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* C O N F I D E N T I A L MEMORANDUM To: Chairman McCabe R&S 1578 ' July 15, [' From: Woodlief Thomas The attached tables give information that may be useful as background for your discussion with the Secretary of the Treasury. Table I gives estimates of Treasury cash transactions during the last half of 19^8 and shows the source of funds which the Treasury could use to retire 1.9 billion of securities held by Federal Reserve Banks and thereby absorb 1,2 billion dollars of bank reserves. It appears that the Treasury will have an excess of cash income including debt transactions (aside from the retirement of Federal Reserve held debt) amounting to I4OO million dollars. This surplus, together with reductions of 800 million in Treasury (war loan) deposits with commercial banks and of 700 million in existing Treasury deposits with Reserve Banks, would permit retirement of 1.9 billion of Federal Reserve held debt. Estimates of these transactions by months and of changes in Treasury balances by weeks are shown in more detail in the attached mimeographed tables. Table II shows the effect on bank reserves of the Treasury transactions set forth in Table I, of likely sales of securities to the Federal Reserve by nonbank investors, and of other factors. The surplus cash receipts of the Treasury and amounts drawn from war loan deposits, a total of 1.2 billion, would drain a corresponding amount from bank reserves. Federal Reserve purchases of securities from nonbank holders, however, may supply banks with 1,7 billion dollars of reserves. An additional 200 million dollars may come from gold inflow and other factors. Thus, the Federal Reserve would find it necessary to sell 700 million dollars of securities to banks in order to keep bank reserves from increasing. Table III shows total outstanding amounts of Government securities by types of issues, Federal Reserve holdings, and estimates of commercial bank and nonbank holdings as of June 30, 19U8. Federal Reserve holdings comprise three-fifths of all bills, about one-fifth of certificates and notes, and a small fraction of the Treasury bonds outstanding. Commercial banks hold nearly half of the certificates and notes and over two-thirds of the bank eligible bonds outstanding, Nonbank investors hold most of the restricted bonds, which are all of long maturities, but about two-fifths of their holdings consist of short- and medium-term issues, including bank eligible bonds, bills, certificates, and notes. Their holdings of short-term issues are partly for necessary liquidity purposes, although under the Federal Reserve support policy any issue is liquid. Table IV gives estimates of principal commercial bank assets and liabilities for June 30, 1914-8 and compares estimated changes in the first half of this year with changes in the two preceding half-year periods. There was some over-all credit contraction in the past half year, as in the corresponding period of 19U7» Total loans increased, however, although commercial and industrial loans declined slightly. A seasonal expansion in business loans and further growth in real estate and consumer loans is to be expected in the last half of this year, similar to, if not as large as, the increases that occurred in the last half of 19U8. http://fraser.stlouisfed.org/ Federal ReserveAttachments Bank of St. Louis TABLE I ESTIMATED TREASURY CASH TRANSACTIONS July - December 19U8 (in billions of dollars) Cash income Cash outgo Excess of income Net cash borrowing or repayment of debt Nonmarketable securities Marketable (voluntary redemption of maturing issues) Excess cash available Possible reduction in "war loan accounts 6/3O/I4.8 1.8 12/31/1+8 1.0 Possible reduction in Treasury balance with Federal Reserve Banks 6/30/I+8 1.9 12/31/1+8 1.2 Total available for retirement of securities held by Federal Reserve Banks 20.3 19»U + .9 + .5 - 1.0 + .i+ .8 .7 1.9 Note: Estimates of cash receipts and expenditures are subject to a margin of error that may -wipe out the surplus or increase it considerably. Estimates of changes in marketable debt do not include retirement of securities held by the Federal Reserve* Figures for Treasury balances as of December 31 are arbitrarily assumed; they could be reduced further by retiring more debt. 7/15A8 TABLE II ESTIMATED CHANGES IN SUPPLY OF BANK RESERVES July - December 1914-8 (in billions of dollars) Absorption of reserves through Treasury operations (Excess cash receipts and reduction of war loan accounts as shown in Table I) Reserves available from gold inflow and other factors minus increase in currency in circulation - 1.2 + .2 Federal Reserve purchase of securities from nonbank holders!/ New reserve funds available Necessary Federal Reserve saLe of securities to banks to avoid credit expansion^/ + 1.7 • .7 .7 l/ Estimated volume of sales of marketable securities by nonbank investors to obtain funds for buying F and G savings bonds, as well as for other uses, assuming a continuation of the demand for credit by business, home owners, and State and local governments. It is estimated that these demands will aggregate between k*5 &n(* 5 billion dollars, of vdiich about 3 billion may be met from new funds obtained from the public and the remainder by selling securities to the banking system. (See also footnote 2./,) 2/ To the extent that commercial banks purchase securities sold by nonbank investors, the amounts that the Federal Reserve will need to buy will be correspondingly reduced. No allowance is made for reserves that banks may need to meet an increase in amounts required resulting from any expansion that may occur in deposits. 7/15/U8 TABLE III 1/ ESTIMATED OWNERSHIP OF FEDERAL SECURITIES BY TYPE OF SECURITY AND CALL CLASSES, JUNE 30, 19/48 (Par values in billions of dollars) Type of Security Investor Classes Total - All F. R. ' Commercial Banks investors banks Marketable securities, due or callable: A. Within 1 year: 1. Treasury bills 2. Certificates of indebtedness Treasury notes 3. Treasury bonds 5. Total u. B. C. D. S. Monbank investors 13.8 8.6 2.5 2.7 22.6 U.6 2.0 10.3 7.7 11. k 2.2 .1 5.2 1.6 .5 19.^ 1575 1 * 5 years: 1, Treasury bonds 14.6.1 2.6 32.9 10.6 5 - 1 0 years: 1. Treasury bonds 10.5 .5 6.5 3.5 k.3 JU9.6 .3 2.7 2.9 1.3 1.1 21. u 63.2 75-8 After 10 years: 1. Treasury bonds a. Bank-eligible b. Bank-restricted c. Total Total marketable securities Nonmarketable securities: A. Savings bonds 53.9 I6O.3 53*3 52.1 B. Savings notes U*h k.h C. Special issues to Government agencies and trust funds 3^2 30.2 D. All other E. Total nonmarketable securities 92.0 Total, all securities k> 1 252.1+ 3.5 — 21.k 1.8 90.2 65.O 166.0 * Less than 50 million dollars. l/ Gross public debt and guaranteed obligations. 7/15A8 TABLE IV SELECTED ASSETS AND LIABILITIES OF ALL COMMERCIAL BANKS (In billions of dollars) Item Loans and investments, total Loans, total Commercial, industrial, and agricultural Real estate Consumer For purchasing securities Other 2 / Change June 30, December 31» 1st half 2nd half 1st half 19U8 1/ 19U7 19U8 3/ 191+7 191+7 llli.l H6.3 -2.2 +3.5 -1.2 Jjg>6 38.1 +1.5 +U.1+ +2.6 19.5 10.3 6.2 2,2 1.1* 19.7 9.3 5.7 -0.2 +1.0 +0.5 +0.2 —• +3.4 +0.9 +1.1 +0.9 65,2 9.3 69.2 9,0 -4.0 -1.3 +0,5 -1+.2 +0,3 3U.0 37.5 -3.5 +U.8 -1.5 82.7 87.1 35.2 -u.u +0.5 +5. 0 -1.2 +1.0 1.5 +0.6 -2.0 +0. +0. 1 +1. 3 2.0 l.U +1.1 +0,8 -0.8 -0.1 -0.3 Investments U. S. Government securities Other securities Cash assets +0.1+ Deposits Demand deposits, adjusted Time deposits U, S, Government deposits Interbank deposits 35.7 2.1 11.0 13.0 u -1.7 -1.0 1/ Partly estimated* «?/ Includes loans of noninsured nonmember banks, amounting to about 5^0 million dollars. 7/15/1+8