Chris Pacia clarifies MMT and U.S. law

Chris Pacia’s May 21 post on X made a narrow claim about how to describe the U.S. monetary system: whatever Modern Monetary Theory says in theory, he wrote, it does not describe how the United States operates under current law. The point of his post was not that the U.S. government cannot run deficits or that the Federal Reserve cannot buy Treasury securities. (x.com) It was that statutes and institutional arrangements set limits on how Treasury spending is authorized and how the Fed can finance government debt. (law.cornell.edu) Two pieces of law are central to that distinction. One is the Federal Reserve Act provision now codified at 12 U.S.C. 355, which says direct obligations of the United States may be bought and sold by Federal Reserve banks “only in the open market.” The other is the Anti-Deficiency Act, which bars federal officers from obligating or spending money in excess of appropriations or before appropriations are made, unless authorized by law. (gao.gov) ### What exactly was Pacia pushing back on? Chris Pacia’s post addressed a common shorthand used in online finance debates: that the U.S. government can simply spend by creating money and therefore faces no operational financing constraint. (x.com) His clarification was that this is not a description of the system as it exists today under U.S. statutes. The Congressional Research Service drew a similar distinction in a 2019 report on deficit financing and MMT. CRS said discussions of MMT often differ from “current U.S. economic and governance systems,” which is the legal and institutional point Pacia was making rather than a broad macroeconomic argument about inflation or debt sustainability. (law.cornell.edu) ### Why does the Federal Reserve Act matter here? Section 355 of Title 12 is the clearest statutory constraint Pacia referenced. The law says direct obligations of the United States may be bought and sold by Federal Reserve banks “only in the open market,” language that bars routine direct Treasury-to-Fed financing of the kind often implied in simplified MMT descriptions. (x.com) That does not mean the Fed is absent from Treasury financing. The Federal Reserve can and does buy U.S. government securities in the secondary market as part of monetary policy operations. Pacia’s point was narrower: under current law, the Fed is not set up as a standing mechanism for unlimited direct financing of Treasury outlays. (congress.gov) ### How does the Anti-Deficiency Act fit in? The Anti-Deficiency Act governs the spending side. GAO says the law prohibits federal employees from making or authorizing expenditures or obligations in excess of available appropriations, and from involving the government in payment obligations before funds have been appropriated unless otherwise allowed by law. (law.cornell.edu) That matters because it means Treasury cannot simply disburse funds whenever it chooses outside the appropriations process. Congress authorizes and appropriates spending, and agencies that exceed those limits can face reporting requirements, administrative discipline, and in some cases criminal penalties, according to GAO. (law.cornell.edu) ### Didn’t the Fed once finance the government more directly? The Federal Reserve’s own history shows a closer wartime financing relationship did exist. During World War II, the Fed committed to maintaining low rates on Treasury debt and bought large amounts of government securities to support that peg, according to Federal Reserve History. (gao.gov) March 1951 is the date Pacia’s broader point runs through. The Treasury-Fed Accord that month separated government debt management from monetary policy and, in the Fed’s account, “laid the foundation for the modern Fed.” That institutional separation is part of why many lawyers, market participants and policymakers do not describe the current U.S. system as one of unrestricted Treasury-Fed monetary financing. (gao.gov) ### So what is the practical takeaway from his post? The practical takeaway is legal, not rhetorical. Under current U.S. law, Congress appropriates spending, the Treasury finances government operations within that framework, and the Federal Reserve conducts monetary policy under statutes that restrict direct purchases of Treasury obligations. (federalreservehistory.org) The next place to check the claim is the statutory text itself: 12 U.S.C. 355 for Federal Reserve purchases of U.S. obligations and 31 U.S.C. 1341, along with GAO’s Anti-Deficiency Act guidance, for spending limits on federal officials. (law.cornell.edu) (federalreservehistory.org)