Monetary Aspects of Changes in Treasury Cash Balances

Abstract

The monetary impact of Treasury operations in connection with what is commonly understood to be debt management-that is, sale, exchange, or redemption of debt instruments, determination of interest rates and maturities offered, and the related questions of debt ownership-has been extensively discussed in the economic literature of recent years. Such discussion has, however, largely neglected an aspect of the problem which we may refer to as asset management rather than debt management. This aspect, which came to the fore as an important part of the over-all Treasury function during World War II, is the size, distribution (as between commercial and Federal Reserve banks), and use of Treasury deposit balances. Since shifts and other changes in these cash balances may at times have considerable effect on credit conditions and monetary developments generally, an inquiry into the various factors involved may be fruitful. From earliest times the Treasury made use of private banks in varying degrees as depositories for public monies. From 1863 to 1914, the depository function was shared by National banks and the subtreasuries. From 1914 to World War I, the Treasury's working balance was carried largely at the Federal Reserve banks, National banks being used as depositories only in special cases, such as those required by law in connection with postal savings accounts. The use of private bank depositories for the carrying of funds derived from the sale of government securities was introduced during World War I, and was continued to a lesser degree throughout the interwar period. Until 1935 these Treasury accounts were exempt from reserve requirements, although until 1933 the depository banks were required to pay interest to the government on such balances. After 1935 (and until 1943) deposit accounts due the Treasury were subject to the same reserve requirements as other demand deposits. They remained small in size until World War II. It was to be expected that Treasury balances would increase greatly during the war, particularly during and immediately after war bond drives. (Figure 1.) The use of War Loan Accounts, as they then came to be called, was greatly extended after 1943, when reserve requirements against these deposits were suspended. Although the exemption from reserve requirements was withdrawn as of June 30, 1947, banks have continued to maintain these accounts in the postwar period. Their use has been further expanded by the practice, begun in 1948, of permitting banks to credit to these accounts not only the proceeds of security sales, but also funds arising from payroll taxes under the old-age insurance and railroad retirement programs, certain excise taxes, withheld income taxes, and, in certain instances, large individual income tax payments which had formerly been deposited by the Director of Internal Revenue with Federal