Evening star., 1935-01-25
BABY BOND" PLAN
CALLED PER|LOUS
Public Confidence Held Key
to New Scheme of
Treasury.
BY DAVID LAWRENCE.

"Baby bonds" the latest investment
idea of the United States Treasury
nave brought out number of inquiries
as to where the process ultimately will
lead and what will be the psychology
cal effect of the distribution of billions
of on-intereSt bearing bonds.
The first question asked is: What
will the public think is the difference
between non-intereSt bearing bonds
and non-interest bearing currency? II
notes can be issued by the simple
promise to pay, why can't the printing
presses be turned on to do the same
thing?
The answer given by the defenders
of the plan would naturally be that a
non-interest bearing bond is not cur
rency because it is not acceptable fol-
debts and is not legal tender.
Interest Deducted in Advance.
The baby bonds" will differ from
other bonds of the interest-bearlne
kind in the fact that the interest will
be deducted in advance and paid when
the bond comes due. Thus, if TO-
wear bond, for example, is issued for
the face amount of $l00 it might be
sold to a purchaser today by the Gov
ernment for SIS. The remaining SIS
would be paid when the bond natures
10 years hence, so anybody who PAID
out SIS now would get $l00 a decade
hence.
What difference does it make
whether the interest is paid currently
or on maturity? This query will be
answered in different ways. From ar
economic viewpoint, the transactions
are the same because in each case
the Government pays fixed sum fol
the use of the money. From fiSca
standpoint, it means an increase II
public debt and, whether bonds dc
or do not bear interest, any consider
able increase in public debt may in thu
long run cast doubt on government:
capacity to pay.
AS yet little has been said about
sinking fund to pay the principa
and discount on these baby bonds
There was no provision in the last
budget for it, though doubtless this
will be arranged for in due time.
Currency Question Raised.
But will the non-intereSt- bearing
bonds be treated as currency and sole
at further discount when the!
get in the hands of large number
of people? This depends on what
the educational drive Of the Govern
ment happens to develop. 1t may bt
that department stores and retail
shops will accept the bonds in pay
ment for goods. 1t may be, also, thai
II there isn't good market for them
the SlO0 bonds, which were bought
at rs, for instance, would be sold al
70 or 73.
All this is bound to raise points
in the public mind as to why somt
bonds sell at par, namely at 100. Of
more, and other bonds sell at con.
siderable discount. Banks and in.
count idea, but will the average person
accept the innovation as readily?
Clearly, an educational campaign
will be necessary in order to sell
baby bonds" and if something likt
the Liberty Bond campaigns of wal
time are organized, it will be necessary
for the Government to teach the peo.
pie that non-intereSt- bearing bonds
are just as good as interest-bearihg
securities.
Greenback Peril Seen.
Will this cause the people to ask
why the Government doesn't Just
print greenbacks and let it go at that:
This question will not be so simple
to answer, for even the famous green
backs of Civil War days, which caused
the American dollar to depreciate
actually had promise of retirement
and sinking fund set up to pay
them off.
Some of the orthodox financial au.
thorities are not disturbed about the
baby bonds" because they say that
any bond issued by government
which doesn't balance its budget anc
by government which cannot predict
when its budget will be balanced is
just as Objectionable from an invest
ment standpoint as if the public debt
Is increased beyond capacity to pay
no matter whether the bond does OF
does not bear interest or whether il
Is or Is not sold at a discount.
Confidence Is Key.
So long as the public thinks the
Government by its taxing power will
be able to provide ultimately for the
retirement Of public debt and for the
payment of annual interest and sink
ing-fund charges, just so long will the
securities of the American Govern
ment, or any other government, for
that matter, stay up around par
Every government in world history
which started out on an inflationary
course was always confident in ad-
vance that it could repay its borrow
ings or could honor its fiat money
Some have succeeded and others have
landed at zero.
1t will be an interesting test oi
public confidence to see what the peo-
pie do about buying baby bonds" and
whether, when they do buy them, they
will demand a better accounting Of
Government finances and a better un-
derstanding of what the future spend.
ing policies are to be and what Sounc
measures, if any, are being taken tc
promote economic recovery.
(copyright. 1935.)