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THE UNDER SECRETARY OF THE TREASURY
Washington

January 17, 1942

Dear Ifarriner:
We in the Treasury have been giving some thought to a
question of a special security for the purpose of absorbing
some of the idle balances that will be created by corporations
and state and local governments as a result of the application
of priorities, allocations, and other controls. I am enclosing
herewith several copies of a memorandum discussing this proposed special security with a schedule of redemption values
and yields for the first five years• Thereafter it would bear
1-3/4 per cent interest payable every six months*
I shall appreciate it if you will go over this with your
people and let me have your suggestions and criticisms. You
can either do this in writing or we can have a conference on
it within the next x^eek.
Sincerely yours,
(Signed) D. W, Bell
Under Secretary of the Treasury
Honorable Marriner S, Eccles,
Chairman,
Board of Governors of the
Federal Reserve System,
Washington, D. C.




Proposed Special Security for the Purpose of
Absorbing Idle Business Balances
It is claimed in some quarters that funds saved
business enterprises because of deferred maintenance,
reduoed inventories, inability to reinvest depreciation
and depletion reserves, and inability to make plant extensions will provide a major source for financing the
war effort. The amount of these funds has probably been
exaggerated* To the extent that such funds are saved,
furthermore, they may be devoted to reducing bank loans,
retiring other indebtedness, etc., and so will be available to the Treasury only through the sale of securities
to banks or to persons or corporations other than the
business enterprises making the savings* Nevertheless,
it seems that idle business balances may prove a sufficiently important source of funds to Justify offering
a special type of security for their investment* Suoh a
security would also be suitable for the investment of
idle State and municipal, and, to some extent, personal
balances.
In order to provide a suitable investment for funds
of the character discussed, a special seourlty should,
from the standpoint of the investor, be liquid, free from
market risk, and bear a satisfactory rate of return* From
the standpoint of the Treasury, it should be readily callable, so that it may be retired or converted into more
permanent forms of debt as soon as practicable after the
conclusion of the war emergency.
The proposed security would mature in ten years* It
would be issued at 93#96, and interest during the first
five-year period would consist exclusively of a gradual
increase in its value to 100 at the end of five years*
This is equivalent to interest at the rate of 1-1/4- percent per annum compounded eemiannually if held for the
full five years. During the second five-year period
current interest would be paid semiannually at the rate of
1-3/^ percent per annum. The average return, if held for
the full ten-year period, would thus be 1-1/2 percent• •
This is, of oourse, merely the simple average of
1-1/4 percent per annum (received during the first five
years) and 1-3/4 percent per annum (received during the
second five years). Making full allowance for the compounding factor, however, the average return, if held
for the full ten years, would still be 1*49 percent.




- 2 The security would be redeemable, at the option of
the holder, on three months1 notloe at any time six
months after date of issuance. During the first fiveyear period such redemption would be at prices corresponding to a scale of yields commencing at 1/k of 1 percent per annum if the security is held for one year and
rising by l/g of 1 percent per annum (for the entire
period held) for each additional six months. These prices
and yields are shown in the attached table* They are
somewhat under those on Series 3 savings bonds, which com*
mence at 0*30 percent per annum if held for one year and
rise to 1.51 percent per annum if held for five years.
They are also somewhat below the yields obtainable in the
open market on taxable Treasury notes. This is considered desirable because the proposed securities, unlike
Series G bonds, are purchasable in unlimited amount and,
unlike open market securities, are redeemable on demand.
The proposed security would be callable at the
option of the Government upon three months1 notioe at
any time six months after date of issuance. During the
first five-year period such callabllity would be at an
ascending scale of redemption values corresponding to a
flat yield of 1-1/4- percent for the period held. These
redemption values are shown in the attached table. During the eeoond five-year period the seourity would be
callable at 100.
The proposed security would be non-negotiable and
would be available for sale in unlimited amount to all
persons and oorporations other than banks and insurance
companies. The minimum denomination would be $5,000.

Attachment




Intermediate Redemption Values and Yields of
Proposed Special Security to Absorb
Idle Business Balances

Period held

1/2 year

Yield
for
period
held
0

jo

Redemption
value

Redemption
value if
called b y
Treasury #

9H-.2O

95-1^

1-1/2

"

3/8

9^.14.9

95-73

2

"

1/2

94-. 90

96.33

2-1/2

•

5/8

95-^

96.93

3A

96.09

97-51*-

7/8

96. gg

98.15

l

97-78

9S-76

1J--1/2 «

l-i/g

92-S3

99.38

s

9^.55

iA

1

93-96

1-iA

100.00

100.00

3

VJl

3-1/2

#

•

All values In this column correspond to a yield of
/^ percent for period held.