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

In Birth of a Market, Kenneth Garbade 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. Garbade 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.

Introduction:

The market for U.S. Treasury securities is a marvel of modern finance. In calendar year 2009 the Treasury auctioned $8.2 trillion of new securities, ranging from 4-day bills to 30-year bonds, in 283 offerings on 171 different days. (See box 1.1 for a description of Treasury securities.) By the end of the year, total Treasury indebtedness stood at $12.3 trillion, $7.2 trillion of which was publicly held marketable debt spread out over 256 different issues. 1 That immense indebtedness, coupled with the creditworthiness of the U.S. government, provided the raw material for the most liquid securities market in the world, where market participants buy and sell large amounts quickly, with minimal transaction costs and minimal price impacts.

However, it was not always so.

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 — six years passed between the last pre-war offering (sold to help finance the Panama Canal in 1911) and the first wartime sale — and the debt was narrowly held — 80 percent was owned by national banks. The limited amount of debt, the infrequency of new offerings, and the narrow ownership base made for an illiquid market.

This book traces the development of the Treasury market from a financial backwater prior to World War I to something reasonably familiar to a current observer on the eve of World War II. Central to this description is how successive Secretaries of the Treasury responded to the needs of their time and how their responses contributed to the development of the modern market.

Contents:

• The Payments System before World War I
• Treasury Debt Management before World War I
• Treasury Finance during World War I
• Designing the Liberty Loans
• Marketing the Liberty Loans
• Treasury Cash Management: Certificates of Indebtedness
• Treasury Cash Management: War Loan Deposit Accounts
• Federal Reserve Support of the Treasury Market during World War I
• Coda on Treasury Debt Management during World War I
• Treasury Finance during the 1920s
• Paying down the War Debt
• Revival of the Over-the-Counter Market
• Evolution of the Primary Market and the Introduction of Treasury Bills
• Coda on Treasury Debt Management during the 1920s
• Treasury Finance during the Great Depression Nonmarketable Treasury Debt
• Treasury Debt Management during the Great Contraction
• Treasury Debt Management during the New Deal
• The Primary Market during the Great Depression
• Statutory Control of Treasury Indebtedness
• The Brief Revival and Subsequent Extinction of National Bank Notes
• Coda on Treasury Debt Management during the Great Depression
• Treasury Debt Management since 1939

Birth of a Market: The U.S. Treasury Securities Market from the Great War to the Great Depression By Kenneth D. Garbade pdf