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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. )<•