Business: Escape Hatch

One of the long-standing difficulties of the Eisenhower Administrationwas its inability to persuade Congress to abolish the 4¼% interestceiling on long-term (over five years) Government securities. TheKennedy Administration last week got around the problem deftly. In aletter to Treasury Secretary Douglas Dillon, Attorney General RobertKennedy ruled that it was legally permissible for the Government tooffer long-term bonds at a discount provided the coupon interest ratedid not exceed 4¼%. Thus, a long-term $1,000 bond could be sold for$950, with the $50 discount in effect boosting the yield to theinvestor to more than 4¼%. Since bond yields in this year’s easy-moneymarket are down to about 3%, the Administration’s maneuver wasprimarily designed to make it easier for the Government to borrow infuture tight-money periods.

Established in 1918, the 4¼% interest ceiling has long been a bone ofcontention. It hampers Government borrowing in periods of tight money,when investors are tempted by nonfederal issues that offer a higherrate of interest. In 1959. former Treasury Secretary Robert Andersonconsidered the discount as a legal escape hatch but rejected it asdevious—an opinion prompted by his inability to get a change through aDemocratic Congress.