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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.

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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