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Birth of a Market: The U.S. Treasury Securities Market from the Great War to the Great Depression
Published by EH.Net (May 2012)
Kenneth D. Garbade, Birth of a Market: The U.S. Treasury Securities Market from the Great War to the Great Depression. Cambridge, MA: MIT Press, 2012. xii + 393 pp. $50 (hardcover), ISBN: 978-0-262-01637-7.
Reviewed for EH.Net by Franklin Noll, Noll Historical Consulting.
Kenneth Garbade has been doing path-breaking work for years in what I like to call the mechanics of Treasury finance. In various case studies and articles, Garbade, Senior Vice President at the Federal Reserve Bank of New York, has charted the origins of the sometimes revolutionary developments in Treasury financing that we now take for granted, including book-entry securities and Treasury auctions. In Birth of a Market, he applies his special insight to the changes in Treasury financing methods during the interwar period. Attention to this topic is long overdue as sixty years have passed since the last detailed examination of Treasury debt management in the mid-twentieth century.
In his book, Garbade argues that between 1917 and 1939 the Treasury undertook four initiatives that made possible the familiar post-World War II primary securities market: the revival of auction sales, the linkage of Treasury cash and debt management, the loosening of Congressional constraints on Treasury management of the debt, and the start of offering securities on a regular, consistent schedule. These developments, in turn, were caused by the Treasury’s reaction to the new reality of a large, permanent public debt created during the period.
At the start of World War I, most securities were being sold at auction. This changed with the U.S. entry into the war. Aiming to expand the market for the Liberty Loan bonds beyond large New York banks and to build popular support for the war, the Treasury promoted fixed-price subscription sales to appeal to less sophisticated investors. This sales approach took hold in the Treasury after the war. The road back to auctions began with a new instrument called a Treasury bill. As an initiative to integrate Treasury cash and debt management, bills were introduced in 1929 as short-term funding instruments. Their sale by auction provided flexibility in both the timing and amount of issuance, which was next to impossible with subscription sales.
The interwar period also marked a transition in Congressional and Treasury views of the nature of debt offerings and the public debt. Prior to the 1920s, Garbade argues, debt was issued for a specific purpose such as to finance a war or to accomplish a particular task. However, after World War I, the public debt increasingly came to be seen as something permanent that needed to be managed. By 1939, Congress had ceded to the Treasury all debt management responsibilities, maintaining only the right to set a debt limit ceiling. Managing a continual debt forced the Treasury to think in terms of “issuance programs” that would provide for the ongoing need to refinance maturing securities. This realization was the start of the “regular and predictable” offerings that are now a fundamental Treasury strategy.
In presenting his points, Garbade needs to be hailed for his explanations of the workings of Treasury securities’ issuance and management. His discussion of pre-World War I issues is revelatory, explaining how various factors merged to create a specific issue and method of issuance. His descriptions of the rationales behind the various wartime Liberty Loan bonds and notes are probably the most concise and informative written. He also delves into the long ignored subjects of the operation of New Deal program funding, the challenges of subscription issuance, and the interconnections between National Bank Notes and Treasury debt in the 1930s.
The weakness of Garbade’s interpretation, which he shares with his predecessors, is an overly narrow conception of causation for changes in Treasury actions, focusing almost exclusively on pressures arising from Treasury financial imperatives and the reactions of financial markets. No doubt much of the reason for this stems from dependence by researchers on official Treasury reports and the financial press for a majority of their evidence.
Garbade fails to factor in the ideological and political forces of the thrift movement and efforts toward the democratization of investment. (Before, during, and after World War I, the federal government made repeated attempts to bypass financial institutions and sell debt instruments directly to the general public.) As a result, Garbade overlooks that the period saw a running battle between the government and the (ultimately victorious) financial industry for the souls and money of the average investor. What we see during the period – with the sole exception of Savings Bonds – is the active exclusion of small and medium investors from the primary market that would continue until the establishment of the Treasury Direct system at the end of the twentieth century.
Also missing from Garbade’s analysis is the growth of the buyers’ side of the bond market. After all, it takes two to make a market. Though Garbade often talks about the market’s response to Treasury issues and discusses “free riders,” one discovers little of the development of the market makers in Treasury securities. And, it is hard to believe that the influence of the bond dealers on the Treasury’s actions was limited to their enthusiasm, or lack thereof, to a bond issue. The growing size and sophistication of the market as well as the Treasury’s increasing dependence on it no doubt gave the advantage to the bond dealers. To what extent did the buyers rather than the seller give birth to the modern market?
More questions arise if we consider the other major player during the period – the brand new Federal Reserve System. As the Treasury’s fiscal agent, how was the market affected by the new systems it established to facilitate Treasury security transactions? How did the Fed shape the market as it pressured banks to buy securities during World War I and set up its own portfolio of Treasury securities as it began open market operations?
The fact that Garbade’s account prompts all these questions attests not to the weakness of his analysis, but the degree of insight and clarity he brings to a long-neglected topic. By clearing away the miasma surrounding the study of Treasury debt management, he lets us take long, hard looks at the subjects. One can only hope that Garbade will build upon this work and continue to break new ground, giving us the story of the United States Treasury securities market in the late twentieth century.
Franklin Noll is president of Noll Historical Consulting and historical consultant to the U.S. Bureau of Engraving and Printing. He is the author of “The United States Monopolization of Bank Note Production: Politics, Government, and the Greenback, 1862-1878,” in American Nineteenth Century History (forthcoming) and is currently studying the post-Civil War debt crisis.
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