The one thing that jumps out at you when reading the mainstream posts of the past week-and-a-half bringing Platinum Coin Seigniorage (PCS) into the forefront of attention again, for the first time since last year’s debt ceiling crisis, is that every mainstream blogger or commentator is telling a story about minting a Trillion Dollar Coin (TDC), or a few trillion dollar coins as an option the President can either use or not to get around the debt ceiling. But no one is telling us the much bigger story of the enormously increased authority to cause the creation of fiat money, delegated to the Executive Branch by the Congress in the 1996 legislation enabling PCS. And no one is telling us what the possible implications of this change are for our political and economic systems.
I’ve reviewed these posts, as well as a cable segment, in the four earlier installments of this series. The installments, beginning with this one, are here. The posts and the cable segment are by: Pethokoukis, Wiesenthal, Carney, Drum, Yglesias, Yglesias, Harry Bradford, Brad Plumer. and Chris Hayes.
Background: Moving off the Gold Standard
This is reminiscent of the situation with the system of fiat currency itself in 1971, when President Nixon, took us off the gold standard for purposes of international trade. After Nixon’s action there were no good treatments in the Press, or by economists, about how the move to a non-convertible fiat currency with a floating exchange rate ,and no international debts denominated in any other currency, had changed the financial system by removing the possibility that the Government could become involuntarily insolvent (“run out of money” except through its own choice not to create more).
Before Nixon’s big change, the amount of US currency and reserves was limited by the amount of our gold reserves, because it was possible for other nations to demand payment in gold in return for the dollars they held in their accounts at the Federal Reserve. In fact, Nixon closed the gold convertibility window, because France had started what looked like might be a multinational run on the gold reserves of the United States, jeopardizing the stability of the dollar in international trade, and threatening its role as the reserve currency in the middle of the Vietnam War.
After the window was closed however, other nations followed the United States in leaving the gold standard, with the result that now we have a world of nations with fiat currencies, though many nations aren’t “sovereign” in their own currencies because they’ve incurred debts in other currencies, or have pegged their currencies to the dollar, or, in the case of the Eurozone nations have, like the American States, given up their power to issue currency, and become currency users of the Euro (or the dollar, as the case may be).
Nixon’s ending of the gold standard was enormously significant because it removed the gold supply solvency constraint on the United States. And it restored the powers of the Government given it by the Constitution to issue money as needed to provide for the common defense and the general welfare (today we might say fulfill the public purpose).
The Gold Standard Hangover and Progressive Fiscal Policy
But the full significance of this event wasn’t understood by most government officials or the public, both here and in other nations. Constraints on spending that were appropriate for a gold standard-based financial system were never repealed. They persist to this very day in our institutions, in our minds, in our economic systems, and in our politics.
These included: 1) Congress dividing the financial functions of the Government between the Federal Reserve and the Treasury; 2) Congress prohibiting the Fed from directly buying Treasury-issued debt; 3) Congress’s ceiling on debt subject to the limit; 4) Congress’s prohibiting the Fed from issuing credits directly to the Treasury to implement deficit spending, forcing it to issue debt and making the terms deficit and debt close to synonymous in the public’s mind; 5) Congress’s delegating its currency power primarily to the Fed; while leaving its delegation of the power to coin money with the Treasury; and 6) Congress leaving the Fed, the Central Bank, independent of the Executive Branch and the Treasury, but, at the same time closely associated with the Banking and Wall Street interests that own the regional banks, and sit on the Federal Open Market Committee (FOMC).
These constraints have divided the sovereign currency power of the Government and weakened the President’s power to implement spending appropriated by Congress, when that spending involves deficits, even though that deficit spending was previously approved by Congress in its appropriations process. They have also perpetuated the previous gold standard-based understanding of deficit spending as closely associated with the national debt and the further understanding of the debt as a threat to government solvency, the international credit of the United States, “our grandchildren,” our standing with “the bond vigilantes,” fiscal sustainability, and fiscal responsibility.
So, these constraints have mired us down in the deficit/debt cluster of issues, self-imposed chains that prevent us from using Federal fiscal policy to meet our many problems. They have been the worst enemy of economic progressivism over the past 40 or so years, and have prevented us from responding strongly enough to the crash of 2008 to create a robust, full employment economy.
And, perhaps worse, the thinking that arises out of them now rationalizes the policies of austerity and deficit reduction that threaten to destroy the social safety net and bring our economy down again into recession or depression, or at least into a decade or more of future stagnation. These austerity policies will ruin the economic lives and prospects of a generation of Americans, and will place increasing burdens driving more and more older people into poverty, for the sake of false gold-standard based theories about how to run fiscal policy in what has become a sovereign fiat currency-based financial system.
PCS Creates a Great Crack in Gold Standard Constraints and Austerity Justifications
The big story about Platinum Coin Seigniorage is not the Trillion Dollar Coin and its possible implications for solving the debt ceiling crisis, as the mainstream has been telling us. Instead it is the great crack it creates in the wall of gold standard-based constraints still hanging over our politics and economics, and the increased fiscal and policy space this gives us to use to solve our various national problems. It is the authority the Executive Branch of Government now has to break through these constraints, and begin to unify the financial functions of government behind the public purpose. Let’s look at those constraints again, and see what PCS, if used vigorously by the President, can do to weaken them or make them irrelevant.
– Congress dividing the financial functions of the Government between the Federal Reserve and the Treasury: PCS enables the Treasury to commandeer the power of the Fed to create unlimited reserves to fill the Treasury General Account (TGA); the public spending purse, to cover debt repayment and deficit spending for years to come. The Treasury can use this power to demonstrate to the public that there is no Federal solvency problem, and no need for austerity or deficit reduction, because many trillions of dollars fill the public purse.
Another implication of this power is that it would add greatly to the amount of reserves in the banking system as the Treasury adds reserves through debt repayment and deficit spending without destroying them through a corresponding amount of debt issuance. To compensate for Treasury’s reserve adds, the Fed, if it wants to keep the Federal Funds Rate at a target level above zero, would have to pay interest on reserves (IOR) shifting the interest paying function from the Treasury to the Fed.
– Congress prohibiting the Fed from directly buying Treasury-issued debt: PCS, if used to produce coins with face values high enough to repay the debt subject to the limit and also pay for future deficit spending appropriations for some years, enables the Treasury to get along without issuing debt. So, it would need no one including the Fed to buy Treasury debt.
– Congress’s ceiling on debt subject to the limit: PCS, if used to produce coins with face values high enough to repay the debt subject to the limit and also pay for future deficit spending appropriations for some years, would make the debt ceiling a dead letter for some time to come, even if the PCS authority were repealed. The law would be still be there; but it would have no effect on politics or fiscal policy because there would be no, or at least very little, debt. And there would also be no political issue due to the presence of public debt.
– Congress’s prohibiting the Fed from issuing credits directly to the Treasury to implement deficit spending, forcing it to issue debt and making the terms deficit and debt close to synonymous in the public’s mind: This constraint arises from the prohibition against the Fed granting credit to the Treasury. PCS however, involves the Fed exchanging reserves for a legal tender coin produced by the Treasury. Technically this isn’t granting credit to Treasury; but just the Fed accepting a deposit of legal tender into the Mint’s account, crediting that deposit as reserves, and then transferring most of the reserves created into the TGA as seigniorage. So, PCS produces revenue for the Treasury without violating this constraint, and also renders the constraint unimportant.
– Congress’s delegating its currency power primarily to the Fed; while leaving its delegation of the power to coin money with the Treasury: This constraint still remains with PCS. But the 1996 legislation, for the first time, makes the coining power of the Mint the near equivalent of the reserve creating power of the Fed, by allowing the Treasury to create coins with arbitrarily high face values.
With that power, the Treasury can require the Fed to fill the public purse to any level that Treasury thinks is necessary for its purposes. So, the Treasury’s lack of currency and reserve-creating authority would be far less important than before, if PCS is used to its full potential.
Let’s be clear, however, filling the public purse to any level, however high it may be, doesn’t open the purse strings for free spending by the President. Congress still has to appropriate spending in excess of tax revenues for Treasury to spend that money. So, Congress still has control of the public purse; even after delegating its authority to fill it to the Treasury and the Fed in combination.
– Congress leaving the Fed, the Central Bank, independent of the Executive Branch and the Treasury, but, at the same time closely associated with the Banking and Wall Street interests that own the regional banks, and sit on the Federal Open Market Committee (FOMC) which sets the monetary policy of the United States: PCS, again, if high enough coin face values are involved, reduces the independence of the Fed relative to the Treasury, by influencing its actions in setting its target interest rate.
As I’ve explained above, when and if coin seigiorage is spent by Treasury, reserves are added to the banking system in the trillions of dollars. But, these reserves would not be drained by debt issuance, so their existence in the system will drive the Federal Funds Rate (FFR) down to zero. If the Fed has a positive interest rate target, then it will need to pay IOR to depositors, and this will shift the bill for Federal interest over to the Fed, rather than the Treasury, taking it off budget.
Variations in PCS Options
The mainstream bloggers and commentators told the PCS story solely in terms of the theoretical availability of coins with face values in the low trillions and their potential impact on the debt ceiling conflict. But they never considered or examined a more aggressive use of PCS to change the US financial system substantially, by freeing the Treasury from its gold standard chains and the political system from fiscal policy alternatives focused first and last on their fiscal impact on deficits, debts, and misplaced solvency fears, rather than on full employment, price stability, and other public purposes. They never considered a range of PCS options and their possible wide range of impacts on economics, politics, and the federal financial system, as well as on the debt ceiling conflict.
Not even Brad Plumer. quoting the acute Jack Balkin, is thinking, for example, about very high value PCS, in the $60 T or greater range, as options that might liquidate the debt completely, and change the whole structure of how fiscal policy could be implemented. In addition, no one was thinking about the relationship between the general PCS authority and the broader government context including the Congress and the Fed.
As I’ve said in another place, a $60 T solution would allow Treasury to harness the authority of the Fed to fill the TGA (the public purse), so that Treasury need never issue debt again for the next 15 – 20 years, ample time to reconsider the unwise and damaging decision made by Congress in gold standard days to make the Fed independent of the Executive Branch and unaccountable to the public. That solution would also make the debt ceiling issue a dead letter, to the point where that legislation could easily be repealed over the next few years, since no one would expect to use it again.
When one proposes a very high value PCS solution, almost the first objection, after getting over the shock of hearing or seeing the proposal, is that either repayment of the debt, or deficit spending using seigniorage rather than debt issuance would be inflationary. That consideration made it into the mainstream posts. I’ll consider the inflation objection at length in my next post. However it’s also already been considered and evaluated in past writings by myself, and also by Scott Fullwiler. The bottom line, however, is that debt repayment won’t be inflationary; and that deficit spending using seigniorage, also won’t be inflationary in itself.
Any inflation effect will result from unwise and excessive Congressional deficit spending past the point of full employment. It will have nothing to do with using seigniorage credits rather than credits accumulated through bond sales for deficit spending.
If the mainstream had considered a wide range of PCS options, then one among them would have caught the broader PCS story, not that PCS could help the President over his current hump with the Republicans; but that it can remove many of the Treasury’s gold standard-based constraints and, in the process, free up progressive advocates to push for solutions to most of our acute policy problems without always having to fight the “we can’t afford it, because we’re running out of money and what will we do about the burden on our grandchildren,” battle. If used properly, PCS can end all current justifications for austerity, debt, and deficit reduction in public spending. It can free progressives to build the Green New Deal and with it a bright future for America. The mainstream bloggers have missed all that by their narrow focus on the Trillion Dollar Coin and the debt ceiling rather than on PCS and its more general implications and potential significance if used.
One important question, is why the mainstream bloggers who are interested in the PCS idea haven’t explored options other than the band-aid option of a few trillions in coin seigniorage to get by the debt ceiling for a little while. Why couldn’t they see PCS more broadly than they do and explore the idea to begin to understand the likely impact of it generally as well as alternative PCS options. What’s holding them back? Is it the impact of busy lives and hectic days? Is it the time they spend on the telephone or in email communications with other mainstream bloggers and insiders in the Washington/New York village? Is it that they consciously or unconsciously shy away from ideas that might lead them to advocate policies that would actually change the system of political economy we have now?
I cannot say. But what I do know is that their examination of platinum coin seigniorage in the context of the debt ceiling crisis, and otherwise, is too narrow and superficial too serve us well. We need deeper thinking and more detailed exploration of this relatively new idea, and its implications.
But the sudden waves of blogging by the mainstream when debt ceiling crises approach, aren’t giving us any of that. What they’re giving us instead, is an echo chamber treatment of the TDC, not the daring explorations of a new idea, very high face value platinum coin seigniorage, that we have a right to expect from a free press.
(Cross-posted from New Economic Perspectives.)
Photo in the public domain.