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BOARD o r OOVBDfOM o r THE rEDEML M m tV B STITEM MEMORANDUM FROM THE O FFICE OF GOVERNOR M. S. SZYMCZAK TO:. Honorable John W. Snyder f> PAXMEMT OF DIVIDMDS 01 HATIOMAL SKftVIGS U P E ISSOTUSCE POLICIES (Special report of Task Fore© No. 5# established by Defense Mobilisation Director C. E* Wilson*8 letter of March 12, 1951) Hi© Director of Mobilization, the Ohaimaa of the Board of Governors of the Federal Reserve Systea, and the Secretary of the treasury have received identical letter© under date of April 3, 1951* from the Administrator of Veterans* Affair® re questing an expression of opinion regarding a proposed, distri bution of about #6#§ million of dividends on National Service Life Insurance policies* The letter© were sent pursuant to a request of the Subcommittee of the Committee on Appropriations of the Halted States Senate and relate to the questions of in flation involved in the proposed payment. The Task Force has considered this matter and has dis missed it with Mr* H. ¥* Breining, Assistant Administrator of Veterans1 Affairs for Insurance* The conclusions of the Task Force are set out belowi 1« The exact status of the funds represented by the proposed dividend Is a matter on which there may be some difference of legal opinion* In view of the fact that it has been detewdned and announced publicly that there is a surplus in the insurance fund, there are strong reasons of law and of felrness for making the payments at this time* Vhile the law appears to give the Administrator of Veterans* Affair® wide latitude in the tiiaing of the distribution, especially since the dividends which accrued from 1940 to 194$ were not distri buted until about two years ago and the distribution here in question would cover the dividends from 194® through the anni versary date of the policies in 1951, the fact that he has already declared that there is a surplus in the fund may be a barrier against a postponement of a distribution which will require farther study* 2* It is clear that the payment of the proposed divi dend of about $685 million would be inflationary. Bel sing the funds would increase the demands on the Treasury and on the Government securities markets* Even though veterans could be expected to save some part of the dividends they receive, the distribution would add appreciably to the spending stream. These facts do not necessarily mean that the payment should not be made — there are some payments that must be made even though they are inflationary, the most important being payments for plan©®, tanks and other defense materials.' It is clear, however, that the payment would add appreciably to inflationary pressures, and therefore should be scrutinized with special care. 3» The Veterans* Administration proposes to spread the payment fairly evenly over the coming 12 months. Such a spreading out of the payment would help to minimise its in flationary impact* A* It is understood from the Veterans* Mai n! strati on that about fl,5 million to |2.5 million has already been spent preparing for the distribution, and that virtually all of the time, money, and effort thus far emended would be wasted if the distribution is 'not mad© as planned by the Veteran** Admini©** tration. , 5* One reason for the size of the dividend at the present time is the faet that for various reasons beyond the control of the Veterans* Mministration, distribution of the dividend® heretofore has not been on am annual tesla, k #2.5 billion distribution was made about two years ago to bring the payments down to 19-4$. The presently proponed distribution would bring the payments tip to the anniversary date' in the calendar year 1951. The Veterans* Administration proposes to mate® any pay ments annually that may fall due thereafter. 6. If the payment herein considered were postponed, it is not clear whether a less inflationary period could be expected to exist in the near future. The present defense program is likely to last for sevens! years. Accordingly, while a postponement of the payment might avoid an increase in inflationary pressure* at this time, the delay would add to the sis© of the payments — and hence to the inflationary potential which would have to be released at some future time. 7. The Task Force gave some consideration to the possi bility of making the distribution in some form which woisld itself constitute savings or would encourage the recipient to add it to savings. It has seemed to the Task Force that at the present time it would not be feasible or desirable to substitute a bond for the cash payment. Tbs Veterans* Administration has indicated that great expense would be involved in offering to veterans an alternative of .accepting c&ah or adding the amount of the distri bution to the value of their policies. It is recognised that, whatever might have been the expense of such a procedure as an origins! proposition, it would undoubtedly be greater at the present time in view of the work that ha® gone forward toward the different type of distribution. - 3 - 8 . The Task Force suggests that the Veterans* Adminis tration and the Treasury Department explore every possibility vfbr encouraging the saving of the largest possible am o u n t of the dividend distribution n e t only generally, but particularly in the form of United States Savings Bonds. It might be helpful to enclose specially designed literature wi th t he check. Con sideration might be given to going further and including order blanks and return envelopes for investing the payment in savings bond*. As a further means of facilitating and sim plifying such investment by t h e veteran, consideration might even be given t o enclosing two separate checks, one representing the cost of the largest savings bond p u r c h a s a b l e with the dividend end the other representing the remaining part of the dividend. This, however* would involve serious administrative difficulties and the additions! cost to the Treasury Disbursing Office in making the payments would be substantial. This proposal would add materially to the expenses of the Treasury Division of Disbursement for the reason that under existing procedure checks are inscribed through a method known as the “ Transfer Posting Process,® through which the inscription of the check is accomplished by means of the transfer of a carbon deposit on the back of the schedules prepared \sy the Veterans Administration to the face of the checks, thus avoiding the manual typing of the checks* Further special considerstion should be given to the question whether these or any other steps that could be taken to encourage the saving of the dividend would justify the addi tional expense involved. 9. The Task Foree suggests that the Veterans* Adminis tration give further consideration to the relative advantages fnd disadvantages — from the standpoint of cost, convenience, and other aspects — of making provision in the future for allowing veterans the alternative of adding the ©mount of future dividends to the v a lue of their policies. Even after the dividends are placed on an annual basis, such an option offered to the veterans might be worth while for helping to attract more of these funds to the Treasury and for provic policy-holding veterans. Mw a r d F, Bartelt April 11, 1951 .
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