Have you ever wondered where the government actually keeps its money? Governments usually get tax revenue in bursts, for example when income taxes come due – April 15^th here in the US. They then have to spend all that money over the course of the year. So where do they keep their cash in the meantime? Essentially, a giant checking account.

Right now, the US Federal Government keeps most of its money, over \$600 billion, in the Treasury General Account (TGA) at the Federal Reserve. But they haven’t always used this account this way. Prior to the 2008 financial crisis, the TGA had only about $5 billion, and most of the government’s money was in a mix of smaller accounts at private banks.¹ So how does this account work, and why did it suddenly see more use after 2008?

The main characters

First, let’s go over the main players in this story. There’s the US Treasury, which is the part of the US government’s executive branch that collects taxes, takes on debt by issuing bonds, and sends the actual checks when the government spends money.

Then there’s the US Federal Reserve, our central bank. Call it “the Fed” for short. It’s job is to control the supply of US dollars and the availability of loans in our economy, with the goal of managing inflation and unemployment – the so-called “Dual Mandate”.

The Fed also your favorite bank’s favorite bank – they hold deposits and offer loans for private banks, providing a central way for banks with extra cash on hand to lend money to banks with less cash on hand. Hence, central bank.

Private banks are the ones you’re probably most familiar with. They’re the corporations that lend money and hold deposits for individuals and businesses. If you have a US bank account, it’s almost certainly with one of these – the largest ones being JPMorgan Chase, Bank of America, and Citigroup.

Why the government wants money to move

In general, before 2008, the government didn’t want to keep all its money at the Federal reserve because it wanted that money to be available for lending to help grow the economy.

Suppose you deposit a thousand dollars in a private bank. Your neighbor goes to the bank and wants a $500 loan to fix her pizza delivery van, so the bank takes part of your deposit and lends it to her.

The government loves this kinda stuff. The bank earns money through interest, your neighbor gets to fix her van, her customers get their pizza, and the economy grows. And usually, it doesn’t cost you anything. You’re not the bank’s only customer, so if you need your $1000 all at once, the bank has enough money ready to go to give it to you.

This all works great so long as we never see the specific situation where all the bank’s customers all want their money all at once. That’s called a “run” on the bank, and it’s why banks fail. This happened to lots of banks during the Great Depression and a bunch of people lost all their savings. To stop this from happening again, the government created the Federal Deposit Insurance Corporation (FDIC), which insures people’s money and pays them back if a member bank fails, to the tune of $250,000 per category of account per depositor.

The Fed’s problem

If the Treasury’s money isn’t being lent out, it’s not growing the economy, and since the Treasury deals with a lot of money that’s a noticeable effect.

One possible solution to this problem is that the Treasury deposits its money with the Federal Reserve, the Fed lends it out to private banks, and those banks further lend it out to people. But this comes with its own problems. Before 2008, the Federal reserve only held a few tens of billions of dollars of cash at any one time.² Adding a few hundred billion dollars of the government’s money that fluctuates up and down semi-randomly through the year would make it hard for the banks to adapt.

The Fed could try to stabilize its cash reserves by frequently buying and selling bonds on the open market, but that would be inconvenient. Instead, the treasury spread its money out over both the Fed and many different private banks through the Treasury Tax and Loan (TT&L) program. Depending on the day, the Treasury might have anywhere from about \$3 billion to $100 billion in these accounts.

What changed in 2008

There was a big financial crisis in 2008. You might have heard of it.

To try and stop the bleeding, the Federal reserve bought over a hundred billion dollars of the mortgage-backed securities that were the immediate cause of the bank failures, and lent tens of billions more to shaky private banks to keep them afloat a bit longer. All this extra money flowing around brought a risk that the value of a dollar would go down quickly, causing a spike in inflation. The Fed could prevent this by hoovering up enough free cash to re-balance the money supply, so they decided to start paying interest on accounts. This convinced those remaining private banks that weren’t failing to start storing loads of money at the Fed – hundreds of billions.

For the Treasury, this meant two things. First, there was now a financial incentive to move more money into the TGA at the Fed. Second, the Treasury’s account at the Fed was now only a small part of a much larger amount of cash, so it wouldn’t cause so much volatility. Add onto all this the loss of trust in private banks, and putting all our money in the TGA now becomes the obvious move.

Why $600 billion?

So now we know how the TGA became the main checking account for the US Federal Government. But why did it get up to $600 billion, especially given that the US has so much debt?

Well, besides balancing spikes in income, there’s another big reason the government wants to have so much cash on hand. Every so often, the US national debt pushes up against the “debt ceiling”, a hypothetical statutory limit to how much debt the executive branch can have. So far, Congress has always raised it sooner or later – which is definitely better than America not paying its bills. But while the senators and representatives argue and bargain with each other to make that happen, it’s good for there to be a bit of a cash cushion in our accounts. Turns out that, like all of us, the government could use some money in the bank for a rainy day.

Coming soon: The mountain that weighed the Earth