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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 my estimates*
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
Excess
:
debt
:» and Old Age >
:
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

(277 ( 2 / i )
(455
942

1939

Dec.

ID

Total

-

817

-

1,619

618

596

-

1,946

1,294

•

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.