High Bonds

The Public Debt of the U. S. last week stood at its all-time high--$27,160,804,446. Simultaneously nine issues of Federal bonds were selling at their all-time high. Treasury 4%'s, due 1944-54, could not be bought for less than 109 while Treasury 3 1/2%'s due 1940-43, were quoted above 105. Liberty bonds at 3 1/2% were more valuable than they had ever been since they were issued in 1917. No one who wanted to invest in a direct obligation of the U. S. Treasury could buy it cheap enough to net him 3% on his money.

The much reviled law of supply & demand had worked the seeming miracle, for in spite of the fact that a greater supply of Government obligations was available than ever before, demand for this form of security was greater still. Contributory factors:

P: Some $1,700,000,000 excess reserves of banks (unnecessary idle deposits with the Federal Reserve on which member banks get no interest). These have been piled up by the return to the banks of hoarded cash, by the $1,676,000,000 which during two and one half years Federal Reserve Banks have paid out in buying Government securities, by the return of $800,000,000 of gold from abroad, by the Government's spending of part of its $2,000,000,000 exchange stabilization fund.

P: Business stagnation which has caused a lack of rediscounts.

P: A negligible demand from business for long term financing--due to the Securities Act and general fear that the New Deal will limit profits, regulate business, boost costs, compete with established industry.

Grand Result: a vast accumulation of investable resources in banks and in the hands of the public. Months ago they began to put their funds heavily into short-term government securities until interest rates fell to virtual zero. Last week investors wishing to buy one-year Treasury notes could not get a yield over 3/100 of 1%. For better profits banks and other customary short-term investors turned to long-term Government bonds. Prices of U. S. bonds had climbed gradually for months. Last week saw the movement go to a new high mark.

Significance. Officials in the U. S. Treasury were not at all upset to see Government bonds go to a yield of less than 3%. It meant that in spite of the topheavy public debt, the Government can still go on borrowing the New Deal's pocket money easily and cheaply. To be sure, if investors take confidence and start once more to invest in industry, the great surplus of investable cash will subside and Government bond prices will sink. But this possibility would please the Treasury even more, for relief expenses would fall, the Government would spend less, and tax receipts would begin to increase. Chief worry of economists last week was that this change might be postponed until such a huge investable surplus had been piled up that when it finally pours into industry, it will produce a bigger and more dangerous boom than that of 1929.

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