Bell, Stephanie - Do Taxes and Bonds Finance Government Spending

Do Taxes and Bonds Finance Government Spending? Author(s): Stephanie Bell Source: Journal of Economic Issues, Vol. 34, No. 3 (Sep., 2000), pp. 603-620 Published by: Association for Evolutionary Economics Stable URL: http://www.jstor.org/stable/4227588 Accessed: 16/07/2010 13:01 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp.. JSTOR's Terms and Conditions of Use provides, in part, that unless http://www.jstor.org/page/info/about/policies/terms.jsp you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aee.. http://www.jstor.org/action/showPublisher?publisherCode=aee Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

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JOURNALOF JOURNALOF ECONOMIC SSUES Vol. XXIV No. 3 September2000

Do Taxes and BondsFinance BondsFinanceGovernment GovernmentSpending? Spending? StephanieBell

Debates over over the impactsof impacts of various ways of financinggovernment financinggovernmentdeficits and about the relative impact of monetaryand fiscal policy have, unfortunately,been carriedout carriedout without recognitionof the institutionalprocessby process by which modem government spending, borrowing, and taxation are accomplished.1In the United States, close cooperationbetween cooperationbetween the Treasury, the Federal Reserve System, and depository institutionsmakes traditionaldistinctionsbetween institutionsmakes the traditionaldistinctions between monetaryand monetaryand fiscal polrenders irrelevantmany icy hard to use in describingactual describing actual processes and rendersirrelevant many of the theories about the most appropriatemix of borrowingand borrowingand taxation. Indeed, the entire treatmentof treatmentof taxationand taxationand of governmentborrowing assumes a monetarysystem governmentborrowingassumes quite unlike that of the modern U.S. system. My purpose in this paper is to describe, in some detail, the way in which the Treasuryand Treasuryand the FederalReserve coordinate policies that are are neither purely fiscal nor purely monetaryand monetaryand to argue that theories of monetary/fiscalpolicy monetary/fiscalpolicy should incorporatemore incorporatemore discussion of the issues of reserve management.

The "Reserve ffects"of ffects"of Taxingand TaxingandSpending Spending Before examiningthe examining the reserve effects of various Treasuryoperations, Treasuryoperations, it is, perhaps, prudentto prudentto begin by looking closely at aggregatemember aggregatememberbank bank reserves.2 BeThe author author is Ph.D. candidate at The New School for Social Research and Lecturer at the Universityof Universityof Missouri-Kansas City. Thispaper Thispaper was wntten while the authorwas CambridgeUniversity CambridgeUniversity The Jerome Levy EconomicsInstitute VisitingScholar VisitingScholar at TheJerome EconomicsInstituteat at Bard College and has been presented at the Post Keynesian SummerConference Summer Conference Knoxville, Tennessee, July 1998; the Post KeynesianGraduate Keynesian Graduate Workshop Leeds, UnitedKingdom, UnitedKingdom,1998; 1998; and at the Conferenceon Conferenceon the Economics of Public Spending in Sudbury,Ontario, 1999. Financialsupport Financial support rom the Center or Full Employmentand and Price Stability commentsfrom Victoria Chick, John F. Henry, Peter Ho, Anne grateftly acknowledged. Helpful commentsfrom Edward Nell, Alain Parguez, James Tobin,Randy Mayhew, EdwardNell, Tobin, Randy Wray,and twao nonymousreferees nonymousreferees greatly this paper. improved he argumentsmade argumentsmade in thispaper.

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StephanieBell StephanieBell

ginning with the Federal Reserve's balance sheet, equivalent erms can be added to each side, and the entries can be manipulated lgebraically n orderto order to isolate member bank reserves.3 The result, often referredto referredto as the "reserveequation," "reserveequation,"depicts total memberbank member bank reserves as the difference between alternativesources alternativesources and uses of reserve funds. The reserve equationcan writtenas seen in Figure 1. equationcan be writtenas From Figure 1, it is clear that an increase in any of the bracketed erms on the left will increase reserves, while an increase in any of the bracketed erms on the reduce them. rightwill right will reducethem. "ReserveEffects" of Taxingand Taxingand Spending In this section, the reserve effects of two importantTreasury importantTreasuryoperations-govoperations-governmentspending ernment spendingand and taxing-will be analyzed. To emphasizethe impact of these operations on bank reserves, the case in which all governmentpayments and regovernmentpaymentsand ceipts are immediatelycredited/debited accounts held at Reserve banks will be immediatelycredited/debited accountsheld considered.4 When the governmentspends, governmentspends, it writes a check on its accountat the Federal Reserve. If, for example, a Social Security check is deposited into an account at commercialbank, commercial bank, member bank reserves rise (by the amountof the check) as the Federal Reserve debits the Treasury'saccount, Treasury'saccount, decreasingthe decreasingthe right-handbracket Figure 1, and credits the account of commercialbank. commercial bank. Thus, system-wideinsystem-wide increase in member bank reserves resultswhenever results whenever a check drawnon TreasuryacTreasuryacFigure 1. The Reserve Equation

Sources FederalReserve Federal Reserve Credit: U.S. Gov't Securities Loans to MemberBanks MemberBanks Total MemberBank Member Bank Reserves

Float Gold SDR Certificates TreasuryCurrency TreasuryCurrency

Uses Currency

Circulation

U.S. TreasuryBalance TreasuryBalance at Fed Foreign Balances at Fed TreasuryCash TreasuryCash OtherFed Deposits and accounts (net)

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count at a Federal Reserve bank is depositedwith a commercialbank. commercialbank. Government bank reserves (ceterisparibus). increasesaggregatebankreserves spending,then, spending, then, increasesaggregate (ceterisparibus). accountat the Fed, the Treasuryreceives funds insteadof drawing on its accountat When, insteadof into this account, the reverse is true. For example, if taxpayerpays taxpayerpays his/her taxes by sending a check to the InternalRevenue Service (IRS), his/her bank and the of reserves, as the IRS deposbankingsystem bankingsystem as a whole, lose an equivalentamount equivalentamountof its the check into the Treasury'saccountat accountat the FederalReserve. FederalReserve. Total memberbank memberbank reserves decline as the right-handbracket n Figure increases. Thus, the payment of taxes by check results in system-widedecrease system-wide decrease in member bank reserves (ceterisparibus).5 teris paribus).5 If Treasuryspending out of its accountsat accountsat FederalReserve Federal Reservebankswere perfectly Treasuryspendingout coordinatedwith coordinatedwith tax receiptsdeposited receipts depositeddirectly directly into the Treasury'saccounts Treasury's accountsat Retheir opposingeffects serve banks, theiropposing effects on reserves would offset one another.That is, if the governmentran governmentran a balancedbudgetwith budgetwith daily tax receiptsand governmentspendgovernmentspending timed to offset one another, there would be no net effect on bank reserves. However, as Figure shows, the Treasury'sdaily Treasury'sdaily receipts and disbursements rom accountsat accounts at Reserve banks can be highly incommensurate. ndeed, duringthis during this short sampleperiod, sample period, Figure shows thatthey that they can differ by almost $6 billion. This is substantial, given that total member bank reserves average only about $50 billion [Meulendyke 1998, 145]. Thus, one-day decline in total reserves-to $44 billion-amounts to a 12 percentdecrease percentdecreasein memberbank memberbankreserves. Such a sharpdecline is likely to result in an immediatebidding immediatebiddingup up of the federalfundsrate. funds rate. Thus, despite an attenuationof the reserve effect due to the simultaneous njection and withdrawalof withdrawalof reserves, governmentspending governmentspendingand and taxationwill taxationwill never perfectly offset one another. Moreover, even if a more even pattern could be established, some discrepancieswould discrepancieswould persist because, as Irving Auerbach[1963, Auerbach [1963, complete accuracy, 349] recognized, "there s no way to determine advance,with completeaccuracy, the total amountof amountof the receiptsor receipts or the speed at which the revenuecollectors revenue collectors will be

Figure2. Figure2. DailyFlows Daily Flows nto/fromFederal nto/fromFederalReserve ReserveAccounts, Accounts,March March 1998(Net 1998 (Net of Transfers o/fromT&L o/fromT&LAccounts Accounts nd ndDebt DebtManagement) Management) @1

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concurrentgovernment pendingand able to process the returns."Thus, returns."Thus, while concurrentgovernment pendingand taxation have some offsetting impact reserve effect from the Treasury's impact on reserves, the reserveeffect daily cash operationswould operations would still be substantial,especially substantial,especially "if they were channeled immediately through the Treasurer's balance at the Reserve Banks" [Auerbach 1963, 333]. TheImportance The Importanceof of the "ReserveEffect" The inabilityto inability to perfectly coordinateTreasuryreceipts Treasuryreceipts and expenditureshas serious implicationsfor implications for the level of bank reserves and, subsequently, he money market. Because banks are requiredby requiredby law to hold reserves against some fraction of their deposits, but earn no interest on reserves held in excess of this amount, they excess reserves. Government pending, substantialexcess will normallyprefer not to hold substantial then, will leave them with more reserves than they will prefer/needto hold, while the clearing of tax payments will leave them with fewer reserves than are desired/required ceterisparibus). The fed funds market s the "market f first resort" for bankswishing banks wishing to rid themselvesof excess reserves or to acquirereserves needed to meet deficiencies [Poole 1987, 10]. When there is build-upof reserves within the system, many banks will attemptto lend reserves in the federal funds market. The problem, of course, is that lending reserves in the funds marketcannot marketcannothelp help bankingsystem, bankingsystem, which began with an "equilibrium"evel of reserves, to rid itself of excess reserves. Moreover, when the system is flush with excess reserves, banks will find that there are no bidders for these funds, and the federal funds rate may fall to a zero percentbid. percentbid. Likewise, the clearing of tax paymentswill leave a bankingsystem that began with an "equilibrium"evel "equilibrium"evel of reserves short of required(and/or required(and/ordesired) reserves. marketto acquireneeded Banks will look to the funds marketto acquire needed reserves, but since all banks cannot return to an "equilibrium" eserve position by borrowing federal funds, system-wide shortage will persist. That is, like a system-wide surplus, systemwide deficiency cannot be alleviated throughthe funds market;attemptsto do so will simply drive the funds ratehigher rate higherand andhigher.6 higher.6 interestrateaffected Importantly, he funds rate is not the only interestrate affectedby by changes in the level of bank reserves. As the "focusof "focus of monetarypolicy, monetarypolicy, the fundsrate funds rate is the "anchor for all other interest rates" [Poole 1987, 11]. Thus, when banks are content with their reserve positions, Treasuryoperations Treasuryoperations such as governmentspending governmentspendingand and these positions by addingor taxation)disrupt taxation) disruptthese adding or drainingreserves, drainingreserves, and banks react to these changes by first turningto funds market.There, funds rate is bid up or turningto the fundsmarket. There, the fundsrate down, and other short-terminterest rates are affected. Although some individual bankswill banks will be successful in eliminatingtheir eliminatingtheir own reserve deficiencies/excesses, the bankingsystem banking system as a whole will not be able to alleviate a shortage/deficiencyon shortage/deficiencyon its own. Only throughgovernmentadding/draining governmentadding/draining f reserves can system-wide im-

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balance be eliminated. Because attemptsto resolve system-wide reserve "disequilibrium"through brium"throughthe the funds marketcan marketcan affect a numberof numberof other interest rates, variety of procedureshas procedures has been developed to mitigate the adverse impact of Treasury operationson operationson banks' reserve positions. Strategies or Reducing the Reserve Effect In the preceding discussion, the effects of governmentspending governmentspending and taxing on bank reserves were examinedby examinedby assumingthat disbursementsand receipts were assumingthat all disbursementsand immediatelycredited/debited immediately credited/debited o the Treasury'saccounts Treasury'saccounts at Federal Reserve banks. This treatmentallowed treatmentallowed us to highlightthe highlightthe impactof each of these operationson operationson the level of bank reserves, but it did not paint realistic pictureof picture of the way things currently work. If things did indeed work this way, there would be an unrelentingdisruption of banks' reserve positions and, subsequently,chronic turmoilin turmoil in the funds market. Because these consequencesare consequencesare highly undesirable rom a policy perspective, some important trategieshave been developedto developed to mitigatethese mitigatethese persistent,yet unpredictable,reserve unpredictable,reserve effects. The Use of Taxand Tax and Loan Accounts The disruptivenature disruptivenatureof of the Treasury'soperations Treasury'soperationswas was recognizedunder recognized underthe the IndependentTreasury dependent TreasurySystem7 and ultimatelyled System7and ultimately led to the use of General and Special Depositories,8 which are privatebanks private banks in which governmentfunds governmentfunds could be kept. This importantstrategy importantstrategydeveloped developed to mitigate the reserve effect. As John Ranlett recognized, the reserve effect caused by the "point nflow-continuous outflow natureof natureof Treasuryactivities" Treasuryactivities"could could be temperedby temperedby placing certaingoverncertain government receipts into tax and loan accountsat accounts at privatedepositories private depositories[1977, [1977, 226]. Thus, the reserve drain that would otherwise accompanypayments accompanypaymentsmade made to the government could be temporarilyprevented.9The prevented.9The benefitsof benefits of using these depositorieswere depositorieswere quickly recognized, and their functionswere functions were broadenedwhen broadenedwhen it became clear that they could be used to furthermitigate furthermitigatethe the reserve effect. As the size of the government's fiscal operationsgrew, operationsgrew, SpecialDepositories Special Depositoriesquickly quicklybecame became the most important group of bank depositories [Auerbach 1963]. As Figure 3 shows, just over two-thirds of all Federal tax receipts are currentlydeposited currentlydeposited directly into tax and loan accounts. Today, the tax and loan accountsare accounts are by far the most importantdevices importantdevices used to guard the money market against the sizable daily differences (shown in Figure 2) between the flows of governmentreceipts governmentreceiptsand anddisbursements. disbursements.

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Figure 3. Disposition of Federal Tax Deposits (November 1997-March 1998)

Other 2%

FederalReserve Reserve Account Direct) 13% RemittanceOption Option Depositaries 18%

Tax and LoanNote LoanNote Accounts 67%

Source:DailyTreasury DailyTreasury tatement, ttp://fedbbs.access.gop.gov/dailys.htm

Managing the Treasury'sBalance at the Fed Since almost all governmentspending accountsat the governmentspending nvolves writing checks on accountsat Fed, virtually all funds in tax and loan accounts must eventuallybe transferred 10 Because only net changes in the Treasury'saccountat Reserve banks.10Because accountat the Fed im"the Treasurer's pact the aggregate level of reserves (ceterisparibus), (ceteris paribus), maintaining"theTreasurer's balance with the Reserve Banks at reasonablyconstantlevel" is the second strategy used to minimize the reserve effect of the Treasury's operations [Auerbach "aimsto maintain closing balanceof $5 bil1963, 364]. Specifically, the Treasury "aimsto lion in its Federal Reserve checking accounts each day" [Manypennyet [Manypennyet al. 1992, 728]. The trend line fitted to the data in Figure 4 shows how successful the Treasury is in its endeavor to maintain his target closing balance. With the exception of mid-January,one mid-January,one of the major (quarterly) ax dates, and mid-Novemberand mid-Novemberand midthe closing balance March, when a variety of taxes are withheld from fluctuatesonly fluctuatesonly moderatelyaround moderatelyaround he $5 billion target evel. Recall that th government receives funds into its accounts at the 12 Reserve thousandsof commercialbanks commercial banks each day, but that nearly all govbanks as well as thousandsof ernmentspending ernment spending is done by writing checks on accounts at Reserve banks. Maintaining closing balance of $5 billion at Reserve banks, then, usually requires mountfrom tax and loan accountsto transferring he appropriate mountfrom accountsto the Treasury'sacTreasury'saccount at the Fed. For example, if the Treasuryexpected to receive $5 billion directly into accounts at Reserve banks (today) and expected $6 billion in previously issued checks to be presented for payment (today), $1 billion would need to be

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Figure 4. Daily Closing Balance in Treasury's Account at the Federal Reserve (November 1997-March 1998)

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transferred o the Treasury's account at the Fed (today) so that there would be no level of reserves. net change in the level funds to cover anticipatedshortfalls The Treasurytransfers Treasury transfersfunds anticipatedshortfallsby making a "call" advancenotice is given before transferring on tax and loan accounts. In most cases, advancenotice funds from these accounts.11 "reverse-call" "direct nvestment" nvestment" s also possible. This would be necessary if the Treasuqr'sclosing balanceat Reserve banks was expected to substantially xceed $5 billion. To avoid the reserve drain that would result from an excessive closing balance, the Treasurymay or all of the Treasurymay place some or excessive funds into tax and loan accounts at Special Depositories (a.k.a. note-option banks). Whether"calling" unds om tax andloan and loan accountsto accountsto make up for an expected shortfall or transferring unds to tax and loan accountsthrough accounts throughdirect direct investment (or canceling previous calls) to preventan prevent an excessive closing balance, the amounts transferredare transferredare intended to maintain the Treasury's balance at Reserve banksas banks as steadyas steady as possible. In pursuitof pursuitof this goal, the Treasuryrelies Treasuryrelies on the cooperationof erationof the FederalReserve. Coordinationwith Coordinationwith the FederalReserve The Federal Reserve Reserve is extremely interested helping the Treasuryachieve Treasuryachieve its targetclosing targetclosing balance, because the Treasury'sbalance at the Fed "is the reserve facTreasury'sbalanceat tor that shows the most variationfrom variationfrom one reserve maintenanceperiod maintenanceperiod to another" [Meulendyke1998, [Meulendyke 1998, 156]. Indeed, the Fed's abilityto ability to successfullyconduct successfully conductmonetary monetary policy (specifically, to hit its target funds rate) depends, to large extent, on the

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Treasury'sability Treasury's ability to hit its targetclosing target closing balance. Daily contactbetween the Treas"numerousoccasions . . to assist the ury and the Fed provide the Treasurywith "numerousoccasions Reserve authorities o achieve a desired objective"[Auerbach objective"[Auerbach1963, 1963, 328]. Unfortunately,the Unfortunately,the Treasury unable, even with the cooperationof the Federal Reserve, to completely offset the effects of its daily spendingusing spending using tax and loan calls and direct investment. Indeed, as Table shows, the Treasury's average monthlyclosing monthlyclosing balancecan differ substantially rom its $5 billion target. This, again, is the result of the inherentuncertaintyregarding uncertaintyregarding he size/timing of receipts and expenditures.While expenditures.While it is easy to see how this uncertaintywould prevent daily inflows and outflows from offsetting one another,Table 1 shows that even on an average monthlybasis, monthly basis, the Treasury's balance can close as much as 31 percent above its targetlevel. target level. Thus, as Figure confirms, one expects non-zerochange in the Treasury'sdaily Treasury's daily closing balance. Despite this, changes in the daily closing balance do tend to fluctuate fairly closely aroundzero, deviating most drasticallywith Table 1. (Give this a short, descriptive title) AverageClosing AverageClosing Balance($ Millions)

Month November 1997 December 1997 January1998 January1998 February1998 February1998 March 1998 Five-MonthAverage Five-MonthAverage

5,015 5,371 6,563 5,118 5,763 5,618

Source:DailyTreasury DailyTreasury tatement, ttp://fedbbs.access.gop.gov/dailys.htm

Figure 5. Change in Daily Closing Balance (November 1997-March 1998) 10,000 8,000 6,000

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CY

co

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quarterly ax payments(January, payments (January,April, April, June, and September)and with the collecbusiness taxes. tion of withheldbusinesstaxes. In sum, three importantpoints importantpoints have been made regarding he Treasury'soperaTreasury's operations. First, the natureof its recognizedthe disruptivenatureof operationsand respondedby responded by maintainingaccounts at private depositories. Second, the Treasury uses these accountsto accounts to diminishthe diminish the reserve effect of its operationsby operationsby using tax and loan calls and direct investmentsto minimize the net changes in Reserve account balances (to coordinatethe coordinatethe flow of its receipts with its expenditures).Finally, expenditures).Finally, the Treasuryand Treasuryand the Fed cooperate to bring about fairly high degree of harmonyin balancesat Reservebanks. managing he Treasury'sbalancesat Reserve banks.

SeUling onds o Coordinatehe Treasury'sOperations Operations So far we have addressedonly addressedonly the Treasury'sattempts Treasury'sattempts balance its taxing and spendingflows spending flows in order to minimize the reserve effect of its operations.Implicit in operations.Implicitin our discussion, therefore,was notion thatthe governmentattempts therefore,was the notionthat governmentattempts balanceits balance its budget. What if it doesn't? That is, what if the governmentruns governmentruns a budget deficit? How does the sale of bonds affect the Treasury'scash Treasury's cash flow operationsand, operations and, subreserve effect? There are three scenariosthat sequently, the reserveeffect? scenariosthat must be analyzedin analyzedin order to determinethe determinethe reserve effect of selling bonds, the key being by whom and how are they purchased. First, it must be recognized that tax and loan accountsactually accountsactually receive not only proceeds from tax payments, but also funds from the sale of government debt. When commercialbanks commercial banks with tax and loan accounts (or customersof customers of these banks) purchasegovernment purchasegovernmentbonds, bonds, there may be no immediate oss of reserves to the purchasing bank or the bankingsystem. banking system. If, when the Treasuryauctions Treasuryauctions new debt, it specifies that at least some portionof portionof the bondsare bondsare eligible for purchaseby purchaseby credit to tax and loan accounts, Special Depositoriesmay Depositoriesmay acquirethe bonds by crediting deposits (in the name of the U.S. Treasury).These Treasury). These depositories, therefore, will not lose reserves as they purchasenewly purchase newly issued bonds.F4Similarly, the purchase of newly issued governmentdebt governmentdebtby by customerof customerof SpecialDepository, Special Depository, as long as the Treasuryspecifies Treasury specifies that some (or all) of the offering is eligible for purchaseby purchaseby tax and loan credit, will leave reservesunaffected. reserves unaffected.For For example, when customerof Special Depository purchases governmentsecurities, government securities, the Treasury redeposits the check into the bankon bankon which the checkwas check was drawn.The drawn. The bankthen bankthencredits creditsthe the Treasury's tax and loan account,offsetting account, offsettingthe the debitto the buyer'saccount. buyer's account.Thus, Thus, like the purchaseof purchase of governmentdebt governmentdebt by Special Depository, the sale of governmentdebt governmentdebt to customer of one of these institutionscan institutionscan be effected without any loss of reserves. The second method concerns the privatepurchase private purchaseof newly issued government debt that does not involve creditinga creditinga tax and loan account. When the securities are

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account creditand/or and/or are not purchasedby ineligible for purchaseby purchaseby tax and loan accountcredit purchasedby so-called "note-option" ank (or one of its customers), the purchaseof government bonds will immediatelydrain immediatelydrain reserves from both the bank and the bankingsystem. banking system. This is because the proceeds from the sale of the securitieswill securitieswill not stay "in the system," but will be depositeddirectly deposited directly into one of the Treasury'saccountsat Federal Reserve bank. When bonds are sold in this way, memberbank memberbank reserves decline as the Federal Reserve credits the Treasury's account, increasing the right-hand bracketin Figure 1. Thus, a bank wishing to purchaseU.S. governmentsecurities, governmentsecurities, when tax and loan credit is not an option, will do so by drawing on its accountat account at the Federal Reserve. system-wide loss of reserves will, therefore, accompany every private purchaseof purchase of newly issued government debt not eligible for payment through ax and loan credit. Finally, the sale of Treasurysecurities Treasury securities to the Federal Reserve must be considered. If the Fed purchasesnewly purchasesnewly issued bonds directly from the Treasury, t will not cause a changein change in memberbank reserves This, as Figure makes clear, is because both the right-handbracket right-hand bracket (U.S. Treasury Balance at Fed and the left-hand bracket(U.S. bracket (U.S. GovernmentSecurities GovernmentSecurities increase by the same amount,leaving amount, leaving total reserves unaffected. Furthermore, ince the government'sbalance government'sbalancesheet sheet can be considered on consolidatedbasis, consolidatedbasis, given by the sum of the Treasury'sand Treasury'sandFederal Federal Reserve's balance sheets with offsetting assets and liabilities simply canceling one anotherout anotherout [Tobin 1998], the sale of bonds by the Treasury the Fed is simply an internal accounting operation, which provides the government with self-constructedspendable structedspendablebalance. balance. Althoughself-imposed Althoughself-imposed nstitutional onstraintsmay onstraintsmay prevent the Treasuryfrom Treasuryfrom creatingall creatingall of its deposits in this way, there is no financial constraint o preventit preventit from doing so. 15 Now, the Treasuryclearly Treasuryclearly has choices regarding he manner n which newly issued bonds will be sold. For example, if the governmentplans governmentplans to engage in deficit spending, the Treasurycan Treasurycan sell bonds, allow them to be purchasedby purchasedby tax and loan credit, and therebyeliminate thereby eliminateany any immediate mpacton mpact on reserves.16 When the Treasury sells bonds in this way, the bonds act as sort of ex ante coordination ool. Since the Treasurycan Treasurycan control the size and timingof timing of fundstransferred funds transferred romtax rom tax and loan accounts, this type of bond sale Treasury o drain(more drain (more or less) the same numberof numberof reserves from the system thatare that are being addedto the system as re17 sult of its deficit spending.17 If, however, there is problemwith problemwith the coordination for example, if the Treasury and Fed underestimate he amountof checks that are drawn on the Treasury's accountat the Fed), bondscould bonds could be sold in orderto orderto drainexcess drainexcess reserves.18In other words, insufficienttax insufficient tax and loan calls (which result in a system-wideincrease system-wide increase in reserves threatento threatento send the overnightlending overnight lending rate to a zero percentbid) percent bid) could promptthe prompt the sale of bonds as an ex post coordination ool. In order to immediately

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drain the excess reserves, banks could not be allowed to purchase the bonds by creditinga creditinga tax and loan account,but account, but this is somethingthe Treasurycan specify. The Nuances of ReserveAccounting ReserveAccounting section is twofold. First, the commonly held belief that the The purposeof purpose of this section purpose of collecting taxes and selling bonds is to provide the governmentwith governmentwith the financialresources financialresources that fund its expenditureswill be examined.The examined. The questionwill be addressedintuitively, addressed intuitively,drawingon drawing on the reserve effects analyzed in the first three sections of the paper. Second, for those who remainunconvinced remainunconvincedby the intuitiveanalysis, the question as to whether the proceeds from taxes and bond sales are even capable of financing government spending will be considered. The argument requires an applicationof application of basic accountingprinciples accountingprinciples to an analysis of reserve accounting in order to determine whether it is possible to use the revenues from finance the government'sspending. taxationand taxationand the sale of bonds to financethe government'sspending. There is surely no doubt that the proceeds from taxationand taxationand bond sales are deposited into accountsheld accountsheld by the U.S. Treasury eitherwith either with commercialbanks commercialbanks or at the FederalReserve) Federal Reserve) and that the governmentspends governmentspendsby by writing checks on Treasury accountsat accountsat Reserve banks. Moreover, since fundsare funds are transferred rom tax and loan accountsto accounts to the Treasury'saccount at the Fed in order to cover anticipated hortfalls Treasury'saccountat in these accounts, it certainly as though the purpose of taxing and selling fund expenditures.This bonds is to fundexpenditures. This coordinationundoubtedly upports he belief that taxes and bond sales are necessarysources necessary sources of governmentrevenue. governmentrevenue. But the coordinationof nation of taxationand taxationand bond sales with (deficit) spending actuallya actuallya somewhatdifferentoperation. ferent operation. An intuitive analysis of Treasuryoperations Treasuryoperationssuggests suggests practicalmotivation practical motivationfor coordinationof taxationand the coordinationof taxationand bond sales with governmentspending. governmentspending. Specifically, because of the reserve effects of taxing, spending, and selling bonds, the government chooses to coordinate these operations in order to mitigate the impact on banks' reserve positions and, hence, on short-term nterest rates. This interdependence, then, is not defacto evidence of financingrole financingrole for taxes andbonds. and bonds. Similarly, the governmentneed not borrow from the private sector by issuing bonds in order to enable it to spendin spend in excess of current axation.This, axation.This, again, is because the governmentcan governmentcan always create its own spendablebalance spendablebalanceinternally internally(on (on its consolidatedbalance consolidatedbalance sheet) by offsetting Treasury iability against Federal Reserve asset (e.g., but not necessarily, Treasurybond). Treasurybond). In the absence of private bond sales, deficit spending would result in a net increase in aggregate bank reserves. Bonds, then, are used to coordinatedeficit coordinatedeficit spending, drainingwhat would otherwise become excess reserves. Govermnentdebt Govermnent debt provides the private sector with an interest-earning lternative non-interest-bearingovernment non-interest-bearingovernmentcurrency, currency, allowing the government spend in excess of taxationwithout taxationwithoutdriving driving the overnight

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means of creatingand maintainlending rate down. Thus, taxes can be viewed as meansof ing demandfor demand for the government'smoney, government'smoney, while bonds, which are used to prevent deficit spending from flooding the system with excess reserves, are a tool that almaintained.Their coordination, is arlows positive overnightlending overnight lending rates to be maintained.Their gued here, is undertaken or pragmaticrather pragmaticrather han "financial" easons. There is a dangerthat danger that this argumentmay semantics. This is argumentmay be viewed as pure semantics.This not so. That is, while it is certainlyappropriate consider taxationand and bond sales certainlyappropriate considertaxation as part of the process of government inance, the implicittreatmentof treatmentof money, in its physical form, being transferred rom the private to the public sector results in sales as necessary sources of government treatmentof taxes and bond sales misleading treatmentof revenue. In a world where money has been effectively divorcedfrom divorced from commodities, and where public andprivate sectors can vary the amountof and privatesectors amountof money to be spent, this naive way of thinkingcan be highly deceptive. That such a treatmentcould treatmentcould have gone uncontested or so long is, perhaps, surprising. Indeed, some readersmay readersmay resist acceptingthe acceptingthe claims made in this paperon paper on the groundsthat groundsthatthey they would, were they correct,have correct, have been made long ago. But there have been a numberof number of earlier critics who, althoughthey although they did not undertakea undertakea detailed analysis of the institutionalworkings institutionalworkingsof of governmentfinance, governmentfinance, reachedsimilar reached similar conclusions. Abba Lerner, for example, argued that "taxing s never to be undertaken merely because the governmentneeds governmentneeds to make money payments" 1943, 40]. He furtherrecognized furtherrecognizedthat thatthe the governmentshould governmentshould sell bonds "onlyif "only if it is desirable that the public should have less money and more governmentbonds, governmentbonds, for these are the effects of governmentborrowing," governmentborrowing,"adding that "thismight "thismight be desirable f otheraddingthat wise the rate of interest would be reduced too low" [1943, 40]. Thus, the main points made in this paper were made long ago, but they did not succeed in overthrowingexisting throwingexisting theoriesregarding he natureof natureof government inance. Perhaps this was because Lerner, who attempted persuadehis persuadehis opponentson opponentson logical groundsalone, grounds alone, providedno evidence to supporthis supporthis claims. more compelling case can be made, it is arguedhere, arguedhere, throughan throughan applicationof applicationof simple accounting. The argument is technical one and requires an understanding hat Federal Reserve notes (andreserves) (and reserves)are are booked as liabilitieson liabilities on the Fed's balancesheet balance sheet and thatthese liabilities extinguished/discharged hen they are payment o the state. It must also be recognized that when currencyor reserves returnto returnto the state, the liabilitiesof liabilities of the stateare reduced,andhigh-powered and high-poweredmoney money is destroyed. The destructionof destructionof these promises is no differentfrom differentfrom the privatedestruction private destructionof of promiseonce promise once it has been fulfilled. In otherwords, otherwords, when a bankmakes bankmakesa a loan to an individual, it results in promise to the bank. Once the promise is kept (i.e., the loan is repaid), the loan debt is eliminatedfrom eliminatedfrom the borrower'sbalance borrower'sbalancesheet. sheet. Likethe state, once it fulfills its promise to money (high-powered money) at statepay-offices, state pay-offices, eliminatesan eliminatesan equivalentnumber equivalentnumberof of these liabilitiesfrom liabilities from its balancesheet. balance sheet.

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Thus, while bank money (MI) is destroyed when demand deposits are used to pay taxes, the government'smoney, government'smoney, high-poweredmoney, high-poweredmoney, is destroyedas destroyedas the funds are placed into the Treasury'saccount Treasury'saccount at the Fed. Viewed this way, it can be conthatthe moneycollected taxationand bond sales cannotpossicannotpossivincingly moneycollected from taxationand bly finance the government'sspending. government'sspending. This is because in order to get its hands on taxationand bond sales, the governmentmust the proceeds from taxationand governmentmust destroy what it has collected. Clearly, governmentspending government spending cannot be financed by money that is destroyedwhen stroyed when received in payment the state. How, if not by using the money received in paymentof payment of taxes and bond sales, inance its spending?Notice does the government inanceits spending?Notice that the governmentwrites governmentwrites checks or on an account that does not comprise part of the money funds become partof that when it does, the fundsbecome money, but thatwhen partof the money supply (Ml if deposited into checking accounts, M2 if into savings accounts, etc.) and part of the monetarybase. monetarybase. It is therefore apparent hat while the paymentof paymentof taxes destroys an equivalentamountof amountof money (MI immediatelyand immediatelyandhigh-powered high-poweredmoney money as the proceeds go into the Treasury'saccount at the Fed), spendingfrom Treasury'saccountat spendingfrom this accountcreates an equivalentamount equivalent amountof new money-both bank money and high-poweredmoney. In short, the governmentfinances governmentfinances all of its spendingthroughthe creation of throughthe direct creationof new (high-powered)money. (high-powered)money. Summaryand Summaryand Conclusions If the government(Fed government(Fed and Treasury)had Treasury)had no regardfor regard for the "reserveeffect" "reserveeffect" of its operations,it operations,it would have little use for tax and loan accounts. It could simply create its own spendabledeposit spendable deposit (on its consolidatedbalance sheet) and then spend without regard for the size/timing of its tax receipts. But this behavior would frequentlyleave quently leave a bankingsystem which was previouslysatisfiedwith bankingsystemwhich satisfied with its reserve posiexcess reserves than it wished to maintain. A system tion, substantially flush with excess reserves would find few biddersfor these funds, and the overnight towardzero. Taxes, as they drifted n, would draina portion lendingrate lending rate would fall towardzero. of the excess reserves. Still, the funds rate rate could remainat zero percent bid for of time. prolongedperiod prolongedperiodof In order to move to any positive funds rate, either the Federal Reserve or the Treasurywould Treasurywould be forced to sell bondsto bonds to drainexcess drainexcess reserves. Banks, not wishing to hold an excessive amountof non-interest-bearingovernment non-interest-bearing overnmentmoney, money, would be all too happyto happy to exchangenon-interest-earningeserves non-interest-earningeservesfor interest-bearingTreasury bonds. The bonds would have to be sold until enough excess reserves had been drainedto yield positive (target) funds rate. Althoughthis process of adding and later drainingreserves drainingreservescould couldwork, work, it would involve substantial ariation n the level of reserves and, subsequently,significant turmoil in the market for federal funds. Knowingthat Knowing that these are the undesirableeffects undesirableeffects of disregarding he reserve effects effects of

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its operations, the Treasury chooses to coordinate ts operations,transferring operations, transferring unds account at the from tax and loan accounts (drainingreserves) (drainingreserves) as it spends from its accountat Fed. Taxes are not capableof when they are paid uscapable of financinggovernment governmentspending spendingwhen ing high-poweredmoney high-powered money (i.e., by cash or check in fiat money system). In order for the government to get its hands on the proceeds from taxation, it must place these funds into the Treasury'saccount Treasury's account at the Fed. As it does, the banking system of desired and/or requiredreserves loses an equivalentamount equivalent amountof requiredreserves (either immediately or as the Treasury transfers the proceeds from tax and loan accounts into its acof high-poweredmoney counts at Reserve banks), and an equivalentamount equivalentamountof high-poweredmoney is destroyed. Similarly, reserves are drained, and high-powered money is destroyed when the Treasury ssues bonds(immediately bonds (immediately f tax and loan creditis not allowed or with a lag as the proceeds are transferred rom tax and loan accounts). In contrast, governmentspending government spending from the Treasury'saccount Treasury's account at the Fed injects reserves and creates an equivalent amount of new money (MI, M2, etc., and high-powered money). It is impossible to perfectlybalance perfectly balance(in (in timingand timing and amount)the amount)the government'sregovernment'sreandthe and the Fed can do is to compare ceipts with its expenditures.The expenditures.The best the estimatesof anticipatedchanges in the Treasury'saccount anticipatedchangesin Treasury'saccountat the Fed and to transfer approximately he correct amountto/from tax and loan accounts. Errorsdue to excessive or insufficient tax and loan calls are the norm. Althoughsame-day calls and Althoughsame-daycalls direct investments are designed to permit the authoritiesto react to these errors, they are not always an option. When the Treasury s unable to correct these these errorson errors on its own, the Federal Reserve may have to offset changes in the Treasury's closing balance. necessary whenever the errors are large enough to move the funds rate away from its target rate. In fact, as argued previously, the uncertaintyfaced by monetary authorities s often primarilydue primarilydue to uncertainty egarding he Treasury'sbalance Treasury'sbalance at the Fed. Its role as an offsetting agency is essentially forced upon it by its commitment to target funds rate. Indeed, William Poole [1975] goes further,statingthat the Fed will usually abandonany abandon any other objective target in order to maintainthe funds range. The adding/drainingof adding/drainingof reserves, then, is as monetarypolicy largely non-discretionary,as monetarypolicy is concernedprimarily concernedprimarilywith with maintaining the overnigh lendingrate. lending rate. Fiscal policy, policy, in contrast,has contrast,has more to do with determiningthe mining the supplyof supply of high-poweredmoney high-poweredmoney than is usuallyacknowledged.Moreover, acknowledged.Moreover, while both taxation and bond sales drainreserves from the bankingsystem, banking system, neither provides the governmentwith government with money with which to finance its spending. Indeed, both taxation and bond sales lead (ultimately)to the destructionof destructionof high-powered money. In addition to reconsiderationof reconsiderationof taxationand taxation and bond sales as financing operations, perhaps it is time to reassess the definitions of monetaryand fiscal policy.

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Fiscal policy has more, and monetarypolicy monetarypolicy less, to do with the money supplythan supply than is usually recognized. An analysisof analysis of reserve accountingreveals accountingreveals that all government financed by the direct creationof high-poweredmoney; spendingis spending is financedby high-poweredmoney; bond sales and alternativemeansby taxationare taxationare merely alternativemeans by which to drainreserves/destroy reserves/destroyhigh-powhigh-powalternative "financing"methods, then, ered money. The debate over alternative"financing" then, should really alternativemethodsfor drainingreserves be a debateover the alternativemethods drainingreserves (taxes vs. bond sales) in order to prevent the overnightlending rate from falling to zero. As Lerner ar"sound"but "functional"inance "functional"inance that moderngovernments gued, it is not so-called "sound"but means using taxes and bonds "simplyas should practice, and this meansusing "simplyas instruments,and instruments,and not as magic charms thatwill that will cause mysterioushurt mysterioushurt if they are manipulatedby the wrong people or withoutdue reverencefor reverence for tradition" 1943, 51]. Notes 1.

Earlydebates Early debates[Modigliani [Modigliani1961; 1961; Blinderand Solow 1973, 1976; Barro 1974; Buiter 1977; Lerner 1973; Tobin 1961] over the optimalmethod to finance deficit spending optimal methodby which to remain controversialtopic controversialtopic today [Trostel 1993; Ludvigson 1996; Smith and Villamil 1998]. Despite differingbeliefs differing beliefs about the macroeconomicconsequences macroeconomicconsequences of, say, borrowing vs. "printingmoney,"economists money," economistson on both sides of these debates debatesclearly acceptthat accept that the purpose of collectingtaxes is to secure fundsthat funds that are then respentby collecting taxes and sellingbonds selling bondsis respent by the government. In otherwords, other words, it is generallyagreed thatthe role of taxationand taxationand bond sales is to transferfinancialresources financial resources from households and businesses (as if transferringactual dollar bills or coins) to the government,where government,where they are respent (i.e., in some real sense "used"to "used"to finance governmentspending). governmentspending). This erroneousview follows from an implicit treatmentof treatmentof money in its physical form and can be avoided by consideringthe considering the balance sheet and reserve effects of taxationand bond sales. This, in short, is the purposeof purpose of this paper. 2. Althoughreserve Althoughreserve requirementsare requirementsare generally met by holding combinationof combinationof vault cash andchecking and checkingaccounts accountsat at districtFederalReserve FederalReserve banks,accounts held by depository nstibanks, accountsheld tutions at Federal Home Loan Banks, the National Credit Union AdministrationCentral LiquidityFacility, LiquidityFacility, or correspondent anksmay anks may also counttoward satisfyingthe reserv e resatisfyingthe reserve quirement.Depository quirement. Depository institutionsdo institutionsdo not have to meet these reserve requirementson requirementson "reserveperiod"(ending on Wednesdays)within (endingon daily basis. They have a two-week "reserveperiod" Wednesdays)withinwhich which mustmaintainaverage they mustmaintain average daily totalreserves equalto the requiredpercentage requiredpercentage of average daily transactionsaccounts transactionsaccounts held duringthe during the two-week period ending the preceding Monday. Thus, despitebeing despite being referred referred o as contemporaneous eserve accounting(CRA) accounting(CRA) system, it is, in practice, lagged for two days. Thatis, That is, banksalways banksalways have two days (Tuesday and Wednesday)within which to acquire (ex post) reserves needed to eliminate known Wednesday)within which deficiency. While some banks may choose to hold excess reserves, profit-maximizing banks will economize on reserves. Unless a bank has preference for funds, it will exchange excess excess reservesfor "earning ssets"such as loans or securities. 3. See Ranlett[1977, Ranlett[1977, 191-1931 or the derivation. 4. It is, of course, true that the Treasurykeeps Treasury keeps accountsat accounts at thousandsof thousandsof commercial banks and other depositoryinstitutions institutionsas as well as Federal Reserve banks. This changes things taken up in the next section. considerablyand considerablyand will be takenup 5. It is worth notingthat noting thatgovernment governmentspending spendingmust originallyhave preceded taxation.That taxation. That is, the payment of taxes could not increase the Treasury'saccount Treasury'saccount at the Fed (Figure 1, right-handbracket), right-handbracket), reducingbank reducing bank reserves, until the reserves had been created. More-

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and/orTreasury,as as the only agents capable of supplyingthem, over, the Federal Reserve and/orTreasury, capableof supplyingthem, reserves. This will be taken up in the section must have been the originalsource original source of these reserves. Reserve Accounting. TheNuances of ReserveAccounting. titled TheNuances system as a whole, bankscould attempt When there is a reserve deficiencyfor deficiency for the bankingsystemas bank begins this process (selling to resolve the deficiency by reducingdeposits. If a single bankbegins non-bankpublicor or allowing loans to be repaidwithout securitiesto a memberof the non-bankpublic U.S. securitiesto banks folreissuingthem), it will result in a multiplecontractionof contractionof deposits(assumingall (assumingall banksfoleliminatethe bankingsystem's reserve deficiency low suit). Though Though this would ultimatelyeliminatethe additionalreserves), the process takes time and will (without requiringbanks requiring banks to acquire additionalreserves), disrupt nterest rates until "equilibrium"s "equilibrium"s restored. Deficiencies therefore will usually be rereduces depositsthat thatreeliminatedas eliminatedas the banking system acquiresmore acquiresmore reserves, not as it reducesdeposits "backup." serves are required o "backup." establishmentof the FedThe IndependentTreasurySystem was in effect long before the establishmentof established in 1840, abolishedthe abolishedthe following year, re-estaberal Reserve System. It was establishedin lished in 1846, and discontinued 1921. while SpecialDehave become known as "remittance-optionanks," GeneralDepositories General Depositorieshave "remittance-optionanks,"while Special Debanks."Both are depository nstitutions positoriesare positories are currentlyreferred o as 'note-optionbanks."Both "remittance-optionank," ank," like its predecessor, predecessor,the Genwith tax and loan accounts, but a "remittance-option accountbalancesto to a Reserve bank the day afmust remit its tax and loan accountbalances eral Depository, mustremit ter the funds are received. In 1978, note-optionbanks note-option banks were given the opportunityto opportunityto accumulate he daily tax paymentsthey paymentsthey receive by transferring hem from the ordinary ax and loan accounts (where they are held interest-free or one day) into an interest-bearing "noteaccounts"unun"noteaccount." "noteaccount."Up Up to a pre-approvedimit, these funds can remain "noteaccounts" til the Treasury "calls" or them to be transferred o Reserve Banks [Manypennyand Bermudez 1992, 728]. distinctionbetween the "supplyof In this case, a distinctionbetween money" andhigh-powered high-poweredmoney money (bank "supplyof money"and hould be made. When tax receipts are placed into reserves and currency outstanding) houldbe narrowmoney (MI), howtax and loan account,high-poweredmoney high-poweredmoney is not affected. The narrowmoney demand deposits, where they are part of M1, ever, is. When funds are transferred rom demanddeposits, into tax and loan accounts(or accounts (or the Treasury'saccount Treasury'saccountat the Fed), which is not part of any of the money supply (MI, M2, etc.), the "moneysupply" "moneysupply"declines. declines. standardmeasure standardmeasureof This is not because the governmentneeds government needs the proceeds from from taxation in order to spend again, but because it chooses to coordinate ts taxing and spending.This spending.This will be taken up in the final section. Special Depositories (or note-optionbanks) note-option banks) fall into three categories: A banks, B banks and banks. A and B banks are typically smallerinstitutions, smaller institutions,while while depositories hat are classified as banks are generally large banks. Tax and loan calls are calculatedas calculatedas fractions of the book balancein balance in each tax and loan account on the previous day. "Calls"made "Calls"made on A and B banks are usually made with longer lead times times than calls made on C banks, and the latter same-dayor next-daycalls may be usually only againstwhich againstwhich same-dayor issued. in the Treasury'saccount The closing balance in Treasury'saccountat the Fed could exceed the target level for two reasons. First, previously place tax and loan calls may have been been too large. In this case, the amountof amountof spendingfrom spendingfrom accounts at Reserve banks is less than the sum of the paymentsreceived paymentsreceived directlyinto directly into accountsat the Fed and the amounts "called" rom tax and loan accounts. Second, it is possible thatthe that the paymentsmade paymentsmade to the governmentand governmentand deposited directly into accounts at Reserve banks exceed the amount presented for payment from these accounts. This could happen, for example, during months in which quarterly tax paymentssent payments sent directlyto directly to accounts at the Fed are large enough to more than compensate for governmentspending. governmentspending. The Treasurywill its exTreasury will not, in all instances,be successfulin successful in its attempt o directlyinvest its cess funds. Some note-optionbanks note-optionbanks will not meet the collateralrequirement and will be

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Additionally,tax and loan accounts, ineligible recipients of additional ax and loan funds. Additionally,tax like the Treasury's account at the Fed, may swell during unusuallyheavy quarterlytax interest on tax and loan accounts, they limit the size of banksmustpay must pay intereston payments.Because payments. Becausebanks balances they are willing to accept. When direct investment not an opthe tax and loan balancesthey scheduledcalls in an attemptto attemptto draw tion, the Treasurycan Treasury can attempt o cancel previously scheduledcalls down its balancein balance in Reserve banks. additionalreserves reserves are requiredas wonderwhether whetheradditional The readermight reader mightwonder requiredas a result of the larger establishmentof interest-bearingnote tax and loan balance. The answer is no. Since the establishmentof accountsin accounts in November 1978, Special Depositorieshave been free of reserve requirements loan deposits. againsttax againsttax and loandeposits. The Federal Reserve was, for time, prohibited rom purchasingbonds purchasingbonds directly from the during World War II, when the Fed was authorized o purchase Treasury. This changed duringWorld up to $5 billion of securities directly from the Treasury. Since then, the limit has been raised severaltimes. involves this practice. notes thatdeficit spendingmost commonlyinvolves spendingmostcommonly Boulding [1966] notesthat without taxing or selling bonds first, but if Note that the governmentcan government can deficit spend withouttaxing is greaterthan the bankingsystem bankingsystem will be left with exces taxation,the governmentspending governmentspendingis greaterthantaxation, bonds to coordinate ts deficit spending, reserves. The Treasury, therefore, prefers to use bondsto selling them to Special Depositories (and allowing tax and loan credit) before spending from its accounts at Reserve banks. The bonds, then, allow the government defend (ex ante) the fed fundsrate. Note that bonds would have to be sold even if the governmentran annually balanced governmentran an annuallybalanced eliminatethe "reserveeffects" "reserveeffects" of the Treasury's impossibleto eliminatethe budget. This is because it is impossibleto threatento daily operations.Thus, operations.Thus, swings in the Treasury'sdaily closing balance, which threatento inducethe sale of bonds despitean move the funds rate away from its target,would despite an annutarget, would inducethe balancedbudget. ally balancedbudget.

References UnitedStates TreasuryCash Balances and the Controlof Controlof MemberBank MemberBank Reserves, FisAuerbach,Irving. UnitedStates Credit.EnglewoodCliffs, Cliffs, N.J.: cal and Deb ManagementPolicies: ManagementPolicies: 7he CommissiononMoney and Credit.Englewood Prentice-Hall, 1963. Government Bonds Net Wealth?"Journal Wealth?"Journal of Political Economy 82, no. 6 (NoBarro, Robert J. "Are GovernmentBonds vember/December vember/December1974): 1095-1117. Matter?"Journalof of Public Economics 2, Blinder, Alan S., and RobertM. Solow. "Does Fiscal Policy Matter?"Journal no. (November 1973): 318-37. Matter:A Comment."Journal Comment."Journalof Economics 5, nos. 1-2 (January"DoesFiscal "Does Fiscal Policy Matter:A (Januaryof PublicEconomics5, February1976): February1976): 183-184. Economic Analysis: Macroeconomics,vol. Macroeconomics,vol. 2, 4th ed. New York: Harper & Row, Boulding, Kenneth. EconomicAnalysis: 1966. Public Economics Buiter, William H. "CrowdingOut and the Effectivenessof Fiscal Policy." Journal of PublicEconomics 7, no. 3 (June 1977): 309-28. Finance and the Federal Debt." Social Research 10 (February1943): (February1943): 38Lemer, Abba P. "FunctionalFinance 51. Econometricsand and Economic Theory:Essays Theory:Essays in Honor of Jan "Money, Debt and Wealth.' In Econometrics Arts and Sciences Press, Tinbergen, edited by W. Sellekaerts. White Plains, N.Y.: InternationalArts 1973. MacroeconomicEffects Effects of GovernmentDebt GovernmentDebt in a StochasticGrowthModel." Growth Model." Ludvigson, Sydney. "TheMacroeconomic Joumal of MonetaryEconomics MonetaryEconomics38, 38, no. (August 1996): 25-45. Manypenny, Gerald D., and Michael L. Bermudez. "The Federal Reserve Banks as Fiscal Agents and States."Federal Federal Reserve Bulletin78, Bulletin78, no. 10 (October1992): 727-737. Depositoriesof Depositoriesof the United States."

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Bell, Stephanie - Do Taxes and Bonds Finance Government Spending

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