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August 20, 19142

Honorable Danlol W. Boll,
tfndor Secretary of th« froa*uvy#
llashingtan, P. C.
Doar Dant

For yoor oonfldantlml inforaation I wm
attaching hereto a oopy of a l«tt#r sent to th«
S«or«taiy oovorlug a vuggesttd prograa for tho
Stg&mfeer and Ootobor Hnanolng.
V«f7 truly

II* 8*



20, 1 & 2
Honorable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, X>« C*
Deer Henryi
Sinoe I «n leaving at the end of the week and expect to bo
away when tho September financing it being discussed and aay bo away
at th» time of the preliminary discussion* of tho October financing»
I an submitting tentative suggestions catering tho September and
Ootobor financing as I so© tlio situation at tho present time.
Tho following program for September would raise 2.5 to 3*0
billion dollars of funds $

1* Tho offering on September 1 of the modified
fans of tax notes In lino with the general Ideas suggested by BOAS except for the rates, which should bo
higher, would raise 0*5 to 1.0 billion dollars In
September in exoees of tho usual solos of tax notes
If tho sale of tho Modified notes is vigorously prolooted by tho Victory FiauJ Ccstalttees. In order to
sell this amount It would be neeesoary for tho rates
on tho notes to approximate market yields for tho
earlier periods* A suggested schedule of rates is
compared in tho following table with current market
(Psr cent por ennusO

Period held

Modified tax notes
Rate per"
Tield during
period held

X/Z year
1 year
1 1/2 years




2 years
2 \fit years
3 years




2. Continuation of the weekly bill offering at 350
Billion dollars would raise about 200 million dollars of
funds in September. An ideal time to Increase the weekly
offering to 1^00 million dollars would bo for tho issue
dated September 9, since this Is tho date when tho emount

Honorable Senary Morgenthau, Jr.


of maturing bill* Increases froti 250 to 300 million
dollars. An additional 200 million dollars would be
raised by this means to September bringing the total
amount of fund* free bills during the mouth to 500
willion dollar*•
3* the two small issues that nature la September
and October should be rodssmod in cash on their maturity
datot. These issues inolude 3^2 nil lion dollars of
September Treasury notes and 320 million dollars of
October Reconstruction Finance Corporation notes.
km Tim rsmlnlsg needs in September could be net
by offering an ls«tae of 1*5 billion dollars of 2 to 3
year notes carrying a ecaijxm rate of 1 \/k per oent.
If sales of the aodifled tax notes should exceed the
gsixifittn of 1*0 billion dollars* the amount of this
offering could be redueed. If they should not reach
the miniKUR, it siicht bo preferable to offer two
note issues*
The following program for &etober would raise h»5 to 5*0
billion dollars of funds«

1. the modified tax notes might raise an additional
500 million dollars in Ootober.
2. Continuation of the weekly bill offering at
1*00 million dollars would proride 300 million in
Ootober. the weekly offering could be Increased to
U50 million dollars for the issue dated October 21,
which is the date when the amount of the maturity
increases from 300 to 350 aillion dollars. An additional 100 Aillion dollars would be raised by this
means or a total of 1*00 million in bills in October*
3* An opea~e&d offering of 2 per oent bonds
around ths middle of Ootober accompanied by a vigorous
campaign «* the part of the Victory Fund Committees
might raise 0*5 billion dollars* Shis would be the
fourth offering this year of 2 per oent bonds* It
would establish the offering of 2 per cent bonds on
a quarterly basis and would accustom the market to
7 * 9 year 2 psr oent bonds with ths oall and maturity
dates aoved forward by three months each time* I
think that it would be a mistake to offer 2 per cent
bonds before Ootober*

Honorable Bsnry Morgenthau, Jr.

U. It i s estimated that an of ferine around the
middle of October of 2 1/fe per eent bonds, which would
not be available for eonaeroial banks, would raise
1*5 billion dollars If the bonds were issued In
coupon fern* Coupon obligations would attract sows
funds that are not obtained by registered bonds, and
sales oould be further stimulated by the Victory Fund
Cosadttees* 2he existing registered I962-678 should
be available for oosverelon into coupon bonds
with banks prohibited from purchasing them* the
maturity of the coupon issue need not be extended by
aore than a few months beyond that of the registered
Issue* An issue of perhaps December 1$6£~67 vould not
seriously affeot tba market for the 1967~72«* The two
offerings of registered 2 x/2m have
resulted In Tory
l i t t l e selling in the 1967-72t * n d i» «nl7 Mall
declines in quotations*
There seems to be eons strong support for a large open-end
market offering in October of 2 X/k per oent bonds available to e l l investors including banks* I think that this would be a mistake* An
offering of 2 X/k per oent bonds would result in a substantial esount of
selling of 2 per cent bonds by banks, would increase the cost to the
Treasury* would add another type of issue, and would bring in no additional
funds that are not reached by the 2 end £ XfZ per eent bonds* I think
that It is Important to distinguish between banking and non-banking funds.
This has been clearly dene up to the present by prohibiting banks from
taking the 2 l / 2 s f but to raise the rate from 2 per cent and to lengthen
the Maturity would seem to me to be contrary to the original conception.
I think that i t would be undesirable to offer for bank irrrestawnt securities having as long a maturity as would be placed on 2 X/U y*r oent bonds.
Banks infest out of funds that are obtained from the Federal Reserve
System either by reductions in reserve requirements or by open-market
purchases* I believe that It Is unnecessary to pay on bank investments
rates in excess of 2 per cent* Banks generally will make adequate earn*
Ings at this rate* the only exception mlgjbt be the smaller banks with
a large proportion of savings deposits* these banks could be provided
for in some special manner sad should be paid 2 X/Z rather than 2 X/k
per cent. Otherwise there would be discrimination against oommeroial
banks and in favor of mutual savings banks and other saving* institutions,
which at present are allowed to subscribe to 2 X/St per cent bonds.
In connection wiHi the program to increase the amount of the
weekly b i l l offering and to obtain a wider distribution of b i l l s arrangements should be made for either the Treasury or the Federal %t*rm Banks

Honorable iionry Korsonthau, Jr

to aooopt in full b i l l teators at A mte of 2/b of 1 per oent up to
porhapt 1100,000 on «noh individual aubforlption. Ihit provision
would bo attrmoti^ to nany of tho mailer banks who aro unfaaillar
with tiio bidding ao^iod and who haw Had th«ir bid* roj«oted in part
or In full*

V«ry truly yours,

M* S. Ecol©«,