delay action on the interest rate legislation at this time, only to find after adjournment that rate developments had even more securely locked the Treasury out of the long-term market. This would mean even further shortening of the average maturity of our huge public debt and a continuation of the undesirable debt management operations that the restrictive ceiling has forced us to pursue. If the Government securities market improves to the point where the Treasury can undertake long-term financing at rates of 44 percent or less, then we shall certainly do so. We cannot, however, afford to gamble on this development, and it is to be hoped that the Congress will act as speedily as possible to provide the appropriate flexibility for debt management, once and for all. Otherwise, the difficulties with which we have been confronted during the past year may well prove to be a recurring situation whenever pressures of demands for credit tend to force interest rates to higher levels. In this connection, it is heartening that several important groups in the country, especially those associated with the mortgage and homebuilding industry, have strongly supported legislation to permit flexible management of the public debt. On Monday of this week, the National Association of Homebuilders, representing 43,000 builders throughout the Nation, strongly urged passage of the Ways and Means bill (H.R. 10590) in order to stimulate a larger flow of credit into mortgages to finance the purchase of new homes. This endorsement of the legislation, added to similar resolutions passed by the National Retail Lumber Dealers Association and the National Association of Real Estate Boards, is convincing evidence that people in the homebuilding industry recognize that the existence of the ceiling can only hamper our efforts to provide adequate housing for the American people. Please feel free to call upon us if you have any additional questions on this subject. Sincerely yours, JULIAN B. BAIRD, Under Secretary of the Treasury. Market yields of U.S. Government bonds having five or more years to maturity as of 39% 21/2 3% Coupon rate Mar. 11, 1960 1 1 Closing bid yields as reported by the Federal Reserve Bank of New York. EXHIBIT 19.-Memorandum to the Press, April 14, 1960, and a letter from the Comptroller of the Currency, April 6, 1960, to all district chief national bank examiners on collateral margins on credits extended against Government securities The attached letter has been sent by the Comptroller of the Currency to all district chief national bank examiners. (For any background information contact should be made with the Comptroller of the Currency, Mr. Ray M. Gidney, Executive 3-6400, extension 2104 or Deputy Comptroller L. A. Jennings, EX ecutive 3-6400, extension 2821.) A Treasury spokesman, in announcing increased debt management flexibility with regard to handling of maturing issues (preemptive rights) in a background briefing on March 31, said that the Government also had other devices and procedures under study as a means of controlling undue speculation in the Government securities market when and if it may occur. The letter being released today is a further step in this program. We have reviewed the relative adequacy of collateral margins generally required against loans and other credits in the light of the findings of the enclosed TreasuryFederal Reserve Study of the Government Securities Market (which will provide you with background information). 1 One of the findings of the study was that the extension of credit without adequate margin for the purpose of carrying speculative positions in Government securities was a contributing factor to the disruptive fluctuations in Government securities prices during the late spring and summer of 1958. While there can be no ultimate loss in connection with Federal Government securities carried to maturity, fluctuations in the price of Government securities in certain instances may raise questions as to the propriety and soundness of loans made by banks secured by and dependent on such securities without adequate margin. For this reason it is deemed desirable to establish discretionary guide-lines for the use of examiners in considering and appraising such loans. While only a very small proportion of the total number of banks is engaged to any substantial extent in extending credits against United States Government securities, it seems desirable that views along the lines set forth herein be communicated to your examiners for their use in considering and appraising such loans. As a general principle: (a) Collateral margins required on credits extended against U.S. Government securities should be equal to at least 5 percent of the amount of the loans. (b) Lower margins may be adequate for loans on securities of short maturities. (c) Need for higher or lower margins may be indicated by the circumstances of a particular credit. (d) In the event that maturing securities are to be exchanged for longer term securities while the credit is still outstanding, the bank should require that adequate margin be provided before such an exchange is made. (e) Adequate margins should be required regardless of whether the credit is extended in the form of a loan, repurchase agreement, or other form. In view of the importance of a smoothly functioning Government securities market, and in view of the fact that dealers who make primary markets in Government securities report daily to the Federal Reserve Bank of New York their positions with respect to Government securities and borrowings thereon, appropriate exceptions or adaptations of this margin policy need to be made with respect to credits extended to such dealers. Very truly yours, RAY M. GIDNEY, Comptroller of the Currency. EXHIBIT 20.-Press release June 6, 1960, preliminary announcement of advance refunding of marketable Treasury bonds The Treasury Department is for the first time, in respect to marketable securities, making use of advance refunding legislation passed last fall in offering holders of a specific issue of marketable bonds the option, well in advance of maturity, to exchange such bonds for either a marketable note or bond of longer maturity. Accordingly, the Treasury Department is offering the holders of $11,177,152,000 of the outstanding 21⁄2 percent Treasury bonds maturing November 15, 1961, the option to exchange them during the period from June 8 to June 13, inclusive, for like face amounts of either 34 percent Treasury notes maturing May 15, 1964, or 3% percent Treasury bonds maturing May 15, 1968. Exchange subscriptions to the 34 percent notes of May 15, 1964, are invited up to an amount not to exceed $31⁄2 billion, and subscriptions to the 3% percent bonds of 1968 are invited up to an amount not to exceed $12 billion. However, if subscriptions to the respective issues exceed these amounts by more than 10 Omitted here. percent, they will be subject to allotment. As is customary, the lowest denominations of the new note will be $1,000 and of the new bond will be $500. The new 3% percent notes and 37 percent bonds will be dated and bear interest from June 23, 1960, payable on November 15 and May 15. Accrued interest from May 15, 1960 to June 23, 1960 on the 2% percent bonds of November 15, 1961, will be paid on the bonds accepted for exchange. No gain or loss shall be recognized for Federal income tax purposes upon the exchange of the 22 percent bonds of 1961. The official offering circulars applicable to the new notes and new bonds contain the following provision: "Pursuant to the provisions of section 1037 (a) of the Internal Revenue Code of 1954 as added by Public Law 86-346 (approved September 22, 1959), the Secretary of the Treasury hereby declares that no gain or loss shall be recognized for Federal income tax purposes upon the exchange with the United States of the 2 percent Treasury bonds of 1961 solely for the 3% percent Treasury notes of Series D-1964 (or 3% percent Treasury bonds of 1968). Gain or loss, if any, upon the obligations surrendered in exchange will be taken into account upon the disposition or redemption of the new obligations." Exchange subscriptions to the new 34 percent Treasury notes maturing May 15, 1964, and to the new 37 percent bonds maturing May 15, 1968, will be received subject to allotment, and will be received from banking institutions for their own account, Federally insured savings and loan associations, States, political subdivisions or instrumentalities thereof, public pension and retirement and other public funds, international organizations in which the United States holds membership, foreign central banks and foreign States, Government Investment Accounts, and the Federal Reserve System without deposit. Subscriptions from all others must be accompanied by the deposit of 2% percent bonds of 1961 in the amount of not less than 10 percent of the face amount of the notes or bonds applied for. The Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have indicated that they intend to issue rulings advising banks under their supervision that they may place the securities received in exchange on their books at an amount not greater than the amount at which the securities being tendered by them for exchange are carried on their books. The subscription books will be open only on June 8 to June 13, inclusive, for the receipt of subscriptions for the new issues. Any subscription for the new notes or bonds addressed to a Federal Reserve Bank or branch or to the Treasurer of the United States and placed in the mail before midnight, June 13, will be considered as timely. EXHIBIT 21.—Memorandum to the Press, July 11, 1960, on the method to be used in future Treasury refunding operations In response to inquiries as to the method to be employed in future Treasury refunding operations, Under Secretary Julian B. Baird stated today that, "As previously indicated, the Treasury intends to remain completely flexible to make either an exchange offering (with preemptive rights) or a cash offering, whichever seems most desirable from the standpoint of the Government in the light of market conditions as they exist at the time of the announcement. "The Treasury has not as yet made a decision as to which method will be employed in handling the August 15 maturities ($91⁄2 billion of 44 percent notes) of which $4 billion are held by the public. This decision probably will not be made until the latter part of July. "It should be reemphasized that those investors who hold maturing issues now or in the future, or who are thinking of acquiring such issues, should not assume the existence of a preemptive right to any new issue." EXHIBIT 22. "Debt Management and Advance Refunding," white paper issued by the Treasury Department September 1960 I. Summary Debt management is an important link in the vital chain of Federal financial responsibility. The objectives of debt management are threefold: to contribute to an orderly growth of the economy without inflation, to minimize borrowing costs, and to achieve a balanced maturity structure of the public debt. The latter 563852-61- -21 has been the most pressing problem confronting the Treasury as there has been a relentless increase in the short-term debt. Related to this, the Treasury has found it increasingly difficult to retain as customers long-term investors in Treasury bonds (pars. 1 to 16).1 Advance refunding makes possible significant progress toward the twin goals of a better maturity structure and ownership distribution of the public debt. In essence, it involves offering all individual and other holders of an existing U.S. Government security selected for advance refunding the opportunity to exchange it, some years in advance of maturity, for a new security on terms mutually advantageous to the holders and to the Treasury (par. 17). Broadly speaking, two types of advance refunding may be distinguished: (a) "senior" advance refunding, in which holders of securities of intermediate maturity (5 to 12 years) would be offered the opportunity to exchange into longterm issues (15 to 40 years), and (b) "junior" advance refunding, in which holders of securities of shorter maturity (1 to 5 years) would be offered the opportunity to exchange into securities in the intermediate range (5 to 10 years). The two types of operations are related and keyed to the differing investor needs and demands in terms of investments of varying maturity (pars. 18 and 19). Prior experience with advance refunding in this country-such as the operations in 1951-52 and in June 1960-has been limited. These operations were not directly analogous to a senior advance refunding in which investors in mediumterm marketable bonds would be permitted to exchange for long-term marketable securities (pars. 20 to 27). Advance refunding offers significant advantages to the economy, to long-term investors, and to the U.S. Treasury. Advantages to the economy By facilitating significant debt extension with a minimum change in ownership, advance refunding: (a) Minimizes the adverse market impact of debt extension such as that which occurs in the case of comparable cash offerings (pars. 28 to 30); (b) Avoids the absorption of new, long-term funds in cash offerings and consequently does not interfere with the flow of new savings into the private sector of the economy (pars. 28 to 32); (c) Improves the functioning of the U.S. Government securities market by contributing to a better maturity structure of the marketable public debt (par. 31); (d) Helps to minimize inflationary pressures by reducing the amount of highly liquid short-term debt, especially in the case of junior advance refunding (par. 32). Advantages to the investor By participating in an advance refunding, the investor: (a) Gains an immediate increase in interest return, in consideration of his acceptance of a longer-term security (pars. 33 and 37); (b) Avoids any immediate book loss for tax purposes and, if nontaxable, in most instances is not required to take a book loss (par. 36); (c) Acquires a security whose market yield is at least equal to, and in most instances slightly higher than, that on outstanding issues of comparable maturity (par. 34); (d) Earns a rate of return over the life of the new security only equaled, if he does not exchange, by reinvesting at maturity of the old security at higher than present market yields (pars. 35 and 37 to 39). Advantages to the U.S. Treasury By using advance refunding as a debt management technique, the Treasury: (a) Achieves substantial improvement in the present unbalanced maturity structure of the marketable public debt (par. 40); (b) Reduces its dependence on inflationary bank borrowing (par. 41); (c) Retains its customers for long-term securities (par. 43); (d) Helps keep down the long-run cost of managing the public debt by avoid ing concentration of maturities in a given area (pars. 41 and 42); (e) Reduces the size and frequency of Treasury refunding operations and minimizes interference with timing of appropriate monetary policy actions (pars. 12 and 40). 1 The numbers refer to the paragraphs which follow the summary. An important impediment to the earlier use of advance refunding was the tax treatment of the exchanges. This obstruction was remedied by new legislation enacted in 1959 which permits the postponement of the tax consequences of any capital gain or loss resulting from the exchange (pars. 24 and 36). Another important obstacle to advance refunding has been the 44 percent statutory interest rate limitation. Although this limitation still exists, recent declines in interest rates now permit advance refunding of selected issues (pars. 44 to 50). Advance refunding, therefore, offers much promise at the present time as a way of implementing sound debt management policy as an integral part of Federal financial responsibility (par. 51). II. Debt Management and Advance Refunding 1. The ability of the American economy to sustain orderly growth without inflation, to generate increased employment, to provide sufficient real capital to finance expansion, and to function as a source of strength for the entire free world— all of this depends on the maintenance of responsible financial policies. There are three main links in the chain of Federal fianancial responsibility. Debt management is only one, but an important one, of these links. The two strongest links in the chain of financial responsibility are a sound fiscal policy-in terms of the relationship between revenues and expenditures-and an independent and responsible monetary policy. Without strength in these areas there is little that debt management alone can do. Combined with effective fiscal and monetary policies, however, appropriate debt management can contribute substantially to our overall financial strength. Inappropriate debt management inordinately increases the burdens of fiscal and monetary policy. A. THE OBJECTIVES OF DEBT MANAGEMENT 2. Debt management policy has three major objectives. 3. First, management of the debt should be conducted in such a way as to contribute to an orderly growth, without inflation, of the economy. This means that, except in periods of recession, as much of the debt as is practicable should be placed outside of the commercial banks (apart from temporary bank underwriting). Restraint must be exercised in the amount of long-term securities issued, particularly in a recession period, in order not to preempt an undue amount of the new savings needed to support an expansion of the economy. A related aim should be to minimize, as far as possible, the frequency of Treasury trips to the market so as to interfere as little as possible with necessary Federal Reserve actions and also with corporate, municipal, and mortgage financing. 4. A second important objective of Treasury debt management is the achievement of a balanced maturity structure of the debt, one that is tailored to the needs of our economy for a sizeable volume of short-term instruments but also includes a reasonable amount of intermediate and long-term securities. There must be continuous efforts to issue long-term securities to offset the erosion of maturity caused by the lapse of time, which otherwise results in an excessively large volume of highly liquid short-term debt. 5. A third objective of debt management relates to borrowing costs. While primary weight must be given to the two objectives just noted, the Treasury, like any other borrower, should try to borrrow as cheaply as possible. Unlike other borrowers, however, the Treasury must consider the impact of its actions on financial markets and the economy as a whole. Consequently, the aim of keeping borrowing costs at a minimum must be balanced against broader considerations of the public interest. 6. These several objectives are not easily reconcilable at all times; nor can a priority be assigned to one or another of them under all circumstances. 7. There is some merit, for example, in the view that Treasury debt management policy should take account of cyclical considerations-pressing long-term securities on the market to absorb investment funds when the economy is expanding and, conversely, issuing short-term securities attractive to banks so as to increase liquidity in a period of recession. Yet in practice it has proved both impracticable and undesirable to adhere strictly to this view in disregard of other considerations. The Treasury's first obligation is to secure the funds needed to meet the Government's fiscal requirements; these requirements cannot be postponed. A pressing need for cash may force it to market short-term issues-for which there is usually a substantial demand-even when the economy is expand |