Bold Action Needed to Manage the Debt

THE TREASURY MESS

TESTIFYING before the Senate Finance Committee, George M. Humphrey made an unusual admission for an outgoing Secretary of the U.S. Treasury. The nation's finances, he agreed, were "in a mess" when he took office in 1953--and they are still in a mess. Democrats went much farther, cried loudly of a crisis at the Treasury. Reason: in the next twelve months, the Treasury must refinance some $75 billion (28%) of the U.S. debt, and do it in a market where Government bonds are at their lowest level since the Depression, and interest rates are climbing. Last week, to sell $3 billion worth of 264-day tax anticipation certificates, the Treasury was forced to raise the interest rate to 3.485%, highest since 1933.

In his own defense, Secretary Humphrey points to some important achievements during his regime. The budgetary deficit was reduced, paving the way for a $7.5 billion tax cut and a balanced budget in 1956 and 1957. The Administration also claims an important victory by reducing its "floating" (i.e., callable on demand or payable within one year) debt by $25 billion since 1953, an action that helps insulate the Treasury against sudden runs on its cash supplies.

But Secretary Humphrey has failed to make much headway toward one of his primary goals in 1953; this was to stretch out and stabilize the debt by transferring much of it from short-term into long-term securities. Not only would such a transfer help combat inflation by sopping up credit, it would also make the Treasury's debt management job much simpler by cutting down on refinancing operations.

The big trouble is that from the start, Secretary Humphrey's Treasury failed to match the prices other borrowers were willing to pay for money. When the Treasury sold its first longterm, 30-year issue in 1953, it pegged the interest rate at a below-market 3 1/4% an average 3 3/4% for corporate issues; the bonds soon became known as "Humphrey's Dumpties," dropped far below par, and still sell at 93.26. A 40-year issue at 3% in 1955 has tumbled to 87.24. The result, says Humphrey, is that "we must therefore sell mostly short-term securities, which are attractive because of their liquidity."

Even with rising rates offered by the Government, the attrition on refinancing operations is reaching alarming proportions. When the Treasury attempted to refinance $4.1 billion worth of if % notes last May by offering an exchange of 3 1/2 1/2% to 3 5/8% securities maturing in eleven to 57 months, only $2.9 billion in bonds were exchanged; the other $1.2 billion was cashed in. The attrition is equally heavy in Government savings bonds. So far in 1957 investors have cashed in $2.4 billion more than they have bought, almost doubling the 1956 loss to a rate of $5 billion annually.

With some 68% (about $185 billion) of the total U.S. national debt due for refinancing within the next five years, the problem will get worse unless something is done soon. Many bankers argue that the Treasury should have moved much faster to keep U.S. Government securities rates in line with the overall money market. By hiking rates a fraction at a time, always too little too late, Secretary Humphrey has, in effect, guaranteed the failure of long-term issues. He has also increased the margin between Government and corporate bonds instead of narrowing it. On a straight interest basis, Government bonds paid as much as 2.37 1/2^% in 1952 v. an average 3.42% for corporate issues; today, the highest paying Government bond rate is 3 1/4% v. almost 5% for some corporate issues.

To make long-term Government bonds more attractive, some bankers think that the Treasury should boost its rates more in line with the market level. While some financial men fear that such a move would demoralize the entire Government bond market by depressing lower-paying issues, others argue that the Treasury needs strong medicine to solve its problems. Still another idea is to float a convertible bond. The U.S. Treasury could issue a convertible bond at 4% interest, for example, give investors the option of either cashing it in after one year, or of converting it into a longterm, twelve-year bond paying 4%. Thus investors would have an incentive to buy, since if interest rates showed signs of turning down, bond holders could convert into a longterm, good-paying bond.

One of the major stumbling blocks to all such ideas--one that Secretary Humphrey is well aware of--is that by boosting the U.S. Government's borrowing costs, the Treasury lays itself open to angry criticism from Congress for helping to nudge up all rates. But the U.S. financial community is convinced that Robert B. Anderson Jr., the incoming Secretary, will have to try some bold experiments if he is to finally clear up the mess.

This file is automatically generated by a robot program, so reader's discretion is required.