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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»