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F E D E R A L R E S E R V E BANK
OF NEW YORK
r C ircu la r N o . 3 1 0 3 ~
1
Ju n e 26, 1946
J

L

LOANS TO PURCHASE GOVERNMENT SECURITIES
To the President o f each Bank and Trust Company
in the Second Federal Reserve D istrict:

The program of the -Government for the financing of the war emphasized that banks should
not make loans to facilitate speculative purchases of Government securities. On October 8,
1945, prior to the Victory Loan, the Secretary of the Treasury addressed a letter to all banks
in the United States requesting them to decline to make loans for speculative purchases of
Government securities and to decline to accept subscriptions from customers which appeared
to be entered for speculative purposes.
It was recognized, however, that there would be instances in which purchasers of securities
for investment and not for speculation would want to anticipate income by borrowing tempor­
arily from banks. It was understood that these loans would be repaid out of income and
would have maturities of not to exceed six months. Loan arrangements of this character were
recognized in the joint statement issued by the National and State bank supervisory authorities
in November 1942, which said that “ such loans will not be subject to criticism but should be on
a short term or amortization basis fully repayable within periods not exceeding six months. ’ ’
During the Victory Loan Drive, a large amount of long-term bonds was purchased with
the aid of bank loans. It has been reported that many such loans have not been repaid out of
current income and that bank credit has been used for speculative carrying of Government
securities. Reports have been received also of the activities of money brokers and others
seeking to arrange bank loans on Government securities for customers without provision for
amortization and with margins and rates of interest which emphasize high returns on small
amounts of the borrower’s own funds required for relatively large transactions. The same
general considerations which led to efforts to discourage speculative subscriptions to Govern­
ment securities during the war loan drives clearly apply to this sort of loan.
Borrowing from banks creates an addition to the country’s money supply to the same
extent as direct purchases of securities by banks. The existing unprecedented supply of
deposits and currency, in the face of an inadequate supply of goods and services, is a dangerous
inflationary potential. Therefore, every effort should be made to reverse the wartime trend
of increased borrowing for the purpose of purchasing and carrying Government securities and
to reduce as much as possible the use of bank credit for that purpose.
It seems timely to ask your cooperation to this end, particularly as loans made to facilitate
purchases of Government securities during the Victory Loan Drive, which are still unpaid, have
now run for more than six months. You will realize, of course, that nothing will be accom­
plished if one bank makes a loan on Government securities to enable a customer to comply
with the request of another bank to pay off a loan originally made to purchase Government
securities.




A l l a n S prou l,

President.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102