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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* Chaiman Attachment UfPtloo 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 yieldst (Psr cent por ennusO Period held Modified tax notes Approximate Rate per" Tield during current anntai period held Market X/Z year 1 year 1 1/2 years .60 1*06 1.20 .60 »6L .96 •& .86 .95 2 years 2 \fit years 3 years 1*52 1.32 l.£2 1.0$ 1.10 l.UU l.dU 1.12* 1*25 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. -2- 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 S6.de 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©«, Cb&lraan.