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Rh total ordinary receipts (excluding receipts on account of public debt). Although the rates were severe, rising to 80% for 1918, the tax was collected without crippling industries owing to the high level of profits and to the protective effect of the normal exemption, the relief provisions, and the large degree of administrative discretion authorized in practically all excess-profits tax laws. Indeed, after payment of the heavy war income and profits taxes combined, the corporations of the United States had left, in each of the years 1917-9 inclusive, larger money profits than in any other year for which statistics exist, except the year 1916.

Weakness of the Tax.—Both political parties had promised the repeal of the excess-profits tax in the year 1921. This was partly explained by the sharp decline in its productivity under peace conditions, reflected in the statistics given above. But in the main the unpopularity of the tax was due to the effect of its high rates in stimulating extravagant expenditures by the taxpayers subject to it; the general belief (probably ill-founded in part) that it was passed on loaded with additions to the general body of consumers; its limitation to a small proportion (in number) of the business concerns; its great complexity which left the taxpayer uncertain as to his liability and threatened to cause, in the words of the Secretary of the Treasury, an administrative breakdown; and most of all to its capricious inequalities. The essential object of the tax was to lay a heavy tax upon “supernormal” income or profits. But to determine what constituted “normal” profits was a task of great difficulty. Where this normal profit was determined on the basis of pre-war profits, to use the words of the British Chancellor of the Exchequer, “prosperous concerns with a large pre-war profit standard might escape liability for the tax because their present profits, though high, are not in excess of their standard, and, at any rate, they pay tax on what all of us think an unduly low scale.” In the United States, where the normal exemption was computed as a percentage of invested capital, corporations which had been liberally capitalized gained an unfair advantage over those which had been conservatively financed. The American tax unquestionably bore more heavily upon hazardous industries than upon those with more stable earnings. Thus for 1918, among corporations liable for excess-profits tax, the average ratio of the tax to net income was 30%. But construction companies paid 48%, manufacturing industries 38%, mining 25% and banks only 9%. This tax, said the Secretary of the Treasury in 1919, “encourages wasteful expenditure, puts a premium on overcapitalization and a penalty on brains, energy and enterprise, discourages new ventures, and confirms old ventures in their monopolies.”

See Treasury Department, Regulation No. 41, relative to the War Excess-Profits Tax of 1917. (T. S. A.)  EXCHANGES, FOREIGN (see ). In no department of finance was there a greater upheaval as the result of the World War than in that of national currency-values as shown in the foreign exchanges. The theory of foreign exchange is sufficiently explained in the earlier article. It remains to deal here with the historical developments subsequent to 1910.

For some years immediately preceding the World War there had been a gradual movement on the part of all important countries towards the establishment of their currencies on a gold basis. It is true that only in England, the United States and India was there an absolutely free and unrestricted gold market, yet all the other leading countries, with the exception of China and Brazil, may be considered to have achieved this object, for although, as regards most of them, difficulties were placed in the way of those who desired to withdraw gold from their respective State banks for the purpose of export, yet it was generally understood that, in the last resource, these banks would part with gold rather than permit their exchanges to depreciate below their gold parity. The result was that exporters and importers in all these countries could trade with each other without troubling themselves about possible fluctuations in exchange. Rates moved within very narrow limits and merchants could ignore them.

Even in the case of such countries as Italy and Spain, which had not quite succeeded in stabilizing their exchanges (i.e. bringing their currency-values up to the gold par), the risk of loss through sudden and violent fluctuations in exchange rates was very slight. It was only when trading with China, Brazil, Portugal, and a few small South American and Central American states, that merchants felt it necessary to take exchange risks into account, and the more prudent were in the habit of avoiding such risk by buying or selling exchange for forward delivery.

Most banks and banking houses in England and elsewhere bought and sold foreign exchange, but they did not do so primarily with the object of making large profits, for very little money

could be made out of exchange operations when fluctuations were small and of rare occurrence. Their chief object was to meet the requirements of their customers. Indeed, foreign banks having branches in London regarded their foreign exchange trading departments as the least expensive form of advertising. In fact, when one looks back to those times, one realizes that the currencies of nine-tenths of the world were for all practical purposes identical. One felt just as certain of getting 25 francs or 20 marks for a pound sterling as of getting twelve pence for a shilling or 100 centimes for a franc.

War-time Conditions.—In reviewing conditions that ruled during the early days of the war, one cannot but wonder at the remarkable adaptability of the London foreign exchange market, particularly when account is taken of the numerous obstacles and restrictions that the British Government considered necessary, for good reason, to put in the way of exchange transactions. When the British Treasury assumed complete control over the London exchange market at the outbreak of the war, they had three important objects in view: first, to prevent British capital from being sent abroad; secondly to close every avenue by which enemy nations might carry on their trade with direct or indirect assistance from England; and thirdly to enable every British or Allied trader to obtain or to dispose of all the “exchange” necessary to carry on his legitimate business.

The following are some of the difficulties that had to be contended with. All communication between England and enemy countries was strictly prohibited. All letters and telegrams to and from England were opened and read by official censors and were subject to indefinite delay, if indeed they ever reached their destination. No transactions of a “speculative” nature were permitted. No gold coin or bullion was allowed to be exported from Great Britain without a licence, which was almost always refused. Exchange dealers were not permitted to deal with neutral banks or firms unless they obtained from them their signatures to the following declaration:

We undertake to the best of our ability that the account which you keep in our name on your books will not be utilized by us or by third parties for our account in any way which will, either directly or indirectly, assist, or be for the benefit of, any enemy of Great Britain, including any person, firm or company on any list published by His Britannic Majesty's Government and called the Statutory List; and, further, that any business whatsoever that we request you to undertake for our account will neither facilitate, nor compensate, nor clear transactions in any way or at any time connected with an enemy of Great Britain, including any person, firm or company on any list published by His Britannic Majesty's Government and called the Statutory List.

We understand this undertaking to apply to every kind of transaction for which we utilize our account with you, including (but not excluding any other transactions which might directly or indirectly benefit any enemy of Great Britain or her Allies as above stated):—

All sight or telegraphic payments to private individuals, firms, banks, etc., in Great Britain or other countries.

The transfer of pounds sterling and/or foreign moneys to or from neutral countries on behalf of ourselves or third parties.

The collection of remittances, coupons, drawn bonds, etc.

The opening of documentary credit for the import and/or export of goods to or from our country or other countries.

The collection and/or negotiation of cheques and bills on Great Britain and other countries.

All cheques and bills drawn by us to the order of third parties.

All payments, telegraphic and mail, that we make in sterling through your intermediary.

All moneys that you receive in sterling from other parties for the credit of our account and/or moneys ordered to be held at the disposal of third parties.

Bills domiciled payable with you.

British banks and bankers, dealing with foreign countries, had to fill up once a week and send to the Ministry of Blockade, a printed form showing under four columns:—

(a). The approximate total of available cash sterling balances held for account of persons, firms and corporations domiciled in each country (less overdrafts);

(b). The approximate total of British Treasury bills and other sterling bills, payable in Great Britain, held at their free disposal for persons, firms and corporations domiciled in each country;

(c). The approximate sterling equivalent of foreign currency balances with banks in each country; 