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Office Correspondence

Ch^mnan Ennlai


Ri.ohayd A- Musgrfnm

Subject: Mr« Wiggins' Proposal on

^ *M*


The following summarizes some developments with respect to the
bill discussion which occurred during your absence.
The Proposal
Mr. Wigginsf aocording to Mr. Sproul1s report on their luncheon
meeting on Ufay 2, indicated that (a) action on bills should be gradual$
(b) an announcement that the buying rate is being disoountinued should be
avoided if possible; (c) changes in bill policy should be such as to
facilitate the handling of the certificate problem later on. Regarding
the certificate rate, Mr. Wiggins expressed concern about the decline
below par in the prioe of outstanding certificates, which would result
if the certificate rate were permitted to rise. Apparently, he objects
to policies which will reduce the price of any coupon security below par.
In applying these ideas, Mr. Wiggins recommends that the Treasury replace maturing three-month bills with six-month bills. I understand
from Mr. Sproul that he told Mr. noggins that the Committee would consider
the proposal and let him know their conclusion.
How it Would Work
The proposal might be interpreted in several ways:
(l) One procedure would be to do all bill refunding with sixmonth bills which would not become subjeot to the option.
This would eliminate the three-month bill after a TDeriod of thirteen weeks. There would then follow a three months period in which no
bills mature, and after this period the volume of weekly maturities would
again be as it is now.
Assuming that the new six-month bills will not become subjeot
to the buying rate at any time, this proposal combines the System's recommendation for discontinuation of the buying rate on new bills with a policy
of substituting a bill maturing six months from issue date for the present
bill maturing three months from issue date. Since both these changes are
desirable, their combination makes for a good plan.
It is doubtful, however, whether this is the plan which Mr.
Wiggins has in mind. It does not get around the need for announcing discontinuation of the buying rate at the outset. At the time the sixmonth bill is introduced, it would be necessary under this version to
indicate clearly that the buying rate will not become applicable to such

- 2 bills even after they have run for three months. If the announcement was
delayed for three months it would be objected at that time that investors
purchased the six-month bills in good faith that the buying rate would
come to apply*
(2) Another interpretation of the Wiggins plan is again to do
all bill refunding with six-month bills but to apply the "buying rate to
these six-month bills when they are within three months from maturity*
The yield of six-month bills at three months to maturity ?/ould
then remain at y/8 per cent. The yield on six-month bills at the time of
issue would be above the y/8 level, but not as much as under (l), since
the bill would become eligible for option at a 3/8 rate after three months,
A flpattern of rates" problem would arise as the banks might make profits
from selling the bills at the three-month point*
This plan merely provides for the introduction of six-month bills
but it does nothing toward unpegging the three-month rate. Rather, the
plan introduces a new rigidity. In the present situation, liquidation of
the option aooount Y/ill take three months after announcement of a decision
to terminate the buying rate on new bills* Under the new system it would
take six months,
(3) A third possibility would be to replace only a fraction of
each maturing bill issue with six-month bills, which would not become
subject to the option, and to continue the issuance of some three-month
The buying rate would then continue to apply to three-month
bills but there would be an announcement that it ^ldll not became applicable to six-month bills, even after they have only three months to run.
Under this system, the three-month bills might be permitted to
run out more gradually; that is, the option privilege could be abolished
over a period of six or twelve months rather than over a period of three
months as under plan (l)* If, for instance, l/2 of each maturing threemonth bill issue was refunded in six-month bills and l/2 in three-month
bills (while all maturing six-month issues are refunded in six-month
issues) the amount of three-month bills outstanding would decline within,
three months to about 7*5 billion and within six months to 3,7 billion,i/
T/ithin a year the three-month bill would have virtually disappeared* Also,
the fraction of three-month bills replaced with six-month issues could be
increased monthly, to speed up the transition.
Under this system there would be bills with three months to
maturity, some of which would carry the option privilege while others would
not* This situation would develop after three months, and continue until
l/ The figures assume an initial bill level of 15 billion and no change in
the amount outstanding*

the three-month bills had disappeared. There would be a rate differential
between the two, measuring the advantage of the option. This might create
some confusion in the market, but this difficulty is not such as to rule
out the plan. Even now there are certificates, notes and bonds 1r.h three
months from maturity idiich have no option; to avoid confusion, the name
of the three-month bill might be changed to "option billft.
The Wiggins plan as interpreted under version (l) is "wholly
compatible with the views of the Open Market Committee*
Version (2) is not acceptable. Introduction of a six-month
bill is desirable but not if it is to be given the option privilege.
Version (3) looks complicated, but may be acceptable. If the
main effect of the bill action on the market is in the uncertainty which
it creates, much might be said for stringing out such action as proposed
under (3). "While (3), like (l), requires an announcement that the buying
rate will not apply to six-month bills, such announcement might be more
acceptable to Mr. Wiggins in this connection, where three-month bills
subject to option are continued for some time. This version also appears
to be the one "which Mr. Bartelt has in mind.
Relation to Certificate Rate
The introduction of a six-month bill might make it possible
gradually to replace certificates by bills. After the certificates have
disappeared, the short-term instrument would then be in the form of a
discount security. It would then become possible to permit a moderate
increase in the short rate without permitting the price of any coupon
security to decline below one hundred. The coupon rate on notes and bonds
is sufficiently high so that a slight rise in short rates would not reduce
their prices below par. However, a rather drastic refunding program would
be necessary to transfer the bulk of market-held certificates into bills.
At best it could be completed in one year. Considerable time would have
to lapse before an increase in the short rate would become possible.
In other words, if the dictum of "no price of coupon securities
below partT is subscribed to, it will be very difficult to raise short
rates. The substitution of a discount sectarity at the short end offers
a technical way out, even though the market (according to Mr. Rouse) would
dislike it.

Mr. Thomas has seen this memorandum and I am sending a copy to
Mr« Rouse, Mr. Thomas is going to be at the New York Bank on Friday and
might discuss the matter further.