Re: Money, Taxes, and Government Debt

[wfhummel@xxxxxxxxxxxx (William F. Hummel)]

Ed Wood questioned this statement of mine.

>>                          The Treasury's   ...
>>.....Its commercial bank accounts are a part of the
>>banking system reserves, i.e state money.

Let me offer a more serious and accurate response.  The
commercial bank accounts where the Treasury deposits its revenues
from taxes and bond sales are known as TT&L accounts.  When the
checks of the payees clear, they become reserves of the bank at
which they were deposited.  However reserves themselves can only
exist as bank deposits at the Fed or as vault cash.  The TT&L
accounts are liabilities of the banks, not reserves per se.

The Treasury makes all of its own payments out of its account at
the Fed, known as the General Fund.  Why doesn't the Treasury
simply deposit its revenues directly into an account at the Fed?
The answer involves the issue of maintaining tight control of the
Fed funds rate.  That in turn means controlling the banking
system reserves to balance supply and demand for reserves among
banks to meet their reserve ratio requirement.  The Treasury
helps this process by transferring funds from TT&L accounts to
its Fed account as it makes payments out of that account to cover
government spending.

Those who receive large government checks will promptly deposit
them into their own bank accounts which would increase banking
system reserves.  The Treasury offsets that increase by
transferring an equal amount from its TT&L account to its Fed
account.  [The Treasury's Fed account is not a part of the
banking system reserves.]  Since incoming revenues from taxes and
bond sales are not synchronized with government spending, the
TT&L accounts provide a buffer that keeps the fluctuation of
banking system reserves at a level that the Fed can handle
through its own Open Market Operations.

All of this goes to explain why I do not accept the Mosler/Wray
thesis that the government must spend before it taxes, from which
they build a structure based on the (true though academic)
principle that taxes cannot *finance* government spending.

William F Hummel