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July 19,

Chairman Eccles
L. M. Piser and D. M. Kennedy

One of the memoranda that you sent on Saturday was a copy of a
letter from Mr* M. J. Fleming, enclosing a communication from Mr. Stanley,
President of the Union Trust Company of Pittsburgh, that we had received
a week previously and that contained no recommendation for the inclusion
of certificates in the basket. The other was a memorandum from Mr. Haas,
recommending the inclusion of certificates. We assume that it was the
latter memorandum to which you wished a reply and that the former was
sent only for our information*
We are in agreement with all except the second paragraph of the
attached reply. We believe that the maintenance of the weekly offering
of bills at a billion dollars and the offering of some additional amounts
of certificates would help to bring the market into balance, since it would
tend to adjust the supply to the demand. We do not think that there is
serious danger that banks will shift from bills to certificates on any
large scale; bills are much more useful than certificates for the adjustment of reserve positions, because bills can be sold to the Reserve Banks
at any time for immediate delivery, -while certificates usually can be sold
only for regular delivery and often it takes several days to complete a
transaction. We do not think that corporations are likely to play the
pattern of rates on certificates to a large extent, because (1) they have
held practically all of the issues that they have purchased in previous
drives, (2) their quota in the September drive will be slightly less
than their accumulation of funds since the last drive, and (3) they have
no knowledge of or experience in speculating in the Government security
market, the low rate of interest on Government securities is not particularly
attractive to them, and the slight additional return that they would obtain
would not be worth the bother. While we feel that the issuance of a large
amount of certificates would help to bring the market into balance, we
are in agreement that the proposed 9-month bill would be a better solution*



July 19,


Mr. Haas memorandum of July l j on the Third War Loan contains two rel.
commendations to which exception may be taken. First, the memorandum recommends
that 7/8 of 1 per cent certificates be included in the basket. Second, it recommends that subscriptions from institutions such as corporations and insurance
companies be deferred until September 27.
The first recommendation is subject to the important objection that the
issuance of a large amount of additional certificates would not meet the difficulties
with which we are faced in maintaining the pattern of rates. With corporations
under pressure in the next drive, they would buy new certificates by selling shorterterm certificates. The System would need to purchase a large amount of the shorterterm certificates. If banks purchased some of them, the banks would sell bills to
the System. The process would merely play into the hands of the banks and encourage
them to shift from bills to certificates. With a continuation of the wide disparity
between three-month paper at 3/8 of 1 per cent and 1-year paper at 7/8 of 1 per cent,
the issuance of even many billions of dollars of certificates would not bring the
market into balance. If it were decided to issue 9~mon"fck bills after this became
fully evident, there would be too many issues of certificates in too large amounts
to permit of a ready conversion into the new bill issues.
In addition, the first recommendation is subject to the objection that
a 1-year security is not a proper instrument to include in a drive. Mr. Haas1
arguments are largely on the grounds (1) that most corporations prefer to invest
in certificates rather than in either marketable notes or savings notes and (2)
that if they were sold marketable notes the liquidation of these notes prior to
maturity would give rise to a market problem. It is not difficult to understand
the reason that corporations prefer certificates. They can purchase 1-year certificates at a rate of 7/8 of 1 per cent, hold them for six months, sell them at a
premium that gives a return of between 1 l/8 and 1 l L . per cent on a six-month
investment, and then repeat the process. It is necessary for the System to maintain
a premium on short-term certificates in order to keep them in proper relation with
3-month bills at 3/8 of 1 per cent. The premium and yield on holding certificates
for various periods is shown in the following tables

Period held
At issue
3 months
6 months
9 months
1 year

Yield to





Yield from




- 2 -


Although corporations would prefer to purchase certificates, they can
be sold other issues. Tax savings notes are the fairest of all issues, because
the return to the investor depends on the length of time that the Treasury has
used the funds and no profit is derived from playing the pattern of rates* Even
if corporations purchase longer-term issues and sell them before maturity, the
future market problem is not likely to be serious; the liquidation will be
spread over a period of time, because corporations will find that they will not
need a large amount of cash immediately upon the termination of the war or at
any other one time*
The reasons given for the second recommendation are (1) that the
coincident appeal to individuals and to institutions would be confusing and
(2) that the large early subscriptions from institutions would indicate little
need for strong efforts by the selling group and little need for sacrifice by
individuals. Regarding the first point, there is no reason for confusion, because the selling technique is entirely different for individuals than it is
for institutions. The disturbing effect of large early subscriptions can be
eliminated by establishing separate quotas for individuals and by placing the
entire emphasis on reaching these quotas* Insurance companies and other institutions should be permitted to subscribe from the beginning of the drive.
They have been anxious to invest accumulating funds for some time, and a further
postponement would be unfair to them.