The Guaranteed Security in Federal Finance

Abstract

S INCE the creation of the Reconstruction Finance Corporation in I932, the federal government has employed two general types of borrowing instruments-direct Treasury, and United States guaranteed obligations. The latter type was originally intended to serve as a substitute for the former in financing a temporary program of recoverable expenditure. While this intention was never technically superseded, New Deal legislation rapidly expanded the number of lending and insuring activities and simultaneously multiplied the kinds and amounts of guaranteed securities to provide the necessary operating capital. Thus indirect federal borrowing for individual instrumentalities led to the rapid growth of the contingent debt, as distinguished from the direct debt, in Treasury accounting. The threatened permanence of this dual-debt system was obviated, at least temporarily, by the revision of administrative policy rather than by congressional action. In October, I94I, the Treasury announced that no more guaranteed securities would be sold and that all outstanding issues would be converted at call or maturity into direct obligations. Under this plan the continuing lending functions of federal corporations are to be financed with general Treasury funds.' Little criticism has ever been aimed at the dual-debt system as a fiscal expedient; contemporary comment has usually centered upon the potential budgetary effects of mounting indebtedness for which the Treasury might become liable. While the philosophy and results of public lending will offer much future opportunity for investigation, it is not too early for critical examination of the history and rationale of indirect borrowing in the light of current problems. Such is the task of this paper.