Financing The Nation
( Originally Published Early 1900's )
MAGNITUDE OF CLERICAL AND ROUTINE OPERATIONS
THE actual operations of each of the various Treasury bureaus are conducted under the immediate observation of the chief of the bureau responsible for executing the tasks relating to the particular class of service his bureau has assigned to it; but the regulations governing the operations of the bureau are framed by the head of the department. In scores and scores of cases, the application of the rules to particular instances is submitted by the bureau chief to the general management for decision. The difficult cases—such as may have far-reaching effects—are the ones that are submitted to the general responsible authority to be decided finally. In a great many instances they require not only the careful reading of the file but painstaking reflection before decisions are rendered.
It is perfectly apparent that the responsibility for supervision over such a service as the customs, which necessarily utilizes some 10,000 employees, requires business capacity of a high order. Similar capability is required of the heads of the Internal Revenue service force of about 12,000 individuals; the Coast Guard, which utilizes between 12,500 and 13,000 officers, enlisted men, and civilian employees; the Public Health Service, which employs about 9,500 surgeons, nurses, hospital stewards, and other employees, technical and clerical; and the Bureau of Engraving and Printing, which employs over 4,500 printers, engravers, and clerks.
Each of those services and some twenty other Treasury bureaus and divisions, as set forth in previous chapters, are under Treasury control, and the head of the department is responsible for the efficiency of their conduct. It should be understood that each of those establishments is independent of the other, but that the general management of them devolves upon the executive who serves as a directing head. Obviously, the responsibility is very great, and if good results are secured, it is apparent that those who pay the taxes used to conduct those operations may well feel a sense of satisfaction.
Over 60,000 individuals are employed by the Treasury, and the scope of their activities is probably wider than that of any business organization in the world. It is a certainty that there never has been an organization the operations of which have had a greater effect on the welfare of this nation. The fact that the great machine operates so smoothly that no criticism of it is ever heard seems to be convincing evidence that the United States Treasury is a well-managed establishment. Of course, it occasionally happens that some superficial theorist voices objection to some decision or to some rule or method; but in such cases it has almost always been true that if the objector had made inquiry and had heard the reasoning that supported the Treasury decision, or had himself been energetic enough or diligent enough fully to comprehend the Treasury's action, he would have found the attitude of the department was based on law and sound policy.
In further reference to the subject of management of this great organization, it does not seem inappropriate to state that the excellent results of the past decade have not just happened. They have not been the con-sequence of accident or chance good fortune. They have come through capable leadership.
Every business man, whether he be banker, merchant, farmer, or mariner, knows that satisfactory results follow only after constant thought and watchful care, prudent creation of obligations, and the elimination of unnecessary costs. No business and, if you please, no Government operation ever attains satisfactory objectives without careful plans and careful execution directed by capable minds.
The preceding references to general supervision have related mainly to the clerical and routine operations of the various Treasury bureaus. There are operations of an entirely different character that are of the utmost importance to the nation, and that it is the immediate task of the Secretary and the Under Secretary to perform, viz., the nation's financing operations—the tasks of providing for the needed revenue, reducing the tax rates, meeting the daily Federal expenses, reducing the public debt, and reducing the interest rates on the loans.
Those tasks are performed in person by the directing heads. The determining of the questions that arise in connection with them are second in importance to no other Federal executive task.
Before considering how the nation acquires an immediate benefit by those duties being skillfully performed, it seems proper to mention certain facts as to the results that the Treasury financial records disclose. Let us select for observation the period 1921 to 1930.
It will be recalled that on July 1, 1921, the national debt was just about $24,000,000,000 and that it was bearing an average rate of interest of approximately 4.3 per cent. The income-tax rates were burdensome to the taxpayers and hence were retarding business progress. At that time the annual cost of Government operations, excluding postal receipts and payments, was about $4,470,000,000.
REDUCTION IN THE INTEREST RATE
At the beginning of the fiscal year 1931, the national debt had been reduced since July, 1921, by about one-third, or to just about $16,000,000,000. The average rate of interest on the debt had been reduced to less than 3.7 per cent.
During the period from 1924 to 1929, the Second and Third Liberty loans were refinanced. This was accomplished without any disturbance of either the security market or the money market.
REDUCTION IN OPERATING COSTS
The average annual expense incident to conducting the ordinary operations of the Government during the period after 1921, excluding postal operations, was about $3,075,000,000. That aggregate discloses the improvement that was brought about by the adherence to the budget program of economy that was adopted for 1922 and that was followed each year after that. Of course, the major portion of the great reduction in expense is attributable to reduction in the Army personnel and to the limitation of armament, but economical administration of the executive departments has also materially added to the reduction in operating costs.
THE EFFECT OF REDUCTIONS
Inasmuch as income-tax rates have been successively reduced five times during the period under discussion, so that every income-tax payer in the land has been very appreciably relieved of the tax burden, it seems perfectly manifest that the nation's finances must have been wonderfully well administered for nearly $8,000,-000,000 to have been paid off and the interest aggregate to have been reduced to a point where the annual interest charge on June 1, 1931, was fully $440,000,000 less per year than it was on July 1, 1921. The reduction of our war cost means that the taxpayer has been relieved of his burden to the extent of over $1,250,000 a day in interest charge.
ABLE OFFICIALS IN CHARGE OF NATION'S FINANCING
Of course it is a matter of first importance that the President have the best-trained financiers in the country at the helm to handle the national finances. In having Mr. Andrew W. Mellon, the present Secretary of the Treasury, in charge, the country has the services of the man who for years was the leading banker of Pittsburgh. He has been probably the most successful banker our country has produced. His knowledge of the money market and the bond market is considered second to that of no other financier in the country.
Ogden L. Mills, the Under Secretary of the Treasury, is Mr. Mellon's chief adviser. He is at the Secretary's elbow and his advice and constant assistance is the Secretary's chief reliance. He is said to be the best-informed tax man in the country. He is a man of remarkable capacity for work and has great ability as a financier. He understands the Treasury problems, and it is to him that the bureau chiefs look for guidance. Their hard problems are submitted to him for solution and his decisions are always soundly based.
It seems proper to remark that the taxpayers have cause for gratification that the two officials referred to are willing to serve in the capacity to which they are now giving their time and attention. Both are men of independence in the sense that salary is of no consequence to them. No one but the Government could procure their services, for no salary, however great, would be attractive to them. The desire to be of benefit to the country clearly is the cause of their willingness to carry their present burdens of responsibility.
EVIDENCE OF CAPABLE MANAGEMENT
The bare assertion that an official performs his tasks extremely well carries very little weight unless the evidence on which such a conclusion is based is submitted. What facts support the opinion? What is there that is specific to demonstrate the assertion? Let us review the major moves that brought the great debt under satisfactory control and then observe some of the minor ones that have further hastened the debt reduction operation.
In July, 1921, the Treasury was carrying a cash balance of about $550,000,000 and the market price of the Second, Third, and Fourth loans stood under par about 12% points—at something like an average of 87% in the security market. The first move was to speed up the use of all the accumulated and idle balance that could be spared. The excess was used to buy in the bonds and retire them. Whenever any surplus cash became available it was promptly utilized by the Secretary in the same way. The Government was the best customer at the bond market, and great amounts of bonds were recovered at advantageous prices. Due to the steady purchases by the Treasury the market price of Government bonds rose steadily until they reached par.
Whenever the Federal revenues exceed the expenditures, the excess is used to buy in outstanding bonds. Thus when the Treasury can spare the funds. the Treasury management scrutinizes the market very carefully to determine by comparison which class of outstanding obligations it is most advantageous to purchase. The maturity date as well as the interest rate are both carefully considered in conjunction with the present and probable future state of the market. When sums that aggregate hundreds of millions are involved, it seems that it has been very prudent of the Chief Executive to have officials who know what they are about assigned to the buying. No novice in market transactions should be intrusted with that job. The Secretary and the Under Secretary personally attend to it.
THE REPLACEMENT OF THE LOANS
There is another financial process that engages the particular attention of the Treasury management. It involves great responsibility and requires talent of the highest order to produce a maximum of economy—the refinancing of our great Liberty loans. It may be of interest to consider how those processes are conducted.
The Great War loans were originally floated at abnormal rates and for vast sums. The amounts necessary to meet the Victory, Second, and Third loans were huge and, of course, could only be procured by issuing other bonds. Each of the great loans has been met by the issuing of other securities at lower rates. It was the task of the management, in anticipation of the maturity or the call date, to determine from market conditions what the rate should be on the replacement issues. Subsequent events demonstrated that the terms were properly forecast, for each of the loans was very advantageously floated. The replacement securities were skillfully placed in the hands of purchasers appropriately and proportionately throughout the country, through the cooperation of the Federal reserve banks, so that there was no disturbance of the security or the money market. The fact that each class sold on the markets immediately afterwards just around par showed that the interest rate had been accurately determined upon.
THE SHORT-TERM SECURITIES
The present Treasury management has recognized it is of advantage to have the public debt represented by short-term as well as long-term securities, and a considerable aggregate of one-year securities, and some with a shorter maturity date, have been issued. The short-term instruments have a variety of maturity dates, and by an observation of security market sales of the large variety of the Government's obligations, it is possible to determine very accurately how low a rate it is safe to assign to each issue of either long-or short-term instruments and be assured that they will be fully subscribed at or above par. Each of the re-cent certificate issues are small in amount compared with the aggregate of the long-term bonds and notes outstanding. On June I, 1931, about 22 per cent of our interest-bearing debt was in comparatively short-term instruments, and their average interest rate was just about 2.335 per cent. Those then outstanding fall due on various dates from thirty days after that time to December, 1932. And as time passes it is to be the practice to increase the number of issues and the number of maturity dates.
One of the greatest of Treasury financing problems is to avoid an excess in the balance to the credit of the Treasurer, just as it is imperative that there be enough balance on hand to meet all current needs. Customs receipts produce a steady flow of revenue daily, where-as income-tax payments come in quarterly, March 15, June 15, etc. Thus, unless special means are employed to avoid it, the Treasury will have an excess balance on hand immediately after those dates; and it would be poor management to have the excess idle until daily expenditures cut down to a low point just prior to-the next quarter day. Of course, the ideal would be to have a normal continuous small balance on hand—barely enough but not too much.
FUNDS NOT ALLOWED TO STAND IDLE
There are two processes by which the waste incident to idle funds may be avoided and by which the money and security markets may be left undisturbed by the quarterly income-tax payments and payments for the Government's due obligations. Manifestly, it would disturb the markets to withdraw great sums suddenly from the banks and make transfer to the Treasury.
The short-term obligations are dated so as to fall due coincident with or shortly after the quarterly income-tax payments. New obligations are usually issued just about the date the maturing obligations must be honored. The banks that subscribe for the new issues pay for their subscriptions by according book credit in favor of the United States Treasurer, after having previously deposited satisfactory security with the Federal reserve banks as a pledge. Income-tax funds are used to pay maturing securities, thus restoring them almost simultaneously to the market. The bank pays the Government interest on the daily balance and the funds are checked out only as needed—a gradual process. By that means the banks can afford to subscribe for certificates at a rate that is but a small amount over the interest each pays on the Government's book-credit balance carried on deposit in the bank. The small gain the subscribing banks acquire in the process is a mere fair handling charge. The process of disposing of the Government's securities to subscribers who pay for them through the depositary banks, and by the latter's according book credit, has been a great advantage to the Treasury and has resulted in procuring much more advantageous interest rates.
Congress, upon the recommendation of the Treasury, on June 17, 1929, afforded an improved means for still further facilitating the short-term loan process.
It was put into operation in December, 1929, and is working wonderfully well. A new instrument in Federal financing, called a "Treasury bill," was created. These bills are short-term instruments, which are is-sued to the highest competitive bidder; at maturity they are redeemable at par. The discount represents the interest. They are a very attractive investment because they are short-term, and funds desired by the owner to be but temporarily out of his hands can be safely placed by investing in these bills with the knowledge that their maturity is but a short time away.
There have been about twenty issues of Treasury bills. Nearly all have carried a three-months maturity date. Four have carried sixty-day maturity. Each issue was very advantageously floated. The first was issued at 3.30 per cent. Commercial interest rates were then very high. The second occurred in February, 1930, and was issued at 3.28 per cent; the third, fourth, and fifth were issued at 2.93 per cent, 2.54 per cent, and 1.87 per cent, and from $50,000,000 to $100,000,000 was borrowed at those rates. In October, $120,000,000 was procured at 1.72 per cent. On February 3, $60,000,000 was borrowed at 96/100 of 1 per cent. On February 16, another $150,000,000 was borrowed and the rate was 1.22 per cent. The next were issued April 2 for $100,000,000—they carry a rate of 1.49 per cent. On April 27, $53,000,000 was borrowed; the rate was 1.33 per cent. On May 5, $60,000,000 at 1.29 per cent; on May 11, $50,000,000 at 1.18 per cent; on May 18, $100,000,000 at slightly over 1.0 per cent. The last issue was on June 1, 1931—$80,000,000 was borrowed at 85/100 of 1 per cent. That is the lowest rate at which the Government ever borrowed money.
The fall in the rate was, of course, attributable to the easy condition of the commercial-loan market, but the Treasury bill afforded the Treasury management the means with which to take advantage of such favorable market conditions. The sale of such obligations on a discount basis to the highest bidder has beyond question resulted in a great economy—a great interest saver. The benefit to the taxpayer has been obvious.
POSTWAR TREASURY MANAGEMENT SUCCESSFUL
The task of superintending the Treasury during the period following the war was such that careful business management was a stern necessity. The improved state of the national finances demonstrates how well this task was performed.
Those who have lived in the Treasury atmosphere and who have seen at close range what transpired know that the excellent results obtained came about through sagacious management. It has been clear to all that every decision and every order has been made in the public interest. The public. welfare has been the object of every official act of those who have had the task of managing the Treasury.