The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
ADVANCE REFUNDING AND DEBT MANAGEMENT
HEARINGS
BEFORE THE
COMMITTEE ON EINANCE
UNITED STATES SENATE
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
MARCH 14 AND 16, 1962
Printed for the use of the Committee on Finance
U.S. GOVERNMENT P R I N T I N G O F F I C E
81366
W A S H I N G T O N : 1962
COMMITTEE ON FINANCE
H A R R Y F L O O D B Y R D , Virginia, Chairman
R O B E R T S. K E R R , Oklahoma
R U S S E L L B. L O N G , Louisiana
G E O R G E A. S M A T H E R S , Florida
C L I N T O N P . A N D E R S O N , N e w Mexico
P A U L H . D O U G L A S , Illinois
A L B E R T G O R E , Tennessee
H E R M A N E. T A L M A D G E , Georgia
E U G E N E J. M C C A R T H Y , Minnesota
V A N C E H A R T K E , Indiana
J. W . F U L B R I G H 1 , Arkansas
J O H N J. W I L L I A M S , D e l a w a r e
F R A N K C A R L S O N , Kansas
W A L L A C E F. B E N N E T T , Utah
J O H N M A R S H A L L B U T L E R , Maryland
C A R L T. C U R T I S , Nebraska
T H R U S T O N B. M O R T O N , K e n t u c k y
ELIZABETH B. SPRINGER, Chief Clerk
n
CONTENTS
Page
Statement of Hon. Douglas Dillon, Secretary of the Treasury
..
1, 43
S E L E C T E D DATA ON D E B T M A N A G E M E N T POLICIES
S U B M I T T E D BY T H E S E C R E T A R Y OF T H E TREASURY
Average length of the marketable public debt
Average length of the total marketable debt on March 1, 1962
Comparison of net interest savings or cost on five advance refundings on
current value basis and discount basis
Comparison of total returns to an investor from alternative courses of
action in advance refunding of 2}£s of December 15, 1967-72 into 3}^s
of 1998 (total proceeds per $100 face value from March 1, 1962 to December 15, 1972)
Five advance refundings, 1960-62
Five advance refundings—interest costs and interest savings
Income on U.S. private long-term capital investment by area, calendar
year 1960 and calendar year 1961
Interest cost of extending debt to 1998
Long-term market yields, monthly averages, 1959-62
Market yields on Treasury securities
Maturity distribution of marketable debt
Overall deficit on U.S. balance of payments and portion representing U.S.
gold loss, 1950-61
Potential growth of the under 1-year marketable public debt
Statute under which the Secretary of the Treasury is authorized to issue
bonds
Treasury bonds outstanding February 28, 1962
U.S. balance of payments by major components
U.S. private long-term capital outflow by area, calendar year 1960 and
calendar year 1961
17
33
52
21
12
14
78
8
7
4
34
85
3
50
50
80
77
ADDITIONAL INFORMATION
Letter of Hon. Albert Gore to the Secretary of the Treasury and reply
64, 65
Letter of Hon. John J. Williams to the Secretary of the Treasury and
reply
10, 11
m
ADVANCE R E F U N D I N G AND D E B T MANAGEMENT
WEDNESDAY, MARCH 14, 1962
U . S . SENATE,
C O M M I T T E E ON F I N A N C E ,
Washington, D.C.
The committee met, pursuant to notice, at 10:20 a.m., in room 2221,
Senate Office Building, Senator Harry F. Byrd (the chairman) presiding.
Present: Senators Byrd, Kerr, Long, Anderson, Douglas, Gore,
Williams, Carlson, Bennett, Curtis, Morton, and Hartke.
Also present: Elizabeth Springer, chief clerk.
The C H A I R M A N . The committee will come to order.
The purpose of this meeting is to hear the Secretary of the Treasury
with respect to advance refunding.
You may proceed, Mr. Secretary.
STATEMENT OF HON. DOUGLAS DILLON, SECRETARY OF THE
TREASURY
Secretary D I L L O N . Mr. Chairman, I welcome the opportunity to
discuss with this distinguished committee the Treasury's debt management policies and, in particular, our use of advance refunding as a
tool in achieving our debt management objectives.
The management of the debt is one of the major financial responsibilities of the Federal Government and it is, in addition, an important
arm of economic policymaking. If the Federal debt were small, we
could afford to manage it much like the treasurer of a corporation
manages his company's debt, without giving much thought to the
impact of our operations on the money markets and the economy.
This is not, however, the case. The magnitude of the Federal debt
is such that the decisions made in managing the debt can have profound effects on the money markets, on the structure of interest rates
and on the magnitude of the flow of funds into corporate and municipal
bonds and mortgages. Moreover, debt management decisions can
have a significant impact on the liquidity of the economy, on the
effectiveness of monetary policy and on the balance of payments.
All of this means that the management of the debt is a continuous
and unrelenting task. Even in a year in which the Federal budget is
in balance, debt operations on a very large scale must be carried out
both to meet the seasonal financial needs of the Government and to
refund maturing obligations.
The primary objective of debt management is to assure a satisfactory placement of the debt, and our aim must always be to minimize
the burden on the American taxpayer of the interest cost of the debt.
An important objective of economic policy with respect to debt
management is to help create conditions in the money and capital
1
2
ADVANCE REFUNDING AND DEBT
MANAGEMENT
markets which are most conducive to the orderly growth of the
economy without inflation. A further objective, now of very great
importance, is to conduct operations in such a way as to contribute
toward the achievement of equilibrium in our balance of payments.
We must constantly blend these objectives so as to obtain the overall
result that most clearly reflects the national interest at the moment,
as well as over the long term.
In seeking to attain these debt management objectives, we are
continually striving to produce a more balanced maturity structure
for the debt—that is, a broad distribution of the outstanding debt
among holders interested in short-term securities, others who want
issues of intermediate term, and those whose needs are for long-term
bonds. This will enable us to reach all types of demand for Government securities and to avoid the problems produced by an excessive
concentration of debt in a particular maturity area.
One of the Treasury's principal instruments in working toward the
needed restructuring of the debt over the past few years has been
the advance refunding. I would like to emphasize, however, that the
achievement of a more balanced debt structure is not an end in itself.
I t is a necessary means toward achieving ail of the other goals that I
have already mentioned. We do not advocate lengthening the debt
structure merely for its own sake. If it were possible to accomplish
all of our objectives with a Federal debt entirely composed of short
maturities, our problem, in some respects, might be easier. In that
same light, the shortest maturity of all would be that of printing
money. But merely to mention that extreme result—the ultimate
result of continually shortening the maturity of the debt—is to give
the answer. The eventual breakdown of the entire payments mechanism would be the inevitable end of that kind of course.
One fact of life which bears heavily on any debt manager is that
unless he moves in a fairly regular fashion to put out reasonable
amounts of intermediate and long term debt, he will, within the space
of a few years, find himself with a debt that is predominantly short
term in character, and getting shorter every day. In this connection,
I would like to call your attention to chart 1.
(Chart 1 is as follows:)
3 ADVANCE
REFUNDING
AND DEBT
CHART
Offca of the Sacntary of thi l a a a i y
MANAGEMENT
1
B-1435
Secretary D I L L O N . This chart shows what would happen to the
size of the under 1-year debt if, beginning today, we were to refund
all maturing securities with 1-year issues during the next 5 years.
With no change in the total size of the debt, the amount of debt
maturing within 1 year would rise from the present level of $88.5
billion to $132.4 billion in 2 years and to $153.1 billion in 5 years.
As a percentage of the present total of outstanding marketable debt,
this would mean a rise from 45 to 67 percent, to 77 percent.
Granted that the printing press extreme is out of the question,
why, though, should a concentration of debt in the short-term area
cause serious economic problems? Why are we seeking a balanced
maturity structure which includes reasonable amounts of intermediate
and long-term debt? These are the questions I would like to discuss
further before considering the subsequent question; namely, if it
should be agreed that we ought to put out some long-term debt,
why use the advance refunding technique rather than offering longterm issues for cash or in regular refunding operations?
Offhand, looking at the smooth manner in which our short-term
security operations have usually been carried out, with relatively
little disruptive impact on the money markets, and at interest rates
usually lower than on longer term issues, one might ask why we do
not put the entire Federal debt in short-term securities.
The answer is that the short debt only behaves this way now because we have kept its size down to the present relative magnitudes.
While it is true that there is a strong demand for short-term Govern-
4
ADVANCE REFUNDING AND DEBT
MANAGEMENT
ment securities, the demand is not without limits. If the Federal
Government were to try to increase the supply of short-term securities
far beyond the needs of the economy for this kind of instrument,
yields would be certain to rise sharply. As a consequence, if we were
to concentrate the entire Federal debt in maturities of 5 years or less,
the average interest cost of the debt would probably be at least as
high as it is with our present debt structure.
A good example of what can happen when the Federal Government
pushes more debt into a particular maturity area than the economy
wishes to hold is provided by the experience of 1959. Because, under
the interest rate ceiling, it could not offer securities with a maturity
over 5 years bearing a coupon higher than 4}£ percent, while the market
demanded a higher rate, the Treasury concentrated all of its financing
operations from April 1959 through March 1960 in the 5-year-orunder area. During that period you will recall that the debt increased
by $9.1 billion. I would like to call your attention to chart 2, which
shows the effect on yields of this concentration of relatively short term
financing.
(Chart 2 referred to is as follows:)
CHART 2
MARKET YIELDS ON TREASURY SECURITIES
Office of the Secretary of the Treasury
F-646
Secretary D I L L O N . Chart 2 shows the pattern of yields on Government securities in January 1960, when short-term issues from 91-day
bills out to 5-year notes were selling at higher yields than bonds
maturing in 25 to 35 years. I need not remind you that we have only
one outstanding U.S. Government security bearing a coupon of 5
5 ADVANCE
REFUNDING AND DEBT
MANAGEMENT
percent. This was a 4-year-and-l0-month obligation sold on October
6, 1959. Without reviewing the experience of 1959 and early 1960 in
detail or the related role of Federal Reserve action and other market
factors at that time, the events of that period provide a vivid demonstration that concentrating an excessive amount of Treasury securities
in short maturities, a greater quantity than the market desires to
absorb, produces higher rather than lower interest costs.
As time passes and the economy grows, the demand for short-term
Government securities for use as liquidity reserves will also grow, and
it would be quite appropriate for the Treasury to expand the outstanding volumes of the short-term Government securities consistent with
this growing demand. During 1961, the outstanding amount of Government securities maturing within 1 year was increased by $10.6 billion. Thus far in 1962, the under-l-year debt has been increased by an
additional $2.6 billion. We have not been reluctant to increase the
outstanding short-term debt in those quantities which we felt the
economy could appropriately absorb, and we will continue to do so
in the future.
Increasing the supply of short-term securities, of course, tends to
put upward pressure on short-term rates. One of the Treasury's purposes in increasing the volume of under 1-year debt during the past
year has been to do just that—to put upward pressure on short-term
interest rates and, thereby, to keep our short-term rates in reasonable
equilibrium with rates in other countries. The objective was to deter
outflows of short-term money to foreign countries stemming from
interest rate differentials, outflows which would weaken our balanceof-payments position. In substantially increasing the supply of under
1-year debt, the Treasury did help to push short-term rates higher,
as illustrated by the fact that yields on 3-month Treasury bills have
moved up from around 2.25 percent in January 1961 to 2.80 percent
at present.
Even if it were possible to reduce substantially the burden of interest
costs by concentrating on relatively short-term security offerings,
which we do not believe to be true, there is a vital economic reason
for avoiding an excessive concentration of short-term debt; that is,
the undesirable effects of such an excessive concentration on the
liquidity of the economy and the effectiveness of monetary policy.
Short-term Government securities are close substitutes for money.
They can be turned into cash quickly, with little marketing cost and
relatively little risk of loss. A banking system holding excessive quantities of short-term Government securities will respond only slowly to
monetary controls. This means that to achieve a given level of monetary restraint the Federal Reserve would be required to adopt more
restrictive measures than would otherwise be necessary.
An excessive volume of short-term debt hampers an effective
monetary policy in still another way. The shorter the maturity
structure of the debt, the more often the Treasury must come to the
market in sizable refunding operations. Because of the magnitude of
Treasury debt operations, it has always been considered essential
that the Federal Reserve maintain an "even keel" in the market
during such operations. However, if the Treasury is almost continually in the market, the Federal Reserve will find itself with very
little room to operate in carrying out its responsibilities. A balanced
debt structure, which reduces the number of occasions during the year
81366—62 2
6
ADVANCE REFUNDING AND DEBT
MANAGEMENT
that the Treasury must carry out sizable refunding operations, will
make for the exercise of more effective monetary control by the
Federal Reserve.
For all of these reasons, it is essential that the Treasury, from time
to time, put out some longer term debt. If this must be done, why
is it often more advantageous to put out longer term debt through
advance refunding rather than through direct cash sales or regular
refunding operations?
There are three important and unique advantages to the Treasury
in the advance refunding approach. First, and most important, the
advance refunding technique does not immediately pull large blocks
of long-term funds out of the capital markets, funds which otherwise
would go into corporate and municipal bonds or mortgages. What
this means is that job-creating business investments and the financing
necessary to build schools, roads, other public improvements, and
homes will not be curtailed. Were the Treasury to sell any substantial quantity of long-term bonds for cash, it would immediately
reduce the quantity of long-term funds available for private investment and investment by State and local governments and, thereby,
slow down our economic expansion. With the economy still operating
well below capacity levels, we believe that this would be poor economic
policy.
The advance refunding, however, has the least possible immediate
impact on the current flow of new long-term savings. It merely
changes the form in which old savings are held by lengthening the
maturity of the obligation. New cash funds are not involved, except
to the relatively minor extent that some investors buy the eligible
securities in the market in order to make the exchange, and even in
such cases an equivalent amount of funds is freed for other uses.
By use of the advance refunding technique, the Treasury can
assure the retention of its regular customers for genuine long-term
investments. This is not possible if long-term securities are only sold
as part of regular refundings since, for a considerable period before the
maturing securities come due, they have become liquid money market
instruments; and their ownership has largely been shifted out of the
hands of long-term investors into the hands of short-term investors
who are not likely to be interested in long-term securities.
A second important advantage of advance refunding is that, through
this technique, a substantial quantity of long-term bonds can be
added to the Government's debt structure with an absolute minimum
of upward pressure on long-term interest rates. This was the experience in earlier advance refundings, and it was certainly the experience in our most recent operation. In last month's advance refunding, we placed an additional $1.4 billion in bonds maturing in
1990 and 1998 in the hands of the public. Yet the level of long-term
Government bond yields is somewhat lower today than it was at the
time we announced the advance refunding on February 15. The
level of long-term interest rates in both the corporate and the municipal bond markets is lower now than on February 15. If we had
attempted to sell $1.4 billion of long-term bonds in the current market
as a cash offering or regular refunding, we would certainly have put
substantial and immediate upward pressures on long-term bond yields.
The administration's policy on long-term interest rates has been
stated on many occasions during the past year. WTe have continually
sought to avoid putting upward pressures on long-term interest rates,
7 ADVANCE REFUNDING AND DEBT
MANAGEMENT
in order to provide the kind of atmosphere in the capital markets
conducive to a large flow of long-term funds into private investment.
Our debt management policies have been and are being directed toward this end. We feel that our efforts in this direction have been
successful, for 1961 saw the largest combined flow of funds into
corporate bonds, municipal bonds and mortgages in our history; and.
despite this fact, long-term interest rates, on the whole, are no higher
today than they were a year ago, when we were close to the bottom of
the recession, and this is shown on chart 3. While yields on long-term
U.S. Government bonds are about one-fourth of 1 percent higher than
a year ago, yields on corporate bonds are approximately unchanged; and
those on municipal bonds and mortgages are lower. In considering
these results, we should realize that the most important long-term
rates from the point of view of the economy are those for new corporate
borrowing, for the sale of new municipal bonds and for mortgages,
since they finance new jobs and new schools, roads and homes.
A third important reason for using the advance refunding approach
is t h a t it is usually the cheapest way for the Treasury to put. out longterm securities. There is one simple reason for this. When the
Treasury puts out long-term securities for cash or in a regular refunding, we must appeal to investors who have complete freedom
of action. They are free to choose among our Treasury offerings,
corporate bonds, corporate equities, municipal bonds, mortgages, and
still other alternatives. The yields on our long-term cash or refunding
issues must be fully competitive with these alternatives.
(Chart 3 referred to is as follows:)
CHART
3
LONG-TERM MARKET YIELDS
Monthly Averages 1959-62
%
FHA Mortgage Yields ^
> New Aa Corporate Bonds*
Reoffaring Yields
/
\
V Long-Term Treasury Bonds
Municipal Bonder ' X
J
1 I I I 1 I I 1 1 11 I I 1 I
M
M
J
1959
S
N
J
M
M
J
I960
1 I I 1 I 1 1 I I I I I I t • 1 I •• I I »
S
N
J
M
M
J
S
N
J
1961
M
M
1962
*Estimate ofoverageyields on Moody's Ao rated new Corporate bonds.
*Rond Buyers average of 20 bonds on first Thursday in each month.
Office of the Secretary of the lre«sury
B-1436
ADVANCE REFUNDING AND DEBT
8
MANAGEMENT
Secretary D I L L O N . However, in an advance refunding we are appealing to a group of investors who do not have complete freedom action.
To move out of their present holdings many of these investors would
have to realize substantial capital losses on market sales. Through
the advance refunding, these investors may extend the maturity of
their holdings without putting capital losses on their books and with
a minimum of inconvenience and uncertainty. I t is because of this
special appeal of an advance refunding to those who otherwise would
not wish to disturb their holdings that the Treasury can in this way
put out larger quantities of long-term bonds at lower interest costs to
the taxpayer than would be possible by other means.
I mentioned earlier that we placed in the hands of private investors
$1.4 billion of bonds maturing in 1990 and 1998 in last month's advance refunding. To have attempted to sell such a large quantity of
long-term bonds for cash would have required a greater total interest
cost to the Treasury than we paid in our advance refunding offering.
I would like to present a numerical example, which, I believe, illustrates this last point. While the situation is hypothetical, it rather
closely parallels the form of last month's advance refunding. The
details of the example are shown in chart 4, but I will attempt to
summarize the principal features.
(Chart 4 referred to is as follows:)
CHART
4
_ INTEREST COST OF EXTENDING DEBT TO 1998 __
Through Advance Refunding and through Direct Long-Term Borrowing-, Per $100
3/1/62
2/15/64
Interest tobe*
Paid
Saved
j
Cosh
Borrowing... >6.95
Extension through Advance Refunding
3
2/15/64*
I 3%,
Advance
Refunding-
Advance
Refunding.
Total
Net.
m
43.42.
2/15/64
|4%,
2'/2%, 1 2 / 1 5 / 6 7 - 7 2
26.98.
•f
Issues Offered
/
Issues Replaced
l2/15/72xj
127.98
117835 $32.86
$145.49
Direct Long-Term Borrowing
Cash
Borrowing..»l56.0l.
$ 10.52—Net additional interest on Direct Long-Term Borrowing
"
_J
i
I
I
I
8
10
_
12
-Years to Maturity #
Hypothetical issuer
2/l5/(& "sold" at a
356 bond due 2/15/64
due II/15/98 "sold"
advance refunding.
based on market pattern of rates on 2/lkf&2\ 3-l/2$ note due
discount to yield 3.55%; ^ bond due 12/15/72 "exchanged" for
plus $0.25 per $100 payable by the Treasury; and
bond
at par. Other issues were actually involved in the latest^
Interest figures are simple arithmetic totals. They are not discounted to present
value. Even when discounted at 4.25^ (the rate for 1996 cash borrowing directly)
the net di'scoUritea c6st through advance refunding" is' lover.j&ffice of the Secrttary of the treasury
F-647
9 ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Secretary D I L L O N . In the example, we assume that the Treasury
needs to borrow $1 billion in cash and that, to improve the debt structure, it is desirable to place this $1 billion out in the 1998 maturity
area. We can accomplish these objectives in one of two ways. One
way, of course, is to sell a $1 billion 1998 bond directly for cash. An
alternative is to place $1 billion in bonds out in the 1998 area through
advance refunding and to raise the required cash through the sale of a
short-term issue in the maturity area vacated by the advance
refunding.
We will assume that the $1 billion of 1998 bonds could have been
sold for cash in the present market with a 4%-percent coupon, placed
at par. In the opinion of the Treasury, this interest cost assumption
for the sale of such a large quantity of new long-term bonds is most
conservative. Even on the basis of this conservative assumption the
total interest payments on these 4%-percent bonds through their
maturity in 1998 would amount to $156.01 per $100 of bonds sold.
Now let us look at an alternative way of handling tlie situation
which, as I noted earlier, rather closely parallels last month's advance
refunding operation. I t is, in effect, a way of putting an issue into
the long-term area while drawing funds from the shorter term area.
This is done by what some market observers have called "leap frogging." Not all of the leaps may occur at once; but to make this
example clear, I will assume that they do. What happens is that a
10-year issue, for example, is converted into a 36-year issue; then,
following behind that, a 2-year issue is converted into a 10-year issue.
There are two leaps involved; one from 10 out to 36 years; the second
from 2 out to 10 years. In effect, the second move has filled in the
space vacated when the first move occurred.
After that, the third step is an easy one—borrow for cash at a
2-year maturity. In the end, then, the Treasury will have its cash.
I t will have borrowed the cash at the 2-year rate of interest, but it
will have no more 2-year debt outstanding than before the operation
began. Nor will it have any more 10-year debt than before. The
only increase will have occurred in the 36-year debt.
Now, let me repeat the example more precisely, using issues and
prices now in the market. What we have here is a combination
"junior" and "senior" advance refunding. The "senior" portion
involves the advance refunding of $1 billion of 2^-percent bonds
maturing in 1972 into 3%-percent bonds maturing in 1998. To fill
the 1972 vacancy in the maturity structure created by this "senior"
advance refunding, there is a "junior" advance refunding of 3-percent
bonds maturing in 1964 into 4-percent bonds maturing in 1972.
Finally, to meet the $1 billion cash requirement, the 1964 gap in the
maturity structure created by the "junior" advance refunding is filled
by selling for cash $1 billion of 3K-percent notes maturing in 1964.
Adding the interest payments to maturity on the 1964 note which
we would sell for cash, and the interest payments on the 1972 bonds
placed through the "junior" advance refunding and the 1998 bonds
placed through the "senior" advance refunding, we find that the total
interest cost resulting from this three-part operation over the entire
period to 1998 is $145.49 per $100 borrowed. Thus, we would have
achieved our objectives of raising $1 billion in cash and placing
10
ADVANCE REFUNDING AND DEBT
MANAGEMENT
$1 billion in bonds out in the 1998 area through advance refunding
at a total interest cost during the period of $10.52 less per $100
borrowed than if we had issued $1 billion of 4}i percent, 1998 bonds
directly for cash. The total interest cost savings on the $1 billion of
debt over the period would have amounted to $105.2 million.
Moreover, the debt management objectives would have been
achieved without draining new long-term funds out of the capital
markets or placing any overall upward pressure on long-term interest
rates.
The basic reason that the advance refunding approach resulted in
a lower total interest cost to the Treasury is that, in the "senior"
advance refunding, holders of the 1972 maturities were induced to
extend an additional 26 years with a 3^-percent coupon, three-fourths
of 1 percent below the minimum coupon that would have been required
for a direct cash sale of 1998 bonds. In order to induce the holders
of the 1972 bonds to extend to 1998 at 3% percent, the Treasury had
to offer to increase their return from 2% to 3% percent during the 10
years from 1962 to 1972, but this was an exchange that the Treasury
could well afford to make. I t represented a payment of 1 percent
in additional interest for the next 10 years in return for a saving of
three-fourths of 1 percent in interest over the following 26 years—a
fair offer but no bonanza.
The calculated interest costs and interest savings in the five advance
refundings are summarized in the tables attached to the appended
correspondence with Senator John J. Williams.
(The documents referred to are as follows:)
U . S . SENATE,
Washington,
H o n . DOUGLAS
D.C., March 5, 1962.
DILLON,
Secretary of the Treasury,
Washington, D.C.
M Y D E A R M R . S E C R E T A R Y : I n connection with t h e series of advance refunding
operations of the Treasury Department, I would appreciate the following information:
1. The maturity date and the coupon rate of the outstanding bonds involved in t h e refunding operation and the m a t u r i t y date and coupon rate of
the new bonds offered in transfer.
2. The total amount of these bonds of each series which were traded for
the new issue (if more t h a n one issue is involved, give the amount involved
in each transfer).
3. In connection with each refunding operation, please furnish the total
amount of additional interest which will be paid b y the Government to these
new bondholders during the period between the date of t h e refunding operation and the original date of m a t u r i t y of the bonds traded in.
What I a m trying to establish is how much additional interest t h e Federal
Government will be paying during the next 5 to 10 years above the amount which
would have been paid had these low coupon bonds been allowed to mature in a
normal manner.
Yours sincerely,
JOHN J .
WILLIAMS.
11 ADVANCE REFUNDING
THE
AND DEBT
SECRETARY
MANAGEMENT
OF T H E
Washington,
H o n . JOHN J.
TREASURY,
March 13, 1962.
WILLIAMS,
U.S. Senate, Washington, D.C.
D E A R J O H N : I n response to your letter of March 5 , I enclose two tables which
provide the information you requested on the five advance refundings which the
Treasury has undertaken in the past 2 years.
One of the tables presents the additional interest costs incurred by the Treasury
in the five advance refundings. In addition, it shows the interest savings to the
Treasury in these advance refundings on the assumption t h a t the original issues
are to be refunded at m a t u r i t y into the issues offered in exchange a t today's
interest rate levels. Looking at both the additional interest costs to the Treasury
and the interest savings involved in advance refundings places the interest cost
issue in its proper perspective.
You will note t h a t only the June 1960 and March 1961 " j u n i o r " advance refundings resulted in a net interest cost to the Treasury on these assumptions
and t h a t , in taking the five advance refundings as a whole, these calculations
indicate a net interest savings to the Treasury of $541 million over the entire
period through fiscal year 1999.
With best wishes,
Sincerely,
DOUGLAS
DILLON.
So1
3o
^
OO CS
CO OS 1-1 »o
CO
i—»
C4
CO
6,755
CO
oo
00
CO
i—I
CO
CO
£o
i—I
Nov. 15,1980
Feb. 15,1990
Nov. 15,1998
00
Nov. 15,1966
00
19,436
i I1I
Nov. 15,1967
00
Nov. 15,1967
^H
3,971
OS C
OS
S C
O
O 00CO
C
O
Nov. 15,1967
1,226
819
998
2,399
5,442
1,296
1,177
1,131
2, 438
1,113
3,395
31.1
36.1
28.5
34.1
24.6
31.9
32.7
o
CO
O
cd
lO
»0 Tfl Tf CO
T-H CT5
CO TP
[1
iO
SO"
50.1
30.3 I
35.8
26.3
30.2
25.9
31.4 I
33.9
30.3
£
+
September 1961:
2% percent,
Mar. 15,1965-70.
So co So
3,979
993
29.3
32.5
27.8
CO
CO
Total
£o
—"
\CS S^l
5,262
So So
Tfl
1
cs !
3,449
1
^H
1,248
777
35.3
30.5
37.1
00 1
March 1961:
2% percent,
June 15,1959-62.
2yi percent,
Dec. 15,1959-62.
2Y% percent,
Feb. 15,1963... _
2Yz percent,
Aug. 15, 1963-...
00
1,095
512
37.7 1
Percent Percent
34.8
34.7
2.9 j
2.4
1 PubTotal 11 licly
held
o
12,474 1
993
i
4,077 1
L
4,214
CS lO 1-1
$3,814
264
»c
C
O iC
-H
S C
00
T-H
S O
CS
S
$3, 893
320
643
Publicly
Total
held
(millions (millions
of
of
dollars)
dollars)
4.16
4.23
4.19
4.09
3. 63
3. 98
3. 75
4.10
4.14
4. 08
4. 09
3.99
3. 75
4.17
3.97
3. 75
4. 23
3.96
Percent
4. 51
4.22
3.92
Percent
4.24
4.14
Effect on
average "Boot"
Approxilength of paid to I Approxi- mate minimarket- Treasury
mate
mum reinable debt (+) per investment vestment
(months)
$100
yield from
rate for
exchange
extension
date to
period
maturity i adjusted
for "boot"
\
Total
CO
Th
Nov. 15,1998
^H
3,812
j
I
Nov. 15,1998
Yrs. Mos.
3 11
7 11
Extension
Percent
exchanged
For nontaxable holders
or before tax
ADVANCE REFUNDING AND
3,738
Feb. 15,1990
1
Term to
maturity
Amount
exchanged
«D CO CO o
1^NCD
CS
2,815
Nov. 15,1980
Date
May 15,1964
May 15,1968
Mos.
1 5
I Percent
1
1
2,109
Yrs.
Term to
maturity
Description
New issues
s
October 1960:
2V2 percent, June
15, 1962-67
2Yi percent, Dec.
15, 1963-68
2XA percent,
June 15, l?64-69_
2percent,
Dec. 15, 1964-69.
Total
June 1960: 2]4 percent, Nov. 15,1961.
r-
III 'II
Description
Amount
outstanding
(millions
of
dollars)
Old issues
12
DEBT MANAGEMENT
CO CO CS
TJH
w o o
cs T—: cs
+ I I
CO
o
00
O
CS C
Cs
00SC
(M
to
O TO
P
lO
C
O CCSS »o
CS
ONtI*
OO T-H 00
T-H T-H
O OS C
OSO
00
OS 00
cs »o CS
T-H CS CO
So So ro"
13 ADVANCE REFUNDING AND DEBT MANAGEMENT
lO^O)
H
IN H
a
a
++l
CO _I
+ + + ++++
O C3
7-H
r-\
CO OS
<M <M t-H
OS »C
OS
<M co
C
O lO 00
O
MT-^ (M
-tl
O
oo
rH
cq
^M^OOiCiOCOOiH
O
OS 00 Ol CO GO CO 05 00
HWMHHHNNN
I? 3
TJIHHJOO'OONM
>
o >c co M oo TMM N co
rtcoioNHcc^mro
CO CO o oc »o u
NCOIQNCONC;
lQ>Oi-HHOOHOOH«
OS os os
HHOOOOOOOOOO
00 OS OS OS OS OS OS
OSOSOSOSOSCSOSOSOS
> o' >
o^ O
bh
fcjbjd^i
S 3'©
©>
o
O O 00
^
&
Art
C
3©
CO CO C*
ibjOa»-l T—I CO CO
OS
C3 O
fl O
1-H (N O O O
-r)H CO CO
10Q
O) t 0 00
co~ co —
iT
& la
"J.
I I iC
M t>.
i lOi tr^tj+
rC
H
»>• rO
O
S C^D
OS C
^O
OS% %
121 iff
l l ^ P l i ©"Soo
ft® ^E-i 6-1
Sg-S&H&g
o ^^v^Hs;s^ggs^P
•§5 CO CS CQ <
81366-62-
oflflo
§§2
ftSt)
" £°
°S ©
is I
-
14
ADVANCE REFUNDING AND DEBT MANAGEMENT
t*©iCOOOOOOOOOOOOOOOO'-l
Slaeslifs
.gglB-sail-a
OiOlQiOONN^M^r
-2
5 ® 53 © 2.2
\g S ©
MNOOOOOO^«^i0i0>0i0>0>
O H ci ci N M' <N" <N" r-J ,-i TH Tti h'Tetioeceoeoeocoeoeocor-i
Tti TM '
•S > S-c Effs-is'S w
oocoococococccoeoco<Mco
2 >>,2
'SsSas
S
©oo^ariaooo'aoaoooaOTjH
MOlOCOHHHHHHH
mI
»w05 0)05»05 0 0s0> 050500 00 00 00 00 00 00 00<N
© 1=1 ® 3
£ a «
SosHw £
lifll
53
CC
©%®2
§ ©1? ° I
«a w«SB
(NMOffiOCON
o CO IC IC lO 1-H CO
-2 >>3
©
iN^NMOOOOOOOOOOP3ffl(C®tD®tO®(OOi
®-£ PI--S S3) SB'S S
^©-2fr^>>£
c£2 «S?
5£
lOGOOOOOOOOCiOrtiOt
-r-
>5 lO <N M
( <M M
I
•2 > S-c
w
en -r"t: ©
-§ © a MS
1
tDCDCOtOtO©®©©
050505050502050505I Dt^t^t^t^r^t-r^r^.t^r^ooooooooaoooooocooccc
fc05050505050>0501050505030i050505050i
15 ADVANCE REFUNDING AND DEBT MANAGEMENT
m^ioioicioioio®
ss
tuo J3
B ~
S
f of
•3
OiOSOSOSOiOiOiOSCO
)
h a> s W
^
§
-Co
O^g® 2
Si >
h Z;CQca
©
.
.
O
-
bo ©
fl % .22
2 * in d
CN<NN
( <M<NM
( <N<M*Ci
>>8 ©
05 05 05*050505050iC»5
^P
S! <H M
© O 03
S
c353
a-
p&
a
P'®3O
4 dcoo
® cS K H
mSdS
3
8
StS
a&
M
©5 i
p
H g Ofi
^ M5
ZjSd
M
.£©3rP>
COCCCOCCCOCOOOPQO
i
.Sg
P fe ££
©©
3S
n. o3
®
© ©
o© sg
lol l l ©
l
s-gis5
s
p°'§^ £f a
§5
bjo
>>P*>© O-P
Q, c3 p T5 P
bC _ 3
'P I o
^jlsi
03 OJ ©^ M
Sag!*
as ega©^©a i"J
- £.§- S
16
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . In our last advance refunding, 1 9 percent of the
public holdings of the 2% percent bonds of 1 9 6 7 - 7 2 were exchanged
for 3% percent bonds maturing in 1990 and 1998. This was a response
with which the Treasury was well satisfied. But if this had been a
windfall offering, something which involved an undeserved gain for
the investor, one would have to conclude that American investors
holding 81 percent of the bonds did not know a windfall when they
saw one, because 81 percent of the bonds were not exchanged.
To sum up, the advance refunding offers a number of unique advantages to the Treasury. Through this device, it is possible to put out
substantial quantities of long-term Treasury bonds with the least
possible drain of new long-term funds out of private investment
channels and with the minimum of upward pressures on long-term
interest rates. In addition, this technique has enabled the Treasury
to place long-term bonds in private hands at lower interest costs than
could have been possible through cash offerings or regular refunding
offerings of any comparable size. To be sure, as market conditions
shift about, there will be times when long-term cash issues or refunding exchanges will also be appropriate. But the appraisal will depend
in large part upon analysis of alternates such as I have tried to outline here. Clearly, in the tool-kit of debt management, advance refunding must be recognized as an instrument of major importance.
Advance refunding was first used by my predecessor, Secretary
Anderson, who conducted two advance refunding operations in I960.
Last month's operation was this administration's third use of this
technique, making a total of five advance refundings in all. These
advance refunding operations have accomplished much in producing
a more balanced maturity structure for the debt. The average length
of the debt today is 4 years and 11 months, the longest it has been
since the fall of 1958. If the five advance refundings had not been
undertaken, the average length of the debt would now be only 3 years
and 7 months, almost 30 percent shorter. See this on chart 5.
(The chart referred to is as follows:)
17 ADVANCE
REFUNDING
AND DEBT
CHART
MANAGEMENT
5
^Adjustedto exclude
bonds exchanged for nonmorketable 2%% bonds. Portiolly
tax-exempt bonds to earliest call date; all other callable bonds to maturity.
Office of the Secretary of the Treasury
B-I372-D
Secretary D I L L O N . We now have $15.2 billion in outstanding debt
maturing beyond 20 years. $7.7 billion, or just over half of this total,
was placed through advance refunding.
In conclusion, advance refunding is a technique that we would hope
to use again in the future, whenever circumstances are appropriate for
its use. In seeking to conduct our debt management operations in a
responsible manner, we will continue to be mindful of the need to
minimize the interest burden of the debt, and we will also continue to
be mindful that our debt management policies, through their impact
on the money and capital markets, must contribute toward our major
economic objectives of sound economic growth, reasonable price
stability and equilibrium in our balance-of-payments position.
Thank you, Mr. Chairman.
The C H A I R M A N . Thank you, Mr. Secretary.
Mr. Secretary, I think we can all agree that with the Federal debt
at its present level, a substantial portion in long-term issues eases
management problems. But there are some questions in my mind
about the manner in which this can be brought about.
What is the total of advance refunding under this administration?
Secretary D I L L O N . The total we have done, is shown on the table
on the back page. It shows that in March 1961 we did a total of
$6 billion; in September of 1961 a total of $3.8 billion
Senator K E R R . When?
18
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . In March 1 9 6 1 , $ 6 . 0 billion; and in September
1961, $2.8 billion; and in March 1962, $5.2 billion. Those totals
add up to about $15 billion.
And in 1960, in the preceding administration, they had two which
added up to a total of about $8 billion.
The C H A I R M A N . Was it your purpose to refund approximately $ 1 9
billion as of March 1, 1962 in the categories
Secretary D I L L O N . We offered this refunding to the holders of
$18,734 million worth of debt at that time, and it was accepted by
the holders of a total of $5.2 billion, including Government accounts.
This is somewhat less than the average acceptance; the average
acceptance over all has been a third, 33 percent, and this was just
under 28 percent.
So we did not expect when we made the offering to do any better
than the average, and we were well satisfied with the amount we got.
The C H A I R M A N . For purposes of this discussion, I would like to
take as a base this March 1, 1962 offering of $18,736 million.
In that offering there was $3.8 billion in 3 percent bonds which
had 1 year and 11 months still to run.
And you offered to refund that now at 4 percent until 1972.
Secretary D I L L O N . That is correct.
The C H A I R M A N . N O W , how long did that 4 percent bond run?
Secretary D I L L O N . I t ran to August 1 5 , 1 9 7 1 , which is just over 9
years from now, about 9K years.
The C H A I R M A N . Then on March 1 the Treasury offered the holders
of these bonds 1 percent more than it promised to pay for nearly 2
years.
Now, the next March 1 refunding was for $6,896 billion, on which
the interest rate has been 2% percent?
Secretary D I L L O N . That is right.
The C H A I R M A N . N O W , the increase on these bonds was 1% percent,
bringing the interest on them to approximately 4 percent for nearly
3 years to the original maturity date.
The next one is $1,757 billion which originally was sold at 2% percent
interest.
When would these bonds expire?
Secretary D I L L O N . These were a series of bonds which become due
eventually in 1972, some in June, some in September and some in
December. The first batch come due in June.
The C H A I R M A N . That was approximately 1 0 years and 3 months,
I believe.
Secretary D I L L O N . Yes.
The C H A I R M A N . Had all of those bonds been traded for higher rate
bonds in the March 1 refunding, the Treasury would have lost $180
million; is that correct?
Secretary D I L L O N . We have some overall figures which we prepared
for Senator Williams which showed that on this whole March operation
we would have lost, on that computation, $256 million, which, of
course, is offset by what we would have gained during the extension.
But the initial additional cost is $256 million.
The C H A I R M A N . All right let's take the total of all of the $ 1 8 , 7 3 6
million in bonds offered for advance refunding on March 1.
By my figures
19
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . I see. You mean, Senator, if everyone had
taken
The C H A I R M A N . I calculate that if all of these bonds had been
refunded at the higher rate offered on March 1, the increased interest
cost to the Treasury—over the period from now to original maturity
dates—would have been $1.2 billion.
Senator K E R R . N O . One precent on $ 1 8 billion for 10 years.
Secretary D I L L O N . N O .
Senator K E R R . Y O U could not get a billion something at 1 percent
a year for 10 years on a billion something.
Secretary D I L L O N . I t is a complicated thing Senator, there are only
about $8 billion of the 10-year bonds on which there is that amount of
interest, and the others are for the shorter term that the Senator
talked about first.
The C H A I R M A N . The point I am trying to make is that the Government offered to pay a penalty, so to speak, of $1,194 billion to
lengthen the life of the bonds; it offered to increase interest rates
approximately 40 percent during the remainder of the original life of
the bonds is that correct?
Secretary D I L L O N . For the 10 years, that is correct. But at the
same time we are getting people to accept a bond for another 26
years of maturity beyond 1972 at a rate that is three-quarters of
1 percent lower than we could otherwise get in the market today.
The C H A I R M A N . That is goes beyond the point.
What I want to know is what is the loss on these bonds during the
original life of the bonds?
Secretary D I L L O N . If you say during the life of the lower interest
rate bonds, then your figures are correct.
The C H A I R M A N . M y figures show that paying the higher interest
on the $18 billion block of bonds over this period would cost the
Government $1,194 billion.
Secretary D I L L O N . That would be correct, Senator, up to 1 9 7 2 ,
and thereafter you would recoup from 1972 to 1998.
The C H A I R M A N . Don't you think it is likely that 10 years from
now there may be another refunding
Secretary D I L L O N . N O , sir.
The C H A I R M A N . And thereby you would pay an increased interest
rate on the 30-year bonds that you are replacing?
Secretary D I L L O N . N O , sir; I would think these approximately
30-year bonds would stay out pretty well until their maturity.
Certainly there would be no refunding of them in such a short period
as 10 years.
The C H A I R M A N . That is just supposition on your part; isn't it?
Secretary D I L L O N . I think it is very reasonable.
The C H A I R M A N . H O W can you predict what the interest rates are
going to be 10 years from now?
Senator B E N N E T T . May I ask a question at this point, Mr. Chairman?
Assuming that these 30-year bonds are refunded again by an
advance refunding 10 years from their maturity, have you calculated
that, assuming you treat them the same way you are treating the
present bonds and refund them?
Secretary D I L L O N . N O , we haven't attempted to calculate what the
interest rates would be in 1988, which would be 10 years before they
became due, and I don't think anyone could.
20
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
But certainly unless interest rates changed materially from the
present level, there wouldn't be any advance refunding at that time.
And our basic assumption—and I think it is the only conservative
assumption that we can make—is that interest rates will stay about
at the level which they have now arrived at rather than trying to
foresee that they will either go up or down.
It is our assumption that they will stay about level.
The C H A I R M A N . Mr. Secretary, that assumption hasn't been correct
in the past 10 years at all.
Secretary D I L L O N . In the Dast 10 years interest rates have been
adjusting upward to a new level. We think that this adjustment
is pretty well completed, and we would hope that we are entering
into a period where there will be much less fluctuation in interest rates
than has been the case in the last 10 years.
The C H A I R M A N . Y O U hope for that?
Secretary D I L L O N . We expect that.
The C H A I R M A N . But you have no assurance that 10 years from
now the interest rates will not go up, have you?
Secretary D I L L O N . No; if we have a war or something of that
nature
The C H A I R M A N . If you have inflation, they will go up, and we have
that now, and we will have much of it.
Secretary D I L L O N . If we have very serious inflation interest rates
would, of course, go up.
The C H A I R M A N . I would not think that, as one of the best Secretaries of the Treasury we have had, you would try to predict what
interest rates will be 10 or 20 years from now?
Secretary D I L L O N . N O .
The C H A I R M A N . What we are getting into is a policy of refunding
Government bonds when interest rates go up.
Secretary D I L L O N . Actually, only a small percent of the holders
took this; and in the second place, and on our assumption that we
need more long-term debt now and we don't want to wait 10 years
before putting this long-term debt out, we are putting it out in this
way cheaper than we could put it out any other way.
The C H A I R M A N . I t seems to me you are putting a, 3% percent floor
under the interest rate, on long-term bonds; you are not putting any
ceiling on it. And these particular bonds, and others that you are
handling in this same way, may be refunded again on a still higher
interest rate.
If you have done it now, and you say it is a successful operation,
and conditions change 10 years from now, then you may do it again.
On a 30-year bond you may do it twice.
Secretary D I L L O N . If we were to sell a 30-vear bond for cash now,
or a 35-year bond, as I pointed out, it would have to be a 4){ percent
bond, and that would mean that we were operating at the 4% percent
ceiling for Government debt.
The C H A I R M A N . These people who bought these bonds did it with
the understanding that they would be paid 2% percent interest; did
they not?
Secretary D I L L O N . Originally?
T h e CHAIRMAN. Y e s .
Secretary D I L L O N . That is right.
The C H A I R M A N . And did they buy
them below par or not?
21 A D V A N C E
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . It depends on whether they were original purchases or not. Bonds in recent years have been selling well below
par. The original purchasers paid par, but purchasers since have
bought well below par.
The C H A I R M A N . This is a windfall for these particular people, is
it not?
Secretary D I L L O N . N O , I have looked into that and prepared a table
on that which, if you would like, we would be glad to give to you.
The computation would indicate that there is a net differential in
favor of exchanging into the 3^s of 1998 of 18 cents over the period
from now until the due date of 1972.
(The table referred to follows:)
Comparison
of total returns to an investor from alternative
refunding
of 2XM of Dec. 15, 1967-72
into 3}is of 1998
value from Mar. 1, 1962, to Dec. 15,
1972)
courses of action in
advance
(total proceeds per $100 face
Continuing
to hold 2V2s
of Dec. 15,
1967-72
Interest received Mar. 1, 1962, to Dec. 15, 1972
Value on Dec. 15, 1972
Total
Net differential in favor of exchanging into the
Exchanging
into
of
Nov. 15,1998
100.00
of 1998.
126.98
0.18
I
i $37. 27
2 89.89
127.16
1
2
$37.77 less $0.50 cash payment to the Treasury on account of issue price of the 3Ks of 1998.
Price on Dec. 15,1972 based on market yield as of Feb. 28,1962, of issue closest in maturity to the term of
the extension (25 years, 11 months) of maturity in the exchange.
The C H A I R M A N . I submit to you that that is not an answer to my
question.
If I own a million dollars of these bonds, I am going to get a hundred
thousand dollars more in interest in the next 10 years.
Secretary D I L L O N . That is correct, Senator.
But you give up a bond that will be worth $100 ten years from now
in exchange for one that is only going to be worth $90 ten years from
now.
The C H A I R M A N . Are not some of these bonds worth $100 now?
Secretary D I L L O N . Not at these interest rates, and unless there
should be a marked cheapening of money over the next 10 years, these
3K percent bonds of 1998 will only be worth a little less than $90 in
1972.
The C H A I R M A N . Nobody can predict what the bond will be worth
10 years from now.
Secretary D I L L O N . N O ; that is why I assume the market will stay
the same, I am not predicting it will get better.
The C H A I R M A N . Who can predict that this particular person will
or will not sell the bond. Consider a man that is going to continue
to hold the bond for 10 years. What is he going to get? He gets a
high interest rate for 30 years, as a matter of fact, but for the 10 years,
when he was to get only 2}{ percent, the man, if he has $1 million
in these bonds, would get $100,000 more; would he not?
Secretary D I L L O N . That is correct. But the original fellow would
have $100 left at the end to reinvest in new Government bonds,
whereas the other fellow would only have $90.
81366—62
4
22
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
The C H A I R M A N . Suppose he does not sell them? These are 30-year
bonds.
Secretary D I L L O N . I say, if the fellow retains his holding of 2 K S and
they were paid off in 1972 he would get $100, and he could use that
to buy a $110 face value of the
at that time.
The C H A I R M A N . He may not sell; is that right? He can keep the
bond for 30 years?
Secretary D I L L O N . The long-term holders; yes.
The C H A I R M A N . And he has the possibility, at least, of another
refunding in the 20 years beyond the first 10 years?
Secretary D I L L O N . I t could possibly take place.
The C H A I R M A N . And that would be a good gamble; would it not?
Secretary D I L L O N . I don't think that anyone would be particularly
likely to gamble on that. I think that is the reason why only 19
percent of the public
The C H A I R M A N . Suppose he retained the bonds, you do not deny
that a man who bought a million dollars worth of them is going to
get $100,000 more in the next 10 years than he would have received
under the older bonds?
Secretary D I L L O N . From a financial point of view I respectfully
have to say that that is not going to be the end result. He will get
$100,000 more in interest, but he will have something at the end that
is worth approximately $100,000 less.
The C H A I R M A N . Nobody knows that.
Secretary D I L L O N . That is assuming the market stays the same;
the loss to him in the price of his bonds will be greater if interest
rates are higher then than now.
The C H A I R M A N . It depends on what the bonds are worth at the
end of 10 years, and what the interest rate is, and it looks to me like
you are putting a floor on the interest rate at 3% percent, yet there is
no ceiling on it.
I am just stating my opinion. Maybe I am wrong about it.
But that is what disturbs me about it.
Have you noticed any speculation in these bonds?
Secretary D I L L O N . Very little, Senator.
The C H A I R M A N . Y O U don't think there will be any more refunding
on these bonds we are now advance refunding for 30 years? What
do you base that on?
Secretary D I L L O N . I don't think there will be any until shortly
before their due date at the earliest, certainly not for 20 years.
The C H A I R M A N . The usual time is 10 years before they become due;
is it not?
Secretary D I L L O N . That would be about right, for a senior advance
refunding.
The C H A I R M A N . I have a feeling that when a man makes a contract
and buys a bond at 2% percent interest, there is no reason to give him
a present or a windfall.
Secretary D I L L O N . I agree with you, Senator.
I think our difference is that we don't think we are giving him a
windfall, and I think the way the public responded to this
The C H A I R M A N . Did you ever hear of a business corporation doing
anything like this? Most of the business corporations that I know of,
when they refund them, they pay a smaller rate of interest, not a higher
rate of interest.
23 A D V A N C E
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . Most business corporations don't have as much
debt as the United States. But I think most business corporations
have had to make up their mind as business people whether they wanted
to take this exchange or not, and the great majority did not want to,
so they certainly felt this was not any bonanza or windfall, or they
would have accepted it.
The C H A I R M A N . Did you ever hear of a business corporation calling
in bonds at a low rate of interest and reissuing a higher rate?
Secretary D I L L O N . Yes, sir, I think there have been some occasions
when they could retire debt—the comparison is, if you can retire a
5-year bank loan and refund it into a 30-year bond at a slightly higher
rate of interest, I think many good businessmen do that.
The C H A I R M A N . There are not many that do it. The A.T. & T.
refunded some at a lower rate of basis, and a longer term.
Senator W I L L I A M S . Did you ever hear of them calling in a bond issue
and refinancing it?
Secretary D I L L O N . Not usually, no. But this is quite a different
operation.
The C H A I R M A N . There is just one more point I want to make, and
then I will let other members of the committee ask questions.
What this actually means is about 6 percent of the total of the debt;
is it not?
Secretary D I L L O N . The debt is approximately $300 billion; yes, sir.
The Chairman. And this relates to 18 and you have not consummated the entire 18.
Secretary D I L L O N . That is what the offer was, the offer is now
closed, and about $5.2 billion accepted.
The C H A I R M A N . And how many actually traded?
Secretary D I L L O N . $5.2 billion.
The C H A I R M A N . S O $ 5 . 2 billion is about 2 percent.
The point I am trying to get at is that we are paying a penalty, a
very substantial penalty, and we are converting only a small percent
of the debt into long-term bonds; is that not right?
Secretary D I L L O N . I do not think we are paying a penalty. But we
are converting enough into longer term bonds so that over half of our
longer term debt now consists of bonds put out there through advance
refundings.
The C H A I R M A N . I am speaking of this particular method of advance refunding. Let us take all of them, you say there have been
five?
Secretary D I L L O N . Yes, sir.
The C H A I R M A N . What percent of the debt has been extended, say,
for 20 years, or whatever the time may be, on this refunding basis?
Secretary D I L L O N . We have extended for about 20 years a total of
about $10 billion.
The C H A I R M A N . In other words, there is $10 billion that would be
put on a longer term basis at about 3 percent?
Secretary D I L L O N . Yes, a little over.
The C H A I R M A N . And yet in this single issue the Government was
willing to pay a penalty of $1,194 billion
Senator A N D E R S O N . I do not think that figure is right, Mr.
Chairman.
The C H A I R M A N . What is wrong with it?
Senator A N D E R S O N . Y O U figured against the total issues the amount
refunded.
24
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
The C H A I R M A N . I am figuring a loss of $1,194 billion acceptable to
the Treasury.
Senator A N D E R S O N . I am only suggesting that what you have done
is this. You have said that if you refunded the whole $300 billion
a certain thing would happen. If you refund the whole $11 billion
it certainly would happen, but you only refunded a portion of it, and,
therefore, the charges would be against only the portion and not the
outstanding issue.
The C H A I R M A N . Let's get that clear.
The Secretary says that he has refunded $10 billion out of $300
billion. That is correct; is it not?
Secretary D I L L O N . That is the total that has been done.
The C H A I R M A N . That is the total of all of it. Your recent plan up
to date has only refunded $5 billion.
Secretary D I L L O N . That is right.
The C H A I R M A N . What I am trying to make clear is that this plan
is not an answer, because only a small percent of the debt has been
extended.
Secretary D I L L O N . That is right. As I pointed out in my statement, this is only one of the useful tools that we have in our
The C H A I R M A N . It is useful to the extent of 3 percent; yes. But
in the case of only one of these issuances, if it all went through, the
Government would pay a penalty of about a billion, $1,194 billion.
Of course, I will concede in that case a larger total of the bonds
would be put on a long-term basis.
Senator G O R E . Will you yield for a question, Mr. Chairman?
T h e CHAIRMAN. Y e s .
Senator G O R E . If this
useful tool has cost a billion dollars thus far,
what will be the cost of using this tool in the course of 8 years of the
Kennedy administration if the country should be so fortunate?
The C H A I R M A N . This billion covers a period
Senator G O R E . You say what percentage of the debt has been refunded?
The C H A I R M A N . Three percent.
Senator G O R E . All right, suppose that 3 percent is refunded each
year, suppose that extra interest cost adds an additional billion dollars each year to the budget?
The C H A I R M A N . I have just one more comment to make: I am in
favor of the long-term bonds. I think when you have a plan imder
which you can refund only 3 percent, at a high cost, you had better
look for another plan. I am very frank to say 1 do not like the idea
of the Government, after selling bonds on the basis of a fixed time and
rate, coming in and offering to substitute other bonds at a higher rate
of interest; this policy is even more objectionable when it does not
substantially accomplish the purpose.
Senator Long?
Senator L O N G . Mr. Secretary, what concerns me about this is
whether we Democrats are doing what we said we were going to do
when we ran for office.
The Republicans tried to make me pay for a news item that rates
were going to be lower under the Democrats. I heard President
Kennedy debate Vice President Nixon, and I was discouraged to
hear him say he was going to reduce the interest rates on the national
debt, I thought he was going to cut it by about $3 billion.
25
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Can you tell me how the interest payment this year will compare
with last year on the national debt?
Secretary D I L L O N . I think our total interest cost will be about the
same as last year.
Senator L O N G . Could you give me the figures?
Secretary D I L L O N . The average interest rate on debt, marketable
d e b t Senator L O N G . Not average, let's get it in dollars first, how many
billions and millions is it going to be?
Secretary D I L L O N . I t is in the budget, and I think that the figure
is about $9 billion.
Senator L O N G . Let's get it down to millions.
Secretary D I L L O N . Here we are, I have got it.
The fiscal year figure is—-for this fiscal year—is $8.9 billion.
Senator L O N G . $ 8 . 9 billion what, now?
Secretary D I L L O N . $8.9 billion.
Senator L O N G . I S that an even or rounded figure?
Secretary D I L L O N . That is the rounded figure that we use.
Senator L O N G . Every time you round off at a hundred million, it
seems to me as though
Secretary D I L L O N . That is an estimate; you cannot come any closer.
The actual figure for fiscal 1961 was $9.0 billion; and $9.3 billion in
1960.
Senator L O N G . $ 9 . 0 billion for 1 9 6 1 , and $ 8 . 9 billion for this year?
Secretary D I L L O N . Yes, sir.
Senator L O N G . SO you estimate that you are going to be
Senator A N D E R S O N . Y O U cannot use those two figures, because one
is an estimate, and purposely down a little bit.
Secretary D I L L O N . The actual for 1 9 6 1 is $ 9 . 0 billion, fiscal 1 9 6 1 ,
and for fiscal 1962, which is pretty near over, our estimate has been
$8.9 billion, it could run over that by maybe 50 or a hundred million
for the years at the end, but no more, it is going to be a substantial
reduction this year from what it was in fiscal 1960, when it was $9.3
billion.
Senator L O N G . SO you think it will be a hundred million dollars
below what it was last year?
Secretary D I L L O N . In fiscal 1961, that is right.
Senator L O N G . What do you estimate it is going to be in the following year?
Secretary D I L L O N . In the following year our figure in the budget is
$9.3 billion, which is back up again, but, of course, we are, as you all
know, carrying a very considerably larger debt.
So the rate will have to be somewhat lower to carry that larger
debt at about the same cost.
Senator L O N G . M y impression on this thing was that in the last
year of the Eisenhower administration interest rates were dropped,
and I said in this newsletter that I thought that the administration
was deliberately putting interest rates down to fix the election.
And they were lower prior to that.
Can you tell me what has happened to the interest rates since this
administration took over?
Secretary D I L L O N . Yes. I mentioned in my statement that they
have performed very well. Municipal bond rates, which is an important rate, are at the lowest levels in 3 years, and considerably
26
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
below what it was when this administration took over. Corporate
bond rates are the same as they were last year, which again was a
low point for 2 or 3 years, and we have equaled it again just yesterday
when a bond issue, a 30-year bond issue of Pacific Gas & Electric,
was sold for 4%. General mortgage rates have been lower by about
a quarter of 1 percent than they were a year ago. So, generally—and
this is in the first year of substantial recovery, in pase periods the
trend has always been tighter money as soon as you start a recovery—
we have had slightly cheaper money.
Senator L O N G . D O you feel that at this time the general level of
interest rates is somewhat less than it was at the time that President
Kennedy took office?
Secretary D I L L O N . Except for long-term Government bonds, I do,
and I think that these other interest rates are more important. Longterm Government bonds are a quarter of 1 percent higher.
Senator L O N G . H O W about the short-term rate on Government
bonds?
Secretary D I L L O N . On short-term rates I mentioned that, particularly for balance-of-payments reasons, we have tried to keep that rate
up, and that rate is now about half of 1 percent higher than it was
before. But it has not affected the long-term rate at all, arid we have
been able to make that increase without any corresponding increase,
and in fact with a decrease, in long-term rates.
Senator L O N G . A S I understand it, you say that the short-term rates
are a half of 1 percent higher than they were at the time this administration came in?
Secretary D I L L O N . Yes.
Senator L O N G . N O W , do I understand you to say that the long-term
rates are lower than they were at the time the administration came in?
Secretary D I L L O N . General long-term rates for mortgages, for
municipals, for corporate financing, all put together are lower than
when we came in.
Senator L O N G . N O W , you gave us this chart here as a part of your
testimony.
First, let me ask you this: What is the legal rate on long-term bonds
described by Congress?
Senator G O R E . Ceiling.
Senator L O N G . Ceiling.
Secretary D I L L O N . The coupon is 4 % percent for any bond over
5 years; that is the definition.
Senator L O N G . Then Congress has fixed at 4% percent the legal
ceiling that this Government can pay on Government bonds, is that
correct?
Secretary D I L L O N . 4){ percent is the highest coupon rate on Government bonds, which are defined as being anything over 5 years.
Senator L O N G . I was on the committee when we discussed that
matter, and I know the purpose for this, and I think the purpose for
some of the others was that we didn't want legally for this Government to issue a bond or to pay more than 4% percent on Government
obligations, that was the purpose that we had in mind.
Now, I understand that the previous administration had a refund
where they by the refunding technique exceeded 4){ percent. In my
opinion, I felt that that was violating the spirit of the law, if not the
letter of the law.
27
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
I assume that you do not agree with that statement?
Secretary D I L L O N . This has to do with a complicated method of
figuring interest rates which we don't feel is the method that actually
counts. We look at the actual rate on the bond issue, and we have
not as yet sold a new issue where the rate on that issue at the time it
was sold, the investment yield based on the price at which it was
sold, was more than 4}{ percent.
Senator L O N G . What you are telling us in this chart that you prepared in your Department is that you have broken the spirit of that
law in 10 different cases. For example, on your June 1960 2Ks, you
are trading those for a bond that would go at 3% or 3%, depending upon
the date of maturity, and if you take the 3%, if you look at what you
are giving them plus what they are earning, they are making 4.51,
4K percent, so you have broken the spirit of the law there if you have
not broken the letter of it.
Secretary D I L L O N . We didn't think so. The table we used, we
think, governs the approximate investment yield from exchange date
to maturity, and on that table the highest one of those in any advance
refundings that we have done was in September last year, when there
was one that was 4.23. And in this latest issue the highest is 4.21.
And that is what we think governs.
Senator L O N G . I am looking at the second to the last page of your
prepared statement here, at that chart, five, advance refundings.
Secretary D I L L O N . That is the same chart I am looking at, Senator.
Senator L O N G . N O W , you started in June 1 9 6 0 , and by the time you
get through tabulating you come out with what I want to know,
if I was holding some of these bonds, what do I make when I exchange
them compared to what I make if I hold these bonds?
<'Kid in the final column you have what I regard as the payoff figure,
wh^t do I make if I make this deal? And the answer is 4.51 percent,
which is slightly more than
percent.
Secretary D I L L O N . That was in June 1960, for a short-term issue,
yes.
Senator L O N G . N O W , you come on down to March 1 9 6 2 , every one
of those breaks
Secretary D I L L O N . They all are on that basis, but we don't think
that is actually the rate on which the bonds are sold. That is based
on a different assumption which was prepared to indicate at what
rate an individual who kept the original issue at the original rate up to
the time of its maturity would have to reinvest his money for the
extended period to come out the same as he would by taking our offer.
Senator G O R E . Will the Senator yield there?
Senator L O N G . Yes.
Senator G O R E . I have here a pamphlet from the Department of
the Treasury, September 1960, entitled "Debt Management and
Advance Refunding."
Secretary D I L L O N . That is correct.
Senator G O R E . This pamphlet, Mr. Chairman, contains the method
of calculating yields and interest rates which was described to the
committee at the time the committee approved the refunding bill
in 1959. Perhaps we were misled.
But according to this method of calculating the yield, some of these
most recent refundings go up as high as 4.38.
28
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator L O N G . Mr. Secretary, it would take a college graduate to
understand all this, I am a college graduate and it gets too complicated for me. I am sure someone with financial experience can understand it.
But, to me, it looks as though if you are going to extend the maturity
date of your debt you ought to do it at the time the interest rates are
low rather than at the time interest rates are breaking through the
ceiling.
You say here that you are at the mercy of the money market. But
my impression is that under the law this Government has the market
pretty much at its mercy if it wants to use the powers available to it,
especially if the Federal Reserve Board wants to expand the amount
of money and currency in circulation, and they have that function; is
that correct?
Secretary D I L L O N . The Federal Reserve certainly has control of
monetary operations. I think there is a basic problem in debt
management which I pointed out early in my testimony, and that is
that if you want to sell long-term debt at the cheapest possible price,
the time to do it is in the middle of a recession when interest rates are
low. Then you sell long-term bonds at the lowest possible price and
increase interest rates.
^
Well, from the point of view of the general economy that is just the
time I don't want to do that, because you want to keep money freely
available and interest rates as low as possible.
On the other hand, at the time when business is booming and there
is no problem about availability of credit, and money is available, and 7
you can sell at a longer date, and probably it is good to have jsome
restrictive effect on the economy at that time, then your interest ^ost
would possibly be higher.
So the two things are in conflict, and we have to work them ott as
between these two objectives as best we can.
Senator L O N G . Would you agree that monetary and fiscal policies
are a relatively inefficient and sometimes ineffectual method for
controlling inflation?
Secretary D I L L O N . Certainly I think there are a whole lot of things
that enter into inflation besides monetary and fiscal policies, if that
is the purport of your question. You can have the wage-price type of
inflation, even with the best possible use of monetary and fiscal
policies; you can have inflation without misuse of this type of policy.
On the other hand, the misuse of monetary and fiscal policy can
produce inflation by itself.
Senator L O N G . We passed a minimum wage law, we have passed
various labor laws, the President right now is trying to head off an
increase in the price of steel.
Would you recognize that those matters are probably more effective
as far as controlling the general level of prices than a fluctuation in
interest rates?
Secretary D I L L O N . Today I think you are quite right; I think the
most important thing right now is this type of thing.
Senator L O N G . Mr. Secretary, all I can say is that for my part I
am not prepared to go out here and defend these high interest rates,
and this advance refunding. I t looks to me as though the Democrats
in this administration are trying to outbid the support of the people
who should logically be Republicans. And I suspect that our Re-
29 A D V A N C E
REFUNDING
AND
DEBT
MANAGEMENT
publican friends will come back and top your bid, and all we will find
is that people who are interested in lower interest rates don't have
anybody looking after them. And I hate to see this refunding at
higher rates.
The C H A I R M A N . Senator Williams?
Senator W I L L I A M S . First I join my friend from Louisiana in wishing
that we had a good old Republican administration in power managing
the debt.
Secretary D I L L O N . It was pointed out that this advance refunding
technique was not initiated by this administration.
Senator W I L L I A M S . T O get back to just how much interest we are
paying over and above what would have been paid had these bonds
not been called in and refinanced at a higher maturity rate, how much
additional did you pay under the first advance refunding in June 1960?
Secretary D I L L O N . $74 million.
Senator W I L L I A M S . That is over and above what would have been
paid on the same bonds.
Now, in the advance refunding of October 1960 how much additional
interest will be paid to those bondholders?
Secretary D I L L O N . $335 million.
Senator W I L L I A M S . And in 1 9 6 1 , March 1 9 6 1 , you had another
advance refunding. How much additional interest will be put out by
the Government over and above what would have been required?
Secretary D I L L O N . $120 million.
Senator W I L L I A M S . And in the refunding of September 1 9 6 1 another advance refunding, and how much additional interest will be
paid there?
Secretary D I L L O N . $ 3 0 1 million.
Senator W I L L I A M S . N O W , in March 1 9 6 2 how much advance interest in that refunding—I mean additional interest?
Secretary D I L L O N . $256 million.
Senator W I L L I A M S . And the most recent refunding operation, how
much additional interest will you pay on this most recent one,
Mr. Secretary?
Secretary D I L L O N . That was the one I just gave you, $256 million.
Senator W I L L I A M S . That is the last one?
Secretary D I L L O N . Yes.
The C H A I R M A N . Mr. Secretary, you have offered the, but the
haven't all been taken; is that it?
Secretary D I L L O N . N O , sir; the offering is closed, it is all finished.
Senator W I L L I A M S . And this is what has been taken?
Secretary D I L L O N . Yes. The offering is closed, and it is all finished.
Senator W I L L I A M S . These figures which you have given me is
interest which will be paid on those bonds which have been traded?
Secretary D I L L O N . That is right.
Senator W I L L I A M S . And that totals altogether $ 1 , 0 8 5 billion additional interest?
Secretary D I L L O N . That is right. And that is offset by savings of
$1,627 billion on longer term issues that have been sold at a lower rate
than if we had tried to sell them for cash at the same time. So there
is a net saving to the Treasury of $541 million in the whole operation.
Senator W I L L I A M S . N O W , that saving is determined by projecting
to 1998 the fact that interest rates will never be any lower than they
are at the present time; is that correct?
81366—62
5
30
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . N O . It assumes that we wanted to sell 1 9 9 8
issues now rather than wait until 10 years from now and find out
what we could sell them at at that time and gamble on that. We
wanted to sell them at this time at a rate which was cheaper than
that at which we otherwise could sell them on the market.
Now, if we wanted to gamble and hope that in 10 years the interest
rate would be cheaper, we could have done that, but we didn't choose
to do that.
Senator W I L L I A M S . You chose not to gamble, and you proceeded •
on the premise that interest rates would remain stable; is that right?
Secretary D I L L O N . That was our premise.
Senator W I L L I A M S . S O that is my question, this whole refinancing
is based on the premise that there is no anticipation of lower interest
rates between now and the maturity of the bond which is being
put out?
Secretary D I L L O N . I think there are two assumptions. One is that
it was wise to have some long terms put out at this time. If we had
to wait until 1972, we wouldn't have put out any until 1972. And
we think you should move now, and if you have to move now this is
the cheapest way to do it.
Senator W I L L I A M S . But you would have achieved the same answer,
and this is the same result as it would be in going out in the open
market and selling at 3% percent bond that is maturing in 1990 or
1998 at 89 to 90 percent of par; is that correct?
Secretary D I L L O N . Well, the only difference is that you would (in
the kind of offering you describe) have taken many billions of dollars
out of savings that are readily available in the long-term market for
homes, for schools, and other things, and you would have affected
the general levels of interest rates. But the interest cost assumption
that you are making is correct.
Senator W I L L I A M S . I am not debating the merits, I am just speaking of the mathematics of it. The mathematics of it are that you
have in effect sold 30- to 35-year 3}£-percent bonds at 88 to 90.
Secretary D I L L O N . At a price of about 4 . 2 0 , as against a price of
4.25 or more that we would have had to pay if we had sold them for
cash in the market.
Senator W I L L I A M S . I would agree with you, because that is what
galls me a little, even admitting that we are selling a Government
bond at 89 percent of par. But is it not in effect in reality what we
have done?
Secretary D I L L O N . What we have done is allow the people who
own one Government bond that sells at 88 or 89 to exchange this
piece of paper for another Government bond which is already in the
market which is already selling at 88 and 89. And still they have a
piece of paper that is worth 88 or 89.
Senator W I L L I A M S . This billion dollars, when you roll off this billion
dollars of new bonds, 3K-percent bonds, they are not already in the
market, there is a similar issue in the market, but the bonds which
you put out are new bonds?
S e c r e t a r v D I L L O N . That is correct.
Senator W I L L I A M S . And you are putting new bonds out in exchange
for a piece of paper which is worth $88 to $89; is that not correct?
Secretary D I L L O N . T h a t is correct.
31 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Senator W I L L I A M S . And the mathematics of it are the same as if
the Government went out in the money market and sold this
percent bond at 88 to 89? I am not speaking about the net results
and the good of changing this debt, I am speaking of the mathematics
of it.
Secretary D I L L O N . Well, the mathematics, maybe interestwise, are
the same, but they are not the same principalwise, because what we
have done is we have exchanged a $100 face value Government
bond for another $100 face value Government bond, so we have not
increased the total of the Government debt.
If you sold in the market at 90 you would only get $90, but you
would owe a hundred, so you would increase the face value of the
Government debt. So there is a difference there.
Senator W I L L I A M S . We will approach it from this angle: These
2K-percent bonds maturing in 1972 are a hundred par bonds, and if
the bondholder holds them to 1972 they will be paid $100.
Secretary D I L L O N . That is correct.
Senator W I L L I A M S . Now, and at that time under this refinancing
we will have what in effect is a 20-year 3K bond; is that correct?
Secretary D I L L O N . Which will be worth $ 9 0 at that time.
Senator W I L L I A M S . Maybe and maybe not. But what you have
done, you have gone to this bondholder who owns this 2%-percent bond
today, and we will say—Senator Byrd pointed out the example of a
man who had a million dollars' worth of these 2^-percent bonds—you
have gone to him and said, "If you will buy in 1972, contract in 1972
for a 3K-percent 20-year bond at par, we will give you an additional
$100,000 in the interval." Is that not what you have done, in
additional interest?
Secretary D I L L O N . I think that is exactly correct. And that
additional $100,000 in interest will be just the difference between
paying par for a 3%-percent bond in 1972 and buying it in the market
at 90, which would be the price that it is worth, based on the present
level of what a 28-year or 36-year bond is now worth in the market.
Senator W I L L I A M S . And this is all justified on the premise that
looking into the future in 1972 you don't conceive of any possibility
that you will be able to sell the 3^-percent 20-year bond at higher
than 90 percent of the Government bond; is that not correct?
Secretary D I L L O N . N O ; it is based on the feeling that it is desirable
to put out some long-term debt at this time, and we are trying to put
it out at the lowest cost possible. We feel it is preferable to put some
out now rather than to wait until 1972 to do it and see what the
market is then.
Senator W I L L I A M S . I will phrase my question another way.
Do you think that in 1972 you will be able to sell a 3%-percent, 20year bond at higher than 90?
Secretary D I L L O N . Not unless interest rates change from and are
lowered from where they are now. If they are at the same level as
they are now, we would not be able to sell 3%-percent bonds due in
1998 for as much as 90.
Senator W I L L I A M S . If you can sell a 3%-percent bond at 9 0 , a 20-year
bond in 1972, the Government will have lost as a result of this transfer;
will it not?
Secretary D I L L O N . If interest rates are going to decline and be
considerably lower 10 years from now, then, of course, you are right.
32
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
You could sell long-term bonds cheaper then and it would be better
to wait. That argument is merely that we should never sell long-term
Government bonds until such time as we decide interest rates are at
their very bottom, and that is a speculative thing. No one can decide
that. I t is our feeling, and I think it is the only conservative feeling
for a manager of the public debt, that we have to put out a certain
amount of long term continually, year in and year out, when we think
the general conditions are average good as we think they are now.
Senator W I L L I A M S . I am in complete agreement with this principle
of putting more in a long-term debt, and I regret that we haven't
been following that more. In arriving at that there may be a difference of opinion. But I still get back to the question that this whole
thing is premised on the assumption that there will be no lower interest
rates in the next 10 years.
Secretary D I L L O N . I don't think it is.
Senator W I L L I A M S . But, in effect, you are paying out $1 billion
additional interest to these bondholders in return for an agreement
from them that they will buy in 1972, that they will contract now for
a 20-year 3K-percent bond at par.
Secretary D I L L O N . Yes—-it is 26-year, but it is the same thing.
Senator W I L L I A M S . In computing your projected savings here, did
you take into consideration that you are going to have to borrow the
money and pay interest on this billion dollars extra interest which
you are paying?
Secretary D I L L O N . Y O U can take that into the computation.
Senator W I L L I A M S . Did you?
Secretary D I L L O N . N O . We can make a computation that does r
but, also, if you wanted to be fair, you would have to take into account
the fact that on the extra billion dollars worth of interest you get some
tax revenue, you get very substantial tax revenue. So it wouldn't be
a billion dollars. If you want to net out the final Government cost
on this thing, it is very complex, and in your favor would be working
this tax revenue, and against you the accumulated cost of borrowing
interest.
Senator W I L L I A M S . Y O U are not going to justify this additional
billion dollars of interest as being profitable to the Government solely
on the basis that they are going to have to pay taxes on it?
Secretary D I L L O N . N O , I am not trying to at all.
Senator W I L L I A M S . H O W much of our debt today——
Secretary D I L L O N . But certainly the taxes it would collect would
more than offset the interest cost on the billion dollars that might
have to be raised gradually over that period to pay it, Senator.
Senator W I L L I A M S . Would you repeat that?
Secretary D I L L O N . I said, the amount of taxes that would be paid
on the billion dollars would certainly be more than the interest cost
on the billion dollars that would have to be borrowed, not all now,
b u t year by year over the period to pay this extra billion.
Senator W I L L I A M S . I am lost, but I am going to ask you this question. To satisfy everybody, why don't you give them an extra $2
billion and we will pay off the national debt, if the Government is
going to make money out of this?
33 A D V A N C E
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . The real reason is t h a t the Government is getting
a pretty good deal on this, when you come down to the end result.
Although the financial brains of the country feel that these advance
refundings are good for this particular purpose, the result has been
t h a t the great majority have felt it is better to hold the shorter term
security at the lower rate of interest than to take these long-term
offerings.
Senator W I L L I A M S . H O W much of our public debt, of our national
debt is in the hands of the public?
Secretary D I L L O N . About $200 billion of marketables.
Senator W I L L I A M S . About $200 billion?
Secretary D I L L O N . $196 billion.
Senator W I L L I A M S . What is the average maturity of the debt that
is in the hands of the public? Do you have t h a t separated to drop
out the hundred billion that is in the trust funds?
Secretary D I L L O N . I don't think I have t h a t particular figure;
someone may be able to get that for you.
(The information requested is as follows:)
The average length of the total public marketable debt on March 1, 1962, was
4 years 11 months. Excluding the holdings of the Federal Reserve banks and
Government investment accounts, the average length increases less than a month
and the rounded number in years and months remains 4 years 11 months.
Senator W I L L I A M S . H O W much of over $200 billion debt represents
less than 5 years maturity?
Secretary D I L L O N . Less than 5 years maturity—I have it here. Of
the marketable public debt of the total of $200 billion, approximately
$150 billion is under 5 years.
Senator W I L L I A M S . $ 1 5 0 billion?
Secretary D I L L O N . Out of the $200 billion, yes, approximately,
Senator.
Senator W I L L I A M S . And do you have that broken down as to how
much is less than 3 years?
Secretary D I L L O N . Under 1 year—this is as of March 1—the grand
total of the publicly held debt is $197.7 billion. Under 1 year is 88%
billion, or 44.8 percent; from 1 to 2 years, it is 17.9 billion, or 9 percent. And 2 to 5 years is 41.7 billion or 21.1 percent. From 5 to 10
years is 23.7 billion or 12 percent. And over 10 years is 25.9 billion
or 13.1 percent.
So 25.1 percent of that total is over 5 years.
Senator W I L L I A M S . N O W , could you give me those comparable
figures for 2 years ago, or 1 year ago?
Secretary D I L L O N . I don't know that I have those right here, but
I certainly can give them to you for the record. I think that they
will show that there has been an increase in the under 1-year debt,
and an increase, also, in the very long debt, which is more or less
offset, and the middle part that stays the same.
34
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
(The following was later received for the record:)
Maturity
distribution
of marketable
debt
Mar. 1,1960
Maturity classes
0 to 1 years
1 to 2 years
2 to 5 years
5 to 10 years
10 years and over
Total
___
Mar. 1, 1961
Percentage
distribution
Amount
outstanding
(billions)
Percentage
distribution
Amount
outstanding
(billions)
$76.7
22.2
50.6
15.3
24.6
40.5
11.7
26.7
8.1
13.0
$80.1
24.7
42.3
18.7
24.2
42.2
13.0
22.3
9.8
12.7
189.4
100.0
189. 9
100.0
Senator W I L L I A M S . It was my understanding that in reality the
real short-term debt has increased substantially, and these averages
of an extended debt are as a result of this 30-year rollover.
Secretary D I L L O N . This isn't all broken down, but it shows that the
total of 5 years and over altogether has stayed about the same since
from 1953 to 1961, but there has been a very big increase in the very
long term, the 20 years and over. Tn 1953 there was only about
$1}£ billion over 20 years, and the figures we have now show about
$15 billion over 20 years.
Senator W I L L I A M S . I won't press for that. But I wish you would
furnish them for the record.
Secretary D I L L O N . Yes.
Senator W I L L I A M S . The ceiling, 4%-percerit ceiling on the rate that
you can pay, as I understand it, the basis for considering that that is
applicable to coupon rate only and not to yield is based upon a ruling
by Attorney General Kennedy; is that correct?
Secretary D I L L O N . That is correct. That is a ruling based on the
Attorney General's view of what the law as passed means, and we
ourselves have not in our view surpassed the yield.
Senator W I L L I A M S . And prior to this ruling there had been two or
three attempts by the Treasury Department to get Congress to repeal
this ceiling?
Secretary D I L L O N . That is correct.
Senator W I L L I A M S . And when Congress did not repeal the ceiling,
then the Attorney General's ruling came in, that you could in effect sell
a 5-, 6-, or 10-percent yield bond if you so wished, so long as you kept
the coupon at 4}{ or under and give them the yield by depreciating
the price of the bond, is that not true?
Secretary D I L L O N . That was the Attorney General's ruling, that
isn't what we have done.
Senator W I L L I A M S . I am not speaking of that.
But that is the ruling, that there is in effect under this ruling no
limit on the yield rate of a Government bond provided you can sell
them for 50 percent of par or 75 or 90 or whatever it is?
Secretary D I L L O N . That is the Attorney General's ruling based on
the law, which I think was passed 40 or so years ago; it is a very,
very old law.
Senator W I L L I A M S . But prior to that ruling it was the opinion of the
Treasury Department that the clear intent of Congress was that that
was to be a ceiling on yield; was it not?
35 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . I think that the opinion of the Treasury Department is probably no different from what it was before as to the
legal interpretation of the law. And their interpretation is based
more on what they felt was appropriate in view of what they thought
were the desires of the Congress at this time. And I think they were
right.
I know what the desires of the Congress are. And I don't think we
have any intention of flying in the face of them, even though there is
this ruling as to what the law means.
Senator W I L L I A M S . Are you going to ask for a repeal of the 4){percent ceiling?
Secretary D I L L O N . The 4%-percent ceiling, Senator, could, once
again, if interest rates should go up, which I hope they won't, become
a difficulty in handling the finances of the Government. And I think,
if t h a t time came, we would probably discuss with the President
whether he wished to recommend such a change. So far it has not
been a problem, and we have not seen why it was necessary to enter
what would be an area of very great controversy, or what had proved
to be an area of great controversy, when there wasn't an immediate
necessity for our operations.
Senator W I L L I A M S . D O you foresee any prospective need for the
repeal?
Secretary D I L L O N . This could happen. We are right close to it.
As I say, ii' we wanted to sell for cash a long-term bond now, it would
be right at the ceiling. So if interest rates should go up we could not
sell re&lly long-term bonds for cash without increasing the ceiling.
Senator W I L L I A M S . Accepting the principle that it was the intent
of Congress that this 4% percent be a ceiling, would you approve of
a rollover or transfer proposition such as you had recently if in that
transfer the yield, computed yield, was in excess of 4}{ percent?
Secretary D I L L O N . A S a matter of policy, we have kept the yield
on the new securities, when they were issued, under 4% percent.
Senator W I L L I A M S . But suppose in computation it was 4 . 3 5 or 4%
percent?
Secretary D I L L O N . We haven't made any such offers. The highest
offer on the table, as I pointed out, was last fall. There was one
issue that computed at 4.23 and there have been several at 4.21.
Senator W I L L I A M S . I appreciate that point. M y question is, would
you approve such a transfer without coming back to Congress and
getting a change in the law?
Secretary D I L L O N . I think as a matter of policy I probably would
not, because I think that it has been our thought that certainly this
was something that Congress did not desire us to do, therefore we
didn't want to do it.
But I would like to reserve my judgment as to what I would do
until the time comes when T have to do it, because, as I say, if we
needed a change in the 4% percent ceiling we would have no hesitancy
in recommending to the President that he consider making such a
recommendation to the Congress. But we haven't found that
necessary.
The C H A I R M A N . Senator Kerr?
Senator K E R R . Mr. Secretary, when was the law passed under
which this refunding is being done?
Secretary D I L L O N . 1959.
36
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Senator K E R R . Was that the recommendation of the administration at that time?
Secretary D I L L O N . Yes, sir.
Senator K E R R . N O W , there has been a number of questions asked
on the basis of indulging assumptions.
I presume if you wanted to indulge in making assumptions you
could just as readily assume higher interest rates as lower interest
rates, or lower interest rates as higher interest rates, or even indulge
in the assumption of steady interest rates.
Secretary D I L L O N . That is correct.
Senator K E R R . Y O U wouldn't be limited in the indulgence of assumptions to any one of the three general classifications?
Secretary D I L L O N . If one wanted to make assumptions, you could
make any of those.
Senator K E R R . In 1 9 5 7 or 1 9 5 8 , this committee had a rather extended investigation into the fiscal policies, the monetary control
policies, the debt management policies of the administration, at which
time Mr. George Humphrey was the Secretary of the Treasury, and
Burgess was his assistant, I believe, charged primarily with the responsibility of the management of the public debt. At that time
Mr. Burgess frankly admitted that the monetary control policies had
been handled on a basis to promote and bring about a higher level
of interest rates not only on Government bonds but generally in the
economy. You are aware of that?
Secretary D I L L O N . Yes.
Senator K E R R . The Senator from Oklahoma took quite a vigorous
part in that investigation. And, as I recall, the underlying basis of
defense by Mr. Humphrey and Mr. Burgess, and by Mr. William
McChesney Martin of the Federal Reserve Board, of policies inevitably
resulting in higher interest rates was that the Federal Reserve Board
or bank or system had to be independent of the control of the Treasury
Department of the U.S. Government.
Secretary D I L L O N . I understand that position; yes.
Senator K E R R . The Senator from Oklahoma frankly was violently
opposed to the principle that the Federal Reserve System should be
independent of the executive branch of the Government either directly or indirectly through the Treasury. But the fight that he and
others made in that regard was lost. And the independence of the
Federal Reserve Board and System was not only clearly established
but definitely exercised; is that correct?
Secretary D I L L O N . That is correct.
Senator K E R R . N O W , is it a fact that insofar as the supply of credit
is concerned in this country, both as to the total available and the
relation of the total supply of credit to the total demand for credit is
determined exclusively by the management of the Federal Reserve
System?
Secretary D I L L O N . Yes, sir, they make those decisions, we don't
make them.
Seiiator K E R R . And their policies determine the results in relationship to the supply of credit to the demand for credit?
Secretary D I L L O N . That is correct.
Senator K E R R . The Treasury Department under the law has no
authority to fix those policies or make those decisions?
Secretary D I L L O N . N O .
37 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Senator K E R R . And in the preceding administration, whether it
was right or wrong, we were confronted with a situation wherein the
Federal Reserve Board was demanding independence of the executive
branch of the Government and of the Treasury Department, and
wherein the Treasury Department was supporting the Federal Reserve
in achieving that objective.
Secretary D I L L O N . I wasn't aware of the Treasury Department's
position at that time, but I do know they thought they achieved the
objective.
Senator K E R R . Well, for your information, I would say—and I refer
to the record of the hearings and the testimony both of Mr. Humphrey,
the Secretary of the Treasury, and his assistant, Mr. Burgess, in which
they defended that principle just as stoutly as did the representatives
of the Federal Reserve System—and in view of what I thought was
the wide publicity given to the evidence of Mr. Humphrey and
Mr. Burgess, I thought their position in the matter was fully known
and widely publicized and understood.
Secretary D I L L O N . Undoubtedly it was; yes.
Senator K E R R . And, therefore, naturally I would assume that you
were aware of that fact.
Secretary D I L L O N . Well, I accept that; I am sure it is the fact.
Senator K E R R . SO that when you became Secretary of the Treasury
the battle for the independence of the Federal Reserve System and the
recognition of their claim that they were the agency to determine the
supply of credit in relation to the demand for credit had become a
firmly fixed element in the economic environment of the Nation.
Secretary D I L L O N . I think that is correct, absolutely.
Senator K E R R . N O W , in one period of the examination of Mr.
Humphrey, the Senator from Oklahoma asked him at what rate he
thought he could sell long-term Government bonds, and the Secretary
said he didn't know. The Senator from Oklahoma asked him if the
Treasury could sell them at 4}i percent or less if he sold them at par,
and he said that he could not. The Senator from Oklahoma asked him
at what rate he thought he could sell long-term Government bonds
and get par for them, and Secretary Humphrey said he didn't know at
what rate he could sell them.
I want to congratulate you upon the fact that you at least are
sufficiently familiar with the economic environment and the situation
of debt management that you are in a position to have a knowledgeable
opinion and one that you can defend and establish and maintain and
answer the question, at what rate you could sell long-term Government bonds.
Now, as I understand it, you believe that one of the sound principles
in the matter of debt management is that certain percentages of the
public debt should be in long-term securities or maturities?
Secretary D I L L O N . That is correct, Senator, yes.
Senator K E R R . What would be today the overall average term of
the total public debt as to its maturity, its average maturity, had there
been none of the refunding operations which have been carried out
under the law which the Congress passed in 1959?
Secretary D I L L O N . Three years and seven months, approximately.
Senator K E R R . N O W , the Senator from Oklahoma remembers that
under cross-examination, or direct examination, both Mr. Humphrey
and Mr. Burgess stoutly maintained to the committee that economic
81366—62 6
38
ADVANCE
REFUNDING AND
DEBT
MANAGEMENT
chaos would prevail if the average length of the entire public debt
ever got below a period which I believe they referred to as between
4}{ years, at least that was the only interpretation I could give to
their positive statements to this committee in the hearings that we
had. They also advised this committee that the two worst aspects
of the debt management policies of the administration that preceded
them were these, No. 1, the effort by the administration to control
the policies of the Federal Reserve System to cause it to give that
degree of cooperation to the Treasury that would maintain low interest rates; No. 2, that the preceding administration had managed
the public debt in such a way as to bring about what they described
as a fiscal mess because the overall average of the maturities of the
public debt had reached a level nearly as low as 5 years. And they
stated that the two most necessary things to accomplish to establish
sound monetary control and fiscal policies and debt management
policies, No. 1, was to make the Federal Reserve System free of any
control of the executive branch of the Government; No. 2, extend a
greater percentage of the total public debt in to maturities of longer
term than those existing when they came into office in January 1953.
And while the Senator from Oklahoma didn't agree with them, yet
the result that was achieved during that administration brought about
a situation where the Federal Reserve System was free of domination
or control of the executive, and where the Treasury Department had
to do its borrowing in the open money market on the basis of the
availability of credit in comparison with the demand for it and
actually compete with other borrowers for the available supply of
credit.
Secretary D I L L O N . That is correct.
Senator K E R R . And that was the situation that confronted you
when you took this office.
Secretary D I L L O N . T h a t is correct.
Senator K E R R . And that was the basis of the recommendation of
the previous administration that the refunding legislation be passed.
Secretary D I L L O N . I think that is correct.
Senator K E R R . And their claim was that if that were passed, the
Treasury Department could take advantage of that law to convert
existing bonds which when issued had been long term bonds, but
which due to the passage of time had become bonds maturing in a
much shorter period of time, into bonds which would be of a maturity
25 years or longer into the future.
Secretary D I L L O N . T h a t is correct.
Senator K E R R . N O W , if you are to achieve the objective of having
a certain percentage of the public debt in long-term bonds under
existing circumstances, the only two alternatives available to you is
whether to sell a long-term bond or to convert a medium-term bond
into a long-term bond.
Secretary D I L L O N . T h a t is correct, sir.
Senator K E R R . And if you are going to achieve the situation of a
certain percentage or a larger percentage of the debt being placed
into long-term bonds, you have to do it now on the basis of what the
interest rates are now and on the basis of what the money market
will permit now.
Secretary D I L L O N . T h a t is correct, absolutely.
Senator K E R R . I want to say, Mr. Secretary, I think you are a
very able—I am not going to say brilliant, but you may be brilliant—•
39
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
but I do not have the opinion of you that permits me to think that
you can tell this committee today what the economic environment will
be in 1972 as to the availability and cost of credit.
Secretary D I L L O N . N O , sir; I don't pretend to.
Senator K E R R . Y O U have some confidence in your ability, I
presume.
Secretary D I L L O N . That is right.
Senator K E R R . But not that much?
Secretary D I L L O N . N O , sir.
Senator K E R R . Accepting the thesis, therefore, that the Treasury
is to some extent another borrower in the money market, it is to that
extent subject to the economic laws which control that market?
Secretary D I L L O N . That is correct, sir.
Senator K E R R . And so long as the Federal Reserve System is
independent of the executive branch of the Treasury, that environment will prevail and be a reality in which you must manage the public
debt?
Secretary D I L L O N . That is correct.
Senator K E R R . S O , therefore, that environment will prevail so long
as the Federal Reserve System has the degree of independence that
it now has, and operates under the law to maintain the economic
environment which determines the availability and the cost of credit.
Secretary D I L L O N . That is correct.
Senator K E R R . N O W , every borrower that goes into the money
market has to pay some cost for borrowing.
Secretary D I L L O N . Yes.
Senator K E R R . Some fee for financing.
Secretary D I L L O N . That is right.
Senator K E R R . The Senator from Oklahoma, maybe on this basis
of his limitations, is proportionately the world's greatest living
borrower. I definitely recall an experience in 1935 when of my own
free will and accord I placed myself to some degree in the hands of
operators in the money market, seeking public credit. I inquired as
best I could the rules of the game. I finally found a group of investment managers who were frank enough to advise me of some of the
rules of the game, and the one I remember most distinctly was this:
I said, "How much do you charge for your services in obtaining
credit for your borrowers?"
They told me this: "All the traffic will bear."
And before I was through, I learned that they meant every word of it.
And my experience with them since then has confirmed and fortified
my conviction that they told me the truth.
Now, so long as an environment is maintained by the one agency of
Government that has full and complete power and authority to determine that economic environment, you as the world's biggest borrower
are to some extent subject to the same law of the money marketplace?
Secretar}^ D I L L O N . That is correct.
Senator K E R R . Different maturities cost different amounts, don't
they, Mr. Secretary?
Secretary D I L L O N . That is correct, depending on demand and
supply.
Senator K E R R . I S it a fact that of the credit available it is divided
into more than one category with reference to maturity dates?
40
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . That is correct. We generally talk about short
term, intermediate, and long term.
Senator K E R R . Can you tell the committee the total amount of
public and private debt in this country?
Secretary D I L L O N . The exact figure I can furnish, but it is in the
order of a billion dollars.
Senator K E R R . Y O U mean a trillion?
Secretary D I L L O N . A trillion, excuse me.
Senator K E R R . N O W , that credit is available from many sources.
Do you have the figure there?
Secretary D I L L O N . The figure is $ 1 , 0 5 8 , 5 0 0 million.
Senator K E R R . A S of what date?
Secretary D I L L O N . December 1 9 6 1 .
Senator K E R R . December 3 1 , 1 9 6 1 ?
Secretary D I L L O N . That is right.
Senator A N D E R S O N . We have increased that a little.
Senator K E R R . Yes, we have, because I have done some borrowing
myself.
Of that amount of debt provided by all of the lenders who make it
available, portions of it are available for short-term obligations, portions of it are available for medium-term obligations, and portions of
it are available for long-term obligations?
Secretary D I L L O N . That is correct.
Senator K E R R . N O W , the trend has been for local governments
seeking financing for schools and hospitals and roads and civic improvements, for educational institutions seeking funds for dormitories
and other facilities, and for many other borrowers, to obtain their
funds on as long a term as possible.
Secretary D I L L O N . That is correct.
Senator K E R R . Congress has moved more and more to preempt
portions of the long-term credit available for home building.
Secretary D I L L O N . That is right.
Senator K E R R . I believe that Congress 2 or 3 years ago passed a
bill authorizing the TYA to borrow up to $750 million to finance its
operations.
Secretary D I L L O N . That is right.
Senator K E R R . And that is long-term money.
Secretary D I L L O N . T h a t is correct.
Senator K E R R . I believe the Congress passed a bill authorizing the
New York State Power Authority to finance and build a great hydroelectric project at Niagara Falls which cost upward of three quarters
of a billion dollars.
Secretary D I L L O N . I think that is right, too; yes, sir.
Senator K E R R . And that is long-term money.
Secretary D I L L O N . I t certainly is.
Senator K E R R . All of these things are in the picture as the Treasury
goes into the market, the money market, to obtain long-term credit?
Secretary D I L L O N . That is right.
Senator K E R R . And if the Treasury is to have certain percentages
of its obligations in long-term maturities, as we said awhile ago, it
has to do so on the basis either of selling a long-term security for cash,
or refunding intermediate term securities into longer term maturities.
Secretary D I L L O N . That is correct.
41 A D V A N C E
REFUNDING
AND
DEBT
MANAGEMENT
Senator K E R R . And on the basis of the law available to you, and
your judgment of what was the most advisable method and the
easiest method and the one that would have the least impact on
others seeking long-term credit, the wise course available to you and
the wiser policy for you was to follow the course that you have in the
refunding of intermediate term maturities to longer term maturities?
Secretary D I L L O N . Very much so, Senator.
Senator K E R R . And the only way t h a t you can do that is on the
basis of what today's interest rates are, not on the basis of what even
the Treasury of the United States thinks they will be 5 or 10 years
from now.
Secretary D I L L O N . That is correct.
Senator K E R R . N O W , the present level of interest rates is the
result of the operation of the Federal Reserve System in its independent status, which has emerged and become a reality in the last 10
years.
Secretary D I L L O N . That is correct, sir.
Senator K E R R . In view of the fact that prior to 1 9 5 2 the Federal
Reserve System had been operated on the basis of supporting the
price of Government bonds, it had maintained a lower interest rate
level generally.
Secretary D I L L O N . I think that is correct.
Senator K E R R . N O W that any restriction on it or any effort to
direct its fixing of its policies has been removed, and it has been left
free to meet its responsibilities on the basis of its decisions, the
present level of interest rates have come into being and have been
relatively stable for a period of some years.
Secretary D I L L O N . That is right.
Senator K E R R . I S that fact a part of the information considered
by the Treasury in feeling that we have reached a level of interest
rates with reference to which we can expect that there is a greater
degree of stability to it than there was at a time when the Federal
Reserve System was operated on a basis of being influenced by or
controlled by the Executive through the Treasury Department?
Secretary D I L L O N . I think that the fact that due to these operations, interest rates have stabilized, apparently, for a period of well
over a year, maybe a couple of years, here in the United States is one
reason we feel that. And we also feel it because apparently trends in
other countries are working toward greater stability, in other words,
toward somewhat lower interest rates than the very high level, much
higher than ours, that has characterized the interest rates in Europe
to date. They seem to be tending more toward a level which is not
too far different from our long-term rates now. Therefore, it seems
t h a t the whole world interest rate picture seems to be coming into an
equilibrium that may continue for some time.
Senator K E R R . There wasn't any doubt t h a t the interest rates of
the country up to 10 years ago were determined in part by the fact
that the Federal Reserve System was used in a way to help keep the
interest rates at a lower level than would be the case in the ordinary
working of the law of supply and demand of credit?
Secretary D I L L O N . That is correct.
Senator K E R R . Those restraints were removed?
Secretary D I L L O N . That is right.
42
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Senator K E R R . And the Federal Reserve System now operates
generally on the basis of what they regard to be the law of supply and
demand of credit.
Secretary D I L L O N . That is correct.
Senator K E R R . S O that would certainly form a basis to feel t h a t
we have a level of interest rates with reference to which we can expect
it to be more nearly stabilized than it was at a time when the restraints
were in existence that kept them at a lower level.
Secretary D I L L O N . I think that is probably correct, because when
the restraints were in existence, the only reason we stayed at the lower
level was because of the restraints, and you always had the possibility
that they would be removed.
Senator K E R R . And they have been removed?
Secretary D I L L O N . They have been.
Senator K E R R . And they now have found the level which has been
relatively stable actually for a period of 4 or 5 years.
Secretary D I L L O N . I think that is probably right; yes.
Senator K E R R . I believe that is all, Mr. Chairman.
The C H A I R M A N . I would like to ask the committee, since we cannot
finish today, whether it would be satisfactory to those members who
have not had an opportunity to question the Secretary to do so Friday
morning?
Senator A N D E R S O N . Would it suit the Secretary?
Secretary D I L L O N . Friday morning would be all right. I have an
engagement tomorrow morning with the House Ways and Means
Committee on the trade bill.
The C H A I R M A N . The committee will meet at 10 o'clock Friday
morning, and those Senators who have not had a chance to question
the Secretary will come first.
(Whereupon, at 12:25 p.m., the committee recessed, to reconvene
at 10 a.m., Friday, March 16, 1962.)
ADVANCE R E F U N D I N G AND D E B T
MANAGEMENT
FRIDAY, MARCH 16, 1962
U.S.
COMMITTEE
SENATE,
ON F I N A N C E ,
Washington, D.C.
The committee met, pursuant to recess, at 10 a.m., in room 2221,
New Senate Office Building, Senator Harry F. Byrd (chairman)
presiding.
Present: Senators Byrd, Kerr, Anderson, Douglas, Gore, Fulbright,
Williams, Carlson, and Bennett.
Also present: Elizabeth B. Springer, chief clerk.
The C H A I R M A N . The committee will come to order.
The Chair recognizes Senator Anderson.
Senator A N D E R S O N . Mr. Secretary, I am not going to have many
questions but I was interested in this question of whether or not the
handling of bonds in this fashion results in any way in a windfall.
This morning's paper says that the 2^s of 72-67 are selling for
87z%2, whereas the 3%s of 98 are selling for 882%2. That is only a single
point difference in the value of these maturities.
Would you regard that as a windfall or is that pretty close?
STATEMENT OF HON. DOUGLAS DILLON, SECRETARY OF THE
TREASURY—Resumed
Secretary D I L L O N . N O , Senator; I think that is pretty close.
Senator A N D E R S O N . I want to say, Mr. Secretary, that the records
of this committee would show that I made the motion to strike out
the authority for this advance refunding when the bill was in the
Senate committee, and it was carried 8 to 6. The chairman didn't
vote. I see that the vote on this side in favor of it was Senator Frear,
Senator Long, Senator Anderson, Senator Douglas, Senator Gore,
Senator Talmadge, and Senator Williams.
It was stricken from the bill and it was put back in conference only
after some long extended conferences with the then Secretary of the
Treasury.
Now, the one thing that came into that was a letter from the then
Secretary, Mr. Robert Anderson, to the chairman of this committee,
Mr. Byrd, dated September 9, 1959, with reference to this advance
refunding, and promising to report on the results of this to this committee.
Was that letter ever called to your attention?
Secretary D I L L O N . It never came to my attention until last week
after this hearing had been underway. There was some oversight in
the Treasury Department because neither Mr. Roosa nor myself have
known about it.
43
44
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator A N D E R S O N . If this was made by your predecessor, you
should have lived up to it.
Secretary D I L L O N . We would have lived up to it. I t was an oversight which we regret.
Senator A N D E R S O N . I am certain that you would have, Mr. Secretary. I just wanted to call your attention to it because I think maybe
some of the misunderstanding about how this works out is because
of failure to report frequently to the committee.
Now, it happened in the previous refunding, the firm with which
I am connected has some bonds they wanted to exchange. They
were just about as these, a point difference. Actually when you
come to send your old bonds in, insure them, get your new bonds
back, put them on the box, take down the figures that you had for
amortization and values of your old bonds and set up a new set of
amortization figures it is about worth a point to go through that
proceeding, and I didn't regard this as an extremely advantageous
offering, although it did give a set investment for many years to come.
I only want to say to you that the fact there is only a point difference
in these two issues as of today after the period for handling this
transaction is over, indicates that you guessed the market pretty
well, and I want to commend you on it.
I don't think you can predict interest rates, the rest of us can't.
They shift around at most unexpected times. I think the important
thing is to be sure that you do guess the market reasonably well in
these offerings.
Do you depend on any of your advisory groups such as the advisory
for Federal Reserve banks in setting the figure at the interest rate
at which these bonds are to be offered?
Secretary D I L L O N . N O , Senator, we do not utilize the advisory
groups at all for these advance refundings. We do make use of them
when we have regular refundings coming up in the regular course, but
we did not ever think it was appropriate to utilize them for an advance
refunding because they would get advance knowledge of the fact that
it was coming.
Senator A N D E R S O N . As a matter of fact, Mr. Secretary, when this
matter was red hot before this committee the last time, and when—
as I say, we had stricken it out in the Senate and then it came back
in conference, the then Secretary came to talk to me and said to me
t h a t he would be perfectly glad to submit in advance a program they
had so that there would be a chance to check and see if it was proper.
I told him, I couldn't let him in my office under those circumstances
because he would give me inside information on it.
He then promised he would reveal it to the chairman of the committee if he wanted it. I don't think he would, it would be better not
to give it out.
But I do think that to follow out what was promised in that letter
to report to the chairman of the committee and let him in turn report
to the Congress after each refunding how it came out, although the
information is available to the daily press so it ought to be available
to the Secretary.
Senator Long asked me if I would put in the record the tables so
we may have them in the record.
The C H A I R M A N . The tables referred to have already been inserted
in the record.
(The tables referred appear on pp. 12 through 15).
45 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Senator A N D E R S O N . I thank the Senator from U t a h for letting me
go ahead. I have to go to a meeting downstairs.
Senator B E N N E T T . Yes.
The C H A I R M A N . Senator Bennett?
Senator B E N N E T T . Mr. Chairman, I have no very important
questions to ask the Secretary.
I have looked over this list and generally these refundings have
been made by adding a point to a point, a little more than a point,
nearly a point and one-half to the one in March of 1961, a point and
three-eighths.
In this last one only 5}{ billion were taken out of 18 billion offered,
isn't my memory right on that?
Secretary D I L L O N . That is correct.
Senator B E N N E T T . Would a wider margin have resulted in a
greater agreement to roll these over, do you think?
Secretary D I L L O N . Probably a somewhat wider margin would have
resulted in somewhat more market acceptance to the offering. But I
think there are many holders of certain types who would not accept
any reasonable offering because they prefer to hold the shorter term
security rather than the longer one irrespective of differences in yield.
Senator B E N N E T T . If you had been able to, or if there had been an
acceptance, say, of 10 billion instead of 5%, this could have postponed
the time when you must make another advance refunding?
Secretary D I L L O N . Another advance refunding or another cash
offering in the long-term area because we would have gotten just t h a t
much more out in that area.
Senator B E N N E T T . Have you made any cash offerings, has the
Treasury made any cash offerings since the first advance refunding
in 1960?
Secretary D I L L O N . I have in m y mind only what we have done
ourselves in the last year, and we have made some offerings during the
course of refundings.
Last fall we offered a choice of 3% bonds of 1974, and in August we
did the 3% of 1968. Last January we sold for cash, not during the
refunding, a 4-percent bond of 1969. I t was already outstanding but
we offered an additional billion dollars.
Senator B E N N E T T . The 1 9 6 8 and 1 9 6 9 bonds are within the 10-year
period. The other is just over, a little bit.
But you have made no offering of 20-, 30-year bonds.
Secretary D I L L O N . N O .
Senator B E N N E T T . A S long as you continue to offer these bonds on
an advance refunding basis, do you think the market will be interested
in accepting sales without an advance refunding?
Secretary D I L L O N . Well, as I pointed out the other day, I think you
could sell long-term bonds without advance refunding, but only at a
higher interest rate. I would think the very minimum interest rate
now would be 4% percent. I t was m y own feeling that we could sell
under present conditions, not tremendous quantities, b u t substantial
quantities, of long-term bonds, at t h a t rate, but doing so would then
have had a very real effect on the overall market and we wouldn't be
able to continue because the market rates generally would reflect this,
and interest rates generally would rise.
Senator B E N N E T T . The net income to the buyer of the bonds on
this particular turnover is approaching the 4.25 rate.
46
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
What is going to happen when you run out of 2^s, and you want
to make an advance refunding, and you only have got three-quarters
of a percent left between 3% and 4%?
Secretary D I L L O N . I don't think that there would be very much in
it. One big reason for these long-term advance refundings was the
fact that there were before they started some $28 billion of these 2%percent bonds outstanding with various maturity dates running from
1967 to 1972, which all had been issued during the war. This meant
they were mostly owned by long-term investors, and, therefore, there
was an opportunity to use this technique to the advantage both of
the Government and the holder.
With this last operation, we have completed offering an advance
refunding to each one of these issues. The technique that was used
was that in 1960, the previous administration had started with 1967,
1968, and 1969 ones, and on our first one we picked up 1970 and 1971,
and then in this last one 1972, so everyone who bought a bond orignally during the war has now had an equal opportunity to have an
exchange of this sort.
Senator B E N N E T T . S O you have no more 2Ks left?
Secretary D I L L O N . N O , unless you went over the ground again, and
we are, at least at this time, loath to do that because that would indicate that someone could hold back in the hope of getting a better
offer a little later. So I doubt if you would do it again very soon.
The C H A I R M A N . Mr. Secretary, I have a question I would like to
ask at t h a t point.
Suppose that you did offer this $13 billion which, as I understand
it, were not taken up. Would you then increase the interest rate
above 3% percent on the later refunding?
Secretary D I L L O N . N O , we thought it was best to use bond issues
t h a t were already outstanding, which were these 3K percents of 1990,
and 3%'s of 1998 t h a t were in the market, because then you have a
very clear measure of the market value of the security at the time.
So you can figure out, as the Senator from New Mexico has, what
a fair offering is between the two.
The C H A I R M A N . If, at 3 K percent, you did not refund but 2 0 percent—was t h a t about it?
Secretary D I L L O N . About 20 percent took it. But I don't consider
t h a t a failure; the average acceptance throughout all these advance
refundings has been about a third.
This was a little less. I n this particular issue there were probably
more individual and private holders than in any of the preceding ones
because two of these issues of 1972 were issues that were originally
limited to individuals. Banks could not originally acquire them so
they had a very broad distribution.
Some 12,000 individual people took advantage in small amounts of
this refunding.
The C H A I R M A N . I understand that, but you actually only succeeded
in refunding to the extent of——
Secretary D I L L O N . Just under 20 percent on the 72s.
The C H A I R M A N . $ 5 billion plus out of more than $ 1 8 billion, is that
right?
Secretary D I L L O N . T h a t is right.
In the overall operation about 25 percent.
47
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
The C H A I R M A N . Would it be useless to offer it again at
percent?
You would have to go up to maybe a 4-percent coupon.
Secretary D I L L O N . We would not plan to do that; no, Senator.
In the past they have always been offered, for these long-term
bonds, a 3%-percent coupon.
The C H A I R M A N . Can these same people still come in and take the
3%-percent bond?
Secretary D I L L O N . It is entirely closed with one technical exception.
We were generous in the case of individuals who were absent from
their homes and couldn't get to their safe deposit boxes at a certain
time. We accepted from them statements of intent. So that when
they got back to their boxes they could unlock them, get the actual
security and turn it in. But the time for those statements of intent
was only during the 10-day offering period, and t h a t was over about
the end of February. Except for a few very small amounts of those
that still come in; it is closed.
The C H A I R M A N . I t is closed now?
Secretary D I L L O N . Yes, sir, it was closed about the 1st of March.
The C H A I R M A N . I understood in response to Senator Bennett that
you don't expect to use this advanced refunding technique except on
the 2%-percent bonds?
Secretary D I L L O N . For the long-term refundings that is the only
thing that it has been useful for and it may be that would be about the
only ones that it would be useful for.
The C H A I R M A N , That does not offer reason for very high hope for
extending the debt by this method.
Secretary D I L L O N . A S I pointed out, this is only one way. I think
we have to work everlastingly at keeping the debt extended in every
way possible, and that the better part of the results from this method
of advance refundings, the really long-term results may well have been
obtained by now.
The C H A I R M A N . I was wondering, in view of the small amount
taken whether it is justified as far as costs are concerned. I t has been
developed that all together these advance refundings have increase
interest costs by about $1 million.
Secretary D I L L O N . Well, it is our view that we more than save
that by the difference in costs after 1972 compared to what we would
have had to pay if we had sold those same issues today for cash.
The C H A I R M A N . 1 9 7 2 is 1 0 years off and you don't know what the
interest rate is going to be.
Secretary D I L L O N . I am not trying to guess that, Senator. I am
just saying that if we try to place a long-term bond for cash now
we know what we would have had to pay today which would have
been 4}{ percent.
We know what we paid on this one today. We know the total
interest costs.
The C H A I R M A N . Y O U do not expect, then, to offer again these
2^-percent bonds that were not taken?
Secretary D I L L O N . Certainly not in any near future, no.
The C H A I R M A N . And if you did try to refund them under the
present conditions you would have to offer, say, 3%?
Secretary D I L L O N . N O , Senator.
The C H A I R M A N . Or 4 percent?
48
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . N O , I think if we did we would offer the same
thing again in the hope there might be some who would still take it.
The C H A I R M A N . I t seems to me you are building up an artificially
high interest rate by this method.
From my viewpoint interest is a commodity that goes up and down
in accordance with the demand and supply—I beg your pardon,
Senator Bennett.
Senator B E N N E T T . Well, I appreciate the questions you have asked
because they clarify the point I was trying to make.
We have come pretty close to the end of the successful use of this
device for extending the debt.
Secretary D I L L O N . For the long-term advance refunding?
Senator B E N N E T T . Yes.
Secretary D I L L O N . These junior advance refundings which are
very useful to meet the congestion that we face in the 2 or 3 years
ahead of us, could still be used. I think it is necessary to use them,
because we have some tables here showing the debt due in the succeeding 2 years and it is really tremendous. Anything that can help
relieve that congestion would be helpful.
Senator B E N N E T T . M a y I go on for just a minute?
Senator W I L L I A M S . Yes.
Senator B E N N E T T . The problem of maintaining the right proportion of our debt in very long term bonds still remains, and while this
has been a useful device, you still face the problem, and maybe next
time you will have to go into the market to get long-term money.
Secretary D I L L O N . Yes, that is right.
Senator B E N N E T T . I just wanted to find out how much more leeway
you had. Really the only leeway you have left is the opportunity to
reoffer some of the same bonds.
Secretary D I L L O N . T h a t is about right.
Senator B E N N E T T . When the market seems to be right.
Secretary D I L L O N . That is right.
Senator B E N N E T T . If you turned around to offer the 3% you would
bump your head against the ceiling, and the difference of three-quarters of 1 percent would not be attractive enough perhaps to persuade
people to make the change.
Secretary D I L L O N . I t might not.
Senator B E N N E T T . I am happy to yield to my friend from Delaware.
Senator W I L L I A M S . Just one point, Mr. Secretary.
Some of these, certain issues of these 2^s as I understand it, are
acceptable by the Treasury Department at par in the payment of
estate taxes, are they not?
Secretary D I L L O N . I think that is correct.
Senator W I L L I A M S . N O W , were any of those issues involved in this
offer for——
Secretary D I L L O N . Since all of these issues were covered they must
have been involved, yes.
Senator W I L L I A M S . Yes.
When we speak of the fact that there were 12 billion outstanding
which did not accept this offer, to a large extent those 2^s are far
more attractive, even at a 4 percent, because to someone at an
advanced age who may have the possibility of soon being confronted
with an estate tax, even though these bonds are selling today at 88
to 90, they are acceptable at par in payment of estate taxes which
49 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
means that by keeping them they can in effect drop their estate taxes
10, 12 percent, isn't that true?
Secretary D I L L O N . That is correct.
Senator " W I L L I A M S . S O there is nothing unusual about the fact that
they would not have accepted t h a t offer of yours to call them in at
3/2?
Secretary D I L L O N . That is correct.
Senator W I L L I A M S . S O that would eliminate the possibility to a
large extent of your ability to refinance in this same manner.
I thank the Senator.
Secretary D I L L O N . I am informed by Mr. Heffelfinger that the new
3%s that were exchanged for the same issues have the same privilege
so there is no effect there.
Senator W I L L I A M S . These new 3Ks that you issued in exchange have
this same privilege?
Secretary D I L L O N . The ones that were issued in exchange for the
2%s have the same privilege.
Senator Williams. Then those portions of the investors who take
these 3Ks have got an additional advantage over and above the 3%s
quoted generally on exchange; isn't that correct?
Will they be quoted separately? They are worth a lot more money.
I t was my understanding that this privilege was extended by law,
and I am wondering if this is by Executive order being extended?
Secretary D I L L O N . N O , no. I am told that practically all of our
long bonds have the same privilege—all Treasury bonds, the 2%s of
1959, 1962, running on through 1963, 1968. I t is*m this February 28
daily statement of the Treasury on page 6, the statement of the public
debt. And all of the Treasury bonds that are there indicated by a
footnote No. 4, have this same privilege and those are all of the
long-term bonds that I can see here.
Senator W I L L I A M S . I am not speaking of those to which this
privilege was given at the time they sold the 2% percents. B u t how
many of the 3 or 3% that are outstanding for 25 or 30 years of the
most recent issues carry that?
Secretary D I L L O N . Apparently practically all of them do. They
all did when they started the issue.
Senator W I L L I A M S . When you say practically all, will you furnish
for the committee an exact list of those that do and those that don't
and the time that they were offered?
Secretary D I L L O N . I would be glad to; yes.
(The list referred to follows:)
50
ADVANCE REFUNDING AND DEBT MANAGEMENT
Treasury bonds outstanding Feb. 28, 1962
Orginal
issue date
Description of bond
Bonds redeemable at par in payment of Federal estate
taxes: i
2% percent, 1959-62
2 p e r c e n t , 1959-62
2Yi
percent, 1962-67
2XA percent, 1963-68
2H percent, 1964-69
2Yi percent, 1964-69
2H percent, 1965-70
2V2 percent, 1966-71
2Vi percent, 1967-72
2M percent, 1967-72
4 percent, 1969
3% percent, 1974
4J4 percent. 1975-85
3% percent, 1978-83
4 percent, 1980
3M percent, 1980
3M percent, 1985
3M percent, 1990
3 percent, 1995
3H percent, 1998
June
Nov.
May
Dec.
Apr.
Sept
Feb.
Dec.
June
Nov.
Oct.
Dec.
Apr.
May
Jan.
Oct.
June
Feb.
Feb.
Oct.
1,1945
15,1945
5,1952
1,1942
15,1943
15,1943
1,1944
1,1944
1,1945
15,1945
1,1957
2,1957
5,1960
1.1953
23,1959
3,1960
3,1958
14,1958
15,1955
3,1960
Maturity
date
June
Dec.
June
Dec.
June
Dec.
Mar.
Mar.
June
Dec.
Oct.
Nov.
May
June
Feb.
Nov.
May
Feb.
Feb.
Nov.
15,1962
15,1962
15,1967
15,1968
15,1969
15,1969
15,1970
15,1971
15,1972
15,1972
1,1969
15,1974
15,1985
15,1983
15,1980
15,1980
15,1985
15,1990
15,1995
15,1998
Subtotal
3,964
2,271
1,463
1,818
2,636
2, 553
2, 428
1,417
1, 756
3, 512
2,638
1,171
470
1, 595
884
1,916
1,132
4,016
2, 670
3,529
43,736
Subtotal _ _ _
Bonds not redeemable at par in payment of Federal estate
taxes:
2% percent, 1960-65
2lA percent, 1963
3 5percent, 1964
2 A percent, 1965
3% percent, 1966
3 percent, 1966
3% percent, 1966
zy2 percent, 1967-72
3% percent, 1967
37A percent, 1968
Total.
Outstanding
(millions
of dollars)
-
_-
_
Dec.
Dec.
Feb.
June
Nov.
Feb.
Mar.
Oct.
Mar.
June
15,1938
15,1954
14,1958
15,1958
15,1960
28,1958
15,1961
20,1941
15,1961
23,1960
Dec.
Aug.
Feb.
Feb.
May
Aug.
Nov.
Sept.
Mar.
May
15,1965
15,1963
15,1864
15,1965
15,1966
15,1966
15,1966
15,1972
15,1967
15,1968
1,485
4,317
3,854
6,896
3, 598
1,484
2,438
2,716
3,604
2,460
32,852
76, 588
1
Redeemable, at par and accrued interest, to date of payment, at any time upon the death of the owner
at the option of the duly constituted representative of the deceased owner's estate, provided entire proceeds
of redemption are applied to payment of Federal estate taxes due from deceased owner's estate.
Senator WILLIAMS. Was this original privilege of the 2% extended
by Executive determination or by congressional action?
Secretary DILLON. T h a t I could not answer. I would be glad to
find out how t h a t was done originally.
(The information referred to is as follows:)
T h e s t a t u t e under which the Secretary of the Treasury is authorized to issue
bonds provides t h a t they shall be subject to such terms and conditions as he may
prescribe. The provision in outstanding bonds for acceptance at par in p a y m e n t
of taxes is one of the terms and conditions prescribed by the Secretary under this
authority.
The CHAIRMAN. Senator Douglas.
Senator DOUGLAS. Mr. Secretary, we all have great respect for your
ability. It is in part due to the fact you sit here and answer these
complicated questions with your experts behind you.
Senator GORE. Way behind.
Senator DOUGLAS. Way behind. And I think we all have a very
high appreciation of your desire for real public service.
M a n y of us agree with you on most of the things you are advocating.
Some of us may disagree on specific matters. I have been very
dubious about advanced refunding when applied to bonds which will
not mature for a considerable period of time. I had always assumed
51 ADVANCE R E F U N D I N G A N D
DEBT
MANAGEMENT
that the two cases in which advanced refunding would be most desirable would be, first, when you can substitute a lower interest bond for
a higher interest bond, and second, when you had bonds which were
maturing almost immediately and had to face that question even if
you had to pay a higher rate of interest than we are doing.
But I must say when Mr. Anderson started this practice of taking
up bonds which were not due for some time and then substituting
bonds of longer maturities but at a higher rate of interest, I felt very
dubious about it and I can't change my doubts just because a new
administration has come into being.
Now, the other day, many of the members of the committee, I
thought, criticized your statement and criticized it very properly on
the ground that it is difficult to make assumptions about the future
rate of interest. But the higher rates of interest in the short-term
period were certain. I think there is an additional criticism, if I may
say so, of your argument, and I would invite your attention to the
last chart which you submitted and to the information about the
added interest which this issue would certainly bring and the presumed
savings which you think it will effect. Do you have that chart?
Secretary D I L L O N . I can't at the moment identify which one it is.
Senator D O U G L A S . It is not numbered but it is headed "Five
Advance Refundings, Interest Costs and Interest Savings."
Secretary D I L L O N . Yes.
Senator D O U G L A S . If you will look at the two final columns you
will find that the added interest is in the earlier years, and comes to a
total of about 1,100 million. The claimed savings, and I am not at all
certain that there will be savings, amounted to a little over 1,600
million, and with the exception of 200 million, these savings will come
in the later years.
Yet you treat a dollar of savings in the later years as equivalent to
a dollar loss in the earlier years. And I think it is just as important
to get a dollar later as it is to lose a dollar now.
Now, if this were true there would be no rate of interest, because
interest is the payment which you make for dollars in the present over
dollars in the future. It is what the economists call a time preference—preference for money in the present as compared to money in
the future—and, therefore, I am not at all certain that even on a
dollar-for-dollar basis that you would effect the savings of $514 million.
But certainly you would have to discount the projected savings in
the future at the rate of interest, either 2% percent or 3K percent,
whichever you use, and if this is done, though I haven't had time to
work out these computations myself, I doubt if you would have any
savings at all. It might be that you would have a deficit.
Secretary D I L L O N . I think that is quite correct, Senator. We can
work out those computations. The savings on the gross basis were
rather large and I would think when we finished we would still come out
about even, and our main point, I think, w^as to indicate that it was
not a costly procedure and we feel that actually net there is some
savings.
Senator D O U G L A S . Excuse me.
Secretary D I L L O N . Yes; we would be glad to do that.
Senator D O U G L A S . T O work out what these would be if the future
savings were discounted and cumulatively discounted?
Secretary D I L L O N . That is right.
52
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator D O U G L A S . At the——
Secretary D I L L O N . We would be glad to do that.
Senator D O U G L A S . At given rates of interest?
Secretary D I L L O N . We would be glad to do that on the same chart.
But our point is that, if you grant that, you want to extend the debt
and sell long-term debt if you can do it in a way that does not affect
the market immediately; it seemed to us that it is far better from the
point of view of the economy to do it in that fashion without disturbing
other long-term interest rates. Therefore, if you come out even, we
would still prefer this technique for the reason of its effect on the
economy.
(The information requested is as follows:)
The five advance refundings taken together involved the exchange of $23.2
billion of securities. Of this amount, $9.6 billion was attributable to "senior"
exchanges—intermediate-term bonds exchanged into long-term bonds—these
took place in October 1960, September 1961, and March 1962; $13.6 billion of
securities were exchanged in "junior" refundings—issues maturing in 1 to 3 years
exchanged into intermediate and longer term issues. This type of refunding
occurred in June 1960, March 1961, and March 1962.
On a present value basis 1 the total net interest savings on senior exchanges is
$137 million. The junior refundings because of shorter terms to maturity of
both existing issues exchanged and new issues offered show relatively little change
from current value figures.
Senator D O U G L A S . I have no more questions, Mr. Chairman.
The C H A I R M A N . Senator Carlson?
Senator C A R L S O N . Mr. Secretary, you are dealing with interest
rates in a way that you hope to be of real value and assistance to our
balance of payments. I notice in your statement here you say that
the objective—you are speaking previously to this of the long-term
interest rate:
The objective was to deter outflows of short-term money to foreign countries
stemming from interest rate differentials, outflows which would weaken our
balance-of-payments position.
I know that's one of our real problems.
I notice, however, that the U.S. gold stocks fell another $20 million
during the past week, and this is in the morning financial roundup
1
See the following table:
Comparison of net interest savings or cost on 5 advance refundings on current value basis and discounted
basis
[Amounts are in millions of dollars]
Junior advance refundings
Current value basis: Net savings or added cost (—) over
life of issue offered
Discounted basis: Net savings
or added cost (—) over life
of issue offered °
Senior advance refundings
October Sep- March
1962
1960 tember
1961
June
1960
March
1961
March
1962
-80.4
-52.7
- 5 5 . 0 -188. 2
383.8
229.8
115.7
729.3
-78.3
-56.7
- 5 5 . 8 -190.8
92.5
38.6
5.9
137.0
Total
Total
a The Treasury borrows to pay its obligations at many rates: On 3-, 6-, and 12-month bills; on
1-year certificates as well as on notes and bonds. A convenient measure of what the average Treasury
borrowing rate might be at a given time is indicated by averaging market yields on all Government
issues. This average of market yields over time, based on June 30, each year, from 1955 through 1961,
is 3 percent. Accordingly, 3 percent was used as the rate for discounting to present value.
53 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
in the Post. What is our status on the balance of payments at the
present time?
Secretary D I L L O N . Well, actually, from the preliminary figures
which are available to us to date for January and February—the
figures are always preliminary until some 2 months, at least, have
elapsed for any particular period—indications are t h a t we are having
the same sort of very definite improvement, which may be seasonal,
similar to that we had last year as compared to the preceding fourth
quarter. I might say that the best indications t h a t we have is t h a t
our overall deficit to date is no larger than the amount of gold that has
been taken.
In other words, the amount of gold taken, as was the case in January
a year ago, is fully equal to our total deficit, and the large takings are
more due to redistribution of dollar assets in various countries abroad,
moving from countries that don't hold their assets all in gold to countries that do hold their assets in gold, than to any effect on our balance
of payments, as such, during this quarter.
Senator C A R L S O N . H O W general is this situation where a foreign
corporation borrows money in this country for expenditures in its own
country?
That is, I believe a southern company or some company yesterday,
I don't have the name—Southern Pipeline—a southern corporation is
borrowing money in this country to build in foreign countries.
What will happen if that is approved? Will t h a t be a general
policy? Is it to their interest to do that.
Secretary D I L L O N . Well, we have always felt t h a t we should keep
our capital markets open. We have never done what other countries
in Europe all do which is to have governmental capital committees,
from which you have to get authority before a foreign corporation
borrows publicly in their market.
We have been working just in the opposite direction, t h a t is, to
open up these European markets far more than they have been
opened so they will be able to absorb this sort of thing themselves.
We have got general agreement from the members of the O E C D t h a t
this is a desirable course, in general, but it's taken some time to
actually implement it.
We had felt it was undesirable and do feel it is undesirable to move
in the opposite direction at this time while we are just at the same
time trying to get the European countries to liberalize further.
I might say one thing on foreign sales such as this one: I t is not
necessarily true, and I don't think it is true in this particular issue,
which was $40 million as 1 recall, that it is a net $40 million drain on
our balance of payments at this time. Because as I understand it,
a substantial amount of these securities were sold to European
customers, even though they were denominated in dollars and originally offered in New York.
I think the majority of the issue, may be more than a majority, was
placed in that way. So those purchasers had to sell their European
currencies for dollars, obtain dollars to buy these securities, so to t h a t
extent it would not be a drain on our balance of payments.
No doubt it was a drain but not as big as the full $40 million.
Senator C A R L S O N . What is the present amount of money in dollars
that these foreign countries could call on us for payment in gold?
Secretary D I L L O N . Well, the official assets are about $ 1 1 billion.
54
ADVANCE
REFUNDING AND DEBT
MANAGEMENT
Senator C A R L S O N . That they could call on us, and what is our gold
reserve as of today roughly?
Secretary D I L L O N . Our gold reserve is about $ 1 6 . 7 billion, a little
over that.
Senator C A R L S O N . And require about $11 billion; is that not right?
Secretary D I L L O N . Yes; I think our free reserves over and above
the statutory requirements are about $5 billion. .
Senator C A R L S O N . And interest rates in several of the foreign countries are much higher than ours, is that not correct?
What about Great Britain's interest rate?
Secretary D I L L O N . In Great Britain they are considerably higher.
They had a crisis in their foreign exchange last year and they put up
their bank rate, which is their equivalent to the Federal Reserve
discount rate, to 7 percent, which was designed not only to slow down
consumption in their country, but also was designed specifically, I
think, to attract some foreign funds, up to a point.
And it served both purposes, so it was reduced in two steps last
fall to 6 percent and was reduced just last week, or maybe the week
before, but early in March, to 5% percent. So it is now only half a
percent higher than it was before the crisis when it was put up by 2
percentage points.
I t is much the highest rate in Europe. Most of the European
central banks, I think, have a rate of no more than 3% percent, a good
many of them 3 percent, and a few of them less than that, like Switzerland.
Senator C A R L S O N . At the time the British interest payments were
7 percent and 6 percent, did it attract substantial amounts of money
from the United States?
Secretary D I L L O N . I think it attracted some. I t did not attract
as much as the difference would seem to suggest, because most American short-term investors, make such transfers on what is called a
covered basis.
In other words, they sold forward sterling for dollars and bought the
dollars back again to come to them in 90 days, say, or 6 months,
whatever the time period may be, and the cost of covered forward
transactions at the time of the 7-percent rate was very high.
I t got up one time to as much as 4 percent; 4 percent plus our interest
rate of, say, 2%, gives 6K percent so there was only about a half
percentage point advantage in moving to Great Britain at that time.
But right now there is no advantage. The cost of cover is actually
now a little more than the difference so on that basis there is a small
net advantage for short-term investments in U.S. over British Treasury
bills.
Senator C A R L S O N . In other words, the 5 K percent would be no
attraction to the
Secretary D I L L O N . Unless someone was willing to do it on an uncovered basis which means they are subject to the full exchange risk.
Senator C A R L S O N . On that basis is there greater danger for demand
for loans of foreign countries such as the Southern Pipeline Co. in
view of the fact our interest rates are still low?
Secretary D I L L O N . I think there are two questions: One is the shortterm rate question, which I think is probably in somewhat better perspective and is not so dangerous now as it has been, and the other is
a continuing advantage in the long-term areas to the extent either
55 ADVANCE R E F U N D I N G
AND DEBT
MANAGEMENT
these foreign governments or a company with high credit, such as this
pipeline company, apparently are able to sell their bonds like this.
There is a substantial interest advantage in that long-term area in our
market as compared to practically all European markets because their
capital markets on a long-term basis are not as well developed.
The only place in Europe where you can sell long-term bonds generally cheaper than in the United States is Switzerland and they
ration that quite carefully, as to the number of companies that can
take advantage of it.
But long-term bonds in Switzerland can be sold cheaper than they
can here in the United States.
Senator C A R L S O N . I take it from your statement you feel we are
making some progress in equalizing interest rates in the foreign
field and there probably would not be as great a demand as there had
been in previous years?
Secretary D I L L O N . I would hope so. Certainly there was progress
made last year by the reduction in bank rates of many of the continental banks.
There is one thing that is a problem in this area which is impossible
to be sure of, but which many of the best monetary authorities think
may be occurring, and that is that in the 1930's and in the period after
the war when the situation in Europe was very unsettled, all the
money, European money, that could get out of Europe got out, and
about the only place that was safe for that kind of money was the
United States, so we had quite an inflow of this sort of money.
In the last 2 or 3 years, with convertibility and with economic
growth and with greater stability in Europe, many people feel that there
may be sort of a fundamental redistribution or repatriation of these
funds, that they are gradually going back home, and that that has
been one of the reasons on top of interest rate differentials that have
led to outflow of capital, short term and longer term, from the United
States.
Senator C A R L S O N . I think we are making progress in the field of
interest. But what about our international trade? I t is not only a
matter of interest that affects our balance of payments but it is international trade.
Secretary D I L L O N . Very much so. Our surplus, our commercial
surplus, on exports last year was the same as it was the year before.
I t amounted to about $3 billion. We want to improve that if we
possibly can. We have many programs to try to increase commercial
exports.
Senator C A R L S O N . I was just reading, in this same financial article
that I was reading here now, it says this:
The Commerce Department announced—
and this is yesterday's paper—•
announced January exports of civilian goods totaled $1,591,800,000 and showed
a seasonally adjusted drop of 3 percent from December. A day earlier the Department announced that imports had risen 2 percent for the same month.
Now, 3 and 2 makes 5, and would that not make quite—have quite
an effect on the balance of payments?
Secretary D I L L O N . For that month; yes.
Imports and exports both notoriously fluctuate month to month for
reasons that are not seasonally determinable. Usually those of us
56
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
who try to follow this feel that a better measure is a moving 3-month
average. The latest moving 3-month average, including January and
going back 3 months, compared to the preceding 3 months' average,
shows t h a t exports are staying about level, and imports are increasing
at about 2 percent, something like that.
So I think that certainly, if the January experience turned out to
be general and continued, it would be discouraging. But we have
had such fluctuations during the course of last year. One month it
would be bad and the next month it would be very good and if you
have a very good month you must not think you are out of the woods,
either.
Senator C A R L S O N . I t occurs to me that international trade is probably as important as any feature of this balance-of-payments problem
as I see it.
Secretary D I L L O N . I t is the most important element because it is
the biggest single one. We have about $17 y2 billion of exports that
are exported commercially and paid for in dollars and we have had
about $14.5 billion of imports a year in the last 2 years. Undoubtedly
this year, because of better business at home, the import figure will
go up to $16 billion or maybe a little higher. We would hope that at
the same time our commercial exports might increase, but they will
not rise t h a t much.
We don't appear to be out of the woods this year.
Senator C A R L S O N . In other words, it looks as though you are going
to get some additional problems.
Secretary D I L L O N . S O far as the commercial merchandise surplus
during the last half of last year is concerned, it ran at a rate of about
$2 billion a year; the first half was at a rate of around $4 billion; the
average for the year was about $3 billion, and we would expect that it
would not get any worse than it was in the last half last year. This
would mean about a $2 billion surplus this year. We hope it will be
better.
Senator C A R L S O N . That is all.
The C H A I R M A N . I think Senator Carlson perhaps has mentioned
one of the greatest problems confronting us in a fiscal way.
What is the maximum amount of gold we have had at any one time?
Secretary D I L L O N . I don't have the exact figure here. I can get it
for the record, but I think it was $23 or $24 billion.
The C H A I R M A N . $ 3 4 billion?
Secretary D I L L O N . $ 2 3 or $ 2 4 billion.
The C H A I R M A N . Yes. My recollection is that it was between $ 2 4
and $25 billion.
Secretary D I L L O N . I t may well have been, $24 billion.
Senator K E R R . M y recollection is that it was above $ 2 6 billion at
one time.
Secretary D I L L O N . A S much as that?
Someone may have that figure for you shortly.
The C H A I R M A N . What is the amount of gold on hand now?
Secretary D I L L O N . Just over $ 1 6 , 7 0 0 million.
The C H A I R M A N . H O W much of that is free gold?
Secretary D I L L O N . Approximagely $ 5 billion.
The C H A I R M A N . $ 1 1 billion is dedicated to our own currency?
Secretary D I L L O N . About $ 1 1 % billion.
57 ADVANCE R E F U N D I N G
AND
DEBT
MANAGEMENT
The C H A I R M A N . SO you actually have had a loss in gold of somewhere at least $8 billion, haven't you?
Secretary D I L L O N . Well, we have had a loss from whatever the
correct high figure was to $16 billion.
The C H A I R M A N . Approximately $ 8 billion?
Secretary D I L L O N . I t would be a large figure; yes, sir.
The C H A I R M A N . Isn't that a very serious situation?
Secretary D I L L O N . Well, I think that a certain redistribution of
what was an excessive concentration of gold in the United States at
the end of the war was in our interest and in the interest of world
trade generally.
At present we have some 40 percent of the free world's gold stock
in the United States. I would think that was adequate.
But what concerns me and concerns me greatly is the situation we
find outselves in with a balance-of-pavments deficit, which means
the gold losses that go with it.
If our balance of payments now were stable and we could look
forward to no further gold losses, I would think our gold stock is
perfectly adequate. But it doesn't look very good when 3^011 are
facing continual losses.
The Chairman. Under the present custom when we make settlements with the central banks of foreign nation^ they have the right
to ask for gold at the value of $35 an ounce or ask for dollars?
Secretary D I L L O N . That is correct.
The C H A I R M A N . I S that correct?
Secretary D I L L O N . That is correct.
The C H A I R M A N . Isn't that the reason why we have lost this $8
billion of gold, that they have asked for gold instead of dollars?
Secretary D I L L I O N . T O the extent they have asked for gold. They
buildup
The C H A I R M A N . Suppose the time ever came that we couldn't give
the option because we had exhausted our free gold, what would be
the result then?
Secretary D I L L O N . Well, if we were unable to pay out gold the
dollar would lose its value in international commerce.
The C H A I R M A N . That would be one of the greatest blows to the
free world that could happen, would it not?
Secretary D I L L O N . I t certainly would.
The C H A I R M A N . I wish to ask what is being done to prevent any
further loss of gold; but first, I want to mention that I voted for the
bill to reduce the amount that tourists may bring in from $500 to
$100, but I think that, like bringing back the dependents, is a flyspeck
on the wall. I do not know of any plan adopted by either the Eisenhower administration or the Kennedy administration which
substantially prevents this flow of gold.
Secretary D I L L O N . Senator, this whole balance-of-payments problem is^i very complex one, and it can only be attacked in very many
ways across a very broad front.
I only wTish there was some one simple way in which we could do
one simple thing and have the whole answer.
The C H A I R M A N . Would a simple way be to stop spending more
money abroad than we take in, isn't that the simple way?
Secretary D I L L O N . Well, that would involve bringing our American
troops back home.
58
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
The C H A I R M A N . That would involve cutting out sdme foreign aid
and some of the other things we are doing abroad.
Secretary D I L L O N . The dollar cost of foreign aid last year, was
about 1.3 billion.
The C H A I R M A N . It would be more than that now, wouldn't it,
because we are giving foreign aid to countries in direct cash instead
of furnishing materials that are manufactured in this country?
Secretary D I L L O N . Well, we have a goal, a policy objective which
the President has announced and which we are trying to push, of
reducing the dollar outflow to no more than 20 percent of the overall
foreign aid figure and that would mean a reduction of the release of
actual dollars to a billion or less as against 1.3 billion last year, and
the 1.3 billion last year was large because we were paying off on
commitments made many years before to purchase goods in other
parts of the world.
The C H A I R M A N . Take the present request of the President which
I see by the papers is more than
billion.
How much of that 4% billion will be sent out of this country in
cash?
Secretary D I L L Q N . Well, I think the exact figure was 4 . 8 billion,
and the policy objective is to send not more than 20 percent which
would be $950 million, $960 million, something like that.
The C H A I R M A N . And the rest of the 4 . 8 billion is to be sent in
materials and equipment?
Secretary D I L L O N . That is the policy directive which the President
has issued, and which he expects the administrators of the program
to carry out.
The C H A I R M A N . Have the export figures been corrected? Of
course, you and I have talked about this a number of times. Commerce Department includes food and other things that we have given
away.
In other words, I think you told me the Commerce Department
figures were 2% billion too high.
Isn't that misleading
Senator K E R R . 2% billion too high insofar as balance of payments
are concerned.
The C H A I R M A N . That is what I mean, and so far as cash income
is concerned. They have included in the export figure 2% billion
more than we have taken in because we gave it away.
Secretary D I L L O N . Yes. That is correct, Senator. We have, as
you say, discussed this. We have been trying for some time to work
out with the Commerce Department a way to clarify these figures,
and I am glad to say that after many months' effort, they are now
going to publish in their regular quarterly balance-of-payments
presentations a new table which will appear this month for the first
time in the March issue, of the Survey of Current Business, and which
will very clearly differentiate between commercial exports and the
exports that result from our aid program and which are not paid for
in dollars.
The C H A I R M A N . It has taken a long time to do this.
The Finance Committee brought this matter up more than a year
ago.
Secretary D I L L O N . We brought it to the Commissioner's attention
at that time, but it was very difficult to work out the details.
59
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
The C H A I R M A N . If necessary, I suppose we could pass a law to
compel them to tell the truth about it.
Secretary D I L L O N . I not only brought our own feelings to their
attention, but I made very clear your feelings, Mr. Chairman.
The C H A I R M A N . Many newspapers and others are misled by these
higher figures in ofFcial reports. You advised me that the realistic
figure is $2% billion less than indicated.
Secretary D I L L O N . That is right.
The C H A I R M A N . That narrows the figure between the exports and
imports.
Secretary D I L L O N . That is right, that is why I said our surplus has
been $3 billion.
The C H A I R M A N . It is misleading to the public and I am very much
surprised that something has not been done about it.
Secretary D I L L O N . I agree; we have done our best.
The C H A I R M A N . The committee was promised that better reports
would be provided, but we got something more confusing than what
we had before.
Secretary D I L L O N . I think this new table will do the trick. I t is
a table we prepared, in general, first in the Treasury. Commerce
Department will publish their original table alongside it. But anyway there will be a table there which does clearly show it.
The C H A I R M A N . Will it be itemized?
Secretary D I L L O N . Yes, sir.
The C H A I R M A N . Y O U won't count the counterpart money that does
not come back to this country?
Secretary D I L L O N . N O , this will show clearly total exports, less the
amount that is not paid for.
The C H A I R M A N . It will be on a strict dollar basis, the number of
dollars?
Secretary D I L L O N . That is right.
The C H A I R M A N . It will show what we get back in this country for
exports? When is that coming out?
Secretary D I L L O N . It is coming out in the March issue of the Survey
of Current Business which I think is due out sometime in the next
week or so.
It always comes out in the latter part of the month or middle of the
month.
The C H A I R M A N . That will be for what period?
Secretary D I L L O N . That will be for the last year. For the last
quarter and for the whole of 1961.
The C H A I R M A N . I am very glad you have finally gotten around to it
because the public and many others have been misled by the figures
published.
Secretary D I L L O N . There was a great deal of resistance to making
any changes in the way the Department of Commerce handles the
balance-of-payments figures, and it was very difficult to accomplish
changes, but I am glad to say they have been made.
The C H A I R M A N . Why should there be resistance to telling the
truth?
Secretary D I L L O N . Well, the technicians who were in charge of
this had their own reasons which were apparently good for them.
The C H A I R M A N . In other words, they don't care whether they mislead the people or not, because they gave out a figure of $20 billion;
wasn't that the figure they gave out?
60
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . T h a t was the figure that has come out so far,
and I quite agree with you it is a misleading figure.
The C H A I R M A N . I called you up about it on the phone.
Secretary D I L L O N . T h a t is right.
The C H A I R M A N . And you have been very frank and fair as you
always have, let me say, and you told me it was %2}{ billion more than
the actual cash that was taken out.
Secretary D I L L O N . T h a t is right.
The C H A I R M A N . And the same thing occurred a year ago and now
we are just getting the correction.
I hope it will be an accurate one.
Senator K E R R . M a y I ask a question?
T h e CHAIRMAN. Y e s .
Senator K E R R . These reports are brought out
Secretary D I L L O N . Department of Commerce.
Senator K E R R . D O you have any control over
Secretary D I L L O N . None whatsoever, except
by whom?
them?
to try to persuade
them.
Senator K E R R . H O W long has the practice prevailed which shows as
the export figure not only exports for which we receive dollars valid in
computing the balance of payments, but also include as exports,
without being identified, items which have either been sold, such as
agricultural products, much less than the domestic market provides
or as the chairman said, food and other items which have been given
away.
How long has that been the practice?
Secretary D I L L O N . A S far as I know it has always been the practice.
There has been no change in the Department of Commerce figures
until right now, and when these types of exports began, they lumped
them with other exports. They have always done that.
Senator K E R R . I want to say, I want to thank the Secretary of the
Treasury for helping this committee get that done because the Senator
from Oklahoma has been screaming about it for the last 8 years when
the figures were being provided by the Secretary of Commerce, not
only during the last 8 years but during the years before that, and
probably if it hadn't been for the efforts of this committee and the
Treasury Department they would still be doing it.
Secretary D I L L O N . I think so. I was concerned with it personally
quite a while ago, and tried when I was working in the Department of
State to get this clarified, but with no success at that time.
The C H A I R M A N . I want to commend the Secretary, too, because he
has been completely frank about this matter from the beginning.
An official of the Commerce Department was testifying—I don't
recall his name—and he indicated that this was all in cash, in American dollars.
Now, the heading of the publication in regard to it said, "The dollar
value," but they have not separated how much is given away or taken
in counterpart money or something else and never comes back to this
country, and I do hope that it will be a full and complete statement
and accurate and I want to thank the Secretary like Senator Kerr has
done, for your cooperation and activity in getting it done.
Secretary D I L L O N . Thank you, Senator.
The C H A I R M A N . I am surprised that it is—it has taken so long.
Maybe if you had been Secretary some time ago we would have gotten
the facts sooner.
61
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Senator Gore?
Senator G O R E . With respect to the subject under discussion for the
moment, I would like to ask you, M r . Secretary, what would be the
difference in balance of payments, in the flow of funds, in receipts and
disbursements of U.S. dollars, as between this $2 billion of unilateral
transfers which you were discussing with Senators Byrd and Kerr, on
the one hand, and the purchase of $2 billion worth of automobiles, on
the other, taking them a hundred miles from shore and letting them
drop in the ocean?
Is there any difference?
Secretary D I L L O N . I don't think there is any. I might say t h a t in
these overall balance-of-payments figures, the Commerce overall
figure, of course, in the end came out accurately.
The place that was misleading was giving the impression t h a t
commercial exports produced a bigger surplus than they actually had.
Senator G O R E . Well, to treat unilateral transfers
Senator K E R R . I don't—I would love to understand the Senator's
question about putting those automobiles in the ocean.
Senator G O R E . Well, I was
Senator K E R R . Y O U are not under obligation to make it so I can
understand them because that is a burden t h a t no m a n should p u t
on you, but if you could I would appreciate it. [Laughter.]
Senator G O R E . I would say that, insofar as touching the nerve of
comprehension of the senior Senator from Oklahoma, if it were within the capacity of the junior Senator from Tennessee to touch such a
nerve in anyone it would be touched in him quicker than in any
Senator I know.
The point I was trying to make, with which the Secretary agreed,
was that, insofar as balance of payments are concerned, insofar as
flow of cash, receipts, and disbursements to the Government, the
economic effect of a unilateral transfer of merchandise to a foreign
country, from which we expect to receive no goods or benefits in return, is identical with the purchase of $2 billion worth of oil, automobiles, or any other commodity in the United States and taking t h a t
o u t into the ocean and dropping it on the bottom and forgetting it.
Senator K E R R . I t doesn't seem to me it would be because if they
purchased the $2 billion worth of automobiles they would have to p a y
for them.
Senator G O R E . Well, they pay for the corn and wheat.
Senator K E R R . But they don't. T h a t is the point. If they bought
$2 billion worth of automobiles
Senator G O R E . I am speaking of the case in which the United States
does the purchasing of the automobiles.
Senator K E R R . If the United States purchased the automobiles in
the United States, that would create no outstanding dollar claims in
the hands of the foreign central bank t h a t would be a claim against
our gold, and as I see it, and I am not trying to start an argument, I
am just trying to get a clear picture.
As I see it that would be an entirely different situation t h a n the one
t h a t exists when we well or send $2 billion worth of agricultural
products abroad for which we get soft currency.
Senator G O R E . N O ; we don't get anything.
Senator K E R R . We get soft currency for it. Let's say we get
nothing for it.
62
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator G O R E . All right. We get the same amount for it as if it
didn't arrive.
Senator K E R R . Well, not our agricultural products, Senator.
Senator G O R E . Well, you have got soft currencies which can be
used only by the recipient country.
Senator K E R R . We get soft currency which we can use only in the
recipient country. Otherwise, our Congressmen could not go over
there and spend so much money. [Laughter.]
Senator B E N N E T T . Hurray for Lankford. [Laughter.]
Senator K E R R . But if somebody here bought $2 billion worth of
automobiles with American dollars in America and took them out and
dropped them in the Atlantic that would create no adverse effect on
our balance of payments at all.
Senator G O R E . Well, I asked the Secretary of the Treasury, insofar
as balance of payments are concerned, inflow and outflow of money,
cash disbursements and receipts, if unilateral transfers didn't have the
same effect as the dropping of $2 billion worth of automobiles into the
ocean, and he said they did.
Senator K E R R . I know. But I don't know what a unilateral
transfer is.
Senator G O R E . Well, if you will look on page——
Senator K E R R . I just wanted to make it clear that if I understand
the situation, the purchase in this country of anything in this country
which does not cause dollars to leave this country and become the
property of some foreign central bank in no way touches our balanceof-payments situation.
Does the Senator agree with that?
Senator G O R E . T h a t is true with respect to wheat or automobiles
or oil.
Senator K E R R . Or clothes or medicine or nylon hose for women or
shorts for men.
Anything bought in this country does not have any effect nor does
our domestic deficit have any effect on our balance of payments.
Senator G O R E . The Senator is certainly making one of the points
that I was making.
Senator K E R R . But what I was trying to do was to relate that to
the unilateral transaction, that is all and I just didn't understand
him. I t isn't necessary that I do.
Senator G O R E . Well, I would certainly hope that the Senator would,
and I think his comments indicate that he does understand it.
I t may be that I have used a term that he has not customarily
applied to such an international transaction, but if he will look on
page 295 of the Economic Report of the President he will find the
term, "Unilateral transfers, net: Total." The figure for 1960 is
$2,489 million and this is treated as a payment item. Economically, it
is a net loss. We receive no economic benefits in return, either in
goods or services. There is no benefit insofar as balance of payments
is concerned.
Secretary D I L L O N . Not immediately. I think there is this small
question of counterpart that can be used to pay administrative expenses and things like that.
Senator G O R E . I am speaking of the balance of payments of this
country, and it was in that context that I asked the question but I
didn't mean to make a major issue of it.
63 ADVANCE REFUNDING A N D
DEBT
MANAGEMENT
Incidentally, I notice in this same table, Mr. Secretary, that about
20 percent of our payments deficit is treated as unrecorded transactions, errors, and omissions.
Now, as I understand it, this amount, whether it is 19, whether it
is 21, 24 or 10 percent, it is merely a balancing item.
Isn't that a rather large item?
Secretary D I L L O N . This item includes transfers of capital that they
cannot account for directly in any one of the various categories t h a t
have been reported.
Senator G O R E . Yes.
Secretary D I L L O N . And we have underway a project, which I think
will bear fruit, to try to improve our reporting and get better facts
and figures on the flow of capital, both short and long term by corporations, by banks, by individuals than we have ever had before, and I
think we will be in a better position. I t may be, in that way, we may
be able to reduce this figure.
Usually what happens is that at the end of each year or immediately after the end we can total up a rough balance; the errors and
omissions figure is somewhat larger than it is, maybe, 6 months
later when we finally close out the figures, because you then find during the next 6 months that you can identify a certain portion of that
and place it up in other identifiable categories. But for the last few
years and pretty regularly over the last 10 years there has been an
errors and omissions figure running in the neighborhood of $500, $600
million either in our favor or against us, one way or the other, recently against us, in our favor before.
Senator G O R E . It is true, then, that this is a balancing item?
Secretary D I L L O N . That is right.
Senator G O R E . On which the Government does not have information and it is thrown, in whatever amount is necessary to make the
columns balance. That is the errors and omissions figure?
Secretary D I L L O N . I think in Great Britain they caJl it a balancing
item for that purpose. They have a similar thing in England.
Senator G O R E . About 3 years ago, I believe it was, when I initiated
the fight which I hope will later this year become successful, of eliminating the preferential tax treatment of income earned abroad, this
committee supported, and Congress passed, a bill to require more
reporting of oversea activities so that the Government would be able
to have more accurate reports, and I congratulate you upon your
pushing of this program.
I hope that we can have more correct and more complete reporting.
I wonder if these corrected and improved tables about which you
spoke, will show as a separate item such details as exports of machinery
to start a new factory abroad when the machinery is not paid for or
when the company shipping the machinery merely holds stock in a
new foreign subsidiary in lieu of a receipt of dollars?
Do you know whether that will be shown?
Secretary D I L L O N . That would not be shown on the overall tables
that we have been concerned with. I don't know whether the Department of Commerce has figures of that type or not actually.
Senator G O R E . Mr. Chairman, to return to the principal subject
under study today, the Secretary of the Treasury did me the honor
and courtesy of a visit almost a year ago, and we discussed this subject of advance refunding. In the subsequent few days there was an
64
ADVANCE
REFUNDING AND DEBT
MANAGEMENT
exchange of letters between us which I would like to have inserted in
the record.
(The correspondence referred to follows:)
COMMITTEE
U . S . SENATE,
ON F O R E I G N R E L A T I O N S ,
March 13, 1961.
Hon.
DOUGLAS
DILLON,
Secretary of the Treasury,
Washington, D.C.
D E A R M R . S E C R E T A R Y : The advance refunding formula which we discussed
recently and which is explained in a pamphlet, " D e b t Management and Advance
Refunding," prepared by t h e Treasury Department in September 1960, appears
to be one logical way of determining yield in an advance refunding operation. I
find no fault with this formula. In the example given, the yield is either 4.16 percent or 4 percent, depending on the effect of compounding which might be considered. In either case, this yield is below the statutory 4.25 percent interest rate
ceiling.
As you know, there has been some discussion to the effect t h a t not the yield but
the coupon r a t e must be below the statutory ceiling. In this connection, I would
like t o cite the s t a t e m e n t made by Senator Harry F. Byrd on the floor of the
Senate on September 12, 1959, when the legislation allowing a tax-free exchange
was under consideration. Senator Byrd said t h a t "the use of the tax-free exchange
provision in connection with advance refunding will be limited to securities with
yields of not in excess of 4J4 percent * * *." In my view, also, the yield on the
new security m u s t not exceed 4.25 percent, the coupon rate, of course, being
somewhat lower.
I have also reviewed t h e entire matter in the light of current conditions, and
I must say t h a t I seriously question the advisability of employing advance refunding as a debt management technique at this time.
In my view, there are two conditions which warrant advance refunding. If
the long-range outlook for long-term interest rates is upward, advance refunding
might prove t o be a method of saving on interest costs over a period of years; or,
if a disproportionately large amount of long-term debt is scheduled to mature at
one time, it might be well t o refund a part of those securities in advance. It does
not seem t o me t h a t either condition prevails at this time.
I realize t h a t several arguments can be advanced in favor of using this technique. There is some validity in some of these arguments. At the present time,
however, I feel t h a t our efforts should be directed toward driving down long-term
rates in all fields of investment and, if such a move is successful, it is not likely
t h a t there will be any great amount of switching from Government securities to
mortgages or other types of bonds.
I think there are two basic problems which must be faced and for which a
solution must be found. First, and perhaps most important, is the psychological
effect of t h e expectation of continued rate increases. This has been an almost
insurmountable obstacle during the past 8 years since it was obvious t h a t a determined effort was being m a d e t o raise long-term rates. If, however, an equally
determined effort is m a d e t o reduce these rates, the public will soon cease to
expect continued r a t e increases and will be willing to purchase and hold longt e r m bonds. I think t h e record of sales and cash-ins of savings bonds during
t h e last 2 months may well be something of a weather vane in this regard.
The other basic problem which must be overcome is faulty marketing technique.
Our "pet dealer" marketing system works fairly well for speculators and professionals and serves t h e short-term market with a reasonable degree of satisfaction.
However, I do not believe this type of market serves the true long-term investor.
I feel t h a t a broader market needs to be made and t h a t securities of proper types
need to be made more readily available for sale to the general public, b o t h individuals and corporations of all sizes and types.
I do indeed appreciate having had the opportunity of discussing this matter
with you.
Sincerely,
ALBERT
GORE.
65 ADVANCE REFUNDING AND
THE
DEBT
SECRETARY
MANAGEMENT
OF THE
Washington,
H o n . ALBERT
TREASURY,
March 23, 1961.
GORE,
U.S. Senate,
Washington, D.C.
D E A R S E N A T O R G O R E : As Mr. Lynch has no doubt mentioned t o you, following
Mr. Roosa's telephone call to your office, your letter of the 13th on advance
refunding arrived in the Treasury just as we were announcing our most recent
offering. I wanted you to know right away t h a t we had, in working out t h e
terms of this particular offering, had in mind t h e criticisms which you indicated
t o me during our earlier conversation. I hope you will agree t h a t this effort t o
extend by an additional 3 to 5 years, t h e m a t u r i t y of issues coming due within
the next 2}{ years, will be constructive, without encountering the other objections
which you state so effectively in your letter.
On the two basic problems which you mention, I t h i n k we are also making some
progress. We are doing all we can, in our own operations as well as through our
other contacts, to develop different expectations with respect t o t h e p a t h of
interest rates ahead. I t is important t o remove t h e psychological effects of any
general view that the only prospect for the f u t u r e is continued r a t e increases.
On marketing techniques, I think there is an i m p o r t a n t difference t o be noted
between the facilities for assuring continuous markets for outstanding securities,
as holders want to try to sell or to buy, and t h e facilities for distributing new
issues. With respect to the trading market, I am most hopeful t h a t t h e one
glaring shortcoming, the lack of public information, will be largely removed by
a new program which we plan to announce within t h e next 2 weeks (a copy of t h e
latest material on this is enclosed for your confidential information—pending
final action on publication). As to t h e sale of Treasury securities on original
offer, we are already in touch with a broad cross section of potential investors,
but recognize the need to do more, and will as rapidly as we can.
My associates and I appreciate very much your t h o u g h t f u l consideration of
these matters and look forward to discussing t h e m f u r t h e r with you, as we move
ahead.
Sincerely yours,
DOUGLAS
DILLON.
The C H A I R M A N . Without objection.
Senator G O R E . Upon that occasion, Mr. Secretary, you and I had
some disagreements and also some areas of agreement. One of our
points of agreement which you will recall was the danger posed to our
international balance-of-payments situation by continuing preferential treatment of income earned abroad. You have since been successful in obtaining some mildly helpful provisions in the House bill, and
I understand you will be prepared to support your recommendation
in detail when you come before the committee.
Secretary D I L L O N . That is correct, sir.
Senator G O R E . On the tax bill.
One other area which we discussed that day, but upon which studies
had not yet been completed, was the tax treatment of certain options
known as restricted stock options.
This committee, at my request, held a hearing last year on the
subject of restricted stock options. One of your Assistant Secretaries
testified and said that the studies had not been completed and, therefore, the Treasury was not in position at that time to make its recommendation, but expected to be this year.
As I understand it, those studies have been completed or are nearing
completion and you will be prepared to state the Treasury position
on that subject when you come up for the hearings on the tax reform
bill.
Secretary D I L L O N . That is correct, yes.
66
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator G O R E , One other subject with respect to the tax bill.
I had a letter from you this morning with respect to the studies which
have been made on percentage depletion allowances.
Will those studies be completed in time for the hearing later this
month?
Secretary D I L L O N . I doubt that. These studies are being undertaken in connection with our overall tax reform bill which we have
intended to send and which the President has said he would send up
later this session, probably in the summer, some time after this particular bill now before the Congress is completed. I t was our intention
t h a t we would cover all other matters there that were not included in
the particular bill that we suggested last year.
We would have been prepared by that time to make our recommendations on, for instance, the stock options that you mentioned.
B u t in view of your interest in the hearings last year we expedited
that so we will be prepared to talk on that.
B u t I don't think that on any of the many other items which are
being studied, we would be prepared to state our position.
Senator G O R E . I was pleased to learn that the Treasury had
reopened these studies on percentage depletion and I am pleased now
to hear that you will later this year present the administration's
recommendation on this item. I am, of course, sorry that it will not
be ready for treatment in the bill this year, but I am grateful for the
expedition of the study on restricted stock options and for the fact
t h a t you will be ready with a recommendation on that subject this
year.
I was very interested yesterday, Mr. Secretary, to listen to Senator
Kerr's questions and your response.
Senator Kerr seemed to me, when he had concluded his questions,
to have led you to the position which former Secretary of the Treasury
George Humphrey described, in referring to himself as Secretary of the
Treasury, as being as helpless as a merchant trying to sell fleece-lined
underwear in the summertime.
Senator K E R R . Woolen underwear in the summer time.
Senator G O R E . I asked my assistant about the terminology. He
said he didn't know, but it was some kind of long drawers.
Senator K E R R . I t was underwear.
Senator G O R E . And, to my consternation, after he had left you in
this predicament, you seemed to be comfortable in both the condition
arid the climate.
Secretary D I L L O N . Well, if you wish me to comment on that, there
was one
Senator G O R E . Y O U mean the nature of the garment or the condition?
Secretary D I L L O N . M y condition. [Laughter.]
There wTas one subject that was not raised in that connection, and
t h a t was the type of working relationship that we have had in this past
year with the Federal Reserve. Granting that the Federal Reserve
has all the powers that the Senator from Oklahoma mentioned, we have
been able to develop and maintain a position of understanding with the
Federal Reserve and cooperation during the past year in our joint
efforts in the balance-of-payments field, and debt management field,
and the general monetary field. I think that the actions of the Fed-
67 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
eral Reserve in maintaining a much greater degree of credit ease than
was the case in any of the preceding recoveries was in accordance with
our desires. So we had not chafed under this situation that was
mentioned by the Senator from Oklahoma.
I think the fact that long-term money rates generally are, if anything, lower today, after we have proceeded through a year of recovery, than they were a year ago is certainly unusual in recent experience
and for that reason we have been happy.
Senator G O R E . I appreciate this further elucidation of your position. I certainly do not agree that the Federal Reserve Board is
completely independent of the President of the United States; that it
can be, or that it ought to be. You have just illustrated the fact
that the Board has been voluntarily responsive to the leadership of
President Kennedy and yourself.
What disturbed me on Wednesday was your apparent willingness
to leave things on that basis. Your further elucidation this morning,
as I have said, is certainly welcome.
Another thing that concerned me very much, in response to the
questions put by Senator Williams, which answers were certainly
inherent in your response to Senator Kerr, was t h a t you foresee no
lowering of interest rates for many years. Your refunding operations
seem to be based upon the idea that they may go up. In fact, this
whole assumption on which we spent so much time, which I think is
unworthy of your time or our time, is that interest rates will remain
as they are, caused you to suggest that the Government might actually
be saving money.
Secretary D I L L O N . Actually this is a difficult problem. If I am
forced to answer a question as to what my own personal views are
as to what will happen, I will be glad to do that. B u t certainly the
Treasury policy is not based on any assumptions or looking ahead as
to what interest rates are going to be and I don't think it can be.
Our reasons for this particular operation are that, granted that it is
desirable, as we thought it was, to place some debt out in the very
long-term area today—not 10 years from now, but today—it is our
feeling that we can do it at least as cheaply and probably more
cheaply through the advance refunding technique. Also, we do have
the great advantage of not upsetting current money markets and
driving interest rates up.
So we feel it is much better to do it this way rather than to sell
substantial quantities, over a billion dollars, of long-term debt in
the market, which would certainly have a different effect on interest
rates than the way we have operated.
But I think the difficulty is that the individual is asked to make
his choice. He may have, in his own mind, to decide what the results
are going to be 10 years from now when he makes his choice. But
we, in offering him this, we don't make assumptions. We are just
looking at the difference between selling the bond for cash—it is a
30-year bond, or 36-}7ear bond—and doing it this other way, today.
Senator G O R E . Well, as I said, I don't want to spend much time
on this, which seems to me to be a really irrelevant assumption.
You say on the one hand, Mr. Secretary, you merely make such an
assumption; on the other hand, you presented testimony that you
were saving the taxpayers money—some $500 or $600 million.
68
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Secretary D I L L O N . No, no; the assumption is just on what the sum
would be in selling a long-term 4}£-percent bond today or doing what
we also did today.
Senator G O R E . Maybe I should say hypothesis instead of assumption.
Secretary D I L L O N . Both things are done today; they have no
connection with what happens in 10 years.
Senator G O R E . Really, I don't care to spend any more time on
that; I don't think it is worth your time or mine.
Secretary D I L L O N . Thank you, Senator.
Senator G O R E . Would you call a 10-year bond a long-term bond
or a short-term bond?
Secretary D I L L O N . Generally speaking, in the market, it is on the
dividing line, just about. Anything over 10 years would be long
term; in the area between 4 or 5 and 10 to 12 would be called intermediate.
Senator G O R E . Well, I really couldn't understand, and don't yet
understand, why you would refund a bond that still has 10 years to
run to maturity. Some of your refunding has not even been up to
10 years, and yet, in other cases, you have refunded bonds that have
yet 10 years to maturity.
Secretary D I L L O N . Well, the only reason, Senator, is that we felt
it was advisable. This is something which might be debatable, but
we do feel it is advisable—and I think the general financial consensus
is t h a t it is—to have an appropriate amount of our debt placed out
in the very long term area. And because of the problem of Treasury
management of this very big debt we feel we have to take very possible
opportunity to place appropriate amounts out there without disturbing general interest rates.
We felt that the time to do some of that was now, and the alternatives we were faced wTith were either selling it for cash, which w^ould
affect interest rates generally, or doing it in a way which would not
affect other interest rates in the market through the use of this advance
refunding technique. We can do it that way without any increase
in cost; indeed, we think it has some savings. Therefore, we chose
this method.
But we would not have refunded just for the sake of refunding if
we didn't think it was good to have something out in that area.
Really the choice was between this and a cash sale and we didn't want
to do a cash sale.
Senator G O R E . A S Senator Byrd pointed out right in the beginning
of these hearings, what you are really doing is freezing into the interest
rate structure of the country interest rates at the highest level they
have reached in many years. Now, I would like to inquire about the
amount of marketable Government bonds.
Secretary D I L L O N . There are about $ 1 9 7 billion. But I would
also like in response to that question to say again that if we sold a
long-term bond for cash today, it would have to be with a 4%-percent
coupon, and as it is we now have oustanding in our longest debt 3%
percent, three-quarters of 1 percent less.
Senator G O R E . Well, as a matter of fact, isn't the total of marketable bonds about $76 billion?
Secretary D I L L O N . Above 100, nearly 200.
Senator G O R E . T h a t is the total bonded indebtedness.
69 ADVANCE REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . Y O U mean just what we call bonds alone?
Senator G O R E . Yes.
Secretary D I L L O N . Yes.
Senator G O R E . And of that $76 billion, isn't about $10 billion worth
held by Government trust funds?
Secretary D I L L O N . Very substantial amounts are held by Government trust funds.
Senator G O R E . Well, your assistants will tell you. I t is about $10
billion, isn't it?
Secretary D I L L O N . He has found the figure, $10 billion.
Senator G O R E . All right.
Secretary D I L L O N . Y O U are right, Senator.
Senator G O R E . All right.
Then that leaves $65 billion of marketable bonds, in the hands of
the public. I believe you testified the day before yesterday that the
total outstanding debt in our country was a trillion dollars.
Secretary D I L L O N . About a trillion dollars is the total public and
private debt of all kinds; yes.
Senator G O R E . SO we have the picture here, with which you seemed
to be agreeing on Wednesday, that this $65 billion, which is only about
6% percent of the total public and private debt of the country, is
really unmanageable. You were really left as a merchant trying to
sell woolen underwear in the summertime.
I just don't agree with that at all. I think this is a question of
public debt management, a question of monetary policy; and what
disturbed me so much was to see you apparently comfortably accepting the highest rate we have had in many years, and projecting 30
years into the future an interest rate structure on that basis. I am
not trying to be unpleasant with you, I am just saying we have a basic
disagreement on the philosophy of public debt management and
monetary policy. I simply do not subscribe to those views, and I
hope I can say so without being unpleasant so far as you are concerned.
Secretary D I L L O N . Very much so. I would just like to point out,
though, so far as our debt management responsibilities go, that we
don't have only to manage the so-called Treasury bonds, which are
issues which were originally sold for over 5 years. Much of t h a t
$76 billion is now very short term. But we have to manage the whole
marketable debt which is as of February 28, $197.5 billion.
Senator G O R E . Well, even if you take that total, it is still only a
small percentage of the total debt in our country, and yet the vested
financial interests of our country manage to use this $65 billion as the
bellwether. I must say that under former Secretary Humphrey, and
his assistant, Mr. Burgess, the Government bond rate was used deliberately, purposefully and admittedly to push up the whole interest
rate structure.
Mr. Anderson continued those policies, and now, much to m y disappointment and regret, in a Democratic administration the same
policies are continued and projected for 30 years.
Secretary D I L L O N . I would like to say one thing there. I do
think it is important to say there is a very real difference between the
impact of long-term Government bonds on the whole economy and
the interest rate structure, and the impact of short-term Government
bonds on the rate structure.
70
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Short-term Governments, not just bonds, but certificates, bills,
all short-term Government securities, make up the great bulk of the
short-term market, and whatever the Government rate is, is the
market rate.
When you come to longer term rates, the situation is quite different.
I think what happened last year shows that. While the interest rate
on long-term Government bonds in the last 12 months has increased
on a market yield basis by about a quarter of 1 percent—from about
3.80 to a little over 4 percent—at the same time, the interest rate on
other outstanding long-term debt has gone down. Municipal bonds
are now selling at the lowest interest level in the last 3 years; corporate
bond rates are as low as they have been back 2 or 3 years; mortgage
rates have gone down by about a quarter of 1 percent.
So I think that indicates the fact that these things could go in opposite directions. But if the long-term rate on Governments is pushed
aggressively by selling for cash large amounts out in the long-term
area, this would disturb the relationships.
I quite agree that the Treasury has it in its power, if it wanted to,
to offer $5 billion of 1990 bonds, and we would change the whole
interest rate structure of the country. But we have not done that,
and we, under the present circumstances of our recovery, certainly
don't intend to go into that sort of operation.
Senator G O R E . Well, you have just confirmed, it seems to me, Mr.
Secretary, the premise I had stated, that this $65 billion, this 6 or 7
percent of the Nation's debt structure is used as the bellwether to
affect interest rates. I t is now being used to push rates upward, but
it could be used to bring the interest rate structure down.
Secretary D I L L O N . Certainly the Federal debt could be but that is
not just the $67 billion, because we can take all——•
Senator G O R E . That is the marketable bonds in the hands of the
public?
Secretary D I L L O N . That is what is out now. But if we wanted to
have an effect on the long-term interest rates we would have to put
out considerably more and increase the amount.
Senator G O R E . Why don't you try to have a downward effect on
the long-term interest rate? Why don't you use this power that is
vested in you?
Secretary D I L L O N . We don't have any power that is vested in the
Federal Government to reduce arbitrarily the long-term interest rates.
We couldn't call these bonds that are outstanding. We do feel that
it is good to keep some long-term debt out and certainly, the only
way we could influence it is by selling a great deal more of long-term
debt than the market wishes to have which, of course, cause interests
rates to go up and that certainly is directly contrary to everything
we believe in, in all our policies. That is why we didn't push it.
Senator G O R E . Mr. Secretary, this is the 10th year now that I have
heard the desire to lengthen the debt used as an excuse to increase
interest rates.
I certainly think that the national debt structure should be managed
as to maturity, but frankly I can't see any virtue that a 30-year bond
has over a 25-year bond or that a 20-year bond would have over a
50-year bond. I have never quite understood just how you people
who endorse this philosophy and hold it, and hold it sincerely—anyone
can be sincerely right or sincerely wrong—-attach such great value to a
30-year bond. Why don't you make it 33 or 40?
71 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . I think the only reason that we have used these
issues of 1990 and 1998 recently are that they happen to be outstanding
and they are in the market and we felt it was easier and better to use
something of which the value could be measured rather than creating
something new. But when you get into the basic economic argument
as to whether the Federal debt should have its longest issue 30 years
out or 20 years out or 25 or 35, that I quite agree is a difficult and complex subject and is not subject to exact proof one way or the other and
economists could differ on that.
Senator G O R E . I agree. You are in the position of refunding a 10year bond, that is, a bond that has 10 years yet to maturity at a greatly
added burden to the taxpayer, for a 30-year bond which you say may
or may not have any particular virtue over a 20-year bond.
Secretary D I L L O N . We think it does because it is longer, it puts
the debt that much further out. But I admit that is a debatable
matter, and one, I suppose, could get economists to argue both sides
of that question at quite some length. All I have said is if you once
grant that there is virtue in a 30-year bond, then we think the advance
refunding technique is the cheapest and the best way to do it. I t
also has the least effect on the market.
If you question the need for a 30-year bond, then we have, I think,
a more substantive question and one that economists may differ on.
But it is our feeling, certainly, that it is advisable to have some long
bonds and have more of them than we have. We think this is the
general consensus in the financial community of the country; I am
sure it is. Therefore, the confidence which the country has in the
Treasury and its debt management is enhanced in financial circles by
the fact we have done what we could do to extend the debt this way.
Senator G O R E . In response to a question from Senator Byrd you
affirmed that if a holder of $100 million in 2^-percent bonds, with a
10-year maturity, should receive in exchange therefor 3% percent
bonds of whatever maturity, whether it be 20 or 30 years, that during
the 10 years in which the bond originally held at 2K-percent interest
had to run, the holder would receive a million dollars a year interest
payment to which he would not now be entitled or to which he would
not be entitled except for the refunding.
Do I correctly state it?
Secretary D I L L O N . That is correct.
Senator G O R E . N O W , in further response to Senator Byrd, you said
that this would be true if he were an original purchaser. The total
profit to him would accrue if he were the original purchaser. He may
have bought his bonds on the market at a higher or lower price.
I believe you stated that you didn't know how many of these were
original purchasers.
Secretary D I L L O N . I see your question.
Certainly anyone who owned the bonds and made the exchange,
whether he was an original purchaser or had purchased them later in
the market, would get the same result.
Senator G O R E . In order to obtain this information, Mr. Chairman,
I, last week, wrote to Mr. Martin, Chairman of the Federal Reserve
Board, and to the Secretary of the Treasury as to the identity of these
beneficiaries, the persons or institutions with whom this refunding
contract had been consummated.
72
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
The Chairman of the Federal Reserve Board wrote back, very
promptly, that the Federal Reserve System did not have such information, that it served as the agent of the Treasury, and quoting from
Mr. Martin's reply, "since I understand that you have also written
the Treasury for this information"—I was glad to find there was that
much cooperation, that the Federal Reserve knew I had on the same
day dispatched a letter to the Secretary of the Treasury—Mr. Martin
referred me to the Secretary of the Treasury.
Subsequently, one of Secretary Dillon's assistants came to my office
and said that the Treasury Department likewise did not have such
information, but that they could get it. I believe Mr. Knight said it
would cost approximately $50,000 to accumulate this information, and
he was kind enough to say, Mr. Chairman, that if I wanted it, they
would get it.
I didn't feel inclined to insist because of the expense involved, but
I do suggest for your consideration, Mr. Chairman, that, at least for
this last refunding, it would be helpful not only to this committee but
to the Treasury Department to know whether these are speculators,
whether they are original purchasers, or just who these people are
who have received this great benefit. The benefit may be great or it
may be small. It would depend to some extent upon the type of
holder, and I suggest that it might be helpful to the committee and
to the Treasury to have this data collected for at least one of these
five refundings.
The C H A I R M A N . Have you got that information, Mr. Secretary?
Secretary D I L L O N . We don't have it; no. As the Senator said,
we would have to get it. We do, I think, have adequate information
in overall terms. I would quite agree that it would be new information, and might be useful to us. We do have one problem with that
as far as publication of data would be concerned. That is that the
Treasury has always operated under a regulation whereby we do not
make available for publication or for public use the names and the
amounts that specified individuals hold. I would hope we would not
have to do that in this circumstance but certainly if we could get the
overall figures and break them down in any way by classes or types,
I think that would be useful.
Senator G O R E . Well, Mr. Chairman, I agree with the Secretary—•
at least temporarily, I will agree—-that for our purposes confidential
information to this committee would be sufficient.
However, I wouldn't be satisfied with just a classification. I would
like the committee to have and for the Treasury to have an actual
identification of the people who have received this refunding, with
whom the refunding contracts have been consummated, but I would
request this detailed information, because of the expense and work
involved, only for the last refunding.
Secretary D I L L O N . I don't know, Senator, how we figured out that
cost. I t might be very substantially higher if we tried to find out
everybody. There were all in all in the last refunding a total of
32,693 individual subscribers, and I think that to get detailed information from that many people might cost considerably more than
$50,000.
Senator G O R E . Well, I don't want to impose any great burden or
expense, / f t e r all, 32,000 transactions is not an enormous volume.
So far as I am concerned, you can cut it off at a hundred thousand
73
ADVANCE REFUNDING AND DEBT
MANAGEMENT
dollars, and get this information for those people exchanging bonds
totaling a hundred thousand dollars or more of face value. A hundred
thousand, two hundred thousand, five hundred thousand, a million,
et cetera.
Secretary D I L L O N . I think that would be very helpful, because I
think very many are under $50,000.
Senator G O R E . That would be agreeable to me, Mr. Chairman. I
am only trying to get helpful information.
Senator K E R R . Would the Senator yield?
Senator G O R E . Yes.
Senator K E R R . Why would you want it for only the last refunding?
Senator G O R E . Because of the expense and work involved. T h a t
is the only reason. I thought it would be easier for one than for all
five refundings.
Senator K E R R . H O W about getting that on the first refunding?
Senator G O R E . I would like to have it for all five refundings. I was
merely trying to make my request as reasonable and economic as
possible. I will leave it to the chairman of the committee. I would
not want to substitute the first for the fifth, because that is a very
short one, and a comparatively small one. The last one is the big one.
Senator K E R R . What were the sizes of the ones that you had?
How many have there been, five?
Secretary D I L L O N . There have been a total of five, Senator.
Senator K E R R . Give us the dates and the amounts.
Secretary D I L L O N . The first one was in July of 1 9 6 0 , and the
offering was for a short term advance refunding of $11 billion, of which
$4.2 billion was taken. That was the amount exchanged.
The second was in October 1960, and the total offered—this was a
long term exchange—the total offered was $12.5 billion roughly, and
roughly $4 billion exchanged.
In March of 1961, there was another short term operation, 19.5
billion were offered, and roughly 6 billion were exchanged.
Senator K E R R . Which one was that?
Secretary D I L L O N . That was March 1 9 6 1 .
In September 1961, which was the smallest one, a long one again,
a total of $7.6 billion was offered, and of that a rather high percentage,
about $3% billion, were taken.
In the last issue, which for the first time combined the two quite
different operations, the short term kind of refunding and the longer
term, a total for both transactions of $18% billion was offered and
$5.2 billion accepted.
Senator K E R R . And of the $5.2 billion, which were in exchange for
72s and which were in exchange for short terms, do you have that?
Secretary D I L L O N . Yes; the exact figure in exchange for the 72s
was about $1.9 billion, something like that—a billion eight hundred
and thirty-two million.
Senator K E R R . That is the one with reference to which the information is desired, Senator?
Senator G O R E . I suggested the last one. The first one, Senator
Kerr, has pretty well come full circle. I t was refunded in June of
1960, and involved 2%-percent bonds due in November 1961. So this
wouldn't be of particular value to us. I think the larger one would
be more beneficial to the Treasury and to the committee.
74
ADVANCE REFUNDING AND DEBT MANAGEMENT
Secretary DILLON. Could I ask a question, Senator, so I understand
that clearly?
Did I understand that you are primarily interested in the longterm segment of 2%-percent bonds of 72, the longer term ones, or do
you wish the other one, too?
Senator GORE. What I would like is a breakdown on the most
recent refunding.
Secretary DILLON. Yes; including the short term?
Senator GORE. Yes.
Secretary DILLON. Fine.
Senator GORE. I think, as you indicated, it probably would be
useful to you.
Secretary DILLON. Yes, sir.
Senator GORE. I t should be. The Treasury ought to know these
things and I am sure you would like to know.
Secretary DILLON. Well, we will do that for all categories that you
suggested of a hundred thousand dollars and up.
(The following was later received for the record:)
The information referred t o is being gathered by the Treasury from its own
records and those of the Federal Reserve banks. When the material is compiled
the D e p a r t m e n t will inform the chairman of the committee.
Senator GORE. Incidentally, twice you have referred to the lowering of interest rates for municipal bonds, and I thought perhaps the
inference might be t h a t the Treasury claims major credit for that.
Do you think the Treasury is entitled to credit for that or is it due
to the fact that commercial banks have started buying municipal
bonds in a big way?
Secretary DILLON. I think that latter is a most important element
in what has happened.
Senator GORE. SO do I .
More important than what the Treasury has done.
Secretary DILLON. I t may be. But certainly the general climate
which has led corporate bonds to sell at the same price they were a
year ago, the lowest since 1959, and which reduced all mortgage rates
through the year, must have had some effect in this area, too.
Senator GORE. Well, I don't wish to take any credit from you, if
you are entitled to any, for lowering interest rates. I wish you were
entitled to more, but I didn't want that to stand.
I think t h a t the movement of the commercial banks into this field
has been the major thing, and I would like to read from the New
York Times of March 11, 1962:
T h e other b r e a t h t a k e r was a decision of commercial banks in December to
extend t h e m a t u r i t y limit of their holdings of State and municipal bonds from
5 t o 20 years. T h e banks became big purchasers of such bonds of extended
m a t u r i t y in early December and kept up their buying all winter. A consequence
was t o give t h e municipal bonds maturing in up to 20 years their sharpest price
rise in years.
Do you find any disagreement with that?
Secretary DILLON. Well, I think that, in general, is one of the
things t h a t very strongly affected the market in municipal bonds. I
think it is somewhat oversimplified saying that all commercial banks
suddenly decided on one day just exactly what they were going to do.
B u t I certainly think it is true there has been a substantial volume
of additional commercial bank purchase of municipal bonds in recent
75 ADVANCE REFUNDING A N D
DEBT
MANAGEMENT
months since December, no doubt of that. And that has had a real
effect on the market.
Senator G O R E . Well, it is now approximately 12 o'clock and I will
ask a question on only one more point and then desist.
When you and I conferred about refunding a year ago, we discussed
it on the basis of the manner of calculating yield which is contained
in the pamphlet of the Treasury entitled " D e b t Management and
Advance Refunding."
Now, based upon that publication, in preparation for this hearing,
my staff did some calculation of yield, and called a member of the
technical staff of your Department, and your own Department
calculated a yield of 4.38 percent which, it seemed to me, violates,
as one member said yesterday, I believe Senator Long, the spirit of
the law if not the actual letter, of the 4.25 percent interest rate ceiling.
But you discussed that and I just wanted to point out to you that
your own technical staff gave us a yield of 4.38.
Secretary D I L L O N . That is all listed in this table in the back of
the statement.
Senator G O R E . Thank you, Mr. Chairman.
The C H A I R M A N . Senator Fulbright.
Senator F U L B R I G H T . Mr. Chairman, I think it is a little late for me,
I don't wish to delay the committee, b u t the line of questioning that
was proceeding when I first came in gave rise to one or two questions
which are very short.
I would like to ask the Secretary about this balance of payments.
1 noticed in the paper a rather large sale of $40 million of bonds to
build a pipeline in France, I think, earning 5% percent and I believe
25 years.
Why is this allowed and why shouldn't these sales have the approval
of the Treasury?
Secretary D I L L O N . We had a brief discussion on this earlier, and T
think the point is this, Senator.
The European countries have what they call capital committees
or something of that nature, whose permission is required before a
foreign borrowing is permitted in their country. This is the general
situation in Europe.
We are working hard to try to free up European controls on capital,
so that their capital will be freer to come to the United States, to be
invested here, so it will be freer to go anywhere.
We have made some progress. We obtained a general agreement
in the OECD that this is a proper objective, and now there are
attempts to move in that direction, and some countries—I happen
to know of a case in Italy—have relaxed some of their regulations
recently.
We felt that it was inconsistent for us to be moving in the opposite
direction.
Also it would pose some questions regarding our different position
from other countries as the world banker if we would to some extent
start to control the flow of capital which we have prided ourselves on
not having to do.
For those reasons we have not done it and do not feel t h a t it is
necessary or advisable at this time.
76
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
I also pointed out in the case of this $40 million issue—and I think
it is true in many of these foreign issues that have been floated on
our market that the whole issue is generally not sold here.
The general practice is that a substantial part, usually a majority,
and I think it is well over a majority in the case of this particular
$40 million issue, is actually bought by Europeans, and in so doing
they must put up their own European funds. To that extent there
is an offset to the $40 million drain on our balance of payments.
So while it is a drain, it is not as large a drain as would otherwise
be the case.
Senator F U L B R I G H T . D O you have any figures, say, for the last
year or longer, as to how much of our deficit is accounted for by this
kind of transaction, and including such things as the purchase of
Ford stock last year, how much that amounts to, how much of an
impact that has had on the market?
Senator K E R R . Purchase of what?
Senator F U L B R I G H T . When the Ford Co. bought all of the outstanding
Senator K E R R . That was the year before last.
Senator F U L B R I G H T . I thought it was last year.
Secretary D I L L O N . The year before last,
Senator F U L B R I G H T . I t was very substantial.
Senator K E R R . $ 3 5 0 million.
Senator F U L B R I G H T . D O you have any figures, cumulative figures,
as to how much this has amounted to?
Secretary D I L L O N . We can furnish you with figures of portfolio
investments and of sales in our market of this sort of thing, and the
type of thing that you refer to would include the Ford transaction
which is listed as a direct foreign investment. I do not know any
way to single that type out from any other direct foreign investment
in Europe. I think we would have to give you the overall figures.
Senator F U L B R I G H T . B u t you do have figures?
Secretary D I L L O N . Oh, yes.
Senator F U L B R I G H T . D O you know how much it amounts to?
Secretary D I L L O N . Oh, yes.
Senator F U L B R I G H T . I S it a substantial amount?
Secretary D I L L O N . U.S. long-term private investment abroad is a
very substantial amount. I t runs to about $2.5 billion a year.
B u t the American investment going abroad
(See pp. 77, 78.)
Senator F U L B R I G H T . Well, that has as much effect on the outflow
of gold as anything else.
Secretary D I L L O N . I t has a very large effect. The flow of capital,
as I pointed out, has a large effect.
Senator F U L B R I G H T . I t would be much larger than the effect of
the foreign aid bill, would it not?
Secretary D I L L O N . I t is about twice the size.
Senator F U L B R I G H T . Twice the size.
B u t you think if this continues there is a possibility of some
restriction?
Secretary D I L L O N . Well, there is a possibility that would have to
be looked at. Of course, in the overall, foreign investment is one of
the important reasons why we favor a revision in our taxation of
foreign income, because it would bring a substantial benefit to our
balance of payments.
77 ADVANCE REFUNDING AND DEBT
MANAGEMENT
Senator F U L B R I G H T . D O you have any figures as to the amount of
return in cash to this country from its foreign investments?
Secretary DILLON. Oh, yes.
Senator F U L B R I G H T . Are they substantial?
Secretary DILLON. Very substantial. They exceed the annual outflow; that is, what we get in from our total long-term p r i v a t e foreign investment, which has been built up over the years, which is
over $50 billion, is now larger by a relatively small amount than what
goes out each year. This is only true on an overall basis.
We have a very substantial surplus in our dealings with the underdeveloped countries, where the inflow to the United States is much
larger than the outflow; and we have a substantial deficit in our dealings with Europe and Canada, where the outflow is much greater
than the inflow.
The reason for that is primarily the extractive industries, such as
oil and mining industries, which are situated in underdeveloped
countries, generally.
Senator F U L B R I G H T . If those figures are available, not only are they
interesting to this committee but I think they would be interesting
to the Foreign Relations Committee in its consideration of the foreign
aid bill.
We are all worried, and we will be worried; we have much to be
concerned with in this problem—I mean, of course, the biggest reason
has always been given because it has a serious impact on our balanceof-payments problem, as has been made here, and I thought this was
a good time, as good a time as any, to ask you for some of these
figures, because we will need them, I think.
Secretary D I L L O N . We will be glad to put a series of these figures
into the record here if you would like.
Senator F U L B R I G H T . I would like them. I think they would be
useful generally, and I know they would be useful to us in consideration of that bill.
(The information referred to follows:)
U.S. "private long-term capital outflow by area, calendar year 1960
and calendar year 1961
[In millions of dollars]
Calendar year 1960
Total
outflow
Direct
Calendar year 1961
Long-term
portfolio
Total
outflow
Direct
Long-term
portfolio
Total, all areas
2,544
1,694
850
2,568
1,601
967
Total, developed countries
1,732
1,433
299
1,597
973
624
Western E u r o p e . .
1,099
633
962
471
137
162
1,042
555
664
309
378
246
812
261
551
971
628
343
349
333
130
95
154
12
254
179
118
280
723
-32
203
437
-12
77
286
-20
Canada....
Total, less-developed countries i
Latin
America
All other
countries
International..
i Includes several developed countries including J a p a n and also international shipping companies operating Under flags of 4 less-developed countries.
NOTE—Excludes reinvested earnings of subsidiaries.
Details m a y not add to totals because of rounding.
Source: Based on data from Department of Commerce, Office of Business Economics.
78
ADVANCE REFUNDING AND DEBT MANAGEMENT
Income on U.S. private long term capital investment by area, calendar year 1960
and calendar year 1961
[In millions of dollars]
Calendar year I960
Total
income
Total, all areas
Total, developed countries...... . . . ___
Western Europe
. ___
Canada
Total, less-developed countries
1
Latin
America.
_
All
other
countries
International
Direct
Calendar year 1961
Long-term
portfolio
Total
income
Direct
Long-term
portfolio
2,743
2, 338
405
3.129
2,652
477
1,055
780
285
1,293
968
325
505
5G0
418
362
87
198
661
632
551
417
110
215
1,078
1, 558
120
1,837
1, 684
153
GS3
952
43
G41
913
4
42
39
39
770
1,009
58
716
958
10
54
51
48
1
Includes several developed countries including Japan and also international shipping companies operating under flags of 4 less developed countries.
NOTE.—Returned income only.
cause of rounding.
Does not include royalty receipts. Details m a y not add to totals be-
Source: Based on data from Department of Commerce, Office of Business Economics.
GENERAL NOTE
A breakdown of these d a t a by U.S. subsidiaries and branches abroad is n o t
available for 1960 and 1961. The preponderance of U.S. direct investment in
Western Europe and C a n a d a is in subsidiary organizations. At the end of 1959,
out of a total direct investment in Europe valued at $5.3 billion, $5.1 billion was
in subsidiaries; in Canada, out of $10.3 billion, $9 billion represented the value of
investment in subsidiaries. In other areas, consisting largely of the less-developed
countries, subsidiaries represented $8.4 billion of total direct investments of $14.2
billion as of the end of 1959.
Senator F U L B R I G H T . One other thing, unless you have already put
them in the record: How much net effect does the upkeep of our troops
and our foreign military have on our balance of payments? Do you
have those figures?
Secretary D I L L O N . Yes, sir. The gross cost of military expenditures abroad has been running every year at around $3 billion, $3.1
billion.
Senator F U L B R I G H T . $ 3 . 1 billion?
Secretary D I L L O N . Yes. We have the last few years been making
sales for cash, for dollars, of military equipment to some of these
countries, running from $ 2 0 0 million up to maybe as much as $ 3 5 0
million last year, and if you offset that our net outflow would be about
$ 2 . 7 5 billion.
We do expect this year to have very substantially increased sales of
military equipment as a result of some arrangements we have been able
to make with some of our NATO partners, which will greatly reduce
or greatly offset this item, maybe by as much as $1 billion.
Senator F U L B R I G H T . I S that the $ 2 . 7 5 billion in dollars or gold, I
mean equivalent?
Secretary D I L L O N . In dollars.
Senator K E R R . Which is a claim against our gold.
Secretary D I L L O N . T h a t is right.
Senator F U L B R I G H T . T h a t in itself almost accounts for the deficit,
does it not?
79 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Secretary D I L L O N . Oh, yes. I think as the President stated in one
of his messages or press conferences, if we did not carry these burdens
of defense of the free world we would not have any deficit at all or any
balance-of-payments problem at all.
Senator F U L B R I G H T . Did you have the responsibility for negotiating with such people as the Germans as to their taking a greater
share of this burden, or is that the State Department?
Secretary D I L L O N . Those negotiations were conducted, actually
handled, by the Defense Department.
Senator F U L B R I G H T . By the Defense Department?
Secretary D I L L O N . Dealing with the German Defense Department.
Senator F U L B R I G H T . Would that be true of the other members of
NATO?
Secretary D I L L O N . Not necessarily. IT happened that seemed to
be the most appropriate way to handle the German negotiations.
vSenator F U L B R I G H T . Can you tell us whether these negotiations
are proceeding at the present time or not?
Secretary D I L L O N . They are well in hand. We think we have the
result which we need with our expenditures generally cut in Germany.
Senator F U L B R I G H T . I believe that is all, Mr. Chairman.
The C H A I R M A N . Thank you.
Senator K E R R . I would like to ask him a few questions.
The C H A I R M A N . Senator Kerr.
Senator K E R R . In view of the questions on certain items creating
adverse conditions or creating a deficit with respect to the balance of
payments, I would be glad for you again to do what you have heretofore done, and that is put into the record the items which bring about
the deficit.
As I understand it, eliminating the amount from the total exports
which do not bring us an offsetting credit in balance of payments, we
have somewhere between $2.5 to $3 billion of a favorable balance in
the exports and the imports.
Secretary D I L L O N . About $ 3 billion the last 2 years.
Senator K E R R . And if you would put that into the record, and then
put into the record the items which create the deficit, which generally
consist of the foreign investments, the military costs, the tourist expenditures, and what you referred to as the so-called hot money. Is
there any other considerable item in that group?
Senator G O R E . Foreign aid.
Senator K E R R . Of that group which creates the deficit?
Secretary D I L L O N . The dollar components of foreign aid. On the
receipt side we have receipts from services of different kinds, airplane
fares, investment return from abroad.
Senator K E R R . Since you have been asked for so many of the items,
I think, by both of the questions which have been asked you, a very
useful purpose could be served by just putting into the record a
tabulation.
Secretary D I L L O N . We will be glad to do that.
(The information referred to follows:)
80
ADVANCE REFUNDING AND DEBT MANAGEMENT
U.S. balance of payments
by major
components
[Billions of dollars]
1961 (seasonally adjusted
except where noted)
19591 1960 1961 2
I
Goods a n d services, 3 G o v e r n m e n t assistance, and long-term
capital accounts:
A. N o n m i l i t a r y t r a d e a n d services:
N o n m i l i t a r y merchandise exports
....
Less those financed b y Government grants and
capital
II
III
IV 2
16.3
19.4
19.9
5.1
4.8
4.9
5.2
1.7
1.8
2.3
.6
.5
.6
.7
Merchandise exports, other t h a n those financed
b y G o v e r n m e n t grants a n d capital
14.6 17.6 17.6
4.4
4.5
4.3
4.5
N o n m i l i t a r y merchandise imports
-15.3 -14.7 -14.5 - 3 . 4 - 3 . 4 - 3 . 8 - 3 . 9
Balance on trade, excluding merchandise exports
financed b y G o v e r n m e n t grants and capital
N o n m i l i t a r y service exports
Less those financed b y G o v e r n m e n t grants and
capital
Service exports, other t h a n those financed b y
G o v e r n m e n t grants a n d capital
N o n m i l i t a r y service imports
Balance on services, other t h a n those rendered under
G o v e r n m e n t grants a n d capital
Balance .
-.7
2.9
3.1
1.1
.9
.5
.6
7.1
7.6
8.0
2.0
2.0
1.9
2.1
.3
.3
.4
.1
.1
.1
.1
2.0
1.9
1.9
6.8
7.3
7.6
1.8
-5.1 -5.6 -5.6 -1.4 -1.4 -1.4 -1.5
1.7
1.7
2.0
.5
•5
.4
.5
.9
4.6
5.0
1.6
1.4
.9
1.1
-.8
.1
-.8
.1
-.7
.1
-.7
.1
-.3
-.3
-.3
4-4
.1
5.9
.1
5.2
-.5
-.6
-.6
-.8
.1
-.2
.2
-.2
(6)
-.2
.1
-.2
B. Other major transactions:
-3.1 -3.0 -3.0
M i l i t a r y expenditures abroad
.4
M i l i t a r y receipts f r o m abroad
.3
•3,
G o v e r n m e n t grants a n d capital—dollar paym e n t s to foreign countries and international
institutions
i-l.O -1.3 -1.3
K e p a y m e n t s o n U.S. G o v e r n m e n t loans (excluding r e p a y m e n t s f u n d e d b y new loans)
.6
1.3
1.1
U.S. direct
and long-term portfolio investments
-2.3 -2.5 -2.6
abroad 3
Foreign direct and long-term portfolio invest.4
.3
.6
m e n t s in the United States
-.8
-.9
-.8
Remittances and pensions
Balance
Balance on goods and services,
Government assistance and
long-term capital accounts 3
-5.3
-6.5
-5.6
-1.5
-.7
-1.7
-1.8
-4.3
-1.9
-.6
.2
.7
-.7
-.7
Recorded U.S. private short-term capital outflow less foreign short-term commercial credits to the United States..
Unrecorded transactions
,
Overall balance, seasonally adjusted
.1 - 1 . 4
.5 - . 6
-3.7 -3.9
-1.2
-.6
-2.5
-.5
1
-.3
1
-.5
.2
-.6
-.2
.1 - . 2
- . 8 -1.5
Less seasonal a d j u s t m e n t s
..
Overall balance, actual (not seasonally adjusted)
-3.7
-3.9
-2.5
(6)
-.3
.1
.1
.1 - . 2
-.9 -1.3
-1.5
-.4
-1.3
.1
-.6
-.2
-.5
-2.3
-3.6
-1.2
-.4
.6
-.7
-.8
E q u a l s changes in liquid liabilities to foreign private
holders (including banks) and n o n m o n e t a r y international and regional i n s t i t u t i o n s . :
P l u s changes ,in holdings of gold and convertible currencies b y U.S. m o n e t a r y authorities and changes in
U.S. liquid liabilities to foreign and international
monetary authorities...
1
2
3
Excludes U.S. subscription of $1,400,000,000 to I M F .
Preliminary.
Short-term capital m o v e m e n t s between parent companies and their foreign affiliates are reported as
p a r t of direct investment.
mi* Includes $172,000,000 in subscription p a y m e n t s to the Inter-American Development B a n k and the
International Development Association.
5 Includes $649,000,000 in foreign d e b t prepayments to U.S. Government in the 2d quarter of 1961, and
$43,000,000 in t h e 4th quarter.
6 Less t h a n $50,000,000.
NOTE.—Excludes military grant transactions.
Detail m a y not add to totals due to rounding.
81 ADVANCE REFUNDING
AND DEBT
MANAGEMENT
Senator K E R R . N O W , then, with reference to the sudden spurt of
buying by banks of tax-exempt securities, that is, the income from
which is tax exempt, I think I know what caused that, but I may be
entirely mistaken.
When was it that the Federal Reserve Board permitted the New
York banks or any other banks, for that matter, to increase their
interest on saving loans to 4 percent?
Secretary D I L L O N . The Federal Reserve permitted this increase
as of the 1st of January, and they announced it some time early in
December, I think pretty close to the 1st of December.
Senator K E R R . Y O U say they granted it in January?
Secretary D I L L O N . Granted it as of the 1st of January, but they
announced it the 1st of December.
Senator K E R R . The 1st of December of last year?
Secretary D I L L O N . Yes.
Senator K E R R . If a commercial bank pays 4 percent interest for a
savings account, actually, in view of the fact that they pay 52 percent
of their profit in taxes, their net costs on that are 48 percent of 4
percent; are they not?
Secretary D I L L O N . That is correct.
Senator K E R R . Which would be 1.92.
In view of the fact that insofar as calculating is concerned it can
reasonably be assumed that that particular expense is subject to the
top tax rate, their net cost of that money is a little less than 2 percent.
Secretary D I L L O N . That is correct.
Senator K E R R . So simultaneously with that they began to have
the expenditure of very large sums of money for so-called tax exempts,
the average income from which is what, between 3.5 and 4 percent?
Secretary D I L L O N . N O , sir. I think it is lower in this area. I
think it is somewhere probably between, around, 3 percent, maybe
3 to 3.25, but something like that.
Senator K E R R . Don't you think, Mr. Secretary, that in view of the
fact—and I would like for you to put into the record what the overall
average of tax exempts now being issued is.
Secretary D I L L O N . Well, the index, I know, is around 3 . 3 0 , which
is
Senator K E R R . The overall?
Secretary D I L L O N . Yes.
Senator K E R R . And, of course, an alert manager of a tax-exempt
portfolio in a bank would try to secure those that would bring in the
highest rate consistent with complete safety.
Secretary D I L L O N . Of course, when you get into special situations
such as revenue bonds there are some that are considerably higher,
over 4 percent.
Senator K E R R . SO that what would you expect an alert manager
of that portfolio in a commercial bank to have as his objective of the
average income on that, on the contents of that portfolio?
Secretary D I L L O N . Well, if he could make 1 percent more than the
figure you indicated might be the cost to him of this 1.9 to interest cost,
he would be doing, I think, quite well.
Senator K E R R . But even if he made the average, aside from his
administrative expense, he would be doing a little better than 1.25
net.
Secretary D I L L O N . He would be doing better than that.
82
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator K E R R . And if he were really an alert fellow, like some I
know in some very fine Oklahoma banks, who tell me they get an
average of 3.75, that would be a rather natural consequence of their
having made that drastic change in their policy of going up from an
interest rate on savings that had ranged from 2 to 3 percent, and
not in excess of 3 percent, to 4 percent to find a way to enable them to
do that and still maintain the previous levels of profit, would it not?
Secretary D I L L O N . I think that is probably the reason why they took
this action.
Senator K E R R . Don't you think that that was the needle that injected the stimulant into their financial stream that brought about
that surge of buying of municipals?
Secretary D I L L O N . I t is generally considered to be, and I think that
is probably a correct assumption.
Senator K E R R . T h a t is the impression I have.
Senator G O R E . Would the Senator yield there?
Senator K E R R . Bear this in mind, that one of the things that the
Senator from Oklahoma has done for a number of years which he
thought was to have had a small part in opposing the authority of
commercial banks to increase that interest rate on savings, but the
battle was lost last year in the Fed by a vote of 4 to 3 which authorized
the raise, as I understand it.
Secretary D I L L O N . I do not know what the vote was. There was,
I think, a split. I t has been published. I do not know what it was.
Senator K E R R . Yes.
Senator G O R E . Will the Senator yield?
Senator K E R R . Yes.
Senator G O R E . What disappoints me is that my distinguished
colleague from Oklahoma seems willing to abandon the battle and
consider it lost. I invite him to join. Let us mount our chargers.
Senator K E R R . Well, I will tell you, so long as I can fight with some
degree of some possibility of success I believe in fighting with all the
vigor I have got.
B u t if I could go about changing the results of previous battles in
previous wars, I would keep Stonewall Jackson alive at Chancellorsville, and do a lot of changing. [Laughter.]
I want to say to my good friend from Tennessee, that I think I
would have just as much chance of doing that as I would of changing
the environment that now exists by reason of the policies which the
Federal Reserve Board for many years had fought the committee to
be established, and did establish, and I want to say to him that it is
my judgment, and it is a very deep-seated conviction, that the Federal
Reserve Board is not going to change that policy until Congress
changes the law with reference to them and places upon them restrictions which are not now in the law, and which can again dramatize the
information that I deduced from the Secretary the other day and put
into this record, that the Treasury Department, when it is no longer
permitted, and the President, when he is no longer permitted, to have
any control over the policies of the Federal Reserve Board, the
Treasury Department is in the market just like every other borrower,
and has to borrow on the basis of the rules of the game, which every
man who goes into that jungle knows, is that he will pay all that the
traffic will bear.
83
ADVANCE REFUNDING AND DEBT
MANAGEMENT
I know that from 30 years of personal experience, and the Treasury
knows it because of the fact that for many years they fought to have
some control over the rules of the game, b u t that battle was lost just
as definitely as the War Between the States, and it would be just
about as hard at this time to change as the other one would.
Senator G O R E . Mr. Chairman, I believe the term used by the New
Frontier to describe the condition with which my friend is afflicted,
is "pragmatism."
Senator K E R R . Which friend is afflicted?
Senator G O R E . I am afraid my friend from Oklahoma.
Senator K E R R . Well, I go some places and they tell me to save my
Confederate money, that the South will rise again, and I have regarded
it as a thing devoutly to be hoped for, but one in which I never
indulged any hope, and if being in that shape makes me pregnant
Senator G O R E . A pragmatist.
Senator K E R R . I am glad it was an " a " instead of an "e."
[Laughter.]
Senator G O R E . Well, so long as he does not admit that he is defeated, there is still some hope.
I would like to ask one additional question, Mr. Secretary, in
following up Senator Kerr's very astute interpretation of one of the
effects of the action of the Federal Reserve Board in permitting commercial banks to pay 4 percent on savings.
This has brought about, on the part of the banks, this activity in
the field of long-term tax-exempt securities. Will this not eventually
offer severe competition for capital funds for long-term home mortgages, veterans home mortgages, F H A guaranteed home mortgages,
savings and loan association mortgages on homes?
Secretary D I L L O N . Well, I think a similar thing has been taking
place to a less marked extent in that field, too. I think t h a t at least
some of the larger commercial banks have decided to increase or go
for the first time on a large scale into the purchase of mortgages,
and in the last reports over the last few months, t h a t has happened.
Some of the New York banks, for instance, which never made a
practice of holding a large amount of home mortgages have started
to buy them throughout the country, and this has made additional
capital available there and has tended to help to lower mortgage rates.
I think mortgage rates went down in February, and this may well
have been part of the reason.
Senator G O R E . I t may well be a temporary situation, too.
Secretary D I L L O N . I would think for as long as the banks paying
interest at this rate feel they ought to keep a proportion of their
investment in this long-term area. I think, certainly, the building
up of their investments, either in municipals or in mortgages or other
long-term higher yielding things, to what they consider the appropriate level, is proceeding now at a faster rate than you would expect
it to proceed in the future.
Senator G O R E . Well, basically, is it not a fact that, with this increase
in the interest payment on savings b y commercial banks, a fierce
competition for savings has been set underway between the savings
banks, building and loan associations, and the commercial banks?
Secretary D I L L O N . I think there is certainly more competition in
mortgages.
Senator G O R E . All right.
84
ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
Now, have not the savings banks, the savings and loan associations,
building and loan associations, likewise increased their interest payment on savings?
Secretary D I L L O N . Generally, yes.
Senator G O R E . I S not that rate now on the west coast up to 4 . 7 5
percent or some such figure?
Secretary D I L L O N . I think some of the savings and loan associations
on the west coast either have gone or are talking seriously about going
to 4.75 percent from 4.5 where they have been for some time.
They went immediately to 4.6 percent, and I think they are talking
of going up that extra, about an eighth of a percent.
Senator G O R E . Well, Mr. Secretary, if as a result of this competition the interest rate which banks of all types, all financial institutions
which are particularly active in the home loan field, pa}7 for savings
goes up, isn't it inevitable that eventually these institutions are going
to have to charge a higher interest rate for mortgages?
Secretary D I L L O N . I would think there certainly is a connection
there. I t depends again on what sort of an interest rate they can
charge for mortgages.
The supply of money at the moment for mortgages is very adequate,
so it has actually worked the other way.
But that might be different at another time and, as a result, because of that, for the last year we have made every effort we could
to try to convince the savings and loan associations to be moderate
regarding any interest rate, dividend rate increases, as they call it,
and you probably have seen the concern that the Chairman of the
Home Loan Bank Board has expressed at this present trend.
Senator G O R E . I am aw;are of that and in sympathy with it.
Nevertheless, they are jumping over the traces very rapidly now,
and the consequence seems to me to be inevitable. Either this will
spur greater investment in tax-exempts, as Senator Kerr has pointed
out, or a bidding up, not down, of the eventual charge on home mortgages. So that is why I asked you if this might not prove to be a
temporary condition.
Secretary D I L L O N . Y O U mean the present decline?
Senator G O R E . The present decline, yes.
Secretary D I L L O N . I do not think one can count on it as being
permanent.
Senator G O R E . That is all, Mr. Chairman. Thank you.
The C H A I R M A N . Mr. Secretary, in regard to the information to be
furnished, what was the date that we had the maximum amount of
gold, what year?
Secretary D I L L O N . We have our month-end figures here, and it
showed that the highest level of Treasury gold stock Was reached iii
1949, and it amounted to, as you have thought, Mr. Chairman; to
something over $24 billion, exactly $24,607 million.
The C H A I R M A N . I think it would help the committee and the public
if you would show for each of those years to date the loss of gold,
and then opposite each year give the deficit in the balance of payments.
Then we could compare deficit payments, with the loss of gold which
occurs when you have deficit in the balance of payments; isn't that
correct?
Secretary D I L L O N . Not necessarily, but you are not likely to lose
gold if you do not have it.
85 ADVANCE
REFUNDING
AND
DEBT
MANAGEMENT
The C H A I R M A N . The countries abroad cannot ask for gold unless
they have a deficit payment.
Secretary D I L L O N . They can now because they could feel that they
wished to have a greater part of their existing dollars in gold even if
there was not a deficit, and that, as I pointed out, is what the current
situation is, more or less, in each of these 3 months. Our balance-ofpayments deficit has been very small for these 3 months, possibly
for seasonal reasons, but they have been taking gold nevertheless.
The C H A I R M A N . There might be a buildup of some kind?
Secretary D I L L O N . That is right.
The C H A I R M A N . But the main reason that we have had the flow of
gold is the inbalance of payments.
Secretary D I L L O N . That is entirely correct.
The C H A I R M A N . If you would associate those to each year and make
what comment you think proper as to the reason why the foreign
nations decided to ask for gold instead of dollars. If they have full
confidence in the dollar, they are not so likely to ask for gold: also
give the price of the production of gold as of now. I have understood
it was over $35.
Secretary D I L L O N . N O , at least the gold that is produced in South
Africa is produced at a substantial profit.
The C H A I R M A N . The gold that is available to the nations of Europe
that we deal with, isn't the average over $35?
Secretary D I L L O N . N O , sir. The Canadian gold mines and the
South African gold mines, which produce the new gold, all make good
profits.
Some would like to make more, b u t they make adequate profits to
operate profitably at $35.
The C H A I R M A N . A S I understand it, when this gold once goes out
it very rarely comes back; is that correct?
Secretary D I L L O N . That has been relatively true, although there
have been periods of reflow. The second quarter last year we picked
up nearly $200 million of gold. T h a t was partly as a result of the
difficulties the British were having. They were losing gold. Some of
it came in.
The C H A I R M A N . Thank you very much, Mr. Secretary.
(The information referred to follows:)
Overall
deficit
in U.S.
balance
of payments
and portion
1950-61
representing
U.S.
gold
loss,
[In millions of dollars]
Overall
balance-ofpayments
deficit
(+=surplus)
1950
1951
1952
1953
1954
1955
—
_
-3,486
-301
-1,048
-2,152
-1,550
-1,144
Gold loss
portion of
deficit
(-f-=gain)
-1,743
+53
+379
-1,161
-298
-40
Overall
balance-ofpayments
deficit
(+=surplus)
1956
1957
1958
1959
1960
1961
-922
+535
-3,528
1
-3,743
-3,929
-2,454
Gold loss
portion of
deficit
(+=gain)
+305
+799
-2,275
2 -731
-1,703
3 -857
1 Excludes $1,375,000,000 subscription to the International Monetary Fund.
2 U.S. gold stock was reduced by an additional $344,000,000, representing the gold portion of our subscription to the International Monetary Fund.
3 As a partial offset to these gold losses, we gained $116,000,000 in convertible foreign currencies.
86
ADVANCE
REFUNDING
AND DEBT
MANAGEMENT
Senator G O R E . Mr. Chairman, I would also like the Se-cretary to
have permission, or be requested, in the table he is going to furnish as
to foreign investments and income from foreign investment, to break
down his figures between branch form and subsidiary form.
Secretary D I L L O N . Yes.
Senator G O R E . And as between the underdeveloped countries and
the highly developed countries.
Secretary D I L L O N . Fine, we will be glad to do it where possible.
(See general note to table on p. 78.)
The C H A I R M A N . Thank you.
Senator W I L L I A M S . Mr. Secretary, before we leave, as one who was
somewhat skeptical about the wisdom of the advance refunding, I
want to make very clear that my criticism is not directed against
you personally. You followed a policy that was approved by the
Congress and upon which there was an established precedent before
you came in,and my criticism of this program, this policy, was not
in any way intended toward you.
The C H A I R M A N . I want to associate myself with that.
Senator W I L L I A M S . I think you are doing a wonderful job.
(Whereupon, at 1:30 p.m., the committee adjourned.)
o
@FedFRASER