left me with a WTF... Tom Hickey Reply: August 9th, 2010 at 1:16 am Unforgiven, it's not quite correct to say that the Treasury "funds" the FRB's. Congress appropriates funds for disbursement IAW its constitutional prerogative, and Treasury disburses the funds as called for as the executive branch makes the deals, e.g., by sending out checks or more likely directly crediting deposit accounts. These have to clear in the interbank settlement system, in the US, the FRS. The Fed not the Treasury provides reserves, to the Treasury has to get the necessary reserves for settlement from the Fed. Since Treasury is prohibited by law from running overdrafts at the Fed, it issues Treasury securities equal to the amount to be disbursed. The Fed cannot legally buy these directly ("monetize" the disbursements), so it has to sell them at auction to primary dealers who then sell them to others. This auction sale switches the tsy's for reserves that the Fed credits to the Treasury reserve account for settlement of its disbursements in the interbank market. This makes it seem as though the reserves are removed from the system through borrowing from those who purchase the tsy's, but these funds just get injected back into the system immediately through the Treasury disbursements that necessitated the tsy's as an offset. So it's a wash at the macro level, with the funds that Treasury disburses being saved at interest in the form of tsy's. What actually happens monetarily is that the excess reserves resulting