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February U, 1949 John l?
Secretary of the
boa* : . C,

Mr. Secretary:

of Cha
I have m:
LM -low to? vtom .
lie executive coasiitee s
Mftlfctt r w i t f M vith respect
i tf problem of credit policy and
•at as tflitnii I
• th you OB /AttlUU/ 26 and At I subseMMtlag of the cosislttee on tbftt day:
1, The Trs&eury prograrfl of ealXfl on war ios.n aeccimts
to offset the teftsonal r t t u m flov of curre^c.;jorts
otfcter factors wmA to
in t,ozm pres$ur
:.nk r e serves httt v/orK.ed e&tisfactorily i
\ . 4
2« Availatle TI'iMMIJ bslances- ahoul^
t i r e System holdings of Mtrtii
LI eartlfieat*
aillicn of tl—I
r t o f MkTC
early April*

to re*to

3» Tbe present
« policy wltln ror
b i l l s and |HU'ihi.i#i ana sale© of bill© h; I . red£"'actory and should be
4* ¥ith th© lifting
^gure from the long-term
a»rk©t, tb« aoat pressing conaldarati
acccunt in aetting the rate fof t ;
.;,rii ceri,ifioat€^ refiiDdings | i Uk
i l i t y of holdin..; irivest-;;jeat
interest i s a staadily growing volume of short-term d*bt«
Th^ market will be called upon to fcbtorfe • v$ry aea^ volume
of rsfmndiogu ia tilt near future* Certificates will m,txir%
ia the amount of $30 billion, in &• eanlB| year.
million of bond-: will aatmnt in Jun®, | 1 . 3 million ia
'id %k*U b l l l i
. vroporv.
•: ..
• suitor:* L la alrw

Honorsble John V, ©nyd*r — 2

large &nd vill Increase substantially. Short-terst r&t#s
should be set a- a level which v i l l attract Invesisseiit in
these iasues and avoid or
ise the inducement to "pla
the pattern of rates".

&• DttriOf recent weeks there \m$ beea
eri&eace ©f a tendency oa the part or' Ihe baaks to
resmae this practice. The System has been called upon
to [Winilmie bills la ls.rge volume vMle banks vere la*
creasing their purchases of siigible lon^-ters:
The ByMoft** portfolio of eligible bonde callable
after 4- years M« MMHttti to only t l i t t l e ovc- r |J00
millicn. If Uu practice oI
rates' 1 co-itinues or spreads signi?lcaxit.iY, i t v i l l
be ia^OMdble for the 8y«t«& to prvvwtt I oisorclerly
rate structure t&4 to keep loag-teiTt b(mds9 particuV.
D •Xtglblftfj from developing erratdc

Once the Ijfit— &J

I t o §tHX 1»ng 11

eligible bonds to offset i t s acquisition
-hortterm securities, excess rtftil"fti will ftfftia be
1Q lerge voliime leaving the und
which tht fcystes voold like to avoid, of imposing
L#T res^i^re requirements on
c. WhlXe la the opinion of the cassitte:
shortly beeosi^ desirable to refund BOSS of the mxtari .
debt into in termed imte term tecttrltlt tbii c^uinot be
accomplished within the present stmoture of mtejg
without aeoentuating ihd preblev of tffcet eappeyt
debt MSJ
'.. A short rate that v i l l liold Bjarket interest
v i l l permit the continued refuniiiag of •fttttrtftf longtern bea4l into shorter issues witlSMNlt ijacreat;in^ tlM
aggregate cost of servicing the isarket-hel\ debt* It
v i l l ftjjg tend to avoid urume concentration
.-=•-ttt*r>r; debt in the portfolios of the Fed&^.l IHeserv®
t t Since
. i is to be coatinueti support or t)M
2-1/2 per cent iong-tena rat«, i t is essential \
itxiiitted & greater decree of flexibility in
9 -term

Honorable John i« £nyder —• 3
rates. I t is not possible to exercise & flexible anna
taiy policy vith tvo pegs—one t t the giiort end and one
at the long end—M :
W*% M frt present*
|« H i DUMMI considerations point tov&ra the desirability
o; refunding the certificates maturing on Maroh 1 into s 1-3/S
per cent l-ye&r certificate or i 13~®onth 1-3/6 mr cent note*
The l a t t e r would make possible tine coaxbin»t.ten
- -;&reh
irlti4Mi into • single issue*
view i\re N '
conviction uhat
.preparation suoulo be initiated nov for the successful pi
11 oiitsdersl Reserve Bsal
cae large MMWfct of
necessary to refund IjilMH maturing or callable through 1952. tf* hope you
v i l l n»d youreelf in agreement vith these vievs.

roui, ?iM CaaixOtHM •


February 9, 1949

Dear Allan:
Reference is made to your letter of February 4> 194-9,
summarizing the views of the Executive Committee of the
Federal Open Market Committee with respect to the problems
of credit policy and debt management developed during discussions of the Committee on January 26, 1949.
I have given careful consideration to the views of the
Committee suggesting the desirability of refunding the certificates maturing March 1 into a 1-3/8$ one-year certificate
or a 13-iaonth 1-3/8^ note. In the light of conditions existing at this time I find isyself unable to agree that the certificate maturing on March 1 should be refunded into a 1-3/8$
security, and I feel that it is too early to decide what
should be done in the refinancing of the certificate maturing
April 1.
It is noted that the Committee suggests that the present
System policy •with respect to bids for bills and purchases
and sales of bills be continued. As you know, I have had
some apprehension concerning the gradual rise in the bill
rate, but understand that it will be the policy of the Federal
Reserve to exercise a high degree of caution so as to enable
the Treasury to continue the refinancing of the floating debt
at the current one-year rate of 1-1/4$ until such time as a
different rate can be mutually agreed upon.
¥ith respect to a program for the redemption of maturing
Treasury bills during the latter part of March and early April,
I am in general agreement that Treasury bills be redeemed as
the Treasury balance and market conditions permit, but I would
prefer to continue the present policy of considering Treasury
bills on a week-to-week basis and making our decisions accordingly.
It seems to me we should permit more development in the
present factors affecting debt management before making any substantial changes in our refunding operations or to move to higher
levels for the one-year rate. The April 1 maturity of certificates

-2amounts to only $1 billion, or thereabouts, and there is no
further maturity until June 1. In a few months we can better
judge the course of events with particular reference to the
legislative program which might be enacted, including the
action which the Congress may take in connection with the
President's recommendation for increased taxes. We will then
have a much better base upon which to plan our operations
covering the period from June through the balance of the year.
In line with these views, I aa reluctant at the present
time to use the cash balance to retire any of the System's
holdings of certificates maturing on March 1, and would prefer
to have the System exchange its holdings of this maturity.
Sincerely yours,

(Signed) JOHN ¥. SNIDER

Secretary of the Treasury

Mr. Allan Sproul,
Vice Chairman,
Federal Open Market Committee,
Federal Reserve System,
Washington 25, D. C.