Table of Contents
The background: Mint the coin
Law Professor Rohan Grey wrote an interesting paper describing how the US government can use an obscure provision of the US Coinage Act to circumvent the political fight about raising, or not, the US debt limit.
In it, he argues that
Reintroducing coinage into our fiscal discourse raises novel an interesting question about the broader nature of, and relationship between, “money” and “debt”. It also underscores how legal debates over fiscal policy implicate broader social myths about money.
And he’s right.
Our teachable moment: How money and banking actually work
Not only do most people not know the slightest about how money and banking work, but THE dominant school of economic thought (neoclassical economics) doesn’t even consider it to be important.
In truth, very few things are as important to society as to how its money and banking systems work, and that the dominant school of economic thought ignores this is not just weird, it feels like something the community of YouTube conspiracy theorists should be talking about.
But this, this weird ability to “just” mint a $1T platinum coin, and deposit it into the US Treasury account at the Federal Reserve, can help us show people just how arbitrary the rules of our economy, and the rules of our money system, and the rules of our banking system, truly are.
So, what exactly is the problem?
We have rules about money and banking that are a holdover from when US dollars were convertible into gold, gold was (effectively) the only real form of money, and since exchange rates of national currencies were all pegged to gold, they were all pegged to each other.
In the US that system was abandoned in 1971 when the United States went off the gold standard, implemented a full fiat currency, whose value relative to other currencies floated.
But, as Rohan Grey says in his paper:
… monetary regimes matter, and what may be technically impossible and/or undesirable in a gold standard or fixed exchange rate regime, may conversely be possible and/or desirable in a floating rate, fiat currency regime.
So rules that worked well in a gold standard economy can (and do) hinder operations of a full fiat economy.
Currently, when Congress has authorized spending but not raised the debt limit to allow that spending (which would be like going to a restaurant, ordering and eating a meal, then refusing to pay the bill), they’ve put the President in a no-win situation.
In such a scenario, Congress has instructed the US government to:
- Spend a certain amount
- Tax a certain amount
- Maintain a limit or ceiling on how much debt can be incurred
And simply put, something has to give.
The President can either violate the instruction to spend a certain amount, the instruction to tax a certain amount, or he can spend such that we blow through the debt ceiling.
All three of which require the President to violate laws passed by Congress.
Where did the debt ceiling come from?
In the beginning… By which I mean Article 1, Section 8 of the US Constitution, Congress has the power “to borrow Money on the credit of the United States”.
Congress did this along with its power “to pay the Debts and provide for the common Defence and general Welfare of the United States”.
Every need to spend money on whatever was in bills for that whatever. Every government program had a dedicated funding authority.
This worked well up until the early part of the 20th century, by which time the US government budgeting process had gotten big and complex, as had the US economy.
Distinct funding sources and rules for each program became hard to manage.
So Congress merged our ability to fund and to borrow into one mechanism at the US treasury when in 1917 President Wilson signed the Second Liberty Bond Act into law.
After a decade or so, the treasury wanted greater flexibility.
After another decade or so (and presumably much politicking), in 1939, President Roosevelt signed the Public Debt Act into law, in which Congress eliminated all the different limits on types of bonds the treasury can issue and replaced them with one debt limit ceiling.
This resulted in numerous subsequent political fights about actually spending money Congress had previously authorized.
So, in 1979 Congress made it easier to raise the debt ceiling by implementing The Gephardt Rule, which allowed the House of Representatives to raise the debt ceiling by including the raising of it in a budget resolution bill. Thereby allowing it to be raised without a separate vote.