Evening star., 1951-02-09
By WiIIiom Hines

Board and the Treasury Depart.
ment is more than simply dis
pute over what interest rate shall
be paid on long-term Government
securities. The basic issue goes
deeply into the question Of how
imitation will be controlled in the
face of heavy defense spending
Actually, the question Of what
interest rate shall be maintained
for long-term Government securi-
ties is only one of many problems.
On most of the other vital issues,
the Federal Reserve Board and
the Treasury are in substantial
agreement.
Both agencies are interested In
preserving the integrity of the
dollar.
The Treasury is charged with
supervision OF the Nations money
policies. 1t believes that through
proper control over these, imitation
can be Stemmed.
FRB Controls Credit.
The Federal Reserve Board,
legally independent of the Ad-
ministration, is charged by law
with control over credit. 1t feels
that credit control is one of many
factors in preventing a skyrocket-
ing of living costs.
At the forefront of the admin
tstration's forces is Treasury Sec
retary Snyder. a stand-patter on
the subject of 21a per cent in
terest rate on long term Govern
ments. His opposition is the ma
jority of the Federal Reserve
Boards Open-Market Committee,
made up of the seven Federal Re-
serve governors and the heads Of
five big Federal Reserve banks.
The committee is not unani-
nous in it's stand. One of the
Federal Reserve governors, James
K. Vardaman, jr.. has come out
openly in support of the Treasury's
position. Mr.. Vardaman is an old
friend of President Truman. Most
vociferous of the opponents of the
Treasury is Gov. Mariner S. Ec-
cles, onetime head of the Reserve
Board.
Truman Behind Snyder.
President Truman has had his
say, too. He has indicated clearly
that he is behind Mr.. Snyder in
the fight.
To understand why the question
Of interest rates on Government
securities takes on such Importance
now, it is necessary TO know a
little about Federal finances, the
Nations credit structure as a
whole, and the workings of the
Federal Reserve Boards Open
Market Committee - the group
whose meeting January 81 with
President Truman excited current
interest in feud of long duration.
OF all the money owed by debt
ors to creditors in the United
States-some $3.50 billion-about
half is owed by the Government
in the form of various types of Sc
curities.
"E" Bonds Not Affected.
Approximately $50 billion Of
these securities are in the form
OF Series E, F and G Savings
Bonds-which are not affected di-
rectly by the squabble over in
terest rates. Indirectly-as will
be brought out-they can be af-
fected to a great extent.
The money lending business is
based on a number of factors. The
most important is that. in general,
interest rate and degree Of risk go
hand in hand. The bigger chance
you have of losing your money
when you lend it, the higher the
rate you are justified in charging.
Historically, Governments" as
United States bonds are called, are
the best risk of all. Historically.
too. they bear the lowest interest
rate. At present, long-term Gov
ernments bring 212 per cent or
thereabouts; short term ones
ebout half that. The very sound
est type of commercial securities
don't vary much from these rates
but less desirable bonds bring
higher interest. So it goes down
the line to an unsecured payday
signature loan that may cost the
borrower many times 2l2 per cent.
Open-market Committee.
The law of supply and demand
would work in the bond market
just as it does at the grocery
but for the existence of the Open
market Committee, This group
operates what amounts to a price
support program.
For many years the Open-mar-
ket Committee has been pegging
the price of Governments at 100
cents on the dollar. When the
Government floats a bond issue,
the Open-market Committee buys
in any part that isn't purchased
by banks and other private buyers.
On existing issues, the committee
is there to protect the holder, too.
It will buy at 100 any bond that
can't be sold elsewhere for that
price.
Like any rice-support plan, the
Open-market Committees work
tends to put an artificial value
on Government bonds. What the
real worth of a Government bond
is today. no one can say.
Treasury Wants Continuation.
What the Treasury wants is a
continuation of the committees
operations, which means a guar
antee that all bonds f1oated at 2la
per cent will be marketable. This,
says the Treasury, will guard
against an increase in what the
Government has to pay in in
terest, or about $50 billion this
year.
What the Federal Reserve wants
is a showdown in the committee IS
buying operations. This means
there would be no guarantee that