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The Treasury and the Fed

Dear WSJ Editors:
Your letter-writer Robert Eisenbeis (“Treasury and the Fed’s Cash Flow, Jan. 19) is missing the forest for the trees. He is correct that the act by which the Fed rebates its interest earnings on Treasury bonds back to the Treasury does not itself generate revenue for the government, any more than a husband transfering funds to his wife is a source of household revenue. But he is completely wrong to assert that “Your editorial ‘The Fed Cash Machine’ (Jan. 12) is wrong in implying that the Fed has been a ‘huge money-maker for the Treasury.’” The Fed certainly has been a huge money-maker for the federal government. The huge money-making comes earlier, before the rebate, when the Fed purchases additional Treasury debt for itself in the open market. The Fed pays by increasing its own monetary liabilities, making a profit for the government by converting Treasury debt into lower-yielding Fed debt (bank reserves or zero-yielding currency). As Eisenbeis himself notes, the Treasury debt "has effectively been retired" by this act. Expansion in the Fed's liabilities is an undeniable source of government revenue. To deny this would be like denying that a husband is contributing to household revenue when he pays his wife’s bills by running a counterfeiting operation in the garage.

  • A typo, I think: this phrase "the Fed has been a ‘huge money-maker.." should have a "not" in it, shouldn't it?

    • anarcho capitalist

      He's being ironic; the Fed has been a "huge money maker" meaning the Fed has created huge amounts of money via the printing press…

  • Luke M

    Essentially all of the Fed's profit comes from $100 bills, and I would suggest that most of the $100 bills are held for purpose of illegally avoiding taxes. Given that, the "optimal" seignorage is probably not zero; in fact, it may be optimal to maximize seignorage!

    • Luke M

      (In case it isn't clear, I'm talking about profits on the so-called permanent money base. Not speculative trading profits, which have been considerable since 2008).

  • Larry, with all due respect.
    Excuse me???
    ""The Fed certainly has been a huge money-maker for the federal government. The huge money-making comes earlier, before the rebate, when the Fed purchases additional Treasury debt for itself in the open market.""

    ANY funds advanced to the Treasury as a result of its debt-issuance had to come from existing money at that time of issuance.

    The Treasury is a mere ‘user’ of the Federal Reserve Banking System’s money.
    In using that money, the advance to the Treasury happens whenever the debt is first issued, moving private bank account money to the Treasury’s TGA, from where it is spent back into private bank accounts. So, what ?

    When the Fed buys that Treasury debt from the private bank holders, NOTHING happens to any Treasury balance. Sorry, there is zero truth to your assertion that the Fed is, in any sense, a money-maker for Treasury.
    The FRBS is a money-TAKER from the Treasury and the taxpayers, using Treasury to take from the taxpayers pocket INTEREST on the Treasury’s debt, but also on EVERY dollar ever created by the entire FRBS for a hundred years…… In perpetuity.
    The purpose of the FRBS is to feed to galling wealth-appetite of the Creditocracy. Not the Treasury.
    The FRBS is not the spousal equivalent of the Treasury.
    One is a lender; one a borrower……… From the other.
    I think we all know who RULES in a borrower-lender relationship.
    It ain’t the Treasury that gains ANYTHING.
    It’s the FRBS that gains EVERYTHING.

    • Joe,

      What interest rates do you think the Treasury would have to pay if the FedResBank stopped buying Treasuries? What do you think would happen to the relative price between Treasuries and everything else if the FedResBank didn't expand the monetary base to do so?

      • First, I’m all in favor of the Fed stopping any purchases, and selling the public bonds back in to the market, and letting that price be found. The Fed has other interest rate mechanisms at play that can prevent market manipulation of interest rates.

        The Fed has never had a purpose of supporting the government in any of its policy initiatives; support of the government does not get a second look from reserve bankers.
        The federal reserve is not part of the government.

        The Fed’s initiatives are aimed at saving the finance and banking industries, which it is part of, primarily because these presently represent an unnecessary threat to the real economy.

        If by the monetary base you mean the Trillions in excess non-cash reserves that the Fed used to acquire its balance sheet, then all those excess reserves did was give comfort to more lending by the banks, lending which did indeed increase the money supply. And which did indeed increase the debt.
        Which was its purpose.

        Only the private bankers can increase the money supply. Except for coins. The Treasury does issue coins into circulation.

        • The Federal Reserve was created by and exists at the behest of Congress. If you don't like its lack of transparency, it's occasional undermining of fiscal policy, its ownership claims, its management structure, or its mere existence, only Congress can change those things–not the FR board, not the banks, not the Trilateral Commission, not the Bilderberg Group, and not the Rothschilds. Regardless of de jure claims, it is de facto as much a Federal government institution as the EPA.

          What do you think Federal spending would be without the Federal Reserve's purchase of Treasuries? Do you know who the single largest purchaser of Treasuries is?

          Do you think the FedRes would not do everything in its power to prevent the fall of the Federal government–its creator, master, source of power, and reason for existing?

          • Thanks for the feux-lesson on what the Federal Reserve Banking System is…… something ‘federal, because the Congress created it. The Congress has created all the laws on how to charter every private bankcorporation in this country, still they be not ‘federal’, but private profit seekers .
            I read Mullins and Silas Adams on the Fed almost 40 years ago, and am close enough to Edward Griffin's Jekyll Island banker-creation Theory for the Fed as anything else.

            So, originating in public law obviously does not make the FRBSystem public at all. And you really shouldn’t ask these questions unless you already know the answer…… to which I will reply…….
            Every employee of the EPA is a ‘federal’ employee, whose salaries are paid by the taxpayers, and the work of the agency is done for the public’s benefit. Not very well, these days. The EPA is a public agency.

            Every ‘federal’ reserve bank is a private bankcorporation, whose stock is owned, and who’s Board is majority-elected by its Member banks, who are each another private bankcorporation. The salaries of NONE of the federal reserve banker employees are paid by the taxpayers. The source of the private FRBS’ operating budget is the FRBSystem itself. Its revenues are privately generated……. There are no federal budget considerations of the FRBSystem, as there are with the EPA.

            Why would you care to paint the private FRBanking system as part of the government? There is a Bill that has been introduced to make the Fed part of the government.

            It could not have been entered as proposed law, had the Fed already been government. There was another back in the FDR day……. the Monetary Control Act of 1934.

            The private FRBSystem is part of the private economy, and its interaction with the government, besides paying agent and other payments system functions, is pretty much limited to managing the public debt……. Again this is where the sovereign government that inherently possesses the money power abdicates that money power to the private FRBSystem, and then borrows from that System the money that it has the power to create and issue for the public benefit in the first place.

            There is zero danger of the government falling or failing based on money machinations. Meanwhile the ‘protective’ policy agenda of the Fed, as feeble as it is, can be more accurately described as protecting….. NOT the government, but the national economy.
            Given that the FRBS controls the national economy, it IS in their interest to keep it afloat to grab some more financial profit.
            Is that a problem?

    • Larry White

      Joe, let me try again. Fed's interest income comes from its portfolio of Treasury and other bonds. What did it use to buy those bonds? It simply "printed money": it created new Fed "liabilities" against itself in the form of additions to the stock of fiat base money. (Following the standard usage, base money = [FRNs in circulation] + [commercial bank reserve deposits on the books of the Fed]). While it is true that the purchase of Treasury bonds by the public does not change the quantity of base money, that is not true of purchases by the Fed, which has a money-printing apparatus.

      Suppose a third-world central bank prints up 1,000,000 local currency units, delivers it to the government, and the government uses it to pay the salaries of government workers. That's government spending financed purely by an addition to the stock of money. If the US Treasury borrows $1m for a new spending program by auctioning off $1m in new debt, and the Fed buys that Treasury debt by issuing $1m in new US base money, such that debt in the hands of the public doesn't change, the net result is the same. $1m in new government spending is financed by a $1m addition to the stock of money. (There is no additional tax revenue, and there is no addition Treasury debt held outside the government).

      The Fed keeps a sizable cut (about $5b in 2014) of the cash flow from the assets it has acquired (Treasuries and MBS) with the money it has created. The rest ($99b in 2014) it transfers to the Treasury.

      • Larry, thanks for joining in. I appreciate it.
        Not sure the point of some of the interesting data presented.

        But, there’s this fog around the ‘government’ here that stems partly from the unnecessary fog around the ‘money’, and a little monetary-economic clarity is in order.

        You use the term 'monetary base’ as if the machinations of the Fed’s LSAP program had any connection with changes to the monetary base itself, or more importantly, any distinction to changes in the money supply ….. as in “printing all that money”.
        Which the Fed does not do.

        We’ve known for several generations what the BoE spoke out loud last year…… banks create money…. thus the ENTIRE money supply, out of nothing but DE Bookkeeping powers. The monetary base matters not to the banks’ money-creation powers.

        And the Fed is obliged to issue the balancing ‘reserves’ in order to make the payments system work, and generate profits for private bankers (having nothing to do with QE.)

        “Money”, it is they (the banks) create out of nothing, by adding digits to the monetary aggregates that make up the (M1)money supply. The only part of the monetary base that goes into the actual money supply is cash. And that FR Note ‘cash’ is issued into circulation by the private bankers, and not the government.
        While ‘cash in circulation’ is part of the monetary base, new notes issued since the GFC are about $400 Billion, a pittance compared to either money supply or central bank liability totals.

        The issuing of the non-cash reserves by the Fed has zero outcome on the money supply. Being only another extension of the entire “confidence-trick’ that serves as our money system.

        From the Fed:
        “The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
        The reserve balances are not money, and must be held by the banks in their own Fed account.
        The Fed is not “printing money”.

        Again, these are non-cash reserves and they have absolutely NO money power, and, as such are NOT “in the form of additions to the stock of fiat base money”. (??)
        First, another clue, the stock of 'real' fiat based money can be flipped heads or tails.
        Real ‘fiat’ base money enters circulation with a gain to the issuing public authority.
        What you are here calling “fiat base money’ does not really exist anywhere.

        The Fed did not print money or issue money in the transactions that swapped BS assets between the private banks and the Fed. The ‘reserves’ created as the Fed’s own liability (not a big deal, really) NEVER leave the inter-banking system….. nobody EVER borrows them, and NOBODY ever lends them. We do have a huge excess of these reserves…….. liabilities of the CB………. But the CB can’t figure out what to do with them. Their fail for a great CB opportunity.

        In closing, BTW, trying to paint the government with the machinations of the private banking system ……. ???

        “”Suppose a third-world central bank prints up 50,000 local currency units,””
        Gawd. Our private central bank has no authority to issue and circulate any currency units……. So this is a flawed supposition.

        Suppose the government took back the money power it has given to the FRBS and printed and issued all of the circulating media, in whatever form, that was necessary to achieve the productive potential of the national economy …. Without inflation or deflation?

        “”Government spending is financed by an addition to the stock of money. (There is no additional tax revenue, and there is no addition Treasury debt held outside the government).”
        Larry, it’s called a sovereign fiat money system.
        It’s what Martin Wolf, Lord Adair Turner and the IMF’s Kumhof have been calling for……. For some years now…. Reform to the money system.
        What’s the problem, again??

        • Larry White

          "You use the term 'monetary base’ as if the machinations of the Fed’s LSAP [Large-scale asset purchase, I presume] program had any connection with changes to the monetary base itself." Why yes, yes I do. How do you think the Fed paid for its asset purchases if not by expanding its own base-money liabilities?

          I'm afraid that you are quite unjustifiably letting the Fed off the hook for the behavior of the base, M1, and M2.

          "What you are here calling 'fiat base money’ does not really exist anywhere." I'm afraid I don't know to make sense out of this statement. Central banks do not exist? Central banks do not have monetary liabilities? The liabilities of central banks are not fiat?

          The 12 regional FRBs are nominally private. But they don't call any shots. Their policies do not come from their nominal shareholders, but from the Board of Governors of the FR System. Most importantly, each FRB's operating budget is determined not by its own management but by the Board of Governors. In fact, then, the Board controls the 12 regional FRBs. The members of the Board are all Presidential appointees, confirmed by the U. S. Senate. The Governors and all other employees of the Board are federal employees.

          • Thanks, Larry. Apology for the late reply

            “How do you think the Fed paid for its asset purchases if not by expanding its own base-money liabilities?”
            Sorry, expanding non-cash reserve balances of private bankers with an accounting media that does not circulate, is never loaned, borrowed or spent, and never enters the real economy of national GDP is not equivalent, or even related to, “money” printing.
            Which is what this was all about.

            Again, as I have said and shown above, non-cash reserves of the central bank-US issuance are not money. Did I not quote the Federal Reserve System publication THAT the reserves are not money and MUST BE HELD in the reserve account of the bank at the Fed.
            This is one of our issues, Larry.

            Here you correctly say that they are liabilities of the Fed, as according all the financial accounting standards legally define those terms. Of course, the Fed acknowledges they are accounting liabilities, but the Fed is clear to state that they are not money.
            If they are not money, then expanding them cannot be money-printing.
            Yet you trans-substantiate those non-money interbank settlement media into “money” , using for a reason that they are also defined as a component of ….. not “money”, but the separately defined ‘monetary base’.

            First, in having a discussion of whether the private central bank itself is “funding” the government when it expands its balance sheet relationship with its Member private banks, we should have a solid understanding of what is money, and what is money printing.
            Otherwise it is a charge without substance. I have already shown that the private bankers “print” all the money in the Fed’s 'money-supply' accounts by issuing loans that result in checking account deposit “balances”. Except the coinage, again.
            The Treasury has no back-door pickup of money printed at the central bank; rather the sovereign people’s government must go to private capital markets in order to borrow the funds it needs to carry out the public purpose. That public debt becomes a private monetary asset that trades in free capital markets. That the Fed swaps its interbank reserves temporarily to those banks, in order to seem to be doing “something”, is another tale of the day, but, again, it has absolutely zero effect on either the money supply, or the balance in the Treasury’s TGA account.
            So they can't be printing money.

            And I think that was the substance of this article.

  • anarcho capitalist

    My Dearest Fed,

    I need some money to pay the bills.

    With love,

    The Treasury

    Dear Treasury,

    Give me an IOU and I'll print that amount of money for you.


    The Fed

    Thank you my darling! Once I collect enough taxes, or sell an IOU to somebody else, I'll pay that IOU.

    The Treasury

    Don't mention it baby…

    • Borrowing by the Treasury has no real effect on the money supply.
      The Treasury borrows money already created by the private bankers and in circulation, and in bank accounts. It spends it right back into those private bank accounts.
      The Treasury is a user of the private bankers' money.
      So, what the Fed says to the Treasury is more like: "Give me an IOU and I'll get it from my friends who have it all already in their bank accounts …… and you can pay them back, with interest. From taxes. Or, just keep paying them the interest. Forever."
      Same as those bankers say to you and me.

      • So, you think the monetary base is a fixed quantity?

        • No, why do you ask ?

          • "The Treasury borrows money already created by the private bankers"

            So how do you imagine increases in the monetary base are able to be excluded from the purchase of Treasuries?

          • Hopefully to Vikevista , hopefully above…

            Any money-gain (from private TO Treasury) from the sale of Treasuries happens whenever the debts are first issued, and as I said, the Treasury borrows money previously created by the private banks. So the private banks print the money that funds the Treasury, and not the fed. The private bankers are the only “money-printers” here.

            The monetary base includes things that are NOT money, being non-cash reserves, accounting-entried settlement media used by the bankers in the fed’s payments system.

            Treasury debt, once on the “open” market, are a major capital investment media of relatively stable quality. Indeed they are used in capital asset swaps of all kinds throughout the banking system and elsewhere.

            There is an implied truth here that the Fed is expanding the money supply when it purchases (swaps) these assets…… “the cash machine” narrative.
            That’s all false.

            The Fed did not expand the “cash” assets of the banks and thus the money supply in these transactions. The money supply was expanded by the bank’s financing investments. The Fed merely expanded balances in Fed accounts of the banks, balances that the banks cannot spend or lend, and never count a nickel to the national economy.

            It’s not that the monetary base component of non-cash reserves are excluded from the swap. It’s that non-cash reserves are not ‘money’, and expanding them results in ZERO money printing.

          • "the private banks print the money that funds the Treasury, and not the fed. The private bankers are the only “money-printers” here."

            That what you say here is factually incorrect, is without controversy among economists, bankers, and schools of thought. Therefore, you have a substantial burden of proof to overcome. Can you provide such evidence?

  • Mike Sproul

    The Fed is not a counterfeiter. No counterfeiter puts his name on the currency he prints, or recognizes it as his liability, or stands ready to use his assets to buy it back.

    People seldom consider the printing and handling costs of Federal Reserve Notes. Let's say those costs amount to 2%/year. If the Fed's bonds yield only 3%, then the Fed's profit is only 1%.

    • Larry White

      Mike, to say that the Fed funds government spending LIKE a counterfeiter funds his own spending is not to say that the Fed is a counterfeiter.

      You are over-estimating the cost of FR Notes ten-fold. For 2013, The Fed ( reports spending $705m on new currency (printing, transportation, and destruction of mutilated currency) plus another $550m on cash operations (processing, paying, receiving, etc.). Total $1.255b. Currency in circulation that year was $1.198t, or $1198b. So the cost was not 1.0% but 0.104%.

      • Mike Sproul

        I'll use your defense and point out that saying "Let's say those costs amount to 2%" is not to say that those costs are 2%.

        But not only is the Fed not a counterfeiter, it is not LIKE a counterfeiter. The Fed is like a guy who borrows (from users of currency) at 1% and turns around and lends (to the government) at 3%.

        This is not to say that I'm comfortable with the idea of the Fed's profits. Old-time note-issuing bankers used to say that issuing notes was not profitable, but was done as a form of advertising. That's what the zero-profit theorem leads us to expect for competitive banks. Now, maybe the Fed's profits result from its monopoly position, but there are probably lots of small countries that are close to being competitive issuers of currency, and yet they still seem to earn profits from currency just like the (monopolistic) Fed.

        • Larry White

          So the Fed doesn't (as a counterfeiter also does) expand the quantity of base money?

          • Mike Sproul

            The Fed only issues new dollars in exchange for a dollar's worth of new assets. Those assets are identified on the Fed's balance sheet as "collateral held against federal reserve notes". The new FRN's are recognized by the Fed as its liability.

            The counterfeiter, in contrast, does not put his name on the money he issues, does not recognize that money as his liability, does not hold assets against that money, and does not stand ready to use his assets to buy back that money.

            So, while both the fed and the counterfeiter do expand the quantity of FRN's, the counterfeiter causes inflation while the fed does not. By analogy: GM can expand the quantity of GM shares, but of course GM's assets rise in step with the issuance of new shares, and the share price would not change. But if a counterfeiter printed perfect fake shares of GM, then GM's assets would not change as the new shares were issued. Counterfeiting causes a pure dilution of GM shares, so the share price would fall.

          • Larry White

            "the counterfeiter causes inflation while the fed does not." Pray tell, what did cause the double-digit inflation of the late 1970s? What has been causing the chronic inflation we've had since, say, 1960, if not nominal base money growth (determined by the Fed) exceeded growth in real demand to hold base money?

          • Mike Sproul

            Inflation happens when the quantity of money issued by the fed outruns the fed's assets. For example, if the fed initially holds assets worth 100 oz of silver, and it has issued $100 of FRN's, then $1=1 oz.(=100/100). If the fed then issued 2 more dollars, but gets assets worth just 1 oz in return, then the new value of the dollar is .99 oz (=101/102).

            So on my theory, inflation happens when money outruns its issuer's assets, while on your theory, inflation happens when money outruns the quantity of goods.

          • Mike, You seem to say that FRNs lose real value because the Fed creates FRNs to pay for Treasuries (its assets) while the Treasuries lose real value. An ounce of silver is always an ounce of silver, but a Treasury is only a promise to pay a specified quantity of FRNs over time, so the Fed can pay a current price for Treasuries (in FRNs) while the value of Treasuries (in silver say) falls, even expecting the real value of Treasuries to fall.

            This Fed policy seems calculated to enable the Treasury to "borrow" FRNs with a falling real value, thus enabling the Treasury to repay the Fed with less valuable FRNs than it borrows, and the Fed does not collect interest on the Treasuries it holds. This arrangement does seem like a sweetheart deal for the Treasury, at the Fed's expense, so Larry seems right to say that the Fed is a source of revenue for the Treasury, regardless of the semantics of "counterfeiting".

          • Mike Sproul


            Yes, it's a sweet deal for the treasury, but surely you see the difference between a counterfeiter and a guy who borrows at 1% while lending at 3%.

            What sets me off about "counterfeiter" is that mainstream monetary theory asserts that money's value is determined by money supply and money demand. The fed's assets and liabilities are not even mentioned, because the mainstream view says they don't matter. If this view is taken to its logical conclusion, it sees the fed as really being no different from a counterfeiter. That view, in turn, leads to a can of worms that is bigger that I'd care to handle in one blog post. Suffice it to say that if someone really thinks that the fed's assets and liabilities are irrelevant to the value of the dollar, they'd have a hard time explaining why every central bank I've ever heard of does in fact hold assets.

          • Mike,

            I understand the objection to "counterfeiting", but I don't see how the Fed is like someone borrowing at 1% and lending at 3%. When the Fed issues FRNs and exchanges them for Treasuries, I don't see how it's borrowing from the public at all. If banks borrow from the public to buy the Treasuries first, they must be reselling the Treasuries to the Fed at a nominal profit, but the Fed doesn't borrow the notes from anyone.

            I understand a bank issuing notes backed by collateral, like the value of a house, in a free banking system. If the bank's operation is sound, the notes ultimately are as valuable as the house, so a seller of the house will accept the notes in exchange for the house, knowing that he may claim an income stream from the bank by depositing the notes and that anyone accepting the notes from him may do likewise. In this scenario, the bank is hardly the lender at all. The home seller is the lender, and anyone accepting the notes from the seller becomes a lender. The bank is an accounting service.

            The value of these notes does not reflect some aggregate supply of and demand for money. It reflects the value of the collateral. If demand for money (for indirect exchange) rises, these notes don't become more valuable than the collateral. Instead, banks create more money to satisfy the demand, just as a bank created these notes to enable the home seller's transaction in the first place.

            But the Fed doesn't operate this way. Its assets are not like homes valuable to people. Its assets are entitlements to streams of the same FRNs it issues, streams of revenue collected forcibly by the state from taxpayers and either removed from circulation ("repaid to the Fed") or recirculated through state spending. In this sense, MMT makes more sense to me as a description of money (the U.S. dollar at least) in reality. I'm not advocating a policy here, only saying that MMT describes what the Treasury/Fed actually does better than a free banking metaphor. [I know that the Fed now also holds many mortgage backed securities, but this policy is still very recent, and I haven't thought about how it plays out in MMT.]

          • Mike Sproul


            When a bank (including the fed) issues and sells its notes, it is borrowing from the receivers of those notes, just like someone who issues and sells a bond is borrowing from the receivers of those bonds. If the bank pays no interest on those notes, but the printing and handling costs of those notes amounts to 1% (approximately true for $1 bills, but not for higher denominations), then the bank is effectively paying 1% for its "borrowing". If the bank uses its notes to buy 3% treasury bonds, then it is borrowing at 1% and lending at 3%. If the bank had not bought those bonds, then the treasury would have paid 3% to its bond holders and would never have seen any of that 3% again, but when the bank buys the bond and returns its 2% profit to the treasury, the treasury gets the 2%.

            "The value of these notes does not reflect some aggregate supply of and demand for money. "
            Amen, and well put. I wish mainstream monetary theorists understood that.

            If FRN's were nothing but claims to more FRN's, then FRN's would be holding themselves up by their bootstraps, and we'd be living in neverland. But some of those assets are real, physical things, and this anchors the value of the dollar.

            For example, a bank issues $100 of its notes for 100 oz of silver. Nothing weird yet. Then the bank issues another $30 of notes in exchange for an IOU that promises $33 payable in a year. Now, that last $30 of notes could be said to be nothing but a claim to more notes, but the denomination of the IOU is irrelevant as long as that 100 oz is there anchoring things.

          • Mike,

            We agree, but I'll go another round. Most FRNs are electronic these days, so 1% seems high. The Fed may use these FRNs to buy 3% Treasury bonds, but if it doesn't actually collect the 3%, it doesn't seem be lending at 3%. The same goes for a 2% yield if the Fed bears a 1% cost of producing FRNs. Would we say that a bank "lends at 3%" if every lending agreement requires the bank to return the 3% to the borrower, particularly if the bank will roll over the borrower's "debt" indefinitely while lending more and more? All of this "lending" and "borrowing" looks fictitious to me. At least, it's not using the words in the conventional way.

            In terms of the Fed's Treasury holdings, the real, physical things backing FRNs are the labor and other property of U.S. taxpayers, because Treasuries are entitlement to tax revenue. That's the central idea behind MMT, but we don't need all this talk of "borrowing" and "lending" to understand it. Again, I'm definitely not defending chartalism as a policy here, but chartalism seems to be what's actually happening.

            When a free bank issues promissory notes to the seller of a house and holds the title to the house as collateral, it owes interest to depositors of the notes, and over time, to balance its books, the bank must either withdraw these notes from circulation or use them to extend additional credit. We can even say that the bank necessarily withdraws these particular notes from circulation over time, because "reusing" these notes is equivalent to withdrawing them and issuing new notes to extend additional credit secured by other collateral. A bank withdraws its notes from circulation as borrowers repay them or as borrowers repay a standard of value for which note holders redeem their notes.

            No contingency ever compels the Fed to withdraw FRNs from circulation. It may choose to do so by selling its entitlement to tax revenue, but it is never compelled to do so. This distinction between the Fed and a free bank makes all the difference.

            The last $30 in your example may be secured only by the labor of a borrower. Labor alone can be sound collateral. The 100 ounces of silver doesn't secure these last notes. The laborer's ability to earn another 30 ounces of silver (or its equivalent in market value) secures the last $30 in notes. The bank may use the original 100 ounces to redeem notes before realizing the value of the last $30 in notes, but if it doesn't realize the latter value from the borrower ultimately, its books don't balance ultimately (assuming that its notes promise redemption in silver at $1/ounce).

        • One could easily implement a service accounting for mortgages as follows. Each circulating bank note specifies particular collateral (a particular house) securing it (via a serial number and an online ledger for example). Holders of these notes can verify that the collateral securing their notes is not over-leveraged (by this particular service anyway). An insurance fund could still spread losses across holders of notes backed by different collateral, which is what a free bank essentially does, but this sort of insurance is morally hazardous, since note holders then police their interest in the collateral less scrupulously.

          It's a mistake to think of a bank as the "lender", seems to me. The bank is an accounting service. Its note holders are the lenders, and they don't lend the notes as much as they lend their interest in collateral securing the notes. The notes are only accounting devices, signifying ledger entries.

          • Mike Sproul

            1. “Most FRNs are electronic these days, so 1% seems high.”
            FRN’s are, by definition, paper. You are thinking of what is normally called federal funds, which are purely electronic, and very low cost.
            2. “All of this "lending" and "borrowing" looks fictitious to me. At least, it's not using the words in the conventional way.”
            Yes, this is the point where people have to recognize that the fed is just an arm of the government. It’s easier to think of the government issuing notes directly to the public, in which case a note-issuing government is borrowing from the public at 1%, thus saving itself from having to issue 3% bonds.
            3. “In terms of the Fed's Treasury holdings, the real, physical things backing FRNs are the labor and other property of U.S. taxpayers, because Treasuries are entitlement to tax revenue. That's the central idea behind MMT, but we don't need all this talk of "borrowing" and "lending" to understand it. Again, I'm definitely not defending chartalism as a policy here, but chartalism seems to be what's actually happening.”
            I don’t see that as the central idea behind MMT at all. The whole idea of anything backing FRN’s is the antithesis of MMT. They speak of the price level being determined by the intersection of money demand and money supply curves, and they never breathe a word about backing, except to mock it.
            Chartalism holds that taxes give value to money by creating a demand for it, while the backing theory (aka the real bills doctrine) says that taxes provide the backing for money. Chartalism is explained with money supply and money demand curves, while the backing theory is explained with balance sheets.
            4. “the bank must either withdraw these notes from circulation or use them to extend additional credit. “
            The notes could stay in circulation as long as people want them, which could be centuries.
            5. “No contingency ever compels the Fed to withdraw FRNs from circulation. It may choose to do so by selling its entitlement to tax revenue, but it is never compelled to do so. This distinction between the Fed and a free bank makes all the difference.”
            I think that’s a mistake. The fed doesn’t need some outside party to compel it to do anything. The fed can stand on its own. If it credibly promises to back the dollar then people will value it. If not, they won’t.
            6. “It's a mistake to think of a bank as the "lender", seems to me. The bank is an accounting service. Its note holders are the lenders, and they don't lend the notes as much as they lend their interest in collateral securing the notes. The notes are only accounting devices, signifying ledger entries.”
            I can buy groceries by giving the grocer my $100 IOU, and I have just borrowed from the grocer. Or I could give my $100 IOU to a bank, and he gives $100 of his IOU’s (bank notes) to me, to spend at the grocery store. It’s borrowing either way, but in the second case the bank is only a broker. But if the bank issues its IOU (notes) to buy a building, then the bank is a real borrower.

          • 1. I accept this nomenclature, but the distinction between a paper FRN and an electronic record is not relevant to my point.

            2. "Borrow from the public" still seems a misnomer to me. The state sells entitlement to tax revenue for various reasons, but it doesn't borrow anything that it's bound to repay. It sells me a bond today, and if doesn't want to pay me principal and interest tomorrow, the Fed creates new currency to buy the bond from me. The state may devalue its currency this way, but this inflation is not equivalent to bearing a debt in the usual sense.

            3. I haven't read Mosler's academic work, so I don't really know how he formulates the theory. I wouldn't say that taxation gives value to money. Money has real value because people exchange things of real value for it. Taxation only compels people to use particular notes as money. If the productivity of U.S. citizens falls to 18th century levels tomorrow, the value of the dollar falls similarly, even if the force extracting taxes remains the same.

            Ultimately, people exchange goods of real value for money, but when I buy a Treasury bond, I buy the state's promise to shoot taxpayers (as a last resort) if they won't transfer real goods to me. Not being shot is really valuable, so we can think of these promises as "valuable assets" backing the state's currency, but I'm not sure this description contradicts the MMT talk of money supply and demand curves, where demand for money is demand for not being shot. These two descriptions seem equivalent to me. We can still call the money "backed" in the MMT, seems to me. The question is: backed by what?

            4. The question is: why do people want them? In the free banking scenario, people want the notes, because they can deposit them to receive a stream of valuable goods generated by collateral (which may be only the labor of borrowers) securing the notes. In the state money scenario, they want them because they must pay taxes with them. Of course, a state money system can blur this distinction, and the Fed does blur it.

            5. I suppose the Fed only needs to back its notes with the state's willingness to harm subjects refusing to pay taxes in the notes, and the fact that FRNs continually lose real value seems to support this supposition. The Fed system (including member banks) does hold other assets (other than entitlement to tax revenue), but these assets only illustrate the substitution of the Fed for a free banking system that would exist without the Fed.

            6. If you give my $100 IOU to a grocer, you have not borrowed from the grocer as much as you have converted my obligation to pay you into an obligation to pay the grocer. The grocer agrees to borrow from me, not from you.

            A bank issuing notes is the borrower in this sense, but this sense of "borrow" obscures the fact that the bank's note is only as secure as the bank's collateral. If we instead view the bank as only an intermediary between its note holders and the collateral securing its notes, then note holders may feel a greater need to police the value of the collateral. This policing is useful, because bankers can benefit by issuing IOUs with a nominal value greater than the real value of the collateral. That banking institutions fail in the long run when bankers behave this way needn't concern the bankers.

    • Andrew_FL

      Even Scott Sumner has thrown the word "counterfeiter" around. I think we can forgive Larry a mere analogy.

    • James Spyder

      Doesn't the fed just cover all of their operating costs and return the rest of the interest to the treasury? There is no profit.

  • nomorecranks

    Here is the issue and perhaps Larry (and George Selgin) can clarify this. Now, I don't know Larry's position but I will assume – and please correct me if I'm wrong – by association with the good Selgin and GMU that its similar.

    Now, of course the fed doesn't "print" money literally, its a colloquial usage of the phrase to denote what would be now typing-money, so I don't follow Joe Bongiovannis critique of this post. But here is the issue:

    Since, again, it is documented fact that MMT (Mad Money Typers) is project whos promotion is funded by George Soros – again documented fact:

    here is Mad Money Typer Bill Mitchel on INET:

    and KOCH, as Selgin can tell you all about that (once again proving there is no difference between the so-called "left" and the so-called "right" its a big scam to create false paradigms and co-op oppositions)

    HOW can FreeBankers criticize the Feds expansionary monetary-base and then with the other hand at the same time promote the platinum coin Mad Money Typer MMT Cranks who claim the Fed has been the tightest in history like Scott Sumner and Bill – the Soros Shill – Mitchell?

    The credibility factor here is dropping like the turtle and the bald eagle:

    • Larry White

      If you want to show that the other guy is a crank, it doesn't help your case to sneer or to imply guilt by association. You need to unpack his argument and show that it is unsound.

      No free banker I know promotes the ideas of MMT-school economists. Scott Sumner is not of the MMT school.

      Free Bankers want to end the Fed. While the Fed exists, there are various opinions among free bankers on the least damaging way for the Fed to run monetary policy. Whether or not you agree with Sumner, it is not a logical contradiction to criticize Fed monetary policy for a chronic tendency to excessive looseness and yet to think (with Sumner) that in a specific period it was too tight.

      • nomorecranks

        MMT, NGDP Targeting, and Public Banking a la the Ellen Brown crowd are all part of the same project, one promoted by george soros the other by the KOCHs to co-op opposition to the fed and give it new life. Its all part of the same Crank. The fussing of some technicality with-in one theory of another is a red herring. They all want serve to continue money printing by the fed – Give me a break.

  • Matt Young

    Great discussion.
    I treat the 75 billion or so in remits to the Treasury as a tax on the bond market. Seems the easiest method.

    Inflation? Integrating from the Nixon shock out to 2030, inflation plus price neutral growth is equal to money 'lost' by the currency banker. Lost in the sense of decoupled, as when Nixon decided not to redeem money for gold.

    How is the currency banker going to 'lose' money between now and 2030? Trading losses or net interest rates paid out. Principal, deposits or loans, are numerically tied to the double entry accounting system and net to zero, or become losses, ultimately. Net free money has to come from net rates paid or trading losses tied to the currency banker.

    There is no infinite horizon with which to produce net free money, neither mathematically nor historically. A look back tells us that we remake the monetary regime about every 40 years; mainly because the integration fails. Some theories propose that indefinite increases in transaction rates can create money by the principle of productivity growth outpacing loan interest. No, that is limited by a finite number of people buying a finite number of things.