9 - THE FEDERAL TREASURY, THE NATIONAL DEBT, AND THE MONEY SUPPLY

Abstract

This chapter discusses the federal treasury, the national debt, and the money supply. The potential monetary powers of the federal Treasury are formidable. When the Treasury transfers its balances from the tax and loan accounts it maintains at commercial banks to the Federal Reserve, the monetary base contracts and, given the money multiplier, reduces the money supply. This action on the part of the Treasury is analogous to open-market operations by the central bank in its impact on the monetary base and the money supply. Current interest in the activities of the Treasury centers on their implications for the money supply. Yet, in many respects they resemble the powers of the central bank in that they can change the monetary base, the money multiplier, and the money supply. For that reason, it is important that the Treasury and the Federal Reserve know policies of each other and coordinate them. If the central bank ignores the requirements of the Treasury, additional uncertainty is introduced into forecasting the movements of the monetary base, the money multiplier, and the money supply.