The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
124 F E D E R A L RESERVE BOARD WASHINGTON X-3031 January 26, 1921. Confidential Subject: Purchase of C e r t i f i c a t e s of Indebtedness from Borrowing Member Banks, Dear S i r : There i s enclosed f o r your c o n f i d e n t i a l i n f o r m a t i o n copy of a l e t t e r which was r e c e n t l y sent out by t h e Federal Reserve Bank of New York t o 114 of i t s borrowing member banks. I t i s e s t i m a t e d t h a t e x c l u s i v e of New York, eleven Federal Reserve Banks hold a s c o l l a t e r a l t o member b a n k s ' f i f t e e n day n o t e s about $45,000,000 of Treasury C e r t i f i c a t e s of i s s u e s p r e v i o u s t o t h a t The Board b e l i e v e s t h a t i f you would care dated January 15, 1$21. t o p o i n t out t o t h o s e of your member banks which a r e borrowing on Treasury C e r t i f i c a t e s t h a t t h e r e i s now a ready market f o r t h e s e i s s u e s , you could e f f e c t a s u b s t a n t i a l r e d u c t i o n i n t h e volume of n o t e s which you a r e c a r r y i n g f o r member banks secured by Treasury Certificates. As you know, t h e Board has been i n communication with Federal Reserve Banks r e c e n t l y on t h e s u b j e c t of r a t e s of i n t e r e s t charged on paper secured by c e r t i f i c a t e s . The Federal Reserve Banks of S t . Louis and San F r a n c i s c o have e s t a b l i s h e d a f l a t r a t e of 6$ on a l l paper s e cured by t h e s e o b l i g a t i o n s without regard t o t h e r a t e of i n t e r e s t borne by t h e c e r t i f i c a t e s . There i s enclosed f o r your f u r t h e r c o n s i d e r a t i o n copy of a memorandum r e c e i v e d today from A s s i s t a n t S e c r e t a r y of t h e Treasury G i l b e r t , i n which he p o i n t s out t h e d e s i r a b i l i t y of e l i m i n a t i n g t h e p r e s e n t 5$ and rates. In a n o t h e r communication, dated January 24th, Mr. G i l b e r t s t a t e s t h a t "Treasury c e r t i f i c a t e s a r e now f i r m l y e s t a b l i s h e d on an investment b a s i s and i t would be h e l p f u l t o t h e g e n e r a l s i t u a t i o n if borrowing banks g e n e r a l l y would t a k e s t e p s t o reduce t h e i r l o a n s a t t h e Federal Reserve Banks by f u r t h e r s a l e s of Treasury c e r t i f i c a t e s " . Very t r u l y yours, G o v e r n o r . TO GOVERNORS OF ALL F.R.BS. EXCEPT NEW YORK COPIES TO CHAIRMEN " " " 125 Copy. FEDERAL RESERVE BANK NEW YORK X-3031a January 21, 1921. Dear S i r : You w i l l be i n t e r e s t e d t o know t h a t t h e l a t e s t i s s u e of U. S. Treasury c e r t i f i c a t e s of i n d e b t e d n e s s , which was d a t e d J a n u a r y 15, 1921, has been more l a r g e l y o v e r s u b s c r i b e d t h a n any p r e v i o u s i s s u e , t h e r e b y i n d i c a t i n g t h e h i g h l y s a t i s f a c t o r y c o n d i t i o n of t h e c e r t i f i c a t e m a r k e t . The a l l o t m e n t s t o t h i s d i s t r i c t of t h e January 15 c e r t i f i c a t e s were a b o u t $138,000,000, w h i l e t h e s u b s c r i p t i o n s r e c e i v e d a t t h i s bank t o t a l e d f u l l y $300,000,000, which l e a v e s an u n s a t i s f i e d demand a p p r o a c h i n g $200,000,000 in t h i s d i s t r i c t alone. With r e g a r d t o t h e p r e v i o u s i s s u e s of Treasury c e r t i f i c a t e s now o u t s t a n d i n g , f o r which t h e r e i s l i k e w i s e a ready m a r k e t , we f i n d t h a t a number of our member banks have pledged t h e s e c e r t i f i c a t e s w i t h u s a s c o l l a t e r a l f o r advances a n d , a l t h o u g h they a r e f o r t h e most p a r t s c a t t e r e d among many banks i n small amounts, t h e a g g r e g a t e makes a s i z e a b l e f i g u r e . The u n s a t i s f i e d demand i n t h e market f o r c e r t i f i c a t e s would r e a d i l y a b s o r b , on very f a v o r a b l e t e r m s , t h e e n t i r e amount of c e r t i f i c a t e s so pledged w i t h us by member banks, and we a r e c o n f i d e n t t h a t we can s e l l a l l of t h e c e r t i f i c a t e s which you own of t h e March 15, May l 6 and June 15 m a t u r i t i e s on a 5 i $ b a s i s , and a l l of t h o s e maturing between August l 6 and December. 15 on a 5 5/8$ b a s i s . As you know, i t h a s been t h e d e s i r e of t h e Treasury t o g r a d u a l l y g e t t h e s e c e r t i f i c a t e s , a s w e l l a s o t h e r Government s e c u r i t i e s , out of t h e banks and i n t o t h e hands of i n v e s t o r s , and we f e e l s u r e t h a t you w i l l a g r e e w i t h u s a s t o t h e d e s i r a b i l i t y of a c c o m p l i s h i n g t h i s , e s p e c i a l l y w i t h r e s p e c t t o such c e r t i f i c a t e s a s a r e used f o r l o a n s a t F e d e r a l Reserve Banks. The e x t e n t t o which t h i s h a s been accomplished i s evidenced by t h e f a c t t h a t t h e r e a r e a t p r e s e n t $2,350*000,000 c e r t i f i c a t e s of a l l i s s u e s o u t s t a n d ing, w h i l e t h e F e d e r a l Reserve Banks a r e now l o a n i n g only $131,000,000 o r 5 i # of t h a t t o t a l a g a i n s t c e r t i f i c a t e s . I t i s of obvious p u b l i c advantage t h a t borrowings a t t h e Federal Reserve Banks should be g r a d u a l l y reduced i n order t o b r i n g t h e System back t o a normal b a s i s , and one way t o accomp l i s h t h i s r e s u l t i s t o d i s t r i b u t e c e r t i f i c a t e s now h e l d by t h e banks among ultimate investors. We a r e b r i n g i n g t h i s m a t t e r t o your a t t e n t i o n a s we b e l i e v e i t w i l l be of i n t e r e s t t o you t o know t h a t t h e p r e s e n t i s a n extremely f a v o r a b l e time t o d i s p o s e of your h o l d i n g s of c e r t i f i c a t e s i f you d e s i r e t o do s o . We s h a l l be glad t o h e a r from you if we can be of any s e r v i c e i n t h i s connection. , Very t r u l y y o u r s , (Signed) J . H. CASE, Deputy Governor. 126 Cos.! X-3031b TREASURY DEPARTMENT Assistant Secretary. Washington January 25, 1921. TO GOVERNOR HARDING The l a t e s t schedule of d i s c o u n t r a t e s i n e f f e c t a t t h e s e v e r a l F e d e r a l Reserve Banks shows t h a t a t t h e F e d e r a l Reserve Banks of P h i l a d e l p h i a , Cleveland, Richmond, A t l a n t a , Chicago, Kansas C i t y and D a l l a s , t h e d i s c o u n t r a t e on paper secured by Treasury c e r t i f i c a t e s corresponds t o t h e i n t e r e s t r a t e borne by t h e c e r t i f i c a t e s , w i t h a minimum of 5 p e r cent i n case of P h i l a d e l p h i a , A t l a n t a , Kansas City and D a l l a s , and 5 i p e r cent i n case of Cleveland, Richmond and Chicago. E n t i r e l y a p a r t from t h e q u e s t i o n of a f l a t 6 p e r cent r a t e on paper secured by Treasury c e r t i f i c a t e s , i t o c c u r s t o me t h a t i t would be d e s i r a b l e t o c l e a n up t h e s i t u a t i o n by e l i m i n a t i n g t h e r a t e s under 5 i p e r c e n t , which a r e s t i l l p o s s i b l e under t h e p r e s e n t schedule a t P h i l a d e l p h i a , A t l a n t a , Kansas C i t y , and D a l l a s . There i s o n l y one i s s u e of Treasury c e r t i f i c a t e s now o u t s t a n d i n g which b e a r s i n t e r e s t a t a r a t e lower t h a n p e r c e n t , namely, t h e c e r t i f i c a t e s - of S e r i e s T M 1921, maturing March 15, 1921, which bear i n t e r e s t a t 4-f p e r cent. The amount of t h i s s e r i e s o u t s t a n d i n g i n t h e hands of t h e p u b l i c i s r e l a t i v e l y small, namely, about $160,000,000, and t h e c e r t i f i c a t e s can be r e a d i l y sold i n t h e market on about a p e r cent b a s i s . Except f o r t h i s one i s s u e , t h e p r e s e n t 5 and 5 i p e r c e n t r a t e s i n t h e banks named a r e , t h e r e f o r e , p r a c t i c a l l y p a p e r r a t e s , which have f u l f i l l e d t h e i r purpose, and which, if c o n t i n u e d , might i n v i t e a p o l i c y of o f f e r i n g Treasury c e r t i f i c a t e s a t t o o low a r a t e t o be a t t r a c t i v e a s i n v e s t m e n t s , i n r e l i a n c e on a l e v e l d i s c o u n t r a t e which would make i t p o s s i b l e f o r t h e c e r t i f i c a t e s t o be pledged w i t h o u t l o s s a t t h e F e d e r a l Reserve Banks. From t h i s p o i n t of view p a r t i c u la f l y I t h i n k t h a t t h e p r e s e n t 5 and 5"4 p e r cent r a t e s should be e l i m i n a t e d , and t h a t t h e p r e s e n t i s a good t i m e t o accomplish i t . (Signed) S. P. G i l b e r t , J r .
@FedFRASER