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July 10, Mr. Allan Sproul, President, Pederal Reserve Bank of Sew York, Sew York, H« Y. Dear Mr. Sproul: At Chairman Becles' suggestion I am enclosing for your confidential information a copy of a memorandum outlining a possible Treasury financing program for the next three months• This memorandum was discussed at the last meeting of the Executive Coraaittee, Copies are also being sent to the Presidents of the other Beserve Banks. Very truly yours. Leroy M. Piser, Chief, Government Securities Section Enclosure Digitized LMPUee for FRASER This let s mailed to presidents of all Reserve Banks. July 3, 1942 TREASURY FINANCING Confidential A total of 6 billion dollars wi31 have to be borrowed by the Treasury in the next three months in order to meet requirements. This estimate a3.1ows for receipts from special issues to trust accounts., from war savings bonds} from tax notes, and from the weekly issuance of 300 million dollars of bills. The following specific financing program is suggested for the three-month period: 1. Intermediate Treasury bonds. An offering would be made on or about July 8 of 2.0 billion dollars of Treasury bonds. Various alternatives for this financing are given below. 2. Treasury bills. The weeklv offering would be increased to 350 million dollars for the issue dated July 22 and possibly to 4-00 million dollars for the issue dated August $. Although a substantial part of the offering dated July 1 was taken by the System Account, this may be attributed largely to the fact that the entire 300 million dollars constituted new funds. It would appear preferable to continue the 300 million dollar offering for the issues dated July 8 and 15 and to increase the offering to 350 million dollars for the issue dated July 22 After two weeks at the 350 million dollar level the offering possibly could be raised to .^OO million dollars. By the end of September this source would havv; provided 1.0 billion dollars of funds. 3. Long registered Treasury bonds. An additional open-end issue of registered 2-1/2 per cent bonds would be announced before the beginning of trading in the present icsue en July 6. In order to avoid confusion in the market the date of this issue might be advanced to September 1962-67 or the 60-day prohibition on trading might be eliminated. The books would be opened within a few days after the closing of the books on next v/eek's offering and would be kept open until some time in September. This issue woulo. provide between 500 and 750 million dollars. 4. Short nonmarket-abie Treasury note?. An open-end issue of short nonraarketable notes would be offered as soon as the Treasury can complete the necessary preparations. Thic might be about the first of August. The books would remain open indefinitely, as is the case with savings bonds and tax notes. It seems likely that from 1.0 to 2.0 billion dollars could be raised through this issue by the end of September. This issue as well as the long registered bonds would be actively promoted by the Victory Fund Committees. -25. Certificates of indebtedness. Although the market for certificates is easier at the present time, an issue of 1.5 or 2.0 billion dollars probably could be sold in September. The amount of the offering would depend in part on the amount of funds raised in the interim through the other sources mentioned abova. As the maturity of certificates is gradually increased to a year with a resultant increase in the coupon rate, these issues will become more attractive to commercial banks outside of the large cities and to investors other than commercial banks. This program is tabulated below. The smaller amounts shown in the range would raise 6.0 billion dollars, and the larger amounts would raise 7.75 billion dollars. Period July July - Sept. July - Sept. Aug. - Sept. Sept. Issue Amount (In billions of dollars) Intermediate Treasury bonds Treasury bills Long registered Treasury bonds Short nonmarketable Treasury notes Certificates cf indebtedness Total 2.0 1.0 .5 1.0 1.5 6.0 - .75 - 2.0 - 2.0 - 7.75 Regarding next week16 financing the following suggestions are made: 1. A single issue instead of two issues tion of keeping the number of individual issues at point and would avoid the market difficulties that two issues of different attractiveness are offered would bo in the directhe lowest possible sometLT.es arise when at the same tine. 2. The single issue Blight be of 2, 2-1/8, or 2-1/4. per cent bonds. Sinco there is a large amount of bonds that are due or callable in the period where 2 per cent bonds offered at par would fall, such an issue would have some disadvantage. From the point of view of the Treasury's maturity distribution 2-1/4- ?er cent bonds would be desirable, but since they would bo callable in more than 10 years and would mature in more than 12 years they would be slightly long for commercial banks, who will be the principal market in this financing. One solution would be to offer 2 per cent bonds of March 1950-52 at a slight discount. Such an innovation would be popular with investors, who have a preference for discount issues. One objection would be the possible psychological effect of a Treasury offering at less than par. Perhaps the best solution would be 2-1/3 per cent bonds, which would be callable early in 1951, a period in which there is a relatively small amount of outstanding issues and a period also that would be more suitable for commercial bank investment. —3— 3. If two issues are offered, the second issue might be of notes of about three or four years. Notes with a coupon rate of 1-1/4 per cent would fall in about June 194-5 and would be attractive to commercial banks. Instead of announcing the amount that will be allotted on each issue, it would seem preferable to announce the total amount only and to allot each issue in accordance with the amount of subscriptions received on each issue. 4. It is suggested that subscription rules should not be applicable to this offering, except that full allotment should be given to subscriptions of §25,000 or less. This program is designed to obtain outside of the commercial banking system the largest possible proportion of the required 6 billion dollars. A considerable part of this would be accomplished by the issue of nonmarketable notes. The existing amount of reserves could be made more effective by increasing the demand from smaller banks and an additional amount could be obtained from investors other than commercial banks if the buying rate on new issues of bills should be increased to 1/2 of 1 per cent. This could be done with the least disturbance after next week's offering is subscribed and the secondary distribution largely completed. The rate on issues already outstanding at the time of the increase would remain at 3/3 of 1 Ve? cent. If the program that is adopted should result in a substantial amount of purchases b/ conmorcial banks, it would appear necessary for the System Account to purchase a substantial amount of securities or tor the Board to reduce the reserve requirements of central reserve city banks. From the point of view of reducing the inflationary effect of Government financing it woula appear preferable to offer all of the various types of securities mentioned in che early part of this memorandum. The Victory Fund Committees would actively promote the sale of these securities. The suggested increase in the bill buying rate would be another anti-inflationary factor. After all methods of reaching investors other than commercial banks had been tried and the largest possible amount of funds obtained from these investors, it would then be possible to determine the amount of securities that it is absolutely necessary for commercial banks to purchase. In that event a program could be developed for whatever open-market operations, or reduction in reserve requirements, or both as would be necessary to assure the success of the war financing with the smallest possible inflationary effect.
@FedFRASER