The Definition of a Government Bond and its Relationship to Money Creation

Executive Summary

• The US Treasury creates money through issuing debt — or a government bond, not through directly issuing money itself.

Introduction

The Fed and the US Treasury relationship is extremely bizarre, and few people understand its implications. The Treasury cannot issue money. Instead, it has to issue a bond, which the Fed purchases. However, the Fed creates this money. It is extraordinary that the US dollar, which is actually a Federal Reserve Note (and issued by a private bank), purchases Treasury bonds from the US government with money that it creates from nothing. The situation is made entirely strange when one considers that issues go onto the Government debt. However, if the government could issue its own currency, there would not be any debt. The US Government would only have to restrict money creation so that it maintained relatively stable price levels.