WHAT PEACE CAN MEAN TO AMERICAN FARMERS 25 



when it is due. Second, the owners of these securities must be able 

 to get the cash for them when the due date arrives. 13 



The present rate of interest which the Treasury is paying on bor- 

 rowed funds averages a little less than 2 percent a year. With a debt 

 of 300 billion dollars, this means that about 6 billion dollars of taxes 

 must be used to pay interest on the debt. This is about one-third 

 of what the personal-income tax yielded to the Treasury in the fiscal 

 year ending June 30, 1944. It would represent about 4 percent of 

 the national income at full-employment levels in 1950, if prices 

 remain about where they were in 1943. 



Although the average rate of interest on the entire debt is about 

 2 percent, the rate on short-term loans held by banks is much lower. 

 This suggests the possibility of lowering the average rate still further 

 by increasing the proportion of the debt held by banks as short-term 

 loans. 



But meeting the interest on outstanding securities of the Govern- 

 ment is not the same thing as redeeming the securities when they 

 come due. Can this be done ? So long as the interest on Government 

 debt is paid when it is due, and investors think that it will continue 

 to be paid in the future, there will be thousands of individuals, banks, 

 and other business firms anxious to invest their money in Govern- 

 ment securities. At the very same time that some people want to 

 cash in their bonds, others will want to invest in them. It is not 

 necessary, therefore, for the Government to reduce its total indebted- 

 ness every time an issue of bonds must be redeemed. It can issue 

 new bonds to pay off old ones, so long as it is following policies that 

 are calculated to inspire confidence in the future. A workable full- 

 employment policy will inspire more confidence than one which would 

 tolerate a depression. 



A strong demand for Government securities at relatively low 

 interest rates continues to exist. Indeed, the average annual interest 

 rate on the Federal debt for the fiscal year ended June 30, 1944, was 

 lower than for any fiscal year during the last decade. 14 This is not 

 to suggest that a very large debt, as such, is a good thing. It is only 

 to point out that the seriousness of the problem of managing the debt 

 is to be judged not by its absolute size but by its relation to national 

 production, income and employment — as well as by the kind of taxes 

 levied to pay interest to bondholders. 



Management of the Federal debt presents no insuperable obstacles 

 as long as the carrying charges or interest on it bears a reasonable 

 relation to the total tax base. A policy maintaining low interest 

 rates is not only a real incentive to private investment but is also 

 a significant force in lowering the carrying charges on the Federal 

 debt. A debt no larger than that which the Federal Government is 

 likely to have at the close of the war could be carried indefinitely 

 at present rates of interest, if high levels of production and employ- 

 ment are maintained. The debt can always expand safely as long as 

 the expansion in its service charges is accompanied by a proportionate 

 (or greater than proportionate) expansion of the Nation's produc- 

 tion. The debt should be reduced, but not when payment to reduce 



i 13 In the case of securities such as the Series E Savings Bonds, the owner has the 

 option of cashing them in at any time just as he can write a check on his deposit 

 account whenever he has money in the hank. This means that the Treasury must stand 

 ready to pay these bonds off just as rapidly as their owners demand the cash. 



14 Bulletin of the Treasury Department, October 1944, p. 27. 



