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31, Honorable Laxiel W. Eell f Sader Secretary of the Treasury, treasury Washington, D. C. Dear Dam I an enclosing a BsworasdiaB regarding the tion that the Xr«&0tak^ lcor»at« i t s offering of hillA \iy 200 miXlioE dollars a ^©^c beginning vitb the offering to b« dated M^uet 10* This lae^crftcdum hat prepared follcraring & ftill discus a ion of tJw question by ExecutiT^ 0owiitt«« oa July 20. I beliere that th# randua is i s liae with th* conclusions reached at thit but there has not as jet been sufficient time to clear the isemorandu* with a l l of the members of the Executire If any rerisions are to be made, however* I shall get in touoh with you regarding the«* Sincerely yours. Chairman. Enclosure f TRJ&TLt MEMOSASDUH m(M THE EXECUTIVE C0MJITTB1 OF TUB F1BK8AL OPSN SIHUBBT CC^ttTTSI TO THE SSCESfAIT OP TUB TRBASWRT The Executive C a m ittee of the Federal Open Market Committee discussed at A meeting held & l y SB9 19Ut» the suggestion that the treasury increase Its offer* ing of Treasury bills by 200 million dollars a week beginning with the weekly offering to be dated August 10* After discussion, the Committee -voted unanimously to recommend that the Treasury make no further increase at this time In outstanding Treasury bills* The principal reasons for the Committee1 s recommendation are as followsi 1* There is no net market demand for bills* Between the end of October I9I4.3 and the end of February 19^4., marking In both oaees the end of war loan drives, Federal Reeerre holdings of bills increased by about 800 million dollars, while holdings by other investors declined by about the same amount* Between the end of February I9I4I4 and the end of July I9uk$ Federal Reserve holdings of bills increased by 2*6 billion dollars, while holdings by oihers declined by about 100 million* Holding! outside the Federal Reserve Bask* are likely to decline further between now and the next war loan drive* 2* A further increase in outstanding bills would be inflationary, in that it would call Reserve Bask credit Into use regardless of the needs of individual banks and thus would tend to ewell the amount of financing done through the banks* la supplying bank reserves. It is generally preferable for the Federal Reserve to purchase securities from banks that are short of r+tvrrw and that need to replenish them* When the Federal Reserve purchases new offerings of bills, the reserves thus created go in part to banks that already have sufficient reserves* These banks are, therefore, encouraged to expand credit* During the recent drive, the shift of deposits to war loan accounts released nearly 5 billion dollars of funds to banks* They utilised these funds in part by increasing their holdings of Oovernaent securities by large amounts* At weekly reporting member banks, the increase was 5*1* billion dollars, of which bills accounted for 1*6 billion* All basks seeding reserves before the next drive can obtain them by selling to the Federal Reserve from their existing holdings of Government securities of by borrowing from the Reserve Banks. 3* A further increase in outstanding bills would increase the existing difficulty la maintaining the pattern of rates, in that it weald tend to force up prices and to reduce yields of longer-term securities for whioh the banks are showing a growing appetite* A premium has been established on the new issues included in the drive* and this premium has orsated substantial profits for speculators in Government securities, the existing pressure has made It necessary for the Federal Reserve to sell bonds and notes in the market* If the Federal Reserve forces r+**armn into the market by purchasing the increase la outstanding bills rather than purchasing from the banks* existing holdings* banks will be encouraged to add further to their holdings of longer*term securities* to our opinion, the proper time to issue additional bills is whoa they are needed by the Federal Reserve for purposes of supplying reserves and of maintaining the pattern of rates* This time will arrive when banks have reduced their portfolio of bills to the smallest amount that they wish to hold and are finding it necessary to sell bonds and notes* STRICTLY 2 - 1*.. A further increase in outstanding bills at this tiia© would unneees« s&rily diminish the Treasury1 s capacity to use in tine of need its best instrument for emergency financing* We understand that the Treasury's present estimates shew that at the end of October the Treasury's balance trill be 9*3 billion dollars if there is a farther Increase of 000 million a week in outstanding bills. If no further increase is made, the balance will be 6*9 billion* In our opinion, the latter balance would be adequate to carry the Treasury through to payment date on whatever securities are offered in the sixth war loan drive and to meet any emergencies. If, however, a greater need for funds did arise, the Treasury would still be able to raise sufficient funds by offering additional bills at the time. In the interim, the Treasury would save Interest costs* We feel strongly that the Treasury should permit all holders of maturing bills to exchange their holdings for newly-issued bills* We understand couneel had agreed that it is within the authority of the Treasury to provide for such exchange and that the exercise of such rights by the Federal %m**m would not eome within the statutory limitation on direct purchases« The increase in outstanding bills Is going to the Federal M*nirr% through the medium of Government security dealers, who place tenders at the request of the Treasury, such request being conveyed to the dealers by the Federal Reserve. In our opinion, this procedure is open to the oirticism that, in substance, the bills are set being sold in the open market and that their purchase by the Federal &***rv* is, in the circumstances, at least an eveidanee of the Intent mat spirit of the law. July 31. 19U»