View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

The Executive Committee of the Federal Open Market Committee, at
its meeting held on July 28, I9I4I4., discussed the results of the Fifth War
Loan Drive, giving particular attention to suggestions that might be made
for further improvement in performance during the Sixth and succeeding drives.
While recognizing the substantial accomplishments in increasing sales of
Government securities to nonbank investors since the First War Loan Drive in
December 191*2, the Committee is concerned about the large expansion in bank
credit, the growth in speculative purchases, and the methods of indirect purchases of securities by banks that accompanied the recent drive. It is feared
that these developments, which no doubt were profitable to those who evaded
the rules, will lead to further evasion in the future, unless some simple and
definite yardstick is provided for limiting subscriptions that can be applied
when subscriptions are initiated. Under conditions that existed during the
past drive, the Reserve Banks, had no basis, except in the case of dealers and
brokers, by which to impose effective and uniform policing of subscriptions
and had to rely primarily on the commercial banks, inasmuch as the only subscriptions subject to policing were those that involved bank loans* It is
the opinion of the Committee, therefore, that additional steps should be taken
to curb undesirable practices and to increase the pressure for sales to nonbank
investors, to the end that the proportion of the debt going to the banking
system, particularly indirectly, may be further reduced.
At weekly reporting member banks, total loans on and investments in
Government securities between June 7# the reporting date preceding the drive,
and July 12, the reporting date following the drive, increased by 6.7 billion
dollars* This total comprised 1±*9 billion dollars of purchases of Government
securities, 5l±6 million of loans on Government securities to brokers and dealers,
and 1*3 billion of loans on Government securities to others* A substantial
part of the increase in bank investments and of the loans on Government securities to brokers and dealers represented securities that were sold in the market
by nonbank investors desiring to increase their subscriptions in the drive.
A considerable part of the loans on Government securities to others represented
subscriptions that were made for the purpose of quick resale or to carry at a
profit* In addition, there is evidence that a number of banks arranged with
their customers, officers, directors, or affiliated corporations to place subscriptions during the drive, with the understanding that after the drive the
banks would purchase the securities thus obtained* The loans that made possible
these latter transactions are in direct contravention of the Treasury1 s request
with respect to bank loans for the purchase of securities during the drive*
While no data are available as to the exact extent of these speculative and indirect purchases, it is evident from the figures of reporting member
banks and from reports of sales in certain categories that such purchases were
not only widespread but reached exaggerated proportions in certain localities*
In eight States, sales of Series E bonds ranged between 83 and 121 per cent of
quotas, but sales of other securities to individuals, partnerships, and personal
trust accounts were disproportionately large, reaching more than three times the
quota in Georgia and between two and three times the quotas in Alabama, Florida,


- 2 -

Kentucky, Maryland, Mississippi, Oregon, and Tennessee* Such comparisons,
together with knowledge of practices carried on in certain cities, created
much dissatisfaction on the part of bankers and other members of the War
Finance Committee organization and so impaired the usefulness of quotas•
Bankers who respected the Treasury's request and made no speculative
loans and no special subscription arrangements with their customers or with
others feel that they were placed at an unfair disadvantage in relation to
their competitors who engaged in such practices. They resent purchasing
securities at a premium from speculators when their competitors by virtue of
prior arrangements have obtained the interest on loans, obtained the use of
war loan deposits, and purchased the securities at or near par« Unless the
Treasury takes strong steps to eradicate such practices, it is likely that
other banks will follow them in the next drive, and sales organizations in
communities that reached their quotas the hard but the sound way may be
tempted to adopt, the easier method. Few bankers would object to restrictive
measures if they were satisfied that these measures were being applied uniformly.
With this background in mind, the Executive Committee suggests
consideration of the following measures to improve the situations
1. That the Treasury appeal more strongly than heretofore for the
whole-hearted cooperation of commercial banks in complying with Treasury
wishes regarding loans on securities offered in the next drive and that the
Treasury at the same time condemn the undesirable practices that developed
during the Fifth War Loan Drive and indicate that in the future any subscriptions not entered in accordance with the Treasury's request will be subject
to rejection.
2. .That subscribers for market issues, other than brokers and
dealers, be required to make a down payment of 25 per cent of their subscriptions from existing funds when entering subscriptions that involve bank loans.
Policing .of subscriptions from investors, other than brokers and dealers, by
the Federal Reserve Banks is probably physically impossible because of their
volume and timing when the drive technique is used. The only practical way
to police or limit them, therefore, is at the commercial banks before they are
entered and paid for. This method in any case would cause the least resentment • Since it is only those subscriptions involving bank loans that are
subject to policing, it is the feeling of the Committee that the requirement
of 25 per cent down payment will serve naturally to reduce speculative subscriptions and to bring about uniform action by the banks in all parts of the
country. In this connection, banks should be required to certify on the
subscription form that at least 25 per cent of the amount of each subscription has been paid in cash without borrowing from the certifying bank for the
purpose and that they have no beneficial interest in such subscriptions.
3. That the Treasury again request the Reserve Banks to police
subscriptions from brokers and dealers and that the Treasury provide a more
specific yardstick, one that can be readily understood and uniformly applied.


- 3 -

I4.. That a partial-payment plan be inaugurated and the lowest
denomination of marketable bonds be reduced from $500 to $100 in an attempt
to increase subscriptions from permanent investors* These jieasures would
also reduce the demand for securities between the drives and meet the reported
demand from an increasing number of investors who would prefer to purchase
marketable bonds rather than add further to their holdings or regular current
purchases of Series E bonds•
5« That the number of issues offered in drives that are available
for bank purchase after the drive closes be reduced. A substantial part of
the speculation during the Fifth Drive arose from the fact that the basket
included three issues available for bank purchase after the drive closed.
6* That the use of war loan deposits above a minimum uniform percentage be denied to all qualified depositaries who ignore the Treasury's
request concerning speculative loans.
7» That consideration be given to a return to the practice of
offering securities directly for commercial bank subscription. It is just as
inflationary for banks to acquire securities indirectly as directly. If the
indirect method serves to reduce bank purchases, it should be continued. If,
howeve.r, it does not so serve, it would be preferable again to offer securities directly for commercial bank subscription. Banks might be permitted,
as after the Third Drive, to purchase a limited amount of securities shortly
after the close of the drive, when their excess reserves are large. Such
purchases should serve to reduce the amount of speculative subscriptions
from nonbank customers, since the secondary demand would be reduced. The
corporate but not the individual quota should be reduced by the amount of the
offering for direct bank subscription.
8. That trading in the marketable issues included in the drive
be postponed until 15 days after the close of the drive.
9. That the Treasury make no increase in outstanding bills during
the drive. Increases in outstanding bills are taken by the Federal Reserve,
thereby adding to excess reserves, and consequently stimulate bank purchases.

August 11,