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March 27, 1922.

My dear Governor:
Governor Harding has handed me your letter of March 22,
1922, to him on the subject of the purchase and sale of Government
securities by the Federal Reserve Banks, with particular reference
to transactions in Treasury notes and certificates by the Federal
Reserve Bank of New York. I think it has always been clear that
the Federal Reserve Bank of New York has taken care not to be itself a purchaser or seller for its own account when executing orders for the Treasury or for account of any of the funds under the
control of the Treasury, and there has been no suggestion in my
correspondence with Governor Harding of any criticism of the Federal
Reserve Bank of New York on this score. I think it is also clear
that at least until the beginning of the present calendar year the
operations of the Federal Be serve Bank of New York in the market
for Treasury notes and certificates have been helpful to the Treasury's program. Within the past three months, however, the character
of the operations has somewhat changed, and the Federal Reserve
Bank of New York, with other

Federal Reserve Banks, has from time

to time acquired large blocks of short-term Treasury securities for
its own account, which are apparently being carried as investments
for the purpose of earning money to meet expenses and dividends.
Purchases and sales of Government obligations under Section 14 of
the Federal Reserve Act are required to be made, as you know, under


rules and regulations prescribed by the Federal Reserve Board, and
the question whether such purchases will be permitted in order to
provide the Federal Reserve Banks with earning assets is doubtless
a question of Federal Reserve policy which will have to be determined by the Federal Reserve Banks and the Federal Reserve Board.
From the point of view of the Treasury, the matter is important,
first, because of its relation to the market for short-term Government
securities and its consequent effect upon new offerings, and second,
because of its relation to investments which the Treasury must make
for account of the several funds under its control. On the first
point the Treasury is interested, of course, to avoid anything that
may create an artificial situation and embarrass the Treasury in
locating the investment basis on which its securities ought to sell.
It is difficult to say what effect the holding of substantial blocks
of securities by the Federal Reserve Banks for their own account
may have on the market, but with the reduced amounts of Treasury
certificates and Victory notes outstanding and the active demand
for Treasury notes of all series, I am inclined myself to think that
the holding of between $280,000,000 and $350,000,000 of these securities in the aggregate by the Federal Reserve Banks is not a negligible factor in the market, particularly when the probabilities are
that this amount represents in substance the marginal supply. To some
extent, the reaction is the same on the Treasury's investments of
trust funds under its control, and the result of heavy purchases

by the Federal Reserve Banks Is naturally to skin off most of the
floating supply in the market, with the result that even though the
Federal Reserve Banks may take care not to purchase for their own account in handling Treasury orders, their previous purchases nay have
made it next to impossible for the Treasury to accumulate the desired
amount of securities. The present calendar year, moreover, has seen an
important change in the attitude of the Federalfieserve Banks toward
the disposition of the shortpterm Government securities purchased. Heretofore the Federal Reserve Banks hare been willing to sell to the Treasury, at least at prevailing market prices. Government securities acquired
for their own account, and from time to time have freely sold their holdings in the market whenever conditions made it seem advisable. But now
that the policy of holding Government securities for investment has been
adopted, the Federal Reserve Banks are apparently confining their operations to purchases and are not prepared to dispose of their holdings,
except, of course, upon redemption at maturity•
I hope you will not get the impression from the recent correspondence and discussion on this subject that the Treasury is either
critical or unappreciative of what has been done in the past. I have
been concerned rather with what seemed to me the dangers involved in
the rapidly mounting holdings of Government securities by the Federal
Reserve Banks for their own account, to which the Federal Reserve Board
itself had begun to call attention in its successive weekly statements
as to the condition of the Federal Reserve Banks.
Very truly yours,

(Signed) S. P. Gilbert, Jr.
Benjamin Strong, Esq.,
Governor, Federal Reserve Bank,
New York, N. Y.