$ 1,000 bill, which was phased out in 1970.
Courtesy of The Joe I. Herbstman Memorial Collection of American Finance transferred into a book-entry system. By 1970, nearly half of the outstanding marketable debt was in book-entry form. Wall Street and the Fed never looked back. The decade saw the precipitous rise of bookentry securities. The last bearer Treasury Bill was issued in 1977, but the end of paper T-Bills 40 years ago did nothing to dampen the demand for these bonds.
By December 1980, the government reported $ 216 billion on the books in outstanding Treasury Bills, with an average interest rate of 12.8 %. At the same time period a decade later, the total outstanding tab for these securities had reached $ 527 billion, averaging a rate of 7.6 %. And, as with nearly all things debt-related, time is a financial fertilizer. As of May 2017, the total value of outstanding T-Bills stood at $ 1.74 trillion, with a daily trading volume of around $ 100 billion.
The Treasury Note
The Treasury Note traces its origins to the War of 1812. The US government needed to raise additional revenue, but there was a problem. The idea of a Hamiltonian central bank had proved unconvincing for many in Congress. Although the Bank of the United States( BUS) proved to be successful in its operations, which included acting as the fiscal agent of the government, political opposition to it was intense. And when the bank’ s first 20-year charter expired in 1811, it was not renewed.
The timing could not have been worse, as America would be at war with Great Britain a year later.
The government’ s coffers were insufficient to sustain the conflict, so Treasury Secretary Albert Gallatin proposed a series of interest and non-interest bearing notes to raise needed revenue.( The final cost of the war would total some $ 158 million.)
Issued from 1812 – 1815, these notes were redeemable as payment for government duties and taxes. While they were not technically legal tender, they served a de facto role as America’ s first circulating currency, as merchants and individuals used them in that capacity. Although the low denomination notes were noninterest bearing instruments, they were exchangeable for a 7 % stock at the government’ s discretion. The success of the War of 1812 notes provided a foundation for later innovations in American finance: federally-issued paper currency and shortterm hybrid debt certificates.
Treasury Notes also aided the government during the Panic of 1837. Once again, political stubbornness had left the federal government with limited options to address a financial crisis. Despite the lessons learned from the War of 1812, Andrew Jackson was determined to kill off the Second BUS, which had its 20-year charter expiring in 1836. One-year Treasury Notes helped the government through the panic and subsequent financial depression of 1840. But the issuance of these notes was not without controversy, as again their usage came seemingly close to a federal paper currency( which was not yet authorized by Congress).
Interest-bearing and compound interest-bearing Treasury Notes would play an important role in financing the Civil War. The hybrid debt-currency nature of these instruments was an important feature to the Treasury. As legal tender, the notes would serve as currency, easing the pressure on specie payments from the government’ s coffers. But the interest-bearing features of these issues meant that investors would withdraw many notes from circulation until their redemption dates, combating the inflationary effects of the Treasury printing paper money.
In the 20th century, the Treasury Note would come to be the Treasury’ s shorterterm coupon debt instrument.( The T-Bill was a zero-coupon security.) No longer a usable form of legal tender, the T-Note was a traditional bond. In 1919, with the recent end of the Great War, the Treasury issued a fifth Liberty Loan. Known as“ Victory Bonds,” these four-year securities were Treasury Notes, raising some $ 4.5 billion to pay for the war’ s expenses. A search of the 1919 Monthly Financial Statement of the United States shows notes for the first time under the category of“ Interest-bearing Debt.”
T-Notes were issued throughout the 20th century, serving an important function in the debt issuance of the federal
34 FINANCIAL HISTORY | Fall 2017 | www. MoAF. org