1942: National Debt

When the United States declared war on the Axis powers in December 1941, it undertook military and naval campaigns together with lend-lease aid to the Allied Nations which may cost as much as $400,000,000,000 before the struggle is ended. Within a year's time, some $220,000,000,000 have already been appropriated by Congress for war purposes. The monthly expenditures of the Government for war activities during November 1942, passed the $6,000,000,000 mark. It is estimated that the Government's expenditures will exceed $85,000,000,000 for the current fiscal year (1942-43), about 25 per cent of which will be met by taxes. This leaves more than $65,000,000,000 to be raised from borrowings, which when added to the national debt at the beginning of the fiscal year will make a total debt of approximately $140,000,000,000 by June 30, 1943.

Extension of Debt Limit.

In anticipation of rapidly mounting expenditures for war, Congress extended the debt limit in March 1942, from $65,000,000,000 to $130,000,000,000. Included in this limit was an allowance of about $5,000,000,000 for guaranteed debt. In addition, provisions were made to allow the Treasury greater flexibility in financing operations by permitting the issuance of marketable securities on a discount basis or on a combination interest-bearing and discount basis at the discretion of the Secretary of the Treasury. Previously securities issued on a discount basis were limited to maturities of not more than a year. Obligations of the Government, redeemable on demand, were also made acceptable for the direct payment of taxes without having to be turned into the Treasury for cash and the cash then used to pay the taxes. The replacing of guaranteed issues by direct government issues was facilitated by allowing the Treasury to offer direct securities in exchange for guaranteed ones.

On Nov. 30, 1942, the national debt was slightly over $100,000,000,000, of which about $4,000,000,000 were guaranteed issues. The remaining $96,000,000,000 consisted roughly of the following: treasury bonds, $45,000,000,000; war savings bonds, $14,000,000,000; treasury notes, $20,000,000,000; certificates of indebtedness, $11,000,000,000; and treasury bills, $6,000,000,000.

Treasury Financing.

Bonds.

Treasury bonds are the one standard issue in peacetime, but now they are supplemented by several other kinds of securities in order to appeal to every type of investor. These bonds are intended for permanent investors who desire to use the interest payments as they come along, usually twice a year. They are negotiable, long-term issues, running up to 30 years, and pay from 2 to 2 per cent interest. Of course, there are several billions of Treasury bonds outstanding which pay more interest, in fact, up to 4 per cent; but most of these bonds were issued more than ten years ago. All of the Treasury bonds issued since 1938 have carried rates of interest ranging from 2 to 2 per cent. More recently they have been held to 2 per cent.

The war savings bonds are nontransferable but are redeemable by the Treasury after the elapse of a short time. When first issued in 1935, they were known simply as savings bonds, later they were called defense savings bonds, and some months after the declaration of war they were renamed war savings bonds. Nearly $15,000,000,000 of these bonds had been sold up to Nov. 30, 1942, about $1,000,000,000 of which had already been redeemed by the Treasury. The A through E series of these bonds are discount obligations, calculated to earn 2.9 per cent interest if held to maturity, which is ten years. They may be redeemed by the Treasury at any time after 60 days. The purchase of these bonds is restricted to individuals who may buy up to $5,000 maturity value in any one year. Series F bonds were first offered in May 1941, for large investors; they are also discount obligations, running for 12 years and earning 2.53 per cent interest if held to maturity. They may be redeemed 6 months after date of issue. Series G bonds, offered at the same time as the F series, are coupon obligations, bearing 2 per cent interest semi-annually, and due in 12 years. They are also for large investors, and may be redeemed at a discount 6 months after date of issue. The higher rate of interest on all the war savings bonds is intended as a premium to the investor for letting the money stay in the Treasury for the full term of the bonds.

Treasury Notes.

The Treasury notes are designed to pay the principal back to the investor in not more than 5 years. They earn from  of 1 per cent to 1 per cent interest. The interest is paid semi-annually. The rate of interest is low, because the term of the notes is short.

The Certificates of Indebtedness are intended to interest individuals or business concerns with idle money, which may not be needed for short periods. The certificates run no longer than a year and pay up to  of 1 per cent interest.

Treasury Bills.

Treasury bills are regarded as a sort of 'I'll-pay-you-back-tomorrow' loan. They usually run for 91 days, and currently pay interest on a discount basis at the rate of about  of 1 per cent. They are intended to absorb funds which would otherwise lie idle; such, at least, was the original notion behind their issue. But they have been tremendously expanded in recent months, and are now being offered at the rate of $500,000,000 a week, maturing issues being paid out of fresh borrowings. At this rate, as much as $6,000,000,000 of these bills may be outstanding at one time, involving an annual refinancing of about $26,000,000,000. In October 1941, the interest paid on some treasury bills was at the rate of 1/1,000 of 1 per cent and the average was below  of 1 per cent. The rate has risen steadily, and at times sharply, to the present level of about  of 1 per cent. This would seem to indicate that there is much less idle money, at least much less available for investment in treasury bills.

Tax Anticipation Notes.

There are also some special issues, such as the tax anticipation notes, which are as yet comparatively small in outstanding volume. Individuals and corporations may buy these tax notes to apply against the payment of their taxes at any time within 2 or 3 years from the date of issue. Three series of the notes have been issued so far, upon which interest accrues at the rates of .48 of 1 per cent to 1.92 per cent if applied to the payment of taxes at maturity; otherwise, no interest is earned on most issues. About $6,000,000,000 of these tax notes (included under treasury notes in the above summary) were outstanding on Nov. 30, 1942.

Treasury Operations.

During the calendar year ended Nov. 30, 1942, approximately $45,000,000,000 were added to the national debt, making a total gross debt of $100,379,000,000 in round figures. To borrow this huge sum of money, treasury operations were conducted on an unprecedented scale. The planning and timing of the issues were largely the responsibility of Daniel W. Bell. Under Secretary of the Treasury. The Treasury sold for cash on Dec. 15, 1941, about $1,000,000,000 of 30-year, 2 per cent treasury bonds, and about $500,000,000 of 14-year, 2 per cent treasury bonds. Refunding and conversion operations were carried out during January 1942, amounting to something over $1,000,000,000. On Feb. 25, the Treasury sold for cash about $1,500,000,000 of 13-year, 2 per cent treasury bonds. Again on Apr. 15, it sold $1,500,000,000 of  of 1 per cent certificates of indebtedness, maturing in 6 months. This issue, the first of its kind since 1934, was designed to meet a demand for securities having a maturity somewhat longer than treasury bills. During May the Treasury sold over $2,000,000,000 of 25-year, 2 per cent bonds, and $1,290,000,000 of 9-year, 2 per cent bonds. On July 15, it again sold over $2,000,000,000 of the same type of 2 per cent bonds which it had sold in May. Treasury notes were sold in June and September, $3,250,000,000 of the first issue at 1 per cent, and $1,500,000,000 of the second issue at 1 per cent. In September $1,500,000,000 of certificates of indebtedness were also sold at .65 of 1 per cent. During October $4,000,000,000 of 10-year, 2 per cent treasury bonds and 1 per cent treasury notes due on Dec. 15, 1946, were sold. The low volume of subscriptions for these issues was regarded by some as indicating the need for a higher coupon rate on the bonds. But Under Secretary Bell announced in a speech on Oct. 19, that future issues of government obligations would follow the same general pattern set by previous issues. He stated that only obligations with less than 10-year maturities would be available for commercial banks, and that they would carry interest rates at not over 2 per cent. Only about 25 per cent of the October issues were bought by other than commercial banks.

The culmination of the year's financing was the new borrowing program announced by the Treasury for December. It was stated that this program would eliminate the frequent offerings of recent months, and substitute therefor larger offerings at less frequent intervals, possibly every two months. The first offering, designed to raise $9,000,000,000, is said to be the largest borrowing operation ever attempted. Included in the program are plans for extended sales campaigns directed at a more widespread diversion of securities into the hands of non-banking investors. The several billions of new money will be raised through continuing the sale of war savings bonds, tax anticipation notes, and treasury bills, as well as through the sale of three special issues, consisting of 2 per cent, 26-year bonds; 1 per cent, 6-year bonds; and 1-year  of 1 per cent certificates of indebtedness. Banks accepting demand deposits are barred from holding the 2 per cent bonds for a period of ten years.

The sale of war savings bonds is being energetically pushed by the Treasury. It hopes to sell $12,000,000,000 during the current fiscal year. About one fourth of the required total was sold during the first third of the fiscal year, which means that sales must be stepped up during the remaining eight months to an average of about $1,100,000,000, or something like the high water mark reached in January 1942, when $1,129,000,000 of these bonds were sold. The pay roll savings plan, inaugurated in December 1941, had grown by November, 1942, to include about 23,000,000 workers who were investing something like 8 per cent of their pay in war savings bonds. By the end of the calendar year, the Treasury hopes that this number will have grown to 30,000,000 workers investing at least 10 per cent of their pay. Even so, there is talk of the need for some form of compulsory savings.

The Treasury is also pushing the sale of tax anticipation notes. The purchase of these notes has been stepped up considerably since September, probably due to the issuance of a new note, Series C, 1945, which may be redeemed for cash without the loss of interest and may also be used as collateral. While the other notes in the tax series may likewise be redeemed for cash, interest is paid on them only when turned in for the payment of taxes. So far it appears that less than 10 per cent of the tax notes sold has been in denominations of less than $10,000. This would indicate that these notes are not, as originally planned, being used to any extent by small taxpayers in the payment of their income taxes.

It is part of the Treasury's borrowing policy to maintain a low rate of interest in financing this war, and not permit the rate to rise as it did in the last World War when the final victory loan was sold at 5 per cent. When some bankers expressed their disappointment over the fact that the $2,000,000,000 of bonds offered in October did not carry 2 instead of 2 per cent, Secretary of the Treasury Morgenthau is reported to have said that the Treasury expects to finance this war on a 2 per cent basis so far as borrowings over the 7-to-10-year range are concerned. The Treasury has succeeded, mainly through the sale of a huge volume of short term securities (more than a third of the total debt consists of securities with terms of 5 years or less), in bringing the average interest rate on all outstanding government securities down to 2.12 per cent. The rate has declined since last January from 2.38, or approximately  of 1 per cent. A reduction of this amount in the average interest rate means for the time being that $250,000,000 less a year are required to pay the interest on the national debt.

But a very low rate of interest on the national debt is not an unadulterated virtue. The commercial banks of the country, that is, the credit-creating institutions, continue to hold a large part of this debt — about $22,000,000,000 at the present time. Aside from the highly inflationary aspects of this situation, it is quite probable that the prevailing rate of interest may rise within the next few years. If the rate does rise, the price of government bonds, in the absence of strong support by the Federal Reserve Banks, will drop in proportion. Any substantial price decline would clearly threaten the solvency of the whole banking system. If the Federal Reserve System continues to follow the policy of supporting the government bond market in periods of emergency, as it has done since 1937, it will not only be coining the bonds into current purchasing power but it will also be creating bank reserves which may be used as the basis for credit expansion, thus intensifying the inflationary situation.

Methods of Financing the War.

Certain definite proposals as to the proper methods of financing the war have been made by economists. First, that the war should be financed as far as possible, though not entirely, by current taxation. It is evident that the Administration and Congress have moved very slowly in this direction. While Canada has been able to pay 50 per cent of its war expenditures from taxation, the United States is now paying scarcely 25 per cent by taxes. Canada expects through heavier current taxation to obviate inflation, minimize postwar debt problems, and lessen the need for extensive and prolonged price controls and rationing. Second, that any remaining excess purchasing power in the hands of individuals should be absorbed by government bond purchases — made compulsory, if and when necessary. Unless the bonds so bought immobilize purchasing power until such time as it can safely be released, the object of their sale is to that extent defeated. Third, that funds needed by the Government over and above those raised by taxation and by bond sales to individuals should be raised by the sale of bonds to corporations, insurance companies, savings banks, fiduciaries, and the like. If these sources do not fully meet the Government's monetary needs, as they normally would, any additional sums can safely be raised by bond sales to commercial banks. Fourth, that it might be a wise procedure, depending upon the willingness of the people to make sacrifices which cannot in any case be avoided, to immobilize excess purchasing power by means of over-all price controls and general rationing, and then divert these usable funds to the Government by taxation and borrowing. Rationing could thus be made to serve as a complement to fiscal policy in distributing the necessary war sacrifices.