and would involve in itself a serious threat to our freedom. It is noteworthy that Nikolai Lenin, the prophet of modern communism, held that debauching the currency is the best way to destroy a country.

Alarmed at the rise in prices which got under way with the outbreak of war in Korea, Congress acted promptly in passing the Defense Production Act and in enacting an increase in personal income taxes. In addition, the Federal Reserve Board and the various Government housing agencies have acted quickly to tighten consumer and real-estate credit. The measures taken so far are commendable, but they must be broadened and strengthened if we are to win the battle against inflation.

We believe that inflation can be stopped and held in check if steps along the lines outlined below are taken in time by the Federal Government. For the present, at least, inflationary pressures can be halted through the use of indirect controls without the need to resort to direct controls, such as general price and wage ceilings and rationing. Indirect controls, if stern enough, have the great advantage of getting at the heart of the inflationary process which lies in the excessive effective demand for goods and services. They also have the advantage of not interfering with the freedom of choice of individuals. On the other hand, direct controls deal merely with the symptons of inflation without getting at the basic causes, and for this reason, should be employed only as a last resort. Even then, to be effective they must be accompanied by powerful indirect controls.

THE MEASURES WHICH SHOULD BE TAKEN BY GOVERNMENT

The basic reason for the inflation we have been experiencing is that our money supply has expanded faster than the supply of goods and services, so that the key to an effective fight against rising prices is a well-rounded program by Government directed toward reducing the active money supply in the hands of the public. The volume of bank deposits and currency held by the public has risen from 63.3 billion dollars at the end of 1939 to $173,000,000,000 at the end of October 1950, with a sharp increase of 5.9 billion dollars occurring from the end of March through October of this year. Furthermore, in recent months money has been turning over at a much faster rate. The measures adopted by Government, therefore, should restrict not only the current income of the public but also the accumulated money supply. These measures should include the following:

INCREASED FEDERAL TAXATION

The military preparedness program, at least in its present dimensions, and all other government expenditures should be carried on a pay-as-you-go basis. The taxes chosen to raise additional revenue should be geared to cut directly into the mass purchasing power which has given rise to inflationary forces.

A broad extension of excise taxes, or the imposition of a general "spending tax," should be given careful consideration. This form of taxation is a direct deterrent to spending and an encouragement to saving both because of the tax itself and because of the psychology of it. The tax should not be applicable to necessities such as food and clothing at the minimum level.

A further rise in personal income taxes, when required, should be levied across the board on a straight percentage increase. A sharply graduated income tax will fall short in yielding revenue and will weaken the incentive which is needed for harder and more efficient work to increase production. It should not be forgotten that over a period of time expanding production is probably the most effective way to combat inflation.

When it becomes necessary to place a heavier tax burden upon corporations, this should be done by increasing the present corporate income tax. An excessprofits tax should not be employed because it is distinctly inflationary in that it leads to unnecessary corporate expenditures and discourages efficiency and increased productivity.

REDUCED COVERNMENT EXPENDITURES

As all individuals and business concerns will be called upon to cut their expenditures drastically, clearly it follows that all non-military expenditures by the Federal, State, and local governments likewise should be cut to the bone. This requires, particularly at the Federal level, searching reexamination of the peacetime functions of Government and the elimination or pruning of many activities. With the additional demands of our military program the burden of Government expenditures will be crushing without continuing to carry many items which were

put into the Federal budget in the postwar period. Furthermore, although our military program must be sufficiently large to play our proper role in the preservation of freedom throughout the world, at the same time rigorous care should be exerted to insure that military expenditures are made efficiently and with a minimum of waste.

TIGHTENED MONETARY AND CREDIT CONTROLS

A pay-as-you-go tax program is the cornerstone in the fight against inflation, but it is not enough to do the job. Its restrictive effects could be defeated by an expansion of credit and a resultant increase in the money supply, as well as by the spending of liquid assets which are now held in very large volume by the American people. The action which has already been taken by the Government to curb real estate and consumer credit is highly commendable because much of the current inflationary boom lies in the housing and durable consumer goods fields. While we do not like to see housing, automobiles, or any other such goods denied to anyone, it is to the best interest of all of us that the Government restrictions have been put into effect. It is imperative that the real estate and consumer credit controls be watched carefully in order to insure that they have the desired restrictive effect, but it is not enough to rely solely on selective credit controls. The Federal Reserve Board should have freedom to employ its general credit control powers in order to exert its maximum influence in the fight against inflation. Steps which have already been taken by the Federal Reserve Board to raise the rediscount rate, and its efforts through open market operations to tighten commercial bank credit and thus to bring about a rise in short-term interest rates, have been in the right direction. The same is true of the Treasury's recent decision to raise the rate on 5-year notes. The guiding principle here should be that the Federal Reserve must be permitted to restrict bank credit even though as a result interest rates must rise. Neither the Government nor the American people can afford a policy of easy money and low interest rates in a period of strong inflation.

ANTI-INFLATIONARY PUBLIC DEBT MANAGEMENT

Through public debt management the Treasury can and has influenced the money supply. Much of the Federal debt issued during the war and postwar period is lodged in the commercial banks or the Federal Reserve banks with the resultant effect of a greatly expanded money supply. During the next several years the Treasury will be faced with heavy refunding of maturing debt, and its policy in managing this debt should be directed toward getting a substantial part of the debt out of the banking system into the hands of savers. The constructive effect of this policy would be to reduce the money supply in the hands of the general public. Any new issues of Government debt should be placed outside the banking system. In order to accomplish these goals, it will be necessary for the Treasury to make its securities more attractive to all types of investors, which means essentially a higher rate on Government securities.

STRONG WAGE-PRICE POLICY

The Government, through concerted efforts by its various branches and by means of appeal to public opinion, should strive to prevent further developments of the wage-price spiral. This means not only the avoidance of wage and salary increases designed to keep up with the cost of living-it also means the avoidance by business of unwarranted price increases. The various measures of indirect control urged in this statement will fail unless at the same time the Government, with the cooperation of labor and management, succeeds in holding down the wage-price spiral. By the same token, if the controls urged herein are used fully, much of the cause for the wage-price spiral will be removed.

COOPERATION BY INDIVIDUALS AND BUSINESS

These measures outlined above can go far toward fighting further price inflation, but in the last analysis their success will depend upon a thorough understanding by individuals and business of the forces which give rise to inflation along with the measures needed to combat it. With this understanding the American public and business can be counted upon to cooperate with a determined program by Government along the lines set forth here to fight inflation.

The main elements of action by individuals and business concerns in the fight against inflation are clear. Both groups should keep their spending for non

essentials at an absolute minimum and should bend every effort to increase their current savings. Existing savings of individuals in the form of war bonds, bank deposits, and in other liquid forms should continue to be held out of the spending stream. Business concerns, as well as individuals, must refrain from hoarding goods. Scrupulous care should be exerted by both groups to conform with rules and regulations promulgated by the Government to control such things as real estate and consumer credit. Finally, labor and management should cooperate in stopping a further rise in the wage-price spiral. Real sacrifice by all of us is needed to wage a successful fight against inflation. The objective is so compelling that we must make that sacrifice, and it will be made only if effective controls compel it to be made.

SUMMARY

Since the autumn of 1939 we have experienced a decline of 43 percent in the purchasing power of the dollar, and with the outbreak of the Korean War we are now suffering an acceleration in the upward movement of prices. The basic cause of this development is that the demand for goods and services by the American people and Government, supported by a record-breaking money supply, is running far ahead of the available supply of goods and services at present price levels. Eighty-three million life insurance policyholders, in the interest of protecting the value of their insurance, have a vital stake in urging upon the Government that a stiff program be employed to fight inflation. The main elements of this program, which must be directed toward reducing the money supply in the hands of the public, are as follows:

(1) Federal taxation should be geared to carry the military preparedness program, at least in its present dimensions, and all other Government expenditures on a pay-as-you-go basis. Taxes should be directed toward limiting civilian spending to the available supply of goods and services at existing price levels.

(2) All non-military expenditures by the Federal, State, and local governments should be cut to the bone and every effort should be made to insure that military expenditures are made efficiently and with a minimum of waste.

(3) Selective credit controls such as those to control real estate and consumer credit should be employed as fully as necessary to restrict credit in certain boom areas, and the Federal Reserve authorities must have freedom to use their general credit control powers to curtail the money supply even though as a result interest rates must rise. Neither the Government nor the American people can afford a policy of easy money and low interest rates in a period of strong inflation.

(4) In refunding the public debt, Treasury policy should be directed toward getting a substantial part of the debt out of the banking system into the hands of savers, thus reducing the money supply held by the general public. New issues should be made attractive enough to be placed outside the banking system.

(5) The Government and business should pursue vigorously a policy of discouraging further rounds in the wage-price spiral.

These steps can be employed effectively by Government to halt inflation, but Only if individuals and business concerns cooperate fully by cutting their spending to the bone and by increasing their savings, as well as by conforming in letter and spirit to the regulations issued by Government. It will require real economic sacrifice to combat the forces of Communist aggression successfully without ncurring further inflation, but the American public, given sound leadership by Government, can be counted upon to make that sacrifice.

The CHAIRMAN. Mr. Eberharter.

Mr. EBERHARTER. Mr. Adams, what is the total of the assets of the ife insurance companies of the United States?

Mr. ADAMS. $60 billion.

Mr. EBERHARTER. They can assert a powerful influence on the economy of the country, as much as any other industry or any other ctivity?

Mr. ADAMS. Definitely, and a very good influence.

Mr. EBERHARTER. How much taxes did the insurance companies Day last year to the Federal Government?

Mr. ADAMS. Last year $42,000,000. This year it will be $72,000,000. Under this law next year it will be $120,000,000.

Mr. EBERHARTER. With assets of $60 billion your contribution to the activities of the Federal Government and defense will be $120,000,000 next year?

Mr. ADAMS. All right, but, Mr. Eberharter, you will excuse me if I say this, that is only one part of the picture. If you get $100,000 from a man today and give him a demand note for it and pay him interest on it, is that your asset? This $10 billion does not belong to the Metropolitan; it is the trustee for 33,000,000 people who have about $300 each on deposit. So when you say the assets of the life insurance companies, those are the savings of 80,000,000 people and do not in any true social sense belong to the institution. That is the point I am trying to make.

Mr. EBERHARTER. I understand that. I am sure that all the members of the committee appreciate that fact.

Now the surplus of the insurance companies increased last year, did it not?

Mr. ADAMS. The surplus increased about $400,000,000, just about the rate that the companies have found it necessary to maintain as a margin of safety all through these years.

Mr. EBERHARTER. $400,000,000 additional went into the surplus of the life insurance companies?

Mr. ADAMS. Policyholders.

Mr. EBERHARTER. Policyholders.

Mr. Adams. For their protection.

Mr. EBERHARTER. Is the burden of Federal taxation in the aggregate greater than the burden of the combined States' taxation?

Mr. ADAMS. No; the combined States taxed life insurance companies last year something over $135,000,000, and one of the reasons, when Federal income tax started, that life insurance companies were taxed in a low way was that that has been one field that traditionally has been left very much to the States. In Public Law 15 the Congress said that was the policy of Congress. There are very few sources left for the State of Ohio any more when we get through down here in Washington.

Mr. EBERHARTER. There are very few sources left anywhere.

Mr. ADAMS. That is right. All the companies paid, as I say, about $135,000,000 to $137,000,000.

Mr. EBERHARTER. Most of the States will increase their taxes on life insurance companies, will they not, so that the $135,000,000 State tax toll will probably become much greater?

Mr. ADAMS. Of course we hope not, and I will tell you why. They do it by premium tax, and the tax relates not only to what we sell, heretofore, but on these premiums that we fixed in 1925, 1935, and 1945, when we calculated the tax burden in calculating the premiums. Of course that always comes up.

Now, there is a great difference in individual States. New York taxes are much lower than Oklahoma taxes, but the general burden is about $135,000,000 or $137,000,000. $137,000,000 was the exact figure last year.

Mr. EBERHARTER. Is there any other industry than the life insurance companies that pays less in State taxation than it pays in Federal taxation? In other words, the life insurance industry is the only industry that pays less in Federal taxation than it does in State taxation; is that correct?

Mr. ADAMS. That I would not know.

Mr. EBERHARTER. I can see that is a kind of broad question. Mr. ADAMS. I am not familiar with all of it. You understand, until the Supreme Court turned a somersault about 4 or 5 years ago, life insurance was supposed to be entirely not in interstate commerce. The States have always felt that was their particular dish. They started out to tax us to support the insurance departments for our own regulation. Now I suppose 5 percent of our taxes do not go to that; it is a source of general revenue and it is a very heavy tax.

Now if we are taxed relatively more heavily by the States than the Federal Government, you can argue that one way; I would argue that the other way because we are taxed so much more heavily by the States.

And when you say business, certainly life insurance is a business if I engage in it, but it is not a commercial enterprise in exactly the same way, because we deal in liabilities, we deal in contracts.

Now we have had pretty good mortality for a while, but when the last flu epidemic came and you do not know whether this flu epidemic that was in Great Britain is coming here-if that epidemic had not straddled the year end, I mean October to December, and then January to April, some of the companies would have been in a very difficult situation. But it ended in April and they accumulated April and May payments.

Mr. EBERHARTER. Regarding that point you made of the Supreme Court turning a somersault, you know the power of the Federal Government is not limited in its taxation powers to taxing only those businesses engaging in interstate commerce. That decision in that respect does not make much difference as far as taxation is concerned. Mr. ADAMS. To the best of my knowledge and belief, and I am not making a smart answer, but making a legal answer, the Federal Government is limited by nothing in their power to tax. I think

that is probably correct.

Mr. EBERHARTER. Of course you brought out a point toward the end of your presentation that this would really be a tax on the beneficiaries-widows and orphans. Is that the point you made? Mr. ADAMS. Yes, sir.

The

Mr. EBERHARTER. You know, we have people in business, let us say companies that manufacture medicine, and they pay a pretty high income tax. Of course they pass that on to the sick people, do they not? So it can be said that we are taxing the poor, sick people who need medicine because we tax the manufacturer of medicine. same thing could be said of a concern that manufactures spectacles or eyeglasses. They are doing a great job for the people who are afflctedi with poor eyesight. They pass the tax on to the people who buy the spectacles. It is the same way if we tax the insurance companies; they pass it down to the beneficiaries. So I do not see the logic of that argument.

Mr. ADAMS. Of course I am responsible for these beneficiaries, that is my business, but the point is that, certainly, it would hit an individual, and I can well understand the medicine people who think they have an equitable point there. But in the life-insurance business it is not a one-shot deal or three- or four-shot deals. Man after man has died thinking that he was leaving his family reasonably well off. If he left them $150 10 years ago, that was one thing, but this matter is