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Kenneth D.

Garbade

Why the U.S. Treasury
Began Auctioning
Treasury Bills in 1929
• In the 1920s, there were several flaws in 1. Introduction
the structure of U.S. Treasury financing
operations.

• The flaws were attributable to the war-time
T he introduction of a new financial instrument by a
sovereign issuer is never a trivial event. New instruments
require the development of marketing programs and
practice of selling securities in fixed-price accounting systems, consume disproportionate amounts of
subscription offerings and the newer practice senior executive time, and not infrequently require new
of limiting Treasury debt sales to quarterly statutory authority. It is hardly surprising that the United
dates. States has introduced only a handful of new instruments since
the development of a liquid, national market for Treasury
securities during World War I, including savings bonds,
• In 1929, the Treasury introduced a new
STRIPS, foreign-targeted Treasury notes, and TIPS (Box 1).
financial instrument to mitigate these flaws.
This article examines the U.S. Treasury’s decision to
introduce a new financial instrument—Treasury bills—in
• Treasury bills were auctioned rather than 1929. We show that Treasury officials were willing to commit
offered for sale at a fixed price and were sold the resources required to introduce the new security in order
on an as-needed basis instead of on a to mitigate several flaws in the structure of Treasury financing
quarterly schedule. operations, such as:

• By introducing a new class of securities, the • New debt offerings were chronically oversubscribed. Reliance
on fixed-price subscription offerings of new debt during
Treasury was able to address the defects in
the 1920s resulted in chronic oversubscriptions, a clear
the existing primary market structure even indication that the offerings were persistently underpriced.
as it continued to maintain that structure.
• The schedule for new debt sales resulted in negative “carry”
on Treasury cash balances at commercial banks. The
Treasury sold new debt only four times a year—on tax

Kenneth D. Garbade is a vice president at the Federal Reserve Bank The author thanks Jeffrey Huther and William Silber for help researching this
of New York. article and for comments on earlier drafts. This article could not have been
<kenneth.garbade@ny.frb.org> written without the extraordinary assistance of Megan Cohen, Kara
Masciangelo, and Mary Tao of the Research Library and Crystal Edmondson
and Joseph Komljenovich of the Records Management Function (Archives) of
the Federal Reserve Bank of New York. Extremely helpful comments from two
anonymous referees are gratefully acknowledged. The views expressed are
those of the author and do not necessarily reflect the position of the Federal
Reserve Bank of New York or the Federal Reserve System.

FRBNY Economic Policy Review / July 2008 31

Introduced in March 1935. 40 Stat. January 1997. . Introduced in requirements. Warren Harding called a special • The Treasury had to arrange short-term loans from session of the Congress to reduce personal and corporate taxes. argued that the tax system encouraged “wasteful commercial bank accounts that earned interest at a rate expenditure.” New York Times. “Both War I. . 1921. 1921. and enterprise. and 1919 Treasury Annual Report. 1921. encourage extravagant expenditures. Treasury Began Auctioning Treasury Bills in 1929 . President on March 4.”). Savings Bonds Single-payment. discouraged new ventures. p.2 Treasury Inflation-Protected Securities (TIPS) Political leaders recognized that the tax system had become Coupon-bearing notes and bonds with principal and interest badly warped in the haste of responding to wartime payments indexed to the consumer price index. p. April 13. See also “President’s Address to Congress on Domestic Treasury financing operations in the mid-1920s and explaining and Foreign Policies. 31-84.S.”a Four foreign-targeted notes were sold $25. We begin by describing in Section 2 the structure of March 8.” New York Times. and produce industrial stagnation. p. and “President to Call Congress April 11.” New York Times.5 Federal Reserve Banks to make maturity payments. remove the incentive to new enterprise. In mid- Foreign-Targeted Treasury Notes 1914. Section 3 describes the flaws in the structure of Treasury Democrats and Republicans believed that . 186. be destructive of business activity October 10. . as expeditiously present from the readjustment of internal taxes.” New York Times. nonresident alien individual. Treasury Financing Operations of Securities (STRIPS) in the Mid-1920s Single-payment securities derived by separating the principal and interest payments bundled together in conventional Treasury The two principal objectives of federal fiscal policy in the 1920s notes and bonds. 287) (by 1920. the maximum tax rate on between October 1984 and February 1986. Urging Return to Peace Reserve Bank loans sometimes created transient Basis. 46. 1919. 23. Introduced in February 1985.” penalized “brains. 38 Stat.” and lower than that paid by the Treasury on its indebtedness. 114. The evolution of bill financing in the early 1930s is described briefly in Section 5. p. p. energy. there was only $968 million of interest-bearing Treasury Notes providing for limited disclosure of ownership when owned debt outstanding. intermediate-term non-marketable securities with fixed-price redemption options. and Smiley and Keehn (1995. there was near- Treasury officials set new issues to mature on tax universal agreement that taxes should not be cut to levels that payment dates. 6. Section 6 concludes. in advance of its needs and to inventory the proceeds in Carter Glass. 1. and whether they may and certain related foreign partnerships. February 24. . December 3.”). In his address to borrow from the Federal Reserve to bridge the gap 1 between the date it needed to make a maturity payment 1914 Treasury Annual Report. were tax reduction and paying down the war debt. and Section 4 shows how Treasury revenue collected from the wealthiest Americans . p. There is a point at which in peace times high rates of income and profits taxes discourage energy. by mid-1919. 32 Why the U. President Woodrow Wilson suggested that Congress might well consider whether the higher rates a of income and profits taxes can in peace times be A United States Alien is defined as a foreign corporation. p.1 Over the same period. 5 “Harding Will Call Special Session for April 4 or 11. October 3. personal income had increased from 7 percent to 77 percent. The short-term 3 “Text of President Wilson’s Message to Congress. Treasury Circular no. and Garbade (1987). This schedule forced the Treasury to would impede expeditious debt reduction. In his 1919 State of the Union message. tax avoidance had reduced the financing operations. 2 and the date it actually collected tax receipts—typically Underwood-Simmons Tariff Act. 1057.2 billion. 7 (quoting Harding’s how that structure had evolved in support of an important comment that “The most substantial relief from the tax burden must come for the objective of federal fiscal policy: paying down.S. and productive of waste and inefficiency. 1984. Separate Trading of Registered Interest and Principal 2. Despite the intense interest in tax reduction. 1919. and Revenue Act of 1918. and the revision or repeal of those taxes which have become unproductive and are so artificial and burdensome as to as possible. fluctuations in reserves available to the banking system 4 1919 Treasury Annual Report. . p. and undesirable volatility in overnight interest rates.3 payment dates—and was consequently forced to borrow President Wilson’s first post-war Secretary of the Treasury. 1. not.4 Promptly after being sworn in as resulting in negative carry on the account balances. Treasury after 1918 bills. 1913. 1921. the debt had ballooned to by “United States Aliens. the debt incurred in the course of financing World defeat their own purpose. March 15. Box 1 New Financial Instruments Introduced officials planned to correct or mitigate the flaws with Treasury by the U. nonresident alien fiduciary of a foreign estate or trust. effectively productive of revenue. several days after the stated due date. on the contrary.

1924. Mellon reiterated his view of the link that it could—if the debt were sold to foreigners.”8 a change in that policy. and I see no reason for reducing the heavy annual interest charges. but then leveled off— (Other Than for Debt Retirement). enormous fixed debt charges . balanced budgets. Emphasis added.9 Treasury receipts fell from their high-water Times reported that “some members of Congress are advocating the raising of 75 per cent of the first year needs by 6 “President’s Address to Congress on Domestic and Foreign Policies.” New York taxation. 287-8 and 313-8). Some. pp. 10 Quoted in Adams (1917. limited government. 292). on April 6. Aside from gradual debt end of the spectrum: “It has been the custom of this refunding at lower rates of interest. [T]he more rapidly the debt is retired. we first have to understand how the war was financed. 1921. p. . FRBNY Economic Policy Review / July 2008 33 . Smiley and Keehn (1995). April 13. At the same time. and Cannadine (2006. 5 4 Despite the intense interest in tax 3 reduction. the wartime Secretary of the Treasury. Report. . 33-4. .13 In that case. Secretary of the 2. 26. pp.11 Further along the spectrum. and even rose a bit in the second half of the decade—as a result Fiscal Year 1920 – Fiscal Year 1930 of rapidly expanding economic activity. it is the only method of country to pay war bills by bond issues. p. the Billions of dollars Congress was able to effect significant expenditure reductions.”7 should be financed with debt or taxes. Emphasis added. the federal government was able to reduce financier.”10 The nation’s most prominent Remarkably.” and leading economists at forty-three colleges and Times. between debt reduction and tax reduction in 1926: “As long as there are the war might require little sacrifice in current living standards. . p. The surpluses underwrote a 37 percent 7 Expenditures reduction in Treasury indebtedness—to $16 billion by the end 6 of the decade. . Economists agreed 8 1924 Treasury Annual Report. and to take care of the debt. like Senator Debt reduction. p.” The central issue was whether debt could transfer the 7 Mellon (1924. was “the best Furnifold Simmons of North Carolina. 8 The result was a budget surplus in every fiscal year from 1920 Receipts to 1930 (Chart 1). William McAdoo. the sooner will come the 9 See Blakey (1922. Murnane time when these charges can be practically eliminated. . President Harding announced a policy of “orderly funding and gradual liquidation” of the debt. President Wilson’s three revenue measures adopted between 1921 and 1926. In a series of of war expenses should be paid from taxes. Secretary Mellon claimed.75 billion in fiscal year 1920 to $4 billion in 1922 in Treasury Receipts and Expenditures the wake of a severe post-war recession.” 1926 Treasury Annual (2004). thought Congress reduced tax rates on personal income to a maximum half was preferable. burden of the war to future generations. To understand how the Treasury structured its financing operations to support the goal of debt reduction. set off a prolonged national debate over whether the war properly to run its business .6 Three years later. manageable national debt. believed that no more than 20 percent both tax rates and the national debt in the 1920s. . 278) describes universities signed a petition urging taxation as the principal Harding’s economic agenda as a restoration of “the prewar climate of low taxes. 7. Chart 1 mark of $6. J. no large reduction in total expenditures is possible. took a position at the method of bringing about tax reduction.12 functioning international economy backed by the gold standard. there was near-universal 2 agreement that taxes should not be cut 1 to levels that would impede expeditious 0 1920 21 22 23 24 25 26 27 28 29 30 debt reduction. p. Cannadine (2006. Morgan. and a means of finance. as to deprive the Treasury of sufficient revenue with which 1917. 20). P. the New York of 25 percent. the special session of the Congress in 1921. and 1926). Source: Treasury annual reports. in the course of arguing for a second round of tax cuts.1 Financing World War I Treasury Andrew Mellon cautioned that “the Government must always be assured that taxes will not be so far reduced The entry of the United States into World War I.

. October 3. but he concluded that there were good reasons to prefer public. 906-7). p. (“I believe that if we are to preserve the soundness and stability of our financial 18 Annual fiscal year receipts and expenditures in excess of “normal. 300. p. 1917. pp. of the $32. but repayment would be Chart 2 funded from taxes imposed on later generations. Blakey (1918. it. Dodge. April 19. It may be best all war.”).”). 1917 $0. 892) (“For the people considered as a whole.7 percent 13 See. McAdoo (1931. quoted in Synon (1924. feeling has been that fifty per cent of the cost of the war should be financed by 16 Blakey (1918. were: expenditures for the fiscal year 1919…. The question of debt versus tax financing was resolved during the course of the war in a series of incremental actions.7 billion was 23. 17 The major wartime tax acts were the War Revenue Act of 1917. p. some are in a much better position to economize at this time than are to Cleveland H. Anderson (1917.”) Emphasis in the (“McAdoo believes that about half the expenses of the war should be paid from original. Receipts Expenditures 12 “Big War Loan Bill Ready for Debate. 40 Stat. . and “Taxation is Favored to Meet War Expenses. Treasury Receipts and Expenditures. 860) (“Our own citizens must pay now out of current income whatever the government spends now. the war by floating five enormous Liberty loans. Either way. . 15 current revenues….336 “Economists United in Favor of War Tax. for example.”). pp. . so far as a nation as a whole is concerned. taking the easier advantageous credit transactions by itself assuming the nation as a whole.202 April 19. approximately temporarily. a prominent philanthropist and Princeton classmate of others. 1918 3. we should raise by taxation not less than one-third of the estimated of dollars. 222-3) (“As to taxation.5 billion during Source: Treasury annual reports. Borrowing at home. see individual from himself . domestic arranged through individuals.708 $32. in the form of reduced consumption. 1919 3. 1917. p. 93).” New York Times.374 $ 1. 1917. p. . p. April 12. April 19. 383). June 7. .” New York Times. See also Blakey (1917. The total excess of war-related tax receipts of $7.581 Atlanta Constitution. p.”16 borrowing postpones no burden to the future . some borrowing is socially justifiable because it allows Woodrow Wilson. it also raised additional sums with monthly—sometimes biweekly—sales of short-term certificates of indebtedness. McAdoo later revised his thinking to one-third taxes and two-thirds debt. 94). p.14 Economists also agreed that debt financing and tax 10 financing differed at a disaggregated level and that debt financing facilitated intertemporal reallocations of the burdens of war among individuals. Roy Blakey. p.” in billions system.” Boston Daily Globe.18 that individuals as well as governments can borrow. 2. 34 Why the U. 1917.”) and Durand (1917. 6.17 Chart 2 shows unexpectedly it may find many individuals unprepared to pay Treasury receipts and expenditures prior to and during the their just shares of a new and large burden. letter from McAdoo means. finance: “In so far as the government can make See.6 billion in excess expenditures.” New York Times. For McAdoo. . there is a further net gain.”). and the April 14. The idea that the burden of war expenditures can be “Senate Will Pass Bond Bill Quickly. p. by Americans. 372) (“I hoped to raise about half of Blakey (1918. . hence. my accommodation as between individuals. is precisely similar to borrowing by an 11 Morgan’s view is reported in McAdoo (1931. rather 14 than private. and the Revenue Act of 1918. . Assuming (based on the pre-war data) “normal” receipts around to permit some to assume the burden of others and expenditures of about $750 million per year. 1917.” Total $7.The debt would have to be repaid.S. p. 1 and Blakey (1919). the entire cost of the war had to be 15 borne immediately. 7. 1918. observed that “when a war comes 0 1910 11 12 13 14 15 16 17 18 19 The Treasury raised $21. since there were no other countries from which to borrow in Fiscal Year 1910 – Fiscal Year 1919 1917 (Japan was the only major country not already involved Billions of dollars in the conflict). an economist at the 5 University of Minnesota.904 18. including especially new tax legislation. 1917.043 “College Men Want Direct Taxes Instead of Bonds. 92). there was no essential difference—from an 20 Receipts aggregate point of view—between debt financing and tax Expenditures financing. 3 deferred to future generations is the supreme fallacy of finance. p. Treasury Began Auctioning Treasury Bills in 1929 .”) borrowing agency instead of leaving the transactions to be and Durand (1917. However. either wholly or in part. for example. April 13. p. See Blakey (1917) and Blakey in “M’Adoo Advises Doubling War Tax. it is simply impossible for ‘posterity to share the burdens’. 24.”15 Blakey appreciated one quarter of the cost of the war was financed with war taxes. 813) (“Among persons of equal the expenditures through taxes. and.430 13. See his letter to the chairman of the House Ways and Means Committee quoted 1917.” New York Times. p.

10. officials sums with monthly—sometimes biweekly—sales of short-term allotted securities on the basis of order size. is hereby authorized to deposit in such banks and A later certificate series.5 Amount subscribed (billions of dollars) 3.) To facilitate subscriptions to Liberty loans and certificates All wartime security sales were by subscription.” Wall Street Journal. 8. . 1919 First call date June 15. callable in fifteen years callable in ten years not callable callable in fifteen years callable in three years Coupon rate 3¾ if nontaxable. (percent) 3½ 4 4¼ 4¼ 4¾ if taxable Dated date June 15. 1917 April 6–May 4. more typically for several weeks. in his discretion.” The Conditions. 1928 October 15. p. p. 1927. 1938 May 20. and Santoro (2004). 1918 May 20. McDonough (1976). Attached.19 The needed to meet expenses. 35. with a preference certificates of indebtedness.0 6. April 25. 1918 September 28– April 21– October 19. and in one Treasury securities by crediting the War Loan Deposit Account exceptional case for almost three months. it also raised additional amount more than Treasury officials wanted to sell. 1918 May 10. April 24.0 3. FRBNY Economic Policy Review / July 2008 35 . 1922 Maturity date June 15. . When funds were pace of sales and how much the Treasury wanted to sell. 1918. The Treasury raised $21. that is.5 billion during the war by floating Liberty bonds).5 Subscription period May 14–June 15. “Loan Will Be Made at Once. 10. depending on the that the Treasury maintained at the bank. funds on deposit at a Federal Reserve Liberty Bond Act.8 4. 1923 Amount offered (billions of dollars) 2. 1933 June 15. “Tax Certificates at 4½% Meet Investment the bonds and certificates of indebtedness authorized by this Act . 1919 Source: Treasury annual reports. There investors. 1917.S. arising from the sale of August to early November 1918. subscription Accounts” at commercial banks around the country.0 5.2 7.0 3. p. 20 Section 7 of the First Liberty Bond Act provided that “the Secretary of the Certificates to be Paid for Today. 1932 November 15. remained open from mid. . designated series T-G. Lovett (1978).” Wall Street Journal. 1917 October 1-27.0 4. 1947 November 15. trust companies as he may designate the proceeds .6 4.S. Treasury of indebtedness. (Certificates of indebtedness were given to small orders to effect a broader distribution to retail coupon-bearing securities that matured in a year or less. 1917 November 15. pp. April 25.2 Amount sold (billions of dollars) 2. Treasury. 1917 May 9. Bank. The system of War Loan accounts the Victory Liberty notes—see Table 1) and sometimes filled all was important because it encouraged subscriptions: banks subscriptions in full (as in the sales of the Third and Fourth could pay for their purchases and the purchases of their 19 Subscription books for the first series of certificates offered to the public customers with deposit credits in lieu of “immediately opened—and closed—on the same day that President Wilson signed the First available” funds. October 12. Twenty-five-year bond. Subscription books for the Liberty created and managed a system of “War Loan Deposit loans remained open for three or four weeks. the Treasury and the twelve district Federal officials set the coupon rate on a new issue and then offered it Reserve Banks (acting as fiscal agents for the United States) to investors at a price of par. Twenty-year bond.” Wall Street Journal. 40 Stat. 1927 Not callable October 15. Four-year note.0 4.2 7.” Wall Street Journal. that authorized their issue.0 3. 1918. Table 1 Liberty Loans First Second Third Fourth Victory Liberty Loan Description Thirty-year bond.20 A bank books for certificates of indebtedness remained open for as typically paid for its own and its customers’ purchases of little as one day. 1917. . . November 7. See Garbade. In cases where investors subscribed for an five enormous Liberty loans (Table 1). was $3. 5. Table 2 presents an example.45 billion in certificates outstanding in mid-1919. 1917. p. Ten-year bond. 215-6. 1942 September 15. and 1918 Treasury system of War Loan accounts was the forerunner of the modern Treasury Tax Annual Report. See also “U. p.” New York Times.21 War Loan deposit liabilities were relatively inexpensive “Secretary McAdoo to Sell Certificates.0 4. 1918 October 24. and “U. the Treasury would request that some Treasury sometimes sold a fixed amount of Liberty loans that it of the balances be transferred to Treasury accounts at Federal Reserve Banks (from which the Treasury paid most of the bills specified ex ante (as in the sales of the First Liberty bonds and of the federal government). April 21. Tax Certificates Have Five Coupons and Loan system. Partlan. 1. and Brockschmidt (1975).

“Government Special Deposits. and conducted through a series of steps that at no time overstrained the market’s absorptive capacity. but not less than $60. In the process. 2) cash refinancings (with At a purely technical level.35 4½ percent per annum in 1917 and 1918. and 3) cash repurchases of debt near whether intra-year certificate financing or refunding maturity and cash redemptions at maturity. 22 The 2 percent rate was established prior to the war for an earlier depository $4 billion of new notes maturing between June 1924 and system that was limited to national banks. 2. the Treasury had paid off the Victory notes.000 to $2.000 to $250. Gaines (1962. 134-5. .26 Policy actions of the 1920’s were directed toward specific. April 24.41 Over $10.000 30 percent.6 billion of short-term p.000 to $6. p.000 21 percent Third Liberty Bond 3. when they matured.000 100 percent Pre-war debt 0. pp. clearly-stated objectives. if not.20 $6.000 $100. Post-war debt Certificates of indebtedness 1.000 Average of 20.87 $10. See “Banks Must Pay 2 Per Cent. “Banks Must Pay Interest on All Government Deposits. p.10 Bonds 0. certificates of indebtedness to dates after the Victory notes May 2. and reduced reserves from the private banking system into Treasury accounts at Federal the short-term debt to $1 billion.000 Liberty Loans $250. 1912.33 Total 14. They solved the problem with a carefully constructed expected to be available to redeem them.000 Second Liberty Bond 3. Tilford Gaines. Gaines (1962. in the history of the country. and predictable.” Wall Street Journal. p. The concluded that “the decade of the 1920’s witnessed what is program was orderly.76 and cost banks only 2 percent per annum.2 The Mechanics of Paying Down the Debt The principal problem facing Treasury debt managers in the 1920s was how to pay down the large Liberty loans with were refunded to a carefully selected niche in the debt budget surpluses that became available only gradually over structure where. 5 and 211. Table 2 Table 3 Subscription Allotments on First Liberty Loan Treasury Debt in Mid-1923 Billions of Dollars Subscription Allotment Up to and including $10.000 to $100. p.S.01 Source: 1923 Treasury Annual Report. p. 1912 Treasury Annual Report. funds might be time.)23 Total debt 22.000. the Liberty and Victory loans. for two reasons: to refinance $2.” December 1927 (Table 4) as well as a modest amount New York Times.000 45 percent. 23 25 Board of Governors of the Federal Reserve System (1943. the job done by Secretary short-term certificates and intermediate-term notes) of Mellon during the 1920’s was superb. maturing Liberty loans.000. During the preceding four years. May 1.03 Notes 4. the War Loan Deposit Account System avoided draining the four remaining Liberty bonds to $15 billion. 1912.500 First Liberty Bond 1. 34). p. was carefully planned in his groundbreaking study of Treasury debt management. 1913. reduced the outstanding amount of 21 Additionally. p.” New York Times. but not less than $10. 8. they (Table 3).000.000 60 percent. Treasury Began Auctioning Treasury Bills in 1929 .000. 8. 8. 439). p. p. 149. in the sense policy. in a technical sense.22 (By comparison. and 1913 Treasury matured in May 1923 but before the Third Liberty bonds came Annual Report. it had issued Reserve Banks when investors paid for their securities.89 borrowing from a Federal Reserve Bank cost between 3 and Other debt 0.000. but not less than $112.000.95 $2.”24 that the Secretary’s program and intentions were clearly Gaines pointed out that understood. April 25. 36 Why the U. with ample advance notice to the probably the most effective execution of debt management market before each step. Each operation. pp. p. 15.000 25 percent. .” Wall Street Journal.89 Source: 1917 Treasury Annual Report. The new notes had been issued Street Journal. “Money.25 program of 1) exchange offers of new notes and bonds for and that Liberty loans approaching maturity. 1913. Total 5. “Must Pay Interest on Nation’s Cash. 29).2 percent Fourth Liberty Bond 6. 1912. 24 26 Gaines (1962. 27). 8.000 to $10. Maturing securities Treasury indebtedness stood at $22 billion in mid-1923 were redeemed if funds were available . 1. April 26.” Wall ($760 million) of new bonds. but not less than $600.

p. 1922 4¾ March 15.31 On balance. 1924 311 and its retirement. 1921 5½ September 15. 1926 Treasury Annual Report.”) and p. See also 1923 Treasury Annual Report. The maturities of new certificates varied erratically disburse during the coming quarter. 1922 4½ June 15. December. 1922 4¾ March 15. With this object in view all of the short-term quarter. Nevertheless. redemption of the war debt. p. March and certificates of indebtedness in every quarter. 1926 618 August 1. 1921 5¾ June 15. the cash in the general fund notes issued in the course of the refunding have been given maturities on and the Government receipts to be expected. Third Liberty bonds. on the receipt side. taking into account. the refunding has all been on a short-term basis. 39 30 There were only two cases after 1922 when certificates of indebtedness were (“New issues of public debt securities in regular course are made only on tax. 1925 469 column shows the four tax payment dates in 1925. sold on other than a tax payment date: an issue of 213-day certificates sold in payment dates and the amount of the issue is determined by the estimated cash November 1927 to finance the redemption of Second Liberty bonds and an requirements of the Treasury to the next payment date in excess of the cash in issue of 335-day certificates sold in October 1928 to finance the redemption of hand and the estimated receipts from taxes and other sources of revenue. the Annual Report noted that the practice of having issues 29 1922 Treasury Annual Report.”). 20 27 The Revenue Act of 1918 provided that the tax on income earned in a (“Except for the issue of about $750.”) the probable expenses of the Government during the quarter. 1927 668 January 15. on the expenditure side. 1925 335 second column shows the amount of securities maturing on March 15. and. and June the Treasury in such manner that surplus revenues may be applied most effectively to the determines what income it will need to meet expenditures during the coming gradual reduction of the debt. and all outstanding issues of Treasury certificates amount of cash required to meet obligations maturing during the quarter. Treasury officials estimated the receipts they cash management. on March 15. These features reduced the some of the maturing debt. however.28 The 1922 Treasury amount and term to maturity. This gives the best to Refinance Shorter Term Debt and Maturing assurance of the gradual retirement of the war debt. Amount for by distributing the debt over early maturities in amounts Coupon (Millions not too large to be financed each year these refunding Issue Date (Percent) Maturity of Dollars) operations have given the Treasury control over the debt June 15. more predictability of Treasury operations and facilitated the generally. the quarterly tax-payment dates. September 15. . it was part of a larger scheme debt management.30 The regularity enhanced the designed to facilitate redemption of the notes and.000 of 25-30 year Treasury bonds in particular year was due in four quarterly installments during the following the fall of 1922. for example. As a tax payment date integration of Treasury debt management with Treasury approached. and it has been year. 9. note] refunding which the Treasury has been carrying on. arranged with a view to distributing the early maturities of debt at convenient 28 intervals over the period before the maturity of the third Liberty loan in 1928 See. They used balances from quarter to quarter (Chart 3). The June 15. June 15. 1926 487 May 15. March.”29 September 15. and the sizes of new in Treasury accounts at Federal Reserve Banks and in War offerings also varied widely. depending on the amount Loan Deposit Accounts at commercial banks equal to the maturing and the magnitude of anticipated tax receipts and estimated excess of receipts over expenditures to redeem expected expenditures (Chart 4).248 operations on quarterly tax dates was an Source: Treasury annual reports. and they refinanced the predictability of two important aspects of a financing: remainder to a subsequent tax date. 1922 4¾ December 15. 1924 391 Table 5 illustrates how the scheme worked. .000. 1923 4¾ March 15. and December 15. 1925 602 December 15. and have likewise been reduced to tax maturities. . Table 4 mature on quarterly tax dates absorbed “any surplus Treasury Notes Issued between 1921 and 1923 revenues which may be available. 1923 4½ December 15. 35 (“A few weeks prior to the 15th of each September. month of a calendar quarter—when most individuals and The “regularization” of Treasury financing operations on corporations made quarterly income tax payments. the system was not were about to receive and the funds they were likely to flawless.27 This quarterly tax dates was an important innovation in Treasury was no accident. including a 29¾-year bond in maturing Victory notes. 1922 4¼ September 15. The third shows the amount of due in September 1928. FRBNY Economic Policy Review / July 2008 37 . rather. The first February 1. and to refinance a portion of the securities issued on each date. important innovation in Treasury debt management. 1927 367 The “regularization” of Treasury financing Total 4. each of the four dates. The All the new notes matured on the fifteenth of the third fourth shows the amount paid down. p. and is Victory Notes perhaps the greatest advantage of the short-term [that is.

32 and 33. 1925. Source: Treasury annual reports. Structural Flaws in Treasury solution to the problem of paying down large debt issues with Financing Operations budget surpluses that became available only gradually.” New York Times. p. the Treasury regularized term to maturity and offering amounts as well as offering dates when it adopted a “regular and predictable” issuance in fixed-price subscription offerings and allowing banks to pay strategy for notes and bonds in the 1970s (Garbade 2007). white circles are certificates issued on a date other than a tax payment date. “June Funding Issue Lowest Since War. “New Treasury Issue Is $250. all of which were well understood by early 1929. p. June 8. Note: Dark circles are certificates issued on tax payment dates. “Treasury to Issue 4% Bonds at Premium. 1925 250 252 -2 Nine-month certificate maturing June 15. 1926 September 15. 1925 480 453 27 One-year certificate maturing December 15. 24. 1926 Treasury Annual Report. Note: Dark circles are certificates issued on tax payment dates.000 Loan. 1925. Chart 3 Chart 4 Term to Maturity at Original Issuance of Certificates Issue Size of Certificates of Indebtedness of Indebtedness Millions of dollars Days 600 360 400 270 180 200 90 0 0 1923 1925 1927 1929 1931 1923 1925 1927 1929 1931 Source: Treasury annual reports.” New York Times. 1925. 1925 Sources: 1925 Treasury Annual Report. 37. 8. p.000. pp. p. on a quarterly basis.S. 41.and late 1920s. September 8. program of regular quarterly financings was an innovative 3. 1925.000. 1925. were attributable 31 to the continuation of the wartime practices of selling securities In contrast. Table 5 Refinancings and Paydowns on Tax Payment Dates in 1925 Amount (Millions of Dollars) Date Maturing Issued Paid Down Refinancing Securities March 15. There were several important structural flaws in Treasury financing operations in the mid.” Wall Street Journal. December 7. March 5. p. 1926 December 15. 1954 June 15. Treasury Began Auctioning Treasury Bills in 1929 .000. white circles are certificates issued on a date other than a tax payment date. and “Treasury Will Seek a $450. and $290 million of a 29¾-year bond maturing December 15. 1925 400 124 276 One-year certificate maturing June 15.” New York Times. The flaws. 32. for purchases of securities with War Loan Deposit Account 38 Why the U. 1925 560 509 51 $219 million of a nine-month certificate maturing December 15.

1920. Federal Reserve Bank of Boston. p. April 14. 1.5 Additional subscribed Additional issued Fixed-price subscription offerings gave Treasury officials an Offered 2. relative to contemporaneous market conditions. and letter dated December 16. 51-2. 18. The Wall Street Journal pointed out the problem as early as April 1921: “The fact that 3. New York bankers expressed intense 0 dissatisfaction with the rate and suggested that the new certificates 1920 21 22 23 24 25 26 27 28 29 30 should pay “at least” 5 percent.5.33 Investors subscribed for only $200 million of the certificates. adopting the system of offering the certificates at tender. House Ways and Means Committee in May 1929. March 10. 1920. In March 1920.credits. and Subscribed in Quarterly (Tax Payment Date) Offerings of Treasury Securities 3. and “Treasury a year. the Wall Street Journal requirements and inventory the proceeds in War Loan accounts until they were needed. 1921. 410.0 incentive to offer securities at cheap prices. Secretary of the Treasury Ogden Mills observed that “it is 1920. in addition to the newer practice of limiting Treasury Chart 5 debt sales to quarterly dates. p. 37 “Government Borrowing by Tender Suggested Here. 4. from Under Secretary of the Treasury S. 38 “Government Borrowing.”38 Oversubscriptions—the principal indicia of underpricing— were a persistent characteristic of Treasury offerings throughout the 1920s (Chart 5). Under 33 “Treasury Offers New 4¾% Tax Certificates.”39 Made Mistake in Certificate Rate at 4¾%. in December 1922. 34 reasonably clear that if you are going to borrow only four times 1920 Treasury Annual Report. March 23.1 Fixed-Price Subscription Offerings Billions of dollars 2. the Treasury offered a total of $400 million in three-month and one.”35 Two-and-a-half years later. but garnered only $310 million in subscriptions.0 $350 million in an offering of one-year certificates. you have got to borrow in advance of requirements. Issued.” Wall Street Journal. May 19.2 Infrequent Offerings there has been a big over-subscription to recent offerings of certificates of indebtedness. In testimony before the 32 “The Certificate Sale. 12. March 23.” New York Times. Amounts Offered. In a meeting with Assistant Secretary of the Treasury Russell Leffingwell. pp. 1921.” New York Times.34 The New York Times described the response as “disappointingly small” and the Wall Street Journal labeled the 4¾ percent rate “a mistake.32 Investors resisted what they believed to be an unreasonably low interest rate 0. This method was expensive because the 2 percent interest rate p. what it paid on its certificates of indebtedness. Federal Reserve Bank of New York Archive File no. subscription books open for two weeks after the issue date.36 These episodes gave Treasury officials illustration of the advantage that might have been afforded by clear incentives to avoid pricing their offerings close to the market. selecting coupon rates close to contemporaneous market they been offered by tender a considerable saving might have yields on outstanding issues with similar maturities. 18. to limit the risk of a failed offering. March 30.” Wall Street Journal.5 The risk of a failed offering was more than conjectural. suggests that the rate fixed for the The decision to limit security sales to a quarterly schedule certificates has lately been slightly higher than the money compelled the Treasury to borrow in advance of actual market warranted. 1920. Governor. 1922. 12 (characterizing the bankers as “vexed”).5 of 4¾ percent. been effected. 4. Treasury officials proposed to raise between $300 and 1. 3). p. even though officials kept the Source: Treasury annual reports. 15. that the Treasury earned on War Loan accounts was less than 36 1923 Treasury Annual Report. 39 Committee on Ways and Means (1929.” Wall Street Journal. remarked on the advantage of auctioning securities: “Bankers year certificates.” Wall Street Journal. p. Parker Gilbert to Charles Morss. Had that is. p. p. 35 “The Certificate Sale. p. point out that [the $275 million oversubscription on an including $45 million in last-minute subscriptions from three offering of $200 million of nine-month certificates] is another Federal Reserve Banks.”37 A month later. FRBNY Economic Policy Review / July 2008 39 .

methods of draining excess reserves. Committee on Ways and Means a situation that makes for confusion and artificial values in (1929. the bank would sell the new securities for settlement on oversubscribed [at a primary market offering price of the issue date and. more expensive. p.3 Late Tax Payments Chart 6 Federal Reserve Bank of New York Discount Rate Late tax payments sometimes led to undesirable volatility in Percent overnight loan markets. payment periods. the Open Market Investment Committee (a forerunner of securities in post-offering secondary market transactions.”40 3 2 3. 40 Why the U.” New York Times. upon the collection of the tax checks.” New York Times.41 expect to retain War Loan balances was long enough. for example. new Treasury offerings. At other In response to bank oversubscriptions for. This places reserve bank funds temporarily on the market and results in 4 easier money rates. 44. Government securities are awarded on subscription the Substituting War Loan deposits for other sources of funds banks do not pay for them at once. Substitution made is left on deposit until the Treasury calls for it. electing instead to acquire the that. p. making it necessary to 6 borrow temporarily from the Federal reserve bank on a special securities of indebtedness [sic] in anticipation of the tax 5 receipts which it takes several days to collect. a period economic sense even if a bank had to sell its allotment at a which is usually two or three weeks and sometimes discount from the par subscription price. the Reserve Banks Treasury financing.” New York Times. This money to raise discount rates in 1928 (Chart 6). 1928.”42 sometimes sold participations in their Treasury loans to member banks. Banks learned in the 1920s that they could use Treasury securities subscriptions to substitute Treasury deposits for other. “New Factor Enters Treasury Financing. The 1925 Treasury Annual Report 7 observed that. 40 1925 Treasury Annual Report. When Loan balances. To dampen these episodes of transient ease. At the Federal Reserve Bank of New York’s Monthly Review. however. transient decline in call loan rates. Meltzer (2003. December 15. 357) describe other 42 “New Treasury Plan Similar to English. April 28. N11. promising to pay by crediting the Treasury’s War Loan Deposit Account at the bank. After receiving notice of its This paradox of an issue being apparently heavily allotment. member banks used the surplus reserve balances to reduce temporarily their of. following settlement. use the proceeds to reduce par] at the same time that [secondary market] sales are other borrowings. A bank would first subscribe to a new offering. and prompt sales times. . Rates tighten up again. 106) reports from subscribing for new issues. The banks pay the Treasury rates were high enough and the period in which the bank could 2 per cent interest on these deposits. 25. as long as interest stretches into months. p. Treasury Began Auctioning Treasury Bills in 1929 . Smith. in July 1924. pp. “Frequently payments [on maturing issues] exceed [tax] receipts on the tax day. 9). 3. 1929. p. Beckhart. sources of funds. nonbank investors began to abstain Reserve Bank borrowings. this produces the spectacle of a Treasury issue being which a temporary $200 million increase in member bank reserves led to a heavily over-subscribed and simultaneously selling below par . Treasury borrowings from the Federal Reserve typically lasted for about five days. April 1. but credit the became increasingly attractive when the Reserve Banks began Treasury’s account with the sum involved. 1-2. June 9. the New York Times reported that wide 1928. pp. 39. . In June The following April. the episode described in and they often sell the securities as soon as they are allotted. and Brown (1932. The net result was a reduction in the cost of being made below par was explained by conditions in the money market and the opportunity for profit arising funds to 2 percent per annum during the period between the issue out of the methods by which the Government securities date of the securities and the date the Treasury called for its War are sold to the banks. n. when the loan is repaid. the New York Times reported bank sales of new spreads between open market interest rates and the War Loan certificates at prices of 99-31/32 and 99-30. even though the Deposit Account rate gave banks an incentive “to bid for larger certificates had been heavily oversubscribed: amounts of Treasury securities than they ordinarily would take. in times. 1929. 1930. 440-1). the Federal Open Market Committee) approved a proposal to sell and 41 repurchase securities to reduce transient dips in money market rates during tax “Sales Reported in Treasury Issue. their largest purchasers. p. 203. p.S. p.4 Substitution of Treasury Deposits 1925 26 27 28 29 30 for Other Sources of Funds Source: Board of Governors of the Federal Reserve System (1943. See.

Banks unquestionably subscribe for redemption of debt maturing on tax payment dates with Government certificates because of the deposit privilege. Committee on Ways and Means (1929. Case also visited the Banque de France but did not make any 43 detailed study of French debt management techniques.5 Summary offerings to reduce Treasury borrowings before funds were needed. possibly weekly.” oversubscriptions. 413. refrain from putting in their subscriptions Federal Reserve Bank of New York. “Discussion of method of handling short term debt by United States Treasury. Treasury officials understood the Account system. Case filed a report describing the British system (Box 2) and recommended that a variant of the system be introduced banks at a higher price than the general public was willing to pay. but earned only 2 percent on the proceeds left on deposit in the United States. He further noted that reliance on bill financing could result in the demise of the War Loan Deposit By the beginning of 1929.7.” Federal Reserve Bank of New York Archive File no. providing it can keep the Government oversubscribed issues selling below the par subscription deposit for 30 or 40 days. In January 1928. Banks gained from accessing cheap Treasury Case’s plan had four major provisions: balances. but lost when they sold certificates to nonbank 1) Treasury bills would be auctioned rather than offered for investors at prices below par. several ways the British system could be adapted to American markets. Under Secretary Mills. those corporations and individuals who want to invest 4. The principal consequence of the scheme provided a detailed analysis of the British bill market to Benjamin Strong. a clear indication that offerings were 45 The report is attached to a letter dated February 16. Memo dated January 4. Federal Reserve Bank loans. including comparison with British Treasury method. In his 1928 memo.Under Secretary Mills summed up the problem in his 1929 2) Infrequent quarterly financings forced the Treasury to testimony before the Ways and Means Committee: borrow in advance of its needs and to inventory the “There has grown up recently a practice on the part of proceeds in low-yielding War Loan Deposit Accounts. having observed that they show a tendency to go below par almost immediately In early 1929. In other words a bank can afford to deposits for other sources of funds. the Deputy Governor of the after issue. and contributed to the appearance of six-thirty-seconds and still show a profit on the a weak secondary market in new issues. 1928. During the last year or so. even if they at 2 per cent for 30 or 40 days. It can of course the flaws in their financing operations. a practice has developed on the part of the 4) The ability of banks to pay for new issues by crediting War banks of selling these certificates sometimes even before Loan accounts led to the substitution of War Loan they are issued. Case focused on the use of regular. The anomaly of transaction. Case secondary market). Federal Reserve Bank of New York Archive File no.43 the behest of Under Secretary of the Treasury Ogden Mills.45 with the banks. pp. was a primary market increasingly limited to banks and opaque Governor of the Federal Reserve Bank of New York.7. but also noted the advantages inherent in auctioning bills. Herbert Case. 4-5). 1929. What the bank is really doing price suggests that Treasury officials priced securities too is borrowing from the Government of the United States high for nonbank investors in 1928 and 1929. from Case to Strong. of course. He pointed out that “Competitive gained nor lost (as long as they waited to buy securities in the 44 Case’s trip was not his first involvement in this matter. at once to pay off its indebtedness to the Federal reserve The next section describes how Treasury officials mitigated bank. Introduction of Treasury Bills in Government securities. the banks which was somewhat detrimental to the credit 3) Late tax payments forced the Treasury to fund the of the Government. journeyed to London to at the time the certificates are offered and rely on their study the British Treasury bill market. The Treasury gained by being able to issue securities to return.44 Upon his Account credits did not benefit either the Treasury or the banks. The study. J. And. and he questioned whether such a demise would be a desirable flaws in the existing structure of Treasury financing operations: result: “The depositary bank system was built up during the war and was unquestionably of great value to the Treasury in floating the war debt and in its 1) Fixed-price subscription offerings resulted in chronic subsequent refunding. was intended to clarify whether the British system of issuing bills Allowing banks to pay for securities with War Loan Deposit could be adapted for use in the United States. bill 3. which has been a period of tight money. afford under these circumstances to sell these certificates at a discount. and it can use that money were cheap for bank subscribers. from Case to persistently underpriced. led banks to further subscribe for these certificates and sell them at a loss of oversubscribe for new issues (in order to generate larger say two-thirty-seconds or four-thirty-seconds and even War Loan balances). 413. Nonbank investors neither sale at a fixed price. FRBNY Economic Policy Review / July 2008 41 . So that Government certificates during the course of the last year have sold at less than par almost immediately when they were issued. undertaken at ability to buy them in the market afterwards. in which he explored to the general public. in which it is paying 5 per cent.

The British Treasury had been issuing current market rates. Under Secretary of the the new securities “on a competitive basis. with immediately available funds. there was about £600 million in British Treasury . taken together with the process of bill financing. Treasury Secretary Mellon See also “New Treasury Plan Similar to English. chairman of the House Ways unnecessary. but issuance increased substantially during and 2) Bills would be sold when funds were needed.” introduction of Treasury bills). 1929. might be expected to enable the Treasury to The Primary Market for British Treasury Billsa get the lowest discount rates consistent with current market conditions. April 25.”50 In testimony before the Ways Chapter of the American Institute of Banking on April 24. The British system of bill financing—particularly the daily emissions and maturities—fitted nicely with the British income tax system. 40 Stat. following World War I. 1917. 3) Bill maturities would be set “to correspond closely to the British bills were auctioned weekly—on Friday. Herbert Case. 39.7. should enable the Treasury to get the lowest discount rates consistent with b See also address of Under Secretary Mills before the Washington current market conditions. from J. they have obtained a 46 “Case Heads Board of Reserve Bank. They have so auctions: developed the system of financing by means of Treasury bills that. p. that is. 4. Bidders on the nominal date of tax payments as at present. stated that “Competitive bidding . and not all made to fall the following week—and matured three months later. p. . 413. p. and report attached to letter dated The proposed legislation required that the Treasury offer February 16. 1929. (The Treasury needed new statutory authority to issue bills Governor. . 1928. This ability eliminated any possibility of In late April 1929. from Case to Ogden Mills. Federal Reserve Bank of New York. 42. Successful bidders paid for their bills with drafts on the instrument to American financial markets. these provisions would cure all of the existing proposals for a given settlement day in order of decreasing price flaws in the structure of Treasury financing operations. April 28. 1930. 40 Stat.” bills since about 1877. and. “Discussion of method because existing statutes did not allow the sale of Treasury of handling short term debt by United States Treasury.46 Bank of England.” New York Times. 1).”49 Officials viewed Treasury. Federal Reserve Bank of New York Archive File no. including comparison with British Treasury method. 1929. 48 Section 5 of the Second Liberty Bond Act of September 24. . to Benjamin Strong.”) and “Mills Explains Aim of Treasury Bills. p. New York Times. 50 “Treasury for Sale of Notes Below Par. Senator Reed Smoot. 1929.)48 New York Archive File no.R. it would not be necessary for the At the beginning of 1929.S. reprinted and Means Committee. April 23.b and Means Committee. p. February 28. 1309. to offer interest rates on new issues above Treasury bills outstanding. for settlement actual collection of income taxes. 47 “Treasury for Sale of Notes Below Par. so that payments did not all come in at virtually the same time. and system like the American War Loan Deposit Accounts Representative Willis Hawley. reprinted in Committee on Ways and Means (1929. p. Case’s until they had accounted for all of the funds needed to be raised on plan set the framework for the introduction of a new that day. 27.7. 14 degree of flexibility that enables the Treasury to adjust its cash positions (commenting that Case’s 1929 report was the basis for the Treasury’s practically from day to day.” Section 1 of the same act authorized the issue of bonds and required that they “first be offered at not less than par as a popular loan.1 Obtaining Statutory Authority revenue officials had considerable discretion to arrange for to Issue Bills alternative payment dates.” New York Times. with weekly offerings. 1929. sporadic drains of reserve balances from the banking system the defects in its financing operations. Treasury Deposit Accounts. 1919. April 23. .” New York Times.” New York Times. 413.” The Victory Liberty Loan Act of March 3. took the first step by introducing legislation to allow the Treasury to issue zero-coupon bills with a Based on memo dated January 4. Box 2 bidding . .” Federal Reserve Bank of securities at a price less than par. auction offerings as a key provision.47 Governor. authorized the issue of notes “at not less than par. Pre-war emissions were relatively small and infrequent. 279 (“The Treasury bill has been used for many years by the British Treasury as a most convenient and burden of fixed-price offerings as well as the advantage of economical medium to obtain funds to meet current needs. Although there were dates when taxes were nominally due. 42 Why the U. Under Secretary Mills pointed out the in 1929 Treasury Annual Report. and daily maturities. 27. 288.” submitted tenders that specified a price and amount as well as a 4) Sales would be for cash. 1648. instead of credits to War Loan settlement day sometime during the following week. . Federal Reserve Bank of New York. p. the Treasury unveiled its proposal to correct large. 1929. officials sorted the tenders by settlement day and accepted Point by point. made a chairman of the Senate Finance Committee.” 49 See H. Treasury Began Auctioning Treasury Bills in 1929 . daily issues. Deputy maturities of up to one year at a discount from face value. authorized the Secretary of the Treasury to issue certificates of indebtedness “at not less than par.

the tax- first bill auction. 306-8.125. reprinted in 1930 Treasury Annual Report. reprinted in 1930 discount rate.” New York Times. of a ninety-day bill quoted at 4. “Plan Further Use of Treasury Bills. 23 (“The bookkeeping records 57 “Treasury Bills Well Received. any gains or losses upon sale prior to maturity. However. the Treasury announced the the maturities fit into a known time of income.3 Subsequent Bill Offerings in 1930 with three digits of precision to the right of the decimal point55 51 Committee on Ways and Means (1929. December 15. 60 November 23. 12. For example. 99. and the Bank of Manhattan. and Federal Reserve Bank of New York Circular no. itself. 1929. See also 59 Treasury Circular no. Bank. from Andrew money market yield. 34) (The corrective measure “was rendered 1919. p. 56 “Plan Further Use of Treasury Bills.”52 (At the time. 1929. should fix the interest On Saturday. 309-12. p. In the case proved unworkable and was eliminated by the Act of June 17. 1929.. if D = 4.888 if the quoted rate is a Treasury Annual Report. 1929. . December 16.”). December 14. We will sell government bills to fit the immediate needs and make On Tuesday. fn.50 percent. .2 The First Auction anticipation of needs for which we have only estimates . 1930. that is. 944.”60 settlement on Tuesday. 46 Stat. p. 1929. It is not as difficult at the lowest accepted price (the “stop-out” price) would be as it seems and yet. offering $100 million of ninety-day bills for paying dates. reprinted in 1930 Treasury Annual “Plan Further Use of Treasury Bills. p. 99. was a variety of conventions. Payment would be due very rapidly from day to day. 418. that is. . December 15.152 percent. p. such as the wording that would appear on the in “considerably cheaper money than we could get through the face of a bill and how it would be sold to the public. December 10. pp. provided that the original issue discount on a bill was interest income and would be exempt from state and 55 Bidding on a price basis insulated the Treasury from specifying how bids in federal income taxes. Mills expressed the view that “the market will adjust the and stopping at 99.172 percent). 949. The latter provision quoted at a money market yield of R is P = 100/[1+. pp. December 17. if the market could not be made by crediting a War Loan account. as differentiated from exempt interest. on the settlement date in immediately available funds and It would be more desirable both from the standpoint of the Treasury and I think of the public. p.58 President Hoover signed it into law on June 17. 1930 Treasury Annual Report. See amended Treasury Circular no. The International Manhattan Company was the securities division necessary by the large amount of burdensome bookkeeping necessary to formed following the March 1929 merger of the International Acceptance comply with the terms of the Act of June. The Treasury offered Treasury bills on seven occasions in 1930 52 Committee on Ways and Means (1929. 1930. by competitive bidding. p. on Friday. . December 10.875 if the quoted rate is a 775. Secretary of the Treasury. Treasury was setting coupon rates on certificates of won the major portion of the offering and promptly reoffered indebtedness in increments of 1/8 percent. November 22. and Beckhart.53 During the Under Secretary Mills stated that he was “entirely satisfied” following six months. required in order to calculate gains. . The reoffering price is computed as 54 99. 11. . 1930. 1929. terms of interest rates would be converted to prices. See Treasury Decision 4276.) $70 million of the bills at a discount rate of 3 1/8 percent. and P = 98. the price of a bill with n days to maturity subject to capital gains tax. P = 98. 4). Smith. medium of certificates of indebtedness . December 15. Tenders would be accepted in accurately current market conditions so as to adjust the order of decreasing bid price (auction market participants interest rate as closely as possible to those conditions. 16. June 25. the Brothers & Hutzler and the International Manhattan Company. 1929. The offerings were all in the middle of the first or 53 The Act of June 17. and “Issue Satisfies Mills. .181. and price of 99. 16. The price of the same bill reprinted in 1930 Treasury Annual Report. . 1929. 303-6. p.01×(n/360)×R]. December 13.m. specified as a percentage of face amount 4.219. (Table 6).51 had accepted tenders starting at the highest bid.” Wall Street Journal.57 The average than we can.”). We rather expect that these bids will be made in accepted price was 99. if R = 4. quoted at a discount rate of D is P = 100 – (n/360)×D.219 = 100 – (90/360)×3. Market participants used computed net of the accrued interest to the settlement date of the sale. to mature Monday. Inc. 19. the Treasury announced that rate. 46 Stat. letter dated June 30. December 16. could submit multiple tenders with different bids) and tenders using the best judgment that it can. or a The Congress quickly approved the proposed legislation. 309. 3). 58 were so complicated that a very real sales resistance resulted. March 17. and Brown (1932. p.50 percent. November 22. 1930. 16. rather than have the Secretary of the Treasury use investors had bid for $224 million of the new bills and that it his best judgment in fixing the rate. p.56 Tenders bidding at the stop interest rate much more closely to actual market conditions were allotted 80 percent of the amount bid for. Mellon. A syndicate of two dealers. p. 1929.” New York Times.54 Auction tenders were due by 2 p. Salomon terms of one twenty-fifth of 1 per cent. [T]he Treasury has the difficult task of estimating (for example. with money conditions fluctuating allotted securities on a pro-rata basis. Report. 418. it is not an easy thing . Treasury officials worked out the details of with the results of the auction and that the auction had resulted the new security. 354. Federal Reserve Bank of New York Circular no. that is. 47.310 percent. 1929. . December 17.50 percent.”59 He further noted that the government would henceforth be able to tailor its borrowings more closely to its needs: “We will not be in a position where we have to borrow a lot of money and hold it in 4.” New York Times. 1923.” Wall Street Journal. Each tender had to state the amount bid for and a bid price. 1929.” New York Times. FRBNY Economic Policy Review / July 2008 43 . 1929. “3 1/8% Discount Rate on Treasury Bills. pp.

second month of a quarter. The flaws included underpricing securities the new instrument quite as they had anticipated in 1929. speech of Under Secretary Mills before the American Institute of Banking (1929 Treasury become an instrument of debt management—part of the more or Annual Report. 275-80. and “Mills Explains Aim of Treasury Bills. 1930. 1930 October 16. 1930. new bills. Secretary needed cash. 44 Why the U. Times. 1930 August 18. pp. to discontinue the present depositary method. the Treasury began to issue thirteen-week bills weak post-offering secondary markets for new issues. p. Table 6 Treasury Bill Sales in 1930 Auction Date Issue Date Maturity Date Term (Days) Amount (Millions of Dollars) February 14. By the end of 1934. Although issue sizes varied from All three flaws could have been addressed without week to week (Chart 8). 1930 September 15. and the other half in bills issued on October 16 and maturing on December 17. This suggests that Treasury officials began at an early they simultaneously stopped offering certificates of date to incorporate Treasury bills into their debt management indebtedness.”61 Neverthe- that all four of those offerings were refinanced at maturity with less. For example. modify its financing practices by selling bills when it certificates of indebtedness with Treasury bills. 1930 May 19. 1930 91 100 July 10. 6. matured in 1930 did not mature on a tax payment date (the or system of short-term financing. with deposit credits that gave banks an added incentive to As the contraction of 1930 deepened and hardened into oversubscribe to new issues and contributed to the appearance of depression in 1931. . . 1930 July 14. 1930 February 16. The quantity of bills outstanding stabilized during 1932.S.62 it could have begun offering certificates but then rose sharply in 1933 and again in 1934. 1930 August 18. (instead of bills). 1931 91 125 Source: Treasury annual reports. infrequent financings evolving circumstances can prompt change in the use of any that necessitated borrowing in advance of need. 1929. Treasury began auctioning Treasury bills in 1929 to The Treasury began issuing bills just as the Great Depression correct several flaws in the post-war structure of Treasury was beginning. 1930 November 17. 1930 90 50 May 15. By the end of 1934. 1930 91 120 a October 10. Each accepted tender was allocated half of the amount bid for in bills issued on October 15 and maturing on December 16. 1930 May 19. bills were the short-term operations and that they did not limit the use of Treasury bills instrument of Treasury debt management. 1929. when Treasury officials expanded bill issuance in 1934. the Treasury rose fairly steadily to more than $500 million by the end of 1931 could have begun auctioning certificates of indebtedness (Chart 9). 42). in Treasury officials did not originally intend to replace fact. Mellon stated in 1929 that “It is not the purpose of the Treasury It is interesting to note that four of the six offerings that Department . a The Treasury offered a total of $100 million bills.S. 1930 December 17. sold in fixed-price subscription offerings. but rather to supplement it exceptions are the July offering that matured in September and with the new system. to sporadic cash management needs. the aggregate volume of bills outstanding introducing a new class of securities. using both as may prove to be most the twin offering in October that matured in December) and advantageous to the interests of the government. 1930 62 50 a October 10. 1930 90 50 April 11. April 25. See also the April 25. almost every week (Chart 7). suggesting that the Treasury did. 275. Conclusion 5. It is hardly surprising that officials did not use financing operations. and payment financial instrument. 1930 February 18. Treasury Began Auctioning Treasury Bills in 1929 . 1930 October 15. 1930 November 17. 1930 63 50 August 14. 1930 July 14. 1930 62 50 November 13. p. 1930 December 16. reaching almost 61 $2 billion at the end of 1934.” New York less permanent debt of the nation. Treasury Bills in the Early 1930s The U. 1930 April 15. Treasury bills had 1929 Treasury Annual Report.

315-8. FRBNY Economic Policy Review / July 2008 45 . The introduction of Treasury bills in 1929 gave the Treasury an exit strategy—as well as a way 25 forward—in the development of the primary market for 0 Treasury securities. p.5 26 2. 316) and contributed to a failed bonds again in 1963 and finally succeeded on its third attempt in the early auction in 1973 (Garbade 2004. the Treasury was free to return to exclusive reliance on regularly 75 scheduled fixed-price subscription offerings and payment by 50 credit to War Loan accounts. 1894. but the effort floundered and the auction in 1894 (“Carlisle Talks to Bankers. A minimum price restriction nearly led to a failed bond auction system for bond sales in 1935. See Garbade (2004). the Treasury was able to Millions of dollars 175 address the defects in the existing primary market structure Thirteen-week bills even as it continued to maintain that structure. If auction sales.0 0. It tried—and failed—to introduce auction sales of Barnes 1931.5 0 0 1929 30 31 32 33 34 35 1929 30 31 32 33 34 Issue date Source: Treasury annual reports.5 Other bills 13 1. 38). “Success Crowns the Loan. 1. by introducing a new class of securities. however. following the introduction of Treasury bills. However. February 1. and it could have begun selling Treasury Bill Amounts Issued certificates for immediately available funds. Chart 8 between quarterly tax dates.0 Thirteen-week bills Twenty-six-week bills 1. Source: Treasury annual reports. 1929 30 31 32 33 34 35 Issue date Source: Treasury annual reports. Treasury thereafter sold notes and bonds on a fixed-price subscription basis p. the statutory restriction on selling certificates of indebtedness below par would have limited the ability of the Treasury to offer the securities Treasury suspended certificate sales in 1934. p. Chart 7 Chart 9 Term to Maturity of Treasury Bills Aggregate Amount of Treasury Bills Outstanding Weeks Billions of dollars 2.” New York Times. the new procedure could be expanded to notes and bonds. pp. through the early 1960s. and settlement in immediately available funds 125 proved successful.63 If subsequent experience revealed an 100 unanticipated flaw in the new procedure. the However.” New York Times.) It attempted to introduce an in an auction format. 1. and continued to receive large oversubscriptions to those 62 offerings. and Carosso 1987. January 30. (As noted earlier. 150 Twenty-six-week bills Other bills tactical issuance. 1970s. 63 The Treasury initially continued to offer notes and bonds on a fixed-price subscription basis. p. 1894.

no. 1854-1913. The New York Money New York: Columbia University Graduate School of Business Market. Anderson.” Federal Reserve Bank of New York Quarterly Review 3. ———. 1962. Cambridge. 2004. no.. The Handbook of Treasury Securities. Policy Review 10. Blakey.S. 1917.” American Economic Review 14. New York: Carosso. 4 (December): 791-815. J.” American Lovett. Operations by Federal Reserve. Santoro. Open Market Operations. Blakey. 9 (November): Barnes. no. 1926. 1 (March): 53-71. 1929. and W. Carlisle: Financial Statesman. “New Policy Prompts Increased Defensive Bank of Kansas City Monthly Review.. Columbia University Press.” Journal of Political Economy 25. Taxation: The People’s Business.S. 2 (summer): 41-6. Mass. E. 1976. 1 (May): 29-45. “Taxation versus Bond Issues for Financing the War. Vol. T. (November).. “Issuance of Treasury Bills. Washington. D. New York: Houghton Mifflin Company. William G. D. Macmillan Company. P. no. 1932.” April 7: 292-4. K. 1st Sess.. References Adams. Mead & Co. J. T. F. Crowded Years: The Reminiscences of the Federal Reserve System. W. W. IV. no. 1987.: Board of Governors of McAdoo. 1917. March: 8-12. 71st Cong. “The War Revenue Act of 1924. New York: 888-916. no. Partlan. 1931. “Foreign-Targeted Treasury Securities. R.” Federal Reserve Bank of Dallas Business Review. and G. B. July-August: 12-20. “Recent Innovations in Treasury Cash Management..” American Fabozzi. “Treasury Cash Balances. Auctions. McAdoo.” In Frank Blakey. Board of Governors of the Federal Reserve System. Chicago: Economic Review 7. 1918. 11 Review 16. U. J. Garbade. House of Representatives. “Customary War Finance..” American Economic Current Issues in Economics and Finance 10. no. External and Internal Relations.” Journal of Political Economy 25. Brown. 1917. 1922.” American Economic ———. “Fundamental Factors in War Finance. ———. A. K. 1924. Probus Publishing Company. 1970-75. Beckhart. 2007. 2004. Smith. Brockschmidt. 1975. ed. “The Institutionalization of Treasury Notes and Bond of the American Academy of Political and Social Science 75. V. John G.C. Mellon: An American Life. 3 (September): 401-25. 1917. 1931. Committee on Ways and Means. no. 1 (March): 75-108.” Federal Reserve Bank of New York Economic Policy Review 13. May 29. 2 (June): 213-43. “Treasury Tax and Loan Accounts and Federal Reserve Economic Review 9. “The Emergence of ‘Regular and Predictable’ as a Review 12. Durand. Banking and Monetary Statistics. 1924. 1919. “The War Revenue Act of 1926. no. Mellon. 9 (November): 857-87.” Federal Reserve Bank of New York Economic January: 90-104. Treasury Began Auctioning Treasury Bills in 1929 . 1943. no. R. “The War Revenue Act of 1917.” Federal Reserve McDonough. New York: Knopf. Cannadine.” The New Republic. New York: Administration and Free Press of Glencoe. 1978. Treasury Debt Management Strategy. Hearings before the Committee on Ways and Means. no. Techniques of Treasury Debt Management. and P. 2006. D. 1987. Garbade. Gaines.: Harvard University Press. The Morgans: Private International Bankers. J. ———.” Federal Reserve Bank of New York ———. “The Revenue Act of 1918. “Shifting the War Burden Upon the Future. “The War Revenue Act of 1921. 3 (September): 475-504. Dodd.” Annals ———. 46 Why the U.

“Selling Scientific Taxation: The Treasury Department’s Campaign for Tax Reform in the 1920’s. McAdoo. M. Volume I. The views expressed are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. no.. S. Smiley. as to the accuracy. Chicago: University of Chicago Press. 2004. Keehn. Social Inquiry 29. References (Continued) Meltzer. 2 (June): 285-303. in the 1920s. “Federal Personal Income Tax Policy 1913-1951. Indianapolis. 4 (October): 819-56. 1995. M. Murnane.” Journal of Economic History 55.” Law and Synon. 1924. A History of the Federal Reserve. or fitness for any particular purpose of any information contained in documents produced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever. FRBNY Economic Policy Review / July 2008 47 . timeliness. and R. completeness. G. IN: Bobbs-Merrill Company. 2003. express or implied. The Federal Reserve Bank of New York provides no warranty. A. merchantability. no.