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Fiscal Agent of the United States

r Circular N o . 2 9 1 9 1
M a r c h 22,1945.

Elimination of Speculative Subscriptions
Abuse of War Loan Deposit Privilege
Portfolio Adjustments by Non-Bank Investors

To all Banking Institutions, and Others Concerned,
in the Second Federal Reserve

T h e r e w e r e three statements in the p r e l i m i n a r y announcement b y the S e c r e t a r y o f the
T r e a s u r y concerning the Seventh W a r L o a n D r i v e (set f o r t h in our Circular N o . 2913, d a t e d
M a r c h 3, 1945) which it is desirable to emphasize at this time when transactions related t o
the o f f e r i n g of securities in the drive m a y be u n d e r consideration.

T h e s e statements w e r e , in

substance, as f o l l o w s :
1. In order to help in achieving the objective of selling as many securities as possible outside
of the banking system, the Secretary will request the cooperation of all banking institutions in
declining to make speculative loans for the purchase of Government securities, in declining to
accept subscriptions from customers which appear to be entered for speculative purposes, and in
not making loans for the purpose of acquiring drive securities later for their own account.
2. The acquisition of outstanding securities by banks on the understanding that a substantially like amount of the new securities will be subscribed for through such banks, thus enabling
them to expand their war loan deposit balances, is regarded as an improper practice by the Treasury.
The Secretary will request banking institutions not to make such purchases.
3. The Treasury requests that all non-bank investors refrain from selling securities heretofore acquired to obtain funds to subscribe for the securities offered in the Seventh W a r Loan
Drive. However, this request is not intended to preclude normal portfolio adjustments.
T h e m e a n i n g o f the first request is believed to be well u n d e r s t o o d b y the banks a n d their
T h e second
w a r loans.

request relates to a p r a c t i c e which has d e v e l o p e d d u r i n g the m o r e recent

Y o u r aid in its p r e v e n t i o n w a s s o u g h t p r i o r to the o p e n i n g o f the S i x t h W a r

L o a n , a n d the statement then contained in o u r Circular N o . 2865, d a t e d N o v e m b e r 13, 1944,
is r e p e a t e d h e r e :
Apparently some banks have solicited sales of outstanding securities, either directly from customers
or through the Government securities market, with the understanding that the sellers will use the
proceeds of such sales to pay for subscriptions entered through these banks for substantially equivalent amounts of new securities offered during the drive. The initiative has also come from present
holders of securities, who wish to sell the securities to a bank, with the same understanding with


respect to a subsequent subscription to be made through the bank. In either case the banks appear,
in effect, to be purchasing the privilege of creating war loan deposit balances, an undesirable practice
in itself and one which exaggerates natural adjustments in security portfolios.

The third request grows directly out of the experience of the Sixth War. Loan, when a
large amount of indirect bank participation was the consequence of heavy sales of previously
acquired securities by holders other than commercial banks, who wished to increase their
drive subscriptions and who found it profitable to do so in this way. The Treasury's request
is not, of course, intended to interfere with normal portfolio adjustments of non-bank investors. It is recognized that investment requirements change in response to changes in income,
the character of liabilities and other factors, and that a realignment of maturities may be
appropriate from time to time. It is also recognized that, between drives, investors properly
make use of short-term securities, such as Treasury bills and certificates of indebtedness, as
a temporary means of employment of cash balances pending reinvestment of such funds in
obligations having more appropriate rates and maturities when they become available in
succeeding war loan drives. It is not possible, therefore, to define precisely each type of transaction embraced in the. Treasury's request. It is believed, however, that portfolio managers
and non-bank investors, in most cases, will be able to distinguish between sales of Government
securities merely to obtain funds with which to subscribe for securities offered in the Seventh
War Loan Drive, and sales representing normal portfolio adjustment.
The whole-hearted compliance of all banks and their customers with the spirit of these
requests will be of the greatest aid in helping to achieve the Treasury's objective of selling as
many Government securities as possible outside the banking system. It will contribute to the
real success of the Seventh War Loan Drive.



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