Republicans and Democrats have many disagreements about fiscal policy. But almost all lawmakers on Capitol Hill agree that there are exactly three ways that the U.S. government can finance new public spending: By raising taxes, cutting existing outlays, or increasing the national debt.
But this is a fiction.
In truth, the federal government can fund large-scale public investments without burdening taxpayers, trimming other budget items, or adding to deficits. And not only can Uncle Sam work such sorcery in theory, he has already done so in practice.
During World War II and its immediate aftermath, the Federal Reserve committed to buying as many Treasury bonds as necessary to keep yields on U.S. debt flat. Much of that debt never made its way back into private hands. In keeping those bonds permanently on its balance sheet, the central bank effectively financed much of the U.S. war effort through printing money. When a central bank takes permanent ownership of its own government’s debt, that debt ceases to exist for all practical purposes. The Fed may own the U.S. government bonds, but the U.S. government owns the Fed. No entity can be meaningfully indebted to itself. Thus, by buying up its own bonds, the U.S. financed about 15 percent of its involvement in WWII through printed dollars rather than present or future taxes.