What is a 'One-Day Certificate'

One-day certificates were a type of temporary financing used by the U.S. Treasury. One-day certificates were interest bearing and were used when the Treasury needed to fund itself through the Federal Reserve System for cash flow management. One-day certificates have not been issued since 1979.

BREAKING DOWN 'One-Day Certificate'

The ability of the Treasury to borrow directly from the Federal Reserve System (Fed) was seen a safety net being available to the Treasury in the event that it had an unforeseen depletion in its cash balances. Reasons for a sudden adverse cash flow situation arising might include (inter alia) revenue falling short of expectations, expenditure spiking above expectations or a failed bond or note auction. In such situations, the Treasury might want to access funding through the Federal Reserve System to meet its obligations; it would repay the Fed when its cash flow had normalized. The method of accessing such funding would be for the Treasury to issue an interest-bearing security to the Fed; the Treasury would receive the funding that it needed, and repay the loan on maturity of the security.

The original enactment of the Federal Reserve Act provided a robust safety net in this context, through implicitly allowing the Fed to purchase securities from the Treasury. This was referred to as the "direct purchase authority," and was actively used during World War I and thereafter until the mid-1930s. These direct purchases usually occurred when Treasury cash balances ran low shortly before tax receipts or the settlement of a public securities sale were due. The Fed would then purchase a one-day certificate of indebtedness from the Treasury, rolling over the investment on a daily basis until Treasury received the funds it was awaiting and the certificate could be repaid.

In 1935, Congress prohibited Treasury from being able to directly borrow from the Fed. However, following the onset of World War II, Congress made a $5bn exemption to this law to assist Treasury with cash flow management. The facility was used during the war. After the war ended, Congress renewed the exemption for three years at a time, continuously until 1979. At that stage, Treasury had recently developed new cash management securities. There was another 2-year extension of the exemption but this time subject to it only being used for “unusual and exigent circumstances” and under approval of a super-majority of the Fed Board of Governors. The certificates were never issued under these terms, and the exemption was not renewed after 1981.

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