Greatest Flop Since Mellon

Last week Secretary of the Treasury Henry Morgenthau turned up in London on an unannounced mission and was introduced to some 300 newspaper correspondents by Minister of Information Brendan Bracken, who jokingly compared his achievements in Government finance with those of Alexander Hamilton.

To many a U.S. banker it seemed that Mr. Bracken would have been smarter to compare Mr. Morgenthau to the late Andrew Mellon, whose astute Government financing was marred by the market flop of the famous Mellon issue of 3% bonds in 1931. For Mr. Morgenthau went to London just after he had had an equally outstanding failure.

The U.S. Treasury’s gigantic $4 billion bond issue consisting of 1½% notes of 1946 and 2% bonds of 1952 had just been subscribed for a total of $4,100,000,000—a squeak-through compared to the 50% (and greater) over-subscriptions of recent years. But to save even this much face the Treasury had to beg banks to increase their purchases, for the unsolicited subscriptions fell considerably short of the necessary total (about $1,000,000,000 short, according to many bankers’ beliefs).

The Fetish of 2%. This fiasco was the result not of any weakness in the Government’s credit but of the Treasury’s stubborn amateurishness. Most bankers agreed that the offering would have been a success if it had consisted of 2¼% bonds of 12 to 14 years maturity, but the Treasury brushed aside their advice. More than that, unlike Mr. Mellon, who confessed to his error when he misjudged the market, Mr. Morgenthau stuck to his dignity, put on a little homily on 2% financing.

“Now that we have successfully raised $4 billion with the cooperation of the investors of the nation, I sincerely hope we will be able to continue to finance this war in the seven-to-ten-year range at 2%. If we are able to accomplish this . . . we will save not only this but future generations many millions of dollars on the public debt.”

This talk of saving the taxpayer money was of course sheer eyewash since the Treasury, if it chose to put out short enough maturities, could finance the war at a fraction of 1%, or for nothing if it issued greenbacks. Moreover, a 2¼% longer term issue would not have been out of line with current Government bond yields. But the Treasury feared that if it put out such an issue just now investors in the future might demand this higher rate on shorter maturities. This would jack up the price of money all around and might—so the argument runs—unsettle the market for existing Government obligations.

With these fears in mind the Treasury forgot about the dangers of the failure of its issue, ignored the fact that it was antagonizing its customers, the bond buyers, blandly pooh-poohed the consequences of its decision.

The Customers Be Damned. Mr. Morgenthau is very high-principled, very modest about his limited financial ability, very timid. His daring move in sticking to 2% was out of character for him but not for his New Deal advisers. Those advisers were not worried about the consequences. They are quite sure that the banks will continue to take Government offerings, at almost any price, and that they do not have to worry about giving the banks what they want. Their attitude is: This is war; the banks have to buy our offerings, they have no choice, nor any other way of earning a living.

The Treasury still throws up its hands in horror at the idea of forced allocation of bonds to the banks, but recognizes that possibly it may be necessary to allot the banks quotas of bonds to be bought. This, the New Dealers point out, is voluntary and was done in the last war. How voluntary it will be with the Treasury in the mood of “the customers be damned” remains to be seen. But if forced allocation becomes a fact by what ever name it may be called, the Government will in effect have to take control of the whole banking and credit system.

What Price Inflation? If the banks fail to absorb Government loans on a voluntary basis the Government expert comforts himself that he can always sell his bonds to the Federal Reserve. Selling the Government bonds to the banks is of course inflationary because it adds to the amount of credit money in circulation. But selling them to the central bank is the next thing to printing greenbacks. (France followed that road to inflation in the early ’20s.) It means one more retreat from what the Treasury itself has said was its wartime objective: to cut down the sale of bonds to the banking system (whether the Federal Reserve or individual banks) and to sell them directly to the public to help cut down personal spending.

So far from being a bad thing, an overall rise in interest rates might help in this bond-selling job, though voluntary campaigns will almost certainly not be enough. To put a further brake on consumer spending the Government will have to rely heavily on forced savings (now implicit in the Victory tax), combined with much higher and broader regular taxes. Thus the U.S. is about to follow the lead of Britain which long ago discovered that forced savings are a vital part of wartime financing.

Possibly Henry Morgenthau was learning these hard truths in London last week. But on his past record he will probably continue to think about war financing in terms of the cheap-money theories of the ’30s—will go on trying to fight a war boom as if trying to fight a depression. And timid Mr. Morgenthau in sticking to his fetish of 2% is likely to find that either he has to take control over the entire credit system of the nation or add to the inflationary fires.