APPENDIX D

1. EXCERPTS FROM AN ADDRESS BY SECRETARY SNYDER BEFORE A LUNCHEON MEETING OF THE NEW YORK BOARD OF TRADE, JANUARY 18, 1951

FINANCIAL MOBILIZATION

Without question a most effective over-all fiscal measure for avoiding the evils of deficit financing, and thereby combating an inflationary spiral in prices is a revenue system which enables the Government to pay its current bills out of current income. No one welcomes heavy taxes. But in a time of unprecedented national danger like the present, I am certain that all groups of our population will soon realize that very much higher taxes-for themselves, as well as for others are a necessary defense measure.

While adequate revenues are an essential safeguard against the development of inflationary tendencies, they cannot do the job alone. Measures for allocating essential materials have been adopted in order to assure priority for our military needs without increasing the strain on the price structure. Selective credit controls such as those embodied in the Defense Production Act passed by the Congress last July are also of definite help. Other measures of demonstrated effectiveness in curbing inflationary tendencies, such as price and wage controls, are under consideration and will assuredly be adopted soon.

You will note that I have not included the use of fractional increases in interest rates on Government securities as one of the measures of effectively controlling inflation. The Treasury is convinced that there is no tangible evidence that a policy of credit rationing by means of small increases in the interest rates on Government borrowed funds has had a real or genuine effect in cutting down the volume of private borrowing and in retarding inflationary pressures. The delusion that fractional changes in interest rates can be effective in fighting inflation must be dispelled from our minds.

In the absence of new legislation, the Federal deficit will amount to $16.5 billion in the fiscal year 1952.

This deficit is a result largely of our defense requirements. In nondefense spending, as the President has noted, the only major new public works projects included in the budget are those directly necessary to the defense effort. Construction of many public-works projects now under way has been substantially curtailed. Many other activities have been abbreviated.

The revenue requirements which the defense situation demands need no comment. These requirements can be met without damage to the economy if our citizens have mutual willingness to make the necessary sacrifices.

Along with adequate revenues and specific controls required for curbing price and wage rises, there is a weapon of great importance available to us for keeping inflationary forces under control. That is a debt-management program which is directed toward placing the largest possible proportion of Federal securities in the hands of nonbank investors-individuals, insurance companies, mutual savings banks, and other investors outside the banking system-and reducing the proportion of Federal securities held by commercial banks and Federal Reserve banks. This program is a powerful weapon in combating inflation. There seems to be a lack of sufficient public knowledge or understanding of what the Treasury has achieved in this area during the postwar period. It should be pointed out, therefore, that as a result of specific Treasury debt management policies, holdings of Government securities by private nonbank investors have increased substantially since the end of the war, and have reached an all-time peak during the last half of the calendar year 1950. This activity has been accompanied by a decline in the holdings of the commercial banking system, which reached new postwar lows during the last half of 1950. Three years ago the public debt was the same as it is now. But the Government security holdings of the commercial banking system have dropped nearly $10 billion; and approximately $4 billion of this reduction took place during 1950.

The importance of this anti-inflationary accomplishment cannot be overestimated. This reduction in the money supply of the country holds particular significance at the present time when it is vitally important to the well-being of the economy that the inflationary potential of commercial bank assets be kept at a minimum.

There are two other important matters relating to debt-management policy which hold particular interest at the present time and which have been given

extensive consideration in the financial community and elsewhere in recent months. Te first is the place of savings bonds in the Government financing picture, and the actions that will be taken to refund maturing "E" bonds. The second is the rate of interest that the Treasury is going to pay on long-term Government bonds in refunding and new borrowing programs. I want to take up each of these two questions in turn.

A moment ago, I stated that an important anti-inflationary action could be accomplished by placing the largest possible proportion of Federal securities in the hands of nonbank investors. As part of the Treasury Department's endeavor toward this end, the savings-bond program has been of outstanding value. It has been both dramatic and effective. It has been dramatic because it is sustained on practically a volunteer service basis. It has been effective because today, the total of outstanding savings bonds represents approximately 25 percent of the entire Federal debt.

It is really inspiring to know that there are about $10 billion more savings bords outstanding today than there were at the end of World War II financing. The tremendous selling program involved in achieving this remarkable record is due in the main part to the volunteer efforts of individuals, business groups, and all organizations who have contributed time, money, and ingenuity to the promotion and sale of savings bonds.

There are only about 500 paid employees in the Savings Bond Division of the Treasury. These employees plan and coordinate the program. The real volume of the work, however, is done through the generous efforts of those volunteers who have sold savings bonds to over 85,000,000 purchasers.

Of the $58 billion total of outstanding savings bonds, nearly $35 billion is in "E" bonds. This is a noteworthy accomplishment-for no one would have been rash enough to predict at the end of World War II hostilities that 5 years later there would be a $4 billion increase in the total of outstanding "E" bonds. Most of us were sure in 1945 that there would be a heavy cashing of savings bonds as soon as war scarcities and restrictions were over. On the contrary, however, the "E" bond total has gone up every year because of the organized promotion by volunteers in bringing the merits of the savings-bond investment to the attention of the public. As a matter of fact, in the calendar year just ended, the volume of "E" bonds outstanding rose by three-quarters of a billion dollars, notwithstanding the fact that there were increases in redemptions as a result of the scare buying iramediately following the outbreak of the Korean crisis. It is interesting to observe in this connection that the redemption of "E" bonds-in relation to the amount outstanding-was less percentagewise than other comparable forms of savings. So it becomes readily apparent that the savings bond is, in fact, a very popular form of savings.

It was this last fact that led to the conclusion on our part, after consulting with many individuals and business groups, that the Treasury should continue the savings-bond program after World War II as a major effort to encourage the promotion of thrift. It is this same conclusion that leads us to announce that the Treasury will continue to offer the "E" bond, in its present form, to the public as a Defense bond during the mobilization period. The aim now is not only to promote thrift, but to act as an anti-inflationary force and to help further distribution of the ownership of the public debt.

As you know, beginning in May of this year, a portion of the savings bonds bought during the war years will mature. While some of the holders of these bonds may desire to cash them upon maturity, it is our belief that the majority will desire to continue their investment in United States savings bonds. Therefore, the Treasury is adopting the following plan for handling the maturing bonds. The holder may have his choice of (1) accepting cash if he so desires; (2) continuing to hold the present bond with an automatic interest-bearing extension; and (3) exchange his bond for a current income savings bond of series G.

Under option 2, the bond would be automatically extended, bearing interest at the rate of 21⁄2 percent for the first 71⁄2 years and interest at a rate sufficient thereafter so that the aggregate return for the 10-year extension period will be 2.9 percent compounded. The term of the extension would be limited to 10 years after maturity. The existing option of paying taxes on interest on series E bonds Currently or at maturity would be retained. Necessary congressional legislation to authorize this option will be requested immediately. Once the plan is placed in effect, it will apply to all outstanding "E" bonds as they mature, and will apply by right of contract to all new series E savings bonds that are issued.

Now let us go on to the subject of interest rates. It is my view that a 2percent rate of interest on long-term Treasury bonds is a fair and equitable rateto our Government which is borrowing the money, to the purchaser of Government bonds who is lending the money, and to the taxpayer who has to pay the interest on the money borrowed.

The 2 percent rate of interest on long-term Government securities is an integral part of the financial structure of our country. During the past 10 yearsa period in which we fought our most costly war and made a most extensive reconversion to peacetime activities-the 2% percent rate has become a most important influencing factor in financial policy in the country. It dominates the bond markets-Government, corporate, and municipal. Moreover, it dominates the operations of financial institutions. Most of these have already adjusted themselves to the 2% percent rate-and after so doing, have become more prosperous than ever before.

Most life-insurance companies, for example, have changed the guaranteed interest provisions of their new policies during the past decade to conform with the 21⁄2 percent rate, so that today about 85 percent of the new life-insurance premiums received by insurance companies are on policies written at interest rates of 21⁄2 percent or less. Mutual savings banks also have tied their current interest rate on funds of depositors to the Government rate.

Any increase in the 221⁄2 percent rate would, I am firmly convinced, seriously upset the existing security markets-Government, corporate, and municipal.

We cannot allow this to happen in a time of impending crisis, with the heavy mobilization program to finance. We cannot afford the questionable luxury of tinkering with a market as delicately balanced as the Government security market. Now is no time for experimentation.

We have not hesitated to draft our youths for service on the battle front, regardless of the personal sacrifice that might be entailed. Neither can we hesitate to marshal the financial resources of this country to the support of the mobilization program on a basis that might, in some instances, require a degree of profit sacrifices.

In the firm belief, after long consideration, that the 2% percent long-term rate is fair and equitable to the investor, and that market stability is essential, the Treasury Department has concluded, after a joint conference with President Truman and Chairman McCabe of the Federal Reserve Board, that the refunding and new money issues will be financed within the pattern of that rate.

When I came to the Treasury in June 1946, the war had been over less than a year, and war financing had only recently been completed. I felt at that time that stability in the Government bond market during the transition period was of vital importance. As the economy became more stabilized, the Treasury used more flexibility in its debt management program by allowing short-term rates to increase gradually.

Later, beginning with the crisis in Korea, however, the considerations calling for stability in the Government-bond market became tremendously important. The credit of the United States Government has become the keystone upon which rests the economic structure of the world. Stability in our Government securities is essential.

I do not think that we can exaggerate when we emphasize these matters. I think they are basic to our national survival.

2. LETTER FROM THE GENERAL COUNSEL OF THE TREASURY

Mr. GROVER W. ENSLEY,

NOVEMBER 22, 1950.

Acting Staff Director, Joint Committee on the Economic Report,
United States Senate, Washington, D. C.

DEAR MR. ENSLEY: This is in reply to your request for Treasury comments and suggestions on the first draft of the study on Monetary Policy and Economic Mobilization, prepared for the Joint Committee on the Economic Report by the committee staff. The study, we note, was prepared in response to Senator O'Mahoney's request that the staff assemble "basic facts with respect to recent changes in short-term interest rates and their effects upon business borrowing, commercial credit, cost of Government borrowing, debt management, and inflation."

The Treasury is glad to have the opportunity to review and comment upon this study and I am transmitting to you for your consideration certain basic facts

which either are omitted from your study or which, in our opinion, have not been given sufficient weight. We realize that some of the facts have been omitted because they have not been available to you.

First, it is of utmost importance-and we feel should be brought out more strongly that the actions of the Treasury and the Federal Reserve System were undertaken at a time when the Nation was in the midst of a serious international

crisis.

Second, actions by the Treasury and the Federal Reserve cannot ignore the tremendous changes in the financial structure of the country which have been brought about by the increase in magnitude and relative importance of the public debt as a result of financing World War II. At the end of the fiscal year 1940, the public debt amounted to less than $50 billion and comprised less than onefourth of the total debt of the country-public and private. At the present time the public debt amounts to over $250 billion and comprises approximately onehalf of the total debt of the country. The public debt is the predominant factor in the financial structure of our Nation at the present time. It constitutes a large portion of the assets of all of the major investor classes of the country, and operations affecting the debt have repercussions which are felt throughout every sector of the economy. The use of "traditional” monetary weapons in the "traditional" manner has to be evaluated in the light of the changed economic and financial environment.

Third, Secretary Snyder advised the Open Market Committee on June 26 of his firm conviction that everything possible should be done to maintain a basically strong position in the Government-bond market during the period of international disturbance; the Secretary's position was developed further in a letter to Chairman McCabe, dated July 17, a copy of which is enclosed. The position taken by Secretary Snyder does not mean that he is an advocate of inflexible interest rates. He has, in the past, recognized the desirability of flexibility in interest rate policies; and, as you know, short-term interest rates on Government securities have risen considerably since mid-1947. Before the August 18 financing announcement, the rate on the longest Treasury bill, for example, had risen from three-eighths of 1 percent to 1.18 percent (bid); while the rate on securities having maturities of approximately 1 year had risen from seven-eighths of 1 percent to 1.24 percent. But in the situation which has existed since Korea, the Secretary felt that stability was definitely called for at the present time.

Fourth, the August 18 offering of 14 percent, 13-month notes by the Secretary of the Treasury was made with the approval of the President of the United States. This is in accordance with the provisions of the laws of the United States-which require that the President approve each issue of United States Government securities maturing in more than 1 year before the offering of such securities can lawfully be made to the public.

Fifth, throughout the study it is implied that Secretary Snyder has been less concerned with controlling inflationary pressures than with the cost to the Treasury of a rise in interest rates. Secretary Snyder was among the first to recognize the inflationary implications of the Korean crisis and has been in the forefront of the efforts to control inflationary pressures. As early as July 5, in testimony before the Senate Finance Committee, he warned Congress that if we were confronted with a substantial increase in defense expenditures it would be necessary to gear changes in the revenue laws to the needs of our economy. It was at Secretary Snyder's request that the Senate, on July 12, decided to shelve the tax-reduction bill which had been under consideration, in order to make way for the consideration of new tax measures which would bring in the increased revenues made necessary by the Korean situation. The Defense Production Act of 1950, which incorporates the President's anti-inflation program, has had the wholehearted support of the Secretary. The implication, therefore, in the study that Secretary Sayder was more concerned about the cost to the Treasury of a rise in interest rates than with controlling inflationary pressures, when he made the August 18 financing announcement, does not square with the facts. On the other hand, the Secretary is firmly opposed to the use of ineffectual methods of inflation control-such as small fractional increases in short-term interest rates-which hold the possibility of impairing confidence in the credit of the United States Government.

Sixth, the financial policies of the Government have provided a successful record of debt management, the importance of which must not be overlooked. Ownership figures indicate that, during the calendar year 1950, private nonbank investors will add about $5,000,000,000 to their holdings of Government securities primarily through purchases of short-term marketable securities and savings notes by corporations. Private nonbank holdings of Government securities at the

end of the year will reach an all-time peak. On the other hand, the Government security holdings of the commercial banking system will decline approximately $5,000,000,000 during the calendar year 1950, reaching a new postwar low. This followed on previous declines in bank holdings of Government securities in recent years. For the 3-year period ending December 31, 1950, the decline will be nearly $11,000,000,000. This anti-inflationary movement in the ownership of the public debt has not come about accidentally. It has been one of the important objectives of the debt-management policy of the Treasury. It has come about because the Treasury has studied the investment position of the various investor classes carefully; and has offered securities designed to meet the needs of the economy.

As you know, the Secretary of the Treasury attends the meetings of the National Security Council. He has, therefore, an intimate knowledge of the defense situation and what it might involve in the way of Treasury financing which is not available to the Federal Reserve. With the possibilities of the serious international situation in mind, Secretary Snyder felt that it was of paramount importance that no uneasiness about the management of the public debt should occur; and that actions which would unsettle the Government security market when the debt amounts to over $250,000,000,000, and when its successful management is no simple matter, might have serious results in our successful prosecution of the defense effort. Secretary Snyder made this clear in his August 21 statement when he said: * * Developments in the Government-bond market have repercussions which fan out through the entire economy. Both the present size and the wide distribution of the Federal debt are unprecedented in comparison with what faced us at other periods of international crisis. We have an obligation of the highest order not only to maintain the finances of the Government in the soundest possible condition but also to fulfill our responsibilities to the millions of Federal security holders throughout the Nation. A stable and confident situation in the market for Federal securities is our first line of defense on the financial front."

The Federal Reserve ignored the Secretary's request for a stable Government security market. Charts 1, 2, and 3 show how rapidly the operations of the Federal Reserve System ran up the yields (ran down the prices) of Government securities, commencing on August 21, and the unsettled state of the market since that time.

It seems to us that, in the interests of keeping the facts straight, the study should note that the September-October refunding issues were approved by the President and announced by the Secretary on Friday, August 18, before the Board of Governors of the Federal Reserve System made its announcement. Also, the study should note that the issues which the Secretary offered were priced in line with the market on the day of the announcement, as shown in chart 4. Chart 1-previously referred to-shows that it was not until Monday, August 21, after the Open Market Committee engaged in open-market operations designed to raise the yields on short-term Government securities, that issues of this type went to a discount.

Finally, in connection with the material in the study analyzing loans of weekly reporting member banks, we think you will find chart 5, "Trend of Bank Loans," helpful in clarifying the picture that is presented in the study. It is, for example, of some significance that the upward trend of bank loans has continued; and that, in fact, the increase in commercial, industrial, and agricultural loans of weekly reporting member banks since August 18 has been three times as large as in the comparable period last year. In this connection, there is also enclosed a table which compares bank loans outstanding and the 1-year market rate Government securities from June 28, 1950, to the latest date available.

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The above facts will, we believe, add to the factual presentation requested by Senator O'Mahoney. I am also transmitting to you with this letter some detailed comments that we have prepared on the study, which you may wish to consider before presenting the study to the joint committee.

Very truly yours,

THOMAS J. LYNCH,
General Counsel.