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NEWS RELEASE

"The business expansion now 38 months old and on its way to
becoming one of the longest on record, is due in large part to the
new and bold program of managing the national debt adopted in January,
1961, when traditional remedies for meeting the recession were
faltering," Joseph W. Barr, Chairman of the Federal Deposit Insurance
Corp., said in a speech on "Debt Management -- The Record and Outlook"
Tuesday at the annual dinner of the Chicago District, Illinois Bankers
Association.
"Remarkable success of the program has dissipated most of the
misgivings in the financial community which greeted its adoption,"
Mr. Barr said. The FDIC Chairman at that time was Assistant to the
Secretary of the Treasury. As signposts of the progress of business
expansion generated by the program, Mr. Barr listed:
(1)
(2)
(3 )
(1+)
(5)
(6)
(7)

(8)

GNP - up 16 percent in constant dollars;
Wholesale price index - unchanged;
Industrial production - up 23 percent;
Personal income - up 17 percent;
Corporate profits - up
percent;
Average length of the public debt - increased 15 percent;
Ownership distribution of the public debt - improved
with relative proportion of the total held by banks
decreased by 11 percent;
Gold outflow - from $1,669 million in i960 to only
$391 million in 1963; only $15 million in the' last
quarter of the year.

Debt management, Mr. Barr emphasized, is "no 1dry-as-dust1
affair. If it is bungled, the economic strength of the country--at
home and abroad — can be seriously damaged."
Reviewing what the new Administration faced in 1961, Mr. Barr
said:
"Three problem areas clamored for attention. First, the debt
structure was sorely out of balance with a huge volume of short-term
maturities ever in need of refunding. Secondly, there was a persistent
deficit in the balance of payments. Finally, the economic climate of
the nation was such that the traditional remedies for the first two
problems led to contradictions and inconsistencies.

"A few figures reflect the magnitudes involved in the
management of a debt which was largely the heritage of World War II.
In 1961 more than $85 billion of the marketable debt was due to mature
in one year and behind this was another $58 billion moving down toward
this category. Long-term debt--maturities beyond 20 years--accounted




2
for only $11 billion, or
percent of the total. Moreover, the average
maturity of the marketable public debt had declined rather persistently
from 9 years and 5 months in June 19^7 to as little as 4 years and 2
months at the postwar low in i960, or by more than 50 percent.
"The first task was to cut down the size of the near-term
maturities and to restore balance in the entire debt structure. The
second major problem was our posture in the international balance of
payments. The payments deficit in i960 was $3*8 billion. In the
previous 3 years, the nation had run a total deficit of $10 billion in
its basic international accounts. Gold was leaving the country at a
rate of more than $300 million a month. The third problem area was
the economic climate of the nation in January 1961. Our economy was
in the grip of recession. We found ourselves, in short, with new
problems calling for new methods and policies.
"To meet this complex of difficulties there emerged a policy
framework which took account of both the domestic and the international
situation. Efforts were concentrated on encouraging and raising the
level of private investment as an essential stimulant to recovery and
basic economic growth.
"Close cooperation between the Federal Reserve System and
the Treasury maintained general monetary ease to assure an ample
supply of credit and attractive rates in the long-term capital market.
This was designed to promote business and mortgage borrowing. At the
same time, the short-term interest rate structure was shored up to
levels which would discourage the outflow of funds by removing the
attractiveness of competitive investment opportunities abroad— and yet
not put undue upward pressure on our own long-term interest rates.
"Meanwhile, reduction of the FHA ceiling rates on insured
mortgates, supported by FEMA mortgage purchases, eased mortgage credit
and stimulated home-building. The Small Business Administration made
its credit more widely available at lower cost. Advance refunding
techniques has been an effective brake on inflation. It has made it
possible to extend the maturity of the debt in sizable amounts and to
offset the increased volume of Treasury bills that had to be sold
for balance of payments reasons. Furthermore, so far as ownership of
the debt goes, the policy of non.inflationary finance has been pursued
vigorously. Commercial banks have not been called upon to monetize
the Federal debt."




NEWS RELEASE
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D. C.

20429

FOR RELEASE TO PRESS
WEDNESDAY A.M., APRIL 1, 1964




DEBT MANAGEMENT - THE RECORD AND THE OUTLOOK

Address of

JOSEPH W. BARR, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D. C.

at the

ANNUAL DINNER
of the

CHICAGO DISTRICT, ILLINOIS BANKERS ASSOCIATION
at the
Pick-Congress Hotel
Chicago, Illinois
Tuesday, March 31, 1964

Telephone: 393-8400
Br. 221

DEBT MANAGEMENT - THE RECORD AND THE OUTLOOK

On January 31, 1961, the day I was sworn in as Assistant

to the Secretary of the Treasury, problems of debt management facing

the country and facing those charged with the responsibilities of

Government were formidable indeed.

Three problem areas clamored for attention.

In the first

place, the debt structure was sorely out of balance with a huge

volume of short»term maturities ever in need of refunding.

Secondly,

there was a persistent deficit in the balance of payments.

Finally,

the economic climate of the nation was such that the traditional

remedies for the first two problems led to contradictions and

incons is tenc ie s.

A few figures will give you some idea of the magnitudes involved

in the management of a debt which was largely the heritage of World War II.




2

In 1961 more than $85 billion of the marketable debt was due to mature in

one year and behind this was another $58 billion moving down toward this

category.

Long“term debt°“maturities beyond 20 years“~accounted for

only $11 billion, or 4 percent of the total.

Moreover, the average maturity

of the marketable public debt had declined rather persistently from 9 years

and 5 months in June 1947 to as little as 4 years and 2 months at the

postwar low in I960, or by more than 50 percent.

The first task, of course, was to cut down the size of the

near°term maturities and to restore balance in the entire debt structure.

Too much short“term debt means a constant stream of sizable refundings.

Thus, the Treasury lacks the option to avoid financing when market

conditions are unfavorable.

Moreover, this refunding pressure can inhibit

the execution of monetary policies.

Only for short intervals would the

Federal Reserve be able to work out gradations of change, or shifts, in

monetary policy freely and independently without risking iindue disruption

of the markets and of the Treasury financing operations as well.




- 3 -

Of course, for very short periods it is possible to defer debt

extension, should this conflict with economic policy considerations.

But

this is like deferred maintenance on a railroad or on an industrial plant.

If the deferral is continued too long, the deterioration may virtually

preclude return to a sound debt structure.

This is one reason why the

debt managers have to seize every appropriate opportunity to extend

maturities.

And, I might add, this takes courage.

Sizable and vocal

elements in the community can always be depended upon to insist that any

time is the wrong time to lengthen the debt.

Quite apart from the structure of the public debt, the second

major problem facing the debt manager in 1961 was our posture in the

international balance of payments.

$3.8 billion.

The payments deficit in 1960 was

In the previous 3 years, the nation had run a total

deficit of $10 billion in its basic international accounts.

Gold was

leaving the country at a rate of more than $300 million a month.




- 4 -

Confidence was shaken abroad in our willingness and our ability to

maintain and defend the stability of the dollar.

Whatever debt management could do to remedy our balance of

payments deficit clearly needed to be done.

According to the

classical prescription, the therapy for such a balance of payments

deficit was simple enough: tighten money across the board with the

objective of shrinking domestic business activity.

But remember, this

prescription assumes business excesses as chiefly responsible for the

payments deficit.

Owing to the peculiar shape of our payments deficit problem

in early 1961, and at present, it has not been amenable to the

classical remedies, except at a cost to economic well being that is

wholly unwarranted.

This brings us to the third problem area— the

economic climate of the nation in January 1961.

the grip of recession.




Our economy was in

Almost 7 percent of the labor force was

5

unemployed.

Productive output was running $50 billion short of the

economy's potential.

in idleness.

Nearly one-fifth of manufacturing capacity lay

These conditions reflected not only the 1960 setback,

but also some carry-over from the incomplete recovery from the recession

of 1957-58.

In other words, the problem was not only how to recover

from one recession but how to recover from two.

Moreover, acceleration

of the economic growth rate would help to alleviate both our domestic

and foreign problems.

Application of classical remedies for the balance of payments

deficit in 1961, as today, would injure our domestic economy and would

be of very dubious value on the international front.

We found

ourselves, in short, with new problems calling for new methods and

policies.

I think we can justly take a great deal of satisfaction in

the ingenious techniques which have been devised and applied so

successfully to redress the balance of payments without harming domestic

business.




Now what was done and how have we fared?

In the circumstances

the debt manager had to weigh goals one at a time against each of the

others with due regard for possible conflicts.

The need to restore

balance in the structure of the public debt argued for issuing long-term

securities.

But such a policy carried the risk of raising long-term

interest rates.

This, in turn, could discourage businessmen from

borrowing for investment in productive facilities, an

combating a recession.

essential for

Furthermore, higher interest rates in the United

States were indicated as a corrective for the balance of payments problem.

Yet, the depressed condition of business domestically called for decided

credit /ease.

Reduced cost and increased availability of credit were needed

to stimulate confidence and encourage businesses to replenish their

inventories and to pour new resources into plant and equipment.

Then the

familiar multiplier and acceleration effects could be expected to inject

new life throughout the economy and reverse the prevailing downward trend.

To meet this complex of difficulties there emerged a policy

framework which took account of both the domestic and the international



7

situation.

Efforts were concentrated on encouraging and raising the level

of private investment as an essential stimulant to recovery and basic

economic growth.

Such investment in the longer run would increase the

productivity of American industry and its competitive position in world

markets.

Close cooperation between the Federal Reserve System and the

Treasury maintained general monetary ease to assure an ample supply of

credit and attractive rates in the long-term capital market.

designed to promote business and mortgage borrowing.

This was

At the same time,

the short-term interest rate structure was shored up to levels which would

discourage the outflow of funds by removing the attractiveness of

competitive investment opportunities abroad--and yet not put undue upward

pressure on our own long-term interest rates.

Meanwhile, reduction of the FHA ceiling rates on insured mortgages,

supported by FNMA mortgage purchases, eased mortgage credit and stimulated

home-building.

The Small Business Administration made its credit more

widely available at lower cost.



-

8

-

In the financial community, there were many who doubted the

efficacy of these multipurpose remedies.

As they saw it, any efforts to

compartmentalize the money market were doomed to failure.

Fortunately,

the remarkable success of the program has dissipated most of these

misgivings.

The business expansion which got underway in February 1961

is now 38 months old and oh its way to becoming one of the longest on

record.

Our progress since 1960 speaks for itself.




GNP - up 16 percent in constant dollars.

Wholesale price index - unchanged.

Industrial production - up 23 percent.

Personal income - up 17 percent.

Corporate profits - up 44 percent.

Average length of the public debt - increased 15 percent.

Ownership distribution of the public debt - improved
with the relative proportion of the total held by
banks decreased by 11 percent.

Gold outflow - from $1,669 million in 1960 to only
$391 million in 1963; only $15 million in the
last quarter of the year.

- 9 -

The policy of maintaining stability in long-term interest

rates while at the same time permitting short-term rates to rise--the

so-called twist mechanism--has been much more successful than appeared

likely at the outset.

While short-term rates (Treasury bills) have

risen approximately 50 percent since 1961, long-term rates and

corporate bond rates are today actually lower than they were in

February 1961.

This is particularly significant.

A builder, an

industrialist, anyone in the economy who wanted to borrow money finally

began to realize that he did not have to hedge or speculate on a merciless

money market.

Industrialists, municipalities, builders, and just plain

people did not need to play the market to get the best rate, because an

environment had been created which enabled a person in need of money

to borrow on fair and reasonable terms.

And how about the impact of management policies on our debt

structure and our goal of noninflationary finance?




Skillful use of the

10

advance refunding techniques has made it possible to extend the maturity

of the debt in sizable amounts and to offset the increased volume of

Treasury bills that had to be sold for balance of payments reasons.

Furthermore, so far as ownership of the debt goes, the policy of

noninflationary finance has been pursued vigorously.

Commercial banks

have not been called upon to monetize the Federal debt.

From the

year-end 1960 to 1963 the debt has risen about $20 billion, reflecting

budget deficits in a period of inadequate economic growth.

During

the same period, commercial bank holdings have risen only $2 billion.

This, it can be argued, is evidence of excessive conservatism.

After

all, savings deposits in commercial banks have grown at the rate of

about $10 billion annually.

This leads to just one more thought that I should like to

leave with you.

States.

It concerns investment in obligations of the United

Sound and sensible Federal debt management needs the support




11

-

and cooperation of the lending and investing institutions.

I am

appalled that many corporate treasurers and financial officers of

other institutions do not invest a reasonable portion of their funds

in United States bonds.

Ordinary prudence dictates the wisdom of such

commitments.

There is no safer investment than the obligations of the

United States Government.

These securities should not be forgotten

in an era which has seen a fair number of sophisticated lenders absorb

sizable losses because they paid too little attention to credit quality.

U. S. Government securities also have the virtue of being

easily marketable.

There is no question but that, even for the

long-dated obligations, Federal bonds in multimillion dollar blocks

can be sold on very short notice.

The superior marketability will be

appreciated by anyone who has ever tried to sell a comparable amount

of corporate bonds.




12

-

Generally, the owner of Federal bonds has protection for a

longer period against a call for payment prior to maturity than

do corporate bondholders.

The corporate bond investor is fortunate

if he has five years of protection against a call for payment.

Yet

there are U. S. Government securities outstanding that cannot be

called for twenty-three years.

To be sure corporates offer a higher

coupon but in recent months the spread between corporate and Treasury

bond yields, 4-3/8 percent or even 4-1/2 percent against 4-1/4 percent,

has been much too narrow to compensate for the greater vulnerability

owing to the call date feature.

Commercial banks, of course, have investment problems that

make it difficult for them to take full advantage of good buying

opportunities in the bond market.

They are always balancing the

alternatives for the employment of funds--loans versus investments.

Their investment record does not appear to be outstanding.




But banks

13

are primarily lending institutions and when loan demands are high,

bond prices go down as yields go up.

At such times, liquidation of

bonds often is the chief source of funds needed to accommodate

borrowing customers.

Banks thus face a general dilemma.

I do suggest

however, that many banks could manage their bond portfolios more

advantageously for themselves and for their stockholders by studying

the choices with greater care than heretofore.

President Johnson has directed me to keep in mind the history

of the Great Depression, and especially the years 1932-34.

this era only from what I have read.

I understand

But I do remember distinctly the

evening of Hay 28, 1962, the day of the largest stock market break in

recent history.

I sat in the office of the Secretary of the Treasury

that night while we pondered what we could or should do and what should

we say.

We decided that we could not do anything, that we should not

do anything, and that silence was the best statement.




In retrospect

14 -

I am convinced that we were right.

We did not and could not move to

protect investors in a disorderly stock market.

But the investors

in the obligations of the United States are in a different position.

They know that in this one sector of our financial system their

Government can and should act to correct or prevent a disorderly market.

Only holders of U. S. Governments are safeguarded by an assurance of

this nature;

no comparable securities are available in the world today.

To conclude, I would like to share with you a few personal
observations on my three years in the U. S. Treasury.
debt management to me is no "dry as dust" affair.

First of all,

If it is bungled,

the economic strength of the country— at home and abroad--can be
seriously damaged.

Secondly, the credit of the United States is no

petty partisan affair.

Douglas Dillon, a Republican, has served

Lyndon B. Johnson and John F. Kennedy faithfully and well for the past
three years and has established the record which I have attempted to
describe.

But Douglas Dillon and Bob Roosa built on a sturdy framework

of development and change that was bequeathed to us by Mr. Robert Anderson
and Mr. Julian Baird.




Thirdly, I am convinced that the pace of change

- 15 -

in the nation and in the world today forces all of us in Government and
all of you in the financial community to a constant appraisal of ways
and means to meet new situations.

And, finally, I am convinced that

the U. S. Treasury is no place for a lazy or a complacent man.
the credit of the United States is surely worth all the effort.




However,