1938: National Debt

Extent of the Debt.

At the end of 1930 the national debt of the United States was almost entirely a war debt. It then stood at the lowest post-war figure, namely, $16,026,087,087, some ten and a half billion having been retired since its peak on Aug. 31, 1919. During 1931 and 1932 the debt began to increase slowly as a result of deficit financing. Then in 1933 the 'pump-priming' policy of the New Deal was started and the debt thereafter mounted rapidly upward. By June 30, 1934, it reached $27,000,000,000, thus passing the war-time peak. During the next three fiscal years approximately ten billion more were added to the debt. Then there came a temporary lull in borrowing, which lasted for about a year. But on Sept. 15, and again on Dec. 15, 1938, the Treasury sold bonds and notes for cash amounting each time to approximately $700,000,000, or a total of $1,400,000,000 of new money within a period of three months. This amount plus borrowing from the sale of savings bonds and treasury bills brought the national debt up to a grand total of $39,300,000,000 in round figures on Dec. 15, 1938.

Securities Constituting Debt.

The outstanding debt now consists of bonds issued prior to the World War, Postal Savings bonds, Treasury bonds, savings bonds, adjusted service bonds, Treasury notes, certificates of indebtedness, Treasury bills, matured debt on which interest has ceased, and debt bearing no interest. Only a few bonds remain which were issued prior to the World War, namely, $49,800,000 of 3-per cent Panama Canal bonds and $28,894,500 of Conversion bonds. There are $117,800,000 of 2½ per cent Postal Savings bonds. The great bulk of the debt, approximately $23,100,000,000, consists of Treasury bonds upon which the interest ranges from 2½ to 4¼ per cent. Savings bonds amount to $1,400,000,000 and adjusted service bonds $800,000,000. The total of bonds, or long-term debt, amounts to $25,500,000,000. Treasury notes and reserves approximate $11,000,000,000, certificates of indebtedness $1,000,000,000, and Treasury bills $1,300,000,000, totaling $13,300,000,000. Matured debt on which interest has ceased and debt bearing no interest amount to $535,000,000. The 1938 session of Congress fixed $45,000,000,000 as the limit of national indebtedness, $30,000,000,000 of which may be in long-term bonds and the remainder in notes, bills and certificates. Since the national debt is now within $6,000,000,000 of this limit, Congress may be asked, at the 1939 session, to lift the limitation, at least for the long-term bonds.

Savings Bonds.

In an effort to get more of the national debt into the hands of small private investors, in 1935 the Treasury introduced a new type of Government security, the savings bond. This type of security was made possible through authority to issue bonds on a discount basis, an innovation in Treasury practice, which was granted in the Second Liberty Loan Act, as amended by the Act of Feb. 4, 1935. The new savings bonds were placed on sale beginning March 1, 1935. They bear maturities of ten years from the first day of the month in which issued. The issue price of these bonds is fixed at $75 for each $100 of face amount. At this price, according to the Treasury, the investment yield is about 2.9 per cent, compounded semi-annually, if the bonds are held to maturity. The bonds are issued in denominations of $25, $50, $100, $500, and $1,000 (maturity value), and single ownership is limited to $10,000 (maturity value) of bonds issued in any one calendar year. This plan was criticized at first as a scheme to increase the national debt by appealing to the 'little fellow,' since the banks were already overloaded with Government obligations.

Reduction of Interest Rate.

By refunding some bonds — principally the Liberty Bonds — with high interest rates, and by issuing a larger volume of Treasury notes, it has been possible to reduce the average interest rate very considerably since 1930. The average rate of 3.75 per cent on Dec. 31, 1930, was reduced to 2.55 per cent on Nov. 30, 1937. Since that time the rate has gone up slightly, standing at 2.58 per cent on Nov. 30, 1938. But even with this marked reduction in the rate, the annual interest charge of the National Government is again passing the billion dollar mark for the first time since shortly after the close of the World War, at which time the average rate was 4.196 per cent. If it becomes necessary to refund much of the floating debt, on which the interest rate is around 1 per cent, into long-term bonds, the average interest rate will be considerably increased.

Contingent Debt.

The contingent debt of the National Government, amounting to over $5,000,000,000, consists of bonds and notes issued by the Commodity Credit Corporation, the Federal Farm Mortgage Corporation, the Federal Housing Administration, the Home Owners' Loan Corporation, and the Reconstruction Finance Corporation. These bonds and notes are guaranteed by the Government as to principal and interest. Aside from heavy responsibilities of this kind, the Government is also subject to possible losses as full owner of such corporations as the Reconstruction Finance Corporation, the Home Owners' Loan Corporation, the Federal Farm Mortgage Corporation, and as part owner of such agencies as the Federal Land Banks, and the Federal Home Loan Banks. It has invested in capital stock and subscriptions to these corporations and agencies over $2,500,000,000. If any of them incur losses which exceed the Government's proprietary interest, there is no doubt that the Government would feel obligated to assume their liabilities even when there is no guarantee. Such was the case when the Government came to the rescue of the Federal Land Banks in 1931-32. The credit agencies, such as the Reconstruction Finance Corporation and the Home Owners' Loan Corporation, and the credit insurance agencies (Federal Deposit Insurance Corporation, Federal Savings and Loan Insurance, and the Federal Housing Authority mortgage insurance), with assets of approximately $11,000,000,000, may have to absorb enormous losses in the event of a renewed general crisis in finance. There is no way of calculating the extent of these losses, and hence the increase of the Government's net debt which might result.

Absorption of National Debt.

It now appears that virtually all the increase of outstanding national debt since 1930 has been absorbed by the credit institutions of the country. Into these institutions have gone most of the individual savings accumulated through the rising incomes between 1933 and 1937 rather than into the normal forms of new houses and new corporate stocks and bonds. So it may be said that the national debt has been the main channel for the flow of savings during these years. Hence it is possible that the expansion of Government debt may be preventing private investment from taking other forms, and thus be perpetuating the very emergency it is intended to cure.