Article I, Section 8 of the U.S. Constitution (1789) grants Congress the power to “coin Money [and] regulate the Value thereof,” as well as to “make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers.”
In 1871, the Supreme Court jointly decided two cases – Knox v. Lee & Parker v. Davis – known as the “Legal Tender Cases,” which held that the requiring private creditors to accept legal tender currency not redeemable in gold or silver in payment of debt contracts did not violate the Constitution.
Even the advocates of a strict literal construction of the phrase, 'to coin money and regulate the value thereof,' while insisting that it defines the material to be coined as metal, are compelled to concede to Congress large discretion in all other particulars.
The Constitution does not ordain what metals may be coined, or prescribe that the legal value of the metals, when coined, shall correspond at all with their intrinsic value in the market.
... More than once in our history has the regulation been changed without any denial of the power of Congress to change it, and it seems to have been left to Congress to determine alike what metal shall be coined, its purity, and how far its statutory value, as money, shall correspond, from time to time, with the market value of the same metal as bullion.
In 1933, Congress passed a Joint Resolution to “assure uniform value to the coins and currencies of the United States,” which held that:
[E]very provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby, is declared to be against public policy.
... Every obligation, heretofore or hereafter incurred, whether or not any such provisions is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any such coin or currency which at the time is legal tender for public and private debts.
In 1935, the Supreme Court decided a series of cases – Norman v. Baltimore & Ohio Railroad Co. & States v. Bankers' Trust Co, Nortz v. United States, and Perry v. United States – together known as the “Gold Clause Cases,” which upheld the constitutionality of the Roosevelt administration’s currency reforms during the Great Depression, including the voiding of all gold clauses in public and private contracts under the Joint Resolution of 1933.
In the accompanying majority opinion of Perry, the most famous of these cases, the Court held that:
There is no question as to the power of the Congress to regulate the value of money -- that is, to establish a monetary system, and thus to determine the currency of the country.
...Public law gives to...coinage a value which does not attach as a mere consequence of intrinsic value. Their quality as legal tender is an attribute of law aside from their bullion value.
They bear therefore the impress of sovereign power which fixes value and authorizes their use in exchange (Quoting Ling Su Fan v. United States (1910)).
In 1971, President Nixon directed the Treasury Secretary to close the “Gold Window” and suspend the international convertibility of the U.S. dollar into gold and other reserve assets.
In 1973, the “Bretton Woods” system of international fixed exchange rates, which had been in operation since the conclusion of World War II, ended and was replaced with a system in which the value of the U.S. dollar was allowed to “float” freely against other currencies.
As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills[.]
In this sense, the government is not dependent on credit markets to remain operational.
In 2019, the United States Court of Appeals for the Second Circuit – in United States v. Wells Fargo – determined that Federal Reserve Banks act as “agents” of the United States when they conduct emergency lending programs, and that the funds they lend out are “provided” by the United States, and are “as much a product of the ‘public fisc’ as money that is distributed by the Treasury Department.”
In its accompanying opinion, the Court noted that:
The Fed is comprised of twelve [Federal Reserve Banks], which are separately incorporated banks dispersed geographically through the country, and a Board [of Governors], which is based in Washington D.C. and is an independent agency within the executive branch.
...The United States’ overall control [over Federal Reserve Banks] is undisputed...The [Federal Reserve Banks] extend emergency loans pursuant to a statutory delegation from Congress and according to the terms set forth by Congress in the [Federal Reserve Act]. Congress may revoke this authority at any time or change the terms of its exercise. See Am. Bank & Tr. Co. v. Fed. Reserve Bank of Atlanta, 256 U.S. 350, 359 (1921) (“The policy of the Federal Reserve Banks is governed by the policy of the United States with regard to them.”).
...Amici concede that the [Federal Reserve Banks] are, as they put it, “federal instrumentalities." ...And they concede that they are not merely standalone instrumentalities, they are part of a system created by Congress and subject to the Board [of Governors]’s general supervisory authority. See McKinley v. Bd. of Governors of Fed. Reserve Sys., 647 F.3d 331, 332 (D.C. Cir. 2011); 12 U.S.C. § 341. ...[Federal Reserve Bank] Amici at 7 (“Congress established Federal Reserve Banks for public purposes to be the operating arm of the nation’s central bank, in accordance with the statutory mission set out in the [Federal Reserve Act].”).
Amici argue that the Fed’s emergency lending facilities do not qualify as money requested or demanded by the [United States] because the [Federal Reserve Banks] are not funded by the United States Treasury. Defendants make a similar point.
...But the [False Claims Act] nowhere limits liability to requests involving “Treasury Funds.” ...The text of the [False Claims Act] is deliberately broad, including “any request or demand...for money or property...whether or not the United States has title to the money or property,” as long as “the United States Government...provides or has provided any portion of the money or property requested or demanded.
...The statute makes no mention of the Treasury Department. Indeed, as the United States and the Board [of Governors of the Federal Reserve System] concede, the word “‘provides’ is properly read to reach some circumstances in which the government makes money available through an exercise” of its legal authority outside the appropriations process. ...United States ex rel. Health v. Wisconsin Bell, Inc., 111 F. Supp. 3d 923, 926 (E.D. Wis. 2015) (“The fact that [Universal Service] Fund money does not pass through the Treasury does not make the government any less its source.”). This is such a circumstance.
...[Federal Reserve Banks] are the issuers of base money. They do not lend out preexisting funds; they create “funds” in the most elemental sense. They perform this function on behalf of the United States, as federal instrumentalities.
...As [Federal Reserve Bank] amici explain:
These new reserves are created ex nihilo, at a keystroke.
When the Fed makes a $100 million loan to [a bank], the bank is credited with $100 million of reserves...No preexisting “source” of funds exists. Crediting the loan amount to the borrowing bank’s reserve account creates new reserves, increasing the overall level of reserves in the banking system by exactly the amount lent.
(fn: Although banks and other depository institutions can also create money in the form of deposits, only the Fed can issue legal tender. Banks must always stand ready to redeem their deposit credits in Federal Reserve notes. The Fed faces no such constraint).
...The [Federal Reserve Banks’] promises to pay notes serve as money or legal tender because they must be accepted by the Treasury and by other banks as payment. As the United States explains, “the United States vested the Reserve Banks with the authority to make the loans at issue and to credit the Reserve Bank accounts of borrowing institutions, thereby increasing the overall money supply.”
Our Constitution bestows this power on Congress.
(fn 17: Knox v. Lee traces the state’s prerogative back to The Case of Mixt Money (1605) ... (“the king by his prerogative may make money of what matter and form he pleaseth, and establish the standard of it, so may he change his money in substance and impression, and enhance or debase the value of it, or entirely decry and anul it” ... “no other person” may make money “without special license or commandment of the king”)).
Had Congress not delegated this power to the Fed, the [Federal Reserve Banks] would be unable to extend the loans at issue in this case.
And we see no reason why Congress’s decision to separate the [Federal Reserve Banks] from the Board [of Governors of the Federal Reserve System] and the Board from the Treasury Department should alter our conclusion that the United States is the source of the purchasing power conferred on the banks when they borrow from the Fed’s emergency lending facilities.
The loans in this case are also money provided by the United States in a further sense. The Board puts Federal Reserve Notes into circulation by supplying them to the [Federal Reserve Banks], which are the actual direct issuers. See 12 U.S.C. § 411 [& 12 U.S.C. § 412].
Thus, when banks...withdraw the proceeds of loans requested from (and extended by) [Federal Reserve Banks], the banks quite literally receive money “provided” by the Board [of Governors of the Federal Reserve System], i.e. money made available and/or supplied by the United States.
...Further, we are not moved...by the fact that private banks serve as the [Federal Reserve Banks’] nominal shareholders. See 12 U.S.C. § 282. ...Today, the United States, not the nominal shareholders, are the economic owners of the [Federal Reserve Banks].
Among other things, Congress has provided that the net earnings of the [Federal Reserve Banks] be “recorded as revenue by the Department of Treasury,” ...and the [Federal Reserve Banks] are required to remit all their excess earnings to the United States Treasury[.]
Thus, the “capital” contributions made my member banks function as debt interests owned by the member banks, not equity interests. See [Federal Reserve Bank] Amici at 8 (“Commercial banks acquire Federal Reserve Bank stock not for ownership or control, but because it is a condition of membership in the Federal Reserve System”).
...And, as the United States explains, “in the event that a[n] [Federal Reserve Bank] is liquidated, any value remaining (after debts are paid and certain required payments are made)...become[s] the property of the United States.” United States Amici at 6 (citing 12 U.S.C. § 411).
Accordingly, a bank’s failure to pay the applicable amount of interest on a loan from an [Federal Reserve Bank] injures the public fisc, not the [Federal Reserve Bank’s] nominal shareholders; money created for the Term Auction Facility or the Discount Window is as much a product of the “public fisc” as money that is distributed by the Treasury Department.
In 1792, Congress passed the first Coinage Act, which created the United States Mint, and established dollar as the standard unit of U.S. currency.
In 1982, Congress passed Public Law 97-258, amending the Coinage Act, and providing that:
The Secretary of the Treasury...shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States.
In 1995, Congress passed Public Law 104-52, establishing the U.S. Mint Public Enterprise Fund, and providing that:
In 2002, the United States Court of Federal Claims – in Ains, Inc. v. United States – determined that the U.S. Mint, “[t]hrough the Public Enterprise Fund, funds all of its activities with revenues derived solely from the Mint’s operations.”
[A]ll receipts from Mint operations and programs, including...the production and sale of circulating coinage...shall be deposited into the Fund and shall be available without fiscal year limitations;
...[A]ll expenses incurred by the Secretary of the Treasury for operations and programs of the United States Mint...shall be paid out of the Fund;
...[T]he Fund may retain receipts from the Federal Reserve System from the sale of circulating coins at face value for deposit into the Fund;
...[A]t such times as the Secretary of the Treasury determines appropriate, but not less than annually, any amount in the Fund that is determined to be in excess of the amount required by the Fund shall be transferred to the Treasury for deposit as miscellaneous receipts.
This decision was subsequently affirmed upon appeal in 2004 by the United States Court of Appeals for the Federal Circuit (Ains, Inc. v. United States).
That Congress intended the Mint to be self-financing is buttressed by legislative history. The House Report accompanying the bill containing [31 U.S.C. § 5136] noted that the Mint would be“financed through the transfer of seigniorage.” H.R. Rep. No. 104-183, app. 6, at 23 (1995).
Significantly, the purpose of establishing the Public Enterprise Fund was to relieve the Mint of the “funding variables imposed by annual appropriations.” Id.
The House Committee on Appropriations has repeatedly noted that the establishment of the Mint Private Enterprise Fund has “eliminated the need for future appropriations to support the mission of the U.S. Mint.” H.R. Rep. No. 104–660, app. 10, at 35 (1996); H.R. Rep. No. 105–240, app. 13, at 36 (1997); see also H.R. Rep. No. 106–231, app. 15, at 25 (1999).
The above cited legislative histories are in reality redundant and unnecessary. ...The statute here is clear on its face. In establishing the Public Enterprise Fund, Congress plainly intended the Mint “to operate without the benefit of appropriated funds.”
...In fact, the Mint has never lost money and its statuary scheme contemplates continuing surpluses that will be deposited in the general Treasury as miscellaneous receipts.
In 2019, the United States Court of Appeals for the Second Circuit – in United States v. Wells Fargo – observed that:
Federal law recognizes two types of legal tender in the United States: “United States coins” and “Federal reserve notes.” 31 U.S.C. § 5103; see also 12 U.S.C. § 411. The Treasury Department physically creates both. See 31 U.S.C. § 304; id at § 5114; id at § 303; 12 U.S.C. § 418.
However, while the Treasury Department determines the supply of United States coins, 31 U.S.C. 5111(a)(1) (“The Secretary of the Treasury...shall mint and issue coins...in amounts the Secretary decides are necessary to meet the needs of the United States”), the Board [of Governors of the Federal Reserve System] controls the supply of notes, 12 U.S.C. § 411 (“Federal reserve notes, to be issued at the discretion of the Board...are hereby authorized”); id at § 419.
The Board [of Governors of the Federal Reserve System], like the U.S. Mint, is an agency of the United States. That the Board, unlike the Mint, is not also a bureau of the Treasury Department is of no legal significance here.
In 1996, Congress passed Public Law 104-208 – also known as the Omnibus Consolidated Appropriations Act of 1997 – which, among other things, amended the Coinage Act to provide that:
One of the original co-authors of the provision was Rep. Michael Castle (R.-Del.), who at the time was the Chairman of the House Financial Services Committee’s Subcommittee on Domestic and International Monetary Policy, which had jurisdiction over matters related to coinage. According to Rep. Castle, his goal in introducing the provision:
The Secretary [of the Treasury] may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time.
The other original co-author of the provision was Philip Diehl, who at the time was the Director of the U.S. Mint. According to Diehl:
[W]as to enable the Treasury to put out collectable platinum coins of a variety of sizes...[in order to] produc[e] income from seignorage (that is, the profit collected by the government by minting coins or printing paper money that is worth more than it costs to produce) as a means of reducing the deficit, albeit by a small amount, without raising taxes or cutting spending.
"We saw it as an opportunity to make money for the Mint and the Treasury," he remembers.
When we passed this law in 1996, it was with full knowledge that it was unprecedented in the history of US coinage.
[Until then] Congress had always specified coin denominations by law.
In 2011, during the first debt ceiling crisis of the Obama administration, a private attorney named Carlos Mucha (known online as “Beowulf”) published an article arguing that Treasury Secretary could use his or her existing legal authority under this provision to mint and issue high value platinum coins (i.e. of a face value of $1 trillion) in order to avoid government shutdown or breach of the debt ceiling.
Later that year, Yale Law Professor Jack Balkin, in an interview with CNN, stated that:
This idea subsequently gained widespread public attention via the hashtag #MintTheCoin, which was introduced by economist Stephanie Kelton, and popularized by bloggers including Joe Weisenthal and Joe Firestone.
We are having a debt-ceiling crisis because Congress has given the president contradictory commands; it has ordered the president to spend money, and it has forbidden him to borrow enough money to obey its orders.
Are there other ways for the president to raise money besides borrowing?
Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.
Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination.
So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.
The same day, Philip Diehl, the 35th Director of the U.S. Mint and Treasury Department Chief of Staff who co-authored the provision with Rep. Castle, and who was responsible for minting the original platinum coins authorized under the provision, issued two statements - one to Business Insider, and the other to the American Enterprise Institute - in which he noted that:
I don’t think it makes sense to think about [the $1 trillion coin proposal] as some sort of “loophole” issue.
Using the statute this way doesn’t entail exploiting a loophole; it entails just reading the plain language that Congress used. The statute clearly does authorize the issuance of trillion-dollar coins.
First, the statute itself doesn’t set any limit on coin value.
Second, other clauses of 31 U.S.C. § 5112 do set such limits, but §5112(k)—dealing with platinum coins—does not. So expressio unius strengthens the inference that there isn’t any limit here.
Of course, Congress probably didn’t have trillion-dollar coins in mind, but there’s no textual or other legal basis for importing this probable intention into the statute.
What 535 people might have had in their collective “mind” just can’t control the meaning of a law this clear.
It’s also quite clear that the minting of such a coin couldn’t be challenged; I don’t see who would have standing.
A few days later, in an interview with Wired Magazine, Diehl further noted:
In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary’s authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8).
...Contrary to some media reports, minting a trillion dollar platinum coin would not raise the debt limit. Rather, it would add a trillion dollars to the general fund of the treasury without requiring additional borrowing, effectively delaying the date when the debt limit is reached. The law enables this course by authorizing Treasury to produce the coin in whatever denominations the Secretary chooses.
...What is unusual about the law (31 U.S.C. § 5112(k) is that it gives the Secretary complete discretion regarding all specifications of the coin, including denominations...When we passed this law in 1996, it was with full knowledge that it was unprecedented in the history of US coinage. Congress had always specified coin denominations by law.
...[T]he accounting treatment of the coin is identical to the treatment of all other coins...When the Mint ships a coin from its vaults to those of the Fed, it books as profit (or “seigniorage”) an amount equal to the difference between the coin’s face value and its cost of production. This amount is subsequently transferred to the general fund of the treasury where it is available to...finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.
...[I]f the coin dies were manufactured ahead of time, the Mint could strike a single trillion dollar coin, ship it to the Fed, immediately book a trillion dollars and transfer that amount to the general fund. This would take a day, maybe two....The coin would never be “issued” or circulated and bonds would not be needed to back the coin....The coin never has to leave the Fed’s vaults for the general fund to receive this new spending capability.
...There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit.
...The law provides Treasury all necessary authority to pursue this course. I know this because I wrote the law and produced the nation’s first platinum coin. I’ve been through the entire process.
Any court challenge is likely to be quickly dismissed since:
Yes, this is an unintended consequence of the platinum coin bill, but how many other pieces of legislation have had unintended consequences? Most, I’d guess.
- authority to mint the coin is firmly rooted in law that itself is grounded in the expressed constitutional powers of Congress,
- Treasury has routinely exercised this authority since the birth of the republic, and
- the accounting treatment of the coin is entirely routine.
In 2019, Willamette Law Professor Rohan Grey, in a forthcoming article in the Kentucky Law Review, argued that:
When I first heard about the idea to mint a trillion-dollar coin, I was very surprised.
But because I know that law backwards and forwards, I knew immediately that the guy who came up with the idea was right.
It’s an ingenious use of the law to avoid a ridiculous and irresponsible situation, in which the country would be driven to default
Seigniorage has been a valid and legal method of increasing the Treasury’s fiscal capacity for centuries. It was not until 2011, however, that it was seriously considered as an option for circumventing the debt ceiling.
... On one hand, using [31 U.S.C.] § 5112(k) to circumvent the debt ceiling via [High Value Coin Seigniorage] is clearly a) an accounting “gimmick” that b) stretches the statute beyond the original intent that motivated its passage into law. On the other, neither of these observations are reasons to dismiss it from consideration out of hand.
... Plenty of statutes have been reinterpreted over time, particularly in moments of crisis.
In 2008, for example, the Fed justified its unprecedented expansion of emergency lending facilities, including selective liquidity provisioning and purchases of assets with limited market value, under the auspices of Section 13(3) of the Federal Reserve Act, despite little evidence that that provision was enacted with such use in mind.
Similarly, the fact that § 5112(k) represents an accounting gimmick is a source of its strength, rather than a weakness.
Accounting workarounds are used regularly in financial and business contexts to overcome otherwise incoherent or suboptimal operating requirements that do not implicate a deeper economic or solvency issue.
Indeed, the debt ceiling itself can be viewed as one big, poorly designed accounting gimmick, in that it is not intrinsically tied to any underlying real economic constraint, and does not impose any spending limitations not already inherent to the appropriations process.
In that respect, the idea of “fighting an accounting problem with an accounting solution” is entirely coherent, and perfectly describes the various “Extraordinary Measures” employed by Treasury Secretaries during prior debt ceiling crises.
On March 21, 2020, Rep. Rashida Tlaib (D.-Mich.) introduced a preliminary version of the Automatic BOOST to Communities Act (#ABCAct) to provide emergency relief to every person in America, as part of a broader response to the COVID-19 pandemic.
On April 16, 2020, Rep. Tlaib introduced an updated and complete legislative version of the #ABCAct. The bill was co-introduced by Rep. Pramila Jayapal (D.-Wash.), and cosponsored by Rep. Jesús G. “Chuy” García (D.-Ill.), Rep. Alcee Hastings (D.-Flor.), Rep. Eleanor Holmes Norton (D.-D.C.), Rep. Alexandria Ocasio-Cortez (D.-N.Y.), Rep. Ilhan Omar (D.-Minn.), Rep. Ayanna Pressley (D.-M.A.), Rep. Bobby Rush (D.-Ill.), Rep. Jan Schakowsky (D.-Ill.), and Nydia Velázquez (D.-N.Y.). The #ABCAct is designed as a “money-financed fiscal program,” similar to the House Financial Services Committee proposal for Comprehensive Fiscal Stimulus announced by Chairwoman Maxine Waters (D.-Ca.) on March 18, 2020.
Similarly, on April 9, 2020, the U.K. government announced that it had directed the Bank of England to expand the Treasury’s overdraft account, known as the “Ways and Means” facility, in order to provide the government with additional funding without requiring the sale of new public debt. That same day, Paul Krugman observed that the U.K. Governments decision was:
However, whereas these approaches require the Federal Reserve and Bank of England, respectively, to make the necessary funds available to fiscal authorities, the #ABCAct authorizes the Treasury to create its own funding by directing the Mint to issue high value platinum coins under 31 U.S.C. § 5112(k) of the Coinage Act.
Basically the equivalent of minting a trillion-dollar platinum coin. It basically shows that advanced countries that borrow in their own currencies don’t face financing constraints.
In addition, because the #ABCAct is a new legislative bill, concerns regarding the legality of the The Original #MintTheCoin Proposal, which involved the Treasury Secretary exercising his existing authority under 31 U.S.C. § 5112(k) in order to circumvent the debt ceiling, do not apply.
- It does not require issuing any additional public debt. While there is little meaningful economic difference between “debt-financing” and “money-financing,” the public often mistakenly believes that they are very different, and that the former involves “borrowing” which must be “paid back” in the future via higher taxes or lower spending. This mistaken belief is easily weaponized by pro-austerity ideologues seeking to build support for cutting critical public programs.
- It does not rely on the Federal Reserve to provide the necessary funds. Instead, it is based on the principle of “fiscal money for fiscal policy,” with any and all responsibility for the program born exclusively by the fiscal authorities, i.e. Congress and the Treasury.
- It is simple, efficient, and easy to understand. Instead of the current financing approach, which consists of a complicated, multi-step process whereby the Treasury sells public debt to private investors, they sell it on to the Federal Reserve, and the Federal Reserve remits its net profits back to the Treasury, coin seigniorage involves only a single, symbolic act – minting and depositing a coin – that even children can understand. Increasing the transparency of the federal budget process is good for democratic accountability.
In a convertible or fixed exchange rate currency regime, there is a meaningful economic difference between financing a budget deficit via issuing currency, which can be readily converted into gold [or foreign exchange], and via term-maturity Treasury securities, which only promise to be redeemable into gold[- or foreign exchange-]convertible currency upon maturity.
This is because the former imposes a real economic liability, in the form of immediate pressure on accumulated gold [or foreign exchange] reserves, whereas the latter defers that liability until a future date, when the outstanding Treasury securities come due for redemption (if they are not rolled over).
By contrast, in a floating, fiat currency regime, Treasury securities, as well as other government-guaranteed debts, derive their nominal value, liquidity, and general acceptability from the same full faith and credit of the federal government that underscores legal tender such as coins and Federal Reserve notes, as well as government-backed private monies like bank deposits[.]
This observation is not new – Thomas Edison made the same point in 1921:
In light of this fact, many monetary scholars have argued that for monetarily sovereign nations like the United States, the act of issuing government-backed securities [debt], denominated in the domestic unit of account, which can be redeemed only for other government obligations [currency] also denominated in that unit of account, is functionally closer to “money creation” than it is to “borrowing.”
If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also...
It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay...If the currency issued by the Government were no good, then the bonds issued would be no good either...
If the Government issues bonds, the brokers will sell them. The bonds will be negotiable: they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people.
Therefore it is the people who constitute the basis of Government credit.
... & Kelton & Fullwiler (2013):
Deficits unaccompanied by bond sales are disapprovingly labeled "monetization"; however, beyond the fact that absent bond sales the federal funds rate falls to zero in the case of [Non-Interest Bearing Reserve Balances] and to the rate paid on reserve balances in the case of [Interest Bearing Reserve Balances], there is no meaningful difference from when bonds are issued.
A government deficit always creates net financial assets for the private setor...that is, when a deficit occurs, by definition total credits to recipient bank accounts due to government expenditures are greater than the total debits from bank accounts to pay taxes.
Whether bonds are issued to drain excess balances has no effect upon the private sector's net financial assets...the ability of banks to finance further spending is unaffected...since loans create deposits, if there are willing, creditworthy borrowers then desired spending is financed in any event.
For deficits, what matters for the determination of aggregate spending and inflation is not whether bonds are sold but whether the deficit is too large given the private sector's desire to net save.
(Extract from R. Grey, Administering Money: Coinage, Debt Crises, and the Future of Fiscal Policy, Kentucky Law Review (Forthcoming 2020))
[T]he main advantage of [money-financed fiscal policy] is not that it provides a greater boost to the monetary base but that it would relieve the government from the practice of selling bonds altogether.
In other words, the main advantages of direct money creation are political rather than economic.)
From the outset [of the formation of the United States] ... [b]ills directing the Treasury to spend money on new programs were typically accompanied by separate legislation authorizing the Treasury to issue government securities to fund those programs in the event other revenue sources, such as taxes, customs duties, and seigniorage[,] proved insufficient[.]
When a program’s borrowing limit was exhausted, Congress would simply pass supplementary legislation to extend it, thereby ensuring every program had its own dedicated financing authority.
This two-step approach to fiscal policy, whereby increases in borrowing capacity were linked to specific spending commitments, worked relatively smoothly throughout the eighteenth and nineteenth centuries. With few exceptions, the United States persistently ran budget deficits, and comfortably increased its stock of outstanding government securities without risk of default[.]
Moreover, Congress exercised close control over the type, duration, and interest rate of the securities issued by the Treasury, reflecting its active interest in managing not only the quantity, but the composition of outstanding government debt[.]
By the early twentieth century, however, the budgeting process had become unwieldy. Faced with an increasingly complex and fragmented economy, it was no longer practically feasible to maintain distinct financing strategies for each and every spending program, or for Congress to micromanage debt issuance.
In 1917, faced with the exigencies of World War I mobilization, Congress enacted the Second Liberty Bond Act, which merged various sources of unused borrowing capacity from different spending programs into a consolidated borrowing limit. In addition, it granted the Treasury wide discretion in how the funds available under that limit could be used[.]
Over the next decade, Congress enacted a series of procedural amendments that expanded the Treasury’s discretion over fiscal financing and debt management practices. These included, for example, authorizing the Treasury Secretary to replace older, more expensive securities with cheaper, newer issues, reintroducing previously defunct financing instruments such as Treasury notes and savings certificates, and replacing limits on total note issuance with limits on total notes outstanding in order to improve the Treasury’s capacity to roll over short-term debt[.]
The success of these reforms increased the Treasury’s appetite for even greater operational flexibility. In 1930, Treasury Secretary Andrew Mellon declared that “orderly and economical management of the public debt requires that the Treasury Department should have complete freedom in determining the character of securities to be issued and should not be confronted with any arbitrary limitation.[”]
This vision was realized by the end of the decade, when on July 20, 1939, President Roosevelt signed into law a bill that replaced prior restrictions on the issuance of shorter and longer term securities with a single aggregate debt limit, totaling $45 billion.
(Extract from R. Grey, Administering Money: Coinage, Debt Crises, and the Future of Fiscal Policy, Kentucky Law Review (Forthcoming 2020))
In the [decades after 1939], Congress raised this limit repeatedly to accommodate growing spending obligations. Occasionally, Congress refused to pass debt limit increases that were requested by the Treasury[.]
However, such refusals were typically intended to force the Treasury to reduce the growth of new spending, rather than impede financing for existing programs[.] Consequently, they rarely escalated to the point of a general financing crisis, and never resulted in government shutdown[.]
Instead, instances of Congressional budgetary brinksmanship put pressure on the Treasury to experiment with creative methods of increasing its financing capacity.
These included drawing down cash holdings, and ‘monetizing’ existing free gold holdings by issuing gold certificates against them (which were not subject to limit under the debt ceiling), depositing those certificates at the Fed, and using the resulting credits to repurchase maturing Treasury notes directly from the Fed[.]
In 1979, the House of Representatives, recognizing the political hazards of allowing a significant divergence between mandated appropriations and financing authority, instituted the Gephardt Rule[.] This Rule allowed the House to automatically raise the debt limit via passage of a budget resolution, without the need for a separate vote[.]
...In 1982, the debt limit was formally codified into law as 31 U.S.C. § 3101[.]
...In the [following] decades[,] political standoffs over the debt ceiling became increasingly common and severe.
In September 1985, faced with the imminent likelihood of breaching the ceiling, the Treasury Secretary for the first time resorted to “Extraordinary Measures;” accounting maneuvers that extended the government’s capacity to continue meeting its federal obligations without breaching the debt ceiling[.]
These measures included divesting and declining to reinvest in various government accounts, such as the Federal Financing Bank, federal employee retirement funds, and the Social Security trust funds, as well as ceasing the issuance of non-marketable securities, such as State and Local Government Series Treasury securities.
On November 1, 1985, the Chairman of the House Committee on Ways and Means’ Subcommittee on Social Security requested an opinion from the General Accounting Office on the legality of the Treasury’s use of Extraordinary Measures[.]
On December 5th, the Comptroller General issued his opinion, which concluded that:
...In 1986, the Omnibus Budget Reconciliation Act granted new authority to the Treasury Secretary to declare a “debt issuance suspension period” in the event they determined that additional Treasury securities could not be issued without exceeding the debt limit[.]
[A]lthough some of the Secretary's actions appear in retrospect to have been in violation of the requirements of the Social Security Act, we cannot say that the Secretary acted unreasonably given the extraordinary situation in which he was operating.”
On February 4, 2013, the No Budget, No Pay Act was passed, which temporarily suspended the statutory debt ceiling for the first time[.]
Between 2013 and March 2019, the debt ceiling was temporarily suspended six times[.] In each instance, the debt ceiling was increased upon its reinstatement to accommodate the additional securities issued during its suspension[.]
On August 1, the President signed the Bipartisan Budget Act of 2019, which suspended the debt ceiling until July 31, 2021.
Notwithstanding this temporary respite, the debt ceiling statute remains valid law.
Furthermore, there is no reason to believe that the partial and/or temporary relief afforded by the various creative accounting, procedural and statutory innovations employed in the past and described above will be sufficient to avoid future debt ceiling crises...
Moreover, while the real costs of government shutdowns should not be understated or downplayed, there are a number of reasons why defaulting on existing obligations would likely be even more economically and socially harmful.
First, the size of non-discretionary spending commitments dwarfs that of discretionary spending programs subject to ongoing appropriations. Consequently, an across-the-board default would create an economic shock orders of magnitude larger than that of a government shutdown.
Second, failure to honor interest payments on outstanding Treasury securities would likely destabilize global financial markets that rely upon the unquestioned safety of U.S. government obligations as an operating benchmark for their day-to-day contract-setting activities[.]
Third, default could provoke a constitutional crisis by violating the Fourteenth Amendment, which holds that “[t]he validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions ... shall not be questioned.”
In addition, financing crises pose unique structural challenges relative to other kinds of fiscal or budgetary disputes.
This is because it is Congress’s prerogative to incur spending commitments on behalf of the United States, but the President’s (and Treasury Secretary’s) responsibility to honor those spending commitments under Article II, Section 3 of the Constitution, which provides that the President must “take Care that the Laws be faithfully executed.[”]
In other words, Congress may create the legislative conditions that produce a financing crisis, but it is the Executive Branch that must ultimately decide on the appropriate response, implement it, and be held liable in the event its actions are deemed inadequate, illegal, or unconstitutional.
Consequently, whereas a financing crisis merely poses a political problem for Congress, it also poses a legal problem for the President and Treasury Secretary.
(Extract from R. Grey, Administering Money: Coinage, Debt Crises, and the Future of Fiscal Policy, Kentucky Law Review (Forthcoming 2020))
[C]ritics [of #MintTheCoin] like [Breitbart’s] John Carney [have] argued that the wording of 31 U.S.C. § 5112(k) is overly broad, and thus represents an impermissible delegation of Congress’s Article I Section 8 power to coin money [under the nondelegation doctrine].
(fn. The nondelegation doctrine derives from Article I of the Constitution, which vests all legislative powers in Congress.
Under this doctrine, Congress must supply an “intelligible principle” to inform the lawmaking decisions of the executive agent to whom lawmaking power has been delegated for that delegation to be constitutional.
This intelligible principle serves as both a constraint on the agent’s discretion, and as a standard against which courts can review the agent’s decisionmaking.)
This is incorrect.
31 U.S.C. § 5112(k) clearly has an overriding intelligible principle that limits the Treasury’s ability to create money: the Congressionally determined appropriations process itself[.]
[Indeed, Article I, Section 9 of the U.S. Constitution provides clearly that “No money shall be drawn from the treasury, but in consequence of appropriations made by law....this constitutional principle has been explicitly enshrined in budgetary law since the passage of the Antideficiency Act of 1884.]
Since Congress determines both the level of spending and tax receipts, as well as the programs on which funds can be spent, the Treasury Secretary does not have the power to effectuate its money creation powers except in the manners prescribed by Congress.
Instead, the Treasury’s fiscal discretion is limited to operational questions of how best to manage budget financing demands given the instruments and options available to it[.]
Furthermore, the trajectory of legislative and operational developments with respect to fiscal operations over the past century has been overwhelmingly in favor of granting the Treasury ever greater latitude to make intra-budgetary financing decisions, while at the same time restricting executive discretion more broadly with respect to actual spending decisions.
There is little reason to view § 5112(k) as out of line with this historical trend.
To the contrary, granting the Treasury Secretary significant financing autonomy may be the best way to ensure that it fully honors its Congressionally mandated spending commitments, without being forced to contend with ambiguous or conflicting statutory directives [regarding financing operations] that require them (or the President) to assume additional lawmaking power in order to resolve.
(Extract from R. Grey, Administering Money: Coinage, Debt Crises, and the Future of Fiscal Policy, Kentucky Law Review (Forthcoming 2020))
The Treasury’s efforts to expand its budgetary financing authority during the early and mid twentieth century were mostly successful and largely uncontroversial.
This was in large part because the powers Treasury sought concerned how to finance fiscal spending, as opposed to what fiscal spending to undertake.
In contrast, whereas the Treasury today enjoys greater discretion over financing operations than it did a century ago, the same cannot be said with regards to the President’s discretion over spending authority.
Perhaps the most significant twentieth century example of Congress rebuking the President for deviating from its fiscal directives was the Congressional Budget and Impoundment Control Act of 1974 (Impoundment Act), which was passed in direct response to President Nixon’s decision in 1973 to “impound” approximately $14.7 billion of Congressionally appropriated funds and effectively terminate a number of longstanding nonmilitary programs[.]
Among other things, the Impoundment Act prohibited the President from future impoundments, and required them instead to submit spending cut proposals to Congress for approval under a budgetary process called “recission.”
Prior to 1920, the Presidential impoundment power had been invoked on only two occasions.
(fn. During that period, the major concern was not executive underspending but overspending, which occurred when executive officers entered into contracts obligating the government to make payments in the future that were not authorized by Congress.
Such concerns ultimately culminated in the Antideficiency Act of 1884).
In 1803, Thomas Jefferson informed Congress that he had declined to spend approximately $50,000 in appropriated funds for the construction of a number of gunboats[.]
In contrast to Nixon, however, Jefferson was careful to justify his decision as a mere “delay” in spending, warranted by the “favorable and peaceful turn of affairs on the Mississippi.[”] Moreover, the following year he promptly released the funds from impoundment, and spent them in accordance with Congress’s original wishes.
Subsequently, in 1876, President Grant impounded approximately $2.7 million in appropriated funds for river and harbor improvements, on the grounds that the spending was “of purely private or local interest, in no sense national,” and that the Treasury lacked sufficient dedicated revenues to cover the expenditures[.]
Notably, Grant’s reasoning reflected an implicit recognition that impoundment would not have been as justifiable had the spending commitments in question been deemed in the national interest and/or financially feasible.
Beginning in 1920, impoundment became increasingly commonplace, with almost every President from Hoover through to Nixon using it to override Congressional spending directives at least once during their presidencies.
With a couple of notable exceptions, however, each of these actions was justified on one or more of the following grounds:
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
In 1949, the Congressional Joint Committee on the Economic Report published a report titled "A Collection of Statements Submitted to the Subcommittee on Monetary, Credit, and Fiscal Policies by Government Officials, Bankers, Economists, and Others."
In that report, in response to the question "What changes, if any, should be made in the powers of the Federal Reserve in order to increase its effectiveness?", Columbia University Economics Professor Albert G. Hart stated:
In my judgment, the Federal Reserve System rather than the Treasury should handle the debt relations between the Government and the public. Specifically, I recommend:
- Authorizing the Federal Reserve System to incur interest-bearing debt by issuing securities...and by holding interest-bearing deposits for commercial banks;
- Not only authorizing but instructing the Federal Reserve System to buy from the Treasury all new and refunding issues of Treasury certificates; ...
- [R]efunding all publicly held Treasury bills...as they mature, by flotation of Federal Reserve securities (or if banks prefer, by refunding bank held issues into interest-bearing deposits); ...
- [I]nstructing the Treasury to carry all its cash...as a deposit balance with Federal Reserve banks; ...
The object of this recommendation is to cure the existing diffusion of open market policy between Treasury and Federal Reserve, and set the Federal Reserve free to use open market policy and interest rates for monetary purposes.
In 1951, the Secretary of the Treasury and Chairman of the Board of Governors of the Federal Reserve System issued a Joint Announcement, declaring that:
The Treasury and the Federal Reserve System have reached full accord with respect to debt-management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government’s requirements and, at the same time, to minimize monetization of the public debt.
In 1981, Congress allowed the Treasury’s overdraft authority at the Federal Reserve to permanently expire. Prior to 1981, some form of Treasury overdraft authority had been in place near-continuously since the founding of the Federal Reserve, with the exception of the period of 1935-1942.
In 2006, Congress passed Public Law 109-351 – also known as the Financial Services Regulatory Relief Act of 2006 – amending the Federal Reserve Act, and providing that:
Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.
In 2008, the Treasury Department established the Supplementary Financing Program, at the request of the Federal Reserve.
This program involved the sale of additional Treasury securities, separate from the Treasury’s regular fiscal financing operations, in order to help the Federal Reserve offset the impact of its recent lending and liquidity initiatives by draining excess reserves from the banking system.
In 2010, the Federal Reserve introduced the Term Deposit Facility to facilitate the conduct of monetary policy by draining excess reserve balances from the banking system and replacing them with interest earning, longer-maturity instruments that could not be used to clear payments.
In 2015, Congress passed the Fixing America’s Surface Transportation Act (FAST Act), which amended the Federal Reserve Act to require any surplus funds held by the regional Reserve Banks in excess of $10 billion be immediately transferred to the Board of Governors for further transfer to the Treasury.
This amendment effectively codified a longstanding historical directive of the Board of Governors’ into legislation, but modified it to reduce the aggregate amount of surplus funds that regional Reserve Banks could hold.
In 2018, Congress passed Public Law 115-123 – also known as the Bipartisan Budget Act of 2018 – which further amended the Federal Reserve Act to reduce the aggregate limit of surplus funds held by regional Reserve Banks from $10 billion to $6.825 billion.
In 2019, the United States Court of Appeals for the Second Circuit – in United States v. Wells Fargo – held that:
We see no tension between our conclusion that the [Federal Reserve Banks] act as agents of the United States when extending emergency loans and the fact that the [Federal Reserve Act] expressly designates the [Federal Reserve Banks] as “fiscal agents” with respect to certain matters (that do not include extending emergency loans). See 12 U.S.C. §§ 391-395.
Congress specified the fiscal agency relationship for the purpose of putting the [Federal Reserve Banks] under the direction of the Treasury Department in certain limited circumstances, not to preclude an agency relationship between the United States and the [Federal Reserve Banks] in other circumstances.
See, e.g., 12 U.S.C. § 391 (instructing the [Federal Reserve Banks] to take various actions “upon the direction of the Secretary of the Treasury” and stating that “when required by the Secretary of the Treasury, the [Federal Reserve Banks] shall act as fiscal agents of the United States”).
In 2019, Willamette Law Professor Rohan Grey, in a forthcoming article in the Kentucky Law Review, argued that:
On April 16, Rep. Tlaib released the full legislative text of the #ABCAct. The bill includes a section titled "Preserving Federal Reserve Independence and Efficacy of Monetary Policy," which states:
[C]ritics argue that because [High Value Coin Seigniorage] is tantamount to “monetizing debt,” it constitutes monetary policy, and thereby it effectively undermines the independence of the Federal Reserve[.]
However, this argument is also unpersuasive, as it relies upon a mistaken understanding of the nature of the Fed’s “independence,” and how [High Value Coin Seigniorage] would specifically affect the Fed’s practical capacity to implement monetary policy.
At the outset, it is important to distinguish between the legal independence of the Fed, which relates to its leadership and executive decision-making discretion, from its policy independence, which relates to its ability to effectuate particular policy outcomes in accordance with its legally articulated mandate.
From a legal perspective, the Fed is established by the Federal Reserve Act, and led by the Board of Governors, an independent decision-making body whose seven members are appointed by the President and confirmed by the Senate for 14-year terms in a manner similar to other government agencies[.]
Outside of the nomination process, Board members, along with their colleagues on the Federal Open Mark Committee, enjoy wide legal latitude to use the range of policy tools at their disposal in such a manner as they deem necessary to “promote effectively” the Board's statutorily defined goals of “maximum employment, stable prices, and moderate long-term interest rates,” as well as maintenance of the payment system.
Such legal independence is distinct, however, from the policy independence over interest-rate targeting operations that is often viewed as the core of “central bank independence” in the economic sense of the term[.]
Such policy independence, in contrast, was the result of an inter-administrative agency dispute between the Fed, Treasury, and White House that culminated in an informal victory for the Fed in 1951, and the signing of the Treasury-Fed Accord[.]
The Fed’s victory in this dispute led to the era of modern central bank independence in the economic sense, and with it, the modern division of labor between the Treasury and Fed with respect to interest rate policy.
Under this division of labor, the Treasury is free to establish and innovate policy with respect to debt management and Treasury auction policies, on the understanding that such actions do not ultimately undermine the Fed’s capacity to set interest rates in the broader financial markets, including rates paid on different classes of Treasury securities.
Even during the contentious depths of the political dispute that led to the Treasury-Fed Accord, the Treasury and Fed nevertheless continued to cooperate closely on a day-to-day basis to ensure smooth liquidity conditions within the broader financial system.
Furthermore, in the aftermath of the global financial crisis this already high degree of institutional entanglement was expanded further, when both entities introduced programs that significantly overlapped with the other’s historical policy domain.
For example...the creation of the Fed’s Term Deposit Loan Facility effectively gave it the capacity to issue positive-maturity, interest-bearing liabilities similar to Treasury securities.
Conversely, the 2008 Supplementary Financing Program (SFP)...established a Treasury-led mechanism for absorbing excess reserves that resembled almost identically the Fed’s traditional open market operations.
As Hamilton explains: “In a traditional open market sale, the Fed would sell a [Treasury] bill out of its own portfolio, whereas with the SFP, the Fed is asking the Treasury to create a new T-bill expressly for the purpose. But in either case, the sale of the T-bill by the Fed or by the Treasury through the SFP results in reabsorbing previously created reserve deposits.”
In 2011, the Treasury drained the SFP of its entire balance of $200 billion as part of extraordinary financing measures intended to avoid hitting the debt ceiling, despite the program being established with the explicit intent to support the Fed’s monetary policy objectives.
Nevertheless, the Fed’s operational independence over interest rate-targeting remained intact, and endures to this day.
In this respect, it is perhaps more accurate to understand the Fed’s policy “independence” as a second-order emergent property of its first-order institutional interdependence[.]
In other words, the policy freedom the Fed enjoys with respect to interest rate setting (and more broadly, portfolio management of overall outstanding government securities) does not derive from a bright-line legal or operational separation from the Treasury, but rather (at least partly) from an ongoing commitment by the Treasury to respect and accommodate the Fed’s policy goals within areas traditionally considered to be within its policymaking jurisdiction[.]
Moreover, if the Treasury truly wished to interfere with the Fed’s interest rate management practices, it could easily do so without relying upon [High Value Coin Seigniorage], simply by changing the maturity structure of government debt it chose to issue into circulation.
This is because the Fed relies on adjustments to yield rate differentials on different maturities of Treasury debt in order to affect interest rates in credit markets more broadly.
Thus, if the Treasury ceased to issue any security with a maturity greater than three months, for example, it would have a significantly disruptive effect on the functioning of capital markets, and force the Fed to seek new ways of effectuating its monetary policy objectives.
Even then, however, such disruption would likely not ultimately undermine the Fed’s operational independence, as the Fed would still retain other policy tools that it could use to maintain influence over both long and short term market interest rates[.]
These include paying interest on excess reserves (as it has done since 2008), issuing term deposits, or even issuing its own securities directly into circulation[.]
Thus, to the extent that preserving the Fed’s policy independence over interest-rate targeting operations is an important legal consideration, it has little bearing on whether or not the Treasury can use coin seigniorage to finance its deficit, or indeed may be obligated to do so in the context of a debt ceiling crisis.
To the contrary, the Fed’s policy independence has always and everywhere depended on the ongoing consent and cooperation of the Treasury, and there is every reason to believe such cooperation and support would persist in the event high value coin seigniorage was implemented.
To ensure that the Program does not unintentionally or unduly interfere with or limit the efficacy of the Federal Reserve System in achieving its statutory obligations, including in particular with respect to implementation of its monetary policy objectives, the Board of Governors of the Federal Reserve System shall be authorized:
- Supplemental Financing Securities. - To issue as Federal reserve notes under Section 248(d) of title 12, United States Code, digital securities, including bills, notes, and bonds, of whatever maturity, denomination, and yield, as is deemed appropriate and necessary by the Board of Governors to achieve its statutory objectives under the Federal Reserve Act, in quantities up to an amount equivalent to the total face value of all platinum coines issued by the United States Treasury and held as assets by the Federal Reserve System.
Notes issued under this paragraph shall be sold on the open market in a manner similar to the sale of Treasury securities, and like Federal reserve notes, shall be considered direct obligations of the United States under section 8 of title 18, United States Code, but shall be recorded for accounting purposes as direct liabilities of the Federal Reserve System, and accordingly shall not be included in calculations of public debt subject to limit under section 3101 of title 31, United States Code.
- Establish a Dedicated Special Treasury Monetary Financing Account. - The Federal Reserve Bank of New York shall establish an account titled the "Special Treasury Monetary Financing Account," in which shall be recorded any expenses associated with payment of interest on settlement balances or Federal reserve securities up to a total principal amount equivalent to the total principal value of all platinum coins issued by the United States Treasury and held as assets by the Federal Reserve System, plus any additional liabilities incurred as a result of prior interest payments made on liabilities issued against coin assets purchaed under the Program.
Any ongoing losses incurred by this account shall be recorded as a negative liability, and shall be maintained separately from the rest of the balance sheet of both the Federal Reserve Bank of New York and the Federal Reserve System, so as not to reduce or impact the calculation of total income or revenue generated by the Federal Reserve System, or otherwise reduce the total amount of net operating profits to be made available for remittance to the Treasury on an ongoing basis.