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September 27, 1946


Chairman Eccles


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
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
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.