Riding Two Horses

Not since 1931 has a Secretary of the Treasury cared or dared to ask the people of the U. S. to buy U. S. bonds dated as far off as twelve years. Last week Secretary Woodin so dared. In so daring he not only submitted his financial wisdom to a major test but he gave evidence of an important decision by the Administration as to its monetary policy. During Depression, John Businessman, more & more eager for liquidity, bought short-term securities whenever he had money to invest. He liked very little to tie up his money in long-term investments. Fearful lest long-term issues would not sell, and tempted by low short-term interest rates, the U. S. Treasury issued more & more short-term securities: Treasury notes, certificates and bills. Result: eight of the 23 billions of the Government's debt will fall due within five years, much of it within a few months. Besides these eight billions, over six billions of 4th Liberty Loan bonds also fall due in 1938. With more borrowing needed to finance the New Deal, it was obviously high time to do some long-term financing.

What the Treasury announced last week was an issue of twelve-year bonds (callable after ten years) to bear 4 1/4% interest for the first year, 3 1/4% thereafter. First the Treasury offered $500,000,000 of the new bonds to the public for cash, at 101 1/2 (including 16 days accrued interest)-- this to provide money for the Government's current use. Second the Treasury called $1,900,000,000 (about one-third) of the 4th Liberty Loan for redemption April 15 and told holders of the called bonds that they could exchange their old bonds for bonds of the new issue. Third, the Treasury offered to let all holders of 4th Liberties, called or uncalled, make the same exchange, the Treasury reserving the right to end this offer at any time. Just how much skill Secretary Woodin had shown remained to be seen. Financiers freely prophesied that holders of nearly all the called bonds will exchange them instead of demanding payment in cash. Result: of the 14 billions of government debt falling due during the next five years nearly two billions will be converted to long-term debt at a saving of 1% ($19,000,000 a year) in interest. If many holders of uncalled 4th Liberties choose to exchange for the new issue, several more billions of the 4th Liberties may be converted. To Secretary Woodin's great satisfaction the $500,000,000 cash offering was promptly oversubscribed--a good omen for the Government's ability to finance the New Deal by long-term borrowing. Financiers agreed that the Treasury was not offering any better terms than absolutely necessary. If those terms were good enough to bring out a big public response Mr. Woodin would have got a very good deal for the Government, would pass his examination as a financier with a high mark. But though Mr. Woodin may get the high mark, others will have helped him earn it, particularly Dean Gooderham Acheson. Just as seventyish Andrew Mellon had fortyish Ogden Mills as undersecretary, to do much of the heavy work of his office, so sixtyish Mr. Woodin has fortyish Mr. Acheson. All summer long while doctors were treating Mr. Woodin's ailing throat, Dean Acheson as Acting Secretary ran the Treasury. While Mr. Woodin was in Philadelphia attending a concert, Mr. Acheson officiated--with U. S. Treasurer Julian. Economic Adviser Sprague and Governor Black of the Federal Reserve Board standing by--at drawing from a glass jar the serial numbers of the 4th Liberties to be called. "No Greenbacks Before April." Secretary Woodin rates as one of the "sound money" men in the Administration. Dean Acheson rates it just as strongly. Unlike Mr. Mellon's Undersecretary Mills. Mr. Acheson is not a considerable politician on his own account. He is a son of the Episcopal Bishop of Connecticut, a graduate of Yale and Harvard Law, a young horse-loving squire from Maryland. He got into the intricacies of finance as a lawyer in the Washington firm of Covington, Burling & Rublee, into the Treasury through the offices of his good young friend Budget Director Douglas, who is perhaps the Administration's "soundest money" man of all. That Messrs. Woodin's & Acheson's bond issue was a proclamation for sound money was apparent from this fact: the President has the power to issue $3,000,000,000 worth of greenbacks whenever the Government needs money. Rather than dilute the currency the Treasury deliberately chose to sell bonds. People will not buy bonds (or exchange bonds soon to be paid off for new long-term bonds) unless they have confidence in the value of the dollar. The implication of the offering was obvious: radical currency inflation has been put off at least until April 15. Paper Panic. Many a sound money man breathed easier. No confidence have financiers in "controlled" inflation of the currency. In spite of the dollar being off gold and selling at 60-odd in international exchange, the dollar is still a dollar to John Citizen, is still backed by perfectly sound government credit. Yet let the printing presses once start pouring out dollar bills, and some morning John Citizen would suddenly realize he did not trust the dollar. When citizens of any country lose faith in money, there follows a rush to change currency into commodities--just such a panic as there was last March to change bank deposits into currency. Banks can be closed to conserve deposits, but there is no known control for paper panic. Prices soar beyond reason and the higher they go the more eager are people to spend before prices go still higher. Currency swiftly becomes a figment of a paper imagination. Owners of bonds, of bank deposits, of life insurance policies, of pensions find the value of their holdings reduced to microscopic size. Wages and salaries cannot keep pace with rising prices. The quantity of goods sold drops to less & less in spite of every one's eagerness to buy. Business comes to a standstill. The Government's credit goes to pot. Then, as in Germany after the War, when everyone is ruined except a few profiteers, sanity returns, sound money is again established and everybody begins again--at the bottom. Right Horse Forward. John Citizen has not seen this gruesome spectre but it has lurked in the minds of many a financier and speculator, has induced them to hedge against inflation by buying commodities and common stocks. Last week the Treasury's announcement of a long-term bond issue swung these hedgers sharply about. They sang paeans of relief and sold stocks and commodities. Because they felt so good and sold so freely prices slumped, threatened to break through the low levels established in last July's reaction. So abruptly did prices fall, particularly wheat prices which broke the limit of fluctuation (5-c- a bushel), that Governor William Langer of North Dakota declared an unprecedented embargo upon all shipments of North Dakota hard wheat, tying up some 50,000,000 bushels. Some of the hedgers feared that their joy might be the cause of the very disaster they dreaded. They well knew that Mr. Roosevelt, committed to raising prices and redistributing wealth, rides two horses. Should prices slump too far. he might be virtually forced to turn to direct inflation. Last week the Right or sound-money horse of his team bounded so far ahead when spurred by the bond news that the dollar was yanked from 66 to 70-c- on foreign exchange. Left Horse Whipped. As soon as the sound-money horse got ahead, the President felt it wise to whip up his Left horse, the steed of inflation. A "high authority'' was at pains to explain in detail to the Associated Press:

"That it would be absurd to attempt in present circumstances to stabilize the dollar against foreign exchange.

"That the present credit expansion in itself is intended to be inflationary, increasing buying power.

"That it still is the purpose to redeem Government securities in dollars of the same value as those borrowed."

The last statement was a perfect expression of the President's ambiguous dual policy. It means either 1) decreasing the purchasing power of the dollar to give back to buyers of boom time bonds the same kind of dollars they gave, or (just the opposite) 2) leaving the purchasing power of the dollar where it now is in order to give a square deal to those who buy the bonds now offered.

Pushing on the Reins. Committed to speeding his inflation horse by credit expansion, the President was busy last week pushing on the reins of credit. He got down to cases about freeing $2,000,000,000 of deposits locked up in closed banks. Federal Deposit Insurance Corp., created by the Glass Banking Act, was designed for this purpose but because it can legally liquidate only closed Federal Reserve member banks, it has not been set to that work. For a time the President entertained the idea of forming a Federal bank or special corporation with R. F. C. funds to liquidate all closed banks. He rejected this for a new plan: A deposit-liquidating division of R. F. C. was set up in charge of a board headed by Carroll Burnham Merriam, obscure member of the R. F. C. directorate, an experienced small-city banker from Topeka, Kans.

Other members of the new board: Jesse Jones, Dean Acheson, Budget Director Douglas, Comptroller of the Currency O'Connor, Deposit Insurance Corp.'s Chairman Walter J. Cummings.

Their job: to lend enough money on the assets of banks closed since Jan. i to pay 50% dividends to depositors. The 50% is to include dividends previously paid, and will only be paid to the extent that assets of each bank in question are sufficient to secure the necessary loan from R. F. C. Special appraisal committees will be set up locally to value assets not already appraised by Federal authorities. Hope of the President is that the R. F. C. liquidating division will be able to market the securities of closed banks in orderly fashion without dumping them at sacrifice prices and at the same time set free up to $1,000,000,000 of tied-up bank deposits.

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