RICHARD V. ADAMS

Open market operations are the primary way in which the Fed con-
ducts monetary policy. Since open market operations consist of the
buying and selling of government debt, to understand the operation of
monetary policy one must understand how the government securities
market works. In this essay I describe the operation of one important
player in the debt markets--the Treasury--and how it manages the
government debt.

The U.S. government is in debt ( 1991) to the tune of $3.5 trillion.
This debt has accumulated over the years because the revenues of the
government have not been equal to the expenditures of the govern-
ment--it is that simple. The consequences of this debt and the ongoing
deficits and the accumulation of $3.5 trillion of debt have been the
subject of much debate among economists, politicians, and concerned
citizens, but that is not the topic of this essay. The subject here is
technical: how that debt is managed so that new deficits are financed
and old debt coming due is refinanced. Careful debt management is
necessary so that government has the funds it needs when it needs
them, and so that the cost of borrowing, in terms of interest, is held to a
minimum.

The government's debt consists of two general categories: marketable
and nonmarketable. The nonmarketable securities are of three types:
First there are the savings bonds that individuals buy. This debt is
redeemable at par when it matures and interest is paid either periodi-
cally or at maturity.

A second category of nonmarketable securities is issued to govern-
ment accounts themselves, such as the Social Security account. When

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