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April 2 7 , 19W;

Hon. Daniel W. B e l l ,
Under Secretary of the Treasury,
Washington, D. C,
Dear Dan:
I am enclosing six copies of the supplementary
recommendation by the Executive Committee to the Secretary.
I regret that I was unable to get this memorandum to you
Sincerely yours,

M* S. Bccles, Chairman,
Federal Open Market Committee.



April 27, I9hh



I n o u r memorandum of March 2 9 , 19hht

we recommended t h a t t h e r a t e on

Treasury b i l l s be increased to l/2 of one per cent and the maturity extended to
four months. At the meeting of our representatives with you, concern was expressed by your associates as to the effect on the whole interest rate structure
of the abandonment of the 3/8 of one per cent r a t e . At the same time, our
representatives referred to the fact that an increase in rate would mean an
increase in earnings on the large holdings of b i l l s by the System and expressed
the view that, while this circumstance should not be a determinant of financing
policy, ways could be devised to overcome i t , if necessary.
Renewed consideration of our recommendation has further convinced us
that i t is sound in principle. Renewed consideration of the Treasury's views
has suggested an adaptation of our proposal that should make i t acceptable
without detracting essentially from i t s advantages. In brief, we now propose
that there be two issues of Treasury b i l l s , one of three-month maturity, which
would be largely if not wholly taken by the Federal Reserve Banks, and one of
five-month maturity, which would achieve the wider distribution we seek in the
market. In order to make this proposal effective, we would recommend that:

The Treasury plan to raise funds between drives largely
by means of five-month b i l l s instead of certificates
or longer-term securities,


The Treasury offer i n i t i a l l y 1.2 billion dollars of b i l l s
each week, including 600 million of three-month b i l l s
and 600 million of five-month b i l l s . At the end of each
three-month period, the Treasury would increase the
weekly offering of three-month b i l l s , in order to enable
the System to provide banks with such reserves as aro
needed on the basis of 3/8 instead of 5/8 °f o n e VQT cent,


The Federal Open F.arket Committee direct the Federal
Reserve Banks to establish a buying rate of 5/8 of
one per cent and a repurchase option on the new b i l l s ,


The Federal Open Market Committee direct the Federal
Reserve Banks to offer each week to purchase from
dealers the amount of the offering of new threo-month
b i l l s and to maintain the present buying and repurchase
, j rate of 3/8 °f o n e P e r cent on such b i l l s , the rate
being maintained i n i t i a l l y to protect existing holders
and subsequently to avoid i t s disappearance from the
This proposal has the following advantages:



By offering 1.2 billion dollars of b i l l s a week, the
Treasury could raise 8,0 billion of funds. Following the completion of both cycles, there would be
outstanding 7»8 billion dollars of three-month
b i l l s (600 million a week for 13 weeks) and


— 2 —

April 27,

13.2 billion of five-month b i l l s (600 million
a week for 22 weeks), making a total of 21
billion, compared with the present 13 billion.
This amount of new funds would cover the maximum
necessary interim bank financing in 19Uh»

The rate on the new five-month b i l l s would be in
line with the present pattern of rates as indicated
by the market for certificates of indebtedness that
mature in five months, but the difficult task of
maintaining a market pattern between 3/8 &nd 7/8
of one per cent would be relieved in considerable


The net cost to the Treasury would probably be no
larger than if the financing were done partly with
3/fe of one per cent b i l l s and partly with 7/o of
one per cent certificates or higher-rate securities*
What the Treasury would lose by shifting some of
the b i l l s from 3/& to 5/8 °f o n e Ver cent would
be regained by shifting from certificates at f/Q
of one per cent to b i l l s at 5/8 of one per cent.
To the extent, moreover, that the higher-rate bills
proved attractive to nonbank investors, so that
they could be used to reduce materially the amount
of Treasury financing to be done indirectly through
the banks, the net cost of the Treasury's borrowing
would be less than under the present program,


It would eliminate the offering of certificates or
longer-term securities between drives. Such
offerings require special announcements that call
attention to direct bank financing and are an
indication that the Treasury has not obtained
sufficient funds from nonbank investors. Such
offerings, moreover, involve problems of handling
subscriptions and making allotments and in the
case of certificates necessitate annual refunding
offerings. Offerings of b i l l s , however, are more
or less routine and can be used to provide whatever
amount of residual financing is needed and whenever
i t is needed.


Treasury b i l l s would regain some of the character of
market obligations, whereas now they ,Te tending to
become almost solely a medium for Federal Reserve
financing. Banks are now keeping their holdings of
three-month b i l l s at low levels, because of the unattractive rate, and are purchasing certificates for
their shortest-term investments. The higher rate
on bills would result in an increase in commercial
bank buying and holding of b i l l s and would encourage
banks to meet fluctuations in reserves through changes
in their b i l l portfolios rather than through buying
and selling certificates, notes, and bonds.

— 3 —



A p r i l 2 7 , 19144.

More important, there would also be an increase in
the buying and holding of b i l l s by business concerns,
which are now holding large amounts of cash on
deposit with banks. Since b i l l s are as liquid
as deposits, business concerns could reduce their
deposits substantially and meet some of their
fluctuating needs for cash by changes in their
b i l l holdings rather than through bank deposits.
By this process, the amount of nonbank investment
in Government securities would be increased, and
the amount of necessary bank financing would be

It is suggested that these recommendations be put into effect as
soon as possible so that they will immediately become a part of the Treasury's
financing program for the remainder of the year.



April 27,

Chairman Eccles
Governor McKee
Governor Draper

Attached is a copy of the supplementary recommendation as it was sent to the Treasury this afternoon*

I am

also sending copies to Hr« Sproul and Mr. Leach.

,L. M. P.