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2. Nonmarketable Securities

The question asks for a discussion of the advantages and disadvantages of nonmarketable securities, in addition to the discussion on marketables. Obviously, nonmarketables are so designed that their advantages take care of most of the disadvantages of marketables. The discussion that follows necessarily takes up again, therefore, some of the points that have already been covered.

(a) Advantages.-(1) As the public debt grew, it became apparent that nonmarketable securities would have some important advantages both to the Government and to the various investor classes. Nonmarketable securities could, for example, be designed to reduce the volatility of the debt by encouraging firmer holding. In the case of savings bonds, for example, the interest pattern was constructed so as to reward purchasers for holding them to maturity. In the case of the Investment Series B bond issued in 1951, the investor can today convert into cash only with a capital loss, since the 5-year notes which may be obtained in exchange are selling below par. The penalty on redemption will, of course, vary with the movement of money rates; and, at some future time, he may be able to avoid that loss.

Some of the nonmarketable issues encourage investor retention also by the inconvenience of their conversion into cash. Series F and G savings bonds can be redeemed only upon one calendar month's. notice, for example; and, as mentioned previously, the 234 percent Investment Series bonds require a conversion into notes as the first step in the cashing process. A marketable obligation, on the other hand, may often be sold and turned into cash with a minimum of delay and effort.

(2) The issuance of nonmarketable securities in addition to marketable securities makes it possible to offer each class of investor the typeof issue which will stimulate maximum investor participation and satisfaction. For example, to assist in attracting individuals' savings. into Governments, the Treasury has offered a somewhat higher yield to individual investors than would be necessary to attract bank or other institutional funds. A nonmarketable security such as the registered savings bonds permits this to be done.

(3) Nonmarketable securities reduce the volume of buying and selling and the speculation that goes on in various areas of the Government security market. Many institutions and investor classes own large volumes of Government securities that they consider as more or less permanent liquid reserves. Continued refunding of such securities and the buying and selling that occurs in order to take advantage of temporary market situations can be avoided or reduced when a largeportion of the debt is in nonmarketable form.

(4) Nonmarketable securities permit the Treasury to pay a particu-lar investor an appropriate rate of interest for the exact period for which he holds the Government securities sold to him. The Treasury has much less control over this matter when marketable issues are sold. In the situation that developed in the market in 1948, for example, buyers of long-term bonds were able to get the long-term rate for what turned out to be a relatively short period of Government security ownership.

(5) Nonmarketable securities redeemable in cash permit the Treas-ury to handle liquidation problems of particular investor classes in an

orderly manner without market disruption. When one investor class is selling marketable Government securities on balance, for example, and another investor class is making net purchases, the needs of the buyer frequently cannot be met by the type of security being liquidated at that particular time. An issue with new characteristics to meet the requirements of the new purchasers would be much more appropriate. For example, banks or business corporations require securities that are different from those that might be sold to insurance companies or other long-term investors. To the extent that an exchange between classes is handled through the Treasury-instead of through the market-it is possible to put out new issues appropriate for the buyer. This is particularly advantageous in the case of exchanges between two groups of nonbank investors.

(6) Nonmarketable securities provide some insulation from the marketplace which has advantages to investors holding them, to the Government, and to the market itself. From the investor point of view, risk is reduced. From the Government point of view, the amount of the debt which is exposed to market swings is reduced, thereby facilitating credit restraint operations by the Federal Reserve, which are less likely to cause unwanted repercussions than if the whole debt were marketable. From the point of view of the market itself, the advantage is that weak, volatile holdings are minimized.

(b) Disadvantages.-(1) Nonmarketable securities are less flexible than marketable issues. The advantages of marketable securities on this account have already been discussed; and there is no doubt that the nonmarketable issue is less flexible, particularly from the viewpoint of large institutional investors and the managers of corporate and State and local government accounts.

(2) Such nonmarketable obligations as Series E savings bonds are payable on demand; and there are people who feel that it is unwise for the Treasury to have such a large volume of demand obligations outstanding. This has never caused the Treasury any trouble, and I don't believe it is likely to in the future. Savings bonds are similar, in many of their economic aspects, to savings deposits in banks. Yet the banking system is not overly concerned with the large volume of savings deposits which are payable practically on demand. Banks recognize (particularly with Government deposit insurance) that no large segment of the population is likely to cash savings accounts at the same time. The same may be said of Government savings bonds. As a matter of fact, the rate of turnover on E bands (comparing redemptions with amounts outstanding) during the postwar period has been only half as high as the turnover experience of either the savings banks or the savings and loan associations, and even less when compared with savings accounts in commercial banks.

(3) Another disadvantage of nonmarketable issues redeemable in cash is the refunding problem posed whenever market rates of interest change materially. If market interest rates increase enough, for example, it may pay an investor to cash in his nonmarketable securities and buy marketables; and this might drain the Treasury's cash balance substantially and sharply. The Treasury could take care of this situation by offering existing holders the opportunity to acquire a new nonmarketable issue carrying a higher schedule of rates. This has been done in the past with savings notes. There are a relatively small number of savings note holders, however; the problem would be much

more complicated if savings bonds-with 500 million pieces outstanding-were involved.

It should be noted that this disadvantage of nonmarketable securities can be avoided mechanically to some extent by the issuance of nonmarketable obligations which are convertible into a marketable issue, instead of redeemable in cash-as has been done with the Investment Series B bond. The convertibility provision has a place in securities sold to a relatively small number of financial institutions and other long-term investors. I do not think it would be desirable in savings bonds sold to millions of small purchasers, nor in savings notes sold to the holders of large short-term balances.

The reverse of the above situation might occur if market rates declined. Investors might then shift from marketable to nonmarket-' able securities to improve their return. An instance of action along this line occurred in the short-term market in the summer of 1949. The approach of the Government under these circumstances becomes one of making the particular nonmarketable issue less attractive-or, if necessary, withdrawing it from sale entirely.

(4) Another disadvantage of nonmarketable securities which has been mentioned is that they do not necessarily operate in the right direction as business activity rises or falls. There may be a tendency at times for nonmarketables to be cashed too freely when the economy is at high levels, and held too firmly in depressed periods. Some people feel that marketable securities do not have this disadvantage because their value can be influenced up or down by the central bank to help induce people to hold them or cash them, depending on what the liquidity needs of the economy may be.

38. What new types of securities, if any, do you believe should be given consideration for use (a) under present conditions; (b) in the event of the necessity for substantial net Government borrowing? Give the merits and demerits.

The general objectives which the Treasury seeks to achieve through its management of the public debt are discussed in the answer to Question 2. Within the framework of these objectives new types of securities are considered from time to time by the Treasury in making public debt management decisions.

Over the years a major task in public debt management has been to design Government securities which will fit the needs of the various investor classes as closely as possible and at the same time suit the requirements of the Government and of the economy as a whole. As the public debt has increased and as the various investor classes have increased their holdings of liquid assets, the Treasury has made considerable use of new types of securities.

Savings bonds provide the best known example of a security that has demonstrated its success for the purpose intended. The Treasury designed them primarily to meet the needs of small individual investors. There are now three series of savings bonds being issued, each of which is designed to meet somewhat different investor needs. The combined sales of the three issues amounted to $4 billion in the calendar year 1951. The total amount of the three issues-Series E, F, and G-now outstanding is $571/2 billion; E bonds alone account for $3434 billion, an all-time peak for this series.

Savings notes provide another example of a security designed to meet particular investment needs. These were originally issued early in the war period primarily to provide an investment medium for tax reserves, and were then designated as tax notes. It soon became evident, however, that this type of issue would be suitable for shortterm investors for purposes other than the accumulation of tax reserves especially as a place to put liquid reserves of corporations which were being accumulated for their anticipated capital needs in the postwar period. In recognition of the broadening investment area served by this type of issue, a new series of notes-designated as savings notes-was issued in 1943. In all, five different series of these notes have been issued since 1941. Changes have been made in the terms of the notes, including the interest return, as the situation required.

During the past year, the Treasury has issued two other special types of securities-the new nonmarketable 234 percent Series B Investment Bond which is convertible before maturity into a marketable 5-year Treasury note, and two issues of the new Tax Anticipation Series of Treasury bills which mature on major tax dates. These new securities were offered after study at the Treasury and discussion with the Federal Reserve to meet particular situations that arose during the calendar year 1951.

The Treasury is always studying possible new securities, or revisions of existing ones. Whenever an area for investment in Government securities is developing, we study how best to tap that area. Suggestions on this account come to the Treasury nearly every day. Many of them refer to situations in which the amount of money involved, for the country as a whole, would be too small to warrant the issuance of a new security. Some of them have referred to situations which are promising, however; for example, the one associated with people who are trying to provide income for the time when they retire. It has been suggested that with the growing number of older people in our population, the Government should provide an investment medium for retirement purposes in convenient form in addition to savings bonds. This area of Government security investment may offer certain possibilities, and is being studied.

There is also the question of providing new securities designed particularly for pension funds. The pension fund movement has gained considerable momentum in recent years. An estimated total of $5 to $6 billion is invested in pension fund reserves of State and local governments-about one-half in Federal Government bonds and one-half in other securities, mainly State and local government issues. It is estimated that an additional $6 billion is invested in corporate pension funds-about one-third in Federal Government securities and twothirds in other securities, mainly corporate bonds and stocks. It has been suggested to us that pension funds have investment problems that differ somewhat from the problems of other institutional investors, and that securities differing from the present types would better suit their needs. This is another of the matters being studied.

The question asks that proposed new types of securities be considered separately (a) under present_conditions, and (b) in the event of the necessity for substantial net Government borrowing. The Government is borrowing substantial amounts this fiscal year, and expects to do so again next year. Thus (a) and (b) both appear to be cases

related to a budget deficit. The question may, however, aim at distinguishing between the cases of a budget surplus and a budget deficit.

In this connection, I should like to point out that in the calendar year 1952 over $50 billion of the public debt will come due for refunding. The situation in subsequent years will probably not be very much different. Thus, there will be ample opportunity to introduce new types of securities that might be desirable regardless of the Government's budget position. A new type of security designed to provide for the needs of a particular investor class could be introduced just as well in a period of budget surplus as in a deficit period. The major question is the worth-whileness of the security itself.

39. Are there any ways other than those implied in the answers to the preceding questions for insulating public debt securities from the impact of restrictive credit policies designed primarily to discourage the growth of private debt?

The desire to insulate public debt securities from the impact of restrictive credit policies aimed at private borrowers is a relatively new development. Its purpose is to protect at least a portion of the public debt from sharp price fluctuations-and consequent market unsettlement-whenever the central bank wants to restrict credit expansion through the use of general credit control measures which affect interest rates. Few proposals have been suggested that promise anything like complete insulation of outstanding public debt issues from the impact of restrictive credit policies. The plans which have been offered would, if adopted, be only a step in this direction.

The nature of the problem and most of the measures which have been proposed in connection with it have been indicated in answers to other questions. Questions 35-36 request a discussion of secondary reserve requirements for commercial banks held in the form of Government securities, and of commercial bank reserves held against classes of assets rather than against deposits. In addition, in the answer to these questions, I have also commented upon the loanexpansion reserve plan which would impose additional bank reserves levied against increases in loans. The answer to Question 44 discusses devices used in foreign countries which have had the effect of insulating a portion of the market for Government securities from the private credit market.

The three measures discussed in the answer to Questions 35-36 all utilize the principle of bank reserve requirements to provide more direct restraint against bank loan expansion-and to discourage the sale of Government securities to provide the funds for such expansion.

There are, however, at least three other approaches to the problem which have been suggested: (1) Increased use of nonmarketable securities, (2) direct controls over loans, and (3) "moral suasion." 1. Increased use of nonmarketable securities

One approach to the insulation of a part of the Government security holdings of nonbank investors which has been suggested is to induce such investors to increase the proportion of nonmarketable Government issues held relative to marketable issues. This approach would protect their asset positions against book losses from possible market declines resulting from restrictive general credit polícies. It would

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