Business: Managing the Debt

The Eisenhower Administration’s request to remove the ceiling on interest rates on Government bonds ran into a Democratic stone wall last week. Out of House Speaker Sam Rayburn’s office flowed the official party line: the proposal would not stand a chance in the House, even though it would enable the Treasury once more to sell long-term bonds. Many a Democrat fears that approval of the plan would cost him votes in 1960 because of the hardships that the Democrats say higher interest rates will impose on small borrowers.

In a hunt for alternatives, the House Ways & Means Committee called in Treasury Secretary Robert B. Anderson and suggested several other plans, asked him to return this week with possible compromise proposals. The Democratic alternatives:

¶ Take the interest-rate limit (now 3.26% on savings bonds and 4.25% on other long-term bonds) off only E and H savings bonds.

¶ Give the President the right to raise interest rates for a limited time.

¶ Enable the Treasury to call in Government bonds before their maturity date and offer new securities at lower interest rates as market conditions change.

¶ Sell Government bonds at cut prices, under their par value, thus increasing the yield and matching higher money-market rates.

¶ Set a higher fixed-interest limit, either 4¾% or 5%.

The proposals came as no surprise to Anderson, who has thoroughly explored them all and remains firmly convinced that only by abandoning the interest ceiling entirely can the Treasury efficiently manage the U.S. debt. In the past fortnight, he has spent the better part of nine working days on the Hill explaining his views to Congressmen. Point by point, he has countered Democratic objections. To take the interest rate off E and H bonds or give the President the right to set interest rates, warned Anderson, is only a halfway measure. To make bonds callable before maturity would disrupt the market; selling them at cut prices would shake public faith in Government securities. Even less effective, he said, would be to set a new and higher ceiling, since the Treasury would lose the flexibility it needs in meeting changing conditions in the money market.

“The choice,” said Anderson, “is either between a somewhat higher level of interest rates or stimulation of inflationary pressures through monetary expansion. There are no other choices.” The Administration fears that Congress may try to solve the problem by directing the Federal Reserve system to support the price of bonds, as the Fed did during World War II and the Korean war, when the economy was under controls to prevent inflation. Along with Anderson, Federal Reserve Board Chairman William McChesney Martin Jr. vigorously rejected this idea. Warned Martin: “This cannot be done without promoting inflation—indeed, without converting the Federal Reserve system into an engine of inflation.”

The Senate last week reluctantly passed a House-approved bill to raise the nation’s permanent debt limit to $285 billion. It also hiked the temporary debt ceiling from $288 to $295 billion, thus allowing the Treasury to finance an expected deficit during the first six months of the new fiscal year until tax receipts can catch up and, hopefully, balance the budget.