Two

Faces
of
Debt Federal Reserve Bank of
Chicago
This booklet is the fifth revision of "Debt -- Jeckyl and Hyde," originally published by the Federal Reserve
Bank of Chicago in the November 1953 issue of its monthly review, Business Conditions. The original
article was written by Dorothy M. Nichols. The latest revision was written by Anne Marie L. Gonczy and
Timothy P. Schilling.
First revision: October 1963 Second revision: February 1968 Third revision: October 1972 Fourth revision:
August 1978 Fifth revision: September 1992

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Types of Debt Owed, by Sector [back]

(billions of dollars)
Households Businesses Governments Financial
Institutions
Rest of World
-- Loans, securities, and other payables -- Mortgages 2,934 Farm
mortgages
126 Bonds 515 Bonds 120
Consumer credit
84 Savings
bonds
611
Other borrowing
809 Other
976 Other
3,786 Pension fund
1, 961 Business mortgages
federal
reserves
investment securities 265 Bonds 1,089 State and

849 Insurance
813 Borrowing
35 local
reserves
from banks securities

120 Trade
759 Pension

1,014 Borrowing
Commercial Payables
fund and
from Federal
paper insurance
Reserve and reserves
Home Loan banks
75
Taxes Payables
58 Other
payables
102 Borrowing
on securities
380 Other
borrowing
105
Borrowing from banks
741 Commercial
paper
366
Commercial paper
117 Mutual fund
shares
579
Finance company loans
309 Other
liabilities
465
Foreign loans and investment
549
Other borrowing

155
-- Money-type liabilities -Currency in circulation
254 Commercial
bank deposits
2,291 Foreign
currency
113
Deposits at Federal Reserve banks, vault cash, and other
155 Savings
institution deposits
1,251
Money market mutual funds
498
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obtain as much credit as he or she wants and may have to accept a relatively
short&term loan with higher payments than expected. However, the increasing number

of mortgage options available (shorter maturities, balloon payments, adjustable

mortgage rates, prepaid points) has made mortgage financing more accessible. Still, if
none of these alternatives are viable, the consumer may have to consider renting
instead.
Although most borrowers have some choice in the terms they offer lenders for the use
of funds, the federal government is unique in its appeal to the whole range of lenders.
Because of the huge volume of its borrowing, the ease with which its debt can be
traded, and its superior credit rating, the government can exercise considerable choice
in the terms it offers and accepts. A major task of public debt management is tailoring
government securities to fit the needs of all types of lenders && individuals, depository
institutions, pension and trust funds, and businesses && that have funds available for
different periods and have different earning and liquidity requirements.
Given its ability to offer attractive terms to all lenders, the federal government plays a
particularly significant role in the debt market vis& &vis the other borrowers with which it
competes. Like any borrower, when the federal government enters the debt market to
obtain new credit, the increased demand has the potential to raise the price of credit,
i.e., the general level of interest rates. Because the federal government is generally
willing to pay whatever rate is necessary to attract the funds it needs, and because its
debt is very safe and liquid, lenders typically meet the government"s needs or demand
for credit. Other borrowers, however, generally must offer even more attractive terms if
they want to attract credit. When borrowing by government comprises only a small
portion of the total new debt desired, its impact on interest rates is generally small.
However, as the governmental portion of total borrowing increases, the potential impact
on interest rates also increases, and private borrowers are forced to offer even higher
rates if they wish to obtain credit. Concerns have sometimes been raised that a large
volume of federal borrowing !crowds out! other borrowing because private borrowers
are unable to offer terms attractive enough to obtain all the credit they desire.
While government debt can be attractive to all lenders, debts of the major types of
financial institutions && especially commercial banks and savings institutions && are
particularly well suited to the requirements of small savers. These institutions generally
stand ready to repay funds left with them, in exact dollar amounts and immediately upon
request. To be able to meet such demands, they must invest part of their funds in
assets that can be readily sold at