RICHARD V. ADAMS
Open market operations are the primary way in which the Fed conducts 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 government--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 periodically or at maturity.
A second category of nonmarketable securities is issued to government accounts themselves, such as the Social Security account. When