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7,

Mr, Edward F. Bartelt,
Fiscal Assifctant Secretary,
Treasury Department,
, D. C.
Dear Ed:
Enclosed for your information ie a copy of a
3,etter relating to the September maturity. Chairman E
is leaving the original of this letter "?dth the Secretary
this afternoon.
Sincerely yours,

David M. tmnetiy,
Special Assistant to the Chairman.
Enclosure.

DMKipb




Honorable John W. Snyder,
Secretary j»f-the

7~

Dear Johnt
As repeated by Mr. Bartelt, I am pleased to give
you the flews of til© executive eeisslttee of the Federal Open
Market Gosdttee nith reapeet to the asaturlug Septiffltoer ©eiv
tiflcatee and the debt retlreffi.«at
A vigorous 8mbb ratlrotmRit progrm wml<£ vmaXt ia
•n ±&t#r#»t saving to ill© Tr**«ui*f and a redaction in th#
of batiks ilil^i ar® at hi^i l#mLs, By r«stricti^|
ortdit eipaasion, i t wsuld &lso b# helpful in combating the tmrrmt infl&tim&ty pr^s^^irea. W rm®smm&9 there*
fore* that 2.5 Mllioa dollar* of the 8eptea^er eertifleatee
and 2 billion of the October m& NoTm&er i»»uee be redeemed
for cash. W estimate that this vould s t i l l leave an enple
e
e&^i balance of froc 2 to 3 billion dollars at the end of
November.
I t ie t^aeeess&rv for tb# Tr#&m*ry to earry & large
cash balance* the treasury MH go into the roarket at aaay tint®
borrow at low rate* fey offeriaf aclciiticaial certificates.
Federal l©s®rve stands r©a<^sr to asimr^ the sucoessfal flotation at existing rates ef ^ny amotmt that ^ight be needed by
the Treasury. Thsre is- practically no U n i t on the amount of
otatstamdiiaf 8#eariti$» that th# ?e4eral Kes®rv# ea® p^urehase
in the jcarkefe ttans enabUng the Tr«a«^ry to successfully raise
faasd* i f needed. In addition, tbe Federal Seeerve ©ttt lemt
up to 5 billion dollars directly to the f memory under tlie
direct buying authority, laa other «erdsf- the frea«ary Is la
a flexible position, to pay off debt or borrow a©@ortliif to
&<sei®, thus making i t unnecea*&ry to ntaintsia & large cash
balance.




Ur, Sayder

- 2 -

the debt retirement program i s not inflationary
on the contrary, i t h&s beem srlldly deflationary. The
ing securities that &re beixig we&d off &re held largely fey the
banking system. Of the- 12*2 billion dollars th&i h&v* been
paid off since the first of March, ©*5 billion were held toy
e«n-.«roi*l banks, 9 billion by the Federal Reserve Banks,
E
and 3.7 billion by nonbank investors* Of the 12 billion dollars >hich will Mature b«t«««a now ati4 Sav«rsb«r 1, all bat 2
billion ar« h«ld by the banking syst«6» Th« «ff»ct of the debt
program by classes of holders i s us follows!




1* Hfltirasaeat of securities held by
commercial baokg« Thie reduces var loan deposits
*»<! baak holdings of short-tcm aseettritlee* I t
tanda to check the sale of further
$«eurltles to the Federal 8.*B*rv
panda b«aik r#serves—the b&«ie for credit estp«a*ion.
of securities hel<| by
Federal Hejs#ry» Bmk*» AM mer lo&n Aeeounts are
ir&wa upon to redeem in e&sh securities held fey
the Federal Reserve Banks, jnenber btmk reserve
balances with TodmrtiL Reserve Banks are reduced
in a like amenjnt. As 6 res»lt f the lending and
inventing capacity of cosm^ret&X banks i s effectively ciartalled* Baj^ca ^»re placed nisd#r
pressure to seet this loss of funds and th«gr
are required to s e l l securities to or borrow from
the Federal Reserre Banks. A* a result, less
ahort-turffi securities are likely t© be sold to
the Federal Reserre Basks for the pwpoiMi of reIn longer issues*
of securities held to
noabaak inveators. The securities being redeemed
are held by large corporatism* ajsd m*t fef S J M W W I
ieho might apend the proceed* of redeemed »*eurit i e s . the corporations *.re In % highly liiuid position and will hold the funds la the form of deposits
or will pureb&se additional securities from the bank
ing system. When the proceeds of the securities redeemed are deposited in co»#rci&l banks reaerres
are required af&inet these deposits* This increase
in r&8&TYm requireiBsnta curtails the lnrestlng and
lending cap&city of banks.
Sincerely yemrs,

If* 5* Ecelea, Chalrsan,
Federal Op«a Market Coaeittee

Stetsber bftnfc n^t profits r&&eh«& « » all-tiff* hi$h la 1945-—*
*
788 e&ilicm dall&rs., or 10,9 P$r cent of empitel aecmmt*. I t i t
#«ti»«iied that net profits in 194*6 wilX be approximately the
as in X94S. There irilt probably b« 80«« .i*©lln# in n«t
to
dollars in 1?49» ftr a^&rl/ ea»4i&lf of
se«iriti®» i d l l b« sorewhat i&rg$r in 19^6 than In 1945*
Ltfff«r aTftrag* holding*, «M will probably d«eXla«i its
of pre»«nt
Int«r«?*t c© l&au« will iner<i«8« ah^rply iji 1946 oir©r 1945
should intr#&*# farihsr in 1947# Eacp^ms^^ will &X*e b« higher in
m$ 1947# th» principal lncr*«s* bein^ In t i l i t i — %&.& m$m
ar» e*ti«&t«d to increase froe 5^0 ©illlcai dollars in 1945 to 670 sdlllon
In 1946 mti farther to 750 million in 1947.
prof%%« m »#«ariti*s, #t«#, are diffie«lt to
,
I t i» ro&«^tt«bl» to #xp#ct * cbn.ro 4iMilin9
s«enritl«« following the «&4 of my loan 4rtv**» LOIMNIS
sffs &re likely *l*o l i de«lin«. ?«xe* oa «»t lne^^#
to -c70 « i l l ion dollars in 1945, •»• wtiv---ated at &X) million i»
r«flnoting th# «sd of eatfiess profit® t « # « f m*l. 170 viUloii in 1947.
#

Dividend* id 11 probtbly increase r-'04er^t#ly *JFI4 c o i t a l
i l l fee b«ilt mp fet abotit the mm ra..t* Ml in war y«ar«#
n»sait vJJll be* large b&nk warning© In 1946 *«d 1947* Tho
of set pro.fit* to e&pital aecotmt® will, however, decline* the rea»«n
for this i s that capital «ne«ovnt* h^,ve ieer«*«#d through r«t*ft3ti*4_eAnilngiA.larielf.fsDs G<mn»fiitYcpe<nirl^e«fti taring theJW,ff©r»* ^ ?f
exiawpl©, in 1940 total capital accounts wsotmteri to 5.o billion dollars and
by 1945 these had increased through retained earnings (principally earnings on
Government securities) to 7.2 billion. If the ratio of net profits to
c a p i t a l acco\jnts were based on total capital accounts in 1940, the ratio
for 1945 and 1946 would be 14»1 P«r cent and for 1947 the ratio i*ould be
12.1 per cent.




Member Bank Profits, 1945-1947
(In irdllions)

1929
(Actual)
Earnings
On securities: U.S.GovH.
Other
On loans
Other

2.399

Expenses
Salaries and wages
Interest oa time deposits
Other

1.684
464
445
775

473
1,563
363

1940
(Actual)

f

1945
(Actual)

1946
(Estimated)

1947
(Estimated)

1.323
229
202
595
297

2.102
997
139
588
378

2,350
1,050
160
750
390

2.400
975
170
800
455

921

1.268
580
183
505

1.460
670
220
570

1*625
750
235
640

390

-,775

400

147
374

Set ciorrent earnings

715

402

Recoveries, profits on
securities, etc.

137

303

454

300

250

Losses and charge-offs

295

356

230

200

175

Set profits before income
taxes

—

1,058

990

850

Taxes on net income

—

—

270

200

170

Net profits

557

349

788

790

680

Cash dividends

387

210

246

265

275

7.2

10.9

10.0

8.1

7-2

14.1

14.1

12.1

5,597

7,243

7,800

8,200

Net profits as percent of
capital accounts

11.2

Met profits as per cent of
capital accounts in 1940
Capital accounts




6,360

Commercial Bank Holdings of GoYeroraent Securities
(In millions of dollars)

Item

Total
marketable
debt outstanding!/

Held by
commercial
banks

Securities held outs3.de banks _
Restricted
Eligible for Win be
Will not
eligible be eligible
purchase by
to banks
commercial
to banks
id thin
banks
until after
8 years
8 years

Treasury b i l l s
Certificates
Notes
Total b i l l s , certificates and notes

17.023
37.720
13.351

1.715
18.157
11.828

15.308
19.563
1.523

68.094

31.700

36.394

Bonds due or callable:
Within 5 years
5 to 10 years
10 to 20 years
Over 20 years

26.915
32.847
37.189
22.372

20.519

a.85O
3.251
2.536

6.396
10.997
135
180

30.322

119.323

48.156

17.708

30.322

23.137

187.417

79.856

54.102

30.322

23.137

Total bonds
Total marketable
securities

—
—

3*4*1
19*656

Excluding postal savings and prewar bonds and guaranteed securities.
Hote: Amoufct outstanding in first col^ai is as of July 31, 1946; commercial bank
holdings as showi in May 31, 1946, Treasury surrey of ownership.