1941: National Debt

The declarations of war by the United States against Japan on Dec. 8, and against Germany and Italy on Dec. 11, 1941, put an entirely new construction on the national debt. Prior to that time the debt was being incurred mainly for two purposes: first, to build up the nation's defense facilities and, second, to provide lend-lease aid to Great Britain and her allies in their struggle with the Axis powers.

Extension of Debt Limit.

In January 1941, the Secretary of the Treasury asked Congress to increase the national debt limit from $49,000,000,000 to $65,000,000,000. After considerable discussion, a Debt Limit Act was passed by the House and Senate and approved by the President on Feb. 19. It set a debt limit of $65,000,000,000 and eliminated the special $4,000,000,000 category created by the previous session of Congress for national defense needs which required certain revenues to be earmarked to retire specific defense bond issues. The Act also authorized the Treasury to issue taxable securities in the future.

During the calendar year ended Nov. 30, 1941, approximately $10,250,000,000 were added to the national debt, making a total gross debt of $55,039,000,000 in round figures. Treasury operations during December pushed this total up to over $56,500,000,000 by the end of 1941. The average interest rate on all government securities declined over the past year from 2.588 to 2.465 per cent, according to Treasury calculations. The annual interest charge on the debt at the end of 1941 was about $1,400,000,000.

Treasury Financing.

During 1941, Treasury financing, in addition to the continuous sale of defense stamps and bonds and the regular weekly sale of treasury bills, was carried out on Jan. 31, March 15 and 31, June 2, Oct. 20, Nov. 1, and Dec. 15. On Jan. 31, $635,000,000 of treasury notes were sold for cash. These notes bore  of 1 per cent interest and ran for 3 years 7 months. On March 15, the first taxable treasury bonds were issued. This issue amounted to $1,116,000,000 of 2 per cent bonds with terms of 7 to 9 years. These bonds were exchanged for two issues of treasury notes which came due on March 15, one of $482,000,000 10-year 3 per cent and the other $634,000,000 5-year 1 per cent. At the same time $65,000,000 of 2-year treasury notes at  of 1 per cent were issued in exchange for a like amount of treasury bonds and notes due for retirement. On March 31, $1,024,000,000 of 2 per cent treasury bonds with terms of 11 to 13 years were issued. Some $448,000,000 of these bonds were exchanged for a like amount of 5-year treasury notes, drawing 1 per cent and due on June 15. Fifty millions of these bonds were sold directly to government investment accounts for cash. The issue thus provided the Treasury with $576,000,000 of new money. On June 2, the Treasury disposed of $1,450,000,000 of 2 per cent bonds, maturing in 14 years and 9 months to 16 years and 9 months. Of this issue, $788,000,000 were exchanged for 8-year, 3 per cent bonds due on Aug. 1, and $662,000,000 were sold for cash. On Oct. 20, the Treasury issued the largest single flotation of securities for cash since the first World War. It consisted of $1,596,000,000 of 2 per cent treasury bonds, maturing in 25 years and 11 months to 30 years and 11 months. This issue established a record for long maturity dates in bonds sold by the government during recent years. The bonds sold at par with accrued interest, and $189,000,000 of them were exchanged for 5-year, 1 per cent treasury notes due on Dec. 15. One hundred millions of the bonds were sold directly to government investment accounts. The net result was $1,307,000,000 of new funds. On Nov. 1, the Treasury sold $503,000,000 of notes, bearing 1 per cent interest and running for 4 years and 4 months. These notes were available only to holders of Reconstruction Finance Corporation notes of Series P, maturing Nov. 1, and of Commodity Credit Corporation notes of Series E, maturing Nov. 15. On Dec. 15, the Treasury offered a new money bond issue of $1,500,000,000, $1,000,000,000 of which were 2 per cent, 30 years and 11 months treasury bonds, similar to those sold on Oct. 20. The remaining $500,000,000 were 2 per cent, 10 to 15 year treasury bonds. While this issue was largely subscribed by the banks of the country, an effort was made to interest the small investor in it through preferential allotments up to $5,000. Fifty millions of the 2 per cent bonds were sold to the government investment accounts.

Defense Saving Bonds.

On May 1, 1941, the Treasury offered for the first time a series of defense savings bonds. Series E of these bonds is practically identical with the discount savings bonds sold by the Treasury in recent years. The bonds of this series mature in ten years and give the purchaser 2.9 per cent interest if held to maturity. They are nontransferable and may be redeemed at any time after sixty days at the Treasury for values indicated on the bonds. Purchases of these bonds are limited to $5,000 maturity value in any one year and are restricted to individuals. Series F and G defense savings bonds are also nontransferable and are intended for larger investors and for trustees of estates, reserve funds, associations, corporations and the like. Series F bonds are also discount obligations, due in twelve years and providing a yield of 2.53 per cent annually if held to maturity. Series G bonds are coupon obligations, due in twelve years and bearing 2 per cent interest. Savings stamps, which may be purchased from the post offices and savings banks in small amounts and later exchanged for defense savings bonds, were also put on sale on May 1. The savings stamps are not a new idea; they were on sale in practically the same form and amounts during the first World War.

The sales of defense savings bonds, from which the Treasury had estimated that it might raise $4,000,000,000 a year, were not particularly impressive during the first seven months after the initial offering. About $2,000,000,000 were sold during this period. No special campaign was conducted by the Treasury in an effort to sell these so-called noninflationary securities; in fact, the Treasury refrained from any form of pressure salesmanship. However, on Dec. 10, the Secretary of the Treasury called on defense savings workers throughout the country to redouble their activities and conduct a sales campaign designed to life the sagging monthly totals. It appears that the monthly sales had dropped from $349,000,000 for May to $233,000,000 for November. During this period the popular priced Series E bonds, intended for the small investor, and the Series G bonds had sold best.

Towards the close of 1941 an average of $200,000,000 of treasury bills were being sold each week. Earlier in the year this amount had been $100,000,000, stepped up to $150,000,000 and then to $200,000,000. These bills are issued for 91 days, and they must be refinanced at maturity. On the present basis of $200,000,000 a week, refinancing amounts to $10,000,000,000 a year.

Tax Anticipation Notes.

On Aug. 1, the Treasury inaugurated a new tax payment plan through the use of tax anticipation notes. Under the plan the Treasury sells throughout the year interest bearing notes which can be remitted in payment of taxes the following year. These notes are issued in two series: one for the small taxpayers, bearing interest of 1.92 per cent annually, and the other for the large taxpayers, with an interest return of 0.48 per cent. Both series are dated Aug. 1, 1941, and mature on Aug. 1, 1943. Tax Series A-1943 are issued in denominations of $25, $50 and $100 and the amounts which may be presented in payment of income taxes during any one year are limited to $1,200 for each taxpayer. In buying these notes, the taxpayer receives them at par value plus the interest which may have accrued on them between the date of issue and his purchase. If not presented for taxes, the notes will be redeemed under certain specified conditions at the purchase price but without any interest. The notes are not registered but bear the purchaser's name and address for comparison with that on the tax return. Tax Series B-1943 are issued in denominations of $100, $500, $1,000, $10,000 and $100,000. Unlike the Series A notes, they are not limited as to the amounts which may be presented in payment of taxes. Aside from being a convenience to the taxpayers, the Treasury thought that these notes might have an important effect in cutting down expenditures for consumer goods and thus tend to avoid inflationary rises in living costs. The sales of these notes during August amounted to $1,037,000,000. On this basis the Treasury calculated that it might take in as much as $6,000,000,000 or $8,000,000,000 from them during the current fiscal year. If this proved to be the case, these notes would be the means of providing a steady flow of income for the Treasury, making possible reduced borrowing and better management of the whole fiscal program.

Treasury Borrowing.

In October the Secretary of the Treasury proposed that henceforth the Treasury would borrow funds for the half dozen independent agencies of the government whose securities had previously been guaranteed by the Treasury. These agencies are the Reconstruction Finance Corporation, the Home Owners Loan Corporation, the Commodity Credit Corporation, the Federal Farm Mortgage Corporation, the Federal Housing Administration, and the United States Housing Authority, with aggregate securities outstanding of approximately $7,000,000,000. Ultimately these securities would all be retired or exchanged for direct Treasury obligations and the total amount added to the national debt. According to the Secretary of the Treasury, this change would simplify Federal borrowing and result in lower interest rates. A move in this direction has already been made, but it will be some time before the entire $7,000,000,000 can be retired or exchanged.

Lend-Lease Appropriations.

With the adoption of the Lend-Lease Act on March 11, 1941, the United States embarked upon a policy of furnishing materials, food and supplies to those nations 'whose defense the President deems vital to the defense of the United States.' There have been two appropriations made by Congress under the terms of this Act, the first in March, amounting to $7,000,000,000, and the second in October, reaching $5,985,000,000, or a total of almost $13,000,000,000. This amount exceeds the aggregate principal of the war debts owed to the United States by allied nations as the result of the first World War. An additional $1,300,000,000 of lend-lease aid may be involved without further action by Congress, for under the act the President is given the power to transfer to lend-lease that amount of Army and Navy materials for which appropriations were made prior to March 11, 1941. Recent figures indicate that approximately $63,000,000,000 have already been appropriated or authorized by Congress for the war effort in this country, so that lend-lease operations comprise about 20 per cent of the outlay so far authorized. Most of the lend-lease aid has thus far gone to Britain. China has been given substantial assistance and Russia has been promised $1,000,000,000 from lend-lease funds. Approximately $400,000,000 of lend-lease aid have been extended to Latin American governments. Partly because of lend-lease shipments, the United States has been exporting in recent months more goods than at any time in the past ten years.

War-Financing Formula.

Early in 1941, the Secretary of the Treasury developed a war-financing formula which called for raising two thirds of all Federal spendings by taxation and one-third by borrowings. This formula was endorsed by the revenue-raising committees of both houses of Congress last Spring when the $3,500,000,000 Revenue Act of 1941 was first proposed. But before the bill was enacted in September, estimated spendings rose from $19,000,000,000 (on which the Treasury had based its calculations) to $22,000,000,000 for the fiscal year 1942. Later estimates again raised this figure to $24,500,000,000. Net receipts from all taxes, including those to be produced by the Revenue Act of 1941, were estimated at about $12,000,000,000, thus leaving a deficit of some $12,500,000,000.

The outlook for the fiscal year 1943 makes even a fifty-fifty ratio of taxes to borrowings seem improbable. While no official estimates are yet available, spendings for this period may run to $35, or $40, or even $50,000,000,000. Present tax laws are estimated to produce a maximum of about $15,000,000,000 for the fiscal year 1943. Without considerable new taxation, the Treasury would therefore be unable to maintain any more than a sixty-forty ratio between borrowings and taxes. This is the reason that the Secretary of the Treasury has recently recommended another increase in Federal taxes of something like $4,800,000,000. See also TAXATION.