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August 22,
Dear John:
2he enclosed letter is the one I spoke
to you about at lunch today* I am mure you will
find It in complete accord with your address, of
which Z heartily approve. It will provide supporting reasons for some of the views which you
I hope it xaay give some information
which will be of assistance to you In your conference with the bankers tomorrow*

The Honorable John W« Snyder,
Secretary of t h e Treasury,
Washington, D, C.



August 22, 19U6.
The iionorable John W. Snyder,
Secretary of the Treasury,
Washington, D. C*
Dear Johns
I appreciated the opportunity to disouss fully with you recently the problems connected with the management of the public debt*
These discussions, I believe, were vry useful, and with the thought
that it might be of some help to you in connection with your further
consideration and disoussions of the problems, I have put down in
writing the aain points that we disoussed and I an passing them along
to you*
The vast amounts of money and public debt which were created
in the process of war finance have greatly added to the present inflation potential. But, they are a natter of past policy* We cannot retrace our steps and, within a short period, Materially reduce either
the debt or the money supply* The ultimate solution to inflation lies
in a high level of production* Only with greater production, reduced
consumption, and increased savings will it be possible to obtain
sufficient yield from existing tax rates to have a budget surplus and
to retire some of the debt* Thus to retrace our steps is at best a
slow process*
tthile there is relatively little on the inflation front that
can be done in the monetary field, some minor steps can be taken* A
continuation of the debt retirement program will help* Even after the
cash balance has been reduced to a mini arum working level, and despite
the forecasted small budget deficit, it is possible to continue to reduce the bank-held debt through receipts from Government trust accounts and the sale of savings bonds* The present bill-buying program
should be abandoned later in the year* The amount of bills that the
market would absorb should be offered on a bid basis* With the oertifi'
oate rate being held at 7/8 per cent, the bill rate probably would be
between 5/8 P«** eent and 3 A P 6 r cent* The market would not likely
take more than 5 to U billion dollars of bills. The balance of the
bills, in excess of what the market would take, would be taken by the
Federal Reserve under a special arrangement at a low rate and avoid

The Honorable John W Snyder



Auguat 22, I9I46

the weekly turnover of bills* Reserve requirements oould be increased in Mw York City and Chicago i f the strength of the bond
market from bank acquisitions of Government securities indicated
the need* This action would require banks In Sew York and Chicago
to s e l l about 1*5 billion dollars of Government securities. For
some time the above three actions would discourage further moneti*ation of idie debt by the commercial banks, keep intermediate and longtern interest rates from declining, and make i t unnecessary to in*
crease the short-term rate*
Bankers, dealers, insurance companies and others are recommending an increase in short~tem interest rates as a means of combating
inflation* They overemphasise the effectiveness of monetary controls in
the present situation* An inorease in snort-term Interest rates for
some time, as I have indicated above, would be unnecessary. To do so
now would also be undesirable because i t would add to the interest oost
of the Government debt and raise bank earnings which are already at an
abnormally high level, due entirely to the interest paid them on the
Government debt* If bank earnings increase further as a result of an
inorease in the short-term rate, banks will tend to rely more on their
Governments and less on the making ot private loans* A moderate increase in interest rates would not in any way be effective in combating
inflation* A sharp rise in rates i s out of the question because i t
would cause a serious drop in the bond market and in addition would add
greatly to the cost of carrying the public debt, which Is already vry
high* This would also stop the sale of savings bonds at existing rates
and cause large redemptions*
Some argue that short-term rates should not be raised but that
some flexibility should be introduced* They suggest that this would
bring uncertainties into the market which would discourage banks from
shifting into longer term issues. This Is quite unrealistic* There
oould be ntry l i t t l e uncertainty as to rates in view of the large volume
of securities that mature monthly.
If a policy were adopted permitting
short-term rates to rise without setting an upper limit, the Treasury
would have difficulty in refunding i t s isaturitios, since banks and other
investors would be inclined to withhold funds because of the uncertainty
in rates* The question then is not whether the short-term rate should
be pegged at 7/& per cent or permitted to fluctuate up and down, but
whether i t should be pegged at 1, 1 - l A . <>* \-l/Z per cent, or some
other level* There i s no natural level.
The same group that want the short-term rate increased are
also advocating that the Treasury offer additional long-term 2-1/te
per cent marketable securities for Investment of funds by insurance
companies and savings banks* This would be a serious mistake* It
no appears that the Federal Heservo w i l l have to support the long-

The Honorable John W. Snyder



August 22,

torn 2-1/2 per cent rate Indefinitely. This in effect makes these
s e c u r i t i e s , regardless of their tern, a demand l i a b i l i t y and gives
the holder who s e l l s prior to maturity the benefit not only of fee
higher rate but a premium dependent upon the spread between the
short and long-term rate* I t would be d i f f i c u l t i f not impossible
to price a 2-1/2 per cent market issue at the present time* Also,
there would be great speculation in such an issue* If the issue
were limited t o insurance companies and savings banks there would
be complaint by those who were not permitted to subscribe on the
ground that they had been discriminated against in favor of insurance
companies and savings banks* the issuance of additional 2-1/2 per
cent Marketable bonds would not serve to increase savings of individuals who are largely responsible for inflationary pressures*
Series U, F, and 6 savings bonds already offer attractive investment
outlets for individuals.
There i s a serious question of whether the Government has
any obligation t o private insurance companies and savings banks,
over which i t has no power of regulation or control, to provide 2 p^r cent investments at a time when the Government i s not needing
funds, there oould be no Justification for doing so except as the
surplus funds were used to reduce by a like amount demand deposits
and Government securities held by oornraarcial banks. Such a refunding of short-term securities held by banks into long-term securities
held by insurance companies and savings banks would cost the Government the difference between the f/& p«r cent short-term and 2-1/2
per cent long-term rates, the Treasury, therefore, jsust be sure If
such refunding I s done that I t w i l l accomplish this purpose of reducing demand deposits and Government securities held by ooauraercial
banks* If 2-1/2 par cent securities are made readily available to
insurance companies and savings banks there w i l l be less pressure
for them to purchase private bond i s s u e s , such as world bank securit i e s and many e l i g i b l e corporate i s s u e s , and to ig&ke mortgage loans.
If additional long-term securities are offered, however,
they should be nonmarketable securities and 'Una amount of subscriptions should be limited under some formula which would prevent switching out of lower yielding bank-eligible securities t o raise funds with
which to subscribe to the new securities* The yield on nonmarketable
issues depends on the period held, which i s only f a i r as long as there
Is a difference between the short-term bank rates and the long-term
investment rates* Sonmarketable securities protect the Treasury against
investors who buy long-term securities for short-term holding* They are
no more of a demand l i a b i l i t y than are isarketable securities as long as
the market i s supported*

The Honorable John W. Snyder -


August 22, I9I46

To su@ffiii.rige, there i s relatively l i t t l e on the inflation
front that can be done in the monetary f i e l d , the debt retirement
program should be continued, the bill-buying program should be
abandoned later in the year, and reserve requirements oould be i n oroased in Hew York and Chicago, These aotions would for some time
discourage further raonetitation of the debt by oosaaerci&l banks and
make i t unnecessary t o inorease the short-term rate. An increase in
the short-term rate i s undesirable 1 i t would not be effective In combating inflation. I t would serve only t o increase the cost of the
Government debt and add to bank earnings* The question i s not A e t h e
t h i s rate should be pegged a t ?/d per cent or permitted to fluctuate
up and down, but whether i t should be pegged at 1, 1-1/1*, l - l / 2 per
oent or ease other l e v e l . There cannot be uncertainty In the shortterm rate when the Treasury has large amounts of securities that
have t o be refunded monthly* Additional long-term 2-1/2 per oent
narket&ble bonds should not be offered. Such an offering would make
only for speculation and i n s t a b i l i t y in the zsarket*
If any additional long-term securities are offered they should be nosnarketable
s e c u r i t i e s , the subscriptions should be limited, and the funds should
be used to reduce demand deposits and Government securities held by
commercial banks* the argument that the Treasury i s now faced with
a large volume of demand obligations i s not effective* Under present
conditions, the entire debt i s in effect a demand obligation, since
the Federal Hes&rve assures the Treasury at a l l times of a ready
market for i t s offerings and provides holders of securities with a
market under the pattern of rates* There I s no p o s s i b i l i t y of a fjree
iaark©t with the debt as large as i t i s today — the total public debt
i s now more than twice as large as the t o t a l private debt* The
public interest demands a stable market for Government securities and
low rates*
Sincerely yours,

k. S. Ecoles,




Dear Marrinerj
Thanks very much for sending the
information enclosed in your letter of the
22nd, It was very helpful.
With kind regards,

Hon, Marriner S. Eccles
Chairman, Board of Governors
Federal Reserve System
Washington, D, C.