1939: National Debt

Extent of the Debt.

The national debt is fast approaching burdensome proportions. During the calendar year prior to Nov. 30, 1939, $2,700,000,000 in round figures were added to it, thus making a total gross debt of $41,305,056,750. Treasury operations during December will bring this total to approximately $42,000,000,000 by the beginning of 1940. This figure will leave a margin of only $3,000,000,000 for further expansion of the debt before the limitation of $45,000,000,000, set by Congress, is reached. The 1940 Congress will, therefore, have to consider the matter of raising the present debt limitation. Such action will probably provoke a heated debate in that body upon the policy of 'deficit financing,' which is being consistently pursued under the New Deal. The national debt per capita now stands at approximately $314 as against $129 on Dec. 31, 1930, when the post-war debt was at its lowest.

Composition of the Debt.

The composition of the national debt remains practically the same as last year; no new types of securities have been added. Treasury bonds have increased by $2,100,000,000 to reach a total of $25,200,000,000, while savings bonds have increased approximately $700,000,000 to a total of $2,100,000,000. About $600,000,000 of the latter total, however, represent unearned discount on the savings bonds. The average interest rate on all government securities has gone up slightly since last year. It now stands at a little more than 2.60 per cent. The annual interest charge on the debt, which passed the $1,000,000,000 mark about a year ago, has now reached $1,060,000,000. This charge may be expected to increase, both as a result of the steady growth of the debt and of the continual funding of short-term treasury bills into long-term bonds.

Treasury Financing.

During 1939, Treasury financing, in addition to the regular sale of treasury bills each week, was undertaken on March 15, June 15, November 1, and December 15. On March 15, there were issued $894,000,000 of treasury bonds bearing 2 per cent interest for a term of 22 to 27 years. $319,000,000 of treasury bonds at 2 per cent for a term of 12 to 14 years, and $53,000,000 of 5-year treasury notes at 1 per cent interest. These securities were exchanged for treasury notes of an equal amount issued in 1934, and maturing on June 15, 1939, bearing 2 per cent interest. On June 15, $416,000,000 of treasury notes were issued for a term of 5 years at  per cent interest in exchange for a like amount of such notes issued in 1937 at 1 per cent. On November 1, $515,000,000 of treasury notes were issued for a term of 4 years and 4 months at 1 per cent interest, and exchanged for a like amount of notes issued in 1935 at 1 per cent. The December 15 financing offered to holders of $1,378,000,000 of 1 per cent notes, maturing on March 15, 1940, a new issue of treasury bonds for 12 to 14 years at 2 per cent, and 1 per cent notes for 4 years and 9 months. The amount of each offering is limited to the amount of the maturing notes tendered and accepted in exchange, the total issue therefore not being ascertainable at this writing. In addition, the Treasury set aside $100,000,000 of the bonds, which will be sold to the Government investment accounts for cash before March 15, 1940, at par and accrued interest. This plan was adopted, the Secretary of the Treasury declared, so that Government investment agencies would not compete with private investors. During 1939, the Treasury has pursued the policy of refunding maturing obligations three months in advance in order to anticipate and meet any market situation resulting from either domestic or foreign events.

During 1939, Government guaranteed securities were marketed by the Treasury to the amount of $2,191,000,000. These securities were sold for the Commodity Credit Corporation, Home Owners' Loan Corporation, Reconstruction Finance Corporation, and United States Housing Authority. They were mostly for short terms of from 1 to 5 years, and carried interest rates of from  to 1 per cent. An issue of from $50,000,000 to $60,000,000 of bonds for the Tennessee Valley Authority was to have been marketed during 1939, but for some reason the Treasury deferred the matter. These bonds, when issued, will be used to reimburse the Treasury for funds it has advanced to the Authority for the acquisition of the Tennessee electric properties.

Contingent Debt.

The combined assets of government corporations and credit agencies amounted to $12,866,000,000 on Oct. 31, 1939. The government has a proprietary interest in these corporations and agencies amounting to $3,865,000,000 most of which is in the form of capital stock supplied by the government. The securities of the corporations and agencies have also been guaranteed by the Government to the extent of $5,480,000,000. This arrangement makes the Government responsible for over $9,000,000,000 of the liabilities of these corporations and agencies. In addition to this heavy responsibility, the Government is also likely to suffer 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. If any of them should incur losses which exceed the government's proprietary interest, there is little doubt that the government would feel obligated to assume their liabilities regardless of the extent of its actual guarantees. It is impossible to estimate how much such contingent losses may eventually add to the national debt.

Amortization of the National Debt.

The amortization of the national debt, as it is now arranged, is spread over the next 20 to 25 years. The longest bonds are the 2 per cent treasury bonds, callable in 1960 and maturing in 1965. They amount to $1,485,000,000. The largest single group is the $2,611,000,000 of 2 per cent treasury bonds, callable in 1955 and maturing in 1960. At present market prices, these longer-term treasury bonds yield about 2.5 per cent. During the early fall of 1939, there were times when the price of Government bonds showed considerable decline, so much so that the Treasury came to the support of the bond market for a while. It is possible for the Treasury to do this for a time through the use of its extensive reserve funds. Between Aug. 16 and Sept. 27, 1939, the price of long-term treasury bonds (12 years or more to the earliest call date) declined at such a fast rate as to increase their yield from about 2.15 to 2.75 per cent. While these bonds did not break in price as precipitate as high grade corporate bonds, they were longer by about 3 weeks in starting to rebound in price. This fact would indicate that the market is already conscious of an overload of Government bonds, and that another critical period like the one in August and September may easily drop these bonds to a much lower price. In this event, the Treasury will find itself in the predicament of having to bolster up the market price of existing Government securities and at the same time of having to dispose of more of these securities in order to finance chronic operating deficits. See also PUBLIC FINANCE; TAXATION.