Fiscal Year Ended June 30, 1920
SECRETARY OF THE TREASURY.
107
tion taken by the Housing Corporation, the Grain Corporation, and
the War Finance Corporation. The total reduction was $734,417,623.43, leaving net investments on this account of $390,582,376.57.
Thei^e has been further liquidation since the close of the fiscal year
by the Grain Corporation, in the amount of $100,000,000.
The railroad securities, aggregating $444,847,105, may be classified as (a) those purchased from the revolving fund appropriation
under authority of section 7 of the Federal control act, approved
March 21, 1918, as amended, in amount of $110,578,755 (not including securities purchased by the Director General of Railroads from
the operating revenues of railroads under the provisions of section
12 of the Federal control act) ; (b) those acquired by the Director
General by way of reimbursement for motive power, cars, and other
equipment ordered for carriers under Federal control, amounting to
$329,203,750; and {c) obligations acquired as the result of new loans
to railroads from the $300,000,000 revolving fund appropriation
under section 210 of the transportation act, 1920, in the sum of
$5,064,600.
The other securities consist of capital stock and bonds of the
Federal land banks, aggregating $174,040,510, and of $65,192 of
bankers acceptances of short maturities received by the Secretary
of War on account of sales of surplus war supplies. F o r the most
part, the securities shown in the statement are held in custody for
the Secretary of the Treasury by the Treasurer of the United States,
the Assistant Treasurers, or the Federal reserve banks. Appropriate
custody accounts and records are kept in the section of investments
under the superAasion of the Coinmissioner of Accounts and Deposits.
The facilities of the Treasury have been extended to other departments and establishments, which have been invited to deposit their
holdings with it, in order to obtain greater safety and to permit the
publication of complete reports. Certain trust funds, such as those
of the Governnient life insurance fund, and of the Alien Property
Custodian, with the iuA^estment of which the Treasury is charged,
are not shoAv^n in the statenient of securities, inasmuch as they are not
beneficially owned b}^ the United States.
R E T I R E M E N T S OF L I B E R T Y BONDS A N D VICTORY N O T E S .
Five per cent bond purchase fund.
Purchases of Liberty bonds and Victory notes for the bond-purchase fund were continued during the fiscal year 1920, but ceased on
June 30,1920. Section 15 of the second Liberty bond act, as amended
by section 6 of the third Liberty bond act and the Victory Liberty
loan act, authorized the Secretary of the Treasury, until the expiration of one year after the termination of the war, to buy anDigitized for FRASER
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nually bonds and notes issued under authority of the second Liberty
bond act, as amended, including bonds issued upon conversion of
bonds issued under the first Liberty bond act or the second Liberty
bond act, as amended, at such prices and upon such terms and c(^nditions as he might prescribe, up to 5 per cent of the par amount of
bonds or notes of any series outstanding at the beginning of the
bond-purchase fund year. The Treasury's purchases under this
authorization have been made from time to time, at average cost,
through the Federal reserve bank of NeAv York, and from the W a r
Finance Corporation. These agencies in turn made purchases in
the open market, when it Avas deemed necessary, to stabilize market
prices and to protect the Government's credit. These operations undoubtedly sustained and strengthened the market for Liberty bonds
and Victory notes and so redounded to the benefit of all holders of
these issues. The securities bought liaA^e been canceled and retired.
On April 18, 1920, the folloAving statement was issued b}^ the Secret a r y Avitli reference to purchases for the bond-purchase fund to June
30, 1920, and thereafter for the cumulatiA^^e sinking fund:
The authorization conferred upon the Secretary of the Treasury by Congress
to make purchases of Liberty bonds and Victory notes for the r per cent
bond-purchase fund expires one year after the termination of the Avar. The
continuance of a technical state of Avar beyond the period contemplated at the
time the authority was conferred has presented to the Secretary of the
Treasury the practical problem of determining what his future course should
be Avith respect to the bond-purchase fund. Secretary Glass, in his annual
report, said, " Purchases of bonds under authority of section 6 of the act of
April 4, 1918 (bond-purchase fund), are not included as an item of estimated
expenditure (for the fiscal year beginning July 1, 1920) ; this authority expires
one year after the termination of the Avar, and the Secretary reserves decision
with respect to such purchases after July 1, 1920." Congress created in the
Victory Liberty loan act a 2^ per cent sinking fund to commence July 1, 1920;
In viCAv of the fact that on July 1 more than a year Avill have elapsed since
the fiotation of the last Liberty loan and of the further fact that unless Government expenditures should be greatly decreased or taxes increased, continued
purchases for the bond-purchase fund could only be financed by the issue of
additional certificates of indebtedness, thus increasing the floating debt whiledecreasing the funded debt, my present intention is not to treat the tAVO fundsas- cumulative, but to discontinue purchases for the bond-purchase fund on and
after July 1, 1920, and to make purchases thereafter only for the sinking fundi
created under the Victory Liberty loan act. The approximate amount of thebond-purchase fund quota for the period ending .lune 30, 1920, will be taken
over from the War Finance Corporation or, to a limited extent, purchased in
the market, and in either case canceled and retired.
Hereafter such purchases as the Treasury may have to make for the bondipurchase fund or the sinking fund under the general program above announced Avill be occasional and not habitual. ^
I am confirmed in the determinations above set forth by the fact that the^
natural market in Liberty bonds and Victory notes has UOAV reached such dimensions that the purchases for the bond-purchase fund have ceased to' be a
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SECRETARY OF THE TREASURY.
•dominating factor. The recent liquidation which has brought the bonds and
notes, to new^ IOAV levels seems to find its chief source in selling by industrial
and other corporations Avhich Avere large purchasers during the Liberty loan
campaigns and Avhich are UOAV under pressure to find funds for their current
husiness, in a period Avhen necessary measures of credit control make further
expansion of,bank loans both difficult and expenslA^e. This offers a unique op-,
'portunity to investors, large and small, the quotations for the bonds and notes
toeing extremely attractive to investing institutions and private investors. I believe that the time has come when the disappearance of the Governni'ent from
the market, except as an occasional purchaser within tlie limitations above outlined, Avill have a beneficial effect upon the rnarket for the bonds and notes, both
by reducing the Treasury's current borrowings on Treasury certificates and
stimulating the interest of investment bankers and the public In the market
for Liberty and Victory securities.
Pursuant to this announcement, no purchases for the 5 per cent
bond-purchase fund have been made since June 30, 1920, and those
made prior to that date, after April 18, 1920, represented chiefly
accumulations taken over from the W a r Finance Corporation.
The aggregate par value of Liberty, bonds and Victory notes
retired by the bond-purchase fund between April 15, 1918, and
June 30, 1920, when purchase ceased, was $1,764,896,150, and the
aggregate paid therefor was $1,677,566,210.26, or, on an average,
•slightly more than 95 per cent of the par value. The following is a
summary of the purchases:
Summary statement of bond purchases to June 30, 1920.
•
Loan.
First Liberty loan converted 4 per cent and 4.1 per cent
bonds, 1932-1947...
.
.
.
Second Liberty loan 4 percent and 4J per cent bonds,
1927-1942
Third Liberty loan 4^ per cent bonds, 1928
Fourth Liberty loan 4^ per cent bonds, 1933-1938
Victory loan,4| per cent and 3 | percent notes,1922-i923.
Total
Par amount
purchased.
Amount paid.
S36,912,000 $34,722,342.29
478,688,000
433,308,100
566,987,050
.249,001,000
Accrued interest paid.
S532,112.62
452,358,913.01
414,067,698.57
530,548,515.45
245,868,740.94
6,896,021.63
3,679,624.35
6,523,811.37
8,500,393.93
1,764,896,150 1,677,566,210.26
21,131,963.90
•
I n accordance Avitli the requirements of section 6 of the third Liberty bond act, a detailed statement of the complete operations will be
submitted to the Congress in a separate report. Now that operations
have been completed, attention may be called to the reasons which
actuated the Treasury in making its purchases. The bond-purchase
fund was discussed at length by the Secretary of the Treasury in connection with the third Liberty loan and subsequent Liberty loans and
was an important factor in the success of those loans. Of late,
however, there seems to have been some misapprehension on the
subject. The considerations which moved the Treasury in recommending that the bond-purchase fund' authority be granted, and
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REPORT ON TliE FINANCES.
which guided it in the exercise of the authority, are set forth in
the testimony of the Secretary of the Treasury before the Committee on Ways and Means of the House of Eepresentatives in connection with the third Liberty bond bill, on March 27, 1918, as
follows:
Very careful and earnest attention to the situation which has developed since
the last Liberty loan has convinced me that the United States must do what
each of the warring countries in one form or another does, and prepare itself
to support the market for its bonds. No measure of this sort, hOAvever, can be
of any value unless the fund provided for the purpose is a large one. Every
effort must be made to reach the people who have money to invest or those who
will have and who can be induced to save and pay for the bonds for which they
subscribe. In connection with every issue, hOAvever, it will be found that the
patriotism of some has outrun their ability to pay for the bonds, so that either
those Avho buy them and get tired of holding them do not want to hold them, or
those who from necessity or for other reasons are obliged to sell them, will
offer their bonds in the market; and it puts the Government at a very great
disadvantage if there is no means of sustaining the market to a reasonable
extent so as to steady it * * *. Inevitably during the period of the war,
after each Liberty loan has been closed, we have been forced to face the facts
that there will be more sellers than buyers of the bonds. The present bill
Avould authorize the Treasury to retire the excess. That is, it Avould authorize
through the sinking fund a repurchase ^of such an amount of the bonds as the
sinking fund Avould permit and Avould take up the surplus offerings, and the
amount provided, I think, Avould be sufficient for the purpose. With such a sinking fund and the secondary distribution which the War Finance Corporation can
bring about, there will not be such a desire to sell the bonds, because the very
fact that they can sell them will make people feel more confident about holding
them. There is a curious feeling in the breast of the average man that if he
buys a Government bond, even though he contracts to lend his money to the
Government, nevertheless if he gets tired of his investment and wants to get
his money back, that he ought to be able to sell the bond at par regardless of
the fact that the Government is not under any obligation to redeem that bond
before maturity. It is extraordinary the extent to which that feeling exists.
People would not have that feeling about a corporation which sold its bonds,
or about any indiAddual who gave his note. They would not expect them to be
redeenied at par before maturity. It is a perfectly unreasonable feeling, but
one of the things Ave have got to reckon with. I believe that the provision for
this sinking fund will relieve the situation somewhat. This sinking fund, by
the way, ought not to be a mandatory sinking fund but discretionary; that is,
the Secretary ought to be permitted within the limits of 5 per cent of the bonds
issued to buy back bonds.
it is a most difficult thing, but a thing which we must face, to try to keep
Government bonds measurably around par. We have got to continue Government borroAAdngs at a reasonable rate of interest. I think that some such thing
as this sinking fund will be much cheaper for the Government than to increase
the interest rate; at least Ave Ought to try it. The reason I say it is cheaper is
this: Suppose Ave need three billions, and the sinking fund on the entire outstanding bonds for the year—assuming Ave had ten billions outstanding—at 5
per cent Avotild be $500,000,000. -It only means that we should have to sell a
few more bonds and then buy them back and keep the rate of interest up, and it
does not hurt us any. We are just taking back some of the bonds. * * *
This 5 per cent each year is intended to apply during the war only. * * *
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SECRETARY OF THE TREASURY.
It is also interesting to note, in view of the widespread contention
that purchases should have been made at par rather than at the
market, that this A^ery proposal was rejected by the Committee on
Ways and Means, when the matter of granting the authority was
under consideration. The Secretary of the Treasury in his testimony
before the committee said in this connection:
I do not think it would be a wise thing for us to attempt that—that is to say,
to purchase the bonds at par—because I think if we were to state that we had
$100,000,000 that the Government would invest in these bonds at par, for instance, that Avould be simply an invitation to the people to sell their bonds to
the Government at par and you would exhaust the fund in short order.
Bonds purchased from repayments of foreign- loans.
In accordance with the provisions of section 3 of the first Liberty
bond act, and section 3 of the second Liberty bond act, repayments by
foreign Governments on account of the principal of their obligations
bought under authority of these acts have been applied to the purchase^ and retirement of Liberty bonds. The face A^alue of those secured to November 15, 1920, was $119,109,050. They were bought
for $114,538,818.16, or slightly less than 95 per cent of the par value.
These operations are fully set forth in the separate detailed statement of all expenditures under the Liberty bond acts. The purchases may be summarized as follows:
Bonds purchased as the result of payment of foreign loam^s to Nov.. 15, 1920.
Loan.
Third Liberty loan 4\ per centcoupon bonds
Third Liberty loan 4^ per cent registered bonds
Fourth Liberty loan 4^ per cent coupon bonds
Total
Principal
amount
purchased.
Amount paid.
Amount of
accrued
interest paid.
$80,758,750 $76,472,985.84
8,407,550.00
8,407,550
29,942,750 29,658,282.32
$927,529.20
6,909.62
553,567.76
119,109,050
114,538,818.16
1,488,006.48
Bonds purchased with franchise tax paid by Federal reserve banlcs.
Section 7 of the Federal reserve act provides that the net earnings
derived by the United States from the Federal reserve banl?:s, as
franchise tax, shall in the discretion of the Secretary be used to supplement the gold reserve held against outstanding United States
notes, or applied to the reduction of the outstanding bonded indebtedness. These earnings for the calendar year 1919 have been applied to
the purchase, at the market, of $2,922,450 par amount of second
Liberty loan 4:| per cent bonds, at a cost of $2,703,850.74, with accrued
interest of $20,814.43, the latter amount being chargeable as interest
on the public debt. These bonds have been canceled and retired.
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REPORT ON THE FINANCES.
Bonds retired on account of gifts.
From time to time various persons, for patriotic or other reasons,
present Liberty bonds and Victory notes to the Government. These
are redeemed at par and retired, and the proceeds are covered into the
Treasury as miscellaneous receipts. The aggregate amount presented
and retired to November 15, 1920, is $12,850, as follows:
Bonds retired account of gifts, November 15, 1920.
Par
amount.
Loan.
First Liberty loan 4J'per cent coupon bonds
Second Liberty loan 4 per cent coupon bonds
Second Liberty loan 4 per cent registered bond
Second Liberty loan 4J per cent coupon bondss
Third Liberty loan 4 | per cent coupon bonds
Third Liberty loan 4J per cent registered bonds
Fourth Liberty loan 4 | per cent coupon bonds
Total coupons
Total registered
Grand total
$350.00
700.00
7,000.00
2,150.00
800.00
500.00
1,350.00
Accrued
Accrued
interest
interest
matured. unmatured.
$6.22
2.35
44.59
2.93
5.71
9.81
7.02
$51.00
42.49
40.10
35. 24
5,350.00
7,500.00
168.83
24.23
54. 40
12,850.00
168.83
^ 78.63
Bonds retired on account of forfeitures to the United States.
WhencA^er Liberty bonds or Victory notes are forfeited to the
United States for any reason and deposited in the Treasury, they
are canceled and retired. Up to November 15, 1920, there have been
retired on this account $3,550 of bonds and notes, as follows:
Bonds i^etired account of forfeitures to the United States to Nov. 15, 1920.
Loan.
Par
amount.
First Liberty loan 3^ per cent coupon bond
"-.
First Liberty loan 4^ per cent conA'erted coupon bond
Third Liberty loan 4^ per cent coupon bonds
Fourth Liberty loan 4^ per cent coupon bonds
Victory Liberty loan 4f per cent coupon notes
Total
$50
50
700
2,650
100
3,550
Bonds retired on account of estate and inheritance taxes.
Under section 14 of the second Liberty bond act, as amended by
the third Liberty bond act and the Victory Liberty loan aet, 4J per
cent Liberty bonds and 4f per cent Victory notes are receivable by
the United States at par and accrued interest in payment of any
estate or inheritance taxes. Such securities are canceled and retired,
and the face amount, with any accrued interest, is covered into the
Treasury as receipts on account of Federal estate (or inheritance)
taxes. The value of those received to November 15,1920, is $9,781,750,
as follows:
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SECEETARY OF THE TREASURY.
Acceptanoe of Liberty bonds and Victory notes in payment of estate or
inheritance taxes to Nov. 15, 1920. .
Paramount
of bonds.
Loan.
First Liberty loan converted 4^ per cent icoupon bonds
[First Liberty loan converted 4 | per cent registered bonds...
Second Liberty loan converted 4^ per cent coupon bonds...
•Second Liberty loan converted 4^ per cent registered bonds.
Third Liberty loan 4i per cent coupon bonds.
.Third.Liberty loan 4i per cent registered bonds
Fourth Liberty' loan 4^ per cent coupon bonds
Fourth Liberty loan 4^ per cent registered bonds'
Victory Liberty loam 4f per cent coupon notes
Total coupon
Total registered
Grand total
.^
Interest
paid.
$159,400.00
3,800.00
2,120,950.00
456,700.00
3,477,600.00
613,650.00
2,799,950.00
131,600.00
18,100.00
$1,839.57
31.85
23,144.63
4,180.25
38,512.74
5,676.59
25,633.92
865.27
197.29
8,576,000.00
1,205,750.00
89,328.15
10,753.96
19,781,750.00 1100,082.11
1 Subject to adjustment because of items in transit.
^Summary of retirements to Nov. 15, 1920—par amount of bonds or riotes {including cumulative sinking fund).
^ per cent bond purchase fund (to June 30,1920)
Purchases on account of sinking fand
Purchases Avith payments on foreign loans
(Purchases with earnings of Federal reserve banks
'Gifts
1
Forfeited ._^-^---—
^Estate or inheritance t a x e s - —
'
Total
$1, 764, 896,150
15, 040, 2.50
119,109, 050
2,922,450
12, 850
^ 3,550
9, 781, 750
1, 911, 766, 050
CUMULATIAnE S I N K I N G F U N D .
The cumulative sinking fund established by section 6 of the Victory
Liberty loan act approved March 3, 1919, became effective July 1,
1920. The law permanently appropriates, for the current fiscal year
-and for each fiscal year thereafter until the debt is discharged, an
.^amount equal to the sum of "(1) 2^ per centum of the aggregate
amount of such bonds and notes outstanding on July 1, 1920, less
;an amount equal to the par amount of any obligations of foreign
'Governments held by the United States on July 1, 1920, and (2)
i;he interest which wo.uld have been payable during the fiscal year
for which the appropriation is made on the bonds and notes purchased, redeemed, or paid out of the sinking fund during such year
•or in previous years."
On this basis the constant appropriation annually for sinkingrfund purposes is $253,404,864.87, deriAxd as folloAvs:
-Aggregate amount Liberty bonds and Victory notes out^
standiug:July 1, 1 9 2 0 - :
$19, 581, 201, 450. 00
Xess par amount obligations of foreign Governments pur^chased under the several Liberty loan acts and held by
the United States on July 1, 1920
9, 445, 006,855.18
' Difeerence
—
2^ per cent thereof
13799—FI 1920
8
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10,136,194, 594. 82
253, 404,864. 87