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Federal Reserve Bank of St. Louis

THE TREASURY AND THE
MONEY MARKET

E BA#

93
44
RATED IhP\

Federal Reserve Bank
of New York
May 1954

FOREWORD
This booklet is the third of a series of publications of
the Federal Reserve Bank of New York designed to furnish
the student of banking with information, not readily available elsewhere, concerning various aspects of the national
money market and factors affecting it. The articles in this
booklet deal with financial operations of the Government,
including public debt transactions, and their effects on
the money market.
All of these articles first appeared in, the Monthly
Review of Credit and Business Conditions of the Federal
Reserve Bank of New York,and have been revised to bring
them up to date.
We shall be glad to make additional copies of the booklet
available for classroom use and for similar purposes.
ALLAN SPROUL,

President.
NEW YORK CITY,
May 1954.

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CONTENTS
Page
The Treasury and the Money Market

Managing the Treasury's Cash Balances

Treasury Tax and Loan Accounts at Commercial Banks

Cash Borrowing of the United States Treasury: Nonmarketable Issues

Marketable Issues of the United States Treasury

Marketing of Treasury Bills

Direct Purchases of Special Treasury Certificates of
Indebtedness by the Federal Reserve Banks

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CHARTS
Page

Treasury Deposits in Federal Reserve Banks
and Special Depositaries, 1952 and 1953

Treasury Deposits in Federal Reserve Banks
and Special Depositaries, 1947 and 1953

Public Debt, by Major Types of Obligations

Nonmarketable Public Debt, by Type of Issue

Marketable Public Debt, by Type of Issue

Schedule of Public Marketable Debt, by Call Classes

Ownership of Treasury Bills

Sources of Federal Reserve Credit

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THE TREASURY AND THE MONEY MARKET
by
H. C. CARR
immense growth of the Federal Government
THE
budget, and of the Federal debt, over the past
two decades has made Treasury operations the largest, and most nearly continuous, of all influences
upon the flow of funds through the money market.
The Federal Reserve System, in its continuing effort
to control bank reserves and the net availability of
money market funds in keeping with the general
aims of credit policy, must take account of the cross
currents set in motion by debt transactions, tax collections, and other operations of the Government.
The impact of a given amount of public debt transactions or of tax receipts, however, is not always
the same. The effects on the money market depend
on how payment is made for securities sold, or for
taxes due; in the final analysis, they depend on what
happens to bank reserves.
For example, a Treasury offering of new securities for maturing securities ordinarily has little direct effect on bank reserves, but it may give rise to
changes of ownership of Treasury securities and to
shifts of funds between banks. Furthermore, if it results in an increase or decrease in bank holdings of
Treasury securities, it may cause an increase or decrease in bank deposits and a corresponding change
in the banks' reserve requirements. Even securities
sold for cash may have differing effects on bank
reserves, the results depending on the form of payment required or permitted by the Treasury. Nor
is the collection of taxes necessarily an automatic
drain on bank funds, since different taxes may be
collected through different procedures, and the procedures may be varied from time to time.
Some of these considerations are touched upon in
the various articles appearing in this pamphlet. This
article is an introductory summary of the effects of
the Treasury's cash operations on the money market.

THE FLOW OF FUNDS THROUGH
TREASURY ACCOUNTS
The proceeds of taxes and of borrowing operations are originally collected either into Treasury
accounts at some 11,000 commercial bank depositaries, or through direct payments into the Treas-

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ury's accounts at the Reserve Banks; but with minor
exceptions all Treasury disbursements are made out
of funds held on deposit in the Reserve Banks.
Thus, nearly all the cash operating receipts and expenditures of the Government—over 70 billion dollars during fiscal 1953—and the receipts and expenditures connected with the debt sooner or later
flow through the Treasury's accounts with the twelve
Federal Reserve Banks. Each payment from the public into a Reserve Bank account involves a reduction
of member bank reserves; each disbursement by the
Treasury from a Federal Reserve account causes an
equal increase in member bank reserves. Clearly,
the magnitude and the timing of the flow of funds
through the Treasury's accounts at the Reserve
Banks must inevitably be of major importance to
the money market.
The impact of these money flows could be held
to a minimum if the Treasury's operating balances
in the Reserve Banks were kept at a constant figure,
and if each day's inflow of funds were approximately offset by a corresponding amount of disbursements. While such a situation could represent
a goal, the vast scale of the Government's operations, the diversity in the sources and uses of its
funds, and unavoidable seasonal or mechanical
characteristics of payments make such a neat balancing impossible. The likelihood of abrupt changes,
resulting in intense stringency or sudden ease in the
money market, can be lessened by the Treasury's
current practice of initially funneling a considerable
part of its receipts into its deposit accounts (known
as Tax and Loan Accounts) at commercial bank depositaries. In this way, the transfer of funds into
Treasury accounts at the Reserve Banks can be regulated, within the limits permitted by expenditure
requirements, so that reserves are withdrawn from
the commercial banks for the briefest practicable
period prior to their subsequent replacement
through Treasury disbursements. To the extent it
proves practicable to handle Treasury receipts in
these two steps, that is, original collection in Tax
and Loan Accounts,followed by scheduled transfers
to Federal Reserve accounts, the Treasury can large1

THE TREASURY AND THE MONEY MARKET

ly neutralize the money market impact of the flow
of funds through its accounts, or at least regulate
the impact of Treasury operations on the money
market in a way that will be least disturbing, taking
into account the various other factors that influence
the magnitude of bank reserves.

Treasury Outlays

throughout the country; these agents are reimbursed
by the Treasury from its accounts with the Reserve
Banks upon presentation of the securities. In the
fiscal year 1953, 98 per cent of the redemptions of
Series A to E Savings bonds were handled in this
fashion. Series F and G bonds, and their alphabetical descendants (Series H, J, and K), on the
other hand, can be cashed only at Federal Reserve
Banks and branches (and in Washington by the
Treasurer of the United States); thus, a check on
the Treasury's Reserve Bank account is involved.
Savings notes and investment series bonds redeemed
for cash also require a check in most instances. Savings notes that are tendered in payment of taxes,
however,obviously do not.
Most expenditures for interest on the debt are
also made without the use of checks; the banks
present the interest coupons on bearer securities
directly to the Reserve Bank. As in the case of securities being redeemed, the coupons are presented
by the banks not only for their own account but also
for the account of their customers.
In one sense, the distinction between Governmental expenditures made by check and those made
without the use of checks is artificial. In both cases,
the reduction of the Treasury's account with the
Reserve Bank, when the instrument is presented for
collection, is immediate. The corresponding rise
in some other Federal Reserve account, nearly always member bank reserve balances, is also immediate. There is no deferred availability schedule for
Treasury checks; they are immediately available
funds. From the standpoint of the individual
banks, however, there are real differences between
payment by check and direct presentation of obligations. By direct action, the banks realize the advantages of speedier collection of funds, because
this procedure eliminates the travel time involved in
the journey of a check from the Treasury to the
debt holder, thence to the bank, and finally to the
Federal Reserve. The banks also have the assurance
of obtaining the deposit. For the Treasury, such
action means that the drain on its balances takes
place sooner.

Under present practices the Treasury has little
control over day-to-day timing of disbursements
from its balances with the Reserve Banks. The
Government's suppliers of goods and services or its
creditors have some potential discretion to delay or
to speed up the presentation of their Treasury checks
or redeemable debt instruments for payment, but
as a practical matter the cashing of checks is rarely
postponed.
Checks which are collectible at any Reserve Bank
or any Reserve Bank branch—and at the Treasury
Department—are used to pay for nearly all Governmental operating expenditures. Some outlays do
pass through accounts maintained with commercial
banks for the convenience of certain disbursing officers, such as a paymaster for a military post, but
disbursements made in this way are relatively small
in proportion to the total.
On the other hand, only a small fraction of the
expenditure connected with the debt involves the
use of checks. Instead, banks obtain more speedy
payment in the form of a direct credit to their accounts with the Reserve Banks upon presentation
of redeemable bearer securities. Such maturing marketable issues are ordinarily forwarded by banks
directly to their District Reserve Bank, sometimes
by mail, sometimes by messenger. Some of the forwarded securities belong to the banks themselves,
others belong to correspondent banks in outlying
sections of Federal Reserve Districts for which the
banks are acting as agents. Still others belong to
nonbank customers for which the banks also act
as agents so as to obtain the deposits and to render
a service to their customers.
Notwithstanding the fact that all nonrnarketable
bonds are registered in the name of the owner,
many of them do not require the issuance of a check
by the Treasury when they are redeemed. Series A Treasury Receipts
As was indicated earlier, the Treasury's inability
to E Savings bonds may be redeemed (prior to cancellation of registration) by nearly 17,000 paying on any appreciable scale to quicken or slow down
agents of the Treasury—mostly banks—located at will the flow of disbursements through its Reserve

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FEDERAL RESERVE BANK OF NEW YO.RK

Bank balances does not extend to receipts. Through
the Tax and Loan Account device much of the
Government's revenues, as well as the proceeds of
its sale of securities, may be diverted into a reservoir of funds with commercial banks to be tapped
when the occasion demands. Obviously then, eligibility of receipts for credit to Tax and Loan Accounts is of considerable importance in determining
the degree of control over the impact of receipts
on Treasury accounts with the Federal Reserve and
on member banks' reserve accounts. Were all the
Treasury's funds to come directly into its Reserve
Bank accounts, the build-up frequently would bring
serious drains on bank reserves. At times, when the
expenditure rate was rapid, the subsequent fall
might also cause serious distortions in reserve positions. How great these distortions would be may
be seen from a comparison of the variations in the
movements of the two types of Treasury accounts
shown in the chart on the following page. The variations in Reserve Bank accounts are already sizable,
but, if the variations in the Tax and Loan Accounts
were superimposed, it is easy to see how much
greater they would be.
Payment for Treasury debt sold to the public for
new money may usually be made with credits to Tax
and Loan Accounts. Proceeds of nonmarketable securities absorbed by the public are uniformly eligible for credit to such accounts. Marketable issues
also are ordinarily, but not always, sold for Tax
and Loan Account credit. The principal exceptions
to this rule are the 91-day Treasury bills, which are
rarely sold for book credit. Eligibility for credit to
Tax and Loan Accounts does not guarantee that all
payments will be made in this fashion but a large
proportion of them are. Of the close to 18 billion
dollars of new money issues—marketable (other
than weekly bills) and nonmarketable—bought by
the public in 1953,85 per cent was paid for by Tax
and Loan Account credits.
Not all securities sold to the public by the Treasury are new issues; sometimes the Treasury sells in
the market limited amounts of already outstanding
issues. These securities, usually held for the account
of some Treasury trust fund, are always paid for
by credit to the Treasury's Reserve Bank account.
The Treasury occasionally also sells very short-term
securities—special certificates of indebtedness—di-

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rectly to the Federal Reserve System. The temporary
funds involved are "created" by the Federal Reserve
Banks and are credited to the Treasury's Reserve
Bank account; they do not come from the public.
In contrast to debt proceeds, many types of taxes
flow directly into the Treasury's balances with the
Reserve Banks, because these taxes are regular in
their flow and individually are small relative to total
receipts. Others, however, arrive only after a sojourn in the Tax and Loan Accounts of commercial
banks. Dollarwise, the relatively few types of taxes
eligible to flow first into Tax and Loan Accounts
constitute the bulk of the Government's revenues,
but banks are not always in a position to exercise their option of receiving these taxes into Treasury accounts on their books (since the taxpayers
sometimes send their payments directly to the Director of Internal Revenue). Withheld income
taxes, most social security taxes, and some excises
can be and are largely retained by the banks until
the Treasury specifically calls for them by a withdrawal from Tax and Loan Accounts, and a sizable
portion of corporate taxes—in most quarterly
months—are returned to the banks under an arrangement through which the proceeds of income
tax checks of 10,000 dollars or more are returned
to the banks on which they are drawn for credit to
the Treasury's account in those banks. The latter
credits are referred to as the "X" balances in the
Tax and Loan Accounts. A modest amount of nonwithheld individual income taxes also comes under
the "X" account procedure. During 1953, over 70
per cent of the eligible tax payments were credited
originally to Tax and Loan Accounts.

THE INFLUENCE OF TREASURY OPERATIONS
ON THE MONEY MARKET
The influence of Treasury operations on member
bank reserves and the money market depends upon
the combined effect of the flows of receipts and
expenditures through the Treasury's balance with
Reserve Banks. If the flow of receipts is greater
than the outgo, the Treasury's balance obviously
goes up and member bank reserve balances are reduced. At times, such an increase occurs as a result
of "natural" influences; that is, the rise takes place
because cash collections through the Treasury's Federal Reserve accounts exceed cash disbursals without
the withdrawal of funds from the Treasury's.Tax

TREASURY DEPOSITS IN FEDERAL RESERVE BANKS AND SPECIAL DEPOSITARIES
1952 AND 1953
Millen: of dollars

Bullies of dollars

•

7
TAX & LOAN ACCOUNTS IN
SPECIAL DEPOSITARIES
6

6
.

1952
5

,
4
'1953
-3

AVA LABLE FUNDS IN
FEDERAL RESERVE BANKS

1952

Jan

Feb

Mar

Apr

Notes Closing dilly balances: Sundays and SoIldays omitted.
Source: U. S. Treasury Department

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1953

ir 'ibie- i

Aor..).• 0111/11101 r •Alli

May

Jun

Jul

Aug

Sop

Oct

Nov

,
Dec

FEDERAL RESERVE BANK OF NEW YORK

and Loan Accounts in the commercial banks. Such
occasions are few in number and they are short-lived.
Before the rapid rise in defense expenditures after
the outbreak of the Korean conflict, and before the
introduction of the Mills plan for collection of corporate taxes (which resulted in setting up the "X"
balance procedure in March 1951), these "natural"
excesses of cash receipts occurred during January,
March, June, September, and December, starting
about the 17th or 18th of the month and lasting for
approximately a week. Now,they seldom occur.
On balance then,and increasingly so since defense
expenditures increased greatly, the Treasury's receipts which come directly to its Reserve Bank balances fall short of the amounts which must be paid
out. As a result, more or less continuous transfers
from Tax and Loan Accounts to the Reserve Banks
must be made. It thus becomes generally possible,
by withdrawing the right amounts from Tax and
Loan Accounts, to prevent material changes in the
Treasury's balance at the Federal Reserve and thereby to minimize the corresponding effect on bank
reserves which those changes exert. How much to
"call" from the commercial banks must be gauged
in accordance with estimates of how large the needs
of the Treasury are likely to be. This requires a calculation involving a forecast of the daily receipts
and expenditures which flow in and out of the Reserve Bank balance of the Treasury. In order to
make these forecasts, detailed studies are made of
many individual categories of receipts and expenditures by both Treasury and Federal Reserve staffs.
Withdrawals from Tax and Loan Accounts are normally announced twice a week, Monday and Thursday, and at these times the estimates, made independently by each of the two staffs, are compared.
After any differences are resolved (the Treasury,
of course, making the final decision), the schedule
of calls is fixed and notices are sent to the banks.
The Treasury may at times, because of changes in
the scale of its operations or for other reasons that
are generally of a long-range character, find it necessary to alter the desired level of its working balances at the Reserve Banks. If the Treasury wishes
its balance unchanged, of course, withdrawals from
Tax and Loan Accounts are made with an eye toward matching the net outgo from accounts at the
Reserve Banks. When the Treasury's balance has,,

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for any reason, fallen below the level required for
operating convenience and it is desirable to restore
it to a somewhat higher position, the withdrawals
from Tax and Loan Accounts are scheduled so as to
exceed the rate of net disbursements for all operations. When the Treasury's balance may have become too large at the Reserve Banks, or when the
aim is to anticipate a subsequent rise in the Treasury's balance, the withdrawal of balances from
commercial banks is slackened or suspended so that
the Treasury's balance at the Reserve Banks may
dedine. At times, thought has also been given,
within the limits permitted by all other considerations, to calling funds for transfer to the Treasury's
balances at the Reserve Banks in such a way as to
offset to some extent the effects of other factors
influencing the volume of funds being placed 'at
the market's disposal. In practice, however, very
little range has been found for this kind of Purposeful variation in Treasury calls, and attention has
necessarily centered on minimizing the disturbing
money market effects of these calls.
Depending on what needs to be achieved, devices other than Tax and Loan withdrawals may
also be used. Special certificates of indebtedness
may be purchased from the Treasury by the Reserve
Banks under authorization of the Federal Open
Market Committee if it is deemed desirable in a
period of heavy tax payments to engage in a
"smoothing-out" operation. These purchases enable
the Treasury temporarily to make disbursements in
excess of its current receipts, thus providing the
banks with additional reserves in advance of a later,
unavoidable drain. Such an operation is consistent
with a general policy of maintaining Treasury balances as nearly level as possible, if the special certificates are purchased shortly in advance of a period
when Treasury receipts, without calls, will exceed
expenditures. Under such conditions, it may be desirable to reduce or suspend withdrawals from Tax
and Loan Accounts, even though Treasury deposits
with the Reserve Banks may already have been exhausted, so that the later pouring-in of receipts will
not build the Treasury accounts with the Reserve
Banks to an undesirably high level. .
It is clear, however, that management of the
Treasury's Reserve Bank balance, so as to avoid
large changes in bank reserves, is dependent on

THE TREASURY AND THE MONEY MARKET

rather precise use of the various methods of accomplishing that purpose, and there are definite limitations to such methods. First among these limitations
are those set by operating considerations. For example, although full freedom to vary the balance
may demand that all receipts be made eligible for
credit to Tax and Loan Accounts, it is not practicable to do so. Take the case of declarations of estimated income taxes filed by individual taxpayers.
In the first quarter of every year about five million
of such declarations are filed. Probably no more
than 50,000 of these are accompanied by checks
in amounts of 10,000 dollars or more. It would be
an enormous, unrewarding task to attempt to return
the huge volume of smaller checks to the banks
upon which they were drawn, although this is done
with the larger checks credited to "X" accounts.
Thus, flexibility—the power to vary at will the level
of the Treasury's balance with the Federal Reserve
Banks—is circumscribed by the limits imposed by
considerations of practicability.
Another operating consideration relates to the
fact that there are certain minimum levels needed in
Tax and Loan Accounts to keep the system working.
Were the Treasury consistently to hold only small
balances in Tax and Loan Accounts, such accounts
would become unprofitable and unattractive to the
banks. Thus, the Treasury cannot allow its balances
in those accounts to remain very low. On the other
hand, operating considerations also call for the
maintenance of a certain amount of funds with the
Federal Reserve Banks. If less than 200-250 million
dollars is kept in its General Account balance, the
Treasury is exposed to the necessity of frequent
shifting of funds among Reserve Banks, and its staff
is compelled to pay undue attention to the regional
pattern of receipts and expenditures so that sufficient balances are available in each Federal Reserve
District to cover expenditures in that District. A
balance of 400-500 million gives a margin of safety.
The carrying of a balance of some size is also needed
in order to avoid unnecessary borrowing from the

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Federal Reserve Banks in the event that the estimates go awry.
In fact, the margin of error in the estimates permits only an imperfect control over the Treasury's
balance for the purpose of neutralizing disturbances
that result from the large and variable flow of funds
through the Treasury's accounts. Despite the earnest
efforts of the various staffs engaged in making such
estimates, the margins of error are at times sizable.
The problems of estimating collection of tax checks
during March may illustrate the reasons for the miscalculations. The volume of daily income tax receipts at such a time depends not only on the
amount of taxes due but also on the Revenue Service's ability to process the returns and to forward
checks to the Reserve Banks; this ability has varied
greatly. Whether the taxpayer will take refunds on
the previous year's liability in the form of a credit
on the current year's bill or in the form of a refund
check, whether the corporate taxpayer finds it more
advantageous to use Savings notes or tax anticipation issues for payment or to sell marketable securities and pay the bill by check, whether the bank
wishes an "X" balance credit, indeed, whether a
taxpayer uses more than one check in payment (thus
bringing each check under the 10,000 dollar minimum for credit to "X" accounts) are also important
factors bearing on the reliability of estimates. So
long as the behavior of the taxpayer is relatively
stable, the forecasts may be fairly good; sometimes,
however, taxpayers have shown considerable deviation from their "normal" practices.

CONCLUSION
The range of variation in the Treasury's balance
with the Reserve Banks may at times be large enough
to introduce undesirable changes in the volume of
bank reserves. The increased attention given to the
management of the Treasury's cash balances in recent years, however, has materially reduced accidental or sudden swings in member bank reserves
that would otherwise arise in the normal course of
the Treasury's collecting and disbursing operations.

MANAGING THE TREASURY'S CASH BALANCES
by

HELEN J. COOKE
rTIHE working cash of the Treasury, like that of
1- any business, consists of bank accounts and currency, but unlike private concerns, the Treasury
keeps its active cash mainly in deposit accounts at
each of the Federal Reserve Banks and their
branches. Large balances are built up in the Treasury Tax and Loan Accounts maintained at "Special
Depositaries" (qualified commercial banks and
other banking institutions), but these balances are
not drawn upon directly for Treasury disbursements. Daily average balances at the Reserve Banks
in recent years have ranged from around 1.4 billion
dollars in 1948 to an average of about 450 million
in 1953. The amount on deposit in the Tax and
Loan Accounts, on the other hand, increased from
an average of nearly 1.8 billion dollars in 1948 to
3.8 billion in 1953. The rise in the latter accounts
reflected not only the rise in the Treasury's cash
receipts in this period but also the Treasury's increasing use of the Tax and Loan Account technique, since March 1948, as a means of spacing out
the impact of its large cash receipts on the reserves
of the banking system.
Relatively small amounts (around 500 million
dollars) of the Treasury's funds are also held in
insured domestic banks designated as "General
Depositaries," and in insular, territorial, and foreign depositaries. Accounts are maintained in these
various types of depositaries, in areas at some distance from Federal Reserve Banks or their branches,
to provide agents of the Federal Government with
convenient facilities for depositing funds collected
and in a few cases to permit disbursing officers to
make payments in local funds. At any given time,
the balances in these depositaries are fixed in proportion to the volume and character of the Government business transacted, and any excess is transferred daily to the District Federal Reserve Bank.
In many cases General Depositaries qualify as Special Depositaries as well. The Treasury also maintains a "Cash Room"in Washington where currency
may be obtained or Treasury checks cashed, but the
flow of funds through the Cash Room is relatively
insignificant.

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In addition to these bank accounts and cash balances, the Treasury has an additional cash asset
referred to as "free gold" (excess of gold bullion
over specific gold liabilities) and some "free" silver
bullion, which for the most part could be used to
cover general operations. These are not properly
induded, however, in a description of the routine
banking of the Treasury's funds.

FUNDS IN THE SPECIAL DEPOSITARIES
"Treasury Tax and Loan Accounts" (formerly
known as"War Loan Deposit Accounts") are main
tamed at nearly 11,000 designated banking institutions in the continental United States. By allowing
funds to accumulate in the Tax and Loan Accounts
and withdrawing them through calls only as desired,
the Treasury can achieve a measure of control over
the flow of cash into its accounts at the Federal
Reserve Banks, and the potential disturbance to the
money market and to bank reserves can be held to a
minimum. The reserves which banks lose through
calls can be immediately or very shortly returned
through Government disbursements, if calls are
planned to coincide closely with out-payments,
whereas if all Treasury receipts were deposited immediately at the Reserve Banks, reserves would frequently be drained off long before the Treasury
could be in a position to disburse them, and the
ability of the banks to meet the credit needs of their
customers would be impaired. Although the Tax
and Loan deposits are payable on demand,the Treasury gives several days' notice by calling for the funds
before payments are due.

Classification of Depositaries
In order to permit some differentiation between
larger and smaller deposit accounts, the Treasury
has classified its Special Depositaries into two
groups. The present classification places in Group A
those banks whose Treasury Tax and Loan Account
balances on February 16, 1954 were 150,000 dollars
or less; those with larger balances on that date are
in Group B. This classification'does not apply, however, to the "X" balances, which may be accumu7

THE TREASURY AND THE MONEY MARKET

lated by depositary banks in the quarterly tax
months,if the Treasury decides to return all or some
fraction of the larger checks to the banks on which
they are drawn, for credit in the Treasury's account
at these banks, instead of collecting them for immediate credit in the Treasury's account at the Federal
Reserve Banks. The "X" balance arrangements are
made for payments of nonwithheld income and
profits tax checks when all the funds are not needed
immediately by the Treasury.
Calls on "B" depositaries and on "X" balances
are usually announced on Monday or Thursday and
payments may be scheduled for any working day
of the week; the Monday calls ordinarily require a
transfer of funds into the Treasury's account at the
Reserve Banks on the following Friday and on
Monday of the next week; calls on Thursday usually
are made for payment on Tuesday, Wednesday, and
Thursday of the following week. Calls on "A" depositaries are made less frequently, usually once a
month. The Treasury may call for funds from individual banks without regard to any dassification,
but this has been done only on rare occasions. Individual calls, for example, were made in 1952 from
particular banks which obtained unusual increases
in their Treasury Tax and Loan Accounts as a result of switching by their depositors out of an old
series of Savings notes into a new series.

Creditable Receipts
Until 1948,funds flowed into the Special Depositary accounts only as a result of Treasury borrowing
operations. But early in that year the Treasury decided to permit withheld income taxes to be credited
to its accounts in the depositary banks. Other selected taxes were added subsequently and by August
1953 payroll taxes under the old-age insurance
program, taxes on carriers under the Railroad Retirement Act, and the payments of certain excise
taxes, as well as withheld income taxes, were regularly eligible, while large payments of nonwithheld
corporate and individual income taxes in the quarterly months were declared eligible whenever the
funds were not immediately needed by the Treasury
(a more detailed historical review and description
of current procedures is given in the subsequent
article).
In 1953, roughly three fifths of the Treasury's
cash receipts (including cash borrowing) from the

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public were creditable initially to the Treasury Tax
and Loan Accounts. In 1947, when only the proceeds of sales of Savings bonds and notes were
payable into the War Loan Deposit Accounts (as
they were then called), the maximum flow of funds
into the Special Depositaries was only 17 per cent
of aggregate Federal cash receipts.
Not all of the creditable receipts pass through
accounts held with the Special Depositaries, but a
large share of them do. In 1953, about three fifths
of the receipts from Savings bonds, withheld income taxes, and eligible social security and excise
taxes were credited to these accounts, and practically all of the eligible quarterly payments of nonwithheld income and profits taxes and all of the
proceeds of Savings notes and new money issues
went into Tax and Loan Accounts.

Fluctuations in Receipts
The monthly flow of funds into the Special Depositaries from the several eligible sources has
shown marked fluctuations, as shown in the accompanying chart. And within any given month, the
receipts from the several eligible taxes have tended
to be concentrated around the final payment date
for the respective taxes, while purchases of Savings
bonds and notes tended to be distributed throughout the month, with some concentration of sales of
Savings notes on and after the fifteenth of the
month (the issue date of each monthly series). Receipts from the sales of Savings bonds, except for
the special sales, have been highest in the first three
months of the year and in July and December,
whereas receipts of withheld taxes are customarily
low in the first month of each quarter, high in the
second month, and moderate in the third as a result
of technical characteristics of the payment schedule.
The major changes in sales of Savings notes during
the postwar period until October 1953, when sales
were discontinued, apparently paralleled the
changes in market rates of interest.
A growing proportion of the receipts from the
quarterly income and excess profits taxes has been
received in March and June. Under the Mills plan,
enacted in 1950, corporate tax collections are being
gradually brought forward, so that in 1955 all corporate taxes on income earned in 1954 will be payable within six months after the end of the year.
Formerly, corporations paid their taxes in approxi-

TREASURY DEPOSITS IN FEDERAL RESERVE BANKS AND SPECIAL DEPOSITARIES
1947 AND 1953
Billions of dollars

Billions of dollars

TAX & LOAN ACCOUNTS IN
SPECIAL DEPOSITARIES

_
1953

1
.
1

lk
1947

1947
'

,sdili
AVAILABLE FUNDS
ERVE B
' IN FEDERAL RESANKS
1953
Jan

Fib

Mar

Apr

May

Jun

Jul

Aug

Notes Closing daily balances; Seldays sod holiday$ emitted. Rata for deposits Is Coders! Reserve Basks through August 1947
Include a smell eacieet of escollected Items, which were cot reported separately at that time.
Sources U.S. Treasury Department.

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Federal Reserve Bank of St. Louis

Sip

Oct

Nov

Dec

THE TREASURY AND THE MONEY MARKET

mately equal instalments in the four quarterly periods following the end of their tax year (which
for most corporations is December 31). In each of
the five years beginning with 1951, the proportion
of taxes due in the first two quarters of the following year was increased by five percentage points and
the proportion in the last two quarters lowered by
five percentage points. In 1953, for example, 40
per cent of the tax liability of most corporations for
1952 income had to be paid in March; an additional
40 per cent was due in June; and 10 per cent was
payable on each of the two remaining quarterly
"tax dates." By 1955 half of a corporation's tax
liability will be due in the third month after the
close of its fiscal year, and the remaining half before
the end of the following quarter.1 Because the fiscal
years of some corporations differ from the calendar
year, and because certain amounts of "back" taxes
are paid throughout the year, a small proportion of
corporate income and profits taxes has continued to
be collected in the intervening months and in the
last six months of a year.
If all of these tax collections were allowed to
flow directly into the Reserve Banks, as had been
the case prior to 1948, the banks would at times
face an extremely difficult task in maintaining their
reserves at the required levels. Record payments of
taxes have been made in recent years for several
reasons, including unparalleled incomes and profits,
higher ordinary tax rates on both corporate and individual income,the enactment of a corporate excess
profits tax law (which expired at the end of 1953),
and the acceleration of corporate tax payments under the Mills plan. In the same period, the banks
could no longer rely upon as ready a market as in
former years for the Government securities which
1 Much of the half-yearly swing in tax payments by corporations would be gradually offset by a pay-as-you-go measure in the 1954 "tax revision bill" but large intra-monthly
fluctuations will remain nevertheless. The new plan, applying to incomes earned in the first fiscal year ending on or
after December 1955, calls for the payment by large corporations within the last four months of the year in which
the income is received. That is to say, most of these corporations will make their first instalment on taxes due on
1955 incomes on September 15 of that year, when 5 per
cent of their estimated annual tax will be due. The payments will be stepped up gradually until 1959 and thereafter when 25 per cent of the current year's estimated
tax liability will be due on September 15 and also on
December 15 of that year and the remainder (with any
adjustment for errors in the original income estimate) in
two equal instalments on March 15 and June 15 of the
following year.

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they might have had to sell to cover the losses of
reserves entailed in paying tax funds into the Treasury's deposits at the Federal Reserve Banks.
The contrast in the amount of fluctuations which
would have occurred in the Treasury deposits at
the Federal Reserve Banks without the use of the
Tax and Loan Accounts can be seen by comparing,
as shown in the chart on page 9, the fluctuations
in 1953 in the Tax and Loan deposits with the
changes in that year in the Federal Reserve deposits.
Also, it can be seen that the fluctuations in the deposits in the Reserve Banks in 1953 would then
have been greater than in 1947 when all tax collections flowed directly into the Reserve Banks. For
example, the increases in the Tax and Loan Accounts in the quarterly months in 1953, reflecting
the collection of income and profits taxes, were substantially larger than the comparable 1947 increases
which at that time occurred in the Treasury's deposits in the Reserve Banks. Likewise, the increases
in Tax and Loan Accounts during the third week
of February, May, August, and November, reflecting for the most part the receipt of withheld income,
old-age, and railroad retirement taxes, were far
larger than the comparable 1947 increases in the
deposits at the Reserve Banks. The other bumps in
the 1953 Tax and Loan deposits reflected new
money borrowing on May 1, June 3, July 15, and
November 9.
DEPOSITS AT THE FEDERAL RESERVE BANKS
The Treasury's accounts at the Federal Reserve
Banks have fluctuated basically with the Treasury's
needs, reflecting the Government's cash income and
outgo (both operating and debt transactions). But
the precise level, above the operational minimum,
has normally been determined with reference to the
influence on the money market of a shift of funds
into (or out of) the Federal Reserve Banks. The
minimum level must be adequate for expected daily
cash needs, and must also provide for the appropriate distribution of the funds for operating convenience among the 12 Federal Reserve Banks and
their 24 branches. When the aggregate volume of
receipts and expenditures is increasing, larger errors
may be made in estimating the daily needs, and
consequently a somewhat higher minimum level is
necessary.

FEDERAL RESERVE BANK OF NEW YORK

Because of the wide range of influences at work
—the varying tax dates, changing levels of taxable
incomes, seasonal and cyclical influences on outlays,
changes in the schedule of callable and maturing
debt, as well as changes in Government programs—
it is not a simple problem to manage the Treasury's

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balances. The special collection arrangements introduced in a series of steps since March 1948, however, have, through expanding the use of the Special
Depositary technique, materially lessened the severity of the impact upon the money market of fluctuations in the Treasury's cash position.

TREASURY TAX AND LOAN ACCOUNTS
AT COMMERCIAL BANKS
by
HELEN J. COOKE and KATHLEEN N. STRAUS
TN order to minimize the disruptive effects that prevailing. The interest rate was lowered in the
Treasury operations might have on the money early 1930's and was eliminated entirely, along with
market, the Treasury resumed during the Second interest payments on other demand deposits, under
World War the extensive use of the War Loan the provisions of the Banking Act of 1933. War
Accounts in commercial banks which had, to a con- Loan Accounts were not very active during the thirsiderable extent, fallen into disuse in preceding ties, as receipts from the sale of Government secuyears. These accounts, which are now known as the rities were then relatively small. During the interTreasury Tax and Loan Accounts, had originally war period the number of depositary banks declined
been employed to facilitate the financing of the sharply.
As the Treasury's needs for financing expanded
First World War. More recently, the accounts have
been used to reduce the money market disturbances greatly during World War II, an encouragement to
arising from the payment of certain taxes as well as banks to open War Loan Accounts was given in
from the transfer of funds for the purchase of new 1943 by suspending again, for the duration of hostilities plus six months, reserve requirements against
money issues sold by the Treasury.
Loan deposits and by exempting them from
War
Treasury Tax and Loan Accounts are Treasury
insurance
assessments for the Federal Deposit Inaccounts at banking institutions that qualify as "Spesurance
Corporation. Thus, when banks subscribed
cial Depositaries." Upon pledging certain specified
securities as collateral, and upon recommendation to Government securities for their customers' acof the Federal Reserve Bank in its District, any in- counts, their regular deposits decreased and their
corporated bank or trust company may be designated required reserves dedined, although their total deby the Secretary of the Treasury as a Special Depos- posits remained unchanged. When banks subscribed
itary. At the end of June 1953, there were about for their own account, they received interest on the
11,000 Special Depositaries in the United States. securities from the time of the purchase and did
As noted in the preceding artide, these depositaries not lose funds until the Treasury made withdrawals
are divided into two classes, depending on the from these accounts. Even though reserve requirements and insurance assessments were reimposed
amount of deposits held on a given date.
after June 30, 1947, banks continued to maintain
HISTORICAL BACKGROUND
War Loan Accounts. It was still profitable for banks
The system of "Special Depositaries" originated to retain such accounts,
although the advantages acduring the First World War.The First Liberty Loan
cruing to depositary banks were not so marked as
Act of 1917 authorized banks purchasing Governduring the war period. The deposits are not drawn
ment securities (issued under terms of that Act) for
down and reserves are not lost (although required
their own or their customers' accounts to make payreserves may be increased) until the Treasury withment for such securities by crediting the amount of
the subscriptions to special accounts, called "War draws funds to meet its current expenditures.
Since the end of World War II, the Treasury
Loan Deposit Accounts." Several provisions made
has
been expanding the use of the War Loan Acthe holding of War Loan deposits attractive to commercial banks. From the time of their inception counts. Starting in March 1948, banks were peruntil 1935, War Loan deposits were exempt from mitted to credit to the War Loan Accounts their
reserve requirements. While the banks holding War receipts of withheld income taxes, which formerly
Loan deposits were originally required to pay in- they had had to turn over to the Federal Reserve
terest to the Treasury, the stipulated rate of 2 per Banks as soon as the amount in their (separate)
cent was considerably lower than market rates then withheld tax account reached 5,000 dollars, and at

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FEDERAL RESERVE BANK OF NEW YORK

depositary banks until the end of the following
month. The employer receives a validated receipt
each month and forwards these receipts to the Director of Internal Revenue (along with a return)
every quarter.2
Banks that qualify as Depositaries for Federal
Taxes must accept deposits of these Federal taxes
without compensation. However, part of the derical
work involved in processing old-age insurance, railroad retirement, and withheld income taxes is undertaken by the Federal Reserve Banks. The forms
filed by employers are forwarded on the day of
receipt by the depositary banks to the Federal Reserve Banks, which send directly to each employer
a validated receipt for the tax payment he has made.
Prior to January 1, 1950, banks were compensated
for handling withheld income taxes by being entitled to buy special depositary bonds, but on
February 28, 1950,the Treasury redeemed the 2 per
cent Depositary Bonds, Second Series, which had
been issued to depositary banks since September 10,
1943 to compensate them for the work involved in
processing withheld income taxes.3 Some 96.9 million dollars of this series of Depositary Bonds were
redeemed. The funds for purchasing these Depositary Bonds had been provided in some cases by a
Treasury time deposit; depositary banks which instead elected to invest their own funds (as over
CURRENT PROCEDURES
half of them in the New York District did) had
allotted twice the amount. Purchases were rebeen
Taxes
Withheld
to a bank's depositary activity (as measured
lated
withheld
for
system
Under the new collection
average monthly dollar amount and number
the
by
withheld
paying
of
taxes, employers have the option
receipts, adjusted semiannually).
tax
of
retirement
railroad
income, old-age insurance, and
depositary banks affected by the new proceThe
bankto
taxes either to the Federal Reserve Banks or
ing institutions which qualify as Depositaries for 2 However, the taxes may be paid directly to the Director.
single card form (the Federal Depositary Receipt) and
Federal Taxes. Only banks which have qualified aA single
return cover the payment of income and old-age
also as Special Depositaries of Public Moneys may insurance taxes by the employer. Another card form (the
Retirement Depositary Receipt) covers the recredit taxes to Treasury Tax and Loan Accounts.1 Railroad
tirement taxes paid by railroads. If the employer withholds
Employers must deposit withheld individual in- no more than 100 dollars a month of the combined withheld income and old-age insurance taxes or of the Railroad
come, old-age insurance, and railroad retirement Retirement taxes, payments of the respective taxes may be
taxes on a monthly basis by the middle of the fol- made quarterly rather than monthly.
The First Series of 2 per cent Depositary Bonds, issued
lowing month. For the last month of a quarter, 3since
June 28, 1941 to banks acting as Depositaries of
however, deposits are not required to be made at Public Moneys and of which around 300 million dollars

the end of each month regardless of the balance.
Effective January 1, 1950, the Treasury Department revised the system under which banks accepted
deposits of income taxes withheld from wages and
salaries and extended this system to indude deposits
of payroll taxes for the old-age insurance program.
The renaming of War Loan Accounts as "Treasury
Tax and Loan Accounts" accompanied the transformation of what had initially been a wartime
emergency measure into a permanent instrument of
Treasury operations. Within a short time, other
appropriate taxes were made eligible for deposit in
the Tax and Loan Accounts. Under a special arrangement, large payments (checks of 10,000 dollars or more) of corporate income and profits taxes
in the quarterly months beginning March 1951 became eligible for deposit in the Tax and Loan Accounts when, and to the extent that, the funds are
not immediately needed by the Treasury. Large
payments of individual taxes beginning June 1951
were induded in that arrangement. Payments of
the railroad retirement taxes beginning July 1951
were induded in the withheld tax system, and,
finally, the system for the payment of certain excise
taxes was revised beginning July 1953 and the payments were made eligible for deposit in the Tax
and Loan Accounts.

1 Initially, Special Depositaries were permitted also to
credit to their Treasury Tax and Loan Accounts the equivalent of checks drawn on them but sent directly by employers to the Federal Reserve Banks. Since most of the
taxes were deposited directly with the depositary banks, the
Treasury discontinued this aspect of the new system on
September 1, 1950.

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were outstanding at the beginning of 1950, was unaffected
by this move. The amount of First Series bonds that depositary banks are entitled to purchase is related to other
services rendered by the banks. Along with other specified
issues, Depositary Bonds may be pledged as collateral to
meet the requirement that banks must pledge collateral
security against Government accounts in excess of 10,000
dollars.

THE TREASURY AND THE MONEY MARKET

dure lost the 2 per cent return on Second Series
Depositary Bonds, but the net loss of income was
reduced to the extent that they reinvested their own
funds in other securities, and also, under the new
system, Special Depositaries earn a return on the
temporary investment of the old-age insurance and
railroad retirement tax funds until the Treasury
makes "calls" from Tax and Loan Acounts.

Quarterly Income and Profits Taxes
Under procedures initiated in February 1951, the
Treasury announces shortly before each quarterly
income tax payment date whether or not the large
payments of income and profits taxes in that month
will be eligible for deposit in the Tax and Loan
Accounts. The taxes are returned to the banks under
a special procedure. Although the Treasury could at
any time select a different dividing line, it has thus
far, for reasons of clerical simplicity, considered as
"large" all checks in dollar amounts of five or more
digits. Checks of 10,000 dollars or more received
during a specified period are separated by the Directors of Internal Revenue and deposited in the
Federal Reserve Banks, which prepare daily a special form of cash letter, with an attached certificate
. indicating the amount of the checks eligible for
credit in Treasury Tax and Loan Accounts. The
Special Depositaries, wishing to avoid any immediate loss of reserves through these tax payments,
execute and return the certificates to the Reserve
Banks, thereby indicating they have credited the
funds to the Treasury's accounts on their books.
Through 1953,the Treasury had permitted "credit"
payments equal to 100 per cent of the amount of
checks shown in the cash letter in all but four of
the quarterly months.
The funds accumulated from these large quarterly tax checks are known as the "X" balances.
At the outset, the Treasury called the funds in the
"X" balances before calling other funds in the
Tax and Loan Accounts but this tended to concentrate calls on the relatively few banks with customers making large tax payments. In September
1951, the procedure was changed to allow withdrawals from either or both balances as necessitated
by the Treasury's financing needs and the condition
of the money market.

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Excise Taxes
Under procedures introduced in July 1953, the
payment of eligible excise taxes is handled in much
the same manner as that employed for withheld
taxes. Payments must be made by the end of the
month following the month in which the tax liability accrues and may be made either to a Federal
Reserve Bank or to a qualified depositary bank. The
payments eligible for credit to the Tax and Loan
Accounts consist for the most part of manufacturers', retailers', service, and facilities excise taxes.
Altogether, these taxes accounted for about half of
the "miscellaneous internal revenue" collected in
fiscal 1953.4
VOLUME OF FUNDS
The volume and activity of funds in War Loan
Accounts rose sharply during World War II, and
during 1944 withdrawals reached a peak of over
43 billion dollars. In 1947, only a little more than
9 billion dollars of Treasury funds passed through
these accounts. With the crediting of withheld income taxes to the War Loan Accounts (late March
1948),the flow of Treasury funds through the commercial banks increased, and in 1949 calls exceeded
15 billion dollars. After the outbreak of the Korean
conflict (June 1950), calls again rose sharply, as a
result of both the rise in the Treasury's cash receipts
and the addition of other creditable taxes. In the
calendar year 1953, nearly 42 billion dollars of
Treasury funds were called from the Tax and Loan
Accounts. In that year over 6 billion dollars of
Savings bonds and notes were sold through banks
and credited to Treasury Tax and Loan Accounts.
4 When payments are made at a commercial bank, the covering deposit card forms (Depositary Receipt for Federal
Excise Taxes) are sent by the banks to a Federal Reserve
Bank. The cards are forwarded daily, along with any of
the two other depositary cards the banks have received
from taxpayers making deposits either of old-age insurance
and withheld income taxes or of railroad retirement taxes.
The three cards are then validated by the Reserve Bank and
returned directly to taxpayers. For the third month of a
quarter, however, excise taxes may be remitted directly to
the Director of Internal Revenue (along with a return filed
quarterly under the revised system instead of monthly) or
deposited as in the other two months. In the latter case,
the validated receipts for the full quarterly payments are
filed with the Director of Internal Revenue, along with
the quarterly return, which in this case is not due until
10 days after the month-end due-date for returns with
direct payments (to allow time for the processing of the
third-month receipt). If the excise tax liability is less than
100 dollars a month, payments may be made quarterly instead of monthly.

FEDERAL RESERVE BANK OF NEW YORK

In addition, over- 9.6 billion dollars from the sales
of other public issues and nearly 25 billion dollars
of Federal taxes were credited to these accounts.
The credits represented practically all of the collections of eligible quarterly payments of nonwithheld income and profits taxes and of the proceeds
of the new money issues and of sales of Savings
notes, and about three fifths of the total sales of
Savings bonds and of the collections of the eligible
withheld and excise taxes.

TREASURY FUNDS AND BANK RESERVES
During both World Wars, the use of the War
Loan Accounts in paying for new issues of Government securities provided an effective mechanism
for smoothing out the impact of Government financial operations on the banking system. To the extent
that this method of payment for Government securities was used, total bank reserves were not immediately reduced when new Government securities
were issued. Calls for the War Loan deposits were
issued when the Treasury required funds to meet
Government expenses, so that corresponding
amounts of Government checks were soon deposited
with the banking system. Of course, the amount of
War Loan withdrawals and of new deposits did not
necessarily balance, even roughly, for each individual bank. Nevertheless, if the banks made adequate
use of this procedure, they could to a large extent
prevent any severe disturbances to their reserve positions during periods when the Government sold
securities in large volume, as during the War Loan
drives of World War II.
If the special depositary system had not existed,
there would have been periodic, heavy drains on
bank reserves during times of large-scale Government financing, followed by considerable gains of
reserves, with disruptive effects on the money mar-

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ket and particularly on the Government securities
market. If the banks had had to pay for new issues
purchased for their customers' and their own accounts by drawing down their reserves to transfer
funds to Treasury accounts at the Federal Reserve
Banks, the Federal Reserve System would have had
to extend credit to them in large amounts in order
to prevent widespread liquidation by the banks of
Government securities previously held. Then, as the
proceeds of the new issues were spent by the Government, they would have been deposited by the
customers of banks and thus bank reserves would
have been built up again. The Federal Reserve System would then have had to absorb the resulting
excess reserves.
Since the end of World War lithe Treasury has
continued to sell substantial amounts of Savings
bonds and notes (although offerings of notes were
stopped, at least temporarily beginning in October
1953) and, since mid-1951, the Treasury has also
made several sizable offerings of other new money
issues.5 In addition, tax collections and other cash
operating receipts have exceeded 40 billion dollars
annually; in 1953, more than 70 billion dollars were
collected. Disruptive effects on deposits and reserves
resulting both from seasonal movements in tax payments and in sales of Savings bonds and Savings
notes (that are unrelated in timing to the needs
of either the Treasury or the money market), and
from the offering of large individual issues are thus
ironed out through the operation of the Tax and
Loan Accounts.
The Treasury covered part of its new money needs by
increasing its weekly bill issues, but these securities were
sold on a "cash" basis; the proceeds could not be credited
to Tax and Loan Accounts. On the other hand, payments
for the special tax anticipation issues and other "new
money" issues could be made by credits to the Tax and
Loan Accounts.
5

CASH BORROWING OF THE UNITED STATES TREASURY:
NONMARKETABLE ISSUES
by
HELEN J. COOKE
TN borrowing the money necessary to finance
the operations of the Federal Government, the
Treasury has resorted to a variety of debt instruments. Currently, more than 100 different interestbearing Federal debt issues are held by the public.
They differ with respect to interest rates, maturities,
tax exemptions, redeemability, and freedom of purchase. Most of these issues can be bought and sold
freely in the market by investors, but a substantial
portion cannot be sold by investors although they
may,on demand or on short notice, be redeemed for
cash or, in one case, converted into an intermediateterm marketable issue. The negotiable issues are

known as marketable issues and the nonnegotiable
securities as nonmarketable issues. This artide will
be confined to the nonmarketable public issues.'
1 In addition to the interest-bearing public issues, the
Treasury has outstanding a substantial volume of "special
issues" sold only to the various Government trust funds
and agencies and a large amount of nonmarketable noninterest-bearing special notes issued to the International
Monetary Fund as part of our subscription to that agency,
as well as a small amount of matured public issues and
other debt bearing no interest. In the calculation of Treasury cash borrowing in the Treasury Bulletin, most of the
transactions leading to the issuance or redemption of the
special issues are not considered part of the Treasury's cash
debt operations. For an analysis of the relationship of these
debt transactions to the cash transactions, see the article on
"The Nature and Significance of the Treasury's Cash Transactions" in the February 1952 issue of the Monthly Review
of this Bank.

Chart I

PUBLIC DEBT, BY MAJOR TYPES OF OBLIGATIONS
(End of quarters, December 1945-December 1953)

Billions of dollars.

300

19 46

19 47

1948

(949

1950

1951

Note: Interest-bearing direct debt only. Savings bonds ore included at current redemption values.
Source: U. S. Treasury Department.

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Federal Reserve Bank of St. Louis

FEDERAL RESERVE BANK OF NEW YORK

lars in net new public borrowings since the spring
For various reasons, greater emphasis has been of 1949). On the other hand, nonmarketable public
placed on nonmarketable issues over the past two issues had shown an almost uninterrupted rise to a
decades. Prior to the middle thirties there were no peak of almost 81 billion in May 1951 and by the
such securities, but by the time of our entry into beginning of 1954 were only slightly lower at 77
World War II, they had grown to constitute 14 per billion dollars, or 28 per cent of the total Federal
cent of the gross direct and guaranteed debt. Shortly debt and over 33 per cent of the public issues.
after the close of the Victory Loan Drive, when the
Currently, there are three important types of nondebt stood at a peak of over 279 billion dollars (on marketable public issues—Savings bonds, Savings
February 28, 1946), nonmarketable public issues
notes, and Investment Series bonds, as shown in
represented over a fifth of the total Federal debt,
Chart II. These several types were introduced at
as shown in Chart I. By the beginning of 1954,
the Federal Government had reduced its total pub- different times, and their terms have been changed
lic issues by some 25 billion dollars from the peak from time to time in line with changes either in inof its borrowings (despite a rise of 14 billion dol- vestors' needs, or in competitive borrowing condi-

CHANGING ROLE OF NONMARKETABLES

Chart tI

NONMARKETABLE PUBLIC DEBT, BY TYPE OF ISSUE
(End of quarters, December 1945-December 1953)

Winans of dollars

Billions of dollars

100

80
\ TREASURY BONDS, ‘ N
\\
\"\ INVESTMENT SERIES
‘N
\‘`.
N
% N
N N‘N

DEPOSITARY BONDS &
ARMED FORCES LEAVE BONDS

INGSNOTESfff

'4'4' — *Wtri*Ittlitt:
41
$
4
•13

1946

1947

• 1948

1949

1950

1951'

1952.

1953

Note: Interest-bearing direct debt only. Excludes special issues and guaranteed obligations. Savings bonds are included at current
redemption values.
Source: U. S. Treasury Department.

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Federal Reserve Bank of St. Louis

THE TREASURY AND THE MONEY MARKET

tions, or in general fiscal and credit policy. Other
nonmarketable public issues are generally sma11.2

over the life of the bond or paid semiannually;
second, according to the rate of interest, maturity,
and restrictions on purchases; and third, according
SAVINGS BONDS
to the length of the period before the bonds become
The Treasury has made offerings of Savings bonds redeemable. Under the first distinction, the Series E
in order to encourage individual thrift and enlarge and J bonds can be grouped together, both being
the ownership of debt by small investors. To cover discount bonds sold at a price below maturity value.
the Treasury's requirements for more funds than Interest is accrued, on a rising scale, every six
could be raised from small investors alone, indi- months to produce the redemption values of these
viduals of larger means and institutional investors securities at any given period in their life and is not
have also been invited to subscribe to certain Savings paid to investors until the bonds are redeemed.3
bond issues, and on occasion special sales to com- Thus, when the bonds are redeemed before matumercial banks and other investors have been made. rity, a penalty is involved since lower yields are paid
Individuals, however, are by far the largest holders than would be paid at maturity, the effective yield
of Savings bonds, accounting for 85 per cent of the depending on the length of time held. Series H and
present investment of almost 58 billion dollars (re- K bonds, in contrast, are current income bonds sold
demption value). Institutional investors, with their at par and the interest is payable semiannually. Instaffs of market-wise portfolio and loan managers, terest payments on the H bonds are graduated upfind small need for these securities and ordinarily ward, whereas payments on the K bonds are made
are narrowly limited by the Treasury in the amounts at a constant given rate; but if the K bonds are
redeemed before maturity, an investor receives less
they may purchase.
To encourage purchases of Savings bonds, the than par, which, in effect, refunds part of the inTreasury has endeavored to make them attractive terest and thus his effective yield is reduced for the
by: (1) setting the yield at maturity higher than shorter investment period.
In terms of the second standard of comparison,
rates on marketable issues of comparable maturity
(at least at the time when the yields were fixed), the Series E and H bonds are companion bonds.
(2) making the bonds redeemable at any time prior They are designed primarily for the small saver and
to maturity after a short specified investment pe- draw approximately 3 per cent if held to maturity—
riod, and (3) protecting the bonds against a general nine years and eight months; purchases of each
drop in security prices through the provision of a type are limited to 20,000 dollars (maturity value)
fixed redemption schedule. To encourage retention, annually and may be made only by natural persons.4
the yield is scaled upward according to the length An investor, thus, may purchase up to 35,000 dollars (issue price) of Series E and H bonds in any
of time the bonds are held.
Currently, there are four series of Savings bonds one year-15,000 dollars of E bonds and 20,000
on sale, the E, H, J, and K bonds. These several dollars of H bonds. If the bonds are purchased in
series may be differentiated in three ways: first, ac- 3 While the interest on E and J bonds is not paid until the
cording to whether the bonds are discount or current bonds are redeemed, it is credited semiannually by the
Treasury and is accumulated into the redemption value of
income bonds, i.e., whether the interest is accrued these bonds. In other words, the liability for the interest
These issues include Savings stamps, which are ultimately
converted into Savings bonds; depositary bonds, which, as
explained on page 13, are sold only to banks acting as
depositaries for the Treasury in order to provide these
banks with an income which will cover the expense of
handling certain Government transactions; and certain
other minor noninterest-bearing or matured obligations.
As defined in the calculation of cash borrowing in the
Treasury Bulletin, the Treasury also raises some cash or at
times pays out cash to the public through the purchase or
redemption of special issues by the Postal Savings System
to cover the normal deposits or withdrawals of funds by
depositors and at times to cover the sale or purchase of
Treasury issues in the market.
2

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is considered to be a current budget expenditure of the
Government, but the Treasury, in effect, postpones the cash
payment and borrows the interest as the redemption value
of the bonds increases. The interest is ultimately paid in
cash (along with the initial purchase price) when the
bonds are redeemed and at that time the interest is included in the calculations in the Treasury Bulletin of regular cash operating outlays of the Government (and not
in the estimate of the Government's cash debt transactions).
4 Early in 1954, the Treasury relaxed this rule to permit
trustees of certain types of employee's payroll savings plans
to purchase bonds in a new denomination of 100,000 dollars (maturity value) but the individual annual limit on
purchases made by any one employee remains at 20,000
dollars (maturity value).

FEDERAL RESERVE BANK OF NEW YORK

co-ownership additional holdings are permitted, as
the annual limit per person may be apportioned
among the purchasers. The J and K bonds, in contrast, pay approximately 2.76 per cent if held twelve
years to maturity, but combined annual purchases of
up to 200,000 dollars (issue price) may be made by
all investors except commercial banks.
On the third basis of comparison, according to
the required investment period before the bonds
are redeemable for cash, the Series E bonds are
unique. They may be redeemed as early as two months
after issue date without notice, and, since the issue
date is the first of the month in which purchased,
this period actually can be as short as a month and
a day. However, no interest is payable until six
months after issue date. Series H, J, and K bonds
are not redeemable until six months after issue
date, and a notice of redemption must be given one
month before the end of the waiting period. Like E
bonds, the H, J, and K bonds do not provide any
interest until six months after issue date.
Savings bonds have undergone several major
changes to meet changing conditions and to reflect
changing concepts since they were first offered for
sale in March 1935. Originally, only one series was
sold to investors; now four series are sold concurrently to meet the needs of investors both for small
or large purchases and for current or accrued income. In the same way, purchase limits have been
changed several times to meet the changing requirements of both the Treasury and investors. For example, until March 1948 investors could buy no
more than 3,750 dollars (issue price) of E bonds
in any one year; then the annual limit was raised to
7,500 dollars and now it stands at 15,000 dollars,
while another 20,000 dollars of the companion H
bonds may also be purchased. Other important
changes have also been introduced to meet the redemption problem on maturing issues and to restore
the competitive attractiveness of Savings bonds,
especially for the large investor, in the recent period
of rising market yields from other securities. The
last such move, made in the spring of 1952, increased to four (from three) the issues on sale and
raised the interest rates both on new issues and on
E bonds held beyond maturity. An earlier change
had extended the life of the maturing Series E bonds
for another ten-year investment period and had pro-

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vided for higher yields in the early years of the reinvestment period.
Altogether, Savings bonds now represent over a
fifth of the total Federal debt and almost a quarter
of the public issues. At the beginning of 1954 there
were fourteen annual issues of E bonds (including
two issues for 1952, one for the old type of E bonds
and the other for E bonds sold after April) and
eleven annual issues each of F and G bonds (the
predecessors of the current J and K bonds),the first
issues sold in 1941 having matured in 1953. The
amounts of these issues which were outstanding
totaled roughly 36 billion, 3.5 billion, and 17 billion dollars, respectively. There were also two issues
each of the new H, J, and K bonds outstanding in
the combined amount of nearly 1.4 billion dollars.
Since these securities were sold on a continuous basis
and were dated as of the first of the month in which
sold, over 450 different monthly issues were outstanding at the beginning of 1954.

SAVINGS NOTES
Savings notes are used mainly for the investment
of short-term corporate funds being accumulated
for tax reserves and other purposes. They may be
used without notice for payment of taxes two months
after issue date at purchase price plus accrued interest, and they are redeemable for cash four months
after issue. The notes last on sale in October 1953,
Series C,provide an annual yield, if held to maturity
(two years), of 2.2 per cent; the annual yield on
this issue is graduated upward from 1.56 per cent
for an investment of less than six months and accrues monthly. Commercial banks receive interest
on Savings notes only if these- issues are presented
in payment of taxes.
Over the years, the terms of the Savings notes
have been changed, like those of the Savings bonds,
to meet changing conditions and concepts. Introduced in August 1941 as Treasury Tax notes to provide a regular investment medium for tax reserves
being accumulated to pay the greatly increased defense income tax liabilities, the notes were revised
within a short time to make them acceptable for the
payment of estate and gift taxes as well as income
taxes and to provide an instrument for the investment of other short-term funds. Few short-term
Government issues were available in 1941 and they
were selling at low yields. When the requirements

THE TREASURY AND THE MONEY MARKET

for tax reserves changed, a change was made in the
number of issues. Originally, there were two series
to cover reserves for both small and large tax payments, but in 1943, with the beginning of the collection of individual income taxes through withholding at the source, the need for the small tax
payment series disappeared. The series for large tax
reserves and other short-term investments was continued, and the securities were renamed Treasury
Savings notes. Similarly, to meet changing competitive market conditions, the rate on Savings notes
was changed on four occasions in recent years. The
first change, made in September 1948, raised the
yield from 1.07 per cent (Series C)to 1.40 per cent
(Series D)annually, if held three years to maturity;
the second, in May 1951, increased it further to
1.88 per cent (Series A); the third, in May 1953,
raised it to 2.47 per cent annually, if held two years
instead of three years to maturity (Series B); and
the fourth, in October 1953, cut the two-year yield
back to 2.21 per cent (Series C). Sales of this last
series were suspended after about three weeks, and
no Savings notes are now being issued. At the beginning of 1954,there were outstanding one annual
interest-bearing issue of the earlier Series D, three
issues of the Series A notes, and one each of the
latest issues of B and C notes.5 The Series B issue
sold from May through September 1953 is by far
the largest currently outstanding issue of Savings
notes, accounting for all but 1.6 billion dollars of
the 6.0 billion invested in these securities at the
start of 1954. Altogether, Savings notes represent
less than 3 per cent of the Federal debt.

INVESTMENT BONDS
The third important type of nonmarketable security—the Investment Series bonds—represents a postwar innovation adopted by the Treasury mainly to
reduce or hold down the volume of long-term marketable debt. The first series was sold in the fall of
1947 as part of a policy of dampening the upward
movement of Government bond prices, while the
second was first offered in March 1951, at the time
5 Beginning May 1951, Savings notes were pre-dated as of
the fifteenth of the month for purchases through the 14th
of the following month. Previously, they were pre-dated
as of the first of the month in which purchased. The change
was made to bring the monthly interest period in line with
the tax payment dates on the fifteenth of the month. Since
August 11, 1949, the purchaser has paid the accrued interest from the issue date to the date of purchase.

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of the "accord" with the Federal Reserve System,
and was reopened in May 1952 for subscription as
part of a deficit-financing program. The first series,
which was offered to institutional investors in a
single sale, was a new type of long-term current income bond, redeemable after six months on short
notice but not negotiable. This issue, designated Investment Series A, was adapted from the Series G
Savings bonds but had higher purchase limits, and
commercial banks were permitted to buy restricted
amounts. It was sold to yield 2.5 per cent, if held
to maturity on October 1, 1965; a penalty for cashing before maturity was imposed through a belowpar redemption schedule. At the beginning of 1954,
investors held over 910 million of this series, or
only about 55 million less than originally purchased.
The second series of Investment bonds—Series
B-1975-80, paying an annual return of 2.75 per
cent in current income—was first issued by the
Treasury on April 1, 1951. In this case, the bonds
were not sold for cash but were offered in exchange
for the two longest bank-restricted marketable
bonds. Unlike the other nonmarketable issues, the
Series B bonds may not be redeemed for cash; but
to cover unforeseen requirements of investors, the
Treasury added a novel feature permitting investors
at their initiative to exchange the new bonds, without any penalty against interest already received, for
a five-year marketable note yielding 1.5 per cent,
which could in turn be sold in the market at whatever the prevailing prices for such securities might
be. Almost 13.6 billion of the bonds were issued
through this exchange (including nearly 5.6 billion
to the Federal Reserve Banks and the Treasury investment accounts) out of a potential maximum of
19.7 billion dollars.
Finally, in May 1952,the Treasury reopened subscriptions to the Series B Investment bonds but for
a combined cash and exchange subscription as part
of a program to raise new nonbank money to cover
the current rearmament deficit. In this offering, the
Treasury required a minimum 25 per cent cash subscription, or one dollar of cash for every three dollars of exchangeable bonds, and the four longest
marketable bank-restricted bonds were eligible for
the exchange. Payments could be made in four instalments. The combined cash and exchange subscriptions to the second offer amounted to less than

FEDERAL RESERVE BANK OF NEW YORK

1.8 billion dollars as many investors shunned a nonmarketable issue at a 23
/
4 per cent rate of interest at

2 per cent issues
that time, despite the fact that the 21/
eligible for the exchange were quoted at below-par
prices in the market. Apparently, many investors did
not favor a nonmarketable issue as such and found
the conversion privilege unattractive. Only 450 million dollars in cash subscriptions were obtained, and
of this,132 million dollars represented subscriptions
by Government investment accounts. The exchange
subscriptions amounted to slightly over 1.3 billion
out of a potential of 14.8 billion dollars.
At the beginning of 1954, less than 700 million
dollars of the Investment Series B bonds had been
converted into marketable five-year notes by private
investors; however, the Federal Reserve Banks had,
by conversions from time to time, gradually converted the entire 2.7 billion dollars of their holdings. Together, the two series of nonmarketable
bonds amounted to over 12.9 billion dollars at the
beginning of 1954 and represented almost 5 per
cent of the total Federal debt. Private investments
in these issues alone amount to 9.4 billion dollars;
they are held largely by those institutional investors
that could so plan their long-term portfolios as to
allow the investment of part of their funds in these
nonmarketable issues in return for a relatively high
yield on Treasury obligations at the time of issue.
How NONMARKETABLES ARE SOLD

AND REDEEMED
Savings bonds were first issued in over-the-counter sales for cash at the post offices, but within a
short time provision was made for mail order sales
through the Treasury of the United States and the
Federal Reserve Banks and their branches. When
plans for the defense issues were developed, private
banking institutions offered their services for the
program, and it was decided to designate generally
all organizations meeting certain qualification standards as sales agencies with authority to issue Series E
bonds. Currently, there are around 21,000 qualified
issuing agencies,including companies operating payroll savings plans, building and savings and loan
associations, credit unions, and others, as well as
commercial banks and a few post offices.6 These
At the end of 1953, the Treasury withdrew Savings
bonds from sales at post offices where other sales outlets
exist.

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agencies sell the bonds without any direct reimbursement except for postage and registry fees. In contrast, Series J, K,and H bonds, like their prototype •
F and G bonds and Savings notes and Investment
bonds, are issued only at the Federal Reserve Banks
and their branches and at the Treasury Department
in Washington. Regardless of the issuer, commercial banks and trust companies which have qualified
as special depositaries are permitted to credit the
proceeds of their sales of Savings bonds and notes,
when the latter were sold, to the Tax and Loan Accounts which the Treasury maintains with them.
Similarly, payments for the Investment bonds, when
issued for cash, were creditable to the Tax and Loan
Accounts. As a matter of fact, the bulk of the sales
of the nonmarketable public issues has been
handled through the special depositary banks since
they first became qualified Series E selling agencies.
Funds from E bond sales received by other agents
are sent directly to the Federal Reserve Banks for
immediate collection.
Redemptions of Series E bonds are likewise made
for the most part by qualified banking institutions,
numbering over 16,500, which receive a small reimbursement for the service. The redeemed bonds
are sent to the Federal Reserve Banks where the
Treasury's general account is charged and the reserve account of the paying bank or its correspondent bank is credited. Other types of Savings bonds,
as well as Savings notes and Investment Series A
bonds, can be redeemed for cash only at the Federal Reserve Banks and their branches or at the
Treasury Department, where a check is issued to
the registered holder. Savings notes redeemed for
taxes, on the other hand, are presented to the District Director of Internal Revenue for credit against
tax liabilities. The latest issue (Series C), however,
may be deposited with a Federal Reserve Bank or
branch and the receipt obtained therefrom forwarded to the District Director. The taxes must
equal or exceed the combined value of par and
accrued interest to the tax date.

RECENT CHANGES IN INVESTOR
ACCEPTANCE OF SAVINGS BONDS
When the period of war financing ended with
the Victory Loan, a total of 48.6 billion dollars was
invested in Series E, F, and G Savings bonds. By
the outbreak of the Korean conflict in mid-1950,

THE TREASURY AND THE MONEY MARKET

investors had added almost 9 billion dollars to the
value of their holdings of Savings bonds but nearly
half of this increase reflected the net accumulation
of accrued interest on outstanding bonds.In the past
three and a half years, the effects on sales of
renewed emphasis on the payroll savings plan and
of a substantial rise in savings have been largely
offset by redemptions, especially of matured issues,
and there has been only a small net increase in these
issues. After June 1950, sales generally ran below
redemptions and exchanges of maturing issues into
marketables, but the ensuing net retirements of
these issues (measured in terms of issue price) were
somewhat less than the nearly 2.4 billion dollar increase in value arising from the excess of accrued
interest over interest paid on redemptions.7
Since the end of the war, it is interesting to note,
the behavior of the smaller denomination E bonds
has been in marked contrast with that of the larger
E, F and G bonds, and their alphabetical successors, J and K bonds, and the new H bonds. Generally speaking, over the postwar period sales of the
lower denomination E bonds (maturity value of 25
and 50 dollars) were less than redemptions, and
the Treasury paid out money to these investors, although net redemptions in the early postwar years
were less than had been commonly anticipated. By
contrast, until the fiscal year 1951, sales of the
higher denomination E bonds (100, 200, 500, and
1,000 dollar maturity value) and of the F and G
bonds (including the special sales) exceeded redemptions and accounted for most of the increase
in that period in the outstanding volume of publicly held nonmarketable securities (exclusive of the
net interest accruals). In the fiscal years ending
June 30, 1951 and 1952, however, sales of the
larger bonds declined and redemptions increased,
so that on balance the large investors (along with
the investors in the lower denomination E bonds)
withdrew cash from the Treasury. This shift apparently reflected in part (at least after the Korean
7 The interest accrued on Savings bonds has risen steadily
as a result mainly of the growing volume of outstanding
issues which receive the higher yields payable after several
years of holding. In each of the past four fiscal years, the
interest provision for these bonds has exceeded one billion
dollars. The interest paid in cash on redeemed securities
has also risen, from less than 100 million dollars in the
war years to a high in fiscal 1953 of almost 550 million
dollars. On balance, therefore, interest accruals have added
to the outstanding value of Savings bonds.

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war-inspired consumer buying spree had subsided
in the spring of 1951) the desire for other investments. It should be noted, however, that in fiscal
1952, for the first time since the end of the war,
sales and redemptions (at issue price) of the lower
denominations were almost in balance. The marked
improvement in the lower denomination bonds reflected several factors,induding the general increase
in savings as well as an expansion of payroll savings
plans and the adoption of the automatic extension
plan for matured Savings bonds.
After the revision in Savings bond terms which
became effective in May 1952, some improvement
in sales occurred and in fiscal 1953 sales were only
500 million less than redemptions for cash (at issue
price), as compared with net redemptions of 700
million in the preceding fiscal year. The smaller
denomination E bonds remained in balance as a rise
in redemptions was offset by an increase in sales.
Sales of the higher denomination Series E bonds and
the new H bonds increased while redemptions
lagged, but the net gain from these issues was partly
offset by the increase in the net cash redemptions of
Series F and G bonds. Sales of the new J and K
bonds were less than the combined sales of F, G,J,
and K bonds in the preceding year, while redemptions of these issues increased, partly reflecting the
maturity of the first annual issues of F and G bonds
beginning May 1953. The Treasury in April 1953
offered to exchange 314 per cent marketable bonds
of 1978-83 for the F and G issues maturing through
December 1953, and investors holding nearly two
fifths of the maturing issues accepted the offer,
leaving about 700 million in cash maturities from
May through December 1953.

FLUCTUATIONS IN SAVINGS NOTES
By the end of World War II, corporations and
other investors held over 10 billion dollars of Savings notes. In the following three years through the
end of fiscal 1948, investors reduced their holdings
by nearly 6 billion dollars as funds were withdrawn
to cover the postwar industrial expansion, and later
for investment elsewhere as the rise in market rates
made the notes relatively less attractive. In fiscal
1949 and especially in fiscal 1950, however, investments in Savings notes increased sharply as the
rate on Series D notes, which had been set in the
fall of 1948 to bring these securities in line with

FEDERAL RESERVE BANK OF NEW YORK

the then-prevailing market rates, became considerably more attractive to investors than rates on comparable marketable securities, which had fallen with
the onset of the inventory recession of 1949.
By the end of June 1950, investors held nearly
8.5 billion dollars of Savings notes. With the firming of market rates after the middle of 1950, Savings notes again appeared less attractive as an investment medium, despite the issuance of a new,
higher-rate note from May 1951 and the substantial rise in the accruals of corporate tax liabilities.
Redemptions for both cash and taxes exceeded sales
in most months, and by April 1953 less than 4.8
billion dollars of these securities were outstanding.
A small further decline in the volume of Savings
notes occurred in June despite the further rise in
rates on the new issue of notes beginning May 1953,
but with the subsequent softening of market rates
purchases revived and in September moved ahead
rapidly. By the end of that month, more than 5.6
billion in Savings notes were outstanding. To keep
demand for them within practicable proportions in
view of the then impending approach to the debt
ceiling, and to reduce the interest cost of the prospective deficit financing in line with the lower market rates then prevailing, the Series B issue was
withdrawn on September 25. But despite the sale
of the lower-yielding Series C note from the beginning of October, sales continued at a high level and
the issue was withdrawn from sale within roughly
three weeks. By the beginning of 1954, slightly
more than 6 billion of Savings notes were outstand-

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ing. By far the largest investments in Savings notes
have been made by nonfinancial corporations. Freedom from the risk of price fluctuations and the relative ease of purchase and redemption have probably had some influence in making Savings notes
attractive to many corporate investors.

CONCLUSION
Public issues of nonmarketable Treasury securities now represent 28 per cent of the total Government debt and currently account for about a
third of the budgetary debt service charges. Since
the end of World War II, these issues have increased by nearly 20 billion dollars, but less than
4 billion dollars, or only about a fifth, of this rise
has come from net cash sales to the public. Prior
to the outbreak of the Korean conflict the net cash
sales had amounted to nearly 8 billion, but net redemptions in the past three and a half years have
drawn down this total. This experience has apparently suggested, first with respect to Savings notes
and later to Savings bonds,that in periods of strong
competitive demands for funds some improvements
in interest yield and in selling techniques are
needed if redemptions of nonmarketable issues are
to be minimized and new sales encouraged. This
experience also indicates that some demand exists
for Savings bonds and notes among individuals,
pension funds, and corporations for a part of their
investment needs, as long as the yields on these
issues are moderately attractive. On the other hand,
there is little evidence of any significant demand by
institutional investors for nonmarketable issues.

MARKETABLE ISSUES OF THE UNITED STATES TREASURY
by
HELEN J. COOKE
01-1HE cash borrowing of the Treasury through
nonmarketable public issues was described in
the preceding article. This article is a companion
study of the marketable public issues, in terms of
their different characteristics and of the maturity
and ownership pattern of the outstanding issues.
At the beginning of 1954, marketable securities
amounted to nearly 155 billion dollars, or about 56
per cent of the total direct and guaranteed Federal
debt. In the past two decades, however, and especially since the end of World War II, marketable
issues have shown a marked decline in relative importance in the debt structure. In the early thirties,
virtually all of the Federal debt was in marketable
issues, but after 1935, with the establishment of the
social security trust funds and the introduction of
Savings bonds, special issues and nonmarketable
public issues showed a substantial growth. By the
time of our entry into World War II, marketable
issues had already dedined to three quarters of the
Federal debt and to about 84 per cent of public
issues. During the war, marketable issues were used
in about these same proportions and, when the debt
reached its peak on February 28, 1946, marketable
securities amounted to about 71 per cent of all
Federal securities. Until mid-1951, marketable issues lost ground almost steadily as the outstanding
volume declined while nonmarketable public and
special issues increased, as shown in the chart on
page 16. With the reviving emphasis on such issues
in recent Treasury deficit financing, marketable issues increased from a low of 54 per cent of the
total debt at the end of June 1951 to somewhat over
56 per cent by the beginning of 1954.
At the peak of Federal borrowing related directly
to World War II (February 28, 1946), marketable
issues amounted to almost 200 billion dollars. This
was 154 billion dollars more than the amount outstanding before Pearl Harbor. By the beginning of
1954, however, marketable issues were 45 billion
less than at the peak of borrowing in February 1946
(despite an increase of almost 17 billion since
June 1951). Over the same period, the total Fed-

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eral debt in contrast was reduced by less than 5 billion dollars.

TYPES OF ISSUES
Currently, the Treasury has outstanding four
major types of marketable issues—Treasury bills,
certificates of indebtedness, notes, and bonds.' In
general, the different issues have been used as required to meet both the Treasury's needs and investors' preferences for different maturities. Bills
and certificates of indebtedness, which are used for
the shortest borrowing periods, are required by
statute to mature within a year or less from the time
they are issued. Notes are used to borrow funds for
a period of more than one year and less than five
years, while bonds are used for longer-term borrowing (although bonds could be issued legally for
any borrowing period). There is no limit on the
amount which the Treasury may issue of the various
types of issues, although there is a statutory limit,
apart from minor exceptions, on the total amount
of Federal debt, now set at 275 billion dollars.
The relative importance of these four types of
securities at the present time reflects, in part, the
long-term borrowing of both World War II and
the prewar period and, in part, the Treasury's
choice of issues since the end of World War II.
In the postwar period, the Treasury relied largely
on short-term issues, and in 1951 and 1952 afforded
investors an opportunity to shift a substantial segment of long-term marketable bonds into nonmarketable Investment bonds, convertible into marketable notes. Consequently, marketable bond issues
by the beginning of 1954 amounted to slightly over
77 billion dollars, having dropped 45 billion dollars
from their level at the peak of Federal borrowing
on February 28, 1946, as shown in Chart I. Certificates and notes, together, at the beginning of 1954
totaled almost 58 billion dollars (including a 5.9
billion issue of tax anticipation certificates), about
3 billion dollars less than at the borrowing peak.
Bill issues outstanding at the beginning of 1954,
Small amounts of other marketable issues, including
the Panama Canal loan, Postal Savings bonds, and guaranteed Government corporation debt, are also outstanding.

FEDERAL RESERVE BANK OF NEW YORK

at over 19.5 billion dollars, were 2.2 billion below
the record level of the year before (when 4.5 billion
in tax anticipation bills was outstanding), but they
were almost 2.5 billion dollars higher than at the
1946 peak of the Federal debt. Bond issues at the
beginning of 1954 represented half of the marketable issues and only 28 per cent of total Federal
debt, whereas at the peak of World War II borrowing, bond issues were more than 60 per cent of.
marketable securities and almost 44 per cent of total
debt. Bills, certificates, and notes together now represent 50 per cent of the marketable debt and 28
per cent of the total Federal debt, compared with
about 40 per cent of the marketable issues and
roughly 28 per cent of Federal debt at the peak of
borrowing.

CHARACTERISTICS OF ISSUES
While the four types of marketable issues differ

mainly in the varying length of the original borrowing periods, there are other important distinguishing features of the currently outstanding marketable issues. These include such characteristics as
whether the issues are (1) fully marketable or ineligible for bank purchase, (2) fully taxable or
partially tax-exempt,(3) discount or fixed-rate securities, and(4)payable only at maturity or redeemable before maturity upon call by the Treasury.
Other differences which also influence investor
preferences indude acceptability for tax payments,
eligibility for payment in the form of tax and loan
credits at the time of issuance, transferability of
ownership, and interest payment dates. Some of
these features are a result of differences in the
Treasury's borrowing customs, while others are a
result of legislative changes and shifts in emphasis
on certain terms by the Treasury over the past two

Chart I

MARKETABLE PUBLIC DEBT, BY TYPE OF ISSUE
(End of quarters, December 1945-December 1953)
Billions of dollars

Billions of dollars

250

200

150

100

100
TREASURY BONDS, ELIGIBLE ISSUES

PARTIALLY TAX-EXEMPT

0
1946

1947

1948

1949

1950

1951

1952

1953

Note: Interest-bearing direct debt only. Does not Include a small would of conversion bonds (prior Jo 1947), Panama Canal bonds,
and Postal Savings bonds.
Source: U. S. Treasury Department.

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THE TREASURY AND THE MONEY MARKET

decades. The detailed characteristics of each issue
are given in the formal offering circular, and once
the issue is sold the Treasury may not change the
original terms (under most conditions) or retire
the issue before the stipulated redemption or call
dates. However, if the Treasury should desire for
any reason to replace an outstanding issue, it could
offer the holders a voluntary exchange or it could
purchase, within the limit of available funds (which
might involve the sale of a new issue), whatever
part of the old issue investors were willing to sell
in the market.
By far the major portion of the outstanding marketable issues are fully taxable securities and are
readily transferable. Altogether, such issues at the
beginning of 1954 amounted to 134.5 billion dollars, or 87 per cent of marketable obligations. The
remaining marketable Treasury securities—all bond
issues—were of two types. There were five issues,
amounting to 6.7 billion dollars, sold before February 1941 which were partially tax-exempt and eligible for bank purchase, and there were four issues,
amounting to 13.4 billion dollars, sold after May 1,
1942 which were taxable but not eligible for bank
purchase until a specified date, except in limited
amounts.

Bank Ineligibility
The feature of ineligibility for purchase by commercial banks was introduced by the Treasury after
April 1942 as a part of the World War II financing
policy of restricting bank purchases of bonds with
a maturity of over ten years and bearing more than
2 per cent interest.2 Normally, commercial banks
are not interested in more than limited amounts of
All long-term bonds sold after April 1942 were originally ineligible for bank purchase, but beginning with the
Fourth War Loan(January 1944), commercial banks were
permitted to subscribe for new issues of restricted bonds
in amounts related to their time deposits, and since May
1946 they have been permitted to own a limited amount of
restricted issues for the purpose of servicing customers.
Bonds purchased by banks during the War Loans, if sold,
may not be repurchased by banks except to cover their
trading account requirements.
The 2/
1
2 per cent bonds issued from May 1942 to June
1945 were not made available freely for commercial bank
purchase until after a lapse of ten years from issue date,
irrespective of maturity, but beginning with the Seventh
War Loan (June 1, 1945), this provision was changed so
that the later issues of 2/
1
2 per cent bonds were ineligible
for commercial bank purchase until the time remaining to
maturity should be ten years. Similar but shorter restrictedpurchase periods were used for 21/
4 per cent bonds.
2

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long issues, but under the fixed-interest-rate pattern that prevailed during the war financing a tendency to reach out for higher returns appeared inevitable. Altogether, over 53 billion dollars of
bank-restricted issues were sold, but in 1951 and
1952 almost 14.9 billion of these bonds were converted into nonmarketable Investment bonds. Prior
to 1952, only one issue of less than 4 billion dollars
in 21/4 per cent bonds had become fully marketable
(in September 1946). In 1952 and 1953, however,
13.7 billion and 7.6 billion, respectively, of the
previously restricted bonds became eligible for bank
purchases, and in 1954 another 7.7 billion dollars
of these bonds will become eligible. The remaining
5.7 billion in two issues of restricted bonds will
not become eligible until 1962.

Taxability
The partial tax exemption of Government securities was eliminated on new issues under the Public
Debt Act of 1941 at the request of the Treasury in
connection with a move to finance the defense program on a widespread basis. For some time, it had
been felt that the tax exemption accorded preferential treatment to subscribers who paid income
taxes. Also, exemption from normal income taxes
favored corporate investors because they paid higher
normal taxes than individuals.
The fully taxable securities are subject to all
Federal income taxes and to both Federal and State
inheritance, estate, gift, or other excise taxes, but
they are exempt from all taxation now or hereafter
imposed on principal or interest by any State, possession, or any local taxing authority. The partially
tax-exempt securities, in contrast, are subject only
to estate or inheritance taxes (both Federal and
State) and to Federal graduated additional income
taxes, commonly known as surtaxes, and excess
profits and war-profits taxes; holdings up to 5,000
dollars, however, are exempt from these taxes.3

Discount or Fixed-Rate Securities
The only marketable securities that the Treasury
in recent years has sold at a discount on a competitive basis have been Treasury bill issues—both the
Interest on larger holdings of "tax-exempts" by individuals, thus, is now exempt from the 3 per cent individual normal tax, while that of corporations is exempt from
the 30 per cent corporate normal tax.

FEDERAL RESERVE BANK OF NEW YORK

regular weekly bills and the recently introduced tax
anticipation bills. The other issues have been offered
to investors at par at rates stipulated by the Secretary
of the Treasury, although the Treasury, since February 1942, may sell any of the other issues at a
discount on a competitive basis.4 Until recently,
the rates were usually stipulated when the new issue
was formally offered and the books were opened
for subscriptions (generally not later than two weeks
in advance of the issue date). At times, however,
the Treasury sought to forestall a rise in interest
rates by making preliminary announcements giving
the rate and maturity of prospective issues up to a
month or more in advance of the opening of the
subscription books. Since the summer of 1952, the
Treasury, in an effort to make marketable issues
competitive in a free market, has delayed the announcements of the terms of refunding offers until
a few days before the opening of the subscription
books, and in the case of new money issues, has
initially made a preliminary general announcement
and has not set the exact terms until the market has
indicated the appropriate rate and maturity.

Callable Issues
Bond issues, being long-term and thus more likely
to carry a rate which may ultimately vary from the
going market rates, are usually sold with an optional
redemption date as well as a maturity date. The
optional redemption date, which is also known as
the "call" date, indicates the earliest time the Treasury may elect to redeem the particular issue. The
Treasury must notify holders of a redeemable issue
four months in advance of an actual redemption
before maturity; if the first call date is passed, the
issue may be redeemed, upon four months' notice,
at any subsequent interest date until maturity. At the
Originally only bills could be issued on a discount basis
and sold through competitive bidding, but in 1934 the
Treasury was authorized to sell any obligation with a maturity of one year or less on this basis, and finally under
the Public Debt Act of 1942, the Treasury was given
complete discretion as to the sale of marketable securities
on a competitive or other basis and their issuance on an
interest-bearing or discount basis, or on a combination
basis, at whatever price or prices the Secretary may prescribe. There is no statutory limit on the rate that may be
paid on bills, certificates, or notes, but there is a limit of
4 per cent on the coupon rate for Treasury bonds. A
41/
detailed analysis of the "Marketing of Treasury Bills" is
given in the following article.

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beginning of 1954, all presently outstanding Treasury bonds—except three intermediate-term issues
sold in 1952 and 1953—had been issued with a call
option. At issuance, these optional redemption dates
varied from two to five years ahead of the maturity
date. When market rates are below the issue rate,
the call feature permits the Treasury to refund
ahead of maturity and take advantage of the current low rates. The Treasury did this throughout
the period of falling or low rates from the early
thirties until September 1951; all redeemable issues
were refunded, or in some instances retired, at the
earliest possible date.

Acceptability for Tax Payments
Of all the marketable issues outstanding at the
beginning of 1954, only 5.9 billion dollars in tax
anticipation certificates were acceptable at maturity
for the direct payment of Federal income and profits
taxes.5 However, all of the outstanding Treasury
long-term bond issues sold from May 1942 through
the end of 1945 during the World War II financing
4 per cent bonds of
/
drives and the recent issue of 31
1978-83, are acceptable before maturity at par and
accrued interest for the payment of Federal estate
taxes; when so used, the redeemed bonds must not
exceed the taxes due and must constitute part of
the deceased owner's estate at the time of death.
The tax anticipation issues have been either bills
or certificates. They have been sold in the past three
years in a move to counteract the seasonal fluctuations in tax receipts which had become accentuated
under the Mills plan for the payment of corporate
taxes. The tax anticipation issues are intended to
anticipate, in the second half of the calendar year
when corporate tax payments decline, part of the
funds which the Treasury will receive in taxes in
the subsequent spring. In 1951 and 1952,two issues
were sold each year, one dated to mature about
March 15 and one about June 15 of the following
year. In 1953, however, when tax collections in the
early months fell below requirements, a small short
issue was sold in June to mature about September
15; in the interim, funds were raised for a longer
period by the sale in July of a sizable issue of tax
anticipation certificates to mature in March 1954.
5 The Treasury may designate bills, certificates, or notes
as acceptable in payment of income and profits taxes.

THE TREASURY AND THE MONEY MARKET

The tax anticipation issues may be redeemed for the Treasury and thus returned to the commercial
cash or taxes; they are sold to mature a few days banks.6
after the quarterly tax payment dates but the full
interest is earned when they are presented earlier Transferability of Ownership
in payment of taxes, making the issues especially
Treasury bills, certificates, and notes are issued
attractive to taxpayers. As used thus far, presenta- payable to the bearer, while Treasury bonds are
tion of such issues for payment of taxes has ac- issued in either bearer or registered form as recounted for about half of the redemptions. Thus, quested by the subscriber. Coupons covering the
investors other than those intending to use them payment of interest are attached to notes and the
for tax payments (chiefly banks) supply part of the bearer bond issues and since September 1953 to
funds.
certificates,7 while interest checks are sent by the
Treasury to the owners of registered bonds on recPayments Through the Tax and
ord one month prior to each interest date. Bonds
Loan Accounts
may be shifted from bearer to registered form and
To reduce the impact of sizable new money back again as desired. The bearer issues are readily
borrowings on the money market as payment is negotiable for resale in the market and are
also
made, the Treasury generally permits qualified bank easily convertible into smaller denominations (when
depositaries, instead of paying cash immediately a holder desires to sell only part of his investment),
into Treasury accounts at the Reserve Banks,to make whereas some delay for the clearance of ownership
payments for themselves and their customers by is experienced in the sale and conversion of regiscrediting the Treasury's Tax and Loan Accounts tered securities. Because of this delay, the registered
maintained on their books. In such offerings, com- issues generally sell in the market slightly
below
mercial banks are permitted to submit subscriptions the price of the bearer issues. The
discount allows
for the account of their customers as well as for for the fact that the buyer must make
payment to
their own account and these need not be accom- the seller of registered issues within
a day of the
panied by a "deposit" or partial payment at the
sale, even though he does not obtain a clear title
Reserve Banks, although the bank's customers are
immediately. Less than 9 billion dollars of marketrequired to submit a deposit to commercial banks
able issues were registered securities on June 30,
with their subscriptions. These deposits are held
1953 (the latest data available).
in a suspense account by the commercial banks.
Subscriptions by others, which are submitted directly Interest Payment Dates
to the Reserve Banks, require a specified deposit
Interest payment dates for the four types of issues
when submitted, and when allotments are made the
differ considerably. The return on Treasury bills,
remaining full amount must be covered by the acbecause they are sold as discount obligations, is
tual date of issue by cash payments (which repre- included in their maturity
value; that is, the difsent a transfer of bank reserves to the Treasury's ference between the sale
price and the maturity value
account at the Federal Reserve Banks). Upon allot- provides the return to the
investor. Holders of cerment, commercial banks initially have to provide tificates, since
August 1947, also receive their return
only enough funds to cover the reserves required
when the issue matures, but in this case the interest
against the increase in Treasury deposits on their
payment is in addition to the maturity value of the
books. These deposits, of course, must be fully colsecurity. Holders of notes and bonds, on the other
lateraled by pledged specified securities, including
hand, receive interest payments semiannually.
Treasury issues. When the funds placed at the
Treasury's disposal in Tax and Loan Accounts are 6 For more detailed analysis, see "The Treasury and the
needed by the Treasury, they are withdrawn and de- Money Market" in this pamphlet.
7 The interest on certificates sold since August 1946 has
posited in the Treasury accounts at the Reserve been paid at maturity; thus a separate
coupon was not atBanks. This is generaly done with the briefest prac- tached until September 1953, when some uncertainty arose
over the application of the premium amortization proviticable interval before the funds are to be spent by sions of the Internal Revenue Code.

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FEDERAL RESERVE BANK OF NEW YORK

INTEREST RATES
There are substantial differences in the rates of
interest on the various outstanding issues of marketable obligations, reflecting in part the differing
conditions in the money and capital market at the
time of issuance and in part the several characteristics discussed previously. Issuing rates, of course,
must be closely related to yields of comparable securities in the market at time of issue. Actual market
yields on outstanding issues are determined by the
current forces of supply and demand at any given
time, so that effective yields may vary widely above
or below the original issuing rate during the life
of any outstanding obligation. At the beginning of
1954, as the table below shows, the average rates
on Treasury bills, regular certificates, and notes at
the time the securities then outstanding were issued
were 1.510, 2.476, and 1.765 per annum, respectively, while the average rate on all outstanding
bonds was 2.393 per cent. The yields at market
prices, however, were quite different, especially for
the certificates.
The differentials in rates at any one time on issues
of differing maturity and other characteristics are
referred to as the "pattern of rates," or in terms of
market prices, "the yield curve." During World
War II, there was a fixed pattern of rates on new
issues (all of which were fully taxable) running
from 0.375 per cent per annum for Treasury bills,
0.875 per cent for one-year Treasury certificates,
2 per cent for bank eligible ten-year bonds, to 2.5
per cent for the longest term bank restricted bonds
maturing in 1972. This pattern held until July 1947
when the fixed rate policy was modified.
In June 1953, when rates hit their record highs
since the early thirties, the issue rate on bills (issue
of June 4) stood at 2.416 per cent while the rate on
the nearest certificate (June 1) was 2.625 per cent.
The increase from mid-1947 to the peak in issuing
rates on the short end had amounted to 2.041 percentage points per annum for bills (issue of June 4)
and 1.750 percentage pointsfor certificates. No longterm bonds comparable to those outstanding were
issued between mid-1947 and mid-1953, but the increase in yields on the longest outstanding issues
amounted to only 1.05 percentage points on the
bank eligible issue and 0.87 percentage points on
the bank restricted issue. In other words, the spread

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Average and Coupon Rates on Selected Marketable
Treasury Issues, December 31, 1953

Type and date of issue

Treasury bills, average*
Certificates (regular), average
Certificates (tax anticipation
series)
Treasury notes, average
Dec. 15, 1949
Mar. 15, 1950
Dec. 15, 1950
Sept. 15, 1953
Dec. 1, 1953
Conversion issues*

Treasury bonds, averaget
Issued, 1935-59
Mar. 15, 1935
Sept. 15, 1936
Dec. 15, 1938
Issued, 1940-49
Oct. 20, 1941

Nov. 15, 1945
July 22, 1940
Nov. 15, 1945
Oct. 7, 1940
Dec. 1, 1944
Issued, 1950-53
Mar. 1, 1952
July 1, 1952
Feb. 15, 1953
May 1, 1953
Nov. 9, 1953

Period to
Rate of
maturity at interest on
issuance
issuance
Years Months

3
12
81/4

1.510
2.476

3
4
5
5
3
1
5
18

2.500
1.765
1.375
3
1.500
1.750
6
2.875
/
1
2 1.875
1.500
_2
2.393

25
23
27

2.875
2.750
2.750

30
27
15
17
14
10

11
1
103/4
1
81/4

7
5
5
30
7

/
1
2
111/2
10

/
1
2

11
/
2

10/
1
4

2.500
2.500
2.250
2.250
2.000
2.000
2.375
2.375
2.500
3.250
2.750

* The average sale price of these discount issues is converted to a
yield on a true discount basis (365 days a year).
# Notes issued after April 1, 1951 at a set rate in exchange for
Investment Series bonds.
t The issues shown are the first and last issue at the same rate.
SOURCE: The Treasury Department.

between the rates on short and long issues narrowed, and the "rate curve" leveled off as it moved
up. The greater increase in rates on short issues in
this period reflects in part the relative increase in
the volume of these issues outstanding.
MATURITY PATTERN
of
the type of refunding and exchange
Because
policy pursued since early 1946, the average maturity of outstanding marketable issues has shortened. At the beginning of 1954, 47 per cent of the
marketable issues-amounting to 73 billion dollars
-were due to mature within a year. Issues amounting to nearly 112 billion dollars, or 72 per cent of
the outstanding marketable issues (including the
one-year maturities), were to mature or were redeemable within the next five years through 1958,
as shown in Chart II, while over 17 billion dollars,
or around 11 per cent, were redeemable in the
subsequent five years through 1963 and about 25

THE TREASURY AND THE MONEY MARKET

billion dollars, or only 16 per cent, after 1963. The
longest Treasury marketable issues outstanding at
the beginning of 1953 were redeemable in fifteen
years and were to mature in twenty years (that is,
issues dated 1967-72). On May 1, 1953,however, a
new 30-year 11
/
2-month, 31/4 per cent issue of
bonds, in the amount of over 1.6 billion dollars,
was sold by the Treasury as a first move toward
lengthening the debt.
The change in the maturity pattern of marketable
issues has been marked since the Victory Loan that
shortly followed the end of World War II. In contrast to the 72 per cent of the marketable issues
outstanding at the beginning of 1954 that were
callable or were to mature within the next five years
ending with 1958, less than 55 per cent of the

Treasury marketable issues fell into this less-thanfive-year group at the peak of the Federal debt on
February 28, 1946. Issues maturing or callable within from five to ten years then amounted to about
16 per cent, and those maturing or callable in over
ten years represented over 30 per cent of the total
marketable debt. From the end of 1947 until May
1953, all marketable Treasury issues were redeemable in less than twenty years. At the peak of the
debt, long-term issues redeemable in more than
twenty years amounted to nearly 10 per cent of the
total marketable issues. Over the period from February 28, 1946 to the beginning of 1954, the average maturity of the outstanding marketable issues
declined from nine years and two months to five
years and two months.

Chart II

SCHEDULE OF PUBLIC MARKETABLE DEBT, BY CALL CLASSES
(End of December, 1945-53)
DOLLAR AMOUNTS

PERCENTAGE DISTRIBUTION

200

100
Over 20 years
\\,

180
160

140

.01-20 years •
•

120

5-10 years /

rg,

100

;eh
$$

•

rt1.11

:44

30
Within 1 year

50
1-5 years

80
60

20
10

0
1945 '46 '47 '48 '49 '50 '51 '52 '53

1945 '46 '47 '48 '49 '50 '51 '52 '53

Note: Covers interest-bearing issues only. Excludes conversion bonds(outstanding prior to mid-1947), Panama Canal bonds, Postal
Savings bonds, and guaranteed obligations.
Source: U. S. Treasury Department.

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FEDERAL RESERVE BANK OF NEW YORK

OWNERSHIP PATTERN

cates, and notes comprised 86 per cent of Reserve
Bank holdings, and almost 91 per cent of their portfolio was callable or was to mature within five years.
Their total portfolio amounted to nearly 17 per
cent of the total amount of marketable issues outstanding.
Since the peak of Government borrowing on
February 28, 1946, there have been some changes
in the general pattern of ownership; one significant
change has been a shift of Treasury bills from the
Federal Reserve Banks to corporations, following
the rise in rates on these issues to more attractive
levels. Also, the System's holdings of bonds increased, especially during the early postwar years,
as a result of the support given to long-term security prices by the System at a time when savings
institutions were shifting from Government bonds
to other investments on a large scale. Because of the
passage of time, the Treasury's emphasis on short
issues in its refundings, and the Treasury exchange
offers of nonmarketable investment bonds for outstanding marketable bonds, the average maturity of
the marketable portfolios of all groups of private
investors at present is considerably shorter than in
1946.

In a broad sense, the distribution of marketable
issues of various maturities among different groups
of investors reflects the characteristic needs of those
investors. Commercial banks, which hold over a
third of the marketable issues and are by far the
largest single investor group among the types of
holders, require relatively liquid assets and are restricted as to their holdings of certain of the longest
issues. At the beginning of 1954, they held around
a third of the outstanding Treasury bills, certificates, and notes and almost three fifths of the short
and intermediate-term bonds. In contrast, insurance
companies and mutual savings banks, which hold
about 7 and 5 per cent, respectively, of the marketable issues, maintain predominantly medium and
long-term investment portfolios. Together, at the
end of 1954, they held about one third of the longterm bonds (redeemable after ten years), and only
a very small proportion of the other types of issues.
Other private investors have shown a similar tendency to concentrate their holdings of the Treasury
marketable issues in segments of the maturity range
particularly suitable to their needs. For example,
nonfinancial corporations, which have been the most
rapidly growing investor group in the Government
MARKET TRANSACTIONS BY THE FEDERAL
security market in recent years, require mainly short• INVESTMENT ACCOUNTS
term investment outlets. They hold a large share of
In addition to the direct issuance or retirement
the Treasury bill issues. At the other extreme, private
to
pension funds (also an increasingly important in- of marketable issues, the Treasury may influence
available to the
vestor group) and large individual investors have some extent the supply of its issues
or purchases
market
sales
secondary
through
market
most of their holdings in, and account for a subaccounts.
Such
investment
Federal
various
the
by
stantial share of, the longer-term bonds.
be undertaken within the
transactions
can
market
Investments by the Federal trust funds and other
the statutory investment requirements
Government agencies, which hold about 2 per cent limits set by
Purchases are also limited, of
accounts.
of
the
of the marketable issues, are concentrated in longof funds available; and sales,
the
amount
course,
by
term bond issues. Like private investors, Federal
marketable securities in the investof
the
amount
by
agencies hold securities according to their needs,
portfolios of the accounts. In the first two
but their needs are much more narrowly controlled ment
after
the end of the Victory Loan, around 1.5
years
by statutory regulations. These regulations generally
dollars
of marketable issues were sold by
billion
require that their investments yield a certain return
these accounts. Later, substantial purchases were
related to their actuarial requirements and usually
made, and in total volume they roughly offset the
special securities covering these needs are issued to
amount of earlier sales.
the trust funds.
Reflecting their role as the nation's central bankTHE REFUNDING PROBLEM
ing institution, the Federal Reserve Banks have conEach year since the end of World War II, the
centrated their portfolios of marketable issues in Treasury has faced a substantial and, at times, a
short issues. At the beginning of 1954, bills, certifi- formidable refunding task. Not only has the total

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THE TREASURY AND THE MONEY MARKET

volume been large, but the issues have been so distributed that the Treasury has found it necessary
to make anywhere from five to twelve offerings a
year, aside from its regular bill offerings.
At the outset on February 28, 1946, there were
. over 70 billion dollars of issues maturing and callable in one year, and aside from the weekly rollovers of bill issues the Treasury was in the market
eleven months out of the twelve. By 1949,the issues
refundable in a year had dedined in volume to 49.1
billion dollars and the number of offerings other
than bill issues had been reduced to nine issues.
But by the beginning of 1954, these issues were at
a new high of nearly 76 billion dollars and involved
eight maturing issues and three callable issues, as
well as the thirteen regular weekly bill issues and a
maturing issue of tax anticipation certificates.
The fluctuations in the annual volume of the refundable marketable issues since the Victory Loan
have reflected increases brought about by the passage of time (moving longer issues into the shorterterm areas) and the Treasury's almost complete
reliance for several years on short-term issues in
both its exchanges and new money offerings. These
increases were only partly offset by reductions arising both from planned retirements in the early
postwar years and from the attrition (or unexchanged portion) of maturing and called issues.
Similarly, the changes in the annual number of refundable issues in this period reflected the increase
in issues with the passage of time and the offsetting
reductions arising from complete retirements or
consolidations in refundings.
The first significant step toward lessening somewhat the increase in the annual volume of refundings was made by the offering of intermediate-term
issues beginning December 1949. In all, the intermediate issues offered since that time have, in effect, postponed the refundings in whole or part of
nine issues (induding two new money issues)
amounting to almost 30 billion dollars for periods
ranging from 31/
2 years to nearly eight years. The
first of these intermediate-maturity issues will ma-

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ture in 1954. The 1954 volume of issues actually
maturing that must be handled within the year
came to 73 billion dollars at the beginning of the
year.

Experience with Attrition
Altogether, in the period 1946-53, over 278 billion dollars of exchange issues aside from bill issues
were offered, but private investors holding almost
15.5 billion of the refundable issues preferred to
present their holdings for cash redemption.8 The attrition thus amounted to less than 6 per cent of the
exchange offerings. On some offerings, the unexchanged portion was considerably higher than 6 per
cent, while on others it was lower. The attrition
ratio on any one issue reflected, in part, investors'
reaction to the terms of the new security, as well
as the holdings acquired with the intention of obtaining cash at maturity. In general, when the terms
of exchange issues have been in line with current
market conditions, offerings have been accepted virtually in full by commercial banks and institutional
investors, while other private investors have tended
to redeem *part of their holdings in keeping with
apparent plans to use the funds for specific purposes
or to purchase securities whose maturities would
coincide with expected needs for funds. After the
Treasury-Federal Reserve accord of March 1951,the
proportion of Federal Reserve support purchases
was reduced, and cash redemptions on the whole
declined as the terms of new issues were fitted to
the yields determined by a relatively free market.
Since October 1952, no support has been given by
the System to the Treasury refundings; in the
months through June 1953,when interest rates were
rising and the pricing of issues was especially difficult, attrition varied from less than 2 per cent to
nearly 18 per cent of the refunding offers, but in
the latter half of 1953, when a sharp about-face in
market rates occurred, cash redemptions were less
than 4 per cent of each offer.
This does not include the close to 40 billion dollars of
issues which were partially or fully retired by the Treasury
according to plan.

MARKETING OF TREASURY BILLS
by

HELEN J. COOKE
HE Treasury bill was first introduced in the
TUnited
States as an instrument of Government
finance in 1929. Designed to attract short-term
funds, through a weekly market auction as contrasted with the customary procedure of subscription and allotment for instruments bearing fixed
coupon rates, the Treasury bill filled an important
need in the, money market. By the end of 1934, it
had completely replaced the Treasury certificate of
indebtedness which had formerly been the principal
means of shorter-term Treasury financing. It was
not until 1942, when wartime needs impelled an
unprecedented growth in the public debt and made
necessary the use of a wide variety of debt instruments, that the certificate of indebtedness was reintroduced. At the present time, Treasury bills, certificates, and other Government securities nearing
their maturity dates constitute a dominant proportion of the money market instruments in use in the
United States. The growth in these instruments has
been paralleled by a shrinkage in the importance,
for money market purposes, of the call loan, bankers' bill, and trade acceptance.
Because the Treasury bill is sold at auction, on a
discount basis, it is uniquely suited to the needs of
a highly competitive money market. During the
war years, when most market rates of interest were
stabilized through Federal Reserve action, and competition could not be allowed to operate in unrestricted form, most of the growing volume of Treasury bills moved into the portfolio of the Federal
Reserve System. By early 1947, the System held
about 90 per cent of the 17 billion dollars of bills
then outstanding, as shown in Chart I. With the
gradual return of a competitive climate, both in the
money market and the Government securities market, bills left the System portfolio to find a key place
in the secondary reserves of the commercial banks
and among the liquid assets of a growing number
of industrial corporations. This decline in the System's holdings continued through early 1952, when
for a brief period there were no bills in the System
portfolio. Some purchases were made thereafter and

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beginning late in 1952 this instrument was used
almost exclusively in effecting the System's open
market operations. By the beginning of 1954, with
roughly 19.5 billion dollars of bills outstanding,
the System's holdings amounted to almost 3 billion
dollars. The commercial banks held nearly 4.5 billion dollars, and nonbank investors the remainder.
This article will briefly describe the methods
through which Treasury bills are initially sold, the
existing market for trading in outstanding bills and
other Treasury issues, and,the principal sources of
demand for bills, with particular reference to the
role of the Federal Reserve Banks in the Treasury
bill market.

•SALES OF REGULAR WEEKLY ISSUES
New issues of the regular 91-day Treasury bills
are obtained only by tender to the Treasury through
the Federal Reserve Banks and their branches. Each
week,the Secretary of the Treasury invites competitive and noncompetitive tenders for a specified
amount of Treasury bills. Public announcement of
offerings of Treasury bills is usually made on Thursday. Tenders are received up to 2 p.m. (Eastern
time) on the following Monday, and bills are usually dated and issued on Thursday of that week. If
bidders prefer to wait until the last tender day, and
if distance prevents physical delivery of the tender
to a Federal Reserve Bank or branch prior to the
closing time, the bid or bids may be tendered by
telegram, but only through a bank. Confirmation
by mail, of course, is necessary. Tenders are received
without deposit from incorporated banks and trust
companies, and from responsible dealers in investment securities. Tenders from others must be accompanied by payment of 2 per cent of the face
amount of bills applied for, unless the tenders are
submitted with an express guaranty of payment by
an incorporated bank or trust company.
Whereas other Treasury marketable issues are
sold at par to yield a specified rate of interest, bills
are sold on a discount basis at prices set by the
market. Noncompetitive tenders for up to 200,000
dollars from any one bidder are accepted in full
33

THE TREASURY AND THE MONEY MARKET

at the average price of accepted competitive bids.'posted buying rate of 99.905 (equivalent to 3/ per
Competitive bids, however, cover the bulk of the cent discount) then maintained by the Federal
new weekly issues, although noncompetitive bid- Reserve. Late in 1944, the maximum on noncomding has increased notably in recent years. Tenders petitive bids was raised to 200,000 dollars, and
are made in even multiples of 1,000 dollars, on a since mid-1947, when the posted rate was elimimaturity value basis, and the prices are stated on nated, the noncompetitive bids have been accepted
the basis of 100 (and to the third decimal place— at the average price of the accepted competitive bids.
for example, the issue dated January 7, 1954 sold at In recent years, as industrial corporations and the
an average price of 99.668, which is equal to an smaller banks began to buy bills, noncompetitive
bidding increased somewhat in importance, and in
annual discount rate of about 1.314 per cent).
1953
tenders
at
the noncompetitive bids represented more
more
submit
competitive
Some bidders
than
15
per cent of most of the accepted weekly
and
often
make
a
noncompetitive
than one price
tenders,
whereas
in 1947 they averaged less than
Noncompetitive
bidding
was
introbid as well.
the
offerings.
2
per
cent
of
duced in 1943, primarily to help widen the market
for Treasury bills among small banks. Beginning
Upon expiration of the time set for placing bids,
at that time an investor could bid for not more than all tenders received at each Federal Reserve Bank
100,000 dollars of a new issue on a noncompetitive are opened, the bids arranged in descending order
basis, and the price of these bids was set at the of price named, and the details communicated by
Chart I

OWNERSHIP OF TREASURY BILLS
Billions of dollars

(End of month, December 1945-53)

Billions of dollars

0
1946

1947

1948

1949

1950

1951

1952

1953

Note: Includes tax anticipation bills in 1952 and 1953. Commercial bank holdings based on Treasury Survey of Ownership which
covers banks holding nearly 90 per cent of Government securities held by all commercial banks.
Source: U. S. Treasury Deportment and Board of Governors of the Federal Reserve System.

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FEDERAL RESERVE BANK OF NEW YORK

wire to the office of the Secretary of the Treasury.
Starting with the highest price, the Treasury awards
bids in full until it has obtained the approximate
amount of funds stated in the offering circular.
Where more than one bid is made at the same price
and only a part of the tenders at such price can be
accepted, the amount accepted is prorated in accordance with the respective amounts for which bids
have been made. The Secretary of the Treasury
makes a public announcement of the results of each
weekly sale of Treasury bills late on Monday after
the allotments have been determined. (This announcement generally appears in the newspapers on
Tuesday morning.) The Reserve Banks then advise
those who have submitted tenders of the acceptance
or rejection of their bids.
Settlement for accepted tenders must be made or
completed at the Federal Reserve Banks by the issue
date, in cash or other immediately available funds
(that is, deposits at the Reserve Banks) or, since
May 1947, in a like face amount of Treasury bills
maturing on that date. The Treasury, however, may
provide that qualified special depositaries may make
payment for accepted tenders (on behalf of themselves or their customers) by credit to a Treasury
account on their own books, but in recent years
this privilege has not been granted in connection
with the sale of regular weekly issues. In the past,
the Treasury on several occasions sold regular bills
on a book-credit basis to lessen the strain on the
money market. The last such occasions were late in
1941 and early in 1942, when the marketing of increased offerings needed facilitating at a time when
member bank reserves were being subjected to severe pressures.
Currently, only a small percentage of bills are
sold on an exchange basis, whereas in fiscal 1948,
the first full year when exchanges were permitted,
nearly 70 per cent of the new issues were sold in
exchange for maturing bills. At that time, the Federal Reserve Banks held the major portion of outstanding bill issues. Commercial banks and other
investors have not adopted, to any extent, the practice of using maturing issues to pay for the new
bills they may be awarded. They prefer, probably
for accounting reasons, to redeem the maturing bills
and pay cash for the new issue. To some extent,
however, the current low proportion of exchanges

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• 35

may reflect a shifting of ownership among private
investors; some investors redeem bills while others
subscribe for and receive a larger allotment of the
new issue than they hold of the maturing issue.
The new bills are delivered on the issue date
according to instructions from the purchasers. The
securities awarded are generally picked up by dealers and banks. The banks pick up the bills purchased for their customers' accounts as well as their
own. In other cases, the investors specify how they
want the new issues delivered. By means of the socalled "allotment transfers," an investor in one Federal Reserve District can enter his subscription to
new issues with his local Federal Reserve Bank and
have the securities delivered to his custodian or
other representative in another Federal Reserve
District.

OTHER TYPES OF BILL ISSUES
A special series of tax anticipation bills was introduced by the Treasury in the fall of 1951 in a
move to reduce the impact on the money market
of the seasonal fluctuations in tax receipts, which
had become accentuated under the Mills plan for
the payment of corporate taxes. Whereas in 1950
and preceding years corporation taxes were due in
even quarterly payments, by 1955, 50 per cent will
be due in each of the first two quarters.1 The TABs,
as the tax anticipation bills were called, were sold
in two issues in the autumn of both 1951 and 1952
to anticipate part of the funds which the Treasury
would receive in taxes the following March 15 and
June 15. To cover an unexpected need for funds,
one small issue of TABs was also sold in June 1953,
to mature around September 15. In its next seasonal
borrowing in July 1953, however, the Treasury
shifted to tax anticipation certificates; the size of
this issue made the sale of bills at auction less desirable at this time. The tax anticipation issues have
been redeemable for cash or taxes; thus, investors
other than those intending to use the TABs for tax
payments (chiefly banks) have initially supplied
part of the funds.
In earlier years, bill issues were sold with varying
maturities. Beginning in February 1934, the Treasury bill maturities, which previously had been limited to three months, were extended to six months,
1 For an explanation of this plan, see the article entitled
"Managing the Treasury's Cash Balances."

THE TREASURY AND THE MONEY MARKET

and starting in February 1935, they were extended ,Banks in payment for maturing bills, made it posto nine months. These issues, which were sold to sible for the System to extinguish reserves.
Beginning in 1949, increases in the amount of
cover short-term requirements for funds or to rollover maturing shorter issues of bills, gradually re- successive weekly issues were made for brief periods
placed certificates. Certain issues of bills, known as in the spring or summer of each year. The increases
tax bills, were sold by the Treasury from October varied from 100 to 300 million weekly, and raised
1935 through June 1938 and again in 1941, and the total of outstanding regular bills to 19.5 billion
for a time were issued for two to five months with dollars by the middle of September 1953.
maturities in the quarterly tax payment periods. The
TRANSFERS OF OUTSTANDING TREASURY
longer maturities, on both tax and regular bills,
BILLS IN THE MARKET
proved to be less attractive to the market than three
purchases of Treasury bills and other
Secondary
months' bills and in December 1937 the Treasury
issues
are made currently in most cases
marketable
returned to the policy of issuing three months' bills
over-the-counter
in
the
market, maintained in volregularly, with somewhat shorter or longer maturiume
than
by
fewer
twenty-five
dealers and dealer
ties as necessary on tax bills. The tax bills were
dealers
These
make
banks.
a
market
by establishing
used in those years because it was not possible under
offering
bid
and
prices
at
which
they
are willing to
the Banking Act of 1935 to offset the impact of
and
sell
buy
reasonable
amounts
of
Government
concentrated tax collections on member bank resecurities
as
principals;
no
commissions
are charged.
serves through direct purchases of special issues
That
is,
they
make
outright
purchases
and acquire
by the Federal Reserve System.2
ownership of the securities and alternatively sell
THE VOLUME OF BILL OFFERINGS
securities outright from their portfolios. Dealers
have
not
obtain their reimbursement through the difference,
bill
offerings
In recent years, the weekly
been
exceeded 1.5 billion dollars and at times have
or "spread," between their bid and offering prices.
as low as 800 million. Since the regular bills usually Brokers have a negligible role in this market. Aside
mature in 91 days, there is a 13-week cycle of these from exchanges on tender and redemptions for cash,
issues.3 At the beginning of 1954, the weekly ma- any changes in the Government portfolio of the
turities were 1.5 billion dollars each. At the end of Federal Reserve Banks are effected in the market
World War II, there were 17 billion dollars of bills by the New York Reserve Bank through dealers.
in weekly issues of 1.3 billion dollars each. The first However, "sales contracts" may be entered into by
postwar reduction in Treasury bills was made with the individual Reserve Banks with dealers when it
the issue of April 17, 1947. At various times there- is desirable temporarily to lessen a strain on the
after, through April 7, 1949, as funds became avail- money market. These contracts provide for tern- ,
able, principally through surpluses, the Treasury porary sales to the Reserve Banks, subject to rereduced weekly new bill issues by amounts of either purchase within 15 days at the option of either
200 or 100 million dollars. In these two years there party; the Reserve Banks make an interest charge
was a net redemption of 5.4 billion dollars of bills, for the period the securities are held by them. Such
reducing the outstanding total to 11.6 billion dol- transactions are entered into at the discretion of the
lars. The cash retirement of bills was concentrated Reserve Banks.4
The market for Treasury issues has been broadin Federal Reserve holdings. Thus the Treasury,
ened,
and deliveries and payments have been mateby drawing funds into its balances at the Reserve
rially
aided,
by the use of the "telegraphic transfer"
Banks and then turning them over to the Reserve
facilities which the Federal Reserve Banks provide
2 For a detailed analysis of this device, see the article which
as fiscal agents of the United States. Beginning
follows on "Direct Purchases of Special Treasury CertifiMarch 1948, the telegraphic transfer facilities,
cates of Indebtedness by the Federal Reserve Banks."
If there is a holiday on the normal date of issue or date
of maturity, Treasury bills of 90 or 92 days' maturity are
issued. If a holiday falls on the normal day for closing of
bids (Monday), the closing is advanced to the preceding
Friday.

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Treasury bills were also acquired by the individual Federal Reserve Banks during World War II under a posted
bill rate procedure, allowing for repurchase at the option
of the seller.

FEDERAL RESERVE BANK OF NEW YORK

which previously were available only in the case
of short-term issues, were extended to include all
unmatured marketable bearer securities of the
United States. The transactions are commonly referred to as "C.P.D. transactions" (C.P.D. being
the abbreviation for Commissioner of the Public
Debt by whose authority such transactions are handled), but they may be made only when the delivery
of the securities is necessary to complete a sale
transaction. In the case of Treasury bills, there is
no charge for this service. By use of these facilities,
a sale to a dealer in New York may be completed by
an investor in San Francisco, for example, without
making physical shipment of the securities. Instead,
in a typical case, the securities are delivered to the
Federal Reserve Bank of San Francisco which then
cancels them and wires the Federal Reserve Bank of
New York to deliver, from its unissued stock, a like
par amount against payment. When the delivery is
completed, the New York Federal Reserve Bank
wires the proceeds back to the San Francisco Reserve
Bank and the funds are passed on to the seller.

THE SOURCES OF DEMAND
A substantial proportion of the new issues of
Treasury bills is sold in the New York area. Bids
in this District accounted for around 70 per cent
of those submitted in 1953 and approximately two
thirds of the actual sales of new bills were awarded
on tenders made in New York. In most cases, nonbank investors (other than dealers) submit tenders
through the large New York City banks. New York
City banks also submit tenders for their own account. Small banks are not active bidders, but a
growing number have been buying through the arrangement for noncompetitive bids which has been
described above. Dealers constitute the other important group of private bidders. Dealers generally
purchase Treasury bills for resale to nonbank investors and small banks (and also to large banks
when the latter are unsuccessful in their bidding
or acquire additional funds which they wish to
invest). The large banks, on the other hand, may
or may not find it necessary to sell their bills before
maturity, depending on money market developments, but usually their bill portfolios change from
week to week. Nonbank investors generally buy
bills for a longer investment period and in many

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cases hold them for the life of the issue. Because
of the difficulty at times of setting a price on bids
(for amounts greater than provided for through
noncompetitive bids), some nonbank investors prefer to wait until new bills have been issued and then
to purchase them in the open market from dealers
and dealer banks. Secondary purchases and sales of
other outstanding issues, of course, are also made
by the nonbank investors as well as by banks to
obtain maturities better suited to their requirements.
Nonbank investors have turned to Treasury bills
as an investment medium for several reasons. Rising
yields over the past several years (until the summer
of 1953) have provided more income. At the same
time there has been a substantial increase in the
demand for short-term investment outlets in which
to place growing tax reserves, and temporary accumulations of funds for dividends, capital expansion, and other uses. As long as the yields on
Treasury bills are competitively attractive and tax
rates and profits remain at high levels, there should
be a continuing demand for these securities from
nonbank investors.
The Federal Reserve System does not submit
tenders for more than the amount of maturing bills
in its portfolio; consequently, an increase in the
holdings of the Federal Open Market Account results only from a purchase of bills in the market.
The Reserve System did not tender bids for Treasury bills until early in 1947, when the Treasury
permitted maturing bills to be submitted in payment
for new bills. Previously, cash payments had generally been required, and, since the Treasury customarily does not borrow directly from the Reserve
Banks (except through special certifica,tes to smooth
out very temporary money market fluctuations, particularly during tax payment periods), the System
acquired bills solely by purchases from others. The
System Account, therefore, could only replace its
maturities through market purchases, that is, from
the dealers in Treasury securities. This procedure
proved circuitous, and the adoption of the exchange
privilege facilitated the System's operations in replacing maturing bills.
Tenders for bills are submitted for the System
Account in accordance with the current policies of
the Federal Open Market Committee. The System's
tenders, like those of any other investor, must be

THE TREASURY AND THE MONEY MARKET

submitted before the closing hour for the acceptance of tenders, and without knowledge of other
bids submitted. The System thus must compete on
an equal basis with bids from all other subscribers.
If it is deemed desirable to tighten the money market, bids may be placed comparatively low in an
effort to allow all, or some part, of maturing
holdings to run off without replacement. In this
case, a larger amount of the bids submitted by
others is likely to be accepted by the Treasury and
a corresponding portion of the maturing bills held
by the Reserve System redeemed for cash. Whenever the System reduces its holdings in this way,
a direct withdrawal of money market funds occurs,
since the additional allotment of bills to private
investors must be paid in cash or immediately available funds at the Reserve Banks (that is, some
member bank reserves at the Reserve Banks must be

• transferred to the Treasury). The Treasury uses
the funds to redeem the unexchanged bills of the
Federal Reserve Banks.
The decline in System bill holdings beginning in
1947 provided an important means of implementing credit policy. At times, by redeeming or selling
bills the System was able to bring about a reduction
in the over-all amount of Federal Reserve credit
outstanding. At other times, when the System felt
compelled to purchase other Government securities
(even though credit conditions did not call for the
increase in Federal Reserve credit resulting from
such purchases), System sales or redemptions of
bills helped to reabsorb some of the Federal Reserve
credit released by these other security purchases.
Since the accord with the Treasury in March 1951,
and more particularly since the Treasury's refund-

Chart II
SOURCES OF FEDERAL RESERVE CREDIT
(End of month, December 1945-53)

Billions of dollars

Billions of dot ars

30
TOTAL
FEDERAL RESERVE
CREDIT OUTSTANDING

25
OTHER
SOURCES OF
RESERVE BANK
%CREDIT

Y ISSUES'

1946

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1947

1948

1949

1950

1951

1952

1953

FEDERAL RESERVE BANK OF NEW YORK

•

ing operations have been carried out (beginning small, and there were few changes in the System's
late in 1952) without direct Federal Reserve sup- bill portfolio that affected the banks' reserve posiport, changes in the System's bill portfolio have tions materially.
In the less than twenty-five years since their first
been used to effectuate credit policy decisions. The
relative importance of Treasury bills as a source introduction as an instrument of Treasury finance,
of Federal Reserve credit since 1946 is illustrated Treasury bills have become firmly established in a
in Chart II. During the war years, of course, System broad market among financial and nonfinancial inacquisition of bills served as a principal source of stitutions. They not only serve as an ideal money
Federal Reserve credit. In the prewar years, how- market investment but they also provide a flexibility
ever, the System's bill holdings were relatively well suited to the short-term needs of the Treasury.

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DIRECT PURCHASES OF SPECIAL TREASURY CERTIFICATES OF
INDEBTEDNESS BY THE FEDERAL RESERVE BANKS
by
MABEL B. WALLICH and IRVING M. AUERBACH
cINCE 1942 the Reserve System has had temporay'
authority to purchase directly from the
Treasury up to 5 billion dollars of direct or fully
guaranteed Government securities. The successive
renewals of this authority by Congress have enabled
the Treasury to sell special certificates of indebtedness directly to the Federal Reserve Banks for the
purpose of smoothing out the impact of large Treasury transactions on the banking system, particularly
at quarterly tax dates. This type of operation, the
use of which is subject in each instance to arrangement between the Reserve System and the Treasury,
was resorted to quite regularly during the twenties,
during the Second World War, and in the past
several years. In the war period from June 1942 to
December 1945, special certificates were outstanding on a total of 73 days with an average daily
amount of 378 million dollars. From 1946 through
1948 no special certificates were issued as the Treasury's net cash income in each of these calendar years
made such operations unnecessary and the System's
task of money market management was handled
more conveniently without their use. However, with
the return of cash deficits in 1949 and the difficult
budgetary and financing problems brought on by the
outbreak of hostilities in Korea on June 24, 1950,
it was again found expedient at times to employ the
special certificates of indebtedness. From the beginning of 1949 to the end of 1953, special certificates
were held by the Reserve Banks on 75 days with an
average daily level of 319 million- dollars. The
maximum amount outstanding at any one time since
1942 was 1.3 billion dollars on March 15, 1943,
but as indicated by these daily averages, the amount
of direct Treasury borrowing is seldom more than
a small fraction of the 5 billion dollar maximum
authorized.
The occasional use of special certificates to finance
Treasury expenditures for very short periods has
proved beneficial to both the Federal Reserve System
and the Treasury in carrying out their respective
functions. It has helped to minimize short-run fluctuations in member bank reserve positions and to

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reduce pressure on the market for Government securities. The Treasury, for its part, has been able
to maintain a somewhat smaller average working
balance with a consequent saving in interest cost.
Primarily, the special certificate of indebtedness
has been used to offset the effects of short-term
fluctuations in receipts and expenditures on the
Treasury's total cash needs. During the year these
fluctuations result, at times, in a net accumulation
of funds and, at other times, in a net drain of funds.
There is a wide seasonal divergence between receipts and expenditures since the larger part of tax
revenues is collected during the first half of the
year. Strong intramonthly fluctuations are superimposed on these seasonal movements of longer
duration, especially in quarterly tax months. In
quarterly months, large disbursements for interest
on the public debt, and to some extent for the cash
redemption of maturing securities, are made during the first half of the month; often the concentration is actually on the fifteenth. Revenues from
taxes are due on the fifteenth, but do not start to
become available to the Treasury in large volume
until a few days after the middle of the month because of the time consumed in processing and collection. The Treasury's balances, therefore, tend to
be drawn down during the first half of a quarterly
month; in the second half, as tax checks are collected, the balances tend to increase rapidly.
In order to avoid unnecessarily large accumulations of funds in its balances in the Reserve Banks,
and consequent drains on bank reserves, during
the tax collection periods, the Treasury usually suspends or reduces its withdrawals from Tax and Loan
Accounts before the middle of the tax months and
sometimes sells special certificates to the Reserve
Banks for a few days to meet its disbursements.
The funds released by the Treasury's disbursements
at such times provide the banks with a cushion of
extra reserves against prospective losses in the second half of quarterly months when the drain on
bank reserves from income tax payments is often
considerable. Without temporary borrowing from

FEDERAL RESERVE BANK OF NEW YORK

difficulties that might be experienced in Treasury
financing during the war period.
During the First World War and afterward until
1933, the New York Federal Reserve Bank, and
occasionally the other Reserve Banks, at times made
purchases of Treasury special certificates of indebtedness to reduce the frequency of withdrawals from
War Loan Deposit Accounts in the commercial
banks and at times in anticipation of receipts from
the sale of securities by the Treasury in the open
market. After World War I, this type of financing
was limited largely to tax periods. At the same time,
in order to absorb the excess member bank reserves
resulting from Treasury disbursements of the proceeds of the special certificates and to provide the
banks with a means of employing the funds temporarily, the Reserve Banks sold other Government
securities to member banks under repurchase agreements. By the terms of these agreements, the Reserve Banks repurchased Government securities sold
from their portfolios just before the middle of a
month in which tax payments were due, as the banks
lost reserves through income tax collections. The use
of repurchase agreements was ended in 1926, however, since several Reserve Banks no longer were
willing to incur the loss of earnings that resulted
from the sales of high-yield Government securities
against the purchase of low-yield special certificates.
Beginning in 1927, participations in the special
one-day certificates were sold to member banks in
the New York money market in lieu of sales of
other securities under repurchase agreements. The
entire transaction in each instance was handled by
the Federal Reserve Bank of New York. Although
the Reserve Banks continued to hold part of each
issue, the major portion was placed with member
banks. Participations in the special certificates continued to be sold to member banks until 1933,
when the Treasury suspended the use of this form
of temporary borrowing. The practice of selling
participations in the issues was not resumed by the
System when its authority to make direct purchases
was reinstated at the beginning of the Second World
War.
The first two purchases of Treasury special certificates during the Second World War were made
2 During these years, Treasury bills maturing in the tax
collection period were issued. The redemption of these primarily for money market purposes. They both
securities was useful in offsetting the banks' losses from
preceded the sale of large amounts of securities by
tax revenues.

the Reserve Banks, the reserves of the banking system frequently could not so readily be prepared
for the tax drain, and the pressure on the banks
would not be alleviated until Government expenditures again exceeded receipts after the tax period.
Furthermore, without the alternative of special
certificate financing with the Reserve Banks, the
Treasury would have to maintain large enough balances with the commercial banks and the Federal
Reserve Banks during the first half of the month to
cover its disbursements on the fifteenth with an
ample margin. These balances would then increase
(temporarily) in the second half. A succession of
these developments over the year would result in
the carrying of higher average balances than necessary. The temporary financing by the Reserve Banks
permits the Treasury to anticipate tax receipts so
that the effect of seasonal short-term fluctuations in
receipts and expenditures on its balance is reduced.
The System's present authority to purchase securities directly from the Treasury was first obtained
under special wartime legislation enacted in 1942.
At the time, the authority was intended to be
granted only for the duration of the war, but since
the Treasury's financial needs continued to be large
during the postwar period, especially after the outbreak of Korean hostilities, the legislation has been
extended several times and a further renewal is
now being considered. In earlier years, the Federal
Reserve Banks made direct purchases of special certificates, usually of one-day maturity, under section
14(b) of the original Federal Reserve Act. This section authorized the purchase of Government securities by the Reserve Banks, but failed to specify how
they should be made;consequently,it was commonly
understood that this provision did not prohibit urnited direct purchases from the Treasury. Between
1935 and 1942, no special certificates were purchased because the Banking Act of 1935 specifically
stipulated that all Government security purchases
and sales by the Reserve Banks must be made in the
open market.2 The restoration of the direct purchase
authority under Title IV of the Second War Powers
Act in 1942 was designed to meet any transitory

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THE TREASURY AND THE MONEY MARKET

the Treasury in the open market and thereby pre- Treasury up to some specified maximum amount has
pared the banks for the subsequent drain of re- been to provide an arrangement whereby the Reserves. Sufficient funds were available in Treasury serve Banks could assist the Treasury temporarily in
accounts at the commercial banks to cover the Treas- meeting some unforeseeable and urgent need for
ury's net disbursements on these two occasions. Calls funds, pending the financing of the expenditures
on these balances, however, were suspended be- through Treasury sales of securities in the market
cause in a matter of days funds obtained from the or until the required funds could be withdrawn
open-market sales of securities were transferred to from Tax and Loan Accounts. So far, this emerthe Treasury's accounts at the Reserve Banks. The gency "stand-by" function has been used on only
direct purchase of securities by the Reserve Banks one occasion. This occurred in June 1951, when a
under these circumstances, of course, is analogous large volume of cash-ins of the old Series D Savings
to the purchase of special certificates in quarterly notes to purchase the new Series A issue temporarily
tax months.
drained all of the Treasury's funds at the Reserve
Aside from its use in income tax periods, the Banks until calls could be made on those Tax and
principal purpose of the Reserve Banks' authority Loan balances that were enlarged by the receipts
to purchase Government securities directly from the from the sale of Series A Savings notes.

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Full text of The Treasury and the Money Market

FRASER