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March 27, 1947,

Chairman Eccles:
Mr. Rouse, Mr. Musgrave and I went to the
Treasury yesterday, and Mr. Bartelt read the
opinion which I had prepared regarding the
legality of exchanges of Treasury bills. We
had a helpful discussion of the subject with
Mr. Bartelt and he_asked that you send a
copy of the opinion over to him with a letter
of transmittal. He said he would take the
matter up with the Treasury^ General Counsel
and then with the Secretary. I attach a suggested letter transmitting a copy of the opinion
to him and a copy of the brief memorandum on
the mechanics of the transaction prepared by
Messrs. Rouse and Musgrave. I may say for
your information that Walter Logan told me
over the telephone that he was in entire agreement with my opinion on this subject.


March 28,

Wbr. Fdvard F. S&rtelt,
Fiscal Assistant
awi *• •*
V ftr4 B a r t e l t i
Qader iftt* o f Mareh 10* Haf?« I s e a t to you a
dat«d February M f 1947^ refardiajf proposed eb«sf«a la Treatm-rj b i l l
p o l i c i e s * 1 s&w e n c l o s e for |NMV iofors&tio-Q. 9. sop^r of &a opiHiQii
of the General Cooasel of the Federal Opes Herket Gofinlttee «s t o the
l e g a l i t y of t l » exehafige fey Federal % s « r f e Banlea of matarliif Tr#»««.i<y
b i l l s for u#w b i l l s AS •*>*IOT3O8©^ i n t h a t aR#f^om-ndtoHj to^etfeer with is.
of & b r i # f g^s^raadum of the mechanics of soeh an






Mr. Eccles, Chairman,
Federal Open Market Committee

March 26, 1947*

Subject: Exchange of Treasury Bills by

From Mr. Vest

Federal Reserve Banks.

In order to simplify the weekly refunding operations of the
Treasury by permitting holders of maturing bills to exchange them for
new issues of bills the following proposal is under consideration:
The Treasury would provide in its circulars or regulations that bills
awarded on tenders could be paid for either by cash or by surrender of
a like face amount of the maturing issues of bills, with an adjustment
for the discount. This privilege would be offered to all holders, including Federal Reserve Banks. In cases whero the holders tendered maturing bills in exchange for new bills the holders (whether Federal
Reserve Banks or others) would receive payment from the Treasury for
the difference between the redemption value of the maturing bills (par)
and the discounted value of the new bills. Where the holders receive a
full allotment, the amount of this payment would be the amount deducted
by way of discount from tho face amount of the new bills ind where the
holders are awarded only partial allotments by the Treasury the amount
of this payment would, of course, include in addition the amount of the
Treasury* bills redeemed and not exchanged.
The question is raised whether this proposal for the exchange,
directly with the Treasury, of maturing bills held by the Federal Reserve Banks for new issues of bills is permissible under the law without counting such exchanges in computing the amount of Government obligations acquired by Federal Reserve Banks directly from the United States

In my opinion, exchanges by Federal Reserve Banks of maturing
Treasury bills for newly issued bills in the manner described above is
permissible under the provisions of the law, and such exchanges do not
have to be counted in computing the amount of Government obligations acquired by the Federal Reserve Banks directly from the United States.
The provisions of section H ( b ) of the Federal Reserve Act authorize the purchase and sale of obligations of the United States by the
Federal Reserve Banks. Such purchases and sales must be in the open market, except that until March 31, 1947 (unless further extended by Congress)
purchases may be made directly from the United States up to an aggregate
amount held at any one time of $5,000,000,000.

Mr. Eccles, Chairman,
Federal Open Market Committee


The question of exchanges, directly with the Treasury, of
Government obligations held by the Federal Reserve Banks for new Government obligations has been the subject of previous legal opinions
rendered to the Federal Open Market Committee. On January 26, 1937,
Mr. Dreibelbis, then Assistant General Counsel of the Committeet
reached the conclusion that exchanges of Government obligations permitted under Treasury circulars may be made directly with the Treasury
for new Government obligations. On October 27, 194-2, Mr, Wyatt, then
General Counsel of the Committee, rendered an opinion to the effect
that obligations acquired through such exchanges do not have to be
counted in computing the amount subject to the $5*000,00^,000 limitation contained in the law, and that this is true regardless of whether
the obligations arc in the form of bonds, certificates, or bills. On
October 30, 1942, Mr. Dreibelbis stated that a plan for replacing maturing certificates was legally permissible under which, while the
holders of maturing certificates have no preemptive rights with respect
to new certificates, those holders who happen also to be successful
subscribers for new certificates were to be allowed to pay for the new
certificates by turning in their maturing certificates; and that this
would likewise apply to an exchange of bills.
I have reviewed and considered the various opinions discussed
above and am in agreement with the conclusions expressed. Without undertaking to restate the considerations set forth in those opinions, it may
be said briefly that the power of the Federal Reserve Banks to make exchanges of obligations directly with the Treasury would seem to xesult
from the authority given the Reserve Banks by section 14(b) of the
Federal Reserve Act taken in connection with their authority under
section 4 of the Act to exercise "such incidental powers as shall be
necessary tc carry on the business of banking within the limitations
prescribed by this Act". Since this power existed prior tc 1942, it
seems clear that it continued to exist after the amendment in that year
permitting Reserve Banks to buy up to $5>000,000,000 of Government obligations directly from the Treasury. That amendment was liberalizing
rather than restrictive and is to be construed accordingly.
A study of the legislative history of the requirement of section 14 of the Federal Reserve Act that purchases be made in the open
market shows that its principal purpose was to prevent the Treasury from
acquiring unlimited new funds by the simple process of borrowing them from
the Federal Reserve Banks without the necessity for fjoinr to the public.
The requirement appears to have been aimed against financing by the Government otherwise than on a free and open market and not against the practice of exchanging obligations previously acquired in the open market.
Under the present proposal the bills obtained through exchanges by the
Federal Reserve Banks would merely be substituted for those which they
had previously purchased in the open market. Thus the proposal would not
violate the primary purpose of the reouirement that purchases be in the
open market.

Mr. Eccies, Chairman,
Federal Open Mnrket Committee.


As a matter of fact, for a number of years pact, both before
and after the amendment to the law enacted in 194-2 permitting direct
purchases from the Treasury up to $>5,000,000,000, Federal Reserve Banks
have frequently exchanged directly with the Treasury certificates, notes,
and bonds which they had previously acquired in the open market for
other obligations of the Treasury of the same par value (or a smaller
par value if partial allotments were made by the Treasury).


The only significant difference between the proposal now under
consideration and the exchanges of Government obligations which have been
made in the past arises from the fact that certificates, notes, and bonds
ordinarily bear interest coupons, whereas Treasury bills are issued on
e disccunt basis. This in my opinion has no effect upon the legality
of the direct exchanges between the Federal Reserve Banks and the Treasury
In the case )f Treasury notes and bends, for example, some such maturing obligations having a certain face an unt hive been exchanged for
Treasury certificates having the same face amvunt but having coupons attached for higher or lower rates of interest than were borne by the
maturing Treasury notes and bonds. In the case of Treasury bills an
obligation having a certain face amount is exchanged for a like obligation having the same face amount if held to maturity, the difference
between the discounted price and the face amount being paid to the Federal Reserve Banks. In e^ch case the Federal Reserve Banks five up a
maturing obligation and receive another obligation of the same corresponding value, subject to an adjustment for interest to accrue in the
future. In neither case does the amount of Government obligations held
by the Federal Reserve Banks after the transaction exceed the amount
of the same type of Government obligations which were previously held
and which were originally acquired by the Federal Reserve Banks in the
open market.
Un'er the present proposal, in response to a request from the
Treasury addressed to Federal Reserve Banks ~nd others for tenders for
new issues of bills, the Reserve Banks would advise the Treasury that
they are willing to accept for maturing bills which they hold other bills
which will have an equal face amount at maturity and in addition a certain amount in cash representing the adjustment for interest. The net
result, if the offer is accepted, is thnt instead of receiving cash for
the entire face amount of their maturing; bills Federal Reserve Banks
would receive in exchange a small amount of cash representing discounted
interest together with new Treasury bills having a face amount equal to
the face amount of those turned in.
The fact that the Reserve Banks bid for the new securities does
not in my judgment affect the fact that the transaction is a legally permissible exchange. The bid is merely a statement of the .amount of the
adjustment for interest which the Federal Reserve Bank is willing to

Mr. Eccles, Chairman,
Federal Open Market Committee
accept. It affects the amount of the cash T hich the Reserve Banks
receive from the Treasury, but it does not affect the face amount of
the bills received. The exchanges which have been made in the past
have sometimes involved turning in by the Federal Reserve Banks of onetype of obligation and the receipt by them of another type of obligation.
Sometimes the obligations received have differed as to maturities or as
to rates, or both, from the same kind of maturing obligations delivered
to the Treasury. Thus the fact that, as a result of a bid, the bills
acquired in exchange may bear a different rate of discount from those
turned in does not bring any new element into the situation from a legal
standpoint. Where bids are used the Reserve Banks make the offer;
where coupon issues are exchanged the Treasury makes the offer. Whether
there is r.n exchange of bills or of coupon securities and whether the
exchange is made pursuant to an offer by the Federal Reserve Banks or
pursuant to an offer by the Treasury, the Reserve Banks would in no case
receive a greater face amount of obligations than the face amount of the
maturing obligations which they turn in to the Treasury.
It seems clear from this analysis of the transaction that an
operation involving a bid and an adjustment by way of a discount is just
as much an exchange as is an operation involving obligations with coupons
attached. The practice of exchanging obligations with coupons attached
has prevailed for years past, and the fact that such exchanges are made
was reported to Congress as early as 1937. For the reasons stated I have
reached the conclusion indicated above that the proposal involves a
legally permissible exchange.

Mechanics in connection with new issues
of Treasury Bills on "exchange" tenders.

Under this plan the Treasury would offer weekly a fixed
amount of a new issue of Treasury bills for which bills awarded on
tenders could be paid for either by cash or surrender of a like face
amount of the maturing issue of Treasury bills. In cases where the
investor tendered the maturing issue for the new issue, the investor
would receive payment from the Treasury (through the Federal Reserve
Banks) for the difference between the redemption value of the maturing
issue (par) and the purchase price of the new issue.
New issues of Treasury bills would be sold on a discount
basis under competitive bidding as in the past. No preferential
allotment would be made on tenders for which an exchange is to be
made by surrender of a maturing issue. Full allotments for small amounts
on a fixed price basis could be continued.
Tenders for new issues of Treasury bills may be entered by
the System Open Market Account, and, according to an opinion by General
Counsel of the Federal Open Market Committee, awards of an amount not
in excess of maturing bills held by the Federal Reserve Banks may be
acquired directly from the Treasury without coming under the $5,000,000,000
statutory limitation for direct purchases from the Treasury, provided the
new bills are issued against surrender of the maturing issue of Treasury
When it is decided to discontinue the buying and repurchase
option on bills, bills held in the option accounts would be transferred
into the system account in the course of a 13 weeks cycle.



April 1,

Honorable John i• Snyder,
Secretary of the Treasury,
Washington, B. C,
pear Johns
At today*a meetings the Executive Comaittee of the
Federal Open Market Committee considered the money and
security market outlook and the prospective developments of
treasury finance during tfee current quarter. The Coiffitittee
oonoluded that it would be desirable to utilise funds accumulated in Treasury balances with commercial banks for t&e
purpose of redeeming a*turing bill issues during this period,
in order to counteract excessive ease in the money aarket.
the Coanittee recommends the retirement of 200 million
dollars of uafcuring Treasury bill issues weekly for the next
four weeks* It is also suggested that, if prospects for treasury
expenditures and receipts justify, 100 a&llion of maturing bills
be paid off weekly during the subsequent weeks of lay and June,
in addition to a substantial cash payment on the June 1 certificate issue. In order to make this program effective as a means
of absorbing reserves, funds needed to retire bills should be
obtained through calls on war loan deposits.
If this recommendation is accepted, it is further suggested that the Treasury announce to the public that 200 million
of the following weeks' treasury bill issue is to be redeemed as
part of its program of debt reduction, without announcing in advance a detailed program of amounts and duration of bill retirements. In view of the condition of the market, we believe it
wise to create this element of uncertainty.

Honorable John U+ Snyder

- 2 -

Current estimates Indicate that a program of this
kind would leave the Treasury with an adequate balance at the
end of the fiseal year. Asstaaing retirement of 1*6 billion
dollars of bills in the next three months and of 1 billion of
oertifieaies in June, it appears that the treasury balance at
the end of the period will still be well above 2 billion, witfa
war loan deposits of about i billion*
With kindest regards, I am,
Si&eerely yours,

M» S, &eal©s, Chairman,
federal Qpmn larket Goamittee,