Foreign Affairs

The funds to pay taxes and buy govt securities come from govt spending (or lending which is a subset of spending but to acquire financial assets).

“Govt debt” is akin to a savings account at the Fed, as the Fed is the U.S. Treasury’s fiscal agent.

On the gold standard, govt securities functioned to delay convertibility, with the yields a function of what it takes to get someone with a dollar to not demand gold with it.

Today govt securities are a relic, and previous to interest on reserves (banks’ checking accounts at the Fed) the only tool available to pay interest to set positive interest rates.

If we allowed the Treasury to overdraft at the Fed, there would be no reason to issue govt securities.