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dkc IQG-2637 April 1, CONFIDENTIAL BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Division of Research and S t a t i s t i c s PROSPECTIVE TREASURY FINANCING AND SYSTEM OPEN MARKET OPERATIONS Tax r e c e i p t s in March below e a r l i e r estimates and r e v i s i o n s in estimates of Treasury r e c e i p t s and expenditures for t h e remainder of t h i s f i s c a l year and the next f i s c a l year n e c e s s i t a t e considerable changes in the Treasury refunding plans and in t h e System* s program for open market operations* Tax r e c e i p t s have been about a b i l l i o n d o l l a r s l e s s than e a r l i e r estimates and the t a x reduction l e g i s l a t i o n w i l l lower r e c e i p t s considerably over t h e next 15 months* At t h e same time t h e new m i l i t a r y program w i l l cause an increase in expenditures# The Treasury debt r e t i r e ment program,therefore, w i l l have t o come t o an end, The current increase in nonmarketable debt may be j u s t about s u f f i c i e n t t o take care of volunt a r y redemptions of maturing i s s u e s , but i t i s not u n l i k e l y t h a t a t times during t h e next 15 months t h e Treasury may find i t necessary t o borrow moderate amounts in the market in order t o maintain i t s cash balance a t a desired level* A p r i l - J u l y I9I4B Treasury program* The second quarter begins with a Treasury deposit balance of about 3«9 b i l l i o n d o l l a r s , or 800 million l e s s than had been estimated on February 26* In order t o meet a cash d e f i c i t during t h e second q u a r t e r , and another s u b s t a n t i a l one i n July and t o pay off volunt a r y r e t i r e m e n t s of maturing issues during the next four months, i t w i l l be necessary for t h e Treasury t o discontinue immediately i t s program of r e t i r i n g Federal Reserve-held s e c u r i t i e s * Already i t has cut r e t i r e m e n t s of Treasury b i l l s below t h e amounts proposed by the Open Market Committee. Maturities, other than b i l l s , include certificates of 1*3 b i l lion on April 1, 1*8 billion on June 1,'and 6.1 billion on July 1, and 3«1 billion dollars of bonds on June 15* It is estimated that voluntary redemptions of these issues w i l l be about a billion dollars• Federal Reserve holdings of 106 million of April 1 certificates are being paid off, and 100 million of b i l l s are being retired on April 1 and again on April 8* This program will reduce the Treasures t o t a l deposits from 3#9 billion at; the eM af March-to about'2*6 billion at the end of June and to a l i t t l e less than a billion at the end of July* (These figures do not include a billion dollars of free gold which the Treasury could use to r e t i r e Federal Reserve-held debt.) The end-of-June balance is larger than had been previously contemplated in order to allow sufficient funds to meet the large cash payments in July* If the balance is drawn down any more i t might be necessary for the Treasury tp borrow new money in July* - 2 Effect on bank reserves» These transactions will eventually increase bank reserves, but this can be postponed until July by substantial calls on war loan accounts, At the end of March the Treasury has approximately 2 billion in war loan accounts and an additional 2 billion dollars on deposit with the Federal Reserve* The balance with the Federal Reserve will be reduced during the early part of April by retirement of some 300 million of Federal Reserve-held securities, which will have no effect on the reserve position of banks * To maintain that balance and thus avoid increasing bank reserves it will be necessary to make calls of 300 million dollars a week until the middle of May and somewhat more between then and the middle of June* If the effect of the gold inflow on reserves is to be an offset* the calls would need to be somewhat larger, but war loan deposits would be reduced to a minimum that much q\jicker* On the basis of the schedule proposed, they fall below a billion dollars by the end of May* The only other means of absorbing bank reserves would be another increase of requirements at central reserve city banks p but this would probably result only in sales of securities by banks in those two cities and have no effect upon the situation in other banks where the credit expansion is taking place* Some reserves might be absorbed by inducing banks or others to purchase Government securities from the System, but this will be at the initiative of the buyers. An increase in short-term rates would be the only measure available to exercise an influence toward this end* Fiscal Year Revised estimates of Treasury receipts and expenditures for the fiscal y e a r I9l4.8-i4.9t assuming tax reduction and allowing for an increased military program, indicate a small budget deficit which will be slightly more than covered by net receipts in Treasury trust accounts available for investments It appears that only about 2 or 3 billion dollars will be available for retirement of marketable securities; this amount will probably just about cover voluntary redemptions, leaving none for retirement of Federal Reserve-held securities* This situation contrasts with previous estimates of about 7 l/2 billion that might have been available for retirement of marketable debt* Estimated receipts for the fiscal year are less than the January budget estimates by about 2 billion dollars* This difference allows for a decrease of around 5 billion in taxes due to the tax reduction legislation offset by an increase in receipts resulting from higher income estimates* Estimated expenditures are about l± billion dollars larger than previous budget estimates* This includes an additional 3*5 billion for national defense and *5 billion for tax refunds* The increase for national defense covers the additional cost of universal military training, aircraft procurement, stockpiling, and the increase in the authorized strength of the Army* If international relations worsen, it is possible of course th^t additional expenditures for national defense will be greater than the amounts here contemplated* There may also be a small increase in expenditures for international purposes and a large payment (perhaps 1»5 billion dollars) not included in budget estimates, may need to be made, sometime during the next? year or so to refUnd certain amounts due to policy holders under tfyp national service life insurance* The schedule of receipts and expenditures during the next fiscal year may bring about a reduction in the Treasury cash balance at certain times to a lower level than is deemed advisable* According to the estimates, the deposit balance (leaving out free gold) may fell to slightly below a billion dollars in July and August and in October and November may be down to an almost negligible figure* In these periods some consideration may need to be given to new Treasury borrowing* CONFIDENTIAL ESTIMATED TREASURY CASH BALANCE R&S 100-2637 April 1, ^ (In billions of dollars) Item Net receipts Expenditures l / Budgetary surplus Change in nonmkt*. debt: t o t a l Special issues Other •^Redemption of mkt* debt: t o t a l Adjustment 2 / Net change !UL balance Balance, end of period 3 / • •Redemption of mkt» debt* Federal Reserve holdings Other ISkl July-Dec» Jan.* Feb.* Mar. Apr. 4.3 19*2 ,18.0 + 1.2 + 1*6 + 1.6 ,_2tit +1.9 + .5 - 2.9 + .3 - ;8 - .2 +1.1+ + -3 + .2 2.9 - -9 - 2.0 + .2 1+.3 2.7 +1.6 + .2 + .1 + .1 ,-2;2 + .2 - .2 h.3 1 U.i 19U8 May June Fiscal Years 191+9 Oct.- J a n . - Api>. July Aug. Sept.. Dec. Mar. June 1947-i48: 19l48-ii9 6.2 2.7 2.8 ijj.7 2.1 2.1+ 5.0 8.8 1U.5 9.8 U+.2 i 5.0 3.8 3.6 3*2 3.2 3.8 2.7 io»5 11.2 12.0 .38.1 +2.6 - .5 - .k - .3 -1*7 - .3 +1.2 - 1.7 • 3.3 -2.2 + 6.1 - .2 - .2 -1**4 + . 2 + . 2 + .5 + . 3 + .2 + .2 + . 6 + . 6 + . 2 + .3 - .1+ - . 1 + . 1 - . 1 - .2 - . 3 - .5 - .2 + . 2 + .8 " ••/. - .2 1+.9 1+.2 l+.o -~lh 3.6 -1.7 1.9 + .9 +1.1 + 2.5 + . 5 +1.0 + 2.7 + »i|. + . 1 - .2 - .5 - .6 - 8 . 0 • .3 +1.2 - 2.0 + 3.7-1.7 + .9 1.1 3.6 4.8 3.1 1.9 3.1 + + - .3 .5 .2 t6 - .6 - 2 . 1 - .9 - .3 — - .3 - .5 — - . 2 -"".6 - . 2 - . 1 - .5 - .1 U.8 .5 - .6 - 3.2 Note: 1+2.6 - 1^+ + 3.5 + 3.1 + .2 - 2.i+ - .5 . 3.1 . -1.1+ Assumptions underlying estimates for V)hl» 19^*S and 19i49 respectively as follows,, in billions of dollars: Personal income, 197, 212, 219; Personal income tax collections^ after tax cut begixraing with 19U8# 21*©, 19<5, 20*0; Corporate Federal income tax liability, 10«0 and 9 # 8; Budget expenditures reduced from January official estimates by .5 in fiscal I9I4S and increased by i±.2 in fiscal 19l;9* * Actua 1 l/ Including net expenditures in trust accounts and clearing account* 2/Adjustment for difference between General fUnd balance and cash balance due principally to timing of receipts and expenditures* 3/ Including free gold of about 1 billion dollars • GOVERNMENT FINANCE SECTION, BOARD OF GOVERNORS STRICTLY CONFIDENTIAL Period ESTIMATED TREASURY DEPOSITS AND RELATED (In millions of dollars) Treasury d e p o s i t s w i t h Federal Reserve Banks Change Arpoixrvfc Tr» purv Redemptions (end of Calls Income Other mktb. o f mktb. Other period) Bills taxes issues bonds ITEJB i'<"ar loan deposits Change Amount New Income [end o f securities taxes p e r i od ) A p r i l 1, 191+8 R&S IOC>-2637 Total Treasury. . deposits-* Calls (end of period) Statement week ended: — — 191+8; March 3 * +11+6 '— + 380 - 65 2*1+72 - 1+78 1,518 -100 -1+39 951+ - 6 — 10* — +101 - 558 1,618 + 1488 - 11 751 2,369 -100 _ — __ -101+ +1,629 - 5U 17* 2,372 -1,118 1,695 + 78 677 -1+27 +1.L&8 - 9 - 11 _2l+* + 27 + 78 - 1+92 1,799 1,1+58 -195 3,257 — — <-l31 + 8 5 5 — 232 + 1,3 1,972* 31 -91+ 3#9i*l+* r 15 1,97s* + 500 — April 7 3,705 + 88 — — - 550 2,110 + 50 -225 -ToIJ! £§93 + 350 - 623 2,055 11+ +150 300 1*500 + 300 - 1 0 0 - 20 3*555 • 95 + 225 21 +120 1,1+50 + 300 - - 300 3*1+00 + 75 - 575 1,950 28 + 50 -— - 300 1#395 + 300 — +125 + H+5 3,219 - 500 1,821+ + 290 «... — May 5 +110 + 65 3,08^ 300 1,3^5 + 300 - 600 1,699 12 +200 +100 + 1+20 3,2Qt+ - 300 1,505 + 300 - 600 1,699 +105 + 320 +180 19 - 300 3^109 1,1+25 + 300 —- 700 1.681+ 26 +105 + 205 1,1+30 + 1+00 — - 1+00 2,89ii - 600 10+61+ • 75 June 2 1,1+ob + "6OO + 8 0 2,389 600 -175 989 + 1+5 + H+5 - 600 —. + 32+0 + 6 0 + 3 0 0 + 9 0 2,251+ 300 9 600 25 839 1,1+15 + 7 9 0 1 , 2 1 5 + 600 16 +200 + 9 0 . . . 600 1,714+ 529 - 90 -1,500 __ — — 23 +115 + 6 0 +1,110 600 701+ 2,1+19 1*715 - io — — 30 860 +130 1,71+0 + 25 - 550 2,600 + 575 — -1+60 July 7 + J4O 1+75 1,^*75 • 500 + 75 + 295 — - 500 - 600 1,950 -1+0 310 + 60 + 21+0 1,635 11+ - 300 • 75 1,375 + 3 0 0 - 600 21 + 2 2 5 + 2 0 0 200 + 3 0 - 600 1,200 1,1+15 + 75 215 — — — 28 + 20 + 70 — -305 + 175 - 600 775 1,080 Month: 19i+8 - March +1+.681 - l o i ; + 70 +1+65 1,972* — -2,805 1 , 9 7 2 * -898 3,9U+* -1+93 April tl+78 +1,270 +350 1,600 +1,200 -SOU -1,200 -2,393 1,600 3,200 -21+5 May +520 -1,600 +1,260 -2,1+05 3,000 +1+25 2,055 +1,600 91+5 June +1+50 +2,885 860 — - 900 1,71+0 + 9 0 0 -300 +365 -3,800 2,600 +1,01,0 530 +1,000 July 900 +16O +350 -500 — 370 -1,000 -2,750 •Actual l/ Total Treasury deposits at Federal Reserve Banks and war loan deposit accounts; total does not include free gold, which amounts to a little more than one billion dollars, and other small items in the General Fund balance* GOVERNMENT FINANCE SECTION, BOARD OF GOVERNORS
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