Representative WOLCOTT. We talk about these things so freely that I guess we do not respect your position in that field.

Secretary SNYDER. Unfortunately, as I said this morning, I just cannot detach myself from being Secretary of the Treasury, and as much as I would like to talk freely on my own sometimes, why

Representative PATMAN. That will be eminently satisfactory, Mr. Secretary. I have some questions along that same line, but I will withhold them as you suggest.

Secretary SNYDER. Thank you.

Representative WOLCOTT. Would you recommend, as the President has, that we give the Federal Reserve additional power to increase reserves, reserve requirements?

Secretary SNYDER. I believe that in answers 35 and 36 I addressed myself to that problem. I will be glad to call attention to that answer. It has already been submitted.

Representative WOLCOTT. The problem seems to be that the Federal Reserve Board at the present time has been unable to agree upon the amount of authority which they are going to ask us for. I wondered, when the President in the economic message asked for additional reserve authority, whether he and the Federal Reserve Board had come to some understanding in respect to the authority which they would ask for, how much they would ask for.

Secretary SNYDER. I am not in a position to answer that.

Representative WOLCOTT. Last year when we brought it up it was suggested that probably they would not have too much trouble in getting a little more authority to have some more reserves, and my memory is that we could not get the Board to agree on how much they should ask for, and so no action was taken.

Have there been any discussions in respect to the restoration of these gold reserves that I mentioned behind the deposit liabilities issued by the Federal Reserve?

Secretary SNYDER. That looks like an easy question to answer, but I would like to do it in writing. I say I would like to answer that one in writing. Unfortunately, Mr. Congressman, too many times when I have said that we have had, or have not had, discussions the remarks have been interpreted as meaning we have some plans. That is the reason why I am making that request.

Representative WOLCOTT. Well, we are all against inflation; are we

not?

Secretary SNYDER. We can agree on that.

Representative WOLCOTT. Now, speaking for myself, and I will not ask you for an answer to affirm my position, it seems to me that if we are against inflation, having created inflation legislatively in the 1930's, the Congress could stop the inflation if it did an about-face and restored the powers and authority and the standards and guides that were in existence in legislation in the 1930's before we changed them.

Secretary SNYDER. Well, I think we would have to measure it very carefully against conditions at that time and conditions today, and the problems facing us at both times before we could make a complete acceptance of the theory of reversal.

Representative WOLCOTT. Do you think that we have got to accept inflation as a matter of permanent governmental policy?

Secretary SNYDER. I certainly hope not. We had up until last June an over-all balanced budget situation for 5 years, as you know-in fact, receipts exceeded expenditures by nearly $8 billion in that period. Í would be very hopeful that we can return to a balanced-budget situation as quickly as possible.

Representative WOLCOTT. Thank you, Mr. Secretary. I think that is all I have, Mr. Chairman.

Representative PATMAN. Mr. Secretary, I would like to ask you a few questions. I have two written out here that I think I will read to you first.

About a year ago prices suddenly stopped advancing. Since then they have declined slightly, at least at wholesale. Some of the pricecontrol people and some of the monetary people have taken pretty complete credit for this. Others think that it was principally a natural reaction from the post-Korean buying spree. What do you think about it?

Secretary SNYDER. First, and most important in my mind, was a leveling off in consumer and business demand after the early rush to buy goods and stock large inventories after the outbreak of hostilities in Korea. Largely, this was the result of a rapid increase in the output. of consumer and other civilian goods before defense demands had created a shortage of materials-thereby easing the fear that there would be shortages such as prevailed in World War II. Coupled with this has been an array of measures designed to alleviate particular areas of inflationary pressures. We have had priorities and allocations of scarce and strategic materials; Government production loan guaranties and loans to increase production for national defense needs; selective restrictions on credit in areas such as consumer credit and realestate credit; the voluntary credit-restraint program; and price and wage controls-all of which have made an important contribution to the over-all problem of inflation control.

Representative PATMAN. You have said that you favored some flexibility in interest rates as an instrument for influencing inflationary and deflationary forces. Do you believe at the present level of interest rates on marketable securities that it is suited to present conditions? Will you distinguish in your answer between short-term and long-term rates?

Secretary SNYDER. The present situation is one in which we are experiencing a lull-inflationary and deflationary forces seem to be about in balance. In this situation, stability in interest rates seems appropriate in both the short- and long-term area.

Representative PATMAN. I asked you the next question in writing and you have submitted the answer. It was, Could you present a table for the record showing the change in interest rates since the end of 1949 and tell us briefly what it shows.

Secretary SNYDER. We would like to put the answer into the record, the answer that I have supplied.

Representative PATMAN. You gave me a letter on that, and without objection we will insert that in the record at this point. It is quite interesting.

(The document referred to follows:)

EFFECT OF CHANGES IN INTEREST RATES ON THE COST OF SERVICING THE PUBLIC

DEBT

GENERAL STATEMENT OF THE PROBLEM

Interest costs are affected by four elements: (1) Changes in the total amount of the debt; (2) the nature of the debt in which changes occur; (3) changes in composition of the debt resulting from refunding operations; and (4) changes in interest rates.

There are five different classes of debt which must be considered in dealing with interest costs: (1) Short-term marketable debt which currently is responsive to changes in interest rates (e. g., Treasury bills and certificates of indebtedness); (2) longer-term marketable debt which reflects changes in interest rates as the debt matures and is refunded; (3) nonmarketable debt which has been affected by changes in rates, such as Treasury savings notes; (4) nonmarketable debt, the rates on which have not yet been affected by changes in interest rates on other debt, such as United States Savings bonds; (5) special issues for trust accounts which are affected by the over-all average rate of interest, viz., the Old-Age and Survivors Insurance Trust Fund and the Unemployment Trust Fund; and (6) special issues which are not affected by changes in the average interest rate, such as the National Service Life Insurance Fund.

Increases or decreases in interest rates affect interest costs to the Treasury on different types of debt in different ways, and at different times. For instance, the interest costs on short-term marketable debt is more quickly affected by changes in interest rates than the interest cost on long-term marketable securities, the nonmarketable debt, and the special obligations which are issued to trust funds and Government investment accounts. Changes in interest rates in Treasury bills are reflected more currently since they are rolled over every 91 days, but even here there is some overlapping of the effects of interest rate changes as between fiscal years.

The amount of change in interest costs as a result of increased or decreased interest rates cannot be determined merely by comparing total interest payments in one fiscal year with that of another. One of the reasons for this is that the full effect of a change in the interest rate on actual expenditures is not reflected in expenditures until the fiscal year following the one in which the change in the rate has occurred. This is generally true in the case of securities which have a year or more to run. As an illustration, the interest on a 1-year certificate of indebtedness issued in August of one fiscal year would not be payable until August of the following year. The same sort of situation occurs with respect to securities, the interest on which is payable semiannually. For instance, a note or bond dated in the first half of a fiscal year would carry only one 6-month interest coupon payable in that fiscal year, and a bond or note issued in the second half of a fiscal year would not have any interest coupons payable during that fiscal year.

CHANGES IN INTEREST RATES

During the period from December 31, 1949, to February 29, 1952, the interest rates on 90-day Treasury bills fluctuated between 1,076 percent and 1,883 percent. The latest issue in December of 1949 was sold to yield 1.087 percent on an annual basis, as compared with a rate of 1.563 percent for the latest issue in February of 1952, an increase of 0.476 percent. If this increase in rate should be applied to the total amount of 91-day Treasury bills outstanding on February 29, 1952, the increase in the annual interest cost on this segment of the debt would be $74 million.'

The interest rate on an 112-month certificate of indebtedness dated March 1, 1952, was 1% percent, as compared with a 1-year rate of 1% percent in December of 1949, an increase of 34 percent. On the total amount of certificates of indebtedness outstanding on February 29, 1952 ($29 billion), this would result in an increase in the annual interest cost of $218 million.

On April 1, 1951, as part of the Treasury-Federal Reserve accord, the Treasury issued $13,574 million of 24 percent of nonmarketable bonds in exchange for an equal amount of 21⁄2 percent marketable bonds of 1967-72. An increase of 4 per

1 Does not include the tax anticipation bills.

cent in the interest rate on this amount of bonds would amount to $34 million on an annual basis. However, these bonds are exchangeable for 11⁄2 percent 5-year marketable notes. Therefore, the effect of these exchange operations on interest costs will vary from year to year and will be governed to a large extent by subsequent exchanges of the 24 percent nonmarketable bonds for the 12 percent marketable notes. The figures as of February 29, 1952, in connection with this exchange operation are as follows:

NOTE. On February 29, 1952, the Federal Reserve System owned $22,528,000,000 of Government securities, the annual interest on which amounts to $439,000,000. Since Federal Reserve banks return to the Treasury 90 percent of their net earnings, a considerable portion of their interest earnings comes back to the Treasury. The net earnings paid to the Treasury for the calendar year 1951 amounted to $255,000,000.

On March 1, 1952, the Treasury issued $922 million of 7-year taxable bonds carrying an interest coupon of 2% percent. In December of 1949, the market yield on a 7-year taxable bond was approximately 1% percent. An increase of seveneighths of 1 percent on $922 million of securities would involve an increased annual interest cost of $8 million.

Except for the above-mentioned bond the Treasury has not issued any marketable securities with maturities of over 5 years since December of 1949. The market yields, however, on the long-term restricted Treasury bonds of December 15, 1967-72 increased from 2.24 percent on December 31, 1949, to 2.72 percent on February 29, 1952, indicating that long-term financing in this area would have to be done at an increase of about one-half of 1 percent per annum. While the rate increases in the long-term area have not yet been reflected in Treasury interest payments, unless interest rates decline in the meantime the effects will be felt when maturing issues are refunded and in any long-term financing which may be conducted in the present emergency.

Increases in interest rates appear to have affected the sale and redemption of Treasury savings notes, which are used to a large extent by corporations and others for the purpose of accumulating tax reserves. If these securities are to be kept attractive for investors, the interest return must be kept in line generally with short-term market rates. Consequently, the interest rate on savings notes must be responsive to changes in market yields, although there may be a time lag before all outstanding savings notes reflect such changes in yields.

The 3-year rate on Treasury savings notes was increased on May 15, 1951, from 1.40 percent per annum to 1.88 percent. This increased rate on savings notes has not yet been fully reflected in interest payments. Of $8,044 million of these notes outstanding on February 29, 1952, $2,039 million represents the older, lower rate notes. The average interest rate on the notes outstanding is currently 1.758 percent compared with 1.360 percent on December 31, 1949, an increase of .398 percent. This represents an increase of $32 million in the annual interest charge on savings notes, based upon the present amount outstanding.

There are two other large areas of the public debt where material changes in interest rates have not taken place. These are (a) the United States savings bonds, and (b) the special issues to trust funds (e. g. Old-Age Survivors Trust Fund and State Unemployment Trust Fund).

Sales of United States Savings bonds have held up remarkably well, particutarly among the smaller savers. The amount of outstanding Series E bonds (including interest accruals) on February 29, 1952, was $34,903 million, as compared with $33,754 million on December 31, 1949. There are now approximately 7 million persons buying savings bonds regularly on payroll savings plans as compared with 42 million a couple of years ago. The number of $25, $50, and $100 denominations sold was $34,900,000 in the first 7 months of the fiscal year 1950 and about the same number in the comparable period of the fiscal year 1951.

Sales of these denominations increased to $40,500,000 in the first 7 months of the fiscal year 1952.

Present law limits the interest rate on such bonds to 3 percent per annum, compounded semiannually. Series E bonds now yield 2.9 percent, compounded semiannually, if held to 10-year maturity, so there is little leeway for an increase in the rate of interest which can be paid on these bonds under existing law. Series F and G bonds yield 2.53 percent and 21⁄2 percent, respectively, if held to 12-year maturity.

There is another large segment of public debt on which the impact of higher interest rates has been only partially reflected in Treasury interest payments. They are the special obligations issued to trust funds. There are over $36 billion of such special obligations outstanding. The interest rates on obligations issued to two of these trust funds (i. e., Old-Age Survivors Trust Fund and Unemployment Trust Fund, amounting to over $20 billion) are, by law, based upon the average interest rate on the total outstanding public debt, except when the average rate is not a multiple of % of 1 percent, the interest rate on the special securities is fixed at the next lower multiple of % percent. At the present time $20,775,000,000 of special obligations are held for account of the Old-Age and Unemployment Trust Funds, on which the average interest rate is 2.135 percent as compared with $16,399,000,000 of special issues held for such funds in December of 1949, at an average rate of 2% percent. However, it should be pointed out that although the rate on special obligations currently being issued to these trust funds is 24 percent, over $19 billion of the special securities now held by the funds were issued when the average rate on the public debt was somewhat lower, and bear a rate of 2% percent. At the end of this fiscal year all of the special securities held will have to be reissued on the basis of the average rate on the public debt at that time, which probably will result in a 24 rate on all of the Old-Age and Unemployment Trust Fund obligations. An increase of % of 1 percent on the special securities held for these funds would increase the annual interest charge by $26 million. Thus, in considering the additional cost of servicing the public debt as a result of increases in interest rates, care must be exercised in appraising the long-run effects not only on the marketable debt as it is refunded, but also on other categories.

AVERAGE INTEREST RATES

The amount of outstanding public debt, by classes and issues, and the rates of interest paid on the different issues, are published in the Daily Statement of the United States Treasury, as of the last day of each month. Copies of such statements as of December 31, 1949, and February 29, 1952, are attached. The average rates as of December 31, 1949, and February 29, 1952, are set forth on the following page:

While the foregoing figures are of interest as an indication of the changes in average rates borne by interest-bearing securities outstanding now as compared with December 31, 1949, they do not reveal the ultimate effect of the changes on total costs to the Treasury.

LONG-TERM PROJECTION OF INTEREST COSTS

As has previously been mentioned, it will take some time before the higher rates are infiltrated throughout the different segments of the public debt. Not