Monday, November 24, 2014

The Federal Reserve and its Direct Purchases of US Government Debt

The following is a fascinating paper by Kenneth D. Garbade:
Kenneth D. Garbade, “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks,” Federal Reserve Bank of New York Staff Report No. 684, August 2014
Garbade examines how the US Federal Reserve originally had the power to directly buy US government debt, and how this was done frequently from 1917 to 1935, in 1942 (during WWII) and some other years too.

Bill Mitchell also has a nice analysis and summary here:
Bill Mitchell, “Direct Central Bank Purchases of Government Debt,” Billy Blog, October 2, 2014.
Bill Mitchell also notes how Australia (before the 1980s) had a similar “tap” system in which the Australian central bank could directly purchase government bonds from the Treasury.

This is all fascinating and lost history and, as Bill Mitchell notes, the idea that central banks should be forbidden from directly purchasing government debt is a piece of neoliberal fiction. There are clear lessons for today too. We have already seen how indirect central bank purchases of government debt on a large scale can limit government-debt-to-GDP ratios. It would be easier and more effective for central banks to do this directly, especially for nations like Japan where government-debt-to-GDP ratios are already very high.

Garbade, Kenneth D. 2014. “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks,” Federal Reserve Bank of New York Staff Report No. 684, August.


  1. FYI

    "Given the rejection of the “funding complex”, the practical issue was to devise a debt
    management technique which facilitated keeping the public as liquid as they would like.
    Keynes argued that the technique of the “tap issue” provided such a policy: “it is the
    technique of the tap issue that has done the trick”.28 Under the tap system, the Government
    announced the price and maturity of the bond being issued, but set no limits to the cash
    amount of that issue. The “tap” of the bond issue was held open so individuals and
    institutions could purchase when and whatever quantities they desired. The system,
    therefore, enabled the public to choose the quantity of debt issued at each degree of liquidity,
    at the price set by the Government."

  2. What is the difference in economic terms between the CB directly purchasing govt debt and the CB indirectly purchasing it after the govt has first sold it the the public ?

    1. Also : How does direct v indirect purchase of debt make a difference to debt/gdp ratios?

  3. Replies
    1. So that these things can happen.