2 Thomas Klitgaard and Linda Wang, “Is the United States Relying on Foreign Investors to Fund Its Larger Budget Deficit?,” Liberty Street Economics, Federal Reserve Bank of New York, November 28, 2018.
3 To put it simply, duration has to do with the time to maturity. Keynes had discussed a similar concept he called the “square rule”—noting that potential capital losses on longer maturity bonds are increasingly likely to wipe out interest earnings as the interest rate rises.
4 Paul Sheard, “Repeat After Me: Banks Cannot And Do Not ‘Lend Out’ Reserves,” Standard & Poors Credit Market Services, Global Economics and Research, August 13, 2013.
5 James K. Galbraith, foreword to Seven Deadly Frauds of Economic Policy by Warren Mosler, (Valance Company, 2010), 2.
6 Some were also “redeemable” or convertible to precious metal or other currencies—although many or most were not. And it is sadly true that some governments abused the privilege—issued too much currency, or “cried down” its value (announced that outstanding currency would henceforth be accepted in payment at a lower nominal value), or even refused to accept its own currency in payment (effectively a default). There are many sorry tales that one could tell when it comes to monetary history—both of failures of private monies as well as of public monies. The Bank of England got its start when the King defaulted on his tally sticks, refusing to accept them in payment to the Crown, and according to some reports, Zimbabwe’s government today is refusing to accept its own coins in payment.
7 See Farley Grubb, “Colonial Virginia’s Paper Money Regime, 1755–1774: A Forensic Accounting Reconstruction of the Data,” Historical Methods 50, no. 2 (2017): 96–112; and Cory Cutsail and Farley Grubb, “The Paper Money of Colonial North Carolina, 1712–1774,” Working Paper No. 2017-01, Alfred Lerner College of Business and Economics, University of Delaware, 1971. Quotes here are from the second paper.
8 Sometimes provisions were made in which some notes were not burned but were retained for specific uses. Importantly, however, the idea was not to re-spend them.
9 In the UK, these views were called the “Treasury View.”
10 See Serban V. C. Enache, “Thomas Edison and Henry Ford Explain Modern Monetary Theory in 1921,” Hereticus Economicus, April 23, 2018.
11 See L. Randall Wray, “A Monetary and Fiscal Framework for Economic Stability: A Friedmanian Approach to Restoring Growth,” September 1, 2002.
12 Note that this sequence is indicated by our term “tax return” (and the word “revenue” itself is derived from the Latin for “come back” (revenire) which became revenue in French and then in late Middle English. What “comes back”? The currency is returned to the sovereign that issued it.
13 The domestic private sector can also have net financial assets in the form of claims on the rest of the world.
14 The Treasury, Fed, and special banks cooperate using complex procedures and tax and loan accounts to ensure Treasury checks never bounce.
15 Klitgaard and Wang.
16 Plus remittances, foreign aid, and factor payments to foreigners.
17 Plus factor payments to the United States, and foreign aid and remittances to the United States (if any).
18 In March 2005, in response to a question by Rep. Paul Ryan (“Do you believe that personal retirement accounts can help us achieve solvency for the system [Social Security] and make those future retiree benefits more secure?”), Chairman Greenspan said: “Well I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.” Later, in a 60 Minutes interview by Scott Pelley, Chairman Bernanke said much the same thing. When asked about the Fed’s bailout of Wall Street, Pelley asked “Is that tax money that the Fed is spending?” Bernanke (correctly) responded: “It’s not tax money. The banks have—accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed.” That is true, and it applies equally well to Fed purchases of assets (Fed “lending” is really just the purchase of a bank’s IOU). In truth, both Bernanke and Greenspan have accurately described the way both the Fed and the Treasury spend—they credit bank accounts.
19 When financial institutions are involved, we actually use quadruple entry booking since payments are made and received through banks so there are entries on their balance sheets too.