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AMENDMENT OF SECTION 14(b) OF THE FEDERAL RESERVE ACT HEARING BEFORE SUBCOMMITTEE NO. 1 OF T H E COMMITTEE ON BANKING AND CURRENCY HOUSE OE REPRESENTATIVES E I G H T Y - S E V E N T H SECOND CONGRESS SESSION ON H.R. 11654 A B I L L T O A M E N D S E C T I O N 14(b) O F T H E F E D E R A L RESERVE ACT, AS A M E N D E D , TO E X T E N D FOR 2 Y E A R S T H E A U T H O R I T Y OF FEDERAL RESERVE BANKS TO PURCHASE TIONS D I R E C T L Y F R O M T H E J U N E 19, 1962 P r i n t e d for the use of the Committee on B a n k i n g and Currency U.S. GOVERNMENT PRINTING OFFICE 85511 WASHINGTON : 1962 U.S. TREASURY OBLIGA- COMMITTEE ON BANKING AND CURRENCY B R E N T S P E N C E , Kentucky, Chairman W R I G H T P A T M A N , Texas C L A R E N C E E. K I L B U R N , New York A L B E R T R A I N S , Alabama G O R D O N L. M C D O N O U G H , California A B R A H A M J. M U L T E R , New York W I L L I A M B . W I D N A L L , N e w Jersey H U G H J. A D D O N I Z I O , N e w Jersey E U G E N E S I L E R , Kentucky W I L L I A M A. B A R R E T T , Pennsylvania P A U L A. F I N O , New York L E O N O R K. S U L L I V A N , Missouri F L O R E N C E P . D W Y E R , N e w Jersey H E N R Y S. R E U S S , W i s c o n s i n E D W A R D J. D E R W I N S K I , Illinois T H O M A S L . A S H L E Y , Ohio S E Y M O U R H A L P E R N , New York C H A R L E S A . V A N I K , Ohio J A M E S H A R V E Y , Michigan W I L L I A M S. M O O R H E A D , P e n n s y l v a n i a T O M V. M O O R E H E A D , Ohio C L E M M I L L E R , California J O H N H. R O U S S E L O T , California E D W A R D R. F I N N E G A N , Illinois W I L L I A M W. S C R A N T O N , Pennsylvania R O B E R T G. S T E P H E N S , JR., G e o r g i a F E R N A N D J . S T . G E R M A I N , Rhode I s l a n d H U G H L. C A R E Y , New York H E N R Y B . G O N Z A L E Z , Texas H A R O L D M. R Y A N , Michigan JOHN E . BARRIERS, Majority Staff Member ORMAN S. F I N K , Minority Staff Member ROBERT R . POSTON, Counsel THOMAS A . GRAHAM, Jr., Counsel S U B C O M M I T T E E NO, B R E N T S P E N C E , Kentucky, W I L L I A M A. B A R R E T T , Pennsylvania H E N R Y S. R E U S S , W i s c o n s i n T H O M A S L . A S H L E Y , Ohio W I L L I A M S. M O O R H E A D , P e n n s y l v a n i a R O B E R T G. S T E P H E N S , JR., G e o r g i a II 1 Chairman G O R D O N L. M C D O N O U G H , California F L O R E N C E P . D W Y E R , N e w Jersey S E Y M O U R H A L P E R N , New York W I L L I A M W . S C R A N T O N , Pennsylvania CONTENTS H . R . 11654. A bill to amend section 14(b) of the Federal Reserve Act, as amended, to extend for 2 years the authority of the Federal Reserve banks to purchase U.S. obligations directly from the Treasury Statement o f — Roosa, Hon. Robert V., Under Secretary of the Treasury for Monetary Affairs Additional data submitted to the subcommittee b y — Spence, Hon. Brent: Federal Reserve System, Washington, letter of W i l l i a m M c C . Martin, Jr., dated June 13, 1962 Treasury Department: History of direct Treasury borrowing from the Federal Reserve banks Table 1. One-day certificates of indebtedness issued by the U.S. Treasury to the Federal Reserve banks, 1923-33 Table 2. Direct borrowing from Federal Reserve banks, 1942 to date Instances of actual use of the direct borrowing authority since 1952 (table) Ratio of Treasury operating cash balance to average budget expenditures, fiscal years 1932-62 in Page 1 1 12 6 7 7 3 5 AMENDMENT OF SECTION 14(b) OF THE FEDERAL RESERVE ACT TUESDAY, JUNE 19, 1962 H O U S E OF R E P R E S E N T A T I V E S , C O M M I T T E E ON B A N K I N G AND CURRENCY, S U B C O M M I T T E E N O . 1, Washington, D.G. The subcommittee met at 10 a.m., Hon. Brent Spence, chairman, presiding. Present: M r . Spence (chairman), and Messrs. Barrett, Reuss, Moorhead, Stephens, Mrs. Dwyer, and M r . Scranton. The CHAIRMAN. The committee w i l l be i n order. W e are here to consider H . R . 11654, with reference to the purchase by the Federal Reserve banks of obligations directly from the Treasury. (H.R. 11654 is as follows:) [H.R. 11654, 87th Cong., 2d sess.] A B I L L T o amend section 14(b) of the Federal Reserve Act, as amended, to extend for two years the authority of Federal Reserve banks to purchase United States obligations directly from the Treasury Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, T h a t section 14(b) of the Federal Reserve Act, as amended (12 U.S.C. 355) is amended by striking out " J u l y 1, 1962" and inserting i n lieu thereof " J u l y 1, 1964", and by striking out " J u n e 30, 1962" and inserting i n l i e u thereof " J u n e 30, 1964". The CHAIRMAN. M r . Roosa, Under Secretary for Monetary Affairs for the Treasury Department, is our witness. Y o u may proceed as you please, M r . Roosa. I f you have a written statement, you may conclude it before you are interrogated. STATEMENT OF HON. ROBERT V. ROOSA, UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS M r . ROOSA. Thank you, M r . Chairman, it is a pleasure for me to be here to review the reasons why we are asking for renewal of this authority. T h i s bill would extend through June 30,1964, the existing authority of the Federal Reserve banks to purchase directly from the Treasury Government debt obligations up to a limit of $5 billion outstanding at any one time. The measure is also supported by the Board of Governors of the Federal Reserve System. Under the Federal Reserve A c t of 1913, the Federal Reserve banks were given unlimited authority to purchase Government securities either directly from the Treasury or in the open market. The Banking A c t of ,1935 revised this provision and required that all Federal Re- 1 A M E N D M E N T OF S E C T I O N 1 4 ( B ) — F E D E R A L RESERVE ACT 2 serve purchases be made in the open market. Then i n 1942 the Federal Reserve banks were again given authority to buy securities directly from the Treasury subject to the restriction that the outstanding amount of such debt should not exceed $5 billion. This authority was originally granted through 1944, and has been extended from time to time since then. The current authority expires on June 30, 1962. Although the direct purchase authority is employed only infrequently, and has not been used at all since 1958, its continuation is essential because it provides an important backstop for Treasury cash and debt management operations. Economical management of the Treasury's cash position allows the public debt to be kept to a minimum, thereby saving interest costs to the Government. F o r this reason, total Treasury cash balances are typically maintained at a level averaging only about one-half of 1 month's expenditures. Since receipts and outlays cannot always be predicted with certainty, occasions naturally arise when Treasury balances decline unexpectedly. The availability of immediate direct access to Federal Reserve credit provides a precautionary reserve for such unforeseen contingencies that would otherwise have to be provided by considerably higher operating balances. Furthermore, at times it is highly useful to allow Treasury balances to f a l l to levels considerably below the average. F o r example, for the several days immediately preceding a taxpayment date, it may be desirable to allow the Treasury's balances to f a l l to exceptionally low levels prior to the large inflow of cash over the tax date. Direct access to Federal Reserve credit provides the margin of safety necessary i f such a practice is to be followed. Otherwise it would sometimes be necessary for the Treasury to float additional security issues in the market before taxpayment dates even though the funds would be needed for only a few days, and then only as a cushion against unforeseen cash drains. Similarly, other occasions may arise when the availability of this limited line of credit at the Federal Reserve permits desirable flexibility i n cash and debt management. F o r example, there may be occasions when Treasury financing operations ought to be postponed for a short period because of market disturbances. The possibility of direct access to Federal Reserve credit increases the Treasury's elbowroom i n such a situation by making it feasible to let balances run down to abnormally low levels for a short time. I n general, then, the availability of a limited amount of direct credit from the Federal Reserve is important, because it makes it possible for the Treasury to operate with a lower cash balance than would otherwise be necessary and to "ride through" low points in the balance with confidence that, i f needed, funds are available on a temporary basis. Additionally, the direct purchase authority provides a source of funds for temporary financing in the event of a national emergency. I n all of the planning we do on the financial side i n the event of a national emergency or nuclear attack, this is a key provision that any Federal Reserve bank may make available funds through the direct issuance of a special certificate to that Federal Reserve bank in the event that the important areas of the country were disrupted in such f r i g h t f u l circumstance. A M E N D M E N T OF S E C T I O N 1 4 ( B ) — F E D E R A L RESERVE ACT 3 So that having this statutory authority on the books, in reasonable amount, of this kind, and with the facilities in readiness, also a part of the necessary precautionary planning for the event of a national defense emergency. Such an emergency might disrupt financial markets at a time when the Treasury needed to float debt issues for new cash or refunding purposes, and direct access to Federal Reserve credit would be extremely helpful. F o r these reasons, the Treasury feels that passage of H . R . 11654 is essential. I should like to emphasize that the direct purchase authority is regarded as a source of temporary accommodation only, not to be used except under unusual circumstances. The Treasury agrees with the general principle that public debt issues should be floated i n the market and that central bank purchases should be made through this market. This principle provides a safeguard against abusive use of the credit of the central bank. The Treasury, through the years, has been very careful not to abuse this direct borrowing authority. The accompanying table provides details on the instances of actual use of the direct borrowing authority since 1952. I t shows that there has been only one occasion in the last 8 years on which the Treasury did, in fact, borrow directly from the Federal Reserve banks. I n recent years the value of the authority has derived primarily from its availability to meet unusual circumstances. I n the normal course of events, the authority might not have to be used at all, but its availability is nonetheless of considerable importance in providing flexibility i n Treasury cash and debt management operations. The knowledge that it could be drawn upon almost instantly, i f needed, has enabled the Treasury on countless occasions to plan for a close fit between expected outlays and receipts, secure i n the knowledge that these supplemental funds could be borrowed in the event that expenditures should unexpectedly and temporarily outrun planned receipts. (The table above referred to is as follows:) Calendar year 1952 1953— 1954_ 1955 1956 1957 19581959 1960__ 1961— 1962 . Days used 30 29 15 None None None 2 None None None None Maximum amount at any time (millions) Number of separate times used Maximum number of days used at any one time 811 1,172 424 4 2 2 9 20 13 207 1 2 M r . ROOSA. That concludes my prepared statement, M r . Chairman, and copies of it have been made available to the committee. The CHAIRMAN. M r . Roosa, this authority has been in effect really since the creation of the Federal Reserve System, has it not ? M r . ROOSA. The authority, w i t h some variations, M r . Chairman. T h e present form of the authority dates from 1942. There was an interval of 7 years i n which it was not possible under the law to oper AMENDMENT OF SECTION 1 4 ( B ) — F E D E R A L RESERVE ACT 4 ate i n exactly this way. B u t except for those 7 years, this has been i n effect since the founding of the Federal Eeserve, nearly 50 years ago. T h e CHAIRMAN. M r s . D w y e r ? M r s . DWYER. N o questions. T h e CHAIRMAN. M r . B a r r e t t ? M r . BARRETT. I assume, M r . Roosa, that all you are requesting here today is an extension until 1964 ? M r . ROOSA. Yes, sir; that is correct. M r . BARRETT. O n page 2 you state, and I quote: The current authority expires June 30, 1962. Although the direct purchase authority is employed only infrequently and has not been used at a l l since 1958, its continuation is essential because it provides an important backstop for Treasury cash and debt management operations. W o u l d you explain i n greater detail f o r us ? M r . ROOSA. Yes, sir; I think one way would be to provide a few illustrations. O n the cash management side, there are three or four times d u r i n g the year when we have f a i r l y heavy expenditures which f a l l due on the 15th of the month. December 15 is a good example. T h e tax receipts that are due as of the 15th flow i n through the banking system at a lagging pace because we allow our taxpayers to receive credit for any check dated on the 15th. Consequently, we know that we can plan ahead and predict w i t h reasonable accuracy for a flow, owing to the time required for the mails and processing of checks, that w i l l be arriving over the next week, sometimes even 10 days, following the 15th. W e also know that most of the contractual disbursements, includi n g the payment of interest on the public debt, as well as the retiring of maturing debt—we have to take this into account i n some cases, not, however, those obligations specifically identified as tax anticipation obligations—these payments normally are on the 15th of the month, just to conform w i t h financial practice. T h u s disbursements would occur on the 15th, and the cash flows i n a little later. W e try to plan so that there w i l l be an assurance of adequate balances all the way. But, i f we were to plan for the outside risk, the one i n a million risk, or the 1 i n 10,000 risk, just to be certain that there would never be a taint on the Government's credit by a delay i n meeting its payments, we would have to carry, and obtain through borrowing i n advance, a somewhat higher cash balance, even though we would be i n a position to retire it 10 days after the tax date. T h e knowledge that we can turn to this authority i f need be, allows us the same k i n d of operating freedom., the opportunity to take that slight risk that our own calculations may be wrong; that would apply i n the case of an individual who is planning his own cash flow but might have arranged w i t h a bank that i n the event some unexpected development occurs he can have a short-term loan f o r a few days. M r . BARRETT. One further question. Over this 7-year period i n which you d i d not have the authority, were there any unusual conditions at that time? M r . ROOSA. Yes, sir; i n relation to the size of the Treasury's cash flow at that time, it d i d prove necessary to maintain a considerably larger cash balance. T h e cash balance then, of course, is very hard to AMENDMENT OF SECTION 14(B) — F E D E R A L RESERVE ACT 5 put into present terms, because before W o r l d W a r I I the whole scale of Federal Government operations was entirely different, but the ratio between cash balance and the annual or monthly cash flow, was considerably higher. I would be glad to provide a record of that, i f you would like, sir. M r . BARRETT. That would be fine. M r . ROOSA. Very good. (The data referred to above is as follows:) Ratio of operating1 Treasury cash "balance to average fiscal years 1932-62 budget expenditures, Average monthly budget expenditures Ratio—cash balance to expenditures (percent) [Dollar figures in billions] Fiscal year 1932 1933.. 1934 1935 1936 1937 1938 1939 1940 1941 1942 . 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 3 Average operating cash balance 2 $0.4 .6 2.1 2.4 1.8 1.6 2.3 2.3 1.7 1.5 2.3 5.8 12.9 16.0 20.1 7.2 3.9 4.4 4.2 4.8 4.7 5.6 5.1 5.0 4.4 3.9 4.2 4.5 4.7 4.8 5.2 _ $0.4 .4 .6 .5 .7 .6 .6 .7 .8 1.1 2.8 6.6 7.9 8.2 5.1 3.3 2.7 3.3 3.3 3.7 5.4 6.2 5.6 5.4 5.5 5.7 5.9 6.7 6.4 6.8 7.4 100 150 350 480 257 267 383 329 213 136 82 88 163 195 394 218 144 133 128 132 86 91 90 93 79 68 70 67 74 70 71 1 Gold plus available funds in Federal Reserve banks plus tax and loan accounts. 2 13-month average of end-of-month figures for 1932 through 1949; average of monthly averages of daily figures for 1950 to date. 3 Estimated. M r . BARRETT. That is all. T h e CHAIRMAN. Mr. Scranton. M r . SCRANTON. M r . Roosa, just a couple of questions. The chart at the end of your statement indicates that some f a i r l y sizable amounts were borrowed i n 1952 and 1953. W h a t occasioned that? M r . ROOSA. I believe the occasion i n 1958—you w i l l notice i t was used for only 2 days. M r . SCRANTON. I w a s r e f e r r i n g t o 1952 a n d 1953, M r . ROOSA. The large number of occasions i n 1952 and 1953 were instances i n which—you w i l l have to bear i n mind two things which have changed since that time: First, instances of the k i n d that I have just described. AMENDMENT M r . SCRANTON. OF SECTION 1 4 ( B ) — F E D E R A L RESERVE ACT 6 Yes. M r . ROOSA. Second, cases in which it was important to borrow i n advance in order to minimize and stretch out the strain on the money market from a very sizable shift of funds into the Treasury balances i n the Federal Reserve banks, and then out again. Now, we have changed the procedures that required that. I n 1955 we changed those procedures. I was at the other end of the process then, on the trading desk in New York, when we introduced a new class of depositary, with respect to the very large banks, wherein we told them that henceforth they would have to be subject to a k i n d of arrangement in which they could, instead of having notice of the call of funds, could expect that up to 11 o'clock in the morning on any day, they could be notified that they had to make payment, during the course of that business day, of a substantial part of their outstandi n g Government deposits. O n the other side, and this we follow carefully to see that there is no inequity resulting from this, on days when Government accounts i n the Federal Reserve banks are rising very high, and there would i n this way be a strain on the market as these funds move out of the market, and into the impounded balances i n the Federal, on those days we may also by notice at 11 in the morning make a redeposit of those funds into Government checking accounts so that they can get the funds back and use them for the rest of the day. So that there is a fair exchange. There has been some complaint, but, overall, you can see the principal effect of it i n this table. Since 1954 there has been virtually no use of this facility. M r . SCRANTON. I n the history of this provision and its operation, what is the most amount of money borrowed at any one time ? M r . ROOSA. I should know that, sir. M r . SCRANTON. A l l I a m t r y i n g to get at is M r . ROOSA. Yes, sir; the maximum as indicated i n this table, in 1953, w a s $1,172 m i l l i o n . M r . SCRANTON. I was thinking of previous to that. M r . ROOSA. Going back earlier, and before the war, I would have to review that. M r . SCRANTON. H a s it ever been a very sizable amount ? M r . ROOSA. NO, never. (The following information was added at this point to the record:) HISTORY OF D I R E C T TREASURY BORROWING F R O M THE FEDERAL RESERVE BANKS T h e act of December 23, 1913, the original Federal Reserve Act, gave the F e d e r a l Reserve banks general authority to purchase Government obligations w i t h o u t specific reference to direct purchases from the Treasury, and without l i m i t a t i o n as to amount. T h e record is not clear o n any earlier use, but during the 1920's and early 1930's 1-day certificates of indebtedness were issued by the Treasury to the Fede r a l Reserve banks at times when the Treasury had allowed cash balances to f a l l i n anticipation of quarterly tax receipts. I f funds were needed for more than 1 day, the prior day's securities were paid off and new 1-day securities were issued. T h e majority of 1-day certificates were issued to the F e d e r a l Reserve banks i n the months of March, June, September, November, and December. T a b l e 1 shows the m a x i m u m amounts of 1-day certificates issued by the Treasury to the F e d e r a l Reserve banks for the years 1923-33. The last record of an issue of this type was on December 17, 1933. I t w i l l be noted i n table 1 that the largest 1-day certificate outstanding during the period covered by the table w a s f o r $316 million. T h i s certificate was issued on December 15,1928. AMENDMENT OF SECTION 14(B) —FEDERAL RESERVE ACT 7 T h e B a n k i n g A c t o f 1935, a p p r o v e d A u g u s t 23, 1935, a u t h o r i z e d t h e F e d e r a l Reserve to purchase Government obligations o n l y i n the open market. During t h e 7 y e a r s , 1935 to 1942, t h e T r e a s u r y d i d n o t b o r r o w d i r e c t l y f r o m t h e F e d e r a l Reserve banks. T h e S e c o n d W a r P o w e r s A c t , a p p r o v e d M a r c h 27,1942, a m e n d e d s e c t i o n 1 4 ( b ) o f t h e F e d e r a l R e s e r v e A c t so as to a u t h o r i z e t h e F e d e r a l R e s e r v e b a n k s t o p u r c h a s e s e c u r i t i e s d i r e c t l y f r o m t h e T r e a s u r y w i t h a l i m i t a t i o n of $5 b i l l i o n outs t a n d i n g a t a n y one time, to e x p i r e o n D e c e m b e r 31, 1944. T h i s a u t h o r i z a t i o n h a s been s u c c e s s i v e l y e x t e n d e d ; t h e c u r r e n t a u t h o r i z a t i o n , p r o v i d e d b y t h e a c t o f J u l y 1,1960, e x p i r e s o n J u n e 30,1962. T a b l e 2 shows the use w h i c h has been m a d e of the d i r e c t b o r r o w i n g a u t h o r i t y b e g i n n i n g w i t h t h e c a l e n d a r y e a r 1942. S i n c e 1942, a s s h o w n i n t h e t a b l e , t h e m a x i m u m a m o u n t of b o r r o w i n g o u t s t a n d i n g a t a n y o n e t i m e w a s i n 1943, a n d a m o u n t e d t o $1,320 m i l l i o n . T A B L E 1.—1-day certificates of indebtedness issued by the Federal Reserve banks, 1923-33 Calendar year Maximum amount at any time (millions) Day used 30 14 15 14 46 20 1923 . 1924 1925 1926 1927 1928 T A B L E 2 . — D i r e c t borrowing $156. 5 184.0 182.0 246.0 251.5 316.0 from Calendar year 1942 1943 1944 1945 1946 _ 1947 — 1948 1949 _ 1950 1951 1952 1953 1954 1955 1956 1957 1958. 1959 I960 __ 1961 1962—January-May. Federal — - . — — — M r . SCRANTON. Thank you. Treasury to $314.0 218.0 219.5 32.0 9.0 17 18 18 8 4 Reserve banks, Maximum amount at any time (millions) 19 48 None 9 None None None 2 2 4 30 29 15 None None None 2 None None None None 191$ to Number of separate times used the Maximum amount at any time (millions) Day used 1929 1930 1931 1932 1933 Days used - T h e CHAIRMAN. Calendar year U.S. date Maximum number of days used at any one time $422 1,320 4 4 6 28 484 2 7 220 108 320 811 1,172 424 1 2 2 4 2 2 2 1 3 9 20 13 207 1 2 T h a t is all. M r . Reuss. M r . REUSS. Thank you, M r . Chairman. Thank you, Secretary Roosa, for your very clear exposition. I do have a couple of questions about this extension, which I support. F r o m 1913 to 1935, the Federal Reserve could buy directly from the Treasury, could it not ? M r . ROOSA. Y e s , sir. M r . ROOSA. A b o u t r i g h t ; y e s , s i r . M r . REUSS. W h a t I am getting at is, why the limitation to $5 billion here? I take i t the reason is contained on page 4 of^your prepared p^ndpk^th^p^blfc^ebt^issues s h o u l d b ! floated i n the Sarke^and that central bank purchases should be made through this market," is M r . ROOSA. Y e s , s i r . ^ has to agree ? ^ ^ M r . ROOSA. Y e s , s i r . M r . REUSS. Y O U have Vr^Roos^Yes^siT ^ P h ' f th > to have a ready and willing buyer i n the ranSaC ^ c u ^ ^ h a t isthe^leprj«i^ Isitatpar^ ^^ ^ ^ U S 6 th Y o r k Federal a^thTbasis.011^ ^ F e d e r a l b a n k S S ° ® M r . REUSS. This, then, is inexpensive borrowing for the U.S. Treasury, is it not? M r . ROOSA. Y e s , s i r ; i t is. ^ ^ ^ ^ ^ ^ ga M?.rROOSA. NO. Year i n and year out it would be a little hard to predict. A t the moment, i f we were to use it, with the discount rate feeing three, we would borrow at 2%. W e auctioned Treasury bills yesterday at 2.72. So it is pretty close. M r . REUSS. I f you were utilizing this special $5 billion direct borrowing. what would you pay the Federal ? ^ R O O S A . W e would pay 2% at.the present discount rate. T w o with regSar portfolio procedure^ w L T L p p e n s T o T h a t ^ L r o f P A £ ROOSA. Perhaps there is more to this question, and I don't mean to be neglecting that i f I should come back to it, but i f you mean the Treasury bill, the issuance of the Treasury bill, just as an illustration, A M E N D M E N T OF S E C T I O N 1 4 ( B ) — F E D E R A L RESERVE ACT 9 Wednesday. A f t e r the results of the auction were announced late last night, those who were successful bidders knew that they were going to come into possession of Treasury bills on Thursday of this week. There is, therefore, an interval of Tuesday and Wednesday, as we say, of "when issued owners." They w i l l receive the piece of paper on Thursday, and they w i l l pay their money on Thursday. I f they find an opportunity to sell their rights over this interval, they can sell it, and i f they make money on it, as sometimes dealers do, depending upon the way the market goes the day after the auction, that might be what you are referring to as the commission. There isn't any other commission. T h e Treasury, itself, does not make a payment to anyone. A n d Treasury bills are paid for without commission. M r . RETJSS. Let us talk about notes and certificates and bonds for a moment. D o I understand that the dealers i n U.S. securities charge no commission for purchases and sales, but simply make their money out of their inventory? M r . ROOSA. Yes, sir; the spread between their b i d and asked prices. They always maintain a spread, and competition determines how wide or narrow that spread w i l l be, and also the state of the market. I n a period of great uncertainty they widen the spreads. M r . RETJSS. Wouldn't it be true that to the extent that the Federal Reserve, i n the normal course of its secular additions to the money supply, buys directly from the Treasury, rather than through the market, that the Treasury ends up with that i n its pocket, which the bond dealers would otherwise have i n their pockets ? M r . ROOSA. Yes, sir. The point then, of a fixed interest bearing obligation, might be illustrated by saying that on issuance, the security immediately begins to trade at its price, u p or down f r o m par. I f the Federal Reserve on becoming a buyer of this security from a dealer paid somewhat more than par m the market, than it would pay for the security on an initial issue, the normal dealer hope is that, of course, that to whomever they w i l l sell, they w i l l make money. O n balance, over the years, since they do, this would no doubt apply on an average to Federal Reserve purchases. The other side of this is that both the Treasury and the Federal Reserve require, for the effectiveness of their operations, an active and broad trading market i n Government securities. Therefore i f on balance there is some attributable part of the Federal Reserve purchase which flows into the maintenance of this market, I think we would have to judge it on whether or not that is serving the public interest. I n the continued maintenance of a vigorous market the Federal, along with all other buyers, has the opportunity of buying at whatever is the going market price, and, of course, very often what happens is that the Federal buys at bargain prices. M r . REUSS. I thoroughly agree with you that it is i n the national interest to maintain a good, vigorous, private market i n U.S. securities. I am not suggesting for a moment that we socialize that market. H o w ever, I am also interested, as I know you are, i n saving money for the taxpayers. M r . ROOSA. Indeed. AMENDMENT OF S E C T I O N 1 4 ( B ) — F E D E R A L R E S E R V E A C T 10 M r . REUSS. SO I come to my main question: Has the Treasury or the Federal Reserve ever made a study to determine just how large a private market in the securities of the National Government it is necessary to maintain? I t might turn out, for instance, that the Federal Reserve could impinge somewhat on the present market, saving money for the taxpayers as it so impinges, without in any way disturbing the vigorous character of the private market. I wondered i f anybody had taken out a slide rule and tried to make that determination? M r . ROOSA. Yes, sir; we have, and in order to make that possible— and I should here acknowledge the influence both of yourself, and particularly, I think, of Senator Douglas, in providing some initial urging at times when this seemed like really a forbidding statistical effort—we initiated, just 2 years ago, a very detailed daily reporting system from all of the dealers—and this includes their transactions and the prices at which they are making markets throughout the day— so that, on the basis of this information now, and for about a 2-year period, it is possible to make the kind of calculation you are suggesting. However, we have been very careful to also assure that the complete confidentiality of individual dealer data would be maintained. F o r example, I want to be protected from knowing the situation of any individual dealer. I have not looked at that kind of information at all. I have looked at tabulations, and I must say that my conclusion to date is that the market is certainly adequate, and is indeed vigorous, in the under 1 year area. Beyond that I feel that it leaves something to be desired. So that i f anything the longer term market needs additional encouragement rather than having to function without some direct Federal Reserve participation. T h i s goes back to another point we have talked about at other times. I am a little regretful there has not been more Federal Reserve activity i n that part of the market, rather than being kept to the fairly limited volume we have seen in the last few months. M r . REUSS. W o u l d it be possible to place the result of your studies before this committee in the near future ? Not necessarily as part of this record, because we want to get this particular b i l l out, indeed have to, by June 30. MR. ROOSA. Yes, sir; surely. M r . REUSS. L e t me recapitulate what I am after, although I think our minds have been meshed here. I would like to know from your studies, and this should be divided into the various segments of the market, under 1 year, over year one, and so on, to what extent the Federal Reserve could, i f Congress so willed, enlarge its direct purchasing power from the Treasury, and i f it d i d so, what the net savings to the taxpayer would be, and, also, where the limits of this are likely to be, having in mind the need for preserving at all maturities a lively and vigorous market. D o you feel that you understand what I am driving at ? M r . ROOSA. Yes, indeed, and I think this is a somewhat different subiect. W e would be glad to explore the questions involved more f u l l y with you as we go along. W e would certainly be glad to come back to deal w i t h this in, I hope, a fully responsive way. A M E N D M E N T OF S E C T I O N 1 4 ( B ) — F E D E R A L RESERVE ACT 11 M r . REUSS. I think not necessarily i n conjunction with this hearing. Y o u could write the chairman so that we would have it i n our records. M r . ROOSA. Surely. M r . REUSS. Thank you. T h e CHAIRMAN. M r . M o o r h e a d . M r . MOORHEAD. M r . Roosa, under this statutory authorization, could the Federal Reserve refuse to lend to the Treasury when the Treasury called for it, or is it a requirement that the F e d must come up with the amount that the Treasury asked for ? M r . ROOSA. NO, sir; in law, the Federal Reserve could refuse, and this would then require—you may have noticed that I said "almost instantly," and not "instantly," in terms of the availability of the funds— this would require action on the part of the Open Market Committee. I n practice, going back to one time when this occurred i n 1958, I remember the way in which this was done. There was an advance discussion of the possibility with the Open Market Committee, so that when the initiation of the facility came after, in February, there had already been tentative approval, and it simply required a triggering to bring it about. B u t there was a need for formal action by the Open Market Committee, on its side. The purport of this bill is to permit the transaction to occur, but not to direct the Federal Reserve to do it at the Treasury's instant bidding. M r . MOORHEAD. YOU have discussed with us how the interest rate was arrived at ? M r . ROOSA. Y e s , s i r . M r . MOORHEAD. Is that authorized by statute, regulation, agreement, or how ? M r . ROOSA. I t is by agreement and subject to review. T h e suggestion formally comes, I think, shortly following the reenactment of this authority, whenever that has occurred in the p&st, w i t h the Treasury and the Federal Reserve discussing the appropriateness of renewing this kind of interest rate charge. Then an action of the Open Market Committee is taken so that there w i l l be no need for debating these technicalities. These things can be taken care of very quickly. M r . MOORHEAD. But, legally, in the future, the Open Market Committee could either refuse to lend or insist upon different terms than have been the case in the past ? M r . ROOSA. Y e s , s i r . M r . MOORHEAD. Thank you, M r . Chairman. T h e CHAIRMAN. M r . Stephens. M r . STEPHENS. Thank you, M r . Chairman. M r . Roosa, as I understand it, there is no expectation that this authority would be used any time soon; is that right ? M r . ROOSA. Yes, sir. W e rely on it, and we are most successful when we don't actually draw on it. M r . STEPHENS. That is, this is primarily like a safety valve? M r . ROOSA. Y e s , s i r . M r . STEPHENS. Thank you. T h a t is all. The CHAIRMAN. A r e there any other questions ? I f not, M r . Roosa, thank you very much for your very clear and informative statement, and we hope to have you before the committee often. A M E N D M E N T O F S E C T I O N 1 4 ( B ) — F E D E R A L R E S E R V E A C T 12 M r . ROOSA. T h a n k you very much, M r . Chairman. The CHAIRMAN. T h i s w i l l conclude the hearings, and we w i l l go into executive session on the bill. M r . POSTON. M r . Spence, we have a letter from M r . M a r t i n of the Federal Reserve B o a r d on this b i l l favoring enactment. W o u l d you like to have it included i n the record ? The CHAIRMAN. Yes, sir; that w i l l be included i n the record. W e w i l l go into executive session. (The letter from M r . Martin, referred to above, is as follows:) B O A R D OF GOVERNORS, OF T H E F E D E R A L R E S E R V E S Y S T E M , O F F I C E OF T H E C H A I R M A N , Washington, Hon. BRENT June 13 , 1962. SPENCE, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN : T h i s is i n response to a request by telephone on June 12 f r o m Robert R . Poston, counsel of your committee, for the views of the Board on H . R . 11654, a b i l l to amend section 14(b) of the Federal Reserve Act, as amended* to extend for 2 years the authority of Federal Reserve banks to purchase U.S. obligations directly f r o m the Treasury. T h e use of this authority by the Federal Reserve enables the Treasury to avoid creating unnecessary financial strains that would otherwise occur i f i t had to d r a w heavily on its accounts especially during periods immediately preceding tax payment dates. Temporary Treasury borrowing at such times, followed by prompt repayment f r o m the proceeds of tax payments, provides a smooth operating mechanism, without the abrupt money market fluctuations that would otherwise occur. T h e authority could also be useful i n dealing w i t h situations resulting f r o m a national emergency. Since 1942, when the authority was granted, i t has been used sparingly, and its use is reported, as required by law, each year i n detail i n the Board's annual report. T h e results of its use also appear currently i n weekly statements issued by the Federal Reserve and in daily statements issued by the Treasury. T h e B o a r d favors the proposed legislation. Sincerely yours, WM. MCC. MARTIN, Jr. (Whereupon, at 11 a.m., the subcommittee proceeded into executive session.) O
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