New Money for Old

To the microphone one evening last week stepped Secretary of the Treasury Morgenthau to announce that the last $1,250,000,000 of Liberty Bonds remaining in the hands of the public had been called for redemption next October. "And so," said the Secretary, "in this 17th year after the Armistice these famous securities move from the realm of Government finance to the pages of history."

Mr. Morgenthau did not reveal what plans he had for refunding the last old high-coupon Liberties. But he did take time to review the Treasury's vast operations since his Administration took office. High points: 1) with completion of its present program, the Treasury will have refunded in two years no less than $8,000,000,000 of Wartime loans, and retired, largely from its so-called "gold profit," another $674,000,000 of Panama Canal and Consol bonds; 2) saving in debt service will be $100,000,000 yearly; 3) though the national debt has risen to $28,800,000,000 in the last two years, present interest costs of $800,000,000 annually are actually less than in 1925 when the debt was $8,000,000,000 smaller.

"Refinancing on this scale," said Secretary Morgenthau, "has the quality of high adventure." And reminding the country of Britain's great War-loan refunding program, which included a six-month ban on new private capital issues and a purple appeal to public patriotism, he declared: "Here we have handled this same transaction so easily, and in such a commonplace manner, that many people have undoubtedly been unaware of its nature or significance."

Chief significance to Mr. Morgenthau was that, by taking the initiative in refunding operations, the Government had helped lower interest rates in general, boosted bond prices and dressed the money market for private financing. Citing the $112,000,000 of corporate refunding last March--nine times the figure for March 1934--he flatly stated: "It shows conclusively that the financial logjam has been broken."

Most bankers would give credit for the current flood of corporate refunding, not to the Treasury, but to Chairman Joseph Patrick ("Joe") Kennedy of the Securities & Exchange Commission. It was his new simplified registration form for old, established companies that tempted bankers and their clients to risk operations under the Securities Act.

Last week's total bond offerings of $263,000,000 set a four-year record but it just happened that only $5,000,000 was private financing--a United Biscuit issue, notable because it included more than $1,000,000 of new capital. Most of the week's total was accounted for by $162,000,000 of Federal Land Bank refunding, a $24,000,000 California relief loan and a $50,000,000 New York City refunding issue.

Nevertheless, at least a quarter-billion of corporate refunding is shortly expected. Southern California Edison is about to float $73,000,000 of 4% bonds--biggest issue ever registered. Union Oil has filed a $13,500,000 offering. And last week big corporations like American Rolling Mills, California Packing, Virginia Electric & Power, Pennsylvania R. R., Commonwealth Edison, Armour & Co. and Texas Corp. were all reported to be considering financing ranging in amounts up to $100,000,000.

Yet, like Mr. Morgenthau's great Treasury conversions, almost all such financing was only substituting new money for old. None but a tiny fraction of the total involved will go into new plants, new branches, new machinery. The companies are simply saving money by borrowing at present low rates in order to pay off bonds bearing high coupons.* As to new capital which would liven heavy industry, the money market is still as logjammed as ever. . But the current refunding spree has done two things: 1) kept the bankers busy and 2) squelched the argument that no major financing can be done under the Securities Act.

*Last week the interest rate on call loans, pegged at 1 % on the New York Stock Exchange for 16 months, was cut to 1/2%--lowest in 31 years.

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