Evening star., 1937-02-28
BY HERBERT M. BATTER.

THE question of foreign hot
money is proving to be really
hot, so far as the authorities
u here are concerned. While
they have decided to do something,
they don't know what to do. Ever
since Gov. Eccles of the Federal Re-
serve System last November COM
planned about the injustice of letting
foreigners get away without a tax on
capital gains. Washington has been
seeking ways of curbing the steady
inflow Of foreign capital, which comes
to us mostly in the form of gold.
Some steps have already been taken,
such as the gold sterilization" move.
The corporate surplus tax also helps.
But more remains to be done, and
something will be done as soon as
some formula can be worked out. Un-
fortunately all suggestions for meeting
the problem involve certain disad-
vantages. The most likely step seems
to be reimposition of tax on the cap
ltal gains of nonresident aliens, who
are at present exempt.
The term "hot money" as now used
in Washington refers to those foreign
investments which are of temporary
or indefinite duration and which
might be liquidated and withdrawn
upon sudden notice. Most obvious in
this category are the foreigners short
term deposits in American banks, or
their investments in short-term Treas
ury bills. Such liquid funds, pre-
sumably sent here from war-threat-
ened Europe for greater safety, might
in the event Of war or other serious
disturbance be hastily withdrawn,
some hold, and the sudden withdrawal
OF foreign short term funds might
easily have bad repercussions on our
money market. AT present probably
81 SOC, 100000 of foreign short-term
capital is held in the United States.
More general is the interest in for
eign long-term investments here
Since 1888 there has been a very
heavy inflow of foreign long-term
capital, the inflow coming chiefly in
the form of gold Due to this inflow
and to the appreciation of the stocks
and bonds in which it has been in
vested, foreign long-term investments
here have increased from S5.O35. .OOO..
600 at the end of 1885 to about Sc =
25o,o0o,o0. Thus short and long-term
foreign holdings add to some $780,
100000 at present.
Foreigners Have Advantage.
AS set forth by Gov. Eccles in No
vember, the objections to further in
creases in these large foreign holdings
were that it is manifestly unfair for
foreigners to escape the taxes to which
our own people are subject and that
the speculative movement of foreign
FUNDS was the sole source of our ex-
cess reserves, tending to become the
base Tor an unhealthy speculative ex-
panslon at home. Moreover, the move
ment put a heavy load upon the sta
blization funds. Since November the
Government has attempted to freeze
the situation in so far as it bears on
excess banking reserves by "sterilizing''
new gold imports. that is, by keeping
such imports from being added to the
active monetary reserves upon which
bank credit may be built. Instead,
such imports are now being impound-
ed by the Treasury in a separate ac-
count. This sterilization of the
gold is accomplished through the is
suance of new Government bonds.
I The proceeds of these bonds are used
to buy up the incoming gold, and thus
f1nd their way into the banking de-
posltS, which are already ample. In
cldentally. no satisfactory explanation
of the Treasury's authority to increase
the public debt for this purpose has
ever been published.
But the sterilizing of new gold i'm
ports. while it helps solve the prob
lem OF excess reserves and in that
sense is check against imitation. does
not solve another side of the problem,
that of swelling bank deposits. When
the gold or foreign capital comes into
the United States it results in an
equivalent increase in bank deposits.
Naturally. this process is not welcomed
by the Federal Reserve authorities
who are charged with controlling our
whole credit structure, or in other
words. controlling imitation. Even
without the foreign capital inflow,
that constitutes man-sized job. The
capital inflow only aggravates it.
That the capital and gold inflow is
mainly a result of our devaluation of
the dollar and only in part reflection