What Fuels The National Debt?

What Fuels The National Debt?
by Reem Heakal (Contact Author Biography)


First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.


Responsibilities of the Treasury



The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)



The primary tasks of the Treasury include:

• The collection of taxes and custom duties
  


• The payment of all bills owed by the federal government
  


• The printing and minting of U.S. notes and U.S. coinage and stamps
  


• The supervision of state banks
  


• The enforcement of government laws including taxation policies
  


• Advising the government on both national and international economic, financial, monetary, trade and tax legislation
  


• The investigation and federal prosecution of tax evaders, counterfeiters and/or forgers
  


• The management of federal accounts and the national public debt

The National Debt



A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)



The Role of Congress



Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.



Who Owns the Debt?



The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.



Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.



The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).



War Time



In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.



The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.



Conclusion



The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.



For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)



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