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July 9,
Cfaainmn Secies
Allan Sproul

Statement of views of
Allan Spreul, edited by Robert House,

The reasons advanced, heretofore, suggesting the desirability
of ® increase in rates on treasury certificates of indebtedness and of
introducing some flexibility into the short-term rate structure, "became
m®re compelling in the face of the refunding problem facing the Treasury during tim fisaal year, ISitf-ltB* j¥a«tat estlinates indicate that
duriag the f i r s t six months of the fiscal year, surplus eash will not
permit substantial debt retirement other than, the usescchaaged portion
of maturing debt* Meanwhile, the tendency of banks to reach for longerterm securities, and the downward pressure cm long-term interest r a t e s ,
which are the inevitable consequences of maintaining the wartime pattern
of short-term rates, continues. Tfe# forasr i s obscured in the figures by
changes in nisturities with the passage of time, but i t i s apparent In market
transaction* (Baaed on the increase of mar 350 million dollars in holds of Treasury bonds by reporting banks la 101 cities since April 9*
i t i s estimated that holdings of Treasury bonds by a l l banks increased between 500 million and 600 million dollars during that period* )
fhe l a t t e r , that i s , the downward pressure on long-term, interest r a t e s ,
has been obscured by Treasury sales* but the sale of more than 750 million
dollars 2 l/2 per cent restricted issues and 170 million bank eligible
issues since April 10 served to more prices down only l/2 t o one point
for the restricted issues and less for the bank eligible issues* Tkm
action of the market indicates that t h i s loss would be quickly recovered
if sales diminish or cease*
Because the treasury will have to refund a substantial amount
of notes and bonds during the fiscal year now beginning, i t i s faced
with the necessity of deciding whether to perpetuate t h i s undesirable
situation, with i t s encouragement to debt monetiiation, for a further
extended period* A refunding i«su© of notes or intenasdiaii©' bonds
priced on the present rate patterzi would free*« that pattern iate the
rate structure for another terra of years, probably express itself through
an excess and unwanted premium on the new issues* Similar refunding
issues priced on the present B&rket which, in terms of yield i s below the
rate pattern, would actually impose a reduction in that patters* Hefunding of maturing notes and bonds with certificates, at present r a t e s ,
would intensify existing undesirable pressures* It seems to ne almost
imperative, therefore, to narrow the spread between short-and long-term
rates and t o introduce some flexibility and uncertainty into the rate
structure 'if the refmading program i s to be g«&red t© a sound policy ©f
debt management and credit policy* The way t o proceed, i t seems to m&9
is iriaediately to adopt a program which will consolidate outstanding
issues of certificates into four or six issues, with a gradual increase
in the rate* With such a program* refunding into certificates should
be possible, at least until a better rate structure has developed*