The high cost of debt: very-high-denomination Treasury Notes and US Treasury Debt Management, 1955-69

"For most of their history after World War II, Treasury notes have been issued with denominations never rising above a high of $1 million. Yet, from 1955 to 1969, the Treasury issued Treasury notes with the added denominations of $100 million and $500 million. These very-high-denomination Treasury notes were issued because Treasury notes were the only viable way for the Treasury to refund the debt resulting from World War II and very-high denominations reduced the costs of servicing the public debt. The need to refund a sizeable amount of the debt arose from the cost of the war. By 1946, the public debt had risen from a pre-war level of $49 billion to $269 billion. Debt of this magnitude, 130% of the gross domestic product in 1946, could not be paid off quickly and would have to be refunded or rolled-over into the future. The period from 1946 to 1952, saw a rather haphazard management of the public debt’s refunding. And, while the Treasury’s post-war rates on shorter-term securities remained fairly in-line with the market, its longer-term interest rates fell ever more out of step with market demands. As a result, it became increasingly difficult for the Treasury to sell anything other than shorter-term securities to investors, shortening the average length to maturity of the public debt as a whole and the time to the next refinancing. The disturbances caused by the Treasury’s frequent and irregular financing operations and competition for short-term debt, created inflationary pressures that further raised market interest rates and compounded the Treasury’s financing problems. To minimize market rates overall, the Treasury had to do its best to lessen its involvement in the short-term market and enter the market less often and on a more regular basis. To do this, the Treasury needed to lengthen the average length to maturity of the public debt. This action would also decrease the Treasury’s presence in the short-term debt market and hopefully bring about lower interest rates, reducing borrowing costs and promoting overall economic growth. But, unable to sell large quantities of long-term Treasury bonds, the Treasury, in the early 1950s, was forced to turn to medium-term securities—Treasury notes—to refund maturing securities. The result was a rapid expansion in the issue of notes. By the end of fiscal year 1955, the percentage increase in dollar amounts from 1952 was 979%, an increase of over $20 billion. These increases translated into increased administrative costs and difficulties. With the ten-fold increase in the dollar amount of Treasury notes issued between 1952 and 1955, the amount of work handled by the Federal Reserve banks and the Treasury exploded. Correspondingly, the printing run of Treasury notes at the Bureau of Engraving and Printing increased from 66,775 notes (or 667,750 coupons in total), in fiscal year 1952 to 686,515 notes (or 6,865,150 coupons in total) in fiscal year 1955. All these millions of notes and coupons would have to pass through the Federal Reserve system, which issued payments and physically canceled each coupon and note, and the Bureau of the Public Debt, which recorded all the payments made and destroyed each coupon and note. But costs were not just rising for the Federal Reserve and the Treasury; investors (the Treasury’s customers) were also feeling the pinch. An investor buying millions of dollars in notes or a custodial bank holding billions of dollars in notes for their customers had a lot of work to do when they wanted to cash in coupons every year. As interest was paid semiannually, twice a year a coupon had to be physically separated from the rest of the document for every individual security and turned in for payment. If an investor had $500 million in Treasury notes, and hopefully held the sum in $1 million denomination securities, he would have to detach and turn in 1,000 coupons a year. Custodial banks handling larger sums and many smaller denominations had an even worse time. People had to be employed to cut, count, track, file, transport, and guard the coupons. Vault space was needed to store the Treasury notes. And, between 1952 and 1955, the number of notes and coupons involved was to expand ten fold. The resulting increase in costs was burdensome, making Treasury securities less attractive. An easy way to reduce the administrative costs involved would be to add a few zeros onto the existing denominations, and this is what was done. In February 1955, added to the existing denominations were the $100,000,000 and $500,000,000 denominations. Raising the denominations cut down the amount of work involved in large issues of Treasury notes for everyone. The $500 million investor now had only two coupons to worry about, as did the Bureau of the Public Debt. And, the Bureau of Engraving and Printing only had to print one $500 million security instead of 500 $1 million securities. The issue of Treasury notes bearing very-high denominations continued for the next 14 years, with the last issue of very-high-denomination Treasury notes occurring in 1969. After that, the maximum denomination returned to the earlier high of $1 million. It was the drive for further cost savings in managing securities by the Federal Reserve that led to the disappearance of very-high-denomination Treasury notes. In the early 1960s the Fed began to investigate the use of electronic bookkeeping. By January 1970, 40% of all bearer securities, including all those held by the Federal Open Market Committee, were converted into book-entry form. It was at this point that the Treasury stopped offering very-high-denomination Treasury notes. Very-high-denomination Treasury notes were no longer necessary or cost-efficient. Large buyers of government securities, including the Federal Reserve’s Federal Open Market Committee, were eager to use the cost-saving book-entry option, obviating the need for very-high-denomination Treasury notes. "