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PUBLIC DEBT
LIMIT
HEARING
BBFORB T H E
COMMITTEE ON FINANCE
UNITED STATES SENATE
EIGHTY-SEVENTH CONGKESS
FIRST SESSION
ON
H.R. 7677
AN ACT TO INCREASE FOR A 1-YEAR PERIOD THE PUBLIC
DEBT LIMIT SET FORTH IN SECTION 21 OF
T H E SECOND LIBERTY BOND ACT
JUNE 27, 1961
Printed for t h e use of the Committee on Finance
U.S. GOVERNMENT P R I N T I N G
71950
WASHINGTON : 1961
OFFICE
COMMITTEE ON FINANCE
H A R R Y FLOOD B Y R D , Virginia, Chairman
R O B E R T S. K E R R , Oklahoma
J O H N J. WILLIAMS, Delaware
RUSSELL B. LONG, Louisiana
F R A N K CARLSON, Kansas
GEORGE A. S M A T H E R S , Florida
W A L L A C E F. B E N N E T T , Utah
C L I N T O N P. A N D E R S O N , New Mexico
J O H N M A R S H A L L B U T L E R , Maryland
P A U L H. DOUGLAS, Illinois
CARL T. CURTIS, Nebraska
A L B E R T GORE, Tennessee
T H R U S T O N B. M O R T O N , Kentucky
H E R M A N E. T A L M A D G E , Georgia
E U G E N E J. MCCARTHY, Minnesota
V A N C E H A R T K E , Indiana
J. W. F U L B R I G H T , Arkansas
ELIZABETH B . SPRINGER, Chief Clerk
II
CONTENTS
Text of H.R. 7677
Statement of Hon. Douglas Dillon, Secretary of the Treasury
Exhibits:
Forecast of public debt outstanding, fiscal year 1962, based on
constant operating cash balance of $3.5 billion (excluding free
gold)—based on budget deficit of $3.7 billion
Actual cash balance and public debt outstanding July 1960May 1961
Gross public and private debt, 1929-60
Estimated budget and trust fund expenditures for programs of
Federal aid to State and local governments in fiscal year 1962__
Federal aid to State and local governments based on existing
and proposed legislation
Summary of public debt and guaranteed obligations outstanding
May 31, 1961
Long-range commitments and contingencies of the U.S. Government as of December 31, 1960
Letter to Attorney General and reply
Budget operations, fiscal year 1959
Public debt related to gross national product and other measures
of economic growth
m
Pag*
1
1
5
6
11
15
16
24
25
34
39
50
PUBLIC DEBT LIMIT
TUESDAY, JUNE 27, 1961
U . S . SENATE,
C O M M I T T E E ON F I N A N C E ,
Washington, D.C.
The committee met, pursuant to notice, at 10:25 a.m., in room
2221, New Senate Office Building, Hon. Harry F. Byrd (chairman)
presiding.
Present: Senators Byrd, Long, Smathers, McCarthy, Hartke,
Williams, Carlson, Bennett, Butler, Curtis, and Morton.
Also present: Elizabeth B. Springer, chief clerk.
The C H A I R M A N . The committee will come to order.
The bill before the committee is H.R. 7677.
(The bill referred to, H.R. 7677, follows:)
[H.R. 7677, 87th Cong., 1st sess.]
A N ACT To increase for a one-year period the public debt limit set forth in section 21 of the Second Liberty
Bond Act.
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, That, during the period beginning on July 1, 1961,
and ending on June 30, 1962, the public debt limit set forth in the first sentence
of section 21 of the Second Liberty Bond Act, as amended (31 U.S.C. 757b),
shall be temporarily increased by $13,000,000,000.
Passed the House of Representatives June 26, 1961.
Attest:
R A L P H R . R O B E R T S , Clerk.
The C H A I R M A N . We are ready to hear the distinguished Secretary
of the Treasury, Mr. Dillion.
Please proceed, Mr. Dillon.
STATEMENT OF THE HONORABLE DOUGLAS DILLON, SECRETARY
OF THE TREASURY
Secretary D I L L O N . Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, I am here today in
support of a new temporary limit of $298 billion on the public debt for
the fiscal year 1962.
Under the existing legislation, the current temporary ceiling of
$293 billion reverts at the end of this month to $285 billion. On that
date, June 30, 1961, which is now just a few days away, we estimate
that the public debt subject to limitation will be about $289 billion.
This is expected to include a cash balance of approximately $5% billion,
which is about the usual balance for the end of the fiscal year.
During the next 12 months—the fiscal year 1962—we expect revenues to fall short of expenditures. On the assumption that we are
able to close out fiscal year 1962 with a minimum working cash
balance as low as $3.5 billion, we estimate a total public debt subject
1
2
PUBLIC.
DEBT LIMIT
to limitation of about $290 billion on June 30, 1962. Because of normal seasonal factors, however, the end-of-June debt position is generally well below the high point reached during the fiscal year. Our
current projections—as shown in the attached table—indicate a net
increase of about $6 billion in the public debt for the rest of the
calendar year to a high of about $295 billion in December.
In addition, it is prudent to set the debt limit at a level that makes
a reasonable provision for errors in the estimates as well as other
unforeseen contingencies, and permits sufficient flexibility in debt
management so that the efficiency of day-to-day operations is not
impaired. To provide this margin, I believe that an allowance of
$3 billion—the same allowance that has been made in previous years—
should be added to the projected high point of $295 billion in the
public debt during fiscal year 1962. This clearly indicates the need
for a temporary debt ceiling of $298 billion in the forthcoming fiscal
year.
As you know, setting the temporary debt limit at $298 billion is by
no means a "license" to spend freely out of borrowings up to that
amount. Federal expenditures are determined on the basis of congressional authorizations and appropriations, and I am wholeheartedly
in support of observing, strict discipline in weighing the merits of the
many competing demands for additional expenditures.
If the Congress wished to set limits on its own actions in authorizing expenditures, it could do so directly by placing a ceiling on new
spending authorizations in any year. There is no way by which the
debt ceiling can be effective in limiting congressional authorizations
to spend, because there is no direct and immediate connection between
congressional authorizations and their effects on the public debt which
will be felt months or even years later, when the spending actually
takes place.
In arriving at the projected need for a temporary debt ceiling of
$298 billion, the latest budget estimates have been taken into account,
including full allowance for all of the new or expanded programs
recommended by the President in his message of May 25 on "Urgent
National Needs."
Budget outlays for fiscal 1962 are now estimated at $85.1 billion.
The increase of $800 million from the $84.3 billion figure reported in
late March largely represents additional funds for space exploration,
defense and military assistance, expanded lending to small business,
and programs to alleviate structural unemployment. Budget revenues are still estimated at $81.4 billion, the same as reported in
March, indicating a deficit of $3.7 billion.
These spending and revenue projections have been based on the
assumption that the Congress would act favorably on the President's
recommendations to put the highway building program on a fully
self-sustaining basis, to eliminate the postal deficit by raising postal
rates, and to maintain various tax ratjes otherwise scheduled for reduction or termination.
Since the preparation of these estimates the Congress has acted
favorably on the President's request for continuation of existing tax
rates. In addition, the Congress has completed action on the highway financing bill which avoids any diversion of general revenues
during fiscal 1962.
However, there has as yet been no action on postal rate increases
which were recommended in the amount of $741 million. If the Con-
3
PUBLIC.
DEBT LIMIT
gress fails to act on this legislation the expected fiscal 1962 deficit
would be increased to $4.4 billion, and the Treasury's margin of
flexibility would be reduced to $2% billion.
I might add that the currently projected budget deficit of $3.7
billion for the fiscal year 1962 compares with deficits of $4.2 billion
.and $12.4 billion in the fiscal years following the two previous business
recessions, the fiscal years 1955 and 1959.
It may seem incongruous that with a vigorous recovery already
underway, we nonetheless expect a deficit next year. The reason
for this deficit is simple. Corporate income tax revenues, as you
know, are highly important in our overall revenue structure. But
the corporate tax revenues which will be available to us in fiscal 1962
will be based on corporate profits during the present calendar year
Which includes the lowest point of the recession.
In effect, while the economy is recovering, our corporate income
tax revenues will still be at recession levels. The same applies to a
somewhat lesser extent to individual income tax collections above the
standard withholding deductions, because these collections are largely
dependent on incomes realized during calendar year 1961. Therefore,
the coming fiscal year will be one of a continued recession revenues
as far as the Federal Government is concerned. .
On the spending side, the latest estimates indicate that the January
budget underestimated expenditures for going programs by about
$400 million. In addition, President Kennedy has proposed certain
national defense, promoting a healthy and vigorously growing economy
at home, and meeting the challenge of space exploration.
Total budgetary expenditures for these new proposals in fiscal year
1962 are expected to amount to $3.8 billion. The main increases in
spending that we expect for 1962, compared with those in the January
budget message, are for defense, extended unemployment compensation, aid to education, agricultural programs, and space exploration.
The spending for unemployment compensation is under a program
very similar to what was done in 1958. A substantial portion of the
additional spending on agricultural programs represents the use of
more realistic assumptions in preparing our spending estimates.
In the areas of defense spending and space exploration, the force of
external events has called for additional programs that would and
should have been undertaken, in some form, whatever administration
was in office. In short, in my view the budget changes since January
simply do not add up to the picture of unrestrained spending that some
have sought to draw.
Moreover, the deficit now anticipated for fiscal year 1962 will not
have an inflationary impact on our economy. For while we do expect
the economy throughout this period to be recovering sturdily, the
period as a whole will not be one of full prosperity. For today there is
substantial unused capacity in every part of our industrial structure,
and most seriously in our labor force. Rather than creating the
inflationary pressures that are inevitably associated with deficits in
times of full employment, the deficit we anticipate in the coming
fiscal year will be helpful in putting our unused plant capacity and
labor force to work.
Looking further ahead we can and do foresee a sharp increase in
revenues in fiscal year 1963. This follows the same pattern as in
previous recovery periods.
4
PUBLIC.
DEBT LIMIT
Revenues increased very substantially in the fiscal years 1956 and
1960. In fact, during fiscal year 1960 the increase over the preceding
year amounted to $9.8 billion. While naturally we cannot make any
firm prediction at this point, I believe it is a reasonable expectation
that we will be able to present a budget for fiscal year 1963 in which
receipts exceed expenditures. For as the President stated in his
message on budget and fiscal policy of March 24, 1961:
Federal revenues and expenditures * * * should, a p a r t f r o m any t h r e a t to
national security, be in balance over t h e years of the business cycle—running a
deficit in years of recession when revenues decline and the economy needs th&
stimulus of additional expenditures, and running a surplus in years of prosperity,
t h u s curbing inflation, reducing the public debt, and freeing f u n d s for private
investment.
This statement by President Kennedy clearly outlines our budgetary
policy, a policy from which we have never wavered.
Our projections of the public debt at semimonthly intervals during
the fiscal year 1962 are shown in the first table attached to my statement. One important assumption in preparing these projections is
that the Treasury's operating balance at the Federal Reserver banks
and private commercial banks would hold steady throughout the
period at $3.5 billion.
This is actually a rather low working balance for an operation as
large and as subject to sharp fluctuations in receipts and expenditures
as is the management of the Treasury's cash position. A balance of
$3.5 billion would cover only a little over half of an average month's
budget expenditures, which is a much lower ratio of cash holdings to
expenditures than is maintained by the averaged business corporation*
In fact, as shown in the second attached table, the operating balance has been more often above than below $3.5 billion during the
fiscal year now ending. It has averaged closer to $5 billion than to
$3.5 billion, and this has provided a highly desirable and important
degree of flexibility in the efficient conduct of day-to-day Treasury
operations.
It is because of this need for flexibility in the management of cash
balances, and because of the inescapable uncertainties of revenues and
expenditure estimates that the $3 billion margin has been added to
our calculation of the appropriate debt ceiling.
As you can see from the first table, our debt projections, plus the
$3 billion allowance for flexibility, will reach a high point of $298
billion during the winter months. A temporary limit of that amount
should give us sufficient elbowroom for maximum efficiency of operations and yet not impair any useful function which may be served by
the public debt limitation.
The intended function of the debt limit is but poorly served, I
think, when a specific limit fits so closely that the Treasury is forced
to obtain additional funds—at higher cost—through the market borrowings of Federal agencies not subject to the statutory debt limit.
Indeed the Government was forced to take such steps a few years
ago when the debt ceiling imposed too tight a limit on Government
fiscal operations. In addition the Treasury in its own borrowings
has at times had to defer borrowings because of the limitations of too
little margin under the debt ceiling.
8PUBLIC.DEBT LIMIT
In conclusion, I believe that a temporary increase in the debt limit
to $298 billion is essential to the orderly and economical management
of the Government's finances, and I earnestly recommend its prompt
approval by this committee.
(Tables I and II, referred to, follow:)
I.—Forecast of public debt outstanding, fiscal year 1962, based on constant
operating cash balance of $3,500,000,000 {excluding free gold) (based on assumed
budget deficit of $3,700,000,000) 1
TABLE
[In billions]
Operating balance, Federal
Reserve banks
and depositaries
(excluding free
gold)
Public debt
subject to
limitation
Allowance to
Total public
provide flexibility in financ- debt limitation
required 3
ing and for
contingencies
1961
June 30
July 15
July 31
Aug. 15_
Aug. 31_
Sept. 15
Sept. 30
Oct. 15
Oct. 31
Nov. 15
N o v . 30
Dec. 1 5 . — —
Dec. 31
...
$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
» $286.4
288.6
289.6
289.9
290.1
291.9
288.2
290.7
292.2
293.0
292.S
294.9
292.4
$289.4
291.6
292.6
292.9
290.1
294.9
291.2
293.7
295.2
296.0
295.8
297.9
295.4
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
3.5
294.0
294.1
293.2
294.7
291.2
293.4
292. 7
291.9
292.3
293.6
290.1
297.9
297.0
297.1
296.2
297.7
294.2
296.4
295.7
294.9
295.3
296.6
293.1
1962
Jan. 15
Jan. 31
Feb.15
Feb. 28
Mar. 15
Mar. 31
Apr. 15
Apr. 30
M a y 15
May 3 1 . .
June 15
June 30
1 Incorporates estimated budget revenues of $81,400,000,000 and estimated expenditures of $85,100,000,000.
2 From July 1,1960, to June 30,1961, the statutory debt limit is $293,000,000,000. Thereafter it will revert
to $285,000,000,000.
3
Because the actual operating balance on June 30, 1961 is expected to be considerably larger than
$3,500,000,000, the public debt subject to limitation will be about $289,000,000,000 on that date.
71950—61
2
6
TABLE
PUBLIC. DEBT
I I . — A c t u a l cash
balance
and
public
LIMIT
debt outstanding
July
I960-May
1961
[In billions]
Operating balance Federal
Reserve banks
and depositaries
(excluding
free gold)
July 15, I960..
July 31
Aug. 15
Aug. 31
Sept. 15
Sept. 30—....
Oct. 1 5 — .
Oct. 3 1 — .
Nov. 15
Nov. 30
Dec. 15
Dec. 31
Jan. 15,1961 . .
Jan. 31
Feb. 15
Feb. 28_
Mar. 15
Mar. 31
Apr. 15
Apr. 30
May 15
May 31
$7.4
6.2
4.8
5.1
3.0
7.5
3.6
5.9
4.1
5.0
2.7
5.7
3.4
3.8
3.7
5.3
2.8
4.0
1.7
2.9
4.0
4.4
Public debt
subject to
limitation
$288.6
288.1
287.5288.4
288.3
288.2
287.2
290.2
289.9
290.2
290.0
290.0
289.9
289.8
290.5
290. a
290.0
287.3
288.4
287.8
288.8
290.0
NOTE—From July 1, 1960, to June 30, 1961, the statutory debt limit is $293 billion. Thereaftir it will
revert to $285 billion.
The C H A I R M A N . Thank you very much, Mr. Secretary.
Mr. Secretary, what was the debt on June 30, 1960?
Secretary D I L L O N . The public debt on June 3 0 , 1 9 6 0 , was $ 2 8 6
billion.
The C H A I R M A N . I S it the same, then, on June 3 0 , 1 9 6 1 ?
Secretary D I L L O N . On June 30, 1961, the forthcoming fiscal year
end, we estimate about $289 billion.
The C H A I R M A N . Y O U mean on June 3 0 , I 9 6 0 , the debt was $ 2 8 6
billion?
Secretary D I L L O N . Yes.
The C H A I R M A N . Y O U have in your statement here, on June 3 0 , ,
1961, it was $286 billion.
Secretary D I L L O N . That is on the table that we are looking at.
The C H A I R M A N . That is not the actual debt.
Secretary D I L L O N . It has a star there opposite that and a footnote,
which indicates that because the actual operating balance on June 30
is expected to be considerably larger
The C H A I R M A N . The actual debt a year ago was $ 2 8 6 billion.
What is the actual debt today?
Secretary D I L L O N . $289 billion.
The C H A I R M A N . Then the increase in 1 year is $ 3 billion?
Secretary D I L L O N . Yes; that is right.
The C H A I R M A N . What is the estimated debt on June 3 0 , 1 9 6 2 ?
Secretary D I L L O N . The estimated debt at that date, including an
estimated cash balance of $3% billion, would be $290 billion. If we
had the same cash balance June 30 next year as we will have this
June 30, it will be about $292 billion.
The C H A I R M A N . Are you not estimating the same cash balance for
each of these years?
7PUBLIC.DEBT LIMIT
Secretary DILLON. We always, for this purpose, estimate a steady
and fixed cash balance of $3% billion. That has been the custom.
Actually, it varies as tax collections come in. The end of the fiscal
year happens to be a period when the cash balance is often a little
higher, because we have a lot of receipts on June 15. That is one of
our times of largest receipts.
The CHAIRMAN. What will be the deficit for the fiscal year that
ends on Friday?
Secretary DILLON. For the fiscal year that ends on Friday, we are
estimating a deficit of about $3 billion. It may be slightly under that.
The CHAIRMAN. That does not include the recommendations to
increase taxes? Of course, we could not pass any in that time anyway.
Secretary DILLON. N O .
The CHAIRMAN. What will be the deficit for next fiscal year?
Secretary DILLON. The deficit for next fiscal year is estimated at
$3.7 billion. However, as I pointed out in my statement, that assumes
the Congress will take action on postal rates, which they have not yet
done. If they do not take such action, as I pointed out in my statement the deficit will be $700 million larger, or a total of $4.4 billion.
The CHAIRMAN. And the deficit for the 2 years would be $ 3 . 7 billion
and $4.4 billion; is that correct?
Secretary DILLON. The deficit for this year would be $ 3 billion or
something just under, and for next year, either $3.7 billion or $4.4
billion, whichever we want to figure it, so it is somewhere between
$6.7 billion and $7.4 billion for the 2 years.
The CHAIRMAN. For the 2 years, it would be between $7 billion and
$8 billion?
Mr. DILLON. If there is no action on postal rates this year.
The CHAIRMAN. NOW, Mr. Secretary, you have been quoted repeatedly in the newspapers that you think deficits are "appropriate."
Does that word "appropriate" have any relation to the size of the
debt? Suppose we owed $350 billion or something. What did you
mean—I was a little puzzled when I saw it—that any deficit would
be appropriate if it could not be avoided.
Secretary DILLON. That was just quoted as "deficits are appropriate," which I never said. I said certain very specific deficits in
amount and in time, depending on the economy, are appropriate,
because when the economy is in recession, our incomes fall very
abruptly. In fact, expected income for this fiscal year fell a total of
about $5 billion from the time the first estimates were made, before
it was obvious that there was going to be a recession.
I do not feel that it is proper, at such a time, to try to cut back
expenditures to meet the drop in recession revenues, because that
would just put more people out of work and increase the severity of
the recession.
In the part of President Kennedy's message which I read, he said
that the budget—and that is my belief also—
should be in balance over t h e years of t h e business cycle, running a deficit in
years of recession when revenues decline and t h e economy needs the stimulus of
additional expenditures.
At such a time, I think a deficit, provided it is a moderate and
reasonable deficit, is appropriate. I do not think that deficits as
8
PUBLIC. DEBT
LIMIT
deficits, or all the time, are appropriate at all. I never have thought
that and never have said that.
The CHAIRMAN. I S it not a fact that we have only balanced the
budget three times in the last 30 years?
Secretary D I L L O N . No; I count 5 in the last 14 years. I am
counting here from 1948.
The CHAIRMAN. I think we have had fewer balances, perhaps, of
any consequence.
Senator C U R T I S . Will the chairman yield on that?
T h e CHAIRMAN.
Yes.
Senator C U R T I S . Does that include back there about 1 9 4 5 or 1 9 4 6 ,
the war ended abruptly and we had borrowed more money than we
needed and it was really turned back to the purchasers of Government
bonds? Is that counted as one of the years in which the budget was
balanced?
Secretary D I L L O N . These figures go back to 1 9 4 8 , and in that year
there was a very substantial surplus of $8.4 billion. The other surpluses are later and much smaller. The next biggest one was in 1951,
which as $3% billion. Then there were surpluses of about a billion
and a half dollars each in 1956 and 1957, and a billion and a quarter in
1960.
Senator C U R T I S . I beg the chairman's pardon for intruding, but
thfere was a year when we reduced the national debt and yet operated
at a deficit, because we borrowed more money than we needed.
Senator W I L L I A M S . But that is reflected as a debt and does not
change the budgetary balance as to surpluses and deficits.
Senator C U R T I S . That is right.
The CHAIRMAN. Mr. Secretary, I came to the Senate about 2 9
years ago, and as I recollect, the debt then was $16 billion. It has
increased now to the figure of approximately $300 billion. I just
wonder when you use the word "appropriate" whether you should
not take into consideration the size of the debt and also the fact that
you have to pay the interest on the debt.
Now, we are paying, every taxpayer when he pays his bill now, 11
percent of what he pays goes for interest on the debt.
So I think it would just seem to me, when you say it is appropriate
to increase it, you have other factors beyond whether it is a recession
or whatever it may be. You have to consider the size of the debt,
you have to consider that you have to pay interest on what you borrow—all of which falls on the taxpayer.
Now, in connection with that word "appropriate," how large a debt
do you think this country could stand?
Secretary D I L L O N . Mr. Chairman, I think the size of the public
debt has to be considered in connection with the economic strength
of the country. The situation since the end of the war has indicated
that the burden of our national debt, our Federal debt, has steadily
and continually decreased in relation to our overall economic strength.
Whereas in 1946 our debt was 128 percent of our gross national
product, it has fallen as a percentage continuously since then in every
year except 1958, and it is presently, for this year, estimated at 56
pement of our gross national product. And we estimate for 1962 that
despite this increase in the debt which we are talking about, there will
be a further decrease in its proportion of gross national product down
to*§3 percent.
9
PUBLIC.
DEBT
LIMIT
The burden of the Federal public debt is presently expanding at a
very much slower rate than our economy is expanding and at a very
much slower rate than other debt has expanded.
Another way to put it is that our public debt has increased about
12 percent since the end of the war, whereas State and local debt
has increased some 430 percent, corporate debt has increased some
320 percent, and individual debt some 470 percent.
I think that we ought to have the very lowest public debt we can
possibly have and still run our economy effectively. I think in times
of prosperity we ought to have budget surpluses and reduce our
public debt, because that makes funds available for investment in
the private sector and reduces the interest burden of the debt.
But I do think it is impossible to set a fixed limit of some dollar
figure under which everything would be all right and over which
everything would be wrong. I think we have to look at this problem
in a relative manner, and particularly in connection with our gross
national product.
The C H A I R M A N . What is the total of the public debt?
Secretary D I L L O N . The total of the Federal public debt is about
$289 billion.
The C H A I R M A N . I mean the total, the States and localities.
Secretary D I L L O N . The State and local debt is about $67 billion
and corporate debt is $352 billion.
The C H A I R M A N . D O the States include the localities in that figure?
Secretary D I L L O N . Yes; State and local.
The C H A I R M A N . And that is $67 billion?
Secretary D I L L O N . $ 6 7 billion. Corporate debt is about $ 3 5 2
billion, and individual debt, $ 2 8 7 billion. The total figure overall is
just over $1 trillion—a thousand billion dollars.
The C H A I R M A N . When you talk about the Federal debt and associate it with the economic prosperity, it seems to me you have to take
into consideration all the debts to do that.
Secretary D I L L O N . I think that is correct. The Federal debt is 2 9
percent of all the debts now, whereas at the end of the war it was 58
percent of all the debts.
The C H A I R M A N . Furthermore, when increase the debt at one period
because of national prosperity, that prosperity may decline and you
still have the debt.
Secretary D I L L O N . That is correct.
The C H A I R M A N . And many businessmen that attempted to expand
their businesses on account of earnings have gone into bankruptcy
because they found out they could not maintain it. So I respectfully
differ with you on predicating a debt on a temporary business prosperity.
Secretary D I L L O N . At times of business prosperity, I quite agree.
The C H A I R M A N . I suggest that you add the other 71 percent of
debt, totaling nearly $1 trillion—what is the total of all the debt?
Secretary D I L L O N . $1 trillion—$1,000 billion.
Senator B U T L E R . Mr. Chairman, may I ask a question of the
Secretary.
T h e CHAIRMAN.
Yes.
Senator B U T L E R . Mr. Secretary, you said the local debt was increasing more rapidly than the national debt. Have you any figures
to show the amount of local indebtedness or the amount of the in-
10
PUBLIC.
DEBT
LIMIT
crease that has been generated by Federal funds going into the States
on a matching basis?
Secretary D I L L O N . I am afraid I do not have that available. It
probably could be developed.
Senator B U T L E R . I get the impression that while you were speaking of the relationship of the debt and prosperity, that that is but a
reflection of increasing inflation, is it not?
Secretary D I L L O N . N O ; because while our gross national product
has gone up since 1946, by well over double—nearly three times—
since that time inflationary pressures have been only about 30 percent.
The C H A I R M A N . Mr. Secretary, could you furnish for the record a
statement of the total debt beginning in 1930?
Secretary D I L L O N . Yes.
(The information requested is as follows:)
Gross public and private debt, 19&9-60
1
[In billions of dollars]
Private
Public
Individual and noncorporate
Farm
End of year
Nonfarm mortgage
Public and
private
total
Total
Federal 2
State and
local 3
Total
Corporate
Production *
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939_
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952.
1953
1954
1955
1956
1957
1958
1959
I960
-
—
214.0
214.3
203.3
195.2
190.5
197.3
200.2
205.9
208.5
203.6
207.7
215.8
242.3
299.1
364.5
430.9
463.3
457.9
485.6
498.6
520.3
566.4
607.5
646.0
683.9
714.1
786.4
831.1
869.1
913.1
986.0
1,026.8
See footnotes on p. 12.
34.7
35.8
38.6
42.4
47.5
57.1
61.0
64.7
67.4
67.0
70.1
73.8
89.2
142.9
205.4
271.2
309.2
288.0
286.6
276.7
287.0
290.6
297.2
308.9
322.0
332.3
345.0
348.5
354.2
367.8
384.4
387.6
17.5
17.3
19.1
22.8
27.7
37.9
41.7
45.1
47.8
47.4
50.1
53.6
69.0
123.2
186.7
253.7
292.6
272.1
269.8
258.0
266.1
266.4
270.2
279.3
289.3
294.4
301.8
300.5
301.7
310.6
322.0
320.5
17.2
18.5
19.5
19.6
19.8
19.2
19.3
19.6
19.6
19.6
20.0
20.2
20.2
19.7
18.7
17.5
16.6
15.9
16.8
18.7
20.9
24.2
27.0
29.6
32.7
37.9
43.2
48.0
52.5
57.2
62.4
67.2
179.3
178. 5
164.7
152.8
143.0
140.2
139.2
141.2
141.1
136.6
137.6
142.0
153.1
156.2
159.1
159.7
154.1
169.9
199.0
221.9
233.3
275.8
310.3
337.1
361.9
381.8
441.3
482.6
514.9
545.3
601.7
639.2
107.0
107.4
100.3
96.1
92.4
90.6
89.8
90.9
90.2
86.8
86.8
89.0
97.5
106.3
110.3
109.0
99.5
109.3
128.2
138.8
139.6
167.0
190.6
201.6
211.5
216.3
251.0
274.9
293.4
305.0
335.9
352.3
Mortgage 5
2.6
2.4
2.0
1.6
1.4
1.3
1.5
1.4
1.6
2.2
2.2
2.6
2.9
3.0
2.8
2.8
2.5
2.7
3.5
5.5
6.4
6.2
7.0
8.0
9.1
9.3
9.7
9.6
9.8
12.1
11.4
25.4
1
1
9.6
9.4
9.1
8.5
7.7
7.6
7.4
7.2
7.0
6.8
6.6
6.5
6.4
6.0
5.4
4.9
4.8
4.9
5.1
5.3
5.6
6.1
6.6
7.2
7.8
8.3
9.1
9.9
10.5
11.3
12.4
1- to 4family
residential
Multifamily
residential
and commercial
18.0
17.9
17.2
15.8
14.6
14.8
14.7
14.6
14.7
15.0
15.5
16.5
17.4
17.3
16.9
17.0
17.7
21.9
26.8
31.6
35.7
42.9
49.1
55.6
62.8
71.9
83.8
94.1
102.2
111.8
124.4
134.7
13.2
14.1
13.7
13.2
11.7
10.7
10.1
9.8
9.6
9.5
9.5
9.6
9.7
9.5
9.2
9.0
9.3
10.6
12.0
13.5
14.9
16.5
18.3
19.6
21.0
22.7
24.9
27.2
29.4
32.8
36.6
39.2
Other nonfarm
Commercial
3.8
4.3
5.0
4.1
3.8
3.7
4.4
6.2
7.1
7.8
7.9
8.9
9.5
10.3
9.9
10.4
12.4
13.3
13.2
14.1
15.4
17.3
Financial fl
Consumer
28.9
27.3
22.4
17.6
15.2
15.1
15.7
17.3
18.0
16.4
6.0
5.2
5.0
4.0
5.7
8.1
10.3
5.9
4.8
5.1
6.0
6.9
6.7
7.5
8.5
10.4
11.6
11.1
11.1
12.8
13.4
14.2
7.2
8.3
9.2
6.0
4.9
5.1
5.7
8.4
11.6
14.4
17.3
21.4
22.6
27.4
31.4
32.5
38.9
42.5
45.3
45.5
52.1
56.0
Gross public and private debt,
1
Data for State and local governments are for June 30 of each year.
2 Includes categories of debt not subject to the statutory debt limit.
3 Includes State loans to local units.
* Comprises debt of farmers and farm cooperatives to institutional lenders and Federal
Government lending agencies; farmers' financial and consumer debt is included under
the "nonfarm" category.
«Includes regular mortgages, purchase money mortgages, and sales contracts.
1929-60—Continued
6
Comprises debt owed to banks for purchasing or carrying securities, customers' debt
to brokers, and debt owed to life insurance companies by policyholders.
Sources: U.S. Department of Agriculture, Agricultural Research Service; Board of
Governors of the Federal Reserve System; U.S. Department of the Treasury; U.S.
Department of Commerce, Bureau of the Census, and Office of Business Economics,
13P U B L I C .D E B T
LIMIT
The C H A I R M A N . Separating them, of course.
Going back to the word "appropriate" I would like to know when
you think it is appropriate to pay something on a public debt.
Secretary D I L L O N . I think it is appropriate as soon as we have a
year when our revenues are not recession revenues. As I pointed out
in my statement, I expect that to be the case in the fiscal year 1963,
and I said that I expected that we would be able to present a budget
6 months from now which would forecast a surplus for that fiscal year.
Senator B U T L E R . Mr. Chairman, may I ask a question?
The C H A I R M A N . Wait, I have one more question.
You indicated the other day when you made your statement of an
increase in revenue of $10 billion, that you were going to recommend a
tax reduction. Did you indicate that you were going to recommend
anything to reduce the debt?
Secretary D I L L O N . That was in answer to a question from the floor.
I said there would be a surplus left over and it would be a question of
deciding how much of that surplus should be used for debt reduction
and how much might be used for tax reduction.
The C H A I R M A N . In view of this overwhelming debt, do you not
think it would be well to make a payment on the debt rather than
reduce taxes?
Secretary D I L L O N . T am not sure that we cannot do both.
The C H A I R M A N . At this, if your estimate of $10 billion more income
is realized, that would mean a period of prosperity, would it not?
Secretary D I L L O N . That is certainly correct.
The C H A I R M A N . Then certainly in a period of prosperity, bearing
out your own logic, you should reduce your debt.
Secretary D I L L O N . That is right.
The C H A I R M A N . And not reduce taxes.
Secretary D I L L O N . Well, Mr. Chairman, there has been considerable
evidence that our tax system has now become a heavier tax system
than it was originally intended to be because of inflation and the steady
upgrading of incomes. People are now in a considerably higher tax
bracket than they used to be for doing the same sort of job. Therefore this burden is quite heavy, and there are clear indications that
this was one of the causes of arresting the recovery in the spring of
1960.
But concerning tax reform, when we are talking about individual
tax reduction, we certainly look to achieving a very substantial part
of it, a major part of it, through a rearrangement of the tax law rather
than just a straight reduction and through closing various loopholes
to provide the funds that would enable you to make these reductions.
The C H A I R M A N . D O you not think, though, that the tax reductions
should come from reducing expenditures and any increased revenue
due to temporary prosperity, whatever the prosperity may be,
should go toward reducing the debt?
Now, of the increased expenditures for this fiscal year and next
fiscal year, what precentage was for military and what percentage
was for so-called domestic?
Secretary D I L L O N . Of the increased expenditures for fiscal year
1962, totaling about $3.8 billion, about $700 million was for military,
which is nearly 20 percent.
The C H A I R M A N . Military was what?
71950—61—i—3
14
PUBLIC. DEBT LIMIT
Secretary DILLON. About 20 percent.
The CHAIRMAN. IS space in the 80 percent?
Secretary DILLON. Yes; the 80 percent includes space exploration.
The CHAIRMAN. Then of the increased expenditures, only onefourth of it is due to the military?
Secretary DILLON. That is correct, though there is a substantia]
other element in there. About $700 million, another 20 percent, is
due to extended unemployment insurance and aid to dependent
children of unemployed, which are temporary measures to handle the
recession.
So the more or less permanent type of increases in the domestic
would come to about $2.3 billion out of the $3.8 billion.
The CHAIRMAN. D O you visualize a steady increase in expenditures?
Secretary DILLON. I am not an expert in that, but I have been
impressed by the study that was made by the Bureau of the Budget
last fall which was completed in January shortly before the changeover
in administrations and was made under the aegis of Mr. Stans. This
study indicated that as the country grew in population, there would
be an increase.
The CHAIRMAN. HOW soon do you think it will reach a hundred
billion dollars?
Secretary DILLON. I would hesitate to make a guess about that,
Senator.
The CHAIRMAN. What concerns me is the constantly increasing
debt on which interest must be paid, and I think you would agree
with me that it is not beneficial or wise to increase the interest payments on a Government debt, because that has to be raised by taxes.
Secretary DILLON. That is correct.
The CHAIRMAN. But then, on the other hand, to talk about lowering taxes and when the debt should be paid off, to my way of thinking,
at least, and then constantly extending domestic spending in the way
of State grants and other things—Federal aid to education, that in
the opinion of many of us, we believe to be a local and State responsibility—I would like to have a statement for the record to what extent
the Federal Government has increased the grants to the States by
legislation that has actually been enacted and by what it would be
increased in the event the present recommendations now pending in
Congress should be adopted.
Secretary DILLON. I would be glad to get that.
T h e following table includes increases under (1) existing legislation, (2) legislation enacted during current session of t h e Congress, and (3) recommendations
now pending before t h e Congress.
15
PUBLIC.
Estimated
DEBT LIMIT
budget and trust fund expenditures for programs of Federal aid to State
and local governments in fiscal year 1962
[In millions]
J a n . 16, 1961, estimate
1
Proposed program changes in budget:
Labor and welfare:
School lunch and special milk programs
Aid to dependent children
Medical education
Hospital construction
Water and airpollution control
Other public health service
Maternal and child welfare grants
Vocational rehabilitation
Elementary and secondary education
National defense education
:
Aid to federally alfected schools
OASDI liberalization and medical care (budget effect on public
assistance)
Agriculture and agricultural resources:
Watershed protection
Food stamp pilot program
Surplus food distribution
Commerce and housing:
College housing loans
Public works planning
Urban renewal
Public facility loans
Open space grants
Area redevelopment
Small Business Administration loans
Subtotal, budget changes
Estimated changes in trust f u n d s :
Unemployment t r u s t f u n d
Highway trust f u n d
Subtotal, t r u s t f u n d changes
Total changes in budget and t r u s t funds
Revised estimated 1962 budget and t r u s t f u n d expenditures for aid to
State and local governments
$7, 905
19
215
1
3
10
8
10
3
500
7
—5
— 52
3
50
100
25
2
30
10
5
5
15
964
24
23
47
1, 011
8, Q16
i See following table from special analysis of Federal aid to State and local governments in the 1962 budget.
16
PUBLIC. DEBT LIMIT
Federal aid to State and local governments based on existing and proposed
legislation
[In t h o u s a n d s of dollars]
F u n c t i o n , agency, a n d p r o g r a m
Functional
code
1960
actual
1961
estimate
1962
estimate
BUDGET ACCOUNTS
GRANTS-IN-AID
Veterans' services a n d benefits
Veterans' Administration
Aid to State homes 1
State supervision of schools a n d training establishments 1
Total, veterans services a n d benefits
International affairs a n d finance: D e p a r t m e n t of State
East-West C u l t u r a l a n d Technical Interchange
Center,
Labor a n d Welfare:
General Services Administration: Hospital facilities i n t h e District of Columbia (private nonprofit) 2
D e p a r t m e n t of Agriculture:
N a t i o n a l1 school lunch a n d special m i l k programs
Proposed legislation: Special milk program
D e p a r t m e n t of H e a l t h , E d u c a t i o n , a n d Welfare:
P u b l i c assistance
Hospital construction *
Portion to private nonprofit institutions
C o m m u n i t y health activities i 2
Control of venereal diseases 1 2
Control of tuberculosis 1 2
M e n t a l health activities 1
National Heart Institute 1
N a t i o n a l Cancer I n s t i t u t e 1
M a t e r n a l a n d child welfare
M e n t a l health facilities, Alaska 1 3
E n v i r o n m e n t a l health activities
Hospital a n d medical care, H a w a i i 1
Construction grants for waste t r e a t m e n t facilities
G r a n t s for
construction of health research facilities 1
Poliomyelitis vaccination program
Assistance for school construction a n d operation
in federally affected areas:
School construction *
M a i n t e n a n c e a n d operation of schools 1
Vocational education
Co.leges for agriculture and the mechanic arts.._.
]defense educational activities 1
G r a n t s for expansion a n d teaching in education
of t h e m e n t a l l y retarded i
E d u c a t i o n of t h e blind
'
G r a n t s for library services
Vocational rehabilitation
W h i t e House Conference on Aging 1
Proposed legislation:
Medical benefits for t h e aged
M a i n t e n a n c e a n d operation of schools in
federally affected areas
D e p a r t m e n t of t h e Interior: B u r e a u of I n d i a n
Affairs: E d u c a t i o n a n d welfare services L
D e p a r t m e n t of I abor: U n e m p l o y m e n t compensation a n d e m p l o y m e n t service administration 1
105
6,128
7,536
106
1,752
1,560
1,450
7,8
9,096
9,024
2,163
10,500
600
200
242,634
153,234
94,300
153
213
217
217
231, S
212
213
213
213
213
213
213
213
213
213
213
213
213
2,058,896
143,578
(80,411)
14,971
2,371
3,993
4,905
2,905
2,203
47,433
356
2,659
1,065
2,158,901
154,000
(86,000)
19,400
40,295
40,600
Total, agriculture a n d agricultural resources.
See footnotes at e n d of table, p . 19,
4,000
6,000
3,500
3,500
51,261
1,823
3,000
1,100
2,285,800
167,100
(93,700)
24,220
6,000
3,500
3,500
53,506
3,321
3,000
1,100
43,000
213
213
504
-1,287
214
214
214
214
214
70,553
166,661
39,140
5,052
68,507
63,350
181,000
40,257
7,277
78,314
57,382
93,500
40,442
10,744
214
214
215
217
217
71
400
7,037
48,607
759
450
400
7,986
55,176
41
500
400
8,416
59,270
500
212
25,000
214
60,000
214
5,378
5, 450
211
317,156
2,246
3,287, 490
3,132, 786
148, 994
18,522
14,169
61, 303
31,085
162, 901
22, 929
13, 852
65,000
32, 060
Total, labor a n d w e l f a r e Agriculture and agricultural resources:
D e p a r t m e n t of Agriculture:
C o m m o d i t y Credit Corporation a n d removal
of surplus agricultural commodities: Contributions to school l u n c h program a n d to
other public agencies
Watershed protection 5
Flood prevention 1
Cooperative agricultural extension work 1
Agricultural experiment stations 1
P a y m e n t s to States, territories, a n d possessions, Agricultural M a r k e t i n g Service
1,455
7,574
351
354
354
355
355
355
6,950
3,292,968
168, 829
34,700
16, 500
67,390
34,018
1,195
1,195
1,195
275,267
297, 937
322,632
17PUBLIC.DEBT LIMIT
Federal aid to State and local governments based on existing and proposed
tion—Continued
legisla-
[In thousands of dollars]
F u n c t i o n , agency, a n d program
Functional
code
1960
actual
1961
estimate
1962
estimate
BUDGET ACCOUNTS—Continued
GRANTS-IN-AID—Continued
N a t u r a l resources:
D e p a r t m e n t of Agriculture: Forest protection and
utilization, a n d assistance to States for tree
planting
D e p a r t m e n t of t h e Interior:
Bureau of Reclamation:
Disposal of Coulee D a m c o m m u n i t y and
other grants »
Grants, Boulder C i t y disposal i
Grants for small reclamation projects 5
Bureau 1 of I n d i a n Affairs: Resources management
Drainage of anthracite mines
Federal aid in fish restoration a n d management i
Federal aid in wildlife restoration 1
402
11,447
11,496
401
401
401
101
239
17
150
130
401
403
627
1,232
700
1,365
750
500
404
404
4,318
17,610
4,500
14,900
5,000
15,200
35,575
33,258
33,742
4,923
26
7,370
20,500
Total, n a t u r a l resources.
Commerce a n d housing:
Office of Civil and Defense Mobilization:
Federal contributions
Research a n d d e v e l o p m e n t 1
F u n d s 1appropriated to the President: Disaster
relief
Federal 1 Aviation Agency: Federal-aid airport program
Small Business Administration: G r a n t s for research
Housing and Home Finance Agency:
Slum clearance and u r b a n renewal, capital
grants 5_
U r b a n planning grants
Low-rent
housing program, a n n u a l contributions 5
Defense c o m m u n i t y facilities and services 5
D e p a r t m e n t of Commerce:
State marine schools * 1
Public lands highways
Surveys and p l a n1s .
Forest highways
Federal aid highway (liquidation of contract
authority)
Proposed legislation:
1
Forest and public lands highways
0
Area assistance activities 1
D e p a r t m e n t of the Interior:
Virgin Islands public works.
Alaska public works 5
520
520
1,473
3,800
3,800
57,113
83,305
82,153
2,028
800
900
515
515
101,705
2, 554
152,253
3, 500
199,721
6,000
516
517
127,373
93
148,200
172,800
510
511
511
511
524
1,871
98
26,935
550
3,897
98
29, 581
550
4,431
521
512
518
Total, general governmentTotal, grants-in-aid
See footnotes at end of table, p. 19.
31, 555
-250
-35,986
4,000
511
518
515
515
Total, commerce a n d housing.
General Government:
National Capital Planning Commission: Acquisition of lands in M a r y l a n d
D e p a r t m e n t of the Interior: G r a n t s to American
Samoa, G u a m , and the T r u s t Territories 1
District of Columbia: Federal contributions 1
F u n d s appropriated to the President: Transitional
grants to Alaska
12,290
12
2,164
600
328,641
433,954
490,624
609
138
162
1,200
609
609
6,819
25,000
7,582
33,700
10,258
36,000
610
10, 386
6,098
6,000
42, 343
47,542
53,458
3,977,196
3,956,736
4,212,948
18
PUBLIC.
DEBT LIMIT
Federal aid to State and local governments based on existing and proposed
tion—Continued
legisla-
[In thousands of dollars]
Function, agency, and program
Functional
code
1960
1961
1962
actual
estimate
estimate
SHARED R E V E N U E
Natural resources:
Federal Power Commission: Federal Power Act
Tennessee Valley Authority: Payments in lieu of
taxes
Department of Agriculture:
National forests fund, to States for counties and
schools
Submarginal land program
Department of Defense: Corps of A r m y Engineers—Civil: Flood Control Act of 1954 to States.
Department of the Interior:
Submarginal land program
Grazing receipts to States
Payments to States, sales of public land and
materials
Alaska school lands, income and proceeds
Columbia Basin project, payments in lieu of
taxes
Boulder Canyon project, payments to Arizona
and Nevada
Oregon and California land-grant f u n d , to
counties—
P a y m e n t to Coos and Douglas Counties, Oreg.,
Coos Bay Wagon Road grant lands
Payments to Oklahoma from oil and gas royalties
Mineral Leasing Act, to States
Payments to Alaska, coal leases
P a y m e n t s to counties, Migratory Bird Conservation ActPayments to Alaska, seal and game receipts
P a y m e n t to Wyoming in lieu of taxes, Grand
Teton National P a r k
401
59
55
67
401
6,313
6,483
6,862
402
402
29,904
453
35,663
425
28,663
425
401
1,454
1,492
1,600
401
401
108
433
286
518
292
562
401
401
274
34
304
12
422
401
13
15
15
401
600
600
600
402
14,762
16,259
18,400
402
137
100
100
403
403
403
19
36,431
79
11
34,183
11
38,297
404
404
506
831
487
1,052
477
539
405
Total, natural resources
General government:
Department of the Interior: Internal revenue collections, Virgin Islands
Treasury Department: Tax collections for American Samoa, Puerto Rico, and Guam
T h e judiciary: U.S. courts, receipts, Alaska 1
30
29
30
92,438
97,974
97,362
609
4,918
6,500
5,000
609
610
22,934
710
22,990
23,000
Total, general government
Total, shared revenue
28,562
29,490
28,000
121,000
127,464
125,362
NET LOANS AND REPAYABLE ADVANCES
Labor and welfare: General Services Administration:
Hospital facilities in District of Columbia (private
nonprofit) 7
Agriculture and agricultural resources:
Watershed protection
t
Flood prevention 7_ _ __ __ __ __
_
_
Natural resources: Department of the Interior: 7Bureau
of Reclamation: Loans for irrigation projects
Commerce and housing:
Office of Civil and Defense Mobilization: Procurement f u n d .
Small Business Administration: Loans to State
and local development companies
Housing and Home Finance Agency:
Public facility loans 7
Public works planning i
Slum clearance and u r b a n renewal 7
Low-rent housing program 7
C o m m u n i t y facilities
i
College housing 1
Department of the Interior: Alaska public works 7._
Proposed legislation: Department of Commerce:
Area assistance loan^f
___
See footnotes at end of table, p. 19.
213
1, 455
600
200
354
354
138
3,128
1, 570
2,103
600
401
8,821
15,402
24,857
520
-70
100
100
518
2,269
8,322
13,908
515
515
515
516
517
517
515
13, 295
4, 473
2, 814
3,264
-706
121,710
2,474
18,800
5,000
3,004
726
-700
103,200
1,090
24,800
5, 3 5 0
2, 0 0 0
996
-400
120,000
198
518
1.000
19
PUBLIC.
DEBT LIMIT
Federal aid to State and local governments based on existing and proposed legislation—Continued
[In t h o u s a n d s of dollars]
F u n c t i o n , agency, a n d program
Functional
code
1960
actual
1961
estimate
1962
estimate
SHARED R E V E N U E — C o n t i n u e d
NET LOANS AND REPAYABLE ADVANCES—CONTINUED
General government:
District of Columbia: Loans for capital outlays
D e p a r t m e n t of Defense: Corps of Engineers—Civil:
Construction of power s y s t e m s — R y u k y u I s l a n d s .
609
900
11,614
27,260
160,837
171,856
225,972
4,259,037
4,256,056
4, 564,282
358,962
345,366
609
Total, loans a n d repayable advances
Total, all n e t b u d g e t expenditures
3,000
TRUST FUNDS
Labor and welfare: T r e a s u r y D e p a r t m e n t : Unemployment trust f u n d : 8
Grants 4
Loans
Commerce a n d housing: D e p a r t m e n t of Commerce:
Highway trust fund: *
Federal-aid h i g h w a y grants
Proposed legislation: Forest a n d public lands highways 4
200
200
2,004
500
2,912,999
2,839,963
2,959,000
Total, t r u s t f u n d s
2,915,003
3,198,925
3,340,352
Total, n e t b u d g e t a n d t r u s t f u n d expenditures
for grants-in-aid, shared revenue, loans, a n d
repayable advances
_
_
7,174,036
7,454,981
7,904,634
423,831
2,912,999
498,431
2,839,963
537,492
2,994,986
500
35,986
SUMMARY
Grants-in-aid, loans, a n d repayable advances for civil
public works:
Budget accounts
Trust funds
_
G r a n t s a n d loans for hospital construction to private
nonprofit institutions
Other grants-in-aid, shared revenue, loans, a n d repayable advances
__
83,321
87,200
94,100
3,753,885
4,029,387
4,278,056
Total, n e t budget a n d t r u s t f u n d expenditures
for grants-in-aid, shared revenue, loans, a n d
repayable advances
7,174,036
7,454,981
7,904,634
1
2
P a r t of a larger appropriation account.
Control of venereal diseases transferred to c o m m u n i t y health activities beginning i n 1961 a n d control of
tuberculosis will be transferred to c o m m u n i t y health activities beginning in 1962.
3 E n v i r o n m e n t a l health activities formerly classified as water pollution control.
4 G r a n t s to States for administering u n e m p l o y m e n t compensation- a n d e m p l o y m e n t services transferred
to u n e m p l o y m e n t t r u s t f u n d beginning i n 1961.
5 P a r t of a larger appropriation account. A related p a r t of this appropriation is s h o w n under repayable
advances.
« To be transferred to h i g h w a y t r u s t f u n d in 1962.
7 P a r t of a larger appropriation account. A related p a r t of this appropriation is s h o w n under grants-inaid.
s P a r t of a larger account.
The CHAJRMAN. It occurred to me, too, that when we talked about
this national product, we have to consider the whole debt, not just the
debt of the Federal Government, which as you say is more than 25
percent of the total. There is such a thing as getting too much debt.
This interest payment, 11 percent, is a serious burden upon the
Government, is it not?
If we did not have this interest payment to make, to what extent
could we reduce the taxes? It comes to $9 billion, does it not?
Secretary DILLON. Eleven percent.
The CHAIRMAN. It is a complicated thing and I am not going back
to this appropriate statement again, but it just seems to me that that
20
PUBLIC. DEBT
LIMIT
statement was along the lines of encouraging deficits and I think we
ought to resist those deficits. I do not think deficits should be tied to
whether we have prosperity or whether we have a recession or what
we have. Because when we add to the public debt, then that continues throughout the years.
I thank you.
Any questions?
Senator W I L L I A M S . Mr. Secretary, first I would compliment you
and call attention to the fact that you are about the first Secretary
of the Treasury we have had down who has used the term "trillion" in
terms of debt. It seems to be a word that is going to be added to the
dictionary from here on. I hope we can forget it.
Secretary D I L L O N . That did not refer to the Federal debt, though;
Senator W I L L I A M S . NO, but it referred to the overall.
What is your estimate for the deficit for 1961? That is, this June
30?
Secretary D I L L O N . Our estimate is somewhere in the neighborhood
of $3 billion, hopefully maybe slightly short of that. We will not
know until all the final checks come in.
Senator W I L L I A M S . What is your estimate of the expenditures for
fiscal year 1961?
Secretary D I L L O N . Fiscal year 1 9 6 1 is $ 8 1 billion.
Senator W I L L I A M S . And your estimate for the receipts for this year
would be
Secretary D I L L O N . At the moment, it is slightly over $ 7 8 billion.
Senator W I L L I A M S . The House committee report I think referred
to it as 78.2?
Secretary D I L L O N . That is right and I think we estimate expenditures about $500 million higher than the figure that is shown in that
House report, because there have been a lot of bills, defense bills,
from contractors that have come in somewhat more rapidly than
were expected and have been paid.
The C H A I R M A N . That would bring your estimated expenditures to
$81.2 billion and your receipts to $78.2 billion?
Secretary D I L L O N . That is right.
Senator W I L L I A M S . I notice you state that on the spending side, the
latest estimates indicate that the January budget underestimated
expenditures for going programs by about $400 million.
Secretary D I L L O N . That is right.
Senator W I L L I A M S . N O W , the January budget estimated budgetary
expenditures at $78.9 billion. In other words, theySecretary D I L L O N . That was for fiscal 1961.
Senator W I L L I A M S . Fiscal 1 9 6 1 and the budgetary receipts they
estimated at $79 billion. In other words, they underestimated, based
upon this, the receipts by about $800 million; is that right? Or overestimated their receipts, rather?
Secretary D I L L O N . Overestimated their receipts for fiscal 1 9 6 1 .
Senator W I L L I A M S . By about $ 8 0 0 million?
Secretary D I L L O N . That is right.
Senator W I L L I A M S . N O W , they had expenditures estimated at $ 7 8 . 9
billion and you have $81.2 billion. They underestimated expenditures by $2.3 billion; is that correct?
Secretary D I L L O N . For fiscal 1961 that was not a question entirely
of underestimates. That was made up both of underestimates and
21P U B L I C .D E B T
LIMIT
of increases by the new administration. Underestimates were about
$400 million in 1961, as they are also in 1962.
Senator W I L L I A M S . Then $ 4 0 0 million of it was underestimates and
the rest of it increased expenditures of the administration?
Secretary D I L L O N . That is correct, of which the biggest amount
was temporary unemployment compensation.
Senator W I L L I A M S . But as I understand it, of this estimated deficit
of around $3 billion, $2*4 billion is accounted for by the increased
expenditures during the past 6 months of the new administration,
over and above the estimated expenditures in the budget of January,
is that correct?
Secretary D I L L O N . That may well be. I do not have that exact
figure in my mind.
Senator W I L L I A M S . I was not clear on the $ 4 0 0 million, because
as I had it figured here, the $3 billion deficit which we have is accounted
for by about $ 7 0 0 million or $ 8 0 0 million, an overestimation of the
revenues, and about $3.2 billion, an underestimate of the spending
ability of Congress and the administration.
Secretary D I L L O N . The underestimate for spending in 1961 was
about $2.3 billion.
As to the main place where there was a big swing in the estimates,
it was in the defense expenditures, an acceleration of which was
started last summer and last fall when the recession was in view.
That acceleration took hold somewhat faster than anybody thought
would be possible.
Those expenditures, as of March, were estimated in that one Department alone to be $760 million higher than in the January estimate.
Since then, they have gone even higher than that, to about a billion
dollars more.
Senator W I L L I A M S . That may be so, but the acceleration which took
place last year was presumably included in the January estimate.
Secretary D I L L O N . N O ; it was not. The January estimate was in
error and they did not realize how far the acceleration, once they
started in the fall, would actually take hold.
Senator W I L L I A M S . Only by $ 4 0 0 million. The January estimate
was nearer. They did not realize how fast the new administration
could spend.
Secretary D I L L O N . It had nothing to do with that. It is just that
when they placed an order in December, they did not realize that the
actual outflow of money would come quite so quickly.
Senator W I L L I A M S . Without trying to fix responsibility, I am going
to the budget estimate to which you refer. The January estimated
budget receipts at $79 billion. You are today estimating them to
be at $78.2 billion. That is a reduction of $800 million below the
January estimates.
The low January expenditures were estimated at $78.9 billion and
they are estimated now to be $81.2 billion and I think those figures
represent changes which have taken place since the January budget
was submitted to Congress.
Now, whether the earlier figures were correct or your figures were
correct, time alone will tell.
Senator B E N N E T T . May I point out to my friend that the overspending of the Defense Department, according to these figures on page 7
71&50—>61
4
22
PUBLIC. DEBT
LIMIT
of the report of the House, were $761 million, but there was an offset
on military assistance of $200 million, which reduced it to $561 million.
There were then some additional offsets, so that this $400 million
overestimate is a composite of which the military were actually nearly
twice that high.
Secretary D I L L O N . That is right.
Senator B E N N E T T . They overspent nearly twice as much as $ 4 0 0
million, but there were some other offsets.
Secretary D I L L O N . That is absolutely correct and those are the
sorts of things that continue. Actually, we found that our estimate
of March of defense expenditures under just permanent ongoing
programs was low, and they spent even faster than that.
So the defense expenditures are the primary reason, in this one year
of 1961, that our deficit is bigger than we had originally expected.
Secretary W I L L I A M S . Well, we have a deficit estimated here of fiscal
1961 of $3 billion. Now, I think you gave the estimate of next year's
deficit at $4.4 billion?
Secretary D I L L O N . I gave it at $ 3 . 7 billion and said if Congress did
not take action on postal rates, it would be $4.4 billion.
Senator W I L L I A M S . I think you would just as well figure $ 4 . 4 billion,
because even if Congress takes action on that, Congress will be acting
on something else too which may more than offset it on some of the
relations. But the picture as it stands now, assuming no action is
taken to either increase expenditures or increase taxes, would be $4.4
billion. Is that right?
Secretary D I L L O N . Assuming all the programs that the President
has requested are voted, that there is no action on postal rates and no
additional programs above what the President has recommended, it
will be $4.4 billion.
Senator W I L L I A M S . And that will mean including this year and the
next fiscal year, we will have an increase in the debt of around $7.4
billion.
Secretary D I L L O N . That is about correct; yes, sir.
Senator W I L L I A M S . N O W , approximately how much interest rates
are you going to have to pay in borrowing that additional $7 billion?
Secretary D I L L O N . That would depend, Senator, on how it is
borrowed, on the length of the instrument, on how we manage the
public debt. The average cost of interest on the public debt is somewhat just over 3 percent. Maybe that is the fairest figure to use.
Senator W I L L I A M S . That average is not realistic. You are taking
into consideration in that average the 2%-percent bonds which were
outstanding. Do you think you can sell these bonds on a 2%-percent
yield?
Secretary D I L L O N . N O ; I do not think we can sell them on a 2
percent yield at all, but there are also some bonds that are outstanding
that are shortly becoming due at a higher rate. So it balances out
fairly well. That is a rough and easy figure. If you wanted to take
3% percent, that would be all right.
Senator W I L L I A M S . Is it the intention to finance this increased debt
in short-term money, or are you going to try to stretch the debt out in
long term?
Secretary D I L L O N . That is a question which we will have to face
concretely in July, when there will have to be a very substantial
refinancing of maturities coming due in August. We have asked for
23P U B L I C .D E B T
LIMIT
all of the various committees that advise us on this, some five different
committees, to come in and meet with us early in July, and our
decision will be based on what we find the market will accept. Certainly, we would like, at that time, to issue some of the debt, at least
in the intermediate range.
Senator W I L L I A M S . It would cost at least in the neighborhood of
3, 3}i, or 4, to finance that long term?
Secretary D I L L O N . The very longest term Treasury bonds are
selling at a yield basis of just under 4 percent.
Senator W I L L I A M S . Well, then, that would mean that if you
financed it on such a basis, you would be increasing our interest
charges on our debt as a result of this expanded borrowing by around
a quarter of a million dollars a year.
Secretary D I L L O N . Yes, I think that is correct. Somewhere in
that area.
The C H A I R M A N . If the Senator yields, I would like to ask if you
have included the cost of going to the moon in your estimates. It
would cost $40 billion to send a man to the moon. Have you included
that in your estimate of future expenditures?
Secretary D I L L O N . The cost of the President's recommendations is
included, which includes next year's costs on that, if Congress
approves.
The C H A I R M A N . Did the President not indicate it would be $4
billion a year?
Secretary D I L L O N . I think there was some very big area of give in
that, and I think, as I recall, what he said was that the extra expenditures over and above what we have been budgeting for space anyway,
which were planned to go very high, was something like $7 billion to
$9 billion over that period. I think the total was somewhere between
$20 billion and $40 billion to get to the moon, and that is a very big
spread.
The C H A I R M A N . It was an estimate of somewhere around $40 billion
to get to the moon.
Secretary D I L L O N . Somewhere around $ 2 0 billion or $ 4 0 billion,
a very big spread.
The C H A I R M A N . N O W , there is one question I failed to ask. You
have given us the direct debt to the Federal Government. What is
our contingent debt?
Secretary D I L L O N . I will have to give you that figure.
The C H A I R M A N . Will you give it in that memorandum?
Senator B E N N E T T . I S that included in the trillion dollars?
The
CHAIRMAN. IS
it?
Secretary D I L L O N . I would think it would be included somewhere
in that figure, because that is all debt.
The C H A I R M A N . I do not think all of it is included. I imagine it
would run at least $200 billion or more. Would you not estimate that?
Secretary D I L L O N . I would rather not give it just offhand.
The C H A I R M A N . If you will give the committee a memorandum
showing the direct debt and all the other debts, plus the continued
debt to the Federal Government, and give an itemized statement.
Secretary D I L L O N . That is right, I shall.
Senator W I L L I A M S . D O you think there is a possibility that our debt
may reach the moon before we do?
Secretary D I L L O N . N O , I do not think so. The moon is a long way
away.
24
PUBLIC. DEBT LIMIT
(The information requested is as follows:)
Summary
of public debt and guaranteed obligations outstanding
May 81, 1961
[On the basis of daily T r e a s u r y s t a t e m e n t s ]
M a y 31,1961
Title
Average interest rate 1
Public d e b t :
Interest-bearing d e b t :
P u b l i c issues:
M a r k e t a b l e obligations:
T r e a s u r y bills (regular series)
T r e a s u r y bills (tax anticipation series)
Certificates of indebtedness (regular series) _
T r e a s u r y notes
Treasury bonds
Other b o n d s
T o t a l marketable obligations .
N o n m a r k e t a b l e obligations:
U n i t e d States savings b o n d s
Depositary b o n d s
T r e a s u r y b o n d s — R E A series
T r e a s u r y bonds, i n v e s t m e n t series..
Amount outstanding
Percent
2 2,607
2 2.778
3.073
3.705
2.829
2.902
$33,403,892,000.00
5,006,666,000.00
13,338,019,000.00
56,245,737,000.00
80,849,231,650.00
49,800,000.00
3.068
188,893,345,650.00
3.405
2.000
2.000
2.730
47,461,102,558.82
119,475,500.00
18,486,000. 00
5,849,803,000.00
T o t a l n o n m a r k e t a b l e obligations..
3.328
53,448,867,058.82
T o t a l public issues.
3.125
242,342,212,708.82
2.611
2.000
2.810
2. 091
2.000
2.662
2. 000
3.956
3.520
3.102
3.067
3.000
3.229
2. 643
10,061,995, 000.00
551,400, 000.00
2,250,186, 000.00
182,400, 000.00
87,393, 000.00
16,430,477, 000.00
134,000, 000.00
31,040, 000. 00
1,048,040, 000.00
154,895, 000.00
5,621, 589, 000. 00
3,098,773, 000.00
4,749,003, 000.00
101,913, 000. 00
Special issues:
Civil service retirement f u n d
Federal Deposit Insurance Corporation
Federal disability insurance t r u s t f u n d
Federal home loan b a n k s
Federal Housing Administration f u n d s
Federal old-age and survivors insurance t r u s t f u n d .
Federal Savings and Loan Insurance C o r p o r a t i o n . .
Foreign service retirement f u n d
G o v e r n m e n t life insurance f u n d
Highway trust fund
N a t i o n a l service life insurance f u n d
Railroad retirement account
Unemployment trust fund
Veterans special t e r m insurance f u n d
T o t a l special issues _
T o t a l interest-bearing d e b t
M a t u r e d d e b t on which interest h a s ceased..
D e b t bearing n o interest:
International Monetary F u n d
I n t e r n a t i o n a l D e v e l o p m e n t Association..
Other
T o t a l gross p u b l i c d e b t Guaranteed obligations n o t owned b y the T r e a s u r y :
Interest-bearing d e b t
M a t u r e d d e b t on which interest h a s ceased
T o t a l guaranteed obligations n o t owned b y the T r e a s u r y _
T o t a l gross p u b l i c d e b t a n d guaranteed obligations
Deduct d e b t n o t subject to s t a t u t o r y limitation
T o t a l d e b t subject to limitation 3_
2.802
44, 503,104,000.00
3.075
286,845,316,708.82
348,643,319.01
2,496,000,000.00
57,652, 200. 00
398,028,613.73
290,145,640,841. 56
224,663,950.00
732,475.00
225,396,425. 00
290,371, 037,266. 56
396,445,620.83
289,974,591,645.73
1 Beginning w i t h the s t a t e m e n t for Dec. 31,1958, t h e c o m p u t e d average interest rate on the public d e b t
is based u p o n the rate of effective yield for issues sold at p r e m i u m s or discounts. Prior to Dec. 31,1958, t h e
computed average rate was based u p o n the coupon rates of the securities. T h i s r a t e did n o t materially differ
from the rate c o m p u t e d on the basis of effective yield. T h e T r e a s u r y , however, a n n o u n c e d on N o v . 18,
1958, t h a t there m a y be more f r e q u e n t issues of securities sold w i t h p r e m i u m s or discounts w h e n ever appropriate. T h i s "effective-yield" m e t h o d of computing the average interest rate on t h e p u b l i c d e b t
will more accurately reflect the interest cost to the T r e a s u r y , a n d is felt to be in accord w i t h the i n t e n t of
Congress where legislation has required the use of such rate for various purposes.
2 C o m p u t e d on t r u e discount basis.
s S t a t u t o r y d e b t limit was established a t $285,000,000,000 b y the act approved J u n e 30, 1959. T h e limit,
including t e m p o r a r y increases, was $290,000,000,000 on J u n e 30,1959, and $295,000,000,000 from J u l y 1, 1959,
to June 30, 1960. F r o m J u l y 1, i960, to J u n e 30, 1961, the limit, including a t e m p o r a r y increase of
$8,000,000,000, is $293,000,000,000. Thereafter it will revert to $285,000,000,000.
25
LONG-RANG*
PUBLIC.
COMMITMENTS
DEBT LIMIT
AND
OF
CONTINGENCIES
DECEMBER
31,
OF THE
U.S.
GOVERNMENT
AS
1960
The attached statement covers the m a j o r financial c o m m i t m e n t s of t h e U.S.
Government, except the public debt outstanding a n d those involving recurring
costs for which funds are regularly appropriated b y the Congress and are n o t y e t
obligated, such as aid to States for welfare programs and participation in employeeretirement systems. The statement is segregated into four categories, namely
(a) loans guaranteed and insured, etc., b y Government agencies; (b) insurance in
force; (c) obligations issued on credit of the United States; a n d (d) undisbursed
commitments, etc.
T h e items appearing in this statement are quite different f r o m the direct d e b t
of the United States. They are programs of a long-range n a t u r e t h a t m a y or
m a y not commit the Government to expend f u n d s a t a f u t u r e time. T h e e x t e n t
to which t h e Government may be called upon to meet these commitments varies
widely. T h e liability of the Government a n d the ultimate disbursements to be
made are of a contingent nature and are dependent u p o n a variety of factors,
including the nature of and value of the assets held as a reserve against t h e commitments, the trend of prices and employment, a n d other economic factors.
Caution should be exercised in any a t t e m p t to combine t h e a m o u n t s in t h e
s t a t e m e n t with the public debt outstanding for t h a t would involve not only
duplication b u t would be combining things which are quite dissimilar. As
indicated by t h e enclosed statement, there are $108.1 billion of public d e b t
securities held by Government and other agencies as p a r t of the assets t h a t would
be available to meet f u t u r e losses. T h e following examples illustrate t h e need
for extreme caution in using d a t a on the contingencies a n d other c o m m i t m e n t s of
the U.S. Government.
1. The Federal Deposit Insurance Corporation had insurance o u t s t a n d i n g as of
December 31, 1960, amounting to $149.7 billion. The experience of t h e Federal
Deposit Insurance Corporation has been most favorable. D u r i n g the period this
Corporation has been in existence, premiums and other income h a v e substantially
exceeded losses which has permitted the retirement of Treasury a n d Federal
Reserve capital amounting to $289.3 million (all repaid t o Treasury), and t h e
accumulation of $2.2 billion reserve as of December 31, 1960. T h e Corporation's
holdings of public debt securities as of t h a t date a m o u n t e d to $2.3 billion which
already appears in the public debt total. Out of $291.4 billion of assets in insured
banks as of December 31, 1960, $65.3 billion are in public d e b t securities (also
reflected in t h e public debt). The assets, b o t h of insured b a n k s and t h e Federal
Deposit Insurance Corporation, as well as t h e continued income of t h e Corporation f r o m assessments and other sources, s t a n d between insured deposits a n d t h e
Government's obligation to redeem t h e m .
2. The face value of life insurance policies issued to veterans and in force as of
December 31, 1960, amounted to $42.1 billion. This does n o t represent t h e
Government's potential liabilities under these programs since some of these
policies will probably be permitted to lapse a n d f u t u r e premiums, interest, a n d
the invested reserves amounting to $6.9 billion of public debt securities should
cover the normal mortality risk.
3. Under t h e Federal Reserve Act of 1913, as amended, Federal Reserve notes
are obligations of the United States which, as of December 31, 1960, a m o u n t e d to
$27.4 billion. The full faith and credit of t h e United States is behind t h e Federal
Reserve currency. These notes are a first lien against t h e $53 billion of assets of
t h e issuing Federal Reserve banks which includes $27.4 billion of G o v e r n m e n t
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, 1960, amounted to $21.1 billion in G o v e r n m e n t securities a n d
$9.4 billion in gold certificates.
26
PUBLIC. DEBT LIMIT
Long-range
commitments
and contingencies of the U.S. Government as of Dec. 81.
1960
[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
Loans guaranteed, insured, etc., b y Government agencies:
Agriculture Department:
Commodity Credit Corporation
Farmers' Home Administration:
F a r m tenant mortgage insurance fund
Civil Aeronautics Board
Commerce Department: Federal Maritime Board and Maritime Administration:
Federal ship mortgage insurance revolving fund
Development Loan F u n d
Export-Import Bank of Washington
Housing and Home Finance Agency:
Federal Housing Administration:
Property improvement loans
Mortgage loans
Office of the Administrator: U r b a n renewal fund
Public Housing Administration:
Local housing authority bonds and notes (commitments covered
b y annual contributions)
Local housing authority temporary notes (guaranteed)
Interstate Commerce Commission
Small Business Administration:
Revolving f u n d
Reconstruction Finance Corporation liquidation fund
Treasury Department:
Reconstruction Finance Corporation liquidation fund
Defense Production Act of 1950, as amended
Federal Civil Defense Act of 1950, as amended
Veterans' Administration
Defense Production Act of 1950, as amended
716,328
190
Total loans guaranteed, insured, etc., b y Government agencies.
54,382
Insurance and guarantees in force:
Agriculture Department: Federal Crop Insurance Corporation
Commerce Department: Federal Maritime Board and Maritime Administration: War risk insurance revolving fund
Export-Import B a n k of Washington: War risk and expropriation Insurance
Federal Deposit Insurance Corporation
Held b y insured commercial and mutual savings banks
Federal H o m e Loan Bank Board: Federal Savings and Loan Insurance
Corporation
Held b y insured institutions
International Cooperation Administration: Industrial guarantees 10
U.S. Information Agency: Informational media guarantees
Veterans' Administration:
National service life insurance
U.S. Government life insurance
Total, insurance and guarantees in force.
Obligations issued on credit of the United States: Postal savings certificates:
U.S. Postal Savings System
Canal Zone Postal Savings System
Total postal savings certificates
Other obligations: Federal Reserve notes (face amount)
Undisbursed commitments, etc.:
T o make f u t u r e loans:
Agriculture Department:
Commodity Credit Corporations
Disaster loans, etc., revolving f u n d
Farmers H o m e Administration:
F a r m tenant mortgage insurance fund
Loan programs
Rural Electrification Administration
Development Loan F u n d
Export-Import B a n k of Washington: Regular lending activities.
See footnotes at end of table, p. 27.
0)
$172
23
00
2 319
4
4
387
32,630
585
2,839
790
78
5 19
(3)
«2
614
62
707
8 263
112
®1
149, 684
2, 319
65, 308
58, 620
332
4, 329
444
6
40, 679
1,388
5, 853
1, 078
251,197
79, 219
H 760
ii 5
778
5
27, S
(3)
16
756
973
1, 817
783
i2 27, 384
27PUBLIC.DEBT LIMIT
Long-range commitments
and contingencies of the U.S. Government as of Dec. 31,
1960—Continued
[In millions of dollars]
Commitment or contingency and agency
Undisbursed commitments, etc.—Continued
To m a k e f u t u r e loans—Continued
Housing and Home Finance Agency:
Office of the Administrator:
College housing loans
—
Public facility loans
U r b a n renewal f u n d
.
P u b l i c Housing Administration
Interior Department:
B u r e a u of Commercial Fisheries: Fisheries loan f u n d
Defense Minerals Eploration Administration: Defense Production Act of 1950, as amended
International
Cooperation Administration: Loans to foreign countries 10
Small Business Administration (revolving f u n d )
Veterans' Administration (veterans' direct loan program)
Total undisbursed commitments to make f u t u r e loans.T o purchase morgages: Housing and Home Finance Agency: Federal
National Mortage Association:
Secondary market operations
Special assistance f u n c t i o n s . .
T o t a l commitments to purchase mortgages
T o guarantee a n d insure loans:
Agriculture Department: Farmers' Home Administration: F a r m
t e n a n t mortgage insurance f u n d
Commerce Department: Federal Maritime Board a n d M a r i t i m e
Administration: Federal ship morgage insurance revolving fund—.
Housing a n d Home Finance Agency: Federal Housing Administration
Defense Production Act of 1950, as amended
T o t a l commitments to guarantee and insure loans
T o purchase investment company debentures: Small Business A d m i n istration (revolving fund)
U n p a i d subscriptions, etc.:
International Bank for Reconstruction and Development
Inter-American Development Bank
International Development Association
Total unpaid subscriptions, etc
P u b l i c debt
securities
Gross a m o u n t
held b y
of commitGovernment
m e n t or
a n d other
contingency
agencies
$235
36
615
175
(3)
(3)
6,085
165
411
576
3
141
5,681
40
5,865
21
5,715
370
247
6,332
1
Guaranteed loans and certificates of interest, included in the Corporation's balance sheet w i t h the direct
loans, a m o u n t e d to $638,000,000 as of Dec. 31,1960.
2 Includes accrued interest.
3 Less t h a n $500,000.
* Represents the Administration's portion of insurance liability. T h e estimated a m o u n t of insurance i n
force a n d loan reports in process, as of Dec. 31,1960, is $1,609,000,000. Insurance on loans shall not exceed
10 percent of the total amount of such loans.
«Excludes $17,000,000 deferred participations (guaranteed loans) representing estimated a m o u n t not
requiring purchase.
6 Represents deferred participations.
7 Represents the Veterans' Administration portion of insurance liability. T h e total a m o u n t of loans i n
the h a n d s of private lenders is estimated at $29,755,000,000.
s Represents estimated insurance coverage for the 1960 crop year.
» Excludes political risk export guaranties a m o u n t i n g to $107,000,000.
io T h e Export-Import Bank of Washington acts as agent in carrying out this program.
" Excludes accrued interest.
12 Includes public debt securities amounting to $21,065,000,000 t h a t h a v e been deposited w i t h the Federal
Reserve agents as specific collateral.
NOTE.—The above figures are subject to the limitations a n d precautionay remarks, as explained i n t h e
note attached, to this statement.
28
PUBLIC.
DEBT LIMIT
Senator W I L L I A M S . Mr. Secretary, trying to get back to this financing of the debt, it is the plan of the Treasury to concentrate as
much as you can of this debt in long-term financing, is it not, rather
than continue the concentration in short term as you have it now?
Secretary D I L L I O N . I would think more accurately in the intermediate ranges, as much as is feasible under present market conditions.
Senator W I L L I A M S . That gets back to the question, do you think
in order to have the flexibility of financing this debt which you as
Secretary need, it would be well for us to repeal the present limitation
on the ceiling on long-term interest? Payment of interest on longterm bonds?
Secretary D I L L O N . On that subject, Senator, we feel we have
flexibility now within limits that were set forth by the Attorney
General. However, we feel that complete removal of the statutory
ceiling would be desirable, since it serves no really useful purpose,
and its removal would clarify and simplify things.
We feel that we have this question of this particular debt limit
bill, which is so urgent that we did not feel it should be encumbered
by any anything that might be controversial, that would hold it up,
because it would be a chaotic situation if action on this bill was not
completed this week. We have questioned the wisdom of trying to
include a provision of that type at this time in view of the past history
of extensive debate and controversy over this subject.
^Senator W I L L I A M S . Well, I might say, I have no intention of delaying this and I recognize its importance, but the reason we are acting
at this late date is your failure to come down to Congress with a
recommendation for an extension, because the House just passed the
bill yesterday and we are acting today.
I think that the House acted promptly at the same time. Perhaps
you do not know, but nevertheless, as I understand it, this ceiling, it
was recognized by all preceding Secretaries of Treasury, and I think
by you, yourself, the importance of repealing this ceiling and the
ceiling was recognized as effective under the law until this Morris
decision of the Attorney General.
Now, as I understand the Attorney General's decision, it is that the
4}i percent covers the amount of the coupon rate only on the bond, is
that your interpretation?
> Secretary D I L L O N . That is correct. I would just like to correct one
thing.
Previous administrations did not recognize that this was a legal
limitation. Secretary Anderson very clearly and publicly stated that
his interpretation of the law was the same as the interpretation which
the Attorney General has made. But he felt that repeal would clarify
the thing and as he said, repeal would be merely affirming in a more
convenient form the basic authority granted by the Congress in 1942.
This is his testimony of 2 years ago before the Ways and Means
Committee.
Senator W I L L I A M S . There were several of us who thought that was
more or less wishful thinking, unless it was willing to be repealed.
But if there is no effective ceiling, why did he waste the committee's
time down here asking us to repeal a nonexistent law and why was
the committee's time wasted to repeal the limitation on the E bonds.
I think you recognize there is a ceiling on E bonds.
Secretary D I L L O N . That is somewhat different. There is a ceiling
on effective yields on the E bonds.
29PUBLIC.DEBT L I M I T
Senator WILLIAMS. If there is a ceiling on E bonds, whereby you
cannot go beyond an effective rate, and I understand you can sell
those other bonds at 80 to 90, or sell them at 50, under this Attorney
General's ruling if he so desires, is that correct?
Secretary DILLON. That is correct. I do not want to give the
impression that we so desire, but that is correct. The E bond thing
was set quite differently. The language there very specifically talked
about effective yield and was quite different from the language on all
other bonds. That is an effective ceiling of 4% percent now.
Senator WILLIAMS. YOU are not now recommending the limitation
of a ceiling on E bonds and boosting of no ceiling on other types of
bonds, are you? We are not putting E bonds on a less advantageous
position by saying there is a legal ceiling on those but no ceiling on
what you can pay, the maximum.
Is that the interpretation being put on this new limit?
Secretary DILLON. NO, I would think the interpretation is that
there is an effective ceiling on E bonds which does not exist on the
others. However, that ceiling is set at 3}i percent, with authority for
the President to waive it up to a maximum of 4% percent. Beyond
that, he cannot do so. The E bonds have been selling quite successfully at an interest yield of 3% percent. So this has been sort of
a moot question. They are nowhere near 4% percent, so it has not
really applied.
Senator WILLIAMS. Now, if these bonds are sold at 9 0 , yielding a
4-percent coupon, a 20-year bond, or whatever it may be, will the 10
points appreciation be counted as an appreciation of capital, subject
to capital gains, or will it be interpreted by the Treasury Department
as a portion of interest payments and therefore subject to tax at a
regular tax rate on interest? How will you interpret the appreciation
of the bonds which you sell at a discount?
Secretary DILLON. I do not want to pretend to be giving an authoritative legal opinion on that, but that may be correct. However,
I would be glad to furnish the opinion of the Internal Revenue Service.
Senator WILLIAMS. If correct, that would mean if you continue this
present Attorney General's ruling, you would be extending to the
buyers of these bonds long-term bonds who are buying them at
discount, a technical tax advantage which would not be extended to
the buyers of the E-bonds, is that correct, because the E-bond buyers
have to pay regular income tax on the appreciation of their bonds.
Secretary DILLON. The information I will obtain from the Internal
Revenue Service, will bear on this subject.
Senator WILLIAMS. It is appreciation from the 7 5 to 1 0 0 , which
represents interest under the interpretation.
Secretary DILLON. Yes.
Senator WILLIAMS. But the appreciation on these other bonds you
are going to interpret as capital gains. That is a tax advantage that
will not be extended to the others.
Secretary DILLON. AS I have stated, I will be glad to get an authoritative opinion on that.
(Information concerning this subject submitted by the Secretary
of the Treasury after the hearing is as follows:)
The Commissioner of Internal Revenue has advised me t h a t t h e assumption
made above by Senator Williams and me was not correct and t h a t t h e appreciation
would in fact be subject to ordinary rather t h a n capital gains rates.
30
PUBLIC.
DEBT LIMIT
Under section 1232 of t h e Internal Revenue Code of 1954 the amount of t h e
original issue discount is in general regarded as ordinary income
If a bond
purchased f r o m t h e Treasury on original issue for $90 and is redeemed by t h e
original purchaser at m a t u r i t y for $100 the entire $10 gain is treated as ordinary
income. If t h e bond is bought and sold in the market, a pro r a t a share of t h e
original issue discount is attributable to each holder. In the case of a bond
issued at $90, bought in t h e market after 5 years at $95, and redeemed at 10-year
m a t u r i t y for $100, t h e $5 gain of the buyer in the market as well as the $5 gain
of the original purchaser is treated as ordinary income. If, however, this bond
were bought in t h e market after 5 years for $94, the $4 gain of the original purchaser would be ordinary income, $5 of the gain of the buyer in the market would
be ordinary income, and $1 would be capital gain.
I n short, t h e realization of original discount by a bondholder is treated as
ordinary income for tax purposes while appreciation attributable to market
fluctuations is treated as capital gain. Where bonds are sold in the market, each
seller is accordingly taxed on his allocable share of original discount realized plus
capital gain, if any, realized.
Senator WILLIAMS. In order to eliminate that, do you not think
it would be a better point of sound debt management for the Government always to sell these long-term bonds at par, with a coupon
rate which will command their sale in the market?
Secretary D I L L O N . I think that certainly that would be the sounder
policy. At the moment, we do not have any idea of departing from
that, with the exception of the technique of advance funding, where
we trade one security for another, both of which are below par.
Senator W I L L I A M S . I appreciate that and I do not think you have
such intentions. But I am pointing out the fact that under this,
interpretation, you are moving over into a field where we will be
adopting, as a standard practice, presumably, the sale of Government
bonds at discount rates, which may be 95 today or 90 tomorrow, and
conceivably, they may be starting selling at 75 and certainly, that is
not, as a businessman, you would not make such a recommendation
that any corporation start that as a practice, would you, for sound
management.
Secretary DILLON. Well, the only thing I would say to that is that
I would hesitate to criticize this, because this was action taken by the
Congress in 1942, when, in the Public Debt Act, they specifically
repealed the provision that bonds must be sold at par and authorized
the sale of bonds at a discount.
I do not know what the history of that is, why they did that, but
I just hesitate to criticize an act of the Congress. But I would not
sell them myself at such a discount.
Senator W I L L I A M S . Y O U would prefer selling the Government
bonds at par. You would, as I understand it, prefer to see the ceiling
removed, the present legal ceiling, on the interest rates of these bonds,
is that correct?
Secretary DILLON. That is correct. That is what we stated in my
letter to the chairman.
Senator WILLIAMS. And that you would prefer to see that removed?
Secretary DILLON. That is right.
Senator W I L L I A M S . I am going to say we are going to try to comply
with your wishes as a part of this bill.
The CHAIRMAN. Senator Smathers?
Senator S M A T H E R S . I do not have any questions at this time.
The CHAIRMAN. Senator Bennett?
Senator B E N N E T T . Mr. Chairman, I have sat through a number of
hearings on this same basic subject, raising the debt limit, and it
31PUBLIC.DEBT LIMIT
always reminds me of a story which I would like to contribute to
lighten up the situation, one of my father's stories about the old
saloon.
The proprietor is down at the cash register, the
Senator MORTON. Why would you with your background be telling a story about an old saloon? That is my story.
Senator BENNETT. If you'll let me finish perhaps I can satisfy your
curiosity.
For years, before prohibition, the little business that we operate in
Utah stood between two old saloons and the man who owned the
one on one side of the business was ashamed to go in and collect his
rent. So my father always had to go in and collect the landlord's
rent, because it was all right for him to be seen going in, but not the
other fellow.
The bartender yelled down to the proprietor, across the length of
the bar, and you will pardon me, Mr. Secretary, "Is Doug Dillon good
for a glass of beer?"
The proprietor said, "Has he had it?"
The answer was "Yes." "Well, then, he is good for it."
Well, every year we come up here and ask if the United States is
good to have a little extra credit extended for raising the debt ceiling,
and the question always is, Have they pushed the debt up to the
ceiling point where the ceiling has to be raised—have they had the
beer—and the answer is "Yes," so they are good for it. So we
make a little fuss and ask questions, but we always raise the debt
ceiling, which we will do this time.
Mr. Secretary, I am very much interested in your statement where
you quote from the President, and I think my questions and my concern about this are also in the minds of other members of the committee.
Your statement is to the effect that Federal revenues and expenditures should be in balance over the years of the business cycle, running
a deficit in years of recession when revenues decline and the economy
needs the stimulus of additional expenditures, and running a surplus
in years of prosperity, thus curbing inflation, reducing the public debt,
and that is the point at which I stop.
As I read this statement, it is a statement of policy, which would
indicate that over succeeding business cycles, the level of the public
debt should be reduced, and that surpluses should outweight deficits
and that we should expect to continue reducing the debt by an amount
not mentioned.
Yet, as the chairman has pointed out, that has not been the case.
We have gone through four business cycles since World War II, and
the debt has been higher than when that war ended.
You point out:
This statement by President Kennedy clearly outlines our b u d g e t a r y policy, a
policy from which we have never wavered.
I assume you mean the present administration and it has only been
in office during that part of the business cycle when it is somehow
fashionable to believe in deficits.
Under the questioning of the chairman and Mr. Williams, we have
discussed the prospect of what you are going to do when you come to
the surplus side. Can we assume that before we get into the next
32
PUBLIC. DEBT
LIMIT
recession, which will come, I am quite sure, during the term of this
administration, because we have been in that pattern
Senator H A R T K E . Will the Senator yield? Is this a prediction on
the part of the Republicans that we are going into a recession in the
next few years?
Senator B E N N E T T . This is a prediction of the Senator from Utah
that if you can depend on the pattern of the last dozen years, we will
have a recession before January 1965.
Senator M C C A R T H Y . I thought you were giving us 8 years.
Senator B E N N E T T . I cannot handle you both at once. Talking to
the Senator from Minnesota, I do not think at this point you have
any real basis for hoping for 8 years. I think that will be determined
between what happens between now and 1965 and how you handle
the next recession.
I am very much interested in that flat statement that over the
business cycle, and we are just moving out of the trough to the top,
with the prospect of another trough before 1965, this administration
expects to reduce the total of the public debt. That is the way I
read this statement.
Is that a fair reading, Mr. Secretary?
Secretary D I L L O N . I am not sure the word "expect" is a fair reading. It is a fair reading, I think, to say that it is a basic policy goal
that what we should aim at over the business cycle is a balance and
some reduction in the public debt.
Naturally, because there are other policy goals that have to be
taken into account, I do not think it is a prediction. That is why I
say the word "expect" would make it a prediction.
Senator B E N N E T T . T O O strong?
Secretary D I L L O N . Yes.
Senator B E N N E T T . A S the Chairman has pointed out, we have
gone now for more than 30 years and we have failed to do this, both
in terms of the number of surplus years and in terms of the way the
debt has continued to climb over every cycle.
The Senator from Utah would be delighted if, in this current cycle,
in which we are on the upward swing, we could hope for a balanced
budget and reduction of the debt. But in terms of the additional
expenditures that this Congress is making and in terms of the additional programs which you referred earlier I don't see how you can
ever achieve a balanced budget. The President has recommended a
program which will write the temporary unemployment program into
a permanent law, so we can expect that the cost which we now see as
temporary unemployment benefits is going to be largely translated
into a permanent cost of Government.
Secretary D I L L O N . NO, sir; not unless long-term unemployment
stays at a high level. If we are more prosperous and long-term unemployment falls off, then expenditures will fall off. And also, in the
future, that would be handled by a trust fund which would have full
self-financing.
Senator B E N N E T T . In other words, we are going to take it out of
the public debt area.
Secretary D I L L O N . Out of the budget area, yes. I think it is perfectly clear that there is something lacking in our unemployment legislation, compensation legislation, as regards particularly this long-term
unemployment, because in both of the last two declines—1958 and
33P U B L I C .D E B T
LIMIT
now in 1961—Congress had to take exactly the same action and pass a
special temporary law to take care of those who had been unemployed
over a long period.
Senator B E N N E T T . I do not think it is quite accurate to say they
took exactly the same action. There was a substantial difference in
the approach. One was the program which was financed and passed
out. The other set a new pattern of direct Federal concentration of
unemployment funds this and part of the program is going to be
translated into the new funds. The Federal Government is going
to set the standards now.
Secretary D I L L O N . Setting standards is another question.
Senator B E N N E T T . Once that is done, they are going to set the
amount of money and the States are going to find the power to control
their local unemployment situations very much reduced if this new
program is adopted. The 1958 pattern did not interfere with the
right of the States to set their standards.
I, for one, would be happy to vote to remove the debt limit completely. I think it is fiction, a complete fiction, and we go through
the ritual of coming up here and raising it every year. It has no real
effect on the programs of the administration or the actions of the
Congress in voting appropriations. It actually can be burdensome
and difficult for the Treasury in operating its responsibility to manage
the debt. The Treasury does not create the debt. It has no power
with that respect. It just has to live with it after it is created.
The debt limitation is supposed to be a brake on the spending pattern of Congress, but in the 10 years I have been in the Senate, I have
seen no evidence that it has had that effect. But we solemnly raise
it to give the Treasury a little more headroom every time.
I think we actually increase the difficulties of the Treasury rather
than minimize them. Yet emotionally, if we were to take it off,
people out in the country who do not understand the problem, would
say we have endorsed runaway spending.
That is all I have to say, Mr. Chairman.
The C H A I R M A N . Senator McCarthy?
Senator M C C A R T H Y . Mr. Chairman, I am going to, I hope with
the support of the Treasury, propose an amendment which would
raise the debt ceiling as proposed but have the act terminated after
1 year. This may answer the problem of the Senator from Utah.
Have the act expire after next year.
The C H A I R M A N . The whole extension is for 1 year, is it not?
Secretary D I L L O N . Through this particular legislation, we are
requesting a temporary 1-year increase.
The C H A I R M A N . It is temporary now.
Senator M C C A R T H Y . I would have the act which establishes the
permanent ceiling expire after 1 year.
The C H A I R M A N . Oh, the permanent.
What do you think of that, Mr. Secretary?
Secretary D I L L O N . I think that is something for the committee to
decide, although I think, as has been pointed out, Mr. Chairman,
the Treasury itself has the responsibility just for managing the public
debt and managing expenditures that have already been approved
by the Congress. So I do not think the ceiling has any effective
control over public spending.
34
PUBLIC.
DEBT LIMIT
However, it does give an opportunity to review on an overall basis,
publicly, the fiscal policy of the Government as a whole once a year,
and I think that has been a useful thing.
Senator M C C A R T H Y . Mr. Chairman, we can do that without this
action.
The C H A I R M A N . Y O U would not just consent to making it temporary, the whole thing? Would you consent to making the whole $289
billion temporary?
Secretary D I L L O N . Oh, no. We either have to have a permanent
ceiling or no ceiling at all.
Senator M C C A R T H Y . Y O U could make it temporary for 1 year with
the provision that the act would expire. Then you would have no
ceiling.
Secretary D I L L O N . N O ceiling thereafter.
The C H A I R M A N . I S that your suggestion, Senator McCarthy?
Senator M C C A R T H Y . That is my suggestion.
The C H A I R M A N . We will vote on that later on.
Senator B U T L E R . Mr. Secretary, has a copy of the ruling of the
Attorney General been made a part of the record?
Secretary D I L L O N . I will be glad to make it a part of the record.
(The information requested is as follows:)
T H E SECRETARY OF THE
Washington,
Hon.
ROBERT F .
TREASURY,
April 7, 1961,
KENNEDY,
Attorney General of the United
Washington,
D.C.
States,
D E A R M R . A T T O R N E Y G E N E R A L : I would greatly appreciate your opinion as t o
whether the Secretary of t h e Treasury has authority under sections 1 and 20 of the
Second Liberty Bond Act, as amended, to issue bonds bearing a coupon rate not in
excess of 4*4 percent at a discount which would raise the investment yield or the
cost to the Treasury of the bonds above 4}i percent.
While currently prevailing low interest rates may make the question appear
academic, and while no specific borrowing operation to which this opinion could
apply is now contemplated, I believe your opinion would be timely in two respects.
I n the first place, considerable interest in this problem has been and is being
expressed by both t h e Congress and the press. Additionally, to request such an
opinion with respect to a specific proposal to issue bonds for cash, exchange, or
a n advance refunding would inevitably promote speculation and have a generally
undesirable effect on the market. Thus it would appear appropriate to obtain
your opinion now so t h a t if a t some f u t u r e time the Treasury D e p a r t m e n t should
propose to issue securities at a discount which would raise the investment yield
or cost t o the Treasury above 4*4 percent, the question would have been resolved
a n d t h e integrity of Government securities maintained beyond question.
Sincerely yours,
DOUGLAS
OFFICE OF THE A T T O R N E Y
DILLON.
GENERAL,
Washington, D.C., April 25, 1961.
T h e Honorable t h e
S E C R E T A R Y OF THE
M Y D E A R M R . S E C R E T A R Y : This is in
TREASURY.
reply to your request for m y opinion as
t o whether you have t h e authority under sections 1 and 20 of t h e Second Liberty
Bond Act to issue bonds for cash, exchange, or on advance refunding 1 where
such bonds bear a coupon r a t e not in excess of 4*4 percent b u t are issued a t a
discount which would raise t h e effective rate or cost to the Treasury of the bonds
above t h e r a t e of 4*4 percent. For the reasons set forth hereinafter in detail I
conclude t h a t you possess such authority.
i Sec. 1 of the Second L i b e r t y B o n d Act of Sept. 24,1917, 40 Stat. 288, as amended, 31 U . S . C . 752, authorizes
the Secretary of t h e T r e a s u r y , w i t h t h e approval of the President, to borrow on the credit of the U n i t e d
States for a n u m b e r of purposes including " t h e purchase, redemption, or refunding, at or before m a t u r i t y
of a n y o u t s t a n d i n g bonds, notes, certificates of indebtedness, or Treasury bills of the U n i t e d States * * *."
35PUBLIC.DEBT LIMIT
Section 1 of the Second Liberty Bond Act authorizes t h e Secretary of t h e
Treasury, with the approval of the President, t o borrow on t h e credit of t h e
United States and to issue therefor bonds of t h e United States which shall be
.subject to a " r a t e or rates of interest, not exceeding 4}i percent per a n n u m "
and shall " b e offered at not less than par'."
Section 20 of the Second Liberty Bond Act, as amended by section 3 of t h e
Public Debt Act of 1942, 56 Stat. 189, 31 U.S.C. 754b, 2 provides t h a t t h e bonds
authorized by section 1 of the act:
" m a y be issued on an interest-bearing basis, on a discount basis, or on a combination interest-bearing and discount basis, at such price or prices and with interest computed in such manner and payable at such time or times as the Secret a r y of t h e Treasury may prescribe; and a n y such obligations m a y be offered for
sale on a competitive or other basis under such regulations a n d upon such t e r m s
and conditions as the Secretary of the Treasury m a y prescribe; a n d his decision
with respect to any such issue shall be f i n a l / '
On May 1, 1958, my predecessor concluded t h a t t h e 1942 a m e n d m e n t of section
20 had repealed the earlier enacted requirement set f o r t h in section 1 t h a t bonds
issues thereunder shall "be offered at not less t h a n p a r " (41 Op. A.G. No. 62).
H e based this opinion on the conclusions t h a t t h e two sections are irreconcilable
and t h a t the legislative history of the 1942 a m e n d m e n t of section 20 disclosed a
congressional purpose "to give the Secretary of t h e Treasury greater flexibility in
determining the terms upon which Treasury bonds, bills, notes, a n d certificates
of indebtedness may be issued." 3
T h a t opinion, however, did not purport to consider whether t h e Secretary of
the Treasury is authorized to issue bonds, bearing a stated coupon rate of no
more t h a n 4}i percent, for cash, exchange, or on advance refunding, if, as t h e
result of a discount at which the bonds are issued, or for some related reason,
their effective rate, investment yield, or cost to t h e Treasury should exceed the
s t a t u t o r y rate of 4J4 percent per annum. 4 I base m y conclusion t h a t you have
this power on the following considerations: First, when Congress uses the t e r m
"interest" in connection with bonds without f u r t h e r explanation, it refers to t h e
coupon or stated rate, the usual meaning of t h a t term, and not to t h e accountants'
concept of effective rate; second, when a s t a t u t e limits only the coupon rate of
a security issue, and permits it to be offered a t less t h a n par, it authorizes sales
a t an effective rate in excess of the maximum permissible coupon r a t e ; and third,
when Congress seeks to limit the effective rate of securities which m a y be sold
a t a discount, it does so expressly.
I
As originally enacted, section 1 of the Second Liberty Bond Act provided t h a t
t h e interest rate of the bonds should not exceed 4% percent per a n n u m , a n d t h a t
they should not be issued at less t h a n par. In view of the latter prohibition, t h e
effective rate could not exceed the coupon rate, and it was therefore unnecessary
to determine whether the 4% interest rate referred to the coupon rate or to t h e
effective rate.
The 1942 amendment of the Second Liberty Bond Act, while leaving t h e 4%
percent limitation on "interest" untouched, permits bonds to be issued on a discount basis, or on a combination interest-bearing a n d discount basis. I n view
of this amendment, it becomes material to ascertain whether the words " r a t e or
rates of interest" in section 1 refer to the coupon rate or to the effective rate.
T h e pertinent judicial decisions indicate t h a t the first alternative is the correct
one; hence, t h a t a limitation on "interest" has no direct bearing on t h e effective
rate.
In Old Colony R. Co. v. Commissioner, 284 U.S. 552 (1932), t h e Supreme Court
was confronted with a situation closely related to t h e one at hand. A corporation
which had sold its bonds at a premium sought t o deduct the entire interest p a y ments on those bonds from its gross income for income tax purposes. T h e Government claimed t h a t this was not permissible because these p a y m e n t s included
in part the repayment of the premium, which constituted a loan a n d consequently
had to be amortized over the life of t h e bond. Hence, t h e " i n t e r e s t " p a y m e n t s
constituted in part "genuine interest" which was deductible, a n d in p a r t p a y m e n t s
2 Sec. 20 was added to the Second Liberty Bond Act b y sec. 14(a)(4) of the Gold Reserve Act of 1934, 48
Stat. 343.
3 H . Rept. 1876, 77th Cong., 2d sess., p. 4. See also S. Rept. 1173, 77th Cong., 2d sess., p p . 1, 2; P u b l i c
D e b t of 1942, hearings before the Committee on Finance, U.S. Senate, 77th Cong., 2d sess. on H . R . 6691, p. 3;
88 Congressional Record 2184.
4 In the interest of brevity I shall use only the term "effective r a t e " when referring to the three related
concepts of "effective rate," "investment yield," and "cost to the Treasury."
36
PUBLIC. DEBT LIMIT
on a loan which could not be deducted. In a nutshell, the Government's position
was t h a t where bonds were sold at a premium, the effective rate of interest was
lower t h a n the coupon rate, and t h a t the excess of the coupon over the effective
rate did not constitute deductible interest but a repayment on capital (284 U.S.
552, 559). 5 The Supreme Court held t h a t when Congress uses the word " i n t e r e s t "
without further amplification it refers to the normal meaning of the word, i.e., t h e
stated or coupon rate, and not to the accountants' concept of the effective rate.
The Court said (284 U.S. 560-561):
«* * * the usual import of the term [interest] is the a m o u n t which one has
contracted t o p r y for t h e use of borrowed money. He who pays and he who
receives p a y m e n t of the stipulated amount conceives t h a t the whole is interest.
In t h e ordinary affairs of life no one stops for refined analysis of the nature of a
premium, or considers t h a t t h e periodic p a y m e n t universally called 'interest' is
in p a r t something wholly distinct—that is, a return of borrowed capital. It has
remained for t h e t h e o r y of accounting to point out this refinement. We cannot
believe t h a t Congress used the word having in mind any concept other t h a n t h e
usual, ordinary, and everyday meaning of the term, or t h a t it was acquainted
with t h e accountants' phrase 'effective rate' of interest and intended t h a t as
t h e measure of t h e permitted deduction."
The holding in Old Colony t h a t Congress and courts use and interpret s t a t u t o r y
language according t o its usual meaning and not on t h e basis of accounting
theories 6 does not constitute an exception to the general course of decisions. 7
T h e S t a t e courts also hold t h a t the term "interest" without explanation normally
refers to the coupon rather t h a n the effective rate. 8
II
T h e limitation on t h e interest rate set forth in section 1 therefore refers exclusively to the coupon rate of the bonds. The original prohibition on t h e
offering of those bonds below par, however, constituted a bar on their sale at an
effective rate in excess of t h e coupon rate. Indeed, it has been recognized by
students of public finance t h a t one of the functions of a s t a t u t o r y prohibition of
t h e sale of securities below par is t o prevent their sale at an effective rate in
excess of t h e coupon rate. T h u s it was stated by Dr. Love in his treatise on
"Federal Financing," a t page 210:
" W e are accordingly justified in thinking t h a t the ever-present restriction
against sale below par is in reality a logical teammate of the restriction on t h e
nominal rate of interest, and t h a t it was only by combining the two t h a t t h e
public's wishes in respect to limiting the net yield on securities were carried o u t . "
I t follows t h a t prior to 1942, bonds authorized by section 1 of the Second
Liberty Bond Act could not be issued at an effective rate in excess of 4*4 percent
because the s t a t u t e barred the sale of those securities below par. When t h e
Public D e b t Act of 1942 repealed t h a t prohibition and expressly authorized t h e
sale of those bonds at a discount, the basis of the restriction on t h e effective r a t e
of interest disappeared. 9
5
See also Brief for the United States in No. 349, Oct. T. 1931, pp. 6-7, 10-14, 50-52. Significantly, the
brief a n d the accounting authorities quoted in it stressed that these considerations applied conversely where
bonds h a d been sold at a discount.
6
T h e holding in Old Colony therefore applies with equal force to an advance refunding of bonds at an increased
interest rate which according to some accountants constitutes the issue of the bonds at a discount.
7
See. e.g., Woolford Realty Co. v. Rose, 286 U.S. 319, 326-327 (1932); Crane v. Commissioner, 331 U.S. 1,3-7.
This, indeed, has been a source of complaint on the part of accountants, see, e.g., May, "Accounting and
the Accountant in the Administration of Income Taxation," 47 Col. L.R. 377; 4 Mertens, " T h e Law of
Federal
Income Taxation" (1960 Revision), sec. 23.162.
8
Golden Gate Bridge etc. District v. Filmer, 217 Cal. 754, 21 P. (2d) 112 (1933); Stanley v. Mayor etc. of City
o) Baltimore, 146 M d . 277, 301-302, 126 Atl. 151, 160 (1924); Rowland v. Reno County, 108 Kan. 440, 195 Pac.
863 (1921); Kiernan v. City of Portland, 61 Or 398,122 Pac. 764 (1912).
9
T h e decisions of the State courts agree t h a t where a statute permits the sale of securities at a discount,
the investment yield m a y exceed the statutory coupon rate; cf. the authorities cited supra, fn. 8, and Jones,
" B o n d s and Bond Securities" (4th ed., 1935), sec. 369.
Where a statute establishes a limit on the coupon rate and does not expressly authorize the sale of the
securi y below par, the courts are split on the question whether the sale at discount is prohibited because
it would result in an evasion of the statutory coupon rate; see, e.g., Ohio ex rel. Laskey v. Board of Education,
35 Ohio 519, 524; 43 American Jurisprudence, Public Securities and Obligations, sec. 135, 91 A.L.R. 7, 12-13.
These considerations, however, are inapplicable where, as here, the sale at a discount has been expressly
parmitted.
37
PUBLIC.
DEBT LIMIT
III
In view of t h e fact t h a t t h e limitation on t h e effective r a t e was tied inextricably
t o the ban in sales below par, it would appear inappropriate t o view t h e 1942
amendment of section 20 as being designed merely t o permit greater flexibility in
financing 10 and therefore to conclude t h a t Congress h a d no intention to modify
the then existing limitation on the effective rate. As already explained, once express permission had been given to sell t h e bonds issued p u r s u a n t t o section 1 a t a
discount, there remained no legal basis for a limitation on t h e effective rate.
Moreover, the history of t h e Second Liberty Bond Act a n d of its amendments
reveals sophisticated awareness on the p a r t of Congress t h a t , if securities m a y be
sold below par, any limitation on the effective r a t e must be express.
Section 6 of the original Second Libery Bond Act (40 Stat. 291) authorized t h e
issue of war savings certificates "on which interest t o m a t u r i t y m a y be discounted
in advance." There was no limitation In t h e interest r a t e of these certificates;
thus, it was not necessary to distinguish between t h e coupon a n d effective rates.
Section 14 of the Gold Reserve Act of 1934 (48 Stat. 343) added t o t h e Second
Liberty Bond Act a section 20, the predecessor t o t h e present section 20, which
authorized the Secretary of the Treasury t o issue obligations having a m a t u r i t y
of less t h a n 1 year "on a discount basis and payable at m a t u r i t y without interest."
Again, there was no limitation on the interest these obligations could bear.
The problem created by the difference between coupon r a t e and effective r a t e
of securities issued below par was first raised a n d dealt with in section 6 of the a c t
of February 4, 1935, 49 Stat. 21. T h a t section added to the Second Liberty
Bond Act a section 22, 31 U.S.C. 757c, which authorized t h e issuing of U.S.
savings bonds. 11 These bonds were to be issued "on a discount basis to m a t u r e
not less t h a n ten nor more t h a n twenty years * * *: Provided, T h a t the issue
price of the savings bonds and the terms u p o n which t h e y m a y be redeemed
prior to m a t u r i t y shall be such as to afford an investment yield not in excess of 3 per
centum per annum, compounded semiannually." [Emphasis added.]
Section 3 of the Public D e b t Act of 1941 (55 S t a t . 7) amended and broadened
section 22 of the Second Liberty Bond Act. I t provided in p e r t i n e n t p a r t :
"Savings bonds and savings certificates m a y be issued on an interest-bearing
basis, on a discount basis, or on a combination interest-bearing and discount
basis * * *. Such bonds and certificates m a y be sold a t such price or prices,
and redeemed before maturity upon such t e r m s and conditions as t h e Secretary
of the Treasury may prescribe: Provided, T h a t t h e interest r a t e on, and the issue
price of, savings bonds and savings certificates a n d t h e t e r m s upon which t h e y
m a y be redeemed shall be such as to afford an investment yield not in excess of 8 per
centum per annum, compounded semiannually." [Emphasis added.]
In the following year the same Congress, which amended section 22 with its
express reference t o the investment yield, amended section 20 so as t o permit
t h e sale of bonds below par. I t is significant t h a t when modifying section 20,
Congress did not start out from the original version of t h a t section contained in
section 14 of the Gold Reserve Act of 1934, b u t t h a t it followed almost verbatim
t h e language of the 1941 amendment of section 22, with t h e significant omission
of the proviso limiting the investment yield of securities issued a t a discount. 12
T h e act of April 20, 1957, Public Law 85-17, 71 Stat. 15, amended t h e proviso
in section 22 to read:
"Provided, T h a t the interest rate on, a n d t h e issue price of, savings bonds a n d
savings certificates and the terms upon which t h e y m a y be redeemed shall be
such as to afford an investment yield not in excess of 3.26 per centum per annum,
compounded semiannually." [Emphasis added.]
Finally, section 101 of the act of September 22, 1959, Public Law 86-346, 73
Stat. 621, added a section 25 to the Second Liberty Bond Act (31 U.S.C. 757c-l)
which is indicative of the full congressional awareness of t h e difference between
interest rate and investment yield:
Cf. supra, footnote 3.
11
On the legal and financial history of U.S. savings bonds, see H . Kept. 1148,86th Cong., 1st sess., pp. 2-7;
S. Kept. 909, 86th Cong., 1st sess., pp. 2-7.
" The same 77th Congress again showed its awareness of problems resulting from securities sold at a prem i u m or a discount by enacting section 126 of the Revenue Act of 1942, 56 Stat. 822, which added a section
125 to the Internal Revenue Act of 1939 (now I . R . C . 1954, sec. 171). This section permits a bondholder
who purchased a bond at a premium to treat part of the bond "interest" as amortization of the premium.
Cf. the discussion of the Old Colony case, supra.
38
PUBLIC.
DEBT LIMIT
"Section 25. I n t h e case of any offering of U.S. savings bonds issued or to be
issued under section 22 of this act, t h e maximum limits on the interest rate or the
investment yield or both m a y be exceeded upon a finding by t h e President with
respect t o such offering t h a t t h e national interest requires t h a t such maximum
limits be exceeded: Provided, however, T h a t in no event may the interest rate or
the investment yield exceed 4}i per centum per a n n u m . " [Emphasis added.]
T h e various sections of t h e Second Liberty Bond Act are in pari materia.
Sections 22 a n d 25 disclose t h e congressional awareness, at least since 1935, t h a t
when used in t h a t s t a t u t e t h e term "interest" refers only to the coupon rate and
not to t h e effective rate. Consequently, I conclude t h a t when Congress permitted t h e sale at a discount of the bonds referred to in section 1 for cash, exchange, or advance refunding, without placing a limitation on their investment
yield, it fully realized t h a t such bonds could be sold or exchanged below par a t
an effective rate, investment yield, or cost to the Treasury in excess of t h e
s t a t u t o r y coupon rate.
M y interpretation of t h e legal effect of the 1942 amendment of section 20 is
not novel. Your predecessor testified before the Committee on Ways and Means
of t h e House of Representatives to the effect t h a t "since March 1942 t h e Treasury has h a d t h e right t o offer securities at a discount. I t is permissible under
present s t a t u t o r y authority, therefore, for the Treasury t o issue a bond with a
4^-percent coupon r a t e a t a price below par to yield any rate of interest to t h e
investor above 4}i percent which may be required by market conditions." 13
Secretary Anderson, however, did not wish to exercise t h a t authority without
specific congressional leave because he did not consider it appropriate "to circumvent t h e 4}i percent ceiling in this way." 14 Considering t h a t the 4}i percent
ceiling applies—as recognized by Secretary Anderson himself—only to the coupon
rate, the issue of bonds below par, as authorized by section 20, and bearing a
coupon r a t e of 4}i percent, as authorized by section 1, does not "circumvent" any
congressional prohibition. T h e power to do so plainly exists, 15 and I cannot see
anything inappropriate in exercising it if you believe t h a t the circumstances
require such action. I therefore answer your question in the affirmative.
Sincerely,
ROBERT F . KENNEDY Attorney General.
Senator B U T L E R . I think it should be made a part of the record.
Then, will you explain to me how the United States—would the
United States borrow money by issuing bonds without consulting the
Congress, if the debt ceiling was removed or if the Attorney General's
opinion was held to be a correct ruling?
Secretary D I L L O N . They are two different subjects, Senator. The
Attorney General's opinion has to do only with the coupon rate on
bonds.
Senator B U T L E R . Only with the rate of interest and not with the
principal amount of bonds?
Secretary D I L L O N . N O .
Senator B U T L E R . In other words, he does not interfere at all with
article I, section 8, provision of the Constitution, that the Congress
shall have power to borrow money on the credit of the United States?
Secretary D I L L O N . N O .
Senator B U T L E R . That will always be here.
Secretary D I L L O N . Of course.
Senator B U T L E R . And you could always sell the bonds, as I understand it, at a discount and come here and raise the rate of the ceiling?
Secretary D I L L O N . That is correct.
w Public debt ceiling and interest rate ceiling on bonds, hearings before the Committee on Ways and
Means, House of Representatives, 86th Cong., 1st sess., p. 18; see also H. Rept. 1297, 86th Cong., 2d sess.,
pp. 3,13.
" Supra, fn. 13.
" I cannot see any significance in the failure of Congress to enact H.R. 10590,86th Cong., 2d sess., favorably
reported by the House Ways and Means Committee in H. Rept. 1297, 86th Cong., 2d sess., which conferred
on the Secretary of the Treasury the authority to exceed the effective rate of 4M percent in certain circumstances. I n view of Secretary Anderson's statements, Congress may have considered this legislation
redundant. In any event a statutory power remains in effect until it is repealed, limited, or modified.
Its existence is not affected by the failure to enact such repealing, limiting, or modifying legislation*
39PUBLIC.DEBT
LIMIT
Senator B U T L E R . But you have one of the two things to do.
Now, Mr. Secretary, you refer to the deficit of $12.4 billion, 1959.
Do you have the original and successive revised estimates of the
deficits from budget 1959, which I understand resulted right after
the last recession we had?
Secretary D I L L O N . I do not have those with me, but I am certain
I can make them available. I am sure it was a very similar situation
to what we are facing now.
Senator B U T L E R . I would like to have, if you can give it to me, the
date of the original statement and also the date of the revised estimate.
Secretary D I L L O N . We will be glad to do that; yes.
Senator B U T L E R . And the final figure, and it is also my recollection,
Mr. Secretary, that that deficit of $12.4 billion which was quite
unexpected and we did not realize it was on us until it materialized.
Secretary D I L L O N . I do not think that is quite the case. I think
that there was some realization considerably earlier that it was going
to materialize, because spending in that year went up $9 billion.
There was a sharp increase in the public debt in this same legislation
that was enacted on September 2, 1958. So at some time in the summer of 1958, which is just about where we stand now, they had a
pretty good idea that a sizable deficit was in prospect.
Senator B U T L E R . If you can, if you will supply the original statement and then the dates of both. I refer to it because I am just
wondering, in connection with your statement, whether we will not
have somewhat a similar situation now, that we will have a much
larger deficit and it will be on us before we realize it.
Secretary D I L L O N . I would not expect so. I am led to believe that
there must have been a realization of this—maybe not the full size
of it, but the general order of magnitude—at least a year earlier,
because at that time, the public debt was increased by $8 billion by
congressional action taken on September 2. That was for the year
ending the following June, so there was a pretty good idea at that
time of the prospective increase in the deficit.
But I will be glad to give you the specific information you request.
Senator B U T L E R . I thank you, sir.
(The information requested is as follows:)
Budget operations, fiscal year 1959
[In millions]
Budget
receipts 1
Original estimate in budget document, January 1958
Revised estimate in review of 1959 budget, September 1958
Revised estimate in budget document, January 1959
Actual
$74,400
67,000
68,000
68,270
Budget expenditures 1
$73,934
79,223
80,871
80,697
Surplus ( + )
or deficit (—)
+$466
-12,223
-12,871
-12,427
1
These figures have not been adjusted to give effect to change in reporting effective July 1960, whereby
certain interfund transactions (mainly interest payments to Treasury b y Government agencies on their
borrowings from Treasury) are deducted from budget receipts and expenditures, with no effect on budget
surplus or deficit.
The CHAIRMAN. Senator Hartke?
Senator H A R T K E . In regard to Senator Bennett's statement, I
agree that the limitation serves no useful purpose. Is this not, though,
a limitation on the ability of the Treasury Department to borrow
rather than a limitation on the debt itself?
40
PTJBLIC DEBT L I M I T
Secretary D I L L O N . Well, Senator, it is a limitation of the total
amount of public debt that can be outstanding at any one time.
That affects the Treasury because it cannot borrow money that
exceeds that limit.
Senator H A R T K E . It is not really a limitation on the amount of the
public debt in any sense, is it, because if the revenues do not come in
or the expenditures exceed what were estimated, the debt has occurred,
there is no real meaning at all in the debt. Is this not a misnomer?
Secretary D I L L O N . I do not think so, but what you are saying is—and that is the fact—that if your revenues do not come in or your
expenditures are higher, you would either have to find some complex
ways to circumvent this rule—as was done 3 years ago when they
sold issues of FNMA in the public market, which are not subject to
the public issue, and FNMA then paid the debts off to the Federal
Government and the Government came back and got it another
way—or get an increase in the ceiling.
Senator H A R T K E . There has been a lot of controversy about the
national debt and the total cost. Assuming we take out the cost of
the war, as I look at the record, the increase in the debt ceiling from
1940 to 1945 is from $49 billion to $300 billion, which was an alltime
high, is that not right?
Secretary D I L L O N . That is correct.
Senator H A R T K E . Then in the subsequent period from 1 9 4 5 up
until 1954, the only change in the national debt limit was a reduction
of $25 billion, which occurred in 1946.
Secretary D I L L O N . That is correct.
Senator H A R T K E . Then the increase occurred in subsequent years
from 1954, during the last administration, is that not true?
Senator B E N N E T T . The increases started after 1 9 4 6 . They were
not down to 275 in 1952, were they?
Senator H A R T K E . I would like to just have this clarified for the
record. I am talking about the ceiling now.
Secretary D I L L O N . I think what the Senator from Indiana says is
perfectly correct regarding the ceiling.
Senator B E N N E T T . But not the total debt.
Secretary D I L L O N . Not the total debt.
Senator H A R T K E . If we can agree upon the total debt, let us take
the actual total debt and do that once. From 1940, according to
what I have here, the Economic Report of the President on January
1941, it shows the increase there was up from 1940 to 1945, which
were war years, from $50.9 billion to $278.7 billion, or an increase of
$227.8 billion during the war years.
That is where the big increase in the national debt occurred, is that
not true?
Secretary D I L L O N . That is absolutely true; yes.
Senator H A R T K E . And this was in the defense of the United States
of America, for preservation of our way of life, which is a pretty small
price.
Now, from 1945 to 1953, there was the change in the actual debt
from $278.7 billion down to $275.2 billion, or a decrease of $2.5 billion,
is that not true?
Secretary D I L L O N . Yes, although actual public debt outstanding
reached a high
Senator W I L L I A M S . What was the cash on hand as of the different
years?
41P U B L I C .D E B T
LIMIT
Secretary D I L L O N . There was a substantial amount, I think, of
excess cash on hand right at the end of the war, which reduced
Senator W I L L I A M S . H O W much was that?
Secretary D I L L O N . I do not have that figure. I have the yearend
figures here. The highest yearend figure was the end of 1946, $269
billion. Thereafter the public debt decreased. The next year, the
public debt decreased to $258 billion and there was only a surplus of
$750 million, so it must have been the reduction in cash balance that
brought that about.
Senator W I L L I A M S . Will you furnish for the record the cash balances
in each of the years, because it is my understanding that cash balances dropped about $18 to $20 billion over that period.
Senator H A R T K E . This is true for 1 year but not true for the entire
period from 1945 to 1953
Senator W I L L I A M S . NO, between the periods. That is what I am
asking, the cash balances.
What were the cash balances in this period?
Secretary D I L L O N . We have that figure here. The highest cash
balance when the highest war debt occurred was February 28, 1946,
when the total debt was $279 billion.
At that time, there was a cash balance of just about $26 billion.
At the end of 1946, that same
Senator W I L L I A M S . What was it in 1953 that he was speaking of?
Secretary D I L L O N . We do not have that figure. But the cash balance
nt the end of an ordinary year rims about $5% billion. For all these
years, you can assume that.
Senator W I L L I A M S . That is about a $20 billion drop in the cash
balance.
Secretary D I L L O N . Which would have enabled a reduction from
$279 billion to $269 billion.
Senator W I L L I A M S . $ 2 5 8 billion.
Senator H A R T K E . That is right.
Mr. Secretary, to point out the fact of it, from 1945 to 1956, from
April 3 to June 26, there was an actual reduction in the debt limit of
$25 billion?
Secretary D I L L O N . That is right.
I think maybe an easier way to put it is for the total years after
1946, running up through 1952, there was an overall surplus in the
'Government's operation, but not a very big one. It was a surplus of
:about $4 billion, something like that.
Senator W I L L I A M S . Would the Senator yield?
Senator H A R T K E . Yes.
Senator W I L L I A M S . Would you repeat that, please? I did not get it.
Secretary D I L L O N . I said in taking the fiscal years 1 9 4 7 , 1 9 4 8 ,
1949, 1950, 1951, and 1952, there was a surplus of about $4 billion.
That evaporated in 1953 with the Korean deficit of $9 billion.
Senator W I L L I A M S . If you will yield just a moment.
Senator H A R T K E . Oh, certainly. I think this is a fact which has
commonly been misstated and should be corrected.
Senator W I L L I A M S . In 1 9 4 7 , what was the debt?
Secretary D I L L O N . At the end, $258 billion.
Senator W I L L I A M S . What was your cash on hand—what date was
;that? The end of 1947?
Secretary D I L L O N . These are the fiscal year's end in 1 9 4 7 .
42
PUBLIC. DEBT
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Senator W I L L I A M S . In 1947, it was $258 billion?
Secretary D I L L O N . Yes, sir.
Senator W I L L I A M S . What was your cash on hand that same date?
Secretary D I L L O N . I guess I have that figure. General fund
balance on hand that date was $3.3 billion.
Senator W I L L I A M S . N O W , what was it in 1953, you say?
Secretary D I L L O N . The close of 1952, the public debt was $259
billion, $1 billion higher than it was in 1947, but the cash balance was
$7 billion, $4 billion, roughly, higher. So there was a net improvement of about $3 billion over those years.
Senator W I L L I A M S . And your debt at the end of 1 9 5 2 was $ 2 5 9
billion.
Secretary D I L L O N . Yes.
Senator C U R T I S . N O W , Mr. Chairman—were you through?
Senator H A R T K E . N O ; I was not. I was yielding to the Senator from
Delaware.
Does he have any other questions?
What I was getting back to when I was interrupted, we show in this
thing a $227 billion debt in the war years and a $3% billion increase up
to 1953. Now, to come back to the increase, from 1953 to 1961, that
raised again to $286.4, which made it a net increase of $7.7 billion.
This occurred entirely during peacetime.
Senator B E N N E T T . Would the Senator like to put in the record the
year in which the Democrats took over the Congress?
Senator H A R T K E . I would be happy to do that.
Senator B E N N E T T . That was the year 1954. So this is the period
you are talking about in which we had a split administration, but the
power of the purse resided with your party.
Senator H A R T K E . I am glad we eliminated that difficulty.
Senator M O R T O N . And $9 billion was cut out of the Truman administration by the 80th Congress at his request.
Senator H A R T K E . I do not care what you want to argue about. I
want to tell you this, that the record clearly shows that during the
Truman administration there was a decrease in the debt of $3% billion
and during the Eisenhower administration, there was an increase in the
national debt of $7Ko billion. These figures are in the record and
cannot be refuted.
Senator C U R T I S . They can.
Will the Senator yield?
Senator H A R T K E . Certainly.
Senator C U R T I S . Mr. Truman made the statement many times,
that he reduced the debt more than any other President. What
happened? In the last bond drive in the war, the good people of the
United States way oversubscribed to bonds. We borrowed money,
more money than we needed. The war ended. There was money in
the pipeline and that money was used to retire obligations of the
United States falling due and the debt was reduced with money that
we borrowed that it turned out we did not need, and it was not
reduced by surplus financing. I think the record will bear that out.
Senator H A R T K E . I do not think the record will bear that out and
I would like to call upon the Secretary, if he has the figures there, to
show what I understood you to say, that there was
Secretary D I L L O N . I think your statement was correct. Certainly
the major reduction in the debt from the high was due to this repay-
43
PUBLIC.
DEBT
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ment, but there was a reduction, an improvement in the Government's
fiscal
position, of about $4 billion over the years 1947 through 1952.
1
Senator H A R T K E . And that did not take into account that there
was a reduction in the cash surplus of about $26 billion and a reduction
in the national debt of $25 billion, which really demonstrates very
conclusively that this overall debt ceiling limitation is very misleading
in trying to get figures, because we can get a much worse picture of the
Eisenhower administration by using the debt limitation than we can
by using the actual figures themselves.
Senator W I L L I A M S . If you will yield for a moment, your debt for
the fiscal year 1953, which begins June 30, 1952, during the Eisenhower
administration, that increased the debt $7K billion over and above the
figures you are using, is that not true?
Secretary D I L L O N . Yes. I stated in the year ending June 3 0 , 1 9 5 3 ,
when expenditures reached a high point as a result of the Korean
effort, there was a deficit of $9% billion, which is the biggest postwar
deficit we have had, with the single exception of 1959.
Senator W I L L I A M S . That is true, but even that deficit was lower
than the deficit was estimated to be by the Truman budget in 1952?
Secretary D I L L O N . It may be. I would not know about it.
Senator H A R T K E . The deficit occurred in 1 9 5 9 as a result of the
1958 recession, which was the largest peacetime deficit, is that
correct?
Secretary D I L L O N . That is correct.
Senator H A R T K E . Was this caused primarily by an increase in expenditures or a decrease in revenues?
Secretary D I L L O N . The revenues in 1 9 5 9 were actually slightly
below the revenues for 1 9 5 8 . They were about $ 6 0 0 million less, but
expenditures for 1959 were $9 billion in excess of expenditures for 1958.
Senator H A R T K E . Yes, but the real fluctuation here and the real
cause
Secretary D I L L O N . Was expenditures. Expenditures went up $ 9
billion.
Senator H A R T K E . Yes, all right. I was interested in a statement
by the leading exponent of conservatism, outside of Congress, one
Edmund Dale, in which he followed the same pattern as some of the
conservatives in Congress today, which was written about 2 or 3 years
ago. I have forgotten the exact date. I was also interested in his
recent rebuttal in a publication, in which he said that his conclusions,
based upon his observations of the European economy were that the
approach which was adopted by the conservatives was one which
would lead to unemployment and a lack of economic growth.
Is this not true? Or do you want to agree?
Secretary D I L L O N . I think that is substantially what he said,
because I have seen Mr. Dale's latest article and I think he was trying
to compare the European fiscal system with our own, which are quite
different.
Senator H A R T K E . The truth of it is that at the moment, the Western
European countries are enjoying unprecedented growth in their
economies, with practically no unemployment, is that not true?
Secretary D I L L O N . I think that is generally true, except possibly
when we talk about growth in economies. For example the United
Kingdom, which has not been growing.
Senator H A R T K E . I understand your recent statements, all you are
saying is that if we follow the course of prudence, along with taking
44
PUBLIC. DEBT
LIMIT
care of our housekeeping here and looking to the future, this coming
recession which my dear friend from Utah predicts, does not have to
come and we can go forward with years and years of prosperity, too,
is that not right?
Secretary D I L L O N . That can be true, and we hope through the use
of wise policies to avoid another recession.
Senator H A R T K E . I say this administration is the optimistic one,
while the members of the opposition are preaching the theory of gloom
and doom, not alone for us all over the picture but as far as the future
of the United States is concerned.
Senator W I L L I A M S . Would the Senator yield for just one moment?
I would like to correct one figure. We were figuring on the 1947
debt, which was $259 billion, and I think you gave us a figure of the
cash on hand as being about $7 billion.
Based on the Treasury's report, the cash on hand was $3.3 billion?
Secretary D I L L O N . That is right, $ 3 . 3 billion in 1 9 4 7 , that is right.
Senator W I L L I A M S . Instead of $ 7 billion.
Secretary D I L L O N . I said $3.3 billion. That $7 billion was at the
end of 1952.
Senator W I L L I A M S . Yes. In other words, at which time—we had
an increase in cash at that time, did we not?
Secretary D I L L O N . That is right.
Senator W I L L I A M S . In 1953, it had gone back down again?
Secretary D I L L O N . At the end of the fiscal year in 1953 it had gone
back down to $4.7 billion, yes.
Senator C U R T I S . Mr. Chairman, reference has been made to Western Europe. Has not recovery been most in West Germany?
Secretary D I L L O N . That is correct.
Senator C U R T I S . What has been their financial policy, one of deficit
spending or not?
Secretary D I L L O N . Their financial policy has been one of heavy
governmental expenditures, that are far higher than in the United
States. They run about 33 to 35 percent of their revenues, their
expenditures, their income through their Federal budgets of one sort
or another, whereas a comparable figure in the United States is about
25 percent.
But with that, they have maintained generally balanced budgets
and have operated on
Senator C U R T I S . And they have held the value of the mark?
Secretary D I L L O N . They certainly have.
Senator C U R T I S . And they have done it without deficit financing?
Secretary D I L L O N . They have.
Senator C U R T I S . N O W , in comparing what the percent of their
gross national product or income is to Government expenditures,
under their system, more things are handled by the central Government—by the central Government and fewer by the States, or what
we would refer to as States than in this country, is that not true?
Secretary D I L L O N . I do not pretend to be an expert on that. I
think that in Germany, the States, the Laender,have greater authority
comparatively than in any other European country and more nearly
approach our States, but they are not the equivalent.
Senator C U R T I S . At any rate, they have maintained a high level
of employment where, at the present time, workers are in demand.
45
PUBLIC.
DEBT LIMIT
They have done so without deficit financing and they have maintained the value of the mark.
Secretary D I L L O N . That is correct.
Senator C U R T I S . I read an article not long ago that the Germans
followed that course in direct opposition to the recommendations of
the American mission that was going to tell them how to do things
in their reconstruction days. I do not have the article before me.
Now, I would like to ask you, at what time of the year, the calendar
year, does the cash balance usually reach its lowest point?
Secretary D I L L O N . I think that is——
Senator C U R T I S . It is high at the time people are paying their tax?
Secretary D I L L O N . That is right. To reach its lowest point, it
depends, of course, on what the Treasury does in the way of borrowing, because if the Treasury replenishes the cash balance by borrowing,
then it would not be low. I think it is probably more accurate to
say that at certain times it reaches its peak, like right now, when
we have had these big tax payments coming in at the end or middle
of June, which is the biggest tax payment time we have, rather than
to speak of time when it is at its bottom.
Last year, just looking at the figures on our table, actually the
lowest balance we had on one of these dates of the 15th and the end
of each month, was the 15th of April, where we got down to a balance
which was really too low. But it was only for a day or two, because
we had the big Treasury financing and tax collections at that same
time.
Senator C U R T I S . N O W , I want to state a hypothetical case which
I do not advocate and I think it would be a mistake to permit it to
happen.
Suppose we had an absolute debt limitation of a certain number
of dollars, but the Congress appropriated and the Executive spent
money far beyond and the United States owed bills—they owed
contractors who are building roads, contractors who are building
missiles, and our employees like the State of Michigan, missed some
paydays for their employees.
Our actual debt would be the total amount we owed and not the
figure in the national debt ceiling, is that not correct?
Secretary D I L L O N . I think that is correct, yes.
Senator C U R T I S . That leads me to my next question, then: What
causes national debts? It is when the Congress appropriates and the
Executive spends more money than we take in, is not that right?
Secretary D I L L O N . That is absolutely correct.
Senator C U R T I S . Yes. And now, while a debt ceiling may have
a publicity value and a moral restraint when it is publicly reviewed
once a year the raising of the national debt ceiling in itself does not
create debts, is that not right?
Secretary D I L L O N . Yes, that is absolutely correct.
Senator C U R T I S . N O W , SO the debt of the country, now and in the
future, is going to be determined upon how much taxes we levy and
how much money the Congress votes and how much the Executive
spends, is that not right?
Secretary D I L L O N . That is correct.
Senator C U R T I S . N O W , with few exceptions, is the Executive
legally bound to spend all the money the Congress appropriates?
46
PUBLIC.
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Secretary D I L L O N . I am not enough of a lawyer to answer that.
Certainly I know the President has the right or has exercised the right
to impound some appropriations, but that is always a small amount.
Senator C U R T I S . Well, it is conceivable that an agency could
economize, spread the work, and spend less than was appropriated
for it?
Secretary D I L L O N . That is correct.
Senator C U R T I S . And do it without violation of the law.
Secretary D I L L O N . Oh, yes. There is nothing that requires us to
spend the entire appropriation. If we can economize and do the job,
we do it.
Senator C U R T I S . The amount of Government spending is determined by our philosophy of government and what is a proper function
of the Government, is that right?
Secretary D I L L O N . That is correct, yes.
Senator C U R T I S . I do not intend to draw you into a controversy
about housing. That is an illustration. Frankly, I am opposed to
public housing of all forms. I have gone along with the financing of
private housing, insured loans, and so on. But one of the things that
the Congress has to face right now is proposals for housing at public
expense for middle income people.
Now, it is conceivable that the homeless and the distressed and the
people who have no place to go for shelter may have a claim on
Government for housing, but it seems to me as we extend the socialistic
philosophy, taxing the people or increasing the debt to provide housing
for people who admittedly are not classified as distressed, we have to
realize that this is going to determine our level of expenditures and
may determine the course of our national debt.
Would you agree?
Secretary D I L L O N . I would agree; yes, sir.
Senator C U R T I S . N O W , in the figures that have been quoted about
the national debt, has that been confined to the direct debt, or has it
included any secondary or contingent obligations of the Federal
Government?
Secretary D I L L O N . NO, sir. This just includes the debt subject to
the legal limitation, which is the direct debt.
Senator C U R T I S . And it does not include future direct obligations,
does it?
Now, for instance, by way of illustration, if we insure a loan on a
house, the man pays off his loan, the Government loses no money on
it, other than probably some administrative costs.
So we do not know whether or not the Federal Treasury is going to
suffer, unless we know there is a loss on that transaction. But if we
vote a benefit for military retirement, that is going to pyramid in
years to come, there is nothing contingent about that unless we repeal
it, that is going to be a direct obligation?
Secretary D I L L O N . That is correct.
Senator C U R T I S . N O W , do these figures that you have quoted as to
receipts and expenditures include trust funds?
Secretary D I L L I O N . NO, they do not.
Senator C U R T I S . But in the Treasury's cash balance sheet, they are
included?
Secretary D I L L O N . We have to take account of tbem in our cash
balance in figuring our overall debt, that is right.
47
PUBLIC.
DEBT
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Senator C U R T I S . In other words, in the field of social security, we
might happen to have collected more social security taxes than paid
out in a particular year in social security benefits, and so far as the
£ash budget is concerned, that shows as an item on the plus side, does
it not?
Secretary D I L L O N . Yes.
Senator C U R T I S . Even though the benefits that we have voted,
for a year from now, or 5 years from now or 10 years from now, may
be tremendous.
Here again, I am not asking you for comment. I just want to
express for the record a problem that has worried me. I think our
budget system, our financing system, is very hard to understand for
the people back home. We have trust funds, we have a cash balance,
we have accrued obligations, we have this and we have that.
As a general rule, most taxes are levied and collected on a calendar
year basis, are they not?
Secretary D I L L O N . Yes, that is so.
Senator C U R T I S . Some concerns may elect a fiscal year?
Secretary D I L L O N . That is right.
Senator C U R T I S . But the rates are on a calendar year basis and our
spending is on a fiscal year basis?
Secretary D I L L O N . That is correct, and that is the reason for this
lag.
Senator C U R T I S . So if a Member of Congress or an interested
citizen asks the question, is the Government living within its means
right now, there has to be a lot of transposition to give the answer?
Secretary D I L L O N . Yes, there is a thing called the income and
product account, which is very complicated.
Senator C U R T I S . Yes, and I do hope that can be simplified. I
think it would be very helpful to Members of Congress and also to
building public opinion for sound financing in the country if all these
transpositions were not necessary.
Is it not also true that the Congress can vote an expenditure or an
authorization which in the first year of operation does not cost very
much, but in a period of a few years, it is a tremendous program even
if they do not add to the legislation?
Secretary D I L L O N . That is perfectly possible.
Senator C U R T I S . SO it is possible for a spendthrift Congress to come
to the end of the year and say, here we ended up with a cash balance
of so much, but their votes calling for future expenditures, which
probably legally could be canceled but morally they create an obligation and an expectation of the part of the people—such a Congress
.conceivably could be a very expensive Congress, is that not true?
Secretary D I L L O N . That is right.
Senator C U R T I S . I agree with the expression made around this
table that the debt ceiling in itself does not hold down our debts. It
is fictitious. I do think it serves a public purpose in this regard, that
once a year, or however long we extend it, it does call attention to the
Executive and to the Congress and the country of our position and the
financial direction in which we are headed.
Does that not have to be taken into view?
Secretary D I L L O N . That is certainly correct.
Senator C U R T I S . I think that is all the time I want to take.
48
PUBLIC. DEBT
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Senator M O R T O N . I just want to associate myself with those who
said that the debt ceiling does not limit the expenditures which are
afforded by the Congress, voted by the Congress and subsequently
spent by the administration. I think this is a useful exercise to some
degree.
I feel sorry for the Secretary of the Treasury, not only this one but
his predecessors and those who will follow, having to come up and
go through this exercise when they do not have anything to do with
controlling the expenditures and we on the Finance Committee have
little to do with them.
I think next time we have this operation up, we ought to yield to
the Appropriations Committee and let them ask the questions.
That is all, Mr. Chairman.
Senator C U R T I S . Mr. Chairman, may I have 10 seconds?
I would like to make an observation here. I am very fond of the
Senate, but I did serve 16 years in the House, 10 years on the Ways
and Means Committee, which is the oldest committee in the country,
it is older than the Republic itself. It was created by the Continental Congress.
And for many, many years, the Ways and Means Committee
handled appropriations. So the same committee that levied the
taxes determined how much money would be spent. And, of course,,
the workload has gotten so big that it was impractable, but it does
add to all this confusion that we were mentioning a moment ago of
taxing on a calendar year, spending on a fiscal year, trust funds,
future obligations, and so on, that it is not a simple matter to determine the exact financial status of the Government.
That is all, Mr. Chairman.
Senator B U T L E R . Mr. Chairman, may I ask one question?
Mr. Secretary, you have the right under the law to issue bonds and
borrow on the credit of the United States up to the legal limit as set
by the Congress.
Secretary D I L L O N . Yes.
Senator B U T L E R . N O W , it was suggested by the Senator from
Minnesota that we now can put the limit up and then let it expire
within the year, then the Congress would have no control whatever
over the expenditures other than the appropriation of the money.
Secretary D I L L O N . That is correct.
Senator B U T L E R . And they would have no control whatever over
your imbalance in social security, for instance, as pointed out by the
Senator from Nebraka.
If you take less in than you pay out, you just issue bonds of the
United States. If you collect more in taxes and pay less in balances,,
you have a credit balance from which you issue a bond and put it in
the Treasury of the United States.
Secretary D I L L O N . That is right.
Senator B U T L E R . S O the Congress now has no control over that type
of financing. Has the question ever been raised in view of article I,
section 8, that the Congress shall have the right to borrow money on
the credit of the United States—-if such bonds are illegally issued?
Senator C U R T I S . Those bonds within the limit.
Senator B U T L E R . I am talking about after the limit is removed*.
Where do you go?
49
PUBLIC.
DEBT
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Secretary D I L L O N . That is up to the Congress if the Congress decides it does not want to have a limit. I presume they can do so if
they want to.
Senator B U T L E R . What I am getting at is this: You come up every
year to have the limit renewed. You would come up every year to
have financing reviewed.
Secretary D I L L O N . I do not think you would have to if a law was
passed to make it clear there was no fixed limit, but I would certainly
think it would be a useful procedure.
Senator B U T L E R . If the law was a simple abrogation of a constitutional provision and the Congress said you can borrow any amount
you want, we are not interested, then you would not have to come up.
But you have to come up for two purposes: To have the debt ceiling
adjusted or to have the specific financing authority you asked approval
for.
Secretary D I L L O N . Y O U certainly have to have the authority of
Congress on that.
The C H A I R M A N . If the debt was to be extended, is it not true that
you would have to have the consent of Congress?
Secretary D I L L O N . That is true.
The C H A I R M A N . That was repealed in 1 9 1 5 , somewhere along in
there.
Secretary D I L L O N . I would take your word for it, Mr. Chairman.
The C H A I R M A N . And Congress substituted then a ceiling, instead
of approving each specific issuance of bonds.
The C H A I R M A N . Any further discussion? Senator Long?
Senator L O N G . Mr. Secretary, I believe you have over in your
Department—if you do not, the Federal Eeserve Board does—certain
comparisons of the national debt as it compares to the gross national
product and as it pompares to personal income. I have seen references made to those relationships, taking into account constant dollars
and things of that sort, which indicate that our national debt today,
as compared to our national income—that is, the personal income—
is not as great as it was in 1946.
I am not trying to endorse the effect of inflation that has occurred
and things like that since that time. I would Just like to have made
available those studies for this record if you can provide some of those.
Secretary D I L L O N . I will be very glad to do that, sir.
(The information requested is as follows:)
50
PUBLIC.
DEBT L I M I T
Public debt related to gross national product and other measures of economic growth
End of fiscal
Gross nayear debt tional product
(billions of
(billions of
dollars)
dollars)
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
19613.
1962 3
...
269.4
258.3
252.3
252.8
257.4
255.2
259.1
266.1
271.3
274.4
272.8
270.5
276.3
284.7
286.3
289.0
290.0-292.0
Personal
income
(billions of
dollars)
210.7
234.3
259.4
258.1
284.6
329.0
347.0
365.4
363.1
397. 5
419.2
442.8
444.2
482.1
503.2
515.0
555.0
179.3
191.6
210.4
208.3
228.5
256.7
273.1
288.3
289.8
310.2
332.9
351.4
360.3
383.3
404.2
(*)
(*)
1
Ratio of debt Ratio of debt
Real per
to GNP
to personal capita debt 2
(percent)
income
(dollars)
(percent)
127.9
110.2
97.3
97.9
90.4
77.6
74.7
72.8
74.7
69.0
65.1
61.1
62.2
59.1
56.9
56.1
52.3-52.6
150.3
134.8
119.9
121.4
112.6
99.4
94.9
92.3
93.6
88.5
81.9
77.0
76.7
74.3
70.8
(*)4
<)
2,291
1,874
1,671
1,662
1,648
1,490
1,452
1,46®
1,453
1,452:
1,397
1,314
1,281
1,287
1,256'
(4)
0)
1 Ratios compare debt at end of each fiscal year (June 30) with GNP and other measures for the calendar
year including that June 30.
23 Public debt divided by consumer price index (1947-49=100) and then divided by total population.
Projected.
* Not available.
Senator L O N G . I would like to see what they look like.
As you know, Mr. Secretaiy, there have been some phases of administration spending which I have not endorsed and vigorously opposed.
I think you were more aware of that when you were in the Department of State. I have thought that those who are voting on the
higher side of spending in some cases should vote for taxes to pay for it,
but I do not think we should try to tell you that we are not going to
give you the money to pay the bills after the majority vote has voted
on spending it so I think we are going to have to go along with you
on this.
Secretary D I L L O N . Thank you.
The C H A I R M A N . Any other questions?
Thank you vei-y much, Mr. Secretary. We will see you tomorrow
morning at 10 o'clock on another bill.
(Whereupon, at 12:25 p.m., the committee proceeded into executive
session.)
o
@FedFRASER