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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