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FEDERAL RESERVE DIRECT PURCHASES

HEARING
BEFORE T H E

COMMITTEE ON BANKING AND CUERENCY
UNITED STATES SENATE
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
ON

S. 3291
A BILL TO AMEND SECTION 14(b) OF THE FEDERAL RESERVE
ACT, TO EXTEND FOR 2 YEARS THE AUTHORITY OF FEDERAL
RESERVE BANKS TO PURCHASE U.S. OBLIGATIONS DIRECTLY
FROM THE TREASURY

JUNE 20, 1962

Printed for the use of the
Committee on Banking and Currency

U.S. GOVERNMENT P R I N T I N G O F F I C E
86641




WASHINGTON : 1962

COMMITTEE ON BANKING AND CURRENCY
A. WILLIS ROBERTSON, Virginia, Chairman
H O M E R E. CAPEHART, Indiana
JOHN SPARKMAN, Alabama
WALLACE F . B E N N E T T , Utah
PAUL H. DOUGLAS, Illinois
P R E S C O T T BUSH, Connecticut
JOSEPH S. CLARK, Pennsylvania
J. GLENN BE ALL, Maryland
WILLIAM P R O X M I R E , Wisconsin
JACOB K. JAVITS, New York
HARRISON A. WILLIAMS, JR., New Jersey
JOHN G. TOWER, Texas
E D M U N D S. MUSKIE, Maine
EDWARD V. LONG, Missouri
M A U R I N E B. N E U B E R G E R , Oregon
MATTHEW HALE, Chief of Staff




CONTENTS
S. 3291
S t a t e m e n t of—
Roosa, Robert V., Under Secretary of t h e Treasury for M o n e t a r y
Affairs
Letters, statements, etc., s u b m i t t e d for t h e record b y —
Federal Reserve: Report on S. 3291
Treasury D e p a r t m e n t :
Letter t r a n s m i t t i n g proposed bill, a n d comparison showing
changes in existing law
District borrowing from Federal Reserve b a n k s
T r u s t funds and certain other accounts of the Federal Government—Holdin gs of Federal securities
U.S. overall balance of p a y m e n t s deficit a n d portion of deficit
representing gold loss
Balance of p a y m e n t s of the United States
Changes in U.S. gold stock and holdings of convertible currencies




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4
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3
6
12
19
28
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FEDERAL RESERVE DIRECT PURCHASES
WEDNESDAY, JUNE 20, 1962
U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room 5302,
New Senate Office Building, Senator A. Willis Robertson, chairman,
presiding.
Present: Senators Robertson, Sparkman, Proxmire, Bush, and
Tower.
The CHAIRMAN. The committee will please come to order.
We are pleased to have with us this morning one of our monetary
experts, the Under Secretary of the Treasury in charge of monetary
affairs. We want to ask him some questions about the pending bill,
not because we think there is going to be any opposition to the passage
of S. 3291, but because it is very well to have a record of why we are
acting at all on the matter.
The bill, S. 3291, a letter from the Treasury Department transmitting a draft of a proposed bill, a memorandum showing changes
in existing law made by the proposed bill, and such agency reports
as we have on S. 3291 will, without objection, go into the record at
this point.
(The material referred to follows:)




1

2

FEDERAL RESERVE DIRECT PURCHASES

a CONGRESS

C!

O O A 1

2D SESSION

JJ # « 5 ^ 5 J 1

I N T H E SENATE OF T H E U N I T E D STATES
MAY 14,1962
Mr. ROBERTSON (by request) introduced the following bill; which was read twice
and referred to the Committee on Banking and Currency

A BILL
To amend section 14(b)

of the Federal Eeserve Act, as

amended, to extend for two years the authority of Federal
Eeserve

banks

to

purchase

United

States

obligations

directly from the Treasury.
1

Be it enacted by the Senate and House of Representa-

2

tives of the United States of America in Congress assembled,

3

That section 14 (b) of the Federal Eeserve Act, as amended

4

(12 U.S.C. 355) is amended by striking out "July 1, 1962"

5

and inserting in lieu thereof "July 1, 1964" and by striking

6

out "June 30, 1962" and inserting in lieu thereof "June 30,

7

1964".
I




3

FEDERAL RESERVE DIRECT PURCHASES
THE

SECRETARY OF T H E T R E A S U R Y ,

Washington,
Hon.

May 4, 1962.

L Y N D O N B. J O H N S O N ,

President of the Senate,
Washington, D.C.
D E A R M R . P R E S I D E N T : There is t r a n s m i t t e d herewith a draft of a proposed
bill, t o amend section 14(b) of t h e Federal Reserve Act, as amended, t o extend
for 2 years t h e authority of Federal Reserve banks t o purchase U.S. obligations
directly from t h e Treasury.
T h e proposed legislation would extend for 2 years, from J u n e 30, 1962 t o J u n e
30, 1964, t h e authority of t h e Federal Reserve banks t o purchase public debt
obligations directly from t h e Treasury, rather t h a n in t h e open market, in an
a m o u n t not t o exceed $5 billion outstanding at any one time.
While t h e direct purchase authority has not been utilized in t h e past few years,
t h e D e p a r t m e n t considers its continued existence highly essential. T h e existence
of t h e authority permits t h e Treasury t o maintain lower cash balances t h a n would
otherwise be possible a n d contributes t o flexibility in t h e management of t h e
public debt. I n addition, t h e authority constitutes a line of credit which would
be immediately available for t e m p o r a r y financing in t h e event of a national
emergency. Also, t h e utilization of t h e authority has assisted t h e Treasury in
t h e past in leveling out t h e impact of short-run fluctuations in t h e cash balance
immediately preceding periods of concentrated t a x collections.
There is enclosed for your convenient reference a comparative t y p e showing
t h e changes in existing law t h a t would be m a d e b y t h e proposed bill.
I t would be appreciated if you would lay t h e proposed bill before t h e Senate.
A similar proposal has been sent t o t h e House of Representatives.
T h e D e p a r t m e n t has been advised by t h e Bureau of t h e Budget t h a t there is
no objection from t h e standpoint of t h e administration's program t o t h e submission of this proposed legislation t o t h e Congress.
Sincerely yours,
DOUGLAS DILLON,
A BILL To amend section 14(b) of the Federal Reserve Act, as amended, to extend for two years the
authority of Federal Reserve banks to purchase United States obligations directly from the Treasury

Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, T h a t section 14(b) of t h e Federal Reserve Act,
as amended (12 U.S.C. 355), is amended by striking out " J u l y 1, 1962" a n d
inserting in lieu thereof " J u l y 1, 1964" a n d by striking out " J u n e 30, 1962" a n d
inserting in lieu thereof " J u n e 30, 1964".

COMPARATIVE T Y P E S H O W I N G C H A N G E S I N E X I S T I N G L A W M A D E BY P R O P O S E D
BILL

Changes in existing law m a d e b y t h e proposed bill are shown as follows (existing law proposed t o be omitted is enclosed in black brackets; new m a t t e r is
printed in italic):
S E C T I O N 14(b)

OF T H E F E D E R A L R E S E R V E A C T , AS A M E N D E D

(38 Stat. 264; 12 U.S.C. 355)
(b) To b u y a n d sell, a t home or abroad, bonds a n d notes of t h e United States,
bonds of t h e Federal F a r m Mortgage Corporation having maturities from date
of purchase of n o t exceeding six months, bonds issued under t h e provisions of
subsection (c) of section 4 of t h e H o m e Owners' Loan Act of 1933, as amended,
and having maturities from d a t e of purchase of n o t exceeding six months, a n d
bills, notes, revenue bonds, a n d warrants with a m a t u r i t y from date of purchase
of not exceeding six m o n t h s , issued in anticipation of t h e collection of taxes or in
anticipation of t h e receipt of assured revenues by a n y State, county, district,
political subdivision, or municipality in t h e continental United States, including
irrigation, drainage a n d reclamation districts, such purchases t o be made in
accordance with rules a n d regulations prescribed by t h e Board of Governors
of t h e Federal Reserve System: Provided, T h a t notwithstanding a n y other provision of this Act, (1) until [ J u l y 1, 1962J July 1, 1964, a n y bonds, notes, or other
obligations which are direct obligations of t h e United States or which are fully




4

FEDERAL RESERVE DIRECT PURCHASES

guaranteed by the United States as to principal and interest may be bought
and sold without regard to maturities either in the open market or directly from
or to the United States; but all such purchases and sales shall be made in accordance with the provisions of section 12A of this Act and the aggregate amount
of such obligations acquired directly from the United States which is held at any
one time by the twelve Federal Reserve banks shall not exceed $5,000,000,000;
and (2) after [June 30, 1962] June 30,1964, any bonds, notes, or other obligations
which are direct obligations of the United States or which are fully guaranteed
by the United States as to principal and interest may be bought and sold without
regard to maturities but only in the open market. The Board of Governors
of the Federal Reserve System shall include in their annual report to Congress
detailed information with respect to direct purchases and sales from or to the
United States under the provisions of the preceding proviso.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Washington, May 22', 1962.
Hon. A. WILLIS ROBERTSON,

Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
DEAR M R . CHAIRMAN: This is in response to your letter of May 15, 1962, requesting the views of the Board on S. 3291, a bill to amend section 14(b) of the
Federal Reserve Act, as amended, to extend for 2 years the authority of Federal
Reserve banks to purchase U.S. obligations directly from the Treasury.
The use of this authority by the Federal Reserve enables the Treasury to avoid
creating unnecessary financial strains that would otherwise occur if it had t a
draw heavily on its accounts especially during periods immediately preceding
taxpayment dates. Temporary Treasury borrowing at such times, followed by
prompt repayment from the proceeds of taxpayments, provides a smooth operating mechanism, without the abrupt money market fluctuations that would otherwise occur. The authority could also be useful in dealing with situations resulting from a national emergency. Since 1942 when the authority was granted it
has been used sparingly, and its use is reported, as required by law, each year
in detail in the Board's annual report. The results of its use also appear currently in weekly statements issued by the Federal Reserve and in daily statements
issued by the Treasury. The Board favors the proposed legislation.
Sincerely yours,
C. CANBY BALDERSTON,

Vice Chairman.
The CHAIRMAN. The Chair takes pleasure in recognizing M r .
Roosa.
Mr. ROOSA. Thank you, Mr. Chairman.
STATEMENT OF ROBERT V. ROOSA, UNDER SECRETARY OF THE
TREASURY FOR MONETARY AFFAIRS
M r . ROOSA. I am glad to be here today to represent the Treasury in
presenting our views in support of S. 3291, which would extend
through June 30, 1964, the existing authority of the Federal Reserve
banks to purchase directly from the Treasury Government debt
obligations up to a limit of $5 billion outstanding at any one time.
The measure is also supported by the Board of Governors of the
Federal Reserve System.
The Federal Reserve banks were given unlimited authority t o
purchase Government securities either directly from the Treasury
or in the open market by the Federal Reserve Act of 1913, when it
was first established. Conditions remained that way until the
Banking Act of 1935, when the provision was revised to require t h a t
all Federal Reserve purchases of Government securities be made in
the open market, none from the Treasury directly at all.




FEDERAL RESERVE DIRECT PURCHASES

b

Then, 7 years later, in 1942, the Federal Reserve banks were again
given authority to buy securities directly from the Treasury subject
to the restriction that the outstanding amount of such debt should
not exceed $5 billion. This authority was originally granted through
1944, and has been extended from time to time since then, most of
the extensions being for 2-year intervals and the current authority
expires June 30, of this year. The direct purchase authority is used
only infrequently, and it has not been used at all since 1958. However, we do feel that its continuation is essential because it provides
an important backstop for both our cash and debt management operations.
I would like to explain that a little further. I t seems from our
experience that careful management of our own cash position will
make it possible to keep the outstanding public debt to a minimum
and that means we don't have to borrow more in order to carry a
larger cash balance. In that way we save interest costs to the
Government.
The availability of immediate direct access to Federal Reserve
credit provides a precautionary reserve for unforeseen contingencies
that would otherwise have to be met by maintaining continually a
higher level of operating balance.
Specifically:
(1) Direct access to Federal Reserve credit provides the margin
of safety necessary if the Treasury is to follow its customary practice
of allowing its cash balances to fall to exceptionally low levels just
before the usual large inflow of cash over a tax date.
(2) There may be occasions when Treasury financing operations
themselves ought to be postponed briefly because of market disturbance and in those instances the possibility of having direct access to
the Federal Reserve gives us more elbowroom. It doesn't mean we
would, and we actually haven't, relied on the actual use of the authority, but the knowledge that it was there and could be used has allowed
us to skate a little closer to zero in our own cash balance for a day or
two or three at a time and thereby postpone individual borrowing
operations.
That hasn't been done since 1954, in any substantial volume, but it
did occur then, as I recall, twice.
Our third consideration, and this also, I think, is very relevant in
thinking of this authority as a kind of standby, relates to the conditions
of a national emergency when financial markets might be disrupted
with direct access to Federal Reserve credit then necessary in order
to continue the orderly payments that are required for the functioning
of government.
These are the principal reasons why the Treasury feels that passage
of this bill is essential. I add one other which I think is obvious
enough; I don't want to seem to be crying "Wolf" or raising the fear
of anything quite unlikely to occur, but I would note that—we didn't
put this in the prepared statement—the existence of this authority is
an integral, in fact critical part of all of the arrangements that the
Treasury has made to be ready in the event of a national defense
emergency in the event of nuclear attack. Then parts of the country
might be immobilized and this existing authority, always available,
to permit the direct use of the Federal Reserve banks to make immediate advances is a part of the legal background, and would be the bul85641—62

2




6

FEDERAL RESERVE DIRECT

PURCHASES

wark for a number of the emergency arrangements that have been
worked out.
So, what we are concerned with here, then, is basically a standby
facility and I should also mention that if we ever were actually to use
it that kind of debt, just as much as any other debt, would be subject
to the statutory limit on the outstanding Federal debt.
We have been careful, I think, the Treasury traditionally has been
careful not to abuse this authority. We have provided a little table
to show the instances of actual use since 1952 indicating that there's
only been one occasion in the last 8 years when the Treasury did, in
fact, borrow directly from the Federal Reserve banks. But it was the
knowledge that this line of credit could be drawn upon almost instantly if it were needed that has enabled us on a number of occasions
to plan for a close fit between expected outlays and receipts, secure
in the knowledge that these supplemental funds could be borrowed
in the event that expenditures should unexpectedly, temporarily,
outrun our planned receipts.
Direct borrowing from Federal Reserve banks

C a l e n d a r year

1952
1953
1954
1955__
1956 _
1957
1958 _ _
1959
1960
1961- _
1962

.
_ _

.

_
__

_
-_
.

_

D a y s used

- _
_

_

___
___
-__
__

_

.
_

_ _ _

30
29
15
None
None
None
2
None
None
None
None

Maximum
amount at
any time
(millions)

N u m b e r of
separate
t i m e s used

Maximum
n u m b e r of
days used at
a n y one t i m e

$811
1,172
424

4
2
2

9
20
13

207

1

2

Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Secretary, is the Federal Reserve Board
independent of the Treasury?
Mr. ROOSA. Yes, sir; in the legislation providing for the Federal
Reserve Board and the Federal Reserve System, it is designated in
effect as an instrument of the Congress whereas the Treasury is in the
executive branch.
The borrowing arrangements under the authority we are describing
here do depend upon the agreement of the Federal Reserve that the
borrowing can occur. The legislation we are discussing authorizes
it to occur if there were need
The CHAIRMAN. When you need money and you want a quick way
to raise it by selling bonds directly to the Reserve banks, do they
have the free option to buy them or not to buy them?
Mr. ROOSA. Yes, sir; they do.
The CHAIEMAN. And suppose you are asking them to buy them for
a price that they do not think is the market price, can they then turn
them down?
Mr.

ROOSA.

Yes.

The CHAIRMAN. YOU can't force these bonds on Federal Reserve
banks at any arbitrary interest rate that you might select?
Mr. ROOSA. N O , sir.




FEDERAL RESERVE DIRECT

PURCHASES

7

The CHAIRMAN. When your predecessor, Mr. Julian Baird, was
testifying before us in continuation of the same legislation, he said
that this power should not be abused by considering it as a device to
permit increased Federal Reserve purchases of U.S. Government
securities for purposes of influencing the level of interest rates or
affecting the overall availability of credit.
Do you agree with that?
Mr. ROOSA. Yes, sir, absolutely.
The CHAIRMAN. Up to the present time, the Federal Reserve
direct purchase authority has been used as a temporary rather than
a permanent financing device. Ever since the authority was first
granted in its present form in 1942 I understand that it has been
exercised at any one time for no longer than 28 days.
Do you anticipate that any future use of this authority will
continue to be on a very short-term basis?
Mr. ROOSA. Yes, sir; I would think so, with the one possible
exception of the national calamity that I mentioned, but no one can
foresee that.
The CHAIRMAN. Of course, this committee does not have jurisdiction over the legislation pertaining to how many bonds you can
have outstanding at one time. But we are interested because we
do have jurisdiction over the Federal Reserve Board, and we have
to a large extent delegated to that Board the constitutional power of
Congress to coin money and fix its power. By its powers over
discount rates, reserve requirements, and open market operations,
the Federal Reserve can largely determine the value of our money.
Under present law, it can issue money far in excess of what is circulating now, simply by printing a dollar bank note, which is money,
against a dollar bond, as long as these notes have a 25 percent gold
backing.
The House has recentlv passed a bill jumping the legal debt limit
from $285 billion to SSOS'billion.
What do you think will be the size of the actual debt by the end of
this calendar year?
Mr. ROOSA. At the end of this calendar year, 1962, the debt will
be very close to $305 billion; the peaks are hard to predict from day
to day. Uusualry the peak occurs at the middle of the month and
our present estimate is that that would be $304.9 billion, but this is
an estimate that was prepared on the basis of the expenditure and
revenue estimates in the original budget document. Other changes
have occurred and certainly there is a risk alread}^ that changes have
occurred in expenditures that could involve as much as a half a billion
more than that; whether that amount wxmld all be spent before
the end of December is doubtful, but we can't be precise within—in
these terms—certainly less than a billion dollars on any given date.
The CHAIRMAN. In March of this year we raised the debt limit to
$300 billion.
Mr.

ROOSA. Yes,

sir.

The CHAIRMAN. Doesn't the House bill (H.R. 11990) provide for
$308 billion through next March, then for $305 billion through June
24 of next vear, and fin all v for $300 billion for the remainder of
fiscal 1963? "




8

FEDERAL RESERVE DIRECT PURCHASES

Mr. ROOSA. The present legislation, sir, as I understand it, will
expire at the end of June 1962, so that the only remaining debt limit
will be that which stands permanently—the $285 billion, so that there
must be given the size of the present debt and the prospective seasonal
requirements through the autumn of this year, some legislation in
order to validate that. The question is really why should it be $308
billion, I believe.
The CHAIRMAN. T h a t is what bothers me.
Mr.

ROOSA. Yes,

sir.

The CHAIRMAN. I am willing to vote for whatever is necessary to
pay the debts that the Congress has incurred, but I don't want to
put a debt limit up $2 or $3 billion above that and invite somebody to
see if they can't get up to it. If $306 billion will take care of the
debts that the Congress has authorized in the budget that we have
been asked to approve, why put an extra $2 billion in there?
Mr. ROOSA. The reason for that arises from experience we have
had in Treasury administration under the debt limit for the last 10
years. I think you may recall that when you had an opportunity to
discuss this with Mr. Baird or Mr. Burgess, my predecessors, they
would have explained the same way I am going to, that try as we may
the precise timing of these debt requirements cannot, this far in
advance, be pinpointed as to individual dates. For simple operating
efficiencies the Treasury has asked for, and the Congress has provided,
a $3 billion leeway above the expected, best estimate.
The CHAIRMAN. I don't challenge that, but the trouble is we have
been making much of a farce of debt limitation. I t was supposed at
one time to mean something; now, if we put 2 or 3 billion more above
what you are actually going to spend, it looks as if we are challenging
Congress—can you get up to that, and if so, we will raise it still higher.
You are our best money experts. Are you just a little disturbed
about the balance-of-payments situation?
Mr. ROOSA. Yes, indeed, more than a little.
The CHAIRMAN. We will take that up later. Are you a little worried about the possibility of inflation—possibility, not as it now is, but
the possibility?
Mr. ROOSA. The possibility; yes, sir.
The CHAIRMAN. All right. Isn't the gross national product running close now to the annual rate of nearly $550 billion?
Mr.

ROOSA. Yes,

sir.

The CHAIRMAN. I t didn't go up to the $570 billion that some
people thought, but it is at a grand and glorious high.
Mr.

ROOSA. Yes,

sir.

The CHAIRMAN. Don't we face a possibility of a $7 or $8 billion
deficit in this fiscal year?
Mr. ROOSA. Yes, sir; this fiscal year the present estimate is approximately $7 billion.
The CHAIRMAN. Don't we face the possibility of deficit in the next
fiscal year?
Mr. ROOSA. That possibility; yes, sir. But that——•
The CHAIRMAN. Of course, if we have a tax cut, whatever the
deficit is will be that much bigger?
Mr. ROOSA. Indeed; yes, sir.

The CHAIRMAN. That is right.
So, while we don't have inflation now, and while the speculators on
the stock market are making out as though they fear a deflation—we



FEDERAL RESERVE DIRECT PURCHASES

9

are not in any depression, of course, but they make it sound that one
is coming—there is always the possibility that if we would get reckless
we could have inflation.
Mr. ROOSA. Yes, sir.

The CHAIRMAN. D O you, as our top money expert, figure that there
is going to be such a great drop in production between now and
December that you will have to spend $2 billion more than you anticipate right now, and borrow the money?
Mr. ROOSA. N O , sir; it isn't for that reason that we ask for this
leeway, and find from time to time that we need it. I should make
very clear that our present presentation of the request for the $308
billion, in the form in which it has passed the House, would only get
by if the budget is balanced in fiscal 1963. The way in which the
limit is scaled down in March and again in June could not be satisfied
if the budget were out of balance; so I think this formulation has p u t
in a signaling system which makes it imperative, if there is a move
away from balance, that a new request would have to be introduced
for additional authority on the debt limit in the beginning of calendar
1963. B u t for the period——
The CHAIRMAN. About balancing the budget, do you want to go
to the hocus-pocus of saying that the funds we put in so-called public
works or Federal buildings or other things of a public character, are
investments that don't count in the budget?
Mr. ROOSA. N O , sir; there is a
The CHAIRMAN. I t is money out of the Treasury. Any way you
cut it, we will still end up in a deficit, whether you call it a budget
deficit or other kind of a deficit.
Mr. ROOSA. I am particularly sensitive to that, sir, because m y
special responsibility in the Treasury is to borrow the money.
The CHAIRMAN. I S to what?
Mr. ROOSA. Borrow the money.

The CHAIRMAN. Borrow the money?
Mr. ROOSA. Borrow the money whichever way it goes.
The CHAIRMAN. That is right.
And are you endorsing the conventional budget? What other
kind of budget would you prefer, so that the people you have to
borrow money from would know the status of the Government
Treasury?
Mr. ROOSA. Well, of course, there are these various concepts of the
budget. I think all of them serve a purpose. I think it is useful to
see the way in which each one would work out. From the point of
view particularly of Treasury debt management there are two of these
concepts that are relevant: the usual administrative budget is important, primarily important, and it tells us what the change in the
outstanding debt will be. Then sometimes there are adjustments
between the outstanding debt and the debt held by the public itself
because part of the debt may be acquired by trust funds. Those
Government trust funds then, when they are introduced as a special
item in the calculation, change the budget from the administrative to
the cash budget. So, from our point of view in the handling of the
debt, it is important for us to know both.
The CHAIRMAN. Yes. But isn't it true that you also have outstanding liabilities that are not subject to the debt limit?




10

FEDERAL RESERVE DIRECT PURCHASES

Mr. ROOSA. Yes, there are a great number of contingent liabilities.
The CHAIRMAN. Would you mention some of those? What are
the liabilities that are not subject to the debt limit?
Mr. ROOSA. There is in preparation, I think, a new tabulation of
these because they vary in the degree to which they represent a liability. But as an illustration, of course, the Federal Deposit Insurance
Corporation, while already possessing large reserves collected through
assessments on the banks, has in addition the right to borrow on demand from the Treasury in the event of need, as I recall, an additional
$3 billion—the Savings and Loan Insurance Corporation an additional
$750 million, and so on. There are a number of these
The CHAIRMAN. But don't let's say "and so on." Give us a total.
Mr. ROOSA. The degree to which this liability represents a meaningful liability, of course, varies, and there are a good many which are
extremely difficult to think of adding together. One could say that
the Treasury is ultimately liable for all of the currency issued by the
Federal Reserve System or all of the deposits issued by the banking
system. There have been such tabulations made, they get to very
large but not very meaningful figures. In more realistic terms, the
liabilities that are incurred by Government-sponsored institutions for
which the Government has some responsibility, the figure is now
between $8 and $9 billion.
The CHAIRMAN. Well, that gives us definite information.
Mr.

ROOSA. Yes,

sir.

The CHAIRMAN. H O W has the increase in liabilities not subject to
the debt compared with the increase in the debt itself? Have they
both been going up by leaps and bounds?
Mr. ROOSA. Yes, sir, they have.
The CHAIRMAN. They have all been going up?
Mr. ROOSA. These have been going up, if anything, percentagewise
a little faster. I should have here
•
The CHAIRMAN. D O you anticipate any immediate change in the
amount of Federal securities outstanding that are not subject to the
public debt limit?
Mr. ROOSA. There is a continuing increase in those. In the last
calendar year there has been an increase of about a half a billion
dollars, such issues as the Tennessee Valley Authority borrowing
another $50 million, and others of that kind. I have a list of the
recent ones here if I can put my hand on it, and these, of course, are
all carried out under authorizations made by the Congress. The
1963 proposed budget, looking forward in items that may further be
approved by the Congress, although action has not yet been taken,
include an additional 50 for the TVA, $475 million for FNMA, $40
million for the Bank for Cooperatives, $200 million for the Federal
home loan banks, $125 million for the Federal intermediate credit
banks, $135 million for the Federal land banks, which, of course, are
no longer federally owned at all, and that adds up to a total of a billion
dollars. That will increase a total that now is nearly 9 to a total
that is nearly 10.
The CHAIRMAN. I t seems that since a Government bond is as good
as Government money, you can exchange one for the other. So we
have been investing funds in Government bonds.
Mr.

ROOSA. Yes,




sir.

FEDERAL RESERVE DIRECT PURCHASES

11

The CHAIRMAN. If we don't pay any regard to the limit of public
debt and keep on, what is going to happen to those trust funds?
Mr. ROOSA. The trust funds are basically dependent upon the
Government's credit.
The CHAIRMAN. Of course. Don't you think it is desirable not
only for the taxpayers to know what they owe but also for the people
who have their trust funds in Government bonds to know what may
be the future value of those bonds? Then they can determine whether
we have acted wisely in putting the trust fund in Government bonds,
or whether we should put them in the bonds of some of these utilities
and General Motors and what not?
Mr. ROOSA. Yes, sir. Well, I agree, it just happens that this also
is the area of the Treasury which I deal with primarily.
The CHAIRMAN. I t might be helpful if you would indicate, for the
record, what trust funds you are now managing that have been invested in Government bonds. The biggest is the social security. So
we owe it to ourselves, don't we?
Mr. ROOSA. Yes. The principal funds that we are administering
and there are—I can just hold up the list from our annual report of
the Secretary of the Treasury.
The CHAIRMAN. We are making a record here that somebody
might read.
Mr. ROOSA. I will just submit this for the record because it is perhaps longer than you would like to hear and I can read the principal
items, if you wish.
The CHAIRMAN. YOU can do that. But hit the highlights of them
now.
(The information referred to follows:)




T R U S T F U N D S AND

CERTAIN O T H E R ACCOUNTS OF THE

T A B L E 64.—Holdings of Federal securities

l

by Government

[Par value.
I n v e s t m e n t s of agencies
HANDLED

1952

1953

FEDERAL

fcO

GOVERNMENT

agencies) and accounts, June 30,

1952-61

I n t h o u s a n d s of dollars]

1954

1955

1957

1958

1959

1960

1961

BY THE TKEASURY 2

M a j o r t r u s t funds a n d a c c o u n t s :
Civil Service C o m m i s s i o n :
E m p l o y e e s h e a l t h benefits fund
E m p l o y e e s ' life insurance fund
Federal D e p o s i t I n s u r a n c e C o r p o r a t i o n
F e d e r a l disability insurance t r u s t fund
F e d e r a l e m p l o y e e s ' r e t i r e m e n t funds:
Civil service r e t i r e m e n t a n d d i s a b i l i t y . .
Foreign Service r e t i r e m e n t a n d disability
J u d i c i a l survivors a n n u i t y
Federal Housing Administration funds:
A r m e d services h o u s i n g
mortgage
insurance
H o u s i n g insurance
H o u s i n g i n v e s t m e n t insurance
M u t u a l mortgage insurance
N a t i o n a l defense h o u s i n g insurance
Section 220 h o u s i n g insurance
Section 221 h o u s i n g i n s u r a n c e
Servicemen's mortgage insurance
Title I housing insurance
Title I insurance
W a r housing insurance
F e d e r a l old-age a n d s u r v i v o r s i n s u r a n c e
t r u s t fund
F e d e r a l Savings a n d L o a n I n s u r a n c e
Corporation
H i g h w a y t r u s t fund
P o s t a l Savings S y s t e m
Railroad retirement account
U n e m p l o y m e n t t r u s t fund
V e t e r a n s ' life i n s u r a n c e f u n d s :
G o v e r n m e n t life i n s u r a n c e
N a t i o n a l service life i n s u r a n c e
Special t e r m i n s u r a n c e




1,422,300

1, 510, 700

1, 612, 750

1,711,200

3 3,137
1, 815,200

3 8,310
1,919,000
325,363

3 43,910
2,034,400
1,054, 544

3 101,888
2,158,000
1,607,200

3149,604
2,291,996
2,101,160

12,324
3196,625
2, 439,517
2,386,452

4,998,402

5, 586, 418

5, 839, 646

6,152,373

6, 697,179

7,497, 551

8,166, 751

9,122,980

9,991,227

11,051,014

16,592

16,130

15,229

16,558

19,451

22,387
760

24,252
1,000

26, 416
1,104

29,178
1,346

32,180
1,556

9,450
4,450

12, 750
5,950
950
235,067
11, 500

10,550
3,300
800
212, 667
8,100

75, 900

77,300

20," 600

12,950
3,300
800
268,267
5,100
750
750
750
1,700
38, 000
23,200

12,250
4,400
800
305,688
5,720
750
750
1,250
2,400
44,400
28, 750

15, 500
7,000
850
363,088
5,270
650
750
2,650
2,450
56, 350
30, 820

11,974
4,648
870
411,326
5,200
1,100
900
4,100
2,180
69, 529
27, 222

11,749
7,068
897
458,851
2,370
1,770
1,030
5,160
2,070
77,189
29,222

13, 454
7,268
907
501,078
1,495
2,820
920
8,163
2,015
87,308
34,118

36,285
7,318
910
556,223
530
4,300
100
10,413
2,200
103, 523
35,232

16,268,037

17,814,387

19,337,092

20, 579,051

22, 041,438

22,262,664

21, 764,964

20,478,466

19, 756,158

19, 552,914

209, 540

218, 240

228,940

241,690

256,690

2, 558, 209
2, 863,144
8, 644,000

2,481,042
3,142,803
9, 236,000

2, 246,642
3,345,255
8, 988,000

1, 997,038
3,485,903
8, 442, 915

1, 741, 053
3,606, 505
8, 700,688

275,190
404,444
1, 459, 053
3,642,058
8, 974, 894

294,350
822, 226
1,206,253
3,608,953
7, 719, 944

311,000
429,214
1, 052, 703
3, 573,604
6, 710, 565

329, 500
1,335
845, 703
3,837,767
6,669, 557

363, 500
234,034
720,703
3,759, 509
5, 719, 956

1,300, 500
5,190, 644

1,299,000
5,249,479
425

1,234,000
5,272,479
3,025

1, 232,685
5, 345,628
9,589

1,216,833
5,481, 068
20, 234

1,200,427
5, 570, 310
34, 082

1,144,116
5, 665, 319
48,267

1,127,235
5, 741, 548
66,164

1,106, 540
5,803,089
84, 613

1,071,433
5, 759,371
106,280

1,400

«

CO

#
H

!
CO
CO

Other trust funds and accounts:
A d j u s t e d service certificate fund
A i n s w o r t h L i b r a r y fund, W a l t e r R e e d
General Hospital
Alien p r o p e r t y t r u s t fund
C a n a l Zone P o s t a l Savings S y s t e m
C e n t r a l h o s p i t a l fund, U . S . A r m y , Office
of t h e Surgeon General
C o m p t r o l l e r of t h e C u r r e n c y
D i s t r i c t of C o l u m b i a :
D e p a r t m e n t of O c c u p a t i o n s a n d Professions
Fees a n d o t h e r collections, R e c r e a t i o n
Board
G e n e r a l funds
H i g h w a y fund
Miscellaneous t r u s t funds
M o t o r vehicle p a r k i n g fund
Redevelopment program, Redevelopm e n t L a n d Agency
S a n i t a r y sewage w o r k s fund
S t a d i u m fund, A r m o r y B o a r d
T e a c h e r s ' r e t i r e m e n t a n d a n n u i t y fund.
W a t e r fund
Welfare f u n d s
E x c h a n g e stabilization fund
F a r m t e n a n t m o r t g a g e i n s u r a n c e fund
F e d e r a l s h i p m o r t g a g e i n s u r a n c e escrow
fund, m a r i t i m e activities
General p o s t fund, V e t e r a n s ' A d m i n i s t r a tion
I n d i v i d u a l I n d i a n m o n e y deposit fund a n d
t r u s t funds
L i b r a r y of Congress t r u s t funds
Longshoremen's and Harbor Workers'
C o m p e n s a t i o n A c t , relief a n d rehabilitation
M e r c h a n t m a r i n e m e m o r i a l chapel fund
N a t i o n a l A r c h i v e s t r u s t fund
National Capital Housing Authority...___.
N a t i o n a l p a r k t r u s t fund
Office of N a v a l R e c o r d s a n d H i s t o r y f u n d . .
P e r s h i n g H a l l M e m o r i a l fund
P h i l i p p i n e G o v e r n m e n t pre-193^ b o n d
account
P r e s e r v a t i o n of B i r t h p l a c e of A b r a h a m
Lincoln, N a t i o n a l P a r k Service
P u b l i c H e a l t h Service:
Gift funds
P a t i e n t s ' benefit fund, P u b l i c H e a l t h
Service h o s p i t a l s
.
See footnotes a t e n d of t a b l e , p . 15.




4,643

4,580

25,029
5,779

10
984
6,250

10
615
6,050

10
570
5,350

10
570
5,050

2,045
4,140

2,275
5,140

2,275
5,950

2,075
5,950

2,075
5,335

1,945
5,085

1,945
4,749

21,994
6,757

28,190
10, 769

39,996
11, 760
2
1,686

49,679
11,234

10
9,213

2,077

32,862
5,288
19
2,576

27,862

1,194

31,200
11,985
219
1,391

34
2,882

34
3,378

15,324
2,134

4,017
2,534

5,165
729

1,361
12
34,793

409
2,429
10,140
37,088

15
60,000

10
46,000
35,232

1,845

13,974

10
1,732
6,752

45,916

1,570

10
4,567
6,750

1,951

10
7,200
7,100

10
4,442
6,850

870

10
4,958
7,100

20,310
1,773

21,810
1,773

10
6,650
7,100

23,510
1,773

25,434
1,673

"27," 237"

28, 890

30, 626
15
35,000

20,000
1,250

20,000
1,250

25,000
1,250

25,000
1,250

95,000

~95~666~

2,666

2,666

2,866

2,866

2,868

2,660

35,425

34,076

31,831

32,982

33, 669
46

36,081
136

632

657

727

759
424

15
87,120

1,064

1,086

42, 497
16

40, 541

772
554

690

588

50
21
44
199

730
509
102
4,027
21
100
211

102
1,452
21
100
211

102
1,031
21
153
211

5,068

1,844

<

38,359

772
424

I

1,288

37, 572
16

W

1,571

18
44
199

18
44
199

18
44
199

18
44
199

49
20
44
199

15,138

7,471

6,467

6,351

6,251

5,481

5,466

63

63

63

63

63

63

81

81

76

71

7

7

7

W
>

63

86

d
o

18
199"

7
02

T R U S T F U N D S AND C E R T A I N O T H E R ACCOUNTS OF T H E F E D E R A L
1

T A B L E 64.—Holdings of Federal securities

^

GOVERNMENT—Continued

by Government agencies and accounts, June 30

1952-61—Continued

[Par value. In thousands of dollars]
Investments of agencies

1952

1954

1953

1955

1956

1957

1959

1958

1960

1961

HANDLED BY THE TREASURY—Continued 2

Other trust funds and accounts—Continued
Saint Elizabeths Hospital unconditional
gift fund
_._
__
Tennessee Valley Authority
,.,.,,
U.S. Army and "Air Force "Motion Picture
Service
U.S. Department of the Air Force:
Cadet fund _
General gift fund _
_.
U.S. Department of the Army—General
gift fund
_U.S. Naval Academy—General gift fund
U.S. Naval Academy—Museum fund
Workmen's Compensation Act within the
District of Columbia, relief and rehabilitation
Total handled by the Treasury

!
1,000

85
1

500

85
1

51,289

1
28, 500

500

85
1

102
1

22
102
1

102
1

22
102
1

22
109
1

'1
r
5
22
109
1

1
5

w

31
109
1

<

97

101

101

101

110

110

110

110

110

126

43,887,613

47,041,552

48,524,873

49, 730,633

52,243,838

54,339,629

54,335,252

53,340,841

53,941,949

54,393,000

43,038

43,038

52,078

42,463

42,463

44,263

42,963

42,963

42, 963

45,990

HANDLED BY THE AGENCIES 4

Banks for cooperatives
District of Columbia: Miscellaneous trust
funds... .
_
Farmers Home Administration, State rural
rehabilitation funds
....
Federal home loan banks
Federal Housing Administration, mutual mortgage insurance fund
Federal intermediate credit banks_ _
Federal National Mortgage Association
Housing and Home Finance Administrator
liquidating programs..
_
Merchant marine memorial chapel fund
Panama Canal Company
Production credit corporations
Reconstruction Finance Corporation




d

139
310,398

378,198

138

149

133

118

116

222
1,364,258

2,816
1,065,040

2,173
1,167,070

856
1,454,060

670,254

660,567

1, 085,141

217
1,018,325

14,165
59,524
11,060

14,165
99,331
36,253

11,737
99,520
42,333

6,493
104,535
56, 593

6,493
106,313
72,423

6,493
107,800
80,203

15
39,762

17
33
25

33
25

33
25

33
25

25

48,329
198

51,252
154

49,933
12

1,228
59,524
1,479

10
42,488
1,158

15
44,593

15
41,761

15
41,924

(8)

w
a
W
>
w

W o r k m e n ' s C o m p e n s a t i o n Act w i t h i n t h e District of C o l u m b i a , relief a n d rehabilitation
T o t a l h a n d l e d b y agencies
T o t a l holdings of securities b y Governm e n t agencies a n d a c c o u n t s
r
1
2
3
4

15
445,618

517,250

814,053

807,200

1,252,269

1,212,766

1,561,241

1,278,632

1,397,626

1,695,543

44,333,231

47,558,802

49,338,926

50,537,833

53,496,107

55,552,395

55,896,493

6 54,619,473

6 55,339,576

6 56,088,544

Revised.
Public debt, and guaranteed obligations of the Federal Government.
For further details of certain of these accounts, see tables 65 through 88.
Includes Series F and J savings bonds at current redemption value.
Some of the investment transactions clear through the accounts of the Treasurer
of the United States.
s Production credit corporations were merged in the Federal intermediate credit




banks as of January 1, 1957, pursuant to the act approved July 26, 1956 (12 U.S.C.
1027(a)). Certain assets, including the Federal securities, and the liabilities of the
corporations were transferred to the banks.
e Excludes securities in the amounts of $19,365,000, $19,222,000, and $19,247,000 held
by the Atomic Energy Commission as of June 30, 1959, 1960, and 1961, respectively,
which in turn are held by trustees for the protection of certain contractors against
financial loss in event of a catastrophe.

e
>

Ed

GO

£d

3
td

Oi

16

FEDERAL RESERVE DIRECT PURCHASES

Mr. ROOSA. The civil service retirement and disability which
now—this is the report as of the end of 1961—has in terms of funds
that are handled by the Treasury a total of just over $11 billion.
The CHAIRMAN. And how much is the Federal Government delinquent in paying its share of funds into the trust funds? I happen
to be on the Appropriations Committee. How much do we owe on
that?
Mr. ROOSA. I am not aware of any sidestepping.
The CHAIRMAN. What do you call it when an obligation matures
but we don't honor it simply because participants are not drawing
out that much right now and we expect that they are going to put in
more in the future? We are supposed to put in so much into these
trust funds so they will be actuarially sound, but we don't. What do
you call that besides sidestepping?
Mr. ROOSA. I am also Chairman of the Investing Board of that
body, and I meet with the actuaries twice a year, and we are under
the impression that on an actuarial basis and with regard to the accumulation of additional funds over the years as against the incurring
of additional obligations that we are on an actuarially sound basis.
The CHAIRMAN. H O W would you recommend that we meet our
recurring obligation to keep these funds actuarially sound, when time
after time we have had a budget estimate to pay it in and then we
deliberately ignore it and say that we are under the budget. That
has been the favorite House way of cutting under the budget by ignoring the liability to the civil service fund.
Mr. ROOSA. Yes, sir; I understand the point now; yes.
The CHAIRMAN. All right.
Mr. ROOSA. Of course, we can't go on doing this. At present the
fund is up to this moment sufficiently laige; the yield that we are
paying on the special Government securities held by the fund is 3%
percent, and on these assets at this average rate of yield, we are for
the presently foreseeable requirements actuarially sound.
We will have to be certain, of course, as we go forward in the
future, that there is no impairment of the payment by Congress to
the fund.
The CHAIRMAN. NOW, take these civil service funds, the railroad
retirement funds, and the social security funds. When you invest
them, do you give them the top paying bonds, the bottom paying
bonds, or the medium paying bonds? What kind of bonds do you
give them?
Mr. ROOSA. We try in each case to administer them according to
the provisions of law affecting each, and so they differ, but 1 can give
you an example. On these larger funds I was mentioning, we now
have them so invested that civil service gets an average yield on its
special issues at the moment of 3% percent; the Federal disability
insurance the same; the Federal old age the same; the Government
life insurance 3K percent; some of these are the result of having more
investments committed at an earlier period when interest rates were
somewhat different——
Senator BUSH. These are all long-term bonds?
Mr. ROOSA. Yes, sir; the highway trust funds, 3% percent; the
national service life insurance, 3% percent; the unemployment trust
fund, because according to law there must be more liquidity, shorter
holdings there, the average is 3% percent; and the veterans special




FEDERAL RESERVE DIRECT PURCHASES

17

term insurance fund is 3% percent; both of those reflecting the fact
that it is a higher liquidity composition.
In addition, some of these agencies have another special privilege
in their relation with the Government; they are able to hold special
notes which bear, as a rule, only 2 percent, but they have the right
to turn those in for cash on demand at any time. They get 2 percent
year in and year out whether the Treasury bill rate is 1 percent or 3
percent.
The CHAIRMAN. What is the total interest you are paying now?
Mr. ROOSA. The total interest on the public debt now is running
$9 billion annually.
The CHAIRMAN. I thought it was in the budget for $9.3 billion.
Mr. ROOSA. I t is for next year, sir.
The CHAIRMAN. I see. Well, it is going up.
Mr. ROOSA. Yes,
The CHAIRMAN.

sir.

If we have inflation and prices go up and wages
go up, will the cost of borrowing money go up, too?
Mr. ROOSA. With inflation, interest rates always rise, yes.
The CHAIRMAN. I S there anything that the Government can legitimately do to keep interest rates down if Congress deliberately goes
ahead and spends money and borrows money and has inflation?
Mr. ROOSA. There are things the Government can legitimately do;
there are risks in trying to do it wrongly, very grave risks.
The CHAIRMAN. After World War IT, didn't we in effect force the
Federal Reserve Board to buy Government bonds below what their
actual interest rates would be if it was a free market?
Mr. ROOSA. Yes, sir.
The CHAIRMAN. All right. You don't
Mr. ROOSA. N O , sir.
The CHAIRMAN. Well, neither do I.

favor that, do you?

I am monopolizing these
questions. I think it is a rather interesting subject.
Senator TOWER. Mr. Chairman, may I ask a question?
The CHAIRMAN. Yes. The Senator from Texas.
Mr. T O W E R . In your estimation, what effect does the increase in
interest on Government debt obligations have on the investment of
capital in stocks?
Mr. ROOSA. The Government interest rate, if we have the free
market we should have, will vary roughly in line with the rate on all
outstanding long-term fixed indebtedness and in general interest rates
on fixed indebtedness tend to rise when stock prices rise. This isn't
always true, but this is the general pattern. This means that bond
prices tend to decline when stock prices rise.
Senator T O W E R . Hasn't the general tendency been for interest yield
to compete with dividend yield—very favorably, as a matter of fact?
Mr. ROOSA. Yes, sir, and, of course, no one can be so brave,
particularly in the presence of an experienced investment banker, as
to venture views on the recent developments. But among the factors
is certainly the influence coming from interest rates that were higher
than the average yield available on purchases of common stock.
This, as it became realized, was an influence in shifting new investment
funds from further purchases of stock into the purchase of fixed
interest obligations, including to some extent Government securities.
The CHAIRMAN. Mr. Secretary, we mentioned your concern about
the balance of payments. What do you mean when you use that
term balance of payments?



18

FEDERAL RESERVE DIRECT

PURCHASES

Mr. ROOSA. In its broadest sense, the balance of payments is the
schedule of our receipts and expenditures that cross the national
frontier, the things that we spend money for abroad and the sales we
make that provide receipts coming in from abroad. This includes,
and this is where the analysis becomes more difficult, not only the
sale of goods or the purchase of goods but it includes a whole range
of services, it includes the receipt of interest on investment made
abroad, or the payment of interest and dividends on stocks held here
by foreigners, and it includes such other things as tourist remittances,
but this whole total
The CHAIRMAN. D O you think that our balance of payments statistics are adequate to reflect what we are talking about, or do they
need some revision?
Mr. ROOSA. I don't mean to be sounding critical of the work now
done but I would say that it is not adequate. I think the people who
are engaged in this statistical work would agree that for a long time
the United States has, in comparative terms, ignored its balance of
payments; we have not developed statistical measurements that were
equal to the needs we face at the moment. We are making strides,
and I would point out that beginning in March of this year for the
first time the Survey of Current Business—this is from the Department of Commerce—began to publish what we will now get from now
on, a second major table on the balance of payments in which you get
a much finer breakdown of the actual exports and imports so that
you can tell what we are really selling, what is going abroad as aid
shipments and what is being spent abroad because of military authorities.
Those things are now clearly subdivided and we are getting that
kind of data for the first time, but we have been at it, trying to evolve
that since about the 20th of January a year ago. It has only begun
now.
We have a number of other things that will come along, but we
don't have all we should have yet.
The CHAIRMAN. Of course, it is very misleading if we include our
military aid and other give-away programs as exports.
What do you mean when you say that we have a deficit in the balance of payments?
Mr. ROOSA. The deficit, again, I apologize for seeming to equivocate, but there are two kinds of deficits.
The CHAIRMAN. I want to hear your comments about them.
Mr.

ROOSA. Yes,

sir.

The first important one is the overall deficit and that means the
difference between the total receipts of the United States and the
total out-payments of the United States. That difference—the
deficit—is then made up in one of two ways. Either we sell gold—
ship gold out in effect in order to pay for the deficit—or we increase
our short-term dollar liabilities to foreigners. That means they may
hold currency, they may hold Treasury bills, or they may hold bankers
acceptances. But it is a short-term liability, the close equivalent
of cash.
The CHAIRMAN. All right. The deficit winds up in a reduction in
the gold supply if we issue short-term securities and if foreigners buy
them and then ask for gold. We have to give them gold, haven't we?
Mr. ROOSA. Yes,




sir.

FEDERAL RESERVE DIRECT

19

PURCHASES

The CHAIRMAN. SO a deficit in our balance of payments all winds
up as a threat upon our gold supply?
Mr.

ROOSA.

Yes.

The CHAIRMAN. H O W much have those deficits caused us to lose
in gold in the last 3 years?
Mr. ROOSA. The gold loss has run about $3.5 billion, the deficit
has been—well, I better say 3 years plus calendar 1962, then the total
of gold becomes larger. If we take calendar 1959, 1960, 1961, and
thus far in 1962, the gold loss is in the rough magnitude of $4 billion.
I will put the precise figure in. Mr. Morris can check this. And the
balance of payments deficits, giving rise to this, have been over $3.5
billion for 2 of those years, $2.5 billion last year, and is currently
running $1.5 billion.
(The information referred to follows:)
U.S. overall balance-of-pay merits deficit and portion of deficit representing
loss} 1959 to date

U.S. gold

[In millions of dollars]

C a l e n d a r year

Overall
balance-ofpayments
deficit

1959
I960.

3,743
3,925

Gold loss

i 1, 075
1, 703

C a l e n d a r year

1961
1962 to d a t e

Overall
balance-ofpayraents
deficit
2,461
21, 500

Gold loss

857
3 455

i Includes $344,000,000 gold subscription to I M F .
2 Based on available data at a seasonally adjusted annual rate.
3 Change in Treasury gold stock through June 15.

The CHAIRMAN. Well, then, the balance-of-payments deficit has
exceeded the gold loss?
Mr. ROOSA. Yes,

sir.

The CHAIRMAN. Simply because foreigners haven't asked to cash
in all of the dollars?
Mr. ROOSA. That is right.
The CHAIRMAN. H O W many dollars, in terms of private and public
short-term demands and what not, could they demand gold for?
What is the total?
Mr. ROOSA. The total of claims that are almost immediately available is roughly $20 billion. But I should quickly add that that total
can be much larger because this figure includes only the short-term
holdings of foreigners.
The CHAIRMAN. I heard it was $21 billion.
Mr. ROOSA. That is right, because in addition, we have to include
some of the international institutions, but we don't regard them as
likely to draw.
The CHAIRMAN. All right, $21 billion that they could demand
against our gold. How much gold do we have?
Mr. ROOSA. Our present stock is $16,434 million.
The CHAIRMAN. We have to have a 25-percent backing for Federal
Reserve bank deposit liabilities and for Federal Reserve bank notes
that are acceptable for all taxes and debts and so forth; how much
gold does it take to back our currency?
Mr. ROOSA. The 25-percent requirement now takes in round numbers $11.8 billion, against the notes and deposits.




20

FEDERAL RESERVE DIRECT

PURCHASES

The CHAIRMAN. When did it drop from $12 billion?
Mr. EOOSA. No; it hasn't dropped from $12 billion. Twelve billion
dollars is just a rounded number that has been used.
The CHAIRMAN. Twelve is a rounded number?
Mr. ROOSA. Yes.
The CHAIRMAN. H O W much free gold does that leave?
Mr. ROOSA. A little over, 4%
The CHAIRMAN. About $4.5 billion against a potential

demand of
$21 billion. Is it important for us to prevent inflation or not?
Mr. ROOSA. Indeed it is. I would like to make one correction,
though, if I may, sir.
I didn't mean to imply that only the $4.5 billion would be available
in the event of a gold drain
The CHAIRMAN. We could borrow a little from the International
Monetary Fund maybe.
Mr. ROOSA. No, sir; under the provision, I believe, of the Banking
Act of 1935, the Federal Reserve Board may waive the requirements
for an initial 30 days, renewing it for successive 2-week periods.
Thus in the event there were any concern by foreigners that somehow
or other they ought to draw their gold because we are approaching
close to a firm and absolute limit, they shouldn't worry. They
shouldn't speed up their gold purchases for that reason, because the
requirement can be waived.
The CHAIRMAN. The Federal Reserve Board in an emergency, can
now print money without any gold behind it
is that what you are
saying?
Mr. ROOSA. In effect, sir, I'm saying the law allows—it doesn't
have to be an emergency—the law allows the Board on its finding to
waive the application of the requirement for additional 2-week intervals. This, of course, becomes a matter of public notice and the Board
is required in this circumstance to impose a fee or penalty on the Federal Reserve banks for doing to. I make this point only, sir, because
this is an important part of the explanation which our foreign holders
of dollars should know, if it is in their minds at any time doubtful
that the Federal Reserve Board could provide this waiver in the event
of a run on gold it would, of course, increase the chances of a run on
gold.
The CHAIRMAN. Well, I don't mean to discount either the wealth
or the productive capacity of our Nation. Some persons have suggested that there should be more pay for less work; I don't think this
is going to help us. At any rate, we are far from being broke.
You have mentioned the effect of inflation upon the balance of
payments. If inflation would happen, foreigners would lose confidence in the dollar. We could then be in a situation requiring us to
decide whether to suspend gold reserve requirements, or to revalue the
dollar. No matter what we would do would hurt, wouldn't it?
Mr. ROOSA. We can't let ourselves get into the situation where we
would have to think of either of those things, so I agree with you
emphatically.
The CHAIRMAN. SO we have to watch that situation when we vote
on how much we are going to raise the debt ceiling. We have to
watch that on any proposal to go above the budget and take a second
look at some of the budget items. What other steps do you have in
mind to protect this diminishing gold supply?




FEDERAL RESERVE DIRECT PURCHASES

21

Mr. ROOSA. Our effort is mainly directed toward eliminating the
deficit in the balance of payments.
This includes primarily the points you have already been making,
that we must avoid inflation, we must keep expanding American
industry competitive and improve, if we can, its competitive position—I say we, speaking of the American people, I don't think Government does this by some heroic act of its own—and then in addition
we must do all we can to reduce the balance-of-payments burden
of our governmental expenditures abroad. We could do that
The CHAIRMAN. That means we can gut down a little bit on what
we give away?
Mr. ROOSA. We are doing it largely by giving away goods in kind,
and in that way not making dollars available which can be a drain
on our gold.
The CHAIRMAN. I want to recognize at this time one of our advocates of economy. He is a Harvard-trained man in economics
and he didn't even want the Congress to authorize a new airplane
carrier in the defense appropriation bill because it costs too much.
The Senator from Wisconsin.
Senator PROXMIRE. I would like to ask some questions if I could,
Mr. Chairman. But I think the Senator from Texas had a particular
question on the points that the Senator from Virginia has been raising.
If I could yield to the Senator from Texas for that question, I would
be happy to do so. Then I have some questions.
The CHAIRMAN. I know you have some pertinent observations on it.
Senator PROXIMIRE. I do, Mr. Chairman.
The CHAIRMAN. YOU may help straighten us out.
Senator TOWER. I thank the Senator from Wisconsin.
I would like to ask if you sense any wavering of confidence in the
American dollar abroad?
Mr. ROOSA. N O , sir; there have been periods, of course, when there
have been flutters against us. There will always be some changes in
the foreign exchange markets which occur from week to week because
of commercial reasons. But I think the most reassuring, gratifying
byproduct of the disturbing stock market developments has been
that—to me because the balance of payments is where I spend a large
part of my life—there have been no appreciable repercussions in the
foreign exchange markets.
There is, therefore, a fundamental confidence in the position of the
dollar. I should stress though that that confidence arises from our
repeated assurances and thus far our demonstration that we are reducing the balance-of-payments deficit and that we are maintaining a
position of fiscal responsibility and it is essential that that position
be retained, as the chairman has been stressing, if we are to have the
continuation of this confidence.
Senator T O W E R . Are there some conflicting views between, say,
Government economists abroad and those who actually hold claims
against American gold reserves?
Mr. ROOSA. Yes, there are.
Senator T O W E R . If we raise the debt limit and reduce taxes b u t
maintain spending at present or higher levels, what effect do you
perceive this would have on the confidence in the American dollar?
Mr. ROOSA. In my own appraisal, and here it would include foreign
financial opinion as well as Government officials, it makes a great




22

FEDERAL RESERVE DIRECT PURCHASES

difference as to whether you say maintain or increase on the expenditure side. I think as far as the foreign observer in general is
concerned there has emerged out of the discussion of the last 3 years
of our balance-of-payments problem a recognition that this is going
to take time and a very massive effort to restore the position of the
American economy to its previous comparative strength and dominance in world trade, and I think there would be understanding for
a tax reduction if it were clear that this was related to an incentive
program that gave great promise for future cost reduction as well as
for expansion in the producing capacity of the American economy.
I think foreign observers of all kinds would clearly distinguish that
kind of move from what does worry them, the appearance, and we
don't have that now, the appearance of earless expenditure policy.
Senator B U S H . Say that again, the appearance of what?
Mr. ROOSA. Of a careless policy on expenditure.
Senator BUSH. Careless policy?
Mr. ROOSA. Yes. And I would suggest that it makes more sense
to the foreign observer that we should have an expenditure limit than
it does that we have a debt limit.
Senator TOWER. Let me refer back to a question I asked a while
ago wilich you answered "Yes." Assuming that there are conflicting
views between Government economists abroad and between those
who actually hold claims against American gold which has the most
pessimistic view toward the American dollar? Which seems to be
the most confident and which seems to be the least confident?
Mr. ROOSA. I have to make a further distinction there, too, sir.
Some of the Government people would be central bank people. They
are the people who actually have the immediate claim on gold. In
general they would be among the optimistic group, have clearly been
since they haven't been taking gold. The other large group of
holders who now have dollars could, if they choose, sell the dollars,
then as these would tumble in on the central banks the central banks
would have to face a new problem, whether to hold additional dollars
or convert these new ones. I t is a two-stage process.
Going back to the first stage, the private holders of dollars who
might unload them, who haven't yet, this group is the group from
which you hear the greatest amount of concern, uncertainty, and
typified by some of the more extreme comment that sometimes
appears in the press. Certainly in this group of private citizens as
in the financial community in any country you will find a concentration of a more conservative—I say conservative in the best sense—
approach to the role of government and to the performance of an
economy. That may turn out in this instance to be pessimistic in
your——
Senator T O W E R . I think in the terms you used it it has a favorable
connotation.
Senator PROXMIRE. Mr. Roosa, in your prepared statement you
say:
T h e Federal Reserve banks were given unlimited a u t h o r i t y t o purchase Governm e n t securities either directly from t h e Treasury or in t h e open m a r k e t b y t h e
Federal Reserve Act of 1913. T h e Banking Act of 1935 revised this provision
a n d required t h a t all Federal Reserve purchases be m a d e in t h e open m a r k e t .




FEDERAL RESERVE DIRECT PURCHASES

23

Why was that action taken?
Mr. ROOSA. I think, sir, at the time—and I haven't studied the
legislative history, this is what I got from textbooks and perhaps is
not thoroughly adequate—the feeling was that there was a real risk
that there would be abuse of the money creating capacity of the Federal Reserve System; we had just been through the very harsh depression period, the liquidation phase of the great depression. There
had been widespread demands for extensive use of the Federal Reserve as a bailout, they had not been fully acceded to, but you might
remember Federal Reserve capital was used to provide half of the
resources needed for the establishment of the Federal Deposit Insurance Corporation and other such measures were resorted to, I think
they were all perfectly proper, but in the air of the time there was a
fear of more extreme possibilities.
Senator PROXMIRE. Then, the Congress only restored it in 1942,
the middle of the war, of a limited basis, well, $5 billion, and also the
limited time?
Mr. ROOSA. Yes.
PROXMIRE.

Senator

In your prepared statement you say:

The availability of immediate direct access to Federal Reserve credit provides a
precautionary reserve for unforeseen contingencies t h a t would otherwise h a v e
to be provided b y considerably higher operating balances.

Was this the experience in 1935 to 1942, that the balances had to be
higher? Were they in fact higher at that time?
Mr. ROOSA. Yes.
Senator PROXMIRE.

Were there any situations that developed
which indicated the inconvenience and expense of having this kind of
system?
Mr. ROOSA. Yes, there were. As a ratio to total Government
expenditures, the balances maintained were higher—•—•
Senator PROXMIRE. For this reason?
Mr. ROOSA. It's hard for me to be sure. I deduced that, but I
can't be certain.
Senator PROXMIRE. Why can't you virtually always to to the
market instead of going to the Federal Reserve? You gave one
instance, that, when this ban was in effect in 1937, you had to go to
the market.
Mr. ROOSA. The best illustration, the best evidence I can give is
that we need the authority so that we don't use it. In fact, we are
using it all the time in the knowledge that we can afford to skate
close to the edge, but we have not found ourselves going over the
edge with one exception since 1954. The exception, by the way——
Senator PROXMIRE. I would like to hear a little bit about that
exception. What would have happened in 1958 if you hadn't been
able to make that one borrowing from the Federal Reserve for 2
days?
Mr. ROOSA. Actually, that one wouldn't have created any great
crisis.
Senator PROXMIRE. The others were in wartime, were they not?
Mr. ROOSA. No. You see, the others, if you look at the table on
page 6, there was considerable use in 1952, 1953, and 1954 and the
reason for the decline in use was that we made another change that
provided possible economy in the handling of the Treasury cash
balances. We made it in July of 1954 and since that time we have




24

FEDERAL RESERVE DIRECT PURCHASES

had much less occasion, actually, to rely on the authority. Nonetheless, the existence of the authority has been in our minds. There
have been a number of times when we could plan on the assurance
that if things went wrong this could be used. But you say why
can ; t we always go to the market?
We always can, but let me explain the timing involved, the procedures there.
The quickest borrowing is a Treasury bill. Even for this the
market itself has to make preparation. It's an auction
Senator PROXMIRE. T O interrupt. However, in view of the shortness of the present debt—with so much of it in bills—you are going
to the market constantly anyway, aren't you? This is a matter of
whether you want to go to the market quite to the same extent as
you are as a matter of routine. You are in the market virtually every
week, and most days, you are in a pretty big way.
Mr. KOOSA. That's just what I wanted to explain.
Because each Treasury bill auction normally occurs on a Monday,
in order to prepare the market for the auction we have to announce it,
as we will be today. We send out the first announcements on the
confidential wire, in time to get them printed about 11 o'clock this
morning, on a Wednesday. They are released Wednesday afternoon.
The market then has to have time to prepare. They aren't sure until
it's announced what the amount of the auction will be. The auction
is held as of 1:30 o'clock on a Monday; then the market has to have
time to get the money together to pay for the bills. These are big
amounts, even though we are used to them. The total amount each
week is about $2 billion, and they can't make the payment until
Thursday. The time interval, then, between the moment when we
decide what we want, on the quickest sort of borrowing facility we
have, is from Wednesday morning until Thursday, the following week.
This facility at the least provides for the situation that might
become urgent in an interval of less than 8 days.
Senator PROXMIRE. And you haven't really had such a situation in
the last 8 years. You had one and you said it wasn't very important.
Mr. ROOSA. That's right.
Senator PROXMIRE. However, the fact that you have this ability,
No. 1, permits you to keep your balances lower?
Mr.

ROOSA. Yes.
PROXMIRE.
Mr. ROOSA. Yes.
Senator PROXMIRE.
Mr. ROOSA. Yes.
Senator PROXMIRE.

Senator

I t conserves, you say, millions of dollars a year.
In interest?

And No. 2, it tends to stabilize the market
because the awareness of the market that you have this alternative.
Mr. ROOSA. Yes, that is a helpful reassurance.
Senator PROXMIRE. I have a very brief question along the extremely
interesting lines the chairman was asking about.
What concerns me most about the present situation is that t h e
President has asked for a tax cut for next year at a time when most
of the indicators we have are quite favorable:—the best automobile
year since 1955, construction is improving, and unemployment has
been dropping so that we are half way to the 4 percent goal. My
question is this: If we are going to have a tax cut of substantial proportions in 1963, without diminishing our spending, we are going to




FEDERAL RESERVE DIRECT PURCHASES

25

deliberately run a deficit, and if so, when in the world are we ever
going to run a surplus, at least in the administrative budget?
Let me interrupt to say this. The President has said we aren't
getting out of the recession rapidly enough. Certainly, at the time
you are getting out of a recession, you are going to run a deficit.
Certainly, when you get into a recession, you are going to run a
deficit. Almost everyone would agree you would tend to do that, it
seems to me. The President and others argue that we should run a
surplus in times that the business cycle is moving ahead and we have
an expanding economy, and that we should run a deficit in times of
retraction. This would seem to me to be the time to run a surplus, if
ever.
Mr. ROOSA. This as a concept, and put that way, would express
the general position as I understand it, of the administration as well.
The view with respect to a tax cut is one that will have to be developed
as we know what kind of decisions the President makes on his recommendation and then the way in which Congress will review them as
they pass through the legislative process some time early next year.
He has indicated that the net effect of the proposals he will submit will
be to provide for less revenue from any given income structure, and
in the aggregate somewhat less revenue than would arise from existing
taxes as applied to the same range of incomes and processes that are
taxed. But he has not said by how much, and the decision as to how
much and what combination between tax reductions and offsetting
broadening of the tax base has not yet been made. So that I'm sure
that the factors that you are mentioning have to weigh very heavily
in reaching that final decision. And once the President has decided
they will come in for much further continuing examination as this is
reviewed by the public and then intensively in the Congress.
So, I would say that in broad principle the only exception to your
formulation would come in terms that it might be decided, and it has
not yet been decided, that a deficit as the result of tax changes in
another fiscal year was an appropriate or acceptable price to pay at
t h a t stage for a realinement of the tax structure which would promise
much greater income-producing potential in future years.
This would have to be the kind of analysis on which it was based,
not analysis that would assume continuous deficits.
Senator PROXMIRE. See, here's what the administration has done.
They have said we will not have a tax cut apparently this year,
probably not; they probably will not recommend it. They will
recommend one, however, next year; recommend it next year means
it might conceivably be passed as early as April or March and be
retroactive to January 1. Certainly, if we try to predict what
the situation is going to be 6 months from now or 8 months from
now we are really asking for trouble, it seems to me.
Mr.

ROOSA. Oh,

yes.

Senator PROXMIRE. The situation might be expansive then; it
might not be. Why don't we wait until then instead of making an
announcement now we are going to have a tax cut, particularly in
view of the very vague—I say this with all respect—and general
attitude which you have as perhaps the top expert in this field in the
Treasury Department, the feeling that this might be primarily a tax
change situation with a net reduction; it might be a billion dollar
reduction, 2 billion, you don't know how much. From what you said




26

FEDERAL RESERVE DIRECT

PURCHASES

earlier to Senator Tower or Senator Robertson, I presume that this
would be primarily in the incentive area for business to invest more
rather than an individual tax cut. It's hard for me to understand
why, under these circumstances, it is desirable for the President to
say we are going to have a tax cut next year when the thinking is
this general and unprecise.
Mr. ROOSA. I don't want to try to speak for the President on this
subject at this time, but I would point out two other aspects of this.
First, that income earned and taxed in calendar 1963 is the income
that is relevant to the budget for fiscal 1964. Consequently, when
we talk about a tax cut effective in calendar 1963 we are talking about
the effect on the revenues for fiscal 1964 and that budget
Senator PROXMIRE. That makes it even worse. You go even
further ahead.
Mr. ROOSA. Right. That budget will not be submitted in its first
form until next January. Consequently, and this is the second point
I wanted to make, if the decision is made—and I think we all know
to our sorrow how long, and how rightly long, the scrutiny takes to
get a tax bill from conception to completion—by putting our proposals
before Congress adjourns this year there is a chance that they can be
passed and become effective at the beginning of calendar 1963.
Although we may not know the terms until some time later as
finally passed, this is one of the two variables. We will then know
something about the revenue side for the budget for fiscal 1964.
The expenditure side which is also relevant in determining whether
and how much the deficit will be, we won't know and there won't be
any announcement on it until early in calendar 1963.
So, you can conceptually take the tax measure separately, particularly if you view this, and we have so viewed it since early last year
as we have been working ahead on this, as a major tax reform and
one which ought to be introduced as soon as it's reasonably ready for
the scrutiny that such a major reform will have to have. Whether a
planned loss of aggregate revenue will in fact produce a deficit of
some size thus depends on two unknowns: (1) what will the possible
revenue be for fiscal 1964, and (2) what will planned expenditures be
in that year?
Senator PROXMIRE. Thank you very much, Mr. Chairman.
The CHAIRMAN. Senator Bush.
Senator B U S H . Mr. Secretary, you said in speaking of the balance
of payments problem a little while ago, you gave the figures for the
last 3 years and this year to date.
Mr.

ROOSA.

Yes.

Senator B U S H . If I am correct, you said that this year to date the
balance of payments deficit was of the order of §l}{ billion; is that
right?
Mr. ROOSA. I meant, sir, that it's running close to that annual rate.
Senator BUSH. Oh, you meant it was at the annual rate?
Mr. ROOSA. At that annual rate; yes, sir. The actual annual rate
deficit for the first quarter, and that's the only one for which we have
adequate data so far, was $1.8 billion. The indicated rate of deficit




FEDERAL RESERVE DIRECT PURCHASES

27

to date is slightly under $1% billion, and this is, of course, from preliminary data, not complete; it's our hope that the year as a whole
when finally totaled will, at the worst, show a deficit no more than
2 billion, but we like to think we will see the prospect of its ending
up closer to a billion and a half dollars.
Senator B U S H . YOU have some reasonable hope of ending up around
a billion and a half dollars?
Mr.

ROOSA.

Yes.

Senator B U S H . What is the balance-of-trade figure so far this year?
Have you got those in mind?
Mr. ROOSA. Yes. You may recall I mentioned in response to an
earlier question that it has been important to sort out the three levels
of trade and after you remove the military, after 3^011 remove the aid
assisted—-and incidentally it's this aid assisted, plus commercial, that
has usually been published and therefore has been misleading—you
emerge with an actual trade surplus. This is the balance on merchandise trade, excluding everything that has been financed by Government, for calendar 1961 of $3 billion and we are running just about
that right now, I think, but were behind in the first quarter.
If you add services to that, include trade and services, the total
for 1961, again now we are excluding the aid assisted, it was $5 billion,
and we are running in that respect about the same.
Senator B U S H . SO we are maintaining about the same pace in
respect to trade balance as we did in 1961?
Mr. ROOSA. Yes, and for the present we regard this as a very
favorable sign because with the economy continuing to expand imports are normally at this stage expected to rise substantially and what
we have been able to do is largely match the rise in imports with further
exports. So that at this stage we are holding our own and we hope,
have reasonable prospect over the remainder of this year that the
export position will improve more. We are just coming into the full
effect for one thing of the export credit finance arrangements which
are serving as a catalyst, not just as finance, but the facilities through
which it is made available are alerting a good many businessmen to
the feasibility of trade abroad. We think that we are seeing activated
a great many more export activities than the country has had in the
past.
The Commerce Department is working aggressively to this end and
they are having, I think, remarkable success in the business community in organizing, not just through meetings but in business
selling campaigns.
Senator BUSH. Thank you, sir.
The CHAIRMAN. Mr. Secretary, I believe you have a table going
back to the end of 1945 that shows the trend of the balance of payments, the gold stock, and the demands on it.
Mr.

ROOSA. Yes,

sir.

The CHAIRMAN. Could you submit that for the record?
Mr. ROOSA. Yes, sir; I would be glad to.
(The information referred to follows:)




28

FEDERAL
Balance

RESERVE

of payments

DIRECT

PURCHASES

of the United States,

194-6-61

[In millions of dollars]

Basic U . S .
position,
deficit (—)

Year

1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961

Recorded U . S .
short-term
p r i v a t e capital
outflow a n d
foreign commercial credits
to U n i t e d
States

Transactions
unaccounted
for, i n c l u d i n g
unrecorded
capital flows

-310
-159
-119
+130
-33
-61
-50
+117
-669
-186
-482
-191
-357
+77
-1,433
-1,443

+195
+936
+1,179
+775
-30
+470
+505
+296
+167
+446
+643
+748
+380
+528
-592
-602

+1,694
+4,114
-57
-751
-3,423
-710
-1,503
- 2 , 565
-1,048
-1,404
-1,083
-22
- 3 , 551
-4,348
-1,900
-416

_

_

Total, recorded overall
U . S . position,
deficit ( - )

+ 1,579
+4,891
+1,003
+154
-3,486
-301
-1,048
-2,152
-1,550
-1,144
-922
+535
-3,528
-3,743
-3,925
- 2 , 461

Source: U.S. Department of Commerce, Survey of Current Business.
Changes in U.S. gold stock and holdings

of convertible currencies,

1945-62

[In millions of dollars]
ANNUALLY

Year

1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961

_
_- «
.

U . S . gold
(A)

20,083
20, 706
22,868
24,399
24, 563
22,820
22,873
23,252
22,091
21, 793
21, 753
22, 058
22,857
20, 582
19, 507
17,804
16, 947

Change

Convertible
currencies
(B)

-548
+623
i +2,162
+ 1 , 531
+164
- 1 , 743
+53
+379
-1,161
-298
-40
+305
+799
-2,275
-1,075
-1,703
-857

116

Change

+116

Total
(A+B)

Change
(A+B)

20, 083
20, 706
22, 868
24,399
24, 563
22,820
22,873
23, 252
22,091
21, 793
21, 753
22, 058
22,857
20, 582
19, 507
17,804
17,063

-548
+623
i +2,162
+ 1 , 531
+ 164
-1,743
+53
+379
-1,161
-298
-40
+305
+799
- 2 , 275
-1,075
-1,703
-741

16,963
16,948
16, 873

-100
-15
-75

MONTHLY
1962:
January
February- _
March
Total 1st quarter..
April
Apr. 30
May 31
June 18 4
1
2

16,847
16,795
16,643
16, 519
5 16,495
* 16,435
* 16,434

-100
-52
-152
-304
-124
-60
-1

116
153
230

(2)
(2)
(2)
(2)

+37
+77
2+114

( 2)
()
(2)
(2)

(2)

(2)

-190

Includes transfer of $687,500,000 gold subscription to I M F .
Not available.
3 Treasury gold stock.
4
Released June 21, 1962.
NOTE.—U.S. gold stock includes gold in exchange stabilization fund, which is published with a 1-month
lag. E S F gold is not included in Treasury gold stock, which is published daily.




FEDERAL RESERVE DIRECT PURCHASES

29

The CHAIRMAN. We want to thank you for your appearance and we
feel you have given us some very interesting and helpful information.
Senator SPARKMAN. Mr. Chairman, I want to ask some questions.
The CHAIRMAN. Excuse me. All right.
Senator SPARKMAN. I will admit that practically everything has
been asked but there are a few things that I want to clear up.
I want to see if I understand correctly something you said. This
was about the statistics with reference to the gold outflow and the balance of payments, and so forth. I believe you said that those statistics
had not, in the past, been adequate, you feel.
Has there been any change in the setup? In other words, has
there been an improvement?
Mr. ROOSA. Yes; there has. Our feeling as to the question of
adequacy is not that we have been in any doubt as to what the deficit
was, that we know. It's more in terms of some of the detailed items
that contribute to it.
Senator SPARKMAN. Some of the analyzing?
Mr. ROOSA. Yes, and some of the things we need to know if we are
going to make an effective attack on the problem. There has been
a very significant job done by the Department of Commerce and I
shouldn't have implied that this was something that the Treasury is
responsible for other than having tried to encourage and urge, Commerce is doing the work, doing it very well, and the Treasury people
are maintaining very close relations with them, and we have a number
of additional improvements, particularly with respect to capital
movements where we need much more knowledge than we have had.
You see, one of the large swing items has been the errors and
omissions. As long as that's what you have to call it you don't
really know what you are dealing with, and this, last year, accounted
for a quarter of the deficit.
Senator SPARKMAN. Refresh my recollection on this: Did the
changeover in the balance of payments come rather suddenly and
unexpectedly, or was it a gradual growth over a period of time?
Mr. ROOSA. N O , sir; it was a gradual evolution.
Senator SPARKMAN. AS the economy in Europe recovered, was it
based mostly on that?
Mr. ROOSA. Yes, there are a great variety of things. To those
who point to deficits it's common to say that for the 8 years before
1961 the Government ran a total deficit of $32 billion and surpluses
of only about $4 billion; and consequently, the Government was
running deficits that were
Senator SPARKMAN. Let me get that figure again. For 8 years
prior to what?
Mr. ROOSA. Prior to fiscal 1961 it's about $32 billion of deficits,
and there were 3 years, I believe, of surpluses; at any rate, the total
was a little over $4 billion.
Senator SPARKMAN. SO, it ran about $28 billion over that period
of years?
Mr. ROOSA. Yes, and this is the period when we were also developing our balance-of-payments deficit, and you can't go on this way
indefinitely and still maintain confidence in the dollar.
Senator SPARKMAN. NOW, I want to see if I'm correct on this,
because I have gotten a good bit of mail about this outflow of gold
and the balance-of-payments, and so forth.




30

FEDERAL RESERVE DIRECT PURCHASES

I have been under the
improving that situation.
Mr. ROOSA. Yes, sir; we
Senator SPARKMAN. The
or 4 years, was it?

impression that we have been gradually
Is that true?
have.
sum total you gave was over the last 3

Mr. ROOSA. Yes.
SPARKMAN. D O you have that broken
Mr. ROOSA. Yes.
Senator SPARKMAN. Would you give us the

Senator

down by years?

balance-of-payments
first and then the
Mr. ROOSA. And then the gold.
The deficit in 1958, as I remember, $3.5 billion. I will give you
that in just a second.
Senator SPARKMAN. When you say 1958 you mean fiscal?
Mr. ROOSA. No, this is calendar.
Senator SPARKMAN. Calendar?
Mr. ROOSA. Yes,

sir.

I think, sir, I better supply these in better form for the record later.
Senator SPARKMAN. If you will give me the rough numbers and
supply the accurate figures for the record, that will be all right.
Mr. ROOSA. The gold sale in calendar 1958 was $2,275 million.
And then in 1959, the deficit was $3.7 billion, and the gold loss in that
year was $731 million.
Senator SPARKMAN. $731 million?
Mr. ROOSA. Yes, but we also transferred a large amount to the
International Monetary Fund that year which brings the total to
about $1.1 billion.
Senator SPARKMAN. One point one?
Mr. ROOSA. And then in 1960 the indicated deficit, $3.9 billion,
the gold loss $1,703 million; and then in 1961 the balance of payments
deficit is $2.5 billion—it has been revised since these figures were
printed—these figures keep being revised—it's $2.46 billion, the
deficit. The change in gold, $857 million.
Senator SPARKMAN. $857 million?
Mr.

ROOSA.

Yes.

Senator SPARKMAN. And then what is projected for 1962?
Mr. ROOSA. Our hope is that 1962 will be a deficit of $1.5 billion
and I hesitate to predict the gold. So far the net loss has been
approximately $450 million.
Senator SPARKMAN. That's not the annual rate but the total to
date?
Mr. ROOSA. N O , this is the actual. And, of course, we are hopeful
that the last half of the year will not be as great.
I should point out that most of this is of a somewhat different
nature. I t arises from the fact that the United Kingdom has been
rebuilding its reserve position, and as the other key currency they
need some gold, so most of the gold sold this year has been mainly
to them. It doesn't have quite the same significance it would have
otherwise.
Senator SPARKMAN. SO you think it will be under a billion dollars
this year?
;

Mr. ROOSA. Yes.
Senator SPARKMAN.
Mr. ROOSA. I might




$750 million.
hope so, but I don't want to put my neck out.

FEDERAL RESERVE DIRECT

PURCHASES

31

Senator SPARKMAN. I'm doing this for rough figures for myself.
Eight hundred million.
Mr. ROOSA. That is possible, but I'm not predicting.
Senator SPARKMAN. And you are constantly working on steps to
improve this problem?
Mr.

ROOSA. Yes,

sir.

Senator SPARKMAN. That shows that there has been a decrease in
the loss of gold each year since 1958.
Mr. ROOSA. Well—yes.

Senator SPARKMAN. Each year according to the figures I have here.
Mr. ROOSA. Yes, that's the trend.
Senator SPARKMAN. In other words, the big outflow has been
slowed down, though not completely checked?
Mr. ROOSA. Yes.
The CHAIRMAN. Inflation has been
Senator SPARKMAN. We have had

slowed down, too.
a very stable condition for
nearly 3 years now with reference to that; that is correct.
I am just interested on the Canadian rate of exchange. A couple
of years ago, in terms of the Canadian dollar, the American dollar
was only 92 cents as I recall. Wasn't it?
Mr. ROOSA. Yes, sir. The history of the Canadian dollar has, of
course, been a variable one because for a long time they didn't try to
peg their exchange rate. They did, beginning about the fifth of May
this year, finally choose 92% cents, U.S. cents, as the external value of
their dollar, and it had in earlier years been as high in terms of U.S.
dollars as $1.05&
Senator SPARKMAN. I knew that just a couple or 3 years ago the
American dollar held an unfavorable position in the Canadian money
market, and then it was reversed more recently.
Mr. ROOSA. Yes, sir. This is, of course, a delicate time for anyone
in our Government to be commenting on their affairs since they are
in the process of a change. I think it would be recognized
Senator SPARKMAN. N O , I didn't mean to comment on what they
have done. But does it indicate, in a sense, a strengthening of our
position in the minds of the Canadians; or is it simply a housekeeping
proposition of their own?
Mr. ROOSA. It's a mixture of several things. One, to go back to
what the chairman mentioned before, the Canadians have run a very
high and an increasing internal government budget deficit. Their
budget deficit, if you translate it into our terms, they have been running
deficits of $10 billion a year and more, fairly steadily. In addition,
they have been running, translated into our terms, balance-of-payments deficits of almost that same magnitude, fairly steadily. You
can't do that forever. So, their currency has suffered as a result.
They have now reached a sticking point where they will organize
government policy around this present rate and hold it and that, of
course, will have to mean some change in both of these other respects—
the fiscal deficit and the balance-of-payments deficit.
Senator SPARKMAN. I must confess that I'm somewhat puzzled
about the use of the tax laws and I'm not clear in my mind about
the extent they ought to be used as economic adjusters.
However, there are many factors, I take it, to be considered, and
I suppose the principal factor in connection with proposed tax reduc-




32

FEDERAL RESERVE DIRECT PURCHASES

tion next year or this year, whenever it may come, is an incentive to
stepped up production.
Mr. ROOSA. Yes, sir.
Senator SPARKMAN. Because,

after all, the revenues that the Government gets are related directly to the gross national product.
Mr. ROOSA.

Yes.

Senator SPARKMAN. And it might be possible to step up production
to such an extent that a tax reduction would really pay off, probably
not the first year, but on the long-range basis.
Mr. ROOSA. Yes. This would have to be the basis—you have put
clearly what I fumbled in trying to mention to Senator Proxmire
that the only reason for this kind of tax law chenge that involves a
net revenue loss in a given year—I shouldn't say the only reason but
a principal reason for doing it at this time, after we have had other
deficits—is that you expect that it's going to produce much greater
revenues in the immediate following years.
Senator SPARKMAN. I notice that a paper which our staff prepared
for the use of the chairman shows three different kinds of budgets
and just where we would stand under each one.
The first is the administrative or conventional budget which shows
a projected deficit of $7 billion in fiscal 1962 and a $500 million
surplus in 1963. The cash consolidated budget shows a projected
$8.5 billion deficit in fiscal 1962, and projected $1.8 billion surplus in
1963. And the national income accounts show a deficit of half a
billion dollars in fiscal 1962 and a $4.4 billion surplus in 1963.
In tracing the relation between our domestic and our international
financial position, what budget measure is most useful? The one we
are using? Or do we need to revamp it?
Mr. ROOSA. I think as in so many things we should add without
subtracting. I think we need the budgets we have had. I think
it's also very useful to employ the newer concepts as well. The main
difference, as I'm sure you know well, is, the administrative budget is
straightforward totaling of all expenditures and all receipts as incurred
during the fiscal year but without inclusion of that part of the receipts
and expenditures that may flow through trust funds. These latter
come into the Treasury and effect our cash requirements.
That is, then, the difference between the consolidated cash budget
and the administrative budget and it's usually a small one, the
difference usually runs between $1 and $2 billion, and represents
whether or not the trust funds are net receiving cash or whether they
are net paying out cash, and the swing is usually of that magnitude.
Then the third one, the national income, has a much greater difference, and there is not one standardized way of presenting it. There are
actually a dozen ways of computing the national income accounts
budget, so that there isn't any real agreement on which is best and
appropriate that can stand immutably the tests of criticism. But the
one that is used by our Bureau of the Budget I think comes the closest
and takes into account the current accrual of liabilities and therefore
steps over the kind of distinction I was making when I spoke to Senator Proxmire about the fact that our tax base in calendar 1963 becomes the income for fiscal 1964, and so on; everything is accrued and
entered into the accounts as the liability arises, not when it's actually
paid, so that it's a measurement of what is going on sumultaneously




FEDERAL RESERVE DIRECT PURCHASES

33

and not what has actually reached and passed through the Government's accounts.
I t financially produces a difference; it shifts a lot of these things forward in time.
Senator SPARKMAN. I agree with the chairman and most of the
others as to the need of having a balanced budget. I wouldn't say
necessarily year in and year out. But certainly we need more balanced budgets than unbalanced budgets. We hear a lot of talk about
the need of a balanced budget in prosperous times. We have prosperous times and I keep wondering when are we going to get the budget
balanced or running in such a way that we would have them in prosperous times so that we would be able to sustain a deficit when bad
times hit us and it became necessary.
Are you hopeful in that respect?
Mr. ROOSA. Yes, sir; I'm hopeful to the point of being determined. The question we do face with respect to the new tax suggestions will be whether, if accepted and introduced, they increase the
likelihood of this by shifting the incidence of the tax burden in such a
way that we get the needed revenue with somewhat greater volume
of overall physical activity in the country. Now, this is obviously a
nice theory if it works. We have to wait to see just what form that
will take.
Senator SPARKMAN. H O W long a gap or a lag would there be? In
other words, if the money saved from taxes is not spent in the form of
a purchase of consumer goods or the investment in new productive
capacity, it's not going to accomplish the desired results, is it?
Mr. ROOSA. N O , sir; it isn't.

Senator SPARKMAN. NOW, there will be a lag time. How long do
you think it would be before results could be shown?
Mr. ROOSA. I wish I could give a resounding answer. I must say
I don't know and our hope has to be that the time will be very short;
certainly that a major response would occur within a year. I- doubt,
though, that you can expect to see much of a response within the
interval of, say, 6 months. I t takes something like that.
Senator SPARKMAN. That's all. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Secretary, we thank you very much.
(Thereupon, at 11:45 a.m., the committee proceeded to other business.)




o