Author: Kenneth D. Garbade

• Prior to the mid-1960s, U.S. Treasury securities were represented by physical certificates setting forth in writing the federal government’s promises to pay interest and principal.
  
  
• Market participants, facing significant costs and risks associated with safekeeping and transferring bearer Treasury securities, required a more efficient way to manage the securities. In recognition of this need, the U.S. Treasury and the Federal Reserve in 1966 began the process of converting Treasury securities to book-entry, or nonphysical, form.
  
  
• This article observes that the conversion to book-entry was an important step in the evolution of the Treasury market. The conversion resulted in an automated system that has sharply reduced market operating costs and risks.
  
  

• According to author Garbade, the conversion was spurred by three objectives:
  
  
• the Federal Reserve Banks and the Treasury were interested in lowering their operating costs and risks,
  
  
• the Reserve Banks and the Treasury wanted to preserve market liquidity, and
  
  
• the Reserve Banks sought to decrease operating costs for their member banks.
  
  

• Garbade emphasizes that two "shocks"—a loss of securities at a Reserve Bank in 1962 and an insurance crisis in 1970-71—played major roles in the early development and subsequent expansion of the book-entry system. The repercussions of these incidents were critical in motivating diverse market participants to move from bearer to book-entry securities quickly and uniformly.
  
  
• A key lesson to take from the book-entry system’s early history, the study concludes, is that the prospect of greater efficiency alone may not always lead to the type of rapid change that requires coordination among market participants with different interests. The pace of change may also depend on other, unexpected events that focus attention, provide motivation, and create a commonality of interests.
  

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.