Introduction to Finance

dealer system
for marketable U.S. government securities occupies a central position in the 
nation’s fi nancial markets. The smooth operation of the money markets depends on a closely 
linked network of dealers and brokers. Bank and nonbank dealers report their daily activity in 
U.S. government securities to the Federal Reserve Bank of New York. New dealers are added 
only when they can demonstrate a satisfactory level of responsibility and volume of activity. 
The dealers buy and sell securities for their own account, arrange transactions with both their 
customers and other dealers, and also purchase debt directly from the Treasury for resale to 
investors. Dealers do not typically charge commissions on their trades. Rather, they hope to sell 
securities at prices above the levels at which they were bought. The dealers’ capacity to handle 
large Treasury fi nancing has expanded enough in recent years to handle the substantial growth 
in the government securities market. In addition to the dealers’ markets, new issues of federal 
government securities may be purchased directly at the Federal Reserve banks.
Tax Status of Federal Obligations
Until March 1941, interest on all obligations of the federal government was exempt from all 
taxes. The interest on all federal obligations is now subject to federal income taxes and tax 
rates. The Public Debt Act of 1941 terminated the issuance of tax-free federal obligations. 
Since that time, all issues previously sold to the public have matured or have been called for 
redemption. Income from the obligations of the federal government is exempt from all state 
and local taxes. Federal obligations, however, are subject to federal and state inheritance, 
estate, or gift taxes.
Ownership of Public Debt Securities
The U.S. national debt must be fi nanced and refi nanced through the issuance of government 
securities, both marketable and nonmarketable.