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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.