Bond Sales
Sales of treasury bonds, notes, and bills, which play an integral role in fiscal and monetary policy.
The conventional view assumes the government must sell
securities to finance the difference between its spending and
its tax revenues (deficit spending). However, this view overlooks the crucial role that bond sales play in managing aggregate bank reserves and in the administration of short-term
(overnight interbank) interest rates.
When government spends, recipients of Department of
the Treasury checks deposit them into banks, which adds
reserves to the banking system. When government taxes,
reserves decrease. The Federal Reserve does not pay interest
on reserves, so if government deficit spending (spending that
exceeds tax revenues) causes excess total bank reserves, the
overnight interbank interest rate quickly falls to 0 percent. To
maintain a positive overnight rate, the government can sell
securities to drain the excess reserves from the system. Thus,
logically, government spending precedes bond sales and
functions to support interest rates, not to fund expenditures
as generally assumed. In this sense, the imperative of treasury
bond sales should not be thought of as borrowing, since the
sales do not finance or fund government expenditure.
The national debt in this sense provides a record of government action to maintain a positive short-term interest
rate and functions as an interest rate maintenance account.
Modern (state) money remains fiat currency (irredeemable paper currency that derives its purchasing power
from the declaratory fiat of the issuing government), with the
national government the monopoly issuer. Treasury bonds
thus differ from other, nongovernment types of debt, because
no financial constraint restricts the issuer of the currency.
Government debt denominated in another currency or debt
issued by parties not acting as currency monopolists constitute very different matters.