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•· . Washington, February 13, 1918. Me_more..nd'1Ill• The Jbjer.t of this memo:ra.ndum is to outline briefly sor:Je Jf the most import~nt points of difference, in substance and e~Ie:rt, between the so-called "0al.der BHl'' c...nd the VJar Finance Corporation. (l) ~nks· The Calder BUl wuuld give power to Federal Reser-:e to rediscount member banks' notes secured by "such bonds or note;s of any rCLilroad, industrial, public utility co:rporat~.on or municipality ... s the FederCLl Reserve Boc:Lrd upon inves"Ciga.t:i.vn dMms a proper security for the Federal Reserve Banks to racaive as collateral .. " aesu~e, For the purposes of this memorandum, we must of course, tha.t if the bill were passed the Feder""l Reserve B.oe.rU. would permit tl!e· ·rediscount of member b~:mk notAs secured by snch col.late.rA.l. Upon thc:Lt assumption, it is clear that billions of outstanding s:::curities would become directly avta.ilable CLS eolJ.ater~l by Feder""l. Reserve Btmks, i:l.nd indirectly av...iiable Feder... l Reserve notes. It would not be ci. interA~t or vd th the renewal of mtt turing ob) igi.i.tions, but ptv.rer of alre~di outst~nding differentic:~.tion ~t would become ....11 ~s the public interest at this '\;ime. f')j.· J.~he ~vail~ble 0.<1Jy c.t ~.. hi:. wh:Jle Irk:L >!:; t:~me·•, >_,_ with~ut Q~y to whether or not they- ~re servinE, The proceeds of such bo·rrowing could be used for anything - compatible or c:~.s S<'~t;U>:"ity question Jf ufla.1'.ne; with new· fimLncing "cvmp;4.tibJ.e with the publ.ic securities for t:i.dv.-..nces incompatible~ It is un- X-740 necessary to (2) elabor~te 2 the importance of this point. Granting that most of the securities covered by the Calder Bill amP.ndriJent are either unsalci.ble today or could be sold only with substtmtia.l concessions, even as against the present heavily reduced prices, the Calder Bill does not have for its object to find a means of thawing out these frozen securities. The only solution that the Calder Bill provides is that holders of securities, either directly or indirectly, pledge them against advances to be secured from Federal Reserve Banks. The Finance Corporation, on the other hand, pro- viues ways and means by which the appeal should be made not exclusively to the Federal Reserve System but to the securities market in general. By substituting, in effect, the short term bond for the unsale- able security of industrial corporations, public utilities, railroads or municiFalities, or by substituting these short term bonds for the maturing obligations of such corporation, a new security is offered which will have a general marker, first, because it will be considered a Government security, and, second, because of the fact that some provision is made, in case of emergency, to use these bonds as collateral for borrowings from Federal Reserve Banks. Suppose that an electric company has million dollars; m~turing To make this p~int clear:. bonds amounting to ten it wants to offer instead a five year electric note but finds it impossible to place the same. Under the Calder Bill,all that could possibly be aone would be to borrow the full amount from the Federd.~- Reserve B.:mk · Under the plan of the War Finance Corpor~- tion, five year bonds of that corporation would be issued and either X-'740 tak0n in '3.Y.C~1 ...i.Y"6'?. 3 by the holders of the old, zr.aturing electric notes, or the new fi·.re :,rsa':"' short term bonds coC-tld be placed on the zr.arket and the t!~0 pruceeC..s us0d to pay off the maturing notes. In otiher words, C0rpard.tion should h"-ve the tendency of reopening the se- F:i.~1ance now unsAleable securities, so that new elasticity curi~y rnar~et fo~ will be the securities tr.drket instedd of regarding this mdrket give~ as hopt::)essly dea.d dnd inst.edd of using the Federdl Reserve System, an instn1ment credted for the p.cotection of commercidl paper, as a zr.arket upon w~ich to unload unsaleable securities. (3) It is safe to conclude from the above thdt the amount of paper secured by Wur Finance Corporo.tion bonds expected to be rediscounted with Federdl Reserve Banks would be much smaller than the amount likely to be borrow·ed from the Federdl Reserve System in the case of the Salder Bill, not only because, in the first case, the absorbing povJer of the security rearket acts as a buffer the security zr.~rket cannot t~ke C~.nd on1y v.rhat - and what, after that, the banks cannot carry - wi.J.l go into the Federal Reserve System, but also, as stated under (1), because the output of the short term bonds by ths War Fin<;~.nce Corporation is restricted to definite purposes of the pres- ent emergency, while, under the Calder Bill, the only possible ass~st ance would have to come through the Federo.l Reserve System, a.nd all securities issued during p~st generutions wo~ld become a.vail~ble as collateral without a.ny scrutiny t..s to the objects for which they have been issw.3<.i. "' ... x.rf40 (4) 4 If we hb.ve these points clearly in mind, it is incompre- hensible why the hue and cry of inflation should be raised agciinst the Fincince Corporation by the very people who, apparently, are in favor of the Cb.lde r Bill· As a matter of fact, as above stated, we would have to expect a much larger degree of inflation under the Cc;~.lder under the proposed Vlar Finance Corporation legislation. Bill than Are we not driven to the logical conclusion that these critics of the Vib.r Finance Corporation bill are opp'Jsed to it because it restricts infJ.ation so much more tho..n the Calder Bill rather than becciuse they are generb.lly apprehensive of too much inflation to be ca.used by the contemplated legislation 7 ?i;;l.u1 M. Warburg~
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