FISCAL: Morgenthau Laughs Last

Last fall Henry Morgenthau got enough whacks from the banking community to fracture a softer skull. Over the dead-body opposition of almost all U.S. bankers, the Treasury Secretary insisted on shoving through a $4 billion bond issue of 1½% notes of 1946 and 2% bonds of 1952. The issue barely squeaked through for a total of $4,100,000,000, whereas most issues theretofore had been oversubscribed 50% or more. Even to achieve this the Federal Reserve begged the banks to increase their subscriptions, offered to take over all the banks didn’t want. (Subsequently they did take over a half-billion dollars’ worth.)

Bankers criticized Mr. Morgenthau furiously for his “fetish of 2%,” arguing that the offering would have been a success if it had consisted of 2¼% bonds of 12 to 14 years maturity. But Mr. Morgenthau, breathing heavily, stuck to his old cheap-money theory, fighting the war boom as he had fought the depression. His program “to finance this war in the seven-to-ten-year range at 2%” was denounced as “stubborn amateurishness.” His reason (labeled as “eyewash”): “to save this and future generations many millions of dollars on the public debt.”

Treasury Wins. Last week Mr. Morgenthau got the last laugh. The Treasury hung up an alltime record: applications for $19½ billions worth of Treasury 1½% notes (due in 50 months) had come in for the $2½ billions worth the Treasury was offering. No oversubscription for any major Government issue had ever been so great.

Reasons for the cataract of oversubscriptions were varied, some good, some dubious: 1) banks and investors had become at least temporarily reconciled to the present interest rate; 2) Government borrowings have fantastically increased the banks’ capacity to lend; 3) in order to get the amount of notes they actually wanted, banks and investors subscribed for more than they expected to get, thus inflating the size of the oversubscription.

Speculators Win. In the wake of the frenzied demand, the “free riders” had a field day. Because the Treasury wanted to get the notes into vaults of small banks and safety deposit boxes of individual investors, it had stipulated that subscriptions up to $100,000 would be allotted first. Speculators hastened to put their names down for such sums, confident they could sell the notes as soon as they got them to people and institutions really intending to hold them. Because it was necessary to put up only 2% of the subscription at the time of making the commitment, many a “free rider” made $500 by laying out $2,000 for three or four days (the notes sold as high as 100 and 17/32nds almost as soon as they were issued).