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MISS EENTON of the John* With ay l a t t e r of J&nuary 22P 1947, I cent you & copy ui it ^^esior^ftdtiiii wisicli npNMMBlMdl llM M i tatlvtt re«ult« of th» tiiiaklnf of the MMlMPi of th« executive eoss%itt«4» of thm Federal O-pen 'Market Coswitt»«? aad i t » staff with respect la Ikt possibl? i s by the Tr@amiry of a long-t^r^ sscmrity* that tirae w« !iav^ givsn further consideration to t h i s probles ttti I Ml attaching a copy of a fttttttpfttl vhich wpfiii>i)iT th« uaanisnyus T ! « W of KMisbers of tha full ^•dhertail Op»n H&r?n?t Committee reoeiit M*tt&g af th* Cor-initt»ft la * the- statesont the issuance of s *M.rk:«tahl« lonf^ttrnt security proposes t—%t>d that at the pT&$mr H M a &bl# is?f»^ of tii« Series Q Rr« Sproul &n I 1 v i l l btj glftd to discuss matter with you a t a OMTfWdtSt tine should yoti so 5iac«:rely jours, : cc: Mr. Rartalt Mr. Husgrave SRC/mg : . ••., f. Confidant!*! MMHQr *f§ X947 XS5QASCK EX O B TKEJOTCt OF A WEW LO1G-T12S4 for th* U m a N ®f additional long-»t*»a $@miylii®®f an purt of th® frftftswsr1^ rofu&dln^ ppftJPMaj hav* b@®n «nd*r discussion for tfc* M i l 1WMS Sine«s rapl&caamt of mturiag iaaueit vlth loag rathar taaa abort-tars o&tnriti** v l l l result In & high*? cost of carrying th* rf®bt# tmy such program must b# tentod of eredit and debt a»tn«ig9fa«nt i; f would b® d^atrabl* whmz sos® ftddltiosftl supply of lssg-t@ras 0ov®r«ia®nt (l) s^ir Instituti^eal and savings fluids bsteg pl»e»d in private invoatetont o«tl«t©| {2} fe® JUMor«iiiA| YOIUBM o f py Ioaf*t®3m ja&toritit* ter#nt®a» to d«py^ss th« g lonf-t@r®- ^jT^wa^t bonds fellow 2-1/2 p#r Mttt« (A itititm rmtoa ftPM this MMl aau$t bo diftinnuish^d from, to ) (3) tho A&ada raised Ijy th# iMRWMM of atlditioxi&l longU H MNMVi^MI can bt mpplitd to the red«aptlon tioca whieh er# h«Id by fe# beakiog syataa* Th* r@tir#®#n.t ©f a®<suritl#® hold % ecmauiroiAl tenki would h#lp t o r«daa« €#a&nd a* vfeil® rotinBMat of s@onriti#f h#M lay th© F^ioral %?©uli a s s i t t la ksopisg m^sb®r bank r»s@rra» uador sos® wm&Xd oontribu^ to pjwrsntisg rmmm&. inflationary oradit «xi« nion* yttftttaft oft rsltet.<ling opsratios® for th© traa&f#r of teaMMill bond* to aomteMik JJl'WHtwa i s imer#s«ia§ly iftport&nt at tliig t i s o in Tiaw of th# pr©*p«ot for I m r#itt@tlo» and9 in cQna«quoii«e> of reduction in budgat axurplaa €?silabl« for dabt i t th* rooant saaatiog ^Ith Tr#at5ttrar official a» tha ivpNNMHla^lWi of eeatpaalas appaavad t o Justify tha iaWflMi of long«-t#ra bonds hj th* botb fro® th® ataadpoint of tha aacnmt of Institutional ftaada eiirr#stlj for ixmataa&t* and from tha standpoint of Hn rtffiHI itlftj @ff@©t ©f mpom isiwst®@Bt yi^ldjs in ftnara.1* Ivsa tlKm||k thsir praaantation isotfeu-T@ftilly ffi#t tha raqtilraffl^mts of comditions (1) Ifli {2} aboYs* i t dots support t o eo»diti0B (3)* th0 Coismitt#a oonald«r* i t d**ir&bl*9 th*r«for* t to trnkm a b®giuKiaf in tha dir»oticm of c long->t*m refundiag progrsusi* In th* © adapt*d to r*w aituationa Ml thej davalop* I - t ^ a . l o t 0*^1*4 for VhH* th*a*-'*oactid*r&tioiia justify tha iasuaae* of aons* veuld not b# a#r?^d b^r an offatvi&f of (1) A marketable security would provide renewed opportunity for investment institutions to "play the pattern of interest rates". At a coupon rate of 2-i/2 per cent, a market obligation would attain an iismediate premium and a supplementary premium would develop as the issue moved toward maturity. In this way, holders of JMch an issue would be able to obtain a return considerably above 2-}/2 per cent by selling at a premium some time during the life of the obligation. Past experience indicates that this would be done by many purchasers of the new issue. (2) Unless the new issue was quite small, it would be accompanied by substantial sales to commercial banks of securities (due or callable in more than one year), now held by institutional investors. Bank3 would sell short securities to the Reserve System, The "rollover" would be completed as institutional investors replaced holdings which they had sold by subscribing to the new issue. The result would be increased rather than reduced monetization of debt, (3) With a stabilized level of interest rates on long-term Government securities, such issues are, in effect, demand obligations of the Federal Reserve System. If a market obligation is issued, the Treasury would pay long-term rates on bonds which the System would make it possible for investors to buy on a short-term basis. For these and the following reasons, the Committee strongly advises against the issuance of a marketable long-term security at this time. Non-marketable Issue Serves the Purpose A non-marketable Treasury issue of the Series G type would be much superior in meeting the objectives of credit and debt management policy, (1) If there are bona-fide investment funds seeking a safe and long-term placement, a bond of the G type should be as satisfactory as a marketable security, (2) A market bond would require a fixed offering and a complicated system of allotment, the amount and timing of which would be difficult to gauge, A bond of the G type could be placed on sale for an undetermined period and an indefinite amount. Since these bonds would be registered, subscription, if necessary, could be limited to a percentage of new money accrued within a stated period. (3) The G type issue would attract mostly bona-fide investors and minimize the "rollover" problem, (4) The issuance of a G type bond would tend to stabilize all long-term interest rates. *&* (5) Is vim? of the MTtttBt uncertain ©concalc outlook* the Treasury needs to retain flaxib.lt control over the tUHMI of securities to nonfe&nk investors* (6) Isv&etors WfKild receive a long-tens rsta of interest for long-»tara holdings only* fh% «ppAXH»nt lack of is.t6r@«t la • rantrlct^dt l$eu«, on tk® \mrt of iBV«stor»| m&j %mll r&fl®&t %h®tr hopa of obtaining better terms, Ifc If evident that fcltttf tarms v l l l nut baeo^n* available in th« near a non-^nrketable issue of the 0 type might b© axptetod to find a flatlsf45,ctory institutiosftX denubnd* If not f this wotiXd b» In Itself an indication thmt th-^r© is no r«&l surplus of fuads for lmreftaent in long*-tera Ooverussent seattritiiaa la •sce*» of currant opportunities for buying prlT&te issues* fhe av&ll&bllitgr of a r@strict@d tap l^su© of Series (* tjp© bonds, at toils tim»» offer an adequate protection for iia in twining th* long^tera rat® at 2-1/2 cent ®rA the Coanittee r®cm£&m&® that Wch an issue b® etade avuilable* MISS BMTON March U , 1947 CONFIDENTIAL Honorable A* L. M, Wiggins, Under Secretary of the Treasury, Washington, D. C. Dear Lee* I am enclosing a copy of a letter and the ii®aioranduia referred to therein which I am sending to the Secretary today with further regard to the possible issuance by the Treasury of a long-term security. Sincerely yours, (signed) Marriner M. S. Eccles, Chairman, Federal Open Market Conmittee. Enclosures cc: Mr. Musgrave MISS 3ENT0N J * 1947 CONFIDENTIAL Kr. B. F. 'rstrtelt, f i s c a l Assistant Secretary, Trea inry Pep&rtisstat, i ft* C« Dear M l I am enelositi.g a OQgQF of a l e t t e r and ref*rred to therein vriid^h I a s sending to N » l » t a i j today with further regard to th^ .poss i b l e iastt&nee by Ust Treasury of a- long-term Federal Open Ifairket Committee.