This is a holdover from capitalism’s roots in feudalism. Only the well-born were allowed to own land and everyone else paid rent to support the elite class. That pretty much sums up our economic system right down to the money supply.
Treasury bonds were a method to level out wild swings in the money supply between Congress spending and the collection of taxes. They simply took money out of circulation, paying a small dividend for giving up liquidity, and made it unconvertable to gold to defend the gold reserve. The money to purchase them had already been spent, or there would be no excess money in the system to do so. The monopoly issuer of the currency never had to “get” money before spending, so it is more accurate to say that spending “funds” bonds (and taxes) than the opposite.
The rate paid to investors in Treasury instruments has swung wildly as it represents the base cost of money to banks from which they calculate what to charge as interest on private sector lending. As such, it can have a dramatic effect on the economy, cooling it off with higher rates should it get overheated, or providing an incentive for business investments and private credit if the economy needs a boost.
The original purpose of bonds was made moot when we left the gold standard, but the requirement that Treasury issues them to “match” (not fund) deficit spending by Congress was left in place to give the Fed leverage in moving rates up or down. The problem with this is that it redirects government spending from the public purpose to payment of interest to the already extremely wealthy and banks.
Higher interest rates produce involuntary unemployment in the economy as more private money must be directed to paying interest as well which puts inflationary pressure on everything sold, but takes its toll on the poor and middle class, as well as small business, as their leverage over their own wages disappears in the absence of unions. The expense of the safety net and automatic stabilizers also increases in business cycle downturns which produces more government deficits and bonds for the wealthy to purchase.
This would suggest that the underlying purpose is not to control inflation, but to keep labor in its place and provide income insurance for the masters of the universe via debt service payments from our “democratically elected” government.
