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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 therefore* 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. We estimate that this vould s t i l l leave an enple 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, 9E billion by the Federal Reserve Banks, 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.