- 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.