The national accounts include the Fed's payments to the Treasury as a component of corporate taxes. These payments constituted 22% of reported corporate profits taxes in 1981. This paper discusses alternative concepts of inflationary finance. Measures for these concepts are reported for the post-World War I1 period

Robert J. Barro

English

Research Papers in Economics

NBER WORKING PAPER SERIES
MEASURING THEFED'SREVENUE FROM MONEY CREATION
Robert J. Barro
Working Paper No. 883
NATIONALBUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge MA 02138
April 1982
Theresearch reported here is part of the NBER' s research program
inEconomic Fluctuations. Any opinionsexpressed arethose of the
author and not those of the National Bureau of Economic Research.NBER Working Paper #883
April 1982
Measuring the Fed's Revenue from Money Creation
ABSTRACT
The national accounts include the Fed's payments to the Treasury as
a component of corporate taxes. These payments constituted 22% of reported
corporate profits taxes in 1981. This paper discusses alternative concepts
of inflationary finance. Measures for these concepts are reported for the
post—World War II period.
Robert J. Barro
Economics Department
University of Rochester
Rochester, N.Y. 14627
(716) 275—2669Most economists know that the Federal Reserve system pays out the bulk
of its net revenues to the U.S. Treasury. However, very few economists
(actually, none whom I have asked) know where this term appears in the national
accounts. The Federal Reserve is treated as a member of the corporate sector.
The Fed's payments to the Treasury (labeled as "interest on Federal Reserve
notes") are regarded as taxes on corporate profits (at nearly a 100% rate in
this case). Therefore, the category, "corporate profits tax accruals," includes
as a substantial component the earnings of the Fed. Anyone using the aggregate
corporate tax figures to measure levies on the activities of private
businesses should know about this peculiarity in the data.
The data from 1946-81 for amounts paid from the Fed to the U.S.
Treasury, corporate profits tax accruals (which include the first item),
and the ratio of the Fed's payments to the figures on corporate profits
taxes are shown in Table 1. (Payments from the Fed were near zero. for
most years prior to 1946.) The Fed's payments constitute 22% of measured
corporate profits taxes in 1981! The ratio was 17% in 1980, between 8%
and 12% from 1969 to 1979, between 3% and 7% from 1959 to 1968, and below
3% prior to 1959. In other words the "tax payments" by the Fed significantly
distort the reported measures of total corporate profits taxes for recent
years. Presumably, this effect will be at least this important in the near
future.
We often measure the inflation tax as the product of an interest rate,
R, andthequantity of high-powered (non-interest-bearing) money, H.
Auernheimer (1974) discusses the sense in which this construct, R.H,
measures the effective flow of revenues for the government. He—2-
Table1
The Fed's Payments to the Treasury inRelation to Corporate Profits Taxes
Year
(1)
Payments from Fed
to Treasury
Corporate Profits
Taxes
Ratio: (1)/(2)
1946
47
48
49
50
0.0
0.1
0.2
0.2
0.2
8.6
10.7
11.8
9.6
17.2
21.7
.000
.009
.017
.021
.012
.014
195J
52
53
54
55
0.3
0.3
0.3
0.3
0.3
18.6
19.5
16.9
21.1
20.9
.016
.015
.018
.014
.019
1956
57
58
59
60
0.4
0.5
0.5
0.9
0.9
20.4
18.0
22.5
21.4
21.5
.025
.028
.040
.042
.033
1961
62
63
64
65
0.7
0.8
0.9
1.6
1.3
22.5
24.6
26.1
28.9
31.4
.036
.037
.061
.045
.051
.063
.069
.083
.114
.101
1966
67
68
69
70
1.6
1.9
2.5
3.0
3.5
30.0
361
36.1
30.6
33.5 1971
72
73
74
75
3.4
3.2
4.3
5.6
5.4
36.6
43.3
45.1
43,6
54.6
.087
.099
.124
.124
.108
1976
77
78
79
80
81
5.9
5.9
7.0
9.3
11.7
14.0
61.6
71.2
74.6
70.2
64.9
.096
.098
.125
.167
.216
Notes: All amounts are in billions ofdollars. Payments from the Fed are
given in the Board of Governorsof the Federal Reserve System, Annual
Report,various issues. Corporate profits taxaccruals are in
Economic Report of the President, variousissues.-3-
also relates this measure to the change in the stock of basemoney, LJ-1.If
we neglected the finite maturity of the Fed's bond portfolio, and such items
as administrative expenditures net of fees, gold, float, Treasury deposits,
and surplus, then the payments of net revenues to theTreasury would maintain
equality over time between the monetary base (now consisting of Federal
Reserve notes and the reserves of depository institutions held at the Fed)
andtheFed's total portfolio of securities and loans. Hence, the amount
earned on the Fed's portfolio (all of which would be transferred to the
Treasury) would equal R•H. In practice, there are some differences--these
include the following: 1) when interest rates rise, the yield on the Fed's
holdings (measured at book value) respond only gradually, and vice versa
when interest rates fall; 2) a small part of the Fed's revenuesgo into
surplus; and 3) there are changes over time in gold, treasury deposits,
float, etc.
Table 2 reports values from 1946-81 for the Federal Reserve's
net revenues; for the product, Rfl (where iiisthe annual average of high-
powered money); and for the change in base money, iH. The interest rate, R,
is measured as the yield on U.S. government securities with 3-year maturities
(3 to 5 years before 1953). This rate approximates the yield on the Fed's
portfolio. The Fed's revenues are always below the constructed measure,
R•H. Principally, this gap reflects an excess (currently about $20 billion)
of the monetary base over the Fed's loan portfolio (measured at book value).
Basically, a gap of roughly this size appeared with the large acquisitions
of gold during the 1930s. Otherwise, this gap has fluctuated mostly because
of changes in Treasury deposits, float, and gold holdings (measured at book
value, except for a few increases in the official price of gold).-4-
Table2
Measures of the Revenue from Inflationary Finance
Year
Net Revenues ot
the_Fed
R.H tH
1946
47
48
49
50
0.1
0.1
0.2
0.2
0.2
0.5
0.6
0.7
0.6
0.7
1.0
0.7
2.2
-4.4
1.2
1951
52
53
54
55
0.3
0.4
0.4
0.3
0.3
0.9
1.1
1.2
0.8
1.2
4.2
2.2
-0.8
-0.9
0.5
1956
57
58
59
60
0.5
0.6
0.6
0.7
1.0
1.6
2.0
1.4
2.2
2.0
0.8
0.0
-0.1
0.1
-1.7
1961
62
63
64
65
0.8
0.9
1.0
1.1
1.4
1.7
1.8
1.9
2.2
2.4
1.5
1.2
2.7
2.8
3.3
1966
67
68
69
70
1.7
2.0
2.5
3.1
3.6
3.2
3.2
3.9
5.2
5.6
3.2
3.6
5.3
3.6
4.1
1971
72
73
74
75
3.3
3.4
4.5
5.7
5.7
4.7
5.1
6.6
8.1
8.1
5.8
4.7
8.6
8.4
44
1976
77
78
79
80
81
6.0
6.2
7.7
9.6
11.9
14.6
7.8
8.2
11.2
14.3
18.3
23.6
7.6
9.5
14.8
10.5
13.1
8.0
Notes: All amounts are in billions of dollars. Net revenues of the Fed are
in the Annual Report, various issues. R from 1953-81 is the yield on
U.S. government securities with 3-year maturities (Economic Report of
the President), and from 1946-52 is the yield_for 3- to 5-year maturities
(Banking and Monetary Statistics, 1941-70). H is the annual average of
the monetary base, as reported in Banking and Monetary Statistics, 1941-
70; Annual Statistical Digest, 1970-79; and the Federal Reserve Bulletin.
Mt Il -Hi
where H is the seasonally-unadjusted value for December
(sources as aSove for Hi.-5-
Recently, the Fed's revenues have lagged behind R•Hbecause of sharp
increases in interest rates. In 1981the Fed's net proceeds of $14.6 billion
were substantially below the figure ofRH =$23.6billion
The change over the year in themonetary base, H, would correspond
to R.IT only if the nominal interestrate equaled the growth rate of the
monetary base. Typically, Ed-I <R.J-1applies, although substantial fluctua-
tions arise from year toyear. Notice that the change in high-powered
money for 1981 is only $8.0 billion, ascompared with the Fed's revenue of
$14.6 billion and the value of R•H=$23.6billion.(A rise in the real
interest rate means more revenueto the Fed without any change in thegrowth
rate of prices or the monetary base.)
Table 3 expresses the measures ofinflationary finance as ratios to the
federal government's total tax andnon-tax receipts, T, and as ratios to
nominal GNP. As a fraction of total federal
receipts in 1981, the inflation
tax, RH, is 3.8%, while the Fed's revenuesare 2.3%. These percentages are
roughly double those applying in the early l960s.As a fraction of GNP in
1981, the inflationtaxis 0.8%, while the Fed'srevenues are 0.5%. These
fractions are more than double those forthe early 1960s.1T
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 —7—
Notes to Table 3: T is total federal tax and non-tax receipts,
and GNPisnominal GNP(EconomicReport of
President). Other variables are defined
in Table 2.- 8-
Reference
Auernheinier, L., "The Honest Government's Guide to the Revenue from
the Creation of Money," Journal of Political Economy, 82,
May/June 1974, 598-6O6
Footnotes
*The research reported here is part of the NBER's research program in
Economic Fluctuations. Any opinions expressed are those of the
author and not those of the National Bureau of Economic Research. I
have benefited from research support by the National Science Foundation.
Jo Anna Gray wasagreat help in locating some data for 1981. Cathy
McDevitt found some other data. Marty Feldstein motivated me to look
into this topic. He told me that the Fed's revenues appeared in a
strange place in the national accounts, but he couldn't remember where.
1At least someone is making a lot of money in recent years.

Measuring the Fed's Revenue from Money Creation

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