fact that the citizens of that Sate have been taxed for sink¬ 
 ing funds nearly $19,000,000 in excess of the amount required 
 under a scientific bond-amortization plan. This situation is not 
 due to any one administration, but is the result of the opera¬ 
 tions of four recent State governments. It was estimated that 
 this accumulation of unnecessary money would have amounted 
 before the maturity of the bond issues outstanding to $234,- 
 000,000. 
 
 Last year the city of New 1’ork made a sale of $40,000,000 
 50-year 4J per cent sinking-fund bonds and $15,000,000 1 to 
 15 year 4i per cent serial bonds. Mr. Alfred D. Chandler, of 
 Brookline, Mass., to whom I am indebted for much of my in- 
 82945—1705G 
 
formation relating to this particular subject and who has 
 given it more complete consideration than any person in this 
 country, makes this comment on this sale of bonds. As an 
 illustration of the difference in the results obtained from sink¬ 
 ing-fund and serial bonds, he said: 
 
 Such an issue of sinking-fund bonds will ultimately cost New York 
 City $16,720,320 more than if issued in serial form, assuming that the 
 sinking-fund earnings would foi half a century average 3i per cent, or 
 $19,182,200 more if the sinking-fund earnings averaged 3 per cent, 
 which is the basis of computation adopted by the State of New York. 
 
 If the $40,000,000 4^ per cent sinking-fund bonds were exchanged 
 into serial bonds at an increase of £ per cent, or l per cent, or g per 
 cent, or even ^ per cent, the,difference in favor of the serials would be 
 for the 50 years as follows: 
 
 
 Sinking 
 fund, 3 per 
 cent basis. 
 
 Sinking 
 fund, 3| per 
 cent basis. 
 
 As serials at 4 J per cent. 
 
 $19,182,200 
 18,067,200 
 16,632,200 
 15,357, 200 
 14,082, 200 
 
 $16, 726,320 
 
 15.451.320 
 
 14.176.320 
 
 12.901.320 
 
 11.625.320 
 
 As serials at 4§ per cent. 
 
 As serials at 4J per cent. 
 
 \s serials at 4§ per cent. 
 
 As serials at 4| per cent. 
 
 
 Mr. WADSWORTH. Will the Senator yield merely for me to 
 make a comment? In the discussion of the proposed amend¬ 
 ment of the New York constitution having relation to serial 
 bonds taking the place of long-time sinking-fund bonds, it was 
 estimated that were the long-term sinking-fund bonds now 
 issued or having already been issued by the State of New York 
 changed into serial bonds, short-time bonds, by the time of the 
 maturity of those bonds, bonds issued it will be remembered to 
 the amount of $100,000,000 for the building of highways and 
 many million dollars worth of canals, the State of New York 
 would thereby save $40,000,000 in taxes. 
 
 Mr. WEEKS. 1 think I have some figures here which I will 
 give and which will confirm the statement just made by the 
 Senator from New York. 
 
 If the State of New York had issued its 50-year sinking-fund 
 bonds, which now equal, principal and accrued interest, 
 $001,071,144, in serial form, the total difference in their cost 
 in favor of the latter method, adopting the New York State 
 basis of 3 per cent for its sinking-fund earnings, would have 
 been $89,977,262. If the respective outstanding bond rates, 
 which are 3 per cent, 4 per cent, 4£ per cent, and 4-J per cent, 
 had all been increased one-eiglitli of 1 per cent and the bonds 
 issued in serial form, the difference in favor of the serial 
 method would be $83,339,730. If the rates had been increased 
 one-fourth of 1 per cent, the difference in favor of the serial 
 method would he $76,525,535. If increased three-eighths of 1 
 per cent, the difference in favor of the serial bond would be 
 $69,799,970. If increased one-half of 1 per cent, the difference 
 would be $63,074,855, and even if the sinking fund could earn 4 
 per cent, llie difference in favor of the serial method would 
 range from forty to sixty-live millions of dollars. 
 
 If any other arguments were necessary to determine the de¬ 
 sirability of a serial over a sinking-fund bond we could find 
 impressive examples enough to justify the statement that there 
 has been and is the greatest recklessness in the management of 
 82945—17056 
 
27 
 
 sinking funds. This is not alone due to the fact that they are 
 not as economical ns the serial method, but that they frequently 
 are not used at all. This contention is verified in the case of 
 our own Government. 
 
 The sinking-fund provisions applying to our outstanding 
 bonds date back as far as 1862. The law reads as follows: 
 
 Revised Statutes, section 3688. There Is appropriated annually, out of 
 the receipts for duties on imported merchandise, a sum for the payment 
 of the public debt equal to the interest on all bonds belonging to the 
 ■inking fund. 
 
 Revised Statutes, section 3689. There is appropriated, out of anv 
 moneys in the Treasury not otherwise appropriated, for the purpose's 
 hereinafter specified such sums as may be necessary for the same, re¬ 
 spectively, and such appropriations shall be deemed permanent annual 
 appropriations. 
 
 Kinking fund. Of 1 per cent of the entire debt of the United States, 
 to be set apart as a sinking fund for the purchase or payment of the 
 public debt. In such manner as the Secretary of the Treasury shall from 
 time to time direct. 
 
 That law is now on the statute book, and yet no attention 
 whatever is or ever has been paid to it, except to apply to the 
 payn cut of our indebtedness the surplus revenues the Govern¬ 
 ment might have from year to year. This surplus was very 
 large during the period immediately after the Civil War and 
 for 25 years thereafter, and it was in that way that the indebt¬ 
 edness accruing during the Civil War was met. 
 
 Public sinking funds, as I have stated, have proved to be 
 too precarious for sound finances, notwithstanding the estab¬ 
 lishment of such funds in connection with our municipal, county, . 
 and State indebtedness in the United States. Scalings down 
 and interest defaults are reported to have exceeded a billion 
 dollars, and to-day eight States of the Union are in default, 
 principal and fnterest, to the extent of more than seventy mil¬ 
 lions of dollars. Legislators have been dilatory and irrespon¬ 
 sive to this subject, as is witnessed by the failure to take action 
 by Congress itself. Thirty-one years elapsed in Massachusetts 
 between the permissive and obligatory legislation relating to 
 serial bonds, and only recently has the second State taken any 
 action on this subject. 
 
 The sinking funds of New York State amount to more than 
 $-10,000.000; those of New York City to more than $370,000,000. 
 Theoretically such funds are promptly and continuously invested 
 to yield a rate of interest above the usual bank-deposit rates, 
 but actually millions of dollars of New York City’s sinking 
 funds are uninvested, amounting recently to $25,969,7G1. The 
 average uninvested amount of New York City’s sinking funds 
 during a year’s time has been more than ten millions of dollars, 
 which means a material loss of interest, and which, of course, 
 subverts the sinking-fund principle. 
 
 One of the first recognitions of the desirability of serial pay¬ 
 ments is found in the famous codicil to Benjamin Franklin’s 
 will. In which he left to the cities of Boston and Philadelphia 
 $5,000 each, contemplating the investment thereof for two cen¬ 
 turies, the income in part to be loaned to young married 
 artificers, who were to repay “ with yearly interest one-tentli 
 part of the principal,” which is exactly the serial-bond method. 
 
 Speaking of the New York City debt, the comptroller of that 
 city recently stated that a 50-year $50,000,000 sinking-fund 
 loan would show a difference between the serial and sinking- 
 82945—17056 
 
28 
 
 fund basis of $73,663,750 in favor of the serial system. It lias 
 been carefully estimated that if $1,000,000,000 of the New York 
 City debt bad been issued in serial instead of sinking-fund form, 
 assuming the term to be 50 years at 4 per cent, the difference 
 in the interest account between the two forms would amount 
 to the amazing sum of $980,000,000. 
 
 So definitely has the correctness of this great difference 
 been worked out that the mayor of Boston has recently peti¬ 
 tioned the legislature to authorize the city of Boston to ex¬ 
 change serial bonds for the outstanding bonds of the city against 
 which there is a sinking fund, and there is a bill pending before 
 the Legislature of Massachusetts authorizing the Commonwealth 
 and all municipalities in the State to exchange serial bonds for 
 outstanding sinking-fund bonds. 
 
 In a statement before a committee having this matter in 
 charge, Mr. Chandler recently said: 
 
 “ Of the outstanding $200,000,000 or more of sinking-fund 
 bonds maturing between 1935 and 1958, about $100,000,000 have 
 an average duration of about 30 years. Assuming that only 
 one-lialf of this $100,000,000 or $50,000,000, are exchanged into 
 30-year serials, the difference in the interest account in favor 
 of taxpayers would be (assuming the same rates per cent of 
 interest) about $27,000,000 and crediting the sinking funds with 
 the safe estimate on such long time as earning 31 per cent, 
 the difference in the actual cost to the taxpayers in favor of 
 .the serials would be about $5,250,000.” 
 
 Therefore, if the Massachusetts indebtedness had an average 
 maturity of 30 years from date and it could be refunded into 
 serials bearing the same rate of interest, there would be a 
 saving to the taxpayers of the State on this $200,000,000 of 
 indebtedness between now and the final liquidation of the 
 debt of about $21,000,000. It is significant that no opposition 
 whatever appeared against this legislation at the hearing given 
 on this subject by the committee of the Massachusetts Legis¬ 
 lature. 
 
 I have not had the time to figure the saving which might 
 be made on the present outstanding Government indebtedness, 
 if it were refunded into serial bonds. Indeed, I am not quite 
 sure I could do this with accuracy, but I intend to have it done 
 by experts so that there can be on record a complete demonstra¬ 
 tion of the desirability of changing our present indebtedness 
 into serial form and gradually liquidating it. There is no 
 reason why this should not be done, and from the standpoint 
 of business prudence there is every reason why such action 
 should be taken. 
 
 If that is true, what a piece of folly it would be to issue 
 Panama Canal bonds or any other bonds on any other basis 
 than as serials. As far as I know, this subject has not here¬ 
 tofore been given any consideration by Congress, but it will 
 continue to appear from time to time until we have taken some 
 action. At some later date I shall hope to submit to Congress 
 a complete demonstration of what may be done with the 
 national debt if such a policy is followed. 
 
 A somewhat careful investigation indicates that nearly every 
 authority on the issuing of bonds prefers the serial to the 
 sinking-fund method. M. Trinquat, a noted French writer on 
 this subject, stated in 1S99 the manifestly sane proposition 
 82945—1705G 
 
29 
 
 that the only way of extinguishing debt, for a State as for an 
 individual, is to use the revenue above the expenses, and that 
 when the public frees itself from its obligation to pay its debts 
 at maturity it encourages the incurring of new debts. 
 
 That is exactly wliat we are doing. We are not paying 
 any of our debts. We issue bonds from time to time under 
 different forms, and when those bonds mature we refund them 
 by issuing others. The Xlebt will keep on accumulating, and 
 if we do not take some steps to liquidate it as it matures, at 
 least paying it by annual installments, as I think should be 
 done, we are going to have piled up a great volume of indebted¬ 
 ness without any prospect of its payment. 
 
 The French writer to whom I have referred quotes Ricardo 
 as saying that “ sinking funds rather tend to encourage expendi¬ 
 ture than to diminish debt.” Another writer, speaking of 
 indebtedness, says that a sinking fund “acts on the public as 
 a narcotic,” and “ the confidence placed in the efficacy of such 
 methods has contributed to ease the alarm which the magnitude 
 of the public debt would otherwise produce.” 
 
 Mr. Macl’herson, a leading member of the Institute of Char¬ 
 tered Accountants of Ontario, Canada, recently in a statement 
 pronounced “ the day of the sinking fund as past,” and that 
 in his judgment it was a curse to the average municipality, 
 insisting that debentures should be issued on the serial basis. 
 
 Mr. J. Hampden Dougherty, a member of the charter commis¬ 
 sion for a new charter for New York City, recently wrote: 
 
 The theory of sinking funds as security for the payment of public 
 debts has become obsolete * * *. The commission of 1908 favors 
 
 the abolition of all sinking funds. 
 
 And goes on to argue that the city debt of New York should 
 be re-funded. 
 
 While the provisions of the sinking fund have been consid¬ 
 ered an abundant safeguard, experience has shown that there 
 have been many exceptions to the rule. This is particularly 
 true in the case of railroad indebtedness, and there have been 
 numerous instances of either dishonesty or ignorance in the 
 application of the sinking fund provisions. For example, I 
 have referred to the fact that New York City within a few 
 years had been taxed for sinking-fund provisions $19,000,000 
 more than the sinking fund required. In 18S0 the Boston 
 sinking funds were despoiled of $82,000. In 1904 a commission 
 reported that $292,000 had been taken from the Boston sinking 
 funds to pay current expenses. In 1909 the sinking fund of the 
 city of Lynn, Mass., was reported to be $400,000 short. That 
 does not mean peculation, but that there was not enough in 
 the sinking fund to pay the indebtedness by that amount when 
 it matured. The funds in that case, I understand, were used 
 for current expenses. 
 
 In the city of Chicago there has been a very general practice 
 of using sinking funds for current expenses. One of the results 
 of commission administration in Des Moines, Iowa, has been 
 supposed to be its good financial record, and yet an expert 
 analysis of Des Moines’s finances recently made demonstrated 
 a shortage in its interest and sinking fund appropriations of 
 $43S,S27.77, and the investors affirmed at that time that the 
 new city government had recently made a levy which should 
 have been 5.9 mills for this purpose but was only 2.G mills. 
 
 82945—1705G 
 
 
30 
 
 It can he seen very easily why that would be done. It reduces 
 taxes and gives that additional amount of credit to those re¬ 
 sponsible for levying the accessary taxation to carry on the 
 government. It is charged that the city administration has 
 systematically evaded its obligation, and in order to keep down 
 its tax rate an insutlicient amount has been levied for sinking- 
 fund purposes. 
 
 One of the few so-called authorities who has doubted the ad¬ 
 visability of giving up the sinking funds is a Mr. Turner, a lec¬ 
 turer at the municipal school of finance in Manchester, Eng¬ 
 land. In Mr. Turner's own illustration of the application of 
 different methods of paying indebtedness be uses an example 
 of a million pounds borrowed for 10 years and show's the fol¬ 
 
 lowing results : 
 
 Total cost. 
 
 (1) Installment method_£1,275,000 
 
 (2) Annuity method-- 1,295, 100 
 
 (3) Sinking-fund method (5 per cent basis)_ 1, 295, 100 
 
 (4) Sinking-fund method (31 per cent basis)- 1,352,000 
 
 In other words, the serial method produced the best result. 
 The annuity method, which means paying off not only one-tenth 
 of the total indebtedness but one-tentli of the total interest, costs 
 £20,110 more than the serial method. The sinking-fund 
 method, figuring the sinking fund at 5 per cent, costs exactly 
 the same amount; but figuring the sinking fund at 3£ per cent, 
 the cost is £77,000 more than the serial method. 
 
 I wish to submit a table showing the results of the serial and 
 sinking fund methods in the case of a million dollars borrowed 
 at 3 per cent and 4 per cent, and ranging from 20 to 50 years. 
 It is a complete demonstration of the value of the serial method. 
 I ask unanimous consent to insert herewith the statement to 
 which I have referred. 
 
 The PRESIDING OFFICER (Mr. Lee of Maryland in the 
 chair). Without objection, it is so ordered. 
 
 The matter referred to is as follow's: 
 
 Scrial-hond anil sinking-fund methods contrasted. 
 
 $1,000,000 at 3 per cent. Difference in interest in fa¬ 
 vor of serial bonds. 
 
 $1,000,000 at 4 per cent. Dif¬ 
 ference in interest in favor of 
 serial bonds. 
 
 20 years. 
 
 40 years. 
 
 50 years. 
 
 20 years. 
 
 40 years. 
 
 50 years. 
 
 $285,000. 
 
 $585,000 
 
 $735,000 
 
 S3S0,000 
 
 $7S0,000 
 
 $980,00-3 
 
 
 Difference in cost in favor Difference in cost in favor 
 of serial bonds. of serial bonds. 
 
 Sinking fund. 
 
 On 3 per cent basis. 
 On 3-} per cent basis 
 On 4 per cent basis. 
 
 20 
 
 years. * 1 
 
 40 
 
 years.* 
 
 63 
 
 years. 3 
 
 20 
 
 years. 1 
 
 40 
 
 years. 2 
 
 50 
 
 years. 1 
 
 $19, 426 
 
 $109,199 
 51,791 
 
 $173,305 
 111,908 
 58,057 
 
 $114,426 
 
 76,483 
 
 40,231 
 
 $304,199 
 246,791 
 194,765 
 
 $418,305 
 
 356,908 
 
 303,057 
 
 
 
 
 
 decimal for 19 years, and 19 payments. 
 
 1 Decimal for 39 years, and 39 payments. 
 
 : Decimal for 49 years, and 49 payments. 
 
 82945—17056 
 
 
31 
 
 If the number of payments were to equal the full number of years, 
 there woubl be an Increase over the above In the saving In favor of . 
 serial bonds, the ratio of such increase being larger with the bonds of 
 a shorter term. 
 
 If both the decimal taken and the number of payments made each 
 equal the full number of years, there will still be a large gain in favor 
 of the serial bonds. 
 
 Mr. WEEKS. The committee proposes to issue Panama 
 Canal bonds without sinking-fund or serial provisions. As¬ 
 suming that the only method the Government has ever used in 
 issuing securities—namely, the sinking-fund method—were fol¬ 
 lowed and the bonds were issued for a term of 50 years, as 
 provided for in the act authorizing their issue, the cost to the 
 taxpayers of the United States on $1,000,000 of bonds would 
 be $173,305 more than it would cost if serial bonds were issued. 
 It is proposed in this bill to issue the remaining $222,000,000 
 of Panama Canal bonds. If the sinking-fund method is applied 
 to the payment of this indebtedness—and of course some method 
 must be provided for liquidating it at maturity or sometime 
 during the life of the loan—the cost to the taxpayers of this 
 country will bo $38,473,710, an amount which justifies some 
 hesitation In passing this legislation without giving serious 
 attention to the'form of bond to be issued and the manner of its 
 payment at maturity. 
 
 It has been charged that the serial bond is unpopular and 
 that it requires a higher rate of interest than an issue of bonds 
 which mature at one time, but if that condition existed hereto¬ 
 fore, I believe it has entirely disappeared. There is now a great 
 demand for Government bonds to use as a basis for postal 
 savings deposits and for short-time loans to be held by the 
 banks, Federal reserve as well as others. An issue of Govern¬ 
 ment bonds having one-twentietli of its total amount maturing 
 within a year would be eagerly picked up by a great many in¬ 
 terests that have in the immediate future a disposal of some 
 of their funds for a specific purpose, but want to keep them 
 employed until that purpose has fully developed. In fact, 
 there is no latitude to the method of liquidating an indebted¬ 
 ness issued under the serial plan. It is safe for the creditor 
 and the debtor, and an immediate public exposure must be 
 made if the debtor fails to make provision for its maturing 
 obligations. Incidentally an indebtedness issued in this way 
 becomes safer as it grows older, because each year a portion of 
 it is liquidated. 
 
 In the hearing to which I have referred, which recently took 
 place in Massachusetts, three main items of indebtedness were 
 taken up—that is, the State’s contingent obligation in the metro¬ 
 politan parks, sewerage, and water loans—and it was demon¬ 
 strated that the difference in favor of issuing serial bonds for 
 this indebtedness, amounting to some fifty-six millions of dol¬ 
 lars and having 40 years to run, would be something like 
 $2G,000,000, even if the bond had been issued in serial form at 
 a one-half per cent higher rate than under the sinking-fund 
 method. The difference in the actual cost to the taxpayers be¬ 
 tween the two methods was shown to be about $8,360,000 on a 
 3| per cent basis. 
 
 82945—1705C 
 
32 
 
 I insert herewith a summary showing the indebtedness to 
 which I have just made reference, and the possibilities if issued 
 on a 3 or a 3$ per cent basis: 
 
 
 3 per cent. 
 
 31 per cent. 
 
 Total. 
 
 Interest. 
 
 Pre¬ 
 
 miums. 
 
 Sewerage. 
 
 $7,989,912 
 2,680,000 
 10,900, 000 
 
 $2,980,000 
 8,350,000 
 23,600,000 
 
 $10,969,912 
 11,030,000 
 34,500,000 
 
 $13,270, 652 
 14,826,000 
 45,532, 875 
 
 $370,813 
 739,160 
 2,300,487 
 
 Parks. 
 
 Water. 
 
 Total, principal 
 and interest.... 
 
 21,569,912 
 
 34,930,000 
 
 56, 499,912 
 
 73,629, 527 
 3,410, 460 
 
 3,410,460 
 
 70,219,067 
 56,499,912 
 
 126,718,979 
 
 
 
 
 
 I can not emphasize too strongly the fact that the mainte¬ 
 nance of a sinking fund is a source of a great deal of trouble, 
 expense, and hazard. The volume of sinking funds now held 
 by the sinking-fund commissions of the city of New York aggre¬ 
 gate several hundred millions of dollars. Necessarily, as there 
 must be some considerable parts of these funds uninvested, 
 the possibility of errors and even of dishonest handling would 
 be entirely removed if a serial form of bond were issued 
 instead. Our Government should go out of debt, and provision 
 should be made to refund all Government bonds on a serial 
 basis, or, at least, reestablish a sinking fund, so that our bonds 
 could be paid. As a financial action this should appeal to 
 every Senator. There is no argument against it, and, from the 
 standpoint of good finances as well as good preparedness, there 
 is no reason why we should not pay our indebtedness promptly 
 and systematically. If that were done, there would be no 
 trouble about our financing ourselves in times of greatest 
 stress. 
 
 Finally, it is, perhaps, sufficient to say that sinking funds 
 do not in theory amortize a debt; they simply offset it. The 
 only true amortization is extinction. The only sensible method 
 of extinguishing a debt is to pay it in approximately equal 
 installments, which is exactly what the serial bond does. 
 
 82945—1705G 
 
 9