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

by Kenneth D. Garbade

The evolution of “a marvel of modern finance,” the market for U.S. Treasury securities, from 1917 to 1939. 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 4-day bills to 30-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. 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. He 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. Garbade's 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. He concludes with an examination of aspects of modern Treasury debt management that grew out of developments from 1917 to 1939.

Genres: Finance

393 pages, Hardcover

First published December 23, 2011

Reviews

[Winmonroe · Rating 4 out of 5]

8/10

Kenneth Garbade's masterful history of the early US Treasury market traces its development from small, sleepy, and occasional to the highly structured, massive foundation of the global financial system it is today. Garbade carefully weaves together highly technical details of bond auctions and market conditions with the changing larger perspectives on public finances and their broader economic conditions. Early funding debates were surprisingly political, with private placements seen as crony capitalism - a particularly important episode being a placement to JP Morgan that resulted in the Cleveland administration being attacked for handing out free money to bankers. Subsequently, Treasury attempted to place debt with ordinary citizens, using fixed price auctions to simplify them. During war periods, issuance subscription was encouraged as a barometer of patriotism - if the public was eager to fund a war, America's foes must fear their commitment. On the other hand, oversubscription in bond drives resulted in underpricing and increased public financing costs.

The history is painted as a gradual evolution, iterative, and in fits and starts. For example, market structure evolve from initially almost all bonds were bought by banks, who had to hold them to back their banknote issuance to being traded on the stock exchange and then finally, the OTC dealer market took over.

Issuance strategies also evolved. Private placements, irregular auctions, and fixed price subscription drives were all tested in the early years. Treasury attempted note and bond auctions in the 1930s, but having rushed this change in market structure too quickly for investors and dealers to adapt, ultimately having to wait until the 70s to start again, when interest rate volatility meant prices changes right up to issuance had big effects. Finally, the Treasury market begins to look like the modern market of today - large in scale, regular and predictable auctions, highly liquid and increasingly only the interest of technicians and market experts.

The book is accessible, though the incredible attention to detail can be dense and dry. Regardless, if one is interested in the history and institutions of the Treasury market, it is an absolute must.

[Frank Stein · Rating 3 out of 5]

The Treasury market has become something like water to the proverbial fish, so pervasive in financial and world markets that we are hardly aware it is there. Much of the world's savings is placed in its tender mercies, and banks and hedge funds and pension funds and every kind of financial institution rely on it to manage their cash and earn money on what is still known as the world's safest asset. But this largest market in the history of mankind, constituting hundreds of billions or trillions of dollars traded daily across the globe, has its own history. Garbade shows that bureaucratic and political battles from the first World War to the Second made it what it is today, for better or for worse.

First, Garbade shows that pre-World War I sales of bonds were usually auctions, where the bonds were given to the highest bidder, but growing unease about the auctions being dominated by New York City banks lead Treasury Secretary William McAdoo to offer his famous "Liberty Bonds" to the world at a fixed price, which allowed small investors to pick them up. But this lead to the problem of them being constantly "underpriced." The Treasury worried that any sale that did not include a high enough interest rate would fail, and thus lead to wider uncertainty, so they were in these years always generous with interest and thus usually had these bond sales "oversubscribed" by three or four times the amount actually offered. They sometimes used this oversubscription to further favor small savers and "allot" bonds to the smallest bidders.

At the same time the Federal Reserve's ability to repurchase debt and, starting in 1921, to used its specially leased telegraph wires to easily transfer debt across the country, lead to a vigorous open market in these bonds such as had never existed before, and which continues to today. Banks, however, became the major dealers in this secondary market, and recaptured much of what they had lost by the end of auction sales, and this caused the Treasury to need to manage how debt flowed in and out of banks to prevent temporary financial panics, and this finally lead to a return of auctions for short-term "bills" in 1929 (long-term bonds wouldn't be auctioned until Volcker tried it in 1972).

Garbade also describes the evolution of what we today know as the "debt ceiling": from a congressional authorization for each and every bond sale in the pre-war period, to statutes that limited the amount of "outstanding" bonds, and "outstanding" short-term bills, and "outstanding" notes, to finally, in 1939, a limit on the total amount of debt outstanding, which Treasury Secretaries' Mellon, Mills and McAdoo had all striven for, and which is today the debt ceiling.

There's lots more detail in here. For those who are already bored by this brief description, and even for many who aren't, its probably far too much. In the early years of the story the detail is manageable, but as it goes on Garbade's desire to record seemingly every minor sale and transfer of debt can become tedious. But of course, this isn't for the casual reader. More attention to unpublished sources and non-government sources would have fleshed out the story, but this is still an impressive piece of research for which we should be grateful.