The Changing Views on Debt Management
In period before the Great Depression, debt management was not a topic of active controversy. There was virtual unanimity regarding the elements of "sound" debt management policy and very little debt to manage. An interesting similarity of opinion was observed among academic economists and between the economists and the Treasury.
The events of the 1930s and 1940s created problems for the Treasury; the prolonged depression and the demands of war finance resulted in a greatly expanded federal debt which led the Treasury to retreat from its older and simpler precepts of debt management. Some observers were concerned about the debt and the possibility that it might permanently lay to rest independent and flexible monetary policy.
Economists set about reconsidering their views on the relation ships of debt management, monetary policy, and economic stabilization. The revision of Treasury policy did not coincide with the advance of the newer doctrines. Academic economists disagreed among themselves, and usually they disagreed with the Treasury. Conflicting policy positions developed; proponents described them as sound, and they were judged by various standards to contribute to stability.
Currently there is some dispute about every major aspect of debt management. This paper delineates the changing views on debt management, contrasts the older views with the various newer concepts of policy, and points out the current, and very significant, divergence of thought on debt policy.
In the pre-Keynesian, pre-fiscal policy era the benchmark of sound finance was to be found in the concept, and practice, of funding the debt. Short-term or floating debt was not looked upon with favor by the Treasury, and sound policy avoided excessive reliance on shorter-term securities.
The objectives of debt policy were all related to these fundamental principles of debt management. Important advantages were seen to accrue from funding the debt and minimizing reliance on floating debt. A longer debt was less likely to expose the Treasury to the mercy of the market, since the Treasury would face fewer holders of maturing debt at anyone time.
The Treasury would not be tied so closely to the market, and shifts in the market would not be so serious from the Treasury's point of view. Refinancing could be smaller with longer debt. Also, a funded debt could more easily be adapted to plans for debt retirement, and debt retirement was considered a worthy endeavor.
Treasury policy was concerned with the interest burden of the debt, but the Treasury contemplated neither a program of inflation to cope with the debt nor extensive reliance on floating debt. Interest costs were to be kept down by retirement and by refinancing at lower rates.
Pre-Keynesian Treasury policy did not relate debt management to the cycle; neither did pre Keynesian writers on public finance and debt management. One may observe the interesting similarity of academic view and Treasury policy.