ABSTRACT
This chapter focuses on the contribution of debt policy to economic stability and, in particular, to checking inflation. Debt holdings by nonbank investors present a difficult problem. Sales by nonbank holders to the Federal Reserve not only give them cash but also add to bank reserves, just as do direct sales by commercial banks. Since the effects of yield changes on security prices are greater the longer the maturities of the issue, and since long-term issues are held largely by nonbank investors, this is where the major problem of stability arises. Operations on the short end of the rate structure are more feasible and restriction of bank credit might be achieved, perhaps, at the cost of rising short rates only. With higher rates on short-term government securities, commercial banks will be less likely to shift into commercial loans and other assets and expand credit in the process.
