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March 25, 1944.
Hon. M. S. Eccies, Chairman,
Federal Open Market Committee,
Board cf Governors of the
Federal Reserve System,
Washington 25, D. C #
Dear Marriner:
Enclosed is a tentative draft of a memorandum on Treasury Financing and Credit Policy which I thought it would be helpful to have before us
at our discussion meeting on Tuesday. It may be that, by the time I get to
the meeting, I shall have changed some of my ideas, but I am convinced the
general approach is the right one.
lours sincerely,

Sproul, Vice Chairman,
Federal Open ivlarket Committee,


1. The main objectives of Treasury financing policy and credit administration still are borrowing as much as possible from non-bank investors while maintaining an interest rate structure with a maxi mum market borrowing rate of 2 l/2$.
2. There is no question of our ability to maintain the maximum borrowing
rate of 2 1/2%, but we are still measurably short of the goal of maximum borrowing
from non-bank investors* While the Treasury must be certain that it will obtain the
funds needed to finance the war, it should not permit early estimates of receipts
and expenditures, and too gloomy forecasts of non-bank borrowing, to cause it to embrace bank borrowing too much and too soon.
3# Actual developments may depart considerably from the estimates. The
estimate for government expenditures rightly assumes that it will be necessary to
continue the war ^program without curtailment to the end of the year, but once our
invading forces have become established in Europe, this may not be so. Cash Receipts may well be larger than are assumed by the Treasury estimates (for example,
if corporations retain tax notes and use cash to pay taxes) and the amount of securities to be redeemed may be smaller (particularly if a vigorous campaign to encourage holding of Series E bonds, and stressing the advantages of such holding,
were launched). In other words, the estimates have properly assumed the worst, but
that should not mean that the worst method of financing must be adopted before these
estimates have further proved themselves.
A. The estimates seem actually faulty in their conservative appraisal of
possible sales to non-bank investors. The net absorption of government securities
by non-bank investors (exclusive of Federal agencies and trust funds) is placed at
$33,300,000,000 for 1944, compared with #28,000,000,000 for 1943* Without assuming
any improvement in the sales program, or any increase in selling pressure, a figure
$2 or #3 billion higher seems reasonable. The cards are stacked in favor of 1944,
With a drive at the beginning of the year (drawing off funds accumulated in November
and December 1943), and drives scheduled for the middle and for the close of the
yearr so that all funds available throughout the year should be mopped up.
This may be illustrated by comparisons with two previous periods of 12
months which included 3 war loan drives, and each of which end6d with a drive,
although neither began with a drive as did 1944* During the year ending October 31,
1943, which embraced the First, Second, and Third drives, non-banking investors absorbed $34,700,000,000 of government securities. During the year ending February
29, 1944, embracing the Second, Third, and Fourth drives, non-bank investors took
approximately $36,400,000,000. If we do no better than we have in the immediate
past, non-bank investors should buy at least $36,000,000,000 of government securities
in 1944*
5* But we should do better than we have done. According to Treasury estimates, the net absorption of Federal securities Xsj non-bank investors was only
50$ of the net savings available in the October 1943 - February 1944 period, compared with 60$ in May - October 1943, and 65$ in January - April 1943* Another
Treasury estimate is that only about 50$ of the people of the country were actually
solicited in the Fourth War Loan drive. These figures are not good enough. If we
are to prevent an accelerated rise in idle cash, in the form of currency and bank
deposits, we must sell not far from $40,000,000,000 of government securities to
non-bank investors in 1944»

6. Steps should immediately be taken to improve our performance in selling securities to non-bank investors, including:
a. Further strengthening the sales organisation to include a larger,
more active permanent staff, in the States, to promote an increase in
payroll savings, and a larger, more active volunteer mte£f to increase
actual solicitations during drives*
b. An increase in short-term rates of interest, particularly to attract idle corporate funds• Treasury estimates for 1944 indicate that
purchases by corporations will increase very litlle compared with 1943,
yet corporations are known to have large cash balances, in relation to
their liabilities and their holdings of government securities• "When the
Treasury is too niggardly in the rates of interest it pays on its indebtedness the results may be somewhat the same as when borrowing is done
without payment of interest (printing the money) - the money supply
(currency and bank deposits) rises rapidly because the investment of accumulating funds does not appear worthwhile. Net yields, after taxes,
on Treasury bills and certificates, tq corporations, particularly in the
higher tax brackets, are extremely low.
c. Offering market bonds, and 2 1/2% bonds (and 2 l/A% bonds when
issued) of restricted marketability, in denominations of $100, to tap the
small investor market which does not want a registered bond*
d. Offering a general partial payment plan for market bonds, further to
broadedsales toaaall investors, and a special partial payment plan for
market oonds and bonds of restricted marketability for the use of insurance companies, savings banks, pension funds, trusts, etc.
7. It may be that in the absence of a sterner tax program, no larger
proportion of current savings can be diverted to government use, but the attempt
must be made, and made even more vigorously than in the past. If the attempt fails,
recourse can be had to the banks, between the Fifth and Sixth drives, when present
estimates will have been further tested, and when otherwise Treasury balances would
be reduced below what the Treasury deems safe.
3. In the light of these general observations, it is recommended that
there be no direct recourse to the banksjbef ore the Fifth War Loan drive •
9. Fifth War Loan;
Timing: A three to four week drive in June or June - July, at
the time considered best by the sales organization.

Securities: It is recommended that there be offered to all nonbank investors, throughout the drive, the following
(a) Series E, F and G War Bonds and S*£ies C Savings Note
(b) A certificate of indebtedness or a short note
(c) A 7$ bond of 8 - 10 year maturity
(d) A 2 1/2J6 bond of restricted marketability (reopen
the 2 :Jl/2% bond of 1965 - 70.)

10. In lieu of another 7/8^ certificate of indebtedness, a short note
bearing, say, 1% interest, might be preferable. This could be fitted into a
program of readjustment of interest rates, at the short end of the pattern, and
should further broaden the market for short securities among non-bank investors,
particularly corporations whose net return, after taxes, is very small in any ease.
11* In addition, and as part of this general program, a change in Treasury
bill offerings to a U month 5/8$ bill should be made. This would have the advantage of helping to create a more tenable interest rate structure for the war and
immediate post-war period; it might increase somewhat the market for Treasury
bills among banks continuing to hold excess reserves, and among corporations; it
would increase the volume of bills available for purchase by the Federal Reserve
banks; and it would bring in #4 billion of new money to the Treasury.
If it is argued that these bills would flow largely into the hands of the
Federal Reserve banks, and that there is no need fior justification for the Treasury1 s
paying a higher price for such funds than at present, it could be agreed (by the
Board of Governors, the Federal Open Market Committee, and each of the Federal Reserve banks) that the difference in income derived from holding bills, yielding in
excess of 3/8%, would be paid to the Treasury, so long as the earnings of the
Federal Reserve banks are sufficient to cover their expenses and dividend requirements. Treasury financing and credit policy cannot be determined on such grounds.
12. Fear as to the effect of an increase in short-term rates upon the
whole interest rate structure are misplaced. The rate structure is under close
control, but the short end of the structure has already become untenable in practice*
Meanwhile, the very real danger of a further breach in the structure, lies in the
tendency of the banks to reach for the longest term securities available to them,
in order to protect or enhance income, which will eventually force down (not up)
the yield on such securities* The rate of 2 l/2# on long-term securities of restricted marketability is not threatened.

Question has been raised as to the reserve position of the Federal Reserve
banks* We see no need for adjusting the present Treasury borrowing program nor
present credit policy, to take account of the possibility that, at some future date,
the reserves of the Federal Reserve banks might reach the present legal minimum.
Treasury estimates of reserve funds required during the year 1944 total
$8.5 billion* For certain technical reasons this figure appears to be too high,
even on the basis of the Treasury1 s assumptions as to bank and non-bank financing.
And these assumptions make a considerable difference in the outcome for the year.
If no more than $33 billion of government securities is sold to non-bank investors
(other than Federal agencies and trust funds) the increase in member bank reserve
requirements would be about |1*5 billion (not $2 billion as estimated ty the Treasury),
If sales to non-bank investors are increased to |36 billion, the increase in member
bank reserve requirements is reduced to slightly over #1 billion; and if such
sales are $40 billion, the increase is around $500 million* For these and other
reasons, we believe the Treasury estimates of reserve funds required are |1 billion
to $2 billion too high*

The change which this difference would make in the combined reserve
percentage of the 12 Federal Reserre banks, is only about two points, however,
and is really immaterial* The important facts are:
a. That the war financing program'cannot be jeopardized by the
existence of certain minimum reserve ratios, and that there are a
variety of methods by which the situation can be met if it arises•
b. That we should not be diverted fro© the fundamentals of the
financing problem by contesplation of reserve ratios; we must continue
to attack the root cause of declining reserve ratios by taking every
means to check the accumulation of idle funds in the hands of the public increased taxation, increased borrowing from non-bank investors, and
more effective controls over other factor* in our economy tending toward

March 25, 1944-