Escape Hatch

One of the long-standing difficulties of the Eisenhower Administration was its inability to persuade Congress to abolish the 4 1/4% interest ceiling on long-term (over five years) Government securities. The Kennedy Administration last week got around the problem deftly. In a letter to Treasury Secretary Douglas Dillon, Attorney General Robert Kennedy ruled that it was legally permissible for the Government to offer long-term bonds at a discount provided the coupon interest rate did not exceed 4 1/4%. Thus, a long-term $1,000 bond could be sold for $950, with the $50 discount in effect boosting the yield to the investor to more than 4 1/4%. Since bond yields in this year's easy-money market are down to about 3%, the Administration's maneuver was primarily designed to make it easier for the Government to borrow in future tight-money periods.

Established in 1918, the 4 1/4% interest ceiling has long been a bone of contention. It hampers Government borrowing in periods of tight money, when investors are tempted by nonfederal issues that offer a higher rate of interest. In 1959. former Treasury Secretary Robert Anderson considered the discount as a legal escape hatch but rejected it as devious--an opinion prompted by his inability to get a change through a Democratic Congress.

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