As we have seen, after it buys some gold, the Treasury usually issues an equal amount of gold certificates (a Treasury liability) and hands them to the Fed (for whom they are an asset), so that the Treasury can replenish its deposit account at the Fed. However, it is really the gold purchase that increases bank reserves, not the subsequent issue of gold certificates. Since gold, perse, does not appear on the balance sheet of the Fed, we had to talk about the gold certificates while we were confining ourselves to the Fed’s balance sheet. But now that we are bringing the Treasury explicitly into the picture, we can go right to the heart of the matter: When the Treasury buys gold, bank reserves rise, and when the Treasury sells gold, bank reserves fall.
A second aspect of Treasury operations that affects bank reserves is changes in the Treasury’s deposits at the Federal Reserve banks. Since we have just seen the T-accounts illustrating this process, there is no need to repeat them.
Finally, we have to take account of the fact that the Treasury also issues a small amount of our currency, including all of our coins. Actually, the Bureau of Engraving and Printing operates the printing presses for bills (this is not the same thing as the Government Printing Office, although for all practical purposes maybe there isn’t much difference), and the Bureau of the Mint manufactures the coins in three coin factories that are located in Denver, Philadelphia, and San Francisco. Both of these bureaus are departments of the U.S. Treasury.
The impacts on bank reserves of changes in Treasury currency outstanding are the same as the effects of Federal Reserve notes. Thus the T-accounts presented above apply here as well. The reason is straightforward: There is no difference between currency that is in the form of Federal Reserve notes and currency (such as U.S. notes or silver certificates) that is issued by the U.S. Treasury. Regardless of who issued it, all coin and bills in bank vaults count as reserves. Thus when the public decides it wants to hold more currency-because a trip to the supermarket calls for a fifty-dollar bill rather than a twenty-then bank reserves fall dollar for dollar with the drain of currency out of bank vaults into the purses of the public. It doesn’t matter whether the currency leaving the banks is in the form of Federal Reserve notes or Treasury-issued money. And conversely, when the public redeposits its change- nickels, quarters, and a few dollar bills-back in the banking system, bank reserves rise dollar for dollar with the currency reflow regardless of the type of currency being redeposited.