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Chairwan Socles
IM If. Pi««r
i s A r«Tliion of th« swwrandum on short%mm rfOT«rn»*ct ••ouriti«§ along tho lines that you


Host of the bank* in Hsw York City and Chicago and some batiks la other
large cities M « hold no more bills than thoy wish to bold for sorting day-to-day
adjustments in thoir reserve positions. In tho absonoo of any ohango la tho
situation. it it likely, therefore, that thoso banks will meet thoir noods for
additional reserves largoly by soiling oortlfioatos and other short-ton* seourities. Tho suggestion has boon made that tho Treasury increase tho wookly of for ing
of bills in Gtimt to onablo tho System to oontinuo to provide reserves by purchasing bills* In view of tilt lack of demand ffcr bills at 3/& of ono per oont,
however, It would bo necessary In this OTont tor tho Systoa to arrango far dealers
and banks to place tenders each week far la excess of their needs and to tall tho
bills immediately to the System. Suoh a solution to tho problem would only
aggravate tho serious difficulties sow being encountered in obtaining sufficient
bill tenders eaoh week.


The only really adequate solution to tho problem Is for the Treasury to
adopt ono of tho proposed methods of increasing the rate on short-1era securities
and thereby to restore those securities to an Investment status. If the Treasury
It unwilling to do so, it should be recognised tliat Treasury bills at a rats of
3/fe of ono par cent are no longer investments but are merely instruments that are
used la adjusting tho reserve positions of basis tor day-to-day fluctuations and
that tho buying rats is really a discount rats* It should bo tho policy of the
System to supply reserves by purchasing bills rather than other kinds of securities. As long as tho System continues to pay largo premiums on certificates,
however, It will continue to purehas© tho oortlf Ioatos that are solid by tho money
market banks* whereas If the yields woro higher outside banks would purchase tho
certificates and either sail bills to tho System or utilise their excess reserves.
It 1« suggested, therefore, that tho System permit tho yields on shortterm securities, Inoludlng certificates, partially tax-exempt bonds, and guaranteeds, to advance to tho level at whioh banks oats Ida of the money ©enters would
purchase sueh of these securities as the mossy msrkot basks soil* Tho System,
of course, would sot permit the yields on those short-term securities to advanoe
so rapidly as either to endanger a loss of confidence Is tho Market, greatly to
increase tits difficulty of obtaining sufficient tenders for the weekly offering
of bills* or to oause a flood of selling of bills to the System* and la no case
would tho System permit any certificates to decline bolow par. It cannot be
said is advance at what yields outs Ids basks would purchase short-term securities
other than bills, but those yields would soon bo determined by tho action of the
market. In this manner, the System for some time could supply reserves by purchasing bills rather than by purchasing other securities at premiums, and it
would sot bo necessary to flood the market with bills* for which there is no
outside demand at present rates.