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September 27, 1946

To:

Chairman Eccles

From:

David M. Kennedy and
Richard A. Musgrave

As an alternative to eliminating the buying and repurchase rate on Treasury bills and permitting the rate to rise to
say 3/4 pe** cent, you might want to renew your proposal for a
single 9-££>nth, 3/4 per cent security to replace bills and certificates. Such a security would have many advantages:
1. It would not increase the level of interest
rates since it would be priced at approximately the
market.
2. It would simplify short-term financing
through substitution of a single for two issues,
which in effect are both demand obligations.
3* It would simplify open market operations
making it unnecessary to support two short-term rates.
The System would then maintain only the 3/4 per cent
and 2 1/2 per cent rates and permit the rest of the
market to take care of itself.
4* It would provide flexibility to banks in
making adjustments for deposit fluctuations.
5. It would reduce bank earnings by a small
amount.
The proposal could include provision for exchange of the
System's holdings of 3—^onth Treasury bills into a special low-rate
security. Even without this provision the cost to the Treasury
would be only about 2 million dollars more per year than under the
present 3/8 per cent bills and 7/8 percent certificates.




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