To Call or not to Call

In October 1918 the A. E. F., having overrun St. Mihiel, was bursting its way through the Argonne and all the Allied armies were plowing into the German front. It was an expensive pastime, both in life and money. Secretary of the Treasury William Gibbs McAdoo then had a big problem. Money there had to be, and in October 1918 the U. S. Treasury was very busy drumming up $7,000,000,000 from the U. S. public in exchange for 4th Liberty Loan 4 1/4% bonds payable in October 1938. In the bonds which were delivered to patriotic buyers there was a clause saying that on any interest date beginning with Oct. 15, 1933 the U. S., having given six months notice, might retire the issue in whole or in part.

Last week the big problem was Secretary Woodin's. There are $6,268,095,250 of 4th Liberty Loan bonds outstanding. At their 4 1/4% interest rate they cost the Government some $266,000,000 a year and 4 1/4% is considerably above the interest rate one gets these days on like securities; 3% or 3 1/4% is more like it. Should Secretary Woodin call the 4th Liberty Loan for next October and sell an issue of 37% bonds to pay it off, the Government would save $62,680,000 a year. Financiers waited to see whether he would jump at the chance. Last autumn Britain refunded one of her large loans at an annual saving of $100,000,000 in interest. France by a similar action saved herself $52,000,000 a year.

One afternoon last week with only 24 hours remaining in which notice of October redemption could be given. President Roosevelt received newshawks in his regular semiweekly conference and announced quietly that the Treasury had no intention of calling the 4th Liberty Loan.

There could be but one reason for postponing this great possible saving: that the problem of handling the whole national debt outweighs the immediate saving of $62,680,000 on one issue.

The post-War peak of the national debt was $25,482,000,000 in 1919. Over $8,500,000,000 was lopped off in ten years bringing it down to $16,000,000,000 in 1930. Since then $5,000,000,000 has been added, by an unbalanced Budget and depression expenditures. On March 31 the debt stood at $21,362,000,000. Of this amount just about two-thirds is in bonds, one-sixth in notes due during the next five years, one-sixth in certificates and bills due in a few months time. To have so much of the debt due so soon--upwards of $3,000,000,000 in short-term debt--is not a wholly desirable condition, but during the last year people have wanted short-term securities. Promising to pay in a few months time was an easy way for the Government to get the billions it needed to balance its Budget, keep the R. F. C. in funds.

This extraordinary borrowing is obviously not yet completed. Nobody knows exactly how many more billions Mr. Woodin will need to buy preferred stock in reopened banks, to relieve unemployment, to do over Muscle Shoals and the Tennessee Valley, to refinance farm and home mortgages, to reforest hills, to revamp railroads, to boost wheat, cotton and other prices. Selling a huge bond issue will not be easy until the public knows i) that the ordinary Budget is balanced; 2) what limit is going to be set on extraordinary expenditures.

Last week's failure to call the 4th Liberty Loan points to the fact that Mr. Woodin is waiting until he and the public know these things. When the President announced that there would be no call, a newshawk demanded whether the Government was waiting to float a monster bond issue to convert the short-term debt, to pay for the emergency expenditures and perhaps to refund part of the 4th Liberty Loan. The President's response was brief: "Not necessarily."

Two major possibilities are undoubtedly under consideration:

1) Floating a huge issue of small denomination bonds with ballyhoo and a patriotic appeal to the public like that used for the Liberty Loans.

2) Instead of calling the 4th Liberty Loan (now not possible until April 1934) to issue lower interest bonds and invite holders of 4th Liberties to exchange voluntarily, thus whittling down the amount of 4th Liberties outstanding before the issue is called. This was the method that Andrew Mellon followed in refunding the 3rd Liberty Loan.

Each of these plans involves first buttressing confidence in the Government's credit. No such confidence was evident last week in a sudden raid on the dollar which raised the price of the pound sterling to $3.50, of the franc to over 4-c-. Still another way for Mr. Woodin to solve the problem of managing the public debt would be to devalue the dollar, pay off the debt with depreciated dollars. This idea started last week's raid, boomed commodities and common stocks.

It was not an idea that came from Washington. It originated abroad (inspired by a report that Premier Bennett of Canada was going to Washington to talk over foreign exchange problems). The sudden raid actually pushed the dollar down below the gold export point* testing Mr. Woodin's statement that the U. S. is still on the gold standard. Unless the Government then licensed gold for export the dollar was obviously off gold. Promptly shipments of gold to Holland and France were authorized.

Evidence that U. S. confidence in the dollar was not impaired was the fact that U. S. bonds instead of selling down as stocks sold up actually tended to sell up likewise. Speculators, toying with the idea of inflation, evidently were thinking in terms of credit inflation which would improve the value of bonds by enabling debtors to pay their debts, not currency inflation which would destroy the value of the dollar, deflate bonds.

*The "gold export point" is the exchange price at which it becomes cheaper to obtain credits in a foreign country by shipping gold instead of buying exchange. Thus if the franc (worth 3.91-c- at par) costs 3.93-c- in foreign exchange it is theoretically cheaper to buy francs with gold than to buy foreign exchange. But there are costs of freight, insurance and the loss of interest on the gold for several days while it is in transit. So it does not pay to ship gold until the franc costs about 3.94 1/2-c-.

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