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TREASURY DEPARTMENT WASHINGTON February 11, 1937 Dear Governor Eccles: Oomplying with your request at the financing meeting last Monday, there is transmitted herewith a copy of the memorandum prepared by Mr* Bell on Treasury financing. It is, of course, not necessary for me to add that this memorandum is strictly confidential# Sincerely yours, of the Treasury Honorable Marriner S* Eccles, Chairman, Board of Governors, Federal Reserve System, Washingt on, D. C • Enclosure. TREASURY DEPARTMENT WASHINGTON Tebruary 3 f 1937 STRICTLY TO THE SZCH2TAHY: Re: Treasury Financing The following comments are submitted on Treasury financing for the next few months: Tebruary 1 to June 30^ .1557: After the discussions of last wee^ on ay estimates of the cash position for this period, I believe there was a feeliiig that the 30 nillion dollars a month allowed for inactive gold was insufficient and tnat tnis estimate snould be increased to 50 nillion dollars a aonth. Fron: inforoation now available it i s believed tnat 30 million dollars for tr.e xaonth of Feoruary will be Just about rig-rit. I have, however, increased the other four raonths by 20 nillion dollars each. Furthermore, tnere was a feeling that tr^e Treasury should not permit i t s balances to run as low as indicated in m estimates* y The following table shows the estimated Treasury balances at tne end of eacn montn, including estiniated sales of U. S. Savings Bonds, and adding $80,000,000 for inactive gold on tne basis of (l) no new fiiiancin^; (2) $ 3 0 0 , 0 0 J , J 0 0 of new funds raised in April, in addition to tne refunding of $502,000,000 naturine notes (this can be switched to March 15th); (3) sane as (2) but adding $300,000,000 of Treasury b i l l s to be issued between February 17th and March 24tn, a l l to nature June 16-18 (this amount can oe reduced to $200,000,000 and stop issue on March 10th); (4) $500,000,000 of new funds raised in April in addition to the refunding of §502,000,000 of maturing notes (this can be switched to Ikrch 15th); (5) sa-ae as (4) but adding $300,000,000 in Treasury b i l l s to be issued between February 17th and March 24th, all to raature June 16-19tn (this car. be reduced to $200,000,000 arid stop issue on !£ircn 10th): - 2 (In millions of dollars) Treasury balances 3assd on new financing in the amount of .sad of Ifontii Ko new financing (1) February March $300M of Treasury notes or bonds $300M of T/N $50041 or bonds and of T/N $3OOM b i l l s or bds. (3) (4) 769 1,149 1,104 839 7; 669 849 1,004 739 934 $500M of T/N or bonds and $30011 b i l l s (S) 769 1,149 1,304 1,039 934 It is obvious that our balances under (l) above would run too low for comfort, and even under (2) and (3), although I believe we could get through with them, would run considerably under what you have in the past content la ted* (4) or (5) is the safest course to pursue, and one under which you would feel more comfortable. It will be noted that the low points in the balances will be reached at the end of the months of February and May, but then we are, at these points, approaching heavy incoiae tax payments and there is therefore no harm in letting the balances run down at these periods. Moreover, I feel that the time is approaching when a billion dollar working balance is too high for our needs, especially in view of the large anticipated receipts under the Social Security Act. I would suggest, therefore, that you give consideration to (1) raising two or three hundred millions of new funds through additional issues of Treasury bills beginning February 17th and stopping either on March 10th or 24thf depending on the amount, all to mature June 16-18, for purposes of leveling off income tax payments at that time (later discussed), and (2) raising $500,000,000 of new funds through the issuance of Treasury notes or bonds at the time and in connection with the refunding of $502,000,000 Treasury notes maturing on April 15th. I prefer to see this major financing on April 15th rather than on March 15th for money market reasons (later discussed). While it gets away temporarily from our policy of financing on quarterly taxpayment dates, yet the new issue can be made to mature on a taxpayment date without any difficulty and would not, inrayopinion, - 3 - interfere with any major financing on June 15, 1937f if you should later decide that it would be advisable to finance on that date. If we finance on March 15 we can expect a substantial payment in cash for tne new issue, which will only add to the excess funds to be taken out of the market through income tax payments during this month. Bonds or notes: As we approach a balanced budget, the Treasury will have to consider the problem as to whether it will want to continue to issue bonds maturing beyond ten years from the date of issue# This does not necessarily apply to the .April 15 maturity, but applies only to refunding operations after we reach the point where it will not be necessary for us to raise new funds to finance the expenditure program of the Government. During the past five or six years we have issued securities on such terms and rates as we thought the market would take, with very little regard for a debt program that would meet our Sinking Fund and investment reouirements. The Treasury now has the problem inmediately before it of re-arranging its debt program to meet the requirements of its Sinking Fond and investment accounts* In other words, over the next few years, certainly beginning not later than January 1, 1938, and it might be batter to begin with the September 15 maturity, the Treasury should refund all maturing notes and bonds not retired through the operations of the Sinking Fund or from funds made available through investment accounts, into other securities maturing during those periods where there is now a shortage of maturities available to meet the Sinking Fund and investment requirements. Below is a statement showing the total debt maturing or subject to call (exclusive of regular Treasury bills) in each of the fiscal years 1937 to 1950, and the net total estimated requirements of the Sinking Fund and Cld Age Reserve Account: - 4- (in millions of dollars) > : Total • Sinking Fund : debt :» and Old Age > Excess : maturFiscal : maturing • Reserve Year .: or c a l l - • requirements : i t i e s » : » able > 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 802 2,167 2,832 2,995 3,287 614 933 1,794 1,384 1,537 1,425 1,438 1,559 1,668 1,646 1,748 1,841 1,310 1,889 1,953 24,031 21,445 204 454 2,920 1,037 3,557 _ 1,982 — 188 1,234 1,448 1,458 1,862 — _ 1,252 _ 1,809 _ 172 9f423 » Shortage • in : maturities lf234< l f 105 — 609 l t 841 — 1,889 159 6,837 1T0TB: Ho allowance nade in above figures for investments for account of Unenployment Trust Fund. No intelligent estimate of the payments from this fund can be made to cover a period of years, so it is assumed that for the purpose of above statement the receipts will just set payments* A glance at this statement shows that in some years there is too much debt maturing, while in others there is not enough. An ideal situation from the standpoint of the Treasury would be to have about $2,000M maturing each year, about $50011 each tax-payment date. In 1942 and 1943 there are not sufficient maturities to meet, even the Sinking Fund requirements at that time, while in 1947 and 1949 there are no maturities. We can, of course, purchase securities in the market for the Sinking Fund provided we do not exceed an average of par, but the operation is much less disturbing if these requirements are mat through - 5 maturing issues* This will also be true of the investment operations, where we are authorized to issue special securities to the investment accounts. In other words, to pay off maturing obligations with revenue cooing in and to issue special securities to the investment accounts would represent an ideal investment arrangement • So far as new legislation is concerned, we can assume that there will be rery little change in the Sinking Fond over the next few years, but the aaounts available for investment under the Social Security Act will be problematical for some tiae to cone. The Act not only has to run the gantlet of the Iiiprs— Court, but will be subject to political attack for the next tm years* An atteapt is now being made in the Congress to eliminate the Old Age Reserve ?und and substitute therefor a pay-as~yot*-go plan. To offset this attexqpt, the Social Security Board has prepared amendments to the Act which will liberalize Old Age Assistance and thereby increase the costs to the fund amounting in 1942 to more than $380,000,000, without any corresponding increase in taxes* The Treasury should now recognize that it can not possibly build up the reserve of 40 or 50 billion dollars contexqplated under the Act, but if it can hold the present arrangement until a reserve of, say, $5,000,000,000, or better still, $10,000,000,000, is available, I believe it should then agree to the principle of pay-as-you-go. On the basis of the present law, the reserve would probably amount to as ouch as |9,000,000t00C in twelve years, or January 1, 1949f the year when the tax rates reach their maximum There seems to be rather general agreement that the tax rates are not out of line with the present requirements of the Act. Furthermore, there does not seem to be much doubt at the present but what the benefit requirementB of the Act will be increased rather than decreased. Effect of Treasury financing on money market: Prior to the period of huge excess reserves, it was always necessary for the Treasury to give consideration to the effect that its financing operations, including collections of revenues on quarterly income tax payment dates, would have on the money market and what steps were necessary to correct any adverse effects. The Treasury considered that it was its duty to so arrange its financing as to cause as little disturbance as possible to the mrket. Now that the Federal Reserve Board has taken definite action which will eventually reduce excess reserves to about five or six hundred million dollars, it becomes - 6 - inportant for toe Treasury to again consider the «ffect of its major financing operations on the money narket. So that you will be able to see the picture, the following table shows the estimated net amount of funds (after deducting estimated expenditures) that the Treasury will withdraw from the market on it8 next four income tax dates. The only large public debt maturities included for the purpose of this statement are the Treasury bills in the amount of $300,000,000 maturing March 16, 17 and 18. • e Heavy income tax payment dates e J Uarch j e June ! Sept. ! Dec. e 8-14 15-20 21-23 66 123 32 46 271 29 52 223 23 Total 221 /SIT) 298 56 235 21 The full effect of the Federal Reserve Board's action will not be felt until May first. During Uarch there will still be substantial excess reserves and tae withdrawal of $221,000,000 from the market at that time should not therefore cause any disturbance. This amount will be increased by cash payments for the new issue if major financing operations are conducted in March instead of April. In order that the Treasury may be in a position to meet in part any disturbance that may occur, I suggest we permit our investment funds for Postal Savings and Federal Deposit Insurance Corporation to accumulate, which on March 15th should amount to between 50 and 60 million dollars and which can be increased by redeeming special 2$ securities, and on or about March 15 invest these funds in long-term bonds in order to put funds back in the market to offset excess receipts* If this does not entirely relieve the pressure, I suggest we permit payment by credit in War Loan account of one or more Treasury bill issues. - 7 It is quite obvious that the Treasury can not expect to withdraw excess funds during the months of June, September and December in the net amounts above indicated, with only 500 or 600 million dollars in excess reserves9 without serious effects on the money market. It seems to me, therefore, that it is important we should have Treasury bill maturities of not let8 than $200,000,000 in June* It may be necessary to have maturities of bills also in September and December to meet a similar situation, although these can be discussed later in the year. Action which the Treasury can take to offset large net withdrawals of cash from money market; The Treasury can, by some action of its own, meet almost every tight money market situation caused by its withdrawing from the money market more funds than it is putting back into the market. This can be accoiqplished in one or more of the following ways: (1) Purchase outstanding Treasury notes or bonds for account of the Sinking Fund. (The Treasury can purchase notes or bonds for the Sinking Fund at prices exceeding par so long as the total premiums paid do not exceed the discount accumulated on the books as a result of purchases made for this account at prices less than par. The amount of such Ndiscount11 now amounts to about $7,684,000. Authority is, therefore, now available to purchase up to $768,000,000 for this account at a price of not to exceed an average of $101* If the price is lover fc>mn or exceeds $101, then the amount available will be correspondingly increased or reduced.) (2) Purchase outstanding Treasury obligations for investment accounts* (About $45,000,000 now available in cash which can be increased by redeeming special 2f£ securities amounting to $200,000,000.) (3) Pay off naturing Treasury bills in cash without any issue of billst or pay off maturing Treasury bills in cash and permit payment of issuing Treasury bills by credit in War Loan Account* (4) Provide beforehand for Treasury bills or other public debt obligations to nature in these heavy income tax payment periods for the specific purpose of offsetting excess receipts* ~ 8 (5) If there is a Treasury note or bond maturity during these periods of excess receipts, provide for refunding only part of itf paying balance in cash, thus offsetting effect on market of excess receipts* For example, in September there is a Treasury note maturity of $817 million and there are estinmted excess funds coming in of $298 million. The Secretary would announce in his financing circular that the maturing notes would be accepted in exchange for any new issue offered up to only9 say, seventy per cent of the amount of such maturing notes. This would leave thirty per cent, or $246 million, to be paid off in cash. Such an operation as this would have to be handled with care as the maturing notes to be paid off in cash might come in faster than the excess receipts, in which case it might result in an overdraft at the Federal Reserve Banks. We could operate this in conjunction with (a) and (b) below. (a) Deposit Inactive gold with Federal Reserve Banks for a period of not to exceed seven days to cover overdraft, at the end of which the operations could be reversed. The amount deposited might be returned to the Treasury from day to day as the receipts come in. These temporary deposits would have no appreciable effect on the market. (b) Sell through the Federal Reserve Banks as our fiscal agents, one to seven day certificates of indebtedness to >y large banks in money centers, redeeming the certificates as the V excess receipts come in. Prior to the Banking Act of 1935, it was customary for the Treasury to run overdrafts at Federal Reserve Banks during the tax-payment periods, giving them a one-day certificate for the amount of such overdraft, the Federal Reserve Banks in turn selling to local banks participating certificates in our on^-day obligation. Each day these certificates were redeemed and others issued in smaller aggregate amounts until finally wiped out by revenue receipts. (6) Redeposit some of the income tax receipts in War Loan accounts of special depositaries. We have authority to do this, but it is cumbersome unless confined to a relatively few banks. (7) Purchase in the mrket (in effect advance redesptions) of any Government securities from surplus moneys in the general - 9 - fund* The Act of March 3f 13811 authorizes the Secretary of the Treasury to apply at any tine surplus iioney in the Treasury not otherwise appropriated, or so nuch thereof as he nay consider proper, to the purchase or redezrtion of United States bends. The tern "bonds" in this JLCI has been construed to aean any public debt obligations outstanding. The foregoing could, of course, ce s'jpplenentei by action of the Federal Reserve Board, (Exclusive of regular Treasury BHI3) (In millions of dollars) June 15 M»rch 15 1937 1938 Bills Notes All ID Total 817 - 1,619 618 596 - 1,946 1,294 (277 ( 2 / i ) (455 942 1939 Dec. - • 526 2,762 300 502 (4/15) notes Sept. 15 1940 Noto» 1,378 N B 738 353 • N 727 3,196 1941 Notes Bonds 677 545 N B 504 834 (8/1) • N 204 2,764 - - 1942 1943 All bonds 454 1944 * 1945 ft — 1946 * 489 1947 * 1948 * 1949 • 1950 1951 1,519 (4/15) • 1,854 - 1,223 - 1,401 (10/15) - 1,214 - 759 (1C/15) ft ^ -- - 1,855 1,037 2,556 • 1,214 - 2,343 - 759 1,223 - 1,794 - - 1,794 - - - - 1,62? 755 - 2,382 1952 - - - - - 1553 - • - • • 1954 • - - - - 1955 2,611 - - - 2,611 - 982 - 982 1956 10,918 Accounts and Deposits February 6, 1937 8,276 6,524 4,288 30,006 BOARD DF GDVERNDRS • F THE FEDERAL RESERVE SYSTEM Office Correspondence '•r From Chairman Eecles «* ^ +* p a te February is, 1957 Subject: P i s e r I am returning herewith the memorandum prepared by Mr. Bell. I have taken the liberty of adding marginal comments on a number of the important points raised in this memorandum.