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White House - 1/29/40 x : • ,Y V < ? January 27, 1940 Chairman Eoclea Henry Edmiston Attached are th© revised tables and dieeussion. Mr« Dreibelbis tell8 me that he has been tied up an another matter* but is planning to have an answer by the first of next week on the legality of using gold from the Stabilisation Fund. ,• ' January 27, TREASURY TISASCJMQ W 19hO With a view to holding down, the increase in the amount of and the interest charges on the public debt, it is suggested that consideration be given to the following programs (a) to raise no cash in I9I4O through public offerings of direct obligations, and (b) to use part of the gold in the Stabilization Fund to retire the £1,100,000,000 of Treasury notes and bonds due or callable next June* Cossraent Ko cash financings The accompanying Table 1, based upon the official estiaates of the Budget Message, shows that it is unnecessary for the Treasury to raise any new cash through public offerings of direct obligations from now until the end of 19l#« Such a prograa contemplates, however, that the 1700,000,000 excess capital funds of Government corporations shall be repaid to the Treasury in new cash before the end of the year. If this were done, the Treasury cash balance could be maintained at a level of at least 1500,000,000 for the rest of the year. While #$00,000,000 is a low balance by recent Treasury standards, it is a sufficient ajaount for the Treasury to carry in its working accounts« Prom 192i| through 1931 the Treasury was able to operate effectively on a working balance which averaged less than 1250,000,000. At present, with the tremendous and growing volume of excess bank r®&err®Bt the Treasury can borrow on snort-tern at negligible rates under any conceivable circumstances . There is also reason to believe that the Treasury cash position will be more favorable than the budget estiimtes indicate. The Treasury1s estimates of receipts for the rest of the fiscal year 19^0 appear too conservative, particularly for incoiae taxes and custom, while budget expenditures may be slightly high. Last year the budget estimates for the comparable period, January-June 1939 • indicated a deficit which turned out to be over H|.00,000,000 too high. Independent estimates show that an error of similar mgnitude xaay exist in the present estimates for January-June 19U0. If these independent estimtes are proved correct by the March incox&e tax collections, the Treasury1 s cash balance could be mintained at a level of at least #1,000,000,000 during the last half of the year and, consequently, there would be even less justification for undertaking any new cash direct financing. Use of gold to retire debt. It is no longer necessary to hold the present large amount of gold £n""the Stabilization Fund either from an economic or from a political standpoint. The Stabilisation Fund has operated successfully, throughout its existence, with a working balance of only 1200,000,000, while the remaining 11,000,000,000 of the fund has been held in the form of sterilized gold in the Treasury. The only possible uses of this gold for exchange stabilization purposes would be to make foreign - 2 - loans* to buy and hold foreign currencies, and to counteract gold outflows from this eountry* The first of these uses is not permitted under present legislation* the second would subject the Fund to possible serious losses through currency depreciation, and at least for the duration of the European m r there is no chance that -we will suffer a drain of gold* Any likely outflow of gold in the more reaote future ean be taken care of directly by the basking system* Excess reserves of the banks stand at a record level of over $5,500,000,000 and will be further augiaented by the prospective additions to the country* s gold stock as well as by any doissstic use of gold now held in the Stabilization Fund* Although a strong fight was nsade in the last session of Congress to extend the life of the Fund, it can now b© argued that the outbreak of war has completely changed the picture and, consecjuently, the Fund has become largely inoperative* There is no longer any reason to borrow and to pay interest on money which, in effect, would be used siaply to maintain a large sterile gold balance in th© treasury* Moreover, this Administration has always taken the position that the Stabilization Fund represents an offset to the public debt* To ask Congress, later in this session, to authorize the use of part of the gold to retire debt would, therefore, merely be putting tibia contention into practice. If the $1,100,000,000 of Treasury notes and bonds due or callable next June were paid off by use of this gold, the annual interest saving to the Treasury would be about $23,000,000* Effect of the above program upon the public debt* Even, though new direct mrket financing is avoided, the public debt will continue to rise because of special issues to trust accounts and of sales of United States Savings bonds* The accompanying fable 2 shows that these securities will increase the public debt, subject to the statutory limitation, to about 12*3,000,000,000 by June 30, 19^0, and to tUi.,000,000,000 by the end of the year. If the notes and bonds due or callable in June were paid off in cash by using gold, these figures would b© reduced to about |i|2,000,000,000 and fh3,000,000,000, respectively. It appears, therefore, that the question of raising the statutory debt limitation can easily be postponed until the next session of Congress. January 27* (Based upon Treasury estimatest in millions of dollars) cash r©^ulr©a©nts Treasury cash balance, Peoerabor 51, 1939 Add for y S Sales of U. S« Savings bonds Social 3«ourity funds* net reoeipts Total funds OTWlfifolt for C&sh defioit pjetironent of Trwuzwy b i l l s Hetlrvnent of inatured d«bt» eto# ^#710 5&0 1^0 »1>010 57^0 1,870 150 IgD urer cash balance, A n 3^# Add for ^ OX &• ;>• I ^®ouritv' funds, rot US—itfta of surplus funds froa.1 Govft corporations total fvuuis availablo for Casli deficit of matured <l©bt, tfeN WQ JJSSL 1,1*80 96 + i*22S,lj6 1* Treasury MUrii b&l&ne®, Docasab»r A M for y Sales of U« S. Sa?in|:8 bondsSocial Security funds., net reeeipts Proposed additional, tsaoes Total, avmilabi© funds for ^ 9| Cash deficit of i^aturiad debt, oto* 620 100 iS 1,1JO I^Q Treasury cash balance, Juz» J0 9 19^2 3aot expessudituros of Ot^HMMft oorporatiooa* 9U0" January 2?, Table 2 imam ram PUBLIC nan SUBJECT TO STATUTORY i n (Based upon Treasury estimates* in millions of dollars) Outstanding debt, Deoenbor 31» 1939 Add for y U» Sm Savings bonds (mturity m l u © ) 750 Special issues to Social Security accounts, etc. ffiO +1,280 Deduct for Retirement of Treasury b i l l s KSBnt of imtured debt, e t c . 150 lij.0 Outstanding debt, June 3 0 , 19^0 1^2,970 Add for U« S* Savings l*»onds (imturity valuo) Speoiitl issues to Social Security accounts,©tc« 5?Q • 1.030 Deduct for July*Deoesiber Eetirei^nt of outured debt, etc. l j0 Outstanding debt, Deoenber 3 1 , 19hO Add for Jazmary^une I9hlt U« S« Savings !x>nds (s^&turity "raiuo) issues to Soci&l Security accounts,etc* Induct for Jajiuary-Jian© 19i*l* Retiroistant of laatured debt, etc* Outstanding debt, June 30, 19^2 | i^ h%520 < Ilotei Although the Budget Kassage shows tliat the debt limit will not quite be reached by the end of the fiscal year IS^l* it appears that If Savings bond sales continue at the present rate the debt would autoaRtically exceed the statutory limitation. This is because the maturity ir&lue of Savdngs bonds is msed in calculatiaig debt subject to statutory limitation, isiill© the Budget Message shows gross public debt in i^ticb Savings bonds are included at tkeir current redemption value* Froa January l<&0 to June 19^1 # assuming ea@h sales of Savings bonds of |l,560,0O0,0O0, the imturity valu© would be one-third higher, or 12,080,000,000. After taking account of retirement of 1150,000,000 Treasury bills this r*sonth and other ad lustjaents, this m@ans that net retirements of other opea-imrket debt of about $3^0,000,000 would be necessary to stay within the statutory limitation as is shomi in the table* January 27, 19*4-0 Table3 DSTIl^TED fIBiSUHY CASL I^QUlIMISlfS AKL FCBLIC P£BT, JAK-DLC. (Based upon Independent estiraates: i n millions of d o l l a r s ) Treasury cash re^ulroinenta l/ Treasury cash balance, December 1939 Add f o r January-June Sales of V* S# fSHflfi bonds Social Security funds, n o t r e c e i p t s Total available funds Deduct for January*June Cash d e f i c i t Retireiaent of Treasury b i l l s Eetirenient of matured debt, e t c . 550 1,520 150 ihp Treasurer cash balance, June JO, 19l|0 Add for July-December Sales of U« t« Savings bonds Social Security funds, net receipts Return of surplus funds of Government corporations 1,090 2,000 1,010 990 580 53^ JOQ Total available funds 1,610 2,600 Deduct for July-December Cash deficit Retirement of matured debt, etc. 50 1»59'Q Treasury cash balance, Leoeinber 31* ISfcfl 1,210 Direct public debt subiect to statutory limitation Outstanding debt, December 31* 1959 1*1«'9^3 Add for January*June U. £• Savings bonds (siaturity value) Special issues to Social Security accounts, etc. Deduct f o r January*June Hetirement of Treasury b i l l s Retireiaent of matured debt, e t c . 612 150 li;Q Outstanding debt, June JO, l$40 Add for July*Deceiaber 19u0: U. S* Savings bonds (maturity value) Special issues to Social Security accounts, etc» Deduct for July-Deceaber Retireiuent of rmtured debt, e t c . Cutstandinc debt, I/ecessber 3 1 , I5I4O \J Excludes siet expenditures of Government corporations. -290 lj-3,052 507 6ll -50 1J+,12O
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