Mr. SHERMAN. I have no doubt that Congress may, as a part of the contract, and before the loan is issued, say that the States my tax the security. But, Mr. President, what effect.would that have? Could you sell such bonds? Would you allow the southern States now to tax Government securities? Would you allow them to have the power over your public credit which would be involved in their power to destroy the income from government securities, because, as Judge Huger says in the 1st decision made, if you give them the power to tax one mill you cannot restrain it? No, sir, the contract between the U.S and all the citizens of the world is a contract higher than any imposition levied by a State, and we ought no more to tolerate the idea of levying tax upon the securities of the Q U.S. except by the U.S. it self, than GreatBritain would allow any foreign Power to levy in GreatBritain a tax on British securities. It must be remembered that by exress provisioniuse rted in all the acts passed during the recent war U.S. bonds are exempt from State taxation. All the debt now out standing is thus exempt. Even the bonds is sued under the recent acts will be so exempt. Suppose you follow the suggestion of the Senfrom Maine and refuse in this bill to so exempt a bond bearing but 5%. interest, or, as he suggests, actually provide that they shall be taxable. Who would buy them? Who would surrender their resentsecuritics? How could you fund your ( ebt? No device could be more perfect to continue the present high rates of interest and what goo would result to State or nation? None whatever. The State could not tax the present bonds, and the holders would not take your new ones. The only way is to stand by the inviolability of our bonds as declared by the Supreme Court and upheld by every party or resident to this time. I now wish to meet the argument so often and forcibly made that it is unjust to exempt U.S. se ciirities from loealtaxes. and, sir, I admit that if this is regarded as a privilege to the holderit is indefensible; but it is the privilege of the Government, not. of the fund holder. It is the supreme power of the whole people to borrow money on the most favorable terms that is taxed and limited by a tax in the contract. such an exemption is only jus tifiable on the ground that it enables the government to borrow money on better terms. In the contract of borrowing the lender considers the rate of interest, the security of the principal, and the burdens of taxation. I no taxes are to be deducted from his interest and the principal is absolutely sure and easily convertible into money, he is willing to part with his money at a low rate of interest. This is the reason of the exemption, and the Government is presumed to receive the taxes in the more favorable terms of the loan. But, sir, when the tax payer sees that the Government is paying a higher rate of interest than the law allows to a citizen, the exemption will be felt to be wrong. With the present rate of interest there will be a constantly growing jealousy between the bond holder and tax payer. The latter will complain that his property is burdened with all the expense of government while his neighbor enjoys his full income free from all burdens. This feeling is founded upon so clear a sense of what is right that no wise legislator will disregard it. It is true that a contract once made cannot be violated whether it costs much or little. Public faith demands an exact and specilic perform ance, but an adjustment of this billicult problem ought to be made that will, while it preserves intact. the rightful power of the Government to borrow money free from local taxes, require property in the funds to aid in the support of the Government. I have shown that this cannot be dpnc with safety to the U.S. by allowing States to tax our securities. Two other modes have been suggested: 1st, to tax directly by act of Congress the public securities at a rate equal to local taxation; and 2nd ly, to reduce the rate of interest. A proposition has been made by Mr. Hayes, one of our tax commissioners, to levya direct tax on all U.S. bonds held in this country of 1%. on the principal of the bond, or to reserve one 6th of the interest payable on a 6%. bond. such a tax applied to our present securities would be a breach of public faith. Congress may have the power to do it using the word power in its unrestricted sense but it would be unjust, a fraud upon our creditors, and would forever impair our public credit. It is an indirect violation of a contract made in good faith. It is true the U.S. did not stiulate that it would not tax the bond, and tie U.S. may properly levy an income tax upon public securities of any amount, as it may upon other incomes; but when the U.S. selects this particular kind of property as the only kind ot property upon which it will levy a specific tax, it is a violation of public faith. To levy the some tax on this kind of property that you levy upon other property would not be unjust; but to select it out and put upon it exclusively an income tax of 16 and 2/3rds%. in order to defeat in this way the stipulated exemption from State taxation would be a violation of the public faith; and yet that proposition has been inadeby an officer of the Government. Mr. Hayes has furnished us a long and elaborate report on the subject. I do not know that it is necessary for me to read his report, because any gentleman can find it. He attached to it the form of chill for that purpose. It was disapproved by a majority of the revenue commission, but was submitted by Mr. Hayes as his own individual opinion.