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86ls t Session8 }

JOINT COM M ITTEE P R IN T

QUESTIONS ON MONETARY POLICY AND
DEBT MANAGEMENT

PREPARED FOR THE

STUDY OF
EM PLOYM ENT, GROWTH, AN D PRICE LEVELS

JOINT ECONOMIC COM M ITTEE
CONGRESS OF THE UNITED STATES

Printed for the use of the Joint Economic Committee

UNITED STATES
GOVERNMENT PRINTING OFFICE
45132




W A S H IN G T O N : 1959

JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
PAUL H. DOUGLAS, Illinois, Chairman
W RIGH T PATM AN , Texas, Vice Chairman
SENATE

HOUSE OF REPRESENTATIVES

JOHN SPARKM AN, Alabama
J. W ILLIAM FULBRIGHT, Arkansas
JOSEPH C. O’M AHONEY, Wyoming
JOHN F. KEN N EDY, Massachusetts
PRESCOTT BUSH, Connecticut
JOHN M ARSHALL BU TLER, Maryland
JACOB K. JAVITS, New York

RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
H EN RY S. REUSS, Wisconsin
FRAN K M. COFFIN, Maine
THOMAS B. CURTIS, Missouri
CLARENCE E. KILBURN, New York
W ILLIAM B. W IDNALL, New Jersey

STUDY OF E M PLO Y M E N T, GROW TH, AND PRICE LEVELS
(Pursuant to S. Con. Res. 13, 86th Cong., 1st sess.)
Technical Director
W L e h m a n , Administrative Officer
r.
W. K n o w l e s , Special Economic Counsel

O t t o E c k s t e in ,
Joh n

n




Jam es

CONTENTS
Page




in

V
1
1
OCn

Foreword________________________________________________________________________
Questions on monetary policy and debt management_______________________
Questions for the Secretary of t-lie Treasury____________________________
Questions for the Chairman of the Board of Governors of the Federal
Reserve System_________________________________________________________
Questions for dealers in Treasury securities_____________________________

FOREWORD
In connection with its responsibilities under the Employment Act
of 1946, the Joint Economic Committee has had a continuing interest
in the formulation and application of monetary policy and in the
problems of debt management. Intensive studies were conducted
in 1949 by the Subcommittee on Monetary, Credit, and Fiscal Policies,
under my chairmanship, and in 1951 by the Subcommittee on General
Credit Control and Debt Management under the chairmanship of
Representative Patman, who is the present vice chairman of the
Joint Economic Committee. Since these studies, the committee has,
in conjunction with its annual reports on the President’s report or on
special occasions, attempted to keep abreast of current problems in
this area.
The Joint Economic Committee is now conducting a large-scale
study of employment, growth, and p
>rice levels. As part of this study
the committee held public hearings at which the Secretary of the
Treasury, the Chairman of the Federal Reserve Board and other
officials of the System, and five dealers in Government securities
testified on current monetary and debt management policies.
As a supplement to these hearings the Joint Economic Committee
has submitted a series of questions to the individuals and organiza­
tions appearing at the hearings, and to the other 12 firms dealing in
Government securities. The questions have been designed to present
the general setting for current monetary policy, a comprehensive
view of the nature of the market for Federal Government securities,
and the role of this market in monetary policy and debt management.
The questions were submitted to the respondents during the week
of August 16. Because of widespread interest in the Congress, and
the press in the questions themselves, they are reproduced herewith
prior to receiving the answers. The answers are to be submitted by
the end of September and are expected to be published by the com­
mittee during the month of October, as part of the materials upon
which the committee will be basing its report which is to be submitted
to Congress by January 30, 1960.
P a u l H. D o u g l a s , Chairman.
A u g u s t 31, 1959.
IV




QUESTIONS ON MONETARY POLICY AND DEBT
MANAGEMENT
QUESTIONS FOR THE SECRETARY OF THE TREASURY
T. M O N E T A R Y

P O L IC Y A N D

IT S

R E L A T IO N

TO D E B T M A N A G E M E N T

A. Has too much reliance been placed on monetary restrictions and
not enough o i l budgetary surpluses in recent years to achieve the goals
of economic stabilization and sound debt management?
B. Does the Treasury participate in the formulation of monetary
policy? If so, in what ways? Is any such participation sufficient to
insure coordination of monetary, budgetary, and debt management
policies for achieving public economic policy objectives?
II.

THEORY

A N D P R A C T IC E

OF D E B T

M ANAGEM ENT

A. Should the Treasury follow the policy of issuing long-term
obligations during periods of economic expansion and short-term
obligations during periods of economic contraction? Alternatively,
should the Treasury manage the debt with the objective of minimizing
interest costs?
B. In view of the postwar history, can the average maturity of
the debt be lengthened appreciably during periods of economic
expansion? during periods of economic contraction?
C. Is the issuance of short-term debt during periods of economic
expansion inflationary? If so, why?

D. Why has the Treasury somewhat lengthened the average
maturity of the debt during periods of recession?
E. What are the arguments for and against assigning the entire
task of debt management to the Federal Reserve System, completely
separating budgetary policy and debt management policy?
F. Would the Treasury favor limiting the number of types of
Treasury securities currently being issued? For example, the Treas­
ury might issue only bonds; or onl\^ bills; or consols only.
II I .

M A R K E T IN G

T H E P U B L IC

DEBT

A. To what extent does the Treasury use moral suasion in market­
ing its debt? What type(s) of moral suasion is (are) used?
B. On balance, would debt management costs be reduced by the
Treasury’s maintaining a larger cash balance than at present so as to
minimize the need for having to come to the market at inopportune
times?
C. Could the Treasury undertake its financings more frequently
and in smaller volume in order to make it easier for the market to
absorb its issues? Could “tap” issues be used for this purpose?




1

2

QUESTIONS ON MONETARY POLICY AND DEBT MANAGEM ENT

D. Would it be desirable for the Federal Reserve to use its direct
purchase authorit}r of section 14(b) of the Federal Reserve Act, as
amended, to finance an increase in the Treasury’s cash balance in
order to facilitate Treasury management of the debt?
E. (1) Would it be possible to reduce the Treasury’s debt manage­
ment problems by making greater use of the auction technique in
connection with the issuance of intermediate- and long-term securities?
(2) If the auction technique were feasible and if all Treasury debt
financing employed this technique, would there be less constraint on
the Federal Reserve in discharging its monetarj7policy responsibilities?
(3) Does the Treasury under present marketing arrangements pay
a premium interest rate so as to compensate those who bu}r on the
primary distribution (dealers and commercial banks) for resale on a
secondary distribution basis?
(4) Might there on occasion be an overpricing of an issue? If so,
how does this arise? Is it possible that the risk of such a development
could ever be entirely eliminated? In particular, would the auction
technique eliminate this risk?
F. How has the Federal Reserve’s “bills only” policy influenced
the Treasury’s marketing problem? Has this policy made the market­
ing problem easier by strengthening the market for Treasury securities,
and thereby making it easier for the market to absorb large issues?
Or has the “bills only” policy made the marketing problem more
difficult; for example, by denying to the Treasury the possibility of
obtaining temporary underwriting support?
Is it possible for the Treasury to use its own trust accounts to this
end, or in some other way provide itself with temporary underwriting
support?
G. Are present arrangements for the secondary distribution of
Treasury securities adequate? Do dealers and commercial banks
provide an adequate network for placing securities with final holders?
If not, is there some better arrangement? For example, would
making use of the Federal Reserve as a distribution system be of help?
H. How does the Treasury conduct its advisory consultations con­
cerning debt operations with the various representatives of the finan­
cial community? For example, what kinds of institutions and indi­
viduals are called upon for advice? And how stable is the composition
of these various advisory groups? Are specific recommendations of
any sort made by these groups, and, if so, is a record kept? To what
extent does the Treasury get conflicting advice from its various ad­
visers? When there are differences, how, if at all, are they reconciled?
To what extent has the Treasury been guided in its debt operations
by the advice of these advisory groups? To the extent that the
advice provided is adhered to, does it (1) tend to result in operations
which minimize the interest cost to the Treasury, or (2) tend to result
in operations which contribute directly to maintaining economic
stability, or (3) both? In any case, why?
I. To what extent can the Treasury, without disrupting the bond
market and without support from the Federal Reserve, obtain addi­
tional funds by borrowing at short term by raising short-term interest
rates?
J. Is the market for Treasury issues largely limited to current cash
flows, or do Treasury offering terms sometimes induce a readjustment
of existing portfolios to accommodate the new issues?
r



QUESTIONS ON MONETARY POLICY AND DEBT MANAGEMENT

3

If the market for new Treasury issues is largely limited to current
cash flows, to what extent are these flows earmarked for particular
maturity lengths and for particular degrees of risk? How is such
earmarking to be accounted for?
IV . THE

C O M P E T IT IV E

P O S IT IO N

OP T R E A S U R Y

S E C U R IT IE S

A. Has the competitive position of Treasury securities worsened
in recent years? If so, which factors account for this development?
Has the competitive position of Treasury securities been affected by
recent price behavior of Treasury intermediate- and long-term issues?
By growth in amount outstanding of federally guaranteed and agency
issues?
B. There are several possibilities, listed here, for correcting the
alleged decline in the competitive position of Treasury issues. Which
of the following alternatives would be most desirable and acceptable
in improving the competitive position of Treasury securities:
(1) Remove the present ceiling on interest rates payable on issues
with maturities over 5 years?
(2) Institute secondary reserve requirements, of a variable nature,
which can then be used to put Treasury securities permanently into
commercial banks?
(3) Raise reserve requirements of member banks and offset this
potential reduction in the money supply by Federal Reserve purchases
of Treasury securities?
(4) Offer a type of security which would compete directly with
savings institutions (savings and loan associations, mutual savings
banks, etc.) for the current savings of the household sector?
(5) Abandon the several types of guarantee programs— guaranteed
and insured mortgages, guaranteed non-Treasury securities issues,
guaranteed deposits of commercial and savings banks, and shares of
savings and loan associations— or else require affected lending insti­
tutions to take stipulated amounts of Government securities?
V.

PERFORM ANCE

OF T H E

M AR KET FOR TR E A SU R Y

S E C U R IT IE S

A. What are the criteria according to which the performance of the
market for Treasury securities should be judged? What is satisfactory
market behavior?
B. If market performance has been unsatisfactory, what factors
account for it? Are there any specific remedial steps which could be
taken to improve market performance?







QUESTIONS FOR THE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
I.

GENERAL

M ON ETARY

P O L IC Y

A. The proper degree of monetary restraint
(1) Has monetary policy had to assume too much of the burden
of economic stabilization in recent years? at the present time? Would
greater reliance on fiscal policy, and less on monetary policy, better
serve to achieve public economic policy objectives?
(2) Is the present level of interest rates sufficiently high to limit
expansion of total spending to noninflationary proportions? Is the
present level of interest rates serving to check spending for consumer
durable goods and for plant and equipment?
B. The impact of monetary policy
(1) Does a restrictive monetary policy, as reflected by high interest
rates and tight bank reserve positions, equally affect all sectors of the
economy?
Does a restrictive monetary policy have a greater impact on any
of the following sectors than on others:
(а) State and local governments;
(б) Small business;
(c) Business in competitive (as opposed to oligopolistic) in­
dustries ;
(d) The residential construction industry;
(e) Industries, such as public utilities, with long planning
horizons?
(2) Have any empirical studies been undertaken in the Federal
Reserve System in recent years to determine whether restrictive
monetary policies affect some types of activity more than others?
If so, what are the results of these studies? If not, are any such
studies now planned? Can the flow-of-funds analysis which has been
developed at the Board of Governors be used in this connection?
C. The mix of weapons of monetary control
(1) Reserve requirements:
(а) Has Federal Reserve policy aimed at a secular decrease in
reserve requirements in the postwar period? In the last few years?
If so, what objectives are sought? Is a change in the level of bank
profits one of these objectives? Would lower reserve requirements
make it possible for the monetary authority more readily and effec­
tively to control the member bank reserve base?
(б) Does the Federal Reserve System, in carrying out its responsi­
bilities for monetary policy, affect member bank earnings? If so,
has the discharge of this responsibility permitted an adequate level
of bank earnings over the postwar period as a whole? At the present
time?




6

QUESTIONS ON MONETARY POLICY AND DEBT MANAGEMENT

(c) Is the logical limit of the policy of minimum intervention and
the associated “bills only” policy that all changes in member bank
reserves should be carried out by changes in reserve requirements?
If so, why hasn’t the “bills only” policy been carried to this limit?
(2) Open market operations, with special reference to “bills only” :
(a) The explanation provided in the report of the Ad Hoc Sub­
committee on the Government Securities Market is quite generally
cited as the “official” explanation for the “bills only” policy. Has
this position changed?
(b) With the benefit of hindsight, should there have been more
frequent deviations from the “bills only” policy than in fact occurred
since 1953?
(3) Selective credit controls: Are standby consumer credit controls
necessary at the present time? Would any of the following standby
credit controls be desirable at the present time?
(a) Direct control of bank lending?
(b) Secondary reserve requirements?
(c) Direct control over the terms of mortgage lending?
(d) Direct control of corporate and State and local securities
issues?
(4) Control of financial intermediaries: Would it be desirable to
give the Federal Reserve System or some other Federal agency author­
ity to control the lending activities of institutional lenders, e.g., life
insurance companies, mutual savings banks, savings and loan associa­
tions? If so, should such authority be on a standby basis? What
specific controls would be desirable?
II.

DEBT

M ANAGEM ENT

A. Do the Treasury’s debt management operations hamper the
execution of monetary policy? If so, is this hindrance of major
significance? If so, are there ways of conducting debt operations so
as to minimize this interference?
B. To what extent can the Treasury, without seriously affecting the
bond market and without support from the Federal Reserve, obtain
additional funds by borrowing at short term by paying short-term
interest rates?
C. Is the market for Treasury issues largely limited to current cash
flows, or do Treasury offering terms sometime induce a readjustment
of existing portfolios to accommodate the new issues? Why?
If the market for new Treasury issues is largely limited to current
cash flows, to what extent are these flows earmarked for particular
maturity lengths and for particular degrees of risk? How is such
earmarking to be accounted for?
D. Marketing the 'public debt
(1) Private underwriters provide their own underwriting support
for issues they market. In view of the fact that its issues typically
are larger than private issues, doesn’t the Treasury need such under­
writing support? If such support is sometimes necessary, should the
Treasury provide this support or should the Federal Reserve pro­
vide it?
(2) What are the arguments for and against assigning the entire
task of debt management to the Federal Reserve, completely sepa­
rating budgetary policy from debt management policy?



QUESTIONS ON MONETARY POLICY AND DEBT MANAGEMENT

7

E. Theory of debt management
(1) Should the Treasury follow a policy of issuing long-term obliga­
tions during periods of economic expansion and short-term obligations
during periods of economic contraction?
Alternatively, should the Treasury manage the debt with the objec­
tive of minimizing interest costs?
What other considerations determine the choice of maturity when
new securities are to be issued?
(2) Is the issuance of short-term debt during periods of economic
expansion inflationary? If so, why?

III.

THE

PERFORM ANCE

OF

THE

M ARKET

FOR

TREASURY

S E C U R IT IE S

A. From the viewpoint of aiding the conduct of an effective mone­
tary policy, should the market for Treasury securities be so organized
as to make it possible for transactions of relatively large volume to
take place with only small price changes? Or would it be better if
the market were so organized as to require relatively large price move­
ments, even for transactions of small volume? Or does the best
arrangement lie somewhere in between these two extremes? If so,
where?
B. Does the discharge by the Federal Reserve System of its respon­
sibility for controlling the money supply seriously affect the normal
functioning of the market for Treasury securities? Does it hamper
debt management operations? Are the characteristics of the market
for Treasury securities such as to limit the Federal Reserve System in
the discharging of its responsibility?
C. Has the performance of the market for Treasury securities, as
measured by price volatility, been satisfactory in the period since
mid-1953? Has this performance been better than in the period prior
to mid-1953?
D. What criteria other than price volatility should be used in
evaluating market performance? According to these other criteria,
has the market for Treasury securities performed satisfactorily in the
period since mid-1953? In particular, has it performed better than
in the period prior to mid-1953?
E. What is the outside limit on the amount of securities the Fed­
eral Reserve System can sell (or buy) per period of time without “dis­
organizing” the market for Treasury securities? On what factors
does this outside limit depend? Has this outside limit increased,
decreased, or remained constant over the last few years?
F. Has the “bills only” policy of the Federal Reserve System
strengthened the market for Treasury securities in any way? If so,
how? In particular, has this policy had the effect of reducing or of
increasing the amount of speculative activity in this market? Wbv9
G. Would it be desirable to extend the Federal Reserve System’s
control over margin requirements to cover borrowing for the purpose
of buying Treasury securities? Would this significantly reduce specu­
lative activity in Treasury securities?
Would a reduction in speculative activity in Treasury securities be
helpful from the point of view of conducting monetary policy and debt
management in the interest of economic stability? For example, has
such speculation actually hindered monetary policy, or counter­
cyclical debt management policy, in the period since the accord?






QUESTIONS FOR DEALERS IN TREASURY SECURITIES
I. D E A L E R

F U N C T IO N S A N D P R A C T IC E S

A. What functions do dealers in Treasury securities serve?
B. Do dealers in Government securities have an obligation to
stabilize securities prices in the very short run?
C. How do your inventories of Government securities (long-, inter­
mediate-, and short-term) change when interest rates change? For
example, when interest rates increase, do you increase your holdings
of long-term securities, or decrease them, or perhaps even take a short
position? Under what circumstances might one or the other of these
reactions occur?
D. What factors other than interest rates influence the level of
and changes in your inventories of Government securities?
E. Have your inventories (as measured by, say, monthly or quar­
terly averages) increased perceptibly in the period since mid-1953?
On the average, are they larger now than they were in 1953-54? or
than they were before 1953? or before the accord?
F. In financing your operations, to what extent do you rely on—
(1) Your own capital?
(2) Borrowing from New York City banks?
(3) Borrowing from banks outside New York City?
(4) Borrowing from State and local governments?
(5) Borrowing from nonbank financial intermediaries?
(6) Borrowing from nonfinancial corporations?
(7) Borrowing from the Federal Reserve System?
(8) Borrowing from other sources?
Has the relative importance of these sources changed in recent
years? If so, how? Does the relative importance of these sources
change in a systematic way as credit conditions change?
Do you experience difficulties in raising sufficient funds to finance
your positions? If so, what changes in financing arrangements
might improve the situation?
Do the present arrangements give a competitive advantage to
bank dealers?
G. Have your operations in Government securities changed as a
result of the introduction of the “bills only” policy? If so, how? In
particular, has this policy strengthened the dealer function of your
firm relative to the broker function?
H. In what way would your operations be affected if the Federal
Reserve System were to deal in long-term Government securities?
Would such operations create a more serious problem for dealers than
Treasury debt operations in the long-term market?
II.

TREASU RY

DEBT M ANAGEM ENT

A.
Can the Treasury, without disrupting the bond market and
without the support from the Federal Reserve, continue to obtain



9

10

QUESTIONS ON MONETARY POLICY AND DEBT MANAGEMENT

additional funds by borrowing at short term through raising short-term
interest rates?
B. Is the market for Treasury issues largely limited to current cash
flows, or do Treasury offering terms sometimes induce a readjustment
of existing portfolios to accommodate the new issues? Why?
If the market for new Treasury issues is largely limited to current
cash flows, to what extent are these flows earmarked for particular
maturity length: and for particular degrees of risk? How is such
earmarking to be accounted for?
C. Would it be possible to reduce the Treasury’s debt management
problem in some measure by making greater use of the auction tech­
nique in connection with the issuance of intermediate- and long-term
securities, and/or by issuing such securities more frequently, more
regularly, and in smaller amounts?
D. Might the auction technique, assuming it is feasible, make it
possible for the Treasury to increase the average maturity of the
public debt during periods of inflationary pressure without impeding
the Federal Reserve’s ability to apply a restrictive monetary policy?
E. Would greater use of the auction technique in the marketing of
intermediate- and long-term Treasury issues affect the stability of
the market for Treasury securities in any appreciable way? Would
it have any impact, in the longer run, on the behavior of interest
rates?
F. Are there any other possible innovations in the area of debt
management which might make ;t easier for the Treasury to issue
securities appropriate to economic conditions (e.g., long-term issues
during periods of inflationary pressure), in connection with either
refundings or new money operations?
I I I . T H E C H A R A C T E R A N D P E R F O R M A N C E OF T H E G O V E R N M E N T
S E C U R IT IE S

M ARKET

A. Has the performance of the market for Treasury securities, as
measured by price volatility, been satisfactory in the period since
mid-1953? Has this performance been better than in the period
prior to mid-1953?
What criteria other than price volatility should be used in evaluating
market performance? According to these other criteria, has the
market for Treasury securities performed satisfactorily in the period
since mid-1953? In particular, has it performed better than in the
period prior to mid-1953?
B. What meaning do you attach to the phrase “ depth, breadth, and
resiliency” as applied to the Government securities market?
C. What meaning do you attach to the adjective “ disorderly”
when it is used to describe the market for Treasury securities?
D. Assuming a specific market price quotation to start with, what
magnitude of price change is necessary to effect a transaction in
Treasury securities of a given volume? Does the magnitude of the
required price change depend in any significant way upon—
(1) The type of security (e.g., long- or short-term) traded;
(2) The market conditions (e.g., credit ease or credit restraint)
prevailing;
(3) The initial or current price of the traded security; or
(4) The state of expectations in the market?



QUESTIONS ON MONETARY POLICY AND DEBT MANAGEMENT

11

E. What is the outside limit on the amount of securities the Federal
Reserve System can sell (or buy) per period of time without “disor­
ganizing” the market for Treasury securities? Upon what factors
does this limit depend? Has this limit increased, decreased, or re­
mained constant over the last few years?
F. Has the “bills only” policy of the Federal Reserve System
strengthened the market for Treasury securities in any way? Has
it increased the depth, breadth, and resiliency of the market as the
1952 report of the Ad Hoc Subcommittee on the Government Securi­
ties Market said it would? If so, how?
Has this policy had the effect of reducing or of increasing the amount
of speculative activity in this market? Why?
Would it be desirable to extend the Federal Reserve System’s con­
trol over margin requirements to cover borrowing for the purpose of
buying Treasury securities? Would this significantly reduce specula­
tive activity in Treasury securities?
Would a reduction in speculative activity in Treasury securities be
helpful from the point of view of conducting monetary policy and debt
management in the interest of economic stability? For example, has
such speculation actually hindered monetary policy, or the issuance of
long-term debt during boom periods, in the years since the accord?




o