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From

Aubrey G. Lanston.

To

Mr. Morgenthau.

The problems confronting the Federal Deposit Insurance Corporation,
and those problems which the Postal Savings System may some day likewise have to face in a greater degree than at the present time, are
similar to the problem confronting the Treasury in the handling of the
investments and dispersements under the Adjusted Compensation Act.
Both the Federal Deposit Insurance and the Postal Savings are confrSnted
with the problem of investing large amounts of funds and the possible
necessity at some future date of selling large amounts of securities*
The Postal Sa Tings System has an alternative in that they may, instead
of selling securities, call deposits from banks.
Practical experience
in handling collateral of Postal Savings Depositaries has given me a
strong conviction that any sustained c 11 by the Board of Trustees
of their deposits in banks would necessitate a similarly steady offering
of securities on a declining market.
I do not share the belief
of Mr. Eilenberger and Mr. North that the present level of deposits
in the System will not meet a steady decline at some future period of
greater confidence and higher business activity.
Attached hereto is a copy of a statement made January 2, 1925, by former
Secretary of the Treasury Mellon regarding the Adjusted Service certificate Fund provided for in the Adjusted Compensation Act and the manner
of handling the investments of that fund.
Siiailar handling was
eventually given to several other funds in subsequent years, the Civil
Service Retirement and Disability Fund, the Foreign Service Retirement
and Disability Fund, and the Can?JL Zone Retirement and Disability Fund.
I suggest that the method used in handling the Adjusted Service Certificate Fund and the other funds be followed for the purpose of investing
the available balances of Federal Deposit Insurance Corporation and the
Postal Savings System.
In order to simplify the current holdings of these funds and to provide
a clear and simple picture for future handling (assuming it to be legally
possible and mutually agreeable) that the current holdings of U. S.
Government obligations be sold to the Treasury Department at the market
and that the Treasury Department in turn sell to these two funds an
equivalent amount of special Treasury certificates with such an interest
rate as will meet the requirements of the two funds.




It is obviously impossible for the Federal Deposit to pay dividends
as required by the Banking Act of 1953•
The United States, through
the Secretary of the Treasury, is the largest dividend-receiving
stockholder of the Corporation.
4$ Treasury certificates given
to the Federal Deposit Corporation in an amount up to 90$ of its
available funds as of April 15, 1954, would permit the Corporation to
cover its estimated annual expenses of $3,000,000 and pay a dividend
of B%.
This is 1% below the apparent intest of the Banking Act
of 1933.
Receipt of dividends at 5% by the Treasury from the
Federal Deposit would reduce the cost of the Treasury's interest
rate to this fund to approximately 3.07/5.
The Postal Savings System pays to its depositors 2% and receives
from the banks Z^% so that an issuance of special certificates to the
System of Z^% would very probably cover their needs.
The rate on
this certificate, however, could be better determined afiter further
consultation and consideration by the Board of Trustees•
One of the purposes of the Act creating this System was purported to
be the establishment of a place of safekeeping for funds desiring
maximum safety which otherwise might be hoarded and the return of
those funds through the functioning of the System to the territories
from Yfhich the funds came in order that the credit needed for industry
in the various localities would not suffer restriction.
From a
practical viewpoint, it is my opinion that the funds return largely
to the financial centers and not to the communities from which they
were obtained as a greater portion of the banks (mj opinion only)
use the deposits given them by the Bfl*ard of Trustees to purchase the
security which forms the collateral behind the deposits of the System.
Cash funds received by the Treasury in payment cf special certificates would more readily find dispersement generaly among the
communities coming within the intent of the original Postal Savings
Act through the current expenditures of the government under the
recovery program*
The actual exchange of outstanding Treasury bonds held by the
Federal Deposit and the Postal Savings for special certificates
would not increase the funded debt of the government.
Should it be
legally possible to keep a certain saall portion of these bonds
alive in safekeeping, they could be sold to other trust funds, such as
Indial Affairs who is administered by other than the Secretary, at
prices in between the bid and asked of the market at such time as
the particular fund would wish to make investments*
"The Government
Life Insurance Fund, as an example, was forced to rim the market up
against itself in a small measure yesterday on an order to buy
$1,500,000, long term, high coupon bonds.
All of the order has not
yet been completed although it was initially given February 14.
Treasury Special Certificates might in the future be given this fund
as well as the other two.




Cash funds obtained from the Federal Deposit and the Postal Savings
would reduce by an equal amount those funds to be obtained in the
open market from new issues*
Due to the extent that funds are withheld from investment for market
reasons, there would seem to be some justification for Mr* Eilenberger!s
feeling that the Board of Trustees might be subject to criticism in
view of the original purpose of the Postal Savings Act,
Should it be, in your opinion, more important to have the current moneys
of the Federal Deposit and the Postal Savings available for support
purchases rather than a reduction in the amount of new money to be
borrowed, then through the issuance of special certificates the moneys
obtained at least from the Federal Deposit Corporation could be used
purely for that purpose without prejudicing the interest of the two
accounts.
To what extent moneys obtained from Postal Savings could
be withheld for the same purpose would depend upon the weight given
to the necessity of placing Postal Savings deposits immediately
in circulation, as previously mentioned.
Full consideration of the
interest of the two accounts and of the market interests of the
Treasury under the present system cannot be made to coincide.
The following might be considered as a policy matter by the Board of
Trustees of the Postal Savings System.
In October, they stopped
giving out to banks new deposits, in view of the desire of the President
that funds be made available for direct investment in the government
market.
In December, placing of deposits in banks was resumed,
as the Treasury Department was unable to make investments fast enough
to prevent the accumulation of large amounts of working capital on
which the System was paying 2% interest to depositors and receiving
no return*
Temporarily, the Board might again cease giving out
new or additional deposits to banks and purchase from the Treasury,
as cash balances accumulated, additional special 1?reasury certificates.
The principal objection to the building up dt large cash balances
by the System over and above the interest loss, was that the intent
of the Act, as mentioned, was to get the money back into circulation.
Expenditures of the government from the general fund to which the
proceeds from the sales of these special certificates would be credited,
as also previously mentioned, would probably place the funds more
efficiently in circulation from the benefit of trade and industry
throughout the country.