View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

PUBLIC DEBT CEILING A N D
INTEREST RATE CEILING ON BONDS

HEARINGS
BEFORE THE

COMMITTEE ON WAYS AND MEANS
HOUSE OE REPRESENTATIVES
EIGHTY-SIXTH CONGRESS
FIRST

SESSION
ON

BEQUEST OF T H E P R E S I D E N T FOR AN INCREASE IN T H E
CEILING OF T H E PUBLIC DEBT AND FOR REMOVAL OF
T H E I N T E R E S T R A T E CEILING ON SAVINGS BONDS AND
N E W TREASURY BOND ISSUES

JUNE 10, 11, AND 12, 1959

Printed f o r the use of the Committee on Ways and Means

UNITED STATES
GOVERNMENT PRINTING OFFICIO

41950




WASHINGTON : 1959

COMMITTEE ON W A Y S AND MEANS
WILBUR D. MILLS, Arkansas, Chairman
AIME J. FORAND, Rhode Island
CECIL R. KING, California
THOMAS J. O'BRIEN, Illinois
HALE BOGGS, Louisiana
EUGENE J. KEOGH, New York
BURR P. HARRISON, Virginia
FRANK M. KARSTEN, Missouri
A. S. HERLONG, JR., Florida
FRANK IKARD, Texas
THADDEUS M. MACHROWICZ, Michigan
JAMES B. FRAZIER, JR., Tennessee
WILLIAM J. GREEN, JR., Pennsylvania
JOHN C. WATTS, Kentucky
LEE METCALF, Montana

RICHARD M. SIMPSON, Pennsylvania
NOAH M. MASON, Illinois
JOHN W. BYRNES, Wisconsin
HOWARD H. BAKER, Tennessee
THOMAS B. CURTIS, Missouri
VICTOR A. KNOX, Michigan
JAMES B. UTT, California
JACKSON E. BETTS, Ohio
BRUCE ALGER, Texas
ALBERT H. BOSCH, New York

LEO H . IRWIN, Chief Counsel
JOHN M . MARTIN, JR., Assistant Chief Counsel
THOMAS A . MARTIN, Minority Counsel
GERARD M . BRANNON, Professional Staff
II




CONTENTS
Page

Press release, dated June 8, 1959, regarding request of the President for
an increase in ceiling of the public debt and removal of the interest rate
ceiling on savings bonds and new Treasury bond issues

1

STATEMENTS
American Woman's Council, Mrs. Cecil Norton Broy, first vice president.
284
Anderson, Hon. Robert B., Secretary of the Treasury
2, 33, 67
Baird, Julian B., Under Secretary of the Treasury for Monetary Affairs-_
2
Bennett, Representative Charles E., of Florida
250
Broy, Mrs. Cecil Norton, first vice president, American Women's Council. _
284
Budget Bureau, Hon. Maurice H. Stans, Director
216
Colm, Gerhard, chief economist, National Planning Association
289
Federal Reserve System:
Martin, Hon. William McChesney, Jr., Chairman, Board of G o v ernors
173
Young, Ralph A., Director, Division of Research and Statistics
173
Hargis, Representative Denver D., of Kansas
271
Hemphill, Representative Robert W., of South Carolina
287
Johnson, Representative Byron L., of Colorado
274
Martin, Hon. William McChesney, Jr., Chairman, Board of Governors,
Federal Reserve System
173
Matthews, Representative D. R. (Billy), of Florida
252
National Planning Association, Gerhard Colm, chief economist
289
Patman, Representative Wright, of Texas
221
Reuss, Representative Henry S., of Wisconsin
253
Rogers, Representative Paul G., of Florida
272
Stans, Hon. Maurice H., Director, Bureau of the Budget216
Treasury Department:
Anderson, Hon. Robert B., Secretary
2, 33, 67
Baird, Julian B., Under Secretary for Monetary Affairs
2
Wright, Representative James C., Jr., of Texas
261
Young, Ralph A., Director, Division of Research and Statistics, Federal
Reserve System
173
LETTERS, EXHIBITS, ETC.
American Bankers Association, Reno Odlin, chairman, savings bonds
committee, telegram to Congressman Mills, dated June 10, 1959
American Farm Bureau Federation, Charles B. Shuman, president, telegram to Congressman Mills, dated June 12, 1959
Anderson, Hon. Robert B., Secretary of the Treasury:
Chart A. Public and private debt
Chart B. Market yield trends of short- and long-term securities
Chart C. Changes in major forms of debt
Chart 1. Longer term U.S. Treasury and Government aided debt
outstanding
Chart 2. Federal securities held by nonbank investors
Chart 3. E - and H-bonds—cash-sales and redemptions
Chart 4. Maturity yields on &-bonds and market rates
Chart 5. Interest rates oil E-bonds and savings accounts
Chart 6. Trends in individuals' savings
Chart 7. Market yields on Governments
Chart 8. Interest cost on new long-term corporate bonds
Chart 9. Interest cost on new long-term Treasury bonds
Chart 10. Long-term interest rates since 1920
Chart 11. Changes in major forms of debt




in

315
316
34
46
48
5
7
10
11
12
12
17
18
19
20
22

IV

CONTENTS

Anderson, Hon. Robert B., Secretary of the Treasury—Continued
Chart 12. The Treasury cash balance problem
Chart 13. Budget expenditures—semiannual
Chart 14. Budget receipts—semiannual
Chart 15. Budget surplus or deficit—semiannual
Chart 16. Monthly range of public debt subject to limit
Es'imated distribution of the interest on the public debt fiscal years
1946 and 1958
Letter to the Speaker of the House of Representatives, dated June 8,
1959, with two proposed bills enclosed
A bill to facilitate management of the public debt, and for other
purposes, with a section-by-section analysis
A bill to permit the Secretary of the Treasury to designate certain
exchanges of Government securities to be without recognition
of gain or loss for income tax purposes, with a section-by-section
analysis
Long-range commitments and contingencies of the U.S. Government
as of December 31, 1958
Table 1. Forecast of public debt outstanding, fiscal year 1960, based
on constant operating cash balance $3.5 billion (excluding free gold) _
Table 2. Actual cash balance and public debt outstanding July 1958M a y 1959
Colm, Gerhard, chief economist, National Planning Association, table
entitled 1 'Sources and uses of gross saving"
deLaittre, John, president, National Association of Mutual Savings Banks,
letter to Congressman Mills, dated June 12, 1959, with an address by
Carl G. Freese, chairman of the committee on Government securities
and the public debt, National Association of Mutual Savings Banks,
entitled "Federal Debt Management and the Savings Banking Industry"
enclosed
Heller, Dr. Walter W., speech entitled " W h y a Federal Debt Limit" filed
by Fepresentative Byron L. Johnson, of Colorado
Johnson, representative Byron L., of Colorado, speech made by Dr.
Walter W."Heller, entitled " W h y a Federal Debt Limit"
National Association of Mutual Savings Banks, John deLaittre, president,
letter to Congressman Mills, dated June 12, 1959, with an address by Carl
G. Freese, chairman of the committee on Government securities and the
public debt, National Association of Mutual Savings Banks, entitled
"Federal Debt Management and the Savings Banking Industry" enclosed
National Planning Association, Gerhard Colm, chief economist, table entitled "Sources and uses of gross saving"
Odlin, Reno, chairman, Savings Bonds Committee, American Bankers Association, telegram to Congressman Mills, dated June 10, 1959
Patncan, I epresentative Wright, of Texas:
Article from New York Tines, dated Mar. 15, 1959, entitled " U . S .
Bond Study Called Overdue"
Article from Washington Post and Tin es Ferald, dated March 9,
1959, entitled " U . S . Bond Market Speculation Probed"
Table 1. Gross Federal c ebt per capita, 1939-53
Table 2. Demand for private savings as related to gross national
product 1951-58
Table 3. Rate of personal savings compared with interest rates,
1951-58
Table 4. Changes in interest rates compared with changes in rate of
personal savings
Table 5. Average maturity of marketable interest-bearing public
debt
Table 6. Business loans of member banks, 1955'and 1957, by size of
borrower
Table 7. Change in amount of business loans of member banks, 195557, by business and size of borrower
Table 8. Business loans of member banks, 1955-57, by business and
relative size of borrowersPresident's message to Congress regarding management of the public debt,
dated June 8, 1959




Page
25
26
27
28
29
44
76
78

84
151
32
32
299

316
274
274

317
299
315
248
249
243
243
244
244
244
245
246
247
74

CONTENTS

V
Page

Shuman, Charles B., president, American Farm Bureau Federation, telegram to Congressman Mills, dated June 12, 1959
Treasury Department, Hon. Robert B. Anderson, Secretary:
Chart A. Public and private debt
Chart B. Market yield trends of short- and long-term securities
Chart C. Changes in major forms of debt
Chart 1. Longer term U.S. Treasury and Government aided debt outstanding
Chart 2. Federal securities held by nonbank investors
Chart 3. E - and H-bonds—cash sales and redemptions
Chart 4. Maturity yields on E-bonds and market rates
Chart 5. Interest rates on E-bonds and savings accounts
Chart 6. Trend in individual's savings
Chart 7. Market yields on Governments
Chart 8. Interest cost on new long-term corporate bonds
Chart 9. Interest cost on new long-term Treasury bonds
Chart 10. Long-term interest rates since 1920
Chart 11. Changes in major forms of debt
Chart 12. The Treasury cash balance problem
Chart 13. Budget expenditures—semiannual
Chart 14. Budget receipts—semiannual
Chart 15. Budget surplus or deficit—semiannual
Chart 16. Monthly range of public debt subject to limit
Estimated distribution of the interest on the public debt fiscal years
1946 and 1958
Letter to the Speaker of the House of Representatives, dated June 8,
1959, with two proposed bills enclosed
A bill to facilitate management of the public debt, and for other
purposes, with a section-by-section analysis
A bill to permit the Secretary of the Treasury to designate certain
exchanges of Government securities to be without recognition
of gain or loss for income tax purposes, with a section-by-section
analysis
Long-range commitments and contingencies of the U.S. Government as of December 31, 1958
Table 1. Forecast of public debt outstanding, fiscal year 1960, based
on constant operating cash balance $3.5 billion (excluding free
gold)
Table 2. Actual cash balance and public debt outstanding July 1958May 1959
Wright, Representative Jaires C., Jr., of Texas, amortization table, based
upon a national debt of $280 billion, paid off at the rate of 1 percent each
year, and interest at the hypothetical rate of 3}£ percent on the unpaid
balance




316
34
46
48
5
7
10
11
12
12
17
18
19
20
22
25
26
27
28
29
44
76
78

84
151
32
32

268




PUBLIC DEBT CEILING AND INTEREST RATE
CEILING ON BONDS
WEDNESDAY,

JUNE

HOUSE

OF

COMMITTEE

10,

1959

REPRESENTATIVES,
ON

WAYS

AND

MEANS,

Washington, D.C.
The committee met at 10 a.m., pursuant to call, in the committee
room, New House Office Building, Hon. Wilbur D. Mills (chairman)
presiding.
The C H A I R M A N . The committee will please be in order.
Our public hearings this morning are for the purpose of considering
the request of the President for an increase in the ceiling on the public
debt and for changes with respect to the interest rate ceiling on savings
bonds and new Treasury bond issues.
Without objection, the press release referring to this hearing will
be printed at this point.
[Press release, for immediate release, Monday, June 8, 1959, Committee on W a y s
Means, U.S. House of Representatives, 1 1 0 2 New House Office Building]

and

C H A I R M A N W I L B U R D . MILLS, DEMOCRAT, OF ARKANSAS, COMMITTEE ON W A Y S
AND MEANS, HOUSE OF REPRESENTATIVES, ANNOUNCES PUBLIC HEARINGS ON
REQUEST OF THE PRESIDENT FOR AN INCREASE IN THE CEILING OF THE PUBLIC
DEBT AND REMOVAL OF INTEREST RATE CEILING ON SAVINGS BONDS AND N E W
TREASURY BOND ISSUES

Chairman Wilbur D. Mill, Democrat, of Arkansas, Committee on Ways and
Means, House of Representatives, today announced that the Committee on Ways
and Means would conduct public hearings beginning Wednesday, June 10, 1959,
on the request of the President for legislation to provide for an increase in the
public debt ceiling and f o r legislation to remove the statutory ceiling on the
interest rate payable on new Treasury bond issues and on savings bonds. Chairman Mills stated that the Honorable Robert B. Anderson, Secretary of the Treasury, would be the first witness to testify before the committee to be followed by
the Honorable William McChesney Martin, Jr., Chairman of the Federal Reserve
System, Board of Governors; and the Honorable Maurice H. Stans, Director of
the Bureau of the Budget.
At the present time, the permanent statutory ceiling on the public debt is $283
billion. In addition, there is an additional temporary increase of $5 billion which
expires June 30, 1959. The ceiling on the interest rate which can be paid on
Treasury bonds presently is 4 % percent and the present interest rate ceiling on
savings bonds is 3.26 percent. The President has requested the Congress to
raise the permanent public debt ceiling from $283 to $288 billion, with an additional temporary increase to $295 billion through June 30, 1960. The President
requested that the interest rate ceilings on savings bonds and Treasury bonds be
removed.

Our first witness this morning is the Secretary of the Treasury, the
Honorable Robert B. Anderson.
Mr. Anderson, we are always pleased to have you before the committee and you are recognized, sir, to proceed in your own way.




1

2

PUBLIC DEBT AND INTEREST RATE

CEILINGS

STATEMENT OF HON. ROBERT B. ANDERSON, SECRETARY OF THE
TREASURY, ACCOMPANIED BY JULIAN B. BAIRD, UNDER SECRETARY FOR MONETARY AFFAIRS; WILLIAM T. HEFFELFINGER,
FISCAL ASSISTANT SECRETARY; ROBERT P. MAYO, ASSISTANT
TO THE SECRETARY; AND CHARLES E. WALKER, ASSISTANT TO
THE SECRETARY
Secretary ANDERSON. Thank you, Mr. Chairman.
I should like to say that it is always a pleasure to appear before
this committee and I come this morning rather apologetically because
of the length of the statement which I have. It is broken into two
parts, one of which I shall present to the committee, and the other
which is added as a supplement in order not to unduly tax the committee's time.
My only justification for such a lengthy statement is the importance
of the issues which are before this committee for their consideration.
I appear this morning to support policies I sincerely believe to be
in the best interests of 176 million Americans. I do so in the realization that all thoughtful people share common objectives. We realize
there are honest differences of opinion as to the methods by which these
objectives may be attained.
Fundamentally, we Americans endeavor to achieve sustainable economic growth in terms of real goods and services. We seek a sustainable rate of growth that would promote maximum job opportunities, continuity of employment, and real earnings. W e seek as well
to insure that the process of saving, which underlies the growth of
this or any other country, is not diminished but encouraged. W e seek
to protect the welfare of those individuals who now depend for their
livelihood on accumulated savings, the proceeds of insurance policies,
benefits of retirement systems, the aid of social security payments,
and similar accumulations from a lifetime of effort.
W e seek also to insure that those who plan for the education of
their children, who guard against adversity, and who provide for
their own economic well-being through any process of accumulated
savings shall not have the rewards of their diligence and thrift
diminished.
W e live in a world of tensions and in a world where new nations
with new freedoms are seeking to improve their standards of living
and their economic well-being, where all eyes are turned toward
America. A sound domestic economy is essential if we are to maintain sufficient military strength to preserve freedom and liberty for
ourselves and our friends abroad. I f we are to witness the growth
of better conditions for our neighbors all over the world, we must
adopt and stanchly support enduring sound monetary and fiscal
policies, the same policies that we have strongly encouraged them to
adopt in their own interests.
W e must not be unmindful of the lessons to be learned from the
financial history of others who have tried methods less demanding
and less exacting, nor must we succumb to the belief that real wealth
is created by any other means than by the physical and mental labor
of human beings working with the physical resources with which
each country is blessed.




3 PUBLIC DEBT AND INTEREST RATE CEILINGS

Mr. Chairman, it is with this belief that we support the proposals
which have been laid before you by the President. In a world of
economic complexities, there is a constant interrelationship between
fiscal policy, monetary policy, and the individual and collective actions of all who participate in our economic structure. We cannot
isolate one and set it apart as controlling, but we can say that each,
in its own sphere, is a sine qua non to the achievement of our total
objectives.
It is because of my belief that the people of our country are willing
to subscribe to the disciplines which freedom exacts from government
and individuals that I have confident faith in the security and wellbeing of our Nation's future.
I should like now to address myself to one important element of
our economic life, the management of our national debt.
The public debt rose last month to an all-time high of $287.2
billion and is now only slightly below that figure. This represents
over $1,600 for each man, woman, and child in America. The Federal
Government owes as much money as all of the corporations in the
United States put together. Our debt is as large as the debts of all
the individual borrowers in the country put together plus the debts
of all of our State and local governments.
The U.S. Government, therefore, owes about one-third of all of
the debt in the United States and is the largest single borrower.
In the calendar year 1958, the Treasury issued $69 billion of new
marketable securities—$19 billion for cash and $50 billion in refinancing maturities, quite apart from the continuing rollover of about
$22 billion of weekly bill maturities. All of the corporations in
America issued slightly under $10 billion of new bonds and notes
last year while State and municipal new security issuances amounted
to $7y2 billion.
In the year%head, the Treasury faces the refinancing of $76 billion
of short-term securities that will mature. In some ways, the volume
of this short-term debt is as important a factor in our financing picture as the size of the total debt. Each time the Treasury goes to
the market—either for refunding operations or for new cash borrowing needed to cover seasonal requirements or retirement of other
securities—it is a significant event in all financial markets. Both the
size of our borrowing requirements and the frequency of our trips
to the market tend to interfere with the smooth marketing of new
corporate and State and local government securities.
Another problem related to the large size of the debt maturing
within 1 year is that such debt is only one step away from money.
It should be realized, however, that in this country we have a large
active and continuous demand for short-term debt instruments outside of the banking system inasmuch as corporations, State, and local
governments, foreign accounts, and many other investors invest their
short-term funds in this manner. Almost 60 percent of our under-1year debt, therefore, is held outside of the banks—a larger percentage
than in any other country we are aware of.
Even though it is preferable to have large amounts of shortterm securities in the hands of nonbank investors rather than in
commercial banks, we must never lose sight of the fact that a wellbalanced debt structure calls for continued offerings of intermediate




4

PUBLIC DEBT AND INTEREST RATE CEILINGS

and longer term securities, whenever conditions permit, if debt management is to be conducted in a manner consistent with economic
growth and stability.
The quest for a balanced structure of the debt is never-ending since
the passage of time brings more and more of the outstanding debt
into the short-term area. The high point of our under-l-year debt
was reached at the end of 1953 when the total was $80 billion. The
total is now $76 billion, having dropped below $60 billion for short
periods in 1955 and 1956.
If the Treasury should be able to do nothing but issue under-l-year
securities to replace maturing issues between now and December 1960,
instead of the present $76 billion, we would have almost $100 billion
of under-l-year debt outstanding at that time.
The Treasury does not intend this to happen. W e must, therefore,
continue to sell intermediate and longer term bonds whenever appropriate as we try to keep the short-term debt from growing. The only
reason we have been able to keep the short-term debt from growing
since December 1953 is that since then we have issued $34 billion of 5to 10-year bonds, $2 billion of 10- to 20-year bonds, and $ 6 ^ billion
of over 20-year bonds.
T H E COMPETITION W H I C H

WE

FACE

Let us look at some of the competitive phases of our problems.
Federal Government programs to guarantee home mortgages for veterans and to provide F H A insurance on various types of mortgages
have contributed to the unprecedented volume of homjebuilding in
America since World War II. But they have also fostered a marked
improvement in the quality of mortgages as investments for the billions of dollars that Americans each year save out of their earnings—
savings which they invest directly of which insurance companies,
savings banks, savings and loan associations, or pensioiP funds invest
in their behalf.
There are a great many other debt obligations outstanding today
which our Government also aids in one way or another, including
securities issued by many Federal Government agencies, even though
those securities are not actually guaranteed by the U.S. Government.
While the volume of long-term Government-aided obligations has
been growing, the volume of long-term Treasury bonds has been
declining. A t the end of 1946, for example, there were $117 billion
of U.S. Treasury bonds outstanding which originally bore maturities
of over 10 years. In contrast, there was $6% billion of what might
be called long-term "Government-aided" debt outstanding. Twelve
years later—December 31, 1958—the $117 billion total of long-term
Government bonds had shrunk to $65% billion while the $6% billion
Government-aided total had grown to $58i/2 billion—$55 billion of
which is in F H A and Y A mortgages alone.




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

(Chart No. 1 follows:)
CHART

1

^LONGER TERM U.S. TREASURY AND GOVERNMENT AIDED—,
DEBT OUTSTANDING
$Bil.

Original Maturities Over 10 Years

120
Bonds

Dec. 31,
1946

Dec. 31,
(958

80
58'/2

Invest. Series
Bonds

Marketable

j|j

40

I ^ M i s c .
w

F H A

Mortgages
VA

30'/2
6Vj>

Treasury

Govt
Aided

I
2'/2

Treasury

j

J

Public
Housing

Govt
Aided

Secretary ANDERSON. In addition, the continuation of high individual and corporate income tax rates in the postwar period has
made the complete exemption from Federal income taxes which is
enjoyed by State and local government securities very valuable.
State and local debt outstanding has increased from $16 billion in
1946 to $59 billion in 1958. Tax exemption has contributed to the
ability of State and local governments to sell their securities, but it
has also meant that Federal securities are relatively that much less
attractive.
Competition for funds available for investment has also been increased in other ways. A high corporate income tax rate has made
corporations more inclined to borrow than to issue stock, since interest payments are deductible for income tax purposes but dividend
payments are not. Moreover, from the standpoint of the average
small saver, Federal insurance of bank deposits and savings loan
shares has practically eliminated any difference in risk between private savings and Government bonds.
The problem of encouraging more long-term investors to buy and
hold Treasury securities is also increased by the tendency among
some investors to prefer stocks to fixed dollar obligations because of




6

PUBLIC DEBT AND INTEREST RATE CEILINGS

what I believe to be a mistaken conviction that the purchasing power
of the dollar will decline further. It is in this environment that the
sale of enough long- and intermediate-term Treasury securities sufficient to keep the debt from getting shorter must also compete with
large and growing demands for borrowing by State and local governments, by corporations for plant and equipment needs, and by homebuilders and buyers.
Many investors have also become increasingly confident in the
continued growth potentials of our Nation. As this grows, the
high quality of Government securities becomes relatively less important than in the past and the safest bonds in the world—U.S. Government securities—are more difficult to sell.
In recent years there has been substantial liquidation of longterm Government securities by investors who bought large amounts
of such securities during World War II, based on the improvement
in the relative attractiveness of other investments.
Long-term Treasury securities are held primarily by three broad
classes of private investors other than commercial banks. The first
group consists of savings institutions such as insurance companies,
mutual savings banks, saving and loan associations, corporate pension
funds, and State and local government pension funds. These investors, in the aggregate, held only $31 billion of Government securities in December 1958, as compared with $4iy 2 billion 12 years ago.
When the rapid growth of institutional assets generally is taken
into consideration the decline in their holdings of Government securities is even more striking. In 1946, life insurance companies had
45 percent of their assets invested in Government securities; the percentage now is 7 percent, far below the 18-percent level back in 1939.
Twelve years ago mutual savings banks had 63 percent of their
assets invested in Government securities; that has now been reduced
to 19 percent. Savings and loan associations now have only 7 percent of their assets in Governments, although their percentage has
never been much higher.
Corporate pension funds have 12 percent of their assets in Governments as against 30 percent just a few years ago. Even in State
and local pension funds, where statutory requirements are much less
favorable to investments outside of Government securities, the percentage invested in Governments has fallen from 54 to 35 percent in
the last 6 years alone.
The second group of long-term investors includes principally personal trust accounts and individuals in the upper income brackets.
Their holdings of Governments have also declined substantially in
the postwar years—from $34 billion in December 1946 to $21 billion
now. It is in this group where competition with tax-exempt State
and local obligations becomes most important.




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

(Chart No. 2 follows:)
CHART

2

.FEDERAL SECURITIES HELD BY NONBANK INVESTORSl
Dez'dQ-

a r^i^

40/2

Shorter-term
Holders

Savings
31 "** Institutions

Other Sav.
Bonds,etc.

42 % ^ E o n d H
^ Bonds

\Excluding Government Investment Accounts.

Secretary ANDERSON. By contrast, there is a third group whose
holdings have been growing. This group includes the millions of
small savers who buy and hold series E and H savings bonds.
Through the savings bond program they have added substantially
to their holdings of Government securities in the postwar period—
from $30 billion in 1946 to more than $42y2 billion now.
There is also a fourth area of long-term investment demand for
Government securities apart from private investors—Federal Government investment accounts.
These accounts—social security funds, veterans' life insurance
funds, civil service and railroad retirement funds, et cetera, added
substantially to their holdings during the entire postwar period at an
average rate of about $2y2 billion a year until last year. During the
fiscal year 1959, however, trust fund expenditures are exceeding receipts, serving to complicate further the Treasury's task of keeping the
short-term debt from growing.
We are just completing a fiscal year in which the largest peacetime
deficit in the history of our country had to be financed. In contrast,
we are looking forward to having sufficient budget receipts next year
to cover our expenditures. That fact, in itself, should brighten significantly the opportunities to improve the debt structure. Budgetary soundness has a pervasive effect in improving the environment in
which we operate. The confidence which grows out of proving that
we can live within our means is contagious.




8

PUBLIC DEBT AND INTEREST RATE CEILINGS

Our willingness and ability to act soundly in managing our debt and
in conducting our fiscal affairs is important also to our friends
throughout the free world who have a right to look to the United
States as an example of fiscal integrity.
While the gold movements of the past 18 months have been in response to the normal functioning of gold in international exchange,
the correction of prior adjustments, and the historical rebuilding of
monetary reserves, they should serve as a reminder that the postwar
dollar shortage has long since disappeared, although there remains a
shortage of capital resources in many of the less-developed countries.
These gold movements should remind us that other nations have built
strong financial and industrial communities and that we must reorient
our thinking in order to perform our full responsibility in the conduct
of our internal and international economic affairs.
We have demonstrated the ability of a free economy to come out of
an economic recession; it remains for us to demonstrate the willingness
to pursue appropriate policies during a period of high and rising
business activity. Under current conditions, such policies would include at least a balanced budget and sufficient flexibility for the Treasury to permit sound management of the public debt.
We would be less than frank, however, to suggest that living within
our means as a National Government will automatically cure the entire
problem of managing the public debt. W e would also be less than
frank if we suggested that the legislation which you have before you
will solve all of our problems. We feel very strongly, however, that
the proposed legislation can contribute significantly to a fuller realization of our goals of managing the debt in a way that is consistent
with sound economic progress.
The President has already outlined his program to you, incorporating principally improvements in the savings-bond program, removing the 414-percent ceiling on Treasury bond interest rates, and an increase in the debt limit. Proposed legislation on these three parts of
the program is incorporated in sections 1 through 3 of the first of the
bills we have placed, before you. With your permission I should like
to discuss each of these three items with you, and also to take up the
second proposed bill.
Sections 4, 5, and 6 of the first proposed bill deal with three somewhat technical matters on which I am submitting a short written statement for the record. These sections would provide a 10-year statute
of limitations on the liability of paying agents who in rare instances
may redeem savings bonds by erroneous payments; clarify the statute
which exempts U.S. obligations from State and local taxes, and authorize the issuance of bonds to the Government's various trust funds
at the same prices as bonds are issued from time to time to the public.
If there are any questions on these provisions, one of my associates will
be glad to answer them later.
IMPROVEMENTS I N T H E SAVINGS BOND PROGRAM

The statement on the savings-bond program which was attached to
my letter to the Speaker of the House of Representatives on June 8,
1959, contains a complete description of our savings-bond plans, if the
first proposed bill is enacted.




9 PUBLIC DEBT AND INTEREST RATE CEILINGS

As I pointed out in that statement, the new savings bond program
has three maj or features.
(1) All series E and H bonds sold beginning June 1,1959, will
earn interest of 3% percent per annum if held to maturity—onehalf percent more than at present—with lesser improved yields
for shorter periods of holding.
(2) All series E and H bonds outstanding will also earn approximately one-half percent per annum more than they do now, if held
to maturity, starting with their first full semiannual interest
period which starts on or after June 1,1959, with lesser improvement if redeemed earlier.
(3) All series E bonds on which an extension has already been
promised and which had not yet reached first maturity before
June 1, 1959, will be offered an improved extension on which 3%
percent will be paid if held the full additional 10 years, with
lesser yields (starting at 3y 2 percent) for shorter periods of holdThe savings-bond program is a program that every American has
a right to be proud of. It puts more of the public debt in the hands
of long-term investors—few people realize that the average dollar invested in these bonds stays with the Treasury approximately 7 years.
It also encourages desirable habits of thrift throughout the Nation.
Almost half of the current E - and, H-bond sales are accounted for by
purchases on payroll savings plans by some 8 million Americans
throughout industry and Government. Many of these savings grow
out of the convenience of the payroll plan, savings which would not be
taking place in such volume if it were not for the savings program.
Corporations throughout America, large and small alike, are administering these payroll savings plans on a voluntary basis because
they realize their importance and the benefits to their employees of
regular habits of thrift. Similarly thousands of banks and other
financial institutions across the country are selling bonds every day
without compensation because this is a program they sincerely believe
in.
As you know, series E and H bonds are designed particularly for
small savers. We have more than $42^ billion of E - and H-bonds
outstanding at the present time—$38 billion in the accrual-type series
E bonds issued at 75 percent of their face value with the interest
reflected in successively higher redemption values each 6 months to
maturity—and $ 4 ^ billion in series H bonds which pay interest currently by semiannual check to give a sliding sale of investment yields
approximating E-bond yields for similar periods of holding. These
are the only series of savings bonds which the Treasury has currently
on sale, although approximately $8y2 billion of the old series F, G,
J, and K bonds (sales of which were discontinued 3 years ago) are
still outstanding.
There are many reasons why so many millions of Americans buy
and hold series E and H savings bonds. I have already mentioned
the convenience of buying bonds on the payroll savings plan, and you
are familiar with the convenience of savings bond redemption privileges throughout the country. Owners of savings bonds never need
to
worry about market fluctuations; their redemption values at all
times are known in advance and are guaranteed by the Treasury.




10

PUBLIC DEBT AND INTEREST RATE CEILINGS

Furthermore, unlike savings accounts, where rates may move either
up or down from year to year, the Treasury guarantees whatever rate
of interest it puts on the bond for the full term of that bond.
Americans also know that savings bonds are perfectly safe; the
Treasury has replaced over a million of them which have been lost
or destroyed since the program began. These are attributes of savings bonds which have not changed over the years, quite apart from
the relative attractiveness of the interest rate.
CURRENT SAVINGS BOND

TRENDS

Sales of series E and H bonds improved slightly from 1957 to 1958
but were still behind sales for 1955 and 1956. [Redemptions in 1958
declined significantly from the 1957 peak. But the 1959 record to
date has not been good. Sales for the first 5 months are 6 percent
behind a year ago, with a worsening trend. Similarly, 1959 redemptions through May are 9 percent above a year ago, also with a worsening trend. The amount of E - and H-bonds outstanding (including
accumulated interest on E-bonds) declined by $36 million in April
and May—a greater decline than in any 2-month period since the
autumn of 1950.
Furthermore, on a cash basis, the net drain on the Treasury of an
excess of redemptions over sales of E - and H-bonds in the current
quarter is expected to amount to approximately $300 million—equal
to the cash drain at the low point in the third quarter of 1957. This
decline will undoubtedly become much more serious as time goes on
unless the present terms of these bonds are improved.
(Chart No. 3 follows:)




CHART

3

"Estimate based on April and May1959.

11 PUBLIC DEBT AND INTEREST RATE

CEILINGS

Secretary ANDERSON. Furthermore, we can expect enthusiastic cooperation of financial groups and employers in sponsoring the program only when they can conscientiously recommend savings bonds to
themselves, to their customers, and to their employees.
The rate of interest return on E - and H-bonds is now much less
favorable in comparison with savings accounts, as well as with other
types of securities—both Government and private—than in earlier
years. At the end of World War I I series E-bonds paid 2.90
percent for a full 10-year term of holding, as compared with
2% percent on long-term maturities of marketable Government securities, an average of 2% percent of savings and loan shares, 1%
percent on mutual savings bank deposits, and less than 1 percent on
commercial bank savings deposits.
At the present time the rate on E - and H-bonds held to
maturity is 3*4 percent as compared with more than 4 percent on
long-term Treasury marketable securities, and average rates paid of
3% percent on savings and loan shares, 3*4 percent on mutual savings bank accounts, and 2*4 percent on accounts in commercial banks.
Furthermore, the holder of an E-bond has to wait 3 years to get as
much as 3 percent on his money, whereas the applicable rates on savings accounts apply to a far shorter period of holding.
This is the principal reason, therefore, that the growth of savings bonds in recent years has been far overshadowed by the rapid
expansion of savings in mutual savings banks, commercial banks,
and—particularly—savings and loan associations.
(Charts Nos. 4, 5, and 6 follow:)
CHART 4

MATURITY YIELDS ON E BONDS AND MARKET RATES—
%

May 29:59

Quarterly Averages, 1941-'59

2.0
0

1941

1945

I960

Calendar Years

1955

*A!so H bonds beginning June 1952.
,41950—59




2

1959j

12

PUBLIC DEBT AND INTEREST RATE
CHABT

CEILINGS

5

^INTEREST RATES ON E BONDS AND SAVINGS ACCOUNTS_
E Bonds
at Original Maturity}

Insured Savings
and Loan Assns.

/

Y

VMutual
Savings Banks

1

J
^

1945
v

i

i

'47




i

'49

'51

insured Commercial Banks

'53

December 31

CHART

'55

'57

6

.TRENDS IN INDIVIDUALS' SAVINGS.

'59

13 PUBLIC DEBT AND INTEREST RATE

CEILINGS

Secretary ANDERSON. The percentage increases during the past 6
years shown on the chart are revealing: 52 percent for commercial
bank savings, 50 percent for accounts in mutual savings banks, 150
percent for savings and loan shares, and only 21 percent for E - and H bonds.
Overall series E savings bond rates were improved from 2.90 to 3
percent in the spring of 1952, and from 3 to 4.25 percent early in
1957. In neither case did the increased rate make up for the increased return on competing savings since the preceding change.
SOME FEATURES OF T H E N E W SAVINGS BOND PROGRAM

The Treasury's present plan attempts to correct this situation by
bringing the savings bond program back approximately to the same
competitive position that it held in 1952. It would, by so doing, contribute both to a greater awareness of the advantages of thrift throughout the country and to a better structure of the public debt.
Two of the three features in the new program—a higher rate on
new bonds being sold and an improved extension term for bonds
reaching maturity—follow the same pattern as in earlier savings
bond revisions. You will note that we would like to make these
changes effective as of June 1, 1959, regardless of when the legislation is approved, so that purchasers will know it is unwise to stop
buying bonds on the false grounds that by waiting they could buy a
better bond.
The other feature of our savings bond program is new and although
it is rather completely described in the attachment to which I have
been referring, I want to call it particularly to your attention. We
feel quite strongly that the Government has an obligation to the millions of Americans who hold E - and H-bonds to improve the future
earnings of bonds already outstanding. We plan no additional interest on holdings of savings bonds for any period in the past. But
we do feel that each holder of an outstanding bond is entitled to an
increase of approximately one-half percent per annum on the future
earnings of his bond if he holds it to maturity just as we are planning
now to pay one-half of 1 percent more to the buyers of new bonds.
Thus, present holders of E or H bonds would have little or no
incentive to cash present bonds and buy new ones. Such switching
operations would be costly both to the investor and to the Treasury.
The Treasury has, however, an even more important reason for
taking this step—a reason which relates to the equitable treatment
of all bondholders. The Treasury has something of a trusteeship
function on behalf of millions of individual savers who do not follow
interest rate trends closely. They buy bonds and hold bonds with
understandable faith that the Government is giving them a square
deal.
The new savings bond program is expected to add $30 to $35 million to the savings bond part of the budget cost of interest on the
public debt for the fiscal year 1960. Approximately $5 million of
this increased cost is attributable to the higher rate on new bond sales
and to improved extension terms. The remainder is accounted for
by increased interest on outstanding E and H bonds.




14

PUBLIC DEBT AND INTEREST RATE CEILINGS

In assessing the true cost of the new program, however, in terms
of overall budget costs of interest on the public debt, allowance should
be made for some expectation of increased sales and decreased redemptions as a result of the new program in comparison with a continued deterioration of the savings bond picture if present terms
are continued.
The Treasury can borrow more economically through the proposed
increase in savings bond terms at the present time than it can by
borrowing through marketable securities. We believe, therefore, that
the net addition to next year's budget costs for interest on the public
debt because of the new savings bond program may be less than $10
million, and could quite conceivably result in no net increase in all.
It is realized, of course, that the gross cost on savings bonds will tend
to build up in later years, but the saving in comparison with alternative borrowing would very likely continue to be a sizable offset.
The inauguration of the new savings and bond program will depend on the favorable consideration by the Congress of section 3 of
the first proposed bill. Section 3 will permit the Treasury to pay
interest in excess of the present maximum interest rate of 3.26 percent, to pay increased interest on bonds already outstanding, and
to permit future extensions of bonds for more than 10 years (the
present limit) beyond their original maturity dates.
BACKGROUND OF T H E 4 $ PERCENT INTEREST RATE CEILING

I should like to consider next the 4 % percent interest rate ceiling
currently applying to all new issues of Treasury bonds, which includes all new Treasury issues maturing in more than 5 years. Section 1 of the first proposed bill would repeal the present limit.
The earliest of all public debt statutes, in 1790, authorized the
President to borrow money on the credit of the United States for
the specific purposes of payment of the foreign debt, funding of the
existing domestic debt, and assumption of the debts of the several
States.
The President delegated this authority to the Secretary of the
Treasury, Alexander Hamilton, and this pattern of responsibility
continued in general until the early Civil War period. At that
time (1861) the Congress directly authorized the Secretary of the
Treasury to conduct the financing of the war through the issuance
of bonds, 1-year notes, and demand notes.
Prior to World War I, however, the Secretary of the Treasury had
little discretion in the actual carrying out of the public debt operations. The acts of Congress authorizing the issuance of U.S. Government obligations usually specified the terms and conditions applicable to each individual issue.
World War I brought a change in this situation. Because of the
large amounts of borrowing involved and the expectation that a number of loan operations would be required, Congress departed from its
previous policy of specifying the terms and conditions of the obligations to be issued. Instead, in the first and succeeding Liberty Bond
Acts, Congress gave the Secretary of the Treasury broader authority
to determine the terms and conditions of issue, conversion, redemption, maturities, payment, and the rate and time of payment of interest in respect to the several classes of obligations authorized to be




15 PUBLIC DEBT AND INTEREST RATE CEILINGS

issued. Interest rate ceilings on Treasury bonds were still set forth
in the statutes, however; the last one was the present 4 ^ percent rate
ceiling.
In making these changes, Congress proceeded in several steps. In
the first of the war-financing operations of World War I, authorized
by the First Liberty Bond Act in April 1917, Congress departed
from its policy of determining the specific terms and conditions of
each Treasury issue. The Secretary of the Treasury was authorized,
with the approval of the President, to issue securities to the extent
of $5 billion at a rate of interest on bonds issued under this authorization not to exceed 3y2 percent. The bonds were to be offered at not
less than par and no commissions were to be paid; other terms were
left to the discretion of the Secretary.
There was an expectation that wartime rates might move higher.
It was provided, therefore, that these first Liberty loan bonds could
be converted into bonds bearing a higher rate than Sy2 percent, if any
subsequent series of bonds should be issued at a higher rate before the
termination of the war. It may be noted that the effective return on
the new bonds was actually higher than Sy2 percent for many owners
in comparison with corporate bonds or mortgages, since both principal and interest were exempt from all taxation—Federal, State, and
local—except estate and inheritance taxes.
In the same act, authorization was given to the Secretary of the
Treasury to issue up to $2 billion of certificates of indebtedness, 1
year or less to maturity. The interest rate ceiling of 3 y 2 percent and
the tax-exemption privileges provided for the bonds applied also to
the certificates.
The Second Liberty Bond Act in September 1917 in effect increased
the Treasury's bond-issuing authority under both acts to $7.5 billion
and increased the interest rate ceiling on bonds to 4 percent. The
conversion privilege was retained for the new bonds except that in
this instance the privilege was to arise only once instead of each time
new bonds were issued at a rate higher than 4 percent. In this act
and thereafter, the rate of interest payable on certificates was left to
the discretion of the Secretary. Tax exemption was retained under
the Second Liberty Bond Act, but to a lesser degree.
By the spring of 1918, when a third Liberty loan was under consideration, the bonds of the previous loans were selling below par
and industrial and other securities were yielding a return much in
excess of the rate on Government bonds. The Third Liberty Bond
Act (April 1918), therefore, authorized the issue of 41/4-percent nonconvertible bonds. The tax exemption status of the new bonds was
virtually unchanged from the second Liberty loan.
The 41/4~percent interest rate ceiling was retained for the $7 billion
of bonds issued under the Fourth Liberty Bond Act (July 1918).
In order to make the rate more attractive, however, tax exemption
privileges were considerably extended with respect to surtaxes, excess
profits taxes, and war-profits taxes payable during the war and within
a fixed time after the termination of the war.
During the early months of 1919 it became clear that new financing
would again be required in the near future. A complicating element
in the situation was the fact that the final session of the 65th Congress
would terminate on March 4, 1919, considerably before the expected
date of the new financing. Carter Glass, then Secretary of the Treas-




16

PUBLIC DEBT AND INTEREST RATE CEILINGS

ury, wrote to the chairmen of both the House Committee on Ways and
Means and the Senate Committee on Finance and presented a strong
case for giving the Treasury greater leeway in setting the terms of
new issues. He cited at length the difficulty under conditions then
prevailing of fixing the terms of loans considerably in advance of
the offering.
In a statement before the Ways and Means Committee on February
13, 1919, the Secretary made a number of specific requests in connection with the forthcoming Victory loan, including the request that
the interest rate ceiling be removed for notes and for bonds having
maturities of less than 10 years.
T o withhold f r o m the Secretary of the Treasury the power to issue bonds
or notes bearing such rate of interest as may be necessary to make this refunding possible [i.e., refunding the interim certificates issued between the fourth
and fifth (Victory) loans] might result in a catastrophe—

the Secretary stated.

He added that:

T o specify in the act the maximum amount of interest at a figure sufficient
to cover all contingencies would be costly, because the maximum would surely
be taken by the public as the minimum.

It may be noted that the interest rate on certificates issued in anticipation of the third Liberty loan had risen to 4*/2 percent a year
earlier (February 1918) and had remained at that figure on subsequent issues in anticipation of the fourth and Victory loans. Certificate rates later rose to 6 percent.
Before its adjournment, Congress responded to the Secretary's appeal in March 1919 wih the Victory-Liberty Loan Act. This act
granted increased discretion to the Secretary of the Treasury to enable
him to deal with the situation as it might develop as far as notes
were concerned, but his request on bonds was not granted.
A note issue (one of the possibilities previously suggested by the
Secretary) was authorized in the amount of $7 billion—
* * * containing such terms and conditions and at such rate or rates of interest
as the Secretary of the Treasury may prescribe.

The notes were to run not less than 1 year nor more than 5 years
from the date of issue. In April 1919, the Treasury offered $4% billion 4 % percent 3-4 year gold notes, exempt from State and local
taxes (except estate and inheritance) and from normal Federal income taxes, and convertible at the option of the holder into 3% percent 3-4 year gold notes exempt from all Federal, State, and local
taxes (except estate and inheritance). The 414 percent interest rate
ceiling on bonds was thus not involved in the final financing of World
War I, but only because no bonds were authorized or issued.
THE

41/4

PERCENT

CEILING I N

OUR CURRENT

ENVIRONMENT

Until recently, the trend of interest rates in the past 25 years has
made the 4^4-percent ceiling a somewhat academic problem. Except
for a short period in the early 1930's, interest rates were low all
through the depression. Confidence in the future had been seriously
shaken and available savings exceeded the demand for borrowed
funds. In World War II, interest rates were held down artificially
on Federal borrowing and the demands for borrowed funds by State
and local governments, businesses and individuals were reduced to a
minimum by rationing and other direct controls.




17

PUBLIC DEBT AND INTEREST RATE CEILINGS

After World War I I the demand for funds by non-Federal borrowers began to grow again and interest rates started to rise. This
was aided by the fact that the Federal Government has not been able
to reduce its debt in the postwar period as a whole. Budget surpluses
in the 1920's allowed the Federal Government to reduce the public by
more than one-third (from $26 billion in 1919 to $16 billion in 1930).
As a direct result, interest rates declined during a period of general
prosperity.
Today, current demands for funds by businesses, homebuilders,
State and local governments, and other borrowers continue to push
heavily against a relatively modest volume of savings, and interest
rates have risen further.
At the present time it is extremely unlikely that the Treasury would
be able to issue bonds in any volume at a rate of 41/4 percent or less.
This is particularly true of the intermediate term area (5-10 years),
where the volume of new bonds which the Treasury can sell is usually
substantially larger than the more limited market for bonds in the
long-term area. By the end of May 1959, a number of bonds with
more than 5 years to run were selling in the market with yields above
4!/4 percent.
Chart 7 on the market pattern of rates on outstanding bonds reveals
that a large part of the "market curve" is above 4*4 percent. Furthermore, since the market for longer bonds is very thin (very little
buying or selling) the "market yield curve" in the longer area is low
as an index of what the Treasury would have to pay for a long bond
if one were to be issued today.
(Chart 7 follows:)




CHART

7

*Estimatedyields at constant maturities.

18

PUBLIC DEBT AND INTEREST RATE CEILINGS

Secretary A N D E R S O N . T O date the Treasury has been able under
the 414 percent ceiling to sell bonds beyond 5 years to maturity. Last
January we sold more than three-quarters of a billion dollars of
21-year bonds to yield 4.07 percent and in March we sold more than
half a billion dollars of 4-percent bonds due in 10y2 years. But the
market has moved down further since these offerings (down in price,
up in yield) and with the present level of interest rates the Treasury
would be seriously restricted by the present ceiling from taking advantage of reasonable opportunities to improve the structure of the
public debt by issuing intermediate and longer term bonds*
It should be mentioned that since March 1942 the Treasury has had
the right to offer securities at a discount. It is permissible under
present statutory authority, therefore, for the Treasury to issue a
bond with a 4%-percent coupon rate at a price below par to yield any
rate of interest to the investor above 4^4 percent which may be required by market conditions. The Treasury has not believed it appropriate, however, to circumvent the 4^-percent ceiling ill this way
and is taking the direct approach to the problem by requesting appropriate legislation.
As the President stressed in his message the Treasury borrows at
the lowest interest rate at which it can successfully sell the securities
it should issue. However, the Treasury must secure its funds in the
competitive market for credit as its exists at the time it needs the
money. It must sell its securities at rates sufficient to attract buyers
who always have the alternative opportunity to buy outstanding securities or new issues of corporate or municipal securities.
These are conditions which are true of both Government and
private borrowing. Typically, over recent years, the average new




CHART

8

*Moody's Investors Service.

19

PUBLIC DEBT AND INTEREST RATE

CEILINGS

highest grade corporate security, for example, has cost the borrower
about three-tenths of 1 percent more than the market rate on outstanding issues. The Treasury's pricing of new issues has been even
closer to the market pattern of rates on outstanding issues than corporate pricing, as is shown in chart 9, in comparison between the new
Treasury issue interest cost and the estimated market rates. All borrowers—including the Treasury—try to do their borrowing as cheaply
as possible, but each new issue must be attractive or fail.
CHART

9

Secretary ANDERSON. Interest yields on long-term Government
securities are higher today in the United States than at any time since
the 1920's except for a very brief period in the early 1930's. They
are still, however, among the lowest in the world.
Long-term Government-bond yields in Canada average approximately 5 percent; long-term yields in the United Kingdom are almost
the same, and have been as high as 5y2 percent within the past 2 years.




20

PUBLIC DEBT AND INTEREST RATE CEILINGS
CHART

10

Any comparison between present interest rates in the United States
and the rates on Government bonds in 1918, at the time the 4 ^-percent
rate was originally established, should also recognize that the original
414-percent rate was in large part a tax-exempt rate, whereas all
Treasury bonds issued since February 1941 have been fully taxable—
and at income tax rates which are substantially higher than in 1918.
Secretary ANDERSON. The request for removal of the limit reflects
an honest appraisal of market conditions for what they are—conditions
which have now made the 414-percent ceiling a barrier to effective
debt management. Under current conditions, continuation of the
414-percent ceiling would not only deny the Government the opportunity to extend debt, but also could easily increase reliance on shortterm financing to such an extent as to result in further imbalance in
the debt structure, add to inflationary pressures, and push short-term
rates to relatively high levels.
It has been alleged that the removal of the 414-percent ceiling would
raise interest rates. This is simply not the case. The inflationary
aspects of debt management policy under the present ceiling would
raise increasing apprehension both here and abroad as to the future
value of the dollar. Nothing contributes so strongly to forcing interest rates upward as fear of inflation. Those investors who want
to invest in fixed-dollar obligations (rather than in stocks) will demand higher interest rates to compensate for their expectation of a
shrinking purchasing power of the future repayments of principal
and interest.




21 PUBLIC DEBT AND INTEREST RATE CEILINGS

Those who feel that removing the 41/4-percent ceiling would raise
rates need only look to the market for shorter term issues, where no
ceiling applies.
Treasury 91-day bill rates in a competitive market have moved up
and down with the business cycle—up to almost 2y2 percent in 1953,
down to five-eighths of 1 percent a year later, up to 3% percent in
1957, down to five-eighths of 1 percent a year ago, and up again to
over 3 percent now. Even the 5-year rate has fluctuated from below
2 percent to more than 4 percent within the last business cycle.
The President has requested that the limit be removed, not just
raised to a higher figure. If the principle of flexibility has any
meaning at all, it is clear that applies here. Any figure selected for
a new limit would carry with it the connotation that the Government
thought that is where interest rates should properly go. As Secretary Glass said in 1919—such a "maximum would surely be taken
by the public as the minimum."
HOW INTEREST RATES OPERATE

Popular discussion of interest rates is often clouded by misunderstanding of their nature in a free market economy. It is often incorrectly stated that the level of rates is determined by actions of the
Federal Reserve authorities, or that the Treasury determines general
interest rate policy each time it issues a new security. The view is
also incorrectly expressed that interest rates somehow are fixed at
high levels by large financial institutions.
The rise in interest rates which has occurred since last summer—
following a rather sharp decline in the preceding 8 months—has been
incorrectly attributed by some to have been the result of Federal Reserve and Treasury policies, and it is said that these policies have, in
effect, cost the Treasury large sums in interest payments on the public
debt. This view is followed with the suggestion that interest rates are
"too high" and that something must be done to bring them down.
A supplemental statement that I am submitting contains a description of the factors affecting interest rates in our free market economy,
a discussion of the forces causing higher interest rates during the
current fiscal year, and an analysis of the various courses of action
which might be effective in inducing lower rates of interest. I shall
simply summarize briefly at this point the major conclusions reached
in my supplemental statement.
The interest rate is a price—the price of borrowed money. It
responds to forces that operate through demand and supply in free
credit markets. This being the case, the primary determinants of
interest rates are the actions of millions of individuals and institutions rather than those of the Treasury or the Federal Reserve. The
rise in interest rates since the end of World War I I has resulted primarily from unprecedented demands for credit on the part of individuals, businesses, and State and local governmental units. In addition, the Federal debt has expanded, rather than contracting as it did
during the prosperity of the 1920's.
A major factor contributing to the rise in interest rates since last
summer has been the record peacetime Federal budget deficit of
approximately $13 billion. As is shown in the chart, during the cur-




22

PUBLIC DEBT AND INTEREST RATE

CEILINGS

rent fiscal year expansion in several categories of debt—which reflect
demand pressures in credit markets—have been moderate in comparison with other recent years. Mortgage debt has increased substantially since last summer, but the total expansion in corporate bonds
and notes, State and local government securities, and bank loans has
been less than in any fiscal year since 1954. In addition, growth in
consumer credit, except for recent months, has been moderate. On
the other hand, the rise of almost $9 billion in publicly held Federal
securities is in sharp contrast to the moderate increases in fiscal years
1954,1955, and 1958 and the decrease in 1956 and 1957.
(Chart No. 11 follows:)
CHART 11

.CHANGES IN MAJOR FORMS OF DEBTFiscal Years !954-'59

$Bil.

Corporate Bonds and Notes,
State and Local Securities,
and Bank Loans

$Bil.

Mortgages

(5

(0
15.6

15.7

10.0

5

18.0
12.9

12.2

'57

1954 '55

'59

Federal Government*
-

:8.9i

iii m
1954 '55

t

«

1954 *55

ill H
0 ®
*

i

'57

i

*

'59

Secretary ANDERSON. These figures support the judgment that the
Federal deficit, rather than debt management or monetary policies,
has been an important major factor promoting higher interest rates
during this fiscal year, a fact which my supplementary statement
treats in detail.
Is there, as some suggest, some practicable way of inducing lower
interest rates in this country without causing great harm to our
Nation?
The interest burden on the public debt—now about $8 billion per
year—is, of course, of deep concern. Of much more concern, however,
is the need to maintain freedom and flexibility in our economy and,
at the same time, avoid more erosion in the purchasing power of the
dollar. The causes of inflation in a highly industrialized, free-market
economy are many and complex. Consequently, a program of inflation control must be broad gaged, and cannot rely on monetary and
fiscal policy alone.




23 PUBLIC DEBT AND INTEREST RATE CEILINGS

Nevertheless, monetary and fiscal policy are indispensable instruments in our attempts to protect the value of the dollar. Logic and
experience show that attempts to maintain interest rates at artificially
low levels—either through creation of high-powered money by the
central bank or by legislative attempts to maintain artificially low
interest-rate ceilings—foster inflationary pressures. Inflation works
its greatest hardships on people of modest means, whose savings are
primarily in savings accounts, savings bonds, insurance policies, and
similar types of fixed-dollar assets. Furthermore, an inflationary upsurge is usually followed by recession—the greatest enemy of sustained, rewarding economic growth.
Therefore, in any attempts to promote lower rates of interest, I
would strongly counsel against some suggested techniques (discussed
in detail in my supplemental statement) that would rely upon the
ability of the Federal Reserve System to create large amounts of
high-powered dollars.
This does not mean, however, that we cannot take actions which,
although perhaps not leading immediately to lower levels of interest
rates, would remove some of the significant pressures in the Government fiscal field that have tended to push rates higher during the past
year.
In particular, we must have a clear demonstration of our willingness to maintain fiscal and monetary discipline. A period of high
and rising business activity, such as the present, requires a surplus in
Federal fiscal operations for debt retirement, and freedom for Federal
Reserve authorities to conduct flexible credit policies. A budget surplus in the coming fiscal year can convert the Federal Government
from a net borrower in credit markets to a net supplier of funds
through debt retirement. Pressures on interest rates can be considerably less than if the Treasury had to compete strongly with other
borrowers for funds to finance a deficit.
As I have said before, the clearly mistaken view that inflation is
somehow inevitable has tended to push interest rates higher. Inflationary expectations generate higher rates primarily because borrowers are anxious to obtain funds that they expect to repay in cheaper
dollars, whereas many individuals and institutions with funds to invest prefer equities over debt obligations, or will make loans or purchase bonds only if interest rates are high enough to compensate for
the expected rise in prices.
Any actions that would let borrowers and lenders know that the
value of the dollar will be preserved would remove one of the pressures promoting higher interest rates. This can be done only by
means of a broad-gaged attack on all of the forces and practices that
stimulate inflationary pressures. I would reemphasize, however, that
under current conditions the most important single action would be a
clear demonstration of our determination to maintain fiscal and
monetary discipline.
Coupled with this demonstration is the need for greater flexibility
in debt management, so that a better balance in the debt structure
can be achieved, and so that markets will not become unsettled over
such matters as an impinging interest rate ceiling. The removal of
the 414 percent ceiling on new issues of Treasury bonds would be an
important and necessary step in this direction.




24

PUBLIC DEBT AND INTEREST RATE CEILINGS

The overriding advantage of this approach to reducing pressures
on interest rates stems from the fact that the actions would be consistent with the requirements of sustainable economic growth, and
would also transmit effects through market forces of demand and
supply rather than by means of Government decree or regulation.
By proceeding in this way, the Federal Government would be
promoting "maximum employment, production, and purchasing
power," as required in the Employment Act of 1946, in a manner
consistent with those crucially important but often overlooked words
in the act which stipulate that such actions be carried out "in a manner calculated to foster and promote free competitive enterprise and
the general welfare."
NEEDED INCREASES I N T H E DEBT LIMIT

I turn now to the third part of my discussion of the major elements in our public debt legislative package; namely, the President's
request for an increase in the public debt limit, as provided for in
section 2 of the first proposed bill.
The existence of a restrictive debt limit plays an important part in
our struggle for fiscal soundness. Unlike my views on the 4*4 percent interest rate ceiling, I believe a specific dollar ceiling on the
public debt serves a useful purpose and can be effective in focusing
attention in a unique way on the part of the executive departments,
the Congress, and the public to the problems of sound Government
finance. Such a limit should be restrictive enough to accomplish this
purpose, yet not so rigid as to impede the normal operations of the
Treasury. The debt limit changes the President has requested meet
this test.
Last July the President recommended enactment of legislation
to increase the regular (permanent) statutory debt limit from $275
billion to $285 billion and to provide for an additional temporary
increase of $3 billion to expire June 30, 1960. Instead, the act of
Congress approved September 2, 1958, increased the regular statutory
debt limit to $283 billion and the temporary increase of $5 billion for
the period ending June 30, 1959, provided for in the act of February
26, 1958, was allowed to continue m effect. As a result, the statutory
debt limit will revert to $283 billion on June 30, 1959, with no provision for any temporary increase in the limitation beyond that time.
On June 30, 1957, after 2 fiscal years of budget surpluses aggregating more than $3 billion, the public debt subject to the statutory debt
limitation was $270.2 billion. However, as a result of the recession
in late 1957 through early 1958, the Treasury incurred a budget deficit
of $2.8 billion in the fiscal year 1958 and will incur a budget deficit of
almost $13 billion during the year that will end on June 30, 1959,
based on the President's January budget estimates.
The financing of these budget deficits is now expected to bring the
public debt subject to limit to approximately $285 billion on June 30,
1959—$2 billion over the present regular ceiling. As a result the President is proposing an increase in the regular statutory limit to $288
billion, an increase equal to the $275 billion debt limit in effect at
the beginning of the fiscal year plus the estimated deficit far the
current year.




25 PUBLIC DEBT AND INTEREST RATE

CEILINGS

This will enable the Treasury to conduct its debt operations with a
margin of $3 billion to allow the flexibility in debt management operations and contingencies. A $3 billion margin is essential to proper
handling of the Government's operations. The Treasury has been
operating on an average cash balance of about $4% billion during each
of the last 3 fiscal years. This is relatively small; the average operating cash balance this year has averaged only 69 percent of average
monthly budget expenditures—the lowest percentage for any recent
year, as is shown on the right side of the chart below. The Treasury's
cash balance is no higher today than it was a decade ago, when budget
spending was half its present rate.
(Chart No. 12 follows:)
CHART

12

Secretary ANDERSON. The efficient use of cash balances in this way
has, however, gone about as far as it can without impairing efficiency
of Treasury operations. There are times when a somewhat larger cash
balance would have given the Treasury much needed flexibility in
timing its borrowing operations so that it could ride out a period of
market apathy for new issues, rather than forcing the Treasury to
borrow in an unfavorable atmosphere because it was running out of
cash.
In addition to maintaining an adequate cash balance, the Treasury
should also be prepared to sell new issues of securities a week or so
in advance of the maturity of old securities if such action would add
materially to the success of a particular financing operation. This
was true, for example, of the recently completed May 1959 financing.
As part of this financing the Treasury sold $2 billion of 11-month




26

PUBLIC DEBT AND INTEREST RATE

CEILINGS

Treasury bills with an issue date of May 11 to provide most of the
funds necessary to pay off a $2.7 billion Treasury bill issue maturing
on May 15. For the intervening 4 days, therefore, there was an
increase in debt of $2 billion. This was possible only because the
Treasury had some flexiblity under the $288 billion temporary ceiling—flexibility which we requested and which the Congress approved
last summer.
A third reason for our firm belief that a $3 billion debt leeway is a
minimum relates to the possibility which always exists that there may
be sudden demands on the Treasury in event of a national emergency,
when the Congress might not be in session.
OUR DEBT PROJECTIONS FOR FISCAL 196 0

The outlook for the fiscal year beginning July 1, 1959, is for a level
of budget receipts sufficient to cover budget expenditures. Even with
this improvement in our fiscal outlook, however, there will still be a
large seasonal deficit in the first half of the fiscal year, offset by a heavy
seasonal surplus next spring.
There is no distinct seasonal pattern in budget expenditures between
the two halves of the year, as indicated by the chart below, which is
based on the January budget estimates.
(Chart No. 13 follows:)
CHART

13

BUDGET EXPENDITURES-SEMIANNUAI
Fiscal Years !956-'60

$Bil.

25

33.1

33.41

33.8

JulyDec.

Jon.June

JulyDec.

—1956—'




356

36.0

Jan.June

JulyDec.

—1957—'

35.9

-1958-

! 39.9

41.0!

39.0:

JulyDec.

Jan.June*

JulyDec*

v

1959

* Estimate on basis of January 1959 Budget Message.

'

38.0

Jan.June*

-I960-

27

PUBLIC DEBT AND INTEREST

RATE

CEILINGS

Secretary ANDERSON. On the other hand the budget receipts follow
a distinct seasonal pattern. Even when the speedup in corporate tax
collections, growing out of revisions in the Revenue Code of 1954, is
completed there will still be a substantial seasonal disparity in tax
receipts. As you know, smaller-sized corporations will continue to
concentrate payments in the spring which, together with the concentration of individuals' declarations and final payments, will still result in relatively high tax receipts in January-June of each year.
Again, the January budget estimates provide the basis for these figures.
(Chart No. 14 follows:)
CHART 1 4

BUDGET RECEIPTS-SEMIANNUAL
Fiscal Years 1956-60

$Bil.

VUIJ

1

Dec.

—1956

VUI1.

June

WUIJ

' '

Dec.

WWII.

June

'57

VHIJ

1

'

Dec.

VHII.

June

'58

' '

Dec.

»»"•

June*

'59

' '

"V„

Dec.

June*

BO

'

*Estimate on basis of January 1959 Budget Message.

We expect, therefore, that even with a balance between expenditures
and receipts for the fiscal year as a whole expenditures will exceed
receipts by approximately $6 billion during the July-December half
of the year. The July-December 1959 deficit will be only slightly
more than half of the $11 billion deficit in July-December 1958.

4,1950 0 — 5 , 9




3

28

PUBLIC DEBT AND INTEREST RATE

CEILINGS

(ChartNo. 15 follows:)
CHART

15

*Estimate on basis of January 1959 Budget Message.

Secretary ANDERSON. At intermediate points, such as December 15
and January 15, the cumulative deficit—and, therefore, borrowing
needs—will reach or exceed $7 billion. That is why the President
has requested a temporary debt ceiling of $295 billion. We are asking that this temporary limit be provided only through June 30,
1960, although a valid case can be made for a provision that would,
for a longer period of time, control the debt at fiscal yearends and
yet provide for seasonal requirements within the year. It is entirely
appropriate for the Congress to review the debt limit situation each
year, however, if it so desires.
Table 1, attached at the end of this statement, indicates in detail
our current semimonthly projection of the debt subject to the limit
during the fiscal year 1960, assuming a constant $ 3 ^ billion operating
cash balance.1 The projections are stated both before and after the
allowance for $3 billion flexibility. As you will note from the table,
and also from chart 16 below, on December 15, for example, even the
$295 billion temporary debt limit would appear to be insufficient for
a few days, but we will be able to operate within that limitation without undue impairment of our flexibility.
Chart 16 also indicates the wide fluctuations in the amount of debt
outstanding within each month during the fiscal year just ending.
1

Similar data for the fiscal year 1959 are shown in table 2 at the end of the statement.




29

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

(Chart No. 16 follows:)
CHART

16

MONTHLY RANGE OF PUBLIC DEBT SUBJECT TO LIMIT.
Actual

Estimated
Proposed Temporary
Increase

n

I .

2

T $3Bil.
1 Flexibility

Secretary ANDERSON. The fiscal 1 9 6 0 estimates on which the current
request for an increase in the debt limitation is based are the same as
those contained in the budget which the President submitted to you
earlier this year—budget receipts of $77.1 billion and budget expenditures of $77 billion.
Those estimates were prepared 6 months ago and as the President
indicated in his message on public debt management, it now appears
that interest on the public debt during the forthcoming year will
amount to about $8y2 billion instead of the $8 billion included in the
budget.
As I pointed out earlier, only a negligible amount of this halfbillion-dollar increase, perhaps less than $5 million, represents the
net additional cost of the new savings bond program. For all practical purposes the entire increase is attributable to the rise in interest
rates which has taken place since the earlier estimate was made.
The President also made it clear in his public debt message that the
strength of our economic recovery beyond earlier expectations has
improved the revenue outlook for the fiscal year 1960 sufficiently to
offset the increased interest cost.
FACILITATING EXCHANGES OF TREASURY SECURITIES

Before discussion of the remaining sections of the first proposed
bill, I would like to complete my statement by discussing briefly the
provisions of the second proposed bill.




30

PUBLIC DEBT AND INTEREST RATE CEILINGS

I have already spelled out in some detail the problem of an evershortening public debt and the Treasury's determination to issue intermediate and long-term bonds whenever market conditions are appropriate.
Typically, new Treasury bond issues arise either from a new issue
sold for cash or a new issue offered in exchange to holders of securities which are maturing within a matter of weeks. Many of these
maturing securities were originally long-term bonds, bought initially
by long-term investors such as individuals, personal trust accounts,
life insurance companies, mutual savings banks, or pension funds.
When the bonds approach maturity, however, most of these longer
term investors have already liquidated their holdings and at maturity
the bonds are usually held largely by commercial banks or by nonfinancial corporations or other short-term investors. Therefore, both
of the traditional methods of issuing long-term securities which the
Treasury uses involve a substantial amount of churning in the market as long-term investors seek to raise the cash to pay for a newT cash
issue or to buy the maturing issue which gives them the right to
exchange the maturing issue for the new one.
There is a third approach, however, to the problem of selling
longer term securities to long-term investors, and it is an approach
which we believe would add materially to the Treasury's ability to
encourage such investors to maintain investment in long-term securities. This approach may be characterized as "advance refunding."
It is a technique which wTas used in the Canadian conversion loan
operation last summer, whereby $6 billion of securities having from
6 months to 8 years yet to run to maturity were exchanged for securities w7ith maturities ranging from 3 to 25 years—an operation involving about 40 percent of that country's national debt.
Because of fundamental differences in the financial systems of the
two nations, the U.S. Treasury has no intention of embarking on
such an ambitious program in attempting to solve our debt problem.
The basic thought behind the Canadian operation should be given
careful consideration, however, as to its possible application in the
United States in a much more limited way.
One of many possibilities in this direction, when and if market conditions are appropriate at some time in the future, is to offer new
long-term bonds to the holders of the large amount of 2^2-percent
bonds sold immediately before or during World War II.
Such a newT issue, or issues, would be sold on terms that would be
attractive to the present holders and would permit the Treasury to
do a substantial amount of debt extension on a straight exchange
basis with existing holders, and, therefore, with a minimum of effect
on the Government securities and capital markets. These are investors w^ho already hold substantial amounts of Government securities. We want to keep them invested in Governments if we can.
Under present law, however, the exchange of one Federal security
for another in any refunding operation requires that the gain or loss
from the exchange must be recognized for tax purposes if value of the
old security on the books of the investor is above or belowT the market
value of the new issue as of the date of exchange. In practice, this type
of advance refunding operation would be expected to establish a loss
for tax purposes to most holders because the Treasury would be




31 PUBLIC DEBT AND INTEREST RATE CEILINGS

likely to engage in advance refunding only if the obligations to be
exchanged are selling below par in the market. The
-percent
bonds referred to, for example, were selling at prices ranging from
$83 to $88 per $100 bond as of end of May. The terms of the new,
longer issue would, of course, be set so that it would be worth approximately the same price in the market as the issue being turned in.
Whether an investor would accept such an offer or not would be
entirely his own decision. No holder can be compelled to give up
his present contract rights by taking an exchange issue unless he wants
to.
Under these circumstances, the present taxable character of the
exchange represents an immediate tax advantage to any taxable
holder since he may take a loss which he can employ for tax purposes.
If he holds the new issue to maturity or sells at a higher price, he may
realize a corresponding gain on the new security. He will then have
to pay a tax on this gain, but in the meantime he has had the benefit of
postponing the tax on the loss deduction under present law.
Under the proposed bill postponing the recognition of gain or loss,
the reason that an investor may find an exchange more attractive,
despite the denial of a tax advantage, is because of his balance sheet
and reserve position. So long as gain or loss on the exchange must
be recognized for tax purposes many governmental authorities who
supervise financial institutions require that the institution record the
loss on its books. This means a corresponding reduction in earnings
and in surplus, which is understandably distasteful to many investors.
If recognition of gain or loss were to be postponed until the ultimate disposition of the new security, however, it would become possible on the assumption that governmental supervisory authorities approve, for the institutional investor to carry the new securities at the
same basis of valuation that he has been carrying the old ones. Thus,
removal of the need to accept a book loss would make the exchange
more attractive to many investors. Any investor who would benefit,
under present law, from taking a tax loss could sell the old security
and buy the new issue in the market.
Enactment of the second proposed bill would permit the investor
to carry over the valuation basis of the bonds which are directly
exchanged for the new bonds in this way. This could be done only
under rules which we would prescribe for each exchange of securities
so that the recognition of gain or loss for tax purposes could be
deferred. There would be no change in present provisions of law
where exchanges of obligations other than tj.S. Government securities are involved.
I would like to emphasize again that the practical application of this
bill at the time of any such exchange—to the extent that the bondholder is a taxpayer in the first place—is to postpone recognition of a
tax loss and, therefore, would tend initially to increase rather than
reduce revenues.
Actually, the effect on tax revenues will be small because of the
character of many of the institutions involved—pension funds, mutual
savings banks, savings and loan associations, and charitable organizations.
I thank you for your patience in bearing with me through my long
statement. I hope it has given you some insight into our problems
and why we feel prompt enactment of both proposed bills is essential.




32

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

(The tables referred to follow:)
TABLE 1.—Forecast of public debt outstanding, fiscal year 1960, based on constant
operating cash balance $3.5 billion (excluding free gold) (based on 1960 i
document)
[In billions]

July 15, 1959
July 31
Aug. 15
Aug. 31
Sept. 15
Sept. 30
Oct. 15
Oct. 31
Nov. 15
Nov. 30
Dec. 15
Dec. 31
Jan. 15, 1960.
Jan. 31
Feb. 15
Feb. 29
Mar. 15
Mar. 31
Apr. 15
Apr. 30
May 15
May 31
June 15
June 30

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

Public debt
subject to
limitation

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

$287.1
287.6
287.5
288.9
290.8
286.7
289.7
290.0
292.5
290.6
293.5
290.2
292.6
290.9
291.7
289.8
291.3
286.1
288.9
288.3
289.3
288.3
290.6
284.4

Allowance to pro- Total public
videflexibilityin debt limitafinancing and fortion indicated
contingencies
$3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0

$290.1
290.6
290.5
291.9
293.8
289.7
292.7
293.0
295.5
293.6
296.5
293.2
295.6
293.9
294.7
292.8
294.3
289.1
291.9
291.3
292.3
291.3
293.6
287.4

NOTE.—When the 15th of a month falls on Saturday or Sunday, thefiguresrelate to the following business day.
TABLE 2.—Actual cash balance and public debt outstanding,

July 1958-May

1959

[In billions!
Operating balance, Federal
Reserve banks
and depositaries
(excluding free
gold)
Actual:
July 15, 1958.
July 31
Aug. 15
Aug. 31
Sept. 15
Sept. 30
Oct. 15
Oct. 31
Nov. 15
Nov. 30
Dec. 15
Dec. 31
Jan. 15, 1959.
Jan. 31
Feb. 15
Feb. 28
Mar. 15
Mar. 31
Apr. 15
Apr. 30
May 11
May 15
May 31

$5.5
3.9
5.3
5.3
1.5
3.9
4.7
3.3
2.2
5.3
2.1
3.8
1.7
4.5
2.8
3.9
2.1
3.2
4.2
4.4
6.1
4.2
4.7

Public debt
subject to
limitation

$275. 2
275.1
277.8
278.2
276.3
276.4
280.0
279.9
279.9
282.7
282.2
282.6
282.6
285.5
284.8
284.8
284.6
281.7
285.4
285.0
286.8
285.0
286.0

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




33

PUBLIC DEBT AND INTEREST RATE CEILINGS

(Supplemental statement of Secretary Anderson follows:)
Supplemental Statement on Public Debt Management
by Secretary of the Treasury Robert B# Anderson before the
House Ways and Means Committee,
10:00 A.M., June 10, 1959
INTEREST RATES IN A FREE MARKET ECONOMY
As I observed in the main portion of my statement before this
committee, popular discussion of interest rates i s often clouded by
misunderstanding of their nature in a free market economy.

The

purpose of this supplementary statement i s to discuss in some d e t a i l
the nature of interest rates - particularly the factors that cause
them to rise or f a l l ; the reasons for the increase in rates since
last summer; and several alternative courses of action that might be
effective in inducing a lower level of interest rates.
Demand and Supply in Credit Markets
Speaking broadly, the interest rate i s nothing more nor less
than a price, namely, the price of borrowed money.

As a price, the

rate reacts to the same sort of influences as other prices in a free
market economy - influences that operate through the demand for and
supply of funds available in credit

fljarkets.

Just as an increase in

the demand for goods or services tends to increase the prices of these
items, so does an increase in the demand for funds tend to increase
interest r a t e s .

And an increase in the supply of funds available in

credit markets has the same basic e f f e c t as an increase in the supply
of any good or service in any market; price tends to f a l l .




This i s

3 4

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

true under our present market arrangements; i t will remain true so
long as credit markets remain free and borrowers and lenders are
permitted to manage their affairs with a minimum of interference
and regulation.
From the side of demand, the principal impact on interest rates
reflects the actions of four groups of borrowers:

individuals,

corporations, State and local governmental units, and the Federal
Government.

As i s shown in the chart, total indebtedness of these

borrowers has almost doubled since 194-6.
Ghart-A

Office of the Secretary of the Treasury




B-II72-C

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

3 5

Individuals, borrowing to finance purchases of a variety of
goods and services and to construct or purchase homes, increased
their gross indebtedness from $60-1/2 billion to $24-0 billion between
1946 and 1958.

The gross debt of business corporations, which seek

credit to finance working capital needs and for longer-run purposes
in expanding and modernizing plant and equipment, rose from $110-1/2
billion to $298 b i l l i o n .

State and local governmental units, con-

fronted with growing needs for schools, highways and streets, and a
variety of other f a c i l i t i e s , have borrowed heavily in the postwar
period; their gross debt expanded from $16 billion in 1946 to $59
billion in 1958.

The Federal Government, the fourth major borrower

in credit markets, seeks funds to meet seasonal needs and to finance
a deficit.

The public debt increased from $259-1/2 billion in 1946

to $283 billion in December 1958.

As of the end of June, the debt

i s expected to total $285 b i l l i o n .
The postwar pressure on interest rates arising from the demand
for credit i s apparent.

Concomitant with the large expansion in

demand, however, has been a growth in the supply of funds available
in credit markets.

These funds come ultimately from two sources:

savings or money creation.

I t makes l i t t l e difference to the borrower

whether the ultimate source i s one or the other; dollars flowing out
of money creation are fully as spendable as those made available from
savings.

The ultimate source may be of crucial importance from the

standpoint of achieving price stability and sustainable economic
growth, however, simply because dollars generated through money




36

PUBLIC DEBT AND INTEREST RATE CEILINGS

creation represent an increase in the t o t a l pool of dollars available
f o r spending and, i f not matched by a more or less equal increase in
output of goods and services, tend to force prices up.

I t i s no

accident that consumer and wholesale prices have more than doubled
during the past twenty years, in view of the fact that a fourfold
increase i n the active money supply was only partly matched by an
approximate doubling of real production of goods and services.
There i s no need to go in d e t a i l into the various forms of
saving - by individuals, business firms, and governmental units - or
to d i f f e r e n t i a t e sharply between funds flowing from current saving and
those that represent savings of earlier years that subsequently are
made available to borrowers.

The really important point relates t o

the distinction between funds obtained from existing pools of dollars
and those generated by money creation.
How does money creation take place?

largely through the lending

and investing a c t i v i t i e s of the more than 13,000 commercial banks in
this country.

Suppose that John Doe wants funds for use in his

business, or t o improve his home, or to meet medical or other expenses.
And suppose that he applies for a loan from a commercial bank t o obtain
the funds.

I f the loan i s granted, John Doe simply signs his promissory

note and acquires a credit t o his deposit account in the bank.

This

transaction represents no transfer of existing dollarsj quite the
contrary, John Doe has an extra $100, $1,000, or $10,000, depending on
the amount of the loan, but no other individual or institution has any
Jaaa_money.

Money creation has indeed taken place.




Moreover, not only

37

PUBLIC DEBT AND INTEREST RATE CEILINGS

John Doe, but thousands of business firms, many State and local governmental units, and the Federal Government also borrow, directly or
indirectly, from commercial banks.

Each bank credit extension of this

type which i s not o f f s e t by a reduction in other bank loans or i n v e s t ments results in an equivalent amount of new money creation.
Do commercial banks have unlimited a b i l i t y to create money in
this fashion?

Not by any means.

People borrow money primarily in

order t o spend, and the banker who makes such loans knows that within
a relatively short period of time the newly created deposit w i l l
probably be withdrawn from his bank.

This w i l l probably take the form

of a transfer to another bank, perhaps in the same c i t y , perhaps somewhere else in the Nation.

But, the important point i s that the banker

must be able to meet a drain of cash out of his bank; and his a b i l i t y
to do so depends on his cash reserve position.

In other words, he

cannot afford to make large extensions of credit unless he has extra
cash on hand (or on deposit with his Federal Reserve Bank) to meet the
resulting drains, or unless he i s in a position to obtain additional
cash as the drains take place.
This i s where the Federal Reserve System comes into the picture.
Through various devices ( e . g . , discount policy, open market operations,
and control over member banks* reserve requirements), Federal Reserve
authorities can influence the cost and availability of bank cash
reserves.

In so doing, the willingness and a b i l i t y of commercial banks

to make new loans and investments - and thus add to the flow of funds
available in credit markets - i s very much a f f e c t e d .




38

PUBLIC DEBT AND INTEREST RATE CEILINGS
The resiliency of bank credit expansion and contraction can serve

as an important balancing wheel i n credit markets — or, i t can operate
as a serious destablizing factor in our attempts to achieve a stable
price structure and relatively f u l l and e f f i c i e n t use of our economic
resources.

The c r i t i c a l question i s , of course, the rate at which

bank deposits come into or go out of existence.

During a period of

high and rising business a c t i v i t y , when credit demands are especially
strong, and when men, machines and materials are being used at high
capacity, an excessive amount of money creation tends to add to
inflationary pressures.

Spending in the economy as a whole may expand

rapidly but, with resources in relatively f u l l use, the volume of goods
and services that can be produced can only be increased slowly.
f l a t i o n i s then the r e s u l t .

In-

And judging by past experience, an

inflationary upsurge i s likely to be followed by readjustment and
recession, so that our end objective of achieving maximum economic
growth i s actually impeded.
Since recession i s a serious deterrent to sustained economic
growth, bank credit expansion may be desirable when economic a c t i v i t y
i s lagging.

Under these conditions, the men, machines and materials

necessary t o support increases in production are available.

Greater

spending by consumers and business firms i s to be desired.
Consequently, sustained and rewarding economic growth — which
requires reasonable price s t a b i l i t y and relatively f u l l and e f f i c i e n t
use of our economic resources - can be attained only i f the aggregate
flow of credit i s consistent with the a b i l i t y of the economy to absorb




39

PUBLIC DEBT AND INTEREST RATE CEILINGS

that flow, when translated into spending, at a given time.

And, the

Federal Reserve System, in f u l f i l l i n g i t s statutory obligations, i s
constrained to employ i t s monetary powers f l e x i b l y .

In a free market

economy, an inevitable result of the interaction of demand and supply
forces in credit markets - including the impact of Federal Reserve
actions - i s fluctuations i n interest r a t e s .
Stated simply, f l e x i b l e credit p o l i c i e s , attuned to the business
situation as i t unfolds over time, can be e f f e c t i v e only i f interest
rates are free t o respond to the forces of demand and supply i n credit
markets.
tha&e

But i t must be emphasized that the major forces affecting
d fcoAu i i^M. aw li ^ua

Ccoo

fluia

iiAdopeudfeat*

LoiTjd&i d

Aujd«*„

The law of supply and demand i s a powerful and inescapable economic
force; attempts to thwart i t in the past have inevitably led to greater
d i f f i c u l t i e s later on.
At times interest rates seem to decline faster than might be expected in view of basic trends in credit demands, savings, and the
a v a i l a b i l i t y of bank c r e d i t .

At other times they seem to rise faster

than might seem warranted in view of these f o r c e s .

For example, the

sharp decline i n rates in late 1957 and early 1958 seemed to outrun
basic forces of demand and supply, and the same can be said of the
sharp increase in rates in the summer of 1958.
The explanation of such sharp s h i f t s can be found primarily i n
the impact of expectations on credit markets.

In late 1957 i t became

clear that recessionary forces were gathering strength.

The Federal

Reserve System, consistent with i t s responsibility to conduct i t s




40

PUBLIC DEBT AND INTEREST RATE CEILINGS

operations f l e x i b l y , shifted from the r e s t r i c t i v e policy of the
preceding 2 - l / > years toward a policy of monetary ease.

In view of

the s h i f t in the business situation, which implied a slackening demand
for funds in credit markets, and in view of the reversal of Federal
Reserve policy, which implied an increase in a v a i l a b i l i t y of bank
credit, market participants reasoned that the uptrend in interest rates
that had prevailed since 1954 would be reversed, and that the outlook
for some time to come va? for declining rates.
Declining interest rates are synonymous with rising prices f o r
outstanding Government and other types of bonds.

Consequently, i n d i -

viduals and institutions with funds to invest tended to step up purchases of such instruments - the supply of funds available in credit
markets expanded sharply; and individuals and institutions with bonds
for sale became more reluctant to part with them - the demand for funds
subsided, relatively speaking.

The result:

sharp declines in interest

rates (or increases i n bond prices), stimulated largely by expectations
of lagging business and easy money.
The decline in business a c t i v i t y came to an end much sooner than
many observers anticipated.

In June 1958, the strengthening business

picture gave rise to rumors that Federal Reserve policy might be i n
the process of shifting away from the aggressively expansive policies
of preceding months.

Many investors in debt instruments, including

Government bonds, became anxious to dispose of the securities^ before
interest rates rose and bond prices declined; potential buyers became
less anxious to buy.

The result: sharp increases in interest rates,

stimulated largely by expectations.




41

PUBLIC DEBT AND INTEREST RATE CEILINGS
Thus, one type of expectation i s related primarily to the swings

i n business a c t i v i t y and the impact of f l e x i b l e monetary p o l i c i e s .
But at times other types of expectations exert important influences.
During the past year, the increase in interest rates has been stimulated partly by a growing - but, in my judgment, mistaken - conviction
that i n f l a t i o n i s inevitable.

Many investors have been reluctant to

purchase debt instruments, which carry a fixed interest return and
principal payment, as opposed to equities.

This reluctance to pur-

chase* bonds, and the preference for equities, has contributed to
relatively low bond prices (high interest rates) and high stock
prices.
I t i s important to emphasize, however, that e f f e c t s of expectations are likely to be short-lived, unless later r a t i f i e d by the
expected events.

The sharp decline in interest rates in late 1957

and early 1958 could not have been sustained had i t not been for the
fact that recession did occur, credit demands did subside, and
monetary policy did assume a posture of aggressive ease.

Again, the

sharp rise of last summer was later r a t i f i e d , in part, by the vigorous
expansion of business a c t i v i t y , with the accompanying demands for
credit, and the impact of a $13 b i l l i o n Federal d e f i c i t on credit
markets.

Finally, the impact of inflationary expectations on the

level of interest rates can be minimized only when i t becomes clear
to participants in free credit markets that the integrity of the
dollar w i l l be preserved.




42

PUBLIC DEBT AND INTEREST RATE CEILINGS
In summary, interest rates in a free market economy are i n -

fluenced by a number of factors which can best be understood in terms
of the forces working through demand and supply in credit markets.
Of primary importance on the demand side are borrowings by individuals,
businesses, State and local governmental units, and the Federal
Government.

The supply of funds available in credit markets i s

mainly a reflection of the a v a i l a b i l i t y of financial savings, coupled
with net changes i n commercial bank c r e d i t .

Federal Reserve policy,

by influencing reserve positions of commercial banks, a f f e c t s the
rate of flow of bank funds into credit markets.
Before examining the reasons for the rise in interest rates in
this country since last summer, i t might be worthwhile to discuss
b r i e f l y two popularly held views concerning the nature of interest
rates that, in my judgment, are mistaken.
One often hears the statement that increases in interest rates
are necessarily inflationary, in that interest i s a cost of doing
business and sellers of goods tend to pass on rate increases in the
form of higher prices.

The people who hold this view overlook the

fact that rising interest rates are indicative of pressures in credit
markets growing out of strong demands for funds relative to the supply.
Inasmuch as individuals and institutions borrow money primarily to
f a c i l i t a t e spending, rising interest rates r e f l e c t an i n a b i l i t y of a l l
potential borrowers to obtain as much credit as they would like to
have.

In other words, spending i s impeded, and the rise in interest

rates i s one measure of the degree of restriction on spending.




And,

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

4 3

under normal circumstances, anything that tends to dampen spending
when business activity i s high and rising tends to diminish - not to
augment - inflationary pressures.
Moreover, available figures indicate clearly that interest, as a
cost of doing business, i s a decidedly minor expense.

In 1957, for

example, net interest costs of a l l manufacturing corporations were
only A/lO of 1 percent of gross sales."

Thus, i f the cost of an

article selling for $100, only A.0 cents represented interest cost.
Admittedly, interest expenses of wholesalers and retailers, who also
must finance some of their operations by borrowing, would add slightly
to total interest cost included in items bought by final consumers.
S t i l l , however, the contribution of interest expense to total cost
would be small.
I t has been suggested that public u t i l i t y rates are influenced
significantly by interest costs, since such firms rely heavily on
bonded indebtedness.

In this case, however, net interest expense i s

estimated to be less than 4 - 1 / 2 percent of gross revenues.
The evidence seems clear that an increase in interest rates
exerts only a small direct effect on prices of goods and services,
and that this impact i s far outweighed by the restrictions on total
spending stemming from limited availability of funds in credit markets.
There i s also a misconception concerning the

identity of the

recipients of interest payments on the Federal debt.

Some observers

appear to believe that large financial institutions are not only the
major recipients of such payments, but that their share has increased
as interest rates have advanced in the postwar years.

41950 O — 5 9




4

4 4

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

The accompanying table, which presents estimates of the d i s t r i bution of- interest payments on the public debt in 1946 and 1958,
indicates clearly that such i s not the case.

In 1946, the major

financial institutions - commercial banks, mutual savings banks, and
insurance companies - received an estimated $2.1 billion in interest
on holdings of Government securities, or about 45 percent of the total
of such payments.

By 1958, the share of these institutions had de4 •'
clined to $2.0 billion, representing only 26 percent of total payments.

Estimated Distribution of the Interest on the Public Debt
Fiscal Tears 1946 and 1958
(In billions of dollars)

j Budget Expenditures
*

1946

s

1958

Investor classes:
Individuals:
Savings bonds••••••••
Other s e c u r i t i e s . . . . .

......

Subtotal
Commercial banks
••••••••
Mutual savings banks
Insurance companies.....
•••••••••••••
Nonfinancial corporations.....
••••••••
State and local governments
Miscellaneous Investors
Federal Reserve b a n k s . . . . . . . . . . . . . . . . . . . . . . .
Government Investment Accounts
Total




.7
.5

1.5
„.. •„. «4

1.2

1.9

1.4
.2
.5
.2
.2
.2
.1
*7

1*5
.2
.3
.6
.4
.4
#8
„ 1*5

4.7

7.6

PUBLIC

DEBT

AND

INTEREST

RATE

4 5

CEILINGS

Moreover, a significant portion of the interest income of banks has
been passed on to customers in the form of higher rates on time and
savings deposits.

For example, in 194-6 member bank interest payments

to depositors were only 20 percent of interest income on their
holdings of Treasury securities.

Reflecting the sharp increase in

rates paid on time and savings deposits in the past few years, member
banks in 1953 paid almost 90 percent of their interest income on
Governments to depositors•
Other important trends brought out by the table include an $800million increase in interest payments on savings bonds, held mostly
by individuals; a $700 million expansion in payments to Federal
Reserve banks, which returned 90 percent of their net earnings to the
Treasury; and an $800 million increase in payments to Government i n vestmant accounts, which are operated almost wholly for the benefit
of individuals.
These figures indicate, therefore, that a substantial portion of
payments on the debt accrue directly or indirectly to the benefit of
individuals, many of whom are of relatively modest means.

Moreover,

the increase in interest payments since 194-6 reflects increased payments primarily to individuals, Federal Reserve banks, and Government
investment accounts, rather than to private financial institutions.




46

PUBLIC DEBT AND INTEREST RATE CEILINGS

The Rise in Interest Rates Since To at. Syyjff
Trends in interest rates over a period of several years, or of
several months, can be understood only in terms of the major demand
and supply forces at work. Accordingly, it might be worth while to
examine closely the increase in rates that has occurred during the
current fiscal year in order to gain an understanding of the factors
underlying the advance.
Interest rates on Treasury and other securities have risen considerably from the lows reached during the recession of

1957—58.
Chart-B

MARKET YIELD TRENDS
OF SHORT AND L U N b - i h K M S t o U k M i t s
May 2 9

Monthly Averages

I

A

2

i il 111111111111111111111M11111111ii1111

QI Mini nil

'55

'52

'56

'57

'58

1

Federal Reserve Bonk of New York.

Office of the Secretary of the Treasury




B-I26I-C

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

4 7

Yields on long-term Treasury bonds, which averaged 3.12 percent in
April 1958, had risen to an average of 4«08 percent in May 1959*
Average issuing rates on 3-month Treasury bills, which fell below
1 percent in the spring and summer of 1958, have recently risen above
3 percent. Similarly, rates on commercial paper, bankers1 acceptances,
prime bank loans, corporate and municipal bonds, and other debt
instruments have advanced substantially during the past year.
What factors lie behind this rise in rates? First, let1 a look
at the demand for credit.
The growth of consumer credit in the current fiscal year has been
less than in most recent years. Thus, pressure on interest rates from
this source has been moderate, except for the past few months, in which
demand for consumer credit has risen substantially. Individuals have
indeed been active borrowers of funds, primarily in the form of
mortgage credit. Total real estate mortgages, consisting largely of
individuals' borrowings, are expected to increase $18 billion this
fiscal year, a greater rise than in any of the past five fiscal years.
This increase can be viewed as having contributed to demand pressures
in credit markets.
Total corporate bonds and notes, State and local government
securities, and bank loans have increased lass than In any fiscal year
since 1954. Thus, these credit demands have not exerted significant
pressures on financial markets.




48

PUBLIC DEBT AND INTEREST RATE CEILINGS
Chart-C

.CHANGES IN MAJOR FORMS OF DEBTFiscal Years 1954- 59
$Bil.

Corporate Bonds and Notes,
State and Local Securities,
and Bank Loans

3 0

20

1954 '55
10

Federal Government*
:8.9i

5

10

0

13.11 |3.3|

- 5

1954 '55

1954 '55

'57

'59

*Excluding debt held by Federal Reserve Banks and Government Investment Accounts.
Office of the Secretary of the Treasury

The demand for credit on the part of the Federal Government, to
finance a record peacetime deficit of approximately $13 billion, has
been much greater than in any of the preceding five fiscal years.

The

publicly held Federal debt will increase by almost $9 billion in this
fiscal year, as contrasted with increases of $3.1 to $3.3 billion in
fiscal years 1954, 1955, and 1958, and declines of $4.7 and $3.5




49

PUBLIC DEBT AND INTEREST RATE CEILINGS

b i l l i o n , respectively, in 1956 and 1957. (The difference between the
$13 b i l l i o n d e f i c i t and the $9 b i l l i o n increase in Federal debt in
this f i s c a l year results primarily from a reduction in the Treasury's
cash balance.)
These figures demonstrate clearly that the more important demand
pressures on interest rates during the past year have stemmed from the
increase i n mortgage debt and the record peacetime Federal d e f i c i t .
However, the rise i n mortgage debt, although substantial, i s not much
greater than i n f i s c a l years 1955 and 1956.

Thus, i t appears that a

major factor contributing to the sharply rising demand for credit in
f i s c a l 1959 has been the record peacetime Federal d e f i c i t .

The

addition of almost $9 b i l l i o n in Federal securities to what might be
viewed as more or less normal aggregate credit demands could only
exert strong pressure on interest rates.
As I noted e a r l i e r , however, trends in interest rates are also
influenced by forces working through the supply of funds available
in credit markets.

While data on savings are d i f f i c u l t to interpret

i n terms of impact on credit markets, there appears to be no evidence
that a s h i f t i n the a v a i l a b i l i t y of savings has contributed to the
rise i n rates during the past year.
As t o the timing of the events i n the summer of 1958, i t i s
important to note that member bank reserve positions and short-term
money market rates reflected a continuation of monetary ease u n t i l
August - a f u l l two months following the reversal of market rates on
intermediate - and longer-term Government bonds.




Thus, the market

50

PUBLIC DEBT AND INTEREST RATE CEILINGS

appears t o have led monetary policy and, as stated e a r l i e r , the market
s h i f t resulted primarily from radical changes i n expectations.
s h i f t i n expectations resulted, in turn, from:

The

( l ) a growing compre-

hension that the recession had ended and that vigorous recovery was
under way, with i t s consequent Impact on demand for credit;

(2) a

b e l i e f that Federal Reserve credit p o l i c i e s , i n view of the s h i f t i n
the business situation, would soon move toward restraint i n keeping
with the requirements of f l e x i b l e administration of such p o l i c i e s ;
(3) a realization that i n f i s c a l year 1959 the Federal Government
would be confronted with a d e f i c i t of $10 to $15 b i l l i o n , with i t s
strong impact on demand for credit; and (4) a growing - even i f
unfounded - conviction on the part of investors that further i n f l a t i o n
would probably occur, stemming from the r i g i d i t y of prices during the
recession, the impact of business recovery, and the inflationary
ramifications of a record peacetime d e f i c i t during a period of rising
T

business a c t i v i t y .

In addition, market pressures were increased

significantly by liquidation of heavy speculative holdings of Government and other securities, built up e a r l i e r i n the year and in June,
sometimes on relatively thin margins.
I t should be emphasized again, however, that the increases i n
rates arising from expectations could not have been sustained had not
the expectations later been r a t i f i e d .
ratified.

And most of them were indeed

Business a c t i v i t y has expanded vigorously; a $13 b i l l i o n

d e f i c i t was confirmed by o f f i c i a l sources; and Federal Reserve credit
policy did s h i f t avay from the strongly expansive policies of early




51

PUBLIC DEBT AND INTEREST RATE CEILINGS

1958.

The expectation of continuing i n f l a t i o n has not been confirmed;

whether or not i t w i l l be depends in no small measure on the degree
of f i s c a l and monetary discipline that i s maintained during this
period of high and rising business a c t i v i t y .
Furthermore, the available evidence points only to a mild degree
of credit restraint since last summer.

For one thing, the strong

upward trend in production, employment, and income with, as y e t ,
absence of strong inflationary pressures, indicates that credit has
been s u f f i c i e n t l y available to meet the needs of the economy.

More-

over, monetary growth since last summer, as measured by the annual
rate of expansion in the seasonally adjusted money supply, has been
at least equal to and perhaps slightly greater than what i s usually
thought of as a normal rate.
A l l things considered, i t seems to me clear that the major factor
contributing to the rise in interest rate3 during the past year has
been the $13 b i l l i o n Federal d e f i c i t .
impacts

I t has exerted a twofold

f i r s t , by stimulating expectations in the summer of 1958 of

strong credit demands and of a further erosion in the value of the
dollar; and, second, by adding almost $9 b i l l i o n in Federal securities
to the demand side of credit markets.
Consequences of Various Proposals to Induce Lower Interest Rates
Are there any courses of action, open to Congress, the Executive
Branch, or the Federal Reserve System, which might be successful in
inducing lower interest rates?




I t must be emphasized that any such

52

PUBLIC DEBT AND INTEREST RATE CEILINGS

actions, t o be e f f e c t i v e without leading to later d i f f i c u l t i e s , must
operate through the basic forces of demand and supply.

As I stated

e a r l i e r , the law of supply and demand i s a powerful economic f o r c e .
Any attempt to hold interest rates to a r t i f i c i a l l y low levels would
be doomed to ultimate failure unless appropriate steps were taken to
adjust demand and supply forces consistent with the selected level of
rates.

And even then, later d i f f i c u l t i e s may well a r i s e .

The

situation i s parallel to attempts to maintain price ceilings on goods
and services during national emergencies; prices can be prevented from
r i s i n g , i f inflationary pressures are strong, only through resort to
rationing, allocation of materials and labor, and so on.

Similarly,

interest rates can be kept from responding to the forces of demand and
supply only through direct intervention in credit markets and a consequent abridgement of economic freedom.

I t i s therefore assumed that

any courses of action to be considered would involve influencing demand
and supply.
With this stipulation accepted, six proposals might be mentioned.
Several of these proposals, however, would so harm the Nation that
responsible people would be unwilling even to consider them.

They are

presented solely for the purpose of bringing forward issues which
apparently are often misunderstood.
(l)

One approach would be for the Government, through various

means, to promote recessionary pressures i n the economy.

Interest

rates commonly decline during recessions, partly because of a slackening demand for funds on the part of individuals and businesses, partly




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

53

because of a relative increase in availability of financial savings,
and partly because of greater availability of bank credit in connection
with a flexible shift of monetary policy toward credit ease.
This first alternative is, of course, absurd; no responsible
government would attempt to induce recession - with its accompanying
loss of production and rise in unemployment - simply to produce lower
rates of interest. But the introduction of this alternative highlights
the fact that high and rising interest rates are a sign of expanding
business. For a responsible government, the choice between high levels
of business activity and employment as opposed to low interest rates is
actually no choice at all. Stated differently, high interest rates are
not an end in themselves; rather they are the usual accompaniment of
the active credit demands that characterize expansion in production,
employment, and income.
(2) It has been suggested that interest rates could be reduced
if the Federal Reserve banks were directed by Congress to purchase all
new issues of Government securities; this would tend to reduce
pressures on interest rates, since the Federal Reserve banks would in
effect create the funds necessary for the purchase of the securities.
The actual process would involve credit to the Treasury's deposit
balance in Federal Reserve banks in return for the newly issued
Government securities.
There are at least two serious objections to this course of
action. In the first place, the prohibition of direct sales of
securities by the Treasury to the central bank, except under unusual




54

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

and very limited circumstances, has been an important characteristic
of our financial mechanism ever since the establishment of the Federal
Reserve System in 1913*

As one adjunct to their primary function of

influencing the flow of money and credit, the Federal Reserve banks
were envisaged, by the framers of the Act, as fiscal agents for the
Government — to hold Treasury working balances; to clear Treasury
checks; to issue, redeem and pay interest on Government securities;
and so on —

not as a source of credit to finance the Government's

needs. Experience in a number of foreign countries has demonstrated
the dangers of easy access to central bank credit on the part of the
branch of Government that has the responsibility for financing the
Governront's requirements. Fiscal discipline is especially difficult
to preserve if the exchequer has, in effect, a "blank check" on the
money—creating authority.
A second major objection to sale of nev Treasury issues directly
to the Federal Reserve banks arises from the fact that the transaction
would provide the basis for a highly inflationary expansion of the
money supply. The recipients of Treasury checks drawn on the newly
created deposits at the Reserve banks would deposit most of the proceeds in Federal Reserve member banks, and the member banks in turn
would send the checks to their District Reserve banks for payment*
Payment would be effected in the usual way, by crediting - or
increasing - the reserve balances of the banks on the books of the
Reserve banks • Bank reserves would be increased by the amount of the
credits; this would provide a basis for additional lending and in-




55

PUBLIC DEBT AND INTEREST RATE CEILINGS

vesting by the banking system by an amount equal to about six times
the increase in reserve balances. Growth in the money supply would,
therefore, be strongly stimulated. Interest rate pressures would have
been restrained only at the cost of highly inflationary increases in
bank credit and the money supply. Moreover, as I pointed out in the
main portion of my statement, strong inflationary pressures tend to
promote even higher levels of interest rates.
Recognizing the objection that large-scale purchases of Governmant
securities by the Federal Reserve banks would be highly inflationary,
advocates of this course of action sometimes maintain that the inflationary growth in the money supply could be avoided simply by
raising member bank reserve requirements. In other words, the new
reserves created by the Federal Reserve purchases would be immobilized
immediately by increasing the percentages of idle funds that member
banks must hold in relation to deposits.
There is an important practical objection to this proposal. The
purchase of, say, $5 billion of new Government securities by the
Federal Reserve banks would result in the creation of $5 billion in
new bank reserves, but these reserves would flow into the banking
system, and be disseminated among individual banks, in accordance with
market forces. No one could predict the ultimate distribution of the
new reserves in advance. Some banks would receive a large portion,
some a smaller portion; the ultimate distribution would depend primarily upon the location of the individuals and institutions who
received the Government payments financed by the deficit borrowing.




56

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

An increase in member bank reserve requirements, however, affects
all banks in a given classification (central reserve city, reserve
city, and "country") equally in terms of percentage points of reserve
requirements. Consequently, a blanket increase in reserve requirements of the magnitude required to neutralize the reserve-creating
impact of large-scale Federal Reserve purchases of Governments might
well lead to severe dislocations and disturbances in credit markets.
Some banks would have ample reserves, others would find themselves
severely pinched. It can be argued that market forces would tend to
correct these imbalances, and they would —

over time. But in the

short run, forces might well be set in motion leading to abrupt swings.:
in interest rates and availability of credit; credit "droughts" in one
part of the country and "surpluses" in another; and so on. And, in
any event, the credit market, while highly efficient, by no means
operates with complete perfection in transferring funds from areas of
plenty to areas of shortage.
To this important practical objection

against selling Government

securities to the Reserve banks and then offsetting the inflationary
impact by raising member bank reserve requirements can be added a
more basic objection, if it ?.s assumed that one purpose of the action
would be to prevent interest rates from rising. As I noted earlier,
purchases of $5 billion of Federal securities by the Reserve banks
would result in an equivalent increase in the money supply as the
recipients of the checks deposited the proceeds in their commercial
banks. In the first instance, then, there would be an important




PUBLIC DEBT AND INTEREST RATE CEILINGS

57

inflationary impact, resulting from the spending of the funds by the
Government and the expansion in the money supply.
A large increase in reserve requirements could indeed nullify
the growth in the money supply, but only by severely restricting the
lending and investing activities of commercial banks. This, in turn,
would exert pressure on individuals, business firms, and State and
local governments, and tend to force interest rates for such borrowers to higher levels. The inflationary impact of the increase in
money supply resulting from Treasury borrowing from the Reserve banks
can be offset only if credit contraction occurs in other segments of
the economy; the $5 billion increase in deposits held by recipients
of the Treasury checks must be offset by a $5 billion decline in funds
of other individuals and institutions.

This can be achieved, in free

credit markets, only through credit restriction, which implies additional pressure on interest rates. Thus, during a period of
prosperity and a growing demand for credit, the choice is either
between a somewhat higher level of interest rates, or stimulation of
inflationary pressures through monetary expansion. There are no
other choices.
The recommendation that Federal Reserve banks buy all or substantial portions of new issues of Treasury securities involves one
other aspect that deserves discussion. Specifically, i t has been
recommended that the Federal Reserve banks be required to purchase
only that portion of a new issue that investors other than commercial
banks would not purchase; thus, the Reserve banks, in effect, would
replace commercial banks as buyers of Governments. This recoimaenda-

other choices.
The recommendation that Federal Reserve banks buy a l l or substantial portions of new issues of Treasury securities involves one
other aspect that deserves discussion.

Specifically, i t has been

recommended that the Federal Reserve banks be required to purchase
only that portion of a new issue that investors other than commercial
banks would not purchase; thus, the Reserve banks, in e f f e c t , would
replace commercial banks as buyers of Governments.




This recommenda-

58

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

tion i s based partly upon the assumption that commercial banks do not
perform a necessary service in buying Government obligations®

Their

a b i l i t y to create money, i t i s maintained, permits them to buy these
securities; but in fact the authority over money creation i s constitutionally vested in Congress,,

Thus, i t i s argued that the Government

should perform this function, through the Federal Reserve banks,
without burdening taxpayers with interest charges*
This argument deserves several comments.

In the f i r s t place, as

noted earlier, purchases of Government securities directly by Federal
Reserve banks would be highly inflationary.

Secondly, whether or not

the commercial banks perform a "necessary" service in creating money,
there i s l i t t l e doubt that they perform an important economic function®
Demand deposits in commercial banks have assumed a monetary function
simply because people prefer to hold funds and make payments in that
form, rather than in the form of currency.

Moreover, money i s essen-

t i a l to e f f i c i e n t performance of a highly industrialized market
economy and, i f the commercial banks did not perform the moneycreating function, some other institution or agency would have to do
so.
Furthermore, commercial banks do indeed perform a useful service
in purchasing and holding Government securities.

The business of

commercial banking, in essence, i s that of holding relatively i l l i q u i d
assets — principally loans and investments — against l i a b i l i t i e s
that are largely redeemable on demand.

This involves risk and, in

assuming that risk, stockholders of commercial banks are entitled to




PUBLIC DEBT AND INTEREST RATE CEILINGS
a return f o r a service performed.

59,

The f a c t that an asset i s a

Government security rather than a commercial loan i s not germane}
marketable Government securities, while devoid of risk relating t o
interest and principal payments, do possess risk as to the price at
which they can be sold i n the market.

Because of the nature of their

l i a b i l i t i e s , banks must be prepared — and at times may be compelled —
to liquidate assets i n order t o meet deposit drains.

They are there-

fore providing an economic service by holding i l l i q u i d assets which
the public does not desire to hold at the time, and i n return furnishing the public with the liquidity — or money — that i t desires.
There are at least two important reasons why the money-creating
function should not be assigned wholly to the Federal Reserve banks.
In the f i r s t place, under our institutional arrangements the moneycreating function i s closely a l l i e d with that of granting credit to a
wide variety of borrowers.

I t i s a cardinal principle of our type of

government that private institutions should dominate credit-granting
a c t i v i t i e s ; otherwise, the a b i l i t y to obtain credit might rest less
on credit-worthiness and more on noneconomic f a c t o r s .
Secondly, lodgment of the money-creating authority wholly i n the
Federal Reserve banks, along with expanded authority f o r the Reserve
banks to lend directly t o the Government, would permit the Government
t o finance i t s residual needs through the Reserve banks and thus
by-pass the market.

This would violate the basic principle set forth

e a r l i e r , namely, that direct entry of the Government to the central
bank f o r purposes of meeting f i s c a l requirements should be severely
limited.

41950 O—59




5

60

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

In many respects, the question of transferring in whole or in
part the money-creating function from the commercial banks to the
Federal Reserve banks i s actually a question of whether the banking
system should be nationalized.

When i t i s said that "the commercial

banks do not perform a necessary service in purchasing Government
securities," i t should be realized that there are many other services
that the Government could perform for i t s e l f .

I t could, for example,

organize i t s own construction crews to build the interstate highways,
rather than encouraging the States to undertake this work through
private contractors; i t could establish i t s own transportation network
for carrying mail and other Government property; i t could set up
manufacturing establishments to produce missiles, airplanes, warships,
and a variety of items now purchased from private industry — i t could,
in short, perform many of the economic functions now performed by the
private sector of the economy.

The crucial question i s , of course,

whether i t could perform those functions as e f f i c i e n t l y as private
enterprise and - of prime importance - whether the act of doing so
would not ultimately destroy economic and p o l i t i c a l freedom in our
Nation.
(3)

A third suggestion for inducing lower interest rates would

involve a Congressional directive forcing the Federal Reserve banks to
"peg" prices of Government securities at some predetermined level,
presumably par.

Then, i f market holders decided to s e l l Government

securities, purchases by the Federal Reserve banks would provide a
floor under which bond prices could not f a l l (interest rates on
Governments could not r i s e ) .




PUBLIC

DEBT

AND

INTEREST

RATE

61

CEILINGS

The unfortunate experience with this technique between the end of
World War I I and 1951 should convince serious observers of the dangers
involved; the Federal Reserve System could indeed be transformed into
an "engine of inflation" rather than a responsible central bank
attempting to promote sustainable economic growth.

Once market yields

on Governments rose to the predetermined levels, the System would be
able to operate in only one direction:

as a creator of bank reserves,

through purchases of the securities, in whatever amounts market holders
might desire.

Flexible administration of credit policies would be

impossible.
The dangers of this course of action, especially during a period
of high and rising business activity, are obvious.

Nor i s i t at a l l

certain that, in the long run, the Federal Reserve banks could be
successful in keeping interest rates from rising.

As inflationary

pressures mounted, borrowers of funds would be strongly encouraged to
borrow heavily as soon as possible, in order to repay the debts in
eroded dollars.

Lenders would be encouraged to cut back on lending,

realizing that the dollars they received in payment would be worth
less in real terms.

Consequently, the pressure on interest rates to

increase would magnify — borrowers would be willing to pay higher
rates, lenders would be willing to lend only at higher rates.

In

order to stem the tide, the Federal Reserve banks would have to buy
more and more Governments from market holders, and thus create even
more bank reserves and provide a basis for further inflationary credit
expansion.

The spiral could ultimately come to a halt only as a result

of a c r i s i s and subsequent readjustment.




62

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

Some observers point to experience in this country in 1947 and
1948, when the Federal Reserve was indeed pegging prices of Government
securities at predetermined levels, as an illustration of an instance
in which the consequences were not too bad.

But i t should be recalled

that the Federal Government experienced a t o t a l cash surplus of almost
$14 b i l l i o n in calendar years 1947 and 1948.

The lesson of that

experience i s that an inflationary monetary policy can be offset in
part by large cash surpluses in Federal f i s c a l operations; but, i f the
cash surpluses had not existed, inflationary pressures would have been
much more severe than they were.
occurred.

A disastrous spiral might well have

Nowadays, advocates of System pegging of Governments most

often do so because of a desire to f a c i l i t a t e easy Federal financing
of d e f i c i t s .

The combination of a large Federal deficit and unbridled

creation of bank reserves, in a period of high and rising business
activity, could only result in the severest type of inflationary
pressures, ultimate reaction and recession, and disruption of the
process of economic growth.
(4)

A fourth alternative that should perhaps be mentioned in

passing relates to the apparent preference of some investors to purchase equities rather than debt instruments. To the extent this preference prevails, stock yields tend to be low and bond yields tend to be
high.

I t might be, therefore, that some action which would contribute

to a severe break in the stock market would in turn contribute to a
s h i f t from stocks to bonds; interest rates would tend to decline.




PUBLIC

DEBT

AND

INTEREST

RATE

63

CEILINGS

To suggest that a break in the stock market be induced either
through Federal regulation or otherwise would, of course, be i r r e sponsible.

Moreover, to the extent that preference for equities over

bonds reflects a fear of inflation, the answer to the problem i s to
remove the bases of the fear of inflation.

As stated earlier, this

would require, in part, a clear demonstration of the determination
of the Government to maintain f i s c a l and monetary discipline.

Con-

viction on the part of investors that the value of the dollar w i l l be
protected would do more than any other single thing to increase the
attractiveness of debt instruments and thereby reduce pressures on
interest rates.
(5)

Inasmuch as Treasury securities occupy an important position

in credit markets, interest rates could perhaps be reduced i f

signifi-

cant progress were made in retiring part of the public debt.

In this

respect, there have been several proposals over the past few months
to set aside a specified portion of Government revenues each f i s c a l
year; these funds would be earmarked for debt retirement.
During a period of prosperity, retirement of some portion of our
huge public debt i s certainly desirable; i f we cannot achieve some
debt reduction when incomes are high and rising, there i s serious
question as to whether we shall ever be able to do so.

Consequently,

a l l proposals to establish a fixed annual percentage of debt retirement should be given serious consideration.
Many of the proposals, however, f a i l to drive to the heart of the
problem, in that no provision i s made for assuring that Government




64

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

revenues would actually exceed expenditures by an amount 3arge enough
to permit the selected percentage of debt retirement.

The use o f , say,

$2.8 b i l l i o n of tax revenues to effect a 1 percent reduction in the
debt would, in the absence of a surplus in the budget, achieve nothing;
additional borrowing would be necessary to supplant the tax revenues
used for debt retirement.

In essence, therefore, the securities

retired would be replaced in the market by an equivalent amount of
new securities; interest rate pressures would not be reduced.

More-

over, t o t a l public debt would actually grow, instead of decline, i f
the revenue-tax relationship continued to reflect an over-all d e f i c i t .
Again, I should like to repeat that these plans are laudable in
purpose; but undue attention to them tends to obscure the hard, basic
fact that meaningful debt retirement can be effected only by means of
an over-all surplus of budget receipts over expenditures.
(6)

There i s a sixth and f i n a l alternative for reducing pressures

on interest rates, although i t must be admitted that success in pursuing this sixth course of action would not necessarily result in
lower rates.

This i s because the basic trends in demand and supply

in free credit markets reflect the actions of millions of individuals
and institutions, and these actions might work toward higher rates
even though some of the more significant pressures were reduced.
The sixth alternative can be summarized quite simply, as followst
(a)

Convert the Federal Government from a net borrower to a

supplier of funds in credit markets by achieving a surplus in the
budget during periods of high and rising business activity.




A net

PUBLIC

DEBT

AND

INTEREST

RATE

65

CEILINGS

surplus permits the Treasury to retire debt, on balance; consequently,
Government actions would result in a net supply of funds available for
private borrowers, not a subtraction as i s the case when the Federal
Government borrows to finance a d e f i c i t .
(b)

Convince investors that the value of the dollar will be

protected, thus removing the pressures for higher interest rates
stemming from a conviction that further inflation i s likely to occur.
This can be done only by means of attention to a l l of the factors and
practices that stimulate inflationary pressures.

But i t should be

re-emphasized that the most important single action would be a clear
demonstration of the Government's determination to maintain f i s c a l
and monetary discipline.

During periods of high and rising business

activity, f i s c a l and monetary discipline requires a surplus in the
budget, for debt retirement, and freedom for Federal Reserve authorities to pursue flexible monetary policies.
(c)

Provide the Treasury with sufficient f l e x i b i l i t y for sound

management of the public debt, so that a better balance in debt
structure can be achieved - including larger amounts of longer-term
securities outstanding - and so that bond markets w i l l not become
unsettled over such things as an impinging interest-rate ceiling.

The

Government securities market i s understandably sensitive to the
existence of an a r t i f i c i a l interest-rate ceiling; this i s one reason
why the President has proposed that the 4-1/-4 percent limit be
removed completely, rather than merely raised.

An increase in the

limit would only act as a signal to investors that the new ceiling




66

PUBLIC DEBT AND INTEREST RATE CEILINGS

i s the new "normal" level as defined by Government action.
As I emphasized in the main portion of my statement, the interest
burden on the public debt - now close to $8 billion - i s of deep concern to me.

But the alternative to sound f i s c a l and monetary

policies - further shrinkage in the purchasing power of the dollar concerns me even more.

In the long run, no one benefits from i n f l a -

tion; by stimulating the excesses that develop in a period of business
expansion, and thus sowing the seeds of readjustment and recession,
inflation actually hinders the attainment of a high rate of economic
growth.

Moreover, inflation strikes hardest at those groups in our

society least able to protect themselves.

The man of modest means,

not th£ rich man or the large business institution, i s the primary
victim of a shrinking dollar.
The overriding advantage of this sixth and final approach to
reducing pressures on interest rates stems from the fact that the
actions i t requires would not only be directly beneficial in terms
of economic growth, but would also transmit effects through market
forces of demand and supply rather than by means of Government decree
or regulation.

And I would like to repeat that, in proceeding in this

way, the Federal Government would be promoting "maximum employment,
production, and purchasing power," as required in the Employment Act
of 1946, in a manner consistent with those crucially important but
often overlooked words in the Act which stipulate that such actions
be carried out "in a manner calculated to foster and promote free
competitive enterprise and the general welfare."




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

67

Statement on Technical Phases
of Proposed Debt Management Legislation
by Secretary of the Treasury Robert B. Anderson
before the House Ways and Means Committee,
10:00 A. M., June 10, 1959

Sections 1 through 3 of the f i r s t proposed b i l l have been
discussed in the opening statement; this statement reviews sections
h through 6.
*

*

*

Section k of the b i l l would amend section 22 ( i ) of the Second
Liberty Bond Act, as amended (31 U.S.C. 757c(i)), to direct the
Secretary of the Treasury to relieve any authorized agent from
l i a b i l i t y to the United States for a loss incurred in savings bonds
redemptions where written notice of liability or potential liability
has not been given by the United States to the agent within 10 years
after the date of the payment.

This limitation would be similar to

the limitation upon the time within which the Government may proceed
against a person who cashes a Government check upon a forged endorsement.

In that case the time limit imposed upon the Government is six

years.
Presently the law directs the Secretary to relieve an agent from
l i a b i l i t y only when he can determine that the loss resulted from no
fault or negligence on the agent's part, regardless of the length of
time between the date of payment and the date the loss is discovered.
In some cases the time lapse may be considerable because the owner of
the bonds may not discover their loss or theft until their -»aturLty




68

PUBLIC DEBT AND INTEREST RATE CEILINGS

or thereabouts, and. would have no reason to expect that they might
have been fraudulently negotiated.

I t should be emphasized that this

proposed legislation in no way limits the time within which the real
owner may make a claim upon a savings bond which was fraudulently
negotiated.
Where there is a long lapse of time between the date of the payment and the date the United States discovers i t has, or may have,
incurred a loss resulting therefrom, i t would be extremely difficult
for a paying agent to prove that the loss resulted from no fault or
negligence on i t s part.

In view of this, as well as the fact that

the risks involved arise from the assumption of a task which was urged
upon them by the United States and which was not related to the ordinary
course of their business, the Treasury Department believes that socalled "qualified" paying agents, that is, commercial, banks, trust
companies, savings and loan associations, building and loan associations, and similar financial institutions, should have some limitation
upon the time during which they may be liable.
Because they would have the same problem of proof, and for the
sake of uniformity and orderly administration, the proposed legislation
would give the same immunity to the Treasurer of the United States, the
Federal Reserve Banks, and the Post Office Department or the Postal
Service, which are also accountable for losses incurred by the United
States in savings bond redemptions.




PUBLIC

DEBT

AND

INTEREST

RATE

69

CEILINGS

The proposed legislation excludes cases arising under special
regulations issued "by the Treasury Department which authorize qualified
paying agents to pay savings bonds without obtaining the signatures of
the owners on the bonds, i f the agents unconditionally assume l i a b i l i t y
to the United States for any loss resulting from such payments.

In

making payments under these regulations, which paying agents requested
for their own and their customers' convenience, they represent that
they have the owners' instructions to redeem the bonds, and guarantee
the validity of the transactions.
* *

*

Section 5 of the b i l l would amend section 3701 of the Revised
Statutes (31 U.S.C. 7^2) to c l a r i f y the exemption i t accords to the
interest on obligations of the United States from State and local
income taxes.
Section 3701 of the Revised Statutes provides that obligations
of the United States shall be exempt from taxation by or under State
or local authority.

Ttle Supreme Court of the United States has held

that this provision also exempts the interest on obligations of the
United States from taxation by or under State or local authority
(N. J. Realty Title Ins. Co. v. Div. of Tax Appeals (1950), 338 U.S.
665).
In recent years the State of Idaho has taken the position that
i t s income tax law enacted in 1933 has required the inclusion of
interest on obligations of the United States in computing gross income (from




PUBLIC DEBT AND INTEREST RATE CEILINGS 70,
which taxable net income was determined), and that the Federal statutes
have not precluded this requirement.

The Idaho statute provided that

there shall be levied "upon every individual . . .
be according to and measured by his net income."

a tax which shall
The tern "gross

income" (from which taxable net income was determined) was defined
to include, among other items, " a l l interest received from federal,
state, municipal or other bonds."

The law elsewhere provided, how-

ever, that " a l l income, except . . . income not permitted to be taxed
under . . . the constitution or laws of the United States, shall be
included and considered in determining net income of taxpayers."
I t has apparently been the position of the State of Idaho not
that the Federal Government i s without power to exempt the interest
on i t s obligations from State income taxes, but rather that i t has
not exempted that interest from a tax such as the Idaho tax.
The reasoning of the Idaho authorities appears to have been as
follows:

The Federal statute has exempted the interest on Federal

obligations from State taxation, and the State tax statute excluded
income not permitted to be taxed by the Federal exempting statute, but
the Idaho statute did not attempt to tax this income.

Rather i t care-

f u l l y provided that there should be levied "upon every individual . . .
a tax . . . measured by his net income.1'

Apparently their position

has been that this has a different e f f e c t from the State statute before
1933* which provided that there should be levied "upon the net income
of every individual . . .

a tax," which was therefore a tax not per-

mitted under the Federal exempting statute.




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

71

The Treasury and the Department of Justice have f e l t that the
position of the State of Idaho rests upon a distinction of words which
is without substance.

We have not, however, been able to persuade the

Idaho authorities to change their position.

Since this position does

not rest upon a theory of lack of Congressional power to exempt interest
on Federal obligations from a tax such as Idaho has had, but rather
upon the theory that Congress has not exercised its power, the Treasury
and the Department of Justice believe that the simplest resolution of
the matter would be through Congressional action which would clarify
the exemption by expressly exempting Federal obligations and the
interest on them from every form of State and local income taxes.
The proposed provision would accomplish that purpose.
I t should be mentioned that on March 20, 1959; the State of Idaho
adopted a new income tax law.

The new law declares i t to be its

intent to impose a tax identical as far as possible to the income tax
imposed by the Federal Internal Revenue Code.

Since the Federal

Internal Revenue Code imposes a tax "on the taxable income of every
individual" i t has been suggested that Idaho may no longer attanpt
to maintain i t s position that the Federal exemption statute does not
extend to its income tax.

We have communicated with responsible State

authorities, however, and have been unable to obtain assurances that
the State will discontinue requiring the inclusion of interest on
obligations of the United States in computing State income taxes.




PUBLIC DEBT AND INTEREST RATE CEILINGS 72,
In these circumstances, we believe i t to be highly desirable for
the Congress to make the exemption statute more specific at this time.
If positions such as Idaho has held are adopted by other States the
resulting taxation could have a serious adverse effect on the sale
of United States savings bonds, uhich are so widely held by individuals,
and could have undesirable effects on Treasury financing operations in
general.
* *

*

Section 6 of the b i l l would authorize the issuance of obligations
of the United States to Government trust funds at the issue price.
Congress has established some f i f t y Government trust funds.

The

Portions

of any of these funds not currently needed may be invested in obligations of the United States.

With respect to six of these trust funds,

however, the Congress has specified that Government obligations may be
acquired on original issue only at par.

Thus in the Act of August

1935j establishing the Unemployment Trust Fund, i t was provided that
"such obligations may be acquired ( l ) on original issue at par, or
(2) by purchase of outstanding obligations at the market price."

Sub-

stantially identical language has been used in four other provisions
dealing with five other trust funds.

Ihe trust funds and the citations

to the pertinent provisions governing them are:

Federal Old-Age and

Survivors Insurance Trust Fund and the Federal Disability Insurance
Trust Fund (42 U.S.C. )+Ol(d)); the Railroad Retirement Account (1*5 U.S.C.
2280(b)); the special trust account for the payment of bonds of the




73,

PUBLIC DEBT AND INTEREST RATE CEILINGS

Philippines (22 U.S.C. 1393(g)(5)); and the Highway Trust Fund (23 U.S.C.
173(e)(2)).

The reason for providing in these relatively few cases

that acquisition on original issue must be at par i s not known.
When the f i r s t of these provisions was enacted in 1935 the Treasury
could not issue interest-bearing bonds at a discount.

In 19^2 the law

was amended to permit issuance at a discount, but none were issued in
this manner before l a s t November.

Therefore the requirement that

obligations be acquired on original issue only at par has not created
a problem until recently.

With the possibility of more obligations being

issued at a discount or at a premium in the future, however, the requirement that these six trust funds acquire obligations on original issue
only at par i s highly discriminatory against them.

For example, the

Treasury recently issued k^ bonds of 1980 at 99> the public could subscribe for these bonds at 99 and any of the trust funds other than
these six could acquire them at 99* but the law prohibited any of
these six trust funds from acquiring them on original issue except
at 100.

If the Secretary of the Treasury had issued these bonds at

par on original issue for account of these funds, they would have
earned interest at a lower effective rate than any of the other trust
funds or any member of the public acquiring them on original issue.
Hiere does not appear to be any sound reason for this result.

It

has therefore been recommended that these provisions of law be amended
to authorize these trust funds to acquire obligations of the United
States on original issue at the issue price, which is the price the
other trust funds or the public would pay.




74

PUBLIC DEBT AND INTEREST RATE CEILINGS 74,

The C H A I R M A N . Without objection, we will include in the record
of the hearings the statement of the President to the Congress of the
United States delivered on Monday, and also, immediately following
that, the statement of the Secretary of the Treasury to the Speaker,
including the drafts of the two bills referred to by the Secretary in
his appearance this morning.
(Statements referred to follow:)
THE

WHITE

HOUSE

To the Congress of the United States:
Successful management of the debt of the Federal Government is one of the
most important foundation stones of the sound financial structure of our Nation.
T h e public debt must be managed so as to safeguard the public credit. It
must be managed in a w a y that is consistent with economic growth and stability.
It must also be managed as economically as possible in terms of interest costs.
The achievement of these goals is complicated today by several factors, despite
the f a c t that U.S. Government securities are the safest investment in the world.
Our growing prosperity, combined with Government programs to support mortgages and other types of debt obligations, has strengthened the position of these
mortgage and other investments with which the Treasury must compete when it
sells Government securities.
In addition, the rapid growth in borrowing demands of corporations, individuals, and State and local governments (which issue tax-exempt obligations)
tends to diminish the amount of funds available f o r investment in direct Federal
Government securities. Furthermore, the market f o r all fixed dollar obligations has been affected by a recent preference among some buyers f o r common
stocks.
The achievement of a fiscal position that allows our revenues to cover our
expenditures—as well as to produce some surplus f o r debt retirement—will improve substantially the environment in which debt management operates.
Greater flexibility of debt management action is required, however, under
present-day conditions if a reasonable schedule of maturities is to be maintained
and the safeguards against inflation strengthened.
I am, therefore, asking the Secretary of the Treasury to transmit to the
Congress today proposed legislation designed to improve significantly the Government's ability to manage its debt in the best interest of the Nation.
T h e legislation provides principally f o r —
( 1 ) Removal of the present 3.26 percent interest rate ceiling on savings
bonds. This, together with other changes, will reinvigorate the savings
bond program.
( 2 ) Removal of the present 4*4 percent interest rate ceiling on new issues
of Treasury bonds. The present ceiling seriously restricts Treasury debt
management and is inconsistent with the flexibility which the Secretary
of the Treasury has on rates paid on shorter term borrowing.
( 3 ) An increase in the regular public debt limit f r o m $283 billion to $288
billion, and an increase in the temporary limit f r o m $288 billion to $295
billion. These increases are essential to the orderly and prudent conduct
of the financial operations of the Government, even with expenditures covered by revenues in the fiscal year 1960, as the Budget proposes.
SAVINGS BONDS

Removal of the present 3.26-percent maximum limit on savings bond interest,
together with certain other changes, will permit the Treasury to improve the
terms of savings bonds. This will strengthen the contribution of the program
both to habits of thrift throughout the Nation and to a better structure of the
public debt.
T h e Treasury is proposing the following revisions in the savings bond program, subject to approval of enabling legislation : A 3%-percent interest rate to
maturity f o r all series E- and H-Savings Bonds sold on or after June 1, 1959;
an improved interest rate on all series E - and H-bonds outstanding and continued to be h e l d ; and improved extension terms f o r outstanding series E-bonds
when they mature.




75,

PUBLIC DEBT AND INTEREST RATE CEILINGS
FOUR AND ONE-QUARTER PERCENT M A X I M U M INTEREST RATE ON NEW

BOND ISSUES

There is no statutory maximum on the interest rate which can be paid by the
Treasury for marketable borrowing of 5 years or less (bills, certificates, and
notes). The Secretary of the Treasury should have similar flexibility with
regard to Treasury bonds (which run 5 years of more to maturity).
The Treasury always tries to borrow as economically as it can, consistent with
its other debt management objectives. But in our democracy no man can be
compelled to lend the Government on terms he would not voluntarily accept.
Therefore, when the Government borrows, it can do s o successfully only at
realistic rates of interest that are determined by the supply and demand for securities, as reflected in the prices and yields of outstanding issues established
competitively in the Government securities market.
I am aware of the fact that many proposals have been made which are designed! to produce lower interest rates. However, any debt management device
which would seek to interfere with the natural interaction of the competitive
forces of our free economy and produce unnatural reductions in interest rates
would not only breach the fundamental principles of the free market, but under
current conditions could be drastically inflationary. The additional cost of the
Government alone from increased prices of the goods and services it must buy
might far exceed any interest saving. The ultimate harm to the entire Nation
of such a price rise could be incalculable.
Market yields on a number of Treasury bonds are already above 4 % percent.
With one exception all bonds which have 5 years or more to run to maturity
have market yields above 4 percent. The Treasury recently has done substantial short-term borrowing. But it must avoid undue shortening of the public
debt and therefore should continue to sell intermediate and longer term bonds
whenever market conditions permit. It should not be prohibited from doing
so by the existence of an artificial ceiling which under today's conditions makes
it virtually impossible to sell bonds in the competitive market.
DEBT

LIMIT

The Treasury's current estimates, assuming that revenues cover expenditures
for the fiscal year 1980 as a whole, indicate the need for an increase in the
regular (or permanent) statutory public debt limit from $283 billion to $288
billion. The $288 billion figure is $13 billion above the permanent limit of
$275 billion in effect at the beginning of the fiscal year 1959. This $13 billion
increase is approximately equal to the Federal Government deficit during the
current fiscal year, as estimated in the Budget submitted in January.
The Treasury expects the debt to approximate $285 billion on June 30, 1959,
leaving about $3 billion leeway under the proposed $288 billion regular ceiling—
a leeway which is essential to protect the Government in case of unforeseen
emergencies and to provide necessary flexibility in debt management operations.
Even with budget receipts covering expenditures in the next fiscal year the
debt is expected to rise considerably above $288 billion next fall and winter
as the Treasury borrows to cover seasonal needs. This seasonal borrowing
can then be repaid before the end of the fiscal year. I am asking, therefore,
for a temporary increase of $7 billion in the public debt limit beyond the $288
billion permanent ceiling to cover those seasonal borrowing needs. This temporary limit would expire June 30, 1980, and can be reviewed prior to that
time.
Certain other technical proposals to improve the management of the public
debt are also included in the proposed legislation.
The enactment of this program is essential to sound conduct of the Government's financial affairs. It will contribute significantly to the Treasury's ability to do the best possible job in the management of the public debt. I urge,
therefore, that the Congress give prompt consideration to this request.
There is another matter to which I wish to c i l l your attention, quite apart
from the legislative program discussed above. When I submitted my budget to
you in January interest costs on the public debt for the fiscal year 1960 were
estimated at $8 billion. The increase in interest rates that has taken place
since t h i t estimate was made is now expected to add about half a billion dollars
to this figure.
At the same time, however, I am informed that, because of the strength of
economic recovery and growth beyond our earlier expectations, our revenue estimates for fiscal year 1980 will be sufficient to offset the increased interest cost
on the public debt.
M

T H E W H I T E HOUSE, June
4 1 9 5 0 O—5J9




6

8,

1959.

I)WIGHT D .

EISENHOWER.

PUBLIC DEBT AND INTEREST RATE CEILINGS 76,
FOR R E L E A S E A T NOON (EDT), MONDAY,

JUNE 8,

1959

Tbe Secretary of the Treasury today sent the following letter and
attachments to the Speaker of the House:
THE SECRETARY OF THE TREASURY
Washington
June 8,

1959

Dear M r . Speaker:
In accordance with the President's Message today on public debt management, there are transmitted herewith drafts of two bills to facilitate
management of the public debt (Attachments A and B).
A s mentioned in the President's M e s s a g e , these bills provide primarily
for three major steps designed to strengthen the public debt management
program, as follows:
(1) Removal of the present 3 . 2 6 % interest rate ceiling on
savings bonds which, together with other changes, will
permit the Treasury to go forward with a re-invigorated
savings bonds program;
(2) Removal of the present 4 - 1 / 4 % interest rate ceiling on
new Treasury bond issues; and
(3) An increase in the regular public debt limit f r o m $283
billion to $288 billion, with a temporary increase to
$295 billion through June 30, I 9 6 0 .
The bills also provide certain technical amendments designed to improve
the management of the public debt.
A s an attachment to the proposed legislation, I am also transmitting h e r e with further details on the new savings bonds program, m o s t of which I
plan to put into effect as of June 1, 1959, if the proposed legislation is
enacted (Attachment C).
A s the President stressed in his M e s s a g e , this program is urgently needed
in the public interest to allow the Treasury to operate with appropriate
flexibility in meeting its debt management responsibilities within the
context of competitive markets and without resort to improvident procedures
or controls.




PUBLIC DEBT AND INTEREST RATE CEILINGS

77,

It is hoped that the Congress can consider the proposed bills with reasonable promptness. We will be glad to present further details and all of the
information concerning the proposals which will enable the Congress to
effectively consider these important proposals.

Sincerely yours,

Secretary of the Treasury

The Honorable Sam Rayburn
Speaker, House of Representatives
Washington 25, D. C.

Enclosures




78

PUBLIC DEBT AND INTEREST RATE CEILINGS 78,
Attachment A
A

BILL

To f a c i l i t a t e management of the public debt,
and for other purposes

Be i t enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, Biat section 1 of the
Second Liberty Bond Act, as amended (31 U.S.C. 752), i s amended by
striking out the following:

not exceeding 4 - 1 / 4 per centum per

annum,".
SEC. 2.

(a) The f i r s t sentence of section 21 of the Second

Liberty Bond Act, as amended (31 U.S.C. 75Tb), i s amended to read as
follows:
"SEC. 21.

The face amount of obligations issued under

authority of this Act, and the face amount of obligations
guaranteed as to principal and interest by the United States
(except such guaranteed obligations as may be held by the
Secretary of the Treasury), shall not exceed in the aggregate
$288,000,000,000 outstanding at any one time."
(b) During the period beginning on the date of the enactment of
this Act and ending June 30, 19&0, the public debt limit set forth
in the f i r s t sentence of section 21 of the Second Liberty Bond Act,
as amended, shall be temporarily increased by $7,000,000,000.
SEC. 3.

Paragraphs ( l ) and (2) of subsection (b) of section 22

of the Second Liberty Bond Act, as amended (31 U.S.C. 757c
and ( 2 ) ) , are amended to read as follows:




(b)(l)

PUBLIC DEBT AND INTEREST RATE CEILINGS

79

" ( b ) ( 1 ) Savings bonds and savings certificates may be
issued on an interest-bearing basis, on a discount basis,
or on a combination interest-bearing and discount basis.
Such bonds and certificates may be sold at such price or
prices and rate or rates of interest and in such denomination
or denominations and may be redeemed before maturity upon
such terms and conditions as the Secretary of the Treasury
may prescribe.
" ( b ) ( 2 ) The Secretary of the Treasury, with the approval
of the President, is authorized to provide by regulation:
" ( i ) that owners of series E and H savings bonds
may, at their option, retain the bonds after maturity,
or after any period beyond maturity during which they
have earned interest, and continue to earn interest
upon them;
" ( i i ) that series E and H savings bonds on which
the rates of interest have been fixed prior to such
regulations will earn interest at higher rates."
SEC. U.

Subsection ( i ) of section 22 of the Second Liberty Bond

Act, as amended (31 U.S.C. 757c ( i ) ) ,

is amended by inserting after

the third sentence thereof the following:
"Relief from l i a b i l i t y shall be granted in a l l cases where
the Secretary of the Treasury shall determine, under rules




80

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

and regulations prescribed by him, that written notice of
l i a b i l i t y or potential l i a b i l i t y has not been given, within
ten years from the date of the erroneous payment, to any
of the foregoing agents or agencies whose l i a b i l i t y i s to
be determined:

Provided, That no relief shall be granted

in any case in which a qualified paying agent has assumed
unconditional l i a b i l i t y to the United States."
SEC. 5.

(a) Section 3701 of the Revised Statutes (31 U.S.C.

7^2) i s amended by adding at the end thereof the following:
"Ihis exemption extends to every form of taxation
that would require that either the obligations or the
interest thereon, or both, be considered, directly or
indirectly, in the computation of the tax, except franchise or other non-property taxes in lieu thereof imposed
on corporations and except estate taxes or inheritance taxes."
(b) The following provisions of the Second Liberty Bond Act, as
amended, relating to the tax-exempt status of obligations of the United
States, are repealed, without changing the status of any outstanding
obligation:
(1) Subsection (b) of section 5 (31 U.S.C. 75^(b));
(2) Hie second and third sentences of section 7 (31 U.S.C. 7^7)*
(3) Subsection (b) of section 18 (31 U.S.C. 753(b))j
(k) Die f i r s t sentence of subsection (d) of section 22 (31 U.S.C.
757c(d)).




PUBLIC

SEC. 6.

DEBT

AND

INTEREST

RATE

CEILINGS

81

The following provisions of law are amended by striking

out the words "on original issue at par" and inserting in lieu thereof
the words "on original issue at the issue price":
(a) Section 6(g)(5) of the Act of March 24, 1934, as amended
(22 U.S.C. 1393(g)(5));
(b) Section 201(d) of the Act of August 14, 1935, as amended
(42 U.S.C. 401(d));
(c) Section 904(b) of the Act of August l4, 1935, as amended
(42 U.S.C. 1104(b));
(d) Section 15(b) of the Act of August 29, 1935, as amended
(45 U.S.C. 2280(b));
(e) Section 209(e)(2) of the Act of June 29, 1956 (23 U.S.C.
173(e)(2)).
SEC. 7 .

The amendments made by section 3 shall be effective as

of June 1, 1959-




82

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

Section-by-section Analysis
of
A B i l l to Facilitate Management of the Public Debt

Section 1 would remove the present limit of k - l / k percent on
the rate of interest on new issues of Treasury bonds.
Section 2 would provide a permanent increase in the debt limit
to $288 b i l l i o n and would provide a temporary debt limit of $295 b i l lion through June 30, i960.
Section 3 would remove the present limit of 3*26 percent on the
rate of interest on savings bonds, i t would remove the present limits
on maturities of savings bonds, i t would authorize further extensions
of Series E savings bonds which have been authorized to earn interest
after maturity, i t would authorize similar extensions of Series H
savings bonds, and i t would authorize the increasing of interest rates
upon Series E and H savings bonds after rates of interest have been
fixed by contract.
Section k would relieve agents authorized to make payments in
connection with the redemption of savings bonds from l i a b i l i t y to
the United States for erroneous payment unless written notice of
potential l i a b i l i t y i s given within ten years from the date of the
erroneous payment.
Section 5 would make i t clear that present provisions of law
exempting obligations of the United States from State and local
taxation cover State income taxes.




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

83

Section 6 would permit certain Government trust funds which can
now acquire Government securities on original issue only at par to
acquire them at the issue price like any other purchaser from the
Treasury.
Section 7 would provide an effective date of June 1, 1959, for
amendments authorizing increased interest rates on savings bonds.




84

PUBLIC DEBT AND INTEREST RATE CEILINGS 84,
.

A

BILL

Attachment B

To permit the Secretary of the Treasury
to designate certain exchanges of Government
securities to be without recognition of gain
or loss for income tax purposes

Be i t enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, Ihat part I I I of subchapter 0 of chapter 1 of the Internal Revenue Code of 195^ (relating
to common nontaxable exchanges) i s amended by adding at the end thereof
the following new section:
"SEC. 1037-

CERTAIN EXCHANGES OF UNITED STATES OBLIGATIONS.

" ( a ) General rule.--When so provided by regulations promulgated by the Secretary in connection with the issue of obligations
of the United States, no gain or loss shall be recognized on the
surrender to the United States of obligations of the United States
issued under the Second Liberty Bond Act in exchange solely for
other obligations issued under such Act.

For rules relating to

the recognition of gain or loss in a case where the preceding
sentence would apply except for the fact that the exchange was
not made solely for other obligations of the United States, see
subsections (b) and (c) of section 1031.
" ( b ) Application of section 1232.--Notwithstanding any
provision of this section, section 1031(b), or section 1031 (d),
section 1232 shall apply to any recognized gain to which i t
would otherwise apply, except that in the case of an exchange




PUBLIC DEBT AND INTEREST RATE CEILINGS

85

of a transferable obligation for another transferable obligation, the issue price of the obligation received by the taxpayer in exchange shall be considered to be the same as the
issue price of the obligation given by the taxpayer in exchange.
For purposes of this section, the holding period of any transferable obligation received by the taxpayer in exchange for
another transferable obligation shall include the holding
period of the obligation given by the taxpayer in exchange
except with respect to any gain recognized at the time of the
exchange.
" ( c ) Cross references.--For rules relating to the basis
of obligations of the United States acquired in an exchange
for other obligations described in subsection (a), see subsection (d) of section 1031."
(b) The table of sections for part I I I of subchapter 0 of
chapter 1 of the Internal Revenue Code of 195*1- i s amended by adding
at the end thereof the following:
"Sec. 1037.

Certain exchanges of United States obligations."

(c) Section 1031 (b) (relating to gain from exchanges of property
not solely in kind) is amended by striking out "the provisions of subsection (a), of section 1035 (a), or of section IO36 ( a ) , " and inserting in lieu thereof "the provisions of subsection (a), of section
1035 (a), of section 1036 (a), or of section 1037 ( a ) , " .




86

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

(d) Section 1031 (c) (relating to loss from exchanges of
property not solely in kind) i s amended by striking out "the provisions of subsection (a), of section 1035 (a), or of section
1036 ( a ) , " and inserting in lieu thereof "the provisions of subsection (a), of section 1035 (a), of section IO36 (a), or of
section 1037 ( a ) , " .
(e) Section 1031 (d) (relating to basis in the case of exchanges of property held for productive use or investment) i s
amended by striking out "this section, section 1035 (a), or section IO36 ( a ) , " in the f i r s t sentence thereof and inserting in
lieu thereof "this section, section 1035 (a), section 1036 (a),
or section 1037 ( a ) , " .
SEC. 2.

Section 4(a) of the Public Debt Act of 194-1, as amended

(31 U.S.C. 742a), i s amended by striking out "under the Internal
Revenue Code," and inserting in lieu thereof "except as provided
under the Internal Revenue Code,".
SEC. 3-

The amendments made by this Act shall be effective

for taxable years ending after the date of enactment of this Act.




87,

PUBLIC DEBT AND INTEREST RATE CEILINGS

Section-fey-section Analysis
of
A B i l l to Permit the Secretary of the
Treasury to Designate Certain Exchanges o f .
Government _Securities to "be without Recognition
of Gain or Loss for Income Tax Purposes

Section 1 would permit the Secretary of the Treasury to designate
certain exchanges of Government Securities upon which recognition of
gain or loss would be deferred for Federal income tax purposes.

The

characterization of the gain or loss so deferred, however, would not
be affected except as the actual holding period would convert short-term
gain or loss into long-term gain or l o s s .

Also, a special rule i s

provided to eliminate the possible creation of original issue discount
in the case of exchanges of transferable Government securities.
Section 2 would conform the Public Debt Act of 19^1 to accord
with the amendments of the Internal Revenue Code proposed in section 1.
Section 3 would provide an effective date.




88

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

Attachment C
TREASURY SAVINGS BOND PROGRAM IF PROPOSED LEGISLATION IS ENACTED
(June 1959)
At the present time approximately $i*2-l/2 billion Series E and H bonds
are outstanding, owned by perhaps as many as 1|0 million Americans.

Approxi-

mately 8 million Americans are buying bonds currently on payroll savings plans
in industry and Government throughout the Nation,

Many of these savings grow

out of the convenience of the payroll plan and are savings which would not be
taking place in such volume if the savings bond program did not exist.
The E and H program is the only broad area in the debt management picture
where the Treasury has been successful in attracting long-term savings into
Government securities during the period since the close of World War I I .
Holdings of Government securities by individuals outside of the E and H program
have declined by $13 billion during the last 12 years, while holdings by
savings institutions have gone down by $10-1/2 billion.

During the same

period the volume of E and H bonds outstanding has risen by $12-1/2 billion.
In recent years the E and H program has been attracting a declining share
of individuals1 liquid savings.

In 1958, for example, only 6% of these savings

(in saving accounts in banks, savings and loan shares, and E and H bonds) was
accounted for by the savings bond program, as against 2k% in the early postwar
years.
Savings bonds are attractive to many investors largely because of their
safety and their convenience of purchase and redemption.

However, with interest

rates on savings bonds lagging behind the increases in interest paid on other




PUBLIC DEBT AND INTEREST RATE CEILINGS

89,

forms of saving i t is apparent that in all fairness to present holders, as
well as to new purchasers of savings bonds, some upward revision in interest
rates is called for.

In addition to increased rates, certain other features

are being added to the program which will make i t a much more positive force
in stimulation of savings than i t has been for many years.

An increased

volume of savings is important to the welfare of our Nation and contributes
effectively to the sound financing of industry and government.

It reduces

the pressures leading to excessive increases in bank credit, which in turn
result in an expansion of money supply beyond the normal needs of a growing
economy.
The new savings bond program has three major features (subject, of course,
to the enactment of enabling legislation):
(1)

All E and H bonds sold beginning June 1, 1959, will earn 3-3/1$ if

held to maturity — l/2# higher than at present — with lesser improved yields
for shorter periods of holding.
(2)

All E and H bonds outstanding will also earn approximately \/2%

more than they do now if held to maturity beginning with their first semiannual
interest period which starts on or after June 1, 195>9, with lesser improvement
if redeemed earlier.
(3)

All E bonds on which an extension has already been promised and

which had not yet reached first maturity (before June 1, 1959) will be
offered an improved extension on which 3-3/b% will be paid if held the f u l l
additional ten years, with lesser yields (starting at 3-1/2JO for shorter
periods of holding.




PUBLIC DEBT AND INTEREST RATE CEILINGS 90,
Each of these three items is discussed in the paragraphs which follow.
(l)

One-half Percent Increase on New Bonds

The increase in interest earnings from 3-1/1$ to 3-3/h% for full term
of holding on E bonds is realized by shortening the term to maturity from
the present 8 years and 11 months to 7 years and 9 months.

The purchase

price of the bond will continue to be 75$ of its maturity value, thus preserving the advantages of the present we11-ingrained system of bond purchases
through payroll savings.
The amount of interest earned if the new E bond is redeemed before
maturity will also be improved.

The rate of interest earned at the 1-year

point will be increased from 2.28£ to 2.33$, at the 2-year point from 2-3/1$
to 3%, and at the 3-year point from 3% to 3-1/1$.

This modest increase in

earnings for short-term holdings reflects the desire of the Treasury not to
compete unfairly with the rates paid on accounts in private savings institutions for short periods of time.

At the same time, the increased incentive

to hold the new bond to maturity to earn the full 3-3/1$ emphasizes even
more strongly the Treasury's desire to appeal primarily to longer-term
savers.
The planned increase in rates returns the relationship between E bonds
and other forms of saving roughly to the same position they held when the
E bond rate was increased from 2.90% to 3% seven years ago.

The increase

makes no attempt, however, to restore fully the 1952 relationship between the
3$ E bond rate at that tiros and the 2.6$ average rate on long-term marketable




91,

PUBLIC DEBT AND INTEREST RATE CEILINGS
Treasury bonds.

Even the new 3 - 3 r a t e is more than l A $ below comparable

marketable bond yields at the present time (See Appendix 1 for detail on the
new E bond).
The new H bond, like its predecessor, will continue to be a current income bond issued at par, redeemable at pax on one month's notice at any time
after six months' holding, and maturing at par at the end of its 10-year l i f e .
The H bond will continue to have approximately the same increasing schedule of
interest earnings as the E bond by means of increasing interest checks up to
two years, with a constant amount thereafter (See Appendix 2 for detail on
the new H bond).
The present interest rate ceiling on savings bonds is 3-26^.

Thus, the

ceiling will have to be lifted in order to put the new rates into effect. A
retroactive effective date of June 1 has been requested, however, so every
bond bought on or after that date will benefit by the new terms regardless of
what is stated on the bond.

This procedure is similar to that followed when

E and H bond terms were changed a l i t t l e over two years ago.
(2)

Increased Earnings for Outstanding E & H Bonds

In a l l previous savings bond revisions the Treasury has taken the position
that no change should be made in the terms of savings bonds already outstanding.
In both 1952 and 1957 i t was pointed out to holders of such bonds that if they
felt they could do better by turning in their old bond and buying a new one
they were free to do so; but i t was also pointed out that in the vast majority
of cases it was s t i l l to their benefit to retain the existing bonds.

In 1957,

for example, this was true for continued holding of all bonds which had not

4,1950 O—5ft




7

PUBLIC DEBT AND INTEREST RATE CEILINGS 92,
yet reached first maturity, except for those purchased in the 2-1/2 years
preceding the change in terms.

It was true also for most of the holders of

bonds in the extension period who would in many cases be dissuaded from buying
the new bond since they would have to pay upon redemption whatever taxes were
due on the accumulated interest on the old bond.

On the other hand, continued

holding would defer the taxes, as well as permit continued earning of interest
on the amount of deferred tax.
This position was quite satisfactory under conditions where the changes
were only 1/10% as in 1952, or 1/1$ as in 1957.

Under the conditions applying

to a more substantial increase in the interest rate on E and H bonds, however —
particularly when added to the earlier increases — the volume of potential
switches out of the old bond in order to buy the new one is much larger and
could reach significant proportions.

Such switches would be costly enough

from the standpoint of the Treasury even if they would indeed result in purchases of the new bonds.

As a practical matter i t is recognized, however,

that once the incentive to redeem the old bond is increased many holders,
despite the more attractive interest rate, will prefer either to spend their
money or invest i t elsewhere at even higher rates of interest and would be
lost to the savings bond program.

This tendency would be accentuated by the

fact that i t is rarely possible to reinvest the exact proceeds of a redeemed
bond in a new bond since the number of available denominations is limited.
There i s , in addition, an important question of equitable treatment of
a l l bondholders.

The Treasury has something of a trusteeship function on

behalf of millions of individual savers who do not follow interest rates
trends closely.

They buy bonds and hold bonds with understandable faith that

the Government is giving them a square deal.




93

PUBLIC DEBT AND INTEREST RATE CEILINGS

The new plan provides, therefore, for improved yields to start with the
first 6-month interest period beginning June 1, 1959* or thereafter.

Only

future earnings will be affected; no retroactive increase in interest rates
for past periods is involved.

To bring the future earnings of bonds bought

since January 1957 — which are on a 3-1/1$ basis if held for the full term
to maturity — in line with the new 3-3/W bond, 1/2% per year will be added
to the interest earnings of such bonds for the remaining period to maturity
if held until that maturity, with lesser increases of interest for each future
period if redeemed before maturity.
Similarly, bonds issued from Kay 1952 through January 1957 will have 1/2
of 1% added to the yield of their present 3% bonds from now until maturity if'
they are held until that date.

Bonds sold from December 19k9 through April

1952 will have an increase of .60$ above their original rate of 2.90%, so that
they too, in effect, will earn 3-1/2% frora the beginning of the next interest
accrual period until maturity if held that long

(For l i s t of categories of

E bonds outstanding see Appendix 3 on revision of existing E bonds, Table 1).
The Treasury's decision to increase gradually the interest rate on outstanding bonds, rather than giving each bond a full 1/2% or .60$ increase
beginning with the next interest earning period, again reflects a desire to
encourage continued holding of these securities.
The increased interest return on Series E bonds will be achieved through
an improvement in the guaranteed redemption value on each bond over and above
the schedule of redemption values printed on the bond.
holder is necessary.
may be as 3ittle as V




No action by the bond-

In the first period the increased interest adjustment
on

* $100 bond, but in all cases a ful3 half percent

PUBLIC DEBT AND INTEREST RATE CEILINGS 94,
(or .60/6, as the case may be) will be earned for future periods if the bond
is held to its first maturity date

(For examples, see Appendix 3 on revi-

sion of existing E bonds, Tables 4-6).
A similar adjustment will be made for all bonds which have passed their
original maturity date and are in the extension period.

In the case of bonds

purchased from May 1942 through May 1949 — bonds which already have a 10-year
extension at 3% — the rate will be raised to approximately 3-1/2? for the remaining number of 6-month interest periods to maturity if held for the f u l l
term.

Similarly, the rates on bonds sold from May 19ljl through April 1942,

which have a 10-year 2.90? extension, will be raised by .60% so that they also,
in effect, will earn 3-1/2? if held to the second maturity date

(For examples,

see Appendix 3 on revision of existing E bonds, Tables 2-3).
The only outstanding bonds remaining are those sold from June through
November 1949*

These will be reaching first maturity on, or within the first

6 months thereafter, the effective date of the revision and thus will be
entitled to the new 10-year extension described below.
The improved interest on Series H bonds will be paid directly to the holder
as part of his regular semiannual interest check, beginning with interest checks
payable on December 1, 1959-

As in the case of interest earned on E bonds, the

f u l l 1/2% improvement in earnings from now until maturity will be realized only
i f the H bond is held until maturity

(See Appendix 4 on revision of existing

H bonds, Tables 1-3, for l i s t of categories and examples).
(3)

Improved Extension Terms on Bonds Which Have Already Been
Promised a Further Extension

All unmatured bonds (before June 1, 1959) issued June 1949 through April
1957 have already been promised a 10-year 3% extension, which period had not




95,

PUBLIC DEBT AND INTEREST RATE CEILINGS
yet begun.

There will be a 3-3/k% extension for all of these bonds if the bonds

are held for the f u l l 10-year extension period, with lesser yields (beginning
at 3-1/2%) if redeemed before the end of the 10-year extension period.

The

decision to offer a gradually increasing rate on the future extension of these
bonds reflects again the Treasury's desire to give an added interest incentive
for longer-term holding (See Appendix 3, Table 1> for detail on revised extension of E bonds).
When the Treasury started issuing the present 3 - l / W E bond in the spring
of 1957 9 i t offered no extension beyond the original maturity of 8 years and 11
months.

The Treasury is now announcing that a 10-year extension will be provided

after maturity for the 3-1 /h% E bonds issued May 1957 through hay 1959 > as well
as the new 3 - 3 / W E bonds with issue dates beginning June 1959 • However, other
terms and conditions (including interest rates) pertaining to the 10-year extension will not be announced until the first of these bonds approaches maturity.
The first extended savings bonds will reach the end of their extension
period in May 1961 (bonds originally sold in May 19lil).

The Treasury is

announcing that, as that date approaches, the holders of all bonds which
reached first maturity before June 1, 1959 (issued May 19iil through May 19li9)
will have the opportunity to extend their bonds for a further 10-year period,
with other terms and conditions (including interest rates) to be announced
prior to Kay 1961.

As part of its legislative program, therefore, the Treasury

has asked for removal of the present 10-year limitation on E bond extension,
thus permitting this program to go forward at the appropriate time.
The Treasury also has asked that its present authority to extend Series E
bonds be broadened to include Series H bonds.

The Treasury has not reached

any decision whether or not to extend H bonds when they begin coming due in
February 1962.

Broadening of the present authority will permit the Treasury




9 6

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

t o t r e a t these s e c u r i t i e s i n the same manner as the Congress has approved
with regard t o Series E bonds i f i t i s deemed advisable*
The above three-pronged program i s designed to make savings bonds more
a t t r a c t i v e and w i l l add m a t e r i a l l y both t o the encouragement of desirable
habits of t h r i f t throughout the country and t o the a b i l i t y of the Treasury
to achieve a b e t t e r balanced structure of the public debt*

The attached

appendices present f u r t h e r d e t a i l on each aspect of the new program.




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

9 7

Subject t o enabling l e g i s l a t i o n

Appendix 1

Revised Series' E Savings Bond - - New Purchases
On or A f t e r June 1 , 1939
Summary of Terms and Conditions
(1)

Date of announcement — June 8 , 1959 (Treasury Circular No. 653 - F i f t h
Revision).

(2)

E f f e c t i v e date — The revised terms apply to a l l bonds sold on or a f t e r
June 1 , 1959.

(3)

Issue price — 7$% of maturity (par) value.

(W

Issue date — F i r s t day of month in which payment i s received by an
authorized issuing agent.

(5)

Maturity date — 7 years and 9 months from issue date.

(6)

Interest — Accrues to par to provide an investment y i e l d of 3 - 3 / 4 $ compounded semiannually i f held to maturity; l e s s e r yields i f redeemed at
e a r l i e r dates.
1/

(7)

Redeemability prior to maturity at option of Treasury — None.

(8)

Redeemability prior to maturity at option of holder — At any time not
l e s s than 2 months from issue date without notice, at stated redemption
values, at any qualified bank or other paying agent, any Federal Reserve
Bank or branch, or at the United States Treasury.
1/

(9)

Negotiability — None.

(10)

E l i g i b i l i t y as c o l l a t e r a l f o r loans — None.

(11)

E l i g i b l e subscribers — For cash, any investor other than commercial banks.
In exchange f o r matured and maturing Series F and G savings bonds, any
holder other than commercial banks.

(12)

l i m i t s on subscriptions by e l i g i b l e subscribers — Annual l i m i t f o r cash
§10,000 (maturity value). Series E bonds obtained in exchange f o r matured
and maturing Series F and G savings bonds are excluded from this l i m i t a t i o n .

(13)

Denominations — $2£, $50, $100, $200, $500, $1,000, and $10,000 (maturity
value).
(Also $100,000 denomination f o r certain employee savings p l a n s ) .

(14)

Bearer or registered — Registered form onlyj may be registered in name of
single owner (with or without beneficiary) or in co-ownership form.




PUBLIC DEBT AND INTEREST RATE CEILINGS 98,
(l£)

Extension privileges — A 10-year extension will be provided if owner
wishes to nold his bond beyond maturity. Other terms and conditions
(including interest rates) of the extension will not be announced until
bonds approach maturity.

(16)

Handling of subscriptions before new bonds are printed — Old stock will
be used until new bonds are available. In all cases the regulations will
apply the new terms and conditions to all bonds purchased on or after
June 1, 1959* If the purchaser wishes, he may exchange any bond issued
on or after June 1, 1959 on old stock for a new bond with the same dating
when new stock is available, although his rights would be in no way impaired if he does not do so.

1/
~~

For schedule of redemption values and investment yields see Table 1
attached.




PUBLIC DEBT AND INTEREST RATE CEILINGS

99,

Subject to enabling legislation
Appendix 1 — Table 1

Revised Serial E Savings Bond — New Purchases
On or After June 1 . 1959
Schedule of Redemption Values and Investment Yields
(Based on $100 Bond, Maturity Value; $75, Issue Price)

Period after issue date

1 - 1 / 2 to 2
2 to 2-1/2
2-1/2 to 3

years••*••••.••.••«
7-1/2 to 7 years and 9 months.
Maturity value (7 years and
9 months from issue date)..

Redemption
value during
each period

Compounded semiannually.




—

1 75.00
75.64
76.76
78.Oil
79.60
81.12
82.64
84.28
86.00
87.80
89.60
91. 44
93.28
95.16
97.08
99.00

1.71*
2.33
2.67
3.00
3.16
3.26
3.36
3.45
3.53
3.59
3.61*
3.67
3.70
3.72
3.71*

100.00

3.75

Office of the Secretary of the Treasury

1/

Approximate investment yields 1/
~
: On current redemption
On issue price . v a l u e f r o m beginning
to beginning of .
of each pev±od to
each period
maturity
;
3.75*
3.89
3.96
4.01
4.01
4.03
4.05
4.06
4.06
4.01*
4.03
4.02
U.oi
U.oi
3.99
4.06

June 1959




Subject to enabling legislation
Appendix 1 - Table 2

O
O

Revised* and Present Series E Bond First Maturity Period Redemption Values and Investment Yields
($100 bond, face value)
Period after issue
date (years)

0

-

1/2 1
1-1/2 2
2-1/2 3-1/2 4
k-l/2
5
5-1/2 6
6-1/2 7 . 7-1/2 -

Redemption value

$ 75-00
75.64

2....

78.04
79.60
81.12
82.64
84.28
86.00

2-1/2

3....

3-1/2
4....
4-1/2
5....
5-1/2

6..••

6-1/2

7....

7-1/2

7-3A

7-1/2 - 8

7-3/4 (maturity)...

Yield for 1/

Revised "Present'Increase Revised ; Present; Increase

1/2
1 ...

1-1/2

Period held 2/

76.76

87.80
89.60

91.44
93-28
95-16
97.08
99.00

$ 75.00
75.60
76.72
77.92
79.24
80.60
82.00
83.40
84.84
86.28
87.76
89.24

8-11/12 (maturity).

$ .04
.04

.12

.36
•52
.64
.84
1.16
1.52
1.84
2.20

90.72 2.56
92.24
93.76

2.92
3.32

95.32

3.68

100.00

8 - 8-1/2
8-1/2 - 8-11/12

_

_
1-71*
2.33
2.67

3.00
3.16
3.26

3.36
3^5
3.53
3.59
3.64
3.67
3.70
3.72
3.7^

_

i.6o#

2.28
2.56
2.77

2.90
3.00
3.06
3.11
3.14
3.17
3.19
3.20
3.21
3.21
3.22

_

.51

4.06
4.04
4.03
4.02
4.01
4.01
3.99

3.25*
3.35
3.38
3.39
3.39
3.39
3.38
3.38
3-37
3.37
3.36
3.36
3.37
3.37
3.39

.50*
.54
.58

.52

4.06

3.41

.65

.1156
.05

.11
.23
.26
.26
.30
.34
•39
.42
M

3.75

3.75*
3.89
3.96
4.01
4.01

4.03
4.05

4.06

.62
.62

.64

98.44

96.88

3.23
3.23

100.00

3.25

Bonds issued after May 31, 1959.
Compounded semiannually.
From issue date to the beginning of any subsequent l / 2 year period.
On current redemption value from the beginning of each l / 2 year period to maturity.

d
w
O
©

H
W
H
>

.67

O
H-4

.67

H
W
W
W

.68
.69
.67
.66
.64
.64

.60

W

H
SJ
H
O
w

-

Office of the Secretary of the Treasury
*
l/
2/
3/

Remaining period t o "
maturity 3 /
; Present-.Increase

s

3.^9
3.81

O

-

02

June 1959




Appendix I-Chart I

SERIES E BOND YIELDS FOR PERIOD HELD
~%T
First Maturity Period

June

1959on

Yrs.-Mos. —* 7-9

\

8-11

9:8
10-0

—•3*4%

••••

3 -

Feb.

1 9 5 7 - M a y

•34%
i n

1959

2 B%

2 -

V M a y

4

5

1941-Apr.

6

Years to Redemption or Maturity

1952

7

J

L

9

10

* Subject to enabling legislation.
0«ct oftt»Sacmary of D
m huuy

B-I373-I

102

PUBLIC

DEBT

AND

INTEREST

hATE

CEILINGS

Subject to enabling legislation
Appendix 2
Revised Series H Savings Bond - - New Purchases
On or After June 1, 1959
Summary of Terms and Conditions

(1)
>(2)

Date of announcement — June 8, 1959 (Treasury Circular No. 905 - Second
Revision).
Effective date — The revised terms apply to all bonds sold on or after
June 1, 1959.

(3) Issue price —

Par.

(4)

Issue date — First day of month in which payment is received by a Federal
Reserve Bank or branch, or the United States Treasury.

(5)

Maturity date — 10 years from issue date.

(6)

Interest —• Varying semi-annual interest checks to provide an investment
yield of approximately 3-3/4$ per annum if held to maturity; lesser yields
if redeemed at earlier dates. 1/

(7) Redeemability prior to maturity at option of Treasury —

None.

(8)

Redeemability prior to maturity at option of holder — On first day of any
month after 6 months from issue date on 1 month*s notice, at par, at any
Federal Reserve Bank or branch, or at the United States Treasury.

(9)

Negotiability — None.

(10) Eligibility as collateral for loans — N«ne.
(11) Eligible subscribers — For cash, any investor other than commercial banks.
In exchange for matured and maturing F and G savings bonds, any holder other
than commercial banks.
(12) Limits on subscriptions by eligible subscribers — Annual limit for cash
$10,000 (maturity value). Series H bonds obtained in exchange for matured
and maturing Series F and G savings bonds are excluded from this limitation.
(13)

Denominations — $500, $1,000, $5,000, and $10,000.

(14)

Bearer or registered — Registered form only; may be registered in the name
of single owner (with or without beneficiary) or in co-ownership form.




PUBLIC DEBT AND INTEREST RATE CEILINGS
(15)

103,

Extension privileges — None.

(16) Handling of subscriptions before new bonds are printed — Old stock will
be used until new bonds are available* In all cases the regulations will
apply the new terms and conditions to all bonds purchased on or after
June 1, 1959* If the purchaser wishes, he nay exchange any bonds issued
on or after June 1, 1959 on old stock for a new bond with ths sans dating
when new stock is available, although his rights would be in no way
impaired if he does not do so.

l/

For schedule of varying amounts of checks and investment yields see Table 1
attached.




104

PUBLIC DEBT AND INTEREST RATE CEILINGS 104,
Subject to enabling legislation
Appendix 2 - Table 1
Revised Series H Savings Bond - - New Purchases
On or After June 1, 1959 l /
.annual Interest Checks and :Investment Yields
Schedule of Semiannual
(Based on $1,000 Bond 2/)

Approximate investment yields 3/
Period of time bond is
held after issue date
At issue date
1/2 year
1
year
1 - 1 / 2 years
2
years
2-1/2 years
3
years...
3-1/2 years
4
years
4-1/2 years
5
years
5-1/2 years
6
years
6-1/2 years
7
years
7 - 1 / 2 years....
8
years
6-1/2 years
9
years
9-1/2 years
10 years (maturity)

1/
1/
3/

! Interest J From issue date j From each interest
J check
! to each interest J payment date to
i
!
payment date
!
maturity
$ 8.00
14.50
16.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00 .
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00

1.600
2.25
2.56
2.91
3.12
3.26
3.36
3.44
3-49
3.54
3.58
3.61
3.64
3.66
3.68
3.70
3.71
3.72
3.74

20.00

3.75

3-75
3.88
3-95
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
h'.OO
4.00
4.00
4.00
4.00

With investment return approximating return on revised Series E bond.
Redemption value at all times • $1,000.
Compounded semiannually.







Subject to enabling legislation
Appendix 2 - Table 2
Revised* and Present Series H Bond Interest Checks and Investment Yields
($1,000 Bond) 1 /
Period a f t e r
issue date
(years)

1/2

h

li-l/2
<

7-1/2
8-1/2

10 (maturity)

Yield f o r 2 /
Interest checks
Revised

Period held 3/

: Present : Increase

_

_

16.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00

$ 8.00
14.50
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90
16.90

$-.90
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10
3.10

20.00

16.90

3.10

$ 8.00
1U.50

Revised

0
0

Office of the Secretary of the Treasury-

*
I/
2/
3/

Bonds issued a f t e r May 31, 1959.
Redemption value at a l l times = $1,000.
Compounded semiannually.
From issue date to any interest payment' date.

1.603&
2.25
2.56
2.91
3.12

3.26

3.36
3.1*1*
3.1*9
3.$h

3.58
3.61
3.61*

3.66

Remaining period to maturity

: Present : Increase

_

1.6c#
2.25

2.62
2.80

2.92
2.99
3.01*
3.08
3.11
3.1U

3.16
3.18
3.19

3.20

0
0
-.0&f>

Revised
3.75*

3.88

3.95
4.00

.11
.20

h.OO
h.oo

.27
.32
.36
.38
.40
.1*2
.2*3
.45
.46
•47
.1*8

h.oo
1*.00
li.00
4.00
1*.00
1*.00
li.00
h.oo
h.oo

3.6?
3.7 C
3.71
3.72
3.7 h

3.21
3.22
3.23
3.21*
3.21*

.50

3.75

3.25

.50

.1*8

•1*8

h.OO
h.oo
h.oo
h.oo
h.OO
-

: Present : Increase

3.25*
3.35
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.36
3.38
3.38
3.38
3.38
3.38
3.38
3.38
-

.50*
.53
.57
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
.62
..62
-

June 1959

d
w
tr1
O
w
w
>
o
3
H
w
w
M

s

>
H
W
o
w

B
O
CD

^
<3
p«

PUBLIC DEBT AND INTEREST RATE CEILINGS 112,
Subject to enabling legislation

Appendix 3
Revision of Existing Series E Savings Bonds
Outstanding Bonds Issued before June 1, 1959
Summary of Revisions in Terms and Conditions
Date of announcement, — June 8, 1959 (Treasury Circular No. 653 - Fifth Revision).
Effective date for start of increased yields — June 1, 1959 for a l l existing
bonds dated June and December of any issue year; for a l l others the next date
on which their redemption values increase. Therefore, the f i r s t change in
redemption values from the schedules published in Uth revision of Treasury
Department Circular No. 653 dated April 22, 1957, wITl take place 1/2 year
after June 1, 1959 in the case of bonds dated June and December of any year
and 1/2 year after the next date (after June 1959) on which redemption values
increase in the case of a l l other bonds.
Revision of future yields until next maturity date — Beginning December 1, 1959,
on bonds issued in June and December of any year ( a l l other bonds on the next
date of increase in value), future redemption values will be increased to provide
an increase in investment yields for the remaining period to next maturity. At
next maturity date the amount of the increase in investment yield (compounded
semiannually) will be: 5/10 of 1% per annum on bonds now earning more than 2.90$
per annum for their f u l l current maturity period and; 6/10 of 1%per annum on
bonds now earning 2.90$ per annum for their f u l l current maturity period, with
lesser increases in investment yields i f bonds are redeemed before next maturity. 1 /

Extension privileges at first maturity — On bonds which have not already reached
first maturity before the effective date of this revision:
(a) Bonds issued June 19^9 through April 1957 — i f owner does not wish
to cash his bond at maturity he may hold his bond for a period of 10 years
more with interest accruing at a rate of approximately 3-1/2$ per annum (compounded semiannually) for the f i r s t 1/2 year period of holding during the
10-year extension and increasing gradually to approximately 3-3/U# per annum
(compounded semiannually) for the entire 10 years i f held to the end of the
extension period. 2/ (The redemption value of any bond at the beginning of
the new extension will be the base upon which interest will accrue during the
10-year extension period.)
(b) Bonds issued May 1957 through May 1959 — a 10-year extension will
be provided i f owner wishes to hold his bond beyond maturity. Other terms
and conditions (including interest rates) of the extension will not be announced
until bonds approach maturity.




PUBLIC DEBT AND INTEREST RATE CEILINGS

107,

(5)

Second extension privileges — On bonds which have reached first maturity
before June 1. 1959 Us sued May 19ld through May 19ii9) a second 10-year
extension will be provided if owner wishes to hold his bond beyond second
maturity (20 years from issue date). Other terms and conditions (including
interest rates) of the extension will not be announced until bonds approach
second maturity.

(6)

No changes in other terms or conditions.

1/
~

The categories of outstanding E bonds are shown in Table 1 attached. For
examples of redemption values and investment yields in each category see
Tables 2 through 6 attached.

2/

Schedule of redemption values and investment yields during extension shown
in Table 7.







Subject to enabling legislation

^

O
00

Appendix 3 - Table 1
Categories of Outstanding Series E Bonds, May 31, 1959

Issue year and month

Bonds in extension period:
May 1941 - April 1 9 4 2 . . . .
May 1942 - May 1949
Maturing bonds:
June 1949 - November 1 9 4 9 . . . .
Bonds in f i r s t maturity period:
December 1949 - April 1952...
May 1952 - January 1957
February 1957 - May 1 9 5 9 . . . . .

*

Current maturity period
Yield for
Range of yields for remaining s Range of time to: Yields during
f u l l current
time to next maturity 1 /
next maturity 1 / new extension
maturity
(years)
2/
Present
Revised
period

2.90*

3.00

4.17* - 4.26*
3.00 - 3.07

4.77* - 4.86*
3.50 - 3.57

1-1/2 - 2-1/2

2.90
2.90

3.00
3.25

H
u

2-1/2 - 9-1/2

3.50* - 3.75*

4.08 - 4.26
3.28
3.35

- 3.89
- 3.39

4.68 - 4.86
3.78
3.85

- 4.39
- 3.89

1/2 - 2-1/2

2-1/6 - 7 - 1 / 6
6-5/12 - 8-5/12

3.50
3.50

- 3.75
- 3.75

y

cj
td
oE
o
w
td
H
>
o
2
H
W
5d
H
CD
H
S3
>

O
Office of the Secretary of the Treasury

i

y

June 1959 '

S

S
a

Based on next date of increase in redemption values.
For schedule of redemption values and investment yields during extension see Table 7.
A 10-year second extension will be provided. Other terms and conditions (including interest rates)
of the second extension will not be announced until bonds approach next maturity.
Bonds issued February through April 1957 have the same extension privilege as bonds issued May 1952January 1957. For remaining bonds a 10-year extension will be provided; other terms and conditions
(including interest rates) of the extension will not be announced until they approach maturity.

GO

109,

PUBLIC DEBT AND INTEREST RATE CEILINGS

Subject to enabling legislation
Appendix 3 - Table 2
Example of Revision in Existing Series E Savings Bonds,
Category of Bonds Issued May 19^1 through April 19^2*
Redemption Values and Investment Yields of Bonds Issued June through November 19^1
(Based on $100 face value bond)
:
Approximate investment yield l 7 on:
_
:Value at e f f e c - :
:Current redempRedemption value. t i v e d a t e o f
. Issue p r i c e t o ; t i o n v a l u e from
during each
. revision to
: beginning of : beginning of
: each period to
period
. beginning of : each period
: each period
:
:
maturity
Original:Revised:Original;Revised:0riginal;Revised;Original:Revised

Period after
f i r s t maturity
(years)

0

1/2...
1/2 - 1
1
- P-1/2-...
1 - 1 / 2 - 2*
2
i - 2-1/2...
2-1/2 - 3
3
- 3-1/2...
3-1/2 - i*
4 - 4rl/2...
4-i/2 - 5
5
- 5-1/2...
5-1/2 - 6
6
- 6-1/2...
6 - 1 / 2 - 7-.
7
- 7-1/2...
7-1/2 - 8
8 (June 1 - Nov.
1959 2 / ) - 8 - 1 / 2
8 - 1 / 2 -~9
9
-9-1/2...
9.-1/2 - 1 0 . . . . . . .

.>
1,1

.L

$100.00
101.25
102.50
103.75
105.00
106.25
107.50
108.75
110.00
111.25
112.50
113.75
115.00
116.25
117.50
120.00
122.67

—,

2.90*
2.92
2.94
2.97
3.01
3.05
3.10
3.16
3.23
3.32
3.43
3.56
3.73
3.96
4.26
4.26

2.90*
2.88
2.86
2.84
2.82
2.81
2.79
2.77
2.75
2.74
2.72
2.71
2.69
2.67
2.66
2.70
2.75
^

.

v

.
.
.

125.33
128.00
130.67

125.1*4 •
128.40
131.56

4.34*
4.30
4.26'

4.52*
4.624.72 "

2.79
2.83
,2.87

2.80
2.85
2.90

10 (2nd maturity). .

133.33

134.92

4.21

4.82

2,90

2.96

4.21
4.17
4.12
. -4.08
-

Office of the Secretary of the Treasury

*
l/
2/

For categories of outstanding Series E bonds see Table 1.
Compounded semiannually.
Effective date of revision for bonds issued June through November 19^1.




_
-

-

-

_
_
-

_
4.82*
4.92
5.02
5.11
-

June 1959

PUBLIC DEBT AND INTEREST RATE CEILINGS 110,
Subject to enabling legislation
Appendix 3 - Table 3
Example of Revision in Existing Series E Savings Bonds,
Category of Bonds Issued May 1942 through May 1949*
Redemption Values and Investment Yields of Bonds Issued June through November 1942
(Based on $100 face value bond)

Period after
f i r s t maturity
(years)
0

-

Approximate investment yield~l/~~on:
Value at
:
:Current redempeffective date : Issue price to Jtion value from
of revision to : beginning of : beginning of
beginning of : each period
Jeach period to
: each period
:
^:
maturity
0riginal:Revised:0riginal:Revised:'0riginal:Revise'dt0riginal; Revised
Redemption
value during
each period

1/2

$100, , 0 0

1-1/2 - 2
2
- 2-1/2

106, 00

1/2-1
1
- 1-1/2

2-1/2 - 3

2.90$
2.90
2.90
2.91
2.90
2.91
2.91
2.91
2.91
2.91
2.92

101, 50
103,,00
104,• 50
107,,60

3
- 3-1/2
109, 20
3-1/2 - 4
110, ,80
4
- 4-1/2
112, 40
4-1/2 - 5
114, 00
5
- 5-1/2
115. 80
5-1/2 - 6
117. 60
6
- 6-1/2
119 <40
6-1/2 - 7
121, 20
7 (June 1 - Nov. 1,1
123. 00
1959 2/) - 7 - 1 / 2 . . J ,
<
124.84
7-1/2 - 8
......
124.80
126.80
8
- 8-1/2
126.60

2.92

2.93
2.93
2.93
2.93*
2.91
2.99

2.99%

8-1/2 - 9
9
- 9-1/2
9-1/2 - 10

128.60
130.60
132.60

129.08
131.48
134.00

3.03

3.07
3.24
3.36
3.46

10 (2nd maturity)..

134.68

136.68

3.05

3.55

3.02

2.93
2.93
2.94
2.94
2.94

3.00

2.95

3.02

2.93
2.94

2.96

2.98

3.00$
3.00
3.00
3.01

3.02
3.02
3.02
3.03
3.04
3.05
3.04
3.04
3.03
3.04
3.05
3.07
3.12
3.10
3.10
3.14

Office of the Secretary of the Treasury

*
l/
2/

For categories of outstanding Series E bonds see Table 1.
Compounded semiannually.
Effective date of revision for bonds issued June through November 1942.




.55*
,66
.79
.85
.92

,00

June 1959

PUBLIC

DEBT AND

INTEREST

RATE

111,

CEILINGS

Subject to enabling legislation
Appendix 3 - Table 4
Example of Revision in Existing Series E Savings Bonds,
Category of Bonds Issued December 1949 through April 1952*
Redemption Values and Investment Yields of Bonds Issued June through November 1950
(Based on $100 face value bond)

Period a f t e r
issue date
(years)
0

1/2
1/2-1
1
- 1-1/2
1-1/2 - 2
2
- 2-1/2
2-1/2 - 3
3
- 3-1/2
3-1/2 - 4
4
- 4-1/2
4-1/2-5
5
- 5-1/2
5-1/2 - 6
6
- 6-1/2
6-1/2 - 7
7
- 7-1/2
7-1/2 - 8
8
- 8-1/2
8-1/2 - 9
9 (June 1 - Nov. 1 ]
1959
2. J
J-7 J J ^J2 / /) - y9 -i-f1 /c.*
9-1/2 - 10
10 (maturity)

Approximate investment yield 1/ on:
Value at
:
:Current redempe f f e c t i v e date : Issue price to :tion value from
of revision to : beginning of : beginning of
beginning of : each period
:each period to
each period
:
maturity
Original:Revised Original;Revised:Original:Revised:Original:Revised
Redemption
value during
each period

_

* 75.00
75.00
75.50
76.00
76.50
77.00
78.00
79.00
80.00
81.00
82.00
83.00
84.00
86.00
88.00
90.00
92.00
94.00
96.00
98.00

98.16

100.00

100.60

-

.672
.88
.99
1.06
1.31
1.49
1.62
1.72
1.79
1.85
1.90
2.12
2.30
2.45
2.57
2.67
2.76

-

4.172

4.50$

2.84

2.85

4.12

4.74

2.90

2.96

2.902
3.05
3.15
3.25
3.38
3.52
3.58
3.66
3-75
3.67
4.01
4.18
4.41
4.36
^.31
4.26
4.21
4.17
4.12
4.08
-

Office of the Secretary of the Treasury

*
1/
2/

For categories of outstanding Series E bonds see Table 1.
Compounded semiannually.
Effective date of revision for bonds issued June through November 1950.




June 1959

PUBLIC DEBT AND INTEREST RATE CEILINGS 112,
Subject to enabling legislation
Appendix 3 - Table 5
Example of Revision in Existing Series E Savings Bonds
Category of Bonds Issued May 1952 through January 1957*
Redemption Values and Investment Yields of Bonds Issued June through November 1952
(Based on $100 Face Value Bond)

Period after
issue date
(years)

0
1

1/2 - 1

1/2

1-•1/2

Approximate investment yield l / on:
Value at
:Current redempeffective date
Issue price to t i o n value from
of revision to
beginning of : beginning of
beginning of
each period
:each period to
each period
:
maturity
Orlginal:Revised:Original:Revised;Orlglnal:Revised:Original;Revised
Redemption
value during
each period

$ 75.00
75.40

76.20

1-1/2 - 2
2

77.20

78.20

- 2- •1/2

2-1/2 - 3
3
- 3- •1/2
3-1/2 - 4
4
- 4••1/2
4-1/2 - 5
5
- 5- •1/2
5-1/2 - 6
6
- 6.•1/2
6-1/2 - 7
7 (June 1 - Nov,
1959 2/) •• 7 - 1 / 2
7-1/2 - ^
- 8-1/2
8-1/2 - 9
9 .
- 9- 1/2
9 - 1 / 2 - 9- 2/3
9-2/3 (maturity).

1.07*
1.59
1.94
2.10
2.19
2.25

79.20
80.20

81.20

2.28
2.30

82.20

83.60
85.OO

2.43

2.52

86.40

2.59
2.64
2.69

87.80
89.20
90.60
L
92.00
93.60
95.20
96.80

2.72

98.40

92.04
93.76
95.56
97.44
99.40

3.09*
3.28
3.33
3.34
3.33

3.18*
3.46
3.59
3.67
3.74

100.00

101.32

3.74

4.24

2.74
2.79

2.75
2.8l

2.86

2.83

2.87

2.88

2.93
2.99

3.00

3.14

3.00*
3.10
3.16
3.19
3.23
3.28
3.34
3.41
3.49
3.50
3.51
3.54
3.58
3.64
3.74
3.89
4.01
4.26
4.94
9.92
-

Office of the Secretary of the Treasury

*
For categories of outstanding Series E bonds see Table 1.
1J Compounded semiannually.
2/ Effective date of revision for bonds issued June through November 1952.




4.24
4.48
4.71

5.08

5.94
11.81
-

June 1959

PUBLIC

DEBT AND I N T E R E S T

RATE

113,

CEILINGS

Subject to enabling legislation
Appendix 3 - Table 6
Example of Revision in Existing Series E Savings Bonds,
Category of Bonds Issued February 1957 through May 1959*
Redemption Values and Investment Yields of Bonds Issued February through May 1957
(Based on $100 face value bond)

Period after
issue date
(years)

Approximate investment yield 1/ on:
Value at
:Current redempeffective date
Issue price to : tion value from
of revision to
beginning of : beginning Of
beginning of
each period
:each period to
each period
:
maturity
Original:Revised Original:Revised Original:Revised:Original:Revised
Redemption
value during
eeuch period

0

1/2
$ 75.00
1/2-1
75.60
76.72
1
- 1-1/2
77.92
1-1/2 - 2
79.24
2
- 2-1/2
80.60
2 - 1 / 2 (Aug.l-Nov. 1,)
1959 2/) - 3
J
82.00 82.04
3 . - 3-1/2
83.48
83.40
3-1/2 - 4
85.00
84.84
4
- 4-1/2
86.56
66.28
4-1/2 - 5
87.76 68.20
5 , - 5-1/2
89.84
89.24
5-1/2 - 6
91.56
6
- 6-1/2
• 90.72
93.36
92.24
6-1/2 - 7
95.24
93.76
97.16
95.32
96.88 99.12
6
- 8-1/2
0-1/2 - 8-11/12.... 98.44 101.16

3.47$
3.44
3.45
3.43
3.43
3.42
3.41
3.40
3.39
3.38
3.37
3.36

8-11/12 (maturity).

3.39

H*: r/2::::::

100.00

103.20

1.60$
2.28

2.56
2.77
2.90
3.57^
3.5^
3.58

3.60

3.64
3.65

3.68

3.71
3.74
3.77
3.80
3.82
3.89

3.22
3.23
3.23

3.01
3.08
3.15
3.21
3.27
3.31
3.35
3.40
3.44
3.48
3.52
3.55

3.25

3.61

3.00

3.06

3.11
3.14
3.17
3.19
3.20
3.21

3.21

3.25$
3.35
3.38
3.39
3.39
3.39
3.38
3.38
3.37
3.37
3.36
3.36
3.37
3.37
3.39
3.41
3.^9
3.81

Office of the Secretary of the Treasury

*
l/
2/

For categories of outstanding Series E bonds see Table 1.
Compounded semiannually.
,
Effective date of revision for bonds issued February through May 1957-




3.89$
3.92
3.95
3.99
4.02
4.05
4.10
4.15
4.19
4.23
4.30
4.45
4.85

June 1959

PUBLIC

DEBT

AND

INTEREST

RATE

C E I L I N G S 114,

Subject to enabling legislation
Appendix 3 - Table 7
Revised Extension on Series E Savings Bonds Reaching First Maturity
June 1, 1959 through September 1, 1966 (Bonds issued June 1949 through April 1957) 1 /
Summary of Redemption Values and Investment Yields on Bonds Issued
June through November 1949
(Based on $100 face value bond) l /
7
Period after
f i r s t maturity date

Redemption
j
value during
,
each period.

1

Extended Maturity Value (10
years from f i r s t maturity)

t

Approximate investment yields ZT
s On current redemption
On f i r s t maturity
: value from beginning
value to beginning
:
of «ach period to
of each period
:
: extended maturity
t

$100,00
101.76
103.56
105.40
107.32
109.24
111.24
113.28
115.36
117.52
119.72
121.96
124.28
126.64
129.04
131.56
134.12
136.72
139.40
142.16

3.52*
3.53
3.54
3.56
3.57
3.58
3.59
3.60
3.62
3.63
3.64
3.66
3.67
3.68
3.69
3.70
3.71
3.73
3.74

145.00

3.75

Office of the Secretary of the Treasury

3.755S
3.76
3.77
3.79
3.80
3.81
3.82
3.83
3.85
3.86
3.87
3.88
3.89
3.91
3.93
3.93
3.94
3.96
3.98
4.00

—

June 1959

1/

Bonds reaching f i r s t maturity beginning December 1, 1959 will have maturity values
higher than their face value. The ratio of the value at f i r s t maturity to the redemption value for any given period of holding will be approximately equal in a l l
cases.

2/

Compounded semiannually.







Subject to enabling legislation
Appendix 3 - Table 8
Revised* and Present Series E Bond Extension Period Redemption Values
and Investment Yields
($100 Bond, Face Value) l /

Period after
f i r s t maturity date
(years)
0
1

1/2

_
-

1-1/2
2
2-1/2

_

3

-

4

-

3-1/2

1/2

-

-

3
3-1/2

_
_
_ 5-1/2
_
_ 6-1/2
_7

Yield for 2 / :
Redemption Value
Revised

?100.00
101.76
103.56
105.40
107.32
109.24
111.24

113.28

Present

$100.00
101.50
103.00
104.50
106.00
107.60
109.20
110.80

10,

139.40
142.16

112.40
114.00
115.80
117.60
119.40
121.20
123.00
124.80
126.60
128.60
130.60
132.60

10 (2nd naturity)..

145.00

134.68

'2

5
5-1/2
6

6-1/2

7
7-1/2
8

8-1/2

9
9-1/2

-

7-1/2

-

_
_
_
-

115.36
117.52
119.72
121.96
124.28
126.64
.129.04
131.56
134.12

136.72

Office of the Secretary of the Treasury
*
1/
2/
2/

:Increase
$

0

.26
.56
.90
1.32
1.64
2.04
2.48

2.96
3.52
3.92
4.36
4.88
5.44
6.04

6.76
7.52

8.12
8.80
9.56

10.32

Period held }J
Revised
Present :Increase
3.52*
3.53
3.54
3.56
3.57
3.58
3.59

3.60
3.62
3.63
3.64

3.66

3.00*

2.98
2.96
2.93
2.95

.52*

.55
.58
.63

2.96

.62
.62

2.96

.66
.69
.67

2.95
2.94
2.93

.64

2.97
2.98
2.98
2.98
2.98
2.97

.67

.68

3.74

2.99
2.99

.69
.70
.71
.73
.73
.74
.75

3.75

3.00

.75

3.67

3.68
3.69
3.70
3.71
3.73

2.98

Remaining period to
second maturity
Revised
Present :Increase
3.00^
75 $
3.75*
3.00
76
3.76
3.00
77
3.77
3.01
78
3.79
3.02
78
3.80
3.02
79
3.81

3.82
3.83
3.85

3.86
3.87

3.88

3.89
3.91
3.93
3.93
3.94
3.96
3.98
4.00

3.02

3.03
3.04
3.05
3.04
3.04
3.03
3.04
3.05
3.07
3.12
3.10
3.10
3.14

80
60

>TJ
d
W
5
o
©
M
W
H
£
©

81

81
83
84

86
8'
88
86
82

86

June 1959

Bonds reaching f i r s t maturity after May 31, 1959, ( b o n d s issued June 1949 through April 1957).
For bonds reaching first maturity June - November 1959. Later maturing bonds will have f i r s t maturity values
higher than their face value (see Footnote 1 - Table 7 ) .
Compounded semiannually.
On first maturity value to beginning of any subsequent l / 2 year period.

M
Sd
H

5
H
a
H

§CO

116

PUBLIC DEBT AND INTEREST RATE CEILINGS 116,
Subject t o enabling legislation

Appendix 4
Revision of Existing Series H Savings Bonds
Outstanding Bonds Issued before June 1 . 1959
Summary of Revisions in Terms and Conditions
(1)

Date of announcement — June 8, 1959 (Treasury Circular No. 905 - Second
Revision),

(2)

Effective date for start of increased interest — June 1 , 1959 for existing
bonds dated June and December of any issue year; for a l l others the next date
on which interest checks are due. Therefore, the f i r s t change in the amount
of interest checks from the schedules published in Treasury Department Circul a r No. 905 - revised, dated April 22, 1957, w i l l take place 1 / 2 year after
June 1 , 1959 in the case of bonds dated June and December of any year and 1 / 2
year a f t e r the next date (after June 1959) on which interest checks are due in
the case of a l l other bonds.

(3)

Revision of interest payable in the future until maturity — Beginning with
interest checks due on December 1 , 1959 for bonds issued June and December of
any year ( a l l other bonds on interest checks due 1 / 2 year after the e f f e c t i v e
date of the revision for such bonds) the amount of each check until maturity
w i l l be increased to provide a graduated increase in investment yield for the
remaining period t o maturity. At maturity the increase in investment yield
w i l l amount to approximately 1 / 2 of 1% (compounded semiannually), with lesser
increases in investment yields i f bonds are redeemed before maturity.
1/

(4)

No changes in other terms or conditions.

1/

The categories of outstanding H bonds are shown in Table 1 attached. For
examples of changes in amounts of interest checks aoi investment yields see
Tables 2 and 3 attached.




Subject to enabling legislation

Appendix k - Table 1
Categories of Outstanding Series H Bonds, May 31> 1959

Issue year and month

Current maturity period
Range of yields for remaining : Range of time to :
: Yield for
time to next maturity 1/
: next maturity 1 / :
: f u l l current
i
(years)
:
:
maturity
Revised
Present
:
period

ExtensjLon

.
^

ld_

June 1952 - January 1957.

3.00*

3.342 - 3.812

3.842 - 4.312

2-2/3 - 7-1/6

2/

February 1957 - May 1959.

3.25

3.35

3.85

7-1/2 - 9-1/2

2/

Office of the Secretary of the Treasury
1/

Based on next date interest checks are due.

2/

No extension planned at this time.




- 3.38

- 3.88

June 1959

PUBLIC DEBT AND INTEREST RATE CEILINGS 118,
Subject to enabling legislation
Appendix 4 - Table 2
Example of Revision in Existing Series H Savings Bonds
Category of Bonds Issued June 1952 through January 1957*
Interest Checks and Investment Yields on Bonds Issued June through November 1952
(Based on $1,000 Bond) l /

Period after
issue date
(years)

Approximate investment yields 2/
s From effective
.
ct:
Interest
jdate of revision: F r o m i s s u e date .From each intercheck
sto each i n t e r e s t : t o e a c h interest.est payment date
.
. payment date : payment date . to maturity
: Original: Revised: Original: Revised: Original: Revised :0riginal :Revised

0

3.00*
3.13
3.18
3.22
3.27
3.34
3.41
3.49
3.58
3.60
3.63
3.66
3.69
3.74

-

1/2

$ U.oo
12.50
12.50
12.50
12.50
12.50
12.50
12.50
17.00
17.00
17.00
17.00
17.00
17.00

.80*
1.65
1.93
2.07
2.15
2.21
2.25
2.28
2.40
2.49
2.57
2.63
2.69
2.73

1
1-1/2
2
2-1/2
3
3-1/2..
4
4-1/2
5
5-1/2
6
6-1/2
7 (June 1 1
Nov. 1 , 1959 y ) \
17.00
7-1/2
8
17.00
17.00
8-1/2
17.00
9
9-1/2
17.00

17.50
17.50
20.20
20.20
20.20

3.40*
3.40
3.40
3.40
3.40

3.50*
3.50
3.68
3.76
3.62

2.77
2.81
2.84
2.87
2.89

2.78
2.82
2.88
2.94
2.99

3.81
3.91
4.07
4.36
5.10
10.37

9 - 2 / 3 (maturity). 17.00

20.20

3.81

4.31

3.00

3.12

-

-

A

s

Office of the Secretary of the Treasury

*
l/
2/

For categories of outstanding Series H bonds see Table 1.
Redemption value at a l l times » $1,000.
Compounded semiannually.
Effective date of revision for bonds issued June through November 1952.




-

•

-

-

-

4.31*
4.51
4.83
5.18
6.06
12.37
-

June 1959

119 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Subject to enabling legislation
Appendix 4 - Table 3
Example of Revision in Existing Series H Savings Bonds
Category of Bonds Issued February 1957 through May 1959*
Interest Checks and Investment Yields on Bonds Issued February through May 1957
(Based on $1,000 bond) l/
:
Period after
issue date
(years)

Approximate investment yields 2/
From effective :
date of revision:**0* i s s u e d a t e From each interto each interest:to each interest est payment date
to maturity
payment date : payment date
Original:Revised Original:Revised:Original:Revised:Original:Revised

0

Interest
check

1/2

$ 8.00

1-1/2

16.90
16.90
16.90

1

2-1/2
Nov. 1, 1959 2/)]

1.60*
2.25

l4.*>

3-1/2!!!!!*.!!
4

4-1/2.
5
.
5-1/2.

6
6-1/2.
7
7-1/2.

6

8-1/2.
9
9-1/2.
10 (maturity).... 16.90

2.62
2.80
2.92

17.40
17.40
17.40
17.40
17.40
19.80
19.80
19.80
19.80
19.80
21.00
21.00
21.00
22.10

3.38*
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38

22.10

3-38

3.48*
3.48
3.48
3.48
3.48
3.56

2.99
3.04

3.65

3.19
3.20
3.21

3.61

3.68

3.71
3.75
3.78

3.81
3.85

3.08

3.11
3.14
3.16

3.01
3.07

3.12
3.16

3.24

3.19
3.25
3.30
3.35
3.39
3.42
3,46
3.50
3.53
3.57

3.25

3.61

3.18

3.22

3.23

3.2U

3.25*
3.35
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3.38
3-38
3.38
3.38
3.38

Office of the Secretary of the Treasury

*
l/
2/
3/

For categories of outstanding Series H bonds see Table 1.
Redemption value at all times = $1,000.
Compounded semiannually.
Effective date of revision for bonds issued February through May 1957.




3.88*
3.92
3.95
4.00
4.05

4.11

4.13
4.16
4.19
4.23
4.29
4.31
4.35
4.42
4.42

June 1959

120

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

The C H A I R M A N . In addition, without objection, the material referred to by the Secretary in his statement appended to it will be
included immediately following the Secretary's statement in the
record.
Mr. Secretary, aside from the request affecting the ceiling on the
public debt itself, I am sure you recognize that your proposal with
respect to the ceiling on the rate of interest which may be paid on
the U.S. bonds will arouse a great deal of critical review of recent
debt-management policies of the Treasury.
I think you would agree with me that it is perhaps advisable and
good that this is the case, because this whole debt-management area
is involved in the interest-rate limitation that we are discussing today.
You have referred to it in your opening statement.
I think you will agree also that the Congress has a proper concern
in debt-management policies and that this is not something purely
mechanical.
Secretary ANDERSON. It is, indeed, Mr. Chairman.
The C H A I R M A N . Are you indicating in your statement, as at least
I gain the impression, that this congressional concern over debt management is not adequately discharged by a ceiling interest rate of
414 percent ?
Secretary ANDERSON. AS indicated in the statement, we believe that
the 41,4 percent impairs the ability of the Treasury to do the best
possible job of debt management in providing the proper structure
of the public debt.
The C H A I R M A N . Are you also saying in this regard that it may have
been a mistake for us over the years to have had an interest-rate
ceiling ?
Would we have been better off over the years and would the lack
of a ceiling have contributed to better debt management on the part
of the Treasury at any time of which you are aware ?
Secretary ANDERSON. Mr. Chairman, as I stated, I think that the
414-percent rate since its establishment in 1919 for obligations 5 years
and beyond has been relatively academic, because during the 1920's
when we had high levels of prosperity we were reducing the debt
substantially.
The result of the reduction of debt during these high levels of prosperity caused declines in interest rates because the Government was
a net contributor of money by debt retirement rather than in net
borrowing.
Then came the end of the 1920's, 1929, and we had the period of
the thirties. Except for a brief period in the thirties, we had a great
problem of depression which we were trying to overcome.
At the end of the thirties we had a war. During the war, we held
the limits of interest rates and the price of securities artificially
through the utilization of the Federal Reserve System, the buying
and selling of securities. Also, during the war, there were not as
great demands by a great many people, because we had rationing,
because there was a shortage of a number of items which both business and individuals could buy.
Subsequent to the war, we have had generally rising levels of business activity. We have also had business cycles.




121 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

During the periods of business cycles, the interest rates have gone
relatively high, during periods of high levels of prosperity. During
periods of low levels of business activity, as I pointed out, the interest
rate fell very substantially.
During some of these years of the postwar the Federal Reserve
still maintained what we call the peg on the price of Government
securities.
We are now at a period in our history in which we have the highest
levels of business activity not for any period subsequent to the war,
but for any period in the history of this country. By almost every
standard as we look at the rate of business activities going up from
month to month, we are setting new peaks.
I believe that what Carter Glass said in 1919 would have been true,
or let me say more appropriately could have been true, if during
the twenties, instead of being able to retire a third of the debt we had
been adding to it in high levels of prosperity, and for these various
other factors which I have cited.
I think now we have come to a point of such high levels of business
activity in our country that the Congress is justified and should appropriately examine the proposals of giving the Treasury greater flexibility.
The C H A I R M A N . Mr. Secretary, you are saying then that we may
have not failed to show proper concern about debt management in the
past ?
Secretary A N D E R S O N . That is correct, Mr. Chairman.
The C H A I R M A N . This ceiling of 4 ^ 4 percent has been insignificant,
because in the past it has been rather academic. It has not appeared
over any period of time that the interest rate itself was close to or near
the ceiling itself.
Secretary A N D E R S O N . That is correct, Mr. Chairman.
The C H A I R M A N . Y O U are concerned now apparently because of your
recognition or acceptance of the thought that over a period of time
in the future, the next several months, or the next year, or the next
2 or 3 years, interest rates generally may rise above the levels that
can be paid by the Government under existing legislation?
Secretary A N D E R S O N . Mr. Chairman, not necessarily.
I am concerned about the fact that the Treasury should operate in
a free market in the sale of its obligations. I think realistically we
have to look at the fact that Government securities today, although
bearing lower coupon rates, are selling in the market to yield higher
than 4 p e r c e n t interest rates.
It is my judgment that if all of us so conduct ourselves as to lead
the people here and abroad to believe that we are going to pursue sound
policies which will obviate the erosion of the purchasing power of
our money, we will have contributed substantially to an environment
in which interest rates would not rise, but which would lower.
I think, on the other hand, that all of us realize that we are in a
period of growth. It is an expanding period of growth. We do not
know how long it will continue. I for one hope that it continues for
a long time.
One of the characteristics of a period of growth is the increase in
demands for credit and the increase in interest rates, unless there is
the concomitant occurrence of such an advantage as took place in the




122

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

twenties when we were substantial retirers of the debt at the same
time that we were in the period of growth.
The C H A I R M A N . Mr. Secretary, I want you to understand clearly
that I am not trying to get you to say something about this entire
matter that should not be said publicly by you in the position that you
occupy. I am sure that all the members of the committee would recognize that there are certain questions that perhaps could better be asked
off the record about some of these matters, rather than on the record.
I asked this question a moment ago because this proposal has been
characterized by some as meaning an increase in interest rates generally. If the Government is to pay more, as I understand their thinking, if the ceiling comes off, then others borrowing money would also
have to pay more, and there would be a general increase in interest
rates affecting all borrowers as a result of the Congress action you
request.
If that is not the case, I think it is time for the people who have
indicated that to be the case to be straightened out in their thinking,
and I do not know how we can avoid a discussion of it this morning if
we hope to straighten them out.
Secretary A N D E R S O N . I should like very much to engage in that
discussion.
Mr. Chairman, if I may, I would like also to refer the members of
the committee to portions of the supplemental statement which was
filed here, because a portion of this subject is elaborated on in that
statement, which I just didn't want to take all morning to read.
I would like to address myself to it.
Broadly speaking, the interest rate, as I said in my statement, is
a price which you pay for borrowed money. As a price, the rate reacts to the same sort of influences as other prices in a free market
economy, influences that operate through demand for and supply of
funds that are available for lending in the credit markets, and just as
an increase in the demand for beans, or bicycles, or any other commodity tends to increase the price of those items, so does an increase
in the demand for credit tend to increase interest rates.
And an increase in the supply of funds available in the credit market has the same basic effect as an increase in the supply of goods and
services in the market. Prices tend to fall.
This is true under present market arrangements. It will remain
true so long as the credit markets remain free and borrowers and
lenders are permitted to manage their affairs with a minimum of
interference and a minimum of regulation.
The existence of a ceiling on interest rates on Government securities
in no way affects the basic market forces, and particularly it cannot
reduce the demand for funds nor can it increase the supply so as to
reduce the pressure on interest rates, but its existence may indeed
affect the borrower and the investor's expectations, and could so promote temporarily higher rates of interest.
I am talking about the existence of this ceiling. For example, the
existence of an artificial ceiling on interest rates severely hampers
the Treasury's efforts for the sound management of the public debt
in securing a structure in which there is a balance between long, medium, and short securities.




123 PUBLIC DEBT AND INTEREST RATE CEILINGS
Under present conditions it would be impossible virtually to market
a security for more than 5 years maturity at the present ceiling. This
forces the Treasury to borrow through shorter term issues. The expansion in these issues exerts a double inflationary effect,first,because
of the effect of the liquidity of the economy—and I point out here that
a 30-year bond is a true investment security, but a 91-day Treasury
bill is very close to being money—and, secondly, because short-term
securities are very often purchased in large volume by commercial
banks, and thus promoting inflationary expansion in the bank deposits and the money supply.
Mr. Chairman, to the extent, therefore, that an artificial interest
rate forces reliance on short-term financing, inflationary expectations
are stimulated.
This in turn tends to force interest rates up because borrowers increase their demands for funds which they expect to pay in eroded
dollars, and lenders become more reluctant to lend because the payments will be in dollars of reduced purchasing power.
Therefore, the borrowers will be willing to pay higher rate of interest, lenders will be willing to lend only at higher rates of interest,
and the net result is that interest rates tend to be higher than if price
stability were expected.
I think also, Mr. Chairman, that one should point out that we have
percent limit, and yet this artificial ceiling is not effective in holding down the interest rate yields on outstanding issues, even though
the coupon rates may be 2y2 percent or much less. The yields are
forced to this level not alone by Treasury financing, which has been
largely confined to short-term issues in the past years, but also because
of the strong demand for funds in this period of high levels of business
activity.
Do I make myself clear, sir ?
The C H A I R M A N . I do not know whether or not this explanation is
convincing to those who have made the charge that I just talked
about. State it another way, if there is a more convincing way to put
it-

Secretary ANDERSON. As of today, as indicated in my statement, we
have about $76 billion of debt that will be due within a year. If we
do nothing except to refund the issues which are now becoming due,
whether they were originally 1-year certificates, or 4-year notes, or
20-year bonds, if we do nothing except to renew them by new issues
of debt for 1 year or less, we will drive up the amount of debt due in
a year or less to almost $100 billion. This would be like putting the
next thing to money in the next 18 months into the economy or the
country, the difference between roughly $76 billion and $100 billion.
If we should add to that another series of short-term instruments,
which would represent tax collection fluctuations, the seasonal difference between expenditures and receipts, it might be even more.
Both here and abroad as people looked at our present structure and
at the yields which are being paid on Government securities outstanding, on corporate securities, and on municipal and State securities
which have the advantages of tax exemption, they would very naturally say to themselves, "The Treasury is boxed in. It is forced to
borrow all of its money in an area between 1 year and 5 years," in
addition to the fact that if we crowd this short-term debt very heavily
41950—59




9

120,

124

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

in the first year or from 1 to 5 years, we are dealing largely in an
area that is concerned with purchases by banks which create the
money when they buy the securities, and, therefore, add to the
inflationary pressures.
We are also creating a very severe pressure on the short-term
interest rates.
For a period early in the 1920's, the interest rate on short-term
money went as high as 6 percent. Then came the debt retirement
and it fell very rapidly. Within the last 2 years we have offered
bonds for 1 year, 4 years, and 12 years, something like that, all at a
level rate of interest.
If we are concerned not only about the inflationary impact, but if
we are concerned about the cost of increasing the national debt, the
thing that affects the cost of increasing the national debt more quickly
than anything else is the rapid rise of the short-term rate. If we are
going to put a lot more into the short-term area, we are simply going
to increase the pressure on the rate and the rate will go up.
The C H A I R M A N . Mr. Secretary, let me see if I can get a little better
understanding of it by proceeding in this way: From the point of
view of the management of the public debt, you are saying that one
of the very bad things that could occur would be the shift of more
and more dollars from long-term securities into so-called short-]term
securities, less than 5 years.
Secretary ANDERSON. That is correct, sir.
The C H A I R M A N . I would think that that point could be more thoroughly demonstrated to the satisfaction of most people, because when
you enter the short-term money market today seeking $76 billion, that
has an effect upon the money market.
I assume from what you say that if you go into that market a year
from today, not asking for $76 billion but $100 billion or more, it
has more of an adverse effect upon the money market.
Secretary ANDERSON. That is correct, sir.
The C H A I R M A N . Your concern in this proposal must mean then
that you are fearful that in the months ahead you will not have enough
flexibility within the ceiling of 41/4 percent to market the amount that
you think ought to be in long-term securities, and either a larger
amount would have to be put into short-term securities, or you would
have to issue the bonds at a discount in order to show more interest
than 414 percent.
Without talking about whether it is good or bad to shift from
long term to short term, without talking about whether or not this
would mean increased interest or that the Government would be setting the pattern that would be followed by everyone else, I cannot
reach any other conclusion but what I have stated as the concern that
I have, namely, that you cannot get enough long-term maturities in
issue in the next months ahead under this ceiling.
Secretary ANDERSON. That is correct, Mr. Chairman.
The C H A I R M A N . That means then, Mr. Secretary, and I think we
might as well recognize it and face up to it, that one way or the other
under existing law, in order to finance this debt, you will have to pay
whatever the people with the money demand in the way of interest,
and if you cannot pay them what they want on long-term securities,
you will have to pay them what they want on short-term securities?




125

PUBLIC

DEBT AND INTEREST

RATE CEILINGS

120,

Secretary ANDERSON. That is correct, sir.
The C H A I R M A N . This then itself may not mean an increase in the
interest rate that you have to pay.
I am trying to distinguish it. If you are going to have to pay a
higher interest rate in your opinion, and that is what, it appears to your
advisers is the case, you are going to do that under existing law by
doing it through the vehicle of these short-term securities?
Secretary ANDERSON. Yes, sir.
The C H A I R M A N . Because it is sounder debt management, then, you
reach the conclusion, that if I have to do it anyway, let me have
the opportunity of doing it through the issuance of long-term securities rather than short-term securities ?
Does it boil down to that ?
Secretary ANDERSON. Substantially, sir.
The C H A I R M A N . I have a habit of oversimplifying these things.
Secretary ANDERSON. It is a good habit, Mr. Chairman.
What I would like to say to you is that when you use the term "longterm bonds," I would like to interpret it as meaning 5 years or more,
because we sometimes think of a bond running 5 to 10 years as an inter. mediate bond, and a long-term bond is something running out beyond
that.
If I can do it more simply, let us say first that our concern is with
the fact that it is now costing $8 billion to carry the debt and that we
are judging it is going to cost about $ 8 ^ billion to carry the debt in
1960. If we should take the difference between $76 billion, which we
now have in short-term debt, and something more than $100 billion,
which will include that coming due on our seasonal requirements, then
somewhere we have to find buyers for more than $25 billion worth of
new 1-year debt obligations.
With the interest rates already running about as high in the shortterm area as some of the longer terms, we are going to add very substantially to that kind of a cost.
If, on the other hand, we look at it not from the standpoint of cost,
but if we look at it from the standpoint that when we are supplying
funds to the short-term market, obligations in the short-term market,
we are supplying the next thing to money, then we have done the
second thing of creating in the minds of the people of this country
and abroad that we are headed for an inflationary process because, this
being the next thing to money and being financed largely in the banks,
has an inflationary aspects, and they will govern their actions
accordingly.
So, while we realize that there are some reasonable limits to the
amount of money that can be secured in the intermediate markets
and the long-term markets, we believe that in both instances what
the chairman has said is correct, that in the best interest of the country and the management of the debt we need the flexibility which we
would not have without this rate.
The C H A I R M A N . I was asking the question, trying to get some
information.
Frankly, I know very little about the problems that you have in
the management of the public debt. I do not remember that we in
this committee have gone into this phase of our jurisdiction as often
or as much in detail as we have many other aspects of our jurisdiction.




126

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

What of the statement that is made that there is a relationship
between this request that would permit issuance of long-term securities at a higher interest rate and the desire that is expressed to protect the dollar from further devaluation ?
Is the value of the dollar in any way affected at this particular
time by this request ?
Secretary A N D E R S O N . Yes, sir; I think it is.
The C H A I R M A N . In order to protect the value of the dollar, do we
reach the conclusion that it is necessary at this time that that dollar
be able to earn more when used ?
Secretary A N D E R S O N . Mr. Chairman, let me say this: I think that
what we are concerned about is that, in the absence of some additional
flexibility, we are concerned about the future of the dollar. I think
it must be remembered that we have gone through about as stable a
period from the standpoint of cost of living, the commodity price
index, the fact that we have not used all of our facilities to the fullest, and a number of other factors as we have had in a long time.
I think for the future we must realize that there are two kinds
of money really. One of them is the money you save and it comes
from the work and the practice of people who put their brains, and
their muscles, and their resources together, and the other, this money
that is created. You can create money through the banking system
and you can create money through the Federal Reserve System. If
we go to the commercial banks with a large amount of short-term
debt, they will give us their obligations and they will issue deposits
for us, and we will spend the money and pay for all the things that
governments pay for.
If, on the other hand, we provide some of these bonds for State
sinking funds, for insurance companies, for the holders of E- and Hbonds, for a large part of the true savers in the country, and they
give us funds and hold the obligations, they are true savers.
We are affected not only by what we actually do in this regard,
but we are affected by what people expect to come out of our policy.
If people expect that we are going to finance all of this debt in the
short-term area, and if people believe that we have no alternative except to do it, and if people recognize that the short-term debt is more
nearly like money than longer term debt, then all of them will govern
their actions accordingly. People who have money to lend will say
to themselves, " I will only lend it at higher rates of interest because
my expectation is that I may get back an eroded dollar."
The C H A I R M A N . Mr. Secretary, are you of the opinion, in addition
to the problems of debt management that you would have under the
existing provisions without change, that a continuation of the existing limitations in themselves, in the light of what economic developments you make be able to foresee over the next few months, would
contribute to further devaluation of the dollar ?
Secretary A N D E R S O N . I wonder never like to be a prophet as to how
long we are going to have a high level of business activity.
I would say that at the moment the levels look strong now and in
the future.
I think if one looks at the plans which are being made for permanent construction, the amounts of money that are being borrowed,
and if I recall correctly there was about $3% billion of construction




127 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

awards during the month of April, which is one of the highest months
in our history, one sees, at least for the foreseeable future, a continued rise in the level of business activities and their demands for
credit.
If, during that same period of time, we are demanding credits, and
particularly in the short-term are where the credits more nearly approximate money, then I think that the anticipation or the thought
of the people wTill be that inflation is a likely result and they will take
their actions accordingly.
While I would not like to elaborate on the subject, I would like to
mention that we have not only a domestic, but we have a problem
involving our neighbors abroad. Our neighbors abroad do not operate in the same kind of an economic environment that we operate in.
In this country there is a real market for a substantial amount of
short-term securities outside of the banks. As an example, people
borrow several millions of dollars to build a building. It can only
go up at a certain rate. Rather than hold the funds idle, they will
put part of the funds in short-term Government securities. They will
hold other corporate funds, funds which they accumulate for tax
purposes or dividends.
In Europe and in other countries, this sort of practice is not followed to the same extent it is followed in the United States. Therefore, as the European and those abroad look at our situation, they
say, "You have a 414-percent ceiling on all things beyond 5 years
of securities, and therefore you are forced into short-term lending,"
and in the shorter term, because of the interest rates going up on
even the 1- or 2-year issues, they become more and more concerned.
And we must remember that the central banks of very strong industrial countries, and the holders of our obligations on the part of
private buying people, and companies abroad beyond their needs for
working capital, also begin to make appraisals of what are the capacities of the Government of the United States to maintain a sound
structure in their debt.
I would not want what I say here to imply that by the removal of
this 414-percent rate, the Treasury would either want to or intend
immediately to go out and tap all of the markets at whatever rates
they could be tapped for funds. I would simply want to say when
the opportunity arises and the short-term, and the long-term, and
the intermediate term rates are considered, and when the occasion
arises that we believe there is a market demand that would readily
absorb those funds without undue impingement upon the economy of
the country which is dependent also on those markets, that we should
have that opportunity to do so.
The C H A I R M A N . Mr. Secretary, it is quite evident that we will not
be able to finish your presentation before the committee has to recess.
Would it be agreeable with you to be back at 1:30 ?
Secretary A N D E R S O N . Yes, sir.
The C H A I R M A N . Without objection, the committee will reconvene at
1:30 this afternoon.
(Thereupon, at 12:10 p.m., the committee recessed, to reconvene at
1:30 p.m. same day.)




128

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

AFTERNOON SESSION

The C H A I R M A N . The committee will please be in order.
Secretary ANDERSON. Mr. Chairman, it was suggested to me at noon
by some of my staff that I perhaps was not as fully responsive to the
chairman's opening question this morning as I should have been. It
was not my intention to not be fully responsive, but I should like to
clarify it, if I may.
The chairman's opening question, as I recall, was whether or not
the removal of the d^-percent rate would cause interest rates generally
to rise.
I believe that the removal of the limitation in itself would work in
the opposite direction. I believe it would work in the opposite direction for these reasons:
The Treasury does not establish the rate at which it can sell its
securities. The Treasury sells in a competitive market at the lowest
possible prices, with the knowledge that its issues must be priced sufficiently attractive to secure the money required to pay the Government's bills.
The market is established by the demand for and the supply of
funds reflecting the actions of lenders and borrowers of every character over the Nation.
Secondly, there is nothing in the removal of the rate by itself that
would tend to raise other interest rates, for interest rates are determined by the forces of demand and supply in the credit market.
Third, the existence of the ceiling may force the Treasury to borrow
heavily on the short-term issues, which, as I observed this morning,
is inflationary, and expectation of inflation tends to cause higher and
not lower interest rates.
Fourth, if the people expect inflation, they will save less and this
tends to diminish the flow of savings into long-term credit markets.
If we remove the fear of inflation, partly through being able to
pursue sound management, savings should tend to be stimulated,
making more funds available for investments in mortgages, State and
school bonds, and that sort of thing.
Further, if there is fear of inflation, investment funds now available will seek short-term investments instead of supplying funds
to essential long-term capital markets.
As I emphasized this morning, if the ceiling is removed, we do
not intend to indiscriminately issue large amounts of long-term Government bonds. We have in the past 6 months offered only $1%
billion of securities of over 5-year maturity in amounts which we
consider to be consistent with the availability of long-term funds
in the market, and, similarly, if the ceiling is raised we would intend
to issue from time to time, as market conditions permit and as we
judge business, and individual, and State and local demands to fluctuate, some appropriate volume of securities of over 5 years maturity.
We would do this only as market funds become available and not
in amounts that would force market rates up.
We believe that the Treasury is simply entitled to a fair share of
the long-term investment funds that are available in the market.
This is the clarification I would like to make.
The C H A I R M A N . Mr. Secretary, is it your thought that the total
demand for credit will exceed the amount that can be extended




129 PUBLIC DEBT AND

INTEREST

RATE

CEILINGS

120,

without inflationary consequences through, say, the end of the fiscal
year 1960 ?
Secretary ANDERSON. Mr. Chairman, I think that the nearest I
could come to answering that directly would be to say that the state
of the economy is indicative of a high level of continuing demands
for credit.
As I indicated this morning while I would not want to forecast
at the moment, it looks as if this sustained demand is going to be kept
up, and to the extent that the demand is kept up or grows, there
would be that much additional pressure on the funds.
The C H A I R M A N . If the demand is greater, somebody is likely to
be priced out of the market; is that true ?
Secretary ANDERSON. This comes down partially to the question of
how much a rise in interest rates contributes to increased costs. This
is one of the subjects which I have covered in the supplementary
statement.
The C H A I R M A N . The charge has been made, of course, that the
monetary policies that have been pursued in the past have tended
to work contrary to the best interests of small business people and
some others that have been mentioned.
If we get into a contest here for a limited supply of credit in the
market, and the Government, which is of course the biggest borrower
of all, finds it necessary to pay more in order to get its part, would
there be people who would be adversely affected and crowded out of the
market for money ?
Secretary ANDERSON. The most important thing, of course, is the
fact that as long as the Government has to borrow, and particularly
to cover a deficit, we take money out of the market.
To the extent that we would create a surplus and retire debt, we
would be contributing to the market.
To the extent that we contribute rather than demand, we would
have a healthy effect on other people who want to secure money in
the market.
If you maintain simply an equilibrium or a balance between your
expenditures and your revenues, then you neither contribute to the
market nor do you take anything out in the way of funds.
The C H A I R M A N . D O we create a hardship on States and localities
in the issuance of their own bonds when we have to pay more or we
pay more in the way of interest on our bonds under circumstances
such as we think may exist now in the next months ahead ?
Secretary ANDERSON. Again, we in the Government borrow in the
same markets as cities and municipalities borrow.
The C H A I R M A N . Today they have somewhat the advantage; do they
not?
Secretary ANDERSON. They have the advantage of borrowing on taxexempt securities to the extent that funds are readily available in the
market both to meet the requirements of cities and municipalities, the
needs of both of them need to be satisfied.
This is one of the reasons that I emphasize that even if we did not
have this ceiling, we would not go into the market indiscriminately for
long-term securities, for we would take into account what all of the
cities, municipalities, corporations, and others over the country were
doing at the same time, because we never issue a Government security




130

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

without trying to measure the effect that we would have upon other
segments of the economy that we want to prosper and do well at the
same time.
The C H A I R M A N . In other words, your activity here, if the course of
action is taken which you would intend to take, would not in your
opinion have any adverse effect upon the availability of funds for
States and localities ?
What I am trying to ascertain is whether or not you reached a conclusion that the interest rate of State and local bonds would also rise
if the interest rate on Federal bonds rose ?
Secretary A N D E R S O N . Let me say again, referring to the statement
which I made earlier, the extent to which we can create an environment in which there is both an accumulation of savings and a willingness on the part of the lenders to lend without fear of inflation, which
they would have to compensate for by higher rates of interest, then I
think we would work in the direction of providing lower rates at which
municipalities, corporations, and all others can borrow.
The C H A I R M A N . There is one point that disturbs me quite a bit.
I wonder whether you have a thought on it and have reached any
conclusions with respect to it.
If we take the ceiling off long-term issues, would prospective investors in Government securities expect interest rates to continue to rise,
and if they did, would this not have an adverse effect upon the marketability of your long-term securities in the next few months?
Secretary A N D E R S O N . I do not believe that taking off the rate itself would cause people to believe that long-term interest rates would
rise.
What would concern them would be a problem of whether or not the
Federal Government would go indiscriminately into the market and
try to sop up or use up an undue amount of the accumulations in that
area for Government financing.
One of the things that we have been and would try to continue to
be careful about is to try to so assess the availability of funds in those
areas and the fluctuating demands of municipalities, and corporations, and others, so that we would not impinge against their
requirements.
The C H A I R M A N . Mr. Secretary, you would agree, and I wonder
if it is your purpose that it should be clear to everyone, that the
Treasury will make every effort to prevent any further rise in the rate
payable on Teasury obligations, and even to reduce these rates and
costs in the future.
I would take it that any Secretary of the Treasury worth his salt
would certainly want to operate in that way, and I certainly consider you are one worth more than your salt.
What can we do, in the event that the Congress should decide to go
along with this request, to make that intention clear and that in the
process of taking off the ceiling, we do it with the thought in mind
that that intention will be clearly and at all times carried out ?
Secretary A N D E R S O N . Mr. Chairman, I am sure, as you have indicated, that every Secretary of the Treasury, regardless of any
party, would feel that one of his obligations was to finance the public
debt as cheaply as he could consistent with good debt management
practices.




131 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

I believe that the actions which are being taken here will contribute
to the capacity of Secretaries of the Treasury in the future to do
that.
I think also that perhaps as salutary a thing as could be done would
be to let the world know and our country know that we intend to live
within our means in times of high levels of activity and that we do
feel some responsibility for the retirement of the debt.
I should like particularly to direct the attention of the committee
to page 32 of the supplemental statement that was filed with you. I
say here that there is a sixth and final alternative for reducing pressures on interest rates, although it must be admitted that the success
in pursuing this sixth course of action would not necessarily result
in lower rates.
This is because the basic trend in demand and supply in free credit
markets reflect the actions of millions of individuals and institutions,
and these actions might work toward higher rates even though some
of the more significant pressures were reduced, but if we could convert the Federal Government from a net borrower to a supplier of
funds in credit markets by achieving a surplus in the budget during
periods of high and rising business activity, we would have made a
substantial contribution.
The CHAIRMAN. Mr. Secretary, let me turn now to your procedures
for marketing Government obligations.
The claim is made in some quarters that through use of alternative
procedures, or others than those which you do use, it might be possible for you to obtain greater economy in the financing of the debt,
that is to say, finance it at a lower rate of interest.
Are there in fact any alternative procedures to those which you
presently use which in your opinion would accomplish any economy
in the management of the public debt ?
Secretary ANDERSON. Mr. Chairman, if one looks at what one pays
for interest and if the criterion is how do we reduce the carrying
charge for the national debt, there are alternatives.
I tried in the supplemental statement again to cover some of them.
Rather than read them, I would like to here indicate generally what
they are.
While I would not class it as an alternative, certainly when the
economy is in a period of recession or a period of depression, there is
not a great demand for funds and interest rates go down very low.
One looks at the interest rates in the thirties, at the rates at which
we could borrow funds. To give a typical example, if one looks at
the recessionary period of only last year, we were at the point where
we were borrowing 1-year money at less than 1 percent, but this means
loss of jobs, it means loss of income, it means loss of productivity,
and if there is any one single enemy to sustained growth in this country, it is depression.
There is a second alternative and that might be brought about if
we undertook actions which would substantially reduce the prices in
the stock markets on investments in common stocks.
Here again it would be very costly to the owners of stocks and costly
to the country, and it would have a very serious effect upon the actions of corporations. It is not a course of action which I think
a responsible country would pursue.




132

PUBLIC

DEBT AND INTEREST

RATE CEILINGS 120,

There is a third suggestion which has been made, that the Federal
Reserve System might, under the instructions of the Congress, hold
the level of interest rates at a relatively fixed pattern by buying and
selling securities in the markets. This has been tried. We did it during the war.
We pursued this course for a portion of the time after the war. It
was carefully examined into. It was regarded as being highly inflationary.
The methods by which we would attempt to reduce the inflationary
pressures, such as the increase of reserve requirements in the banks,
would fall indiscriminately on various classes of banks over the
country, so that you would have certain areas in which there would
be an inadequate supply of funds and other areas in which there would
be a surplus of funds.
Other suggestions have been made that the Federal Reserve System
might buy outright the securities issued by the Treasury and again
try to compensate by methods of sterilizing the resources or the credit
expansion which would be generated by this kind of an activity.
Again you are faced with the problem of how you would make
it equitable over the communities in the various parts of the country
because it would take quite a long time for the moneys that were
generated by this method to filter throughout the entire system.
I think also we have to realize that even in these efforts, while we
might undertake the question of sterilizing the secondary or expansive
effect of the money, thus created, we must remember that whether the
money comes into being as a result of being financed in the commercial
banks or whether it comes about as a result of being financed in the
Federal Reserve System, the primary effect of the money is pretty
quickly felt in our country because it is paid out by the Treasury at
the rate of $1,500 million on an average 5-day basis for all of the
services and goods and materials which the Government purchases.
I have tried to elaborate to some extent on these alternatives in this
supplement.
I realize, sir, that there are honest differences of judgment. I have
thought and tried to analyze as best I can these sorts of alternatives.
The C H A I R M A N . Mr. Secretary, as I understand, you only auction
so-called Treasury bills; is that right ?
Secretary ANDERSON. Up to 1 year.
The C H A I R M A N . Have you given consideration to the possibility of
marketing issues other than these 1-year Treasury bills on an auction
basis?
Secretary ANDERSON. Yes, we have, and with the chairman's permission I would like Secretary Baird to respond to that question.
The C H A I R M A N . All right, sir.
Mr. CURTIS. Mr. Chairman, I would like a clarification.
The C H A I R M A N . Mr. Curtis.
Mr. CURTIS. By auction, you mean above the fixed price ?
The C H A I R M A N . Just a regular auction.
Secretary ANDERSON. N O ; where the auctionfixesthe price.
Mr. CURTIS. In other words, there is not a lower one? It can be a
discount ?
Secretary ANDERSON. We have issued securities at a discount where
you have coupons and you sell them at a discount in order to achieve




133

PUBLIC DEBT AND INTEREST

RATE CEILINGS

120,

a sharper cleavage than the normal, say, one-eighth and that sort, of
thing, on which bonds are normally based, but in the true auction the
rate is fixed by the purchaser.
The C H A I R M A N . That is the type of auction I was referring to.
Mr. BAIRD. Mr. Chairman, over a period of years the suggestion
has been made many times that the Treasury consider extending the
auction technique beyond what it originally was in 91-day Treasury
bills.
At one time in Mr. Morgenthau's regime it was tried for a few weeks
on longer term Treasury bonds and was dropped as not successful.
Secretary Anderson has extended in the last year the auction technique considerably and we have brought out a 6 months' bill. We used
tax bills of approximately 8 or 9 months to a greater extent, and
some 3 months ago announced a program of auctioning four times a
year a block of 1-year bills.
However, Ave are not of the opinion, and most of our technical advisers are not of the opinion, that the auction technique permits of
indefinite expansion. It works very well in the professional market,
but when you come to intermediate and longer term bonds, you are
getting the occasional buyer. He does not know how to appraise what
to bid.
Therefore, you force all of your financing practically through the
professionals in the first instance for redistribution to John Jones or
the local Elks Lodge that has $10,000 that they are waiting to build a
building with. They do not understand the auction technique. They
would rather buy in the market at a price they know.
Therefore, we think it would not be constructive to extend it much
beyond what we have done at the present. We do not believe it would
be in the public interest, nor would it save us any money.
The C H A I R M A N . Mr. Secretary, as we look back, however, without
referring to any particular year, we find instances where we have made
errors in evaluating the market conditions at the time and perhaps
have made more under the procedures that we have followed in the
way of interest rate than perhaps we should have paid. We have seen
errors committed; have we not?
Secretary ANDERSON. Mr. Chairman, it would be certainly not possible to suggest that there are not errors in pricing of these securities.
The C H A I R M A N . There will always be errors, I take it, when we
proceed to market securities as we do through this method that we
follow of relying upon the advice of the financial community with
respect to what market conditions are.
We have made mistakes in the past. We will make mistakes in the
future. The result will be that if we make the mistake of underestimation, we will not find the purchasers of our securities available.
If we make a mistake of overevaluating, we pay too much interest,
more than we would have otherwise had to pay.
How can we get procedures that are more precise, if it is possible, and
therefore more economical than those which we have been using
historically ?
Secretary ANDERSON. Mr. Chairman, I should first like to call your
attention to page 32 of the statement which I read this morning.
In this chart is shown the interest cost on new long-term Treasury
bonds indicating the issue price and the estimated market rate at the




134

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

new maturity issue. I think that by looking at this chart you will
see that over the years, 1951 up through 1959, the Treasury has been
reasonably close to the market.
If you will look back on page 31, you will see the interest cost on
new long-term corporate bonds. I think that we would all agree that
people who wanted to borrow money for corporations would try to
borrow it as cheaply as they could, and there you will see on the triple
A corporate bonds the average yield on the outstanding and the new
issue interest costs, and that the disparity of the margin between the
rate at which the Treasury has borrowed over, say, a 10-year period
is considerably less than the disparity at wrhich corporations have
borrowed.
We would welcome any suggestions as to how this thing could be
improved, because we constantly think about it.
As I indicated earlier, one of the things that we have done is to
price a bond at a coupon rate and then sell it at a discount or at a
premium, whichever it would be, and by so doing you can price the
issue much closer to the market than if you try to deal in one-eighth
or that sort of a fixed percentage.
You get to where you can price it in decimal points.
As Mr. Baird indicated, we have tried to extend the auction principle more liberally than it has been used in the past. Recently we
had three issues which came fairly close together. We price two of
them at auction in order to try to determine from the auction what
the price ought to be for the cerificate which would bear a fixed rate
of interest.
I think that what we have to do is to continually explore and try
to develop within the atmosphere of a competitive market, securing
all of the competition that we can, and that is the thing that will
allow us to price as closely as possible.
The CHAIRMAN. Mr. Secretary, we are just now in the process of
recovering from a downturn in business activity and we find that conditions that bear upon the money markets are perhaps leading to the
situation wherein at the moment we cannot market as many of our
long-term securities at 414 percent as we think should be marketed.
Should we be concerned at this point as to whether or not if our
economy as a whole follows the usual pattern in recovery the result
will be higher interest rates before we reach a new peak in economic
activity ?
Should we be concerned about that as we consider this matter of
our own interest rate structure?
Here we are faced with this situation. Apparently it isn't a temporary thing. Apparently it is not the result of some short-run
phenomena.
Are the prospects such that we need to evaluate further increases
in the demand that will result in further increases in interest rates
as we consider this problem that is before us ?
Secretary ANDERSON. Mr. Chairman, in a complex economic society
such as ours, it would be a mistake for any of us to pick out any single
limit as the primary motivating factor which influences our ambition
to achieve a sustainable long-term rate of growth. The very forces
of competition themselves tend to cause people to do the same things
at the same time.




135 PUBLIC DEBT AND

INTEREST

RATE

CEILINGS

120,

If one business tends to expand to develop methods by which they
get cheaper prices, other competitors must follow along in order
to remain competitive.
When a whole series of business activity start moving in the same
kind of a direction, you have an expansive quality to the economy.
When any business starts to contract in any one area, the others
tend to contract, and when a number of them contract together, the
economy becomes characterized by recessionary movements.
We are now in one that is moving very solidly to higher levels.
I hope that we can maintain a high level of growth in this country
because it means more goods and services, it means more employment,
it means more gross national product, and it means that the Government is able to do more things both in the field of security and
otherwise.
As to what happens in the specific thing of interest rates during this
period, I think we should remember that high rates are a sign of
expanding business and that the extent to which they go depends upon
our willingness to accept discipline and judgment. It depends upon
whether the Government during this period is a net borrower of
funds, or whether it is a net supplier of funds.
It depends upon the attitudes of people and companies.
It depends upon whether or not we are able to assure a substantial belief that savers in our country can save with safety and can
supply the funds that are needed for business activities, and I think
all of these things and the things which the chairman mentioned are
matters with which we can be concerned and must be concerned, but it
is the composite of the whole that really taxes the ingenuity of our
people in our country.
The C H A I R M A N . Mr. Secretary, maybe you do not want to discuss
this in public, and if you do not just tell me, but since the next witness
today is the Chairman of the Federal Reserve System, I wanted to ask
you the question whether or not it is your opinion that the Federal
Reserve System has followed the monetary policies that should have
been followed in this connection ?
Secretary ANDERSON. Mr. Chairman, I would not want to try to
evaluate specific activities of the Federal Reserve System. I would say
to you that we have inaugurated a system of constant consultation between the Treasury and the Federal Reserve System and the President, the Council of Economic Advisers, so that each of us acting in
our own spheres may do so with the benefit of the judgments and the
benefit of the knowledge that we are able to acquire from the other
agencies which are concerned.
I think the available evidence points only to a mild degree of credit
restraint since last summer.
The C H A I R M A N . Mr. Secretary, I am not talking about that as
much as I am talking about this point. Maybe it is because I am
not completely informed.
However, I do not see how you can avoid a rise in interest rate
in an economy growing at the rate of 3 percent a year, if the supply
of money is not permitted to keep pace.
Secretary ANDERSON. I think there are two things we have to
consider.




136

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

One of them is the fact that if the environment is such that people
are encouraged to save, we save larger amounts of money and have
larger amounts of money available for borrowings out of the savings.
I think tile second thing that we must do is to take a look at the
enlargement in the money supply which has taken place, say, from
March 1958, to March of 1959.
It would seem to me that the principle which ought to govern in
this respect is that we have a rate of growth in our money supply at
something about the rate of growth in our productive capacity.
The CHAIRMAN. That is the whol&poittt
I am told, and I do not know whether this is true or not, but I
want to find put, that over a period of time when our economy has
grown, say, at the rate of about 3 percent a year, we only let our money
supply grow at the rate of about 1.5 or 1.6 percent.
I do not know that it is necessary that money grow 3 percent as the
economy grows 3 percent. I do not know what the figures ought
to be.
However, I think everyone of us would admit that a growing
economy demands more money, and if that money is not available
in proportion to the demands of the economy, in the final analysis we
will pay more interest for what is available.
Do we reach any conclusions looking backward ?
I am not criticizing the Federal Reserve, because I would probably
have done the same thing they did at the time they did it. I am not
saying I would not.
However, as we look back, can we determine now that the policies
they have followed, the policies of the past or present policies, are
in the direction of making a contribution to holding down the rate of
the interest or making a contribution toward an increase in the rate
of interest ?
Secretary ANDERSON. Mr. Chairman, I think if we look back that we
would say that the effort has been to try to keep the rate of the growth
of the money supply reasonably consistent with the rate of growth of
the country.
I have before me a chart which reflects the rate of growth on a
seasonally adjusted basis for the money supply from April 1958
to April 1959. While this is essentially in the line of questioning
which I am sure you are going to develop with Mr. Martin, I would
like to point out that, according to these figures, the annual rate
of growth from April 1958 to April 1959 was 4.4 percent.
If you select months from May 1958 to April 1959, and various
periods, the shorter the time period the more you get into margins
of error because of the float and that sort of thing which is in the
money supply. But my judgment is that the Federal Reserve has
tried to follow a flexible money policy that has been reasonably
consistent with the requirements of growth in our country.
I think also that one must not look entirely to growth in the
money supply, because the velocity of the money supply is also an
equally important factor.
The CHAIRMAN. What I had in mind, Mr. Secretary, is shown in
a chart that I had looked at earlier, the Economic Indicators for
Mav of 1959, prepared for the Joint Economic Committee.
On page 26 GNP has gone up, say, since 1952, by 20 percent.
The supply of money has gone up by 11 percent. I know that you




137 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

cannot just look to the supply. You have to look to the turnover
of your money as well as supply. I realize all that.
Secretary ANDERSON. That is correct.
The CHAIRMAN. I do not know that I am convinced one way or
the other, but I have a very strong suspicion as we look back that
one of the contributing factors as well as this matter of the wrong
kind of fiscal policy may well have been this restrictive monetary
policy followed by the Federal Reserve over the years, and, as you
know, when we wTere going into this economic downtown, it took the
Federal Reserve quite a little while to make up its mind to reverse
its position, and then a long time before I could think we were coming out of it they reversed again and went right back to contraction.
These folks are smarter than I am. I am just wondering if you,
upon looking backward, thought they had made a mistake. Apparently you did not.
Secretary ANDERSON. Mr. Chairman, may I content myself by saying that looking backward since the change of policy which occurred
last summer, measured by the annual rate of expansion of the seasonally adjusted money supply, it seems to us that it has been at least
equal to or perhaps slightly greater than what is normally thought
of as a normal rate.
I am sure that, while Mr. Martin will answer more fully, when
you get into the policy or into the problem of timing and precisely
what ought to be done at any given time, all of use would heartily
wish that every action we could take would be done with the benefit
of hindsight.
I think one only has to look at last year. As we look back now,
we see that the turn of the economy was taking place in May of last
year. In June of last year there would have been very few who
would have thought that this was a completely permanent turn.
I think it is important for us to remember that in our backward
looking, if we try to look back 18 or 20 months, which in point of
time is short, in August of 1957, almost the watchword of what we
were trying to achieve in this country was economy, the saving of
money, and 6 months or 7 months later, in January of 1958, we were
wrestling with recession, how long would be the downturn.
We wrestled with that all during the first half of the year. Then
came the knowledge that the economy began to turn the other way,
that we were going to have to finance a very large deficit in periods of
rising levels of activity.
One would pick up almost &ny periodical in September of 1958,
and the problem related itself to inflation, high prices, and this sort
of thing.
I think this is indicative of two things:
One is that the swings which actually take place are not as great
as sometimes we think they are, as we look at the possibilities.
And the second thing is that it gives us some idea of how much
of the direction that we take is based upon expectation.
Admittedly, the long-range effect of expectation will not be so
severe unless the expectations are subsequently validated, but if they
are subsequently validated, then the long-range effect of the expectation continues.




138

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

The CHAIRMAN. Mr. Secretary, we will have to interrupt. There
is a record vote on the floor. We will be back in 20 minutes.
Secretary ANDERSON. We will wait here, sir.
(Brief recess.)
Mr. K I N G (presiding). The committee will come to order, please.
Mr. Mason.
Mr. MASON. I have not particularly a question, Mr. Chairman, but
a statement to make.
Mr. Secretary, in my opinion you have given us the most comprehensive analysis of the fiscal headaches that confront the Nation
today and particularly the Treasury. It has not been a very pleasant
picture that you have presented but it has been a true picture, as I
see it.
In my opinion, I am just giving this as my opinion, the Congress
itself is mainly responsible for the picture that you have presented
and the analysis you have made in that for the last 20-odd years we
have been carelessly, unnecessarily spending more money than we
have taken in. That is what has been brought about, in my opinion,
and that is the major reason, at least, for the situation that we are in
today.
I want to say that we have never had such a comprehensive statement of the financial picture of the Nation during the years I have
been in Congress as we have had this morning.
That is all, Mr. Chairman.
Secretary ANDERSON. Thank you, Mr. Mason.
Mr. K I N G . Mr. Karsten will inquire.
Mr. KARSTEN. Mr. Chairman, I should like to join the distinguished
gentleman from Illinois in complimenting the Secretary on a very
fine historical presentation. Since I have been a member of the committee I have listened to approximately six such presentations and I
believe that this is the most comprehensive one that I have ever heard.
It does furnish a rather complete picture.
I am frankly looking for reasons, Mr. Secretary, to support you
in your requests.
On page 40 of your statement you say:
B y proceeding in this w a y —

I assume favoring your suggestions—
the Federal Government would be promoting maximum employment, production,
and purchasing power, as required in the Employment Act of 1946.

Am I to assume that a vote for your proposals would be a vote in
favor of carrying out the program recommended by the Employment
Act of 1946?
Secretary ANDERSON. I believe it would, Congressman.
Mr. KARSTEN. Y O U would construe it as furthering and promoting
the Full Employment Act ?
Secretary ANDERSON. Yes, sir.
Mr. KARSTEN. On page 41 you make the statement :
As a result of the recession in late 1957 through early 1958, the Treasury
incurred a budget deficit of $2.8 billion in the fiscal year 1958 and will incur a
budget deficit of almost $13 billion during the year that will end on June 30,
1959.

Now. was that the result of the recession exclusively ?




139 PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

120,

Secretary A N D E R S O N . A portion of it was the result of the recession,
largely because of the decline in corporate income tax.
Mr, K A R S T E N . Y O U know many of us down here have been hearing
statements that are blaming Congress for what has resulted in this
situation. I wonder if you care to comment on that.
Secretary A N D E R S O N . An analysis of the deficit I think would reflect that a substantial portion of it was brought about by the decline
of the corporate income tax, a portion of it was brought about by the
very large crops with which we were blessed and on which we have
crop supports and other parts of it were brought about by various
other expenditures.
Mr. K A R S T E N . In other words, you would not attribute the blame
to the Congress for this deficit ?
Secretary A N D E R S O N . N O , sir; I think that the analysis fairly put
is applicable to the recession and to the programs in existence such as
crop support programs when we had a very heavy crop and that sort
of thing.
Mr. K A R S T E N . I also heard other statements that our present financial situation is the result of previous mistakes in previous administrations. Would you subscribe to that feeling ?
Secretary A N D E R S O N . Well, I would think that
Mr. K A R S T E N . Of course we all make mistakes. We have to concede that.
Secretary A N D E R S O N . I would think what you are looking at is this:
You are looking at $286 billion, which is the difference between what
the country has taken in
Mr. K A R S T E N . I did not hear you, sir.
Secretary A N D E R S O N . Y O U are looking at $286 billion, which is
the
Mr. K A R S T E N . That is the national debt ?
Secretary A N D E R S O N . Yes, approximately, which is the difference
between what the country has taken in and what the country has spent
since it was founded. It has taken in money all over these years;
taxes and customs and all the other sources from Avhich we acquire
funds.
Mr. K A R S T E N . Let us look at that national debt for the moment.
What was it when the present administration assumed office?
Secretary A N D E R S O N . Approximately $267 billion.
Mr. K A R S T E N . Today it is what ?
Secretary A N D E R S O N . Approximately $286 billion.
Mr. K A R S T E N . During that period of time, which is approximately
6 years, has there been any debt reduction below the initial figure that
you quoted ?
Secretary A N D E R S O N . KTO, sir.
Mr. K A R S T E N . There has not been any debt reduction.
Well, now, to get back to the question, you would not place any
blame on the Congress for this present situation as I interpret you ?
It is the result of the recession, this $13 billion deficit you are talking
about ?
Secretary A N D E R S O N . Mr. Karsten, I would not like to isolate any
group of people.
Mr. K A R S T E N . I am trying to find reasons to support you. What
you say will guide my votes.
41950—59




10

140

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Secretary ANDERSON. I would not like to isolate for any reaspn.
My purpose here is not to find people who are responsible. My ^purpose here is to see a situation, face it realistically, and do what we
should do from the debt management angle.
Mr. K A R S T E N . In your statement you make the statement that it
was the recession. Can we rely on that and it was not the Congress
that caused this.
Secretary ANDERSON. Y O U can rely on the fact that the biggest single cause was the decline in revenues.
Mr. K A R S T E N . And that was the recession quite apart from the Congress itself.
I also cannot seem to follow you, Mr. Secretary, when you say that
this program of taking off the ceiling on the interest would not have an
effect on municipal securities and even down into the private investing
field. It would seem to me that Government security is in the nature
of a riskless security whereas other securities, particularly when you
get in the commercial field, are risk investments. In risk investments
it has always been my experience that you have to have a higher interest rate in order to attract the money. Am I in error in that?
Secretary ANDERSON. The primary factor affecting the movements
of the cost of money is the supply and the demand at any particular
time. During times of high levels of business activity one of the signs
of it is that the cost of money goes up, because people are trying to
expand at the same time that cities and municipalties are trying to
finance their activities. They are trying to expand at the same time
that the Government is meeting its requirements. If at the same time
the Government is meeting excess requirements because of the failure
to have revenues to compensate, then it is demanding funds at a time
when all others are demanding them, consequently the pressure increases.
Mr. K A R S T E N . Assuming we would go to 5 percent on Government
securities, which I say are in the nature of riskless securities, could
not you conceive that private securities would have to have a higher
rate of interest ? Would they not ?
Secretary ANDERSON. It would only go to 5 , Congressman, if the
market pushed it there. It would not go to 5 simply because you
took off a
Mr. K A R S T E N . I know that, yes. But assuming that it did go to 5.
Could we not then expect higher interest rates and higher interest on
private securities?. : •
Secretary ANDERSON. If the market forced it up.
Mr. K A R S T E N . Forced it up. In fact your private interest rate is
going to go right on with your Government interest rates.
Secretary ANDERSON. May I say, let us assume for a moment that
you still have the ceiling. Although because of market forces forcing the rate up you might not be able to sell any new longer securities, but the fact that you had the ceiling there would not prevent the
yields on the outstanding securities following right along where the
market is, the yield would be just the same.
Mr. K A R S T E N . I S there really contemplated or in process now anything that might result in, conceivably result in depressing the interest rates ?
Secretary ANDERSON. I did not get your question.




141 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

Mr. K A R S T E N . Are there any actions now in process or pending or
contemplated, perhaps by Federal Reserve, which could have the
effect of depressing the interest rates ?
Secretary ANDERSON. Well, as I indicated this morning if the Government became a net supplier of funds by reason of being able to
retire part of its debt rather than a demander of funds that would
certainly take off some of the pressure. Even if we only had an
^xact equilibrium between expenditures and balance it would not
increase the pressure. If, on the other hand, at the time when
everybody else is expanding the Government should show up being
•a net demander of funds then we obviously would increase it.
Mr. K A R S T E N . Let me ask you this: This year how much of the
debt will: you. have to refund and refinance, for the remainder of
this year, just roughly ?
Secretary ANDERSON. Roughly $ 7 6 billion.
Mr. K A R S T E N . $ 7 6 billion. Assume you have this authority to
take the lid off the interest. Do you plan to go to long-term financing on a portion of this and if so, how much portion of it? Would
you answer that ?
Secretary ANDERSON. Mr. Karsten, I could not now try to make
a statement as to what portion of the debt we would try to extend
beyond 5 years.
Mr. K A R S T E N . A S a general practice, do you not try to get longrange securities, you like to finance them that way, because you can
watch it, that is really an efficient way to manage it, is that correct?
Secretary ANDERSON. Well, the idea is to keep the balance so
that you do not allow too many of the securities to crowd into the
short-term. area.
Mr. K A R S T E N . You are going to have an immediate difficulty over
the next 6 to 9 months with the $76 billion at the present rate, as I
understand ?
Secretary ANDERSON. I think that is correct, sir.
Mr. K A R S T E N . What would you think of a suggestion whereby we
might grant your request to take the ceiling off the interest but
1 imit it to short-term securities and limit it to 1 year ?
Secretary ANDERSON. Congressman Karsten, I just do not believe
that one should try to anticipate the extent or the duration of business cycles. I think what we would be trying to do there is to say
that we are trying to forecast the time during which there is going
to be a large demand for credit and alsQ/the period ofter this time.
Mr. K A R S T E N . Maybe the interest rates might come back on your
long-range financing and then could be done at lower rates.
Secretary Anderson. Let me say this to you, sir.
Mr. K A R S T E N . I want you to get over this hump you are in right now.
Secretary ANDERSON. Let me say this to you, sir. If you take the
limit off I could not believe that anybody would ever sit where I sit
and have any other objectives than to finance at the lowest possible
rate at which he could get money.
Mr. K A R S T E N . I would agree with you on that.
Secretary Anderson. Th$t being so it would seem to me that we
ought not to try to forecast the length of time in which the artificial
ceiling of
should remain off, the length of time in which we might
have rising levels of business activity and then a decline, but rather




142

PUBLIC DEBT AND INTEREST

RATE

CEILINGS 120,

to say that we are going to have a competitive market, that the obligation rests upon the Treasury to finance as cheaply as it can to get the
money. But to do it in an atmosphere of complete flexibility.
Mr. K A R S T E N . What I suggest, though, would that get you out of
your present difficulties for the moment, that is, to take the ceiling off
on a short-term securities for a period of 1 year.
Secretary ANDERSON. Well, sir, there is no ceiling, no limit, on what
can be paid now for any securities with a maturity of less than 5 years.
We can pay any rate of interest.
Mr. K A R S T E N . Would it not be more economical to continue to finance
that way until interest rates do go down or do you think they are going to continue to go up or stay up ?
Secretary ANDERSON. There are a number of things that have to be
taken into consideration. Let me point to the first one.
If we do nothing but sit idly by and finance in the shortest area
possible, whereas today we have approximately $76 billion of debt
due in 18 months from now we will have something like approximately
$100 billion. This will mean that we have to get $24 billion out of the
short-term market. Now, if we add to that
Mr. K A R S T E N . Mr. Secretary, conceivably your interest rates may not
be at the level. They could be somewhat depressed. Maybe you could
find some of that on long term.
Secretary ANDERSON. That again comes back to the question of forecasting how long we are going to have this sustained level of high
business activity.
Mr. K A R S T E N . Y O U have to do a little forecasting, too, to make your
plea here, I would think.
Secretary ANDERSON. The point I would like to make is that I would
not like to be in the position of trying to say that this is how long we are
going to have a high level of business activity and then interest rates
will fall, because what we want to maintain in this country is as high a
level of business as we can in the future.
Now, the second thing, I would not with propriety be able to make
any predictions with reference to interest that could set up a very
highly speculative condition in the market. If, on the other hand,.
Congressman, and I think this is important, I think there are two
things there with reference to it, and one of them is if you get a lot of
debt crowding in on the short term and you have to go out and borrow
in the short-term market many billions of dollars more, then you are
forcing up very quickly the total cost of financing the public debt because it is a rise in the short-term rate that has a quick effect on how
much does it cost per year. Whether it is $8 billion, $8^, or $9*
billion.
The third thing, you put your money in the short-term area
which is the next thing to money itself, the next thing to monetary
liquidity or to monetization. Then you have created the expectation
that you are going to have higher interest rates.
Now, if you create that expectation you have to gage what a man
would think if you come to him and say, "I want to borrow money for
15 years." He is going to do one of two things. He is either going
to charge a high enough rate of interest that he compensates himself
for what he believes is going to be the eroded value which will drive
the interest rate up or he will take his money out and buy short-term




143

PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

securities and simply wait. If he takes his money out then there is
less money in the pool out of which long-term loans can be made and
that within itself forces up the interest rate.
So the point that I have tried to make here is that it is my judgment
that the removal of the 414-percent rate will work in the direction of
lowering rather than increasing interest rates.
Mr. K A R S T E N . Many of us have just the opposite view that that is
the signal they are going up. We do not know where they are going
to stop. But we know they are going up. That is the impression I
get from it. I do not know whether the average person will receive
the same impression or not. But that is the view I get of your proposal.
Secretary ANDERSON. Let me again make this statement. If we
maintain the 414-percent rate it could very well mean that we in the
Treasury would not be able to sell a new security.
Mr. K A R S T E N . That is long term.
Secretary ANDERSON. Beyond 5 years. But it will not have any
effect on what the market will pay for an issue that is already outstanding regardless of its coupon. The rate will continue to go just exactly
where it is, wherever it would have gone otherwise. What makes the
rate come down ?
Mr. K A R S T E N . That is what we would like to know. Can you tell us ?
Secretary ANDERSON. Yes, sir; I think I can. It is the actions in relationship to supply and demand of funds.
Mr. K A R S T E N . What action could we take short of controls that
would accomplish this ?
Secretary ANDERSON. I think one of the actions you could take is
to remove this ceiling which would be a signal to the country saying
the Treasury is not required to finance all of its debt in the short-term
area. The Treasury is not required by the passage of time to allow an
accumulation of additional short-term securities which will have to
be put in that area. They will not, therefore, be contributing, have
to contribute, to monetization of the debt or to near monetization.
Another action would be that we are going to live within our means
so that we are not demanding excess funds for the Government, at the
same time that businesses are demanding it and even more than that,
that we become a net supplier of funds, because we generate revenues
in excess of expenditures and therefore we are supplying funds to the
market rather than demanding funds out of it.
Mr. K A R S T E N . We have not been in that position for a long time;
have we ?
Secretary ANDERSON. We were there in 1 9 5 6 and 1 9 5 7 .
Mr. K A R S T E N . For short periods.
Secretary ANDERSON. Yes, sir; for short periods. We had two surpluses.
M r . KARSTEN. 1956 a n d 1 9 5 7 ?
Secretary ANDERSON. 1 9 5 6 and 1 9 5 7 .
Mr. K A R S T E N . There is one final question.

There appears to be
some inconsistency in your statement in that you favor a ceiling on
the national debt itself but you do not favor a ceiving on the interest,
on the securities that finance the debt. Could you enlighten me a little
on that?




144

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Secretary ANDERSON. Congressman, as I pointed out in my statement, the existence of a restrictive debt limit serves a useful purpose,
in focusing the attention of the country, the Congress, the public,
the executive departments and everybody else on the fact that the debt
is continuing to rise.
As I pointed out this morning, it would be perfectly appropriate
if the Congress wanted to set a normal or what we call a permanent
debt limit and then set an additional amount sufficiently large that
we could take care of seasonal fluctuations, that we could borrow part
of the year and pay off in the other part of the year. But I think
this is quite unlike the ceiling on the 414-percent rate because the
ceiling on the 41/4-percent rate is an indication to the people of the
country and to the world that given periods of high levels of activities
such as that that we are going into now, that you are required to
finance in the short term area and your monetization.
So I think it quite different. Now, I fully recognize that there are
those who feel there should be no limit to the debt. Again this is
purely a matter of honest difference of opinion and judgment as to
whether or not it is worthwhile once a year to focus attention on
this factor.
One thing is quite sure, that whatever the expenditures of the
Government are, whatever we do in order to protect ourselves to carry
out the responsibilities which we conceive to be ours, the debt limit
will have to be moved up if we spend more than we receive and it
can be moved down if we receive more than we spend.
Mr. K A R S T E N . It is really not a limitation but a highwater mark.
Whenever water washes up high the debt has to go right up with it ?
Secretary ANDERSON. Yes, sir.
Mr. K A R S T E N . Assume now that we would refuse to authorize this
debt increase that you request. Would this be taken as an authorization by the administration to cut out any expenditure programs that
they might not favor?
Secretary ANDERSON. Y O U referred to the limitation of the rate or
the limitation of the debt ?
Mr. K A R S T E N . N O ; the limitation on the debt. Not the rate. The
limitation on the debt I was speaking of.
Secretary ANDERSON. I would have to stop selling Treasury bills.
Mr. K A R S T E N . Could you tell me, would it be regarded as an authorization or a directive to the administration to discontinue certain
programs that cost money ?
Secretary ANDERSON. What would be much more important is that
you simply could not pay the Government's bills. You would be in
default.
Mr. K A R S T E N . I realize that would happen.
Secretary ANDERSON. Yes.
Mr. K A R S T E N . I wondered if it would also be a direction and authorization for the administration to cut out a lot of expenditures.
Secretary ANDERSON. That, of course, I think would have to be
prejudging what the President would decide. I would certainly take
it if we were going to default on Government obligations we would
be very reluctant to create some more.
Mr. K A R S T E N . That is all, Mr. Chairman.
Mr. K I N G . Mr. Keogh, of New York, will inquire.




145 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

Mr. K E O G H . Mr. Secretary, I regret very much my inability to
be here for the entire day. I hope that I do not become repetitious
with respect to any questions. If I am I wish you would let me
know.
Secretary ANDERSON. It is perfectly all right.
Mr. K E O G H . I recall when the committee had under consideration
the adjustment upward of the rate of interest on the E- and H-bonds
from 2.9 to the 3.26 that I think it now is. During the course of our
sessions we had a considerable discussion of the relative place in competing for the savings of the people of the country that those bonds
should have. It leads me to this question: Is your suggestion with
respect to the increase to 3% for the primary objective of maintaining
your relative place or of increasing it in the competition for the savings
of the country ?
Secretary ANDERSON. I am looking for the place in the statement
where I
Mr. K E O G H . 16,17,18, and 19.
Secretary ANDERSON. Yes. I , as I pointed out here, what we are
trying to do is get back to a relative competitive position. The chart
on page 19 is indicative of the relative amounts which are going into
savings and loan associations, commercial banks, mutual savings, and
E- and II-bonds. It also is applicable to the fact that we feel a trusteeship responsibility to the people who hold these securities. They
are not the kind of fellow who rings up his broker in the morning
and says, "What is a good investment"? They are not the kind of
fellow who gets hold of the financial journal and says, "What is
happening today or is likely to happen tomorrow with reference to
all kinds of securities" ?
He buys these securities because of convenience and because he
wants to prepare for the education of his children, to build a new
home, the multiple purposes that he might have in mind. And it
is not what we would call afinancialexpert.
Now, we feel that this kind of a buyer is entitled to look to his
Government and say that. "We expect from you a square deal. If
other rates go up we would expect for you to come along from time
to time and treat us with reasonable fairness."
Mr. K E O G H . That leads me to my next question. Have you given
consideration with respect to the effect that this increase to 3.75 would
have with respect to the competitive position of the mutual savings
banks and other thrift institutions who are for the most part dealing
with the same types of people as you have described the holders of
E and H bonds to be ?
Secretary ANDERSON. The mutual savings banks, savings and loan
associations, have gone up relatively more than we are now asking.
So that if we went back to the same period, when the rate was adjusted to 3.25, and compared the increase that we are now asking
for, compared to the increase of other types of securities, the other
types of savings have gone up more.
Now, there is an additional factor, and that is this: When you buy
a savings bond you usually have a 2-month period before you can come
in and cash it at all. When you hold it for a longer period, the increment which you earned goes up gradually by steps. In most of the
other types of savings your benefits accrue immediately and even




146

PUBLIC

DEBT

AND

INTEREST

RATE

C E I L I N G S 120,

though some institutions normally require periods of notice before
cashing, in actual practice very few of those periods of notice are
enforced. So you get your money much more quickly.
Mr. K E O G H . Are you satisfied, therefore, that if this increase on
these types of bonds were to be granted that it would not result in
requiring the other institutions to make adjustment upwards in their
dividend or interest rates ?
Secretary A N D E R S O N . N O , sir; I think that they would simply continue to grow.
Mr. K E O G H . I understand, Mr. Secretary, that there have been discussions recently with some representatives of institutional investors
looking toward the conversion of some of their presently held 2%
nonmarketable bonds for Federal Mortgage Association mortgages.
Do you know about that ?
Secretary A N D E R S O N . Mr. Baird, if you will agree, will respond to
your question.
Mr. B A I R D . Yes. That matter has been under discussion and the
President presented that in his message.
Mr. K E O G H . Pardon me.
Mr. B A I R D . The President in his budget message to the Congress
did propose that FNMA might offer some of the mortgages held, GI
mortgages, 4 percent, in exchange on some equivalent basis for 2%percent nonmarketable Government bonds.
Mr. K E O G H . That is the type of transaction that is contemplated
in this second bill mentioned; is it not ?
M r . BAIRD.

N O ; it is n o t .

Mr. K E O G H . Similar to it; is it not ?
Mr. B A I R D . One is Government bond for Government bond. The
other was mortgages for Government bonds.
Mr. K E O G H . That is that distinction. It is a conversion of presently held lower interest bearing Government bonds for another type
of security with a higher yield.
Secretary A N D E R S O N . Congressman Keogh, they are quite different.
I would like to call your attention
Mr. K E O G H . I would like to have the differences pointed out to me.
Secretary A N D E R S O N . All right, sir.
Mr. K E O G H . I am arguing that there are no differences.
Secretary A N D E R S O N . Yes.
Mr. K E O G H . I am just leading up to wondering why a transaction
like that could be under discussion and frankly, I think it is a fine
way to handle the difficult situation with which some of those institutional investors are now faced. I am wondering why discussions
about a transaction like that can be going on without any necessity for
further legislative action and we must consider a legislative proposal
with respect to the conversion and exchange of Government securities.
Secretary A N D E R S O N . Let me say that the technical aspects of this
matter, which involve interpretations of the Internal Revenue Code,
are going to be presented by Mr. Rose, who is the General Counsel of
the Treasury.
As a general proposition, when you today exchange one Federal
security for another in a refunding operation, you are required to show
the gain or the loss for tax purposes if the value of the old security on




153 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

the books of the investor is above or below the market value of the new
issue at the time of the exchange.
Now let us assume that somebody had a bond which was issued 25
years ago. It is now a 5-year bond. In order to present or to induce
this long bondholder, as you come down closer and closer to maturity,
from treating this as a short-term obligation, because it is no longer
a long-term obligation, it is due in 5 years, regardless of the fact that
it started out as a 20-year bond, we would envision that there would be
occasions when we would want to go out 2, or 3 or 4 years before the
bonds came due and say to the holder of those bonds, "If you will stay
in the Government securities we would offer to exchange the kind of a
bond you hold for one which has the same relative market value as
your bond now has."
Now if, on the other hand, if that should have occurred at a time
when his current bond, which he has, is selling below par, then he
would have to write down his surplus in most cases, particularly in
savings banks and building and loan associations, they would have to
write down their surplus. It would be a tax loss and the tax loss could
have been offset against their profit.
But what they are concerned about mostly is not having to write
down their surplus account. We would, therefore, say to him that so
far as Federal income tax laws are concerned the Secretary of the
Treasury could designate this specific exchange to be one in which
you would not have to take it into account for the profit or the loss.
Therefore, you would take a new bond with the same market value
and you would not write down the surplus account.
Now we still have the problem of being sure that this is consistent
with the laws of the respective States because we would have to be
sure, for example, in New York, that the regulatory bodies of New
York, regulating, say, building and loan associations or savings banks,
would allow the institution to treat it in that manner.
Now if on the other hand somebody under those circumstances
wanted to take the loss they would simply sell their security in the open
market and they would buy the new security. It would not be an exchange of one for the other and the loss would take place.
I think, also, I should like to point out here that someone has said
to me why could not one, therefore, postpone gain or loss indefinitely,
just as often as you replaced one security with the other.
It is for that reason, if you will notice, on page 52 of my statement,
this could be done only under rules which we would prescribe for each
exchange.
In other words, the mere fact that you did it with reference to one
exchange would not mean that you could have the same kind of an
exchange without tax consequence in perpetuity. It would be applicable only to each exchange.
Now this is the sort of a mechanism which would give us the opportunity instead of allowing some of the debt that was at one time long
term, say 20 years, from just running down until it runs completely
out of its 20 years, until it gets down where it is due within a year.
As far as we are concerned that is in exactly the same class as a note
that we issued a year ago and it is due in a year. Before it gets into
that category we would like to put this same long-term real investment back into an investment which would carry for 10,12,20 years in
the future.




148

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

Mr. K E O G I I . I appreciate that explanation. I am sure that those
who read the record will be delighted to have it.
I would like to finally ask Mr. Baird, Mr. Chairman, if I may, are
the negotiation with respect to those FNMA mortgages continuing or
are they in process of completion ? Would you know ?
Mr. B A I R D . I think FNMA is continuing some negotiations. They
have not called for any proposals yet. I think largely because some
of the Members of Congress have said they wanted to look into it.
There was a hearing held last week at which some questions were
asked about it.
Mr. K E O G H . I appreciate the motivations for the suggestions, Mr.
Secretary, with respect to those E and H bonds. But I wonder if I
could have the record show what your opinion is as to the effect of
the increase of this on the capital funds that are otherwise available
from the thrift institutions. By that I mean to the extent that that
type of savings goes into E and H bonds are they not being withdrawn
from normal capital markets ?
Secretary ANDERSON. I will be glad to furnish a statement but, as
a matter of fact, we feel that by those processes we will generate
new savings.
Mr. K E O G H . But savings in E and H bonds ?
Secretary ANDERSON. Yes, sir.
Mr. K E O G H . T O some extent at the expense of the savings that are
now going into the established thrift institutions ?
Secretary ANDERSON. This will narrow the gap between them, but
I would say to the Congressman that I do believe that the other thrift
institutions will continue to grow at a very good rate.
Mr. K E O G H . That I would rather leave to them to say as to what
their guess on it is before we come back to where we were when we
were talking about the increase from 2.9 to 3.26. And that is whether
the Government, however desirable it might think the widening of
the holdings of E and H bonds might be, how far the Government
should go into active competition for that type of savings dollar in
the United States. That is not a question, Mr. Secretary. But I will
be delighted to have your reaction to it.
Secretary ANDERSON. Of course this, I think, goes to the whole question of whether or not we should have a savings bond program. I
believe very strongly that we should. The money which is held in
savings bonds is a true type of saving. It is a class of bonds which
are normally held for 7 years. It has perhaps the least inflationary
effect of any security which we could market. It is a type of saving
in which thousands, literally thousands of dedicated people from 1941
to this date have given and are giving their services, in order to
develop it.
While, of course, we welcome the acceleration of capital through all
of the savings institutions, we believe that a reasonable share of those
savings should go into E and H bonds in support of their Government
and that they should be treated fairly and reasonably with relationship to other savings institutions.
Mr. K E O G H . My concern about it, and I agree generally with your
position, that you should have a share, but whether it should be an
increasing share is open to some reasonable discussion.




149 PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS

120,

But my concern about that area, springs principally from the
breaking in New York of the historic difference between the rates
of interest paid on the thrift accounts in commercial banks and the
normal thrift institutions and the active and sometimes competitive
•activity to attract that thrift dollar. I think that it has had some
serious effect on the balance between and among the various types of
institutions. I hesitate to think that the Government would further
complicate that by suggesting an abnormal gap between the interest
paid on E- and H-bonds and that paid by the thrifty institutions.
Secretary ANDERSON. I do not believe that we would in any way
generate any additional competitive factors or characteristics of the
kind which you mentioned between private institutions. I do believe
that we do attract into the savings bond program substantial numbers
•of people who would not otherwise be savers at all. And I think
this is very important.
Mr. M A S O N . Mr. Chairman, I want to clear up one point in the
concern of the gentleman from New York.
The proof of the pudding, Mr. Secretary, is in the eating. We
raised the interest rate on the E- and H-bonds in order to make them
more competitive with these other savings last year. The actual
fact was that there were more withdrawn and the percentage of the
withdraws from the E- and H-bonds was greater than the percentage of the sales which shows that they are still not in a competitive position.
So I think your concern, judging from the results, is unnecessary.
Mr. KEOGII. Mr. Chairman, the gentleman knows that he would be
the last one in the world I would enter into any colloquy with. But
the charts on page 19 of the Secretary's statement would seem to
indicate that the curve on E- and H-bonds has relatively steadily increased and that leads me to the very point that I am trying to make.
Is the Government entitled to increase that beyond its related position or should the Government be willing only to take in E- and Hbonds that which comes into it voluntarily?
Mr. M A S O N . I will still ask the Secretary if it is not a fact that
the ratio of withdrawals last year was greater than the ratio of sales.
Secretary ANDERSONS. For the calendar year 1 9 5 8 sales were approximately $ 4 , 6 8 9 million. Redemptions were approximately
$ 4 , 8 5 6 million, but there was reinvested interest of $ 1 , 1 7 8 million, that
is, accrued interest.
Mr. K I N G . Does that conclude your questioning, Mr. Keogh?
Mr. K E O G H . That concludes mine.
Mr. K I N G . Mr. Curtis.
Mr. CURTIS. Mr. Secretary, I think some of the difficulty that we
on this committee experience in explaining these so-called debt limitation increases each time we go before the House and also to the
public is so often as a result of semantics.
I made the point in a debate last tirtie wer had this up that this
would be better described as a Debt Management Act, rather than a
Debt Limitation Act. I wonder if you do not agree that that is the
more descriptive of what we are talking about here?
Secretary ANDERSON. Debt management ?
Mr. CURTIS. Debt management.
Secretary ANDERSON. I think it is a management problem; yes, sir.




150

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

Mr. C U R T I S . It is a management proposition and the limitation is
only on certain types of securities that evidence the debt. In other
words, the debt is there.
Secretary ANDERSON. That is correct.
Mr. CURTIS. And we are not going into anything about the debt one
way or another. We are trying to find how the Treasury Department
manages it.
Secretary ANDERSON. That is correct.
Mr. CURTIS. I am going to suggest we refer to the legislation as the
Debt Management Act. because many people think by voting against
increasing the ceiling in the debt-management legislation that thereby
they are voting to limit the debt and conversely that there are people
who vote for increasing the ceiling on these kinds of securities who
are voting to actually increase the debt. I think that point needs to be
driven home.
I find that it sort of underlies some of the questions that have been
asked you, a misunderstanding, that by this act whatever we might
do here we might thereby be limiting the debt itself. We are not
doing that, are we, limiting the debt itself ?
Secretary ANDERSON. N O , except to the extent that there is a real
limitation if the debt limit should get to a point that prohibited us from
raising the cash which we would need to pay the Government's bills,
during periods of low revenue income. We would be in a position of
having to say to the man that presented his check that we had insufficient funds. This, I think, would be a national catastrophe.
Mr. CURTIS. Yes; I do, too. Because actually what would be happening then, the debt would be there, but we would not be able to
get the cash to meet our obligations.
Secretary ANDERSON. We would not be able to pay our bills.
Mr. C U R T I S . That is exactly it. There was some reference made by
one of the questioners to the debt in 1953 as $267 billion and the debt
of 1960 about $285 billion. However, that is only an incomplete
fiscal picture as I see it. To each column should be added new obligations which in 1953 were $81 billion, carryover from appropriations
$78.4 billion, carryover from other authorizations of $24.4 billion,
making a total of $450.8 billion in 1953 and putting a column to the
other side for 1960 of $285 billion debt, $77 billion new obligations,
$41.5 billion carryover, and a $30.2 billion carryover from other
authorizations, giving us a figure of $433.7 billion against $450 billion.
Does that not represent a more accurate fiscal picture of just where
we are sitting right now ?
Secretary ANDERSON. We are comparing two different things. One
is the amount of the debt which is under the ceiling and the other
is the amount of commitments which the United States has authorized
to be made and for which payment will be made.
Mr. CURTIS. Which is the real debt. That is the real thing we are
going to have to meet. That is what you have to anticipate. Those
are what your cash needs are.
Secretary ANDERSON. That is correct. We will eventually have to
pay them. Of course we will have revenues in between.
Mr. CURTIS. That is correct.
Secretary ANDERSON. I think also, that we have other guaranteed
obligations which are not within that.




151 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Mr. C U R T I S . I was just going to ask that question, because last time,
too, in order to try to get across this concept of what the real debt is,
and that is what our outstanding obligations might be, we would have
to consider these other contingent liabilities which as I recall run
around $450 billion and that is subject to pretty much of an estimate.
It will vary, depending on who is doing the estimating.
Secretary A N D E R S O N . There are all kinds and shades of contingent
obligations, ranging from those which are guaranteed by the United
States to those which are simply what we call Government aided
which are issued by an agency of the Government beyond which there
is no guarantee.
Mr. C U R T I S . Y O U pointed out one point, I believe, that really became
a factor in this present fiscal picture and that is the Commodity Credit
Corporation in our agricultural program.
Secretary A N D E R S O N . I have a complete list of the long-range commitments and the contingencies.
Mr. C U R T I S . I wonder, Mr. Chairman, if we could have those placed
in the record.
Mr. K I N G . N O objection, so ordered.
(The information referred to follows) :
LONG-RANGE COMMITMENTS AND CONTINGENCIES OF THE U . S . GOVERNMENT
AS OF DECEMBER 31, 1958

The attached statement covers the major financial commitments of the U.S.
Government, except the public debt outstanding and those involving recurring
costs for which funds are regularly appropriated by the Congress and are not
yet obligated, such as aid to States f o r welfare programs and participation in
employee-retirement systems. The statement is segregated into four categories,
namely, (a) loans guaranteed and insured, etc., by Government agencies; ( b )
insurance in f o r c e ; ( c ) obligations issued on credit of the United States; and
(<Z) undisbursed commitments, etc.
The items appearing in this statement are quite different from the direct debt
of the United States. They are programs of a long-range nature that may or
may not commit the Government to expend funds at a future time. The extent
to which the Government may be called upon to meet these commitments varies
widely. The liability of the Government and the ultimate disbursements to be
made are of a contingent nature and are dependent upon a variety of factors,
including the nature of and value of the assets held as a reserve against the
commitments, the trend of prices and employment, and other economic factors.
Caution should be exercised in any attempt to combine the amounts in the
statement with the public debt outstanding, f o r that would involve not only
duplication, but would be combining things which are quite dissimilar. As indicated by the enclosed statement, there are $111.8 billion of public-debt securities held by Government and other agencies as part of the assets that would be
available to meet future losses. The following examples illustrate the need f o r
extreme caution in using data on the contingencies and other commitments of
the U.S. Government.
(1) The Federal Deposit Insurance Corporation had insurance outstanding
as of December 31, 1958, amounting to $137.7 billion. The experience of the Federal Deposit Insurance Corporation has been most favorable. During the period
this Corporation has been in existence, premiums and other income have substantially exceeded losses which has permitted the retirement of Treasury and
Federal Reserve capital amounting to $289.3 million (all repaid to Treasury)
and the accumulation of $2 billion reserve as of December 31, 1958. The Corporation's holdings of public-debt securities as of that date amounted to $2.1 billion, which already appears in the public-debt total. Out of $267.7 billion of
assets in insured banks as of December 31, $71 billion are in public-debt securities (also reflected in the public debt). The assets, both of insured banks and
the Federal Deposit Insurance Corporation, as well as the continued income of
the Corporation from assessments and other sources, stand between insured
deposits and the Government's obligation to redeem them.




152

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

(2) The face value of life insurance policies issued to veterans and in force
as of December 31, 1958, amounted to $43.3 billion. This does not represent the
Government's potential liabilities under these programs, since some of these
policies will probably be permitted to lapse, and future premiums, interest, and
the invested reserves amounting to $6.8 billion of public-debt securities should
cover the normal mortality risk.
(3) Under the Federal Reserve Act of 1913, as amended, Federal Reserve notes
are obligations of the United States which, as of December 31, 1958, amounted
to $26.9 billion. The full faith and credit of the United States is behind the
Federal Reserve currency. These notes are a first lien against the $53.1 billion
of assets of the issuing Federal Reserve banks, which includes $26.3 billion o f
Government securities already included in the public debt. These notes are
specifically secured by collateral deposited with the Federal Reserve agents,
which, as of December 31, 1958, amounted to $18,6 billion in Government securities and $11.1 billion in gold certificates.
Long-range commitments and contingencies of the U.S. Government as of Dec. 31
1958
[In millions of dollars]

Commitment or contingency and agency

Loans guaranteed, insured, etc., by Government agencies:
Agriculture Department:
Commodity Credit Corporation
Farmers Home Administration: Farm tenant mortgage insurance
fund
Civil Aeronautics Board
Commerce Department: Federal Maritime Board and Maritime Administration: Federal ship mortgage insurance revolving f u n d . . .
Development Loan Fund
Export-Import Bank of Washington
Housing and Home Finance Agency:
Federal Housing Administration:
Property improvement loans
Mortgage loans
Office of the Administrator: Urban renewal fund
Public Housing Administration:
Local housing authority bonds and notes (commitment covered
by annual contributions)
Local housing authority temporary notes (guaranteed)
International Cooperation Administration: Industrial guarantees
Small Business Administration
Treasury Department:
Reconstruction Finance Corporation liquidation fund
Defense Production Act of 1950, as amended
Federal Civil Defense Act of 1950, as amended
U.S. Information Agency: Informational media guarantees
Veterans' Administration
Defense Production Act of 1950, as>aifaended
Total loans guaranteed, insured, etc., by Government agenciesInsurance in force:
Agriculture Department: Federal Crop Insurance Corporation
Commerce Department: Federal Maritime Board and Maritime Administration: War risk insurance revolving fund
Export-Import Bank of Washington
Federal Deposit Insurance Corporation
Held by insured commercial and mutual savings banks
Federal Home Loan Bank Board: Federal Savings and Loan Insurance
Corporation
Held by insured institutions
Veterans' Administration:
National service life insurance
U.S. Government life insurance
Total insurance in force..

See footnotes at end of table, p. 153.




Gross amount
of commitment or
contingency

2178
5
2149
5

8

3 320
24,749
213
2,345
891
4 341

53
&16
«2
8

16,933
236
47,214

6 244
62
3
137,698
44,767
41,738
1, 514
226,026

153 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

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

Commitment or contingency and agency

Public debt
Gross amount
securities
of commitheld b y
ment or
Government
contingency
and other
agencies

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

71,134
76

1,132
6

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

1,140
26,934

1,138
«26,347

Undisbursed commitments, etc.:
T o make future loans:
Agriculture Department:
C o m m o d i t y Credit Corporation
Disaster loans, etc., revolving fund
Farmers H o m e Administration: Loan programs
Rural Electrification Administration
Development Loan Fund
Export-Import Bank of Washington: Regular lending activities
Housing and H o m e Finance Agency:
Office of the Administrator:
College housing loans
Public facility loans
Urban renewal fund
Public Housing Administration
Interior Department:
Bureau of Commercial Fisheries: Fisheries loan fund
Defense Minerals Exploration Administration: Defense Production Act of 1950, as amended
International Cooperation Administration: Loans to foreign countries
Small Business Administration
Treasury Department:
Reconstruction Finance Corporation liquidation fund
Defense Production Act of 1950. as amended
Veterans' Administration (veterans' direct loan program)
Total undisbursed commitments to make future loans
T o purchase mortgages:
Agriculture Department: Farmers H o m e Administration: Farm
tenant mortgage insurance fund
Housing and H o m e Finance Agency: Federal National Mortgage
Association:
Secondary market operations
Special assistance functions
Total commitments to purchase mortgages
T o guarantee and insure loans:
Agriculture Department: Farmers H o m e Administration: Farm
tenant mortgage insurance fund
Commerce Department: Federal Maritime Board and Maritime
Administration: Federal ship mortgage insurance revolving fund,
Housing and H o m e Finance Agency: Federal Housing Administration
U . S . Information Agency: Information media guarantees
Defense Production Act of 1950, as amended
Total commitments to guarantee and insure loans
Unpaid subscriptions: International Bank for Reconstruction and Development

2
1
12
763
246
1,556
302
33
397
222
6
3
*1,207
81
1
1
47
4,880

1
80
1,498
1,579

5
96
5, 235
I
117
5, 454
2,540

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




154

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

Mr. C U R T I S . One other point. You did mention this, in looking at
our fiscal picture, you said of course items are involved that do not
include the fact that you have revenue coming in.
Secretary A N D E R S O N . Yes.
Mr. C U R T I S . Of course revenue coming in to a certain degree is based
upon our gross national product, and in 1953 it was $411 billion, 1959
by now it has gotten up to around $ 4 5 0 billion. Whether we maintain
it this coming year, I do not know.
Secretary A N D E R S O N . The first quarter G N P was $ 4 6 7 billion.
Mr. C U R T I S . $ 4 6 7 billion the first quarter. I was taking it off the
last figure I had and interpolating.
Now, then, I do not want to get you into a political debate here
because that is not the purpose. But just for the clarity of the record,
it is the Congress that does the appropriating along with the Executive who signs the appropriations bill. That is what creates the
Federal debt, is that not true?
Secretary A N D E R S O N . It creates the obligations and the obligations
generate expenditures. The expenditures are measured against revenues and the difference is either a deficit or a surplus or a balance.
Mr. C U R T I S . Of course that can be left in the arena of political argument as to who is responsible for creating these obligations. I personally, of course, take the position it has been the Democratic Party
which has controlled the past two Congresses. But I do not want you
to become involved in this present discussion of the problem which
you have in trying to manage the Federal debt.
You mention in your statement some very interesting history and
one thing you pointed out was that Carter Glass when he was Secretary
of the Treasury had requested changes in the bond limitations.
Congress only granted him one of those requests and not the other.
What was the result of that? How did he handle it?
Secretary A N D E R S O N . During the period 1 9 2 0 - 2 1 the Treasury put
out 25 separate short-term issues on which we pay 5 percent or more
in interest.
Now, thereafter, while we had a continued level of prosperity we
retired about a third of the debt between there and 1929. This is a
very good illustration of a period in which you had a level of growing
activities, but with the decline in interest rates becauses the Government was a net contributor of funds through debt retirement. I do
think it is rather significant that the Government was forced into
as many as 2 5 issues in the period 1 9 2 0 - 2 1 at an interest rate of 5 or
more percent because again we crowded so much into this area.
Mr. C U R T I S . In other words, it was an uneconomic operation. In
retrospect we now look back and see had he been granted the authority
he probably could have managed it better ?
Secretary A N D E R S O N . I am sure Mr. Glass would have done differently if he could.
Mr. C U R T I S . Because this committee has the job of carrying this
meaesure to the floor and explaining it to our colleagues the best we
can, we must understand it ourselves. I am anxious to present to you
some of the arguments that have been going on recently on the floor
of the House about the Federal debt management.
There are those who say we are paying entirely too much money in
interest on the Federal debt plus the fact we are also increasing the
interest rate.




155 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

And their proposal has been that the Federal Reserve start pegging
the market again. I have taken the floor on occasions when I was
there to point out that in 1951 the Treasury and the Federal Reserve
reached an accord whereby the Federal Reserve no longer followed
that policy and that was the result of, I thought at any rate, some
pretty good reason and to prevent the economic damage that was
being done otherwise.
I remember Senator Douglas made quite a speech on the floor of the
Senate. One of the points he made and this is what I direct your
attention to, was that it is true that although the cost of Federal
Government may be another $300 million or $400 million in interest
by having the interest rate go up, the cost of pegging the market
before had been several billions of dollars as a result of inflation on
the products and services that the Federal Government bought.
In other words, the Senator at that time at any rate was pointing
out that the Federal Government actually saved money through this
process of unpegging the Government bonds.
Now, is that essentially the theory that you have been trying to
present here or are you in accord with that point of view ?
Secretary ANDERSON. Congressman Curtis, on page 28 of the supplemental statement which I filed with the committee this morning,
there is a discussion of this possibility. I think for the purposes of
the statement here this afternoon, it points out that there was a very
serious study made of the activities of the Government between during the war and between World War I I and 1951. It seems to me,
then, that on a bipartisan basis, the conclusion was reached that this
was inflationary, that it was without the scope of a responsible central
bank, because once market yields rise to a predetermined level the
Federal Reserve System during this period could operate in only one
direction and that was the direction of creating additional bank reserves through the purchases of securities and whatever amounts that
the market holders of these securities wanted to sell.
If we propose to have a flexible monetary system then this takes
away that degree of flexibility because it does operate in one way.
I think, also, that if we must take into account the fact that in a
period of high levels of business activity, such as this, if by the creation of additional bank reserves through the purchase of these securities we generate additional inflationary pressures, which occurred
then and which I think would occur again, then those people who
have money that they want to lend would be willing to lend it only at
rates high enough that they could be compensated for the erosion of
their dollar. The people who wanted to borrow would be willing to
pay higher rates of interest because they would believe that they were
borrowing a currency which would erode in value and allow them to
pay an obligation with cheaper dollars.
Consequently, if this occurred, the pressure on interest rates would
intensify and if it did intensify you continue to try to maintain the
peg, the Federal Reserve could do only one thing and that is to buy
more and more Governments from the markets and as they bought
more they would create more bank reserves and the process would
continue.
41950—59




11

156

PUBLIC DEBT AND INTEREST

RATE

CEILINGS 120,

Mr. CURTIS. I S it for this same reason as I visualize it, that you
feel that a deficit occurring in this prosperous fiscal year, it seems to
me, 1960, is so highly inflationary ?
Secretary ANDERSON. Yes. You see, I think we ought to take a
lesson from past experience in this. However, the deficit is generated,
you generate the deficit during the period of the recession. Then you
have to raise the money to pay off the deficit as happened this time,
largely after the termination of the cycle.
Now, if you could raise the money to pay off the deficit before it was
created, or while it was being created, you could contribute to monetization by selling to commercial banks, short-term debt. So that one
of the great problems of deficit financing is that all too frequently the
deficit has to be paid at the time when the cycle has turned and you
are in high levels of business activity.
Mr. CURTIS. One final question, Mr. Secretary.
Of course, this has been a popular saying over a period of years,
that it did not make too much difference about how high the Federal
debt was because we owed it to ourselves. There are many reasons,
of course, economic reasons, why I do not think that is a very good
attitude. But beyond that, since World War II has not the United
States moved into a position where we are somewhat the banker of
the world and therefore do not we have added responsibility in how
we look upon our Federal debt and how we manage it ?
Secretary ANDERSON. Congressman Curtis, this is an area in which,
Mr. Chairman, with your permission, I should like to make limited
comment.
I think one has to recognize that you must take the balance of trade,
which is generated by normal commercial transactions and which
has consistently run in, favor of the United States, and you have to
add to it the total of all other activities on the part of our country
which went into efforts to rebuild the devastated countries of Europe
after the war, the increasing volume of what we call invisible payments, which is tourists going abroad, the fact that foreign investments are being made by citizens of the United States at the rate of
about $3 billion per year, the fact that in order to preserve our security
and that of other countries we have maintained forces overseas and
continue to maintain them, and must continue to maintain them. The
fact that we have engaged in many other programs, has resulted in a
net accumulation of dollars by foreigners as a result of our total complex of international transactions.
We have come to a point in history when a large number of our
neighbors, and we are gateful for it, are not weak and troubled countries, they are sound, highly industrialized countries of Western
Europe, they are countries who are actively competing for their historical position in the trade of the world. While there are millions of people in other less-developed, less-privileged countries, who
are still looking to us and to other nations of the world for economic
aid, that we must reorient our thinking with the knowledge that there
are very substantial amounts of dollar balances and outstanding shortterm instruments of indebtedness which are held by relatively strong
foreign countries and by their citizens.
While we, in turn, hold larger amounts of investments and evidences of indebtedness than they hold, our holdings are mainly long




157 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

term. And so we have come to be somewhat in the position of a
world banker in the sense that they hold our short-term obligations
and we hold longer term investments.
I think, also, that we should remember that wTe believe that this
country became great and strong because of a competitive enterprise
system. We believe it became great and strong because of the profit
incentive. And we have said to other countries around the world
that if you want to raise your standards of living you must save
your own money, you must compete for the world's capital, you must
assure everybody that it is safe, and safe not only from confiscation
but safe from erosion. You must have monetary and fiscal discipline,
And I think for us to waver in following the same exacting standards
that we have asked of others would weaken the position of financial
leadership in the world.
Mr. CURTIS. I thank the gentleman for a splendid answer, and I
want to say, which I did not say in the beginning and should have,
I thought your presentation and your answers to questions have just
been tops. My thinking happens to coincide with most of your thinking on this.
Secretary ANDERSON. Thank you, sir.
Mr. CURTIS. I am very glad to have someone express it better than
I can do it.
Secretary ANDERSON. Thank you, sir.
Mr. K I N G . Mr. Ikard.
Mr. IKARD. Mr. Secretary, I know it is getting late here and I will
not prolong this.
I do have two or three questions in my mind, though, that I would
like to ask.
One is that we have heard it suggested that, assuming that the
legislation that you propose were adopted, that it should be done for
a term of years rather than permanently, the thinking being that
if it is done on a permanent basis it will be a final movement on the
part of Congress going out of this area, the early history of which
you very ably outlined in your prepared statement. If you would,
please, I would like to have your comments on that, on whether this
should be or could be for a term of years, much as we handled the
debt limit and as you pointed out has been back and forward periodically and serves primarily the purpose of bringing to focus the
fact of what the situation is with respect to the debt. Would it be
worth considering if this measure would be adopted to have it for
a term of years where the debt management and the interest and
all the collateral problems would periodically come up before the
Congress and, therefore, in turn be thrown open to public view ?
Secretary ANDERSON. Congressman Ikard, I share with you the
feeling that this is an area of such importance and magnitude that
it always ought to be of great concern, and I am sure it has been and
will continue to be of this Congress.
I can appreciate the suggestion that if the ceiling were lifted for
a period of years that at the time that there would be a restoration;
it would call for a reinvestigation by the Congress of its appropriateness and perhaps an examination of what had been done during the
period in which the ceiling did not exist.




158

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

To me the really fundamental thing is that what we are trying to
do is to finance our debt as cheaply as we can consistent with the basic
objectives that I outlined in the opening pages of my statement and
which I will not repeat. I am quite sure that any Secretary would
want to do it as cheaply as he could. And that he would welcome
any review of the Congress from time to time as to whether or not other
or more appropriate actions might be taken. The thing that bothers
me in putting a period of years with reference to the ceiling on the
interest rate as compared to the debt ceiling is this: The debt is actually
going to be the difference between what we take in and what we spend.
It is going to be affected by the rate at which we accumulate revenues
from whatever source.
The review does not make the debt less nor does it make it more.
It simply provides a mechanism by which we are required to look.
On the other hand, if we pick out a date and say "during from now
until this period we are going to remove the ceiling" it would be very
difficult to do so without trying to make some ancillary judgment as
to what is going to be the kind of an economic condition which
would prevail between now and that time. Are we, in fact, forecasting
that there will be such an accumulation of events, whether it be recession or otherwise, that a new ceiling would then be appropriate ? Are
we attempting to forecast the way in which any economy as complex
and as diverse as ours would move over a period of years?
I find it, for example, very difficult indeed to sit down in December
of every year and try to estimate what the revenues of the Government are going to be 10 months hence. And when I do it I have a
full awareness that I do not have the competence and no one else
does to do it with accuracy. We do it. It is a matter of judgment
to the best of our ability. But we do it because in the process of
budgeting you have to have those kinds of guidelines.
So my reluctance to believe that you would get the same dividend
from a review stems from what might be taken as forecasting of
predictions in the way in which the economy would move over that
period of time.
Mr. I K A R D . And it seems to me a very fine statement that there
might be conceivably some uncertainty, particularly during the periods
when you are coming up to the time. The only way that it would
appear that that could be overcome would be the fact that people
generally would become conditioned to it much as they are on other
items that come to Congress and would assume that the policy would
continue.
Secretary A N D E R S O N . Yes, sir; I think hope that they would come.
Mr. I K A R D . Yes. One more question about this, skipping over to
another area. I was interested in the question the chairman asked
this morning about the auctioning of long-term securities and I heard
Mr. Baird's answer in which he said, I believe, or the net effect of
his answer was that if you auctioned long-term issues that it necessarily would mean that the professional, so to speak, would be the one
that would participate in that market and, for example, an Elks lodge
that would want some bonds would not be accustomed and acquainted
with that type of operation to the extent that they would participate
in it.




159 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

Now, is there any other reason—if I may just direct it to Mr.
Baird—other than that fact that it would be a strange procedure to
where the ordinary purchaser would not participate ?
Mr. B A I R D . N O , Congressman, I do not think there is. We have
been quite willing to use the mechanism just as far as it seemed to be
useful. I would not say that in years to come Secretaries of the
Treasury might find they can extend it a little further. But once
you leave the short-term area which is in the 1- or 2-year area
Mr. I K A R D . Yes, sir, I understand.
Mr. B A I R D . That is where your bond dealers, your banking institutions and your corporation treasurers who invest temporary funds,
who are real professionals in the finance market operate and they can
learn and get used to this type of a mechanism. They are in the market constantly. They watch it. They are students of it. On the
other hand, we have very spasmodic buyers, when you reach out into
the long investment area.
Mr. I K A R D . A S one who knows practically nothing about it, this
auction procedure appeals to me. That is the reason I asked the question, Mr. Baird.
Secretary ANDERSON. I think this elaboration might be worthwhile,
that even in the normal marketing conditions, small banking institutions very frequently do not buy for themselves but they ask their correspondent banks to buy.
Mr. B A I R D . May I just say this, Congressman? It appeals very
much to those of us who are charged with responsibilities of debt
management. It is not a pleasant job to have to price an issue. It
is much easier for us to say, "Let us put it out and let the market
price it."
Mr. I K A R D . I would think that would be the case. That is the
reason I asked the question. I wondered if there was any other reason
other than the fact that it was just one people were not accustomed to
and that the average purchaser did not feel qualified to move into that
market.
Mr. BAIRD. That is correct.
Mr. I K A R D . One more question. It is my understanding from what
facts I have been able to get that this is more of an economic question, that during the last 6 years, 5 or 6 years, money supply generally
has increased something in the order of 11.8 percent while the gross
national product has increased something in the order of 26. My
figures may not be exactly right. Maybe Mr. Walker could answer
that. Should not the money supply nearer track the growth of the
general economy ?
Secretary ANDERSON. Congressman, I do not think that you can
consider the rate of monetary growth as an isolated factor but that
you have to link it with the velocity because important though it is
with respect to the growth of the economy, monetary velocity and
monetary growth very nearly have to be considered together.
During relatively short periods of time, the velocity of money or
the rate at which it turns over can exert significant influences and
the money supply may grow relatively slowly but if the velocity increases then total spending expands and I think that the two ought
to be considered together. I am sure that when Chairman Martin
testifies that he can give you statistics on this.




160

PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS 120,

Mr. I K A R D . I better direct that series of questions along that line I
had in mind to Mr. Martin and I will save it until that time.
Thank you very much.
Thank you, Mr. Chairman. That is all, Mr. Chairman.
Mr. K I N G . Are there further questions ?
Mr. A L G E R . Mr. Secretary, I have endeavored to listen carefully to
the other questions and I shall do my best to stick to new fields or
things that are troubling me beyond what has been mentioned thus
far and also relating to your written testimony which you read earlier
to us.
First of all, I recall on page 30 you discussed this matter. The fact
that the Treasury already can offer the bonds, can offer bonds under
existing law under par so that the net effect is creating a different rate
if Congress chooses not to grant the increase that is now being asked.
I commend you for coming to us this way because you said you prefer the direct approach. My question, then, is this:
Is not the position that you state there the result of what you are
forced to do, either at this time or if Congress fails to take this responsible action ?
Secretary ANDERSON. N O ; I am not trying to say here that this is a
choice of alternatives. While the Treasury has the right to issue securities at a discount, this is a monetary matter of such significance and
importance that we would not want to increase the rate without bringing it and securing the permission of Congress. I would not feel that
it is appropriate for me to substitute my judgment for the judgment of
the Congress.
And neither did I consider it appropriate for me to try to evade the
4 1 4 - p e r c e n t limitation by using it as a coupon rate and selling at
additional discount.
Mr. ALGER. Thank you, sir. I appreciate that attitude, Mr. Secretary. That raises another interesting question, obviously, but I will
move on.
You mentioned, too, the tax-exempt feature of municipal-type
bonds, for example, which are competing with Federal bonds in the
marketplace and is very definitely affecting refinancing by the Government. Can you go any further than what you said in your statement,
to give us an idea of how much this is hurting Federal bonds competitively ? And I think this is partially an answer to earlier statements
made when it was alleged that the Government bonds are riskless and
therefore might deserve a lower rate of interest, that many people will
invest in the municipal bonds in preference regardless of the risk
feature. Can you add anything ? How tough is the competition now
from tax-exempt bonds ?
Secretary ANDERSON. I think you cannot isolate one form of competition and say, "Let us measure the effect of the competition of taxfree instruments, which are issued by the municipalities or other political subdivisions." What you can do is to say that you have a substantial number of factors which accumulate. One, you have the capacity on the part of municipalities and others to issue tax-free securities, and these are particularly attractive to people in high-income
brackets, because the tax-free quality makes a great deal of difference
to them. Secondly, we have a very large number of Government
securities issued by agencies which are aided although not guaranteed
by the United States.




161 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Then we have a large number of issues of the character of local housing authority bonds which are in effect guaranteed by the United
States and which are tax exempt.
You have, as I pointed out earlier the fact that for many years trust
funds grew at the rate of $2% billion more than they were spending
and you had at least a place to put $2% billion special issues in the
trust funds.
As I pointed out in the statement, for a number of years by reason
of statute or otherwise certain kinds of institutions and certain kinds
of funds held a large proportion of their portfolio in Government
securities. A good example, in the Congressman's State is the funds
held by the University of Texas, which they are now able to invest
in different kinds of securities that for many years were only in
governments.
What you have is a diminishing group of buyers for these various
reasons at a time when you are financing very large and expanding
debts. This is the kind of problem that we have in this whole
competition.
Now, it would be difficult to pick out one segment and say that this is
the most important, but I think if you would look on page 9 of the
statement you get some idea here of the kind of competition. When
you look at individuals, because it is in the hands of individuals, particularly those with high income tax brackets, that the municipals
starts to compete.
Mr. ALGER. I am really asking this because we are all aware that
later this year we will have tax hearings and will study the entire
gamut of taxes. This is a delicate subject, because the municipality
would be very uneasy if they thought anything was going to happen
to their tax exempt status, but we are talking about a national matter, and I thought possibly you might suggest that we take this up
for study along with other tax matters in November.
If I may I will move on here to something else.
On pages 36 and 37, which ends on 38, as far as I am concerned, I
think this is the meat of the coconut and will become debatable in
Congress, if I understood what you said, you pointed out that the
$13 billion deficit of last year spending was a major factor in the
pressure, as I understand, for the increase in interest rates. This was
the result of big Federal spending and this will result in inflationary
pressure and all of this will be harmful to the people of modest
means, and I think I am more or less quoting you, is that correct ?
Secretary ANDERSON. I think so.
Mr. ALGER. Secondly, on page 3 8 , I think the language goes, you
pointed out that the artificial interest rate limitations actually would
foster inflation, and again this inflation would hurt most of all those
of modest means—am I paraphrasing this correctly ? Therefore, we
want to protect those of modest means from asking for these artificial
interest rate limitations, is that correct, Mr. Secretary ?
Secretary ANDERSON. I think it is correct. All the inflationary
problems fall with greater impact on people who are unable to protect themselves.
I think you go down to this: Whether as a nation, whether as a
people, whether those of us who are charged with monetary management by the Congress can sit idly by and allow a situation to continue




162

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

which can lead to the debasement and erosion of our currency. This is
the sort of thing that we would seek to avoid.
Mr. ALGER. I think we all see that, and I think we are all agreed,
Mr. Secretary.
The two things I got out of this, and I say, commentators and others
are going to go over your statement with a fine-tooth comb, I think
we here are aware of the fact that on these two pages you made the
statement this $13 billion deficit has a big part to do in the inflationary
impact hurting those of modest means, spending beyond our income,
and, secondly, that artificial interest rate limitations will have another
inflationary impact.
Secretary ANDERSON. Congressman, I would very strongly commend
a study along this line. If you look at the expansion which is taking
place over 6- or 7- or an 8-year period, in corporate bonds and
notes, in the expansion of State and local government securities, and
in bank loans, you will find that there has been in the past year
modest increases in a good many instances, smaller increases than
took place in the past.
This is also true of consumer credit except in very recent months
in which it has gone up very rapidly.
On the other hand, mortgage debt has increased very substantially.
Most of this is housing, but the one big thing that has gone up is a
rise of almost $9 billion in publicly held Federal securities. This is in
sharp contrast to the moderate increases that took place in 1954 and
1955 and 1956 and the decreases which took place in 2 years, 1956
and 1957.
Mr. ALGER. I believe you pointed out simultaneously that even consumer credit at that point in your statement had not gone up in this
same duration.
Secretary ANDERSON. Not except until recently. Now, in order that
you would understand the difference between this $9 billion in publicly
held securities and the $12 to $13 billion deficit we are talking about,
this is simply because we started the year with a relatively high cash
position and used up the cash. So that w^e come out with this net addition to Government securities.
Now, if you contrast a period like this when you have a high level
of business activities and a rise in net additions to Government securities with a position like that in the 1920's when you had increasing
levels of activity and debt reduction, in this period the interest rate
goes up sharply, in that period the interest rate went down. In both
periods you had increased growth.
Mr. ALGER. Mr. Secretary, let me quickly go to another field, if I
may. I think you deserve a compliment on page 39. No one has mentioned this although I am sure other members have caught this.
You said:
Inflationary expectations generate higher rates primarily because b o r r o w e r s are
anxious to obtain funds that they expect to repay in cheaper dollars.

In times past we know and expected this applied also to governments. So your position here is a statesmanlike position, because actually when you deflate the currency you can pay back the debt a
little easier, can you not, with cheaper dollars ?
Secretary ANDERSON. The thing I think here that we have to remember is that inflation tends to generate recessions, if there is any




163 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

great enemy to continued growth in our country, it is recession. This
is the thing I think that compels us to try to live with fiscal responsibility.
Mr. ALGER. One other question, if I may, Mr. Secretary.
You mentioned on pages 42 and 43 the fact that you are operating
on something like half of the cash balances we used to have. When
the budget was half of its present rate you had as much of a cash
balance. Then at the bottom of the page and top of the next two
pages you pointed out that you felt there were times when somewhat
larger cash balances would have given the Treasury much needed
flexibility in timing its borrower operations.
From experience, do you feel we actually handicapped ourselves to
any degree of losing money because of inflexibility in your hands in
this matter of short cash balances ?
Secretary A N D E R S O N . I think in 1 9 5 7 there were occasions when
if we had had larger balances we would have been willing to price
more closely and in which the net cost would have been less.
Mr. A L G E R . I S this a good enough point for me to ask you, Would
you be willing to deliver us additional figures to put in the record to
support this point that you ought to have more cash in order to
refinance ?
Secretary A N D E R S O N . Yes, sir; I would be delighted to.
Mr. ALGER. Mr. Chairman, I ask unanimous consent that the Secretary be permitted to put in these additional figures to show where
if in the past he had additional cash in reserve he could have refinanced at a little better rate to the Government.
The C H A I R M A N . Certainly. Without objection that material will
be included at this point.
(The information follows:)
Larger cash balances under a more adequate debt limit would provide considerably more flexibility to the Treasury in its debt management functions.
W i t h larger balances the Treasury could ride out periods of market apathy f o r
new issues rather than being f o r c e d into the market with a new issue because
of a declining cash balance.
More flexibility in management of our caish balance permitted the Treasury
in May of this year to sell $2 billion of 11-month bills in advance of the maturity
date of $2.7 billion of special bills. T h e flexibility available under the $288 billion debt ceiling made it possible to carry an increase in the debt of $2 billion
over the period f r o m M a y 11 to May 15.
T h e lack of such leeway has on occasions hampered the Treasury in several
ways. F o r example, in the September 1957 cash financing the payment date
on a small bond issue had to be delayed until October 1 because there wasn't
room f o r the issue under the debt ceiling until a f t e r the attrition had been paid
on the October 1 maturities.
On other occasions the Treasury has had to resort to the smaller adjustments
possible only through the increase in the regular weekly bill auctions. This
was especially true in the period f r o m December 1957 through January 1958.
There have been other occasions where Government agency financing has been
in part determined by the problems of a low cash balance and of the debt ceiling. ThiiS w a s part of the reason f o r the issuance of the Commodity Credit
Corporation certificate of interest in a pool of loans back in 1953 and in 1954.
T h e timing of the issuance of the various Federal National Mortgage Association (management and liquidation functions) securities has been affected by the
debt limit problem, these issues might have been put out at different times if
the Treasury cash position and the debt limit had not been a problem at the time.
B u t in broader terms, a reasonable margin f o r contingencies and provision
f o r flexibility in financings is important in the public interest. I f the Treasury
should go into the market to refund an outstanding issue it must take into consideration the f a c t that in the normal course of events certain of these securities




164

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

will be turned in f o r cash. Some holders will decide that the terms of the new
securities d o not meet their particular investment requirements and they, too,
may take payment f o r their maturing securities in cash. When the debt margin
is very n a r r o w and the cash balance is low, the Treasury has to estimate caref u l l y what this attrition will be so as not to be in the position where the Treasury
could not make payment f o r all maturing obligations presented. This might
mean that the yield on the new securities would have to be more generous than
w o u l d otherwise be required. If the attrition proved to be greater than anticipated the Treasury would have to go back into the market almost immediately
to restore working balances even before the previous issues had been f u l l y
distributed. This threat of a new issue hanging over the market creates uncertainty in the minds of investors and when employed would have a tendency to
keep the market f o r U.S. Government securities in a weaker position than
otherwise. It also unreasonably handicaps the normal financing operations of
States, municipalities, and private businesses.
If, on the other hand, a cash offering is included in the refunding program and
the market were to improve between the date of announcement of new U.S.
Government financing and the date the books close, the attribution might be
substantially less than anticipated. In such an event the Treasury must calculate that it runs the risk of inadvertently exceeding the limit f o r a short period.
Simple prudence in the management of our fiscal affairs also calls f o r some
additional leeway in the management of cash balances related to opportunities
to b o r r o w f u n d s when market rates are favorable and lendable f u n d s are available. There is also the need f o r leeway in the event of sudden emergencies when
Congress might not be in session. However, even with these considerations the
Treasury would want to maintain its cash balance at a figure no higher than is
consistent with the efficient and orderly management of its affairs.

Secretary A N D E R S O N . I would only want to say this to the Congressman. This is the sort of thing that you cannot show by arthmetic
figures always. It is a matter of judgment.
Mr. ALGER. I do not only realize this, but I know everybody in
Congress, men of good will, are interested in trying to learn from our
experience. We respect your judgment. We can get a little guidance
from our own history; we ought to take advantage of it.
Thank you.
The C H A I R M A N . Mr. Simpson will inquire.
Mr. SIMPSON. Mr. Chairman, I apologize for not finding it possible
to stay here the balance of the day.
Secretary A N D E R S O N . I understand, sir.
Mr. SIMPSON. I know it was my loss.
Mr. Secretary, if you could write the ticket as to the persons who
should hold the biggest portion of your debt, in what area would you
place that debt ?
Secretary A N D E R S O N . I would place it in the hands of long-term
savers.
Mr. SIMPSON. Long-term savers?
Secretary A N D E R S O N . Yes.
Mr. SIMPSON. Of the nature of series E and H ?
Secretary A N D E R S O N . I would put it in E - and H-bonds. You
would put it in savings institutions.
Mr. SIMPSON. My next question is the obvious. Why do not we pay
them the highest interest rate? Why do we not make it more attractive for them to buy ?
Secretary A N D E R S O N . Y O U mean sell them at a different rate than to
other people ?
Mr. SIMPSON. If I understand the plan we envisage the time of
paying higher than 4*4 for a long term. Why not offer the individual
a long term security to pay 4% or more.




165 PUBLIC DEBT AND

INTEREST

RATE

CEILINGS

120,

Secretary ANDERSON. The individual can buy marketables like anyone else. The individuals can buy E-bonds and of course has a limit
on amount of E-bonds he can buy. Because this is a bond that carries special characteristics such as guaranteed redemption values at
any time.
Mr. S I M P S O N . Why not extend those characteristics and make it
more attractive in order to have those people we prefer to have the
debt buy more Government securities %
Secretary ANDERSON. I think you would run into a number of problems. One of them would be the problem of discrimination and in
tailoring the obligations to the various institutions.
Then I think also we must remember that this might be unfair
competition with other types of savings institutions. What we want
to do is to finance our debt in such a way that other people who want
to borrow, cities, corporations, and utilities and everybody else
Mr. S I M P S O N . Could we pay the same to the persons buying series
E and H as we offer to pay to people buying the long term Government securities ? It would not seem to me to be unfair competition.
Secretary ANDERSON. The difference in the E - and H-bonds and
the other marketables is that the E- and H-bond is a demand obligation and the others are term obligations.
Mr. S I M P S O N . Perhaps that is a good and sufficient answer if the
necessity ever arose to permit demand on long-term securities. They
cannot demand redemption with respect to long terms and ordinary
securities in advance of maturity ?
Secretary ANDERSON. N O , they cannot do it.
The C H A I R M A N . Mr. Byrnes will inquire, Mr. Secretary.
Mr. B Y R N E S . Mr. Secretary, I apologize for questioning you at this
late hour.
Secretary ANDERSON. Perfectly all right, sir.
Mr. B Y R N E S . I do, however, want to compliment you on the statement that you made here and the detail with which you went into
the problem. I recognize that in the beginning you rather apologized
for the length, but as one member of the committee, let me express
my appreciation that you went to the length you did in discussing
some of these problems, particularly in view of the debate that seems
to be taking place in some (juarters over the issue of interest and monetary policy, Mid more particularly by some of the self-appointed monetary experts in the other body. I think it was well that you took some
time to elaborate on the matter.
There is one aspect that I would like to inquire a little about. I
think the point has been raised that your short terms carry a lower
interest rate and therefore a lower cost as far as carrying the debt is
concerned. The contention is made that that is the case and that your
policy now in suggesting that you should be able to move into long
term with a higher interest rate will result therefore in a higher cost
in carrying the debt.
For instance, the statement made on Monday—C'I see no reason
why short-term bonds bearing low rates of interest should be converted to long-term bonds bearing higher rates of interest"—the argument seems to be to focus at least to some extent on that aspect. I
wondered if you would comment on that part of the picture?




166

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

Secretary ANDERSON. Yes. We have recently paid as high as 4.05
percent for 1-year money. As I pointed out earlier in August of 1957
we issued a 1-year, 4-year, and 12-year bond, I mean securities, all
of which bore the same rate of interest. Now, if you look at page
29 of the statement you see the market yields of Governments through
a 35-year period to maturity. What it really says is that in the longer
term you have less pressure than you have in the shorter terms. Now,
if your concern gets to be primarily about the cost of debt servicing,
the thing that really has the effect on the increased cost of debt servicing is how fast does this short-term rate go up. A year ago we were
able to borrow 1-year money for under 1 percent. Now we pay over
four. Today we have $76 billion due in a year or less. If we just sit
still and do nothing and allow everything to run out the string by
December of 1960, this will be practically $100 billion and you have
to add to it the seasonal borrowing and this will put it over $100
billion, as I recall, about $104 billion. If you are paying 4.05 for
money today and if the rate of other borrowers, the demand from
other borrowers keeps up and you put into the market $24 to $28 billion more of the same kind of money then you can see what kind of
a pressure you will exert against that interest rate. I think that you
were probably not here at the time that one of the members of the
committee asked me what happened when Secretary Glass in 1919
asked that there be no artificial ceiling and pointed out that you
could very well run into great difficulty. The Congress took all of the
limitation off for 5 years or less but they left the 5-year and over
limitation. So what happened was that in 1920 and 1921 the Treasury
put out 25 issues of short-term securities and paid more than 5 percent
on every one of them, that is, 5 percent or more on every one of them.
Mr. B Y R N E S . In other words, what you are saying, really is that
these people that are making this argument are starting on a false premise that your short terms carry a lower rate of interest and will
continue to do so ?
Secretary ANDERSON. In 1920 and 1921 the short-term rate was
higher than the long-term rate.
Mr. B Y R N E S . In other words, you are saying that these people are
starting off on a false assumption that short rate bonds are cheaper
to the Government than the long term ?
Secretary ANDERSON. That is correct. I do not think that we ought
to allow ourselves to believe that the only consequence of this kind of
procedure is that you may more quickly pay more to finance the servicing of the debt. Of equal importance or perhaps greater longrange importance is the fact that this is a process which does not
stop—because you are not going to stop the clock or the calendar and
time will crowd more and more into the short-term area and the
shorter you make it the nearer you come to money and the more likely
you are to put it in the bank and therefore the more likely the inflation
and so you get not only the increased quick-interest cost but you get
the inflationary pressures as well.
Mr. B Y R N E S . I was directing my attention to the arguments that
were made within the last day or two in the other body, that they
can see no reason why short-term bonds bearing low rates of interest
should be exchanged for long-term fiancing based on the assumption
that the interest rates at the present time are substantially less on




167 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

sliort-term obligations than on long-term obligations. I wanted to at
least get the facts clear as far as that particular picture was concerned.
Secretary ANDERSON. I would like also to direct your attention,
if I may, to page 12 of this supplementary statement, because I think
it gives a comprehensive idea of how you distribute the interest on the
public debt and of course this again figures into both the revenues and
to the impact which it has in the national financial community.
Mr. B Y R N E S . I would like, if I could, Mr. Secretary, to spend a
minute inquiring about the deficit picture, because I think you covered the matter of interest quite thoroughly, although I imagine
there will be a lot more discussion about it before this matter has been
concluded and finally settled. I understand the debt on June 30,
1959, will be about $285 billion.
Secretary ANDERSON. That is correct.
Mr. B Y R N E S . That you expect it will be about $285 billion on June
30,1960.
Secretary ANDERSON. Yes.
Mr. B Y R N E S . Assuming the budgetary picture as outlined by the
President, that is what you can anticipate ?
Secretary ANDERSON. Yes.
Mr. B Y R N E S . That within that period you will have a $ 7 billion
fluctuation, a need to borrow $7 billion in excess of the $285 billion
and you will need about a $3 billion flexibility fund or leeway.
Secretary ANDERSON. If you have an operating balance of $ 3 ^
billion and if you have an allowance for contingencies of $3 billion,
in a country of our size it does not seem unreasonable, on December
15,1959, you will have a total public debt limitation of $296.5 billion,
this is above the request, but we can get along with it, because it is
temporary and because we have got these other cushions of the $3
billion flexibility and $3^ billion working balance.
Mr. B Y R N E S . Eight. Now, what do you envisage the picture to be
as far as your needs during the period from June 30, 1960, to July
1,1961 ?
Secretary ANDERSON. It is too early for us to make the calculation.
Mr. B Y R N E S . Are you not going to be in almost as bad a situation ?
Do you see anything in the situation which would lead you to believe
you are not going to need some place between the $7 billion and $10
billion borrowing authority to meet seasonal needs the following year ?
Secretary ANDERSON. There will certainly be a seasonal requirement, regardless of how we come out on expenditures.
Mr. B Y R N E S . Which is what I am getting to, what you are asking
for now is really going to take care of the situation only to June 30,
1960?
Secretary ANDERSON. That is correct.
Mr. B Y R N E S . But you are going to be back here, just as sure as you
have been sitting here all day, a year from now suggesting that the
permanent limits need not be changed but that you have got to have
an extension of temporary authority.
Secretary ANDERSON. That is correct.
Mr. B Y R N E S . Why, then, should we not explore in a little greater
detail the point which you make in your statement, where you suggest that a valid case could be made for a provision that would, for a




168

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

longer period of time, control the debt at fiscal year end and yet provide for seasonal requirements within the year ?
Secretary ANDERSON. This could be accomplished if the Congress
saw fit in its judgment to establish what I would refer to as a permanent debt limit and then provide that within any yearly period you
could go above that, on the seasonal basis, to enough billions of dollars,
provided it was subsequently repaid. You could operate on it. If
you got into a period of deficits as we had in the previous years,
where you could not pay it down, then even with that limitation
you would have to come back to the Congress and ask for additional.
Mr. B Y R N E S . Y O U still have to come back so you would have
Secretary ANDERSON. Surely.
Mr. B Y R N E S . The ceiling acting as somewhat of restraining influence if it has a restraining influence, I do not know.
Secretary ANDERSON. What you are asking is a high permanent
ceiling that we would judge to take care of the yearend debt and
then a latitude of going over that ceiling so many billions of dollars
in order to take care of seasonal needs, if this would work ?
Mr. B Y R N E S . The same thing you are suggesting except that instead of calling it a temporary ceiling we would call it a seasonal
ceiling with the permanent ceiling being the ceiling that shall exist
at thefiscalyear's end.
Secretary ANDERSON. This would work so long as you did not run
into the debt ceiling through deficits.
The C H A I R M A N . Would the gentleman yield to me ?
Mr. B Y R N E S . Glad to.
The C H A I R M A N . Mr. Secretary, I though in terms for a long time of
a debt ceiling applying at a specific time without regard to the
seasonal variation or anything else, just say that the debt as of the
30th day of June in a year shall not be in excess of such and such
amount, whatever it is. Regardless, almost invariably you have a
lower debt on the 30th of June, do you not, than probably any other
time in the course of the year.
Secretary ANDERSON. It is the low point because it is the end of your
high-tax-collection dates.
Mr. B Y R N E S . The same thing, except I would add, Mr. Chairman,
a little restraint on some of their seasonal operations; in other words,
let us say as they saw December approaching that they might get
their house in a little better order to avoid, if possible, some additional
borrowing.
Secretary ANDERSON. Our house gets in order pretty much in proportion to the way we get revenues and the way we accumulate bills.
Mr. B Y R N E S . I was thinking of this only in terms of the fact tKat
for some time we are going to have to face the need for temporary
authority. Let us change the name, Mr. Chairman, and call it a
seasonal authority and make the seasonal authority permanent when
we know very well that you are going to be back here next year
asking for continuation of the temporary authority. You are going
to be here the next year and the next year and the next year on this
problem unless there are some radical changes made in the spending
policies of the Government. Although I do agree that we should
review this matter periodically I am not so sure that there would not
be a more satisfactory device for providing the congressional review.




169 PUBLIC

DEBT AND INTEREST RATE

CEILINGS

120,

There is one question that is raised every time this matter of debt
ceiling comes to the floor. It was urged during the debate last year
that if the Congress refuses to raise the ceiling that will force the
executive branch to reduce expenditures and we will adjust our financial picture ; instead of having increased borrowing, we will have
reduced expenditures because we just will not give you the authority
to borrow.
I know that is just a lot of wishful thinking, but I would like to
have your comment on that line of reasoning.
Secretary ANDERSON. The first thing that would occur is that you
would be forced to discontinue the sale of Treasury bills. Of course
when you discontinue the sale of Treasury bills, if your expenditures
ran above your cash you would simply default on the payment and as
I expressed earlier I think during your absence, to me this would be
a great catastrophe. I would hate to see the date that somebody
would put a bill to the window of the Treasury and we say, "We do
not have sufficient funds." If this were brought about because we
could not borrow it would be almost as deleterious as for any other
reason. It would be a very unfortunate occurrence. There is not a
week that we do not go to the market, every Monday morning in an
auction in order to meet the cash requirements of the Government.
And if we got above this debt ceiling to do it, we simply would not go;
we could not. And the result would be a default in payments.
Mr. B Y R N E S . That is all, Mr. Chairman.
The C H A I R M A N . Mr. Betts will inquire, Mr. Secretary.
Mr. BETTS. T O what extent, Mr. Secretary, does legislation which
might be passed at this session enter into the pitcure? I suppose
when you fix this temporary debt-limit request you assume the debt
will reach a limit in December, that is based on certain obligations
you are going to have to meet. How much of that obligation will
arise from legislation we may pass in this session of Congress? Is
that a fair question ?
Secretary ANDERSON. I would not be able to separate out the particular items. I will say this as a general matter, that these calculations are based upon the hypothesis that we will not generate in that
year expenditures above our receipts.
Now, if we should create an obligation which did that then we
would have to readjust our figures. If, on the other hand, you created
an obligation which did not have any expenditure impact until sometime in the future, then it would be taken into account in the future
in computing the cash needs of the Treasury. But it is based upon
the hypothesis that we would have revenues to cover our expenditures.
Mr. BETTS. The reason I asked that, I can see possibly some uncertainty under the present picture.
Secretary ANDERSON. Yes,
Mr. BETTS. Your $ 2 9 6 . 5 billion limit is based on your request for
gasoline tax, whereas if it is not passed we should shift maybe the
excess tax and highway fund, and you are going to have a deficit.
Then where is your $ 2 9 6 . 5 billion ?
Secretary ANDERSON. This, of course, is one of the reasons that we
are anxious to have the $3 billion leeway, what we call the operating
balance.
M r . BETTS. I s e e .




170

PUBLIC DEBT AND

INTEREST

RATE CEILINGS 120,

Secretary ANDERSON. I S because we may run in those periods. If
it were not for some latitude which we have in the cash balances we
obviously could not have a $296.5 billion deficit, I mean debt.
Mr. BETTS. I just wondered could Congress maybe cut down the
obligation and relieve the necessity or is the debt limit as high as
you want to go ?
Secretary ANDERSON. My primary problem there is that you have
got a large number of outstanding obligations authorized already,
then you have certain automatic programs, you take military expenditures, expenditures for all kinds of atomic energy, interest on the
public debt, mutual security, items to that effect, you have somewhere
in the neighborhood of 80 percent of the money which was spent.
Mr. BETTS. That is thefigurethat I was looking for. What percentage of your anticipated obligations do you think you can save by the
interest ?
Secretary ANDERSON. It is hardly correct to say they are fixed because Congress could rescind what is now outstanding obligations, all
authority. They could alter the rate at which you
Mr. BETTS. It has already occurred.
Secretary ANDERSON. Y O U buy or sell hardware for military purposes. If you get these categories and then make an assumption that
you are going to have as much or more expenditures for military
defense, as much or more for atomic energy, as much or more for interest on the debt, and so forth, then you come down saying this is about
80 percent of your expenditures and of course your flexibility is in
the remaining 20.
Mr. BETTS. The 20 percent, you would say that the 20 percent is a
range in which this Congress at this session might be able to make up
or down adjustments; is that right ?
Secretary ANDERSON. In the absence of going to the root of some of
the programs which generate expenditures or which arise out of prior
authorizations.
M r . BETTS. I s e e .

Thank you, Mr. Secretary, and I want to say on the record I want
to thank you for your presentation.
Secretary ANDERSON. Thank you.
The C H A I R M A N . Mr. Secretary, I have one further question I
wanted to propound. If we should follow your suggestion and take
the ceiling off of the interest that you could pay on so-called longterm securities what length securities would you anticipate that you
would be able to find a market for that you do not now find sufficient
market for? Would it be in securities between 5 and 10 years in
length or would they be in securities in excess of 10 years in length ?
Secretary ANDERSON. Mr. Chairman, I would not want to try to
forecast our offerings because I think it would be speculation. But
answering your question on a broad policy basis I would say that there
would be a wider market in the 5- to 10-year area than there would
be 10 years and beyond. I would say, also, that we would not contemplate doing more than modest amounts of long-term financing,
that is, financing beyond 5 years at the present time. And that we
would have to base our judgment on market conditions and on the
demands of business, individual States and local governments as we
judge them at the time because we would not want to unduly affect




171 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

the ability of those institutions and government to perform as they
should in the economy. But there would be more certainly and there
would be a wider area between 5 and 10 than beyond.
The C H A I R M A N . Y O U get very little additional help beyond 10 ?
Secretary ANDERSON. It might be helpful to you, Mr. Chairman,
to take a look since December 1953, we issued $34 billions, 5- to 10vear bonds, $2 billions of 10 to 20 and $6% billions of over 20. This is
looking back.
The C H A I R M A N . What is wrong with this idea of Mr. Byrnes, the
thought that I told you that I had in my mind, for viewing the debt
as of a certain date ? If you cannot hold more than a certain amount
on a certain day that serves as a restraint with respect to the entire
fiscal year, does it not ?
Secretary ANDERSON. Yes, sir.
Mr. B Y R N E S . Does it not serve just as effectively to control for a
fiscal year as it does to have a ceiling at a much higher level every
day of thefiscalyear ?
Secretary ANDERSON. I would think that if Congress would like to
vork out a formula of that kind we would have no objection.
The C H A I R M A N . Any further questions ?
Mr. B Y R N E S . I do not think it is a matter of whether you would
have objection. I would like to know whether it might not be a good
idea. You would not have to come up here and spend a whole day.
If I were Secretary of the Treasury I do not think I would like to
spend a whole day up here.
Secretary ANDERSON. A S I pointed out, Congressman Byrnes, the
real merit in the debt ceiling is to bring consciousness and awareness
of the problem and focus on it. As Chairman Mills pointed out, if
you had a debt ceiling at the end of each year you would have to focus
on it anyhow. So I think it would be comparable and it would be
more comforting; I would say that the Treasury would be just as
happy with one as another.
The C H A I R M A N . What you owe at the end of the fiscal year is what
I am more concerned about than the fluctuating higher amounts that
you may owe at a time when you are not getting your collections.
Secretary ANDERSON. I personally would look with, I think, more
favor on having the fiscal yearend ceiling without a fixed limitation
of seasonal fluctuations, both because of inability to compute it and
because of the fact that you would run into periods perhaps of turns
in the economy when you would have small amounts of deficit financing
to do.
The C H A I R M A N . Mr. Secretary, let me join others, I am sure, in
expressing the feeling of all members of the committee with respect
to your appearance today. I know that a few witnesses have been
called upon to remain as long before this committee as you have on
this occasion. You have from the point of view of the proposal that
you have brought us, I think given a very clear and concise and full
statement of the problems that are involved and of the reasons that
have prompted you to think as you do.
Again I will not only compliment you upon your great ability, and
the fine job that you are doing as Secretary of the Treasury, with
the very great problem, but also I want to take official notice here in
the record of your great spouse.
41950—59




12

172

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Secretary ANDERSON. Thank you, sir, and I am very grateful and
honored and I should like to express my appreciation to the committee and say I am particularly gratified. I think every member of this
committee was present this morning and have been present during
most of the day, and I think that this is a sort of problem which is
worthy of and has received the most careful consideration of the
committee.
The C H A I R M A N . We will see in the morning if we can talk Mr.
Martin into our line of thinking and give you some more help.
Secretary ANDERSON. Good, sir.
The C H A I R M A N . Without objection, the committee will adjourn until
10 in the morning.
(Whereupon, at 5:15 p.m., Wednesday, June 10, 1959, the committee adjourned to reconvene at 10 a.m., Thursday, June 11,1959.)




PUBLIC DEBT CEILING AND INTEREST RATE
CEILING ON BONDS
THURSDAY,

JUNE

11,

1959

H O U S E OF R E P R E S E N T A T I V E S ,
C O M M I T T E E ON W A Y S A N D M E A N S ,

Washington, D.C.
The committee met at 10 a.m., pursuant to recess, in the committee
room, New House Office Building, Hon. Wilbur D. Mills (chairman)
presiding.
The C H A I R M A N . The committee will please be in order.
Our first witness this morning is the Chairman of the Board of
Governors of the Federal Reserve System. We are very pleased this
morning to have with us the Honorable William McChesney Martin,
Jr.
Mr. Martin, you are recognized to proceed in your own way, sir.
STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
FEDERAL RESERVE SYSTEM, BOARD OF GOVERNORS, ACCOMPANIED BY RALPH A. YOUNG, DIRECTOR, DIVISION OF RESEARCH
AND STATISTICS

Mr. M A R T I N . Thank you, Mr. Chairman.
The first thing I want to do, Mr. Chairman, is place the Board of
Governors of the Federal Reserve System squarely on the record as
endorsing the debt management proposals transmitted to you by the
President.
In our judgment they are both necessary and desirable and we are
urging their favorable consideration.
There are only a few points that I want to make and while this
isn't necessary before a group such as this, nonetheless I think it is
important to emphasize that I am before you today not as a spokesman for the administration, but as Chairman of the Federal Reserve
Board.
We are living today in a country of unprecedented wealth. It is
wealthy in part because of abundant natural resources, and in part
because of the energy and initiative of our people.
An even more important distinction between the United States and
most other countries is the size and quality of the accumulated stock of
capital goods in the hands of producers and consumers. Due to past
saving—I emphasize the word "saving"—we enjoy the benefits which
flow from a reservoir of housing and durable goods in the hands of
consumers, of public facilities, such as highways, school buildings,
and waterways, and of industrial plant and equipment.




173

174

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

The society in which we live has been popularly characterized as
affluent, and despite our proper concern for certain depressed areas*
both economic and geographic, I am sure that we can all agree with
this characterization.
One consequence of affluence is exposure to instability in the pace
of general activity and also in interest rates which rise in periods of
boom and decline in periods of recession.
In a primitive economy, where everyone must work as hard as he
can to eke out a bare living, additions to stock of capital are largely
made by diverting effort directly to production of capital goods.
Such borrowing and lending as does take place is effected at interest
rates which we would regard as fantastically higher. In this type
of economy, there is little threat of instability except from natural
causes.
A drought or an unusually good season may produce relative poverty or plenty. But the range of economic fluctuation will tend to be
fairly small.
The greater the accumulation of wealth the greater are the possibilities for economic fluctuation. These may stem from shifts in
the peoples' preferences among the wide range of expenditure opportunities open to them, from changing attitudes toward saving and
investment, from overspeculation which undermines the solvency of
financial institutions, or, perhaps on some occasions, simply from the
arrival at a point where even a high rate of technical innovation fails
to induce investment decisions adequate to sustain capital expansion.
It is not surprising then that, in a free and wealthy economy, we
are unable to counterbalance perfectly, through changes in public
policy, the wide shifts that can take place. We always have had,
and I think always will have, changes in the pace of our economic
progress. We can and should work to reduce these fluctuations and
strive for the goal of stable growth. At the same time, however, we
must recognize that it is highly unlikely that we shall ever achieve
perfection.
Fluctuations in our economy express themselves in various ways,
and we attempt to gage them by various statistical measures.
If we look at the movements in any of the broad measures or economic activity and compare them with fluctuations in interest rates,
the conclusion is inescapable that interest rates tend generally to move
upward in periods of prosperity and downward in times of recession
or arrested growth. Hence, concerned as we may be about the impact of rising interest rates on the burden of the public debt or on
necessitous borrowers, we must recognize that rising interest rates are,
in fact, a symptom of broad prosperity and rapid economic growth.
I might insert here, Mr. Chairman, that I have been coming up to
the Congress for a number of years now and I would much rather
come up to explain high interest rates as a byproduct of prosperity
than I would to be up here when interest rates were declining as a
result of a deflation.
Since the stabilization of monetary systems in key countries after
World War II, interest rates in most other industrial nations of the
free world have been higher than in the United States. This has been
a period of great economic growth, very active demands for credit,
further monetary expansion, and continuing, though perhaps abating,




175 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

inflationary pressures. This past year's rise in interest rate levels here,
accompanying economic recovery, has been in contrast to some decline
in interest rate levels in Western European countries, where a modest
recession came somewhat later than in the United States and Canada.
In the United States, the rise in interest rates has affected all types
and maturities of debt instruments. Yields on long-term securities
have generally risen by about 2 percentage points since the low point
reached shortly after the end of the war. Yields now range from 4 to
4^2 percent on U.S. Government securities of long- and medium-term,
over 4^/2 percent on many outstanding Aaa corporate bonds, and
average over 5 percent on outstanding Baa corporate bonds. New
issues necessarily have to be offered to investor's at higher rates.
Despite their recent upward movement, interest rates in the United
States are still at levels comparable with those prevailing during
much of our history.
Long-term rate movements since last summer have been within
the range of the period from the early part of this century through
1930. The level is still substantially lower than during most of the
19th century. From a historical viewpoint, the present level of rates
can hardly be regarded as "out of line" for a period of wide prosperity and growth.
In comparing present rate levels with those of past periods, one of
the most important things sometimes overlooked is the effect of our
necessarily high tax structure on the effective rate of interest. For
example, if both the borrower arid lender are subject to the 52-percent tax on corporate profits, the borrowers' net cost and the lenders'
net return is a little less than half of the expressed rate. Thus a market rate of, say 4 percent, implies for both parties a net rate of a little
less than 2 percent. On its own taxable bonds, the Federal Government, through the income tax, recaptures a substantial share of the
interest it pays. When we look at interest rates in long-term perspective, we must bear in mind that net yields after taxes are lower
today than a comparison of market rates would suggest, because of
the fact that taxes are higher.
Aggressive demands for financing, which, as I have said, are characteristic of prosperous times, represent efforts to attract resources
away from current consumption in return for the payment of interest. In a free economy, no matter how affluent, it follows that, when
borrowers attempt to attract a larger share of the total product for
their purposes, they will have to pay for doing it.
The presence of strong demands on the credit markets from borrowers of all kinds does create a difficult financial problem. Recently credit demands have been pressing on the banking system, and
the banks have been accommodating a growing volume of loans.
As borrowers have sought accommodation, banks have raised their
prime rate from 4 to 4 ^ percent. This is the interest rate that banks
charge top-quality customers on short-term loans.
More recently, the discount rate of the Federal Reserve banks has
been raised from 3 to 3% percent. The discount rate, as you know,
is the interest rate that is charged by a Federal Reserve bank when
a member bank borrows money from it. This money is often called
high-powered money. It is high powered because it is credited directly to the reserve account of a member bank, and, unless used to




176

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

finance a payment of currency into public circulation or an outflow of
gold or some other development which drains the member bank reserve base, it forms the basis for a multiple expansion of bank credit
and money.
For some months we have been having rapid expansion of bank
credit and money, based largely on borrowed reserve funds. The
seasonally adjusted money supply—demand deposits at banks plus
currency in circulation—has increased by more than $2 billion in the
last 4 months, an annual rate of growth of about 5 percent. In the
face of developing high-level prosperity and the potential threat of
inflationary boom, the Federal Reserve should not be in the position
of encouraging an undue expansion of bank credit and money. Hence
the appropriate discount rate under present circumstances is one that
does not encourage member bank borrowing and is generally above
current rates on short-term market obligations, such as bills.
It is sometimes asserted that the Federal Reserve System should
step in and halt the upward trend of interest rates resulting from
active demands for loans by supplying sufficient Federal Reserve credit
in one form or another to keep interest rates from rising. This cannot be done without promoting inflation—indeed without converting
the Federal Reserve System into what has been called an engine of
inflation.
When such a program was adopted during and following the war,
it did succeed for a time in actually pegging interest rates on Government obligations. But at the same time it promoted and facilitated
the dangerous bank credit and monetary expansion that developed
under the harness of direct price, wage, and material controls. The
suppressed inflation that resulted, we are now well aware, burst forth
eventually in a very rapid depreciation of the dollar and even threatened to destroy our free economy itself.
This experience is very recent and the effects are widely and well
remembered. It is now very doubtful whether the Federal Reserve
System could, in fact, peg interest rates on Government obligations
under today's conditions even if we accepted the inflationary costs,
which would be high and would eventually, in my judgment, lead to
severe collapse. It is certain that the Federal Reserve could not extend interest rate stability to all markets.
The trouble is that the world has learned from wartime inflationary
experience. It now knows that inflation follows any effort to keep
interest rates low through money creation as the night follows the
day. Any attempt on the part of the Federal Reserve to peg rates
today would be shortly followed by an acceleration of the outflow of
gold in response to demands from abroad, by further diversion of
savings from investment in bonds and other fixed interest obligations
into stocks and other equities, and by a mounting of demands for borrowed funds in order to speculate in equities and to beat the higher
prices and costs anticipated in the future.
Those familiar with the investment markets will confirm to you
that such developments would inevitably follow a Federal Reserve
attempt to peg interest rates. A simply tremendous volume of bank
reserves would have to be thrown into the market through Federal
Reserve open-market purchases in the attempt to stem the upward
pressure on interest rates.




177 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

As these reserves enhanced inflationary pressures even further, the
rush from money and fixed obligations into gold and physical property as well as the mounting demands for credit to reap speculative
profits and to hedge against future inflation would overwhelm even
the most heroic efforts to hold interest rates down. Ultimately, if the
gold reserve requirements to which the Federal Reserve is now subject
were eliminated, the System might acquired a large proportion of
publicly held Government debt of over $200 billion in this way.
True, the interest rate on Government obligations might be said in
some distorted sense to have been stabilized by such an operation.
Interest rates generally, however, would spiral upward as they always
have in every major inflation.
People who save will be unwilling to lend their money at low
interest rates even when they expect the deprecation in the value of
their dollars to be limited. This is understandable. Take for example,
a corporate financial institution subject to a 52-percent tax. The
aftertax income from a bond yielding 4% percent interest would
amount to just a little over 2 percent with the dollar stable in value.
If this potential investor had reason to fear that the value of the
dollar would depreciate even 1 percent a year, his real return would
be very low. If the investor had reason to expect a price rise of just
over 2 percent a year, his real return would become negative. Investors, I am convinced, are alert today to this way of figuring interest
returns.
It might be added that to suggest that holding interest rates down
by supplying the banking system with reserves through Federal
Reserve open-market purchases of Government securities, on the one
hand, and taking them away with higher reserve requirement increases, on the other, represents a fundamental misunderstanding of
how the credit system functions. Obviously, if the net effects on the
credit base are, in fact, offsetting, they make no net addition to the
total supply of bank credit, nor do they reduce the demands of borrowers. If they are not fully offsetting, the net result would be
inflationary. We are all acutely aware of the gigantic size of the
publicly held debt that it outstanding and available to provide a basis
for such monetary inflation. Much as we would like it, there is no
magic formula by which we can eat our cake and have it, too.
If the Federal Government should substitute artificially created
money for savings in an effort to prevent interest rates from rising, it
would have a reverse effect. It would worsen the very situation that
the action was intended to relieve.
If you really want to encourage rising interest rates, you have only
to follow the prescription of those who argue that interest rates on
Government or any other obligations can be pegged by inflating the
money supply.
In connection with this discussion, it should be reemphasized that
the Federal Reserve System does not "like" high rates of interest. I
have testified on many occasions that we would like to see as low interest rates as it is possible to have without producing inflationary pressures. Interest is just a governor on the flywheel of the economy
which, if you prevent it working, leads to distortions and maladjustments in the economy from which we all suffer.




178

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

We are anxious, always, that interest levels be as low as is consistent
with sustained high levels of economic activity, with a steady rise in
our national well-being, and with reasonable stability for value for
the dollar. We cannot, moveover, put interest rates where we would,
whatever our "likes."
Federal Reserve policies can, of course, and do, influence interest
rates to some extent thorugh their influence on the rate at which the
banking system can add to the credit and money supply. The effectiveness of Federal Reserve policies is always subject, however, to
the reaction of borrowers and savers as expressed through the
market.
In an economy in which people are alert and sensitive to price
changes, the only way to bring about a lower level of interest rates is
to increase the flow of real savings or to decrease the amount of
borrowing. One important way to do this is to reduce substantially
the deficit at which the Government is operating. This will not only
relieve immediately some of the demand pressures that are pushing
interest rates up in credit markets, it will also reassure savers as to
the future value of the money they put in bonds and savings institutions and thus increase the flow of savings into interest-bearing
obligations.
The proposals before you do not relate to the levels of rates which
will prevail in the market, but rather to whether or not the Government shall be able to use savings bonds and marketable bonds effectively as parts of its program of debt management. The forthright
management of the public debt is an essential part of any program to
encourage savings and lower interest rates. We should not force the
Treasury to resort to undesirable expedients in order to comply with
arbitrary ceilings on either the size of the debt or the rate of interest
it pays.
International levels of interest rates among industrial countries are
now more closely alined than in earlier postwar years. This realinement, together with removal of most restrictions on the movement of
capital, reflects progress toward a closer relationship among international money markets, which is the financial counterpart of progress toward sustained growth in output and trade in the free world
generally; exactly what we have been striving to attain for a long
time.
It also signifies a state of affairs in which capital demands are
becoming international in scope and in which they will converge rapidly on the market that is cheapest and most readily prepared to
accommodate them. Under these circumstances, interest rates in this
country must increasingly reflect worldwide as well as domestic conditions.
We need to remember that today the dollar is the anchor of international financial stability. That anchor must be solid. Realistic
financial policies of Government are esesntial to that end as well as to
the end of a wealthy and strong domestic economy.
At this junction of world development, the least evidence of an
irresponsible attitude on the part of the United States toward its
financial obligations or of its unwillingness to face squarely the issues which confront it in meeting greater demand pressures on resources and prices, would have very serious repercussions throughout
the free world.




179 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

That concludes my statement, Mr. Chairman.
The C H A I R M A N . Mr. Martin, we thank you, sir, for coming to the
committee and giving us the benefit of your advice with respect to this
problem that we have.
Of course, we recognize that you are not here as a spokesman for
the administration, but as a spokesman for the Federal Reserve System, the Board of Governors of the Federal Reserve System, and
also because we thought from your experience in these matters that
you might be able to shed light on different aspects of this problem.
You and I have discussed these matters on other occasions and in
other committees. I have always appreciated your frankness and your
ability to reduce what to many, including me, is a very complex subject
matter into one that is readily understandable.
I have just a few questions, Mr. Martin, that I want to ask and
then I am sure other members of the committee will desire to propound
questions.
On yesterday, as I understand, Secretary Anderson made it clear
that the Treasury proposals are predicated in part on the possible
desirability of greater reliance by the Government in the months
ahead on long-term obligations. As all of us recognize, there is no
limit now on the rate of interest that can be paid on Government
securities up to 5 years, and that from 5 years on there is a limit.
He also made it clear that the issuance of long-term obligations by
the Treasury will compete with other demands for long-term investment bonds.
What would-be long-term borrowers will the Treasury in fact be
competing with ?
Mr. M A R T I N . They will be competing with life insurance companies,
savings institutions, pension funds, individual investors.
The C H A I R M A N . Maybe I didn't make myself clear.
I am thinking in terms of the units of Government, corporations,
and individuals that will, during the course of the next months ahead,
be in the market with long-term securities trying to borrow on a
long-term basis. If we better equip the Secretary of the Treasury to
go into those markets of limited credit resources so that he can put
more and more of the public debt, say, into long-term securities, he
would of necessity be competing in that market with somebody.
Who are these would-be borrowers, not the lenders, but the would-be
borrowers, that the Secretary would be competing with ?
Mr. M A R T I N . With corporations, with Government agencies such
as the FHA and the VA that are paying higher interest rates at the
present time, State and local governments, generally, almost all of
the entities—home buyers, consumers. He just has to compete with
all of these forces that are in the market.
The C H A I R M A N . Then do they in turn have to compete Math him
by proposing to pay more interest themselves for the use of the money
that is available in order to get it ?
Mr. M A R T I N . Or postpone temporarily some of their plans.
The C H A I R M A N . If the Treasury, say, should find it necessary in
order to carry out this program of getting more and more of the debt
into long-term securities, and State and local governments, for example, have projects that they think they cannot postpone, then in
order for those State and local government projects to be carried out,




180

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

would they not be in the position of having to agree to a higher interest yield on their securities in order to compete for such funds.
Mr. MARTIN. In some marginal instances, that might be the end
result, Mr. Chairman.
The CHAIRMAN. What I am trying to get is your opinion of whether
or not what the Treasury is proposing here or what the administration is proposing is merely to enable the Treasury, in the management
of its debt, to get itself in a position to compete with an existing
situation, or whether in the process of that competition offers made by
the Treasury with respect to long-term securities may result in further
complications that will set off a further spiral of increases in the
interest rates.
Mr. MARTIN. A S I tried to point out in my prepared statement, I
don't think this relates to the levels of interest rate. This is merely
giving the Treasury the ability to tap the market when the market
appears appropriate as other people in the market tap it.
At the present time, the mere fact that there is this statutory ceiling on interest rates puts the Treasury at the mercy of the market
with respect to that particular level.
I have said repeatedly, and I believe this wholeheartedly, that the
level of savings in the country at the present time is adequate to
sell long-term bonds at lower than present interest rates if the investing public had confidence that we were going to manage our affairs
responsibly and there is not going to be devaluation of the dollar.
Because of the statutory ceiling on interest—this is not something
that we are projecting into the future; this is the place that we
presently are—I think that we ought to give the Treasury the ability
to use all of the debt instruments effectively to get the lowest charge
for the public debt.
My own personal conviction is that what will actually happen is
that if this ceiling were removed, in the short run the Treasury
would benefit almost immediately by it.
I believe that you will have to pay more to finance the Federal
debt under the present ceiling than if this ceiling is removed.
I would also like to comment, if I may, on interest rates generally,
because this is something that I think is important. People say,
"What
is the trend of interest rates going to be? Where will they
g°?"
Well, there is a great misconception about it. My feeling is that
we manage or mismanage better or worse at times, but the fact
remains that if business continues to improve, interest rates are going
to rise. If business stays about where it is, interest rates are going
to stabilize and and stay about where they are.
If business declines, interest rates are going to decline.
I don't for a moment mean to imply that I believe in laissez faire
or a do-nothing economy, but I believe in using principles and forces
which we know exist and applying all the new ideas we can to them,
but not trying to ignore them.
Some people think that you have to do nothing; you just step by
and let all the forces develop.
Now, the Federal Reserve have never tried to do that, but it has
tried in its operations to accept the fact that these forces exist and
to move with them in the interest of high level employment and




181 PUBLIC

DEBT

AND

INTEREST

RATE

C E I L I N G S 120,

120,

stable prices. That is the best I can do on forecasting interest rates.
I sincerely believe that at the present time a removal of this ceiling
and giving the Treasury the flexibility to operate here will make it
possible for the public debt to be financed cheaper than it will have
to be financed if it does not get this ceiling.
The C H A I R M A N . What I am thinking about is this:
If we are to put the Secretary of the Treasury in a better position
of competing in the money market with long-term obligations, with
State and local governments relying to a great extent upon long-term
obligations versus short-term obligations, and he does not just get
himself in the position of meeting the existing rate, but makes an
error, as errors have been made in the past and errors will be made
in the future, in evaluating the market situation, in order not to
have a failure in his issue he goes a little above the prevailing interest
rate. The interest rate then applicable to State and local long terms
will rise.
I say I fear that as a possibility. Then I look beyond.
If that happens, say we have passed upon whether it will or not,
you and I have observed in the last 20 years that State and local
governments unable to finance their programs within the locality or
within the State have very little hesitancy in coming to Washington
for assistance. Would they possibly, in order to avoid these higher
rates of interest that they might have to pay, increase their demands
upon the Federal Government for financing of services within the
locality or within the State ?
If that happened, would they not to that extent be further contributing or bringing about at least the primary cause of most of
our difficulty today, the amount of Federal spending that is taking
place?
What I am getting at, Mr. Martin, is, this thing is not to me as
easily resolved as it may appear to some to be.
There are dangers certainly in going along on the basis of existing law from the point of view of debt management, but I want to
examine to see whether or not there are dangers in taking the course
of action recommended to us that might even be more detrimental
in their influence upon the economy.
Mr. M A R T I N . I think that is a very sensible approach, and I think
what it comes down to is, you have to make judgments at some point
on these things.
The C H A I R M A N . We are at that point now.
Mr. M A R T I N . Exactly, and I don't have any hesitation in stating
the judgment of the Federal Keserve System today, and I think I
can speak as the System on this today, that the right course to pursue
here is to encourage the flow of savings and not try to supplant
savings with artificially created money, and that if we do we are going to create a bubble that will burst in our face in a recession that
we won't like at all.
The C H A I R M A N . I S not the whole theory that when interest rates
rise they tend to keep people from borrowing money that they would
otherwise borrow at low rates of interest and expand and carry on
activities that perhaps, on the basis of the economy as we look at it
today, ought not to be carried on ?




182

PUBLIC

DEBT AND INTEREST

RATE CEILINGS 120,

It not that a whole lot of the theory of it, and through this higher
charge for use of money there are people who will refrain from
using credit, and thus that particular strain on the economy will be
eliminated ?
If that is the case, who is it in the economy that would otherwise
be a borrower at 4 percent who will not be a borrower at 5 percent?
Is it the corporation that intends to expand its activities in recognition of the requirements of the growth in the economy ?
Do we want that expansion curtailed ?
Mr. M A R T I N . We don't want that expansion curtailed. We don't
want to avoid it in either sense, but if we get a surplus under conditions that demand pressures, the Treasury will benefit by it on the
rate.
Regardless of whether it paid too high on one particular issue or
not, it will flow through the whole credit machinery.
The CHAIRMAN. Y O U say you do not like high interest rates, and
we do not like high interest rates, but what we are being asked to
do here may result in higher interest rates.
Do we have any assurance that those rates are not likely to go to
such levels as to so reduce capital investment, dependent upon borrowed money, as to bring about a downturn actually in our rate of
growth ?
Mr. M A R T I N . I think just the reverse. I think that the assurance
here is that if we utilize the present techniques and principles which
we have, we will have a burgeoning and improving and developing
economy that will be sustainable, and I am also convinced that if
we try to finance by artificially creating savings, we are going to
reap the reward also.
The CHAIRMAN. Maybe I misunderstood you a moment ago, but at
least you led me to believe that you were thinking in terms of this
statutory ceiling having some effect upon the confidence of savers.
Mr. MARTIN. That is right.
The CHAIRMAN. Let me ask you this: Whether it is the ceiling that
has caused the lack of confidence, or whether it is a lot of talk about
inflation that all of us perhaps have engaged in that may have made
a contribution to the shaking of their confidence.
As evidence of that, and I want you to consider the sharp break in
Government bonds last summer to where I think at one point they sold
for 83 or some such figure. Did this not serve to shake the confidence
of savers a lot more than the ceiling on the interest rate the Government could pay ?
Mr. MARTIN. I don't think there is any question about that, Mr.
Mills.
You have to put this, however, in perspective. A lot of factors
brought us to the condition that we are in today. Let's just take
this matter of inflation.
For 10 years or more, 15 years, people have been saying to me,
"Where is the inflation ? There is no inflation. What are you fighting?"
All right. We all know that the value of the dollar has declined
now to such an extent that it is almost immaterial to ask when it
declined.
From 1944 on we have had persistent inflation in this country and a
lot of factors have contributed to it.




120,
183 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

Federal spending has been a major one, but we can't at any particular time say that this brought it about. This matter of talk is
one that has very much concerned me. I have tried to be very careful
about the talking that I have done on this thing, but when everybody
is talking about it, it seems to me that we have to recognize that something is happening and that if the Chairman of the Federal Reserve
Board ignores it, among others, he can't be very alive and alert to
what is going on.
Actually, what has happened over the last year has been that following the 1957-58 recession, which in my judgment came about because of the preceding inflation that got ahead of us—when gross
national product was running a billion dollars a month in value in
excess of goods and services being produced, you knew that inflation
was well ahead of you in late 1956 and 1957, and some adjustment
was going to take placeThen we went into reverse gear, and I think the monetary authorities did everything they could during that period to stimulate the
economy, with due respect to our critics.
I think that when you have a money supply increasing as much
as 8 percent, as it was at one point in 1958, it is hard to say that money
supply was not doing what it could to contribute to stabilizing the
economy and making it possible for the recovery to develop, and this
was about the time that the recovery began, which in retrospect we
know was April of 1958.
But you suddenly had confronting you in the summer the enormous
Federal deficit, nearly $13 billion, which was the main talking point,
and also a conviction that that Federal deficit was not going to be
limited at that time, but might even be doubled.
That was the sort of talk that in part led to collapse in the bond
market, the sudden realization of it, and also complicated the problem for all of us.
The CHAIRMAN. Mr. Martin, I would not have you or anyone else
draw any inference that I am criticizing you. I would not have
your job any more than I would have the job of the Secretary of the
Treasury, under these circumstances which you both operate. I am
trying to get some information because I think there are other points
that have not yet been considered that must be considered before we
take this step.
Mr. MARTIN. I understand.
The CHAIRMAN. I am always a little bit at a loss to be able to understand and interpret economic conditions as they occur.
As I look back, I think about what happened in the Consumer
Price Index between March of 1958, and March of 1959, where there
was only about a four-tenths of 1 percent rise in the overall cost of
all items that go into it. I do not see much evidence of inflation
there, do you ?
Mr. MARTIN. Let me just make a comment on that.
That has to do with this process of inflation that I am talking
about. All the price movements are explosive in their nature in
our economy. I wish they weren't, but that is the way they are.
When I was up here before the Joint Economic Committee in
February, I tried to point out the inflationary tinder that was lying
around at that time that, in my judgment, can make for an ex-




184

PUBLIC DEBT AND

INTEREST

RATE

CEILINGS 120,

plosive movement in that cost-of-living index. We have had periods
since the inflation started in the 1944-45 period that you can point
to these statistical measures that look as if we have everything under control, but the fact remains we have been dealing with a more
persistent and insidious problem than that.
I believe a great deal in these statistical measurements and I
think they are important, but I don't think we should be slaves to
them, and I think the biggest mistake we make at times is to say,,
"Well, from here to here it was stable and from here to here it was
unstable."
What you have to do is to try to interpret those statistics with
respect to what is building up. I say that the level of savings is
slowly beginning to subside at the present time. The future which
I foresee for this country is unlimited. The only thing that limits
it is whether we have the responsibility and the courage to manage
our affairs in such a way that we don't have catastrophic breaks that
come from overexuberance and overebullience.
At the present time, the level of savings has been fairly adequate.
In the last 1958-early 1959 period, it has been fairly adequate, but
people have preferred stocks, equities, and other types of investment, and while some people say you shouldn't talk about it, when
you travel abroad and you talk to a variety of people, you find that
they do not have, and I say this publicly, the confidence in the dollar
that they had a number of years ago. It is up to us to reestablish
that.
The C H A I R M A N . Mr. Martin, over that period of time I agree with
you that you cannot judge an entire proposition by looking at any
limited period, but over the period of time that we referred to here
a moment ago when the price index went up by four-tenths of 1 percent, from March of 1958, to March of 1959, what was the increase in
the interest rate ?
Do you have any information on that ?
Mr. M A R T I N . Yes, I could give it to you. I would say it is about 1
to 1 y2 percent.
The CHAIRMAN. H O W much ?
Mr. M A R T I N . 1 to 1% percent.
I will get the precisefiguresfor the record.
(The information supplied by Mr. Martin is as follows: 9- to 12month issues, up 1.79 percentage points; 3- to 5-year issues, up 1.38
percentage points; issues maturing in 10 years or more, up 0.67 percentage point.)
The CHAIRMAN. D O you still agree, as you said in February, that
much of this inflationary trend is the result of the Government debt?
Mr. MARTIN. Yes, indeed, I do.
The CHAIRMAN. It is still that today ?
Mr. M A R T I N . It is not to the same extent.
The C H A I R M A N . What I do not understand is this:
When we are in the process of contracting the situation, and I think
it is a remarkable feat, if it is accomplished, of reducing from $12%
billion of deficit, say in 1fiscalyear, to a billion or $2 billion of deficit,
or even a balance in expenditures, when you are going through a situation like that when the economy is just coming out of this downturn
and rising interest rates are upon us under conditions of contracting




185 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

debt by Government, which may have made a contribution to the rise
when we were in the hole $12% billion, when all that has happened,
and the interest rate continues to go up, I wonder if it is altogether
due to the fiscal policy and to the debt itself.
I wonder if there are not other factors that are involved in this increase in interest rates.
Mr. MARTIN. I think that the confidence factor is a broad factor,
but I also think that the demand for credit which is beginning to
burgeon again is the major factor.
The CHAIRMAN. Could it be this, Mr. Martin:
In spite of the record that the Federal Reserve has made of allowing the money supply to increase by 8 percent when we were in a
downturn, much more than you would normally permit an increase in
the supply of money and credit, could interest rates be affected as they
have been affected since March of 1958, and up to March of 1959, by a
policy of the Federal Reserve Board that resulted in less money and
credit being made available in a growing economy or an economy coming out of a business downturn ?
I sometimes get lost in this matter of whether or not these demands
for money and for credit result from the normal expected growth, the
desired growth in the economy, and whether they are altogether the
result of pressures that we refer to as inflationary.
Over a period of time when we have had a rate of growth, say, of
3 percent, is it sufficient for the Federal Reserve to follow policies that
permit a rate of increase in money in a comparable period of iy2
percent ?
Does not that in and of itself mean that there is less money than
there is rate of growth and as a result of that less money and credit,
and that somebody is going to have to pay more for it ?
Mr. MARTIN. Let me answer it this way, Mr. Mills, because I think
a lot of people have sincere questions on this point.
Some people believe that we shouldn't have any manmade management of this type of thing, that we should just set a measurement and
increase the money supply in proportion to gross national product or
some ratio figure and automatically increase the money supply or
decrease it if it is called for on that basis.
Unfortunately, the nature of this problem doesn't permit that type
of measurement. When we talk about the money supply, we have
to take the factor of velocity into account just as much as we do the
quantity of money. That involves judgments, and they are, to be
sure, manmade judgments, and the last thing in the world I am
trying to say to this committee or anyone else is that the Federal Reserve has been perfect in its management of the money supply.
But I do want to point out that in 8 years of experience in the
Federal Reserve System, I am convinced that our bias, if anything,
has been on the side of too much money rather than too little. There
have been one or two times when money might be unavailable in individual places, because the money flow is uneven.
That is a serious mistake if that ever happens. We have immediately corrected that just as quickly as we could wherever that has
occurred, but the natural human nature tendencies of this thing work
in such a direction, and that is one of the most difficult things we have
to deal with on this problem of inflation, that it is awful easy to go
down and it is awful hard to go up.




186

PUBLIC DEBT AND INTEREST RATE

CEILINGS 120,

We hear a lot about banker influence and banker domination and
banker's interest and that type of thing getting into it, but my actual
experience is that whether it is bankers or businessmen, generally
speaking, they are not pushing for higher interest rates per se. They
are on the side of, well, now, just don't run any risk of things
developing.
Just taking the recent period as an example, I think that, if anything, we have performed properly. I don't think we were perfect
on timing the recession. I don't think we ever will be. If we catch
it within several months, I think we are going to do very well.
I have used this phrase "leaning against the wind." I like to think
of it in terms of being a rudder and a helmsman. We are not able
to make the wind.
If I can throw in just a personal observation there, I had the privilege of knowing Senator Glass fairly well for a short period of time.
He told me on a number of occasions—I had no idea I would be ever
connected with the Federal Reserve, but I was working on a paper
at the Columbia University—"If the Federal Eeserve ever gets the
idea that they can make the wind, that they can create these forces,
it will fail completely of its objective and its purposes."
I want to put that in the broader perspective that I think is important for us to think of, that we don't have a Gosbank here. I am
using the Russian phrase here. We have to deal with the conditions
that the economy sets for us.
Fundamentally, the problem in the Federal Reserve since I have
been with it has been not one of leaning too lightly against the breeze
when it is going down. When it is going down you have no difficulty.
I went through it in this last experience, and some people question
the way we move, but we had no trouble in going from 3% percent
to 1% percent in the discount rate and increasing purchases in the
open market and reducing research requirements. We had little
or no difficulties with that.
Our problems came when it was perfectly obvious that the wind was
stabilizing and beginning to go the other way, not to interfere to say,
well, just keep them down a little bit longer if you can.
The CHAIRMAN. I am not disagreeing, I repeat again, and I am
not criticizing.
Mr. MARTIN. I want you to.
The CHAIRMAN. I am trying to learn as much about this as I can
in this short time. Am I to reach the conclusion from what you have
said that the Federal Reserve could not initiate policies if it wanted
to, if it decided it could do it, that would have the result of changing
the basic trend of interest rates without the result of bringing about
pressures for a downturn in our economy, or pressures for inflation
within our economy ?
Mr. MARTIN. Leave out the question of whether, if we just froze
money, which wasn't available at any price. If money weren't available at any price, then interest rates are no longer a factor. You
have nothing to price.
But, assuming that interest rates continue to operate, my conviction
is that over long periods of time, not short periods of time, neither the
Federal Government nor the Treasury nor the Federal Reserve can
set an interest rate and make it stick.




187 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

We can lead or follow at various times, but the forces are bigger
than we are. We may at some point develop a totalitarian—I use that
phrase loosely—1 mean an overall general management of the economy which would make it more possible to do that, but 1 don't think
that is what we are discussing this morning.
However, as wTe are set up today, I am convinced that the longrange levels of interest rates are not controllable in that sense. What
we are dealing with here are like, and I have used this phrase a number of times, like the tides of the sea, and King Canute can order
them to stand back, but you are going to get your feet wet if you try
to say they are not there.
The CHAIRMAN. Mr. Martin, on page 5 you call our attention in
the second paragraph to the presence of strong demands on the credit
markets from borrowers of all kinds. You say:
Recently credit demands have been pressing on the banking system, and the
banks have been accommodating a growing volume of loans.

Do you have information with you on how much, aside from the
Federal Government, the increase has been over the past year in number of bank loans to these borrowers ?
Mr. MARTIN. Mr. Young can give it to you from the bulletin here.
The CHAIRMAN. We did not identify Mr. Young.
Mr. MARTIN. Mr. Young is the head of the Board's Division of
Research and Statistics.
Let me point out just in passing while we are waiting that one of
the successful things in Federal finance has been the way the Treasury has succeeded with the increase in profits in corporations and the
recovery and utilizing even the short-term instruments on going into
the hands of corporations rather than otherwise, and that is one of
the things that has given us concern, because we know that as a recovery develops and it reaches the stage of growing prosperity, there
is going to be more and more demand for capital spending by these
corporations, and there is going to be more and more tendency to
dump those securities back in the banks, and that is one of the factors
in the loan picture.
The CHAIRMAN. What I am getting to is this, while Mr. Young
is working: I was under the impression that there had been a considerable increase and that to the extent that we know the composition of the borrowers, it looks like a substantial volume of this recent
borrowing is being used to finance business outlays for plant or
equipment.
I wanted to know whether or not that is true.
Mr. MARTIN. In April 1958, $93,450 million; April 1959, $101,090
million.
The loans of all commercial banks rose from $93 billion plus to
$101 billion plus.
The CHAIRMAN. D O you know anything about the composition of
these borrowings ?
Has it gone for plant and equipment outlays, or has it actually
gone into inventory ?
Mr. YOUNG. We wouldn't know that. It has gone in all directions.
You would judge on the basis of expenditures for plant and equipment, as between the increase in plant and equipment expenditures of
41950—59




13

188

PUBLIC

DEBT AND INTEREST

RATE CEILINGS 120,

business concerns between the first quarter of last year and the first
quarter of this year, that probably only a small part of the increase
has gone into plant and equipment, that it has gone mainly into
inventory.
There has been quite an increase in mortgage loans at banks. Also*
there was some increase in loans on securities.
The CHAIRMAN. There is a limit to business demands for bank
credit for plant of equipment purposes and for inventory purposes*
is there not?
Mr. MARTIN. There is indeed.
The CHAIRMAN. Are we approaching that limit in the opinion of
the Federal Reserve, or are we just beginning ?
Mr. MARTIN. That is a pretty hard judgment to make.
The CHAIRMAN. I S it not a factor that will make a contribution to
whether interest rates remain stable or interest rates rise?
Mr. MARTIN. It is a factor that will make interest rates rise if we
do not increase the level of savings, and I have had the feeling that
the level of savings, while quite adequate in the early part of the
year, is slowing up at the present time in relation to the growth and
development of the economy.
The CHAIRMAN. If we are to get out of this downturn and continue on, I am wondering whether or not our monetary and debt
policy should be so arranged as to accommodate their demand for
funds rather than put the Treasury in the position of competing with
them at this particular time.
Mr. MARTIN. If the savings aren't there, I don't see how our artificially creating them will accommodate them.
The CHAIRMAN. I am not talking about artificially creating or
anything. We are talking about the Treasury converting from
short-term paper to a greater percentage of long-term paper. These
inventory requirements and these capital investments for plant and
equipment that are being carried on at the moment are making a
contribution to the expansion of the economy and it is a desired expansion at this point.
Is the entry of the Treasury to a greater extent into this field
going to impede these businesses in obtaining these required funds*
and should we permit that to happen ?
Mr. MARTIN. The Treasury has to be financed.
The CHAIRMAN. I understand, but the Treasury, to be financed with
short-term obligation, you say costs more.
I agree it probably is not the way to do it, but I am trying to determine whether or not now in the process of getting the Treasury more
and more into long terms, we may be doing something on the other
side that we do not want to do.
Mr. MARTIN. I don't think so. I thing that we are getting too much
in the short end of the market and that, reverting again to this confidence factor, that we know that the bills and the short-term securities at some point become almost interest-bearing money and that
we just have to recognize that they are inflationary forces in the
economy, and we do not want that type of expansion.
The CHAIRMAN. I am sure you are right. I don't yet understand
the difference between short-term paper as being this near money and
thus being inflationary on the one hand; and Government borrowing




189

PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

money through long-term obligations not being inflationary. We
have said, and you said in February, that the size of the deficit, and I
assume you meant the condition of fiscal policy and those things, is
the net inflationary influence. If we manage that debt through longterm obligations, you think that is less inflationary or it is not
inflationary ?
Mr. MARTIN. I certainly do, because if you place the long-term debt
that we placed in the hands of corporations or your individuals, they
are going to hold it for some time.
The CHAIRMAN. It would not all be in the hands of individuals or
corporations, would it?
Mr. MARTIN. SO far as its impact on the Treasury is concerned, it is
not going to come back for repayment 3 months from now or 6 months
from now.
The CHAIRMAN. The fact that the debt has to roll over so fast in
these short-term papers is inflationary. Is that your point?
I am merely asking for information.
Mr. MARTIN. That is correct. That is definitely the point.
The CHAIRMAN. That in and of itself is inflationary ?
Mr. MARTIN. I think so.
The CHAIRMAN. What makes it inflationary?
Mr. MARTIN. The turnover under conditions of high level activity
makes it inflationary because it puts the Treasury in the position of
being at the mercy of the market whenever these securities run off.
The CHAIRMAN. Y O U may have to pay a little more interest the
next time they roll?
You are not saying that interest rates themselves are inflationary,
are you?
Mr. MARTIN. N O . I am saying that with the distortion in the level
of interest rate, the portfolio has been managed with some relationship
to long-term needs and short-term needs.
Most of this money we are talking about is for long-term needs.
It is not for repayment in 3 months or 6 months. It is for projects
which will require 3,5,10 years.
The CHAIRMAN. Most of it is for money already spent—we know
that—from which there is no future return. It has already been
spent. Projects have been completed. Battleships have bieen put
in mothballs. I just have had some difficulty in understanding why
one would be inflationary and the other one not. You helped me. I
see your point.
Mr. MARTIN. It is the placement of the issue. You could have all
the debt in short-term securities.
The CHAIRMAN. Mr. Martin, I had numerous other questions, but
I will not delay you nor the committee to go through all of them.
Thank you, sir, for your continued forthright responses to all of my
questions. You have always done that and I appreciate it.
Mr. Mason will inquire.
Mr. MASON. Mr. Martin, all I want to say is this: that I think Uncle
Sam is mighty fortunate in having Mr. Martin at the head of the
Federal Reserve System in these trying, troublesome times.
That is all.
The CHAIRMAN. Mr. Forand.




190

PUBLIC

DEBT

AND

INTEREST

RATE

C E I L I N G S 120,

Mr. F O R A N D . Mr. Martin, I was very much interested in all yon
had to say this morning. I noticed particularly that you, as well as
the Secretary yesterday, made considerable reference to the fact that
State and municipal obligations were tax-exempt, whereas the Federal
obligations are not.
I am wondering, especially in view of the further statement you
made when you referred to the interest rate of return being cut down
by virtue of the taxes, if you could comment for us on what would
happen if we were to make the Federal obligations tax exempt and
therefore, perhaps, induce investment in long-term bonds?
Mr. M A R T I N . Y O U would make it more difficult for the State and
local governments to finance because they would not have the taxexemption feature exclusively.
I have repeatedly said that I think the tax-exemption feature on
State and local securities is a mistake, but we have it.
I think that to make the Federal issues tax exempt complicates
the who general problem. It might be one way of solving it.
You gentlemen are much more versed in the tax problems than I
am, but it opens up a whole Pandora's box of troubles with respect to
our tax equities.
Mr. F O R A N D . Maybe this committee is better versed in the taxation
than you, but I am sure the committee is not better versed in economics
and the general situation in this country than you are, and that is the
reason why I have asked for your comment.
Mr. M A R T I N . It would have a serious effect on revenues, on the
taxes that the Government pays as interest.
Mr. F O R A N D . However, now the States and local governments, of
course, are getting the benefit of the tax exemption and I am sure
you are aware of the fact that through the excise tax system the States
are taxing the Federal money.
Mr. M A R T I N . Yes; I am aware of that, and it is a ring-around-therosey.
Mr. F O R A N D . In other words, I have to assume from your answers
that you would not be in favor of making the Federal obligations
tax exempt ?
Mr. M A R T I N . Well, I won't say that I wouldn't be in favor of it, but
I would say that it would have to be thought of as a part of a broad
problem and not just for the sake of selling Treasury securities at a
given time, because I think that these inequities have built up over
a period.
Mr. F O R A N D . Y O U feel the Federal Government would be competing
with the State and local groups and that would be the big question so
far as the economy is concerned, that we should have to consider.
On the other hand, I think you will agree with me that if the Federal Government is going to try to sell, for instance, its E-bonds and
H-bonds, which are 10 years or more, that would be one way to get
the money in.
Mr. M A R T I N . Yes; I think that is right, and the Treasury has given
a lot of thought, as you know, to that problem.
I was in the Treasury once myself, so I have a little background on
that, and I think they questioned moving in that direction because of
the difficulties that it opens up on the whole picture.
Mr. F O R A N D . Am I right in the thought that up until about 1 9 4 1
Federal obligations were tax exempt ?




120,
191 PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS

Was it about 1941 that they taxed them ?
Mr. MARTIN. There were some that were tax exempt.
Mr. YOUNG. Partially tax exempt.
Mr. FORAND. However, the big impact came in 1 9 4 1 , 1 believe.
Mr. MARTIN. Right.
Mr. FORAND. Thank you very much.
The CHAIRMAN. Mr. Byrnes will inquire, Mr. Martin.
Mr. BYRNES. Mr. Martin, of course one of the things is if we moved
a large area of our debt into tax-exempt status, that would be to the
rich man's benefit, would it not ?
Mr. MARTIN. That is one of the problems involved in that.
Mr. BYRNES. Y O U would just make a tax refuge for anybody that
has any savings.
Mr. MARTIN. That is right, and I shouldn't get started on this, but
I think it is a bit inequitable with the present State and local securities that some people who may be very good citizens, but do not work
at all, can invest in the tax-exempt securities, whereas the man that
has a large salary, and you may think his salary is too large, at least
works for it and he has to pay a tax on it.
Mr. BYRNES. The Chairman inquired about with whom the Treasury had to compete in borrowing on long-term. I would like to make
an inquiry as to whom the Treasury competes with in the short-term
area, because in both cases we are going into a market and probably
there is distinction between the two markets.
Mr. MARTIN. The short-term area largely goes to the banks at the
present time.
Mr. BYRNES. And that is your inflationary impact ?
Mr. MARTIN. That is your inflationary impact.
Mr. BYRNES. There can be no question of the extent of the inflationary impact as between going into the short-term market and the longterm market ?
Mr. M A R T I N . Not in my judgment, no.
Mr. BYRNES. We have had arguments made relative to this question of short-term versus intermediate and long-term and where the
emphasis should be put as far as financing the $75 billion or the $100
billion, whichever it happened to be, which is going to have to be
refinanced within the next year.
Quite a little emphasis was made in the Senate in the last several days and the argument was made that there was no need to act
in raising or limiting the ceiling on the long-term issues because the
Treasury had no ceiling on its under-5-year issues; there was no reason
at all why there was not an ample short-term market, and that that
is where the Government should go for its financing.
I would like, if you would in your capacity, your comment to that
point.
Mr. MARTIN. Yes. I touched on that a moment ago and I say
that the volume of short-term securities which the banks served as
underwriters of and passed on to corporate nonbank investors because
of their improving profit situation has been the saving limit in my
judgment in the last 9 months, and that as we approach the time
when those corporations and nonbank holders have other uses for
those funds and turn them back, it is either the Federal Reserve
purchasing them or the banks purchasing them, and under those
circumstances that can be nothing but inflationary.




192

PUBLIC

DEBT

AND INTEREST

RATE

CEILINGS 120,

Mr. BYRNES. Could you explain also what effect that would have
on interest rates generally ?
Mr. MARTIN. Well, under present conditions, that is where you get
this overall characterization of the economy. I think it would push
your interest rates up. I do not think it would stabilize and put
interest rates down. I think it will act in the reverse.
Now, w^hat I have tried to state in my prepared statement today,
whether I have done it or not, is that the judgment of the Federal
Reserve Board on this is that if you were ordered to stabilize interest
rates at the present time, if we are given instructions to carry them
out, it would not work.
I was in the Treasury at one period when we were coming out of
the war, and with the harness of wage and price controls and all the
other things we had, we were able, with patriotism and other things,
to handle this. We are in a cold war, but we are not in a hot war
at the present time. And my judgment is—and most of my associates,
I think, concur in this—that at the present time you could not have
lower interest rates unless you had a decline in business, which is
something that none of us desire. At least I do not.
Mr. BYRNES. The matter has constantly cropped up that, as you
increase your interest rates, you freeze some people that need money,
or need credit, out of the market, and therefore expansion that you
might find desirable does not take place. Is it not also true, though,
that as your interest rates go up, and if there can be a feeling of
confidence in some kind of a stability of dollar value, you attract
additional savings as part of that process? It is not just a matter
of freezing out potential borrowers.
Mr. MARTIN. I think that is absolutely right, and I think that we
want to do everything that we can to encourage the saving process
at the present time.
I believe that the need for savings over the next few years is going
to be substantial and that we want to do everything that we can to
preserve and develop the process of saving and investment. And one
of the things that is being endangered at the present time is this
process of saving investment.
Mr. BYRNES. Y O U make reference in your statement to an item that
I think might bear repetition. Is it not true that anything that gives
concern about the future value of the dollar is bound to increase
interest rates because of its discouragement of savings?
Mr. MARTIN. I do not think there is any question of it.
Mr. BYRNES. S O that those who worry about interest rates going
higher, contending that we must avoid high interest rates, actually
encourage higher interest rates if they, at the same time, support
spending policies that impair the future value of the dollar ?
Mr. MARTIN. N O question of it.
The C H A I R M A N . Mr. Keogh will inquire.
Mr. KEOGH. Mr. Martin, I understand that one of the proposals of
Treasury is to adjust upward the rate of interest on E- and H-bonds
to 3% percent.
Mr. M A R T I N . That is right.
Mr. KEOGH. I would like to make a statement and see whether you
agree with this: that for the most part, and generally speaking,
E- and H-bonds compete for the same savings dollar as the thrift
institutions of the country look to?




193 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

Mr. MARTIN. Yes, sir; I would say that is correct, Mr. Keogh.
Mr. KEOGH. N O W , I would like to ask you as to whether you have
an opinion, in the present and under the reasonably foreseeable conditions in the future, the increase in the rate of interest on E- and
H-bonds to 3% percent will have the effect of attracting to them a
percentage of those savings dollars that are now going into thrift
institutions?
Mr. MARTIN. I think it will take some of them. But I think in the
broad sense it will attract others in addition, so that both of them
may benefit by it; that is to say, total savings may increase.
Mr. KEOGH. But there will be some shifting of the dollars, the savings dollars, from the thrift institutions to an E- and H-bond paying
a return of 3% percent?
Mr. MARTIN. I would not deny that, especially as regards new
savings.
Mr. KEOGH. I S it not reasonable, therefore, to expect that the thrift
institutions of the country will be faced with the necessity of considering an adjustment upward of their present interest or dividend
rates?
Mr. MARTIN. They will try to do that. But I just do not think
that this is a leapfrog operation that can go on indefinitely. Because
competition does work in these things. And, at some level, they
would not be able to afford to pay.
Mr. KEOGH. That is right. Now, do you think that it is sound
practice for the Government so to attract from established thrift
institutions the savings dollars by paying a higher rate of interest,
with the effect that you have indicated which will probably occur;
namely, the thrift institutions, in an effort to maintain their position,
vis-a-vis the savings dollar of the country, will be inclined to raise
their interest rates, and some of the existing institutions will be
unable to do it?
My point is: Is it really essential that the Government increase its
percentage of holdings of that type of savings dollar that goes into
E- and H-bonds?
Mr. MARTIN. Well, if it is going to continue its program it is, both
on the basis of fairness to present holders and equity with respect
to prospective holders. NOW t , you may question whether that is the
right program.
Mr. K E O G H . Well, do you have an opinion as to whether that program is necessary ?
Mr. MARTIN. I think it is necessary and desirable; yes, sir. I think
it has been developed, and I think it would be a mistake to scrap it. A
lot of people disagree with me on that, and thoughtful people; but I
think it is one of the really strong things that the Government has
done in trying to get America to share in carrying this debt, the smaller
savers as well as the larger savers.
Mr. K E O G H . Then that is overlooking the patriotic motives that
prompt people to put their savings dollars into E and H, is it not?
Mr. MARTIN. I am considering that as a part of it. But I think
that has been of real value to the country, both through the war and in
the postwar period.
Mr. K E O G H . And the rate of return on these bonds has been of
relatively lesser importance than the patriotic motives ?




194

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Mr. MARTIN. I think it has steadily gotten to the point, though, that
the patriotic motives do not hold up. You see, the trend has been
against that.
Mr. KEOGH. N O W , let me ask you this question. Do you have an
opinion as to the relative inflationary or antiinflationary effect of a
savings dollars going into an established thrift institution or going into
an E- or H-bond? Which one is more or less inflationary or antiinflationary, if either is ?
Mr. MARTIN. I do not think there is any real question there. The
Government is spending the money in one instance, and the thrift
institutions are investing it in the other.
You are placing the debt in the hands of nonbank holders. That
is the main point there.
Mr. KEOGH. D O you not agree that, for the most part, the investments made by thrift institutions are in capital assets that produce
income rather than just going for consumer goods, that the Government spends so much of its money for ?
Mr. MARTIN. Well, the Government does not put all of it into
consumer goods.
Mr. KEOGH. NO, I appreciate that.
Mr. MARTIN. I think that it is noninflationary in either case.
Mr. KEOGH. In either case. Well, one more, or one less ?
Mr. MARTIN. I think that with the program that we have, the savings bond program, as it has been developed, it has been really a major
factor in trying to keep the Government debt in a noninflationary
way.
Mr. KEOGH. I appreciate that, and I am inclined to agree with you.
My only concern is whether that program is so justified as to warrant
their coming in now and asking for virtually a half percent increase in
the rate of interest paid on those types of bonds. And I am looking
for some expert help on it.
Mr. MARTIN. Well, I think we can agree that the present interest
rate level is such that a prospective purchaser would feel that he did
not have any warrant in buying a series E- or H-bond on any other
basis than patriotism or just desire to hold something in the Government. I think that is not a good situation.
The CHAIRMAN. Mr. Baker will inquire.
Mr. BAKER. Let me ask one question, Mr. Martin. In answer to a
question of Mr. Forand concerning the advisability of extending taxexempt status to interest on Government bonds, you stated that one
major factor would be a substantial revenue loss. Do you know what
that would amount to ?
M r . MARTIN. N O ; I d o n o t .
Mr. BAKER. I figured it out,

and I think I had this figure, from the
Treasury, of 1.9 billion. We pay $8 billion in interest annually, as
I understand it. So if you applied the 25-percent effective rate, it
would be somewhere in the neighborhood of $2 billion.
Mr. M A R T I N . Right.
The CHAIRMAN. Mr. Boggs will inquire.
Mr. BOGGS. The point has been made to many of us that the Federal
Reserve System has tried and is trying to carry out its function almost
entirely through increasing the interest rate rather than through such
devices as selective credit controls and higher reserve requirements.
Would you care to comment on that ?




120,
195 PUBLIC DEBT AND INTEREST RATE

CEILINGS

Mr. MARTIN. I will start on the first one first, Mr. Boggs. The only
selective control we have is the stock market regulation. Regulation
of consumer credit and regulation of real estate credit we do not have
at the present time.
On the reserve requirement, as I commented in my statement, I think
that it is a difficult tool to deal with, but if you are going to put reserve
requirements up you are going to cause sales of Government bonds at
the present time, with the demand for credit. Now, that just puts
pressure on the Government securities market.
I remember very vividly when I was in the Treasury when reserve
requirements were put up to 24 or 26 percent in 1950-51, and we had
a pegged Government market. All that happened was that these bonds
were dumped in on us at par, and 22/33, where we stood at the present
time, and we had not made any net gain at all.
I personally think that requirements—I have testified frequently
that reserve requirements for the growth and development of the
country that I see ahead of us, are too high, and that I would hope
that we would get ultimately lower reserve requirements. Every time
I have said that, the press has jumped up and said, "We are going to
lower reserve requirements day after tomorrow." But I am talking
about a longer range thesis, and I want to see this country always have
an adequate money supply, but I do not want to see inflation created,
and I do not think it is going to be a substitute to say we will raise
reserve requirements at the present time and just force additional
sales of Government securities that either we will have to buy or the
banks will have to buy. There is no net gain in that.
Mr. BOGGS. D O you feel that a so-called tight-money policy prevents
inflation ?
Mr. M A R T I N . I think it is one of the factors that are very helpful
in it.
Mr. BOGGS. In the type of an economy in which we are living, with
the tax structure we have, this means that any corporate borrowing—•
52 percent of it is written off right away for tax purposes. So I do
not see how interest rate has any perceptible effect on any large corporate expansion. It seems to me the old law of supply and demand
must have the deciding influence. It might have a very definite effect
on small businesses that cannot afford these high interest rates, and
upon the municipalities and others which are now paying these outrageous rates for money.
Mr. MARTIN. Mr. Boggs, all I can say on this matter of interest rates
is that all my life I have had people tell me that interest rates do not
make any difference, and at one point, I was on the floor of the stock
exchange
Mr. BOGGS. I did not quite say that, Mr. Martin. But you go ahead.
Mr. MARTIN. I am trying to put it in perspective.
Mr. BOGGS. Right.
Mr. MARTIN. And my experience with it has been that it has much
more influence than you realize.
Mr. BOGGS. Where does it have the influence ? That is what I am
trying to find out.
Mr. MARTIN. It has the influence on forcing people to study their
costs at all times, even though they are willing to pay the price. That
is one of the important things.




196

PUBLIC

DEBT AND

INTEREST

RATE CEILINGS 120,

Mr. BOGGS. I am trying to find out. What people ?
Mr. MARTIN. All people. You said the wealthy corporation does
not pay any attention to it. I think they do.
Mr. BOGGS. Would you say they pay as much attention to it as the
fellow who has got to go down to the bank and pay 6 percent and
whose business condition may be such that he does not have any tax
writeoff at all ?
Mr. MARTIN. I will make this observation on that, that I have seen
a lot of people sign contracts that were not 6 percent but 12 percent or
15, that they did not understand or did not pay attention to. I have
seen a lot of corporations study that contract pretty carefully. When
people have got it, you can make that argument either way.
Mr. BOGGS. There is one thing about this I do not understand at
all. I want you to understand that I do not understand. I am just
asking questions.
I read in this morning's paper that the month of May showed the
highest income that we have had in all history, and yet Government
securities are the weakest they have ever been. What accounts for
that?
Mr. MARTIN. As I tried to point out in my statement, Mr. Boggs,
whenever you are having a period of prosperity, there is a tendency
for interest rates to rise. That has always been true, on just normal
factors.
Now, when the Government ran a deficit of the size that it did a
year ago, and interest rates got down to the levels they did a year ago,
some adjustment was likely to occur. Now we have had some stabilization, and interest rates have been behaving fairly well in the last
few weeks. I do not say they will continue. I do not know. But I
mean these adjustments take j)lace. But rising interest rates have
never been a sign of weakness in the economy. That does not mean
that you are trying to produce them. They have been a sign of growing confidence and of a willingness to use that device.
Mr. BOGGS. Y O U seem to be avoiding my question, if you will pardon me for saying so.
I did not ask you about the rising interest rates on Government
securities. I asked you about the declining value of the Government
securities, 80, 82. How long has it been since they have been that
low?
Mr. M A R T I N . Declining prices for Government securities is just
the other side of the coin of rising interest rates. A U.S. Government security is the safest security that there is in the world today.
When it comes to the payment of interest or the payment of principal
at maturity, you do not have any worry there. Your problem is one
of depreciation of the value of the currency.
Now, we have gone through a period of the last 10 or 12 years
where, as I have said earlier, people have constantly said, "Where is
the inflation ? Show us the inflation." Yet the end result is that we
have a dollar today that is worth 20 or 30 percent less than it was in
early postwar years depending on what year you pick for comparison.
Mr. BOGGS. H O W much has it depreciated in the last 12 months,
this dollar?
Mr. YOUNG. Wholesale prices of industrial commodities, sir, have
risen since June of 1958 about %y2 percent.




197

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

120,

Mr. BOGGS. Y O U did not answer my question.
Mr. Y O U N G . That would mean that the dollar in wholesale markets
for industrial commodities has depreciated somewhat less than
percent.
In the consumer markets, the cost of living has been relatively
stable over this same period. So that, in this period the consumer's
dollar has not depreciated in value. If you take a longer period,
then the consumer's dollar has depreciated in value.
Mr. BOGGS. In the last 12 months, from the point of view of what
the purchaser can buy with his dollar, you had the most stable dollar
you have had in how many years? There has been no depreciation
at all. You just said that.
Mr. Y O U N G . I beg your pardon. I did not say that.
I said the dollar at wholesale in industrial commodity markets has
been losing its value.
Mr. BOGGS. And what is the situation from the consumer standpoint ?
Mr. Y O U N G . The consumer's dollar has maintained its value. Now,
a rise in wholesale industrial prices tends to exert upward pressure on
retail prices. It takes some time for these matters to work out.
Mr. BOGGS. Well, you are predicting
Mr. Y O U N G . I do not w^ant to be in the position of predicting.
Mr. BOGGS. Then what significance does your statement have?
Mr. Y O U N G . Retail prices are in part made by wholesale prices.
Mr. BOGGS. S O you are now saying, as I understand, that some time
in the predictable future, the consumer's dollar will decrease 2 percent
in value ?
Mr. Y O U N G . I do not want to be in the position of saying that, price
trends may change.
Mr. BOGGS. That is what I want to get straight.
Mr. M A R T I N . Let me just pick it up and say that that goes back to
what I was trying to point out earlier. You can take several periods
in the last
Mr. BOGGS. Wait a minute, Mr. Martin. I want to get right back
where I was. I want to stay right there.
I asked a simple question about what had happened to the dollar
in the last 12 months, and this gentleman said, on the wholesale index
it had declined 2 percent. From the point of view of the consumer,
he said it had been stable. So then I said to him, does this mean that
the consumer dollar will decline a further 2 percent, and he said he
would not make that assumption. That is where we are, as I see it.
Mr. M A R T I N . All right. Let us leave it right there.
Mr. BOGGS. S O what is the consumer dollar worth today as compared to the last 12 months ?
Mr. M A R T I N . I think that statistically it is worth about the same as
it was 12 months ago.
But it is worth somewhat less in terms of the confidence factor,
which I also think is one measure.
Mr. BOGGS. Y O U do not quite agree with your colleague.
Mr. M A R T I N . I do not think we are in disagreement.
Mr. BOGGS. I am trying to find out, and I am sure you understand
my line of inquiry, where this inflationary thing is coming from.
Here you have had this tremendous deficit situation, $13 billion, which




198

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

is the largest peacetime deficit in the history of the United States.
And by some strange coincidence, you have this magic thing that
everybody sees, a stable dollar. Is there any correlation between the
two? Does this mean a $13 billion deficit gave us a stable dollar?
M r . MARTIN. NO.
Mr. BOGGS. What does it mean ?
Mr. MARTIN. It means that the

forces which are actually in the
economy, many of which had worn themselves out during the period
of 1957 and 1958 recession, have, so far as the cost of living index at
this particular juncture is concerned, stabilized themselves.
Now, let us take the cost-of-living index, as an example. We had it
in 1955 where manufactured items were going up and farm prices were
declining. That preceded a period where shortly thereafter you had
the combination of both of them going up, and then we were in trouble,
and we were not very happy at that time, because the farm prices were
declining.
Now, you are having somewhat of that same factor here. You are
having some prices that have been moving up, and we have had farm
and food prices, on the whole, declining. Now, the composite makes a
fairly good picture during this particular period.
But I do not have the slightest hesitation, and I stand on what I
said in my statement, in saying that the pricing process as it affects
world markets, the lower level of exports, the general pricing of American exports, the stability of our imports, those price factors are things
that have given concern to people with respect to the future value of
the dollar. And part of the problem we have to deal with is this confidence factor.
Mr. BOGGS. Mr. Martin, if this is inflation, it certainly is not in the
traditional sense of excess dollars knocking up against not enough consumer goods. Are there any consumer goods in short supply today ?
Mr. MARTIN. There probably are some; at least, some at prices higher than many consumers want to pay, which is what shortage of supply
means to them. I am not familiar enough with the picture to pinpoint
them. But the big thing here is to return to this process. The process
of inflation is what created the temporary overconfidence that we have
had in the economy and the slack is now being taken up.
Mr. BOGGS. What do you mean by overconfidence? Is it overcapacity, or underconsumption ?
Mr. MARTIN. Overcapacity in the sense of not being able to sell your
product at a price that people are willing and able to pay. If you
give goods away, you do not have to have a payment factor, and you
have a different story. But we built up very rapidly in 1956 and 1957,
and part of it was the expectation of meeting higher prices and passing
the price on to the consumer. That always ends in a period of, in this
country,. I am glad to say, temporary overcapacity. We are coming
out of a period of temporary overcapacity, and the thing that you saw
in the paper this morning on capital spending is one indication that
we are coming out of it. We want the development of this, as it goes
along, to be sustainable capacity, in the sense that they can produce the
product and sell it at a price that people are willing and able to pay.
Mr. BOGGS. We have had no reduction in the debt for a good many
years. As a matter of fact, the administration has been in here asking
us to increase the ceiling again.




120,
199 PUBLIC

DEBT AND INTEREST

RATE

CEILINGS

How much more does it cost to finance the national debt now than it
cost 8 years ago ?
Mr. MARTIN. Several billion dollars.
Mr. BOGGS. How much does it cost tofinancethe national debt now?
Mr. MARTIN. It is over $8 billion.
Mr. BOGGS. About $ 8 Y 2 billion; is it not ?
Mr. MARTIN. That is correct.
Mr. BOGGS. If this interest rate continues to go up, with a national
debt approaching $300 billion, how much money do you think it will
take us tofinancethe national debt %
Mr. MARTIN. I am trying to get the interest rate to go down, and I
think that this measure will be one of the things that will contribute
to it going down.
Mr. BOGGS. Y O U think that the increase in governments will decrease other interest rates ?
Mr. MARTIN. I think in relation to the business picture today, if
the Government cannot get financed on a sounder basis than it is at
the present time, it will make it impossible to finance the Government
at a lower rate than at present.
Mr. BOGGS. I really do not understand that at all. Because from
what I have been told by the administration, there is great competition for money; with industry seeking to expand, and so on, and
looking for money, the building and loan associations looking for
money to build houses, and so forth and so on. And now you say
if you make governments more attractive and you put more money
in governments, you will run the interest rate down. That, I do not
understand.
It would seem to me that building and loan association A would
say, "Now we must raise our interest rates to 4 percent in order to
get Congressman Keogh to deposit his money there."
Mr. MARTIN. I think that is only the short-run implication. My
conviction is that with the present state of the Government finances,
it is imperative to demonstrate to people that w^e are going to have
fiscal and monetary responsibility, and that, if this is demonstrated, it
will do a great deal to lower interest rates in the period ahead.
I think that the only real way you will lower interest rates is by
reducing the level of borrowing and increasing the flow of savings.
Then I think you wTill really get lower interest rates.
Mr. BOGGS. Then this means that there is no competition for this
money.
Mr. MARTIN. Not a bit of it. Competition for money is always
present, but one of the elements in this competition is the factor of
confidence in the dollar.
Mr. BOGGS. If you had complete confidence, now, let us say, in
governments, wrould this mean that you would have less confidence in
the building and loan associations and the other places competing for
this money ?
Mr. MARTIN. No, we would have more confidence in all of them.
Mr. BOGGS. SO there would be more demand for the money ?
Mr. MARTIN. No, more supply.
Mr. BOGGS. What would happen ?
Mr. MARTIN. Well, you are talking about borrowed money now ?
Mr. BOGGS. Certainly.




200

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Mr. M A R T I N . Well, I am talking about savings that come into this
picture, not just the fact that people want more money.
Mr. BOGGS. I do not understand the difference. When you are borrowing, it is the result of somebody's saving, is it not ?
Mr. M A R T I N . That is right.
Mr. BOGGS. SO it is the same thing.
Mr. MARTIN. Well, there is only a limited amount of those savings.
Mr. BOGG. Exactly. So there is competition for it. Is that right?
Mr. MARTIN. That is right.
Mr. BOGGS. S O you have stabilized one, and then the other one must
go up. Is that not so ? And you say it goes down.
Mr. MARTIN. Well, I think the stability comes from the relationship of bona fide savings to the flow of demand for money.
Mr. BOGGS. Has it worked that way in the past ?
Mr. MARTIN. I think so.
Mr. BOGGS. That is all, Mr. Chairman.
The CHAIRMAN. Mr. Curtis will inquire.
Mr. CURTIS. First, let me say that I have appreciated your very
clear statement.
One thing in response to a question by Congressman Boggs about
the effect of the $13 billion deficit: Would you not agree with me that
we have not yet felt the effect of it; that that is what we are coping
with right now? So, I doubt if it would show up at this time, at
any rate, in either the Consumer Price Index or even the Wholesale
Price Index. That is the $13 billion deficit that has been created
this last year. And Congressman Boggs was making the point that
in spite of that we have not seen an increase in the Consumer Price
Index or the Wholesale Price Index, and as I gather what he is trying
to imply, this was not a very great inflationary factor.
And the question asked was: Is not the effect that will come from
a $13 billion deficit something we are beginning to experience about
now and we would not in the normal course have experienced it in
the past 6 months ?
Mr. MARTIN. N O question at all about it. I agree.
Mr. CURTIS. I was a little surprised that he made that statement,
I might say, inasmuch as he is on the Joint Economic Committee,
and in our hearings in January and February on the President's
Economic Report, almost all the economists, whatever their shade
of belief, said that we would not be able to feel the inflationary pressures probably until around May or June. I think they even predicted
a little bit later. But almost all of them said that we would begin
to experience the pressures about then.
And I have been quite interested to see how accurate their predictions
have been, because I think the May Consumer Price Index did go
up a tenth of a percent. That was the first indication.
And I think Mr. Young pointed out that the Wholesale Price Index
would precede the Consumer Price Index.
I just thought that was important, because the people were being
lulled into the belief that because we were able to maintain price
stability in the past 12 months, we do not need to worry about the
financing of the $13 billion deficit and these other inflationary pressures. I am afraid we are going to be badly damaged by the situation.
Would you agree with that ?




201

PUBLIC DEBT AND

INTEREST

RATE

CEILINGS

120,

Mr. MARTIN. I would agree with that.
Mr. CURTIS. One other point I want to stress, because—I might say
that these questions are necessary because of the job that this committee or any committee has in presenting measures on the floor of
the House—our job is to try to explain to our colleagues just what
we have learned in these hearings. I find that there is one great misconception about the Federal Reserve Board, and I note in your preliminary remarks you stated that you are appearing here not as
spokesmen for the administration but as Chairman of the Board of
Governors.
Now, in your capacity as Chairman of the Board of Governors of
the Federal Reserve Board, you are not a part of the administration,
is that true ?
Mr. MARTIN. That is correct.
Mr. CURTIS. And, in fact, there are some who state that the Federal
Reserve Board in some respects is an arm of the Congress. I do not
know that it is exactly that, either. I doubt if it is. But I wonder
if you would just express, if you can, briefly, just what the independence of the Federal Reserve Board means, so that we do not get that
in argument when we debate this on the floor.
Mr. MARTIN. I will not go into a lengthy discussion of it. The
Federal Reserve Board is clearly an agency of the Government. The
Federal Reserve banks are quasi-Government institutions that partake in some sense of the nature of a private connotation. But the
independence that we talk of as to the Federal Reserve is independence within the Government but not independence of the Government.
We are a creature of the Congress, and the Congress has given us, has
bestowed on us, through the Federal Reserve Act, a trust indenture
by which we handle the money supply which comes from the power of
Congress to coin money and regulate the value thereof, and within the
framework of that trust indenture we can exercise the independence of
our judgment until such time as the Congress takes that trust indenture away from us.
Mr. CURTIS. That is correct. And the Executive has no control
over how you carry on those functions.
Mr. Mason is making the point that you said that you are a governmental agency, but he says that does not mean an administration
agency.
Mr. MARTIN. That is right. And it is independence within the
Government and not of the Government.
Mr. CURTIS. N O W , before what has been referred to as the Federal
Reserve accord of 1951, the Federal Reserve Board as a matter of
policy has been supporting to some degree the Government bond market; is that correct?
Mr. MARTIN. That is right.
Mr. CURTIS. My colleagues in the House in recent months have
been suggesting that the Federal Reserve Board go back, as I understand it, to the policy pursued before the accord. I would ask you:
Is there anything different in 1959 that would suggest to you that the
reasons why the policy was changed in 1951 to bring about the Federal Reserve Board, which no longer pegs the bond market—is there
any difference that should make us change that policy now, in your
judgment?




202

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

^ Mr. MARTIN. Well, quite the reverse. My view is that at the present
time we do not have any nearness to war that would make possible
invoking anything that would help us in the field of control.
Now, prior to the Treasury-Federal Reserve accord, you want to
understand clearly that Federal Reserve did this of its own volition.
Mr. CURTIS. That is right.
Mr. MARTIN. It was not forced on it.
Mr. CURTIS. That is right.
Mr. MARTIN. And the reason that it did it of its own volition w^as
that, during the war, we were faced with wartime finance. And
then when the Korean war came along we were one step removed from
wartime finance, but nevertheless it was a national emergency, and
we were still coming out from under the harness of wage and price
and materials controls of the war, and we were able to suppress inflation to a large extent through that wartime period.
And it is my view that, today, if the Congress gives us instructions
to peg Government securities, we will, of course, do the best we can
with that directive, but my guess is that it not only will not be successful but that interest rates will actually rise instead of being stabilized.
And that is the judgment that you would have to make.
Mr. CURTIS. I think that a suggestion my colleagues have been
making is to go back before the 1951 accord and see the economic
forces that brought about the complete change that followed.
I remember Senator Douglas made a very lengthy speech on that
subject, pointing it out. And the one thing that he said there in
answer to those who said that we would have to pay more interest,
that the Federal Government would have to pay more interest, in
handling the Federal debt, if we stopped pegging the Government
bond market, his answer was "Yes," but that the Federal Government being such a purchaser of goods in the market was paying four
times the additional amount they would have to pay in interest
through the inflation that resulted in the increased prices for goods
and services the Government had to pay.
And I think that was one of the underlying factors in changing
the situation into the present accord, which is still in effect, is it not ?
Is not the 1951 accord largely in effect ?
Mr. MARTIN. The 1951 accord is just a milestone.
Mr. CURTIS. But it has not been reversed.
Now, on page 6, you make this statement, in the third paragraph,
the last sentence:
The suppressed inflation that resulted, w e are now well aware, burst forth
eventually in a very rapid depreciation of the dollar and even threatened to
destroy our f r e e economy.

Now, the threats to destroy our free economy are borne out, would
you not say, in the fact that we went to various credit controls and
even to consumer-price controls. Is that an indication of what you
mean as to the damage that results from this kind of process, or do
you have something else ?
Mr. MARTIN. What I had in mind there, really, was that the whole
basis of operations in the market was threatened in such a way that we
were going to move in the direction of overall Government control.
Mr. CURTIS. Yes, sir. I hope our colleagues in the House will bear
that well in mind, that that is what we experienced before 1951, and




203

PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

it is exactly what we will experience, in my judgment, and as I understand your judgment, if we try through artificial means to change
what might be the free market value of money.
One other epithet or shibboleth that is constantly used—and I heard
it used again by my colleagues on Friday here—is this "tight-money
policy." It will be used again. But I want to try to pin that down
to some degree, if I may.
The tight-money policy, as I understand it, is not a situation created
by the Federal Reserve Board, but rather the reaction of the Federal
Reserve Board to a money situation. That money situation is where
there is an increased demand for money and, in order to react to that
economic phenomenon, the Federal Reserve Board then tightens up
so that we do not get more money in the economic system than we
can handle and maintain price stability.
Is that accurately stated ?
Mr. MARTIN. Yes, sir; that is accurately stated. And in the money
stream, we are talking about the velocity of money as well as the
quantity.
Mr. CURTIS. Exactly. As I remember the old formula, it is not
just the amount of money; it is the velocity of money. And I have
been a little bit surprised in questioning by some of my colleagues to
see so much attention paid to the amount of money without the same
regard being paid to money velocity which, I think, you have brought
out.
Conversely, the Federal Reserve, when there is a situation where the
demand for money has eased considerably, where the regulatory reaction of the reserve is in that regard, so that, as I understand, your
objective is to create, if you can do so, the right amount of money in
an economy at the right time.
Mr. MARTIN. That is correct. That is correct. We do not ever
want a period when there is not an adequate money supply. But we
do not want that money supply overflowing.
Mr. CURTIS. Because that damages economic growth, it creates recession. I would hope that when this debate comes up on the floor of
the House we do not hear the phrase "tight-money policy" as if it were
something that were the creation of the Federal Reserve Board, but
rather it is the reaction of the Federal Reserve Board to an economic
phenomenon.
Mr. MARTIN. Yes, sir; and it is the money supply that we are trying to regulate. It is not interest rates. The interest rates—some
people think it is subtle, but there is just a misconception that you are
setting an interest rate.
Mr. CURTIS. Interest rates are set by the demand for money in
the free market; is that not right ?
Mr. MARTIN. They are influenced. I am not saying that we do not
have a managed currency. We do. They are influenced. But I do
not think that they can be influenced against these wider forces
indefinitely. They may be for periods of time, but not indefinitely.
And that is one of the saving graces in Federal Reserve policy, in my
judgment, which means that errors will be forced to be corrected from
time to time.
Mr. CURTIS. I am like the Chairman. I have lots of questions, but
I do not want to trespass on the committee's time.
41950—59—14




204

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

There is one final point I would like to try to clarify if I can, or
bring out.
The Chairman has brought out that probably there might be some
competition on the part of the Government going into the money
market, where competition would provide for private enterprise's need
for these same funds.
There is the matter of going to the banks, for example, for building
and equipment, and so forth, that industry needs for its expansion.
But essentially should not industry be financing this kind of expansion through new equity capital rather than through debt financing,
particularly bank debt ?
Mr. MARTIN. Well, particularly bank debt is bad.
Now, because of the tax problem and others, there has been a
tendency to go into debt, when, in my judgment, people would be wiser
to go into equity.
Mr. CURTIS. I could not agree with you more. And, of course, to
me it is one of the greatflawsin our present tax structure, in connection
with some of these shibboleths my friends have been using when they
were attacking debt credit, which was actually an attempt to shift a
lot of this debt financing into equity financing, which, if achieved,
would have produced more revenue and not less, because we do get more
revenue from equity financing than we do from debt financing.
Mr. MARTIN. One of the dangers in the present picture is that as
these pressures for funds develop, the banks are increasingly moving
in the direction of the type of loan they ought not to be making.
Mr. CURTIS. I agree with you.
Now, one advantage that has not been expressed of this increase of
interest rate, I imagine would be to encourage corporations possibly
to finance more of their growth through new equity issues. We are
now getting into a situation in the market where we might consider
financing new equity issues.
Would you not say that is a proper observation ?
Mr. MARTIN. I would say that is a proper observation.
I would also say, as long as you had a wide disparity between the
income that you get from common stocks and the return on bonds, at
some point ^ou will have to have an equalization of that if our economy
is to resume its
Mr. CURTIS. There was one other thing I did mean to mention that
had not been mentioned before. It is just an item, but I noticed in
the bill proposed there is a feature of it that would require us to pay
into the trust funds, which mean the social security fund, interest
which would average out the kind of interest we are paying on other
governmental securities. I was happy to see that, because, incidentally, that is going to help us a little bit in our financing and some of
these other things.
I would think that that would tend to be deflationary to that extent.
I do not think it is a big item, but to the extent it is there, it would seem
to me to be deflationary.
Would you agree with me ?
Mr. MARTIN. And sound financing.
Mr. CURTIS. And sound financing; yes, sir.
The CHAIRMAN. Mr. Ikard will inquire.
Mr. IKARD. I was very interested in Mr. Curtis' expression of his
hope that we would stop using the term "tight money." I have




120,
205 PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

been operating under the impression for some time now, for instance,
that the Guaranty Trust Co. of New York was an organization that has
some understanding of fiscal affairs, and I notice in their letter which
arrived in my office today, and I assume everybody got it, they refer
to further tightness in money conditions. And I have noticed on
previous occasions that they have used the phrase "tight money."
So there must be some validity to that term, and I do not want to
get into any petty argument here about terms. But if we have been
using the term "tight money" wrongly, I would like to be informed.
Mr. M A R T I N . Well, we get into semantics on this, I think. And
I think it means that the demand for money is constantly building up
and tending to outrun the supply. And that is a situation that is
not brought about by conscious effort to raise interest rates. That
is brought about by the flow of money.
Mr. I K A R D . But it is a fair descriptive term as to the money market
at particular times, is it not ?
Mr. M A R T I N . I will agree with Mr. Ikard that we have worked
like slaves to find other phrases, and that is probably as good as
any.
Mr. I K A R D . That has been my impression, too.
Mr. C U R T I S . Will the gentleman yield ?
M r . IKARD.

Yes.

Mr. C U R T I S . I was not objecting to the phrase "tight money." I
was trying to point out that it was not a phenomenon created by the
Federal Reserve Board.
Mr. I K A R D . I am sorry. I misunderstood you.
Mr. C U R T I S . The Federal Reserve Board was reacting to that phenomenon.
Mr. I K A R D . Yesterday, Mr. Martin, I also raised a question that
Mr. Curtis alluded to, and that was this matter of there being not so
much money available.
If my recollection serves me right, in the last 6 years the amount
of money available has increased something like 11.8 percent, while
our gross national product has increased roughly 26 percent.
Taking into consideration the velocity during that period, as well
as the amount of money available, has the growth in money been
about right, or should it have been more or less ?
I would like to have your comment on that.
Mr. M A R T I N . Well, I will comment. All I can do is give you my
judgment on it.
Mr. I K A R D . That is what I seek.
Mr. M A R T I N . And I also want to say that although money statistics
is the main product of the Federal Reserve Board in one sense, I
am by no means sure that we have found the right way of handling
it. It is our major activity, and we are working on it.
My own judgment, Mr. Ikard, is that it has not only been adequate ;
it has been slightly more than adequate during that period.
Now that is a judgment on the statistical measurement, both putting
quantity as well as velocity into it, and relating it to the whole period.
Mr. I K A R D . Your best judgment is, as I take it, that this growth
in money, and taking into consideration the velocity, the turnover, has
not contributed to the fact that there has been a tendency for interest
rates to edge up ?




206

PUBLIC

DEBT AND INTEREST

RATE

CEILINGS 120,

Mr. MARTIN. I will not say that it has not contributed some. I
think that the demand-supply relationship and the money supply
have at some points contributed.
Mr. IKARD. But I take it from what you previously said that this
pressure on interest has been brought about largely through the
growth of our economy and a growing demand for money.
Mr. MARTIN. That is right.
Mr. IKARD. I was interested in the questions that Mr. Boggs asked
you earlier this morning, too. If I may go back to that a moment, the
question I think he put was substantially this: Assuming so many
dollars available in the money market, if you make the long-term
Government securities attractive to the point where the money moves
into that area, would that be inflationary ? You would be taking this
money out of the market.
Mr. MARTIN. N O , I think the inflationary impact comes in the
short end of the market, in the bank created money; yes, sir.
Mr. IKARD. I understand that. But as someone else said here, I
have no opinion, I am just seeking light.
I do have a question in my mind about what we are really talking
about here. I do not think it is whether it would be a desirable
situation to have it not all long term or short term. Is it not the
matter of balance that we are most concerned with ?
Mr. MARTIN. Exactly. That is one of the reasons I think it would
be desirable for the Treasury to have the authority, so that when
they come up to a situation like this, they could balance it better.
You see, now they are limited by exactly where they stand, and
balance, I think, is exactly the right word.
Mr. IKARD. Another question in that area. Let us say I put my
money into a savings and loan association, and they lend it to you,
let us say, to build a home. Why is that anti-inflationary ?
Mr. MARTIN. Well, savings and loan institutions
Mr. IKARD. Or any other savings.
Mr. MARTIN. Well, just using that as an illustration, it is because
that is on a basis of a certain number of years to pay off that loan, and
that has come out of savings that they have attracted, which are then
placed at a rate of interest; whereas if the banks create the money to
do that, you are just adding to the money stream, without tapping the
savings flow at all. That is the real weak link here. I am not against
bank-created credit w^hen it is being properly used, but if it is being
siphoned into long-term housing projects of individuals it is not
performing its function of being a commercial bank and adequately
protecting the deposits of its customers.
Mr. IKARD. Let me ask you this. It has been suggested to me—
this is not my idea, I want to make that clear, but it has been suggested—that in order to solve the dilemma with reference to the E
and H bonds, we could adjust them to the cost-of-living index, and
make them an anti-inflationary security. The reason would be that
people do not now buy them, because they do not have the confidence
which you have spoken of several times this morning. If we issued
a savings bond that would guarantee at the end of its term the return
of the principal plus sufficient interest to take care of any increases
in the index during that period, we would have no problem selling
it plus the fact that it has been suggested that it might also serve
as some stimulus on those of us in Congress to keep the index down.




120,
207 PUBLIC

DEBT AND INTEREST

RATE

CEILINGS

Mr. MARTIN. I think it would be a tragedy for the Government to
accept the necessity of having a bond tied to a cost-of-living index.
If we cannot manage our affairs in such a way as to have a currency
which people can expect to save and have approximately, not exactly,
the same value over a period of years, but have to have some built-in
insurance for it, then it seems to me we are just following a policy that
ultimately the American people are bound to repudiate. I do not
think this is an issue of party lines at all. I think this is just a matter
of the unit of currency.
Mr. IKARD. And then will it not be a fact if you tied too many things
to this cost-of-living index that every time we moved a point we would
have to readjust our own society ?
Mr. MARTIN. Exactly.
Mr. IKARD. I believe that is all, Mr. Chairman.
The CHAIRMAN. Mr. Martin, would it be possible for you to be
back at 1:30?
Mr. MARTIN. Whatever time you say, sir.
The C H A I R M A N . Without objection, then, the committee will adjourn until 1:30.
(Whereupon, at 12:25 p.m., the hearing was adjourned until 1:30
p.m., this same day.)
AFTERNOON SESSION

The C H A I R M A N . The committee will please be in order.
Mr. Alger will inquire, Mr. Martin.
Mr. ALGER. Thank you, Mr. Chairman.
Mr. Martin, I just returned from the floor where they are talking
about the wheat bills. I thought we had trouble understanding some
of the technical details of debt management, but I think we are in as
much trouble in that field and it is as difficult to understand as this
one.
Referring to your statement this morning, which I enjoyed very
much, I had the privilege of getting it early and studying it before
arriving here today, I want to ask you several things relating to
your testimony.
On page 2 and again on page 10, you speak about interest rates in
periods of boom and recession, and make the general point that interest rates rise in periods of boom and decline in periods of recession.
Yesterday Secretary Anderson spoke to us about the interest rate
in relation to deficit spending by the Federal Government as against
the period, and the only one he could use as an example was during
the twenties, when there was a Government surplus.
My question to you is this: What would be the effect on the interest rate if Government created a sizable surplus and started paying down the debt ?
Would this not have a depressing effect on the interest rate or a
lowering of interest rate ?
Mr. MARTIN. It would have that effect if it went on for any length
of time.
I think you have to look at it practically that in a period of boom
you have to take your opportunity to build a surplus and to pay
down, and then you will reverse that when the boom tapers off and
stability occurs, and you resume your open pressures.




208

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

It would be one of the adjusting limits in the economy.
Mr. ALGER. Your basic point is, which I certainly do not contest,
that the interest rates rise in time of prosperity and decline in times
of recession. The rise in times of prosperity, where because of growth
and expansion everyone is seeking money, would be offset appreciably
if the Government over a sustained period collected more money, in
other words, more receipts, than it spent, would have the effect of
doing the very thing you are trying to do; stabilize the interest rate.
Mr. MARTIN. That is right, exactly right. There is no question in
my mind.
Mr. MASON. Would the gentleman yield ?
M r . ALGER. Y e s .
Mr. MASON. $5 billion

taken out of the money market and $5 billion put into the money market by the Federal Government in paying
its debt makes it $10 billion in the effect upon the interest rate.
Mr. ALGER. YOU would agree with that ?
Mr. ALGER. On page 3 you say in the middle of the page:
Mr. MARTIN. I think in general.
This has been a period of great economic growth, very active demands f o r
credit, further monetary expansion, and continuing, though perhaps abating,
. inflationary measures.

My question is, Do you feel that the inflationary pressures are abating, in reference to the question of Mr. Curtis earlier, in which he
pointed out that the Joint Economic Committee has felt that the
impact of the $13 billion deficit last year has not yet fully been felt,
what did you mean ?
Would you expand on that "though perhaps abating" ?
Mr. MARTIN. Yes. I was referring there to the world, not just to
the United States. I start out:
Since the stabilization of monetary systems in key countries * * *.

Recently there has been a tendency for inflation as a problem to
abate in a number of countries in Western Europe. One of them has
been France that has taken very heroic measures to handle their
fiscal and monetary affairs and seems to be making real progress.
I agree completely that the problem in this country has not yet been
solved, particularly because of the deficit that you are referring to*
and we are frequently getting the comment that I referred to this
morning here: Where is the inflation ?
I counter that by asking, "Does anyone think there is no danger of
inflation at the present time, with a debt of this size having been
built up over a period of the last year and the momentum that the
economy is currently enjoying?"
Mr. ALGER. There is the possibility, therefore, of the inflationary
pressure here, though in the world they might have been abating?
Mr. MARTIN. I only say abating. I don't say that they have been
eliminated.
I was pinning that not to the United States, but to the world economies, and that ties in with the latter comments with respect to the
price level in the world.
Mr. ALGER. I appreciate that, Mr. Martin.
You bring up another subject which I do not believe has been developed, and I realize it is a very technical one.




209 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

On page 4 in the paragraph beginning in the middle of the page,
you refer to the effect of our necessarily high tax structure on the
effective rate of interest. Then you mention the borrowers' net cost,
the lenders' net return, and below you say:
On its own taxable bonds, the Federal Government, through the income tax,
recaptures a substantial share of the interest it pays.

Mr. Martin, I do not recall ever having heard this argument developed fully, although I am a newcomer on this committee.
Mr. MASON. The effect of our heavy taxes upon the interest rate has
never been mentioned before us.
Mr. A L G E R . I S there anything further you could add to this ?
You just touched on it and left it. Many of us are worrying about
the progressive nature of our taxes, not only the high taxes.
What are the effects ?
Does it kill the desire to invest ?
We know it kills somewhat the desire to earn.
Mr. M A R T I N . I think the effects are cumulative. We touched on
some of them this morning and the desire to use debt in preference
to equity investment on the part of some, but the point I was trying
to make here basically was that people say, "Aren't these outrageous
levels of interest ?"
While we want as low interest rates as we can have, we also want to
point out that in perspective they are not exactly the same as they
seem because of the tax relationship. They are actually not as high
as they appear to be because of the tax relationship. That is not a
justification for their rising, but it is something to be concerned about
and to consider, and there is a point, and your committee of course is
more familiar with this than I am, and I think we have skirted
around it, in this country where taxation is progressively destroying
the incentives in the economy and therefore impairing the saving ana
investment process.
I think we ought to have a tax structure as well designed as possible,
and this is not meant to be critical of anything in our present tax
structure, but our tax objective ought to be to have a system which
will provide the incentive for saving and investment, and building the
economy in that way instead of tearing the economy down by reversing it.
Mr. A L G E R . I certainly appreciate your concern for that and the
fact that you even brought it up.
Without taking more time now, could you direct me, or at some
other time direct me, to anything that treats of this?
Do you recall any material written on the effect of progressive or
high taxation on investment and interest rates ?
Mr. MARTIN. We will search our files and see what we have, Mr.
Alger, and be glad to give it to you later.
Mr. ALGER. I would certainly appreciate it, if you will, sir.
On page 8 you bring up something else I know very little about, and
I only want additional comments if you feel they are appropriate in
the way in wThich you mentioned them.
You said, at the bottom of page 7:
Ultimately, if the gold reserve requirements to which the Federal Reserve is
n o w subject were eliminated, the System might acquire a large proportion of
publicly held Government debt of over $200 billion in this way.




210

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

I do not understand that.
Mr. MARTIN. At the present time the Federal Reserve has to have
against its deposit liabilities and currency in circulation 25 percent in
gold holdings. That is in the Federal Reserve Act.
The point I was making there was that if that were eliminated as a
requirement, we could continue to acquire assets up to what is virtually
the limit of the total marketable debt of the United States without
violaing our reserve requirements, which is written in the Federal
Reserve Act.
Mr. ALGER. Does this necessarily imply that when we lose gold
through imbalance in trade or whatever other reason such as mutual
security, the payout of dollars, which are a foreign claim against our
gold unlike our citizens' dollars, your reserves are being cut down all
the time as this gold goes out of the country ?
Mr. MARTIN. Unless we offset it, there is no question about it.
Mr. ALGER. This weakens the amount of money you have for investment in that sense then ?
Mr. MARTIN. That is right.
Mr. ALGER. I want to look into that, too. I may call on you for a
little additional material.
Then you mention on the final page the international effect of the
value of money. Some of us have heard the expression of soft
currency.
Here you make a rather strong statement, which earlier you did not.
Here you say:
T o d a y the dollar is the anchor of international financial stability.

You also express your justifiable concern over the fact that our currency is or could be solid. Do you see any appreciable change in the
value of the American dollar in the international situation or in the
eyes of world investors recently, or a change within the last year, that
should be of great concern to us or not ?
Mr. MARTIN. I have already commented on this publicly, Mr. Alger.
I have no doubt that there is some limited speculation against the
dollar at the present time. I don't think there are substantial
proportions to it, but I think there is enough of it so that it properly
should give us some concern, and that is what I am trying to point out
here.
As the European currencies have become more convertible, or more
nearly convertible, as they have, the temptation to look elsewhere for
an anchor has increased.
Mr. ALGER. Is there some justifiable grounds for their being concerned about the United States ?
I realize that here sometimes the Government spends money we
don't have, for example, $13 billion last year.
Do foreign nations now fear our fiscal soundness and spending programs?
Is that what they are implying ?
Mr. MARTIN. I think that is what they are thinking.
Mr. ALGER. I asked the Secretary about our softening currency. I
do not know either; I am seeking information. Quite some time ago
he made the statement that he made here yesterday, and it is the only
other time I have heard it made. In that vein he said it is natural for




120,
211 PUBLIC DEBT AND INTEREST RATE CEILINGS

nations that are investing in us to worry about our currency, to make
sure we are solvent.
The Secretary pointed out that we are the bank for the world and
others are investing in it. With the money they build up in us, like
anybody that invests in the bank they want to be sure that bank is
solvent and their money is safe.
He said this then is a sign that actually the United States is assuming in the world's eyes more and more the role of the banker. He
made it sound like a matter of strength.
I had the idea that maybe it was not that so much as it was other
nations fearing that the value of the dollar has declined or will
decline because of our own lack of discipline or inability, which we
have demonstrated for almost 25, 26, or 27 years now, of living within
our means.
Mr. MARTIN. I think the overriding point is your latter point. I
think there is that doubt in the world today that we are going to handle our affairs.
Mr. ALGER. I appreciate that and I have suspected this to be true.
Mr. Chairman, just one other question, and I certainly appreciate
this opportunity, Mr. Martin, to get your thinking. I have had uneasy feelings as I have listened to these hearings and all of the questions that have been asked. I looked at your statement, and I studied
carefully what the Secretary said again last night, and I conclude that
there are certain natural economic laws that to the economic world
might be likened to gravity in the physical world.
We here will not change natural law.
Could you say that the interest rate is an economic law as the price
of the commodity in the marketplace, and it will go up and down
with the supply and demand of that commodity just as any other
goods might ?
Mr. MARTIN. I think it has the elements of that.
I have often thought of it and use the illustration of a thermostat.
When the weather is changing outside, you cannot worry about the
cost of the heating material that is required to keep the house at the
temperature that you desire. Interest rate is in my thinking then
one of the governors that we have on the economy generally. It is
the result of those pressures. We do influence those pressures.
I don't want to give the impression that we can do nothing about
it. We have a managed currency in the Federal Reserve and we have
an overriding responsibility in the Federal Reserve to see that money
is available at all times, but not an overriding responsibility to keep
the price of that money from having the forces of the marketplace
reflected. And I am sure that was the intent of the framers of the
act so far as a managed currency was concerned.
If we were to be given the authority to just set an interest rate,
which is the misconception that has bothered me so much over the
last 10 years, that we could just set an interest rate at some level, then
we would have a relatively simple problem, but, unfortunately, that
isn't the way it works, unless you have control of all the elements
of the economy, and then you have the problem of enforcement.
Let me just carry on one minute on that. Take our totalitarian
friends. Some people say they don't have to worry about any of
these problems. They get growth. They are not concerned with infla-




212

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

tion. They don't have to be concerned about inflation. They just
even this thing up at any time that they want.
We cannot operate that way, and I don't think they operate it too
successfully that way, but to say that they don't realize that inflation
impinges upon the growth is I think a misunderstanding of the economic process.
Mr. ALGER. Mr. Martin, you made another statement on page 1,
as I recall, that really just hit me right. You pointed out that the
accumulation of wealth and freedom of choice are a couple of rights
in our society which to me are examples of the natural laws that we
believe don't even come from government. They only are to be preserved by government.
I will not take more of your time on this, though I enjoy your
views. As I see it, the problem now is to determine to what extent we
have natural economic laws and to find out to what extent the Federal
Reserve impinges upon them for good or bad.
If I may, I will conclude by asking you just this, and this came up
yesterday with Secretary Anderson. I was very impressed by two
points that Secretary Anderson made, and I can give you the page
and so forth to be factual.
He pointed out that we have two big dangers. He mentioned the
$13 billion deficit last year, or any deficit spending, for that matter,
spending beyond receipts. He said that this is a major factor in the
pressures for an increase in interest rate, and this in turn will result
in the inflation that hurts most of all people of modest means. That is,
the spending beyond income that the Government does.
Then he went to another point, saying that artificial interest rate
limitation also fosters inflation, which once again hurts most of all
the people of modest means.
Here is the thing which I think a lot of my colleagues in Congress
do not grasp, and I am sure as I am sitting here it is going to come out
in debate, particularly if anyone should unwisely try to use it for political gain, that by insisting on big spending by the Federal Government, spending beyond income, which fosters inflation, by insisting
on artificial interest rates, which again fosters inflation, they are hurting the very little man or the people that they want to help the most.
Would you disagree with that as a matter of principle?
Mr. MARTIN. Not the slightest.
I am convinced that inflation is the bugaboo of the little man. The
little man is almost defenseless against it.
I just make the one overall point that to me as an old investment
man hits me in the face every day, that I know thousands of trust
accounts, and I am not against trust accounts, that have done extremely well in the last 3 or 4 years as opposed to the little man,
and his savings and his relative position in the economy has deteriorated.
That is on a relative basis, but that is to me the key of the whole
thing.
Mr. ALGER. Mr. Martin, taking what I have just said into account—
just think of this—if through inflation we are jeopardizing and hurting, as you have just pointed out, the little man, and if through progressive and high taxation we are lessening the desire of people to
reinvest because of the rate of interest they get, which you pointed




213

PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

out, as 2 percent maybe, if they are in the 52 percent bracket, look
what we are doing through Government mandate. That is what
scares me and why I for one want to learn my lessons on just what
the Federal Reserve is doing relating to these natural laws.
The thing I wanted to ask specifically in this question is this:
Do you feel when we spend beyond Government receipts year after
year, spending beyond our income, this is inflationary ?
Mr. MARTIN. It is inflation, unless it is financed by selling the debt
to nonbank investors, and that is where the flow of savings comes
in to us.
Mr. ALGER. Savings naturally then are caught by taxation, and
you would say also that the limitations on interest rate through artificial means would have an inflationary effect ?
Mr. MARTIN. It causes distortions and maladjustments in the economy which inevitably lead, in my judgment, to a lower standard
of living.
Mr. ALGER. And hurt most of all those of modest means?
Mr. MARTIN. That is my absolute conviction.
Mr. ALGER. Thank you, Mr. Martin. I certainly appreciate your
statement and any help you can give me relative to these questions
I have asked, I hope you will.
The CHAIRMAN. Mr. Metcalf will inquire, Mr. Martin.
Mr. METCALF. Thank you, Mr. Chairman.
I want to pursue a little bit further some of the matters that Mr.
Alger was talking about and some of the matters that Mr. Curtis
was talking about.
Our main objective here is to find out whether or not we should
accept or reject the administration's proposals that we take the present ceiling off of the interest rate on the long-term indebtedness,
and on page 8 of your statement you gave us a little bit of an outline and an example of what would happen to a corporation under the
present tax system under a 4*4 percent interest rate.
My question is how much do we have to increase the interest
rate ? Where are interest rates going to attract that corporate investor
you are talking about ?
Mr. MARTIN. The important point, Mr. Metcalf, I thought was
brought out by Mr. Ikard here this morning, of balance in portfolio.
We are not talking about saddling everything on the long-term bond
market, but the Treasury has to be one of the people that is financed
in that way for its long-term credit needs.
Where we are going on the ultimate level of interest depends in
part upon the demands that are going to occur for interest in relation
to the growth of the economy, and to the extent that we can create
bona fide savings we can finance a much higher level of activity than
we presently have at lower interest rates in my judgment.
Mr. METCALF. However, you had in mind when you set forth that
example on page 8 that there was going to have to be an increase in
interest rate to attract this corporate investor.
Mr. MARTIN. What I was really driving at there was the charge of
many people that interest levels at the present time are outrageous,
and I was pointing out that in relating it to taxation in historical
perspective—I am not advocating high interest rates now—actually
it was not a very high level in terms of historical perspective when
you considered the tax problem.




214

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

Mr. M E T C A L F . I will accept that, but my question is: Why do we
have to increase the interest rate ?
You say if we remove the ceiling it might even go lower, but to
attract this corporate investor you must have in mind that the interest
rate is going somewhere above the 4*4 percent or you would not be here
advocating that the limit be taken off.
Where is it going ?
What is the percentage that we are going to have to increase ?
We just the other day passed out of the House the bill to maintain
the corporate tax rate at 52 percent, so we are going to keep the
income tax rate for those corporate investors at the same level.
Where is the interest rate going to go ?
Mr. M A R T I N . I can't answer it because I don't know.
Mr. METCALF. Y O U must have in mind some place that it is going
to go.
Mr. M A R T I N . N O , absolutely not. It will adjust at some level to an
equilibrium rate across the board, and I think the big problem that
the Treasury is facing today is this problem of balance in its own
portfolio. It has no real choice of how to use its instruments in the
whole market.
For example, I was in Spain just recently and a fellow said over
there, "Isn't it too bad? I just found out the other day your country
can't sell anything but short-term securities."
I said, "How did you just find that out?"
"Well, I just found out that there was a law over there that they
can't pay higher than this rate and the rate is now higher than that."
Well, it doesn't prove anything, but it is an interesting commentary
of how people sometimes look at us.
Mr. METCALF. Then you are trying to tell me that just because we
take the ceiling on interest rates off, these corporate investors that you
are talking about on page 8 will continue to come in and buy at the
present rate ?
Is that what you are suggesting ?
Mr. M A R T I N . The corporate investors are not coming in at the
present time at this rate.
Mr. METCALF. Therefore, it seems to me that you must have some
place in your mind to be able to inform us as to where we are going
to go and where the interest rate is going to go if we take this ceiling
off.
Mr. M A R T I N . I wish I could tell you that. It would simplify
my problem greatly if I could, but I can't.
Mr. METCALF. It seems to me that if you are going to suggest that
we have the balanced portfolio that you were talking about to Mr.
Ikard, you are going to have to attract some of these corporate investors that you are talking about that cannot afford to invest in
Government bonds at the present 414-percent interest rate.
What I am asking you is how much do we raise the rate so they
can afford to invest to get that balanced portfolio ?
Mr. M A R T I N . If we could give you a precise rate, we would give it
to you, but this is not a case of that. You are talking now about the
adjusting forces in the market, and I for one happen to believe that
they would balance out at lower rates than some other associates of
mine would think they would balance out.




120,
215 PUBLIC DEBT AND

INTEREST

RATE

CEILINGS

I believe that the adjustments in interest rate do not have to be as
dramatic as some people think they have to be, and I use as my background for that the Treasury-Federal Reserve accord. I was told at
that time by dozens of people that if the Fed starts pegging Government bonds, they will just fall out of bed, that any adjustment at all
will create a sensation.
As a matter of fact, a very minor adjustment produced for a temporary period of time at least an equilibrium in a market that had become clogged, disjoined, and unable to handle itself.
Mr. METCALF. Y O U cannot tell me then where in your experience
rates may go if we take this ceiling off ?
Mr. MARTIN. N O ; I cannot. I wish I could.
Mr. METCALF. Thank you.
Thank you very much.
The CHAIRMAN. Mr. Knox will inquire, Mr. Martin.
Mr. K N O X . Mr. Martin, first I want to commend you upon the great
knowledge you have of the fiscal affairs of our Nation and the way
that you have responded to the questions which have been propounded
to you here today.
Take the $1,800 million which came due in the month of May of
Federal securities, and the Treasury of course had no funds to pay off
the securities, but asked that the same holders once against purchase new securities on I think 1-year debentures, and that one-third
of the holders of those securities which were purchased at one and a
quarter precent delined to purchase them at 4*4 percent.
We have $76 billion, I understand, of securities coming due next
year; is that correct ?
M r . MARTIN. Y e s .
Mr. K N O X . Of course,

if we are unable to refinance through longterm bonds, then of course naturally the Treasury would have to go
into short-term bonds. Treasury could offer short terms at any
rate of interest which they could sell them at; is that correct ?
There is no ceiling.
M r . MARTIN. Y e s .
Mr. K N O X . What would

this do to the interest rate in your opinion,
if all of the $76 million has now to be financed on short debentures ?
Mr. MARTIN. It will drive the rate up very substantially.
Mr. K N O X . I S there a possible chance that a great majority or some
of the $76 billion may have to go into short-term securities if the
ceiling is not removed from the long-term bonds ?
Mr. MARTIN. I think that is right.
Mr. K N O X . It presents a serious problem, not only on the part of the
Treasury, but on the financial solvency of the Nation; does it not ?
Mr. MARTIN. I think it does.
Mr. K N O X . Most of these short-term securities would be purchased
by the banks of the Nation ?
Mr. MARTIN. They would be purchased by the banks and I think
you put your finger on it, Mr. Knox.
We are talking here about the public credit of the United States.
That is really fundamentally what we are talking about.
Mr. K N O X . I listened to Mr. Anderson and to the statement he
made in his prepared document yesterday. Although the Treasury
does have the option to sell bonds at 4 ^ percent, and it also has the




216

PUBLIC

DEBT AND

INTEREST

RATE CEILINGS 120,

right to discount those bonds, but the Treasury does not look favorably upon it.
If the Congress does not act, there may be a possibility—I hope
it never occurs—that the Treasury may have to discount these bonds
in order to sell them ?
Mr. M A R T I N . It is possible.
I think the Treasury has been very wise in not pursuing that
course before presenting the problem to the Congress, and I hope that
the time will never come when they have to do that.
Mr. K N O X . I think the Treasury has been very explicit in their remarks and statements to the committee here, at least that they do
have and have had this right under the law since 1942, but do not
want to have to exercise that right.
Mr. MARTIN. That is right.
Mr. K N O X . They come here now asking that the ceiling be lifted
so we may give the Treasury some flexibility in order to operate in
the bond market.
Mr. M A R T I N . That is right.
Mr. K N O X . That is all I have.
The CHAIRMAN. Are there any further questions of Mr. Martin?
Mr. Martin, again we thank you, sir, for coming to the committee
and giving us the information you have about this matter. Thank
you very much.
Our next witness is the Director of the Bureau of the Budget, the
Honorable Maurice H. Stans.
Mr. Stans, we appreciate having you before the committee on this
occasion. You are recognized, sir. You may proceed in your own?
way.
STATEMENT OP MAURICE H. STANS, DIRECTOR, BUREAU OF THE:
BUDGET

Mr. STANS. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, in support of the
President's recommendation on the statutory debt limit, I should like
to review the budgetary situation briefly as it now stands.
As you know, first of all, we ended fiscal year 1958 with a budget
deficit of $2.8 billion and with a public debt of $276.3 billion.
The revised budget figures for the fiscal year 1959, which ends
this June 30, as estimated in January, showed expenditures of $80.9*
billion, and a deficit of nearly $13 billion. While there is the possibility that the budget deficit may be as much as one-half billion
dollars less, the January estimates will not be very far from the
mark.
In view of the size of the expected 1959 deficit, it will not be possible
to come within the debt limit of $283 billion that becomes effective
on June 30 under existing law.
With respect to fiscal 1960,1 pointed out to this committee on June1
3 that as of now the only change in the January estimate of budget
expenditures which seems definite is for interest on the public debt.
Because of currently higher interest rates, this expenditure may beabout one-half billion dollars more than originally estimated.




217

PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

As the President stated in his message on Monday, the strength of
economic recovery and growth beyond our earlier expectations is now
expected to increase revenues by enough to offset this one-half billion
dollars of increased interest cost on the public debt.
There are, however, other factors, still not definite, which might
affect the total of 1960 expenditures. Here are some important
enough to deserve special mention.
Most of the regular appropriation bills for fiscal 1960 are still
pending in Congress. The same is true of major substantive legislative bills that could have important effects on the total expenditures
for the coming fiscal year.
For example, major bills approved by one or both Houses of Congress include authorizations for housing, airports, and area assistance
in excess of the amounts recommended in the budget.
While congressional action to date on appropriation bills alone
indicates the possibility of some expenditure reductions, taken altogether action on all bills thus far would, if they were enacted in present form, result in larger increases than decreases in the budget.
Other factors which should be kept in mind in appraising the
budget outlook for 1960 are the recommendations of the President
to raise postal rates and to increase taxes on motor and aviation
fuels. If these are not enacted, the expenditures for 1960 will increase
by more than $600 million, and the estimated surplus affected
accordingly.
Finally, this committee is well aware of the difficulty of predicting
expenditures very far into the future for certain largely uncontrollable
items such as the amount of surplus farm crops which must be acquired under existing laws.
In addition, there are always uncertainties about the international
situation.
Considering all these factors, I hope we can manage to hold to the
slim margin of balance estimated in the January budget. A $70 million surplus in a budget of $77 billion does not afford much leeway.
Assuming that revenues do cover expenditures for the fiscal year
1960, as estimated, the slim surplus could not effect any significant
decrease in the public debt. It therefore seems reasonable to set
the permanent debt limit at $288 billion, which is $13 billion higher
than the permanent limit before the recession-induced deficits of
1958 and 1959 occurred.
As the President and the Secretary of the Treasury explained,s
such a limit would provide about $3 billion of leeway to protect the
Government in case of unforeseen emergencies and to provide needed
flexibility for debt management.
I assure you, and I think the record shows, that the administration,,
while determined to meet our national responsibilities, will do everything in its power to achieve a balanced budget for fiscal 1960.
Nevertheless, the debt limit should take into account the closeness of
the estimated budget balance and the necessity for some margin of
safety.
In addition to the budgetary situation, the debt limit should also
take into account the Treasury's requirements for sound debt management, for flexibility in the timing of resort to the securities markets, and for adequate cash balances.




218

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

According to the best estimates of the Treasury, this requires a
temporary increase of $7 billion above the proposed permanent debt
limit of $288 billion.
The CHAIRMAN. Mr. Stans, we thank you, sir, for your appearance
and this information that you have just given the committee.
Mr. Stans, what would be your reaction to fixing the ceiling on the
public debt as of a given time rather than with respect to each day of
the fiscal year?
Say that we look at the Government's business somewhat like a
business looks at its own operations and we decide that we can have
outstanding so much debt as of a given day, June 30 of each year.
Do you see any harm in such procedure rather than having a ceiling
with respect to every day's operation of the Treasury ?
Mr. STANS. Mr. Chairman, I should think the Secretary of the
Treasury's opinion on this might be perhaps more helpful than mine,
but I would see no reason in the world why it would not be adequate
to have a yearend debt limit and allow the Treasury to have whatever
flexibility it needs in the course of the year.
I think the figures presented by the Secretary of the Treasury show
that there is quite an unevenness in the collection of taxes and some
unevenness in expenditures, and those sometimes are very hard to
predict, so that I believe the Congress would have all the controls
it wants if it had a yearend debt limit alone.
The CHAIRMAN. I wanted to get your judgment. I have great respect for your thinking in this field.
Are there any further questions?
Mr. ALGER. Mr. Chairman.
The CHAIRMAN. Mr. Stans, Mr. Alger will inquire.
Mr. ALGER. This is elementary, but supposing, through existing programs already in law to expend money, that for a fraction of time the
payroll of the Federal Government exceeded our cash on hand, is it
possible that we might not have the money on hand to pay Federal
employees ?
Is it possible we could fall short and not even meet the payroll?
Mr. STANS. I think that is quite unlikely, Mr. Alger. I believe the
Treasury's plans always take into account the contingency of some
irregularity in receipts or in disbursements, and of course they do
have access to the bill market for temporary borrowings.
I think the situation you describe would be an extremely unfortunate one, but I believe we can trust Treasury to see that does not happen, so long as the debt ceiling is adequate.
The CHAIRMAN. Are you through, Mr. Alger ?
M r . ALGER. Y e s .
The CHAIRMAN. Mr. Knox will inquire, Mr. Stans,
Mr. K N O X . Mr. Stans, there is something that has concerned

me for
some time and that is relative to the annual trip that the Treasury,
the Bureau of the Budget, and other agencies that have to do with it
make to the Congress and ask for an increase in the temporary debt
limit.
Why is it necessary that we are confronted with this problem each
year ?
Mr. STANS. I think one of the difficulties, Mr. Knox, is, it is pretty
hard to predict more than a year ahead how the finances of the Gov-




219

PUBLIC

DEBT AND INTEREST

RATE

CEILINGS

120,

ernment are going to come out. In other words, whether we are going
to have a balanced budget or a surplus or a deficit.
I think our experience a year ago is a pretty good illustration of the
problem of predicting the budget situation tor any extended period.
At the present time, we are reasonably confident that the 1960
budget will either be in balance or will show a small deficit, but I think
we all have to recognize that if we start to project into 1961, there are
a tremendous number of uncertainties that would be almost impossible
to evaluate, and I would hesitate at the moment to give any estimate
of what the budgetary situation will be for 1961, particularly until the
Congress has completed its action on the 1960 appropriation bills and
on substantive legislation.
Mr. K N O X . Would you feel that there would be any objection if the
committee should recommend to the Congress, and it was approved,
to put the temporary debt ceiling at $295 billion until June 30, 1961,
instead of 1960, and then if it was necessary that the temporary possibly be made permanent, that the administration could come forth
and ask the Congress for further consideration of the increase ?
Mr. STANS. Again, the Secretary of the Treasury might have a
view on this that would be more valuable than mine. I would not
see anything objectionable certainly in making a 2-year debt limit
because if circumstances appeared to be such a year from now that
it was unworkable, we would have to come back and ask for another
change in it.
Mr. K N O X . It is not also true that with the vast amount of legislative effort that the Congress has made for certain programs which
the money has not been allocated for, there is a possibility that it
would continue at about the same level as it is today ?
Mr. STANS. I think that is a pretty good possibility.
I think it is unlikely that we can expect that the fiscal year 1961
would show any very substantial surplus.
Mr. K N O X . That would just be automatic would it not?
It would just naturally go back?
Mr. STANS. In that case you would need about the same debt limit
as you would need for 1960; that is correct.
Mr. K N O X . That is all.
The CHAIRMAN. Are there any further questions?
Mr. KARSTEN. I have a question.
The CHAIRMAN. Mr. Karsten will inquire.
Mr. KARSTEN. Mr. Stans, I wonder if you could tell us the difference in interest on the national debt in the 1959 budget as distinguished
from the 1960 current budget ?
How much more interest will we pay in 1960 than will be paid in
1959?

Mr. STANS. There is a difference of under a hundred million dollars
between 1958 and 1959.
Mr. KARSTEN. I S that at the increased rate we have been talking
about, this 4% percent, or is that something that came along before
we were talking about increasing the rate and taking off the 4i/2-percent ceiling?
Mr. STANS. I thought you asked the difference between 1958 and
1959.
Mr. KARSTEN. N o , 1 9 5 9 to 1 9 6 0 , Mr. Stans.
41950—59




15

220

PUBLIC DEBT AND INTEREST

RATE

CEILINGS 120,

Mr. STANS. I am sorry.
There will be an increase in 1960 over 1959 of about a billion dollars
in our interest cost.
Mr. KARSTEN. A billion dollars?
M r . STANS. Y e s .
Mr. KARSTEN. Many

of us were under the impression it was $500
million. Can you break that down for us ?
Mr. STANS. I can explain it to you in this sense; that the original
budget estimate that we submitted last January estimated that interest costs would be about $500 million higher in 1960 than in 1959.
Mr. KARSTEN. That was the budget that came down in January;
is that right ?
Mr. STANS. That is correct.
Since then the market situation has been such that, coupled with
the effect of this legislation, it now appears as though the interest
cost will be another $500 million higher than it was in 1959.
Mr. KARSTEN. Then we are about a half-billion dollars wrong in
our January guess ?
Mr. STANS. We were $500 million low.
Offsetting that, it is the administration's present estimate that our
revenues will increase by about the same amount, that our budget
posture is still unchanged in showing a very small surplus.
Mr. KARSTEN. However, we are still in the end paying out about a
billion dollars more interest this year than we will have paid out last
year?
Mr. STANS. Yes, sir; 1 9 6 0 over 1 9 5 9 .
Mr. KARSTEN. D O you anticipate that this legislation we are talking
about which would take off this ceiling on the Government interest
on bonds would result in any further increases in the carrying charge
on the debt, or do you think this is the top ?
Mr. STANS. We don't expect that this legislation will involve any
significant increases in 1960 and we do expect that, whatever the increases will be, the increases will be nominal and will be within the
$500 million figure that I have given you.
Mr. KARSTEN. That is all, Mr. Chairman.
The CHAIRMAN. Are there any further questions of Mr. Stans ?
Mr. ALGER. Mr. Chairman.
The CHAIRMAN. Mr. Alger.
Mr. ALGER. Mr. Stans, I thought someone else would bring this up,
and I for one want to commend you for your statement on page 2.
The House has done most of its appropriation work and we know
the other body many times ups our bills, I know that is implicit in
your statement. You are concerned that this may upset the balance,
but you mention something else, Mr. Stans, that I do not believe some
members have faced up to, namely, the pending spending bills—
housing, airports, and area assistance, and other bills that will provide additional spending, including those which we have been calling
the back-door method where money will be taken directly from the
Treasury, actually going around the Appropriations Committee.
Am I correctly interpreting what you say here in your concern
that this slim surplus you mention on page 3 may turn into a deficit?
Is that the reason you mention these other spending bills there ?




221 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

Mr. STANS. That is one of the things that I am concerned about,
yes, that this type of substantive legislation which Congress is ndw
considering would provide for heavier amounts of authorization and
expenditure than the budget contains for them. If that is the case,
then not only do we face the risk of eliminating any potential surplus
for 1960, but we take on increased burdens in 1961 and subsequent
years as well.
Mr. ALGER. Thank you, Mr. Chairman.
The CHAIRMAN. Are there any further questions of Mr. Stans ?
If not, again, Mr. Stans, we thank you, sir, for coming to the committee and giving us the information you have.
Thank you.
. Mr. STANS. Thank you.
The CHAIRMAN. Our next witness is our colleague from Texas, Hon.
Wright Patman.
Mr. Patman, we are pleased to have you with us today to discuss
this matter that you have discussed with us before in part and this
new feature wThich we have not considered in several years in this
committee. We appreciate having you.
STATEMENT OF HON. WEIGHT PATMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS

Mr. PATMAN. Thank you, Mr. Chairman. It is good of the committee to hear me.
After I finish my prepared statement, I would like to document the
answers to some questions that have been raised here, particularly
about:
One, do we have a free market in Government securities? I want
to document the point that we do not.
And, two, I want to show by citing good authorities that if you
raise the interest rates on U.S. Government securities, that will raise
all other interest rates.
Furthermore, I will show that the independence of the Federal
Reserve System which has been claimed is the principal cause of our
troubles in regard to the national debt and interest rates; that when
we raise the national debt and then raise interest rates, that, in turn,
necessitates increasing the national debt again.
Mr. Chairman, I am opposed to increasing the legal debt limit. I
am also opposed to repealing, or even raising, the interest rate ceiling
which was enacted during Woodrow Wilson's administration in 1918,
and I am opposed to increasing interest rates on the series E and H
bonds.
As to the proposal to raise the debt ceiling, it is unnecessary for
this reason: The Federal Government is now holding $25 billion of
its own interest-bearing debt obligations. At least $15 billion of
these obligations can and should be canceled immediately so as to
reduce the present debt by that amount.
The fact is, as you may know, Congress is now considering a bill
which will give away to the private banks about $15 billion of these
securities, which will be the biggest giveaway in all history.
This legislation, the so-called vault-cash bill, was recommended
by the administration and by the Federal Reserve Board. It has
already passed the Senate; it has been approved by the House Com-




222

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

mittee on Banking and Currency and by the Rules Committee of the
House, and we may expect the House will pass it within the next few
days.
The $25 billion of interest-bearing obligations that I refer to are
held by the Federal Reserve System. They have been purchased in
the open market and paid for with Government funds. They are
owned by the Government and not by the private banks. The private
banks have no claim to them whatever.
In purchasing these securities the Federal Reserve System has not
used any reserves deposited by the private banks, or any other funds
of the private banks. The fact is that most of these bonds were purchased from the private banks.
These statements of mine about the ownership of the $25 billion
of obligations are not in dispute. They have been agreed to many
tinges by all authorities, including the present Chairman of the Federal Reserve Board and the past Chairmen of the Federal Reserve
Board.
Now as to the question of what amount of these securities the vaultcash bill will give away, this is in dispute.
The bill gives the Federal Reserve System authority to reduce
bank reserves by about $12 billion immediately, which authority
could be used only by either:
(a) Setting off the biggest inflation in history, or
(b) By transferring ownership of an equal amount of the
Fed's securities, without cost to the banks.
Some of my colleagues on the Committee on Banking and Currency
would no doubt tell you, however, that they are unaware of anything
in the legislative history of this bill which indicates the Federal Reserve will use this authority for either of the two purposes for which
it could be used. I think the legislative history is clear and unmistakable, but I will not impose on this committee a question which is
in dispute in another committee.
I simply call the committee' attention to the fact that the Federal
Reserve Board has reported to Congress that its present holdings of
$25 billion of bonds and other interest-bearing obligations of the
United States are a great deal more than it needs for all purposes and
all possible contingencies. Consequently, there is no reason why $15
billion of those obligations should not be canceled immediately, and
thus remove any need for increasing the debt ceiling.
I might add also that if $15 billion of these securities are canceled,
this will remove any possibility that this amount of securities will be
given away. If these securities are given away, the Government will
have to pay for them again when they become due, and in the meantime the Government will have to pay interest on the securities,
which interest will go into bank profits.
At the present time the interest on these securities is paid back into
the Federal Treasury. The Federal Reserve System meets it operating expenses out of these interest payments, sets aside some money in
a so-called surplus fund, and returns the balance to the Treasury.
There is an added point about which there is also no dispute.
The $25 billion of Government securities which the Federal Reserve
System is holding have, in the last analysis, been paid for by the
issuance of non-interest-bearing obligations; namely, Federal Reserve




223 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

notes. Feedral Reserve notes are, of course, currency in the pockets of
individuals and in the cash registers of business firms. They are
obligations of the United States, as is plainly stated on the face of
them. They are signed by the Secretary of the Treasury, just like any
other Government obligation, whether they draw interest or not—they
are signed by the Secretary of the Treasury and the Treasurer of the
United States and not by the Chairman of the Board of Governors
of the Federal Reserve System. They are obligations of the United
States—it is so stated in the law—but they are not obligations which
are subj ect to the legal debt limit.
They are not expected to be redeemed. They will remain in circulation for the convenience of business and consumers in carrying on
trade and commerce.
Now^ let me read from a report which the Board of Governors of the
Federal Reserve System submitted to the Committees on Banking and
Currency of the Senate and House with reference to the vault-cash
bill. This is the Board's position as of April 7, 1959, about 2 months
ago, with reference to the amount of its $25 billion of interest-bearing
securities which it feels it needs to keep:
T o the extent necessary to avoid undue credit expansion, reserves released
by any reduction in requirements could be absorbed by Federal Reserve
sales of securities in the market. This would in effect shift earning assets
from Federal Reserve banks to member banks. The present System portfolio
is adequate to permit a substantial reduction and still leave enough to provide
sufficient earnings to cover necessary expenses, as well as f o r current purposes
of policy.
Any decrease in requirements, however, should leave the Federal Reserve
with a portfolio adequate to cover possible future contingencies, such as a large
inflow of gold or economies in the use of currency that might add reserves in
excess of appropriate needs. (U.S. Congress, House of Representatives, Subcommittee No. 2, Committee on Banking and Currency, hearings, "Member
Bank Reserve Requirements," 86th Cong., 1st sess. (1959), p. 28.)

May I suggest an estimate of the amount which the Federal Reserve would need to keep in its portfolio for the purposes which it
has specified?
Six billion dollars of securities would provide the Federal Reserve
System with an income sufficient to meet expenses.
In 1957, which is the latest year for which we have a report, the
Fed's interest income on its holdings of Government securities
amounted to 3.15 percent. Six billion dollars, yielding an annual
interest income of 3.15 percent would give the Fed an income of $189
million. Its expenses in 1957 came to $169 million, including amounts
set aside for various reserves. For its retirement systems, and including some very plush luxuries.
As to the amount of securities which the Fed would need to hold,
to sell at a later time to meet the contingencies which it has mentioned, actually it does not need any amount. These contingencies
could be met by raising reserve requirements.
One contingency is a possible large gold inflow from abroad, which
would increase bank reserves and which would be inflationary unless
offset by Federal Reserve action.
The other possible event is a decline in the public's preference for
currency, as opposed to bank deposits, in which case bank reserves
would also be increased.




224

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

In either case, the Fed would no doubt prefer, however, to meet
such contingencies by selling securities from its portfolio rather than
by raising required reserves of the member banks.
The experience record of the past 40 years would indicate that $2
billion would cover both of these contingencies. In other words, an
$8 billion portfolio of Government securities would be more than
adequate to give the Fed a luxurious expense income and leave it in
a comfortable position to meet the contingencies it envisions and in
the manner in which it would prefer to meet them.
But, to be extra generous, so there could be no possibility of objection, I have proposed leaving the Fed with a portfolio of $10 billion
of Government securities and canceling immediately $15 billion. This
will make the proposed increase in the debt ceiling completely
unnecessary.
Now, if the committee should wish to cancel other amounts of unnecessary debt, there are two other suggestions it might consider.
First, the Federal Reserve System is holding approximately $1
billion in a so-called surplus fund, for which no conceivable need
could ever arise. If this $1 billion were paid promptly into the
Treasury, the present Federal debt could be reduced by that amount.
Second, it is really not necessary, and I cannot imagine by what
reasoning it is appropriate, for the Federal Reserve System to hold
interest-bearing obligations of the United States for the purposes
of having an interest income to meet its expenses.
The $6 billion of debt which I have suggested leaving with the Fed
for this purpose should be canceled, and the Federal Reserve Board
should come to Congress for annual appropriations, just as other
Government agencies do. This would reduce the present debt by
another $6 billion.
When the vault-cash bill comes to the floor of the House for debate,
I expect to offer an amendment to the bill which will require the
Federal Reserve Board to turn over to the Treasury immediately
for cancellation $15 billion of the securities it is now holding.
If the Congress and the President accept this amendment, the administration's proposal to increase the Federal debt by $12 billion
will be completely unnecessary.
Removing the 1918 ceiling on interest rates is unwise and unwarranted.
I come now to the administration's chronic problem, interest rates.
Like most people today, I accept and believe in the collectivebargaining processes. Furthermore, there is no question that when
the bankers and moneylenders want a wage increase, they must come
to the Government to get it. There is no place else to go. In this, I am
assuming, of course, that the Federal Reserve System is still in
reality a part of the Government.
It is true that it has, under this administration, assumed the posture
of a fourth nonelected branch of the Government, exercising powers
to overrule or reverse economic policies decided upon by Congress
and the President through constitutional lawmaking processes.
Futhermore, the President has repeatedly ratified this posture so
that we would seem to have a super government of bankers sitting
over and above the constitutional Government.




225 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

It is hardly reasonable to assume, however, that the President
would agree to this independent government position of the Federal
Reserve System if there were any serious policy differences between
the administration and the Federal Reserve.
We should be fair and openminded on the question whether there
is really any need to give the bankers and moneylenders a larger
share of the national income. We should expect, however, that some
reasonable argument would be advanced for such a proposal.
There is no claim, however, that the moneylenders are entitled to
a cost-of-living increase, that their productivity has increased, or that
there is a hardship which should be met. Rather, the arguments
which Secretary Anderson made to the committee yesterday are these:
One, the Federal debt is now at an alltime high, having reached
$1,600 for each man, woman, and child in the country.
Two, the demand for savings has increased and the Federal Government cannot compete with the demands of State and local governments, private industry, or the stock market; in fact, cannot even
compete with itself.
Three, the main problem is that interest rates have been pushed
up by a growing belief that there will be inflation, an inflation which
Secretary Anderson says has not materialized and a belief which
he says is mistaken. I share his views.
The only inflation we have today is inflation caused by high interest.
In other words, if the interest rate had not been increased since January 20, 1953, the Eisenhower administration would not have had to
come to the Congress at any time in the past or now in order to get
a debt limit increase. It is all caused by high interest, and if you
increase it again, again we will be called upon to increase the debt
limit, just as we have in the past.
Four, monetary policy is an all-controlling factor in times of recession and becomes what is called one of aggressive case. But at times
when interest rates are being raised, all the Government instruments
of monetary policy disappear into the thin air of flexibility and interest rates are made by something called a free play of market forces.
Five, we have demonstrated the ability of a free economy to come
out of an economic recession and the high interest rates have been
caused by the $13 billion deficit, which it is suggested to be a product of
Congress "fiscal irresponsibility."
Six, the same old saw that this administration inherited a shortterm Federal debt and wants to lengthen the maturity of the debt.
And finally, Democratic administrations financed the tremendous
debt of World War II, while holding the bond rate at 2y2 percent, and
the consequences were horrible.
Let us give a little examination to these arguments.
First, the Federal debt is at an alltime high, and it does average
$1,600 for each man, woman, and child in the country. But in past
years it has averaged a great deal more when the country was presumably less rich, and when interest rates were a great deal lower.
In 1946, the debt was $1,908 per capita, and in 1950, it was $1,650
per capita. In 1954, it was $1,670 per capita, and in 1956, it was $1,622
per capita. In all of these years interest rates were lower than now,
so we can hardly blame interest rates on the high per capita debt.




226

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

Let us come now to this question of the total demand for savings.
If we add up the figures on pages 139 and 157 of the President's Economic Report for 1959, we can see what the total demand for savings
has been in the years 1951 through 1958. This includes total private
domestic investment, consumer debt, the surplus or deficit ox State
and local governments, the Federal surplus or deficit, and the net
export of capital abroad.
We find that the total demand for savings amounted to 15.3 percent
of the gross national product in 1951, and 15.4 percent in 1952. In
none of the subsequent years has it been as high. It has ranged from
15.2 percent in 1953 down to 14.5 percent in 1958. (See table 2, following my testimony.)
Why then the increase in interest rates ?
Let us make some comparisons.
In 1953 total demand for savings was a smaller percentage of the
gross national product than in either 1951 or 1952. But the rate on
91-day Treasury bills was raised by 25 percent, from 1951; the yield
on long-term Government bonds was raised by 14 percent; and the
rate on prime commercial paper was raised by 17 percent.
Then, in 1957, we had what the Federal Reserve Board thought
was a "runaway" investment boom. Yet the demand for savings in
that year was only 15.2 percent of the gross national product. But,,
compared to 1951, interest rates on 91-day Treasury bills were raised
by 111 percent; interest yields on long-term governments was raised
by 27 percent, and the rate on prime commercial paper was raised
by 76 percent.
In this span of years? the gross national product was going up,
the country was becoming more affluent, and we would normally
expect that a larger percentage of the national income would go into
savings, since people presumably had more money left over after
meeting the cost of food, clothing, and shelter.
Let me make one other point.
Since 1951 there have been years of low interest rates, medium
interest rates, and extortionate interest rates. But the evidence is
that neither the high nor the extortionate interest rates caused people
to save any larger percentage of their incomes.
On the contrary, people saved the highest percentage of their disposable personal incomes in 1951, 1952, and 1953, when interest yields
on long-term governments ranged between 2.57 and 2.94 percent.
In 1956 and 1957 interest yields on long-term governments were3.08 and 3.47 percent, respectively, yet people saved only 7.2 and 6.8
percent of their disposable personal incomes in those years.
Now this I admit: The administration does have quite a problem
with this belief that inflation is coming and that anyone who puts
his savings into fixed-return securities will be repaid with cheap
dollars. This has been the subject of one of the greatest propaganda
crusades of all times. "Inflation" has been made a household word
in every home in the land.
I was here in the great depression, in the depression that was named
for Mr. Hoover. Mr. Hoover could have had the most prosperous
time in his history named for him just as well, if he had only permitted the people to have had adequate money which he refused.
This word "inflation" was used more during the Great Depression,,




227 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

when we had 10 and 12 and 13 million people unemployed, even than
it is used now. "Inflation" has been the scare word.
In the lowest point of depression or in the highest point of prosperity, that scare word "inflation" is used.
Now, over the past year particularly, the President has taken to
television and to numerous press conferences to carry on a tremendous
word battle against the coming "inflation" which seemed clearly visible
to him. The National Advertising Council has cooperated. Substantially all big-business firms that profit from high interest rates
or from a rising stock market have cooperated, with newspaper and
magazine ads and so on.
Altogether, $4 billion of new money was poured into the stock
market last year, and stock prices were driven up by 25 times that
amount, or an increase of 40 percent within 12 months. The bigmoney boys on Wall Street have made millions and paid taxes at
capital gains rates, and the banks and money lenders have enjoyed a
fat increase in interest rates.
You know, the banks, of course, have a very fine tax provision for
profits on Government securities and for the returns on Government
securities. They are in a tax category different from any other corporation or individual—in a more favorable position.
So, my suggestion to Secretary Anderson for the cure to his problem
is not to come to Congress and ask Congress to ratify what he calls a
"mistaken belief" in inflation, but go back to the opinion makers in his
own administration and have them correct this belief about a coming
inflation which he thinks to be erroneous.
Now on this matter of the Government's monetary policy, I do not
believe it is quite fair of the Secretary to try to have it both ways—
to have it that monetary policy makes low interest rates to help the
people in a time of recesison, but that monetary policy disappears
when interest rates are being raised. The fact is that somebody in
the Government decides every day, and every hour of the day, what
the money supply will be and what interest rates will be. The Government's money managers have now put us back in a condition of
tight money and high interest.
There is one point to which I desire to invite your attention, Mr.
Chairman.
A few years ago there was no such timidity about admitting to tight
money and high interest policies. These policies were then boasted
about. They were presented to the public as being a cure-all for all of
our economic problems.
In 1955 the money managers instituted tight money and high
interest to fight what they thought was a boom in consumer installment purchases. In 1956 and 1957, the money managers squeezed
money and raised interest for the purpose of dampening what they
thought was a runaway investment boom. They finally choked off
investment and brought on a recession. Then they sat back and
counseled that we all wait for "adjustments to take place in the
market," saying they were hopeful that the level of investment would
soon increase again and everything would be all right.
We came out of the depression, Mr. Chairman, despite the Federal
Reserve. Three things pulled us out-




228

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

These are the three things that brought us out of the depression:
(1) The raising of the debt limit which permitted an increase
in defense spending;
(2) The retroactive pay increase for Federal employees—this
is a big factor; and
(3) The unusually large farm crops.
These three things brought us out of the depression. We came out
despite the Federal Reserve.
Earlier this year Chairman Martin testified that the Fed made available enough money last year for the banks to extend credit amounting
to about $10,500 million. Mr. Martin did not know himself that the
banks had not used that money for the purpose of making loans to
business and for the purpose of bringing the country out of the recession. The banks made investments instead in U.S. Government bonds
to the tune of $10,400 million, which they received absolutely free by
reason of the free reserves given to them > by the Federal Reserve
System.
Now, then, instead of the freed reserves being used to help bring
our country out of the recession, the banks used these for the opposite
purpose. Instead of the banks actually increasing business loans
after getting these free reserves, they actually called in business loans
and reduced them a billion and a half dollars during that same period.
I say we came out of the recession principally because of actions
initiated by Congress.
Now the Secretary of the Treasury comes forward and says that
the reason for the new high interest rates is the $13 billion deficit. The
fact of the matter is the deficit came about in the first place because
of the recession brought on by the high-interest, tight money policies
of 1956 and 1957.
When the administration first embarked on a program to raise
interest rates, with its first issue in February 1953, it said then that
its purpose was to lengthen the maturity of the debt. That has been
said repeatedly since, and it has also been said repeatedly that this
administration inherited a debt of short maturity.
When they increased that the interest rate on Government bonds
from the traditional 2% percent (an exception was the issue of 2%
percent bonds under Secretary of the Treasury Mr. Snyder in 1938,
which was the highest rate) to S1/^ percent in May of 1953, just arbitrarily to increase the interest rate structure in this country—this was
done without rhyme or reason and not needed—that was a terrible
mistake. Mr. Martin, who is Chairman of the Federal Reserve Board,
admitted to me the next year when I was interrogating him—and his
testimony is printed—in answer to my questions that it was a mistake;
it should not have been done.
The fact is that on December 31, 1952, 75 percent of the debt was
in Treasury bonds and nonmarketable securities, and it has not been
as high since as in December 31, 1952, nor has the average maturity
of the debt been raised.
On June 30, 1952, the marketable debt had an average maturity of
5 years and 8 months. By mid-1953, it had an average maturity of 5
years and 4 months. By mid-1954, it had an average maturity of
5 years and 6 months. By January of this year, it was down to 4 years
and 9 months. (See table 5 following my testimony.)




229

PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

It seems to me that after 7 years of hearing about raising interest
rates so as to lengthen the maturity of the debt, everybody would be
weary of it. We have now had some clear demonstrations on the
way to manage the Federal debt and on the way not to manage it.
We financed the unprecedented burden of World War II without
having the bond rate go above
percent—and may it be said here
that under President Truman interest rates never went beyond 2%
percent, and bonds never wTent below par, as long as Mr. Truman had
control—and we had the least inflation that any country has ever had
during a major war.
Maintaining low interest left the Treasury in a good position to
make substantial reductions in the national debt after the war. Between 1945 and 1950 the debt, including guaranteed issues, was decreased by $22 billion.
Furthermore, the Government was in a good position to make
savings in other ways. In 1948, bank profits were high so the Federal
Reserve Board increased its contribution to the money supply and
decreased the private banks' contribution, thus acquiring $2 billion of
the debt so that the interest payments went back into the Treasury Interest rates on the obligations were not high then so the bankers did not
object too much.
Today, of course, just the reverse is true. The interest rates are
high and the bankers are demanding a transfer of the Federal Reserve
securities over to them free of charge. We will have to pay them
twice. We will have to pay the interest during that time until they
mature.
In contrast, we have seen two disastrous consequences of trying to
impose high interest and tight money on the country. Certainly by
now everyone should know that these policies will not work.
Now, as to the proposal to raise the interest rates on the series E and
H bonds, we have been playing this kind of ring-around-the-rosy for
a long time, raising one rate to make it competitive with the others,
and at the same time raising the others. This is a fruitless exercise.
I am opposed to raising any of them.
May I close with an example we may take from the business firms
of the country ? In 1956 and 1957, many of the big corporations believed that the high interest rates that had been imposed could not be
sustained. Consequently, instead of going to the bond market for
long-term financing at high interest rates, they went to the commercial
banks and got temporary short-term financing, and it squeezed out
thousands and thousands of small businessmen from getting financing
because small business people had been going to the banks to get shortterm loans, but when the big people moved in, the small people did not
have a chance. They were squeezed out of business instead.
Then, in 1958, when there was a change in policy, and interest rates
were brought down, the corporations paid off their bank loans and
went to the bond market for long-term financing.
There is no limit to the rate which the Treasury can pay for shortterm obligations.
I would suggest that in this period of high interest rates, the Government not be committed to any long-term contracts. There could be,
in the next administration, another change in policy to low interest
rates.




230

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

Now, then, I want to invite your attention to something that has
been said here about the competitive and free market. I first want to
read you something. I do not think it has ever been in the record
before.
Mr. W. Randolph Burgess was Deputy Secretary of the Treasury.
He made arrangements for the appointment of those to pursue the
monetary policy of the Eisenhower administration after the election,
of course, in 1952. On June 12, 1953, Mr. Burgess made a speech
delivered before the student body of the graduate school of banking
at its 19th residential session at Rutgers University, New Brunswick,
N.J., in which he said:
W h a t has happened since—

remember this is June 12, 1953, after Mr. Eisenhower had taken
office on January 20
then is simply that we have assured the Reserve System that it is the boss on
monetary controls.

That is before President Eisenhower ever answered the question
at a press conference explaining that the monetary controls were
turned over to the Federal Reserve System.
I think that was a commencement of the real mess that we are in
today, because when President Eisenhower did that, he then made
the Treasury the captive of the Federal Reserve System, and the
Federal Reserve System is the captive of the New York Federal Reserve Bank. The New York Federal Reserve Bank, in turn, is a
captive of six of the nine directors that are elected by the private
banks in New York City area. That is what caused this mess to
commence, and the trouble we are in today, that so-called independence, in defiance, I say—of course I know people have different opinions about this and I respect other people's opinion as I expect them
to respect mine, and I am at least honest and conscientious in asserting them—to the Constitution, which says that the President "shall
take care that the laws be faithfully executed."
Is not the Federal Reserve Act the law? Was it not passed by
the House of Representatives after the Democrats had a caucus
lasting almost a week—John N. Garner of Texas was chairman of that
Caucus—and they agreed to it and then was it not passed in the
Senate, and sent to President Woodrow Wilson who signed it and
it became a law ?
It is a law just like any other law and it is the President's duty
to see that that law be faithfully executed just the same as any other
law.
Mr. Chairman, I ask consent to extend my remarks and include
some material that I did not state.
The CHAIRMAN. Without objection, you may have that privilege.
(The information referred to follows Mr. Patman's testimony.)
Mr. PATMAN. By reason of turning the Federal Reserve loose, just
footloose and fancy-free, and they are doing everything that they
want to do. Last year in 1958—now, this is a shocking statement—
the commercial banks in dealing and speculating in Government securities received in net profits $681 million. That is in 1958. That
was just after the depression year of 1957, when they bought the
bonds at a low point.




120,
231 PUBLIC DEBT AND INTEREST RATE CEILINGS

X do not know who ran them down, but they were down low, and
then I do not know who caused them to go up, but they went up,
and by reason of that the private banks made $681 million.
Now, then, 50 banks in the country make $300 million of that and
20 of the largest banks—now listen to this, Mr. Chairman, in this
crap-shooting speculative activity that they were engaged in, made
$220 million. Twenty banks averaged $11 million each last year
speculating on Government securities in this kind of a market which
they say is a free competitive market.
Is not that prima facie evidence that it is not a free competitive
market when banks can make a million dollars a month speculating
in that market ?
The Government bond market has no controls. No one is supervising it. The onion market is regulated, but the Government bond
market is not.
There are many things that are regulated, but the Government bond
market is not. By reason of that lack of regulation, the private
banks make exorbitant profits, clearly against conscience. And do
you know how much that amounts to in comparison to the amount of
their actual voting capital stock ?
It is between 12 and 15 percent of their paid-in voting capital stock.
1 am not including the surplus and undivided profits. 1 am talking
about the voting capital stock. That profit on Government bonds in
1 year is between 12 and 15 percent of their common stock.
And then follow that back to 1953 when we had a similar year to
1957, when bonds went down again.
Why did they go down in this free competitive market?
For some reason they took a nosedive and just at the low point, for
some reason unknown to us, the banks bought up the bonds again,
and then the bonds started up again.
In 1954 they sold them and they made $426 million that year, which
was several times as much as was made in all history on speculations
of that kind, and then in 1957 they have exactly the same dip again.
Bond prices go down real low. The banks buy up the bonds again.
The prices go up in early 1958 and they sell the bonds and make $681
million.
How long are we going to say that that is a free market ?
Oh, we have a wonderful free competitive market. It adjusts itself ? It didn't do it there. Something is wrong. Mr. Martin and
Mr. Anderson have recognized that something is wrong about it and
they have started an investigation of their own.
Here is the announcement in the Washington Post and Times Herald of Monday, March 9,1959:
U.S. bond market speculation probed.
Federal Reserve System—

The Treasury Department and the

this is in an article by Mr. Joseph R. Slevin—
said they have begun a joint investigation of the multibillion-dollar Government
bond market. The two agencies declared they want to prevent "excessive speculation" and to improve the functioning of the market. They said that the inquiry will be factual.
The investigation is a direct outgrowth of a speculative buying spree and a
subsequent market collapse in 1958. The agencies said their study will focus on
those developments. The Treasury and the Federal Reserve said they expect to
complete their joint study in time to make it public by midyear.




232

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

When is midyear ?
A month and a half from now. And here it is just before that
deadline when they are going to make their report on what happened
last year in this bad speculation, and so bad they had to take notice
of it, that they are asking you to believe them that there is nothing
wrong with the market, that it is a free competitive market, and
that people are protected by it. [Continuing.]
A number of banks violated the precepts of sound banking by lending money
to speculators.

It says here:
Herald Tribune News Service investigation last summer disclosed that loose
corporate bank and Government bond dealers lending practices made it possible
f o r speculators to obtain huge quantities of Government bonds without making
a downpayment and without paying interest. Some of the Nation's biggest corporations, banks, and speculators simply speculated heavily 011 their own.

This $681 million includes only profits of the commercial banks.
It does not include those of all the corporations, brokers, and the other
speculators that were not speculating for the commercial banks, but
on their own account, so evidently there was an additional billion or
$2 billion made on these gyrations up and down of the Government
bond market—this market is now said to be a very stable market that
is a competitive and free market.
I have another statement from the New York Times, Sunday, March
15,1959:
U.S. bond study called overdue. Scrutiny by Reserve and Treasury may go
beyond most recent abuses. The study of the Government's securities market
about to be undertaken by the Treasury and the Federal Reserve System is the
first effort of this kind in a number of years. It has not stated limitation of
scope. Conceivably it could go far beyond the problem that touched it off, the
abuse of speculative credit in the market, and lay the foundation f o r a broad and
more flexible market structure, but there are many touchy reasons why the study
should not limit itself unduly to the spectacular price gyrations of the 1958
market.
Many disinterested observers feel that the sponsors of the study, the Treasury
and the Federal Reserve, themselves cannot avoid a share of the blame.

Here are reports from people that really know, pointing out that
the investigation is being made by people who are partly responsible
for the evils which require investigation. Those who are making a
study and an investigation and are going to report in a month and a
half are asking this committee and Congress to take their word for
it that there is nothing wrong, that wTe have a very free and competitive
market.
I think that is asking too much of the Congress.
I heard the chairman of this committee ask the question of the witnesses, and he bore down on them:
Now, will this bill raise other interest rates if you raise Government rates?

The answers I heard were that they would not raise other rates.
However, this is not borne out by statements of Allen Sproul. He
was president of the New York Federal Reserve Bank longer than
any other person I think, and the New York Federal Reserve Bank
entirely runs the Federal Reserve System. The other Reserve banks
do not even touch the bonds. The Federal Reserve Bank of New
York buys all bonds. They just send the other Federal Reserve
banks their P-check every year. You know, back in the 1930's, when




233 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

the farmer received subsidy checks from the Government, they referred to them as P-checks. All they do is receive a P-check every
year from the New York banks to keep them going. They do not
make any of their money locally to amount to anything. They get
their money from the interest on the bonds that the Federal Reserve
Bank of New York has purchased for them.
Mr. Sproul had complete charge of that bank for a longer period
than any other person. I asked him one time, "What were the results that you anticipated from the removal of the support price
of the Government bonds by the open-market committee?"
Here is the testimony which was taken in 1951 at the time of the
so-called Treasury-Federal Reserve accord.
Mr. SPROUL. At the time we removed these support prices, my anticipation,
I hope I can say it without too much hindsight, was just about what we had,
no great disturbance of the market, certainly no calamity, no chaos, a market
which pretty quickly found its own bottom and has maintained itself then
throughout without much offense on our part.
Representative PATMAN. Specifically with reference to interest rates, you expected Government rates to increase?
M r . SPROUL.

Yes.

M r . SPROUL.

Yes.

Representative PATMAN. Did you not also expect other rates to increase?

You can find testimony like that from any of these officials because they know it is the truth. You cannot raise Government rates
and not raise other rates. It j ust does not work that way.
It occurs to me that to my Republican friends this should be a
challenge, that they should not want to raise these rates, that the
Democrats over a long period of time borrowed more money than
was ever borrowed before in the history of any nation on earth,
more than all nations in the aggregate, and then fought the biggest
war m all history and yet at a time when it was the hardest and
most difficult time to keep interest rates down and keep prices down,
the rate was maintained at less than 2% percent and bonds never
went below par; never went below par.
This is a challenge to our Republican friends, to beat that record.
It is true that during that time we told the people, "Now, we are
not going to pay the servicemen as much money, and the people who
furnish them money are going to make a sacrifice. It is going to be
at a lower price and the men who serve in the Army, Navy, Marine
Corps, and the Air Force are going to serve for a smaller amount
because this is the business of all to sacrifice together."
But then after the war was over, they commenced raising these
rates on the war debt. Well, the people who bought these bonds
and who have bought these bonds since 1933 have a right to expect
our Government not to break faith with them. But we have broken
faith with them on every issue.
The Government would issue bonds and then they would go down
Whatever is done in the future, there should be an understanding with
this servant of ours, this fourth branch of the Government, the Federal
Reserve, which feels like it is footloose and fancy free and has assumed
many arrogant attitudes, that hereafter it must support this Government bond market; they must support it.
If you have to pay 4i/2 percent, support it. "If you bought these
bonds at
percent, we will never see you lose on them in the market. They will yield 414 percent."




234

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

That should certainly be assured on all new issues that are sold.
I have another question here that I want to bring up and I will be
through, Mr. Chairman. I want to quote Mr. Martin. I show in this
statement that these bonds were paid off, just as I said in this statement, with the use of Federal Reserve notes.
Now, then, Mr. Martin is on the witness stand. I happened to be
chairman of this committee, the Joint Economic Committee, on December 11,1956. It is only 2 years ago.
I asked Mr. Martin this question:
Do you really believe we have a free market in Government bonds, Mr. Martin?
Mr. MARTIN. Well, all freedom is relative, but I say there are forces in the
marketplace, as I repeatedly said to you, that are stronger than both the Federal Reserve and the Treasury together. Some people question that, but I think
that is where the law of supply and demand comes in.

And then I asked him this question:
You would not positively and without reservation say that there is a free
market at all times in Government bonds?
Mr. MARTIN. I would say that there is some intervention, as was provided in
the Federal Reserve Act, in the market, but that generally speaking the market
forces are permitted to operate.

Then Senator O'Mahoney asked:
Mr. Chairman, may I ask a question on that point?

He is granted the request.
Now, this is Senator O'Mahoney asking Chairman Martin of the
Federal Reserve Board, after he did not positively and categorically
answer my question, as to whether there is a free market in Government bonds.
Senator O'MAHONEY. Your answer is a qualified one, is it not, Mr. Martin?

M r . MARTIN. Y e s , it i s qualified.

Senator O'MAHONEY. YOU do not want this committee or anybody w h o reads
or hears this testimony to believe that you are saying that there is a free market
in Government securities ?
There is not, is there? Am I not right?

Now listen to this reply by Mr. Martin. This was only 2 years ago.
Mr. MARTIN. There is not a completely free market in Government securities.
W e are touching over it from time to time.

Now, this is the person who has charge of monetary affairs in this
country telling you that there is no free market in Government securities—something we all know. Secretary Snyder said the same thing
a number of times. Chairman Eccles, of the Federal Reserve Board,
said so a number of times. I do not know of anyone, any unbiased
person, who even claims that there is a free market in Government
bonds. There is not.
Now, then, I want to bring out the points that I feel this committee
should consider. I feel you should go into this open market situation.
You should investigate this free market. I think this committee is
the one to do it. If you pass this bill out, either prong of it, interest
rates or debt limit, so much depends on the free market. And I think
we should have the assurance from this committee that there is a
free market. And therefore I believe this committee should investigate that question.
Now, in Mr. Anderson's testimony, all throughout, he says, "if we
have a free, competitive market." Mr. ^lartin here this morning




120,
235 PUBLIC DEBT AND INTEREST RATE CEILINGS

kept talking about a free competitive market. But when there is
testimony introduced, like these bonds being sold last year in such a
fashion that banks would make a million dollars a month on them,
that excites your curiosity. And when the banks make $681 million,
and that is just part of what is made, on the market going up and
down, that is enough to excite our curiosity about a free market. Furthermore, when we have the chairman of the Federal Reserve Board
himself saying that we do not have a free market, I think that is
enough to cause this committee to give consideration to investigating
whether or not we have a free market before this bill or these bills
are reported out.
I would recommend, Mr. Chairman, that before you vote these
bills out you have some unbiased witnesses. The Secretary of the
Treasury and the Chairman of the Federal Reserve Board are not
unbiased witnesses.
The CHAIRMAN. If the gentleman will not mind the interruption, I
thought we had one here right now.
Mr. PATMAN. I am trying to be unbiased. But I am suggesting
witnesses from outside Government—college professors, people who
know more about these matters than I do. I appreciate the opportunity of being heard, but I am just a country lawyer from down in
the piney woods of east Texas. There are plenty of people in this
country whom you can get to testify who know the score and know it
expertly, and who are unbiased. I hope you consider hearing some
of them before you report something out that would take the bridle
off interest rates and raise the debt ceiling again.
Personally, I would love to see this committee consider rolling back
interest rates.
Now, when we had a crisis during the war, we did not hesitate to
roll back prices. We have a crisis now, and we are paying interest
on interest. Had it not been for increased interest, we would not have
this request to raise the debt limit. We are in a crisis. And I think
it is time to consider a definite, permanent, stable, interest policy for
this Government in reference to both Government securities and taxexempt bonds.
Now, I share the views of Mr. Martin about tax-exempt bonds. I
would not permit any more of them to be issued if I could help it. I
realize is will be a difficult thing to do away with them. And Mr.
Roosevelt started that practice when he was a very popular person.
And it only resulted in the tax exemption being removed from the
Federal Government obligations and not removed from the States,
counties, cities, and political subdivisions.
Just after that was done, Mr. Daniel Bell was testifying before a
committee that I was on, in 1941, and I asked Mr. Bell this question:
"Have interest rates stiffened any since the removal of Government
securities from the payment of the tax on income from Federal securities?" And his answer to that, without reading all of that colloquy,
was: "One-eighth of 1 percent." That is a very small difference, Mr.
Chairman, in tax-exempt bonds and taxable bonds. It is not enough
to justify the loss in Federal revenue, that one-eighth of 1 percent.
The alternative, if you cannot remove the tax exemption, I think, is
that we ought to have an agency of our Government here representing
the people, in cooperation with the bankers if they want to cooperate,
41950—59—16




236

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

something like the RFC, that gave a market for all these tax-exempt
bonds. They bought them up. They permitted the building of roads
and school buildings and things like that. They sold them out when
the market was ripe to take them. The RFC did not lose money.
They made money. And they helped the people that way.
Right now, it is against conscience and a disgrace that some of
our people are voting bonds and paying
percent interest on taxexempt bonds to build highways and schools and for sanitary purposes and things like that. It is the hardest tax on earth, because the
people who are paying these taxes are paying taxes on what they owe
instead of what they own. Many of them own farms and homes that
they have not bought and paid for, but that they have bought and
owe for. And they pay taxes on them as if they own them when they
just owe for them. So they pay taxes on what they owe rather than
on what they own—the hardest tax on earth. And Congress should
not sit idly by and see them robbed in broad daylight by being required to pay 51/2 percent on tax-exempt bonds. Now, that is a disgrace, and it is a reflection on Congress, including every Member of
Congress. It should not be allowed, and I wish this committee would
give consideration to it.
Now, the last point I make is this: Over years, I have asked a lot
of questions of a lot of witnesses—Mr. Eccles and Mr. Martin and
all the different members of the Federal Reserve Board whom we
have had before our committee at different times, as well as every
member of the Open Market Committee. We have heard every member of the Federal Reserve Board, and I have interrogated them about
fixing interest rates. We had a gentleman before our committee one
time—the Committee on Banking and Currency—testifying on the
Housing Act of 1954. His name was Clark. He represented the
mortgage dealers of America. He was president of the Mortgage
Bankers Association of America, and was accompanied by Mr. Massey, president of the People's Bond Mortgage Co. of Philadelphia,
and Mr. Neal of the General Mortgage Bank of America. And with
those gentlemen sitting there, I asked them these questions. This is
really, I think, something worthy of your consideration, because it
comes not from a Government witness, but from people who are, you
know, in the private enterprise system themselves.
Mr. Clark, since by reason of your experience in not only the mortgage
banking field but in the insurance field, in the financial field, you evidently
know a great deal about the interest rates on long-term Government's and how
the interest rates are fixed. Don't you think that the Federal Open Market
Committee has more influence on the fixing of the rates, both short and long
term, than any one factor in the United States?
Mr. CLARK. They certainly seem to me to have it.
Mr. PATMAN. Well, don't they have complete authority? In other words, they
have unlimited power to buy bonds and sell bonds and even to create the money
to do it, manufacture the money to do it?
Mr. CLARK. That is correct.
Mr. PATMAN. Without reference to what they have, they have just got it.
They just do it on the Government's credit.
Mr. CLARK. That is right.
Mr. PATMAN. At one time Mr. Monroney, who sat here next to me before he
went to the Senate in 1947, at a hearing before this committee, interrogated Mr.
Eccles, and Mr. Eccles I guess was longer with the Federal Reserve Board than
any other one person and was Chairman at that time. Mr. Monroney said,
" D o you mean to say that with your present Open Market Committee and the
operation of the Federal Reserve as it now stands, that regardless of what the




120,
237 PUBLIC DEBT AND INTEREST RATE CEILINGS
national income is or other economic factors, that yon can guarantee to us that
our interest rate will remain around 2.06 percent?" Mr. Eccles s a i d : " W e
certainly can. W e can guarantee that the interest rate so f a r as the public
debt is concerned is where the Open Market Committee of the Federal Reserve
desires to put it."
You agree with that statement; do you not ?
M r . CLARK. I d o ; y e s , s i r .

Mr. PAT MAN. A hundred percent?
M r . CLARK. Y e s , s i r .

Now, that is from people who should know something about this.
And they say it is possible to have interest rates low or high, however, you want to fix them.
So in conclusion, Mr. Chairman, I want to express my thanks to
you for the privilege of being heard, and for your consideration. I
know you will give great consideration to this matter. And I hope
you can see your way clear to not increase these interest rates but to
investigate this so-called free and competitive market and look into
this matter very carefully.
The C H A I R M A N . Mr. Patman, we thank you, sir, for bringing to
the committee }^our views on this matter.
Are there any questions of Mr. Patman ?
Mr. Baker will inquire of Mr. Patman.
Mr. BAKER. Mr. Patman, you stated a while ago that Mr. Martin
stated that it was a mistake to increase the interest rate on series Eand series H-bonds from 3 to 31/4 percent. And I understood you
to say that is in the testimony before your committee.
Would you please read that ?
Mr. PATMAN. Yes, sir; I have it right here. This is before the
Committee on Banking and Currency, May the 26 and 27, 1954, on
H.R. 8729, page 22 of the hearings.
Mr. PATMAN. W e r e you consulted about the issuance of these 3- and 4-percent
bonds last April?
M r . MARTIN. Y e s , s i r ; I w a s .

M r . PATMAN. D i d y o u a g r e e t o i t ?

Mr. MARTIN. I agreed that it was in line with Federal Reserve p o l i c y ; yes.
Mr. PATMAN. Aren't you sorry that you did?

M r . MARTIN. NO, s i r .

Mr. PATMAN. Well, there has been a difference within 1 year's time in the
high and low on these particular hj>nds of 1 1 % points. In other words, $11%
on a hundred dollars, and then with the 3%-percent interest f o r that 1 year,
that makes 14%-percent in 1 year on a riskless Government bond.
Mr. MARTIN. I regret that fluctuation. I wish it had not happened.
Mr. PATMAN. Well, don't you think it had something to do with managing
money that caused it ?
Mr. MARTIN. I have already testified, Mr. Patman, that w e made a miscalculation in the spring.
MI*. PATMAN. In other words, you made a mistake.
Mr. MARTIN. All right. A mistake. Y e s ; I do not apologize f o r making a
mistake.

Mr. B A K E R . Y O U do not construe that to mean he made a mistake
in raising the interest rate from 3 to 3% ?
Mr, PATMAN. That is the way I construe it.
Mr. B A K E R . I construe it that he made a mistake in calculation,
because you just read above there: You asked him if he was not sorry
they raised the interest rate, and he said he was not sorry.
Now let us go back to the time we raised that interest rate on E- and
H-bonds. It was developed before this committee, through very complete charts, over a period of months, that more of these so-called




238

PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS 120,

savings bonds were being cashed each month than we were selling.
Had you been Secretary of the Treasury, faced with that curve of
more being cashed than we were selling, what would you have done ?
Mr. P A T M A N . I would have made a recommendation to this Congress that, just as during the war, we should have financed our debt
to permit him to sell all the bonds that he can at the rates allowed by
law to every person or corporation having money to purchase those
bonds. And then, after all had been sold that it was possible to sell,
by using any high pressure or other method to sell them, and there
was remaining a large amount of bonds to be sold that could not be
sold except to sell them to the commercial banks, which create money
on the books of the bank, on the credit of the Nation to buy those
bonds, then permit him to sell those bonds to the Federal Reserve
banks. And then when the interest was paid on those bonds, it would
flow back into the Treasury, and the taxpayers would get the benefit
of it. That is what I would have done as Secretary of the Treasury.
Mr. BAKER. H O W would that have prevented the holders of these
series E- and H-bonds from cashing them in ?
Mr. P A T M A N . It would not. Some of them would have cashed them
in. But it would have stopped them eventually, because they would
have been satisfied with the interest rate they were receiving.
Mr. BAKER. All right. Then the next question: Under today's
market, most savings banks now, at least in the South, are paying 3
percent interest. You can get your money any time you want it. And
you do not have to wait a year for a series H-bond. You have to
wait 6 months before you can get anything back. And building and
loan asociations right here in Washington—first, of course, the savings accounts are insured by the FDIC. The building and loan associations are insured by another Federal agency. In most places they
are paying 3%, a lot of them are going to 4 percent, and even here in
Washington I read in the paper 4 percent. With these two lines of
savings depositors paying from 3 to 4 percent, why would anybody
buy these bonds today, series E and H, at 3%, at maturity, without
much liquidity to start with, when you guarantee up to $10,000 ? It
seems to me that is what we are faced with, and that is all there is to
the question.
Mr. P A T M A N . I recognize that proWem, Mr. Baker. But I do not
want to encourage interest rates going higher. If we go up to 4, then
some of building and loans will go up to 4y 2 . Shall we follow them?
I think there is a limit. Some people desire to do business with their
Government, you know, and they would take less. I do not want to
encourage higher interest rates. If you are in favor of giving higher
interest rates to the others, I am in favor of giving them to the Ebondholders, not to the commercial banks which are paying 3 percent
on deposits. Do you know how many times they can expand those
deposits ? Twenty times.
Mr. BAKER. I am talking about the standpoint of the investor.
Mr. P A T M A N . That is right. From the standpoint of the investor.
Mr. BAKER. The lender fixes the interest rate. It is true that the
Congress fixes the maximum on Government securities. But the Government cannot make anybody buy any bonds.
Mr. P A T M A N . Mr. Baker, you are mistaken about the Fed not fixing
the interest rates, on the commercial banks. They have an application
in right now to increase the time deposits interest rate in New York.




239 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

Mr. BAKER. I understand it has to be approved. But in the last
analysis, if you are going to get the money that you want to borrow,
the debtor, the applicant, the fellow that is applying for credit, does
not fix the interest rate. In the final analysis the fellow who loans
the money fixes the interest rate, or else he says, "I won't let you have
my money." That is an indisputable premise.
We have not had any charts submitted so far to the committee, because these hearings only started a day or two ago. I do not know
whether we are in the same fix today that we were in 2 years ago. If
we are, and as I said frankly I do not know whether we are or are not,
they are cashing in more than they are selling, or that point is rapidly
approaching. Then, with the $50-odd billion in E and H, or whatever the figure is, what in the world is the Government going to do?
Mr. PATMAN. We are not dependent on those E - and H-bonds. Of
course, they are a major source of financing, or they have been, over
the years, and they are very helpful. I am in favor of keeping them
uniform, along with other rates. But I am against increasing any of
them. If one of your constituents, Mr. Baker, asked you the question:
u How do you justify the Government's paying interest on its own
money?" I do not know whether you could answer that right off.
And the question is: If the Government is going to permit itself to
be charged for the use of its own money, it should have something
to say about how much that charge should be. And it should not be
necessary to keep on going into the market and increasing the rates.
The Government itself should fix that rate.
Mr. BAKER. Well, would you advocate having the Federal Government saying to its citizens, "You must loan me a thousand dollars
apiece, interest free?"
Mr. PATMAN. No. I would just offer them the bond at a certain
rate. If they did not want to take it, that is all right.
Mr. BAKER. And then if they did not provide that money, what
would you do ?
Mr. PATMAN. In the past we did not pay but about 4 0 percent of the
cost of the war as we went along. We should have paid more, but at
least we paid that much. And we borrowed a portion from the books
of the banks that just created the money to buy these bonds. I say
that is wrong. That is where the Government is paying interest on
its own credit.
Now what ought to have been done? When all the bonds that were
sold that could possibly be sold to people who had the money to buy
the bonds, then, instead of offering them to the commercial banks
just to create the money by a fountain pen operation, a flick of the
pen, it would have been well to sell them to the Federal Reserve and
let the Federal Reserve banks hold the bonds, and then the interest
would go back into the Treasury.
Mr. BAKER. The United States goes into the open market. They
go into the market and say, " I want a billion dollars in money. I am
willing to pay 2y2 percent."
Well, the people with that billion dollars are getting Sy2 and 4
percent. They say, "No, I don't want to loan a billion dollars at 2y2
percent, because I can get 3y2 percent with practically equal safety."
If there is just one alternative, when the United States has to have
a billion dollars, if they cannot borrow it, they have to start up the
printing presses and print that amount of money.




240

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Mr. P A T M A N . Y O U see, you have the printing presses in the commercial banks. All money is printing press money. There is no
other way. All witnesses testify to that. There is no dispute about
it. You create printing press money whenever you permit the banks
to create money on the credit of the Nation.
Mr. BAKER. Let us put it on the basis of economics and not politics.
From what little I have learned, the only difference between a State,
a municipality, or a county issuing securities, going into the market
to try to borrow money, is that the U.S. Government has one additional remedy, which is to print money.
Mr. P A T M A N . The United States is sovereign.
Mr. BAKER. Solvent?
Mr. P A T M A N . Sovereign. The States are not sovereign for moneyissuing purposes. They would have to pay a 10-percent tax on every
dollar.
Mr. BAKER. The only sovereignty in this area the United States of
America has which the States do not have is the constitutional power
to print money and issue currency; is that right ?
Mr. P A T M A N . Well, the Congress has given that power to the Federal Reserve. Congress did it. So the Federal Reserve people are
responsible to you. They are your agent, Mr. Baker, and you are
responsible for their acts. Everything they do—in tightening money
and raising interest rates—you are a little bit responsible, because
you are a Member of Congress, as I am. Now there is only one difference between us. You want to stabilize interest rates upward.
I want to stabilize them downward. That is the only difference
between us.
Mr. BAKER. Well, in all seriousness, and this certainly is serious,
and I know you know it is serious the same as I do: If, as I said
awhile ago, the situation is facing us, and I do not know whether
it is or not, we cannot borrow this nioney, we of the United States
of America, without paying higher interest, then what in the world
are we going to do to meet our obligations ?
Mr. P A T M A N . Borrow whose money? Only the Government can
issue money. Only the Government makes money that is any good.
We borrow our own money. The Government should have something to say about what it will pay for the use of its own money.
Mr. BAKER. I am not talking about printing press money.
Mr. P A T M A N . All money is printing press money.
Mr. BAKER. The United States as a borrower goes to you, Wright
Patman, and says, " I want to borrow a million dollars. I want to
get 2y2 or 3 percent interest. I won't pay you 4." And you say,
" I won't loan you a dime unless you give me 4." What are you
going to do?
Mr. P A T M A N . Just do not make a loan. If you are going to have
money created anyway, after you have sold all the bonds you can
Mr. BAKER. Y O U mean issue printing press money ?
Mr. P A T M A N . The same kind the commercial banks issue.
Mr. BAKER. If there is no other way to get money, borrowing it,
you have to issue printing press money. I believe that is rather
fundamental.
Mr. P A T M A N . Sure it is. Therefore, we should have something to
say about what we pay for the use of our own money.




241 PUBLIC

DEBT AND

INTEREST RATE

CEILINGS

120,

The CHAIRMAN. Any further questions of Mr. Patman?
Mr. Alger will inquire.
Mr. ALGER. Mr. Patman, why not just monetize the entire debt and
pay it off?
Mr. PATMAN. Oh, we should not do that. You have to have debts.
If you did not have debts, you would not have any money. That is
our system.
Mr. ALGER. Let me ask you something else you did not mention in
your statement, although you covered a lot of ground. What explanation do you give for the devaluation of money between, say, the midthirties and 1950?
Mr. P A T M A N . Oh, I think it was all right. You mean the gold
revaluation?
Mr. ALGER. I am talking about the purchasing power of the dollar
bill.
Mr. P A T M A N . Well, of course, it has gone down.
Mr. ALGER. The reason I specify these years : This takes it out of
politics.
Mr. P A T M A N . That is right. I am going to take it out of politics,
too. I will show you. You take a dollar now that is used to pay
interest on short-term U.S. Government obligations. That dollar in
comparison to the dollar that was used to pay the same kind of interest on short-term obligations, say, in 1945,1946, and 1947, is worth
10 cents now. That has been quite a nosedive.
Mr. ALGER. I listened to your speech the other day on the floor on
this subject. I did not understand it then either. And I am afraid
I have opened too big a field of inquiry. I asked you this question, because you had an answer for everything else. I do not believe you are
giving me the answer.
I asked you about the devaluation of the dollar bill in 15 years, between 1935 and 1950, or take any other time you like between that
period, thus removed from politics. Why was there a devaluation of
the dollar bill, economically ?
Mr. P A T M A N . Y O U are not talking about the gold devaluation?
You are talking about the devaluation or decav in the value of the
dollar?
Mr. ALGER. The purchasing power of the dollar.
Mr. P A T M A N . Well, the dollar has gone down with reference to lots
of things, like the 10-cent dollar on interest. That is the greatest
devaluation. But on a lot of things, such as farm products, the
dollar buys a hundred cents on the dollar, and more. It has gone
down more to buy certain things than for other things. But to buy
interest, it has gone down most.
Mr. ALGER. Mr. Patman, perhaps I am not coming through to you,
because you are not coming through to me. I asked you a question,
and you are not answering.
Mr. P A T M A N . I certainly know the gentleman is asking me a question sincerely, and I am trying to give you an earnest answer. My
answer is that for some things the dollar is worth more than it was,
and to buy other things less. It all depends on what you are buying.
The value of the dollar is relative.
Mr. ALGER. Mr. Patman, I will not pursue this any further at this
point. As far as I am concerned, it is my understanding that the




242

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

dollar bill was reduced drastically in value, 50 percent of purchasing
power, during that period.
Mr. PATMAN. Let us say you are correct. If the workingman
had four times as many dollars, would he be better off, or worse
off?
Mr. ALGER. If he had what?
Mr. P A T M A N . Four times as many dollars in comparison to the
period you are talking about.
Mr. ALGER. This is all in terms of purchasing power.
Mr. P A T M A N . That is what I am talking about. In other words,
from the time you started 15 years ago, suppose the dollar is worth
50 percent less now, but individuals have four times as many dollars
with which to buy. And, therefore, they can enjoy more comforts
and conveniences and even luxuries of life.
Mr. ALGER. Maybe we do not understand each other at all.
Mr. P A T M A N . Maybe I do not understand you. I am ignorant on
this thing. I am glad to get information from the gentleman. If
he will teach me something, I will be greatly appreciative.
Mr. ALGER. I might say to the chairman that this is my maiden
experience in hearing Mr. Patman testify. And there is very little
in your testimony, sir, that I even understand.
Mr. P A T M A N . Well, I am sorry about that, because if a country
boy from down in east Texas can make a statement that a person
so well informed and so highly educated and cultured as yourself
cannot understand, I think there must be something wrong with
myself. I would have to reevaluate myself.
Mr. ALGER. Maybe we both need to learn, Mr. Patman.
But, you see, I come from the school of what we used to call hard
knocks. And economically I do not understand these things that
apparently others have acquired while they were in Government
service.
Mr. P A T M A N . May I reply to that sincerely ?
You know, I have been in Congress—this is my 16th term. I am
serving my 31st year. And I am not only disappointed, I am almost
disillusioned, and almost on the verge of being disgusted, about some
things, for the same reason you mentioned. Now it is not the fault
of the Members of Congress. I have a very high regard and great
respect for Members of Congress. I do not think I could have served
with finer and better people. They are sincere and honest. And
I am not talking along party lines—I am talking about all of the
Members. But there is one weakness, and you have put your finger
on it. The Members are not equipped to do their job. We run
errands all the time for our constitutents. We are pressed, and we do
things that are the most urgent to take care of ourselves and take
care of ourselves politically, too. That is part of the job. We are
expected to do that. And by that time we do that and answer our
correspondence and attend meetings of the committees we are on, we
have no time to look into any other questions.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

120,

And these big questions involving taxes and appropriations and
monetary matters and things like that. We have nobody that is close
to us, that we hire and fire ourselves, to do this research for us and
keep us informed as to what is going on. That is the weakness in our
system today. I think every member of this committee should have
one or two administrative assistants or research assistants, and every
Member of the House should have at least one. This is a weakness
in our democracy. We are not equipped to do the job. And things
happen here in broad daylight that years after we will regret, because
we do not understand them. We are not equipped to do the job.
Mr. A L G E R . Mr. Patman, you and I are on the same side of that
argument, because I feel very definitely we should give more thought
to our legislative chores.
Did not Mr. Lumer do some work for you ?
Mr. P A T M A N . NO, he never worked for me.
Mr. ALGER. Thank you, Mr. Chairman.
The C H A I R M A N . Any further questions ?
Again we thank you, Mr. Patman, for coming to the committee and
giving us the benefit of your thinking.
(The information referred to on pp. 225-226 is as follows:)
TABLE 1.—Gross Federal debt1 per

capita21939-58

June 30—Continued
June 30:
$350. 63
194 9
$1,694.93
1939367.
08
195 0
1, 696. 81
1940_
414. 85
195 1
1, 653. 61
1941_
571. 02
1952
1942_
1, 650. 35
1. 029. 82
1943_
1953
1,667.06
1, 464.17
1944_
1954
1,670. 64
1, 851. 70
1945_
1955
1, 660. 42
1, 908. 79
1946_
1956
1,622, 28
1, 792. 67
1947195 7
1, 580. 54
8
1, 721. 21
1948195 8
1, 588.18
1
9 Includes obligations guaranteed by the U.S. Government.
Based on Bureau of the Census estimated population for continental United States.
• Subject to revision.
Source : Annual Report of the Secretary of the Treasury, 1958.
TABLE

2.—Demand for private savings as related to gross national product,
1951-58
[Dollar amounts in billions]

Year

1951.
1952.
;
1953.
[
1954.
1955.
1956.
1957.
1958.

Gross national product

Gross private domestic and net
foreign investment

Goverament
surplus or
deficit (Federal, State,
and local)

$329.0
347.0
365.4
363.1
397.5
419. 2
440.3
437.7

$56.6
49.7
48.3
48.5
63.4
69.6
68.8
53.6

$6.1
-3.9
-7.1
-6.7
2.9
6.3
1.7
-10.0

Demand
for private
savings

$50.5
53.6
55.4
55.2
60.5
63.3
67.1
63.6

Source: Computed from data in Economic Report of the President, 1959, pp. 139,157.




244

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

TABLE 3 . — R a t e of personal savings compared with interest

rates,

1951-58

[Dollar amounts In billions]
Personal savDisposable ings as related
personal
to disposable
personal
income
income

Year

1951
1952.
1953
1954—.
1955
1956
1957
1958-.June 5, 1959

—

$227.5
238.7
252.5
256.9
274.4
290.5
305.1
311.6

-

Percent

7.8
7.9
7.9
7.3
6.4
7.2
6.8
6.7

Average interest rates per year
Yield on
3-month
Treasury
bills

Percent

1.55
1.77
1.93
.95
1.75
2.66
3.27
1.84
3.18

Yield on tax- Prime comable U.S. mercial paper,
Government 4 to 6 months 2
bonds (long
term) 1
Percent

2.57
2.68
2.94
2.55
2.84
3.08
3.47
3.43
4.11

2.16
2.33
2.52
1.58
2.18
3.31
3.81
2

3.38

1 Series includes: 1951 through March 1952, bonds due or callable after 15 years; April 1952-March 1953,
after 12 years; April 1953 to date, 10 years and after.
2 Averages of daily prevailing rates.
Sources: U.S. Department of Commerce and Federal Reserve Bulletins.
TABLE 4.—Changes in interest

rates compared
savings

with changes in rate of

personal

Percent change from previous year
Year

„

l
1952.
I
1953.
1954[
1955.
1956.
7
1957.
!
1958.

•

Interest
yield on
91-day
Treasury
bills

Interest
yield on
long-term
Government
bonds

+14
+9
-51
+84
+52
+23
-44

TABLE 5.—Average maturity of marketable interest-bearing
Year as of June 3 0 :
195 1
195 2
195 3
195 4
195 5
195 6
195 7
195 8
1959—January
Source : Treasury Bulletin, M a r c h 1959, p. 21.




1
Rate of
personal
savings

+4
+10
-13
+11
+8
+13
-12

+1
0
-8
-12
+12
—6
-6

public debt
Average length
6 years, 7 months
5 years, 8 months
5 years, 4 months
5 years, 6 months
5 years, 10 months
5 years, 4 months
4 years, 9 months
5 years, 3 months
4 years, 9 months

TABLE 6 . — B u s i n e s s loans of member banks, 1955 and 1957,

by size of borrower

~T

Amount of loans
Size of borrower (total assets, in
thousands)

Millions of dollars

All sizes
Less than $50
$50 to $250
$250 to $1,000
•
$1,000 to $5,000
$5,000 to $25,000
$25,000 to $100,000
$100,000 or more
Not ascertained

.
_

Percentage distribution

1955

1957

30,805

40,618

31.9

100.0

1,501
4,505
5,051
5, 586
4, 742
3,240
5,297
883

1,456
5,256
6,302
6,775
5,912
4,893
8,815
1,207

-3.0
16.7
24.8
21.3
24.7
51.1
66.4
36.7

4.9
14.6
16.4
18.1
15.4
10.5
17.2
2.9

NOTE—Details may not add to totals because of rounding.




Percentage
change,
1955-57

Number of loans

1955

1957

Thousands

Percentage
change,
1955-57

Average size of loan

Percentage distribution

Thousands of
dollars

1955

1957

100.0

1,185.2

1,280.6

8.0

100.0

100.0

26.0

3.6
12.9
15.5
16.7
14.6
12.0
21.7
3.0

503.1
414.9
125.8
37.9
11.0
4.4
6.0
82.0

504.7
494.3
157.6
48.2
13.3
5.4
6.5
50.7

.3
19.1
25.3
27.2
21.1
22.7
7.3
-38.2

42.5
35.0
10.6
3.2
.9
.4
.5
6.9

39.4
38.6
12.3
3.8
1.0
.4
.5
4.0

3.0
10.9
40.2
147.3
432.8
732.6
878.8
10.8

1955

1957

1955

1957
31.7
2.9
10.6
40.0
140.5
445.7
901.6
1, 363. 5
23.8

Percentage
change,
1955-57

22.0
-3.3
-2.1
-.4
-4.6
3.0
23.1
55.1
121.3

Source: "Financing Small Business," Report to the Committees on Banking and
Currency and the Select Committees on Small Business, U.S. Congress, by the Federal
Reserve System, Apr. 11,1958.

trH
h
o
a
H
w
H
1

3
H
H
W

I

H
O
a

o

CD

to
Ox

TABLE 7.—Change in amount of business loans of member banks, 1955-57,
[Increase, or decrease ( - ) .
Amount
outstanding Oct. 16,
1957 (in
millions of
dollars)

Business of borrower

All business

—

-

Manufacturing and mining:
Food, liquor, and tobacco
Textiles, apparel, and leather
Metals and metal products
Petroleum, coal, chemicals, and rubber
All other
-Trade:
Retail trade
Wholesale trade
Commodity dealers
Other:
Sales finance companies
-Transportation, communication, and other public utilities.
Construction-..
Real estate
Service firms
All other nonfinancial
-

Size of borrower (total assets, in thousands of dollars)
All borrowers 1

Less than
$50

$50 to $250

$250 to
$1,000

$1,000 to
$5,000

$5,000 to
$25,000

$25,000 to
$100,000

40,618

31.9

-3.0

16.7

24. £

21.3

24.7

51.1

2,392
1,685
5,526
3,750
2,793

28.0
-3.0
70.5
44.1
47.2

-33.5
-38.7

7.1
-20.7
20.1
8.4

23.7
-7.8
20.2
40.3
20.1

5.4
-4.0
46.7
18.3
46.1

-4.6
-9.5
35.1
7.2
76.1

8.5
3.6
106.1
20.4
82.7

4,588
2,982
816

33.2
24.7
10.7

3.4

28.3
21.8
13.4

51.4
23.7
44.2

-22.1

48.7
17.9

32.3
31.0
-2.4

36.6
105.2

3,096
4,168
1,981
2,976
2,263
1,606

9.3
47.0
17.1
22.5
28.3
20.4

-24.0
13.0
9.4
9.9
29.5
18.0

20.2
10.5
9.3
23.3
36.2
26.9

7.5
56.1

36.3
84.0
101.2
109.3
29.7
30.4

i Based on data that include a small amount of loans for borrowers whose size was not
ascertained.
Note.—Details may not add to totals because of rounding.




by business and size of borrower

In percent unless otherwise noted]

-18.2
-16.2

-7.2

-10.6
-18.8

-32.5
31.2
-7.7
-24.9
4.6

6.0

2.2

44.6
23.6
17.1
42.1
-1.3

-.5

27.6
79.8
25.1

$100,000 or
more

61.2

Source: Financing Small Business," Report to the Committees on Banking and
Currency and the Select Committees on Small Business, U.S. Congress, by the Federal
Reserve System, Apr. 11, 1958.

a

H

P
O
w

'TABLE 8.—Business loans of member banks, 1955-57,

by business and relative size of borrowers
Increase, or decrease (—), 1955-57

Loans outstanding Oct. 5,1955
Millions of
dollars

Business of borrower

Percentage of industry total, by size
Percentage of industry total, by size
of borrower 2
Millions of
of borrower 2
dollars
Small

All businesses

_

Manufacturing and mining:
Food, liquor, and tobacco—
Textiles, apparel, and leather
Metals and metal products
Petroleum, coal, chemicals, and
rubber
All other
Trade:
Retail trade
Wholesale trade
Commodity dealers
Other:
Sales finance companies
Transportation, communication, and
Public utilities
Construction
Real estate
Service
firms...
_
All other nonfinancial business

Medium

Small

Large

Medium

Large

Percentage change, by size of
borrower
Small

Medium

Large

30,805

20.5

44.9

31.7

9,813

6.9

39.5

50.4

10.6

28.0

50.7

1,869
1,736
3, 241

21.4
33.0
38.7

55.4
47.2
36.1

22.4
18.2
24.0

523
—53
2,285

10.0
3 -154.4
16.6

6.2
a -95.3
32.0

83.7
3157.1
51.4

13.0
-14.3
30.2

3.1
-6.2
62.5

104.5
26.3
151.2

2,603
1,896

28.7
18.6

44.7
61.8

21.7
18.4

1,147
895

13.0
2.1

14.5
58.9

68.0
38.0

20.0
5.4

14.3
45.0

138.1
97.5

3,445
2,392
736

13.8
23.9
8.9

51.0
56.5
36.5

33.1
17.8
52.3

1,144
590
79

1.4
16.0
7.4

56.9
48.4
12.7

38.9
37.2
78.7

3.4
16.5
8.9

37.1
21.1
3.7

39.0
51.5
16.2

2,832

25.1

32.1

42.5

263

-2.7

74.9

27.1

-1.0

21.8

5.9

2,835
1,692
2,430
1,763
1,333

1.7
7.8
24.4
17.4
7.1

49.0
51.1
22.7
50.1
37.5

46.6
38.0
44.7
27.0
48.8

1,334
289
546
499
272

1.1
-3.5
4.1
2.8
2.1

53.6
27.9
23.5
56.7
41.7

39.7
62.8
52.6
41.4
46.5

31.2
-7.7
3.7
4.6
6.0

51.5
9.3
23.3
32.0
22.7

40.0
28.2
26.4
43.3
19.4

1 For classification of borrower by relative size, see appendix A.
2 Figures do not add to 100 percent because some loans were made to borrowers whose
size was not ascertained.
3 Net change for industry was a decrease; sign indicates direction of change for size group.




1

Source: "Financing Small Business," Report to the Committees on Banking and
Currency and the Select Committees on Small Business, U.S. Congress, by the Federal
Reserve System, Apr. 11, 1958.

1
tr
M
o
©
M
W

H
50
51
'SO
i>
H
M
O
H
S

o

to
•<1

244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,
[From the N e w York Times, Mar. 15, 1959]

U . S . B O N D STUDY CALLED OVERDUE—SCRUTINY B Y RESERVE AND TREASURY
G o BEYOND MOST RECENT A B U S E S

MAY

( B y Paul Heffernan)
The study of the Government securities market about to be undertaken by
the Treasury and the Federal Reserve System is the first effort of its kind in
a number of years.
It has no stated limitation of scope. Conceivably, it could go f a r beyond the
problem that touched it off—the abuse of speculative credit in the market—
and lay the foundation f o r a broader and more flexible market structure.
Such a reform would be long overdue. In many ways the structure and practices of the market still smack over much of the attitudes and concepts inspired
by the psychology of depression and war.
But there are more touchy reasons why the study should not limit itself
unduly to the spectacular price gyrations of the 1958 market. Many disinterested observers feel that the sponsors of the study—the Treasury and the
Federal Reserve—themselves cannot avoid a share of the blame.
After all, was it not the acts of the money and debt managers that egged on
the reckless and, as it turned out, naive speculators? The Reserve System saw
fit to impart dramatic emphasis to public declarations of credit policy change.
And the Treasury was ingenious in devising securities having speculative appeal.
Further, both reputable financial and nonfinancial corporations not only extended questionable credits but joined in the revelry themselves.
INQUIRY TERMED DESIRABLE

It is reasonable to assume that the chagrined parties to this unhappy adventure have learned a lesson and that an official white paper on the subject will
do little, perhaps, except to instruct and appease the public.
But a full inquiry into the structure of the Government market and the Government debt—one that would seek to bind Government securities more closely
into the economic consciousness of the everyday citizen—would be of lasting
social and economic benefit.
Every U.S. citizen should want to own Treasury bonds, not out of patriotism
but out of a deeply held feeling of prudence. Such a feeling must be wanting
in the stock-crazed period of today. And a lack of it is more deplorable than
the occasional market excesses of professional speculators.
Much of the current coolness of the investment community to Government
securities must be a revulsion from the profligacy of a public legislative body
that keeps spending more money than it is willing to cover by taxes.
Some of the indifference must be due, too, to the tax shelter appeal of the
equity market, a refuge where punitive income tax liabilities can be converted
into less onerous and postponable capital gains liabilities. Of course, much of
the equity craze is inspired by the growing shortage of blue-chip common stock,
a phenomenon unquestionably related to the tax structure's encouragement of
debt capital financing and discouragement of equity financing.
A Federal Reserve-Treasury white paper can do little to dismantle the tax
and budget policy barriers that now keep the investment public from buying
Government securities. Congress will undertake this job in due course, probably
when the going rate of interest on Government bonds gets so high as to spur
the Treasury and Federal Reserve to write another white paper. The going
rates today—3 and 4 percent—are still low, historically.
LAST STUDY I N

1952

The last official study of the Government market was a Reserve Board undertaking in 1952. Coming in the wake of the restoration of the long-term part
of the Treasury market to a free basis, the study at the time seemed pointed and
fruitful.
It confirmed the Reserve's resolution to shun intervention in the long-term
market and it brought to an end the concept of "officially recognized dealers," an
arbitrary expedient invoked by the Federal Reserve during the war finance
period to prevent the market's high places from being usurped by opportunistic
financial adventurers from outside.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Experiences of subsequent years have shown, however, that the reforms of
1950 and 1952 fell far short of "reconverting" the Government securities market
to the needs of peacetime. Despite the worthy changes, official Washington
is still conditioned by states of mind born during the great depression as
a consequence of the worldwide economic collapse. Some of these a r e :
Low interest rates are an economic boon. Even if brought on by disaster,
they should be credited to political sagacity and maintained at all costs, even
at the risk of debauching the currency.
There is something wrong about any profit obtained f r o m a financial service.
The man in the street should be shielded from the dangers of the free marketplace. He should be discouraged from buying debt contracts whose prices
fluctuate in the market, and should be encouraged to buy nonmarketable Government bonds cashable at any time without loss of principal.
Securities should be sold not to suit the Government's needs but to suit the
needs of investors. Investors will always have more money to invest than
places to invest it.
It is against public policy for the Government to sell tax-exempt bonds because
wealthy persons will have in such investments a selfish sanctuary f o r preserving
their estates.
Not until the public authorities are further disabused of these holdover, anticapitalist notions can the Government securities market be expected to realize
its full potential, both as a professional market for high-grade basic yields and
as an active part of the everyday life of the citizenry.
Moves such as the following might rid the Government market of most of the
problems besetting i t :
Congressional efforts to restore balance or surpluses to budgets and to reform
taxation.
Restoration of income tax exemption to selected new issues of Treasury bonds.
Aggressive sales campaigns to discourage the man in the street from the hazards of stock speculation and to encourage buying of marketable Government
securities of short or long term, according to his needs.
Payment of special compensation to distribute Government securities on a
wide scale. Otherwise it cannot be expected that the Nation's thousands of
investment dealers and banks otherwise occupied will risk joining the 16 dealers
now handling the Government bond business.
Recurring sales of interest-bearing or non-interest-bearing Treasury bonds of
the capital appreciation type, with the date of call selected at designated quarterly
or semiannual dates by lot. The gambling aspect of such lossproof bonds would
have wide appeal.
[From Washington Post and Times Herald, Mar. 9, 1959]
U.S. BOND MARKET SPECULATION PROBED

(By Joseph R. Slevin, Herald Tribune News Service)
The Treasury Department and the Federal Reserve System said yesterday
they have begun a joint investigation of the multibillion-dollar Government bond
market.
The two agencies declared they want to prevent excessive speculation and to
improve the functioning of the market. They said that the inquiry will be
factual.
The investigation is a direct outgrowth of a speculative buying spree and
subsequent market collapse in 1958. The agencies said their study will focus
on those developments.
The 1958 fiasco was the worst debacle in the history of U.S. free market public
finance. Thousands of investors lost money. The Government bond market
became demoralized and has not yet regained public confidence.
The Treasury and the Federal Reserve said they expect to complete their
joint study in time to make it public about midyear. The findings presumably
will be laid before congressional committees.
A Herald Tribune News Service investigation last summer disclosed that loose
corporate, bank, and Government bond dealer lending practices made it possible
f o r speculators to obtain huge quantities of Government bonds without making
a downpayment and without paying interest. Some of the Nation's biggest
corporations and banks financed the speculators and simultaneously speculated
heavily on their own.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

The Treasury and Federal Reserve made it plain that the plungers' credit
deals will be a prime target of their probe.
They said they will ask for data from major lenders and participants in the
Government bond market including banks, corporations, dealers, and brokers.
The news service investigation revealed that banks and corporations financed
hundreds of millions of dollars of speculative activity by buying securities that
they then agreed to resell at a future date to a speculator or to a money broker
who acted as the speculator's middleman. These arangements were called repurchase agreements and buybacks.
A number of banks violated the precepts of sound banking by lending money
to speculators they didn't know. Direct loans were often granted without
margin.
The bubble burst in mid-June after the plungers had joined with legitimate
investors in buying more than $7 billion of new 2 % percent 7-year Government
bonds. The bond market faltered with signs that the recession was ending.
It broke sharply when speculators began to dump huge holdings of Government
obligations.

The C H A I R M A N . Our next witness is our colleague from Florida,
Hon. Charles E. Bennett.
Mr. Bennett, we are pleased to have you with us today, and you
are recognized, sir, to proceed in your own way.
STATEMENT OF HON. CHARLES E. BENNETT, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF FLORIDA

Mr. BENNETT. Thank you very much, Mr. Chairman.
Mr. Chairman, I appreciate this opportunity to testify on the national debt. You have heard in these hearings the testimony from a
great Secretary of the Treasury. I know it pains him to be forced
to ask for an increase in the national debt limit. If there were any
other way of financing our Government economically and wisely under present laws, I am certain he would not ask for this increase.
His having to come before Congress periodically to ask for debt limit
increases points up the need for stronger laws to keep the national
debt down and, if possible, to roll it back. In an effort to make a contribution toward such laws, I have introduced several bills which are
now pending before this committee. With your permission I would
like to say a few words on these proposals and how I believe they
would help make it unnecessary for the Secretary to request further
debt increases.
Enactment of my bill, H.R. 6292, would be a significant first step
toward exploiting gifts as a means of reducing the national debt.
At present gifts to reduce the debt are negligible. With proper legislative changes, many Americans who are concerned over the national
debt can be interested in making such gifts. H.E. 6292 would authorize acceptance of gifts earmarked to reduce the national debt. Such
gifts can now be treated only as unconditional gifts to be deposited in
the general fund of the Treasury. No assurance can be given that
they will be used to reduce the debt. The donor cannot be certain
that the net effect will not be to increase spending on programs with
which he is not in sympathy. H.E. 6292 makes possible the giving
of that assurance. It provides that such gifts are to be placed in a
special fund to be used only for retiring obligations constituting part
of the national debt. The Treasury has not yet rendered a report on
this bill, but it reported favorably upon a similar bill in the 85th
Congress, and I believe it will render a favorable report on this bill
as well.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

An even more important step in my opinion is that proposed by
my bill, H.R. 6348. This bill is needed as a companion measure to
H.R. 6292, discussed above, to give the strongest possible assurance
that gifts to reduce the national debt are used for that purpose and
not for swelling current receipts. This it does by dividing the
public debt into the "1949 national debt" and the "post-World War I I
national debt." The "1949 national debt" would consist of obligations
totaling the amount of the public debt on April 30, 1949, when the
debt was at its lowest point since World War II, to wit: $251,530,463,254.82. All gifts made for debt reduction would be used to reduce
this figure. This would have the advantage not only of insulating
from current expenditures the debt to which gifts are applied, but
also of maintaining a definite figure which would be affected only
by gifts and other receipts specified for reducing the national public
debt. Thus, every gift would result in reducing the debt by an easily
determined precise amount, and no current expenditure could change
this result. I believe that insulating the debt to be reduced in this
way is an indispensable step in any program to reduce the national
debt. Otherwise, wars, depressions, and deficits will upset the debt
reduction program.
My third debt-reduction bill is H.E. 7457, which is identical with
Congressman Wright's H.R. 4588. Since he is taking the leadership
on this measure, I believe I should permit him to make the major
presentation on it. Suffice it to say, I wholeheartedly agree with
him when he says, "It's cheaper to pay than to owe," and I hope
his bill can be enacted.
My last debt-reduction bill before this committee is H.R. 6293,
which would require proceeds from sales of Federal surplus property
to be used for reducing the national debt. If passed together with
H.R. 6348, such proceeds would be applied to the "1949 national debt."
This would mean that such proceeds would not show up in current
receipts and would not determine whether a current year's budget
is balanced. Applying proceeds of surplus property sales to the
national debt in this way would provide a substantial means of
reducing the debt.
Mr. Chairman, the American people have come to have a defeatist
attitude toward the national debt. As long as nothing is done this
problem they will continue to have such an attitude, and the debt
will continue to rise in good years as well as in bad. But if we
enact some or all of these bills, we will be showing them that something can be done about the national debt and that w^e are doing it.
These bills might not result in a fast payoff, but they would be a
beginning, and that would be a monumental accomplishment.
Thank you again, Mr. Chairman, for permitting me to express
these views.
The CHAIRMAN. Thank you, Mr. Bennett, for bringing this discussion of your bills to the committee. We appreciate your doing so.
Are there any questions ?
Thank you, sir.
Mr. BENNETT. Thank you.
The CHAIRMAN. Our next witness is also from Florida, the Honorable D. R. Mathews, Without objection, Mr. Matthews may extend his remarks at this point in the record.
41950—59




17

244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

STATEMENT

OF R E P R E S E N T A T I V E
OF

D. R .

(BILLY)

MATTHEWS,

FLORIDA

Mr. M A T T H E W S . Mr. Chairman, I appreciate very much the privilege of appearing before this great committee on behalf of H.K. 5317,
and similar legislation which I think would provide a practicable
means for the retirement of the public debt.
The language of the bill is simple. It simply says that "There shall
be included in each budget hereafter submitted to the Congress by the
President under the Budget and Accounting Act, 1921, an item requesting an appropriation equal to 1 percent of the aggregate face
amount of such obligations (not including those held by the Secretary
of the Treasury) outstanding on July 1 of the year in which this sentence is enacted, which item shall be used exclusively for the retirement
of such obligations. No such budget for any fiscal year shall be considered as balanced, or as providing for estimated receipts equal to or
in excess of estimated expenditures unless such item is taken into
account, and considered as an estimated expenditure for such fiscal
year."
Mr. Chairman, I realize there is no painless way of retiring our national debt. I do believe, however, we should determine now to have
set aside in the budget a certain amount that will enable us to begin
that retirement. If such a bill as the one I have introduced were
passed, it would mean it would take about a hundred years to pay off
the national debt, provided we could continue in the future to hold
expenditures in line with receipts.
I believe the American people would be willing to sacrifice some if
they felt that we were really making progress in balancing the budget
and paying off the debt. Such a bill as I am proposing, if it were
passed, would be of great moral incentive to Members of Congress to
take a more personal interest in holding down expenditures. Many
times as new Federal programs would be proposed we would have facing us two alternatives—either we could vote for the new spending
program, or we could decline to vote for it on what might be the
logical grounds of saving the money of this program so that we could
retire the portion of the national debt that we are supposed to retire in
any fiscal year.
I, of course, am not proposing that by means of this legislation we
shall forestall any new Federal programs. I am very much concerned,
however, with the attempt each year to straddle on the Federal Government certain obligations and responsibilities that I think belong to
the States and to the municipalities of America. It doesn't take much
courage many times to vote for new appropriations in Congress because we are not faced with the immediate prospect of assessing new
taxes to take care of these appropriations. We must, however, pay
the fiddler sometime, and I propose that we begin those payments
beginning with fiscal year 1961.
I think the passage of such a bill as H.E. 5317 would have a great
moral effect on the people of America. It would say to them that
surely in this great and powerful country of ours, in order to preserve
the private enterprise system, we are going to fight for the fiscal solvency of the Nation, which in turn, of course, means the fiscal solvency
of every one of the millions of individuals who go to make up this
beloved country of ours.




244 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

Thank you very much, Mr. Chairman, for this opportunity of
testifying.
The C H A I R M A N . Our next witness is our colleague from Wisconsin,
the Honorable Henry S. Reuss.
Mr. Reuss, we appreciate having you before the committee, and you
are recognized to proceed in your own way.
S T A T E M E N T O P R E P R E S E N T A T I V E H E N R Y S. R E U S S , O F W I S C O N S I N

Mr. REUSS. Thank you, Mr. Chairman.
I have a prepared statement, which has been handed to the clerk,
and with the Chair's consent, I would like to offer that statement for
the record and then proceed briefly to summarize what I have to say.
The C H A I R M A N . Without objection, your entire statement may be
printed in the record.
(The statement of Hon. Henry S. Reuss is as follows:)
STATEMENT OF REPRESENTATIVE H E N R Y S . JREUSS, OF W I S C O N S I N

Proposed amendment: Add a new section 8, as f o l l o w s :
"SEC. 8. It is the sense of Congress that the Federal Reserve System, while
pursuing its primary mission of administering a sound monetary policy, should,
to the maximum extent consistent therewith, utilize such means as will assist in
the economical and efficient management of the public d e b t ; that the System, to
the greatest extent possible, should bring about needed future monetary expansion by purchasing United States securities, of varying maturities, rather than
by further lowering bank reserve requirements; and that the System should
promptly and fully explore methods whereby use of the power to raise reserve
requirements may become a more usable and effective anti-inflationary tool."
The House Committee on W a y s and Means is considering a bill to remove the
present interest ceilings on savings bonds and on Treasury bonds, and to raise
the public debt limit f r o m $283 billion to $288 billion, with a temporary increase
to $295 billion.
The bill to accomplish this is called " A bill to facilitate management of the
public debt." It has been brought about by the crisis in our debt management—
higher and higher interest rates, lower and lower market prices f o r U.S. securities, less and less investor interest in the nationl debt.
If the bill merely removes the ceilings on the interest rate and on the amount
of the national debt, it might better be entitled " A bill to facilitate mismanagement of the public debt." F o r it will encourage our monetary managers to continue on the deadend course on which they are embarked.
Merely raising the interest paid on the national debt is not going to solve anything. The $8.5 billion carrying charge on the national debt f o r fiscal 1960 is
already the largest single nondefense item in the budget. Further increases in
the interest rate are not merely going to increase the burden on the taxpayer.
A s high interest rates communicate themselves throughout the entire economy,
economic activity everywhere, but particularly in housing, local government
activities, public utilities, and small business is going to be hurt.
The amendment I propose would express the sense of Congress that the
Federal Reserve System should not continue to turn its back on the management
of the national debt, as it has been doing f o r some years. Of course the Federal
Reserve's sole mission should be a sound monetary policy. But there is no reason w h y a sound monetary policy cannot be used to help, rather than to hurt,
debt management. The proposed amendment involves no backtracking on the
Treasury-Federal Reserve accord of 1951, no commitments to peg the U.S. security market at par, no support measures at a time when monetary expansion
would be inflationary.
The principal directive of the amendment would be that the Federal Reserve
"should bring about needed future monetary expansion by purchasing U.S. securities, of varying maturities, rather than by further lowering bank reserve
requirements."
Consistently since 1953, the Fed has expanded the money supply, where it has
expanded it at all, by lowering reserve requirements of member banks. In the
case of central Reserve city banks (New York and Chicago), reserve require-




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

ments have been lowered from 24 in 1953 to 18 today. In the case of Reserve
city banks, requirements have been lowered from 20 in 1953 to 16y 2 today. In
the case of country banks, reserve requirements have been lowered from 14 in
1953 to 11 today.
About $4.3 billion of reserves has been added to the banking system by this
method—enough to create six times as much credit, or almost $26 billion worth.
Never once since 1953 has the Federal Reserve, when it was pursuing antiinflationary policies, tightened reserve requirements. Instead, it has tightened
money solely by raising the rediscount rate and by selling U.S. securities from
its portfolio.
What is more, the Federal Reserve System has recently stated very clearly
its continuing intention of adding to the money supply by purchasing U.S. securities f o r its portfolio. I recently collected these policy statements from the
Federal Reserve System and set them forth in the Congressional Record f o r
June 4, 1959, at pages 8963-8964.
The proposed congressional directive to the Federal Reserve to use purchases
of U.S. securities as its principal method of expanding the money supply would
help the cause of debt management in three major w a y s :
(X) It would raise somewhat the price of U.S. securities, and thus lower
somewhat the going interest rate, not only on U.S. securities, but on all debt,
public or private. Cushioning fluctuations on the downward side would make
Governments more attractive to investors. Even if the additions to the money
supply in the future need to be only the modest 3 percent currently recommended by the Federal Reserve ( I think 4 or 5 percent would be more like i t ) ,
this requires an addition to the money supply of close to $6 billion annually, or
close to $1 billion in new reserves. If the Federal Reserves achieves this expansion in reserves by purchases of U.S. securities, it will have assured the maximum amount of support f o r U.S. securities, consistent with sound monetary
policy (assuming reserve requirements remain unchanged). It should be noted
that the proposed congressional directive to the Federal Reserves speaks of purchasing U.S. securities "of varying maturities." The Fed presently restricts
itself to a bills-only policy which needlessly deprives the U.S. security market
of the maximum support per dollar that it ought to have.
(2) It would save many millions of dollars annually f o r the taxpayers, because the interest charge on the national debt owned by the Fed comes back to
the Treasury. For example, if the Fed had purchased $4.3 billion of U.S. securities in recent years, instead of achieving this increase in outstanding reserves by lowering reserve requirements, at current interest rates something in
the neighborhood of $160 million would be saved f o r U.S. taxpayers. For the
future, if the Fed's net purchases of U.S. securities average only $1 billion a
year, in 10 years this would amount to $10 billion worth of national debt. The
savings on this sum could be close to $400 million a year, at current interest
rates.
(3) It would at least partially protect the Treasury against the frequent
embarrassment of attrition, whereby holders of maturing national debt suddenly
elect to take cash, rather than a refunding security. In May, for example, onethird of the holders of a maturing 1-year note suddenly demanded cash, rather
than to take another 1-year refunding note.
So far we have been discussing solely decreases in the Reserve requirement,
and making the point that this method of increasing the money supply does not
help in the management of the national debt, as does the method of purchasing,
or at least retaining in the Federal portfolio, U.S. securities. However, there
may well be occasions when the Federal Reserve, from the standpoint of both
sound monetary policy and sound debt management policy, may wish to, and in
fact should, raise Reserve requirements. The Federal gives as its reason f o r not
having done so, and for proclaiming its intention of not doing so in the future,
that the reserve-raising power is a clumsy weapon, in that it may operate
harshly upon certain member banks.
There is strong reason to believe that the Federal Reserve, if it really wanted
to smooth off the rough edges of its debt management policy, could do so by
a series of very simple ^inondments. A number of sound and sensible ways of
doing this, recommended by the late E. A. Goldenweiser, former Director of
Research f o r the Federal Reserve System, and published by the Committee f o r
Economic Development, are set forth in my remarks on the floor on June 4,
1959 (Congressional Record, p. 8965).




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

The House Committee on Banking and Currency on May 28, 1959, formally
requested the Federal Reserve to explore methods of making the Reserveraising power a usable and effective method. The committee said:
"Your committee firmly believes that the Board's monetary tools must be as
efficient as possible. We are concerned over indications that increases in
Reserve requirements may be considered too blunt a weapon to use effectively.
Accordingly, the Federal Reserve Board is requested to give further study to this
problem, and to report to the committee as soon as practicable concerning possible improvements in the techniques of employing Reserve requirements as an
anti-inflationary tool, together with recommendations f o r any remedial legislation that may be necessary to put these improvements into effect" (committee
report, p. 6 ) .
The entire Congress should express the same wish as did the House Committee on Banking and Currency—that the Federal should refurbish its Reserveraising powers, both to fight inflation when inflation threatens, and to permit a
decent Federal participation in the debt management processes without giving
rise to inflationary dangers.
Our debt managers need some guidance from Congress. The proposed amendment endeavors to provide this. In the long run, sustained economic growth,
increased savings, reasonable price stability, national budgets balanced at full
employment and production, are the royal road not only to a healthy economy,
but to a well-managed national debt. Meanwhile, Congress must give the
clearest kind of immediate directive that it can.

Mr. R E U S S . I hope it has been distributed to the members of the
committee, because it may be easier to refer to it.
The committee is taking a look at the debt management crisis—
higher and higher interest rates, lower and lower prices on Government bonds, more and more skittishness on the part of investors,
which has brought the Treasury here asking for the heightening of
the debt ceiling and the removal of the interest rate ceilings on savings bonds and on U.S. securities in general.
Partly, the debt management crisis is the result of natural causes,
but it is also in part, I believe, caused by policies of monetary management and debt management which I believe could be improved.
I therefore present to the House Committee on Ways and Means
a proposed amendment, which is set forth at the beginning of my
presentation, which in my opinion would be a worthwhile addition to
whatever the committee reports out, whether it raises or does not
raise either the debt ceiling or the interest ceilings on savings bonds
or on U.S. securities in general, or even if it should be determined
to do nothing. I believe that Congress should inform the monetary
authorities of how its monetary practices may be improved.
The proposed amendment has three thoughts in it. The first
thought is that—and here I read:
It is the sense of Congress that the Federal Reserve System, while pursuing
its primary mission of administering a sound monetary policy, should, to the
maximum extent consistent therewith, utilize such means as will assist in the
economical and efficient management of the public debt.

In other words, the Federal would be urged not to turn its back
on public debt management, as it has in recent years. Of course, its
major concern must be a sound monetary policy, but there is no reason why that which it does, to bring about a sound monetary policy,
cannot in the course of that, also assist in debt management.
What I propose involves not one bit of back tracking on the Federal
Reserve-Treasury according of 1951. It does not involve any commitments to peg the U.S. bond market at par. It does not involve any
support measures at a time when monetary expansion would be inflationary.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

In this connection, I note what Secretary Anderson had to say in
some 20 pages of his statement yesterday, in which he sought to
answer the contentions of critics as to why the administration was
not doing more about helping in the management of the national debt.
In doing so, he examined and thoroughly stepped on a number of
proposed positions.
I have looked at that part of his testimony, and I find that while
the carnage was terrific, most of the men that he was slaying were
strawmen. For example, the Secretary spent some time examining
the proposition that it would be a good idea, in order to secure a better management of the national debt, that the Government bring
about a recession.
Well, I do not think that anyone outside of a lunatic asylum is
suggesting such a measure, and I therefore find that the Secretary's
answers to criticisms do not really take up the criticism. I have such
a criticism to make. I will state exactly what it is. And I hope that
the ideas I present will get through to members of the committee,
so that they may set me straight if I am wrong.
The main directive that I think the Congress ought to give to the
monetary authorities is contained in the second clause of my proposed amendment, and that is also brief and says: "That the Federal Reserve System, to the greatest extent possible, should bring
about needed future monetary expansion by purchasing U.S. securities of varying maturities, rather than by further lowering bank
reserve requirements."
Now that is my thesis. Let me explain why I urge it.
Consistently, in the last 6 years, the Fed, when it has wanted to
expand the monetary supply, has done so by lowering reserve requirements of member banks. I have set forth on page 2 of my
statement how it has lowered New York and Chicago bank reserve
requirements from 24 in 1953 to 18 today; Reserve city bank requirements from 20 down to 16y2 today; and country banks from 14 in
1953 to 11 today.
This has resulted in the creation of about $4,300 million of reserves,
which, on a 6-for-l ratio, have resulted in the creation of about six
times as much credit or money, $26 billion worth.
Never once during this period has the Federal Reserve, when inflation threatened, and it wanted to tighten credit, done so by tightening reserve requirements back to where they were. Instead, it has
always tightened money either by raising the rediscount rate, or by
selling U.S. securities from its portfolio.
What is more, this is not merely the past, for the historical archives.
The Federal Reserve has, just a few days ago before a committee
on which I am a member, the Banking and Currency Committee,
solemnly set forth that it is going to give us more of the same; that
from here on out it intends to continue to increase the monetary supply by lowering bank reserve requirements, not by purchasing U.S.
securities for its portfolio; indeed, it says that it is going to go on
lowering bank reserve requirements, and if this should prove too
inflationary, it is going to take up the slack by selling securities
from its portfolio.
The method of meeting necessary increases in the monetary supply which I propose is exactly the opposite. I suggest that the Fed




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

be told that it should meet necessary increases in the monetary supply
in the years to come by purchasing appropriate amounts of the
national debt.
There are three advantages in such a method. And let us keep
clearly in mind that from the monetary standpoint, from the inflationary standpoint, the methods are exactly equal. I am not here suggesting either tight money or easy money. 1 am simply saying that
whatever rate of monetary increase appeals to our monetary authorities, the Federal Eeserve, as a good, right, just, and sensible rate of
increase, let them do that, but let them achieve it in the right manner.
They say in their recent testimony that they think a rate of increase
in the money supply of 3 percent a year is about right. Now I happen
to think that 4 or 5 percent is closer to what this country needs to
attain the rate of growth that is necessary, both for what we need
at home and for our world responsibilities. But let that pass. Let
us accept the Fed's judgment at 3 percent.
There are three ways in which debt management can be improved
by utilizing the method of increasing reserves envisaged in the proposed amendment, rather than the method that the Fed has in fact
pursued, of constantly lowering bank reserve requirements.
In the first place, the use of the method of purchasing U.S. securities
by the Fed would tend to raise the price of U.S. securities, because
there would be this much added on the demand side of the equation,
and thus lower somewhat the boing interest rate, not just on U.S.
securities, but by communication throughout the entire debt structure,
the interest rate on mortgages, corporate bonds, State and local governments, and everything else. Cushioning fluctuations on the downside is going to make Governments a lot more attractive to investors.
I can understand an investor being skittish about purchasing a Government bond at par. Last June the investors who bought that issue
of June 1958, now observe that it is selling at around 90.
Even if the additions to the money supply in the future are only the
modest 3 percent that the Federal Eeserve thinks they should be—
and as I say, I am not at this time quarreling with that—this would
require an addition to the money supply of close to $6 billion annually,
or close to $1 billion in new reserves.
Now if the Federal Eeserve
achieves this expansion in reserves by purchases of U.S. securities, it
will assure the maximum amount of help for the problem of debt
management.
It should be noted that the proposed directive by Congress to the
Federal Eeserve speaks of purchasing U.S. securities of varying maturities. I think that would be a good directive to give the Fed,
because the present policy of "bills only" unduly restricts their freedom
of action. While I do not suggest that they ought to be required to
purchase bonds only or certificates only or notes only, I do suggest
they should free themselves of the self-imposed iron maiden of "bills
only," and that they should pursue a policy of purchasing securities
which has as its only criterion w4iat is best for the country.
Secondly, the method proposed of Federal Eeserve purchases to
create needed reserves for needed expansion of the monetary supply
would save many millions of dollars annually for the taxpayers,
because, as is well known, the interest charge on the national debt
which is owned by the Fed comes back to the Treasury. For example,




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

if the Fed had done what I believe they should have done in the last
4 years, if they had purchased this $4.3 billion of U.S. securities,
instead of creating that amount of reserves by lowering bank reserve
requirements, at current interest rates something like $160 million a
year would be saved for U.S. taxpayers.
For the future, if the Fed's net purchases of U.S. securities averaged
a billion dollars a year, which is, if you follow my arithmetic, about
what I think they would average, in 10 years this would amount to
$10 billion w^orth of national debt. And at current interest charges,
again, this would save for the taxpayers close to $400 million a year.
Let me quote from a leading economic authority, Prof. Alvin Hanson, of Harvard, on just how this works. He says in a recent book:
For a growing economy an importance issue is raised: Which method of
economic controls is to be preferred, changes in reserve requirements or changes
in open market operations? Both methods, it is true, provide earning asset
windfalls to the commercial banks. But there is this difference. When the
expansion is effected by way of open market operations, the earning asset windfall is shared between the banks and the Federal Reserve. The net effect of the
open market method is that the Government, since it has paid about 95 percent
of the Federal Reserve profits, would participate in the moneymaking windfall.
The open market method is thus clearly more favorable to the taxpayer.

So, reason No. 1, it helps eliminate fluctuations on the downside.
Reason No. 2, it gives a long delayed and much deserved breaks to the
taxpayer. And reason No. 3, it would in large measure protect the
Treasury against the frequent embarrassment of what is called attrition, namely, when holders of the maturing national debt come around
and are offered a refunding security but instead wave it aside saying,
"No, I want cash."
Just last month, for example, more than one-third of the holders of
a maturing 1-year U.S. note said, "No, we don't want the 1-year note,
even though it bears a coupon of almost 4 percent, which you are offering in exchange. Give us cash." And the Treasury had to go out
and raise some money on the drumhead in an embarrassing hurry.
To the extent that the Fed will assume its responsible role in debt
management, this embarrassment of attrition will diminish.
So far, Mr. Chairman, I have been discussing just the question of a
Federal Reserve helping hand to the Treasury in the course of the
normal creation of an expanded monetary supply, at whatever rate
the monetary authorities deem it advisable. However, I want to call
to the attention of the committee that here may well be occasions when
the Federal Reserve, from both the standpoint of sound monetary policy and sound debt management policy, may wish to, and indeed
should, raise reserve requirements.
The Fed has in effect thrown away this very valuable anti-inflationary weapon by saying, as it repeatedly does, and as the Treasury
said yesterday, "Oh, this weapon is so blunt that we can't really use
it." So constantly they lower reserve requirements but never, never,
never raise them.
I believe that if the Federal Reserve put its mind to the problems,
if it really wanted to smooth off the rough edges of the reserve raising
power, it could do so.
A number of very sound and sensible methods of doing this have
been suggested by the late E. A. Goldenweiser, who for many years
was Director of Research for the Federal Reserve; and in a series




244 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

of excellent books published by the highly respectable CED, the Committee for Economic Development, in recent years, Mr. Golden weiser
suggested most cogent and lucid and sensible ways of refurbishing
this reserve requirement weapon so that we have a solid weapon of
monetary management that can stem whatever inflationary pressures
there may be in the economy.
Just recently the House Committee on Banking and Currency in
its report, on May 28, just a few days ago, told the Federal Reserve
to get off its dime and do a little work and report back to the Congress how it can use this power. The committee said—this is set
forth on page 4 of my testimony:
Your committee firmly believes that the Board's monetary tools must be as
efficient as possible. W e are concerned over indications that increases in reserve requirements may be considered too blunt a weapon to use effectively.
Accordingly, the Federal Reserve Board is requested to give further study to
this problem.

And it goes on to say to report back speedily to Congress.
The entire Congress, I believe, Mr. Chairman, should express the
same wish as did the House Committee on Banking and Currency,
and that is why the third and last clause says, and I quote:
* * * that the System should promptly and fully explore methods whereby
use of the power to raise reserve requirements may become a more usable and
effective anti-inflationary tool.

I believe that our debt managers need some guidance from Congress. The proposed amendment endeavors to provide this. In the
long run, sustained economic growth, increased savings, reasonable
price stability, national budgets balanced at full employment and
production, are the royal road not only to a healthy economy, but to
a well-managed national debt.
But meanwhile, I sincerely believe that Congress should give the
clearest kind of immediate directive that it can in connection with
this problem.
Thank you very much, Mr. Chairman.
The C H A I R M A N . Mr. Reuss, we thank you, sir, for bringing your
ideas to the committee. They, I am sure, will be very helpful to the
committee.
Are there any questions ?
Mr. ALGER. I may have misunderstood what the gentleman from
Wisconsin said.
When you referred to the Secretary's statement, I was here
throughout that entire statement. Did you say he spent 20 some
pages talking about creating a recession ?
Mr. REUSS. No; what I said was the Secretary spent 20-odd pages
answering assumed criticisms of the monetary management policy of
the administration. On pages 19 through 34, particularly, toward
the end of his prepared statement, he has a section entitled "Consequences of various proposals to induce lower interest rates." And
I feel a little hurt, frankly, that the Secretary of the Treasury
did not take up my proposal, which I think is a sound one, and incidentally a proposal which would save the taxpayers millions of dollars, and instead spent his time demolishing various crackpot ideas
that nobody is seriously suggesting, one of which was "Let's have a
recession so that interest rates will go down."




244

PUBLIC DEBT AND INTEREST

RATE CEILINGS 120,

Well, the Secretary did a marvelous job of running his sword
through that idea. But nobody is seriously suggesting it. And 1
think the Secretary would have been better advised to spend those
pages of his testimony answering, if answers there be, the proposition which I have been putting forth both on the floor of the House
and here today and in communications to the various monetary
authorities.
Mr. ALGER. I apparently did not understand. I better understand
now what you said. I recall he did put an addendum to his statement yesterday.
I personally want to object to your saying that you felt the Secretary was attacking or disposing of various strawmen. I rather felt
these were very real problems. I felt the Secretary was confronted
with certain problems that he felt to be very real, and that he was not
trying to scare us or set up imaginary situations. I would like to ask
the gentleman in two regards, then, as to what the Secretary said. In
his questioning from his statement, he pointed out that he felt deficit
spending was creating the inflationary pressure w7hich both makes
for difficulty in the refinancing of money through the weakening of
the bond market, and also is the force that is bidding up the interest
rate.
Would the gentleman care to comment on that? Because we are
all faced with the problem of paying the bill.
Mr. REUSS. I am awfully glad to comment 011 that, and it is a very
good question.
Let me say right at the start, as I said a moment ago in my testimony, that 1 believe an essential concomitant of a sound economy is a
balanced budget at a high level of production and employment. Indeed, we want over the years to have a sufficiently growing economy
so that we can run a surplus and pay off part of the national debt.
And the next witness, Mr. Jim Wright of Texas, is going to offer some
very cogent thoughts on that.
However, in my opinion, it would be a dire mistake to say that the
debt management problems of the administration and of the Congress
are caused by the deficits we have had in recent years. Debt management has become a problem quite independent of deficits.
Just having budget surpluses, for example, and paying off part of
the national debt, is not going to solve the problem of debt management. It is not going to bring about lower interest rates, as long
as we pursue the policies we are now pursuing.
Strangely enough—and I will be glad to document this very fully
for the gentleman if he is interested—in the last 4 or 5 years, the times
when the Treasury has had the easiest time in managing the national
debt happened to be times when there has been a very considerable
deficit. Please do not misunderstand me. Please do not suggest that
I am saying that we should have big deficits to ease the management
of the national debt. What I am saying is that balanced budgets,
however desirable they are—and they are very desirable—are not in
and of themselves the way to solve the crisis in the national debt. The
crisis in the national debt is very largely the result of monetary and
debt-management policies which exacerbate and intensify the tendencies in the economy which, I grant you, are there anyway, producing high interest charges.




244 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

Mr. A L G E R . Well, I am sure you would agree that we have not had
much experience in Government surpluses to pay down the debt or
to affect our economy. I am pleased to hear the gentleman say he
believes in a balanced budget, but for the life of me I cannot understand how we could reach a balanced budget when we continue to
spend beyond income. The entire debt is the result of deficit spending, unless I am mistaken.
Mr. REUSS. Well, of course the entire national debt is the result
of deficit spending. The question to which I was addressing myself
was: Given a $285 billion national debt, which we now have, will
balanced budgets from here on out make the debt management problem an easy one? My answer is definitely "no"; that as long as we
continue incorrect debt management and monetary policies, we will
have that problem with us.
Mr. A L G E R . The gentleman is not saying that the $13 billion deficit
last year does not play a part in this. That has nothing to do with
debt management, but is the creation of this debt. We did it. Is that
not correct ?
Mr. REUSS. The $13 billion deficit last year constitutes thirteen
two hundred eighty-five thousands of the total debt management
problem. That is all it does. Obviously, if you have less of a national
debt, you have less of a problem. But my point is that at almost any
level you have a very difficult problem, made much more difficult by
what I regard as wrong-headed policies by the Treasury and the
Federal Reserve. So that if we could lower the national debt to zero,
we would then eliminate a national debt problem. But no matter
what we do with it, until we improve our debt management practices,
we are going to have an extremely serious problem.
For example, in 1956 and 1957, Mr. Alger, we not only had balanced
budgets, but surpluses. Yet the Treasury, at that time, could not
issue any long-term debt. With interest rates on the increase, investors shied away from any but the shortest term Governments. So
even when we had a splendid budgetary picture, with nice surpluses,
the problem of debt management, far from being solved, was almost
as bad as it is today.
Mr. A L G E R . I cannot agree with that, Mr. Reuss, but I will not
pursue it at this time. I realize the hour is late. We appreciate your
viewpoint.
The C H A I R M A N . Are there any other questions ?
If not, we thank you, Mr. Reuss, for the information given the
committee.
The C H A I R M A N . The next witness is our colleague from Texas, Mr.
Jim Wright.
You are recognized to proceed in your own way, Mr. Wright. Do
you have copies of your statement ?
STATEMENT OF REPRESENTATIVE JAMES C. WRIGHT, JR., OF TEXAS

Mr. W R I G H T . I am very sorry that I do not, sir. I have copies of
statements that some of my colleagues who are cosponsoring this
proposal which I am here to advance have asked me to present for
them, and others are presenting their own.
The C H A I R M A N . Y O U always present a matter in such a fine way
that I am sure we will be able to follow you.




244

PUBLIC DEBT AND INTEREST

RATE

CEILINGS 120,

Mr. W R I G H T . Mr. Chairman, one of the things that has fostered
my admiration for this committee and for you as its chairman is the
gracious manner in which you receive us and sit there listening
patiently to so much tedious discussion as you have done today. I hope
I can spare you undue punishment, and I will try to make this as
brief as I can.
I am here in the interest of presenting for your very serious consideration, on this committee, a proposal that has been advanced by
at least 19 of us in the House, which would create a systematic and
orderly method of retiring the national debt.
Among the cosponsors of this legislation are the gentleman from
Texas, and member of the committee, Mr. Ikard; the gentleman from
Louisiana, and a member of this committee, Mr. Boggs; the gentleman
from Florida and a member of this committee, Mr. Herlong; the
gentleman from Arizona, Mr. Udall; the gentleman from Florida,
Mr. Rogers; the gentleman from Texas, Mr. Casey; the gentleman
from Florida, Mr. Bennett, who earlier addressed you; the gentleman
from Tennessee, Mr. Loser; the gentleman from Nebraska, Mr. Brock;
the gentleman from Florida, Mr. Matthews; the gentleman from
Nebraska, Mr. McGinley; the gentleman from Iowa, Mr. Coad; the
gentleman from Kansas, Mr. Hargis; the gentleman from Maryland,
Mr. Brewster; the gentleman from Virginia, Mr. Downing; the gentleman from South Carolina, Mr. Hemphill; the gentlewoman from
New York, Mrs. St, George; the gentleman from Florida, Mr. Sikes;
and the gentleman from South Dakota, Mr. McGovern.
Similar bills, not identical to this, but varying in slight degree, have
been introduced, and have been referred to this committee by such
members as the gentleman from Texas, Mr. Teague; the gentleman
from Arizona; Mr. Rhodes; and the gentleman from New Jersey,
Mr. Thompson.
If I might summarize briefly what our feelings are in this regard,
may I ask permission that each of these members may have the
privilege of extending his remarks in the record of this hearing ?
The C H A I R M A N . Immediately following yours, Mr. Wright, without
objection it is so ordered.
Mr. W R I G H T . Thank you.
Early in this session of the Congress
The C H A I R M A N . Pardon me. You included our colleague, Mr.
Sikes, in thaJt; did you not ?
Mr. W R I G H T . Yes, indeed.
Early in this session of the Congress, the gentleman from Texas,
Mr. Ikard, and I began discussing the stark necessity for doing something to begin a system of orderly retirement of this burgeoning
national debt.
We introduced, first of all, a sense of Congress resolution, which
would express the intent of Congress that each year not less than 1
percent of the currently outstanding debt should be retired, and that
this payment on the principal of the outstanding obligation owed by
our Government should come out in the same package with the interest
which we are paying on this national debt.
You are confronted here, in these hearings, with the unpleasant task
of trying to decide how to handle and best manage this increasing
debt. You are confronted with the necessity for arranging some




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

means of paying an increasing interest. The interest on the national
debt, as you so well know, is the second largest single item in the costt
of operating our Government.
Today, at some $Sy2 billion, as it was represented this morning, I
believe, by Mr. Martin, it represents some 11 cents out of every tax
dollar that the taxpayer sends in for Federal taxes. This is 11 percent
of the cost of operating our entire Government. It is deadweight. It
buys nothing. It is the price we pay simply for the privilege of owing
this debt.
The interest charges on our public debt have grown and are continuing to grow, so that they constitute today an immense burden
upon the taxpayers. And in the foreseeable future, it seems predictable that we shall be paying 3 or 3y2 percent on the average Government obligation. And assuming the debt were not to increase
actually any more than it is now, 3y2 percent would mean $9,800
million in interest payments annually.
It does not take a mathematical wizard to think of the many other
useful and constructive things for which that money could go if
it were not needed for interest payments. That much money could
build 15,000 miles of superhighway every year, or in 3 years complete the entire 41,000-mile Interstate System. Or applied to the
development of the Nation's water resources, it could complete in 1
year three times as many flood control and navigation projects as
we have authorized for the next 10 years. Applied to soil conservation for the saving of our Nation's most vitally indispensable resource, it could perform more useful work in 1 year than we have
devoted to that awesomely important task in the last 25 years, or
perhaps in the entire history of our Nation.
It probably could purchase some 700 B-58's, more than we would
ever need, of the world's newest and most modern operational aircraft in our defense arsenal.
Or, considered another way, if we did not have to pay the interest
on the national debt, this $9,800 million, which seems a foreseeable
cost of debt management in the near future, if returned to the taxpayers on an equal pro rata basis, could mean that the average taxpaying family head could pay some $275 less in taxes every year.
Of course, I am not suggesting that we do not have to pay it.
Certainly we must pay it. As long as we owe the obligation, we
must pay the interest on the obligation.
The only alternative would be to do as Communist Russia has
done and repudiate its debts to those of its citizens who have loaned
the Government money. This would be unthinkable.
I want to say it is demonstrably provable that it is cheaper to pay
the debt than it is to owe it, and far, far less burdensome to the
American people in the long run. If we continue, Mr. Chairman,
on the present course in which we have been engaged in the last
few years, simply mounting up the debt and passing off to some
future time the responsibility of beginning a systematic method of
payment on the debt, we shall have reached the point, in 28 years,
where, in interest alone we will have paid the total amount of the
debt we now owe, and we will still owe every penny of it. It would
be almost comparable to the situation of one of us as a family headpaying only the interest on a home on w-hich a mortgage was held




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

by some lender, and for 28 years paying interest, without reducing
the mortgage by a penny or purchasing a penny's worth of equity
in the home.
If we were to embark on this proposal suggested by the gentleman
from Texas, Mr. Ikard, and the gentleman from Louisiana, Mr.
Boggs, and the rest of us, it would mean that in 29 years we will
have reached the point, by paying 1 percent each year on the presently
outstanding obligation and interest on the unpaid balance, in 29 years
we will have reached the point where payment on the principal
and interest on the unpaid balance will be less than we now pay
on the principal alone on this total obligation.
And there is a further thought that I would like to suggest to you,
which arose from a discussion the gentleman from Texas, Mr. Ikard,
and I were having day before yesterday afternoon with a Government
economist from the Treasury Department. And that is the conclusion that paying on the debt has a salutary effect upon the interest
rate.
I ask you to think in terms of two 7-year periods, the one that is
just ending the 7-year period which is ending with this fiscal year,
during which time we have not £>aid anything on the debt. We have
not increased the debt greatly percentagewise, and yet it is costing
us some $3 billion more to pay the interest on it and manage this
debt than it was just 7 years ago.
The cost of carrying the debt has increased during this period,
while we have not paid any of it off.
And now compare, if you will, the period between 1920 and 1927,
when the cost the Government incurred in paying the debt, the interest
that it was required to pay on its long-term Government bonds during
that 7 years, declined from almost 6 percent to 3% percent.
During that time, some $10 billion worth of debt had been paid
off. And as a result of this, I am constrained to the conclusion that
Government securities were more attractive and met a readier demand,
and it was possible for the Government to finance its debt on smaller
interest payments.
There is a second thing I want to say, if you agree, as I believe you
will, that it is demonstrably cheaper in the long run to pay this debt
than it is to go on owing it. To pay the debt is the fair thing to do
from the standpoint of the future of the country and those who will
follow us in the country. I am not going to presume to preach you
a sermon on that subject. I think you are every bit as cognizant
of that situation as I am.
There is something, however, that offends the sensitivities of all
of us when we think that we are building this debt on the purchase
of equipment on which obsolescence is taking a toll and the building
of such things as highways which will be obsolete or wornout, and
that we are passing on to a future generation the responsibility of
paying for things that we will have used up and wornout, by the time
they come on the scene to pay for them.
And then the third thing I wanted to say is this: And I apologize
almost for mentioning it, but I think it is crucial in this particular
instance, because I have the feeling that many of the Members of the
House have felt for a long while that we should begin paying something on this debt. But just have not believed quite strongly enough




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

that the American people were able to bear it or were ready to embrace
it. The public, I am convinced, will approve it.
Since the introduction of these bills by the gentleman from Texas,
Mr. Ikard, and the gentleman from Louisiana, Mr. Boggs, and the
rest of us, editorials have spontaneously appeared in newspapers
throughout the country, in which I have had no part, and I am sure
none of my colleagues have had any conscious part in encouraging.
I have in my possession editorials which appeared in 55 metropolitan
daily newspapers throughout the country. This includes 19 ScrippsHoward newspapers—and includes as a random sample, the Washington Daily News, the Cleveland Plain Dealer, the Nashville Banner,
the Wall Street Journal, the Hartford (Conn.) Times, the South
Bend Tribune, the Omaha World-Herald, the New York News, and
many others, throughout the entire breadth of the country. Without
exception, the editorial response has been favorable. If I were able
to characterize what the newspapers have said, those that have come
to my attention—and I did not employ a clipping service; these were
sent to me by people who noted my name or sent them to Mr. Ikard or
me from all over the country, Kansas City, St. Louis, Idaho, and so
forth—the tenor of them seems to be this: "Why, of course this is a
good idea, and certainly it should be done; but of course the Congress
is not going to do it." That is the only negative note that has been
cast—a sort of a cynical attitude which assumes that the Congress is
not going to do anything about it.
I think we have the opportunity here to disprove that cynicism, to
prove that we will do something about it.
During this time, I have received spontaneous letters from people
all over the country, inspired by the amount of publicity that has been
gained. And here they are. I do not know how many of them there
are, but you can look at them. Probably 300 or 400. I have not
written and asked anybody to write to me on this subject. Without
exception, people are for it. They say, "We should pay off our debt.
We should begin, as a homeowner must begin paying off his home, as a
man who owns a business must take into account month by month
some payments on the principal of his debts."
I am convinced that on this particular matter the public is ahead
of the politicians. And I mean no disparagement in the use of that
term. I mean it in the sense in which Webster used it, the science and
art of government.
I am convinced that the public would even approve, if necessary,
a special tax, the proceeds of which would be earmarked for a trust
fund to pay off the national debt bit by bit each year. I think they
would embrace it. I am satisfied they would approve it. I am certain they would.
There is one other thing I want to say. And that is that unless we
set about such a systematic method and make a firm resolve to do it,
and plant our feet definitely and securely on that path, we are not ever
going to find it convenient to do. If we simply sit back and await a
Utopian time when it will somehow be easy to retire the national debt,
I fear that we will be waiting a long, long while.
If you need any more proof of that than the experience of tli© last
few years, I do not know what it would be. In the last 10 or 15 years,
we have had unprecedented prosperity in this country. If there




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

has ever been a time when it would have been relatively easy for us
to pay off some of our debt, those were the years when it would have
been.
I think perhaps we were sitting around waiting, thinking, "Well,
maybe these crises will dissolve, and we will have an opportunity
to build a big surplus 1 year in the Treasury, and we will pay off in
lump sum a good bit of this debt."
Well, to live in that anticipation I fear is living in a fool's paradise, because there is no reason for us to believe that these crises are
not going to continue. We have had crises now for 15 or 20 or 25
years, and probably if we are realistic—we may as well face it—this
cold war is going to last maybe for another 20 or 25 years.
But in the midst of crisis, we should be making an orderly systematic retirement of our debt, I think. This method has proven successful. It has been employed before. It is not new to us, really.
It was used with considerable success following the Civil War in this
country, and for a period we retired about a third of the debt accumulated during that war. It was followed after World War I with
similar salutary results.
As the gentleman from Texas, Mr. Ikard, pointed out so ably in a
study he prepared and presented on the floor of the House, this is
the one method which historically has been proven workable and
usable as a means of actually retiring debt—to set a goal and take it
out first, just as you take out the interest on your debt, and not to
consider that you have balanced your budget until you have accounted
a certain amount of payment on this principal each year in the expenditures of the Government.
I have probably labored your patience beyond the point of your
endurance, and were it not for your tolerance and your good will, I
am afraid I would have bored you into leaving before now. I want
to thank you very much for this opportunity of having been with
you. And if there are any questions I can answer, I would be happy
to do my best to try.
Some of my colleagues are here. Mr. Hargis is here, and Mr.
Rogers, of Florida, is here, and several of the other gentlemen. The
gentleman from South Carolina, Mr. Hemphill, is interested in this
proposition. And if any of us can answer any questions, I know
that any of us would be glad to.




244 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

Mr. HERLONG. I think Mr. Ikard has done an excellent job, and I
am very pleased to be associated with him and to have the original
companion bill with him on this. I think the whole sense of this,
Mr. Wright, is that we apply to the operation of Government finance
the same rules that all families apply to theirs, and that is that—as
you indicated a moment ago—the family budget is not balanced until
you take into consideration the car payment or the house payment or
the refrigerator payment or whatever else it is that they might be
purchasing on the installment plan, and this attempts to envision a
systematic method whereby, even though it would take a number of
years, this debt can be retired, and the savings that would be made by
doing this would more than offset the minimum payment that would
be required through the years, which w7ould be something in the
order of $2.8 billion.
Mr. W R I G H T . It would indeed more than offset it. Using the hypothetical figures of 3% percent—which I realize is a little high and for
this reason reflects not quite a completely true picture but nevertheless
makes the point—I worked out a table of amortization on this debt
extending over a hundred years, and it proves out that in 100 years we
could completely retire the debt on that basis by paying $495 billion
in interest and $286 billion in principal, or a total of $781 billion.
Mr. HERLONG. Mr. Wright, could you furnish that amortization
table for the record ?
Mr. W R I G H T . I would be very happy to do so. As I pointed out,
it is predicated on the assumption of an average interest rate of 3%
percent, which I realize is a little high, but we were moving in the
direction of higher interests. And I would be glad to do it. What
is proves in the long run is that if we pay nothing on the debt for a
hundred years, but simply continue paying interest, we will have paid
$980 billion in interest, and we will still owe $283 billion, or a total of
$1,263 billion, which would be $485 billion more than it would cost
us in both principal and interest to pay it off.
The C H A I R M A N . Without objection, that material will be included
in the record at this point.

41950—59




18

244

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

(The table referred to is as follows:)
Amortization
table, based upon a national debt of $280,000,000,000,
paid off at
the rate of 1 percent each year, and interest at the hypothetical rate of SV2 percent on the unpaid balance
[In billions of dollars]
Year end
0
1
2
3
4
5
6
7
8
9
10
11
12
13—
14
15
16
17
18—.
19
20
21
22
23
24
25
26
27
28
29 1
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51

—-

Total debt Payment on Interest at
principal 3.5 percent
280
277.2
274,4
271.6
268.8
266.0
263.2
260.4
257.6
254.8
252.0
249.2
246.4
243.6
240.8
238.0
235.2
232.4
229.6
226.8
224.0
221.2
218.4
215.6
212.8
210.0
207.2
204.4
201.6
198.8
196.0
193.2
190.4
187.6
184.8
182.0
179.2
176.4
173.6
170.8
168.0
165.2
162.4
159.6
156.8
154.0
151.2
148.4
145.6
142.8
140.0
137.2

2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8

9.702
9.604
9. 506
9.408
9.310
9.212
9.114
9. 016
8. 918
8.820
8. 722
8.624
8.526
8.428
8.330
8.232
8.134
8.036
7.938
7.840
7. 742
7.644
7. 546
7.448
7. 350
7. 252
7.154
7. 056
6. 958
6.860
6. 762
6.664
6. 566
6.468
6. 370
6.272
6.174
6. 076
5, 978
5.880
5. 782
5. 684
5. 586
5. 488
5.390
5.292
5.195
5. 096
4. 998
4.900
4. 802

Year end

Total debt Payment on Interest at
principal 3.5 percent
134.4
131.6
128.8
126.0
123.2
120.4
117.6
114.8
112.0
109.2
106.4
103.6
100.8
98.0
95.2
92.4
89.6
86.8
84.0
81.2
78.4
75.6
72.8
70.0
67.2
64.4
61.6
58.8
56.0
53.2
50.4
47.6
44.8
42.0
39.2
36.4
33.6
30.8
28.0
25.2
22.4
19.6
16.8
14.0
11.2
8.4
5.6
2.8
0

Total .

2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8

4.704
4.606
4. 508
4.410
4.312
4.214
4.116
4.018
3.920
3.822
3.724
3.626
3.528
3.430
3.332
3.234
3.136
3.038
2.940
2. 842
2.744
2. 646
2. 548
2.450
2. 352
2. 254
2.156
2. 058
1.960
1.862
1.764
1.666
1.568
1.470
1.372
1.274
1.176
1.078
.980
.882
.784
.686
.588
.490
.392
.294
.196
.098
.000

280.0

494.900

1 At the 29th year the total paid for the payment on the principal and the interest amounts to $9,758,000,000.
This is $42,000,000 less than the $9,800,000,000 we are paying per year at the present time, and will continue
to pay on our present program.
On the above program, we will have paid out $494,900,000,000 in interest, and $280,000,000,000 in principal,
or a total of $774,900,000,000. If we just keep on paying interest, we will have paid $980,000,000,000, and still
have the $280,000,000,000 debt left, or a total of $1,260,000,000,000. The difference is $485,100,000,000 to the
good, and our debt is paid.

The C H A I R M A N . Any further questions of Mr. Wright ?
Mr. Alger?
Mr. A L G E R . I might say to my colleague I have listened very carefully. It strikes me this is an awful lot like taking a firm stand
for motherhood and against sin.
Mr. W R I G H T . I appreciate the comment of my colleague from Texas.
Mr. A L G E R . I have been interested for some time in a constitutional




244 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

amendment Mr. Byrd had in. I am not sure it is still in, because
it was fruitless. It was a constitutional limitation on the power
of Congress to tax, spend, and borrow.
My question to the gentleman is this: Do you think there is any
validity or any hope for success through this bill, meritorious though
it may be, unless it is allied to some limitation on Government
spending ?
Specifically, some limitation so that the Government cannot spend
beyond its means. Otherwise, are you not spending with one hand and
paying off with the other ?
Supposing last year, for example, Mr. Chairman, we had paid
off $3 billion of the national debt and then ran up $16 billion beyond
the budget, which would have the net effect last year of coming to $13
billion.
Mr. IKARD. If the gentleman will yield, it would not have that effect.
Excuse me.
The C H A I R M A N . One of you gentlemen from Texas speak up.
Mr. W R I G H T . Of course, I do understand what the gentleman has
in mind, and it would not be productive of the results we seek if each
year in addition to paying off this amount of principal on the national
debt wTe continued to borrow more. I think, however, if we were to
set our feet firmly in this path, and if in our budget as it was presented
to us by our President, we had a figure representing not less than 1
percent on the principal, there wTould be a powerful moral force on
the Congress, particularly if it had said, in enacting such a bill, that
this is what it intends to do, to go ahead and follow through.
I do not know, short of a constitutional provision, how we could
bind a future Congress. Obviously, we are not going to be able to
solve this unless we do one of two things, increase revenues or reduce
expenditures, to the point that we will have a balanced budget.
Mr. ALGER. Does the gentleman think there is any more moral
force to paying off the debt than to living within the income ?
Mr. W R I G H T . It is one and the same thing; is it not ? A family is
not living within its income unless it is making its payments on its
obligations. I think the moral force would be much greater if we
had adopted this provision and thus set ourselves to the firm policy
and put in our budget and said, "This is what we are going to do,"
than it would be if we did not. I think what the gentleman is saying
is that it is not going to do any good to say we are going to do this and
then not do it. And he is correct. But I think it is demonstrably
true by the record of the last few years that we are not going to do it
until we say we are going to do it and officially establish such a policy.
That is what I am proposing that we do.
Mr. ALGER. It would be nice, of course, if just saying it made it so,
and I would like to think that could be the possibility, and if so, certainly would be for it.
Does the gentleman feel that the same Members of Congress who
favor this would agree in any year to stay within the budget ? Would
there be any more moral force to trying to pare down the budget?
That is what stops me cold.
Mr. WRIGHT."Let me say this: That I think this House in the
months that have expired in this session has made a pretty good record all in all. In some 10 appropriation bills that have come before




244

PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS 120,

us, we have reduced the President's budget requests by a total of $952
million. Some of us have voted for additional reductions that have
not come about, in the House. But I think all in all, over the past
6 or 7 years, the Congress annually has reduced the total amount
asked, in the approval it gives its appropriations. I think the total
reduction for the past 6 years comes to almost $23 billion that the
Congress has appropriated less than the Chief Executive in his
budget submission has asked. So I do not think that is such a bad
record.
Mr. A L G E R . May I ask the gentleman how much in the same 6-year
period we have voted beyond the President's budget that was not
included in the budget? And I think that needs to be said, in order
to present the whole picture.
Mr. W R I G H T . Well, if I have failed in my presentation of the whole
picture, I apologize, because I thought the figures I presented were
representative of the total appropriations voted by the Congress in
those years. If I am in error, I will stand corrected, because it was
not my intention to misrepresent it.
Mr. A L G E R . I am certain of that. I merely want to say to the
gentleman that obviously we cannot say that last year, as he has just
said, along with the total of 6 years, we spent less than the budget,
when we went $13 billion over Government income. We all know
some of that is backdoor financing, where some of us are actually not
in a position of being immediately responsible, but this too is a part
of the legislation we voted.
The thing that appalls me, however, is that this statement is made
frequently that the gentleman has just made. Up to the present
time, for example, we have reduced X number of appropriation bills.
Yet we have the airport bill, the housing bill, the depressed areas
bill, and many other bills pending. And this committee is going to
have to help raise moneys for it, or we are going into a deficit again.
Mr. W R I G H T . Of course, the gentleman will agree that before
money is expended on those bills, the Congress will have to appropriate moneys on those authorizations, will he not?
Mr. ALGER. I think the figure in the last year was some $9 billion
or possibly more than that, that was not going through appropriations, of course.
Mr. W R I G H T . I surely would not quarrel with the gentleman about
that. I think probably what we are both trying to say is about the
same thing, and that is that the Congress is going to have to face up
to the necessity of providing fiscal responsibility and maintaining a
balanced budget, including some payment on the debt.
I think each member tries to do that in his own way. I have maintained the record of my particular votes since I have been here, and
some of them have not prevailed. And I realize that that is not a fair
criterion, for that reason. But I always try to balance the taxes I
have voted for with the expenditures I have voted for. I thought I
was doing that last year. But our revenues did not live up to expectations, because of the recessionary trend that set in. And I think
all of use were surprised that we received less revenues from the taxpayers than we had anticipated and less than the administration had
anticipated.
So we have made mistakes. And it would be very presumptions
of me to try to say what, in each of 100 years coming, we are going to




244 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

cut out, or what we are going to do in the way of raising revenues, but
I think as a matter of principle we can say now that we definitely
intend to do it, and we can require the Secretary of the Treasury in
his budget submissions to include a payment of not less than 1 percent of the principal of the national debt, and can clearly state that no
budget will be considered balanced unless it includes that on the
expenditure side.
I think I have intruded upon the more factual answer that the
gentleman from Texas, Mr. Ikard, may have wished to make.
Mr. ALGER. I want to congratulate the gentleman for his interest in
the debt. If this would help pay down the debt, I certainly would
join with the gentleman.
The C H A I R M A N . We thank you again.
Mr. W R I G H T . Thanks to you and the members of your committee.
The C H A I R M A N . We will now hear from our colleague from Kansas,
the Honorable Denver D. Hargis.
You are welcome, sir.
Mr. HARGIS. Thank you, Mr. Chairman.
STATEMENT OF REPRESENTATIVE DENVER D. HARGIS, OF
KANSAS

Mr. HARGIS. On February 2*5 this year, I had the honor of speaking
on the House floor in support of legislation coauthored and cosponsored by my good friends and distinguished colleagues from Texas,
Mr. Wright and Mr. Ikard. Certainly the events of succeeding
months have done nothing to lessen my belief in, and wholehearted
endorsement of, the plan for an orderly, systematic program to reduce
the public debt, as embodied in the Wriglit-Ikard bills, H.R. 4587 and
H.R. 4588. On the contrary, the overwhelmingly favorable reaction
expressed by the citizens of my home district, and their growing concern with the problem of finding a means of reducing the heavy burden
of public indebtedness, have served to strengthen my convictions.
This committee is now faced with an administration request for
legislation to raise the ceiling on the public debt. We are told that
this is unavoidable, and this may be so. But I do not believe that we
need continue to regard as unavoidable, or endless, or forever hopeless, the present necessity of pouring billions upon billions of dollars
down a bottomless rat hole, by paying interest alone, without taking
sensible steps toward annual reduction of the principal.
I do not claim to be an expert on fiscal policy, but I do not believe
it takes any marked degree of financial wizardry to gage the desirability of the Wright-Ikard proposal in preference to present policy.
The figures offered in support of it are amazing—at least they were
to me—but they are also irrefutable. By a budget allocation equal
to 1 percent of the aggregate debt, appropriated annually for 100
years, both debt and interest could be paid in full. But if nothing is
paid on the debt proper during the same 100-year period, interest alone
will amount to approximately $200 billion more than the total for
principal and interest under the 1 percent annual retirement plan—
and the original indebtedness will still be there, entirely unpaid.
I am firmly convinced that the public is ready and willing to make
the sacrifices this program would entail initially, once they are made to




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

realize—as a great many already do realize—the incalcuable benefits
of the plan's long-range goal. Thinking Americans everywhere are
distressed, agitated, and appalled, not only by their own share of the
burden of public indebtedness, but by the ever-growing share that may
well be faced by their children and their children's children.
Before my election to Congress, I was mayor of a fast-growing and
progressive city in southeast Kansas, for three consecutive 2-year
terms. When I say that this city made tremendous strides during my
tenure of office, I do not feel that I am being immodest, because such
progress would have been impossible without the full cooperation of a
majority of Coffeyville's citizens. They knew that community progress costs money, and they were willing to assume the necessary bonded
indebtedness. But they also knew that this indebtedness was based
upon a sound and orderly plan for repayment. No annual budget that
I assisted in drawing up for city operation would have been acceptable
without provisions for substantial payments on both principal and
interest. In this respect, what's good for Coffeyville is undoubtedly
good for the country.
I feel it is heartening and significant that such able and public-spirited legislators as Mr. Wright and Mr. Ikard have presented a feasible plan for debt reduction at a time when the "big spenders" label is
being so carelessly and heedlessly applied to their party and mine.
The widespread public support this proposal has drawn is equally encouraging, and provides strong evidence that the people of this great
Nation are eager to help. I believe they are willing to accept this
program for orderly retirement of our country's obligations, in the
nonpartisan spirit of farsighted service in which it was conceived and
presented.
I therefore urge this committee to give earnest and serious consideration to recommending the adoption of this plan, and I commend
Mr. Wright, Mr. Ikard, and the others supporting this bill for their
selfless and sincere efforts to arrive at a solution to a problem demanding immediate attention.
I do not believe there are any of us here in Congress who can fail
to take pride and pleasure in visualizing a debt free and prosperous
America a hundred years hence. I earnestly hope that we all live
long enough to take equal pride and pleasure in feeling that we
helped give the country a sensible and very worthwhile start on the
long road back to a sound and healthy economy.
The CHAIRMAN. Thank you, Mr. Hargis, for giving us the benefit of
your experience.
Our next witness is our colleague from Florida, the Honorable Paul
G. Rogers.
You may proceed in any manner you desire, sir.
Mr. ROGERS. Thank you, sir.
STATEMENT OF REPRESENTATIVE PAUL Gr. ROGERS, OF FLORIDA

Mr. ROGERS. Mr. Chairman and members of this distinguished committee, I sincerely appreciate the opportunity to offer testimony today
in connection with a problem of the gravest magnitude.
It has been estimated that our national debt will total some $285
billion by the end of the current fiscal year. While the President




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

originally estimated a surplus of half a billion dollars, revised estimates of receipts and expenditures for fiscal 1959 indicates that we
face a deficit of some $12.9 billion. The prospect of a balanced budget
during 1960 also appears to be somewhat dim despite the President's
prediction of a small surplus. An error in computing anticipated
revenue similar to the one which occurred at the beginning of the 1959
fiscal year will lead to another deficit for the 1960 fiscal year. The
programs now in the process of obtaining congressional approval
which carry with them vast new obligational authority are bound to
have a considerable impact on a balanced budget for years to come.
It makes one wonder just when in the future we might look forward
to spending less than wo, take in. In any event, based on past history,
it will take a concerted effort on the part of both the legislative and the
executive departments of Government in order to insure some sort of a
surplus in the near future.
This state of fiscal affairs leaves us with two alternative courses of
action. The first of these might properly be termed the easy way out.
It would be to continue on a program of deficit financing and continue
to raise the debt ceiling as deficits occur. The adverse effects of such a
fiscal policy are many and varied. For the purposes of this statement I will touch lightly on two fundamental effects. Maintenance
of the principal of the debt and the constant payment of accruing interest, estimated at some $8 billion for the coming fiscal year, tend to
cripple the productive capacity of our people. Secondly, and equally
important, is the fact that the immense size of the debt and its service
reduces the action of the Treasury and the Federal Reserve System in
their credit policy. The value of Government securities tends to depress thus making them less desirable to the investor. In short, the
larger the debt and interest load currently, the less room there will be
for the Government to finance readily and soundly some future
emergency.
The other alternative open to us consists of a sound Government
spending program which includes some provision for paying off this
staggering debt. I have been privileged to join with Jim Wright and
Frank Ikard and others in submitting a plan to the Congress which
would provide an orderly, systematic method for reducing the debt.
Our proposal would require the Secretary of the Treasury to include
in his annual request for funds an amount sufficient to pay off 1 percent of our national debt.
Objectively speaking, there is substantial merit in a program of
gradual debt retirement. Some advantages to be realized are: first,
that it results in a saving of governmental expenditures for interest;
second, that it strengthens the credit of the Government so that it can
better meet an emergency; third, that in times of inflation it may serve
as a tool to cope with excessive spending; fourth, that money paid out
in debt retirement could well serve as a stimulus to business. Of the
amounts paid to individuals and financial institutions, a limited sum
may be held in idle balance, but the bulk will be reinvested thus helping
to shore up our economy in times of recession.
The important thing to remember in any program of debt reduction
is that we must make up our minds to go ahead and then do it. It is no
answer to say that now is not the time. I submit that we are passing
through the most prosperous economic period in our history. Let's




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

chart a course now rather than take a chance that a more convenient
time will materialize in the future. We need only remember that
throughout our history the greatest obstacles to national financial
strength and the most acute dangers to fiscal collapse have never been
the results of inadequate or failing resources but always consequences
of weak financial policies.
Thus, I join with my colleagues in urging the adoption of this plan
to put us back on the track to fiscal responsibility.
The C H A I R M A N . Thank you, Mr. Rogers, for appearing before our
committee.
Our next witness is our colleague from Colorado, the Honorable
Byron L. Johnson.
Please come forward.
You are recognized, sir, to proceed in your own way.
STATEMENT OF HON. BYRON L. JOHNSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO

Mr. JOHNSON. Thank you, sir. I regret that I did not have time,
because of my interest in legislation pending on the floor, to prepare a
precise statement, but I think I can speak extemporaneously and cover
the main points I would have given you in a prepared statement,
and, if I may, I ask permission to revise and extend my remarks to
include such other data as may prove necessary.
The C H A I R M A N . Y O U may have that permission.
Mr. JOHNSON. The President has made a series of requests which
occasioned these hearings. One of them deals with the debt limit.
Frankly, I am prepared to agree to a raise in the debt limit. In fact,
I w^ould be willing personally to go further, because I think the debt
limit has proved to be more of a mischiefmaker than a source of
fiscal responsibility in the operations of the Government.
And, rather than argue that point at this time, I would simply call
to the attention of the committee a very fine statement heretofore made
by Dr. Walter Heller, onetime assistant to the Director of the Division
of Tax Research in the Treasury Department.
If that statement is not in your hearings, or Dr. Heller is not to be
a witness, I would be happy to submit his statement, made some time
ago, on this point, for the record.
The C H A I R M A N . Without objection, we will receive it for the
record.
(The statement of Dr. Heller, referred to, is as follows:)
WHY

A FEDERAL DEBT L I M I T ?

( B y Walter W . Heller, Chairman, Department of Economics, University of
Minnesota, B e f o r e the 51st Annual Conference of Taxation of the National
T a x Association, October 28,1958)
The position taken in this paper can be briefly put by amending the title
to read, " W h y a Federal Debt Limit, Indeed?" Far f r o m promoting fiscal
prudence and expenditure restraint, as claimed by its protagonists, the Federal
debt limit has in f a c t eroded the integrity of our Federal budget, interfered with
efficient expenditure scheduling and effective debt management, endangered our
defense program, and aggravated the 1957-58 recession. The facts and analysis
underlying each of these indictments form the core of my paper.
No attempt will be made here to trace the history of the debt limit, nor to
identify the half billion dollars of public debt obligations not subject to the




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

limit. The testimony of Treasury Secretary Anderson before the Ways and
Means Committee last January contains a most useful historical survey of,
and commentary on, the debt limit. 1 An annual summary of the basic data
and history of the debt limit is contained in the annual reports of the Secretary
of the Treasury. 2 A monthly release summarizing the status of the debt is
issued by the Treasury Department Fiscal Service. The latest one, for example,
shows a margin of roughly $12 billion between the outstanding debt on September 30 of $276.4 billion and the limit of $288 billion (consisting of the permanent limit of $283 billion, as amended September 2, 1958, and a temporary
additional $5 billion, expiring June 30, 1959 ) .3
A. EROSION OF BUDGETARY

INTEGRITY

One of the most serious charges against the debt ceiling is that it has served
as stimulus and sanction f o r devious budget practices and proposals. Quite
apart from the costly defense slowdowns last year, which have been very much
in the public eye, the ceiling has been a major factor in prompting (1) manipulations to remove certain spending items from the budget entirely (e.g., in 1953,
$1.2 billion of price support loans), (2) proposals in 1955 for highway financing
outside the conventional budget and outside the debt limit, and (3) substitution
in 1957 of costly agency borrowing for cheaper Treasury borrowing.
Under the impact of the large deficit in fiscal 1953, compounded by the sparse
receipts typical of the July-December half of each fiscal year (when only 40
percent of the year's receipts typically flow into the Treasury), the pressure of
the debt limit mounted steadily. By August 1953, Treasury Secretary Humphrey
was moved to say, "The present debt limit severely restricts flexibility and will
more and more limit our ability to administer the financial affairs of the Government." 4 Simultaneously, the fiscal authorities found an escape valve that
has been utilized many times since, namely, requesting Federal agencies to
finance themselves by direct operations in the money market rather than through
Treasury borrowing. The Commodity Credit Corporation led the way by selling
$1.2 billion of certificates of interest to the commercial banks during the second
half of 1953 against a nationwide pool of price-support loans on grain. Thiis
amount stayed out of the national debt and the nearly $1 billion still outstanding
on June 30 quietly disappeared from the fiscal 1954 Federal budget. 5
When the rest of the 1953 support loans matured in 1954, bringing much of this
amount back onto the budget a roughly equivalent amount was similarly financed
the following summer. When this phase of off-the-budget financing was terminated in fiscal 1955 by retiring about a half-billion dollars of certificates still
outstanding, the Federal National Mortgage Association ( F N M A ) issued an
offsetting amount of notes directly to the public. The collateral in this case
was not farm crops but the FNMA mortgage portfolio. In both cases, interest
costs were substantially higher than on direct Treasury obligations.
In 1955, a related fiscal maneuver in connection wTith the Federal Highway Program never got beyond the proposal stage because of a storm of congressional
protest. The proposal was that an independent authority be set up to finance
a Statement by Treasury Secretary Anderson before House Ways and Means Committee
on H.R. 9955 and H.R. 9956, bills to amend the statutory debt limitation, Jan. 17, 1958,
U.S. Treasury Release No. A-138.
2 See, f o r example, the "Annual Report of the Secretary of the Treasury on the State of
the Finances, Fiscal Year 2957," U.S. Government Printing Office, Washington, 1958,
tables 26 and 27, pp. 432-433. These tables show the fiscal yearend status of the debt
under the limit and the history of the debt limit since 1941. Monthly summaries are
presented in the Treasury Bulletin. The pre-1941 history is summarized in the Treasury's annual report, fiscal year 1940, p. 70.
3 Treasury Department Fiscal Service, "Statutory Debt Limitation as of September 30,
1958," Release No. A-341, Washington, Oct. 9, 1958. The two controlling laws at the
present time are the act of Sept. 2, 1958: U.S.C., title 31, sec. 757b, and the act of Feb.
26, 1958 ; Public Law 85-336, 85th Cong.
4 Treasury Department release, Aug. 3, 1953 ( H - 2 1 1 ) .
5 The Treasury noted that this financial maneuver increased the participation by banks
in the crop loan program and gave temporary assistance to the Treasury in staying below
the statutory debt limitation (U.S. Treasury, annual report, fiscal year 1954). Pressure
on the budget and the public debt was also diminished by "the Federal National Mortgage
Association's accelerated program of mortgage sales and repayment of advances by local
housing authorities to the Public Housing Administration," ibid. For a more detailed
explanation of the maneuvers to minimize the budget totals in 1953-54, see Frederick C.
Dirks, "Recent Progress in the Federal Budget," National Tax Journal, June 1954, vol.
VII. No. 2, pp. 141-154.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

the program by the issuance of general revenue bonds to be repaid out of the
growth of Federal revenues from excise taxes on gasoline and lubricating oils.6
There was bitter objection to thus circumventing the debt limit and hiding the
expenditures from ordinary budget view. As finally passed, the program provided f o r increased highway-user taxes, earmarked for highway purposes and
channeled through a special trust fund.
One does not have to go back to 1953 and 1955 for examples of evasive action
and financial brinkmanship under the debt ceiling. The Treasury's greatest
hour of jeopardy to date under the ceiling was in 1957. No halfback threading
his way precariously down the sidelines ever executed more nimble maneuvers
than the Federal fiscal authorities did to keep from going out of bounds during
the past fiscal year. 7 "In order to help keep the debt under the limit in 1957-58
various agencies, particularly the Federal National Mortgage Association, borrowed funds from the public to permit repayment to the Treasury of sums which
had been advanced to them. About $1.5 billion of such repayments were made
by the Federal National Mortgage Association from February 1957 to March
1958." 8 Coupled with these moves were slowdowns of defense programs and
payments (to be examined in sec. C) and monetization of some of the Treasury's
gold. 9
The debt limit, then, has served as an ethical shield behind which assaults have
been made on the fidelity of our Federal budget. I put it this way because
some of the manipulative practices described above were attractive in serving
quite a different purpose, namely to make the budget look smaller than it really
was—sort of an incredible shrinking budget—but they might not have been dared
without the protective casuistry of the debt ceiling.
B.

SELF-DEFEATING

EXPENDITURE

CONTROL

Defenders of the stautory debt limit usually cite its salutary effect in curbing
Federal spending. For example, in the hearings on the debt limit last January,
Senator Harry Byrd asserted, "The only protection Congress and the people
have against wasteful expenditures is the debt limit." Prof. Yale Brozen of
Chicago came to its defense in a similar vein during a panel discussion before
the Joint Economic Committee last February. Prof. Lester Chandler of Princeton had proposed "that they should abolish the debt limit or raise it so much that
this would become ineffecetive as a ceiling," a position quickly concurred in by
Prof. J. Kenneth Galbraith of Harvard, Mr. Ralph J. Watkins, director of economic studies of the Brooklings Institution, and Prof. Roy Blough of Columbia.
Mr. Brozen disagreed, stating " I think to some extent there has been a salutary
effect from the existence of the debt ceiling inasmuch as the administration does
tend to think a little more seriously about its overall spending program." 10
The expenditure restraint which these statements contemplate typically has
two facets. One is economizing, i.e., eliminating waste and thereby providing
a given service with a smaller input of money and resources. The other is simply
House of Representatives, Committee on Public Works, Hearings on National Highway
Program, 1955, p. 130. For the detailed proposals and the criticisms directed: at them,
see these hearings as well as the corresponding hearings before the Senate subcommittee
of the Committee on Public Works, also in 1955.
7 The following item from, the Wall Street Journal, Sept. 27, 1957, p. 1, vividly brings
out the mood of the time and the measures that were contemplated, to meet the debt ceiling
crisis : "Fiscal chiefs struggle to stay under the debt limit. 'They seize on new tactics.
Defense officials postpone every postponable spending item beyond the critical next few
months. 'They confer with major contractors on delaying payments. Less urgent operating maintenance outlays will wait till after January. The Budget Bureau holds back
funds to keep other agencies from expanding employment as much as Congress allowed,
at least f o r now. Other weapons are in reserve. Farm, officials consider selling private
banks certificates representing shares in a pool of price-support loans : the cash would
ease the current squeeze.
The Federal National Mortgage Association can sell more
securities privately, pay off some debt owed the Treasury. Money men talk of last-ditch
moves if the scrape with the debt ceiling gets desperate. Defense officials say they could
stop paying all bills until January tax receipts roll in."1
s The First Boston Corp.. "Securities of the United States Government," 18th edition,
1958, Boston, pp. 40-41. This publication also summarizes the history of debt limit legislation from 1917 to 1958 and charts the relationship between the debt and the legal limit
f o r the fiscal years 1954-59.
9 Monetization is effected by converting the free gold in the Treasury's general fund
into gold certificates f o r deposit in Treasury balances in the Federal Reserve banks. By
this method, $500 million of gold was monetized in November 1953, and another $100
million in February 1958. The process is described in detail in the Treasury's annual
report, fiscal year 1954, p. 26.
10 Joint Economic Committee, U.S. Congress, hearings, January 1958 Economic Report
of the President, U.S. Government Printing Office, Washington, 1958, pp. 490-491.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

the curbing of growth or forcing of cutbacks in Government spending when
deficits threaten to push the debt through the legal ceiling.
On the first score, the record of the debt ceiling is lamentable. It has forced
Government borrowing into uneconomic, expensive channels. The $802 million
FNMA notes sold outside the debt limit a year ago are a perfect case in point.
That they were sold at the Treasury's request in the context of the painful
debt squeeze is beyond dispute.11 That they were costly is also beyond question.
Maturing in only 8 months, the notes carried an interest rate of 4 % percent,
when the Treasury could have borrowed the money directly at 4 percent.12 In
other words, a loss of $4,667,000 can be laid directly at the debt limit's door on
account of this single evasive action.13
One cannot so readily put a price tag on the much greater waste attributable
to the debt limit's disruptive affect on expenditure management and scheduling
of particular programs. The force of the debt ceiling can strike swiftly, and to
some extent, unexpectedly. Consider, for example, that Secretary Anderson's
estimates last January (later revised) placed the prospective debt as of September 30, 1958, at $271.3 billion and the required debt limit at $274.3 billion.
In fact, the debt was $276.4 billion on September 30. Even when the debt
squeeze "was anticipated in 1957, and advance action was taken to slow down
expenditures, still further stretchout and pinchpenny economizing measures had
to be taken when the squeeze turned out to be worse than expected. The resulting on-again, off-again scheduling of expenditures is just as wasteful of public
moneys as stop-and-go driving is of gasoline.
As an overall curb on the growth of Government, the debt limit is even more
inept and perverse in its impact. In a boom, when cutbacks might make some
sense as an anti-inflationary device, bulging revenues nullify any restraining
effect. Thus, Federal cash expenditures rose from $70.5 billion in fiscal 1955 to
$80 billion in fiscal 1957 at a time of little or no discomfort under the debt ceiling. It is at the onset of recession, as in the fall of 1953 and again in 1957, that
the debt ceiling tightens its grip.
Does it then lead to rational choices among alternative programs, to a careful
weighing of relative returns offered by different possible applications of resources? Quite the contrary. It seems to be a case of the devil, i.e., the debt ceiling, taking the hindmost. For example, when the psychological impact of the periodic debt limit wrangle hit Congress last July, the $2 billion community facilities bill bore part of the brunt, not necessarily because it was deemed a poor use
of resources but because it happened to be under active consideration when the
debt limit psychosis took hold. 14 This is budget pruning by the last-in first-out
principle.
But perhaps it is fruitless to ascribe to the debt ceiling any rigorous disciplinary logic at all. Perhaps it is more realistic to view it as an atavistic or nostalgic substitute f o r the annually balanced budget in the age-old battle between
rules and authority, between laws and men, in Government budgeting. In this
light, the debt limit is seen as a wistful vestige of the fiscal orthodoxy which, f o r
example, led Franklin Roosevelt to drive income and excise tax increases through
Congress in 1933 at the depths of the great depression is a quixotic attempt to
carry out his campaign promise of a balanced budget.
Its kinship with the ill-fated "legislative budget" procedure (enacted in 1946)
is even clearer. Under that procedure, Congress tried, unsuccessfully, to impose
budgetary discipline on itself by requiring the enactment, early each session, of
an overall ceiling on expenditure appropriations. But in the very first year of
operation, the sum of the indvidual appropriations pierced the House ceiling by
nearly $6 billion and the Senate ceiling by nearly $3 billion. In effect, the procedure foundered on our national schizophrenia in budget matters which leads us
11 See. f o r example, the Business Week article, "Treasury's Eye Is On Ceiling," Nov. 2,
1957, p. 46.
12 Outstanding 1 Treasury notes maturing in June were yielding 3 % percent at the end of
October 1957. Assuming that the Treasury would "sweeten" the yield a bit to gain market
acceptance of a new issue, one arrives at a Treasury interest rate of 4 percent.
13 In reporting plans f o r redeeming the FNMA 8-m,onths notes, the Wall Street Journal
on June 16. 1958. reported that the notes, which had been issued "at the request of the
Treasury, when the Federal debt was close to the ceiling," would not be replaced with a
new offering, thereby reflecting "the improved position of the Treasury since the new debt
ceiling went into effect." The higher interest rate wTas also cited as a factor dictating
against any refunding of the maturing notes. In other words, with the debt limit straitjacket loosened, the Treasury followed a course directly opposite to the one that had been
forced on it bv the debt ceiling squeeze in 1957.
14 Wall Street Journal, "Treasury Seeks Debt Ceiling Hike to $288 Billion," Aug. 25,
1958.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

to recoil in dismay from the budget totals, even though they be no more than the
sum of the parts we have warmly embraced one by one.
Failing in its attempt to curb its own spending tendencies with the aid of one
rigid rule or another, the Congress has, ironically, used the debt ceiling to harass
and castigate the executive authorities f o r the deficits which congressional
budgetary enactments have forced them to incur. In this sense, the statutory
limit has been an instrument of fiscal hypocrisy.
If the influence of the debt celling were benign, or at least negligible, we could
afford to indulge ourselves in this hollow symbol of our budgetary schizophrenia.
But the facts simply do not permit such tolerance. Last year's undercutting
of defense in the very teeth of sputnik is a most telling case hi point.
C. THE NATIONAL DEFENSE CRISIS OF 195 7

The operation of the debt ceiling "as a ruinous and arbitrary determinant of
Government policies" is nowhere better illustrated than in last year's actions.
" I n the second half of 1957 the debt ceiling forced the administration to cut
back programs needed for long-term national security. And the resulting slash
in defense expenditures was an important contributing cause of the recession.15
A bill of particulars on the disruption of the defense program was summarized
as follows a year a g o : "Here are major Defense Department actions in recent
months that are related to the campaign to save the debt ceiling : (1) The services
stretched out production schedules—for at least 19 big plane and missile projects,
(2) overtime f o r defense contractors was restricted, (3) installment buying of
weapons was banned, (4) a $38 billion spending ceiling for fiscal 1958 was clamped
on, stimulating a new round of program reshuffling. Form this action came the
5-percent reduction in progress payments; an order to contractors to cut payroll
costs 5 percent; the Air Force's limitations on monthly payments) to contractors,
creating new stretchouts a 200,000-man cut in the Armed Forces." 10
Apart from the dangerous 1957 slowdown itself, these actions have had lingering effects which have undermined the vigor of our response to the Soviet challenge. As the Wall Street Journal reported (J'uly 8, 1958), "Because of the
delayed action effects of the Wilson economy slashes, spending actually dropped
in the post-sputnik January-March quarter of this year to $9.4 billion, from
$9.6 billion in the previous quarter." Even as late as May and July 1958, defense
contractors were expressing such apprehension of a repetition of the 1957 slowdown of payments and stretchouts in delivery schedules that the Secretary of
Defense was moved to write a memorandum referring to "needless apprehension about a financial crisis." 17
Thus far, the consequences of the 1957 cutbacks have been no more than
dangerous f o r our national security. They could have been tragic.
D. PERVERSE STABILIZATION EFFECTS

W e have already noted the perversity of the debt limit in relation to inflation
and recession. Its discipline on spending is little felt in the boom, but pinches
hard in recession. The defense cutbacks to squeeze by under the ceiling are
believed by many to have helped trigger the 1957-58 recession and increase its
severity. As Ralph Watkins so forcefully put i t : "* * * the crisis of confidence which shook American society last fall * * * may well have been precipitated by the cutbacks and stretchouts • in military procurement starting in
the summer. They affected a wide range of industry all across the country and,
added to the impact of evidence of slow payment of bills by Government, could
hardly fail to influence business confidence adversely. The real culprit, given
our defense needs, may have been the arbitrary debt ceiling * * *." 1 8
Apart from its direct impact in accelerating the 1957-58 recession, the debt
ceiling has a more insidious indirect effect in that it condemns deficits without
regard to economic circumstances. As long as there is substantial unemploy15 Quotations are from a Business Week editorial, "Common Sense in Budgeting," June
28, 1958, p. 124.
16 Business Week, "Treasury's Eye Is On Ceiling," Nov. 2, 1957, p. 47.
The various
moves are also described in Editorial Research Reports, under the heading "Fiscal Maneuvers to Avoid Piercing Debt Ceiling" in its article, "National Debt Limit," Nov. 27, 1957,
vol. II, pp. 879-880.
17 As quoted in "Getting the Budget Back in Line," Business Week, July 12, 1958, p. 27.
See also, "Arms Makers Fear Retrenchment," Business Week, May 31, 1958, pp. 21-22.
18 Joint Economic Committee, "Hearings on the January 1958 Economic Report," op. cit.,
p. 467.




*

244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

ment and idle plant capacity, deficits should be applauded as the hero of the
peace, not hissed as the villain. They act as a constructive economic force,
cushioning the shock of recession and stimulating production during the recovery
phase. They become destructive only when the response to their expansionary
impact is no longer rising employment and output, but rising prices, i.e., inflation. But the debt ceiling condemns all deficits alike, whether expensionary or
inflationary.
Undoubtedly, the debt limit played a considerable role in restraining the administration and Congress from taking more resolute action to counter the recession in 1958. To be sure, it is a matter of open dispute whether the avoidance
of tax cuts was economically a good or bad thing. It can be argued on one
hand that we are enjoying a brisk recovery without tax reductions. It can be
argued on the other that, with them, we might be farther along the path toward
our full economic potential of $470 to $475 billion of gross national product
against a current level approaching $450 billion. But even if the no-cut position
could be proven correct, the debt limit would, at best, gain the distinction of
being the wrong reason for reaching the right decision.
E. RIGIDITY I N DEBT MANAGEMENT AND

THINKING

The debt ceiling also inhibits stabilization policy by denying the Treasury the
flexibility it needs to make full use of debt management, especially in strengthening our defenses against inflation. This point has been stressed again and
again by Treasury officials in petitioning Congress for an increase in the statutory limit. As Secretary Anderson stated in his January testimony. "There is
need f o r more flexibility f o r more efficient and economical management of the
debt." He went on to s a y : " W e have been able to discharge our obligation
within the debt limit * * * only by maintaining cash balances which have been
distressingly low at times. W e have had little or no margin f o r contingencies.
We believe that with some flexibility we would have been better able to manage
the public debt to a better advantage for the public interest." 19
With a higher debt ceiling, or in its absence, the Treasury would be able to
build up a more comfortable cash balance when good opportunities presented
themselves for marketing long-term debt. Long-term borrowing might be advantageous, for example, shortly in advance of a refunding operation. The net
cash redemption or "attrition," during the refunding, could readily be handled
out of the ample cash balance. Given the debt ceiling, however, the Treasury
might run afoul of too little attrition, i.e., the refunded issue would overlap the
newly issued long terms, thereby piercing the ceiling. To avoid this contingency,
the Treasury, in the shadow of the debt ceiling, would have to give up the
opportunity to go into the long-term market and rely on bills instead.
Such rigidity in the short run is perhaps symptomatic of the patterns of
thought that inhibit the all-out use of debt management as a stabilizing instrument. In this pattern, the debt ceiling assumes more the position of a limiting
strategic factor than that of a basic cause.
If we are truly confronted with a complex of inflationary forces in the longer
run, it is high time that we removed such shackles as the debt limit and permitted
the Treasury, for example, to compete aggressively for long-term funds at the
height of the boom and, if necessary, stockpile the proceeds in the Treasury
cash balance. W e need to reexamine the near axiom that the Treasury cannot
borrow long in a boom because it would impinge unduly on sources of investment
funds needed for private capital construction and State-local public works.
Perhaps such borrowing, combined with stockpiling of the cash or retirement of
bonds owned by the Federal Reserve banks, has advantages over traditional
Federal Reserve measures to restrict the availability and raise the cost of credit.
More freedom in shifting from one type of debt to another also merits further
exploration. To clear the way for moving from a largely passive to an aggressively active debt management policy would involve many things. One of them
would be to abolish the debt limit.
F. MEASURING DEBT BURDEN

This brief digression on unleased debt management raises doubts that our
statutory debt limit—insofar as it may be anything more than an ernptly gesture—is even cast in meaningful terms. As it stands, the debt limit perpetuates
19

S t a t e m e n t t o t h e H o u s e W a y s a n d M e a n s C o m m i t t e e , J a n . 17, 1 9 5 8 . o p . c i t . , p p . 1 - 2 .




244

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

t h e m y t h t h a t t h e o v e r a l l d o l l a r figure s o m e h o w r e p r e s e n t s t h e b u r d e n o f the
d e b t . B u t t h i s figure b e a r s l i t t l e r e l a t i o n s h i p t o o u r fiscal c a p a c i t y o r t o t h e
burdensomeness of the debt.
Merely subtracting the debt held by Government agencies gives us a m o r e
m e a n i n g f u l figure f o r m o s t p u r p o s e s . A s p a r t I o f t h e a c c o m p a n y i n g t a b l e s h o w s ,
t h e $ 2 7 0 b i l l i o n o f d e b t s u b j e c t t o t h e c e i l i n g in m i d - 1 9 5 7 s h r i n k s t o $215 b i l l i o n
if w e e x c l u d e the holdings of G o v e r n m e n t agencies and a c c o u n t s and $192
billion if w e eliminate the Federal R e s e r v e holdings to arrive at privately
held debt.
T o i n f u s e g r e a t e r s i g n i f i c a n c e i n t o t h e d e b t figure, e v e n i f still i n a r a t h e r
p a s s i v e sense, w e need to relate it to s o m e m a g n i t u d e that m e a s u r e s or reflects
our ability to carry the debt burden.
Part I I of the accompanying table shows
t h a t , a s a p r o p o r t i o n o f a n n u a l n a t i o n a l i n c o m e , t h e F e d e r a l d e b t w a s c u t in
h a l f , o r m o r e , b e t w e e n 1946 a n d 1957. O r r e l a t i n g t h e i n t e r e s t o n t h e d e b t t o
n a t i o n a l i n c o m e , t h e b u r d e n h a s f a l l e n b y one-third. 2 0
The

size

of the Federal

debt

and interest, 19'i6-ol—A
measures

comparison

of

various

[In billions]
PART I: DOLLAR AMOUNTS OF DEBT, CASH BALANCE, AND INTEREST

Fiscal year 1

Total outstanding
debt

$270. 5
272.8
274.4 .
271.3
259.1
257.4
252 3
269.4

1957
1956
1955
1954..
1952
1950
1948
1946

Total debt
less debt
held by Government
account 2
$214. 9
219 3
223. 9
221.9
214.8
219.5
216.5
240.3

Privately
held debt 3

$191.9
195. 5
200 3
196.9
191.9
201.2
195. 1
216.5

Treasury
cash balance

Annual
interest
charge on
total public
debt

$5.6
6.5
6.2
6.8
7.0
5.5
4.9
14.2

$7.3
7.0
6.4
6.3
6.0
5.6
5.5
5.4

P A R T II: RATIO OF DEBT AND INTEREST TO NATIONAL INCOME

Fiscal year

1957
1956
1955
1954
1952
1950
1948
1946

Total debt
as percent of
national
income

Total debt
less debt
held by
Government
accounts as
percent of
national
income

Privately
held debt as
percent of
national
income

74
78
83
90
89
106
113
149

59
63
68
74
74
91
97
133

53
56
61
65
66
83
87
120

4

Interest on
public debt
as percent of
national
income

2.00
1.99
1.94
2.09
2. 05
2.31
2. 44
2.96

All debt and cash balance figures are shown as of June 30. the end of the fiscal year.
"Government accounts" includes Government agencies and trust accounts.
Excludes debt held by Federal Reserve banks as well as debt held by Government accounts.
These percentages relate June 30 debt totals and fiscal year interest charges to the calendar year national
income.
1
2
3
4

Source: U.S. Treasury, Annual Report, fiscal year 1957, Washington, D.C., 1958. National income
figures underlying pt. II were taken from U.S. Department of Commerce, "Survey of Current Business,"
July 1958.
29 Another approach to measuring the dead weight burden of the debt is suggested by
James Buchanan in his new book, "Public Principles of Public Debt" (Richard D. Irwin,
Homewood, 1958, pp. 2,06-210). First, he would adjust the maturity value of the debt
downward f o r increases in the interest rate since issuance, a process which would have
shaved $15 billion off of the size of the debt in mid-1957. Next, he would capitalize the
value of the stream of interest payments on the debt in accordance with the pure rate of
yield on capital investment at the margin of use. This brings the sum of the debt down
to $185 billion, a "pure" measure of the national debt in the sense that the net yield from
$185 billion of earning assets in the private economy is obligated to the service of the
national debt.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Quite apart from these quantitative measurements, the real burden of the
debt in a functional sense consists of its complication of inflation control, the
possible unsettling effects of public debt transactions 011 the money markets, and
the disincentive effects that may be involved in transferring funds f r o m taxpayers
to bondholders. Only a dynamic and continuous analysis of the debt, its composition, and its relation to economic conditions will serve as a basis f o r appraising its burden in this sense. Any single magnitude merely diverts attention
f r o m the intrinsic debt problem.
G. CONCLUSION

Trying to infuse into the debt ceiling as now stated any rationality as an indicator of debt burden probably goes f a r beyond its central purpose: to curb
Federal spending. This paper lias shown that it not only fails to> accomplish
this purpose, except in occasional episodes of arbitrary and capricious cutbacks,
but that it involves heavy costs which are out of all proportion to any value
it might have as a nostalgic symbol of passive and puerile government.
In the name of budgetary integrity, financial prudence, adequately financed
national security, and aggressive policies to combat inflation and counter recession—in other words, in the name of everything that is fiscally holy and wholesome—our anachronistic Federal debt limit should be abolished.

Mr. JOHNSON. Secondly, the President has requested an increase in
the interest rate on series E and H bonds. In face of the prevailing
conditions, and in face of the importance of preserving private savings
and the willingness of private savers to invest in Government bonds,
I would give my reluctant support to an increase of not more than
one-half of 1 percent in those interest rates.
But his third basic recommendation deals with the interest on longterm Government obligations. And I wish to register here my opposition to that proposal.
I would note that the law under which the Treasury manages the
debt was put into effect by the Congress during the heat of World
War I. We successfully financed World War I. We got through a
major boom, a great depression, World War II, a postwar reconversion period, and the Korean incident down to date, without needing to modify that basic legislation, the Liberty Loan Act.
We have provided for far more difficult periods in the Nation's
financial experience than we are currently involved in, without modifying the interest rate limit. And I see this as no time to change
the rate. The slight deficits that the Treasury may experience during
the present fiscal year or in the forthcoming one are no reason to
change the maximum rate.
Furthermore, I see no reason to make long-time contracts on the
public debt at the highest interest rate in the Nation's recent financial
history. It makes more sense to me to encourage the use of shortterm credit at the present time until the long-term rates can be
brought down.
And my third reason for opposing the increase in interest on longterm loans is that I believe it is high time that the Federal Reserve
Board of Governors and its Open Market Committee discharged their
responsibility to help provide an orderly market for Government
obligations. I think that the reasons which gave rise to the accord in.
1951, during the heat of the Korean incident, were sufficient for the
accord at that time, but I long ago accepted the wisdom of James Russell Lowell's comment that "New occasions teach new duties; time
makes ancient good uncouth; they must upward still, and onward,
who would keep abreast of truth."




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

The Treasury should be asked to reconsider the logic it has been
following.
I recognize in making this observation that if the Federal Reserve
were to buy up large ^mounts of Government bonds in efforts to provide an orderly market, this would greatly increase bank reserves. I
therefore am prepared to support an increase, if need be, in the maximum amount of Federal Reserve requirements, and this can be done by
a simple amendment on S. 1120, an amendment which I supported in
the Banking and Currency Committee, and which I will support on
the House floor whenever S. 1120 reaches the House floor.
But I would call to the committee's attention that the bulk of the
postwar inflation, insofar as it can be said to relate to the increase
in debt, is not due so much to increases in the Federal debt, but rather
to increases in State and local and more particularly in private debt.
Now, the increase in short-term private debt is not responsive to
the raise in interest rates, particularly in face of the remarkable
loosening of credit terms that has taken place since the end of World
War II. We have consistently lowered downpayments, and we have
consistently lengthened amortization periods and encouraged a
splurge in private debt use. 1 submit that a far more effective way
to control the aggregate volume of outstanding debt, which is the
important step to be taken insofar as classical inflation is concerned, is
to modify the terms of credit, particularly the downpayment requirements and the amortization periods. These will be far more effective
in controlling the volume of private debt, which is quite as inflationary—when it is increasing more rapidly than the economy can absorb—as any increase in the Federal debt.
In other words, if we are concerned about inflation, our concern
must extend to the private sector as well as to the public sector of
debt management, and the Federal Reserve has an obligation to be
quite as concerned about both. Indeed, concern should be shown not
just by the Federal Reserve, but by the other Federal credit agencies,
and the indirect agencies such as the Federal Housing Administration.
And my final reason for opposing it is that I am opposed to inflation. The first bill I introduced in this Congress was one to implement the President's recommendation that we declare that we want
stable price levels to be one of the purposes of the Employment Act
of 1946. This bill was heard by the Government Operations Committee. They have brought out a different bill in a report to the
House of the Clark-Reuss measure, which w^ould underwrite the concern of the House that we put an end to inflation.
I w^ould note for the committee's sober contemplation one of the
closing paragraphs in the President's statement, which noted that the
rise in the cost of money in the past 5 months, since the budget for
fiscal 1961 was submitted to the Congress, is so great as to cause him
to ask us to appropriate an extra $500 million for next year's interest
on the public debt alone.
We talked earlier this afternoon about the Airport Act, the Housing Act, the Stream Pollution Act, and so on. I submit that all of
these programs put together, insofar as their burden on next year's
budget is concerned, will be less than the increase in the budget for
the coming year due to the interest rise in the past 5 months. I think




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

it is extremely important, in terms of the burden upon the taxpayer,
that this committee give the interest ceiling sober contemplation, and
I would recommend that we refuse to permit an increase in the interest rate on long-term Government loans.
I would go further. I would note that the interest rise during the
past 6 years has raised the cost of carrying the public debt from about
$5y2 billion to now apparently $8.6 billion. We have just heard an
excellent suggestion that we budget retirement of 1 percent per year
of the outstanding debt. The entire proposal just made by the gentleman from Texas could be financed out of the increase in interest
rates, the increased carrying cost on the public debt, during the past
0 years. If we could push interest rates back down to what they
were in 1952, we could include in the budget the cost of the entire
suggestion just made, without increasing the budget by one thin dime.
Xow, the Federal debt is only one-third, roughly, of the whole
of public and private debt, and therefore if the increased cost of
the Federal debt has been of the order of $3 billion a year, the taxpayers, businessmen, citizens, and farmers, who have been in the
market and borrowing in recent years is of the order, or will be when
the old loans are paid off and new loans are made, of 8 to 10 billions
of dollars a year in increased costs, with no increase in the real
value of the service provided. The same amount of money, in other
words, will today cost $8 to $10 billion more to negotiate than it
would have cost for the same volume of loans in 1952.
This is an increase in cost, without any increase in the quantity or
or quality of service being provided to the people of the United
States.
I submit further that the inflation we have been experiencing in
recent years, as was so ably demonstrated by the testimony of Dr.
Gardiner Means, is primarily administered price inflation rather
than the classical inflation of too many dollars creating too few goods.
Changing interest rates, tightening money, making money hard to
come by, has absolutely no effect on that type of inflation.
I hope that the Clark-Reuss bill will be adopted by the Congress
as a demonstration of our intent to hold prices stable.
There is no question but that there has been gradual price inflation since the end of World War II. In the last year the aggregate price index has been stable, but I say regretfully that that is only
because farm prices have fallen by as much as other prices have
risen. There are still inflationary pressures operating within the
economy. But if Ave could demonstrate to the people of the United
States that it was our intent to actually hold prices stable, then
we would have a very fine answer for them in explaining why we
are now prepared to drive interest rates down. The rise in interest
rates can be explained in part, but not fully, by the fact that people
have come to fear that the value of the dollar will gradually decline, and they want a higher interest rate in order to partially offset or fully offset the decline in the value of the dollar.
If we can demonstrate that we intend to have a stable dollar, we
will be more than justified in then taking the steps necessary to push
interest rates back to the kind of interest rates that saw us through
the entire period of the 1930's and the 1940's and most of the early
years of the 1950's.
41950—59




19

244

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

Finally, I would note that the argument with respect to debt management really has almost nothing to do with whether the total public debt is increasing or decreasing. The Treasury is involved in the
next 2 years in debt operations of the order of $130 billions in
magnitude. Whether we have a $13 billion deficit or a $3 billion
deficit or a surplus, the Treasury will still have to redeem the bonds
that come due and to float new bonds to pay them off, because we
are not going to pay off $130 billion of debt except by borrowing a
similar amount or almost a similar amount from somewhere.
So for all of these reasons, Mr. Chairman, while I am quite willing
to see the debt limit go up, while I am willing to see a slight rise in
the rate for true savings bonds, series E and H, I strongly recommend
against the committee's even reporting to the House an increase in
the interest on the long-term loans.
I think that the alternative courses of action that I have suggested
here are a far better way by which the Congress and the administration should proceed at this time in history.
I thank you.
The C H A I R M A N . Mr. Johnson, we thank you, sir, for bringing to the
committee your views on this subject. Thank you very much.
The Chair understands that Mrs. Cecil Norton Broy, first vice
president of the American Woman's Council, would like to be heard for
3 or 4 minutes; is that right ?
S T A T E M E N T OF MRS. CECIL N O R T O N B R O Y , F I R S T V I C E P R E S I D E N T ,
AMERICAN WOMAN'S

COUNCIL

Mrs. B R O Y . Yes, Mr. Chairman.
Thank you, Mr. Chairman and members of the committee, for your
patience. I will be very brief.
The C H A I R M A N . Will you identify yourself ?
Mrs. B R O Y . Yes; I would like to say that my first husband was the
late Thomas Upton Sisson, who for years was a member of the Appropriations Committee of this important body. And I received my
first interest in sound Government from Congressman Sisson.
The American Woman's Council stands for integrity in Government, and after 15 years of interest in the money question we have
determined that money reform is basic to all reforms, and I trust
you gentlemen will not follow the President's advice on this increase
in the debt ceiling or interest rates on bonds.
We have come to the place in the history of this Republic where
we must call a halt, and it is up to you gentlemen. You have the
power. I think that our children and grandchildren and posterity
generally will think we did not know what we were doing if we do
not call a halt on this now $8.5 billion interest on the public debt, for
which we get absolutely nothing, and which comes out of the taxpayers' pockets, because, of course, we have no money that we do not
take from the taxpayers, I being one of the humble ones of that body.
Now, I think that I should say that in my study on the money question, one of the most terrific tilings that I read was in the June 1957
American Mercury magazine. Carter Glass, who as as Member of




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

the House of Representatives, helped to put through the Federal
Reserve Banking Act, was quoted as saying:
Had I known that the Federal Reserve Banking Act would bankrupt this Nation,
I would never have helped to put it through the House of Representatives.

So by way of exhortation, as a Baptist preacher's daughter, I would
like to say that I hope you will investigate the manipulation of money
as described by Congressman Patman and Congresman Wright, who
have studied it, and you all know about it. Unless we go back to the
beginning with our banking system and stop manipulation, we will
never survive as a republic, and as a free and independent people.
It has been the history down through the ages that certain people
who believe in public debt have—well, even way back in England
I have read that in the 14th or 15th century—one of the monarchs
wanted to contract a loan to carry out a certain project, and these
people working through the Bank of England said, "Not unless you
will take it and not pay us back all at once."
Now, I am not speaking of commercial loans. I think short-term
loans in the business field are very important. I am talking about
the public debt, and I am talking about this great big interest bill
that we have piled up.
Our American Woman's Council has gone on record in favor of
Congressman Jim Wright's proposition, that we start paying 1 percent of the principal of our public debt each year and start to get this
public debt down. And I think if we do not, Ave are going to be
very, very sorry.
Andrew Jackson while President of the United States told the
money manipulators in no uncertain terms what he thought of them.
Thomas Jefferson warned us that we must not let the banking interests
control the Government of our country. Abraham Lincoln also knew,
because he borrowed $23 million to fight the Civil War, and he would
not borrow it from the Bank of England, because -ie did not want
to pay interest rates on a loan.
I leave this in your hands. Again I say, you have the power.
We have a constitutional government composed of three equal divisions. The taxation part originates with the committee. The tax
burden is your responsibility, and we now feel this burden heavily.
The value of our dollar will again go up, if we do something to
decrease the huge interest bill on the public debt. It is at this time
$8.5 billion per annum. I have followed the hearings of Senator
Byrd's Finance Committee in the Senate. The value of our dollar
is scheduled to go down 3 cents every year. The then Secretary of
the Treasury Humphrey took part in those Senate hearings. This
devaluation of the dollar must stop, gentlemen, or we will not have
a free republic. We will have a super world government, and we
will have a dictator, and you folks together with the rest of us, will
go back on the farm and be told how much produce to raise. I




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

suggest that the solution to our dilemma will come with an investigation of the Federal Reserve Banking System.
I wish I had longer, but you are very kind to permit me to speak.
The C H A I R M A N . We appreciate your bringing to the Congress the
views of the American Woman's Council.
Without objection, the committee will adjourn until 10 o'clock in
the morning.
(Whereupon, at 5:10 p.m., the committee adjourned, to reconvene
at 10 a.m., Friday, June 12,1959.)




PUBLIC DEBT CEILING AND INTEREST RATE
CEILING ON BONDS
FRIDAY,

JUNE

12,

H O U S E OF

1959

REPRESENTATIVES,

C O M M I T T E E ON W A Y S

AND

MEANS,

Washington, D.C.
The committee met at 10 a.m., pursuant to recess, in the committee
room, New House Office Building, Hon. Wilbur D. Mills (chairman)
presiding.
The C H A I R M A N . The committtee will please come to order.
Our first witness this morning will be our colleague from South.
Carolina, Hon. Robert W. Hemphill.
We welcome you, Congressman.
Mr. H E M P H I L L . Thank you, Mr. Chairman.
STATEMENT

OF

REPRESENTATIVE
SOUTH

EGBERT

W.

HEMPHILL,

0E

CAROLINA

Mr. H E M P H I L L . Mr. Chairman and members of this great committee,
some time ago our distinguished colleague, Jim Wright, of Texas, discussed with me the bills he and his great colleague on your committee,
Hon. Frank Ikard, had introduced. After study and consultation,
I introduced H.R. 7469, which in purpose, is identical.
My bill calls for amendment to the Budget and Accounting Act
of 1921 to include an item in each appropriation bill, except in wartime, to effect a 1-percent reduction each year in the national debt.
It further provides that no budget shall be considered as balanced
unless such item is taken into account.
I am mindful of the letter from the Secretary of the Treasury to
the Speaker of the House asking for the removal of the present
interest-rate ceiling on savings bonds, removal of the presesnt 434percent interest rate on new Treasury bond issues, and an increase of
the debt limit. I wonder if this is the administration's surrender to
inflation.
It is amazing to me that at a time when business is supposed to be
booming that we cannot begin some effort to retire the national debt.
How can we ever expect to retire the debt in hard times when money
is scarce and the economy is at a low ebb? It does not make sense
and it is not sense.
As I understand the argument of the administration for removing
the ceiling and increasing the debt limit, the increase in the supply
of money would, by their theory, make so much money available that
the Government will be able to borrow at less interest. If this is true,




287

244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

then why not increase the debt limit, print the money, and see what
happens. I do not believe this theory is sound, as there is no provision
in the program for any surplus with which to retire the debt.
Is it reasonable for the administration to think that the bankers
are going to rush to buy the Treasury bond issues at a lower rate if
they can get them at a higher rate ? Of course not, they are in business to profit, and since the current administration's philosophy is
one of borrowing to the hilt, Americans are more loan conscious than
any other people in the world. Americans expect to borrow and pay
back with the inflated dollar.
So far as I can see this administration has done nothing to restore
the soundness of the dollar and the proposal of the Secretary of the
Treasury offers nothing to that end. The reason the Government is
holding securities that have gone down is twofold: (1) Inflation in
the past 6 years has caused Government bonds to be less desirable,
and (2) the increase in consumer goods has taken from the savings
for the purpose of purchasing them.
The reason I comment on both the bill I have introduced and the
report of the Secretary of the Treasury is that I feel the committee
is now in a position as never before to force the administration to take
a positive step toward lowering the debt. Regardless of what legislative action this committee takes, it can put the administration in a
position of having to recognize the desire of all of us to start on
the road back toward a sound dollar and a balanced budget.
Last year I voted against the increased debt limit. One of my
friends asked me if I had any fiscal responsibilities. I told him I
not only had fiscal responsibilities, but it was time somebody protested against the annual surrender to inflation. I consider raising
the debt limit a surrender, and. like you, seek some alternative. The
hypocrisy of the temporary increase each time the debt limit is raised
is gradually being exposed. Xow we are asked to have a temporary
increase to $205 billion. The next request will be to have the $295
billion made permanent.
Finally, let me associate myself with the high purposes of Congressman Wright and Congressman Ikard. I shall appreciate any
consideration given my thoughts.
The C H A I R M A N . Thank you, Congressman Hemphill, for giving us
the benefit of your thoughts.
Our next witness this morning is Dr. Gerhard Colm, of the National
Planning Association, who appears in response to the request of the
Chair, in that Dr. Colm is not in a position to be a witness of his own
choosing, and because we wanted to have his views on this subject,
having worked with him over a number of years and having great
respect for his judgment.
Dr. Colm, I know that you are appearing here not to express the
views of the National Planning Association but in response to our
request to give us the benefit of your own thinking on this subject.
We appreciate it very much that you have accepted our invitation
to be present. You are recognized, sir.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

STATEMENT OF GERHARD COLM, CHIEF ECONOMIST, NATIONAL
PLANNING- ASSOCIATION

Mr. C O L M . Mr. Chairman, I thank you for your kind words.
I have a prepared statement, which was prepared with the thought
that the committee might have 10 minutes forme.
I had the privilege of listening to the extremely interesting presentation and discussion of the last 2 days; and with your permission, Mr.
Chairman, I would like at times to depart from my prepared testimony and make a few comments on the testimony.
The C H A I R M A N . I would certainly want you, I)r. Colm, to not only
give us the information you prepared ahead of time to deliver to the
committee but, if you can, include as much comment as possible with
respect to various suggestions that have been made during the course
of the 2 days of the testimony since you have been present and have
had an opportunity to hear what was said.
Mr. C O L M . In that respect, Mr. Chairman, I would like to make one
introductory remark. I will make a few critical comments about
certain statements made by the Secretary of the Treasury, the Chairman of the Board of Governors, and others.
In order not to repeat this later, I would like to say right at the
beginning that I was deeply impressed with the Government witnesses, and by the staff work that was reflected in their testimony.
Anything I say in criticism is in the professional spirit of trying to
find the best answers, and by no means should be considered as in any
sense apart from my respect, and in one of the cases friendship, for
these extraordinary men.
It was a presentation of high caliber and great competence.
Mr. Chairman, I would like to focus my statement on one specific
proposal; namely, the removal of the interest ceiling. I may at the
end make a short remark on the question of the debt ceiling, but in
general I shall be very happy to answer any questions you have
concerning other aspects of the legislation that is before you.
Mr. Chairman, I am in favor of the proposed removal of the interest
ceiling, first, because in principle it is in my opinion not desirable to
tie the hands of the debt managers by statutory provisions. Since the
time when debt issues were pretty much specified by legislation, a
great many changes have occurred. At that time nobody thought that
debt management might be closely related to changes in the business
cycle.
Today debt, management must be a flexible instrument in the hands
of the managers of the debt in the Treasury Department and in the
Federal Reserve, Therefore, I think under present-day conditions,
only a minimum of specific legislative direction is desirable, even
though these agencies are fully responsible to Congress and I hope
Congress in this case will see fit to clearly state the objectives that
should be accomplished by debt management policy.
My second reason for recommending the removal of the interest ceiling is because I do not believe that these restrictions, under present
conditions, really accomplish the purpose.
The continuation of the restrictions might induce the Treasury to
rely more heavily on short-term securities and to raise their short-term
interest rates. So it is entirely possible—and that was pointed out




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

both by Mr. Anderson and Mr. Martin—that under the present ceilings the interest from the total debt, short term and long term, may go
up, even though the ceiling would be maintained.
But, Mr. Chairman, there is one argument that could be advanced
against adopting this legislation at the present time. It would be unfortunate if this action by Congress were interpreted by the monetary
authorities and the financial community as a whole as advice or even
as a mandate for a further rise in the rate of interest on Government
securities. This would have undesirable effects on the whole interest
structure of the country and would result in a further increase in the
already very heavy interest burden on the Federal budget.
There are already signs that the Presidential request is being understood as foreshadowing a further general rise in interest rates.
If the Congress decides that the request should be granted, the legislation should be accompanied, in my opinion, by the strongest possible
statement which will dispel any misinterpretation of the intent of
Congress with respect to the present interest rates on Government
securities.
If the Treasury and Federal Reserve adopt appropriate measures,
it may well be that a further rise in interest rates can be prevented
and a decline in interest rates in the foreseeable future will be possible.
Some parts of the concurrent resolution of Congressman. Reuss
could very well be adapted to the legislative proposal which is before
you. Actually Congressman Reuss yesterday evening proposed an
amendment which includes some parts of his concurrent resolution and
I will at the end come back to this and make a specific proposal in that
direction, if that is agreeable to the committee.
Mr. Chairman, I would like to elaborate why I believe that with
appropriate policies a further general rise in interest rates is not a
necessity under present and foreseeable circumstances.
Let me begin by stating the opinion of those who believe that a
further rise in interest rates is mose likely.
When I wrote this I thought: Perhaps I am building up a strawman. But I think what I am saying here pretty much applies to the
argument presented by the Secretary of the Treasury.
Those who take this opinion refer to the law of supply and demand,
namely, the supply of funds on the one hand through saving and the
demand for funds 011 the other through investments by business in
plants, equipment, and inventories, through consumer and mortgage
credit, through State and local borrowing and last, but certainly not
least, through the financial needs of the Federal Government.
Some believe—and I believe the Secretar}^ said—that there are so
many claimants for the funds provided by saving that there are
simply not enough funds available to satisfy everyone.
Then, in accord with the supply and demand, the price for funds
must go up in order to cut out some of the claimants, that is, those who
are unable to pay the high price for funds.
If that is the situation, no artificial holding down of the interest
rate would do any good unless at the same time savings could be substantially increased. And few economists suggest that a rise in the
interest rate really makes people save more.
I might add here, Mr. Chairman, a word about this view related
to this situation of excess demand.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Actually, our knowledge in the field of saving is not very good.
As a matter of fact, in the preparation of this whole testimony, I became very much aware of how limited, unfortunately, our knowledge
is in many of these fields. I do not offer a statement of absolute certainty, but I give you my opinion. I think legislative action should
be taken in full consideration of the uncertainty which we are facing.
I see no evidence of a general shortage of funds in the near future.
Through recent months an extraordinary demand for funds took place
when nonfarm inventors shifted from a liquidation of $1 billion in
the fourth quarter of 1958 to an accumulation of $5 billion in the
first quarter of 1959, everything expressed as an annual rate.
At the same time, outlays for residential construction and for plant
and equipment increased by an annual rate of about $3 billion, and
installment credit increased, too.
As a consequence of this bunching in the demand for loanable
funds, financial transaction of the Treasury got into a kind of traffic
jam.
I have here attached to my testimony a table which illustrates this
special situation for the fourth quarter of 1958 and the first quarter of 1959.
It is quite a remarkable fact, Mr. Chairman, how the deficit of the
fiscal year 1959 has been financed. As far as we have data on the
changes in holdings of Government securities—and they are not quite
up to date—I take this as of February—the conclusion seems to be
clear that all financial institutions in the United States have actually
not contributed anything to the financing of that deficit.
Neither the Federal Reserve, except for perhaps a $100 million, nor
the commercial banks, nor insurance companies, nor any other savings
institutions. Virtually the entire increase in the holding of Government securities took place outside the financial institutions.
Apparently corporations, using their idle funds, have absorbed
about one-half. By corporations, I mean outside banks and insurance
companies. They have absorbed about one-half. The other half
apparently was absorbed by pension funds, individuals, and miscellaneous funds.
Another fact, one mentioned repeatedly, is that most of the financing
was short term, in bills and notes.
I do not believe that an absolute shortage of funds was really the
main explanation of the rise in interest. I think there were more
specific reasons why the investment in Government securities was
discouraged.
One is the following: Government securities are bought to some
extent by individual and institutional investors who are interested
in steady capital values as much as in a high interest yield. The
dramatic decline in Government security prices in recent years, particularly last summer, which in part resulted from a rise in interest
rates, paradoxically deterred some investors and made for still higher
interest rates,
Here we have a kind of vicious circle.
A second argument was the fear of inflation, and that argument
was very much emphasized, both by the Secretary of the Treasury
and the Chairman of the Board of Governors.
The investors fear a devaluation in the real value of fixed obligations in contrast with the expected growth in stock values, and this
41950—59




20

244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

helped to channel some funds away from bonds and into the stock
market.
Thirdly, the Federal Eeserve has given only a minimum of support to the Government security markets, because such support was
believed to be in conflict with the anti-inflation policy of the Board.
Mr. Chairman, I think that this third point requires a bit of discussion. I think the views presented to you can be understood only
in the perspective of the views of the inflation problem. I cannot
discuss the inflation problem in all its aspects in 5 minutes, but I
Iwould like to present to you a few views which I think will help
us to understand the view of the Government witnesses and the Federal Reserve.
The traditional theory is that inflation is a result of the increase
in money supply, assuming velocity of circulation remains the same,
which is usually taken for granted, even though yesterday the witnesses emphasized the point that change in velocity would have to be
taken into account.
And, second, the changes in money supply, when they come about
through Government deficits, always result in inflation.
Mr. Chairman, the argument that we just have to watch the money
supply is very much weakened by the fact that this velocity is a very
changing item in the equation. Thus there would be no correlation
between money supply and prices.
We have situations where the money supply did not change and
prices went up. We have other situations where the money supply
went up, and prices remained stable. That was as a result of changes
in velocity. But strangely enough, that is where most of the economists have to learn something.
Also, the deficit has not quite played the role which we thought it
did play. If I had been asked some years ?go what would happen if
the Government has a $13 billion deficit to be financed by short-term
bills and notes, I would have said without much hesitation, "That will
be a period of inflation and of price rises," You may have noticed
yesterday, in response to a question by Congressman Curtis, I think,
about whether this deficit had any inflationary effect, the Chairman of
the Board took it for granted and was somewhat surprised that this
was a period of extraordinary price stability.
Mr. Young gave the figure of 2 percent increase in wholesale prices,
which I cannot find in any statistics. He is a good friend of mine.
I will ask him where he found that. I find only seven-tenths of 1
percent increase over a period of 12 months.
He later stated that although we didn't get the consumer price rise,
an increase in the wholesale price always foreshadows a rise in the cost
of living index, which in my experience sometimes happens and sometimes does not happen.
Furthermore, again in response to questions, the chairman agreed
to the statement that the $13 billion did not yet have its full effect
on inflation, but that we were just at the beginning, which I take is
a rather scaring prediction of an unavoidable price rise, which is
contrary to the statement made by the Secretary of the Treasury
that such a price rise is not unavoidable.
And I would emphasize that as much as I can; that, as a matter of
fact, the experts are cautious in making such predictions. And Mr.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Martin did not make any prediction, except by implication. I know
that people in the Bureau of Labor Statistics think we are in a period
of pretty good price stability probably for a year or so.
I never make short-range predictions which catch up with me too
soon. I only make long-range predictions. So I am only presenting
to you these views.
But it was quite clear that Mr. Martin was surprised by this price
stability, and it didn't quite fit into his concepts. And it doesn't
quite fit into my ideas, but I am willing sometimes to learn by experience.
As a matter of fact, that is not a new experience. If we look back,
we had period of budget surplus with a considerable price rise. The
cash budget had a very considerable surplus in the calendar years
1947 and 1948, both years—a big surplus, and we had the price rise
in spite of the surplus.
In 1956 and 1957, we had a similar situation.
On the other hand, we had the deficit of the year 1953, with considerable price stability.
So I would say in all humility, Mr. Chairman, that the frame of
reference which was presented to you, which was more or less the
general economic reasoning we all have been engaged in, in recent
decades—that this requires a bit of reexamination. If we only look
at the money supply and budget surpluses and deficits and know what
is going to happen, that is one thing, but it isn't as easy as that.
As a matter of fact, we had a price rise during the recession. Mr.
Martin was very sure that an increase in interest rates would be just
a phenomenon of a recovery period. We had periods of recovery without price rise and without rise in interest rates, and we had periods
of rising prices during a recession. I don't say without decline in
interest rates—I think that rule still applies, but not necessarily to a
continuing price rise. This is something that should give us pause to
think whether we have not, in the present inflationary situation, phenomena which we have not thought of before. I am referring to what
has popularly been called the cost-push kind of inflation and administered prices.
Wage determination sometimes does and sometimes does not push
prices up. I am not suggesting to you that there is a new scapegoat
that is no longer the Government deficit but labor. We have a much
more complex situation, in which we cannot follow the simple rule
that if prices go up that is time for stepping on the monetary brake.
We may have a situation where such a policy may contribute to the
recession, as in my judgment it has done in the fall of 1957. Because
of a continuing rise in prices, the Federal Reserve continued its policy
until late in the fall or early in the winter, at the time when other than
f>rice indicators already told us that we are in the beginning of a pretty
severe recession.
I think, if I may use a metaphor, Mr. Chairman, we are a little bit
in the situation—the Federal Reserve has been in the situation—of a
driver coming from the Mountain States, driving toward the east
coast. And he is told, "Well, it goes pretty much downhill, so you
had better keep your foot close to the brake." But in order to be
really cautious in this situation, the driver not only kept his foot near
the brake, he pressed right down a bit on the brake and consequently
found that he could not reach his destination on time.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

So they were surprised that the brake got a little worn out. I think
this is a time when we have to reexamine our brakes, our anti-inflationary weapons that we have available.
Coming back to my prepared testimony, from this discussion I
would like to draw the following conclusions. One, if there has been
an absolute scarcity of funds in recent months, it was largely the
result of temporary factors. It is not unreasonable to maintain that
the Federal Reserve should tide the market over a period of merely
temporary stringency rather than add to it by a restrictive credit
policy.
I believe that with advancing recovery as great an increase in private and corporate savings will be generated as will be absorbed by
private and public demand under present or possibly even somewhat
lower interest rates.
Mr. Chairman, if I may bring to the attention of the committee a
table, which on page 7 is attached to my testimony, you will find
here I think one quite interesting fact.
This table shows the sources and uses of gross savings. You will
find that in the first quarter of 1959, earnings available for business
finance were running more than $6 billion higher than in 1957. And
this was a relatively good year.
It was the second quarter before there was any drop due to the
oncoming recession. Business retained earnings, $6 billion above 1957.
Investment in plant and equipment, which in the first quarter of 1959
had made a little comeback after the recession, w^as still $5 billion
below 1957. That means accrual of funds was $6 billion above; the use
of funds for fixed investments, $5 billion below the 1957 level.
We had a situation in inventory which absorbed part of that accrual of funds, as I said before, switching from a big inventory liquidation early in 1958 to a very big inventory accumulation in the first
quarter of 1959. In part this shift was influenced by the anticipation
of a possible steel strike.
That has in part absorbed these funds. But that is what I call
a temporary factor, Mr. Chairman. Because we cannot have for long
such an accrual of inventories year after year.
Second, such a development—that means a more ample availability
of funds and a consequent easing on the pressure for increased interest rates—such a development will be enhanced if the Federal
Reserve System assists in the maintenance of an orderly market for
Government securities. This can be done, for example, through open
market operations, to mitigate major fluctuations and to promote the
development of an interest rate which relates to longer run supply
and demand conditions, rather than to short-run fluctuations.
Mr. Chairman, I would like here to add a few comments, unless I
am taking too much time.
The CHAIRMAN. G O right ahead.
Mr. COLM. Many of the arguments presented, particularly in the
appendix material that the Secretary of the Treasury inserted in the
record, but also part of the argument presented by Mr. Martin,
anticipated this argument or this proposal, that the upward pressure
on interest rates should be in some part counteracted.
I would like briefly to discuss these arguments.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

First, Mr. Martin to some extent has constructed a strawman and
knocked it down, and I must say effectively and with beautifully convincing language.
I enjoyed that, particularly since I felt he could not be referring to
my position or to the position of others, like Congressman Reuss, before
this committee. Because he knocked down the strawman of going back
to the preaccord pegging of the bonds of March 1951. And I think
he knocked it down effectively.
Anybody who really recommends that policy—I think he got his
answer, which he deserves. But I would like to submit that there is
something in between a policy which in effect pushes interest rates up,
on the one hand, and the pegging of a fixed bond price on the other
hand. I think there is a wide range in between and I think we should
somewhere search for a policy that is in between these two things.
You can have a flexible policy, which leaves lots of uncertainty for
the investor, and still avoids and counteracts, the wide fluctuations in
bond prices which we have had in recent years.
I do not want to go into detail how that could be done, but I think
temporary and seasonal increases in the debt should be counteracted
by an active Federal Reserve policy. Of course, it would be more
desirable if there were working funds of the Treasury which could
absorb these fluctuations, but unfortunately we do not have them.
It is said that in any case, this is an inflationary policy. It is said
that if we recommend that such temporary or seasonal increases in the
issue of securities should be absorbed in part by Federal Reserve purchases, open market purchases, this is by necessity inflationaiy.
The answer given is that such an inflationary pressure, if it develops—and it might develop—could be counteracted then by the
instrument of changes in reserve requirements.
Mr. Anderson has dealt with this proposition and he says that, for
instance, if the Federal Reserve buys $5 billion in bonds and then,
through an increase in reserve requirements, absorbs the reserves
created in the member banks, then the Government would have to take
away with the right arm what they have given with the left arm, and
the result is the same as before.
I submit that this overlooks two things. First, the result is not the
same, because there would be a somewhat better position for the interest rate or the prices of Government securities, with possibly some rise
in interest on private loans. The Federal Reserve takes Government
securities and curtails funds available for private lending.
And so while I believe that in the postwar period the Government
was exclusively concerned with Government securities and not sufficiently with the controls of the private credit system, I do think now
we are doing the opposite. There is less concern about what happens
to Government credit on the side of Federal Reserve and, as I have
suggested before, I think there should be a more balanced position.
Second, I would not propose that if the Fed buys $5 billion worth of
Government securities they should really take away the full rise in
lending power by higher reserve requirements, I only would say that
to the extent that these open market operations have an inflationary
impact, it should be counteracted by using the instrument of reserve
requirements.
It does not need to be a 100-percent offset because we have to have an
increase in credit for a growing economy.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

Tliat is the sort of answer I would give to the Secretary and to the
argument which he has on pages 24 and 25 of the document presented
for the record.
I want to make quite clear one thing in this connection. We have
heard a lot about the free market for Government securities.
Basically, I agree. I do not believe that it is possible in the long
run or would be prudent for the Government to try to fix an interest
rate which is not in accord with the savings and use of the savings
situation over the long run.
My point has been that we should aim at a policy in that respect
which takes account of the longer run f actor, but which absorbs shorter
runfluctuationsin the process.
We should also remember that the market for funds in not a very
ideal competitive market. I mentioned already one fact, that the
supply of funds is not very elastic, in response to changes in the interest rate. When the interest rate goes up, it is not that you then consume less and save more, at least not substantially more. And we
have encountered effects which go in the other direction, because with
higher interest rates a lesser amount of saving permits you to make
some provision for your future rainy day or your life insurance, et
cetera.
Second, the big demand for funds unfortunately is largely outside
the influence of our interest rate policy. The biggest factor is the
demand of corporations for plant equipment, and that is almost fully
covered by their internal accruals, which are only very vaguely and
indirectly affected by monetary policy. Therefore, the interest rate is
not a very perfect instrument.
As a matter of fact, I agree with what Mr. Martin said yesterday,
in response to a question, that in the long run interest rates are determined by supply of and decreased demand for saving. They can be
influenced, however, by policy in the short run. And I believe this
power to influence interest rates in the short run should be used.
In the present economic juncture, Mr. Chairman, I cannot give
any definite advice with respect to appropriate monetary policies for
a longer period ahead. As a matter of fact, I w^ould challenge any
economist who says he can.
Therefore, I would not propose that your committee should go
on record with a recommendation or a direction that the Federal
Reserve Board should switch now to an easy money policy.
With the end of the recent inventory boom, it is still not clear
whether the pace of recovery will slow down, will turn into balanced
and sustained economic growth, or will develop into an inflationary
boom. In such a situation, the monetary authorities need to be on
guard and should be prepared to respond promptly to changes in
the employment and production outlook. In the terms of my
metaphor today, I would say we should have the foot near the brake,
but we should not always step on the brake. The readiness to take
anti-inflationary action if excessive demand develops should not and
need not prevent the monetary authorities from playing their role in
debt management.
Third, the problems of debt management cannot be solved merely
by increasing the rate of interest. Several witnesses have said that.
Improvements in tailoring debt issues to potential markets and im-




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

provements in the marketing techniques should be explored. Lessons
should be learned from past failures.
What I am referring here to is the fact that there was no sale to
the financial institutions during the last year, and I think a way
should be found to tap that money. Also, the relationship between
fiscal policies, especially tax policies, debt management, and credit
policies, require reexamination.
I know that this committee has planned such a reexamination as
far as tax policies are concerned.
Fourth, the Federal Government should do everything in its power
to combat the notion that promotion of a desirable rate of economic
growth will lead of necessity to continuing inflation. Policies needed
to reconcile the objective of economic growth with a reasonable degree
of price stability should be explored and adopted. I know that other
committees of Congress are looking into this problem. This will
be more helpful to the restoration of confidence in Government securities than scare talk about unavoidable inflation as a result of deficit.
I believe that such restoration of confidence is entirely possible. The
fact that savings deposits and similar fixed forms of savings have
been rising all through 1958 and into 1959, as long as we have records,
demonstrates that the confidence of the American people in the soundness of the dollar has not been shaken.
I refer to the fact that from April 1958 to April 1959 time deposits
of all kinds have increased by more than $6 billion. That does not
look like running away from the dollar.
In conclusion, I would like to repeat that I favor removal of the
interest ceiling on Government bonds. The increase in the debt limit
and the removal of the interest ceiling on bonds should be used as
an opportunity for the Treasury and the Federal Reserve System
to improve their debt-management policies. In order to avoid possible misinterpretations and unwarranted expectations resulting from
such congressional action, it would be most desirable if the appropriate committee and the Congress as a whole would make it clear
that this action is not taken in support of generally higher interest
rates on Government securities in general.
In the last part of my prepared testimony, I changed after I heard
Congressman Reuss yesterday, and I tried to utilize some of his proposals, though I modified them. I do not know whether he would
agree or not. I guess he would not agree with this.
The Congress could direct, as was proposed by Congressman Reuss,
that the Federal Reserve System:
While pursuing its primary mission of administering a sound monetary policy,
should, to the maximum extent consistent therewith, utilize such means as
will assist in the economical and efficient management of the public debt.

And I add to this: Also, the System could be directed to explore
what use of purchase of U.S. securities of varying maturity could
be made in order to bring about needed future monetary expansion,
and what improvement in the methods of reserve requirement could
be made so that they become a more usable and effective anti-inflation
tool.
That is the end of my suggestion for this committee.
With such affirmative policies, a further rise in the interest rate
on the national debt may be avoided, and in time a decline may be




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

possible. Such policies would also make a contribution to the broader
national objective of economic growth without undermining confidence in the dollar.
Mr. Chairman, I would like to add just one remark on the debt
ceiling problem. I do that with some hesitation, because my logic
as an economist is somewhat contrary to my feeling of political feasibility on this thing. But after all, I do not want to take your job,
and I want to do mine. I think the debt ceiling in essence has become
a two
The C H A I R M A N . A two-edged sword ?
Dr. COLM. I think in one respect it would be good to have the debt
limit high, to give elbowroom to the authorities. But this could be
interpreted as meaning that Congress is not concerned with the rise of
the national debt and is going on spending to that limit. On the other
hand, a tight debt limit may have very unfavorable consequences, as
was demonstrated to us in the fall of 1957. That was a situation where
it was believed politically not wise to go to Congress and ask for an
increase in the debt limit, with the result that there were cuts in expenditures. And the result was waste, because we had to make up for
it in the defense program afterward. Also, there was great inconvenience for some of the procurement corporations, which simply were
not paid.
In addition, Mr. Chairman, there is always a way of getting around
this, and that is also undesirable. By manipulation of transactions,
it is always possible, to some extent, to engage in debt transactions
which are not reflected in the debt subject to the statutory limits.
I bring to your attention that the fiscal year 1960 budget, which
is in balance on the books, shows, in an apendix table, that there is
proposed for the fiscal year 1960 an increase in private debt secured
by Federal insurance and guaranties, of more than $10 billion.
Mr. MASON. Backdoor expenditures ?
Dr. COLM. $10 billion. Now, I am not criticizing these operations.
In some cases that is a better instrument than outright spending and
borrowing. But I do not think the situation is desirable when the administration is induced to use that instrument, even when the merits
would be on the other side. But I have said that, Mr. Chairman, because it is my conviction, as an economist, that we are getting into
trouble with the debt limit. But I recognize that this is one bit of
advice which you will certainly disregard.
Thank you.




PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS

299

(Chart entitled "Sources and Uses of Gross Saving" is as follows:)
Sources and uses of gross savings

(seasonally

adjusted at annual rates )

[Billions of dollars]

Sources of saving
Private saving
Personal saving _ _ _ _ _
Business retained earnings
Government surplus (Federal)
Uses of saving
Gross private domestic investment
Investment in plant and equipment
Residential construction
Inventories
Net foreign investment
Government deficit
_..
Federal
State-local
Statistical discrepancy

2d quarter,
1957

1st quarter,
1958

4th quarter,
1958

71.0
68.4
23.2
45.2
2.6
72.5
67.1
47.7
16.5
2.9
4.2
1.3

62.3
62.3
19.9
42.4

69.5
69.5
19.9
49.6

72.2
72.2
20.4
51.8

60.7
50.9
42.1
17.1
-8.2
.5
9.3
6.6
2.7

69.2
61.6
41.5
20.1
0
-1.0
8.5
7.4
1.1
-.3

72.0
70.2
42.8
21.7
5.7
-1.7
3.5
1.8
1.7
-.2

1.3
1.5

1st quarter,
1959

Sources: Survey of Current Business; Federal Reserve Bulletin; and National Planning Association.

The C H A I R M A N . Dr. Colm, we thank you for your very fine presentation of your views on this problem.
Without objection, the table to which you referred on page 7 of
your statement will be included in the record at the point where
you referred to it, or at the conclusion of your statement.
Dr. Colm, we have heard a lot in the last 2 days about, primarily,
the matter of the elimination of the interest rate. And you have
referred in your discussion this morning more to that than to the
question of the debt ceiling.
Actually, about the only issues involved with respect to congressional action on the debt ceiling at this point, as I see it, would be
whether or not such increases as appear necessary are to be on a socalled temporary basis or on a permanent basis; or whether or not we
might reevaluate the present requirement and prepare a different type
of a limit with respect to the debt itself; whether the limit shall
apply to a debt every moment of every day of every fiscal year, or
whether the limit shall apply with respect to the close of business
at the end of a fiscal year.
Those issues are not so technical that they are not understandable.
You realize and I realize that the Congress, for many reasons, perhaps,
will not think at this time in terms of eliminating entirely the ceiling
on the debt as has been recommended by some people outside of
Government.




244

PUBLIC

DEBT AND INTEREST

RATE

CEILINGS 120,

Let's pass from that, then, into this more troublesome area of
eliminating the ceiling on the interest that will be paid by the Government.
Now, let us understand first of all, clearly, just what the existing
situation is. As I understand the existing law, there is no ceiling
with respect to interest that can be paid by the Government on
securities up to 5 years in term. The ceiling applies with respect to
securities that are issued for a period of longer than 5 years.
We have been told—and I want you to speak up at any moment if
I am not stating this correctly—we have been told that banks generally are the purchasers of Government securities that are of short
duration.
Dr. C O L M . Yes, sir. That has usually been the case.
The C H A I R M A N . S O that if the future should develop circumstances
in which the Government would have to pay a higher rate of interest
in order to refinance the existing obligations than it is permitted by
law to pay now with respect to long-term obligations, the Treasury
would, of necessity, turn more and more to short-term securities, where
there is no limit, and which are securities that would be bought by
banks, rather than individuals.
D r . COLM. Y e s , sir.
The C H A I R M A N . S O

that the result would be, as I see it, that we
would, under existing law, be frozen into a position where greater
interest than has to be paid to the Government would be paid to banking institutions rather than to individuals. We .would not be in a
position to pay more, if necessary, in order to attract the savings of
individuals to Government securities.
Is that true ?
Dr. C O L M . That is my understanding, Mr. Chairman.
The C H A I R M A N . N O W , let me ask the question: Is not that procedure
in and of itself conducive to further inflation ?
Dr. C O L M . Mr. Chairman, if the nonfinancial corporations and pension funds would stop buying the Government securities which they
have been buying during the last 6 months, then the Federal Reserve
would have to make available the reserves for commercial banks to
enable them to buy the securities, and that would have an inflationary
tendency. I make a small distinction between inflationary tendency
and inflation. What I mean is that sometimes there are offsetting
factors in the economy. That is why sometimes a deficit or an expansion of credit and purchase of Government securities does not create
inflation—it still is an inflationary tendency which is offset by other
tendencies in the economy. I do not see that it necessarily would result
in price rise and inflation.
The C H A I R M A N . N O one could say that, because we do not know
what the other factors would be that could counteract this. But you
say at least this would be a factor that would tend to cause inflation.
That is what I am trying to ascertain.
D r . COLM. Y e s , s i r .
The C H A I R M A N . That is true, is it ?
Dr. C O L M . If the purchase is made

available through expansion of
Federal Reserve credit.
The C H A I R M A N . Well, it would have to be, would it not ?




244 PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS

120,

Dr. C O L M . Well, theoretically, Mr. Chairman, there might be a
switch from private loans into Government bonds, if they are secure,
if they are more attractive. Theoretically. I mean not each purchase
of a commercial bank, of Government securities, is inflationary in
itself, if there is a switch in assets. It is inflationary if the Federal
Reserve in order to promte that makes the reserves available by either
lowering of reserve requirements or open market operations.
The C H A I R M A N . What I am getting at this this: Over the next year
or 2 years the Secretary of the Treasury will in all probability have
to refund $130 to $140 billion of public debt. Some of that is in
short-term obligations. Some of it is in long-term obligations. If
he cannot induce investors in the long-term area, then he will of
necessity have to inducer investors in the short-term area.
D r . COLM.

Yes.

D r . COLM.

Yes.

The C H A I R M A N . S O that the short-term obligations of Government,
which today may be some $75 or $76 billions, could be expected, under
those circumstances, to materially increase, and there would, therefore,
be pressures for greater availability of credit on the part of the banks
if they are the ones that we must look to to take these short term
obligations.
The C H A I R M A N . N O W there would have to be, if inflation did not
occur under those circumstances, a number of factors counteracting
that influence, would there not ?
Dr. C O L M . Yes, exactly.
The C H A I R M A N . And we are told already by those in a better position than we to predict with respect to Government spending, that
even if Government spending may be $78 billion in fiscal 1960, but
there is also evidence to cause us to believe that it may be $80 or $81
billion. Already the evidence causes us to believe that with respect to
1961.
D r . COLM. Y e s .
The C H A I R M A N .

S O that we would be in a very tight fiscal situation, maybe in a deficit. Now we would not want to be in that position, would we, under circumstances such as I have described ?
D r . COLM. NO.
The C H A I R M A N .

Because that would be another factor working in
the direction of inflation, would it not ?
D r . COLM. Y e s .
The C H A I R M A N .

All of these things that we can think of working
together might well bring about the very thing that none of us want,
higher interest rates.
Dr. C O L M . That is right.
The C H A I R M A N . In spite of the fact that we might write up a report
to the contrary, that might follow ?
Dr. C O L M . Yes. That is the reasoning that led me to the support of
the removal of the interest ceiling on long-term bonds, longer than
5 years.
The C H A I R M A N . Have you discussed this matter on the outside with
other economists? Do you know their thinking with respect to it?
Do those that you have talked to possess about the same views that
you do on this ?




244

PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS 120,

Dr. C O L M . I could mention a number of economists who I believe
hold the same views, and at least an equal number with different
views. Unfortunately there are differences of opinion.
The C H A I R M A N . Are economists divided on this question that we are
talking about, that our failure to do this thing would create inflationary trends ? Are there some who think it would not ?
Dr. C O L M . I can hardly imagine, Mr. Chairman, that somebody
would question that statement, if you called it an inflationary trend.
That means possible offset by other factors. And if you considered
the pressure on the monetary authorities to make the purchase of
short-term bills and notes possible by the banking system, I can
hardly imagine that somebody would deny that that is an inflationary
trend. There may be some who say that is what we need, because we
have other deflationary factors, for example, a very high accrual of
funds within corporations. We may have such factors which require
offsetting. But with respect to the facts, Mr. Chairman, I can hardly
believe there is a difference of opinion, though I am only talking for
myself and I cannot talk for my colleagues.
The C H A I R M A N . Let me see now if I can get from you some understanding of the basic propositions that are involved in this policy
area. I am talking now about this question of the interest rate. If
we are to have a growing economy, does this not mean that this year's
money claims have to be greater than last year's; and next year's
money claims greater than this year's ?
Dr. C O L M . We think that growth in the economy, let us say, year by
year, should be in the neighborhood of $15 to $20 billion.
The C H A I R M A N . Are you talking now in terms of net money claims?
Dr. C O L M . Gross national product.
The C H A I R M A N . All right. Go ahead.
Dr. C O L M . And that such a growth is likely only if there is a corresponding growth, one that is proportionate, in money claims.
The C H A I R M A N . That has to follow, does it not ? There has to be
that increase in money claims ?
D r . COLM. Y e s .
The C H A I R M A N . Y O U do
Dr. C O L M . That is right.
The C H A I R M A N . If you

not have growth without an increase.

maintain your money supply on A static
basis so that your claims do not grow, you do not have growth. So
we must, therefore, conclude that we are not opposed to any and all
increases in credit, which is the bulk of what we call our money supply. That is true, is it not ?
D r . COLM.

Yes.

The C H A I R M A N . Our whole purpose, then, in this connection, is to
be certain that the increase is not excessive. That is the purpose, is it
not?
Dr. C O L M . Both, Mr. Chairman; that the increase is adequate, and
not excessive.
The C H A I R M A N . We repose such latitude in the Federal Reserve as
to give the Federal Reserve System authority to see that it is adequate
and not excessive.
D r . COLM. Y e s , sir.
The C H A I R M A N . They

are the ones that we charge with that responsibility. Now if velocity of money remains a constant, that means




244 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

that the money supply must increase proportionately with the increase in total production, does it not ?
Dr. C O L M . Yes. That is correct.
The C H A I R M A N . Would it be the same percentage ? If velocity remains constant and if you had 3 percent growth in your economy
would you need 3 percent growth in your money supply ?
D r . COLM. Y e s .
The C H A I R M A N .

If that does not happen, then the economy slows
down, does it not ?
Dr. C O L M . Yes. That has been the experience in recent years.
The C H A I R M A N . I am getting back to the question I raised with Mr.
Martin. Has the money supply over the past years increased enough,
in your judgment ?
Dr. C O L M . The money supply has increased much less than the
increase in the gross national product, because we had some increase
in velocity.
The C H A I R M A N . All right. Then the money supply not having
increased as much, of course, the velocity has not remained constant.
But does it mean that the money supply has not increased, in your
opinion, taking into consideration velocity, as much as it should have
increased to satisfy the needs of the growth that has occurred ?
Dr. C O L M . I think over the last few years, starting with 1 9 5 7 , the
money supply has not increased adequately to support even a modest
rate of growth at 3 percent or a more desirable rate of growth, I would
say, of around 4 percent.
T h e CHAIRMAN. YOU say it h a s n o t ?
D r . COLM. I t h a s n o t .
The C H A I R M A N . Then if it has not,

has that made a contribution
to the rise in interest rates ?
Dr. C O L M . I think it has made a contribution.
The C H A I R M A N . Y O U would criticize, then, the policy that the Federal Reserve has followed up to date with respect to making money
and credit available ?
Dr. C O L M . Yes, and I think it became most obvious in the fall of
1957.
The C H A I R M A N . That is what I am thinking about.
Dr. C O L M . That is the period where it is most obvious. At the
present time it is a little bit more doubtful, because there are some inflationary signs. But during 1957—I am speaking of the last half of
1957—there was in my judgment no reason for holding down the
increase in money supply and every reason for stimulating expansion.
We had curtailment in Government expenditures, due partly to the
effect of the debt ceiling. I am not for an increase in expenditures
if other factors in the private economy are permitted to go ahead.
But we had a slowdown in the private sector and in the Government
sector at the same time, with the result of the recession of 1958.
The C H A I R M A N . If you will pardon the personal reference, I made
a speech on the fifth of November 1957. I do not know whether my
audience appreciated what I said or not, but they had given me
unlimited right to select my subject. I called attention then that the
policies of the Federal Reserve were such—this was the beginning of
November—that if it continued and if there was not an easing of these




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

policies, that is, the creation of more credit, through Federal Eeserve
policies, by March of 1958 there would be 5 million people unemployed.
You say you do not like to make predictions with respect to the near
future, because you could be wrong. I do not, either. But I could
not escape the conviction that there was this downturn, and that the
policies of the Federal Reserve were policies more appropriate to an
inflationary period, and they were not appropriate to a period of
decline.
Now, what I am concerned about today, very frankly, is that there
will not be enough shift or change with respect to Federal Reserve
policies in this area to cause interest rates to remain constant or to go
down if we take the ceiling off of Government obligations, and we
thereby will be accused, at least, rather than the Federal Reserve, of
having created the situation of higher interest rates.
Dr. COLM. I agree entirely with that, Mr. Chairman. That was
exactly the reason why, recognizing the logic of the proposal for removal of the ceiling, I felt that Congress wants to be protected against
the misinterpretation of that action. That could be done by some such
language as I proposed at the end, which was a modification of the
amendment proposed by Congressman Reuss.
The CHAIRMAN. It will be said to you and me that we are wrong in
our thought that the policies of the Federal Reserve should be so
adjusted as to bring about a greater supply of money, because that
action would be inflationary in all probability. Now, you have said,
and I have said, that I did not think enough had been made available
in the past, and that that was a factor causing higher interest rates.
Now, can we catch up, make up for what may have been a mistake
according to your thinking and mine, through Federal Reserve policies, without running the risk of creating an oversupply and therefore
inflation ?
Dr. COLM. Mr. Chairman, it is in the nature of the problem that
there always will be the risk of doing the wrong thing. I think in
this area, with our imperfect knowledge, there is only one way, and
that is proceeding by trial and error. If I would give advice to the
Federal Reserve, I would pursue a policy designed to increase the
money supply and make funds available. But I would not take my
foot too far off the brake.
The CHAIRMAN. YOU mean away from the brake ?
Dr. COLM. Not too far away from the brake. I would take it off.
I would not step down. I would let it go. But I would keep it in a
position where I could step down as soon as I see that I have gone
too far. I do not think this is an area in which we can say the one
or the other policy should be pursued. That is why I am in favor of
discretionary power for the Federal Reserve as long as they are told
that they have to look at all the objectives, namely, promoting economic growth, orderly market for Government securities, and the
stability of the dollar. And particularly, Mr. Chairman, they should
recognize that not every price rise is a sign of excessive demand. We
had price rises, inflation, certainly during the recession, which had
nothing to do with excess demand, and where the use of the Federal
Reserve instrument was the wrong policy.
The CHAIRMAN. What I am trying to find out is this: We all agree
that the Federal Reserve System could so expand credit and money




244 PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS

120,

as to take care of this problem of the Treasury without an increase
in the interest rate. Now, can it do so without the possibility of this
resulting in inflationary expansion of the credit supply?
Dr. C O L M . I think it can, Mr. Chairman.
The C H A I R M A N . D O you think it should make the effort to do it?
Dr. C O L M . I think it. should make the effort; aways ready to step on
the brake if a truly inflationary situation develops. And "inflationary'7 means here excess lending because of too great monetary reserves.
The C H A I R M A N . All right. This is another point that bothers
me. If the Federal Reserve does not do what we are talking about,
the Secretary of the Treasury has no alternative but to go into the
market and to take this ceiling off and pay such interest as is required
to be paid to get people to buy these securities. Does that not mean
that if there is a continuation of the present Federal Reserve policy
without any easing, as you and I have suggested should occur then
there would be some would-be borrowers who are going to be squeezed
out of the money market ?
Dr. C O L M . Yes, I think so.
The C H A I R M A N . N O W , who are they going to be ?
Dr. C O L M . Pardon me ?
The C H A I R M A N . Who, in your opinion, are they going to be ?
Dr. C O L M . Those squeezed out? Well, the situation to which I
referred, where most of the long-term fixed investments in plant and
equipment are financed not through the credit mechanism but through
internal fund accruals the victims of high-interest rate are the construction industry, unless that is offset by Government mortgage policy, smaller businesses, which depend on credit, and some public utilities, which traditionally are financed by debt rather than by their own
means, State and local governments, which are very sensitive to the
interest rate. I think that is about it, Mr. Chairman,
The C H A I R M A N . All right. Now, let us turn in another direction.
Even if we do not do it, even if we do not take the course of action
that you suggest, that the administration suggests, and if the Federal
Reserve does nothing but maintain its present policy of making less
money and less credit available than you and I think expansion requires, then are not the same people affected ? Are not the same people squeezed, anyway? Through the use of the short-term obligations by the Treasury ?
Dr. COLM. Yes, they are, Mr. Chairman.
The C H A I R M A N . They are. There is no question about that. So
that we cannot say, and it cannot be successfully proven, first, that
the elimination of the ceiling on the rate of interest b.v Congress
will be the cause of any increase in the rate of interest that may or
may not follow.
Is that true ?
Dr. C O L M . Yes, that is true.
The C H A I R M A N . Second, it cannot be proven, it cannot be demonstrated, that the Congress will be the cause of the hardships that are
going to develop in the next months with respect to some of these
would-be borrowers of the next several months, because they are
squeezed either way.
D r . COLM.

Yes.




244

PUBLIC DEBT

AND INTEREST

RATE

CEILINGS 120,

The C H A I R M A N . And it comes right back to this basic problem, that
is basic, I think far more so than the things that we have discussed,
perhaps—that it is in the operation and the management of the supply
of money by the Federal Reserve that we find the crux of the criticism
if these things that we are talking about do happen in the future.
D r . COLM. Y e s , sir.

The C H A I R M A N . If interest rates go up and certain people are
crowded out of the market, because of the necessities of the debt
situation ?
D r . COLM. Y e s .
The C H A I R M A N .

I know very little about it, frankly. I know very
little about anything. But as to what is a satisfactory monetary
policy, as I said yesterday, I certainly would not want to have Mr.
Martin's job. But I guess it can only be done on a basis of trial and
error, and it looks like there are about as many errors as there are
trials in the process of making decisions.
Dr. Colm, I thank you very much for being here today and for
straightening me out, at least, on some of these problems that I have
with respect to this basic policy area.
Are there any other questions ?
Mr. Mason?
Mr. M A S O N . Dr. Colm, reverting to the chairman's phrase, or statement, that the total money claims must go along with the total production or expansion of the economy, is it not also true that if we
want a healthy economy the balance of the money savings, the other
side of the picture, must go along with this increase in money claims?
Those two, you might say, balance each other in a healthy economy.
Is that not true ?
Dr. C O L M . That is true, Mr. Mason.
Mr. M A S O N . And while we cannot determine the amount of money
savings, because that fluctuates without any rhyme or reason, it seems
to me, we have got to keep that in mind in this expansion of our economy and the total money claims that must be met.
Now, then, with that settled in my mind, or for me, particularly, I
want to try to clarify what you said about the Federal Reserve and
its responsibility.
As I gather, you liken the Federal Reserve to a power brake on our
economy that must be handled very, very carefully, not pushed down,
not taken away, but just kept there so as to have our economy on an
even keel all the time and not inflation or depression. And I would
judge that you said that maybe the Federal Reserve put the pedal
down a little bit too much in 1957, say.
D r . COLM. Y e s , sir.

Mr. M A S O N . It was not adjusting it about as it should be. That is
a delicate brake and must be handled in a delicate way; is that not
true?
D r . COLM. Y e s , sir.
Mr. M A S O N . N O W , then,

you told this committee a well-known truth
in economics: that economic truth and an economic proposition that
is excellent does not always go along with political feasibility. And
we particularly are sensitive to political feasibility, and we may not
always follow what we know to be economic truth because of the
fact. And I was delighted that you brought out that point.




244 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

We have heard, a good deal in the last 2 days about the money
velocity; that it is not the total amount of currency available by itself,
but we have to consider the velocity of movement of that currency in
order to know whether it is too much currency or not enough, because
the velocity determines the effect upon this.
I like, as a schoolteacher, to illustrate things. A $5 bill that is used
10 times in 1 month to buy some goods equals a $50 bill that is used
once. Is that not what we mean by velocity ?
Mr. C O L M . That is right.
Mr. M A S O N . That is all, Mr. Chairman.
The C H A I R M A N . Any further requests of Dr. Colm ?
Mr. B Y R N E S . Mr. Chairman.
The C H A I R M A N . Mr. Byrnes will inquire, Dr. Colm.
Mr. B Y R N E S . Very briefly, I want to go back to the last discussion
of the chairman with respect to what the effects would be, assuming
no change in the general attitude or operations of the Federal Reserve,
in all actions by them, to change the credit supply available.
The suggestion was, and I think there was agreement on it, that if
the Congress removes this interest rate ceiling, some borrowers eventually are going to be squeezed out of the money market and if we do
not do anything and the Government has to rely on short-term financing, the borrowers are still going to be squeezed out.
I do not wrant to put words in the chairman's mouth.
The C H A I R M A N . That was a part of it.
What we were trying to emphasize was that a continuation of existing Federal Reserve policy, regardless of what happens here, in all
probability will bring about a squeeze with respect to many would-be
borrowers in the next several months ahead.
Mr. BYRNES. That is what I was getting at. However, assuming
the Congress does not do anything and the Federal Reserve Board
does not change its policy, is not the squeeze going to be more severe
than if we eliminate the ceiling or raise it ?
What I am getting back to is the implications that were involved,
particularly in the statement of the Secretary of the Treasury to us
in regard to the psychological effect on savers with the Treasury being
bound in and restricted to short-term borrowing and therefore the
assumption that inflation is bound to be the order of the day.
Mr. COLM. Mr. Byrnes, it is difficult to answer the question as to
which one would have the most effect. The assumption the chairman
made was that there would be no change in the Federal Reserve
policy.
Mr. B Y R N E S . That is the same assumption I make.
Mr. C O L M . If the ceiling is removed and some of the notes and bills
due are replaced by a long-term issue of higher rate, that in itself
would lessen the inflationary impact.
On the other hand, it would have a repercussion through the whole
interest structure, because as was mentioned yesterday by one gentleman these higher interest rates on bonds do affect the interest rates
on other competitive securities, they may affect State and local securities, and so on.
On the other hand, if the ceiling is not removed and the Treasury
through the same Federal Reserve policy is forced to go up in shortterm interest rates in order to make somebody buy the bonds and notes,
then you have pretty much the same effect.
41950—59

21




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

I would guess that the difference would not be too great, but I think
there might be a chance that the effect on interest rates outside the
Government might be somewhat larger with the present ceiling than
without, because you have some chance of saving through long-term
investors.
Mr. B Y R N E S . The Secretary, as I recall, put a great deal of emphasis
upon the psychological effect, even internationally. He suggested
that in the financial field if there was a feeling that the Treasury was
going to be bound in and forced to seek its bonds in short-term
borrowings, the psychological effect of that would be bad from the
general interest standpoint and from the tendency to interpret that as
indicating that we were going to be moving even faster into an inflationary period.
Do you agree or disagree with the Secretary's interpretation of the
psychological effect ?
Mr. C O L M . I guess none of us, without any reflection on the Secretary, is an expert on psychology.
As a matter of fact, this is at least as complicated as the economic
issue itself.
I think there are all kinds of psychological repercussions. There
has been much emphasis on the psychological effect of, let's say, a tight
money policy, and one Economic Minister of a foreign country, in
a television show 10 days ago, said that he had advised the Federal
Government to engage in a tight money policy, while his own country
was reducing the interest rates month by month.
But I think there is also another psychological effect. If, because
of that monetary policy, the economic growth is not what it could be,
I would submit, Mr. Byrnes, that can have a more important undesirable effect on the psychology both at home and abroad.
Labor during the recession became less willing to cooperate, let's
say, with automation and technological advances because there was a
fear for job security, and in foreign countries you got very unfavorable reaction on the lack of economic growth in the United States.
So if you refer to psychology, I think we have to take all sides into
consideration and not only the one effect Mr. Anderson talked about.
Mr. Martin, 011 another occasion, also talked about the experience in
New Delhi.
This question of the dollar was discussed, but I submit among the
people who were assembled in New Delhi, there was a certain selection and the selection assembled in New Delhi on that occasion was
not exactly a cross section of the population of those countries.
Mr. B Y R N E S . In other words, your point is that assuming no change
by the Federal Reserve in policy, what we do with the recommendations of the Treasury Department with respect to the ceiling on the
medium- and long-term obligations won't make any appreciable
difference ?
Mr. C O L M . I didn't mean that what the Federal Reserve does makes
little difference.
Mr. B Y R N E S . Am I right in inferring from your statement that
based on the assumption the Federal Reserve Board does not make
any change in policy, that what we do here is of no significance.
Mr. C O L M . I come out in favor of the removal, as you know, Mr.
Byrnes, because I do think that with the removal there is a better




244 PUBLIC DEBT AND INTEREST

RATE

CEILINGS

120,

chance that the Federal Eeserve will adopt a flexible policy in time.
I mean the whole discussion was based on the assumption—I hope
unrealistic—that there is no change in Federal Eeserve policy.
I ask the question of myself, under what kind of action of Congress is there a better chance that there will be a change, and I come
out, rightly or wrongly, with the recommendation that with the removal of ceiling, Congress has a better chance to exert a wholesome
influence rather than if you do not grant that.
Then the Federal Eeserve will say, "Well, it was Congress which
prevented us from taking the necessary action."
Mr. B Y R N E S . I understand that you recommended that wTe comply
with the Treasury's request as far as eliminating the 4-percent ceiling.
M r . COLM. Y e s , sir.
Mr. B Y R N E S . However,

you also coupled it with the change in
Federal Eeserve policy.
I was wondering, though, what your position would be after the
questions asked by the chairman and your answers, or what your recommendations would be on the 4-percent proposal if you went on
the assumption that the Treasury and Federal Eeserve policy was
not going to be changed.
Would you still advocate that we act to remove the ceiling %
Mr. C O L M . I advocate that Congress remove the ceiling with a
strong declaration which reaffirms the objectives of the monetary policy, both to work toward stability, an orderly market for Government securities, and promotion of economic expansion, and implement
that with exploration.
Mr. BYRNES. Even if we did not take this second step of the suggestion that the Federal Eeserve Board had to make some changes or if
the Congress did not direct that they make some changes, you would
still advocate that we take off the ceiling ?
Mr. C O L M . Mr. Byrnes, I don't as a witness necessarily have the
privilege of saying that that is an "iffy" question. I wish I could.
If Congress says go ahead and says nothing else, I think the psychological impact would be that all interest rates will go up further,
and this would have a very bad effect.
I would be hard pressed if you say, "Now, assume nothing else can
be done, just give the green light, and go ahead and increase the interest rate on the bonds."
Quite frankly, at this moment I don't want to make up my mind.
Mr. BYRNES. In your opinion, if the Congress does not do anything
would the Federal Eeserve have been forced to act in some way ?
Mr. COLM. Mr. Byrnes, I don't think the Federal Eeserve could be
forced. There would be an increase in the interest rates on bonds and
notes. That to some extent is a self-defeating policy, because the rise
in interest on bonds would create a fall in the price of these bonds,
which again deters purchasers, and this is the spiral to which I referred, which may then create another need for an increase in interest
and then comes a point when the Federal Eeserve says, "We have to do
something."
I think it is much more desirable if that situation is anticipated so
that action be taken before it comes to that situation.
Mr. BYRNES. Thank you.
The C H A I R M A N . Mr. Watts will inquire.




244

PUBLIC

DEBT AND

INTEREST

RATE

CEILINGS 120,

Mr. W A T T S . In view of the statements I have heard I would like to
ask whether the Federal Reserve Board has, within the framework of
its authority, the ability to correct the situation that is before us now,
irrespective of whether we take any action or not ?
Mr. C O L M . The way I interpret the Federal Reserve Act, I think
the Federal Reserve has not only the ability, but the duty to act in
accordance with the lines proposed here.
What is proposed is more a reaffirmation of Federal Reserve objectives which I think are already in existence.
If you consider both the Federal Reserve Act and also the fact that
the Federal Reserve has a responsibility under the Employment Act
of 1946, as has been repeatedly acknowledged by the Federal Reserve
authorities, it is really not a new function. It is a reaffirmation of
existing responsibilities.
Mr. W A I T S . D O I understand you to say then that the Federal
Reserve does have the authority to correct that situation and it would
not be necessary for us to take any action ?
Mr. C O L M . It is not necessary to create a new law. There are possible improvements in certain provisions concerning reserve requirements, I think it would be very desirable if such improvements would
be explored. This, may require legislative action at some future time;
there are all kinds of structural improvements which would make it
easier for the Federal Reserve to live up to its responsibilities.
I may remind you that there is working on these things a monetary
commission to make proposals in the long run. These are structural
improvements.
The things we are discussing here probably could not wait for such
improvements and at the moment the Federal Reserve would have to
act with the powers available now, and I think the powers are adequate for dealing with the present situation.
Mr. W A T T S . However, you do think it would be better if both
Congress and the Federal Reserve moved together ?
Mr. C O L M . Yes, I think you have a better chance if there is an
expression of legislative intent concerning Federal Reserve policy
which makes it clear that this removal of the interest rate ceiling is not
intended to say: This is all there is to it, go ahead, increase interest
rates, and then t he problem will be solved.
The C H A I R M A N . Dr. Colm, the Congress need have no timidity about
doing so, because actually the law is quite clear, as you point out, that
not only does the Federal Reserve have the right, but it has the duty.
Mr. C O L M . Under existing law.
The C H A I R M A N . And it is an instrument of the Congress, as all of
as know and as agreed to here yesterday by Mr. Martin. Any time
the Congress feels that the Federal Reserve is not performing its duty,
then the duty is on the Congress to tell it, is it not ?
M r . COLM. Y e s , sir.
The C H A I R M A N . Mr. Baker.
Mr. B A K E R . Doctor, I compliment

you very highly on your testimoney. Assume that the Congress does nothing, what could the
Federal Reserve do or what action could the Federal Reserve take
which would encourage or cause the holders of these $50 billion worth
of series E and H bonds to hang on to them and to continue to buy
them ?




244 PUBLIC DEBT AND

INTEREST

RATE

CEILINGS

120,

How wTould any action by the Federal Reserve encourage present
holders of the $50 billion worth of series E- and H-bonds to hold on
to them, not cash them and to continue to buy as we want them to buy
without increasing the interest rate.
Mr. C O L M . Mr. Baker, I have not mentioned in my testimony the
third proposal of the Treasury to increase the interest on the savings
bonds.
Mr. B A K E R . Which to my mind is highly important from every
aspect.
M r . COLM.

Yes.

I don't have a very strong conviction on it. I don't think I have
anything to add. That is why I didn't go into it.
I also feel a strong conflict of interest in this because I have quite
a number of these bonds and I would be very happy if not only future
buyers, but also those that bought them in the past, enjoy the high
interest rate. So, since my feeling was that good policy and my personal interest went together, I thought I better be quiet on that
point, but I am in favor of the proposal since you asked me.
Mr. B A K E R . I assume that practically all of us would be in the
class of interested witnesses on that subject, so just disregard that.
Mr. M A S O N . Will you yield ?
M r . BAKER. Y e s .
Mr. M A S O N . The

answer to your question, sir, is that Federal Reserve could do nothing about the E- and H-bonds and it is up to the
Congress. If the Congress wants the holders to hold and to buy more
to make that increase as proposed in the bill.
Mr. B A K E R . D O you agree with Mr. Mason on that ?
M r . COLM. Y e s ; I d o .

Mr. B A K E R . That answers my question just as clearly as anything.
The C H A I R M A N . I do not agree to that myself.
You think a little more about that, Dr. Colm, because if the Federal
Reserve does what we are talking about, asking it or requiring it to do,
then there is the effect upon future purchasers of the E- and H-bonds.
There is the effect upon the present owners of those bonds, holding
those bonds, to drive in the direction of the adjustment of your interest rate, stabilizing it, or bringing it down.
Mr. C O L M . There is an indirect effect.
What I meant when I agreed with Mr. Mason was that the Federal
Reserve directly has no influence on the interest rate of these bonds.
The C H A I R M A N . Not directly; no.
However, the actions that you and I are suggesting they should take
indirectly make those desirable enough for them to hold them and to
buy more.
M r . COLM. Y e s .
Mr. BETTS. Would you state
The C H A I R M A N . All right.

what those actions are ?

Dr. Colm and I have suggested that they have not permitted enough
money in credit to be made available from time to time as the increase
in economic activity would justify and they are falling behind following a policy that we would call tight money when it should have
been just a little less tight and that maybe $100 million more money
or credit should have been made available at a given time than was
made available, or a billion dollars more, whatever the figure is.




244

PUBLIC

DEBT

AND

INTEREST

RATE

CEILINGS 120,

That is what we are talking about,
M r . COLM. Y e s , sir.

Mr. B E T T S . I cannot quite see how it would help the Government to
sell long-term bonds.
The C H A I R M A N . Because the squeeze, at least according to Dr. Colm
and me, that is in existence is that the demand through economic
growth for dollar claims is not compensated by the availability of
dollar credit.
Mr. G R E E N . Doctor, do I understand correctly that the reason we
have this request before us to lift this ceiling on the
-percent longterm securities is that the Treasury Department, in order to better
manage the national debt, would rather see a shift to more money in
the long-term securities than in the short-term securities ?
Mr. C O L M . I think this is one of the main reasons.
As you know, in recent years all efforts toward lengthening the
maturity of the debt have been in vain. For instance, in 1951 the
average length was 6 years and 7 months and. in March 1959, it was 4
years and 9 months.
Mr. G R E E N . I understood the Secretary to say that they could
better manage the national debt if they could direct more of their
securities into long-term instead of short-term.
We know that there is a ceiling of 4*4 percent on long-term securities. I do not know whether the interest paid by the Treasury
Department on short-term securities has been brought out here?
Mr. C O L M . We have notes for iy 2 percent up to 3 percent.
Mr. M A S O N . They offered here a few weeks ago and could not replace what became due an offering of 4 percent on this short-term.
Mr. C O L M . That is right.
The C H A I R M A N . I want to check, but I understand that there are
some short-term obligations outstanding today at 4.07 percent, I
believe.
Mr. C O L M . I would like to answer that more fully for the record.
(Information referred to follows:)
Representative

yields on U.S. Government securities of short maturity,
closing bid prices, June 11,1969

Maturity date
September
December
Apr. 15, I960..
Mav 15, I960..
May 15, 1961..

Type of security
Treasury bill..
do
.do..
3^-percent note.
3H-percent note..

Period remaining to
maturity
90 days
182 days
10 months
11 months
1 year, 11 months.

based on

Yield in
percent
3.28
3.49
3.92
3.99
4.17

Mr. G R E E N . Doctor, I just have one or two more questions.
As a result of the question of the chairman and your answer to it
which would pretty much determine who gets hurt by the squeeze
as a result of the policy of the Federal Reserve Board, and assuming
that there is no change in it, who benefits ?
Mr. C O L M . We have a pretty good profit situation in the banks.
This is really a double-edged proposition because on the one hand they
charge more, and, on the other hand, they have to pay more on
time deposits where they do pay, but since there is no interest on




244

PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

demand deposits, I tliink the banks profit from the high interest rate
policy.
Mr. GREEN. That has pretty much been the policy of the Federal
Reserve Board up to the present time. I have the same fear, that I
think that the chairman does. If there is not any change in that
policy and we pass this legislation, even wTith your suggestion that
we put into the legislation a strong declaration that it is our hope
that the Federal Reserve Board will change its policy, and they
do not, then I am impressed writh the testimony that I heard here, that
we would be worse off instead of being better off.
Mr. COLM. Mr. Green, I am looking for a table.
The Secretary has presented a table as to who gets the interest
on the long-term. You get a pretty wide distribution through the
pension funds which in turn may be pension funds in favor of insured
workers. You find a distribution of interest payments on page 12 of
this material put into the record by the Secretary. It is the classification of the receipt of interest on the public debt.
The commercial banks have a substantial amount, but they are
not the only ones who profit.
Mr. GREEN. Mr. Watts asked a question and I have one I thought
was similar.
If there would be no change, in other words, if we did not take
off the ceiling on the 4y2 long-term securities, but the Federal Reserve bank would change the policy they have been following, then
would this legislation be necessary ?
Mr. COLM. I think the legislation would be desirable, first, because
there might develop a situation in which some increase is desirable,
in interest on bonds, with no increase or decline in interest on the
short-term securities. That means you may have, as a result of this
legislation, plus the influence Congress may have through this occasion on the conduct of Federal Reserve policy, a lower interest on the
Government debt as a whole. It might be desirable to go above the
414 for some new bond issue, but this would be offset by developments
of the short-term securities, so that with the hoped-for change in
monetary policy, I still would think that this legislation is desirable.
Mr. GREEN. That is where you lose me and that is where it is hard
for me to understand.
Both the Secretary and the Chairman of the Federal Reserve
Board said they thought that the legislation was desirable and the
eventual result would be a decrease in the interest paid on Government securities overall, and it just seems to me sitting here, and I
am very frank to say to you that I am pretty well confused about
this whole situation, that if we lift the ceiling the interest rate will
increase, and I believe both the Secretary and the Chairman of the
Federal Reserve System said that we would probably pay another
half-billion dollars in interest rate as a result of lifting the ceiling
of 414 percent.
The CHAIRMAN. N O , Mr. Green. Let me correct that impression,
if you will yield to me.
This $500 million additional in interest rate is predicated upon interest increases that have occurred without regard to any action by
the Congress in this respect. They estimated that it would cost in
fiscal year 1960 $500 million more for interest than in 1959, when the




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

President delivered his budget message to Congress, but since then
they have revised that estimate.
They now tell us that it will cost a billion dollars, $500 million
more. That is where that comes in, not with respect to this proposition. Whether we do anything or not here, that appears to be the
situation.
Mr. GREEN. That is under the present operation as a result of the
original estimate being lower than they expected?
The CHAIRMAN. The size of the debt and the increases that have
occurred this year in rate of interest since January.
Mr. COLM. Mr. Chairman, if I may answer this question in the
following way: Assume that there is a rollover of, let's say, $100
billion during the next year or so in short-term securities. Assume
that there is an increase in the interest rate on short-term securities
of, let's say, one-fourth of 1 percent. That gives you $250 million,
if my arithmetic is right.
But now assume that the interest on new issues on Government
bonds—what could be issued during the next year and a half is probably a relatively small amount, let's say one or two billion dollars—
is increased by a quarter of a percent on some new issue on bonds;
that is much cheaper than if you get a quarter of a percent on the
whole rollover of the short-term securities.
That is why it is not a necessary conclusion, but it is a possible
conclusion, that you may have a small increase on long-term bonds
and still a lower total interest burden on the Government debt than
you would have otherwise.
Mr. GREEN. Thank you.
T H ^ CHAIRMAN. Mr. Alger will inquire, Doctor.
Mr. ALGER. Dr. Colm, you mentioned earlier that there is a difference between economic considerations and political considerations.
Very obviously we are in a very technical economic field and you
can see that we are seeking light and trying to get the facts in what
would be economic decision.
Would you agree that to whatever degree we would make a political decision in an economic field, particularly if there is a conflict
between the political decision and the economic facts, we would be
making a mistake ?
Mr. COLM. Mr. Alger, my remark was addressed particularly to
the question of the debt limit. I said on strictly economic grounds,
or even, say, on political science grounds, there is no need for a debt
limit because Congress controls appropriations, which determine expenditures, and Congress controls revenue through tax policy, and the
result of these is the change in debt. All the facts are under the control of Congress.
I think that the debt limit is in a way a political fact because it
serves as a red flag, that there must be a new discussion of the problem, and that is what I referred to.
In general, Mr. Alger, I must say that with the situation in the
country and the world today, economic and political considerations
are much closer together than they used to be because there is nothing
that affects international and domestic politics as much as a well-going
economy.




244 PUBLIC DEBT AND INTEREST RATE

CEILINGS

120,

We can make no better contribution to, let's say, the question of the
cold war and coexistence than showing that our economy is solving
its problems. I am naive in these things but I think that if an administration has a good economic record this should do no harm at
the polls. So I would not say as a general proposition that there is
a wide discrepancy between the economic and political considerations.
I have tried to cover one particular problem, the debt issue, and I
just wanted to say what I had to say, knowing that Congress will
not remove the debt limit.
Mr. ALGER. Dr. Colm, I did not intend either to misinterpret what
you said nor in any sense unfairly put you in a position that would
be at cross purposes politically or economically, so let me make this
statement.
Mr. COLM. I am sure you didn't.
Mr. ALGER. I have seen, in my 5 years here, Congressmen make
many political decisions. I am convinced some of those were made
without regard at the time to the facts involved, particularly in matters of economics, where there is a great need for understanding.
This results in part because of the terrific pressure of our job, the
rush that we are faced with, and the fact that we are elected
politically.
I simply w^as saying to you, and I will make it as a statement
rather than a question, that to whatever degree Congress makes a
political decision in an economic field that is contrary or conflicting
with the facts, I feel, No. 1, Congress would be making a great mistake, and No. 2, it will hurt our economy.
Finally, I want to commend you for the objective way in which
you have presented your economic facts, and I hope that I will benefit
from the knowledge you have imparted.
Thank you.
Mr. COLM. Thank you, Mr. Alger.
The CHAIRMAN. Dr. Colm, we do very deeply appreciate your taking time from your busy schedule to come to committee at our invitation and be of the assistance to use that you very evidently have.
You have made it possible for us to see these policy issues in this
area more clearly and I am sure you have stimulated us to even
deeper thinking.
Thank you so much.
Mr. MASON. I want to join the chairman in that expression. You
have done me a lot of good.
Mr. COLM. Thank you.
The CHAIRMAN. Thank you again, Dr. Colm.
Without objection, the committee will adjourn until 10 o'clock Monday morning when it will go into executive session.
(The following material was submitted for the record:)
TACOMA, WASH., June
WILBUR D . MILLS,

10,1959.

Chairman, Ways and Means Committee,
New House Office Building, Washington, D.C.:
As chairman of the American Bankers Association Savings Bonds Committee,
I should like to express to you and your colleagues our approval of the proposals before you f o r revision of the rates and terms of series E- and H-savings
bonds. T h e savings bonds program urgently requires this revision to place
these bonds in a realistic competitive position in this money market.
We




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

have been finding if increasingly difficult to sustain the momentum of the program in recent months. The proposed revisions will put us back in the picture
and give us every hope of reaching our $5 billion goal in sales this year, as well
as insure a lower rate of redemptions than has appeared recently.
After some 18 years of voluntary service in this savings bonds program I
continue to feel it is the most desirable and healthy process in the management
of the debt problem. Forty-two and one-half billion dollars of such savings
by millions of people represents about 15 percent of the total debt, and an increase in that outstanding amount would be healthy and noninflationary.
I earnestly urge early approval of the proposals by your committee.
Respectfully submitted.
RENO ODLIN,

Chairman, Savings Bonds Committee,
American Bankers Association.
WASHINGTON, D.C., June 12,
H o n . WILBUR D .

1959.

MILLS,

Chairman, House Ways and Means Committee, U.S. House of Representatives,
Washington, D.C.
The American Farm Bureau Federation favors elimination of interest rate
ceilings on long-term Government bonds and savings bonds as means of helping to
combat inflation. Removal of ceiling will not of itself raise interest rates.
Rates have already been raised by market trends which have reduced prices of
outstanding bonds. If ceilings are maintained, Government will be forced to engage in increased short-term financing (on which there is no rate ceiling) through
commercial banks. This would be highly inflationary. The antidotes to the
rising cost of the Government debt are increased savings and debt reduction—
not a ceiling on interest rates.
CHARLES B .

SHUMAN,

President, American Farm Bureau Federation.

N A T I O N A L ASSOCIATION OF M U T U A L SAVINGS

BANKS,

New York, N.Y., June 12, 1959.

H o n . WILBUR D .

MILLS,

Chairman, House Ways and Means Committee, House of Representatives,
Washington, D.C.
DEAR CONGRESSMAN MILLS : The Federal debt is so large a part of our entire
capital and credit structure that its management influences the course of activity throughout the Nation's financial and industrial markets. Current Federal statutes impose unrealistic restraints on debt management operations, and
hinder efforts to maintain fiscal discipline.
Accordingly, legislative action is necessary to enable the Treasury Department to manage the debt more effectively through greater flexibility. The President's proposals with respect to ceilings on interest rates and on debt limits
represent such constructive legislation and, thus, have the support of the savings banking industry.
I t is a basic tenent of our free enterprise economy that buyers and sellers,
borrowers and lenders, compete in open markets f o r the goods, services, and
financial claims, which they offer and seek. In this setting, the Federal Government, in financing its operations, must be free to compete with other types
of borrowers for available funds. The only ultimate alternative to permitting
the Treasury to compete freely on the basis of interest rates and other terms
is to turn to Federal regimentation requiring investors directly to purchase
U.S. Government securities.
Recognizing the basic importance of an effective Federal savings bond pro*
gram, savings bankers have always supported this program even though it
competes directly with thrift institutions f o r the funds of small savers. A
higher interest rate on these bonds is important to restore their competitive position in financial markets and their basic role in Federal debt management.
The recommendations in this letter are based on proposals made in December
1958 by Carl G. Freese, chairman of the national association's committee on
Government securities and the public debt. These proposals were approved at
that time by our board of directors.




120,

244 PUBLIC DEBT AND INTEREST RATE CEILINGS

I would have no objection to your including this letter in the record of the
committee's hearings.
Very truly yours,
J O H N DELAITTRE,

President.

P.S.—I am enclosing a copy of Mr. Freese's statement, with this letter.
FEDERAL DEBT MANAGEMENT

AND THE SAVINGS B A N K I N G

INDUSTRY

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

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

Clearly, debt management policy is but one of the anti-inflationary weapons
available to the Federal Government. Its coordination with Federal Reserve
monetary and credit actions is essential and, by now, a well accepted principle.
During periods when economic expansion threatens to become excessive, f o r
example, and the monetary authorities are rightfully pursuing a policy of credit
restraint, it is important that the Treasury offer securities which do not require
Federal Reserve support on more than a temporary basis.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

It is not as well accepted, at least in practice, that there are other Federal
programs in major credit areas which must also be coordinated with Federal
Reserve and Treasury operations if debt management is to be most effective
and the battle against inflation won. In particular, Federal programs to insure
and guarantee mortgage credit operate in direct competition for investment
funds with the Treasury Department. Higher yielding mortgages, backed by
the contingent liability of the Federal Government, provide nearly as much
safety as do U.S. Government securities. Indeed, their amortizing nature
provides f o r a type of liquidity not inherent in Government bonds. When the
Federal Government pursues a policy of stimulating demands for mortgage
credit, out of social rather than economic considerations in the housing field,
at a time when inflationary forces are rampant, it is assuredly acting at crosspurposes.
It is necessary, therefore, that the huge and expanding Federal mortgage
credit programs—some $48 billion, or 44 percent of all home mortgage debt, is
now underwritten by the Federal Government—be subordinated to, and modified
f r o m time to time in accordance with the changing need to control inflationary
forces. For. after all. if the ability of the Federal Government to stabilize
the value of the currency is seriously impaired, the public's confidence in Federal
obligations is undermined and Federal credit guarantees become of limited
value. The coordination of Federal housing credit policies with fiscal and
monetary policies must include not only the Federal Housing and Veterans'
Administrations—the Federal underwriting agencies—but also the Federal National Mortgage Association, Federal Home Loan Bank System, and Public
Housing Administration. Coordination must extend, also, to the Nation's agricultural credit programs,
COMPETITION FOR CAPITAL MARKET FUNDS

I t is a basic tenet of our free enterprise economy that buyers and sellers,
borrowers and lenders, compete in open markets for the goods, services, and
financial claims, which they offer and seek. In this setting, the Federal Government, in financing its operations, must compete with other types of borrowers—both private and public—for the funds available in financial markets.
This is as fundamental a principle of sound debt management as the need to
combat inflation and to coordinate all Federal fiscal, monetary, and credit
policies.
There are no isolated or preferred markets in which the Treasury can operate. Thus, in order to attract funds away from other borrowers, and successfully to finance its debt largely outside the commercial banking system,
the Treasury must compete on the basis of interest rates and other terms. There
can be no other effective financing method short of Federal regimentation or
statutes requiring investors directly to purchase U.S. Government securities,
or banks to hold them as part of their legal reserve.
Techniques of moral suasion and appeals to institutional investors to overlook normal market considerations in order to support Treasury financing are
not realistic, short of war or grave national emergency. Fiduciaries are themselves in sharp competition for the savings of individuals and have a prime
obligation and public trust to depositors, shareholders, and stockholders to earn
the highest return possible on invested capital commensurate with safety and
liquiduity requirements. Long-run considerations of inflation are, of course,
essential but the best weapons in this battle are sensible and courageous fiscal
and monetary policies of the Federal Government, effectively coordinated with
housing and agricultural policies to preserve the purchasing power of the dollar.
T o be sure, a debt management policy based on offering securities at competitive rates of interest is not without its problems. The Treasury is, for
the most part, in competition with borrowers who are able to deduct interest
payments from their tax bill. A corporate borrower, for example, who pays
5 percent interest on debt securities has a net cost, after Federal income tax,
of 2.4 percent. The same principle applies to the mortgage borrower. T o compete effectively with these borrowers, it may be necessary at some future time
f o r the Treasury to request an increase in the statutory rate of interest which
it can pay on Government bonds.
Competing with other capital market borrowers on the basis of interest rate
means, also, that the cost of interest payments in the Federal budget will be
increased. It means, further, that prices on outstanding issues of Government
securities may decline and fluctuate over a wider range than they have in




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

other earlier years. This phenomenon has characterized the market for Government securities over the past year or so.
Higher interest costs on the Federal debt, while not in themselves desirable,
are a necessary price for managing the huge Federal debt so as to contribute to
the prevention of inflation and of an unsustainable rate of economic growth.
Market instability may likewise be considered a price that must be paid to prevent
economic excesses. Bankers and other investors, of course, rest more comfortably when markets are stable and risks are reduced, but this peace of mind is a
luxury that must at times be sacrificed in the Nation's battle against its principal internal enemy—inflation.
It must not be overlooked, on the other hand, that a higher level of interest
rates—which might result from vigorous Treasury competition—may well stimulate an increased flow of savings, an essential element of an anti-inflationary
program. Moreover, deferral of plans for increased investment as interest rates
rise, will relieve the pressure on the limited supply of capital funds. In an expanding economy the Treasury can successfully draw funds away from marginal
borrowers, in both the corporate and mortgage sectors, only if it is willing to
compete on the basis of rates and terms.
TREASURY MARKET

TECHNIQUES

While a willingness and determination to compete for capital funds in the
open market must be the chief factor in a successful debt management program,
other factors relating prncipally to techniques for offering new, and refunding
outstanding U.S. Government securities, should also be given careful consideration. Among these techniques, the following might be considered.
The technique of forward commitments, widely used in the marketing of
mortgages and in the direct placement of corporate securities, may be adaptable
to the marketing of U.S. Government securities. Basic modifications would, of
course, be necessary. The extended period of time covered by commitments in the
mortgage market, for example, would be inappropriate in the Government securities market. In the corporate securities market, however, the length of time
covered by commitments has been generally shorter.
Actually, a commitment technique was used by the Treasury in 1955 in connection with its offering of 3 percent bonds due in 1995. Not many institutional
or other types of investors subscribed for this issue on a commitment basis,
however. This suggests that the technique may not have been well suited to
investors, or that the Treasury did not appropriately publicize it. In any event,
the commitment device will have to be studied more carefully and refined before
it can again be employed.
One refinement which might be considered is the payment of a modest commitment fee by the Treasury. Such a fee to investors would be an added inducement to enter into contracts and would tend to offset in part the disadvantages
of a possible market reduction in the price of forward contracts soon after the
closing of books. If the problems associated with the commitment technique can
be overcome, there will be distinct advantages both to the Treasury and to investors of permitting payment for Government securities over a limited period
of time as funds become available from savings, insurance premiums, etc.
There are other marketing techniques, associated with redemption and conversion privileges, which might be considered. A limited disadvantage of these
techniques is that, in most cases, the initiative for debt management is transferred from the Treasury to investors. This course is to be avoided when possible
but may be a necessary price, on occasion, in order to attract new groups of investors. Privileges of redemption wTere granted in connection with the two
4-percent note issues offered in 1957. These notes, it will be recalled, had definite
maturities, but holders were given the right to redeem them at par at about the
midpoint of their contract maturity.
This redemption device need not be limited to note issues. Further, there
might be one or more optional redemption dates. For example, the Treasury
might offer a 30-year bond, giving the holder the right of redemption on a
fixed date, after appropriate notice, perhaps at the end of 2 years and again
after 5 year>. The disadvantage of this type of security is, of course, that
it is redeemable in cash, a fact which might be inconvenient to the Treasury
or blunt monetary policy at redemption dates.
In this respect, the offering of securities with conversion rather than cashredemption privileges might be prefereable. The offering of' a long-term bond




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,

which f o r the first several years of its life would be convertible into any new
issue of Treasury securities having a maturity of, say, more than 5 years, might
be attractive to investors. Another possibility would be to offer a long-term
security bearing a rate of interest in the early years different from that in
the later years—higher or lower depending on market conditions—with the
option of redemption at the end of the earlier period or retention f o r the
longer period.
An approach of a different sort, directed toward increasing the participation
of individuals in the market f o r Government securities, might operate through
tax benefits. Tax exemption per se is not considered to be good public policy,
and and rightfully so. This is not to say, however, that there are no tax advantages associated with U.S. Government securities. Certain issues which
are available at discounts, f o r example, may be used in payment of certain tax
obligations at face value. All issues selling at discounts, moreover, offer some
tax advantage in that the discount may be regarded as a potential capital
gain.
In the case of individuals, a tax deduction of $1,000 is permitted, with carryover privileges of amounts in excess of $1,000 f o r losses sustained in U.S. Govrenment and other types of securities. In this connection, the Treasury might
wish to consider the advantages of broadening this privilege by permitting individuals to deduct from taxes an additional $1,000 or more, with similar
carryover privileges, f o r losses sustained in the sale of U.S. Government securities issued after January 1, 1959. To encourage the continuing interest
of individuals in the market for Treasury securities, however, it should be
provided that additional tax losses be deductible only from current or future
interest earned on Treasury securities.
Consideration might also be given to similar limited tax benefits to nonbank
corporate holders of U.S. Government securities.
DEBT LENGTHENING AND ORDERLY

MARKETING

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

The Canada conversion loan of 1958 has created considerable interest with
regard to the feasibility of a similar advance refunding operation in this country.
Apart from considerations of the relative success of the Canada conversion loan,
there is a serious question about the applicability of this type of large-scale,
dramatic refunding operation to the United States. At this time such an action
is hardly to be recommended.
While the near-term problem confronting the Treasury concerns the issues
maturing in the period 1959-61, it does not appear feasible to undertake an
advance refunding of these issues considering their large volume, relatively
attractive yields, and current conditions in the capital markets. With respect to
the feasibility of an advance refunding of issues scheduled to mature in later
years, particularly the more than $28 billion of 2 y 2 percent wartime issues with
final maturities in 1967-72, there would seem to be little practical advantage to
the Treasury in such an action. These issues do not now present a problem to
the Treasury, nor would their refunding ease the refinancing problems of the
1959-61 maturities. There are enough "inbetween" dates available in the 196772 range to accomplish such refinancing in this maturity area, if desired, when
the time is appropriate.




244 PUBLIC DEBT AND INTEREST RATE CEILINGS

120,

Finally, it is open to queston whether conversion of the 2 % percent wartime
issues into long-term bonds bearing higher interest rates would reduce sales from
investment portfolios. At current low prices, holders of the 2 % s are reluctant to
take the substantial losses attendant upon sale. Conversion to securities with
higher yields instead of making for more "permanent holders," might result in
increased net selling as losses were reduced or perhaps converted to gains.
For all of these reasons, advance refunding of outstanding securities does not.
seem appropriate at this time. Because an advance refunding on a relatively
small scale offers important advantages with respect to debt lengthening and
orderly scheduling of maturities, I do feel, however, that the question should be
kept under continuing study in the event that subsequent market changes make it
feasible to undertake such an operation.
MODIFICATION OF U.S. SAVINGS BOND PROGRAM

Since the end of the war the public appeal of savings bonds has been considerably reduced even though the rate of return on these bonds, when held to maturity, has at times equaled or exceeded that paid by mutual savings banks and
commercial banks on savings deposits and by most savings and l o i n associations
on share accounts. The clear indication is that savers prefer the convenience
and flexibility of savings and share accounts and the protection of life insurance
to ownership of savings bonds. Only in time of war does it seem possible to sell
U.S. savings bonds readily and in large volume.
While large-scale expansion of savings bond sales does not appear feasible, nor
in fact economically desirable, the general rise in interest rates that has occurred
in recent years suggests the need for a revision in savings bond terms.
The 3 % -percent series E bond was first offered to the public in February
1957. Since that time yields on U.S. Government securities have advanced by
approximately one-half percent. Rates on new7ly offered issues of corporate
and State and municipal securities have also advanced by about one-half percent or more during the intervening period. The maximum rate on savings
bonds is set by Congress and it may be February or March of 1959 before
congressional action can be taken on this matter. In order to restore the competitive position of savings bonds, therefore, it would seem reasonable to have
the yield on series E bonds raised from 3% to 3 % or 3% percent. It is also
desirable to shift responsibility for establishing the rate from Congress to the
Treasury, wrhich would administer the rate in accordance with market needs.
Accompanying this revision in interest rate there should be a revision in
terms and prices of savings bonds. Heretofore, advances in rates have been
achieved by a shortening of maturities. Thus, wlien the rate on series E bonds
was raised from 3 to 3y 2 percent in 1957, the maturity was reduced from 9 years
and 8 months to 8 years and 11 months. The price at which the bond wras
offered remained unchanged at 75 percent of ultimate maturity value.
In
revising the present rate to 3 y2 or 3 % percent, a similar device might be
employed and an effective rate change achieved by a corresponding reduction
in the maturity.
In view of the expense incurred by the U.S. Government in connection with
the issuance and turnover of these bonds, however, consideration must be given
to maturity extension in order to achieve a reduction in expenses. It is desirable, also, that the cost of the bond be a round fraction of its ultimate
maturity. The present and older series E bonds, as you know, were offered
at a price of three-fourths of their maturity value. If the cost were to be
reduced to five-eighths of maturity value, then the term could be adjusted
to provide a 3%-percent return. For example, a $100 bond costing $62.50 would
give a return of 3.75 percent compounded semiannually at a maturity of 12
years and 8 months.
A price reduction, as suggested above, would give the Treasury an opportunity to eliminate the $25 denomination and make the $50 denomination the
smallest issue. This would reduce the administrative costs of the savings bond
program considerably.
Corresponding modification should be made in the
yield, price, and terms of the series H bonds.




244

PUBLIC DEBT AND INTEREST RATE CEILINGS 120,
CONCLUSION

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

(Thereupon, at 12:10 p.m., the committee recessed, to reconvene at
10 a.m., Monday, June 15, 1959, in executive session.)
X