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FEBRUARY 21, 1957
The importance of the proposal before you lies in the con¬
tribution it can make to the maintenance of the economic health and
progress of the country. Savings currently are inadequate to meet
the demands for funds sought by most sectors of the economy. All of
these demands could only be met at present by creation of new supplies
of money through the banking system.

That is the high road to inflation.

To the extent that United States savings bonds are made more attractive
to investors, more saving and less spending should be encouraged.


is clearly in the public interest.
Carrying charges on the public debt are of concern to all of

They will almost surely be increased unless more savings are drawn

into and held in these securities. Otherwise, the Treasury will be
obliged to go to the money markets for funds to replace these savings.
And the floating of marketable issues at this time can hardly be
accomplished at rates lower than those here proposed.
This move to increase the interest rate on Series E and H
savings bonds is designed to maintain the position of these securities
in our public debt structure and to maintain the traditional role of
the small saver who purchases these bonds through the payroll savings
plan. The savings bond program has been well established over a
20-year period.

Some $41 billion are now held in the E and H series.

This is an important and substantial part of our debt structure that
should be maintained.


Persistent net liquidation of savings bonds has recently
produced cash drains that have greatly complicated the task of
managing the Treasury's cash position. Any substantial further
reduction in savings bond holdings would add to the problems both
of debt management and monetary policy.
Yield increases from 3 to 3-14 per cent as proposed for
E and H bonds are needed if the investment returns available on
these issues are not to lag too far behind returns obtainable from
alternative uses of savings. Historically, savings bonds held for
extended periods have typically provided yields above those paid on
competitive forms of savings such as savings deposits and marketable
U. S. Government securities.
In 1956, however, the relationship between yields on
savings bonds and marketable U. S. Government securities was reversed.
Yields on other marketable debt also rose sharply. As a result, the
Treasury Department was confronted with the largest liquidation of
outstanding savings bond debt in the history of the U. S. savings
bond program, as well as with a decline in sales of new bonds.
In accordance with the general advance in interest yields
during 1955 and 1956, many banks raised the rates paid on savings
and other time deposits.

In recognition of this trend and the need

for additional savings at a time of inflationary pressure, the Board
of Governors of the Federal Reserve System and the Federal Deposit
Insurance Corporation at the end of 1956 raised the maximum permissible

-3rates that commercial "banks may pay on time deposits. Many banks
announced increases in their rates--some for the first time and others
on top of previous raises. Following this adjustment, rates paid by
some other savings institutions such as savings and loan associations,
which in most cases exceeded rates at commercial banks, also underwent
further advances.
As a result, the competitive pressure on the Treasury savings
bond program was greatly increased• Net redemptions rose still further.
Without some adjustment in the relative returns obtainable from savings
bonds as compared with other forms of investment, net liquidation of
savings bond debt is likely to continue at an accelerated pace, further
complicating the cash financing problems of the Treasury.
Normal experience with U. S. savings bonds indicates that
although such issues are demand obligations, in the aggregate out¬
standing savings bond debt tends to remain fairly stable as long as
interest returns are sufficiently favorable. This has been especially
true of smaller denomination E bonds. On the other hand, examination
of past data indicates that sales of Series J and K bonds and to a
lesser extent sales of large denomination E and H bonds have been more
sensitive to changes in flexible interest rates than has been true of
smaller denomination bond sales. Thus, the Treasury proposal to lower
the purchase limits on E and H bonds and to discontinue Series J and K
bonds would tend to reduce holdings by large investors and make for
greater stability in the over-all savings bond program.

- 4The proposed revision represents an adjustment of fixed
rates of return to advances that have already occurred in more flexible
interest rates. As such it would be unlikely to create expectations
of further general rate increases. General interest rate advances
develop when the borrowing demands of businesses, consumers, and
governments outrun the supply of savings. An increase in the over¬
all volume of savings would certainly lessen upward pressures on
interest rates.
With the adoption of the Treasury proposal, current
uncertainty over the revision of terms would be eliminated and the
declining trend in E and H bond sales so far this year should be