Egg From Vault

MONEY

Once last summer when businessmen were jittery over Government finances, Secretary of the Treasury Morgenthau declared that the Government's $2,800,000,000 gold "profit" realized on dollar devaluation was "under lock & key." And to end all fear of the sudden emission of $2,800,000,000 of new money, President Roosevelt called the gold profit a "nest egg to be disposed of only in the indefinite future."

Last week without warning Secretary Morgenthau unlocked his vault and took out almost all the nest egg which was not tied up in the Stabilization Fund. Forthwith he announced that he was about to pare the public debt by $675,000,000.

Instead of retiring some Government bonds with relatively high interest rates, however, the Treasury will call its lowest coupon bonds of all--the pre-War 2% Consols and the 2% Panama Canal issues. The saving in debt service will be only a trifling $13,500,000 annually. But that was not Mr. Morgenthau's prime purpose. In one of the slickest Treasury moves in history, he was hatching not one bird but four:

1) The Panamas and Consols are the only Government bonds with the so-called circulation privilege. When a bank wants to issue its own notes, it must deposit in Washington approximately an equal amount on those bonds and no others.* Thus by calling the Panamas and Consols the Government will eliminate National Bank notes from circulation--something contemplated by the founders of the Federal Reserve.

2) In effect the Treasury will pay off its Panamas and Consols with gold certificates deposited in the Federal Reserve banks, which in turn will pay out Federal Reserve notes. Thus while the Government is injecting more than a half-billion of new money into the economic system, practically the same amount in bank notes will disappear. In this way Mr. Morgenthau will spend part of his gold profits with no direct inflationary results.

3) Nevertheless, there was a certain inflationary twist to the plan in the fact that the gold certificates will support not only a compensating increase in Federal Reserve notes but nearly another billion besides. Furthermore, the end of National Bank notes will concentrate control of the country's currency in the Treasury and Federal Reserve.

4) Lastly and perhaps most important at the moment, Mr. Morgenthau apparently hoped to give a fillip to the Treasury's $2,378,000,000 refunding program, launched last fortnight. Public response to the exchange offers has been slow. If any headlines could harden a soft Government bond market, none would be better than REDUCTION OF PUBLIC DEBT. Day after the announcement Government bonds declined.

*Under emergency legislation a number of other Government bonds currently carry the circulation privilege but only until July 22.

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