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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
851
51




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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