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before the Institute of Investment Banking sponsored by Investment Bankers Assoc, of -America & Wharton Sc' ool, T . of P. J Phila., Pa. April 14. 1954 THE GOVERNMENT - DEBT MANAGEMENT AND INTEREST RATES by Karl R. Bopp I* II. Stable Economic Growth Fiscal Policy and Size of Debt A. Debt primarily result of 1. B. Wars 2. (Historical Chart Book p. 53) Depression Result of Congressional action C . Changes 1. Automatic (a) Receipts our tax system Calendar 1953 Direct: (Historical Chart Book p. 60 profits P* G.N.P.) 19 Total (b) on individuals on corporations social insur. 35 70 7 Expenditures Social Security Support programs 2. D. Discretionary Too soon and too fast? Compensatory fiscal policy 1. Idea 2. Limits Legislative process the calendar year Powerful but not too flexible 1. At any rate debt managers are confronted with Results of Congress and its own previous decisions (on maturities) - 2 III. Debt Management Total debt about $275 billion Non-market (includ. conv.) YOUR INTEREST IS IN Market able s 120 " $155 " Alternative Principles A. Lowest interest cost 1. Obviously don*t make any issue "too sweet" 2. But if this is BASIC objective a. b. 3. B. Pressure on monetary authority - pre accord Also tends to rising interest structure so issue shorts - end with basket of quicksilver Of course, it makes for ease of flotation Tailor issues to investor demand 1. Nice sounding title 2. "Investor demand" not absolute (Ownersnip Chart pp.32-33) depends on relative attractiveness of issues e.g. corporate purchases of bills 3. What it comes down to is other borrowers would get what they want and Treasury would get what is left i.e. short-terrain boom and long-terms in depression 4* C. Aggravate the business cycle Counter - cyclical 1. Intellectual appeal Vary liquidity to suit requirements of the economy 2. Some problems - need to predict economic future a. When do you issue long terns? (1) In prosperity! - But (a) Bisk of failure - other demands are then strong (b) (c) (2) Means when rates are high also late prosperity issues will go to premium Hard to explain to unsophisticated audience In depression? (a) No for fear of aggravating depression but funds are plentiful then - 3 - b. What about economic conditions When bonds mature? (1) c. D. Make callable - but not for nothing Illustrate with problem of savings bonds Balanced debt structure 1. ' Various meanings a. Chicago idea of only cash + consols b. Have funds flowing thru market in orderly way Regular maturities say quarterly E. IV, Debt management can make-.oaiylimited -contribution Monetary Policy and Interest Rates A. Alternative extremes 1. Pegged rates - lose control over supply and availability of money and reserves 2. A predetermined supply of money - lose control over cost or rates 3. Pegged market "Free?1market - part of it is market’s expectation of what the F.R.S. and Treasury will dot Flexible market B. Flexible interest rates 1. Principles a. Objective is not to achieve any given rate of interest or any given quantity of money b. Influence supply, availability and cost so that "the supply and flow of credit is neither so large as to induce destructive inflationary forces nor so small as to stifle our great and growing economy." (¥. McC. Martin, April 9* 1954, Pullman, Wash.) c. Open market operations Discounting Reserve Requirements ) ) availability - 4 2. Recent illustrations a. The year 1953 as a whole Directives to Executive Committee of F.O.M.C. "Transactions for the System open market account should be with a view... (1) March 4— 5 "to exercising restraint upon inflationary developments." (2) June 11 "to avoiding deflationary tendencies without encouraging a renewal of inflationary developments (which in the near future will require aggressive supplying of reserves to the market)" (3) September 2 . 4 "to avoiding deflationary tendencies." (. 4) December 15 "to promoting growth and stability in the economy by actively maintaining a con dition of ease in the money market." b. -The stoiy of the 3-1/4* s V. Government Policy, as a market factor Based on economic conditions Can’t predict until we can predict what conditions will be
