Re: two currencies and Korean war

[William F Hummel <wfhummel@xxxxxxxxxxxx>]

Ted Winslow wrote:

>Per wrote:
>
>> The financial deficit is the excess of government spending over taxes and
>> other fees. If no taxes were collected, then the whole of government
>> spending would directly increase the monetary base. There are two ways of
>> limiting its increase (besides cutting back on spending): the levying of
>> taxes and other fees, and the sales of government debt instruments. What I
>> had in mind when I said that the second of these methods is of limited
>> importance, I meant that quantitatively speaking, taxes and fees are usually
>> much greater than the net sales of debt instruments.
>>
>> I would have thought all this to be fairly straightforward and standard
>> doctrine, as presented in any textbook on the subject.
>
>Taxes are much larger than government borrowing to avoid or minimize
>deficits (which are considered a very bad thing).  What does it have to do
>with limiting the growth of the monetary base?  Central bank purchases and
>sales of government debt can be used to change the base but this has no
>necessary relation to the deficit or to taxes, does it?

>Collecting no taxes
>would leave the monetary base unchanged if no part of the spending was
>financed by borrowing from the central bank.

This is a curious statement.  Unless some new definition is being
invoked, government debt is what is generated by the deficit
spending of the Treasury.  Zero tax revenues would imply that all
Treasury spending is "financed" by the sale of Treasury
securities either to the public or to the central bank.  If the
latter, then the monetary base must surely increase with that
spending.

The central bank could sell Treasury debt from its own portfolio
to the public to soak up the base money created by Treasury
spending for a short period.  But that would end when the supply
of Treasury securities in the central bank's portfolio was
depleted, thereby ending any control by central bank over the
monetary base.

William F Hummel