60523_1955-1959

268 195 5 REPORT OF THE SECRETARY OF THE TREASURY

States, and by Ambassador Berckemeyer on behalf of the Government of Peru and the Central Reserve Bank of Peru.

Under the terms of the agreement, the United States Exchange Stabilization Fund undertakes to purchase Peruvian soles up to an amount equivalent to $12.5 million if the occasion for such a purchase should arise. The agreement is designed to assist in maintaining trade and payments between the two countries substantially free from governmental restrictions and avoiding unnecessary fluctuations in the rate of exchange.

The International Monetary Fund has also announced today the extension of its standby arrangement with Peru under which the Monetary Fund agrees to make available up to $12.5 million. The two agreements, therefore, can provide a total of $25 milhon in standby resources.

Peru's currency is freely convertible into dollars at a market rate of exchange. In 1954 balance was achieved in Peru's commodity trade with other countries, and foreign exchange reserves increased in the last half of the year.

Ambassador Berckemeyer stated that his Government intended to continue the sound monetary and fiscal policies which have contributed to this improved international position.

Exhibit 41.—Statement by the Department of State and the Treasury Department, July 1, 1955, concerning the proposed Inter-American Bank for Economic Development

The Department of State and the Treasury Department, in reply to inquiries from the Press, issued the following statement, concerning the proposed Inter-American Bank for Econoniic Development.

"The proposal for the estabhshment of an Inter-American Bank was made by a committee of experts consisting of representatives of nine Latin Anierican central banks and the Secretariat of the Economic Commission for Latin America. This committee was established by a resolution of the Meeting of Ministers of Finance or Econoniy in the Fourth Extraordinary Session of the Inter-American Economic and Social Council held at Rio de Janeiro, Brazil, in November-December, 1954, to make specific plans for an inter-American financing institution.

"The United States delegation at that meeting abstained from voting on the resolution, stating that the United States had giveii a great deal of thought to the problem of Latin American needs for credit and investment facilities, and had concluded that in its opinion the facilities available through the International Bank for Reconstruction and Development, the Export-Import Bank, the proposed International Finance Corporation, and private organizations, will be adequate to meet all demands for sound purposes. It also indicated that if we find at some later date that this program is not achieving the results which we believe it can, we shall be glad to discuss other solutions. The United States delegation therefore expressed its regret that it could not at that time join in the proposed inter-American regional financing institution, and indicated it would abstain from participating in drafting specific plans for it. There have been no developments which would justify a change in the position expressed by the United States delegation at that time."

Addresses and Statements on General Fiscal and Other Policies

Exhibit 42.—Remarks by Secretary of the Treasury Humphrey, October 19, 1954, before the American Bankers Association, Atlantic City, N. J.

All Americans can welcome the fact that this Nation is making the shift from high to lower Government spending without more strain on the economy.

Hundreds of thousands of our people have successfully changed from making things for killing to niaking things for living. This has involved temporary hardships in some individual cases but this great shift is being made without a great economic upheaval.

Industrial activity and total employment have held remarkably well throughout recent nionths. The fourth quarter of this year is already even brighter both industrially and commercially.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Fiscal Year Ended June 30, 1955

EXHIBITS 2 6 9

The number of unemployed is currently decreasing. We have had more people working during this year than in any other year in the Nation's peacetime history. Unemployment is a matter of the greatest concern to everyone in this administration. We are working and planning in every way to reach the day when every man looking for work can find a job. We have shaped our entire economic program in the way best calculated to bring that happy day at the earliest possible time. ^

This Nation has not always been able to make the transition from war to peacetime spending without major economic upsets. American history shows that we have had severe economic adjustments following all great wars. This was true after the War of 1812, the Civil War, and World War I.

As you all know, one of the causes of postwar depressions is the fact that when our Nation goes to war it postpones for the time being the production of all sorts of peacetime goods. Once war ends, we turn to satisfying the backlog demands which built up while the war was on.

It is wholly human, even if unwise, for such reconstruction booms to be overdone and for speculative eredit structures to come into being. Soon the Nation finds itself with surpluses instead of shortages and an inventory readjustment is required. Using up these surpluses and the resulting readjustment of manpower and resources to the invention, production, and distribution of more new and different products and services has often in the past been a long, slow, painful process.

Study of past depressions makes clear some of the things that ought to be done. It also makes clear some of the things that ought not to be done. Many of the things in both categories concern monetary policy, with which you as bankers are • intimately famihar.

So that if the record tells us anything, it says that the most dangerous thing is to permit the erection of a great collapsible structure of speculative credit. When such structures finally topple, they set off a spiral of liquidation which ean quickly descend into widespread depression throughout the economy. We should note that there is all the difference in the world,between the systematic and orderly liquidation of inventories that have simply become too large, and liquidation forced by fear for loans that are in danger of going "under water." History records dramatically the "race for liquidity" and the disaster that it caused in the early 1930's.

We have been most fortunate that no such fear caused any similar race for hquidity in the past year and a half. It must not occur in the future.

There are other lessons from the past which were apphed to our economic situation over the past year and a half. It was clear that the Government's policies during all the 1930's were wrong and worked badly. They were designed to solve unemployment; 3 et there were still nine million unemployed in 1939. These unemployed only got back to work after "war broke out in Europe. I know of no one who thinks that war is the right way to cure unemployment.

Jobs are created, and only honestly created in our free competitive price economy, by people using their money to expand existing businesses or start new businesses in the hope of making a profit. If any Government pohcy is such as to make a profit unlikely or very diffieult, people simply aren't going to launch the new ventures from which new jobs grow. New ventures are discouraged by Government controls of materials, labor or prices or by uncertainty of labor and other costs or by the threat or actual practice of Government competing with private enterprise.

Limitations on incentives or freedom of legitimate activity in any way have a deadening effect. This administration's fiscal policies are shaped about the reduction of Government spending as an absolute requirement for the reduction of incentive-destroying taxation. The reduction of Government spending and lower taxes wih help to avoid the inflation which destroys confldence and ultimately any nation's economy. The handout principle of deficits and resulting debts of the 1930's was a temporary expedient that assisted nothing fundamental. It actually deterred individual risk taking in competition with the free money that was being passed around and finally became a means of destroying the soundness of the dollar.

A primary responsibility of government must, of course, be to relieve human suffering and destitution which cannot be taken care of by the individuals themselves when overtaken by adversity. But this must be done in the proper ways which this administration has already improved and enlarged.



270 1955 REPORT OF THE SECRETARY OF THE TREASURY

We seek the multiplication of production and income, not simply a new division of a stagnant pool.

Most of you are well familiar by now with the major accomplishments of this administration during the past 20 months. You know how spending and spending programs have been cut by billions of dollars. You know how taxes have been cut by the largest a-mount in any year in the Nation's history. You know how waste and extravagance have been stopped in many areas of government. You know how these and other policies have been successful in creating a remarkably constant value of the dollar during the past year and a half while the cost of ordinary living has shown a slight decline.

You know what efforts we have been making to reconstruct the debt. I would like to give you today an analysis of what we have done in the past 20 months, which shows that we have already made steady, if not spectacular, progress in this vital field.

President Eisenhower, in his first State of the Union Message in February 1953, said, in his discussion of fiscal policy, that "too great a part of the national debt comes due in too short a time." The President said that the Treasury would undertake at suitable times a program of extending part of the debt over longer periods and gradually placing greater amounts in the hands of longer term investors.

Our determination to do this at suitable times was based, of course, on the knowledge that too much short-term debt is infiationary. Handling of the debt by previous administrations had contributed substantially and deliberately to the inflation which robbed the dollar of almost half of its purchasing power from 1939 to January 1953.

Every month the debt gets closer to maturity simply as a result of the passage of time. Like the Red Queen, we have to run fast just to stand still. Our immediate job has been to stop the debt from getting shorter and then to start lengthening it gradually.

This we have done during the last 20 months. In nine of the eleven major financings of the last 20 months, the debt was

lengthened by offering investors securities other than one-year certificates. This is quite a contrast to the 20 months prior to January 1953, when on only two occasions out of 13 was longer term debt offered.

The major debt lengthening in the last 20 months has been a reduction in the amount of very short-term debt. The amount of marketable debt maturing in less than one year was cut down by over $11 billion.

The amount of marketable debt running more than five years was increased by about $8> bilhon.

We have made progress, too, in placing greater amounts of the debt in the hands of longer term individual savers, largely as a result of the highest level of E and H savings bonds sales since World War II. Individual investors altogether hold more than $66 billion of Government securities at the present time.

We are continuing to work to further the objective of reconstructing the debt. But we will continue also to operate with extreme care because, as you so well know, our economy is a sensitive mechanism that can be seriously upset by hasty or ill-considered action. We repeat that our goals can be clear— our start toward them can be immediate—but action must be gradual. Progress has been made and will continue to be made. But we will continue also to make every effort not to act so as to upset the sensitive mechanism of our economy.

The Government must borrow the money it needs so as not to interfere with the needs of other governmental units or private enterprise for any money they may need. The Government should not borrow large amounts of long-term money at times when it would seriously interfere with the supply of that money to finance the building of schools, hospitals, or highways by local or State governments or the expansion of power plants or building of new factories or other industrial enterprises by private business. What we are trying to do at this particular time is to have the Government borrow its money in such a way as to avoid the possibility of interfering with the expansion of our economy and the making of more and better jobs.

Every program that the Eisenhower administration undertakes, every problem that we inherited, we look at with one thought in mind: Is it necessary for the good of most of our people ? If so, we try to make sure that it is done in the most economical way. We are now definitely getting more and better defense for less money. There are many other examples of how we are getting better government at less cost and so helping the economy to become healthier.



EXHIBITS 2 7 1

There is nothing to fear about the long future of this economy or this Nation, If we keep doing the things we ought to do and this administration can continue to put its sound fiscal and economic policies' into effect, the years ahead will see greater prosperity and more jobs for more people making more, new, better, and cheaper things for better, fuller living for us all, than any of us have ever dreamed.

Exhibit 43.—Remarks by[Secretary of the TreasuryrHumphrey, October 21,1954, before the Investment Bankers_Association, New York, N. Y.

It is an often neglected fact that within the last half century this Nation has gone through an economic evolution that makes pale any other in the long history of man's efforts to achieve a better life.

The result is, and. the public's huge investment in savings bonds underscores it, that this Nation is today a Nation made up of small to medium savers and investors.

This means that today this is a Nation of "haves," and not a Nation of "have-nots."

We have been in a tremendous and beneficial evolution, peacefully bettering the lives of most of us.

We in this administration have hitched our wagon to this rising star of a "have" Nation to make sure of its continued rise—to keep making "have-nots" into "haves."

We are admirers of, and believers in, what has been this uniquely American growth and progress.

But on coming into office we found that this great day-to-day American evolution from the bottom up was in danger. In fact, we found that it had not even been properly recognized by economic policy makers of the past two decades. They were too busy fighting the frightening ghosts of a "have-not" Nation, a Nation that had even then already ceased to exist.

As a result, we found the economy blown up with the hot air of inflation, to a point where there was real danger that it might burst, letting us all down with a crash that would have maimed us as a Nation, and dropped the free world's defenses invitingly low.

We found the economy's growth hampered and hobbled by a tangle of successive layers of regulations, controls, subsidies, and taxes imposed in past emergencies. The economy was being twisted into the shape of things past, when it should have been reaching freely for its rightful future.

In addition, we found defense spending being used partly to buy defense, and partly as a crutch to support an unsound economy, thereby endangering both defense and the economy.

In other words, we found an economy going stale, out of step with the times and out of step with the Nation it had to serve, an economy fearful of the ghosts of bygone crises, living precariously on the treacherous dodges of inflation, subsidy, and excessive crash-and-crisis Government spending.

We have been reshaping this Government's economic policies into the policies required for a strong and forward-looking nation, its economy firmly footed and self-supporting; an economy that will pump a continuous new flow of nourishment into the day-to-day American evolution of self-betterment; an economy that will constantly generate new and better paying jobs for an ever-growing popula-tion» At the same time our economy must provide an ever-higher standard of living, plus the social services the people want and need, as well as the men and the weapons the Nation must have for its defense.

Now, let's look at what you millions of American citizens have been making of our economy, how you have been creating the world's most successful and beneficial economy, and what we in the Government are now doing to see that you have every possible opportunity to press forward and continue making a better life for all.

All hands in our Nation: Labor unions and the employer, the rich and the poor, both major parties, the farmer and the city man, the woman at home, and the man at his job—all have had a part in making our new productive way of life.

The point now is that this peaceful evolution has resulted in a tremendous upheaval of this Nation's whole economy that really has created a different kind of Nation, a unique Nation of "haves" that needs an up-to-date way of thinking about itself, and up-to-date policies, in keeping with its strength and growth potential.




Let's look back to the turn of the century and see what has. been happening, economically, since then. Only by making such a comparison can you realize how outmoded a line of thought , only a few years old, can be when apphed to our economy, and how alert we must be not to let out-of-date thought and practices tie MS down while opportuni ty passes us by.

Our total national production of goods and services this year will come to about 355 billion dollars. Tha t is 17 tinies as much as our national output in 1900. Whftn you make allowance for priee rises sinee the turn of the century, today 's national production is still six times what it was in 1900. Our population has more than doubled since 1900, but our national output per capita (production per man, woman, and child in the Nation) is three times what it was then.

Our national income this year will be about 300 billion dollars. After ahowance again for price changes, this is six times what it was in 1900. And our ineome per man, woman, and child in the whole population is, like production, three times as big as in 1900.

Here is the important thing about t ha t income change since 1900. The lower and middle inconie groups have received the greatest share of our increased income. Early in the century, only 10 out of every 100 Anierican families earned as much as $4,000 a year in terms of today 's prices. Now 55 out of every 100 families earn more than $4,000 a year. Those with inadequate incomes for a decent hving are becoming fewer and fewer, and more and more of them are becoming "haves"—people who have enough money not only to live adequately, bu t to save besides. Tha t is the basic economic development in this country which we are trying most fervently to keep going, and to continually improve.

Let 's see just how widespread and important this fiow of purchasing power to the broad base of our economy has been and will continue to be.

One of the most common methods of saving is the purchase of insurance. At the tu rn of the century, people in this country had t a k e n , o u t 14 million life insurance policies. Today, with the population only slightly more than doubled, and with many people owning several policies, the number of life insurance policies has increased nearly 18 times, to 250 milhon.

Ownership of individuals in their life insurance has increased from under 2 billion dollars in 1900 to 80 billion dollars today.

Small investors' holdings in United States savings bonds total the huge amount of nearly 50 billion dollars. No such investment existed in 1900.

Let 's see some other ways in which the average man on the street in this Nation has been making himself over Into a real investor—a man with a real financial s take in the future such as no other average citizen anywhere ever had before.

Nearly 10 percent of all American families today own stock in American corporations. At the tu rn of the century, this was just getting underway.

In 1900, individuals had liquid savings of all types amounting to less than 10 billion dollars. Now such savings of individuals in this country total more than 225 billion dollars.

Last year alone, Americans bought equipment for themselves and their homes of approximately 30 billion dollars. This included things unknown to the homeowner of 1900, like 8 milhon radios, 7 million television sets, nearly 4 million refrigerators, about 3}^ million washing machines, and a million air conditioners. These are mass investments in a bet ter life only a nation of "haves" eould make.

About 25 million families own their own homes today, comparied with only 7 million homeowners half a century ago, while population has only a little more than doubled in t ha t t ime. About 55 percent of our families now live in homes of their own. Nearly all the others want to. And ways and means of helping them to do so are of greatest concern in present Government policy.

Labor unions to which many American workmen pay dues, are also investors. Not so many years ago, union treasuries were low. Today many of them bulge with huge sums. They own banks and buildings, bonds and stocks, and investments of many kinds.

Today nearly 15 million Americans have more than 25 bilhon dollars invested in pension and retirenient t rus t funds. This represents an investment of more than $1,500 per worker. These ret irement plans V e r e practically unknown in 1900.

You can see from those few examples what has been happening to the individual and the family in our wonderland economy. We need a completely new set of s tandards in thinking about ourselves. We are a Nation of "haves ," not of "have-nots ." This Nation's economy has grown right over, and has left behind in the dust both socialism and communism.



EXHIBITS 2 7 3

The consequence of this brilliant human achievement in our Nation is that the basic interests of the man in the bungalow are today the same as the basic interests of the man in the penthouse.

Business long ago recognized this fact, and centered its attention on the wants and needs of the man in the bungalow. Tt is time that we all caught up with the facts of life in this Nation.

Let's see how the man in the bungalow and the man in the penthouse today have the same basic interests and what that revolutionary fact means to the whole econoniy.

Both men have current earnings and probably savings in one form or another. That means that both are interested in seeing the dollar keep its purchasing power. To the extent that inflation develops, both men are robbed.

If you had $1,000 saved up in 1939, which you did not draw out to use unth 1953, you really took a beating. Inflation had sneaked into your savings during those years and made off with $478. How? Because inflationary price rises during that-time cut the purchasing .value of the dollars you were saving, every minute of every day. When you drew out your $1,000 savings, inflation had stolen away with all but $522 of the purchasing power your dollars had when you put them aside in 1939.

This is a terrible thing to happen to a Nation of people who are working and sweating and scrimping to put aside money for the education of their children, the purchase of a home, or to provide for their old age.

The man in the bungalow often tries, by purchasing insurance, to build up some security to leave to his wife and children in the event of his untimely death. It is a terrible thing to have the purchasing power of his insurance—the time that it will pay the rent and set the table for those that are left—cut nearly in half in the short period of just 15 years.

It is a heartless thing for a man and woman who put aside savings in a pension or retirement trust fund as they work during their lifetime to find on retirement that inflation has robbed them of nearly half of what they had invested to live on in their declining years.

We in the Eisenhower administration have made halting inflation one of the principal goals of our administration. In the last 20 nionths, the value of the dollar has changed only one-half of one cent. This means that we have kept inflation's hand out of your savings almost entirely. We want to keep inflation locked out, so that when you save by putting money in the bank, by buying a savings bond, by buying insurance, by contributing either work or money to a pension fund or fraternal order or in any other way, you will get from your investment the same value that you toil now to put into it.

The man in the bungalow and the man in the penthouse have at least an equal interest in this fight. But, if there is any difference between them, it is the man in the bungalow who most needs protection. He ean less afford to lose.

Now, it is the vast sum of the many smaller savings of the man in the bungalow on which our industrial and commercial system depends for its financing. The sum of all the little savings is tunneled mainly into big investments by the savings banks, the building and loan associations, the insurance companies, investment trusts, pension funds, union and fraternal organizations, and others handling the savings of the man in the bungalow.

Business in this country is pouring nearly 27 billion dollars of new investment into its plants and equipment this year. That tremendous amount must come from somebody's savings. Without it, the future's new jobs will never be born, nor will we get tomorrow's increase in productivity, as the result of new and better tools of production, bought by new investment.

Saving is important to the Nation, and must be encouraged, not discouraged, because it strongly influences the security of the job you have, and your hopes for ever-better pay through continued increase in your productivity. Thus you can see how inflation can rob you not only of your personal savings but, in addition, steal away your pay increases and perhaps even your job.

We must have policies that put solid ground under our day-to-day evolution of continual betterment from the bottom up. Such policies must aim at everyone, spreading the riches throughout the land. There is only one way to have everyone have more. The Nation's treasures of goods and services must constantly increase, by continually increasing individual productivity, so that they • can be spread ever deeper and broader throughout the whole economy.

Our pohcies must result in giving the man in the bungalow ever more and more of the same things which the man in the penthouse also wants to have. And

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that can only be accomplished by an economy that constantly produces more of the comforts, conveniences, and necessities of life. Such an economy will not only be of direct benefit here at home, but will also be a beacon of progress in the whole free world, a sharp, attractive contrast to the smouldering darkness behind the Iron Curtain.

Our strong economy must and can carry the costs of fully adequate defense and of indispensable pubhc services, and at the same time continue its healthy growth. But it will only be able to do so if we balance the load correctly, so that it can be carried, and carried indefinitely, without a breakdown.

We have devised policies to fit our new situation and have begun to balance the load.

We are not the slave of any particular aspect of our flexible policies. We regard inflation as a public enemy of the worst type. But we have not hesitated, either, to ease or restrict the basis of credit when need was indicated. Under the new cooperation that exists in this administration between the Treasury and the Federal Reserve, the full force of monetary policy has been made effective more promptly than ever before in the Nation's history to better respond to natural demands.

We found when we came to office an overblown economy. It was harnessed with all sorts of artificial controls, dangerously dependent upon the uncertainties of defense spending and inflationary pressures. It was borrowing from tomorrow's production and income at a prodigious rate, with unsound confiscatory taxation that still failed to provide for the profligate spending. This resulted in huge deficits that were passing the heavy burden of our excesses on for our children and grandchildren to bear. And sooner or later it was sure to result in complete downfall.

Correction of that situation has been well started. The whole economy, the livelihood of all the people, has been made more safe. This has been done by the timely use of monetary policy and credit in response to actual demand; by the return to the public of purchasing power through the biggest tax cut in the history of the Nation, by cutting unjustified amounts from Government spending; and at the same time by timely encouragement to construction, home building, and needed improvements. By the prompt and vigorous use of all these measures we have made the difficult and delicate change from a dangerously artificial economy to a healthy one, with every, effort exerted to the utmost to involve the very minimum of cost in terms of unemployment meanwhile.

In turning our faces resolutely from inflation, and unreahstic spending, what have we turned toward ?

We have turned to you, to the 160 million people of America. We have turned with full confidence to a people that have demonstrated that

you are industrious, saving, inventive, daring, progressive, and self-reliant to an unprecedented degree'. We believe in your capacity to go on providing yourselves with an ever better life, if we in Government support your efforts where the general welfare calls for such support, and do not load you with unnecessary burdens, or take from you by excessive taxation the increase in your income that you might otherwise earn and save.

Realistic economic policies that take account of the true nature of our economy and the burdens it must bear, will bear big fruit.

We will not be rising on the hot, uncertain air of inflation. Nor will we be wearing the false, rose-colored glasses of a prosperity based on unwise and dangerous Government deflcit spending, treacherous alike to the Nation's security and its economic health./

We will be rising on the solid ground of these things: Savings protected against shrinkage by a stable dollar; Increased production and increased wages and earnings made possible by the

investment of those savings in more, new, and better tools of production; Wide use, by Americans who are both workers and investors, of these tools of

production for the creation of more jobs and new, better, and cheaper goods, with ever-widening distribution among an ever-growing number of consumers as their earning power increases and the cost of the goods declines;

Use of the increased income from this increased production of the things you want—not to pay the bill for unneeded or unwise Government spending, or as tribute to inflation, but for the creation of a better life for all.

We have turned our backs on artificial stimulants. We have turned our faces confidently to practical, natural methods for the creation of a better life for all of us, firm in the belief that continuation of the process of the American evolution of self-betterment from the bottom up is second nature to our whole people.



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Exhibit 44.—Memorandum to the Honorable Wright Patman, October 29, 1954, on the depositary practice of the Treasury Department

DEAR MR. PATMAN: In response to your letter of September 3, which I acknowledged on September 13, I am enclosing herewith a memorandum giving you the history of the depositary practice of the Treasury Department, legislative authority therefor, and other information concerning the maintenance of deposit accounts by the Government in commercial banks.

I trust that this memorandum will furnish the information you desire. Very truly yours,

G. M. HUMPHREY, Secretary of the Treasury.

HONORABLE WRIGHT PATMAN, House of Representatives, Washington 25, D. C.

WHY THE FEDERAL GOVERNMENT KEEPS FUNDS IN COMMERCIAL BANKS

This memorandum has been prepared in response to Congressman Patman's letter to the Secretary of the Treasury, dated September 3, 1954, regarding the practice of the Federal Government in keeping funds in the commercial banks of the Nation. The memorandum presents the following information requested by Congressman Patman:

1. History of depositary practice of the Treasury Department. 2. Legislative authority. 3. Complete and definitive statement explaining the operations of, and

reasons for, this practice. 4. Specific terms on which banks accept these deposits. 5. Precisely how decisions are arrived at as to leaving funds on deposit

and to transferring them. 6. Why these funds are not transferred to the Federal Reserve Banks

immediately upon receipt. 7. What the high, low, and the average balance carried in commercial

depositaries has been during the fiscal year ending June 30, 1954. 8. Same information for each of the twelve Federal Reserve districts.

1. History of depositary practice of the Treasury Department Except for brief intervals the United States Government has throughout its

history followed a practice of depositing its public funds in the banks of the Nation. Among the first acts of Alexander Hamilton as Secretary of the Treasury was the designation of the Bank of North America and the banks of New York, Massachusetts, and Maryland as depositaries of Government funds.

The First Bank of the United States, chartered in 1791, served as a Government depositary and fiscal agerit. When the Bank, was not rechartered, the Government funds were transferred to State banks. The act authorizing the chartering of the Second Bank of the United States in 1816 specifically authorized the Secretary of the Treasury to deposit Government funds "in places in which the said bank and branches thereof may be established." When the Second Bank ceased functioning as a national institution in 1836, the Government again relied upon State banks to act as depositaries.

Ih 1846 a system was set up to separate, as completely as possible, the Government's financing operations from the money market. Congress passed a law establishing the Independent Treasury System, and the Government became its own banker. This act created four subtreasuries, located in New York, Boston, Charleston, and St. Louis. Their duties were to receive deposits of publie moneys,

. to make disbursements, and to transfer money from one point to another, functions theretofore performed by commercial banks.

The financial history of the ensuing years proved the inadequacy of the Independent Treasury System to meet the needs of a growing country. This System received a serious setback at the beginning of the Civil War when the attempt to collect in specie the money whicb the Treasury needed to finance the war forced the suspension of specie payments. The result was the establishment in 1863 of the National Banking System, which provided for the designation of these banks as depositaries of public funds.

One of the disadvantages of the Independent Treasury System, not fully met by the National Banking System, was its inability to supply business with suflS-




cient note circulation when needed and to avoid overexpansion when speculation reached the danger point. It was not capable of keeping pace with the growth of business in the United States and had become obsolete by the time the Federal Reserve System was established in 1914.

The Federal Reserve Act contained authority for the Federal Reserve Banks to act as fiscal agents for the United States Government and to hold deposits of Federal funds. In order to give the Federal Reserve Banks time to become organized, the Treasury did not appoint them as fiscal agents until January 1, 1916. The Independent Treasury System was abolished by act of Congress,, approved in May of 1920, when the remaining duties of the subtreasuries were taken over by the Federal Reserve Banks. However, it was necessary for the Treasur}^ to continue to utilize commercial banks as depositaries in those principal cities which did not include Federal Reserve Banks or branches.

In the Second Liberty Bond Act of 1917, the Congress provided for the establishment of Treasury war loan accounts to take care of the financing of the Liberty loans. These accounts were originally established to enable the banks to retain, until withdrawn by the Treasury, the proceeds arising from sale of Liberty bonds to such banks or their customers. Later authority for use of these accounts was extended to the sale of other Government securities, including United States savings bonds and Treasury savings notes. Under the Current Tax Payment Act of 1943, and later legislation, withheld ineome taxes, certain quarterly income and profit tax payments, sociah security taxes, and excise taxes are deposited in these accounts which have become known as tax and loan accounts.

2. Legislative authority The legislative authority for deposit of Government funds in commercial banks

is provided under several basic acts of Congress. Citations of these acts and the pertinent provisions are as follows:

(1) Revised Statutes, Section 5153, derived from the act of June 3, 1864 (13 Stat. 113, as amended), relating to the designation of National Bank Associations as depositaries of public moneys:

"All national banking associations, designated for that purpose by the Secretary of the Treasury, shall be depositaries of public money, under such regulations as may be prescribed b)'' the Secretary; and they may also be employed as financial agents of the Government; and they shall perform such reasonable duties, as depositaries of public money and financial agents of the Government, as may be required of them. The Secretary of the Treasury shall require the associations thus designated to give satisfactory security, h j the deposit of United States bonds and otherwise, of the safe-keeping and prompt paynient of the public money deposited with them, and for the faithful performance of their duties as financial agents of the Governnient: * * *" (12 U. S. C. 90)

(2) The Federal Reserve Act of December 23, 1913 (38 Stat. 259) as amended on May 7, 1928 (45 Stat. 492), relating to the designation of member banks as depositaries:

"All banks or trust companies incorporated by special law or organized under the general laws of any State, which are members of the Federal Reserve System, when designated for that purpose by the Secretary of the Treasury, shall be depositaries of public money, under such regulations as may be prescribed by the Secretary. * * *" (12 U. S. C. 332)

(3) The act of September 24, 1917, with regard to authority to deposit the proceeds of sales of bonds, certificates of indebtedness, and war savings eertificates (40 Stat. 291, as amended): . '"'The Secretary of the Treasury, in his discretion, is authorized to deposit, in

such incorporated banks and trust companies as he may designate, the proceedfe, or any part thereof, arising from the sale of the bonds and certificates of indebtedness. Treasury bills, and war-savings certificates * * * and arising from the payment of internal revenue taxes, * * *" (31 U. S. C. 771)

(4) Act of June 19, 1922 (42 Stat. 662), relating to depositaries in foreign countries. Territories, and insular possessions:

"The Secretary of the Treasury may designate such depositaries of pubhc moneys in foreign countries and in the territories and insular possessions of the United States as may be necessary for the transaction of the Government's business, under such ternis and conditions as to security and otherwise, as he may from time to time prescribe: Provided, That in designating such depositaries American financial institutions shah be given preference wherever, in the judg-



EXHIBITS 2 7 7

ment of the Secretary of the Treasury, such institution is safe and able to render the service required." (31 U. S. C. 473)

(5) Act of June 11, 1942 (56 Stat. 356), relating to insured banks: "All insured banks designated for that purpose by the Secretary of the Treasurj^

shall be depositaries of public moneys of the United States * * * and the Secretary is hereby authorized to deposit public nioney in such depositaries, under such regulations as may be prescribed by the Secretary; and they may also be employed as financial agents of the Government; and they shall perform all such reasonable duties, as depositaries of public nioney and financial agents of the Government as nisbj be required of them. The Secretary of the Treasurj^ shall require of tbe insured banks thus designated satisfactory security by the deposit of United States bonds or otherwise, for the safekeeping and prompt paynient of publie money deposited with them and for the faithful performance of their duties as financial agents of the Government. * * *" (12 U. S. C. 265)

(6) The Current Tax Payment Aet of 1943 (57 Stat. 126) with respect to the designation of depositaries for withheld taxes:

"The Secretary may authorize the incorporated banks or trust companies which are depositaries or financial agents of the United States to receive any taxes under this chapter in such manner, at such times, and under such conditions as he may prescribe; and he shall prescribe the manner, times, and conditions under which the receipt of such taxes by such depositaries and financial agents is to be treated as paynient of such taxes to the collectors." (26 U. S. C. 1631)

(7) Sec. 6302 (e) of the Internal Revenue Code of 1954 (derived from the act of August 27, 1949, 63 Stat. 668), with respect to depositaries for collections:

"Use of Government Depositaries.—The Secretary or his delegate may authorize Federal Reserve Banks, and incorporated banks or trust companies which are depositaries or financial agents of the United States, to receive any tax imposed under the internal revenue laws, in such manner, at such times, and under such conditions as he may prescribe * * *."

3. Complete and definitive statement explaining the operations of, and reasons for, this practice

The Congress has vested in the Secretary of the Treasury authority to utilize the services of the Federal Reserve Banks and the commercial banks of the country as depositaries and fiscal agents of the Government. Not only has the Congress granted authority to the Secretary to utilize the services of banks but it has also established, by law, the basic procedures for handling the receipts and expenditures of the Government.

The twelve Federal Reserve Banks are now the principal fiscal agents.of the United States Government. Each Reserve Bank maintains an account in the name of the Treasurer of the United States. Into these accounts virtually all Government reeeipts eventually are credited, and from them nearly all payments are made.

Implementing the Treasurer's accounts at the Federal Reserve Banks is a nationwide network of deposit, accounts in commercial banks. Most of the money collected by the Government feeds into the U. S. Treasurer's accounts at the Reserve Banks through the banking systern of the country. Any incorporated bank is'eligible to qualify as a Governnient depositary. All Government deposits in banks must be secured by a pledge of collateral security, this collateral usually being in the form of United States Government securities.

(a) Operation of special depositaries (tax and loan accounts) The system of "Special depositaries" originated during World War I. The

first Liberty Loan Act of 1917 provided that banks purchasing securities issued under terms of the act, for their own accounts or for the accounts of their customers, could deposit the proceeds from such purchases into special accounts known as "War Loan Accounts." Until 1935, deposits in these accounts were not subject to reserve requirements. Originallj^ the banks were required to pay 2 percent interest on such deposits. However, this was' considerably below prevafling interest rates at that time. In the early 1930's, this interest rate was lowered and then eliminated entirely along with interest payments on other demand deposits in keeping with the provisions of the Banking Aet of lt)33.

During the 1930's, receipts from the sale of Government securities were relatively small and comparatively little use was made of the war loan accounts.




The heavy borrowing requirements of the Federal Government accompanying World War II provided a need for the Treasury to utilize more fully the war loan accounts. The act of Aprfl 13, 1943 (57 Stat. 65) suspended, for the duration of hostilities plus 6 months, against balances in these accounts, all reserve requirements and Federal deposit insurance assessments. The reserve and insurance requirements were reimposed after June 30, 1947.

Following World War II, the Congress provided for wider use of these accounts by authorizing the Treasury to use them for processing certain tax receipts. Beginning with March 1948, the banks were permitted to credit to these accounts their receipts of withheld income taxes, which previously had been turned over to the Federal Reserve Banks monthly or more frequently. On January 1, 1950, the Treasury revised the system for deposit of withheld ineome taxes and extended the provisions for deposit to war loan accounts to include deposits of payroll taxes from the old age insurance program. The war loan accounts were renamed "Tax and Loan Accounts" on January 1, 1950.

Other appropriate taxes have since been made eligible for deposit in these accounts. Under a special arrangement, large quarterly payments (cheeks of $10,000 or more) of income and profits taxes, may be deposited in tax and loan accounts, when, and to the extent that, the funds are not immediately needed by the Treasury. This arrangement was first provided for quarterly tax payments of March 1951.

Beginning in July 1951, railroad retirement taxes became eligible for deposit to these accounts. In July 1953, certain excise tax paynients became eligible.

It. must be borne in mind that deposits are not made by the Treasury into these accounts. Deposits to the tax and loan accounts occur in the normal course of business under a uniform procedure applicable to all banks whereby customers of banks deposit tax payments and funds for purchase of Government seeurities. In most cases the transaction involves merely the transfer of money from a customer's aceount to the Government's account in the same bank. On occasions, to the extent authorized by the Treasury, banks are permitted to deposit in these . accounts proceeds from subscriptions entered for their own aceount as well as for the account of their customers.

The working cash of the Treasury is held mainly in the Federal Reserve Banks and branches. The Treasury draws upon these balances for its daily disbursements. As these balances become depleted they are restored in part through various receipts deposited directly to the Treasurer's account at the Federal Reserve Banks. However, the larger part of receipts to these accounts is derived by calling in funds from the tax and loan accounts. Well over half of the Government receipts now flow through tax and loan accounts.

In order to reduce the administrative cost to the Treasury by avoiding making frequent withdrawals from small accounts. Treasury has classified special depositaries into Group A and Group B. The present classification places in Group A those banks whose Treasury tax and loan aceount balance as of February 16, 1954, was less than $150,000. Banks with balances in excess of this amount on that date are classified in Group B. Banks are regrouped at least once a year. Still another classifieation in use is what is known as "X" balances. These are the balances derived from deposit of large quarterly payments of income and profits taxes. These balances are usually depleted more rapidly than those of the A and B accounts. These "X" balances may be held by banks of both Group A and Group B.

Calls for withdrawals from Group B depositaries and on "X" balances are usually announced on Monday or Thursday and payments scheduled for several working days subsequent thereto. Withdrawals from Group A depositaries are made less frequently, usually only once a "month.

The tax and loan accounts are very active, and the .flow of deposits and withdrawals is rapid and continuous. As a result of the uneven flow of the Government's receipts and expenditures the balances fluctuate considerably. Using end of the month figures, the balances in these accounts fluctuated during the fiscal year 1954 from $6,690,000,000 on July 31, 1953, to $2,406,000,000 on January 31, 1954. The volatility of these accounts is indicated- by the frequency and size of withdrawals made against uncalled balances in the Group B accounts (see attachment 3). Withdrawals from these larger accounts are usually made twice weekly and frequently reach 25 to 50 percent of the balance in the account as of a particular date. The single monthly withdrawals on the smaller accounts usually equal or exceed 50 percent of the balances.



EXHIBITS 279 The volume of receipts and disbursements fiowiug through the tax and loan

accounts has increased almost steadily during the past 7 years as follows:

[In millions of dollars]

Fiscal year

1948 _ ---1949___ 1950 JL _ 1951.. 1952 1953 — 1954 . . . .

Receipts

8,575 15,231 16,876 24,128 36,492 41, 267 41,645

Withdrawals

7,765 15,233 15,380 21,716 37,066 43, 302 39,880

Out of approximately 14,500 ehgible banks in the United States nearly 11,000 have qualified as tax and loan depositaries.

(b) Operation of other depositaries While the principal balances are held in the tax and loan accounts of special

depositaries, relatively small amounts (aggregating about $500 million) are held in other types of depositaries whicii are designated by the Treasury to hold balances of Government funds and to perform certain services for the Government. It is the policy of the Treasury to utilize the facilities of the Federal Reserve Banks and branches to the fullest extent possible for these services. However, as these facilities are available at only 36 points in the United States, it has been necessary to supplement them by designating banking institutions as depositaries at other points when justified by the volume and character of essential Government business. These depositaries, which extend to all areas of the United States, our Territories and insular possessions, and foreign countries, are briefly described as follows:

General depositaries.—There are approximately 1,420 general depositaries which hold about $400 million of Government deposits exclusive of balances they may have in tax and loan accounts. This type of depositary is authorized to maintain on its books an account in the name of the Treasurer of the United States. It is maintained only at points where there is a necessity to meet cash requirements of Government officers for payrolls or other expenditures, or to receive deposits of cash from depositors of public moneys. General depositaries are given a stated balance which is fixed in relation to the volume of business in the Treasurer's account and which may be retained until the need therefor no longer exists. All moneys received in excess of the authorized amount must immediately be remitted to the Federal Reserve Bank of the district.

Limited depositaries.—Limited depositaries are designated at such points as are required to receive up to specified maximum amounts deposits made by postmasters, officers of U. S. courts, and other officers in special cases for credit in their official checking accounts with the depositary. As a general rule, no Treasurer's balances are maintained in limited depositaries for this purpose.

Bank draft depositaries.—These depositaries are designated by the Treasury to issue bank drafts to Government officers in exchange for funds received by the officer for the account of the United States. These designations are made when the volume of business does not justify a general depositary. Small Treas^ urer's. balances are maintained in these depositaries. The balances are fixed in relation to volume of business handled.

Depositaries for State unemployment compensation accounts (social security) and veterans unemployment compensation benefit payment accounts.—Depositaries for State unemployment compensation accounts are designated for the purpose of handling receipts and payments for social security unemployment compensation under arrangements with the Social Security Board. Likewise, depositaries for veterans unemployment compensation are those designated to handle the receipt of Government funds and the payment of unemployment compensation to veterans under arrangements with the Veterans Administration. In both instances payments are made by checks signed by State officials. Treasurer's balances are maintained in these depositaries.

Banking facilities.—Banking facilities are those offices provided by commercial banks, primarily at military posts, to render certain necessary banking services to the post and its personnel. These services include cashing Government checks, furnishing cash for payrolls, receiving deposits of Government funds, and similar




services. The facflities are located at Army posts. Air Corps installations, naval stations, military and veterans hospitals, Atomic Energy Commission plants, and other Government establishments where regular banking services are not readily available. Treasurer's balances are maintained with the banks designated to operate banking facilities.

Check-cashing facilities.—Because of the large concentration of Government employees in the District of Columbia and adjoining area, certain banks have been designated for cashing of Government payroll checks for noncustomers. Treasurer's balances are maintained with these banks.

Territorial and insular depositaries.—These may be either general or limited depositaries located in the Territories or insular possessions of the United States.

Foreign depositaries. —Banks in foreign countries may be designated as general. depositaries, limited depositaries, or depositaries of foreign currency. Substantial amounts of foreign currency are acquired from foreign governments without payment of dollars in connection with various economic, technical, and military foreign aid programs, as well as in settlement for lend-lease, surplus property, etc. Foreign branches of American banks are given preference when available and able to render the service required.

As a basis of offsetting expenses incurred by the banks in handling Government business of this nature the Government has long followed a practice of maintaining Treasurer's balances with the depositaries, or, as with limited depositaries, authorizing Government officers to maintain minimum operating balances in their official checking accounts.

Briefly, the procedure followed in establishing these depositaries and in determining the balances to be authorized for handling Government business is as follows:

The request to establish a particular depositary is generally initiated b} a Government officer in the field, who presents to his administrative officer in Washington the reasons for needing a Government depositary in the particular area. ^ An estimate is made of the amount of business the depositary would be called upon to perform. If the Washington headquarters of the agency agrees with its field officer that a depositary is necessary, the agency requests the Treasury to designate such depositary. In addition to considering the volume of business to be transacted and the possibility of utihzing other depositary facilities already established, the Treasury will usually estimate, or call upon the banks under consideration for designation to estimate, the cost of performing such service. Any possible earnings accruing to the bank as a result of serving as a Government depositary must be shown as an offset against cost.

If, in view of all factors concerned, it is believed to be in^the^best (interests of the Government to establish a depositary, the Treasury will issue the necessary designation. A Government deposit will be made to the depositary in an amount sufficient to offset the expenses incurred by the bank for servicing the Government. The initial allotment of a Treasury balanee to a depositary must be based upon an estimate. Each depositary is advised that the initial allotment will be subject to adjustment upon the basis of the volume and character of the Government business actually handled. Depositaries submit monthly analyses of business handled and their costs. Due to differences in the size and location of banks, nature and volume of business handled, etc., it is not practicable to adopt uniform standards which may be applied to all banks. However, based upon experience gained in reviewing analyses submitted by banks throughout the Nation, and even in foreign countries, and a day-to-day review of cost studies made by banking associations and individual banks, certain guides have been estabhshed for use in determining reasonableness of bank costs.

Treasury balances maintained with these depositaries are generally time deposits. They are subject to both reserve requirements and Federal deposit insurance assessments. Depositaries at present are required to compute the earning value of the average daily loanable balanee in the Treasurer's aceount at the rate of 2 percent per annum for analysis purposes. Depositaries may, if they so desire, purchase 2 percent depositary bonds, in amounts equal to their authorized Treasury balances. The depositary bonds are held as collateral security for the Treasury balance. If the depositaries do not purchase depositary bonds, they must pledge other aeceptable collateral.

(c) Reasons for this practice The Treasury uses commercial banks as depositaries of Government funds for

two reasons: (a) The system provides the most efficient and most economical



EXHIBITS 2 8 1

way of transacting the Government's business and (b) it reduces to a minimum the effect of Treasury financial operations on the economic stability of the country. These advantages will be discussed in turn.

There have already been described these services which are performed for the Government by the commercial banks and for which the Treasury authorizes maintenance of Government balances as an offset to bank costs. In addition, the banks incur expenses in rendering a number of other iniportant services for whicii no reimbursenient is made.

One of the most important public services the banks render is the sale and issuance of United States savings bonds, either by direct cash sales or through the servicing of payroll savings plans. They do this work without charge to the Treasury, notwithstanding the fact that in many cases it is necessary to employ full-time employees on the work. The banks distribute announcements and receive subscriptions for the purchase of marketable seeurities, and they handle matured marketable securities for redeniption or for exchange into new issues, all without reimbursement by the Government.

Commercial banks render considerable assistance to the Treasury in the weekly sale and distribution of Treasury bills. Treasury bills are usually issued with maturities of 91 days, with an issue maturing each week for thirteen consecutive weeks. The proceeds of these bills are not deposited in tax and loan accounts. Ill bidding for Treasury bills, many subscribers submit their tenders through commercial banks. The banks check with dealers on possible bid ranges and enter their customer's bid for the aniount requested. This work is done without compensation to the banks.

In World War I and again in World War II the banks played a major role in the success of the war-loan drives. Three-quarters of the dollar volume of war-loan campaign sales were made through commercial banks.

Banks handle without charge to the Government remittances from employers inconnection with the deposit of withheld income and social security taxes. As a means of assisting the Treasury in preventing or reducing tax evasion, banks furnish the Internal Revenue Service, without charge, information regarding large currency transactions. They report to the Internal Revenue Service interest paid on savings accounts and the payment of dividends where banks act as financial agents for corporations. They cooperate with the Government's foreigii funds eontrol activity in order to prevent leakage of Anierican assets into certain foreign hands, requiring the keeping of supplemental records and the filing of many reports with the Treasury.

There are only a comparatively few areas where banks receive fees for services such as the redemption of savings bonds and the servicing of Commodity Credit Corporation crop loans. These services entail risks of loss as well as expense which the Government could hardly expect the banks to assume without reimbursement. For instance, when a bank redeems a United States savings bond,, it is hable for any loss resulting from an error in identification.

Thus, the banks perform for the Government, and particularly for the Treasury, a nuniber of indispensable services. Most of these services are perfornied free of charge, either as a public service or in the interest of fostering good customer relations. Without such services a large increase in the number of Federal employees would be necessary and a large expense to the Government would be entailed. Even though the Government did perform these services itself, and at a great eost, it could not provide many of these services as expeditiously and as conveniently for the public as can the banking systeni. By having the commercial banks perform certain fiscal agency functions of the Federal Government in conjunction with serving the regular business needs of their customers these functions ean be handled most efficiently and most economically for the Government. This arrangement works to the mutual advantage of the Government, the public, and the banking systeni.

The second reason for depositing Government funds in the commercial banks of the Nation is that this practice provides the most effective method yet devised for maintaining a smooth flow of funds from the banking system.into the Treasury and back again into the channels of trade through Government disbursements.

Nearly all Government disbursements are made from funds held on deposit in the Federal Reserve Banks. This means that virtually all funds, both receipts and expenditures, sooner or later, flow through the Treasurer's accounts with the twelve Federal Reserve Banks. When checks drawn on the 'commercial banking system for payment of taxes or purchase of Government securities are deposited




in the Treasurer's accounts at the Federal Reserve Banks, there is an equivalent drain on^member bank reserves, sinee the member banks pay the cheeks by drawing the amounts from their reserve balances held in the Federal Reserve Banks. Each payment from the public intp a Federal Reserve account involves a corresponding reduction in bank reserves. Each disbursement by the Treasury from a Federal Reserve aceount causes an equal increase in member bank reserves. The impact of these money flows could be held to a minimum if each day's inflow of funds into the Federal Reserve accounts were approximately offset by a corresponding amount of disbursements. Obviously it is not possible for the Government to time its borrowing operations and to make its tax collections in such a manner that daily receipts will equal the Government's daily disbursements. The uneven flow of Government receipts and expenditures and the need for spacing cash borrowing operations make such perfect balancing impossible. However, the likelihood of abrupt changes resulting in intense stringency in the money market can be lessened immeasurably by Treasury's practice of initially funneling a considerable part of its reeeipts from borrowing and taxation into its deposit accounts at the commercial banks. In this manner, reserves are not withdrawn from the banking system until such time as they can be returned by Treasury disbursements. Through the utilization of its tax and loan accounts

^the Treasury ean largely neutralize the money market impact of the flow of funds through its accounts and can so regulate the impact of Treasury financing operations on the money market as to avoid disruption to the market.

If the special depositary system did not exist there would be heavy drains on bank reserves during periods of heavy tax payments or of large-scale borrowing operations. The banks would have to draw down their reserves to transfer funds to the Treasurer's accounts at the Federal Reserve Banks. In order to meet this drain on their reserves the banks would have to liquidate Government seeurities previously purchased, restrict normal extension of credit to their customers, or obtain credit from the Federal Reserve System. As the balances built up in the Federal Reserve Banks were disbursed by the Government they would be deposited by the customers of the commercial banks and bank reserves would be built up again. The Federal Reserve System would then have to absorb the resulting excess reserves. These fiuctuations in bank reserves would have an extremely disrupting effect on the money market and the Nation's business.

Not only does the system of tB,x and loan.accounts make it possible to leave funds in the bankmg system until such time as they are required for Government disbursement, but it also permits such funds to be retained in the communities from which they come. For example, assume that a commercial bank in Panhandle, Tex., sells $100,000 of savings bonds to its customers. This nioney is left on deposit in Panhandle until such time as it is needed to pay the Govern-ment's bills. If this money should be immediately deposited in the Federal Reserve Bank before it can be returned to channels of trade through Government disbursement, the money in the community of Panhandle would be transferred to Dallas. Without the tax and loan accounts there would be during periods of heavy tax payments or during borrowing operations tremendous shifting of funds between banks and communities.

f On occasion, the Treasury, in anticipation of heavy tax receipts during heavy j tax months, will, under statutory authority, replenish balances at Federal Reserve ' Banks by borrowing directly from such banks through the issuance of special i certificates of indebtedness, rather than withdrawing funds from Treasury tax and • loan accounts.. These^funds are borrowed for only a few days and enable the

Treasury temporarily to make disbursements in excess of its current receipts thus providing the banks with additional reserves in advance of a later unavoidable drain. Such an operation is, of eourse, consistent with the overah policy of smoothing out the effects on bank reserves of the Government's financing operations.

The tremendous growth of the Federal Government budget and of the pubhc debt in recent years has made Treasury operations the largest and most important single influence on the flow of funds through the money market. Federal fiscal operations growing out of an annual budget of more than $60 billion and a public debt of more than $275 billion also underscores the importance of the Treasury maintaining a sufficiently large cash operating balance to be able to meet any unusually heavy drains upon the Treasury. The Federal Government, like any private corporation or business, cannot be prudently managed if its cash operating



EXHIBITS 2 8 3

margin is so close that every time unexpected bills come in, it has to rush out and borrow the money to cover them.

In the case of the Federal Government it seems reasonable to carry an operating reserve at least equal to a month's expenditures. Not only are there great fluctuations in the Government's receipts and expenditures within the year, but, in addition, there is a huge volume of demand debt outstanding, such as savings bonds, which adds to both real and potential demands on the Treasury. Many of these fluctuations are predictable and cash can be built up ahead of time. But the timing of many of the demands cannot be anticipated exactly and the Treasury has to be prepared to meet them. By providing an effective mechanism for smoothing out the impact of the Government's financial operations on the banking syslem~anBr the, ecoriomy, the Treasury tax and loan accounts render a service of Jnestimable value,

4. Specific terms on which banks accept deposits Specific terms on which banks accept deposits are spelled out in Treasury

circulars, the more important of which are Circulars 92 and 176. (See the 1943 annual report, p. 368, and the 1954 annual report, p, 398.) However, for the major types of depositaries the most important terms are: (1) The banks must be designated by the Treasury subject to qualifications set by the Treasury, (2) the banks must pledge collateral at least equal to deposits, (3) deposits may not exceed limitations set by the Treasury, (4) deposits are subject to reserve requirements and Federal deposit insurance assessments, (5) the banks must perform the services stipulated in the designation and submit such reports as prescribed by the Treasury. All deposits to tax and loan depositaries are of a demand nature and can be called by the Treasury at any moment.

5. Precisely how decisions are arrived at as to leaving funds on deposit and to transferring them

Treasury's calls for withdrawals of funds are based upon its cash requirements. Balances with the Federal Reserve Banks are maintained at a fairly constant level adequate to cover expected daily cash needs and to provide for a proper regional distribution of funds. A day-to-day analysis is made of these balances, of anticipated direct deposits to the Federal Reserve accounts, and of estimated disbursements. Calls for withdrawals are issued on tax and loan accounts to the extent that additional funds will be required to meet Treasury's daily cash requirements.

As pointed out earlier the calls generally provide that payments be made several days subsequent to date of call. The calls provide for withdrawal of a specified percentage of the balance within the account. Ah accounts are treated uniformly except that withdrawals from banks holding balances in excess of $150,000 are made more frequently than from banks holding balances in smaller amounts. The Treasury does not take money from one bank to put into another. It draws out money as needed for Government expenditures.

6. Why these funds are not transferred to Federal Reserve Banks immediately upon receipt

There are two principal reasons why funds are not transferred to Federal Reserve Banks immediately upon receipt. The most important one is that such a procedure would have damaging effects on the economy of the country. The second reason is that it would result in no financial gain to the Treasury—on the contrary, it could easily result in increased overall costs of Government financing.

As discussed at considerable length earlier in this memorandum, the immediate transfer of Government funds from commercial bank accounts to Federal Reserve accounts would disrupt the even fiow of money and the Nation's system of bank reserves. Serious dislocations would occur if the Government receipts should be transferred immediately from local communities to the Federal Reserve Banks, perhaps long before the money is returned to channels of trade by Government disbursements. This action would, in fact, remove the economic stability advantages now derived from the use of tax and loan accounts.

There would be no financial gain to be derived from such action inasmuch as it does not cost the Treasury any more to keep the money on deposit in com-




mercial banks than in the Federal Reserve Banks. While no interest is received from the commercial banks on their Government deposits, neither would interest be received if the money were immediately deposited in the Federal Reserve Banks. M^iepy_er,. .all .Governrnent deposits in Treasury tax and loan accounts are.fully protected JDy coilateraLpledged by the commercial banks.

On the other hand, such action would likely result in substantially increasing the Government's general financing costs. The transfer of the funds immediately to Federal Reserve Banks might affect commercial banks' decisions to buy Government securities and banks might feel that they should be reimbursed for the numerous services the Treasury now receives free of charge, such as issuance of savings bonds and assistance in the sale of marketable issues.

7. What the high, low, and the average balance carried in commercial depositaries has been during the fiscal year ending June 30, 1954

The high, low, and average balances in the tax and loan accounts by months for fiscal year 1954 are shown in the following table:

Tax and loan balances fiscal year 1954


1953—July August September. October.... November. December.

1954—January... February.. March April May June

High

7,493 6,448 5,642 5,164 5.177 4,194 3,114 3,659 4,546 4,727 4,574 4,836

Low

1,649 5,758 3,984 2, 812 2,573 2,302 2,081 2,507 2,450 2,698 1,902 1, 722

4,944 6,095 4,957 3,698 4,268 3,223 2,536 3,129 3,450 3,541 3,303 3,297

The tremendous fluctuations occurring in these balances is well illustrated for the month of July 1953, when the balance ranged from a high of $7,493 million down to $1,649 million.

The above figures do not include balances in general and limited depositaries. These balances are fairly consistent running usually slightly below $500 mihion (see attachment 4). If balances in these depositaries exceed certain stated maxima the excess is immediately sent to the Federal Reserve Banks.

An important yardstick in assessing whether Treasury tax and loan balances appear to be unduly high or dangerously low is to measure the Government's cash operating balance (which is made up primarily of tax and loan balances but also includes our deposits in Federal Reserve Banks and gold in the general fund) in terms of average monthly budget expenditures. As pointed out previously, to be on the safe side this operating reserve ought to be at least equal to one month's operating expenditures. For the 1954 fiscal year as a whole, for example, budget expenditures averaged $5.6 billion a month and the end of month cash operating balances averaged about $5.4 billion—less than a month's expenditures. Furthermore, the fiscal year average hides the fact that there were many times during the year when the balance was under $3M billion, or less than two-thirds of a month's outgo.

Viewed historically^ the Treasury's cash balance margin in relation to budget expenditures has been much smaller recently than earlier years. Obviously, it was necessary to carry unusually high balances during World War II, but even in the 1930's the average balance was well over double the average monthly expenditures. (See attachment 5 for table and chart showing Federal expenditures and the operating cash balance fpr fiscal years 1932-54.)



EXHIBITS 285

8. Same information for each of the twelve Federal Reserve districts

Tax and loan balances fiscal year 1954, V Federal Resei-ve districts

[In thousands of dollars]

Federal Reserve district

High balance

Date

Low balance

Date

Average balance

Boston New York Philadelphia.. Cleveland Richmond Atlanta Chicago St. Louis Minneapolis.-Kansas City.. Dallas San Francisco.

July 16, 1953 July 16, 1953 Aug. 24, 1953 July 17-18-19,1953. July 16„ 1953 July 17, 1953 July 21-22-23, 1953. July 17-18-19, 1953. July 16, 1953 July 17-18-19, 1953. July 16, 1953-July 18-19, 1953..-

286,805 2, 905,084

322,799 543,362 282, 285 310, 802

1, 231,064 228,094

, 197,628 232, 659 179, 397 840,138

June June July May July July June July Jan. July July July

15,1954 15,1954 14,1954 12,1954 14,1953 14.1953 15.1954 14.1953 11.1954 14,1953 14,1953 10,1953

91,024 407, 287 88, 265 135, 992 77, 253 59,499 344,189 64,721 57, 467 68, 502 56, 693 166,437

182,961 1, 219, 953 204,344 325,170 160, 855 156, 795 744, 767 137, 914 102,020 152,002 114,557 370,189

ATTACHMENT 1.—Treasury tax and loan accounts—deposits, balances in A, B, and X accounts


withdrawals, and

Fiscal year or month Deposits 1 With-drawals 2

Balance 3 (at end of period)

Group A banks

Group B banks accounts * Total

1941 . 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 -1952... 1953 1954 1954—July

August---September October..-. November. December-January. _. February.. March April May June

767 6,902

33,231 54,018 50,102 27,007 7,430 8,575

15,231 16,876

• 24,128 36,492 41,267 41,645 7,336 2,545 3,110 1,969 4,404 2,339 1,349 2,369 4,607 2,494 4,486 4,636

911 5,884

27,243 43,678 45.487 36,609 19.488 7,765

15,233 15,380 21,716 37,066 43,302 39,880 3,718 3,410 3,681 4,331 2,752 3,526 2,301 1,316 3,685 3,601 3,656 3,903

661 1,679

5 7, 667 fi 18,007 5 22,622 575 231 272 160 347 285 327 I 217 553 I 422 324 476 368 I 461 428 382 I 391 264 336 652 553

12,447 731

1,501 1,611 2,921 2,404 1,915 1,527 1,944 6,268 5,501 4,779 2,524 4,084 2,930 2,024 3,067 2,321 2,936 3,451 1,944

2,991 2,865 1,328 2,339

1,794

'2,'339'

661 1,679 7,667

18,007 22,622

5 13,020 962

1,772 1,774 3,270 5,680 5,106 3,071 4,836 6,690 5,825 5,255

. 2,893 4,545 3,358 2,406 3,458 4,379 3,273 4,103 4,836

1 Deposits consist of proceeds from sales of securities, deposits on account of withheld taxes, beginning March 22, 1948, deposits on account of taxes withheld under the Federal Insurance Contributions Act, beginning Jan. 1,1950, deposits on account of railroad retirement taxes, beginning July 1,1951, and deposits on account of excise taxes, beginning July 1, 1953.

2 Includes calls by Treasury and voluntary prepayments accepted by Treasury. 3 Effective May 11,1943, Federal Reserve Banks were instructed to establish subsidiary controls so as to

classify war loan depositaries in their districts into two groups. Group A including all depositaries having balances of $300,000 or less and Group B those having balances of more than $300,000. Various amendments have since been made to the original disposition, the current dividing line being $150,000.

^ Represents income taxes deposited under a special procedure, first adopted in March 1951, for crediting in tax and loan accounts the proceeds of checks of $10,000 or more. This procedure is usually followed in quarterly tax payment periods.

fi Breakdown into A and B banks not available. 8 Does not agree with daily Treasury statement.- Breakdown based on telegraphic reports for last day 0'

fiscal year which was a Saturday.




ATTACHMENT 2.—Treasury tax and loan accounts—analysis of deposits, withdrawals, and balances


Fiscal year or month

1941 1942 1943 -1944 1945 1946 1947 1948 1949 1950 1951 1952 1953-.-1954 1954r—July

August September October Noveinber December January February March April May June

Credits to tax and loan accounts

Proceeds from sales of securities

Savings bonds

Savings notes Other

(Breakdown noi avauaoie;

4 4,493 4 3,931

4,879 3,755 3,390 2,227 2,667 3,457

240 211 211 222 208 263 389 339 396 349 300 330

4 2,937 4 2,024

3,878 5,834 3,437 4,678 2,231 2.333

378 363 911 681

804

"2^738" 10,285 11,164 5,874

2,150

996 2,144

Taxes

Income taxes not

withheld!

6,971 13,270 10, 227 4,791

136

2,134 180

"2^341'

Other 2

1,820 6,473 7,287

10,331 13, 581 15,858 19,899

708 1,971 1,988 1,066 2,046 2,077

961 2,029 2,076

969 2,043 1,966

Total credits

767 6,902

33, 231 54,018 50,102 27,007 7,430 8,575

15,231 16, 876 24,128 36,492 41,267 41,645 7,336 2,545 3,110 1,970 4,404 2,339 1,349 2,369 4,606 2,494 4,486 4,636

Withdrawals

911 5,884

27,243 43,678 45.487 36,609 19.488 7,765

15,233 15,380 21, 716 37,066 43,302 , 39,880 3,718 3,410 3,681 4,331 2,752 3,526 2,301 1,317 3,685 3,601 3,656 3,903

Balance at end

of period

661 1,679 7,667

18,007 22, 622 13,020

962 1,772 1,774 3,270 5,680 5,106 3,071 4,836 6,690 5,825 5,255 2,893 4,545 3,358 2,406 3,458 4,379 3,273 4,103 4,836

Outstand

ing calls atend

of period

[ (3)

2,103 291 796 804 310

1,400 1,475

934 1,233

938 1,825 1,728

888 1,782 1,261

345 1,501 1,101 1,487 1,688 1,233

1 Represents income taxes deposited under a special procedure, first adopted in March 1951, for crediting in tax and loan accounts the proceeds of checks of $10,000 or more. This procedure is usually followed in quarterly tax payment periods.

2 Represents withheld income taxes, beginning March 22,1948; taxes withheld under the Federal Insurance Contributions Act, beginning January 1,1950; railroad retirement taxes, beginning July 1,1951: and excise taxes, beginning July 1,1953.

3 Not available. 4 Partly estimated.



EXHIBITS 287

ATTACHMENT 3.—Calls on Treasury tax and loan accounts, fiscal year 1954

[Dollars in millions]

Date

1965 July:

2 6. __. 9-. 13 16 . -20 23 27 30

August: 3 6 10 13 17 20 24 27 31

September: 3 10 14 21 24 28

October: 1_ 5 8 13. 15 19 22 26 29 _

November: 2 5 _. 9 - . 12 16—. 19 2 3 . . . 25 30

December: 3 . . 7 10. 22-28 30

1954 January:

4 -21. 25 28-.-

February: 1 . . . 4 11 15 18 23 25

"A" accounts i

Calls

Percent

50

60

50

50

50

60

50

Amount

$133

245

230

177

219

202

206

Uncalled balance

$133

245

230

177

219

202

206

*'B" accounts 2

Calls

Percent

10 22 22

8 4 5 5

10

6 6 9 4

9 6

16 16

7 " 16

6 6 6

13

18 6

24 13 8 8 8

14 12

6 9 8

10 5 8 9

18 18

19 10 15 10 12

. 24

20 15 6 5

12 4 4 6

15 6

27

Amount

$161 387 413

541 278 336 325 613

313 350 501 216

496 352 928 897

365 694 254 251 280 648

860 283 993 480 268 251 220 370 298

161 211 197 441 217 364 427 812 76U

723 360 398 274 358 702

587 321 133 101

243 99 93

144 429 199 871

Uncalled balance

$1,450 1,211

916

6,214 6,136 5,967 5,698 5,181

5,016 4,981 4,554 4,518

6,019 5,369 4,355 4,498

3,580 ' 3,258

3,102 3,924

" 4,135 3,927

3,271 3,241 2,574 2,221 2,106 2,133 2,149 1,925 1,819

1,811 1,886 1,902 3,559 3,483 3,821 3,731 3,093 2,437

2,049 1,923 1,662 2,465 2,348 1,730

1,288 1,821 1,769 1,786

1,679 •2, 033 2,224 2,168 2,287 2,545

. 1,870

" X " accounts 3

Calls

Percent

(')

(')

A m o u n t

$424

106

Uncalled balance

Footnotes at end of "table.




ATTACHMENT 3.—Calls on Treasury tax and loan accounts, fiscal year 1954—Con. [Dollars in millions]

Date

1954 M a r c h :

1 4 11 15 -38 25 29

Apri l : 1 5 8 12 15 19 22 26 2 9 - . -

M a y : 3 6 10 1 3 - . . -17 - . 20 24 27

J u n e : 1 - - -3 -7 10 14 - -17

" A " accounts J

Calls

Percent

75

50

50

•Amount

$363

188

313

Uncalled balance

$121

188

' 313

" B " accounts 2

Calls

Percent

14 15

55

21

no 5

10 30 33

7 32 24 10 18 15 4

24

11 12 15 40 10 15

A m o u n t

$429 400

i,08i

580

' 259 122 246 722

1,001

•206 274 487

' 150 281 563 158 845

380 386 430 979 221 196

Uncalled balance

$1, 666 1,650

884

2,183

2,090 2,055 1,962 1,316 1, 311

1,250 1,274

864 861 766

2,834 2,946 2,331

2,068 1,891 1,673

844 725 890

" X " accounts 3

Calls

Percent

25 14 16

45 30

(«) («)

A m o u n t

$115 226 294

807 569

237

71

Uncalled balance

$343 1,391 1,318

692 226

56

NOTE.—Banks are segregated into Groups A and B in the interest of economy. Calls are made, usually twice a week, upon the Group B banks (the larger banks but smaller in number) and about once or twice a month on the Group A banks.

1 Accounts with balances of $150,000 and under (approximately 8,000 banks). 2 Accounts with balances over $150,000 (approximately 2,500 banks). 3 These accounts are used during heavy tax payment periods to avoid excessive strain on bank reserves

Income tax checks of $10,000 and over are deposited in them. 4100% of uncalled balances. fi 100% of remaining balances. « 80% of uncalled balances. ^ Includes $8.7 million special call of 28% on New Orleans district only to adjust for error made by that

bank on previous " B " call. 8100% of remaining balances. .



EXHIBITS 289

ATTACHMENT 4,—Deposits in banks

[End of month figures in millions of dollars.* On basis of daily Treasury statements]

E n d of m o n t h or fiscal year

J u n e 1941 .1942 . . . 1943 1944 . 1945 1946 1947. . . . 1948 1949 . . . . 1950 1951 1952 1953 --

Fiscal year 1954 Ju ly 1953— . . -Augus t . September October N o v e m b e r . . . . . December J a n u a r y 1954.. . . . F e b r u a r y March April . M a y . J u n e . .

Fiscal year 1955 Ju ly 1954. August September October November . December

Federal Reserve B a n k s (available)

1,024 603

1,038 1,442 1,500 1,006 1,202 1,928

438 950 338 333 132

548 496 642 662 451 346 404 548 722 679 422 875

727 511 704

Commercial banks

General depositaries

63 69

228 235 225 227 215 213 238 270 319 397 413

423 420 466 440 420 409 484 422 459 427 426 433

480 399 416

Special depositaries

(tax and loan accounts) 2

661 1,679 7,667

18,007 22, 622 12, 993

962 1,773 1,771 3,268 5,680 6,106 3,071

6,690 5,825 5,255 2,892 4,545 3,368 2,406 3,458 4,379 3,273 4,095 4,836

2,638 4,078 3,469

Foreign depositaries

53 51 12 16 5

14 20 27 33 37 52 49

102 102 119 121 122 89 86 89 87 91 88 88

88 86 89

To ta l

724 1,801 7,946

18, 254 22, 863 13, 225 1,191 2,006 2,036 3,571 6,036 5, 555 3,533

7, 215 6,347 6,840 3,463 5,087 3,856 2,976 3,969 4,925 3,791 4,609 6,357

3,106 4,563 3,974

To ta l deposits

1,748 2,404 8,984

19, 696 24,363 14, 231 2,393 3,934 2,474 4,521 6,374 5,888 3,665

7,763 6,843 6,482 4,115 5,538 4, 202 3,380 4, 517 5,647 4, 370 5,031 6,232

3,833 5,074 4,678

NOTE.—There are approximately 14,600 banks eligible to hold Government deposits. As of August 31, 1954, there were 1,422 general depositaries; 11,113 special depositaries; ana 34 foreign depositaries.

' These figures do not incluae Saturday transactions when Saturday falls on last day of reporting period. 2 Prior to January 1, 1950, these accounts were designated as war loan accounts.

ATTACHMENT 5,—Treasury operating cash balance and average Federal budget expenditures, fiscal years 1932-1954

[In billions of dollars]

Fiscal year .o

1932 1933 1934 1935 1936 -1937 1938 1939 - - - - -1940 - - . 1941 1942 1943

Average operat

ing cash balance i

0.4 .6

2.1 2.4 1.8 1.6 2.3 2.3 1.7 1.6 2.3 6.8

Average m o n t h l y budget

expenditures

0.4 . 4 ' .6 .5 .7 .6 .6 .7 .8

1.1 2.8 6.6

Fiscal year

1944 1945 1946 1947 - --1948 1949- - - . . I960 1951 1952 . 1953 1964

Average operat

ing cash balance i

12.9 16.0 20.1

7.2 3.9 4.4 4.5 5.3 5.2 5.7 5.4

Average m o n t h l y budge t expendi

tm-es

7.9 8.2 5.1 3.3 2.8 3.3 3.3 3.7 5.5 6.2 5.6

I 13-month average of end of month figures.

356812—56 20




FEDERAL EXPENDITURES AND OPERATING CASH BALANCE.

$Bil.

15

\0

5

4 • 8 * 0

/ 1 /

^mage ^ / Cosh Balance \ \ (Bid ef Month) : \

1 ' I H B

Jlyeroge Monthly / H g \ Expenditures V M [ H H | p^

KnB MH B H ^''•*Si&*nS9R — yjB H M ^SJ BB \ ••*******BS | ^ 9 ^ ^

•^illl ' —'nBI! ,....*.... s. ^ ^^SH^^^H^HH^ ••...... ^ p^ g ggggggg

^ 1 ^ 2 * ' " ™ " " " " ^ ^ " ^ ^ " ^ ^ ^ ^ ^ I —„,_.., ., r ie /^n l Vf lnre ^

Exhibit 45.—Statement by Secretary of the Treasury Humphrey, December 7, 1954, before the Subcommittee on Economic Stabilization of the Joint Committee on the Economic Report

We welcome tills opportunity to appear before your subcommittee to review the fiscal and debt management policies of the Treasury from the point of view of their economic influence.

At the outset and before considering in detail the activities of the Treasury during the past two years, I want to make a few general comments on the direction of our entire fiscal program as well as the principles guiding us in the management of the public debt.

The administration's budgetary and tax policies, along with its debt management policies, have all been designed to promote high employment, rising production, and a stable dollar.

We have in fact been following the policies advocated by your predecessor subcommittees that, as stated in the Douglas report of January, 1950, in language reaffirmed in the Patman report of June, 1952, ''appropriate, vigorous, and coordinated monetary, credit, and fiscal policies" should "constitute the Government's primary and principal method" of promoting the purposes of the Employment Act, and further, their recommendation "that Federal fiscal policies be such as not only to avoid aggravating economic instability but also to make a positive and important contribution to stabilization, at the same time promoting equity and incentives in taxation and economy in expenditures."

Government spending programs have been cut by billions of dollars. Waste and extravagance have been eliminated in many areas. Economy in Government and efforts to get the Federal budget under even better control are continuing without letup. These efforts are of great importance to the future of our country and are fundamental in the administration's honest money program.

IVTajor tax reductions and comprehensive tax revisions, along with the ending of price and wage controls, are removing barriers to economic growth and restoring individual initiative and enterprise. Savings in Government spending which have been returned to the people in the form of tax cuts are helping sustain the economy, increase employment and production.

Progress is being made toward getting our huge public debt in better shape, so that its maturities can be handled more easily and' debt operations will not stimulate either inflation or deflation. Treasury financings have been designed



EXHIBITS 2 9 1

to tie in with action taken by the Federal Reserve System to keep the supply of money and credit in line with the needs of the country.

The principles we have been following in the management of the large public debt are not new. They are, likewise, principles that have been laid down by your predecessor subcommittees after extensive study and careful consideration of the fundamental role they can play in effective monetary policy.

The first principle is that monetary and debt management policies should be flexible. To be effective they must lean against inflation as- well as deflation. As put by the Douglas subcommittee^and reaffirmed by the Patman subcommittee: "Timely flexibility toward easy credit at some times and credit restriction at other times is an essential characteristic of a monetary policy that will promote economic stability rather, than instability."

The second principle is that Treasury debt management operations should be consistent with current monetary.and credit control policies of the Federal Reserve, This means close cooperation at all times between the Federal Reserve and the Treasury. As Representative Patman's Subcommittee reported in 1952: "Neither the problems of monetary policy nor those of debt management can be solved in isolation from the other. We recommend that the Treasury and the Federal Reserve should continue to endeavor to flnd by mutual discussion the solutions most in the public interest for their common problems. . . . "

The answers which we have already submitted to your subcommittee's questions detail the actions we have taken in cooperation with the Federal Reserve during the past two years in carrying out these principles. They show the manner in which our debt operations have been designed to complement monetary action taken by the Federal Reserve to promote economic stability, ^rst by helping to restrain inflation and then later by helping to avoid deflation.

The record has not always been as impressive. As you know, at the time of the earlier congressional hearings on monetary policy and debt management, the economy had been under strong inflationary pressures. IMonetary policy had been largely ineffectual in helping to control inflation because of the previous administration's policy of selling mostly short-term securities and using the powers of the Federal Reserve System to hold down interest rates artificially, A fundamental conclusion of both of your predecessor subcommittees was that such action was not in the best interests of the Nation. This was their considered judgment in language used by the Douglas Subcommittee and reaffirmed by the Patman Subcommittee: " , . , we believe that the advantages of avoiding inflation are so great and that a restrictive monetary policy can contribute so much to this end that the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored even if the cost should prove to be a significant increase in service charges on the Federal debt and a greater inconvenience to the Treasury in its sale of securities for new financing and refunding purposes,"

This administration has followed these principles because we believe them to be fundamental principles of good government. We believe the record of the past two years has indicated their effectiveness in giving us honest money and laying a firm foundation for the sound growth and prosperity of our country.

Exhibit 46.—Remarks by Secretary of the Treasury Humphrey, February 16, 1955, following receipt of an award of the Chamber of Commerce of Greater Philadelphia, Philadelphia, Pa. I am deeply honored to receive the 1954 William Penn Award of the Chamber

of Commerce of Greater Philadelphia. It is a great privilege for me to receive this honor as a member of President Eisenhower's administration.

I am going to talk to you tonight not as Secretary of the Treasury, not as a Cabinet officer, or even as a businessman who is now a bureaucrat. I will talk rather as a friend and fellow citizen and a taxpayer who shares with you the responsibility of good government, of keeping America the land of opportunity, the land where the economy of today must build for the economy of tomorrow by its wisdom, its soundness, and its farsightedness. We must build a world with more and better opportunities for our children and our children's children and not a world that will take opportunity away froni them.

The problems and accomplishments I speak of tonight are the problems of every citizen, and the accomplishments are the work of all who, by their own efforts, have helped to build soundness and opportunity by hard work and honest endeavor.




I am going to talk to you tonight not of headlines, controversy, and crises, but of the quiet, undramatic, progressive developments that are going on all around us in America. There have been no headlines to tell you that more than 60 million Americans are working at jobs of their own choosing, jobs that they are free to leave or change if and whenever they so desire. There are no headlines to tell you that about 55 percent of the 47 millions of families in America own their own homes, that Araericans have savings of $80 billion in life insurance policies; almost $50 bilhon in United States savings bonds; and $25 billion in retirement pension funds. There are no headlines to remind you that stringent wartime Government controls no longer hamper or restrict the individual or the businessman. And there are no headlines to herald the stirring return of confidence of Americans in their Government, in each other, and in our abihty and strength to do whatever may be required of us in any emergency.

I am even more encouraged to talk about these simple principles that have made our country great when I read over the list of names of those who have been previous recipients of the William Penn Award, showing that the Philadelphia Chamber of Commerce over the years has been honoring men who stand for the same principles of free competitive enterprise and initiative which we now believe are basic to our American way of life, the way of life which has yet to be surpassed anywhere in this world of ours.

It has been a dedicated goal of the Eisenhower administration to keep alive and vigorous the priceless principles of free, competitive enterprise and initiative. But we must do more than keep them alive and vigorous. We must keep them growing and always developing the new things and the better ways of doing things which have made this Nation great.

What has been done in encouraging initiative and enterprise has not been sensational or dramatic. But it has been important to every American in his daily life. It is important to the standard of living of every American worker and his loved ones. And it is vitally important to the defense of all Americans against any possible enemy attack, for the power and strength of American industrial capacity are the very foundation of our security.

It is often true that "good news" is "no news" to attract public attention in the daily news outlets of press, radio, and TV. Yet the quiet, undramatic, progressive developments that are going on in America, without making sensational news, are important for the present and future of our people.

I have no quarrel with wliat makes news. I make these observations only as a reason for talking a little tonight about some of the constructive things that have been done during the past two years—important things which are worth mentioning because they do not draw the attention that controversy and violence do.

What are some of these unspectacular things that this administration has been helping to accomplish during the past two j^ears?

The undramatic but steady and healthy progress which has been going on in this country has increased the confidence of all Americans in the possibilities of our future. This increasing confidence is the most important stimulant to the development of the strength of our Nation's economy, with the careful and quiet assistance of an administration which knows that government can do relatively little except to help to properly set a stage upon which free vigorous Americans can perform.

Our Nation has made the transition from a wartime high to a lower level of Government spending without a major economic upset. This transition was helped substantially by heavy tax cuts and other moves stimulating confidence.

While there is still high tension in many places, there is no armed warfare between major powers at any point on the globe as of this moment. There is peace, uneasy as it is, as far as American fighting men are concerned. War in Korea has halted. War in Indo-China has ceased.

The present improved relationships in many places throughout the world have been achieved by ceaseless and dedicated pursuit of solutions for the vexing and serious widespread international problems. It is a treacherous path. Bold risks must sometimes be taken, but success to date is high proof of the competence and wisdom of the policies which have been adopted in wrestling with this problem of preserving the peace and making it more secure.

Inflation has been stopped. In the past two years the value of the dollar has changed only one-fifth of one cent. This compares with a drop in the value of the dollar from 100 cents in 1939 to only 52 cents ih January 1953, All departments and many people in Government have been working hard for, and



EXHIBITS 2 9 3

insisting upon getting, our Federal spending under control. Deficits which lead to more borrowing and so to inflation, have been cut substantially.

The Federal Reserve System has acted promptly, courageously, and wisely to adopt monetary and credit policies which have met the needs of the economy while walking the fine line between deflation and inflation. And the Treasury has done its bit in halting inflation and avoiding deflation by doing its borrowing so as to be as careful as possible concerning its effect upon the constructive course of the economy.

This is well illustrated by the issue and highly successful placement only a few days ago of nearly two billion dollars in 40-year 3 percent bonds. They are the longest bonds that have been sold by the Government since an issue to help pay for the Panama Canal in 1911,

There is nothing academic about the importance of keeping inflation locked out. The value of earnings and savings can be protected in no other way. Just realize that 55 out of every 100 families in America now earn more than $4,000 a year as compared with only 10 out of 100 earning $4,000 a year early in the century in terms of today's prices. And recall the millions of owners of their homes, accounts in savings banks, savings bonds, insurance policies, and pensions, of which I spoke just a moment ago. Because this Nation has quietly become a Nation of "haves" rather than "have nots," inflation must stay checked to protect the earnings and savings of millions of Americans.

We had a cash balance between money collected from the public and money paid out by the Government last year. Although we will not have a cash balance this year, we are estimating a small surplus in the fiscal year ahead. The total debt has continued to grow because of the large deficit we inherited in our first year in office and the subsequent deficits, even though they have been much smaller. But the inflationary effect of deficit financing has been almost wholly eliminated now that most of the increase in debt is being financed by securities issued to Government trust funds rather than borrowing from the public.

In fiscal 1956, spending will be almost $12 billion less than in 1953. We have not yet balanced the budget. We could have done so in 1954, but a big tax cut was more stimulating to a growing economy and we believed that it was better for the people to have more of their own money left with them to spend, as they thought best, rather than to have the Government spending it for them. We have cut the deficit from more than $9 billion in fiscal 1953 to what we estimate will be less than $2^ billion in 1956. We are still a year and a half away from the end of that period, and we have every hope of cutting this deficit even further if some development elsewhere in the world does not upset our plans.

There is nothing in the Formosa situation or elsewhere in the world which up to this moment has altered our budget program for reduced expenditures in the year to come. And reduced expenditures we make do not mean reduced defenses.

As the President has said, the United States is in a stronger position to defend itself against aggression than it was two years ago. The Defense Department has developed a better balanced, more mobile and flexible, and effective defense establishment at lower cost to the taxpayers.

Progress has been made in reducing waste and extravagance. Obsolete equipment and supplies are being eliminated. There is much left to be done, but that does not alter the fact that much has already been accomphshed. We have a far better balanced program. We are making progress in real unification in the armed services, so that competition between them is less likely to duplicate efforts and expenditures that squander both tax money and our national resources. Greater unity adds strength to our defense position.

We can and we must spend whatever is needed for our security; that is our first concern. But we know that real security does not result simply from spending huge amounts of money. The worth of our defense must be measured not by its costs but by its wisdom.

The President's decisions on our defense forces are recognition of the fact that in this age of almost unbelievable developments in science and production techniques, we cannot have a static defense committed to old-fashioned strategy and weapons. Real security for our Nation over an extended period must also rest upon a sound and growing economy.

As cuts in future expenditures all through the Government's operations come clearly into sight, and if at the same time our expanding economy promises greater income with lesser rates of tax, we will look forward to further reductions in our tax structure, distributed as fairly as possible among all taxpayers.

The expectation of further tax reduction and the maintenance of sound fiscal




policies are firm foundation stones creating greater confidence in our future prosperity.

These, then, have been fine, worthwhile accomplishments for the good of the Nation, its economy, and its future. They have been accomphshed without fanfare or sensational controversy. In the Cabinet and in the Agency heads in this administration, there exists a wonderful team spirit which has resulted in real accomplishment with few headline battles.

The role which the Government can play in the economic affairs of the Nation should be limited. Government manipulation is the antithesis of a free America, and encroachment by government in restricting the freedom of its citizens should be limited to doing, as Lincoln said, "for a community of people whatever they need to have done, but cannot do at all, or cannot so well do for themselves in their separate and individual capacities. In all that the people can individually do for themselves, government ought not to interfere."

The future of free America lies in the initiative, the resourcefulness, the tenacity, daring, and courage of 160 million Americans, each free to choose how best he can promote his own interest and the interest and future of his loved ones in whatever way he can best, devise only so long as he does not interfere with the rights of others. It is the cumulative power of this great effort which has made America great in the past and which I am convinced will drive us ahead in the future at an accelerated pace in excess of anything we have ever known before.

You and I as citizens must participate in this great drive toward a better America. As such a citizen, I am pleased and proud to accept this fine award from the Chamber of Commerce of Greater Philadelphia, and to receive it in recognition of the contributions which President Eisenhower's administration has made to the advancement of the economy of this Nation.

Exhibt 47.—Remarks by Secretary of the Treasury Humphrey, February 19, 1955, before the National Canners Association, Chicago, 111.

I am delighted to have the opportunity to meet with the National Canners Association this morning.

I am greatly impressed with something I have just heard about your association, I am told that your financial statement for the past year shows that you have operated with a budget that is balanced. To one who has the ambition to do hkewise but is beset with all of the problems of the Secretary of the Treasury of the United States, that is something I note with great envy.

I am also glad to have this opportunity to see so many of my good friends of days that were more carefree and to have this chance to explain to such a fine group of leading businessmen as are here this morning some of the simple principles so vital to the successful operation of our economy which the Eisenhower administration is trying to perpetuate and strengthen.

We live in an age of change, devoted to the use of new techniques. Now, as I am not an orator but at heart, and by experience, just a businessman like yourselves to whom deeds mean more than words, I am going to choose a new technique in speaking to you this morning. It is the technique of the popular radio-TV quiz show. By using questions which I am constantly being asked by Government officials, newsmen, IMembers of Congress, and people like yourselves, I will try to inform you by my answers of our problems, our accomphshments, and our hopes.

Gentlemen: The stage is set. The clock is marking off the seconds. The kleig hghts are on. The moderator is in his place. We are on the air and are ready for the first question.

Q, ]\Ir, Secretary, please tell us: Has the administration abandoned its program of trying to balance the budget ?

The answer to that is absolutely no. We are working, and with a reasonable amount of success, toward a balanced budget. The record shows that progress has been'^'good, even though we have not reached the goal. The Government's deficits have been cut substantially since we came into office. The deficit in fiscal 1953 was almost $9H billion. We could do very little about this in five short months as actual spending plans were committed beyond recall. However, the Eisenhower administration did cut the deficit in the next fiscal year, fiscal 1954, down to $3.1 billion, or two-thirds of the way toward a balanced budget. It is true that the deficit in the present fiscal year (fiscal 1955) looks like $4.5 bilhon, but the new budget for fiscal 1956 again cuts the deficit to $2.4 bilhon.



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Both the present deficit and the deficit for the next fiscal year may be less than now estimated if revenue holds up and if we are able to cut spending further, as we are continuously trying to do.

Q. Why haven't we cut Government spending faster? The Government can only reduce its expenses by putting people out of work,

either directly or indirectly. This sounds harsh, but the fact is that the Government spends most of its money for only two things: (1) The employment of people working directly for the Government, or (2) the purchase of goods which are made by people who will be out of work if the orders for the goods are canceled. Under these circumstances, it would not be prudent to cut Government spending too fast, even if it were possible to do so. Of course the most important reason is that in these perilous times our first obligation to the Nation is to adequately provide for our security. But there is another very important consideration that must be prominently kept in mind.

We must constantly have in mind in making these reductions the necessity of creating new employment to. absorb those who will thus be out of work. There must be a great transition: IMoving people from working for the Government, either directly or indirectly, into jobs working for the production of goods for the general public. We have gone through two years of this transition with reasonable success. We are striving continually to do better and to make the transition with less loss of time for those directly involved. We cannot switch from years of deficit spending to a balanced budget in too short a time.

Q. Why has this administration cut so much from the defense budget? Sixty-five percent of our latest budget goes for major national security pro

grams. This amounts to about $40.5 billion a year. Of the remaining $21.9 billion, $14.8 billion, or 24 percent of the total budget goes for payment of interest on the debt and other charges fixed by law. That leaves only $7.1 billion, or 11 percent, of the total budget for other so-called civihan agencies of Government. So, it simply follows that if any large cuts in spending are to be made, they must largely come, but carefully and wisely made, from the heavy total for defense.

Now, when we talk about "cutting" expense, let's always remember that does not mean cutting our effective defense. Let's recall how much stronger we are today than we were when Korea began in June of 1950. At the outbreak of Korea, our armed forces had less than 1> million men, equipped almost wholly with material of World War II manufacture. We now have 3,100,000 men in service, and our present target for 1956 is an armed strength of 2,860,000 men, or almost double the number of June 1950. By the end of fiscal 1956 we will have an Air Force of 131 wings and 975,000 men as compared with 48 wings and only 411,000 men when the Korean fighting began. The Navy and IMarines will be second to none (with 857,000 men). And the Army will be 80 percent above June 1950 in manpower (1,027,000 as compared with less than 593,000), but of even greater importance is the fact that because of advances in the science of warfare, each Army division will have 80 percent more firepower than a division of World War IL

To support these forces we will spend an estimated $34 billion, almost three times what we were spending when Korea broke out. So the total in both personnel and money going into our defense forces today is comparatively substantially increased.

Q. Have we cut too much from our security? No! The reductions that we have made in spending for defense have not

reduced our armed strength. As the President has said, we are increasing it; this Nation is in a stronger position to defend itself today than it was two years ago. We have a more flexible and better balanced defense establishment tailored to meet the requirements of future warfare and at lower cost to the taxpayers. Nothing that has happened in Formosa or elsewhere in the world up to this very day has changed our budget plans for lower spending in the year to come. I say this while emphasizing one basic fact: We can and will spend whatever we need to spend for our security. But this administration is operating in the firm knowledge that real security comes not from merely spending billions of dollars but rather from spending them wisely.

What we are doing is shifting some of the emphasis from men to machines, from the old concept of slugging it out with masses of men to being ready to beat the enemy with mobility, technological know-how, and the most modern superiority of weapons and equipment.

Q. Can't we cut spending and balance the budget by just eliminating all foreign aid?




That is a program which is often suggested but is neither simple nor wise to carry out if you just stop and think about it. Certainly it is better to put military equipment in the hands of our friends overseas so that they can help to defend themselves if the need comes rather than to also send American boys to handle those weapons, with all the potential loss in lives and national wealth, as well as the human anxiety that is involved. Total expenditures for mutual security, including both military assistance and economic support, are estimated at $4.7 billion for fiscal 1956, including the provisions for a program in Asia. This compares with mutual security spending of $4.3 billion in the present fiscal year.

The total cost included in this program for economic assistance alone is $1,025 million in fiscal 1956 as compared with $1,075 million in the present fiscal year. The total estimated expenditures in 1956, not including obhgations for the future, for all Asian economic assistance will be about $585 million as compared with about $500 million to be spent for economic aid in Asia in the present fiscal year. So, while the estimated over the actual spending for economic aid increases slightly in Asia, the overall foreign economic aid program is still decreasing. This is directly in line with this administration's conclusion that we can best serve the cause of the free world by helping its members to help themselves through selective development programs in which private investment can play the major role.

While significant accomplishments have been realized through foreign aid which are in the mutual interest of the United States and other free countries, history has sadly proved that large grant programs not only burden the American taxpayer but do not always produce either stronger or more friendly allies. The entire program is under intensive, continuing review to be sure that in the future both military and economic assistance may be properly balanced as operating parts of our foreign relations and defense programs.

Q, In view of the big reductions in expenditures that have been made could the budget have loeen balanced ?

Yes! If we had not accompanied the heavy cuts we made in spending with substantial tax cuts, we would have balanced the budget. But we had to consider the proper balance in our sensitive economy. We knew that heavy cuts in Government spending meant putting people out of work. We believed that we

. should cut taxes sharply and so give more people added money to spend for themselves to help create jobs for those who previously got their pay checks directly from the Government or from Government purchases. We cut taxes in calendar year 1954 by a total of $7.4 billion, the largest single dollar tax cut in history. We did this to help make possible the easier and quicker transition in jobs from high Government spending to lower Government spending. The fact that the economic downturn was so quickl}^ checked and that we are now proceeding upwards on a broad front is proof that the policy of cutting taxes as we cut spending is a sound policy. The fact that consumer spending in the past year was the highest that it has ever been is also good evidence of how the tax cuts helped to make the successful economic transition.

Q. Will there be further tax cuts? Not this year, if the administration's recommendations are accepted by the

Congress. The President has proposed that the corporate rate of 52 percent, as well as excise taxes which would go down on April 1, be continued for one full year. We are asking this because we think the current status of the economy will take it and because further tax reduction would lead to too heavy deficit financing and a possible revival of dangerous inflationary pressures.

This does not mean that taxes must not be cut further. They are still too high for the long run and must come down. As the President has said, we certainly hope that we can be planning additional tax reductions a year from now.

Q, If you are going to cut taxes further next year, how can you ever balance the budget?

That is a question we are often asked and it is an important one. As I have said, we have not abandoned the goal of balancing the budget, and neither have we stopped cutting taxes. We can and will do both. We will keep trying to cut Government spending further. At the same time our expanding economy can provide greater tax income even at lower tax rates because it is on a broader base. As this country continues to grow, there is no reason why we can't have both a balanced budget and lower tax rates provided only that world conditions continue to improve.

Let's notice here the difference between the administrative and the cash budgets. As long as the Government is not taking out of the economy more than



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it spends, the Government is not increasing the money supply and thus being inflationary. So when we have a balance in the cash budget (which includes the receipts of the trust funds such as social security) we have eliminated that particular inflationary pressure. We did have a cash balance between money collected from the public and money paid out by the Government last year, although we will not quite have a cash balance this year. We estimate a small cash surplus in fiscal 1956. So that the inflationary effect of deficit financing will have been almost eliminated during the entire period this administration has been in financial control.

Q. Why do you have to raise the debt limit if you are really cutting spending as you claim?

When we came into bffice, tliere was $8 billion between the amount of the then-existing debt and the $275 billion debt ceiling. Now, in the very first year, the previous budget which we inherited turned out with a deficit of $9K billion. Actually there was little we could then do beyond carrying out the spending that had already been planned and paying the bills that were presented. We had no leeway under the debt limit as we entered our first full fiscal year, 1954, so we asked the Congress for an increase, as a matter of prudence as we looked ahead. As things came out in fiscal 1954, we cut the prior administration's $11 billion estimated deficit (after an overestimate of revenue is figured in) to $3 billion, a cut of $8 billion. But even then we still had this $3 billion deficit that had to be put on top of the $9 billion deficit that we inherited from the preceding year. These two things, plus the wide seasonal variations in collection of corporate income taxes, made some elasticity in the debt limit absolutely essential. Congress recognized this and last year authorized a $6 billion temporary increase in the hmit on the condition that the debt would go back to the $275 billion limit at the end of this fiscal year.

This year we estimate a $4.5 billion deficit, which we hope we may cut a little, as I have said. And in fiscal 1956 we are estimating a smaller deficit of $2,^ billion or less. But regardless of the size of the deficit and the reductions we are making, each deficit pushes up our debt still further, and so involves the problem of what to do about the debt limit. It will be with us acutely again this June.

Q. Is borrowing outside the debt hmit necessarily improper? No, not necessarily. If the Government borrows outside of the regular debt

for something which must be paid back from general funds, it is and would be improper. But if the Government is acquiring or operating "earning assets," it is perfectly proper that they should he independently financed.

For example, if a toll road is built and the tolls to be collected are sufficient to meet the debt service, both principal and interest, required to amortize the debt that is created to pay for the road, it is a perfectly clear case of a proper independent financing'of an earning asset. Now, the toll to be collected can be based on weight or axle charge,. on a mileage basis, or on any other suitable measure of use, including the consumption of oil and gasoline.

If the collections made under such a measure of use are dedicated in good faith to meet the debt obligations that are incurred, it is a perfectly .proper way to independently finance debt required to pay for roads. IVEoreover, the entire economy is benefited: First, by the construction of the road and its employment of men and materials; second, by the use of the road and its benefits to transportation; and, third, by the liquidation of the cost of the road through a user tax measured by gas and oil, rather than by placing an additional burden on the back of the general income taxpayer.

Q. Is the Government improving its debt structure? Yes. The enormous debt is too heavy in short-term maturities. These can

be inflationary as well as the source of trouble and possibly real danger to our whole economy under certain circumstances with so many short maturities. We are making progress slowly in lengthening the average maturities, and we must move slowly so as not to upset our sensitive economy. The 40-year 3 percent bonds just issued have been a real step forward. The issue was a great suceess. It has lengthened the average maturity of our whole marketable debt from four years and two months to four years and nine months. It .is the longest Government bond issued since 1911 when some 50-year bonds were issued to help finance the Panama Canal. This issue, like all our financing operations, had to be rightly timed for market conditions which were appropriate to be sure that we did not interfere with other financing requirements and so affect the economic situation in an unfavorable way.




Q. Will there be more long-term issues? Yes. It is our firm goal to continue to lengthen the maturities of the debt as

rapidly as appropriate conditions permit. The issue last week was the second long-term issue we have put out. The first was the 3}^ percent 30-year bond in the spring of 1953. We will have more when and as the conditions make it appropriate. We want to have varied types of issues so that all types of investors will have appropriate Government securities in which to put their funds. This will spread the debt as widely as possible among the largest number of investors so as to both finance the debt and promote sound economic growth.

Q, Have we permanently stopped inflation? That depends upon the courageous and tenacious will of the great majority of

the American people to do so. The lure of inflation is something that is never permanently killed. It beckons like a siren to enticing evil ways. Unless continuously watchful resistance is always exerted, the weak may fall for its false promises of ease to riches and be led down the primrose path to their ruin. It means the destruction of savings, which make investment possible, which in turn makes jobs. When we jeopardize the making of ever more and better jobs in America, we are ruining the very foundation of this republic.

Our record of the past two years has been good. The value of the dollar has changed less than one-flfth of one cent between January 1953 and today. This compares with a loss of 48 cents in the value of the dollar from 1939 to the time when this administration took office. Inflation will stay checked only if we continue to actively resist the things which bring inflation about. Government must continue to cut down deficit financing and to handle its debt in a proper way.

The Federal Reserve System must continue to use wisely its money and credit responsibilities so that the economy of the Nation can operate with the minimum of regulation. Savings must be protected. Investmient must be encouraged by a great and ever-growing group of both large and small investors, and more and better jobs will thus be created to produce more goods for better living for more and more Americans.

Q, Isn't a little inflation a good thing? 1 0, it is not, and such thinking is very dangerous. I know there are millions

of Americans who are earning more dollars today than they did 20 years ago. That's good. In many cases there is a real improvement in that they have better homes, automobiles, and so forth. But the fact that this increase in dollar income has been accompanied by less value of the dollar must be considered. In addition, the large numbers of persons on fixed incomes and persons who have put aside savings for retirement and old age have been cruelly hurt by inflation taking away 48 cents of each dollar they saved 15 years ago.

Fortunately, inflation has now been stopped. As economists of the American Federation of Labor put it recently, according to press reports: "Unionized labor fared better in 1954 on the wage front than in any other postwar year. Higher hourly wages and stable living costs had given most workers their greatest postwar gain in purchasing power. This was true even though the average pay rise of 5-9^ per hour was modest in comparison with increases in previous years. Last year the wage-earner got the full benefit of a fatter pay envelope. In other years inflation gobbled up much of his gain."

There is nothing academic about this point because America today is a Nation of earners and of "haves" rather than "have-nots." Most Americans today are saving several dollars a week out of their pay and putting it in insurance policies, retirement funds, and so forth. The recurrence of inflation would rob millions of people of their savings.

Q. What is the prospect for more jobs in this country ? The prospect for jobs is very closely related to what I have just been talking

about. Probably the most important thing in promoting a high level of employment and business activity is confidence: People's confidence in our Government, confidence in each other, and confidence in the future.

If the great bulk of the American people are reasonably confident of the future they will expand their activities, invoke new initiative, and try new ways of doing things. As they continue to find their confidence justified, they will not only save money but will invest their savings. This will provide the funds to produce the tools and power for the new plants, new equipment, and new and better ways of making more things. This will lead to greater production, greater earnings of



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more people to pay for more consumption of more things and so in turn make more and better jobs as the years go by. A man can earn more only if he can produce more. As we produce more we will all have more. If we maintain confidence in the stability of our system, there will be more and cheaper goods produced

. through more and better jobs and with more and better earnings for both the workers and the investors.

Q, What is the economic outlook today? The economic down-turn of last year is behind us. In general, the economy is

now moving upward on a broad front. There are some lines and areas which are still depressed. Unsolved problems still remain on which we are diligently working. Unemployment in January was 3,300,000, an increase of 500,000 over the previous month and an increase of 200,000 over January a year ago. But as concrete evidence of the economy's upward movement, employment in January was 60,200,000, or 400,000 higher than in January a year ago. The economy never moves in a smooth straight line, up or down, but as long as our broad movement is upward we are moving in the right direction. If government, business, labor, farmers and all our citizens remain both confident and reasonable in their demands upon the whole economy, we should be able to maintain this upward trend, and supply the rightful demands of an ever-growing population.

Exhibit 48.—Extracts from remarks by Under Secretary of the Treasury Folsom, December 3, 1954, before the Conference of IMayors, Washington, D. C.

It is a pleasure to meet with you again to discuss the perennial problem common to your jobs and mine: Financing Government. Our problems are much alike, with the difference that Federal finances have larger dimensions and possibly receive more front page space. I sometimes feel that city finances would be nearer solution if they had the benefit of more thoughtful public discussion. It is important that your financing problems receive more public attention, not only because they are difficult and challenging, but also because the success with which city halls and town halls solve their problems is vitally important to the continued healthy progress of our economy.

Local government today is a big and growing business. In 1953, it spent $21}^ billion. This is almost twice the direct expenditures of the 48 State governnients. In 1953, State and local government together spent almost half (42 percent) as much as did the Federal Government for all purposes, including national defense.

A very important supporting influence in the economy in this transition period is that while Federal expenditures have been coming down. State and local spending and personal consumption expenditures have increased. Federal spending for goods and service on an annual basis averaged $51.4 billion in the first three quarters of this year, down $8.8 billion from the same period last year. At the same time State and local spending for goods and services increased from $24.8 billion to $27.2 billion, and personal consumption expenditures were up from $230.2 billion to $232.8 billion. As a result the total economy has been well ustained.

Large cuts in Federal spending made financially feasible tax reductions this year which total $7.4 biUion, the largest doUar tax reduction in any one year in our Nation's history.

We believe that the overall reduction in the Federal tax load is a more effective way to help meet your financing problems than would be a reallocation of tax sources among governments. Our goal is to encourage growth in the entire economy, which increases your tax bases and ours, by proper tax and monetary policies as well as by other appropriate measures.

As reductions in Federal taxes take place, the financial capacity of States and municipalities is increased. Federal tax cuts have an important effect, though mainly an indirect effect, upon the problems facing you in your respective cities. Most of the solutions to the financing problems of municipal governments rest with you and your voters as well as with the State governments. The tax and other policies of this administration are designed to help you by facilitating national economic prosperity and by improving the ability of your State legislatures to help you.




Exhibit 49.—Address by Under Secretary ofthe Treasury Burgess, June 17, 1955, before the Graduate School of Banking, American Bankers Association, New Brunswick, N. J.

The dynamism of tradition When I started studying the history of philosophy we began with the contrast

between two earlyllGreek philosophers whose names were Herachtus and Parmenides.

Heraclitus was the philosopher of change. He thought that the most important characteristic of the world was its constant change, its fluidity, as he observed the mo.vements of the tides, the growth of all living things, and the infinite variety of human events.

Parmenides was the philosopher of permanance, of the essential continuit}^ of existence, "The more it changes, the more it remains the same."

As I sit in my office in Washington, I am surrounded by tradition. The room, which dates back more than 100 years, once housed Andrew Johnson in his first few months in office as President after Lincoln's assassination because he did not want to disturb Mrs. Lincoln at the White House. Portraits of former Secretaries of the Treasury now hang on this wall.

These former Secretaries, as we realize when we read their writings, faced problems astonishingly like our own: Difficulties in raising taxes, despair over the -spending pressures of the Congress, the constant importunity of people looking for Federal jobs. "The more it changes, the more it remains the same."

A new world But the world in which Government works today is a different world. It

faces threats and dangers which are new: The atom bomb is new; the battle of ideologies has a new tempo. There is a new destructive force in the world. Attila came with his conquering hordes from out of the East. So did Genghis Khan. Both left a wake of physical destruction, but it was a narrow wake. Today, again, the age-old destructive impulse to scourge and conquer the rest of the world has stirred in the East, but today destruction is not limited by the length of a spear. Whole populations may be blasted with the atom bomb. An entire generation may be poisoned by the insidious venom of an idea.

Under the joint pressures of hot war and cold war and a changing social point of view, the American people have come to expect their Federal Government will undertake a whole new range of activities and a new responsibility for the well-being of the people.

A few years ago a truthful and influential book bore the title, "U. S. A.: The Permanent Revolution." The book showed with illustration after illustration how in this country we have been moving forward from one new conquest of nature to another, from one new social advance to another, how education is fitting our people for new and interesting adventures in living—social revolution without bloodshed.

To describe the challenge of the fast-moving world of today, we have built a new vocabulary. A good example is the word "dynamism." Everybody uses it today. A political policy must be a "dynamic policy." A public program must be "dynamic."

The word is from the Greek dyiiamis, meaning power. It conveys to us something more in the way of explosive growth. Modern research and invention, the atom bomb, the newer chemicals have stirred our imagination and desire for change. A new population spurt has pressed for new schools, new houses, new occupations. Wars and threats of war awaken our sense of history.

Thus we understand that it takes effort just to stand still; the law of nature decrees that every living thing moves either forward or backward. To remain in the same place, to follow the same patterns, often calls for the use of force to resist the inertia which is always slowing down physical or human effort.

Tradition still a great force But even the politician who talks about dynamism in his speech always gets

around to saying something about the great traditions of America and brings in a resounding quotation from Lincoln, or Jefferson, or Franklin. Rehgion is, of course, nourished by the wells of tradition.

At this time of year many of us go trouping back to our college campuses and glory in the tradition of our colleges which has been passed down successive



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generations. We want our sons to go to the ivy covered colleges in order that they may absorb the traditions of the past.

When war comes, the band begins playing the martial airs of long ago and the tradition of patriotism and the stories of the country's oldtime war heroes prove the most inspiringiinfluence to' rouse the new generation into taking its militant part.

Ever}^ area of endeavor develops its own set of traditions. One of the best known belongs to show business. "The show must go on" has provided the inspiration and the strength by which manj'' a saddened or sickened Thespian has surmounted personal grief or illness and gone before the footlights to give the finest performance of a lifetime.

An American President gave us the phrase, "Don't flinch, don't foul, and hit the line hard."

Tradition is a powerful cohesive force which enables millions of people of the same religion, or family, or nationality, or community to work together to subordinate their differences in serving a common purpose. A moral precept is a dull, inert affair but a vital tradition which stirs the emotions can be in itself a great dynamic force.

Here, then, are two of the great forces of the world standing in apparent opposition: "Dynamism," the symbol of change and development; "Tradition," the powerful urge to carry on the ideals and principles of the past.

On the surface, these two forces often appear to be in contradiction. One says, "We must not let mere tradition stand in the way of progress," but the other cautions, "We must not let the desire for change ruin the great traditions of the past."

The successful yoking into a harmonious relationship of these two great impulses which bid for men's minds is one of the greatest problems of Government, of banking, or of any other human endeavor. It is also one of the problems of the Graduate School of Banking, as each of you may have discovered as you have sat hstening to your teachers during these two weeks.

Dynamism in banking In banking, the standstill forces may have achieved a slight edge over the

dynamic, and banking has suffered from the slowness to make changes. This is not strange because the banker, as the custodian of other people's money, develops a strong protective instinct. This is liis plain duty.

But, let me give you a few illustrations. Sometime in the 20's the Economic Policy Commission of the American Bankers

Association employed a competent economist to make a study of installment credit. At that time installment credit was a method that was used only by a few flnance companies and by the loan sharks. The economist who made the study, after a careful investigation, reported that installment credit, if properly administered, was a safe and valuable form of credit. The ABA Committee received the report, studied it, and suppressed it as a thoroughly dangerous doctrine. It was only gradually, over the last few decades that the bank experimented in this field, found it good, and adopted it as a regular department of iDanking.

All of you will recall the mortgage mechanisms of previous generations by which banks and others made short 3 to 5 year mortgages, supplemented by second mortgages at very high rates. Some of you are old enough to remember the troubles that arose when these mortgages fell due at the wrong time.

It took the emergency of the 30's to bring about a common adoption of the longer-term installment payment mortgage which has so proved itself that it has been generally adopted. In fact, it was the savings and loan associations, rather than the chartered commercial banks, which developed this form of lending. The traditional lending practice had been a poor one.

Pension funds provide another illustration. A few years ago a prudent banker or trustee would, as a niatter of principle, invest pension funds in prime bonds. Today they put up to 50 percent in equities. Even life insurance companies are authorized by law in some States to buy shares. Rightly or wrongly this marks the passing of a stout tradition.

On the other hand, there are many traditions in the banking business which are properly cherished. There is the tradition of always balancing your books before you leave for the night. There is the tradition of knowing your customer and his character as well as looking at his statement. There is the tradition that complete integrity is essential in the banker. In no transaction must the banker




sit on both sides of the same table. Complete confidence of the customer is the key to good banking.

In our national finances there are also many illustrations of both the value of Change and the value of tradition.

The Reserve System and tradition The introduction of the Federal Reserve System was a drastic yet highly de

sirable-departure from banking practices of the past century. The System was received rather slowly by the banks of the country; and there are still certain respects, I believe, in which banking has not fully adapted its way of life to the presence of a central banking system. For example, a very interesting report on check clearings by a joint committee of commercial banks and Federal Reserve representatives was recently rendered. The recommendations of the committee were carefully, thoroughly studied and would appear to lead to overall economies in the handling of checks. Y et there has been such resistance to this report that.the question may well be raised as to whether some of this resistance does not spring from a fear of change rather than from a reasoned judgment.

But more generally we. are, I believe, building in this country a tradition of central banking, new in some of its aspects, but in others as old as the Bank of England.

The economic and social reasons for cherishing a central banking system are overpowering. They stem from the need to exericse control over the great swings of economic activity and employment which are called the business cycle. These cycles, if unimpeded, bring a swifter transition from rags to riches and riches to rags than our economy can take without disaster and rebellion.

There are two kinds of prescriptions for the business cycle. One is government management of business, intervention at every point, in effect, state socialism.

The alternative is fiscal and monetary control, influencing the economy through the supply and price of money. This method leaves the individual and business free to exercise their own choices, but alters the climate in which these choices are made. This is the form of economic control most consistent with a political democracy. It allows the maximum of freedom for enterprise and progress with the least government interference.

For this type of social control a central banking system such as the Bank of England or our Federal Reserve System is essential. Alexander Hamilton knew that when he set up the Bank of the United States as one of the financial cornerstones of our new Republic.

Unhappily, Hamilton's concept was dulled and distorted under political pressures and the First as well as the Second Banks of the United States were allowed to perish.

During succeeding years when we had no central bank we learned to our sorrow the need for one, and 41 years ago the Federal Reserve System was established.

In these 41 years we have been learning to live with this sort of banking system: Learning the meaning of the discount rate, open market operations, and its other mechanisms.

We have learned that the Reserve System has powerful weapons of great influence. As recently as the spring of 1953 we saw their power in checking economic overexpansion and in 1954 the restorative influence of easy money.

Another thing with which I beheve you would all agree is that there is nothing automatic or mechanical in the System's operations. They work only through their influence on the decisions of many people, decisions whether they press forward or hold back with their individual undertakings.

Thus the success of the System in its great social objectives depends on the understanding and cooperation of leading citizens. If they heed its signals promptly and trim their sails accordingly, the economic ship can sail a true course. Here is dynamism in its truest sense, yet at the same time we enter the realm of tradition, of the accumulation of experience and understanding. *When the old lady of Threadneedle Street, the Bank of England, speaks through action, Lombard Street understands, through 250 years of experience. The leadership of the Bank is recognized and respected; it was one of the foundations of England's long-time financial leadership of the world. Here is a great tradition.

In 41 years of the Federal Reserve System we have begun to build such a tradition. The financial and business community is beginning to understand the place of the Reserve System and what its action means. Sometimes the System has failed to give clear leadership. Sometimes business and banking



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have failed to heed its signals. But year by year progress is being made in accruing a tradition. Nothing could be more vital to the preservation of the ' kind of economic principle we want here, the dynamic, vigorous life of free enterprise.

Thus, indeed a sound tradition of central banking becomes for us a foundation for dynamic growth. A sound central banking policy supported by a powerful tradition can give us the underlying confidence to support courageous enterprise. So we are justified in speaking of the dynamism of tradition.

Tradition of the budget Side by side with the central banking action as an instrument of economic

policy is fiscal policy centered on the budget. An unbalanced budget tends to increase the country's money supply and so could offset the central bank's effort to keep the money supply on even keel. History shows that unbalanced budgets have been the greatest and most frequent cause of disastrous inflations.

So there has grown up a tradition that "the budget must be balanced." All over the world this powerful tradition has been invoked in times of stress to persuade reluctant parliaments to forego excess spending, levy adequate taxes, and so keep their money, sound. When the International Bank and the Export-Import Bank are considering loans in any country, one of their requirements is that the budget must be under control and at least within range of balance.

In recent years this tradition of the balanced budget has been disputed in the name of dynamism. Just a year ago, for example, several economists appeared before t-he United States Congress and recommended large Government spending programs as essential to start the country growing again and take up the slack of unemployment. Their appeals were fortunately not heeded and the natural forces of private enterprise have brought a vigorous recovery. So today the problem is not lack of dynamism, but almost too much. The question is whether the economic pace may not be faster than can be sustained.

The important lesson is that dynamic growth came not from what the government did for the people, but what the people themselves did when they had confidence in the economic climate. Sound monetary policies and sound budgetary policies helped to provide an encouraging climate. They were a symbol of integrity in government.

So here again is evidence of the dynamic quality of sound tradition. The experience of various European countries in recent years is especially

interesting testimony to the resurgent power of old traditions of balanced budgets and vigorous central bank policies. In Belgium, in Germany, in Holland, in Italy, in England, and elsewhere the greatest upswing of recovery and vigorous economic growth came after the reestablishment of traditional fiscal and monetary policies; bringing budgets into balance; checking inflation by courageous monetary policy.

Conclusion It seems clear that there is no pat answer to the conflicts between the great

forces of change and the conserving power of tradition. Both may be good and both may be bad, depending on the time and the circumstances.

Tradition, itself, may be dynamic in furnishing that confidence and that inspiration which are so often the wellsprings of human action. And, again, in this country we have a tradition of welcoming change and seeking the dynamic solution of our problems.

The problem is one of balance, of analysis, and of nurturing both of these great forces for social progress.

Perhaps one can do no better than to quote from St. Paul and say, "Prove all things; hold fast that which is good."

Exhibit 50.—Address by Under Secretary of the Treasury Burgess, July 2, 1955, before the National Federation of Business and Professional Women's Clubs, Louisville, Ky.

Financial roots of dynamic growth I was particularly glad to accept the invitation from this association because

your President, Marguerite Rawalt, is a valued and effective member of our Treasury team. Also, my wife has been active in this organization for many




years, and at the time when she was conducting an educational program of pubhc information for the Marshall Plan this organization gave enthusiastic and helpful support and took an active part in spreading an understanding of the importance of international trade. Therefore, I feel not only that I am among good friends, but that your organization has earned by hard, persistent, and able work the fine reputation you have among professional associations.

On this Fourth of July holiday weekend it is customary to recall the pohtical foundations of the United States. It is well that we do so; for the great principles of political freedom and self-government do not perpetuate themselves automatically. Each generation must battle to secure and regain its freedom from the constant pressures without and within toward totalitarian government.

In the field of finance where I labpr we are, perhaps, less frequently reminded of our founding traditions. It has therefore seemed to me it might be appropriate for me to remind you that this country has certain financial traditions which parallel those in the political arena; I could even say that they undergird the political ones.

Great financial traditions Every day in my office at the Treasury I am surrounded by these traditions.

My room, which dates back more than 100 years, once housed Andrew Johnson in his first few months in office as President after Lincoln's assassination because he did not want to disturb Mrs. Lincoln at the White House. Portraits of former Secretaries of the Treasury now hang on this wall.

These former Secretaries, as we reahze when we read their writings, faced problenis astonishingly like our own: Difficulties in raising taxes and borrowing money, despair over the spending pressures of the Congress and the people, the constant importunity of people looking for Federal jobs.

This evening, I should like to remind you of the nature of the great financial traditions which we inherited along with our Declaration of Independence and Constitution and then examine those traditions in the light of the pressures and problems of this new dynamic atomic age in which we live. -

It was in the year 1789, immediately following the adoption of the Constitution, that Alexander Hamilton became the first Secretary of the Treasury. He was the first Cabinet officer appointed by George Washington.

Hamilton's most immediate and challenging problem was that the country had no money that could be trusted. There were some coins of various nationalities and some paper money issued by the States and the Continental congress. "Not worth a continental," was the common phrase which characterized the value of that money. It has come down to us today, and still means what it did then, something which has no soundness, nor integrity behind it.

Hamilton reahzed that a politically independent and permanent nation was virtually impossible without national financial stability. To achieve this in a raw, new country, with credit virtually destroyed both at home and abroad, and with States strongly opposed to taxation by a Federal authorit}^, seemed an almost insurmountable task.

Hamilton's bold plan for reestablishing the Nation's credit involved recognizing and funding the Nation's debts, paying interest on them, and retiring them as they came due. The domestic debts owed by the Federal Government, the debts incurred by the Thirteen Original Colonies in fighting the war, and debts owed to foreign countries aniounted in all to 78 million dollars, a towering sum in those days. Perhaps no more courageous step was ever taken by a financial statesman than Hamilton's action committing the country to pay this debt in full, even though bonds representing the debt sold in the market at 10 cents on the dollar or less. But Hamilton knew that the surest way to establish confidence in the new Government's financial integrity was to start immediately on a sound program to pay debts.

Before the Governnient could put the plan into effect, it needed money, and needed it badly. No sound financial prograni was possible without adequate Federal income to pay interest on the debt, to retire the debt as it matured, and

. to meet Government operating expenses. But the possible sources of Federal revenue were limited. The individual

States were jealous of their own prerogatives in levying taxes. The colonists, under the British crown, had vigorously resented such imposts as the stamp tax on tea, and had taken dehght in evading British levies on imports. The administration of any systera of internal taxation was certain tb be very difficult.



EXHIBITS 3 0 5

For this reason, and because of the country's heavy dependence on imported products, the Government decided to rely on import duties for most of its income, adding levies on distilled spirits to cover domestic production as well. Under this simple plan, collections were concentrated at relatively few points.

But there was one especially serious threat to the success of this plan,, the widespread evasion of customs duties through smuggling. For revenue enforcement, so vital to the Nation's sound money program, Hamilton recommended the construction and manning of "ten boats," to use his words, at $1,000 each for a "Revenue Marine Service."

These ten- vessels, so small that Hamilton called them boats, were authorized by the Congress, were built, and started active operations against smugghng in the following year. Thus, the Coast Guard began. It was comraanded by forty carefully selected "officers of the customs," and manned by crews which, as Hamilton insisted, should be made up of "respectable characters,"

Despite its small size and the extensive area of its operations, the Revenue Marine Service gradually established an effective blockade against smugghng. Hamilton's aims were realized. The Coast Guard remains today an important agency of the Treasury.

Thus, the first steps were designed to assure that the Nation's income would be adequate to meet its current expenditures, as well as to begin some payment on the debt.

The second step in support of a program of handling the debt was the establishment of the Bank of the United States which was chartered in 1791 to act as a central bank and as the core of the new American banking system.

These policies of Alexander Hamilton, supported by the great moral force of George Washington, were adopted by a reluctant Congress and carried out under great difficulties. The result was that the foundations were laid for making the dollar the best money in the world. You of this organization who have traveled in many countries and have such wide international experience know what this means. The dollar today is a standard of value for the whole world. "Sound as a dollar" has taken the place bf "not worth a continental."

The Treasury as the national bookkeeper These rigorous principles which Alexander Hamilton inaugurated have an

implication far beyond technical finance. The Treasury of the United States is, in a sense, the bookkeeper for the country's civilization. It keeps the books, not only for the national treasury, but for the whole economic and social life of the country. Women are theoreticaUy the Nation's bookkeepers so they, particularly, will understand the importance of sound bookkeeping. On this subject, I quote from an article by Esther Eberstadt Brooke in the second challenging volume of "The Spiritual Woman," edited by Marion Turner Sheehan, a member of this association:

"One creaky relic of the didies-not-dollars-for-women era is the deathless myth that women hate figures. The truth is that woman brought to business an orderly mind, trained by years of battling with the budget. Woman is the only creature on earth able to multiply nothing by nothing and get something out of it. She is inherently a bookkeeper with an accountant's delight in the profit column and a determined broom to sweep away the loss."

Our own personal checkbooks reflect almost every aspect of our personal lives: Food, clothing, education, transportation, medical, recreation, charitable, social. Anyone who flipped over the stubs in our checkbooks would have a pretty good idea of the life of the family. So, the accounts of the Treasury give a vivid picture of the life of the Nation.

When the Nation's checkbook is out of b.alance, when income fails to meet outgo, then people begin to question the sound value of their money and the many transactions which depend on money are thrown out of gear.

Hamilton and his associates in the Government knew that, because he saw how the disorganization of the value of money during the Revolution held back the war effort, made people even more reluctant to serve in the Army and Navy, made the people desire to hoard their foodstuffs instead of making them available to feed the troops. His tremendous determination to establish the country's money on a sound and rehable basis was a direct result of what he had seen and known.

866812—56




Sound traditions followed Fortunately, the sound principles of finance on which this country was founded

have been cherished during most of our history. There have been exceptions. At times of each great war we have had serious

inflation, more than was necessary had wiser policies been followed. Over the span of history we have had tremendous disputes about money in

and out of Congress. , The central bank which Hamilton set up, the Bank of the United States, and its successor bank were the subject of violent political arguments and the lives of both banks were terminated for political reasons. It was, indeed, not until 1914 that we had reestablished in this country a sound central banking system and during this interim period we suffered frora inadequate monetary pohcies.

Other great disputes about money included the question of the resumption of specie payments after the Civil War; and there was the struggle for free silver, led by Wilham Jennings Bryan and defeated so decisively in 1896.

But, in the main, and in the long run, the American people have clung to the concept of sound money and the dollar has been so secure in people's minds that the flow of trade and business could go on unimpeded by worry about the value of their money. This, of course, is one of the reasons for the great prosperity and economic growth of this country.

Some questions But in the past few years some voices have been raised to question these old

principles. World War II with its long duration and the succeeding cold war produced

an inflation which seriously reduced the buying power of the dollar and brought hardship to people who were depending on savings or were living on pensions or fixed incomes.

It is this recent experience, particularly, which has led some to wonder whether traditional policies of sound money could be maintained and whether it is, possible, in the long run, to avoid inflation, I am sure you have heard people say, "What's the use of saving your raonej^ because it willnot buy as much when you come to spend it?'^

Some economists have even gone so far as to predict that this and other countries would face continually rising prices and a gradual decline in the value of money.

Our policies today Let me reassure you: Today in the Treasury Department we do not believe

this. Quite the contrary, we believe firmly that this country can have sound, stable money which will retain its value down the years. We beheve also, that this is the best foundation for a sound and growing economy.

We are, in fact, in the Treasury today following policies which are closely parallel to those inaugurated by Alexander Hamilton 165 years ago. Let me list them:

(1) We beheve in, and are working toward, a balanced Federal budget. The first year we came into office (1953), there was a deficit of $9> bilhon, which we inherited from our predecessors. This we have reduced so that, this coming year, it is estimated at about $2}^ bihion; we shall try to make it less. This has been done, primarily, by reducing expenditures by about $12 billion. With the recognition that our tax rates are too high for the maximum d3mamic growth of the econoniy, taxes have also been reduced by $7}^ billion. The road block in the way of further econoray is the cold war and the iraperative need it iraposes to keep our country's defenses strong. Until we bring the budget into coraplete balance, the debt, of course, will continue to increase and the legal debt lirait will have to be teraporarily raised, just as the Secretary of the Treasury requested of Congress this week.

(2) We have sought by raany means to distribute the debt more widely araong raore people. AVe are trying to lengthen its maturity by the sale of long-terra and raediura-term bonds. The araount of the floating, or short-terra, debt has been reduced. The savings bond program has been stepped up.

(3) We have worked unceasingly to carry out Hamilton's policies of an effective central banking system as the core of a sound financial raechanisra. Our principal objective has been to relieve our Federal Reserve Systera frora political pressure and raake sure that its activities are devoted solely to serving the welfare of the people.



EXHIBITS 3 0 7

We are, as I hope I have been able to show you, following financial principles which go back to the establishment of the Republic, adapting thera, of course, to current conditions.

What is our answer to those critics who say that these old-fashioned principles are lacking in dynaraism and that raore and more Government spending is required to assure the country's growth and prosperity? Here is our reply:

First, that the dynaraic growth of the United States has exceeded that of alraost any otlier country in the world. The principle that good raoney is the best foundation for econoraic growth is supported by our econoraic history.

This year, under a continuation of these policies, indices of industrial production, eraployraent, retail trade, and other econoraic factors have gone steadily upward until the country is once more at a high level of prosperity. The national incorae and gross national product are both setting new high records this year and without any price inflation. Confidence that coraes frora sound principles is proving the best stiraulus to dynaraism that could be found.

Evidence from overseas Second, let me cite evidence in another area, which I know particularly in

terests you, of the dynamic force of our traditional financial policies. In the Treasury Departraent, we have an Office of International Finance, the business of which is to follow carefully the financial developraents abroad as a guide to the policies of the United States with respect to the financial aspects of foreigii aid, the lending policies of the International Bank, the Export-Import Bank, and the operations of the International Monetary Fund. This United States Treasury division has representatives in many foreign countries. We receive a steady flow of information from thera and other sources and have been able to watch at first hand financial developraents throughout the world. Frora this listening post, we have seen startling and alraost incredible evidence of the return to traditional and tested raethods by country after countrj^

The period frora 1951 on, I would say, could be designated the period of revival of sound monetary policy throughout the world.

It stands out very vividly to me personally because I visited Germany in 1946 and again in 1950. The thing that happened between those dates was the revaluation of the currency and the reestablishment of the Gerraan currency systera under the "Dodge Plan," devised by our own Joe Dodge, Director of the Budget in 1953 and 1954. There you saw an econoray turning from night to day in the space of a few months when a sound monetary and fiscal policy was adopted.

The International Monetary Fund has published a study entitled, "The Revival of Monetary Policy," A conclusion drawn in this study is that experience throughout the world indicates ". . . the use of raonetary policy in recent years has strengthened confidence in currencies. It can no longer be assuraed that the value of money will move uninterruptedly in one direction, downward. People are again encouraged to save and to keep their savings in their national currency, instead of seeking refuge in gold and dollars."

What you can do about it All of this raay seera remote to some of the raerabers of your organization, but,

in reality, it is very close. First, raany of you are direct participants in the financial program of the

Governraent and related institutions. Your President this year deals every day in the Treasury with parts of the problem of maintaining sound money, the problem of honest tax collection. A former President, Sally Butler, was a roving representative of the Treasury. Another member. Ivy Baker Priest, Treasurer of the United States, is a particularly ]3ersuasive advocate of our policies.

Many other merabers are in responsible positions in finance and business, and it is my confident prediction that this number will increase year by year and that their responsibilities will grow. So the raerabers of this organization will have a direct share in the country's raonetary future.

Second, the education both of youth and of adults in this country is peculiarly within the sphere of woraen's influence. Early youth raay not be the tirae to teach the theory of sound raoney in the technical sense, but it is the tirae in which to inculcate an attitude of raind, an approach to life's probleras. It is then that the foundation is laid for an attitude of syrapathetic understanding for the great achievements of the past and the.great men and women in the country's history,




Youth is the time to build bulwarks against the cynical attitudes which find satisfaction in debunking our historical heroes and traditions. We need to help our youth to respect integrity, whether it is integrity of stateraent, or of character, or of money.

Beyond this, I believe we can go much further and earlier in teaching more specifically the elementary principles of finance and their human and political as well as their technical aspects. A business group is, today, organizing a program in this direction, and your organization may be interested in studying their program.

Third, your organization is taking a helpful part in one particular phase of the Treasury's sound money program. I refer to the savings bond program. This year, millions of Americans are purchasing about $5H billion of E and H savings bonds. This is in response to the work of raany thousands of volunteer workers, including raany business and professional woraen.

The imraediate purpose of this prograra is to distribute the debt widely araong our citizens, following the precedent set by Alexander Hamilton in 1791.

Less directly, but just as important, the savings bonds program is a method of educating more people in this country in habits of thrift and in giving them greater understanding and sympathy with the work of our Government. Through their savings bonds, they becorae shareholders in the United States.

In these three ways, the raerabers of your association have already rendered distinguished service, and our appreciation is not only real and heartfelt but it conforms to the definition of "gratitude" as "a lively anticipation of favors yet to come."

Exhibit 51.—Statement by Under Secretary of the Treasury Burgess, July 13, 1955, before the Senate Committee on Banking and Currency

The bill before you relates to a series of acts governing the monetary use of silver. It deals with a subject which is controversial both from the point of view of monetary theory and because of the diverse interests of important groups of our population. -

The Treasury interest in this bill relates to the very practical question of our ability to carry out successfully, and without economic ill effects, operations within the area of our statutory responsibility for silver coinage and paper currency secured by silver.

Frora the point of view of Treasury operations todsbj, the principal effect of this bill would be that the Treasury would no longer be required to purchase newly rained doraestic silver and to issue silver certificates against it.

Under the bill the Treasury would, however, be instructed to raaintain the silver reserve behind silver certificates, and raight use silver not required for reserves for coinage purposes.

The Treasury would continue to have authority, under prior legislation, to buy in the market silver needed for subsidiary coinage.

The Treasury has operated under the provisions of the present legislation for a period of years and has found no serious difficulty in so doing, without untoward economic effect, either inflationary or deflationary. On the other hand, if this legislation were repealed, we could operate under the reraaining provisions of law to meet the coinage and currency requirements of the United States which are related to silver.

Silver has had a spectacular place in our monetary history. I shall not go into the details of the attempt to operate a bimetallic currency in the 18th and 19th century. Since the act of 1900 the United States has, except .in 1933, operated on a gold standard, but through this period has used silver to back part of the currency, and has used silver for subsidiary coinage.

The Silver Purchase Act of 1934 reintroduced the legal requireraent of the purchase of silver by the Treasury without imraediate regard to coinage needs. Under the further legislation adopted in 1939 and 1946, the Treasury buys all domestically mined silver offered to it at a net price of 90.5 cents per ounce. The Treasury then issues silver certiflcates at a monetary value of $1.29 per ounce. The seignorage of 30 percent is left as "free silver," which can be used

. for subsidiary coinage or other purposes authorized by law.



EXHIBITS 3 0 9

For the last 20 years, except for a few brief periods, the Treasury buying price for silver was higher than the market price for silver. Domestic silver, therefore, came to the Treasury, while industrial needs were supplied from foreign silver.

Silver has today a secondary, not a primary monetary role. We have an international gold bullion standard. The dollar is defined in terras of a fixed araount of gold and the Secretary of the Treasury is required to keep all forras of United States currency at a parity with gold. This is the firm base of our monetary policy.

In the past year (April to April), new silver certificates were issued for about $26 million.. Total silver certificates outstanding are $2.2 billion, compared with a, total of $30.0 billion for all forras of raoney in circulation outside the Treasury and Federal Reserve Banks, The proportion of silver certificates in our systera is about the sarae now as it was in the 1920's, and for the past decade.

Although the forra of the law has been changed frora time to time, this country has historically used silver for coinage and to back smaller denoraination currency. Silver certificates are the only currency which we have in the $1 denoraination and they constitute a part of the $5 and $10 bills. The bill before you conteraplates continued circulation of silver coins and certificates.

If the legislation were repealed, the Treasury would still be able to purchase silver for subsidiary coinage by using the bullion fund first established in 1792. Last year we used 53 raillion ounces for such coinage. The United States production of silver in 1954 was 37 raillion ounces, an araount less than Treasury requireraents for subsidiary silver.

The world was drawing on silver stocks, since consuraption for coinage and industrial use was 219 raillion ounces, 5 raillion raore than production of 214 million ounces. But the situation was almost in balance.

In short frora a raonetary standpoint the legislation which would be repealed by S. 1427 is not necessary and the Treasury would have no objection to its repeal. On the other hand, it creates no serious difficulties for us and we can continue to operate under it if the Congress so decides.

Exhibit 52.—Address by Assistant Secretary ofthe Treasury Rose, May 30, 1955, at the dedication of the U. S. Coast Guard World War II Memorial, New York, N. Y.

Since the Civil War, Memorial Day has been set aside as the tirae when a grateful Nation pauses to reraeraber and pay tribute to the gallant dead of our Arraed Forces who raade the ultiraate sacrifice of all their own toraorrows in order that toraorrow raight dawn bright and full of proraise for the United States and for all of us.

It is peculiarly fitting that on this day we should gather here to dedicate a perraanent raeraorial to the raen and woraen who served in the United States Coast Guard during the last war, I ara particularly grateful that it has fallen to my lot to come here today for this purpose, because it affords me the opportunity to bear public witness to ray esteem for that great service, born of an intimate and raost rewarding association with it over these last few years.

It coraes as a surprise to raany that the Coast Guard is the Nation's oldest fighting force afloat, and that its proud tradition stretches back to earhest days of the Nation, when in 1790 Alexander Harailton as the flrst Secretary of the Treasury brought into being the Revenue Marine. In tirae of war the Coast Guard raerges for the duration with the Navy, its larger sister service. For that reason it is iraportant, particularly on this occasion, to identify the kind of war-tirae tasks the Coast Guard had, and perforraed so well.

What were these tasks? The Coast Guard is unique among the five armed services in this respect: It has, in addition to its military responsibility, the vital and huraanitarian peacetinie job of protecting and watching over the seaborne coraraerce of the ISFation. It raaintains the lighthouses and the buoys along our coasts and in our harbors. Its cutters and lifeboat stations, its planes and helicopters, are daily at their work of saving people and ships frora the perils of the sea. Its ocean stations in the isolated reaches of the Atlantic and the Pacific and its chain of loran stations spanning rauch of this heraisphere supply navigational and weather data to enhance the speed and safety with which raan raay sail the seas. There is no place where it is raore appropriate to eraphasize



310 195 5 REPORT OF THE SECIRETARY OF THE TREASURY

the iraportance of these peacetirae tasks than here in the greatest harbor of the continent.

All these jobs, of course, need even raore urgently to be done in wartirae, under the raore hazardous and difficult conditions of blackout and subraarine and air attack. All these jobs the raen and woraen of the Coast Guard continued to do superlatively well throughout the war.

In addition to all this, the augraented railitary activity of the Coast Guard ran the whole gamut of the war at sea and on the beaches. The Coast Guard manned transports and escorted convoys. It was part of the antisubmarine patrol and killed its share of U-boats. On the beachheads from Normandy and Sicily to the Philippines, whose naraes are etched in glorious memory, the Coast Guard landed assault troops and brought away their wounded from the battle. It was such a deeply moving incident on the beaches of Luzon that was seen by Norraan Millet Thoraas, hiraself aboard the Coast Guard-manned transport Calloway, and then so effectively translated into the meraorial that we dedicate today. It was such an incident that is comraeraorated in the posthuraous award of the Congressional Medal of Honor to Coast Guardsraan Douglas Albert Munro, whose citation I would like to read:

"For extraordinary heroisra and conspicuous gallantry in action above and beyond the call of duty as officer in charge of a group of twenty-four Higgins boats engaged in the evacuation of a battalion of marines trapped bj^ eneray Japanese forces at Point Cruz, Guadalcanal, on September 27, 1942. After raaking prelirainary plans for the evacuation of nearly five hundred beleaguered marines, Munro, under constant strafing by eneray raachine guns on the island and at great risk of his life, daringl}^ led five of his small craft toward the shore. As he closed the beach, he signalled the others to land and then in order to draw the enemy's fire and protect the heavily loaded boats, he valiantly placed his craft, with its two small guns, as a shield between the beachhead and the Japanese. When the perilous task of evacuation was nearly corapleted, Munro was instantly killed by eneray fire, but his crew, two of whom were wounded, carried on until the last boat had loaded and cleared the beach. By his outstanding leadership, expert planning and dauntless devotion to duty, he and his courageous corarades undoubtedly saved the lives of nianj^ who otherwise would have perished. He gallantly gave up his hfe in defense of his country.*"

It is wholly fitting that we recall these things in the uneasy peace of this Memorial Day of 1955. In another raeraorial cereraony nearly four score years ago one of our greatest soldier statesmen. Justice Oliver Wendell Holmes, gave his explanation of why we celebrate this day in these words:

"Feeling begets feehng, and great feeling begets great feeling. We can hardly share the emotions that make this day to us the most sacred day of the year, and embody them in ceremonial pomp, without in some degree imparting them to those wiio corae after us. I believe from the bottora of ray heart that our raeraorial halls and statues and tablets, the tattered flags of our regiraents gathered in the State-houses, and this day with its funeral raarch and decorated graves, are worth raore to our young raen by way of chastening and inspiration than the raonuments of another hundred years of peaceful life could be."

That is why it is iraportant that we celebrate this day and dedicate this raeraorial: Not only as a fitting tribute to past deeds of greatness, and those who did thera, but also as an inspiration to the present and the future, for "great feeling begets great feeling." That is the wellspring of the raorale of any arraed service; and perhaps because it is the smallest of the services, or perhaps because alone among them it is charged with a humanitarian as well as a military mission, the Coast Guard has, I feel, a special morale that is all its own. I once said to a graduating class at the Coast Guard Acaderaj^ that the spirit of the Service was akin to the raorale and spirit of that little English array just before its victory on the battlefield of Agincourt whicii Shakespeare described in that unforgettable line spoken by Henry the Fifth, "We few, we happy few, we band of brothers."

That was the spirit that infused and inspired the hundreds of thousands of devoted raen and woraen who served their country in the Coast Guard during the four years of World War II. To thera we pay our heartfelt and hurable tribute, which in this splendid raeraorial will endure throughout the years.



EXHIBITS 221

United States Exchange Stabflization Fund to purchase Chilean pesos up to an amount equivalent to $10 million, should occasion for such purchases arise. Chilean pesos so acquired would be repurchased by Chile for dollars.

Addresses and Statements on General Fiscal and Otlier Policies

EXHIBIT 26.—Remarks by Secretary of the Treasury Humphrey, November 17, 1955, before the American Petroleum Institute, San Francisco, Calif.

It is an often-neglected fact that within the last half century this Nation has gone through an economic evolution that makes pale any other in the long history of man's efforts to achieve a better life.

The result is that this Nation is today a Nation made up of small to medium savers and investors.

This means that today this is a Nation of "haves,'* and not a Nation of "have nots."

We have been in a tremendous and beneficial evolution, peacefully bettering the lives of most of us.

We in this administration have hitched our wagon to this rising star of a "have" nation to make sure of its continued rise—to keep making "have nots" into "haves."

We are admirers of, and believers in this uniquely American growth and progress.

But on coming into office we found that this great day-to-day American evolution from the bottom up was in danger. In fact, we found that it had not even been properly recognized by economic policymakers of the past two decades. They were too busy fighting the ghosts of a "have not" nation, a nation that had even then already ceased to exist.

As a result, we found the economy blown up with the hot air of inflation, to a point where there was real danger that it might burst, letting us all down with a crash that would have maimed us as a Nation and dropped the free world's defenses invitingly low.

We found the economy's growth hampered and hobbled by a tangle of successive layers of regulations, controls, subsidies, and taxes imposed in past emergencies. The economy was being twisted into the shape of things past, when it should have been reaching freely for its rightful future.

In addition, we found defense spending being used partly to buy defense, and partly as a crutch to support an unsound economy, thereby endangering both defense and the econoriiy.

In other words, we found an economy in danger of going stale, out of step with the times and out of step with the Nation it had to serve, an economy fearful of the ghosts of bygone crises, living precariously on the treacherous dodges of inflation,* subsidy, and excessive crash-and-crisis Government spending.

We have been reshaping this Government's economic policies into the policies required for a strong and forward-looking nation, its economy firmly footed and self-supporting; an economy that will pump a continuous new flow of nourishment into the day-to-day American evolution of self-betterment; an economy that will constantly generate new and better paying jobs for an evergrowing population. At the same time our economy must provide an ever-higher standard of living, plus the social services the people want and need, as well as the men and the weapons the Nation must have for its defense.

Now, let's look at what you millions of American citizens have been making of our economy, how you have been creating the world's most successful and beneficial economy, and what we in the Government are now doing to see that you have every possible opportunity to press forward and continue making a better life for all.

All hands in our Nation: Labor unions and the employer, the rich and the poor, both major parties, the farmer and the city man, the woman at home, and the man at his job—all have had a part in making our new productive way of life.

The point now is that the peaceful evolution has resulted in a tremendous upheaval of this Nation's whole economy that really has created a different kind of Nation, a unique Nation of "haves" that needs an up-to-date way of thinking



222 1956 REPORT 01 THE SECRETARY OF THE TREASURY

about itself, and up-to-date policies, in keeping with its strength and growth potential.

Let's look back to the turn of the century and see what has been happening, economically, since then. Only by making such a comparison can you realize how outmoded a line of thought can be, even if only a few years old, when applied to our dynamic economy, and how alert we must be not to let out-of-date thought and practices tie us down while opportunity passes us by.

Our total national production of goods and services now approaches 400 bilhon dollars. That is just 20 times as much as our national output in 1900. When you make allowance for price rises since the turn of the century, today's national production is still about seven times what it was in 1900. Our population has more than doubled since 1900, but our national output per capita—production per man, woman, and child in the Nation—is three times what it was then.

Our national income is now over 320 billion dollars. After allowance again for price changes, this is seven times what it was in 1900. And our income per man, woman, and child in the whole population is, like production, three times as much as in 1900.

Here is the important thing about that inclDme change since 1900. The lower and middle income groups have received the greatest share of our increased income. Early in the century, only 1 out of every 10 American families earned as much as $4,000 a year in terms of today's prices. Now almost half of our families earn more than $4,000 a year. Those with inadequate incomes for a decent living are becoming fewer and fewer, and more and more of them are becoming "haves", people who have enough money not only to live adequatelj^, but to save besides. That is the basic economic development in this country which we are trying most fervently to keep going, and to continually improve.

Let's see just how widespread and important this flow of purchasing power to the broad base of our economy has been and will continue to be.

One of the most common methods of savings is the purchase of insurance. At the turn of the century, people in this country had taken out 14 million life insurance policies. Today, with the population only slightly more than doubled, and with many people owning several policies, the number of life insurance policies has increased nearly 18 times, to about 250 million.

Ownership of individuals in their life insurance has increased from under 2 billion dollars in 1900 to more than 85 billion dollars today.

Small investors' holdings in United States savings bonds, total the huge amount of 50 billion dollars. No such investment existed in 1900.

Let's see some other ways in which the average man on the street in this Nation has been making himself over into an investor, a man with a real financial stake in the future such as no other average citizen anywhere ever had before.

Nearly 10 percent of all American families today own stock in American corporations. At the turn of the century, this was just getting under way.

In 1900, individuals had liquid savings of all types amounting to less than 10 billion dollars. Now such savings of individuals in this country total more than 235 biflion dollars.

Last year alone, Americans bought equipment for themselves and their homes of almost 30 billion dollars. This included things unknown to the homeowner of 1900, like 7 million radios, 7 niillion television sets, nearly 3J million washing machines, and a million air conditioners. These are mass investments in a better life only a nation of "haves" could make.

About 25 million, families own their own homes today, compared with only 7 miflion homeowners half a century ago, while population has only a little more than doubled in that time. About 55 percent of our families now live in homes of their own.. Nearly all the others want to. And ways and means of helping them to do so are of greatest concern in present Government polic3^

Labor unions to which many American workmen pay dues, are also investors. Not so many years ago, union treasuries were low. Today many of them bulge with huge sums. They own banks and buildings, bonds and stocks, and investments of many kinds. These are investments belonging to, and benefiting, the man in overalls.

Today more than 15 million Americans have more than 30 billion dollars invested in pension and retirement trust funds. This represents an investment of almost $2,000 per worker. Such retirement plans were practically unknown in 1900.

You can see from these few examples what has been happening to the ordinary individual and the ordinary family in our wonderland economy. We need a



EXHIBITS 2 2 3

completely new set of standards in thinking about ourselves. We are a Nation of "haves," not of "have-nots." This Nation's economy has grown right over, and has left ,behind in the dust, both socialism and communism.

The consequence of this brilliant human achievement in our Nation is that the basic interests of the man in the overalls are today the same as the basic interests of the man in the business suit.

Business long a go recognized this fact, and centered its attention on the wants and needs of the far greater number of men who at times wear overalls. I t is time that we all caught up with the facts of life in this Nation.

Let's see how the man in the overalls and the man in the business suit today have the same basic interests and what that revolutionary fact means to the whole economy:

In the first place these clothes are interchangeable and great masses of our people wear both depending upon the day of the week, the time of day, and their occupation at the moment. This fact in itself illustrates the virtual rempva,l of" any gap between them. But there are many other illustrations of similarity ,of purpose, thought, and situation..

Both men have current earnings and probably savings in one form or another. That means that both are interested in seeing the dollar keep its purchasing power. To the extent that inflation develops, both men are robbed.

If you had $1,000 saved up in 1939, which you did not draw out to use until 1953, you really took a beating. Inflation had sneaked into your savings during those years and made off with $478. How? Because inflationary price rises during that time cut the purchasing value of the dollars you were saving, every minute of every day. When you drew out your $1,000 savings, inflation had stolen away with all but $522 of the purchasing power your dollars had when you put them aside in 1939.

This is a terrible thing to happen to a Nation of people who are working and sweating and scrimping to put aside money for the education of their children, the purchase of a home, or to provide for their old age.

The man in the overalls and the man in the business suit often try, by purchasing insurance, to build up some security to leave to their wives and children in the event of untimely death. It is a terrible thing to have the purchasing power of his insurance, the time that it will pay the rent and set the table or help with the education for those that are left, cut nearly in half in the short period of just 15 years.

It is a heartbreaking thing for a man and woman who put. aside savings in a pension or retirement trust fund as they work during their lifetime to find on retirement that inflation has robbed them of nearly half of what they had invested to live on in their declining years.

We in the Eisenhower Administration have made halting inflation one of the principal goals of our administration. In the last 2% years, the value of the dollar has changed only one-half of one cent. This means that we have kept inflation's hand out of your savings almost entirely. We want to keep inflation locked out, so that when you save by putting money in the bank, by buying a savings bond, by buying insurance, by contributing either work or money to a pension fund or fraternal order or in any other way, you will get from your investment the same value that you toil now to put into it.

The man in the overalls and the man in the business suit have at least an equal interest in this fight. But, if there is any difference between them, it is the man in the overalls who most needs protection. He can less afford to lose.

Now, it is growing more and more to be that it is the vast sum of the many smaller savings of the man in the overalls on which our industrial and commercial System depends for its financing. The sum of all the little savings is fun-neled mainly into big investments by the savings banks, the building and loan associations,- the insurance companies, investment trusts, pension funds, union and fraternal organizations, and others handling the savings of the man in the overalls.

Business in this country is pouring nearly 28 billion dollars of new investment into its plants and equipment this year. That tremendous amount must come from somebody's savings. Without it, the future's new jobs will never be born, nor will we get tomorrow's increase in productivity, as the result of new and better tools of production, bought by new investment.

Saving is important to the Nation, and must be encouraged, not discouraged, because it strongly influences the security of the job you have, and your hopes for ever-better pay through continued increase in your productivity. Thus you




can see how inflation can rob you not only of your personal savings but, in addition, steal away your pay increases and perhaps even your jobs.

We must have policies that put solid ground under our day-to-day evolution of continual betterment from the bottom up. Such pohcies must aim at everyone, spreading the riches throughout the land. There is only one way to have everyone have more and that is to produce more. The Nation's treasures of goods and services must constantly increase, by continually increasing individual productivity, so that they can be spread ever deeper and broader throughout the whole economy.

Our policies must result in giving the man in the overafls ever more and more of the same things which the man in the business suit also wants to have. And that can only be accomplished by an economy that constantly produces more of the comforts," conveniences, and necessities of life. Such an economy will not only be of direct benefit here at home, but will also be a beacon of progress in the whole free world.

Our strong economy must and can carry the costs of fully adequate defense, and of indispensable pubhc services, and at the same time continue its healthy growth. But it will only be able to do so if we balance the load correctly, so that it can be carried, and carried indefinitely, without a breakdown.

We have devised policies to fit our new situation and we are balancing the load. We are not the slave of any particular aspect of our flexible policies. We re

gard inflation as a public enemy of the worst type. But we have not hesitated, either, to ease or restrict the basis of credit when need was indicated. Under the new cooperation that exists in this administration between the Treasury and the Federal Reserve, the full force of monetary policy has been made effective more promptly than ever before in the. Nation's history to better respond to natural demands.

We found when we came to office an overblown economy. It was hobbled with all sorts of artificial controls, dangerously dependent upon the uncertainties of defense spending, and inflationary pressures. It was borrowing from tomorrow's production and income at a prodigious rate, with unsound confiscatory taxation that still failed to provide for the profligate spending. This resulted in huge deficits that were passing the heavy burden of our excesses on for our children and grandchildren to bear. And sooner or later it was sure to result in complete downfall.

Under the Eisenhower Administration, the whole economy, the livelihood of all the people, has been made more safe. This has been done by the-timely use of monetary policy and credit in response to actual demand; by the return to the Dubhc of purchasing power through the biggest tax cut in the history of the Nation, Dy cutting unjustified Government spending; and at the same time by timely encouragement to construction, home building, and needed improvements. By the prompt and vigorous use of all these measures we have made the difficult and dehcate change from a dangerously artificial economy to a healthy one, with every effort exerted to the utmost to involve the very minimum of cost in terms of unemployment.

In turning our faces resolutely from inflation, and unrealistic spending, what have we turned toward?

We have turned to you, to the 166 million people of America. We have turned with full confidence to a people that have demonstrated that

you are industrious, saving, inventive, daring, progressive, and self-reliant to an unprecedented degree. We believe in your capacity to go on providing yourselves with an ever better life, if we in Government support your efforts where the general welfare calls for such support, and do not load you with unnecessary burdens, or take from you by excessive taxation the increase in your income that you might otherwise earn and save, or allow you to be robbed by inflation.

Realistic economic policies that take account of the true nature of our economy and the burdens it must bear, will bear big fruit.

We wifl not be rising on the hot, uncertain air of inflation. Nor wfll we be wearing the false, rose-colored glasses of a prosperity based on unwise and dangerous Government deficit spending, treacherous alike to the Nation's security and its economic health.

We wifl be rising on the sohd ground of these things: Savings protected against shrinkage by a stable dollar; Increased production and increased wages and earnings made possible by the

investment of those savings in more, new, and better tools of production; Wide use, by Americans who are both workers and investors, of these tools of



EXHIBITS 2 2 5

production for the creation of more jobs and new, better, and cheaper goods, with everwidening distribution among an evergrowing number of consumers as their earning power increases and the cost of the goods decline;

Use of the increased income from this increased production of the things you want; not to pay the bill for unneeded or unwise Government spending, or as tribute to inflation, but for the creation pf a better life for all.

We have turned our backs on artificial stimulants. We have turned our faces confidently to practical, natural methods for the creation of a better life for all of us—firm in the belief that continuation of the processes of the American evolution of self-betterment from the bottom, up is second nature to our whole people.

The United States is now enjoying plenty in peace. Americans are breaking all records in the number of people with jobs, the high wages they are receiving, and in the production of goods for people to enjoy. And they are enjoying this high prosperity while successfully resisting pressures toward inflation.

Whether this high prosperity will continue without getting into the excesses of inflation or deflation depends in very large part upon what 166 million Americans do. It depends upon you in this room this morning, and your associates in the economic life of America.

We hope for continued prosperity based, not on war scares or artificial Government stimulants, but on steady spending by consumers, and investment by business. It has a broad and solid base. We have laid to rest the myth that a free enterprise system can thrive only in war. We have shown that free men in a free world can provide an abundance, can provide plenty in peace, far above the capacity of the government-run economies of the world.

The best that government can do to strengthen our economy is to provide a fertile field in which raillions of Americans can work. The continued success of our economy depends, not upon government, but upon the efforts of all the people trying to do a little more for themselves and their loved ones. It is the sum total of all these individual efforts that makes our system superior to anything known in this world before. It is what makes America.

The continued prosperity of America is peculiarly a responsibility of a group such as the petroleum industry of America. For it is from such industries as yours that we constantly get the new products, and new uses for products which lead to the new jobs, higher income, and better living, which is the progress of America. From the seemingly inexhaustible spring of American research flows a stream of new ideas and new products resulting in new opportunities and new wealth for everyone. Your industry is one which must continue to be a front-runner in nurturing progress from the spring of research.

The continuance of good and even better times in America is up to you. It is up to you and all the rest of the American people.

If all Americans, workers, producers, businessmen, consumers, and investors go ahead and buy and build and improve with confidence tempered with prudence, this Nation will continue to be even more a Nation of "haves" enjoying new peaks of prosperity in business, production, and wages, and constantly higher standards of living for all the people.

EXHIBIT 27.—Remarks by Secretary of the Treasury Humphrey, November 19, 1955, before the National Grange, Cleveland, Ohio

I am honored and pleased to be able to talk for a few minutes today to this session of the National Grange. I am honored because of the great influence your farm family fraternity has in the rural life of America. And I am pleased because it affords the opportunity to try to explain some of the fiscal and economic principles this administration is attempting to follow in the best interests of our farm people and all of our 166 million Americans. After outlining some of the general principles we have been following as they affect the whole Nation, I wifl describe how they apply to the best interests of the farm people who make up American agriculture and who are such an important part of our whole economy.

On a bright afternoon just short of three years ago today I boarded by helicopter the heavy cruiser Helena off Wake Island in the mid-Pacific. Already aboard were President-elect Eisenhower, just returned from Korea, and several other appointees to the new cabinet. Mr. Eisenhower had just finished one of the missions which he had laid out in his campaign for the presidency. He had been to Korea to see for himself what, if anything, should or could be done about

399346—57 16




bringing an end to death and suffering in the war of stalemate that was dragging on and on and taking the lives of American boys month after month.

Let's go back to those days for a few minutes to look at the situation then confronting this country and recall the objectives toward which we then set our ^ sights.

We on the Helena nearly three years ago. were determ.ined to restore the fullest measure of freedom and the good things that go with it to the American people. We were determined to work to^vard freedoiri from war and the cruel strains and stresses throughout the world that threatened its very destruction, freedom from communism and corruption, and freedom from inflation and the artificial controls which throttled our economy.

A mom.ent's reflection will recall the situation both domestic and around the world which obtained as we talked .on the Helena three years ago. The most pressing problem., of course, was Korea, where 33,000 Am.erican boys were killed arid nearly 104,000 wounded, and where there was no end to war in sight.

The war in Indo-China had been going for six years and there were no plans to bring it to an end. .

Although we were spending record amounts for our defense and for foreign aid, we found as we tried to be strong everywhere at once that we were diffusing our efforts to such an extent that we weren't really strong enough anywhere to be as effective as we should be.

President Eisenhower on the Helena then was as determined as he is today that "mankind longs for freedom from. M ar and from rum.ors of war"; and that working toward peace, and thus toward freedom from_ war, must be the primary goal df the new administration.

As we surveyed the scene three years ago, there were other things that also concerned us.

We saw that for many years we had been following unhealthy financial policies that induced inflation, depreciated our currency, and threatened to exhaust our credit. Our dollar had shrunk in purchasing power from 100 cents to 52 cents in 13 short years. Savings of the people had been half destroyed by cruel inflation.

We found ourselves with more than $267 billion of debt. We found obligations to spend some $80 billion, with no provision for payment.

We found a proposed budget left for us to spend $78 billion in our very first fiscal year with a deficit of $10 billion over anticipated revenues.

We found a tax structure so high that it threatened to destroy the incentives to work and to save and to invest.

We found controls needlessly strangling the economy. , We found corruption' and communism in too m.any places. A constructive program was designed to bring about peace in Korea, and

pressures were applied to accomplish it. These pressures were successful, and in July the arm.istice in Korea was achieved, to end the killing and wounding of our American youth as M ell as to bring welcom.e relief from worry and heartbreak to thousands of fam.ilies back home. Freedom from war in Korea had so soon become an established fact.

But there remained the greater problem, of establishing better relations throughout the world. We sought to establish relations which might eventually lead to peace, a just and honorable peace for all nations. To keep strong meanwhile was prerequisite to everything else. Plans and programs for ourselves and our allies have progressed far since then with improved relations in many directions.

On the fiscal and economic side, we determined early in 1953 to adopt a fiscal program which would help to make more jobs and better living for every citizen. This program involved the restoration of freedom in many fields.

One of the most severe restrictions on freedom which we inherited was that of wage and price controls and allocations of materials. A difficult but prompt decision was made to lift those controls very early in 1953. As soon as it was announced, the voices of the timid cried out that it could never be done without runaAvay prices and further inflation wrecking the economy. You all remember the public hue and cry. Yet within a matter of weeks the hue and cry was as dead as the controls. This was the actual result rather than the disaster which bur critics had prophesied.

In the spring of i953, as the prospects for a Korean armistice appeared brighter, we were faced with a new problem. Fear was voiced bj?- some that the coming of peace and the reductions in Government spending which our program of economy was producing might lead to an upset in business and a depression.

It was in peace that America grew great and accumulated the homes, industries.



EXHIBITS 2 2 7

farms, and mines t ha t saw us through two M^ars. I t was wars tha t brought us debt and taxes, and inflation. There was no reason why we should fear peace, even though there might have to be adjustments in the economy as there were swings in Government spending.

We did get peace. We did not have a depression. In only about six months we had obtained freedom from war in Korea. We

had obtained freedom from controls on the private lives and busiriesses of our citizens. Progress along the lines of the framework of the freedoms we had determined on the Helena to re turn to the people of America began to take real shape.

Who wants to go back? In the spring of 1954, progress toward greater freedom for the American people

was jeopardized by the prophets of doom and gloom. There appeared ill-advised spokesmen who proclaimed t h a t our economy was in a bad way. These prophets loudly predicted t h a t the economy was headed for serious trouble unless the executive branch should greatly increase deficit spending and embark on large emergency public-works expenditures to "st imulate the economy."

The administration resisted the pressure to move in and t ry to run the economy from Washington. We retained the new freedoms which we had won, with confidence in our position. We had then made tremendous savings in Government expenditures over the past two years by big reductions in both Government payrolls and purchasing. We were in the transit ion of absorbing the people who had previously been working for the Government directly or making wartime goods which the Government had been buying by helping them get jobs making peacetime goods for all the people to buy to improve the general scale of living.

One reason it was so certain t h a t the private economy would make the jobs to hire people previously employed by the Government or by the Government 's spending was the tax program. Tax cuts pu t into effect in 1954 totaled $7.4 billion, the largest to ta l dollar tax cut in any year in history. This tax cut left this huge sum in the hands of all of the people to buy the goods which they wanted to buy ra ther than in paying it in taxes to the Government. Returning this huge sum of money to the people to spend for themselves was certain to result in greater purchasing and in the creation of more and better jobs for the people who used to make their living from Government spending.

Millions of individuals were also assisted by these great tax cuts. Every single taxpayer in this country received a tax saving, and millions of cases of hardship existing under the previous laws were corrected so t ha t individuals were encouraged to expand their purchases and all their activities.

The great bulk of the tax savings went directly to individuals. The Government can help best to strengthen the economy by helping to pro

vide a fertile field and sound basic conditions in which 166 million Americans can work.

The success of our economy depends not upon Government bu t upon the efforts of all the people all t rying to do a little more for themselves,. trying to better themselves and their loved ones.

I t is the cumulative effect of all this individual effort, each for himself, thinking, planning, and wbrking to improve his own position in his own way, t h a t makes our system superior to anything ever known in this world before. That ' s what makes America.

Prosperity in America cannot be had just by stimulating consumption, essential as t h a t certainly is. Unemployment in the heavy industries can be just as real a problem. To solve this, the people must buy the productiori of heavy industries. This means more investment because it is the investors who buy the heavy goods. Tha t is wha t makes the jobs in the heavy goods industries of America, and t h a t is what creates new plants and new tools and new jobs for the ever-growing work force of this expanding country. Tha t is what control of inflation and the tax revision bill helped to accomplish.

More impor tant perhaps than any other single thing in developing a healthy economy with high purchasing power, high employment, and good times is widespread general confidence in the integrity of the Government, in its security, in its plans and programs, and in the stability of its money.

The cost of living which had doubled during the preceding thirteen years has increased less than one percent in the past three years. The dollar has been stable and is the most prized currency in all the world. Pensions and savings have been protected. Inves tment is encouraged and we a t long last are on the




way to a balanced budget for the Government. It is this course of Government conduct, so carefully planned and so rigidly adhered to, that inspires the great confidence of the people and which has brought us so far from the predictions of doom and gloom into the greatest volume of business and highest employment of people in the long history of this country.

Of great importance is our consistent program of' economy in Government spending. Since the 1953 fiscal year Government spending has been cut by $10H billion. Reductions have been made in spending in many places. In defense, while reductions have been made, we are at the same time developing a better, more efficient defense structure.

Today, at less cost, we have an armed strength more efficient and better organized than ever before. We have the great advantage of guidance from the foremost mflitary leader in this world and under President Eisenhower's great leadership, the defense of America is today stronger in peacetime than at any previous moment in our history.

The unequaled present prosperity of America, except in agriculture, is well known to us* all. We have set new records in almost every way in which good times can be judged and measured. Employment reached 65.5 million for the first time in history. Unemployment has declined to 2.1 million. And at the same time there has been an Eisenhower "extra" for the benefit of all Americans. This Eisenhower "extra" has been created in this sound way. The fact that there has been practically no change in the cost of living since this administration has been in office means that the wage-earners of America have now been getting real wage increases instead of the "cost of living" wage increases which had previously been the order of the day. So they have more money to spend for food, for better living, for the products of both farm and factory than ever before in history.

Who wants to go back? .Now what about more freedom for the farmer? The other day I received a letter from a midwestern farmer's wife in which

she said: "I see by the papers that you made a speech asking, 'who wants to go back?' If you talked to some of the farmers, as well as the farm machinery people, in this area you would very soon find out who wants to go back."

I have thought a great deal about what that good farm lady wrote. I sense in it all the concern and anxiety of a farm famfly that is experiencing the squeeze of declining selling prices and the rise in some prices of the things they buy. I think I can understand a little of the puzzlement and concern that beset her. Why shouldn't she and her famfly be sharing more equitably in the country's unprecedented good times?

Yet I wonder if she and her famfly, and the farm famflies of America generally, really want to go back. •

The peak of farm prices was in February 1951. That was during the war in Korea. I doubt very much that anyone wants to go back to those high prices based on war. I do not believe that this farmer's wife nor anyone else v^ants that with all its heartache and suffering and fear for every famfly. Yet substantially less than half of the decline in farm prices has occurred since the end of that war.

What she wants, and what this administration wants for her, is to share more equally with other Americans in the abundance we as a Nation are enjoying. She is proud of the work that she and her faniily do to help provide the food and fiber needs of our country. She feels that somehow this basic part of the economy is not in step with prospering America.

She is right. But does she want to go back to the discredited program that buflt up the huge price-depressing surpluses which today deny our farmers better returns for what they produce? Does she want to go back to a program from which today a majority of our farmers are reaping not benefits but injury? Does she want to go back to a program that can only perpetuate and make worse all her present difficulties? Does she want to go down that deadend road of Government regimentation of our independent farm folk which is the sure end result of that old program? I doubt she wants to go back to that old road.

These price-depressing surpluses operate in agriculture as they would in any other industry. Imagine the situation if a whole year's production of automobiles was in storage around the country in Government stockpfles. Or if there were millions of Government-owned radio or TV sets or refrigerators in Government storage. These surpluses overhanging the markets would certainly demoralize them, and it is impossible to imagine our present prosperity in those lines under



EXHIBITS 2 2 9

such conditions. So, too, today our agricultural surpluses plague the path ahead to a fair break for our farmers. We must stop adding to those surpluses and we must work at cutting them down.

After Korea and subsequent cutbacks in defense spending, the industrial side of our economy went through a readjustment. Reduced production, particularly in heavy industry, began in 1953 and continued during a considerable part of 1954 as the inventory of excess goods stimulated by the Korean war was being absorbed by sales in excess of production. It was during this period that the false prophets of doom and gloom cried loudest of coming depression and despair. But as the excess supplies were used up, production and employment began to pick up and the industrial side of our economy began the movement toward its present record prosperity.

America's agriculture is still in its postwar adjustment, slowed down by wartime rigid supports and ever-increasing Government surplus stockpfles which have made the process even riiore difficult and drawn out because of the restricted ability of agriculture to bring production into line with changing demands.

There is no easy solution, but there is only one objective that will ever wholly succeed. Production must ultimately become reasonably balanced with demand and those overhanging price-depressing, increasing surpluses must be absorbed and ultimately disposed of.

Surely continuation of the plan that got us into all this trouble is not the answer. While we still press forward to gain our place in world markets, it is obvious

that wholesale dumping indiscriminately abroad is no answer. That would be not only distressing to our foreign relations with friendly nations with whom we are joined for our common.defense, but it would surely result in retaliation by other countries and price wars with the prospect of ruinous prices and competition that would greatly hmit our sales. So the whole thing would be worse than useless in moving the surplus crops.

The middle way is the solution. Price supports that recognize th6 natural laws of supply and demand and do not try futilely to repeal them. Carefully planned restriction of production. Expanded programs of research to find new crops and new uses to aid agriculture. Cautious selling of surpluses both at home and abroad with strenuous efforts continuously made to increase consumption everywhere. All coupled with a dynamic program of sofl conservation and improvement of our farm lands for future generations.

The growth of our population will be of tremendous help. Three million more mouths to feed each year wfll eat into both limited current production and surplus at an amazing rate as time goes on. Our increasing scale of living means that 166 million of us will all eat more and better as each year passes by. Our growing industry with its continuously increasing jobs to be filled wifl continue to offer good opportunities for farm boys and girls to work in industry if they choose to do so rather than raising more cotton and wheat than can be consumed. The farmer is equally interested with all the rest of us in prosperity for industry. Its workers are his customers. The more they earn, the more of his crops they can buy. And the more industry advances in its techniques and inventions the better and more effective tools for farming will be available for him to have. We are all bound together. It is not always evenly balanced, but that is the objective we must always strive to attain.

One fact we should never forget: This transition has been helped because the industrial economy has been operating at high levels. We must keep it so.

Meanwhile we must continuously adopt and apply the most effective means to cushion the hardships and ease the strains of the transition for the people on the farms. We must do this while we continue to make progress toward our true objective of a balanced farm economy, unhampered by excessive stocks of crops which destroy the very markets they were created in false hope to help.

President Eisenhower said after his recent meeting in Denver with Secretary Benson that "no problem on the domestic front is more demanding of our understanding and best ideas" than that facing our farniers. The President's great concern is illustrated by the fact that this agricultural statement was his first personal statement on a domestic matter issued from his hospital bed in Denver.

In it the President cited the need for "new steps" to deal with the farm problem so as "to speed the time when farm production and markets are in balance at prices that return to our farmers a fair share of the national income." I can assure you tha£ there is the fullest realization at the highest levels of the administration" not only of the trernendous importance of our farm people to the welfare



230 1956 REPORT OF THE SEGRETARY OF THE TREASURY

of the whole Nation and national policies but also of the need to help farm people share more fufly in the expanding prosperity which the rest of the economy enjoys.

To do this we must avoid going back to the policies that have failed in the past, policies which were bailed out before only by two ghastly wars and a terrible drought. We must go forward, building on the foundation already laid, to hasten the transition to a better day for farming and better returns for farmers. This means a many-sided program designed to cut down the surpluses, adjust production to markets, expand markets at home and abroad, and spur research into new uses of farm products.

There are two related matters to which the administration has been giving a great deal of earnest attention recently which are of interest to you.

First, I should like to mention the Treasury's position in regard to taxation of cooperatives. We made a written suggestion to the Congress on this subject last July which I recommend you read. It has been charged by some critics that we desire to tax accumulated savings first at the corporate rate in the hands of the cooperative and later to retax the same savings in the hands .of the patrons of cooperatives as income to the individual. This is not true. The Treasury does not favor double taxation. We are interested only in obtaining a means of taxing the income of a cooperative as income either to the cooperative or to the individual wherever the income is held but not to tax at bothdevels. That is only fair and proper. It is to the end only of effectively providing that single tax, such as we envisioned by the act of Congress in 1951, that we have suggested to the Congress that action might properly be considered.

Second, I should like to touch upon the Cabinet report on transportation which I know is of interest to you because of the Grange's role in getting the Interstate Commerce Commission originally established to check transportation monopoly many years ago. The main point of the Cabinet report was that all forms of transportation be allowed more freedom to voluntarily compete so that all the American public riiight have the best transportation as cheaply as possible. Needed safeguards would not be relinquished as freedom increased.

I am no expert on agriculture and I am conscious of being in the presence of experts. But I am sure that Secretary Benson is a true and devoted friend of the farmer, with, the wisdom and the courage to do whatever is soundly required. And I know that in his intensive scrutiny of new ideas for strengthening the present program, Ezra Benson is seeking help from every farmer and every true friend of farmers. In that search he has the full support and interest of the whole administration. Onlj' the best efforts and the best ideas of all of us will be good enough.

I am confident that we Americans have the resourcefulness and the character to work our wa-y o t of this problem as we have out of others. To do so we must think clearly with steadfast adherence to American ideals. There is no trick way to do it, but there is a right way to do it, consistent with our values and traditions. I know that working together we will find that way.

And so we return to a review of our objectives as we outlined them three years ago for the benefit of all Americans.

We now have a sound and stable dollar. We have reduced deficit spending until now we can hope that a balanced budget

this year is within our grasp. Our credit has improved by the manner in which we have handled the debts we

already owe. Taxes have been reduced for every single taxpayer in this country. Free markets in America have been reestablished without price controls. Inflation and its cruel theft of savings is halted and the savings of the old, their

pensions and insurance, are now being protected. America is again becoming the land of unbounded opportunity for the young

where only your own ambition and ability can limit your rise to any height in this fair land.

Progress, you' must admit, is well on its way. There is plenty yet to do but much has already been accomplished.

The turn has been completely made. America now faces in a new improved direction.

There is no reason to go back. Let's all go forward.



EXHIBITS 2 3 1

EXHIBIT 2S.—Excerpts from remarks by Secretary of the Treasury Humphrey, December 7, 1955, before the Mercantile Trust Company, St. Louis, Mo.

The future is promising if we pull together. For three j^ears, we have been reshaping this Government's economic policies

into the policies required for a strong and forward-looking nation, its economy firmly rooted and self-supporting; an economy that will pump a continuous.new flow of nourishment into the day-to-day American evolution of self-betterment; an economy that will constantly generate new and better-paying jobs for an evergrowing population.

At the same time our economy must provide an ever-higher standard of living, plus the social services the people want and need as well as the men and the weapons we must have for our defense.

All hands in our Nation: labor unions and employers, the rich and the poor, both major parties, the farmer and the city man, the woman at home, and the man at his job—all have a part in making our new productive way of life.

The peaceful evolution has resulted in a tremendous upheaval of this Nation's whole economy that has really created a different kind of a nation, a unique nation of "haves" that needs an up-to-date way of thinking about itself and up-to-date policies in keeping with its strength and growth potential.

We have curbed inflation, avoided deflation, and encouraged initiative and expansion which have developed into the greatest period of prosperity that our fast growing, now unhobbled economy has ever known.

Barring unforseen developments, we will have a balanced Federal budget in the present fiscal year. The anticipated deficit of the Government for fiscal 1956 was $1.7 billion at the time of the midyear review last July. If present estimates are realized, we will have a balanced budget for this fiscal year ending June 30, 1956.

Our prosperity didn't just happen. It was brought about by the confidence of the American people in the Eisenhower Administi ation and the favorable climate which has been created for 166 million free Americans to exercise their own initiatives and endeavors to the full limit of their abilities to improve and better the lives of their loved ones and themselves.

The administration's program promised a new, a better day, not for any particular segment of the population but for afl the people. We have seen that day dawn. It is just the beginning if we can continue to achieve national unity and improve the lot of the farmer, about the only large segment of our population still suffering from the overhanging effects of past unrealisti-c governmental programs.

We have the greatest productive machine the world has ever seen. It is expanding rapidly. From the appa.rently unfafling spring we call research flows a stream of new ideas and new products, resulting in new opportunities and new wealth for everyone. .

We have set new records in almost every way in which good times can be judged and measured. Employment last summer reached 65.5 million for the first time in history. Unemployment declined in October to 2.1 million. The dollar has been stable for three years; wage earners have been getting real wage increases instead of "the cost of living" wage increases of the previous several years.

How long this high prosperity will continue without getting into the excesses of either inflation or deflation depends upon what 166 million Americans do.

EXHIBIT 29.—Extracts from remarks by Secretary of the Treasury Humphrey, February 1, 1956, before the Junior Achievement Conference, Washington, D. C.

This is a fine representation from business, from Government, and from the educational world gathered here under the sponsorship of Junior Achievement to . study ways and means of familiarizing more of America's young people with the principles and the practice of free incentive competition.

Few organizations give more direct and more effective support to what we call the American way of life than does Junior Achievement; the organization today holding its first national conference in its thirty-year history.

When young people, generally those of high school age, sign up with Junior Achievement, they agree to "learn by doing." One writer called Junior Achievernent "a kind of 4-H club of business." That's an excellent description. The 4-H young folks learn the agricultural arts by first-hand experience. The youngsters of Junior Achievement, organized in their own local "companies," under the




sponsorship of a local business concern or some civic, service, or professional group, learn the operation of business enterprises in just the same way—^by first-hand experience.

First they learn about raising capital by selling stock at half a dollar a share or thereabouts. They learn about setting up managements, about obtaining production equipment and materials, about selling—in brief, about all the ordinary procedures in setting up a business under our free enterprise economy, and making it work.

Certainly every participant in the program learns a great deal about the way our free enterprise economy works: why it has proved far and away the sort of economy most productive of higher living standards; why it can be depended on to generate new and better paying jobs for an ever growing population; why it is such a powerful force for the defense of our country.

Your purpose here today is to consult on means of extending the Junior Achievement program so it will reach many more young Americans than now. That purpose is a challenge to every one of us who wants to see our country grow and prosper and its people share more and more generously in the rewards of economic freedom. It is a challenge because the Junior Achievement way is so effective a way of helping equip the boys and girls of today to conduct economic affairs of our country in the future.

Today we have the greatest productive machine the world has ever seen. It is expanding rapidly. From the apparently unfailing spring we call research flows a stream of new ideas and new products, resulting in new opportunities and new wealth for everyone.

The success of our economy has. depended not upon government but upon the efforts of all the people all trying to do a little more for themselves, trying to better themselves and their loved ones.

It is the cumulative effect of all this individual effort, each for himself, thinking, planning, and working to improve his own position in his own way, that makes our system superior to anything ever known in this world before. That's what makes America.

Such a sound, prosperous economy based upon free competition and free choice is the real difference between a free country and a slave state. A free nation stems from the freedom of choice of the individual, in religion, in government, and in the freedom of individual opportunity that permits a man or woman to go out and work for an incentive of their own choosing—not because they are told to "do it or else." In America that incentive is for better homes and living conditions, better education, and better opportunities for our children.

As you take part in the Junior Achievement program, giving supervision and guidance to the boys and girls in the ways of operating a business, you have a woriderful opportunity to impress on them the story of how our free enterpiise system has helped make our country strong and prosperous. Remind them that nowhere in the world is there greater freedom of initiative and enterprise than we know right here. Remind them of their responsibilities as citizens of the future to make sure that this continues.

If all Americans: workers, farmers and other producers, businessmen, consumers, and investors all go ahead and work and buy and build and improve with confidence tempered with prudence, we will make more and more jobs and this Nation can enjoy new peaks of prosperity in business, production, and wages and constantly higher standards of living for all the people. If the boys and girls pf Junior Achievement can help to lead all their contemporaries in this path the future of America is unlimited.

EXHIBIT 30.—Statement by Secretary of the Treasury Humphrey, February 3, 1956, before the Joint Committee on the Economic Report

I am pleased to appear before your committee this morning to discuss with you various matters in connection with your study of the President's Economic Report.

The United States today is enjoying plenty—in peace. Americans have broken all records in the numbers of people with jobs, the high wages they are receiving, and in the production of goods and services for the people to enjoy. They are benefiting from this high prosperity while reasonably resisting pressures toward inflation.



EXHIBITS 2 3 3

Whether this high prosperity will continue without involving the excesses of either inflation or deflation depends in very large part upon what 167 million Americans do.

Continued high activity in our economy depends not so much upon Government as upon the efforts of all the people, all in their own ways trying to do a little more for themselves and their loved ones. It is the sum total of all these individual efforts that makes our system so superior to anything ever known in this world before. That is what makes free America.

This Government has helped in several specific ways to provide a more fertile field in which free Americans can work to better themselves.

Total Government spending is now $10 billion below that of three years ago, and $14 billion below what had been previously planned.

We, at long last, have proposed a balanced budget, the surest index to thrifty management in a home, in a business, or in the Federal Government.

We have made the largest dollar tax cut of any year in the history of this country. This tax reduction of nearly $7J4 bfllion was a strong assist in the transition from a wartime to a peacetime economy.

And the long trend of inflation that dropped the value of the dollar from one hundred cents in 1939 to fifty-two cents thirteen years later has been halted, with no significant loss in the buying power of the dollar now for over three full years.

We have been assisted to this high level of prosperity by the confidence of the American people in the policies of their Government and by their confidence in themselves to exercise their own initiative and endeavors to improve and better the lives of their loved ones and themselves.

If all Americans: workers, farmers and others producers, businessmen, consumers, and investors all go ahead and work, and buy, and build, and improve with confidence tempered with prudence, this Nation ^ifl continue to enjoy new peaks of prosperity in business, production, and wages, and constantly higher standards of living for all the people.

EXHIBIT 31.—Remarks by Secretary of the Treasury Humphrey, February 22, 1956, upon receiving an award of the American Good Government Society, via telephone from New York, N. Y.

By telephone from New York I am glad to say that I am deeply honored in being selected as one of those to receive the American Good Government Society's George Washington award.

And I feel doubly honored to be associated in receiving it with that distinguished and widely admired American, my friend. Senator George.

It has been a great privilege for me to serve my country in public office. And if in your opinion I have been able to contribute in some small measure toward furthering good government, then it will have brought great personal reward.

With real humflity, I deeply appreciate Mr. Hamilton's overgenerous remarks and the impressive citation which your Society has seen fit to bestow upon me. I shafl continue to endeavor to merit this honor, recognizing the distinguished company in which you have placed me. I speak, of course, of the outstanding contributors to American gopd government who have been previous recipients of your George Washington awards.

As your Society honors again tonight the enduring contributions of George Washington to good government iri the United States, I should like personally to do honor to his close friend and stalwart associate in good government, Alexander Hamilton, our first Secretary of the Treasury and the first cabinet officer appointed by George Washington.

It was Hamilton who was the architect of sound money policies which are the foundation stones of good government. His principles were simple but vital:

(1) That the country must balance its budget by collecting enough taxes to pay its bills;

(2) That we must have a banking system to manage the country's currency flexibly and in the public interest;

(3) That the public debt is a sacred obligation that must bei honored completely.

There have been times in our Nation's history when some voices have been raised to question these old principles. But in the long run, the American people have clung to Hamilton's concepts of sound money. The dollar is now so secure that the flow of trade and business can go unimpeded by worry about its value.




Which, of course, is one of the reasons for the great prosperity and economic growth of this country.

The policies we are following in the Treasury today, while, of course, adjusted to-current needs, are nevertheless aimed at the same basic objectives as those of Washington and Hamilton. Our philosophy of sound governmental financial principles can be stated no better than in the words of Hamilton himself 161 years ago:

"It is wisdom in every case, to cherish whatever is useful, and guard against its abuse. It will be the truest policy of the United States to give all possible energy to public credit, by a firm adherence to its strictest maxims; and yet to avoid the ills of an excessive employriient of it, by true economy and system in the public expenditures, by steadily cultivating peace, and by using sincere, efficient, and persevering endeavors to diminish present debts, prevent the accumulation of new, and secure the discharge, within a reasonable period, of such as it may be at any time matter of necessity to contract."

Alexander Hamilton's great success in putting into effect these principles of fiscal integrity was due in large measure to the unfailing support of President George Washington, whose birthday we celebrate today.

Again, my sincere thanks to all of you for the honor you have paid me. While I deeply regret that it was impossible for me to be with you in person

tonight, I am happy that Under Secretary of the Treasury W. Randolph Burgess is with you to receive for me this George Washington Award.

EXHIBIT 32.—^Remarks by Secretary of the Treasury Humphrey, February 22, 1956, upon receiving a certificate of honorary membership in the Institute of Mining and Metallurgical Engineers, New York, N. Y.

It is truly an understatement to say that I am highly honored and pleased to be here tonight.

The honorary membership which you have conferred upon me ranks high indeed among the distinctions to which I personally could hope to aspire. My warmest thanks to all who had a hand in bringing this presentation about.

'' I haye long had a genuine admiration for followers of the engineering professions, and particularly for mining and metallurgical engineers, with whose talents many of my activities in private life have been closely identified for so many years. Engineers, including many of you in this room, have been key contributors over the years to the daring developments which have made America great.

Nearly everyone these days seems to be tremendously interested in the engineer- . ing professions. The national administration is seeking ways to stimulate education particularly in that field as a contribution to our national defense program. It must be a matter of real satisfaction, and practical reward, to engineers of whatever persuasion for their profession to be held in such universally high esteem.

To a certain extent my endeavors in public life, over the last three years, also have had to do with engineering. The present administration has been trying to engineer some sound policies and practices into government. Possibly that fact supplies a small measure of justification for your action in readmitting me to membership. I say "readmitting" because I was an Institute member of the ordinary or garden variety for a good many years.

Much of the engineering of government done under President Eisenhower's leadership has had to do with freeing the Nation's economy. Specifically, we have been trying to set the economy free from an accumulation of unhealthy influences that had almost engulfed it. There were such bad influences as unchecked Government deficits, a tax structure so high that it threatened to destroy the incentives to work and save and invest, and a hampering network of regulations and controls.

Since I promised that my remarks would be brief, it is not possible to describe fully what we have done about the governmental situation we found. But I can summarize. We worked to curtail Government spending and reduced it ten billion dollars. We reduced taxes. We removed artificial and unnecessary controls. We installed sound monetary policies. We checked inflation. And we have balanced the budget.

Our objective is simple. It is to provide a more fertile economic field in which free Americans can work to better themselves; in which free enterprise can generate new and better paying jobs for an ever-growing population, while supporting adequately our needs for defense.



EXHIBITS 2 3 5

The effectiveness of these moves toward greater economic freedom is apparent. The country has broken all records in the number of people employed, the high wages being paid, and the Nation's production levels. The productive machine continues to expand, and the research in which so many engineers participate continues to provide an ever flowing stream of new ideas for new products, with its promise of still further expansion and of new opportunities and new wealth..

A sound, prosperous economy based upon free competition and free choice is the real difference between a free couritry and a slave state.

The Government can contribute to economic strength by taking steps, the sort of steps taken in the last three years, to provide a healthy climate for the free competitive activity of its citizens. But the long-run success of our economy depends not so much upon government as upon the efforts of all the people each trying to seize the opportunity to improve his own position, and his lot in life. It is the cumulative effect of all this individual thinking, planning, and working that makes our system superior to anything ever known in this world before.

This is the sort of free economy in. which every engineer and every good American wants to work out his future.

I am deeply appreciative of the honor you have given me and I will look forward to enjoying attendance at your meetings in this new capacity for years to come.

EXHIBIT 33.—Remarks by Secretary of the Treasury Humphrey, April 17, 1956, before the House Post Office and Civil Service Committee

I am.glad to appear before this committee in support of H. R. 9228 which carries out the proposal of the President and the Postmaster General designed to reduce the deficit of the postal service for the fiscal year 1957 and make the department as self-supporting as possible in future years.

The chairman's letter inviting me to appear today indicated that the committee would like comment on how this bill will affect the Government's budget situation. The bill before you would increase postal revenue by about $400 million a year. Failure to enact this bill, ori the basis of simple arithmetic, would to all practical purposes eliminate the very thin $400 million surplus which the President's January budget envisioned for fiscal 1957.

Balancing the Government's budget is not academic or simply a bookkeeping exercise. It is the very keystone of financial responsibility. In a home you can't spend continually more than you earn and not get in trouble. The same is true in a business. And, the same is even more true in Government. With the enormous debt that our Government now has it becomes a matter of extreme importance.

The prosperity which is widely shared in this country today is in large part inspired and sustained by confidence in the Administration's determination and. success in getting the Government's financial affairs on a sounder basis. Americans realize that continued heavy deficit financing by the Government contributes to the pressures for inflation. And inflation robs people of the value of their earnings and savings. Getting and keeping the (]rovernment's budget in balance has a very real, practical bearing upon the jobs and earnings and well-being of every citizen in America.

That is why we all must work to accomplish the things which will help balance the budget and keep it in balance. The proposal to increase the revenue of the Post Office Department, and so cut its annual operating deficit, is one of those things which should be done to help put the Government's financial house in better order.

We all appreciate the basic importance of efficient mail service in this Nation. It is vital to communications between nearly all of the people in America.. It is also vital to the mass suppliers of publications which provide the wealth of information read by Americans every day.

But there is no reason which justifies our postal service pfling up more heavy deficits as each year goes by which must be paid from general revenues. In the past ten years the cost of the Post Office Department exceeded its income by nearly $5 billion. This means that $5 billion of additional deficits have been added to our public debt with the result that the taxpayers not only have the debt to pay but also the extra intei'est on that additional amount of an already too huge public debt.

We cannot justify, particularly in this period of high prosperity, this dodging of the cost of mail deliveries and passing it on to our chfldren and children's




children. That is exactly what we do when we fail to put the Post Office Department on a pay-as-you-go basis. It seems right and proper to me that those who use the mails should pay whatever equitable rates are required to make the postal service self-supporting.

I see no logic in the arguments of those who suggest that the Post Office Department should properly have its deficit made up from general tax funds because it is a public service institution. The important point is that Public Law 137 of the 82d Congress established the policy that measurable service "when performed for identifiable individuals" should be "self-sustaining to the fullest extent possible." Persons who use the mail do so only because they wish to with the full knowledge of what the cost will be. The user of the mail is" in no way comparable to the individual who suddenly needs police or firemen in an emergency over which he has no control.

It is only consistent with fair play, as well as with the intent of Congress, that the Post Office Department should be maintained on a self-supporting basis.

Under the direction of Postmaster General Surnmerfield a persistent, determined, and effective search for possible economies has been made throughout the past three years. That search is being continued, but it cannot realistically be expected to solve the deficit problem which has been running at nearly half a billion dollars a year.

^It would not be realistic because the Department's great service to all of us makes it necessary that it be maintained at a very high standard. It would be poor economy to so reduce expenses that these high standards were lowered. When we realize that our population (and thus the number of our post office patrons) is increasing by more than a million people yearly, it becomes perfectly clear that the problem of putting the Department on a self-supporting basis becomes more and more important as each year passes and can only be done by equitable increases in rates and not alone by reducing costs.

I am not qualified to discuss the specific rate increases by which this yearly deficit problem should be met. But, I do know that it is of basic importance to the fiscal integrity of our Government that the problem should be met.

The suggestion that any substantial part of increased postal rates would be offset by reduced corporate income tax receipts is not realistic. Postage paid by business concerns is an element of their costs, and an increase in costs is ordinarily reflected in prices or absorbed in some other way.

There is no more reason to refrain from charging adequate postal rates because of its effect upon taxes than to fail to try to make money in any other enterprise because over half of it will go to the Government.

Even if the Post Office is considered as a service arm of the Government its rates should be considered to be a user tax paid in proportion by those who use the service and adequate to pay for it in full without deflecting general revenues in the same manner as toll highways.

I urge you to pass this bill to protect the Government's revenues, to reduce its losses, help to balance its budget, strengthen its financial position and let the users of the service fairly and equitably pay for its use in proportion to their respective benefits.

EXHIBIT 34.—Letter and joint statements from Secretary of the Treasury Humphrey and Budget Director Brundage on budget receipts, expenditures, and estimates

LETTER, May 17, 1956, TO SENATORS HAYDEN AND BYRD AND REPRESENTATIVES CANNON AND C O O P E R

MY DEAR MR. CHAIRMEN: For some weeks it has been evident that the upsurge of prosperity in the Nation has increased current Federal budget receipts, and that current economic factors have also played an important part in increasing expenditures over earlier estimates for the fiscal year 1956.

Tabulations of the receipts and expenditures of the United States Government for the month of April and for the first ten months of the current fiscal year have just been completed. The Treasury Department and the Bureau of the Budget have reviewed these financial results and have revised the budget estimates for the fiscal year 1956.

A balanced budget, for which the President has been striving for three years, now appears assured for the 1956 fiscal year.



EXHIBITS 237

On the basis of our new estimates it is expected t h a t budget receipts will to ta ! $67.7 billion, budget expenditures $65.9 billion, resulting in an estimated budget surplus for 1956 of $1.8 billion, which will make a most welcome reduction in our huge national debt. A copy of these revised estimates is at tached.

The revisions are based on the budget results through April 30, 1956, wi th estimates for the last two months. The currently revised estimates are, therefore^ subject to change, but they represent our best judgments on the basis of the d a t a now available.

Yours very truly, PERCIVAL F . B R U N D A G E , G . M . H U M P H R E Y ,

Director, Bureau of the Budget. Secretary of the Treasury.

Budget receipts and expenditures, fiscal years 1953-56

[In millions]

Actual 1953

Actual 1954

Actual 1955

1956

January ]956

budget

May 17 estimat©

BUDGET RECEIPTS (NET)

Individual income taxes _ Corporation income taxes Excise taxes _ All otlier receipts and customs (net)

Total _ -

Refunds of receipts (—). _

Net budget receipts

BUDGET EVPENDITURES (NET)

National security: Department of Defense—Military Mutual security program:

Mutual military program, including direct forces support _

Other Atomic Energy Commission. _ Stockpiling and defense production expansion

Total national security

Special legislative: Veterans' compensation, pension and benefit programs. Commodity Credit Corporation (net) Agricultural conservation program and removal of

sm-plus agricultural commodities Grants to States for public assistance and employment

security __. Federal-aid highway grants. Allother _.._

Total special legislative

Departmental; Veterans Administration (other) Housing and Home Finance Agency Agriculture Department (other). _ Commerce Department (other) Department of Defense, civil _ Department of Health, Education, and Welfare (other).. Department of the Interior __ Post Office Department ._ Treasury Department:

Interest on the public debt and on refunds of taxes. Other

Allother L

Total departmental

Net budget expenditures ._

Surplus (+) , or deficit ( - )

32, 768 21,595 9,934 3,646

32,383 21,523 10,014 4,112

31,650 IS, 265 9,211 4,690

33,555 20,300 9,894 4,540

67, 943 -3,118

68,032 -3, 377

63, 816 -3,426

68, 289 -3,789

64,825

43, 610

3,954 1,702 1,791 1,008

52,065

3,383 1,943

355

1,532 509 597

;,319

950 403 919 554 813 590 587 659

6,583 614

1,218

13, 890

74, 274

64,655 60,390 64,500

40,335

3,629 1,253 1,895 1,045

35, 534

2,291 1,927 1,857 944

34,575

2,464 1,726 1,715 713

48,157 42,553 41,193

3,297 1,526

349

1,641 531 448

3,519 3,414

294

1,621 595 457

3,770 2,211

1,718 740 771

7,792 9,655

952 -593 1,040 469 605 543 535 312

6,470 656 834

153 928 482 548 666 515 356

6,438 156

1,089

962 19

997 558 574 644 557 483

6,875 509

1,244

11,823 12,117 13,422

67, 772 64,570 64,270

-3,117 -4,180 +230

35,000 21,500 10, 000 5,000

71.500 -3, 800

35, 600

2,239 1,550 1,650 000

41,639

3,770 3,550

1,718 740 876

950 19

1,040 540 560 610 557

6,875 475

1,025

13,134

65,872

-1-1,828



2 3 8 1956 REPORT OF THE SECRETARY OF THE TREAStJRY

JOINT STATEMENT, JULY 19, 1956

A balanced budget, to which this administration has been pledged from the beginning, has now been achieved.

This gratifying outcome is shown in the budget statement for June 30th, issued today, which reports a surplus of one billion, seven hundred and "fifty-four million dollars ($1 billion, 754 million) for the fiscal year 1956.

We have also proposed a balanced iD^dget for the fiscal year 1957. This means a great deal to the people of this country. With such financial stability and sound fiscal conditions, the American people

can go forward with their constructive individual plans looking toward better living and more and better jobs.

The actual results for 1956, as compared with the May estimates and prior years, are shown in the following table:

Budget totals, fiscal years 1953-55 [In billions of dollars]

Descr ipt ion

B u d g e t r e c e i p t s . . . _ _ Budge t expenditm'es

Budge t deficit (—), or surplus ( + )

1953

64.8 74.3

- 9 . 4

1954

64.7 6718

- 3 . 1

1955

-60.4 64.6

- 4 . 2

M a y 17 es t imate

67.7 65.9

+1.828

J u n e 30 closing

68.1 66.4

+ 1 . 754

A breakdown of receipts and expenditures by major categories as compared with the May estimates and actual figures for previous years follows.

Budget receipts and expenditures, fiscal years 1953-56 [In millions of dollars]

B U D G E T R E C E I P T S ( N E T )

Ind iv idua l income taxes . _ Corporat ion income taxes _ Excise taxes All other receipts and customs (net) . . .

To ta l . Bef imds of receipts (—)

N e t budge t receipts _ ._ . _

B U D G E T E V P E N D I T U R E S ( N E T )

Nat iona l securi ty: D e p a r t m e n t of Defense—Mili tary _ M u t u a l securi ty p rogram:

M u t u a l mi l i t a ry program", including direct forces suppor t - -_

Other Atomic E n e r g y Commission ;. Stockpil ing and defense product ion e x p a n s i o n . . . :

To ta l na t iona l securi ty

Special legislative: Veterans ' compensat ion, pension and benefit p rog rams . C o m m o d i t y Credi t Corporat ion (net) Agricul tural conservation program and removal of

surplus agricultnral commodit ies , Gran t s to States for publ ic assistance a n d employ

m e n t securi ty _ . . . . Federal-aid h i g h w a y grants _. A l l o t h e r .

To ta l special l e g i s l a t i v e . . . . . - . _ - - - - - - . . - . — -

Actua l 1953

32,768 21,595 9,934 3,646

67, 943 - 3 , 1 1 8

64, 825

43, 610

3,954 1,702 1,791 1, 008

52, 065

3,383 1,943

355

1,532 509 597

8,319

Actua l 1954

32,383 21,523 10, 014 4,112

68,032 - 3 , 3 7 7

64,655

40,335

3,629 1,253 1,895 1,045

48,157

3,297 1,526

349

1,641 531 448

7.792

Actua l 1955

31,650 18, 265 9,211 4,690

63, 816 - 3 , 4 2 6

.60,390

35,534

2,291 1,927 1,857

944

42, 553

3, 519 3,414

294

1,621 595 457

9, 900

1956

M a y 17 est imate

35,000 21,500 10,000 5,000

71, 500 - 3 , 800

. 67,700

35, 600

2, 239 1,550 1,650

600

41, 639

3,770 3,550

445

1,718 740 876

11,099

Actua l

35,337 21, 297 10, 004 5,187

71, 825 —3, 684

68,141

35, 686

2,551 1,588 1,654

587

42, 066

3,780 3,784

394

1,686 740 851

11,235



EXHIBITS 239

Budget receipts and expenditures, fiscal years 1953-56—Continued


B U D G E T E X P E N D I T U R E S ( N E T ) — C o n t i n u e d

D e p a r t m e n t a l : Veterans ' Admin i s t r a t ion (other) Hous ing and H o m e Finance Agency _. __ Agricul ture D e p a r t m e n t (other) Commerce D e p a r t m e n t (other) D e p a r t m e n t of Defense, civil _ . . . . D e p a r t m e n t of Hea l th , Educa t ion , and WeKare

(other) . D e p a r t m e n t o f t h e Inter ior : Pos t Office D e p a r t m e n t . _ . _. T r e a s u r y D e p a r t m e n t :

Interest , on the publ ic d e b t a n d on refunds of . taxes Other . . . -_ .

A l l o t h e r

T o t a l depa r tmen ta l _.

N e t b u d g e t expendi tures . . • .

Surplus ( + ) , or deficit (—) . . . .

Actua l 1953

950 403 919 554 813

590 587 659

6,583 614

1,218

13, 890

74, 274

- 9 , 4 4 9

Actual 1954

952 - 5 9 3 1,040

469 605

543 535

. 312

6,470 656 834

11,823

67, 772

- 3 , 1 1 7

Actua l 1955

886 153 928 482 548

566 515 356

6,438 156

1,089

12,117

64, 570

- 4 , 1 8 0

1 9 5 6 • •••

M a y 17 es t ima te

950 19.

1,040 540 560

610 557 483

6,875 •475

1,025

13,134

65, 872

+ 1 , 828

Actual

•

951 37 1,013

540 571

615 526 457

6,851 477

1,046

13,084

66.386

+ 1 , 754

JOINT STATEMENT, AUGUST 28, 1956

It is gratifying to report that our midyear review indicates that we will have a balanced budget for a second successive year. The surplus for the fiscal year 1956 amounted to $1,800 million. The surplus for the fiscal year 1957 is estimated at $700 million as against an estimated surplus of $400 million last January. Since this estimate is made before two full months of the current year have passed, we will know much better as the year progresses what our actual surplus and future prospects may be. We will continue to exert every effort, as we have in the past, to improve the efficiency of operations, eliminate waste, and obtain a full dollar value for every dollar spent by every department of the Government.

A comparison between the fiscal year 1953 and the current estimates for 1957, in millions, is as follows:

Estimated 1953 1957 Change

Receipts . $64, 800 $69, 800 +$5, 000 Expenditures 74,300 69,100 - 5 , 2 0 0

Net hnprovement, 1957 over 1953 10, 200 Deduct 1953 deficit 9, 500

Net surplus, estimated for 1957 - - - 700 It is clear that even with higher tax receipts from a prosperous economy the

present favorable budget position would not have been possible without a very substantial cut of over $5 billion in Government spending between 1953 and 1957, as estimated. This has been accomplished while we have continually strengthened our Nation^s defenses and improved our civilian services.

No family can continue to live largely beyond its means. It was even worse for the Government to do so. The turn has now been made and we believe that our Government is firmly on a pay-as-you-go basis, provided our policies receive real congressional and public support.




EXHIBIT 35.—Remarks by Secretary of the Treasury Humphrey, May 27, 1956, before members of the Press Club, Washington, D. C.

With your permission, I will just ask myself a few questions. Then, if there is time left, I will do the best I can to answer your questions.

The first question I have here is this: How close can we come to the new estimate for a budget surplus of $1 billion, 800 million?

The answer to that is that we hope we will be pretty close. In trying to say how close we can come, I just want you to have in mind a few things as to how difficult it is to make these estimates.

A billion dollars is an awful lot of money. I do not know how much it is, and I do not believe there is anybody in this audience who knows how much it is. It is a terrific amount of money in the things it will buy and the things it will do. However, a billion dollars in national finances is a relatively small amount of money, when you are collecting and spending 65, 66, or 67 billion a year.

About all we can hope for, to be perfectly frank with you about it, is that in making up our estimates we will make so many mistakes on both sides that they will cancel each other off.

By and large it works about that way. With the efforts that we put out, I have reason to believe that we will come pretty close to the $1 billion, 800 million that we have estimated.

We have about three-quarters of it behind us oh the income side, and about ten months of it on the defense side. But we will have the income for the last quarter of the fiscal year, which are the June tax payments, to come in and we can very easily have $1 billion variation from our estimate.

On the other hand, we have the expenditures coming in for the end of the year and, as you all know, there is a great tendency toward the end of the year when there is money not spent to at least commit it so there is no chance of having an appropriation lapse. The last quarter of the year is a difficult time on both the expense and income side to estimate, but I still believe we will be fairly close to a budget surplus of $1 billion, 800 million.

The next question: On the basis of this estimated surplus, will you recommend a tax cut?

The answer to that one is no. I will not. For one thing, it is high time to start reducing our huge debt. Another reason is this: As I said a minute ago $1 billion, 800 million is a lot of money, but again it is a very small percentage of our total collections and our total disbursements. We have nearly 80 million taxpayers in this country. We have over 50 million tax returns. Some of them are made for husbands and wives jointly, so that we have more actual taxpayers than we have tax returns. That is a lot of people.

When you start dividing up some money among as many people as that, you have to have a lot of money or nobody gets anything that amounts to anything.

In order to have a tax reduction of any proper size, you have to know first, which we do not know, about what we are going to have. We have to be sure how much is available. Then we have to have enough so that we can make proper adjustments among all the people who are entitled to consideration.

I believe very definitely that our taxes are too high. I believe that our taxes have got to come down, and that we ought to reduce our taxes just as soon as we possibly can. Real tax reductions can be made in just one way. That is by having a combination of more income and less expense continuously so that ypu have a surplus that you can count on that is available to hand back to the people.

That is the sort of a program that we have in mind. That is what we are working toward. We had it once and we gave the largest tax cut that has ever been given. We will work, and are working, toward it, I hope, in this country regardless of who is the Secretary of the Treasury, or regardless of what the administration is. We will work toward having surpluses, and having surpluses of sufficient size to count on and to make proper reductions in taxes, in a fair and proper manner, among all the people so that the cut is spread and the benefits are spread, to get the best results for the forward progress of this country. That is what we are all interested in. That is what we must have. We must have, with a growing population, more employment, more jobs, more goods, and more activity all of the time.

In all of our financial activities, and all we do in our financial policies, we should always have in mind the development of the country and the fair spread among all of the people of the burdens that go with taxation.

The third question: What are the prospects for more reductions in Government spending?



EXHIBITS 2 4 1

Of course, the big amount of money that we spend in this country is spent for security. About two-thirds of all that we collect is spent for security. So long as we have the conditions that face us in the world today, so long as we are in this period, we must be sure that we are dealing from strength and never from weakness in all of the negotiations that go on throughout the world, and all the changing conditions that have to be met throughout the world. This country must be in a position to deal with strength. As long as it is necessary to be in that position, we must make sure that we are there and we must spend whatever is necessary to be there.

That does not mean, however, that we should not take account of waste that creeps into every home, every business, into every situation in life, where all the corners have to be watched, whereever reasonable and proper economy should be enforced all the time. That means just continual vigilance. It means watching every single corner, watching every single dollar all the time. No item is too small to watch.

It is a lot of those little ones building up that make the big ones that make the real difference in the amount of money we have to raise.

We also have to have this in mind; and perhaps more so all the time: that is, that we are in a very rapidly developing era in research; that we are in a very rapidly developing and very rapidly changing period in this country. I do not. think that we have ever been in an era where research and development, new things, and new ways of doing things are coming on as rapidly as they are today.

That is markedly true in our security requirements. It is markedly true in. weapons. It is markedly true in the ways in which we protect and preserve our strength, the way in which we will defend ourselves, and the way in which our military people will handle their affairs.

As this rapid development goes on the tendency, of course, always is, as the new things appear, to say that is fine, let us take that one on, that is something we must have and we must have it at once. We must spend a lot of money for research, wbich is proper. Then, because we have done that, and as new things come on, we want to have them. That is a very proper thing to do and we must have new things just as soon as we are sure they are practical and they are workable.

But, if we just keep adding on, if all we do is keep adding on the new and, at the same time, maintaining in the same way all of the old, we very soon will find ourselves in a lot of difficulty.

It is true throughout our whole life, it is true in your home and your business, that when you move forward in one front you must be selective. You must pick out the things that will give you the most strength. You cannot have everything. You take the things that develop the most strength and you drop off some of the things that previously were effective, but which are of less concern because of the new developments.

That is why we must be continually vigilant, to see that as we add on we also recognize the worth of what we put on, and do not keep things that may otherwise, or could otherwise, be supplanted by the new that we have taken.

With that in mind, and I think that we must always approach it from the point of view that we can maintain and increase our strength, we will be able to increase our military strength, our military position, and concurrently we will be able to reduce our expenditures.

That is the history of all business. It is the history of your own situations. As you get these new and more effective things, you can drop off the less effective things that cost a lot of money. As you progress in a business what happens? You add new machines. You add new ways of doing things, new organizations, and you reduce your cost. You improve your product. You have a better product and it costs you less money.

I think that same general principle must be sought for and attempted to be applied in every way that we can in our governmental expenditures.

Now let's look at the remaining one-third of spending, which covers the Government services. It is going to be very difficult to continually reduce those expenditures because, with our growing population, with our growing enterprise, with our growing commerce, and with the growth of the amount of things we do, we have a growing workload for Government. The workload of the various departments keeps increasing. The workload that you people demand that your Government do for you, those things are all increasing. I t is pretty difficult to keep having both an increasing workload and a decreasing cost of doing the work.

399346—57 17




Your unit cost can go down, but your total costs are pretty hard to control under those circumstances. I think that there is some room for some reductions in the normal functions of the Government, but that is not where the real savings of the future will come from.

Of course, when you get right down to it, the real savings and real reductions that we have to look forward to wfll come about through a different atmosphere, a different situation in the Avorld. The time will come, I believe—and must come—when the tensions in the world will not be as great as they are today. Some way or other we will have a better understanding in the world, when this hope for a more surely peaceful situation that we all are striving for will actually develop. When that time comes then the real savings, the real reductions, in governmental expenditures can be realized.

The next question: Has militarj^ security been weakened to balance the budget? The answer to that is positively no. Regardless of the comments of various citizens, columnists, members of Con

gress, and even some of our military people, there never has been a single denial of expenditure of a dollar for defense that has been based purel}^ on saving money or balancing the budget. That has never occurred.

That, of course, does not mean that we have not at all times, and that we will not in the future at all times, watch every expenditure with the greatest of care. It is basic that the strength of this countrj^ be maintained at whatever the cost may be. The people of the country will gladly paj^ whatever the cost maj^ be to be sure that we do maintain ourselves in a position of real strength.

But we must have this in mind, and it is often overlooked. Strength does not come just from spending money. You do not get things done just by spending, money. Just because you spend a lot of money does not mean that you have a good operation of a newspaper, or a good operation of your plant. As a matter of fact, it may mean that you are having a careless one, that you are having one that is not as tightly managed as it should be.

It is the effectiveness of your expenditure that you must be interested in. I t is how well is your money being spent, how carefully is it being spent, how intelligently is it being spent. That is what we must question. You must question it. You as citizens, we as officers of the Government, must question our expenditures, every expenditure, to see that it is being intelligently made, that it is a necessary expenditure, and that we are not just piling one expenditure on another.

I do not think anyone has a right to say, or a right to feel or believe, that because expenditures are questioned, that because various plans or programs are questioned and discussed, that somebody is denying the right to the security of this country for the sake of balancing the budget. That has nothing to do with it. I t is simply a matter of trying to be sure that we have the most efficient expenditure of whatever it is that we have to spend.

There is one other point. Strength does not come just in the military either. The strength of America is just as much economic as it is military. There is no way that this country could be defeated quicker, no way that we could lose our way of life quicker, than by so conducting ourselves in one way that we ruined ourselves in another.

It is the economic strength, the industrial power of America, that is the great power in this world. It is our tremendous economic power that is so far ahead of anj^ other country in the world. .

That balance between the maintenance of a sound and progressive, virile economy which is essential to our welfare and our military expenditures, our expenditures for all forms of governmental operations—that balance should be carefully maintained. It must be carefully balanced to be sure that we are just as strong as possible economicallj^, so that great force, that great economic position of strength is maintained, as well as our military and other positions in the world.

This is my last question: Is there a controversy between the Federal Reserve System and the Treasury?

You must admit that I have tried to ask questions that are at least subjects of discussion.

The Federal Reserve System as a whole spreads out all over the United States. It is made up of boards of our best citizens, a majority of whom are businessmen in the various comniunities, and these communities cover the entire United States.

When you are talking about the action of the Federal Reserve System, j^ou are talking about a widespread system of information, of opinion, of examination of what is going on, and of knowledge of conditions in this country.



EXHIBITS 2 4 3

The Federal Reserve System, under our laws, is an independent system and is responsible for certain areas of action. At some previous times in our history the question of i ts independence has come into discussion. There have been times when perhaps it has been subservient to other judgment.

Before we came here there was such a situation. I t was resolved before we came here in the reestablishment of the independence of the Federal Reserve System in its field. Mark you, in its field.

When. I assumed the responsibility of my office, I realized the close association t h a t would have to exist between the Federal Reserve System and the Treasury, because our fields are so interlocked. Bill Mart in was then the Chairman of the Federal Reserve Board. One of the very first things tha t I did was to ask Bill Mar t in if he would continue. He had tendered a resignation. I asked him if he would continue as the chairman. I did it for one reason. I did it because I thought then, and I think now, t ha t Bill Mart in is the best qualified man in the United States for his job. /

He consented and took the job. We arranged at t ha t t ime tha t we would have the closest cooperation between the Federal Reserve Board and the Treasury, each recognizing the other 's field of operation and the other 's independence in his particular field.

We set up a lot of mechanics, such as meetings back and forth, weekly meetings, biweekly or triweekly meetings. We have gone along in a very close association, each presenting to the other his views, hearing his views, giving consideration to the other 's views, and finally deciding what he was going to do in the field of which he was responsible and going ahead with his job. AVe have had tha t close association, as I th ink you must in any situation where you are trying to balance.

The most difficult situation is where you are trying to balance the effect of pressures, both inflationary and deflationary pressures, not only as to what the effects of those pressures are today but what the effect of those pressures is going to be three months, six months, or even some longer period hence.

You are in a field of t remendous difficulty. You are in a field where nobody can really be very sure t h a t he is right. Worse than that , you never can know afterwards who. is right because this is a moving business. When you take action one way you never will know, and nobody else will ever know, what would have happened if you had taken the action the other way. There is no way to ever check up.

All during this period we had continual discussions, continual questions back and forth amongst our staffs, as to what action should be taken to resist both inflationary and deflationary pressures.

By and large we have been fairly lucky in having a pre t ty close balance during most of the period between these pressures. T h a t is the finest position t h a t the people of the United States can be in. And it is the most difficult position for the people who are tr3dng to balance the pressures in any way t h a t they can.

I will just cite for a moment what the pressures are. We have for a period of a good many months had the highest employment in the

history of this country, the highest earnings in the history of the country, the greatest volume of business in the history of the country. We have been going along at this extremely high level a large par t of this period, and pre t ty well balanced with very little change, either deflationary or inflationary, during this period—very, very little change.

When you are in a period of very high employment, very high business activity, if 5^ou t ry to move up to any great extent from tha t extremely high level, you soon reach the place where there are not enough more materials, and there are not enough more people, to make many more goods. If the pressure is pushed too high under those circumstances, you get a scramble for materials and a scramble for people and you raise costs to the general public, the cost t ha t the public has to pay, without giving the public anything more or bet ter for it.

Tha t is an inflationary pressure t ha t should, and must , be avoided, if it can be, because you are not getting better goods and you are not getting more goods. You are simply parang more for them because j^ou already are at about as high as you can go.

If during such a period there are pressures and scrambles to increase inventories, or to build inventories, or to gamble with goods against price rises, or against material shortages, you very soon get yourselves into a position where you have more t han your normal requirements need. Under those circumstances as inventories accumulate they, in and of themselves, soon become a burden and have to be liquidated. As you liquidate the inventory you curtail your purchase of




new products. Then you begin to have deflationary pressures and you begin to lose employment and begin to get in trouble on the down side.

The Federal Reserve System, with its combined judgment of all of these people, has been leaning, as they say, against the wind during this high period, to prevent inflationary pressures. We have had discussions as to when they should move, or how they should move. We very frankly always stated our opinions to them, and they to us. We talked about it at length. Included in those discussions are the President's economic advisers who worked with us continually, Arthur Burns and his people, and we all expressed ourselves, and a great deal of the time there is a difference of opinion in shades of timing and in shades of what the pressures will be.

We work this out to a point where the Federal Reserve System exercises its final judgment in its field and the Treasury exercises its final judgment in its field.

This last time when the discussion was up as to whether we would make this additional move, we had to balance not only the conditions that obtained at the time, but the question of what those conditions are going to be sometim.e hence. Very frankly I differed with Bill, and our people differed with his people, as to the force of the pressures sometime hence—not as to the conditions of today, but as to the force of pressures sometime hence.

It seemed to us that we could already see some natural conditions that were coming. We could see some excessive inventory in the automobile business. We could see some excessive inventory here and there. We could see a steel wage negotiation coining up. We could see some accumulation in that field. We felt that the natural conditions would exert some downward pressures that would offset these jDressures upward, and that there was no further action required at that time, that it was better to go without it.

My general feeling about our economy is that the best interests of America are served when the great majority of people in America have confidence in the situation, when they believe that things are sound and strong, that their jobs are reasonably secure, and that good times, which we are in, are going to continue. Not necessarily peak times. I think we must distinguish that.

I think we are often apt to exaggerate when in some particular place there is some relatively small readjustment, and think that is bad times, or that when som.ebody is not breaking records all the time, that that is bad times. It is not.

When you have very high levels, you have to expect small adjustments in the economy, and you thank the Lord that they are small and come here, there, and the other place. When they are coming here and there and the other place, it means they are not all going to come at once. When they do not all come at once they correct themselves relatively soon and with relatively little damage.

When you have a high degree of confidence that that is the situation, you can feel that you have pretty sound ground under your feet.

The reason I put so much stress on confidence is this: The majority of people in America have more money to spend than just what they have to spend every day to live on—for clothes and food and shelter. They can spend a little more, or a little less, depending on how they feel, depending on how secure they feel— depending on their confidence.

They can buy a washing machine or not buy. They can trade automobiles, or go along with the one they have. They can buy a house or they can still pay rent. With confidence you have the peojDle going along on an even keel and buying not just the things they need, but other things they want, the things that are availabie for them to have, to keep increasing their scale of living, and to keep a strong economy and widespread "activity..

If people begin to lose that confidence and they begin to curtail their activities, why you can very soon find yourself in a position where, when that fellow decides not to buy that washing machine, it is only a little while before either there is another washing machine in the inventory, and later there is a man out of a job.

The most important thing in America is a job. Don't ever forget it. If you you do not have the jobs, you do not have any America. The problem for all of us is to see, in every way that we can, that we do have jobs in America. It is jobs in America that makes everything that we have. It makes all the goods we have. It m.akes all the material things. I am not talking spiritually. I am talking materially. Jobs make all the material things that we have. Jobs are the most important thing in this country.

Confidence in our financial situation and our financial management, in our prudence, in our financial integrity, is essential to the maintenance of jobs and



EXHIBITS 2 4 5

lots of jobs. Therefore, I think that what we want to do is so conduct ourselves in every way so we do not shake that confidence, so that the people feel that we are working in the best interests of leaning against both inflation and deflation, but letting the judgment of 160 million people determine what they wfll buy, when they wfll buy it, and what they will pay for it; and have the confidence to go ahead and do it.

EXHIBIT 36.—Statement by Secretary of the Treasury Humphrey, June 19,1956, before the House Ways and Means Committee

I am appearing before you today to ask for a temporary increase in the public debt limit from $275 billion to $278 billion for the fiscal year 1957. Because of our improved fiscal position, we are following the suggestion that the temporary increase granted by Congress for two years past be cut in half.

We succeeded in living within the $281 billion limit set a year ago, but by a narrow margin. On several days, we were within $700 million of the debt ceiling, and, at times, our operating cash balance was less than enough to cover 10 days' expenditures. This is closer than is prudent in handling the Government's huge operations efficiently.

However, I am in full sympathy with the desire of the Congress to keep a limit on Government spending.

We hope to finish this fiscal year with a budget surplus of about $1.8 billion and the debt under $273 bfllion. We still face, however, a heavy seasonal swing in receipts, which means borrowing in the first half of the fiscal year for repayment from heavy tax receipts in the second half.

This swing is gradually being reduced |by the shift in time of payment of corporation taxes, provided by 1954 legislation.

Taking these facts into account, I believe we can operate under a $278 billion ceiling, though it will take careful management. If this becomes impossible, we shall advise the Congress promptly.

Our success in living within this ceiling will depend on great restraint by both the Congress and the administration in expenditures. On the basis of present estimates, there is no leeway for any reduction in tax rates. The program calls for applying any surplus to debt reduction in accordance with the recommendations made by the President.

I hope that this year we are setting a precedent which may be faithfully followed year after year, and that from now on we will so handle our financial affairs that we can make each year a modest payment in reduction of our huge indebtedness as a matter of standard practice.

This program is one more step in maintaining fiscal soundness and ensuring the integrity of our money, so that our people can count upon its value and go forward with all their undertakings with full confidence. This is the basis of continuing and growing prosperity and constantly more and better jobs.

Let me thank the members of this Committee for their continued understanding and cooperation in working toward these objectives.

EXHIBIT 37.—Statement by Under Secretary of the Treasury Burgess, November 28, 1955, before the Subcommittee on Housing of the Senate Banking and Currency Committee

The Treasury is vitally interested in any development that affects the value of the dollar. Debt management operations are also influenced by any large demand for funds such as arises from building.

This year there has been mounting evidence that the volume of residential building has been exceeding not only the volume of money available from, normal sources for mortgage lending, but also the availability of labor and building materials.

Building material costs since mid-1954 have moved up by about 10 percent under the impact of the tremendous increase in new housing starts. If materials and labor are available only at increasing prices, the inevitable result is a higher-priced house. In the final analysis, it is the home buyer who suffers. Continued increase in the cost of homes could sharply limit the future market for houses, and limit our progress toward improved housing standards for our people.




Accordingly, the Treasury has been sympathetic to the various actions taken by the Federal .Housing Administration, the Veterans' Administration, the Federal Home Loan Banks, and the Federal Reserve System which have been designed to protect the dollars of the home builders and home owners and others.

Money for home mortgages must come largely from the savings of the people. In times like these, with business activity straining at capacity, we cannot run the inflationary risks of manufacturing money through bank credit to encourage a level of housing starts that probably could not be sustained because of shortages of labor and materials. That would only result in further, price increases.

EXHIBIT 38.—Statement by Under Secretary of the Treasury Burgess, February 27, 1956, before the House Committee on Banking and Currency

I am glad to appear before you today to present the views of the Treasury Department in support of H. R. 9285. This bill would extend until June 30, 1958, the present authority of the Federal Reserve Banks to purchase securities directly from the Treasury in amounts not to exceed $5 billion outstanding at any one time.

The Treasury Department requested the enactment of this, measure in its letter to the Speaker of the House of Representatives on January 24, 1956. It has been endorsed by the Board of Governors of the Federal Reserve System.

Prior to 1935, Federal Reserve Banks could purchase Government obhgations either in the market or directly from the Treasury. From 1935 until 1942, however, this authorit}^ was restricted to open market" transactions under the Banking Act of 1935. In 1942 the authorit3^of the Federal Reserve Banks to purchase securities directly from the Treasury was restored, but a limit of $5.biflion was placed on the amount outstanding at any one time. The $5 billion authority was granted initially only through 1944, but the Congress has extended it from time to time. The present authority was granted for two years and expires June 30, 1956. .

The primar}^ purpose of this direct borrowing authority has been to help the Treasury and the Fed.eral Reserve System work together in minimizing the disturbing effects on the economy of short-run peaks in Treasury cash receipts and disbursements, particularly around the time of quarterly income tax pajanents. These short-run movements of funds are large, and precise estimates of their day-to-day patterns are often difficult. This direct borrowing authority is a useful mechanism for the Treasur}^ and the Federal Reserve and its use has avoided unnecessary strains on the money market on a number of occasions.

Treasury borrowing from the Federal Reserve Banks under this authority has been used infrequently and then only for short periods. The last time it was used was on March 17, 1954. Borrowing has exceeded $1 billion only rarely. A table showing the use of the direct borrowing authority since 1942 is attached.

The Treasur}^ and the Federal Reserve have used the direct borrowing authority only to meet temporary requirements of this nature. The authority is also, however, a safeguard that-could be used in the event of any sudden nationwide emergency requiring heavy cash payments from the Treasuiy before securities could be sold.

While it has never been necessary to use as miich as $5 billion, we recommend continuation .of the present $5 bfllion authority to give the Federal Reserve and the Treasury sufficient flexibility to cover emergency situations if they should arise. Any borrowing under the authority is, of course, subject to the statutory debt limit.

Direct borrowing from

Year

1942 : 1943 ]944-.. 1945 1946 1947 . -1948

Days used .

19 48

8

Maximum amount at any tirae

(inmillions)

$422-1,320

484

Federal Reserve • Banks

Year

1949 1950 1951 1952 1953 1954 .• 1955

Days used

'2 2 4

30 29 15

Maximum amount at any time

(in m.illions)

$220 108 320 811

1,172 424



EXHIBITS 2 4 7

EXHIBIT 39.—Remarks by Under Secretary of the Treasury Burgess, April 25, 1956, in presenting a medal to the American Newspaper Publishers Association, New York, N. Y.

This year, throughout America, we are commemorating the 250th Anniversary of the birth of Benjamin Franklin.

In that connection, the Congress of the United States has authorized and directed the Secretary of the Treasury to have struck 71 bronze commemorative medals and arrange for their presentation to the societies or enterprises of which Franklin was a member, founder, or which he helped in their early development.

When we in the Treasury sought to carry out this responsibility, we were again' impressed by the enormous range of Franklin's interests and achievements.

Without Franklin's skillful diplomacy, which brought to the colonies the aid of France, the Revolution would probably have foundered.

The Constitution of the country reflects his wisdom. He made great contributions to science and education. But he began at the age of 15 and continued throughout his life as a newspaper

pubhsher. Of his work as a publisher and editor, we might well say in the words of Kipling

that he painted on a ''ten league canvas with brushes of comet's hair." Those who work in the newspaper field are thought to be primarily recorders of

happenings of things that have already occurred. Yet, strictly among ourselves, would not every newspaper publisher admit that, to be truly successful in his chosen field, to make a really great newspaper, there must be a good deal of the prophet in his makeup? The best reporters are those who look ahead as well as behind.

Franklin symbolized that ability, that necessity, to look ahead which we have come to associate with your great organizations. Few of us can claim a crystal ball of such enormous power as his, yet I think it may prove inspiring to each of us if we remind ourselves today that, in the infancy of our Nation, these were the three steps which Benjamin Franklin believed could eventually bring lasting peace to the world:

The first step was to develop the threat of massive retaliation by air to deter aggressors from making waT. Amazingly, he wrote this suggestion to the Royal Societj^ at the time of the first balloon flight in France.

The second step was to develop a council of nations to try and adjust their differences without ''first cutting each other's throats."

The third, and to Franklin perhaps the most important step, was the free and open communication between the peoples of all countries.

This third step is the basic theme of the international celebration of the 250th anniversary of Franklin's birth. More than 1,000 organizations and associations in 51 countries are cooperating this year in a free and voluntary exchange of ideas. . Each country, each group, plans its own program. Their ideas are shared through the generous cooperation of many thousands of publishers and broadcasters.

Benjamin Franklin's entire life was lived in the belief that the communication of ideas was, perhaps, man's greatest service to man. In an age when the civil authorities of Boston said that one newspaper was all that New England, perhaps America, would ever need, Franklin set about helping to organize or publish 8 newspapers himself in Massachusetts, Pennsylvania, South Carolina, New York, Connecticut, Rhode Island, Antigua, and in Montreal, Canada, where the Montreal Gazette is generally considered the oldest English-language newspaper in continuous circulation in the British Empire.

He published the first foreign-language newspaper in America, the second monthly magazine, and his almanack and autobiography w ere the first of all our publications to enjoy world-wide circulation. He created the American newspaper cartoon, started the idea of illustration news stories, and. developed advertising from brief, uninspired notices to the warm and persuasive voice of free enterprise.

In fact, we might call Benjamin Franklin and his associates the original "Newspaper Publishers Association."

You ladies and gentlemen have received from him' a rich legacy. You have guarded it well. Nowhere else on earth is freedom of the press a more vital and effective principle. You have taught people to understand both sides of a question and to know the citizens of other countries better. When our viewpoints disagree, it is necessary that we at least understand why, and that Ave try to appreciate the other person's ideas. In this way, as Franklin predicted, we can slowly but surety bring peace one step nearer to all mankind.




In the Franklin tradition, the newspaper men and women of America have been looking ahead in other ways, too. You are lending your talents and industry to furthering the principles of good government and encouraging the initiative and enterprise of our citizens.

In our times, as in Franklin's, one of the first principles of good government is sound money, and sound money depends, in turn, on the national habit of thrift, which is almost a synonym for Franklin's name.

One of your contributions to the cause of sound money has been your active sponsorship of the United States savings bonds program. As a public service, you have donated millions of dollars in advertising space, plus many thousands of man-hours, to bring the merits of this program to the attention of the American people.

America has benefited in countless ways from the new meanings you have given to Franklin's conception of the publishing business as a great medium of public service.

But let me be more personal. The Franklin Medal, which I have the honor to present to you today, carries these words taken from Franklin himself:

"Wise and Good Men are the Strength of a Nation." The complete quotation adds the words "Far More Than Riches or Arms." I am proud to present this medal to the American Newspaper Publishers.

Association. During the years, you have numbered among j our members many of the "wise and good men" of their age. You who publish newspapers hold in your hands a large part of the hope that free communications among peoples may yet bring the understanding that can achieve peace and new standards of thinking and living for the people of this world.

EXHIBIT 40.—Remarks by Under Secretary of the Treasury Burgess, May 8,1956, before the National Association of Mutual Savings Banks, Washington, D. C.

Economic events in the United States in the past year have made the business of your association even more important than it was a year ago. For these events give evidence that for its long-term growth the country needs a higher rate of saving.

What has happened is that the demand for capital has shown itself to be greater than the supply of capital. The amount of money sought to bufld houses, to build factories, roads, and public facilities has been greater than even the large amount, of savings available for these purposes. As a result, some of the demands for this money have been met from bank credit instead of by savings, and the price of money has risen.

This is, in fact, one of the principal reasons why a threat of inflation has developed and why the Federal Reserve System has raised its discount rates from 1% percent a little over a year ago to 2% and 3 percent today.

For some years it was popular in this country to talk about our "mature economy." The economists who used this language said that the growth of our country was slowing down, and that we did not need as much capital as in the past. They emphasized the importance of spending rather than saving.

In recent months we have been demonstrating.the very great capacity of this country for growth. We are building a better America at an exceptionally rapid rate: new houses, new production facilities, new public services. We have disproved the old theory of stagnation because of maturity.

This great progress is based on confidence in our country and in ourselves. It is based on sound Government policies. It means more jobs for more people at bette.r pay than ever before.

This prosperity of ours is shared in Western Europe and in many other parts of the world. The great recovery in these countries from the dislocations and distress of war partly reflects generous cooperative action by the United States.

One reason our own and other countries have gone forward confidently in economic progress is that we feel we have held our own in the cold war. We have increased our striking power to a point where it is a strong deterrent to aggression.

So we have good cause for satisfaction. But history teaches one lesson we must never forget: the seeds of future trouble are often sown in times of prosperity. This is the time to examine ourselves to see how we may bufld better and more firmly for the future, to see how we can avoid trouble.



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One major problem, as indicated, is the danger of inflation. Other countries have the same problem. The Bank of England has raised its

rate to 5H percent; Canada has gone to 3 percent; Germany to 4}^ percent. At the Istanbul meeting last autumn of the 58 countries which are members of the International Monetary Fund and the International Bank, there was agreement by afl present that inflation was a threat. Inflationary pressures have increased since then.

In this country, steps that the Government has taken, with the cooperation of people like the savings bankers here today, have been and are being reasonably successful in keeping things on an even keel.

The great increase that is going on in productive capacity—to turn out more goods by more efficient methods—will, in the long run, help to keep prices stable and, at the same time, pay higher wages.

The large savings of the American people are providing money to bufld this larger capacity, along with more and better homes and public facflities. I t is when we rush the spending faster than the rate of savings, and do it too heavily with borrowed money, that we run the risk of inflation. We have tended to do this in the past year. Home building was a good illustration. We tried to build more homes in early 1955 than we had building materials, building workers, or money available. Therefore, the cost of building rose 4 or 5 percent. The steps that were taken have brought that particular situation into balance.

Some people have said that we are going into debt faster than we are saving. That is not true. Americans set aside about $17 billion of their income last year, . rather than spending it. As you know, almost $2 bfllion of this total represents increased deposits in your own institutions. Savings and loan shares rose by $5 bfllion, and almost $4 billion went into checking and savings accounts in commercial banks. Another $2 bfllion went into United States Government securities and over twice that amount into corporate stocks and bonds and the obligations of State and local governments. "

In addition, individuals added $6 biflion to the value of their insurance last year. They put close to $30 biUion into the purchase of homes and the plant, equipment, and inventories of unincorporated businesses and farms. Even when you aflow for the increases in mortgages, consumer and business debt that individuals incurred during the year, and for property depreciation which is constantly taking place, individuals' savings still added up to about $17 billion in 1955.

In spite of this remarkable record of savings last year, however, individuals saved a little less than in 1954, which in turn was a little lower than 1953. Personal savings are accounting for only about 6J^ percent of our income after taxes now, as against an average of about 8 percent in other recent years. This is disturbing and is a further indication that we are not saving today quite enough to finance the rapid rate of growth of which we are otherwise capable. We need to develop thrift and encourage it by attractive rewards. This is one of the objectives of the Treasury savings bonds program, which is celebrating the 15th anniversary of the E bond this month. Your institutions are enlisted in this same endeavor.

One of the ways your Government is trying to keep the economy in balance, to assure the continued vigorous growth of the country without setbacks, is to bring the budget into balance.

In late 1952, Mr. Eisenhower said that his goal was to bring the budget into balance within four years. We are doing it a little faster than that. This year we shall have a balanced budget as against an inherited $9]^ bfllion deficit in the year we took over. We shall have a balance again next year, if the citizens keep on the pressure against unnecessary spending and the world situation continues to improve.

Taxes have, as you know, already been reduced by $7^ billion as an incentive for increased enterprise and increased savings.

In the long run, if we can keep Government spending under control, can keep on giving the people confidence and incentives, the continuing growth of the country should make our mflitary burdens, easier to carry and we should be able both to make reductions in the public debt and gradually to reduce taxes further.

The other proved mechanism which we have for helping to keep our economy in balance is the Federal Reserve System. This administration is opposed to trying to manage the country by direct controls over wages and prices and commodities. One of the first things the administration did in 1953 was to abolish the remaining wartime price and wage controls.




But we do believe in the traditional and more general influence of central banks over the supply and price of money. In 1953 we pledged that the Federal Reserve System would be free to exercise the functions given them by law to influence the credit supply in the public interest. The success of the System depends, of course, on the understanding and cooperation of the Nation's financial institutions.

I know from long personal experience the problems in running a bank, whether it is a commercial bank or a savings bank, when money is as tight as it is today. It is most gratifying to see the wisdom with which the banks are working in harmony with Federal Reserve policy to see that all sound and legitimate needs for credit are met whfle less essential demands are deferred or reduced.

It gives us grounds for confidence that we can weather this period of adjustment without serious difficulty.

We are looking to the savings institutions of America to help further the dynamic growth of our Nation through the encouragement of greater individuals' savings. If individual investors in savings bonds and in all other forms of saving respond as we hope, we may look forward to financing without inflation the steady, sure, and rapid advance in the economic well-being of our people.

EXHIBIT 41.—Remarks by Under Secretary of the Treasury Burgess, May 10, 1956, at Rutgers University, New Brunswick, N. J.

The great surge in capital expenditures of business this year, following a big year in 1955, naturally raises the question of where the money is coming from.

There are two sorts of evidence that the demands for capital, both for business and personal use,.are running ahead of the country's savings.

One evidence is in the capital markets themselves, where, in spite of the largest volume of new issues of all time, the market has been staggering under the impact of additional demands for funds. With the price of money substantially increased, a number of new issues have had heavy going, and some have been deferred.

The second evidence is to be found in the increase in bank loans. Loans to business by commercial banks are about 20 percent higher than they were a year ago, showing that some of the demand for capital has been absorbed by the commercial banks.

The mortgage market has provided a particularly interesting piece of evidence. In the middle of last year, the volume of mortgages created to build homes could not be fully absorbed by the accumulation of savings in the regular savings institutions and spilled over into the commei cial banks, largely through a substantial increase in mortgages warehoused by the banks.

So here is evidence that savings have not been keeping pace with the demands for funds.

Several questions are naturally raised: Is this a temporary burst of demand, or is this a long-term trend? How serious is the shortage of savings, and what ought we to do about it?

One thing, at least, is certain: We have definitely disproved the theory of the "mature economy," which was held by many economists a few years ago. Instead of stagnating, we are building a better America at an exceptionally rapid rate: New houses, new production facilities, new public services. This great progress is based on confidence in our country and in ourselves. It is based on sound Government policies. It means more jobs for more people at better pay than ever before.

This prosperity in America is part of a larger prosperity throughout the Western World.

I am sure, however, that this audience of businessmen would all agree that it is in times of prosperity like this that the seeds of future trouble often start to grow. It is time to examine ourselves and take every possible precaution to avoid the twin evils of either inflation or deflation.

In judging the balance between savings and spending, we now fortunately have many more figures available than we had a few years ago. I shall avoid getting enmeshed in expounding these figures to you, but I should rather try to give you certain broad conclusions from my examination of the figures.

The first conclusion is that this country is doing a tremendous job of saving money and applying it to increasing our wealth and wealth-producing assets.

•Business corporations in 1955 increased their assets by about $39 billion. Of this, $14/^ billion was covered by current depreciation, and $14/4 biflion was



EXHIBITS . 2 5 1

raised by increasing debt or sefling capital stock. The other $10 bfllion came from retained earnings.

While corporations went into debt by about $9 biflion (outside of income tax liabflity), on the other side of their ledgers, thCy increased their receivables and inventories by almost as much.

So the record for last year is a pretty good one but does seem to suggest that a further substantial increase in plant and equipment expenditures this year, such as is now projected, will mean a further large increase in debt.

Looking further ahead, the number of variables is so great as to baffle firm conclusions. George Terborgh has made a careful analysis and estimates for the coming decade that depreciation and retained earnings are likely to provide the major part of future expansion; so that requirements from the public would be well within the expected amount of funds available.

That raises the question of the trend of individual savings from which capital may be drawn for business growth.

A number of articles in recent, weeks have implied that the people of this country were borrowing more money than they saved and were thus on the road to insolvency. This is not so. While individuals have been increasing their debt rapidly, particularly their mortgage debt and consumer debt, they have been saving more than they borrow. So that, in the aggregate, net personal savings are running better than 6 percent of individual disposable income. This, however, compares with 8 percent savings a few years ago, and the amount and percent have been declining for three years.

Thus the figures show that the American people are a saving people both as individuals and in the operation of business. A huge amount of funds is being made available each year for the progress of the country in satisfying human needs more fully and meeting our national obligations. "

Based on these figures and on what is actually happening in the money markets and with respect to bank credit, my conclusion is that we are doing pretty well, but not quite well enough.

To be sure that our rate of progress will continue without interruption by inflation or lack of accumulation of capital, I believe the time has come when we must all consciously follow policies which will encourage the accumulation of the needed capital.

in the background, we must remember that we are engaged in a great interna-tional struggle to demonstrate to the people of the world the quality of our economic system and its capacity to satisfy human needs. I believe we have the best economic system and the most efficient one, but we must give the broad principles of its operation the same careful attention that we give to the details of the operation of our businesses. What then are the things that we need to do to assure the continued flow of savings in the amounts needed to keep our economic machine moving ahead in high gear?

The first thing we must do is resist inflation. When you have inflation, the cost of building new plants increases faster than the rate of savings.

Inflation is a product of many influences and policies, both governmental and private.

The Government today recognizes its responsibility for maintaining a stable dollar. The first necessity is a balanced budget, and we are promising you that for this fiscal year and, with good fortune and cooperation, for the next fiscal year also.

Perhaps the most potent arm of Government for assuring stable money is the Federal Reserve System. This administration has assured the Federal Reserve Board and the Federal Reserve Banks that they will be free to exercise their judgment in the determination of their policies in the public interest. The broad program of the Reserve System in the past year for holding in check a tendency toward overexpansion of credit has, I believe, been most helpful in keeping the pressure toward inflation within bounds.

There are other governmental actions which impinge on economic stability which I shall not attempt to describe, except to assure you that those of us who are working for you in Washington are doing our best to steer these forces in the direction of sustained economic growth.

Let me suggest, also, that business itself and the policies it follows with respect to wages and the pricing of its products exercise a very important influence on the economic trend.

The other area in which I believe we can all make a contribution toward assuring an adequate supply of funds for progress is the direct encouragement of savings.




In the Treasury we are celebratinglbhis year the 15th anniversary of the Series E savings bond. This bond has proved itself a unique mechanism for teaching regular savings by millions of people. There are now $40 billion worth of these bonds outstanding in the hands of approximately 40 million people in the United States.

The best method of selling savings bonds is through the payroll savings plan, which, I am sure, most of the businesses represented here have in effect in their establishments. The vigorous promotion of this form of savings is one of the best ways of teaching thrift. To the extent that more of the Federal debt can be put into the hands of individuals who would not otherwise have saved, that will tend to release other funds for the use of business.

We have developed in this country, also, a unique system of institutions for savings, including insurance companies, pension funds, savings and loan associations, savings banks, commercial banks, and others. These institutions we need to foster and encourage.

We are today going through a period of uncertainty as to rates of interest. In a free market the balance between the volume of savings and the demand for money is influenced by rates of interest. We are just emerging from a period of twenty years during which interest rates were held artificially low as a matter of Government policy—a great handicap to sound economic progress. Just where the rates should be cannot be determined arbitrarily. The important thing is that rates should have reasonable freedom of movement to reflect the economic forces of supply and demand.

What I believe is that we have escaped from a period of economic regimentation and doctrinaire solutions into a freer atmosphere. In this period, we should be able to make vigorous economic growth toward new standards of satisfaction for the lives of all the people.

If this growth is to go forward with power and assurance, we must somehow learn to combine freedom with restraint to avoid the twin dangers of inflation or deflation which threaten us in every period when we tend to grow overconfident.

The opportunity ahead is very great, indeed.

EXHIBIT 42.—Statement by Under Secretary of the Treasury Burgess, June 7, 1956, before the Subcommittee on Executive and Legislative Reorganization of the House Committee on Government Operations

In reviewing the material already placed in your hands, there seemed to me three or four points that need clarification for your records as to the purposes and the results of the Treasury's consultation with these committees.

The first point I want to be sure is clear is the enormous importance to the American people of sound management of the debt. The $275 billion national debt is a major influence in our economic life. If handled improperly, it could be inflationary or deflationary. The failure, for example, of one of our large financing operations involving $10 biflion or $12 billion could have a serious effect on our whole money market and on the financing of business in this country. It is therefore essential that the Treasury should take every precaution to get information from every useful source before making decisions about any of these operations.

These four advisory committees are representative of an important part of the huge market for Government securities. In the course of exploring the facts for a new Government issue, we consult, however, a great many other people. In particular, we get a great deal of help from the Federal Reserve Board and the twelve Federal Reserve Banks, with their offices throughout the country, who are in contact with a great many people and with the market. We maintain contact, also, with the people who handle investment of pension funds (State, municipal, labor union, and other private), with trust companies which have money to invest, and a great many individuals.

Our exploration of the market for Government securities is continuous and not something that is related solely to the periods when we put out new issues.

The bankers and dealers, whose representatives we consult, are not simply important markets for our securities, but they are also the principal salesmen. We rely upon the banks to keep their customers informed about our offerings of securities and they do this as a service, not only to the Treasury, but to the public. After a new issue is announced the bankers and dealers do an enormous amount of



EXHIBITS 2 5 3

writiug and telephoning to their customers to tell them about the new issues. You always get the best cooperation from people when they know your problem; so that our consultations are one of the methods of assuring the successful sale of our bonds.

One point not commonly understood is that the rates of interest which our securities carry are determined by the Government security market, and when we sit down with the advisory committees there is seldom any important question about the rate of interest which a security of any given maturity should carry. Hundreds of mfllions of dollars of Government securities are bought and sold every day in the free market and the price d.etermined in this way dictates the rates that we have to pay on new issues.

Every week the Treasury sells $1,600,000,000 Treasury bills at free public auction and the rate at which these bflls sell, together with the rates on purchases and sales in the open market, build up a curve of rates which makes it fairly obvious at any time what rate a new issue of securities has to carry to be sold successfully.

Therefore, our consultations with these advisory committees are not so much concerned with the rates of interest, but more largely the question of what kind of security the public wants: a bond issue, an issue of 1 to 5-year notes, or only a 1-year certificate. The market itself writes the interest rate.

The essential point is that the Treasury, for its guidance in very important operations, must have just as complete information as possible as to what maturities the public wfll buy. On this point, the consultation with these committees is invaluable.

Let me emphasize again that we do not tell these committees our decisions; we often receive conflicting advice. The Secretary makes up his own mind only at the last minute before the public announcement and after all the facts are on hand.

The Treasury is most appreciative of the large amount of time and attention that the members of these committees have been willing, patriotically, to give both in advising with us and in assisting in the sale of securities when they are issued. We are fortunate in this country to have a spirit of public service which enables us to call upon our citizens in this way. It would be an unhappy day when citizens felt that services of this sort were no longer welcome.

In your letter inviting representatives of the Treasury Department to appear at this hearing, you asked the Department to give information on the applicabflity of Departmerit of Justice standards for the organization and functioning of advisory committees to the various committees which are consulted, from tim a to time, by the Treasury on matters having to do with debt management policy and have been so consulted since the early 1940's.

Insofar as I am informed, consultations by the Treasury with the advisory committees which are the subject of the hearing this morning have not been considered to raise problems in the antitrust field. The suggested standards, and they are only suggested standards, of the Justice Department have dealt primarily with steps to be taken in order to minimize the possibflity of violation of the antitrust laws. The suggested standards were, I believe, first called to the attention of certain departments of the Government in October of 1950. It is interesting to note, however, that the Justice Department did not at that time write to the Treasury Department concerning such standards.

From time to time thereafter, these standards have been pointed out to various departments of the Government by the Justice Department in connection with the functioning of various committees. I do not understand, however, that it has been suggested that they should be formalized and put into effect insofar as the committees which we are discussing today are concerned.

While no formalized regulations have been issued by the Treasury covering conferences with these committees, the operation of these committees do follow, in the main, the requirements which have been suggested from time to time.

The committees which are your present concern are, in fact, set up as an integral part of the committee system in "their respective parent organizations. Responsibflity for membership selection rests solely with the sponsoring organizations.

Meetings with the Government are called by the Treasury, which fixes the time and place of the meetings and determines the phases of public debt management to be discussed. Whenever the committees meet with representatives of the Government, the direction of the meetings is in the hands of a representative of the Government. The value of the meetings to the Government comes from the open, full, and complete discussion of the problem submitted. While minutes




are not kept of all meetings, the Government representatives secure from such discussions the information which, with other information received from many sources, responsible Government officials use in reaching conclusions in the financing field.

The functions of all of the committees with which we are here concerned are purely advisory and afl determinations of action to be taken in the field of debt manageinent are made solely by Treasury representatives and such decisions are not imparted to the committees,, or any members thereof, these committees learning of the Government's decision when a general public announcement concerning debt financing is issued by the Treasury.

Thus, in their purposes and operating procedures, I believe these committees conform to sound principles for the relationship of such committees to a Government department.

EXHIBIT 43.—Extract from remarks by Assistant Secretary ofthe Treasury Kendall, October 27, 1955, before the United States Customs Service, Detroit, Mich.

We have heard a great deal lately about team play in Government. This team play goes from top to bottom in the Government itself. No one who has been privileged to serve with the present administration could fail but to be deeply impressed by this spirit of enthusiasm, of coordination, and cooperation. One of the most striking and refreshing discoveries I made, and which I think anj'-one new to Washington makes quite quickly, is the realization of what a fine and devoted public service exists among the career employees of the Government. I have not only been deeply impressed but fervently thankful that such is the case.

In practically every problem which arises one can count on the cooperation of at least two or three, or a larger number when necessary, of informed and keenly intelligent associates who make sure that policy and action do not overlook any relevant consideration or point of view.

In an organization as intricate as a national government this is by no means an automatic or built-in safeguard. It necessarily requires a desire as well as a capacity, for imaginative and resourceful thinking, based upon past spadework in getting the facts in order; in getting the ducks in a row.

This is equally true in the field, and the thoughtful cooperation and coordination of each bureau and branch of service, and of the people within its. bureaus and departments, goes a long, long way towards the accomplishment of the ideal in government.

I can speak perhaps with greater knowledge and a greater ring of knowing what I am talking about if I could digress for a moment and discuss public service from the standpoint of the Department with which I have the honor to be associated.

Each of the bureaus and services of the United States Treasury has achieved a record of distinction as part of our Federal Government. You are clearly entitled to take pride in the high tradition which has grown up within each of your units, as well as within the Treasury Department as a whole.

Tradition is a fine thing, and every man who has ever been conscious of a standard of performance and loyalty to duty, built up by his predecessors and his colleagues over a period of j^ears, knows what a constructive force it can be. In a very practical way, tradition can be a guide both as to what should be done, and what should be avoided. Few men possess such infallible judgment, and such sureness of perception that they are not helped by a consideration of the courses of action chosen by other men of high principle in comparable situations.

We in the service of the Treasury Department can justifiably take a special pride in the fact that ours is almost the oldest of our Federal executive departments, and that its high reputation was well established more than a century-and-a-half ago. Yet no tradition, however proud, can stand upon its length alone. It is important that it develop and retain qualities which help its devotees to meet the problems of each new year with the kind of wisdom which deserves fresh approbation. Allowances must be made, too, for the well established propensitj^ of our fellow Americans to challenge every pretension which is based only upon antiquity. During the early part of World War II one of our four-star generals shocked some of the high Navy brass by saying, "when you fellows talk about tradition, what you usually mean is bad habits". What I suppose he meant was that certain aspects of an organizational sense of fitness are as commendable in the first 15 minutes as in the second century of its existence; but that any precepts which do not clearly meet the chaflenge of the present day should be reexamined.



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We in the Treasury are also fortunate in another respect.. The laws which we are charged with enforcing are concerned, in the main, with very tangible and practical mat ters . They are not necessarily popular ones, bu t the need for them is clearly understood and accepted, and thej^ are all basic to the successful operation of this or any representative government. They have to do with protecting not only the totals of our national revenues, but also the individual rights of our citizens as active partners in the great cooperative effort which modern democracy has become. We are helped in this task by many factors, but mainly by the underlying soundness of our national concept of what government must, and must not, under take in its relations with the individuaL The intelligence and loyalty of the average man on the street, in every community, helps to make the orderly processes of law enforcement possible. We can go about our work with confidence in the fact t ha t we have been trained for our tasks in the special functions assigned to each of our separate Treasury agencies. Beyond this is the priceless accumulation of experience which so many of you have gained through your years of service. From the Treasury point of view, t ha t experience, much of it highly specialized, becomes even more valuable when applied through interagency means, of which your meeting here today is a good example. We are, to use a term which our President has often employed, a " t eam," to again refer to t ha t great aspect of his administration.

E X H I B I T 44.—Statement by General Counsel of the Treasury Scribner, June 20, 1956, before the Subcommittee on Government Information of the House Committee on Government Operations

I t is the established policy of the Treasury to make available to Congress and its committees, and to all who are entitled to know, all requested information with the very minimum of restriction. Secretary Humphrey has heretofore writ ten this committee t h a t he has no reservation about the Government 's business being the public's business, and t h a t the public is certainly entitled to know, with a minimum of restriction, exactly what its Government is doing.

I n dealing with the right of the Executive, acting in the public interest, to hold in confidence material which has come to the executive branch of the Government, your committee considers a problem which is as impor tant as it is old. I n the hearings you have heretofore conducted committee members and witnesses have spoken with candor on the rights and privileges of the legislative and executive branches of Government. I t rus t t h a t I will be permit ted the same privilege.

I t is categorically s ta ted in the s tudy issued by the staff of this committee under date of May 3, 1956, tha t : ,

" I t should be s tated a t the outset t h a t judicial precedents do not recognize any inherent right in any officer of the United States to withhold test imony or documents either from the judiciary or from the Congress of the United Sta tes ."

While I do not believe t h a t there is any judicial holding which asserts or denies the right of the Executive to withhold test imony or documents from Congress, there is ample author i ty in the reported decisions for the withholding by the Executive of material from the courts.

I n Marbury v. Madison (1803) 1 Cranch 137, 144, the Attorney General, who had responded to a summons, was a witness. The Court, speaking of test imony he was to give, said:

"There was nothing confidential required to be disclosed. If there had been, he was not obliged to answer it ; and if he thought t h a t anything was communicated to him in confidence, he was not bound to disclose it * * *."

I n the report of the trial for seditious libel of Thomas Cooper, 1800, in a circuit court of the United States, the report states:

"The court a t the same t ime refused to permit a subpoena to issue directed to the President of the United Sta tes ." Wharton, State Trials of the United States, 659, 662.

I n the trial of Aaron Burr, 1807, Chief Justice Marshall presiding, the court issued a subpoena duces tecum to President Jefferson. I n long passages which are somewhat equivocal as to whether the existence of the privilege is to be determined by the officer or by the court, the court said:

"The President,*^ although subject to the general rules which apply to others, may have sufficient motives for declining to produce a particular paper, and those motives may be such as to restrain the court from enforcing its production. . I do not think preciselj^ with the gentlemen on either side. I can readily conceive




that the President might receive a letter which it would be improper to exhibit in public, because of the manifest inconvenience of its exposure. The occasion for demanding it ought, in such a case, to be very strong, and to be fully shown to the court before its production could be insisted on. I admit, that in such a case, much reliance must be placed on the declaration of the President; and I do think that a privilege does exist to withhold private letters of a certain description. The reason is this: letters to the President in his private character, are often written to him in consequence of his public character, and may relate to public concerns. Such a letter, though it be a private one, seems to partake of the character of an official paper, and to be such as ought not on light ground to be forced into public view." Robertson, Burr Trials, V. 2. pp. 535, 536.

President Jefferson did not obey the subpoena. In a letter of June 17, 1807, to the United States Attorney in the case, George

Hay, the President, referred to the public and private sides of the Presidency, and said:

"All nations have found it necessary, that for the advantageous conduct of their affairs, some of these proceedings, at least, should remain known to their executive functionary only. He, of course, from the nature of the case, must be the sole judge of which of them the public interests will permit publication. Hence, under our Constitution, in requests of papers, from the legislative to the executive branch, an exception is carefully expressed, as to those which he may deem the public welfare may require not to be disclosed; as you will see in the enclosed resolution of the House of Representatives, which produced the message of January 22d, respecting this case." Writings of Thomas J ef erson edited by H. A. Washington (1853) Vol. V, pp. 97, 98.

In Totten, Administrator, v. United Staies (1875) 92 U. S. 105, 107, involving an alleged contract between President Lincoln and the claimant for secret war services, the Court said:

"It may be stated as a general principle, the public policy forbids the maintenance of any suit in a court of justice, the trial of which would inevitably lead to the disclosure of matters which the law itself regards as confidential, and respecting which it will not allow the confidence to be violated. On this principle, suits cannot be maintained which would require a disclosure of the confidences of the confessional, or those between husband and wife, or of communications by a client to his counsel for professional advice, or of a patient to his physician for a similar purpose. Much greater reason exists for the application of the principle to cases of contract for secret services with the government, as the existence of a contract of that kind is itself a fact not to be disclosed."

In United States v. Reynolds (1953) 345 U. S. 1, a case discussed in the committee print, the Court referred at pp. 6, 7, to

"the privilege against revealing mflitary secrets, a privilege which is well established in the law of evidence."

While no cases can be cited either for or against the right to withhold, there are ample precedents for the authority of the Chief Executive of the United States to withhold testimony or documents from the Congress. One reads little of these precedents in. the material presented to this committee to, date. In the transcripts one also reads little of the repeated, reasoned, and firm refusals of Presidents from Washington to Eisenhower to agree that the Congress can compel production of records held confidential by the Executive in the public interest, as that interest is determined by the Executive.

The JExecutive position in this controversy has been accepted explicitly by representatives of Congress on more than one occasion over the years. Perhaps the most explicit statement on the subject was made by the House Committee of the Judiciary in 1879. Among other things the comniittee then stated:

"And whenever the President has returned (as sometimes he has) that, in his judgment, it was not consistent with the public interest to give the House such information, no further proceedings have ever been taken to compel the production of such information. Indeed, upon principle, it would seem that this must be so." Page 3 of 1873 House Report 141, 45th Cong.

The Executive's assertion, of its privilege has prevailed through 150 years. It has been suggested in material heretofore presented to this committee that

the time has come for "some kind of a showdown"; that the Executive is not really convinced of its position and would "retreat" if pressed. I think this view is erroneous. I do not beheve that the Executive would, or should, yield on a basic position which seems to the Executive to be correct in principle and



EXHIBITS 2 5 7

which has been asserted successfully and with explicitness by many Presidents from Washington and Jefferson to Eisenhower.

The position t h a t there is no Executive privilege and t ha t the assertion of the same is a violation of the provisions of our Constitution, or a t least of certain of its amendments , appears to be contrary to the understanding of certain of our early Presidents, Avho part icipated in the drafting of the Constitution and of the first 10 amendments , and who, thereafter, adopted and supported the right of the Executive to withhold information when the Executive believed it was in the public interest so to do.

In my opinion there is no basis for suggesting the Executive should concede controlling rights to Congress as to every document in the possession of the Executive.

I do wish to make it clear, however, t h a t it is my understanding t h a t while there is a privilege to withhold, it is nevertheless the general and basic right of Congress and its committees to secure test imony and documents from the Executive. I agree t h a t it is generally in the public interest t h a t Congress' should have them. The right to refuse is, however, possessed by the Executive.

Organization and Procedure E X H I B I T 45.—Treasury Department orders relating to organization and procedure

No. 82 ( R E V I S E D ) , R E V I S I O N AND A M E N D M E N T . — R E G U L A T I O N S U N D E R E X ECUTIVE O R D E R N O . 10450, As AMENDED, R E L A T I N G TO THE P E R S O N N E L SECURITY PROGRAM OF THE TREASURY D E P A R T M E N T

No. 82 (Revised), Revision, August 15, 1955.—Supersedes the revision dated October 12, 1954

Pursuant to the authori ty contained in the act of August 26, 1950, 64 Stat . 476; Executive Orders Nos. 10450, Aprfl 27, 1953, 10491, October 13, 1953, and 10548, August 2, 1954, and Reorganization Plan No. 26 of 1950, 64 Stat . 1280, the following regulations relating to the security program of the Depar tment of the Treasury are hereby prescribed:

Section 1. Definitions

The following terms, as used herein, shall have the meanings specified: (a) " D e p a r t m e n t " means the Depar tment of the Treasury. (b) "Secretary" means the Secretary of the Treasury. (c) "Security Officer" means the person designated as Personnel Security

Officer of the Depar tment , or the person designated as Alternate Personnel Security Officer, by the Secretary.

(d) "Legal Officer" means the person designated as Legal Officer, or any person designated as Alternate Legal Officer, by the Secretary.

(e) "Head of the Bureau" means, the head of the bureau, independent office, or division of the Depar tment , in which the employee is employed.

(f) "Employee" means a civilian officer or employee of the Depar tment . (g) "Nat ional securi ty" means the protection and preservation of the military,

economic, and productive strength of the United States, including the security of the Government in domestic and foreign affairs, against or from espionage, sabotage, and subversion, and any and all other fllegal acts designed to weaken or destroy the United States.

(h) "Suspension" means the temporary removal of an employee without pay, in the interests of the national security, pending final determination of his case under the provisions of this order.

(i) "Reassignment" means the temporary alteration in, or limitation of, the duties of an employee, in the interests of the national security, pending final determination of his case under the provisions of this order. Although reassignment does not necessarfly entafl physical relocation, appropriate steps must be taken to prevent the employee's having access to all categories of classified information or material, pending final determination. No termination following reassignment shall be effected without prior suspension and full compliance thereafter with the procedures applicable to suspension set forth in this order.

399346—57 IS




E X H I B I T 28.—Press release, February 15, 1957, on the signing of an extension of the Stabilization Agreement between the United States and Peru

Under Secretary of the Treasury W. Randolph Burgess and Ambassador Fernando Berckemeyer of Peru today signed an agreement extending for a period of one year the Stabilization Agreement between the United States and Peru.

The agreement extends until February 17, 1958, existing arrangements under which the United States Exchange Stabilization Fund undertakes to purchase Peruvian soles up to an amount equivalent to $12.5 million should occasion for such a purchase arise. The agreement is designed to assist Peru in maintaining external t rade and payments substantially free from governmental restrictions and avoiding unnecessary fluctuations in the ra te of exchange.

The Internat ional Monetary Fund has also announced extension of its s tandby arrangement with Peru under which tha t institution agrees to make available up to $12.5 million for the same purpose. The two agreements therefore provide a tota l of $25 million in s tandby resources for Peru.

E X H I B I T 29.—Press release, April 1, 1957, on the signing of an extension of an exchange agreement between the United States and Chile

Under Secretary of the Treasury W. Randolph Burgess and Ambassador Mariano Puga of Chile today signed an agreement extending for a period of one year the exchange agreement between the United States and Chile originally inst i tuted a year ago.

The agreement is designed to assist Chile in its continuing efforts to achieve economic stability and freedom for t rade and exchange transactions. Under the agreement, the United States" Exchange Stabilization Fund undertakes to purchase Chileau'pesos up to an amount eq.uivalent to $40 million, shoiild the occasion for such purchase arise.

The Internat ional Monetary Fund has announced renewal of its s tandby arrangement with Chile in the amount of $35 million and the Treasury is informed t h a t certain New York banks have renewed credit lines amounting to $30 million, thus continuing tota l s tandby facilities of $75 miUion for Chile.

Addresses and Statements on General Fiscal and Other Policies E X H I B I T 30.—Statement by Secretary Anderson, July 29, 1957, on assuming

duties as Secretary of the Treasury

I take on the duties of Secretary of the Treasury with humility, for I am aware not only of the great honor of the office and the tremendous responsibility involved, bu t of the challenge I face in succeeding such an able and outstanding man as George Humphrey.

The most I can do is pledge tha t I will do my utmost to. serve as Secretary of the Treasury in the coritinued best interest of all the people. I t would be conjectural for me to t ry to say. precisely what I will or wilLnOt do, or exactly how I will t ry to meet situations whicfi may arise. ' This will deperid'ori what will best contribute to the general welfare of our country and our economy in light of circumstances prevailing at any given time.

The continued health of our economy is of vital importance not only to the individual well-being of our people, but to our continued security in the world. We must do everything which will help maintain tha t economic well-being.

I am particularly pleased to have the continued assistance of such a fine and able team at the Treasury. Their experience and dedication,will be of enormous value as I join the team to work collectively with my associates for the best interests of our country.

E X H I B I T 31.—Remarks by Secretary of the Treasury Humphrey, October 8, 1956, before the Economic Club of Detroit, Detroit, Mich.

I , w a n t to talk to you.for a few miriutes today about something t h a t almost eyerybpdyj seems; to b^, talking about—tight money.

We cari't'have^ high'prosperi ty, abundant jobs a t high pay, high confidence, high spending, and wide general expansion with cheap, unlimited money and a stable cost of living all a t the same time.



EXHIBITS 2 2 3

Our problems today are the problems of great prosperity. They are nonetheless real and difficult and must be courageously faced if we want to keep t rue prosperity in America—prosperity t h a t will continue and stretch forward into the future.

Let me tell you why. And let's s tar t , as Al Smith used to say, by taking a look a t the record.

Let 's go back to 1939, before the last world war, and come down to today. In the period of about six years, from 1939 through the end of 1945, the year the war ended, the value of the dollar in goods t h a t it would buy was reduced from 100 cents to 76 cents, a reduction of 24 cents or about one quarter. During t ha t period interest rates, by deliberate design of the administration then in power were artificially held a t low levels.

During the next seven years, from the end of 1945 through 1952, covering the postwar period and prior to the advent of this administration, and when we were supposed to be returning to a peacetime economy, the value of the dollar in goods t h a t it would buy was further reduced from 76 to 52 cerits or another 24 cents, a reduction this t ime of about one third. And, during most of tha t period, by deliberate design of the administration then in power, interest rates were still being held to a low level.

And all t h a t t ime the cost of living was steadily increasing until there was a total increase during those 13 years of the previous administration of almost 100 percent in the cost of living while the dollar was cut nearly in half.

Since the election of this administration from 1952 right up to the present day, almost four years, the value of the dollar in goods t h a t it would buy has been reduced from 52.1 to 50.9 or about 1.2 cents. Interest rates have been allowed to.fluctuate naturally, both up and down, in response to the extent of demand.

The record is all too clear. The evidence of the actual facts is too convincing. While we had arbitrarily cheap and plentiful money the cost of living doubled— the value of the dollar was cut in half. Whereas with money advancing or declining more freely in response to the pressure of demand, we have enjoyed a perfectly remarkable stabilization in the cost* of living and as sound a dollar as can ever be had.

There is plenty of talk nowadays of a new record high in the cost of living but again lets look a t the record. From 1939 through 1952, under the deliberately inflationary policies of the previous administration, there were 30—yes 30—separate times when new record highs in the cost of living were set and the cost of things for living rose from $1.00 to $1.92. The cost of those same things today is at a record high at $1.96}^. But the real point is t ha t of the total increase of 96)^ cents over the whole period 92 cents came during the 13 years under the inflationary policies of the previous administration as compared with only 4}^ cents in nearly four years under the stabilizing policies of the administration now in power.

A new record high now, yes, bu t built up by 92 cents under deliberate inflation in 13 years and held down to only 4)^ cents by a reversal of policy to stabilization duiiri'g the 4 years just past.

No more effective demonstration of the difference between the two policies in their effect upon the lives of the American people could possibly be made.

Now is there any reason why we should not learn from tha t hard experience? Is not this demonstrated fact of the past a reliable guide for the future to show us the pitfalls to avoid and point the course t h a t we should follow if this great prosperity, if these great good jobs, good pay and good times are to endure and further sweeping increases in the cost of living are to be held down?

I can give you no lecture on abstract economics, but I can call your at tent ion to a few common sense basic facts.

Our problem is the problem of prosperity; to continue to live successfully and permanently with prosperity, in peace and freedom.

I t may be even tougher than the problems of adversity, for when you are in trouble the whole idea is to get it over with—to make a change. What we have now, we want to keep. We want good times to continue. We wan t to have exactly the same problem next year, the year after, and as far ahead as we can see.

The problem of learning to live with prosperity,- at peace, and in the freedom which we Americans regard as our birthright, is not alone the problem . of government. . r

I t is equally your problem—the problem of every American. We cannpt place upon the Government the exclusive.concern with the difficulties—we niight call



2 2 4 195 7 REPORT OF THE ..SECRETARY OF THE TREASURY

them the happy difficulties—that arise when you t ry to make prosperity last in a t ime of peace and in a free society.

I t might be called the problem of " too much all a t once." But there is a simpler knd older name for i t : the problem of supply .and demand. We are prosperous, and. t h a t means we are working very close, to the limits of our manpower and our materials. We are at peace, so there is no place for wartime controls qr powers to ration work and materials. We are free and we want to s tay free, so we do riot want to dictate wages, prices, or rents. We do not want to arbi trar i ly allocate materials and labor by Governmerit order or decree.

But just because we are prosperous—in peace and in freedoni—because the public in general has great confidence in the future, we all want to buy and expand. The public wants to earn riiore and spend more, all a t the same time. The demand for money is unlimited, but the supplies of the things money buys— goods, materials, and the labor, skill, and services of people—are limited. We have neither the necessity of war nor the desire of dictatorial government to ration those things. Tha t being so, we must keep the supply of money from growing beyond the supply of people and materials. Tha t is the pnly way to avoid i-apidly rising prices and inflation while maintaining prosperity in company with both peace and freedom.

In years gone by the Government, deliberately encouraging inflatiori, arbitrarily held the price of money down. '• " The cost of living doubled. Our debt went up b y a large amount , par t ly

because the prices of the things the Gpvernment was then buying went up so much in price. And all t ha t extra debt we still have with us to pay with hard yvovk and the sweat of our brows for the errors of the past.

Today a very high percentage of all the people of the United States are employed, and the goods of the United States are being largely absorbed. Materials in most cases are in full demand and in some cases there are even shortages. Except for a very few scattered soft spots, the situation by and large is one of great prosperity straining the Nation's resources.

When as now, widespread confidence in the future is so high t ha t we seek to go further and faster than tha t , what happens? We s tar t drawing either manpower or scarce materials away from each other. Tha t is going on today. If you don ' t th ink it is, do what I did the other day. Take the Sunday editions of half a dozen major city newspapers across the country—including Detroit . Throw away all of the pages except those pages which have to do with advertising by various concerns to hire people, and in these half dozen papers those pages will be several inches thick. Pre t ty nearly everybody in business is advertising in some paper to employ some man for some company other than the one he is now working for.

The same thing is going on with many materials. There has to be some governor, some restriction, in this situation, otherwise

the price of materials and goods keeps going on up without producing any more goods, and we all just pay more for the same.

If this big demand for money is used to expand sales and plant and capacity and activity when expansion only means hiring more people and trying to get more goods than there are, then the price of goods and services will rise with no corresponding increase in either goods or productivity.

. But , if the price of money rises i t will tend to keep the demands for expansion in line with the supply of our resources.

And, it is easier to contract the price of money when it has served its purpose thari it is to contract the price of goods and services. You dori't contract what you pay for services, goods, and materials without some very serious hardships resulting. But you can contract the price of money without hurt ing people. T h a t is why it is the best economic governor. I t protects jobs, prices, and wages as it works.

We don ' t want to go the "easy" money road, the old familar road tp inflation. We don ' t want to go up only to conie down. We want to let natural corrections and restraints operate freely." The Government is not put t ing up the price of money. I t is t h e accumulated demands of people and business t ha t is doing it.

As more and more people want to expand and use more money to do so, the demand for money increases and the, price rises. Now if the Federal Reserve Board neither arbitrarily increases the supply nor arbitrarily holds down the price, interest rates naturally rise. As they rise,, and money costs more, some people refrain from so much expansion and the demand for money decreases. As supply again catches up with demand, . the price again begins to decline and ' the pressure on the cost of living is reduced without an excessive advance hurt ing all the people.



-EXHIBITS. / . . , 2 2 5

. There are other sources of pressure tha t must also be taken into account. The Government of the United States collects and spends so much money t h a t it has a. t remendous effect on the economy. •

In this administration we have reduced our expenditures about eight billion dollars. At the same t ime we cut taxes by nearly the same amount as the money we saved. In cut t ing taxes we gave back to the public to spend for themselves as^ they thought best the money we saved in Government spending. This helped to-riiake jobs in pr ivate industry for those whose livelihood had formerly depended on Government spending. They helped to produce more goods for all the people to buy, whereas when those Government employees were working for the Government they didn ' t produce any goods t ha t the rest of the people could purchase.

Today we are spending in the neighborhood of forty billion dollars for mili tary goods and services. T h a t forty billion dollars is money t h a t goes out in wages and for goods t ha t tu rn into wages. I t makes t ha t much spending power in the country. Yet there isn't anybody involved in t h a t whole forty billion dollars who rnakes-goods t h a t a consumer can buy. Consumers don ' t buy tanks or bombers.

Defense spending is necessary, and we will continue to spend on defense every penny and every billion we need to spend to provide the Nation with security. But the economic significance is t ha t the Government in its own fiscal policy is-put t ing a great pressure on the market for goods by put t ing tha t much money into-this spending stream and not put t ing added goods out for the people to buy.

T h a t brings us to the next point, the Government 's policy with respect to deb t and savings. When interest rates are kept down arbitrarily, not only is the incentive to save monej^ reduced, but the fear of inflation helps t o create a lack of capital—a lack from which the whole world is suffering.

We are short in this country and in the whole world of capi tal—that means savings.

We have been through a period of years when there was little incentive to save. In the first place, the interest ra te was held down so low tha t there was very l i t t le return. There was no natural incentive. In the secpnd place, as the value of t h e dollar declined and as inflationary pressures took hold, people were afraid to save a dollar because it was constantly declining in value. As I have shown, six years later it was worth only seventy-six cents and in 13 years it went down to only fifty-two cents. So the lack of incentive resulting from low interest and the fear of inflation first took away the reason to save and, as it went on, it actually kept people from saving. On top of all this some of our public leaders then scoffed at saving as outmoded and old fashioned and urged spending and more spending, regardless of increasing debt or adequate income.

Saving money and thereby creating capital is no mystery. I t simply means t ha t some one must deny himself the pleasure or desire to spend some par t of his pay check rather than save it. Pa r t of his income he must properly spend but pa r t can be. laid away for the future if (1) there is sufficient incentive to do so because of a fair r e tu rn in interest or dividend, and (2) if he feels safe in the continuing value of his savings. Most all Americans are saving something today through purchase of insurance, paynients forpensions, the purchase of Government bonds or in a savings account or in the many other ways to do so. As interest rates;rise all those savers benefit. But if inflation sets in and the dollar declines they all are robbed of par t of their savings. Inflation is the great thief. The young, the old, the sick; the small saver, a l l those least able to protect themselves, are the helpless prey of wicked inflation. I t must be held in check.

We must also create more incentive for more saving, to have more capital available for expansion. We must have it because we in our growing country have a million new people every year looking for new jobs . ' Unless someone can invest from ten to twenty thousand dollars a piece for them, they cannot get a job in which they can earn the kind of wages now being paid in America—wages 12 percent or more above those paid in 1952. Such wages can only be paid on the basis of high productivity, the kind of productivity t ha t comes only from skilled workers using highly productive machines and power. Those machines and t ha t power cost money. We can only have the plants, the machinery, the power, the t ransportation, and all the rest t ha t goes to make up our modern industrial and farm life by-saving and investing. Inflation kills the goose t ha t lays t ha t golden egg.

Without savings and investmerits yoii cannot get high productivity. ' . Without high productivi ty you cannot have high wages. Without high wages you cannot have the s tandard of living we all want . Inflation stops the whole process. T h a t is soniething we all need to understand. The best known way to help control it is a flexible price for money, because a flexible price for money is a governor t h a t

438363—58 16




operates to hold down the cost of living and make prosperity last, in peace and in freedom.

There can be some differences of opinion as to t iming and the degree with which this process of using the price of money as our economic regulator takes place. But the process is a sound, right step in the direction of sound money; a sound economy; and continuing to have the people of this country working a t more and bet ter jobs a t higher pay and with ever higher s tandards of living for all the people.

Now, I am not here this noon to make a part isan speech. But this all leads me to some vital conclusions about t rue prosperity. There are two roads we can travel.

The past performance, the platform and the campaign speeches of the opposition par ty show clearly what they propose. They show one road.

They propose cutt ing taxes regardless of the amount of the Government 's income. At the same t ime they propose new Government spending programs costing many additional billions of dollars. This is the policy of deliberate inflation and m u s t result in a re turn to a budget unbalanced by several billion dollars with all of the inflationary pressures t h a t would create.

They profess concern about inflation. At the same t ime they a t tack all the things which are our best defense against inflation.

They present a glaring contradiction. They cannot be for the principle of sound money and all t ha t it means to continuing prosperity while they are against the things which make sound money possible.

The record of their past and their promises for the future are filled with concessions to the easy way which will destroy continuing prosperity.

The program of the Eisenhower Adniinistration is exactly opposite. I am proud t o pu t t ha t record before you. I t shows the other road.

The evidence of ourpreseritihighvprosperity is-abundant wherever ^we turn . We have record high employment—more than 66 million people working a t

good jobs. We have record high wages. We have production of goods and services exceeding all previous records. And we have this high prosperity—in peace—with bu t little change in the cost

of living during the past four years. The money of our people during this administ ra t ion has stayed sound, because our Government has been doing the things we said we would do in fiscal and monetary policy to st imulate confidence and incent ive; to keep money sound.

And what of our present promises? We propose to continue those things which have worked so well in the recent past .

We propose to continue to spend only so much as is required for security and necessary services to the public.

We propose to keep our budget in balance. We propose to cut taxes—not out of borrowed money which is inflationary and

only a means of passing our debts on to our children—but whenever our budget surplus permits, when we can look ahead and see a Government surplus of income over spending.large enpugh to pay for ,a. t axcwt which can^be sprjead^ fairly among all our people.

T h e record shows t h a t the policies we-have followed for nearly four years have been successful. We propose to continue them for the good of every American— to have t rue prosperity with peace and with freedom.

E X H I B I T 32.—Statement by Secretary of the Treasury Humphrey, January 16, 1957, in support of the Pres iden t ' s Budget Message for the fiscal year 1958

In support of the President 's Budget Message for the flscal year 1958, which has just been presented to the Congress, there are several recommendations which I want particularly to emphasize.

The President has often said t h a t the basic fiscal problem confronting this Government is how to nieet the necessary costs of an adequate defense and other governmental activities and , . a t the same time, furnish the incentive necessary-to", athriyingy^^growirigj' krid.;r^^spri^^ Failure in either direction could well mean the gradual loss of our freedom and of our way of hfe. , During the past few years the greatest strides in history have been taken in the development of modern lethal weapons which can literally destroy great cities .and whole areas of population. The methods are completely new. They are



EXHIBITS 2 2 7

extremely costly. They are shared to some degree by two great powers with wholly different ideologies.

In this s tate of affairs, we must remain both militarily and economically strong. To do so, the extremely high cost of the new weapons demands t ha t we be highly selective and quick to abandon the expense of obsolete methods and equipment.

No one can say exactly how much we can continue to spend for defense and all other governmental services without seriously weakening our economy. While military manpower and equipment protect our lives and our land, they make virtually no addition to the permanent wealth of t he Nat ion—to new plants and machinery, new mines, new farms, new hornes, or to new;; jobs for, peacetime living.

The billions of dollars spent annually by the Government for military equipment and manpower go into the spending stream but are not matched by an increase in the production of peacetime goods, so t ha t heavy pressure is pu t on the price of goods which all the people must buy. This imbalance makes it more difficult to keep the cost of living within bounds. Monetary measures alone may not be sufficient for this task unless the Federal Government makes reductions in its manpower and in its purchases which will help to increase the production of additional peacetime goods and so help to hold down prices. Moreover, the funds so released will then be available to build up the capital needed to help create the new jobs, to build the new schools, and the countless other improv-ments required in this growing country of ours.

Our reduction in Government expenditures three years ago made possible the greatest tax cut in history, and stimulated the surge of national confidence which has created the prosperity of the past two years, the greatest we have ever known.

These reductions in Government spending also helped to give greater stability to the cost of living than we have.ever had in a pe.rio-d. of ,auch.^p.rosperity. The -cost'of living has recently moved up somewhat in spite of monetary measures to restrain it. Governmental expenditures and the number of Government employees are now increasing. This trend should promptly be stopped.

This administrat ion has a record of gratifying achievements in economical and efficient management of the Federal Government. The civilian working force of the Government has been reduced by over 234,000 persons during the past four years; the accounting and management procedures of Government have been vastly improved; over 400 Federal enterprises competing with business have been abolished; surplus.real estate worth $366,000,000 has been sold and turned back to local tax rolls. These are bu t a few specific illustrations of our progress. We all must work together to widen and enlarge these accomplishments.

Long hours of painstaking and conscientious work have gone into the preparation of the budget for the fiscal year 1958. All Depar tments of Government should be commended for the efforts they have made.

The President in his s tate pf the Union message has just said: "Through the next 4 years, I shall continue to insist t ha t the executive depart

ments and agencies of Government search out. additional ways- to save money and manpower. I urge t h a t the. Congress .be equally watchful 4nvf:this mattier."

Tp accprnplish these esseritiail 'objectives'we'shbuld now all go to work, not -simply to keep within the limits of this budget,^but to make actual and^^substantial reductioris through improved efficiency of our operations during the period of the next 18 months which this budget covers. To make this possible, every depar tment of Government must with vigor and determination modernize and streamline their services. The management of every service must be conducted with the possibilities of economy always in mind.

The President has said t ha t the Federal Government alone cannot successfully combat inflation without the earnest cooperation of all individuals and groups of our citizens. As emphasized in the State of the Uniori Message, business leaders and labor leaders, through their wage and price policies, must make their full, constructive contribution. All other groups must also contribute to the common effort. \

Firs t : We must seek the full cooperation of the public generally in limiting its demands,upon the Federal Government for only essential Federal.functions,-especially a t this time.when t.he eQpn.p5i>| mls. operating _at such a high levSl:^ Reqriests should be avoided' for-services or assistance whieh^ can be supplied by Sta tes or local communities or by the citizens themselves.

Second: We must request the support of t h e Corigress t o restrict the appropriation of public money to amounts within those recommended in the Budget which may be required to carry out the necessary Federal functions.



228 195 7 REPORT OF THE.. SECRETARY OF THE TREASURY

Third: We rnust require every depar tment and agency of the Governmerit to take vigorous measures, without harm to either security or service" to the'public^ to see tha t actual expenditures are kept well within the present budgeted figures "between now and the end of the next fiscal year and, as the President has said, "search p u t additional ways to save money and manpower."

Four th : We must plan for the 1959 budget, giving urgent a t tent ion to niaking further reductions both in Government employment and in expenditures where these savings will not lessen our security or the quality of the necessary services rendered to the public.

If this program is adopted and resolutely followed, we can, a year hence, give "consideration riot only to some'further payment on the public debt but also. to further tax reductions.. This, of course, must be conditioned upon continuation "of our present prosperity. Jus t when and how a tax reduction should be made can "be determined only when it is known how well these conditions have been fulfilled. I n any event, any such tax cuts must provide relief so tha t every individual ;taxpayer may have some benefit. • In the meantime, and until this is accomplished, .we must cpritinue to oppose any revision of the tax laws which results in any substantial" loss of Government incpme.

This program will provide more effective control of our spending. I t will become a desirable'restraint on in.flationar57^ pressures through release to the private economy of added manpower and money which, in turn, can open the way to lower taxes, with a sharper spur to incentive and greater opportunity, and production, and more and better jobs.

This is a program of genuine promise. I believe we must push it vigorously and a t once.

E X H I B I T 33.—Extracts of remarks by Secretary o f the Treasury Humphrey, April 18, 1957, before the National Industrial Conference Board, New York, N. Y.

The President 's letter, of this morning pu ts into propier perspective the problems about the budget which have been the subject of discussion since the budget was sent to the Congress in January . .

At t ha t t ime the. President requested a further painstaking review of the budget by the Bureau of the Budget and by all the depar tments and agencies of Goverur ment . This has now been prepared and discloses the feasibility of postponing certain appropriation requests which can be made without serious damage to the program. . . . .

.. The President, however, s ta ted t ha t actual spending in the coming fiscal year cannot be cut by multibillion dollar, amounts without danger to the national safety or interest, or the modification of sonie of the existing programs now authorized or required by law. . I urge every citizen to earnestly consider and support the President 's direct

and simple analysis of the principles involved in our budget problems. The President 's position not only guards the Nation against ill-considered or

dangerous slashing of the budget, bu t it also points the way to well-considered •steps toward holding future .^FederaL spending down. Controlling the. upward march of total Government spending is of greatest importance to us all. '"• There is nothing new about this approach or the principles t ha t guide it. They are the same principles tha t have guided this administration for the past four years . We have been constantly vigilant to continually make every effort to live within our means and t o get a dollar's worth for every dollar t ha t we spend.

We have continually striven to avoid waste and extravagance and to adequately balance t h e necessary costs of our national safety with the equally necessary maintenance of a strong and vigorous economy. We have sought to stabilize the costs of living and foster more and better jobs, to protect the Government 's , as well as the people's, high income. ^

I t is perseverance in this continuing effort t ha t has brought us now to the prospect of three balanced budgets in succession for the first t ime in 25 years. But we have also been ever mindful of our position of leadership in the "world and the obligations we must necessarily bear in t h a t regard to protect our national security. ' -• - • > . . •

The everlasting •search for possible reductions and the drive to make them real will necessarily continue in the future as it has in the past. With the help of the Congress^ and the public, and the persisting efforts of the administration, progress



• • -'••''-• -- - • "EXHIBITS" •' • - - ^ - 229^

toward a proper balancing of our fiscal affairs and full performance of our national: obligations will continue.

The proven principles set forth in the President's letter will serye both our national security and the people's best interest. They deserve the full support' of every American.

EXHIBIT 34.—Statement by Secretary of the Treasury Humphrey, June 14, 1957, before the Subcommittee on Fiscal Policy of the Joint Economic Committee

I appreciate this opportunity to appear before you on the subject of current budgetary and fiscal policy developments, a subject on which you have already, heard from numerous witnesses.

Before responding to questions I want to repeat my conviction that although present tax rates are too high and the present heavy tax burden will, in the long run, seriously hamper necessary economic growth, no general tax reduction should be considered at the present time. The most effective tax cut that can be made, to promote healthy economic development is a reduction which will bring benefit to all taxpayers—when our fiscal situation permits. By this, I mean when we can see ahead a sufficient surplus of income over outgo to pay for such a tax re-. duction. We should and will keep working vigorously for the day in the not too. distant future when we can see such a surplus. Such a surplus does not exist: at the present time.

In this connection we must keep a close watch of our budget position and make certain that Government spending is conducted as efficiently as is humanly pos-. sible. There is nothing new in this goal. We must continue to follow the principles that have guided this administration for the past four years. We must make every effort to live within our means and to get a dollar's worth for every dollar that we spend.

In watching our budget we must constantly guard against ill-considered, or, dangerous, or so-called meat-axe slashing of the budget.

As the President said in his April 18 letter to the Speaker of the House of Representatives, actual spending in the coming fiscal year cannot be cut by multi-billion dollar amounts without danger to the national safety or interest or the modificationof some ofthe existing programs heretofore authorized by the Congress. It is not the size of any particular budget which is our paramount concern. It is control of the upward march of total Government spending which is of greatest importance to all of us on a long-run basis.

The biggest budget problem, as I see it, is one of seeking out long-term savings. The problem of how much and for what we should spend in the fiscal year 1959, which will not end until two years from now, is already upon us. What we must; continue to do vigilantly is to keep up not only the everlasting search for possible' reductions but the drive to make them real. We must do this while being ever mindful of our position of leadership in the world and the obligations which we must necessarily bear in that regard to protect our national security.

We must balance the necessary costs of our national responsibilities with the equally necessary maintenance of a strong and vigorous economy.

The administration's fiscal record is a good one. The budget in effect when we took office in 1953 produced a $9.4 billion deficit, and the budget proposed by the prior administration for fiscal year 1954 called for a $9.9 billion deficit. Our administration, with the help of the Congress, cut spending, reducing the projected deficit for 1954 by two-thirds, or to a final minus figure of $3.1 billion.

But for the largest tax cut in history (a $7.4 billion cut in 1954) the budget would have been balanced in 1955. A balanced budget was delayed for one year because it was then apparent that the savings we then had in prospect would be sufficient before the end of the next year not only to cover the amount of the tax cut but to give us a balanced budget at the same time.

By fiscal 1956 we had eliminated deficits and had a balanced budget with a surplus of $1.6 billion.- We will have a surplus in the fiscal year ending this nionth and the budget proposed for.fiscal 1958 also is balanced. This means that we have in prospect a balanced budget for three consecutive years for the first time in more than 25 years.

Federal spending was reduced from the rate of $74.3 billion in the inherited budget of 1953 to $67.8 billion in 1954 and $64.6 billion in 1955. . Spending moved up.to $66.5 billion in 1956. to an estimated $68.9 billion in the January budget




for the present fiscal year, and to a proposed $71.8 billion for 1958. Even with the recent increases the budget for the current fiscal year is $5.4 billion below the budget we inherited in 1953 and is 16 percent of our gross national product as compared with 21 percent taken by Federal spending in 1953.

If we are successful in properly controlling the size and spending of Government, we can look forward to a continuing period of high prosperity for our country. A major ingredient in this high prosperity is the confidence of the American people—confidence in themselves, in each other and, of fundamental importance, confidence in their Government.

The greatest hope for major reductions in Government spending lies in a bet ter world situation. Some day the nations of the world must arrive a t some better and insured form of understanding which will make it possible to reduce the large amounts of money and energy and resources now going into making things for killing. I confidently beheve t ha t such a better day will come.

The relationship between monetary and credit restraint and our present high prosperity is worthy of brief comment.

One thing t h a t can destroy not only our present prosperity bu t even jeopardize our way of life is runaway inflation.

The record of this administration in helping control inflation has been good. The value of the dollar, which dropped from 100 to 52 cents between 1939 and January 1953, has changed only 2){ cents in the past four and one-half years, compared with a tota l drop of almost 48 cents in the thir teen years prior to this administration.

The credit policy of the Federal Reserve System is an impor tant factor in sustaining the purchasing power of the dollar in this t ime of very high use of and demand for both labor and materials. The alternative of easy money would mean t h a t there would be more dollars bidding for the available supply of labor and materials. This could only result in sharp increases in the cost of goods. The dollar would buy less.

Mounting increases in the cost of living would bring cruel hardship to millions of our citizens least able to protect themselves. There would be less saving which is the source of investment in plants and equipment which make the ever-increasing jobs t ha t we must, have for our growing population. Without increased savings—without the confidence t ha t money saved would retain its value—we would have fewer of these new jobs. Over a period of time, growing unemployment would result.

I t is essential t h a t the inflationary pressures arising from the high prosperity t ha t we have enjoyed for the past many months be controlled to the greatest possible extent. Restraints on credit involving some increases in the cost of money and the maintenance of taxes a t the present levels, a t least until such t ime as we have a substantial excess of income over expenditures, are important factors which will assist in restraining a substantial increase in the cost of living.

Thank you for the opportuni ty to present these observations to your committee.

E X H I B I T 35.—Statement by Secretary of the Treasury Humphrey, June 18, 1957, before the Senate Finance Committee Hearings on the Financial Condition of the United States

I am very glad indeed to have this opportunity to be here to appear before this committee just before I leave the Government service, to try to be as helpful as I can in discussing with you the serious problems that you have outlined all of which I recognize and whicb I believe, as you bave suggested, are subjects of the most serious import to our country, and deserve the most serious thought and consideration of this committee.

Broadly speaking, your study relates to the financial condition of the United States, t n order to assist you in this inquu*y, it seems appropriate that I provide a statement as to the problems we have faced, the goals we have set, and the record of our accomplishments in the past 4 years.

This is a record of a prospering America with new high levels of employment, rising income, and increasing purchasing power. I t is



EXHIBITS 231

a record of more and better jobs, more homes, more cars, more leisure, and more recreation. I t is a record of unequaled prosperity with both the blessings and the problems of such a period.

Last year an average of 65 million of our people were gainfully employed, an increase of 3,700,000 in only 4 years. During the same 4 3^ears, unemployment has averaged only 3.8 percent of the civilian labor force compared to 4.1 percent during 1949 through 1952, and 15 percent from 1937 until the beginning of World War II .

The present low level of unemployment has been achieved although the civilian labor force has increased from 63 million in 1952 to 68 million today. For the first 5 months of tbis year, unemployment has averaged about 3.7 percent.

The record of the past 4 years is also a record of rising levels of living, widely shared. During this period, average annual family incom.e, after Federal incom.e taxes, has increased from less than $4,600 to an estimated $5,200, an increase of about 12 percent, even after eliminating the effect of price changes.

In 1956, the average family purchased 12 percent more goods and services, in real terms, than in 1952.

Almost 5 million families have moved into new homes since 1952. Almost 30 million families own their own homes today, an increase of 13 percent in only 4 years.

The number of homes with electric refrigerators has increased from 38 million to 45^ million, accounting for 96 percent of all wired hom.es. In only 4 years, the number of homes with food freezers has increased from 5 million to 8^ m.illion; the number with clothes dryers (either electric or gas) from Iji million to 5K million, and the number with television sets from 21 million to 38}^ million. The number of families owning automobiles has increased from 31 million to 37 million.

This growing prosperity has extended to nearly all segments of our society except the farmer. The postwar adjustment in farm income has only recently been reversed, with a small increase last year for the first time in several years.

Farm income per worker last year was $1,862, up $151 from 1955. Farm prices have been rising moderately in the last few months, and on May 15, were up 3 points above the level of a year earlier.

The objective of this administration is to enable our farm families soon to share more fully in the record prosperity which characterizes the rest of the economy.

The record of the past 4 years is one of great enhancement in personal financia] security. The number of life-insurance policies increased from 219 million 4 years ago to an estimated 265 million in 1956, an increase of 21 percent, and the number of persons covered by hospital insurance increased from 91 miUion to 112 million, or 23 percent.

Time deposits in banks and share accounts in savings and loan associations increased from $79 billion to about $112 billion, or 41 percent, and the estimated number of shareholders in American industry increased from 6K million to more than 8K million people.

The record of the past 4 years is also one of increased leisure. There has been a 19 percent increase in the amount of time Americans took for their vacations—85 percent with pay.



232' 195 7 REPORT OF THE SECRETARY OF THE TREASURY

About 55 million of our people visited national park areas last year, .an increase of 30 percent in the last 4 years, and approximately 60 million are anticipated for this year.

Now, this great increase in the income, the living standard, the recreation, and security of our people has been achieved a t a time when there has been a substantial contraction in defense expenditures. ' Our free economy has again demonstrated its ability to absorb the

reductions in Government expenditures not by contracting, but by -expanding employment and the living standards of our people.

The record of the past 4 years has been one of unequaled investment. The Nation has devoted a vast amount of its resources to improving .-and enlarging its productive capacity.

Businesses have spent an alltime high of $152 billion on new plant and equipment, compared with $123 billion in the preceding 4 ^''ears. 'This record volume of capital outlays has provided a dramatic answer to those who would contend that our economy would run down without the artificial stimulus of chronic deficit spending and the bacldog of private demands deferred by the war. i

Outlays to make better provision for needed public facilities have also been at very high levels in recent years. Total public construction in 1956 was $13.4 billion, 23 percent above 1952 levels, and educational construction outlays during this same period increased 56 percent, from $1.6 billion in 1952 to $2.5 billion in 1956.

The increased confidence of our people and of our business concerns, that they will be free to determine their own course—free from unnecessary regulation or harassment—-greater confidence in the -stability of our Government and the wider distribution of purchasing power, have encouraged our consumers, our homeowners, our business •concerns, and our communities, to plan for the future, and to buy the ^automobile, or the home, to build the factory or the schoolhouse, that :a brighter future justifies.

Thus the record of the past 4 prosperous years has been characterized by the many blessings of widely shared prosperity—but it has also been "beset by one of the problems of prosperity.

The tremendous outla^^s to expand our public and private facilities .have required financing, and this has inevitably given rise to a heavy •demand for borrowings. With growing confidence on the part of lenders as well as borrowers, there has been a rapid increase in the volume of both long- and short-term credit.

Almost all of this increase has come from savings and not from an increase of money supply in the banks. Nevertheless, there has been, :and is, the ever-present threat of rising prices.

The monetary policies of the Federal Reserve and the fiscal policies •of this administration have been designed to encourage the growth of the supply of goods (as the foregoing figures indicate), but not to •encourage excessive credit expansion.

The cost of living has risen an average of only six-tenths of 1 percent per year for the past 4 years, as compared with an average increase :at the rate of about 7 percent per year for the preceding 13 years.

In short, the rise in prices during this administration has been at •only one-tenth the average annual rate of the preceding 13 years. Even this rise is more than I like to see, but it is a record of far better price stability than in many years.



. ...... . . . EXHIBITS . . . - 2 3 3

Nevertheless, prices have been rising a little faster for the past 12 months, and the threat of renewed inflation, which had been so severe from 1946 to 1952, is perhaps our most serious domestic economic problem.

The greater increase in demand for credit than in the supply thereof has inevitably brought about higher interest rates.

The record of the past 4 years is one of sensitive and flexible adjustments to the release of controls, and to the return to free markets, an accommodation of the post-Korea curtailment in military spending,, and of a free market^s emphasis first on housing, then automobiles, and now on new plant construction with continuous improvement iit the total economy.

I t is a record of encouraging savings and investment in increa^sed productive capacity, of encouraging an adequate volume of credit, but of not encouraging that excess of credit which, in a period of high employment, could only penalize our people by bidding up prices without increasing production.

I t is essentially a record of flexible and quicldy adjusting fiscal and monetary policy designed to continue the sound improvement iii levels of living, widely shared, which is the wonder and ambition of all the rest of the world.

I t is a most significant record, important to us all, because the-monetary activities of the Federal Reserve System and the fiscal activities of the Treasur}^ affect the wages, the standard of living, and the savings—indeed the entire financial well-being—of each one of our citizens.

I t is above all a record of the renewal of widespread confidence of the people in the preservation of their individual freedom of choice, in their jobs, in their right to the enjoyment of the fruits of their own initiative and endeavor, and in the security of their savings. I t is a record of renewed confidence in the security of our country.

Feeling as I do that there should be the widest possible public interest in this subject, and feeling such a deep pride in what this administration has done and is doing, I welcome this opportunity to speak to your committee and, through you, to the more than 171 million Americans whom the Congress represents.

Let me review the major policies of, and the fiscal actions taken by^ this administration since we took office in January 1953.

In discussing fiscal, monetary, and credit policies, as I am doing today, I do not want to give the impression that they alone can prevent infiation and assure economic growth. They are, however, a subject of the present inquiry and I shall concentrate my attention on them.

Certainly if they are not sound, there is little chance for sound money and sound long-term economic growth.

As a preface to our present policies, let us review the situation as i t existed when we came into office. We came in in 1953.

The direction in which we had been going was as follows: You will recall the tremendous changes that had occurred in the=

period before 1953. In 10 of the 13 fiscal years from 1939 through 1952, the Government operated at a deficit, as it had in the preceding-9 years.



234 195 7 REPORT OF THE SECRETARY OF THE TREASURY •

Largely as a result of World War II, the Federal debt increased in only 13 years from $47.5 billion at the end of 1939, to $267.5 billion .at the end of 1952. Those are figures that to me are simply astounding. I t is attributable to a war period, but a debt going from $47.5 billion to $267.5 billion, in only 13 years.

The interest charge on this indebtedness had grown from an annua) rate of $1}^ billion per year in December of 1939, to $6)4 billion in December of 1952, an average increase in interest cost of almost $400 million per year.

In 13 years, annual Federal taxes had increased from a little less than $5 billion in 1939, to almost $65 billion in 1952. This amounted to an increase in the average tax burden of each American citizen from $36 in 1939, to $413 in 1952.

The conditions which we faced when we took office in 1953: When this administration came to office in January of 1953, we

faced: 1. A Federal debt equal to 89 percent of our annual national income.

2. Budget expenditures of $74.3 billion for fiscal 1953, and proposed budget expenditures, a prepared and then existing budget, of $77.9 billion for 1954.

3. A budget deficit of $9.4 billion for 1953, and a planned deficit of $9.9 billion, almost $10 billion, for 1954.

4. A continuing spiral of inflation which had reduced the purchasing power of the dollar from 100 cents in 1939 to 77 cents by 1945, and down to 52 cents by 1952.

In appraising these conditions and the course to pursue, we were influenced by a recognition of the overpowering importance of preventing other devastating postwar inflation which, prior to 1953, the Government was attempting to control by inadequate means.

Now, what were our goals? Within less than a month of his taking office in 1953, President

Eisenhower, in his state of the Union message, called attention to the ^inescapable need for economic health and strength," and he stated:

Our immediate task is to chart a fiscal and economic policy that can— First, reduce the planned deficits and then balance the budget, which means,

.among other things, reducing Federal expenditures to the safe minimum; Second, meet the huge costs of our defense; Third, properly handle the burden of our inheritance of debt and obligations; Fourth, check the menace of inflation; Fifth, work toward the earliest possible reduction of the tax burden; Sixth, make constructive plans to encourage the initiative of our citizens.

Let us review these goals and our efforts, our difficulties, and our accomplishments to date, in following them.

The first objective was to reduce the planned deficits and then balance the budget.

To what extent have we accomplished this goal? 1. We first reduced and then entkely eliminated planned deficits. The budget in effect when we took office in 1953 produced a $9.4

billion deficit, and the budget proposed for the fiscal year 1954 called for a $9.9 billion deficit. Our administration immediately went to work, with the help of the Congress, to reduce the planned deficit for



EXHIBITS 235

fiscal 1954, and indeed the final deficit ($3.1 billion) was only one-third of that anticipated by the prior administration.

Without the largest tax cut in our Nation's history, the budget would have been balanced in 1955. However, in view of the transition resulting from the reduction in military spending, and anticipated further reductions in spending which in fact materialized concurrently with our action, we were able to pass some of the savings from our reduced expenditures back to the people, even though this meant another year's delay in achieving a balanced budget. Fiscal 1955 was, however, the last year of deficits.

2. We have balanced the budget. By fiscal 1956, we had entirety eliminated deficits, balanced the

budget, and completed the year with a surplus of $1.6 billion. The 1957 budget will result in another surplus, and the budget pro

posed b}^ the President for 1958 provides for a third successive surplus for the first time in 25 years.

3. We have reduced Federal expenditures. Federal expenditures were reduced from $74.3 billion in the in

herited budget of 1953, to $67.8 billion in 1954, and down to $64.6 billion in 1955. As a result of additional programs authorized by the Congress, substantial pay increases, and the need for increasingly expensive military equipment, expenditures increased slightly in the past year to $66.5 billion, with further increases anticipated to $68.9 billion for 1957 and $71.8 billion for 1958.

The 1957 budget is nearly $5.5 billion below the budget we inherited in 1953, and is but 16 percent of our current gross national product now as compared to 21 percent in 1953.

The second objective was to meet the huge costs of our defense. Major national security expenditures have been reduced from $50.4

billion in 1953, to $46.9 billion in 1954, to an estimated $41.0 billion in 1957, with a proposed $43.3 billion in 1958.

This reduction has been achieved despite the fact that, though not at war, we are still engaged in a titanic contest which requires not only the expense of preparedness, but extremely expensive research and development.

Such research is necessary to assure preparedness for tomorrow, and the days beyond, in the terrible race for primacy in the most complete transition from old to new weapons in the history of the world.

While our fantastically costly weapons of tomorrow are still in the expensive research and development stage, we must continue to maintain our maximum strength in the weapons of today. This means that during the transition period we must support increased costs of two systems of defense.

We have met these huge costs with a balanced budget and with a reduced tax burden. We have provided the necessary large amounts of expensive and revolutionarily new equipment needed for our national safety, greatly expanded our productive facilities, and at the same time enabled far more capital and labor to be directed toward building more cars, more houses, more of all of the good things our people need and want.



236 1957 REPORT OF THE - SECRETARY OF THE TREASURY

Our third objective was to properly handle the burden of our inheritance of debt and obligations.

As you have invited the Under Secretary, Mr. Burgess, to meet with you, I have asked him to report to you in detail on our handling*^ of the debt.

In preface to his remarks, I might say that the management of $275 billion of debt is not a simple assignment under any circumstances. The Federal Reserve's proper withdrawal from the pegging of the Government bond market, which withdrawal was the most effective single action taken in the battle against inflation, has made it more difl&cult to manage debt operations than it was when a fixed rate was assured.

Had such a policy continued, however, the resulting inflation would eventually have produced even greater complications for debt management than we have experienced under a system whereby interest rates are determined by the forces of the market.

In January 1953, when this administration took office, the average rate on all Government interest-bearing issues outstanding was 2.35 percent. The total net computed interest cost at an annual rate a t that time was $6.2 billion.

Four years later the average rate on all Government issues outstanding was 2.67 percent, or an increase of about three-tenths of 1 percent. The total net annual computed interest cost, as of December 31, 1956, was $7.3 billion, of which $0.9 billion is due to increased interest rates, and $0.2 billion is due to an increase in the debt incurred to pay obligations inherited from previous commitments.

This increase in interest rates results from the free market influences of supply and demand in a period of unparalleled prosperity. I t is a continuation of a rise that has been going on for the past 10 years under the growing pressure of borrowing demands.

In this little table the computed interest rate is shown:

Computed interest rate on the public debt December— Percent

1946 2.06 1952 2.35 1956 2.67

May 1957 2.75

So that the rate has increased over the 10-year period from 2.06 to 2.75, or a little less than three-fourths of 1 percent.

For the entire period from December 1946 through May 1957, there was an increase of sixty-nine one-hundredths of 1 percent in the computed interest rate on the public debt. Of that increase, twent37^-nine one-hundredths occurred prior to this administration, and forty one-hundredths occurred during this administration, right up to now.

During the past 4 years there has been no increase in public debt interest cost in relation to national income. The interest cost was 2.1 percent of national income in December 1952, and was exactly the same percentage in December 1956, for the increase in interest cost has only kept pace with the increase in national income.

Furthermore, the $1 billion increase in interest paid reflects increased earnings received by the investors who own the securities.

Now, who are those investors?



EXHIBITS ' • 237

Of the $7 billion of interest paid on the public debt during calendar year 1956, $1.4 billion represented the payment of interest to social-security funds and other Government inyestment accounts.

About $0.6 billion of public debt interest was received by the Federal Reserve Banks, and 90 percent of that comes back to the Treasury as surplus earnings.

Commercial banks received approximately $1.4 billion of such interest last year. About $0.6 billion went to other financial institutions, mostly insurance companies and savings banks; about $0.5 billion to •corporations, about $0.4 billion to State and local governments, and about $0.4 billion to nonprofit institutions, foreign accounts, and so forth.

The remainder, of about $1.8 billion, the largest single segment of the interest on the public debt, went to individuals, either in the form of cash payments or accumulated interest to the 40 million holders of savings bonds. Millions of Americans are benefiting from these higher interest rates.

I am asking Mr. Burgess to review other phases of our debt management program. ' The fourth objective, check the menace of inflation.

1. The problem At the risk of oversimplification, let me condense the story of infla

tion to about a dozen lines. Almost all of our employable labor force is employed—and at higher

wages than they have ever received before. Our people are buying virtually all-that they are producing, but they want to buy more, both more consumer goods and more productive facilities.

Being confident of the future, they desire to borrow to buy more. The lenders are lending more than ever before, but still not as much as the public would like. ' However, with most resources fully utilized, additional bank credit would not put any more people to work—it would merely provide additional demand in excess of the supply of both labor and goods. Such a demand in excess of supply would cause a rise in prices if it were fed by excessive bank credit expansion.

A rise in prices hurts every housewife, everyone on a pension, every person with a fixed or lagging income, every saver. I t robs labor of much of its gain in wages. This rise in prices has been a principal cause of the farmers' difficulties, because while income per farm remained fairly static during the last 10 years, the farmer has had to. pay higher prices. As a consequence, he has been particularly hurt by the inflation which, to a lesser extent, injures every single..one of us.

There are two ways to check this rise in prices: {a) increase the supply of goods, and (6) slow the expansion-in the number of dollars bidding for the gppds.

We have utilized both methods. The administration in many ways has encouraged an increase in productive facilities which is the only way to increase the supply of goods. The Federal Reserve and the administration have taken action to restrain a too rapid growth in the number of borrowed dollars available to bid up the price of the limited'supply-of goods-and-ser-vicesv- — -




2. The respective roles of the Federal Reserve and the Treasury . Now, what are the respective roles of the Federal Reserve and the Treasury?

I would like to^take amonaentto identify the respective-rdles played, on the one hand by the Treasury, which influences fiscal policy, through its recommendations on tax and budget policy as well as its management of the public debt, and on the other hand by the Federal Reserve,, which is responsible for monetary policy, through its influence on the cost and availability of money and credit.

A mere statement of the respective functions demonstrates the major ^ role of the Federal Reserve'in the'effort to stop inflation. TheFederaf Reserve has the authority and the tools to take monetary and credit action. We do not.

The Treasury cannot determine the level of interest rates, but must pay the rates determined by market forces. The Federal Reserve can influence the levels of market rates, although there are deflnite limits to its power to maintain any fixed level of rates, as is shown by history..

I do not point this out to shift any responsibility from the Treasury. On the contrary, we approve wholeheartedly the course which the Federal Reserve has followed, and have admiration for the courage and decisiveness with which the Board has acted.

(a) Through 1952 As you will recall, vthrQughout the decade prior tO'195T,. the; Federal

Reserve followed a policy of supporting the market for United States Government securities at or above par. This was done to enable the Government to sell, at a low interest cost, the great volume of securities which was necessary to finance World War II .

I t accomplished that purpose, but it created cruel inflationary conditions which required the sale of more bonds and increased debt to pay the resulting higher costs of the war.

In artificially holding interest rates at low levels, the Federal Reserve made credit ctieap, not only for the Government, but for all borrowers. By maintaining a market which enabled the banks to liquidate their Government bonds at any time at par or better, it encouraged a continuance of the war-born expansion of excessive bank credit.

This ch-eapvrand^plentiful credit was*an irnport^ant cause of the wartime inflation which, despite wartime restrictiohs of direct controls, and rationing, robbed the dollar of 23 cents of its purchasing power between 1939 and 1945.

Then follows a table which shows that the dollar was at 100 cents in 1939, and was 77 cents in 1945.

Calendar year average

1939: 1 9 # . i 9« . J . _ ; 1942 1 9 4 3 . . . . . 1944. . . :_ 1945 . . .

Consumer price index

(1947-49=100)

59.4 59.9 62.9 69.7 74.0 75.2 76.9

Purchas ing power of dollar

(1939=100)

looro" 99.2' 94.4 85.2' 80.3: 79. 0' 77.2-



EXHIBITS 239

At the end of World War I I there was an acute shortage of goods. There was, however, a pent-up demand, a demand made effective by both a large amount of liquid assets accumulated during the war and a rapid increase in private credit.

The war-born policy of the Federal Reserve, mistakenly continued into peacetime under Treasury insistence, enabled the supply of credit to rise too rapidly, with the result that this credit-backed demand for goods exceeded the supply of goods.

While interest rates were held at artificially low levels, prices continued their serious rise, at an average annual rate, of over 7 percent from 1945 to 1951, arrd in tht)se'6 3^ars the *d()irar''l^ cents of its purchasing power.

Then follows, another table, following out the rest of the preceding, table, showing the period after the war.


1945 1 1946 1947 . 1948 1949 -1950 1951 . . _ .


(1947-49=100)

76.9 83.4 95.5

102.8 101.8 102.8 111.0

Purchas ing power of dollar

(1939=100)

77. 2-71.2 62.2-57. 8-58.3 57.8^ 53.5

The dollar at 77 cents in 1945 depreciated to only 53.5 cents in 1951. I t was becoming clear to increasing numbers of observers that the

unwise credit stimulus provided b}^ the Federal Reserve should be withdrawn. Such a withdrawal could be achieved only by pa3dng the lesser penalty of an increase in the interest rates to be paid.

I t was clear that if the Federal Reserve ceased purchasing Government securities at par, natural market forces, reflecting increasing demand for credit, would result in the higher interest rates which the Federal Reserve purchase policy had so far postponed.

During this postwar period the Federal Reserve made several modest moves toward freer short-term markets but was held back by the Tieasury. After a most thorough review of the relMive ad vantages and disadvantages of such a change, the Subcommittee on Monetary, Credit and Fiscal Policies, known as the Douglas subcommittee, concluded in 1950 that, and I quote from the Douglas committee report:

As a long-run matter , we favor interest rates as low as they can be wi thout inducing inflation, for low interest rates st imulate capital investment. But we believe t ha t the advantages of avoiding inflation are so great and tha t a restrictive monetary pplicy can contribute so much to this end tha t the freedom of theFederal Reserve to restrict credit and raise interest rates for general stabihzation purposes should be restored even if the cost should prove to be a significant increase in service charges on the Federal debt and a greater inconvenience to t h e Treasury in its sale of securities for new financing, .and refunding, purposes.

Partly as a result of that review and report, "the administration "then, in office aiid the FederaL Reserve, by an agreement referred to as'the ^'accord," changed the prior policy, and the Federal Reserve began to withdraw its support of the market for Government bonds im March of 1951.



240 195 7 REPORT' dF THE SECRETARY OF THE TREASURY

While this was a step in the right direction, it was not a complete step. On a number of occasions during 1951 and 1952, the Treasury still relied on Federal Reserve purchases to keep new issues from sinking in the market.

Let me pause in this chronology to remind you of the facts about that change in policy.

I t was put into effect by an independent agency, the Federal Reserve.

I t was urged by many of the best informed Members of Congress. I t occurred during the preceding administration—21 months before

this administration took office. This new policy of the Federal Reserve was not so much anti-

inflationary as it was a tempering of what formerly had been positively inflationary action. The Federal Reserve began to reduce the amount of credit it had been artificially creating. I t freed natural market forces.

As an incidental result of the reduction in the volume of artificial credit generated by the Federal Reserve, the supply of credit grew, somewhat more slowly than the demand for credit. As a consequence, interest rates began to rise, and the market prices of bonds went down.

Though the full force of this change in the Federal Reserve policy was not immediately effective, almost a quarter of the increase in the computed interest rate on the public debt (from 2.22 percent at the time of the Federal Reserve-Treasur.y accord in 1951, to 2.75 percent in May 1957) almost a quarter of that occurred in the 21 months prior to the time this administration took office.

As a result, banks and insurance companies, which had such large, blocks of Government securities, were more hesitant to sell them at a. 3- or 4-point loss in order to make a loan. This caused them to make fewer loans than they would have made had the earlier policy been continued.

Although by the accord of March 1951, the administration then in office had reluctantly agreed to the right of the Federal Reserve to take such monetary action, that administration itself continued to rely on direct controls on wages, prices, and rents.

In addition, after the short-lived budget surplus of 1951, increasing Government spending, and renewed deficits in 1952, largely as a result of the Korean conflict, encouraged a further depreciation in the dollar to 52.3 cents.

And then follows a table.


1951 : 1952 _ .-___ _. . _ ._


(1947-49 = 100)

111.0 113.5

Purchasmg power of dollar

(1939=100)

63.5 62.3

Inflation had been appreciabl}^ slowed, but if inflation was to be effectively checked, the Federal Reserve's new policy had to be supported more vigorously and supplemented, with parallel fiscal policies.



EXHIBITS 2 4 1

(b) Since 1952 In 1952, General Eisenhower campaigned for the Presidency in

part on the ground that further inflation must be prevented, and advocated, and I quote:

A Federal Reserve System exercising its functions in the money and credit system without pressure for political purposes from the Treasury or the White House.

i. We have conducted our affairs so as not to interfere with the Federal Reserve's monetary policies.

We have lived up to that promise that the President made. To do so, however, has subjected the Treasury to certain burdens, just as it has other borrowers. Not to do so would have created much more serious burdens for all of us.

Although new financing was less expensive and easier in 1954, it has again become more costly. With a very high percentage of bank and insurance company assets now in loans, these institutions are not clamoring for long-term—or even intermediate-term^—Government securities.

We must, therefore, at present, sell mostly shorter-term securities, which are attractive because of their high liquidity. I do not say this to complain, but to acknowledge an obvious fact.

We will meet these difficulties and solve them as we have in the past, continuing our flexible policy, postponing debt extension when, we must, achieving it whenever we can.

There is a strong demand for short maturities. Our bill auctions each week are always well oversubscribed. The Treasury faces no crisis. Our securities are the most highly regarded in the world.

But in a free market, we must compete for funds. That means the factors of supply and demand determine the rates we must pay. Rates may decline or they may go higher. I would be disappointed to see them go higher, but if that is the price we must pay to prevent growth of excessive credit and consequent inflation, it will well justify the price.

This administration, in addition to supporting the Federal Reserve's independence, has utilized its debt management and fiscal functions to help check inflation.

ii. Planned deficits have been eliminated. Federal deficits necessitate increased Federal borrowing. More

Federal borrowing, to the extent it comes from the banks, means the creation of additional bank credit. This tends to create more spendable dollars than there are goods to buy.

As your chairman. Senator B^ -rd, so clearly pointed out in his remarks to the Senate on August 13, 1954:

Deficit spending is perhaps the greatest single factor in the cheapening of the value of the money.

In ending deficits, we have eliminated this very inflationary pressure, iii. The debt is being reduced. We reduced the public debt in fiscal 1956 as a result of our budget

surplus of $1.6 billion. Another budget surplus is being applied to the

438363—58 17




debt this year, and we expect to do it again in 1958. Reduction of the public debt is one of the best ways to fight inflation.

iv. Government expenditures have been reduced. Government expenditures are inflationarj^, particulaii}^ when the

economy is at a high level of output and employment. Taxes divert to Government spending some funds which, in the hands of the tax-pa3^er, would have gone into savings.

Furthermore, some Government expenditures go into payrolls to produce goods and services (especially military equipment and military services) which neither contribute to the Nation's capital account nor become available for private consumption.

Yet this additional purchasing power competes for the existing supply of both goods and services.

By reducing Government expenditures, we have released more workers and materials directly to private industry where they could add further to the supply of goods and services needed to meet our heavy demands for plant and equipment, and greatly increase the supply of homes, cars, television sets, and other consumer products-necessary for our rising standard of living. Reduced Government expenditures have been an anti-inflationary influence.

V. We have reduced the floating debt. The amount of marketable public debt matuiing within a year,,

plus demand obligations (other than E and H savings bonds) in the hands of the public—securities which in many ways are close to cash—has been reduced by $25 billion from the high point m 1953.

vi. We have also shifted some of the debt away from the banks. Since increases in bank loans represent additional spendable money,,

they tend to be more inflationary than loans that grow out of a transfer of existing savings. As a consequence, one of the Treasury's long-range debt management objectives has been to reduce bank holdings, of Government securities to a reasonable minimum.

To this end we have, in the past 4 3^ears, reduced the amount of Government securities held by the banks by $4 billion. This has-been achieved in part by pa^dng off some securities and in part by designing the terms of new issues, such as tax anticipation bills and certificates, to be particularly attractive to nonbank investors.

vii. We have stimulated increased savings. Greater confidence in the future, higher rates of interest, and

increasing confidence in the stability of the dollar, have all encouraged our people to save more, both in dollars and in relation to disposable income.

As one means of encouraging savings and combating inflation, we have emphasized the continued sale of series E and H savings bonds.. The amount of these small-saver bonds outstanding has increased from $35.3 billion to $41.4 billion during the past 4 years.

Moving thus on all of these fronts, by ending deficits, b}^ reducing the debt, by reducing expenditures, by keeping down the bank-held debt, by reducing the floating debt, and by selling more E and H savings bonds, as well as b ^ working closely with the Federal Reserve., we have accomplished a tempering of inflationary pressures during these y.ears, with a decline in the purchasing power of the dollar of only eight-tenths of a cent in 4 years.



EXHIBITS 243

And then follows a table which shows that up to the end of the year 1956, the dollar went down from 51.9 to 51.1.


1953 ._.- . - . -1954 . . -1955 - -1956 - _ . .

Consumers' price index

(1947-49=100)

114.4 114.8 114.5 116.2

Purchasing power of

dollar (1939=100)

51.9 51.7 51.0 5L1

The past 4 years have been characterized by greater price stability than any other 4-year period since 1939. But inflation is not stopped. I t is onl}^ slowed down.

Indeed, there has been a disturbing renewal of pressures in the las t 12 months, dming which, the dollar has lost almost 2 cents in purchasing power.

And then follows a table which shows that in April of 1956, the dollar was 51.7, and in April of 1957, April just last past, was 49.8,, down almost 2 cents.

Month

195&—April -July - - - ----October '.

1957—January February . -March '. April

Consumers' price index

(1947-49=100)

114.9 117.0 117.7 118.2 118. 7 118.9 119.3

Purchasing power of

dollar (1939=100)

51.7 50.8. 50.5' 50.3 50; 0 50.0 49.8

This most recent decline in purchasing power is disturbing. I t reinforces our conviction that we must continue the vigorous pursuit of our present policies. We should certainly not abandon them. 3. The necessity for flexibility

While over the past 4 years it has been necessary to follow generally anti-inflationary fiscal and monetary policies, we have had changes hi the economy which have required us to moderate them on occasion;. and we may encounter other chcumstances which, may require some relaxation at some times in the future.

We approve the philosophy expressed in the Douglas subcommittee reppr t t h a t -

Timely flexibility toward easy credit at some times and credit restriction a t other times is a,n essential characteristic of a monetary policy that will promote economic stabihty rather than instability.

Our administration had been in office only a few months when the coincidence of the full effect of the Federal Reserve's new policy, and the curtailment of defense spending, temporarily changed the problem.

We were, at that time, more concerned with preventing a decline in employment and production than with a rise in prices. Taxes




were reduced, and the administration relaxed downpayment and maturity terms on FHA- and VA-guaranteed housing loans.

At the same time, Federal Reserve policy also eased, making funds more readily available. The decline was stopped and a sound economic expansion got underway with renewed public confidence in the courage of the administration and the flexibility of its policies.

By 1955, economic activity was again vigorous and the problem was one of inflationary pressures—which have continued—and easy bank credit expansion was no longer encouraged.

What are the available alternatives? Ji.. The available alternatives

In view of the breadth of the subject of your inquiry, it is appropriate that we consider what might have been some available alternatives to general monetary and credit policy.

Some of these alternatives are: (a) Direct controls prohibiting or limiting certain types of credit. (6) Compulsory saving. (c) Ph3^sical controls on prices and wages, plus, perhaps, rationing

and allocation of materials and labor. (d) Higher taxes and large governmental surpluses to be applied

on the bank-held debt. {e) Greater individual savings and voluntary effort at restraint. (/) A reversion to the pre-1951 policy of Federal Reserve purchase

of Government securities at or above par—and consequent encouragement of severe inflation.

The use of any of the first three alternatives in peacetime would have been uiequitable, impractical, and inconsistent with our traditions of freedom.

The fourth alternative would have required the imposition of additional taxes on top of our present heavy load, and would not have been acceptable.

The fifth, which the President emphasized in his state of the Union message just a few months ago—namely, voluntary eft'orts—can help immeasurably, but can be achieved only if other policies are effective.

Thus, as a practical matter, the real choice is between the anti-inflationary course which we have pursued, and a new round of inflation.

Those who, in a period such as this, urge an abandonment of our anti-inflationary policies, those who urge either deficit financing or a policy of artificially creating more spendable dollars are, whether unwittingly or by intention, inflationists.

No matter what their motives, their proposals for further credit expansion are proposals to further reduce the purchasing power of the dollar, to rob every housewife, every farmer, every pensioner, every wage earner, and every family with savings. Their arguments must be understood to urge just that.

There can be no doubt as to the wisdom of our choice in utilizing the tools of monetary and credit policy. As to the extent to which we used these tools, I can only say that I gain confidence from the fact that we are criticized with equal vigor by those who feel that credit



EXHIBITS 2 4 5

has been restricted too severely, and those who feel it has not been restricted severely enough.

Despite some recent tendency for prices to rise again, the administration can take considerable pride in what has been achieved to date in respect to this, the President's fourth goal.

Now, the fifth goal was to work toward the earliest possible reduction of the tax burden.

The Eisenhower administration and the Congress, working together, have already made possible the greatest single tax cut in history.

In 1954, in order that the people might benefit from the substantial reduction in Government expenditures, we brought about a tax cut that has provided them with annual savings of about $7.5 billion.

As the President pointed out in his letter of April 18, 1957, to the Speaker of the House, this tax cut has already saved our people almost $25 billion in taxes.

More than 60 percent of that reduction went to individuals. Every taxpayer benefited.

That was a creditable accomplishment by the Congress and the administration. Tax receipts are now at an alltime high as a result of our current prosperity; but, even so, Federal taxes account for a slightly smaller proportion of our national income than they did in 1953.

We intend to go further at the earliest justifiable opportunity, for the tax burden is still far too heavy. However, the possibility of a reduction hi taxes depends upon the degree of success of the administration and the Congress in keeping the budget position sound.

The sixth goal, to make constructive plans to encourage the initiative of our citizens.

A primary goal of this administration is a free and prosperous America. To encourage the initiative, energy, and saviags of our people, which are the only means to prosperity, our most important steps were our anti-inflationary actions which have increased public confidence in the security and stability of our economy.

In addition, we have taken other helpful action: 1. We relieved the public of the burden of controls. When this administration took office in 1953, the country was still

handicapped with controls over prices and wages, and the use of certain materials. We promptly terminated these controls.

2. We have reduced Government activities which compete with private business.

During the past 4 years, some 500 Federal enterprises competuig with business have been abolished. We have disposed of the Government-owned synthetic rubber producing facilities and the Government-owned tin smelter to private enterprise; and the Reconstruction Finance Corporation is now in the process of liquidation. Surplus real estate, worth $366 million, has been sold and turned back to local tax rolls.

3. We have created a more favorable climate for enterprise. (a) We have moved vigorously to prevent monopolies. The number of antitrust prosecutions.has been materially increased

and the number of convictions, guilty pleas, and consent decrees obtained in the past 4 years has been more than 40 percent higher than in the preceding 4 years.




The number of prosecutions under Section 7 of the Clayton Act, as amended in 1950, has increased from only 1 in the 2 years, 1951 and 1952, to 29 during this administration.

(b) We have encouraged small business. Upon the success of small business firms to prosper and grow depends

much of our production and our survival as a free competitive society. This administration has sought in many ways to aid smaller firms and to relieve them of burdensome taxes and requirements.

In the past 4 years, small business has benefited materially.from tax •law changes, the expiration of the excess profits tax law, the reduction in personal income tax rates in 1954, and the extensive revision of the Internal Revenue Code, Even more important to the smaller firms is the general prosperity of the past 4 years.

To aid small firms which are unable to obtain adequate credit from normal sources, President Eisenhower signed the Small Business Administration Act on July 30, 1953. That act created the Small Business Administration, and authorized a revolving fund of $275 million to provide needed loans to small business concerns.

Subsequently, the administration supported increases in the SBA funds to $375 million in 1956, and to $455 million in 1957. The .administration now has a bill pending to increase th's to $600 million, and to make the SBA a permanent organization.

Each year the SB.tS. has made a larger number of loans, with over $125 million made in the last 10 months, and currentl,y is making loans to about 60 percent of the applicants whose files have been reviewed.

(c) We have encouraged trade with other countries. This administration has effected measures which have aided the

increase in our total foreign trade in 1956 b}^ 22 percent (exports 25 percent) over 1952.

In addition, the Treasury, with the cooperation of your committee, has put into effect a number of customs simplification acts which have reduced the complexities attendant on the movement of goods into the United States. We have also provided greater certainty in our administration of the tariff laws.

(d) We have enciouraged initiative and activity. Throughout the past 4 3^ears this administration has continuously

attempted to encourage rather than discourage enterprise. As a result, our productivity and living standards have been rising steadily.

During the past 4 years, 500,000 new business corporations were formed in the United States. Of course, not all succeeded. A free economy is not a riskless economy. During that period, 44,000 enterprises, noncorporate as well as corporate, failed, but that is lower in relation to the number of new corporations formed than during the preceding 4 years—34,000 failures and 355,000 new incorporations.

(e) We have encouraged savings. The importance of savings as the anti-inflationary source of financing

is so great that I would like to make these points: i. There are many people who benefit from higher interest just as

there are many who find it an additional cost. You and I hear complaints today about the increased cost of mone}''.

W"e know it is nowhere as important as the increased cost of labor, but



EXHIBITS 2 4 7

we also know that higher labor cost is a 2-sided coin, it is a 2-way street. Someone pays more—but someone receives more.

Now, the same is true of interest. Although many of us owe mone}^ in one form or another, it is equally

true that many of us have savings in one form or another. As a result, we have a stake in protecting our principal against deterioration in the value of the dollar.

We have a further stake in a higher interest return on our money. We are owners of millions of share accounts in savings and loan associations, time deposits in banks, and mutual life-insurance policies.

Many of us belong to a pension system, and our benefit payments tend to increase as interest earnings rise.

Some critics allege that higher interest rates benefit only the bankers. That is nonsense. Earnings of insured commercial banks as a return on average capital accounts in 1956 were 7.82 percent.

This is lower than the average for the prior 3 years, or for the years 1948-52. Such bank earnings have averaged 8.29 percent for the past 4 years. This is less than the average of 8.62 percent for the entire 8 years of the prior administration.

Bank earnings for 1956, of 7.82 percent, are substantially less than the average earnings of all manufacturing companies which averaged 12.3 percent. In 1952, bank earnings of 8.1 percent compared with manufacturing earnings of 10.3 percent.

Bankers are brokers of mone}''. When they receive more, they pay more. Our people have approximately 90 million savings accounts in banks and savings and loan associations. As you know, during the past few years most banks and savings and loan associations have increased the rates they pay to the saver.

The amount of return paid or accrued for savers in the savings and loan associations (members of the Federal Home Loan Bank System) increased from less than $500 million in 1952, to an estimated billion dollars in 1956, a little more than double.

The amount of interest so accrued for savers in mutual savings banks rose from $500 million to almost $800 million in 1956. Interest paid or accrued to depositors in commercial banks increased from about $450 million in 1952, to about $800 million in 1956.

In the past 4 years, interest rates on all these types of savings have been moving upward and, in a modest way, we have followed with our recent increase in the interest rates on newly purchased savings bonds.

ii. Increased interest stimulates savings. • The higher interest rates paid in the past few years have encouraged

greater savings. During the 4 years of the Eisenhower administration, our people saved more, both in terms of dollars ($75 billion of personal savings compared to $56}^ billion in the preceding 4 years), and in relation to disposable income, 7.1 percent as compared to 6.4 percent.

iii. Increased savings are a major means of assuring continued high employment and prosperit}^.

Increased capital investment—more tools, more factories, more equipment—is necessary to provide the jobs with the high wage levels which are paid in this country today. I t is the principal means by which we can raise our living standards.




To the extent such increases in capital investment are provided-by excessive bank credit expansion, they are inflationary. To the extent they are financed out of savings, they are not.

With the great increase in capital investment in tools, it is essential to encourage savings in order that as little of this investment as possible be financed in such a way as to stimulate another round of inflation.

In the past 4 years, we have moved to an unparalleled prosperity. More people are living better than ever before. I t is this prosperity, in turn, which creates heavy demands for money and requires some anti-inflationary restraint.

We have made great progress toward the sixth goal established by the President, to make constructive plans to encourage the initiative of our (citizens.

Current monetary and fiscal policies have been beneficial to the economy.

This administration has successfully encouraged saving, enterprise, and production. This is a demonstrable and desirable accomplishment. With such means as it has had at its disposal, the administration has attempted to arrest inflation and has been largely successful.

I note, however, that there have been some complaints that the monetary and fiscal policies have been too severe and have affected certain segments of the economy unfairly.

A. Has the administration's anti-inflationary program been injurious?

Let me review again what the administration has done to fight inflation.

We have reduced the Government debt. We have reduced Government expenditures. We have balanced the budget. We have reduced the floating debt. We have moved some of the debt out of the hands of the banks and

put more of it into the hands of individual citizens. The reduction in Government expenditures has perhaps injured

those corporations which might have received orders had the Government spent more money. The entire course of action, having been anti-inflationary, may have injured those few who might have benefited, at the expense of the rest of our citizens, from runaway inflation.

But, except for these few, the good of the overwhelming majority of our people was best served by the course we have followed.

We have also endorsed the independence of the Federal Reserve and conducted our affairs in such a way as to avoid interference with its anti-inflationary monetary policy.

B. Has the Federal Reserve's anti-inflationary program been injurious?

1. By restricting the growth of credit? The Federal Reserve's program is one of allowing the natural

market forces to operate, while adjusting credit availability to meet the needs of normal seasonal activities and sustainable econoniic growth.



EXHIBITS 249

The Federal Reserve has ceased its earlier policy of creating additional bank credit, except to the extent needed to meet the basic requirements of a healthy economy. The Federal Reserve has not reduced the volume of available credit.

Some current discussions of Federal Reserve policy proceed on the mistaken assumption that the Federal Reserve has reduced the amount of credit below an amount previously available.

Nothing could be further from the truth. Credit, the aggregate of new savings and new bank credit, has expanded substantially in the past 4 years, and at a rate fully equal to the need, to sustain a very high use of both services and materials.

There is more credit outstanding today than ever before—$146^ billion more than in 1952.

I am going to read that again: There is more credit outstanding today than ever before—$146K billion more than in 1952.

Then follows a table which outlines where that extension of credit has taken place, and I would just refer to the last column to illustrate.

Uses and sources of credit


Uses of credit: Individual:

Mortgage Consumer Other _

Total _ _.. . Corporate . _ _ State and local government .._ i _ _

Total (other than Federal) Federal Government

Total

Amount outstanding

Dec. 31,1952

82.4 27.4 25.7

135.5 202.9 31.2

369.6 267 4

637.0

Dec. 31,1956

131 5 41.9 34.1

207.5 249.3 50.0

506.8 276 7

783 6

Change

+49.1 +14.6 +8.4

+72.0 +46.4 +18.8

+137.2 +9.3

+146.6

Mortgage credit has gone up $49 biUion, consumer credit $14 billion. This is over a period of 4 years we are now talking about, over the period of 1952 to 1956, tlirough December of 1956. Mortgage credit has gone up $49 billion; consumer credit $14 billion; and ' 'Other," $8}^ billion, or a total of $72 billion.

Corporate has gone up $46.4 billion; State and local governments nearly $19 billion, for a total of $137 billion.

Now then, the Federal Government has gone up during that same period $9.3 billion, maldng a total, if you add it all up, of $146.5 billion which occurred during the 4-year period.

As important as the fact of the increase in credit, is the source of this increase.

Now, the sources of the increase, Mr. Chairman, again a table, of which I will read only the last figures:

Nonbank credit over the 4 years which came about through savings during that period, nearly $136 billion; bank credit, less than $11 billion—for a total of $146.5 billion.



250 1957 REPORT OF THE SECRETARY OF TH E TREASURY



Sources of credit: Nonbank credit (savings) . . . Bank credit (money supply)

Total. ._

Amount outstanding

Dec. 31,1952

508.0 129.0

637.0

Dec. 31, 1956

643.8 139.7

783.5

Change

+135.8 +10.7

+146.5

In 1956 alone, total debt, other than Federal Government; increased $37.5 billion. Of this increase, $17.5 billion was individual debt $15.5 billion corporate and $4.5 billion State and local government debt.

The increase in total credit in the past 4 years has been greater than i n either of the 2 preceding 4-year periods. But a most important fact to note is that 93 percent of this increase has come from savings and only 7 percent from an expansion in the money supply.

Then follows another table which shows where this has come from, and it shows that $136 billion came from nonbank credit; and about, a little less than $11 billion from extension of bank credit, for the total of $146 billion of extended credit, iricreased credit.


Uses of credit: Individual:

Mortgage.-Consumer. . . _ . _ other

Total -Corporate . . . State and local government .

Total (other than Federal) Federal Government

Total _

Sources of credit: Nonbank credit (savings). _ Bank credit (money supply).---. ^ . . . . . . . .

Total - -

Percent of increase accounted for by: New savings Expansion in money supply

Total ;

Increases in 4-year period

December 1944-48

December 1948-52

December 1952-56

In billions of dollars

19.4 9.3 3.7

32.4 29.6 2.7

64.7 • 20.8

85.5

64.3 21.2

85.5

32.0 13.0 7.4

52.4 63.2 11.5

127.1 14.5

141.6

124.2 17.4

141.6

49.1 14.5 8.4

72.0 46.4 18.8

137.2 9.3

146.5

135.8 10.7

146.5

Percent

75 25

100

88 12

100

93 7

100



EXHIBITS 251

Of the $146.5 billion increase, $135.8 billion has come from existing funds of nonbank investors, which amount may be called ' 'savings," and only $10.7 billion from bank credit expansion, or increased money supply, new and additional spendable dollars.

The total increase has been adequate for our most healthy econoinic expansion in many years. The growth in ' the money supply, at the rate of only 2 perceiit per year, has prevented any objectionable bank credit inflation.

The secret of success in providing adequate funds for proper expansion without inflation is to encourage savings as the principal source. That we have done.

The foregoing table points out three most important facts: (i) Total loans have increased substantially in the past 4 years—^

indeed more than in either of the 2 preceding 4-year periods. (ii) This increase has been primarily in private credit-:—credit to

buy homes, cars, consumer goods^rather than tanks or guns. (iii) This increase has come much more from savings and less from

bank credit expansion than in prior years—hence it has been much less inflationary.

The Federal Reserve policy of not encouraging more rapid bank credit expansion has been based on the premise that further expansion of bank credit would merely have enabled more would-be buyers to bid up the price of the limited supply of goods and services.

This policy has been necessary and in the best interests of the great majority of our people. But despite the substantial credit expansion that has taken place since there has been less new credit created than the demand therefor there has been some disappointment, and in some cases real hardship.

I t is said that the unavailability of unlimited credit has been particularly burdensome on the housing industry, on small business, and on State and municipal projecits. As these areas are very important to all of us, perhaps we should briefly review them.

Let's look at housing. I t is charged that we have impeded the flow of credit to housing.

During the past 25 years, far from restricting credit to housing the Government has greatly increased the volume of credit available to this industry, over what it would be in a normal free market, by stepping in and guaranteeing the payment of millions of homeowners^ mortgages.

This has helped to provide many Americans with homes which they otherwise could not afford. On the whole, this has been a good program, but we must recognize that it has introduced certain artificialities into the free market for the purpose of diverting credit from other uses into home mortgages, credit that wouldn't be available to housing without these Government guaranties.

That was true under the prior administration; it is true under this administration.

Has this administration restricted the terms on new housing loans? We have not—we have relaxed them. We have lowered the minimum downpayment on FHA loans, and we have permitted 30-year loan& in place of the former 25-year maximum. We have materially liberalized FHA mortgage terms on existing homes.




In addition, FNMA special-assistance programs have L^en innovated since 1952 to provide mortgage support for relocation, redevelopment, and rehabilitation housing under Sections 220 and 221 of the National Housing Act, for housing for the elderly, and for Capehart military housuig.

Also, the voluntary home mortgage credit program, started in 1954, has helped obtain home financing for veterans and otliers in small and remote communities, and for minority group members.

Has the administration restricted the availability of mortgage funds by curtailing the FNMA secondary market operations? Again, let's look at the record.

Purchases of mortgages by FNMA in the secondary mortgage market, during the last 12 months, have totaled nearly a billion doUars, an amount surpassed only in the calendar year 1950. . Furthermore, in 1950, all of those funds were provided by the

Treasuiy; under the sounder participating program as Congress has now revised it, the funds largely come from private sources. • According to preliminary figures, in A/[ay of this year there were 96,000 private nonfarm housing starts. This is a second consecutive monthly increase on a seasonally adjusted basis, and brings the annual rate of new housing starts in May up to 990,000.

While this is somewhat below the annual rate of 1,146,000 starts in May a year ago, and even further below the 1,398,000 rate in May 1955, it is still a substantial volume of housing.

There are undoubtedly many contributing causes to this decline. For the past few years, home construction has been running ahead of new family formation, with a consequent reduction in the backlog of young families needing a home.

Building costs have risen substantially in the past 10 years. The price of land has also risen, as have State and local taxes, which are an element of cost. As the aggregate of these costs result in substantial increases in the price of a home, the number of potential purchasers is reduced.

This cost increase has been accentuated by the host of new labor-saving appliances and luxury equipment which our people feel are now necessary in a home. There has been actual overbuilding in some localities and a diminishing supply of desirable building sites in others.

All of these factors have had an adverse eff'ect on new home construction, but the unavailability of unlimited mortgage credit is also a major factor, and it falls most heavily on those who heretofore have been able to obtain mortgage credit only through Government assistance.

The number of new homes financed through conventional mortgages (based entirel}^ on the credit of the borrower and the amount of his equity) has not declined. Indeed the number of such housing starts so financed in the first 5 months of this year (269,400) was slightly higher than the number so financed in the first 5 months of last year. : I t is the Government-guaranteed mortgages which are finding the

less receptive market. The number so financed in the first 5 months of this year (114,200) was 42 percent less than the number financed in the first 5 months last year. This decline is due to the lower interest rate which such guaranteed loans bear.



EXHIBITS 2 5 3

The increase in the maximum rate on FHA loans from 4}^ percent to 5 percent has given such financing renewed strength, but the lack of congressional authorization of an increase in the rate on VA-guaranteed mortgages has made it increasingly difficult for a veteran to obtain such a loan.

The significance of rate limitations is indicated by the most recent figures. Housing starts financed by conventional mortgages increased from 63,900 in April to 69,000 in May, which compares with 64,500 in May 1956.

Housing starts under the FHA program increased from 12,100 in April, to 15,000 in May, as compared with 19,700 in May 1956.

Housing starts under VA inspection declined from 13,500 in April, to 12,000 in May, compared with 26,600 in May 1956.

Thus it appears that there is only a relatively limited supply of mortgage credit available for the small downpayment, extendecl terms, and 4}^ percent interest rate on VA guaranteed loans.

There is a substantial volume of mortgage money available for FHA insured mortgages at the 5 percent rate, although there is some insistence on higher downpayments than the minimum permitted under FHA terms. There appears to be sufficient mortgage credit available to finance those borrowers who can make an adequate downpayment and pay the going rate of interest.

This is the result of a free money market. I t undoubtedly has caused many young families to postpone the purchase of a new home. Their disappointment, and that of the builder, is understandable.

Yet how much better off would they have been if a more than adequate supply of credit had brought about increased prices, not only of their home but of all of the other articles which they desire?

Let's look at small business. I am sure that there have been some small business firms which

have been unable to obtain all of the credit that they would have liked at the rates they would like to pay. I believe this has been true in every year through history, and it has been true for each of the past 4 years, but this does not mean that there has been any reduction in the dollars of credit extended small business in the past 4 years. Quite the contrary. Both the number and amount of loans made to small business have been increasing substantially.

In this connection, we must remember that the great majority of our banks are themselves quite small, and the size of the loans they can make is limited by law. Of the 13,101 insured commercial banks in the United States, 10,853 have deposits of less than $10 million each and, in general, cannot make loans above $100,000.

That is almost 11,000, out of the IO.OOA, that are small banks. Total loans of banks in this catpa^^v increased by almost $2.1

billion during the past 4 years, an increase of 19 percent. Virtually all of their loans are to farmers, homeowners, consumers, and small business firms.

Another 1,802 banks generally can make loans up to $500,000, but Iriost of their loans would actually be in amounts of less than $100,000. Total loans of banks in this category increased by $4.4 billion during the past 4 years, an increase of 44 percent.

The remaining 446 banks do indeed represent almost two-thirds of the Nation's deposits, and are of great importance to the economy.




They are the primary source of barik credit to larger business firms, tet even they make many loans to small business.

A survey made of a representative group of 78 such large balnks 'indicated that in the year from September 1, 1955, to August 31, 1956, their small business loans, for amounts of under $100,000, had iii-creased by $228 million, or 14 percent; and that the number of such loans had increased by.5 percent.

Within this group there was more of an increase, both in numbers and dollar amount, in the loans under $50,000 than in those between $50,000 anci $100,000.

While it is true that total business loans of banks increased somewhat more rapidly than those loans for amounts under $100,000, this is a pattern which would be expected in such a period of rapid economic expansion, for the cyclical heavy goods industries naturally tend to require a larger volume of credit in such a period.

At all times the established, successful firm is more able to obtain necessary credit than is the new, unproven or unsuccessful'company, and this is particularly true of a period of credit stringency. Not all firms have obtained all of the credit they have wanted. Yet, in the aggregate, they have obtained more than ever before.

In addition to the increased amount of bank credit received by small business during ihe past 4 years, there has also been a sizable volume of book credit extended by larger firms to smaller firms—distributors, merchants, and suppliers.

I do not mean to minimize the disappointment, inconvenience, and in many cases real hardship, that some businesses have expeiienced because of their inability to obtain as much credit as they would have liked.

Indeed, this is a matter of deep interest to the adminis teration which, as you know, has supported the creation of the Small Business Administration, the enactment of improved tax laws, and the granting of exemptions from certain Securities and Exchange Commission regulations. ' In addition, we have made vigorous efforts to see that more defense work is subcontracted to smaller firms.

I understand that you intend to invite Mr. Muller, Assistant Secretary of Commerce, to testify before 3'ou, and I believe he will discuss the matter of small business financing at somesvhat greater length. I do, however, want to make the point that there has been a large -volume of credit available to, and used by, small business in the past 4 years.

Let's look at States and municipalities. In the past 4 years, a quarter of a million new schoolrooms have

been built for our ^^oungsters. Total public construction in 1956 was 23 percent above 1952 levels, and educational construction was up 56 percent.

During 1.956 alone, new borrowing b}^ States and municipalities totaled $5.4 billion; and during the last 9 months for which figures are now available, more elementary and secondary school bonds were sold than in any 9-month period in our history.

State and mimicipal financing has increaseci b}^ $18.8 billion in the past 4 years. This is more than it has ever increased iri any other



EXHIBITS 255

4-year period, and compares with only $11.5 billion during the period 1948-52.

These figures do not demonstrate any extraordinaiy burden on State and municipal financing from lack of available credit. Undoubtedly, local governments have been unable to obtain all of the funds they would have wished, but they have built more and they have financed more than in any other 4-3êar period.

The Federal Reserve's monetary policy for the past 4 years has been, and is, one of discouraging the growth of credit at quite as rapid a rate as would-be borrowers desire. As a consequence, some individuals, some home purchasers, some small businesses, and some municipalities, and other categories of our citizens, have felt some pinch as a result of limited credit. But in the past 4 years, small loans to business have increased substantially.

In the past 4 years, $57.5 billion has been spent for housing—as much as had been spent in the preceding 6 years.

In the past 4 3êars, $16.7 billion has been.spent for new highway construction—more than had been spent in the preceding 11 years.

In the past 4 years, $8.8 billion has been spent for school construction—more than had been spent in the preceding 20 years.

This is not the record of extreme credit stringenc}''. 4ny freer credit would have further inflated prices.

Let's look at the rise in interest rates. The Federal Reserve's abandonment of its pegging of prices in the

bond market has prevented an unlimited growth in credit. I t was intended to, and did, slow' the rate of growth of bank credit.

I t also has resulted in some increase in interest rates. I t is alleged by some that this increase in interest rates has brought about a severe increase in the burden of taxes and in the prices we pay for manufactured goods, or utility services; that it has materiall}'- increased farmers' costs, or the price of a home.

Now, are these charges true? Higher interest, although the result of a lesser supph^ of credit

than the demand therefor, a condition which prevents far greater inflationary increases in other costs, is itself an element of general costs and in some cases may be reflected in higher prices.

However, interest payments are such a small fraction of the total cost of business operations, that a rise in the rate does not represent much of an increase in total cost.

What is the interest burden on the taxpa37'er? Total budget expenditures for fiscal 1957 are estimated at $68.9

billion. Of this, $7.2 billion, or 10.4 percent, represents interest expenditures. The per capita cost of all expenditures of the Federal Governm.ent for this fiscal 3êar is $406; for interest alone, the per capita cost is $42.40.

In 1952, interest on the public debt was $37.57 per capita. Thus the increase in interest on the public debt during the past 4 years amounts to less than $5 per person.

Now, what is the effect on the price of manufactured goods? In 1946, gross sales of all manufacturers amounted to $132 billion.

Manufacturers had net interest expense in that year of about $154 million, equal to one-eighth of 1 percent of total sales.

In 1952, interest expense had increased to about one-fourth of 1



2 5 6 1957 REPORT OF THE SECRETARY OF THE TREASURY

percent; and on the basis of limited information now available, it appears that the 1956 ratio will be about one-third of 1 percent. Thus, interest costs are orily one-third of 1 percent of the average sales price of manufactured goods.

Of the cost of an article selling for $100, about 33 cents represents interest, with no more than 10 cents of that representing an increase since 1952.

Furthermore, the increase in this minor item of interest costs reflects an increase in the amount of debt as well as an increase in interest rates.

The relative unimportance of interest as a part of total costs is reflected in the fact that during the same 10-year period, prices of goods that consumers buy rose 27K percent, or $27.50 on a $100 item (due to labor and other costs), compared to the 20-cent increase due to higher interest. ^

In other words, $27.50 for other items as compared to 20 cents for interest.

The far greater significance of the increase in labor and other costs is reflected quite clearly in the price of consumers' services which have risen 43^ percent ciuring the same 10 years.

I t is apparent from these figures that even with increased interest rates and increased indebtedness, the burden of interest costs on manufacturers in reference to their total costs is very slight. The effect of higher interest on the sales price of goods is hardly significant.

This is even more apparent when we compare the increased costs of the last year. Prices of goods bought by consumers (which reflect material, labor, interest, and profit) have risen 1.3 percent. .The price of consumers' services (which reflect primarily labor costs) has gone up 2.3 percent.

How does it affect public utility rates? I t has been suggested that higher interest rates lead to substantial

increases in public utility rates. This sounds plausible because public utilities rely heavily on bonded indebtedness.

However, the latest figures available indicate that the net interest expense of public utilities is still less than 4 percent of gross revenue— the same proportion as in 1952. Even for electric utilities, where average interest cost on long-term debt now exceeds 5 percent of gross revenue, the relative cost of interest has risen very slowly.

The estimated average of 5.2 percent for both 1955 and 1956 compares with 4.8 percent in 1952 and 5.0 percent for 1946. In other words, 5.2 in the last 2 years; 5.0 percent in 1946.

Now, farmers' costs: Difficult as the farmer's position has been, it is not the result of

interest rates. The Department of Agriculture estimates that only about 5 percent of farmers' costs are for interest.

Interest rates on farm loans outstanding in insured commercial banks on June 30, 1956, averaged 6.1 percent. This was fom'-tenths of a percentage point higher than the average rate reported in a siniilar survey made in 1947; less than one-half of 1 percent difference since 1947.

Thus this four-tenths of 1 percent increase in rate would be less than one-half of 1 percent of his total costs or 5 cents on a sale of $10 worth of farm products.



EXHIBITS 257

Now, the cost of a home. The effect of higher interest rates in relation to the decline in private

nonfarm housing starts from 465,000 units in the first 5 months of last year to 384,000 for the same period this year, has been grossly exaggerated.

Housing is perhaps the most dramatic example of the effect of rising-costs. Hourly wage rates in building.construction have risen 21 percent in the past 4 years. In the manufacture of some products, the increased cost due to hourly labor rates has been offset by greater efficiency. Through use of additional capital goods—tools—the productivity per man-hour has been increased enough so that the total cost has been kept fairly stable. This is true of most of our home appliances.

However, in those fields in which mechanization is not practicable or in which restrictive practices or legal requirements have prohibited maximum efficiency, the cost of the finished product has risen in close relation to the increase in hourly labor rates. There is no better example of this than housing.

Many home purchasers consider only the size of the required monthly payment—not the number thereof or the elements that make it up. To them, interest is of no significance. To the more sophisticated purchaser who inquires as to the component elements in his mortgage payments, increased interest rates are small in relation to increased labor and material costs.

This is apparent if we compare the cost and financing charges of the same house in the spring of 1946, the spring of 1953, and the spring of 1957. Let us take as an example a house that cost $10,000 to build in the spring of 1946, and compute the required monthly payments on the basis of 15 percent down and the balance over a period of 20 years.

Fstimatftd co.st of hou.«!ft _. _ _ _ Interest rate (FHA) percent.. Monthly payment (for 20 years) Increase in cost of house since 1946 . . . Increase in monthly payment since 1946:

Due to interest rate . . Due to other costs

Spring of—

1946

$10,000 4

$51. 51

1953

$17,300

$91.06 $7,300

1957

$19,000 5

$106. 58 $9, 000

$8.71 $46. 36

NOTE.—Housing costs are based on data compiled by Roy Wenzlick & Co.

The preceding table shows that the $10,000 house in the spring of 1946 cost $19,000 in the spring of 1957; and of the amount of increase in monthly payments, $55.07, $46.36 was due to other costs and $8.71 was for interest.

The monthly payment has more than doubled in 11 years. Of this increase of $55.07, $46.36 reflects higher labor and material cost, and $8.71 is due to higher uiterest rates.

During the past 4 years in which our policies have resisted inflation, the sales price of that house has gone up much less—about $400 per year as compared to about $1,000 per year from 1946 to 1953. And I want to repeat that the increase in the cost of that house, from

438363—58- -18




$10,000 to $19,000, has gone up much less in the 4 years since we have had these restrictive practices than it did in the 4 years when we had the easy money.

In other words, it went up $400 in these years as against $1,000 in the easy-money years, and the interest went up only $8 a month.

Which has been the major factor in discouraging xonstructiori? The $9,000 increase in building cost ($46.36 per month), or the 1-percent increase in the cost of interest ($8.71 per month)?

While interest is an element in the cost of mortgaged homes« the increase in interest rates has not been the major factor in delaying home construction. Mortgage interest rates were higher in 1955 than in any prior recent year; yet new nonfarm housing starts were the second highest in history, at more than 1,300,000.

Alm.ost 5 million new dwelling units have been built in the past 4 years. Less than 3K million new households have been formed in that period, so that Iji million units have gone to satisfy prior shortages and to cover houses' abaridohed or razed to make way for new construction. The proportion of married couples without their own household has declined 21 percent since 1952.

A strong desire continues to exist for better housing, but it is hindered from becoming an effective demand by today's inflated prices. To attempt to force an acceleration in home construction today by making more credit available for housing would add further to the already increased building costs.

This would not only be inflationary, it would encourage uneconomic practices and curtail the new construction that we might otherwise expect in years to come.

The foregoing review of the eff'ects of this administration's fiscal policies indicates that the supply of credit has not been reduced. The supply of credit has m.erely been prevented from expanding as rapidly as the demand therefor.

This slov^dng of the rate of growth of credit has inconvenienced those who have found credit unavailable, and imposed a higher charge on those who have borrowed. These results are hardly welcomed for their own sal^e, but they are the price we have to pay for the price stability that we have achieved in the past 4 years.

This has been a far greater stability in prices and in the purchasing power of the dollar than we have enjoyed for two decades. Faced with this choice between the inconvenience of limited credit and tho robbery of renewed inflation, our people would certainly choose the course which we have pursued for'the past 4 3'ears.

In conclusion, I have attempted to review for 3 011 the conditions existing when the Eisenhower administration took office, the goals that the President set for us, and our progress toward those goals.

We have not achieved perfection b3' a long wa3^ We have been, unable to fully accomplish some of our debt-managem.ent objectives. We have perhaps checked, but not entirel3^ stopped, inflationary pressures.

In the process, some of our citizens, some of our municiiD aii ties, and some of our businesses have been unable to obtain all of the creciit they would have liked.

We have had a large m.easure of success in encouraging the initiative



EXHIBITS 259

of our citizens, but not ever3^ business has prospered as much as it might, nor ever3^ citizen had all of the comforts he would enjoy.

I acknowledge imperfections in our accomplishments, but i entertain no doubt as to the propriety of our goals or the wisdom of our policies. To aid 3 011 in your consideration of the alternative courses, and to help you measure their promises against the actual results of the past 4 years, let me remind you of soirie of our achievements.

When we took office in 1953, the Federal debt was equal to 89 percent of our national income—in December 1956, it was 79 percent, as compared with 89.

For the fiscal year 1953, budget expenditures were $74.3 billion; and, for the vear 1957, thev are estimated at $68.9 billion, and $71.8 billion for 1958.

For the fiscal year 1953, the budget resulted in a deficit of $9.4 billion—for 1957, it \vill result in a surplus.

From 1939 through 1952, the cost of living increased an average of 7 percent a 3êar—for the.past 4 years, the average increase has been only six-tenths of 1 percent.

In the past 4 3êars, civilian employment has risen 6 percent, average weekly earnings of production workers in manufacturing have risen 18 percent and, after allowance for the 2.4-percent increase in consumer prices which occurred between 1952 and 1956, the gain in workers' earnings, after taxes, amounted to about $10 per week, or more than 15 percent in real purchasing power gained during the period.

Personal income of individuals has risen every year, from $272 billion in 1952 to $325 billion in 1956, a gain of 20 percent, and an estimated $340 bilhon for 1957.

Labor income has not onh' risen in dollars; it has increased from 67.2 percent of national income in 1952 to 69.8 percent in 1956, while corporate profits declined from 12.7 percent of national income to 11.9 percent.

Striking achievements have been made in housing. The 5 million dwelling units that were constructed exceeded the number built in any previous 4-3êar period, and substantiall3^ enlarged the housing stock available to the American people.

There were improvements in the size, design, and equipment of new homes, and sizable outla3^s for repairs and alterations added to the comfort and convenience of existing homes. A growing proportion of our homes were .owner occupied-:—60 percent in 1956, as compared with 55 percent in 1950.

This is a gratif3dng record of the improvement in the level of living that can be achieved only through a vigorous, competitive, free-market economic system which ofi'ers both individual freedom of choice and the stimulation of initiative through personal incentive.

In particular, it shows the capacity of such a system to bring about confidence and daring in enterprise and widespread participation in the benefits of economic expansion. This is in sharp contrast to the artificial restrictions, interferences, and controls of a paternalistic bureaucracy.

The past 4 years have demonstrated the ability of the Nation's private econom3^ to expand, to provide an increasing number of better jobs at better pa3^, and to raise levels of living.




These 4 years have tested the capacity of our economy to adjust to large changes in the pattern of demand and the efl'ectiveness of public policies designed to promote growth of individual freedom and stability in the economy.

Because the problems are continually changing in a dynamic economy, policies aimed at promoting stable growth must be flexible. This fact was well illustrated in the past 4 years of the Eisenhower administration. Our problems have shifted from those of a controlled, wartime economy to those of a rapidly widening prosperity. We have been able to encourage this prosperit37^.

Through the flexibility of monetary and flscal policies, the Government has been able to adjust to the rapid changes in our economy. We have moved forward toward our goals and demonstrated the great capacity of a free economy to correct imbalance and to maintain growth with a high degree of stability.

We have accommodated the reduction in wartime Government spending, accompanied by recordbreaking tax reduction, and off'set a threatened decline in employment and business activit3^ in 1953-54.

We have encouraged an expansion of enterprise to new high levels, and, through expenditure and debt reductions as well as debt management, we have slowed the growth of inflationary credit.

We have encouraged a rapidly rising econom3' which has brought more wealth, more purchasing power, more comfort, more jobs, more homes, more luxuries, more leisure, more education, and more security to our people than they have ever enjoyed before.

Gentlemen, I take great pride in making this report.

EXHIBIT 36.—Remarks by Under Secretary of the Treasury Burgess, October 23^ 1956, at the 82d Annual Convention of the American Bankers Association^ Los Angeles, Calif.

On behalf of the Treasury, let me acknowledge the great service which the country's banks have rendered to the Government during the past year in handling our funds, in helping to sell our security issues, and in many other ways.

We rely particularly on your voluntary efforts for the sale of savings bonds. About 40 million Americans now own more than $41 billion of Series E and H savings bonds, a new alltime high mark. In spite of the increased competition of other investments at higher rates, sales of these bonds this year will exceed $5 billion. Sales of small denomination bonds are ahead of last year.

Our partnership in the sale of savings bonds dramatizes the joint responsibihty of Government and the banks for the preservation of the value of the United States dollar. In selling these bonds to millions of people, we incur an obligation to see that the dollars in which they are finally paid preserve their buying power.

In recent months, this issue has attracted much pubhc attention. The Government is being criticized for allowing, in nearly four years, a 2% percent increase in the cost of living. The same critics are, at the same time, attacking the steps taken by the Government to preserve the value of the dollar and keep prices stable. Under the previous administration, which did not take effective steps to preserve the value of the dollar, the cost of hving rose 92 percent and the value of the 1939 dollar was cut to 52 cents. About half of this loss was after the conclusion of World War II.

Thus, there has been inflation, and the threat continues. This threat is not solely a domestic issue. It is a world-wide problem. Everywhere recognition grows of the wicked damage which inflation does to the young and the old, the pensioner, the saver, the salaried and professional worker'—and to sound economic growth.

One reason for the inflation danger is that we are now enjoying a great peacetime prosperity—the first real peacetime prosperity in this generation. Month by-



EXHIBITS 2 6 1

month, we are making new records.in the country's national product and national income. Our dollar wages and, more important, our real wages are at new high levels.

With confidence in the future, American business is making unprecedented investments in factories, machinery, public utilities, etc. Local and State governments are building roads and schools. In addition, we are building new homes at a rate of better than a million a year.

Because of our great prosperity, the demand for money is greater than the amount we are saving. And this in spite of very large savings. Individuals are saving about 7 percent of their income, and business is saving and using for plant development about half of its net income.

But all the money we are saving, as individuals and business, is not enough to pay for all the things we Americans would like to have and to do. That is fundamentally the reason why we are short of money and interest rates have risen.

Because of these huge demands, money for investment is being drawn from the banks as well as from savings. Bank loans to business have risen by leaps and bounds to alltime highs, with the seasonal peak still ahead. More people are borrowing more money than ever before, but they want still more.

In such a situation, everybody who wants money simply can't have as much as he wants. If the Government tried to provide it through the Federal Reserve System, that would be straight inflation.

If we are to keep our prosperity and continue evenly our dynamic growth without inflation and without ''boom and bust," we must, as a Nation, follow policies directed toward two objectives: First, to restrain or postpone some of the less essential uses of money, and, second, to encourage more saving.

These policies are a joint responsibility of the Government, of business and banking. We are all in the same boat. We don't want ''boom and bust;" we do want to continue our fine prosperity.

Here is what the Government is doing: (1) We have brought the Federal budget into balance and started to reduce

the public debt. You can't have stable money if Government deficit spending is feeding the fires of inflation.

(2) We have reduced taxes, leaving more money in the hands of the taxpayers. (3) We have assured to the Federal Reserve System its freedom to exercise

independent judgment in its monetary policies. The System, in turn, has allowed the relation between the supply and the demand for funds to express itself in interest rates.

Protected by these policies, we have had remarkable price stability. Confidence is high and savings are growing. These fundamental steps take time to work, but we think they are working.

But the banks of the country also have a responsibility for preserving the value •of the American dollar. They are at the crucial point of impact with the individual borrower. For national policy only becomes truly effective when the bank officer sits down with the borrower and discusses specific loan problems.

With the present demand for money running beyond the accumulation of savings, the banks have to be selective in their loans.

Fortunately, in this country, the Government does not try to dictate to the banks just what kinds of loans they can make or not make. That rests in the judgment of the individual banker. The banker thus assumes stewardship in administering the national policy. The critical question in banking today is how the banks carry out this stewardship. Do they freeze up at some point and make no more loans? Do they, as I have heard suggested in some cases, say to the borrower, "Bill, I would like to take care of you, but we are fresh out of money because of Federal Reserve policy."?

Or does the banker screen his loans with care, trying to see that every sound and essential requirement for credit is met but that more speculative and less desirable requests are postponed or reduced? And does he explain the real reasons for restraint in lending in the interest of the borrower?

I believe the evidence is conclusive that the banks of the country have generally been following wise policies. The recent survey of the American Bankers Association of 78 representative banks shows that loans to small business are 14 percent higher than a year ago. This and other evidence from many localities indicates that the essential needs of sound borrowers are being met—but with proper discrimination.

The action which you, as bankers, and we, in Government, take at this time has a weighty impact on human welfare of tomorrow. What all of us do today




will determine whether the pattern of our economy shall be that of "boom and. bust" or whether we shall continue our high prosperity and dynamic growth without serious interruption.

The way you deal with your customers at this critical time will affect the-public reputation of banking more than any advertising campaign.

Our joint ability to recognize and explain Federal Reserve policies will influence public opinion of the Reserve System and of sound money policies. If we should lay all the blame for loan rejections on the Federal Reserve System, we might undermine, its independence and invite political reprisals. Most of us here today value highly the contribution of the Federal Reserve System to sound money, and we must not take it for granted.

Without question, we have today—all of us working together—a great opportunity. The country is enjoying remarkable prosperity and vigorous growth. With wisdom, understanding, cooperation, and courage that prosperity and growth can be carried far into the future.

ExmBiT 37.—Remarks by Under Secretary of the Treasury Burgess, February 5, 1957, before the Citizens Committee for the Hoover Report in conjunction: with their Third National Reorganization Conference, Washington, D. C.

Financial stabihty is one of the great foundations of the unparalleled prosperity and growth of our country. We have grown because of the enterprise of our citizens, and that enterprise is founded on confidence, confidence that people can. build for the future for themselves, their children, and their grandchildren.

The three great foundations of confidence are security from outside attack, justice, and financial stability. Not the least of these is financial stability. For financial instability is the thief and the robber that takes away by inflation the fruit of labor, just as surely as the enemy or the unjust sovereign. Those who believe this place financial stability at the very head of the list of economic and social virtues.

The methods of achieving financial stability are not secret or novel. Theyare exactly those which Alexander Hamilton, with the support of George Washington, estabhshed in this country by almost superhuman wisdom and effort. They are threefold: a balanced budget, an honored and properly managed debt, and a banking mechanism dedicated to serve the people's welfare. Today, as then, these three simple principles are the basis for financial stability.

These principles have always been recognized objectives of Government in. the United States, and our record in achieving them has been better than that of almost any other country. Therein lies perhaps the greatest secret of our growth and prosperity.

We have proved the value of these principles, not only in their observance but negatively also in their neglect. For at times when we have departed from them, we have suffered inflation and deflation, boom and bust. Foreign experience is equally convincing.

For a number of years we faltered seriously in following these principles, and between 1939 and 1952 our currency lost about half of its buying power. The burden fell on all groups of our people but most unfairly on some who have deserved the best from their country—the thrifty, the salaried and professional people, the pensioner, and, from time to time, the farmer.

In the past four years we have returned toward the more rigorous practices of these three great principles. Between the fiscal year 1953 and the fiscal year 1955 expenditures of the Federal Government were cut by $10 billion, from $74 billion to $64 billion. This, together with rising revenue, financed a tax cut of $7.4 billion and brought us a balanced budget for two years, with a third in prospect.

With respect to monetary policy, the Federal Reserve System regained its freedom to exercise its powers solely for the public welfare rather than to suppojt the prices of Government bonds. The exercise of those powers helped to check an inflationary movement early in 1953, helped to cushion a decline in 1954, and has held back inflationary trends in the past 18 months.



EXHIBITS 2 6 3

In the management of the debt, we have regained freedom of action, and debt management has supplemented, instead of crippling, the policies of the Federal Reserve System. A smaller proportion of the debt is held by the banks and a larger proportion is in the hands of the people.

As a result of these changes, the purchasing power of the dollar, as measured by the cost of living, was stabilized within a narrow margin.

Today, under the pressures of huge defense needs and great prosperity—guns and butter—these principles are in danger again. This is the kind of battle, never finally won.- The adiiiinistration has been,able to preseiittb^the Congress a balanced budget for this and the next fiscal year, but by a narrow margin and at a rising level. This balance is threatened by a wave of spending proposals coming before the Congress.

The sound banking and monetary policies of the Federal Reserve System are under attack from many quarters.

The cost of living index, which reflects the buying power of money, is moving up again.

The President and the Secretary of the Treasury have stated and reemphasized the determination of this administration to do its utmost to maintain financial stability.

In the Treasury, which has a very special responsibihty in this area, we are working at this problem every day in a great variety and complexity of ways.

Achieving sound money is no great overall process; it is an hour-by-hour, uphill climb.

Pressures for increased spending come from many sources. The safety, in fact, the very existence of this Nation requires a strong and ever stronger defense establishment. The objective of most Government departments is to achieve some specific service for our rapidly growing country. Most senators and congressmen are subject to pressures for increasing Government benefits for the people they represent. Thus, the pressure for spending is enormous. There are only a few people whose daily business it is to' make all of these desires and pressures conform to the pattern of sound finance. That is why we need every day the help of citizens like you, who are willing to go to bat, not for what you want for yourselves but for the public good.

One of the great virtues of the Citizens Committee for the Hoover Report is that you are not content with reaflftrming and emphasizing general principles, though you do that. You have also performed a great service in studying just how these principles are carried out in detail.

The battle is not won by great, broad, sweeping decisions. It is won by detailed actio'n on thousands of specific problems. The process is: "precept upon precept, line upon line, here a little and there a little."

EXHIBIT 38.—Statement by Under Secretary of the Treasury Burgess, March 4, 1957, before the Subcommittee on Housing of the House Committee on Banking and Currency

I am glad to come before your committee to discuss with you the important problem of assuring an adequate flow of funds for housing.

The Treasury is interested in measures to permit the construction of vitally needed housing throughout our Nation. The Treasury is also interested in helping to insure that Federal Government financial policy is always in tune with the achievement of sound economic growth within the framework of a relatively stable price level. As building costs advance, the purchaser of housing receives less for his money.

The volume of total construction is continuing at a very high level despite some decline in housing starts. Total new construction expenditures (including industry, stores, schools, roads, etc., as well as home building) were estimated by the Department of Commerce at an annual rate of $44.8 billion in January 1957. This is the highest in history with the exception of May and June 1956. A recent joint statement by the Departments of Commerce and Labor concluded that outlays for new construction are expected to total $46.4 billion in 1957, about 5-percent above the record volume of $44.1 billion in 1956.




This heavy volume of construction has been accompanied by increasing prices. The composite index of construction costs, as prepared by the Department of Commerce, stood at 132.8 in December 1956, an increase of 5 percent over December 1955, and Sji percent over December 1954.

It has been suggested that more funds would be available for housing if part of the assets of the national service life insurance fund could be invested in guaranteed mortgages. The Treasury is opposed to such a plan. The funds held for this account are not in idle cash but are currently fully invested in special issues of Government obligations. To raise the cash necessary for the purchase of mortgages would require the Treasury to redeem the obligations now held by the fund. This would involve an equivalent arnount of borrowing in the market by the Treasury, thus adding to the pressure on available funds for private investment. This borrowing would have to be done from many of the same financial institutions and other investors who provide money for mortgages. All this suggestion would do is to increase funds available for mortgages on the one hand and take funds away with the other. There is no "magic well" of untapped available credit.

The other major objection which the Treasury has to this proposal is that investment in mortgages would violate the established principles which have heretofore governed the investment of Federal trust funds—that they should be in United States Government securities, the world's best investment. With this as a precedent, pressure would be built up for similar relaxation of the investment policies of other Government trust funds, such as the unemployment trust fund, Federal old-age and survivors insurance trust fund. Federal employees retirement funds, and the railroad retirement account.

EXHIBIT 39.—Statement by Under Secretary of the Treasury Burgess, April 3, 1957, before the Senate Finance Committee

I am glad to be with you today in support of H. R. 5520, which would raise the ceiling on the interest which the Treasury can pay on savings bonds.

The savings bonds program has played an important role in our national life ever since it was first introduced in 1935. There are now more than $41 billion of Series E and H savings bonds outstanding in the hands of about 40 million investors. This program has been a principal means of achieving a wide distribution of the public debt in the hands of individuals.

There are approximately 8 million people now buying bonds through payroll savings plans alone. The program is encouraging thrift at a time when the Nation requires additional savings to balance spending and avoid inflation.

Savings bonds have many unique qualities. They are free from market fluctuations. They are protected against loss. They are easy to purchase and easy to redeem.

For the vigorous continuation of the program it is also essential that the buyer of savings bonds feels that he is getting a fair interest return on his savings. With increases in interest rates on other types of savings during recent years, a modest upward adjustment in the rate of interest on new E and H bonds is indicated. That is the purpose of the present legislation. It is simply to give the millions of small buyers of savings bonds the benefit of the interest rates the large buyers of bonds are already receiving.

The legislation which the Treasury requested from the House of Representatives in February would, have given the Treasury the same discretion with regard to interest rates on savings bonds that is permitted on other types of Treasury bonds. That maximum permissible rate is 4}^ percent. H. R. 5520, which has just been passed, fixes the savings bond ceiling at 3% percent. While the greater flexibility suggested by the Treasury is preferable, H. R. 5520 would enable the Treasury to put into effect its plans to increase from 3 percent to 3}i percent the yield to maturity on all E and H bonds sold beginning February 1, 1957, and



EXHIBITS 2 6 5

would provide some additional flexibility to meet possible future changes in conditions. We are therefore prepared, in the interest of prompt action, to accept H. R. 5520, as passed by the House of Representatives.

The E bonds which the Treasury has been offering sell for 75 percent of their face value and the bonds yield 3 percent when held to their maturity of 9 years and 8 months. If this bill is passed, the Treasury proposes to leave the issue price and face value of the new E bonds unchanged. The increase in the interest return from 3 percent to S}i percent would be accomplished by shortening the term of the bond from 9 years and 8 months to 8 years and 11 months.

We also propose to increase the redemption values of new bonds to provide a substantially higher yield to owners who find it necessary to cash their bonds early. The return on the new bond when held for 3 years, for example, would be 3 percent compared with 2}^ percent at present.

The Treasury also plans to offer, effective February 1, 1957, a revised 10-year Series H savings bond, paying interest each 6 months by check, with yields generally comparable to the new E bond.

EXHIBIT 40.—Statement by Under Secretary of the Treasury Burgess, July 29, 1957, before the Senate Finance Committee Hearings on the Financial Condition of the United States

I am very glad to appear before your committee today to discuss the problems of the management of our public debt in more detail than was included in Secretary Humphrey's presentation, and this, I realize, is a very technical subject. We will try to make it as clear as we can with the use of charts and slides. But we appreciate greatly the chance to tell the committee our story.

Let me review first some of the more important changes in the debt in recent years, with particular emphasis on the period of 4}^ years since we have been at the Treasury.

1. Trends in the size of the debt: The history of our national debt is, of course, a direct reflection of wars and depressions and changing financial policies over the years. I n the first of several charts which illustrate some of our problems is a comparison of the debt over the past 40 years, and we have large copies of these charts so that you can see them. The audience has copies of the text before them, so they are not completely shut off from seeing these.

The public debt just before World War I was only $1 billion, but by the end of that war the Treasury was faced with the management of a then unprecedented debt of $26 billion. There was $10 billion of debt reduction out of budget surpluses during the prosperity of the twenties, but then came the depression and the debt trebled—from $16 billion to $471/^ billion. That was just before World War I I .

During World War I I , the debt rose to new heights and reached a peak of $280 billion in February 1946. Pa r t of that debt, however, represented a large amount of borrowing during the Victory loan in December 1945, which, as it turned out, was not needed because of a more rapid reduction in war spending than had been anticipated. Therefore^ about $20 billion of that excess cash was used to pay down debt in the remainder of that year—the year 1946. The figure of $2591/^ billion in December 1946 is a more representative figure of the public debt at the end of the war, so we have shown that on the chart.



:266 1957 REPORT OF THE SECRETARY OF THE TREASURY

CHART A

THE PUBLIC DEBT

1916 19 '30 '39 - December-

'46 '52 '56

* Excluding Victory Loan proceeds used to repay debt in 1946. -Office of the Secretary of the Treasury 3-1204-12

Post-World War II debt reduction out of budget surpluses in 1947 -and 1948 was about $8 billion. Then with Korea, and an expanded defense program, there was further deficit financing and the debt ,grew to $267K billion in December 1952.

Inherited deficits, which could only gradually be eliminated, brought the debt to an all-time seasonal peak of $281 billion, in round figures, by the end of 1955. This past December the debt was back down to $277 billion, reflecting budget surpluses and a better balanced seasonal pattern of corporation tax payments.

Our debt of $270i/ billion on June 30,1957, the seasonal low point, was $2 billion below a year ago. Of course, to get the figure you have to deduct the surplus, and you have to make allowance for a little -change in the cash balance.

While this debt reduction is not large, the important point is that, despite huge defense expenditures, the upward sweep of the debt has been checked and reversed—not by much, but by a little.

2. The burden of the Federal debt relative to our strength: As our economy grows steadily and confidently, so does our ability to carry a given amount of public debt without too great a strain on the economy. Thus the sound economic growth of our Nation in recent years has made the Federal debt somewhat less burdensome. That is shown on chart B.



51600

EXHIBITS

CHART B

RELATIVE SIZE OF THE PUBLIC DEBT

267

800 h

I9!6'I9 '30 '39 '46 '52'56 1916'19 '30 '39 '46 '52'56 * December ' ' December '

'Office of the Secretary of the Treasury 6-1207-9

The left-hand side of chart B shovv s the relative size of the Federal debt on a per capita basis. By December 1946, it had risen to a high point of $1,832 for ever}^ man, woman, and child in America.

By December 1956, it had shrunk by about $200 per capita, by reason of the growth of the population. By June 30,1957, the per capita debt was down further—to $1,581.

When the Federal debt is related to national income—on the right-hand side of chart B—the reduction in burden is much greater. Ten years ago the $259i/ billion public debt was one-third larger than •our national income of about $190 billion.

National income has now grown to more than $350 billion, so that our $277 billion national debt in December 1956 was equal to only 79 percent of national income. As of June 30, 1957, the ratio had fallen further—to 75 percent.

Unfortunately, however, a part of this reduced ratio of debt to income—particularly prior to the Federal Reserve-Treasury accord in 1951—was a reflection of the inflation of the earlier postwar years which brought about a significant decline in the purchasing power of the dollar.

In spite of inflation, however, a large share of the reduction represents the growing productivity of our Nation in real terms—the increased ability to produce more houses, industrial plants, highways,




schools, cars, TV sets, and so forth. With greater price stability during the past 4 years, up to a few months ago, increased productivity has accounted for almost all of the reductions since 1952.

In this way we are gradually growing up to the debt, so that even though the dollar amount of debt is not declining as much as we might wish^ the debt still becomes somewhat less burdensome.

I am not arguing for doing nothing. I think we ought to be actually reducing the debt; but even though we do not, the situation, from the economics of the country, is becoming a little better in spite of us.

Another way of looking at the public debt is in terms of its interest burden.

The left-hand side of chart C shows the computed interest charge on the debt, which has been rising during the past decade, partly because of the increased size of the debt and partly because of the increased interest rates associated with the strong demand for money in our record prosperity.

By December 1956, the interest charge on the debt had risen to $7.3 billion a year, an increase of $1.1 billion in 4 years as against an increase of $0.9 billion in the preceding 6 years.

That is, this is not something, this increase in the interest rate, that just started. I t has been going on ever since the war.

CHART C

INTEREST BURDEN OF THE PUBLIC DEBr

Computed Interest Chcirge

7.3

6.2

5.3

i.l i.l .6 n

l.l

D

% 6 Interest Charge as % of:

4.2% ThePublicDebt

3 3 ^ (Computed Int Rate)

2.7%

I

Ndf l lncome % ^

i.4% .9%

i.4%

<<\ k c f

2.1% 2.1%

^ 1916 19 '30 '39 '46 '52 '56 ^ 1916 '19 '30 '39 '46 '52 '56 ' December ^ * December '

^Excluding guaranteed securities, ''less than $50 million. **Less than .05%. Officeof theSecretary of theTreasury 6-1219-6



EXHIBITS 269

I t should be remembered that these total interest costs are not a proper measure of the net cost of interest to the people of the country or the net drain on the Federal budget.

The money used to pay the interest is collected from many people in taxes, and the money is paid out again partly to the same people and partly to others. I think it is fair to say that about as many people benefit directly or indirectly from these interest payments as are hurt by them.

As to the budget, the Federal Treasury gets back promptly in taxes a substantial slice of the interest it pays out. Also, much of the interest goes to Government trust accounts—or to the Federal Eeserve System, which returns 90 percent of its net earnings to the Government.

The upper right-hand side of chart C shows that the computed interest rate on the public debt has risen by about three-tenths of 1 percent in the 4 years ending December 1956, after increasing about three-tenths of 1 percent from 1946 through 1952. The rate as of June 1957 was 2.7 percent; and even after the current refunding operation is completed, the rate will be 2.8 percent.

Looking back, we note that the current average interest charge on the debt is not much higher than it was in 1916, just prior to our entry into World War I ; it is well below the average rates in the twenties; and it is very close to what it was in 1939 at the outbreak of World War I I , despite the fact that the earlier rates were partially tax-exempt.

I t makes quite a bit of difierence now. I t did not make so much difference then, because the tax rate was low.

Of course, during World War I I , interest rates were held at artificially low levels, and that carried over into the postwar era. The current rates are high only in comparison with the abnormally low rates during periods of depression, war, and ratepegging. In terms of history, these are not very high interest rates.

Relating these interest rates to national income we find that now, as in 1952, they represent only 2.1 percent of national income as against a high point of 2.8 percent of national income in 1946. That is, national income has increased so that, even though the dollars have increased, it is smaller in percentage of income.

We should, of course, continue vigorously our policy of seeking to reduce the debt. That is the American way. We have done it before; we are doing it right now. Debt reduction helps to combat inflation; it releases funds for other uses; it strengthens our national readiness for any contingency.

3. The Federal debt and other debt: Another way to look at the Federal debt is in its relation to other kinds of debt in the United States. Chart D shows the total public and private debt on a gross basis over a span of years.




CHART D

PUBLIC AND PRIVATE DEBT^ $Bil.

600

300

1939 9 4 6 December —

'Gross debt

^Federal

State and " Local

Corpor-^ ation

^Individual

9 5 6

The chart starts in 1939, just before the war, whenthe total public-and private debt of the Nation was $207^ billion. In financing the war.overall debt was increased tremendously, with almost all of the change in the Federal sector as the Federal debt rose from $47)^ billion to $259)^ biUion.

During the war, when civilian activities were kept under wraps,, private debt increased very little. Financial as well as physical resources were diverted to the war effort. State and local government debt actually decreased because maturities were paid off and new projects were limited. The corporation and individual debt increased only slightly during those 7 years.

The change during the past decade is shown by the bars in the middle and on the right side of chart D. The Federal debt has increased $17K billion since 1946. In term.s of percentage of the total debt structure, however, it has declined from 58 percent of the total to 35 percent, but it still exceeds the prewar percentage of 23 percent by a substantial margin.

The total debt at the end of 1956 was $7831/2 billion, which is up about 75 percent over the past decade. During that same period



EXHIBITS 271.

our national income has nearly doubled, again partly by inflation and partly by real growth. Thus, our total debt today, of all sorts,, is a smaller percentage of our national income than it was 10 years-^ ago.

State and local government debt increased as the States and localities went ahead with new highways, schools, hospitals, public buildings, and utility services on an unprecedented scale—programs which, had been held back during the war. The total State and local debt is now about $50 billion.

That has been increasing at the rate of $5 billion a year for the past 3 years, which is a rate never before equaled, and I think before-you gentlemen get through your inquiry, it would be very interesting to analyze that debt-a little bit.

The corporate debt also has increased by leaps and bounds as corporations have undertaken postwar expansion and modernization programs. These figures include bank loans and accounts payable as well as new corporate bonds and notes.

The pressure on the security markets of these huge demands for money is the major source of present problems in Treasury financing.

The individual debt more than tripled during the last 10 years,, from $601/^ billion to $2071/2 billion, mostly in the form of increased' home mortgages and consumer debt.

As Secretary Humphrey has already mentioned to you, the totals of all debt has increased $1461/^ billion during the past 4 years, with all but $101/2 billion of the increase accounted for by nonbank sources-rather than by increases in the money supply.

I t thus rests very largely on a sound base of savings rather than on any excessive bank credit expansion, but it has been heavier than the present flow of savings could take care of without straining the-capital markets. Many buyers of bonds and mortgages have been-getting part of their funds by selling Government securities.

Of the record of the past 2 years, it might well be said that almost everybody except the Federal Government has been increasing his debt. Nevertheless, the Federal debt is still the largest single sector of debt, and has a great impact on the country.

The effect of the huge public debt on the country's economic growth-and stability depends a great deal on how the debt is distributed among^ the citizens and financial institutions and the types and maturities of the securities which make it up. So I ask your indulgence in presenting the facts on these points.

4. Who holds the debt? Chart E presents the picture on the ownership of the public debt from 1946 to date.

During the 4 years, looking at the left-hand side of the chart, during the 4 years ending in December 1956, the debt has risen—as shown; earlier—^by $91/^ billion, 3 deficits and 2 surpluses.



272 1957 REPORT OP THE SECRETARY OF THE TREASURY

$Bil.

260

220

CHAKT E

PUBLIC DEBT OWNERSHIP TRENDS

Total Debt ^*^'''

259'4

yjfivest.yy

1946 '52 '56 ^ Dec. '

60

Com1 Banks 74'/2

6 3 ' / 2 ^ 59Ji

1946 '52 '51 > Dtc.

About $8 billion of that is accounted for by an increase in the ownership of Government securities by Government investment accounts, shown by the top part of the chart—largely representing savings by or for individuals in the form of social security, veterans' life insuraQce, retirement reserves, and so forth.

With Federal Eeserve bank holdings of Governments—which is the next strip down in the chart—showing no net change during these 4 years—it Avent up from $23% billion to $25 billion in 1952, and it is still $25 billion, they have not changed their holdings—this left only about $11/2 billion to be absorbed privately.

As shown on the right-hand side of the chart, at the end of December 1956, commercial banks held $591^ billion of the debt. That was $4 billion less than in December 1952. There had been no expansion of bank credit due to an increase of holdings of Government securities.

I t should also be noted that the banks had only 36 percent of their earning assets in Government securities at the end of 1956 as against 45 percent in 1952 and 65 percent 10 years ago, when we had completed the war financing.

Bank holdings were further reduced through June 1957. These reductions reflect bank sales of Govermnents to get funds to meet the loan demands of their customers. Financing the Treasury during this period without adding to bank holdings of United States securities has kept down one inflationary potential.

We had not had a credit expansion due to deficit financing.



EXHIBITS 2 7 3

The upper right-hand part of chart E, which is the private, non-bank investors, shows an increase of $5% billion in the holdings of Government securities by what we call private nonbank investors. All of this increase may be credited to those individuals who have added more than $6 billion to their holdings of series E and H savings bonds during the past 4 years.

The Treasury has put great emphasis on the widespread sale of these small-saver bonds.

Pension funds—State and local as well as corporate—have also been net buyers of Government securities, and so have short-term investors, such as foreign accounts and State and local general funds.

These increases have been enough to more than offset net sale by insurance companies and savings banks as they also have responded to the tremendous demands on them for money for mortgages and capital expenditures.

5. Maturity structure of the debt: Parallel to the question of who holds the debt is that of the distribution of the debt among maturities.

The cheapest and easiest way to borrow is usually at short term, relying first on temporarily idle funds of corporations, trust funds, foreign funds, and—when necessary—on the banks, which in their turn might borrow from the Federal Eeserve System.

There is indeed a large legitimate short-term market for the Treasury to tap, particularly today when lenders of money are trying to keep liquid. The present weekly rollover of $1.6 billion to $1.8 billion of 91-day Treasury bills meets an important market need, is not inflationary, and does not strain the market.

I say "not inflationary" because it does not increase the total amount of bank credit.

But there are a number of reasons why short-term debt becomes undesirable beyond some reasonable amount.

First, a large body of short-term debt increases the frequency as well as the volume of Treasury financing. I t may constitute an irritant at times to the smooth operation of the market for short-term funds and for corporate and municipal securities.

Also, to the extent that the anticipation, the announcement, the offering, and the digestion of new Treasury issues spreads over a large part of a year, the time available for the Federal Eeserve to take appropriate credit and monetary policy actions may be restricted.

A large volume of short-term debt adds to the liquidity of banks and businesses and others who hold short-term Government securities as practically a cash reserve. This strengthens the position of the holders, but by the same token makes them less responsive to changes in monetary policy. They can get cash readily by selling their short-term Government securities.

Also, if at any time in the future the Treasury is faced with a financing emergency, it will probably have to fall back on short-term borrowing.

I t is important, therefore, that this source of funds not be depleted unnecessarily ahead of time. In that way any minor emergency which arises may be handled by selling short-term securities to the private market rather than-having to use the Treasury's authority to borrow directly from the Federal Eeserve System.

438363—58 19




That is a question somebody has asked about, and I will pick it up later.

Of course, when short-term borrowing means increasing bank credit; namely, the volume of money, that is directly inflationary. I t is for these reasons that any country in time of war makes a vigorous effort to sell as much of its securities as possible outside the banks as well as for a longer term.

To the extent war is financed out of taxes and savings, the worst pressure for inflation is checked.

5 a. War and postwar program through 1952: In the Treasury war-loan drives, which all of us had some part in, I am sure, of World War I I , the typical package of securities included savings bonds and notes, a long-term 2i/^ percent bond, not eligible for purchase by commercial banks, a 10-year 2-percent bond, or similar bond, and also a short-term certificate and perhaps a medium-term note.

During the war, a large volume of bonds could be sold because investors had a limited humber of other uses for accumulating savings. Few new mortgages were being written, and neither business nor local govermnent units were heavy borrowers, as we saw in the chart on public and private debt.

The postwar period brought different problems. All types of borrowers began clamoring for money. Government bonds were relatively unattractive at their low pegged interest rates, and it was clear to most lenders that rates could not be held at these levels, even though the Treasury tried.

In any event, little progress was made from 1946 to 1952 in funding the debt, though there were several issues of notes and two short bonds prior to 1953.

The refunding in 1951 and 1952 of a large block of 21^ percent bonds into 2% percent nonmarketable series B investment bonds with an optional exchange into 5-year notes had actually the effect of shortening the average length of the marketable debt. I t was, however, the price of getting through the accord between the Treasury and the Federal Eeserve, and that was worth a very substantial price.

Excluding these issues, the average maturity of the marketable debt declined by about 40 percent in the 6 years ending in 1952, largely through the passage of time.

One is reminded of the quotation from Alice in Wonderland where the Eed Queen said, "You have to run very fast to stand still," and that is true of the debt. Because every month that elapses, the maturity gets shorter if you do not do anything about it.

5 b. Program of the past 4% years: When the new administration came in, we set a goal of selling longer-term securities and giving the debt a wider distribution whenever the market made it possible.

We redoubled our efforts to sell series E and H savings bonds Avidely to the people.

We began to shut down on the sale of other debt payable on demand at the option of the holders.

We began promptly the sale of long-term bonds to the market in the spring of 1953 at the interest rates necessary to sell them. I will review that 1953 issue in more detail a little later on.



EXHIBITS 275

In 1954 and 1955, we made substantial progress toward our objective by selling a large volmne of intermediate-term securities, together with $2% billion of 3 percent 40-year bonds, the longest bonds that had ever been sold since the Panama Canal issue.

In 1956 and 1957, in the midst of the current tremendous capital boom, we have sold no ncAv bonds and only a limited amount of intermediate-term notes.

There are a number of ways of measuring the changes in the debt structure over the years. Some of them refer only to the marketable debt, such as figures on the average length of the debt. Others— more comprehensive—take into account not only the maturity distribution of the marketable debt, but also the demand character of other portions of the debt.

All of these "yardsticks" show that we have moved forward in improving the structure of the debt during the past 4i/2 years, especially in comparison with the record of the earlier postwar period.

6. Average maturity of the marketable debt: One measure of the structure of the debt is the average length of time that the marketable debt has to run to maturity. The amount outstanding of each security making up the marketable debt is multiplied by the number of months it still has to run.

These amounts are then added up and divided by the amount of marketable debt outstanding to give a figure on average length of maturity.

Although the average length of the marketable debt does not reflect changes in other types of debt like savings notes and savings bonds, it is still useful as a yardstick since it encompasses nearly 60 percent of the total debt outstanding, including the most volatile areas of the debt.

The average length of the marketable debt to maturity—calculated to first call date on callable bonds—amounted to 7 years and 2 monthg in December 1939.

By December 1946, that average had fallen to 6 years and 3 months, that is even after selling a very large amount of bonds during the war, but of course the increase in the debt was so large that we could not quite keep up with it. That figure is after excluding, to make the comparison fair, those 2% percent long-term bonds sold in 1944 and 1945 which were exchanged for nonmarketable investment bonds in 1951 and 1952.

By December 1952, the average had fallen further, to 3 years and 10 months, compared to 6 years and 3 months in 1946.

Although the average rose above 4 years for a while during 1954 and 1955 when Treasury debt extension was most active, at the end of 1956 it was back down to 3 years and 9 months—1 month shorter than 4 years earlier.

By June 1957, the average had fallen by 2 more months. This record indicates a loss in average length of 3 months during a

period of the past 4i^ years, as against a loss of 29 months during the 6 preceding postwar years. The loss since December 1952 is even less when only publicly held securities are considered, since Federal Eeserve-held securities, many of longer maturity originally, are being refunded into short-term issues under the present policy.




The average length, exclusive of Federal Eeserve, was 4 years and 1 month in June 1957, as compared with 4 years and 2 months in December 1952. In other words, by running very hard, we have managed to stand still on that.

Furthermore, this measure of average maturity takes no account of nonmarketable demand debt, which has proved an awkward inheritance.

7. The "floating debt": A more accurate measure of changes in the structure of the public debt from the point of view of the job of the debt manager is a comparison between the "floating debt" on the one hand and intermediate and longer term issues on the other, basing the figures on publicly held debt.

This means excluding securities held by the Federal Eeserve banks and Government investment accounts, but including in the floating debt the most volatile part of the nonmarketable debt payable on demand.

The following table shows the composition of the debt from this point of view.

That is the one you want to study. I t shows in detail just what these sections of the debt are. What we call the floating debt is the section held by the public.

Structure of the public debt


He ld by Federal Reserve banks and Government inves tment accounts _. -

He ld b y t he publ ic : Float ing deb t :

Unde r 1-year marke t ab l e s . . Savings notes _.- . F , G, J, a n d K savings b o n d s . . Miscellaneous d e m a n d deb t i

To ta l floating deb t _

In t e rmed ia t e and longer t e rm issues: E and H savings bonds I n v e s t m e n t Series B bonds Marke tab les ma tu r ing in :

1-5 years 5-10 years - -Over 10 years ._

To ta l , held b y the publ ic -

Tota l deb t

Percent floating deb t to total

December 31

1952

70 6

42 9 5 8

22 6 3 4

74.6

35.3 9.1

33.3 19.8 24.8

122.3

267.4

27.9

1953

74 2

58 8 6 0

21 0 3 5

89.3

36.7 8.6

24.9 15.5 26.1

111.7

275.2

32.4

1956

79 0

45 6

14 9 3 5

63.9

41.4 7.5

42.3 14.2 28.4

133.8

276.7

23.1

June 30, 1957

78.6

50.6

13.1 3.0

66.7

41.5 7.2

38.8 11.3 26.5

125.3

270.6

24.7

^ Includes investment series A bonds, depositary bonds, matured debt on which interest has ceased, and debt bearing no interest.

The ainount held by the public. Floating debt: The under-l-year maturities at the end of 1952 were $42.9 billion. That rose in 1953, because we inherited a lot of debt maturing that year, and 1954, so we

' had a jump to $58.8 billion.



EXHIBITS 27.7

^ That was worked down to $45.6 billion in 1956, and is now $50.6 billion, which is higher than it was at the end of 1952, but it is lower than it was in 1953 when you take into account the maturities that slapped us in the face in 1953 and 1954.

Savings notes, those are the 3-year notes which the Treasury used to sell to corporations and others so they could use them for taxpayments, but they were redeemable on demand. That is, a corporation could bring them around any time and get their money, or use them to pay taxes, and we terminated that because we found it to be an undesirable form of debt. But it was something we had to take care of.

The next is F , G, J , and K savings bonds. Those were the larger savings bonds, in lots as large as $100,000, which were sold, some to the banks, some to the trusts, some to individuals. But that again proved to be a very awkward kind of savings bond because it was held by large holders who could shift their money around, and they began turning the stuff in, so that has gone from $22.6 billion down to $13.1 billion. We were hit with $3 billion of that in the past year, and we had to dig up the cash to take care of it, so that was part of the floating debt. We paid that down by $9 billion in 4 years, or a little more.

Miscellaneous demand debt: That is not as important. That is series A investment bonds, and depositary bonds in banks, and a few other things like that. I t does not vary much.

In that total of the floating debt, we had practically $75 billion. I t ran up on us to $89 billion by the end of 1953. There was nothing we could do about it. We tried to push some of it out, but those were the maturities that existed. That was reduced by the end of 1956 to $63.9 billion, and it is up a little bit for June 30, to $66.7 billion.

But if you will compare that with the high point, the floating debt as defined in this way, it is down more than $20 billion from what it was in 1953; and from that point of view, the jpb of the debt manager is a lot easier than it was when we took over.

Here is the rest of the debt: Intermediate and longer term issues. We put the E and H savings

bonds in that. That, in a sense, is demand debt, but experience has shown it is a relatively stable figure; even with the redemptions that you had in the past 12 months, the amount of E and H bonds outstanding has continued to increase a little. While the sales are less than the redemptions, the accumulated interest is enough to take care of that, so that this year that actually has been increasing.

So from the point of view of the debt manager, that is a part of the debt that does not bother us. I t is a good, solid part of the debt. That is held by millions of our people, and it is only in that way that you can get that very wide distribution.

Now, the investment series B bonds, I have referred to. Those were the 2% percent bonds that are convertible into 5-year notes, so that they can become short-term debt or relatively short-term debt, and about a third of the $15 billion that were issued have been converted that way.

Then the marketables: Maturing in 1 to 5 years are up from 1952, but they are down from 1956.




The 5 to 10 years are doAvn. The over 10 years is up a little. That is the long-term bond area. Now take the bottom figure, the percentage of the floating debt to

the total was 27.9. I t rose to 32.4 percent. I t is doAvn to 24.7 percent. So it is a little better than it Avas. So we have made progress in our efforts to reduce the amount of floating debt, which the Treasury may be called upon to handle each year.

The floating debt as defined above has two basic ingredients: (1) Publicly held marketable securities maturing within 1 year—including callable bonds when they actually are taken care of; and (2) non-marketable demand debt which is payable practically on demand and is in the hands of rather large holders who move freely from one investment to another in response to changing market conditions.

We do not include series E and H savings bonds, the small saver's bonds, as part of the floating debt since they are not as sensitive to fluctuations in market interest rates and the total outstanding is quite stable in contrast to the widely fluctuating volume of other savings bonds and savings notes.

Chart F presents data on the ^^floating debt'^ over the last decade. This type of debt Avas reduced by more than $10 billion between December 1952 and December 1956, and the figure at the end of last year was more than $25 billion beloAv the all-time peak in 1953.

Federal Reserve bank oumership of U. S. Oovernment securities [In millions of dollars]

E n d of year or m o n t h

1946 - - - --1947 1948 1949 1950 -1951 1952 1953 . — 1954 1955 1956 (June) 1956 ( D e c e m b e r ) . „ 1957 (June)

Bills

14, 745 11,433 5,487 4,829 1,296

596 1,341 2,993 2,204 1,722

855 1,918

287

Certificates

7,496 6,797 6,078 6,275 2,334

12, 793 5,061 5,967

13, 882 6,002

10, 944 10, 975 11, 367

Notes

355 1,477

791 562

12, 527 5,068

13, 774 13, 289 6,044

14, 259 9,157 9,219 8,579

Bonds

753 2,853

10, 977 7,218 4,620

2 5, 344 4,522 3,667 2.802 2,802 2,802 2, 802 2,802

Tota l hold-ings

23,350 22, 559 23, 333 18,885 20,778 23,801 24,697 25, 916 24, 932 24, 785 23, 758 24, 915 23,035

•

M a t u r i t y dis t r ibut ion i

W i t h i n 1 year

22, 313 19,923 12,426 11, 983 16,003 15.057 15, 613 16, 972 19,417 20, 742 20, 242 22,113 20, 246

I t o 5 years

832 1,377 3,258 1,922 1,285 5,102 6,655 6,155 3,087 1,614 1,087

373 681

5 to 10 years

72 426 434

1,388 982

1,014 1,070 1,374 1,014 1,014 1,014 1,014

750

Over 10 years

133 834

7,215 3,593 2,508

2 2,629 1,358 1,415 1,415 1,415 1,415 1,415 1,358

1 Prior to December 1953, callable bonds classified according to nearest call date. 2 Includes $1,214,000,000 nonmarketable issues. Source: OlH.ce of the Secretary of the Treasury.

This type of debt, the floating debt, was reduced by more than $10 billion between December 1952 and December 1956, and the figure at the end of last year was more than $25 billion below the all-time peak in 1953, which reflected largely the inheritance of scheduled maturities from earlier years and financing growing out of the 1953 deficit.

While the under-l-year marketable debt held outside Federal Eeserve banks and Government investment accounts was $2^2 billion



EXHIBITS 279

higher at the end of 1956 than in 1952, it was nevertheless $13 billion below its all-time peak in 1953.

In contrast, this part of the floating debt rose by more than $10 billion between 1946 and 1952, when primary reliance was placed on the issuance of short-term securities and the passage of time kept shorten-ins: the debt.

CHART F

THE FLOATING DEBT^ $B!{I.

75

, Jl, ^ Nonmarketable ' ,2 DemandDebf

Marketables Maturing Within I Year

'52 December

""Held outside of Federai Reserve Banifs and Govt invest Accts "^Excluding Ato EandH Savings Bonds

One of the most important ways in which the floating-debt picture has changed, as you Avill note from the chart, is through the reduction of nonmarketable demand debt in the hands of large investors. I t has been, reduced by $13 billion since 1952.

The elimination of the sale of short-term savings notes in the fall of 1953, and the recent dropping of sales of the investment-type J and K savings bonds as of April 30, 1957, represent major steps in the reduction of the more volatile Treasury demand debt.

8. Opening up the long-term market and adding to the supply of intermediate-term securities: In the absence of extensive debt payoffs, the objective of reducing the floating debt can be accomplished only by selling, more securities outside the 1-year area.

Chart G shows the history of Treasury financing over the past decade, year by year, in terms of the relative amounts of short term and longer term financing.

The chart also shows the seasonal borrowing which has grown during recent years—borrowing repaid out of increasingly heavy taxpayments each spring up until 1956, when the return to a more even quarterly distribution of corporate-tax payments began.




CHART G

VOLUME OF TREASURY MARKET FIMANCING (Excluding Weekly Roll-Over of Bills)

$Bil.

60

40

20

Long-Term Bondsy

^ S ' l O Year Bonds

-^ Other Notes

37.5

Certs. andSbort

^ Notes'"

un^Seasonal

'50 ^52 Calendar Years

* Notes originally 20 montlis or less to maturity

As chart G shows, there was a modest amount of interinediate-term securities issued in 1949 and 1950—those are notes, $4.7 billion inl949 and $12.2 billion in 1950—which helped to reduce the Treasury's financial burden in 1951.

Two short-term bonds were sold in 1952. The major efforts at debt extension, however, have been made during the past 4% years.

Since 1952, the Treasury has sold $4% billion of long-term bonds. The first of these, the 3 ^ s , totaling $1.6 billion, in the spring of 1953, represented the Treasury's first long-term market issue since the end of World War I I financing.

Then in 1955, we sold $2.7 billion of the 3-percent bonds of 1995, the longest Treasury bond issued since the Panama Canal bonds were issued in 1911.

This $4% billion of long bonds, together with the $261/2 billion of 5- to 10-year bonds issued in 1953 and 1954.

This $23% billion, I can correct that figure for the financing we just concluded, that becomes $26 billion of 2- to 5-year notes issued since 1952, has thus made it possible for the Treasury to keep up with the ever-shortening public debt, and start reducing a little the annual volume of Treasury market financings.

Also, the long-term offerings gave greater breadth and depth to the free long-term Government securities market.

A complete list of marketable securities issued since January 1, 1946, which mature in more than 2 years, is shown in appendix A ; and then in appendix B we have given a complete list of all the securities, except bills, we put out since we have been in.



EXHIBITS 281

Before every Treasury financing, we canvass the market for a long-term bond among dealers and potential buyers. In these 41/2 years, I do not think we have failed to take advantage of any favorable opportunities to sell bonds successfully.

Our job in calendar 1957 is larger than in 1956, and perhaps a little above 1955. During the first half of the year we completed $22 billion of financing. $3 billion of that was extended beyond 3 years through the issuance of Treasury notes, so our record of debt extension in the first half of 1957 was already somewhat ahead of 1956.

On July 3, we sold $3 billion of March 1958 tax bills for cash, that is, by inviting bids, as you know, and as will be covered later, we are now completing the refunding of nearly $24 billion of August and October maturities, more than $14^2 billion of which are held by Federal Eeserve banks or Government investment accounts.

I have a little section later which reviews that whole operation, so you will have the whole picture.

We will have a December maturity, which arises from this last financing, to refund, and we will also have more seasonal tax anticipation financing before then. That is, we will sell some Treasury bills or certificates that will mature at time of tax payments next year and can be paid off out of taxes.

This will bring our total job for 1957 to more than $55 billion, exclusive of weekly Treasury bill offerings.

Treasury bills outstanding as of Aug. 1,1951

Rate of interest (percent) 1

Date of issue Amount issued

Treasury bills (maturity value)—series maturing: Aug. 8, 1957 Aug. 15, 1957 Aug. 22, 1957 Aug. 29, 1957 Sept. 5, 1957 Sept. 12, 1957 Sept. 19, 1957 Sept. 26, 1957 Oct. 3, 1957 Oct. 10, 1957 Oct. 17, 1957 -. Oct. 24, 1957 Oct. 31, 1957

2.909 2.895 3.122 3.245 3.374 3. 256 3.405 3.231 3.238 3.171 3.092 3.158 3.363

May May May May June June June June July July July July Aug.

9,1957 16,1957 23,1957 31,1957 6,1957

13,1957 20,1957 27,1957 5,1957

11,1957 18,1957 26,1957 1,1957

699,381,000 700,033,000 800,033,000 800, 524,000 799, 572,000 799,907,000 600, 298,000 601, 643,000 599, 216,000 599, 742,000 600, 562,000 600, 512,000 699,862,000

Total.. 21,901, 285,000

1 Treasury bills are sold on a discount basis with competitive bids for each issue. The average sale price gives an approximate yield on a bank discount basis as indicated for each series.

Office of the Secretary of the Treasury, July 31,1957.

If Federal Eeserve bank holdings are omitted, the total job this year is only about $35 billion—that is, the total job we have had to do in 1957.

These financings continue to be in competition with very heavy demands for funds in the capital markets. They require attractive rates and careful planning.

I think I will repeat what I said before, that they constitute a problem, but not a crisis, Mr. Chairman. We are not in a crisis in Government financing.



282 195 7 REPORT OF THE SECRETARY OF THE TREAStJRY

9. Encouraging thrift by selling more securities to individuals. I have already mentioned that individuals' holdings of Government securities have been growing and now stand near their all-time high.

The major factor in this growth has been the series E and H savings bonds program. The vigorous promotion of this program, aided by an improvement in terms in May 1952—I want to give credit for a very sound step taken in May 1952 to improve the savings bond program.

But vigorous promotion of this program, aided by an improvement in terms in May 1952, brought an increase of more than $6 billion in E- and H-bond hoMings during the 4 years ending December 1956.

The core of this thrift program has been the payroll savings plans, under which about 8 million workers are now buying savings bonds regularly. We estimate that approximately 40 million Americans now own $41% billion of these E- and H-bonds.

Some figures on E and H savings bonds may be interesting. This table shows the growth of E and H savings bonds averages for

calendar years, in billions of dollars.

Growth of E and H savings honds, averages for calendar years [In billions of dollars]

Annual averages

Wartime: 1941-45 Postwar:

1946-49 _ 1950-52 1953-56

Cash sales and redemptions

Sales

8.6

4.2 3.5 4.9

Redemptions

2

4.1 4 4.5

Net

6.6

.1 - . 6

.4

Interest accruals

0.1

.6 1.1 1.1

Net change in outstand- '

ing

6.6.

.8

.5 1.5

Amount outstanding, end of

period

30.7

33.8 35.3 41.4

Groioth of E and H savings honds, 1941-^1


Fiscal years

1947 1948 1949 1950 . 1951 1952 1953 1954 1955 . 1956 1957

Cash sales and redemptions

Sales

4.3 4.0 4.3 4.0 3.3 3.3 4.1 4.7 6.2 5.3 4.6

Redemptions

4.4 3.8 3.5 3.5 4.3 4.0 4.0 4.3 4.6 4.7 6.2

Net

- 0 . 1 + . 2 + . 7 + . 5

-1 .0 - . 7 '

(0 + . 3 + . 7 + . 5 - . 6

Interest accruals

0.6 .6 .8 .9

1.0

Net change in outstand

ing

+0.4 + . 8

+1.5 +1.4

+1.1 +1.4 +1.8 +1.6 + .6

Amount outstanding

endof period

30.8 31.6 33.1 34.5 34.6 34.9 36.0 37.5 39.3 40.9 41.6

1 Less than $50 million. Source: Office of the Secretary of the Treasury, July 25,1957.

Of course, the heavy loss was in the 1956-57 period until we changed the rate. I t has picked up a little, but not very much, because the interest rates have gone on up, the general market rates.



EXHIBITS 2 8 3

The record of savings bonds sales during the 4 years 1953-56 has been better on the average than during other periods since the end of the war. Eedemptions have risen somewhat in recent years— partly because of the cashing of bonds which have reached their 10-year maturity in increasing amounts. Nevertheless, the net excess of cash sales over redemptions of these bonds was higher in 1953-56 than in either earlier postwar period.

About a year ago, as you gentlemen know, savings bond sales started to slow down uncier the impact of higher interest returns available in alternative forms of savings. Then, as your committee is aware, the Treasury received from the Congress authority to raise from 3 to 3^4 percent the overall yield on E- and H-bonds if held to maturity. The interim yields have also been increased.

Savings bonds are not sold primarily for their yield but for their security, their redeemability, and their convenience. However, the buyer must feel he is getting a fair rate. The action you took was helpful.

The savings-bond program is one of the best means we have of achieving a wider distribution of the debt and of encouraging the overall volume of savings which the country so much needs to keep pace with the tremendous demands of the people for all forms of goods and services.

In summary, then, these are the ways in which the Treasury has sought to manage the debt so as to make it less of a disrupting influence on our economy. We have not always been able to move as fast as we might like toward our long-range objective of achieving a better debt distribution, but we have reduced the floating debt and the bank-held debt and so reduced the inflationary threat which the debt carries. In addition, we have widened the sale of savings bonds and reopened the market for long-term bonds.

10. Now, let me say a word about the techniques of debt management. Before I conclude, I want to discuss with you briefly the way in which the Treasury approaches each of its debt management decisions which involve the issuance of new marketable certificates, notes, and bonds.

Each Treasury financing represents an important event in the money markets of the country. I t is, therefore, essential that the Treasury take every precaution to get information from every useful source in making decisions about these operations.

In the course of exploring the facts relating to a new Government issue, the Treasury consults a great many people. We get valuable help from the Federal Eeserve Board and the 12 Federal Eeserve banks, with their offices throughout the country which are in contact with a large number of people and with the money and capital markets. I might add that the Federal Eeserve Bank in New York is particularly helpful. They have a group of very able officers, and their help to us in deciding about Treasury issues has been invaluable, and I say that not just because I was an officer of that bank for 18 years, Mr. Chairman.

We maintain contact with the people who handle investments of commercial banks, savings banks and insurance companies, pension funds—State, municipal, corporate and other private funds—security dealers, and trust companies which have money to invest.




I may say we did not put in this statement that we also get monthly reports from banks and other principal holders of Government bonds as to their holdings, so we have a statistical series that runs back pretty well and gives us changes in the security holdings of the principal holders.

We rely upon the banks and security dealers to keep their customers informed about our offerings of securities, in addition to our public announcements. After a new issue is announced the banks and dealers do an enormous amount of writing and telephoning to their customers to tell them about the new issue. In this way, hundreds of thousands of investors are reached promptly.

The rates of interest which our securities carry are determined basically by the quotations in the Government securities market. Many millions of dollars of Government securities are bought and sold every day in the free market and the price determined in this way indicates the rates we have to pay on new issues.

Perhaps the best indication of the pricing of new Treasury issues is the record of the prices at which our issues have sold in the market on the day they were actually issued, usually a week or 10 days after the subscription books were closed.

In 1953 the Treasury put on the market almost $44 billion of certificates, notes, and bonds—those securities on which we had to decide on a rate of interest. These issues were quoted in the market on the issue date at an average price of par and 5 and one-half thirty-seconds of a dollar per $100 bond. Prices in the Government securities market are quoted in dollars and thirty-seconds; a thirty-second is equal to 3% cents.

In 1954 we sold $59% billion of this type of security, and the price on those in the market on the issue date was par and eleven thirty-seconds. Money rates were going down a little. I t was a more favorable market.

Since then, our pricing has worked out even closer: Exactly par on the average on $49 billion of such issues in 1955, and par and one thirty-second on $33 billion in 1956, and exactly par again on $16 billion of new coupon issues in the first half of 1957. Appendix B shows these figures in detail, for each issue, what it was quoted at on the day of issuance and the first day it was quoted. And I will give you the figures on our latest 4-percent job in full, also, later.

These figures encompass tho entire $201% billion of certificates, notes and bonds we issued from January 1953 through June 1957. The problem is to make each new issue attractive enough to sell without being too generous.

The attractiveness of a new issue is affected by such influences as the expectation of the market on interest rates and the volumes of funds purchasers have available for investment. Also large issues and longer-term issues have to have a little more margin to assure their successful sale. That is one reason the 1954 issues show a little more margin, because quite a number of those were bonds.

In addition to these coupon securities, certificates, notes, and bonds, the Treasury sells from $1.6 billion to $1.8 billion of 91-day Treasury bills at public auction each week and from time to time tax anticipation bills are also offered on the same bid basis; they may be 9 months, 6 months, whatever it works out.



EXHIBITS 2 8 5

The rates at which these securities sell are determined by the mar-ke t^no t by the Treasury. We have sold more than $375 billion of securities in this way since January 1953—actually much more than we have sold with interest rates fixed by the Treasury.

The interest rates on these bills, together with the yields on purchases and sales of all types of securities in the open market, build up a pattern of interest rates which makes it reasonably clear what ra te a new issue of securities has to carry to be sold successfully. The differ-^ ence is usually a difference of an eighth one way or the other in your decision.

Thus, our discussions prior to a financing are not so much concerned with the rates of interest as with the question of what kind of security we should sell: a bond issue, over 5 years to maturity; an issue of notes, 1 to 5 years; or a short-term certificate, 1 year or less; or a bill—and just what maturity.

The advice we receive is frequently conflicting and the Secretary makes his decision, subject to Presidential approval on maturities over 1 year, only in the last hour before the public announcement. That is literally true.

11. Now, let me take up the 314s that have been discussed at considerable length on the floor of the Senate and the House over a period, and also this last offering. The offering of the 3 ^ s in 1953. This general plan of preparation for financing was followed when the Treasury offered the 3 ^ percent bonds of June 1978-83 in the spring of 1953.

This was not only the first long-term marketable bond that the Treasury had offered since 1945, but it was also the first to be put out without Federal Eeserve market support for a much longer period. As you know, the Federal Eeserve used to be in there supporting the market for a bond issue.

As you will remember, inflationary pressures were heavy in the last part of 1952 and early 1953, under the impact of a then record demand for money. Despite this heavy demand for private funds, we were assured that there were some funds available for investment in a long-term Government bond.

Our offering of the 3i/4s presented as difficult a pricing problem as the Treasury has ever had to face. We had to set the interest rate on the new issue in a market in which prices were moving gradually lower—a market which was still in the process of adjusting to freer market conditions.

Our longest outstanding bond, the Victory 2V2S of December 1967-72, had fallen from almost three-quarters of a point above par— 2.45 percent yield—to 95^—2.80 percent yield—between the Federal Eeserve-Treasury accord in March 1951 and the end of 1952.

Let me say that again: Before we came in, in the 2 years 1951 and 1952, the prices of the Victory 214s had fallen 5 points, so they would be priced at 95% in December 1952.

By April 8, 1953, when the 3i^s were announced, it had fallen to 94; that is 1% points more. The big fall took place before we came in. At 94, they yieMed 2.90.

Now, somebody said the other day that we did this in a 2% percent market. That is just nonsense. The Victory 2i/^s were quoted when we put out the 3i/4s at 2.90 yield basis.




There were no long-term Treasury issues outstanding which would serve as a real guide to the interest rate such an issue should carry. The Victory 2%s were 10^^ years shorter than the new issue, and the market curve of rates, if you plot out a curve, rose as maturities lengthened. One-year inoney was worth about 2% percent as far as Government securities were concerned, and 5-year money a little more than 21/2 percent. I am giving you the mathematics of this.

Therefore we took the market curve on outstanding Treasury issues and extended it parallel to the curve on high-grade corporate issues, retaining, of course, a proper spread between the two types of obligations.

That curve produced a rate of 3.08 percent as of June 15, 1978, which was the call date on the new bonds, and 3.12 as of June 15, 1983, the maturity date of the new bonds.

The 31/4 coupon would appear to offer a rate, therefore, approximately 15 basis points—15 one-hundredths of 1 percent—above the market curve, but the spread would be much less than that if you take into consideration the fact that we were issuing the bond in corapetition with outstanding issues available in the market at a discount, another technical point, which had a capital gains advantage for tax purposes.

The Victory 2%s at 94 were as attractive to a corporate taxpayer in aftertax yield as a new hypothetical 3.10 percent issue at par would be if both were held to a 1972 maturity.

I do not know whether that is clear to you. But if you buy a discount bond, you pay your regular income taxes on the coupon, and then you pay a capital gains tax when it matures for the 5 points that you gain when it is redeemed at par. You pay only half the tax on the capital gain, so that on these quotes you will find they have to quote the outstanding bonds just on a strict yield basis, to take account of the capital gain.

This 31/4 percent rate proved sufficient to enable the Treasury to sell $1.2 billion of the new bonds for cash and to induce the holders of $0.4 billion of maturing F and G savings bonds to exchange them for the new issue.

We gave all the F and G bonds maturing in 1953 the option of exchanging for the new bond, and 400 million of them took advantage of it. That was less than a third of the amount that could have.

The estimated yield spread of about 15-basis points above the market was quite modest, however, compared to the 23-basis point average spread between the 11 new high-grade corporate issues put out during 1953 and the outstanding corporate market. That is, when a corporation sells a bond in the inarket, a new bond, it has to pay a higher yield than the outstanding seasoned bonds. If you are doing an underwriting job you have to pay a higher yield, as you all know, and there was an average spread of 30-basis points on the 58 new high-grade corporate bonds that had been issued since January 1, 1951, in relation to the outstanding market, taking Moody's Aaa bonds as a basis.

Nevertheless, the 314 percent rate was not sufficient to give a real incentive—I would like to put in the "real," because there are always



EXHIBITS 287

some speculators around—to speculators who thought they could turn over the new issue at a profit.

The first price quotation in the market on the new 3i/4s was par and %2 on April 15, 1953. That is what the market said it was worth on this bond that was supposed to be so overpriced. Trading on the new bond between that date and the issue of the bond fluctuated between a high of par and i%2 ^^^ ^ ^^^ of 992%2.

On the issue date of May 1, the 3i/4s were selling in the market at 992%2—that is at a discount—with a yield to the buyer of 3.26 percent. I t was mid-July before the new 3i^s again rose above par.

These figures demonstrate, I believe, that the 3% percent rate was the lowest rate at which we could possibly have sold at 25- to 30-year bond in a free market in the spring of 1953.

12. Our current refunding: This same general pattern of financing was also followed in our most recent refunding program which was announced Thursday, July 18. As you know, this offering did not involve the raising of any new cash. I t was concerned solely with the refunding of four maturing issues: $12,056 inillion 23/4-percent notes maturing August 1, $3,792 million 2-percent notes maturing August 15, $7,271 million 3%:-percent certificates maturing October 1, and $824 million ll/2-percent notes maturing October 1, $23,943 million total maturing issues, of which more than $14% billion was held by Federal Eeserve banks and Government investment accounts.

With an unprecedented heavy demand for funds in the private area we were convinced quite early in our studies that there was no substantial demand for long-term Government securities. The package offering that we decided upon included two certificates and a note, to be issued on August 1: A 3%-percent certificate, maturing in 4 months (December 1, 1957), a 4-percent certificate maturing in 12 months (August 1, 1958), and a 4-percent note maturing in 4 years (August 1, 1961), but redeemable at the option of the holder in 2 years (August 1, 1959). The choice of all 3 issues was given to the holders of the August maturities but the October holders were allowed to choose only between the 2 longer issues. I t did not make much sense to give an October 1 holder an option of converting into December 1, you see, only 2 months, so we let them spread it out.

This package was designed to provide a very short security for corporations and other short-term investors who want their money before the end of the year, an attractive 4-percent 1-year security for other short-term investors, and a longer 4-percent issue which would appeal to 2 somewhat different groups of buyers: (1) those who were not sure that they wanted to invest funds for as long as 4 years in case interest rates continue to rise and, therefore, liked the idea of being able to redeem at the end of 2 years, and (2) those who felt that the present heavy demand for money is perhaps close to its peak and were anxious to get part of their portfolios invested for a longer period than 2 years at a 4-percent rate on the theory that a 4-percent rate might not be available again for a long time.

The pricing on these three issues was done in line with the outstanding market. The market pattern of yields at noon on July 18, just before the announcement was made, showed rates of approximately 3 % percent at the 4-month point on the curve, 3.90 percent at the




1-year point, 3.95 percent at the 2-year point, and 3.98 percent at the 4-year point.

This pricing was as close or closer to the market curve than the average pricing that the Treasury has done during the entire period of more than 6 years since the Federal Eeserve-Treasury accord in 1951.

The new pricing was not, however, quite as thin as on the issues that we put out in February and May of this year, when new short-term issues fell slightly below par on their first market quotation.

The large volume was also a factor in pricing the new issues. •\Vhen you are dealing with $24 billion, you can't cut it quite as thin as you can when you have four to sell.

All three new issues showed closing bid-price quotations of par and one thirty-second on the first day of trading—Monday, July 22^ I may say they went down to an even par bid Tuesday afternoon and Wednesday morning.

The operation was successful. The cash turn-in of $1.1 billion on this refunding—these are preliminary figures—was the smallest percentage of publicly held maturities turned in for cash of any refinancing since March a year ago.

Furthermore, we succeeded in selling $2% billion of the new 4-year notes, again helping to keep the debt from shortening.

When we term this a successful operation we do so with full recognition that this refunding alone has added one-tenth of 1 percent to the computed interest rate on the entire public debt, with an increase of about $250 million in our computed annual interest charge.

More than one-half of this added interest comes back directly to the Treasury since $14% billion of the $24 billion maturity was held by the Federal Eeserve banks and 90 percent of their net earnings are returned to us.

The remainder of approximately $100 million does not represent a net addition to the Federal budget since a substantial share of it will be paid back to the Treasury in taxes.

We would prefer to do our borrowing at lower rates. Naturally, any debtor would. We fully recognize, however, that this is one of the costs to the American taxpayers of a monetary and credit policy which is the primary bulwark against the loss of untold billions of dollars through inflation.

I have presented the background of the 3i/4 percent bond issue and the recent financing to illustrate the point that the Treasury does not force rates up, as sometiines stated. I t has always been our policy to sell our securities at the lowest interest rates at which the maturities offered can be sold.

Attached to this statement are appendixes A and B which will give you the complete information about the offerings. The first one, appendix A, going back to 1946, and showing the amounts of each issue of securities that was put out beyond the one-year maturity—these public issue securities, 2 to 5 years, 5 to 10, and over 10.

And the other, appendix B, shows every issue of marketable securities other than Treasury bills that have been put out by this administration.



A P P E N D I X A

Treasury offerings of intermediate and long-term marketable securities, J anua ry 1946-August 1957 [In millions of dollars]

2 TO 5 YEARS

D a t e subscr ipt ion books were opened

1946» --- - -- - -1947 1 1948 1 1949—Dec. 5 1950—Feb. 17

Dec . 4 19511 19521 _-- - - - - __-1953—Sept. 2 1954—May 4

Sept . 23 1955—Feb. 1

N o v . 28 — -1956—Mar. 15 1957—Feb. 4 . . .

M a r . 18 . M a y 6—. _ . ._ J u l y 22

Total.. _ _-

D a t e of issue

Dec . 15 M a r . 15 Dec . 15

Sept . 15 M a y 17 Oct. 4 F e b . 15 Dec . 1 Dec . 1 F e b . 15 F e b . 15 M a y 1 A u g . 1

Descr ipt ion of securi ty

Percent

2% IK 2 2% 2% 33^ 33/2 3^8 4

T y p e

N o t e . No te N o t e

N o t e N o t e N o t e __ N o t e N o t e N o t e N o t e N o t e -N o t e N o t e

D a t e

M a r . 15, 1954 M a r . 15, 1955 . Dec . 15, 1955

M a r . 15, 1957 F e b . 15, 1959 M a y 15, 1957 Aug . 15, 1957 J u n e l S , 1958 J u n e l S , 1958 M a y 15, 1960 M a y 15, 1960 F e b . 15, 1962 Aug . 1, 1961 2

Per iod to m a t u r i t y

Years

4 5 5

3 4 2 2 2 2 3 3 4

24

M o n t h s

3

6 9 7H 6 6 6 3 3 9H

A m o u n t issued

Cash

2,205 4,155

942

3 100

7,402

Exchange

4,675 5,365 6,854

2,997 2,897

3,792 2,283 2,109 1,464

647 4 2, 481

35, 564

To ta l

4,675 5,365 6,854

2,997 5,102 4,155 3,792 2,283 2,109 1,464

942 647

* 2, 581

42, 966

Year ly totals

} 4,675

12, 219

1 \

2,997

9, 257

6,075 2,109

6,634

5 TO 10 YEARS

• - I

w H Xfl

19461 - - -1947 1 1948 1 - - - - - - - _-19491 19501 -1951 1 1952—Feb. 18

J u n e 16-- - - _- _-_ 1953—Feb. 2

Oct 28 N o v . 18

M a r . 1 J u l y 1 F e b . 15 N o v . 9 F e b . 15

2H 2H 2M 2H

Bond Bond Bond . -Bond Bond ,

•

M a r . 15, 1957-59— J u n e l S , 1958 Dec . IS, 1958 Sept . 15, 1961 Dec . 15, 1958

7 5 5 7 5

l l H 10 10 10

4,245

2,239

927

• 620

1, 748

927 4,245

620 2,239 1,748

} 5,172

4,607

See footnotes at end of table. 00



APPENDIX A

Treasury 'offerings 'of inierrn'ediate and iong-iei^m marketable securities, JdhUary i'946-August 1'957—Continued [In millions of dollars]

5 TO 10 YEARS—Continued

D a t e subscript ion books were opened

1954—Feb. 1 Aug. 3 - _ _ . -N o v . 22

1955 1 1956 1 19571

T o t a l . . . -

D a t e o f issue

F e b . 15 Aug . 15 Dec . 15

Descript ion of secur i ty

Percen t

2K 23^ 2M

T y p e

Bond Bond -Bond

D a t e

N o v . 15, 1961 N o v . 15, 1960 Aug . 15, 1963

Per iod to m a t u r i t y

Years

7 6

. 8

M o n t h s

9 3 8

A m o u n t issued

Cash

6,484

Exchange

11,177 3,806 6,755

25,033

To ta l

11,177 3,806 6,755

31, 517

Year ly totals

\ 21,738

OVER 10 YEARS

1 None. 2 Redeemable in 2 years (Aug. 1, 1959) at option of holder. 3 Issued in special allotment to Government mvestment accounts. * Preliminary.

19461 . 1947 1 19481 -1949 1 19501 19511 19521. 1953—Apr. 13 __ 1954. 1955—Feb. 1 ._

J u l y 11 . _ 19561 . 19571.-

To ta l

M a y 1

F e b . 15 F e b . 15

m 3 3

Bond

Bond . - -Bond

J u n e l S , 1978-83. : .

F e b . 15, 1995 F e b . 15, 1995

30

40 40

IM 1,188

821

2,009

418

1,924

2,342

1,606

1,924 821

4,351

1,606

} 2,745

CO

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o

a

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W

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>

3



APPENDIX B

Market prices of each neio marketable Treasury issue on first date quoted and on date of issue,^ January 1953-August 1957

Issue

Percen t

1953 2K 2H n 2K 2 ^ 2% ^Vs

li 2}4

1954

2)4 V/R

fs IM

l^A VA I H 2M

1955

IVs 2 3

f' VA

T y p e

Certificate . - . . . . - . -B o n d B o n d - _ Cer t i f i ca t e . . - _ T a x certificate . Certificate Cer t i f icate . N o t e -B o n d . -N o t e B o n d

T o t a l .

Certificate . _. . . . . . . . . . . . B o n d Cert i f icate . — . N o t e — - -T a x certificate Certificate B o n d N o t e Certificate . . . Certificate -B o n d

T o t a l -

N o t e . . . - - - . - . . N o t e „ . . . B o n d - -_ . T a x certificate . . N o t e - -^ T a x certificate

M a t u r i t y

F e b . 15, 1954 Dec . 15, 1958 _. J u n e 15, 1978-83 J u n e 1. 1954. M a r . 22, 1954 Aug . 15, 1954 Sept . 15, 1954 M a r . 15, 1957 Sept . 15, 1961 Dec . 15, 1954 Dec . 15, 1958 3

F e b . 15, 1955 N o v . 15, 1961 M a y 17, 1955 F e b . 15, 1959 M a r . 22, 1955 Aug . 15, 1955 N o v . 15, 1960 M a y 15, 1957 Dec . 15, 19553. Dec . 15, 1955 Aug. 15, 1963.- -

M a r . 15, 1956 _ Aug . 15, 1957-F e b 15, 1995 J u n e 22, 1955 Aug. 15, 1956 M a r . 22, 1956 -

A m o u n t issued (millions)

Cash

$1,188

5,902

2,239

9,329

2,205 3,734

4,155

10,094

3,210 2,532 2,202

Exchange

$8,114 620 418

4,858

2,788 4,724 2,997

8,175 1,748

34,442

7,007 11,177 3,886 2,897

3,558 3,806

4,919 6,359 6,755

49,364

8,472 3,792 1,924

3,174

T o t a l

$8,114 620

1,606 4,858 5,902 2,788 4,724 2,997 2,239 8,175 1,748

43,771

7,007 11,177 3,886 5,102 3,734 3,558 3,806 4,155 4,919 5,359 6,755

59,458

8,472 3,792 1,924 3,210 5,706 2,202

F i r s t quo te

D a t e

F e b . 2,1953 F e b . 2,1953 A p r . 15,1953 M a y 20,1953 J u l y 7,1953 Aug . 5,1953 Sept . 2,1953 Sept . 2,1953 Oct. 29,1953 N o v . 18,1953 N o v . 18,1953

F e b . 1,1954 F e b . 1,1954 M a y 5,1954 M a y 5,1954 J u l y 22,1954 Aug . 3,1954 Aug . 3,1954 Sept . 24,1954 N o v . 22,1954 N o v . 22,1954 N o v . 22,1954

J a n . 28,1955 J a n . 28,1955 J a n . 28,1955 M a r . 23.1955 M a y 4,1955 J u l y 11,1955

Pr ice 2

100.03 100.033^ 100.09 100.00 99.31

100.033^ 100.043^ 100.043^ 100.28 100.09 100.11

100.053^

100.12 100.12 100.113^ 100.15M 100.02 100.11 100.12 100.01 100.06 100.06 100.06

100.09

100.04 100.04 100.11 100.00 99.31H 99.313^

Issue da te quo te

D a t e

F e b . 16,1953 F e b . 16,1953 M a y 1,1953 J u n e 1,1953 J u l y 15,1953 Aug. 17,1953 Sept . 15,1953 Sept . 15,1953 N o v . 9,1953 Dec . 1,1953 Dec . 1,1953

F e b . 15,1954 F e b . 15,1954 M a y 17,1954 M a y 17,1954 Aug . 2,1954 Aug. 15,1954 Aug. 15,1954 Oct. 4,1954 Dec . 15,1954 Dec . 15,1954 Dec . 15,1954

F e b . 15,1955 F e b . 15,1955 F e b . 15,1955 Apr . 1,1955 M a y 17,1955 J u l y 18,1955

Pr ice 2

100.05 100.06 99.29 99.30

100. 01 100.04 100.08 100. 09 100.24 100.08 100.11

100.053^

100.14 100. 24 100.09 100.08 100.02 100. I I M 100.19 100.00 100.02 100.02 100.11

100.11

100.02 100.00 100.06 99.31

100.00 100.02

tei

H-t

ZP

See footnotes at end of table. CO



A P P E N D I X B

Market prices of each new marketable Treasury issue on first date quoted and on date of issue,^ J a n u a r y 1953-August 1957—Continued

Issue

Percent

1955 3 2 2 2% 2M 2%

1956 2 ^ 2M 2% 2H V-A

tn 1957

3M 33^ 35^ 33^ ZA ^H 3A 4 4

T y p e

Bond -T a x certificate N o t e . _ -T a x certificate Certificate N o t e

T o t a l

Certificate . . . . No te N o t e . T a x certificate T a x certificate . . . Certificate

T o t a l

Certificate . . No te - __- -Certificate . - - - - -Note Certificate . . . . . . . N o t e - . - - -Certificate -Certificate - - - „ . . N o t e . - - - . _--

T o t a l through Augus t

T o t a l , J a n u a r y 1953-August 1957

M a t u r i t y

F e b . 15, 1995 3 J u n e 22, 1956 Aug. 15, 1956 3 J u n e 22, 1956 Dec . 1, 1956 J u n e 15, 1958

F e b . 15, 1957 J u n e 15, 1958 3 Aug. 1, 1957 M a r . 22, 1957 ._„ J u n e 24, 1957 Oct. 1, 1957. . .

F e b . 14, 1958 M a y 16, 1960 - . . F e b . 14, 1958 3 M a y 15, 1960 3 , . . Apr . 15, 1958 F e b . 15, 1982 Dec . 1, 1 9 5 7 , . . Aug . 1,1958 Aug. 1, 1961

A m o u n t issued (millions)

Cash

$821

2,970

11,735

3,221

3,221

2,437 942

MOO UOO MOO

3,679

38,058

Exchange

$1,486 6,841

9,083 2,283

37,055

7,219 2,109

12,056

1,312 7, 271

29,967

8,414 1,464

2,351 647

5 9,869 810,462

5 2,481

35,688

186, 516

T o t a l

$821 1,486 6,841 2,970 9,083 2,283

48, 790

7,219 2,109

12, 056 3, 221 1,312 7, 271

33,188

8,414 1,464 2,437

942 2,351

647 « 9,969

fi10, 562 5 2, 581

39, 367

224, 574

F i r s t quo te

D a t e

J u l y 11,1955 J u l y 20,1955 J u l y 20,1955 Oct. 4.1955 N o v . 28.1955 N o v . 28,1955

M a r . 5,1956 M a r . 5,1956 J u l y 16,1956 Aug . 7,1956 N o v . 19,1956 N o v . 19,1956

F e b . 4,1957 F e b . 4,1957 M a r . 19,1957 M a r . 19,1957 M a y 6,1957 M a y 6,1957 J u l y 23,1957 J u l y 23,1957 J u l y 23,1957

Pr ice 2

100.03 100.013^ 100.02 99.31 99.31 99.31

100. OIA

100.033^ 100. 033^ 99. 313^ 99.29

100. 00 100.00

100.003^

100. 01 100.01 99. 293^ 99. 313^ 99.29 99.29

100. 01 100.01 100.01

100. 003^

100. 04

Issue da te quote

D a t e

J u l y 20,1955 Aug . 1.1955 Aug. 1,1955 Oct. 11,1955 Dec . 1,1955 Dec . 1,1955

M a r . 5,1956 M a r . 5,1956 J u l y 16,1956 Aug . 15,1956 Dec . 3,1956 Dec . 3,1956

F e b . 15,1957 Feb . 15,1957 M a r . 28,1957 M a r . 28,1957 M a y 6,1957 M a y 6,1957 Aug. 1,1957 Aug. 1,1957 Aug. 1,1957

Pr ice 2

100.00 99.313^ 99.29 99. 303^ 99.31 99.31

100.00

100. OSA 100.033^ 99. 31A 99.28

100.02 100.03

100.01

100.01 100.04 99.30

100.023^ 99.29 99.29 ( ) ( ) («)

100.00

100.043^

CO

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O

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> K!

O

> Ul

d

1 Marketable certificates, notes, and bonds; excludes Treasury bills, and note.s issued solely in exchange for normiarketable 2% percent investnient bonds, series B.

2 Closing bid quotations as reported by the Federal lieserve B^nk of New York, 3 Reopening of existing issue.

< Issued in special allotment to Government investraeut accounts, 6 Preliminary. 9 Not available,



EXHIBITS 2 9 3

EXHIBIT 41.—Statement by Under Secretary of the Treasury Burgess, August 9, 1957, before the Senate Finance Committee Hearings on the Financial Condition of the United States

I t has been a privilege to have had the opportunity to appear before this committee.

I have been glad to participate because I believe that it is imperative that we have an enlarged public understanding of current monetary -and fiscal policies and their influence on the levels of living of every American family. Your committee, in these hearings, and the study of ^other groups in parallel investigations, aid in developing increased jpublic interest and knowledge.

I would like to summarize what appear to me to be the most import a n t facts which have been developed in these hearings up to this point.

1. The economy is, and for some time has been, operating at a very i i g h level.

Employment is at an all-time peak. We are producing more goods :and services than ever before. Personal income is at a high level and is widely shared throughout the population. This has encouraged a large volume of purchases, with resort to extensive credit to aug-jment purchases further, and without the usual resistance to price increases.

2. After 4 or 5 years of stable prices, we have been faced with a jrenewal of inflationary pressures, and it is important that this should be curbed.

As Secretary Humphrey said in his opening statement, "The threat of renewed inflation is perhaps our most serious domestic economic problem."

While some few benefit from inflation, it is a cruel injustice to the great majority of our people and ultimately saps the economic vitality of a nation.

I t runs the risk of "boom and bust," a point that Senator Bennett made so clearly. If these economic movements go so far that they are badly out of balance, then the resulting crack is much more severe than if they are checked earlier.

3. The Federal Reserve has been following monetary policies intended to resist inflationary pressures.

I ts principal policy has been to limit the growth of credit and, hence, exercise some restraint on the demand for goods and services, and thereby restrain prices.

As a consequence of this policy and the heavy demand for funds, interest rates have been rising.

4. This administration has followed fiscal practices designed to resist inflationary pressures.

For the past 2 years, the budget has been balanced and the surplus has been applied to debt reduction. Some of the public debt has been shifted from banks and into the hands of the public, and the floating debt has been reduced. Governmental expenditures were reduced through 1955, but both defense and nondefense items increased in the 1957 and 1958 budgets.

I t is true that, in cutting taxes in 1954 and in helping housing, small business, and the farmer, the administration may have increased demands for goods and services somewhat, but these measures simply




gave some relief in those areas where the impact of credit restraint has been felt most severely.

5. To date, these monetary and fiscal practices have not fully overcome the inflationary pressures.

Consumer prices have risen for 15 of the past 16 months. While the amount of these monthly rises has been small, the consumer price index is now nearly 5 percent higher than it was 16 months ago.

There is some evidence that the current inflationary pressures may abate in the near future, though this is uncertain. Furthermore, such abatement may prove temporary unless measures are taken which affect the underlying causes.

6. This raises the question whether these policies should be relaxed or whether there is some better way to deal with inflation.

The relaxation of these policies has serious dangers. It would result in increasing the demand for goods and accentuating the inflation.

7. We should not underrate the effectiveness of present policies but should have patience to allow them to work.

These are the policies which have been effective in this country and in other countries over many years. They have proved historically powerful influences for economic stability. They require time and patience t'o become effective.

8. No feasible alternatives to present policies have been presented in these hearings.

The alternatives of direct controls are not desirable. Governmentally enforced wage or price controls, or forced savings^

during peacetime, are inconsistent with our traditions of freedom. Specific curbs on credit for particular purposes during peacetime

are an undesirable interference with the individual's freedom and discriminate against a particular segment of our society.

9. A more anti-inflationary governmental fiscal policy is desirable. In the present high state of prosperity in this country, the Federal

Government should have a larger surplus and should be retiring debt more rapidly.

This is probably the most effective step which could be taken by the Federal Government.

10. Similar restraint in excessive spending should be practiced by States and municipalities, businessmen, and consumers.

All such segments of the population have been increasing their debts at much more rapid rates than the Federal Government.

There needs to be greater public recognition of the dangers of over-expansion and overconsumption—on borrowed money—at a time like this.

The citizens of the country cannot look to the Federal Government alone for the necessary restraint in meeting this situation.

11. Such restraint should be matched by equal restraint on the part of business and labor in their demands for profit and wage increases.

As was pointed out by one of the members of your committee, a principal cause of the current renewal of inflationary pressures is the continued— increases in profits and wages greater than increases in productivity.



EXHIBITS 295^

President Eisenhower, in his Economic Report of last January,, said:

Business and labor leadership have the responsibility to reach agreements-on wages and other labor benefits that are fair to the rest of the community as well as to those persons immediately involved. Businesses must recognize the broad public interest in the prices set on their products and services.

12. Such restraint throughout all segments of the economy is necessary for lasting abatement of inflationary pressures.

The monetary and fiscal practices of the past several years may be bringing about a lessening of the current inflationary pressures. But continued vigilance must be maintained against their recurrence.

13. The needed economic statesmanship on the part of Federal^ State, and local governments, the consumer, business, and labor, will arise only from an appreciation of the evils of inflation.

Restraint is inevitably unpopular. I t can be achieved only if the alternatives are recognized as even

less desirable. 14. And finally, it is for these reasons that I believe that such a

hearing as your committee is conducting may prove a most useful instrument.

Such a hearing develops and disseminates the information needed to make the public aware of the disastrous results of inflation and the necessity for self-restraint to prevent it.

EXHIBIT 42.—Statement by Assistant Secretary of the Treasury Kendall, July 29, 1957, before the House Ways and Means Committee on the report on and amendments to the Antidumping Act

The scheduling of these hearings is very much appreciated. Even at the risk of oversimplification it might clear the atmosphere a little

bit in this highly technical field if right now it is pointed out that the amendments suggested are for the purpose of accomplishing two objectives.

First, put an end to the anomalous situation whereby sales can be made at less than fair value, with injury to American industry, but no dumping duties collected;

Second, bring the value definitions of this 1921 law up to date. There will be arguments advanced by a number of people appearing before

you that we do not go far enough, or that we go too far. You will be told on the one hand that dumping duties should be imposed in almost every case of price discrimination, irrespective of whether there is in fact injury to American producers. You will be told on the other hand that the dumping law should be invoked only where American producers are about to be put out of business entirely.

Many say that this is middle of the road legislation. I don't agree. Rather do I think that our proposal is intended to construct a wide and all-inclusive highway toward accomplishing the twin objectives and one which will stand the test of time with its pendulum which moves in the field of economy and Government from one side to the other of the tariff problem as the years go by.

In my judgment, neither of the views which you will hear proposed by understandable and worthy proponents of such views is tenable and, after the lengthy study and careful consideration given by the Bureau of Customs and by Mr. Hendrick who is here with me, a complete new law is not what is required but rather the comparatively simple and common sense changes which are recommended by this study within the framework of a congressional directive.

The congressional directive The directive of the Congress in the Customs Simplification Act of 1956

addressed to the Secretary of the Treasury was a review of the operation and efifectiveness of the Antidumping Act of 1921 after consultation with the United




States Tariff Commission. I should like to say that the Commission has been of very real help in all of our deliberations leading up to the report and the proposed bill which were presented to the House and to the Senate in the latter part of January.

This provision of the Customs Act of 1956 reflected the concern of many Americans and American businessmen and industry representatives that at worst the Antidumping Act was not effective and was not carrying out the purposes for which it had been enacted; and at best thirty-six years is a long time, many changes have occurred in international trade and in industry in general, and that a good hard look should be taken first at the administration of the act and secondly at its effectiveness.

As you know, the Secretary, after consultation with the Tariff Commission, was to report to the Congress within six months of the date of the enactment of the statute, which turned out to be early in February, and recommend any amendment considered desirable or necessary to provide for greater certainty, speed, and efficiency in the enforcment of the Antidumping Act. Objectives of Antidumping Act

Before getting into the technicalities of the amendments which we are proposing, and they are technical, I should like to discuss the objectives behind them so that they may be weighed and decided upon in the atmosphere of trade and industry rather than just pure legal language.

The first thing to bear in mind is that we are as always considering the best interests of the IJnited States. These interests are inseparably associated with the best interests of American industry and American trade. Obviously, it is to the best interests of American industry that foreign producers' dumping price raids which injure American industry should be made actionable. They should be met with full and swift enforcement of the law.

However, we believe it is not to the best interests of either the United States or of American industry if you assess dumping duties merely because of technicalities, where there has not been injury and where common sense shows that action is not warranted. This does not help American industry. On the other hand such findings invite retaliation by other countries. This is a bad thing for our export markets. Not only this: Increases in price caused by dumping duties hurt the American consumer and they hurt American industries processing foreign imports.

There is absolutely no reason that we can find from our study why complete and vigilant protection of American industrj^ cannot go hand in hand with a careful weighing of the facts in each of the cases where suspected dumping is called to attention. What constitutes dumping actionable under the law

I would like to step back for a moment and examine with you what has become today the traditional belief and philosophy of the administration as to what actually constitutes dumping.

The approach to the problem is complicated because of differing interpretations given to the word. The Antidumping Act does not define ''dumping." The generally accepted economists' view is that the word ''dumping" merely means export sales below home price. On the other hand it is also clear that these same economists feel that such sales should not be subject to duties except when there is injury. I have a memorandum on this subject which, if you desire, I can put in the record.

In any event the act clearly provides that dumping duties are to be imposed only if two elements are present: first, sales at less than fair value and, secondly, injury to a United States industry. The administration believes that this is right. Administration of the law

The Treasury Department calculates whether there are sales at less than fair value. The Tariff Commission investigates the facts as to injury and draws the conclusion as to whether or not injury has occurred. That is one of the reasons why, in the Customs Simphfication Act of 1956, the Secretary of the Treasury was directed to make his report after consulting with the United States Tariff Commission.

As you probably know—and this is parenthetical—after we had drawn our first draft of the report and proposed legislation and after that draft had been discussed by members of my staff and the staff of the Tariff Commission, I sat down



EXHIBITS 2 9 7

in conference with the individual members of the Tariff Commission to go over the report as well as the amendment and the consequent two papers presented you are the result of a meeting of the minds of the Commissioners and the Treasury. Sales at less than fair value

Now how do we determine whether or not there have been sales at less than *'fair value" under the Antidumping Act? Really the "fair value" we are talking about is a term of art. Ordinarily it means the price for consumption in the country of export or, to use the language of the trade, the home consumption price.

To find whether there are sales at less than fair value, you compare the foreign producer's home consumption price with his price to the United States purchaser. Let us suppose that we have an item sold for home consumption in country X and also by that country to the United States, with prices as follows:

Home consumption price . $20. 00 Price to U. S. A 15. 00

Difference 5. 00 This is a typical case of sale at less than fair value. Adjustments

In comparing the two prices it is necessary to reduce them to comparable terms. The simplest way to do this is to calculate them on an f. o. b. factory basis. Here is an example. Let us suppose that a merchant in country X goes to a factory there and says, "I want to buy one hundred bicycles. I am going to sell these in country X." The factory owner says: "Here they are. Cost is $20 a bicycle. Take them away." Then suppose an American importer goes to the same factory and says, "I want to buy one hundred bicycles, to import into the United States.'* The factory owner says: "Here they are. Cost is $20 a bicycle. Take them away. You take care of getting them to the United States."

This is not selling at less than fair value. The example is, as you will recognize, oversimplified. Actually the price to the

United States will generally include various charges for which adjustments must be made. Transportation

For instance, if in the bicycle case above cited the factory manager had said to the American importer: "Cost is $20 a bicycle, and I will take care of the shipping charges," then the situation would be as follows: Home consumption price , • $20. 00 Price to U. S. A $20. 00

Less ocean transportation 3. 00 Price to U. S. A. f. o. b. factory 17. 00

Difference 3. 00 Because of the adjustment this is selling at less than fair value. Quantity differentials

Adjustment may be made for quantity differentials in line with the ordinary course of trade for the merchandise under consideration. For example, if the American purchaser of bicycles from country X buys 10,000 bicycles, he might reasonably expect a lower price than the purchaser of 100.

Circumstances of sale If the home consumption sale and the sale to the United States market are made

under differing circumstances, adjustment can be made for that. Let us suppose that the bicycle manufacturer in country X gives a service guaranty for bicycles purchased for use in country X, but none for bicycles exported to the United States. The servicing costs him $0.50 per bicycle. At the same time he pays for American dealers' advertising of the country X bicycle at the rate of $2.00 a bicycle, but does not pay for advertising bicycles sold for use in country X. The price comparison would be as follows, assuming a price in each case of $20 per bicycle.




Home consumption price $20. 00 Less servicing cost $0. 50 Plus advertising cost 2. .00

Adjustment 1. 50

Adjusted home consumption price 21. 50 Price to U. S. A 20. 00

Difference 1. 50

This would be a sale a t less than fair value.

Remission of import duties and internal taxes Fur ther by way of reducing the price to the United States marke t and the home

consumption price to comparable terms, allowance is made, in calculating this price, for various internal taxes, such as sales taxes, which are remit ted by the country of export.

**Such or s imilar" merchandise If a foreign producer sells his product only to the United States, there is no way

to determine fair value by reference to his home consumption sales, because he makes none. In this case we can determine fair value on the basis of the home consumption price charged by other producers in the same country. Another way of determining fair value is by reference to comparable merchandise produced by the same or other producers. There was once a case of shovels sold to the United States with long handles. The producing country had no market for such shovels; its workmen used shovels with short handles. We would base fair value on the short handled shovels sold for home consumption, making adjustmen t for the fact t ha t long handles cost more than short ones.

Third country prices If comparison with home consumption prices is not feasible because home con

sumption sales are not made in sufficient quantit ies to be representative, then comparison will be made with sales for exportation to countries other than the United States.

Cost of production In the absence of home consumption or third country sales or offers, fair value

is based on what is now called cost of production, or what we would propose under the amendment be called constructed value.

Withholding of appraisement So much for fair value. For a moment I would like to turn to something which

should appropriately be called to your at tent ion here. While fair value is being determined and immediately upon suspicion of sales a t a dumping price we withhold appraisement. This means t ha t final determination of the duty cannot be calculated and paid until decision on the question of dumping has been reached.

This insures t h a t every entry can be made subject to a dumping duty when a finding of dumping is finally made. Withholding of appraisement necessarily creates uncertainty. I t is a major deterrent, often more feared than the imposition of the duty .

Determination as to injury If the Treasury determines there are not sales a t less than fair value, the case is

closed. If it determines there are sales a t less than fair value, the case goes to the Tariff Commission for determination as to injury. With its staff of experts experienced in escape clause, peril point, and similar investigations, this is a job it is well qualified to handle.

If the determination is t ha t there is injury, dumping duties are assessed, the collection of which is again a du ty of the Treasury.

The amendments proposed Having given you this sketchy background of the law and its administration,

let me tu rn to the amendments proposed. At the outset, what we have been looking for and what we propose to you are

amendments which contribute to the certainty, speed, and enforcement of the Antidumping Act. We believe firmly t h a t certain definitions should be incor-



EXHIBITS 299 porated in the act and the modifications which we propose are those needed to carry into effect this stated purpose. With equal firmness, there are certain terms in the act which we believe should be left broad and undefined. The amendments proposed—first objective

As stated, the first objective to be accomplished by the amendments is to assure that dumping duties will be collected in all cases where there are sales at less than fair value, with injury to American industry.

Duty measured by third country price.—There are cases where the foreign producer is principally an exporter. He sells mostly to other countries; little within his own country. Under these circumstances we judge fair value by the prices to third countries—that is, to countries other than his own and other than the United States. But if we get a finding under the Antidumping Act, we must under the present law measure dumping duties by the difference between the price to the United States and the price for consumption in the country of export. Under the proposed amendment the same measuring equation would be applicable to both determinations.

Duty measured by restricted home consumption price.—A second type of situation, slightly more complicated, but of even greater importance, is where the home consumption sales are in substantial volume, but are not "freely offered."

Let us suppose that most country X bicycles are sold for consumption in country X, and sold at $20.00 a unit, but with a clause in the contract limiting the area in which the country X purchaser may resell. Such a contract renders the sales within country X "restricted"—they are not "freely offered." They can not be used, under the present law, in calculating dumping duties. Reference must therefore be had under the present law to the sales to third countries (which, we will •assume, are freely offered). Under the proposed amendment, the dumping duties would be calculated on the basis of the sales within country X. Here is the result, in figures:

For home consumption _ . For export to tliird countries For export to U. S. A- _

Dumping duty per unit

Number of bicycles

sold

100,000 1,000

50,000

Unit price

$20.00 15.25 15.00

Dumping duty under

present law

.. $0.25

Dumping duty under

amendment

$5.00

Once again we have a case of sales at less than fair value. I find it hard to believe that the dumping duty should be calculated on the basis of sales to third countries. Or, if the price for consumption in country X was $15.00 instead of $20.00, and thus not less than the price to the United States, I would find it equally hard to believe that any dumping duties should be imposed based on the $15.25 third country price.

Restricted home consumption sales are common practice in many foreign countries, especially those which have cartels. As a result, at present and for some years it has been possible that we may have a finding under the act; yet we are unable either to collect dumping duties or the dumping duties are so infinitesimal as hardly to deter a foreign producer. Concomitantly, this failure and apparent impotency are the source of a good deal of irritation as well as a real detriment to American industry.

The amendments proposed—second objective As to the second of our objectives: There are a number of technical terms used

in the Antidumping Act which are also used in the law relating to valuation for assessment of ordinary duties. Among these are the definitions of "sold or . . . offered for sale," "ordinary course of trade," "such or similar merchandise," "usual wholesale quantities." These definitions were brought up to date, as to valuation for ordinary duties, in the Customs Simplification Act of 1956. We feel that they should be incorporated also, to the extent applicable, in the Antidumping Act to achieve uniformity, avoid needless confusion, and make the body of customs laws more cohesive.



300 1957 REPORT OF THE SEGRETARY OF THE TREASURY

Injury under the Antidumping Act We are not suggesting an amendment to the act which will define what is

meant by "injury," although a great many persons have strongly urged a definition in terms of injury bordering on bankruptcy while a great many others have argued with equal vigor doing away with the injury test altogether. The conflict is one of long standing. Legislative history

If we look at the legislative history, we find that certain members of Congress in 1921 were considering the problem quite simply from the standpoint of price differential, without any reference to injury. Others adopted a test bordering; on destruction of an American industry. The resultant law was a compromise, A price differential alone was not enough; injury, too, must be present; although the degree of injury was not defined.

Shortly after the law was passed the Treasury in effect announced that its determination of price differential was going to be made simply on the basis of arithmetic, without any reference to whether the import price was "fair"—meaning "equitable." This policy has never been seriously challenged by Congress..

In 1954 a careful reexamination of the Antidumping Act was made, as a result of which the law was changed so as to place in the quasi-judicial forum of the Tariff Commission, an arm of the United States Congress, the decision on injury. The decision on fair value remained in the Treasury. Sales less than fair value not of themselves unfair

Selling at less than fair value, as we define it (that is the foreign exporter selling to the United States at a price less than his price for consumption in the country of exportation, calculated f. o. b. foreign factory) is a benefit to the American consumer and to the American reprocessor, as well as the American importer. It may or may not injure an industry in the United States. The fact that a sale is at less than "fair value" is not of itself an indication of injury, nor does it indicate the price is "unfair." "Fair" in this sense does not mean "equitable"; it merely means what a willing purchaser pays to a willing seller for consumption in the country of export, that is, the fair market value.

Comparison of delivered prices U. S. A. for injury determination Essentially American industry does not look to the foreign competitor's foreign

price. American industry looks to what the foreign product sells for in the United States. That means delivered price. If the delivered price of the foreign product is lower than the price of the comparable American product, we have an indication—one indication—that there may be injury. On the other hand, if the delivered price of the foreign product is not lower than the price of the comparable American product, the foreign producer is not underselling American competition, although he may be selling at less than fair value. Here is no price raid, or injury to American industry.

Definition of injury and industry not required To try to define "injury" is very much like trying to define precisely some of

the phases of the common law or of equity where the court's tradition may and should come to its judgment by weighing all of the factors in balance; and in any one case the balance may be very different from that of another. Injury to a large corporation or to the owner of a chain of stores may be very different from injury to the corner grocer. Injury to one industry may be very different from injury to another. IJnder the same set of facts mathematically opposite conclusions or differing conclusions could be drawn. These are questions of economics, not sensitive to either exact science or to predetermined close lines or channels of thought.

So, too, does "industry" beggar proper definition when one is concerned with comparisons. And we have felt right along that the act should neither define industry nor injury for these reasons.

I t is interesting to note that on the one hand some people think injury should be very broadly defined while others would narrow the definition of injury until it disappears. The incompatibility of these differing points of view is strangely compelling. To us neither is correct and the Tariff Commission's hands and minds must not be fettered to the end that their determination may be as realistic as is possible within the set of facts before them—realistic from the standpoint of pure business judgment.



EXHIBITS 3 0 1

In general summation, the Treasury welcomed the manda te of the Congress wi th t rue objectivity and has had the careful, expert guidance of Mr. Hendrick; the practical, hardheaded approach of the many able people of the Bureau of Customs; and also from t ime to t ime, distinguished scholarly assistance from the •outside.

Wha t you have before you in our report and in our proposed amendments results from exhaustive studies. The proposal for legislation, on this basis, represents what we believe to be an Antidumping Act which will meet your requirements now and will do so for a long t ime to come.

Organization and Procedure

E X H I B I T 43.—Treasury Department orders relating to organization and procedure

No. 81 ( R E V I S E D ) , REVISION, D E C E M B E R 3, 1956.—ABOLITION OP THE COMMITTEE ON P R I N T I N G AND PUBLICATION

This order supersedes Treasury Depar tment Order No. 81 (Revision No. 2) of October 30, 1953, and abolishes the Committee on Printing and Publication set up by t h a t order.

The Committee's functions were to supervise generally all printing and binding originating in and procured for the Depar tment , and to recommend printing regulations for the Depar tment , subject to approval of the Administrative Assistant Secretary, The Administrative Assistant Secretary shall continue to be responsible for these functions.

D A V I D W . K E N D A L L ,

Acting Secretary of the Treasury.

No. 83 ( R E V I S E D ) , REVISION, A P R I L 9, 1957.—DESIGNATIONS R E L A T I V E TO THE SECURITY OFFICER AND P E R S O N N E L SECURITY OFFICER

Pursuant to the provisions of Executive Orders No. 10450 and 10501 and of Treasury Depar tment Orders No. 82, Revised, and 160, Revised, Mr. Francis J. Gafford, Assistant to the Secretary, has been designated as Security Officer and Personnel Security Officer for the Treasury Depar tment . Mr. A. Glenn Meerdink shall serve as Alternate Legal Officer.

All officers and employees of the Treasury Depar tment are directed to comply with requests for information received from the persons designated above and to cooperate with them to the fullest possible extent.

This order supersedes Treasury Depar tment Order No. 83 (Revised), dated January 17, 1956.

F R E D C . SCRIBNER, Jr.,


No. 83 ( R E V I S E D ) , REVISION, M A Y 16, 1957.—DESIGNATION OF ALTERNATE P E R S O N N E L SECURITY O F F I C E R

Pursuant to the provisions of Executive Orders No. 10450 and 10501.and of Treasury Depar tment Orders No. 82, Revised, and 160, Revised, Mr. Francis J. Gafford, Assistant to the Secretary, has been designated as Security Officer and Personnel Security Officer for the Treasury Depar tment . Mr. Thomas M. Hughes is designated as Alternate Personnel Security Officer. Mr. A. Glenn Meerdink shall serve as Alternate Legal Officer.

All officers and employees of the Treasury Depar tment are directed to comply with requests for information received from the persons designated above and to cooperate with them to the fullest possible extent.

This order supersedes Treasury Depar tment Order No. 83 (Revised), dated April 9, 1957.

F R E D C . SCRIBNER, Jr.,




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