Author: Kenneth D. Garbade

• In the 1920s, the U.S. Treasury relied upon fixed-price subscription offerings of coupon-bearing certificates of indebtedness, notes, and bonds for its cash and debt management.
  
  
• According to Garbade, there were several flaws in the structure of these financing operations, the three most substantial being:
  


• the underpricing of new securities sold in fixed-price subscription offerings to limit the risk of a failed offering;
  
  
• an infrequent issuance schedule that required the Treasury to borrow in advance of its needs, resulting in negative carry on Treasury cash balances at commercial banks; and
  
  
• payments on maturing issues financed with short-term loans from Federal Reserve Banks that at times could create temporary fluctuations in banking reserves and undesirable volatility in overnight interest rates.
  
  
• The Treasury introduced a new financial instrument—Treasury bills—to mitigate these flaws, and on June 17, 1929, President Herbert Hoover signed into law legislation allowing the Treasury to begin offering the new securities.
  
  
• As part of the introduction of Treasury bills, several provisions were made:
  
  
• Rather than offering the new security at a fixed price, the Treasury auctioned the bills, resulting in pricing more consistent with market rates.
  
  
• Bills would be sold for cash when funds were needed, instead of on a quarterly basis, and timed to mature when funds would be available, allowing for more effective Treasury cash management.
  
  
• Garbade observes that introducing a new class of securities while maintaining the existing primary market structure allowed the Treasury an exit strategy should an unanticipated flaw arise in the new procedure.
  

Kenneth D. Garbade is a vice president at the Federal Reserve Bank of New York.

The views expressed in this summary 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.