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y Spread - *«w Xorii Letter di»«u&oed with you over telaphoa* tu«Lsgr nc^ b«inf «M«ii to 5#cr«t&jP3r M^r^^ntbau by £u»SA«ng«r* There ! • q-.*a below tfeJEt of t*l«fnui vhich w# pMpiM ! • of other Fedtriu Eea^nr© Bums apon r&cei^t tf a4vic* frxa you — that wire frcw yea to isecr^titry M&rg«BUt&tt h*» bee:. «enti (Her* vu,,t« MorrUl August m9 X9U Paddock - Boston Killiame - Philadelphia Fiesri ng - Cleveland Leach * Riefaatand itdUria * atlauta Toxmg - Chicago D*vi* - St. Lotd» Peyton - Minni»apoli» Leedy - K&n*as City Gilbert - Daliae Day - i&n Francisco Following i«tt«r being seat today by Board of Gorernra in reply t- request fro© Secr#i&ry MorgeatHau for reaction of Board to profor ohangaa in existing eerie* tax note* us outlined l a aent to Presidents of Ee» rve Bai^« on August 2?» (Here ^uot« (^attached) Mr. Sproul as Chairaaa ^aceeutive Coraadtt** Federal Open Market Cotatdttee also sending following tele^r&a to Secretary Morg«nthau today i (Here quote \g, attr.c;;ed) Please wire to Board copy your reply to Secretary MorgenthAu's wire of Aaguat 2Tf9 itorriU STKICTLY camPiJlTIAL August 28, 1942, Honorable Henry fcorgenth&u, Jr., Secretary of the Treasury, Washington, D. C. Dear Mr. korgenthau: In reply to your letter of August 27 enclosing a copy of a telegram to the Presidents of the Reserve Banks the Board of Governors agrees entirely with the proposed changes in the Series A tax notes, fee also agree that sose changes in the Series S notes are desirable and in so&e respects essential, but we again recoiaaend a gr&du&ted scale ef rates instead of M M flat rate proposed. Be feel that, while the proposals are in the right direction, the notes will not reach the a&xi&ua amount of funds that can be obtained from this type of issue, unless the? rates are sufficiently attractive for rsaiurities beyond seven months, and, even more important, the notes *ill not be h*ld for extended periods of time, wiless th® rates are so arranged on & graduated scale as to offer a strong inducement to holders to retain them* A"e have considered the objections raised by ia*-:abers of your staff to a graduated scale of rates on the tax notes. Ehile we recognise toe ifcerit of these objections, w«s do not believe that they are sufficiont to outweigh the advantages of & graduated scale of rates. These ariv&nt&gee are that (l) the higher average rate would attract a j&uch larger amount of funds and attain a much wider distribution tk%n would be reached by th flat rate of only 0*72 per cent per annum for three years and (2) the increasing scale of rates would be a real incentive to investors to hold the notes to maturity. »«ith an attractive schedule of rates these notes could be actively promoted by the Victory Fund Committees and in our opinion would raise a large amount of funds, probably between $500,000,000 and $1,000,000,000 in oepteober. objection that has been sade to the offering of @> different Issue each month Is that the work of the Internal revenue collectors would be greatly complicated, fee believe that the i«portance of this objection has been overemphasised. The graduated scale of rates would apply only to the Series B notes, which are purchased in large blocks by corporations and wealthy individuals. We suggest that the Series B notes be issued in $5,000 units and only to investors purchasing at least $5,000. The Series A notes would be available up to and including 15,000. Honorable Henry Morgenthau, Jr. -2- A substantial part of these notea would be purchased for the investment of Idle funds <u»£ WtmXi not be redeemed for tax purposes* Another substantial pert of Ihf notes, although purchased for tax purposes, would be rddee&ed in cash, since MMJf corporations and individuals would prefer to pay their tax bills by chock rather than by turning in the tax notes* The internal revenue collectors would be involved «ith only the remaining portion of the notes that would be turned in for tax payments, and their work would be simplified by having the redemption values printed or stepped on the face of each note* The additional work imposed on the Internal r©v*nu© collectors would not appear to be insurmountable, and the results that would be achieved by obtaining the largest possible amount of funds frcwa ncnbanking investors would certainly offset this disadvantage* This matter has been discussed with Chalreum Eccles and he is in agreement with the statat&dnt* contained in this litter* Very truly yours, uonald ftanson, Vice Chairman. SKCtcfca Reply of Board of Governors of Federal Reserve System to your letter of August 27, 1942, with respect to pro. osed changes in the existing series of tax notes, has been discussed by raettbers of executive committee of Federal Open Market Committee which is body in the Federal Reserve System with which the Treasury has maintained contact on Treasury financing problems, and they are in full agreement with the views expressed in letter. Meabera of comndttee desire strongly to recommend that Board1a suggestions be given careful consideration before decision is reached &s to changes to be made in tax note.
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