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BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
Xo

Chairman Socles
Thomas L* S m i t h ^ J 1
)

Date

Member 12,

Subject! Par chase of bonds for
Treasury accounts.

The purchases of bonds for Treasury trust accounts reduce the
surplus Treasury funds available for retirement of marketable debt, dollar
for dollar * That is t a portion of the trust fund par chases is financed
with net receipts which ordinarily would be made available to the Treasury through the purchase of special issues, and the rest is financed by
proceeds from the cash retirement of outstanding special issues*
Therefore it would seem preferable for the System to make all
purchases needed to support bond prices* The effect on reserves would
be exactly the same as if purchases were made for Treasury account# but
additional Treasury funds would be available for the retirement of securities held by the System which are at present being used to reduce the
nonmarketable debt held by Government trust accounts•
Unless all band purchases are made for System Account, it will
not be possible to carry out a program of debt retirement such as that
outlined in the financing outlook memorandum of December h$ 1947* lastead of a possible 8 billion dollar retirement program in the four
months December-March, only about 6 billion could be retired if bond
purchases for Treasury account at the rate of 30 million a day (the figure
has been from 30 to 80 million each day in December) are maintained on
the average during the period* Instead of retirement of ^ billion held
by Reserve Banks, only 5 billion could be retired*
The effect on the retirement program is almost insnediate,
beginning with the failure of the Treasury to retire the recommended
100 million dollars of bills on December 18* The retirement of January 1
certificates held by the Reserve Banks probably can be carried out, but
either no more bills can be retired through January or else February 1
certificates held by the Reserve Banks cannot be retired* We are re*
working the weekly estimates of changes in the cash balance and the effect
of Treasury operations on bank reserves, to indicate in more detail the
effect of purchases for Treasury account through March*