National Debt Management

Report Outline
Complications of Deficit Financing
Characteristics of the National Debt
Credit Control and Debt Management
Special Focus

Complications of Deficit Financing

Money markets are being put to severe strain by government borrowing to finance the biggest federal budget deficit since World War II. All the skill and ingenuity of the government's debt managers will be needed to keep the strain of the borrowing, combined with mounting inflation and rising interest rates, from disrupting the entire economy. The difficulty of financing a deficit that will total at least $14 billion by next June 30, and might run close to $22.4 billion without a tax increase, was aggravated by the British government's decision on Nov. 18 to devalue the pound sterling. Until then, borrowing pressures had been felt mostly in the bond market. But the cost of business borrowing from American banks, already moving upward, surged ahead in direct consequence of London's action.

Devaluation of the British pound, from $2.80 to $2.40 in dollar terms, was accompanied by an increase in England's basic interest rate to a 53-year high of 8 per cent. To prevent a massive outflow of American investment funds to England, the Federal Reserve Board in Washington acted within hours to raise the “Fed's” basic rate on lending to commercial banks by half a percentage point, to 4.5 per cent. Some of the nation's leading banks, in turn, began pushing interest on their own new loans up to 6 per cent and more.

Britain's devaluation increased doubts as to the ability of the American economy to maintain world confidence in the dollar at a time of huge deficits in both the federal budget and the country's balance of international payments. President Johnson told a news conference, Nov. 17, that the federal budget deficit might reach $30 billion, even $35 billion, if Congress persisted in refusing to impose a 10 per cent income tax surcharge. But administration spokesmen on Nov. 29 revised this figure downward to $22.4 billion under close questioning before the House Ways and Means Committee.