Month 1927 Senator WATSON. Are there any questions to be asked about that table before it is inserted? (No response.) (The table referred to is as follows:) Payments to banks in redemption of loans made on adjusted service certificates by months and years 1 Represents percentage of increase or decrease of payments to banks for redemption of loans on adjusted service certificates. 2 Represents decrease. General HINES. I was also requested to supply the committee with the form of investment of the adjusted-service certificate fund, and I have that before me. The certificates issued by the Division of Loans and Currency of the Treasury Department, subject to the order of the Secretary of the Treasury, to this fund, and bearing interest at 4 per cent, payable annually, or on earlier redemption, are dated, the first one, January 1, 1927, maturing January 1, 1932, in a principal amount of $123,400,000. The next one is dated January 1, 1928, maturing January 1, 1933, for a like amount. The next one is dated January 1, 1929, maturing January 1, 1934, for $127,700,000. The next one is dated January 1, 1930, with a certificate maturing January 1, 1935, for $137,800,000. The next one is dated January 1, 1931, maturing January 1, 1936, for $244,000,000. The certificates in that fund aggregate $756,300,000. Senator COUZENS. At that point, is it not a rather absurd situation that the Secretary of the Treasury is required by law to pay that fund 4 per cent, so as to live up to the law, when, as a matter of fact, they could go out and get the money elsewhere for 1 and 2 per cent? General HINES. Senator, of course he is following the provisions of the law. It does look a little out of step at this time. Senator COUZENS. It is a rather silly situation that has developed, because he is required to maintain that fund at 4 per cent. General HINES. That is right. Senator COUZENS. He is required to go into that fund and take out his money for use in governmental purposes, and pay 4 per cent for it when he could go out into the market and get it for 2 per cent. It is an absurdity created by the law, not by the Secretary of the Treasury. Amount Per cent of de crease or increasel General HINES. If it would be of interest to the committee, and you desire it introduced in the record, the Secretary of the Treasury released, on January 2, 1925, a statement as to just what the policy would be with reference to the investments of the amounts in this fund. It goes into detail and gives just the procedure used in making that investment. I shall be glad to introduce that into the record if the committee desires it. It is quite a long statement, and you probably would not care to have it read at this particular time. (The statement referred to is as follows:) [Treasury Department. For release, afternoon papers, Friday, January 2, 1925] The Secretary of the Treasury to-day made the following statement: The adjusted compensation act provides for an appropriation on the 1st of January in each year to the adjusted service certificate fund of an amount, based upon the American Experience Table of Mortality, which, if kept invested at 4 per cent compounded annually, would be sufficient to pay the face value of the adjusted service certificates upon their maturity in 20 years or upon prior death of the veteran. The Secretary of the Treasury is authorized to invest and reinvest the moneys in the fund in interest-bearing obligations of the United States and to sell these obligations for the purposes of the fund. In order that the fund shall be sufficient to meet the payments in accordance with the plan outlined by the act, it is necessary that the moneys be invested when received and kept invested until payments out of the fund are required. No purpose is gained by the investment of the fund in securities returning more than 4 per cent compounded annually, since this would simply mean an accumulation in the fund of more money than was necessary to meet payments. On the other hand, if less than 4 per cent compounded annually is received, the fund will be insufficient to meet all payments to become due. There are no Government securities in the hands of the public bearing interest payable annually (as distinguished from semiannually) and none which give the exact return of 4 per cent annually on their market price. During each year the fund will be drawn upon to pay certificates matured on account of death, and this continuous liability will require almost daily realization of cash, which can only be obtained by the sale or redemption of securities in the fund. The greater part of the fund will remain intact until the maturity of the certificates at the expiration of 20 years, at which time cash will have to be realized. Since the securities then in the fund will probably not be suited to existing market conditions, the likely solution at that time will be for the Treasury to redeem the securities in the fund with the proceeds of new securities which will meet the market then existing. It is apparent, therefore, that the purchase for the fund of any of the present outstanding Government securities will not meet the exact requirements of the fund and will probably be unsatisfactory for sale when on maturity of the certificates the major fiscal operation to provide cash must be undertaken. If the Treasury were in the Government bond market on the 1st of January in each year to buy $100,000,000 of its securities, the purchases could not be made in one day, nor could such a large order be filled without unduly increasing the market price which the fund would have to pay. If, also, the Treasury in the course of the year was required to sell securities to provide the fund with cash, the tendency would then be to depress Government securities on the market. So if the practice of buying and selling on the open market were used, the Treasury would be continually purchasing on a high market and selling on a low market. The $100,000,000 called for by the adjusted compensation act for January 1, 1925, was authorized by the deficiency appropriation bill signed December 5, 1924. The Secretary of the Treasury has invested this sum in $50,000,000 par amount 5-year special Treasury notes, dated January 1, 1925, and payable January 1, 1930, and in $50,000,000 par amount special Treasury certificates of indebtedness, payable one year from date, with right in each case of certain prior redemptions. Both securities call for interest at 4 per cent per annum, payable annually, or on the prior redemption of the security. It is expected that these special certificates of indebtedness will be redeemed from time to time during the year to provide the fund with cash with which to meet current obligations; that any such certificates remaining unredeemed at the expiration of the year will be refunded into other certificates or into notes; and that at the maturity of the notes, they will be refunded into securities of similar tenor until payments become due on the maturity of the adjusted-service certificates some 20 years later. This method of handling the adjusted service certificate fund has the following advantages: 1. The securities exactly fit the actuarial requirements which are by law made the basis for fixing the appropriations for the fund. 2. The bond market is not disturbed by a purchase of a very large block of securities early in January and by a subsequent continuous pressure for the sale of securities to provide cash for the fund throughout the year, the effect of which would be buying on a high market and selling on a low market. 3. Commissions to brokers on the purchase and sale of Government securities are saved. 4. It is not necessary to borrow on December 15 (the usual financing day nearest January 1) additional cash and carry this cash, with a consequent loss of interest, until it can be invested in Government securities on the market after the first of the year when the appropriation becomes available. 5. Cash demands of the fund can be immediately satisfied by the redemption by the Treasury of the special certificates of indebtedness and the whole plan has great flexiblity. 6. When the adjusted-service certificates mature about 1944, the Treasury will be in position to do the necessary financing to meet the conditions then existing, without being compelled to sell a lot of miscellaneous Government securities perhaps unsuited to the market and to the Treasury's program. The working of this plan can best be illustrated by its first operation. On December 15, 1924, the Treasury, in addition to any money to purchase investments for the fund, required $225,000,000 to carry it through to the next financing period in March, 1925, and sold for cash about $225,000,000 of its 4 per cent bonds of 1944-54. As of January 1, 1925, the Treasury sold to the fund $100,000,000 of its special notes and special certificates of indebtedness, making total sales in December and January of $325,000,000 of Government obligations. This was the plan actually used. Had the other method of applying the appropriation to the purchase of securities in the open market been adopted, the Treasury would have had to sell for cash $325,000,000 of its bonds on December 15, 1924, and consequently would have lost the interest on $100,000,000 from December 15 until the securities for the fund could be bought on the market after January 1, 1925. There is, as will be noted, no difference in the final amount of public debt incurred between the plan of selling special securities direct to the fund and the plan of using the fund to buy securities in the market. In either case the fund would hold $100,000,000 of Government obligations and there would be $100,000,000 less of such obligations in the hands of the general public. It seems quite clear, therefore, that the sale of the special securities direct was the only feasible way of handling the investment required by the Congress. General HINES. There is one feature that I would like to clarify that I am afraid there is some confusion about, with reference to the loans made from the Government's converted insurance fund. Confusion exists, I think, in the minds of some, that if we paid off the bonus in cash, the securities in that fund would remain there, or we could deduct the amount that has been loaned out of that fund from the total amount necessary to be raised. In order to place before the committee just what each of these various bills would require in the way of cash to be raised by the Treasury, I have prepared a statement which I would like to have inserted in the record, giving, first, the title of the bill-for example, the Barkley bill, the Brookhart bill, the Caraway bill, the Dill bill, the Fish bill, the Garner bill, the Patman bill, and the Vandenberg bill, showing, first, the total cost in the event that the bonus was paid in cash; the second column shows the number of veterans to which it would be payable; the third column shows the amount that would have to be paid in to the Government insurance trust fund. That is, these certificates would have to be redeemed, and that amount paid in. The next column shows the credit to the adjusted service certificate fund. That is the sinking fund, which now holds certificates redeemed from banks that have been defaulted upon. The next column shows the amount payable to banks, as nearly as we can estimate the loans which they have at this time; and the last column shows the total cash to be raised by the Treasury Department to carry out any of these provisions. Senator WALSH of Massachusetts. I think that last column might be read. General HINES. The amount to be raised by the Treasury under the Barkley bill is $3,409,250,000; under the Brookhart bill, $3,409,250,000. That is the same. The amount under the Caraway bill is the same. Under the Dill bill, the amount is $1,693,750,000; under the Fish bill, $855,750,000; under the Garner bill, $2,106,250,000; under the Patman bill, $3,409,250,000. That corresponds with the Barkley, Brookhart, and Caraway bills. The Vandenberg bill would require, for loan purposes solely, $1,697,750,000. (The statement referred to is as follows:) Senator WATSON. Aside from the Vandenberg bill, are those subject to deductions? General HINES. The Vandenberg bill is Senator WATSON. I say, aside from the Vandenberg bill. Those amounts which I have just read would be the total amounts of cash necessary to pay to the veterans what is due to them, to redeem the certificates now in the Government's converted insurance fund, and redeem those held by the banks. Senator WALSH of Massachusetts. It assumes that all veterans will take the benefits. General HINES. It assumes that all veterans will take the benefits. Senator BARKLEY. I understood you to say yesterday that from this total of $3,400,000,000 odd, in determining the actual new money that would have to be raised, you deduct the $771,000,000 in this redemption fund, and the amount of the loans, so as to reduce the amount of actual cash to a little above $2,000,000,000, for instance, in the bill I have introduced, and corresponding amounts in the other bills. I do not quite reconcile that with your statement. General HINES. I made the statement at that time, Senator, that the Treasury took the same view with reference to the sale of those securities in that fund, as to the raising of the money to pay the rest of it. Senator BARKLEY. In other words, they have enough certificates and money, representing this accumulated fund, to amount to more than $1,000,000,000. General HINES. $771,000,000, to be exact. Senator BARKLEY. Plus $400,000,000 odd that is loaned. General HINES. I think that is a misunderstanding that exists, Senator. The amount that is loaned from the Government converted insurance fund, which is the trust fund of the veterans who have paid premiums on their Government insurance, plus the amount that we have raised by the sale of securities in that fund, would have to be paid back into that fund in order to redeem the certificates which we now hold; so that that amount, at some time-whether you did it immediately or later would eventually have to be redeemed. In other words, the converted insurance fund has taken the money received from premiums, and from the sale of securities where they had invested premiums previously received and sold those in order to make loans to the veterans on the adjusted service certificates, so the fund to-day holds approximately some $260,000,000 with the investments in adjusted service certificates. If they are paid off, the money must necessarily be paid to the extent of the loan to that fund. Senator BARKLEY. The total amount that would be paid to the veterans is about $3,400,000,000 odd. General HINES. No. That amount would not go to the veterans. That is the total amount of cash the Treasury would have to raise. I have indicated the amount that would go to the veterans in the second column. For instance, under your bill the amount the veterans would receive would be $3,116,250,000. Senator BARKLEY. But, whatever the amount is, of course, as one of the methods of raising the amount, you would have available whatever certificates you are holding now to the credit of this fund. General HINES. That is correct; in the adjusted-service certificate fund. Senator BARKLEY. Yes. Senator COUZENS. But they would have to be sold, Senator. Senator BARKLEY. They would have to be marketed by whatever method may be found necessary. General HINES. I wonder if you understand that there are two very distinct funds? The adjusted-service certificate fund is the sinking fund held by the Treasury for the purpose of redeeming the adjusted-service certificates. Senator BARKLEY. That fund now is $771,000,000? General HINES. Yes. Then there is the Government's converted insurance fund which is the Government's insurance carried by some 675,000 veterans, which is a trust fund for those veterans on their converted insurance. In other words, we have used as an investment for that fund loans on the adjusted-service certificates. Senator BARKLEY. Of course, that has no connection with the adjusted certificates. General HINES. No. Senator BARKLEY. But you have used that accumulation for the purpose of loaning money on these certificates? General HINES. That is right. In other words, it made it a good Government investment. In investing the premiums, it is necessary that we invest whatever surplus we have in Government securities, so that this offered a very good avenue for investing the premiums of that fund. Senator COUZENS. Regardless of the amount of money that is in the sinking fund to take care of the certificates when due in 1945, |