

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.