March Money

No private company could stay long in business if it tried to copy the U. S. Government's methods of financing itself. The Federal Treasury is the country's most prodigal borrower. It operates in the red as a matter of principle. Its preoccupation is keeping one short jump ahead of its creditors. Yet its credit is the highest in the world; financiers vie to lend it money; its profits (surplus) cause the nation to rejoice.*

This week the Treasury was winding up one of its quarterly financing programs which was larger than usual. Such transactions in March, June, September and December are designed not so much to raise additional cash from the money world as to shift the Government's obligations from one pocket to another.

The U. S. owes its citizens about $16,000,000,000. That is the Public Debt. Its War peak was $27,000,000,000. A reduction of $11,000,000,000 in twelve years gives citizen-creditors ample confidence in their Government's ability to pay some day. This debt is roughly divided into three classes: 1) bonds totaling $12,700,000,000; 2) short-term obligations (Treasury notes, certificates, bills) amounting to $2,600,000,000; 3) miscellaneous reserve funds (i. e. for the Bonus, for employe retirement, etc.) of $750,000,000. The smartest fiscal brains in the Federal service are employed to manipulate this debt to the best government advantage. The Treasury's long-range purpose is to filter the bond obligations gradually down through the short-term debt class and thus extinguish them. Its immediate purpose is to keep its notes, certificates and bills turning over & over in such a way that it will get the most money for the least interest.

The March 16 turnover fairly illustrates the operation. Last month Undersecretary of the Treasury Ogden Livingston Mills summoned his department experts to conference, began going over the Government's financial requirements. On the debit side they listed:

$1,109,000,000 in Treasury notes falling due March 16.

200,000,000 requested by the Veterans Bureau for Bonus loans.

525,000,000 for the ordinary expenses of the Government.

$1,834,000,000 Total

On the credit side they placed approximately $425,000,000 as income tax payments due March 16. It took no Treasury expert to see that about $1,400,000,000 would have to be raised to tide the Government over.

Because W. Randolph Burgess of the New York Federal Reserve Bank is wise in the ways of the money market, Undersecretary Mills called him in to help determine just how the Treasury should borrow this huge sum with the least disturbance to public credit. Mr. Burgess brought word that the New York bond market, having recovered from its first Bonus scare, was ripe for a U. S. notation. Mr. Mills agreed; the Treasury would put part of its offering in bonds.

How much? how long? What interest rate?--were the next questions. A billion-dollar issue was mentioned--Mr. Mills's Bonus estimate. That was rejected because the interest rate would probably have to be above 3 1/2%. Half that amount, it was closely figured, would sell at 3 3/8%. Because the fourth Liberty loan (six billions) must be refunded by 1938, Mr. Mills let the new bond issue run well beyond that date, made it callable in 1941, mature in 1943. Outside of the Treasury's consideration were such things as presidential politics, international finance.

With the bond issue settled it was comparatively easy to split up the short-term offering into one set of 2% twelve-month certificates totaling $600,000,000 and another of 1 1/2% six-month certificates amounting to $300,000,000. These were record-low interest rates for such securities but money was plentiful.

The $1,400,000,000 program was explained to Secretary of the Treasury Mellon who announced it on the first of the month. Within five days the banks of the country had oversubscribed the Treasury's total offering two and one-half times, such was the soundness of U. S. credit and the surplus of investment funds. The bond issue was fixed at $593,000,000 after prorating it among holders of Treasury notes eager to exchange their short-term securities for long-term obligations. No cash was involved in this bond issue.

The execution of its financing program gave the Treasury a tidy little profit. The matured notes bore 3 1/2% interest. They were retired with a bond issue at 3 3/8% and (figuratively) short-term securities at 2% and 1 1/2%. This represented a reduction from 3.75% to 3.72% in the interest rate on the gross public debt. Small in percentage, it meant an actual annual saving of $15,700,000 in the Government's interest payments.

The Treasury's next big financing job comes in 1932 and 1933 when the first ($1,930,000,000) and fourth ($6,270,000,000) Liberty bond issues are callable. Already Secretary Mellon has started the machinery for refunding this debt into other bond issues and short-term securities at a lower interest rate. At his request last week Congress passed a bill which upped the maximum offerings under the old Liberty Loan Act from $20,000,000,000 to $28,000,000,000. This eight-billion increase plus a $1,300,000,000 margin left from the War will give the Secretary of the Treasury ample room to turn around in when he asks Liberty bondholders to swap their securities for new ones.

* This year, however, it will have a deficit (estimated: $500,000,000) not because of its financing methods but because of general Depression.

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