HEAVY MATURITIES IN THE NEAR FUTURE

When the public debt is of such a size that its long shadow is cast over all credit arrangements, so that its management becomes a major factor in the maintenance of economic stability, its due dates as well as ownership and cost assume utmost importance. Appendix A, table 3, summarizes the maturity schedule facing the United States Government on its interest-bearing public marketable securities. A glance at the list of early maturities shows better than any data on interest rates or cost data why the Treasury is concerned about the maintenance of "a stable and confident situation in the market."

The Treasury faces the task of refunding 32.3 billion dollars of publicly held issues maturing in the calendar year 1951. This does not include 13 billion of 91-day Treasury bills that are ordinarily rolled over every 3 months. In addition, nearly 12 billion of bonds. with relatively high coupon rates become callable. Whether these are refunded at their earliest call date will, of course, depend upon market conditions at the time. If they are called, as now seems probable, the refunding task for 1951 will involve more than 44 billion dollars, nearly one-third of the total marketable debt exclusive of bills.

When and how much more the Treasury may have to raise by new borrowing is unknown. With defense expenditures increasing rapidly only a courageous tax policy can save the Treasury from the necessity of large new issues. Thus, in addition to the enormous refunding task in forthcoming months there is the probability that the Treasury may have to raise several billions in net new money.

In the face of the ever-present need to keep the credit of the Government on a solid foundation, the Treasury must strive for three objectives: (1) To place as large a part of the debt as practicable in nonbank hands, (2) to fund as much as possible into longer-term maturities, (3) to manage the debt at minimum cost to the Government.

The last point is so apparent that it often becomes the dominant consideration. Obviously, the cost of carrying the debt might be made even lower than it is today, by tipping the scale of maturities more and more toward lower-rate short-term bills and certificates. There is no one "right" apportionment of debt by maturities or between short- and long-term issues. In the past 3 or 4 years there has been a tendency toward increasing concentration of the marketable debt in the shorter maturities. As the first part of table 5 shows, the amount of marketable debt outstanding has been reduced 34 billion dollars since mid-1946 while the amount maturing in over 5 years declined by 31 billion. As may be seen from the second part of table 5. the proportion of marketable debt due or callable in under 3 years has increased from a midyear low of 38 percent in June 1947 to 52 percent in mid-1950. The average maturity of the marketable debt has dropped from about 7%1⁄2 years in June 1947 to slightly over 6 years at the present time. The present level, however, approximates the levels of 1943-44.

TABLE 5.-Marketable public debt outstanding by period to due or first call date, June 30, 1946-50

The sheer size of the debt is important. The inertia of such a mass of debt can hardly be ignored as a determinant of economic stabilization or mobilization. But, the burden of the national debt ought not only to be measured by the principal amount-now about 257 billion dollars but also by its annual carrying charge in relation to current income. Appendix A,.table 4, compares the actual annual expenditures for interest on the public debt with the national income. Since World War II, interest has been equivalent to some 2.5 percent of national income compared with an average of 1.3 percent during the 1930's. Though such an increase is considerable, it is always well to remember that the relative burden of a given debt may be cut not only (1) by paring the interest cost through debt retirement or otherwise, but, (2) even more effectively, by the growth of national income.

Another relationship throwing light upon the burden of the debt is the burden of taxes levied to meet the annual interest charge. Appendix A, table 4, shows also the portion of Federal budget receipts necessary to pay interest on the Federal outstanding debt. There are those who contend that the taxes and interest charges on an internally held debt are of little moment because they represent merely transfer payments. While it is true that a debt "owed to ourselves" is not to be measured as are the debts of individual debtors, one cannot regard lateral transfers of income from one group of the population to another to be without effect or significance. Taxes constitute eventually not only offsets but deterrents.

In postwar years about one-eighth of all Federal receipts have gone for the payment of interest. The percentage is, of course, greatly affected by the enormously increased expenditures for other governmental purposes. That is why it is no higher than and in most cases is well below that for any peacetime year since before World War I. Interest payments on the public debt for 1950 and 1951 of nearly $5,700,000,000 each year are approximately $1,000,000,000 higher than interest payments were in 1946. These increased interest charges

added to total Government expenditures are part of the total outlavs which ultimately taxpayers will have to meet. They occurred. in spite of a substantial reduction in the amount outstanding. During the fiscal year 1946, the Government debt reached a peak of $280,000,000,000, from which it has been reduced by nearly 10 percent, principally through the application of Treasury cash.

There are several explanations for the increased annual charge. The $1,000,000,000 increase in interest cost since the fiscal year 1946, when the debt was at its peak, is largely due to higher interest paid or accruing on savings bonds. Series E and F savings bonds earn little interest in the early part of their term. But as the maturity date approaches interest accumulates at an increasing rate. About $500,000,000 more interest was accrued on these issues in the fiscal year 1950 than in fiscal 1946. An increase in the outstanding amount of series G savings bonds during this period also accounted for a rise of $200,000,000 in interest cost, while interest on the growing amount of special issues held by Treasury investment funds accounted for an additional $300,000,000.

Interest paid on marketable Treasury bonds showed little change. Market short-term interest rates increased during this period, however, with the average computed rate on Treasury bills rising from 0.381 percent in 1946 to 1.187 percent in 1950, and on Treasury certificates rising from 0.875 percent to about 1.20 percent. These changes alone on amounts presently outstanding added about $160,000,000 to the gross annual cost which taxpayers must pay in support of the Government debt. The effect on the over-all interest cost of the marketable debt was partially offset by the retirement of high-coupon maturing issues and a reduction in the total amount of marketable securities outstanding.

COST OF A GIVEN RISE IN INTEREST RATES

Figures on the cost to the Treasury of a given rise in the interest rate on some particular type of security are not entirely easy to measure. In the first place, shifts taking place between types of issues outstanding may result in an actual decrease in the interest cost even though interest rates per unit were rising. Often these shifts arise from purely technical or legal limitations; the difference between a 13-month note and a 12-month certificate, for example, is less important economically than their segregation in statistics and reports suggests.

In addition to the computed average interest rates on each class of security, appendix A, table 5, shows the relative weight in the Government's annual interest bill of short-term issues, nonmarketable issues, and the special issues held by the Government trust funds.

About 15 percent of the annual interest charge on the interestbearing Federal debt is paid over to Government trust funds (appendix A, table 5, third section). Nearly one-third of the interest cost is attributable to the nonmarketable issues, chiefly series E bonds. Finally, chiefly because rates are low, only about 10 percent of the entire annual cost arises from the marketable securities issued for short terms-bills, certificates, and notes.

A further caution is necessary respecting the significance attached to a given rise in the rate of interest on Government securities as it

relates to the debt-carrying cost of the Government. A considerable part of all interest expenditures is recovered through income taxes paid by the recipients. One should, of course, not press the tax-recovery argument too far; the same sort of net-cost argument might be applied to most types of Government expenditures.

The cost of rising interest rates may be illustrated by examples particularly appropriate to the current inflationary situation. In the 12 months beginning December 1, 1950, the Treasury Department, as we have noted, will be called upon to refund maturing and callable issues aggregating nearly $60,000,000,000 of maturing issues. If money-market conditions should make it necessary to refund this staggering sum at rates one-eighth percent above rates on the maturing issues, the added interest cost would be $75,000,000 annually, allowing nothing for tax recovery as an offsetting item.

It may be suggested that if rates rise by one-eighth percent for refunding these early maturities a similar rise will undoubtedly have to be faced for subsequent maturities. The total marketable interestbearing debt is now about $155,000,000,000. One-eighth percent on this amount is approximately $200,000,000. After allowance for tax recovery the net amount will be substantially less. In making calculations based on such an assumption, however, it should be kept in mind that some of the debt has many years to run before refunding is necessary, that some of the issues already have relatively high coupon. rates, and that changes in short-term rates might occur without affecting rates of refunding into longer-term issues. Interest rates may show considerable fluctuations in the interim. By the time the refunding must be done rates may be lower again.

Important as added costs by way of interest burden may be, their significance can be seen in proper perspective only by considering other costs of Government and the effect of inflation on these costs. The Congress recently passed a supplemental national defense appropriation of $16,000,000,000. In connection with it, the Air Forces. pointed out to a House Armed Services subcommittee that a rise in costs of 7 to 8 percent more than anticipated had lessened Air Force purchasing power between April and September 1950 by the equivalent of 750 F-86 jet fighter planes. As a result the purchase of 4,400 new planes programed was expected to cost some $300,000,000 over the original estimates made just a few months previously. No wonder Senator Lyndon Johnson recently warned the Congress "rising prices are making our defense cost calculations empty, tentative guesses." No wonder the Senate Committee on Appropriations was "profoundly disturbed by the untimely increasing prices of commodities affecting national defense." The committee, in its report, went on to say that analysis of information filed with it by the Secretary of Defense "carries the startling information that inflation has cut the value of the dollars of the sums appropriated for defense since preKorea by approximately $3,000,000,000." Other authorities have pointed out that price rises resulted in substantially offsetting or eating up the increased taxes levied on individuals and corporations by the Revenue Act and the Excess Profits Tax Act of 1950.

In the months since April the purchasing power of the defense dollar has been cut inestimably. Direct price comparisons can only be made on relatively standard type items but the changes in the

price of representative items are suggestive. The increase in the price of crude rubber between April and December 1950 amounted to 210 percent; fuel oil, west coast, 112 percent; tires 38 percent; beach tractor, 6.4 percent; wire rope, 100 percent; cloth, 40 percent; and manufactured military communication equipment from 20 to as much as 240 percent on some items. A table showing military procurement price trends on selected raw materials and standard items prepared by the Office of the Secretary of Defense is included in appendix A, table 6. Costs to the Government-the largest purchaser of goods and services in the country-have thus risen as much as and in many cases more than costs to housekeepers and citizens.

Suppose by way of illustration that defense or general governmental costs advance as a result of price rises by $1,000,000,000 over what they would have been had the price rise not occurred. On the supplemental defense appropriation alone, a general rise of all prices averaging only 6% percent would mean loss of purchasing power of that magnitude.

This billion dollars, like every other dollar that the Government must pay in added costs, is effectively added to the Government debt either by the necessity for increased borrowing or by a diversion of money otherwise available for debt reduction. The added costs are thus frozen into the Government debt for all time. No matter what happens to interest rates the Government must pay interest on those extra dollars until the time when the debt can be repaid. The average rate being paid on the interest-bearing debt today is about 2.2 percent or $22,000,000 each year on each $1,000,000,000 of debt.

Rising prices and rising costs of Government add directly to the annual burden of interest on the debt. If one could be sure that moderate credit restriction would stop these rising costs, the resulting rise in interest rates on the debt would be a small or reasonable price to pay. Unfortunately one cannot be sure that it may help to keep prices from rising as much as they would have otherwise. There is, indeed, a responsible body of opinion in the financial and business. world contending that no moderate rise in interest rates will halt or retard inflation so long as Federal deficits continue.

RESTRAINING EFFECTS OF HIGHER SHORT-TERM RATES

While the increased cost to the Government resulting from a rise in the interest rate on the part of the debt may be calculated more or less precisely, the effectiveness of higher interest rates in dampening inflationary forces is unmeasurable and hidden. Thus, the case for a policy of monetary restraint is likely to suffer in discussion from having to depend on prediction and deduction for its justification. There are no statistical measures by which to answer conclusively such questions as: How effective can action be, such as that taken by the Reserve authorities last August? How is a change in the reserve status of member banks translated into a decrease in inflationary demand?

The policy proposed by the Reserve authorities was intended to tighten up bank reserves by raising their cost to member banks. The increased cost of reserves would result from the higher discount rate and from reduced Reserve System purchases of Government securities.