1940: National Debt

During 1940 the United States Government embarked upon a gigantic program of national defense. The financing of this program will have a profound effect upon the future status of the national debt. The 1940 session of Congress made appropriations of over $19,000,000,000, approximately $9,000,000,000 of which are to be applied to the national defense program. By the time this program is completed in 1945 or later, it is estimated that it will cost $25,000,000,000 or $30,000,000,000, a large part of which — perhaps $20,000,000,000 — will have to be financed by borrowings.

Extension of Debt Limit.

In the first revenue act of 1940, Congress extended the national debt limit by $4,000,000,000 for defense purposes, thus pushing it upward from $45,000,000,000 to $49,000,000,000. The Secretary of the Treasury has recently indicated that this limit should again be raised by the next Congress to about $65,000,000,000 which should be made applicable to general as well as defense financing, so as not to hamper the Treasury in meeting the defense and other requirements. He has also suggested that this increase in the debt limit might meet the requirements only until the end of June, 1942. The Secretary's proposal has already excited discussion in Congressional circles on the possibility of making drastic economies in the national budget so as to bring it into balance for the next fiscal year in all expenditure fields except that of emergency defense. Since the budget now provides for approximately $10,000,000,000 of expenditures outside of emergency defense and since existing taxes are not likely to bring in more than about $8,000,000,000 of revenue, it seems highly improbable that a balance can be attained by this method. Either new taxes must be levied, or borrowings must be continued as during the past decade to finance operating expenditures.

During the calendar year ended Nov. 30, 1940, $2,968,000,000 in round figures were added to the national debt, thus making a total gross debt of $44,272,776,325. Treasury operations during December will probably bring this total to approximately $45,500,000,000 by the beginning of 1941. The average interest rate on all government securities is a shade under that of last year, which was about 2.60 per cent. If the Treasury proposal to remove the tax exemption feature on treasury bonds is adopted in 1941, the rate of interest will undoubtedly be increased on future issues of securities. The annual interest charge on the debt, which passed the billion dollar mark less than two years ago, has now reached $1,100,000,000. An accelerated increase in this charge will result from the borrowings for defense purposes, thus adding greatly to the dead load of carrying the debt. The national debt per capita now stands at approximately $335 as compared with $129 on Dec. 31, 1930, when the post-war debt was at its lowest mark.

Treasury Financing.

During 1940, Treasury financing, in addition to the regular weekly sale of treasury bills, was carried out on March 15, June 15, July 22, Oct. 7, and Dec. 11. On March 15, $718,000,000 of five-year treasury notes bearing  of 1 per cent interest were issued in exchange for a like amount of treasury notes, maturing on June 15, 1940, and bearing 1 per cent interest. On June 15, $279,000,000 of treasury notes were issued for 3 years and 3 months at 1 per cent interest. These securities were exchanged for an equal amount of treasury bonds, issued on July 16, 1928 and maturing on June 15, 1940, bearing an interest rate of 3 per cent. On July 22, $681,000,000 of treasury bonds were issued at 2 per cent to run for 14 to 16 years. These bonds were entirely converted into cash to finance the government deficit, $50,000,000 of them being assigned directly to government investment accounts. The assignment of this $50,000,000 was intended to keep the government investment agencies from competing with private investors. This policy was first adopted in 1939 when $150,000,000 were so assigned. On Oct. 7, treasury bonds were again issued in the amount of $725,000,000 to run for 13 to 15 years at 2 per cent interest, said to be the longest 2 per cent bonds the government has ever sold. These bonds were exchanged for a like amount of five-year treasury notes falling due on Dec. 15 and bearing 1 per cent interest. In addition to refunding and other issues, scheduled for December, the Treasury offered on Dec. 11, $500,000,000 of five-year defense notes. The Secretary of the Treasury followed an unusual procedure in that he obtained the approval of a responsible Congressional committee for the issuance of these defense notes. The reason for this procedure was attributed to the fact that the notes were made fully taxable. The interest was fixed at  of 1 per cent, or the same rate as the five-year note issue of the previous March which carried the tax exemption clause. The defense notes were quickly taken up, in fact, oversubscribed, in spite of the low rate of interest. This was undoubtedly due to the easy money conditions prevailing in the banks of the country.

All interest-bearing obligations of the United States Treasury are issued under the Second Liberty Loan Act of Sept. 24, 1917, as amended. According to this Act all treasury bonds must carry tax exemption privileges, but fully taxable treasury notes may be issued if the Secretary of the Treasury deems it advisable. The December issue of defense notes is the first of this kind. It is now expected that future note issues by the Treasury will also be taxable. The next step will be to obtain legislation from Congress to make possible the issuance of fully taxable treasury bonds. In fact, the Secretary of the Treasury has already announced that he will seek such legislation at the next session, meeting in January. There is ample precedent among other nations for such a move. Fully taxable issues of securities are now being sold both by Great Britain and by Canada.

Tax exemption has not been an important question until recently. A quarter of a century ago tax exempt securities did not materially affect the government's revenue calculations. But income taxes are now higher and the national debt greatly increased, so that Treasury officials find it desirable to cut off tax exempt securities. An effort is also being made to convince the states and municipalities that they should follow suit with their own issues. If this were done, the Federal Government would be able to tax the interest on state and local issues as well as on its own, and the states could then tax the interest on Federal bonds. But the localities believe that they make a great saving in interest payments through the tax exemption feature, so that they are not likely voluntarily to accept such a program. A constitutional amendment would then be required, and it might take years to get it adopted. Even so, it would be a long time before all or most of the tax exempt securities now outstanding could be replaced by taxable ones.

Starting early in November, the Treasury's weekly issuance of $100,000,000 of discount bills were designated 'national defense series' to apply against the $4,000,000,000 limit authorized strictly for defense financing. Meanwhile the $100,000,000 of regular bills maturing each week were allowed to 'run off' until the end of the year, thereby reducing by about $900,000,000 the debt under the $45,000,000,000 ceiling. This procedure is intended to serve merely as a stop-gap for Treasury general financing until the debt limit can be raised at the next session of Congress.

Contingent Debt.

During 1940, the Treasury marketed government guarantee securities for the Commodity Credit Corporation and the U.S. Housing Authority to the amount of $301,000,000. On Aug. 1, $289,000,000 of notes were sold for the Commodity Credit Corporation to run 2 years and 9 months at  of 1 per cent interest. On Nov. 1, $112,000,000 of one-year notes were sold for the U. S. Housing Authority at interest of  of 1 per cent. These notes brought the combined government guaranteed securities of corporations and credit agencies up to $5,847,000,000. At the same time the Government holds a proprietary interest, largely in the form of capital stock, in these corporations and agencies amounting to $3,558,000,000. Thus the Government becomes responsible for $9,405,000,000 of their liabilities. The non-guaranteed liabilities of these corporations and agencies amount to $3,317,000,000, while private capital has been invested in them to the extent of $410,000,000, making a total of $3,727,000,000, which the Government is in a way obligated to make good in the event of excessive losses. The total contingent obligation of the Government to its various corporations and credit agencies therefore amounts to $13,132,000,000. It is impossible to estimate how much this obligation may eventually add to the national debt.

Summary.

The general outlook on the national debt situation is by no means as promising as it was a year ago. Even barring direct participation in the current European struggle, the national debt will have risen to $65,000,000,000 or more by the time the defense program has been carried out. When there is added to this total at least $20,000,000,000 of state and local debt, the people of the United States will be called upon to carry a public debt of approximately $85,000,000,000 by the end of 1945. Some $5,000,000,000 or $10,000,000,000 of contingent Federal debt may also be added to this grand total. Compared with the public debt burden that the American people have been accustomed to carry until very recent years, this will indeed be a staggering load. It will mean a dead-weight annual interest charge of $2,500,000,000 or $3,000,000,000, to say nothing of any provisions for debt redemption. See also TAXATION.