Special Message to the Congress on the Management of the Public Debt.

To the Congress of the United States:

Successful management of the debt of the Federal Government is one of the most important foundation stones of the sound financial structure of our Nation.

The public debt must be managed so as to safeguard the public credit. It must be managed in a way that is consistent with economic growth and stability. It must also be managed as economically as possible in terms of interest costs. The achievement of these goals is complicated today by several factors, despite the fact that United States Government securities are the safest investment in the world. Our growing prosperity, combined with Government programs to support mortgages and other types of debt obligations, has strengthened the position of these mortgage and other investments with which the Treasury must compete when it sells Government securities.

In addition, the rapid growth in borrowing demands of corporations, individuals, and State and local governments (which issue tax-exempt obligations) tends to diminish the amount of funds available for investment in direct Federal Government securities. Furthermore, the market for all fixed dollar obligations has been affected by a recent preference among some buyers for common stocks.

The achievement of a fiscal position that allows our revenues to cover our expenditures--as well as to produce some surplus for debt retirement-will improve substantially the environment in which debt management operates. Greater flexibility of debt management action is required, however, under present-day conditions if a reasonable schedule of maturities is to be maintained and the safeguards against inflation strengthened.

I am, therefore, asking the Secretary of the Treasury to transmit to the Congress today proposed legislation designed to improve significantly the Government's ability to manage its debt in the best interest of the Nation.

The legislation provides principally for:

(1) Removal of the present 3.26% interest rate ceiling on savings bonds. This, together with other changes, will reinvigorate the savings bond program.

(2) Removal of the present 4 1/4% interest rate ceiling on new issues of Treasury bonds. The present ceiling seriously restricts Treasury debt management and is inconsistent with the flexibility which the Secretary of the Treasury has on rates paid on shorter-term borrowing.

(3) An increase in the regular public debt limit from $283 billion to $288 billion, and an increase in the temporary limit from $288 billion to $295 billion. These increases are essential to the orderly and prudent conduct of the financial operations of the government, even with expenditures covered by revenues in the fiscal year 1960, as the Budget proposes.

Savings Bonds

Removal of the present 3.26% maximum limit on savings bond interest, together with certain other changes, will permit the Treasury to improve the terms of savings bonds. This will strengthen the contribution of the program both to habits of thrift throughout the Nation and to a better structure of the public debt.

The Treasury is proposing the following revisions in the savings bond program, subject to approval of enabling legislation: A 3 3/4% interest rate to maturity for all Series E and H Savings Bonds sold on or after June 1, 1959; an improved interest rate on all Series E and H bonds outstanding and continued to be held; and improved extension terms for outstanding Series E bonds when they mature.

4 1/4% Maximum Interest Rate on New Bond Issues

There is no statutory maximum on the interest rate which can be paid by the Treasury for marketable borrowing of 5 years or less (bills, certificates, and notes). The Secretary of the Treasury should have similar flexibility with regard to Treasury bonds (which run 5 years or more to maturity).

The Treasury always tries to borrow as economically as it can, consistent with its other debt management objectives. But in our democracy no man can be compelled to lend to the Government on terms he would not voluntarily accept. Therefore, when the Government borrows, it can do so successfully only at realistic rates of interest that are determined by the supply and demand for securities, as reflected in the prices and yields of outstanding issues established competitively in the Government securities market.

I am aware of the fact that many proposals have been made which are designed to produce lower interest rates. However, any debt management device which would seek to interfere with the natural interaction of the competitive forces of our free economy and produce unnatural reductions in interest rates would not only breach the fundamental principles of the free market, but under current conditions could be drastically inflationary. The additional cost to the Government alone from increased prices of the goods and services it must buy might far exceed any interest saving. The ultimate harm to the entire Nation of such a price rise could be incalculable.

Market yields on a number of Treasury bonds are already above 4 1/4 %. With one exception all bonds which have 5 years or more to run to maturity have market yields above 4%. The Treasury recently has done substantial short-term borrowing. But it must avoid undue shortening of the public debt and therefore should continue to sell intermediate and longer-term bonds whenever market conditions permit. It should not be prohibited from doing so by the existence of an artificial ceiling which under today's conditions makes it virtually impossible to sell bonds in the competitive market.

Debt Limit

The Treasury's current estimates, assuming that revenues cover expenditures for the fiscal year 1960 as a whole, indicate the need for an increase in the regular (or permanent) statutory public debt limit from $283 billion to $288 billion. The $288 billion figure is $13 billion above the permanent limit of $275 billion in effect at the beginning of the fiscal year 1959. This $13 billion increase is approximately equal to the Federal Government deficit during the current fiscal year, as estimated in the Budget submitted in January.

The Treasury expects the debt to approximate $285 billion on June 30, 1959, leaving about $3 billion leeway under the proposed $288 billion regular ceiling--a leeway which is essential to protect the Government in case of unforeseen emergencies and to provide necessary flexibility in debt management operations.

Even with budget receipts covering expenditures in the next fiscal year the debt is expected to rise considerably above $288 billion next fall and winter as the Treasury borrows to cover seasonal needs. This seasonal borrowing can then be repaid before the end of the fiscal year. I am asking, therefore, for a temporary increase of $7 billion in the public debt limit beyond the $288 billion permanent ceiling to cover those seasonal borrowing needs. This temporary limit would expire June 30, 1960, and can be reviewed prior to that time.

Certain other technical proposals to improve the management of the public debt are also included in the proposed legislation.

The enactment of this program is essential to sound conduct of the Government's financial affairs. It will contribute significantly to the Treasury's ability to do the best possible job in the management of the public debt. I urge, therefore, that the Congress give prompt consideration to this request.

There is another matter to which I wish to call your attention, quite apart from the legislative program discussed above. When I submitted my Budget to you in January interest costs on the public debt for the fiscal year 1960 were estimated at $8 billion. The increase in interest rates that has taken place since that estimate was made is now expected to add about half a billion dollars to this figure.

At the same time, however, I am informed that, because of the strength of economic recovery and growth beyond our earlier expectations, our revenue estimates for fiscal year 1960 will be sufficient to offset the increased interest cost on the public debt.

DWIGHT D. EISENHOWER