Treasury Debt Management since 1939

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Treasury Debt Management since 1939

Kenneth D. Garbade

in Birth of a Market: The U.S. Treasury Securities Market from the Great War to the Great Depression

Published in print: 2012 Published Online: August 2013

ISBN: 9780262016377 eISBN: 9780262298674 Item type: chapter

Publisher: The MIT Press DOI: 10.7551/

mitpress/9780262016377.003.0024

This chapter examines several aspects of how Treasury officials

exercised their authority with respect to debt management policy after 1939. It begins with a brief survey of how the Treasury financed World War II. It then explains how a wartime interest rate stabilization program solved a problem faced by Secretary McAdoo twenty-five years earlier, and describes the difficult process of terminating that program following the end of hostilities. It concludes with a discussion of how the Treasury arrived at the strategy of regular and predictable auction offerings that has been in place since the mid-1970s—a strategy that grew out of the innovations of Secretary Mellon and Secretary Mills in the 1920s and early 1930s.

Paying down the War Debt

Kenneth D. Garbade

mitpress/9780262016377.003.0012

This chapter examines how the Treasury reduced wartime debt. Andrew Mellon, Secretary of the Treasury, and his colleagues first addressed the problem of refinancing the postwar overhang of short-term debt and then put in place the program of regular tax date financings that became the backbone of Treasury debt operations in the 1920s. Between mid-1923 and early 1927, they whittled down the Third Liberty bonds as sinking

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fund appropriations became available, but when tax receipts exploded in early 1927, they had the mental agility to make a midcourse correction, switching their attention to the Second Liberty bonds and calling those bonds for early redemption. They also made use of intermediate-term securities in the second half of the decade, three times offering 5-year notes callable in three years.

Birth of a Market: The U.S. Treasury Securities Market from the

Great War to the Great Depression

Kenneth D. Garbade

ISBN: 9780262016377 eISBN: 9780262298674 Item type: book

mitpress/9780262016377.001.0001

The market for U.S. Treasury securities is a marvel of modern finance. In 2009 the Treasury auctioned $8.2 trillion of new securities, ranging from four-day bills to thirty-year bonds, in 283 offerings on 171 different days. By contrast, in the decade before World War I, there was only about $1 billion of interest-bearing Treasury debt outstanding, spread out over just six issues. New offerings were rare, and the debt was narrowly held, most of it owned by national banks. This book traces the development of the Treasury market from a financial backwater in the years before World War I to a multibillion dollar market on the eve of World War II. It focuses on Treasury debt management policies, describing the origins of several pillars of modern Treasury practice, including “regular and predictable” auction offerings and the integration of debt and cash management. The book recounts the actions of Secretaries of the Treasury, from William McAdoo in the Wilson administration to Henry Morgenthau in the Roosevelt administration, and their responses to economic conditions. His account covers the Treasury market in the two decades before World War I, how the Treasury financed the Great War, how it managed the postwar refinancing and paydowns, and how it financed the chronic deficits of the Great Depression. It concludes with an examination of aspects of modern Treasury debt management that grew out of developments from 1917 to 1939.

Treasury Debt Management during the Great Contraction

Kenneth D. Garbade

Published in print: 2012 Published Online:

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ISBN: 9780262016377 eISBN: 9780262298674

Item type: chapter DOI: 10.7551/mitpress/9780262016377.003.0018

This chapter traces the evolution of Treasury debt management

actions between 1930 and early 1933. It first examines the outlook for debt management in the second half of 1930. It then describes how unforeseen events complicated, and then derailed, the refinancing program that Secretary Mellon and Under Secretary of the Treasury Ogden Mills had mapped out, and how those officials fashioned innovative responses. When faced with unexpected financing requirements in the first half of 1931, they introduced a program of regularly refinancing maturing Treasury bills with new bills, thus turning bills from their originally intended use as an instrument of cash management into an instrument of debt management. The last section describes how Mills, who became Secretary of the Treasury in February 1932, funded the activities of the Reconstruction Finance Corporation in 1932 and early 1933.

Coda on Treasury Debt Management during World War I

Kenneth D. Garbade

mitpress/9780262016377.003.0010

This chapter discusses the changes in Treasury debt management that accompanied the wartime growth in debt. These include how the Treasury sold securities, the contractual provisions of Treasury securities, and the way in which the Treasury moderated the mismatch between episodic receipts (stemming from bond sales and tax collections) and its more nearly continuous disbursements.

Treasury Debt Management before World War I

Kenneth D. Garbade

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This chapter describes the characteristics of Treasury debt and the primary and secondary markets for Treasury bonds in the decades prior to World War I. The market for U.S. Treasury bonds before World War I differed from the postwar market in two respects. First, bonds were issued to finance specific projects: to replenish Treasury gold stocks, to finance a war, and to build a canal. Second, the requirement that national banks pledge Treasury bonds against their currency issues and public deposits led to a strong demand for Treasury bonds by national banks: 80 percent of all outstanding Treasury bonds were pledged as collateral in 1914.

Statutory Control of Treasury Indebtedness

Kenneth D. Garbade

mitpress/9780262016377.003.0021

At the beginning of the Great Depression, there were three statutory restrictions on Treasury debt management actions: a limit of $10 billion on outstanding bills and certificates of indebtedness; a limit of $7.5 billion on outstanding notes; and the authority to issue no more than $20 billion of Treasury bonds. In contrast, by mid-1939 there was only a single statutory limit of $45 billion on total outstanding indebtedness. This chapter examines why Congress gradually moved away from

controlling individual categories of Treasury debt to controlling aggregate indebtedness.

Coda on Treasury Debt Management during the 1920s

Kenneth D. Garbade

mitpress/9780262016377.003.0015

This chapter briefly discusses three important developments in Treasury finance engineered by Treasury Secretary Mellon and his Under Secretaries, S. Parker Gilbert, Garrard Winston, and Ogden Mills, in the 1920s. First, they refinanced (with intermediate-term

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notes) $2.5 billion of short-term debt that threatened to clog the Treasury market in early 1921. Second, they developed machinery

appropriate for applying budget surpluses to debt reduction in an orderly fashion, redeeming three Liberty Loans between 1922 and 1928 with a thoughtfully constructed mix of early retirements, exchange offerings, cash redemptions at call or maturity, and regular quarterly refinancings. Third, they introduced Treasury bills in 1929 and, in the process, began to revive auction offerings of Treasury securities.

Treasury Finance during the Great Depression

Kenneth D. Garbade

mitpress/9780262016377.003.0016

This chapter examines the impact of the Great Depression on Treasury tax receipts, federal expenditure policies, and Treasury indebtedness. The discussions cover Britain’s departure from the gold standard and the Revenue Act of 1932; revenue acts during the New Deal; Treasury expenditures during the Great Contraction; the birth of the Reconstruction Finance Corporation (RFC); the banking crisis of 1933 and the role of the RFC in reopening the banks; and Treasury expenditures during the New Deal.

Coda on Treasury Debt Management during the Great

Depression

Kenneth D. Garbade

mitpress/9780262016377.003.0023

This chapter discusses Treasury debt management during the Great Depression. The most important development in Treasury debt

management was the introduction of regular and predictable auctions of thirteen-week Treasury bills. These would serve as a model for the regular and predictable note and bond auctions that came to

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characterize Treasury debt management in the last quarter of the twentieth century.