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DEBT CEILING

INCREASE

HEARING
tt!
BEFORE THE

COMMITTEE ON F I N A N C E
UNITED STATES SENATE
EIGHTY-SIXTH CONGRESS
F I R S T SESSION
ON

H.R. 7749
AN ACT TO INCREASE THE AMOUNT OF OBLIGATIONS,
I S S U E D UNDER TTIE SECOND LIBERTY BOND ACT, WHICH
MAY BE OUTSTANDING AT ANY ONE TIME

.TUNE 27), 11)50

Printed for the use of the Committee on Finance

UNITED STATES
GOVERNMENT PRINTING OFFICE
42776




WASHINGTON : 1959

COMMITTEE ON FINANCE
HARRY FLOOD BYRD, Virginia, Chairman
JOHN J. WILLIAMS, Delaware
ROBERT S. KERR, Oklahoma
FRANK CARLSON, Kansas
J. ALLEN FREAR, JR., Delaware
WALLACE F. BENNETT, Utah
RUSSELL B. LONG, Louisiana
JOHN MARSHALL BUTLER, Maryland
GEORQE A. SMATHERS, Florida
NORRIS COTTON, New Hampshire
CLINTON P. ANDERSON, New Mexico
CARL T. CURTIS, Nebraska
PAUL H. DOUGLAS, Illinois
ALBERT GORE, Tennessee
HERMAN E. TALMADGE, Georgia
EUGENE J. MCCARTHY, Minnesota
VANCE HARTKE, Indiana




ELIZABETH B . SPRINGER, Chief Clerk

CONTENTS
Page

Text of H.R. 7 7 4 9 . .
Statement of Hon. Robert B. Anderson, Secretary of the Treasury

1
1

ADDITIONAL INFORMATION
Charts and tables:
Budget expenditures—Semiannual, fiscal years 1956-60
7
Budget receipts—Semiannual, fiscal years 1956-60
8
Budget surplus or deficit—semiannual, fiscal years 1956-60.
9
Comparisons of debt projections of July 30, 1958, with actual results.
12
Forecast of public debt outstanding, fiscal year 1960, based on constant
operating cash balance, $3.5 billion (excluding free gold) (based on
1960 budget document)
12
Monthly range of public debt subject to limit
10
Treasury cash bala nee problem
11
Letter and enclosure from John de Laittre, president, National Association
of Mutual Savings Banks, to chairman
41-46
Long-range commitments and contingencies of the U.S. Government as of
December 31, 1958
17




HI

DEBT CEILING INCREASE
THURSDAY, JUNE 25, 1959
U . S . SEXATE,
COMMITTEE ON FINANCE,

Washington, D.C.
The committee met, pursuant to call, at 10:20 a.m. in room 2221,
New Senate Office Building, Senator llobert S. Kerr presiding.
Present: Senators Byrd (chairman), Kerr (presiding), Frear,
Anderson, Gore, Talmadge, ilartke, Bennett, Butler, Cotton, and
Curtis.
Also present: Elizabeth B. Springer, chief clerk.
Senator KERR (presiding). This is a hearing on H.K. 7749.
(1I.R. 7749 is as follows:)
[H.It. 7749* 86th Cong., 1st sess.]
AN ACT To increase the amount of obligations, issued under the Second Liberty Bond Act, which may
be outstanding at any one time
Bjti it mucted by ihe Senate and House of Representatives of the United States of
America in Congnns assembled, Thai the first sentence of fraction 21 of the Second
Liberty Bond Act, as amended (31 U.S.C., see. 757b), is amended to read as follows: ' T h e face amount of obligations issued under authority of this Act, and
the face amount, of obligations guaranteed as to principal and interest by the
United States (except such guaranteed obligations as may be held by the Secretary
of the Treasury), snail not exceed in the aggregate $285,000,000,000 outstanding
at any one time/'
SEC. 2. During the period beginning on July 1, 1959, and ending on June 30,
1960, the public debt limit set forth in the first sentence of section 21 of the
Socond Liberty Bond Act, as amended, shall bo temporarily increased by $10,-

000,000,000.

SEC. 3. This Act may be cited as the "Public Debt Act of 1959".

Senator KERR. All right, gentlemen, tlio committee will come to
order.
Secretary AXDKRSOX. Shall I proceed?
Senator KERR. Yes, sir.
STATEMENT OF HON. ROBERT B. ANDERSON, SECRETARY OF THE
TREASURY

Secretary' AXDKIISOX. Mr. Chairman, I am here today in support
of H.H. 7749, which was passed by the llouso of Representatives
on June 19, 1959. This bill provides for a permanent increase from
$283 billion to $285 billion in the statutory limitation on the public
debt and a temporary increase in the limitation to S295 billion to be
in effect until June 30, 1960.
As you know, the President on June 8 proposed to the Congress an
increase in the regular statutory limit to $288 billion. In my statement before the House Ways and Means Committee ou June 10,
I explained that the increase to $288 billion would enable the Treasury
l




2

DEBT CEILING INCREASE

to conduct its debt operations, except for seasonal swings, with a
margin of $3 billion between the estimated total debt outstanding
and the proposed debt ceiling.
On the basis of past experience, the Treasury feels that a margin
of $3 billion over and above provision for minimum working balances
represents the minimum needed for flexibility in debt management
operations and for contingencies.
In addition to an increase in the permanent limit to $288 billion,
the President requested a temporary ceiling of $295 billion through
June 30, 1960. This proposal was made in order to cover the situation during the course of the fiscal year, when we estimate that there
will be a cumulative deficit of something like $7 billion by midDecember, necessitating a corresponding temporary increase in
borrowing, despite the estimated balance between expenditures and
receipts for the year as a whole.
While the permanent cciling of $285 billion provided in H.R. 7749
falls short of the President's request, the temporary ceiling of $295
billion approved by the House of Representatives does provide the
Treasury with the necessary flexibility for conducting debt management operations effectively during the coming year.
The Treasury therefore urges the adoption of H.R. 7749, even
though its passage will mean that we shall be operating under a very
narrow margin on June 30, 1960, unless there is a substantial budget
surplus next year.
Before going into the details of the current situation, it might be
helpful for me to summarize briefly previous actions which the Congress has taken with respect to the borrowing authority of the
Treasury.
Prior to World War I, the Secretary of the Treasury had little discretion in the actual carrying out of the public debt operations. The
acts of Congress authorizing the issuance of U.S. Government obligations usually specified the terms and conditions applicable to each
individual issue.
World War I brought a change in this situation. For the first
time, a series of loan operations involving large amounts of borrowing
were anticipated and were in fact required. Under these circumstances, Congress gave the Secretary of the Treasury much more latitude in determining the terms and conditions of issues, although it
continued to set limitations on the amounts of various types of obligations authorized or outstanding, as well as maintaining a ceiling on
interest rates for Treasury bonds.
During World War II, the principle of establishing a limitation on
total debt outstanding, rather than on specific issues or types of
obligations, became firaily established. By an act of June 26, 1946,
the permanent ceiling on the public debt was set at $275 billion.
Congress authorized temporary increases in this ceiling in 1954, 1955,
and 1956. Effective July 1, 1957, the ceiling on the public debt
reverted to $275 billion.
In February 1958, however, when it became apparent that there
would be a substantial budget deficit in the fiscal years 1958 and
1959 Congress again permitted a $5 billion temporary increase in the
ceiling to $280 billion, and in September 1958 two other changes
were made. First, the permanent ceiling was raised to $283 billion,
and second, the $5 billion temporary addition provided in February



3

DEBT CEILING

INCREASE

1958 was continued through June 30, 1959, bringing the ceiling in
effect for the remainder of fiscal 1959 to $288 billion.
As I have already noted, H.R. 7749 recognizes the debt limit
problem which we shall face during fiscal 1960 by raising the permanent ceiling to $285 billion and increasing the temporary ceiling during
the coming year to $295 billion, the amount requested by the
President.
I should like now to discuss some of the elements of this problem.
The requested ceiling of $295 billion is $10 billion above the estimated debt of $285 billion as of June 30, 1959. The need for $10
billion of temporary debt limit authority during the year reflects
two factors: a $7 billion need to cover seasonal borrowing requirements plus $3 billion for much needed flexibility and to allow for
contingencies. The necessity of having an allowance for flexibility
was recognized by the Congress when it. provided the temporary debt
limit of $288 billion which is now expiring.
I shall take up each of these considerations, beginning with a
discussion of the seasonal demands on the Treasury.
SEASONAL BORROWING

NEEDS

Charts 1 and 2 below show budget expenditures and budget receipts
on a semiannual basis for the fiscal years 1956-60, bused on the
January budget estimates.
Chart 1 shows that there is no distinct seasonal pattern in budget
expenditures between the two halves of the year.
In chart 2, on the other hand, it will be seen that budget receipts
follow a distinct seasonal pattern.
Even when the speedup in corporate tax collections, growing out
of revisions in the Revenue Code of 1954, is completed in 1960 there
will still be a substantial seasonal disparity in tax receipts. As you
know, smaller sized corporations will continue to concentrate payments in the spring which, together with the concentration of individuals' declarations and final payments, will still result in relatively
high tax receipts in January-June of each year.
We expect, therefore, that even with a balance between expenditures and receipts for the fiscal year as a whole expenditures will
exceed receipts by approximately $6 billion during the 6 months
beginning July 1 and ending December 31, 1959. Our need for $7
billion of new" borrowing during that period reflects not only the $6
billion deficit for the 6 months as a whole, but also the fact that the
deficit for the period from July 1 through December 15, 1959, for
example, is $7 billion, which means an additional billion dollars of
financing. The July-December 1959 deficit will be, however, only
slightly more than half of the $11 billion deficit in July-December
1958, as is shown in chart 3.
In order to illustrate the problem further we have prepared table 1
at the end of this statement to show our estimates of public debt
outstanding during the fiscal year 1960 based on a constant operating
cash balance of $3.5 billion. The projections are stated both before
and after the allowance for $3 billion flexibility under the debt ceiling.
As you will note from the table (and also from chart 4, below) on
December 15, for example, even the $295 billion temporary debt
limit would appear to be insufficient for a few days. However, we




4

DEBT CEILING INCREASE

will be able to operate within that limitation without undue' impairment of our flexibility. Chart 4 also indicates the wide fluctuations
in the amount of debt outstanding within each month during the fiscal
year just ending.
In connection with our projections for the fiscal year 1960, it may
be of interest to note the comparison between the semimonthly projections which we made on July 30, 1958, for the current fiscal year
and actual results of our operations during that year. These are
shown in table 2, also found at the end of this statement.
The debt subject to limitation shown in column 2 of tabic 2 on the
assumption of an operating cash balance of $3.5 billion throughout
the year may be compared with the figures shown in column 5 of the
table which represent actual debt subject to limitation on semimonthly dates adjusted to the same cash balance figure of $3.5 billion.
It will be seen that the projections plotted a fairly accurate course
of what lay ahead. A greater falloff than expected in revenues during
the early part of the present calendar year threw our estimates somewhat out of line for a brief period. Xlore recently, however, actual
debt outstanding on semimonthly dates has run very close to the
levels which we estimated earlier.
The figures shown in column 3 of table 2 indicate very clearly the
tight cash balance position which we have been in around tax collection dates in fiscal 1959. It will be noted that on January 15, 1959,
for example, we found it necessary to draw down the actual operating
cash balance to $1.7 billion—only slightly more than the Treasury
spends on the average between Monday morning and Friday night
of each week.
THE NEED FOR FLEXIBILITY

The need for $3 billion flexibility over and above the $7 billion
seasonal borrowing need next year is essential to proper handling of
the Government's operations. Three factors are involved.
In the first place, the Treasury must maintain adequate balances.
The Treasury has been operating on an average cash balance of about
$4% billion during each of the last 3 fiscal years. This is relatively
small; the operating cash balance this year has averaged only 69
percent of average monthly budget expenditures—the lowest percentage for any recent year, as is shown on the right side of chart 5, below.
The Treasury's cash balance is no higher today than it was a decade
ago, when budget spending was half its present rate.
It may be noted on the basis of figures available for recent years
that whereas the Federal Government conducts its operations on the
basis of an average cash balance considerably less than average
monthly expenditures, State and local governments typically keep on
hand an amount of cash between two and three times the total of
average monthly expenditures. While the Treasury will continue to
make the most economical use possible of available funds, we believe
that the ratio of casli balance to expenditures has fallen about as low
as it can without impairing efficiency of Treasury operations.
There are a number of reasons why an adequate cash balance is
essential for the efficient management of the public debt. First of
all, the very size of the Government's operations means that the
Treasury has potentially very large demands for cash. In the coming
year we have something like $76 billion of Government obligations



5

DEBT

CEILING

INCREASE

coming due and requiring refunding. In addition, there are) more
t h a n $50 billion of savings bonds of all series outstanding a n d these
are d e m a n d obligations.
(Senator H a r r y Flood B y r d (chairman) now presiding.)
Secretary ANDERSON. When the T r e a s u r y goes into the m a r k e t to
r e f u n d an out-standing issue it m u s t take into consideration the fact
t h a t in the normal course of events certain of these securities will be
turned in for cash regardless of w h a t is offered in exchange. Some
holders will decide t h a t the terms of the new securities do n o t meet
their particular investment requirements and they, too, m a y take
p a y m e n t for their m a t u r i n g securities in cash.
W h e n the debt limit margin is very narrow a n d cash balances are
small, the margin of error in estimating the attrition (demand for
cash) becomes m u c h more critical, and any greater turn-in than
expectcd runs the risk of requiring immediate new financing to raise
the required cash.
T h i s situation also points up the need for sufficient cash balance so
t h a t the Treasury will have greater flexibility in choosing the timing of
cash offerings—rather t h a n being limited to cash financing for budget
requirements on a last-minute basis, regardless of w h a t m a r k e t conditions m a y be at the time.
Secondly, an adequate debt limit will permit necessary debt managem e n t flexibility in another way. T h e T r e a s u r y should be prepared
to sell new issues of securities a week or so in advance of the m a t u r i t y
of old securities if such action would add materially to the success
of a particular financing operation. W h e n the debt is pushing against
the ceiling, of course, this cannot be done.
T h e lack of leeway under the debt ceiling has in the past h a m p e r e d
the T r e a s u r y in several ways. F o r example, in the September 19,57
cash financing the p a y m e n t date on a small bond issue had to be
delayed until October 1 because there w a s n ' t room for the issue under
the debt coiling until after the attrition had been paid on the October 1
maturities.
On o t h e r occasions the T r e a s u r y has h a d to refrain from sizable
m a r k e t offerings and resort to smaller increases in regular T r e a s u r y
bill auctions each week because of i n a d e q u a t e debt limit leeway.
T h i s was especially true in December 1057 and J a n u a r y 1958. There
h a v e also been other occasions where the G o v e r n m e n t agency financing
lias been in p a r t determined by the problems of a tight d e b t ceiling.
T h e third consideration leading the T r e a s u r y to ask for sufficient
flexibility in its debt ceiling—the need to cover contingencies—
requires little elaboration.
T h e possibility always exists t h a t there m a y be sudden d e m a n d s
on t h e T r e a s u r y in the event of a national emergency. T h i s indicates t h e desirability of sufficient room under t h e ceiling to m e e t
unexpected financing needs.
I n addition, there are certain d e m a n d s of a less critical n a t u r e
which the T r e a s u r y should be in a position to meet w i t h o u t r e t u r n ing to the Congress for new authorization. Changing economic circumstances m a y cause our debt projections to v a r y appreciably, a n d
if such variations are all in one direction, leeway under a debt ceiling
which is too restrictive m a y soon disappear.

42776—59




2

6

DEBT

CEILING INCREASE

For example, as you know, corporate tax law makes it possible for
taxpayments on current liabilities in September and December 1959
to be made on the basis of the previous year's tax liability if the
taxpayer so desires. Many corporate treasurers may find it prudent
to make payments this year on the basis of 1958 liabilities, since corporation profits in that year were relatively low. This would, of
course, tend to reduce receipts coming in during the first half of
fiscal 1960 even though the total for the year is unaffected.
I mention this possibility as only one illustration of the many circumstances outside the control of the Treasury which may cause
variations in the fiscal outlook. Prudent debt management, we feel,
requires that there should be sufficient leeway under the debt ceiling
to cover uncertainties of this nature without the need for new authorizations, particularly at times when Congress is not in session.
Thank you, Mr. Chairman.
(The charts and tables referred to are as follows:)







CHART 1

BUDGET EXPENDITURES-SEMIANNUAL

H
W
H
O

O
h
H
o
w
w
>
G
O

w

0fte« o t e S n r o tfwTesr
f h wUy <
rauy
*Estimate on basis of January 1959 Budget Message




CHART

2

BUDGET RECEIPTS-SEMIANNUAL
Fiscal Years 1956-60




CHAIT 3

.BUDGET SURPLUS OR DEFICIT-SEMIANNUAL
Fiscal Years 1956 -'60

e

h
h

td

o
m
P

o
w
H
>
C
O
w

i

j...
1956

1957

'

1958

1959

.-tut o t e Sc Uy *tht toaury
f h cn r

I960
B-II2I-E '

"Estimate on basis of January1959Budget Message.




CHART

2

MONTHLY RANGE OF PUBLIC DEBT SUBJECT TO LIMIT.

««* oft* S n r o tht H««ry
w uy «

*$em'umthfy;os$ming$3,5billion operating balance excluding free gold




CHART

5

.THE TREASURY CASH BALANCE PROBLEM.
$Bil.

Operating Cash Balance as % of
Budget Expenditures

Monthly Averages, Fiscal 1949-59

Operating
Cash Balance F j
mA

'53

'56

'59*

1949

Fiscal YearsOe o t » Sctay « t * lm r
t e f h «r r 4 h r my
"Estimate on basis of Jonuory 1959 Budget Message.

12

DEBT CEILING INCREASE

1.—Forecast of public debt outstanding. fiscal year 1960, based on constant
operating cash balance, $8,500,000,000 (excluding free gold5) (based on I960 budget
document)

TABLE

[In billions]

Operating
balance,
Federal
Reserve
banks and
depositaries
(excluding
free gold)

Public debt
subject to
limitation

$3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5

$287.1
287.6
287.5
288.9
299.8
286.7
289.7
290.9
292.5
290.6
293.5
290.2
292.6
290.9
291.7
289.8
291.3
286.1
288.9
288.3
289.3
288.3
290.6
284.4

July 15, 1959
July 31.
Aug. 15
Aug. 31
Sept. 15
Sept. 39
Oct. 15
Oct. 31
Nov. 15
Nov. 30
Dec. 15
Dec. 31
Jan. 15,1969
Jan. 31
Feb. 15
Feb. 29
Mar. 15
Mar. 31
Apr. 15
Apr. 30
May 15
May 31
June 15
June 30

Allowance
to provide Total public
flexibility
debt
in financing limitation
and for con- indicated
tingencies
$3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3

$299.1
299.6
299.5
291.9
293. 'A
289.7
292.7
293.9
295.5
293.6
296.5
293.2
295.6
293.9
294.7
292.8
294.3
289.1
291.9
291.3
292.3
291.3
293.6
287.4

NOTE—When the loth of a month falls on Saturday or Sunday, thefiguresrelate to the following business
day.
TAT»T,E

2.—Comparisons of debt projections of July 80, 1958, with actual results
[In billions]
Actual

Projections of July 39,
1958
Fiscal year 1959

Actual
debt subject to
limitation, Difference,
Operating
Operating
adjusting col. 5 comcash balcash balDebt
Debt
cash bal- pared with
ance (ex- subject to ance (ex- subject to
ance to
col. 2
cluding limitation cluding limitation $3,500,000,000
free gold)
free gold)
(1)

July 31,1958
Aug. 15
Aug. 31
Sept. 15
Sept. 30
Oct. 15
Oct. 31
Nov. 15
Nov. 30
Dec. 15
Dec. 31
Jan. 15, 1959
Jan. 31
Feb. 15
Feb. 28
Mar. 15
Mar. 31
Apr. 15
Apr. 39
May 15
May 31
June 15

$3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5

(2)
$275.2
276.5
276.8
277.6
275.6
278.6
279.7
289.5
280.8
283.9
281.9
283.3
283.3
284.2
283.4
284.8
281.5
283.4
284.5
284.9
285.2
287.2

(3)
$3.9
5.3
5.3
1.5
3.9
4.7
3.3
2.2
5.3
2.1
3.8
1.7
4.5
2.8
3.9
2.fr
3.2
4.2
4.4
4.2
4.7
2.3

(4)

(5)

$275.1
277.8
278.2
276.3
276.4
289.9
279.9
279.9
282.7
282.2
282.6
282.6
285.5
284.8
284.8
284.6
281.7
285.4
285.9
285.9
286.9
285.8

$274.7
276.9
276.4
278.3
276.9
278.8
289.1
281.2
289.9
283.6
282.3
284.4
284.5
285.5
284.4
286.9
282.9
284.7
284.1
284.3
284.8
287.9

-$9.5
-.5
-.4
+.7
+.4
+.2
+.4
+.7
+.1
+.6
+.4
+1.1
+1.2
+1.3
+1.9
+1.2
+.5
+1.3
-.4
-.6
-.4
-.2

NOTE.—From Feb. 26 to Sept. 2, 1958, the statutory debt limitation was $280,000,009,999 including a
temporary increase of $5,000,000,000 which was scheduled to expire June 30, 1959. The act approved Sept.
2,1958 increased the limitation to $288,909,900,000, which will revert to $283,000,000,000 on June 30,1959.
When the 15th of a month falls on Saturday or Sunday, thefiguresrelate to the following business day.




13

DEBT CEILING INCREASE

The CHAIRMAN. Thank you very much, sir.
You have mentioned corporations paying on the previous year's
tax liability.
In dollars, what difference would that make in receipts?
Secretary ANDERSON. Well, the calendar year 1958, as the Senator
will remember, was the year in which most of the effects of the recent
recession were realized. Accordingly, corporate profits were low,
which was one of the factors accounting for the deficit.
Now, if in September and December of this 3-ear corporate treasurers elect to base their payments on the basis of the 1958 liabilities,
our receipts during that period—and Congress will not be in session—
will be relatively low. The corporations will then be permitted after
January to readjust their taxpavments because the profits from 1959
will be known, and while we will recoup after January, we could have
a lean period of collections during the fall of this calendar year.
Senator KERR. In the fall of this year?
Secretary ANDERSON. This year.
The CHAIRMAN. What would that be in dollars? For instance, you
estimate that on September 15, the debt will be $287.3 billion, on September 30, it is $283 billion. In December it is 290. That is correct,
is it not?
Secretary ANDERSON. Yes, sir. Now, to give some idea of the
variations that could occur
The CHAIRMAN. It will work in reverse next year.
Secretary ANDERSON. IT will work in reverse in the following year.
The CHAIRMAN. I am extremely reluctant as you know to vote for
this large increase. This is $20 billion increase in the debt ceiling in
16 months.
Your figures show that on June 30, 1960 when this temporary debt
ceiling expires the debt will be $280.9 billion.
Could you give the committee any assurance that you will not ask
for an extension of this temporary $10 billion over this year?
Secretary ANDERSON. May I inquire of the Senator the origin of
the $280 billion?
The CHAIRMAN. What?
Secretary ANDERSON. May I inquire
Senator'FREAR. $284 billion less $3.5 billion.
Secretary ANDERSON. Well, if you deduct the $ 3 . 5 billion, this
would assume that we would be operating with no cash balance.
The CHAIRMAN. I understand. Assume that the actual debt will
be $280 billion without allowance for leeway. The ceiling will be $295
billion, $10 billion is temporary, to expire June 30, I960. Will you
be willing to allow that $10 billion to expire on schedule?
As you know, Secretary Humphrey permitted the temporary debt
ceiling to expire. He didn't ask for its renewal.
Secretary ANDERSON. Well, Senator Byrd, I will only say this: I
will not ask this committee to renew any debt ceiling, permanent or
temporary, that I do not believe is necessary or in the best interests
of the country as of June 30 of next year.
The CHAIRMAN. You think there should be a leeway of $ 6 . 5
billion—$3.5 billion, as I understand it, for a constant balance and $3
billion additional for flexibility.
Secretary ANDERSON. That is correct.
42776—59



3

14

DEBT CEILING INCREASE

The CHAIRMAN. The estimates show one point where the actual
outstanding debt is $289 billion. When you add the $6.5 billion for
balance and flexibility you are at a total of $295.5 billion.
Do you think it will be possible to get the $285 billion permanent
limit, excluding the leeway?
Secretary ANDERSON. Well, Senator, if you will look at the figures
on December 15 on the table, if we have $3.5 billion working capital,
and a $3 billion allowance for contingencies, the total public debt
limitation would be $296.5 billion.
This would be $1.5 billion more
The CHAIRMAN. D O these figures reflect the corporation tax payment situation?
Secretary ANDERSON. It will not occur by this time, because
December 15 is this year, and the reverse effect of the approriate
tax payments would not accrue earlier than sometime past January
say on the March 15 dates.
Senator FREAR. But, Mr. Secretary, don't the corporations have
the privilege even next year, if their profits are less, not to use 1959
figures?
Secretary ANDERSON. They do.
The CHAIRMAN. I S it your present feeling, then, that this $10 billion
temporary ceiling will have to be continued?
Secretary ANDERSON. Senator, it is very hard for me to be entirely
emphatic about what we will do toward the debt ceiling as o f - I
mean, for the period of the year after June 30, 1960.
Now, it is very difficult to estimate receipts and expenditures even
a year ahead. For me to try to estimate them 2 years ahead would
have to take into consideration the whole chain of circumstances that
happens in the economy, the kind of corporate profits we have, the
kind of individuals earnings, and I just don't feel I can honestly and
informatively advise the Senator as to figures.
I will say we understand the Senator's feeling, and that we will be
very careful in examining our figures before coming back next year
so as not to ask for an unreasonable extension of either the permanent
or the temporary limits.
The CHAIRMAN. D O you anticipate with any confidence there will
be a balanced budget in next fiscal year?
Secretary ANDERSON. Well, being an optimist, sir, I would hope
very much that we could have a balance between our expenditures
and receipts.
The CHAIRMAN. If you were a betting man—I know you are not,
but if you were—would you bet there would be a balanced budget
or a deficit?
Secretary ANDERSON. Rather than being a betting man, sir, I
will say I will be a working man to achieve that.
Senator KERR. And a praying man. [Laughter.]
The CHAIRMAN. It is a little difficult for me to understand. We
have a $ 1 2 t o $ 1 3 billion deficit this year; and now we are supposed
to have a balanced budget next year, yet we have to give a $20 billion
increase in debt ceiling, and these temporary conditions that you
mentioned about the corporation taxes will be reversed next year.
Secretary ANDERSON. Senator, if you will look at the tables in
the statement, we have the Government expenditures. If you look
at our estimates for the two halves of the year 1960, we estimated



15

DEBT CEILING INCREASE

that in the July-December period we will spend $39 billion. We
estimate in the January-June period we will spend $38 billion.
Now, if you will look at the same two columns in chart 2, we
estimate that in the July-December period we will collect only $33.1
billion, about $6 billion less than we will spend.
Now in the January to June period, we will collect $44 billion, and
spend $38 billion. So we will be retiring a part of the seasonal debt.
We anticipate that if we have the working capital of $3.5 billion
on June 30, 1960, assuming again that we have a balance in our
expenditures, and our revenues, we will have a total public debt of
$284.4 billion.
Now this is the reason why we ask that the permanent ceiling be
set not lower than $285 billion, because I would frankly not know
how to answer the question if someone should ask me, if we had a
lower ceiling as to how we intend to pay the debt back to the permanent limit on June 30, 1960, because as we currently look at it, this
w7ill be our debt ceiling with this amount of working capital.
Now, the $10 billion we can live with, because it will allow us the
$7 billion which is the maximum in the lean period, plus the $3 billion
which wre believe is necessary for our flexibility and our contingencies.
The CHAIRMAN. If your estimates of the debt arc correct, would it
be possible for you to recommend that part of this temporary debt
ceiling should be permitted to lapse?
Secretary ANDERSON. I think that would depend on what we look
forward to in the last half of fiscal year 1960.
The CHAIRMAN. If you could be assured of this $ 0 . 5 billion leeway,
you would make such a recommendation, would you not?
Secretary ANDERSON. Yes, sir.
The CHAIRMAN. NOW, Mr. Secretary, this debt ceiling permits us to
owe $295 billion. How much does this Government owe indirectly
in the form of contingent debt?
Secretary ANDERSON. I have before me a complete list of the longrange commitments, and contingencies of the Government as of
December 31, 1958, and I will be glad to supply this for the record.
It is a four-page list.
The CHAIRMAN. YOU may insert that in the record.
(The list referred to follows:)
LONG-RANGE

COMMITMENTS AND CONTINGENCIES OK THE
AS OF D E C E M B E R 3 1 , 1 9 5 8

U.S.

GOVERNMENT

The attached statement covers the major financial commitments of the U.S.
Government, except the public debt outstanding and those involving recurring
costs for which funds are regularly appropriated by the Congress and are not yet
obligated, such as aid to States for welfare programs and participation in employee-retirement systems. The statement is segregated into four categories;
namely (a) loans guaranteed and insured, etc., by Government agencies; (b)
insurance in force; (c) obligations iesued on credit of the United States; and (d)
undisbursed commitments, etc.
The items appearing in this statement are quite different from the direct debt
of the United States. They are programs of a long-range nature that may or
may not commit the Government to expend funds at a future time. The extent
to which the Government may be called upon to meet these commitments varies
widely. The liability of the Government and the ultimate disbursements to be
made are of a contingent nature and are dependent upon a variety of factors,
including the nature of and value of the assets held as a reserve against the commitments, the trend of prices and employment, and other economic factors.




16

DEBT CEILING INCREASE

Caution should be exercised in any attempt to combine the amounts in the
statement with the public debt outstanding for that would involve not only
duplication but would be combining things which are quite dissimilar. As indicated by the enclosed statement, there are $111.8 billion of public debt securities
held by Government and other agencies as part of the assets that would be available to mee^ future losses. The following examples illustrate the need for extreme
caution in using data on the contingencies ana other commitments of the U.S.
Government.
1. The Federal Deposit Insurance Corporation had insurance outstanding as
of December 31, 1958, amounting to $137.7 billion. The experience of the
Federal Deposit Insurance Corporation has been most favorable. During the
period this Corporation has been in existence, premiums and other income have
substantially exceeded losses which has permitted the retirement of Treasury and
Federal Reserve capital amounting to $289.3 million (all repaid to Treasury),
and the accumulation of $2 billion reserve as of December 31, 1958. The Corporation's holdings of public debt securities as of that date amounted to $2.1
billion which already appears in the public debt total. Out of $267.7 billion of
assets in insured banks as of December 31, $71 billion are in public debt securities
(also reflected in the public debt). The assets, both of insured banks and the
Federal Deposit Insurance Corporation, as well as the continued income of the
Corporation from assessments and other sources, stand between insured deposits
and the Government's obligation to redeem them.
2. The face value of life insurance policies issued to veterans and in force as of
December 31, 1958, amounted to $43.3 billion. This does not represent the Government's potential liabilities under these programs since some of these policies
will probably be permitted to lapse and future premiums, interest, and the
invested reserves amounting to $6.8 billion of public debt securities should cover
the normal mortality risk.
3. Under the Federal Reserve Act of 1913, as amended, Federal Reserve notes
are obligations of the United States which, as of December 31, 1958, amounted to
$26.9 billion. The full faith and credit of the United States is behind the Federal
Reserve currency. These notes are a first lien against the $53.1 billion of assets
of the issuing Federal Reserve banks which includes $26.3 billion of Government
securities already included in the public debt. These notes are specifically
secured by collateral deposited with the Federal Reserve agents which, as of
December 31, 1958, amounted to $18.6 billion in Government securities and
$11.1 billion in gold certificates.




17 DEBT CEILING INCREASE
Long-range

commitments

and contingencies

of the Tr.S. Government

as of Dee. •?/, 19.18

[In millions of dollars]

Commitment or contingency and agency

!
!
Public debt
I (Jross amount 1 securities
of commit- I held by
ment or
Government
and other
contingency
agencies

Loans guaranteed, insured, etc., by Government agencies:
Agriculture Department:
Commodity Credit Corporation.
Farmers Home Administration: Farm tenant mortgage insurance
fund...
Civil Aeronautics Board
—
Commerce Department, Federal Maritime Board and Maritime Administration: Federal ship mortgage insurance revolving fund
Development Loan Fund
Export-Import Bank of Washington
..
Housing and Home Finance Agency:
Federal Housing Administration:
Property improvement loans
_
Mortgage loans
Office of the Administrator: Urban renewal fund
Public Housing Administration:
Local housing authority bonds and notes (commitment covered
by annual contributions)
Local housing authority temporary notes (guaranteed)
International Cooperation Administration: Industrial guarantees
Small Business Administration
Treasury Department:
Reconstruction Finance Corporation liquidation fund
.
Defense Production Act oi 1950, as amended
Federal Civil Defense Act of 1950, a.< amended
U.S. Information Agency: Informational media guarantees
Veterans' Administration
Defense Production Act of 1950, as amended

5 320
24.749
213

Total loans guaranteed, insured, etc., by Government agencies.

47,214 I

Insurance in force:
Agriculture Department: Federal Crop Insurance Corporation
Commerce Department, Federal Maritime Board and Maritime Administration* War risk insurance revolving fund
Export-Import Bank of Washington
Federal Deposit Insurance Corporation
Held by insured commercial and mutual savings banks
Federal Home Loan Bank Board: Federal Savings and Loan Insurance
Corporation
Held by insured institutions
Veterans' Administration:
National service life insurance
U.S. Government life insurance

1 803
2 178
5
2 149

0

8

74
498

2,345
891
<341
8
9

"3
«1ft
52

8

16,933
236
572

•244
3
137,698
44,767
41,738
1,514

Total, insurance in force..

2,953
71,994
3,562
5,689
1.120
83,798

Obligations issued on credit of the United States, postal savings certificates:
U.S. Postal Savings System
Canal Zone Postal Savings System

7 1,134
7
6

1,132
6

Total, postal savings certificates
Other obligations: Federal Reserve notes (face amount)

1,149
26,934

1,138
8 26,347

Undisbursed commitments, etc.:
To make future loans:
Agriculture Department:
Commodity Credit Corporation
Disaster loans, etc., revolving fund
Farmers' Home Administration: Loan programs
Rural Electrification Administration
Development Loan Fund
Export-Import Bank of Washington: Regular lending activities
Housing and Home Finance Agency:
Office of the Administrator:
College housing loans
Public facility loans
Urban renewal fund
Public Housing Administration
Interior Department:
Bureau of Commercial Fisheries: Fisheries loan fund
Defense Minerals Exploration Administration: Defense Production Act of 1950, as amended
International Cooperation Administration: Loans to foreign countries.
Small Business Administration
See footnotes at end of table, p. 18.




2

1

12

763
246
1,556
302
397
222

4

1,297

81

DEBT CEILING INCREASE

18

Long-range commitments and contingencies of the U.S. Government as of Dec. 31,
1958— Continued
[In millions of dollars]

Commitment or contingency and agency

Public debt
Oross amount securities
of commitheld by
ment or
Government
contingency and other

Undisbursed commitments, etc.—Continued
To ma!:c future loans—Continued
Treasury Department:
Reconstruction Finance Coi
Defense Production Act of 1950, as amended.
Veterans' Administration (veterans' direct loan program)
Total, undisbursed commitments to make future loans
To purchase mortgages:
Agriculture Department, Farmers Home Administration: Farm
tenant mortgage insurance fund
Housing and Home Finance Agency, Federal National Mortgage
Association:
Secondary market operations
Special assistance functions
Total, commitments to purchase mortgages
To guarantee and insure loans:
Agriculture Department, Farmers Home Administration: Farm
tenant mortgage insurance fund
Commerce Department, Federal Maritime Board and Maritime Administration: Federal ship mortgage insurance revolving fund —
Housing and Home Finance Agency: Federal Housing Administration
U.S. Information Agency: Informational media guarantees
Defense Production Act of 1950, as amended
Total, commitments to guarantee and insure loans
Unpaid subscriptions: International Bank for Reconstruction and Development

4,880

80
1,498
1,579
5
96
5,235

1

117
5,454
2,540

i The Corporation finances part of its activities by issuing certificates of interest to private lending
agencies. The outstanding amount of $734,000,000, as of Dec. 31,1958, is included in this figure.
a Includes accrued interest.
* Represents the Administration's portion of insurance liability. The estimated amount of insurance
in force and loan reports in process, as of Dec. 31,1958, is $1,307,000,000. Insurance on loans shall not exceed
10 percent of the total amount of such loans.
* The Export-Import Bank of Washington acts as agent in carrying out this program.
8
Represents deferred participations.
* Represents estimated insurance coverage for the 1958 crop year.
7 Excludes accrued interest.
« Includes public debt securities amounting to $18,615,000,000 that have been deposited with the Federal
Reserve agents as specific collateral.
NOTE.—The abovefiguresare subject to the limitations and precautionary remarks, as explained in the
note attached to this statement.

The CHAIRMAN. What is the total?
Secretary ANDERSON. I will have to add them up for you in just a
minute. We have got them in categories.
Senator Byrd, lumping together afl classes of obligations, regardless
of the contingencies that may attend them, the December 31 figures
would show roughly $310 billion. I should say that this does not
include the recent commitment of obligations to the World Bank,
which would have to be added to it and to the non-interest-bearing
notes of the Monetary Fund.
The CHAIRMAN. Would it include any contingent liability in social
security?
Secretary ANDERSON. N O , it does not.
The CHAIRMAN. Would you give some of the main categories in
this $310 billion in contingent liabilities?
Secretary ANDERSON. Well, some of them are loans guaranteed or
insured by Government agencies.



19

DEBT CEILING INCREASE

Senator KERR. That includes the $285 billion?
Secretary ANDERSON. NO, this is in addition to it.
The CHAIRMAN. In other words, the total is $605 billion?
Secretary ANDERSON. This would include the Commodity Credit
Corporation, the FHA, the Veterans' Administration.
It would include insurance in force; FDIC liabilities; Veterans'
Administration; postal savings certificates; Federal Reserve notes
which are outstanding: Reconstruction Finance Corporation liquidation fund.
The CHAIRMAN. If you add that to the $ 2 9 5 billion, assuming we
reach that point, that will make a total of direct debt and contingent
liability of $ 6 0 5 billion.
Secretary ANDERSON. Yes, although it is misleading to add them up;
and to that would have to be added the commitments to the World
Bank whicli we have just passed.
The CHAIRMAN. HOW much will that be?
Secretary ANDERSON. I will have to supply that accurate figure.
I do not have it in my mind.
(The information referred to is as follows:)
The increase in the commitment to the International Bank for Reconstruction
and Development (commonly referred to as the World Bank) is $3,175 million.

The CHAIRMAN. DO you think there is any contingent liability in
social security? We passed a law whereby the Government is obligated to make these payments, whether money is in the trust fund
or not.
Secretary ANDERSON. Well, we would hope that the taxes collected
under the social security laws would be such as to pay off the liabilities,
and I think it is quite-^
The CHAIRMAN. It is a contingent liability, then, is it not?
Secretar}7 ANDERSON. It may be a contingent liability, but not like
the others.
The CHAIRMAN. We are obligated to pay that whether or not there
is money in the trust fund?
Secretary ANDERSON. I think it is only fair to say that included in
this list a,re some rather remote contingencies.
For example, you take the contingencies of the FDIC. As long
Senator KERR. HOW much is that, Mr. Secretary?
Secretary ANDERSON. $137 billion-plus.
Senator KERR. And the Federal Reserve notes?
Secretary ANDERSON. $ 2 7 billion, roughly.
Senator KERR. So that there is one hundred and how much in the
two items? One hundred and sixy-four billion dollars; in connection
with bank deposits arid Federal Reserve notes; is that correct?
Secretary ANDERSON. Yes, sir; and then we have got Federal Savings and Loan Insurance Corporation which is included.
The point I want to make is when we put out a list like this, it
includes all shades of contingencies from the most likely to the most
unlikely.
The CHAIRMAN. When you submit the list for the record, would you
indicate the items you regard as likely contingencies and those you
regard as unlikely? *
Could you do that in regard to each item when you submit it?
Secretary ANDERSON. Senator Byrd, I would have some reluctance
in trying to assess a particular likelihood.



20

DEBT CEILING INCREASE

Certain of the liabilities I regard as rather remote.
Senator KERR. YOU will describe them accurately, Mr. Secretary,
so the committee can draw its own conclusions as to the extent of the
liability?
Secretary ANDERSON. Yes, I will, sir.
The CHAIRMAN. That will be sufficient.
I do not want to press the question.
With regard to the so-called free gold; how much do we have now.
It was $400 million or $500 million.
Secretary ANDERSON. Senator Byrd, on June 2 2 , 1 9 5 9 , we had free
gold of approximately $401,144,000. We are paying out, as of
yesterday, $300 million of that gold to satisfy the contribution of the
United States to the International Monetary Fund, so that as of
today we will have about $100 million left.
The CHAIRMAN. Has that been taken into consideration in these
figures that you have presented?
Secretary ANDERSON. Yes.
The CHAIRMAN. In other words, your estimate of the debt, taking
into account the balance and so forth, anticipates that this particular
obligation would be paid out of the free gold?
Secretary ANDERSON. $300 million of it; yes, sir.
The CHAIRMAN. You will have $ 1 0 0 million left?
Secretary ANDERSON. We will have $ 1 0 0 million, roughly, left.
The CHAIRMAN. At this point, would you care to advise the committee to what extent gold has been withdrawn in recent months?
Secretary ANDERSON. The U.S. gold stocks as of April 30, 1959,
were approximately $20,358 million.
Deducting from that $344 million, which is the total contribution,
and allowing for other changes since April, leaves us an approximate,
$19.8 billion.
The CHAIRMAN. Has there been previously a direct payment out
of the gold fund to the International Monetary Fund such as you have
made at this time?
Secretary ANDERSON. The previous subscription did it the same
way.
The CHAIRMAN. I know when Mr. Humphrey came in, the free
gold was about $1 billion, and he reduced it to $500 million?
Did you sell the gold at that time or did you pay it out as part of a
contribution to the International Bank? 25 percent of our contribution must be paid out in gold.
Secretary ANDERSON. That is correct, sir, with regard to the
increased subscription to the International Monetary Fund.
The CHAIRMAN. I think, Mr. Humphrey, If I recall it correctly,
sold the gold or transferred it and got the currency for the
Secretary ANDERSON. In 1 9 5 3 , $ 5 0 0 million was so treated.
The CHAIRMAN. Did he sell the gold then?
Secretary ANDERSON. The Treasury issued gold certificates to the
Federal Reserve for cash.
The CHAIRMAN. He sold it to the Federal Reserve?
Secretary ANDERSON. Federal Reserve.
The CHAIRMAN. And is that gold stored now in Fort Knox?
Secretary ANDERSON. Well, yes, sir. Some of our gold is at Fort
Knox.




21

DEBT CEILING INCREASE

The CHAIRMAN. By bookkeeping methods you kept what you
called free gold in your checking account?
Secretary ANDERSON. Yes, we had
The CHAIRMAN. It is really a checking account, is it not, of the
Government?
Secretarv ANDERSON. It is part of the Treasury's cash balance.
We had" had $401 million, roughly, until we paid out the $300
million for our recent commitment.
The CHAIRMAN. What is the largest amount of gold we have ever
had on hand?
Secretary ANDERSON. 1 believe, according to the figures I have here,
the highest gold holdings occurred in August of 1949, at which time
we had $24,600 million.
The CHAIRMAN. $ 2 4 what?
Secretary ANDERSON. $ 2 4 , 0 0 0 million.
The CHAIRMAN. Then it has gone down to $ 1 9 . 0 billion?
Secretarv ANDERSON. YesThe CHAIRMAN. $19.8 billion or $19.6 billion?
Secretary ANDERSON. $19.8 billion.
The CHAIRMAN. In other words, we have lost practically $ 5 billion
of gold since 1949?
Secretary ANDERSON. 1 think I should say to the committee that
we would anticipate that there would be some other withdrawals by
countries who are also going to make gold payments to the International Monetary Fund.
The CHAIRMAN. I thought you said you took the gold out of the
checking account to pay that.
Senator K E R R . That was our contribution.
Secretary ANDERSON. We did, sir.
The CHAIRMAN. Other countries?
Secretary ANDERSON. What I mean is, other countries will convert
part of their dollar and short-term securities into gold in order to
acquire the necessary gold for them to pay a quarter of their subscription to the Monetary Fund.
The CHAIRMAN. Could you explain to the committee under what
conditions the other countries have the option to call for gold instead
of dollars?
Secretary ANDERSON. The official holdings of the central banks of
other countries may be to convert their dollar holdings into gold.
The nonofficial holdings
The CHAIRMAN. They can do that in their own right. They can
do it whether we agree to it or not; is that correct? Wnat obligations
do the central banks now own that they can convert into gold?
Secretary ANDERSON. I did not hear the question.
The CHAIRMAN. What is the extent to which these central banks
could call for and be paid in gold?
Secretary ANDERSON. The official dollar balances and short-term
holdings of foreign countries as of April 30, 1958, were $8,432 million.
The CHAIRMAN. And they could call $8 billion?
Secretary ANDERSON. Yes, sir.
The CHAIRMAN. Is that all?
Secretary ANDERSON. Yes, sir.
The CHAIRMAN. I understood there were some short-term loans and
certificates.
42776—BO




4

22

DEBT

CEILING INCREASE

Secretary ANDERSON. Well, this includes their dollar balances and
short-term holdings.
I think I should state to the Senator, in order to be accurate, that
foreign nonofficial holdings amount to $6,700 million.
The CHAIRMAN. Can that be called?
Secretary ANDERSON. That cannot be called directly, but if the
holders of nonofficial dollars and short-term holdings elect to deposit
their dollars or securities with the central bank of another country, of
their own country, and to take currency of their own country in lieu
of it, you would thereby increase the dollar holdings of the other
countries, of the official dollar holdings of the central banks of the
other countries.
The CHAIRMAN. There are $8 billion that can be called in gold
directly. So that leaves our gold down to $11.6 billion, and you said
that it is possible that they could call in gold, $6, billion more?
Secretary ANDERSON. Well, it is about $6 billion of nonofficial
holdings.
The CHAIRMAN. YOU said under certain conditions, though, they
could call the gold for that.
Secretary ANDERSON. Yes.
Let me be a little explanatory in my answer on that, Senator.
As long as countries operate in a trading atmosphere, they have to
have certain dollar holdings and short-term securities in the normal
conduct of their business. They do maintain these kinds of balances
in order to carry out those normal commercial operations.
Now, while it is possible that they would all or could all take their
dollar balances and short-term obligations to the central bank of
their own country and convert them into the currency of their own
country, to the extent that they did, they would not have dollar
balances upon which to maintain their normal trading transactions.
Senator KERR. But to the extent they did, they would then add to
the amount which the central banks of other countries woidd have a
call on, with reference to the gold that is here?
Secretary ANDERSON. That is correct.
The CHAIRMAN. Let us start with August 1949, when we had $24.6
billion. It is now down to $19.6 billion. Calls can be made upon us
which we cannot reject of an additional $8 billion.
That would leave $11.6 billion, and then there is a contingent
liability, so to speak, of $6 billion more.
Suppose our gold should get down to $5 billion. What would be
the effect?
Secretary ANDERSON. Senator, I would not like to assume that we
are going to so manage our affairs, either that foreign central banks or
that foreign holders of gold would do other than to pursue normal
courses.
I think that up to the present we have to take into account, and
believe, that gold has been performing its normal and natural function.
That even though in 1958 there was an outflow of gold to the extent
of about $2.3 billion, there was an increase in the foreign holdings of
short-term dollar balances and securities of $1 billion.
The $1 billion, I suppose, was in dollar balances.
I think one of the things we have to recognize is the fact that we
have become, through a process subsequent to the war, a world banker.
We are performing the normal functions of a world banker.



23

DEBT CEILING INCREASE

We are in the position of borrowing short and lending long.
If we take into account the obligations which are owed to us by
other countries, those obligations are—and I will have to supply the
accurate figure—but I think in the neighborhood of $36 billion or
$37 billion.
(The information referred to is as follows:)
At the end of 1957, U.S. private investments abroad were estimated at $36.8
billion, predominantly at long term. U.S. Government credits to and claims on
foreign countries amounted to an additional $17.4 billion.

The CHAIRMAN. Let me interrupt you there.
Are they repayable in gold, if we require it?
Secretary ANDERSON. I think they are repayable in dollars. I
would again have to check to be sure. I am reasonably sure they
would have to be paid in dollars.
The CHAIRMAN. In other words, the agreements or contracts, whatever they may be, arc such that these other nations can call on us
for gold but we, if we had to call on them, they could pay in dollars;
is that correct?
Secretary ANDERSON. Loans and credits will be payable on the
terms in which the contractual obligations were created.
Now, I think that what we must realize is that we are face to face
with a different kind of situation than that which we have had in the
past, in that we have become the world's banker, and because of that
there is a concern in countries abroad, to a greater extent than before,
as to the way in which we manage the bank, which is our own country,
our own internal affairs.
As long as we maintain such a system that inspires confidence, and
believe that we are going to manage our affairs wisely and properly,
gold will continue to perform its normal functions.
I think what we have to bear in mind is that we are going to be
scrutinized by other countries in the future, to be assured that we do
so manage our own internal affairs to maintain all that confidence.
I think it is quite apparent that that confidence exists today.
If it were not so, foreign countries would not be increasing their
dollar balances and their holdings in short-term securities which is
now going on.
The CHAIRMAN. Foreign countries can call for gold on their dollar
balances. I cannot see what risks they run.
The central banks of foreign countries, can ask that the deposits
they make here be paid in gold and not dollars; is that correct?
Secretary ANDERSON. Yes; but those central
The CHAIRMAN. They are not taking any risks.
Am I not right about the importance of gold in the final showdown—
that gold is the only international currency in the world.
Secretary ANDERSON. Well, I think the dollar is an international
currency. It is internationally accepted as such.
The CHAIRMAN. If the dollar goes down, we have already lost onehalf of the purchasing power of the dollar, more than one-half, in
something like 18 years; is not gold the most solid medium of money
exchange in the world?
Let us take the Russian situation. Russia either buys, barters, or
trades by barter or buys with gold in other countries; isn't that
right? They do not use the Russian currency.




24

DEBT CEILING INCREASE

Secretary ANDERSON. Well, again, J would like to be a little
explanatory in this respect.
I think we all have to realize that when the Russian Government
lends its own currency, that currency is expendable by the borrowing
country only in Russia or in a satellite country where goods can be
purchased for the Russian currency.
By the same token, the Russian can barter in instances where it
is not possible or not practicable for other countries to barter, because
they would not have to take into consideration whether or not the
item bartered was in long supply or short supply, since they have a
dictatorial form of government, and they could, as they have, barter
and then dump what they barter on the world market.
Now, to the extent that they would need to acquire goods outside
of Russia or one of their satellite countries, they would require foreign
exchange.
In order to acquire that foreign exchange, they would either have
to sell to customers willing to buy, or they would have to buy foreign
exchange with gold.
To the extent that they bought foreign exchange with gold, they
would increase the total gold holdings of the free world.
The CHAIRMAN. But gold is acceptable all over the world, is it not?
Secretary ANDERSON. Yes, sir.
The CHAIRMAN. Tn other words, we might say it is about the only
medium of exchange that is.
Its convertibility is on the basis of $35 per ounce?
Secretary ANDERSON. We maintain gold at $35 an ounce; yes, sir.
The CHAIRMAN. YOU would pay out gold, if it was asked for, on the
basis of $35 an ounce?
Secretary ANDERSON. That is correct, sir.
The CHAIRMAN. What is the world price of gold?
Secretary ANDERSON. It is just about at that point.
The CHAIRMAN. Just one more question, Mr. Secretary. This
thing has concerned me a good deal, as it has you. What is the effect
on the credit of this country of constantly reducing the amount of
gold, gold deposits?
Secretary ANDERSON. Senator Byrd, I think we should remember
that the $24 billion figure which we alluded to in 1949 was the aftermath of the war.
We had another influx of gold into this country during the period
of the Suez crisis.
Had the Suez crisis continued for a long time, the flow of gold into
this country would likely have continued.
When the Suez crisis was settled, when the balance of payments
between ourselves and other nations permitted it, countries which
historically had maintained a large part of their own reserves in gold,
and, particularly, during the year 1958, when earnings on short-term
securities in the United States went to a low point, countries elected
to restore what had been their historical position by rebuilding their
own gold reserves.
rri1
1
T
1
'
" *1 1
lal convertibility which took
France, Germany, and the
se it added stability to their
currencies.




25

DEBT CEILING INCREASE

Now, we will still have very close to about half of the world's
free gold. As longas we maintain our
The Chairman. What do you mean by "free gold"?
Senator KERR. Free world gold.
Secretary ANDERSON. Outside of Russia.
Senator KERR. Not the world's free gold, but the free world gold.
That is what you mean.
Secretary ANDERSON. That is correct, sir.
Now, as long as we maintain a condition in which people believe
we are going to manage our affairs soundly, that we are going to work
as diligently as we can toward preventing the impairment of the
value of our dollar, those countries will maintain their confidence in
us, they will hold or increase their holdings of dollar balances, because
the dollar balances meet their commercial requirements, and so long
as they hold them in the securities of this country, they are earning
assets on the part of the other countries.
The important thing, I think, we have to look at is that because
we have over a period of years maintained such a policy which, in
the aggregate, has caused the balance of payments to run favorably
to other nations and, therefore, allowed the buildup of dollar balances
in those countries, that we now have those countries looking to us to
say, "We have a stake in the sound way in which you manage your
internal affairs because you are in the position of being a world
bank."
Therefore, it seems to me, that the problem with which we are
confronted is the problem of maintaining that which now exists,
and that is confidence here and confidence abroad, that we are a
people who are willing to subject ourselves to those disciplines of a
free economy that will inspire confidence here and in holders elsewhere.
The CHAIRMAN. Just one more question. That confidence, how
important do you think a balanced budget is to preserve the confidence of other nations in this country?
Secretary ANDERSON. I think it is very important.
The CHAIRMAN. YOU think it is very important?
Secretary ANDERSON. Yes, sir.
The CHAIRMAN. Senator Kerr?
Senator KERR. N O questions.
The CHAIRMAN. Are there anjr questions?
Senator FREAR. Yes, Mr. Chairman.
Is it not true that our Government encouraged these foreign countries to build up their gold and dollar reserves?
Secretary ANDERSON. I think that is a correct statement, because
what you must look at is not just the trade differentials that occur
in the normal course of business, but that since the war we have engaged in the maintenance of forces overseas; we have engaged in certain mutual security programs, we have had a rapidly growing tourist
business in which we do not limit the amount that can be spent abroad
by Americans.
We have a substantial rate of foreign investment abroad, running
now at the rate of about $3 billion a year.
So the net effect of everything that we have done has been to create
a balance of payments allowing other countries to accumulate dollar
holdings.




26

DEBT

CEILING INCREASE

Senator FREAR. When an American corporation makes an investment abroad, ami its deposits of dollars go to a foreign bank, and
those dollars are converted into the central bank, then that makes, as
I believe you have stated, a direct lien 011 our gold reserves in this
country.
Secretary ANDERSON. Well, I would not describe it as U LION, but
I would describe it as a competence on their part, if necessity should
require, that they ask for conversion.
Senator KERR. I thought- I understood you to say if these dollars
got into central banks thoy could exchange them, for gold if they so
Jesired.
Secretary ANDERSON. That is correct; they could.
Senator FREAR. What type of money do we use in granting economic assistance to foreign countries? Do we use the dollars?
Secretary ANDERSON. Yes.
Senator FREAR. Then in our foreign aid program, all of those* dollars that get into the central bank of a country can be exchanged, as
you said before, for gold out of this country.
Secretary ANDERSON. Yes. But I think I should say that a great
manv or most of those dollars are used to buv goods, and buying
goods from us returns the dollars.
*
*
Senator FREAR. That is right. That has been the part in the past.
Mr. Secretary, and that is one of the tilings that alarms me in the
future.
If we are going to continue to give dollars without—give foreign
aid in the form of dollars without any strings attached to them, and
those countries to which we make these grants have the privilege of
buying machinery in Russia or &ny of their satellites, which I understand they can do, then does it not take the gold supply or the gold
reserve of this country and put it into the hands of the Communists?
Secretary ANDERSON. Well, I should say that about half of it is
currently spent here, and, of course, to the extent that other countries
bargain for our dollars in the sale of goods, whatever those countries
may be, they would in the payment acquire dollars, if that was the
basis upon which they sold their machinery.
Senator FREAR. Yes; and those acquired dollars could be exchanged
for gold or the demand could be put upon us for gold.
Secretary ANDERSON. If and when they are lodged in the central
bank of the respective countries.
Senator FREAR. Yes, sir.
But if they want gold they can get it by that means.
Secretary ANDERSON. Not the individual.
Senator FREAR. NO, sir. But that is what I am saying that
alarms me. Maybe there is a point in here that I have missed somewhere. But the money that our Government gives as economic
grant, as grants to foreign countries, and to the extent that those
dollars that we give are used to purchase goods in another country,
and that sale of goods or the seller of those goods puts his money
into a central bank, those dollars into a central bank, and, of course,
which you said he has to exchange for local currency.
Secretary ANDERSON. That is correct.
Senator'FREAR. But if that central banks wants to demand gold
from our Treasury, what would prohibit us from granting it?




27

DEBT CEILING INCREASE

Secretary ANDERSON. Nothing. They can demand it when it gets
into the central bank.
Senator FREAR. SO that then in reality a part of our grant of foreign
aid can end up in gold in the hands of Communist countries.
Secretary ANDERSON. If they are acquired by Communist countries from—well, we would not. We would only convert the official
dollar holdings of free countries; we would not convert into gold for
Communist countries.
Senator FREAR. All right.
Let us take it a step further then. Suppose what I have said docs
go to a Communist country or an Iron Curtain country, and that
country deals with Switzerland, and that money gets into the Swiss
central bank. Then it can demand from us
Secretary ANDERSON. Then it can be demanded.
Senator FREAR. SO even though it may be rather circuitous, it is
a potential demand?
Secretary ANDERSON. That is correct; when it gets into the
hands
Senator FREAR. IS the same thing true with our military spending
abroad?
Secretary ANDERSON. TO the extent that we spend dollars in those
countries.
Senator FREAR. Yes; and our travel abroad.
As you said, our people are now taking many dollars abroad for
travel, and even when they appreciate or add to the dollars in European countries, and those European countries trade with the Iron
Curtain countries, they can use our dollars and the same thing, if
necessary, come back through Switzerland as a demand on our gold
reserve.
Secretary ANDJBRSON. One can assume a circuitous method by
which, when the money, the dollars ,become lodged as official holdings
in central banks of free countries, then it could become a claim
against us.
I think, if I may, Senator Frear, say that just what you are saying
points up the problems of making sure that our system is a competitive system, and of making sure that we maintain the value of
our currency and the confidence of the people to deal with us.
Senator FREAR. Mr. Secretary, I could not agree with you more.
I think that is my position, too, and I hope I can always maintain
that stature.
Now what other forms of currency are equal to or superior in value
to the U.S. dollar?
Secretary ANDERSON. I do not think there is any currency in the
world superior to the American dollar.
I think you get into conditions, as you do in Canada, as a matter
of trade balances, where you would have one selling at a premium.
But there certainly is no currency in the world superior.
Senator FREAR. Maybe the word "superior" was not the proper
word, but I think we ought to relate it to value, purchasing value.
Senator KERR. Will you yield?
Senator FREAR. Yes; I will yield.
Senator KERR. With reference to these dollars that the Senator
has mentioned that go out of here in the form of foreign aid and
expenditure in connection with our military forces overseas, spending



28

DEBT

CEILING INCREASE

bv American tourists abroad, for any holder of those dollars to put
them in position where they would be in a central bank and become
a call on us for gold, that holder would have to prefer, if in France,
French francs, if in Switzerland, Swiss
Secretary ANDERSON. Francs.
Senator KERR (continuing). Francs.
If in Germany, German marks; if in England, pounds; if in Holland,
guilders.
Secretary ANDERSON. Guilders.
Senator KERR. If in Belgium- Secretary ANDERSON. Francs.
Senator KERR (continuing). Francs, and so forth.
Secretary ANDERSON. That is correct.
Senator KERR. SO that until the time comes that foreign currencies
are more desirable than American currency, the situation visualized
would not become a threat or the basis of
Secretary ANDERSON. That is correct, sir.
Senator KERR (continuing). Or the basis of substantial withdrawals of gold.
Secretary ANDERSON. That is correct, sir.
Senator KERR. That is the reason why you have said here that the
working of this system is based on confidence.
Secretary ANDERSON. That is correct.
Senator KERR. Just like a bank.
Until the depositors get into the frame of mind to make a run on
the bank, the bank can operate as a bank and be secure and a going
institution and of great value to everybody.
But if it operates in such a way that the depositors panic and make
a run on it, they can make a small institution out of any bank.
Secretary ANDERSON. That is correct, sir.
Senator FREAR. I agree with what the Senator has said. I certainly think it is factual.
However, within the past 2 or 3 years the condition has come about
whereas, I believe, the purchasing power of the dollar relative to
other currencies was only exceeded by one country, and that was
Switzerland, to a very minor degree, and now I think there are four
or five countries, especially the German mark, and the value of the
German mark has appreciated many, many times over.
What I think brings out the part that disturbs me a bit is the amount
of money that we have put into West Germany through grants and
through military assistance and through the operation of the spending
of our military forces in Germany.
We have, I think, by design partially tried to build up the economy
of Germany, and rightfully so. I certainly have no criticism of that.
But I think in so doing we have built up Germany to the point of
where their deutsche mark in purchasing power is a bit better than
the American dollar.
If we are going to continue that in all of the countries of the world,
and it does have this circuitous route of calling on our reserves of gold
in this country, I see the potential, at least, of dwindling our gold
supply to a position where we will not have enough gold as a reserve
for the currency we have in circulation in this country. That is the
point I am trying to build up to.




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DEBT CEILING

INCREASE

I am not too fearful—I think the Secretary of the Treasury this
morning has given me a bit more confidence than I had before I
started talking to him. But it still has not alleviated all the fears,
that I have.
That is all.
Secretary ANDERSON. If I may comment for one moment. If one
looks back to the period following World War II, one recalls a
devastated Europe. It was a Europe with very little productive power.
It was a Europe trying to rebuild after the ravages of war. It was the
commonplacc thing at that time to talk of the dollar gap.
As a good creditor nation, the United States from the period
following the war rendered very valuable services in meeting that
"dollar gap" and helping to rebuild the economies of devastated
countries.
We now have a group of countries in Western Europe that are
relatively strong.
Senator FREAR. And friendly.
Secretary ANDERSON. And friendly.
One looks or needs to look back only a year or two to see that some
of our neighbors abroad faced rather difficult circumstances. But
they took those measures, hard as they were, to correct them, and they
have emerged stronger.
After the Suez situation they rebuilt their own reserves. They now
have increased productive capacity.
They are competing for markets all over the world, and while there
is still a great part of this world that is underdeveloped and needs
help, I think we must now reorient our thinking, and we must view it
not just as a task which belongs to us, but as a task in which we must
ask and expect other countries with strong economic situations and
productivity to share in meeting the resource requirements of what we
will call the less developed countries of the world.
We must realize that to that extent, the "dollar gap" has been met.
Now we must realize also that in the pursuance of these worthy
causes we have become, in fact, the world banker and, therefore,
this problem of our maintaining confidence, as Senator Kerr indicated
and as you have indicated, is of vast importance.
Senator FREAR. I agree with you, Mr. Secretary; and I think perhaps it was our duty to do these things, because without a strong
Europe, I think the Communist countries would have overrun it.
As a matter of security, we are probably better off.
However, by building up those countries economically, as you have
stated, we have also built up our competitors, which may be the
right thing to do, too. But we have no control over what those
European countries are doing in relation to the Iron Curtain countries,
and I know you are more aware of this than I am, that even now
Russia is talking about forming an economic bloc of its own, and
putting the Russian ruble in comparison to the dollar in its purchasing
power in these underprivileged countries.
Senator TALMADGE. Mr. Chairman, will the Senator from Delaware
yield at that point?
Senator FREAR. Yes, sir.
Senator TALMADGE. Mr. Secretary, on our foreign aid program we •
deal with governments instead of individuals, do we not?




30

DEBT

CEILING INCREASE

Secretary ANDERSON. Well, I think there would have to he some
qualification by programs.
For example, a number of institutions, the World Bank, for example,
into which we put resources, can deal either with governments or it
can deal with individuals.
If it deals with individuals, it requires the guarantee of the government in which the project, the money, is spent for its repayment.
Senator TALMADGE. The point that interests me is, when this
money gets into the central bank to be in positiou to demand gold
from us.
I saw in the morning paper, I believe, where we had let Yugoslavia
have another $9 million. How do we do that? Do we issue a draft
payable to the Government of Yugoslavia?
Secretary ANDERSON. I am sorry, I am not familiar with that
specific tiansaetion.
Senator TALMADGE. Well, in any event, that $9 million will immediately be made available to the credit of Yugoslavia, will it not?
Secretary ANDERSON. If the grant was an unrestricted grant or
loan, government to government, the money will be lodged wherever
the government of the other country will elect, and, of course, it would
be in the central bank.
Senator TALMADGE. If they saw fit, they could deposit it in the
central bank of Yugoslavia.
Secretary ANDERSON. Yes.
Senator TALMADGE. At that point Yugoslavia could demand $9
million in gold?
Secretary ANDERSON. Without knowing, I would guess that it is
probably tied to purchases. But I would have to find out.
(The following was subsequently received for the record:)
The transaction referred to is a Development Loan Fund loan for a thermal
electric plant. The funds will be used to purchase generators and other equipment.

Senator TALMADGE. SO any grant to any foreign government at its
election could be deposited in their central bank and a demand for
gold made at that time.
Secretary ANDERSON. Not necessarily. It would have to be a transaction in which there were no restrictions.
For example, the grant or transaction might be conditioned upon
purchasing equipment or being utilized either by buying from us or
buying from other countries.
One of the things, for example, that I think we frequently overlook is
when you put money into an underdeveloped country it does not
necessarily remain in the underdeveloped country, because the underdeveloped country will utilize it as an international exchange to buy
whatever and wherever it needs what it wants, unless it is tied to buy
from the United States.
Senator KERR. The only way they can put it in their central bank
effectively would be for the country with whom they sought to trade
to rather have their currency than the dollars which the country we
are helping received from us as help.
Secretary ANDERSON. That is correct, if it is on a project basis.
The CHAIRMAN. Are there any further questions?
Senator TALMADGE. Thank you, Mr. Secretary.
Senator ANDERSON. Mr. Secretary, you talk about a temporary
increase and a permanent limit.



31

DEBT CEILING

INCREASE

Secretary ANDERSON. Yes.
Senator ANDERSON. Why do you ask for a permanent limit of
$288 billion when you are going to need more than that all of next year?
Why don't you make it permanent and be done with it? Didn't
you come here three times now in the last 16 months asking for an
increase in the debt?
Secretary ANDERSON. We asked for $ 2 8 8 billion permanent. The
House gave us a $285 billion permanent.
Senator ANDERSON. I know, but why don't you ask for $ 2 9 5 billion
permanent? You came in here in February 1958, from your own
statement, in September of 1958, and now here in June of 1959. You
are going to need—and your own table back here shows you are going
to need—over $ 2 9 0 billion permanent. Why don't you call it permanent and be done with it?
Senator K E R R . Will the Senator yield?
Senator ANDERSON. Yes.
Senator K E R R . I would suggest that the Secretary would if the
Senator was in a position to give it to him.
Senator ANDERSON. Why don't you try for it? We are not fooling
anybody, are we, by calling it temporary or permanent? We know
it is permanent, do we not?
Secretary ANDERSON. Senator
Senator ANDERSON. It is over $ 2 9 0 billion all the time except for
one short period of a few days.
Secretary ANDERSON. Well, if you come down to June 3 0 , 1 9 6 0 ,
which was the end of the next fiscal year, with a $3.5 billion operating
balance, we will have a debt of $284.4 billion.
Now, before you came in
Senator ANDERSON. If all these calculations work out all right.
But you know you are going to have a bigger deficit than you are
talking about
Secretary ANDERSON. That may be.
Senator ANDERSON. By several billions, so why not face it and ask
for it?
Secretary ANDERSON. If they do not work out, then we would have
to come again.
Senator ANDERSON. Keep coming back; and it is a nuisance to keep
testifying. Why not ask for what you are going to need? It is at
least $295 billion permanent. Why don't we ask for it and why don't
we try to get that? I will not say we will succeed.
What is the advantage in calling one temporary and the other permanent when it is all the same thing?
Secretary ANDERSON. Senator, primarily, I would assume that we
call it temporary because the debt will fluctuate between the $285
billion and the over $290 billion by the $7 billion seasonal factor, and
$3 billion flexibility request.
Now, frankly, if the Senator and others would want it to be made
all permanent, I would not object. We have tried to be as conservative as we can and still meet our obligations.
Senator ANDERSON. Do you think this constantly coming up for an
increase in the debt limit has any effect on Government financing?
For instance
Secretary ANDERSON. Senator, it would be very hard for me to
answer categorically.



32

DEBT

CEILING INCREASE

I would simply say that the fact we sit down once or twice a year
to review it brings it at least to our attention and to the attention of
the country, and to be able to measure that effect would be very
difficult.
Senator ANDERSON. I think it brings it to the attention of the
country, and that is what I am worried about a little bit.
I saw a table recently showing what yields you would have on a
series of Government bonds. I called to the attention of somebody
that the 2% bonds, due February 15, 1965, were 4.49 yesterday. They
were only 4.48, actually, when they got through yesterday, but even
4.48 for a 6-year bond is a rather attractive return.
Aren't some of these yields based on the fact that there is uncertainty as to whether the Government is going to be in the bond
market steadily, to what it is going to be doing when it gets there
because of this debt limit?
Secretary ANDERSON. 1 think that the yields on the bonds are
primarily a matter of demand and supply and are affected, of course,
by judgments which people make as to the course which the Government will pursue, as to judgments of the course of the economy, and
to a whole group of factors which contribute to them.
Senator ANDERSON. D O you know a long-term bond of the U.S.
Government that today has a yield of less than 4 percent?
Senator K E R R . On the basis of market value?
Senator ANDERSON. I am talking about yield.
Secretary ANDERSON. A S of yesterday, the 3 percent bonds of 95
were quoted at 3.84.
Senator ANDERSON. Of 95?
Secretary ANDERSON. Yes, sir. That is the only one.
Senator ANDERSON. Yes, I see that. But the 3%s of 90 were 4.15,
about 4.15; and the 2Ks, 1961, were 4.45; 2%s of 1963 were 4.40-something, and so forth.
Secretary ANDERSON. Yes, sir.
Senator ANDERSON. D O you think that the uncertainty as to what
the Government is going to come in and ask for on these debt increases
and get it is in any way causing trouble in the monev market?
Secretary ANDERSON. I do not think that the debt ceiling in itself
causes it, because I think that the country realizes that as a nation
we arc going to pay our bills and that, as a nation, we have to have a
debt cening at all times that will accommodate a sufficient amount of
borrowing for the country to pay its bills.
Senator ANDERSON. Did you know what the Government of Canada
got last week and the week before on $200 million of government
bonds?
Do you know what its yield was?
Secretary ANDERSON. Yes, sir.
Senator ANDERSON. 5 . 5 0 for the 9-month bonds, and 5 . 6 8 for the
17-month bonds.
Secretary ANDERSON. Yes, sir.
Senator ANDERSON. Did you notice that the rate of the Bank of
Canada went to 5.47 last week? A year ago it was 1.12.
Secretary ANDERSON. Yes, sir.
Senator ANDERSON. Don't those indicate we are going to have some
pretty staggering interest costs?
Secretary ANDERSON. They do if it works out that way.



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DEBT CEILING

INCREASE

Senator ANDERSON. Isn't there anything we can do about it, other
than just keep raising the interest?
Secretary ANDERSON. Senator Anderson, this is, I think, the crux
of the problem.
If we examine into the costs, the factors which affect them, I think
that in a Nation as diverse and as complex as ours, one would be in
error if he tried to isolate any one thing as the moving factor.
We are going through a period of very rapidly expanding prosperity.
Almost every month sees us set new highs.
We are increasing expenditures for long-range projects very rapidly.
We have just going through a process of financing a deficit during a
period of rising activity, for the most part.
If, of course, we were able to reduce our expenditures below our
revenues, and if instead of being a net borrower of money we were a
net contributor of money, we would in the soundest way possible
reduce the interest cost.
I think if we will look at the period of 1921 to 1929, as an example,
you will see a period in which we had a rather constant growth, but
during that period we paid off approximately one-third of the national
debt.
During that period, even though we had a period of growth, we had
a declining interest to pay.
Now, I think that we have to take into consideration the fact that
we have a rapidly expanding economy, and that we have been in the
past a net demander of funds from the standpoint of the Government,
and even now with continued prosperity we are, perhaps, talking about
at best maintaining something of a balance between our expenditures
and our revenues. So that we would not be a contributor of funds.
This being so, a great deal of importance, I think, is paid to the way
in which we manage the debt which is now extant.
Senator ANDERSON. I was glad you said we were talking about
balance, because nobody really believes we are going to get balance in
the next 2 or 3 years; I do not.
Secretary ANDERSON. Sir, I am hopeful that we will.
Senator ANDERSON. I am hopeful, of course. We are all hopeful,
but nobody anticipates that any balancing of the budget will occur in
the next 2 or 3 years.
I think interest is going to be one of the big factors that keeps
throwing it out. You have got what, $4 billion in July to meet?
Secretary ANDERSON. The next lefinancing is in August. We have
about $13 billion to refinance in August.
Senator ANDERSON. YOU have $13 billion in the last 6 months of the
year, do you not, net?
Secretary ANDERSON. $ 7 6 billion for the whole year, and I think
August it was—August 1 we will have $ 4 7 3 million in bonds to pay
off. This was the 2 by 4 notes issued in 1957, and holders of securities
$ 4 7 3 million of the holders elected to take cash.
Senator ANDERSON. Mr. Secretary, I am not just talking about
maturity. You are going to borrow about $4 billion in July to take
care of the needs.
Secretary ANDERSON. Excuse me
Senator ANDERSON. There is a deficit that is suddenly coming due,
so you have to get about $4 billion out of the market in July.




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D E B T CEILING

INCREASE

Secretary ANDERSON. Senator, I would not want to be unresponsive to your question, but may I say we are in the midst of making
a decision or a determination on the financing, and probably it will
be announced in the next day or two, and I would not like to comment
on it until the announcement is made.
Senator ANDERSON. Well, that is coming up right away. I will
not go on if you have a problem coming up, because I recognize what
those things are.
I just think after you get through with the July financing you have
a whole raft coming up again on August 1, these 1% certificates.
Secretary ANDERSON. That is correct.
Senator ANDERSON. And I do not want to commit you, but I do
not believe you think they are going to be refinanced on the IX
or 2% bond, 1965,
basis. So long as a man can go ana buy a
that is a 4-year bond, that pays him nearly 4J£ percent interest, he is
not going to pay IX.
I am wondering whether you are taking that into consideration in
the next budget.
Secretary ANDERSON. Well, let me say that one does not want to
get into a position of trying to forecast all future interest problems,
but one has to take into consideration rates as they exist at the time
you make judgments, and also the fact that on a great portion of the
debt, the rate is fixed during the next coming year. The only thing
that is not fixed is the amount of refunding and cash borrowing which
will occur early during that year.
Senator ANDERSON. But a great proportion of the debt is not fixed,
and is is a floating debt that is very rapidly accelerating in costs.
Secretary ANDERSON. Well, there are $76 billion, roughly, that
will accrue within a year.
Now, on this amount of money we will have to adjust ourselves to
whatever the market demands.
Senator ANDERSON. That is all, Mr. Chairman.
The CHAIRMAN. Are there any further questions?
Senator COTTON. I have just one question.
Mr. Secretary, this is an oversimplification, but if some morning
you should awaken and find there is not enough balance in the Treasury to meet the obligations of that day or that week, wThat, if anything, could the Treasury do about it, assuming your borrowing
authority had all been used up?
Secretary ANDERSON. Senator, 1 would have tried to have anticipated that long before it occurred, and before it occurred do something
about it, even if it required coming to the Congress or doing whatever
else I had to do.
Senator KERR. Will the Senator yield?
Senator COTTON. Yes.
Senator KERR. YOU would have had to have been asleep a lot
longer than you would think you were to have that happen.
Secretary ANDERSON. Yes, sir; I would.
Senator COTTON. Let me ask the second question I wish to ask.
I have properly been put in my place. However, I was talking
about a hypothetical situation on which I wanted to be clear.
If you could stretch your imagination to the contingency I mentioned, or if it was imminent next week or a month from today, outside of coming up to the Congress—are there any funds, any trust



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D E B T CEILING

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funds, anything that is being held by the Government in trust—and—
I do not want to use the word "juggle"—that by transferring and by
moving about would enable the Treasury to get by a situation of that
kind when tax money is expected in the near future; that is, so that
you do not actually say to some creditor, "we haven't any money and
can't pay this obligation."
Secretary A N D E R S O N . There would be some things.
For example, we have $100 million of gold that we could sell.
We could go to such Government agencies as Fannie Mae, Federal
National Mortgage Association, and issue securities in the market and
let them retire obligations held by the Treasury which would, for a
short run, accomplish the purpose.
We are not entirely precluded from everything, but it would certainly not be a desirable thing.
Senator COTTON. I can understand that, but I was just trying to
get that thoroughly in mind.
Well, now, obviously, if the day ever came that because of the lack
of elasticity of your operations, because you did not have this leeway,
that it actually had to go out that the payment of obligations had
been delayed because of lack of funds, it would start a run on the
bank, both domestic and foreign, that we have geen discussing this
morning; right?
Secretary A N D E R S O N . Senator, I do not want to be the man who
says we have insufficient funds. That can be a calamity.
Senator COTTON. Yes, I understand.
The constant effort which you, as a banker, and I am referring to
the Treasury as a bank, naturally make, is to retain public confidence
at home and abroad in the fiscal integrity of this country. By the
same token those very efforts also tend to lull to sleep many segments
of the American people on the possibility of what may happen if we
have unbridled spending; isn't that, of necessity, true?
Secretary A N D E R S O N . Well, I am not quite sure that I follow the
Senator's thinking.
I am assuming that what you are saying is that by maintaining such
a balance, that every time anyone knows that when he presents a
bill to the U.S. Treasury it is going to be paid, he therefore does not
become as concerned as he might become if he thought some of the
bills would not be paid.
I can only respond to that by saying that I would view with such
concern the long-lasting effects upon the credit of this country of being
unable to pay a bill at any time that I would never want that to
occur, even though it dramatically impressed a lot of people.
I would not
Senator COTTON. I can quite understand that. But may I put it
this way: People constantly come into my office and talk to me when
I am in my home State and say, "Don't be ridiculous about this.
There is plenty of money. There is no reason why you cannot give
us this or that, because we have been hearing you people cry * Wolf,
wolf,' for the past 20 years as to what happens when you keep increasing the public debt.'' Part of that confidence is the fact they have
never had one real scare, and the real scare, of course, as I understand
what you said, and we all understand, will be fatal.
May I ask you this, and this is what I was coming to
Secretary A N D E R S O N . Yes.



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# Senator COTTON. The fact that you come to the Congress from
time to time and that we go through this agonizing reappraisal of
extending the temporary or the permanent debt ceiling, does have
some slight salutary effect, would you not think, as a warning sign
even to the man on the street that*it would not have if we give you
everything you asked and said, "Here, this will take care of you for
the next 5 years and you won't have to keep coming back and endangering the credit of the country."
Is that a fair statement?
Secretary ANDERSON. Senator, there are very honest differences of
opinion between very competent people as to "the value of the debt
limit. Certainly I would say that if it is too stringent and too tight,
it is costly and undesirable.
I have felt that so long as there was sufficient elasticity, that so
long as we were given sufficient flexibility, that a review of it from
time to time would have some salutary eifect, bringing to the public
consciousness the necessity of maintaining disciplines within a free
economy.
It is for that reason that I have not asked for the debt limit to be
permanently removed, but have come rather to ask that the debt limit
be sufficiently high that we thought we had a minimum reasonable
elasticity for the operation of this country.
Senator COTTON. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Hartke?
Senator HABTKE. A S I understand you, you say then the real value
of the debt limit, the value it has on the American people, is on the
psychological aspect alone.
Secretary ANDERSON. I would think that is fair, including in the
American people myself and others who have responsibility^
Senator HARTKE. In your opinion, Mr. Secretary, is debt limitation
a major factor in debt control and management?
Secretary ANDERSON. Well, I think again, only to the extent that
j l ¥ B a ? a w a r e n e s s t o u s o f the extent to which the debt has grown
and thereby causes us to restrain ourselves more than we would
otherwise.
Senator HARTKE. Is not the actual control of the debt of the United
States outside the scope and authority of the Secretary of the Treasurv
to a great extent?
*
Secretary ANDERSON. Completely outside.
Senator HARTKE. You have to try to live with what everybody else
has done; isn't that it?
Secretary ANDERSON. That is correct.
The one thing that is within our scope is to seek from time to time
enough elasticity that we think we can operate competently within it.
Senator HARTKE. For you really to project an accurate forecast of
what is going to happen in the future, you not only have to be an
economic seer but you have to probably have all the wisdom of Solomon and then some; isn't that right?
Secretary ANDERSON. Senator, I agonize over this every time a
budget is made, because you have to make certain forward guesses,
which are very difficult.
. Senator HARTKE. But to really predict with just pinpoint accuracv.
it is impossible?
Secretary ANDERSON. That could not be done.




37

DEBT

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Senator HARTKE. That is right. You cannot pay off a debt without
a[ surplus, can you?
k
Secretary ANDERSON. NO, sir.
Senator HAUTKE. And we did not materially change the tax structure in 1959 at all, did we?
Secretary ANDERSON. YOU mean calendar or fiscal?
Senator HARTKE. Fiscal 1 9 5 9 . ,
Secretary ANDERSON. There were some reductions, transportation
tax on freight.
Senator HARTKE. HOW much in dollars, roughly?
Secretary ANDERSON. $300 to $350 million, I think. If it is not
accurate, I will correct it.
Senator HARTKE. I mean it is not $1 billion?
Secretary ANDERSON. N O .
Senator HARTKE. And we have a deficit of $13 billion?
Secretary ANDERSON. $12 billion-something; yes, sir.
Senator HARTKE. $ 1 2 or $ 1 3 billion. All right.
So at least it is—even giving $1 billion for a reduction, which is not
accurate, and give a half billion for me to make a mistake—it is more
than $11 billion, at least?
Secretary ANDERSON. Yes.
Senator HARTKE. Due to economic factors principally?
Secretary ANDERSON. About; a good portion of it is falloff on corporate tax and other forms of tax which resulted, of course, from the
recession.
Part of it was some enlargement of expenditures. For example, we
were blessed with an abundant number of crops over the country,
and therefore your payments went out larger; and some housing costs.
Senator HARTKE. All right.
But the point of it is, did the debt limitation have any effect upon
these economic factors and this abundance that you are talking about?
Secretary ANDERSON. No, sir. It simply required us to come back
in February to get it raised.
Senator HARTKE. What I am trying to get over to my own mind
as I analyze what you said—and since this is the first time I have
had an opportunity to vote upon this debt limitation—I gather that
you are worried about an unrealistic debt ceiling, which does not give
the Treasury enough flexibility; isn't that right?
Secretary ANDERSON. That is correct, sir.
Senator HARTKE. A S I got. your statement, it was if it is too stringent it is costly and undesirable.
Secretary ANDERSON. That is correct.
Senator HARTKE. And if you are going to vote for the best interests
of the taxpayer, you have to give the Treasury and the Secretary of
the Treasury sufficient elasticity; isn't that true?
Secretary ANDERSON. I believe that it is in the national interest to
have at least what we have asked for.
Senator HARTKE. But, as I gathered, what you said, in substance,
was that the inflexibility impairs efficiency, No. 1, of the Treasury
operations; it increases the cost of refunding; it increases the requirement of new financing at inopportune times, irrespective of economic
and market conditions of the time, and forces you into an uneconomic
and expensive market, possibly.
Secretary ANDERSON. I think you are accurate, sir.



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DEBT CEILING INCREASE

Senator HARTKE. It prohibits advance refinancing which, according
to you, would add materially to the success of the particular refinancing operation.
It prohibits market offerings at savings to the taxpayer and does
little to affect the spending in times of national emergency, and has
no effect upon the economic conditions of the day.
Frankly, after I look at all that, why do we talk to the American
people so much about the value of having their national debt limit?
It looks to me like these things far outweigh—that we ought to put
our attention maybe in some other spot, upon increasing our economic future.
Secretary ANDERSON. There is a great body of opinion which would
support the Senator's conclusions that complete abolition of the debt
limit would be desirable.
I say that I have not so advocated it because I thought it desirable
from time to time, if for no other reason than the psychological effect,
that we sit down and review it.
Senator HARTKE. I do not want to say I am advocating the elimination of the debt limit either, but I do think I have enough confidence
in the able Secretary that I certainly feel if I am going to trust you
with all the money of the United States of America, I am going to
trust your opinion as to how much of a debt limit we need.
Secretary ANDERSON. Thank you.
The CHAIRMAN. D O you regard any one of those points made by
Senator Hartke to be applicable to the debt ceiling as you have
observed the situation?
Secretary ANDERSON. Well, I would say that there have been times
when we would have gone to the market, perhaps, for some advance
refunding in which we would have paid off issues that were maturing.
I think we would at times have not wanted some of the agencies
to go into the market where their yield, their price, was a little higher
than prices which we would have paid directly borrowing from the
Treasury.
I think that there have been times when we would have felt that
we would like to have gone into the market for more money at one
time and not so frequently, because the frequency with which we hit
the market is disturbing.
I think these have occurred, and to that extent I think that they
have not contributed to the best interests of our debt management.
The CHAIRMAN. Your predecessor, Secretary Humphrey, came to
the Senate and asked for an increase in the debt limit of $15 billion.
He said if he did not get it he could not pay his bills, and the Senate
Finance Committee by one vote refused to increase it, and he later
testified that he thought that was a wise action, and that he was
heartily in favor of a tight debt limitation because he believed that it
was a restraint on spending, and an indication on the part of Congress
that they did not want the debt increased.
Secretary ANDERSON. Senator, I have testified here that I , too, have
believed that we should come from time to time and review the debt
ceiling; that it does have a salutary effect, and that my one request
is that it have enough elasticity that we have reasonable flexibility
to meet contingencies.




39 DEBT CEILING

INCREASE

The CHAIRMAN. IS there any specific instance that you can give to
the committee where the debt limit that then existed was harmful in
the financing of the Government?
Senator ANDERSON. Could we modify that question, Mr. Chairman,
to ask when there have been times when the money market was very
favorable to take advantage of it?
The CHAIRMAN. I did not suppose the Treasury would want to
borrow money it did not need, and pay interest on it.
Secretary ANDERSON. I would say that in May of 1959 we would
have thought it advantageous to sen issues slightly in advance of the
maturity of the old issues; as a part of this financing the Treasury sold
$2 billion of 11-month Treasury bills with an issue date of May l l r
to provide part of the funds necessary to pay off $2.7 billion in Treasury bills maturing on May 15.
For the intervening 4 days there was an increase in the debt of $2
billion, and this was possible only because the Treasury had some
flexibility under the $288 billion limit.
Had the limit been smaller, we would not have had that flexibility,
and I think it is desirable that we did have it.
The CHAIRMAN. The Secretary is aware of the fact that until
World War I, before money could be borrowed, a special act of Congress had to be passed.
Secretary ANDERSON. That is correct, sir.
The CHAIRMAN. And that we first resorted to a statutory debt
limit during World War I.
Secretary ANDERSON. That is correct, sir.
The CHAIRMAN. And since the beginning of this Republic, either
^ ^
i -. i- .i
• 5ej
debts or it has placed a
Secretary ANDERSON. That is correct, sir.
The CHAIRMAN. And that same thing applies to practically every
State. It applies to most of the cities wherein you can only borrow a
certain percent of the assessed value of the property. So there is
nothing new about the debt limit. It is fundamental in our form of
Government at all levels.
Secretary ANDERSON. I do not quarrel with the Senator's conclusion, only that I would want to be sure we had sufficient flexibility
with which to operate.
The CHAIRMAN. A S I understand it the bill before us has passed the
House and it has the approval of the Secretary?
Secretary ANDERSON. That is correct, sir.
The CHAIRMAN. I realize that the conditions are critical and I have
heretofore, as the Secretary well knows, advocated very conscientiously
a close debt limit. It has more advantages than disadvantages.
I am going to support this bill because of the assurance of the
Secretary that he is not going to ask for renewal of the temporary $10
billion, unless he thinks it is imperative to do so.
SECRETARY ANDERSON., I will ask for only what is necessary.
But I would want to be quite honest, to say that if there would occur
a chain of events, which I do not foresee, but if there should occur a
chain of events which would require a request of the whole or more,
I would make whatever I thought was in the best interests of the
country.




40

DEBT CEILING INCREASE

The CHAIRMAN. The chairman understands that it depends on
the conditions; that you will not ask an unnecessarily high debt ceiling,
more than is necessary to operate.
Secretary ANDERSON. I snail try to be modest and prudent.
The CHAIRMAN. Under the one you are asking for now, you have
at all times a leeway of approximately $6.5 billion. In some places
you have a leeway of as much as $11 billion, and in one instance, on
June 30 next, you have a $14 billion leeway. So certainly this present
debt limit could not be regarded as one that is going to restrict the
operations of the financing of the Government.
Secretary ANDERSON. Of course, this expires next June 3 0 . The
Senator used the June 30 terms. It would expire on that date.
The CHAIRMAN. I understand that. I say from your own figures
on June 30 there would be $14 billion in leeway in the national debt.
Senator Curtis?
Sentor CURTIS. A S long as expenditures exceed revenues, the real
debt of the country will go up, whether we pass this bill or not; isn't
that true?
Secretary ANDERSON. I know no way of paying off debt unless
expenditures fall below revenue.
Senator CURTIS. In other words, while we refer to this as a debt
ceiling, it is a ceiling on the authority to borrow money to pay debts,
is it not?
Secretary ANDERSON. That is correct, sir.
Senator CURTIS. And excepting only what effect it might have on
the Congress to vote more money, the raising of this ceiling in itself
does not increase the debt, does it?
Secretary ANDERSON. The debt is fixed by the facts of life.
Senator CURTIS. That is right.
Secretary ANDERSON. The Congress sets the limits within wliich
the Treasury can borrow. The Treasurv must try to so anticipate
the facts of life that we can manage our debt, pay our bills, take care
of our contingencies, in a reasonable manner within the limits which
are expressed.
Senator CURTIS. In other words, if the Government of the United
States pwes for goods and services, payroll and so on, that is a debt
or an obligation whether we borrow money to pay it or let it go
unpaid; is it not?
Secretary ANDERSON. Yes, we must pay it.
Senator CURTIS. Yes, we must pay it. I am just getting at the
point that this is a ceiling on authority to borrow to meet a debt
rather than a ceiling on debt.
Secretary ANDERSON. That is correct.
Senator CURTIS. The Congress could refuse to pass this and go
on authorizing expenditures and reducing taxes, or not increasing
taxes, and while it is a chaotic condition we do not oven want to
think about, the fact of it is it would increase the debt in spite of any
ceiling, would it not?
Secretary ANDERSON. I suppose it could increase the debt. OF
course, when it got to that point
Senator CURTIS. The difference would be that you wiuld have a
debt you could not pay, while if the borrowing ceiling is increased,
you have a debt with reference to which you could borrow the money
to pay.




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DEBT

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Secretary ANDERSON. What you would simply wind up with under
the concept—under the hypothesis the Senator has suggested, would
simply be, you would have obligations unpaid.
Senator CURTIS. That is right.
The CHAIRMAN. Are there any further questions?
Senator ANDERSON. D O you think you would need next June, a
year from now, more than $10 billion temporary authority, or less?
Secretary ANDERSON. Senator Anderson, I would not say because
you have got so many things
Senator AINDEKSON. Would you like to guess? I am going to put
my guess on the record, if you would like to put yours on the record.
Secretary ANDERSON. I would prefer that the Senator put his guess
unilaterally. [Laughter.]
The CHAIRMAN. Are there any further questions?
(No response.)
The CHAIRMAN. If not, the committee will go into executive
session.
Secretary ANDERSON. Thank you very much.
The CHAIRMAN. Thank you, Mr. Secretary.
(By direction of the chairman, the following is made a part of
the record:)
NATIONAL ASSOCIATION OF M U T U A L SAVINGS

BANKS,

New York, AM"., June 12, 1959.
Hon.

HARRY F .

BTRD,

Chairman, Senate Finance Committee, Washington, D.C.
D E A R SENATOR BYRD: The Federal debt is so large a part of our entire capital
and credit structure that its management influences the course of activity throughout the Nation's financial and industrial markets. Current Federal statutes
impose unrealistic restraints on debt management operations, and hinder efforts
to maintain fiscal discipline.
Accordingly, legislative action is necessary to enable the Treasury Department
to manage the debt more effectively through greater flexibility. The President's
proposals with respect to ceilings on interest rates and on debt limits represent
such constructive legislation and, thus, have the support of the savings banking
industry.
It is a basic tenet of our free enterprise economy that buyers and sellers, borrowers and lenders, compete in open market for the goods, services, and financial
claims, which they offer and seek. In this setting, the Federal Government, in
financing its operations, must be free to compete with other types of borrowers for
available funds. The only ultimate alternative to permitting the Treasury to
compete freely on the basis of interest rates and other terms is to turn to Federal
regimentation requiring investors directly to purchase U.S. Government securities.
Recognizing the basic importance of an effective Federal savings bond program,
savings bankers have always supported this program even though it competes
directly with thrift institutions for the funds of small savers. A higher interest
rate on these bonds is important to restore their competitive position in financial
markets and their basic role in Federal debt management.
The recommendations in this letter are based on proposals made in December
1958 by Carl G. Freese, chairman of the national association's committee on
Government securities and the public debt. These proposals were approved at
that time by our board of directors.
I would have no objection to your including this letter in the record of hearings
which the committee might hold.
Very truly yours,
J O H N deLAiTTRE, President.
P.S.—I am enclosing a copy of Mr. Frecsc's statement with this letter.




42

DEBT

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F E D E R A L D E B T M A N A G E M E N T AND THE SAVINGS BANKING

INDUSTRY

Address of Carl G. Freese, chairman of the Committee on Government Securities
and the Public Debt of the National Association of Mutual Savings Banks,
and president and treasurer, Connecticut Savings Bank of New Haven, before
the 12th annual midyear meeting of the National Association of Mutual
Savings Banks, Hotel Commodore, New York City, December 2, 1958
The Federal debt is so large a part of the Nation's entire capital and credit
structure that its management has an important influence not only on the state
of Federal finances, but also on the course of the national economy. Our Government now owes close to $280 billion, about one-third of the total indebtedness
outstanding in this country. Reflecting recent and expected deficits, moreover,
the Treasury requested an increase in its temporary debt ceiling from $280 to
$288 billion which the Congress recently granted.
All things considered, there is little likelihood in the years ahead of reducing
the huge Federal debt; indeed the prospects are for further increases. In addition
to problems associated with raising large sums of additional new financing, the
Treasury's debt management team must contend with trying problems of refinancing maturing and called issues. In meeting tlnwe problems the Treasury has a
profound and continuing influence on general financial developments. Indirectly,
its debt management policies influence the level and rate of savings; directly they
influence conditions in capital markets, including interest rate movements and
terms of lending. As savings bankers, therefore, we clearly have a special and
continuing interest in Treasury activities. Sound management of savings banks'
investment portfolios requires our close interest in, and understanding of, Treasury
financing problems and practices.
Recent refundings and new cash offerings have, in the main, not been particularly suited to savings banks. Large Treasury operation* scheduled for the
early months of 1959, however, may hold greater investment opportunities for
our industry.
DEBT MANAGEMENT AND INFLATION

It is important to recognize that present burdensome Treasury problems are
the result of heavy wartime expenditures together with spending programs
recently undertaken. In fiscal 1958 the Federal Government spent close to $72
billion, nearly $5 billion more than it took in. In the current fiscal year ending
June 30, 1959, it expects to spend $78 billion, $12 billion more than anticipated
receipts. Clearly, the most direct and effective way of easing debt management
problems without inflation is to reduce expenditures and/or increase revenues.
The deficit in fiscal 1959 may well be lower than the $12 billion anticipated
because of possible higher revenues resulting from the general improvement in
business activity. It is not likely, however, that Federal expenditures will soon
be reduced. Yet the volume of Federal spending must be controlled if we are
to avert a steady erosion of the purchasing power of the dollar.
Apart from broader economic considerations, the Treasury has a direct interest
in combating the forces of inflation. Fundamentally, a sound market for U.S.
Government securities depends on allaying the widespread fears of inflation.
So long as consumers and investors are motivated in their actions by a belief
in the inevitably of inflation, so long will it be difficult to market new Treasury
securities successfully.
COORDINATION OP TREASURY AND OTHER FEDERAL PROGRAMS AND POLICIES

Clearly, debt management policy is but one of the anti-inflationary weapons
available to the Federal Government. Its coordination with Federal Reserve
monetary and credit actions is essential and, by now, a well accepted principle.
During periods when economic expansion threatens to become excessive, for
example, and the monetary authorities are rightfully pursuing a policy of credit
restraint, it is important that the Treasury offer securities which do not require
Federal Reserve support on more than a temporary basis.
It is not as well accepted, at least in practice, that there are other Federal
programs in major credit areas which must, also, be coordinated with Federal
Reserve and Treasury operations, if debt management is to be most effective
and the battle against inflation won. In particular, Federal programs to insure
and guarantee mortgage credit operate in direct competition for investment
funds with the Treasury Department. Higher yielding mortgages, backed by
the contingent liability of the Federal Government, provide nearly as much
safety as do U.S. Government securities. Indeed, their amortizing nature pro


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DEBT

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INCREASE

vides for a type of liquidity not inherent in Government bonds. When the
Federal Government pursues a policy of stimulating demands for mortgage
credit, out of social rather than economic considerations in the housing field, at
a time when inflationary forces are rampant, it is assuredly acting at crosspurposes.
It is necessary, therefore, that the huge and expanding Federal mortgage credit
programs—some $48 billion or 44 percent of all home mortgage debt is now underwritten by the Federal Government—be subordinate to, and modified from time
to time in accordance with the chaning need to control inflationary forces. For,
after all, if the ability of the Federal Government to stabilize the value of the
currency is seriously impaired, the public's confidence in Federal obligations is
undermined and Federal credit guarantees become of limited value. The coordination of Federal housing credit policies with fiscal and monetary policies must
include not only the Federal Housing and Veterans' Administration—the Federal
underwriting agencies—but also the Federal National Mortgage Association,
Federal Home Loan Bank System, and Public Housing Administration. Coordination must extend, also, to the Nation's agricultural credit programs.
COMPETITION FOR CAPITAL MARKET FUNDS.

It is a basic tenet of our free enterprise economy that buyers and sellers, borrowers and lenders, compete in open markets for the goods, services, and financial
claims, which they offer and seek. In this setting, the Federal Government, in
financing its operations, must compete with other types of borrowers—both
private and public—for the funds available in financial markets. This is as
fundamental a principle of sound debt management as the need to combat in
flation and to coordinate all Federal fiscal, monetary and credit policies.
There are no isolated or preferred markets in which the Treasury can operate.
Thus, in order to attract funds away from other borrowers, and successfully to
finance its debt largely outside the commercial banking system, the Treasury
must compete on the basis of interest rates and other terms. There can be no
other effective financing method short of Federal regimentation or statutes requiring investors directly to purchase U.S. Government securities, or banks to
hold them as part of their legal reserve.
Techniques of moral suasion, and appeals to institutional investors to overlook
normal market considerations in order to support Treasury financing are not
realistic, short of war or grave national emergency. Fiduciaries are themselves
in sharp competition for the savings of individuals and have a prime obligation
and public trust to depositors, shareholders, and stockholders to earn the highest
return possible on invested capital commensurate with safety and liquidity
requirements. Longrun considerations of inflation are, of course, essential but
the best weapons in this battle are sensible and courageous fiscal and monetary
policies of the Federal Government, effectively coordinated with housing and
agricultural policies to preserve the purchasing power of the dollar.
To be sure, a debt management policy based on offering securities at competitive
rates of interest is not without its problems. The Treasury is, for the most part,
in competition with borrowers who are able to deduct interest payments from their
tax bill. A corporate borrower, for example, who pays 5 percent interest on debt
securities has a net cost, after Federal income tax, of 2.4 percent. The same
principle applies to the mortgage borrower. To compete effectively with these
borrowers it may be necessary at some future time for the Treasury to request an
increase in the statutory rate of interest which it can pay on Government bonds.
Competing with other capital market borrowers on the basis of interest rate
means, also, that the cost of interest payments in the Federal budget will be
increased. It means, further, that prices on outstanding issues of Government
securities may decline and fluctuate over a wider range than they have in other
earlier years. This phenomenon has characterized the market for Government
securities over the past year or so.
Higher interest costs on the Federal debt, while not in themselves desirable,
are a necessary price for managing the huge Federal debt so as to contribute to
the prevention of inflation and of an unsustainable rate of economic growth.
Market instability may likewise be considered a price that must be paid to prevent
economic excesses. Bankers and other investors, of course, rest more comfortably
when markets are stable and risks are reduced, but this peace of mind is a luxury
that must at times be sacrificed in the Nation's battle against its principal internal
enemy, inflation.
It must not be overlooked, on the other hand, that a higher level of interest
rates, which might result from vigorous Treasury competition, may well stimulate



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D E B T CEILING

INCREASE

an increased flow of savings, an essential element of an anti-inflationary program.
Moreover, deferral of plans for increased investment, as interest rates rise will
relieve the pressure on the limited supply of capital funds. In an expanding
economy the Treasury can successfully draw funds away from marginal borrowers
in both the corporate and mortgage sectors only if it is willing to compete on the
basis of rates and terms.
TIlKASriiY MAUKET TECHNIQUES

While a willingness and determination to compete for capital funds in the open
market, must be the chief factor in a successful debt- management program, other
factors relating principally to techniques for offering new and refunding outstanding U.S. (lovernment securities should also be given careful consideration.
Among these, techniques the following might be considered.
The technique of forward commitments, widely used in the marketing of mortgages and in the direct placement of corporate securities, may be adaptable to the
marketing of I'.S. (lovernment securities. Basic modifications would of course
be necessary. The extended period of time covered by commitments in the
mortgage markel, for example, would be inappropriate in the Government securities market.. In the corporate securities market, however, the length, of time
covered by commitments has been generally shorter.
Actually, a commitment technique, was used by the Treasury in 1055 in connection with its offering of 3 percent bonds due in 1995. Not many institutional
or other types of investors subscribed for this issue on a commitment basis,
however. This suggests that the technique may not have been well suited to
investors or that the Treasury did not appropriately publicize it. In any event,
the commitment device will have to be studied more carefully and refined before
it can again be employed.
One refinement which might be considered i> I lie payment of a modest commitment fee by the Treasury. Such a fee to investors would he an added inducement
to enter into contracts and would tend to offset in part, the disadvantages of a
possible market, reduction in the price of forward contracts soon after the closiug
of books. If the problems associated with the commitment technique can be
overcome, there will be distinct advantages both to the Treasury and to investors
of permitting payment for (lovernment securities over a limited period of time a<
funds become available from savings, insurance premiums, etc.
There are other marketing techniques associated with redemption and conversion privileges which might be considered. A limited disadvantage of these
techniques is that v\ most cases the initiative for debt management is transferred
from the Treasury t > investors. This course is to be avoided when possible, but
may be a necessary price, on occasion, in order to attract new groups of investors.
Privileges of redemption were granted in connection with the two 4-percent note
issues offered in 1957. These notes, it will be recalled, had definite maturities,
but holders wen? given the right to redeem them at par at about the midpoint of
their contract maturity.
This redemption device need not be limited to note issues. Further, there
might be one or more optional redemption dates. For example, the Treasury
might offer a 30-year bond, giving the holder the right of redemption on a fixed
date, after appropriate notice, perhaps at the end of 2 years and again after 5
years. The disadvantage of this type of security is, of course, that it is redeemable
in cash, a fact which might be inconvenient to the Treasury or blunt monetary
policy at redemption dates.
In this respect, the offering of securities with conversion rather than cash
redemption privileges might lie preferable. The offering of a long-term bond
which for the first several years of its life would be convertible into any new
issue of Treasury securities having a maturity, of say, more than 5 years, might
be attractive to investors. Another possibility would be to offer a long-term
security bearing a rate of interest, in the early years different from that in the
later years—higher or lower depending on market conditions—with the option of
redemption at the end of the earlier period or retention for the longer period.
An approach of a different so-*, directed toward increasing the participation of
individuals 111 the market for Government- securities, might operate through tax
benefits. Ta:t exemption per se is not considered to be good public policy, and rightfully so. This is not to say. however, that there are 110 tax advantages associated
with U.S. Government securities. Certain issues which are available at discounts,
for example, may be used in payment of certain tax obligations at face value. All
issues selling at discounts, moreover, offer some tax advantage in that the discount
may be regarded as a potential capital gain.




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INCREASE

In the case of individuals, a tax deduction of $1,000 is permitted, with carryover
privileges of amounts in excess of $1,000 for losses sustained in U.S. Government and other types of securities. In this connection, the Treasury might wish
to consider the advantages of broadening this privilege by permitting individuals
to deduct from taxes an additional $1,000 or more, with similar carryover privileges
for losses sustained in the sale of U.S. Government securities issued after January 1,
1959. To encourage the continuing interest of individuals in the market for
Treasury securities, however, it should be provided that additional tax losses be
deductible only from current or future interest earned on Treasury securities.
Consideration might also be given to similar limited tax benefits to nonbank
corporate holders of U.S. Government securities.
DEBT LENGTHENING AND ORDERLY MARKETING

I would like to offer a brief comment about the General Treasury objectives
of debt lengthening and orderly marketing. Lengthening the average maturity
of the outstanding debt is important to the extent that it makes for a more orderly
marketing of obligations and contributes to the fight against inflation. There
seems to be a tendency at times, however, to overemphasize average maturity
statistics without solving the basic problems of Treasury financing. For example,
the average outstanding maturity of the debt may be lengthened without materially reducing the problem of refinancing immediately maturing issues.
The Treasury is undoubtedly aware that an orderly scheduling of maturities
can be accomplished without necessarily going into the longest maturities. In
this respect, issues in the 10- to 15-vear maturity range would contribute importantly to bringing about a better spacing of outstanding obligations. As market
conditions permit, it would be desirable to have frequent but relatively small
amounts of long-term offerings both for cash and refunding.
ASPECTS OF ADVANCE REFUNDING

The Canada conversion loan of 1958 has created considerable interest with
regard to the feasibility of a similar advance refunding operation in this country.
Apart from considerations of the relative success of the Canada conversion loan,
there is a serious question about the applicability of this type of large-scale,
dramatic refunding operation to the United States. At this time such an action
is hardly to be recommenaed.
While the near-term problem confronting the Treasury concerns the issues
maturing in the period 1950-61, it does not appear feasible to undertake an advance refunding of these issues, considering their large volume, relatively attractive yields, and current conditions in the capital markets. With respect to the
feasibility of an advance refunding of issues scheduled to mature in later years,
particularly the more than $28 billion of 2^-percent wartime issues with final
maturities in 1967-72, there would seem t o be little practical advantage to the
Treasury in such an action. These issues do not now present a problem to the
Treasury, nor would their refunding ease the refinancing problems of the 1959-61
maturities. There are enough "in-between" dates available in the 1967-72 range
to accomplish such refinancing in this maturity area, if desirea, when the time is
appropriate.
Finally, it is open to question whether conversion of the 2H-percent wartime
issues into long-term bonds bearing higher interest rates would reduce sales from
investment portfolios. At current low prices, holders of the 2^s are reluctant
to take the substantial losses attendant upon sale. Conversion to securities with
higher yields, instead of making for more "permanent holders," might result in
increased net selling as losses were reduced or perhaps converted to gains.
For all of these reasons, advance refunding of outstanding securities does not
seem appropriate at this time. Because an advance refunding on a relatively
small scale offers important advantages with respect to debt lengthening and
orderly scheduling of maturities, I do feel, however, that the question should be
kept under continuing study in the event that subsequent market changes make
it feasible to undertake such an operation.
MODIFICATION OF U.S. SAVINGS BOND PROGRAM

Since the end of the war the public appeal of savings bonds has been considerably reduced, even though the rate of return on these bonds when held to
maturity has at times equaled or exceeded that paid by mutual savings banks
and commercial banks on savings deposits and by most savings and loan asso-




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ciations on share accounts. The clear indication is that savers prefer the convenience and flexibility of savings and share accounts and the protection of life
insurance to ownership of savings bonds. Only in time of war does it seem
possible to sell U.S. savings bonds readily and in large volume.
While large-scale expansion of savings bond sales does not appear feasible, nor
in fact economically desirable, the general rise in interest rates that has occurred
in recent years suggests the need for a revision in savings bond terms.
The 3>£-percent series E bond was first offered to the public in February 1957.
Since that time yields on U.S. Government securities have advanced by approximately one-half percent. Rates on newly offered issues of corporate and State
and municipal securities have also advanced by about one-half percent or more
during the intervening period. The maximum rate on savings bonds is set by
Congress, and it may be February or March of 1959 before congressional action
can be taken on this matter. In order to restore the competitive position of
savings bonds, therefore, it would seem reasonable to have the yield on series E
bonds raised from
to 3Vi or 3% percent. It is also desirable to shift responsibility for establishing the rate from Congress to the Treasury, which could
administer the rate in accordance with market needs.
Accompanying this revision in interest rate there should be a revision in terms
and prices of savings bonds. Heretofore, advances in rates have been achieved
by a shortening of maturities. Thus when the rate on series E bonds was raised
from 3 percent to 3K percent in 1957, the maturity was reduced from 9 years and
8 months to 8 years and 11 months. The price at which the bond was offered
remained unchanged at 75 percent of ultimate maturity value. In revising the
present rate to tyi or 3J4 percent, a similar device might be employed and an
effective rate change achieved by a corresponding reduction in the maturity.
In view of the expense incurred by the U.S. Government in connection with
the issuance and turnover of these bonds, however, consideration must be given
to maturity extension in order to achieve a reduction in expenses. It is desirable,
also, that the cost of the bond be a round fraction of its ultimate maturity. The
present and older series E bonds, as you know, were offered at a price of threefourths of their maturity value. If the cost were to be reduced to five-eighths
of maturity value, then the term could be adjusted to provide a 3%-percent
return. For example, a $100 bond costing $62.50 would give a return of 3.75
percent compounded semiannually at a maturity of 12 years and 8 months.
A price reduction, as suggested above, would give the Treasury an opporcunity
to eliminate the $25 denomination and make the $50 denomination the smallest
issue. This would reduce the administrative costs of the savings bond program
considerably. Corresponding modifications should be made in the yield, price,
and terms of the series H bonds.
CONCLUSION

The highest order of economic intelligence and political statesmanship must be
brought to bear on the complexities of debt management problems. Because of
its fundamental influence on the Nation's economic life, debt management policy
must have as its primary long-run aim the contribution it can make toward
achieving sustained economic growth and relative price stability. No matter
the difficulties or the so-called practical problems of Federal finance, all other
considerations muse be subordinated to these basic objectives, lest the Nation's
economic health be undermined.

(Whereupon, at 12:15 p.m., the committee adjourned.)
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