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EMPLOYMENT, GROWTH, AND PRICE LEVELS
HEARINGS
BEFORE THE
JOINT ECONOMIC COMMITTEE
CONGRESS OE THE UNITED STATES
EIGHTY-SIXTH CONGRESS
F I R S T SESSION
PURSUANT TO
S. Con. Res. 13
J U L Y 24,27,28,29, A N D 30,1959
P A R T 6A— T H E G O V E R N M E N T ’S M A N A G E M E N T O P ITS
M O N E T A R Y , FISCAL, A N D D E B T O P E R A T I O N S
Printed far the use of the Joint Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
38563
WASHINGTON : 1959
For sale by the Superintendent o f Documents, U.S. Government Printing Office
Washington 25, D.C. - Price $1.25
J O IN T E C O N O M IC C O M M IT T E E
(Created pursuant to Sec. 5(A) of Public Law 304, 79th Congress)
P A U L H . D O U G L A S , Illinois, Chairman
W R I G H T P A T M A N , Texas, Vice Chairman
SENATE
H O U S E OF R E P R E S E N T A T I V E S
J O H N S P A R K M A N , Alabama
J. W I L L I A M F U L B R I G H T , Arkansas
J O S E P H C. O 'M A H O N E Y , W yom ing
J O H N F . K E N N E D Y , Massachusetts
P R E S C O T T B U S H , Connecticut
J O H N M A R S H A L L B U T L E R , Maryland
J A C O B K . J A V IT S , New York
R IC H A R D B O L L IN G , Missouri
H A L E B O G G S , Louisiana
H E N R Y S. R E U S S , Wisconsin
F R A N K M . C O F F IN , Maine
T H O M A S B. C U R T IS , Missouri
C L A R E N C E E. K I L B U R N , N ew York
W I L L I A M B . W I D N A L L , New Jersey
S t u d y o f E m p l o y m e n t , G b o w t h , a n d P r ic e L e v e l s
(Pursuant to S. Con. Res. 13, 86th Cong., lst’ sess.)
O t t o E c k s t e in , Technical Director
W. L e h m a n , Administrative Officer
James W. K n o w l e s , Special Econom ic Counsel
Jo h n
II
CONTENTS
WITNESSES IN ORDER OF APPEARANCE
Hon. Robert B. Anderson, Secretary of the Treasury; accompanied by
Julian B. Baird, Under Secretary of the Treasury for Monetary Affairs;
Charles E. Walker, assistant to the Secretary; Robert P. Mayo, assist
ant to the Secretary; Nils Lennartson, assistant to the Secretary; and
R. Duane Saunders, Chief, Office of Debt Analysis Staff, Department
of the Treasury__________________________________________________________
Hon. William McChesney Martin, Jr., Chairman, Board of Governors of
the Federal Reserve System; accompanied by Ralph A. Young, Direc
tor, Division of Research, Federal Reserve Board; Winfield W . Riefler,
assistant to the Chairman, Federal Reserve Board; and Robert Roosa,
vice president, New York Federal Reserve Bank_______________ ____ 1231,
Resumed________________________________________________________ _____
George T. Conklin, Jr., vice president, finance, the Guardian Life Insur
ance Co. of America, New York; accompanied by Sherwin C. Badger,
financial vice president, New England Mutual Life Insurance Co.,
Boston; Robert B. Patrick, vice president Bankers Life Co. of Des
Moines; Richard K. Paynter, Jr., executive vice president, New York
Life Insurance Co.; James J. O’Leary, director of economic research,
Life Insurance Association of America, New York______________________
John M. Ohlenbusch, senior vice president, Bowery Savings Bank, New
York City; accompanied by Saul B. Klaman, director of research,
National Association of Mutual Savings Banks, New York City_______
1087
1451
1307
1335
1410
STA TEM E N TS A N D E X H IB IT S
Anderson, Hon. Robert B., Secretary of the Treasury; accompanied by
Julian B. Baird, Under Secretary of the Treasury for Monetary Affairs;
Charles E. Walker, assistant to the Secretary; Robert P. Mayo, assist
ant to the Secretary; Nils Lennartson, assistant to the Secretary; and
R. Duane Saunders, Chief, Office of Debt Management, Department of
the Treasury____________________________________________________________
Exhibits:
Allotments by investor classes on subscriptions for public mar
ketable securities other than weekly Treasury bills____________
Amount of Treasury marketable debt maturing within the next
12 months______________________________________________________
Joint statement relating to the Treasury-Federal Reserve study
of the Government securities market__________________________
Judging the appropriateness of a “ sense of Congress” action re
lating to the techniques of a monetary policy___________ _____
Net profits by banks on securities— calendar years 1955-58_____
Offerings of public marketable securities other than regular
weekly Treasury bills_________________________________________
Ownership of U.S. Government securities, December 31, 1958__Question of commercial banks paying interest on Treasury ac
counts__________________________________________________________
Question of deposits to be maintained in commercial banks_____
Question of Treasury requirements of banks to pay interest on
minimum balance maintained by the Treasury____________ —
Question whether law which prohibits commercial banks from
paying interest on demand deposits should be repealed_______
Questions Representative Patman has asked the Treasury to
answer_________________________________________________________
ill
1087
1104
1181
1209
1165
1143
1171
1113
1201
1202
1191
1204
1185
IV
CO N TE N TS
Anderson, Hon. Robert B., etc.— Continued
Exhibits— Continued
Pag®
Selling Treasury securities through auction______________________
1150
Selling U.S. Government direct and guaranteed issues by tender. 1156
Summary by investor class— all districts_________________________
1108
Taxes subject to the individual income tax______________________
1207
Conklin, George T., Jr., vice president finance, the Guardian Life Insur
ance Co. of America, New York; accompanied by Sherwin C. Badger,
financial vice president, New England Mutual Life Insurance Co.,
Boston; Robert B. Patrick, vice president, Bankers Life Co. of Des
Moines; Richard K. Paynter, Jr., executive vice president, New York
Life Insurance Co.; James J. O’Leary, director of economic research,
Life Insurance Association of America* New York______________________
1335
Exhibits:
Capital funds available from principal savings sources, 1947-58. 1356
Comparative yields of U.S. savings bonds, marketable bonds, and
savings deposits________________________________________________
1370
Holdings by type of investor of long-term Treasury bonds (due or
callable in 10 vears or over) as percent of total outstanding,
1945-59________________________________________________________
1365
Hypothetical Federal debt transactions during a year___________
1364
Long-term Treasury bonds, by type of investor, 1945-59 (due or
callable in 10 years or over)____________________________________ 1365
Net uses of funds in selected investments of corporate pension
funds, 1947-58_________________________________________________
1368
Net uses of funds in selected investments of life insurance com
panies, 1947-58______________________________________________ 1369-70
Net uses of funds in selected investments of mutual savings banks,
1947-58______________________________________________________ 1366-67
Uses of capital funds in corporate financing, 1947-58__________ 1359-60
Uses of capital funds in residential mortgages, commercial mort
gages and corporate securities, 1947-58_____________________ 1361-62
Uses of capital funds in the real estate mortgage market,
1957-48______________________________________________________ 1357-58
Uses of funds in Government financing, 1947-58______________ 1363-64
Martin, Hon. William McChesnev, Jr., Chairman, Board of Governors of
the Federal Reserve System, accompanied by Ralph A. Young, Director,
Division of Research, Federal Reserve Board; Winfield W. Piefler,
assistant to the Chairman, Federal Reserve Board; and Robert Poosa,
vice president, New York Federal Reserve Bank___________________ 1231,1451
Exhibits:
Basic commodity price indexes in relation to price analysis______
1485
Demand for credit________________________________________________
1490
Differences in techniques between raising or lowering money
supply to counteract cyclical changes an1 raising the money
supply in relation to long-range secular growth________________
1496
Federal Reserve policy actions______________________________ 1460, 1491
Profits, recoveries, and losses on securities— member banks,
1951-58________________________________________________________
1238
Ratio of outstanding E and H savings bonds to gross public
debt, 1954-59__________________________________________________
1283
What constitutes disorderly conditions in the Government
securities market_______________________________________________
1278
Wholesale commodity prices_____________________________________
1489
Ohlenbusch, John M., senior vice president, Bowery Savings Bank, New
York City; accompanied by Saul B. Klaman, director of research,
National Association of Mutual Savings Banks, New York City______
1410
Exhibits:
Balance sheets reflecting assumed bank’s position before and
after bond transactions described in text______________________
1425
Holdings and transactions in U.S. Government securities________ 1449
Officers___________________________________________________________
1423
Statement of condition as of June 30, 1959______________________
1424
Summary— bond income, profits and losses, 1946-58____________
1426
Transactions of the Bowery Savings Bank in U.S. Government
obligations______________________________________________________ 1450
CO NTENTS
V
A D D IT IO N A L IN FO R M A TIO N
Analysis of the recommendations on debt management of the Committee
on Government Borrowing of the American Bankers Association to the
Secretary of the Treasury_______________________________________________
Average maturity of the Federal marketable interest-bearing public debt:
semiannually, December 1949 through December 1958_________________
Corporations’ securities issues: by purpose of issue, 1945-58______________
Federal Government issues of certificates, notes, and bonds: by purpose of
issue, 1945-58____________________________________________________________
Government’s management of its monetary, fiscal, and debt operations.._
Interest payments in proportion to the total economy_____________________
Letter of Hon. William McChesney Martin, Jr., Chairman, Board of
Governors of the Federal Reserve System, to Hon. Richard M. SimpsonMember bank earning assets— potential expansion arising from reduction
in reserve requirements, July 1, 1953, to June 30, 1959_________________
Member bank reserve requirements________________________________________
Sources and uses of member bank reserves, 1914 to 1952__________________
State and local governments’ securities issues: by purpose of issue, 1945-58
Total debt and Federal debt: Selected years, 1929-58____________________
Total securities issues of the Federal Government, State and local govern
ments, and corporations, by purpose of issue, 1945-58__________________
Page
1229
1098
1097
1096
1245
1208
1287
1331
1317
1300
1096
1098
1097
EMPLOYMENT, GROWTH, AND PRICE LEVELS
F R I D A Y , J U L Y 24, 1959
,
C ongress of t h e U nited S tates ,
J o in t E conomic C o m m ittee ,
Washington D.C.
The committee met at 10 a.m., pursuant to notice, in the Old Su
preme Court Chamber, the Capitol, Senator Paul H. Douglas (chair
man o f the committee) presiding.
Present: Senators Douglas, Bush, and Javits; Representatives
Curtis, Widnall, Patman, Reuss, and Coffin.
The C h airm an. Gentlemen, the committee will come to order.
W e begin this morning with perhaps the most important series o f
hearings this committee will conduct on the problems of money supply
and debt management in relationship to economic conditions.
W e greatly appreciate the courtesy o f the Secretary o f the Treas
ury, Mr. Anderson, is taking time from a busy life to appear before
us.
W e may not always agree with the Secretary, but we have great
respect for him as a devoted public servant. I will say openly what
I have frequently told him privately, that he is, I think, the most
courteous Government official whom I have ever seen appear before
a congressional committee.
Mr. Anderson, I understand that you and Chairman Martin have
agreed on a joint statement relative to the study which you have con
ducted on the Government securities market, which was distributed
to the members o f the committee yesterday, and that this is to be made
a part of the record, not read but subject to discussion, but that you
would like to submit orally a briefer statement more general in char
acter which you think you could do in 20 minutes or so.
Mr. A n d erson . Yes, sir.
The C h airm an. W e will be very glad to hear you, and at the end
of that time we will have some questions from members of the
committee.
STATEMENT OF HON. ROBERT B. ANDERSON, SECRETARY OP THE
TREASURY; ACCOMPANIED BY JULIAN B. BAIRD, UNDER SECRE
TARY OF THE TREASURY EOR MONETARY AFFAIRS; CHARLES E,
WALKER, ASSISTANT TO THE SECRETARY; ROBERT P. MAYO,
ASSISTANT TO THE SECRETARY; NILS LENNARTSON, ASSISTANT
TO THE SECRETARY; AND R. DUANE SAUNDERS, CHIEF, DEBT
ANALYSIS STAFF, DEPARTMENT OF THE TREASURY
Secretary A n d erson . Mr. Chairman, may I first express my ap
preciation for the opportunity afforded us to appear before this com-
108T
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EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
mittee, and say that I always find the appearances before committees
in which the distinguished chairman participates of great value to us
in our own thinking.
Our national economic objectives can be summarized under three
broad headings: (1) continuity of employment opportunities for
those able, willing, and seeking to work; (2) a high and sustainable
rate of economic growth; and (3) reasonable stability of price levels.
Each of these objectives is important: each is related to the others.
The rapid upsurge in economic activity of the past 15 months pro
vides an appropriate background for your study of these national eco
nomic goals and the best methods of achieving them. The recent
resurgence in output, income, and employment to record levels has
once again demonstrated the basic strength and resilience of our free
choice, competitive economy. Thus, we visualize the task with which
your committee is confronted not as one of devising drastic changes in
our techniques for achieving our economic goals. Rather, it is to eval
uate, within the perspective of developments of the past few years and
during the postwar period as a whole, the existing techniques toward
the end of sharpening their use. There may perhaps be weapons not
now in our arsenal that should be developed. There are, no doubt,
ways in which existing techniques can be improved. But the perform
ance of our economy supports the judgment that basically our econ
omy is sound and healthy.
Much could be said about government economic techniques, their
nature, interrelationships, strengths, and shortcomings. I am sure,
however, that your committee will explore these matters thoroughly,
drawing both from current thinking and from the vast body of earlier
study performed both by committees of the Congress and by private
individuals and organizations.
Before discussing the Treasury-Federal Reserve study of the Gov
ernment securities market, in which you have expressed particular
interest, I should like to consider briefly economic growth as a goal of
public policy.
Some in our country express a belief that the Government should
undertake the primary role in promoting economic growth. It is my
belief that in our system the Government is not the predominant
factor in our Nation’s economic advancement. It must foster and
faci litate economic progress; it cannot force it.
What we all seek is sound substantial growth, not any kind of
growth, or growth at any cost.
Should our efforts to spur progress lead to inflation it will bring
only disappointment and hardship. But when growth is in terms of
goods and services that people need and can buy, it will bring great
rewards.
Only within the past decade has economic growth been explicitly
recognized as a major goal of public policy. This recognition, coupled
with considerable public discussion of the importance of growth to our
economy, provides an important reason for taking a careful look at
growth as a national economic objective.
What is economic growth ? What determines the rate of economic
growth in a free-choice market economy ? And, finally, what is the
proper role o f government in promoting a high and sustainable rate
o f economic growth ?
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1089
What is economic growth ? The most commonly cited definition of
economic growth is in terms of the annual advance in real gross
national product; that is, growth in the dollar value of total output,
adjusted for changes in price levels. For some purposes this is a
good measure of economic growth; for others it is not.
An overall measure of growth tells us nothing about its nature. For
any period, we must get behind the broad figures to determine what
type of growth has taken place. This is simply another way of say
ing that promotion of growth for its own sake may well result in
either fictitious or unsustainable growth. An increase in output, to
be meaningful, must consist of the goods and services that people want
and are able to buy. It is not enough to select some hypothetical max
imum of growth. The actual growth that occurs must consist of use
ful and desirable things as opposed to unwanted or undesirable goods.
Thus, in trying to decide whether growth over a period of years
was at an adequate rate, we would first have to look within the total,
to get behind the figures, and try to determine the characteristics of
the growth.
Some o f the questions we would ask would b e :
How much did personal consumption expand relative to Govern
ment use of goods and services? Within the Government compon
ent, what portion consisted of defense spending as opposed to schools,
highways, and other public facilities?
How much of the increase in output consisted of goods the people
did not want, and thus ended up in Government warehouses, being
given away or destroyed?
What portion of total output was devoted to investment in the in
struments of production, to modernization of plant and equipment,
and to research ?
How much of our effort had to be devoted merely to maintenance
o f our productive plant, as opposed to net new additions?
There are other important questions.
How were the fruits of the growth in output distributed among
various groups in the economy?
Did the growth carry with it certain imbalances that would hamper
future growth?
To what extent was temporary growth fostered by reliance on
actions that impinged directly on the free choice o f individuals and
institutions ?
These are but a few of the questions we should ask. They indicate
that economic growth, in terms of a broad, aggregate figure, is not
necessarily an end in itself. It must be growth of the right kind;
it must be sustainable growth.
What determines the rate of economic growth ? The role of public
policy in fostering a high and sustainable rate of economic growth
in a free-choice, competitive economy can be properly assessed only
on the basis of an understanding of the determinants of growth. *
The factors influencing the rate of growth are manifold and com
plex. Among those of major importance is the pace of technological
advance. No one can study the economic history of this or any other
advanced industrial nation without being impressed by the vital
contributions of the inventor, the innovator, and the engineer. A
stagnant technology is likely to be accompanied by a stagnant econ
1090
EM PLOYM ENT,
G R O W T H , AND PRICE LEV E LS
omy. Man’s ingenuity in tackling and solving his problems lies at
the heart of the growth process.
This is perhaps another way of saying that growth and change
are inseparably intertwined. I f we would enjoy maximum growth,
we must not only be willing to improve the production process through
accepting new ways of doing things, but we must also actively seek
out such techniques. Moreover, the integral role played by change
and technological advance in the growth process contributes to un
evenness in growth over time. Technological advance does not come
at a steady, constant rate. Thus we cannot expect growth, to the
extent it reflects such forces, to proceed at a steady rate year in and
year out.
Technological advance, however, cannot alone assure a high rate o f
growth. The best ideas and the best techniques are of little benefit if
the means are not available to translate them into operating produc
tive processes. This requires real capital, which can only grow out
o f saving and productive investment. Thus, real capital formation—
which consists of the machinery and instruments of production, tools
o f all sorts, and new plant buildings—is a basic ingredient of eco
nomic growth. An economy in which additions to the stock of capi
tal equipment are small cannot be a rapidly growing economy.
The importance of an adequate rate of capital formation in the
growth process deserves special emphasis. Broadly speaking, cur
rent output can be directed either into consumption goods, repre
sented by durable and nondurable consumer goods and services, or into
investment goods, represented principally by new industrial plant and
equipment. So long as our economic resources are being utilized close
to capacity, as has indeed been the case almost continuously since
1941, the more of our output we devote to capital formation, the less
that is available for current consumption. The more we consume,
the less we can devote to capital formation.
This is a basic but apparently little understood principle of eco
nomics. There appear to be some observers who believe that, on top
o f providing adequately for national defense and devoting a con
siderably larger volume of current output to public projects, we can
still achieve uninterrupted future growth in the private sector of
the economy at a rate higher than ever before realized in this country.
Perhaps this is possible, but it seems clear to me that it can occur only
at the expense of current consumption. It can take place, in other
words, only if wTe are willing to accept a lower current standard of
living. With our pressing needs for adequate national defense, we
cannot have an ultrahigh “ maximum” rate of economic growth in the
future, requiring as it does heavy current investment in plant and
equipment, without restricting current consumption. We cannot have
our cake and eat it, too.
A third important requisite for a high and sustained rate of growth
is reasonably full, efficient, and continuous use o f our economic re
sources. Economic recession is the No. 1 enemy of sustained growth
in this country. Idle manpower and idle equipment represent pro
duction that is irretrievably lost. Moreover, inefficiencies in use of
resources can also carry a heavy toll in terms of lost output.
It is important to emphasize that success in achieving high and sus
tained employment, and in providing useful job opportunities for our
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
1091
growing population is closely related to our success in promoting an
adequate rate o f capital formation. In our highly industrialized
economy, workers must have the machines with which to work. These
machines will come into existence only to the extent that productive
investment takes place.
In short, economic growth in a free-choice, competitive economy
tends to vary more or less directly with the pace of technological ad
vance, the rate of capital formation and the extent to which economic
resources are effectively employed. To be effective, any government
program designed to foster growth must operate largely through these
basic determinants.
Government’s role in fostering growth: Government can play an
important role in fostering a high and sustainable rate of economic
growth. One basic principle should be clear, however. In an econ
omy in which major reliance is placed on individual initiative and de
cisions and in which the alternative uses of economic resources respond
through the market mechanism, primarily to consumer demand, gov
ernment can and should play only a facilitating, not a predominant,
role in the growth process.
The moving forces which promote growth in a free-choice market
economy are basically the same as those that account for economic
progress on the part o f the individual.
Thus, the individual’s
desire for a higher and more secure standard o f living for himself
and for his family is the basic stimulus. This is the prime mover.
To this end he studies, plans, works, saves, and invests. He searches
out new ways of doing things, developing new techniques and proc
esses. Where such instincts as these are strong, the forces promoting
growth in society as a whole are strong. Where they are weak, the
impetus for growth is also weak.
The first role o f Government in promoting growth is to safeguard
and strengthen the traditions of freedom in our economy. Stated
differently, the proper and effective role of Government is to provide
an atmosphere conducive to growth, not directly to attempt to force
rowth through direct intervention in markets or through an improvient enlargement of the public sector of the economy. Indeed, gov
ernmental efforts to promote growth that rely on, or subsequently lead
to, excessive intervention in and direction of market processes can
only impede growth in the long run.
The case for this approach to promoting growth is strengthened by
the fact that technological advance flourishes in an atmosphere o f
freedom. Basic to technological advance is pure research, and a
fundamental belief in our society that pure research makes its
greatest contribution when minds are free to meet the challenges of
the future.
Government can also promote rapid, healthy growth by fostering
competition in the economy.
Competition sharpens interest in re
ducing costs and in developing more efficient methods of production.
It places a premium on skills in business management. ^ It stimulates
business investment, both as a means of economizing in the produc
tion process by use of more efficient machinery and by enlarging ca
pacity in order to capture a larger share o f the market. Healthy
and widespread competition, in short, is the primary stimulant to
efficiency in use o f our economic resources, both human and material,
f
1092
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
through technological advance and by stamping out waste and ineffi
ciency in productive processes.
Our tax system may hamper growth in a number of ways. One of
the objectives of the study recently initiated by the House Ways and
Means Committee, and in which the Treasury is cooperating, is to
determine what changes can be made that will be conducive to healthy
and sustainable economic growth. I am hopeful that this study will
lead to significant results.
All of these methods of aiding growth are important. I am con
vinced, however, that Government can make a most significant con
tribution to growth primarily by using its broad financial powers—
fiscal, debt management, and monetary policies—to promote reason
able stability of price levels and relatively complete and continuous
use of our economic resources.
As noted earlier, a high rate of saving is indispensable in achiev
ing a high rate of economic growth. Under conditions of near
capacity production, resources can be devoted to capital formation
only to the extent that they are freed from output of goods for cur
rent consumption. This, in turn, is possible only to the extent that
saving occurs.
In the years since the war, incentives to save in traditional forms—
in savings accounts, bonds, and through purchasing insurance—have
been somewhat impaired by the conviction of some that inflation is
inevitable. In my judgment, this is a mistaken conviction. But
the fact remains that if we allow a lack of confidence to develop in
the future value of the dollar, the desire to save will be weakened.
Full confidence in the future value of the dollar can be maintained
and strengthened only by a concerted, broad-gage attack on all of
the forces and practices that tend to promote inflation. Some o f
these forces and practices may be new and thus require further study
before they can be identified and before appropriate policies to con
trol them can be devised. But there should be little doubt in our
minds as to the proper role of general stabilization policies. Under
present-day conditions, with production, employment, and income ad
vancing rapidly to record levels, such policies should be directed
toward self-discipline and restraint. This requires Federal revenues
in excess o f expenditures to provide a surplus for debt retirement,
flexible management o f the public debt, and monetary policies di
rected toward preventing excessive credit expansion from adding
unduly to overall demand for goods and services.
Some observers have argued recently that we are not now con
fronted with monetary inflation or with a situation in which “ too
much money is chasing too few goods.”
The C h airm an. Mr. Anderson, lest there be any doubt to whom
you are referring, may I identify myself as one of those who made
this comment.
Secretary A n derson . Thank you, sir.
They point to the high degree of price stability during the past
year as proof o f this contention.
This same argument could well have been made in mid-1955, when
that recovery was also merging into the boom phase of the cycle.
A t that time the Consumer Price Index had actually declined slightly
during the preceding 18 months; the wholesale price index had
been stable for about 30 months.
E M P L O Y M E N T , G R O W T H , AND PR IC E LEV E LS
1093
W e failed to recognize at that time, just as we may be in danger
o f failing to recognize now, that the high levels of demand gener
ated in the recovery had sown the seeds of later increases in prices.
Thus, wholesale prices rose moderately in the last half of 1955, at
a steady and relatively rapid rate throughout 1956, and moderately
during 1957. Consumer prices, exhibiting the customary lag, did
not begin to advance until the spring of 1956, but thereafter rose
steadily until early 1958.
The important point is that effective control o f inflation requires
actions to restrain inflationary pressures at the time that such pres
sures are developing. To wait until the pressures have permeated
the economy and have finally emerged in the form o f price increases
is to delay action until the situation is much more difficult to cope
with.
Effective stabilization actions to limit inflationary pressures dur
ing this period o f rapid business expansion, in addition to promot
ing stability of price levels, will stimulate sustained growth in still
another important way. Such policies, by helping to assure that
the current healthy advance in business activity does not rise to an
unsustainable rate and then fall back, wrould promote relatively full
and continuous use o f our economic resources. I am firmly con
vinced that the degree of severity of a business recession reflects to a
considerable extent the development of unsustainable expansion in
the preceding boom. By exercising restraint and moderation dur
ing periods o f prosperous business we can keep booms from getting
out o f hand, and, in so doing, minimize the impact of later adjust
ments.
Appropriate current governmental policy to promote growth must
be consistent with long-range objectives and not resort to quick
expedients that endanger sustainable development. We must reject
the arguments of those who would attempt to force growth through
the artificial stimulants of heavy Government spending and excessive
expansion of money and credit.
I f we would foster growth—not of the temporary, unsustainable
type, but long-lasting and rewarding—we need first to reinforce our
efforts to maintain reasonable price stability and relatively full and
continuous use of our economic resources.
Both logic and experience demonstrate clearly that heavy reliance
on Government spending and monetary and credit excesses during a
period o f strong demand, rather than promoting growth, can lead
only to inflation. Inflation tends to dry up the flow of savings and
leads ultimately to recession, the No. 1 enemy of growth.
W e live in what is basically a free-choice economy. Within rather
broad limits we are free to dispose of our labor, property, and incomes
as we see fit. In disposing of our incomes we are free to spend or to
save, to invest or to hoard. So long as we maintain the basic freedoms
that foster competitive enterprise and stimulate technological advance,
and so long as we use our broad financial powers to promote stability
in the value o f our currency and to avoid the extremes o f economic
recession, I am confident that economic growth will proceed at a
high and sustainable rate. The strength of our economy lies in its
very reliance on the integrity, wisdom, and initiative of the indi
vidual. W e must not weaken this basic strength.
1094
EM PLOYM ENT,
GROW TH,
AND PRICE
LEV ELS
The Government securities market study: I will now make some
brief observations on the Treasury-Federal Reserve study o f the
Government securities market.
Our national economic objectives are, of course, fundamental. It
is only in relation to the successful achievement of these objectives
that the financial polices pursued by our Government can have real
meaning. Furthermore, fiscal, debt management and monetary poli
cies can make their maximum contribution to national economic goals
only if they can operate in a market which is responsive to policy
actions both in terms o f basic understanding of those actions by the
investing public and in terms of the efficiency and maximum useful
ness o f market organization.
The Government securities market is the largest financial market
in the world, with a daily trading volume of more than $1 billion.
It is an extremely complex market and is sharply competitive. It is
very responsive to trends and expectations as to business activity,
Government policies and international developments.
Its responsiveness and competitiveness, under widely varying cir
cumstances, mean that it can provide the proper environment for the
successful flotation of the tremendous volume of frequent Treasury
security offerings to the public, which last year alone totaled almost
$50 billion, exclusive of the rollover of weekly Treasury bill maturi
ties. Similiarly, it can provide an efficient mechanism through which
Federal Reserve monetary policy can operate. Moreover, it must
provide for the smooth transfer of large amounts of Government secu
rities among investors as liquidity and investment needs are satisfied.
The Treasury, the Federal Reserve and the entire business and
financial community, therefore, have a joint responsibility, collec
tively and individually, to encourage the market to resist any forces
which threaten to impair its maximum performance. I f market tech
niques become distorted or restrictive practices arise, the consequences
can extend far beyond any immediate impact on investors, speculators
or suppliers o f credit. It can undermine the basic contribution which
a smoothly functioning Government securities market should make to
the national welfare.
It is with this realization of the importance of the Government se
curities market that the Treasury and Federal Reserve last spring
undertook their joint study of the way in which the market operates,
with particular reference to the market’s performance around the
time o f the reversal o f the economic downturn a little more than a year
ago.
A study o f market mechanisms is necessarily technical. The results
o f any such study are understandably less dramatic than studies of the
broad aspects o f fiscal, monetary and debt management policy which,
together with general economic trends and expectations, provide the
environment in which these market mechanisms operate.
Our joint Treasury-Federal Reserve study group has been working
continuously toward the objectives which were laid out when the
project was announced on March 9,1959. Part I of the study group’s
factual report is now in final form ; parts I I and I I I are only in pre
liminary form. A ll three parts are being made available for public
release on Monday morning.
The C h airm an. Mr. Secretary, do I understand that members of
the committee will be furnished with copies of these three volumes
this afternoon ?
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1095
Secretary A n d erson . Yes, they will, as soon as they are delivered to
us.
The C h airm an. Thank you.
Secretary A nderson. Your committee already has a joint state
ment by Chairman Martin and myself relating to the study. The
virtual completion o f the factual study by the study group provides
a background which Federal Reserve and Treasury policy officials can
now carefully review as we work toward official conclusions and
recommendations growing out of the study.
These conclusions cannot be prejudged. Treasury and Federal Re
serve officials have been following the progress of the study group with
great interest, but, because of the late completion of the report, we
have had little opportunity to examine the factual material which the
study group has assembled.
As Chairman Martin and I state in the concluding paragraphs of
our joint statement, markets are dynamic institutions which require
adaptation to changing needs. The public interest is served only if
the study o f these adaptations is continuous, even though it may be
intensified from time to time as in the present study.
W e both recognize—and I want to emphasize it again—that im
provements in market mechanisms, helpful though they may be, can
not be expected to solve the basic financial problems which our Nation
faces—the problems o f fiscal imbalance during prosperous times, the
tendency for the public debt to grow shorter in its maturity structure,
the need for continuous flexibility in adapting monetary policies to
varying circumstances, the need to encourage increased savings to
finance soundly the Nation’s heavy capital requirements, and the
problem o f the instability o f financial markets as they react to turning
points in economic cycles.
These are basic problems. We are glad to work with your com
mittee in seeking their solutions in the best interest of the public.
The C h airm an. Thank you, Mr. Secretary.
I have read your very full statement to the House Ways and Means
Committee which you gave some weeks ago. I understood from that
that it is your contention that the Treasury, in its issues of public
debt and refunding, does not make interest rates, but has to conform
to competitively set interest rates determined by other groups in the
general money market. Am I correct in that ?
Secretary Anderson. Yes, sir.
The C h airm an. And this carries out the very vivid illustration
given by your predecessor, Mr. Humphrey, who iikened the position
o f the Treasury in borrowing money on the money market to a house
wife going in to buy a dozen eggs. Just as the housewife, so Mr. Hum
phrey said, had no influence on the price of eggs, so the Treasury
could have no influence on the price of money.
I have not looked up the most recent figures on the production of
eggs, but I think there are somewhere around a billion dozen eggs
produced a year. Therefore, the housewife would have the effect of
one-billionth upon the total market, and thereafter it would be
infinitesimal.
I have, however, asked the staff to prepare figures on the relative
amount of money borrowed by the Federal Government as compared
with the total amount of money borrowed by State and local govern
ments and corporations, and I have tables which I would like to have
1096
E M P L O Y M E N T , G R O W T H , AND PRICE
LE V ELS
placed in the record, which I think are substantially accurate, and
the accuracy o f which perhaps you can check as I give them.
Representative C u rtis. May I ask a question about the tables?
The C hairm an. Yes.
Representative C u rtis. They do not include consumer credit ?
The C h airm an. That is true.
Representative C u rtis. Was there a reason for leaving that out?
The C h airm an. No, I do not think there was any reason for leaving
it out.
Representative C u rtis. Don’t you think that is a very important
factor ?
The C hairm an. Yes, I think it is important, and if the gentleman
from Missouri will permit me to introduce this into the record, then
perhaps qualifications can be made.
(The tables referred to follow :)
Federal Government issues of certificates, notes, and bonds: B y purpose of issuet
1945-58
[Dollars in billions J]
Year
Total
New
capital
Refunding
Col. (2),
col. (1)
(percent)
Col. (3),
col. (1)
(percent)
(1)
(2)
(3)
(4)
(5)
$74.1
30.0
28.8
30.1
34.0
38.1
30.6
33. 7
44.2
59.7
49.2
33.6
55.8
62.2
1945____________ _____ _______________________
1946
_____________________________________
1947
______________________________________
_______ _________________ _____ _______
1948
1949
___________ _____ _____ _______________
1950
______________________________________
1951._ ______________________________________
1952 ________________________________________
1953__________________ _______________________
1954
_____________ _____ ___________________
1955_____ ____________________________________
1956____________________________________ _____
1957
_________ ______ _________ _______ ____
1958 ________________________________________
$39.6
4.2
9.3
10.1
11.7
3.2
9.1
11.3
$34.5
30.0
28.8
30.1
34.0
38.1
30.6
29.5
34.9
49.6
37.5
30.4
46.7
50.9
53.4
12.5
21.0
16. 9
23.8
9.5
16.3
18.2
46.6
100. 0
100. 0
100.0
100. 0
100.0
100.0
87.5
79. 0
83.1
76. 2
90. 5
83. 7
81.8
i Source: Treasury Bulletins.
State and local governments1 securities issues: B y purpose of issuet 1945-58
[Dollars in billions l]
Year
1945________ _________ _______________________
1946_____________________ _______ ____________
1947__________________ __________ ________ ____
1948____________ _____ ______ _______ _________
1949______ ________ __________________________
1950__________________________________________
1951
________ _________ __________ ________
1952__________________________________________
1953___________________ _____ _________________
1954__________________________________________
1955___________________________________ ______
1956__________________________________________
1957_____ ________ _____ ______________________
1958__________________________________________
Total
New
capital
Refunding
Col. (2),
col. (1)
(percent)
Col. (3),
col. (1)
(percent)
(1)
(2)
(3)
(4)
(5)
$0.8
1.2
2.4
3.0
3.0
3.7
3.3
4.4
5.6
7.0
6.0
5.4
7.2
7.8
$0.5
1.0
2.3
2.8
2.9
3.6
3.2
4.1
5. 5
6.8
5.9
5.3
7.1
7.7
$0.3
.2
.1
.2
.1
.1
.1
.3
.1
.2
.1
.1
.1
.1
i Sources: 1957-58, Investment Bankers Association; 1946-56, Bond Buyer.
directly comparable.
62.5
83.4
95.8
93.3
96.6
97.3
97.0
93.2
98.2
97.1
98.3
98.1
98.6
98.7
37.5
16.7
4.2
6. 7
3.4
2.7
3.0
6.8
1.8
2.9
1.7
1.9
1. 4
1.3
The two series are n o t
EM PLOYM ENT,
1097
G R O W T H , AND PRICE LEV ELS
Total securities issues of the Federal Government, State and local governments>
and corporations: B y purpose of issue, 1945-58
[Dollars in billions]
Year
Total
issues 1
(1)
$80.8
38.0
37.7
40.1
43.0
48.1
41.5
47.5
58.6
76.1
65.2
49.7
75.7
81.4
1945______ _______________________ _____ ______
1946_________ ________________________________
1947______ _____ ______________________________
1948__________________________________________
1949___________________ _____ _____ ________ —
1952________________________ _____ ______ _____
1955______ ___________________________________
1958______ ______________________ _____________
Total secur Total secur
ities issues ities issues
for new
for refund
capital a
ing
(2)
$41.4
4.9
7.4
9.5
8.5
8.6
10.3
17.0
23.3
24.4
26.4
18.9
28.6
29.8
(3)
$39.4
33.1
30.3
30.6
34.5
39.5
31.2
30.5
35.3
51.7
38.8
30.9
47.0
51.6
Col. (2)4col. (1)
(percent)
Co]. (3)4col. (1)
(percent)
(4)
(8)
51.2
12.9
19.6
23.7
19.8
17.9
24.8
35.8
39.8
32.1
40.5
38.0
37.8
36.6
48.8;
87.1
80.4
76.3
80.2
82.1
75.2"
64.2
60.2
67.9
59.5
62. 0
62.2
63.4
1 Securities issues of the Federal Government includes only certificates, notes, and bonds.
2 The Federal Government component is new money.
Corporations* securities issues: B y purpose of issue, 1945-58*
[Dollars in billions]
Year
Total
issues 1
(1)
1945------------------------ --------- ----------------------------1946_______________________________ ______
1947__________________________________________
1948................. ............................. - ......... - ......... —
1949__________________________________________
1950......... ......... ......... - ......................... ......... .........
1951_________________________________ _____ —
1952__________________________________________
1953_______________________ _____ _____ _____
1954____________________ ______ _______________
1955________________________________ _____
1956_____ ______ ______________________________
1957------ ---------------------------------------------------------
$5.9
6.8
6. 5
7.0
6.0
6.3
7.6
9.4
8.8
9.4
10.0
10.7
12.7
11.4
Total secur Total secur
ities issues ities issues
for new
for refund
capital 2
ing
(2)*
$1.3
3.9
5.1
6.7
5.6
5.0
7.1
8.7
8.5
7.5
8.8
10.4
12.4
10.8
(3)3
$4.6
2.9
1.4
.3
.4
1.3
.5
.7
.3
1.9
1.2
.4
.2
.6
Col. (2)4col. (1)
(percent)
Col. (3)4col. (1)
(percent)
(4)
(5)
22.0
57.4
78.5
95.7
93.3
79.4
93.4
92.6
96.6
79.8
88.0
96.3
98.3
94.7
1 Securities issues of the Federal Government includes only certificates, notes, and bonds.
2 The Federal Government component is new money.
a Cols. (2) and (3) may not add to total because of rounding.
♦Source: Securities and Exchange Commission.
88563—50—pt. 6A—.— 2
78.0
42. 6
21.5
4.3
6.7
20.6
6. 6
7.4:
3.4
20.2
12. 0
3.7
1.6
5.3
1098
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
Average maturity of the Federal marketable interest-bearing public debt: Semi
annually, December 1949 through December 19581
Average
maturity
Average
maturity
End of period
End of period
Years
Months
9.0
2.5
1949— December
1950—Jun............ e
December.
1951— June 2____
December.
1952—Jun e
December
1953—Jun e
December.
1954— Jun e
1.1
6.8
1.0
8.4
3.3
3.8
.2
6.0
Years
Months
1954— December.
1955— Jun_______ e
December.
1956— J_u ne______
December.
1957— Jun e
.
December.
1958— Jun e
.
December.
5.9
9.6
5.5
4.5
10.8
9.3
6.6
2.9
9.3
i Source: Treasury Department. A ll issues classified by final maturity date, except partially tax-exempt
bonds which are classified by earliest call date.
s On Apr. 1,1951, the Treasury offered holders of a 2H-percent bond an exchange for 2^-percent invest
ment bonds, series B, maturing Apr. 1,1980. The new securities were exchangeable for l^-percent market
able notes, but were nonmarketable as such. Thus, the rather sharp drop in the average maturity of the
debt over the first 6 months of 1951.
Total debt and Federal debt: Selected years, 1929-58
[In billions of dollars]
E nd of year
1929.__________ __________ ______ _________ ______ __________________
1934 ____________________ ____________________ _____ _____________
1939 ______________________________________________________________
1944______ ____________ ________ _________ ___________________ _____
1945 ______________________________________________________________
1946_______________________________________________________________
1947_____________________________ _______ __________________________
1948 _________________________________________ _____ ___________
1949____ _________ __________________________________ ______________
1950_______________________________ _____ _______ _________________
1951_______________________________________________________________
1952____________________________________________ _____ _____________
1953___________________________________________________________
1954____ _______________________________________________________
1955_______________________________________________________________
1956___________________________________________________________
1957____________________________________________________ __________
1958__________________________________________________________
Total gross
debt
Total gross
Federal
debt
$214.4
197.3
207.7
430.9
463.3
457.9
485.6
498.6
520.3
566.4
607.5
646.0
683.6
714.0
786.2
830.7
865.1
901.8
$16.3
28.5
41.9
232.14
278.7
259.4
257.0
252.9
257.2
256.7
259.5
267.4
275.2
278.8
280.8
276.7
275.0
283.0
Total gross
Federal
debt as per
cent of total
gross debt
Sources: Total Gross D ebt: Survey of Current Business, September 1953, M a y 1957, M a y 1959.
Gross Federal D ebt: Federal Reserve Bulletins.
7.60
14.45
20.17
53.87
60.15
56. 65
52.92
50.72
49.43
45.32
42. 72
41.39
40.26
39.05
35.72
33.31
31.79
31.38
Total
The C h airm an. I f I may now proceed, this excludes bills. It does
not include the 30-day and 60-day bills. It does include the issues
o f certificates, notes, and bonds. This excluded bills because that
corresponded to commercial bank credits more closely, being of short
duration.
These figures indicate that in 1958, the total Government issue was
approximately $62.2 billion, of which $11.3 billion was for new money
and $50.9 billion consisted of refunding.
Are those figures approximately accurate?
Secretary Anderson. Yes, sir.
The Ch airm an. And similarly for State and local governments,
the corresponding figure, $7.8 billion, of which $7.7 billion was for
new capital and $100 million refunding.
EM PLOYM ENT,
G R O W T H , AND PRICE LE V ELS
1099
I do not know wliether you have those figures. Are those approxi
mately correct?
Secretary A n d erson . Yes. I do not have them exactly.
The C h airm an. The corporation securities total $11.4 billion, of
which $10.8 billion was for new securities, and $600 million refund
ing, making a total of these three forms of the money market of $81.4
billion, o f which the Government issues comprise 62.2 percent. In
other words, instead of one-billionth of the total market, the Govern
ment borrowed three-quarters of the funds in the market, excluding
consumer credit.
Are not the borrowings of the Government of such large volume,
both actually and comparatively, that they help markedly to deter
mine the interest rates instead of merely conforming to an interest
rate fixed by other forces ? That is the first question I wanted to ask.
Secretary A n derson . Senator Douglas, if I may first comment on
your figures, perhaps I did not get all of them, but I did not hear a
figure for mortgages in this compilation.
The C h airm an. Real estate mortgages ?
Secretary A n d erson . Yes. You probably would want to include
them.
I should also like to say this. W e recognize that the Treasury is
the biggest borrower in the country, and we recognize that we in
fluence the cost of money.
The C h airm an. And the interest rate.
Secretary A nderson. And the interest rate.
The C h airm an. That is a very important point, because Mr. Hum
phrey has always denied this.
Representative C u rtis. Oh, no, no.
May I interpose an objection?
The C h airm an . Surely.
Representative C u rtis. You are entitled to your interpretation, but
I think you have always carried his statements to the extreme. He
never said, in my judgment, that it did not influence it. Rather, he
always minimized the influence in relation to what the gentleman
from Illinois thought was the influence.
Secretary A n d erson . I should like to say that as the biggest bor
rower we recognize the fact that we do influence the cost of money.
W e do not fix the cost of money. Although we are the biggest single
borrower, we cannot control the supply of credit in a free market.
I think also that as we look at the Treasury operations in a year in
the order o f magnitude which you mentioned, we must also have an
awareness that refundings, which comprise the largest part of our
operations, do not have the same effect as going into the market for
new cash, which is draining off current savings.
The C h airm an. We have included the refundings o f private corpo
rations and of State and local governments, although, o f course, pro
portionately they are much smaller in those cases.
Secretary A n d erson . Yes. I simply wanted to make the point that
in the order of magnitude there is a difference in the effect which we
will have, if we refund it.
The C h a i r m a n . Now, if I may go into the analogy between the
money market and other markets.
1100
EM PLOYM ENT,
G R O W T H , AND PRICE
LE V ELS
The economists say that where the supply is controlled by one party r
you have complete monopoly, or where it is controlled by a few, you
have highly imperfect competition between sellers.
When you have such a large proportion of borrowings made by
one agency of Government, do we not have something departing very
much from pure competition and approaching what the economists
call monopsony—not complete monopsony, of course, but a type in
which one buyer purchases the major portion of the supply?
Secretary An derson . Senator Douglas, I think that in a very real
sense it is doubtful if there is anything that is perfectly competitive.
However, if we compare credit markets with other markets, the credit
market seems to me to be one of the really competitive markets.
Also in the last 30 years this competition has grown.
How do we judge the degree of competitiveness in a market? One
o f the most important things is the alternatives that are open to the
buyers and the sellers, or in credit markets the alternatives that are
open to the lenders and to the borrowers.
Lenders are confronted with a variety of alternatives, both from
the standpoint of the issuance of the obligations and from the stand
point of the maturity of the various securities. As a matter of fact
one of the problems which we in the Treasury confront in issuing
new issues of long-term Government securities is the fact that we face
an increased competition for the lender’s dollar.
I pointed out in my statement before the House Ways and Means
Committee the variety of investments which are now available to
people who do want to lend, particularly in the number of securities
or mortgages that have grown in the last 8 or 10 years which carry
some degree of guarantee, ranging all the way from a full guarantee
by the U.S. Government simply to the fact that it has been issued by
a Government agency and carries the implication that the Govern
ment would not permit a default.
Borrowers also have a number of alternatives. Let us take, for ex
ample, a man who w^ants to buy a house. I f in the twenties he had
wanted to buy a house he would have had to finance the transaction
largely through a short-term mortgage note, which he hoped that he
could repay or refinance at maturity. Today, he can borrow money
from a commercial bank on that basis, or he can go to a savings bank,
he can go to a building and loan association, he can go to an insurance
company, he can go to a mortgage banker or, he can utilize some of the
agencies of the Government, and most o f these loans are amortized
and paid off month by month.
You take consumers, such as the buyers of automobiles. There is
high competition between whether those loans are held by the banks
or by finance companies, small-loan companies, or even, in some in
stances, corporations created by the sellers of the goods, through which
they can operate.
A businessman also has a variety of choices. He can shift from
one place to the other.
Another thing you use to judge competitiveness is price behavior.
I f the prices in the market tend to remain fixed for a long period o f
time, or if the only type of movement is an irregular upward adjust
ment, then one would become concerned with the lack o f competitive
ness or monopolistic tendencies.
EM PLOYM ENT,
G R O W T H , AND PRICE
LE V ELS
1101
Certainly, prices in credit markets, and particularly the Govern
ment market, with which I am most immediately concerned, move
very flexibly.
The C h airm an. Mr. Anderson, our time will be up in a few min
utes. I do want to raise this point, however, with just one more
question.
I f you, however, compare the money market now with the money
market 30 years ago, then the national debt was only about $20 billion,
as I remember it, and now it is $285 billion; the annual volume of
borrowings, excluding bills as I have said, is $62 billion; and the
total Government debt is approximately one-third of the total debt
in the country. I f you compare this condition with the condition 30
years ago, certainly the Federal Government now is a much larger
borrower, both absolutely and relatively, than it was then. Is that
not true?
Secretary An d erson . That is correct, but even then the Government
was the largest single borrower.
The C h airm an. And while it might have been true 30 years ago
that the Government had to conform to a competitively determined
interest rate, is it not true now that it influences the interest rate
much more than it did years ago ?
Secretary A n d erson . I think the existence o f such a large debt
would cause it to influence the market.
Senator Douglas, may I comment further? I should like to call
the attention o f the committee— and I am sorry I do not have the
page number—to the statement which the Senator referred to, before
the House Ways and Means Committee. We set out some charts
showing the relative pricing of Federal Government securities as com
pared to corporate securities. I thought that the Senator might want
to examine that. (Chart 8 and chart 9, appearing on pp. 18-19 of the
hearings on the public debt ceiling and interest rate ceiling on bonds
before the House Ways and Means Committee, June 10,1959.)
The C h airm an. O f course, as in any problem of the mutual attrac
tion o f bodies, this conforms to the Newtonian law of mechanics in
terpretation, that the larger bodies have an influence on smaller bodies,
as well as the smaller bodies attracting the larger bodies.
Mr. Curtis ?
Representative C u rtis. Thank you, Mr. Chairman.
First, let me state my personal gratification with the presentation
that you have made, Mr. Secretary. I find myself in such complete
accord with the philosophy you have expressed that I can only express
appreciation for the manner in which it was expressed.
I think Senator Douglas is presenting a very proper and fair point
o f view in trying to measure the extent to which the Treasury does
influence the money market. I think, however, as I have previously
stated, that Secretary Humphrey always recognized that the Treasury
does influence it, the issue being only over how much it influenced it.
I think there is real disagreement between the Senator from Illinois
and the former Secretary to the extent of this influence.
The data that has been supplied here is very helpful in trying to
measure that. However, it does leave out a number of factors which
bear on this question of who is competing for the savings of our peo
ple. One, o f course, is real estate mortgages; consumer credit is bound
1102
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
to be influenced, particularly as the Treasury goes into short-term
borrowings; foreign securities. Government and otherwise; real in
vestment, investment in real things; the stock market, certainly to the
extent that the prices, over 1 year, o f the total amount of stocks goes
up.
Would you agree with that ? And are there some other factors that
bear on this that I have not mentioned ?
Secretary A n derson . I would agree that we do compete for sav
ings in our country. I f one looks at the rapid growth which has oc
curred in other forms of savings institutions, these savings in volume
have increased more rapidly, for example, than the volume of savings
in the savings bonds.
It is recognized that anyone who seeks credit in the free market
is competing with all others who seek it.
Representative C u rtis. We particularly have mutual banks and the
the savings and loan people who are constantly worried about how the
Government manages its debt, particularly how attractive E bonds
might be made, because they seem to be tapping the same market.
O f course, ther3 is another factor in here that I think is extremely
important, and certainly your paper bears on it. That is that a dollar
can be an investment dollar or a consuming dollar, depending on the
choice of the individual. That in itself has a great bearing on the
money market, because if the attractiveness of making that dollar a
consumer dollar instead of putting it into investment is great, then we
have a shortage o f investment dollars; this which bears on this whole
market.
Secretary A n d erson . Yes.
Representative C u rtis. I would like to get your expression on this:
The Treasury, in managing the Federal debt, of course, is trying to
get the money as cheaply as possible, or so I imagine, and to that ex
tent it does hold down interest rates the best it can. Is that not a
fair statement ?
Secretary A n d erson . This is the point which I raised about the
charts, indicating that we try to be as careful as we can within the
context o f the obligation which we have to meet the Government’s
debt requirements.
Representative C u rtis. In other words, just like anyone else in
the market for money, the Treasury is going to try to get it at the
cheapest price possible, and there are a lot of other economic factors
that bear on this, other than the competition of other borrowers for
this same money, that affect interest rates. Is that a fair statement ?
Secretary A n d erson . Certainly we try to borrow as cheaply as we
can to secure funds.
Representative C u rtis. What I am getting at, too, is that we are
talking now about the interest rate; Senator Douglas is pointing out
competition is one factor, and he thinks that the competition is a
little bit lopsided because the Government is such a big borrower.
Now I am directing attention to the fact that there are other eco
nomic forces at play other than competition that bear on interest rates.
One of the obvious ones is, how much money is available, how much
investment demand exists.
The C h airm an . Would the Congressman permit me to make a
clarification ?
E M P L O Y M E N T , G R O W T H , AND PRICE
LEV ELS
1103
Representative C u rtis. Certainly.
The C h airm an. My contention was not that there was great com
petition in the money market, but there was less competition than was
commonly believed.
Representative C u rtis. I f I knew what the word “ commonly”
meant, I would better understand your point.
The Chairm an. Well, it was believed by Mr. George M. Humphrey,
or by the Secretary in his statement before the House Ways and
Means Committee.
Representative C u rtis. I might say I felt with you that Secretary
Humphrey was minimizing it more than I would. On the other hand,
I find, after having listened to Secretary Anderson before the Ways
and Means Committee, that I think he has a pretty realistic approach
to the subject.
The C h airm an. I will agree there has been a big improvement in
the Treasury since Mr. Anderson came there.
Representative C u rtis. Maybe we ought to quit there.
The C h airm an . On the principle that when you are lying on the
ground you cannot fall out of bed.
Representative C u rtis. I did not disagree with Secretary Hum
phrey to that extent. In fact, I am more concerned about those who
seem to have the Senator’s point of view that the Government just
controls the price of money, and that money is not a commodity.
The C h airm an. I have not unveiled my point of view yet.
Representative C u rtis. Mr. Patman says money is not a commodity.
I think there can be a basic disagreement there.
But, to get on with this, o f course the Treasury, in doing the best
job possible, needs flexibility in handling the debt.
Is that not true, Mr. Secretary ?
Secretary A nderson. I did not get the last. I am sorry.
Representative C u r t i s . The adequacy of the job that you do in
minimizing the interest rate depends on the flexibility which the
Congress gives you in handling it ?
Secretary A nderson. I think that is an important part of it ; yes,
sir.
Representative C u rtis. It is pretty important right now.
I think those who will not give the Secretary the flexibility that he
requests in this area are the very ones that are going to increase the
interest rate beyond what it would have to be.
Would the Secretary agree with that?
Secretary A n d erson . Certainly the more pressure you bring on the
short-term rate the more the short-term rate goes up, and the more
the short-term rate goes up the more you influence other costs of
money.
Representative C u rtis. Incidentally, the more we have to go into
short-term bonds, too, the more competition we are giving in the con
sumer credit field and other areas of short-term financing.
Secretary Anderson. Y es; that is correct.
The borrowers of short-term money are more nearly the consumers.
Representative C u rtis. My time is running out, but there is one
question I am going to pose and then come back to it because I think
this is a very basic question which I have not had resolved to satisfac
1104
E M P L O Y M E N T , G R O W T H , AND PRICE LEV E LS
tion in my own mind, namely, the relation of the Federal Reserve to
this problem.
I happen to feel that it is true that if the Federal Reserve comes into
the money market and pegs in any sense the Federal bond interest
rate, this has economic effects in other fields which are more damag
ing than the alternative of a rise in the cost of money. But this ques
tion has been posed, not one of absolutes as to whether it does or does
not, but can the Federal Reserve Act peg the market in some temporary
sense ?
I
think your position and the position of others is that there is no
way of being intermediate about it, that either it does or it does not.
But I would like to have that explored. I think it is very important
that the question be explored as to whether or not in a minimal way
or to a degree the Federal Reserve can help to create or be used as an
instrument in creating a more stable market without having other
adverse economic results.
The C h airm an. Vice Chairman Patman.
Representative P atm an . Mr. Secretary, has the Treasury put to
gether any information which shows what proportion of its issues are
purchased by a few large subscribers?
Secretary A n d erson . Not on an individual basis, no, sir.
Representative P atm an . Well, on any kind of basis ?
Secretary A n d erson . On a group basis we do, Congressman Pat
man.
Representative P atm an . Would you make that available for the
record, please ?
Secretary A n derson . On the group basis, yes, sir.
(The material referred to is as follow s:)
The attached table 5 from the June 1959 Treasury Bulletin presents the only
data currently compiled by the Treasury on the allotments by investor classes
on subscriptions for all Treasury marketable securities (other than regular
weekly Treasury bills) from 1953 through May 1959. One further breakdown
which could be compiled for recent issues, if the committee is interested, would
be a breakdown by Federal Reserve districts for each of the same investor
classes.
The Treasury is also compiling data which will show the number of sub
scribers in each of the same investor classes for each issue put out thus far in
1959 and these figures will be provided to the committee as soon as possible.
Any further breakdown of allotments could be made only by analysis of de
tailed records at each Federal Reserve bank and branch throughout the coun
try. In any request for further detail on allotments it should be realized that
all initial allotment figures are at best an imperfect indication of who our cus
tomers are. The allotment figures include substantial allotments to commercial
banks and dealers and brokers, for example, who handle the secondary distribu
tion of these securities to ultimate investors, sometimes within a period of a
week or less. Subscribers who buy large blocks in the first instance may have
very few left after they have completed their normal function of underwriting
this secondary market distribution.
Reference may be made to the publication each month in the Treasury Bul
letin of the ownership of each issue of Government securities by various inves
tor classes, from which figures an analysis of investor trend in any security may
be developed which more accurately reflects the distribution of each issue.
Breakdowns are available for most, but not all, of the classes for which al
lotment data are compiled. In addition, data are shown for each issue on a
semiannual basis for New York and Chicago central Reserve city banks, Re
serve city banks, country banks, and nonmember banks. Monthly data separat
ing life from other insurance companies are also published. A copy of the own
ership extract from the March 1959 Treasury Bulletin is attached.
P u b l ic D e b t O p e r a t io n s
T a b l e 5. — Allotments by investor classes on subscriptions for public marketable securities other than regular weekly Treasury bills 1
[In millions of dollars]
Issue
Allotments by investor classes
D ate of
financing
Description of security
For cash
2 percent certificate, Feb. 15, 1954 A .
.2)4 percent bond, Dec. 15, 1958________
3% percent bond, June 15, 1978-83-......... ..
1,1953
2,1954
Aug. 15,1954
Oct.
4,1954
Dec. 15,1954
See footnotes at end of table.
2,788
4, 724
2,997
2,239
8,175
1,748
7,007
11,177
1,501
10
(9)
2,205
2,897
3, 886
’^155'
50
6,997
5
3,922
(9)
1,001
3,734
175
~3,55S
26
1, 686
1
995
3,806
10
4,919
5,359
6, 755
8,472
3, 792
1,924
4,763
2,520
12
4,012
1
1
1
2,015
711
4, 520
1,499
2,135
2,276
1,296
360
1,174
1,508
8,733
428
915
1,138
1,982
986
2,011
847
3,091
2, 718
57
1, 299
5, 503
2,385
2, 704
1,190
6
(9)
56
117
106
42
127
150
9
98
19
113
(9)
40
82
131
140
190
112
12
43
152
209
61
46
467
(9)
(9)
175
41
68
39
115
54
141
9
103
144
112
69
70
(6)
(9)
146
74
28
59
47
100
98
1
41
226
63
123
130
55
20
99
13
77
(9)
100
27
165
2
52
7
218
(9)
(9)
139
23
4
41
30
31
70
(8)
14
142
15
43
44
(7)
(7)
0
(7)
(7)
(9)
917
411
654
155
93
339
110
756
535'
(9)
(9)
216
247
558
1,146
751
120
497
30
662
152
1,065
329
84
(7)
2;30
13
75
12
366
(7)
(7)
(7)
(7)
(9)
4
48
50
3
49
1
13
6
92
(9)
(9)
36
20
6
3
45
18
69
13
5
37
36
3
10
(9)
1
2
6
2
19
1
1
(8)
7
(fl)
(9)
(8)
1
1
4
2
2
(8)
11
(8)
(8)
1
(9)
68
156
279
40
16
100
26
269
163
(9)
(9)
37
103
294
156
369
68
87
6
311
156
308
128
23
152
100
158
(8)
162
(9)
115
79
219
188
170
42
169
123
450
(9)
(9)
219
276
76
192
117
182
344
6
120
240
256
232
354
1,363
25
248
85
874
(9)
81
192
185
65
64
209
94
218
293
(9)
(9)
73
130
180
85
238
130
117
34
284
144
220
160
17
1105
Feb. 15,1955
UK-percent certificate, M a y 17, 1955-B___
1-percent certificate, M ar. 22, 1955-C 10___
flK-percent certificate, Aug. 15, 1955-D___
\2K-percent bond, N ov. 15, 1960___________
1^-percent note, M a y 15, 1957-B..............
1^-percent certificate, Aug. 15, 1955-D n_.
IK-pereent certificate, Dec. 15, 1955-E___
2H-percent bond Aug. 15 1963____ _______
1%-percent note, M ar. 15, 1956-A_________
2-percent note, Aug. 15, 1957-C .....................
,3-percent bond, Feb. 15, 1995.........................
1
1,153
(9)
187
261
287
98
LEVELS
Aug.
(l^g-percent note, Feb. 1 5 ,1959-A................ .
418
4, 858
800
5,902
2,279
444
131
All
Dealers
and
other •
brokers
PRICE
M a y 17,1954
I..!:
3
118
State aiad local
Private govern:ments 4
pen
sion
and
Pension
Other
and
retire
ment
retire funds
ment
funds
funds
AND
2% percent certificate, June 1, 1954 B _____
2.383 percent bill, Sept. 18, 1953 10_________
2Yl percent certificate, M ar. 22,1954 C I0.„
2% percent certificate, Aug. 15, 1954 D ___
1 2 percent certificate, Sept. 15, 1954 E ___
Sept. 15,1953
\2]4 percent note, M ar. 15, 1957 A ..............
N o v . 9,1953
2% percent bond, Sept. 15, 1961....... ......... ..
(1 % percent note, Dec. 15, 1954 B ._...............
D ec. 1,1953
\2Yz percent bond, Dec. 15, 1958
.............. .
f 1^-percent certificate, Feb. 15, 1955-A___
Feb. 15,1954
123^-percent bond, N ov. 15, 1961............... ..
M ar. 22,1954
0.956-percent bill, June 24, 1954 i°................ .
Apr. 27,1954
0.726-percent bill, June 18, 1954 l0. . _ ............
June 1,1953
June 3,1953
July 15,1953
Aug. 15,1953
8,114
620
188
Insur
ance M utual Cor
com
savings pora
panies banks tions *
GROWTH,
Feb. 15,1953
M ay
U .S.
Govern
ment in
vestment Com
Indi
In ex
accounts mercial vidu
change and Fed banks 2 als 3
for other eral Re
securities
serve
banks
EMPLOYMENT,
Amount issued
5.— Allotments by investor classes on subscriptions for public marketable securities other than regular weekly Treasury bills 1— Continued
[In millions of dollars]
Allotments by investor classes
Issue
Description of security
For cash
Apr.
July 18.1955
July 20.1955
1K-Percent certificate, M ar. 22, 1956-A i°_.
3-percent bond, Feb. 15, 1995 u ____________
/2-percent certificate, June 2 2 ,1956-B i°____
\2-percent note, Aug. 1 5 ,1956-B h __________
2^-percent certificate, June 2 2 ,1956-C I0. . .
f2^|-percent certificate, Dec. 1 , 1956-D _____
\2%-percent note, June 1 5 ,1958-A____ ______
2.465-percent bill. M ar. 23,1956 10__________
f2^-percent certificate, Feb. 1 5 ,1957-A____
\27/8-percent note, June 15,1958-A
.......... ..
2%-percent note, Aug. 1 . 1957-D ___________
2 34-percent certificate, M ar. 2 2 ,1957-B........
2.627-percent bill, Jan. 16.1957....... .................
2.617-percent bill, Feb. 15,1957............ ...........
/3J4-percent certificate, June 2 4 ,1957-C 10__.
\3^-pPrcent certificate, Oct. 1 , 1957-D______
2.585-percent bill, Mar. 22.1957 ......... .........
3.305-percent bill, June 24,1957 io___............. .
(3.231-percent bill, June 24,1957 10.............. ..
<3^-percent certificate, Feb. 14,1958-A____
1314-percent note, M a y 1 5 .1960-A__________
/3^-percent certificate, Feb. 14, 1958-A 17_.
\3^-percent note, M a y 15, 1960-A >7_......... .
/3^-percent certificate, Apr. 15, 1958-B___
13^-percent note, Feb. 15. 1 9 6 2 -A ............ ..
2.825-percent bill, Sept. 23, 1957 .................
3.485-percent bill, M ar. 24, 1958 .................
[3%-percent certificate, Dec. 1, 1957-E____
^4-percent certificate, Aug. 1, 1958-C ______
[4-percent note, Aug. 1 , 1961-A...................... .
4.173-percent bill, Apr. 15, 1958..................... .
Aug.
1.1955
Oct.
11.1955
Dec.
1.1955
Dec. 15.1955
M ar.
5.1956
July
Aug.
Oct.
N ov.
16.1956
15.1956
17.1956
16.1956
Dec.
1.1956
Dec. 17.1956
Jan. 16.1957
Feb. 15,1957
M ar. 28,1957
M ay
1,1957
M a y 27,1957
July 3,1957
Aug.
1,1957
A u g. 21,1957
3,210
2,532
"2^202"
821
1, 486
6,841
5,754
2,970
"i’soi'
9,083
2,283
7,219
2,109
12,056
3, 221
1,603
1, 750
1,312
7,271
1,006
10 1, 601
161, 750
(9)
I, 501
3,002
II,75
5, 708
131
(8)
2, 351
647
is 100
15
6,135
00
2,437
942
is 100
00
00
(9)
8, 414
1,464
18100
5,757
1
(9)
5,028
18
8,078
100
112
365
(9)
(9)
9,871
10, 487
2,509
7, 991
6,822
271
(9)
1,914
1,747
614
1,047
216
387
400
1, 782
1, 349
1, 099
1, 402
570
903
1, 234
2,175
(9)
(9)
358
554
975
700
855
1,159
725
2, 361
786
1,042
166
1,461
2, 955
650
1,606
1, 394
(9)
24
36
53
37
21
29
64
44
108
52
(9)
69
35
140
24
(9)
(9)
48
66
(9)
(9)
00
116
21
20
19
25
3
(9)
(9)
50
170
68
00
39
10
19
17
119
21
32
18
33
62
(9)
21
32
67
10
(9)
(9)
7
10
(9)
(9)
(9)
48
47
2
4
62
14
(9)
(9)
27
56
54
(9)
4
4
6
1
105
10
9
4
16
37
(9)
6
34
22
5
(9)
(9)
4
9
(9)
(8)
(9)
26
31
2
4
14
3
(9)
(9)
17
45
48
(9)
1,009
545
355
988
33
666
205
976
998
478
(9)
852
548
1, 313
947
(9)
(9)
589
198
(9)
(9)
(9)
573
114
33
12
487
45
(9)
(9)
691
827
174
(9)
1
2
22
1
110
5
31
(8)
4
24
(9)
26
13
20
1
(9)
(9)
3
7
00
(9)
(9)
49
14
1
2
42
1
(9)
(9)
19
26
6
(9)
(8)
4
(8)
1
59
2
3
1
2
1
(9)
1
19
(9J
(*)
(8)
(9)
(9)
(9)
(8)
(8)
(8)
(9)
(9)
1
2
1
7
28
(9)
55
21
203
45
20
96
151
38
342
261
(9)
319
195
680
29
(9)
(9)
99
161
(9)
(°)
(9)
448
64
1
2
272
9
(9)
(9)
319
478
215
(9)
135
62
82
36
53
222
7
65
240
137
(9)
39
191
57
18
(9)
(9)
60
23
(9)
(9)
00
168
205
3
7
91
29
(9)
(9)
129
141
129
(9)
29
101
134
28
60
48
185
42
234
131
(9)
288
140
426
12
00
00
(9)
(9)
00
129
108
118
110
14
6
204
12
(9)
00
77
409
221
00
PRICE
2-percent note, Aug. 15, 1956-B.................... .
All
Dealers
and
other #
brokers
AND
1%-percent certificate, June 2 2 ,1955-F i°_.
State and local
Private governments *
pen
sion
Pension
and
and
Other
retire
retire
ment
funds
ment
funds
funds
GROWTH,
1.1955
M a y 17.1955
Insur
Cor
ance M utual
com
savings pora
panies banks tions 4
EMPLOYMENT,
U .S.
Govern
ment in
Indi
vestment Com
accounts mercial vidu
In ex
change and Fed banks 2 als *
for other eral Re
serve
securities
banks
Am ount issued
Date of
financing
1106
T a b le
Sept. 26,1957
Oct.
1,1957
N ov. 29,1957
D ec. 1,1957
Dec. 2,1957
^ e b . 14,1958
Feb. 28.1958
Apr. 15.1958
June 3.1958
June 15.1958
Aug. 1.1958
Aug. 6.1958
Oct.
8.1958
Oct. 10.1958
N ov. 20.1958
1.1958
Jan.
Jan.
21.1959
23.1959
Feb. 15.1959
Feb. 16.1959
Apr.
1,1959
M a y 15,1959
657
1,143
9,833
7,938
” 9,"770'
3, 854
1, 727
5,752
48
82
100
100
654
1,484
3,971
1,135
102
100
1, 817
7,388
13, 500
3,567
2,735
1,184
2,997
92
355
7,218
105
7,711
4,078
(9)
5,086
2,923
2,738
20 884
50
5,646
9
11, 363
1, 435
1,502
743
619
2,006
20 2,003
2 0 1, 500
09
2 0 1,
20
100
50
(B)
201,:
1,952
539
367
221
209
160
24
63
78
(9)
60
25
48
76
150
44
2
31
16
62
24
60
70
52
176
53
110
202
18
233
87
2
20
23
(6)
44
12
37
153
158
47
(9)
(9)
(8)
(9)
61
26
8
14
33
17
35
2
4
15
1
50
21
58
24
98
18
42
68
85
141
76
12
72
43
1
11
19
(9)
36
6
17
65
43
22
CO
28
25
(9)
1
23
22
49
20
28
599
23
1,095
163
113
145
258
102
570
1,045
911
303
221
125
(9)
798
127
175
52
1, 618
140
(9)
52
26
(9)
9
227
266
2
5
5
8
33
29
39
44
47
7
29
31
8
14
26
(8)
4
4
(9)
38
6
5
53
41
13
(9)
11
15
(9)
(8)
C8)
14
(8)
6
12
5
2
14
2
1
10
2
2
48
(8)
4
8
1
1
1
(9)
5
1
1
106
2
2
(9)
1
12
(9)
(8)
(8)
10
2
9
1
182
10
588
81
77
16
16
9
191
190
546
18
30
49
(9)
245
24
11
28
515
85
(9)
5
4
(9)
28
15
98
2
175
79
120
137
52
173
306
461
154
346
127
47
924
550
104
44
25
(9)
171
136
31
48
207
26
(9)
79
37
(9)
1
667
106
IS
39
1
59
202
36
458
256
86
133
235
141
210
311
351
17
82
94
(9)
138
82
111
83
565
75
(9)
58
54
(9)
3
33
192
10 Tax-anticipation security
11 Additional offering of bonds issued Feb. 15,1953.
12 Additional offering of certificates issued Aug. 15, 1954.
13 Additional offering of bonds issued Feb. 15, 1955.
14 Additional offering of notes issued M a y 17, 1955.
is Additional offering of notes issued Dec. 1, 1955.
io Issued as a rollover of special bills maturing Jan. 16 and Feb. 15, 1957, respectively.
17 Additional offering of certificates and notes issued Feb. 15, 1957.
is Issued in special allotment to Government investment accounts.
10 Additional offering of certificates issued Aug. 1, 1957.
20 Preliminary.
21 Additional offering of bonds issued Oct. 1,1957.
LEVELS
Source: Based on subscription and allotment reports.
1107
(9)
23
93
84
39
34
43
171
81
87
113
PRICE
1 Excludes the issuance of 1^-percent Treasury notes available in exchange to holders
of nonmarketable 234-pereent Treasury bonds, investment series B-1975-80.
2 Includes trust companies and stock savings banks.
3 Includes partnerships and personal trust accounts.
4 Exclusive of banks and insurance companies.
6 Consists of trust, sinking, and investment funds of State and local governments and
their agencies.
6 Includes savings and loan associations, nonprofit institutions, and investments of
foreign balances and international accounts in this country. Also includes corporations
and private pension and retirement funds prior to July 15, 1953, financing.
7 Included in “ All other."
8 Less than $500,000.
9 Not available.
756
1,450
296
663
658
189
1,404
2, 780
520
676
2, 511
213
571
4,031
3,600
3,097
2,256
664
2, 871
1,090
736
2,302
170
2,418
972
1, 443
1, 331
335
AND
M a y 11,1959
100
100
100
100
2,000
GROWTH,
D ec.
i 4-percent certificate, Aug. 1, 1958-C ........
\4-percent note, Aug. 15, 1962-B_____ _
4-percent bond, Oct. 1, 1969...........................
3 % ,percent note, N ov. 15, 1962-C_________
3%-percent certificate, Dec. 1, 1958-D........
3>|-percent bond, N ov. 15, 1974....... .............
(2^-percent certificate, Feb. 14, 1959-A____
^3-percent bond, Feb. 15, 1964.............. ...........
1334-percent bond, Feb. 15, 1990____________
3-percent bond, Aug. 15, 1966________ _____
2^-pereent note, Feb. 15, 1963-A____ _____
334-percent bond, M a y 15, 1985____________
/134-percent certificate, M a y 15, 1959-B___
I2^|-percent bond, Feb. 15, 1965____________
1^-percent certificate, Aug. 1, 1959-C_____
13^-percent certificate, M ar. 24, 1959-D i°_.
334-percent bill, M a y 15, 1959....... .................
33^-percent note, N ov. 15, 1959-B.................
2.999-percent bill, June 22, 1959 io__________
|3%-percent certificate, N ov. 15, 1959-E___
13^-percent note, M a y 15, 1961-B______ I . .
334-percent note, M a y 15, 1960-B_________
4-percent bond, Feb. 15, 1980______________
f3?4-percent certificate, Feb. 15, 1960............
14-per cent note, Feb. 15, 1962-D.....................
3.293-percent bill, Sept. 21, 1959 ™.................
4-percent note, M a y 15, 1963-B....................
4-percent bond, Oct. 1, 1969 21. _ ....................
3.386-percent bill, Jan. 15, 1 960 -._................
3.835-percent bill, Apr. 15, 1960____________
'3.565-percent bill, Dec. 22, 1959 10.......... .......
4-percent certificate, M a y 15, 1960-B...........
1108
E M P L O Y M E N T , G R O W T H , AND PRICE
LEVELS
(Secretary Anderson subsequently submitted the following for the
record:)
S u m m a r y b y I n v e sto r C l a s s — A l l D is t r ic t s
If. percent bonds of 1980
[Dollar amounts in thousands.
Bonds of 1980, dated Jan. 23, 1959, due Feb. 15,1980, issued for cash]
Class
1. Individuals, partnerships, and
personal trust accounts__________
M utual savings banks___________ .
Insur -nee companies______________
Deilers and brokers__________
Pension and retirement funds of
State and local governments.
6. Other pension and retirement
funds
____________________
7. State and local government funds
other than pension and retire
m ent____________ _______ ______ _
8. Commercial ban k s._ ___ . . . ------9. Corporations other than banks
and insurance companies________
10. All others______________ ______ _____
11. Government investment and sys
tem accounts______ ______ _______
2.
3.
4.
5.
Total....................................................
Number
Average
subscrip
tion
Subscrip
tions
Average
allot
ment
Allotments
7,653
191
388
369
$21
485
561
828
$160,702.5
92, 592.0
217,858. 5
305,680. 5
$10
341
395
131
$76,283. 5
65,124.0
153, 316. 5
48,187. 5
47
70
70
16
Percent
of sub
scriptions
allotted
139
1,082
150,421.0
760
105,671. 5
70
433
171
73,978. 5
123
53,043. 5
72
107
1,328
366
350
39,137. 5
464,947.1
258
128
27, 587. 5
169,735. 5
70
37
598
919
240
163
143,479.0
150,216. 5
87
91
51,755. 5
83,410.5
36
56
5
10,000
50,000.0
10,000
50,000.0
100
152 1,849,013.1
73
884,115. 5
48
12,130
N o t e .— A 70-percent allotment to savings-type investors, a 35-percent allotm ent to commercial b a n k
for their own account, and a 15-percent allotment to all other subscribers were made. Subscriptions up to
$25,000 were allotted in full where accompanied by 100-percent payment at the time subscriptions were
entered. All other subscriptions for $5,000 were allotted in full and subscriptions in excess of $5,000 were
allotted not less than $5,000.
4 percent bonds of 1969 (additional issue)
[Dollar amounts in thousands. Bonds of 1969, dated Oct. 1,1957, with interest from Apr. 1,1959, due Oct. 1,
1969, issued for cash]
Class
1. Individuals, partnerships, and
personal trust accounts__________
M utual savings banks __________
Insurance companies______________
Dealers and brokers___ _____ . _ _
Pension and retirement funds of
State and local governments____
6. Other pension and retirement
funds___ _______________________
7. State and local government funds
other than pension and retire
ment ____ _________ ________
8. Commercial b an k s.. _
9. Corporations other than banks
and insurance companies________
10. All others___ __ ______ __
11. Government investment and sys
tem accounts_____________________
2.
3.
4.
5.
Total_____________ _____________
Number
Average
subscrip
tion
Subscrip
tions
Average
allot
ment
3,035
79
61
241
$24
478
872
755
$72, 817. 5
37, 735.0
53, 216. 0
182, 056.0
$9
311
569
152
25
731
18, 285. 0
95
247
23,483.0
31
1,313
217
713
196
366
1
5,443
Allotments
Percent
of sub
scriptions
allotted
$26,344.5
24, 591. 5
34,696. 0
36, 591.0
36
65
65
20
477
11, 931.0
65
163
15,455.0
06
6, 729. 5
935, 590.0
141
255
4,362. 5
334,871. 5
65
36
276
323
54,082. 5
118,147. 0
133
149
26,130. 5
54,480. 5
48
46
50, 000
50,000.0
50,000
50, 000.0
100
285 1, 552,141. 5
114
619,454.0
40
Note.— A 65-percent allotment to savings-type Investors, a 35-percent allotment to commercial banks for
their own account, and a 20-percent allotment to all other subscribers were made. Subscriptions for
$25,000 or less from savings-type investors and commercial banks and for $10,000 or less from all others were
allotted in full. Subscriptions for more than these minimum were allotted not less than the minimums.
E M P L O Y M E N T , G R O W T H , AND PRICE
1109
LEV ELS
Jf percent notes of series B-1963
[Dollar amounts in thousands.
Notes of series B-1963, dated Apr. 1, 1959, due M a y 15, 1963, issued for cash]
Class
Number
1. Individuals, partnerships, and
personal trust accounts___ ______
M utual savings banks_____________
Insurance com panies_____________
Dealers and brokers_______________
Pension and retirement funds of
State and local governments
6. Other pension and retirement
funds______ _____ _________________
7. State and local government funds
other than pension and retire
ment_____________________________
8. Commercial banks____________ ___
9. Corporations other than banks
and insurance companies.......... .
IQ. A il oth ers.-. ______________________
11. Government investment and sys
tem accounts........ ........... .................
2.
3.
4.
5.
Total...................... .........................
3,978
128
88
121
Average
subscrip
tion
$20
409
350
1,288
Subscrip
tions
Average
allot
ment
Allotments
$80,082.0
52,363.0
30,834.0
155,801.0
$15
218
188
650
$60,910
27, 888
16, 574
78, 601
Percent
of sub
scriptions
allotted
76
53
54
50
13
120
1, 565.0
78
1,015
65
160
122
19,486.0
71
11,286
58
220
8,372.0
621 2, 504,322.3
124
330
4, 697
1,330, 591
56
53
412
578
227
184
93,491.0
106,122.0
126
103
51,900
59, 578
56
56
1
100,000
100,000.0
100,000
100,000
100
330 3,152,438.3
182
1, 743,040
55
38
4,035
9,552
N o t e . — Subscriptions for $100,000 or less were allotted in full and subscriptions in excess of $100,000 were
allotted 50 percent but not less than $100,000.
3% percent notes of series B-1960
fDollar amounts in thousands.
Notes of series B-1960, dated Jan. 21,1959, due M a y 15,1960, issued for cash]
Class
1. Individuals, partnerships, and
personal trust accounts__________
M utual savings banks.......................
Insurance companies...........................
Dealers and brokers.
___________
Pension and retirement funds of
State and local governments____
6. Other pension and retirement
funds-------- -----------------------------------7. State and local government funds
other than pension and retire
ment.................... .................................
8. Commercial banks__________ ______
9. Corporations other than banks
and insurance companies..............
10. All others__________ _______ ________
11. Government investment and sys_____________
tem accounts____
2.
3.
4.
5.
Total....................................................
Number
Average
subscrip
tion
Subscrip
tions
Average
allot
ment
1,777
91
81
96
$39
358
939
664
$69,599.0
32,558.0
76,030.0
63,748.0
$27
188
455
322
Allotments
Percent
of sub
scriptions
allotted
$47,848
17,082
36,870
30,908
69
52
48
48
3
21
63.0
21
63
100
64
119
7,630.0
71
4,534
59
499
22,953.0
883 4,672,408.5
250
435
11,482
2,301,718
50
49
672
500
356, 111. 0
222,100.0
331
251
175,478
111,292
49
50
656 5,523,200.5
325
2,737,275
50
46
5,290.
530
444
8,422
N o t e .— Subscriptions for $100,000 or less were allotted in full and subscriptions in excess o f $100,000 w ere
allotted 47 percent but not less than $100,000.
1110
E M P L O Y M E N T , G R O W T H , AND PRIC E
LEV ELS
4 percent notes of series D-1962
[Dollar amounts in thousands. Notes of series D-1962, dated Feb. 15, 1959, due Feb. 15, 1962. Issued iii
exchange for 2 ^ percent certificates of indebtedness of series A-1959, and 17
A percent notes of series A-1959}
Class
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Subscriptions
and allotments
Average sub
scription and
allotment
1,690
75
99
56
$44,187
22, 250
47,119
26, 463
$26
297
476
473
Number
Individuals, partnerships, and personal trust accounts..
M utual savings banks____________________________ _____ ___
Insurance companies______________________________________
Dealers and brokers_______________________________________
Pension and retirement funds of State and local govern
ments____ __ ____________________________________________
Other pension and retirement funds______________________
State and local governmentfunds other than pension and
retirement __ ____________________________________________
Commercial banks_________ _________ _____________________
Corporations other than banks and insurance companies.
All others________________________ ____ _____ ________________
Government investment and system accounts___________
8
111
2,381
12,860
298
116
258
4, 992
440
439
2
84. 803
972, 091
140,226
75, 424
7, 232
329
195
319
172
3,616
Total______________ _______ ______________________ _______
8,170
1,435,036
176
4 percent certificates of indebtedness of series B-1960
[Dollar amounts in thousands. Certificates of series B-1960, dated M a y 15, 1959, due M a y 15, 1960.
Issued in exchange for certificates of indebtedness of series B-1959]
Class
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Individuals, partnerships, and personal trust accounts. _
M utual savings banks________ __________ . _______________
Insurance com p anies-___
____________ _____________ __
Dealers and brokers __ ____ __ _________ _____________
Pension and retirement funds of State and local govern
ments_____ _______________ _________ __________ ______
Other pension and retirement funds-. __________ _____ __
State and local government funds other than pension
------and retirenent ___ _ ----- -------------------------------Commercial ban ks._
__ ____ __
Corporations other than banks and insurance companies.
A 11 others_________
_________________ __ _____________
Government investment and System accounts____ ___
Totjal___________________ _______ _________________________
Subscriptions
and allotments
Average sub
scription and
allotment
1,132
30
35
36
$32,991
23, 450
14, 704
106, 437
$29
782
420
2, 957
2
110
105
13, 642
52
124
167
1,381
460
288
3
97, 626
366, 865
266.119
268, 387
79,135
585
266
579
932
26, 378
3,644
1,269, 461
348
Number
4% percent notes of series A-1964
[Dollar amounts in thousands. Notes of series A-1964, dated July 20, 1959, due M a y 15, 1964. Issued in
exchange for 1^8 percent certificates of indebtedness of series C-1959, and 4 percent notes of series A-1961}
Class
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Individuals, partnerships, and personal trust accounts. _
M utual savings banks____ __________ ________ _______ _____
Insurance companies___________________________ ______ ____
_ _________
Dealers and brokers. ___ __ __ ________
Pension and retirement funds of State and local govern
m ents.-- _____________ - ___ __ -_ ___________________
Other pension and retirement funds______________________
State and local government funds other than pension
and retire i.e n t________________ _____ ____________________
___________
_ __
Commercial banks._______ ________ __
Corporations other than banks and insurance companies.
A ll others___ _________ ____________________________________
Government investment accounts________________________
Total (except for system account)______________________
System account__________ . . . ________ ________________
Grand total___________ ___________ _______ ________ _._
Subscriptions
and allotments
Average sub
scription and
allotment
912
79
66
93
$32,004
48,463
25, 477
189, 814
$36
613
386
2,041
5
64
31, 530
10, 347
6, 306
162
122
2,798
233
220
2
67, 868
802, 513
179,585
134,214
14,746
556
287
754
610
7, 373
4, 594
1, 536, 561
2,642, 733
334
Number
4,179,294
EM PLOYM ENT,
G R O W T H , AN D PRIC E L E V E LS
1111
8% percent certificates of indebtedness of series A-1960
[Dollar amounts in thousands. Certificates of series A-1960, dated Feb. 15,1959, due Feb. 15,1960. Issued
in exchange for
percent certificates of indebtedness of series A-1959, and 17
A percent notes of series
A-1959]
Class
1.
.
3.
4.
5.
2
6
.
7.
8
.
9.
10.
.
11
Individuals, partnerships, and personal trust accounts. _
Mutual savings banks ___________________________________
Insurance companies______________________________________
Dealers and brokers_________________________ ____________
Pension and retirement funds of State and local govern
ments _______________________ __________________________
Other pension and retirement funds________ _________ . .
State and local government funds other than pension
and retirement_____________________ . . _______________
Commercial banks _____ ____________________ ___________
Corporations other than banks and insurance companies.
All others ___________ ________ _____________________________
Government investment accounts..______ ________________
Total (except for system a c c o u n t ) __________________
System account___________________________________________
Subscriptions
and allotments
Number
3,632
91
156
172
4
179
$150,224
43,028
157,614
206,914
2, 230
Average sub
scription and
allotment
$41
473
1,010
1, 203
40,937
558
229
483
4, 583
1,640
816
515, 284
2,417,695
1,617, 829
703,129
749
1,067
528
986
862
749
11,757
5, 855,633
5, 506, 993
498
1
11,362,626
Grand t o t a l____________________________________________
4% percent notes of series C-1960
[Dollar amounts in thousands. Notes of series C-1960, dated Aug. 1, 1959, due Aug. 15, 1960. Issued in
exchange for
percent certificates of indebtedness of series C-1959, and 4 percent notes of series A-1961]
Class
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
.
11
Individuals, partnerships, and personal trust accounts___
Mutual savings banks______ __ _______________
.. _
Insurance companies___
______
___________ . .
..
Deilers and brokers.-- - ___ . . . . . ________ _____ . . .
Pension and retirement funds of State and local govern
ments. _ _ ___________ . . . ___________
. ____________
Other pension and retirement funds .
_ _ _ _ _
State and local government funds other than pension and
retirement __ __
___ ___ . ______
_________ __
Commerciil banks______ ____________ ______ _______ __
Corporations other than banks and insurance companies.
All others______________ _ _ ________
___ ________ __
Government investment accounts________________________
Total (except for system account)_______ ______ _________
System account___________ __________ ______ _____________
Grand t o t a l ___________
_______ __ _________ __________
Subscriptions
and allotments
Average sub
scription and
allotment
$108, 885
38,028
74,902
278,202
$39
568
700
1, 728
132
8,491
18,027
1,415
137
431
4,398
1,154
722
3
491,395
1, 374, 877
1,298, 623
364,252
4, 834
1,140
313
1,125
505
1,611
9,973
4,060, 516
5, 500, 000
407
Number
2, 792
67
107
161
6
9, 560, 516
EXTRFICT frdm the
TREASURY S
BULLETIN
Ow n e r s h i p df
U n it e d S t r t e s
Go v e r n m e n t
S e c u r it ie s
DEC.3 l . i a 5 B
UNITED STATES TREASURY DEPRRTMENT
OFFICE DF T H E
SECRETRRV
M R R C H -IS 5 3
1113
3S563 O— 59>—<pt. 6A— —3
1114
Table 3.- Estimated Ownership of Federal Securities
(Par values IJ in b illio n s of d o lla rs)
Held by banks
T otal
1/
1942-June..................
December.........
7 7 .0
112.5
2 8 .7
U7.3
19^3-June..................
December.........
140.8
59-4
71.5
1944-June..................
December.........
202 .6
232 .1
83 - 3
I 9U5 - j une
December.........
2 5 9 .1
2 7 8 .7
106.0
1 1 5 .0
1946-February 2/••
J une..................
December.........
27 9 .8
116.7
2 6 9 .9
25 9 .5
108.2
1947-June..................
December.........
258.4
2 5 7 .0
91 .9
91.3
19*+8 -June..................
December.........
252 .4
8 5 .9
2 5 2 .9
19^9-June..................
December.........
2 5 2 .8
85.8
8 2 . 1+
257.2
8 5 .7
19 50 -June..................
December.........
2 57.4
2 5 6 .7
8 2.6
1951-June..................
December.........
255.3
2 5 9 .5
8 1.4
8 5.4
..........
1952-June..................
December.........
December.........
Insurance
companies
Other
Mutual
savings
banks
1 8 .4
18 .6
1 5.9
2 .5
6 .5
2 2 .7
1 0 .1
1 .9
8 .2
6.3
3 .1
1 6 .1
2 .5
2 2 .8
19.5
17.3
2 .2
7 .1
7.6
1 0 .1
10 .6
2 .6
2 .8
7.5
7 .8
6 .5
6 .9
3 .1
3-2
2 1 .8
1 9.7
2 1 .4
2 .2
2 5 .0
3 1 .0
1 1 .2
3 .6
7 .6
i
7 .1
2 .3
8 .5
9 .5
13.6
5.4
8 .2
;
8 .2
3>
3 .7
26 .0
2.6
6.2
10.6
1 2 .2
37.7
53.0
1 7 .8
2 3 .7
9 .1
13A
8 .7
10.3
|
9.2
11.3
3 .9
4 .5
7.2
11.5
1^ .3
16 .9
67.0
8 1 .7
30.9
37.6
2 k .7
19 .2
11.7
12.9
13.1
15.1
I k .9
2 3 .7
96 .5
97 .9
8 3 .9
259.2
267.4
8 4 .0
2 6 6 .1
8 3 .6
89.6
275.2
Total
Savings
bond 8
8 8 .1
4 1 .1
5 2.2
59 .9
,
23 .9
6 8.4
77 .7
84.2
19 .1
2 1 .7
100.2
18 .8
114.0
k6 .1
53.3
3 1 .2
36 .2
14.9
17.1
2 1 .8
24 .9
18.5
2k.3
1+2 .9
93 .8
84.4
74.5
22 .9
23 .8
27 .0
28.0
2 9 .1
30.9
59.1
6 4 .1
4 0.7
90.8
128.2
136.6
135.1
6k . l
2 1 .2
20 .8
132.6
63.3
64.2
43.3
4 3.5
44.2
70.0
2 1 .9
22.6
2 1 .k
6 8 .7
64 .6
6 2 .5
6 3.0
66.8
65.6
6 1 .8
58 A
6 1.6
6 1 .1
63 .4
58.8
6 3 .7
23.3
23.3
19-3
18.9
18.3
20.8
2 3.0
2 3 .8
22 .9
2 4 .7
2 4 .7
25 .9
130.7
3 2 .8
34.4
133.7
131.3
3 5 .8
3 7.3
38.3
130.7
129.7
39.4
132.1
37.8
39.2
135.6
13^.9
1+1.0
k 2 .3
44 .3
4 5.9
132.9
47.6
48.3
13 2 .2
66.6
65.7
65.8
65.5
66.6
66.3
6 7 .4
66.3
.4
.7
.4
.5
.7
.7
.6
4 .0
.7
.7
.9
4 .9
•9
1 .1
1 0 .1
1 .0
2 .3
12.9
1 6 .4
1 .5
6 .1
2 .1
3A
4 .4
7.3
8.3
3.2
4.3
6 .1
2 1.4
5.3
6 .5
8.3
9 .1
6 .7
6 .5
6 .3
8.6
8 .1
5.3
9.6
10.7
20.2
23,3
22 .2
11 .1
19.9
11.5
1 7 .8
1 1 .8
15.3
13.7
14.1
1 5 .8
7 .0
8 .9
17.6
22 .8
2 1 .2
4 8 .8
1+9.3
1 7 .8
2 0 .5
17.0
2 0 .1
11.4
I 0.8
8.0
8 .1
9.6
9.4
1 7 .6
1 6 .7
16 .3
19 .8
1 1 .6
18.7
10.9
18.4
19.7
8 .7
8 .8
9 .7
10.5
17.1
10 .2
2 0 .1
15.5
16 .5
9 .8
20 .7
9.4
9.6
9-6
9.5
18 .8
10.4
10 .7
10.6
1 1 .6
4 9 .9
6 5 .1
135.0
137.3
6 6 .1
6 4 .9
49.3
49.4
6 4.8
2 4.4
2 4 .9
2 4 .9
2 .2
2 .1
2 .0
2 .0
4 7 .1
47 .8
133-4
65 .k
64 .6
2 4 .0
M iscel
laneous
investors
4 /8 /
1 2 .1
12 .0
12 .0
11 .5
1 1 .6
4 5 .5
46.2
4 9 .6
4 9 .1
4 9 .1
49.0
49.2
13 1.8
130.8
19.9
2 0 .1
17.3
19.6
2 2 .7
State and
Corpora lo ca l
tions 6 / govern
ments j J
2 1 .1
19.4
18 .6
2 4 .6
2 3 .9
15.7
15.7
16 .0
1 6 .1
16 .9
16 .0
15.5
15.8
9 .5
9-2
13.6
14.8
9.6
8.4
7 .1
7.3
7 .8
7 .9
8 .7
8 .9
19.9
11 .1
11.7
18 .6
12 .0
12 .8
2 1 .5
12.7
13.2
LEVELS
December.........
55.3
64 .3
Total
PRICE
19 ^ 1 -June..................
Federal
Reserve
Banks
Individuals
AND
U7 .6
4 8 .5
5 0 .9
Held by private nonbank investors
u. S.
Government
investment
accounts k j
GROWTH,
1939“December.........
1940-June...................
December.........
1 7 0 .1
Commer
c ia l
banks
EMPLOYMENT,
End of
month
T o ta l
Federal
s e c u ritie s
outstand
ing 2J
133.3
135.1
64.8
^ 9.5
15.3
15.0
16 .6
50.0
15.3
13.7
9 .1
63.6
8 .8
19.2
50.5
51.7
136.7
142.3
65.6
65.8
50.2
1 5 .^
50.2
1 5 .6
14.8
1U.3
8 .7
8 .5
138.5
138.5
50.3
5 0.1
17.4
17.2
8 .4
2 3 .1
2 3 .O
54.2
55.6
139.7
67.7
67.3
68.4
13-3
2 4 .9
53.5
54.0
8.0
8 .1
6 7.8
1 8 .8
1 8 .7
1 2 .8
1 2 .6
13 6 .2
49.6
4 9 .1
12.3
7 .9
2 3.4
2 3 .5
23.3
55.2
55.8
55.4
137.3
4 8 .9
4 8 .8
48.6
19 .0
12.3
137.4
6 7 .9
68.4
68.5
19.6
19.9
25 .0
8 7 .1
86 .8
6 3.5
2 3 .6
62.0
2 4 .8
80.8
57.1
59.3
2 3 .8
December.........
272 .8
2 7 6 .7
1957-March................
2 7 5 .1
8 1 .3
58.1
55.8
2 71.3
8 8 .7
2 7 8 .8
9 4 .1
1 9 5 5 -June...................
December.........
271+ .4
280 .8
August..............
September. . . .
84.2
270 .6
78 .9
2 7 2 .6
2 7 4 .O
80.2
8 0 .1
8 1 .6
56 .8
56.6
58.1
2 7 ^ .5
58.3
2 4 .9
13 8 .0
13.9
14.4
13.7
13.9
14.7
15.1
14.4
2 3 .0
17.1
15.7
16.3
18 .2
17.7
15.4
1 6 .1
16 .6
16 .9
16.4
16 .0
16 .9
16 .2
12 .2
12 .2
7 .9
7 .9
7 .9
16.5
15.7
17.1
17.2
15.9
15.9
1 2 .2
1 2 .1
1 2 .0
7 .8
7 .6
7.6
15.9
17.2
17.3
16.3
16.5
16.5
7.6
7 .6
7.6
17 .2
7.6
7 .5
7.4
14.6
14.7
13.3
8 1 .9
58.2
8 3.3
59.1
23.3
2 3 .7
24.2
55.^
55.3
55.2
137.3
137.6
136.4
67.8
67.6
66.8
48.4
48.3
48.2
19.4
19.3
2 7 5 .0
2 7 4 .7
58.6
59.4
59.4
2 3 .2
23 .6
55.1
5 5 .^
55
137.6
136.7
13^.3
6 7 .1
66.8
66.9
48.2
48.2
48 .1
18 .9
18 .6
1 8 .7
1 2 .0
2 7 4 .8
2 7 2 .7
8 2.0
8 2 .7
8 3 .0
23.3
February.........
March................
A p r il................
May.....................
June...................
275.2
2 7 5 .7
6 3.2
6 3.6
2 3 .7
24.2
2 5.4
55.2
55.8
55-9
133-1
132.3
66.4
48 .1
48 .1
48 .0
18 .3
1 8 .1
1 1 .8
J u ly ..................
A u gu st.. . . . . .
September.. . .
2 7 5 .6
55.6
27 8 .6
27 6 .8
24 .5
25.3
^ 7.9
V7.9
4 7 .9
17.4
17.0
November.. . . .
December p . . .
280 .3
2 8 3 .2
28 3 .0
4 7 .8
4 7 .8
^ 7 .7
2 7 6 .4
86 .9
8 7 .7
90.3
89.4
9 1 . 8.
9 0.4
9 2 .1
9 3 .9
93 .6
6 4 .9
65.0
66.4
6 5 .5
66.7
25 .0
55.6
130.5
1 3 0 . 8.
130.7
25.4
55.1
54.8
54.4
133.1
134.5
135.1
6 7 .7
26 .2
6 7.2
26.3
56.0
65.3
65.0
6 4.8
64.9
6 4 .9
6 5 .1
6/
2/
8/
2/
p
11.7
11.7
11.8
7.4
16 .9
11.9
11.9
7.5
7.^
17 .1
17.1
17.4
1 2 .1
1 2 .1
12 .1
l .h
7.3
7.3
17.3
15.4
17 .0
17.3
17.3
17.3
16 .2
17.1
15-7
15.4
15.2
17 .0
16 .9
15.9
1 5 .^
17 .0
15 .0
17.0
17.0
14.9
15.9
17.2
15*8
16 .9
16 .9
1 7 .2
16.0
17.3
16.5
13.9
14.6
Ik .3
15.3
in stitu tio n s and corporate pension trust funds are included under
"Miscellaneous in v esto r s."
Exclusive of banks and insurance companies.
Consists of tr u s t, sinking, and investment funds of State and local
governments and their agencies, and T e rrito rie s and island possessions.
Includes savings and loan association s, nonprofit in stitu tio n s, corporate
pension tru st funds, dealers and brokers, and Investments of foreign
balances and international accounts in th is country. Beginning
December 1946, includes investments by the International Bank for Re
construction and Development and the International Monetary Fund in
special noninterest-bearing notes issued by the U. S. Government.
Immediate postwar debt peak.
Preliminary.
1115
65.7
17.7
11.9
1 1 .8
1 6 .5
1 6 .5
LEVELS
Source: O ffice of the Secretary, Debt Analysis S t a ff.
1 / United States savings bonds, Series A-F and J, are included at
current redemption value.
2 / Se cu ritie s issued or guaranteed by the U. S. Government, excluding
guaranteed s e c u ritie s held by the Treasury. For amounts subject to
statutory debt lim ita tio n , see page 1 .
1/ C onsists o f commercial banks, tru st companies, and stock savings
banks in the Uhited States and in T e rrito rie s and island posses
sio n s. Figures exclude sec u ritie s held in trust departments.
4 / Holdings by Federal land banks are included under "Miecellaneoud
in vestors" instead o f "U . S. Government investment accounts" after
June 2 6 , 1947, when the proprietary in terest of the United States
in these banks ended.
5 / Includes partnerships and personal trust accounts. Nonprofit
6 6 .1
130 .2
18 .6
16 .0
PRICE
8 1 .4
1 6 .1
AND
2 7 ^ .2
2 7 4 .9
15 .6
GROWTH,
October............
November..........
December.........
18.5
EMPLOYMENT,
49.3
49.6
6 3.6
69.2
I 95 U-J une..................
December.........
1116
Distribution of ownership by types of banks and insur
ance companies is published each month. Holdings by commer
cial banks distributed according to Federal Reserve member-
the Survey account for approximately 95 percent of such
secu rities held by a ll banks and Insurance companies in
bank classes and nonmember banks are published for June 30
and December 3 1 . Holdings by corporate pension trust funds
the
United
March J l,
S t a te s .
19^1,
are published quarterly and fir s t appeared in the March 195^
Data were f i r s t published for
Bulletin fo r quarters beginning December 3 1 , 19^9.
in th e May 19^1 “Treasury B u lle tin ” .
Section I.- Securities Issued or Guaranteed by the United States Government
(Par values - in m illions o f d o llars)
Held by investors covered in Treasury Survey
C la s s ific a tio n
Insurance companies
6 ,4 8 l
commercial
banks 2 /
516
mutual
savings
banks 2]
306
life
546 f i r e ,
casu alty,
and marine
U. S. Government
investment
accounts and
Federal Beserve
Banks
Held by
a l l other
investors
y
Memorandum:
Held by
10,239
corporate
pension
trust funds
1/
58,925
1,014 Jj
6,073
1,170
2 ,2 2 3
4,2 5 1
385
280,9^7
59,940
7,2^3
6,935
4,636
2 , 081+
Total se c u r itie s issued or guaranteed by the
283,031
Footnotes a t end o f Table 4.
33,026
2,8 7 7
44,840
80,743
68,708
52,744
1,514
390
1 2 1,4 5 2
1,904
LEVELS
Matured debt and debt bearing no in te r e s t 8 /
4 ,7 22
175,695
60 , 1*12
44,840
PRICE
In terest-b ea rin g s e c u r itie s :
Public marketable............................................................
AND
Total
amount
outstand
ing 1 /
GROWTH,
Table !•- Summary of All Securities
EMPLOYMENT
The Treasury Survey of Ownership covers securities
issued by the United S ta te s Government and by Federal
agencies. The banks and Insurance companies included in
Table 2.- Summary of Interest-Bearing Public Marketable Securities
(Par values - in m illion s o f d o lla rs)
Held by investors covered in Treasury Survey
C la s s ific a tio n
Insurance companies
6 ,4 8 l
commercial
banks 2 /
516
mutual
savings
banks 2 /
306
life
U. S. Government
investment
546 f i r e ,
accounts and
casu alty, Federal Beserve
and marine Banks
Held by
a l l other
investors
11 /
Memorandum:
Held by
10,239
corporate
pension
trust funds
1/
Type o f se cu rity ;
26,072
T o ta l....................................................................................
U56
53
83,352
50
34,743
5,268
7
13
4,124
19
3,129
11
108
175,695
58,925
6,073
4,712
81,339
50,013
35,717
1 8 , 251*
28,550
11,410
612
657
122
130
537
2 ,7 6 1
23
105
654
5,19^
61
270
2 1,3 2 6
2,363
19,196
^,213
7,195
-
10,137
8,304
28,894
38
59
10
2
4 ,251
33,026
68,708
1,51^
1,040
1,727
22,950
1 ,1 8 8
28
68
37,9^3
12,516
12,998
329
1,517
3,395
455
333
305
199
4,210
104
244
422
291
178
670
2
1
291
71
119
1,0 30
•*
C a ll classes?
Due or f i r s t becoming c a lla b le :
Within 1 y ea r........................................................ .
1 to 5 y e a rs...........................................................
5 to 10 y e a r s ..........................................................
10 to 1 5 y e a rs......................................................
15 to 20 yeara......................................................
20 years and over................................................
Various (Federal Housing Administration
debentures)..........................................................
Tax sta tu s:
U51
108
7
13
19
1
59
10
2
175,695
58,925
6,073
4,712
4 ,251
33,026
68,708
l,51fc
50
11
1 ,3 1 0
32
4,216
*
38
142
*
*
4,712
33,026
68,528
1,51**
4,712
^ ,251
33,026
68,708
1,514
18
110
10/
Wholly exempt from Federal income t a x e s . . .. ,
P a r tia lly exempt from Federal income taxes.,
Subject to Federal Income taxes l l / ..................
17M 59
57,605
*
6,072
T o ta l......................................................................................
175,695
58,925
6,073
1,*85
2
-
1117
Footnotes a t end o f Table 4 .
5,036
LEVELS
T o ta l...........................................................................
2 ,257
5,603
540
1,61+5
3,1^9
51
193
482
PRICE
139
115
538
36,3611
AND
6,686
12 ,2 8 5
29,748
GROWTH,
Issued by U. S. Government:
Treasury b i l l s .............................. ........................
C e r tific a te s o f indebtedness.......................
Treasury n o te s......................................................
Treasury bonds......................................................
Panama Canal bonds.............................................
Guaranteed by U. S. Government 2 / ....................
EMPLOYMENT,
Total
amount
outstand
ing
1118
Section I,- Securities Issued or Guaranteed by the United States Government
Table 3«- Interest-Bearing Public Marketable Securities by Issues
(Par values - In ml1 1 Iona o f d o lla rs)
Held by investors covered in Treasury Survey
(Tax status 1 0 / i s shown in parentheses)
Total
amount
outstand
ing
Insurance companies
516
6,481
commercial mutual
banks 2 / \J savings
banks 2J
U. S. Government
investment
546 f i r e ,
accounts and
casu alty, Federal Reserve
and marine Banks
306
life
Held by
a l l other
investors
y
Memorandum:
Held by
10,239
corporate
pension
tru st funds
2/
Treasury h i l l s :
Tax a n ticip a tio n .
Other. .
29,748
5,194
139
456
9 ,770
3,5 6 7
1,817
1,279
25
1,889
1
420
2,375
270
2,363
2 1 ,3 2 6
291
5
14
*
51
5,657
2
112
7
26
49
52
8,313
5,112
2,7 5 3
1,6 5 3
1,26 0
2 ,7 2 9
30
8
18
1,741
1
12
11
16
53
178
19,196
10,137
71
157
24
16
18
C e r tific a te s o f indebtedness:
2 - 1 / 2*
1 - 1/2
1 -1A
1 -5 /8
3 - 3 /8
February
March
May
August
November
1959-A .........
1959-B .........
i 960 -A .........
1961-B .........
7,711
723
7
27
55
36,364
6,686
115
5 ,10 2
2,063
24
6
1,184
2,406
4,078
369
1,058
20
4
40
15
2
582
90
7
119
2
13,50 0
4
88
22
48
2,804
26
106
269
2,926
660
15
14
229
1,140
124
449
3
17
3
9
948
529
8
16
U
3 - 5 /8
4
August
February
August
1961-A .........
19 6 2 -A .........
19 6 2 -B .........
2,609
647
2,000
1,091
170
1,292
3-3 A
2 - 5 /8
1 - 1/2
November
February
A p ril
19 6 2 - c ........
1,143
3,971
119
699
3,191
31
53
83
#
1
10
66
95
48
126
229
514
-
2
3
81
1
1 - 1/2
1 - 1/2
1 - 1/2
October
A p ril
October
1959-BO-----1960-EA-----I960-BO------
99
38
95
149
2
-
6
12
*
-
54
91
114
*
1963- A . . . . .
1959-E A .. . .
198
278
*
1
3
■*
*
56
24
50
13
323
88
*
*
LEVELS
Treasury n o tes:
1 - 7 /8 * February
November
3 - 1 /2
May
3 -1 /2
May
3 - 5 /8
1959-A .........
1959-D 12 j .
1959-B .........
1959-C .........
1959-E .........
PRICE
257
28
17 ,5 2 3
1,8 9 7
1,906
AND
222
19
29
3,466
1,051
GROWTH,
379
10
67
2 ,3 3 1
4
678
95
17
27
24,016
2 ,997
2,735
EMPLOYMENT,
Issue
*
9
-
*
32
2
21
-
106
18
3
41
427
335
46
21
6
18
-
1
7
15
-
7
12,285
538
61
2 ,5 3 8
1,336
162
3,456
78
3,806
2,663
16
*
*
#
97
236
5
34
212
148
444
144
332
551
203
344
1 - 1/2
1 - 1/2
1 - 1/2
October
A p ril
October
1962 -BO-------1963-EA -------19 6 3 -BO____
590
533
87
26,072
102
1
1
145
*
4
-
329
123
34
*
670
4,213
8,304
119
31
26 1
37
141
87
1,10 0
16
26
32
139
390
495
738
25
#
44
164
1,781
62
155
127
268
22
272
198
54
425
63
185
154
58
451
524
873
1,109
1,250
20
48
47
528
1,2 3 0
700
1,941
1,401
775
242
144
90
881
41
40
32
AND
1961-EA _____
1961 -BO----1962- E A .. ..
GROWTH,
A p ril
October
A p ril
36
41
117
106
150
158
2
82
16
350
1,299
969
13
42
_
2
1
Treasury bonds:
2 -3 A
2 -3 A
2 - 1/2
December I 96 O- 6 5 ____
September
November
1,485
2,239
11,177
1,310
1,315
7,469
2 - 1/2
2 - 1/2
2 - 1/2
June
August
December
1 9 6 2 -6 7 ____
2 ,112
6,755
764
4,579
1963 -6 8 ____
2,820
654
3
February
June
December
1 9 6 4 -6 9 ____
1 9 6 4 -6 9 ____
3,854
3,745
3,819
2,786
2 - 1/2
2 - 1/2
779
74
859
766
632
2 - 5 /8
2 - 1/2
2 - 1/2
February
March
March
1965..............
I 965 - T O .. ..
1 9 6 6 -7 1 ____
6,896
4,014
487
144
617
304
3
August
June1 9 6 7 - 7 2 .. ..
September 1 9 6 7 - 7 2 .. ..
1,484
1,840
2,716
December
October
November
1 9 6 7 - 7 2 .. ..
1969..............
1974..............
3,715
118
182
122
51
23
116
28
226
657
654
78
11 8
22
31
100
June
May
February
February
1 9 7 8 - 8 3 .. ..
53
198
174
79
74
83
83
178
237
234
241
37
34
96
69
144
119
1990..............
1995..............
1,604
1,135
1,727
2,7 4 1
T otal Treasury bonds...................
83,352
34,743
5,268
4,124
3,129
2 - 1/2
2 - 1/2
2 - 1 /2
4
3 - 7 /8
3-1
A
3 -1 A
3 -1 /2
3
1 9 5 9 - 6 2 .. ..
1 9 5 9 - 6 2 .. ..
4,700
2 ,948
198
905
108
1,2 2 0
148 •
84
159
162
(Continued on follow in g page)
271
2
361
493
27
821
237
104
1,015
142
639
2,885
585
1,679
829
_
28
78
26
42
56
12
16
2,925
329
305
36
1 ,2 1 2
65
20
18
44
178
523
935
1,937
113
157
7,195
28,894
1,0 30
126
1119
Footnotes a t end o f Table 4 .
5,2 6 7
LEVELS
June
December
November
PRICE
2 - l /4 £
2 - 1 /U
2 - 1/8
EMPLOYMENT,
1 - 1/2
1 - 1/2
1 - 1/2
1120
Section I.- Securities Issued or Guaranteed by the United States Government
Table 3.- Interest-Bearing Public Marketable Securities by Issues - (Continued)
(Par valuee - in mi 11 lone o f d o lla rs)
Issue
(Tax statue 1 0 / is shown in parentheses)
Panama Canal bonds................................................ (v h o lly )
516
6 ,U8l
mutual
commercial
banks 2 / \J savings
banks 2 /
_
11
50
546 f i r e ,
casualty,
and marine
306
life
U. S. Government
investment
accounts and
Federal Reserve
Banks
2
1 ----------------
Held by
a l l other
investors
y
Memorandum:
Held by
10,239
corporate
pension
tru st funds
2/
_
38
*
2
1
2/
Federal Housing Administration deben
tu re s.....................................................(taxable A l /)
108
7
13
19
1
59
10
175,695
58,925
6,073
4,712
4,251
33,026
68,708
1,514
AND
Footnotes a t end o f Table 4 .
PRICE
Table 4.- Interest-Bearing Public Nonmarketable Securities by Issues
Held by investors covered in Treasury Survey
Issue
10/ 1b
shown in parentheses)
Total
amount
outstand
ing
516
6,481
mutual
commercial
banks 2 / \J savings
banks 2/
United States savings bonds:
38,206
1,025
-
178
Memorandum:
Held by
Insurance companies
*
1
U. S. Government
546 f i r e , investment
casualty, accounts and
and marine Federal Reserve
Bank8
306
life
*
7
*
42
2
*
Held by
a l l other
investors
y
10,239
corporate
pension
tru st funds
2/
38,205
796
69
44
LEVELS
(Par values - in m illion s o f d o lla rs)
(Tax status
GROWTH,
Guaranteed s e c u r itie s :
Insurance companies
EMPLOYMENT,
Held by investors covered in Treasury Survey
Total
amount
outstand
ing
G ............................................................(taxable)
E............................................................(taxable)
J 6/ .....................................................(taxable)
K............................................................(taxable)
4,963
355
4,383
717
*
1,898
2
T o ta l united States savings bonds.......................
51,192
535
Series
Series
Series
Series
188
#
31
85
*
142
#
2
8
4,185
107
4 ,382
705
1,826
13
38
2
8
26
102
2 18
18
50,099
272
223
Other U. S. s e c u r itie s :
T otal other U. S. s e c u r it ie s ..................................
Total public nonmarketable s e c u r itie s ........... ..
2J
2/
kj
8,309
145
130
882
24
144
100
2,7 5 9
148
2 ,4 9 7
107
9,220
479 1/
950
167
2 ,8 5 9
2,644
119
60,412
1,014 2 /
1,170
385
2,8 7 7
52,744
390
United States savings bonds, Series X, F, and J, are shown at
current redemption value. They were reported at maturity value
by the banks and insurance companies included in the Treasury
Survey but have been adjusted to current redemption value for
use in th is statement.
2 / Includes $75 m illion depositary bonds held by commercial banks
not included in the Treasury Survey.
8 / Holdings by reporting Investors not av a ila b le.
2 / Excludes guaranteed secu rities held by the Treasury.
1 0 / Federal secu rities f a l l Into three broad classes with respect to
the imposition of Federal income taxes on income derived from them.
"Wholly" tax-exempt secu rities are those with the income exempt
from both normal tax and surtax. "P a r t ia lly " tax-exempt securi
t i e s ere those with the income exempt from the normal tax except
that in the case o f p a rtia lly tax-exempt Treasury bonds, interest
derived from $ 5,000 o f principal amount owned by any one holder
is also exempt from the surtax. "Taxable" secu rities are those
with the income subject to normal tax and surtax.
Remaining footnotes on following page.
LEVELS
1121
6/
2,223
12
PRICE
Includes certain ob ligation s not subject to statutory debt lim itation .
For amount subject to lim ita tio n , see page 1.
Excludes tru st departments.
Includes tru s t companies and, beginning with figures for July 1949,
also includes stock savings banks. Previously, those banks were
reported as a separate c l a s s i f ic a t io n .
Includes those banks and Insurance companies not reporting in the
Treasury Survey.
C onsists o f corporate pension tru st funds and p r o fit sharing plans
which involve retirem ents b e n e fits . The data are compiled from
qu arterly reports by tru stees o f funds which account fo r approximately
90 percent o f United States Government secu rities held by a l l corporate
pension tru st funds. Since the data are not available each month, the
regular monthly Survey includes holdings by these funds under "Held
by a l l other in v e s to r s ." The quarterly data are presented as supple
mental information in a memorandum column accompanying the Survey
for each reporting date, beginning with December 31, 1953. The
corresponding information from e a r lie r rep orts, beginning with
December 31, 1949, i s sunmarized on page 30 o f the March 1954
"Treasury B u lle t in ."
68
AND
2/
203 1 /
706
GROWTH,
1/
203
EMPLOYMENT,
Depositary bonds..........................................(taxable)
Treasury bonds:
Investment Series A..........................(taxable)
Investment Series B . . .....................(taxable)
1122
EMPLOYMENT,
Section II - Interest-Bearing Securities Issued by Federal Agencies but
Not Guaranteed by the United States Government
Held by investors covered in Treasury Survey
Issue
(Tax status 1 0 / i s shown in parentheses)
Total
amount
outstand
ing 1 4 /
Insurance companies
6 ,4 8 l
commercial
banks 2J 3 /
546 f i r e ,
casu alty,
and marine
306
life
U. S. Government
investment
accounts and
Federal Beserve
Banks
Held by
a l l other
investors
y
Memorandum:
Held by
10,239
corporate
pension
tru st funds
2/
AND
516
mutual
savings
banks 2 /
GROWTH,
(Par values - In ml11Iona o f d o lla rs)
Banks fo r cooperatives:
March
Ap ril
June
1959 (Debentures). . ( taxable)
1959 (Debentures). . ( taxable)
1959 ( Debenture s ) . . ( ta x a b le)
Federal home loan banks:
1 - 1 /4 *
1 .6 0
3 - 1 /4
3 - 1 /2
3 - 1 /8
January
February
March
A p ril
A p ril
1959
1959
1959
1959
98
23
6
-
49
51
68
252
71
11
*
2
-
167
1
80
116
20
1
2
2
6
12
1
*
1
1
58
74
89
75
175
*
4
*
21
2?
72
106
282
35
38
24
94
T o ta l Federal home loan bank s e c u r itie s .........
714
211
1 ,1 1 6
347
Federal intermediate cre d it banks:
Debentures....................................................... ( taxable)
4
-
1
1
-
-
1
*
15./
(N o te s)............(taxable)
(N o te s)............(taxable)
( N o t e s ) ..------(taxable)
(N o te s)............(taxable)
(Bonds)............(taxable)
1963
2
130
*
#
1
1
-
23
6
4
-
470
4
30
9
16
1
712
3
1
1
2
1
LEVELS
T o ta l banks for cooperatives s e c u r itie s .........
*
*
82
PRICE
1.70%
2 .8 5
3 - l /2
Federal land banks: 16 /
U- 5 / 8 in February 1959
2 -1 A
May
1959
3 -1 /2 May
1959
(Banda).
(Bonds).
(Bonds).
.(tax able)
.(ta x a b le)
.(tax ab le)
(Bands).
(Bonds).
(Bonds).
. ( taxable)
.(tax ab le)
. ( taxable)
3 - 3 /8
4
4
A p ril
19 6 1
September 19 6 1
May
1962
(Bonds).
(Bonds).
(Bonds).
. ( taxable)
. ( taxab le)
. ( taxable)
(Bonds).
2 -3 A May
1963
(Bonds).
3 -1 A
May
1966
U -l /8 February 19 6 7 - 72 (Bonds).
. ( taxable)
. ( taxab le)
. ( taxable)
4 - 1 /2
4 - 5 /8
3 - 1 /2
October 196 7 - 70 (Bonds).
(Bonds).
July
1969
(Bands).
A p ril
1970
. ( taxable)
. ( taxable)
.(tax ab le)
3 - 1 /2
3 - 7 /8
May
1971
September 1972
. ( taxable)
. ( taxable)
(Bands).
( Bonds) .
Total Federal land bank s e c u r itie s ....................
120
164
124
73
5
-
68
2
106
51
7
*
*
83
35
42
6
120
125
20
122
108
73
40
3
4
60
2
83
9
7
9
72
75
5
U
8
-
3
-
2
2
3
6
10
1
1
2
2
1
1
*
4
5
6
1
10
1
1
1
4
7
5
1
4
2
*
1
1
-
-
-
-
90
3^
72
2
1
1
84
52
*5
1
1
2
40
70
98
1
2
41
5^
58
2
56
48
63
5
3
12
8
7
4
6
3
5
2
-
5
3
-
49
95
11
22
1,7^3
529
108
21
37
-
1,048
84
150
35
33
32
4
3
5
2
6
2
103
*
*
*
29
460
65
3
50
24
*
2
-
2
1
67
17
2
6
267
“
105
Federal R ational Mortgage A sso ciation :
February 1959 (Debentures). .(tax able)
A p ril
1959 (Debentures). .(tax able)
June
1959 (Debentures). .(tax able)
3 - 7/8
3 - 5 /8
3 - 1 /2
August
1959 (Debentures). .(tax ab le)
August
i 960 (N o te s ).............. (taxable)
February 1962 (Debentures) ..(ta x a b le )
3 -lA
4 - 1 /8
4 - 3 /8
3 - 5 /8
March
November
June
March
100
100
100
797
200
(Debent vires). .(tax able)
(Debentures). .(tax able)
(Debentures). .(tax able)
(Debentures). .(tax ab le)
150
100
100
100
T otal Federal National Mortgage Association
s e c u r itie s ......................................................................
1,8 9 7
1963
1963
1965
1968
1
*
-
62
61
*
4
7
58
15
*
21
10
-
73
3
17
48
2
6
8
4
5
4
4
62
31
19
1
1
1
-
68
3
139
10
50
2
9 1k
28
14/
15/
16/
*
-
Includes only publicly offered Issues.
The proprietary in terest o f the Halted States in these banks
ended in July 1951.
The proprietary interest o f the Uhited States in these banks
ended in June 19^7.
Less than $500 ,00 0.
1123
Footnotes 1 through 10 on preceding page.
1 1 / Includes Federal Housing Administration debentures; see
footnote 1 3 / .
1 2 / Tax a n ticip a tio n s e r ie s .
1 3 / A small indeterminate amount o f these debentures i s p a rtia lly
tax-exempt.
#
LEVELS
3^
I .65
2
PRICE
1
*
AND
60
109
GROWTH,
October 1959
February i 960
June
i 960
*
*
*
40
31
37
71
EMPLOYMENT,
1-3 A
2 -1 A
2 - 1 /2
1 U0
1124
The tab les which follow provide an analysis of the
This analysis o f commercial bank ownership was f i r s t
published in the May 1944 issue of the "Treasury Bulletin,"
Treasury survey of ownership of secu rities issued by the
based on the survey data fo r December 3 1 , 19 4 3 .
United States Government and by Federal agencies.
appeared at semiannual or quarterly intervals since
The
figures show the to ta l holdings distributed according to
Federal Reserve meraber-bank cla sses and nonmember banks.
I t has
that
time, and i s now being published fo r the June 30 and
December 31 survey data.
Table 1.- Summary of all Securities
(Par values - in m illions o f d o llars)
l!
Federal Reserve member banks
Central reserve city
4,197
member
banka
18
New York
City
14
Chicago
3,892
country
2,284
nonmember
banks
PRICE
32 central
re serve
c ity
273
reserve
city
Public s e c u r itie s :
58,925
1,014 1 /
51,555
10,19 0
21
7,594
15
2,596
20,780
702
6
114
20,585
567
7,370
237
T o ta l public s e c u r itie s ................................................
59,940
52,257
1 0 ,2 1 1
7,609
2,602
20,894
2 1 ,1 5 2
7,607
LEVELS
Marketable..............................................................................
Nonmarketable 2J ................................................................
Footnotes at end o f Section I I .
AND
C la s s ific a tio n
Held by
6 ,4 8 l
commercial
banks
GROWTH,
Section I.- Interest-Bearing Securities Issued or Guaranteed by the United States Government
EMPLOYMENT,
security holdings o f commercial banks reporting In the
Table 2.- Summary of Public Marketable Securities
(Par values - in millions of dollars)
Classification
1/
Federal Reserve member banks
Central reserve city
4,197
member
banks
32 central
reserve
city
18
New York
City
14
Chicago
273
reserve
city
3,892
country
2,284
nonmember
banks
Type of security:
Issued by U. S. Government:
5,19k
6,686
12,285
3k,7k3
11
7
Total.......................................
58,925
4,275
51,555
10 ,19 0
15,849
3,722
4,639
1,706
*
10,760
1,312
2,050
526
2,38 2
k , 52 k
l,k 7k
12,556
233
363
919
750
1,525
4,167
-
2
2,083
k,097
12,352
*
-
4
2
*
7,59^
2,596
20,780
20,585
7,370
2,8 4 7
3,3 8 1
1,264
*
6
97
875
1,259
442
*
*
20
5,830
10,771
3,989
32
3k
120
6,297
2,406
3,k58
7
Call classes:
Due or fir3t becoming callable:
25,092
10,023
96
9,682
k,329
64
59
151
1,38 6
26
130
100
451
3 88
7
117
7
7
*
*
-
4
2
#
Total...................................
58,925
51,555
10,190
7,59^
2,596
20,780
20,585
7,370
Tax status: 4 /
Wholly exempt from Federal income taxes....
Partially exempt from Federal income taxes..
Subject to Federal income taxes
.........
11
3
1,210
50,3^3
1
1
-
2
*
1,310
57,605
441
9,7^ 9
142
7,451
299
2,2 9 7
449
20,329
320
20,265
7,262
58,925
51,555
10 ,19 0
7,59k
2,596
20,780
20,585
7,370
Footnotes at end of Section II.
62
7
101
1125
Total.......................................
31
LEVELS
10 to 15 years..........................
15 to 20 years..........................
20 years and over......................
Various (Federal Housing Administration
debentures)...........................
18,254
28,550
11,410
122
PRICE
679
1,107
1,613
M93
1
*
AND
30,575
3
7
913
1,470
2,139
5 ,667
1
*
5,935
GROWTH,
Treasury notes..........................
Treasury bonds..........................
Panama Canal bonds.....................
Guaranteed by U. S. Government.............
EMPLOYMENT,
Held by
6 ,4 8 l
commercial
banks
1126
Section I.- Interest-Bearing Securities Issued or Guaranteed by the United States Government
Table 3.- Public Marketable Securities by Issues
(Par values - in m illio n s o f d o lla r s)
Federal Reserve member banks
(Tax status 4J 1s shown in parentheses)
Held by
6 ,U8 l
commercial
banks
1/
Central reserve c it y
U,197
member
banks
32 central
18
re serve
city
New York
City
2,284
nomember
banks
14
Chicago
273
reserve
c ity
3,892
country
658
Treasury b i l l s :
458
200
22
16 1
60
797
334
678
259
35
13
18 1
1,393
331
327
5,19^
4,275
913
679
233
1,312
2,0 5 0
919
1,279
1 ,1 1 8
1,782
210
728
28
159
635
51
94
470
438
649
16 1
106
11
16
422
83
237
185
66
16
168
883
212
67
297
605
405
157
773
310
6,686
5,935
1,470
1,107
363
2 ,38 2
2,083
750
2,063
1,851
465
50
385
80
768
50
70
410
618
182
82
23
32
396
2 12
66
170
92
36
57
1
56
24
5
139
356
57
241
452
79
111
202
28
108
61
627
40
27
207
547
290
*13
214
183
107
1,258
862
238
*
*
*
4
5
30
16
16
10
35
420
2,375
723
369
1,0 5 8
353
2,077
302
888
1,091
472
889
170
142
81
6
1,10 8
14-8
592
2,953
88
1963-A ____
1,292
699
3,191
1959-E A ...
1959-H O ..I 96O -E A ...
31
38
95
3 - 5 /8
4
3 - 5/8
May
August
February
1961-B -----1961-A ____
1962-A ____
4
3 - 3 /4
2 - 5 /8
August
November
February
19 6 2 - c ____
1 -1 /2
l - l /2
1 -1 /2
A p ril
October
A p ril
1962-B ____
582
833
21
1
29
7
15
80
26
15
7
*
118
9
15
PRICE
1 9 5 9 -A ....
1 9 5 9 -B ....
1960-A ____
1,889
126
135
AND
T o ta l c e r t ific a t e s o f indebtedness.........................
619
924
5^2
GROWTH,
T o ta l Treasury b i l l s ................
C e r tific a te s o f indebtedness:
2 - 1 /2 * February 1959-A ____
1 -1 /2
March
1959-D 6/ .
1 -l/U
May
1 9 5 9 -B ....
1 -5 /8
August
19 59 - c . . . .
3 - 3/8
November 1 9 5 9 -E ....
Treasury n o tes:
1 - 7 /8 * February
3 - 1 /2
November
3 - 1 /2
May
2,808
3 ,466
1,051
Tax a n ticip a tio n .
Other..........................
EMPLOYMENT,
Issue
October
Ap ril
October
1960-0 0 .........
1961-EA..........
1961-BO..........
203
118
68
178
1 - 1/2
1 - 1/2
1 - 1/2
1 - 1/2
Ap ril
October
A p ril
October
1962-EA.........
1962 -BO.........
I 9 63 -EA.........
1963-BO.........
344
427
335
46
324
392
311
42
12,285
10,760
2,538
1,336
2,663
1,310
1,315
7,469
T o ta l Treasury n o t e s ....................
Treasury bonds:
2 - 1 /U* June
December
2-1A
2 - 1/8
November
1959-62
1 9 5 9 -6 2 ..........
149
102
June
August
December
19 6 3 -6 8 .........
3
2 - 1/2
2 - 1/2
February
June
December
1 9 6 4 -6 9 .. . . .
1 9 6 4 -6 9
2 - 5 /8
2 - 1/2
2 - 1/2
February
March
March
1 9 6 5 -7 0 .....
1 9 6 6 -7 1 .........
487
198
3
August
June
1 9 6 7 -7 2 -------Septem ber 1 9 6 7 - 7 2 . . . . .
905
,
2 - 1/2
2 - 1/2
.....
.....
4
3 - 7 /8
December
O cto b e r
November
1 9 6 7 -7 2 ..........
1969. . . . . . . .
1974............. .
3 -lA
3- 1A
3 -1 /2
3
June
May
February
February
1 9 7 8 -8 3 ..........
1985................
1990................
1 9 9 5 .......•
2,139
1,613
4,524
4,097
1,525
2,249
1,187
2,354
465
351
329
415
233
257
50
904
385
1,141
880
11 8
289
451
885
149
309
1 ,2 1 0
441
142
1,146
6,614
128
65
1,375
63
631
55
449
320
10 1
1,129
484
2,795
535
2,444
I 69
855
46
488
51
17
1*3
4
306
l , 66 l
257
272
1,711
252
123
576
91
369
148
195
256
113
3
1,045
294
233
360
106
715
85
5
443
84
5
272
1,299
437
211
82
29
6 11
86
1,0 5 8
130
348
70
94
23
55
99
*
44
663
16 1
107
96
53
3
*
3
*
*
83
64
26
6
47
170
157
62
*
41
72
4
30,575
5,667
563
692
198
174
79
71
299
63
246
3,577
426
53
60
168
145
184
11
1,0 1 2
231
264
74
*
1,563
129
*
82
31
*
11
333
15
340
1
21
6
*
32
19
28
25
#
#
15
32
30
64
61
68
33
26
51
32
6
28
18
2
11
8
2
4,193
1,474
12,556
12,352
*
(Continued on following page)
61
41
17
4,167
1127
5
526
766
34 , 743
Footnotes at end of Section I I .
18
146
144
104
19
4,014
78
19
35
24
4
188
111
2,426
673
122
31
3*
25
1*3
2,786
148
70
1
642
4,003
108
1,2 2 0
60
28
82
5
5
*
764
4,579
654
779
18
34
27
1
LEVELS
2 - 1/2
1 9 6 2 -6 7
95
34
56
90
*
PRICE
2 - 1/2
2 - 1/2
2 - 1/2
35
12
AND
December I 96O-6 5 .........
September
November
13
13
24
GROWTH,
2 -3 A
2 -3 A
2 - 1/2
24
13
25
EMPLOYMENT,
1 - 1/2
1 - 1/2
1 - 1/2
1128
EMPLOYMENT,
Section I.- Interest-Bearing Securities Issued or Guaranteed by the United States Government
Table 3.- Public Marketable Securities by Issues - (Continued)
(Par values - in m il l io n s o f d o l la r s )
Federal Reserve member banks
11
4,197
member
banks
32 central
reserve
city
18
New York
City
2,284
nonmember
banks
14
Chicago
273
re serve
city
3,892
country
-
2
#
7
2,596
PRICE
1/
Central reserve city
AND
(Taa statue 4 / is shown in parentheses)
Held by
6 ,4 8 l
commercial
1 banks
3
1
1
7
*
*
4
2
*
58,925
51,555
10 ,19 0
7,594
20,780
20,585
7,370
Guaranteed s e c u r itie s :
Federal Housing Administration deben-
LEVELS
F o o tn o te s a t end o f S e c t io n I I .
GROWTH,
Issue
38563) O—-59i—pt. 6A-
Table 4.- Public Nonmarketable Securities by Issues
Federal Reserve member banks
Issue
(Tax status h/ i s shown in parentheses)
Held by
6 ,4 8 l
commercial
banks
u
Central reserve city
4 ,197
member
banks
32 central
18
re serve
city
New York
City
1
1
29
102
238
3,892
country
2,284
nonmember
banks
Halted S tates savings bonds:
178
Other U. S. s e c u r itie s :
Depositary bonds............................................(taxable)
Treasury bonds:
Investment Series A........................... (taxable)
Investment S eries B........................... (taxable)
1
-
_
8
67
87
*
2
1
-
-
-
»
1
1
535
380
2
1
2
37
341
155
203 3/
110
11
11
_
145
130
113
99
7
3
479 2 /
322
19
1,014 1 /
702
21
24
75
18
4
37
68
1
16
83
33
31
15
5
77
226
82
15
6
114
567
237
1
LEVELS
T o ta l other U. S. s e c u r itie s ......................................
T otal public nonmarketable s e c u r itie s .........................
-
1
1
PRICE
T o ta l U iited S tates savings bonds.........................
111
268
AND
355
*
GROWTH,
14
Chicago
273
reserve
c ity
EMPLOYMENT,
(Par values - In millions of dollars)
Footnotes at end of Section II.
1129
1130
Section II.- Interest-Bearing Securities Issued by Federal Agencies but
Not Guaranteed by the United States Government
Federal Reserve member banks
Issue
(Tax status 4 / i s shown In parentheses)
4,197
member
banks
8
6
54
2
*
1
20
33
17
20
16
25
2
3
1
*
35
38
24
94
76
2 11
71
1959
1959
1959
1959
1963
.
1
8/
(N o te s ).............. (taaable)
(N o te s ).............. (taxable)
(N o te s ).............. (taxable)
(N o te s ).............. (taxable)
(Bonds).............. (taxable)
T otal Federal home loan bank s e c u r i t i e s ................
1
*
1
#
*
*
*
1
-
160
7
347
278
20
26
16
7
8
4
9
8
14
21
12
13
1
5
3
53
22
8
18
4
3
76
78
51
14
7
111
147
68
3
8
11
21
9
20
8
6
8
30
23
14
28
26
3
Federal intermediate cre d it banks:
Federal land banks:
2/
*
4 -5 /8 ^ February
2 - 1 /4 May
3 -1 /2 May
1959
1959
1959
(Bonds). . . .(ta x a b le )
(Bonds)____(taxable)
(Banda)____(taxable)
40
31
37
32
25
28
*
*
*
1 -3 /4
2 -l/4
2 - 1 /2
1959
i 960
i 960
(Bonds)____(taxable)
( Bonds) . . . . ( taxab le)
(Bonds). . . .(ta x a b le)
73
63
57
41
2
1
2
1
October
February
June
68
51
3
1
7
1
1
*
1
5
1
13
31
11
10
10
LEVELS
4
14
*
PRICE
7
12
4
18
1
AND
10
6
T otal banks for cooperatives s e c u r i t i e s ................
January
February
March
A p ril
A p ril
14
Chicago
2,284
nonmember
banks
*
18
19
*
18
New York
City
3,892
country
*
#
*
21
27
23
1 -l/U^t
1 .6 0
3-1A
3 -1 /2
3 - 1 /8
32 cen tral
reserve
city
273
reserve
c ity
*
(Debentures). . ( taxab le)
(Debentures). .(ta x a b le )
(Debentures). .(ta x a b le)
Federal home loan banks:
Cenlir a l reserve c ity
GROWTH,
Banks for cooperatives:
1.70^ March
1959
2 .8 5
A p ril
1959
3 - 1 /2 June
1959
Held by
6 ,4 8 l
commercial
banks
1/
EMPLOYMENT,
(Par values - in m illion s o f d o lla rs)
73
uo
3
59
30
2
1
2
•*
*
*
*
(Bonds).. ..(taxable)
(Bonds).. ..(taxable)
(Bonds).. ..(taxable)
U
3
2
2
6
*
*
9
*
*
*
(Bonds).. ..(taxable)
(Bonds). . ..(taxable)
1
*
_
_
*
*
*
*
529
U2 1
19
35
33
32
28
27
35
k2
2 -3 A
May
May
February
1966
1967-72
(Bands).. ..(taxable)
(Bonds).. ..(taxable)
(Bond s ).. ..(taxable)
U -5 /8
3 - 1 /2
October
July
April
1967-70
1969
1970
3 - 1 /2
3 - 7 /8
May
1971
September 1972
3 -lA
U- i/8
U-l/2
Total Federal land bank securities.
20
-
*
*
*
9
7
3
17
23
11
5
2
1
31
13
26
16
1
15
10
*
*
#
*
*
*
1
9
12
1
3
2
2
k
*
*
*
*
*
7
12
160
2k2
108
*
*
*
*
5
1
1
*
1
22
Ik
Ik
6
6
5
135
3
5
103
*
32
1
2
125
15
1
19
*
Federal National Mortgage Association:
3 - 7/8
3 -5 /8
3-l/2
August
August
February
1959 (Debentures).
i 960 (Notes).....
1962 (Debentures).
.(taxable
.(taxable
.(taxable
29
U60
3-1A
U-l/8
March
November
June
March
1963
1963
.(taxable
.(taxable
.(taxable
.(taxable
58
U - 3/8
3 - 5 /8
(Debentures),
(Debentures),
1965 (Debentures).
1968 (Debentures).
Total Federal National Mortgage Association
securities................................
l/
2/
kj
21
31.
19
782
22
k03
U7
2
U2
13
23
15
1
1
8
*
1
8
*
*
k
k
1
2
2
6
6k6
159
122
37
199
5/
6/
2/
8/
2/
*
7
Ik
Ikk
30
7
57
22
10
16
8
13
k
k
288
18
7
136
amount owned by any one holder is also exempt from the surtax.
"Taxable" securities are those with the income subject to both
normal tax and surtax.
Includes Federal Housing Administration debentures] see foot
note 7Tax anticipation series.
A small indeterminate amount of these debentures is partially
tax-exempt.
The proprietary interest of the United States in these banks
ended in July 1951.
The proprietary interest of the United States in these banks
ended In June 19^7.
Less than $500,000.
1131
I ncites trust companies and stock savings banks but excludes securities
held in trust departments.
Uhited States savings bonds, Series F and J, are shown at current re
demption valve. They were reported at maturity value by the banks
included in the Treasury Survey but have been adjusted to current re
demption value for use in this statement.
Total includes $75 million depositary bonds held by commercial banks
not included in the Treasury Survey.
Federal securities fall into three broad classes with respect to the
Imposition of Federal Income taxes on income derived from them. ''Wholly”
tax-exempt securities are those with the income exempt from both normal
tax and surtax. "Partially" tax-exempt securities are those with the
income exempt from the normal tax except that in the case of partially
tax-exempt Treasury bonds, interest derived from $5,000 of principal
11
11
LEVELS
2/
65
26
1
PRICE
1959 (Debenture s). .(taxable
1959 (Debentures). .(taxable
1959 (Debentures), .(taxable
AND
2
February
April
June
3*
1.6 5
GROWTH,
#
(Bonds).. ..(taxable)
(Bonds).. ..(taxable)
(Bonds).. ..(taxable)
EMPLOYMENT,
1
*
■*
April
1961
September 19 6 1
May
1962
1963
1
27
30
15
3 - 3 /8
k
k
1132
EM PLOYM ENT,
G R O W T H , AND PRICE LEVELS
Representative P atm an . Also, Mr. Secretary, I believe it would
be helpful to have some factual information concerning the percent
age o f securities which have been purchased from the Treasury by
the biggest purchasers of securities.
Would you please supply for this record later a list of each of the
50 biggest purchasers of securities from the Treasury over the past
2 years in each of the categories listed below. Then, if you would
show the total amount of each issue which each of these companies
offered to subscribe, and the amount they were actually sold plus also
the combined totals for each category, this would be very helpful. In
other words, to illustrate with commercial banks, I would like to know
the amount that all commercial banks in the country offered to sub
scribe to each issue, the amount of the allotments to all commercial
banks, and then I would like to have the same information for each
of the 50 largest commercial banks.
The other types of institutions for which I would like to see similar
information are: individuals, insurance companies, mutual savings
banks, utility corporations, all other corporations, private pension and
retirement funds, State and local governments, dealers and brokers,
and others.
(At the time the hearings were printed the problem involved in
supplying the requested data was still under examination. I f and
when the data is supplied, it will be published in a later part of these
hearings.)
In your report that you made with Chairman Martin I notice that
you did not say anything about the enormous profits made by a few
banks in 1958, obviously by reason of a depression in Government
bonds in 1957. Did you cover that in your investigation, Mr. Secre
tary ?
Secretary Anderson. We did not get into the profit question.
Representative P atm an . Y ou know, I am sure, that in 1958 the
banks made 10 times as much as they did the year before, speculating
on Government securities. In fact, they made the enormous amount
of $681 million.
No doubt all banks did not make money but the 20 largest banks
made over $220 million and the banks of over $500 million of deposits
made about $300 million.
I just wonder why you did not look into that.
Secretary A nderson. Congressman Patman, it has long been the
policy of the Treasury, long before I came to it, that all subscribers
of Government securities are treated alike.
Representative P atm an . We are not talking about subscribers here,
Mr. Secretary. We are talking about speculating in Government
bonds in an unregulated, unsupervised market.
Representative C u rtis. Will the gentleman yield just for a mo
ment ?
Representative P atm an . I would be glad to.
Representative C u rtis. In regard to your testimony, I wonder if
you would supply for the record the source of your material?
Representative P atm an . Certainly. I would be very glad to. It is
the very best. (See p . 1183.)
Representative C u rtis. I am sure it is.
Secretary Anderson. I wanted to make these points.
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
1133
Subscriptions, as you know, come to the Treasury through the Fed
eral Reserve Banks over the country.
Representative P atm an . Mr. Secretary, I reiterate that I am not
talking about issues that are subscribed. I am talking about buying
and selling Government bonds in a speculative market.
Secretary A n derson . Y ou mean as between themselves?
Representative P atm an. Yes, and all the other people of the coun
try including corporations. I am not talking about your dealing in
selling issues. They could not have made that much money in the
sale of your issues. They made $681 million in 1 year. That does not
include the interest they made on those bonds. That is just the ap
preciation that they made.
The only year in wThich there was the least comparison was after the
1953 depression. The banks made $421 million in 1954 the same way.
It is beginning to look like a pattern, Mr. Secretary.
You have a recession in 1953. They make $421 million the next
year in profits on the sale of your securities. Then we have a big dip
in 1957 and bonds go up in 1958 and the banks make $681 million.
Now it looks as if they are expecting to make it in 1960. It looks like
they are shortening these cycles.
I was just hoping that the Treasury and the Federal Reserve would
go into that.
Secretary A n derson . Congressman, I think when you see the ma
terial, there is a considerable amount of effort devoted to the problems
of limiting speculation.
When we get into such things as what happened in the 50 large sub
scribers or holders of securities, we have for many years in the Treas
ury had regulations under which we have operated—not just in my
administration, but others—in which the portfolio holdings of various
owners of Government securities from time to time were obtained only
on a very confidential basis. They are not even examined by the
policymaking individuals of the Treasury. These are held by the
people who over the years remain permanent employees of the
Treasury.
By classes of investors of various kinds, this information is always
available to us, and we will make it available to the Congress.
Representative P atm an . I am not insisting on your going into
individual corporations or banks. It occurs to me that the very fact
that they can make $681 million in 1 year, which is 10 times as much as
they made the year before, is enough to excite inquiry; in fact, sus
picion. It is a very large amount of money in proportion to the re
sources of the banks.
Secretary A n d erson . I think, from the standpoint of the examina
tion which we have made, it was not on the question of the profitmaking but, rather, on the question of what kind of procedures might be
considered in order to minimize the speculation in the market regard
less o f whether that speculation resulted in profit or in loss.
When you come down to a question of the profits of banks, in a
period of recession such as we had last year, the prices of securities rise.
Whereas in the past they may have been selling below par, they go
above par. There are profits which are realized in the trade, in ex
change and sale of those Government securities during that year. They
would be nonrecurring gains, as you have indicated, rather than gains
that result from interest rates.
1134
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
It also would have to be examined in the context of the fact that
some of those very institutions which were able to show profits last
year because of the high price of Government securities, will this year
be showing comparative losses because of the decline in Government
securities.
Representative P atm an . With all due respect to the Secretary, I
know he is sincerely trying to answer the question, but I do not think
his answer is responsive to my question.
Secretary A nderson. I am sorry.
Representative P atm an . There are only 17 dealers between the
Government and the money markets. Did not that excite your in
terest and did it not cause any suspicion in your mind about the pos
sibility of its being too tight a market there for 17 dealers ?
Secretary A nderson. Y ou will find in the data that considerable
inquiry wTas made into why there are not more; why, for example,
more people who are dealing in the stock market do not deal more
in Government securities than in corporate securities.
Representative P atm an . I am not talking about that.
Secretary A nderson. Why there are not more dealers?
Representative P atm an . I am speaking about the Government
bond market, unsupported, unregulated with only 17 dealers having
the privilege of dealing with these securities.
Did you notice any particular number of these dealers having an
inside line into the operations of the market in a way that would
excite your attention or suspicion that they are so closely connected
with the Government securities market that they would be in a posi
tion to get inside information ?
Secretary An derson . I must say to tHe Congressman that I have
not examined all of the factual material because it is just coming out
today. I have up to now seen nothing that would make me think
they had inside information.
Representative P atm an . Because these dealers wrould be so closely
in touch wTith the Federal Reserve Bank of New York where the
account is and where all these Government trades are made, and that
they are on boards that help select them—the people who are run
ning the show up there—do you think there is any probability of
inside knowledge or information that would allowT these people to
enrich themselves unduly because of that knowledge ?
Secretary A nderson. I do not have any information of that kind,
Mr. Congressman.
Representative P atm an . You do not have any reason to believe
that anything like that is going on ?
Secretary A nderson. Not at this moment; no, sir.
Representative P atm an . And you did not receive any information
that would excite your curiosity ?
Secretary A nderson. When you ask did I receive, this w^ork has
been done up to now by the study group, and I must be frank to say
that the details of all of the study I have not yet read. But, as of
now, I have no reason to.believe any such operations have taken
place.
Representative Patm an. I f one of these dealers happens to have
enriched itself in what could properly be termed undue proportion
to profits of past years, and that one particular dealer had close and
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
1135
intimate contacts with the people who handle that market, would
that not probably excite your suspicion ?
Secretary A nderson. It would be the sort of thing that we would
want to examine as a matter of policy.
When one looks at profits and losses, if you take the period from
1955 to 1958, profits on securities ran about $830-odd million. I f
you look at the losses on securities in the same period, they were about
$870 million.
Representative P atm an . Yes, sir.
I have time for one more question, I think.
Has the Federal Reserve properly and adequately given you the
assistance and cooperation that you believe you are entitled to as
Secretary of the Treasury ?
Secretary An derson . Congressman, I wrould say that any time
that there are agencies of Government, each independent of the other
and, yet, instances where they have responsibilities that affect areas
that overlap, there is bound to be from time to time some measure of
difference in judgment as to the time and way in which all of the
operations operate.
I think that, if I may take the liberty of referring to a comment
which the distinguished chairman made some years ago, he used what
I think was a very good analogy in saying that “ good fences make
good neighbors.”
The C h airm an. That was taken from a poem by Robert Frost.
Secretary A nderson. I was attributing it to the chairman. What
we do is to try to exchange information as best we can. The
mechanics are something like this: I have the chairman of the Federal
Reserve Board to lunch on each Monday to talk over and exchange
information. The staff of the Federal Reserve and the Treasury
meet in the Federal Reserve on Wednesday at lunch and thereafter
exchange information. The staff people are continually working
with each other.
Since my coming here, as you know, the President has met on an
informal basis from time to time with the Chairman of the Federal
Reserve Board, myself, the Chairman of the Council of Economic
Advisers, the Economic Adviser to the President, in which there is a
free and uninhibited exchange of information and ideas.
While each of us makes his decision and has his responsibilities
for the various fields in which we operate, we do try to exchange in
formation so that the judgments which are going to be made by the
respective bodies are at least made in the light of and wTith the knowl
edge of problems, information, and judgments concerning the others.
Representative Patm an . Has the Federal Reserve assisted you in
lowering interest rates or tTying to lower interest rates ?
Secretary A n d erson . I would not say that as a deliberate policy
we have ever asked the Federal Reserve Board to try to fix or to
move an interest rate up or down.
Representative Patm an . Thank you, sir. My time has expired.
The C h airm an. Senator Bush?
Senator B u sh . Mr. Chairman, I would like to ask Congressman
Patman, before he leaves, about those figures he brought into the rec
ord about the bank profits.
Did you mention $800 million or thereabouts as trading profits ?
Representative P atm an . $681 million.
1136
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
Senator B u sh . And those were the so-called capital gains from
trading ?
Representative P atm an . Yes, sir.
Senator B u sh . From how many banks ?
Representative P atm an . All banks were involved in the aggregate.
Senator B u sh . All banks in the country, 14,000 banks ?
Representative P atm an . 13,000 banks. But the 50 largest banks
profited to the extent of 44.6 percent of that total amount.
Senator B u sh . D o your figures tell us on how big a volume of trad
ing this occurred?
Representative P atm an . N o ; it does not.
Senator B u sh . Was it $2 billion or $200 billion? Have you any
idea?
Representative P atm an . No; I only put the aggregate profits of
$681 million down, and had them written down as to the beneficiaries
o f the profits.
Senator B u sh . I would say that with all respect to the gentleman
from Texas, I do not think the figure is very significant if you do
not relate it to a total volume of trading ?
Representative P atm an . I related it to the 50 banks that made
about $300 million in 1 year. That is pretty good.
Senator B u sh . O f course, you do not relate it even to the assets
of those banks, their holdings of Government bonds, or anything
else?
Representative P atm an . That is right.
Senator B u sh . This, I think, makes it a completely irrelevant
figure.
I would say unless you can furnish us with some figures we can
relate that to, wTe can hardly be impressed with that.
Representative P atm an . They do this on a very low margin of
sometimes 5 percent or even less.
Senator B u sh . Mr. Chairman, so much for that.
I think the chairman has given us a good exhibit in connection with
the joint participation of the Federal Government in the bond mar
kets and how it relates to the State and local governments and cor
porations. It shows that, any way you look at it, the Federal Gov
ernment is a very important factor in the overall market, even if you
rule out refunding and simply look at the money involved in new
issues.
On that basis, if I see this correctly, the Federal Government would
amount to about 30 percent, anyway. So it is a very big factor.
It is a much larger factor, is it not, Mr. Secretary, when the
Government has to raise new money, than when its operations are
confined to refunding ?
Secretary A nderson. That is correct, sir.
Senator B u sh . That, of course, has been the case in the last year ?
Secretary A nderson. Yes, we have been raising more money be
cause of the deficit.
Senator B u sh . Yes.
Conversely, if we had a surplus in the Government budget, that
would seem to reduce the influence of the Government in the total
bond market, because it would be a buyer of bonds rather than a
seller. Is that not true ?
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1137
Secretary A nderson. I think a good period to relate your ques
tion to is the period of 1921 to 1929, when the Federal debt was
reduced by one-third in a period of relatively increasing levels of
activity, and in which the cost of money at the interest rate tended
downward, because we were a net supplier of funds.
Senator B u sh . S o, as you emphasize in the closing part of your
statement, the problems of fiscal imbalance during prosperous times
have a tremendous effect on the whole question of growth and sta
bility.
But they also have a real direct effect on the Government bond
market; is that not true ?
Secretary A n d erson . That is correct.
Senator B u sh . I bring this out to show that one of the real prob
lems in connection with the Government bond market is the Govern
ment deficit, and the way to cure that is to create a surplus rather
than to continue to operate at a deficit. Doing that would tend to take
the pressure off of interest rates and tend toward bringing about
lower interest rates. Is that not true, Mr. Secretary ?
Secretary A nderson. I think so, sir.
The C hairm an. Would you yield?
Senator B u sh . I w^ould love to yield to my distinguished chairman.
The C h airm an. This eloquent statement about Government surplus
would seem to indicate you join the Senator from Illinois in closing
those loopholes ?
Senator B u sh . I w^ould certainly join the Senator from Illinois in
his major objective. I do not know what loopholes he is referring to.
The C h airm an. The loopholes against which the Senator from
Connecticut voted—in part.
Senator B u sh . That, of course, is the Senator’s private definition of
loopholes. Everybody has his own definition of that.
The C h airm an. Excuse me, Senator. I will give you extra time.
Senator B u sh . That is very generous of you.
need it.
I do not think I will
This leads me, then, Mr. Secretary, to another question. Inasmuch
as the Federal Government is a large factor in the market, it seems
to me that it should have as much freedom as possible with offering
securities that are attractive to the market, which leads me to the
issue that is pending before the House of Representatives at the pres
ent time with respect to the interest ceiling on long-term Government
bonds.
I ask you if it w ould not assist the Treasury materially and promptly
in dealing with this very heavy burden of responsibility of financing
this enormous Government debt, if the interest ceiling were elimi
nated ?
Secretary A n derson . Yes, I think so, sir.
Senator B u sh . Another point.
It has been suggested from time to time that the market in Gov
ernment bonds would be facilitated by the Federal Reserve buying
long-term bonds. It has always seemed to me, frankly, that that is
just as inappropriate as it would be for the commercial banks having
demand deposits to buy long-term bonds. I do not think they would
long hold the confidence of the depositors if that became a general
practice, of increasing demand deposits in long-term bonds. But
1138
EM PLOYM ENT,
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there are those who believe that the Federal Reserve should be doing
that very thing with its demand deposits.
Would you care to comment on that particular suggestion that has
been made concerning Federal Reserve policy ?
Secretary A nderson. The whole problem is this. There is a mar
ket for certain securities in our country of different kinds and charac
teristics because of the different needs of institutions. Some insti
tutions buy long-term bonds because they have amortization require
ments; they are interested in getting a security that will meet their
amortization requirements, and simply holding it over the years, re
gardless of fluctuations that may take place in the price of the bond.
We have today about $78 billion of debt which is due within a year,
and as we look forward to the next 18 months, we will have close to
$100 billion coming due within a year if we do nothing except roll over
in 1-year securities.
Then, if we look also at the problem of the seasonal fluctuations,
which run $5 or $6 billion, there would be times when we would run
considerably over $100 billion which is due within a year if we issued
nothing over a year.
Again, just as we have some people who want long-term securities
in this country, we have a certain amount of liquidity requirements.
I think there might be differences of judgment as to just how much
those liquidity requirements are. But if you oversuppiy the liquidity
requirements and put money into the short-term sector, then, of course,
you tend to push up the short-term rate.
I f the Federal Reserve initiates a practice of buying long-term bonds
and then selling short-term issues, you have to assess the fact that in
selling the short-term securities to offset the purchase of the long
term securities, you would be putting additional pressure on the same
short market which is already under pressure because of the heavy
Treasury financing in that area.
I f you did not offset the sale of the lon«;-term bonds by selling short
term bonds, you would simply have added to the money supply. I f
you added to this money supply by buying long-term securities or
any other kind of securities without an offsetting transaction, then
you are supplying into the market what we call high-powered money.
This money will be used by the banking system as additional reserves,
and the amount of money put into the market has an expansive capac
ity of about five or six times. I f this expansive capacity takes place
at a time when the level of business is already high, then you tend
to create inflationary pressures. I f you create inflationary pressures,
the borrower becomes unwilling to lend unless at a higher price,
because he thinks the future value of his money will be eroded and
the borrower becomes willing to pay higher interest rates because
he thinks he will pay off the loan with cheaper dollars than he is
borrowing now. So the interest cost or the cost of money would tend
to rise.
One must also examine the kinds of people who deal in these various
markets. For example, let us say, who uses the 1-year money in our
country ? This is normally the fellow who pays his bills at the end of
the month on the installment plan. It is the fellow who accumulates
some money for taxes, whether they are income taxes or other taxes,
the man who borrows to meet his payrolls. The fellow who borrows
EM PLOYM ENT,
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LEV ELS
1139
normally in the 1- to 5-year cycle is the man who borrows for working
capital purposes or for such things as financing durables like auto
mobiles, household goods, that sort of thing. As these rise and there
is this pressure, the cost of money in this sector tends to go up.
So it would seem to me that what we ought to do is to have the flexi
bility of not having the Government confined by statute within the area
of 1 to 5 years, but of giving the Government the capacity to finance
more soundly and extend some of the debt beyond that point.
I ought to be clear by saying that even if we were given this author
ity, we would use it with discretion. W e would certainly not try to
go into long-term markets indiscriminately. We would consider the
rates which we would have to pay, and we would also consider require
ments of other institutions and other segments o f business. But I
think it would go a great way in relieving the pressure on the short
term market.
Senator B u sh . Mr. Chairman, I would just like to associate myself
with the complimentary remarks of Mr. Curtis regarding Secretary
Anderson’s opening statement. I think it is an excellent statement
and will be very helpful to the committee.
The C h airm an. Congressman Reuss?
Representative Reuss. Thank you, Mr. Chairman.
Mr. Secretary, I have been listening with interest to your colloquy
with Senator Bush just now. Nowt I would like to ask you about
something that I gather you were not discussing. I would like to
ask you specifically about the bill reported out by the House Ways
and Means Committee a couple of weeks ago which first lifted the
4 ^ -percent ceiling for a couple of years and then expressed the sense
of Congress that the Federal Reserve, when it was engaged in its good
judgment in increasing the money supply, should do so by the method
of purchasing U.S. securities of varying maturity.
I read in the New York Times this morning that the Treasury,
which appeared to accept the sense-of-Congress amendment at first,
has now made plain its opposition. Would you make plain to me your
opposition, first by telling me whether you support or oppose the
sense-of-Congress amendment which I just placed before you?
Representative C u rtis. Would the gentleman yield ?
Representative Reuss. Not at this moment.
Representative C u rtis. Just for correction.
Representative Reuss. Not at this moment. I will presently.
Secretary A nderson. Congressman Reuss, may I say, without any
intent of evading any part of your question, that this bill is not yet
reported out of the House Ways and Means Committee. I have been
advised there will be other discussions, in all probability.
Representative Reuss. However, will you give me your views on it?
I know you are thoroughly familiar with it. And would you tell me
whether you favor that language or oppose it? Just yes or no is all
I need on that. Then I want to ask your reasons.
Secretary Anderson. I frankly would not like to give a yes or no
answer. I would like to give an expository answer, if I may.
Representative Reuss. Then I gather you do not oppose it ?
Secretary A nderson. I would not say I did not oppose it, no, sir.
May I have just a moment ?
1140
EM PLOYM ENT,
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Representative R e u s s . Before you go into the expository answer, is
it correct you are unable to say whether you favor or oppose the
sense-of-Congress resolution which I have just put before you?
Secretary A n derson . I will say that so long as it is pending before
the House Ways and Means Committee, it is proper that I should make
no final declaration except to that committee.
Representative Reuss. D o it to me, because I wrote the amendment,
it has been sent to you, and you have been talking to the press about
it— perfectly properly, I think. I just want to be let in on it.
Secretary A nderson. A t the time when the amendment was pro
posed, we made quite clear, I thought, that we in the Treasury must
be concerned not only with what the words themselves said, and not
only with the interpretation which the members of the committee and
the Members of the Congress might place upon those w^ords, but that
we must be concerned as well about the public interpretation that
might be placed upon it.
We are dealing here in an area of confidence. We are seeking to
improve confidence in sound management of our fiscal affairs by
getting a greater degree of flexibility in the management of the debt
as per our original request.
I do not think that any of us are precisely wise enough to know how
confidence is motivated, but I do believe that since the discussions
have taken place with reference to the amendment, I have a growing
concern that the portion of the amendment which relates to the sug
gestion that the Federal Reserve buy varying maturities, would tend
to impair confidence generally.
Representative Reuss. May I interrupt right there to break down
your various reasons.
I gather you do not object to the Congress, under its constitutional
power to coin money and regulate the value thereof, giving appro
priate direction to the Federal Reserve, as a matter of principle ?
Secretary A n derson . I do not as a matter of principle object to any
general instructions which the Congress would want to give to the
Federal Reserve. I must be frank to say I would hope that any such
general instructions should be given in the context of amending the
Federal Reserve Act rather than in the context of amending a debt
management law.
Representative Reuss. Let me next ask, do you object to anything
in that sense-of-Congress amendment other than three words “ of
varying maturity” ? Specifically, do you object to the congressional
direction to the Federal Reserve System that when, in its judgment,
it is in the act of increasing the money supply, it should do so for the
life of the Ways and Means Committee amendment, 2 years, by pur
chasing U.S. securities? Bear in mind that bills are a U.S. security
and that that part of the language could be satisfied by purchasing
bills. Do you object to that ?
Secretary A nderson. Congressman Reuss, it is my own judgment
that the Congress can give any kind of general instructions that it
wants to, to the Federal Reserve.
Representative Reuss. But my question was, is this particular in
struction one that you favor or oppose ?
Secretary A nderson. I think it is wise for the Congress to limit
its suggestion in terms of objectives and in terms of policies and not
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1141
in terms of saying that these are the detailed ways in which those
objectives might be reached.
Representative Reuss. Well, this is a bill that goes beyond details,
Mr. Secretary. This suggestion of the Ways and Means Committee,
in which I heartily join, is that instead of lowering bank reserves,
the Federal Reserve for the life of the resolution, 2 years, shall add
to the monetary supply, when it deems it should be added to, by buy
ing U.S. securities. I believe that that helps the taxpayers, it pre
vents undue downward fluctuations of the securities bought, and it
prevents attrition.
Do you disagree with that? And if so, what are your reasons, so
that the public debate may be conducted in a more informed manner
than it has so far.
Secretary Anderson. The longrun monetary needs of the United
States are expected to grow. I f one looks historically, they might
be expected to grow at the rate of 3 percent or more, if that is the
rate of our national growth.
The bank reserves that are necessary to this growth can be in
creased by increasing our gold stocks. It can be taken care of by
expansion in the Federal Reserve holdings of Government securities.
It can be increased or reduced by bank reserve requirement changes.
Representative Reuss. That is exactly right.
Now, the amendment says, for the next 2 years, to help in the debt
management crisis, let us furnish needed additions to the money sup
ply by purchase of U.S. securities.
Secretary A n d erson . When you get to the question as to wThat ex
tent the needed monetary growth should be supported by Federal
Reserve purchases of securities as opposed to reduction in the reserve
requirements, you have to weigh the fact that the pattern o f develop
ment in postwar business cycles suggests strongly that monetary ex
pansion should be restrained during periods of business expansion, in
order to limit inflationary pressures.
Representative Reuss. Yes, we are all agreed on that. The point
was simply this. When the Federal Reserve pursues the policy it has
announced of raising the money supply by 3 percent per annum on
the average, a policy which you have just reiterated, how should they
do it?
Secretary A n derson . This is the point I am coming to.
In a recessionary period, it is desirable that you have as fast an
increase in money supply as you can accomplish, and that this money
supply be widely spread as quickly as you can. I f you lower bank
reserves all over the country at one time, the various banks imme
diately have more reserves against which there can be credit expan
sion, pushing the economy forward.
In times of high levels of business activity, if one proposed to de
crease liquidity or reserves by the use of the technique of raising re
serve requirements, then I think you would have distortions, in that
you would have-----Representative Reuss. I f I may interrupt, Mr. Secretary, we are
not talking about decreasing reserves. We are talking about what
happens wThen the Federal Reserve, in its own good judgment, de
cides that the money supply, i.e., bank reserves, should be expanded.
I say, and the Ways and Means Committee says, that this should be
1142
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
done for the next 2 years by buying U.S. securities. You are opposed.
I want to know why ?
Secretary A nderson . What I am saying is that at this moment any
suggestion that we increase bank reserves, it would seem to me, would
be only to add to the inflationary problem.
Representative R euss . Precisely. We are talking about the next 2
years, however. I f the Federal Reserve does not deem it wise to in
crease reserves and the money supply, then that is fine. Then this
resolution has no effect, because there is no increase. But the ques
tion to which I asked you to address yourself is, What if, within the
next 2 years, the Federal Reserve says it is going to do what it has re
cently testified it is going to do at some point, namely, raise the money
supply by 3 percent. I, and the Ways and Means Committee, want
them to do that by buying the securities. You do not. Why ?
Secretary A nderson . Here is what I am trying to say to you.
I f the turnaround out of a period of high level of business activity
into one of recession— if that is what brings it about, then I would
say that I would not now want to prejudge. But my disposition is to
say that you would probably want to get the reserves into the banks
more rapidly than you would get them by purchasing securities. You
would want to get them in faster by lowering reserve requirements.
Representative R e u &s. There are $63 billion worth of securities in
the banks. Since a purchase of $1 billion of those by the Federal
Reserve permits an augmentation of the money supply on the order of
4 percent, that is, beyond the wildest dreams of the Federal Reserve,
it does seem to me you are straining at gnats a bit there, Mr. Secretary.
Secretary A nderson . Let us assume that in 3 months from now,
instead of going up, we turn sharply downward and it looks like that
is <roing to continue for awhile. I would say that, not trying to
prejudge, you might very well want to increase the reserves, not by
buying Government securities but by lowering reserve requirements,
or maybe by both.
On the other hand, let us assume that we have a continuing rise of
activity over the whole 2 years and you want to increase the money
supply, but only at a rate that is not going to add to inflationary
pressures. Then I would think that increasing the money supply by
buying Government securities would be the appropriate way of
doing it.
Representative R euss . Then, I gather that your sole objection to the
part of the sense-of-Congress resolution which says when you expand
the money supply, do it by buying securities, other than this meta
physical one about confidence, which I frankly do not understand, the
sole objection to the resolution is that if there were a depression, and
you needed to expand the monetary supply very fast, buying U.S.
securities might not let you rush pell-mell into the monetary expan
sion which you wanted, fast enough. To that I would say, if that
happens, I know Congress would be delighted on 24 hours’ notice to
give the administration the power to accelerate any expansion of the
money supply.
This, however, does not seem to be the problem now.
Do I have time to yield to Mr. Curtis ?
EM PLOYM ENT,
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1143
Representative C u r t is . The correction has already been made to
the effect that the Ways and Means Committee has not reported out,
and I am afraid the gentleman is under a misapprehension when he
says the Ways and Means Committee agrees with him.
Representative R eu ss. The majority do.
Representative C u r t is . Not even the majority. Six of us, and I was
among them, who agreed to vote this bill out, which has not been
voted out, did it only with the reservation that we would oppose your
amendments on the floor. We are opposed to them, and the majority
of the committee is opposed to your amendments.
Representative R eu ss. Let us say a substantial and very intelligent,
minority of the Ways and Means Committee, then.
The C h a ir m a n . Mr. Javits?
Senator J a v its . Mr. Secretary, first I assume that when you give
the information for Representative Patman you will also include the
losses which may have been suffered in connection with the same
general period of years, and that you will also give us some sense of
the relationship, which Senator Bush has mentioned, between the
resources which were engaged in, either losses or profits; and I hope,
too, you will look into the question, if your attention has not been
directed to it before, of the small number of dealers and any relation
ships which may exist between the dealers and the Federal Reserve
banks, or any other agencies of the Government which deal with this
question.
Secretary A n d e r s o n . Senator Javits, we will by classes be delighted
to give you such information as we can on both sides.
(The material referred to is as follows
The questions on bank profits on securities relate to (1) calendar 1958 ex
perience on both profits and losses, (2) relevance of 1 year’s figures versus expe
rience for a full business cycle, and (3) seeming concentration of profits in
larger banks. Each will be taken up in turn.
1. Calendar 1958 experien ce.— During the calendar year 1958, banks realized
a net gain on securities transactions of $588 million, or a capital gain, in effect,
of less than three-fourths of 1 percent of the $81% billion average securities
holdings during the year ($62% billion Governments plus $19% billion munici
pals and corporates).
(Data compiled by the Federal Reserve on the earnings of insured commercial
banks in the United States indicate gross profits on securities (including State
and local government and corporate securities as well as Federal securities) of
$682 million for the calendar year 1958, and gross losses on securities for the
same year of $94 million, for net profit of $588 million.)
2. E xperience over a business cycle.— Figures on bank profits on securities for
a single year are very misleading, however. During the past 4 years, for ex
ample, bank security losses exceeded profits.
During a recessionary period, such as the first half of 1958, interest rates fall
as the result of easier credit conditions and prices of outstanding securities in
the market rise. In that environment banks show a profit on their securities
transactions. However, during the high prosperity of 1955, 1956, and 1957,
interest rates were rising and Securities prices were declining. Commercial
bank losses on securities transactions substantially exceeded gains, therefore, in
each of those 3 years.
For the entire 4 years (corresponding very closely in time to one complete
turn of the business cycle) bank profits on securities totaled $834 million and
losses in the same period totaled $870 million, for a net loss from securities
transactions of $36 million for the 4-year period.
1144
EM PLOYM ENT,
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LEVELS
Net profits by banks on securities, calendar years 1955-^58
[In millions of dollars]
1955____________ _____________ __________________________________
1956_______________ ______ ______ ________ _______ _____ ____________
1957_______________ _______________________________________________
1958-______ _____ ______ ___________________________________________
Total__________ _____ ______ _______ ____________________ __
Net prof
its ( + ) or
losses (—)
Gross profits
Gross losses
57
31
64
682
221
317
238
94
-1 6 4
-2 8 6
-1 7 4
+ 588
834
870
-3 6
Over a period of time bank losses on sales of securities would tend to exceed
profits since banks are typically forced to sell securities on net balance on a de
clining market as they meet mounting loan demands in the face of tightening
credit conditions. Conversely, they buy most of their Governments, on net bal
ance, when interest rates are declining and securities prices rising, since that
is when loan demand is slack and money easier. Bank losses on securities are
expected to exceed profits by a substantial margin again in 1959 on the basis of
the declining prices in the market thus far.
Banks are, of course, permitted to carry Government securities on their books
at cost if bought below par, regardless of their current market value. Never
theless, it has been estimated that the market value of bank holdings of Gov
ernments has declined by about $3% billion during the past year so that losses
could be substantial if holdings decline further, particularly in securities still
several years or more from maturity. This potential loss, even though only a
small part is ever realized, is an important restraint on too rapid an expansion
of private bank credit, as well as a source of concern to every bank as it tries to
meet the needs of its customers. (There was an increase of about $2% billion
in the market value of Government securities held by banks during the develop
ing recession from October 1957 through June 1958.)
3.
D istribution of securities profits among banks.— Bank profits on securities
are divided between large and small banks in much the same ratio as other in
dicators of bank operations.
There are 49 banks in the country which have $500 million or more in total
deposits. These banks had securities profits of $299 million in 1958, or 44
percent, of the total profits on securities by all 13,000 insured commercial banks.
The same 49 banks accounted for 39 percent of total bank assets and 42 percent
of total current bank earnings. These same banks paid 49 percent of the taxes
of all banks, had 38 percent of total bank deposits, and accounted for 40 percent
of the total capital accounts of all banks. Thus large banks accounted for just
about the same proportion of total bank securities profits last year as they
showed on total assets, earnings, taxes, or capital.
I do want to say that as far as the 17 primary dealers are concerned,
as I understand, the Federal Reserve bank is perfectly willing to do
business with anybody in the country who wants to get in and become a
dealer. There happen to be 17 primary dealers and a few others
which are more specialized in one kind of Government issue. There is
a problem here that we have inquired into that I think will come out
in the factual data— as to why there are not more than that.
Senator J a v its . That is all I have in mind, to give a balanced pic
ture. I think that all this may be a sideshow in what you are being
essentially questioned about here. Still, we ought to have a balanced
picture.
As to the questioning which has just taken place by Congressman
Reuss, let me ask you this: Is there any doctrinaire objection on the
part o f the Treasury which will inhibit the United States from becom
ing an open market purchaser of Government bonds ?
EM PLOYM ENT,
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1145
Secretary A nderson . Senator Javits, it seems to me that the mone
tary authorities ought to have a maximum of flexibility as to how the
detailed instruments of the monetary authorities are used from time
to time. Certainly it is within the right and the power of Congress i f
you choose to give detailed instructions as to how they might be
used. I myself would not think that the course of wisdom. Rather,
I would think the course of wisdom to be one of setting out objectives,
matters o f national policy, goals that we try to achieve, and o f relying
upon the monetary authorities to use the various instrumentalities
they have in order to be the most helpful to the whole economy of our
country.
Senator J avits . Do I understand you to say, therefore, that there
is no inhibition in the Treasury about open-market purchases ?
Secretary A nderson . N o ; we have no inhibition.
Senator J avits . Let me get to the substance o f your testimony,
which I think is rather important here.
I notice at page 7 you say that a larger volume o f production can
only take place if you have more equipment, and that may very well
have to be done “ at the expense o f current consumption.”
Do you hold with the President that as we see the situation now,
we cannot contemplate any tax reduction ?
Secretary A nderson . I hold with the President exactly. What
we have to do is to say that we have an obligation with respect to our
national debt; that just the mere fact that there may be on the horizon
a possibility, a reasonable hope, of having some more revenues than
we have expenditures, does not lead us to conclude that we can ignore
the debt and thereby reduce taxes.
I think, on the other hand, that the hearings which will take place
in the fall with reference to tax changes ought to be considered in the
light of the contribution that they could make both toward equity and
toward benefits to the whole economy.
Senator J avits . I s there any other way, except in the tax level, that
the Federal Government can help to bring about the siphoning off of
more o f the public’s income to the building up of our productive
resources ?
Secretary A nderson . A l l of our resources, of course, that we spend
come either through taxes, customs, or some other form o f assessments.
Senator J avits . In other words, if the public would choose itself to
save more money beyond the tax level. Is there anything else the
Treasury can do about that ?
Secretary A nderson . In an economy like ours, the public itself must
decide how much goes for consumer goods, how much for savings, and
how much for investment.
Senator J avits . A very distinguished economist who has been
participating in this debate, Leon Keyserling, talks about a good deal
of economic slack in the economy. Yet I notice that you say that we
have been pretty much using all of our plant equipment and, I assume,
personel to the maximum. Would you care to make any comment
about that ? Incidentally, as you may know, I am not of the school
that believes we are giving sufficient attention to trying to beat the
Russians. I think this is a very important part of the whole picture,
and we are not taking enough account of that.
1146
EM PLOYM ENT,
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But Keyserling says there is a lot of slack in the economy; we are
not using our resources to the full. You seem to think we are. Would
you comment on that ?
Secretary A n d e r s o n . The comment I made here refers to a broad
period. I think over that period we have generally used our resources
rather fully.
There are periods, if you want to take, for example, periods last
year, when we certainly had excess plant capacity and unemployment.
I also point out in the statement the biggest single enemy to continuity
o f growth in our country is recession. How do you prevent recessions ?
Recession is an adjustment to something. It is not something which
anybody in our country wants. But if you bunch together the capital
expenditures and then there is a very sharp decline, if you bunch
together expansion and there is a sharp decline, if inflationary pres
sures are built up and we have to adjust to them, we go through these
recessionary periods.
What we are trying to achieve and what I was trying to say is, How
do we have, as nearly as we can, a sustained rate of high level o f the
use of our total resources ?
This, it seems to me, requires that we utilize to the maximum the
ingenuity, capacity, freedom, technological advances, and all of that
in our country, and that we also encourage the savings out of which
these various plant additions can be made, so that the million people
that are coming into the market every year have a place that they can
work, and that we avoid the readjustments which can follow too rapid
an expansion, with inflationary pressures.
Senator J a v i t s . Mr. Secretary, I have just two other questions, if
I may ask them, with the chairman’s indulgence. One is this:
Talking about savings, 15 percent of our debt is now held in the
savings bonds. Do you believe that the United States would benefit
if we had very materially increased the percentage of the debt which
is held by savings, and that, therefore, that should lead us to some
massive effort beyond the effort we are undertaking today, on that
score ?
Secretary A n d e r s o n . Senator Javits, the savings bonds which are
held by those individuals are one of the best places, certainly, for the
savings to be held. To be very frank, if through what we are asking;
now on E and H bonds we will just be able to keep our own on all
kinds of savings bonds and hold our position for the next year or
two, I will think we have done a pretty good job. I would like to see
it expanded. But even with great effort, I would not be unhappy if
we just held our position.
Senator J a v its. And that goes for the savings bonds, too ?
Secretary A n d e r s o n . I am including those savings bonds like the
F ’s and G’s and J ’s and K ’s, which we no longer issue, but which are
currently outstanding, as well as our E ’s and H ’s.
Senator J a v its. So that you feel that for the next 2 years your
problem is one of not slipping back, rather than o f going forward?
Secretary A n d e r s o n . Yes. We would increase the E and H in or
der to offset the cash-ins and the maturities of the F ’s, G’s, J ’s, and
K’s.
That is not to say that any increase is not desirable. I am talking
about the fact that if we are able to hold own own, we would feel
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
1147
pretty good about it. I f we are able to make some slight gain, we
would feel better.
Senator J avits . I gather you would like to expand the savings bonds
if you could ?
Secretary A nderson . That is correct.
Senator J avits . I have just one last question.
In this present strong feeling in the administration about the
budget, is there any differentiation as to what you spend your money
for, or is all expenditure put in the same category? That is, is de
fense put in the same category with housing and farm price sup
ports, or is there not some distinction about expenditures, which is
as you say yourself, in wThat I consider to be an excellent statement:
Expenditures for goods the people did not want which ended up in warehouses1
being given away or destroyed, or expenditures for goods which people did want
and use.
Is there any such differentiation in your Federal budget? And if
so, how is it reflected ?
Secretary A nderson . In the first place, monetarily, whatever we
pay the money out for has the same kind o f budgetary impact.
Philosophically, it seems what a nation like ours must do is to say
to itself, you must first do everything that is necessary for your coun
try to do. This would certainly include an adequate defense. Then,
you do as much as seems desirable as you can afford to do at any given
time. The fact that perhaps you cannot afford to do everything that
is desirable at any given time does not lessen its desirability. It
simply means that you do not try to do everything that is desirable
plus everything that is necessary at the same time.
Senator J avits . But what about the proposition of what adds to the
wealth of your country and what goes down the drain? Even de
fense does not add to the wealth of your country, but housing does.
Why not make a differential therefore ? Suppose you wrote into your
budget $2 billion for homes. That would add many times that total
value to the country. Why not include that in your calculations on the
budget and in terms of the credit of the United States ?
Secretary A nderson . I think what you could do, if you simply add
on these additional things, whatever they may be, you add them on at
the cost of putting on inflationary pressures that drive the ultimate
cost o f the things up, and in the long run either bring about read
justments or make it impossible for people to buy the things they want
because the price gets too high.
I f this country just undertakes to continually run a deficit, we can
only get this money out in two w^ays: We have either to tax for it or
to borrow it. I f we continue to borrow and never to pay, then we run
these dangers of inflation.
Senator J avits . Thank you, Mr. Secretary. I think it is an ex
cellent exposition of the point.
The C h a ir m a n . Representative Coffin ?
Representative C offin . Thank you, Mr. Chairman.
Mr. Secretary, I wanted to ask a very simple question, prefacing it
with these statements.
I f you wanted desperately to get a better maturity curve on your
long-term securities, you would like to sell your securities at the lowest
possible rate o f interest. W e have had some colloquy about an un
1148
E M P L O Y M E N T , G R O W T H , AND PRICE LE V ELS
easiness prevailing because we do not know why, because there are so
few dealers, we are getting the best possible break when we do sell to
the market. You in your statement have said the market cannot fail
to be improved by more active competition.
You auction your bills now, and sometimes you auction securities
o f a longer term than the bills. My question is, before we jump into
the higher interest rate or remove the ceiling in order to make sure
that this is necessary, why do we not have a try at auctioning some
o f our new long-term issues ?
This is not the auction to which you addressed your remarks in
your statement. I am not talking about an auction within the ex
change for all the securities, new and old. I am just talking about
making an experiment, trying to induce an auctioning o f long-term
issues to see what would happen. What are your views on this?
Secretary A nderson . With the Congressman’s permission and the
chairman’s permission, I would like to respond perhaps briefly and
then amplify my statement with a longer statement, because you have
asked a very pertinent question.
I should like to say first that nothing would please me more than
to believe and to hope that every security which the U.S. Treasury sold
could be auctioned. It would certainly relieve us o f a major responsi
bility in pricing and selling coupon issues where we have to fix the
rate. Traditionally, of course, as you have said, we have auctioned
the 91-day bill. In more recent months we have begun the auction
o f 6 months’ bills. More recently still, we have begun the auction
o f yearly bills, working toward four quarterly dates for the yearly
bills, when they will be auctioned.
When we get into the longer terms, we run into a number o f prob
lems. In the first place, the auction technique is not one that is known
well to a multitude o f people over the country. It requires a great
deal o f professional capacity in order to buy at auction a Government
security, and particularly a long-term Government security, when a
small amount of rate change could have a much larger effect on price
than an equivalent change o f rate would have on the price o f a short
term security.
I f one looks at what happens in other markets, for example, and
goes back to the first o f this year, almost every municipal issue that I
know about that has been $100 million or more has received only one
bid. I think maybe there was only one exception.
These bids were made up by syndicates. There is a distinction,
because they were bidding at that time on an all-or-none basis. Be
cause they bought all or none, they had a greater flexibility in the way
in which they get rid o f their securities.
When the local housing authority mortgages were offered in some
thing like $100 million, which was guaranteed by the Federal Govern
ment, again there was only one bid.
If, therefore, we went into the market, not with $100 million but
with $2.5 billion or some other large amount, we might, rather than
increase the number of bidders, find that we would have only one or a
few bids, or maybe not even enough of a combination between syndi
cates so that they would be willing to take it at all.
Representative C o ffin . Which you would not know until you tried
it.
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
1149
Secretary A nderson . I think one could gage pretty carefully the
fact that if municipalities who sell their securities in $100 million
lots got one or two bids, we could not hope, if we set out for a billion
dollars, to get a great number of them.
Representative C o ffin . I s this not a reaction in part because o f the
first reason you g a v e ; namely, because of lack of certainty or assur
ance by dealers in going in for a long-term bid, or a rather large bid ?
Secretary A nderson . The first reason I cited was that a good many
people did not have the capacity, the professional capacity, in the
country banks and that sort of thing, so they can buy what they want
on a coupon, but they would be pretty hard pressed if they could buy
only from the Treasury by submitting a bid.
Representative C o ffin . I would be very despondent if I felt that
we could plunge into outer space and nuclear weaponry and all that,
and yet feel that the mystic arrangements of the market could not
be communicated to enough people to bring competition to this very
vital area. I would think that perhaps you would be advised to ex
plore ways and means of distributing information, of educating in
this auction technique the people in the market now, and others who
might enter it. Are we to remain resigned to the fact that this is a
field that can only be known by a very few people who can move with
assurance in it ?
Secretary A nderson . N o, Congressman; I would not want to indi
cate any reluctance whatsoever to explore, study, and get the best
judgments from everybody in the country on how it might be done.
Representative C o ffin . Have you made any surveys or studies with
regard to the practicability of engaging in auction techniques for the
longer term issues of new securities ?
Secretary A nderson . We continually talk to people of all classes of
investors as to whether or not an enlargement of auctioning might be
feasible.
Representative C o ffin . I am not really interested in your continual
discussions. I know you must do that on virtually every phase of
your operations, But I am talking about a focused study such as
you made with regard to the auction within the exchange, a deliberate
attempt to explore this with the possibility that this might give you a
tool which you could use in your very difficult task of marketing.
Secretary A nderson . I would say that there have been various
times of highly concentrated study in this area. We have not sin
gled out just one project and said that this is the only point of refer
ence. The paper I ’m submitting for the record goes into the whole
matter quite carefully.
There is one other thing I would like to suggest here, and that is
that under our tax statutes, if one pursues an auction of all securities,
he gets into some very highly complex problems in which the rate of
tax that would be paid by various holders is dependent not only upon
the price at which they buy the security— and there would be many
different issue prices in an auction—but is dependent in part upon
whether, during the life of the security, say a 10 -year bond, they sell
at a higher or lower price.
A t present you would have to have almost a genealogy of some of
these securities in order to know the price which determines how taxes
were going to be paid.
1150
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
This is a problem upon which we have given a considerable amount
of study. Rather than try to expound it here, because it is highly
technical, I will furnish it to the committee in the statement.
Representative C o ffin . The committee, I am sure, would appre
ciate getting as deliberate a statement on this as possible, and also
whether or not you contemplate looking into this problem to a great
extent.
I think it might be a more practicable alternative than the type
of auction to which you addressed your remarks in your joint
statement.
(The statement referred to is as follow s:)
S e l l in g
T reasury
S e c u r it ie s
T hrough
A u c t io n
1. TJse o f auction fo r sliort-term securities.— Since 1929 the Treasury has
sold short-term Treasury bills— mostly with a 91-clay maturity— through com
petitive bidding in an auction rather than by Treasury fixing a price and in
terest return to the investor directly. This has been an efficient mechanism
for establishing a more or less routine payoff and new issuance of as much
as $1.8 billion of new bills each week. These auctions are conducted through
sealed bids submitted in writing within a specified time limit to any Federal
Reserve bank or branch. (Typical Treasury announcements of a bill offering
and the results are attached).
The auction technique has been extended beyond the routine 91-day bill op
eration. Beginning in 1951 the Treasury sold tax anticipation bills through
auction, and since then as much as $8 billion a year of tax anticipation bills
have been marketed in this way. A further extension of the auction technique
was introduced last December when the Treasury announced its new cycle of
6-month bills in addition to the regular 3-month bills.
In March 1959, the Treasury took another important step in the use of
the auction technique by announcing the first of a series of four issues of 1year Treasury bills to mature at quarterly intervals. The hope was expressed
at that time that the greater use of the auction technique for a security as
long as 1 year would permit some reduction in the amount of 1-year certifi
cates which the Treasury has to price. As of July 15, 1959, therefore, the
Treasury has $37 billion of Treasury bills outstanding, all of which were sold
at auction, as compared with $22
billion a year ago, and $13% billion
right after the Treasury-Federal Reserve accord 8 years ago.
The Treasury has obviously concluded, therefore, that there is considera
ble merit in the extensive use of the auction technique in selling short-term
securities. These issues, however, are bought almost entirely in large amounts
by professional investors who are thoroughly familiar with the money market
on a day-to-day basis.
2. Could the auction technique be extended to long-term bonds?— A major
objective of Treasury debt management policy is, of course, to get as broad a
distribution of public debt as possible. In this way more of the debt can be
placed in the hands of longer term investors. Real savings can be tapped and
less reliance is needed on borrowing from commercial banks. The Treasury
has from time to time given careful consideration to the possibility of extending
the competitive bidding system used on Treasury bills to longer term securities.
We do not believe, however, that in the present market environment such a step
would be in the public interest.
Subscriptions to new offerings of Treasury certificates, notes, and bonds issued
on a fixed price basis are made by thousands of small banks, corporations,
associations, and individuals throughout the country. Most of these investors
do not have enough current background data to submit a carefully prepared
bid for these securities. If the competitive procedure wTere used, therefore, the
Treasury could be in a position of impairing the opportunity now open to
small- and medium-sized investors of buying new securities directly from the
Treasury. This might be taken to imply that we aren’t interested in their having
a chance to buy from the Treasury on the same terms as large investors.
Furthermore, on fixed price issues the Treasury can more easily control the
amount issued to any single investor or investor class than it could on an
auction. Total subscriptions from commercial banks on medium and longer term
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
1151
bonds, for example, are typically limited to a certain percentage of capital
and surplus and on occasion subscription limitations from other types of in
vestors have been used. Substantial downpayments are also often required
to minimize speculation. Allotments in full are always made to small investors.
In addition allotments (actual security issuances) to different investor groups
may vary considerably, with preference usually given to savings-type investors.
The allotment procedure, in particular, would be extremely difficult to use in
connection with an auction, and there would be difficulty in adapting other
successful marketing techniques to the auction method.
Another way of looking at it is that the competitive situations arising from
the auction technique in handling short Treasury issues versus long Treasury
issues are quite different. In the auction of a short-term security the pro
fessional underwriters who purchase for secondary distribution are competing
not only among themselves but are also competing with a large number of pro
fessional buyers who are purchasing for their own investment needs. Thus,
the market underwriters have to consider not only the underwriting competition
but they also have to submit bids that are competitive with those submitted
by the primary investors who are well acquainted with this market technique.
On the other hand, in a longer term issue the use of the auction instrument
would undoubtedly generate bids almost exclusively from the professional under
writers, both dealers and banks, who wrould then do the secondary distribution.
In this case the professional underwriters have to worry only about their under
writing competition and do not have the competitive influence of informed bids
submitted by primary investors.
It should also be mentioned that most new Treasury securities are not issued
for cash at all but are offered in exchange for maturing securities. Use of the
competitive bidding system on all new securities would mean, presumably, that
the Treasury would pay off all maturing issues in cash and issue new securities.
At the present time, most holders of maturing issues— again, many of them
small holders— simply turn in the old security for the new one. If, however, each
holder has to enter a competitive bid for the new securities, he again runs the
risk of being left out and of having to buy the securities back from some
successful bidder.
Competitive bidding for all new issues would also tend to add to the amount of
purchases by those buyers familiar with bidding techniques who would submit
bids at relatively low prices just on the chance that they would be accepted.
This would be particularly true in a period where interest rates are rising and
credit is not so readily available. In such periods, reluctant buyers would tend
to indicate their lack of enthusiasm for Government securities by offering low
bids (high-interest rates). One result of competitive bidding under such cir
cumstances would therefore tend to be a net increase in the cost of interest on
the public debt to the Treasury— and to the taxpayer.
In addition, if the successful bids were so low as to produce interest rates on
the new securities well above the market, the entire market could be upset, with
unfortunate implications for both debt management and monetary policy. In
many instances, therefore, too great use of competitive bidding wrould tend to
prevent the Treasury from fully exercising its debt management responsibilities.
On long-term issues the problem of the leverage effect of a small-yield differ
ence in causing a large difference in price comes into play. An eighth of 1 per
cent spread in yield on a 91-day bill is worth only 31 cents on a $1,000 bond.
On a 1-year issue it is worth $1.25 per $1,000, and on a 40-year bond it is worth
$50. That means that even though the high and low accepted bids on a 40-year
bond are within a seemingly narrow range of one-eighth of 1 percent the price
range would be all the way from $950 to $1,000. Let us assume that the aver
age bid accepted is $975. As a result, the bidder who happened to get his bid
accepted at $950, the “tail bidder,” is encouraged to sell his bond immediately for
a quick speculative profit as long as the market price is well above his cost. If
many of those who bought bonds cheaper than the average do this, of course,
their profits will shrink as the price goes down, but in the process they will have
succeeded in knocking the market down and interfered with the orderly distri
bution of the issues by legitimate underwriters to ultimate owmers. The second
ary distribution of an auctioned bond would be further impaired, of course, by
the obvious reluctance of successful bidders who paid above the average price
to take a loss on the transaction at the market price even if it remains steady at
the average bid.
1152
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
Two more points may be made. Many institutional portfolio managers dislike
the auction technique because they have to pick a price. If they bid high
enough to insure buying the new securities they probably will be above the
average accepted bid and will be subject to the criticism of their own institution
that they paid too much. If they try to be sure to get under the average they
may be outside the range of accepted bids, and come away from the auction
(which is, of course, based on sealed bids) with nothing. Since there is always
the secondary market to fall back on, many investors prefer to take the latter
chance rather than the former, thus tending to lower the average price and
increase the cost to the Treasury.
The other point also relates to investor attitudes. Quite apart from tax
considerations, the basic preference by investors in Governments is for issuance
at par. Many investors “buy coupon” ; that is, they want as high a rate of cur
rent earnings as they can get rather than the same overall income consisting
of lower current earnings plus a capital gain when they sell the bond or it
matures. These investors (such as pension funds) prefer to buy a 4% percent
10-year bond at par yielding 4% percent to a 3V4 percent 10-year bond at a little
under 92, also yielding 4% percent. On the other hand, many investors prefer
not to buy at a premium because they don’t like to get part of their capital
back with each interest payment.
During the 1930’s the Treasuy used the auction method of selling some long
term bonds, both with reference to its own issues and to Federal agency issues.
Market performance in the distribution of the bonds was reported to be unsatis
factory, as indicated in a staff memorandum which is included at the end of
this statement.
3. Com petitive bidding for other securities.— It has also been suggested that per
haps the Treasury could sell its longer securities by competitive bids in the
same manner used by corporations and State and local governments in their sales
of longer term issues rather than doing it by the same method used in auction
ing bills. In State and local and corporate issues rival underwriting syndicates
each typically submit bids to take all or none of the securities offered, with bids
that include an allowance, of course, for profit to the underwriter. The bidders
prefer the “all or none” approach. If they only bid for part of an issue there
probably would be practically no bids at all since no dealer would take a sub
stantial position if he was taking the chance that he might be at the mercy of
other dealers who bid less.
Any attempt to apply the syndicate idea to Government securities would
present many problems, however. U.S. Government issues dwrarf in size the is
sues of any other borrower. During the calendar year 1958, for example, the
Treasury sold $48^ billion of new securities to the public. Only 13 issues of
bonds, notes, and certificates were involved (other than the additions of $100
to $200 million a week in bill rollovers) or an average size of issue of about
$3% billion. By contrast, the largest single corporation issue floated in 1958 was
only $350 million, and the largest single State and local government issue some
what less. No syndicate large enough to handle market issues of Government
securities could be formed without its being so large as to dominate the entire
market, both with respect to the Treasury and to ultimate investors. This would
not be good public policy.
It should also be mentioned that so far this year all but one of the State or
local government issues offered in “competitive” bidding in amounts of $100
million or more attracted only one underwriting bid, on an “all or none basis.”
(See attached table.) This suggests that the very size of new municipal debt
issues severely strains the capacity of bond underwriters. The resources of
securities underwriters would obviously be completely inadequate to handle
competitive bidding on Treasury bonds.
4. Tax complications o f auctioning.— In an auction of any coupon issue it
would still be necessary for the Treasury to price issues to some extent since a
coupon rate has to be placed on the security in any event. However, no bid
could be accepted below a certain discount under par without tax complications.
If the discount were less than one-fourth of 1 percent below par for each full
year to maturity on the new security, the increase in value to par would be a
capital gain. But securities issued at any greater discount w^ould be subject
to the tax law provisions governing original issue discount, and the increase
in value to par in this case would be taxed as ordinary income, with a proration
based on time if more than one holder is involved. These provisions do not
apply to bills since they are not a capital asset and all increases in value are
taxed as ordinary income.
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1153
This would not be as great a problem if the Treasury issued all such securities
at the same price. But with an auction, bids may be accepted at a great many
different prices. Each of these securities issued in acceptance of varying bids
would have a different original issue discount under the tax law. Furthermore,
even securities issued with the original issue discount might be accorded differ
ent tax treatment as the result of transactions in the secondary market. In
addition to producing a multiplicity of slightly differing types of the same issue
in the market, this would create additional confusion in evaluating them. Thus,
investor interest in such issues would be effectively undermined.
5.
Conclusion.— The Treasury believes, therefore, that there are formidable
obstacles in the path of any successful application of the auction technique to
intermediate or longer term bonds. We are pleased, however, with the results
to date of the rapid expansion of the auction technique in the very short term
area which we have undertaken recently, and certainly do not foreclose the
possibility of further expansion of auctions in that area. We believe further
that the present practice of offering Treasury certificates, notes, and bonds at
prices and interest rates determined by the Treasury does result in an effective
distribution of new Treasury issues at minimum cost to the taxpayer. In the
last analysis, a potential buyer of a new Treasury issue must find the rate
of interest attractive or he will prefer to buy a security in the outstanding
market regardless of whether the Treasury evaluates that attractiveness for
him by setting a price, or whether he tries to measure the amount of attractive
ness himself in terms of submitting a bid.
[Release Thursday, July 16, 1959]
T reasury D epartm ent,
W ashington, D.C.
A-574.
The Treasury Department, by this public notice, invites tenders for two series
of Treasury bills to the aggregate amount of $1,400 million, or thereabouts, for
cash and in exchange for Treasury bills maturing July 23,1959, in the amount of
$1,400,956,000, as follows:
Bills (91-day) (to maturity date) to be issued July 23, 1959, in the amount of
$1 billion, or thereabouts, representing an additional amount of bills dated April
23, 1959, and to mature October 22, 1959, originally issued in the amount of
$400,070,000, the additional and original bills to be freely interchangeable.
Bills (182-day) for $400 million, or thereabouts, to be dated July 23, 1959, and
to mature January 21, 1960.
The bills of both series will be issued on a discount basis under competitive
and noncompetitive bidding as hereinafter provided, and at maturity their face
amount will be payable without interest. They will be issued in bearer form
only, and in denominations of $1,000, $5,000, $10,000, $100,000, $500,000, and $1
million (maturity value).
Tenders will be received at Federal Reserve banks and branches up to the
closing hour; 1:30 p.m., eastern daylight time, Monday, July 20, 1959. Tenders
will not be received at the Treasury Department, Washington. Each tender
must be for an even multiple of $1,000, and in the case of competitive tenders the
price offered must be expressed on the basis of 100, with not more than three
decimals; e.g., 99.925. Fractions may not be used. It is urged that tenders be
made on the printed forms and forwarded in the special envelopes which will be
supplied by Federal Reserve banks or branches on application therefor.
Others than banking institutions will not be permitted to submit tenders except
for their own account. Tenders will be received without deposit from incorporated
banks and trust companies and from responsible and recognized dealers in invest
ment securities. Tenders from others must be accompanied by payment of 2
percent of the face amount of Treasury bills applied for, unless the tenders are
accompanied by an express guarantee of payment by an incorporated bank or
trust company.
Immediately after the closing* hour, tenders will be opened at the Federal
Reserve banks and branches, following which public announcement will be made
by the Treasury Department of the amount and price range of accepted bids.
Those submitting tenders will be advised of the acceptance or rejection thereof.
The Secretary of the Treasury expressly reserves the right to accept or reject any
or all tenders, in whole or in part, and his action in any such respect shall be final.
Subject to these reservations, noncompetitive tenders for $200,000 or less for
1154
E M P L O Y M E N T , G R O W T H , AND PRICE LEVELS
the additional bills dated April 23, 1959 (91 days remaining until maturity date
on October 22, 1959), and noncompetitive tenders for $100,000 or less for the
182-day bills, without stated price from any one bidder, will be accepted in full
at the average price (in three decimals) of accepted competitive bids for the
respective issues. Settlement for accepted tenders in accordance with the bids
must be made or completed at the Federal Reserve bank on July 23, 1959, in cash
or other immediately available funds or in a like face amount of Treasury bills
maturing July 23,1959. Cash and exchange tenders will receive equal treatment.
Cash adjustments will be made for differences between the par value of maturing
bills accepted in exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or gain from the
sale or other disposition of the bills, does not have any exemption, as such, and
loss from the sale or other disposition of Treasury bills does not have any special
treatment, as such, under the Internal Revenue Code of 1954. The bills are
subject to estate, inheritance, gift, or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on the principal
or interest thereof by any State, or any of the possessions of the United States,
or by any local taxing authority. For purposes of taxation the amount of dis
count at which Treasury bills are originally sold by the United States is consid
ered to be interest. Under sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which bills issued hereunder are sold is
not considered to accrue until such bills are sold, redeemed, or otherwise disposed
of, and such bills are excluded from consideration as capital assets. Accordingly,
the owner of Treasury bills (other than life insurance companies) issued here
under need include in his income tax return only the difference between the price
paid for such bills, whether on original issue or on subsequent purchase, and the
amount actually received either upon sale or redemption at maturity during the
taxable year for which the return is made, as ordinary gain or loss.
Treasury Department Circular No. 418, revised, and this notice, prescribe the
terms of the Treasury bills and govern the conditions of their issue. Copies
of the circular may be obtained from any Federal Reserve bank or branch.
EM PLOYM ENT,
G R O W T H , AND PRICE
1155
LEV ELS
[R e le a se T u esd a y, Ju ly 2 1 , 1 9 5 9 ]
T reasury D epartm ent,
W ashington, D .C.
A-583.
The Treasury Department announced last evening that the tenders for two
series of Treasury bills, one series to be an additional issue of the bills dated
April 23,1959, and the other series to be dated July 23, 1959, which were offered
on July 16, were opened at the Federal Reserve banks on July 20. Tenders were
invited for $1 billion, or thereabouts, of 91-day bills and for $400 million, or
thereabouts, of 182-day bills. The details of the two series are as follows:
91-day Treasury bills
maturing Oct. 22, 1959
182-day Treasury bills
maturing Jan. 21, 1960
Range of accepted competitive bids
Approximate
equivalent
annual rate
Price
H igh________ __ _____ _________ _______ _________
Low _ _______________________ _______________ Average________________________________________ .
$99.171
99.154
99.156
Percent
3.280
3.347
3.337
Price
$98.061
98. 032
98.044
Approximate
equivalent
annual rate
Percent
3.835
3.893
3. 869
N ote .— 84 percent of the amount of 91-day bills bid for at the low price was accepted; 20 percent of the
amount of 182-day bills bid for at the low price was accepted.
Total tenders applied fo r and accepted by Federal R eserve districts
District
B o sto n ______
New Y ork___
Philadelphia..
Cleveland____
Richmond___
Atlanta______
Chicago______
St. Louis_____
M inneapolis-.
Kansas C it y ..
Dallas________
San Francisco.
Total.
Applied for
Accepted
$34,942,000
1, 442, 556, 000
29,087, 000
32,823, 000
15, 522.000
4 1 .138.000
201,611,000
18.352.000
6,990,000
37.986.000
20.444.000
63.685.000
$24,905,000
647, 019, 000
13, 062, 000
32.393.000
13, 722, 000
18.320.000
120, 711,000
15, 866,000
6, 990,000
33, 728,000
1 ,945,136, 000
Applied for
53,343,000
$3,467,000
565,275,000
12,642,000
10, 935, 000
5.868.000
3, 919,000
73, 581,000
4,420, 000
8, 731,000
7.306.000
3.322.000
38,652, 000
$3,367,000
245, 254,000
7.642.000
10, 535,000
5.868.000
3.069.000
63, 531,000
4.420.000
7, 971,000
6, 906,000
3.322.000
38,252,000
i 1,000,080,000
738,118,000
3 400,137,000
20.021.000
* Includes $241,660,000 noncompetitive tenders accepted at the average price of $99,156.
2 Includes $48,548,000 noncompetitive tenders accepted at the average price of $98,044.
Accepted
1156
EM PLOYM ENT,
G R O W T H , AND PRICE LEVELS
Bids fo r large municipal bond offerings (generally $25 million and over)
Date of
bid
Amount
1959
July 15
June 30
30
30
17
10
10
M illion s
$31
195
25
50
30
63
100
4
2
M a y 27
27
40
30
26
105
13
25
12
22
21
14
27
33
200
60
9
9
7
25
53
27
31
17
11
30
29
100
10
26
10
5
4
3
Feb. 26
26
30
25
25
104
25
18
40
25
Apr.
Mar.
Feb. 18
Jan.
Type
Ohio, highway..... .........................................
Grant County Public Utility District.
M aryland______________________________
N ew York State_______________________
Port of New York Authority__________
Connecticut____________________________
California_______________________________
Num
ber of
bids
S .T .
Rev.
Rev.
G .O .
Rev.
G .O .
2
i1
2
2
2
i1
1
New York C it y ..
Los Angeles F .C .
Chicago, 111______
G .O .
2
Rev.
5
New Housing Authority..
P .H .A .
New Jersey,.
G .O .
Cincinnati, Ohio____________________
Oregon______________________________
New York State Power Authority..
Massachusetts______________________
G .O .
G .O .
Rev.
G.O .
Florida Development C om m ission..
Massachusetts Turnpike Authority _
Los Angeles School D istrict-.........—
Rev.
Rev.
G.O .
Pennsylvania General State Authority.
Baltimore, M d __________________________
California__________ ________ ____________
G .O .
G .O .
1
Southern California Metropolitan Water
District.
New York C ity ___________________________
Port of New York Authority----------------Philadelphia, P a __________________________
Michigan, Expressway___________________
New Housing Authority....... .........................
G .O .
2
G .O .
G .O .
G.O .
S.T .
P .H .A .
2
2
3
2
2
Chicago, 111________________________________
East B ay Municipal District of Califor
nia.
60" N ew York State__________________________
G .O .
G .O .
2
3
G .O .
2
Chicago, O ’Hare Airport.
Washington (State)______
Minnesota (State)________
Los Angeles______________
Rev.
G .O .
G .O .
G .O .
i1
3
1
4
Massachusetts Port Authority__________
Puerto Rico________________________ ______
Houston, T e x ____________________________
New York C ity Housing Authority-------Oregon____________________________________
Sacramento Municipal Utilities DistrictNew York State Power Authority----------
Rev.
G .O .
G .O .
i1
2
3
3
3
2
11
16
10
10
4
r 120
25
23
20
3
28
28
27
21
15
6
72
20
20
20
20
25
200
G .O .
Rev.
Rev.
1
Range of bids
3.54 to 3.57 percent.
(300 member A /C ).
4.02 and 4.05 percent.
3.35 and 3.36 percent.
4.09 and 4.11 percent.
4.30 percent.
3.95 percent merged
syndicate.
2 syndicates merged.
4.05, 4.18, 4.19, 4.25,
and 4.26 percent.
3.78 percent. Bankers
and dealers groups
merged.
3.24, 3.26, 3.27, 3.28
percent.
3.47, 3.48 percent.
3.39, 3.43, 3.53 percent.
4.21 percent.
3.46 percent, 3 syndi
cates merged “ due
to thinness of the
market.”
4.10, 4.13, 4.14 percent.
3.44 and (not avail
able.
3.58, 3.65 percent.
3.11, 3.14 percent.
3.55 percent merged
account.
2.96, 3.10 percent.
3.17, 3.21 percent.
3.68, 3.69 percent.
3.27, 3.31, 3.33 percent.
3.54, 3.63 percent.
3.41 percent ($69 million
to bank group—
$35 million to dealer
group).
3.20 and 3.26 percent.
3.45, 3.46, 3.51 percent.
2.91, 2.93 percent (win
ning bid— a merged
a/c).
3.17, 3.19, 3.20 percent.
3.47, 3.48, 3.50, 3.52
percent.
3.94,
3.48,
4.07,
2.77,
3.58,
3.97 percent.
3.51, 3.52 percent.
4.17, 4.18 percent.
2.82, 2.83 percent.
3.62 percent.
i Negotiated with underwriters.
G .O . General obligations.
S .T . Special tax fund.
R ev. Revenue.
S e llin g
U.S.
G o v ern m en t D ir e c t a n d
G u a ra n teed
Issu es
by
Tender
[Excerpts from staff memorandum prepared in September 1940]
With respect to the broad use of the tender method in the sale of securities
by the Treasury, the proponents of this method, prior to the actual operation
of the plan in selling direct and guaranteed securities in 1934 and 1935, believed
that there were several distinct advantages compared with the regular quarterly
offerings by subscription. These were as follows:
E M P L O Y M E N T , G R O W T H , AND PRICE LE V ELS
1157
1. The Treasury could obtain required funds at a minimum interest cost.
2. Market conditions would tend to be more stable, since the Treasury
could do its financing when the market was strong, and could remain out
of the market during periods of weakness.
3. The Treasury would not be forced to accept prevailing market con
ditions on the quarterly dates.
4. The method would permit small issues to be increased gradually from
time to time by subsequent offerings, in whatever amounts the Treasury
saw fit to issue.
Contrary to these expectations, however, the market voiced disapproval of
the tender method after it had been in use for a while. Although the poor re
ception given to the last few offerings on tenders was undoubtedly influenced
somewhat by other factors unsettling to the market, several important criticisms
of the tender method were made as follows:
1. Initial distribution was sharply restricted. Many banks and investors
outside of the largest centers felt that they were not in a position to gage
the market with any degree of accuracy, and those who did submit bids
generally paid the highest prices. The largest portion of the new issues
awarded above the average price for each went to bidders outside New York
City, while most of the amounts awarded at or below the average went to
banks, brokers, and dealers in New York. New York City banks and dealers
bid for about two-thirds of the accepted total; and of the two most successful
issues, 82 and 83 percent, respectively, were taken in the New York district.
2. After the first issues, the market became somewhat nervous over the
extent to which the tender method was to be employed. Due to uncertainty
as to the time, size, and frequency of such offerings, they had the same
effect on the market as if a known seller was waiting to dispose of a very
substantial block of bonds at any time. Banks and dealers were unwilling
to make commitments as freely, and the market generally was not afforded
sufficient respite in which to absorb the offerings. This was especially
important because the initial distribution was not as comprehensive as usual.
3. The profit inducement was practically wiped out, in that the almost
certain market premium on issues offered in the regular way, which had
served as an inducement to smaller banks and others to subscribe, was
eliminated. The market believed that under the competitive bidding method
the probable profit would be small and uncertain, and many investors, feel
ing that the prospective small profit did not justify the risk involved, re
frained from bidding. This was particularly true after the out-of-town
institutions bid for the new bonds near the current market, only to find the
dealers and larger banks receiving sizable amounts at prices substantially
under the market.
Even this latter group seemed dissatisfied with the profit available,
although there apparently was short selling in the market against bids for
the new issues placed below current levels. Generally, the underwriting
margins were smaller and more precarious, while secondary distribution
was made difficult by the frequency of offerings.
4. There appeared to be an increasing tendency toward lower prices.
Prospects of a continued supply resulted in the dropping of bids by dealers
and the larger investors in close contact with the market. This, coupled
with short selling and the psychological effect of the increasing Federal
debt were all factors pointing toward a decline in quotations. The short
selling provided a cushion of bids by tender and under normal conditions
might have been helpful but it is likely that the repeated selling against each
offering had an undue influence on market prices.
In considering the merits of the tender method for selling large amounts at
frequent intervals, of other than very short maturities, such as 90-day Treasury
bills, there are several questions which seem to be worthy of consideration.
Principally, they are:
1. Does the Treasury’s aim of wide distribution into strong holders be
come realized?
2. Is general interest in Government securities stimulated and encouraged
as much as it is by a definite offering at a price, which almost always has
been heavily oversubscribed?
3. Can the Treasury be sure that any particular issue will be successful?
Under the regular method, the Treasury has been able to insure the success
of an issue by adjustment of the coupon rate and maturity date, but, in
1158
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
offerings by tender there is no assurance that a satisfactory total of tenders
will be received or that the bids will be within an acceptable price range.
4. Would the market reaction to a single large issue be as unfavorable
as it was to frequent offerings of smaller amounts in an indefinite aggregate?
5. How does the cost of interest compare with that under the regular
method ?
6. Is there a political disadvantage in selling an additional series of an
outstanding issue under the existing market price?
In order that a more detailed study of the tender method might be made,
the remaining part of this memorandum is devoted to a brief review of the
Treasury offerings by tender in 1934 and 1935, and to the details of each offering,
including data concerning market conditions.
REVIEW OF OFFERINGS B Y TENDER
With the exception of the regular Treasury bill issues and the $50 million
Panama Canal 3s (which were sold in March 1911 at an average price of around
102V2 ) all of the direct and guaranteed issues sold on a tender basis were offered
in 1934 and 1935. In July 1934, $100 million Federal Farm Mortgage Corpora
tion 3 percent bonds of 1944-49 were offered. (There were $171 million of
this issue outstanding at the end of June.) The action of the Treasury in
handling the financing for a Government agency represented an innovation, and
as the Treasury lacked discretion in fixing the coupon rate, it was decided to
sell the issue by the tender method. In August, following weakness in the
market due to European new^s, three new issues of short-term Home Owners
Loan Corporation bonds, totaling $150 million, were sold in the same manner.
No further financing of this nature was done until May 1935, when plans were
formulated to apply the tender method to the offering of additional amounts
of Treasury bonds. Press reports at the time stated that the Treasury believed
this method would prove less disturbing to the market than the customary
policy, and that the Government would obtain required funds at a minimum of
cost. Accordingly, an offering was made on May 27, 1935, of $100 million 3
percent Treasury bonds of 1946-48, of which there were $825 million already
outstanding. An additional lot of $100 million of the 1946-48 issue was sold
late in June, and three blocks of $100 million each of 27/ss of 1955-60, which
were already outstanding in the amount of $2,304 million, were offered on July
15, July 29, and August 12 respectively. The method became increasingly un
popular during this period, as indicated by the criticism which developed in
the market and also by the fact that both the total tenders and the number of
tenders received for the last two offerings were sharply lower than for the
two immediately preceding. Notwithstanding the adverse comment, unsettled
market conditions which had made some Treasury support necessary, and
dwindling interest in the offerings, the Treasury offered $100 million iy2 percent
Federal Farm Mortgage Corporation bonds of 1939 on August 26. Total tenders
amounted to only $85,592,000, against which $S5,172,000 bonds were issued at
an average price of 99. The offering was conceded to be a failure and the
method was discontinued.
M ARKET CONDITIONS M A Y 15 TO SEPTEMBER 1, 1 9 3 5
Prices of Treasury bonds were fairly steady, prior to the initial offering of
1946-48s on May 27, but a slightly easier tendency was apparent. The novelty
of the tender system depressed prices temporarily, but these losses were re
gained in the next 2 weeks, and prices moved slowly upward until July 19
and 20. The market was quiet and fairly steady until August 1, but turned
downward in August and losses ranging up to 2% points took place between
the early part of the month and August 27. There was an irregular upward
reaction of as much as three-eighths of a point between August 27 and Septem
ber 1.
Various external factors influenced the market during the latter part of
this period, and undoubtedly increased its vulnerability to the disadvantages
of the tender method. The main influence was the Ethiopian crisis, not yet
at its peak, but already a disturbing factor. Some thought was also being given
to inflation particularly in regard to certain aspects of the omnibus banking
bill then before Congress, and to the administration pressure on Congress to
dispose of several other measures by passing them as quickly as possible in
order to speed up adjournment.
EM PLOYM ENT,
G R O W T H , AND PRICE
1159
LEV ELS
DETAILS OF INDIVIDUAL OFFERINGS
1. July 23, 1934— $100 million 3-percent Federal Farm M ortgage Corporation
bonds of 19^4-49
These bonds were an additional series of the issue originally dated May 15,
1934, and of which there was a total of $171,036,400 outstanding on June 30,
1934. On that date the total guaranteed debt amounted to $680,767,817, includ
ing $234,814,667 Reconstruction Finance Corporation notes, $134,318,950 Home
Owners Loan Corporation bonds, and $140,597,800 other Federal Farm Mortgage
Corporation bonds.
Immediately preceding the offering, the market had been quiet with a some
what irregular tendency. Guaranteed obligations were firm, but turned easier
after the announcement. The books closed on July 25, having remained open
3 days to permit full opportunity to subscribe, and by this time the issue had
declined about one-half point. Other guaranteed issues were three thirtyseconds to eight thirty-seconds lower. Total bids of $195,081,600 were received,
and a total of $100,260,300 was accepted at an average price of 100.559.
P rice range
Accepted tenders:
High________________________________________________________________
102. 250
Low ________________________________________________________________
100. 438
Average____________________________________________________________ 1100. 559
Market price:
Close July 22_______________________________________________________
101%2
Low while books were open------------------------------------------------------------1002%2
1 2.92 percent to call date.
On July 26, all markets turned downward after the assassination of Chancellor
Dollfuss, and the Federal Farm Mortgage Corporation 3s closed at 993^2 bid.
There was a rally of about one-fourth of a point on the following day, but prices
of all U.S. issues declined sharply, and during the next 2 weeks the Federal
Farm Mortgage Corporation 3s fell to 983%2 bid (on August 11).
2. August 6, 1\934— $50 million each o f iy%-, 1
and 2-percent Hom e Owners
Loan Corporation bonds of 1936,1937 and 1938
These were new issues of short-term bonds, and the only other guaranteed
Home Owners Loan Corporation issue outstanding was the 3-percent bond of
1944-52, of which there was $283,546,000 outstanding at the end of July.
Prices of both direct and guaranteed issues had been weak, following the assas
sination of Chancellor Dollfuss on July 25, and on July 26 there had been a
drop of nearly a point, with a slightly lower tendency in evidence during the
following week. After the announcement of this offering, quotations of guaran
teed issues declined one thirty-second to five thirty-seconds further.
Total bids of $233,128,600 were received for the three series combined, but only
$127,111,100 were accepted, the Treasury announcing that lower bids were
not in line with market conditions. The prices of the issued bonds were as
follows:
High
P A s______________________________________________
1%S__________________ _____
_______
2s______ __________ _____________________________
101. 509
101.130
101. 035
Low
100. 411
99
99
Average
100. 677
99.931
99. 962
Average
yield
Percent
1.15
1. 77
2 01
Yields on Treasury notes of roughly comparable maturity were as follows
(closing bid prices August 8,1934) :
Percent
2 years (Aug. 1, 1936)____________________________________________________
3 years i y 2 months (Sept. 15, 1937)______________________________________
3 years 10y2 months (June 15, 1938)______________________________________
0.75
1.59
1.77
Prices moved upward sharply (as much as i y 2 points for Treasury bonds)
from August 11 to August 17, and the new Home Owners Loan Corporation
issues gained about five-eighths of a point during this period. However, there
1160
E M P L O Y M E N T , G R O W T H , AND PRICE LEVELS
was renewed weakness as selling increased from August 17 to August 30, but
the Home Owners Loan Corporation issues stood up well in the market, declin
ing only about one-fourth of a point net compared with one-half of a point to
one point for Treasury notes and bonds.
S. M ay 27, 1935— $100 million ( additional) 3-percent Treasury bonds o f 1946-4$
The Treasury announced an offering by tender of the 3s of 1946-48, of which
$82,507,900 had been sold in June 1934. An excerpt from the New York Times
of May 27, 1935, indicates the Treasury’s position regarding the tender method:
“Treasury officials are understood to believe that the sale of bonds to the
highest bidders will prove less disturbing to the money market than the former
policy, and also that the Government will obtain the money it needs at a mini
mum cost. Under the policy of selling the bonds at stated figure it has been
necessary for the Treasury so to gage the market’s appetite as to assure the
success of an offering, with the result that the interest rate has been slightly
above the market.
Another explanation is that the Treasury is seeking to avoid the marketing
of further issues carrying different interest rates than bonds already outstand
ing. The moment is considered opportune for the test of an offering of the type
announced, as Government bonds have been enjoying a rising market.”
The market had shown an easier tendency just prior to the announcement,
and considerable price weakness resulted from it, although offerings were not
large. The outstanding 1946-48s declined from 1032%2 to 1031%2 during the
3 days that the books were open. The rest of the market also moved lower,
although short-term bonds showed only minor losses. Total bids of $270,027,000
were received, and while a larger oversubscription had been expected, the opera
tion was officially considered successful. Accepted bids ranged from 1032%2
to 103V32.
4. June 24 j 1935— $100 million {additional) 3-percent Treasury bonds of 1946-4$
Between May 29 and June 22 a moderate but steady improvement in prices
occurred. The 1946-48s gained fourteen thirty-seconds. Other long-term bonds
improved six thirty-seconds to nineteen thirty-seconds, while short-term bonds
advanced about three-fourths of a point. On June 24 an additional $100 million
of the 3-percent Treasury bonds of 1946-48 were offered. The closing price
prior to the announcement was 1032%2, the bonds remaining practically un
changed at this price throughout the 3-day period that the books were open.
Tenders received for this offering were much larger in volume and at prices
closer to the market than the previous offering. The shock of novelty appeared
to have worn off and other influences on the market were more favorable. At
the time of the first offering many dealers were said to have gone technically
short of the 1946-48s, later purchases of the bonds causing a rally in price, but
in this instance it was believed that few dealers were short. Bids totaling
$461,341,000 were received, of which $112,669,000 were accepted at prices ranging
from 103x%2 to 1032%2, or an average of 103x%2.
5. July 15, 1935— $100 million (additional) 2 1/s-percent Treasury bonds o f
1055-60
Between June 26 and July 15 the long market was firm and somewhat higher.
During this period, on July 8, there was a cash issue at par and accrued interest
of $500 million 1%-pereent Treasury note of series B-1939 (due December 15,
1939). The coupon rate was looked upon as a new low for this type of financing.
Subscriptions aggregating $2,970 million were received and dealers reported a
consistently strong demand for the new notes on a when-issued basis at prices
ranging from 10016/32 to 100 20/32.
The announcement July 11 of a probable additional offering on a tender basis
of 2%-percent Treasury bonds of 1955-60 (the longest bond in the market, of
which $2,304,102,800 were already outstanding as of June 30) was well received
by the market, although the price of this and several other long term issues
declined several thirty-seconds. From July 15 to July 17, while the books were
open, the price for the 1955-60s remained practically unchanged at 101 20/32,
although the rest of the market advanced from 1/32 to 5/32. This offering was
considered successful, total tenders for the country amounting to $510,958,000.
The tenders varied in price from 101 27/32 to 101 19/32, the average being
10119/32.
EM PLOYM ENT,
G R O W T H , AND PRICE
LE V ELS
1161
6. July 29, 1935— $100 million {additional) 2% -percent Treasury bonds o f
1955-60
Prices of all direct Treasury issues were little changed between July 17 and
July 29 when the sale by tender of an additional $100 million 2 % -percent bonds
of 1955-60 was undertaken. This offering, although received less enthusiasti
cally than was the similar offering 2 weeks earlier, influenced prices only slightly.
While the books were open the market remained steady with nominal changes
only, the 1955-60s selling at 101 20/32 high, 101 19/32 low and closing on July 31
at the latter price. Tenders aggregating $320,981,000 were received, as com
pared with $510,958,000 at the previous offering. The price range from 10017/32
to 10124/32, with an average of 10118/32.
7. August 12, 1935— $100 million ( additional) XYs-percent T reasury bonds o f
1955-60
Between July 31 and August 10 there was little demand for the longer issues,
prices declining up to one-half point, although the short bonds were unchanged
or only slightly easier. Apparently many of the 2 % -percent Treasury bonds of
1955-60 received on the offering dated July 29 still remained on dealers’ shelves.
Following the announcement on August 12 of another issue of $100 million of the
1955-60s, the market turned weak. There was some apprehension reflected in
the market at this time as to both the frequency of offerings and the total
amount intended to be raised by this method, and losses up 13/32ds were re
corded by the general list. Moreover, as little buying interest was being shown
in the market for the longest bonds, the market voiced objections to the addi
tional offerings of 1955-60s, which was by far the largest Treasury issue out
standing and also the longest term. While the books were open, August 12-14,
the price for the 1955-60s declined from 101 5/32 to 100 27/32. The average
price of the bonds issued was 100 25/32. Total tenders of only $147,264,000 were
received, by far the smallest on any of the Treasury bond offerings.
During this period when the Treasury raised $307 million through the three
reopenings of this issue market weakness resulted in Treasury purchases in
the market of $74 million of the 2yss, or almost a quarter of the total.
8. August 26, 1935— $100 million (new series) ly^-pereent Federal Farm M ort
gage Corporation bonds o f 1939
Under unfavorable market conditions, prices having declined almost steadily
for the preceding 3 weeks, $100 million 1%-percent bonds of the Federal Farm
Mortgage Corporation were offered on a tender basis on August 26. Weakness
continued between August 26 and 28 while the books were open. The issue was
not successful, only $85,592,000 total tenders being received, of which $85,172,000
were accepted. Prices of the accepted tenders ranged from 100 to 98, averaging
99, and affording an average yield of 1.762 percent. Comment in the press was to
the effect that the coupon rate had been shaved too close. No comparable issue
of farm mortgage bonds was outstanding at the time, although at market prices
two Treasury note issues with 1939 maturities yielded approximately 1.30 per
cent, and the 1%-percent Home Owners Loan Corporation bonds of 1939 yielded
1.61 percent.
The new issue was quoted in the market at 99 13/32 bid on August 30 and ad
vanced with the general market during the next few days to sell around 99 26/32.
The balance of $15 million, for which no tenders were received, was sold privately,
through regular market channels, between October 8 to 14, at prices ranging from
100 to 100 2/32.
Secretary A n d e r s o n . We will certainly explore it further, sir.
Representative C o f f i n . Y o u end your statement by saying:
Improvements of the processes and mechanisms of the Government securities
market will in no way solve our problems of fiscal imbalance—
with which I agree. But it is my feeling that you may have overstated
your case when you went on to say:
Nor can they correct their problems of too much short-term public debt, of our
need for continuous flexibility in our approach to monetary policies, of obtaining
a volume of savings which will match our expanding investment needs, or of
the cyclical instability of our financial market.
38563— 59—pt. 6A------ 6
1162
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
These things we have been talking about, the possibility of the
Treasury purchasing securities; perhaps the possibility of auction—
although the effect of that we would not know until we tried it ; swap
ping ; some of the reforms that you mentioned in your statement; pos
sible margin regulations; repurchase agreements. Would not these
things, although they may not bulk large, any one of them, these var
ious mechanisms and processes, if successful, have a very definite ef
fect on your ability to get out of too much of a short-range debt?
Would they not help in giving you the power to achieve greater flexi
bility? Would they not help to some extent in fighting cyclical in
stability? And if you were successful in them, would they not also
have an effect on savings available, which might then be put into the
market, which are now kept out because of the violent fluctuations ?
Secretary A n d e r s o n . Probably better terminology would have been
if we had said that they cannot, within themselves, correct our prob
lem. Anything which we can do to improve the market is an advan
tage, might very well help in distribution, might very well help in a
number of ways.
The point we are making here, that I had in mind at the time of
the statement, was that in certain market conditions at the moment,
if we maintained the ceiling on the interest rate to which we can go
for longer securities, we will still, by the very passage of time, have
the maturities always shortened; that what we need to do, of course,
was to have a greater flexibility in this regard.
Insofar as savings are concerned, if we can rid the country of a
belief that we are going to have a continuous inflationary problem,
then I think the volume of savings will rise.
Representative C o f f i n . I agree that that is very important. But
I think that the way your statement came out, you downgraded the
use o f all of these tools and mechanisms we have been talking about
a little too much. I appreciate your candor in saying this.
Secretary A n d e r s o n . It was not intended to, and perhaps the
grammar could have been better.
The C h a ir m a n . Congressman Widnall ?
Representative W i d n a l l . Secretary Anderson, there are presently
pending in the Congress billions of dollars of new spending schemes.
Conceivably, if Congress were to spend $10 billion more than pres
ently budgeted, what effect would that have on prices, credit, and
interest rates, in your opinion, if there were a large excess of ex
penditures over budget receipts, and particularly so large that we
could only go borrow the money?
Secretary A n d e r s o n . The extent to which we borrow the money
would increase inflationary pressures. Some of the borrowings
would undoubtedly come out of the hands of true savers, some of it
out of the hands of banks, and some of it might very well be forced
into the hands of the central bank. To the extent that you have to
borrow from those types of institutions, you would build up infla
tionary pressures and increase costs.
Representative W i d n a l l . Y o u presently have a tightening money
market, which is indicated by your difficulty in floating Government
loans. Certainly additional spending would create additional pres
sures in bidding for services and in bidding for materials. Does that
not inevitably cause inflation ?
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Secretary A n d e r so n . It would cause increased price levels.
Representative W i d n a l l . Increased prices?
Secretary A n d e r s o n . Yes.
Representative W i d n a l l . Y o u said in your statement :
Appropriate current governmental policy to promote growth must be con
sistent with long-range objectives and not resort to quick expedients that en
danger sustainable development.
Do you have in mind particular matters when you say “ quick ex
pedients” ? Do you have any particular programs that you would
characterize as such?
Secretary A n d e r s o n . I am talking about such things as this. A
year ago, when we were wrestling more with the problem of recession
than inflation, there was a great deal of discussion in our country that
perhaps, in order to restore a high level of business activity, we had
to have very large tax reductions or very large expenditures, or some
of both. It is my own judgment that had we at that time improvidently gone too far in either direction, we would now have a greater
problem than we are currently confronting.
In any particular cycle in which we are, while there may be very
honest differences of judgment and differences of opinion, all of
which I respect, one in making up his own mind must say to himself,
what do I accomplish by this technique today, and what is the longrange effect or impact if the economy moves in accordance with the
way I believe that it will move ?
I am simply trying to point out here that we must judge each of the
fiscal or monetary instrumentalities of our Government, both with
reference to its immediate and its long-range impact.
Representative W i d n a l l . I notice, in attempting to analyze your
statement, Secretary Anderson, that there seems to be quite an admin
istration emphasis on research and development. In placing that
emphasis, is it not with the thought that through that you create the
job opportunities of the future, the employment of the future, rather
than just a holding operation trying to maintain the status quo?
Secretary A n d e r s o n . N o ; what all of us want in this country is
progress, and progress comes about to a large degree because of
technological advances, because of our capacity to do new and d if
ferent things and to utilize our resources more efficiently and more
profitably.
Representative W i d n a l l . Is not our growth materially affected by
the many Government programs which we now have enacted that are
just trying to maintain the status quo? I am thinking now about the
farm subsidy program, and some of the activities of regulatory agen
cies, and trade restrictions. Is that not so, that our national growth
is materially affected by those restrictions ?
Secretary A n d e r s o n . Without referring to any specifics, historically
people have a practice of developing a technique because of a particu
lar set o f circumstances. Then we are rather reluctant sometimes to
review circumstances as they change, to see whether or not the policies
which we adopted at a prior time in history are still valid.
It seems to me that progress is another wTay of saying that we must
adapt ourselves to change. Change means whatever is desirable in
order to bring about greater use of the human material resources of
the country, out of which true growth is made.
1164
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Representative W i d n a l l . With adaptability and flexibility, then,,
we can have more material growth than we have had in the past. W e
have had too many frictions encouraged to last too long.
Secretary A n d e r s o n . I think adaptability, flexibility, and willing
ness to make change, is a necessary ingredient.
Representative W i d n a l l . I s the great rate of growth in the country
materially affected by the emphasis on leisure, by the encouragement o f
more and more leisure? That is a tough question, I know. It pro
vides recreational employment, I suppose. Is our national growth
affected by some emphasis on leisure as against Russia’s national
growth ?
Secretary A n d e r s o n . Let me say that if one tries to relate leisure
time in this country to the philosophy of the Russians, if one should
adopt a belief that the way in which you get a maximum growth in
this country is to have a regulation of everybody’s activities in every
thing that they do, then we are surrendering the very thing we are try
ing to preserve, and that is the freedom of our country.
There may be all shades of opinion as to whether or not people work
long enough hours and that sort of thing, but when you finally get
down to it, it is purely a question of whether or not we utilize to the
best and most effective and efficient manner possible capacity of how
many beings for making things out of the material resources of the
Nation.
Leisure is a part of the human experience that we would not want
to give up. On the other hand, the discipline of a free people requires
that we, within ourselves and within our society, maintain some kind
o f reasonable balance between our periods of work and the times that
we rest.
Representative W i d n a l l . I just have one more question.
Our growth, too, I take it, is materially affected by the willingness
o f the private individual to save, and also by his willingness to pay
increased taxes to meet the demands of the day. Are those not two
things that should be emphasized ?
Secretary A n d e r s o n . Certainly we have to have capital formation
in real terms, and that comes out of savings. The extent to which we
have to have tax money depends upon the needs of our country. I f
we could find a period in which we would have no fears of any kind,
certainly it would be more desirable that we devote a larger portion
of our national income to something other than the implements of
defense, because the best use you can ever make of them is not to use
them at all.
But on the other hand, we have to live with the fact that we have a
period of force, in which there is probably going to be a continuation
o f tension. To that extent I would reiterate the philosophy I ex
pressed to Senator Javits. It seems to me that then a country must
say to itself, are we doing all we have to do, and as much that is
desirable as we can afford to do at any given time ?
Representative W i d n a l l . Thank you, Mr. Secretary.
Representative R eu ss. Mr. Secretary, I would like to button up our
colloquy on the sense-of-Congress amendment.
I gather from your testimony that you favor what you call properly
“ flexibility,” wThereby the Federal Reserve should be encouraged to
buy bills, certificates, notes, or bonds, as it deems wise, unfettered..
That goes to the words “ of varying maturity.”
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Your objection seems to boil down to the idea that there might be
a depression, and that the Federal Reserve, if directed to increase the
money supply by buying U.S. securities, might not be able to increase
it fast enough.
Just sitting here, I have jotted down a proposed addition to that
sense-of-Congress resolution as follow s:
Provided, That if in a depression, the money supply cannot be expanded suffi
ciently rapidly by purchase of U.S. securities, the Federal Reserve should not
consider itself confined to this method.
I would be very hopeful, Mr. Secretary, that you would agree that
this additional language answers the one objection that you have been
able to state. What I ask is that you think it over during the week
end, and let me know. I f it does meet your objection, I will say right
now I will be delighted to go to Mr. Mills, the chairman of the Ways
and Means Committee, to Speaker Rayburn, and whoever, and give
my view that that language in no way weakens the “ sense” resolution,
and that it does seem to meet your objection.
I hope you will think it over.
Secretary A n d e r s o n . Congressman, I will think it over, but may
I say frankly I do not want to leave the impression that this is the sole
problem which confronts me. It seems to me, one, that we are dealing
here with the problem o f debt management, that if the Congress is
going to change the way in which the Federal Reserve System operates,
it ought to be done by resorting to changes in the Federal Reserve
Act, and that any attempt to change their modus operandi in a debt
management bill raises this veiled worry about why do it in a debt
management context.
Representative R eu ss. I f you could set forth the objection you gave
this morning, plus the objection which you give now, that it should
be in Federal Reserve legislation, and make it part of the record as
soon as possible, it would be very helpful to all of us.
(The statement referred to is as follow s:)
In judging the appropriateness of a “sense of Congress” action relating to
the techniques of monetary policy, the single most important consideration in
volves the impact of such action on public confidence. Informed observers both
at home and abroad are deeply concerned as to whether the action would be
construed as working in the direction of restricting the ability of the Federal
Reserve System to promote our vital economic objectives by pursuing flexible and
appropriate monetary policies.
It is for this reason that I told the House Ways and Means Committee, when
the Metcalf amendment was initially considered, that one of the most important
factors to keep in mind was the interpretation of the meaning of the amend
ment on the part of responsible participants in financial markets, including in
vestors in Government securities and all other fixed dollar obligations, foreign
central banks, and everyone else who has an important stake in the soundness
of the American economy.
According to the information we have received, the reactions in these quarters
have been predominantly unfavorable. Concern has been expressed that flexi
bility in the administration of monetary policy would be impaired and that this,
in turn, would raise doubts concerning the determination of the U.S. Govern
ment to pursue sound financial policies in the future.
The additional wording suggested by Congressman Reuss in these hearings
would be aimed at making it clear that the System would be free to reduce
member bank reserve requirements if it deemed necessary to combat recessionary
tendencies in the economy. It is my judgment that the addition of such language
would not be sufficient to allay the fears already expressed concerning the im
plications of the amendment.
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Part of the concern over the implications of the Metcalf amendment stems, I
think, from uncertainty as to whether the amendment is permissive or manda
tory. In view of the fact that the Federal Reserve System is directly responsible
to Congress, it is not surprising that a number of observers view the amend
ment, if not as a directive, as a strong congressional presumption relating to
the manner in which the instruments of monetary policy are to be utilized.
There is, of course, no doubt about the authority of the Congress to issue
specific directives to the Federal Reserve System. The important question, how
ever, relates to the nature of such directives: whether they should pertain to
the actual use of credit control instruments, or whether they should be broader
in nature. In this connection, I would respectfully call the committee’s atten
tion to the conclusions of your Subcommittee on Monetary, Credit, and Fiscal
Policies in 1950:
“It appears to us impossible to prescribe by legislation highly specific rules
to guide the determination of monetary and debt management policies, for it is
impossible to foresee all situations that may arise in the future. The wisest
course for Congress to follow in this case is to lay down general objectives, to
indicate the general order of importance to be attached to these various objec
tives, and to leave more specific decisions and actions to the judgment of the
monetary and debt management officials * * *” (pp. 27 and 28 of subcommittee
report).
This conclusion, which was reached after a thorough and comprehensive
study of monetary, credit, and fiscal policies, seems as valid today as in 1950.
Moreover, the legislation pending before the House Ways and Means Com
mittee relates primarily to debt management. If, within the context of this type
of legislation, there are amendments that would normally pertain to the Federal
Reserve Act, additional doubts may be generated as to the reasons underlying
the amendments. Such doubts can contribute to instability in finanical markets.
In view of the fact that concern over the Metcalf amendment stems not just
from the language, but from several more basic considerations, I do not believe
that the additional language suggested by Congressman Reuss would in itself
be sufficient to allay the fears that have been expressed concerning the impli
cations of the amendment.
If the Metcalf amendment, or the suggested changes in language in it, has no
meaning, there is no reason for it. If it has meaning, we must be concerned
about it.
Secretary A n d e r s o n . May I say again that I feel a primary obliga
tion to make these statements to the House Ways and Means Commit
tee, but to the extent that I can do so, I would be glad to elaborate
upon it.
Representative R e u ss. Thank you, Mr. Chairman.
The C h a ir m a n . Mr. Reuss, I do not want to project myself unduly
into this discussion, but perhaps we could remove some of the mental
doubts and uncertainties o f the Secretary by having this resolution
that was passed out, not merely a new resolution, but an amendment to
the Federal Reserve Act, and therefore this would meet your technical
objection that it should be considered as a part of the Federal Reserve
Act.
I understand that Congressman Curtis wants to make some com
ment on Congressman Reuss’ statement.
Representative C u r t is . Yes, and I want to ask permission to make
it while you are still here. It is a very limited statement.
In regard to this so-called Reuss amendment, the attitude of myself
and many of us is that if we can cut the thing down to where it says
nothing, then we will go along with it. But if it means anything, we
are opposed to it. The question that worries us now is that it might be
interpreted to say something.
Representative R eu ss. It surely does mean something.
Representative C u r t is . Our opinion is that probably it does not say
anything, and if that is so, we are not too concerned. But essentially,
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I would say that it surprises me that the gentleman from Wisconsin*
being a member o f the Banking and Currency Committee, would want
to give to the Ways and Means Committee this jurisdiction. Frankly,
we do not want it. We would prefer to deal with that debt manage
ment as best we can and leave to Banking and Currency the question
o f amending the Federal Reserve Act.
Representative R e u ss. I was just trying to be helpful.
Representative P a t m a n . Mr. Chairman, may I comment briefly on
what Mr. Curtis said ?
I can see why Mr. Martin does not want this language. A number
of times before this committee, one time in particular in 1954, Mr.
Wolcott was chairman of the Joint Economic Committee, and some
thing was said about the relationship between Congress and the Fed
eral Reserve. Mr. Martin said that we were the servants of Congress,
and Mr. Wolcott said, “ Well, let us consider, instead of the master
and servant relationship, it is a principal and agent.” And we dis
cussed it from that standpoint.
Therefore, bearing in mind what he actually believes in relationship
here to the sense o f Congress, the words “ sense of Congress” would
obligate him just as much as if we were to enact it into law. I think
that is the reason he does not want this sense-of-Congress resolution.
Senator B u sii . D o you bear with the sense-of-Congress resolution
rather than enacting legislation ?
Representative P a tm a n . I will take it any way you can get it.
And right now I think the best answer to the Ways and Means is that
I am perfectly willing for our committee to give them the jurisdiction.
Representative C u r t is . The whole jurisdiction?
Representative P a t m a n . O f the “ sense” resolution.
Representative C u r t is . H o w about our taking the Federal Reserve
Act into our jurisdiction ?
Representative P a t m a n . I f you will do more about it than we are
doing.
The C h a ir m a n . Mr. Secretary, the questions which have come from
the Democratic side of this table I think clearly indicate that what
we want is more competition in the Government bond market instead
o f less, as we have sometimes been charged with favoring. The ques
tioning o f the Congressman from Texas, and Congressman Reuss and
Congressman Coffin was all directed at having a more competitive
bond market. This, I think, needs to be emphasized.
Now, it is true, is it not, that before any appreciable bond issue is
floated by the Treasury, the Treasury recalls in advisory committees
from the American Banking Association and the Investment Bankers
Association, and upon occasion from the mutual savings banks and
from insurance companies ?
Secretary A n d e r s o n . That is correct, and on occasion from the sav
ings and loan institutions.
The C h a ir m a n . Yes.
And some of the mechanism of these operations is described in the
hearings o f the subcommittee of the House Committee on Govern
ment Operations, held in 1956. I have gone over those hearings very,
very carefully, and I think the following statement is correct. I am
going to take the record of the American Bankers Association as the
type, because it is more carefully kept and more fully recorded.
1168
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The committee selected
the president of the American Bankers
Association meets at the Treasury. Problems of the Treasury are
outlined to it. The advisory committee then meets by itself and comes
in with a recommendation. The Secretary of the Treasury, or the
Under Secretary acting for him, then appears, does not make a definite
commitment, but states that he will take the opinions under considera
tion. Advice is generally solicited from the Investment Bankers A s
sociation at the same time as from the American Bankers Associa
tion, and sometimes from these other groups.
Is this not a substantially accurate record as to what happens?
Secretary A n d e r s o n . Substantially, yes, sir.
The C h a ir m a n . On pages 12 to 16 of the House hearings to which
I have referred, the American Bankers Association furnished for the
record the accounts for each date of hearings, consisting first of the
problem of financing which they faced, the committee recommenda
tions, and then the Treasury decision.
I have tabulated those recommendations and decisions. I find that
in the year 1952, the Treasury accepted the exact advise of the Amer
ican Bankers Association on 1 1 occasions, that in one instance they
accepted the advice with only minor changes. In seven cases they re
jected the advice. Or, if I can divide, this means that the advice was
rejected in 37 percent of the cases.
In the 3 years from March 20,1953, to February 29,1956, the Treas
ury accepted the advice of the American Bankers Association in 24
cases, in 9 cases accepted the advice with only very minor modifica
tion, in 3 cases accepted the advie with major changes, and in 5 cases
rejected the advice.
With each meeting, I think I should say, there were several recom
mendations, and we are taking the total recommendations.
Again, if I can divide, since 6 recommendations of 45 were rejected,
this comes to 12 percent instead of the 37 percent rejected in the year
!952.
In view o f the fact that the ultimate decision of the Treasury in
such an overwhelming proportion of the cases could coincide with the
recommendations o f the American Bankers Association, can it be
said that the rates and terms which you fix are truly competitive, or
would not a better term be that they are collectively bargained rates or
negotiated rates? And if I may make this illustration more vivid,
suppose that we have a country X — and I am not refering to any one
country, so I hope there will be no international or internal implica
tions in what I say. Suppose you have a country X which has a labor
government, and that this labor government employs a third of the
people; that the secretary of labor fixes the basic wage rate periodi
cally, and before he fixes a wage rate or decides what the competi
tive wage rate is, he calls upon the equivalent of Mr. Meany or Mr.
Reuther or Mr. George Harrison to send a committee up and advise
him; and they advise him that the wage rate should be increased,
let us say, by 9 cents an hour; and upon due consideration, after tak
ing this advice, in from 63 to 88 percent of the cases, the secretary o f
labor decides that wages should be increased by 9 cents an hour.
Under those conditions, could it be said that the wage rate fixed
by the government was a competitive rate, or would it not be a nego
tiated rate, or a collectively bargained rate ?
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1169
I think every financial reporter in the United States would spew
out the idea that this was a competitive rate of wages.
While I address this question not to them but to you, I would like
to ask you how you can say that it is a competively determined rate
when this was arrived at after taking into account the opinions o f the
American Bankers Association, the Investment Bankers Association
and, so far as our records show, coming to an agreement in approxi
mately 80 percent of the cases.
May I say I am going to ask the staff to request from the American
Bankers Association, because I understand the Treasury does not keep
a record o f these things, some material from the conferences from
the 29th o f February until the present date. (See pp. 1225-1230.)
That is a rather heavy broadside that I shot at you, but it is crucial,
and I think it goes to the heart of the subject. It is dictated by the
desire o f those of us on this side of the table, at least, to have a com
petitive money market.
Senator B u s h . Senator, would you yield right there ?
The C h a ir m a n . I have no imputations as to what anyone else be
lieves. I am merely summarizing the opinions o f those o f us on this
side.
Senator B u s h . I just wondered whether the Senator, as long as he
has all those dates o f meetings, had the results of how far the issues
were oversubscribed or undersubscribed in these particular things?
That might also indicate whether a correct decision has been made.
The C h a ir m a n . I think they are nearly always oversubscribed.
Senator Bush, I do not have the huge resources which either the
Treasury or the Republican National Committee has. W e sacrificed
some hours o f sleep to get these done.
Senator B u s h . H o w about the Democratic National Committee?
The C h a ir m a n . W e are very much undermanned.
Now, Mr. Secretary, this is a potent question I have addressed to
you, concerning whether this is a negotiated or collectively bargained
rate, rather than the competitive rate it was described to be by Mr.
Humphrey in his egg analogy. I do not accuse him of being an
egghead, however.
Secretary A n d e r s o n . The practices to which the Senator referred
were inaugurated, according to my information, by Secretary Morgenthau a good many years ago.
The C h a ir m a n . Yes, in wartime; and in wartime this is necessary.
Senator B u s h . There is a cold war now.
Secretary A n d e r s o n . These committees are selected without any
consultation on the part of the Treasury by the respective organiza
tions.
The C h a ir m a n . Let me say to you that if Mr. Meany ever sent a
committee out, his secretary of labor would not dictate who comprised
his committee. Mr. Meany would select the committee.
Secretary A n d e r s o n . Each of these committees is given, as the Sen
ator stated, various information with reference to a particular financ
ing problem which may be imminent, and sometimes information
concerning problems which we face a month, or so ahead. This is
not any information which is not otherwise available to the market.
They are not given any special information. It is merely a summa
tion o f factors.
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Prior to any meeting of this group, the financial analysts and
writers in the country are fully aware of the kinds of problems which
the Treasury faces, and they make their own analysis all across the
country. When one is given a stated problem in financing, in most
instances there is not a great deal of room for various differences of
judgment. There is a common body of knowledge, particularly
among the people who constantly deal in financial matters, which
would lead to relatively close matters of judgment.
In the case of the Treasury, the staff of the Treasuiy works in a
very concentrated way on these problems before the meetings. We
also get any ideas the Federal Reserve people have. We have many
discussions. Sometimes the conclusions that we arrive at before any
o f the meetings are held coincide with the kind of judgments that we
receive. Sometimes they do not. We do not advise them of that.
The C h a ir m a n . Mr. Secretary, we do not have the record since
February 29, 1956, but the record prior to that time indicated that
after March 1953, in the overwhelming proportion of the cases, the
final decision did agree with the recommendation.
Secretary A n d e r s o n . That doesn’t mean we accepted their advice.
It is not a question of negotiation. It is merely a reflection of the
fact that with a given market problem, there was not too much differ
ence in judgment about it.
Frankly, the thing we are most concerned about is not the exact
rates, although at times we may arrive at the same conclusions, but
rather getting judgments as to the existence of markets for various
types and kinds of securities—how much can be sold in what maturity
area, and so forth.
We therefore try to take into consideration not just the kind of
counsel which would come from those committees, but the kind o f
counsel which we would gather from a great many other market
analysts, from all of the data which we have at hand, and from a con
tinuous group of conversations that go on day after day with people
who express some interest in various kinds of markets that exist in
the country.
The final judgment in these things, although it may at times coin
cide with some judgments which we have given, nevertheless is finally
determined only by the Treasury.
I f we did not get an oversubscription to these securities, I think
generally it would be regarded in the market as a failure.
The C h a ir m a n . I brought in this question o f oversubscription
merely to meet the objection of the Senator from Connecticut.
Secretary A n d e r s o n . Yes.
Senator B u s h . Y o u did not bring in the information I asked for,
though.
The C h a ir m a n . Well, that could be supplied.
By the way, can the Treasury supply for the Senator from Con
necticut and the Senator from Illinois the record as to the degree to
which these issues have or have not been oversubscribed ?
Secretary A n d e r s o n . Oh, yes.
Senator B u s h . And the extent o f it.
The C h a ir m a n . I think the record will show that they have almost
invariably been oversubscribed in very large amounts.
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1171
Senator B u s h . That would be, as the Senator said, the normal
thing to expect; else it would be greeted with failure.
(The material requested is as follow s:)
The attached table 4 from the June 1959 Treasury bulletin presents data on
total subscriptions and amounts issued on all Treasury offerings of marketable
securities (other than regular weekly Treasury bills) from 1953 to date. Table
4 indicates that the amount of cash subscriptions for new Treasury certificates,
notes, and bonds has varied from 1 y2 times the amount issued, to slightly more
than seven times the amount issued, with an average of three times. All sub
scriptions received in an exchange offering are, of course, allotted in full.
The extent oif oversubscription to a new Treasury issue does not necessarily
measure the market’s appraisal of the attractiveness of the terms of that issue.
The extent of oversubscription merely indicates the sum of all the guesses by
buyers as to what total subscriptions might be.
Oversubscriptions to Treasury cash issues are expected by those who buy
and have been a common occurrence for many years. In the 8 years 1933-40,
for example, subscriptions ran from 1% times allotments to 38 times, with an
average for the entire period o<f about 7 times. In each cash financing the
Treasury always announces in advance the approximate size of each new issue
which it is offering. This is a decision which is arrived at only after a careful
nationwide survey of approximate investor demand for various alternative
types of offering. The Treasury ahvays announces the approximate size of the
offering (subject to customary overallotment of up to 10 percent or so) so that
investors will make their decisions in full knowledge of the size of the total
supply being placed on the market.
If a potential buyer wants $1 million of a new issue, for example, and the
general discussion in the market indicates to him that he would guess there
might be four times as many subscriptions as actual allotments (that probably
only about 25 percent of total subscriptions will be allotted) he may then
enter his subscription for $4 million. He would prefer to buy Irs $1 million
of new bonds directly from the Treasury so he is willing to bid for more than
a million dollars to make sure. He knows that he can always make up any
deficiency by buying more of the bonds in the open market later on, but if the
issue is attractive he reasons that he can probably do so only by paying a
premium which, of course, would lessen the attractiveness of the security to
him. He knows also that if it turns out he subscribes to too many bonds, and
that is true of other investors, he may have to sell the excess at a loss, so he
wants to base his subscription on the best possible guess as to what the actual
results of the offering will be. He would be the most surprised man in the
world if the Treasury decided to accept his subscription in full.
The Treasury prices its new issues so that they are slightly more attractive
to an investor than the return he would get if he bought an outstanding issue
in the market at the same time. The margin between an interest yield that
attracts buyers and results in a heavy oversubscription on a given day as
against a yield that might cause the issue to fail, in terms of being fully sub
scribed, is very narrow. It is the market price behavior, therefore, of a new
Treasury issue once it is available for trading winch is the most important gage
of whether it is attractive to investors or not, once it has been determined that
subscriptions have been received at least equal to the amount being offered.
Market price behavior can, in turn, be measured in two ways— with reference
to its own issue price, and with reference to the market trend of outstanding
issues of comparable maturity.
There are many cases in recent years where heavily oversubscribed issues
have fallen below par when first quoted in the market. One example was
the Treasury’s cash offering in September 1957 of approximately $y2 billion to
the public of 12-year 4 percent bonds. The amount of subscriptions tendered
for these bonds was $4 y2 billion, yet the issue was quoted at only a small
premium immediately after the subscription books were closed and fell below
par within a few days. In the market environment of the time any sustained
demand for more than $y2 billion of these securities would not have depressed
the price in this way. Actually, in this case, enough purchasers expected an
even lower allotment percentage and received more bonds than they expected to.
The resulting sales in the market pushed the price down. Small subscribers,
of course, are protected by the Treasury so that they always get full allotment
(in this particular case subscriptions up to $50,000 were allotted in full).
1172
E M P L O Y M E N T , G R O W T H , AND PRIC E LEV E LS
The size of oversubscription in the case of a bill auction— as compared with
certificates, notes, and bonds where the Treasury fixes the price— can also be
deceptive if a large number of bids are submitted at very low prices on the
chance that they might possibly be accepted, in which case a quick profit could
be realized by dumping them in the secondary market.
The extent of oversubscription on Treasury bill issues has also varied widely.
Data on tax anticipation bills and other bills outside the regular weekly series
are also contained in the attached table 4. They reveal a variation in ratio
of subscriptions (tenders) to accepted bids ranging from bare coverage (1.1
times) to about 3% times.
Data on weekly bill auctions are shown for recent months in the attached
table 2, also taken from the June 1959 Treasury Bulletin. The ratio of sub
scriptions to accepted bids in the shorter bills shown in the table varied from
a little less than 1 y2 times to about 2% times.
P u b lic D e b t O p e r a tio n s
T a b l e 4 . — Offerings of public marketable securities other than regular weekly Treasury bills
[Dollars in millions]
Feb.
Date of issue
Description of security1
Am ount of sub
scriptions tendered
Ex
change
2,1953
(5)
( 10)
2,788
4, 724
2,997
2,788
4,724
2,997
121
121
12,543
2,239
"8 ,1 7 5
1,748
7,007
11,177
8,175
1,748
7,007
11,177
2,717
2,987
100
(0 100
100
(»))
100
100
100
100
1,501
1,001
119
9,750
119
2,897
3,886
i,250
'% 897'
3,886
3,734
3, 558
3,806
l,'l90'
100
(1?)
2, 205
100
( 13)
"3,"558'
100
( 14)
'4,’ l55'
100
4,919
5,359
6,755
8,472
3,792
1,924
4,919
5, 359
6,755
8,472
3, 792
1,924
3,210
198
198
100
100
( 13)
100
1173
(6)
See footnotes at end of table.
800
5,902
100
\
LEVELS
.........
1,676
8,687
$1,188
$8,114
620
383
* 418
4,858
PRICE
........
$5, 250
$8,114
620
383
6 418
4,858
In ex
change 4
AND
(6)
1 year________________
5 years 10 m o n th s ...
5 years_______ _______
30 years 1lA m onths.
1 year...................... ..
107 days_____________
8 months—. .................
1 year_________ ______
____ do._.........................
3 years 6 months____
5 years______________
7 years 10 months
1 year K m onth.........
5 years K m onth____
1 year............................
7 years 9 months____
94 days______________
52 days_____ ______
5 years_________ _____
4 years 9 m onths____
____ d o ...____________
1 year.......................... ..
7H months..................
1 year_______________
6 years 3 months____
2 years 7K m on th s..
5 years______________
8 months_____ _____ _
1 year............................
8 years 8 months____
1 year, 1 m onth.........
2 years, 6 months___
40 years.........................
months..................
5 years...........................
For
cash 3
Allot
ment
ratio
GROWTH,
Feb. 15,1953
2K-percent certificate, Feb. 15, 1954 A ...................................................
.........do_______
2^-percent bond, Dec. 15,1958 ...................... ........................... .............
Apr. 1,1953
lH-percent note, Apr. 1,1958 E A ................... ........................................
M a y 1,1953 3M-percent bond, June 15,1978 8 3 ....................... ............. .....................
June 1,1953
2%-percent certificate, June 1, 1954 B _____ __________ ____________
June 3,1953
2.383-percent bill, Sept. 18,1953, tax anticipation 8 (at auction)..
July 15,1953
2H-percent certificate, M ar. 22, 1954 C, tax anticipation 0..............
Aug. 15,1953
2^-percent certificate, Aug. 15,1954 D .............................................. ..
Sept. 15,1953
2%-percent certificate, Sept. 15, 1954 E ............ ...................... .............
------- do_______
2%-percent note, M ar. 15,1957 A .......... ......................................... .........
Oct.
1,1953
1^-percent note, Oct. 1,1958 E O ........ ....................................... ...........
N ov. 9,1953
Oct. 28,1953
2%-percent bond, Sept. 15,1961________ ________ _________ ________
Dec. 1,1953
N ov. 18,1953
1%-percent note, Dec. 15,1954 B ________ ________ _____ ___________
Feb. 15,1953
2H-percent bond, Dec. 15, 1958, reopening................................. .........
Feb. 1,1954
Feb. 15,1954
1%-percent certificate, Feb. 15, 1955 A . ...................... ............. .............
.........do_______
2^-pereent bond, N ov. 15,1961.. _____ ______ _____________________
M ar. 16,1954 M ar. 22, 1954 0.956-percent bill, June 24,1954, tax anticipation 8 (at auction)...
Apr. 21,1954
Apr. 27,1954
0.726-percent bill, June 18,1954, tax anticipation 8 (at auction)..
Apr. 1,1954
lK-percent note, Apr. 1,1959 E A ................................................ ...........
™
M a y 4,1954
M a y 17,1954
lJ i-percent note, Feb. 15,1959 A ........................................ ....................
M a y 5,1954 ------- d o ............ ____ do_________ __________ _______________________ _______ _________ _
------- d o _______ 1^-percent certificate, M ay 17, 1955 B __________ _____ ___________
July 21,1954
Aug. 2,1954
1-percent certificate, M ar. 22, 1955 C, tax anticipation 8.................
Aug. 3,1954
Aug. 15,1954
1^8-percent certificate, Aug. 15, 1955 D _ _ ________________________
_____d o_______ 2^-percent bond, N ov. 15, I960............................................................. .
Sept. 23,1954
Oct.
4,1954
1^-percent note, M ay 15, 1957 B .............................. ........... ...................
Oct.
1,1954
1^-percent note, Oct. 1, 1959 E O _____________________ ______ _____
N ov. 22,1954
Aug. 15,1954
lH'Percent certificate, Aug. 15,1955 D , reopening_______________
Dec. 15,1954
1^-percent certificate, Dec. 15,1955 E _____________________ _____ _
do2^-percent bond, Aug. 15, 1963 .............. ................... ............................
Feb. 1,1955 .........do.............. lH-percent note, Mar. 15,1956 A ........................................... .................
.........do.............. 2-percent note, Aug. 15,1957 C .......................................... ..................... .
_____d o.............. 3-percent bond, Feb. 15,1995................ ................... ......... .......................
M ar. 22,1955
Apr. 1,1955
1%-percent certificate, June 22,1955 F, tax anticipation 9..............
.........do.............. lH*percent note, Apr. 1, 1960 E A ............................................................
*
(fi)
Apr. 13,1953
M a y 20,1953
M a y 29,1953
July 6,1953
Aug. 5,1953
Sept. 2,1953
Amount issued
Period to final maturity
(years, months, days)2
EMPLOYMENT,
Date sub
scription
books opened
or bill
tenders
received
1174
T a b le
Amount of sub
scriptions tendered
Date of issue
Allot
ment
ratio
For
cash 3
2, 532
2,202
821
3,174
10,620
1,720
( 15)
3,174
( 16)
07)
1,486
6,841
1,486
6, 841
100
( 18)
)
2, 970
8, 778
'4’ l30'
In ex
change 4
278
9,083
2, 283
278
9,083
2,-283
1,501
7, 219
2,109
144
12,056
332
332
100
1,312
7,271
100
8,414
1,464
100
100
( 19)
1,603
1,750
4, 761
4, 637
1,312
7,271
1,006
2 0 1 , 601
3, 786
2, 414
8,414
1,464
2, 302
7,489
5, 868
20
1, 750
2,437
942
100
9, 871
10, 487
2,509
}
551
2,351
]
647
551
2, 351
647
100
100
1,501
3, 002
100
100
100
9, 871
10, 487 |
2,509
(«)
100
100
23 100
LEVELS
7, 219
2,109
144
12,056
10, 613
3, 689
4, 547
100
100
100
PRICE
1 year, 3 m onth s.. .
8 months___________
39 years, 7 m onths..
10/^2 months________
1 year______________
8 months___________
5 years_____________
1 year______________
2 years, 6 m onth s...
99 days_____________
11M> months_______
2 years, 3 m on th s...
5 years_____________
1 year, M month _ . .
7 months___________
5 years_____________
91 days_____________
____ do______________
6H months_________
10 months__________
95 days_____________
159 days____________
1 year______________
3 years 3 m onths__
129 days____________
103^ months_______
3 years 1X
A months..
5 years_____________
l\]4 m onths_______
4 years 9M months.
119 days____________
264 days____________
4 months___________
1 year______________
4 years
.........
Ex
change
AND
Cash 3
2-percent note, Aug. 15, 1956 B _____________________________________
1/8-percent certificate, M ar. 22, 1956 A , tax anticipation 9------------3-percent bond, Feb. 15, 1995, reopening----------------------------------------2-percent certificate, June 22, 1956 B, tax anticipation 9----------------2-percent note, Aug. 15, 1956 B, reopening-------------------------------------23-i-percent certificate, June 22, 1956 C, tax anticipation 9-------------lM-percent note, Oct. 1, 1960 E O ---------------------------------- ----------------296-percent certificate, Dec. 1, 1956 D ----------------------------------- --------2 -percent note, June 15, 1958 A __________________________________
2.46-pcrcent bill, M ar. 23, 1956, tax anticipation 8 (at auction). . . .
294-percent certificate, Feb. 15, 1957 A _____________________________
2 ^-percent note, June 15, 1958 A , reopening----------------------------------lM-percent note, Apr. 1, 1961 E A ---------------------------------------------------2%-pereent note, Aug. 1, 1957 D ---------------------------------------------------- .
2%-percent certificate, M ar. 22, 1957 B, tax anticipation 9------------lH-percent note, Oct. 1, 1961 E O ---------------------------------------------------2.627-percent bill, Jan. 16, 1957, special (at auction)----------------------2.617-percent bill, Feb. 15, 1957, special (at auction)---------------------3K-percent certificate, June 24, 1957 C, tax anticipation 9-------------3M-percent certificate, Oct. 1, 1957 D ---------------------------------------------2.58-percent bill, Mar. 22, 1957, tax anticipation 8 (at auction)-----3.305 percent bill, June 24, 1957, tax anticipation 8 (at au ction )....
3% percent certificate, February 14, 1958 A -----------------------------------3V£-percent note, M ay 15, 1960 A___________________________________
3.231-percent bill, June 24, 1957, tax anticipation 8 (at auction) —
3^8-percent certificate, Feb. 14, 1958 A, reopening----------- -------------3>^-percent note, M a y 15, 1960 A , reopening--------------------------------lK-percent note, Apr. 1, 1962 E A ---------------------------------------------------3^-percent certificate, Apr. 15, 1958 B -------------------------------------------3*H}-percent note, Feb. 15, 1962 A __________________________________
2.825-percent bill, Sept. 23, 1957, tax anticipation 8 (at au ction )...
3.485-percent bill, M ar. 24, 1958, tax anticipation 8 (at auction).
3fMrpercent certificate, Dec. 1, 1957 E -------------- ------------------------------4-percent certificate, Aug. 1, 1958 C _ ----------------------------------------------4-percent note, Aug. 1, 1961 A
.................. .........................
Am ount issued
Period to final maturity
(years, months, days)2
GROWTH,
M a y 17,1955
July 18,1955
Feb. 15,1955
Aug. 1,1955
M ay 17,1955
Oct. 11,1955
Oct.
3,1955
1,1955
Oct.
(5)
Dec. 1,1955
N ov. 28,1955
. . . .d o _______
Dec. 15,1955
Dec. 8,1955
M ar. 5,1956
M ar. 5,1956
Dec. 1,1955
Apr. 1,1956
(5)
July 16,1956
July 16.1956
Aug. 15,1956
Aug. 6,1956
1,1956
Oct.
(5)
Oct. 10,1956
Oct. 17,1956
N ov. 16,1956
N ov. 13.1956
Dec. 1,1956
Nov. 19,1956
_ . . . d o _______
Dec. 17,1956
Dec. 12,1956
Jan. 16,1957
Jan. 11,1957
Fob. 4,1957
Feb. 15.1957
. . . .d o _______
Feb. 7, 1957 _____do_______
M ar. 18,1957 ____ do_______
____ do_______
Apr. 1,1957
(5)
M ay 1,1957
M a y 6,1957
. . . . . d o _______
M ay 27,1957
M ay 22.1957
July 3,1957
June 26,1957
Aug. 1,1957
July 22,1957
____ d o ............
.do.,
M a y 3,1955
July 8,1955
July 11,1955
July 20,1955
Description of security 1
EMPLOYMENT,
Date sub
scription
books opened
or bill
tenders
received
4.— Offerings of public marketable securities other than regular weekly Treasury bills— Continued
Aug. 14,1957
Sept. 16,1957
(5)
N ov. 20,1957
N ov. 21,1957
Feb. 3,1958
July 21,1958
July 29,1958
(5)
Sept. 29,1958
Jan.
12,1959
Feb.
2,1959
See footnotes at end of table.
590
7,786
3, 817
(25)
(26)
590
1,143
654
9, 833
9, 770
3, 854
1,727
6, 715
9,833
9, 770
3,854
1,727
1, 484
533
15, 741
2, 570
533
3,971
1,135
1, 817
7,388
13, 500
5, 962
1,817
7,388
13,500
3, 567
506
506
(27)
(28)
)
)
5, 805
)
1
100
)
)
(30)
( 31)
100
( 32)
)
2, 997
7, 711
4,078
5, 508
35 1, 800
7, 711
4, 078
2, 738
35 884
11,363
1,435
11, 363
1,435
1,502
100
100
(29)
1,184
2,735
2, 686
1100
( 34)
( 36)
100
100
PRICE
LEVELS
1175
1, 751
933
2,000
657
AND
Feb. 11,1959
N ov. 20,1958
Dec. 1,1958
_____do_______
Jan. 21,1959
Jan. 23,1959
Feb. 15,1959
_____do
____
Feb. 16,1959
3,178
3,067
6,121
4, 648
GROWTH,
N ov. 14,1958
N ov. 19,1958
4.173-percent bill, Apr. 1,1958 special (at auction)..........................
237 days.........................
4-percent certificate, Aug. 1, 1958 C, reopening_______ _____________ 10 months................ ..
4-percent note, Aug. 15, 1962 B 24_____ ___________ _______ ____ _____ 4 years 11 months____
4-percent bond, Oct. 1, 1969_____________ ______ _____ ________ ______ 12 years________ ______
l^-percent note, Oct. 1, 1962 E O _____ ________ __________ _________ 5 years_______________
3M-percent note, N ov. 15, 1962 C _____ _______ ________ ____________
4 years 11H m on th s..
3%-percent bond, N ov. 15, 1974........... ....................................................... 16 years \\lA months.
3%-percent certificate, Dec. 1, 1958 D ................... ............... ............... ..
1 year________________
2K-percent certificate, Feb. 14, 1959 A ..................................................... — _do......................... ..
3-percent bond, Feb. 15, 1964_________________ _____________________ 6 years_______ _____ _
3K-percent bond, Feb. 15, 1990________ ______ ________ ____________
32 years______________
3-percent bond, Aug. 15, 1966__________ ______ _______ _______ ______ 8 years hY2 m o n th s ...
lH-percent note, Apr. 1, 1963 E A ......... ............. ............................. ......... 5 years_______________
2^8-percent note, Feb. 15, 1963 A __________________________________ 4 years 10 months____
33<£-percent bond. M ay 15, 1985, issued at lOOH___________________
26 years 11 m o n t h s ...
1^-percent certificate, M ay 15, 1959 B ____________________________
11 m o n th s___________
2%-percent bond, Feb. 15, 1965 ______________ _____ _____ ____ _____ 6 years 8 months_____
1^-percent certificate, Aug. 1, 1959 C _____________________ ________ 1 year________________
1^-percent certificate, Mar. 24, 1959 D , tax anticipation 9_ _ .......... 8 months_____________
134-percent note, Oct. 1, 1963 EO ____ ______ __________ __________ 5 years............................
3^-percent note, N ov. 15, 1959 B ________ _____ _______ ____________
1 year 1 m onth.............
324-percent bill, M ay 15, 1959, issued at 98.023 (special at fixed 219 days____ _________
price).
2.999-percent bill, June 22, 1959, tax anticipation 8 (at auction)___ 214 days____________
3%-percent certificate, N ov. 15, 1959 E , issued at 99.95....... ............. 1 1 months_______
3^8-pereent note, M ay 15, 1961 B, issued at 9 9 ^ __________________ 2 years 5Vi months.
334-percent note, M ay 15, 1960 B, issued at 99% __________________ 1 year 4 m onth s.. . .
4-percent bond, Feb. 15, 1980, issued at 99.00 _____________________ 21 years 1 m onth. _.
3%-percent certificate, Feb. 15, 1960 A , issued at 99.993 __________ 1 year__________ . . . .
4-percent note, Feb. 15, 1962 D , issued at 99.993__________________
3 years_____________
3.293-percent bill, Sept. 21, 1959, tax anticipation 8 (at au ction )... 217 days____________
EMPLOYMENT,
Feb. 28,1958
(5)
7,1958
3,1958
4,1958
Apr.
June
June
Aug. 21,1957
Aug. 1,1957
Sept. 26,1957
1,1957
Oct.
_____do_______
N ov. 29,1957
Dec. 2,1957
Dec. 1,1957
Feb. 14,1958
_____do____
.
___ do________
Feb. 28,1958
Apr. 1,1958
Apr. 15,1958
June 3,1958
June 15,1958
_____do_______
Aug. 1,1958
Aug. 6,1958
Oct.
1,1958
Oct. 10,1958
Oct.
8,1958
M ar. 23,1959
M ar. 26,1959
M a y 6,1959
M a y 7,1959
M a y 11,1959
Apr.
Oct.
Apr.
1,1959
1,1957
1,1959
-----do...........
M a y 11,1959
M a y 15,1959
____ do________
Amount issued
Period to final maturity
(years, months, days)2
Cash 3
4-percent note, M a y 15, 1963 B ______ _____ ______ _______ ______ _
4-percent bond, Oct. 1, 1969, reopening........................ ............. ..
lM-percent note, Apr. 1, 1964 E A ______________________________
3.386-percent bill, Jan. 15, 1960, special (at auction),.................. .
3.835-percent bill, Apr. 15, 1960, special (at auction)....... ........... .
3.565-percent bill, Dec. 22, 1959, tax anticipation 1 (at auction)
4-percent certificate, M a y 15, 1960 B, issued at 99.95_________
4 years 1H months.
10 years 6 m on th s..
5 year______________
289 days______ _____
340 days_____ ______
221 days.....................
1 year..........................
Ex
change
For
cash 3
In ex
change *
35 1 ,743
35 619
35 3,052
« 1, 502
20
20
3, 445
3, 461
35 1, 699
2,006
2,003
1, 500
35 1, 269
Allot
ment
ratio
351,2
(37)
(38)
100
100
PRICE
LEVELS
commercial banks, were allotted 16 percent but not less than $10,000 on any 1 subscription.
!2 Subscriptions for amounts up to and including $10,000 were allotted in full. A ll
other subscriptions were allotted 22 percent but in no case less than $10,000.
!3 Subscriptions for amounts up to and including $50,000 were allotted in full. Sub
scriptions for amounts over $50,000 were allotted 40 percent but in no case less than $50,000.
14 Subscriptions for amounts up to and including $50,000 were allotted in full. Sub
scriptions for amounts over $50,000 were allotted 50 percent but in no case less than $50,000.
J5 Cash subscriptions for $100,000 or less were allotted in full. Subscriptions for more
than $100,000 were allotted 62 percent but in no case less than $100,000.
16 Subscriptions for $100,000 or less were allotted in full. Subscriptions for more than
$100,000 were allotted 19 percent but in no case less than $100,000.
17 Subscriptions from savings-type investors totaled $749,000,000 and were allotted 65
percent. Subscriptions from all other investors totaled $970,000,000 and were allotted
30 percent. Subscriptions for $25,000 or less were allotted in full. Subscriptions for
more than $25,000 were allotted not less than $25,000. In addition to the amount allotted
to the public, $25,000,000 of the bonds were allotted to Government investment accounts.
Savings-type investors were given the privilege of deferring payment for the bonds, pro
vided that not less than 25 percent of the bonds allotted were paid for by July 20, 1955,
not less than 60 percent by Sept. 1, 1955, and full payment by Oct. 3, 1955.
18 Subscriptions for $100,000 or less were allotted in full. Subscriptions for more than
$100,000 were allotted 32 percent but in no case less than $100,000.
18 Subscriptions for $100,000 or less were allotted in full. Subscriptions for more than
$100,000 were allotted 29 percent but in no case less than $100,000.
20 Issued as a rollover of special bills maturing Jan. 16, 1957, and Feb. 15, 1957, respec
tively.
21 Subscriptions in excess of $100,000 were allotted 31 percent for the certificates and 12
percent for the notes. Subscriptions for $100,000 or less for both issues were allotted in
full and subscriptions for more than $100,000 were allotted not less than $100,000. In
addition to the amount allotted to the public, $100,000,000 of the notes were allotted to
Government investment accounts.
22 Redeemable at the option of the holder on Aug. 1, 1959, on 3 months' advance notice.
23 In addition to the amounts issued in exchange, the Treasury allotted $100,000,000 of
each issue to Government investment accounts.
AND
1 Issued at par except as noted. For bill issues sold at auction, the rate shown is the
equivalent average rate (bank discount basis) on accepted bids. For details of bill
offerings, see table 2. In reopenings, the amount issued is in addition to the amount in
original offering.
2 From date of additional issue in case of a reopening.
3 Consists of all public cash subscriptions and subscriptions by U.S. Government
investment accounts.
* For maturing securities exchanged for the new issues, see table 6.
4 Exchange offering available to owners of nonmarketable 2H percent Treasury bonds,
investment series B - l 975-80, dated Apr. 1,1951. For further information on the original
offering see “ Treasury Bulletin” for Apr. 1951, p. A - l . Amounts shown are as of M ay
31, 1959.
6 The bond offering was made available for exchange of series F and G savings bonds
maturing from M a y 1 through Dec. 31, 1953.
i Total allotments on cash subscriptions were limited to approximately $1,000,000,000.
Nonbank subscriptions in amounts up to and including $5,000 were allotted in full. All
other subscriptions were allotted 20 percent. Commercial banks’ subscriptions were
restricted to an amount not exceeding 5 percent of their time deposits as of Dec. 31, 1952.
The Treasury also reserved the right to allot limited amounts of these bonds to Govern
ment investment accounts, which subscribed to a total amount of $118,000,000. Payment
for the bonds allotted could be made with accrued interest at any time not later than
July 31, 1953.
s Tax anticipation bill, acceptable at face value in payment of income and profits taxes
due on the quarterly payment date immediately preceding maturity.
» Tax anticipation certificates, acceptable at par plus accrued interest to maturity in
payment of in com e and profits taxes due on the quarterly payment date immediately
preceding maturity.
10 Subscriptions for amounts up to and including $100,000 were allotted in full. Sub
scriptions for amounts over $100,000 were allotted 67 percent but in no case less than
$100,000.
11 Subscriptions for amounts up to and including $10,000 were allotted in full. Sub
scriptions from mutual savings banks, insurance companies, pension and retirement
funds, and State and local governments were allotted 24 percent. All others, including
Amount of sub
scriptions tendered
Description of security 1
EMPLOYMENT, GROWTH,
Date sub
scription
books opened Date of Issue
or bill
tenders
received
1176
T a b le 4.— Offerings o f public marketable securities other than regular weekly Treasury bills— Continued
AND
PRICE
Source: Bureau of the Public Debt. Preliminary figures are from subscription and
allotment reports; final figures are on “ clearance” basis in daily Treasury statement.
GROWTH,
LEVELS
1177
33 Subscriptions for $100,000 or less for the bills and $50,000 or less for the notes were
allotted in full. Subscriptions for more than the minimum for each issue were allotted
44 percent on bills and 35 percent on notes but in no case less than the minimum. In
addition to the amount allotted to the public, $100,000,000 of the notes were allotted to
Government investment accounts.
34 Subscriptions for $100,000 or less were allotted in full. Subscriptions for more than
$100,000 were allotted 47 percent but in no case less than $100,000.
36 Preliminary.
36 Subscriptions from savings-type investors totaled $720,000,000 and were allotted 70
percent. Subscriptions from commercial banks for their own account totaled $470,000,000
and were allotted 35 percent. Subscriptions from all other investors totaled $610,000,000
and were allotted 15 percent. Subscriptions for $25,000 or less were allotted in full when
accompanied by 100 percent payment at the time of entering the subscriptions. A ll
other subscriptions for $50,000 were allotted in full. Subscriptions for more than $5,000
were allotted not less than $5,000. In addition to the amount allotted to the public,
$50,000,000 of the bonds were allotted to Government investment accounts. Savingstype investors were given the privilege of paying for the bonds allotted to them in
installments up to Apr. 23, 1959 (not less than 25 percent by Jan. 23, 1959, the issue
date; 50 percent by Feb. 24, 1959; 75 percent by M ar. 23, 1959; and full payment by
Apr. 23, 1959).
37 Subscriptions for $100,000 or less were allotted in full. Subscriptions for more than
$100,000 were allotted 50 percent but in no case less than $100,000. In addition, $100,000,000 of the notes were allotted to Government investment accounts.
38 Subscriptions from savings-type investors totaled $240,000,000 and were allotted 65
percent. Subscriptions from commercial banks for their own account totaled $941,000,000
and were allotted 35 percent. Subscriptions from all other investors totaled $322,000,000
and were allotted 20 percent. Subscriptions for $25,000 or less from savings-type in
vestors and commercial banks, and for $10,000 or less from all other, were allotted in
full. Subscriptions for more than these minimums were allotted not less than the minimums. In addition, $50,000,000 of the bonds were allotted to Government investment
accounts.
EMPLOYMENT,
38563— 59— pt. 6A^
2* Redeemable at the option of the holder on Feb. 15, 1960, on 3 months’ advance
notice.
25 Subscriptions in excess of $100,000 were allotted 22 percent for the certificates and
28 percent for the notes. Subscriptions for $100,000 or less for both issues were allotted
in full, and subscriptions for more than $100,000 were allotted for not less than $100,000.
In addition to the amounts allotted to the public, $100,000,000 of each issue were allotted
to Government investment accounts.
26 Subscriptions for $50,000 or less were allotted in full. Subscriptions for more than
$50,000 were allotted 10 percent but in no case less than $50,000. In addition to the
amount allotted to the public, $100,000,000 of the bonds were allotted to Government
investment accounts. Payment for not more than 50 percent of the bonds allotted
could be deferred until not later than Oct. 21, 1957.
27 Subscriptions for $10,000 or less were allotted in full. Subscriptions for more than
$10,000 were allotted 25 percent to savings-type investors and 12 percent to all other
subscribers but in no case less than $10,000. In addition to the amount allotted to the
public, $100,000,000 of the notes were allotted to Government investment accounts.
28 Subscriptions for $10,000 or less were allotted in full. Subscriptions for more than
$10,000 were allotted 26 percent to savings-type investors and 10 percent to all other
subscribers but in no case less than $10,000. In addition to the amount allotted to the
public, $100,000,000 of the bonds were allotted to Government investment accounts.
29 Subscriptions for $10,000 or less were allotted in full. Subscriptions for more than
$10,000 were allotted 20 percent but in no case less than $10,000. In addition to the
amount allotted to the public, $100,000,000 of the bonds were allotted to Government
investment accounts.
3° Subscriptions for $25,000 or less were allotted in full. Subscriptions for more than
$25,000 were allotted 24 percent but in no case less than $25,000. In addition to the
amount allotted to the public, $100,000,000 of the notes were allotted to Government
investment accounts.
si Subscriptions for $5,000 or less were allotted in full. Subscriptions for more than
$5,000 were allotted 60 percent to savings-type investors, 40 percent to commercial banks
for their own account, and 25 percent to all other subscribers, but in no case less than
$5,000. In addition to the amount allotted to the public, $100,000,000 of the bonds were
allotted to Government investment accounts.
32 Subscriptions for $100,000 or less were allotted in full. Subscriptions for more than
$100,000 were allotted 59 percent but in no case less than $100,000.
1178
E M P L O Y M E N T , G R O W T H , AND PRICE
P u b lic
T a b l e 2 .—
LEVELS
D e b t O p e r a tio n s
Offerings o f Treasury bills
[Dollar amounts in millions]
Description of new issue
Total
unma
Amount tured
maturing issues
Amount of bids accepted
on issue
Num
out
date of standing
M aturity ber of Amount
On
nonOn
com
new
after
of
bids
days to
date
tendered Total
petitive competi In ex offering
new
ma
amount
tive
change
basis
issues
turity
basis 1
Issue date
1959
M ay 7
Aug. 6
Feb. 13______ M ay 14
Aug. 13
Feb. 19........... M ay 21
Aug. 20
Feb. 26........... M ay 28
Aug. 27
Mar. 5_______ June 4
Sept. 3
June 11
M ar. 12 2
Sept. 10
Mar. 19_____ June 18
Sept. 17
M ar. 26_____ June 25
Sept. 24
Apr. 2 _______ July 2
Oct.
1
Apr. 9 3______ July 9
Oct.
8
Apr. 16 3 .... July 16
Oct. 15
Apr. 23 3_____ July 23
Oct. 22
Apr. 30 3____ July 30
Oct. 29
M ay 7 3-------- Aug. 6
N ov. 5
M a y 14 3__ __ Aug. 13
N ov. 12
Aug. 20
M ay 213
N ov. 19
M ay 28 3
Aug. 27
N ov. 27
Tax-anticipation
bills:
19‘ 8—N ov. 20______ June 22
1959— Feb. 16______ Sept. 21
M a y 15 3____ Dec. 22
Special bills:
1958— Oct. 8 *______ M a y 15
Regular weekly bills:
1959— Feb. 5_______
1959— Apr. 1____
M a y 11___
-
1960
Jan. 15
Apr. 15
91 $2,299.9 $1,399. 7 $1,134. 2
182
399.9
371.7
716.1
1,128.6
90 2,303.6
1,401.3
725.3
400.0
373.6
181
91 2,394.8
1,400.0
1,138. 4
182
922.1
372.6
401.1
1,202. 4
91 2, 257.3
1,400.0
182
395.4
754.6
370.0
91 2,089. 7 1,500. 2 1, 264. 9
182
724.2
400.1
375.3
1.041.1
91 2,254. 2 1,300.9
182
372.1
967.4
400.3
91 2,019. 4 1,300.6
1,023.8
182
727.0
400.0
372.2
1,041.1
91 2,122. 4 1,300.1
182
670.5
400.1
375. 5
91
1,200. 3 1,017.4
1,716.9
182
796.7
400.1
383.9
91 2,074.1
1, 200.1
989.0
182
400.0
377.6
765.1
91 2,036.9
1,199.8
947.0
792.2
400.0
182
376.0
91
1,975. 7 1,000. 9
743.9
182
819.3
400.1
376. 5
761.6
1,926. 9 1,002. 0
91
182
862.7
400.2
378.9
784.4
91 1,910.9
1,001.0
182
760.5
400.0
383. 3
754. 7
91 2,058. 2 1,000. 9
400.2
376.2
182
867.5
789.6
91
1,995. 7 1, 000. 5
182
400.2
378.3
832.0
821.2
91
1,953. 5 1, 000. 2
183
858.6
400.0
381.3
214
217
221
5,950.3
2, 984. 4
1,699. 2
2, 996. 7
1,501.8
1,499. 8
219
5,804.6
2, 735. 4
289
340
3,444. 9
3,463. 9
2,006. 2
2,003. 3
2,249.3
1, 297. 6
1,389. 9
$265.6 $219. 9 $1,802.0
28.2
20.7
272.6
95.6
1,800.6
26.4
21.4
261.6
111.4
1,803.0
28.5
6.1
193.4
197.6
1,802.8
25.3
3.9
235.4
58.0
1, 799.8
24.9
14.5
259.8
36.9
1, 599. 9
28.2
1.2
276.8
40.6
1,600.4
27.9
1.3
259.0
75.2
1,600.8
24.6
16.0
182.8
20.8
1,600.3
16.2
.7
211.1
151.9
1, 599.3
22.5
20.9
17.6
252.8
1, 599.7
24.0
.9
257. 0 106.4
1,400. 8
23.6
21.6
240.4
102.9 ’ l~399.3
21.4
20.7
216.6
194.4
1,397. 7
16.8
43.6
246.2
1,401.3
100.0
26.2
24.0
210.9
133.2
1,400.0
21.9
20.7
179.0
181.6
1,399. 9
18.6
22.6
747.4
204.1
109.9
21,006.3
3,600.7
20,607.0
4,000. 7
20,204.0
4,401.9
19,801. 2
4, 797. 2
19,501.6
5,197.4
19, 202. 7
5, 597.7
18, 902.8
5,997. 7
18,602. 2
6,397.8
18, 202. 2
6,797.9
17,802. 9
7,197. 9
17, 403.0
7,597.9
17,003. 0
7,998. 0
16,60x8
8,398. 2
16, 207. 0
8,798.3
15,806. 7
9,198. 5
15,407.2
9, 598. 6
15,007. 5
9,998.6
2,996. 7
4,498. 5
5,998. 3
2, 735.4
1, 733. 3
1, 703.4
272.9
299.9
5 2,735.4
4,741.6
6,744. 9
4,009. 5
1 For 13-weak issues, tenders for $200,000 or less from any 1 bidder are accepted in full at average price on
accepted competitive bids; for other issues, the corresponding amount is stipulated in each offering an
nouncement.
2 Beginning M ar. 12, 1959, the 13-week bills represent additional issues of bills with an original maturity
of 26 weeks.
3 Preliminary.
4 Issued on a fixed price basis; for details, see October 1958 bulletin, p. A - l .
6 M ay 15 maturity.
Source: Bureau of the Public Debt. Preliminary figures are from subscription and allotment reports;
final figures are on “ clearance” basis in daily Treasury statement.
The C h a ir m a n . The Senator from Connecticut is a very experi
enced dealer. I thought this was known to him, so I did not feel it
necessary to elaborate originally, but I am very glad to affirm it now.
Senator B u s h . The Senator is wrong in that, too, because I am not
an experienced securities dealer, and have not had any experience in
dealing in securities for 25 or 30 years.
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
1179
The C h a ir m a n . Y o u are an underwriter, then.
Senator B u s h . N o; I am not.
The C h a ir m a n . Well, some day we will converse as to precisely
what it is.
Senator B u s h . There must be something wrong with me, but the
Senator does not know what it is.
Secretary A n d e r s o n . Use of the advisory groups seems to me, Mr.
Chairman, to be a useful technique in giving us the opportunity of
assessing markets, determining the judgment of others as to whether
or not a market exists for this kind of security or that kind of se
curity, to get some idea of the relative size of those markets, and
does not minimize the competitiveness with which the securities were
bid. When the offering is announced, certainly anyone who wants to
can buy it.
The C h a ir m a n . I will merely conclude with this observation, tying
this matter up with the point raised by Congressman Coffin: Namely,
that if you were to use the auction method and prepare the country
for the issuance of a given interest rate and maturity, and then let
people bid as to the price which they would pay, you w7ould then have
a competitive rate and it would not be necessary to go through this
prior process of negotiation or collective bargaining which, if it were
in the field of labor, would be denounced by the financial writers as
being noncompetitive, but which possibly they may not denounce as
being noncompetitive because it is in the field of finance.
Secretary A n d e r s o n . Senator Douglas, even if we were going to
auction more of our securities—and as I have explained to the com
mittee, if we think we can expand the auction we will certainly do
so, but even so, before wre auction different types of securities, we
would want to make quite widespread' inquiry into the marketplace,
and this same group of people would still serve a very useful purpose
in trying to determine the extent to which the market exists.
The very last thing that would concern me would be the matter of
price since there is only a small difference possible. The primary
thing is the existence of markets in the various areas.
The C h a ir m a n . O f course, if you would have your analysts and
statisticians and other experts just as you have now, you would not
be operating in the void.
Secretary A n d e r s o n . N o , sir; but we would still be seeking judg
ments of people who are operating it all across the country.
Representative C u r t is . I would like to ask the Secretary the pointblank question: Is the Treasury in favor of a more competitive bond
market ?
Secretary A n d e r s o n . Yes. The more competitive we get the better
we like it.
Representative C u r t is . I just wanted to be sure of that. Naturally*
I think that is sort of like being for mothers, and I am glad to know
the rest of the members are for that.
The C h a ir m a n . Yery much so.
Representative C u r t is . I hope you speak for the party, too.
The C h a ir m a n . But we want action, not words.
Representative C u r t is . A ll right. That is the question I was going
onto.
1180
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
The issue, of course, is over what particular techniques might pro
duce a more competitive market. I frequently find that these glib
generalities sound good, but when we get into the details of what
particular program might produce a more competitive market in this
instance, we often find that one may be labeled as being for that pur
pose but it frequently does just the opposite. I f we are going to
reach an issue in this area, and I hope we do, because I think there
is an issue, it should be over what the gentleman on this side said he
believes will produce a more competitive market, and then over what
questions our side might want to raise on actions which might possibly
produce a more competitive market.
Secretary A n d e r s o n . I certainly would be grateful to the com
mittee for any suggestions that will increase competitiveness. As far
as I am concerned, I am perfectly willing to increase auctions if we
could solve all the problems that are connected with them. The state
ment which I am going to submit as a result of the request of the
chairman and Congressman Coffin sets out these problems. I do not
say that they are unanswerable ones. I would hope that there is an
answer to most of our problems.
But we do have to look at the realities of the situation and try to
develop it, if it can be developed, in a more workable manner.
Representative C u r t is . I hope in the name of doing something
desirable we do not make things worse.
The question I ended my previous interrogation with has been
pretty well gone over here in different aspects, but I did want to ask
two questions that somewhat bear on it, by making a statement first
and then asking the question.
Many people want the Federal Reserve Board to engage in swapping
operations as between long and short terms, but the Federal Reserve
Board and Treasury have worked out, as near as I can figure, a kind of
specialization in which the Federal Reserve Board concerns itself with
money supply conditions, while the Treasury as an arm of the executive
branch concerns itself with the level and structure of interest rates.
Thus, given the fact that substantial refundings of the Federal
debt must be carried out each year, the Treasury can effectively
carry out certain swapping operations. But the question is this: Can
this swapping technique now be utilized by the Treasury ?
Secretary A n d e r s o n . Is your question addressed to the advanced
refunding?
Representative C u r t is . Yes.
Secretary A n d e r s o n . One of the elements of the proposals which we
have made to the Congress, of course, is to allow the Secretary of the
Treasury to provide for advance refundings, without taking the con
sequence of loss or gain at the particular time the exchange is made.
This is because, if we have this privilege— and for the most part it
would be postponing a loss, rather than-----Representative C u r t is . I f I may interrupt, that is part of the Treas
ury proposal in its debt management bill presently in the Ways and
Means Committee.
Secretary A n d e r s o n . Yes.
Then, you see, some of the holders of long-term securities who would
normally sell them as they grow short, would be persuaded to exchange
in advance and keep invested in longer term bonds, which is what
EM PLOYM ENT,
G R O W T H , AND PRICE LE V ELS
1181
they want. This would be one of the ways in which we would hope
to secure a substantial amount of debt extension.
Representative C u r t is . The other question I had was proposed by
the staff, and we feel it should be clarified.
What rationale lies behind the Treasury’s interest in lengthening
the average maturity of a debt during periods of economic expan
sion? In other words, what does it mean to say that issuing short
term debt is more inflationary than issuing long-term debt, as the
Treasury has said on a number of occasions ? Is there any comparable
evidence to make this kind o f statement ?
Secretary A n d e r s o n . In the interest of time I would like to sug
gest that I submit a written statement on this subject.
Representative C u r t is . I wonder if he could submit a statement,
Mr. Chairman, and then make a statement such as he would like now.
Secretary A n d e r s o n . I f I am going to submit a written statement,
I will defer oral statement now.
Representative C u r tis . I think it is a point that needs clarification.
(The material referred to is as follow s:)
As of mid-July the amount of Treasury marketable debt maturing within the
next 12 months amounted to $78 billion. In some ways, the volume of this
short-term debt is as important a factor in our financing picture as the size of the
total debt. Each time the Treasury goes to the market— either for refunding
operations or for new cash borrowing needed to cover seasonal requirements or
retirement of other securities— it is a significant event in all financial markets.
Both the size of our borrowing requirements and the frequency of our trips
to the market tend to interfere with the smooth marketing of new corporate and
State and local government securities.
Another problem related to the large size of the debt maturing within 1 year
is that such debt is only one step away from money. It should be realized,
however, that in this country w e have a large active and continuous demand for
short-term debt instruments outside of the banking system inasmuch as cor
porations, State, and local governments, foreign accounts, and many other
investors invest their short-term funds in this manner. Almost 60 percent of
our under-l-year debt, therefore, is held outside of the banks— a larger per
centage than in any other country we are aware of.
Nevertheless, heavy reliance in debt management on short-term issues is more
inflationary than reliance on longer-term issues. The following points Should
be mentioned:
(1) Short-term issues are more suited to the investment requirements of com
mercial banks; consequently, there is a much greater chance that inflationary
increases in the money suply will occur as banks create deposits to buy shortterm Treasury issues. Conversely, longer term Treasury securities— particu
larly those with maturities of 10 years and longer— are more attractive to sav
ings institutions, pension funds, and other institutions that invest a large por
tion of the savings of the public. To the extent that these institutions buy
new Treasury issues, there is no growth in the money supply.
(2) Savings institutions and other investors that buy long-term bonds are
seeking investments to hold in order to obtain a long-run interest return. On
the other hand, many nonbank purchasers of short-term issues are simply in
vesting temporarily idle funds; they intend to liquidate the securities later in
order to spend for goods and services (e. g., business inventories, new plant
and equipment), meet tax payments, or to take advantage of more favorable
investment opportunities. They do this because the cost of shifting from a
short-term issue to cash is likely to be much less than if they had purchased
longer term securities, whose prices tend to fluctuate over wider ranges than
short-term issues. This is what is meant by saying that “short-term secu
rities are only a step away from being money.” The holder can either sell
the security in the market, or wait for it to mature within a few months or
weeks, in order to obtain funds for spending. Consequently, there is much
greater danger of a large shift from short-term securities to cash than from
long-term securities to cash. Stated differently, the existence of a large vol
1182
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
ume of short-term Treasury debt reflects a high degree of liquidity in the
economy; individuals and institutions are in a much better position to liqui
date securities, obtain cash, and spend for goods and services— thereby aug
menting inflationary pressures— than if more of the Treasury debt consisted of
firmly held, long-term securities.
(3)
When and if liquidation of short-term securities by temporary holders
takes place, the inflationary impact of the shift is magnified to the extent that
they sell the securities to commercial banks, inasmuch as bank purchases tend
to increase the money supply. Ho\yever, spending may expand rapidly even
though banks do not purchase large amounts of the short-term securities liqui
dated by other market holders. As short-term interest rates rise, individuals
and institutions with relatively large idle demand deposits in commercial banks
may purchase the short-term issues. These deposit balances, previously idle,
will be transferred, in effect, to individuals and institutions who use them
for spending. This means that the velocity of money— or its turnover— tends
to increase, thereby stimulating inflationary pressures in much the same way
as an expansion in the money supply.
It should be noted that the large flotation of short-term Treasury issues dur
ing the past fiscal year has not as yet exerted strong inflationary pressures;
these issues were largely taken up by business corporations which were experi
encing rapid growth in liquidity as profits rose from recession lows. Moreover,
we expect that corporate demand for short-term Government securities will re
main active for several months to come, consistent with continued growth of
corporate tax liabilities. However, as business activity continues to advance, a
point is likely to be reached where corporations will be seeking funds to invest
in inventories and plant and equipment. They may, at that time, tend to shift
from net buyers to net sellers of short-term Treasury securities. The spending
made possible by such sales would tend to add to pressures in the economy.
Moreover, unless there is a current budget surplus, these securities would prob
ably be sold to commercial banks and the money supply would expand, adding
even further to inflationary pressures.
Even though it is preferable to have large amounts of short-term securities
in the hands of nonbank investors rather than in commercial banks, we must
never lose sight of the fact that a well-balanced debt structure calls for con
tinued offerings of intermediate and longer term securities, whenever condi
tions permit, if debt management is to be conducted in a manner consistent with
economic growth and stability.
The quest for a balanced structure of the debt is never ending since the pas
sage of time brings more and more of the outstanding debt into the short-term
area. The high point of our under-l-year debt was reached at the end of 1953
when the total was $80 billion. The total is now $78 billion, having dropped
below $60 billion for short periods in 1955 and 1956.
If the Treasury should be able to do nothing but issue under-l-year securities
to replace maturing issues between now’ and December 1960, instead of the
present $78 billion, we would have almost $100 billion of under-l-year debt out
standing at that time.
The Treasury does not intend this to happen. We must, therefore, continue
to sell intermediate and longer term bonds whenever appropriate as we try
to keep the short-term debt from growing. The only reason we have been
able to keep the short-term debt from growing since December 1953 is that since
then we have issued $34 billion of 5-to-10-year bonds, $2 billion of 10-to-20-year
bonds, and $6% billion of over 20-year bonds.
Representative P a tm a n . Mr. Secretary, did you say you would fur
nish this information I requested at the beginning of my interrogation
before ?
Secretary A n d e r s o n . Congressman Patman, I will be glad to fur
nish it by the classifications which we have. I would not want to
give names of individual holders, but by given classes of individuals
I will be glad to furnish it.
Representative P a t m a n . But you will break it down into categories,
so it will be meaningf ul ?
Secretary A n d e r s o n . Yes, as nearly as we can.
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
1183
Eepresentative P a tm a n . The information I gave about the $681
million profits last year of member banks—the securities transactions
can be obtained from page 654 of the June Federal Eeserve Bulletin.
It is broken down as to groups of banks, sister groups.
Then, on page 659, you will find information for particular years,
like 1958, which was $681,554,000 profits on securities. The preced
ing year was $64,368,000, and the year before that, 1956, was $31
million. So it was more than 20 times as much as it was in 1956, and
I say that is enough to excite inquiry and suspicion.
Eepresentative C u r tis . The reason I wanted the source was that I
wanted to be able to evaluate the information.
Incidentally, I would appreciate a statement from the Treasury on
their analysis of this, because I think it is a very important point.
Secretary A n d e r s o n . Senator Javits asked for both profit and loss.
Eepresentative P a t m a n . I desire to call the Secretary’s attention
to the fact that the high interest policy which has been pursued for
the last 6 years has had a devastating effect on the farmer, for in
stance. During the year 1952, the farmers’ income was $15.3 billion.
It has been reduced every year since then. Until now, as of June
1959, it was down on the basis of $12.1 billion, which is about $3.2
billion.
On the money lenders’ income, or personal interest income, it was
$12.1 billion in 1952, but it increased greatly in 1953, to $13.4 billion.
It has increased every year since that time, and in June 1958 it was on
a basis of $20,400 million as compared to $12,100 million at the be
ginning o f 1953. This year, in June 1959, a year later from the time
it was 20 billion 4, it is now 22 billion 2, as disclosed by the economic
indicators for July on page 4.
So you realize, do you not, Mr. Secretary, that high interest is
taking too much of our national income ?
Secretary A n d e r s o n . Congressman Patman, I would find it very
difficult to single out any single factor and say that this is the factor
which determines the rise or fall of farm income. This has to be
weighed in the light of the whole complex problem o f the farm situ
ation as it has existed over these years.
Also in determining the relative cost o f income increase, one must
take into account the fact that we have increased the total national
debt. As we increase the total national debt, of course, we have more
debt to service.
Also paid as a part of this personal income interest is the income
which is paid on the savings bonds and that sort of thing, which 40
million Americans hold. So there is quite a widespread ownership
of the interest. It is not all concentrated.
One has to weigh these things in the context of the complexity of
our country and the ownership of the debt in order to come out with
a fair figure.
Eepresentative P a tm a n . About the E-bond figure which you are
asking to increase, you are asking to increase it to about 3% percent;
are you not ?
Secretary A n d e r s o n . Yes.
Eepresentative P a tm a n . W ill you not be in the same unfavorable
situation, then, as you are now, because many of the savings and loan
associations are offering 4.5 percent, guaranteed by the Government,
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and you cannot say that that would relieve the situation, because it
would still be three-quarters of a percent under what they could get
guaranteed by the Government? Would you not still be in the same
unfavorable position, if you had 3% percent ?
Secretary A n d e r s o n . I do not believe, as far as I know, a large
proportion of the savings institutions have gone quite that high.
Representative P a t m a n . A large proportion have gone over it.
Secretary A n d e r s o n . Quite a few have gone to 4 percent, yes.
Representative P a t m a n . And you w o u ld still have the same un
favorable situation, Mr. Secretary.
Secretary A n d e r s o n . A t the same time, historically we have been
falling behind since the war. The earning position of other types
of savings lias improved faster than ours. The thing, of course, that
has helped us is the fact that we have the largest volunteer organiza
tion in the world trying t o help us sell these securities.
Representative P a t m a n . But do you h a v e any evidence to support
the statement that a higher interest rate would cause more savings ?
Secretary A n d e r s o n . Y o u mean generally over the country?
Representative P a t m a n . Yes. In the past I think the evidence
would disclose that it has not affected savings at all, that savings have
been just as much and more when interest rates were low as they were
when they were high.
Secretary A n d e r s o n . It would affect the sale of the securities.
When you get into periods of recession, the whole group of prices
goes down.
Representative P a tm a n . You are talking about E-bonds now.
Secretary A n d e r s o n . Yes, but the amount of savings in E-bonds
went up last year. W e gained, as I recall, about $ 1 billion last year,
and our higher rate of interest helped. But now our cash-ins are in
creasing, and our sales are declining.
Again, I have said if one looks at the trend in individual savings
in the past several years in this statement which I gave to the House
committee, savings and interest rates in savings and loan associations
have both gone up sharply, mutual savings banks up sharply, commer
cial bank savings up sharply, and the E-bonds not nearly so sharply.
But what we are trying to do here now is to at least get into a posi
tion where we can maintain equilibrium with the cash-ins and maturi
ties of the older series we are paying off now.
Representative P a t m a n . Mr. Secretary, should we ever give a suffi
cient interest rate to attract savings to the extent that they would
want to keep their money in savings accounts rather than looking for
some desirable invesment to put their money in ?
Secretary A n d e r s o n . Y o u would want to be fair with your cus
tomers. As I have indicated, we would not have the belief that we
ought to siphon off all the savings in the country into Government
securities. We know that if we are to grow and prosper in our coun
try, there has to be investment of all kinds. But as to the extent to
which people want to save and accumulate, we must treat them fairly
both as to their earnings and as to the protection of their purchasing
power.
Representative P a t m a n . Mr. Chairman, I have a number o f ques
tions but I shall not insist on them if you do not want to have a
hearing this afternoon. And Mr. Coffin has a question he wants to
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ask. I f other members do not want to come back this afternoon and
the Secretary will agree to answer these questions in written form
for the record, it will suffice in my case.
Secretary A n d e r s o n . I will be delighted to.
(The questions which Representative Patman asked the Treasury
to answer follow :)
The Treasury has expressed its willingness to answer each of these questions
as fully as is necessary, but present heavy burdens on the small Treasury staff
precludes an early response. The Treasury will make every effort, however, to
transmit the replies to these questions as expeditiously as possible. (See Part
6C of the hearings.)
Q u e s t io n s for
Secretary A nderson
(P a t m a n )
1. With reference to your request for repeal of the interest rate ceiling on
Treasury bonds, how high will long-term rates go if the ceiling is taken off?
la. The Federal Reserve could, if it wished to do so, drive the rate on long
term Governments to 6 percent, could it not ?
lb. What assurance do you have that the Federal Reserve will not drive the
rate to 6 percent, or even to 7 percent ?
2. Why have interest rates gone so high? What are the most important causes?
3. What is the reason for the flight of money from bonds to stocks?
4. Do you have any evidence that people have saved any larger percentage of
their incomes when interest rates were high than when interest rates were low?
5. What is your understanding of what the main problem is at the present
time that the Fed is trying to solve by its present money policy?
6. Is it your understanding that the main impact of monetary policy is
through interest rates or through the amount of credit available?
7. How much has the cost of living increased in the last 18 months?
8. And what is the present interest rate on 91-day Treasury bills?
9. (Omitted.)
10. Is the difference accounted for by a greater demand for savings?
11. Is it accounted for by investors’ expectations of inflation?
12. Do you think that the administration’s massive verbal attack on inflation,
its constant warnings that inflation is coming, could be the whole cause of the
need to remove the interest rate ceiling?
13. Do you think that investors’ fear of inflation is substantially justified by
the facts?
14. Many of the newspapers and magazines have been carrying ads placed by
the insurance companies and others which say “Help Fight Inflation,” or “Infla
tion Shoots Holes in Everybody’s Pocketbook,” and so on. Do you know whether
or not the cost of this advertising is tax deductible as a business cost of these
corporations?
15. Why is it the Treasury thinks that the debt should be lengthened?
16. Is it the Treasury’s policy to manage the debt in ways to help out in
economic stabilization, or is it the policy to try to obtain the lowest interest cost
without respect to economic stabilization?
17. What criteria does the Treasury use for determining when to issue long
term debt and when to issue short-term debt?
18. Why didn’t the Treasury pay off its short-term debt and issue long-term
bonds last year, particularly in the first half of last year, when long-term rates
were low?
18a. Does the Treasury have in mind an approximate amount of debt which
would be shifted from short term to long term if the interest rate ceiling is
repealed? If so, can you give us an indication of what you think it is?
18b. Assuming that by next year or the year after we may have a low interest
rate policy again, what are the relative advantages and disadvantges of the
Treasury’s confining itself to short-term issues in the meantime, even though the
short-term rate goes to, say, 5% percent?
19. With reference to the long-term issues of the last several years, is it true
that almost all of these have immediately gone to a premium after they were
issued?
20. Does the fact that an issue is immeditaely reselling at a premium indicate
that the interest rate the Treasury put on the issue was too high ?
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21. When an issue is oversubscribed by 4 to 1, doesn’t this indicate that the
interest rate put on the issue is a great deal higher than it needs to be?
22. Do I understand right, that an insurance company, let us say, that wants
to buy $1 million worth of an issue will subscribe $4 million worth if it thinks
the issue will be oversubscribed by 4 to 1?
23. What happens when a man’s allotment is a great deal more than he
expected you to give him? Is he forced to take the whole amount?
24. A man who receives an allotment of an issue much bigger than he expected
to get, could be embarrassed financially, could he not, and actually suffer a loss ?
25. Have you had many instances recently where people were financially
embarrassed by receiving an allotment larger than they could handle?
26. How do you account for the fact that so many investors think they can
guess in advance what the total offer will be on a particular issue?
27. Secretary Humphrey is reported to have said that the Treasury has no
control over interest rates, that it simply goes to the market, like going to the
market for a dozen eggs. Do you agree that the Treasury is that helpless over
that interest rate it must pay?
28. In 1958, total security issues of the Federal Government, the State and
local governments, and the corporations came to $81.4 billion. Of that amount
$62 billion was in issues of the Federal Government, not counting Treasury
bills. Wouldn’t you agree that since the Treasury controls such a large percent
age of the total supply of issues— $62 billion out of $81 billion— it necessarily has
a great deal of discretion as to the rates it can set?
29. With reference to the Treasury’s advisory committees, how do these com
mittees go about determining how much interest there will be in an issue? Do
they poll the investors in their fields, and, if so, do you know what percentage of
the market they poll?
30. Has the fact that so many large investors and dealers all think they can
guess what the total offer will be on an issue, and are willing to back up their
guess with a financial commitment on which they could lose their shirts, sug
gested to you that some of the elements of competition may be missing in the
market for Government securities?
31. If I may I would like to read you a brief paragraph and then ask you to
comment upon i t :
“Among the more important interest rates, one group in which price leader
ship and price administration play decisive roles is the rate structure charged
by commercial banks for industrial, agricultural, and commercial loans. New
departures in this rate structure are ordinarily signaled by one (not always the
same) major bank, in a manner quite similar to price leadership in steel or
aluminum. The last important signal, given on May 15, called for an increase
from 4 percent to 4% percent on prime risks and corresponding adjustment of
other rates. There was little criticism of the commercial banks for raising their
prices by 12% percent at one swoop. Was this not an inflationary action? The
banks made just as many loans at 4 y2 percent as they would have at 4 percent
and to the same people. The price had merely gone up. What would have been
said about any group of wage earners who raised the price of their services by
12y2 percent in one step?
“In its general interest structure, the ordinary commercial bank follows na
tional and regional price leadership. The individual loan operations of a com
mercial bank also bear only a remote relationship to our traditional picture of
competitive practice— and necessarily so. A bank does not auction credit to its
customers; it rations credit among them. The total amount the banking system
has for rationing among its customers is determined not by any action of pri
vate bankers but by the reserves supplied by the Reserve System * *
Would you agree that that is a fairly accurate description of how commercial
bank interest rates are determined?
32. Has it been your observation that after the banks are given excess re
serves, the banks don’t always reduce their lending rate, and at other times
several weeks go by before bank rates are reduced?
33. With reference to the Treasury’s advisory committees, since you have
been Secretary have these different committees given any substantially different
advice as to what the interest rates should be on any particular issue being con
templated? Have the interest rates recommended by the various groups dif
fered by more than one-eighth of a percentage point?
34. Since you have been Secretary, has the Treasury fixed a rate on an issue
which was different from the rate recommended by the Treasury’s advisory
committees?
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35. If so, can yon recall what rates were recommended and what rates you ac
tually put on the issue? (Supply exact information for the record.)
36. As to the terms of the securities issued since you became Secretary, has
the Treasury gone substantially against what the advisory committees recom
mended ?
3T. Have the different advisory committees given substantially different rec
ommendations as to what the term of an issue should be?
38. Has the Treasury felt any dissatisfaction with the auction method by
which Treasury bills are sold? Do you have in mind any significant improve
ments that might be made in the auction technique?
39. With reference to the Fed’s open market operations, you know about the
IT dealers with whom the Open Market Committee does all of its trading? Is
it your understanding that the Open Market Committee gives those dealers sup
port at times— in other words, when the dealers are overloaded with bills, the
Open Market Committee bails them out either with loans, which they call re
purchase agreements, or by buying in some of their bills?
40. Why doesn’t the Treasury sell all of its marketable securities by the
auction method?
41. Isn’t the auction method the best method for finding out what the lowest
rate is the Treasury has to offer in order to sell a given quantity of securities?
In other words, the auction method seems to do away with guessing what the
market rate is and avoids the risk of guessing too high?
43. Has the Treasury ever tried to sell a long-term issue by the competitive
bid method?
44. Has the Treasury made any factual studies to determine whether it gets
a wider distribution of its securities among initial purchasers by the fixed-price
method than it would get by the auction method?
45. When an issue is oversubscribed, what is the Treasury’s method of deter
mining the allotments?
46. In view of the statement frequently made that the Treasury wishes to get
its securities into the hands of savers, why is it that it allots a portion of over
subscribed issues to the commercial banks?
47. Has the Treasury given serious consideration to a policy not to allot any
portion of an issue to commercial banks when the full issue can be sold to savingstype investors?
48. Does the Treasury plan, in the period ahead, to make fewer offerings in
larger amounts or to make more or less regular offerings in smaller amounts?
49. Has the Treasury considered the question whether the Federal Reserve
should be directed to buy all new Treasury issues and thus assume an under
writing function?
(a ) If “Yes,” what are the disadvantages?
50. Would you agree that if the Federal Reserve did buy all new issues di
rectly from the Treasury and raise reserve requirements of the member banks
temporarily to offset the credit increase, the Fed would then be in a good bar
gaining position to sell the securities at a low interest yield, because the banks
would understand that the Fed would reduce reserve requirements only as and
if they bought the Government securities?
51. Has the Treasury considered the advantages of setting up a stabilization
fund to help in stabilizing the market for its new issues?
52. Has the Treasury considered the advantages and disadvantages of carry
ing a larger cash balance?
{a ) If “Yes,” would the fact that the Treasury could defer financing, when the
times are not propitious, more than offset the cost of carrying the larger balance?
(&) Is there anything to be gained from carrying a larger cash balance by rea
son of the fact that the Treasury would be in a position to defer financing when
it thinks market expectations as to interest rates are unrealistic?
53. With reference to the 4.7 percent interest yields at which the Treasury
sold bills week before last, and the 4% percent rate on short-term issues an
nounced last week, do you feel that these rates were too high?
(a) What about your authority to sell up to $5 billion of obligations directly
to the Federal Reserve? Why was that not used?
( b ) What changes are needed to make your authority to sell securities di
rectly to the Federal Reserve more effective?
54. Has any consideration been given to the question whether the Treasury
should have more discretionary authority in managing the Government trust
accounts?
55. Would the Treasury do better to turn the marketing of its securities over to
private underwriting syndicates, such as market corporate securities?
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TREASURY B A N K DEPOSITS
56. What was the Treasury’s average deposit balance with the commercial
banks last year?
(a ) What is the average balance so far this year?
(b ) Can the Treasury disburse funds on deposit with the private banks di
rectly from those banks, or must it first call the funds in to a Federal Reserve
bank?
(c) What would be the disadvantage of the Treasury’s promptly calling its
funds into the Federal Reserve banks and having the Federal Reserve banks
invest these funds in short-term securities?
( d ) What would be the disadvantage of permitting the private banks to pay
the Treasury interest on its deposits?
57. The depression-time bank crisis is long since past, yet the law prohibit
ing commercial banks from paying interest on demand deposits is still on the
books. Would you agree that this law is now obsolete and that it should be
repealed?
MONETARY POLICY
1. Do you think it would be wrong or against the public interest for Congress
to express disagreement with the Fed’s monetary policies, if it does disagree?
2. Would you think it wrong or not in the public interest for the Treasury
to express disagreement with the Fed’s monetary policy, if it does disagree?
(a) If “No,” are you in complete agreement with the Fed’s monetary policy
at the present time?
(b ) What changes in monetary policy would you suggest?
(c ) Without reference to whether the same degree of credit restraint should
be maintained, do you know of any changes in the Fed’s method of operations
that would improve the Treasury’s debt management problems?
3. When the Fed decides to increase the amount of credit in the banking
system by a given amount, is it more inflationary for the Fed to bring about
the increase by buying Government securities in the open market, or by re
ducing required reserves of the member banks ? Why ?
(a ) What are the relative advantages of the two methods from the stand
point of the Treasury?
(b ) What are the relative advantages from the standpoint of monetary
controls, as you understand them?
(c) Did the Federal Reserve obtain the Treasury’s advice on whether it
should acquire part or all of these securities, or whether the Fed should make
it possible for the member banks to acquire them?
4. In the first half of 1958, the Fed reduced required reserves of the mem
ber banks by $1.5 billion, which was enough to allow these banks to increase
their loans and investments by $10.5 billion. The member banks used this
power to create new money to acquire $10.4 billion of Federal securities. Would
the Treasury’s problem be substantially different today if the Fed had itself
acquired that $10.4 billion of Federal obligations?
(a ) What would the difference be ?
(b ) Which method of increasing the money supply is more likely to reduce
interest rates on Government securities?
( c ) If “Yes,” what advice was given?
(d ) Do you regularly obtain advice from the Fed as to the terms and inter
est rates you should set on the bonds you issue?
5. It is sometimes said that member banks’ reserves are funds which the
banks have deposited with the Federal Reserve banks, and that the member
banks are thus denied the opportunity to use their own money. What is
your understanding as to the sources of member bank reserves?
6. If member bank reserves have been created by the Fed itself, and by the
Treasury, and the member banks have been allowed to create several dollars
of money for each dollar of reserves, do you see where there is any burden being
imposed on the member banks by requiring them to keep these reserves on
deposit ?
7. With reference to the amendment which has been placed on the bill to
remove the interest rate ceiling, I believe you first testified that you could live
with this amendment. What is your present position on the amendment?
(a )
What has caused you to modify your views on the amendment, if they
have been modified?
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8. With reference to lengthening the maturity of the debt, should there
be some authority for the Treasury to swap securities with the Federal Re
serve— say, to swap long-term issues for short-term issues being held in the
Fed’s portfolio?
9. What has been the effect of the “bills only” policy on debt management—
has it made the problem easier or harder ?
10. What has been the effect of the “bills only” policy on the relationships
between short-term, intermediate, and long-term interest rates?
11. It is my understanding that at times the purpose of the Fed*s tightmoney policy has been mainly to dampen an investment boom. What inter
est rates most affect the level of investment the short-term or the long-term?
12. Has the Treasury found that high interest rates have, in fact, caused the
big corporations to postpone or to cancel their expansion plans to any substan
tial extent?
GOLD OUTFLOW
13. With reference to gold, the International Foreign Trade Council predicted
this week that this country will have a deficit of about $5 billion in its inter
national balance of payments this year. That would probably mean a $5 billion
loss in the Treasury’s gold stock, would it not?
(а) Do you agree with the proposition that interest rates should be high in
order to hold funds in this country ?
(б) Do you agree with the proposition that further wage increases pose a
serious threat to our gold hoard, because we may be priced out of foreign
markets ?
(c) How much of the expected deficit in the international balance of pay
ments this year will result from an adverse balance of trade— that is, from
trade in actual goods and services?
(d ) How much of the deficit is expected to result from a net export of capi
tal, and how does this amount break down as between foreign aid and other
capital movements ?
(e ) How much U.S. money is going abroad to speculate in foreign stock
markets ?
(/) Do you think it desirable to curb U.S. speculation or investment in for
eign stocks?
(g ) Do you think that the threat to the Treasury’s gold stock is serious
enough that we should cut back on foreign aid?
Representative P a t m a n . I f you want to come back, I will be glad
to cooperate, Mr. Chairman.
Secretary A n d e r s o n . I will be glad to answer any question from
any member on that basis.
The C h a ir m a n . Congressman Coffin.
Representative C o f f i n . Mr. Chairman, I just want to ask one ques
tion, following up on your series of questions of the Secretary with
regard to the advisory committees that are called in when prospective
issues are contemplated.
It just seems to me that facing the tremendous marketing problems
which we do, it is worth exploring whether or not the Treasury could
conduct market analyses, professional spot or comprehensive market
analyses, as an automobile manufacturer does when he contemplates
a new model, or as any large organization does. In other words, here
you are with perhaps the biggest sales job of any executive in the
country. You have your internal staff constantly making studies, I
know. Then you check it with the advice of the committees, who are
also skilled. But it seems to me that you should professionalize this,
systematize this, to the extent that you have people in this field mak
ing this kind of market analysis. This is not unique. This is clone in
other areas.
Secretary A n d e r s o n . Congressman, we do it to the extent that we
can. Under Secretary Baird makes swings around the country at
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various times for this specific purpose. Mr. Mayo makes other swings
around the country. We try to talk to all kinds of investors, people
who are handling pension trust funds for States and that sort of
thing.
Representative C o f f i n . What I have in mind is, when you foresee
particular issues, that you have a force in the field, either on con
tract or permanent staffs, inquiring as to alternatives to particular
issues, in order to get a resume on a systematic basis as to what the
temper might be.
Secretary A n d e r s o n . I think this is a technique worth studying.
Also one would say that you have the choice: Do we send out tech
nicians to talk to 40 members of a certain kind of banking institu
tion, or do we ask 40 members of the banking institution to come
in and say, aThis is what we think about the markets” ?
Representative C o f f i n . Y o u know, in a court trial, if it is very, very
important that one witness not be influenced by another, you examine
him in the absence of the other witness. I would think that there
would be something to say for the individual approach, although
it might not be as convenient.
Secretary A n d e r s o n . We do that also, sir, with even the members
of the advisory committees.
The C h a ir m a n . I think this has been a very interesting morning.
There are certain questions which I should like to read, and which
I hope the Treasury can respond to, because we know you are very
busy, and it would be an imposition to ask you to come back this
afternoon.
The Treasury maintains rather large deposits in the banks of the
country. People who have as diverse fiscal ideas as Senator Byrd
and Congressman Patman and myself, have from time to time urged
that on some of these deposits the Government should get interest
instead of their being free as now.
I should like to address these questions to you.
1 . W hy should not the Treasury require the banks to pay interest
on the minimum balance maintained by the Treasury with the banks
or convert some o f these deposits into time deposits on which it
would draw interest?
2 . I f the commercial banks are not to pay interest on Treasury
accounts, why should not these funds be drawn properly back into
the Federal Reserve, which could invest them in short-time Treas
ury bills until the Treasury drew upon the Federal Reserve?
In this way, the Federal Reserve would be making earnings, and
90 percent of those net earnings would go back to the Treasury.
3. I f the deposits are to be maintained in commercial banks, could
not the Treasury work with a smaller balance and handle temporary
surges or shifts in cash position by an increased use of its authority
to draw temporarily on the Federal Reserve banks ?
4. Would you agree that the law is now obsolete and should be
repealed which prohibits commercial banks from paying interest on
demand deposits ?
I think those are extremely important questions. I f you wish to
answer them now, fine.
Secretary A n d e r s o n . I would be glad to answer them in detail in
writing.
(The answers referred to are as follow s:)
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Question 1.— Why should not the Treasury require the banks to pay interest on
the minimum balance maintained by the Treasury with the banks or convert
some of these deposits into time deposits on which it would draw interest?
This is a question which can be answered only after a full discussion and
understanding of how Treasury deposits with the banks are handled. The
major portion of the cash held by the Treasury to meet its operating require
ments is maintained on deposit in tax and loan accounts in 11,000 commercial
banks throughout the United States. The balances with individual banks fluc
tuate widely from time to time and from bank to bank. They range from
amounts of less than $5,000 in the case of some of the smaller banks to amounts
of several hundred million dollars on occasion in the case of the larger size banks
in the country.
The balances which the Federal Government carries with commercial banks
in the form of tax and loan accounts arise from the periodic payments of taxes
and the proceeds of Treasury borrowing.
It should be borne in mind that the Treasury does not take the initiative in
depositing funds to tax and loan accounts, except in certain cases. Under con
ditions when net receipts in the Treasury's account at the Federal Reserve banks
accumulate appreciably faster than had oeen estimated, excess funds may be
deposited for a few days with class C banks (banks with total deposits of more
than $500 million) and then withdrawn, without notice, as soon as a more
normal flow of funds is restored. Conversely, if the Treasury balance in Fed
eral Reserve is below expectations, the Treasury often makes special calls on
these same class C banks, without notice. The Treasury does not discriminate
either among individual banks within a class or among the three classes in its
conduct of these deposit or withdrawal activities. All withdrawals are based
on a percentage of deposit balances in each bank as of a given date, and the
same is true on any deposits made in class C banks.
The balances the banks acquire as the result of tax collections may arise in
either of two ways. They may arise from soliciting their customers to deposit
certain excise and withheld income and social security taxes with the bank
instead of paying them to the District Director of Internal Revenue, which has
the effect of giving the Treasury the immediate call on those funds rather than
having checks outstanding for several days while the District Director processes
them and deposits them at a Federal Reserve bank. In addition, balances arise
from income tax payments which are credited directly during major tax pay
ment periods to tax and loan accounts by the bank on which the taxpayer’s
check is drawn. In neither case does this represent an increase in deposits to
the banks, but merely a transfer of balances on a bank’s books from the account
of the taxpayer to the Treasury’s account.
The immediate transfer of these balances to the Treasury’s account with the
Federal Reserve banks would be a very disruptive influence to the money market
and the whole economy. The tax and loan accounts, therefore, represent a
mechanism helpful to the whole economy, not just to the banking system alone.
Furthermore, the law requires that banks pledge collateral, usually U.S.
Government securities, to secure all funds in Government tax and loan accounts,
wThich is a special condition that attaches only to public deposits. A bank has
to have on hand at all times free collateral to cover the maximum balance it
may hold in the tax and loan account, or otherwise it cannot accept the deposit.
These tax and loan balances must be subject to withdrawal on demand by the
Treasury because they are the funds which are used from day to day to meet
the expenses of the Government, and they fluctuate widely. It would not be
practicable for the Treasury to shift any part of these balances into time deposits
for the purpose of having them draw interest. Any surplus funds the Treasury
might have in demand deposits would be more appropriately used to reduce the
debt instead of converting them into time deposits.
These fluctuations are well illustrated by the fact that total balances on May
31, 1958, amounted to $4% billion, and increased to to $8% billion as of June 30,
1958; but by July 31, 1958, they had been drawn down to $3% billion. Balances
during the calendar year 1958 averaged less than $3% billion, with balances
running under $1% billion on several occasions. It should also be remembered
that these balances typically include funds on which the Treasury has already
given the bank notice of withdrawal to be effective in a few days, so the “free” ,
or uncalled, balances which banks can actually employ are frequently quite low.
In January 1958, for example, balances less outstanding calls were less than
$350 million on several occasions. Despite their wide fluctuations Treasury
deposit balance are, of course, valuable to each bank in the same way as any
other deposit. If a bank is to keep a deposit rather than lose it to another bank
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it must accept the responsibilities which deposit maintenance and growth re
quire. Prompt and efficient servicing of customers, whether public or private,
is always important. Banks recognize that their Treasury tax and loan deposit
carries "with it important public responsibilities— including many services which
the banks perform for the Government without specific charge.
A full discussion of the Treasury tax and loan account operations is contained
in the Monthly Review of the Federal Reserve Bank of New York for April
1958. A copy is attached to the end of the reply to question 1.
The broadest aspect of this operation is that commercial banks have a special
relationship to the U.S. Treasury in that their demand deposits provide almost
80 percent of the Nation’s money supply as commonly defined, the balance being
currency in circulation. Since they are so charged with acting in the public
interest they are carefully regulated by Federal and State supervisory authorities
as to almost every phase of individual bank practices, as well as being subject to
the powerful effects of the actions of Federal Reserve monetary policy on the
banking system as a whole. They are not free agents, and on many occasions
their ability to expand their volume of profitable loans as much as they could
otherwise expect to do has to be curtailed severely by the requirements of
national economic policy.
In addition to the monetary function performed by the commercial banking
system, the banks operate as a direct arm of the Treasury in other ways. The
banking system is a focal point in the efficient public distribution of upward
of $50 billion a year of Treasury marketable tax anticipation bills, 1-year bills,
certificates, notes, and bonds, plus $1% billion or more regular weekly bills on
the average.
The Treasury, unlike corporate or State and local government borrowers, has
no underwriters for its securities in the usual sense of that term. In other
words, the Treasury pays no commissions to the banks that help place Treasury
securities with their ultimate holders. The Treasury, therefore, depends heavily
upon the commercial banking system to solicit orders for huge issues of Goverment securities on which the books are open only from 1 to 3 days. An over
whelming share of all subscriptions for new issues of Government securities are
handled by the commercial banks. Without their active solicitation and process
ing of these subscriptions, the Treasury operations on the scale now conducted
would be much more difficult as well as expensive.
In addition, banks actively help the Treasury promote the sale of U.S.
savings bonds, sometimes at the expense of their own savings deposits. They
do this not only through their own functions as issuing agents in over-thecounter sales and as managers of their own payroll savings plans, but also in
their communities by helping to acquaint an increasing number of citizens
with the advantages of savings bonds and in assisting business concerns in
setting up and maintaining active payroll savings plans.
The suggestion has been made from time to time that perhaps the Treasury
would be better off if banks were required to pay interest to the Treasury on
tax and loan account balances and that, in turn, the banks should charge the
Treasury for the services it performs. Many of these services are not susceptible
to precise cost measurements, so the designing of a comprehensive system of fees
necessary to completely reimburse commercial banks for their services to the
Treasury would be extremely complicated. Furthermore, it would reimburse
banks for what are now free services, which services are also performed
without charge by other entities. If the banks were to charge the Treasury
for all savings bonds that they sell, for example, those corporations throughout
the country which in the aggregate issue millions of series E bonds each year
and keep extensive records of payroll deductions would certainly ask the
Treasury for reimbursement for their services. Similarly, all business con
cerns in the country would be encouraged to ask the Government to defray
their costs of withholding income taxes and social security taxes from employees
pay checks if the banks were reimbursed for handling the deposits represented
by those taxes.
The impact of a uniform fee system would fall unequally on different banks,
favoring the larger more highly mechanized units. Yet a fee system which
attempted to take cost differentials into account would open a new area of
controversy. Furthermore, the fee system in terms of cost of clerical help
presumably would have to be reviewed from time to time as conditions change.
Problems arising from the suggestion that interest be paid on demand deposits
generally are discussed in the reply to question 4. It should be mentioned here,
however, that it would be unfair for the Government to require by law that
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
1193
banks pay interest on the demand deposits of the Government which because
of their rapid turnover are less desirable than many other types of deposits, while
at the same time the law prevents banks from paying interest on demand deposits
to State and local governments, to business firms, and to individuals.
Total demand deposits (other than interbank deposits) as of December 31,
1958, for example, amounted to $134.3 billion, of which $4.2 billion, or only
3 percent, was accounted for by demand deposits of the U.S. Government. State
and political subdivisions alone had $10.9 billion of demand deposits on that
same date, or 21/£ times the Federal total, despite the fact that U.S. Government
operations are far larger.
The Treasury makes it a policy to keep its working balances adequate but
never excessive. Including deposits in Federal Reserve banks (usually about
$500 million) and gold in the Treasury general fund (formerly as high as $1
billion, but currently only about $100 million, the Treasury’s cash balance has
averaged about $4% billion during each of the last fiscal years. This is rela
tively small; the average operating cash balance this year has averaged only
69 percent of average monthly budget expenditures— the lowest percentage
for any recent year. The Treasury’s cash balance is no higher today than it
was a decade ago, when budget spending was half its present rate.
The efficient use of cash balances in this way has, however, gone about as
far as it can without impairing efficiency of Treasury operations. There are
times when a somewhat larger cash balance would have given the Treasury
much needed flexibility in timing its borrowing operations so that it could ride
out a period of market apathy for new issues, rather than forcing the Treasury
to borrow in an unfavorable atmosphere because it was running out of cash.
But an adequate appraisal of the value of bank services in itself presents
difficult problems. Despite these difficulties, however, the Treasury is under
taking a careful study of costs which banks incur in performing functions for
the Treasury in those situations where costs are subject to specific measurement
(see attached letter) although we do not expect that the resulting partial data
will offer any indication as to the true burden of bank operations on behalf of
the Treasury.
T h e S e c r e t a r y of t h e T r e a s u r y ,
Washington, June 12, Wo9.
Hon. J o s e p h C a m p b e l l .
Comptroller General of the United States,
Washington, B.C.
D e a r M r . C o m p t r o l l e r G e n e r a l : I have your letter of June 3 concerning our
recent discussion relative to your suggestion that the Treasury make a study
to determine whether or not balances in tax and loan accounts may have pro
duced income to the banks in excess of the cost of the services performed by
them for the Federal Government and for which they are not otherwise com
pensated.
As we have tried to make clear in conversations with you, we believe there
are overriding considerations of monetary and debt management policy that
cannot be resolved by a study of the character indicated. However, in view
of your conviction that the Treasury should make such a study, we will under
take one as promptly as possible. As I pointed out in our discussion, the Treas
ury has an exceptionally heavy load of financing to do in the next 3 months,
and in addition we have a heavy legislative program now pending in Congress
relating to public debt management.
We hope to have the study initiated within 90 days, and I shall notify you
when it is undertaken.
Sincerely yours,
( Signed) R o b e r t B. A n d e r s o n ,
S ecretary o f the Treasury.
[Monthly Review, April 1958—Federal Reserve Bank of New York!
T h e T r e a s u r y ’ s D e p o s it B a l a n c e s a n d t h e B a n k i n g
System
Financing the Federal Government’s operations involves huge and irregular
transfers of funds between the Treasury and the general public. While some
progress has been made in recent years in reducing the extreme fluctuations
in the Treasury’s receipts and payments, the remaining swings still are sizable.
Moreover, they are likely to continue to be large, because of the vast scale of
the Government’s financial operations and the unavoidable concentration of
3*8563— 59—pt. 6A------ 8
1194
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
expenditures, tax collections, and debt transactions in certain months and in
certain days of each month.
Almost all of the Treasury’s cash disbursements are made by checks paid by
the Government’s fiscal agents, the Federal Reserve banks. Treasury cash
receipts, on the other hand, typically take the form of checks drawn against
commercial banks. These receipts, reflecting tax collections of the proceeds of
securities sales, sooner or later must be funneled through the Treasury’s bal
ances at the Federal Reserve banks, to reappear as disbursements. Thus, the
flow of Treasury funds from commercial banks into the Reserve banks involves
losses in commercial bank reserves, while Treasury disbursements from the
Reserve banks produce reserve increases. The method used to minimize the
impact of these massive flows of funds into and out of the Federal Reserve
banks involves the regulation of the Treasury’s balance at the Federal Reserve
banks so that it is held as nearly constant as day-to-day operations permit;
consequently, temporary accumulations of Treasury deposits are left in the
commercial banks. This means that the amounts shifted each day from the
commercial banks need to be gaged as closely as possible to the day’s disburse
ments from the Treasure’s balances in the Federal Reserve banks. The cycle
is completed when the Treasury disbursements from the Federal Reserve banks
flow back into commercial bank accounts.
If, in contrast, all tax receipts and the proceeds of Government securities
sales were deposited immediately in the Treasury’s accounts with the Reserve
banks, the effect would be periodic heavy drains on bank reserves, particularly
in the quarterly tax months, as funds poured in more rapidly than they were
disbursed. The resultant contraction of the reserve base could have seriously
disruptive effects on the money market and the functioning of the entire banking
system.
An example of the actual variations in the Treasury’s deposit balances during
March 1957 clearly shows these potential reserve effects. The Treasury’s com
bined cash balances in all depositaries (including the Federal Reserve banks)
fell from $2.5 billion at the beginning of the month to $1.2 billion on the 15th,
then rose in 6 days to 4.7 billion on March 21 as a result of the concentration
of tax collections, and then dropped away once again, due to net disbursements,
to 3.4 billion on March 27. On the following day, a new money borrowing
brought the cash balance to $6.6 billion, and the end-of-month balance was $6.5
billion. If these large increases and decreases of the Treasury’s cash balances
had taken place exclusively in its balance at the Federal Reserve, that bal
ance would first have been reduced by more than $1 billion (with member bank
reserves correspondingly increased), to be followed by a 3y% billion increase in
the balance; it would then have been reduced again by 1 billion, and finally
raised once more by about $3 billion. Such swings in the Treasury’s balance at
the Federal Reserve would have meant that the reserve balances of the com
mercial banking system would have been, successively, raised by 7 percent, cut
by 19 percent, increased by 7 percent, and reduced by 17 percent, all within the
space of 1 month.
For reasons of operating convenience, but principally to prevent the irregular
ebb and flow of Government funds from interfering with the smooth and effec
tive functioning of the Nation’s payments mechanism, it has been necessary to
develop a set of techniques especially adapted to minimizing the strains and dis
locations of drawing money fronl the commercial banks in which it is held, into
the Federal Reserve banks, and later disbursing it. These techniques include
handling the bulk of the Treasury’s receipts in two steps: (1) Most receipts
are credited initially to the Treasury’s tax and loan accounts in commercial
banks all over the country by transfers from their respective customers’ ac
counts as each bank actively solicits its customers to make their payments due
the Treasury through the bank; and (2) through carefully scheduled “calls,”
the funds in these accounts are transferred, as needed, to the Treasury’s deposit
balances in the Federal Reserve banks. This procedure for mobilizing the
Treasury’s funds has been in the course of development since 1917, and makes
it possible, even in periods of abrupt shifts in Government receipts and disburse
ments, to synchronize rather closely the withdrawal of reserves from the com
mercial banking system with their subsequent replacement through disburse
ments from the Treasury’s Reserve bank accounts. In other words, it enables
the Treasury to keep its balance with the Federal Reserve banks reasonably
Chart I
TREASURY DEPOSITS IN TAX AN D LOAN ACCOUNTS A N D FEDERAL RESERVE BANKS
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
1956
1957
Sou rce : U n i t e d S t a t e s T r e a s u r y D ep ar t m en t .
1195
1196
E M P L O Y M E N T , G R O W T H , AND PRICE
LEVELS
stable. The present article examines the effective mechanism employed by the
Treasury in managing its fluctuating working balances with a minimum of un
desirable money market effects.1
M AN AG E M E N T OF TH E TREASURY W ORKING BALANCES
On objective of the “houskeeping” aspect of managing the Treasury’s bal
ances is to neutralize the impact of day-to-day operations on commercial bank
reserves, and one measure of its success is the restricted amplitude of the daily
variations in the Treasury’s Reserve bank balance, shown in chart 1. In recent
years the acknowledged target has been a balance of $500 million in the Trea
sury’s combined balance in the 12 Federal Reserve banks and their branches.
Experience has shown that an active working balance of approximately this size
is necessary to accommodate the Treasury’s transactions. Aggregate balances
in the commerieal bank depositaries vary over a range of several billions of dol
lars because they absorb the wide fluctuations caused by differences in the timing
of overall receipts and expenditures.
The Treasury acts in consultation with officials at the Federal Reserve Bank
of New York in scheduling “calls” against its tax and loan account balances at
the three classes of depositaries (A, B, and C ).2 When regular calls on class B
and C depositaries are necessary they are ordinarily announced each Monday
for payment on the following Friday and Monday, and further calls are announced
on Thursday for payment on the following Tuesday, Wednesday, and Thursday.
Under this schedule, these depositaries are given 4 to 7 days’ notice in which
to prepare for the impending withdrawal. Treasury calls for the transfer of its
balances from the smaller class A banks into the Federal Reserve banks are ordi
narily made only once a month and usually on a week’s notice. This 1-month
interval merely reflects the Terasury’s desire to avoid extensive calling for a
large number of small amounts. Of course, calls could be made more frequently
on these A banks at any time if the Treasury should wish to do so, and on
occasion it does.
The total size of each call from the commercial banks must be set in ac
cordance with estimates of how large the cash needs of the Treasury are likely
to be. This requires a forecast of the daily receipts and expenditures which
flow in and out of the Reserve bank balance of the Treasury. These forecasts
are based on detailed studies by both Treasury and Federal Reserve staffs of
many individual categories of receipts and expenditures.
Should actual Treasury receipts and disbursements on the days between the
issuance of the regular call and the actual transfer of the funds vary sub
stantially from the forecasts projected at the time of the call, the transfers al
ready scheduled would produce unintended effects on bank reserves by either
withdrawing too much or too little from commercial banks. To compensate for
such unavoidable forecasting errors, it is necessary at times for the Treasury to
make “last minute” adjustments by means of a “special” call on the class C
banks or by a redeposit of amounts withdrawn earlier from these banks; de
ferrals or cancellations of previously scheduled withdrawals from “C” banks
are also made.3 Since these are the Nation’s largest banks and are, generally,
banks that rely daily upon the money mraket to adjust for large movements of
funds, they are able to accommodate themselves to withdrawals or redeposits
by the Treasury on very short notice. As a rule, notice is given such banks be
fore 11 a.m. (Washington time) on the day on which the change is to be effective.
An indication of the impact of these swings on class C depositaries is given in
chart II, showing the extremes of daily variation in the aggregate balances at
these large banks during 1957.
1 F o r a detailed descriptio n o f the Federal G overn m en t’ s financial op eration s an d th eir
effects on the m oney m ark et, see “ T h e T reasu ry an d the M oney M a r k e t /’ F e d eral R eserve
B a n k o f N ew Y ork, 3d p rin tin g (M a y 1 9 5 6 ) .
2 Th ese depositaries are classified on th e basis o f size, an d the classification s are periodi
ca lly review ed by the T r easu ry .
T h e m o st recent review o f the rou ghly 1 1 ,0 0 0 “ special
de positaries” placed in to class A those banks w h ose T r e a su ry ta x an d loan accou n ts w ere
$ 1 5 0 ,0 0 0 or less on M ar. 19, 1 9 5 8 .
C lass B includes all bank dep ositaries w hose ta x and
loan accounts exceeded $ 1 5 0 ,0 0 0 on th a t date, except fo r the special group o f the la rg e st
banks, design ated class C.
B an k s w ith to ta l d e posits o f $ 5 0 0 m illion or m ore, a s o f the
la te s t d eta iled rep ort on a ssets and lia b ilities to the bank sup ervisory agencies (w h ich is
kn ow n as a call r e p o r t), are class C depositaries. A s o f the end o f 1 9 5 7 , th ere w ere 9 ,9 4 9
banks in class A , 1 ,3 1 9 banks in class B , and 46 in class C.
T h e to ta l ta x and loan balances
o f banks in each o f the three classes, as of D ec. 31, 1 9 5 7 , w ere abo u t $ 5 0 0 m illion fo r
class A ; $ 1 .3 billion fo r class B ; and $ 1 .2 billion fo r class C.
3 T h ese a d ju stm e n t procedures w ere first in s titu te d on Ju ly 2 9 , 1 9 5 5 .
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
1197
The success of this flexible call procedures in avoiding unstabilizing effects
on bank reserves is apparent in chart I, which shows the daily fluctuations in
the Treasury’s deposits in tax and loan accounts and with Federal Reserve banks
during 1956 and 1957. In contrast to the wide and irregular swings in the tax
and loan balances, the variations in the Treasury’s Reserve bank balance were
small indeed. Except for brief intervals, the latter balance held within a daily
range of $400 to $600 million during the period covered by the chart. The tax
and loan balances, on the other hand, frequently exceeded $4 billion and reached
peaks of $5 billion and even $6 billion which were followed by rapid declines to
the $2 or $3 billion range. This variability in the tax and loan balances gives an
indication of the magnitude of swings in total reserves that might have resulted
from the daily routine of the Treasury’s financial operations if the special fa
cilities had not been developed.4 The small fluctuations in the Treasury’s Re
serve bank balance around the $500 million level, on the other hand, indicate the
remaining reserve effect that it has not thus far been possible to eliminate. It
should be noted that, on the rare occasions when the Treasury’s balance with the
Federal Reserve banks fluctuated widely from the $500 million norm, the devi
ations were permitted by the Treasury in the light of its own needs and in con
sultation with Federal Reserve officials.
In the final analysis, resort to a special mechanism, such as tax and loan
accounts, for easing the shift of reserves from the commercial banking system
to the Treasury’s Federal Reserve balance is imperative. Under fractional
reserve banking arrangements, and with the Treasury receiving funds in
varying amounts from depositors in virtually every bank in the country, the
absence of such a system would work a kind of capricious havoc upon the
reserve position of the banking system as a whole, with undesirable effects
in turn on the position of individual banks. As Government receipts and ex
penditures have grown, country by country around the world, one country
after another is becoming interested in the techniques developed here.
* Swings of this magnitude in the tax and loan accounts do not necessarily affect com
mercial bank deposits as a whole. Unless new money borrowing by the Treasury from the
commercial banks is involved, they usually reflect only shifts from private to Treasury
deposits in the commercial banks, without affecting total bank reserves in a major way.
There is always, of course, a problem for individual banks, as some lose and others gain
deposits on balance, but that is a normal occurrence in conducting banking operations.
1198
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
TREASURY BORROWING AND B A N K RESERVES
The cash borrowings of the Treasury introduce a peculiarly destabilizing
influence into the banking system. Whereas seasonal concentrations of tax
collections may at times generate somewhat larger flows of funds than the
amount involved in an “average” cash borrowing, the transfer of taxes takes
a number of days, while a cash borrowing usually involves a large shift of
funds on a single day. Moreover, cash borrowings by the Treasury may take
place rather often since they are not confined to meeting annual operating
deficits but are also required—and usually in far greater amounts— to re
plenish the Treasury’s balances during seasonal lows in tax collections and
in order to repay matured debt that is not refunded and savings bonds that
are turned in for cash redemption. In the calendar year 1957, for example,
the Federal Government had a moderate cash surplus, but was nevertheless
compelled to raise a total of nearly $20 billion in new cash (exclusive of the
rollover of regular Treasury bills).
The six major cash flotations undertaken last year ranged in size up to
$3.6 billion. In each case, commercial banks were allowed to pay by credit
to Treasury tax and loan accounts for their own and their customers’ sub
scriptions, and virtually all of the proceeds were received in that form. If,
instead, the Treasury had required direct payment to the Federal Reserve
banks, the reserve balances that would have been withdrawn from the bank
ing system on the payment dates for the six flotations would have ranged
from about 4 percent to about 19 percent of total bank reserves. And the
reserve base would have been subjected to considerable irregular buffeting
thereafter, reflecting the release of the borrowed funds in the ordinary course
of Treasury disbursements. If the Federal Reserve System were to attempt
to cushion shocks of such size to the reserve base, the scale and frequency of
its open market operations during each Treasury financing would need to rise
far above current requirements for seasonal operations or for implementing
changes in credit policy.5 With the arrangement for payment through tax
and loan accounts, on the other hand, and with the flexibility of the fractional
reserve banking system, the immediate impact on the reserve base was re
stricted in each case to no more than the increase in required reserves to
cover the new tax and loan deposits credited to the Treasury. In Treasury
borrowings in which the securities were purchased on original issue almost
entirely by the banking system, the immediate increase in required reserves
over recent years has generally been about one-sixth of the amount borrowed.
Perhaps the most effective method of illustrating the process of credit cre
ation in a Treasury financing is to look at a specific offering and to trace the
subsequent cash flows through the tax and loan accounts to the Federal Reserve
Banks. The auction of $3 billion of tax anticipation bills (TAB’s) on June 26,
1957, can be used as an example. Since all but $90 million of this sale of bills
was paid for with credits to tax and loan accounts, approximately $2.9 billion
were added to the latter accounts on the July 3 payment date. This peak,
somewhat reduced by that day’s withdrawals (or calls), is apparent in chart I,
and partially in chart II.
The privilege of paying for the new bills through credit to tax and loan
deposits meant that commercial banks, buying the bills for their own portfolios,
had an immediate rserve need equal to the required reserves on the newT de
posits— at that time 20 percent in the case of the New York City banks—
whereas they began earning interest on the full amount of their allotments im
mediately upon issue. However, the Treasury soon issued calls against the new
tax and loan account deposits and the bills (or other assets) had to be sold so
that funds could be available to pay over to the Treasury’s balance at the
Federal Reserve banks. Many sales of the new bills were made at a price lower
than the original purchase price, but such losses generally were offset by the
earnings on the new securities for the period held. In practice, this meant that
the commercial banks paid a price at the time of original sale higher than the
Treasury could have obtained through the sale of the issue without the privilege
of payment through tax and loan account credit. As a result the banks were
able to outbid nonbank subscribers for the issue. Yet when nonbank investors
first purchased these securities from commercial banks, the price was substan
tially lower than that in the initial sale by the Treasury.
6 For a discussion of the Federal Reserve System’s “defensive” and “dynamic” responsibili
ties for monetary control, see R. V. Roosa, “Federal Reserve Operations in the Money and
Government Securities Markets,” Federal Reserve Bank of New York (July 1956), ch. I.
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
1199
This illustration, which refers to the “retailing” of 'an auction issue, sets
forth quite clearly the distribution of possible gains from a Treasury financing,
to the Treasury itself, commercial banks, and other investors. In addition, the
Federal Reserve System benefited by avoiding large-scale open-market operations
that might have confused the market. In the case of coupon-bearing issues
offered on a subscription basis such gains are not so clearly ascertainable for
illustrative purposes, because coupon securities are sold at a fixed price and not
to the highest bidders. The same forces are nonetheless at work.
Whether Treasury flotations carry a coupon, or are sold at auction, bank pay
ments through credit in tax and loan accounts provide a striking illustration of
the process of multiple deposit expansion. To validate this deposit multiplica
tion, an increase in required reserves of about one-sixth of the deposit increase
has usually been required. If excess reserves at the outset of a deposit expansion
are insufficient, these required reserves must be supplied by the central bank.
The Federal Reserve System may provide the necessary amount of reserves by
open market operations, through the “discount window,” or through changes in
reserve requirements, the choice of action depending upon the current direction
of policy, expected seasonal changes in credit conditions, and other factors.
Returning to the illustration of the sale of TAB’s in July 1957, it should be
noted that member banks in the aggregate were in a negative free reserve posi
tion at that time ; that is, total member bank borrowing from the Federal Reserve
banks exceeded excess reserves in the banking system. In order to subscribe
for the new securities it was necessary for the banks to mobilize a substantial
amount of additional reserves, since the required reserves needed to support
the increase of nearly $3 billion in tax and loan account deposits amounted to
approximately $500 million. An examination of the monetary statistics for
the period surrounding the Treasury financing indicates that this need for addi
tional reserves was met largely through an expansion of Reserve bank credit.
Otherwise, the banks could not have taken up the new issue without making
simultaneous reductions in their other loans and investments, with a resulting
severe wrench to the availability of credit and the money market. In the week
ended July 10, on a daily average basis, the System made open market pur
chases of about $230 million and extended $120 million of repurchase agree
ments to Government securities dealers, and member bank borrowing increased
by about $150 million.
Chart III
CO MPUTED EFFECT OF TREASURY'CALLS”O N TAX A N D
LOAN BALANCES A R IS IN G FROM SALE OF TAX
A NTICIPATIO N BILLS, JULY 3-A U GU ST 8,1957
B i l l i o n s of d o l l a r s
4 -----------------------------------
Bil lio ns of d ol la rs
------------------------------------------------------- 4
P a i d to T r e a s u r y ' s
a c c o u n t at
Reserve Banks
To tal
3
a m ou n t so ld
6
9
12 15 18 21
July
2 4 27 30
2
5
8
August
* R e m a i n i n g b a la n c e is compu ted on the b a s i s of T r e a s u r y " c alls " a f t e r
the July 3 p a y m e n t da t e on Ta x a n d Loan Account b a l a n c e s at each
class of banks.
Source: C o m p u t e d by Federal Reserve Ban k of N e w York.
1200
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
The net result of the Federal Reserve actions, therefore, was to facilitate the
initial placement of this issue with the commercial banks, pending its distribu
tion to others. In essence the banks served as temporary “underwriters.” The
question of how long to permit the additional Federal Reserve credit to remain
within the commercial banking system, once the new securities were firmly
lodged in investors’ portfolios, was decided in the context of the degree of
monetary pressure that was being sought at that time. As it worked out, the
additional reserves were soon needed to support a seasonal expansion of the
money supply.
The next step in making the proceeds of the sale of TAB’s available for
financing Treasury disbursements was to transfer the amounts that had been
credited to the tax and loan accounts to the Treasury’s balance at the Reserve
banks. The manner in which this step was carried out is illustrated in chart III.
The gradual drawing-down of the tax and loan account balances at the three
classes of depositaries cannot be determined from any reported data, since the
Treasury’s calls apply to the total balance in the accounts and not simply to
that portion of the balance representing the proceeds of a particular sale of Gov
ernment securities. The data in the chart were computed by assuming that the
calls subsequent to the July 3 payment date had the same proportionate effect on
the proceeds of the sale of TAB’s as on other balances in the tax and loan
accounts.
Withdrawals of balances at G banks, where the largest share of the proceeds
accumulated, proceeded at a somewhat more rapid rate than the withdrawals at
B banks, and in each of these classes of banks the rate of withdrawals was far
more rapid than in the smaller class A banks. In fact, the first withdrawals for
the latter did not occur until August 1, or 29 days after the TAB ’s had been
issued. By that date the C banks had already transferred to the Reserve banks
almost five-sixths, and the B banks about three-fourths, of their original credits
to tax and loan accounts in payment for the new bills. By August 10, or 38 days
after the securities had been sold, the calculations in the chart indicate that less
than $200 million remained out of the starting balance of $2.9 billion.
There is, of course, an element of potential profitability for each depositary
bank in having tax and loan account balances, however these arise, provided the
variations are not so great as to prevent some useful employment of the funds
as an offset to the costs of handling credits to the account. Whether it is profit
able for the individual bank probably depends, as much as anything, upon the
enterprise it demonstrates in handling these funds while assuring the prompt
remittance of funds due the Treasury. Whether profitable or not, many indi
vidual banks apparently continue to perform these services, both in handling
balances and in “underwriting” and distributing Treasury issues of Govern
ment securities, because of the obligation which they feel arises from the
unique role which commercial banks occupy as a part of the Nation’s monetary
mechanism. That is, commercial banks are, in a broad sense, special instru
mentalities of the U.S. Government in that they exercise in part the function
of creating money.
USEFU LN ESS OF P A Y M E N T FOE C ASH
OFFERINGS W IT H
ACCOUNTS
CREDITS TO TA X AND
LOAN
Commercial banks acquired virtually the entire issue of TAB’s in the July
1957 auction because the privilege of paying through tax and loan accounts
made it possible for them to pay the Treasury a higher price than could other
direct subscribers, with the result that the net interest cost to the Treasury
was clearly much lower than would otherwise have been possible. As noted
in the previous section, however, the forces of competition made it inescapable
that the banks had to share any of their gains with other investors. Thus the
principal net result was the profitability for the Treasury, which actually obtained
a net cost for its issue well below the going market yield on comparable securities.
On the day of issue, for example, a similar security maturing only a month
later than the TAB’s (a 3^-percent certificate maturing April 15, 1958) carried
a market yield of 3.74 percent (bid) while the TAB was sold at an average price
equivalent to a 3.485 percent yield.
The value of the added tax and loan account balance to the individual bank
depended upon such factors as the banks reserve position at the time the credit
was established, the probable price at which the TAB’s would be sold to investors,
the net yield the bank was able to earn on additional (or substitute) loans or
investments, and the length of time the new deposit in the tax and loan account
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remained with the banks. All of these factors had, in some way, to be estimated
by each subscribing bank before it could adequately judge the price it could
afford to pay or the quantity it would like to have.
In effect, therefore, payment with credits to the tax and loan accounts results
in the subscribing banks serving for a time as “underwriters” and distributors
for the Treasury. The banks who calculate correctly are likely to find that they
are compensated for their service as “underwriters” of the new issue, while
the Treasury is able to keep for itself, by borrowing below the market rate,
a considerable portion of the possible earnings value of the tax and loan account
credits to the banks. The process also provides a good example of the more
or less automatic working of competitive forces in the market for Treasury
securities.
c o n c l u s io n
The ability of the Nation’s monetary system to accommodate immense trans
fers of funds within the private sector of the economy without undue strain
on the money market is evidence of the system’s remarkable flexibility. Trans
fers between the private and Government sectors raise a special problem,
however, because of the unique role of the Federal Reserve banks as the Gov
ernment’s banker. Payments to the Treasury’s balance at the Reserve banks
involve a loss, and disbursements of that balance a gain, of commercial bank
reserves, with potentially magnified effects (under our fractional reserve
system) on the availability of bank credit.
Given the impossibility of maintaining an even balance each day between
the Government’s total receipts and disbursements, the Treasury must employ
a financial mechanism which avoids large and sudden increases or decreases
of the commercial banks’ reserve base. The system of tax and loan accounts
is that type of mechanism. As reservoirs for temporary accumulations of
Treasury funds, these accounts provide a necessary buffer against the disturb
ing effects of massive movements of funds during Treasury financings, or on
the major taxpayment dates. Moreover, the tax and loan account mechanism
facilitates monthly collection of withheld and social security taxes, thereby
giving the Treasury the proceeds ahead of the quarterly tax returns. By spacing
out the transfers of funds into its Reserve bank deposits, the Treasury aims
to achieve a close balance between the inflows and outflows, with the result
that these deposits are held at a fairly steady level. Experience has shown
that this method of managing the Treasury’s balances is well adapted to the
U.S. banking system and that it can be used successfully to avoid the grave
money market disturbances that might otherwise be a mechanical byproduct
of large-scale Treasury operations.
Question 2.— If the commercial banks are not to pay interest on Treasury
accounts, why should not these funds be drawn properly back into the Federal
Reserve, which could invest them in short-term Treasury bills until the Treasury
drew upon the Federal Reserve?
The Treasury maintains balances in tax and loan accounts with commercial
banks so as to avoid the disruptive effects on the economy and to the banking
system which would occur if the large amounts of cash collected from time to
time by the Treasury from taxes or from the sale of public debt obligations are
withdrawn at one time and paid into the Federal Reserve banks.
Any action which would have for its purpose the withdrawal of these funds
from the commercial banks and their deposit in the Federal Reserve banks
ahead of the time when they are needed to meet expenditures of the Government
for the purpose of investing them in short-term Treasury bills would give rise
to the disruptive effects which the Treasury seeks to avoid by keeping the funds
on deposit in Treasury tax and loan accounts in the first instance. When funds
are withdrawn from the commercial banks and paid over to the Federal Reserve
banks in order to build up Treasury balances in the Reserve banks, the commercial
banks have to find free reserves to cover these payments.
There are only two ways in which the commercial banks can do this when
their funds are fully employed (when they have no excess reserves). One is
to reduce assets, which can be accomplished either by selling securities in the
market (or cashing them in at maturity) or by terminating loans; the other is
to increase liabilities by borrowing from the Federal Reserve banks. Commercial
banks generally prefer to reduce their assets rather than to be in debt to the
Reserve banks.
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It is true that if the Federal Reserve purchased securities from the banks
simultaneously with the movement of deposits out of the banks this would keep
the commercial bank system as a whole in equilibrium at the lower level of
deposits (and reserves). In theory, at least, the suggestion would appear feas
ible. If there was only one bank it might work (although still with disadvan
tages to be pointed out later), since the transactions would in fact be simple
and instantaneous. If might even work if only a dozen or less banks were in
volved, as in Canada and the United Kingdom. But its operation through 11,000
individual banks would present serious obstacles.
The magnitude of Treasury operations in tax and loan accounts is so large
and the number of banks so great that the effect of timing and the effect among
individual banks would be very disruptive to the money market. In the first
place, even if it were possible to do the entire operation within a day or two
there would necessarily be a difference in timing between the flow of reserve
funds out of the commercial banks and the return flow due to Federal Reserve
purchases of securities. When the flow is reversed as when the Federal Reserve
sold securities as the Treasury made disbursements and the funds flowed back
into commercial bank reserves the same problem of uneven timing would arise.
In the second place, it is obvious that in the case of an individual bank the
funds would not flow back in even approximately the same proportion as they
were withdrawn, even if timing were perfect for the banking system as a whole.
At the peak of each of these flows of funds, Federal Reserve credit would be
expanded by the amount of Governments they acquire. This expansion, even
though offset by increased Treasury deposits with the Federal Reserve, rather
than by increased bank reserves, would still be widely interpreted as an inflation
ary step simply because Federal Reserve credit had grown. Any lack of preci
sion in offsetting the flow of funds away from and back into member bank bal
ances as the Treasury’s balances with the Federal Reserve rose and fell would
also produce unforeseen contraction or expansion of bank reserves.
The job of trying to estimate each day’s flow of funds accurately enough to
permit an operation such as this to proceed smoothly would be almost impossible,
quite apart from the tremendous disparity of effects from one bank to another.
Seemingly small shifts in the reserve position of the banking system (sometimes
only $50 or $100 million) can affect short-term interest rates through the normal
operation of Federal funds. The ability to keep these shifts sufficiently small
would be greatly weakened if the suggested, procedure were followed, with cor
respondingly greater risk of wider short-term interest rate fluctuations and the
possibility of disorderly markets.
Unless the Federal Reserve makes sure that sufficient excess reserves are pro
vided, it is also very difficult to see why a commercial bank would have an incen
tive to buy any new Treasury securities under such circumstances— either for
its own account or for customers— since the resulting deposit would be with
drawn immediately and the bank would be forced to sell either the new issue it
just acquired or something else. Bank underwriting and secondary distribution
of new Treasury issues would be seriously undermined unless the Treasury took
alternative steps such as (1) paying commissions to the banks, (2) adding mate
rially to the interest rate attractiveness of new issues, or (3) increasing the
frequency (and cutting the size) of its offerings so that money was borrowed
in amounts intended to cover the expected cash outflow for the ensuing day or
2 days (or a week at the most) on a hand-to-mouth basis. All three of these
alternatives would add significantly to Federal borrowing costs.
Question 3.— If the deposits are to be maintained in commercial banks, could
not the Treasury work with a smaller balance and handle temporary surges or
shifts in cash position by an increased use of its authority to draw temporarily
on the Federal Reserve banks ?
The Treasury always endeavors to maintain its aggregate balances in tax and
loan accounts at minimum levels consistent with the needs of the Treasury for
funds to meet the day-to-day and month-to-month operations of the Government
It is not possible to maintain these balances at a constant level. The tax and
loan accounts serve as an equalizing reservoir between the inflow of taxes and
borrowing proceeds on the one hand and disbursements on the other.
It is necessary for the Treasury to borrow funds at times when the market is
receptive to borrowing, and this affects both the amount and timing of new issues
as well as their cost.
Also, tax collections flow into the Treasury’s balances on a very uneven basis.
In some months of the year, total tax collections are four times as great as tax
EM PLOYM ENT,
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collections during other months. Furthermore, tax collections during the course
of the month may vary greatly from week to week and from one day to another.
Expenditures follow a more even course, but even here short-term fluctuations
are important and not always predictable. All these are factors which account
for the great variations between low and high balances in the Treasury’s tax
and loan accounts during the course of a month or a year.
These shifts in the timing of receipts and expenditures should not be met by
resorting to direct borrowing from the Federal Reserve banks except for rare
use as a supplement to the present system when there is a particular strain before
peak tax payment dates or when an unexpected volume of debt repayments must
be made in cash.
The Treasury’s direct borrowing authority with the Federal Reserve provides
an essential emergency “line of credit” which the Treasury can tap. It may use
this authority when day-to-day cash flows are out of line with estimates and
the resulting cash balance is below minimum operating levels. It also needs
such authority in order to meet any sudden nationwide emergency which would
require heavy cash payments from the Treasury before public debt obligations
could be sold to the public to provide such funds. The availability of this direct
borrowing authority permits the Treasury to operate on a smaller cash balance
than would otherwise be possible, with corresponding savings to the taxpayer.
The Treasury’s policy has always been to use this borrowing authority sparingly,
and only on a temporary basis, since we recognize that selling obligations of the
Government directly to Federal Reserve banks creates high-powered money
and tends to be inflationary.
Even under conditions when the creation of Federal Reserve credit is com
pletely offset by a Treasury deposit rather than by increased bank reserves it
establishes an unwise precedent. History is full of instances in other nations
where direct borrowing by the Treasury from the central bank has been the
forerunner of disastrous inflationary consequences.
Quite apart from the question of possible misuse (or misinterpretation of
the use) of the borrowing authority it is clear that the objections raised to widely
fluctuating Treasury balances in Federal Reserve and widely fluctuating private
balances in commercial bank accounts in the answer to question 2 are also
applicable here. The avoidance of the tremendous drain on commercial bank
reserves accompanying the withdrawal of customers’ balances when they pay
their taxes or purchase securities, and the tremendous resurgence of deposits
as Treasury expenditures flow through the banking system is one of the major
functions of the Federal Reserve System, and it is a function which is being
performed quite successfully. To accept gyrations in a magnitude not even
dreamed of when the ’ Federal Reserve Act sought to achieve a smoother flow
of funds throughout the banking system would seem, therefore, to be a serious
step backward.
It is also unclear what this suggestion would accomplish as a practical matter.
In the first instance the Treasury would borrow $1 billion from the Federal
Reserve, let us assume, and Treasury’s deposits with the Federal Reserve would
be increased correspondingly. This is simple, but the reverse of the transaction
is much more complicated. As the Treasury spends the money it draws checks
on its balance in the Federal Reserve banks. Those checks are then deposited by
the recipients in the commercial banks, with a corresponding increase in bank
reserves (let us assume one-sixth required reserves and five-sixths excess
reserves). There would obviously be a large expansion of bank credit if the
process stopped here.
To counteract this the Federal Reserve, therefore, simultaneously sells securi
ties to the banks to absorb what would otherwise be excess reserves. This can
be done directly, or it can be done indirectly by the Treasury’s selling new
securities to the banks and paying off its debt to the Federal Reserve. The net
effect is the same in either event. As a matter of fact, the net effect of the
whole transaction is the same as in the case of the procedure the Treasury
follows now when it borrows from the banks- The suggested transactions with
the Federal Reserve are merely superimposed on them. However, any error in
estimating the timing of transactions to offset the creation of bank reserves
would, again, have the effect of restraining or easing credit accidentally.
Any intention implicit in this suggestion that somehow Treasury borrowing
costs would be reduced by shifting Government security holdings (and earnings)
from commercial banks to Federal Reserve banks for short periods of time seems
very unlikely to occur. Banks would find their present incentive to do a good
underwriting and secondary distribution job on new Treasury securities ser
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LEVELS
iously curtailed if deposits are kept extremely low. The Treasury then has the
choice of paying correspondingly higher interest rates to attract the banks
(always assuming, of course, the maximum Treasury effort to borrow outside
of banks) or the payment of commissions, with a net result likely to be higher
rather than lower interest costs to the taxpayers.
Question 4-— Would you agree that the law is now obsolete and should be
repealed which prohibits commercial banks from paying interest on demand
deposits?
The law which prohibits commercial banks from paying interest on demand
deposits was enacted in the early 1930’s to correct abuses in the banking sys
tem which had grown up prior to that time. When commercial banks were
permitted to pay interest on demand deposits, there was a tendency for banking
funds in the smaller cities and rural areas to be drained away from those banks
into the larger commercial banks in the principal money centers. Banks com
peted aggressively for those deposits and paid higher and higher rates of in
terest to attract them.
As a result, banks were under pressure to make more loans and investments
to earn enough to pay higher rates, even though the quality of many such mar
ginal loans and investments became more and more substandard. Conse
quently, during the depression of the early 1930’s this increased the banking
difficulties that occurred at the time. It was that situation which caused the
Congress, in the Banking Act of 1933, to provide that commercial banks could
not pay interest on demand deposits.
In the public interest, there are two reasons why the Treasury believes banks
should not pay interest on such deposits. In the first place, the competition
between banks for demand deposits does not create any additional deposits.
The aggregate amount of demand deposits in the commercial banks is largely
controlled by the Federal Reserve through the operation of monetary policy.
Therefore, the effect of competition is to shift deposits between banks. On the
other hand, member banks are permitted to pay, at present, as much as 3 per
cent interest on savings and time deposits (unless State laws specify a lower
maximum), but the payment of interest on these deposits has an economically
desirable effect by increasing incentives to save. The different character of
time deposits is not only reflected in the fact that a bank does not have to pay
them on demand, but aiso because of lower reserve requirements for them and
the longer term nature of the assets generally held as an offset to them. In the
second place, if the banks were to bid competitively for demand deposits be
cause of this added interest expense, they would probably find it necessary to
charge generally higher interest rates on loans or exact higher service charges,
or both. Even if the Federal Reserve and the Federal Deposit Insurance Cor
poration could by law be authorized to set maximum rates on demand deposits—•
as is done now on time deposits— these influences would be moderated, but not
eliminated.
The payment of interest on tax and loan accounts would probably add to
Treasury borrowing costs. The present practice of commercial bank payment
for new Treasury issues through tax and loan accounts is very effective in
stimulating the banks’ interest in Federal securities, not only for their own
accounts, but also as distributors of these securities in the secondary market.
To the extent that banks are required to pay interest to the Treasury on each
additional amount of tax and loan account they acquire, this obviously will be
reflected in the price they will be willing to bid for securities they purchase
from the Treasury at auction as well as affecting the coupon rate which the
Treasury would put on its fixed-rate securities (certificates, notes, and bonds).
The point should also be made that there are some commercial banks in this
country which do not even accept savings or time deposits at interest, so they
would be even more unwilling than the average bank to pay interest on Gov
ernment demand deposits. In addition, there wTould unquestionably be a con
siderable number of other banks which would not think it was good business
to accept Government deposits with their extreme volatility if they had to pay
interest on them. Payment of interest on all demand deposits would also make
them more attractive than now for nonbank investors to hold, tending to increase
interest rates which the Treasury and all other borrowers would have to pay to
compete.
As mentioned in answer to question 1, the initiation and maintenance of an
adequate service charge or fee system that would presumably grow out of a re
quirement of interest on demand deposits would be difficult. No one can pre
dict, of course, what arrangement of fees and interest rates would be developed
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if such a system were tried. It is quite doubtful, however, if only because of
the overhead expenses for both the banks and the Treasury that would be in
volved in administering such a system that neither the public interest nor the
interest of either the banks or the Government would be served. The present
system not only dispenses with this unnecessary overhead but also recognizes
the fundamental fact that it is difficult to put a price tag on intangible benefits
which the Treasury now receives.
I would say this to the Senator at this moment: The Comptroller
General has asked that we undertake a study of the problem of charg
ing interest on some of our deposits and the problem o f bank service
charges to cover their costs on what they do for us.
The C h a i r m a n . I have done that for years, to no avail; absolutely
no avail.
Secretary A n der son . I know, sir. We are now preparing a study
of this sort, and we are going to undertake it. When we undertake
it, we will, o f course, make available to the Senator the very things
you are asking.
The C h a i r m a n . Mr. Secretary, we all have had some experience in
State and local governments and State and local politics. W e know
that one o f the chief sources o f illicit influence in the States is in the
interest-free deposit of balances of local, county, and State govern
ments. I do not know of a State in the Union where there is not either
an open or a hidden scandal. There may be such.
We have huge amounts o f Government money lying around in the
banks upon which no interest is being paid, although these amounts
stay there in banks for substantial periods o f time and are never drawn
upon.
I f these minimum deposits either could be put directly to drawing
interest or transferred to the reserve, where they could be invested in
short-time Government bills, which are highly liquid, and upon which
interest could be paid, we could have at least $100 million a year, in my
judgment.
Representative P a t m a n . Probably three times that much, Senator.
The C h a i r m a n . Well, I want to be conservative.
And that would help enormously not only in financing the Govern
ment, but in its debt problems.
Frankly, I can understand how this developed during the war, when
the banks performed a large number of unpaid services to the Gov
ernment, particularly in the selling o f E bonds, and so on. But
these unpaid services have diminished in volume, and I think this is
largely a bonus— a subsidy to the banks.
Since the banks do not believe in subsidies for others, I think they
should join us in trying to remove this subsidy.
Secretary A n d e r s o n . A s I have indicated, Senator, we are going to
undertake a comprehensive study of this subject. I should point up
that it is my judgment the banks are still providing a number o f serv
ices, among them being such benefits as the intangible benefits of act
ing as the secondary distributor of a large volume of securities—both
marketables and savings bonds—on which there are no commissions
paid, and certain other services which will be elaborated on in the
study. On these services it seems to me that one finds it difficult or
impossible to put a dollar value. Nevertheless, we will draw up, we
are drawing up now, the techniques we intend to employ in making a
study of it. W e want to have those techniques approved by the Comp
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E M P L O Y M E N T , G R O W T H , AND PRICE LEVELS
troller General. Then we will make the inquiry, and the results of
that inquiry will be made known.
The C h a i r m a n . I appreciate your doing this. It almost convinces
me that the constant importunity of Senators may have some effect.
I have almost despaired of this, but I am beginning to get a little
hope—not much, but a little.
Congressman Curtis.
Representative C u r t is . I just want to say that I join the Senator
in the request and that I have been very much interested over a
period of time in it. So add to that, “ House Members.”
The C h a i r m a n . I do not want to pose as the only virtuous man on
the committee.
Representative C u r t is . I do not know whether we will get any
where on it, but I want to be sure whether the Senator included with
this not just the Treasury fund itself, but also a lot of Government
funds that are in the hands of other Government agencies. One thing
that has concerned me a little bit on these deposits is that there seems
to be a policy measure whereby, in some instances, the State author
ities actually designate the placing of these deposits, rather than the
Federal agency that actually has the money.
The C h a i r m a n . These are some of the skeletons in the closets all
over the country.
Representative C u r t is . I could not agree more.
Secretary A n d e r so n . This distinction ought to be pointed out in the
case of States and our own operations, Senator Douglas, that in the
case of States, various State agencies are putting money into banks.
The way the money gets into the bank, as far as the Federal Govern
ment is concerned, is that they buy a security and create the deposit
or sell a security to a customer and transfer a deposit. So it is not
the same thing as our going out to select a bank and say we are going
to put so many dollars in the bank.
The C h a i r m a n . They can use that deposit to buy more Government
short terms, so they get double interest.
Secretary A n d e r so n . I simply wanted to make that distinction.
They do not get double interest, however.
Representative P a t m a n . Mr. Secretary, I want to ask you a question
concerning these withholding taxes. It has been the policy of the
Government, under both administrations, to make it easy for corpora
tions and people who are going to be large income-tax payers, to buy
short-term securities, and even maturity dates are guided by what will
be most convenient to them. Do peopie whose taxes are withheld get
any benefit of any kind for the prepayment of their taxes ?
Secretary A nd e r so n . I am not sure that I understand the question.
Representative P a t m a n . Twenty percent of a worker’s salary is
deducted each payday, commencing January 31, and for each of the
12 months. I f we are going to make it convenient for the larger tax
payers to get some interest income on the money they are holding to
pay taxes, should we not also consider making it just a little easier
for the person who pays in advance ?
Secretary A n d er so n . I would have to study it to see.
Representative P a t m a n . I understand. It is not exactly related.
But since we are tailoring these securities so that the large incometax payers will get some benefit when they hold their money back to
pay their income tax-----
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Secretary A n d e r so n . Frankly, the question has not occurred to me,
but I will pursue it and give you a statement.
Representative P a t m a n . I am not trying to dig up any snakes to
kill. I am just asking you.
Secretary A n d e r so n . I understand.
(The written statement referred to above follow s:)
Taxpayers subject to the individual income tax are required by law to pay
their taxes more currently than is the case with corporate taxpayers. A large
proportion of individual income taxes are, of course, withheld at source, and
the remainder of individual income tax receipts come in through current quar
terly declarations or through final payments the following April. Most cor
porations, on the other hand, even with completion of the speedup in corporate
tax collections provided by the Revenue Code of 1954, will still be paid equally
in the 9th and 12th months of the year of liability and the 3d and Oth months
of the following year, rather than earlier.
As a direct outgrowth of the taxpayment schedule provided by law, therefore,
a substantial need arises for corporations (and upper income individuals to
some extent) to invest short-term funds as they accumulate the money necessary
to meet these taxpayments. The need to accumulate funds specifically for tax
purposes is recognized particularly by corporations who will accrue their tax
liabilities as they are incurred throughout the year and frequently set up re
serves for this purpose.
These reserves may be left on deposit with a bank or they may be invested
in U.S. Government securities, or in other short-term paper. In the Treasury’s
efforts to rely on nonbank ownership of the debt insofar as possible we, of
course, encourage corporations to invest these funds in Government securities.
The Treasury similarly encourages individuals to buy short-term Governments
for the same reasons. We know that individuals are much less interested in
doing this, however, because the amount of their unpaid liabilities is quite small
in comparison with corporations (the effect both of withholding and more
current payments), and because they are much less likely to set up specific
reserves for tax purposes since they are not business enterprises.
A taxpayer who wishes to invest short-term tax reserves in Government secur
ities may, of course, buy any one of a number of available issues, either in the
market or directly from the Treasury. As early as the summer of 1951, how
ever, the Treasury began to offer tax anticipation securities designed particu
larly for those corporations and individuals who wished to plan their tax reserve
accumulation more precisely. These tax and savings notes which the Treasury
had on continuous sale from August 1941 through October 1953 were nonmarketable, and owners turned them in at redemption values specified on the security
itself. Beginning in 1951, following the enactment of the Revenue Act of 1950
which inaugurated the shift of corporation taxpayments to a more current basis,
the Treasury also began to sell marketable tax anticipation securities. These
have now entirely replaced the nonmarketable tax and savings notes which were
well suited to Treasury needs during the war and early postwar period, but
which became inappropriate when short-term interest rates fluctuated more
widely.
Taxpayers have found tax anticipation securities a more convenient form of
investment than other Treasury issues in most cases because they may be turned
in directly at par in payment of taxes. Other Treasury issues usually would
either have to be sold in the market or, in the case of regular Treasury bills
maturing before a tax date, turned in to the Treasury for cash at maturity, so
that funds would be temporarily uninvested. There are no restrictions as to who
may buy tax anticipation securities so individuals, as well as corporations, are
free to buy them. As mentioned earlier, however, individuals have relatively
little interest in accumulating tax reserves because of the basic structural
differences between the individual and corporate income taxes.
If the Treasury did not issue these particular securities for purchase by these
taxpayers, it would have to issue other securities in lieu thereof, because the
Treasury issues public debt obligations only when it is necessary to raise cash to
meet its operating requirements or to refund outstanding securities. The Treas
ury simply borrows from these taxpayers in advance of the due dates on which
their taxes are payable, and consequently has to pay interest for this privilege.
The borrowings are repaid, in effect, when the taxes are payable.
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From the Treasury’s standpoint the popularity of tax anticipation securities
helps to reduce dependence on borrowing from the banks as well as to provide an
excellent way of meeting a large part of Treasury seasonal borrowing needs.
Corporations would probably put considerable amounts of their tax reserves in
regular issues of Treasury bills even if tax anticipation securities did not exist.
However, the convenience attached to the tax anticipation securities has added
to their attractiveness and this has helped the Treasury manage the debt more
efficiently.
Representative C u r t is . Mr. Chairman, Senator Douglas was so kind
as to refer to the very able staff of the Republican committee, and I
want to put one thing in the record at this point. This is work by the
U.S. Senate Republican policy committee, and has to do with interest
payments in proportion to the total economy, pointing out that inter
est rates by the Federal Government have not increased any more than
anything else in the economy. Net interest paid by the U.S. Govern
ment is a smaller percentage of gross national product now than at any
time under the Truman administration years of “ easy money” and
inflation. It shows that tables from 1946 to 1957, and I have incorpo
rated the figures for 1958.
May this be included in the record.
Representative P a t m a n . Without objection, it is so ordered.
(The material referred to follow s:)
I nterest P a y m e n t s
in
P r o p o r t io n t o t h e
T otal E co nom y
Interest payments by the Federal Government have not increased any more
than everything else in the economy. Net interest paid by the U.S. Government
is a smaller percentage of the gross national product now than at any time under
the Truman administration’s years of “easy money” and inflation.
[In millions of dollars]
N et interest
paid by the
Federal
Government
1946 ____________ ________________________________ _______ _________
1947_______________________________________________________________
1948_______________________________________________________________
1949_______________ _______________________________________________
1950___________________ ______ ____ ______ _________________________
1951________ ______________________________________________________
1952_____ _______ _____ ____________________________________________
1953_______________________________________________________________
1954 ____ __________________ ____________________________
_ ...
1955_________ ___________ _________ _______________________________
1956______ _____ _____ _____ ________________________________________
1957_______ _______ _______________________________________________
1958_________________________________________ ______ _______________
$4.170
4,167
4,264
4, 400
4,509
4,709
4, 729
4, 846
5, 006
4,320
5,238
5,632
5,300
Gross
national
product
$210, 700
234,300
259,400
258.100
284, 600
329, 000
347, 000
365, 400
363.100
397, 500
419, 200
440, 300
440, 000
N et interest
paid by the
Federal
Government
as percent
of G N P
2.0
1.8
1.6
1.7
1.6
1.4
1.4
1.3
1.4
1.2
1.2
1.3
1.2
Source: Office of Business Economics, U .S . Department of Commerce, “ U .S. Income and Output.'*
Percentages computed.
Representative C u r t is . I wanted to demonstrate a sample of the
good work of the committee.
Representative P a t m a n . Y ou mean the good work on the interest
rates.
Representative C u r t is . N o ; the accurate economic statistics it
gets up.
Representative P a t m a n . O f course, I am not accepting that as a
good defense of the high interest rate policy.
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1209
Are there any other questions of Secretary Anderson ?
(No response.)
Representative P a t m a n . At this point in the record, without objec
tion, the joint statement of Secretary Anderson and Chairman Martin
will appear in the record.
(The materials referred to are as follow s:)
J o in t S t a t e m e n t R e l a t in g to t h e T r e a s u r y - F ed e r al R e se r v e S t u d y of t h e
G o v e r n m e n t S e c u r it ie s M a r k e t b y R obert B . A n d e r s o n , S e c r e t a r y of t h e
T r e a s u r y , a n d W i l l i a m M c C h e s n e y M a r t i n , J r ., C h a i r m a n o f t h e B o a r d
of G o v e r n e r s of t h e F e d e r a l R e se r v e S y s t e m
(Presented for the record in connection with Secretary Anderson’s appearence
before the Joint Economic Committee, July 24, 1959)
The objectives of national financial policy as pursued by both the Treasury
and the Federal Reserve System have meaning, of course, only as they con
tribute to the sound functioning of our Nation’s economy. For our economy to
remain healthy and growing, market mechanisms must perform their essential
function of providing a meeting place where the forces of supply and demand
can operate to achieve the best utilization of resources. One of the problems
which has constantly confronted us as a Nation has been how to protect freely
competitive markets from forces which would hamper or restrict the perform
ance of this essential function. Only as everyone concerned remains alert to
new developments in marketing techniques and organization can we be assured
that distortions and restrictive practices have not crept in, to the detriment of
healthy growth. This is, of course, just as important and necessary in the
financial sector as it is in other areas of the economy.
Developments in the Government securities market a year ago led the
Treasury and the Federal Reserve System to undertake a joint study of current
techniques and organization in that market. This joint statement is devoted to
a discussion of the progress of the study thus far.
o b j e c t iv e s
and
conduct
of
study
The immediate background of our joint study was the wide and rapid price
fluctuation in the Government securities market during the economic recession
and revival of 1957-58. These market movements were naturally a matter of
concern to the Treasury in view of its debt management responsibilities. They
were of equal concern to the Federal Reserve because of its responsibilities for
overall credit and monetary conditions.
In undertaking the study our purposes were to find out how organization and
techniques in the Government securities market might be improved, and by
what means the danger of future speculative excesses in this market might be
lessened. The first step, we felt, was to provide the widest possible basis of
factual information. Accordingly, we undertook a detailed and analytic study
of the underlying causes of the 1957-58 movements. At the same time we under
took a broad reexamination and reconsideration of the market’s general organi
zation.
While experience of the Government securities market during a particular
recent period thus provided a specific occasion for initiating this special study,
both the Treasury and the Federal Reserve have recognized for some time the
need for such a study. The last such study, with somewhat more restricted
objectives, was made in 1952 under the auspices of the Federal Reserve’s Open
Market Committee. The Treasury did not participate in that study since it was
primarily concerned with the interrelationship of the market and Federal
Reserve operations. Since that time there have been many new developments in
the market’s machinery and practices, and both the Treasury and the Federal
Reserve felt that these developments needed careful evaluation.
The published version of our study will consist of three parts. Part I, which
is being made available for public release next Monday, consists, first, of a
summary of informal consultations— some conducted in person and some through
written communication— held with informed observers of the Government securi
ties markets and important participants in that market. Part I also includes
a special technical study of the possibilities of an organized exchange, or auction
market, to take care of the major part of the huge volume of Government securi38563— 59— pt. 6A------ 9
1210
E M P L O Y M E N T , G R O W T H , AND PRIC E
LEVELS
ties transactions. These are handled at present, as you know, in the over-thecounter or dealer market, where more than $1 billion of transactions are handled
in a typical trading day.
The informal consultations represented one of the major phases of our study
program. These consultations had three objectives: First, to obtain informed
impressions and judgments on basic causes of last year’s market experience,
especially toward midyear and after; second, to find out how market observers
and participants viewed and appraised existing market processes and mechan
isms ; and third, to get the benefit of whatever suggestions might be made for
improving and strengthening the market. While our consultations were limited
by the special purposes of the study to those who were thoroughly acquainted
with market practices, our aim throughout was to seek out the means whereby
the Government securities market could function best in the public interest. In
our inquiry the needs of the small buyers and sellers were considered carefully,
along with those of the Government and of institutional and other large
investors.
Consultants included various officials of large commercial banks, of insurance
companies and savings banks, and of investment banking firms; primary dealers
and intermediary brokers in the Government securities market; financial officers
of several large nonfinancial corporations; a number of members and officials of
the New York Stock Exchange; a group of financial economists; and a group of
academic economists. In all, approximately 75 persons participated in individual
or group consultation and about 30 others provided written comments. The
individual and group consultations were held in Washington, D.C., and in New
York City, and each lasted from an hour to a full day. The discussions with
financial and academic economists were on a panel basis, but the remaining con
sultations were held separately on an informal basis with one or more individuals
from a single organization.
Part II of our study is a factual analysis of the performance of the Govern
ment securities market from late 1957 to late 1958. Rapidly changing market
conditions in this period presented an unusually wide range of problems. To
obtain the most complete information possible on the market forces at work,,
special questionnaire surveys were addressed to all major lenders and partici
pants in the market. On the basis of the answers received, we were able to com
pile much new data relating especially to market developments from spring
through early fall of 1958.
Concerning this second part of the study, it is gratifying to report that the
responses to our detailed requests for new statistical information were excep
tionally good— indeed, virtually 100 percent.
Part III of the joint project consists of four supplementary and technical
studies growing out of the suggestions and findings of the first two parts. We
comment later on their particular focus and scope. Neither part II nor part III
has been printed as yet, but both are being made available in preliminary form
also for release Monday morning.
Before turning to the substance of the entire study itself, a word should be
added about how the project was staffed. Both the Treasury and the Federal
Reserve System assigned to the study senior personnel experienced in the observa
tion and analysis of the Government securities market. In addition, the Treas
ury retained the services of a former staff official, having both debt manage
ment experience in the Treasury and practical experience in the market, as
technical consultant on the study. Federal Reserve personnel were drawn mainly
from staffs of the Board of Governors and the New York Federal Reserve Bank,
but selected personnel from other Reserve banks also shared in the work. A
central Treasury-Federal Reserve staff group was given full responsibility for
carrying out the project, and since early spring the members of this group
have devoted a major share of their time to it.
INTERPRETATION OF TH E 1 9 5 7 - 5 8 M ARKET EXPERIENCE
As noted earlier, our study of the Government securities market was focused
on the wide swings in market prices and yields of Government securities from
late 1957 through the fall of 1958, with special attention paid to the mid-1958
market experience. Through systematic reexamination of available data and the
development of new data, we endeavored to find out what lessons could be
derived from this experience which would be of benefit to investors generally
as well as to those who are responsible for fiscal policy, debt management policy,,
and monetary policy.
E M P L O Y M E N T , G R O W T H , AND PRICE
LE V ELS
1211
We have not had sufficient time as yet to make a complete evaluation of all the
data which have been brought to light by the joint study. Four general observa
tions relating to private investment and credit extension, fiscal policy, debt
management, and monetary policy, however, are pointed out by the staff
group, as follows:
First, for purchasers of marketable Government securities and for lenders, the
risks of speculation on anticipated cyclical price movements of fixed-income Gov
ernment securities, and particularly of speculation on slim margin, creditfinanced holdings, have been widely learned.
Second, in the area of fiscal policy, there is the problem that recession deficits
often run to very large size and are delayed beyond the turn in the economy;
as a result, they provide stiff financing competition when growing demands for
the financing of recovery must be satisfied from a more slowly growing savings
supply, and this competition for savings funds may have significant, but largely
unavoidable, effects on securities prices and interest rates.
Third, in the area of debt management, there is the problem as to whether, in
periods when easy credit conditions lend investor favor to longer term, higher
yielding issues, a large and rapid shift in the maturity structure of the debt
may result in supply and demand distortions, which may later have upsetting
and disruptive effects on the market.
Fourth, in the area of monetary policy, there is the problem as to whether easy
credit conditions and accelerating monetary expansion for countercyclical ob
jectives may be carried to the point where banks and other lenders respond too
actively to speculative demands for credit, so that lenders, in their zeal to keep
their funds employed to fullest advantage, may too easily relax the credit
standards which long experience has taught to be sound.
These broad conclusions arising out of our study point up a major financial
dilemma which is faced in coping with recession in a free enterprise, market
economy.
We all agree that reduction of economic instability is one of our major objec
tives. National financial policy— which refers to fiscal policy, debt management
policy, and monetary policy in combination— is the primary means available to
the Federal Government for cushioning recession and stimulating recovery.
Yet, the vigorous use of financial policy to promote economic stability runs the
risk of being accompanied by instability in the financial markets, where flexible
movement is an essential part of market mechanism. This appears to be a risk
which we must take, while doing everything we can to minimize the incidence
of instability in these markets.
We know, of course, that many difficulties arise in the effective use of fiscal
policy in recession. Deficits in recession are incurred either automatically be
cause of reduced tax receipts and increased social insurance payments or because
of specific public policy actions taken to combat recession. These in turn have a
direct impact on the prices of Government securities.
The additional burden of increasing debt in such periods— particularly when
preceded by inadequate budget surpluses for debt reduction during the preceding
rise in the economy— may also have a psychological effect on investors. This
may be expected because of the fact that investors are concerned about future
budgetary policies as well as the size of the particular financing needs of the
moment.
There are other perplexing dilemmas in periods of general economic instability
which arise from the very flexibility of our market mechanisms. Investors, for
example, are faced in recessionary periods with either keeping their funds
highly liquid (with low earnings) or attempting to obtain higher yields available
only on longer term investments and thus sacrificing liquidity. Concentration on
liquidity would, of course, accentuate recession tendencies, while emphasis on
higher yields would help to counteract such tendencies.
The Treasury faces difficult choices during a recession. The orthodox theory
of debt management emphasizes short-term financing when resources are not
fully employed. At such times, however, the long-term market is receptive to
offerings— perhaps for the first time since the middle part of the previous up
swing in the business cycle. When the Treasury enters such a period with a
large and growing floating debt, it would seem advantageous to refinance some
part of this debt at longer term. Such a course is also desirable to provide
greater leeway in choosing financing alternatives when the recession-induced
deficit is sooner or later encountered. And since a recession deficit when it
occurs must be financed within a relatively short period of time, the Treasury
must look forward to making heavy calls on available savings during the deficit-
1212
E M P L O Y M E N T , G R O W T H , AND PRIC E
LE V E LS
financing period. In the second half of 1958, for instance— a recovery period, but
one coinciding with heavy deficit financing requirements— the Treasury was
obliged to absorb the equivalent of a third or more of the total new savings funds
then available. The Treasury’s problem of maintaining a debt structure adapt
able to changing circumstances without itself contributing to instability of the
■economy is a formidable one.
Monetary policies, if they are to contribute to resolving our problems of gen
eral economic instability, must be deliberately and appropriately adjusted to
combating recession and they must be shifted when an upturn is evident. The
timing and extent of monetary actions— like those in the fiscal field— must surely
be determined by other considerations in addition to their inijjact upon interest
rates and the prices of securities. Again, however, such effects are not to be
ignored.
SOME
FINDINGS
ABOUT
M ARKET
FUNCTIONING
While the study indicated certain broad lessons from the 1957-58 experience
for both investors and national financial policy, and also highlighted some of
the fundamental and conflicting dilemmas inherent in such a period, it focuses
on the functional and mechanical aspects of the Government securities market
In this setting of recession and recovery. A specific interest was the speculative
*nd credit excesses that developed. Our objective in studying these develop
ments was to arrive at possible adaptations of public policy and also of market
institutions which might lessen the market’s exposure to such excesses in the
future.
The excesses which occurred last year were associated with the buildup in
the Government securities market prior to the Treasury’s offering in late May
1958 of 2% percent, 7-year bond as one option available in its June 15 re
financing of $9 V6 billion of maturing obligations held by the public. The other
option was a 1-year 1% percent certificate. Altogether the holders of about $7V2
billion of the maturing issues prefered the 2% percent bonds— a figure which was
more than double what had been estimated by the financial community or by
Government agencies as true investor demand. This was a surprise to the
market and suggested that a sizable amount of the newly acquired securities
were speculatively held. Nevertheless, there was general market agreement
after the announcement was made that the market would be able to absorb
the excess supply over a period of time.
About this same time, however, market observers were beginning to realize
that the Federal deficit in the year ahead would be the largest since World War
II, and that most of it would have to be financed in the second half of 1958,
coinciding with the period of heavy Treasury seasonal borrowing. At least part
of the flow of economic information in the first half of June had been mildly
encouraging; but it was not until around mid-June that market observers took
into account that economic recovery might soon begin and thnt conditions of
active ease in credit markets might be coming to an end. In this setting, liqui
dation of temporary holdings of 2% percent bonds began and gathered rapid
momentum, with an accompanying sharp decline in market prices of Govern
ment securities and an associated sharp rise in security yields. As you know,
the opportunity for either profits or losses 011 the price behavior of a longer
term bond is much greater than on short-term securities for a given change
in interest rates.
This liquidation period, you may recall, occasioned intervention in the market,
first by the Treasury in late June and early July to relieve the market of some
of the excess supply of 2% percent bonds issued at mid-June, and second by
the Federal Reserve later in July to correct a disorderly condition which de
veloped around the time of the international crisis in the Middle East and a
Treasury financing.
Many observers have placed principal blame for this upsetting market episode
on excessive speculation in the June refundings, financed by the use of credit
extended on unduly thin margins. Our study shows that there was indeed a
substantial volume of credit-financed participation in the June refunding— about
$1.2 billion. Considering that $7M> billion of the 2% percent bonds were issued,
it is obvious that at least four-fifths of the subscriptions represented outright
holdings. A significant share of these were probably also temporary holdings
purchased in the hope of speculative gain. The outright holdings largely repre
sented subscriptions on the part of commercial banks and business corporations.
In retrospect, one key to this widespread speculation may have been the ab
sence of adequate information about current tendencies in the Government se
EM PLOYM ENT,
G R O W T H , AN D PRIC E L E V E LS
1213
curities market itself, which is, of course, the pivotal market in this economy’s
financial organization. Much more important, however, is the fact that too
many speculatively motivated exchanges into the 2% percent bonds were ap
parently based on investor judgments that recession would continue for some
time, and that long-term interest yields would decline further.
Speculation financed by credit created a particular problem in this instance be
cause there were large blocks of holdings acquired by newcomers to the market
who bought or made commitments to buy Government securities on very thin
margin— or in many cases on no margin at all. Several stocks exchange houses
made large commitments themselves and acted between lenders and specula
tors. Some commercial banks and business corporations, actively seeking higher
yielding outlets for funds than were provided by Treasury bills and other shortdated securities, directly or indirectly helped to finance these operations.
The activities of one stock exchange member specializing in money brokerage
facilitated the financing of a substantial volume of the June rights. These op
erations were found to be in violation of stock exchange rules. The enforced
unwinding of these very large positions came at a particularly sensitive stage of
the market decline and, combined with other liquidation of speculative holdings,
put the market under severe supply pressure. The New York Stock Exchange
has since modified its rules so as to prevent a repetition of this kind of specula
tive financing activity in the future.
While positions financed on credit were not the largest speculative element in
the market at the time of the June refunding, they were certainly important in
initiating and accentuating the June-July decline in market prices which ac
companied the economic upturn. Once liquidation of the new Treasury bonds
was underway and prices were declining sharply, it was inevitable that some
margin calls and related selling to protect lenders’ positions would occur. At
the same time, there was substantial liquidation by holders who had done no
borrowing at all as they realized that profits were not in prospect and sought to
minimize or avoid losses by selling out. The development of the Lebanon crisis
in mid-July and the growing awareness of the prospects of large Treasury defi
cit financing in a period of rising private demand for loan funds and accompany
ing expectations of tightening credit conditions, based in part on rumors of a
shift in Federal Reserve policy, heightened market uncertainties during this
period of liquidation. There also was considerable uneasiness due to fears that
the large budgetary deficit would induce renewed inflationary pressures.
Over this entire period of rapid market change, the figures compiled for the
study indicate that dealers operated chiefly in their normal primary function as
intermediaries. As the June financing approached, dealers were called upon to
absorb large amounts of short-term issues that were being sold to meet corporate
liquidity needs over dividend dates and the June tax period. As a result, dealers’
holdings of Government securities increased substantially. The enlargement
occurred mainly in Treasury bills and in June “rights” (maturing issues eligible
for the exchange), and these rights were largely exchanged for the 2% percent
bonds.
To make matters more difficult over the period covered by the June financing,
dealers had to meet large maturities of repurchase agreements which they had
made with nonfinancial business corporations. Under these agreements, corpora
tions accumulating funds in earlier months invested a large portion of them by
arrangements to buy Government securities and, at the same time, agreeing
to resell the securities to dealers on a fixed date in June— again to cover cash
needs related to dividend and income tax disbursements at that time. The short
term securities underlying these arrangements had to be refinanced in June
through placement by dealers with banks or other lenders.
When the June exchanges were completed dealers undertook to accomplish
a distribution of their underwriting holdings o f the new 2% percent bonds.
Such underwriting can result in losses as well as profits to dealers because of
the market risks assumed by them. These risks proved to be real in the June
financing. Normally, the distribution of the securities acquired in underwrit
ing would have proceeded throughout the remainder of June and July. In view
of the then existing market uncertainties, dealers intensified their distribution
efforts and cut back on their total positions generally. These activities also
contributed to supply pressures in the market.
Once market decline had set in, investors, speculators, and dealers were
obliged to make market judgments in the light of their own portfolio and spec
ulative situations and their individual appraisal of current and future uncer
1214
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
tainties. There were times in this period, we were told by market participants,
when dealers in order to protect their own capital positions would accept
large-size orders to sell only on an agency basis, promising to make the best
effort possible to carry out the customers’ requests. The volume of Govern
ment security transactions by the dealer market, however, continued large
throughout the decline.
The question still to be answered from our examination of the 1957-58 market
experience is just what specific findings and interpretations may be drawn about
market excesses and mechanisms. While any specific conclusions at this stage
are subject to later modifications or supplement, the following are the main
ones drawn by the study group in the preliminary version of part II of the
study (ch. V III).
“ (1) Investor and speculator judgments in the late spring period preceding
the June refunding were made largely in the light of information pertaining
to an economic situation of 1 to 2 months earlier. This lag in the flow of eco
nomic information was a factor of basic import in conditioning expectations in
this critical period of market development. The role of changing market ex
pectations as to the economic outlook in this period of 1958 clearly emphasizes
the need for an adequate supply of current information about trends in the
economy generally to facilitate the orderly functioning of financial markets.
“ (2) Underlying the late spring speculative positioning of Government se
curities was a very low absolute level of short-term market interest rates, as
well as an unusually wide spread between short- and long-term market yields.
This low short-term rate level, together with the prevailing yield structure,
vitally influenced the shaping of market expectations of further increases in
Government bond prices. It further provided the incentives that led to unsual
adaptations of customary credit instruments and terms, which facilitated a
rapid swelling in the market’s use of credit. This development made the mar
ket vulnerable to liquidation pressures.
“ (3) These conditions in the market, along with investor expectations of still
higher prices of Government bonds, resulted in a situation whereby market par
ticipants in the June refunding were encouraged to convert an undue amount
of short-term issues into longer term issues, thus oversupplying the longer term
area of the market and at the same time sharply reducing the market supply
of short-term instruments. Pressure on earnings created by the low level of
short-term yields led many banks and some corporations to reach out for the
higher yields available in the June financing in an effort to protect their earn
ings.
“ (4) Speculative positioning of ‘rights’ to the June refunding on the part
of outright owners, together with the conversion into 2% percent bonds of a
disproportionate amount of their investment holdings of the maturing issues,
was of greater volume than speculative positioning by investors who financed
by credit. A large number of banks and business corporations participated in
this outright speculative positioning.
“ (5) Although speculation on an outright basis in the June financing was
larger than credit-financed speculation, the latter was excessive considering the
size of the refunding operation. Moreover, liquidation of credit-financed posi
tions appeared almost immediately upon the settlement date for the refunding
for various reasons and both triggered and accentuated the declining phase of
the market.
“ (6) The equity margins put up in this period by credit speculators were, in
too many instances, either nonexistent or too thin. Despite the low margins,
the losses suffiered on credit-financed transactions were incurred chiefly by the
borrowers rather than the lenders.
“ (7) In the speculative market buildup, the use of the repurchase form of
credit financing as a vehicle to carry the speculative positions of nonprofessional
and unsophisticated participants proved to be unsound. Use of this particular
type of financing instrument, in effect, resulted in lenders advancing credit to
unknown borrowers of unknown credit standing or capacity.
“ (8) Even among known borrowers of professional standing the use of the
repurchase agreement device was stretched in terms of the types of the security
which it covered. In the past this instrument was employed in the dealer
market mainly to finance securities of the shortest term. In its 1958 market
usage the instrument was extended in numerous instances to longer term securi
ties where the maturity bore little or no relationship to the date of termination
of the agreement.
EM PLOYM ENT,
G R O W T H , AND PRIC E LE V E LS
1215
“ (9) Where used in the mid-1958 period to finance holdings of longer term
securities, the repurchase agreement technique in some cases provided a con
venient means to circumvent owners’ equity requirements that would have been
applicable on loans through margins required by lenders.
“ (10) The use of forward delivery contracts in the pre-June market buildup
involving ‘rights’ to the June exchange offerings, though of lesser magnitude
than repurchase financing, nevertheless facilitated an excessive amount of specu
lative positioning in this issue without any commitment of purchaser funds.
“ (11) In the pre-June market buildup, dealers and brokers were not always
aware that their credit standing was in effect used by others to underwrite
speculation with no equity. The preponderance of June ‘rights’ among the
forward delivery contracts would suggest a strong preference for ‘new’ Treas
ury issues as the mechanism for this speculation.
“ (12) The total number of commercial banks outside New York City and
also the total number of nonfinancial corporations drawn into the credit financ
ing of the mid-1958 speculative buildup was relatively small, and the major
portion of the credit extended was from only a few banks and business corpo
rations.
“ (13) In the late spring market buildup some lending by New York City
banks, collateraled by Government securities, was at rates and margins that
under the prevailing market psychology and the then existing conditions was
conducive to the financing of speculative positions.
“ (14) The sizable increase in dealer positions prior to the Treasury’s June
1958 financing was partly associated with the heavy volume of market trading
in that period. Although largely concentrated in short-term securities, the
expansion dealer positions did provide a market for these issues which facili
tated the lengthening of portfolios and speculative positioning by many inves
tors during the period, particularly banks.
“ (15) Even though dealer positions at the time of the June refunding were
heaviest in the short-term maturities in the market, liquidation of these posi
tions in the following 3 months, though largely necessary to protect dealer capi
tal positions, did add significantly to the supply pressures otherwise present in
the market during this liquidation phase.
“ (16) The extensive use of the repurchase instrument for financing all
types of Government securities in late spring of 1958 resulted in very large re
purchase maturities in mid-June coincident with other churning in the money
market in connection with settlement for the Treasury refunding. The neces
sity of refinancing the securities underlying these repurchase transactions put
the Government securities market under heavy internal strain at that time.
“ (17) The absence of a Treasury tax anticipation security maturing at midJune led to much corporate interest in the June maturities as corporations made
use of these issues to invest accumulating funds to meet their June tax and
dividend needs. This accounted for a considerable part of the market churning
at the time of the refunding.
“ (18) The availability of regularly issued statistical information about the
market itself might have succeeded to some extent in forewarning market par
ticipants and interested public agencies of potential speculative dangers around
inid-1958. The fact of the matter, however, is that no such objective informa
tion was available to either group to gage the extent of the speculative forces
that were present in the market.
“ (19) In the closing months of 1958, when many commercial banks were ex
periencing seasonal credit demands, study data show a movement of funds from
the Government securities market to the banks effected through the vehicle of
the repurchase agreement. In other words, some dealers were functioning
as money brokers, acting as principals in obtaining funds from business cor
porations under repurchase arrangements and in turn supplying funds to banks
under a reverse repurchase arrangement (resale agreement) with them. Ques
tion can be raised regarding the appropriateness of a money brokerage function
as part of the dealer operation.
“ (20) Most of the decline in market interest rates on Government securi
ties, following confirmation in the late fall of 1957 that economic recession had
set in, was effected within a short-time span— less than 4 months. The sharp
rise in market rates on Treasury issues, following confirmation after mid-1958
that economic recovery had begun, was likewise effected in a short-time span—■
about 4 months. Although liquidation of Government security positions, built
up in hopes of speculative gains in the June refunding, played a central role
in accentuating the rise in market interest rates after mid-1958, it does not
1216
E M P L O Y M E N T , G R O W T H , AND PRICE LEV E LS
necessarily follow that the upward interest rate movement of the entire re
covery period would have been smaller if the earlier speculative distortions had
been avoided. Upward pressures on interested rates from cyclical Federal deficit
financing in combination with expanding private demands for financing, given
the savings supply over these months, would still have resulted in a substantial,
if not identical, rise in market interest rates.”
A N ORGANIZED EXCHANGE OB A DEALER M ARKET ?
At the hearing of the Joint Economic Committee earlier this year on the Presi
dent’s Economic Report, there was some discussion of the functioning of the
Government securities market. The question was raised whether the market
might not be more effective if it were a formally organized exchange or anctiontype market, with maximum current publicity on transactions rather than an
informal over-the-counter dealer market subject to more limited public observa
tion.
As part of this current study of the Government securities market, accordingly,
we not only raised this question with market participants but asked our study
group to provide a special technical evaluation of the suggestion. The New York
Stock Exchange also gave very careful consideration to the question and re
ported its conclusions to us.
A specialized market tends to develop in a particular form as the individual
participants compete to serve more efficiently and economically the needs of
buyers and sellers of the kind of security or commodity traded. The present
market mechanism for Government securities has grown as a specialized market
ever since World War I. Transactions in Treasury issues in the 1920’s were
carried out both on the New York Stock Exchange and through the over-thecounter dealer market. Even during the early 192G’s, however, a steady decline
in transactions on the auction market represented by the exchange and a steady
rise in the volume handled on dealer markets was taking place. By the mid1920’s, the dealer market was dominant and agency transactions of the Federal
Reserve Bank of New York for the account of the Treasury were moved to the
dealer market.
Only marketable Treasury bonds are listed on the New York Stock Exchange
and this has been true throughout its history. Therefore, the introduction of
the Treasury bill in 1929 and its subsequent development as the primary liquidity
instrument of the money market— a development accelerated by war and postwar
financial trends— further added to the importance of the over-the-counter dealer
market. The growth in the Federal debt in the 1930's and during the war years,
together with the broader participation of large financial institutions in the
market, greatly increase the size of typical market transactions in Governments.
Large transactions are more efficiently managed in a dealer-type market, and
consequently the number of transactions that could be effectively handled through
the auction mechanism of the exchange continued to decline. By 1958 trading
in Government bonds on the exchange had dwindled to an insignificant volume
in comparison with trading in such securities in the over-the-counter dealer
market.
The standards of performance to be applied in evaluating the present dealer
market are, of course, related to the specific job which the market has to do as
well as to the public interest in a well-functioning market economy. The job
to be done first of all is the matching up of purchases and sales by investors
and traders. But it also involves the Treasury as issue of new securities and
the Federal Reserve through the execution of its monetary policies. It is the
conclusion of our joint study to date that both the broad public interest and the
special interests of the Treasury and the Federal Reserve— which are, of course,
designed only to serve the public interest— are being effectively served through
the present market. Those who participated in our study, including a broad
range of investors as well as dealers and brokers, were virtually unanimous in
the view that the present type of over-the-counter dealer market in Government
securities is preferable to an exchange, auction-type market. Even if confined
to bonds, and therefore excluding bills, certificates, and notes, the exchange-type
market was regarded as an unsatisfactory alternative.
Probably the most important standard of performance required of the Gov
ernment securities market in serving existing interests is its ability to handle
without disruptive price effects the typically large transactions that arise as
large institutional holders adjust their liquidity and investment positions. These
individual transactions— by commercial banks in adjusting their reserve and
EM PLOYM ENT,
G R O W T H , AND PRICE LEV ELS
1217
portfolio positions, by corporations adjusting to their cash flow needs around
dividend and tax dates, or by savings institutions or other institutional investors
in making portfolio changes— often run to many millions of dollars, particularly
in short-term issues. If these holders were unable to purchase and sell readily
in such large amounts, their interest in Treasury issues would decline.
The dealers in Government securities api>ear to have developed better facil
ities and techniques for handling large transactions promptly and without ex
cessive price effects than would be possible in an organized exchange. They do
this by purchasing and selling for their own account; by maintaining substan
tial inventories of securities in different maturity categories; by a chain of
transactions with other dealers— purchases, sales, and exchanges or swaps;
and by keeping themselves informed, through their nationwide organizations
or correspondent networks, of major sources of supply and demand for Gov
ernment securities throughout the country. In its operations, the dealer mar
ket acts as a buffer to equalize hourly and daily movements in supply and de
mand, and to absorb the impact of large individual transactions that might
otherwise result in abrupt price effects or undue delays in execution of orders.
The specialized dealer market provides a number of other services that insti
tutional customers consider to be valuable. The cost of a transaction in this
market is very small because of the large volume of business, because of keen
competition among dealers, and because dealer profits do not depend solely on
trading margins. A significant part of dealers’ earnings is derived from man
aging their own portfolios and from supplying, through repurchase agreements,
investment instruments which have the exact maturity date needed by cus
tomers. Such operations also, of course, involve risk of loss.
The dealer market is effectively organized to serve customers throughout the
country even though its organization is informal. Transactions are completed
promptly by telephone and customers know the price or price range when the
order is placed for execution. Moreover, through their intimate experience with
the highly technical aspects of each Treasury issue as well as the ways in which
the Treasury, the Federal Reserve, and the money market operate generally,
dealers provide specialized market advice that customers value. The primary
dealers further provide important services in the secondary distribution of new
Treasury issues. They also provide a convenient point of contact for Federal
Reserve open market operations in short-term Government securities.
The major defects attributed by some critics to the dealer market in U.S.
Government securities reflect three features: First, the market is concentrated
in a relatively small group of primary dealers, and therefore may not be as
competitive as an organized exchange market; second, there is little information
about its operations, without supervision or formal rules governing its prac
tices, despite its special public interest; and third, the market is not geared to
handling small and odd lot transactions nor is it especially interested in them.
As to competition, there is no question that the primary dealer market is
very highly competitive, even though it comprises only 12 nonbank firms and 5
bank dealers, most of whom have central offices in New York City. There is
necessarily spirited competition between the dealers for the available volume
of trading business. Any offers to sell at a price even slightly below the mar
ket usually are quickly taken advantage of, as are offers to buy at anything above
whatever the price may be at the moment. In volume, the Government secu
rities market is by far the largest financial market in the country. It handles
each year a dollar volume of transactions approximating $200 billion, or more
than 3 times as much as the dollar volume of transactions in all corporate
stocks as well as bonds on the New York Stock Exchange.
The dealers are principally wholesalers and their customers consist of sev
eral hundred nonfinancial corporations, several thousand commercial banks who
submit orders both for their own account and for customers, other security
brokers and dealers handling transactions for customers, hundreds of insurance
companies, mutual savings banks, pension funds, and savings and loan associa
tions tlioughout the country, the special funds of State and local governments,
personal trust accounts, and some individual investors of substantial means.
These investors and traders who use the market to buy or sell are generally
themselves expertly informed and experienced in investment matters. Each is
seeking the best return on the funds he places in Government securities; each
is continuously comparing these returns with those on alternative investment
opportunities; and each of the larger investors, who regularly use the services
of several dealers, is constantly comparing the relative performance of the
dealers with whom he is in contact.
1218
E M P L O Y M E N T , G R O W T H , AND PRICE
LEVELS
In this type of highly competitive market, the dealer who succeeds must
execute the buy or sell orders of these numerous and varied investors promptly
and efficiently and the business must be handled in accordance with high
ethical standards. Moreover, if he is to obtain future business, such invest
ment advisory services as the dealer renders his customers must stand the
test of time.
Each of the primary dealers, through one means or another, operates through
out the country because broad coverage is essential to the maintenance of a
sufficient volume of business for profitable operations. This is probably a major
reason why there are not more dealer firms active in the market. Another
reason, according to information received in this study, is that the number
of qualified and experienced personnel available to staff new firms is relatively
small.
Regarding the criticism of market mechanics, it is true that the dealer market
makes available to the public practically no information on its operations other
than market bid and offer quotations. There is no requirement for making
available either to the public or to a duly constituted authority the records of
dealer net positions in securities or amounts borrowed, such as are required of
members of the New York Stock Exchange.
The lack of formal rules, supervision, and adequate information leaves the
market open on occasion to suspicion that it may not always be operating in the
public interest. It has been suggested that in instances dealers’ interests may
conflict with those of customers, that dealer operations may unduly accentuate
swings in securities prices, and that dealer advice may not be entirely accurate.
There was, however, little or no evidence gathered in the study that such prob
lems are common in the dealer market. All of the market customers consulted
in the present study expressed their full confidence in the Government securities
dealers, individually and as a group, and testified to their high standards of
integrity and business practice.
Concerning small transactions in the market, consultants to the study have
indicated that they generally go through other brokers and dealers and com
mercial banks, and that when they reach the market they are handled promptly
by dealers at a relatively low cost that is in part subsidized by the large trans
action. As the dealers are organized primarily to handle large transactions, it
is understandable that they view the small deals as an accommodation, and
do not actively encourage them. It seems clear that if facilities designed more
specifically to serve small investors’ interests in marketable bonds are to be
established, there would have to be some additional incentive provided.
The New York Stock Exchange, prompted by our study, reviewed the poten
tialities for reestablishing a vigorous auction-type market in Government se
curities on the exchange. After extended consideration of the matter, however,
exchange officials concluded that, even though such a development was theo
retically possible, problems raised by the suggestion would be insurmountable
unless both the Government and the exchange shifted a number of fundamental
policies.
One specific problem to be resolved is the difficulty under existing conditions
of encouraging exchange specialists to take the financial risk of making a market
in Government securities. The specialists would be in competition with estab
lished Government securities dealers. In addition, they might on many occasions
need to build up very large positions in Government securities, since this is a
heavy volume market and, when sharp price movements occur, quotations on
maturities throughout the list tend to move together much more so than in
the market for specific corporate stocks or bonds. Finally, because of the public
nature of transactions at exchange trading posts, specialists taking positions
to make orderly and continuous markets would be unduly exposed to possible
raids by nonmember dealers and other large traders.
There is also the problem of developing an adequate incentive for handling
Government securities on the exchange through a commission schedule that
would be competitive with narrow spreads prevailing in the dealer market.
Other conditions set by the exchange for an effective auction market under
its auspices would be—
(a )
A larger supply of long-term Government bonds in the market,
especially of bonds attractive to individual investors through tax exemption
or other special features since these investors now find only limited interest
in Governments other than savings bonds.
EM PLOYM ENT,
G R O W T H , AND PRICE LE V ELS
1219
(b ) The placing on the exchange of all Federal Reserve agency trans
actions in bonds, possibly plus official support of the exchange market; and
(c) A potential requirement for the execution of all transactions of mem
ber firms in Government bonds on the exchange, except for some off-flavor
trades in special circumstances.
(d ) Some protection of the position of member firms who are acting as
Government security dealers.
The exchange did not suggest that its facilities could be adaptable at all to
trading in Treasury bills, certificates of indebtedness, or notes, which together
constitute more than half of the outstanding marketable Federal debt and are
also the issues in which the overwhelming volume of market transactions takes
place.
These conditions make it clear to us that it w’ould be difficult to develop an
auction-type market for Government securities on a broad scale under the exist
ing organized exchange mechanism.
The alternative approach of improving the mechanism and institutions of
the present Government securities market, by carefully studying and remedying
defects in the dealer market as they come to light, appears to us to promise
results that will serve the public interest. At the same time, the New York Stock
Exchange should be encouraged to develop further the auction facilities it now
provides for transactions in Government bonds. The total market cannot be
harmed and may indeed be improved by more active competition between the
exchange market and the dealer market in bond trading.
AREAS
FOR IMPROVING
M ARKET
M E C H A N IS M S
AND
FUN CTION ING
Our study was launched, as stated earlier, in the hope that the suggestions
advanced and problems revealed might indicate certain improvements in the way
the Government securities market operates, with particular emphasis on the
prevention of future speculative excesses in the market. In the light of con
sultants’ suggestions and of findings of our factual review of the 1957-58 market
experience, our study group initiated four supplementary studies to evaluate
possible means of improving the market’s functioning. These are in the nature
of working papers for consideration by Treasury and Federal Reserve officials.
As their preparation has just been completed in preliminary form, they have
not yet been reviewed. Hence, they cannot be interpreted as reflecting any offi
cial recommendations for market improvement. There may also be other sup
plementary studies undertaken as we reexamine market processes and mechan
isms and we naturally intend to pursue this phase of our inquiry as far as will
serve a constructive purpose.
A first area of supplementary study pertains to the adequacy of statistical and
other information relating to the dealer market. As mentioned earlier, it is
commonly recognized that openly competitive and efficient markets are charac
terized by informed buyers and sellers. A broad range of objective information
needs to be available to serve effectively the interests of all market participants,
including the Treasury as issuer of securities for the market and the Federal
Reserve as it participates in the market in regulating overall credit and mone
tary conditions. In this light the present flow of information relating to the
market is inadequate, a point that was agreed to by many of our study con
sultants.
As a result, our study group undertook a thorough analysis of the information
that ought to be regularly available. We were encouraged in this by the ex
cellent cooperation received from dealers and other market participants in
supplying information for our review of market experience in 1957-58. We
believe, therefore, that a reporting program can be worked out by the Federal
Reserve and Treasury staffs to put an adequate information program into active
operation in the not too distant future.
A second area of supplementary study is the credit financing of Government
securities transactions. Last year’s market experience has clearly indicated
that at times an undue amount of speculation financed on thinly margined
credit can be detrimental to the market and that competition of lenders in
extending credit to prospective holders may result in deterioration in appro
priate equity margin standards. This experience raises the question of the
need for some action to assure that sound credit standards will be consistently
maintained by lenders in credit extension backed by Government securities
and also to keep the total volume of such credit from expanding unduly at
times.
1220
EM PLOYM ENT,
G R O W T H , AND PRICE LEVELS
Our study has indicated that there are three approaches which the Govern
ment might consider in dealing ith this problem: first, a statement by bank
supervisors to each lending institution within its jurisdiction indicating mini
mum margins to be adhered to as standard; second, a requirement that each
investor participating in the exchange of maturing Treasury issues for new
issues state his equity position in those securities in compliance with Treasury
standards (plus the continuing requirement by the Treasury of appropriate
deposits on subscription to its new issues offered for cash) ; and, third, the
introduction of special margin regulation, similar to that now applicable under
the Federal Reserve Board regulations T and U to the purchasing or carry
ing of corporate securities. The latter type of regulation would, of course,
require congressional action, since present law specifically exempts Govern
ment securities from this type of credit regulation. It must be reemphasized
here that these are merely possible approaches; they have not yet been fully
appraised by either Treasury or Federal Reserve officials and other alternatives
ma.y be developed in the light of additional study.
A third area for special study is the use of the repurchase arrangement
in credit financing of Government securities. This is not a new method of
credit financing, but it is a method that is easy to apply to Government se
curities transactions and, because of its flexibility and adaptability, has be
come much more popular in recent years. Government securities market activity
last year brought to light certain uses of repurchases that were not in the
public interest when such financing was arranged without the borrower putting
up adequate margin. The study discusses various alternatives which might
be applied to prevent future abuse.
A fourth area of special study of the existing mechanism of the Govern
ment securities market relates to its present lack of formal organization. In
our consultations, a number of market participants and observers suggested
that the market might be improved and strengthened through cooperative ac
tion of primary dealers themselves, working through a dealers’ association.
Various specific functions that an association might perform to improve the
market’s functioning were indicated, including: (a) the adoption of standard
rules to assure fair treatment of buyers and sellers in both large and small
transactions; (b ) the development of standard practices to help maintain dealer
solvency; and (c) greater liaison between the Treasury and the dealers in
Treasury financing operations. It was also suggested that a dealers’ associa
tion could be useful in identifying primary dealers in Government securities both
to improve dealer service and to apply any market rules which may be adjudged
in the public interest. Since the possible advantages of such an organization
as well as its possible disadvantages obviously require careful and detailed
examination, the task of this supplementary study has been to make this muchneeded evaluation.
A question that naturally arises at this point is whether in the light of the
present study there will be any occasion later for special legislative requests
pertaining to the operation of the Government securities market. This ques
tion cannot be answered yet. Before it is, we must try to determine what can
be accomplished in improving market processes and mechanisms without legis
lative action and then ask whether these improvements are enough. The fact
of the study itself, together with educational efforts undertaken by the Treasury
and Federal Reserve System, has already set in process a fuller appreciation
on the part of market participants of the undesirable effects of certain market
practices. If we find that desired improvement of market mechanisms and
institutions requires new statutory authority, we will propose appropriate
legislation to the Congress.
Markets are dynamic economic institutions. They require succesive adaptation
to changing needs. From the standpoint of the public interest, study of these
adaptations is never ending. Study efforts may be intensified from time to time
as the case of the present Treasury-Federal Reserve study, but they are basically
continuous. Continuing observation and study of the Government securities
market is a responsibility which both the Treasury and the Federal Reserve
recognize.
In conclusion, we repeat that improvement in the processes and mechanisms of
the Government securities market will in no way solve our problems of fiscal
imbalance. Nor can they correct our problems of two much short-term public
debt; of our need for continuous flexibility in our approach to monetary policies;
of attaining a volume of savings which will match our expanding investment
needs; or of the cyclical instability of our financial markets. These are basic
E M P L O Y M E N T , G R O W T H , AND PRIC E
problems.
interest.
LE V ELS
1221
We must all work toward their ultimate solution in the public
Representative P a tm a n . Thank you very kindly, sir. W e appreci
ate your making yourself available.
Secretary A n d e r s o n . Thank you, Mr. Chairman.
Representative P atm an . I f you will answer those question for the
record, we will appreciate it.
Secretary A n d erson . Yes; we will do that.
(A t the request of the chairman, the following is made a part of the
record:)
The following is an excerpt from hearings before a subcommittee of the Com
mittee on Government Operations of the House of Representatives on Debt
Management Advisory Committees, Treasury Department, held June 5 and 7,
1956:
Date of
committee
report
Financing problem
Committee recommendations
Treasury offerings
Refanding of 2^-percent
bonds maturing M ar.
15, 1952.
Offer exchange for notes or
bonds with maturity of 3
to 6 years and coupon of
2K to 2H percent, depend
ing on maturity.
Offer optional exchange for
1% percent, 1 1 ^ - or 12month certificates or the
same notes or bonds sug
gested above.
D o not make call at this time.
Offered exchange for 293percent bonds due M ar.
15, 1959.
195%
Feb. 8.
Refunding of l£6-percent
certificates m atu rin g
Apr. 1, 1952.
Call of 2- and 2}4-percent
bonds eligible for re
demption.
Cash offering of long-term
bonds.
Apr. 4_
Cash required to cover
deficit of upward of $10
billion.
Offer $1 billion on M ar. 15 or
Apr. 1 of 35-year 3-percent
bonds.
Offer long-term marketable 3percent bond with maturity
of 30 years. Market should
be approached experiment
ally with initial offering of
$1 billion to $ 1 ^ billion.
For short-term borrowing, in
crease offerings of bills.
Refunding of short-term
bills and certificates.
June 27.
Call of 2- and 2K-percent
bonds eligible for re
demption.
Refunding of certificates
due Aug. 15 and Sept.
1, 1952.
Refunding of 1%-percent
certificates due Oct. 1,
1952.
New cash of $5 billion in
second half of year.
Call b y Aug. 15 of 2- and
2H-percent bonds eliible for redemption on
)ec. 15,1952.
f
Revise savings bond program:
Increase yield on series E to
3 percent; offer new 3 per
cent current-income bond as
companion to series E
bonds; adopt more favorable
yield curve modified to
yield 2% percent for 12 years
on series F and G bonds.
Treasury should feel its way
as year goes on, and roll over
maturities into similar is
sues or wherever possible,
into medium-term issues.
Under present conditions is
sues should not be called.
Suggested combined refund
ing into a similar certificate
or note.
Roll over into similar obliga
tion.
Issue long-term marketable
bonds at appropriate rate
in autumn; revise rates on
tax notes; issue tax bills
maturing around the March
tax date; sell larger amounts
of 90-day bills.
D o not call under present cir
cumstances.
Offered single exchange for
1^-percent 11-month cer
tificates.
Call was not made.
N o long-term bonds issued.
Marketable bond not of
fered . R eop e n ed 2% percent nonmarketable
bonds due 1980 in M ay
for cash and exchange for
outstanding marketable
2Mi-percent bonds.
W eekly issues of bills were
increased by an aggregate
of $1.6 billion between
Apr. 7 and July 3.
Savings bond program was
revised on M ay 1 along
the basic lines recom
mended b y committee.
A ll maturities were rolled
over.
Call was not made.
Offered exchange for 2percent certificates due
Aug. 15, 1953.
Offered
2H-percent
14month note due Dec. 1,
1953.
N o long-term bonds issued.
Sold in October $2.5 bil
lion tax-anticipation bills
due M ar. 18, 1953; also
in November $2 billion
tax anticipation bills du'p
June 19, 1953.
Call was not made.
1222
E M P L O Y M E N T , G R O W T H , AND PRICE LE V E LS
Date of
committee
report
D ec. 5.
Financing problem
Committee recommendations
Refunding of 1%-percent
certificates due Feb. 15,
1953.
Optional exchange for a certifi
cate or note due in about 1
year at an appropriate rate,
or a bond maturing in 1956,
1957, or 1959.
Call partially tax exempt 2-per
cent bonds of June 1953-55.
D o not call fully taxable 2.Hzpercent bonds.
Secure broad permissive legis
lation to extend series F and
G bonds at maturity.
Extension of maturities can be
determined from time to
time only in light of invest
ment market; sound out
market for long-term bond
as conditions appear propi
tious.
Offered optional exchange
for 2K-percent
1-year
certificates or 2^-percent 5-year 10-m onth
bonds due Dec. 15, 1958
Call of 2-percent bonds was
made.
Call of 2H-percent bonds
was not made.
Series F and G bonds were
not extended.
Offer optional exchange for
either 1-year 2^-percent
certificates or a short-term
bond, due around 1961.
Offered single issue of 2% percent certificates due
June 1, 1954.
Time was not opportune for
sale of long-term bond and
no cash offering should be
made in M ay or June. Sug
gested consideration of the
short-term bond due around
1961.
Offer holders in exchange a 3percent marketable bond
maturing in 15 years to test
the market for a moderately
long-term bond.
Offer tax anticipation certifi
cates maturing M ar. 15,
1954, at rate determined by
market conditions which
would prevail in July.
Refund with 1-year certifi
cates, or possibly a some
what longer issue if condi
tions at time favor it.
Offer optional exchange for 1year 25^-percent certificates
or 2J^-percent notes matur
ing in about 3XA years.
Preliminary recommendation
to sell additional notes of
about 33^-year maturity, or
longer if market conditions
are favorable. W ould not
be prudent to sell new long
term bonds at this time.
Issue $2 billion of 2%-percent
bonds maturing in 3H to 6
years.
Offered for cash subscrip
tion $1 billion of 3M-percent bonds, dated M a y
1, 1953, and maturing
June 15, J.983.
Call of 2- and 2M-percent
bonds eligible for re
demption.
Handling
maturity
of
series F and G bonds.
Cash offering of long-term
bonds in first half of
1953.
1953
M ar. 2 0 - -
Refunding of lK-percent
certificates due June 1,
1953,
and
2-percent
bonds recalled for re
demption on June 15,
1953.
Cash offering to cover at
trition on refunding and
apparent cash deficit.
Refunding maturing series
F and G bonds.
June 19.
New cash of $5 billion in
July.
Refunding of 2-percent
certificates on Aug. 15,
1953.
Aug 26-.
Refunding of 2-percent
bonds maturing Sept.
15, 1953.
N ew cash of about $2.5
billion in October.
O ct; 13___
New cash of $1K to $2
billion in early N ovem
ber.
Refunding of 2^-percent
notes on Dec. 1, 1953.
N o v . 13-
Refunding of 2^-percent
notes on Dec. i, 1953.
Preliminary recommendation
for offer of an optional ex
change for short-term and
interm ediate-term bonds
(12- to 14-year 3-percent
bond, or longer if market
conditions permit). Exact
terms would have to be de
termined by prevailing con
ditions at time of offering.
Offer optional exchange for 2percent
notes
maturing
M ar. 15, 1955, or 3-percent
bonds of about 15-year
maturity; however, if hold
ers of series F and G bonds
maturing in 1st half of 1954
are not also offered the right
to exchange into the same
3-percent bonds, the longer
part of the optional exchange
should be 2K-percent bonds
maturing Dec. 15, 1958.
Treasury offerings
(See meeting of W ar. 20,,
1953.)
Exchange offer was made
for 3J4-percent bonds ma
turing June 15, 1983.
Sold for cash $5.9 billion
2H-percent tax anticipa
tion certificates due M ar.
22, 1954.
Offered exchange for 1-year
2^-percent certificates.
Offered optional exchange
into 1-year 2%-percent
certificates or 3^-year
2J^-percent notes.
(See meeting of Oct. 13,
1953, below .)
Offered late in October $2.2
billion
of
2%-percent
bonds maturing.Sept. 15,
1961.
(See meeting of N ov. 13,
1953, below.)
Offered optional exchange
of l>g-percent notes m a
turing Dec. 15, 1954, or
2H-percent bonds m a
turing Dec. 15, 1958.
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
Date of
committee
report
1953
N ov. 13___
1223
Financing problem
Committee recommendations
Refunding 2J4-percent cer
tificates on Feb. 15,
1954, and 1%-percent
notes on M ar. 15,1954.
Consolidate issues in single
refunding operation.
Spe
cific recommendations could
not be presented at this time.
(See meeting of Jan. 20
1954, below.)
Refunding of 2 -percent
certificates of Feb. 15,
1954, and 1%-percent
nates of M ar. 15,1954.
Combine refunding on Feb. 15,
1954, with option to exchange
for 13-month 1^-percent
notes or 2^-percent bonds
maturing in &A years or
slightly longer.
Call should be made for re
demption on June 15.
Offered optional exchange
of maturing issues for 12month 1^-percent cer
tificates or 2H-percent
bonds maturing in 7
years 9 months.
Call was made on Feb. 15,
but redemption of these
issues, as well as the 2percent bonds due June
15, was anticipated by
offering holders right to
exchange on Feb. 15 for
the 2^-percent bonds
maturing in 7 years 9
months also offered on
the refunding.
Offered $1.5 billion of tax
anticipation bills due
June 24, 1954.
Treasury offerings
1954
Jan. 20____
Call on Feb. 15, 1954, for
redemption on June 15
of the 2M-percent bonds
of 1954-56 and 214-per
cent bonds of 1952-55.
N ew cash of $2 billion to
$3 billion after M ar. 15,
Apr. 23_
Refunding of 2%-percent
certificates due June 1,
1954.
Refunding on June 15,
1954, of 2-percent bonds
and remaining 2J4-percent called bonds that
were not exchanged in
February.
New cash of $2 billion in
M ay.
Refunding of 2-percent
bonds maturing or calla
ble in December 1954.
July 9_.
New cash of $4 billion by
Aug. 1, 1954.
Refunding of 256-percent
certificates due Aug. 15
and Sept. 15, 1954.
Sept. 17..
Call on Aug. 15, 1954, for
redemption on Dec. 15
the 2-percent bonds of
1951-55.
New cash of about $3.5
billion in October.
New cash of about $1.5
billion in December.
Refunding of 1^-percent
notes
and
2-percent
bonds on Dec. 15, 1954.
Sale of 3-percent long-term
bonds, maturity to depend
upon market conditions at
time of offering.
Offer holders option of a short
obligation maturing within
18 months or 2 J4-percent
bonds maturing in last half
1960.
Offer an exchange into only
the short obligation matur
ing within 18 months.
Sale for cash of $2 billion of 2\ipercent bonds maturing in
last half of 1960.
Maturity should be antici
pated by giving holders the
privilege of exchanging into
the 2J4-percent bond ma
turing in 1960.
(Committee
recommended
that all of the above financ
ing be combined in 1 opera
tion in M ay.)
Majority of committee recom
mended $2 billion each of
1-percent notes maturing
Sept. 15, 1955, and 156-percent notes maturing Sept.
15, 1957; minority favored
tax-anticipation certificates
or notes maturing M ar. 18,
1955.
Refund together their op
tional exchange for 1-percent
certificates maturing Sept.
15,1955, or 2 ^-percent bonds
maturing Sept. 15, 1960.
Call should be made on Aug.
15.
Dual offering of 1}& percent
tax certificates maturing
June 22, 1955, and 1-year
certificates of indebtedness.
Preliminary recommendation
that 3-percent long-term
bonds be offered, maturity
to be determined by market
conditions.
Preliminary recommendation
that holders be offered an
optional exchange of 1-year
certificates or medium-term
obligations with a maturity
not to exceed 10 years.
Offered optional exchange
for 1-year
1Ms-percent
certificates or 1 K-percent
notes due Feb. 15, 1959.
Offered exchange into 1year 1^-percent certifi
cates.
Offered $2 billion of 1%
percent notes due Feb.
15, 1959.
December maturities were
not included in this
financing operation.
(Financing was combined
in 1 operation in M ay.)
Sold $3.7 billion 1-percent
tax anticipation certifi
cates maturing on Mar.
22, 1955.
Offered optional exchange
into 1-year 1^-percent
certificates or 2 ^-percent
bonds due N ov. 15, 1960.
Call was made.
Sold $4.1 billion of 156percent notes maturing
M a y 15, 1957.
(See meeting of N ov. 18,
1954 below.)
Do.
1224
E M P L O Y M E N T , G R O W T H , AND PRICE LEV ELS
Date of
committee
report
1954
N o v . 18.—
Financing problem
Committee recommendations
Treasury offerings
Ref undin g of 1%-percent
n o te s an d 2 -p e rc e n t
bonds on Dec. 15, 1954.
Offer holders option of a short
obligation—either 1-year 1 14 percent certificates or \\&percent certificates matur
ing Aug. 15, 1955; or a longer
o b li g a t i o n —2 34-p e r cen t
bonds maturing in about
8 years.
December cash financing an
ticip ated in S eptem ber
proved unnecessary. There
fore c o m m itte e r e c o m
mended that long-term bond
should not be offered at
that time but should be
done on the first appro
priate occasion.
Expressed view that Treasury
could sell at least $500 mil
lion F N M A debentures if
conditions were set forth as
to F N M A credit from the
Treasury, restrictions on
amount offered against port
folio, maturity, and rate,
and fiscal arrangements.
Offered optional exchange
into either: 1-year 1J4percent certificates or
1 ^ -p ercen t certificates
maturing Aug. 15, 1955;
or 2^-percent bonds ma
turing in 8 years 8
months.
N o new bond financing
was undertaken.
Offer optional exchange of IH percent 13-month notes or
2^-percent notes maturing
Dec. 15, 1957.
Majority favored optional ex
change for 1^-percent 13month notes or 3-percent 40year bonds. Minority fav
ored $1.5 billion cash offering
of 3-percent 40-year bonds,
with the 2 ^-percent bonds
receiving same exchange op
tion indicated above for the
maturing notes and certifi
cates.
Offer optional exchange for
1^-percent 1-year certifi
cates or 2 ^-percent bonds
due Dec. 15, 1958.
Make cash offering of $2.5 bil
lion of 1%-percent 1-year
certificates.
Offered optional exchange
of 1^-percent 13-month
notes or 2-percent notes
maturing Aug. 15. 1957.
Offered optional exchange
of 1^-percent 13-month
notes or 3-percent 40year bonds.
N ew cash in December___
Issuance of F N M A deben
tures.
Offered $500 million of 234percent F N M A 3-year
notes in January 1955.
1955
Jan. 27.......
Refunding of 1^-percent
certificates due Feb. 15,
1955, and lM-percent
notes due M ar. 15, 1955.
Refunding of 2H-percent
bonds called for redemp
tion on M ar. 15, 1955.
Apr. 17.
Refunding of lH-percent
certificates due M a y 17,
1955.
N ew cash of $2.5 billion to
cover maturity of taxsavings notes in M ay
and June.
lu n e 24.
New cash of $3 billion in
July.
Refunding of Ui-percent
certificates due Aug. 15.
1955.
Retirement of maturing
tax savings notes.
Sept. 25-
New cash of $2.5 billion
at end of September.
(C o m m itte e recom m ended
that the refunding and cash
offering be combined in one
operation.)
Reopen subscriptions to 3percent 40-year bonds due in
1995 for cash of $750 million
to $1 billion; obtain balance
through sale of 1^-percent
tax anticipation certificates
due M ar. 22, 1956.
Offer optional exchange for
1-year 2-percent certificates
(or 11-month certificates), or
the outstanding 2H-percent
bonds maturing Dec. 15,
1958. (Suggested refunding
be done at time of cash
offering.)
Obtain funds by increasing
bill offerings by at least
$100 million each week for
cycle of 13 weeks.
Offer 2J4-percent tax-anticipation certificates due June 22,
1956.
Offered exchange for only
2-percent 15-month notes.
Offered $2.5 billion of 2percent 15-month notes
for cash.
(Financing was combined
in 1 operation.)
Offered $750 million of 3percent bonds of 1995 and
$2 billion of tax-anticipation certificates due M ar.
22, 1956.
Offered optional exchange
for 1-year 2-percent notes
due Aug. 15, 1956, or 2percent tax-anticipation
certificates due June 22,
1956. Did not offer the
longer option. (Terms of
financing were withheld
until payment date of
cash tax certificate fi
nancing announced ear
lier.)
Offered $100 million of
additional bills each week
between July 27 and
Sept. 29.
Sold $3 billion of 2K-percent tax-anticipation cer
tificates due June 22,
1956.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Date of
committee
report
1955
N o v . 18___
1956
Feb. 29____
Financing problem
Refunding of lj^-percent
certificates and 1%-percent notes on Dec. 15,
1955.
New cash of $1 billion by
year end.
Refunding of 1^-percent
notes due M ar. 15, 1956,
and lK-percent notes
due Apr. 1,1956.
Call by M a y 15, 1956, of
2%-percent bonds of
1956-59 for payment on
Sept. 15,1956.
1225
Treasury offerings
Offer single exchange for 1-year
2^-percent certificates.
Make cash offering of taxanticipation bills due Mar.
22, 1956.
Suggested combined refund
ing. Majority favored op
tional exchange for 2^-percent certificates due Feb. 15,
1957, or outstanding 2V%percent notes due June 15,
1958; also later offering of
$500 million additional 3percent bonds of 1995 for
cash or advance exchange of
2M-percent bonds of 1956-58.
Minority favored single ex
change for 2^-percent certif
icates due Feb. 15, 1957, to
be coupled with $500 million
cash offering of 3-percent
bonds of 1955 at time of re
funding.
Call should be m ade...................
Offered optional exchange
of 1-year 2^-percent cer
tificates or 23^-year 27/gpereent notes.
Sold in December $1.5 bil
lion of tax anticipation
bills due Mar. 23, 1956,
on competitive bids.
Offered optional exchange
for 2^8-percent certifi
cates due Feb. 15, 1957,
or 2K-percent notes due
June 15, 1958. N o long
term bonds were offered.
Call was made.
(The following is the material requested of the American Bankers
Association:)
T h e A m e r ic a n B a n k e r s A s s o c ia t io n ,
New York, N.Y., July 27,1959.
Mr. J a m e s W. K n o w l e s ,
Economist, Joint Economic Committee,
New Senate Office Building, Washington, D.(7.
D e a r M r . K n o w l e s : In accordance with your request, I am enclosing three
copies of a summary of meetings of the Committee on Government Borrowing
covering the period since February 1956 and showing:
(1) The financing problem.
(2) The committee recommendations; and
(3) The Treasury offerings.
Also enclosed are copies of the current membership list of the committee.
Sincerely yours,
E u g e n e C. Z o r n , Jr.
Secretary, Committee on Government Borrowing.
88563— 69— p t 6A----- 10
1226
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Financing problem
Committee recommendations
Treasury offerings
Refunding of 2 percent
notes due Aug. 15, 1956.
Offer exchange for 2% percent
notes due Aug. 1, 1957.
Refunding of 2% percent
bonds called for redemp
tion on Sept. 15, 1956.
New cash of $2A billion
in August or September.
Obtain funds by increasing
bill offerings by $100 million
weekly for a 13-week cycle.
Offer tax anticipation issue
due on or about M ar. 22,
1957.
N ov. 15..
Refunding of 2% percent
certificates due Dec. 1,
1956.
Offer optional exchange for
334 percent tax anticipation
certificates due June 21 or
24, 1957, or 3% percent certif
icates due N ov. 29, 1957.
Offered exchange for 2%
percent notes due Aug. 1,
1957.
Paid off the bonds in cash.
D id not increase weekly
bill offering.
Sold in August $3.2 billion
of 2% percent tax antici
pation certificates due
M ar. 22, 1957.
Offered optional exchange
for 334 percent ta* antic
ipation certificates due
June 24, 1957, for 3X
A per
cent certificates due Oc
tober 1, 1957.
'an. 31.,
Refunding of special bills
due .fceb. 15, 1957, 2%
percent certificates due
Feb. 15, 1957, 2% per
cent notes due M ar. 15,
1957, and 1X
A percent
notes due Apr. 1, 1957.
Offer holders of all 4 issues
optional exchange for 3%
percent certificates due Feb.
14, 1958, or 3 ^ percent notes
due Feb. 15, 1960.
M ar. 13—
N ew cash of about $3
billion after March tax
date.
Sale for cash of 3A percent
notes due Apr. 15, 1958 with
privilege of conversion at
maturity into bonds of 12to 14-year maturity.
Apr. 14_
Refunding of 1% percent
notes due M a y 15, 1957.
July 17..
Refunding of 2 % percent
notes due Aug. 1, 1957,
2 percent notes due Aug.
15, 1957, 3H percent cer
tificates due Oct. 1, 1957,
and 1A percent notes
due Oct. 1, 1957.
Offer optional exchange for (1)
certificates due M ay 1, 1958
at rate of not more than 3 A
percent (or a shorter matur
ity if market rates so dic
tated) or (2) 3A percent
notes due M a y 1, 1960 and
convertible into 3 A percent
15-year bonds.
Offer holders of all four issues
optional exchange for 3%
percent certificates due Apr.
15, 1958, or 4 percent notes
due in July 1959, with right
of holder to extent maturity
for 3 additional years.
Sept. ML
New cash of about $3.5
billion in late Septem
ber and early October.
To keep within debt
ceiling, $3 billion before
Oct. 1, and the other $0.5
billion after maturity of
Oct. 1 issues.
N ov 14-
Refunding of 3% percent
certificates due Dec. 1,
1957.
New cash of about $1.5
billion.
Date of com
mittee report
1956
July 12____
To obtain $3 billion, offer $1
billion of 4 percent certifi
cates due Aug. 1, 1958, and
$2 billion of 4 percent notes
due Aug. 1,1961, redeemable
on Aug. 1, 1959 at holder’s
option.
To obtain $0.5 billion, concur
rent with above offering an
nounce offering of 10-year
4 percent bonds, payment
to be made in early October.
Offer exchange for 3% percent
certificates due Dec. 1, 1958.
Offer $1 billion of 4 percent 5year notes and $500 million
4 percent 17-year bonds.
Because of debt limit, pay
ment on two issues to be 50
percent on N ov. 26, and 50
percent on or about Dec. 2.
If 17-year bond not offered,
all $1.5 billion should be in
a 5-year note.
Refunded bills with tax
anticipation bills due
June 24, 1957. Offered
2% percent certificates
and 2% percent notes
optional exchange for 3%
percent certificates due
Feb. 14, 1958, or 3A per
cent notes due M a y 15,
1960. Offered 1H percent
notes exchange for the 3%
percent notes due Feb.
14, 1958.
Offered $234 billion of 3%
percent certificates due
Feb. 14, 1958, and %%.
billion 3 A percent notes
due M a y 15, 1960. (This
was a reopening of issues
offered in February re
funding.)
Offered optional exchange
for 3 A percent certifi
cates due Apr. 15, 1958,
or 3% percent notes due
Feb. 15, 1962.
Offered optional exchange
for 3
percent certifi
cates due Dec. 1, 1957, 4
percent certificates due
Aug. 1,1958, or 4 percent
notes due Aug. 1, 1961,
but redeemable at option
of holder on 3 m onths’
advance notice on Aug. 1,
1959. However, October
maturities were restrict
ed to 4 percent certificates
or extendable notes.
Offered $3 billion for cash
as follows: $500 million
of 4 percent bonds due
Oct. 1, 1969, $1.75 billion
of 4 percent notes due
Aug. 1,1962, but redeem
able at option of holder
at end of 2A. years, and
$750 million of 4 percent
certificates due Aug. 1,
1958.
(See meeting of N o v . 18,
1957, below.)
See meeting of N o v . 18
1957, below.)
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Date of com
mittee report
1957
N ov. 18____
1958
an. 28____
Apr. 1 -.
M ay 29.
Ju if 17..
Sept. 23-
1227
Financing problem
Committee recommendations
Treasury offerings
Review recommendations
of N ov. 14, 1957, due to
change in market follow
ing lowering of discount
rate.
Offer exchange for 3% percent
certificates due Dec. 1, 1958.
Offered for exchange 3% per
cent 1-year certificates
due Dec. 1, 1958.
Offered for cash $1 billion
3M percent notes due
N ov. 15, 1962, and $500
million 3J4 percent bonds
due N ov. 15, 1974.
Refunding:
recommend
which issues of notes,
certificates, and bonds
maturing in first half of
1958 should be refunded
in e a r l y F e b r u a r y ;
whether special bills m a
turing Apr. 15 should be
offered an exchange; and
refunding terms.
Cash: should offering be
made at time of refund
ing, if legislations rais
ing debt lixnit passed by
then?
Call on Feb. 14, 1958, for
redemption on June 15,
the 224-percent tax ex
empt bonds of 1958-63.
N ew easih of about $3,500,000,000.
Refunding of 2^-percent
notes, 2%-percent bonds,
and 224-percent bonds
on June 15, 1958.
Inclusion of two bond
issues called for redemp
tion on Sept. 15, 1958, in
June refunding.
Refunding of 4-percent
certificates due Aug. 1,
1958, and bond issues
called for redemption
Sept. 15, 1958.
Cash financing of unde
termined amount in
August.
New cash of about $3,500,000,000.
New cash offering of $1 billion
of V/% percent 5-year notes
and $500 million of 3% per
cent 17-year bonds.
Offer holders of 3^-percent
certificates due Feb. 14,1958,
2j/2-percent bonds due Mar.
15, 1958, l?/2-percent ex
change notes due Apr. 1,
1958,
334-percent
certifi
cates due Apr. 15, 1958, and
special bills due Apr. 15,
1958, an optional exchange
for 2 1
/ 2-percent 1-year certi
ficates, 3-percent obligations
maturing in 5 or 6 years, or 3
percent 30-year bonds.
Defer refunding of June ma
turities.
Delay consideration of cash
financing until after the re
funding and change in the
debt limit.
Call should be made___________
Offer $3,500,000,000 of 2^-percent notes due Feb. 15,1963.
Offer holders optional ex
change for 1^-percent notes
due Aug. 14, 1959, 2^-percent bonds due Feb. 15,1985,
3-percent bonds due M ay 16,
1971, or 3^-percent bonds
due M ay 15, 1985.
Refunding of called
should be deferred.
bonds
Offered recommended is
sues optional exchange
for 23^-percent certifi
cates due Feb. 14,1959, 3percent bonds due Feb.
15, 1964, or 33^-percent
bonds due Feb. 15,1990.
Following refunding opera
tion and raising of debt
limit, offered for cash
$1.25 billion 3-percent
bonds due Aug. 15,1966.
Call was made.
Offered $3,500,000,000 of
2y%- percent notes due
Feb. 15, 1963.
Offered optional exchange
for 134 -percent certifi
cates due M a y 15, 1959,
or 2^-percent bonds due
Feb. 15, 1965.
Offered for cash $1,000,000,000 of 3 3 4 -p e r c e n t
bonds due M a y 15, 1985,
at price of 100H.
Refunding limited to June
maturities.
Offer holders of all issues ex
change for 1%-percent 1-year
certificates due July 31,1959.
Offered exchange for 1% percent certificates due
Aug. 1, 1959.
Refunding
announcement
should assure the market
that the August cash financ
ing would be in securities
with maturity of less than
1 year.
Otffering should
be tax anticipation certifi
cates or bills maturing in
March 1959 but exact terms
would depend upon amount
of cash to be raised and con
dition of short-term market
at time of offering.
Offer up to $1,000,000,000 of
3^-percent notes due M a y
15, 1960; and later auction
about $2,750,000,000 of spe
cial bills due M a y 15, 1959.
Announcement made as
suggested. Offered $3, 500,000,000 of lH-percent
tax anticipation certifi
cates due M ar. 24, 1959.
Offered $1,000,000,000 ""o f
33^-percent notes due
N ov. 15, 1959, at par
and $2,500,000,000 special
bills due M a y 15, 1959,
at a price of 98.023 to
yield 3.25 percent.
1228
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Financing problem
Committee recommendations
Treasury offerings
Refunding of 3%-percent
certificates due Dec. 1,
1958, and 2% percent
bonds due Dec. 15,1958.
Offer optional exchange for
certificates due in N ovem
ber 1959 or notes due in 4 to
5 years. Securities should
be priced at rates sufficient
at time of offering to avoid
large attrition and with the
longer issue above the short
er issue to encourage exten
sion of debt.
Offer $3,000,000,000 of tax an
ticipation bills due June 22,
1959, on auction basis.
Meet the problem by making
offering during JanuaryMarch period.
Offered optional exchange
into 3% percent certifi
cates due N ov. 15, 1959,
at 99.95 percent of par or
3^ * percent notes due
M a y 15, 1961, at 9 9 ^
percent of par.
New cash of about $2.25
billion.
Offer $750 million of 4-percent
bonds due Feb. 15, 1980, at
price of 99 to yield 4.07 per
cent, and auction $1.5 billion
of tax anticipation bills due
Sept. 22, 1959.
Offered $750 million of 4percent bonds due Feb.
15, 1980, at a price of 99
and $2.5 billion of 334percent notes due M ay
15, 1960, at a price of 99%
to yield 3.45 percent.
Preliminary recommenda
tions on February re
funding.
Under then existing conditions
a 3-way optional exchange
for 1-year certificates, 3-year
to 5-year notes, or bonds
with maturity of about 10
years.
Offer optional exchange for
3%-percent certificates due
Feb. 15, 1960, or 4-percent
notes due Feb. 15, 1962.
Date of com
mittee report
1958
N ov. 7..
New cash in December___
Should part of about $4,500,000,000 cash needed
for period January to
March 1959, be ob
tained by additional
weekly bills.
1959
Jan. 8..
Jan. 29..
Refunding of 2H-percent
certificates due Feb. 14,
1959, and 1^-percent
notes due Feb. 15, 1959.
M ar. 19..
New cash of about $4 bil
lion.
Offer $500 million of additional
4-percent bonds due Oct. 1,
1969, at par, $1.5 billion 4percent notes due M ay 15,
1963, at par, and approxi
mately $2 billion special
bills due N ov. 15, 1959 at
auction.
Apr. 19.
Refunding of special bills
and lJ4-percent certifi
cates due M a y 15, 1959.
Offer holders of special bills
exchange for 3 percent tax
anticipation obligations due
Dec. 22, 1959, and holders of
134 -percent certificates ex
change for 3K-Percent cer
tificates due M ay 15, 1960,
at price to yield about 4 per
cent.
Auction for cash special bills
due Apr. 15, 1960.
N ew cash of about $1.5 to
15 billion.
June 25_
New cash of about $5 bil
lion.
July 1 6 -
Refunding of 1%-percent
certificates and 4-per
cent notes, due Aug. 1,
1959.
New cash in August..
Auction for cash $3 billion of
tax anticipation bills due
Mar. 22, 1960, and later, $2
billion special bills due
July 15,1960.
Redeem 4-percent notes in
cash. Offer 1 % -p ercen t
certificates optional ex
change for 4%-percent issue
due Aug. 1 or 15, 1960, or
4^-percent notes due M a y
15, 1964.
R efu n d in g an noun cem en t
should state August cash
financing to be limited to
short-term securities ma
turing in less than 1 year.
Offered at auction *3,000,000,000 tax anticipation
bills due June 22, 1959.
Undertook additional bill
financing by introducing
new cycle of both 13week and 26-week bills.
Offered optional exchange
for 3%-percent certifi
cates due Feb. 15, 1960,
or 4-percent notes due
Feb. 15, 1962.
Offered $500 million addi
tional 4-percent bonds
due Oct. 1, 1969, at par,
about $1.5 billion 4-percent notes due M ay 15,
1963, at par, and about
$2 billion of special bills
due Jan. 15, 1960. Bill
auction followed sub
scription closing on bonds
and notes.
Redeemed special bills in
cash. Offered
134-per
cent certificates exchange
for 4-percent certificates
due M ay 15,1960, at 99.95
to yield 4.05 percent.
Auctioned for cash $2 bil
lion special bills due
Apr. 15, 1960, and $1.5
billion tax anticipation
bills due Dec. 22, 1959.
Offered at auction $3 bil
lion of tax anticipation
bills due M ar. 22, 1960,
and $2 billion special bills
due July 15, 1960.
Offered notes and certifi
cates optional exchange
for 4 % - p e r c e n t notes due
Aug. 15, 1960 or 454-percent notes due M a y 15,
1964.
(Not yet announced.)
1229
EMPLOYMENT, GROWTH, AND PRICE LEVELS
A m e r ic a n
B ankers
A s s o c ia t io n — M e m b e r s h ip of
B o r r o w i n g , 1958-59
C o m m it t e e o n
G overnment
Robert V. Fleming (chairman). Chairman of board, the Riggs National Bank,
Washington, D.C.
Henry C. Alexander------------------ Chairman of board, Morgan Guaranty Trust Co.
of New York, New York, N.Y.
Bruce Baird------------------------------- President, National Savings & Trust Co., Wash
ington, D.C.
S. Clark Beise------ -------------------- President, Bank of America N.T. & S.A., San
Francisco, Calif.
Kenton R. Cravens--------------------President, Mercantile Trust Co., St. Louis, Mo.
Fred F. Florence_______________ Chairman executive committee, Republic Na
tional Bank of Dallas, Dallas, Tex.
John M. Griffith________________ President, City National Bank, Taylor, Tex.
H. Frederick Hagemann, Jr____President, Rockland-Atlas National Bank of
Boston, Boston, Mass.
N. Baxter Jackson_____________ Chairman of executive committee, Chemical
Corn Exchange Bank, New York, N.Y.
David M. Kennedy_____________ Chairman of board, Continental Illinois Na
tional Bank & Trust Co. of Chicago, Chicago,
111.
Homer J. Livingston___________ President, the First National Bank of Chicago,
Chicago, 111.
John J. McCloy--------------------------Chairman of board, the Chase Manhattan Bank,
New York, N.Y.
Reno Odlin_____________________President, Puget Sound National Bank, Tacoma,
Wash.
F. Raymond Peterson__________ Chairman of board, First National Bank of Pas
saic County, Paterson, N.J.
Dietrich Schmitz_______________ Chairman of board, Washington Mutual Sav
ings Bank, Seattle, Wash.
Earl B. Schwulst_______________ President, the Bowery Savings Bank, New
York, N.Y.
James E. Shelton______________ Chairman of board, Security-First National
Bank of Los Angeles, Los Angeles, Calif.
Norfleet Turner________________ President, First National Bank of Memphis,
Memphis, Tenn.
Joseph C. Welman_____________ President, Bank of Kennett, Kennett, Mo.
A. L. M. Wiggins----------------------- Chairman of board, the Bank of Hartsville,
Hartsville, S.C.
Paul I. Wren___________________Executive vice president, Old Colony Trust Co.,
1 Federal Street, Boston, Mass.
o f f ic e r s a n d
staff
Lee P. Miller__________________ President, Citizens Fidelity Bank & Trust Co.,
Louisville, Ky. (president of the American
Bankers Association).
John W . Remington____________President, Lincoln Rochester Trust Co., Roches
ter, N.Y. (vice president of the American
Bankers Association).
Merle E. Selecman_____________ Executive vice president, American Bankers
Association, 12 East 36th Street, New York,
N.Y.
Eugene C. Zorn, Jr., (secretary Deputy manager and director of research,
of the committee)
American Bankers Association, 12 East 36th
Street, New York, N.Y.
(The following was subsequently submitted for the record:)
C o ngress
of
the
J o in t
U n it e d
E c o n o m ic
States,
C o m m it t e e ,
Septem ber Jh 1959.
Memorandum
T o : Senator Paul H. Douglas, Chairman.
From: James W. Knowles, Special Economic Consultant.
Subject: Analysis of the recommendations on debt management of the Com
mittee on Government Borrowing of the American Bankers Association to
the Secretary of the Treasury.
1230
EMPLOYMENT, GROWTH, AND PRICE LEVELS
When you inserted in the record of the committee’s recent hearings exhibits
setting forth the recommendations to the Secretary of the Treasury by the
Committee on Government Borrowiing of the American Bankers Association,
together with subsequent actual Treasury offerings, you requested the staff to
prepare for insertion in the record an anlysis which would show the degree of
agreement between the recommendation made to the Treasury and the subse
quent offerings. This memorandum has been prepared for the record in accord
ance with your request.
In conformity with your instructions, the advice given by the American
Bankers Association’s Committee on Government Borrowing was compared with
the subsequent offerings of the Treasury for the year 1952 and for 1953-59.
Each recommendation was classified in one of four categories: (1) Advice
accepted; (2) advice accepted, but with minor changes; (3) advice accepted,
but with major changes; and (4) advice rejected. There is, of course, no basis
in the published record for the staff to determine what the Treasury’s views
were on the particular offering before they met with the American Bankers
Association’s committee, or what offering would have been made in the absence
of their advice.
Independent reviews of the record were made by different analysts and the
different classifications were compared. Then a final classification was arrived
at. There were only very minor differences in the results arrived at by the
different analysts.
The tabulation given below shows that the Treasury rejected 19 percent of
the recommendations of the American Bankers Association’s committee. Its
offerings were identical with, or substantially identical with, the American
Bankers Association’s advice in approximately three-fifths of the cases. If we
include the cases where only minor changes were made in the Treasury offering
from what the American Bankers Association’s committee had advised, then
over three-fourths of the offerings were in agreement with the advice given.
Only a minor fraction of the cases represented partial acceptance of the Ameri
can Bankers Association’s committee’s advice but with some major revision in
the terms of the offering. If all cases in which the advice was accepted—
whether entirely, with minor revisions, or with major revisions— are combined,
then in about four-fifths of the cases the Treasury’s offering was in general
agreement with the advice given.
The tabulation referred to above follows :
Advice accepted
Period
Total
As given
1952:
N um ber___________________
Percent. - --------------- ----------1953-59:
N u irbsr________________ ______
Percent________________________
1952-59:
Number________________
___
Percent________________________
But with
minor
changes
Partially
&ut with
some major
changes
Advice
rejected
Total
accepted
19
100.0
11
57.9
1
5.3
0
0
12
63.2
7
36.8
84
100.0
50
59.5
17
20.2
4
4.8
71
84.5
13
15.5
103
100.0
61
59.2
18
17.5
4
3.9
83
80.6
20
19.4
Representative P atm an . We will have our next meeting in the
auditorium of the New Senate Office Building, Monday, July 27, at
10 a.m., when Mr. Martin, Chairman of the Board of Governors of
the Federal Reserve System, will be our witness.
I f I am not mistaken, that is in the northwest comer of the new
building.
The committee stands adjourned.
(Whereupon, at 1.15 p.m., Friday, July 24, 1959, the committee
adjourned, to reconvene at 10 a.m., Monday, July 27, 1959.)
EMPLOYMENT, GROWTH, AND PRICE LEVELS
M ONDAY, JU LY 27, 1959
C ongress of th e U nited S tates ,
J o int E conomic C o m m itte e ,
.
W'ashington, D.G
The committee met at 10 a.m., pursuant to adjournment, in the
auditorium, New Senate Office Building, Representative Wright Pat
man, vice chairman of the committee, presiding.
Present: Senators Douglas and Bush; Representatives Patman,
Reuss, Coffin, Curtis, and Widnall.
Representative P atm an . The committee will come to order. You
may proceed, sir, in your own way.
But for the record, may I first say that Chairman Douglas is un
able to be here this morning at the beginning of our session. He has
two other committee meetings very important to him, to Chicago, and
to Illinois. But he will be here as soon as possible.
STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM; AC
COMPANIED BY RALPH A. YOUNG, DIRECTOR, DIVISION OF
RESEARCH, FEDERAL RESERVE BOARD ; WINFIELD W. RIEFLER,
ASSISTANT TO THE CHAIRMAN, FEDERAL RESERVE BOARD; AND
ROBERT ROOSA, VICE PRESIDENT, NEW YORK FEDERAL RESERVE
BANK
M r. M a r tin . In this opening statement, I would like to comment
first on one aspect of the problem you are considering—the impor
tance of freely competitive markets to maximum economic growth.
In so doing, I do not wish to understress the importance of any other
conditions necessary to healthy economic growth. Indeed, if there is
one essential for substained growth that stands out above all others, it
is the maintenance of a volume of real savings and investment suffi
cient to support continuous renewal, adjustment, and expansion of
our total capital resources. As you know, the maintenance of ade
quate saving and investment depends upon broadly based and justi
fied confidence in a reasonably stable dollar.
Role of free markets: No one here would deny that free markets
are essential to the vital and vigorous performance of our economy.
No one would urge that we encourage monopolistic practices or ad
ministered pricing, and few would advocate Government interference
with the market process as a general principle. On the contrary,
nearly everyone would agree that such developments are injurious to
the best use of our resources, that they distort the equitable distri-
1231
1232
EMPLOYMENT, GROWTH, AND PRICE LEVELS
bution of final product, and that they interfere with economic prog
ress.
Differences of viewpoint on free markets arise only when the com
plexities of specific market situations make it difficult to discern
whether markets are, in fact, functioning as efficiently as we might
reasonably expect. Well-informed and well-intentioned observers
will disagree as to whether an appropriate degree of competition ex
ists in particular markets and, if not, as to what corrective steps, if
any, it is appropriate for Government to take.
I f the policies we follow in the financial field are to be fully effective
in promoting growth and stability, they must be able to permeate the
economy through the mechanism of efficient markets. This generali
zation applies to all markets, for all types of goods and services.
Naturally, the Treasury and the Federal Reserve are most immediately
concerned with financial markets, both because we have some direct
responsibility for these markets, and because they represent the main
channel through which the Government financial policies to foster
growth and stability must pass.
The market for Government securities: We are especiallv concerned
with the market for U.S. Government securities. With a Federal debt
o f $285 billion, Government securities are a common and important
asset in the portfolios of businesses, financial institutions, and indi
viduals. An efficient market for Government securities is obviously
needed for the functioning of our financial mechanism. We are for
tunate in this country to have such a market. From the standpoint o f
the Federal Reserve, it is hard to conceive of the effective regulation
o f the reserve position of the banking system without some such facility
through which to conduct open market operations of large magnitude.
The initial results of our study of this market with the Treasury are
encouraging in many ways. As wns pointed out in the summary o f
the study made available to you on Friday, huge transactions are car
ried out every day in an orderly fashion and at very small cost to
ultimate investors. One cannot fail to be impressed by the fact that
there are denlers who stand ready, at their own initiative and at their
own risk, to buy or sell large blocks of securities. Frequently, single
transactions run into millions of dollars. Despite the absence of any
assurance that a given purchase will be followed by an offsetting sale,
dealers quote bid and ask prices that typically have a spread of less
than one-fourth of 1 percent on the price of long-term bonds and
ranrre down to a few one-hundredths of 1 percent on Treasury bill
yields.
I f you have had an opportunity to examine the preliminary study
manuscripts, you are aware that they do suggest that some improve
ments in the Government securities market may be in order. W e
would hope that these improvements can be made within the frame
work of existing authority and through voluntary cooperation with
various market participants. There is, however, a possibility that
further authority might be necessary or desirable. We expect to have
a clearer idea about how to accomplish desirable improvements after
we have had an opportunity to consider carefully the findings o f the
staff study just completed last week.
There is one possible change in the organization of the Government
securities market that would not, as I view it, lead to improvement.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1233
That change would be the enforced conversion of the present overthe-counter dealer market into an organized exchange market. The
reasons why this change would not be constructive or even practicable
are set forth in the joint statement on the study’s findings. On the
other hand, any efforts on the part of existing organized exchanges to
extend or strengthen the facilities now made available to buyers and
sellers of Government securities should certainly be encouraged. There
is no reason why better exchange facilities would not prove to be a
helpful supplement to those provided by the persent dealer market.
Another change affecting the Government securities market that
has been suggested relates to Federal Reserve participation in it, and
pertains in particular to the extension to longer term maturities of
Federal Reserve open market operations. Some discussion of this
suggested change is appropriate here, for it is not a matter encom
passed by the Treasury-Federal Reserve study.
System operations in short-term Government securities: Since the
Treasury-Federal Reserve accord in 1951, the System’s day-to-day
trading in Government securities has largely been in short-term is
sues. In 1953, after extensive reexamination of System operations
in the open market, the Federal Open Market Committee formally,
resolved to make this a continuing practice.
I think that nearly everyone who has studied these matters would
agree that the bulk of Federal Reserve operations must be conducted
in short-term securities; that necessarily means largely in Treasury
bills. The short-term sector of the market is where the greater part
of the volume of all trading occurs. Dealer positions are character
istically and understandably concentrated in these shorter issues.
Differences of view on whether System trading should extend out
side the short-term area hinge upon whether or not some small part
of our regular buying and selling should be done in the longer term
area.
To appraise this difference in viewpoint, we need first to consider
the basic economics of System open market operations. Federal Re
serve operations in Government securities influence prices and yields
of outstanding securities in three fundamentally different ways:
1. They change the volume of reserves otherwise available to mem
ber banks for making loans and investments or paying off debts;
2. They affect the volume of securities available for trading and
investment; and
3. They influence the expectations of professional traders and in
vestors regarding market trends.
O f these effects, the first is by far the most important. Under our
fractional reserve banking system, additions to or subtractions from
commercial bank reserves have a multiple expansive or contractive
effect on bank lending and investing power. Other things being
equal, this means that any given change in System holdings of secu
rities will tend to be accompanied by a change in commercial bank
portfolios of loans and investments several times as large. Unlike
many other institutional investors, commercial banks maintain Gov
ernment security portfolios with a wide maturity distribution al
though the largest component will be short-term securities. Hence, the
major effect on market prices and interest rates will result from the
actions subsequently taken by commercial banks to expand or con
1234
EMPLOYMENT, GROWTH, AND PRICE LEVELS
tract their asset portfolios, and the impact will be distributed through
out the market.
W ith regard to the effect on the availability o f securities in the
market, substantial System purchases or sales of short-term securities
exert a minimum influence on the market supply. For example, most
o f the $35 billion of bills outstanding is in the hands o f potential
traders. On the other hand, much the largest part o f the marketable
longer term issues is in the hands of permanent investors. Current
trading in them is confined to a very small fraction of the outstand
ing volume. For this reason, the long-term area of the market shows
greater temporary reaction than the short-term area to large pur
chase or sale orders.
Any attempt to use System operations to influence the maturity
pattern of interest rates to help debt management would not, in my
opinion, produce lasting benefits—I emphasize the word “ lasting”—
and would produce real difficulties. I f an attempt were made to
lower long-term interest rates by System purchases of bonds and
to offset the effect on reserves by accompanying sales of short-term
issues, market holdings of participants would shift by a corresponding
amount from long-term securities to short ones. This process could
continue until the System’s portfolio consisted largely of long-term
securities. Accordingly, the System would have put itself into a frozen
portfolio position.
The effect of thus endeavoring to lower long-term yields, without
affecting bank reserves, would be to increase the overall lequidity of
the economy. Not only would the supply of short-term issues in the
market be increase, but also all Government bonds outstanding would
be made more liquid because they could be more readily converted
into cash. The problem o f excess liquidity in the economy, already a
serious one, would be intensified. The Treasury now, even with the
present interest rate ceiling, would have no difficulty in reaching
the same result. It has merely to issue some $20 billion of short-term
securities and use the proceeds to retire outstanding long-term debt.
Fortunately, it is not contemplating any such action.
The effect of System open market operations on the expectations
o f market professionals can be of critical importance depending
upon the market area in which the operations are conducted. In the
longer term area of the market, dealers, traders, and portfolio man
agers are particularly sensitive to unusual changes in supply and
demand. One important reason is that long-term securities are sub
ject to wider price fluctuation relative to given changes in interest
rates than are short-term issues. Therefore, trading or portfolio
positions in them incur a greater price risk.
These traders and investors in long-term securities are aware that
the System holds the economy’s largest single portfolio of Govern
ment securities. They also know that the System is the only in
vestor o f virtually unlimited means. Consequently, if the System
regularly engaged in open market operations in longer term se
curities with uncertain price effects, the professionals would either
withdraw from active trading or endeavor to operate on the same
side o f the market as they believed, rightly or wrongly, that the
System was operating.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1235
I f the professionals in the market did the former, the Federal Re
serve would become in fact the price and yield administrator o f the
long-term Government securities market. I f they did the latter, the
total effect might be to encourage artificially bullish or bearish ex>ectations as to prices and yields on long-term securities. This could
ead to unsustainable price and yield levels which would not reflect
basic supply and demand forces. The dangerous potentialities of
such a development are illustrated by the speculative building and
liquidation o f mid-1958, described in detail in the Treasury-Federal
Reserve study.
Either of these effects would permeate, and tend to be disturbing
to, the whole capital market. Accordingly, instead of working as a
stabilizing force for the economy, such open market operations in
long-term securities could have the opposite result. In other words,
if the Federal Reserve were to intrude in the adjustment o f supply
and demand in order directly to influence prices and yields on long
term securities or in a way that resulted in unsustainable prices and
yields, it would impair the functioning of a vitally important market
process.
Some public discussion of the Federal Reserve’s present practice of
conducting open market operations in short-term securities implies,
it seems to me, that the System has assumed an intractable and doc
trinaire position on this matter. This is not a correct interpretation
o f what we have done. We adopted this practice after a careful
study of experience and of the effects of our operations upon the mar
ket and the banking system. In this review, we were naturally mind
ful of the specific tasks of the System; namely, to regulate the growth
o f the money supply in accordance with the economy’s needs and to
help maintain a stable value for the dollar.
The practice or technique was adopted, not as an iron rule, but as
a general procedure for the conduct of current operations. It is sub
ject to change at any time and is formally reconsidered once each year
by the Federal Open Market Committee in the light of recent experi
ence. Exceptions can be, and have been, authorized by the Committee
in situations where either Treasury financing needs, conditions in the
money market, or the requirements of monetary policy call for such
variations. The System, at times has been a subscriber to longer
term issues in Treasury exchange offerings when appropriate, and at
other times has purchased such securities in the market.
I might interject here, Mr. Patman, that the mere fact that this
matter has received such discussion is well known to all the members
of the Open Market Committee, and you can be sure it will be brought
up by members of the Committee at each of the meetings, as a result
of this. To that extent, I think this discussion is very helpful, be
cause if we are wrong in what we are doing we certainly want to ex
plore it and find out whether we are. But it is not an issue that is
just put on the shelf and disposed of. It is not written into law.
In other words, we endeavor to apply this practice flexibly as we
do all of our practices in the administration of monetary policy. As
I have stated to this committee on other occasions, flexibility is an es
sential ingredient of our entire reserve banking operation. When re
serve banking loses flexibility, it will no longer be able to do the job
that is required of the central bank in the market economies of the
free world.
{
1236
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Measurement of economic growth: Now, I think it is important
that we realize the limitations as well as the usefulness of our statisti
cal means. So, before concluding my statement, I want to mention
one entirely different matter that we have been considering at the
Board and that I think, has special relevance to the broad scope o f
this committee’s interest. That is the measurement of growth. As
you know, one of the most frequently used indicators of growth in
the industrial sector has been the Board’s index of industrial produc
tion. One o f the greatest lessons we learn from the compilation of
this index, which we try to do as carefully and competently as we
know how, is that the mere matter of measuring growth is a very
tricky thing.
As the structure of the economy keeps changing, the job of com
bining measures of its many parts into a single index cannot be done*
despite our best efforts, without having to make major revisions every
few years. We again have underway a basic revision, the final results
o f which will be available soon. The nub of what this revision shows
is that the growth rate in the sectors covered by the Board’s index
has been materially greater over the past decade than has appeared
from the unrevised index.
The statistical data that we have to use from month to month can
only be cross-checked in a comprehensive way when wTe have available
the results of a full census. Congress authorized the Department of
Commerce to conduct one of these in 1947 and another as of 1954.
The immense task of digesting and reappraising the results of these
censuses, and then refitting all of the monthly data into these basic
benchmarks, has now progressed far enough to indicate that the re
vised index, with the 1947-49 period as the starting point at 100,
will show a level of around 165 at mid-1959. That is 10 points higher
than the figure shown by our unrevised index for June.
Some of this difference results because we are now able to include,
with appropriate proportional weight alongside other items, more of
the fuel and energy production that has been going on all the time
without being represented in the index. More than half of the d if
ference, however, results from improvements in measurement of pres
ently included industries. The monthly movements of the revised
and present indexes are quite similar, so that main effect of the
revision in the total is to tilt upward this measure of industrial growth
over the past decade. For example, it now appears that industrial
output of consumer goods on a revised basis has risen at an average
annual rate of 3.8 percent as compared with 3.2 percent shown by
the unrevised index for the consumer goods sector. Population
growth has been at a rate of 1.7 percent per year.
Industrial production, to be sure, is only one of the ways that
growth might be measured, but it is a measure in real terms and so
is free of price influences. Crude measurements of growth in aggre
gate dollar terms can be seriously misleading, not only with respect
to what the economy has done but also in marking out guidelines as
to how we may reasonably expect the economy to grow in the years
ahead. It is no achievement to have a rise of 10 percent in the gen
eral price level such as occurred in the months after the Korean
outbreak—even though that does puff up the figures on gross national
product quite handsomely. The increase of 15 percent in the current
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1237
dollar value o f gross national product from 1955 to 1957 was only
half o f what it seemed to be, because it was inflated by a general price
increase of 7 percent.
Throughout its entire history, this economy has grown by stagger
ing magnitudes. It is because I, for one, want to do everything I
can to keep it growing that I urge the maintenance of free markets
and reasonably stable prices as primary objectives of public policy.
Representative P atm an . Thank you, Mr. Martin. W ill you iden
tify the gentlemen who are accompanying you ?
Mr. M a rtin . Mr. Winfield W. Riefler, on my right, is Assistant to
the Chairman of the Federal Reserve Board. Mr. Robert Roosa is
the vice president in charge of the division of research at the Federal
Reserve Bank of New York, who has come down to help me on this.
And Mr. Ralph Young is the head of our Division of Research and
Statistics.
Representative P atm an . Mr. Martin, with reference to the debacle
in the Government bond market in midsummer 1958 I notice you
say in your joint statement with Secretary Anderson that one of the
causes of the sudden drop in bond prices was—
Expectations of tightening credit conditions, based in part on rumors of a shift
in Federal Reserve policy.
Does that statement refer to the period immediately following the
June 17 meeting of the Open Market Committee or the period im
mediately following the July 8 meeting of the Open Market Com
mittee?
Mr. M artin . It might refer to either meeting, Mr. Patman, as
it could have resulted from the current flow of economic information
which was reflecting fairly clear improvement in business conditions.
Representative P atm an . A s I understand the report, most of the
trouble was caused by the nonprofessional speculators and plungers
coming into this market, mostly late in May. Is that correct?
Mr. M a r tin . Yes, late May and early June, probably.
Representative P a tm a n . You would qualify it to include early
June?
Mr. M artin . Yes, I would. Mr. Young, who has worked on the
study, will be glad to speak on that.
Representative Patm an . And a great deal of money was lost in
the market. Do you know how much was lost?
Mr. M a r tin . We did not make any measurement.
Representative P atm an . Y ou did not make any estimate.
Does your report present any information on the profits made by
either of the 17 Government securities dealers or the New York
banks that financed so much of the speculative boom?
Mr. M a r tin . No, we do not have that.
Representative P atm an . The commercial banks o f the country
made $681 million in profits from speculating in securities last year,
which was 10 times as much as they made in such speculations in
1957, the year before. That would indicate that the commercial
banks got out o f the market pretty well before the bubble burst,
would it not, Mr. Martin?
Mr. M a r tin . The fact that they made these profits ?
Representative P a tm a n . The fact that they made such enormous
profits would indicate that they must have gotten out before the
1238
EMPLOYMENT, GROWTH, AND PRICE LEVELS
bubble burst; are bound to have done so, because they would not
have made such profits.
And remember that these profits were made not by the 13,000 com
mercial banks so much as by 2 percent of the commercial banks, that
made over 66% percent of the $681 million profits. The very fact
that these few banks were able to make such an enormous amount
indicates clearly, does it not, that they must have gotten out before,
the bubble burst?
M r. M a r t in . The decline in interest rates was a m ajor factor in
m aking their portfolios attractive and profitable.
We have a table, Mr. Patman, that shows that over the period
from 1951 to date, taking these profits and offsetting them against
losses, there was a net loss to the banks of $87 million. I believe that
is correct.
Representative P atm an . I am not talking about that. That is
something else. I am talking about profits on Government securities
last year, 1958-----M r. M a r tin . That is what I am talking about.
Representative P atm an . That the banks made in trading or specu
lating, whichever you want to call it, on Government securities.
M r. M a rtin . This table, which we will put in the record, refers
to Government securities.
Representative P atm an . That is right. $681 million for all banks;
$612 million for member banks.
(The table referred to follow s:)
Ju ly
27,1959.
Profits, recoveries, and losses on securities, member banks, 1951-58
[In millions of dollars]
1951_______________________________________________________
1952___________ __________ _____ _________________________ _
1953_______________________________________________________
1954_________________________ ____________________ ______
1955____ _________ ______ __________________________________
1956_____________ ________ ____________________ _____ ______
1957____________________________ ______ ___________________
1958_______________________________________________________
T o t a l................................................. ............... ............... ..
Net (other
than trans
fers to or
from
reserves)
Recoveries
Losses
and
chargeoffs
52
29
35
375
51
28
57
612
16
14
11
15
21
16
10
17
88
108
174
74
261
369
278
94
-2 0
—65
— 128
+316
-1 8 9
—325
—211
+5 3 5
1,239
120
1,446
-8 7
Profits
Source: Federal Reserve Bulletin (p. 650, June 1959; p. 564, M ay 1955).
M r. M a r t in . A t this particular time those are nonrecurring profits,
and when you have a market that turns over in a year $200 billion
worth o f securities, there does not seem to be anything particularly
startling.
Representative P a tm a n . It does not disturb you at all? It does
not excite your curiosity ?
M r. M a r t in . N o.
Representative P atm an . Does it excite your curiosity when it looks
like it is following a pattern, Mr. Martin? In 1953 Government
bonds were forced down in price, and the banks bought them up.
Then in 1954, when they were forced up again or went up again in
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1239
price, the banks unloaded and they made over $400 million profit that
time, 2 percent of the banks making two-thirds of it. Then in 1957
they go way down again and the banks buy them again. In 1958, in
the early part, they go up again and the banks sell and make $681
million. It looks now as if they are making that cycle 2 years instead
o f 4, by running them down in 1959, probably with the expectation
of running them up in 1960 and duplicating that enormous profit.
Mr. M a r t in . W e do not know what the book losses of these secu
rities are at the end of each year. From the complaints that I get
from bankers, they are pretty worried from time to time about their
portfolio losses.
Representative P a t m a n . Worried about them? They get 100 per
cent deduction for losses on them, do they not, whether it is 2 days,
2 weeks, or 6 months ? That is correct, is it not ?
M r. M a r t in . Deduction from what ?
Representative P a t m a n . That is, taxwise, for tax losses.
Mr. M a r t in . Well, they offset them as anyone else does.
Representative P a t m a n . N o ; the banks have a special law taxwise
for themselves.
Mr. M a r t in . Oh, yes; that is right.
Representative P a t m a n . They have a privilege that no other indi
vidual or corporation has; that is correct, is it not ?
Mr. M a r t in . Y es; that is right.
Representative P a t m a n . The profits of most of the dealers I find
are not publicly reported, but in trying to look them up I find that
one of them, probably the biggest one, is a corporation and reported
its profits to Standard & Poor’s. According to Standard & Poor’s,
the Discount Corp. made a net profit of $1,803,585 in 1958. That
was 55 percent more than they made in the previous year. So would
it be safe to assume that The Discount Corp. had unloaded its holding
before the big price break ?
Mr. M a r t in . You could not tell from that alone, but unquestionably
they profited during that period, Mr. Patman. They were in busi
ness for profit, and they can be expected to take advantage of every
situation they can.
Representative P a t m a n . D o you think, Mr. Martin, that there was
any evidence of leaks disclosed in your investigation ?
M r. M a r t in . W e have done our level best to find any evidence o f
that, but we found no indication o f them.
Representative P a t m a n . Y ou found no indication of leaks ?
M r. M a r t in . None whatsoever.
Representative P a t m a n . This $681 million in profits realized by the
commercial banks 2 percent of the banks realizing two-thirds of the
profits, necessarily does not include all the people that have the
benefit o f any information that these banks have or had and enabled
them to make such huge profits.
The $681 million would be profits of the banks, but, of course,
corporations and individuals entered into that. So the question o f
leaks I think would be a very important one.
How do you explain the fact that there are no leaks and no inside
information, when the whole account of the Federal Reserve System,
the open market account, is conducted there in New York under the
auspices, the direction, and the administration and by an official
1240
EMPLOYMENT, GROWTH, AND PRICE LEVELS
selected by the Federal Reserve Bank of New York, when that bank
is operated by nine directors, six of whom are selected by the private
banks? Naturally, they would have access to these officials whom
they have selected to carry out the duties of the banks, they would have
Home contacts with them, and certain information necessarily they
would get.
I would just like you to explain how it is possible to keep down
leaks and inside information under those facts, Mr. Martin, and
particularly in view of the fact that you do not even have a rule or
law against people who are making these policies from investing in, or
speculating in the Government bond market themselves.
Mr. M a r t in . Mr. Patman, you will recall that we have been over
this with you in public hearings before. We have found from a good
deal of study of this problem that we do not know any way you can
positively legislate honesty.
In the administration of this account, this manager that you are
talking about is approved by the Federal Open Market Committee.
Representative P a t m a n . O f course, I know you say that, but is that
very important ?
Mr. M a r tin . Yes.
Representative P a t m a n . A s to the fact that he is a good man, and
he is, of course, you would accept him, and if you did not accept him
for any personal or other reason, they would have another man just
as good. So you have a veto power, but that does not give you much
power over the man, Mr. Martin.
Mr. M ar tin . We always have the power of removal in the final
analysis if we wish to exercise it. I grant you this is a difficult road
to take.
Representative P a t m a n . On that part I do not exactly see eye to
eye with you. How would you remove him ?
M r. M a r t in . W e could deny salary, for one thing. I do not think
he would stay very long if he did not get paid.
Representative P a t m a n . I have not heard of your doing that in any
case.
M r. M ar tin . W e have not had any reason for doing it.
Representative P a t m a n . That is pretty remote, is it not ?
M r. M a r tin . W e do have the power, however.
This matter of the possibility of leaks and the composition of the
Federal Reserve System as provided by statute is a difficult one. They
have had that problem in England. You have been over there and
visited with them and know that they had a tribunal that worked on
it; also, they have had the Radcliffe Committee which will have a com
mission report before too long. I do not know what their hearings
will reveal. There are advantages and disadvantages in all of these
setups.
We try to bring to bear the best minds and the best judgment that
we can get on these problems. I confess to you, as I have in some of
our exchanges before, that there are some things that I have worried
about in the System with respect to the possibility o f leaks. We are
doing everything in our power to correct any proolems in this area.
O f our nine directors, three are appointed by the Board and six of
them are elected through this process of proportional interest in the
System through the subscriptions to capital of the Reserve banks.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1241
That was the device worked out by Congress years ago. It is true
that three of those are bankers—one represents a large bank, one a
medium-sized bank, and one a small bank— and three of them are
industrialists.
Eepresentative P a t m a n . And they may be bankers, too.
Mr. M a r t in . N o ; I do not believe so.
Eepresentative P a t m a n . May I remind you, Mr. Martin, that we
had an exchange about that one time; I asked you to get a statement
from each one of these class B directors, and over half of them had
bank stock at that time.
M r. M a r t in . Yes, but they were not bankers, Mr. Patman.
Eepresentative P a t m a n . I know, but they owned bank stock.
M r. M a r t in . Some of them owned bank stock; not many, but a few
did.
Eepresentative P a t m a n . I will agree with you that to that extent
only are they bankers.
Mr. M a r t in . Yes, only through the ownership of stock.
That has been our device for bringing this to bear.
Now, there have been questions raised from time to time, particu
larly in the New York Eeserve bank, because of its proximity to the
open market, and because of the fact that it is close to the maj or money
market, that has placed a particular responsibility on those directors
not to use any information that they may receive at the bank.
It has been my judgment that those directors have leaned over back
wards to avoid it. Nevertheless, I confess to you that it has concerned
me some, and I think that is something we ought always to continue
to study very carefully, and maybe Congress will w'ant to change it
someday.
Eepresentative P a t m a n . Thank you, sir. My time has expired, but
I just want to ask you one more question.
In sending out your questionnaire to the 17 dealers, did you collect
any information on their profits at all ?
M r. M a r t in . We did not.
Eepresentative P a t m a n . Mr. Eeuss.
Eepresentative E euss . Governor Martin, 2 or 3 weeks ago the House
Ways and Means Committee tentatively approved a piece of legisla
tion lifting the 4*4 percent ceiling for 2 years on Treasury bonds and
containing the so-called sense-of-Congress resolution or amendment.
I am sure you are familiar with it, but it is so short that I will re
state i t :
It is the sense of Congress that the Federal Reserve System, while pursuing
its primary mission of administering a sound monetary policy, should to the
maximum extent consistent therewith utilize such methods as will assist in the
economical and efficient management of the public debt, and that the System
where feasible should bring about future needed monetary expansion by pur
chasing United States securities, of varying maturities.
Naturally I was very interested in the reaction of the Federal Ee
serve System to that. I read some stories in the newspapers about
what it might be, but nothing official until in Friday’s newspaper
there was reported that the System over your signature had stated
its position on that in a letter sent to the Republican members of the
House Committee on Ways and Means.
I think we Democrats would like to know it, too. Would you,
therefore, produce a copy of that letter ?
38563— 59— pt. 6A------ 11
1242
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Mr. M a r t in . I would. As the letter states, I gave a copy of it to
Chairman Mills of the House Ways and Means Committee simulta
neously with giving it to Mr. Simpson, who asked for a letter. I do
not know that I brought a copy with me.
Representative R euss . Would you have one of your associates get a
copy ?
Mr. M a r t in . I will do that, and have copies distributed. I shall
be glad to.
Representative R euss. Can we do something about getting a copy
of that right now so that we can discuss it ?
Mr. M a r t in . Yes. (See p. 1287.)
Representaive R euss . That is a letter sent to the Republican mem
bers of the House Committee on Ways and Means, according to the
press.
Until we get them, Mr. Chairman, let me ask you some general
questions about that sense-of-Congress resolution.
Where the Federal Reserve System determines that the money
supply, for good and sufficient reasons, should be expanded, the same
monetary effect is obtained, is it not, whether the expansion occurs
by lowering bank reserve requirements or by purchases of U.S.
securities ?
M r. M a r t in . Ultim ately, but not necessarily during the flow o f
the money stream, because it varies at different times.
Let me put it this way: We have used a reduction in reserve re
quirements on occasion to actually help the Treasury, because we knew
they were coming to the market at a particular time.
Representative R euss . I understand this. Reduced reserve require
ments give banks more credit-creating capacity, not only to make
loans but to make investments, and included in investments are U.S.
securities.
But let us just take a situation where, for good and sufficient rea
sons, the Federal Reserve determines that it wants to increase bank
reserves bv $1 billion, picking that figure out of the air. Whether it
does that by reducing bank reserve requirements in an amount equal
to $1 billion of new reserves or whether it does it by purchasing $1
billion worth of U.S. securities is equal, from the standpoint of mone
tary p olicy; is it not ?
Mr. M a r t in . Mathematically the same, but as it permeates through
the System, not the same, because one of the reasons for using reserve
requirements is to give all the banks in the country a little bit of
reserve at a given time,
Ultimately the reserves will get distributed broadly among the
banks when we purchase securities, but they do not permeate directly
or as rapidly to the banking system as a wThole as when we reduce
reserve requirements.
Representative R euss . But from the standpoint of the economy as
a whole it is precisely identical; is it not ?
Mr. M a r t in . In the ultimate effect on the reserves; yes.
Representative R euss . And, therefore, from the standpoint of the
monetary policy; that is, fighting inflation or producing an expansion
o f the money supply, as the case may be—the twTo actions are sub
stantially equivalent; are they not ?
M r. M a r t in . Ultimately, they will have the same result.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1243
Representative R euss . Y ou would not call a fellow an engineer o f
inflation or a f unny-money fellow or a printing-press money man i f>
where you were prepared to increase the total money supply $1 billion
by the lowering of bank reserve requirements, he, while agreeing that
the total money supply ought to be increased to the very nickel, as you
suggested, and not one nickel more, nevertheless suggested doing it
by purchase of U.S. securities ? There is no printing press involved
there; is there ?
M r. M a r t in . N o ; no printing press except in the atmosphere in
which you are operating, and assuming what your policy is, Mr. Reuss.
You see, that is where a little difficulty exists on this.
I have followed your letters and tried to answer them as coopera
tively as I can, because I am sure you are sincere in this and are trying
to be helpful. But what we are dealing with at the moment is an
atmosphere, a very serious inflation atmosphere, one which I think
is extremely serious for the country. A great many people are getting
the idea that they ought not to invest in fixed securities at all; that
they ought to just buy common stocks and get rich.
Representative R euss . I know all that, and I do not yield to you, Mr.
Chirman, in my detestation of inflation.
Mr. M a r t in . I know you do not.
Representative R euss . What we are concerned with here is a com
mon, sensible analysis of just what this act of the Ways and Means
Committee says, so that, step 1, I take it that you and I are agreed
that a billion dollars is a billion dollars, and that one method of
adding it to the money supply is no more inflationary and no less
inflationary than adding to it by another method. Is that correct?
Mr. M a r t in . I think in mathematical terms, yes, but I want to
reemphasize that the flexibility of monetary policy revolves around
how it is interpreted as well as what actually is achieved by it.
We have to mop up and take out constantly, and I think the real
heart of your amendment is— I think we can correctly call it your
amendment—you do not think that your method is inflationary; and
I think that under present conditions it would be.
Representative R euss. That is right; and all I ask is that you give
me some reasons. Let us start right in on that.
Why, though it is mathematically equal, is a determination by the
Federal Reserve to do what it can, consistent with sound monetary
policy, to help the Treasury and the taxpayer, inflationary?
Mr. M a r t in . Let me try to put it in the proper setting.
The economical and efficient management of the Treasury debt is
one of the primary concerns of the Federal Reserve, and has been at
all times since I have been there.
Representative R euss . Then you do not object to Congress telling
you what you say you have been doing all the time.
Mr. M a r t in . The question is, if there is an inference that we have
not been doing it, which I think there is in this amendment, I think
it is unfortunate.
Representative R euss . There is such an inference, and I want as
one of the authors, to indicate a participation in it.
Mr. M a r t in . These were executive sessions of the Ways and Means
Committee, and I am trying to be careful not to just spread out what
was developed in that Ways and Means Committee meeting. Per
1244
EMPLOYMENT, GROWTH, AND PRICE LEVELS
haps it is all right now, since more of it has already come out, but I
found quite definitely that there was this criticism and that there was
some feeling that we had produced the situation in which the Treasury
presently felt it was.
I do not think so. I think we have been conducting our affairs
where, if there is a reasonable doubt of how successful we have been—
and no one was talking along these lines—perhaps we should have had
tighter money instead of easier money. That is the framework in
which we are presently working.
Representative R euss. Your remarks, Mr. Chairman, show that you
are introducing entirely extraneous matter into this resolution. I, as
its author, have explained many times, it has nothing to do with an
other controversy; namely, have you been increasing money supply
fast enough? There are those who think you have not; there are
those who think you have been increasing it too fast, although they
are not many. That has nothing to do with this amendment. This
amendment simply says to the extent that you decide to increase it at
all, do it in a way differently, for the next 2 years, from the way you
have been doing it, and from the way the Federal Reserve has testi
fied it wants to continue to do it; i.e., the Federal Reserve in the last
5 or 6 years has increased the money supply, when it has, by the device
o f lowering bank reserve requirements.
The suggestion of the sense-of-Congress-amendment is that for the
period of the 2 years, the Fed effect such increases as it believes should
be made by the device of purchasing U.S. securities.
Let me go on with that and ask you whether, if the Federal Re
serve purchased a billion dollars worth of securities, thus adding to
the money supply by the amount that it wants to add, is not that a
benefit to the taxpayers over the Federal Reserve’s not purchasing
that particular billion dollars worth of securities, deriving from the
fact that the Federal Reserve’s profits go back into the Treasury ?
Mr. M a r t in . Mr. Reuss, we do not ever operate the System ac
count, and never should in my judgment, to make money for the
Treasury Department or the Federal Reserve.
Representative R euss. I know that. That is precisely my objection.
M r. M a r t in . We are trying to exercise our influence in the money
stream in terms of the public welfare of the country.
Representative R euss. Then your answer, Mr. Martin, on this point,
is yes, it does make money for the taxpayers and for the Treasury if
the Federal Reserve owns a particular billion dollars worth of securi
ties, over its not owning that billion dollars worth of securities, but
helping the taxpayers and the Treasury is not one of your reasons for
existence ?
M r. M a r t in . It is not one of our reasons for existence. What we are
trying to do is to use the money supply for the benefit of everyone.
W e could make money for the Treasury—the bills are higher than
the long-term securities at the present time—by just acquiring bills,
and in that case we would be acquiring more earnings for the Treasury
ultimately. What we are trying to do is to have a money stream that
is as effective as we can have it in terms of end cost.
L et me pursue this, because I think you and I have a honest differ
ence o f opinion here that is important, and it is not a question o f
arrogance or intellectual defiance o f the Congress. I have never been
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1245
defiant or arrogant with respect to the Congress. It is a question,
though, o f principle with respect to discretion in the management o f
the money supply.
Representative Reuss. Mr. Chairman, I agree with both your char
acterization of your demeanor, which I have never found arrogant,
and your statement of general principles here. But I want to get an
answer to my specific question, which is a simple one, and it is going
to be followed by others, and it is this:
Would it not save money for the Treasury and for the taxpayers if,
in a given case, the Federal Reserve purchased a billion dollars worth
of U.S. securities rather than letting somebody else purchase them ?
M r. M a r t in . Let me answer you this way. Mathematically, at that
particular point, yes. But if inflation is produced in that way, any
saving would be microscopic. That is really the heart o f what we are
dealing with.
Representative Reuss. I am told my time is up, Mr. Chairman. I
will return later.
Representative P a tm a n . Mr. Curtis.
Representative C u rtis. Mr. Chairman, thank you.
First, Mr. Martin, our staff prepared for us what I thought was an
excellent statement of some of the problems involved in this presenta
tion, evaluating argument pro and con. I do not believe you have had
the advantage of seeing that analysis. It raises five particular points:
(1) The Federal Reserve “bills-only policy,” which your paper today
comments on to some degree; (2) the Federal Reserve “swapping oper
ations;55 (3) providing for long-run growth of the money supply and
the reasons behind that, and whether or not the Federal Reserve can
or should contribute to that; (4) the problem of the interest rate ceil
ing; and (5) the auction technique for marketing Treasury securities,
I have checked with the staff to be sure that this is in proper form.
I might request the committee to turn it over to you for your comments
on the pros and cons of it and to supply that commentary for the
record.
Mr. Chairman, I would like to make the request that the staff do a
little editing on this, which I understand they can do, there is not
much that needs to be done, and that it be sent to Mr. Martin for his
comments for the record.
Representative P a tm a n . Without objection, it is so ordered.
M r. M a r tin . I shall be very glad to do so.
(The material referred to is as follow s:)
T o : Members of the Joint Economic Committee.
From: Otto Eckstein and John Kareken.
Subject: Joint Economic Committee Hearings on the Government’s Manage
ment of Its Monetary, Fiscal, and Debt Operations.
Attached are some materials which have been prepared as background in
formation for the hearings. First, there is a memo which outlines briefly
some of the topics which can fruitfully be developed in these hearings. Then
there are several memos which develop briefly several topics of current interest:
1. The Federal Reserve’s “bills only” policy.
2. Federal Reserve “swapping” operations.
3. Providing for long-run growth of the money supply.
4. The interest rate ceiling.
5. The auction technique for marketing Treasury securities.
Finally, there are also attached indexed sets of charts, taken from the Federal
Reserve chart books, which are intended to supply the basic data pertaining
to the issues which are likely to be developed in the hearings. The first
1246
EMPLOYMENT, GROWTH, AND PRICE LEVELS
set of charts covers the period 1952 to the present, and includes information
on commercial banks, interest rates, financial institutions, the public debt,
and private debt. The second set of charts covers a longer period, in some
cases from 1900 to the present, and includes information on Federal Reserve
credit and the money supply, commercial banks, interest rates, financial insti
tutions, the public debt, and private debt.
J u l y 13,1959.
To : Members of the Joint Economic Committee.
From : Otto Eckstein and John Kareken.
Subject: A background memo on the Joint Economic Committee Hearings on
the Government’s Management of Its Monetary, Fiscal, and Debt Operations.
INTRODUCTION
Events of the past 2 years— for example, the behavior of the Treasury bond
market in 1957-58 and the recent Treasury request for removal of the statutory
interest rate ceiling— indicate the desirability of developing in the coming
hearings testimony covering the following topics :
1. The proper degree of monetary restraint.
2. The appropriate criterion (or criteria) for managing the public debt.
3. The technical problem of marketing the public debt.
4. The place of Treasury securities in the portfolios of private lenders.
5. The performance of the market for Treasury securities, with special refer
ence to the behavior of dealers in Treasury securities and of the Federal Reserve.
1. The proper degree of m onetary restraint
The money markets have, so to speak, forced the Treasury’s hand. With
market conditions what they are and with the existing statutory interest rate
ceiling, it is unlikely that the Treasury will be able to borrow significant amounts
in the intermediate and long-term markets. That interest rates are so high
relatively is a serious matter, and the occasion of the Treasury’s request for
the removal of the statutory ceiling can be used to raise the question of whether
or not we are relying too much on monetary policy to achieve economic (cyclical)
stability.
Higher interest rates suggest an income redistribution, both as between
creditors and debtors generally, and as between taxpayers and holders of Treas
ury securities. Within a rigid balance budget framework, they also suggest
that other governmental programs may suffer. Greater use of fiscal policy, on
the other hand, could avoid these and other consequences of high interest
rates, for with greater fiscal restraint, lower interest rates would not mean
inflation.
The fundamental question, therefore, is whether or not it would be better,
even though it might appear to “hurt” more, to make greater use of counter
cyclical fiscal policy so that monetary policy need not be carried to an extreme?
2 .The appropriate criterion {o r criteria) for managing the public debt
For some time now the Treasury has insisted that the issuance of long-term
debt is essential to any anti-inflation program. The Treasury has largely
failed in its attempt to lengthen the debt maturity, and yet it is this attempt as
much as anything else which accounts for the difficulties it has had in managing
its refunding and new money issues.
It would be well, therefore, to know the official rationale for this policy. Is
it the ordinary rationale of countercyclical debt management policy, or some
thing else?
In a word, what is it that is expected of this attempt to lengthen the maturity
of the debt, even in boom times And is it likely that the expected benefits do in
fact outweigh the costs involved? Might it not be better for the Treasury to
follow a narrower policy of simply minimizing the cost (operating cost as well as
interest cost) of its debt operations, and leave to the Federal Reserve the task of
keeping the right maturity mix in the market?
S. The technical problem o f m arketing the public debt
W’hatever the general level of interest rates happens to be, and whatever the
criterion used in managing the debt, there is still the problem of marketing the
debt in the most efficient way. Present marketing arrangements date from a
long time ago, and are patterned after private underwriting techniques, except
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1247
in the very important respect that private underwriters engage in temporary
support operations, whereas the Treasury has no such help. The question na
turally arises, then, of whether or not the present arrangements are the best
arrangements.
Might it not be better, for example, for the Treasury to rely more on the auc
tion technique in marketing intermediate and longer term issues? (Would
this switch of techniques have the effect of making the Federal Reserve less
conscious of its own contribution to the Treasury’s debt management problem?)
And might it not be better, insofar as it is possible, for the Treasury to plan
financings further into the future, thus making it possible to float smaller issues
more regularly? This may require the Treasury to carry a larger cash balance
at some times, but this could be less costly than having to go to the market at
an inopportune moment. Or it may require temporary use of the line-of-credit
which by law the Federal Reserve extends to the Treasury; again, the gain
may offset whatever disadvantages there are connected with the use of this
option.
Finally, and most importantly, might it not be better if the Federal Reserve
took on once again the task of offering temporary underwriting support for
Treasury operations? Of course, this would require that the Federal Reserve
abandon its “bills only” policy, but it would not require a return to a regime of
pegged interest rates, for by its very nature underwriting support is temporary
and not rigid.
Jf. The place o f Treasury securities in the portfolios of private lenders
Some economists and market professionals feel that there has been a progres
sive “deterioration” in the competitive position of Treasury securities. These
people suggest that it is this factor which accounts for the Treasury’s difficulties
associated with its attempt to market long-term bonds, and which can account
for an ever-narrowing gap beween interest rates paid on Treasury securities
and on other types of assets in which private lenders, institutions, and individ
uals can invest.
It is essential, first, to determine the actual extent of this apparent deteriora
tion of the competitive position of Treasury securities (particularly long term).
There is then, assuming this deterioration to be a fact, the task of accounting
for i t ; that is, why if at all, have private lenders changed their minds about the
advantages of Treasury intermediate and longer term securities? Is it simply
that there are outstanding too many Treasury securities relative to the needs
of private lenders? Or, as is more likely, have Government guarantee programs,
which insure not only certain kinds of mortgages against default but also certain
kinds of assets (for example, savings and loan shares) which households can
choose in place of savings bonds, made Treasury securities less distinctive from
the risk viewpoint.
Or is it, as is often alleged, that Treasury securities are simply suffering the
fate of all fixed-income obligations in times of rising prices? If so, then any
increased freedom for institutional investors to hold equities can be expected to
worsen the Treasury’s problem.
Or, finally, is it that investors are becoming more and more aware of the risk
of capital loss which has attached to Treasury securities increasingly since the
time of the Treasury-Federal Reserve accord?
5. The perform ance o f the m arket fo r Treasury securities
The movement of Treasury securities prices during 1957-58 demonstrated that
this market for Treasury obligations is capable of great instability. It remains
to be determined, however, precisely what factor or factors caused the sharp in
crease in prices and the subsequent even sharper decrease. For if price fluctua
tions such as these are likely to occur again, then the question is immediately
posed as to whether or not they should as a matter of public policy be tolerated.
Many, many subsidiary lines of inquiry, too numerous to be mentioned here,
are opened up by the two basic questions given above. In large part, this is be
cause we know so little about the actual functioning of the market for Treasury
securities; hence, almost any question is appropriate. Of prime importance,
however, is the matter of the contribution of dealers’ activities to the recent
“speculative excesses.” This is a specific aspect of a general problem: Whether
in general dealers’ activities are stabilizing or destabilizing.
It would also be of considerable interest to investigate whether or not any
other institutional investors played a major role in the market developments of
1957-58 (for example, commercial banks). And, finally, there is the question
1248
EMPLOYMENT, GROWTH, AND PRICE LEVELS
of current market practices— such things as the margining of securities posi
tions, and the use of repurchase agreements to finance holdings of securities—
and their contribution to market stability and instability.
Coming then to the matter of public policy with respect to market behavior,
wTe run again into the Federal Reserve’s “bills only” policy. But before con
sidering this policy in relation to last year’s market developments, one other
question must be mentioned: Namely, whether or not the Federal Reserve should
try to encourage dealers in Treasury securities, by whatever means are neces
sary, to take some responsibility for stabilizing the market in which they
operate?
The fact remains, however, that the Federal Reserve has within its own power
the ability to minimize price movements in the market for Treasury issues. The
important questions thus relate to the Federal Reserve’s exercise of this ability.
For example, what criteria does it use to determine whether or not the market
is “disorderly” ? What criterial did it use in 1958, when it temporarily relaxed
its preference for trading only in Treasury bills? What did it expect to accom
plish by this relaxation? And what did it accomplish?
These questions pertain to our most recent experience, but the “bills only”
policy is of more general significance, and hence raises more general issues.
There is, for example, the question of just what Federal Reserve officials think
of as a “good” market, and what adequate market performance is. And last,
but not least, there is the matter of experience over the whole history of this
policy (that is, since mid-1953) : Of whether or not this policy has accomplished
what was claimed for it; namely, result in a stronger market for Treasury
securities.
July 17, 1959.
T o : Members of the Joint Economic Committee.
From : Otto Eckstein and John Kareken.
Subject: A background memo on the Federal Reserve’s “bills only” policy.
A . T H E PREACCORD SITUATION
In order to finance World War II efficiently, the Treasury and the Federal
Reserve agreed early in 1942 that the latter would hold all interest rates on
Treasury securities at fixed levels; in other words, the System took on the job of
“pegging” the market for Treasury securities. Of course, it was recognized at
that time that this pegging operation would tie the System’s hands, but this
consideration was subordinated to the needs of wartime finance.
B. TH E ACCORD
The pegged markets were continued far into the postwar period. But whereas
this arrangement made considerable sense during the war and the reconversion
period, it made much less sense after 1947; as the years went by, the Federal
Reserve’s power was continuously curbed even though the forces of economic
expansion were gathering strength. Thus, in March 1951, the Treasury and the
Federal Reserve reached their famous “accord,” which returned to the System
the power to regulate the money supply.
c.
beyond
the
accord:
the
p o l ic y
of
m in im u m
in t e r v e n t io n
Having the freedom granted it by the accord, the Federal Reserve continued
after mid-1951 to move its policy in the direction of less and less direct inter
vention in the market. In late 1952 and early 1953 it put into effect the so-called
policy of minimum intervention, which included the much-discussed “bills only”
policy. The policy of minimum intervention is made up of the following
principles:
1. The System should buy or sell Treasury securities only to influence bank
reserves in accordance with general policy, and not to influence the interest rate
on a particular type of security, except when the market becomes “disorderly” ;
2. System open-market operations should be conducted entirely in short-term
securities, preferably bills, and the open-market account should not engage in
“ swapping” operations (for example, trading a block of bonds for an equal
volume of bills) ;
3. No direct support should be given Treasury financing operations.
EM PLOYM ENT,
G R O W T H , AND PRICE
D. ACTIONS TA K EN
LEVELS
1249
COUNTER TO TH E DOCTRINE
The policy of minimum intervention has not been always adhered to, but there
have been only three occasions when the System has violated the above principles.
In December 1955 the System bought certificates as well as bills in support of a
Treasury financing. In the first part of 1957, the Federal Reserve sold certifi
cates, presumably because it w as almost out o f bills. In July 195S, a relatively
large volume o f Treasury securities o f different maturities was purchased in
support of securities prices.
E. TH E ARGUMENTS IN DEFENSE OF BILLS ONLY
Those arguments which have been set down on paper, and may therefore be
taken as official, are :
1. That private decisions about investment and spending should be made on
the basis of a structure o f interest rates which are determined, not by the
System, but by the free market.
2. That the private market for Treasury securities can only be made strong
enough to support necessary System open-market operations if dealers are guaran
teed against arbitrary official actions. This guarantee is given by “ bills only.”
3. That sales or purchases of long-term securities give rise to pronounced ex
pectations about future interest rates, and are therefore more likely to obscure
the “ true” supply-demand relationship and so mislead the System into an
incorrect policy.
An unofficial, but nonetheless oft-heard argument is that if the System deals in
securities other than bills—
(a )
It is much easier, as a matter of politics, to return again to a world
of pegged interest rates ; and
( 1)) Policy may really be made in New York, at the open-market trading
desk, for policy directives from the Federal Open Market Committee can
never be sufficiently detailed to guide fully actual open-market purchases
and sales.
F. T H E ARGUM ENTS AG AIN ST “ BELLS O N LY”
1. Leaving the determination of interest rates entirely to the free market
sometimes means speculative excesses, which is why official intervention is
occasionally required, even in the long-term securities markets. (See point D.
above.)
2. Because the flow of funds between the long- and short-term markets is
anything but free and easy, operations in bills produce gluts and stringencies
in the short-term market but have only a delayed influence on long-term inter
est rates; moreover, the response of long-term interest rates to open-market
operations in bills is extremely difficult to predict, except when bill operations
are very large and hence dangerous for other reasons.
3. A strong market for Treasury securities can be best achieved by a policy
which maintains relatively stable securities prices and thus encourages invest
ment by all types of private lenders, not merely dealers in Treasury securities.
4. The “bills only” policy denies the Treasury the type of underwriting support
which is employed in private financing operations.
J u l y 18,1959.
T o : Members of the Joint Economic Committee.
From: Otto Eckstein and John Kareken.
Subject: A background memo on Federal Reserve swapping operations.
A . TH E SIGNIFICANCE OF TH E SW APPIN G OPERATION
A “swapping” operation is, by definition, simply a trade of Treasury secu
rities of different maturities by the Federal Reserve which leaves its total
holdings of such securities unaffected. For example, the System Open Market
Account might buy X billion dollars worth of Treasury bonds and simultane
ously sell X billion dollars worth of Treasury bills. Under reasonable assump
tions, therefore, the impact of this sort of swapping operation on bank reserves
is zero. But the impact on relative interest rates (that is, the difference be
tween the rates on bills and bonds) is not zero; a simultaneous sale of bills
and purchase of bonds will increase the bill rate and decrease the going interest
rate on bonds.
1250
EMPLOYMENT, GROWTH, AND PRICE LEVELS
It is this combination of properties— neutrality with respect to bank reserves,
but not with respect to relative interest rates— which makes the swapping operaion of such potential usefulness as a tool of monetary control even during periods
of inflationary pressures. Specifically, it can be used to support a particular
sector of the market for Treasury securities when the economy is expanding
because the support will not produce more bank reserves.
B. SOME EXAM PLES
Our own postwar history demonstrates how the swapping operation works out
in practice. For example, in the latter part of 1947 Treasury bond prices began
to fall, partly as a response to previous speculative activity; in December 1947
and thereafter downward pressure was even greater, for the Federal Reserve
lowered its bond support price. To prevent bond prices from falling very
considerably the System had to buy large quantities of bonds. But because it
was able to sell large amounts of bills at the same time, total System holdings
of Treasury securities rose by much less than otherwise would have been
the case.
Nor is this the only example of swapping operations. We have another,
though opposite, instance in the 1948-49 recession when the System sold bonds
to offset bill purchases— just as it did in a limited way in the early postwar
period. Indeed, bank reserves were expanded so little in the period before the
Treasury-Federal Reserve accord in large part because the System made so much
use of swapping operations.1
C. SW A PP IN G OPERATIONS AND “ BILLS O N L Y”
It must be emphasized that the possibility of making greater use of swapping
operations currently— for example, to ease the downward pressure on Treasury
bond prices which exists today— cannot be separated from the question of
whether or not “bills only” is a wise policy. Limiting open-market operations
to short-term securities, preferably bills, obviously precludes the kind of swap
ping operations used in the past. Moreover, the broad Federal Reserve philoso
phy of minimum intervention includes as one of its principles an explicit pro
hibition against swaps. And the reason given for this prohibition is essen
tially that given for the entire doctrine of minimum intervention; when it
adopted this prohibition (December 1953) the Federal Open Market Com
mittee argued:
“ * * * if the System open market account were to engage in purchases and
sales in the open market without altering total holdings of securities in the
portfolio, the objective of such transactions would not be clearly discernible
to the market and thus might cause confusion and uncertainty as to credit
and, in so doing, militate against the depth, breadth and resiliency sought in
the Government securities market” (40th Annual Report of the Board of
Governors of the Federal Reserve System, p. 104).
Again, then, swapping operations cannot be undertaken so long as bills
only is in force. Or put another way, if swapping operations are desirable,
then bills only cannot be a wise policy.
D. T H E CURRENT APPLICABILITY OF SW APPING OPERATIONS
Today, of course, the natural question is whether or not this type of openmarket operation by the Federal Reserve represents an altenative to raising
the ceiling on Treasury bonds. What this would mean presumably is that
instead of having Congress remove the interest ceiling, the system would buy
long-term Treasury securities in the open market and simultaneously sell short
term obligations, thus lowering long-term rates relative to short-term rates and
easing the way for long-term Treasury financing. Equivalently, the system
could purchase Treasury bonds directly on issue. Either procedure has the
same effect, however, as short-term Treasury financing. Therefore, no answer
can be given to the question of using swapping operations before it is decided
whether countercyclical debt management is wise or foolish— that is, whether
issuing long-term securities during periods of economic expansion is wise or
foolish.
1 I t m u st be rem em bered, how ever, th a t during m uch o f the preaccord period, p a rticu la rly
in the early p o stw ar years, debt retirem en t w ent on at a goodly p a c e ; th is helped m ake it
possib le fo r the S y ste m to su p p ort a segm en t o f the T rea su ry m ark et w ith o u t crea tin g
u n w an ted bank reserves.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1251
But this is not all there is to this matter. Some economists doubt that the
problem of the interest rate ceiling would have arisen at all if in 1958, when
Treasury bond prices started to fall, the Federal Reserve had quickly given
some temporary support to this sector of the market by means of a swapping
operation. These economists argue that even small purchases of bonds (fully
offset, say, by sales of bills) would have broken the force of what was essentially
a speculative movement. They argue further that such action would have in
no way involved a return to pegged markets, and that long-term interest rates
would be lower today if appropriate action had been taken in 1958. Whether
or not this argument is true is a difficult matter to decide, but it is a widely
hold point of view.
J u l y 20, 1959.
T o : Members of the Joint Economic Committee.
From: Otto Eckstein and John Kareken.
Subject: A background memo on alternative ways of expanding the money supply
to accompany the growth of real output.
A . INTRODUCTION
There may be no rigid relationship between real output, the price level and
the money supply, but it is nevertheless true that as the production of goods
and services increases so must the money supply. Nor is such a growth in
bank deposits inflationary. Quite the opposite, it is intended as a means of
avoiding deflation and the interruption of economic growth.
The question therefore is how best to provide for this long-run increase in
the money supply. Two possibilities should be considered: (1) a gradual re
duction in reserve requirements, and (2) a gradual expansion of the Federal
Reserve’s holdings of Treasury securities. Both methods can be used to pro
duce just the desired potential expansion, so the decision as to which to use
must be decided on other grounds.
B. TH E ISSUES
In one sense, the problem of which method to use is very topical. Some of
the issues on which the choice turns have been the subject of debate both in
the recent hearings of the House of Represnetatives Committee on Ways and
Means on the interest rate ceiling and in the consideration of the bill (S. 1120)
to amend the National Bank and Federal Reserve Acts with respect to required
reserves. Here, however, the choice problem is considered only in the context
of long-run changes in the money supply, and so involves orders of magnitude
which are small relative to those which have figured in the current discussions.
1. The impact on Treasury interest costs
The two methods for expanding the money supply which are considered here
do have different impacts on Treasury interest costs. Moreover, the nature
of the differential impact is clear enough; Treasury borrowing costs will be
smaller if the money supply is expanded through an enlargement of System
holdings of Treasury securities. This is partly because the percentage of
income returned to the Treasury by the Federal Reserve is in general greater
than the percentage returned in the form of taxes by private lenders. Also,
if the amount of securities purchased by the Federal Reserve is large relative
to the total marketable public debt, then interest rates on Treasury securities
will fall relatively, ith a consequent saving for the Treasury each time a por
tion of the public debt is refinanced.
It is very difficult to estimate even approximately the interest saving which
would accrue to the Treasury if instead of lowering reserve requirements the
System purchased additional Treasury securities. An extremely rough calcula
tion suggests, however, that the saving would not be large relative to total
interest payments, it would be on the order of $15 to $20 million per year over
the next few years. Of course, one may reasonably question whether or not
this is so small absolutely.
2. The impact on bank earnings
The two methods of expanding the money supply considered here also have
different impacts on the level of member bank earnings. A reduction in reserve
requirements favors member bank earnings more than an expansion of System
holdings of Treasury securities. This is because under the former method the
1252
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
percentage of total assets held in the form of earning assets is increased, whereas
under the latter method the percentage remains unchanged.
But again, though the direction of the differential impact is clear, an exact
dollar estimate of the difference is extremely difficult. Roughly, however, it
would appear that if the money supply were allowed to expand 3 percent per
year because of a reduction in reserve requirements, member bank net profits
would be $5 to $10 million greater per year than if the same increase in the
money supply came through an expansion of the Federal Reserve’s portfolio.
This differential impact represents less than 1 percent of average member bank
total net profits.
S. In terest costs versus bank earnings
It must be stressed that the above cited estimates are very, very rough, and
may be in error by as much as 50 to 100 percent. Even so, it does seem that the
use of either method to expand the money supply by 3 percent per year would
not alter the present picture for a good many years.1 But this is not to say
that there is not a fundamental choice involved here, for what is at the heart
of the “interest costs versus bank earnings” issue is the question of what rate
of return should as a matter of public policy be allowed the member banks. And
this question does not have a unique economic answer.
If. Other economic considerations
Matters of bank earnings and interest costs aside, there are other possible
contrasts in economic consequence to be considered. For example, a protracted
expansion of the money supply by means of successive reductions in required
reserves would eventually bring sufficiently lower reserve requirements. Some
economists would regard such a development as undesirable. With total reserves,
fixed, lower reserve requirements mean higher excess reserves, and a greater
potential expansion of bank lending; hence the possible need for large-scale
System open market operations. Other economists, however, regard this argu
ment as fallacious; they favor low reserve requirements because of the increased
leverage it gives the Federal Reserve. When required reserves are small relative
to deposits, small-scale open-market operations, which carry little danger of
disorganizing the market for Treasury securities, have a more pronounced im
pact on member banks’ lending power.
On the other hand, continued expansion of the Federal Beserve’s holdings of
Treasury securities means a steady withdrawal from the open market of a type
of security which certain classes of lenders value highly because of its liquidity
and risklessness. Thus, increasing the money supply by this means could force
changes in long-standing portfolio-management practices. Again, however, some
economists would minimize the significance of this possibility by pointing to the
rapid growth of Government-guaranteed debt claims.
J u l y 28, 1959.
T o : Senator Paul H. Douglas, chairman.
From : John Kareken.
Subject: Calculating the impact of Federal Reserve purchases of Treasury
securities on Treasury interest costs.
1.
The procedure underlying the calculation presented in the original memo
randum can be stated in a general way: {a ) An assumption is made about the
desired rate of growth of the money supply; (6) this assumption, when worked
through the mechanics of the aggregate balance sheet for all commercial banks,
gives a figure for the necessary Federal Reserve securities purchases; (c) then
this latter figure is multiplied by the average interest rate on Treasury debt
outstanding; (d ) next, the gross interest figure derived in (c) is multiplied by
the percent of gross income which the Federal Reserve returns to the Treasury;
(e ) then the gross interest figure is multiplied by the percent of gross income
1
Once aga in it m u st be em ph asized th a t the e stim a tes cited here p erta in to lo n g-ru n ,
an d therefore grad ual, changes in the m oney sup ply.
T h u s , th e fa c t th a t in te re st co st
sa v in g s and increases in bank earn ings appear rela tiv ely sm all m ay n o t co n tra d ict th e view s
o f R ep rese n tatives P a tm a n and R euss an d those o f P ro fesso r H a n sen (see H . R ept. N o. 4 0 3 ,
on “ M em ber B nk R eserve R eq u irem en ts,” rep ort o f the C om m ittee on B a n k in g and C urren cy
on S. 1 1 2 0 , 8 6 th C ong., 1 s t sess., M a y 2 8 , 1 9 5 9 ) ; they w ere concerned w ith d ifferent orders
o f m agn itu d e.
A ls o , th e sm alln ess o f these estim a tes m ay in no w ay con flict w ith th e view
th a t the T rea su ry w ou ld have benefited con sid erably i f in stead o f red ucing required reserves
over th e p o stw ar period th e Federal R eserve had expanded the m oney supply eq u iv a len tly
by pu rch a sin g T r e a su ry secu rities.
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
1253
whir'll the member banks return to the Treasury in the form of taxes; ( /)
finally, subtracting the figure obtained in (e ) from that obtained in (d ) gives
the saving of the Treasury.
2. In what follows, the exact calculations are reproduced :
(а ) It is assumed that the money supply should grow at the rate of 3 percent
per year. Thus, since the initial net demand deposit figure is $105 billion, net
demand deposits must increase $3.15 billion. And, since the initial publicly held
currency figure is $29 million, publicly held currency must increase $0.9 million
in the first year.
(б) Taking the current reserve requirements for the three types of member
banks and weighting these by the respective total deposit figures gives an over
all reserve requirement of 15 percent. Hence, the deposit-expansion multiplier
is 6.667.
(c) The mechanics of the consolidated balance sheet for all member banks
are such that the growth figures stated in 2( a) above require that the Federal
Reserve purchase roughly $0,473 billion of Treasury securities in the first year.1
( d) It is assumed that the Federal Reserve returns 71 percent of gross income
to the Treasury, and that the member banks return 14 percent of gross income in
the form of taxes. Hence, if securities are switched from the member banks to
the Federal Reserve, the Treasury realizes a saving of 57 percent in interest
payments.
( e) It is assumed that the average interest rate on outstanding marketable
Treasury debt is 2.8 percent per year. Thus, the gross interest on the Federal
Reserve first-year purchase is $13.2 million.
(/) Now, since the differential accruing to the Treasury is 57 percent, we get
a Treasury saving of $7.5 million.
( g) As the attached table shows, Treasury savings would be more than dou
ble in the second year. It saves $7.8 million on Federal Reserve purchases in
the second year. But it also saves $7.5 million in the second year on Federal
Reserve purchases made in the first year, thus giving a total figure for the
second year of $15.3 million.
( h) As the attached table also shows, average saving per year for the first 4
years would be $19.4 million.
(i) The average saving per year for the first 10 years would be $45.4 million,
with savings in the 10th year in excess of $80 billion.
( j ) As was indicated in the original memo, these are very rough calculations,
and are necessarily arbitrary in some degree. It is believed that they give the
correct orders of magnitude. But different assumptions, which could reasonably
be made, could produce somewhat different results.
Yearly in
crease in
net demand
deposits i
1st ye a r.2d year.__
3d year___
4th year. _
5th year. 6th year__
7th year. _
8th year. 9th year..
10th year.
Total____
Average.
B illion
$3.15
3. 24
3.34
3. 44
3. 55
3.65
3. 76
3.87
3.99
4.11
Yearly in
crease in
publicly held
currency 2
Billion
$0. 0009
.0009
.0009
.0010
.0010
.0010
.0010
. 0011
.0011
.0011
Yearly Fed
eral Reserve
securities
purchases
Interest cost
on Federal
Reserve
securities
purchases 3
Yearly inter
est saving for
Treasury4
Billion
$0.473
.486
.501
. 516
.533
.548
.564
.581
.599
.617
Billion
$13.2
13.6
14.0
14.4
14.9
15.3
15.8
16.3
16.8
17.3
M illion
$7.5
15.3
23.3
31.5
40.0
48.7
57.7
67.0
76.6
80. 5
454.1
45.4
1 The initial figure used for net demand deposits was $105,000,000,000.
2 The initial figure used for publicly held currency was $29,000,000.
3 The assumed interest rate was 2.8 percent per year.
4 It was assumed that the Federal Reserve returns 71 percent of gross income to the Treasury, and that
the commercial banks return 14 percent.
1
I t is assu m ed here th a t th is entire a m ou n t is p u rchased fr o m th e m em ber banks.
A lte rn a tiv e a ssu m p tio n s do n o t m a teria lly influence the re su lts presented below .
1254
EMPLOYMENT, GROWTH, AND PRICE LEVELS
July
28, 1959.
M em orandum
T o : Senator Paul H. Douglas, Chairman.
From: John Kareken.
Subject: Calculating the impact on bank profits of reductions in reserve require
ments and Federal Reserve purchases of Treasury securities.
1. First we calculate what the increase in bank profits would be if a provision
for a 3 percent per year growth in net demand deposits were made possible by
successive reductions in reserve requirements. Then we calculate what the in
crease in bank profits would be if provision for the same growth were made
by the transfer of Treasury securities from the commercial banks to the Federal
Reserve. Comparing these calculations, we thus get a measure of the differ
ential impact on bank profits.
2. It is assumed, then, that net demand deposits are to grow at the rate of
3 percent yer year.1 The initial net demand deposit figure is assumed to be
$105 billion, so that the deposit growth in the first year will be $3.15 billion.
3. The required increase in excess reserves (x ), and the new average reserve
requirement (R ), assuming we start from an initial reserve requirement of 15
percent, are given b y :
(D) (R ) = 1 5 .7 5 -x
x = (d) (R)
where D is total net demand deposits, and d is the change in D.
and d=3.15, we get:
R = 14.56 percent
x=$0.4586 billion
For D = 105
That is, reducing reserve requirements from 15 to 14.56 percent and thereby
creating $0.4486 billion of excess reserves, will allow an expansion of loans2
and net demand deposits of $3.15 billion.
4. Thus, since the ratio of net (after tax) profits to total loans is assumed to
be 0.009,3 this increase in loans means an increase in net profits of $28.35
million.
5. But, of course, if net demand deposits are expanded through Federal
Reserve purchases of Treasury securities, loans will also increase, and by exactly
the same amount, i.e., $3.15 billion. In this case, however, member bank hold
ings of Treasury securities will decline by the amount of Federal Reserve pur
chases ($0,472 billion).4 Thus, total net profits will be lower by this amount
multiplied by the ratio of net profits on Treasury securities to total holdings
of Treasury securities, which is assumed to be 0.007; that is, total net profits are
lower by $3.3 million.
6. This figure of $3.3 million is therefore the amount that member bank net
profits will increase over and above what they will be if the 3 percent expansion
of the money supply is accomplished by Federal Reserve purchases of securities.
7. As the attached table shows, the differential gain in profits will be more
than double in the second year. For, if reserve requirements are reduced
again, this time to 13.74 percent, member banks will gain relatively not only
because they do not have to give up Treasury securities in the second year, but
also because they did not have to give up Treasury securities in the first year.
8. As the attached table also shows, the average differential gain in net profits
over the first 10 years, using the 0.007 figure, is $19.86 million, or about 1.5 per
cent of 1957-58 average net profits. If the 0.014 figure is used, average net profit
over the first 10 years is $39.72 million or roughly 3 percent of the 1957-58
average.
1 B ecause it is so sm all relatively, the 3 percent per year increase in pu blicly held currency
is ignored in the calcu la tion s.
2 I t is assum ed th a t the increase in earn in g assets is in loans or in in vestm en ts oth e r
than T reasu ry secu rities.
F or the sake o f brevity, both categories are referred to as loan s.
3 No sta tistic s are readily a va ilable on the ratio o f net profits on loan s to total ho ld in gs
of loan s.
T h e average ratio fo r 1 9 5 7 and 1 9 5 8 of net profits to to ta l assets, as given by
the F ederal R eserve, is 0 .0 0 7 1 .
T h u s, on the assu m p tio n th at T reasu ry secu rities yield
less th an other noncash earn in g assets, the needed ratio is assum ed to be 0 .0 0 9 .
A ls o , it
is assum ed th a t the ratio o f net profits on T r e a s u ry securities to to ta l T rea su ry secu rities
held is 0 .0 0 7 .
B oth o f these a ssu m p tio n s probably have the resu lt o f u n d ersta tin g net
profits.
Indeed, i f it is assum ed th a t the cost (oth er than tax p a y m e n ts) o f m a n a g in g an
increm ent to the com m ercial ban k s’ h old in gs o f T reasu ry secu rities is zero, then the ra tio
o f net (a ft e r ta x ) profits to to ta l h old in gs o f T reasu ry secu rities w ould be rou gh ly 0 .0 1 4 .
C h a n g in g th is ratio from 0 .0 0 7 to 0 .0 1 4 w ou ld have the effect o f doubling the net profit
figures given on the attach ed table.
4 See the table in the accom p an yin g m em oran du m .
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1255
9.
Again, however, it should be emphasized that the above calculations are
necessarily arbitrary in some degree. It is believed that they give the correct
orders of magnitude, but different assumptions, which could reasonably be
made, could produce somewhat different results.
Yearly differential increase
in member bank net profits3
New reserve
require
ments 1
Percent
14.56
14.14
13. 73
13. 33
12.94
12. 56
12. 20
11. 84
11.50
11.16
1st year_____
2d year_____
3d year_____
4th year____
5th year____
6th year____
7th year____
8th year____
9th year____
10th year___
T otal-
Yearly
increase in
earning
assets 2
Billion
$3.15
3. 24
3. 34
3. 44
3. 55
3. 65
3. 76
3. 87
3. 99
4.11
0.007 <
M illion
$3.3
6.7
10. 2
13.8
17.5
21.3
25.2
29.3
33.5
37.8
M illion
$6.6
13.4
20.4
27.6
35.0
42.6
50.4
58.6
67.0
75.6
198.6
397.2
19. 86
Average____
0.014 4
39. 72
1 Reserve requirements were assumed to be 15 percent initially.
2 It was assumed that all increases in excess reserves, created by the reductions in reserve requirements,
were put into loans and investments other than Treasury securities.
3 This is the gain in net profits over and above the increase which would have resulted if the Federal
Reserve had purchased Treasury securities to expand the money supply.
* The figures appearing here are approximate ratios of net profits on holdings of Treasury securities to
total holdings of Treasury securities. The 0.007 figure is an average ratio, and thus makes allowance for
expenses other than taxes. The 0.014 figure assumes that the only expenses are taxes.
July 20,1959.
T o : Members of the Joint Economic Committee.
From : Otto Eckstein and John H. Kareken.
Subject: Interest rate ceiling.
I . BACKGROUND
It is presently impossible for the Treasury to sell long-term Government
securities below the legal interest rate ceiling. Long-term interest rates have
been rising for the last 10 years. The rate on Government securities has
been rising particularly because of the growth of competition for low-risk
long-term funds. The present high levels, which have occurred extraordinarily
early in the recovery from the last recession, are partly due to the speculative
collapse of the Government bond market last summer and the continued subse
quent decline. Monetary policy has been tighter earlier in this recession than
in the last one, a policy based on the widely held belief that monetary policy
had been too loose at the bottom of the 1954 recession, had been tightened too
slowly and had thereby set the stage for the subsequent inflation.
I I . TH E CASE FOR ABOLISH ING TH E INTEREST CEILING
1. The ceiling is arbitrary, just like the debt limit, and economic policy
is not formulated wisely by fighting over such peculiar rules.
2. If the national debt is to be managed in a neutral manner, the average
maturity cannot be allowed to fall steadily, for this increases the amount of
short-term securities and decreases the Government’s share of long-term securi
ties. This shortening of the debt goes on all the time, independent of the spe
cific maturity dates of old long-term issues. While this definition of neutral
ity is arbitrary, it is true that selling no long-terms whatsoever over a sub
stantial period of time has a net inflationary effect. It releases funds tied
up in long-term Government securities to finance new private long-term
investments.
3. In the event inflation develops, and assuming that it is partly caused by
excess long-term investment, the Treasury should sell long-term securities. It
is true that there are few inflationary pressures now visible in the economy
and that little of them can be blamed on long-term investment. But to pre
serve the Treasury’s capability to sell long-term bonds is a kind of insurance.
1256
EM PLOYM ENT,
G R O W T H , AND PRICE
LEVELS
4. It is likely that sooner or later the interest ceiling will have to be raised
since there are genuine long-run forces that work in the economy serving to
raise interest rates. This may be as good a time as any to dispose of the issue
and future Secretaries of the Treasury may be grateful.
5. European financial circles are supposed to be concerned about American
inflation, and failure to raise interest rates may lead to speculative movements
of capital from the United States to Europe. This would accentuate the gold
drain.
6. If the Treasury issues no long-terms, it has to issue more short-terms
which are turned over so frequently. This complicates debt management and
monetary policy in the future.
II I. TH E CASE AG A IN ST ABOLISH ING TH E INTEREST CEILING
1. While the interest ceiling is arbitrary, the occurrence of the statutory
bottlenecks does provide the Congress with one of the few opportunities to ques
tion monetary policies.
2. The rise in the ceiling will permit the Federal Reserve and the admin
istration to continue their economic policies in exactly the same form as they
have been doing. Thus the debate about the interest ceiling should consider
the wisdom of present policies.
3. Issuance of new long-term bonds as part of anti-inflation policy inevitably
will take long-term funds away from somebody else; just as past monetary
policy has primarily affected mortgages, and secondarily, State and local gov
ernments, public utilities, and small businesses, so a long-term issue of Treasury
securities may have the same specific sectoral impact.
4. The bills-only doctrine of the Federal Reserve System (by which the Fed
eral System ordinarily limits itself to purchases and sales of short-term bills)
is one of the contributory causes for the present high level of interest rates
but this is mostly crying about spilled milk. Abandonment of bills-only now
would nevertheless help in the future.
5. Given the several causes of inflation, i.e., specific excess demands in cer
tain industries, the independent power of management and labor in monopolis
tic markets to raise their prices, and perhaps some general excess demand, a
policy of higher interest rates will not solve the problems entirely.
6. Such an unbalanced program to fight inflation, i.e., a program of tighten
ing long-term credit without complementary fiscal and monetary measures,
will have adverse effects on economic growth.
IV. ARE THERE ALTERNATIVES?
Given the many inflationary hazards in our economy, it is not a safe policy to
gamble on stable prices for the period from now until the Congress meets again.
There must be an arsenal of anti-inflationary weapons. Besides moral suasion,
the Government currently can do little except engage in open-market policy to
affect bank loans with a gradual spillover to the long-term capital market. Treas
ury issue of long-term bonds widens the arsenal somewhat, permitting the Treas
ury to affect the availability of long-term money. This is a substitute for Fed
eral Reserve action in the long-term market.
The wisdom of this set of policies (open-market policy on short-term plus
a possible long-term Treasury issue) can be questioned and broader policy pack
ages can be devised. If sufficient alternatives are employed, a more effective
anti-inflationary policy can be pursued, and incidentally, the need to raise long
term interest rates can be obviated. We list some of the possible alternative
policies that could be explored:
(a)
M o n e y
and
credit policies
1. Abandonment of bills— only doctrine, permitting the Federal Reserve to
sell long-term issues if anti-inflation policy requires it. This very likely would
make the need for getting rid of the interest ceiling even greater next year.
2. Tighten the terms of mortgages. This would serve to restore the position
of Treasury securities in relation to the competition which the Government has
created for itself by guaranteeing mortgages.
3. Regulate consumer credit. This could make the impact of anti-inflation
policies at least partly fall on consumption, thereby raising the rate of growth
of the economy. It would also get at one of the sources for instability.
EM PLOYM ENT,
G R O W T H , AND PRICE LEVELS
1257
( b ) F i s c a l policies
1. Revenues could be increased by closing loopholes or perhaps even by more
general measures such as increases in the rates.
2. Depreciation allowances could be made variable.
3. Certain expenditure programs could be cut back in inflation such as high
ways, water resource projects, and other public works.
(c)
M a r k e t s t r u c t u r e policies
1. If inflation is caused by concentration of market power to any significant
extent, none of the above policies will be wholly effective. There might be some
exploration of policies dealing with this problem.
(d)
Reduce
the direct inflationary
impact
of G o v e r n m e n t
1. Convert the agriculture price support program into some other form.
2. Reduce tariffs, quotas, and “buy American” provisions.
3. Use more income taxes and less excise and property taxes, especially at
State levels, since the latter gets into the Consumer Price Index. This would
require greater assumption of fiscal responsibility by Federal Government.
J u l y 20, 1959.
To : Members of the Joint Economic Committee.
From : Otto Eckstein and John Kareken.
Subject: A background memo on the use of the auction technique for marketing
Treasury securities.
A.
INTRODUCTION
At present the Treasury uses different marketing techniques for selling bills
and for selling certificates of indebtedness, notes and bonds. Bills are sold by
the auction, or sealed-bid technique, which can be briefly described as follows:
the Terasury makes known the maturity of the bills to be issued, then receives
sealed bids from interested lenders, and then makes allocations according to the
bids received. Certificates, notes and bonds are marketed differently; the
Treasury announces all the terms of the contract and then opens its subscription
book for orders at the announced terms. Thus, in the former case the bids of
the private market, when matched against the quantity of funds the Treasury
needs, determines the price of the new issue of bills. In the latter case, the
price is announced by the Treasury, and the quantity of securities sold is
determined by the orders given to the Treasury on the basis of the quoted price.
Currently, there has been a good deal of debate about whether or not the
Treasury should market all of its securities— bonds as well as bills— by means
of the auction technique.
B. T H E CASE FOR GREATER UTILIZATION
OF T H E AUCTION TE CH N IQU E
Essentially, there are two basic arguments advanced in support of greater
utilization of the auction technique in the marketing of certificates, notes and
bonds. The first, and most important, has to do with the influence of Treasury
debt operations on the activities of the Federal Reserve. The second relates to
the possibility that the present technique for marketing certificates, notes and
bonds may involve the payment of unnecessarily high interest rates because it
does involve an attempt to guess ahead of time what the price of the new issue
should be.
1. It is often argued that the Federal Reserve is effectively blocked from
changing the degree of monetary restraint for 2 or 3 weeks before and after a
Treasury financing operation. Why? Because under present arrangements the
Treasury announces beforehand the price at which its securities are to be sold.
Thus, any move by the Sytem to change interest rates might doom the Treasury
issue to failure. Moreover, this kind of limitation on the Federal Reserve's
freedom of action becomes serious when the Treasury has to be in the market
several times a year with nonbill financings. If, however, the Treasury were
to auction its bonds, notes and certificates, as well as its bills, the Federal
Reserve would have to be less concerned that any actions it took would spoil
the Terasury’s market.
2. When secuirties are offered by the Terasury according to its guess as to
what their price should be, there is the chance that the quoted interest rate will
be too high and so will involve a subsidy to private lenders. This appearance
38563— 59—pt. 6A------ 12
1258
EMPLOYMENT, GROWTH, AND PRICE LEVELS
is even harder to avoid when the Treasury, by long-standing practice, makes
use of advisory groups drawn from the financial community in marketing its
bonds and notes. Admittedly, it is very difficult to determine whether or not
subsidies are actually paid by the Treasury. ( For one thing, it must be expected
that the Treasury will typically have to pay something in the form of a mar
keting fee to those who purchase the new securities for distribution to permanent
investors.) But the auction technique would tend to rid the marketing process
of the possibility of the sort of subsidy which could be present under present
marketing arrangement.
O. TH E CASE A G A IN ST GREATER UTILIZATION OF TH E AUCTION TE CH N IQU E
It is not an easy thing to produce arguments against the greater utilization
of the auction technique in the marketing of Treasury bonds, notes and certifi
cates. This is not to say that there may not be such arguments. Rather, it is
meant only to suggest that the Terasury should be asked to make a case aaginst
the auction technique if, as it appears, the Treasury does not choose to make use
of this method.
It is possible to cite one argument advanced against the auction technique,
namely, that private investors are not familiar enough with this method. This
may be so, but if the auction technique is superior to the present method, then
it is worth some expenditure of money by the Treasury to educate these investors.
That is to say, one should be interested in the net gain to be had from switching
to the auction technique.
J u l y 21,1959.
T o : Members of the Joint Economic Committee.
From : Otto Eckstein and John Kareken.
Subject: A background memo on the market for Government securities.
The following brief remarks are intended only to summarize some of the more
important developments in the market for Treasury securities. These develop
ments are covered in detail in the attached materials.
A . TH E ABSOLUTE AND RELATIVE IMPORTANCE OF TREASURY DEBT
The attached tables shows, among other things, that—
1. total public (Federal) debt has increased little in the past few years;
in April 1958 the total was only 111.8 percent of the mid-1951 total;
2. total public debt has been declining in importance relative to total debt
in the postwar period; in 1945 it was about 60 percent of total debt, but
at the end of 1958 it was only slightly more than 31 percent;
3. marketable debt has been increasing in importance relative to total
debt; in mid-1951 it was 54.5 percent of total debt, and at the end of March
1959 was 62.9 percent;
4. that Federal agency issues not guaranteed by the Treasury, while be
coming more important, still do not loom very large in the total Federal debt
picture; in mid-1953 these securities totalled roughly $2.1 billion or 1.4
percent of total marketable debt, whereas in March 1959 they totaled $5.9
billion of 3.3 percent of total marketable debt;
5. savings bonds have been decreasing in importance relative to total
public debt (series E savings bonds, not shown separately in the attached
tables, have increased slightly in dollar amount: From $34.7 billion at the
end of 1951 to $38.2 billion at the end of 1958).
B. T H E M ATUR ITY LENGTH OF THE PUBLIC DEBT
1.
The attached table on average debt maturity shows that except for a rela
tively unimportant interruption in 1954-55 the average maturity of the public
debt has been on the decrease since 1949; it is interesting to note, however, that
the one upturn in the average maturity figure came in a period of relatively low
economic activity.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1259
2.
The following is a table of the future maturity schedule of the public debt,
given by type of holder: 1
Treasury
investment
accounts and
Federal
Reserve
Year
1959 i_____________________________________________________________________________
I960 __________ _________ ________________________________________________________
1961
- . _____________
_ _______________________ ________________
1962
_
_______
________________ ________________________________
1963____________________________________________________________ _____ ____________
1964_________________________________________________________________________ _____
1965_________ _____________________________________________________________________
1966 ____________ ________________________________ ______ _______ _______ _________
1967 ___________ ______ ______________________________ _____ ______________________
1968
____________________________________________________________ _____ —
____
1969
_
................
................ ....................... ......... ....................... .........
1970
___ ___
_____________________ ___________
1971
.
_______ _________
___________ ________ _______ _____ _________
1972
_
____________________________________
1974-95_____________________________________________________ ___________ _________
$13,429
6,070
3,390
1, 757
274
58
595
109
270
425
1,136
1, 230
700
613
779
All other
investors
$10,566
18,210
17, 240
13,331
13,233
3,816
6,301
1,375
1,841
2, 395
7,701
3,468
2, 246
7, 635
7,965
1 1959 figure covers the period August through December.
C. INTEREST COSTS
As the attached table on interest charges shows, interest costs have been in
creasing since 1951; the increase in computed interest rates is most marked for
the marketable component of the debt.
Other of the attached tables and charts show the current level of interest
rates on Treasury guaranteed issues and on nonguaranteed agency issues.
D. PRIVATE SECTOR HOLDINGS OP TREASURY SECURITIES
As the appropriate charts taken from the Federal Reserve chart books which
are included here show—
1. F or commercial banks.— On trend, commercial banks’ dollar holdings of
Treasury securities have declined since the end of World War I I ; more im
portantly, these holdings have fluctuated sharply, increasing in periods of
recession and decreasing in periods of prosperity.
2. F or savings institutions.— Life insurance companies’ dollar holdings of
Treasury securities have declined steadily since the end of World War I I ;
similarly, mutual savings banks’ dollar holdings have also declined steadily,
though less sharply; and, since total assets of life insurance companies and
mutual savings banks have gone up over the same period, the relative impor
tance of Treasury securities in the respective aggregate portfolios has de
clined even more sharply than dollar holdings. For savings and loan associa
tions, on the other hand, total dollar holdings of Treasury securities have
risen steadily but slowly over the postwar years; again, however, Treasury
securities have declined in relative importance.
3. For other in vestors.— This class of investors, which includes individuals
and nonfinancial corporations, State and local governments, pension funds,
trusts, etc., shows an increase in its holdings of Treasury securities for the
postwar period.
1 F igu res taken fro m T r easu ry B u lle tin , June 1 9 5 9 , and are g iven a s m illio n s o f dollars.
T able
1260
D ebt
O u t s t a n d in g
1 — Summary
of Federal securities
[In millions of dollars]
Interest-bearing debt
Matured debt and debt bearing no interest
End of fiscal year or month
Public debt
T o t a l1
Public
debt
Guaranteed
securities 2
Total
Public
debt
Guaranteed
securities 2 3
Total
Total
29
46
52
81
44
74
107
101
104
102
108
118
112
107
109
106
112
119
107
252, 879
256, 907
263, 997
268, 990
271, 785
269, 956
268, 592
274, 798
272,977
274,011
277, 058
275,122
278, 672
281, 531
280, 947
283,913
283, 354
280, 207
283, 603
252, 852
256, 863
263,946
268, 910
271, 741
269,883
268, 486
274, 698
272, 874
273, 910
276, 951
275, 004
278, 561
281, 425
280, 839
283, 808
283, 243
280, 089
283, 497
2, 372
2, 244
2,126
2, 351
2, 634
2, 869
2, 042
1,646
2, 025
1, 557
1, 526
1,662
1, 651
1,636
2, 084
1,994
1,861
1,946
1,856
2, 370
2, 242
2,125
2,350
2, 633
2, 868
2, 042
1,646
2, 024
1, 556
1, 525
1, 661
1,650
1,635
2, 084
1,993
1,861
1,945
1,856
512
419
298
437
589
666
529
507
841
497
481
611
541
524
903
822
677
603
518
1, 283
1,274
1,302
1, 411
1, 567
1,742
1,068
618
746
632
619
626
687
687
757
748
762
923
919
575
550
525
502
477
460
444
430
437
427
425
424
423
424
423
422
422
419
419
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Agreements Act. The notes bear no interest, are nonnegotiable, and are payable on
demand.
5 Includes savings stamps, excess profits tax refund bonds, and currency items. For
current month detail, see “ Statutory D ebt Limitation,” table 2.
Source: D aily Treasury statement.
LEVELS
1 Includes certain obligations not subject to statutory limitation. For amounts
subject to limitation, see p. 1.
2 Excludes guaranteed securities held by the Treasury.
3 Consists of Federal Housing Administration debentures beginning March 1953.
4 Special notes of the United States issued to the International Monetary Fund in
payment of part of the U .S . subscription pursuant to provisions of the Bretton Woods
27
44
51
80
43
73
106
101
104
101
108
117
111
106
108
105
111
118
106
G uarau toed
securities 2
(matured)
PRICE
255, 222
259,105
266, 071
271, 260
274, 374
272, 751
270, 527
276, 343
274, 898
275, 466
278, 476
276, 666
280, 211
283, 060
282,922
285, 801
285,104
282, 034
285, 353
Other 5
AND
255, 251
259,151
266,123
271, 341
274, 418
272, 825
270, 634
276, 444
275, 002
275, 568
278, 584
276, 784
280, 323
283,167
283, 031
285, 907
285, 216
282,153
285, 460
Monetary
fund 4
GROWTH,
1951___________________________
1952__________________________
1953__________________________
1954__________________________
1955__________________________
1956__________________________
1957__________________________
1958__________________________
1957— D e c e m b e r --________ _
1958— July_________
___ _August___________ _____
September__________ __
October________ __ __
N ovem ber____________
December___ __ ___ 1959— January_____ ________
February_____ __
___
M arch_________________
A p ril-.. ----------------- _-
Matured
EMPLOYMENT,
Total outstanding
T a b l e 2 .—
Computed interest charge and computed interest rate on Federal securities
[Dollar amounts in millions]
Total interest-bearing securities
End of fiscal year or month
Am ount out
standing
Public
debt and
guaran
teed se
curities 1
195 1
...........
195 2
195 3
195 4
195 5
195 6
195 7
195 8
1957— December _
1958— Jul________ y
A ugust____
September.
O ctober,.-.
November.
Decem ber.
1959— Januar y
February..
M arch____
A p ril...........
.......
252,879
256, 907
263, 997
268, 990
271, 785
269, 956
268, 592
274, 798
272,977
274, O il
277,058
275,122
278, 672
281, 531
280, 947
283, 913
283, 354
280, 207
283, 603
Public
debt
252,852
256, 863
263, 946
268, 910
271, 741
269,883
268,486
274, 698
272,874
273, 910
276, 951
275, 004
278, 561
281, 425
280,839
283, 808
283, 243
280, 089
283,497
Computed annual
interest charge
Public
debt and
guaran
teed se
curities 1
5, 740
5, 982
6,432
6, 300
6,388
6, 952
7, 328
7, 248
7, 878
7, 210
7,019
7, 088
7,370
7.536
7, 546
7, 670
7, 871
7, 839
7,995
Computed annual interest rate
Public debt
Total
interestbearing
securi
ties
Public
debt
5, 740
5, 981
6, 431
6, 298
6,387
6, 950
7, 325
7, 245
7, 876
7, 208
7,016
7, 085
7,367
7,533
7, 543
7, 667
7, 868
7, 836
7, 993
Total
public
debt
T o ta l2
2. 270
2.329
2. 438
2.342
2.351
2. 576
2. 730
2. 638
2. 889
2. 632
2. 534
2. 577
2.647
2. 679
2. 689
2. 704
2. 781
2. 801
2. 824
1 Excludes guaranteed securities held by the Treasury.
2 Total includes “ Other bonds” ; see table 3.
3 Included in debt outstanding at face amount, but discount value is used in computing
annual interest charge and annual interest rate.
4 The annual interest charge and annual interest rate on U .S. savings bonds are com
puted on the basis of the rate to maturity applied against the amount outstanding.
N o t e .—-The computed annual interest charge represents the amount of interest that
would be paid if each interest-bearing issue outstanding at the end of each month or year
G uar
anteed
securties 1
Marketable issues
2. 270
2.329
2.438
2.342
2.351
2. 576
2. 730
2. 638
2. 889
2. 632
2. 534
2. 577
2.647
2. 679
2. 689
2. 704
2. 781
2. 801
2.824
1.981
2. 051
2. 207
2. 043
2.079
2. 427
2. 707
2. 546
2. 965
2. 534
2. 374
2. 443
2. 558
2. 610
2. 624
2. 649
2. 769
2. 799
2. 832
Bills 3
1.569
1.711
2. 254
. 843
1. 539
2. 654
3.197
1.033
3. 510
.951
1.185
1.702
2. 512
2. 836
2. 930
2. 960
2. 995
3. 020
3.101
Certifi
cates
1.875
1.875
2.319
1.928
1.173
2. 625
3. 345
3. 330
3. 699
3.329
2. 351
2. 361
2. 361
2. 361
2 .212
2 . 212
2. 599
2. 713
2.713
Notes
1.399
1.560
1. 754
1.838
1.846
2. 075
2. 504
2. 806
2.886
2. 801
2. 790
2. 785
2. 823
2. 823
2. 954
2. 995
3. 276
3. 266
3.311
Treasury
bonds
N on
market
able
issues 4
Special
issues
2. 327
2.317
2. 342
2. 440
2. 480
2. 485
2. 582
2. 576
2. 505
2. 575
2. 585
2. 592
2. 592
2. 592
2. 592
2. 607
2. 608
2. 608
2. 619
2. 623
2. 659
2. 720
2. 751
2. 789
2. 824
2. 853
2. 892
2. 875
2. 895
2. 897
2. 899
2. 902
2. 904
2. 909
2. 912
2.915
2. 918
2. 921
2. 606
2. 675
2. 746
2. 671
2. 585
2. 705
2. 635
2. 030
2. 039
2. 633
2. 635
2. 637
2. 640
2. 643
2. 646
2. 648
2. 650
2. 653
2. 656
g
3
2. 656
2. 578
2. 575
2. 547
2. 590
2. 606
2.611
2. 622
2. 619
2. 627
2. 625
2. 629
2. 638
2. 623
2. 621
2. 620
2. 618
2. 612
2. 622
should rem ain outstanding for a year at the ap p licable am iud i^to or i n t e n t . T h e
charge is co m p u te d for each issue b y ap p ly in g the appropiL ito aun iol m t^iest late to the
am ount outstanding on that
T h e aggregate charge fo ail
n g i<>s ins
constitutes the total c o m p u t 'd annual interest charge. T i< i\o <
n m u u interest
rate is co m p u te d b y di, Miu.v V:c co m p u te d annual inteiosl el a .v io, <. io tot il, or for
any group of issues, b y the con cspon din g principal am ount.
Source: D a ily T reasury statem ent.
hj
F
O
Q
O
3
W
5a
hj
W
w
O
6
<1
tr*
fcO
OS
1262
T a b l e 3 . — Interest-bearing
public debt
[In millions of dollars]
End of fiscal year or
month
Total
interestbearing
public
debt
Marketable
Nonmarketable
Special
issues
Total
public
issues
Treasury bonds
Total
BiHs
Certifi
cates
Other
bonds 2
Notes
Total
Bank
Bank re
eligible stricted 1
13, 614
17, 219
19, 707
19, 515
19, 514
20, 808
23, 420
22, 406
26, 857
22, 403
22, 401
22, 699
25, 942
29,148
29, 748
30, 342
31, 832
32, 234
34,244
9,509
28,423
15,854
18, 405
13,836
16,303
20, 473
32, 920
34, 554
32, 938
38, 487
38, 487
38.487
38.487
36.364
36.364
37,957
34.390
34.390
35,806
18.963
30, 425
31, 960
40, 729
35, 952
30, 973
20, 416
20, 664
20, 499
20, 665
20, 749
21,938
21,948
26,072
28, 918
25,299
25,429
27,204
42, 772
48,200
63,980
71, 706
81,057
81,840
80,789
90.883
82,067
90, .501
87,631
85, 743
85, 737
85, 731
83,352
84,142
84,170
84,190
84,821
* Issues which commercial banks (banks accepting demand deposits) were not permit
ted to acquire prior to specified dates, except that (1) concurrently with the 4th, 5th,
and 6th war loans and the Victory loan, they were permitted to subscribe for limited
investment of their savings deposits; (2) they might temporarily acquire such issues
through forfeiture of collateral; (3) they might hold a limited amount of such issues for
trading purposes.
36, 061
27, 460
17,245
8, 672
156
142
124
96
71
50
50
50
50
50
50
50
50
50
50
50
50
50
50
80,281
78, 717
76, 073
76, 326
73,285
69, 817
65, 953
61, 777
62, 883
61, 642
61, 404
61,280
61,041
60, 949
60, 412
60,086
60,066
59, 856
59, 510
7,818
6,612
4, 453
5,079
1, 913
47
14, 526
14, 016
13, 288
12, 775
12, 589
12, 009
11,135
9, 621
10, 253
9, 525
9, 341
9, 244
9,109
9, 083
9, 017
8, 897
8, 832
8, 692
8, 509
319
373
447
411
417
310
196
171
156
204
209
244
217
207
203
196
185
185
183
34, 653
37, 739
40, 538
42, 229
43,250
45,114
46, 827
46, 246
45, 799
45, 877
46, 313
45, 996
45, 367
45,112
44, 840
43, 907
43, 870
43, 940
43, 278
2 Consists of Panama Canal bonds, and also postal savings bonds until the last of these
bonds matured on July 1, 1955.
Source: D aily Treasury statement.
LEVELS
137,917
140, 407
147, 335
150, 354
155, 206
154, 953
155, 705
166, 675
164,192
166, 391
169, 233
187, 728
172,153
175, 364
175, 586
179, 816
179,308
176, 293
180, 709
PRICE
218,198
219,124
223, 408
226, 681
228, 491
224, 769
221, 658
228, 452
227, 075
228, 033
230, 638
229, 008
233,194
236, 313
235, 999
239, 901
239, 373
236,149
240, 220
AND
252, 852
256, 863
263, 946
268, 910
271, 741
269, 883
268, 486
274, 698
272, 874
273, 910
276, 951
275, 004
278, 561
281, 425
280, 839
283. 808
283, 243
280, 089
283, 497
Depos
itary
bonds
GROWTH,
195 1
195 2
195 3
195 4
195 5
195 6
195 7
195 8
1957— December.
1958—Jul________ y
August___
September.
October___
November.
Decen.ber.
1959— January. __
February..
M arch____
April______
U .S.
Treasury Armed
savings savings
Forces
bonds
notes
leave
bonds
Treasury
bonds,
invest
ment
series
EMPLOYMENT,
Public issues
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
4 . — A verage
1263
length and m aturity distribution o f marketable interestbearing public d e b t1
[In millions of dollars]
M aturity classes
End of fiscal year
or month
1951___________________
1952___________________
1953___________________
1954___________________
1955___________________
1956___________________
1957___________________
1958__________________
1957— December___
1958—July____________
August____
September_____
O cto b er---------Novem ber_____
December_____
1959—January_____ _
February______
M arch_________
April.......... .........
Amount
outstand
ing
137,917
140,407
147,335
150,354
155,206
154,953
155, 705
166, 675
164,192
166,391
169, 233
167,728.
172,153
175,364
175, 586
179,816
179,308
176, 293
180, 709
Average length
W ithin
1 year
43,908
46,367
65,270
62,734
49,703
58,714
71,952
67,782
75,288
67,797
70,477
68,896
72,117
76, 506
72,616
73, 210
71,191
68,025
70,115
1 to 5
years
46,526
47,814
36,161
29,866
39,107
34,401
40,669
42,557
47,998
42,639
49, 559
49,643
50,854
48,195
53,803
56,650
61,986
62,117
63,811
5 to 10
years
8,707
13,933
15,651
27, 515
34,253
28,908
12,328
21,476
8,868
21,101
14,347
14,347
14,347
15,832
17,167
17,167
13,312
13,312
13,311
10 to 20
years
20 years
and over
29,979
25, 700
28,662
28,634
28,613
28, 578
26,407
27,652
27,690
27,647
27,642
27,633
27,627
27,623
24,793
24,786
24,779
24,771
25,383
8,797
6, 594
1,592
1,606
3, 530
4,351
4,349
7, 208
4,347
7, 208
7,208
7,207
7,207
7,207
7, 206
8,004
8,039
8,068
8,089
6 years, 7 months.
5 years, 8 months.
5 years, 4 months.
5 years, 6 months.
5 years, 10 months.
5 years, 4 months.
4 years, 9 months.
5 years, 3 months.
4 years, 7 months.
5 years, 2 months.
5 years, 1 month.
5 years, 1 month.
4 years, 11 months.
4 years, 9 months.
4 years, 9 months.
4 years, 9 months.
4 years, 9 months.
4 years, 9 months.
4 years, 8 months.
Source: Office of the Secretary, D ebt Analysis Staff.
i All issues classified to final maturity except partially tax-exempt bonds which are classified to earliest
call date.
S u rvey
of
O w n e r s h ip ,
M a r . 31,
1264
T reasu ry
S e c tio n
1959
II.— Interest-bearing securities issued by Federal agencies but not guaranteed by the U.S. Government
[Par values— in m illions o f dollars]
H e ld b y investors covered in T reasu ry su rvey
6,450 c o m
m ercial
banks
516 m utual
savings
banks
304 life
(*)
(*)
(*)
106
222
96
275
Total Federal home loan bank securities______
699
Federal intermediate credit banks:
Debentures (taxable).....................................................
1, 206
71
120
164
124
89
106
83
120
125
122
108
72
75
(*)
(*)
304
58
170
69
170
(*)
(*)
813
(*)
(*)
(*)
(*)
(*)
(*)
(*)
33
76
87
52
57
49
39
74
98
42
54
58
56
LEVELS
Federal land b a n k s:3
234 percent M a y 1959 (Bonds) (taxable)_________
3 ]/i percent M a y 1959 (Bonds) (taxable)_________
1% percent October 1959 (Bonds) (taxable)..........
234 percent February 1960 (Bonds) (taxable)___
3U percent February 1960 (Bonds) (taxable)___
percent June 1960 (Bonds) (taxable)................
3H percent April 1961 (Bonds) (taxable)________
4 percent September 1961 (Bonds) (taxable..........
4 percent M a y 1962 (Bonds) (taxable)____ ______
294 percent M a y 1963 (bonds) (taxable)_________
334 percent M a y 1966 (bonds) (taxable)_________
4 ^ percent February 1967-72 (bonds) (taxable)..
& A percent October 1967-70 (bonds) (ta x a b le)...
(*)
(*)
(*)
PRICE
258
50
04
62
M em o
randum :
H eld b y
10,484
corporate
pension
trust
funds
AND
Total banks for cooperative securities_________
H eld b y
all other
investors
GROWTH,
Banks for cooperatives:
2.85 percent April 1959 (Debentures) (taxable). .
3Mi percent June 1959 (Debentures) (taxable)___
3.55 percent August 1959 (Debentures) (taxable)
Federal home loan b a n k s:2
3X
A percent April 1959 (Notes) (taxable)........ .......
3^g percent August 1959 (Notes) (taxable)______
3% percent September 1959 (Notes) (taxable;....
3% percent April 1963 (Bonds) (taxable)________
U .S . G o v
ernm ent
in v e s t m e n t
accounts
539 fire, and Federal
casualty,
R eserve
and m arine
ban ks
Insurance com panies
EMPLOYMENT,
Issue
(T a x status is sh o w n in parentheses)
T otal
am ount
outstand
ing i
(*)
3
5
2
3
12
8
4%
4%
3)4
3)4
3%
percent
percent
percent
percent
percent
March 1969 (bonds) (taxable).................................
July 1969 (bonds) (taxable).....................................
April 1970 (bonds) (taxable).............. ................... .
M a y 1971 (bonds) (taxable)........... ....................... .
September 1972 (bonds) (taxable)................... ..
11
7
9
(*)
(*)
Total Federal land bank securities........... ....... ..................... .
1 Includes only publicly offered issues.
2 The proprietary interest of the United States in these banks ended in July 1951.
116
1,103
29
26
(*)
100
100
22
(*)
100
20
797
200
150
100
100
100
397
55
53
1, 947
681
100
100
19
(*)
(*)
21
24
15
72
73
70
325
113
76
65
54
72
(*)
(*)
(*)
(*)
147
3 The proprietary interest of the United States in these banks ended in Jane 1947.
*Less than $500,000.
AND
PRICE
LEVELS
1265
512
GROWTH,
Total Federal National Mortgage Association securities.
11
21
EMPLOYMENT,
Federal National Mortgage Association:
1.65 percent April 1959 (debentures) (taxable)........................
2 percent June 1959 (debentures) (taxable)________________
3 % percent August 1959 (debentures) (taxable)____________
3% percent October 1959 (debentures) (taxable)___________
4 percent June 1960 (debentures) (taxable)______ __________
3 % percent August 1960 (notes) (taxable)____ _______ ______
3lA percent February 1962 (debentures) (taxable).................
3% percent March 1963 (debentures) (taxable)........... ...........
4Y% percent November 1963 (debentures) (taxable)............
4% percent June 1965 (debentures) (taxable)______ ________
3 % percent March 1968 (debentures) (taxable)____________
6
5
fcO
o
o
YIELDS OF TAXABLE TREASURY SECURITIES, APR. 30,1959
Based on Closing Bid Quotations
t-1
O
S
o
w
o
K
hj
W
►
—
i
o
H
f
M
tr1
fit Stcrttory «f tht Trisiw
to
EL
1267
EMPLOYMENT, GROWTH, AND PRICE LEVELS
[From the N ew York Times]
U.S.
G overnment
and
A gency
B onds, M o n d ay, Ju l y
20, 1959
Bonds
3:30 p.m.
Treasury
Change in
bid
Bid
2U s 1962-59, June....................................................................................................
2J4S 1962-59, December__ ________ ____________ _________ ______________
2% s 1960, November.......................................................................................... _
2%s 1965-60, December....................................................................... ................
1961, September........ ................... ..................... ............... ............... ..............
2Ms 1961, November.................................. ............................... ............. ......... _
2Ms 1967-62, Ju ne.._____ __________ __________ _______ _________ _______
2Ms 1963, August__________ ________ _________ ___________ ______________
2Ms 1968-63, December....................................................................................
3s 1964, February______________ _______ ______ _________________ ______
2Ms 1969-64, June........................... ....................... .......................... ..................
2Ms 1969-64, December______________ ____ __
_
_ _
2% s 1965, F e b ru a ry.,................................... ............. ..................................... ..
2Ms 1970-65, March................................. ................... ............................ ........ _
2Ms 1971-66, M arch.......................................................................................... ..
3s 1966, A u gust................................... ................... ................. ............... ..............
2Ms 1972-67, June.............................................................................................. ..
2Ms 1972-67, September............................................. ........... ..................... ........
2M s 1972-67, December_________________________ _______ ________
4s 1969, October......... ....................... ............................................................. ....
3J4s 1974, November........ ......... ....................... ............................. ................. _
3J^s 1983-78, June............................................................................... ....................
4? 1980, February........ ........................... ............................... ................... ............
3 ^ s 1985, M a y .....................................................................................................
3Ms 1990, February...... ................. ........... ................... .............. ................ ......
3s 1995, February__________________ ____________ ____________ _______ _
94.6
93.6
97.17
97.4
96.8
95. 14
87.20
92. 14
85. 20
93. 24
84.22
84. 8
90. 30
84.8
84.6
92.0
84.6
83.0
84.6
98. 6
96.6
87.14
97.4
87.14
89.12
84.18
Asked
94.10
93.10
97.19
97.12
96. 12
95. 18
87. 28
92. 18
85. 28
93. 28
84. 30
84. 16
91.2
84.16
84.14
92.4
84.14
83.8
84.14
98. 14
96.4
87. 22
97.22
87.22
89. 20
84.26
- 0 .4
—.2
—.4
-.4
—.2
—.4
—.2
—.4
—.2
—.2
-.4
-.2
—.2
—.4
-.4
—.2
-.4
Treasury notes
Outstanding— millions
Bid
Rate
4
473 August 1959-________________ _______________________
99 October 1959__________________
_ _ . . . ________
1,184 November 1959_______ _______ __
_ __
________
198 April 1960.............. ................. ................................. .............
2,406 M ay 1960_______ ______ ______________________________
2,738 M a y 1960_____________________________________ _____ _
278 October 1960________________________________________
144 April 1961___________________
_____________________
4,078 M ay 1961--. ______________________________________
2,136. August 1961____ _____ _______________________________
332 October 1961_____________ ._ ____________ ________
647 February 1962__________________ _________ _________
1,434 February 1962________________ ____ ________ __
_
551 April 1962 __________________________________________
2,000 August 1962____ _______________
________________
590 October 1962________________________________________
1,143 November 1962_____________________________________
3,971 February 1963-_____________________________________
533 April 1963_____ _____________________________________
1,743 M ay 1963____________________________________________
506 October 1963________________________________________
137 April 1964_____ _____________________________________
IX
3M
IK
3M
4M
IX
IX
3H
4
IX
%
3
4
IX
4
IX
3H
25
A
IX
4
IX
ix
100.1
99.17
99.30
98. 22
99.10
100.0
97.16
96.0
98. 26
99.16
94.4
98.8
99.8
92.26
99. 26
91.16
97. 22
93.16
90.8
98.18
88.30
87.6
Ask
100.2
99.20
100.0
98. 28
99.12
100.1
97. 22
96.8
98.30
99.20
94.12
98.12
99.12
93.2
99.30
91.24
97. 26
93.20
90.16
98.16
89.6
87.14
Yield
1.70
3.43
3. 48
3.15
2. 26
4.70
3. 50
3.81
4. 23
4.19
4. 22
4.30
4. 26
4.26
4.02
4. 29
4.46
4. 58
4.31
4.31
4.35
4.50
Certificates of indebtedness
Outstanding—millions
13,500
7,711
11,363
11,363
1,269
August 1959 _______ ____________________ ______ _____
November 1959_________ ___________________________
February 1960_____________________________________
February 1960______________________ _____ _________
M ay 1960___________________________________________
Rate
Bid
m
3%
3%
m
4
100.0
99.29
99. 22
99. 23
99.24
Ask
100.1
99.31
99. 24
99. 25
99.28
Yield
0.49
3.45
4.18
4.14
4.14
1268
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Federal Interm ediate Credit Bank debentures
Outstanding—millions
Bid
Rate
133 August 1959_______________________ __________ ________
124 September 1959__________ ________ ___________
______
178 October 1959 _________________________________________
187 November 1 9 5 9 -____ ______ ______
__________ __
196 December 1959__________________ _________ ________ _
190 January I 9 6 0 - ___ ______________ _________ ________
181 February 1960 __ _______ _ _______________________
171 March 1960___________________________________________
150 April 1960_____________________________________________
3.60
3H
3.45
3.45
3. 70
SH
434
4K
4.45
100.0
100.0
99. 29
99. 28
99. 27
99. 23
99. 22
99. 26
99. 25
Ask
Yield
100.1
100.1
99.31
99.30
99. ;:i0
99. 27
99. 25
99. 29
99.28
2.59
3.15
3.54
3. 62
3.82
4.05
4. 51
4.63
4. 62
Federal H om e Loan Bank
Outstanding— millions
Rate
222 August 17, 1959- ______ _______________________ ________
96 September 15, 1959______________ __
____________ _
80 January 15, 1960_________________ _ _________ ______
199 February 15, 1960 ______ ______
______ __ _________
w .i. February 15, 1960 ______ __ __ __
__
124 March 15, 1960________________________________________
275 April 15, 1963_____________________ _________________
3%
3%
3.80
4H
4%
4M
3Vs
Bid
100.0
99.31
99. 22
99.23
99.31
99. 26
95.12
Ask
Yield
100.1
100.1
99. 25
99.26
100.1
99.29
95.28
3.14
3.13
4.22
4.68
4. 81
4.63
4.33
Banks fo r cooperatives
Outstanding—millions
Rate
78 August 1959________________________________ ________ __
77 October 1959 _________________________________________
130 December 1959____________________ _________________
w .i. February 1960_________
______
_ ____________
3.55
334
434
Bid
100.0
99.29
100.1
99.30
Ask
Yield
100.1
99.31
100.3
100.0
2.64
3.6 2
3.96
4. 87
Treasury bills
Outstanding
Outstanding
Bid
(percent)
Millions
1.400
1,402
1.400
1.400
1.401
1,395
1.500
1,600
1,600
1.501
1,600
1, 500
1,600
1,600
400
400
Asked
(percent)
M aturity
July 23.
July 30.
Aug. 6_.
Aug. 13.
Aug. 20.
Aug. 27.
Sept. 3..
Sept. 10.
Sept. 17.
Sept. 21.
Sept. 24.
Oct. 1 ...
Oct. 8 ...
Oct. 15..
Oct. 22..
Oct. 29-
M illions
2.55
2. 55
2. 55
2. 55
2.60
2.65
2.65
2. 70
2.80
2. 92
3. 04
3.10
3.28
3.28
3. 30
3.30
2.30
2.30
2.30
2. 30
2. 45
2.50
2.50
2. 60
2. 70
2. 82
2.94
3.00
3.20
3. 22
3.20
3.20
400
400
400
400
400
500
500
1,500
500
500
400
400
2,006
3.000
2,003
2.000
Bid
(percent)
Asked
(percent)
3.28
3.28
3. 30
3. 34
3. 34
3.36
3.38
3.38
3.42
3.80
3.83
3.85
3.86
4.22
4.22
4.48
3. ia
3.18
3.20
3.24
3.24
3.26
3.28
3.28
3.32
3.74
3.78
3.80
3.80
4.1 9
4.1 9
4.45
M aturity
N ov. 5____
N ov. 12___
N ov. 19___
N ov. 27___
Dec. 3 _____
Dec. 10____
Dec. 17____
Dec. 22____
Dec. 24____
Dec. 31____
Jan. 7, 1960.
Jan. 14____
Jan. 15____
M ar. 22___
Apr. 1_____
July 15____
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1269
Federal Land Bank bonds
Outstanding millions
Rate
164 October 1959_________________________ _________ ______
$9 February 1960___________________ ____________ ______
124 February 1960____________ _____ _____________________
201 April 1960_____________________________________________
107 June 1960__ __________________ _________ _____ ___ __
S3 April 1961______________________________________________
130 September 1961_______________________________________
125 M a y 1962______________________________________________
122 M ay 1963______________________________________________
108 M a y 1966______________________________________________
72 February 1872-67 ______________________________________
75 October 1870-67________________ _____ __________________
86 March 1968________ ______ ______________________________
100 March 1969___________________________________________
60 July 1969_______________________________________________
83 April 1970____ __________________________________________
30 M a y 1971_______________________________________________
109 September 1972_________________________________ ______
Bid
m
2X
3 V%
2X
3 V8
4
4
2%
3X
4l/s
4M
4X
4%
4%
sy2
sy2
3%
99.14
99.16
98. 30
99.12
98.14
98. 4
99.6
99.6
93.8
91.28
95.0
99.8
98.4
98.0
100.0
91.0
90.0
93.0
Ask
99.16
99.20
99.2
99.16
98.18
98.12
99.14
99.14
93. 24
92.12
96.0
100.8
98.20
99.0
101.0
92.0
91.0
94.0
Yield
3. 77
4. 49
4.08
4. 56
4. 22
4. 38
4. 27
4.21
4. 57
4. 57
4. 55
4. 46
4.44
4. 50
4. 50
4.45
4. 49
4.48
Federal 'National M ortgage Association
Outstanding millions
Rate
Bid
3^
100 August 1959. _______________________________________
100 October 1959________ ___________________________ _____
100 December 1959____ ______________________________
150 March 1960_______ ______________________________ ___
100 June 1960 ___________________________ ___________ ____
797 August 1960_______ __________________________________
200 February 1962___________________ ____ _____ _____ __ __
150 March 1963___________________________________ ______
100 November 1963_______ __ _________ _____ _____________
100 June 1965_____________________ ______________________
100 March 1968__________________________________________
*90 April 1969_____ ______ ________ _________________________
3%
3%
4H
4
3^
3M
3X
m
3%
4K
100.0
99. 31
99. 26
99. 26
99.10
98. 20
97.0
95.0
98.4
98.16
92.16
98.0
Ask
100.2
100.1
99.30
99. 29
99.16
98.26
97.8
95.8
98.12
98. 28
93.0
98.8
Yield
2.61
3. 55
3.88
4.63
4. 58
4. 74
4. 65
4.68
4. 55
4. 59
4. 61
4.60
International Bank bonds
Outstanding millions
Rate
150 M ay 1968 ______________________________ ____________
100 January 1969________________________ _
___ ________
>60 October 1971________________ _________
_____
______
150 July 1972. ____________________ __ ________ ______
100 December 1973__ ______________________ _ ________
50 M ay 1975
___ __________________________________
50 March 1976___________ _________________________________
100 January 1977_________ ____________ __________ _______
100 M ay 1978______________________________________________
50 January 1979_____________ _____________________ _______
75 November 1980________________________________ ______
100 October 1981.. _________________________________________
Bid
SH
3K
3lA
3
4M
3^8
3
4^
4M
4X
4X
3M
92.0
91.0
90.0
83.16
98.16
87.0
81.0
98.0
94.0
94.0
98.16
81.16
Ask
93.0
92.16
92.0
85.0
99.16
89.0
83.0
99.0
95.0
95.0
99.16
83.0
Yield
4.71
4.49
4.35
4. 55
4. 55
4.34
4. 45
4. 58
4. 65
4. 65
4. 78
4.46
The following quotation for the IB serial issues represents the highest and
lowest yields for all maturities:
Outstanding millions
401959-62........... ............................................................ ................
Rate
Bid
2
4.25
Ask
3.25
Yield
1270
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Federal Governm ent issues o f certificates, n otes, and bonds: B y purpose o f issue,
1945-58
[Dollar amounts in billions !]
Year
1945________ ________ ________________________
1946
___ __________ _______________________
1947______ ___________________________________
1948________ _________ _______________________
1949__________________________________________
1950.____________ ____________________________
1951__________________________________________
1952_____ ____________________________________
1953. ________ _____________________ __________
1954______ ___________________________________
1955__________________________________________
1956______________________ ___________________
1957____________________ _______ ______________
1958____________________ _____________________
Total
New
money
Refunding
Col. (2),
col. (1)
Col. (3),
col. (1)
(1)
(2)
(3)
(4)
(5)
$74.1
30. 0
28.8
30.1
34.0
38.1
30.6
33 7
44.2
59.7
49.2
33.6
55.8
62.2
$39.6
$34.5
30. 0
28.8
30.1
34. 0
38.1
30. 6
29. 5
34.9
49.6
37.5
30.4
46.7
50.9
4.2
9.3
10.1
11.7
3.2
9.1
11.3
Percent
53.. 4
12. 5
21. 0
16.9
23. 8
9. 5
16. 3
18.. 2
P ercent
46.6
100. 0
100. 0
100. 0
100. 0
100 0
100 0
87.5
79.0
83.1
76.2
90.5
83.7
81.8
1 Source: Treasury Bulletins.
State and local governm ents, securities issu es: B y purpose o f issue, 1945-58
[Dollar amounts in billions !]
Year
1945_____ _____________________ _______________
1946_________________________________________
1947______________________ ___________________
1948__________________________________________
1949__________ _____ _________________________
1950_________________________________________
1951__________________________________________
1952__________ _______ _______________________
1953_________________________________________
1954__________________________________________
1956__________________________________________
1957__________________________________________
1958__________________________________________
Total
New
capital
Refunding
Col. (2),
col. (1)
Col. (3),
col. (1)
(1)
(2)
(3)
(4)
(5)
$0.8
1. 2
2.4
3.0
3.0
3.7
3.3
4.4
5.6
7.0
6.0
5.4
7.2
7.8
* Sources: 1957-58, Investment Bankers Association;
directly comparable.
$0. 5
1.0
2.3
2.8
2.9
3.6
3.2
4.1
5.5
6.8
5.9
5.3
7.1
7.7
1946-56, Bond
$0.3
.2
1
.2
.1
.1
.1
.3
.1
.2
.1
.1
.1
.1
.
Buyer.
Percent
62. 5
83.4
95.8
93.3
96.6
97.3
97.0
93.2
98.2
97.1
98,3
98.1
98.6
98.7
P ercent
37.5
16.7
4.2
6.7
3.4
2. 7
3.0
6.8
1.8
2.9
1.7
1.9
1.4
1.3
The 2 series are not
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1271
Total securities issues o f the Federal Government, State and local governm ents,
and corporations: B y purpose of issue, 1945-58
[Dollar amounts in billions]
Total
issues 1
Year
(1)
1945_____ ________ ________ _________ _______ 1946______________________ ___________________
1947________________________________ ______ —
1948__________________________________________
1949___________________ _____ _______ _______ 1950________________________________ _____
1951________________________________ _____
1952_____ ___________ _______ _________________
1953__________________________________________
1954__________________________________________
1955__________________________________________
1956__________________________________________
1957__________________________________________
1958.______ __________________ _______ ________
$80.8
38.0
37.7
40.1
43.0
48.1
41.5
47.5
58.6
76.1
65.2
49.7
75.7
81.4
Total secu Total secu
rities issues rities issues
for new
for refund
ing
capital2
(2)
$41.4
4.9
7.4
9.5
8.5
8.6
10.3
17.0
23.3
24.4
26.4
18.9
28.6
29.8
(3)
$39.4
33.1
30.3
30.6
34.5
39.5
31.2
30.5
35.3
51.7
38.8
30.9
47.0
51.6
Col. (2)-scol. (1)
Col. (3)-r
col. (1)
(4)
(5)
(P e r ce n t)
51.2
12.9
19.6
23.7
19.8
17.9
24.8
35.8
39.8
32.1
40.5
38.0
37.8
36.6
( P e r c e n t)
48.8
87.1
80.4
76.3
80.2
82.1
75.2
64.2
60.2
67.9
59.5
62.0
62.2
63.4
1 Securities issues of the Federal Government includes only certificates, notes, and bonds.
The Federal Government component is new money.
2
♦Source: Securities and Exchange Commission.
Corporations’ securities issu es: B y purpose of issue, 1945-58*
[Dollar amounts in billions]
Year
Total
issues 1
(1)
1945____________________ ______ - ............. .........
1946_________________________________________
1947__________________________________________
1948_________________________________________
1949__________________________________________
1950__________________________________________
1951________________________________ _____ _
1952_________________________________________
1953_________________________________________
1954_________________________________________
1955___________________________ _______ ______
1956______________________________________
1957__________ _______________________________
1958__________ __________________ _______ _____
$5.9
6.8
6.5
7.0
6.0
6.3
7.6
9.4
8.8
9.4
10.0
10.7
12.7
11.4
Total secu Total secu
rities issues rities issues
for new
for refund
capital 2
ing
(2 )3
$1.3
3.9
5.1
6.7
5.6
5.0
7.1
8.7
8.5
7.5
8.8
10.4
12.4
10.8
(3 )3
$4.6
2.9
1.4
.3
.4
1.3
.5
.7
.3
1.9
1.2
.4
.2
.6
Col. (2)-r
col. (1)
Col. (3) -rcol. (1)
(4)
(5)
(P ercen t)
22.0
57. 4
78.5
95.7
93.3
79.4
93.4
92.6
96.6
79.8
88.0
96.3
98.3
94.7
* Securities issues of the Federal Government includes only certificates, notes, and bonds.
2 The Federal Government component is new money.
3 Cols. (2)^and (3) m ay not add to total because of rounding.
♦Source: Securities jm d Exchange Commission.
(P e r c e n t)
78.0
42.6
21.5
4.3
6.7
20.6
6.6
7.4
3.4
20.2
12.0
3.7
1.6
5.3
1272
EMPLOYMENT, GROWTH, AND PRICE LEVELS
A verage m aturity o f the Federal m arketable interest-bearing public debt:
Semiannually, D ecem ber 1949 through D ecem ber 19581
Average
maturity
Average
maturity
End of period
End of period
Years
1949— December.
1950— Jun_______e
December.
1951— June 2-----December
1952—Jun e
December.
1953—Jun e
December.
1954— Jun e
Months
9.0
2.5
1.1
6.8
1.0
8.4
3.3
3.8
.2
Years
1954— December.
1955—Jun_______e
December
1956—Jun e
December
1957—Jun e
December.
1958—Jun e
December.
M onths
5.9
9.6
5.5
4.5
10.8
9.3
6.6
2.9
9.3
6.0
1 Source: Treasury Department. All issues classified by final maturity date, except partially tax-exempt
bonds which are classified by earliest call date.
2 On Apr. 1, 1951, the Treasury offered holders of a 2M-percent bond an exchange for 2^-percent invest
ment bonds, series B, maturing Apr. 1,1980. The new securities were exchangeable for l^-percent market
able notes, but were nonmarketable as such. Thus, the rather sharp drop in the average maturity of the
debt over the first 6 months of 1951.
Total debt and Federal d eb t: Selected years, 1929-58
[In billions of dollars]
End of year
1929______________ ________________________________________________
1934
__ ____________________________ ______________
— _
1939
_________ ________________________________ _______ 1944 __________________________________________________________
1945
_
___ ________ _______________________________
1946 ______________________________________________
_________
1947 __________________________________________________ _________
1948___________________________________________________ _________
1949
_
____
______________________________________
______
__________
________________________
1950 __________
1951
_ __________________________________
_______ ___
1952 ______________________________________________
_ _
_____
1953
_
_ _
_ _
______________
__ _
_____
1954_______________________________________ ____
1955________________________________________ ______
_ _______
1956__________________________________________
1957_____________________________________________________________
1958__________________________________________________
_________
Total gross
debt
$214.4
197. 3
207. 7
430.9
463.3
457.9
485. 6
498. 6
520.3
566.4
607.5
646.0
683.6
714.0
786. 2
830.7
865.1
901.8
Total gross
Federal
debt
Total gross
Federal
debt as per
cent of total
gross debt
$16.3
28. 5
41. 9
232.14
278.7
259.4
257.0
252.9
257.2
256.7
259.5
267.4
275.2
278. 8
280.8
276. 7
275.0
283.0
Sources: “ Total Gross D e b t," Survey of Current Business, September 1953, M ay 1957, May 1959.
Gross Federal D ebt,” Federal Reserve Bulletins.
7.60
14.45
20.17
53. 87
60.15
56. 65
52. 92
50. 72
49.43
45. 32
42. 72
41. 39
40. 26
39.05
35. 72
33. 31
31.79
31.38
“ Total
Representative C u r t is . Getting to the questions Mr. Reuss has
raised, I want to clarify a few questions.
First o f all, the letter Mr. Reuss has referred to was in response
to a request from the Republican members of the Ways and Means
Committee to state your position. Is that not true ?
Mr. M a r t i n . That is correct.
Representative C u r t is . I wanted it clear that it was at our request
that this was done.
Secondly, that Mr. Reuss in his interrogation seems to separate the
speeches and the context of his amendment from the amendment itself.
He says that they had nothing to do with each other.
I think there is the basic disagreement, at least as far as I am con
cerned. I do not quite see how you can separate the context o f the
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1273
amendment that deals with this very subject of the question o f main
taining an adequate or an inadequate or a too great money supply,
from this issue. Mr. Reuss, Mr. Patman, Mr. Johnson, Senator Doug
las, and the Democratic National Policy Committee, have all com
mented on this thing.
Furthermore, the so-called Reuss amendment, such as it is presently,
is by no means the original Reuss proposal. It has been considerably
watered down and, as I said somewhat ^facetiously but not entirely
so when Secretary Anderson was testifying, if it were watered down
to where it said nothing, then we could go along; but if it actually did
say something, then we felt that it would be dangerous.
Representative R eu ss. Mr. Chairman, will the gentleman yield ?
Representative C u r t is . Certainly I will yield.
Representative R eu ss. I just want to correct the record as to “ the
so-called Reuss amendment.”
I am quite ready to not have my name attached to it, rather than
have it called the so-called Reuss amendment.
The sense-of-Congress amendment was first submitted by me as
House Concurrent Resolution 196 almost 2 months ago. It was re
ferred to the Banking and Currency Committee. This was before the
administration had asked for its interest rate increase. It was then,
in exactly those words, un-watered-down, offered by me in my testimany before the House Ways and Means Committee, and it was
adopted, again in those words, without any watering down or weaken
ing, by the Ways and Means Committee.
Representative C u r t is . Oh, no.
Representative R eu ss. S o I want it clear that I knew what I was
proposing in the beginning, I did in the middle, and I will stand by it
now, I hope, to the end.
Representative C u r t is . I happen to have kept the various mimeo
graphed copies as we corrected and worked over this language, and
the reason I called it the so-called Reuss amendment is that there is no
question as to the original language that the gentleman from Wiscon
sin used that language as then proposed by Congressman Metcalf, I
believe, in the Ways and Means Committee. There has been consid
erable alteration of the language, and I do not believe that what the
Ways and Means Committee tentatively approved— and I might say
some o f those who were opposed to anything going out, voted for it
simply to get the bill out.
That is why I made the point to the gentleman the other day, that
I doubted very much whether the majority of the Ways and Means
Committee were in favor of any amendment along these lines.
Representative R eu ss. O f course, I assume that people when they
vote for something are for it. Perhaps that was incorrect.
Representative C u r t is . The gentleman is a sufficient politician and
sufficiently aware o f the procedures of Congress to know that that
frequently is the case. We have another situation with the labor bill,
where it is doubtful whether the bill that the committee passed out
has majority approval, but many people feel that the House ou^ht to
work its will on this legislation.
Certainly that is the position in regard to this interest ceiling bill.
I voted it out because, even though I disagreed with the Reuss amend
ment, I felt that we had studied it sufficiently so that the House could
3856,3— 59—pt. 6A------ 13
1274
EMPLOYMENT, GROWTH, AND PRICE LEVELS
debate it intelligently. And it is not the first time I have voted out
a bill with which I disagreed.
But, to get back to the merits of this thing, what has been approved
in the Ways and Means Committee is not the original language that
the gentleman proposed. It has been watered down considerably and
has been altered and is still, according to Speaker Rayburn’s press
release, subject to discussion as to whether it can be worded in differ
ent ways.
But essentially I think it must be taken in context with the gentle
man from Wisconsin’s speeches on the floor and the criticism that has
been directed just recently. Incidentally, in Speaker Rayburn’s press
release, the criticism of the Federal Reserve—and this is a question I
might direct to the witness:
Is it not true that the reaction to this abroad and in this country
is that there is criticism of what the Federal Reserve Board has been
doing in this area ? Has it not been interpreted as adverse criticism ?
Mr. M a r t i n . That is pretty difficult, Mr. Curtis, to say how widely
people have thought about it. My feeling is, as I stated in the letter
which we are now getting for Mr. Reuss, that thoughtful people will
interpret it as a lack of determination on the part o f this country to
meet the current situation in a sound way.
Representative C u r t is . The thing I am getting at, Mr. Martin, is
that this amendment, however it is worded, comes from a background
and context of direct and open criticism o f the Federal Reserve, and
I think that it is very proper that people who think it should be criti
cized do so. That is not what I am objecting to or pointing out. It
comes from that context, so, however it is worded, in my judgment
it is apt to be interpreted as being direct criticism as to what they
have been doing.
As I understand what the gentleman has testified to openly, and
certainly before the Ways and Means Committee, in essence, the Fed
eral Reserve has been trying, within the limits of what I understand
you to believe is its basic duty, to preserve the value of money, to be o f
assistance to the Treasury. Is that correct ?
Mr. M a r t i n . That is absolutely correct. W e have done everything
in our power, and as I testified before the Ways and Means Commit
tee, and I am glad to reiterate here, if there has been a bias in our
activities, it has been a bias in favor o f leaning over backward to
help the Treasury, even though at times we have wondered whether
we were going too far. We have never compromised with the prin
ciple, but the bias has been toward easy money, in order not to em
barrass the Treasury in anything that they have been doing. That
has been our conscious, deliberate position. Time after time in open
market meetings it has come up, and the question has been whether
we would do this, that, or the other thing, and we always ask the
question, “ W ill it harm or help the Treasury at this particular junc
ture ?” I think that is perfectly appropriate.
Representative C u r t is . Thank you, Mr. Martin.
One other aspect of the context from vdiich this amendment comes,
and which I regret, I might say, and one on which I have tried to
take issue with the gentleman, is that it comes from an attack on this
administration, on the alleged grounds that this administration and
the Federal Reserve are responsible for high interest rates; and the
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1275
other side o f the coin, that the Democratic leaders, including Mr.
Reuss, are against high interest rates, and therefore those who are
against them are in favor of high interest rates.
I view the Reuss amendment as no more than an attempt to get off
the hook of that untenable economic position of trying to maintain
that they are for lower interest rates and the present administration is
for higher inerest rates, and that by voting for a bill that removes an
interest ceiling, they will have watered down that argument as they
might present it to the people.
It is m that context, too, that the Reuss amendment must be viewed.
I think when the gentleman tries to now separate it from the political
overtones he and his allies have created, having been borne in political
attack, he has an extremely difficult task. I think the gentleman in
fairness should say yes, that it is borne with political overtones, and
that the gentleman believes in that point of view. But let us not now
try to present it as if it were an economic problem entirely.
Representative R eu ss. W ill the gentleman yield ?
Representative C u r t is . I will certainly do so.
Representative R e u ss. My position is very clear. I have felt for
some time that the Federal Reserve was not adding to the money sup
ply sufficiently for the needs of a growing economy. This is an en
tirely separate controversy. I will continue my attacks on the Fed
eral Reserve until either I am not here any more, or the Federal
Reserve changes its policy. That, however, is quite a different matter,
and not related to that which we are discussing here.
The amendment we are discussing here is completely neutral on the
question o f how much money is created or whether any money is
created. It simply says that where it is created, do so not like you
have been doing in the last 5 or 6 years but in a manner calculated to
help the taxpayers and the Treasury, a subject which we will return
to later. I do not want to encroach on your time now further than
to say this, Mr. Curtis-----Representative C u r t is . I just want to comment on that one thing.
That, I think, is fair argument. I disagree with it, but I think
that is nne. I f it is confined to that, that will be good.
Now your second point ?
Representative R eu ss. I will just make the point that because a
given Congressman or a set of Congressmen or a number of members
o f one political party hold views on subject A, it does not therefore
follow that subject B can avoid being subjected to debate on its merits.
And what subject B, that is, the so-called sense resolution, says is: Ir
respective of the policy as to the rate of monetary expansion or as to
whether there should be any monetary expansion at all, does it not
make better sense in a time of crisis in the national debt for the Fed
eral Reserve to do what it can, consistent with its view of a sound
monetary policy, to help the Treasury ?
That is the issue, and bringing in outside considerations about
what I or Senator Johnson or Mr. Rayburn or Mr. Patman or Mr.
Coffin or Senator Douglas or anybody else thinks about the Federal
Reserve’s general policy of the rate of monetary expansion does not
seem to me to meet the issue.
I would hope that the gentleman would address himself to the
specific amendment that we have proposed, and, if he has objections
1276
EMPLOYMENT, GROWTH, AND PRICE LEVELS
to it, state exactly what they are so the press and the public can know
what it is all about.
Representative C u rtis. We have done that, too; but the point the
gentleman raises is that he thinks he can separate the two.
I do not believe it ever was intended that they be separate; that
they were presented in that context. Now that we have raised this
issue, the gentleman seeks to separate it from his previous criticism.
But the fact remains that instead of going before the Banking and
Currency Committee, which has jurisdiction over this matter—and the
gentleman is a member of that committee—this was brought before
the Ways and Means Committee, which really has no background and
experience in the details of the Federal Reserve Act, asking us in an
interest ceiling bill, having to do with debt management, for us in
effect to say something to the Federal Reserve which comes from
those who are great and open critics of the Federal Reserve. How else
would it be interpreted than as adverse criticism ?
That is the point, and the Secretary of the Treasury and Mr. Mar
tin, I believe, have both pointed out that psychology plays a very
great part in this area. I think the gentleman would agree with that,
would he not?
Representative Reuss. I would agree, but I think it is up to the
leadership in this country to provide a wholesome and proper public
psychology, both here and abroad. I think seeing ghosts under beds
and misinterpreting the actions of the Ways and Means Committee
is not a very good way to do that.
Representative C u r t i s . If the gentleman would only join in trying
to present to the public a real clear picture of it, No. 1, by emphasizing
to the public that the Federal Reserve is not a creature of the execu
tive department, but is, in essence, an independent body, but if any
thing, it is a creature of the Congress. Yet the speeches of the gen
tleman and his associates have created the impression, whether in
tentionally or not, that the interest policy pursued by the Federal
Reserve is the administration’s doing.
Representative Reuss. Oh, no; not because of anything the Fed
eral Reserve has done, but because the administration has openly and
repeatedly embraced the policies of the Federal Reserve and said
they are fine.
Representative C u rtis. That is fair because it is true, but it is two
separate groups arriving at the same conclusion.
Representative Reuss. Well, I have been fair.
Representative C u rtis. The question is, what amounts of fairness,
not that the gentleman’s intentions are not to be fair, but as to
whether or not what he has actually done amounts to fairness.
Representative P a tm a n . Mr. Coffin.
Representative C o ffin . Thank you, Mr. Chairman.
Mr. Martin, I think it is perhaps generally understood what a dis
orderly house is. What is your definition of a “disorderly market” ?
Mr. M a r tin . It is a very difficult definition to give, Mr. Coffin, but
I think that a “disorderly market” is one in which large sell orders are
pouring into the market from sellers who do not need to sell and
there are no successive bids, so that panic takes over the market, and
there are no sales possible at any price; in other words, continuous
buying and selling comes to a halt and the market as a place of con
tinuous transactions just stops.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1277
Eepresentative C o ffin . That, then, would be the height of dis
order, would it not ?
M r. M a r t in . Yes.
Eepresentative C o ffin . It would be a chaotic market.
M r. M a r t in . It would be disorderly— even chaotic.
We had in our directive, during the time o f a pegged market, main
taining orderly conditions in the Government securities market. When
we moved away from the peg, we tried to not absolve ourselves or
abdicate our responsibility to see that the market did not fall apart,
but to see that the market was given an opportunity to make adjust
ments that were reasonable within a reasonable framework. There
fore, after long discussion of it, we finally came to this phrase “ a dis
orderly market.55 I am not on the desk which is watching it all the
time, and it might be good for Mr. Eoosa to comment on that. He
was up there.
Would you like to comment ?
Would you object to his commenting on the disorderly market?
Eepresentative C o ff in . N o; I certainly would not, but, before that,
does the Federal Eeserve have any memorandum that helps it decide
when a market is disorderly ? Do you have criteria, do you have any
thing in writing that helps you come to a decision as to the circum
stances that would make you say that a market is disorderly ?
Mr. M a r t in . Yes; I think we have. I will ask M r. Eoosa to com
ment on that because he has been right in the market on a number
o f occasions.
Eepresentative P a t m a n . He is manager o f the account, is he not?
Mr. M ar t in . No.
Mr. E oosa. N o ; I have a name similar to that of the manager, and
for nearly 3 years I worked as his deputy. I am no longer assigned to
work connected with the actual management o f the account, but I am in
the New W ork Eeserve Bank, and of course, being in the research
department, I do have continuous contact with the management of the
account because one o f our tasks is to try to analyze current experience
for the purpose o f learning for the future.
One o f the efforts we undertake in cooperation with the permanent
staff o f the account itself is to study every situation that has verged
on or been disorderly, with a view to trying to sort out those ele
ments in the situation that lead us toward a clearer comprehensive
view for the future.
The essence o f these markets is that they are always changing,
that no single set o f benchmarks will ever serve. The first signs o f im
pending disorder are usually those of a congestion o f sell orders for
which there are no matching bidding interests, and what we call a price
vacuum begins to develop. The incipient signs of this pattern of de
velopment can occur in a wide variety of ways, and we have to be
alert to send word to the members o f the Open Market Committee,
which we do through immediate telephone communication to the
Chairman and then through reporting the details as we see them in the
given circumstances, and alerting the members of the Federal Open
Market Committee that disorder may develop.
I did not happen to be present last summer, I was away at the time,
but this certainly was the pattern that was followed then.
Eepresentative C offin . Let me ask about last spring. As the d if
ference in yields between short terms and long terms became substan
1278
EMPLOYMENT, GROWTH, AND PRICE LEVELS
tial, did anything happen in the Federal Reserve? Were any danger
signals hoisted to the yardarm ?
Mr. R oosa. It would not only be the length or width of the spread
between short and long rates, but certainly a feeling of some alert un
ease in our own appraisal of the market situation began even in May,
and we were particularly concerned as we watched the reactions to the
subscriptions on the exchange offering at that time, and were, of course,
further concerned as we saw the signs of speculative buildup, and were,
within the limits that are proper and under the authority of the
Open Market Committee, interested in going into the details of credit
situations where that was appropriate, to try to ascertain what was
going on.
But these are matters that I think you gentlemen will have an op
portunity to discuss with the men who really know, such as Mr.
Rouse himself. I believe you are scheduled to meet with him in New
York soon. I suggest that he could give you a chapter and verse ac
count. You may also find that the tentative draft o f part II o f the
Treasury-Federal Reserve Study provides an adequate account of the
various developments.
Representative C o f f i n . T o sum up your own testimony, do I under
stand that there is anything in writing setting forth various situations
which could be considered components of disorder?
Mr. R oosa. Yes, indeed. There is a series of memorandums in the
nature of working memorandums. These th in gs are not ever sorted
out in one single page that could readily be handed over to someone
who does not work with these things day in and day out, and is fully
familiar w ith a lot of the jarg o n , but certainly fr o m amone: the memo
randums prepared, and these are being prepared continually, extracted
manuscripts could be made available.
Representative C o f f i n . Would it be feasible to cull out, in language
that I could understand, a fair summary of the components of dis
order as you from time to time have isolated them and articulated
them ?
Mr. R oosa. Yes, sir, that could be done.
Representative C o f f i n . I would be very interested.
Mr. M a r t i n . We would be glad to get that for you, Mr. Coffin. I
mip’ht sav that there is hardly a day goes by that that is not considered.
(The item referred to follow s:)
W h a t C o n s t it u t e s D is o r d e r l y C o n d it io n s i n t h e G o v e r n m e n t S e c u r it ie s
M arket
The general conception of disorderly market conditions in the Government
securities market envisons a situation in which selling “feeds on itself,” that is,
a situation in which a fall in prices, instead of eliciting an increase in the amount
of securities demanded and a decrease in the amount supplied, elicits the re
verse— a falling away of bids and a rise in both the number and the size of offer
ings. Temporarily, there is no price level which will clear the market. The
presence of these technical conditions, however, may not always be enough to
warrant finding of “disorderly conditions,” for other factors which accompany
them or cause them must be considered, and these other factors must be ap
praised in terms of the extent to which they affect or contribute to market
psychology. In this regard, the Open Market Committee in arriving at its find
ing of “disorderly conditions” in July 1958 was influenced, not only by the rapid
falling away of prices and the virtual absence of bids in the face of a multipli
cation of offerings, but also by the threat of almost certain failure in a major
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1279
Treasury refunding operation and by the development of a highly precarious in
ternational, political, and military situation. These factors contributed im
portantly to a demoralized atmosphere in which potential buyers appeared un
willing for a time to commit at almost any price.
It is thus evident that the problem of determining what constitutes disor
derly conditions is a very difficult one. It is clear that price movement alone
would not ordinarily justify a finding that a disorderly market exists (although
such a movement would nevertheless require careful consideration of its causes
and possible consequences). Even rapid price change, accompanied by minimal
trading, might not constitute a disorderly market condition if increased offerings
were not being pressed on the market and, most important, if the price ad
justment were occurring in an atmosphere free of panic.
In general, three conditions would ordinarily have to exist to justify a finding
of disorder: Spiralling price changes that tend to “feed upon themselves” ; a
trading vacuum accompanied by a buildup in the number and size of offerings and
by a disappearance of bids; and a disorganized market psychology. The emer
gence of such conditions might be caused by or be coincident with major interna
tional or domestic political developments or a Treasury financing operation,
although market disorder could conceivably develop in the absence of such
external influence. This definition is, necessarily, general rather than precise;
a determination that disorder exists in a particular market situation must rest
upon appraisal of the combination of circumstances at the time, rather than upon
application of firm criteria.
Representative C o f f i n . I could imagine this might involve many,
many memorandums. I would not expect you to go through every
thing that you have ever done that could remotely be related to this,
but a fair summary of the work you have done.
Now, Mr. Martin, you were, I take it, alertly uneasy last spring,
but it was not until after the Treasury had moved into the situation
in late June and early July that the Federal Reserve finally, in latter
July, moved into the market. I f you had this to do over again, would
you concede that the Federal Reserve’s earlier entrance into the
market would have been a helpful thing ?
Mr. M a r t i n . N o , quite the reverse, Mr. Coffin. I do not think we
had any clear indication of anything that could be done. We must
remember that it w^as Iraq and the landing in Lebanon that really
precipitated our going in, and also a Treasury financing that came
at that particular juncture. Although we looked at it constantly
day in and day out, and I spent a good many evenings reviewing the
reports from the New York people and the data that we have in the
Board, and I know that other members of the Board did also, it was
not until we got a combination of the Iraq-Lebanon situation and the
Treasury financing that we felt we had a situation that was com
pletely disorderly and that warranted our intervening.
Representative C o f f i n . Is this a fair summary from what you two
gentlemen have said: That your criteria of disorder are a very high
threshold. It has to be, as you say, completely disorderly, with some
thing of the magnitude of an Iraq and Lebanon incident, to make you
take advantage of your exception in the 1951 accord ?
Mr. M a r t i n . I do not think it has to be an Iraq or a Lebanon, but
it has to be a situation that we feel is unmanageable by the market
itself.
You must remember, Mr. Coffin, that in the period when we were
moving into a freer market, frequently when the Treasury would
announce a financing it would be reported as favorably received, and
then on the following Monday night, let us say, when the books were
opened, there w^ould be a whole lot of rumors that it was going to
1280
EMPLOYMENT, GROWTH, AND PRICE LEVELS
fail completely, and unless the Federal Reserve came in it would just
collapse.
W e resisted that in several instances, and it went over with a bang,
because we had for quite a time during a period of the evolution
moving out of a pegged market, gotten to be at the mercy of these
rumors, sometimes originating with dealers. Frequently market
participants were merely trying to see how far they could push us
before we would actively come in; and every time we came in we
would acquire a great many more securities than were wanted for
monetary policy. It became highly questionable whether it was a
legitimate monetary operation.
Representative C o ffin . It seems to me we are in a dilemma, be
cause you start off your statement saying how lucky we are to have
a market with these skilled, sensitive dealers, who take so much ini
tiative and incur so much risk, and you are quite happy with the
market as it substantially exists. Now we find that they are still
rumor mongers on occasion.
M r. M a r t in . A ll markets are that way.
Representative C o ffin . Mr. Chairman, will you tell me when my
time is up ? I am afraid I transgressed.
Representative P a t m a n . Y ou have 3 more minutes.
Representative C o ffin . W ill you tell me what the rationale o f your
bills-only policy is?
Mr. M a r t in . To try to get as strong and resilient a market as we
can possibly have, just to avoid the sort of thing I was just talking
about.
Representative C o f f i n . That explains why you do not want to go
beyond bills. But why do you go into bills ?
Mr. M a r t in . Because in order to make adjustments in the money
market, we have from time to time to do it through the medium of
securities.
Representative C o ffin . But this is an infringement on competition
as a mechanism to adjust the money market ?
Mr. M a r t in . Yes, there is no question about it. But we seek to
reduce that infringement to the minimum.
Representative C o ffin . So a little sin is all right ?
M r. M a r t in . It is not a case of a little sin. I think we crossed that
bridge when we came to the Federal Reserve Act and decided we
would have a managed currency and decided to give this authority,
this trusteeship over the money into the hands of a group o f people—
I do not like the use of the word “ experts”—who are supposed to be
devoting their full time to it, and that they would make proper
adjustments when necessary or appropriate.
Representative C o ffin . W e are talking now about 10 nonbank
dealers and 7 bank dealers.
Mr. M a r t in . I was referring to people in the Federal Reserve. As
to dealers, there are about 12 nonbank dealers and about 5 bank
dealers.
Representative C o ffin . Yes, my figures were wrong.
Mr. M artin . And we could, perhaps, have more dealers. W e made
an exhaustive study of this in 1952 in what we called an ad hoc com
mittee report. Recently, we have been doing it again, because this
has to be continuous study. I think a lot of improvements can be
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1281
made. I do not want to give the impression that I think this market
is perfect.
Eepresentative C o ffin . I believe you overstate your position on
page 6 of your statement, where in your argument against going
beyond the bills only, you just paint a picture of pushing it to the
extent where all private investors go into short terms and the Gov
ernment is saddled with nothing but long-term securities, which
seems to be pretty remote from our present-day picture; and the
Government system would put itself, you say, into a frozen port
folio position.
This seems to be really setting up a straw man that just does not
exist.
Mr. M artin . That may be. I was just trying to put in the ultimates of where you could go on it.
Eepresentative C o ffin . Y ou yourself earlier said that the debate
is not in terms o f ultimates; it is in terms of degree.
Mr. M a r tin . That is right. I was trying to establish what the
process could be.
Eepresentative C o ff in . It could be, unless the Federal Eeserve has
plenty of other tools to work with to prevent this from happening,
even if it did not restrict itself to bills only.
Mr. M a r tin . Let me try to put this in the way I see it, as one who
has been a broker a good part of his life, and that is about all.
The real problem here has been that for a long time the Treasury
has been at the mercy o f the market. Being the largest demander
on the market, it has had to come, hat in hand. The real problem
on financing with short-term versus long-term securities at the present
time can be put very simply. The U.S. Government is in about the
same position that you would be as an individual if you had time
payments coming due on an automobile, a refrigerator, and a tele
vision set, and you had a mortgage on your house that instead of being
financed for 20 or 25 years was coming due every 90 days, and you
had not been able to accumulate any savings so that you did not have
much in the way o f reserves. Then you would be going to the market
and saying, “ Well, now, these notes, and charge accounts are due,
and I don’t have the money to pay them, so I have to borrow some
more money.5’
Under those circumstances you would be pretty much dependent
upon paying what the market asked.
For quite a time, there has been denied to the Treasury the tools
to deal with its problem. Consequently, the Treasury has had con
stantly to move into shorter term securities. Part of the problem, as
I have said here, is due to the fact that the Federal Eeserve has been
trying as hard as it can to help the Treasury, though I am not sure
we have really helped them every time.
Eepresentative C o ffin . I know my time is up, Mr. Chairman, but
I just want to throw out my reaction to your statement about being
hat in hand.
I think it is true, but I would have thought that to have available
from time to time this tool of going in on the market for long terms
is one that would make you not quite so helpless.
M r. M a r tin . And it should not be disregarded.
made a very fair comment.
I
think you have
1282
EMPLOYMENT, GROWTH, AND PRICE LEVELS
I do not want to overstate the problem as such, but I want to say,
as one who has had some experience in markets, that it is awfully
easy to take some steps down a path and then find that you cannot
retrace your steps. We have been trying as hard as wTe can, without
being dogmatic or stubborn about it, to avoid moving down a road
from which we will not be able to retrace our steps. It is a very
difficult thing to do.
Representative C offin . Thank you.
Representative P a t m a n . Mr. Widnall.
Representative W id n al l . Mr. Martin, in your statement you said
that speculation financed by credit created a particular problem in
1958 because there were large blocks of holdings acquired by new
comers to the market who bought or made commitments to buy Gov
ernment securities on very thin margin or in many cases on no margin
at all.
Let me understand better the operation of that market. How does
it differ from the regular stock market by way o f margin require
ments ? Is there no control over margin in the bond market ?
M r. M ar tin . N o ; there is no prescription.
Mr. Y oung . That is right. Government securities are exempt from
margin regulation under the provisions of the Securities and E x
change Act of 1934, which provides authority for margin regulation
on securities listed on stock exchanges.
M r. M a r t in . There is a general rule; most brokers, I think, require
5 percent. They did when I was in the business. This has been a
long time ago. What they do now I am not sure.
Representative W idn all . What is the purpose of that exemption?
Mr. M a r tin . It was thought that it might help the Government
securities market. We were trying to do everything we could to be
helpful to the Government securities market, and I think Secretary
Morgenthau thought that that was a very important point. He was
Secretary of the Treasury at that time.
Representative W idn all . In view of this recent experience, do you
think it would be helpful or harmful to require margin requirements
in bond purchasing?
Mr. M a r t in . I am inclined to think there ought to be some margin
on them at all times.
The thing that worried me most in this was not the specific pur
chases as much as the use of repurchase agreements, a type of credit
on which there was no margin at all. To me that kind of lending is
wrong.
Representative W id n a l l . So it lends itself to pure speculation.
Mr. M a r t in . It lends itself to pure speculation and to abuse.
There was speculation on the 2% bonds issued in June of last year,
speculation of all types, a great deal of it on a cash basis, which was
unfortunate, too, and quite a lot on a credit basis. You had a situa
tion where it would have been desirable, in my judgment, to have
had some credit limitation, even if it was not fully effective.
You know the stock exchange disciplined one firm for its activities
in this speculative field.
Representative W id n a l l . As I understand also from your state
ment.
The outright holdings at that time largely represented subscrip
tions on the part of commercial banks and business corporations, and
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1283
the speculative portion of the market was held by others. In other
words, they were not in and out of it as much as the others.
M r. M a r t in . T hat is right.
Eepresentative W i d n a l l . What percentage of the Government debt
is held today by the series E bondholders? A very small portion
of it?
Mr. M a r t in . Series E, n o ; it is not a sizable proportion. About 10
percent, Mr. Eoosa says.
Eepresentative P a t m a n . I figured about 15 percent; o f course, I
am not taking issue with you, Mr. Martin.
Mr. M a r t in . It is all right, Mr. Patman.
Eepresentative W id n a l l . I would like to have the exact figures if
they are available.
Mr. M a r tin . We will get those for you, Mr. Widnall.
(The figures requested by Mr. Widnall are in the table which fol
lows. Those relating to the volume of savings bonds outstanding
include, o f course, accrued interest.)
R atio o f outstanding series E and H savings bonds to gross public debt, 1954-59
As of J u n e -
1954_______________________________
1955_______________________________
1956_______________________________
1957_____ _________________________
1958_______________________________
1959_______________________________
Total gross E bonds out
standing
public d e b t 1
271.260
274. 374
272. 751
270. 527
276. 343
284. 706
36.458
37.186
37.898
37.969
38. 067
38.040
Percent of
total
13.4
13.6
13.9
14.0
13.8
13.4
E & H bonds
outstanding
37.482
39.285
40. 929
41. 498
42.142
42.716
Percent of
total
13.8
14.3
15.0
15.3
15.2
15.0
i Excludes guaranteed debt.
Eepresentative W id n a ll . I would like to see whether, in relation to
2-, 4-, and 6-year periods, it has remained a fairly constant percentage.
M r. M a r t in . Until recent years, I think it was a fairly constant
percentage. In the past few years, there has been a gradual decline
in it, but, on the whole, the programs have held up fairly well. One
o f the reasons for suggested action on the interest rate ceiling has been
to reverse the recent trend.
Eepresentative W id n all . T o try to encourage that ?
Mr. M a r t in . T o try to encourage it.
Eepresentative W id n al l . Have you found an increased number of
early cash-ins on series E-bonds ? I know that many of the holders of
series E-bonds acquire them through payroll deduction plans. Is
there an early call for the money today as compared with 2 to 4 years
ago, rather than holding them through the term ?
M r. M a r t in . I think some tendency toward early cash-ins during
the last year or so has taken place in the larger denomination bonds.
Eepresentative W id n a l l . That is, the people purchasing these bonds
have not held on to them until maturity, which again poses a problem
by way of refinancing.
M r. M a r t in . That is right.
Eepresentative W id n a l l . That is all, Mr. Chairman.
Eepresentative P a t m a n . Mr. Chairman, I notice that running
throughout the report that the Federal Eeserve and the Treasury made
this kind of a statement which appeared on page 17 of your joint state
ment to Secretary Anderson.
1284
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Underlying the late spring speculative position of Government securities was a
very low, absolute level of short-term interest rates as well as an unusually wide
spread between the short term and long term market yields.
Then this statement goes on to say that this unusually wide spread
vitally influences a shifting of market speculation, of further increases
in Government bond prices.
In other words, you have got the bill rate down, but had not got the
long-term rates down, so the amateurs at least thought that the long
term rate eventually would come down, or in other words that bond
prices would go up.
Then your report also makes it clear that it was this unusually
wide spread between the long-term rate and short-term rate that pro
vided an incentive for the banks and nonfinancial corporations to enter
into the repurchase agreements and buybacks that permitted so much
speculation without any downpayment.
Is that correct, Mr. Martin ?
M r. M artin . I think that is about r ig h t; yes.
Eepresentative P a t m a n . Then let me ask this one, which I should
perhaps ask one of the officials who made this investigation, perhaps,
Mr. Boosa.
Was it generally true that the bond dealers and other professionals
were misled by this unusually wide spread between the short-term
and long-term rate, or was that just amateurs ? What would be your
answer to that, Mr. Boosa ?
Mr. B oo sa . I should make clear, sir^ that I am not the best man to
answer this, because at the time the incidents reached their peak, I was
in Austria. But the evidence I have seen in participating in this
study subsequently indicates to me that everyone active in the market
was misled, or at least was misinterpreting the basic economic situa
tion, for one length of time or another. It is the way in which markets
are made up. Some people begin to see the path of the future a little
sooner than others, and I suppose it is true that most of the dealers
were fairly early in seeing what would lie ahead, and the implications
of the changing business situation.
That is what they should do. That is their job, to be out in front
of the market. Whether or not one could say that they were dis
tinctly ahead of the many other highly competent financial observers
who were engaged in trying to make judgments at this time, is very
hard to say.
Eepresentative P a t m a n . That is the reason I am disappointed, be
cause you did not get from the dealers the profit statements, Mr. Mar
tin. In other words, I would like to find out if amateurs lost money
as well as the other newcomers, or did just the big ones and the people
who were in a better position to be in the know, whether they were or
not, make money ?
But of course, that is behind us. I still hope that those profit figures
can be obtained.
How long had this kind of distortion between the bill rate and the
long-term interest rate been developing? Had that been from the
first of the year?
Mr. M a r t i n . Yes; from November on, really.
Eepresentative P a t m a n . Could it have been avoided if the open
market had not been operating under the bills-only policy ?
Mr. M a r t i n . In my judgment, no, Mr. Patman.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1285
Eepresentative P a t m a n . On the whole, would you recommend a
continuation o f the bills-only policy ?
M r. M a r t in . Yes, I would. I have no hesitation on that. I think
that it has worked well. I do not think it is perfect. I think we
should continue to study it, and I welcome the observations that you
and M r. Eeuss have made on it, and welcome your interest in it. I
think we should continue to examine every aspect of it.
Eepresentative P a t m a n . What was the main problem in the reces
sionary period o f the first half of 1958? Was it a falling-off in con
sumer spending, a drop in development, or what was it?
M r. M a r t in . I t was the liquidation o f inventory and cutback in
business investment.
The 1948-49, 1953-54, and 1957-58 recessions were each character
ized by especially sharp inventory adjustments downward, though
there were other factors o f course.
Eepresentative P a t m a n . What would cause that? Was there any
particular reason for that ?
Mr. M artin . I think the falling off of demand and prices. O f
course I happen to believe, Mr. Patman, that 1957-58 recession was a
direct result of letting inflation get substantially ahead of us. When we
had $1 billion in gross national product, increasing every month,
without any additional goods and services, it is a surprise to me that
we did not have an adjustment sooner. I am awfully glad we pur
sued the policies we did during that time, because I think the adjust
ment would have been much more severe.
In 1958, during the first two quarters, there was a booming, long
term State and municipal market for securities.
Eepresentative P a t m a n . My next question bears on that.
During this period in the first half of 1958 that you are talking
about, what were you trying to accomplish most by your monetary
policy? Merely to prevent the inflation from getting worse, or to
encourage investment, or what ?
M r. M a r t in . This is 1958, now ?
Eepresentative P a t m a n . Yes, sir.
M r. M a r t in . In 1958 inflation was not our problem as such. It was
the preceding inflation that had led to the decline. We were doing
everything we could to facilitate adjustments in the economy and help
the economy stabilize for the recovery which has since occurred. The
point I was making was that in the first half of 1958 we had this large
expansion o f State, municipal, and corporate spending projects
through debt financing, many of which had been postponed, in my
judgment, from the earlier period o f tight money, and it was very
fortunate that they came in at this time and acted as a stabilizing
factor from the standpoint o f both employment and adjustments.
Eepresentative P a t m a n . What did the Federal Eeserve do for the
purpose o f trying to get long-term rates down ? Do you feel you suc
ceeded in getting long-term rates down ?
M r. M ar tin . Yes, I think they came down. They did not come down
as much as I thought they would. The monetary developments from
late 1957, when we reduced discount rates, to April, when the recovery
was underway— we did not know it was underway in April, that is all
hindsight now—were amazingly drastic. Talking about the money
supply, money supply for several months in there was rising at the
1286
EMPLOYMENT, GROWTH, AND PRICE LEVELS
rate o f 8 percent and 12 percent, if you include time deposits in it.
W e were doing everything we could, so far as the money stream was
concerned, to facilitate the stabilization of and assistance to the
economy.
I think the bill rate got too low during that period. We cannot set
these rates.
Representative P a t m a n . N o w , Mr. Martin, how do you reconcile
the fight that you have been making against inflation with your sup
port of the vault-cash bill, which reduced your power to deal with
inflation, particularly with reference to the reserve requirements of
the New York and Chicago banks, the Central Reserve city banks?
In other words, that bill absolutely reduced your power to deal with
inflation. How do you justify that and at the time that you are
making such an earnest and sincere fight against inflation ?
Mr. M a r t i n . I would like to discuss that for a minute, Mr. Patman.
I have been up here testifying now for 8 years that I think, by and
large, reserve requirements have been higher than necessary for the
growth and development of the country.
Representative P a t m a n . I am talking about the maximum require
ments.
M r . M a r t i n . I am talking about that, too.
Let us go back to the period of the pegged market. One of the diffi
culties was that we decided that we could not use the general con
trols—open market operations and discount rates—but that we would
have to mark up reserve requirements.
We marked up reserve requirements, and that put heavy pressure
on the long-term market.
Representative P a t m a n . When was that?
M r . M a r t i n . That was in 1950-51.
We put on so much pressure by marking up reserve requirements—
at one point up to 20 percent—that in the period I am referring to,
January of 1951, we literally destroyed our market for Government
bonds. Bonds were being poured onto us, because wTe have no control
over how the banks make their loans.
The fact that we tighten credit does not mean that the banks neces
sarily will deny credit to one of their principal customers. It may
mean that if the demand for credit is strong, they will merely sell
Government securities or some other securities out of their portfolio.
That was really the nub of what we were dealing with at the time
o f the Treasury-Federal Reserve accord.
When we went back to more orthodox methods and gave up the peg
as such, we began to look at this problem in a broader perspective.
I think the growth that is ahead of this country is terrific. I am
constantly testifying to that. I am a great bull on this country’s
future. I f we will handle our finances soundly, we have an unlimited
advance ahead of us.
We use the reserve requirement as a fulcrum for our monetary op
eration. I think that we should be moving toward lower reserve
requirements.
The most difficult problem in the Federal Reserve is this matter of
reserve requirements. I cannot get the people in the System to agree
among themselves on it. I have given that up. And you will never
get bankers or businessmen to agree on it. It looks simple, but it is
not.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1287
I wanted to do something on this in 1956. In 1955, in an exchange
with you, I made some remarks along this line, and you said you
hoped we would make a study.
We made a study. Then came the expansion in business. How
do you account for what looks like a plan for a decrease in reserve re
quirements—the point you are making—when you have an inflation
spreading as it was in 1956 and 1957 ? The answer is that we came
up with this proposal in the recession, but Congress did not act on it
then. It was held over until this year.
Eepresentative P a t m a n . May I interrupt there? You are not re
sponding to my question. My question relates only to maximum re
quirements. In other words, you permitted the maximum reserve re
quirements to be reduced at a time when you were fighting inflation.
I want to know why you were in favor of reducing your power to
more adequately deal with inflation in the event that an emergency
should arise.
I am talking about the maximum now, only.
M r . M a r t i n . In all of this type of thing the maximum cannot be
completely divorced from the minimum; but I will tackle the maxi
mum by saying we had some people that did not want to do anything
with respect to the equalization of reserves. We were trying to get
this together.
This has been called in some quarters an American Bankers Asso
ciation bill. I asked the American Bankers Association to help us
on it, and in 1954 and 1955 they worked on it. They did not go
along with what we wanted, by any means, but we tried to work out
a bill that we thought would be helpful to the longrun development
o f the country.
We have not lowered reserve requirements, and we do not know that
we will lower reserve requirements at all in the next year.
Eepresentative P a tm a n . My time has expired, Mr. Martin, but I
want to get back to you on that.
I believe Mr. Eeuss comes next.
Eepresentative E e u ss. Mr. Chairman, there has been handed to me
a release of July 24 from the office of Congressman Simpson, the
chairman of the Eepublican Congressional Campaign Committee,
which contains on pages 5 and 6 thereof a copy of the letter of Mr.
Martin to Mr. Simpson of July 14, 1959, which I referred to before.
I ask unanimous consent that Mr. Martin’s letter be made a part of
the record.
Eepresentative P a t m a n . Without objection it is so ordered.
(The letter referred to follow s:)
B oard
of
G overnors
of t h e
F ederal R eserve S y s t e m ,
O f fi c e o f t h e C h a ir m a n ,
W ashington, July 14,1959.
Hon. R i c h a r d M. S im p so n ,
H ouse of R epresentatives,
Washington, D.C.
D e a r M r . S im p s o n : This response to the request contained in your letter
of July 13 puts in writing the gist of the comments I made in the executive
session meetings o f the Ways and Means Committee on the amendments to the
legislative proposals originally offered by the administration.
It is my considered judgment we are facing a serious financial situation. The
limitation on interest rates is unrealistic in the light of present market quota
tions and denies the U.S. Treasury the tools essential to effective balanced
handling of its borrowing needs. By statute the Treasury is now limited,
1288
EMPLOYMENT, GROWTH, AND PRICE LEVELS
because of the ceilings, to the issue of short-term securities which under present
conditions of rising prosperity is dangerous. These short-term obligations can
readily be converted into money at the option of the holder. In effect, they are
a substitute for money, and thus could swell the flow of money far beyond
that needed to purchase available goods and services at current price levels.
The threat of a money flow out of hand has a major impact on the cost of
living and places a burden on all of us.
It serves no useful purpose at the moment to argue whose fault it is that we
are in our present predicament. The fact of the matter is we are in it. The
committee is not being asked to vote whether interest rates should or would
go up or down, but merely to grant the Treasury authority to exercise its best
judgment in meeting an existing problem. We are discussing a crucial matter—
the credit of the United States. Failure to deal with this could (and I was
careful not to threaten or assert that it necessarily would) have the most serious
implications. It was my duty to warn of this, much as I disliked the task.
These are the basic facts with which we were dealing and any amendments
must be considered in this light.
The amendment to retain the statutory ceilings but permit them to be disre
garded if the President found the national interest so required did not seem to
me to present unworkable problems. Accordingly, I did not raise objections,
although I prefer the original.
The “sense of the committee” amendment is quite a different matter. I object
to this on principle. The Open Market Committee and the Federal Reserve
Board are given the responsibility under the Federal Reserve Act for regulating
the money supply. If the Congress wishes to spell out the means of doing this,
it should amend the Federal Reserve Act and not tack this on to a debt manage
ment bill.
Furthermore, under present conditions, I am convinced that this amendment,
when stripped of all technicalities, and regardless of whether the language is
permissive or mandatory, will cause many thoughtful people, both at home and
abroad, to question the will of our Government to manage its financial affairs
without recourse to the printing press. To me this is a grave matter. We are
here dealing with trust and confidence which is the keystone of sound currency.
Therefore, I must oppose this proposal as vigorously as possible, as I did during
the hearings.
The amendment limiting the President’s authority to 2 years is, in my judg
ment, unsound. It could be a source of embarrassment to both the next Presi
dent and the then Secretary of the Treasury.
I have tried as faithfully as possible to summarize what I actually said during
the hearings* and not to introduce new ideas. May I, in conclusion, thank you
and all the members of the committee for the courtesy and consideration shown
me and my associates throughout the meetings. I am taking the liberty of send
ing a copy of this letter to Chairman Mills.
Sincerely yours,
W m . M cC. M a r t i n , Jr.
Representative Reuss. Mr. Martin, I am not going to take the time
to read your entire letter at this time, but I would like to read the two
paragraphs in which you address yourself to the so-called sense-ofCongress amendment, and I will read that to refresh your recollection.
This is on page 6, about the fourth line:
I object to this sense-of-the-committee amendment on principle. The Open
Market Committee and the Federal Reserve Board are given the responsibility
under the Federal Reserve Act for regulating the money supply. If the Con
gress wishes to spell out the means of doing this, it should amend the Federal
Reserve Act and not tack this on to a debt management bill.
There is one more paragraph, but I want to take this one up first.
I take it that that first objection of yours is an objection in the realm
of legislative tidiness, and that this first objection would disappear
if the legislation enacted by Congress were an amendment to the Fed
eral Reserve Act.
M r. M a r tin . There is no question at all but that the Congress has
the power to do what it wants.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1289
Representative R euss. But this first objection of yours, I gather,
would be cured by proper labeling ?
M r. M a r t in . I want to make no mistake about it, though. I think
it would be a mistake to do it, but that would be completely limited.
Representative R euss . A s far as objection No. 1 goes, that would be
satisfied.
M r. M a r t in . T hat is right.
Representative R euss . Let us pass on, then, to objection No. 2, con
tained in your second paragraph:
Furthermore, under present conditions I am convinced that this amendment,
when stripped of all technicalities, and regardless of whether the language is
permissive or mandatory, will cause many thoughtful people both at home and
abroad to question the will of our Government to manage its financial affairs
without recourse to the printing press. To me this is a grave matter.
And I might interpolate it would be to me, too, if Congress directed
you to get out the printing press.
We are here dealing with trust and confidence, which is the keystone of sound
currency. Therefore, I must oppose this proposal as vigorously as possible, as
I did during the hearings.
Now, let us address ourselves to objection No. 2, which we will call
the psychological, metaphysical objection. That is, it is not related to
anything within the four corners o f the amendment. It is related
to suspicions such as those Congressman Curtis voiced about the views
on other subjects of certain o f its authors. Would that be a fair
statement?
M r. M a r t in . A s related to this matter, that is right.
Representative R euss . Suppose the sense-of-Congress resolution,
in the exact language in which I introduced it as House Concurrent
Resolution 196 some months ago, and in the exact words in which I
presented it to the Ways and Means Committee, and in the exact words
in which it was adopted— and there is no difference of substance what
ever in those three versions—were in fact passed by the Congress,
suitably labeled as an amendment to the Federal Reserve Act so as to
meet your point No. 1; suppose on the day that it passed and was
signed by the President, a joint statement were made by the President,
the Secretary o f the Treasury, yourself, Majority Leader Johnson of
the Senate, and Speaker Rayburn of the House, and suppose that you
all said, “ Congress has now passed the Ways and Means Committee
bill with the amendment. We all want to make it clear that this res
olution o f Congress says absolutely nothing on the subject of whether
the Federal Reserve Board and System should move faster or in a
different manner than it has in the creation of additions to the money
supply. A ll this resolution does is to criticize the Federal Reserve in
two particulars and ask that they change their ways: First, when
they do in their judgment increase the money supply, they should do
so primarily, for the pendency of this bill, by purchase of U.S. secu
rities rather than by further lowering of bank reserve requirements, as
they have done for the last 6 years and as they say they intend to
do in the future; and secondly, by amending its current-bills-only
policy so that instead of an absolute prohibition on purchasing any
thing but short terms, except for the question of disorderly markets,
there is a frame o f mind on the part o f the Federal Reserve whereby
it is going to look at each purchase of U.S. securities on its merits and
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EMPLOYMENT, GROWTH, AND PRICE LEVELS
not adopt any doctrinaire restrictions on its own freedom of action.”
Suppose, then, that all the gentlemen I named, which includes
yourself, were to make such a statement, would not such a statement
mean that thoughtful people, both at home and abroad, could no
longer question the will of the Government, that thoughtful people,
with that statement before them, would not really think that the
Government wTas about to turn on the printing press and become an
engine of inflation? And would not thoughtful people then recog
nize that while a dispute still existed between the Federal Reserve
and certain Congressmen and Senators about the quantum of money
they are creating, nevertheless this resolution had nothing to do with
that subject, but instead related to the two matters I have discussed:
Namely, purchasing U.S. securities, and an end to the absolute nature
o f the biils-only policy ?
Mr. M a r t i n . And there would be an elimination of the use of re
serve requirements during the foreseeable future.
Representative R e u ss. Not an absolute elimination, but in the word
ing of the resolution, “ Where feasible.”
That is to say, the Federal Reserve would be given a broad hint by
Congress that, barring special circumstances, it should act, when it
acts, to create future additions to the money supply by the device of
purchasing U.S. securities rather than by the device of so dealing
with the reserve requirement feature as, on net balance, to increase
the reserves that way.
But address yourself to the question which I am trying to put in a
constructive and friendly way. What if we all got together for the
good of the country and said, “ Certainly not, there are no people
around here who like inflation or want to have it, but at the same
time, if one or the other of us had been a little bit doctrinaire and
inflexible in the past, let us amend ourselves, consistent with a sound
monetary policy.”
Would that not be good for the souls of all concerned, and very
good for the country ?
M r. M a r t i n . Mr. Reuss, I think you have made quite a few “ sup
poses” there, and done them very effectively. I think it is a matter
of judgment and I am trying to give you my best judgment.
I think the nature of the financial problem that we are dealing with
here is such that my statement is correct, that this would be the
interpretation. I could be wrong on that.
Representative R eu ss. But I am suggesting that we have this mas
sive press conference with all you gentlemen explaining to the public.
Mr. M a r t i n . Let me make the same statement about that that I
have sometimes made about statements that are to reassure us on our
gold or some other problem that seems to be under discussion.
Shakespeare put it very well once when he said, “ Methinks thou
protesteth too much.”
I would think that if the President and the Secretary of the Treas
ury and all of us got together and made a statement of this sort, in
the present atmosphere, the difficulties I have referred to would be
increased rather than reversed. I f the President, with all the prob
lems he has, and the Secretary of the Treasury, with all the problems
h§ has, were to cooperate and make that sort of a statement to the
world, then if I were a thoughtful investor—maybe other investors
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1291
would not feel this way—but if I were a thoughtful investor, I would
think, “ This is a pretty serious matter, and it means that they are
on the high road to inflation.”
Representative R e u ss. And would your feeling be the same if this
five-man symposium I am describing added to its statment: uThe
only reason we are making this statement is because there has been
so much scare talk about what this resolution does, and so much mis
representation of it, that really we think the record should be set
straight. This is not a printing press amendment. It has nothing to
do with the amount of the monetary supply. This is going to be left
to the Federal Reserve as it always has been.”
Do you not think that would take the sting out of it ?
Mr. M a r t i n . N o , I do not think you would cause people to think
that your amendment is not inflationary and would help the Treas
ury. I sincerely believe the reverse. I think the amendment w^ould
be interpreted as inflationary, and it would not help the Treasury.
Now you just have an honest difference of opinion.
Representative R e u ss. That is not really the issue, though. The
issue is whether this amendment is in fact inflationary, and you keep
bringing in metaphysics, and hearsay, and what people abroad are
saying or might say, although you have not really talked to them and
are not sure what they would say. This is a little rough on me, be
cause when I come back at you and say, “ Why don’t you all get to
gether and set the record straight,” you say, “ Well, if we did that,
people would think that we were really turning on the printing
presses.”
That is a “ heads I win, tails you lose” argument, Mr. Chairman.
M r. M a r t in . I understand that. Let me just say that I have con
stantly thought about this for many years, and I am glad to see your
interest in it, and I may turn out to be wrong on this, but money is a
medium of exchange and a standard or store of value. But the
realm of the metaphysics it gets into is in this confidence factor.
There is trust and confidence involved, which is really the important
factor. When that is displaced, then we are in trouble. That is the
only way to express i t ; you may think it is mythical. There have been
a lot of charges about talking too much about inflation, for example.
Let me say I have only made one public address—back in December—
in a long time, apart from the time I have been up here befoe Con
gress. Otherwise I have not said a thing.
Representative R e u ss. I do not mean your talking about inflation.
I am as much against it as you are. But I do frankly mind your
stigmatizing the sense-of-Congress resolution which has been passed
by the majority o f the Ways and Means Committee as a method of
turning on the printing presses. I think that keeps the metaphysics
warm, so to speak, and I wish you would cool it off a bit and talk about
the merits o f it.
My time is up.
M r. M a r t in . I t is a source o f regret to me that I have had to do
that, because I was very careful not to make threats or to indicate
where the end result o f any o f this would be, but as a trustee o f the
people’s money I have to give the best judgment I have. M y ju d g
ment may be wrong, but I have to give the best judgment I have.
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EMPLOYMENT, GROWTH, AND PRICE LEVELS
Representative R euss . A s I say, I cannot imagine a more inflam
matory word than the word “ printing press” money, and if anything
scares"the central bankers from New Delhi to The Hague, “ printing
press” does. I suggest a tidier terminology.
Representative P a t m a n . Mr. Curtis.
Representative C urtis . I yield momentarily to the gentleman from
New Jersey for a comment.
Representative W id n a l l . I would like to make a comment on Mr.
Reuss’ “ suppose, suppose, suppose” question. I f it is necessary to call
in all these people to explain the sense-of-Congress resolution and to
bail Mr. Reuss out of this, why does he not withdraw the resolution or
the amendment in the first place, and he can bail everybody out so we
do not have to have a press conference ?
Representative C urtis . Mr. Chairman, I would like to read a com
ment from the Aubrey G. Langston & Co., Inc., newsletter o f July 27,
1959. They are specialists in U.S. Government bonds and securities—
which I think is very apt:
The somewhat tragic aspect of the matter is that the prolonged, somewhat acri
monious debate over a relatively simple matter is taken by people in other
countries as a sign of the unwillingness of the Congress as a whole to take the
steps that are necessary to maintain order in the Government’s financial affairs
and to preserve the future value of the dollar.
The issue before the Ways and Means Committee is a relatively
simple matter; that is, whether or not the long-term bonds, which can
only be sold under a ceiling of 4% percent can be sold unless this ceil
ing is removed.
That is the simple matter, plus, I might add, the E bonds, which
many people have forgotten, which we likewise cannot market under
their present interest ceiling. Because the law also includes an inter
est a ceiling on E bonds. Further, we have our problem o f trying to
encourage people to retain their holdings in long terms when they are
about to come due. That is the third aspect of the bill. These all are
relatively simple matters, and they are being cluttered up with some
thing that is the subject of the complicated debate going on here and
for 3 months on the floor of the House. The gentleman cannot even
get it through his own committee, Banking and Currency, which has
proper jurisdiction over it.
It is very obvious to me why the statement “the tragic aspect o f the
matter,” is true, The simple situation, which has been presented to
the Ways and Means Committee, should not be cluttered up with this
kind o f irrelevancy.
I yield to the gentleman.
Mr. C h a ir m a n . I yield back my time if he does not want to com
ment. There is one other thing I would like to say.
Representative R euss . Y es; I will take the yield.
Representative C urtis . Let me say this other thing first, though,
before I do, because I should have said this.
In many respects I regret that this has come out in the Joint Eco
nomic Committee hearings, although in another sense I think it is
good, because if we take a specific issue that is before us and direct
these economic problems we have to that, we frequently begin talking
about realities and get away from what we are apt to get into in this
committee, too many generalities. But I do regret it has gone as far
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1293
as it has, because this should have been out of the way before this
committee ever reached these hearings. It was planned and hoped
that we would not have this subject of interest ceiling, which is still
pending before the Congress, still pending at the time these hearings
came about.
Y es; I yield to the gentleman.
Representative R eu ss. Thank you.
Representative C o f f i n . May I interject? This is what is called a
high yield on a long-term issue.
Representative R e u ss. I thank the gentleman for yielding. My
wife frequently accuses me o f clutter, but this is the first time a col
league has suggested I am guilty of the legislative variety of it.
I do not think this is cluttering up the bill. The Congress is asked
by the administration to lift the 4% percent bond ceiling that we
have had since 1918. Congress, it seems to me, is perfectly within its
rights, and indeed is just doing its duty, if it says to the administration,
“ A ll right, we want to be responsible. We will go along and give
you that necessary freedom of action, even though we wish we were
not asked to do so. But in so doing, we want the administration, in
cluding the Federal Reserve, to do everything possible, consistent with
a sound monetary policy, to make it unnecessary to go ever higher and
higher in our interest rates, both on the national debt and, by percola
tion, throughout the entire economy.”
The gentleman is, of course, within his rights in calling that clutter,
but it seems to me good legislation for the Congress to pass out a
package which not only says what we are willing to do, but gives the
administration some guidance on how to do it.
Represesntative C u r t is . I might say to the gentleman that though
that is the assumption, that the administration has not been doing
everything it can to keep the interest rates down, and I believe they
have, that is a fair subject for political debate.
Representative R eu ss, I s it not also a fair subject for legislation by
Congress ?
Representative C u r t is . Certainly, probably so. But certainly not
when we have an obvious thing which has to be done if we are to keep
the interest rate as low as possible. W e have to give the Treasury this
flexibility. Otherwise you just force all the debt refinancing into the
short terms. And, incidentally, this delay has already created great
danger, because our recent issues have been above 4*4 percent. It is
not that this is not subject matter for legislation, indeed, but we have
a simple problem, relatively so, before the Ways and Means Com
mittee which has to do with the Federal Reserve.
The gentleman is posing a very complicated problem on which many
people disagree with his theory and his presumption that the Federal
Reserve is not already doing what it can, within its ideas o f the pri
mary objective, which Congress has said is to preserve the value
of money. And also this administration, I think, is trying to keep
interest rates as low as possible.
Now I yield.
Representative R e u ss. The gentleman makes quite a point of the
inadequacy o f the Ways and Means Committee to consider a complex
subject matter. I certainly would not agree with him. I have a
great respect not only for its jurisdiction, but for the capacity o f its
members.
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Eepresentative C u rtis . I do not want to yield when you make a
statement of that nature. I have not indicated that the Ways and
Means Committee is inadequate. I have indicated that the Ways and
Means Committee has certain jurisdiction, and we do not have the
background of having studied over a period of years the Federal
Eeserve Act, and the constant problems involved in the subject we
are going into here; but the Banking and Currency Committee has.
That is the point.
Eepresentative E euss . That is right, and I am on the Banking and
Currency Committee.
Let me ask the gentleman, was not the witness, Chairman Martin,
before the Ways and Means Committee on numerous occasions in
connection with this bill ?
Eepresentative C urtis . O f course.
Eepresentative E euss . H ow many different days was he up before
you ?
Eepresentative C urtis . Oh, my goodness, possibly 10.
Mr. M a r tin . Eleven days.
Eepresentative E euss . Would it be news to the gentleman if I told
him that unless I am mistaken, Mr. Martin has not been before the
Banking and Currency Committee at all this year ?
I do not suggest this is any fault o f Mr. Martin’s. For one thing,
you were ill for a time; secondly, you were not called as far as I know.
But Ways and Means had 11 times as much of the Federal Eeserve
as Banking and Currency has had. I will bet you do know something
about this subject by now.
Eepresentative C urtis . Actually we could have had this interest
ceiling bill out of the Ways and Means Committee in a day, as it
should have been, if it had not been cluttered up with this matter.
I do remind the gentleman, inasmuch as this whole thing originated
in a political atmosphere and as a result of some rather constant
speeches on the floor of the House and the Senate accusing this admin
istration o f high interest rates, and so forth, that the gentleman’s
party does control the Congress, and they have the chairmanship of
the Banking and Currency Committee and the majority members.
I f the gentleman’s resolution had been in 2 months, as he said, why
was it not brought out before Banking and Currency, and why was not
a study made ?
Eepresentative E euss . One reason is, we did not have a report from
the Federal Eeserve on it. But now we have had the benefit of their
testimony before your committee.
Eepresentative C urtis . All I can say is, I think the statement of
Mr. Langston is entirely accurate, that it is tragic, when we have a
relatively simple matter before Ways and Means, which is so important
to the fiscal integrity o f this country, to have been horsing around
as we have almost 2 months and causing damage even now by our
failure to take action in these three simple areas: E bond interest
rates, securities beyond 5 years, and this problem of trying to facili
tate the holding of securities that have matured in the hands of the
people that are the present holders.
It is those three areas in which we need the action; and this other
thins;, heaven knows what it might lead to and who is right or wrong
on the thing. But the delay caused by not detecting it certainly is
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1295
causing damage now, and I hope the gentleman will, as the gentle
man from New Jersey suggested, if it is going to require a massive
press conference to clarify it, withdraw his resolution and let us get
on with the debt management problem.
Mr. R euss . The massive press conference would only be necessary
because o f misleading statements put out about what the resolution
does.
Representative C urtis . Oh, no. Let us say disagreement as to what
it does. Let us not say “ misleading.55 I happen to think the way we
have described it is accurate. The gentleman is entitled to his inter
pretation.
Representative P a t m a n . Mr. Coffin.
Representative C o ffin . Thank you, Mr. Chairman.
Mr. Martin, I do not know whether you or Mr. Roosa would be the
one to comment on this question. I want to focus your attention on
the condition o f the market a year ago this spring with reference to
the responsibility, if any, of the bills only policy for the situation in
which we found ourselves.
In the statement you and Secretary Anderson gave us Friday, you
say this:
Underlying the late spring speculative positioning of Government securities
was a very low absolute level of short-term market interest rates, as well as an
unusually wide spread between short- and long-term market yields. This low
short-term rate level, together with the prevailing yield structure, vitally influ
enced the shaping of market expectations of further increases in Government
bond prices. It further provided the incentives that led to unusual adaptations
of customary credit instruments and terms, which facilitated a rapid swelling in
the market’s use of credit. This development made the market vulnerable to
liquidation pressures.
Having said that, I would like to bring bills only into the picture
to test the extent to which this policy was good or bad.
In the part of the country I come from, we like to use the water a
lot, and I am not a yachtsman in a very large sense, but I like to row.
I am never able to do very much when I row with only one oar. I am
wondering whether rowing with one oar, namely, bills only, produced
a result that was other than you would wish.
You make, in your statement today, three analyses of the interven
tion o f the Federal Reserve in the Government securities market.
Your first point was that when the Federal Reserve goes into the mar
ket you change the volume of reserves otherwise available to member
banks.
My observation on this is that when you buy bills only, you are
adding reserves to member banks and multiplying the credit available
to these member banks, but the money made available, it would seem to
me would be chiefly used by investors who would be presently in the
short-term market and therefore would be looking for short-term secu
rities in general.
Your second point, about the Federal Reserve’s operations is that
these operations affect the volume of the securities available. So when
you go into bills only, you have stimulated a demand for short terms
but, by your purchase, you have reduced the volume of short terms.
As to your third point, when you go into the short-term market
and create by multiplying a demand for a lot more short-term secu
rities which are not available in such great degree, the price goes down.
1296
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Did this not influence expectations that the long-term securities would
go down also because of the shortness on the short-term market ? And
therefore, did not the policy of bills only, without any other oar to the
boat, have quite a bit to do with the imbalance that finally resulted?
As I say, either you or Mr. Roosa might like to comment on it.
M r. M a r t in . I would like to let him comment on it also from his
point o f view.
Let me first say that there is more logic in the use of purchases o f
long-term securities when you are trying to stimulate expansion, in
my judgment, than under present conditions. The long-term rate did
go down at that time. It went down about a half of 1 percent. I
thought it would go down more. I was wrong on it, but I thought it
would go down.
W e did not use only open market operations and reduction in
discount rates because we made reductions in reserve requirements
as part of our operation. W e reduced the discount rate in November
and then we reduced it three times subsequently, down to 1% . W e
bought nearly $2 billion o f Government securities in the open market
and we made three adjustments in reserve requirements also.
Representative C o ffin . That is multiplying the money available.
M r. M a r t in . T h at is right.
It takes some time for lead or the lag. I cannot say positively that
if we had bought some long-term Government securities—you made
a very good point there—it might not have hastened a decline in the
long end o f the market. I have always conceded that.
However, that is a matter o f judgment, and I think it is something
we ought to bear in mind with respect to future operations. But on
balance, I am not convinced that it would have substantially changed
what happened, at least not to the point that we would have come out
with a 100 percent better result.
Representative C o ffin . Y ou are candid, because this is a little bit
o f a qualification o f your earlier statement that if you had it all to
do over again you would do exactly as you did.
Mr. M ar t in . Yes. I do not think you could ever say you would
not change anything.
But what I am driving at is, for the matter of the broad approach
to it, I do not know. In a manner of speaking, I think it would
it would have been interesting if the recession had continued longer—
I did not want it to do so, of course; do not misunderstand me.
Let us let Dr. Roosa comment on it. He may have a different point
o f view on this. A ll we want is the right answer to this problem.
Mr. R oosa. I think this is essentially the point: that as long as we
are trying to study every situation with the best of all the combined
judgment that we can put together, it must in the end become a prob
lem o f analysis and discussion among people whose careers are in
his kind o f work and who, if they make mistakes, make them because
even with the accumulation of their experience, the problems are so
complex that it will be impossible not to make a mistaken judgment
once in a while.
Representative C o ffin . I agree with you.
Mr. R oosa. I just want to stress that there are no open-and-shut
answers here.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1297
I have tried very carefully to review the record last year. I sus
pect I came out a little differently from the position o f Mr. Riefler,
on my left, in this respect. I certainly do not know whether the view
I have will prove to be right or wrong in full historical perspective.
But the thing that makes it most difficult for me to reach a judgment
on this situation has not been mentioned here. That is, that I believe—*
and please do not misunderstand m e; I think this takes more explana
tion than I should presume to take time to elaborate fully here—
that the level of long-term rates remained as high as it did because the
Treasury was successfully offering more and more long-term issues
through the spring period.
I also believe, sitting here now with the benefit o f all the hindsight
that that permits, that the result o f that Treasury action was useful,
that it prevented an excessive spreading of liquidity at a time when
probably the System was putting in too much.
This only begins to shadow out the outlines of the broad question.
Representative C o f f i n . What you have just said, though, would
indicate that you might have some hindsight reflecting adversely on
the use of bills-only in that spring. W e have seen, i f any analysis is
correct, that this was an operation when the Federal Reserve did quite
a bit to increase liquidity.
Mr. R oosa. Yes, it did. The Treasury, on the other hand, was doing
quite a bit to reduce liquidity. The net, as it emerged from this
period—whether all was intentionally coordinated or whether some
o f the results may have been accidental—looking back on it now, I
would say that as far as the combined effect of both operations is con
cerned, just about the right result was achieved.
Whether it would have been better if the Treasury had issued less
long terms, I doubt. The fact that they were issuing them provided
the offsetting pressure in the long-term market which avoided an undue
seepage of liquidity through the economy that might otherwise have
left us with a residue that would have been very hard to manage when
the recovery came about, particularly because the recovery moved
upward so fast. Nevertheless, trying to appraise that overall, I would
say that for that situation we came out fairly well, and that the swing
in the speculative market behavior that accentuated the actual turning
point was one related more largely to excesses in financial practice.
There are lessons in such experience that may have already been
learned by those who were involved, but I think what happened is also
going to have to lead to some changes in market behavior and perhaps
in the flow of information. It seems to me that these are the major
lessons of this period.
I do not mean to imply in this that I am in full agreement with
everyone else in the System on the extent to which there may be some
room for operations outside of the bill market. I do not think I am.
But I feel that in the atmosphere of free discussion in which we engage
in these matters, one person is sometimes bound to see things a little
differently from the consensus. That has been my experience for
some time.
Representative C o ffin . Are you at liberty to give your views as to
the extent to which the Federal Reserve should go outside the bills
market?
1298
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Mr. M a r t i n . Mr. Roosa is at liberty to give his views on any subject.
Mr. R oosa. I am at liberty; but the question relates to something
that also is a very long and complicated story.
I would say, trying to shortcut detail and go into just a broad char
acterization, that I would probably be more likely in a given situation
to come out in favor of a long-term operation than, for example, Mr.
Riefier. But both of us would be considering it from all sides, quite
freely. This is a matter to some extent just of differences in personal
temperament. There are people in the System you can spot every
time who are going to want to be easier in any situation, after apprais
ing the facts, and others who are always going to want to be tighter,
after appraising the same facts. I think it is a source of the richness
and vitality of System thinking that we continue to have this strong
representation of differing views and some differing biases or predis
positions among the various people wTho participate in discussions of
policy.
I have never had the feeling that if I felt strongly, if I were compe
tent to express a view in a given situation—I am usually not well
enough acquainted to do that—that I could not make whatever sug
gestion I wished, and that the consensus as it came through in the
committee, of which of course I am not a member, but only an associate
economist, would have taken that into account. I think that is all I
could ask for.
Representative C o f f i n . I just want to comment that that is a very
fair statement, but it leaves me a little bit doubtful of our power to
govern ourselves or to exercise conscious forethought, when Dr. Roosa
said that during the last spring the Treasury went in one direction and
the Federal Reserve went in another, and somehow it all came out
right.
M r . M a r t i n . It sometimes happens in legislation, too, M r . Coffin.
Representative C o f f i n . I think it definitely does.
Representative P a tm a n . Mr. Curtis.
Representative C u r tis . Thank you , Mr. Chairman.
In my interest in the other question there was one matter that I
wanted to point out at this time that is contained in this material that
is going to be sent to you, Mr. Martin, for your comment. I will not
read the whole thing. It is really the tail end on which I want your
answer. This is under the heading “ The Appropriate Criterion or
Criteria for Managing the Public Debt.”
For some time now the Treasury has insisted that the issuance of long-term
debt is essential to any anti-inflation program. The Treasury has largely failed
in its attempt to lengthen the debt maturity, and yet it is this attempt as much
as anything else which, for the difficulties it has had in managing its refunding
and new money issues.
O f course, this is the staff posing this.
It would be well, therefore, to kno wthe official rationale for this policy. Is
it the ordinary rationale of countercyclical debt management policy, or something
else?
That is not a question to you, because you could not comment on it
officially.
In a word, what is it that is effected of this attempt to lengthen the maturity
of debt, even in boom times? And is it likely that the expected benefits do in fact
outweigh the costs involved? Might it not be better for the Treasury to follow
a narrower policy of simply minimizing the cost, operating cost as well as in
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1299
terest cost, of its debt operations, and leave to the Federal Reserve the task of
keeping the right maturity mix in the market ?
It is that last part I meant, but I had to read the whole thing in
order for you to comment on it.
M r. M a r tin . I think this is the basic question, and it is where the
Treasury and the Federal Reserve come together. I am sorry that
Senator Douglas is not here, because I usually make this comment to
him. He has repeatedly said that agood fences make good neighbors,”
and I have repeatedly pointed out that in order to be good neighbors
you have to have a revolving door to go through. I do not believe
that you can completely isolate the joining of policy effectively.
The real problem, as I intimated earlier here, on short- and long
term securities is not so much the maturity distribution as it is to get
the Treasury in a position where it can go to the market and get the
best price that is available in the market at that time, and not be at
the mercy of the market.
Representative C u rtis. In other words, to interpolate: not to have
to go to the well so often, but to be able to have the debt coming up
over a longer period of time.
M r. M a r tin . That would unquestionably benefit them greatly. And
also not to go to the well as a necessitous borrower.
Representative C u rtis. In other words, the posing o f the problem
by the staff does not include this very important aspect of the debt
management which, in my judgment, has always been one of the basic
reasons the Treasury has wanted to get more securities in long terms,
and I might say in El bonds, too.
But now, as to the economic problem, where they say, “Is it the
ordinary rational of countercyclical debt management policy, or
something else ?”—of course, it is countercyclical, in my judgment, but
the real reason is not because it is countercyclical as much as it is
because it is necessary in order to manage the debt.
But would you comment ?
Mr. M a r tin . Yes. I think the Treasury’s duty and obligation is to
finance in the most effective way it can to save the taxpayer money.
Our duty is to try to keep the money stream in such a way as not to
interfere with their activities, but to accord with sound monetary
policy.
There are times when those two come awfully close together, but
it is perfectly clear to me that in times of expansion there are oppor
tunities, perhaps, for given opportunities in which they can lengthen
the debt. But the real problem that we are facing at the moment is
that, lacking the tools, the proper tools of debt management, the
Treasury has no choice.
Representative C u rtis. But to go to short term ?
Mr. M a r tin . But to go to short term.
Representative C u rtis. Thank you, Mr. Chairman.
Representative P atm an . Mr. Martin, would it be agreeable to you
to answer any questions that the members submit to you in writing
for the record ?
M r. M a r tin . Yes, indeed, sir.
Representative P a tm a n . I want to ask you a question or two now
about these reserve requirements. As you know, I have had some
correspondence with you, and I do not have all the information I
1300
EMPLOYMENT, GROWTH, AND PRICE LEVELS
desire. I sent you another letter. You probably received it this
morning.
Mr. M a r t in . I got that letter this morning. I am sorry you did not
think it was responsive.
Representative P a t m a n . From the information I have from the best
sources obtainable, I am convinced that the banks have never put more
than a billion and a half dollars in the reserve fund, that is now $18
billion. Does that conform to your thinking or not?
M r. M a r t in . I do not know how you can separate what they put in.
Representative P a t m a n . Here is the way it is done.
Mr. A. J. R. Smith wrote a very fine article on “ The Sources and
Uses of Member Bank Reserves, 1914-52,” which is included in a
pamphlet o f the Federal Reserve Bank of New York, November 1953,
entitled “ Bank Reserves, Some Major Factors Affecting Them.”
Without objection, I will put that in the record.
(The article referred to follow s:)
Sou rces an d
U s e s op M e m b e r B a n k R e s e r v e s ,
(By A. J. R.
1914-52
S m it h )
In 38 years of Federal Reserve System operations, the volume of member
bank reserves has grown from roughly $1.5 billion to nearly $20 billion. What
are the sources from which these reserves have been derived? What are the
uses to which they have been put? And what are some of the major implica
tions of this huge rise in the dollar volume of reserves for the operations and
profits of the commercial banks and the Federal Reserve banks?
Is it correct to suggest, that, historically, as deposits have expanded, member
banks have been forced to turn over vast sums to the Federal Reserve banks
to meet reserve requirements, thus depriving the commercial banks themselves
of funds that might otherwise have been put to profitable use? Would it be
correct to go even further, to suggest that the holding of member bank reserves
by the Federal Reserve banks has enlarged their potential earning power, at
the expense of the commercial banks? Both suggestions seem plausible, espe
cially from the viewpoint of an individual banker observing the direct effect
of a given change in his bank’s reserves. But the issues raised in these ques
tions can best be answered by tracing through in detail the sources of reserves
for the banking system as a whole.
Actually, the Federal Reserve banks have been the principal source from
which the commercial banks have derived reserve funds since the founding of
the Federal Reserve System in 1914. Under our fractional reserve banking
structure, the Federal Reserve credit created by the Reserve banks has in effect,
permitted commercial banks to effect a vast expansion in their loans and in
vestments that otherwise would not have been possible. The extension of
Federal Reserve credit has provided the commercial banks with the funds
needed for meeting the mounting reserve requirements arising from the de
posit expansion generated through the credit-creation process. Instead of
levying a “tribute” from the commercial banks, the Federal Reserve banks
have (mainly through their purchases of Government securities) provided the
reserve base upon which a vastly enlarged balance of commercial bank loans,
investments, and deposits has been erected over a period of nearly four decades.
Earnings as such have, for the most part, been of no immediate concern to
the Federal Reserve banks. The System has generally brought about changes
in member bank reserve balances as needed to provide an elastic money supply
in conformity with the aim of furthering economic growth within a framework
of economic stability, although twice it has had to provide the basis for ab
normal expansions of bank credit for the financing of wars. On the whole,
the earning assets of the Federal Reserve banks have tended to fluctuate in
versely with the banking system’s net acquisitions of reserves (loanable funds)
from sources other than Federal Reserve credit. For example, at times when
the commercial banks have obtained reserves from gold inflows, the Federal
Reserve banks have often contracted their own earning assets as a partial
offset to the increase in bank reserves resulting from the gold inflow. Thus,
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1301
when banks obtain reserves from other sources, the Federal Reserve System
not only does not use the resulting growth of member bank reserve balances
to finance a growth of its own earning assets, but instead it tends to reduce
its earning assets. Growth in the earning assets of the Reserve banks has
usually come about only when, for reasons of national economic policy, the
System wished to provide additional reserves to the commercial banks.
AGGREGATE CHANGES FOR T H E PERIOD A S A W H O LE
As the last column in the accompanying table indicates, net additions to the
Nation’s monetary gold stock and expansion of Federal Reserve credit have
constituted the two principal sources of reserve funds over the period from
the end of 1914 to the end of 1952. Net increases in the amount of currency
in circulation and increases in the required reserves of the banks have con
stituted the two principal uses of these funds. The growth in required reserves
of member banks resulted partly from statutory increases in the percentages
of reserves which member banks have been required to maintain against their
deposit liabilities, but mainly from the enormous expansion in bank credit and
bank deposits that took place during this period.
When the Federal Reserve System was established in 1914, the total cash
reserves (excluding interbank deposits) of all banks in the country, member
and nonmember, were probably less than $2 billion. During the 38 years from
the beginning of 1915 to the end of 1952, the inflow of gold from abroad (together
with some moderate amounts of domestically produced gold) contributed a net
amount of more than $21 billion to member bank reserves. The actual increase
in U.S. gold stock, which also reflected revaluation of the dollar in 1934, was
even greater, but approximately $1 billion was still held as “free gold” by the
Treasury at the end of 1952,1 and about $700 million was used as part of this
country’s subscription to the International Monetary Fund. Federal Reserve
credit during this same period showed a net expansion of close to $25 billion
(almost entirely through purchases of Government securities), and Treasury
operations, chiefly in the form of issues of “Treasury currency” (silver certifi
cates and metal dollars, subsidiary silver, minor coins, etc.), contributed a
relatively small additional amount, bringing the gross additions to member bank
reserves to a total of over $47 billion.
Over the same period, currency in circulation increased by more than $27 bil
lion, as banks obtained currency to meet the needs of their customers and to
maintain adequate suplies of vault cash. Since the banks obtain this currency
by drawing on their reserve accounts in the Federal Reserve banks, a correspond
ing amount of reserve funds was absorbed, leaving a net increase in member
bank reserve balances of slightly under $20 billion. Most of this increase in
reserve balances was used as the basis for expansion of bank credit and was
absorbed in increases in required reserves, leaving only a small residue to be
added to excess reserves. The expansion in total loans and investments of mem
ber banks during this 38-year period was approximately $111 billion, and total
member bank deposits increased by $139 billion.
From these summary data, it is clear that there could have been no such
growth in the Nation’s money supply— currency and bank deposits— or in the
banks’ earning assets, as has occurred without the great increase in Federal
Reserve credit. While specific sources and uses of bank reserves cannot be
precisely linked to each other, and while a given expansion in Federal Reserve
credit has often provided banks with reserves to meet their currency drains, the
fact remains that, from a purely accounting point of view, increases in reserves
from sources other than the expansion in Federal Reserve credit between the
end of 1914 and the end of 1952 did not supply member banks with enough re
serves to meet the actual increase in the amount of currency outstanding. Thus,
in effect, the banking system of this country, in order to do its part in financing
this country’s participation in two world wars and in providing the credit
needed to finance the growth in the country’s production and trade, has been
dependent upon the ability of the Federal Reserve Banks to create additional
reserve funds.
1 In November 1953, $500 million of “free gold” was used to retire Government securities
in order to avoid exceeding the $275 billion legal public debt limit.
1302
EMPLOYMENT, GROWTH, AND PRICE LEVELS
F e d e r a l , R e se r v e B a n k o f N e w Y o r k
Cumulative Changes in Federal Reserve Credit
and in All Other Factors* A ffecting Bank Reserves, 1914-1952
B illio n s
of d o lla r s
S t U io n s
of d o lia rs
* “ All other factors” includes such items as changes in gold stock, in foreign deposits with the Federal Reserve Banks,
and in money in circulation.
1303
EMPLOYMENT, GROWTH, AND PRICE LEVELS
RESERVE B A N K EARNING ASSETS AND MEMBER B A N K RESERVES
There have been periods in which the banks acquired large amounts of addi
tional reserves independently of Federal Resrve credit. As mentioned above,
the idea has been expressed from time to time that member banks, by depositing
these reserve funds in the Federal Reserve banks, have enabled the Reserve
banks to enlarge their earning assets and hence their earnings. This has led
to the conclusion in some quarters that the earnings of Reserve banks have
been derived from funds provided by the member banks, and hence that the
member banks should be permitted to participate more largely in the earnings
of the Reserve banks. On the basis of this conclusion, some observers have
even contended that the payment of a large proportion of the Reserve banks'
net earnings to the Treasury indirectly involves the subjection of member banks
to a disproportionately heavy tax burden.
Changes in factors tending to increase ( + ) or decrease ( — ) member bank
reserves and excess reserves, Dec. 8 1 ,1914-Dec. 81,1952
[In millions of dollars]
Factor
Dec. 11,
1914Dec. 31,
1920
Dec. 11,
1920Dec. 31,
1929
Dec. 31,
1929Dec. 31,
1933
Dec. 31,
1933Dec. 31,
1940
Dec. 31,
1940Dec. 31,
1945
Dec. 31,
194.5Dec. 31,
1952
Dec. 31,
1914Dec. 31,
1952
Treasury factors 1_______ _______
Gold and foreign account trans
actions------- -------------------------Currency in circulation................
-3 3 5
+343
+ 239
2 - 1 , 510
+569
+ 2 ,0 7 8
+ 1,3 84
4-1,108
- 2 , 293
+ 1,3 57
+747
+ 41
-9 4 1
2 +16,830
- 3 , 213
-1 .6 5 9
- 1 9 , 783
+ 3 , 433
- 1 , 918
+21,110
- 2 7 , 401
+ 2,4 46
-6 6 0
+ 12,106
- 2 0 , 870
+ 3 , 592
- 4 ,9 0 6
T otal................... ..................
- 1 ,5 2 0
Federal Reserve factors:
Government securities-------Discounts, advances, and
industrial loans 3_________
Float *______________________
Other deposits and Federal
Reserve accounts 5_______
+287
+224
+ 1,9 26
-2 5 3
+ 22, 078
+435
+ 24, 697
+ 2,9 37
+119
-1 ,9 2 3
-7 2
-7 9 3
-2 8
-2 2 1
+60
+241
+498
-9 0
+389
+151
+966
-2 6 2
-1 0 1
-7 1
-3 9 5
-5 8
-2 9 1
-1 ,1 7 8 ;
T o ta l.................. ...............
6 + 3,0 36
-1 ,8 7 2
+ 1 , 034
-8 0 9
+ 22, 759
+443
« +24, 591
Total reserves. ________________
Effects of changes in required
reserves...................................... .
+ 1 , 516
+574
37.4
+11,297
+ 1 , 839
+ 4 , 035
+19, 685.
r - 1 , 520
7 -6 6 8
+558
- 5 , 541
- 7 ,0 4 6
-6 ,0 6 3
- 2 0 , 28(T
7 -9 4
+932
+ 5 , 756
-5 ,1 5 7
-2 ,0 2 8
-595-
Excess reserves....................
7-4
1 Includes changes in Treasury currency outstanding, Treasury cash holdings, and Treasury deposits;
with the Federal Reserve banks.
2 Under the Gold Reserve Act of 1934 the price of gold was increased from $20.67 to $35 per ounce; this;
resulted in an increase of approximately $3,000,000,000 in the Nation’s monetary gold stock and in Treasury
cash. The effects of these changes have been included in the 1933-40 data shown here.
3 Changes in this total prior to 1934 consist almost exclusively of changes in bills discounted and bills
bought; those during and after 1934 include changes in industrial loans; and those after 1939 consist mainly
of changes in advances.
4 The volume of checks credited to the member banks’ reserve accounts with the Reserve banks prior to
actual collection.
5 Excludes foreign deposits. Federal Reserve accounts consist of capital accounts plus other liabilities and
accrued dividends minus bank premises and other assets.
6 To make this total comparable with those for other periods shown, it has been adjusted downward by
$45,000,000. Such an adjustment has been necessitated by 2 features of member bank reserves in 1914:
(1) member banks held some of their reserves outside the Federal Reserve banks; and (2) member bank
reserve balances held with the Reserve banks were computed on a slightly different basis than in the later
years shown in the table. See “ Banking and Monetary Statistics,” p. 327.
i Estimated.
N ote .— B ecause of rounding, figures do not necessarily add to totals.
The following review of various periods since the Federal Reserve System
was established shows, however, that the earning assets of the Reserve banks
have tended to decline at times when there have been large additions to member
bank reserves from sources other than Federal Reserve credit— notably gold in
flows— and have tended to be greatest when there have been heavy drains on
member bank reserves from factors such as gold outflows and large public de
mands for currency. The ability of the Federal Reserve banks to add to the
reserves of member banks by purchasing Government securities or by making
loans to member banks stems, not from funds provided by the member banks, but
1304
EMPLOYMENT, GROWTH, AND PRICE LEVELS
rather from the note issue privilege and the credit-creating power granted to
the Federal Reserve banks by Congress. And, as the preceding summary of the
sources and uses of reserve funds has demonstrated, the credit-granting capacity
of member banks and the growth in their earnings over the entire period since
the inauguration of the Federal Reserve System have been heavily dependent
upon the reserves provided by the Reserve banks.
Indeed, the view that Federal Reserve banks invest the reserve deposits of
their member banks in Government securities can now be seen to be the opposite
of the actual process. What really happens is that, when the Reserve banks
purchase Government securities in the open market, they create bank reserves.
(The seller of the securities is given a check drawn on a Federal Reserve bank.
He deposits the check in his bank. His bank then presents the check to the
Reserve bank, and gets payment in the form of a credit to its reserve account.)
Just as the commercial banking system of the country is able to expand deposits
(through lending and investing operations) up to 5 times the amount of avail
able reserves, if reserve requirements are assumed to average 20 percent, so the
Federal Reserve banks can expand their own credit, that is, expand bank re
serves, up to 4 times the amount of available gold certificates. Unlike the com
mercial banks, which will make use of excess reserves to expand their loans and
investments if suitable opportunities are available, the Reserve banks do not
base their decisions to lend or invest on the availability of profitable outlets for
their funds. Indeed, at the end of 1952 the Reserve banks had close to $10 billion
of gold certificates in excess of the 25-percent reserve required against their note
and deposit liabilities.
The misunderstanding with respect to this matter no doubt derives from the
fact that individual member banks, except to the extent that they obtain reserves
directly from the Reserve banks by borrowing, usually obtain new reserves
through deposits with them by their customers of currency or checks drawn on
other banks, or through sales of some of their securities. For the banking sys
tem as a whole, however, currency transactions with customers over the years
have constituted an enormous drain on the banks’ reserves, rather than a source
of additional reserves, and the reserves obtained by one bank through collections
of checks drawn on other banks involve only a shift of reserves between banks
and cannot in any way add to the total volume of reserves. In fact, the deposits
on which the checks are drawn are largely created through expansion of bank
credit— bank loans and investments— and, as the deposits of the banking system
as a whole increase, the required reserves of the banks correspondingly increase
and the amount of free reserves is reduced. Sales of securities by the banks
produce additional reserves only to the extent that the securities are purchased
by the Reserve banks. To the extent that the securities are sold to bank de
positors (nonbank buyers), there is a corresponding reduction in the banks’ de
posit liabilities, and, consequently, a fractional release of required reserves; but
there is no overall increase in total reserves.
Finally, since the earning power of the Federal Reserve banks arises from the
note issue and credit-granting authority given them by Congress, and since actual
earnings are largely related to various functions performed in the national inter
est, the Reserve banks either have been legally obliged (from 1914 to 1932) or
have considered it appropriate (from 1947 to date) to turn over a large propor
tion of their earnings ( after expenses and the statutory dividend of 6 percent on
their paid-up stock) to the U.S. Treasury.
W O R LD
WAR I
AND
THE
IN T E R W A R Y E A R S
The sources of reserve funds and the demands for them varied widely from
time to time over the 38-year period from the end of 1914 to the end of 1952.
In the table, this period is broken down to show some of the major swings in
the various factors affecting member bank reserves. The chart shows changes
in Federal Reserve bank credit outstanding and cumulative movements in the
banking system’s net acquisitions and losses of reserves from sources other than
Federal Reserve credit from 1914 to 1952 on an annual basis.
In the 6 years from the beginning of 1915 to the end of 1920, which covered
most of the First World War and the postwar inflation, there was a net inflow
of gold, which for those days was substantial. The public’s demand for currency,
however, exceeded the size of the gold inflow; consequently, the banking system
suffered a heavy net loss of reserves. In addition, a rapid increase in the volume
of bank credit occurred, first in connection with the financing of the war, and
then to finance the postwar inflationary boom. As a result, there was a heavy
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1305
demand for Federal Reserve credit to provide the necessary reserve funds, which
took the form mainly of member bank borrowings from the Reserve banks.
The next period, from the beginning of 1921 to the end of 1929, started with
the postwar depression and ended with the “new era” boom. In that period a
substantial gold inflow, together with a reduction in the amount of currency
in circulation, provided the banks with a sizable volume of additional reserves.
Part of these reserves was used as the basis for further credit expansion, but
a major part was used (at the beginning of the period) to repay member bank
indebtedness at the Reserve banks. For member banks, much of the period was
one of high prosperity, but, despite an increase in member bank reserve deposits
in the Reserve banks, the earning assets of the Reserve banks fell sharply and
then remained at a relatively low level during most of the period, and the earn
ings of the Reserve banks were much reduced compared with the preceding
period.
In the years of acute depression, 1930-33, the major factor affecting the re
serves of member banks was the withdrawal of currency from banks by deposi
tors who were disturbed by the wave of bank failures. An unprecedented liquida
tion of bank loans and investments released a substantial amount of reserves
by lowering bank deposits and required reserves, but the banks nevertheless had
to turn to the Reserve banks for assistance in meeting the demands on them.
The Federal Reserve banks had supplied the banks with additional reserve funds
at the end of 1929 and in 1930 through purchases of Government securities to
assist the banks in reducing their indebtedness to the Reserve banks, and later
in the period made additional security purchases in substantial amount to supply
the banks with excess reserves and thus to make it easier for them to meet the
cash demands of their customers.
The most important monetary and banking development of the period 1934-40
was the tremendous inflow of gold. It reflected, first, a flow of capital to the
United States from the “gold bloc” countries which were endeavoring to remain
on the gold standard without devaluation of their currencies and, subsequently,
the flight of capital from Europe in fear of Nazi aggression before the war and
payments for war materiel in the early stages of the Second World War. De
spite some offsetting factors, such as a sizable increase in the amount of currency
in circulation and a temporary sterilization of gold inflows by the Treasury in
1936-38, member banks were not only completely independent of the Federal
Reserve System in maintaining their required reserves, but accumulated a very
large volume of excess reserves for which they could find no suitable use. In
that period, there was a steady expansion in member bank loans and investments,
but competition for the available earning assets caused a decline in interest rates
to unprecedentedly low levels, which had a depressing effect on the banks’ earn
ings. At the same time, despite the extraordinary growth in member bank re
serve deposits in the Reserve banks, the earning assets of the Reserve banks were
at a very low ebb, and in some of the years their earnings were barely sufficient to
cover expenses and statutory dividends. The increase in the Reserve banks’ assets
that paralleled the growth in their deposit and note liabilities was entirely in
the form of claims on gold, which produce no earnings.
WORLD W AR I I AND THE POSTWAR YEARS
During World War II, the excess reserves of member banks melted away
rapidly as a result of the tremendous upsurge in public demands for currency.
In addition, the reserves required of member banks increased rapidly (despite
the suspension of reserve requirements against Treasury war loan deposit ac
counts in the banks), as a result of very large bank purchases of Government
securities and the rise in private deposits as the Government spent the proceeds
of the war loans. Furthermore, there was a sizable outflow of gold after 1942,
reflecting heavy imports from other countries at a time when civilian produc
tion was restricted here and only very limited amounts of goods (apart from
lend-lease operations) could be made available for export. As a result, there
was a steep rise in the volume of Federal Reserve credit extended to enrble the
banks to meet both the drains on their reserves and their enlarged ne ds for
required reserves as deposits increased rapidly. At the end of 1945 the amount
of Federal Reserve credit outstanding was more than $9 billion in excess of the
total volume of member bank reserves.
Since the end of the war, there have been wide swings in the factors affecting
the supply of reserve funds. The heavy gold inflow from the end of 1945 to the
38563— 59— pt. 6A------ 15*
1306
EMPLOYMENT, GROWTH, AND PRICE LEVELS
fall of 1949, together with a gradual decline in the amount of currency in cir
culation after 1946 was nearly offset by the retirement of approximately $6 bil
lion of Federal Reserve credit In effect, this retirement was accomplished
mainly by the Treasury’s use of its surplus receipts to retire Government securi
ties held by the Federal Reserve banks. But at the low point in the fail of 1949
the volume of Federal Reserve credit outstanding still exceeded the total amount
of member bank reserve balances. After the outbreak of war in Korea, a sub
stantial outflow of gold, which reflected chiefly a great acceleration in U.S.
imports, together with a renewed public demand for currency and a rapid
increase in member bank reserve requirements as a result of loan expansion,
brought about a renewed and very heavy demand for Federal Reserve credit.
Despite the reluctance of the System to release a large volume of such credit in
response to this demand, its support operations in the Government security
market actually led to a growth in Federal Reserve credit which canceled the
earlier postwar contraction. The March 1951 accord between the Treasury and
the Federal Reserve System eliminated any System obligation to undertake
open market operations to support Government bond prices. Nevertheless, ad
ditional small net purchases of Government securities were made during 1951
and 1952. Throughout the entire postwar period, therefore, the amount of Fed
eral Reserve credit outstanding has substantially exceeded the total volume of
member bank reserve balances.
The increase in currency circulation alone since 1940 has exceeded the total
amount of reserves held by member banks at the beginning of the period by close
to $8 billion, and, in addition, the required reserves of the banks have increased
by over $13 billion, only a limited part of which is attributable to increases in per
centage reserve requirements. Between the end of 1940 and the end of 1952,
there were only relatively small net additions to bank reserve funds from sources
other than Federal Reserve credit, so that the banking system has been depend
ent almost entirely upon expansion of Federal Reserve credit to meet its re
serve needs.
These years have witnessed the greatest period of expansion in the history of
banking in this country. Total loans and investments of all member banks in
creased by $82 billion, and at the end of 1952 were well over three times their
volume at the end of 1940. Gross earnings of the banks increased somewhat less
than proportionately, however, and a considerable part of the increase which
did occur was used to meet increased operating costs and heavier taxation. The
direct benefit to bank stockholders in the form of dividends was limited; but
there was a considerable increase in the value of their equity, as the banks re
tained substantial percentages of net profits to strengthen capital positions.
Despite this plowing back of earnings, as well as some sales of new stock, however,
many banks have had difficulty in increasing their capital funds in proportion to
the growth in their business.
The rate of growth in the earnings (gross and net) of the Federal Reserve
banks was much greater than that of the commercial banks during this decade,
partly because their earning assets increased even more rapidly, partly because
their expenses did not increase proportionately, and partly because the Reserve
banks are not subject to income and profits taxes. As pointed out above, how
ever, circumstances made it appropriate for them to pay the greater part of their
net earnings to the Treasury.
Eepresentative P a tm a n . He goes ahead and discusses the sources
o f these reserves, how they were derived. At first, I know, the
bank put in about a billion and a half dollars, most of it gold, I
believe, at the beginning of the Federal Eeserve. Since that time
the facts indicate that the reserves have accumulated by reason of
the inflow of gold or the purchase of securities by the Federal Eeserve
banks, principally.
What is your comment on that ? Are you surprised that the amount
would be so low, or do you dispute the fact that the amount as stated
is correct, or to what extent is it incorrect ?
Mr. M a r t i n . The inflow of gold is certainly the bank putting it
in, is it not, Mr. Patman?
Eepresentative P a t m a n . In a credit w ay; yes.
Mr. M a r t i n . In an actual way.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1307
Representative P a t m a n . The banks did not themselves mine the
gold and create the gold. They were just the benefiicaries of the
inflow of the g o ld ; is that not correct ?
M r. M a r t in . Y e s ; originally they had gold coin and currency.
Representative P a t m a n . But I am talking about gold that comes
into the country.
Mr. M a r t in . It comes in to a member bank.
Representative P a t m a n . Yes; it does. It is paid for through the
member bank. O f course the Treasury pays for it, I guess, by a
check on the Federal Federal Reserve.
Mr. M ar t in . That is right.
Representative P a t m a n . And the check then is deposited with the
member bank. That is what you call his poured dollars, is it not?
M r. M a r t in . That is what our Reserve System is.
Representative P a t m a n . I am not disputing it. It is what you
call his poured dolars. They get them without cost to themselves,
do they not ?
Mr. M a r t in . They are not getting it free.
Representative P a t m a n . I did not say “ free” ; I said, “ without
cost to them.”
Mr. M a r t in . They have a liability on their books as a result of it.
Representative P a t m a n . Y es; that is right.
Mr. M a r t in . We put it into our statement.
I would be glad to try to go over this with you sometime.
Representative P a t m a n . Fine. I f you would answer it, I should
be very glad to have the answer.
Some of our members could not be here this morning. Would it
be satisfactory with you, Mr. Martin, to return here in 2 hours, at
2:30?
Mr. M a r t in . I will be here at 2 :30.
Representative P a t m a n . Very well, the committee stands recessed
until 2 :30 this afternoon.
(Whereupon, at 12:35 p.m., the committee recessed to reconvene
at 2 :30 the same afternoon.)
after recess
[The Joint Committee reconvened at 2:30 p.m., Senator Paul IT.
Douglas (chairman) presiding.]
The C h a ir m a n . The committee will come to order.
FURTHER STATEMENT OF WILLIAM McCHESNEY MARTIN, CHAIR
MAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
The C h a ir m a n . Mr. Martin, I regret that I was not able to be here
this morning. By one of those strange coincidences, I had three hear
ings going on simultaneously. One committee was on lake diversion,
which is a matter of some importance to my city. Another committee
was dealing with the Housing Act and the question o f whether or not
w^e should try to override the veto of the President. Then there was
this committee also in session.
I was unable to be here. I regret very much that I was unable to
be here. I regret causing you to be back this afternoon. We appreciate
your coming back, however, very much.
1308
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Mr. M a r t i n . I understand perfectly, Senator.
The C h a i r m a n . I have been somewhat distressed at the talk which
has come from high official quarters of the danger of inflation. The
President and his advisers have indulged in such talk. I am not cer
tain that the Secretary of the Treasury has. I know you have made
statements from time to time expressing your fear of inflation and,
indeed, implying that inflation was present and upon us.
I know that this has been referred to with the best of intentions.
I do not want to have you think that I am questioning the purity o f
your intentions. But the effect of all this talk of inflation, of course,
is to send down the value of Government bonds with a resultant in
crease in yield, and, hence, to create a higher interest rate in Govern
ment securities, which is then a justification for higher rates on new
issues.
In addition to this, it helps to promote a change in the market and
sends up the price of stock at the same time that it decreases the mar
ket price of Government bonds.
I f inflation is here, of course, we should face it, because no policy
should be contrary to the facts. I remember, however, that when
Senator Fulbright launched his investigation into stock market prices
some years ago, he was subjected to a very vigorous attack by the then
Secretary of the Treasury, Mr. Humphrey, on the ground that he was
sending down the prices of stocks.
I want to make it clear that I am not making such an attack upon
you. But I do think that the effect of what I personally would
call scare talk has been most unfortunate in sending down the price of
bonds, sending up the interest rates, sending up the price of stocks.
In view of all of this, I wondered if I might not review with you
the recent movement of both the cost of living index and the whole
sale price index, w^hich are found on pages 23 and 21 of the Economic
Indicators for the current month.
I wonder if you or your staff have copies of the Indicators here?
I will ask the members of our staff to have ready the charts relative to
this.
These figures only go to June, but in terms of consumer prices they
show an index of 123.7 for June of 1958, an index of 124.5 for June
1959, an increase of only eight-tenths of 1 percent in a year, and fivetenths o f this occurred in 1 month, May-June 1959.
The explanation of the Bureau of Labor Statistics was that this was
largely seasonal, and would be offset later in the summer. I f you
examine the items where the increases have occurred, you will find
that in the field of medical care, for instance, the increase in that year
has been from 144.2 to 150.6. In the field of personal care, the in
crease has been from 128.6 to 131.1.
In the case of other goods and services, it is from 127.2 to 129.2. In
housing, or perhaps we should say rent, 137.7 to 139.5. In other
words, the increase during this period has been very, very slight, and
such increase as has occurred has been in the field of services rather
than the field of commodities.
I f you turn to page 24 of the Indicators—“ Wholesale Prices”—you
will find that in June 1958, there it had been 119.2 and on July 14,
1959, 119.5. In other words, the wholesale index rose by only 0.3
during this year.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1309
These, I think, are facts that should be kept in the foreground. I
well remember 6 months ago you testified before us that you thought
there was a tremendous amount of latent inflation inside the economic
system, which would probably break out at any moment.
I would like to ask this question: In view of what has happened,
can you really say that there has been inflation during this last year ?
Mr. M a r t in . I do not have any hesitation of saying so, Senator.
Let me try to put it this way, Senator:
I have been coming up here now for about 8 years, and in almost
every appearance that I have made up here, someone has raised the
same point that you are raising. Yet we all know what has happened
to the dollar in that period. These movements are explosive in their
force; and while, thank goodness, there has been no precise movement
against the dollar during this period, we have been working very
strenuously, the Treasury and ourselves, so far as the financial aspects
o f this are concerned, to see to it that the boat is not rocked inflationwise.
The C h a ir m a n . Do you take the credit for the stability o f prices,
then?
M r. M a r t in . I take some o f the credit.
The C h a ir m a n . Then do you think the danger o f inflation has
largely departed ?
Mr. M a r t in . Not the slightest. I think this, Senator: That for
the first time in late 1955 and 1956, as you and I discussed it then, I saw
the expectation of inflation beginning to get ahead o f us. I am not
engaging in scare talk, I am just trying to keep the problem in focus,
and I now find that the elevator boys and too many other people around
the country are more interested in common stocks as the way to riches
than they are in fixed-income investment. I think that is a very
serious and unfortunate national development.
The C h a ir m a n . I think it is, too, and I think one o f the factors
which has made them more interested in common stocks than bonds
has been this talk about the inevitability of inflation, that the danger
has been blown up out of all correspondence to reality, and the result
has been to frighten the American people about bonds as long-term
investments, and, therefore, by talk you have helped create, with the
best will in the world, some of the problems with which you now try
to deal.
M r. M a r t in . Senator, I take a little different point o f view. I have
been sorry that I did not do more talking in 1956 and 1957 than I did.
The C h a ir m a n . We are now talking about 1959.
M r. M a r t in . Unfortunately, as I keep trying to emphasize, infla
tion is a process, a very insidious process, that has been going on since
the war, and once you get people into the frame of mind—to put it
the way the Secretary of the Treasury put it, I thought very aptly,
where it is safe to speculate and not safe to invest, then you are in a
very dangerous situation, indeed. I believe that the trend has been
in that direction.
The C h a ir m a n . There was an upward movement of prices in 1950
and 1951. The Senator from Illinois not only recognized that, but
tried to deal with it.
Not all of my brethren agree with me, but I think some part of
the driving force for the accord of 1951 came from the Senator from
1310
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Illinois. A t that time, the distinguished Chairman of the Federal
Reserve Board was Assistant Secretary of the Treasury, which was
very much—“ which” ; I did not say “ who”—was very much opposed
at the time to the policy of the accord, and which had to be forced
into the accord with a club.
So the Senator from Illinois can claim that he is no summer soldier
or sunshine patriot in this matter. But at the same time he does
not believe in playing up dangers which at the moment are non
existent.
I f you will furthermore look at this chart on the board, you will
find that consumer prices were substantially steady in 1952,1953,1954,
1955, and only began to move up in 1956 and 1957, and in the first part
o f 1958, and since then have been steady.
I think you will further find that the increases which took place in
1956, 1957, the first part of 1958, were primarily in the fields of du
rable goods, where the control of output was in the hands of a rela
tively small number of companies, and where, therefore, price agree
ments between producers were very dominant factors.
I think it would be very hard to maintain the contention that the
increase in prices in these years was due to an expansion in the circu
lating medium greater than the increase in physical products, because
I think all the evidence is to the contrary. We can submit data on
that.
Mr. M a r t in . Senator, I would like to put into the record the figures
that have just been placed in front of me.
In tlie 12 -month period we have had $81/2 billion of inflation in our
gross, national product. I don’t think that is a negligible amount,
$81/2 billion of inflation in the 12 -month period. In the past three
months, the inflation in gross national product, annual rate has been
$ 1 billion a month.
I am referring here to GNP in current dollars from the second
quarter of 1958 to the second quarter of 1959 compared with GNP
in constant dollars as reported in the latest edition of Economic In
dicators.
The C h a ir m a n . During that period you had a revival of business
activity which required more money to float the goods at a constant
price level.
M r. M a r t in . That has all been taken into account in these figures.
The C h a ir m a n . It certainly did not show up in the price index.
Mr. M a r t in . The Consumers’ Price Index has only recently begun
to rise. But we were having some rather interesting price develop
ments in the first half of 1955, for example, when we were having sta
bility in our price index, achieved at that time by a decline in farm
prices with an increase in durable goods prices. That is not the sort of
stability we are looking for.
The C h a ir m a n . Y ou say the inflation has only recently begun to
show up in the field of prices. It is true there was the May to June
increase in the cost-of-living index. However, I think the Bureau of
Labor Statistics says it is primarily seasonal and will largely dis
appear when the food commodities come on the market in the fall.
But if you turn to page 24 of the indicator, you will find the index
o f wholesale prices, which is much more sensitive than the cost-ofliving index, showed 120 for April of this year and 119.3 for July 14
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1311
o f this year, or actually decreased nearly 1 percent in the 3 months.
So there has been that indication.
I think that is shown by the chart on the easel.
Mr. M a r t i n . Other than farm products on this chart on page 24, we
have 125.3, I think, in May of 1958 and 128.2 in the week ended
July 14. There was a decline in farm prices during that period
from 95 to 88.3.
I think that is a significant move that has to be watched. I also
want to caution you again on these statistics that we have to use as
guides; they are not conclusive in themselves.
The C h a ir m a n . I notice they are always quoted when they are in
your favor, but disparaged when against you.
M r. M a r t in . N o ; I try not to do that, Senator.
The C h a ir m a n . My time is virtually up. I wanted to depart
temporarily with you on this note: I f you examine the Consumer Price
Index, you will find that the increases have been entirely, I think one
can say, in the field of services.
M r. M a r t in . L a rg e ly ; that is right.
The C h a ir m a n . Almost entirety. And in building. These admin
istered prices which do not lend themselves readily to the quantity
theory of monetary explanation, these certainly cannot be explained
with the quantity theory of money.
I believe one of your eminent advisers in a candid moment before
another committee of the Senate said ‘that credit control could not
deal effectively with the problem of administered prices. You can
not control hospitals or the American Medical Association, can you,
by rigid credit control ?
Are not these price factors something which come up from the
bottom rather than being controlled from the top ? Do you remember
the old controversy which went on when I was a graduate student
between Prof. Lawrence Laughlin, who was head of the department at
my university at Chicago, and Prof. Irving Fisher at Yale, and at the
time Laughlin was thought to be absurd because he was insisting on
the importance of individual prices and Fisher was insisting merely
on the global totals ?
I thought he was foolish at the time, but with the passage of years,
and the facts brought forth by some of your eminent staff, I have come
to the conclusion that there was a great deal to it, and you cannot
control the cost o f medical services and those other items by credit
control.
I think even in the field of durable goods certainly there are price
agreements. I have no doubt but that there are price agreements in
steel, cement, and other things. You are whistling in the wind,
almost, when you try to control those perfectly by credit controls.
M r. M a r t in . I have always recognized the limitations of credit
controls.
The C h a ir m a n . This is fine. Now we are getting somewhere.
This means that we should seek supplementary sources of price con
trols and not confine ourselves purely to credit controls.
My time is up. I will recognize my general and good friend, the
Senator from Connecticut.
Senator B u s h . Mr. Chairman, I will say to the Governor I am
sorry I was not here this morning because we had a conflict with the
1312
EM PLOYM ENT,
G R O W T H , AND PRICE
LEV ELS
housing hearings. I had to be there along with my good friend from
Illinois.
The C h a ir m a n . We each watched each other.
Senator B u s h . Yes. I had to be there to watch him.
He has said, the chairman has spoken earlier, about the scare talk
having had an effect upon the price of Government bonds. I would
like to observe with regard to that that I do not believe that the scare
talk, which he calls the scare talk, has had any material effect on the
price of Government bonds.
I think what has had the effect have been events that have taken
place which have been noticed by intelligent investors and people who
make opinions and make markets, so to speak, and cause things to
happen. This includes not only the important economists and ob
servers in this country, but also in other countries, and it includes not
only the financial institutions in this country, like the insurance com
panies and the pension funds and the investors of other people’s
money, but it also includes the central banks of the world, who watch
the figures and the developments, and are able to interpret them and
analyze them.
They do not pay too much attention as to what the politicans say
about the situation. I would like to ask you if you agree with that
observation or not.
M r. M ar t in . Yes; I agree with that, Senator. I think scare talk
is never good. But scare talk has not been what has caused the de
cline in Government bonds at the present time.
Senator B u s h . I agree that scare talk is an undesirable thing. But
if we are going to stop the sources of inflation, if we are going to
stop the sources of deterioration of the credit of this Government, we
have to talk about it, unfortunately; we have to talk about the things
that are undermining the credit of the Government, if we are going to
correct them.
The only way you can correct them is by action at the source of the
trouble. I don’t see how it is possible in a Government like ours, in
this kind of a government, for us to avoid talking frankly about our
problems, because otherwise I do not believe we would ever get any
thing done about them.
The political pressures in favor of inflationary measures are at
times so great that I simply don’t believe that we can avoid talking
about them and avoid talking about the possible consequences of them.
So I venture to express the hope, although I do not believe it is needed,
that the Chairman of the Federal Reserve Board and his colleagues,
members of the staff who have made many fine analytical statements
in the last year or so dealing with this whole subject, will continue to
point out the cause of the real trouble, the roots of the evil, so that
the informed opinion, in and out of the Congress, may be able to see
what the real trouble is.
I have no questions, Mr. Chairman.
Mr. M a r t in . May I interject one thing there, Senator?
The C h a ir m a n . O f course.
M r. M a r t in . Just for the record, I have only made one formal talk
outside of my appearances in the Congress on this subject. That was
last December.
The C h a ir m a n . Your appearances here have been quite interesting
in nature.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1313
M r. M a r t in . I made it last December. As I explained to you,
Senator, at the time of our February hearings, when you graciously
permitted me to, I did that after a great deal of soul searching and
with the conviction that it was in the public interest.
The C h a ir m a n . I am sure you thought it was in the public interest.
Congressman Patman ?
Representative P a tm a n . Mr. Martin, I do not want the impression
to get out from these hearings that the whole dispute is over the Reuss
amendment, as fine as the amendment is on the Ways and Means
Committee b ill; that we are not opposed to the 4 ^ percent increase.
I am. I am for his amendment. I would like to vote for the amend
ment and vote against the increase.
Mr. M a r t in . I think I understand your position.
Representative P a t m a n . I feel that if you cannot keep short-term
interest rates down, you certainly will not keep long-term interest
rate down. Whenever you have an administration that started over
6 years ago, determined to raise interest rates, and raise them more
and more and more, and you have a Federal Reserve Board cooperat
ing to the extent that they have not one time raised reserve require
ment, I feel as if they are getting along too well together in what I
consider to be against the people in raising interest rates to a very
high level.
For that reason, when I have an opportunity to vote to stop it, I
am going to vote to stop it. I just feel like the interest rates would
go on up and up, and if we have to pay high interest rates, let’s pay
them on short-term obligations, so we can get rid of them quicker.
I f we take the lid off now, and you issue 6- and 7- and 8-percent
bonds, 30 and 40 years, it is a long time before we would get rid of
them. But if you have to issue 6-, 7-, and 8-percent bonds, let’s do
it for just as short a period of time as possible. That is my feeling
about it.
Considering the Reuss amendment to the Ways and Means Commit
tee bill, I don’t see why you would object to that when you did not
object to the qualification that was put on in the conference report
on the vault cash bill. It occurs to me that that restricts the Federal
Reserve about as much as Mr. Reuss’ amendment would on the Ways
and Means Committee bill.
M r. M a r tin . D o you mean changing from 20 to 22 percent— the
upper limit ?
Representative P a t m a n . N o; I am talking about the qualification
that was put on by the conferees, to the effect that it is not the inten
tion of the Congress, to encourage or cause the Open Market Com
mittee to reduce its holdings of U.S. Government securities.
In other words, we have put a sense of Congress resolution in there,
and I didn’t hear of the Federal Reserve objecting to that.
Mr. M a r t in . I was not familiar with that as a sense of the Congress
amendment, Mr. Patman. Maybe I was asleep at the switch, but I
didn’t so understand it or interpret it.
Representative P a t m a n . Y ou do not understand that the Congress
endorsed the policy of the Federal Reserve transferring any of your
bonds to the private banks, do you, in the passage o f the so-called
vault cash amendment ?
M r. M a r tin . We have never had such a policy. Let me point out
on the reserve requirements------
1314
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Representative P a t m a n . I am not talking about policy. I am talk
ing about doing it separately, collectively, or any other way.
M r. M a r t in . W e ll, I make no bones o f the fact that I would like
to see the banking system, as such, handle the decisions with respect
to advancing credit to customers or not advancing credit to customers.
That is their primary purpose and objective.
I want to see the banks do that in the maximum way consistent
with the growth and development of this country. Therefore, I think
reserve requirements are too high.
Representative P a t m a n . Relate that to your holdings of U.S. Gov
ernment securities.
Mr. M a r t i n . Our holdings of U.S. Government securities are not
maintained for the purpose of making money, or for the purpose of
trying to benefit the Treasury indirectly by those holdings. W e are
making our adjustments in the money market through the holdings
o f Government securities, and we wish that the debt were smaller and
we didn’t have so many of them outstanding.
But we are making those adjustments with respect to the flow of
money, and not with respect to whether it benefits the banks or benefits
the Treasury.
Representative P a t m a n . I thoroughly understand your position o n
it, Mr. Martin, but I think that this morning, when you talked about
working with the American Bankers Association on a bill, I do not
think yon can deny that the American Bankers Association had in
mind getting a bill through Congress that would authorize or permit
or encourage the Federal Reserve authorities to transfer about $15
billion of those bonds that you now hold in the private commercial
banks. You cannot deny that, can you ?
M r . M a r t i n . Well, I don’t know what was in the mind o f the
American Bankers Association in working on the bill. But there
was no-----Representative P a t m a n . It was in writing, Mr. Martin.
M r . M a r t i n . Well, as I said this morning, I did what I could to
stimulate the American Bankers Association to make the study on
reserves. I sincerely believe that the reserve requirement level has,
by and large, been too high for the growth and development of the
country that I foresee. We did not follow the American Bankers A s
sociation recommendations.
Representative P a t m a n . I could not understand why you would.
You had a fine weapon there. Just like if you were an apple knocker,
and you had a long stick, and you could reach the apples at the top
o f the tree, then you would agree to have the stick cut half in two
so you could not knock the apples.
I cannot understand it. You had reserve requirements to where
you could increase those reserves to 26 percent if you needed to, if an
emergency should exist. You agreed to cut that stick off.
Mr. M a r t i n . Mr. Patman, you and I discussed this many times. I
don’t honestly see—I have tried awfully hard to get this point on
raising reserve requirements. Under present conditions, if we raise
reserve requirements, we w^ould just knock the bottom out of the
Government securities market and interest rates would go, in my
judgment, considerably higher than they have been.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1315
I do not see how they could help but go that way. I f banks have
a choice between making a loan to a good customer or selling a Gov
ernment security or another security in their portfolio to meet a re
serve requirement, they are going to take it.
Representative P a t m a n . H ow can you know so much about it when
you haven’t tried it? Every time you have used the weapon that
would increase the interest rates of the bank, every time.
I do not know of a time when there has been conflict of interest
between the public in low interest rates and the banks in high inter
est rates that the Reserve System has not taken the side of the banks.
Mr. M a r t in . Well, let me salute Senator Douglas-----The C h a ir m a n . Don’t start anything between Congressman Pat
man and myself.
Mr. M a r t in . I want to point out— and I am quite serious on this—
that I watched, and I may not have observed correctly, but I watched
when I was Assistant Secretary of the Treasury what increases in re
serve requirements under a pegged market did to the Government
securities market.
They came pouring in at par and 22/32 because we raised reserve
requirements from 18 to 20, from 20 to 22, from 22 to 24 percent, and
the demand for credit was such that ultimately we had to find a device
for placing over $15 billion of those bonds with insurance companies
and others at a more attractive rate.
Representative P a t m a n . Mr. Martin, that is not comparable at all,
in my book.
Mr. M a r t in . Well, it is my experience.
Representative P a t m a n . I still say that every time you sought to
tighten credit you kept on raising interest rates and have not tried
raising reserve requirements, so you cannot be an expert on that.
Mr. M a r t in . Let’s take the recent times.
Representative P a t m a n . 1951 was the last time you raised reserve
requirements.
M r. M a r t in . I am not denying that. But you said reduce interest
rates. I am pointing out that in 1957 we did everything in our power
to ease money properly, judiciously, and effectively.
Representative P a t m a n . It was not very effective.
The C h a ir m a n . Would the gentleman yield?
Representative P a t m a n . Certainly.
The C h a ir m a n . Isn’t it true that in the periods of recession you
have always lowered reserve requirements, and during periods o f re
vival you have always increased interest rates, so that the method
which you chose has always been the most profitable one to the
bankers ?
M r. M a r t in . The only place I question is that we have not in
creased interest price. The demand for credit is such-----The C h a ir m a n . Y ou have no power over interest rates ?
M r. M a r t in . W e have an influence on interest rates, but we cannot
control them, sir.
The C h a ir m a n . Y ou influence them?
Mr. M a r t in . Yes.
The C h a ir m a n . Your influence, then, in periods o f revival have
been thrown on the side of increasing interest rates.
M r. M a r t in . T hat has been the trend.
I have used the-------
1316
EMPLOYMENT, GROWTH, AND PRICE LEVELS
The C h a ir m a n . I f the influence has been thrown on the side o f
increasing interest rates and your influence operates, then you have
increased interest rates indirectly.
Mr. M a r t in . We have permitted the forces of the market to oper
ate ; we have not obstructed the forces of the market.
The C h a ir m a n . Y ou merely reflect the market?
M r. M a r t in . In large degree that is true.
The C h a ir m a n . I always thought that the Federal Reserve claimed
as one of its influences, the effect 011 interest rates. Now I learn you
don’t have any effect.
Mr. M a r t in . The Federal Reserve is certainly not all-powerful.
The C h a ir m a n . I don’t say you are all-powerful. I simply ask if
you are somewhat powerful.
M r. M a r t in . W e have some influence.
The C h a ir m a n . And some influence on interest rates ?
Mr. M a r t in . Yes.
The C h a ir m a n . So in periods of revival, you help to raise interest
rates ?
Mr. M a r t in . W e try not to obstruct.
The C h a ir m a n . Doesn’t the record show that in all periods of re
vival you have influenced interest rates ? Haven’t you raised the re
discount rate ?
M r. M a r t in . Yes.
The C h a ir m a n . And this has had an effect on the general interest
rates. Then in periods of recession, what you do is lower the reserve
ratios. I have time and again put into the record the history o f the
reserve ratios. I think the record abundantly bears me out. I will
do it again if necessary at this time.
I will ask that it be included at this point in the record, to point out
that whenever there is a recession, you lower the reserve ratio, so in
one case you increase the multiplier and the other case you increase
the multiplicand
The result is always greater so far as bank earnings are concerned
than it otherwise would be.
1317
EMPLOYMENT, GROWTH, AND PRICE LEVELS
(The information referred to follow s:)
M em ber "bank reserve requirem ents
[Percent of deposits!
Tim e deposits
Net demand deposits 1
Effective date of change
Central
re erve
city
banks
1917—June 21________________________________
1935— ' ug. 16_______________________________
1937— M ar. 1_____ ___________________________
M ay 1 ________________________________
1938— Apr. 16________________________________
1941— N ov. 1 ___________________ _____ _______
1942— Aug. 2 0 ______________________________
Sept. 1 4 _____ __________ ____________
Oct. 3 . ___________ _______ _________
1948— Feb. 2 7 ______________________________
June 11
___________ _____ ______
Sept. 16, 24 2__________________________
1949— M ay 1 ,5 2 __________________________
June 30, July 1 2____________
__ _ _
Aug. 1, 11 2 _________________________ Aug. 16, 18 2 - _ - ________ ________
/ ug. 2 5 ________________ ______________
Sept. 1 .
- __ __ _______________
1951— Jan. 11, 16 2________________ _________ _
Jan. 25, Feb. 1 2 ______________ ______
1953— July 1, 9 2 __________________________
1954— June 16, 24 2
_______________________
July 29, ' ug. I 2 __
___________
1958— Feb. 27, M ar. 1 2_____________________
M ar. 20, Apr. 1 2______ _______________
/ pr. 1 7 ______________________________
Apr. 24 _
_________________________
I n effect July 1 1959
Pre ent legal requirements:
Minim u 11 . _______ ___ _ ____________
M axim um ______________________________
__
13
19M
22%
26
22 %
26
24
22
20
22
24
26
24
Re-erve
city
banks
Country
banks
Central
reserve
and
re erve
city
banks
3
10
15
17H
20
173^
20
7
\m
12&
14
12
14
22
21
20
19M
19
18M
18
19
20
19
16
15
14
13
12
18
17H
17
12
lin
11
18
18
16K
16H
11
5
5
13
26
10
20
7
14
3
6
3
23Yt
23
22M
22
23
24
22
21
20
19H
19
13
14
13
3
414
5H
6
5
6
Country
bankg
m
4H
5H
6
5
6
VA
7
7
6
5
6
5
6
6
5
5
18^2
6
i Demand deposits subject to reerve requirements which, beginning Aug. 23, 1935, have been total
demand deposits minus cash ite ns in process of collection and de land balances due fro n domestic banks
(also minus war loan and series E bond accounts during the period Apr. 13, 1943, to June 30, 1947).
2 1st-of-month or midmonth dates are changes at country banks, and other dates (usually Thursday)
are at central re erve or re erve city banks.
Source: Federal Reserve Bulletin, July 1959.
Mr. M a r t i n . That has been true from the period of about 1958 to
date, where the gold inflow and outflow has not been of a nature to
cause reserve requirements to have the uses to which they were put
earlier. I don’t know that we may have a return of that. I f we had
a heavy inflow of gold at the present time, I wouldn’t hesitate to raise
reserve requirements quickly.
The C h a ir m a n . In other words, there is some other reason.
Mr. M a r t i n . That is our problem. The difficulty is to take periods
and project a continuation over any lengthy period of time of condi
tions.
The C h a ir m a n . I think the record goes back to 1953, with the com
ing of the new administration into power, and not merely 1956.
Representative P a t m a n . They reduced it with the coming of the
new administration and have never raised it.
1318
EMPLOYMENT, GROWTH, AND PRICE LEVELS
The C h a ir m a n . That is what I am saying. The record goes back
to 1953.
M r. M a r t in . It goes back to 1951, for that.
Representative P a t m a n . Have you completed ?
The C h a ir m a n , Yes; I have; and I apologize to Congressman Pat
man.
Representative P a t m a n . Y ou mentioned this morning how helpless
the Secretary of the Treasury is, going to the money market hat in
hand. He would be very helpless indeed were it not for the fact that he
has another agency of Government right there with him, the Federal
Reserve, which has money-creating power and the power to manage
and control monetary matters, and could help the Secretary of the
Treasury if the Federal Reserve only wanted to.
I have studied the operations of the different central banks of the
world. I don’t know too much about them, just a smattering knowl
edge of them, but I don’t know of a single country where they have
a central bank where that central bank does not come to the aid and
rescue of its parent, the Government. I don’t know of a single one
except the United States of America. I don’t think it is a very happy
situation for the Federal Reserve to sit idly by and permit interest
rates to go clear out of sight, which are so burdensome, extortionist
interest rates on the people, and permit the Secretary of the Treasury
to be so helpless and futile in his efforts to get money by passing the
hat.
I just can’t understand our great Federal Reserve System.
You refuse to support the (government bond market at 2y2 percent.
You refuse to support it at 3 percent. Maybe you had good reasons
for it and maybe you were wrong, and the rest of us were wrong.
You refused to support it at Sy2 percent. You refused to support it
at 4 percent. Now you refuse to support it at 4*4 percent.
When are you going to support it? W ill you support it at 5 per
cent? W ill you support it at 6 percent? W ill you support it at 7
percent ?
M r. M a r t in . I hope that we will never support it and that the
Treasury of the United States will never be so weak that it has to rely
on the central bank to justify its existence.
Representative P atm an . N o w you justify your existence. Here
you are serving the Congress. I assume you still recognize that. You
know, one time Mr. Walcott and you were talking about it.
Mr. M a r t in . I would prefer to use trustee rather than servant; but
I will not object to being called a servant.
Representative P a t m a n . Then you were saying you were a servant,
and we discussed it on that basis, and we finally agreed upon the
principle of agent. But regardless of that, you are subservient to the
Congress, and you should carry out its will, and yet you are against
this “ sense of Congress” resolution.
Another thing I cannot understand is why you, as an agent of
Congress, or using any phrase or any definition you want of your
subservience to the Congress— which you concede—go to the Executive
and try to get the Executive to go against your master, the Congress.
That is on the 4*4-percent amendment.
Mr. M a r t in . Mr. Patman, I have no influence over the Executive.
I have very little influence over anybody.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1319
Representative P a tm a n . Y o u recommended to him and he accepted
it, didn’t you ?
Mr. M a r t i n . I made no different statement to the President than
I made to the Ways and Means Committee and that I made to you,
that as a trustee for the Nation’s finances—under a trust indenture
given by the Congress—I want to discharge my duty to the best of my
ability.
Representative P a tm a n . So far as the money is concerned, Mr.
Martin, I asked you about these reserves. I think people are willing
for banks to expand their reserves under the Reserve System. I am
strong for it. Whether it is 7 to 1 like it is, across the board, or
whether it is 10 to 1 in certain banks, or 20 to 1 on time deposits.
But if I am correct about the reserves and the member banks, we are
not only permitting an expansion of 10 to 1 and 20 to 1, but we are
permitting an expansion of $100 to $1.
Here is what I base that on: Starting with the Federal Reserve
System when the member banks put in their gold and their money,
and the way I have arrived at that amount, the banks have only put
in a billion and a half dollars and they have withdrawn most of that.
But we will suppose they have it in there. The rest of that has
been obtained through the inflow of gold and through the purchase
o f U.S. Government securities. That $16 billion that is listed now
as reserves of member banks was not paid in by the banks at all. It
is by reason of reduction of requirements in some cases—of course,
that didn’t increase the amount—the inflow of gold at the purchase of
U.S. Government securities by the Federal Reserve banks.
I f the commercial banks only have a billion and a half dollars in
vested and they have much less than that, they have already made
loans and investments equal to $150 billion. So that is $100 to $1.
I am awaiting your reply to my letter, Mr. Martin, and the question
that I asked you to deny what I have just said. I think you will
verify that.
Mr. M a r t i n . Mr. Patman, as I said to you this morning, we will
take another look at your letter, and I will try to segregate these items
out. I am not able at the moment to follow your reasoning on it.
The C h a ir m a n . Congressman Reuss.
Representative R eu ss. Mr. Chairman, I would like to talk a little
bit about elevator boys. I noticed in your colloquy with the chairman
you said that you thought that one of the troubles with the U.S.
securities market was that elevator boys have gone into the stock
market. I have not myself conducted any depth studies or motiva
tion researches concerning elevator boys, though I do know quite
a few.
I commend this to you for study, seriously: I suspect that ele
vator boys, who have gone into the stock market a good deal recently,
have not done so at the expense of the U.S. securities market. I sug
gest that they have not really held U.S. securities in any large
amounts.
I suspect they have gone into the stock market because it is boiling,
and it looks like a chance to make an attractive short-term capital
gain. I suggest that the real decimation among the holders of U.S.
securities has been among much more conventional and stolid holders,
the financial intermediaries, savings and loan associations, pension
1320
EMPLOYMENT, GROWTH, AND PRICE LEVELS
trusts, mutual savings banks, and so on, and that it really will not do
to say that the trouble with the U.S. securities market is that specu
lators, through fear of inflation, have gone off into the stock market.
I suggest that a lot of the newcomers to the stock market are people
who weren’t holders of U.S. securities at all; furthermore, that a lot
o f the former holders of U.S. securities, particularly the intermedi
aries, are still in fixed income securities, indicating that they are not
afraid of inflation.
But somehow or other they are afraid of something that is wrong
with the U.S. securities market. One of the things, I think, that is
present in their minds, is that there are such crashing losses to be
taken in a U.S. security that you buy in June, let us say, at $100, and
before your eyes it dwindles down to a market value of around 90 in
j ust a very few months.
This, at least, is my reading of part of it. I know you will study
that view.
M r. M artin . Let me exonerate the elevator boys. I was just using
that as a term.
Representative R euss . We all know and admire many fine elevator
boys, and they, as well as everybody else, have entered the stock
market.
Let me refer you, Mr. Chairman, to page 40 of your annual report,
released on July 24, 1959. That describes the bills-only policy, and
t here, on page 40, it says:
Operations for the system account in the open market, other than repurchase
agreements, shall be confined to short-term securities.
It then goes on to say that that was the unanimous formulation of the
Open Market Committee, with the exception of one man, Mr. Hayes,
the Vice Chairman.
I might say if I had been on the Open Market Committee, there
would have been two.
Mr. Hayes stated, so it says, that he would vote to approve the state
ment if the qualifying phrase, “ As a general rule” were inserted after
the word “ shall.”
However, poor Mr. Hayes was not successful, and the qualification
was not permitted.
Now I find to my delight that Hayes has triumphed, apparently,
because in this morning’s statement to us, in speaking of the bills only
policy, you say, Mr. Chairman:
The practice or technique—
o f bills only—
was adopted not as an iron rule but as a general procedure for the conduct of
current operations.
I hope that is right. I hope that this does indicate a departure from
the iron quality of the existing rule. I hope it represents a future
intention, as of today, of the Federal Reserve to treat these matters
on their own merits and to see whether in a particular case, it can best
carry out its function by purchasing bills, notes, certificates, or bonds,
whichever is most appropriate.
That is precisely what the sense-of-Congress resolution expresses
the hope that you will do.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1321
Without asking you to comment unless you want to, I will let the
record speak for itself. It does seem to me that Mr. Hayes’ position,
which I think was wholesome as of March 4,1958, has now prevailed.
I do not ask you to comment, but you may, if you wish.
Mr. M a r t in . I will be glad to say this: What we try to do is reflect
accurately in these reports the discussion. Sometimes it is a difficult
thing to do. The matter of words in connection with this was dis
cussed at great length in the Open Market Committee, and the con
census was against Mr. Hayes as to the value of making the change
that he wished to make.
But there was no disagreement in the Committee that it was not
an ironclad rule that would never be departed from. It was a question
of whether the wording would be changed in his way—in the way
that he was suggesting would be more effective in enunciating that
principle.
Representative R euss . Let the commentators take a look at the
language of the Open Market Committee and the language of what
you said this morning, and see what the words mean.
M r. M a r t in . W e will be very glad to.
Representative R euss . Am I right in my impression, Mr. Chairman,
that this week the Federal Reserve acquired some $2.6 billion of long
term—that is, 4 years, 8 months—U.S. Treasury securities?
Mr. M a r t in . In the course of an exchange, that is correct. We held
over $8 billion of these, and we put around $5.5 billion of them into
the 1-year securities and $2.6 billion into the 4-year-9-month securities.
Representative R euss . Y ou had $8 billion o f short terms and in
your trade you came out with some short terms but with $2.6 billion
o f long terms, 4 years, 8 months?
M r. M a r t in . Yes. A short time ago we did that in splitting up
another issue. I don’t remember exactly what date it was.
Representative R euss . Did the world come to an end when you did
that ?
M r. M a r t in . Not the slightest.
Representative R euss . N o flight o f gold from this country?
M r. M a r t in . I haven’t seen any yet.
Representative R euss . N o flipping of lids by international money
authorities in New Delhi or Hong Kong?
M r. M a r t in . I haven’t seen any.
Representative R euss . I am sure there wasn’t, because it seems to
me a perfectly sensible thing. Again, just what Congress in its
modest, diffident hat-in-hand way is asking you to consider. There
fore, I suggest to you that on this bills-only matter, when you get right
down to it, when you take what you did last week, when we let your
deeds speak, and when we let your words speak as they spoke this
morning, really you shouldn’t set so much store about a bills-only
policy, because it turns out that upon occasion you depart from it.
Mr. M a r t in . Well, Mr. Reuss, that is the point we have been trying
to make right along. We have never set such store by the bills-only
policy. It is not an end-all. On your amendment, we have set con
siderable store about being able to use reserve requirements in the
flexible way which we would be precluded from doing under your
resolution, and we have also set a good bit of store by the fact that
the context in which this has been presented is one that implies
38563—69— pt. 6A—— 16
1322
EMPLOYMENT, GROWTH, AND PRICE LEVELS
criticism of the Federal Reserve—that the Federal Reserve brought
on the predicament that we are in, by virtue of our actions. I don’t
think that is justified or correct.
The so-called bills-only policy is a technical procedural matter.
W e have Open Market meetings every 3 weeks, and any member of the
Committee can raise it at any time for review or in connection with
the Treasury issue. I cleared with the Open Market Committee with
respect to this aprticular issue you are talking about, and they gave
unanimous consent to it.
Representative R euss . You will admit that $2.6 billion of long
term bonds is a lot of bonds for a bills-only buyer to buy ?
M r. M ar t in . Well, let us try to get this straight. For one thing,
we said short-term securities. We never said short bills only.
Representative R euss . I s a 4-year 8-month security a short-term
security ?
M r. M a r t in . Well, I would call that a relatively short-term secu
rity. What do you think of in terms of short-term securities, 60and 90-day bills ?
Representative R euss . I think 4-year 8-month is at least an inter
mediate term security. After it is a little older than that, it gets
to be a long-term security. But if you are going to define everything
as short-term securities, which might be one way out of this, then
you and I have it made.
M r. M ar t in . We have said preferably short-term securities. The
wording which you read was quite correct in our report. We said
short-term securities, excepting disorderly conditions.
Representative R euss . But there was nothing disorderly last week
when you bought $2.6 billion.
M r. M artin . This was in the exchange operation.
Representative R euss . I know, but you acquired them.
Mr. M a r t in . Certainly we acquired them for the purpose of even
ing out the maturity distribution. That was exactly the reason we
did it for, for the maturity distribution. But we were not actually
purchasing them in the market, which is an altogether different
thing.
Representative R euss . I wish you would explain the difference,
monetarily speaking, between acquiring $2.6 billion of 4-year 8-month
securities in the open market, and acquiring them, de novo, from the
Treasury.
In either case you have $2.6 billion.
Mr. M a r t in . We end up with $2.6 billion. But there is quite a
difference when we hold securities and exchange them. There is quite
a difference, even, when we have bills and they run off, although the
monetary achievements may be the same. And there is a difference
when you actually go into the market and solicit bids and offers.
There is that distinction, and that is an important distinction to us.
Representative R euss . From what you just said, I gather, then,
that your objection to the so-called Reuss amendment is not with re
spect to the idea of no doctrinaire adherence to a bills-only policy—
such as some people have said you have been following, but I am
delighted to hear you have not been—but that your objection is to
the advice that you should proceed by purchasing U.S. securities,
rather than by further lowering bank reserve requirements.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1323
M r. M a r t in . I think that gets to the purpose of the Federal Re
serve Act as I read it today. Whether you say purchasing U.S. se
curities of varying maturities, I think as far as my approach to this
is concerned that the proper way to do that, which we discussed this
morning, would be to change the Federal Reserve Act, and spell it
out. I would hope that you wouldn’t do it, because I think wTe need
all the latitude we can get. As I indicated this morning, however,
Congress has the power; I have no question whatever about that.
Representative R euss . I see my time is up, Mr. Chairman.
The C h a ir m a n . Congressman Curtis.
Representative C u rtis . I have just one comment.
O f course, the context in which the Reuss amendment must be taken
is in reference to a definition on long-term and short-term securities
because the ceiling is only on securities 5 years and over. Is that not
correct ?
Mr. M a r t in . That is correct.
Representative C u rtis . And for that reason, most people have been
referring to securities below 5 years as short term and those above 5
years as long term.
The gentleman from Wisconsin is familiar with that. For that
reason, he was in error in referring to the 4 years 8 months as a long
term security.
Representative R euss . I f you will yield for a half minute, perhaps
we can straighten this out now.
I f I was in error, I want to be the first to admit it.
Is it the definition o f the Federal Reserve System that short-term
securities, as used by the bills-only policy and as solemnly set forward
on page 40 of the annual report, refers to securities of 10 years or
less, 8 years or less ? When does a short term become an intermediate
term?
Mr. M a r t in . Let us not have any misunderstanding on this.
Mostly we talk about short-term securities, and we are talking about
1 year or less. This 4% is an exception on that basis. But the point
Mr. Curtis is making is that the interest ceiling applies to 5 years and
longer.
Representative R euss . But that has nothing to do with the point of
whether you violated your bills-only philosophy by buying the longer
terms.
M r. M a r t in . I will agree with that.
Representative C urtis . The point I was making is that the Reuss
amendment is in context with a bill that has to do with securities of
5 years and over, where there is a ceiling, and the ceiling does not
apply to securities below 5 years. Because of that context, I think
it tends to create an erroneous impression to refer to something under
5 years as a long-term security, simply because of another context.
I think Mr. Martin has now fully clarified the definition. Maybe we
need a third term of intermediate.
Representative R euss . Again, we will have to await the publica
tion of the printed record to see whether it is clarified. It certainly is
not as far as I am concerned. I don’t know whether the bills-only
policy applies to securities of 2, 3, 4, 5 years, or whether it doesn’t.
Representative C urtis . I f I may say, the gentleman-----Mr. M a r t in . I wish I could get you, Mr. Reuss, to refer to it as
short-term securities instead of bills only.
1324
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Eepresentative R euss . How do you define a short-term security?
M r. M a r t in . I said, generally speaking, a year or less.
Representative R euss . What about when we aren’t generally speak
ing? Is it anything over that? Can you have a short term of more
than a year ? Words must mean something.
Mr. M a r t in . Supposing we didn’t have anything in our portfolio.
The next shortest would be 18 months, let us say.
Representative R euss . I would say get together the Open Market
Committee and amend the short-term securities policy forthwith.
M r. M a r t in . Since we meet every 3 weeks, I think we can readily
decide what to do.
Representative C urtis . I f I may take some of my time back, I would
like to point out that Mr. Reuss has been referring to two different
things, and he switches. One is, of course, the bills only policy, and
in that relation. I suggest that probably short term and long term
mean one thing.
But the second thing he has been addressing his remarks to has
been the bill before the ways and means which has to do w^ith the
moving of interest rates on securities beyond 5 years.
In that context, short-term and long-term securities have a d if
ferent meaning. It has usually been the breaking point of what the
interest ceiling applies to and what it doesn’t. I have tried to inter
pose to clarify that.
The C h a ir m a n . The questioning by Congressman Reuss has not
been deducted from your time, Mr. Curtis.
Representative C u rtis . No, I had the opportunity to question this
morning.
The C h a ir m a n . Mr. Coffin.
Representative C o ffin . Mr. Martin, I winder if this year, in the
circumstances in which we find ourselves with the practice of the
Fed coming in and buying 90-day paper, you are not making rather
a problem for the Treasury—that is, constantly in the fix of trying
to replenish this very short-term paper.
I am wondering if over the next months or the next year it would
not be w^ise— and this does not get into the debate on bills only— if
it would not be wise to have the Fed buy some issues that are of 12
months’ duration or 18, or 24 months; at least not as a permanent
thing but to ease this situation during this fairly critical time.
Mr. M a r t in . It might be desirable, but the real problem at the
moment is that we probably should be selling securities, not buying.
We are not worried at the moment with too easy a situation as such.
You see, we have to try to look at this thing in terms—well, I am
not forecasting policy now. We have a great many factors, the steel
strike and other things now, and stabilization in the economy. W e
just do not know.
But the Treasury has been adding, of course, to the supply of bills
inordinately recently. In the last week, we had $19 billion of new
Treasury issues; $5 billion of cash and $14 billion refunding, and $5
billion of the total went into bills.
Representative C o ffin . I am just wondering about the concentra
tion on the bills, whether there has to be a choice between raising the
interest rate on your bonds on the one hand, or continuing as you
are at the present time and for the past substantial period o f time,
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1325
or whether there is not a middle course where you could be of great
assistance to the Treasury by operating in the market with these 12or 18-month issues.
M r. M a r t in . I f it were consistent with policy we certainly would
not hesitate to do that. B ut the point I am trying to make is that,
at the moment, it is not my problem.
Representative C o ffin . T o change the subject a little bit, has the
Federal Reserve made any studies on the impact of interest rates on
various sectors of the economy?
I
would want to know before voting for an increase in interest rates
what sectors would be affected as opposed to what sectors would be
affected by a tax increase. In either case it is taking money out of
people.
Have you made any studies to indicate what the impact will be?
Mr. M a r t in . W e have been engaged in a very extensive study of
small business the first parts of which we presented to the Banking
and Currency Committees and Small Business Committees, and we
are now presently gathering material on the last scheduled part of it.
W e hope it will be ready before too long. It won’t be ready for the
next 2 months.
Representative
tainly.
C o ff in .
That would be one important area, cer
Mr. M a r t in . Our thinking so far has been that the impact of inter
est rates, increase in interest rates, generally falls on the marginal
side, whether he is a small man, medium-sized man, or little man.
Representative C o ff in . Y ou say small, medium sized, or little?
Mr. M a r t in . Large; I am sorry. I misspoke myself.
I meant large instead o f little.
Representative C o ffin . I did not know there were any big marginal
people. I thought you were quite correct when you said small,
medium, and little.
M r. M a r t in . I think there are some large enterprises that have
marginal activities.
I f it is a question o f getting financed, they may be forced to defer it
as interest rates tighten up.
Representative C o ff in . What about impact on State and local
governments? Do you have studies on that? Or would that be in
the context o f the studies you say you are now engaged in ?
Mr. M a r t in . W e have been doing a lot of work on that. I pointed
out earlier this morning that one o f the sustaining things in my
judgment in the 1958 recovery was the fact that a great many State
and municipal securities that had been deferred because o f the higher
levels of interest rates in 1957, came in the market with a vengeance in
January, February, and March of 1958, which was one of the largest
extensions o f that type o f credit in history. I think it was a very
important sustaining force in laying the groundwork for the present
upward swing for which we are all grateful and appreciative.
Representative C o ffin . H ow broad would this study be, of the im
pact o f interest rates on the sectors o f the economy ?
Would there be other fields than small business?
Mr. M a r t in . I will ask M r. Young, the head o f our division o f
research, to reply to that question.
1326
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Mr. Y oung . This is a very difficult kind of study. W e are always
engaged in trying to determine from what information there is avail
able and to develop new information that will throw some light on
the different sectors and the degree to which they are affected.
I
do not believe that any really definitive information will ever be
developed that we can have available from time to time. Small pieces
o f information that would seem to add up can help in getting in
sight into the difficult problem of just what the effect of these credit
developments may be.
Representative C o ffin . W e can raise interest rates and it does not
have such public clamor. Although there is plenty o f that, it would
not have half the clamor of a tax increase. And yet it is the exaction
o f money from many sectors.
Mr. Y oung . That is right.
Representative C o ffin . I would hope that we would have a fair
amount of at least generalized information available when we come
to face this.
M r. M a r t in . W e want to get it. O f course, with increases in in
terest rates, where increased interest is a profit to the saver as well
as a cost to the borrower, there is an impact on the economy you
would never get from a tax increase.
Representative C o ffin . It is useful though to see who they are.
M r. M a r t in . Exactly.
Representative C o ffin . It is not purely economical ?
M r. M a r t in . That is right.
Representative C o ffin . I have just one other question, Mr. Martin,
in the field o f your testimony that has not been touched as yet.
That is the part that is not directly addressed to monetary theory*
but the last part of your statement where you indicated that you
had revised the index of growth and had found that we were 10 points
higher than we thought we were.
Does this mean that our production over these past 2 years has been
better than we thought ?
Mr. M a r t in . Yes, that is right. I will ask Mr. Young to comment
on the index because he has worked on it.
Mr. Y oung . O f course, the revision at the higher level comes about
by our being unable, on the basis of the information that was earlier
available, to take into account all the gains that were in fact there.
Representative C o ffin . Yes, but this changes our whole figures on
the product.
Mr. Y oung . That is right.
Representative C offin . Does it also change the conclusions we
have hitherto reached regarding the productivity increase ?
^Mr. Y oung . This will have some considerable impact on our mo
tions of productivity gains over the period.
Representative C o ffin . So the productivity over the past 10 years
will appear somewhat better than hitherto ?
Mr. Y oung . That is correct.
The C h a ir m a n . W ill you yield?
Representative C o ffin . Yes.
The C h a ir m a n . May I ask if this increase in productivity is due
to an improvement in your basic data, or to a change in your weight
ing system?
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1327
Mr. Y oung . It is due in part to a change in the weighting system
because we are now able to include electric power as fuel.
The C h a ir m a n . Is there involved in this the question of values as of
an end year which gave a higher weighting to the commodities which
have increased most ?
Mr. Y oung . W e are using in this particular index revision the re
sults of the Census o f Manufactures o f 1954 which we were not able
to use earlier. It does give a somewhat different weighting.
The C h a ir m a n . This is a technical problem. It has been some years
since I have worked on index numbers.
You change your index numbers either by getting more accurate
data on series already included or by getting new commodities which
previously had not been covered or by changing the weighting system
as to the relative importance given to the ingredient items.
What I am trying to find out is, if the Congressman will permit this,
whether this increase is due in part, and, if so, what part, to the change
in the weighting system ?
Mr. Y oung . It would be due in a small part to the change in the
weighting system. On the old weighting system, a revised index would
have come out even higher than Chairman Martin stated.
The C h a ir m a n . W ill you get a qualitative estimate as to the three
types of change ?
Mr. Y oung . We will. W e will provide a complete description of
our procedures in, I think, either the September or October issue of
the Federal Reserve Bulletin.
The C h a ir m a n . O f course, the changes in the total index affected
by changes in the weighting system are much more conjectural in
nature than changes resulting from the first two factors.
Mr. Y oung . Senator, in connection with this particular revision I
would like to say here that we had an unusual opportunity to test
alternative weighting systems in this instance because we had this
entirely on an electronic computer and it was possible to check all
conceivable weighting systems that were applicable.
The C h a ir m a n . W e shall await with interest your results.
Mr. Y oung . And I should like to add that we consulted with a group
o f outside experts in making our final choice on the weighting system.
The C h a ir m a n . I apologize, Congressman, for taking your time.
It will not be charged to you.
Representative C o ffin . W ith this new revision, these figures are not
quite comparable to figures for prior decades because you added elec
trical energy for one item; is that correct?
Mr. Y oung . When we revise the index it is true that for a period
o f time there will be a gap between what we can show for this most
recent decade and what we have for earlier decades.
But as soon as we are able to carry the undertaking backward we
will get that accomplished, too. It is a matter of considerable effort;
it will take quite a bit of time.
Representative C o ffin . I yield back my time, Mr. Chairman.
The C h a ir m a n . I think you have more time. I took out some time.
Representative C o ff in . It is all right. I have exhausted myself.
The C h a ir m a n . Mr. Martin, I regret I was not here this morning,
but I have read some of your letters and statements.
1323
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Do I understand that it is your contention that if the Federal Re
serve carries out open market operations that this will increase mem
ber bank reserves?
M r. M a r t in . Y ou mean if we purchase securities? Yes, indeed.
The C h a ir m a n . Yes, I thought it was obvious. And that this will
lead to member banks loaning more money, more credit, except pos
sibly in a period of depression? That is to say if member bank re
serves increase, they will take advantage of their increased lending
capacity and lend more credit to borrowers.
Mr. M a r t in . When there is a demand for credit; yes, sir.
The C h a ir m a n . With existing reserve requirements at the ratio of
6 or 6% times the increase in their reserves; is that not right?
M r. M a r t in . That is correct.
The C h a ir m a n . Do I understand you to say that when the Fed
eral Reserve carries out open market operations such as is advocated
in the Reuss resolution, that this is inflationary ?
Mr. M a r t in . Under present conditions, Senator, in the context in
which we are operating, I felt—I know that Mr. Reuss is perfectly
sincere in believing-----The C h a ir m a n . We are all sincere. It is a question of accuracy;
that is all. W e are just as sincere as Mr. Reuss. I hope I am just
as sincere as you are. So let us sweep that off the boards. The
question is whether the Reuss resolution is inflationary. I think you
said it is.
M r. M a r t in . In my judgment it is. In my judgment it will not
help the Treasury and it is inflationary.
The C h a ir m a n . It is inflationary ?
Mr. M a r t in . In the present context.
The C h a ir m a n . I seem to be interrupting, but I always think you
have finished your sentence.
I note that in a letter to Congressman Simpson you termed the
Reuss resolution as one that would involve printing press money.
M r. M a r t in . That is not quite correct. I said that stripped o f
all its technicalities, whether it was permissive or mandatory it would
make many thoughtful people, both in this country and abroad, think
that this country did not have the will to manage its affairs without
resorting to the printing press.
The C h a ir m a n . Then I take it that what you are saying is that
since open market operations increase member bank reserves and per
mit member banks to lend more credit, which this will do, that this
is inflationary.
Now, may I ask why is it any more inflationary than lowering the
percentage o f reserves which the member banks must maintain?
In the first case you increase the reserves o f the member banks so
that with the same percentage reserves they can loan more money.
In the other case you lower the percentages so that with the same
reserves, in absolute terms, they can lend more credit.
In each case they, not the Government, lend more credit.
Now, why is it inflationary to increase the lending capacity of
banks through open market operations, but not inflationary to in
crease the lending capacity of banks by lowering reserve ratios ?
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1329'
Now, this astonished me, Mr. Martin, coming from so able a man
as you, who is surrounded by such eminent authorities on money,
credit, and interest rates.
M r. M a r t in . Senator, I can only answer that by saying that both
will have the same end result.
The C h a ir m a n . I do not think the reporter caught that, Mr.
Martin.
Mr. M a r t in . I said both will have the same end result, Senator.
The C h a ir m a n . It will increase lending by member banks ?
M r. M a r t in . In terms of reserves.
Now, under present conditions our problem is not increasing the
reserves any more than a reasonable amount, so far as the flow o f
money is concerned, to sustain and improve the business situation.
Anything beyond that, any use of the credit mechanism to create a
lack of savings by bank financed operations, will be inflationary.
Now, in the context in which we are operating I have heard nobody
advocating that our policy is too easy. They are all alleging that our
policy is too tight.
The C h a ir m a n . N o w , you are addressing yourself, if I may say so,
to the quantity o f bank credit to be issued rather than to the method
by which the increase is to take place.
Assume, and I think you have said this yourself, assume the bank
credit should expand at the rate of 3 percent a year, what difference
does it make so far as the effect on the prices are concerned whether
this is caused by open market operations, increasing the absolute
quantity o f member bank reserves, or by lowering reserve ratios,
permitting the banks to credit more credit on the same absolute terms
o f reserves?
In each case you can get your 3-percent increase. I do not see that
one is more inflationary than the other.
I am at a loss to understand how you would denounce open market
operations as a means of expanding bank credit and at the same time
reserve your accolade for the lowering of reserve requirements.
M r. M a r t in . I do not denounce that means, Senator.
The C h a ir m a n . I thought you were. You called that printing
press money.
M r. M a r t in . No.
Representative C urtis . Let us be fair as to what the gentleman
said. Let him say it and not you say it.
The C h a ir m a n . My memory may be faulty, but I think in your
letter to Congressman Simpson-----Representative C urtis . Read the whole thing.
The C h airm an (reading) :
* * * cause many thoughtful people both at home and abroad to question the
will of our Government to manage its financial affairs without recourse to the
printing press.
Are you one of the thoughtful people who think that the use of
open market operations would lead to the adoption of printing press
money, the issuance of printing press money, or are these thoughtful
people other than yourself ?
Mr. M a r t in . Let me put it this w ay: the atmosphere in which we
are operating is such that we are not in any context of producing
easier money, and let me address myself to that 3-percent figure.
1330
. EMPLOYMENT, GROWTH, AND PRICE LEVELS
Perhaps it has never been wise to use that, because you are one of
the foremost exponents of velocity as well as quantity in making up
the measurement of the money supply.
I merely am trying to point out that so far as the reserves which
we are putting into the market today, they must not be put in the
context of increasing reserves beyond what is essential to a steady flow
o f money in the stream.
The C h a ir m a n . There is a rollcall going on. I have to leave. In
conclusion I will merely say this:
I do not think there is the slightest bit of difference between these
two methods so far as increasing the lending capacity of the banks is
concerned. The question is how^ much you want to increase.
That is another point, and as one who believes in the quantity
theory of money I do not want to see it rapidly outrun the index of
the real national product, but there is this vital difference, however:
When you lower the reserve ratios the banks are able to create this
credit without any cost to themselves and without any income to the
Government.
But when you use open market operations the Government gets
approximately one-sixth of the amount of credit thus credited and
makes added earnings. It has 110 disadvantage, but it makes for
added earnings to the Government.
Now I have tables here, some compiled by my staff, some compiled
by the staff of the committee. I will submit for the record simply the
one which we compiled which shows that if instead of the policy of
lowering reserve ratios, which the Board under your leadership has
followed since 1953, that expansion of credit had been created by open
market operations, the net increase of revenue to the Government,
i.e., 90 percent of the net profits to the Federal Reserve, in this period
would have amounted to $442,200,000 at the bond rate.
(The material referred to follows:)
Member bank earning assets— Potential expansion arising from reductions in reserve requirements, July 1, 1953, to June SO, 1959
Contemporary
average interest
rate
Reduction in requirements in-
Date
Estimated added payment U.S.
Treasury
assuming
equivalent
open market purchase and transfer
to Treasury of 90 percent of net in
lieu of franchise tax
Per annum at—
Coun
try
Central Reserve
Time
Reserve
cities
Country deposits
cities
Time
de
posits
P ercent P ercent P ercent Percent M illions
14
13
1954.
June 16, 24 1 ________
July 29, Aug. 1 1_____
21
20
18
12
1958
Feb. 27, M ar. 1 1______
M ar. 30, Apr. 1 1______
Apr. 17__________ _____
Apr 24
19*6
19
1 8^
18
17*£
17
11H
11
T o ta l_____________
Bill
rate
Bond
rate
Bill
rate
Bond
rate
M illions M illion s M illions M illion s P ercent Percent M illions M illion s M illion s M illions M illions M illions
}
$500
$345
$311
520
350
310
125
125
130
}
130 J
195
190
180
175
1, 530
$375
r
190
1, 270
976
1 First-of-month or m idmonth dates are changes at country banks, and other dates
(usually Thursday), are the central Reserve or Reserve city banks.
375
$1,156
2.10
3. 25
$24.3
$37.6
$21.9
$33.8
$131.4
$202.8
1, 555
.65
2. 70
10.1
42.0
9.1
37.8
45.5
189.0
500
490
450
1. 35
1.13
1.13
1.13
4,151
3. 25
3.12
3.12 [
3.12 )
6 8
16.3
6.1
14.7
8.2
19.6
10.6
29.3
9.5
26.4
11.1
30.8
51.8
125.2
46.6
112.7
196.2
442.2
Source: Based upon data from Federal Eeserve bulletins and announcements,
1331
Bond
rate
6
5
16H
Bill
rate
LEVELS
20
19
Long
term
bonds
PRICE
24
22
Bills
AND
In effect prior to July
1953_______ _______
1953, July 1, 9 i . .......... -
Total
GROWTH,
Central Reserve
Reserve cities
cities
Cumulative to
June 30, 1959, at—
EMPLOYMENT,
Reserve requirements as percent
of deposits in—
Interest per an
num on open
market purchase
of amount equiv
alent to Reserve
reduction at—
1332
EMPLOYMENT, GROWTH, AND PRICE LEVELS
The C h a ir m a n . That would have enabled the Government to have
bought bonds during that time, reduced its borrowings and, therefore,
improved the financial position.
There are other tables which we have which would indicate that
if we were to change our policy in the future, that then after the
10th year we would be saving around $85 million a year and that this
would distinctly ease our financial condition and help us very much.
Now $85 million to the Chairman of the Federal Reserve Board may
not be very much, but to the Senator from Illinois it is a great deal.
Now having shot this question at you, I will go out the door.
Represenative P a t m a n . Mr. Curtis, are you next ?
Representative C urtis . Yes; I am. I do not know how we will
handle this last testimony of the Senator from Illinois as a witness.
I would have loved to interrogate him.
I think it is unfortunate the Senator did not read the full statement,
the full paragraph. While he did read accurately, the part he just
read was one incomplete sentence.
As I understand, one of the problems which you saw in the Reuss
amendment was that having already proceeded on the theory, when
ever possible, of due regard to maintaining the stability o f the dollar,
and without reference to any other method of maintaining reserve
ratios and in context with the criticism, and political criticism I might
state, of the Federal Reserve Board, this amendment could easily cre
ate this kind o f thinking among people.
Am I right?
Mr. M a r t in . Y ou are absolutely correct.
Representative C urtis . I want to bring this thing in context. I do
regret that this committee should be going along this line. There is a
lot of value which can be obtained from an intelligent discussion o f
this issue. It is a serious one and a very important one to be dis
cussed.
But it started out politically, I regret to say, on the floor of the
House.
The problem was before the Senate, too, several months ago. It
has been hammered at every day to create the impression that the high
interest rate is the result of this administration and the result o f the
Federal Reserve, with relation to the Federal Reserve to create the im
pression it is not an independent agency and that it is all part of one
administrative policy, when, as a matter of fact, there are two separate
groups of men who have made this decision; one group, the adminis
tration, and the second group, yourself and your associates on the
Federal Reserve Board.
It is entirely different impression than trying to create the idea
that it is one policy rather than two groups.
In the light of the way this committee is going, I would hate to
suggest it, but I think maybe we have exhausted the meat that can
be gotten out of it and we are just going to get further and further
into a political discussion rather than economic.
I think we should adjourn.
Representative P a t m a n . Senator Douglas will be back. He had
to answer a rollcall.
Representative C urtis . I appreciate that.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1333
It is 5 minutes of 4. In the light of the manner in which he was
interrogating the witness, I am going to have to insist that a quorum
is not present because I will not leave here and leave the witness to
Senator Douglas.
Representative P a t m a n . What if we recess for 15 minutes ? How
will that do ?
Representative C urtis . I think I will make a motion that the
quorum is not present.
Representative P a t m a n . I wTish you would not do that in considera
tion of Senator Douglas.
Representative C urtis . I must come to the conclusion that he would
extend that kind of thing. I cannot be here and I do not know who
on the minority side can.
Representative P a t m a n . In 15 minutes you would have time to come
back.
Representative C urtis . I am afraid I would not regret it.
Representative P a t m a n . W e will just have to sit here and try to
get a quorum.
Representative C urtis . A ll right.
I am going to move that a quorum is not present.
Representative P a t m a n . A ll in favor of adjourning say “ Aye” .
All opposed, “ No” .
The motion is lost.
Representative C urtis . There is no quorum present.
Representative P a t m a n . With the understanding that if the chair
man wants Mr. Martin back, we will adjourn subject to the call of the
Chair. W e will meet tomorrow in the Supreme Court Chamber at
10 o’clock.
(Thereupon, at 4 p.m., the committee recessed, to reconvene at 10
p.m., Tuesday, July 28,1959.)
EMPLOYMENT, GROWTH, AND PRICE LEVELS
TUESDAY, JULY 28, 1959
Congress o f t h e U n ite d S ta te s ,
J o int E conomic C o m m ittee ,
Washing ton, D.C .
The committee met at 10 a.m., pursuant to recess, in room P-63,
the Capitol, Hon. Paul H. Douglas (chairman) presiding.
Present: Senators Douglas, Bush, and Javits; Representatives Pat
man and Coffin.
The C h a ir m a n . This morning the committee will hear from rep
resentatives of the life insurance industry. I understand that Mr.
Conklin will present the formal paper for the industry. He is ac
companied by Mr. Badger, of the New England Mutual L ife Insur
ance C o.; Mr. Patrick, of the Bankers Life of Des Moines— I recog
nize a middle westerner; Mr. Paynter, of New York L ife; and Mr.
O’Leary, director of economic research for the Life Insurance Asso
ciation of America.
Gentlemen, we are very glad indeed to welcome you. W ill you
proceed in your own way.
STATEMENT OF GEORGE T. CONKLIN, JR., VICE PRESIDENT (FI
NANCE), THE GUARDIAN LIFE INSURANCE CO. OF AMERICA,
NEW YORK; ACCOMPANIED BY SHERWIN C. BADGER, FINANCIAL
VICE PRESIDENT, NEW ENGLAND MUTUAL LIFE INSURANCE CO.,
BOSTON; ROBERT B. PATRICK, VICE PRESIDENT, BANKERS LIFE
CO. OF DES MOINES ; RICHARD K. PAYNTER, JR., EXECUTIVE VICE
PRESIDENT, NEW YORK LIFE INSURANCE CO.; JAMES J. O’LEARY,
DIRECTOR OF ECONOMIC RESEARCH, LIFE INSURANCE ASSOCIA
TION OF AMERICA, NEW YORK
Mr. C o n k l in . Thank you, Mr. Chairman and members of the
committee.
The C h a ir m a n . I notice you have a very formidable statement of
some 50 pages. I wonder if you would be willing to summarize that
and in perhaps 20 minutes, but with the understanding that the full
statement will be printed in the record at this point.
Mr. C o n k l in . Yes, Senator, that was our plan.
1335
1336
EMPLOYMENT, GROWTH, AND PRICE LEVELS
(The statement referred to follow s:)
T e s t i m o n y o f G eorge T . C o n k l i n , J r ., V ic e P r e s id e n t ( F i n a n c e ) , t h e G u a r d i a n
L if e I n s u r a n c e C o . of A m e r i c a , N e w Y o r k C i t y , J u l y 28, 1959
(Accompanied by Sherwin C. Badger, financial vice president, New England
Mutual Life Insurance Co., Boston; James J. O’Leary, director of economic re
search, Life Insurance Association of America, New York City; Robert B.
Patrick, vice president, Bankers Life Co., Des Moines; and Richard K. Paynter,
Jr., chairman of the finance committee and executive vice president, New York
Life Insurance Co., New York City)
I am George T. Conklin, Jr., vice president (finance), the Guardian Life In
surance Co. of America, New York City. Accompanying me are Sherwin C.
Badger, financial vice president, New England Mutual Life Insurance Co., Bos
ton ; James J. O Leary, director of economic research, Life Insurance Associa
tion of America, New York City; Robert B. Patrick, vice president, Bankers Life
Co., Des Moines; and Richard K. Paynter, chairman of the finance committee
and executive vice president, New York Life Insurance Co., New York City. We
are glad to have the opportunity to take part in these important hearings on the
Government’s management of its monetary, fiscal, and debt operations. We have
prepared a detailed statement which I would like to submit to be a part of the
record. With your permission, I shall proceed by reading a summary of the
statement, and then my associates will join me in discussing any questions the
committee may want to raise.
It is our understanding that the general objective of the hearings is to explore
the effects of monetary, fiscal, and Federal debt management policies upon em
ployment, economic growth, and price levels. Senator Douglas’ letter inviting us
to testify further indicated that the committee “hoped to elicit suggestions of
ways in which the Government’s debt management operation and the Federal
Reserve System’s monetary operations could be improved and make a contribu
tion to employment, economic growth, and stable price levels.” It was also sug
gested that the committee would be interested in how the policies of ease or
restraint by the monetary authorities affect the portfolio policies and other
operations of savings institutions, particularly life insurance companies.
It is readily apparent that the scope of the committee's investigation is
very broad and comprehensive. In order to hold this statement within reasonable
limits, the focus has been placed on questions of Federal financing and manage
ment of the Federal debt. It is within this focus that we have also considered
monetary and fiscal policy questions. The prepared statement is by necessity
somewhat selective. It is our hope that the committee’s questions will bring out
issues not covered adequately in the statement.
TH E OBJECTIVES OF ECONOMIC POLICY
Before entering into a discussion of Federal financing and debt management,
it would be helpful to consider first the objectives of Government economic
policy. In announcing these hearings, Senator Douglas stated:
“I believe that there is general agreement on two propositions: (1) that we
should aim, as a nation, at the simultaneous achievement of maximum employ
ment, an adequate rate of growth, and a stable level of prices; and (2) that the
Government’s most potent general tools to help bring about the simultaneous
achievement of these three objectives are the practices it follows in the manage
ment of its monetary, fiscal, and debt operations.”
Senator Douglas’ statement suggests that these objectives are mutually compat
ible and are on an equal plane in importance. That is certainly our conviction.
There are, however, a number of influential economists who argue that these
objectives are not mutually compatible. Specifically, the basic question which
they raise is whether we can, as a country, maintain full employment and vigorous
economic growth without inevitably experiencing a further upward push of the
cost of living. The argument is frequently made that the primary economic
goals of this country under conditions of “cold war” must be full employment and
vigorous growth, and that pursuit of these objectives will necessarily involve a
further rise of the general price level. It is held that under full employment
conditions the strong collective-bargaining strength of powerful organized labor
groups will inexorably produce the wage-cost push as wages are driven up faster
than labor productivity increases, with the result a rising general price level.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1337
The argument continues that the general price rise could be prevented if the
monetary and fiscal authorities of the country would act determinedly to restrain
spending by consumers, business, and the Government. This they could do by
Federal Reserve restriction of the quantity of money and by Federal budget sur
pluses. That is, the argument holds, the monetary and fiscal authorities have
it within their power to prevent or curb a general price rise, but they can do so
only by precipitating a sufficiently high degree of unemployment of labor to
take the steam out of the wage-cost push. Such a degree of unemployment, it is
further contended by these economists, sometimes termed “creeping inflation
ists,” seriously conflicts with the basic objective of vigorous economic growth.
So, it is contended, we must as a nation choose between full employment and
maximum growth, on the one hand, accompanied by creeping inflation, or on the
other hand, general price stability but at the same time excessive unemployment
and less than maximum economic growth. The choice we make, it is held,
must be full employment and vigorous growth, even if it does mean a chronic
decline in the value of the dollar. After all, the argument runs, inflation is not
so terribly bad— most Americans really like it. Through various “escalators”
we have learned more and more to adjust to a decline in the value of the dollar.
Moreover, it is argued, there is no reason to believe that creeping inflation will
have to break into a gallop— our great national output assures that inflation will
remain at a creeping pace. Thus, the argument is that general price stability
is incompatible with full employment and vigorous economic growth, and that we
should recognize that a gradual rise in the general price level is an inevitable
accompaniment of growth.
I have outlined the general argument of the “creeping inflationists” in order
to contrast our own views. We believe that full employment, sustainable eco
nomic growth, and general price stability are vitally interdependent in the longer
run, and that they must be pursued as a while if we are to preserve our free
economic society. This is because a national policy of inflation— even creeping
inflation— would have destructive consequences for economic growth and eco
nomic and political democracy. Many of these consequences are already much
too apparent as the result of the inflation we have already experienced since the
end of the war. What are these consequences ?
First, a continued decline in the value of the dollar is bound to injure and
eventually destroy the will of the American people to save voluntarily and
thereby to finance economic growth. Under our economic system the growth
process springs from the willingness of the people to save some of their income
and the investment of these savings in factories, mines, business concerns, homes,
public works, and other capital goods. Saving is also the basic source of working
capital, so important for the growth of business and industry. Who would
have the desire to save under conditions in which the general price level is ex
pected to move upward as a way of life? Who would find it attractive to invest in
fixed-income obligations such as corporate bonds or mortgages under such condi
tions? If inflation should become generally anticipated as being inevitable, people
would be driven to spending a higher proportion of their curent income before it
deteriorated in value. Moreover, under the expectation of inflation— creeping or
otherwise— people would have the incentive not only to stop saving but also to
incur debt more freely in order to accelerate their spending, for inflation robs
creditors to the advantage of debtors.
If continuing inflation should become a way of life, everyone would redouble
his efforts to hedge and protect against it. Escalation clauses in labor contracts
designed to keep wages in stride with the increasing cost of living would spread
throughout the economy. Through other measures such as increased common
stock and real estate purchases, variable annuities, purchasing power bonds, and
in countless other ways the American people and business would seek to ride along
with rising prices. Regardless of how much escalation did occur, some elements
of our society would be unprotected and would suffer because their incomes would
be comparatively fixed. However, to whatever extent a stimulating effect of a
rising general price level comes from the fact that some elements of society
are able to benefit at the expense of others, the stimulus will be weakened as
inflation becomes a way of life and means are found by many to ride along with
it. Under these circumstances, it is highly likely that bigger doses of inflation
would be resorted to in order to produce a stimulating effect. This is one of the
important reasons why “creeping inflation” is bound to break out into “galloping
inflation” as the public becomes more and more impressed by the need to guard
against a continuing rise of the general price level. The history of almost every
38563— 59i—pt. 6A------ 17
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EMPLOYMENT, GROWTH, AND PRICE LEVELS
inflation the world has experienced is that it started out as a modest creeping
inflation but, as it proceeded, it sooner or later moved at an accelerating pace into
galloping inflation. There is no reason that we can see why creeping inflation
would not follow the same course in the United States.
A second important consequence of a continuing rise in the general price level
lies in the difficulties encountered in Federal financing. As the general public’s
expectation of inflation grows, investors are bound to become less and less willing
to purchase Government bonds because of the flxed-income nature of such securi
ties. The difficulties become especially great when market interest rates rise
above the statutory rate on long-term Government bonds, now fixed at 4*4
percent. Under these circumstances investors shift to the purchase of bonds or
mortgages bearing higher interest rates— or they shift even more into equity
investments of all types. Thus, the Government is compelled to rely upon
short-term financing, much of which finds its way into the commercial banks,
which create new money in purchasing it. The short-term Government securities
which do not lodge in the banks become highly liquid assets in the hands of
corporations and thus render the task of the monetary authorities more difficult
in influencing the volume of spending in the economy. With corporate liquidity
high, it takes more time for a restrictive Federal Reserve credit policy to have a
restraining effect. Moreover, the frequent Treasury trips to the market to
refinance short-term debt seriously hamper wise and effective control of the
money supply by the Federal Reserve authorities. In addition, a persistent
rise of the general price level makes the sale of U.S. savings bonds more difficult
and tends to accentuate the redemptions of outstanding bonds. This is a highly
important problem because there are over $38 billion of E bonds outstanding
at the present time, payable on demand by the U.S. Treasury.
Continued Federal deficits do much to promote inflation and the expectation of
more inflation. There is little wonder, then, why most thoughtful students
of fiscal policy think it is urgent that the Federal budget be brought under control.
A third consequence of inflation is that it breeds a multiplicity of Govern
ment controls and ultimately places serious curbs on our free market economy.
For example, inflation is likely to lead to more and more direct controls over
the free capital market. As noted earlier, rising interest rates are an inevitable
market phenomenon under inflationary conditions because of the heavy de
mands for capital funds relative to supply. Congressional reactions we have
already experienced indicate that a further interest rate rise would soon be
met by legislative efforts to hold down the rise of rates through direct Gov
ernment lending and Government purchases of mortgages and State and local
bonds. Since interest rates are the prices of borrowed funds, if the free move
ment of interest rates is restricted by Government, the result would not only
be policies which would accentuate inflation but also the spread of a network
of direct Government controls over where capital funds can be employed and on
what terms.
Moreover, continuing inflationary measures would ultimately lead to the spread
of direct Government controls over wholesale and retail prices. As we learned
so well during World War II, these controls are not effective in stopping infla
tion because of the breakout of “black market” transactions. This is why,
as we go the route of direct Government controls, they are bound to multiply
and become more pervasive. Under these circumstances could the freedom
of labor to bargain collectively remain intact? It seems inevitable that wages
would be brought under control, and this would ultimately restrict the freedom
of the worker to select his own job.
America must remain strong to protect herself and her allies against the
threat of Soviet tyranny. This means that we must maintain high employment
of our resources and vigorous economic growth. But, we must find the way
to do this within the limits of general price stability, for continued inflation
would undermine the willingness of our people to save, which is the source of
growth. It would also destroy the very system of political and economic
democracy which we are so anxious to preserve.
FEDERAL FIN A N C IN G AND
DEBT M AN AG EM EN T POLICIES
Developments in the past year in the Government securities market, and
in the national economy as a whole, indicate the desirability of a reexamination
of the U.S. Treasury’s financing and debt management policies. The heavy
cash financing and refunding operations which must be undertaken in the
months ahead made such a reexamination particularly timely.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1339
Our discussion of this subject is divided into two main sections. The first
considers the Treasury’s financing and debt management policies in the perspec
tive of postwar developments in the capital market and the national economy
as a whole. The second section considers a number of specific questions re
garding Federal financing and debt management as follows : (1) What should be
the basic considerations behind Federal debt management policy? Is the objec
tive of lengthening the average maturity of the Federal debt so important that
the Treasury should take advantage of every opportunity to sell longer term
bonds even in periods of general economic recession? (2) What maturity dis
tribution of the marketable Federal debt should the Treasury work toward?
(3) What can be done to restore the market for long-term marketable Govern
ment bonds? (4) Should the Treasury undertake a program of advance re
funding? (5) Are there any new or improved market techniques which the
Treasury should adopt to expand or improve the market for Government
bonds? (6) Are there any measures that can be taken to improve the net sales
of savings bonds? (7) Should the Treasury issue a new type of “purchasing
power bond” in which the amount paid to the holder at maturity is tied to the
index of consumers’ prices ?
t h e t r e a s u r y ’ s f i n a n c i n g a n d d ebt m a n a g e m e n t p o l ic ie s
IN PERSPECTIVE
The problems of Treasury financing and public debt management can only be
studied profitably against the background of conditions in the capital market
and the economy as a whole. Competing demands for loanable funds have a
profund effect on Treasury policies, so that it is important to analyze the trends
in these competing demands. Likewise, trends in the flow of long-term capital
funds also must be viewed in perspective, as well as the trends in public policy
in important areas such as housing, residential mortgage lending, and foreign
aid and investment.
During the postwar period, with comparatively moderate interruptions, our
national economy has functioned at capacity or close to capacity, and we have
achieved a commendable growth in national output. Measured in current prices
(i.e., without correcting for price changes), gross national product increased
from $211 billion in 1946 to $438 billion in 1958, a rise of 108 percent. Expressed
in 1958 dollars, however, GNP rose from $312 billion in 1946 to $438 billion in
1958, for a real increase in output of 40 percent. Associated with this growth
was a most unfortunate rise of over 48 percent in prices. The inflation which
has occurred is a highly important force affecting Treasury financing today.
Analysis of the capital markets in the period 1946-58 confirms the above
figures. During most years in this period the demand for capital funds from
both private and public users has been so great as to outrun the supply of sav
ings. As a natural outgrowth of pent-up desires during the war, as well as other
forces such as population growth and technological changes, the postwar demand
for capital funds to expand and modernize industry, to build homes, to construct
schools, highways, and other public works, and for other capital improvements,
has been so enormous as to press sorely against the relatively limited supply of
savings. In addition to the purely domestic demand for long-term funds, there
has been a heavy draft on the capital market to finance both public and private
commitments abroad. Repeated Federal deficits have contributed much to the
demand for funds.
The excess of demand for capital funds over the supply of savings has per
sisted despite the fact that during 1947-58 the total of capital funds available
from savings sources rose from $16.9 to $28.7 billion, as shown in table 1. This
increase in the dollar amount of savings was to a limited extent the product
of the growth of national income in real terms, but it was also largely the
product of the inflated price level and the inflated money incomes of the period.
Inflation does raise the level of money incomes and thus produces a greater aggre
gate of money savings, but not real savings. However, as noted earlier, con
tinued inflation is bound to weaken the urge to save and thus the rate of saving
by our people. Moreover, as figures presented subsequently demonstrate, in
flation raises the demand for capital funds much more than it does the total
dollar amount of saving.
As the demand for capital funds exceeded the supply of savings in many of
the postwar years, the gap was filled by an increase in the supply of money
resulting from an expansion of commercial bank credit. The pressure of this
expanded money supply in the capital goods fields, with its subsequent ramifica
tions throughout the rest of the economy, contributed to inflationary pressures
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EMPLOYMENT, GROWTH, AND PRICE LEVELS
and provided a climate favorable to the wage-price spiral. Excess demand for
goods using this money and the wage-price push teamed to ratchet up prices.
The demand for capital funds has been great in the field of residential con
struction. Chart 1 and table 2 show the large and rising use of capital funds
in residential mortgage financing during 1947-58, as well as the use of funds in
farm and commercial mortgage financing. A major portion of capital funds
throughout the postwar has been employed in residential mortgage financing.
It should be noted that the data employed here measure the net increase in out
standing mortgages. There is little doubt that the large output of housing in
the postwar period, and the heavy demand it has placed upon the supply of
capital funds, has been to a large extent a direct outgrowth of Government
policy— namely the promotion of very low downpayment (often no downpay
ment), long amortization loans insured or guaranteed by the Federal Govern
ment. The availability of this type of financing has made possible an effective
demand for housing by a large proportion of our families. From a social view
point, it is gratifying that good housing is now available to such a large per
centage of our families. Further progress is needed. But, if our national econ
omy is to grow soundly, housing and other capital improvements here and those
we are paying for abroad must be fitted within the limits of our voluntary
savings.
At periods in which private sources of capital funds have not been plentiful
enough, at rigidly fixed interest rates, to meet congressional desires for FHA
and VA mortgage financing, the supply has artficially been expanded through
purchases of such mortgages by the Federal National Mortgage Association and
direct Government lending. Too often this money for FNMA purchases and
direct Government lending has resulted from an expansion of commercial bank
deposits and the money supply. It has thus had an inflationary impact in the
residential construction field and consequently in the economy as a whole. It
is significant that during the period from 1946 to 1958, the Boeckh index of
residential dwelling unit construction costs rose 73 percent, whereas the BLS
wholesale commodity price index rose 51 percent and the index of consumer
prices 48 percent. The reason why FNMA purchases have been inflationary
is that FNMA debentures have usually found their way into commercial banks;
also, too often the funds financing direct lending by the Veterans’ Administra
tion have been raised by the Treasury by means of security sales to the com
mercial banks. Usually an expansion of direct Government loans and FNMA
purchases has conflicted with Federal Reserve efforts to restrain inflationary
forces.
Throughout this period, as the Federal Government has become more and
more active in the housing and mortgage field, individual investors and financial
institutions have come to accept the Government-insured and guaranteed mort
gage as a desirable and comparatively attractive outlet for their funds. This
has been doubly true because Government policy has endeavored to encourage
investment in these mortgages. Indeed, the readiness with which Congress has
been willing to expand direct Government lending and FNMA purchases has
placed pressure on investors to make mortgage loans in order to avoid having
Government replace private capital in the residential mortgage field. Of par
ticular significance for the Treasury in its financing efforts is the fact that the
net yield to investors (after all costs) on FHA and VA mortgages has con
sistently been appreciably higher than the yield on long-term Government bonds.
For example, at the present time FHA and VA mortgages at the maximum 5*4
percent rate can be readily purchased at a price of 96 or lower to produce about
a 534 percent gross yield assuming a 12-year average life of the mortgage. The
net yield on such mortgages to a life insurance company after servicing and home
office costs would be over 5 percent. The current yield on Government bonds
with comparable maturity is about 4% percent. The fact is that in spite of
the higher net yield on FHA and VA mortgages as compared with Government
securities, the supply of funds from private investors for investment in Govern
ment-insured and guaranteed mortgages has been decreasing somewhat in recent
months because of a better net rate of return after costs to be earned on cor
porate bonds and conventional mortgages. At frequent intervals in the past
several years, the supply of Government-insured and guaranteed mortgage funds
from private investors has declined sharly because the rate of return on them
did not keep pace with other interest yields availabe to investors.
It is apparent, therefore, that FHA and VA mortgages (not to mention con
ventional mortgages and corporate bonds) present stiff competition to the Gov
ernment bond market. This has consistently been true throughout the postwar
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1341
period. Through its program of residential mortgage insurance and guarantee
the Federal Government has brought into being an investment instrument which
is considered to have little more risk than a Government bond but which pays a
markedly higher net rate of return. Steadily rising quoted real estate values in
the inflation have fortified the belief of little risk in an FHA or VA mortgage.
It it little wonder, then, that many investors have substituted FHA and VA
mortgages in their portfolios for Government bonds. During the period 194658, for example, the net increase in life insurance company holdings of VA
and FHA mortgages amounted to $13.5 billion, or over 21 percent of the total
net increase in assets during this period. Even more strikingly, the net in
crease of mutual savings banks’ holdings of VA and FHA mortgages in the
period amounted to $13.5 billion, or 65 percent of their net increase of $20.8
billion in total assets.
The above discussion has been in terms of the huge demand for Government
insured and guaranteed mortgage loans and the competition such mortgages
offer to Government bonds. The difficult competitive position of the latter is
quite clear. In addition, there have been federally guaranteed ship loans and
bond issues of various Federal agencies such as the Home Loan Bank System
which compete with the U.S. Treasury for funds. But, it should also be kept
in mind that throughout the postwar period there has been a consistently large
demand for “conventional” or uninsured mortgage loans, both residential and
commercial and industrial. These are included in chart 1. Generally speaking,
the net yield on the conventional loans, even after allowing for somewhat greater
risk of loss, is higher than the net yield on FHA and VA mortgages. Moreover,
as noted below, the net yield on high-grade corporate securities directly placed
with institutional investors has consistently been within the same range as the
yield on conventional mortgages.
The postwar capital market has also witnessed a very large and growing
demand for funds by business and industry. Chart 2 and table 3 depict the uses
of capital funds in corporate financing, 1947-58. The figures again show the
net increase in corporate securities outstanding each year. It should be kept
in mind that the figures on corporate financing do not include funds from retained
earnings. They measure just the funds obtained through the capital market.
Neither did the figures on residential mortgage financing take account of equity
payments in the financing of housing.
From the standpoint of the Treasury’s ability to compete with heavy corporate
demands upon the capital market, it should be noted that the 52-percent corpo
rate income tax rate has reduced the effectiveness of an interest rate increase as
a deterrent to corporate borrowing. Since interest cost is a deductible expense
in business taxation, the effect of a rise in borrowing costs to a business concern
in the higher tax brackets is cut in half. Moreover, it is also important to keep
in mind that double taxation of corporate earnings has militated against financ
ing through the sale of stock and has thus contributed to a greater proportion
of bond financing. The combined effect of the above-mentioned factors and the
heavy demand for capital funds by business and industry has made it difficult
for the Treasury to bid successfully for long-term funds. This has been
especially true in that, after a decade of very few business and industrial
failures, many investors have come to regard corporate bonds practically as
riskless as Government securities. The result is that the risk element in the
yield “spread” between corporate bonds and Government bonds has narrowed
in the postwar period. Figures were given earlier to illustrate how hard it
is for the Treasury, within the range of interest rates it has offered to date,
to compete with yields on FHA and YA mortgages. There are no readily avail
able data showing average yields on high-grade corporate bonds directly placed
with investors or the net yield on conventional mortgages. However, because
of the competitive forces which govern the flow of life insurance funds into
investment, it is certain that the net yield on direct placements and conventional
mortgages at the present time exceeds the rate on FHA and VA mortgages because,
as noted earlier, the flow of life company funds into these mortgages is slackening
in favor of direct placements of corporate bonds and conventional mortgages.
In recent years the rate on high-grade corporate bonds directly placed has con
sistently been greatly in excess of the rate on long-term Governments. Or put
another way, the spread between the yield on long-term Governments and the
yield available on high-grade direct placements has been too large to persuade
investors to purchase Governments.
Chart 3 and table 4 show the combined uses of capital funds in mortgage and
corporate financing in 1947-58. Chart 4 and table 5 show the net use of funds in
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EMPLOYMENT, GROWTH, AND PRICE LEVELS
Federal financing and the steady rise in State and local government financing
as a user of capital funds. In this latter instance, the tax-exempt feature has
made it possible for State and local government borrowing to compete on very
favorable terms with the U.S. Government. Indeed, the tax-exempt feature
has enabled State and local securities to capture a large part of the savings
of individuals. As indicated in chart 4 and table 5, the Federal Government
was a net user of capital funds in the market in 7 of the 12 years, 1947-58, with
the total amount borrowed equal to $36.4 billion. This demand has been a key
factor in the capital markets throughout most of the period.
In addition to the huge demands for capital funds for residential mortgage
financing, corporate financing, and State and local government financing in the
postwar period, and the appreciably higher return to investors in these outlets,
there is one other very important force which has probably acted to place the
U.S. Treasury at a disadvantage in its efforts to sell long-term bonds. That is
the inflationary psychology which has developed in the minds of many Ameri
cans. This is particularly evident today, but it has been growing for some time.
A manifestation of this psychology has been the rise of the stock market in the
past several months. The deep roots of this inflationary psychology are demon
strated by the fact that it persisted in the face of a business recession last year.
It is undoubtedly bred of despair about the inability to get Federal spending
under control. Contributing also is a belief in the inevitability of the wageprice spiral due to the great bargaining strength of organized labor, as well as the
strong political support for measures to maintain full employment.
The inflationary psychology is, of course, to be deplored. The purpose in
discussing it here is to point out that its existence has an important effect on the
capital markets, and hence on Treasury financing, especially the sale of long
bonds. As noted earlier, with more and more people accepting the inevitability
of inflation, investors have become increasingly hopeful that they can find a way
to hedge against it through investment in equities. This is particularly true
of individuals who should provide a substantial market for Government secu
rities. The decline in the value of the dollar, and the expectation of further
inflation, militates against the sale of fixed-income securities. Investors who
continue to buy bonds and mortgages recognize that a higher level of interest
rates is needed, not only to compensate for the use of the funds, but also to
take account of the fact that the dollars paid back may well have a reduced pur
chasing power. Thus, as pointed out earlier, an inflation premium becomes part
of the interest rate. Accordingly, it seems certain that if the inflation psy
chology persists, long-term interest rates are likely to shift to a higher level.
The movement of interest rates since last spring probably is explainable in these
terms to some extent. Thus inflation itself and the investor psychology it
nurtures make more difficult the sale of long-term Treasury bonds.
In summary, during the postwar period the ability of the U.S. Treasury to sell
long-term bonds has been reduced sharply and the problem of maintaining a
balanced maturity distribution has become more and more difficult. This is
primarily because of the huge competing demands for capital funds in the
private sectors of the economy and for State and local financing which too often
have exceeded the total supply of savings. These competing demands, encour
aged and even stimulated by Government housing and tax policies, have outbid
the U.S. Treasury in obtaining the available funds. The inflation engendered
by an expansion of the supply of money to supplement savings, along with the
wage-price spiral, has itself made it more difficult to sell long-term Treasury
bonds.
This review of the Treasury financing and debt management in the perspec
tive of the capital market and the national economy as a whole in the postwar
period suggests that the following basic steps must be taken if the market for
Government bonds is to be broadened:
(1)
The Federal Government and the Congress must together concentrate
vigorously with all fiscal, monetary, and other appropriate policies to bring an
end to inflation and to destroy the psychology of inflation. Sound Government
financing requires that in periods of high prosperity the Federal Government
should run a budgetary surplus and should retire some of the debt. This is a
principle which has been too easily overlooked in the postwar period, as is shown
in chart 4. Failure to implement this principle has made the Treasury financing
and debt management problems much more difficult. In fact, it is hard to see how
debt management problems can be solved unless Federal budgetary policy is con
ducted on a sound basis.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1343
The Employment Act of 1946 should be amended to make it clear that general
price level stability is a goal of equal importance with full employment and
economic growth. Moreover, Government must cease temporizing with the wageprice spiral. The difficulties involved here are not to be minimized, but in
flation is man made and can be brought under control by intelligent and deter
mined action. The cooperation of private elements in the economy is, of
course, essential, but leadership must come from the Government and Congress.
(2) Foremost in the fight against inflation, we need better understanding of
the fact that the only source of genuine growth in our national economy is real
investment and the requisite saving to finance it. As a country we have been
attempting to grow faster than our national saving justifies. Too often we
have resorted to the creation of money to finance the growth beyond what we
have been able to finance through savings. We have learned the painful lesson
that capital expenditures financed by an increase of the money supply under
boom conditions are the certain way to inflation.
(3) Careful attention must be given to reforms of the Federal tax system
which would encourage saving and investment. In view of the shortage of sav
ings relative to the demand for capital funds which has characterized the post
war period, and which will continue in the foreseeable future, our tax system
needs to be subject to careful study to eliminate forms of taxation which unnec
essarily discourage saving. This is not an easy task, in view of the heavy reve
nue requirements of the Government, but the need is clear in terms of the
great demands ahead for capital funds. Toward the same end, interest rate
policies of the Federal Government should be reexamined to see if they are con
sistent with the requirement of greater saving. The level of interest rates has
an important influence on the willingness of people to save.
(4) The only possible way for the Treasury to raise long-term funds on a
sound basis in a free capital market is to pay the interest rate required to bid
funds away from other users. The Treasury task of bidding for long-term funds
will be eased to the extent that steps outlined in the foregoing three parts of
this summary are carried out. If the Treasury is to be in a position to bid for
long-term capital funds, it must be free to meet the going market interest rate.
Specific questions o f Federal financing and debt management
Against the background of the foregoing discussion, I would now like to turn
to several specific questions of Federal financing and debt management.
1.
W hat should be the basic considerations governing Federal debt manage
m ent policy?— Since the middle thirties a widely accepted theory of Federal debt
management has been that in a period of declining general business activity the
Treasury should limit its financing (either new money or refunding) to short
term securities suitable for commercial bank purchase, with the thought that this
would lead to an expansion of bank deposits and thus have a stimulating effect
on business. On the other hand, according to this theory the Treasury should
sell long-term bonds to nonbank investors in a boom and thus draw funds away
from private financing in order to excercise a restraining effect on business. This
theory of debt management was linked to the related idea that Federal budg
etary deficits should be incurred in a business decline and surpluses in boom
periods. Thus, debt management was viewed as an important tool to be em
ployed by Government along with fiscal and monetary policy to combat the busi
ness cycle.
Several times in recent years this issue has come to the fore as the U.S. Treas
ury has sought to sell long-term bonds in order to lengthen the average maturity
of the debt. In June 1958, specifically, the decision of the Treasury to sell a
moderate amount of a long-term bond was roundly criticized in some quarters on
the grounds that such a bond would interfere with business recovery. It was
argued that instead the Treasury should concentrate all of its financing in short
term securities for commercial bank purchase.
The experience of recent years has proved that this theory of debt management
has usually, as a practical matter, led to very little long-term Treasury financing.
There never has seemed to be a good time to sell a long-term bond. Either the
sale of such a bond seemed unwise becasue it would hamper business recovery,
or it was considered out of the question in a boom because it would hurt pros
perity or require too high an interest rate for the Treasury to pay.
Our conclusions regarding the basic considerations governing Federal debt
management are as follows:
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EMPLOYMENT, GROWTH, AND PRICE LEVELS
(1) Debt management should not be regarded as an important tool to be
employed by Government in combating the business cycle. Government efforts
to counteract the cycle have much greater potentialities in the areas of monetary
and fiscal policy.
(2) The objective of lengthening the average maturity of the Federal debt
has proved so elusive, yet is so important, that the Treasury should take ad
vantage of every opportunity to sell longer bonds. This means that efforts
should not be relaxed to sell long bonds in periods of high business activity.
It also means, as a practical matter, that the Treasury must be alert to the
opportunity of selling long-term bonds even in periods of general business slack.
If there is an accumulation of long-term funds available to purchase Govern
ment bonds, the Treasury should make such bonds available even though a
business recession may exist. If such sales do seem to interfere with business
recovery, monetary policy measures can be used to aid in correcting the
situation.
(3) Treasury financing and debt management operations should be aimed
primarily (as discussed more fully later) at developing a maturity distribution
of the debt which will reduce to a minimum the number of trips to the market
by the Treasury. A major objective should be to manage the debt in a way
so as to interfere as little as possible with the freedom of the monetary
authorities.
2.
W hat m aturity distribution o f the marketable Federal debt should the
T reasury w ork toward?— In view of the great practical difficulties which the
Treasury has experienced in lengthening the average maturity of the debt, this
might seem to be a fruitless question. We believe, however, that it is of vital
importance that the Treasury work toward a better maturity distribution.
The ideal maturity distribution of the Federal debt is one which would pro
duce a smooth, regular, and steady flow of maturing issues by means of an
orderly spacing of outstanding issues. Table 6 presents a hypothetical debt
distribution, based on a total marketable debt of $180 billion, which would
produce such a flow of maturing issues, and also shows the new issues required
to keep this maturity distribution unchanged over time. The table was drawn
up merely to illustrate certain principles; the proportions in each maturity
class could be varied considerably without altering these principles.
It will be observed that in the hypothetical maturity distribution in table 6,
$57 billion would be in bonds with a maturity of 5 years and over, or nearly
one-third of the total debt. The portion of the debt with a maturity of 10 years
or longer totals $37 billion, or about 20 percent of the total. Some students
of Treasury financing and Federal debt management would question whether
this latter percentage is high enough. Others would question the need for having
a substantial portion of the debt such as 20 percent in the longer maturity ranges.
They would hold that the case for extending the average maturity of the debt
is not a strong one and that the Treasury would be perfectly well off to con
fine its financing to short-term securities and to abandon efforts to sell longer
term securities. We believe that this argument is not sound and that there
are highly important reasons (discussed in the following paragraph) for the
Treasury to strive for a balanced maturity distribution with a substantial pro
portion of longer term bonds.
A well-balanced maturity distribution would have advantages for the Treas
ury, the capital market, the Federal Reserve, and the economy as a whole.
Advantages to the Treasury are that a “bunching” of maturities in the face of
possible uncertain market reception would be alleviated, and the size and fre
quency of refunding operations involving decisions on new terms would be
reduced. In so doing, Treasury efforts to raise new cash for seasonal needs
or budgetary deficits would be less subject to interference from large refunding
operations with uncertain market reception and attrition. Perhaps most im
portantly, in view of the uncertain international political situation, it makes
sense for the Treasury to have a substantial portion of its debt in a long-term
form in order to leave adequate room for emergency financing. From the view
point of the capital market as a whole, a more even flow of Treasury maturities
and greater certainty about the standard disposition of maturing issues would
be advantageous, for it would mean less interference with the basic pattern of
corporate, real estate mortgage, and State and municipal financing. It would
also mean less uncertainty about shifts in the term structure of interest rates.
From the standpoint of the Federal Reserve and the preservation of economic
stability, an orderly spacing of maturities and a reduced frequency and size
of refunding operations would allow far greater freedom to pursue credit poli
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1345
cies consistently. The frequent Treasury trips to the market when so much
of the Federal debt is short term greatly handicap the use of monetary control
measures.
For all of these reasons, therefore, we believe that the primary objective of
debt management policy should be a well-balanced maturity distribution in
which longer-term issues constitute a substantial proportion.
3.
What can be done to restore the market for long-term marketable Treasury
bondsf— This is, of course, the No. 1 problem of Treasury financing. Before
launching into consideration of it, it will be helpful to review the facts on trends
in ownership of the long-term marketable debt. Table 7 shows the total out
standing long-term Treasury bonds, by type of investors, in the period 1945
through March 1959. Long-term bonds are defined here as those due or callable
in 10 years or over. Included in the figures are the investment series B bonds
of 1975-80. Although these bonds themselves are nonmarketable, they are ex
changeable for marketable V /2 percent 5-year Treasury notes, and hence it
seems desirable to include them. The table needs little comment. It shows that
the total outstanding long-term Treasury bonds declined steadily from $59.8
billion at the end of 1945 to $15.2 billion at the close of 1957, with a moderate
rise to $16.8 billion at the end of 1958. It stood at $17.4 billion at the close of
March of this year. Although not shown on table 7, long-term Treasury bonds
amounted to 30 percent of the total outstanding marketable Federal debt at the
end of 1945. By the end of 1957 this percentage had fallen to 8.7 percent. At
the end of March 1959 it was 9.4 percent. The table shows the steady and pro
nounced decline in holdings of long-term Government bonds by commercial
banks, mutual savings banks, life insurance companies, fire, casualty and marine
insurance companies, and “all other investors” through 1957. This latter cate
gory includes not only individual investors but also banks and insurance com
panies not reporting in the Treasury survey, trust funds, corporations, unin
sured pension funds, and others. The uninsured pension fund holdings are
shown separately as a “memorandum” item from 1953 on. Even the category
“U.S. Government Investment Accounts and Federal Reserve Banks” has shown
a tendency to decline since 1951 after Federal Reserve support of the Govern
ment bond market was abandoned. All of the groups in the table increased
their holdings moderately in 1958.
Table 8 shows the holdings of long-term Treasury bonds by type of investors
as a percent of the total of such bonds outstanding, from 1945 through March
1959. As noted in table 7, the total of long-term bonds outstanding declined
sharply in this period, so that the percentage figures are measured on a declining
base. The figures show that as the outstanding amount of long-term Federal debt
has declined, the broad category “all other investors” and “U.S. Government In
vestment Accounts and Federal Reserve Banks” have become proportionately
larger holders, whereas the commercial banks and life insurance companies have
shown a declining percentage. The percentage figures for the mutual savings
banks and the property insurance companies showed considerably more stability,
but even here a decline has occurred in recent years.
The explanation for the steady decline in holdings of Government bonds by
most investors is quite clear. As noted earlier, with the great demand for
capital funds from business and industry, homeowners, and State and local gov
ernments, investors have been moved by competitive forces to place their funds
where the rate of return is more attractive than in Government securities. This
is illustrated by the following series of charts and tables. Chart 5 and table 9
depict the net uses of funds in selected investments of mutual savings banks,
1947-58. The negative figures on U.S. Government securities indicate, of course,
net reduction in holdings. Chart 6 and table 10 show net uses of funds in se
lected investments by corporate uninsured pension funds, 1947-58. Chart 7
and table 11 similarly show net uses of funds in selected investments of life
insurance companies, 1947-58. Little comment on these charts and tables is
needed. They all indicate how major institutional investors have found that the
corporate bond and residential and commercial mortgage markets have of
fered a better investment return than the Government bond market. It should
also be noted that the fastest growing savings institution in the postwar pe
riod, the savings and loan asociations, have invested almost all of their funds
in residential mortgages. The net amount of funds brought into the capital
markets annually by savings and loan associations increased from $1.4 billion
in 1947 to $6.2 billion in 1958. Out of total net funds of $40.6 billion brought to
the capital markets during 1947 to 1958, inclusive, by the savings and loan associa
tions, $37.7 billion, or 93 percent, have gone into residential mortgages.
1346
EMPLOYMENT, GROWTH, AND PRICE LEVELS
It would perhaps be helpful to comment particularly on the reduction in
holdings of U.S. Government securities by the life insurance companies. At the
end of World War II the life insurance business had nearly 46 percent of assets
invested in U.S. Government securities. This was, of course, the result of a
natural desire on the part of life companies to aid in the war financing, as well
as the general unavailability of private investment outlets in a wartime econ
omy. As the private economy expanded in the postwar period, it was to be
expected that life companies would move to redress the balance by concentrating
their investments in the areas of corporate securities and mortgages. This was
all the more necessary because the rate of return on U.S. Government bonds
during the war was below the rate generally assumed by the life insurance busi
ness in policy contracts. There is a high degree of competition between com
panies to earn the highest possible return on investments because a favorable re
turn makes possible a lower cost of insurance to policyholders. Life companies
recognize, of course, the responsibility they have to policyholders to earn the
highest possible return on investments consistent with safety of the principal.
Not only does this competition exist as between life companies, but more and
more in recent years the rate of return earned by life companies has been a
factor in their competition with other institutions competing for the Nation’s
savings, such as uninsured pension funds, mutual funds, mutual savings banks,
and savings and loan associations.
Accordingly, it has been natural for the life companies to direct their funds
into real estate mortgages, corporate securities, and other outlets where the
rate of return has been consistently much higher than the rate on long-term
Government bonds. For the same reason, it has been natural for life companies
to dispose of Government bonds in order to respond to heavy demands for
capital in the private sectors of the economy. It is interesting to note, however,
that the combined life insurance company holdings of U.S. Government securi
ties and Government-insured and guaranteed mortgages at the end of 1958
amounted to $22.3 billion, or about 21 percent of total assets. If Governmentguaranteed ship loans and U.S. Government agency bonds were added, life in
surance company holdings of direct and guaranteed debt of the Federal Govern
ment would amount to about 22 percent of assets.
During the postwar period, with the amortized mortgage coming into full
bloom, and with sinking funds becoming the practice in corporate financing, the
life insurance companies now have an annual cash flow of roughly double their
increase in assets. This means that they have a high degree of built-in liquidity
which greatly reduces any need to rely on Government securities as a source of
liquidity.
Against the background of the trends we have reviewed, similar as we have
seen for most long-term institutional investors, what if anything can be done to
restore the market for long-term marketable Government bonds? The solution to
this problem is a difficult one because there have been powerful forces behind the
trends of the postwar period. There are many who believe that the answer lies
in new types of marketable Government securities and improved sales efforts to
appeal to individual investors, to personal trust funds, and to other investors than
the major savings institutions. There are also many who believe that ways can
be found to increase sharply the net sales of savings bonds to individuals so that
a portion of the marketable long-term debt can be shifted to the nonmarktable
category. Both of these possibilities are considered later. There are others,
however, who hold that in addition to broadening the market with individuals
it will still be necessary to find ways to bring the major savings institutions back
into the Government bond market as net purchasers, at least on a limited scale.
This leads, then, to the question of what can be done to accomplish this objective.
Let us first consider this question with respect to the life insurance companies.
The basic nature of the problem is about the same for mutual savings banks,
uninsured pension funds, and other institutional investors- What can be done
to bring the life companies back into the Government bond market as net pur
chasers? The heart of the answer lies in the yield offered on Government bonds
versus the rate of return on other investments. The all-important step for the
Treasury is to offer an interest return fully competitive with the yield on other
investments. This the Treasury has not done in recent years despite much talk
about “competing in the market.” As pointed out earlier in this report, the
interest rate on long-term Government bonds has consistently been much below
the net yield on FHA and VA mortgages, an investment area in which there has
been great public pressure for life companies to participate. Moreover, the rate
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1347
on Treasury bonds has been consistently much lower than the return on direct
placements of high-quality corporate bonds and conventional mortgages. The
spread between the yield on new issues of Government bonds and the yield on
new offerings of high-grade corporate bonds directly placed, or conventional
mortgages, has consistently been too great to make Government bonds attractive
to life insurance companies, or most other institutional investors. The interest
rate placed on new offerings of Government bonds has generally been set slightly
above the yield on outstanding Government bonds of comparable maturity. It
does not seem to have been adequately recognized that the market for Govern
ment bonds has been an exceedingly thin one in which the prices and yields are
artificial and do not begin to reflect the market forces existing in other parts of
the capital market. This is due in part to the limited supply of long-term
Government bonds available. At the present time, for example, the market
quotations on outstanding long-term Government bonds (due or callable in 10
years or more) indicate an average yield of about 4.10 percent. This would
suggest that under present circumstances a rate of 41/4 percent on a cash offering
of a long-term Government bond would be fully competitive in the market. Does
this follow, however, under conditions in which FHA and VA mortgages can be
purchased on a net yield basis of over 5 percent after costs, and they are now
receiving a diminishing share of the flow of capital funds because investors are
able to purchase top quality corporate bonds directly placed and conventional
mortgages on an even more attractive net yield basis? The situation which
exists today is not unique; it has been characteristic of the past several years.
If the Treasury desires to broaden the market for Government bonds, it must be
willing to bid realistically for funds.
Government bonds possess some favorable qualities for life company investors.
For one, they are usually noncallable for nearly the entire life of the bond.
In recent years in which interest rates have been subject to sharp fluctuations,
life companies have come to place great emphasis on nonredeemablity. They
have been successful to a large extent in obtaining this in industrial bond issues,
but few issues in the electric and gas utility field have provided adequate pro
tection against early redemption. In addition, little protection is afforded
against early redemption of residential mortgages. Likewise, although life com
panies have a high degree of liquidity, the ultimate marketability of Govern
ments bonds has some advantage. It may not be very great, however, with
the Government bond market a very thin one. These qualities of nonredeemability and marketability are on the plus side regarding life company purchases
of Government bonds.
As is apparent in this statement, life insurance company officers recognize
the inflationary potential in the sale of Government securities to the commercial
banks. They understand and appreciate the argument that enlightened selfinterest suggests that life companies should purchase Government bonds to
aid in the fight against inflation. Certainly the life insurance policyholders
have a vital interest in a sound dollar. At the same time, the officers of life
insurance companies have the responsibility to strive to earn the highest pos
sible return on policyholders’ savings consistent with safety of the principal
amount. This is the basic objective which must motivate life company invest
ments. Life insurance company funds will naturally flow into Government
bonds if they are issued at competitive interest rates, and the same will be
true of other institutional investors and individual investors.
It is important to bear in mind also that the normal process of life company
investing in corporate bonds and mortgages involves forward commitments to
make loans and takedowns of these commitments over an extended period of
time. At any given time, life companies have a backlog of commitments relative
to their cash flow. It would be desirable, therefore, for the Treasury to permit
life companies to pay for subscriptions to Government bonds on a delayed take
down basis. This would better enable life companies to fit the purchase of
Governments into their commitment picture and their cash flow expectations.
Moreover, possibly some means can be worked out, using the forward commitment
technique, whereby life companies enter into commitments with the Treasury
to buy Government bonds on a scheduled takedown basis.
With regard to other types of savings institutions— mutual savings banks,
uninsured pension funds, State and local funds, trust funds, and time deposits
of commercial banks— the basic solution the Treasury problem of selling long
term bonds is the same as with life insurance companies. To restore the interest
of such investors in Government bonds the Treasury must be willing to pay a
1348
EMPLOYMENT, GROWTH, AND PRICE LEVELS
fully competitive interest rate. With some of these investors also, because of
forward commitments it would be helpful for the Treasury to permit payment
for bonds on a deferred basis.
What is needed fundamentally is a determined and sustained drive on the
part of the administration, the Congress, and private groups to bring an end
to the psychology of “creeping inflation” which has apparently become deep
seated with the American people. This is a large order, but until it is done the
Treasury will always find it difficult to compete with interest rates which contain
a substantial inflation premium. Top-level leaders in and out of Government
must come to the realiaztion that inflation destroys the market for fixed-income
investments and drives capital funds to the equity market. As noted earlier,
inflation tends to shrink the rate of saving and to increase the demand for
borrowed funds. Also basic to the problem of restoring the market for Govern
ment bonds with institutional investors, Congress and the administration must
keep foremost in mind that as a matter of public policy the private and public
demands for capital funds must be satisfied out of the voluntary savings of the
American people. As these demands increase in our national economy, measures
must be taken to encourage a higher rate of saving if we are to avoid inflationary
pressures.
Beyond the institutional investors, are there any steps which can be taken
to expand investment by individuals in long-term marketable Government bonds?
In this area, even more than with the savings institutions, the need to deal a
body blow to inflation psychology is clear. Otherwise the strong trend toward
equities by individuals will further reduce their role in the Government securities
market as real long-term investors. Assuming that something can be done to
deal with inflation, the question can be raised as to whether through “hard
selling” the Treasury could not market considerably more long-term bonds to
individuals. Securities are sold just as anything else in this country.
Should
not the Treasury encourage the securities marketing machinery of the country
to go out and sell Government bonds? This means the payment of commissions
to brokers and dealers. Perhaps if incentives are given to salesmen the improve
ment in sales of Governments may be surprisingly great.
There are a number of convincing reasons why the broad mass of individual
savers of the country should be a good market for Government bonds. The
average individual cannot assume the risks inherent in corporate bonds because
he is unable to diversify as is true of an institutional investors. Moreover,
Government bonds possess a number of attributes which should appeal to the
average individual saver; namely, easy and convenient methods of sale can be
employed, the bonds are readily acceptable and are easily marketed, and the risk
of loss if held to maturity is absent. In addition, with the average individual in
vestor tax exemption is probably not an important factor.
Serious consideration should be given to the idea that investors who realize
capital gains, but who invest the proceeds in Government securities, might be
subject to a lower capital gains ta x ; for example, 10 or 15 percent. In order to
qualify for the reduced rate, such investors might be required to hold the Govern
ment securities for some specified period such as 2 to 5 years. It is well known
that investors are loathe to realize capital gains because of the tax. If the tax
were reduced as suggested here, there would be a greater willingness to realize
capital gains and hence there should be an appreciable increase in the flow of
funds into Government securities.
4.
Should the T reasury undertake a program o f advance fundingf— The ad
vance funding last year of more than 40 percent of the Canadian Government
direct and guaranteed marketable debt poses the question of whether the U.S.
Treasury should not undertake similar measures.
To illustrate what is meant by “advance funding,” it would be helpful to
consider the investment series B, 2% -percent bonds of 1975-80. As noted earlier,
these bonds, received by investors in 1951 in exchange for Victory bonds, are
themselves nonmarketable, but they are convertible into 1 % -percent 5-year notes
which are marketable. The total amount of investment series B bonds issued
was $15.3 billion. By the end of March of this year, nearly $8 billion remained
outstanding, so that in the intervening period $7.3 billion had been retired. In
other words, holders of $7.3 billion of these bonds had exercised the right to
convert into the 5-year 1%-percent notes.1 Throughout this period, the sale of
1 This figure of $7.3 billion of retirements includes a small sum growing out of retirement
on death of holders.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1349
the 5-year notes involved a loss, but investors were able to compensate them
selves for this loss over a period of time by reinvesting the funds at a higher rate
of return. Thus, under conditions such as have prevailed in the capital markets
in recent years, the investment series B bonds have come to be little more than
5-year notes. This issue, therefore, would seem to be a prime candidate for
advance funding. What the Treasury could do would be to offer the current hold
ers of investment series B bonds the opportunity to exchange them for a new
marketable long-term issue at a yield in line with the going market rate. Hold
ers of the investment series B bonds would undoubtedly find such an exchange
attractive because they would be able to dispose of a nonmarketable bond with
a low coupon, on which a substantial loss exists if the conversion is exercised and
acquire a marketable bond with a yield in line with the market. The advantage
to the Treasury is extension of the average maturity of the debt and stoppage
of the persistent attrition on the investment series B bonds. Also, debt would
be retained in the hands of nonbank investors. It would undoubtedly be argued
that investors receiving the new bonds, on which presumably there would be
little or no market loss, would thus be in a position to dispose of them to acquire
higher yielding corporate bonds or mortgages. Whether this did take place
would depend on the interest rate on the new bonds and the future course of in
terest rates. Regardless of this, in order for sales of the new bonds to take place
there would have to be purchasers, and so far as the Treasury is concerned
the bonds would remain outstanding and the longer average maturity would be
retained; that is, if the new issue of long-term bonds were sold by some invest
ors, the only market would be other long-term, nonbank investors. The new
bonds could be made nonmarketable for a given period, say 5 years. Such a
feature would decrease the attractiveness of the exchange and would raise ques
tions for life companies and possibly other investors as to whether they would
be legal investments unless there were some means of selling them.
The investment series B bonds are not, of course, the only Treasury issues
which would be suitable for advance funding. There is a wide range of pos
sibilities, with the 2y2s of June and December 1964-69, and 2y2s of March
1965-70, and 2% s of March 1966-71 being other good possibilities. These bonds
are now coming into the commercial bank investment range and will undoubt
edly find their way into bank portfolios. Then the Treasury will be faced with
the very difficult task of selling new cash offering of longer term bonds to replace
them if a sound debt structure is to be achieved. Through advance funding,
this portion of the debt, now in the hands of long-term nonbank investors, can
be kept in their hands. Moreover, a program of advance funding of the 2y2s
will open up a hole in the intermediate-term issues and thus permit the Treasury
to do some extending of maturities in their maturity range.
The Treasury might find it useful to consider the desirability of combining
an advance funding operation with a cash offering of a long-term bond; that
is, the Treasury might offer a cash issue of a long bond and at the same time
permit investors to exchange (par for par) certain other issues for the new
cash offering in a fixed ratio to the cash purchases made. For example, the
Treasury might decide to offer $1 billion of 30-year bonds at a competitive
interest rate. For every two bonds of the new issue purchased, investors would
be given the right to exchange one Investment Series B bond (or some other
ratio) on a par for par basis for the new bond. The ratio of bonds exchange
able would be adjustable, depending on how much encouragement the Treasury
wanted to build up for the cash offering.
It would seem that a tie-in between a cash offering and advance funding such
as outlined above could be employed successfully by the Treasury to aid in build
ing the market for cash offerings of long bonds. The terms of the cash offering
and the exchange would have to be explored carefully with the various investor
groups in the light of market conditions. If the Treasury proceeded to make
regular limited cash offerings, with the investor permitted to exchange holdings
of certain issues of outstanding bonds for the cash offerings, investors would
be encouraged to hold those securities likely to be eligible for exchange in future
cash offerings. Thus, this financing method might have the collateral advan
tage of encouraging investors to hold outstanding bonds which otherwise might
have been sold.
5.
Are there any new or improved market techniques which the Treasury
should consider to expand or improve the market for Government bonds?— The
suggestion has sometimes been made that the Treasury should have a tap issue
of a long-term marketable bond available for investors. Financial officers of
1350
EMPLOYMENT, GROWTH, AND PRICE LEVELS
life companies have sometimes indicated that if a tap issue were available, they
would place more funds in Government bonds than is the case when they are
confronted at irregular intervals with a Government long-term issue. On
careful study, it is doubtful that the availability of a tap issue would help to
broaden the market for long bonds. It might improve the market with a small
minority of purchasers, but actually the overall effect might well be to reduce
the volume of sales of long governments. A reason for this would be that
investors might come to regard the tap bond as an outlet that would always
be present if nothing better could be found.
The advantages which some life insurance company investment officers have
in mind in regard to a tap issue could be realized through limiting the uncer
tainty about allotments on subscriptions and by permitting deferred payment
for Government bonds. It would be desirable to let savings institutionsknow
in advance that they would be given a definite allotment. Every issue of a long
bond by the Treasury sets in motion a guessing game as to what the allotments
will be. Wrong guesses are bound to produce unnecessary disturbances sub
sequently in the market. There seems to be good reason, therefore, for mini
mizing the uncertainty about allotments. The big difficulty involved in giving
out advance information on allotments is apparently that such a ster> 'would
reduce the Treasury’s ability to control the size of an offering. For example,
let us assume that the objective of the Treasury at a particular time was to
sell an issue of $1 bililon of a long-term bond. If it were certain that the market
for the bond with savings institutions and other nonbank investors was about
$1 billion, then an advance announcement of 100 percent allotments to nonbank
investors would be possible. The danger is that if such an announcement were
made in advance, and the total nonbank subscriptions greatly exceeded expec
tations, the Treasury would lose control over the size of the issue. Having such
control, at least within limits, is important for many reasons, the most obvious
being in the example mentioned the Treasury may have need only for $1 billion.
Ways can be found to narrow uncertainty about allotments. One step would
be improved market analysis by the Treasury. Progress has been made through
the Treasury advisory groups in judging the potential market for Treasury
bonds. Assuming that reasonably accurate estimates can be made of the poten
tial market for a long-term bond at any given time and at a particular rate, it
should be possible for the Treasury to be specific in advance about allotments to
savings institutions. This does not mean that the Treasury would always be
able to announce a definite allotment, but it should be able to do so within a
narrow range. Then, if savings institutions could enter their subscriptions with
a high degree of certainty about the allotment, and if they knew in advance that
payment could be made on a deferred basis, all of the apparent advantages of a
tap issue would be achieved.
6.
W hat can be done to im prove the net sales of savings bonds f— During the
past several years the U.S. savings bonds have lost ground as a means of saving
in this country. The record in 1959 has become a source of concern. Sales of
E and H bonds through May are 6 percent behind a year ago, with a worsening
trend. Similarly, 1959 redemptions are 9 percent above a year ago, also with a
worsening trend. On a cash basis, the net drain on the Treasury of an excess of
redemptions over sales of E and H bonds in the second quarter of this year is
estimated at $300 million.
Here again the spread of inflationary psychology poses a serious threat. Un
less the expectation of continuing inflation is brought under control, the Treas
ury will find it more and more difficult to sell savings bonds in competition with
equities. Not only this, but the $38 billion of E bonds outstanding are demand
obligations for the Treasury and pose the threat of a big cash drain under infla
tionary conditions. Therefore, it is vital to the savings bond program that an
end be made to the inflation psychology of our people.
Beyond this, it goes without saying that the interest rate on savings bonds
must be kept in line with other rates if these bonds are to continue to appeal to
the smaller investor. It has been argued that the sale of savings bonds is com
paratively insensitive to interest rate trends, but the evidence is not convincing.
Here again the basic way to induce the individual investor to purchase savings
bonds is to pay an interest rate in line with market conditions. Table 12 shows
the comparative yields on U.S. savings bonds, marketable bonds, and savings
deposits at selected intervals since 1941. It will be noted that if held to matu
rity the yield per annum on series E-bonds in 1941 (when these bonds were
first issued) was 2.90 percent. At this time the yield on E-bonds was most gen
erous as compared with the average rate on marketable bonds, savings bank
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1351
deposits, and commercial bank savings deposits. It compared favorably with
the rate on saving and loan shares. A similar situation existed in 1945, 1948,
and 1952. Between 1952 and June 1959, however, the average yield on E- and
H-bonds increased only 26 basis points, whereas the average yield on marketable
long-term Government bonds increased 141 basis points and Moody’s Aaa cor
porate bond yield index increased 150 basis points. Likewise, the average yield
figures on savings banks deposits, savings and loan shares, and commercial bank
savings deposits show how they have increased much more than the yield on Eand H-bonds from 1952 to 1958. These figures illustrate the need to raise the
rate on E- and H-bonds to restore their early strong competitive position. The
limited success achieved in recent years in the sale of E- and H-bonds is all the
more remarkable in the light of the relatively less favorable yield they have as
compared with other yields on savings. Given a competitive rate, savings bonds
should provide a much greater source of long-term funds for the Treasury.
In addition to a competitive rate, the Treasury should also provide a system
of incentives to the securities market in order to promote the sale of savings
bonds. Here again, commissions should be paid to the sellers of savings bonds.
Moreover, it would seem that a tax-exempt feature could be used with savings
bonds that would not have a serious effect on revenues and would not cause seri
ous diflficulties of an equity nature. Such a feature could, however, have a very
stimulating effect on sales of savings bonds.
7.
Should the T reasury issue bonds ( eith er savings bonds or m arketable
bonds) in which the amount paid at m aturity (or the amount o f in terest) is
tied to some price index such as the index o f consumers pricesf— In view of
the depreciation in the value of the dollar which has occurred in the postwar
period, and in view of the possibility that there may be more inflation ahead,
support exists in some quarters for a purchasing power bond. It is argued
that such a bond would provide investors with a hedge against inflation and
should therefore help greatly to broaden the Government bond market.
We believe it would be a calamitous mistake for the Treasury to introduce
a purchasing power bond. This would be tantamount to an admission of de
feat in the struggle to halt inflation. If Government bonds are placed on an
“escalator” along with wages, an important moral support for the fight against
inflation will be lost. All branches of the Government must redouble their
efforts to fight inflation and not to temporize with it. A purchasing power
bond would be temporizing. Moreover, a purchasing power bond would un
doubtedly enhance the expectation of inflation and could thus seriously ag
gravate the problem.
FEDERAL RESERVE OPEN M ARKET OPERATIONS AND TREASURY FIN A N C IN G
The decline which has occurred in the prices of Government bonds during
the past year has revived the argument that the Federal Reserve, through
open market purchases, should support the prices of Government securities.
There are some who contend that the Federal Reserve should return to the
practice of “pegging” the prices of Government securities as it did during and
after World War II until the Treasury-Federal Reserve “accord” in March,
1951. There are others who recognize that a pegging operation would not be
in the public interest, but at the same time they contend that from time to time
the Federal Reserve should purchase long-term Government bonds in order to
lend stability to long-term interest rates, and at the same time sell shorter-term
Government securities if such sales are required to prevent an expansion of
commercial bank credit. We would like to set forth our views briefly on these
two questions.
Should the Federal R eserve resum e the pegging o f prices o f Government
bondsf— After the disastrous experience under the pegging operation prior to
March 1951, it is difficult to understand support for such a proposal. We cer
tainly oppose a return to pegging of Government bond prices because it would
put our country on the road to ruinous runaway inflation. The reason is clear
and well understood. As the Federal Reserve purchases Government securities,
it adds to the reserves of the commercial banking system and thus permits
a multiple expansion of commercial bank demand deposits in the ratio of six
times the reserves supplied. Thus, a pegging operation converts the Federal
Reserveinto an “engine of inflation” because it forces the monetary authorities
to contribute to an uncontrolled expansion of the principal source of our money
supply demand deposits. It amounts to the same thing as running the print
ing presses to provide more and more paper money.
1352
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Under the general economic conditions existing today there could be only
one result— a sharp runup of the general price level which would undoubtedly
accelerate if the pegging operation were continued. As prices moved upward,
and inflation psychology on the part of the public grew, there would be a number
of effects which would make it more and more difficult to peg the prices of
Government securities, and which would require a larger and larger volume
of support purchases of Government bonds and thus greater and greater ex
pansion of the money supply. One of these effects would be a decline in the
willingness of our people to save as the dollar depreciated in value. Not only
would saving dry up, but in particular, investors would be less and less willing
to purchase fixed-income obligations such as bonds and mortgages. Instead,
funds would move even more strongly into the common stock market and into
direct ownership of real estate, and similar investments which seem to provide
a hedge against inflation. There would, indeed, be a flight from the dollar
into physical goods of all kinds in order to escape the effects of the declining
value of money. Under these circumstances, interest rates on loans and in
vestments other than Government bonds would be bound to rise sharply as
the supply of loanable funds declined and the demand increased, for in an
inflation there are positive incentives to go into debt. Moreover, as inflation
psychology grew, the inflation premium in interest rates on loans and invest
ments other than Government bonds would rise. As this situation developed,
the holders of Government securities would find it more and more advantageous
to sell these securities at the pegged prices because such prices would be
artificially high. Thus, in order to peg the prices of Government bonds the
Federal Reserve would be required to purchase a larger and larger amount
of these bonds, thus heaping more and more fuel on the fires of inflation.
This is not a pretty picture, but it is inevitable if the Federal Reserve is
required to return to a policy of pegging the prices of Government bonds. Actu
ally, there is serious question today whether the Federal Reserve could peg the
prices of Government securities without quickly being forced to buy an enormous
amount of bonds. A great deal of change has taken place in public attitudes
since the early postwar period in which the pegging operation occurred. Most
important, we have experienced a good deal of inflation and the general public
has unfortunately come to expect that it will continue. For this reason alone,
a return to pegging of Government bonds would be a signal that the expectation
of inflation was a certainty, and all of the developments outlined above would
be bound to occur. So, there is really a serious question today as to whether
the Federal Reserve could peg the prices of Government bonds. Certainly if it
did so, the inflationary consequences would not only affect our domestic economy
but they would greatly aggravate our balance of payments problems with other
countries and would lead to a flight from the dollar by foreigners.
Should the Federal R eserve lend support to the prices o f long-term Govern
m ent bonds by buying long-term bonds and selling short-term securities f— Many
who recognize the disastrous consequences of a pegging operation nonetheless
argue that the Federal Reserve should conduct its open-market operations
throughout the entire range of Government securities— long term as well as
short. Thus, it is argued, in recent months, as the prices of long-term Govern
ment bonds declined, the Federal Reserve could have purchased the longer term
issues to aid in stabilizing this sector of the market and long-term interest rates
generally. It is further argued that, to the extent needed to prevent an un
wanted expansion of commercial bank reserves, the Federal Reserve could have
sold an offsetting amount of short-term Government securities.
To the extent that open-market purchases of long-term Government securities
were matched by sales of short-term Governments, there would, of course, be
no expansion of commercial bank reserves from this operation and thus no
increase of the money supply. For this reason— the fact that the money supply
had not changed— the Federal Reserve would not have affected the total supply
of credit and presumably would not have had any influence on the general level
of interest rates. So far as interest rates are concerned, the principal effect
of open market purchases of longer term Government securities and matching
sales of short-term securities would be to alter the interest rate structure on
Government securities. That is, the purchases of long bonds would tend to
make the yields on such bonds lower than they might otherwise have been, and
the sales of short-term securities would increase the supply of such securities
and thus make short-term Government yields higher than might otherwise have
been the case.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1353
Higher interest costs to the Treasury on short-term borrowing are very
quickly translated into a higher service charge on the Federal debt because
$76 billion of Government securities mature in 1 year or less. Accordingly,
taking steps which will raise short-term rates in order to hold down yields on
long-term Governments is not any real solution. This is especially true when
the Treasury is being obliged to concentrate so much of its financing in short
term issues and has already contributed to a sharp increase in short-term rates.
Moreover, there are other difficulties involved in an open market program of
buying long-term Government securities and selling short-term securities. Such
purchases would tend to hold the prices of long-term Governments at an artifi
cially high level (or the yields artificially low) during a period of tightening
conditions in the capital markets such as at present. Thus, as the yields on
corporate bonds, mortgages, and State and local government securities moved
upward in response to heavy demand, investors would be encouraged to dispose
of long-term Government securities at the artificially high prices. The result
would be that the Federal Reserve would have to increase its purchases of
long bonds (as well as its sales of shorts) in order to exert the same stabilizing
effect. Carried to the end, the Federal Reserve would wind up holding most
of the long-term Government bonds, and short-term interest rates would be
driven to a very high level, with the service charge on the Federal debt much
higher in the process because of the huge volume of short-term debt.
In addition, if the Federal Reserve should begin to conduct its open-market
operations throughout the entire maturity range of Government securities, it
would immediately be exposed to more and more pressure to move toward pegging
the prices of Governments, with all the fatal consequences this would involve.
We arrive at the conclusion that if the Federal Reserve is to retain its freedom
to restrain the expansion of the money supply in a period of high and rising
economic activity, which we believe to be absolutely essential, there are no
manipulations of open-market operations that can escape the discipline of demand
and supply forces in the capital markets. Interest rates have risen during the
past year, as they always do in periods of rising business activity, basically
because the market demand for capital funds has outrun the supply. The sound
way to achieve lower interest rates is to encourage an increase in the supply of
loanable funds or a decrease in the demand, or a combination of the two. The
only way to increase the supply without further inflation is to encourage saving,
and the place to start is to remove the fear of inflation itself. So far as the
excessive demand for capital is concerned, the greatest force in many years has
been the U.S. Government and its deficit financing. An end to deficit financing
would be a potent force toward easing the capital and money markets.
S U M M A R Y A N D C O N C L U S IO N S
1. The ability of the U.S. Treasury to conduct its financing and debt manage
ment operations on a wise basis is of crucial importance for the attainment of our
national goals of full employment, sustainable economic growth, and general
price stability. There is hardly any other matter of greater importance to the
country today than that the U.S. Government be able to finance itself and
manage the Federal debt in a manner consistent with these objectives. Accord
ingly, this statement is focused on the Treasury’s financing and debt management
problems, with monetary and fiscal policy questions considered within this focus.
2. Regarding the objectives of national economic policy, we believe that full
employment, sustainable economic growth, and general price stability are vitally
Interdependent in the longer run, and that all three objectives must be pursued as
a whole if we are to preserve our free economic society. This is because a national
policy of inflation— even “creeping inflation”— would have destructive conse
quences for economic growth and economic and political democracy, as follows:
(a) A continued decline in the value of the dollar is bound to injure and eventu
ally destroy the willingness of the American people to save voluntarily and thereby
to provide the only sound means of financing economic growth. Under our
economic system the growth process springs from the willingness of the people
to save some of their income and the investment of these savings in factories,
mines, business concerns, homes, public works, and other capital goods, as well
as working capital. (6) The decreasing willingness of the American people to
buy Government bonds either directly or through savings institutions as the
general price level rises accentuates the U.S. Treasury’s financing problems and
leads to the issuance of a larger and larger portion of short-term debt, thus
8856a— 59—pt. 6A------ 18
1354
EMPLOYMENT, GROWTH, AND PRICE LEVELS
making inflation more difficult to control, (c) A persistent inflation is bound to
breed a multiplicity of Government controls and ultimately to place serious curbs
on our free market economy and thus on our economic and political freedom.
3. During the postwar period the ability of the U.S. Treasury to sell long-term
bonds has been reduced sharply and the problem of maintaining a balanced
maturity distribution has become more and more difficult. In no small measure
this is because of the repeated Federal deficits which forced the Treasury to
borrow in 7 of the 12 years, 1947-58, for a huge total of over $36 billion. It is
also because of the enormous competing demands for capital funds in the
private sectors of the economy and for State and local financing which, along
with Federal financing, too often have exceeded the total supply of savings.
These competing private demands, encouraged and even stimulated by Govern
ment housing and tax policies, have been able to outbid the U.S. Treasury in
obtaining the available funds. The inflation engendered by an expansion of the
supply of money to supplement savings, along with the wage-price spiral, has
itself made it more difficult to sell long-term Treasury bonds.
Our review of the Treasury financing and debt management in the perspective
of the capital market and the national economy as a whole in the postwar period
suggests that the following basic steps must be taken if the market for Govern
ment bonds is to be broadened:
(a ) The Federal Government and the Congress must together concentrate vig
orously with all fiscal, monetary, and other appropriate policies to bring an end
to inflation and to destroy the psychology of inflation. Sound Government
financing requires that in periods of high prosperity the Federal Government
should run a budgetary surplus and should retire some of the debt. Further, the
Employment Act of 1946 should be amended to make it clear that general price
level stability is a goal of equal importance with full employment and economic
growth.
(ft) Foremost in the fight against inflation, we need better understanding of
the fact that the only source of real growth in our national economy is saving
and the investment of savings in capital goods. As a country we have been at
tempting to grow faster than our national saving justified. Too often we have
resorted to the creation of money to finance the growth beyond what we have
been able to finance through savings. W e have learned the painful lesson that
capital expenditures financed by an increase of the money supply under boom
conditions are the certain way to inflation.
(c) Careful attention must be given to reforms of the Federal tax system
which would encourage saving. In view of the shortage of savings relative to
the demand for capital funds which has characterized the postwar period, and
which will continue in the foreseeable future, our tax system needs to be sub
jected to careful study to eliminate forms of taxation which unnecessarily dis
courage saving. This is not an easy task, in view of the heavy revenue needs of
the Government, but the need is clear in terms of the great demands ahead for
capital funds. Toward the same end, interest rate policies of the Federal Gov
ernment should be reexamined to see if they are consistent with the requirement
of greater saving.
(d ) The only possible way for the Treasury to raise long-term funds on a
sound basis in a free capital market is to pay the interest rate required to bid
funds away from other users. The Treasury task of bidding for long-term funds
will be eased to the extent that steps outlined in the foregoing three parts of this
summary are carried out.
4. The principal conclusions reached in this statement regarding several
specific questions of Federal financing and debt management are as follows:
(a ) Debt management should not be regarded as an important tool to be
employed by the Government in combating the business cycle. Government ef
forts to counteract the cycle have much greater potentialities in the area of
monetary and fiscal policy. The objective of lengthening the average maturity
of the Federal debt has proved so elusive, yet is so important, that the Treasury
should be alert to the opportunity of selling long-term bonds even in periods
of general business slack. If there is an accumulation of long-term funds avail
able to purchase Government bonds, the Treasury should make such bonds avail
able even though a business recession may exist. If such sales do seem to
interfere with business recovery, monetary measures can be used to aid in
correcting the situation.
( 1)) Treasury financing and debt management operations should be aimed pri
marily at developing a balanced maturity distribution of the debt, with a sub
stantial proportion of the debt in intermediate and longer term issues. Such a
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1355
maturity distribution would have important advantages for the Treasury, the
capital market, the monetary authorities, and the economy as a whole. In par
ticular, from the standpoint of the Federal Reserve and the objective of sus
tainable economic growth without inflation, an orderly spacing of maturities and
a reduced frequency and size of refunding operations would allow far greater
freedom to pursue credit policies consistently.
(c) In order to bring nonbank investors such as mutual savings banks, unin
sured pension funds, and life insurance companies back into the Government
bond market as net purchasers, the all-important step is for the Treasury to
offer an interest return fully competitive with the yield available on other invest
ments such as residential and commercial mortgages and directly placed cor
porate bonds. In addition, it is desirable that nonbank investors be permitted to
pay for Government bonds on a deferred basis. This would permit such inves
tors to fit their purchases into their forward commitment picture and their
cash-flow expectations.
(d ) The Treasury should give serious consideration to advance funding of
some portion of the debt which has come into the shorter maturity ranges.
The investment series B bonds would present a good possibility for advance
funding. In addition, the Treasury should consider the desirability of com
bining an advance funding operation with a cash offering of a long-term bond.
(e ) The Treasury should seriously consider offering incentives to the secu
rities business to sell long-term marketable bonds. This means that the Treas
ury should consider paying commissions to brokers and dealers just as is done
in the marketing of private securities.
( /) In order to encourage the purchase of U.S. savings bonds, the interest
return on such bonds should be raised in line with the return on private invest
ments. In addition, the Treasury should also provide a system of incentives
to the securities market to promote the sale of savings bonds. A tax exemption
feature should also be considered.
(g ) It would be a serious mistake, to say the least, for the Treasury to intro
duce a “purchasing power bond” in which the amount paid at maturity (or the
amount of interest) is tied to some price index such as the index of consumers’
prices. This would be tantamount to admission of defeat in the struggle to halt
inflation.
5.
The decline which has occurred in the prices of Government bonds during
the past year has revived the argument that the Federal Reserve, through openmarket purchases, should support the prices of Government securities. A re
turn to the policy of Federal Reserve pegging of the prices of Government bonds,
as followed in the decade prior to March 1951, would be disastrous in that it
would place our country on the road to ruinous runaway inflation. It would
force the monetary authorities to foster an uncontrolled expansion of our money
supply, thus promoting a sharp and accelerating rise in the cost of living, and
would actually drive up interest rates on all other forms of debt except Govern
ment securities.
Some who recognize the disastrous consequences of a pegging operation sug
gest that, as the occasion demands, the Federal Reserve should buy longer term
Government securities to afford stability to long-term rates, and at the same
time sell an offsetting amount of short-term securities to prevent any net addi
tion to commercial bank reserves and hence the money supply. Such an opera
tion would have no effect on the general level of interest rates, but it would
hold down the yields on longer term Government securities and raise the rates
on short-term issues. Higher interest costs to the Treasury on short-term
issues are quickly translated into a higher service charge on the Federal debt
because $76 billion of Government securities mature in 1 year or less. More
over, Federal Reserve support of longer term Government bond prices would
lead to a rapidly increasing volume of sales of such securities by private in
vestors, and the outcome eventually would be that the Federal Reserve would
wind up holding most of the long-term Government bonds, and short-term in
terest rates would be driven to a very high level, with the service charge on the
Federal debt much higher in the process because of the huge volume of short
term debt.
I f the Federal Reserve is to retain its freedom to restrain the expansion of
the money supply in a period of high and rising economic activity, which we
believe is absolutely essential, there are no manipulations of open market opera
tions that can escape the discipline of demand and supply forces in the capital
markets.
1356
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b l e 1. — Capital funds available from principal savings sources, 1947-58
[Billions of dollars]
Year
1947................................................ ......... .................
1948.......................................................... ............. .
1949......................... .......... .......................................
1950........... ................. ..............................................
1951............................. ...................... —............... .
1952.....................................................—................. .
1953 ........................................................................ .
1954_______ ______ ____________________ ______ _
1955_______ ______ ____ _____ ________ _____ ____
1956................... ............... ..................................... ..
1957 ......... ............. ............... ......... .........................
1958___________________________________ ______
Year
1947. _______________________________________ _
1948 ....... ................... ........... ........... .................... ..
1949 ............................ ........... ...............................
1950 _________ __________ ___________________
1 9 5 1 ______________ ________ _________________
1952 ...................... — ______ __________________
1953 ............................................................- .........
1954......................... .............. ................... ...............
1 9 5 5 ............—............... ........... ............... .............
1956............... ............. ....................... ................... ..
1957....... ..................................... ............... ............ ..
1958..............................................................
Life insur Savings
ance com and loan
panies
associa
tions
3.0
3.4
3.6
3.7
3.7
4.4
4.7
5.0
5.3
5.0
4.7
4.9
1.4
1.2
1.3
2.1
2.0
3.0
3.7
4.3
5.6
4.8
4.9
6.2
Mutual
savings
banks
0.9
1.0
1.0
1.0
.8
1.7
1.8
2.1
2.1
2.0
1.8
2.5
1.9
1.0
.9
.8
2.3
3.5
3.7
4.2
2.2
3.2
6.6
8.2
U.S. Gov State and Fire and Individ
ernment 2 local gov casualty uals and
ernments companies others 3
3.4
3.0
2.0
1
3.1
3.6
2.4
1.3
2.1
2.3
1.2
-.8
1.1
1.0
1.0
1.5
1.6
2.2
2.5
2.9
2.0
2.4
3.0
2.1
0.8
1.0
1.1
.8
.7
1.2
1.3
1.2
.9
.5
.8
.6
i Time deposits and capital accounts.
* Investments in Federal securities of U.S. Government investment accounts.
* Individuals, unincorporated business, and nonprofit institutions.
N ote.—Components may not add to totals because of rounding.
Commer Corporate
cial
pension
banks 1
funds
3.7
4.4
3.1
1.9
1.5
4.9
5.1
1.6
9.0
8.1
7.4
2.3
0.6
.7
.7
.9
1.3
1.5
1.7
1.9
1.9
2.2
2.6
2.7
Total
16.9
16.5
14.8
12.5
17.0
26.0
27.0
24.5
31.2
30.6
33.1
28.7
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1357
C ha t 3
Uses of Capital Funds in the Real iistate Mortgage Market, 1947-1958
(Billions of Dollars)
17.5
—
12.5
1948
1950
1952
1954
1956
1958
1358
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b l e 2 . — Uses
of capital funds in the real estate m ortgage market, 19Jfl-58
[Billions of dollars]
Year
1947 _______________ _________ ____________________________
_______________ _______ ________________________________
1948
1949 ______________________________________________________
1950 _____________________________________________________
1 9 5 1 ___ ________ _________ _____ ____________ ______________
1952 _________________ ____________________________________
1953_______________________________________________________
1954_______________________________________________________
1955_______________________ _____________________________
1956______________ _______ _________________________________
1957_________ _____ ______ ______ ________ _______ ___________
1958 1 __________________ — ................. .................................. ...
Residen
tial
mortgages
Commer
cial
mortgages
Farm
mortgages
5.7
5.9
5.3
8.7
7.8
7.5
8.2
10.2
13.4
11.4
9.2
11.5
1.3
1.2
.9
.9
1.1
1.0
1.2
1.8
2.0
2.3
2.3
2.4
0.2
.2
.3
.5
.6
.6
.5
.5
.8
.8
.6
.7
1 Preliminary.
N ote—Components may not add to totals because of rounding.
Total
7.2
7.3
6.5
10.1
9.5
9.1
9.9
12.5
16.2
14.5
12.1
14.6
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Churt 2
Uses of Capital Funds in Corporate Financing, 1947-1958
(Billions of Dollars)
1359
1360
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T abue 3.— Uses of capital funds in corporate financingt 1947-38
[Billions of dollars]
Year
1947..................................................................................... ........... ......... ...................
1948_________________________________ ___________________________________
1949..................................... ........................................... ................. ......... .................
1950.................. ......................... ..................... ............... ........... ............... .................
1951_____________ ______ _________ ____ ______ _____________________________
1952_______ ____________ ________ _______________________________________
1953.................. .................................... ........... ................... ............. .........................
1954................................................................................. ............. ...............................
1955....................................................... .............................. ....... ........... ...................
1956......................................................................................... ........... ............... .........
1957............................................................................ ...........................
1958..................................................................................................... _
Corporate Corporate
stocks
bonds
3.0
4.7
3.3
2.0
3.6
4.9
4.8
3.8
4.2
4.7
7.1
6.0
1.2
1.1
1.3
1.5
2.3
2.4
1.9
1.8
1.9
2.5
2.7
2.1
Total
4.2
5.7
4.6
3.5
5.9
7.3
6 .7
5.6
6.1
7.2
9.8
8.1
N ote.—Components may not add to totals because of rounding. Corporate stocks exclude issues of
open-end investment companies.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Chart 3
Uses of Capital Funds in Residential Mortgages, Commercial
Mortgages and Corporate Securities, 1947-1958
(Billions of Do lars)
1361
1362
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able 4.— Uses
o f capital funds in residential m ortgages, com m ercial m ortgages,
and corporate securities, 191ft-58
[Billions of dollars]
Year
1947...............................................................................................................................
1 9 4 8 „,..........................................................................................................................
1949...............................................................................................................................
1950 ...................................................................................... ........... ............... .......
1951 ......................................................................................................... ........... —
1952................................................................................................................. .............
1 9 5 3 ............................................................................................................................
1954 .................................................................................. ......................................
1955................................................................................................................... ...........
1956 .........................................................................................................................
1957 .............................................................................................................. ...........
1958 i.......................................................................................................................... .
Residen Commer Corporate
tial
cial
securities
mortgages mortgages
5.7
5.9
5.3
8.7
7.8
7.5
8.2
10.2
13.4
11.4
9.2
11.5
* Preliminary.
N ote.—Corporate securities exclude shares of open-end investment companies.
1.3
1.2
.9
.9
1.1
1.0
1.2
1.8
2.0
2.3
2.3
2.4
.2
5.7
4.6
3.5
5.9
7.3
6.7
5.6
6.1
7.2
9.8
8.1
EMPLOYMENT, GROWTE!, AND PRICE LEVELS
1363
Uses of Funds in Government Financing, 1947-1958
(Billions of Dollars)
10
7.5
U.S. Governments
ft
r
2.5
\
! \
\
State &
Local Obligations
-2.5
\
\ i
M
V
I
-5
1950
1952
1954
1956
1958
1364
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able 5.— Uses of capital funds in Government financing, 1947-58
[Billions of dollars]
U.S. Gov State and
ernments local obliga
tions
Year
1.4
2 .2
2.3
3.1
2.4
3.1
3.5
4.2
3.5
3 .3
4 .9
5.9
-2 .5
- 4 .1
4.3
-.4
2.7
8.0
7.8
3.5
2.0
- 4 .1
—1. 7
8.0
1947............................................. ......... ......................... - ........... .................................................
1948.................................................................... ......... ............. ....................... ......... - .............
1949
____________________________________ ____________________ _____ ___________
1950....................... ................. ......... ............................. ............. ........... ................... ............... 1951......... ............................. ..................................... ......................... ......................... ............. ..
1952__________________ _________________ _____ _______ ________ _____________________
1953................................. ..................................... —........................... ............. - ....................... 1954............................... ......................................... ............ ..................... ................................. 1955. ......... ................................. ......................... ....... ............... ................... ....................... —
1 9 5 6 . _____________ ______ __________________________________________ _____ ________
1957__________ _______ ___________________ _____ __________________________________
1958____________________ ______________________ _____ _________ __________ - ............. -
T able 6.— Hypothetical Federal debt transactions during a year
[Billions of dollars]
Public marketable debt
Bills, 3-month______________________
Certificates, 12-month. _ ______________
Total_________________________
Bonds and notes maturing:
Within 1 year.. _____ ____________
1 to 5 years _____________________
5 to 10 years. ____________________
10 to 15 years_____________________
15 to 20 years_____________________
20 years and over_________________
Total bonds and notes__ _________
Total marketable debt___________
Outstand Maturing Moving Moving out Added to
ing at each year into ma of maturity class by
beginning
turity class class 1 new issue
25
38
63
100
38
138
12
48
20
15
10
12
117
180
12
12
4
3
21
12
150
22
22
100
38
138
12
4
3
2
1
22
22
8
1
1
1
1
12
150
t Amount outstanding in each maturity class, divided by number of years in the class. Assumes an
even distribution of maturities within each class.
1365
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able 7.— Long-term Treasury bonds, by type of investor, 1945-59
(due or callable
in 10 year8 or over)
[Millions of dollars]
End of period
Fire,
casualty,
Mutual Life in- and
Commer savings urance marine
cial banks banks compa insurance
nies compa
nies
6,107
5,065
5,003
3, 542
3,889
2,934
2,912
2,728
2,691
2,243
2,150
1,849
542
833
830
1945........................1946..........................
1947...........................
1948..........................
1949...................... .
1950..........................1951............................
1952..........................
1953...........................
1954..........................
1955...........................
1956............................
1957........................
1958...........................
1959-March...........
7,575
7,991
8,607
8,048
6,588
7,180
6, 522
6, 065
5,251
3,056
2,485
1,977
1,518
1, 608
1,602
16,697
16,981
16, 507
13,884
12. 287
10, 779
8,681
7,689
6,947
6,183
4,179
3,016
2,483
2,680
2,732
1,234
1,331
1,705
1,346
1,198
1,531
1,587
1,512
1,254
893
776
635
369
439
404
U.S. Gov
ernment
Memo
invest
Total randum;
ment
accounts All other outstand Corporate
and investors1 ing pension
funds *
Federal
Reserve
banks
5,690
5,191
5,227
11,925
8,033
7,190
8,260
7,056
6,984
6, 049
4,993
4,121
3,435
3,529
3,602
22, 513
18,248
17, 759
15,142
13,139
14,035
14,109
14,011
14,168
12.052
12,515
11,883
6,836
7, 738
8,196
59,816
54,807
54,807
53,888
45,134
43, 648
42,072
39,060
37, 297
29. 475
27,098
23, 484
15,184
16,826
17,363
_
806
644
867
666
546
526
544
i Includes those banks and insurance companies not reporting in the Treasury survey.
* Included in data for “All other investors.” Data by call classes were not available prior to Dec. 31,1953.
N
.— Components may not add to totals because of rounding. Data include only interest-bearing
public marketable securities and investment series B bonds of 1975-80 (dated Apr. 1, 1951, offered also in
May 1952) exchangeable for marketable 1H percent 5-year Treasury notes.
Source: “Treasury Survey of Ownership,” as published in Treasury Bulletin, March issue following
year indicated, June issue for March 1959.
o te
T
8 . — Holdings by type of investor of long-term Treasury bonds (due or
callable in 10 years or over)t as percent of total outstanding, 1945-59
a b l e
[Percent]
End of period
U.S. Gov
Fire, ernment
Memo
Life in casualty, invest
Commer Mutual surance and
ment All other Total randum :
cial banks savings compa marine accounts investors i outstand Corporate
ing pension
banks
nies insurance and
compa Federal
funds s
nies Reserve
banks
1945...........................
1946...........................
1947...........................
1948...........................
1949...........................
1950...........................
1951...........................
1952...........................
1953...........................
1954...........................
1955...........................
1956...........................
1957.........................
1958...........................
1959-March..............
10.2
92
91
6.6
8.6
6. 7
6.9
7.0
7.2
7.6
7.9
7.9
3.6
50
4.8
12. 7
14.6
15. 7
14.9
14.6
16.4
15.5
15. 5
14.1
10.4
9.2
8.4
10.0
9.6
9.2
27.9
31 0
30.1
25.8
27.2
24. 7
20.6
19. 7
18.6
17.6
15.4
12.8
16.4
15.9
15.7
2.1
2.4
3.1
2. 5
2.7
3.5
38
39
3.4
3.0
2.9
2.7
2.4
2.6
2.3
9. 5
9. 5
9. 5
22.1
17.8
16. 5
19.6
18 1
18.7
20.5
18.4
17.5
22.6
21.0
20.7
37.6
33.3
32.4
28. 1
29.1
32.2
33. 5
35 9
38.0
40.9
46.2
50.6
45.0
46.0
47.2
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
2.2
2.2
3.2
2.8
3.6
3.1
3.1
1Includes those banks and insurance companies not reporting in the Treasury survey.
2 Included in data for “All other investors.” Data by call classes were not available prior to Dec. 31,1953.
N
.—Components may not add to totals because cf rounding. Data include only interest-bearing
public marketable securities and investment, series B bonds of 1975-80 (dated Apr. 1, 1951, offered also in
May 1952) exchangeable for marketable 1Yi percent 5-year Treasury notes.
Source: “Treasury Survey of Ownership,” as published in Treasury Bulletin, March issue following year
indicated, June issue for March 1959.
ote
1366
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Chart 5
Net Uses of Funds in Selected Investments of Mutual Savings Banks, 1947-1958
(Billions of Dollars)
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
1367
9 .— Net uses of funds in selected investments of mutual savings banks,
1 W -5 8
[Billions o ?dollars]
Year
1947.
1948
1949.
1950.
1951.
1952.
1953.
1954.
1955.
1956.
1957.
1958.
Residential
mortgages
0.3
.8
.8
1.5
1.5
1.3
1.5
1.9
2.4
2.1
1.3
1.9
Corporate
bonds
0.3
.4
.2
-.1
.1
.3
.2
.1
-.3
.1
.6
.6
U .S. Govern
ments
0.2
-.5
0)
-.6
-1 .0
-.4
-.2
-.4
- .3
-.5
-.4
-.3
State and
local securi
ties
0)
(0
0)
(0
0.1
.2
.1
.2
0)
0)
0)
0)
1368
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Net Uses of Funds in Selected Investments of Corporate Pension Funds, 1947-1958
(Billions of Dollars)
T a b le
1 0 .— Net uses of funds in selected investments of corporate pension funds,
1947-38
[Billions of dollars]
Year
Corporate
bonds
Corporate
stocks
0.3
.4
.4
.4
.9
1.0
0.1
.1
.1
.3
.3
.5
1947.................
1948..................
1949..................
1950..................
1951 ................
1952..................
* Under $50,000,000.
U .S .
Govern
ments
0.2
.2
.2
.2
.1
o)
Year
1953.................
1954.................
1955..................
1956..................
1957..................
1958.................
Corporate
bonds
Corporate
stocks
1.0
1.2
.9
1.5
1.7
1.3
0.5
.7
.7
.9
1.0
1.3
U .S .
Govern
ments
0.1
W
G)
.3
-.2
-.3
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1369
Chart 7
Net Uses of Funds in Selected Investments of Life Insurance Companies, 1947-1958
(Billions of Dollars)
19 4 8
19 5 0
3 8 5 6 3 — 5 9 — p t. 6 A --------19
19 5 2
19 5 4
19 5 6
19 5 8
1370
T able
EMPLOYMENT, GROWTH, AND PRICE LEVELS
11.— Net uses o f funds in selected investm ents of life insurance companies,
1947-58
[B illions of dollars]
Y ea r
R esidential
m ortgages
1947_______________________________________________
1 9 4 8 _________ __________________________________
1949..
_________________________________________
1950_______________________________________________
1951_______________________________________________
1952
_ _ ____________ _______ ______ ________
1953______________________________________________
195 4
1955
__________________ _________________
1956
_
_ _______________________________
1957
___ ___
________________________________
1958 _____________________________________
C orporate
bond s
1.1
1.7
1.6
2. 7
2. 5
1. 4
1. 5
2. 0
2. 7
2. 5
1. 2
.9
U .S. G o v
ernm ents
2.9
4.1
2.5
1. 7
2. 5
3. 0
2. 6
2.0
1. 8
1. 9
2. 4
2.2
State and
local secu
rities
— 1. 6
-3 .3
— 1. 5
— 1.8
-2 . 4
—. 8
- .4
-.8
—. 5
— 1. 0
—. 5
.2
(0
0.3
.2
.1
0)
0)
.1
.5
.2
.2
.1
.3
i U nder $50,000,000.
T able
12.— Comparative yields on U.S. savings bonds, marketable bonds, and
savings deposits
Annual averages
June
1959
1941
Savings bonds: 1
Series E ____
_ _ __ ___________________________
_ _ ________________ ____ __
Series H _ ________
_____ _____ _____ __
Series F __________ __
Series .1_________ ____ ______ - - - - - ______ - - Series G _____________________
_ _ __ __ _
Series K _ _
.
_____________
M ar l e t a b!e bon ds :
U.S. G overn m en t lon g-term ___
_______
__
M o o d v ’s A A A co rp ora te--- __ _ __ - ________
D eposits and shares:
Savings banks deposits ___________________________
Savings and loan shares _ _ _ _ _ _ _
___________
C om m ercial bank savings d ep osits_______________
1945
1948
2.90
2. 90
2.90
2. 53
2. 53
2. 53
2. 50
2. 50
2. 50
* 2. 37
2. 77
2. 37
2. 62
1.89
3.10
1.30
1.68
2. 50
.80
1952
1958
3.00
3. 00
(2)
2. 76
(2)
2. 76
3. 26
3. 26
(2)
(3)
(2)
(3)
3. 26
3. 26
(2)
(3)
(2)
(3)
2. 44
2.82
2.68
2. 96
3. 43
3. 79
4.09
4.46
1.78
2. 30
.90
2.80
2. 43
3. 17
3. 50
2. 30
1.10
(5)
(5)
(5)
1 Y ield oer annum if held to m aturity.
2 Issannce discontinued in M ay 19-52.
3 Issuance discontinued in M a y 1957.
4 A verage yield for m on th o f D ecem ber 1941.
6 N o t available.
Mr. C o n k l i n . I am George T. Conklin, Jr., vice president (finance),
the Guardian Life Insurance Co. of America, New York City. A c
companying me are Slierwin C . Badger, financial vice president, New
England Mutual Life Insurance Co., Boston; James J. O’Leary, di
rector of economic research, Life Insurance Association of America,
New York City; Robert B. Patrick, vice president, Bankers Life
Co., Des Moines; and Richard K. Paynter, chairman of the finance
committee and executive vice president, New" York Life Insurance
Co., New York City. We are glad to have the opportunity to take
part in these important hearings on the Government’s management
of its monetary, fiscal, and debt operations. We have prepared a de
tailed statement which I would like to submit to be a part of the
record. With your permission, I shall proceed by reading a summary
of the statement, and then my associates will join me in discussing any
questions the committee may want to raise.
I should like to make clear that this statement represents my views
and those of my associates, and is not an official statement of the views
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1371
o f the life insurance industry, though I would hazard a guess that it
would be generally endorsed by many in the industry.
I will turn now, with your permission, to the summary of the state
ment in the interest of economy of time as suggested by you, Sen
ator Douglas.
Summary and conclusions: The ability of the U.S. Treasury to
conduct its financing and debt management operations on a wise basis
is of crucial importance for the attainment of our national goals of
full employment, sustainable economic growth, and general price
stability. There is hardly any other matter of greater importance to
the country today than that the U.S. Government be able to finance
itself and manage the Federal debt in a manner consistent with these
objectives. Accordingly this statement is focused on the Treasury’s
financial and debt management problems, with monetary and fiscal
policy questions considered within this focus.
Regarding the objectives of national economic policy we believe that
full employment, sustainable economic growth, and general price
stability are vitally interdependent in the longer run, and that all
three objectives must be pursued as a whole if we are to preserve our
free economic society. This is because a national policy of inflation—
even “ creeping inflation”—would have destructive consequences for
economic growth and economic and political democracy, as follows:
{a) A continued decline in the value of the dollar is bound to injure
and eventually destroy the willingness of the American people to
save voluntarily and thereby to provide the only sound means of
financing economic growth. Under our economic system the growth
process springs from the willingness of the people to save some of
their income and the investment of these savings in factories, mines,
business concerns, homes, public works, and other capital goods, as
well as working capital. (5) The decreasing willingness of the Amer
ican people to buy Government bonds either directly or through sav
ings institutions as the general price level rises accentuates the U.S.
Treasury’s financing problems and leads to the issuance of a larger
and larger portion of short-term debt thus making inflation more d if
ficult to control, (c) A persistent inflation is bound to breed a multi
plicity of Government controls and ultimately to place serious curbs
on our free market economy and thus on our economic and political
freedom.
During the postwar period the ability o f the U.S. Treasury to sell
long-term bonds has been reduced sharply and the problem of main
taining a balanced maturity distribution has become more and more
difficult. In no small measure this is because of the repeated Fed
eral deficits which forced the Treasury to borrow in 7 of the 12
years, 1947-58, for a huge total of over $36 billion. It is also be
cause of the enormous competing demands for capital funds in the
private sectors of the economy and for State and local financing
which, along with Federal financing, too often have exceeded the
total supply o f savings. These competing private demands, en
couraged and even stimulated by Government housing and tax pol
icies, have been able to outbid the U.S. Treasury in obtaining the
available funds. The inflation engendered by an expansion of the
supply of money to supplement savings, along with the wage-price
spiral, has itself made it more difficult to sell long-term Treasury
bonds.
1372
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Our review of the Treasury financing and debt management in the
perspective of the capital market and the national economy as a whole
in the postwar period suggests that the following basic steps must
be taken if the market for Government bonds is to be broadened:
(a) The Federal Government and the Congress must together con
centrate vigorously with all fiscal, monetary, and other appropriate
policies to bring an end to inflation and to destroy the psychology
o f inflation. Sound Government financing requires that in periods
o f high prosperity the Federal Government should run a budgetary
surplus and should retire some of the debt. Further, the Employ
ment Act o f 1946 should be amended to make it clear that general
price level stability is a goal of equal importance with full employ
ment and economic growth.
(b) Foremost in the fight against inflation, we need better under
standing of the fact that the only source of real growth in our na
tional economy is saving and the investment of savings in capital
goods. As a country we have been attempting to grow faster than
our national saving justified. Too often we have resorted to the
creation of money to finance the growth beyond what we have been
able to finance through savings. We have learned the painful lesson
that capital expenditures financed by an increase of the money sup
ply under boom conditions are the certain way to inflation.
( c ) Careful attention must be given to reforms of the Federal
tax system which would encourage saving. In view of the shortage
o f savings relative to the demand for capital funds which has char
acterized the postwar period, and which will continue in the fore
seeable future, our tax system needs to be subjected to careful study
to eliminate forms of taxation which unnecessarily discourage sav
ing. This is not an easy task, in view of the heavy revenue needs of
the Government, but the need is clear in terms of the great demands
ahead for capital funds. Toward the same end, interest rate pol
icies of the Federal Government should be reexamined to see if they
are consistent with the requirement of greater savings.
( d) The only possible way for the Treasury to raise long-term
funds on a sound basis in a free capital market is to pay the interest
rate required to bid funds away from other users. The Treasury task
of bidding for long-term funds will be eased to the extent that steps
outlined in the foregoing three parts of this summary are carried
out.
The principal conclusions reached in this statement regarding sev
eral specific questions of Federal financing and debt management are
as follow s:
(a)
Debt management should not be regarded as an important tool
to be employed by the Government in combating the business cycle.
Government efforts to counteract the cycle have much greater poten
tialities in the area of monetary and fiscal policy. The objective o f
lengthening the average maturity of the Federal debt has proved so
elusive, yet is so important, that the Treasury should be alert to the
opportunity of selling long-term bonds even in periods of general
business slack. I f there is an accumulation of long-term funds avail
able to purchase Government bonds, the Treasury should make such
bonds available even though a business recession may exist. I f such
sales do seem to interfere with business recovery, monetary measures
can be used to aid in correcting the situation.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1373
(b) Treasury financing and debt-management operations should be
aimed primarily at developing a balanced maturity distribution of the
debt, with a substantial proportion of the debt in intermediate and
longer-term issues. Such a maturity distribution would have im
portant advantages for the Treasury, the capital market, the monetary
authorities, and the economy as a whole. In particular, from the
standpoint of the Federal Reserve and the objective of sustainable
economic growth without inflation, an orderly spacing of maturities
and a reduced frequency and size of refunding operations would allow
far greater freedom to pursue credit policies consistently.
(c ) In order to bring nonbank investors such as mutual savings
banks, uninsured pension funds, and life insurance companies back
into the Goverment bond market as net purchasers, the all-important
step is for the Treasury to offer an interest return fully competitive
with the yield available on other investments such as residential and
commercial mortgages and directly placed corporate bonds. In addi
tion, it is desirable that nonbank investors be permitted to pay for
Government bonds on a deferred basis. This would permit such
investors to fit their purchases into their forward commitment picture
and their cash-flow expectations.
(d) The Treasury should give serious consideration to advance
funding of some portion of the debt which has come into the shorter
maturity ranges. The investment series B bonds would present a good
possiblity for advance funding. In addition, the Treasury should con
sider the desirability of combining an advance funding operation with
a cash offering of a long-term bond.
(e) The Treasury should seriously consider offering incentives to
the securities business to sell long-term marketable bonds. This means
that the Treasury should consider paying commissions to brokers and
dealers just as is done in the marketing of private securities.
( /) In order to encourage the purchase of U.S. savings bonds, the
interest return on such bonds should be raised in line with the return
on private investments. In addition, the Treasury should also provide
a system of incentives to the securities market to promote the sale of
savings bonds. A tax-exemption feature should also be considered.
(g) It would be a serious mistake, to say the least, for the Treasury
to introduce a “ purchasing power bond” in which the amount paid at
maturity (or the amount of interest) is tied to some price index such
as the index of consumers’ prices. This would be tantamount to ad
mission of defeat in the struggle to halt inflation.
The decline which has occurred in the prices of Government bonds
during the past year has revived the argument that the Federal Re
serve, through open market purchases, should support the prices of
Government securities. A return to the policy of Federal Reserve peg
ging of the prices of Government bonds, as followed in the decade
prior to March 1951, would be disastrous in that it would place our
country on the road to ruinous runaway inflation. It would force the
monetary authorities to foster an uncontrolled expansion of our money
supply, thus promoting a sharp and accelerating rise in the cost of liv
ing, and would actually drive up interest rates on all other forms
of debt except Government securities.
Some who recognize the disastrous consequences o f a pegging op
eration suggest that, as the occasion demands, the Federal Reserve
1374
EMPLOYMENT, GROWTH, AND PRICE LEVELS
should buy longer term Government securities to afford stability to
long-term rates, and at the same time sell an offsetting amount of
short-term securities to prevent any net addition to commercial bank
reserves and hence the money supply. Such an operation would have
no effect on the general level of interest rates, but it would hold down
the yields on longer term Government securities and raise the rates
on short-term issues. Higher interest costs to the Treasury on short
term issues are quickly translated into a higher service charge on the
Federal debt because $76 billion of Government securities mature
in 1 year or less. Moreover, Federal Reserve support of longer term
Government bond prices would lead to a rapidly increasing volume of
sales o f such securities by private investors, and the outcome eventu
ally would be that the Federal Reserve would wind up holding most
o f the long-term Government bonds, and short-term interest rates
would be driven to a very high level, with the service charge on the
Federal debt much higher in the process because of the huge volume
o f short-term debt.
I f the Federal Reserve is to retain its freedom to restrain the ex
pansion of the money supply in a period of high and rising economic
activity, which we believe is absolutely essential, there are no manipu
lations of open market operations that can escape the discipline of
demand and supply forces in the capital markets.
Mr. Chairman, that completes the reading of the summary. With
your permission we would like to have any member of the panel join
in the answering of the questions as he may see fit.
TIu: C h a ir m a n . Thank you very much. It is in a nonmischievous
spirit that I ask the following question. I think you properly em
phasize the desirability of not merely a balanced budget, but a sur
plus, which can be used to retire a portion of the public debt. You
therefore would favor an increase in taxes in such periods as this,
would you?
Mr. C o n k l in . I am sorry, I could not hear that.
The C h a ir m a n . Y ou would favor an increase in taxes to increase
governmental revenues in a period of revival so that a portion of the
public debt could be retired, and thus stability introduced in the fiscal
affairs?
Mr. C o n k l in . I would rather examine the extent to which Govern
ment expenditures could possibly be reduced to achieve the same ob
jective.
The C h a ir m a n . Would you favor plugging loopholes in the tax
system ?
Mr. C o n k l in . I wrould certainly favor plugging any loopholes in
the tax system, as a general principle.
The C h a ir m a n . In the past the life insurance industry or the in
surance industry as such has had one of the lowest rates of taxation
o f any industry, so I take it you are in favor o f the action of the
Finance Committee in increasing the taxation of insurance com
panies particularly on profits made from underwriting and which
raise total receipts or will raise total receipts from the insurance in
dustry from roughly $300 million to roughly $500 million a year ?
Mr. P atr ick . Senator, are you speaking accurately when you say
we have the lowest rate ?
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1375
The C h a ir m a n . That is on net income. It is one of the lowest rates
of taxation on net income. 52 percent and 15 percent of the income.
This applies not merely on mutual, but to stock companies as well.
Mr. C o n k l in . I would like to state that the life insurance industry
in the United States, which is to a substantial extent, as you are awTare,
a savings institution, is the most heavily taxed savings institution in
the world.
The C h a ir m a n . Is this true in the case of stock companies where
the profits accrue to the holders of stock rather than being returned
to the holders of policies ?
Mr. C o n k l in . I am speaking o f the overall picture.
The C h a ir m a n . I am speaking to stock companies. Would you
oppose the increase in taxation to stock companies ?
Mr. C o n k l in . That has been done.
The C h a ir m a n . Would you favor a further increase?
Mr. C o n k l in . N o ; I would not.
The C h a ir m a n . Here is one of the difficulties we get into. People
speak of the desirability of increasing governmental revenues and
plugging loopholes, but no one will admit that they are in possession
of a loophole. So Congress has always been berated for not closing
somebody else’s loophole. I merely raise this point and pass on.
I would like to address a question of your paper in which you say
that the level of interest rates has an important influence on the will
ingness of people to save. Do I take it that you assume that an in
crease in the interest rate will increase the rate of savings?
Mr. C o n k l in . Yes. This is a difficult fact to statistically prove.
I believe that the tendency is for an increase in interest rates to in
crease savings.
The C h a ir m a n . I may say 35 years ago I believe that, too, because
I assumed that savings were positively inclined. Then I spent 2
years studying this subject, 1 year studying the writings of the various
economists on the subject, and I found they made every assumption
under the sun from negative supply curves of savings to positive
supply curves, to constant rates, to first up and down rates, and so
forth. Then I spent a year studying the statistics. 1 could find
absolutely no connection between changes in interest rates and changes
in the rate of savings. That wTas 30 years ago. I published the re
sults in a chapter of a book that I wrote. Have you later informa
tion to prove that an increase in the interest rate increases the rate
of savings ?
Mr. C o n k l in . I don’t believe it would be possible to demonstrate
a close correlation, Senator, between minor changes in interest rates
and savings. I do believe, however, that there can be a very sub
stantial effect upon savings of large changes in interest rates.
The C h a ir m a n . That is to raise the interest rate to 8 percent ?
Mr. C o n k l in . No; this is not the question. The question is pos
sibly whether the attempt to depress interest rates to extraordinarily
low levels would not tend to reduce savings.
Mr. O ’Leary. May I just add this thought? One of the very
noticeable things in the savings picture is that if you get an increase
in interest rates on savings bank deposits versus the interest rate on
commercial bank time deposits, there are very sharp movements of
funds from commercial bank time deposits into the savings bank field.
1376
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Whatever institution happens to get into the lead in terms of the rat©
it is paying, whether it is a savings and loan, or a savings bank, there
are pronounced shifts of funds as between institutions. This proves
that savers are sensitive to rate changes. It does not prove that
changes in the interest rates will affect the total volume of savings,
although this may be true.
The C h a ir m a n . That is not the point I wanted to raise.
Mr. O ’L e ar y . However, I think it does at least give you a clue to
the fact that the interest rate is a very important factor in attracting
savings as between the various types of institutions.
The C h a ir m a n . I don’t doubt that at all.
The raise in the interest rates by one set of savings institutions will
draw savings to it. This advantage will be someone else’s disadvan
tage. The question is whether the increase in interest rates gives
society more savings.
Mr. O ’L ea r y . A s you know, Senator Douglas, the statistics we have
on savings as prepared by the Department of Commerce and others
are largely residual figures growing out of the GNP figures, and so
forth, and they are not very good figures on savings.
The C h a ir m a n . They are the best figures we have.
Mr. O ’L eary . They are the best figures we have but it is awfully
hard to use them with precision. I f you take the Goldsmith “ Study
o f Savings,” it tends to show that the rate of saving, as related to
disposable income, has been constant over a long period of time. How
ever, Goldsmith himself has 200 pages of footnotes indicating the
weakness of the savings figures.
The C h a i r m a n . No matter what the interest rate may be, the per
centage of savings from the gross national product, as you say, tends
to remain the same, despite an upward drift in the real income.
Mr. O ’L e a r y . A ll I am suggesting is that perhaps some light is
being shed on this question by the speed wTith which funds shift as
between various forms with changes in interest rates.
The C h a ir m a n . I don’t doubt that for a minute. The question is,
taking the economy as a whole, whether an increase in the interest
rate raises the total volume of savings. I think what you have said
bears out my own judgment that there is absolutely no statistical
evidence to support this. This is an article of faith, a faith which
I held once very strongly, but about which I have become somewhat du
bious.
Mr. O ’L e ary . I think there is a good deal to what you say. I was
merely trying to add that particular piece of evidence which I think
has a bearing.
Mr. P a y n t e r . May I add this one thing? I am sure you cannot
prove it on the upside, although many of us believe it. I do think
there is a negative point on the downside. There is a certain rate be
low which people say “ Oh, what the heck,” and would rather spend
it than keep it.
The C h a ir m a n . That may well be true. There are those who argue
that since a person wants to set aside a certain amount for an annuity
or get a certain yield, if the rate goes down he will save more in order
to get the same yield.
Mr. P a y n t e r . It is sometimes hard to do, sir.
The C h a ir m a n . I know.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1377
Now, let me turn, if I may, to a more technical question in the field
o f debt management. The American Bankers Association and the
Investment Bankers Association are commonly called into confer
ence with the Treasury when they make a new issue of either short
term or long-term Government securities. Are you frequently called
into conference with them?
Mr. C o n k l in . We are on occasion called in to discuss it with them.
The C h a ir m a n . When was the last time you were called in?
Mr. O ’L e ar y . It was the end of April.
The C h a ir m a n . Can you recall offhand how many times you have
been called into conference in the last 4 years ?
Mr. O ’L e a r y . I would say in the last 4 years we have probably
averaged about three times a year.
The C h a ir m a n . So you have been called into conference 12 times.
Mr. O ’L e ary . That is right.
The C h a ir m a n . Have you made a record of the recommendations
which you make at these conferences ?
Mr. O ’L eary . W e never made any specific recommendations. Our
procedure, Senator Douglas, is quite different from that followed by
the A B A or IB A . I was present at the hearings before the select
committee, and I have heard their testimony. Their procedure is a
much more formal one than ours. We have been meeting with the
Treasury in an advisory capacity since 1941. I have been in my pres
ent job since 1946. My first recollection of these meetings is that we
met with Secretary Snyder. The procedure is a very simple one and
has changed little over this period. When we get to the Treasury we
are presented with a slide show. This slide show brings together the
basic data you can find in the Treasury bulletin but it brings it together
in a well coordinated form to give us a picture of the Treasury’s cur
rent situation.
Then following that we have a discussion of about an hour with the
Treasury and so far as we have been useful, and I have some reserva
tions as to how useful we have been to the Treasury, our function has
been merely to provide a sounding board to them as to what the current
status of the capital market is—how we see the capital market. They
have been interested in knowing how we see the mortgage market, both
Y A and FH A. They have been interested in the corporate bond
market. Their basic purpose has been to try to find out what are the
conditions in the capital market with reference to whether the Treas
ury might have an opportunity to sell a long bond. We have never
made a specific recommendation. The procedure has been one in
which, when we have gotten through, there has been some conclusion
reached as to whether there might be some funds around to buy a long
bond. There lots of times has been a discussion as to whether we
might have an interest in buying such a bond. It has been mainly
just a kind of sounding board type of operation.
The C h a ir m a n . In other words, you do not make recommendations
either as to the rate of interest or the length of the issue.
Mr. O ’L ea r y . That is right.
The C h a ir m a n . But the A B A and the IB A do.
Mr. O ’L e ar y . A ll I know about their procedure is the testimony
that they presented, which, I believe—it is a matter of record—they
did make definite recommendations. They have a very formal pro
cedure which has also been developed over a period of time.
1378
EMPLOYMENT, GROWTH, AND PRICE LEVELS
The C h a ir m a n . May I ask the staff if the A B A has presented its
additional recommendations since the period 1956? I am told not.
It is in the mails, but it has not yet arrived.
Some of us have suggested that instead of this process o f dealing
with representatives of savings institutions, which I call a negotiated
rate or a collective bargained rate— I don’t know that the Treasury
would accept those terms—some of us have urged that an alternative
policy be developed in which the auction is used and that there be
competitive bidding for new issues of Treasury securities. I may say
this in connection with this as I have read the Joint Report of the
Treasury and the Federal Reserve, they misunderstood the nature of
our proposal. They thought we were speaking of an auctioning sys
tem after the issue had occurred. I am suggesting an auctioning
system at the time of issuance in which the Treasury would fix the
interest rate and the duration. Then the bidding would be on the
basis of price. Adequate time should be given for various savings
and lending institutions to become acquainted with the terms of the
issue.
Have you formed any opinion on that ?
Mr. P atrick . Is it similar to the process used in auctioning bills
in which each individual investor names his own price?
The C h a ir m a n . Yes.
Mr. P atrick . Or similar to what is done in the municipal market
where syndicates are formed which buy the whole issue.
The C h a ir m a n . I am not familiar with the municipal market. A t
the same time we hope it would not be restricted to 17 dealers. We
would want a very broad market. We hope that you people might
come into it.
Mr. P a t r i c k . In other words, somebody might bid 4.5 percent and
somebody 4.55 and somebody else 4.60, and if the Treasury had a
billion dollars worth to sell, it would pick out the billion at the lowest
rates and sell them.
The C h a ir m a n . Yes.
Mr. P atrick . I would see no objection to that, giving m y personal
reaction.
The C h a ir m a n . It would let you into this market where you are
now largely excluded; isn’t that true ?
Mr. P atrick . N ot excluded.
The C h a ir m a n . From which you voluntarily more or less retire;
isn’t that true ?
Mr. C o n k l in . Mr. Chairman, speaking as a financial officer and
just for myself, my conviction has been that the U.S. Treasury has
failed almost always to come up with a rate which is competitive and
attractive to us. Therefore, far from being a negotiated rate, which
is a giveaway rate or an attractive rate, we have felt it is very un
attractive. For that reason I feel I would be more than happy to
see an auction market which would reflect the forces of supply and
demand. I feel that then the Treasury bonds would be offered on a
realistic marke
@FedFRASER