The Federal Reserve Bank of New York today released Why the U.S. Treasury Began Auctioning Treasury Bills in 1929—a new forthcoming article in the Bank’s Economic Policy Review series.
On June 17, 1929, President Herbert Hoover signed into law legislation allowing the U.S. Treasury to begin auctioning bills. The legislation addressed several flaws in the structure of the Treasury’s post-World War I financing operations.
Author Kenneth D. Garbade identifies the three most substantial flaws in the Treasury’s financing structure: the underpricing of new securities sold in fixed-price subscription offerings, an infrequent issuance schedule that required the Treasury to borrow in advance of its needs and payments on maturing issues financed with short-term loans from Federal Reserve Banks that at times could create temporary fluctuations in banking reserves.
Along with the introduction of Treasury bills, several provisions were made to mitigate these flaws. 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 notes 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.