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March 29,* I9I4I4.

Before making specific recommendations on the points mentioned
by Under Secretary Bell in his letter of March 27, we should like to state
certain general principles that are fundamental to our recommendations.
The main objectives of Treasury financing policy and of credit
administration, of course, are still the borrowing of the maximum possible
amount from nonbank investors while maintaining an interest rate structure
with a maximum market borrowing rate of 2 l/2 per cent. There is no question of our ability to maintain the maximum borrowing rate of 2 l/2 per
cent, but we are still measurably short of the goal of maximum borrowing
from nonbank investors.
It seems to us that the Treasury's current estimates of sales to
nonbank investors are too conservative in view of both the performance of
the Treasury sales organization during the past two years and the amount of
funds that are shown to be available by all estimates of current savings.
The net absorption of Government securities by nonbank investors, exclusive
of Federal agencies and trust funds, is forecast by the Treasury as 33 • 3
billion dollars for the calendar year 19^4* Since I I I will include three
drives and will begin and end with a drive, it seems likely that a larger
amount of funds should be raised than in previous annual periods. In the
year ending October 19^3* which included three drives, nonbank investors
absorbed 3U-7 billion dollars of Government securities, and in the year
ending February 1 U 4 * which also included three drives, nonbank investors
91absorbed about 36.ii. billion. It should be possible in 19^4-* therefore,
for the Treasury to sell 36 billion dollars net to nonbank investors, and
with continued improvement in the sales program this amount could be further
increased. It is recognized that the figures given above include sales in
the first and second drives, when some idle funds that are no longer available were reached. On the other hand, the organization of the drives has
improved, and there has been considerable repayment of private debt, which
is releasing funds and increasing the number of potential investors. The
reduced rate of increase in national income this year should mean that nonbank investors will have less need to accumulate bank balances tha& in the
For these reasons, we believe that Treasury estimates of sales to
nonbank investors in I I J . are unduly low. Regardless of the amounts that may
be taken by nonbank investors, however, it is our opinion that sales to banks
should be considered as residual financing, to which the Treasury should have
recourse only as a matter of last resort. There is no question of the ability
and the willingness- of the Reserve System to provide the reserve funds needed
to assure the success of this residual financing whenever necessary. We believe, however, that direct bank financing should not be countenanced until
even more vigorous efforts have been made to sell an increased amount of
securities to nonbank investors and until the Treasury is in need of funds to

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March 29, I9I4I4.

maintain its working balance at the minimum level that it considers advisable.
In view of the figures submitted in the tabulation accompanying Under
Secretary Bellfs letter, it does not appear that the latter condition, can
arise until after the fifth dirve and there is, therefore, time further to
test present estimates of nonbank buying.
In our opinion, the situation calls for
(a) enlargement and strengthening of the sales organization,
(b) changes in selling methods and security terms that will
widen the nonbank market, and

increase in the bill rate* In selling securities to commercial banks further emphasis should be placed on bills
rather than certificates and longer-term securities.
Additional bills can be sold to banks, however, only if
there is some increase in the rate. As wo have indicated
before, we feel that the present rate on Treasury bills
is out of line with the remainder of the pattern of
rates and that an increase is justified in order to
reestablish bills as a market instrument.

With this background in mind, we should like to make the following
recommendations on the points mentioned by Under Secretary Bell:
1. The goal for the fifth drive has been set at 16 billion dollars,
and no comment is required.
do no direct
we recommend
with the May
the August 1

For the reasons outlined above, we believe the Treasury should
bank financing, at least until after the fifth drive. Therefore,
that there be no offering of certificates for cash in connection
1 refunding, Decision as to a cash offering in connection with
refunding should be deferred until after the fifth drive,

3. In our opinion and for the reasons outlined above, the rate on
Treasury bills should be increased to l/2 of one per cent and the maturity
extended to four months. By this means, not only would a more tenable market
rate be established but the outstanding amount of bills could be increased
by ij. billion dollars as funds are needed without increasing the present
weekly offering of bills,
L\.. We recommend that the basket in the fifth drive be the same as
in the fourth drive except for the substitution of 2 per cent fully marketable
bonds for 2 I/I4. per cent bonds of restricted marketability. We can see no
point in placing restrictions on the eligibility of 2 per cent bonds for
bank purchase. In order that these bonds may not become a vehicle for renewed
speculative purchases, however, we recommend that the Treasury forcefully
renew its stand on speculative subscriptions, loans by banks to finance such
subscriptions, and on subscriptions by dealers, The Treasury may wish also
to consider the inclusion of 1 l/i; per cent notes in the drive as an

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March 2 9 , I9I4I+

funds from
additional means of obtaining/nonbank investors who are not interested in
the rate on certificates or in the form of Series C notes and who do not
wish to invest in longer-term securities.
5« Our opinion would be that the drive should begin on May 23
or 29 and should cover a period of three weeks, but on this point we believe that the recommendations of the sales organization should be decisive,
60 YIe recommend that nonbaiik investors be permitted to purchase
securities in the drive on a partial-^ payment plan. Such purchases by insurance companies, savings banks, and pension funds, which will be in
relatively large amounts, could be handled by the Treasury* Such purchases
by other investors (minimum $500) could be handled by commercial banks on
the basis that the maximum rate charged would not exceed the rate on the
securities •
We also recommend that the lowest denomination on marketable bonds
be placed at $100 in order to meet tho needs of small investors who for one
reason or another do not wish to place all of their funds in savings bonds.
As a corollary to this recommendation and in view of the manpower and paper
shortage, we recommend that the lowest denomination on Series G bonds be increased to $500 and on Series E bonds to $50.
7. We recommend that each commercial bank be permitted to increase
its holdings of otherwise ineligible bonds to the smaller of the following
amounts: (1) $^00,000 or (2) 20 per cent of its total of savings deposits and
time certificates of deposit of individuals. The inclusion of individual
certificates of deposit is recommended because in some areas of the country it
is customary " o use this type of instrument instead of savings pass books.
The $100,000 limit on holdings of Series F and G savings bonds would, olf
course, continue,