Knowledge that Transforms

For several years the Federal Reserve Board and the Federal Reserve banks have employed a method of presenting figures derived from Federal Reserve bank condition statements and from Treasury circulation statements organized in such a manner as to define the channels connecting banking and monetary conditions of the country with the Federal Reserve banks. These figures are presented in the form of a balanced statement, which shows the various currency and credit elements that correspond to increases or decreases in the supply of and in the demand for reserves of member banks. The importance of factors of supply and use of member bank reserves lies in the fact that the ability of member banks to make loans or investments and their attitude in the matter are influenced by the availability to them of reserves and by the method through which these reserves are obtained. There is an important difference in cost, in liability, and in attitude of the banks between reserves obtained at the banks' initiative through discounting paper and reserves obtained either through open-market operations by the Reserve baniks or through the inflow of gold from abroad or of currency from circulation.

IN ITS usual sense, the term inflation (for example price inflation) implies the increase in some index relative to its own value at some other time. In what follows the term relative inflation implies the increase (with time) of one index relative to another index. And the term will be restricted to mean an increase in the cost of finished goods relative to the cost of materials and wages. This relative cost will be measured by the product of the ratios (V'/M) (V'/W) = V'2/MW (' = value added, M = materials, W = wages). Increase in this relative cost may then be measured either by increase in V'2/MW or by decrease in MW/V'2 = B, say.2 When B decreases we shall have relative inflation of V' with respect to M and W, the only relative inflation herein considered.

PRESENT methods of levying succession taxes in the form of estate, inheritance, and gift taxes leave much to be desired. Relatively minor changes in the form of transmission of property often produce substantial differences in tax. In order to take advantage of these differences, individuals are often led to dispose of their property in ways other than those that would obtain in the absence of such avoidance opportunities. The patterns of ownership thus encouraged by the operation of the tax are not necessarily better, and in fact are often considerably worse, considered from the standpoint of the community at large, than the patterns that would be selected in the absence of such arbitrary pressures. The root of the difficulty is that the tax is ordinarily computed on each transfer separately with very little if any reference to the relation of that transfer to past and future transfers of the same or equivalent property. The taxpayer is thus under considerable pressure to provide for the transfer of his property to the ultimate beneficiaries with as few taxable intervening transfers as possible. Property is accordingly bequeathed directly to children, grandchildren, and great-grandchildren rather than in the more normal sequence of transfer first to the widow, then to the children, and in turn to the grandchildren and great-grandchildren. The testator frequently may attempt to restrict the control of the remote heirs over the property thus directly bequeathed to them by the setting up of various forms of trust; in addition, by setting up trusts for the benefit of minors and even of unborn individuals, the number of taxable transfers may be still further reduced. In some states this may go to the extent of removing the corpus of the estate from further succession taxation for extended periods. The forms of property thus promoted have serious effects on the economic life of the community, in that they multiply the overhead of institutional investment, reduce the amount of capital available for speculative ventures, and are frequently less suited to carrying out the desires of the testator than less involved forms of devolution that might have been selected in the absence of tax pressures.