Established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. The Treasury Department manages the U.S. government’s expenditures and its revenue-raising functions. Here we examine the Treasury’s responsibilities, particularly the reasons for its borrowing, and the means by which it takes on debt.1
The Treasury’s Responsibilities
The U.S. Treasury is divided into two divisions: departmental offices and operating bureaus. The departments are mainly in charge of policy making and managing the Treasury, while the bureaus’ duties are to take care of specific operations. The operating bureaus include the Internal Revenue Service (IRS), which is responsible for tax collection; the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money; and the Office of the Comptroller of the Currency, responsible for safeguarding the federal banking system.2
The Treasury’s primary tasks include:
- Federal tax regulation, enforcement, and collection
- Paying all liabilities of the federal government
- Prescribing tariff rules and regulations
- Printing and minting U.S. notes and U.S. coinage and stamps
- Supervising national banks, federally chartered banks, and thrifts
- Advising the government officials on both national and international economic, financial, monetary, trade, and tax policy and legislation
- Investigating and prosecuting federal tax evaders, counterfeiters and/or forgers
- Managing federal accounts and the national public debt2
The National Debt
Federal legislation, enacted in consultation with the Executive Branch, authorizes spending levels for federal government operations and programs. Often, however, the government may run a budget deficit by spending more money than it receives in current revenues from taxes (including customs duties and stamps). To finance a deficit, the government may raise money by taking on debt, often by borrowing from the public.
From its beginnings, the American government has relied on borrowing. Even before the adoption of the Declaration of Independence, the Continental Congress issued bills of credit to finance the Revolutionary War in 1775. After Alexander Hamilton became Secretary of the Treasury in 1789, the national government took on responsibility for the full repayment of all war debts. Since then, the federal debt has been fueled by more wars, economic recession and inflation. Today, the federal government debt is a result of accumulated budget deficits.
The Role of Congress
Up until World War I, the Executive Branch needed Congressional approval every time it wanted to borrow money. Congress would determine the number of securities that could be issued, their maturity date and the interest that would be paid on them.
With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was granted borrowing authority up to a debt limit expressed as a number, a “ceiling” on the total amount that it could borrow without seeking Congress’s consent. The Treasury also was 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 must receive additional authorization from the legislative branch.4
When the debt ceiling is reached, the Treasury Department must find other ways to pay expenses. The debt ceiling has been raised or suspended several times to avoid the risk of default. And there have been several political showdowns between Congress and the White House over the debt ceiling amount, some of which have led to government shutdowns. Often, the debt ceiling is used as leverage to push budgetary agendas. Fairly recently, the debt ceiling was raised in 2014, 2015, 2017, and 2019. In August 2019, former President Trump signed a bill to suspend the debt ceiling through July 31, 2021.
On August 1, 2021, the Treasury Department implemented extraordinary measures, authorized by law, to finance the government on a temporary basis by suspending government investments in certain federal benefit and retirement funds. On September 8, 2021, the Secretary of the Treasury notified Congress that cash and extraordinary measures likely would be exhausted during October 2021, and urged prompt adoption of a suspension of, or increase in, the debt limit to prevent adverse economic consequences at that time. 5 As of Dec. 30, 2021, the U.S. debt was over $29 trillion.
$31.4 trillion
The approximate amount of the current U.S. debt ceiling, as set by the Congressional vote on Dec. 15, 2021, and signed into law by President Biden on Dec. 16. The sum represents a $2.5 trillion increase in the ceiling.
Who Owns the Debt?
U.S. Government 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; short-term T-bills are offered regularly, as well as quarterly notes and bonds.
When a debt instrument has matured, the Treasury can pay the cash owed (including interest) and reduce its total debt by the amount of the payment; or it can issue new securities, thereby maintaining a corresponding amount of debt. Debt instruments issued by the U.S. government are considered 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 daily. 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. The total debt amount 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 wartime, a government needs more money to support the effort. To finance its war 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 Sept. 11, 2001, Congress passed the U.S.A. Patriot Act. 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 were basically Series EE savings bonds with the words “Patriot Bond” printed on the top half. They were issued between 2001 and 2011 (after which the Treasury stopped issuing paper bonds). Patriot Bonds have the standard EE bond terms and conditions, including a 30-year term. 78 The Treasury also has become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
The Bottom Line
The public debt is a U.S. government liability, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way for the government to reduce debt is for the federal budget‘s expenditures to cease exceeding its revenues. Authorization for the annual expenditure and revenue measures that, together with non-discretionary government obligations like Social Security, constitute the budget requires the passage of these measures by the legislative branch and signing by the president. Thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country’s only choice. The size of a deficit reflects economic circumstances and officials’ policy and political judgment in setting the debt ceiling.
ARTICLE SOURCES
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1. U.S. Department of Treasury. “Act of Congress Establishing the Treasury Department.” Accessed Dec. 30, 2021.
2. U.S. Department of Treasury. “Role of the Treasury.” Accessed Dec. 30, 2021.
3. U.S. Department of Treasury. “History of the Treasury.” https://home.treasury.gov/about/history/history-overview/history-of-the-treasury. Accessed Dec. 30, 2021.
4. Congressional Research Service. “The Debt Limit.” https://sgp.fas.org/crs/misc/IF10292.pdf . Accessed Dec. 30, 2021.
5. Secretary of the Treasury. “Debt Limit Letter to Congress.” https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress_20210908_FINAL-Pelosi.pdf. Accessed Dec. 30, 2021.
6. US Debt Clock. “USDebtClock.org .” Accessed Dec. 30, 2021.
7. U.S. Department of the Treasury. “The Patriot Savings Bond.” Accessed Dec. 30, 2021.
8. Treasury Direct. “Series EE Savings Bonds.” https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds.htm . Accessed Dec. 30, 2021.