Savings Bond Administration

The problem of handling voluminous bond redemptions required a more complex solution. As part of the trend which started when operations had been moved to Chicago, a further decentralization took place. Regional offices were opened in Cincinnati, St. Louis, Chicago, New York and Los Angeles to handle the auditing of the bonds that were being redeemed in such great number by the Federal Reserve Banks. This plan worked well, with the backlog of redeemed bonds eliminated early in 1947. The system proved so effective that within 2 years it was possible to close the regional offices in St. Louis and Los Angeles, and to transfer those Federal Reserve Districts being served from those offices to the Chicago and Cincinnati Offices. 12

It was also during this time that microfilm recording began to replace the storage of actual bond stubs as a system of recordkeeping for new issues. Previously, all of the records were stored in the Chicago Office, which created a problem due to limited space. A policy was begun, with the approval of the Comptroller General on May 7, 1946, of microfilming the registration record of savings bond holdings and eliminating the paper records by selling them as wastepaper under proper supervision by the Bureau. Thousands of square feet of space in the Chicago Office were released for other

Other members of the Federal government were also concerned with bringing some order to the sprawling bureaucracy brought about by the war. The Hoover Commission, in 1949, headed by former President Herbert Hoover, completed an evaluation of the Executive Branch and reported to the Congress, "The United States is paying heavily for a lack of order, a lack of clear lines of authority and responsibility, and a lack of effective organization in the executive branch." 14 The Commission, based on the findings of over 300 economists, management consultants and organizational authorities, issued 19 reports with 281 specific recommendations for improvement of operations in the Executive Branch. 15

The Hoover Commission made two specific recommendations with reference to the Fiscal Service and the Bureau of the Public

12 Kilby, Report, 3 and 5-6.

13 Kilby, Report, 3.

14 82nd Cong., Reorganization of the Federal Government, (Washington, D.C.: Senate Document No. 91, 1952), 1.

15 82nd Cong., Reorganization, 1.

Debt. First, it recommended that the Savings Bonds Division, the Bureau of the Mint, the Bureau of Engraving and Printing and the Secret Service be made part of a proposed new Department of Fiscal Service. Those opposed to this argued that these organizational components had to be located where they could be most effectively supervised by the Secretary of the Treasury. 16 However, some reorganization of the Bureau of the Public Debt was put into place. Functions of the Division of Savings Bonds of the Bureau were transferred to a new United States Savings Bonds Division on November 30, 1951, under the authority of Reorganization Plan No. 26 of 1950, and the duties of the Division of Paper Custody were turned over to the Bureau of Engraving and Printing on July 31, 1950. 17

The second specific recommendation of the Commission concerning the Bureau was that much of the accounting and record keeping associated with bond sales be shifted to the Federal Reserve System, with an ultimate potential reduction of 4,000 employees. Responding, Commissioner Kilby pointed out that many such functions had already been shifted to the Federal Reserve, but it was doubtful that many more could be. Therefore, he did not think the projected reduction of 4,000 employees was realistic. 18 Besides, the Bureau had already done well in reducing the total amount of its employees (see Table Five).

Source: Bureau of the Public Debt, Summary of its History and Principal Functions, etc. May 1954.

War and Peace in the 1950's

The opportunity to continue a careful policy of debt management and administration were diminished with the onset of hostilities in Korea. While not a declared war, and not conducted with an all-out

16

John L. Snyder, Letter from John L. Snyder, Secretary of the Treasury to Senator John L. McClellan, (Washington, D.C.: August 2, 1949), 17.

17

Bureau of the Public Debt, Summary of its History and Principal Functions, etc., (Washington, D.C.: May, 1954).

18 E.L. Kilby, Memorandum, March 19, 1949, copy in Bureau of Public Debt Files.

effort equal to that of World War II, the Korean conflict put new pressure on the Treasury, and for a time, strained relations between the Treasury and the Federal Reserve.

Prior to the conflict, the Treasury had refrained from refunding its maturing securities with short-term obligations. Free from the necessity of supporting low short-term interest rates, in the Spring of 1950 the Federal Reserve embarked on a moderate policy of selling government securities. Inflationary pressures were being felt at the time, as the economy entered into an expansionary phase. Business and consumer borrowing were increasing at this time. 19

The Treasury became concerned again with the problem of financing a war effort with the outbreak of hostilities in Korea in June 1950. Defense spending jumped from $17.7 billion in 1950 to $44 billion in 1953 and $50 billion in 1953. The Federal Reserve was willing to use open market operations to help secure the funds the Treasury would need, but it did not want to return to the interest rate structure of World War II. 20

The difference of views came to a head in August of 1950, when the Treasury attempted to refund long-term issues of 2 percent to 2 1/2 percent in exchange for 13-month notes carrying interest at 1 1/4 percent. The exchange was effected only after the Federal Reserve carried out some very tricky open market operations by selling issues other than those coming due (pushing their interest rates up), and using the proceeds to purchase large quantities of the issues coming due, which were then exchanged for the new securities. When this was completed, the Federal Reserve held nearly 75 percent of the new issue of short-term securities, and the sale of other short-term issues by the Federal Reserve had pushed their yields from 1 1/4 percent to 1 3/8 percent. 21

Secretary of the Treasury Snyder disagreed strongly with the stance taken by the Federal Reserve. He was concerned, with the outbreak of hostilities in Korea, that a war on the scale of World War II might develop. Consequently, he told the Chairman of the Board of Governors of the Federal Reserve System, "Every circumstance at the present time calls for steadiness and manifest strength in the Federal security market as a primary measure of economic pre

19 Abbott, Federal Debt, 93-95.

Tilford C. Gaines, Techniques of Treasury Debt Management, (New York: The Free Press of Glencoe, 1962), 62.

21 Abbott, Federal Debt, 95–98.

paredness." While the Treasury had been willing to go along with interest rate increases earlier, now it wanted its financings to be at the lowest possible rates. 23 Snyder maintained that the refunding program in August 1950 was in line with the market at the time the new issues were offered. He blamed Federal Reserve open market operations just prior to the date of exchange for the poor showing of the offering, wherein only 6 percent of the new issue was exchanged by private holders. 24

After several meetings between officials of both agencies, including a series of conferences with the Secretary of the Treasury, the Chairman of the Federal Reserve, and President Truman, on March 3, 1950, the following agreement was announced: "The Treasury and the Federal Reserve System have reached full accord with respect to debt-management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the government's requirements and, at the same time, to minimize monetization of the public debt.” 25

Accordingly, the Federal Reserve would continue to help the Treasury with its financing, but it would also operate more independently in terms of its efforts to control money and credit. This new arrangement meant that the Federal Reserve would not maintain a specific range of interest rates on government securities. Instead, interest rates would be subject to the influence of market forces. A period of transition was arranged, to allow financial markets time to adjust to this agreement. 26

Specifically, the Treasury would take some long-term debt off the market by offering to exchange it for a new issue of nonmarketable 29 year 2 3/4 percent bonds which were redeemable prior to maturity only by conversion into a five-year marketable Treasury note at 1 1/2 percent. The idea was to keep liquidations of long-term debt to a minimum. At the same time, the Federal Reserve refrained from purchasing short-term securities, with the result that those interest rates began to rise. 27

There was still some disagreement over the extent to which the accord would permit the Federal Reserve to control money and

credit. Secretary Snyder defined a stable market for government securities as one "in which prices and yields fluctuate within a moderate range over a considerable period, but without exhibiting any pronounced upward or downward trend." 28 As discussed earlier, the need for this stability was to keep confidence in the credit of the government, keep debt service costs as low as possible, and to maintain a wide ownership of the debt. At the same time, the Federal Reserve needed to keep control over money and credit and use interest rates as a device for allocating credit. The Federal Reserve also wanted to keep the market for government securities in some sort of balance.

Normally, an accommodation between the two agencies and their separate goals is possible as long as the government's spending program is in line with overall economic conditions. When the government's financing needs are not in concert with economic conditions, as happens when the government runs a deficit while the economy is expanding, the job of the Federal Reserve in controlling the money supply becomes more difficult. In extreme cases, such as World War II, the Federal Reserve is forced to abdicate its control over money and credit to service the Treasury's needs. The Treasury felt the same conditions should prevail during the Korean conflict, but the Federal Reserve did not agree.

The Eisenhower Administration

A resolution of the disagreement was effected by the change of administration in 1953, when President Eisenhower took office. First, the ending of hostilities in Korea was a top priority with Eisenhower, and an uneasy truce was soon negotiated. The new Secretary of the Treasury, George Humphrey, set forth a debt management program that had three goals: "(1) Freedom for the Federal Reserve System, with the Treasury financing at 'going market rates.' (2) Extension of debt maturities. (3) Reduction of bank-held debt." 29

There was little initial progress toward meeting these goals. The Federal Reserve consistently followed a policy of credit restraint throughout the 1950s, to ensure that inflation did not return. At the same time, government fiscal policies were also only mildly expan