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Honorable John ¥• Snyder,
Secretary of the Treasury,
Washington, £• C«

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F. "
-

Dear Johns
The executive eoaraittee of the Federal Open Market Committee
Bet on Janu&ry 20 and considered the related questions of credit p o l i cy asd debt oanagei&Qnt during the f i r s t quarter and IM f i r s t half of
1948• I t Is th© concdttee's opinion that Federal Reserve and Treasurydebt iaanageaumt policies during the immediate future, and unless and
u n t i l condltiona change,- should b detentfj&ed with a rim* to placing
@
contiiiuiag and psr&istant restraint upon th# t i j u i i t m i of bank credit
which is contributing to existing strong i::-fiationary foroea* I t seeftt
llkalgr that there w i l l he % hsavy deajand for bank loansftWMibusiness*
from consumers, &nd fvxm real ©stata owtera dvr'.
I next fev B«aths<
Further expansion of bank loans to Meet these itMttftg trill help to f i nance the continuance of
The existence of & large !r&B®iry wvgpXMM la th© first quarter of the ye&r is tkt m&ivi veapon available for eoabs>tiilf infistion
in thle area. Is th© first instance^ receipt of t&Kes by the Treasury
in excess of current expenditures Will reduce b0.nk deposits and ban&
reserved* Th© use of this excess to r@tir© debt held by the Federal
I m f H Banics vili. seep these fund© from returning to the commercial
bunks, as they would if the excels ware used to retir# securities held
by such banks or other investors. Sine© it is the Withdrawal of
from tli© market by the Treasury which direct!;.'- affects \mnk
the ti"ing of thite vithdravalt ig M important factor la the control
program * Th^ tiodng of the rstir©:nent of securities held by the F@d*«
ar&l Reserve Banks representing, as it does, largely a bookK©eplng
transaction with the Faderal Reserve B*ak*f is not ia^ortast t9tm tlis
standpoint of the mon®y raarket*
As an aid in the eonsidsration of problems of QfMMI Sftftoit
policy and debt 'otanagei^ent which this situation ra^ires, estimates
of the important elements relating to bs.nk r@@»rves, fieiismj bs.iance
and debt retirement by veeks for the first quarter of the jrtif1 and by
months for the half yeer, baaed on certain stat^sd as^iaimptioBS, wer«
prepared by the staff of the Board of Governors, and are gtvwo in the
n t tached me-.iiorandusu




Honorable John ¥. Snyder

-2*

On the basis of I t s consideration of these data, tbe tttMN*
tive eon2iitt&0 suggests that the Treasury r e t i r e a l l of the federal
EilWM holdings of certificates and bonds as/taring in February^ March*
and April. In addition* i t is i B j f fttd that the Tfasuiy reiira 100
million dollars of b i l l s each week* On March 18, April 19 and April 8,

vfeM i t u T l t i l i i BP§ l a r g e r than in oth^r weeks* w*%trwmm%9 oooXd b
@

increased to 200 Billion or >: ' -si* Loa if funds are available,
the question of timing of Treasury vlthdr&v&ls of funds from
the market la complicated by the necessity of support of flttflfnjWst
securities prlcea by tha Federal > T f S &az&s* which puts funds back
into the market» In view of the indicated large with&rav&la by the
Treasury from Nffltt res^rYesf i t is expected that the beaks will sell
a eonsid#rabl^ aaount of Ciovernaient securities between nov and early
April in order to -miatair* their reserves (and thus to sain tain their
ifHPiS and their othsr larestments}$ sat that the IMtfftl Reserve Bsokl
will be fcfes priaeijml if not this only taiyers* fh# SSWttvt of issuyltles
that the banks will need to neli will be considerably less than the
total drain by re&soo of Tre&sury transactions* of course, because of
th© expected inflow of gold and return flov of currency and possible
othar offsetting fi.©tors, the n@o®®smry TO-ISS by b&tsfcB v l i l be further
r«duc#d t"> the extent that nonbank holders of Government securities
to sell part of their holdings and the —ourlti— ax*e pofby the Fed#xml UsterTe Banks^ an operation vhioh also pr
banks vith fjis^Mfti fuiid.s* The Systoa^s .pwrchi";,-s@s of N
©tricted bonds {^old by nonb&ak investors) b»^s already exceeded a
bil:.ioa dollars since tha beginning of the year« If thay continue
at 'this m t i j UMI f;r#gsure on banks v l l l be considerably
The conndttea was unaaiiiCHia la i t s opinion that
<m the I»S*II i i position of ttue baaks should be eaarted eontlxsocmaly

this part ad, la order to restrain furth&r expansion of bank
but was divided la i t s opinion as to whether the aeans available
should practically a i l be usad in the f i r s t quarter of the y-aar, or
•^h-sthor some considerable part should "be IspSf led fo-r use in ths second
quarter• One viev «aa that the saxiaun possible pressure on tfcs reserve position of the ba,nks should bo maintained H0W| timt unless the
trend of expansion of bank eredit If checked during the f i r s t qwurt&r
of tii# year the battle is likely to bus l o s t . DM otheT view va» that
a steady y persistent pressure would ba just as effective M a -iora
aasMMBtyated drain on bank rmmrvm BOVj and that this umild yjsrsait
the retsotloc of some m m i t i o a for ng@ in the second quarter of the
ye&r* Those v!io held the f i r s t tttm advocated naich. larger
of treasury funds fvon war loan accounts, dmring the f i r s t
than would be desirable if the second view --.rev&iled* Both vievg* took
aeeovit of the fact that treasury expenditures v l l l #xc#ed r«oeipts
during the s#eond drsarter of th© yenr and that




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