Federal Government spending during the current health crisis has alarmed many analysts and the broader public. While the U.S. as a sovereign power with its own free floating currency has unlimited capacity to spend, there are, of course, practical limitations to this spending power. The U.S. creates its own currency and there is no limit on the amount of currency which it can create. Inflation creates a practical limitation on this power but the Federal Government has more flexibility than is commonly reported in the press. Federal spending need not be matched by taxation and borrowing. This was demonstrated during the 2011 debt ceiling crisis.
During the 2011 debt ceiling crisis, Washington was scrambling around trying to figure out how to avoid the self-imposed debt ceiling limit in order to avoid a default on debt payments or other payment obligations. One possible solution was to find space under the then current debt ceiling which could be achieved through the elimination of existing debt. Based on a proposal from an early 1990’s political candidate, a unique idea was discussed which would free up space under the then current debt limitation.
The U.S. Mint is a bureau within the Treasury Department charged with creating and stamping U.S. coins. The idea was to have the U.S. Mint stamp a $1 trillion platinum coin. The $1 trillion had nothing to do with the underlying value of the coin and it was legal to do this under U.S. statutory authority. The Treasury would then use the $1 trillion coin to purchase, or pay-off, $1 trillion of U.S. debt then currently being held by the U.S. Federal Reserve. Just like that, $1 trillion of U.S. debt would have magically disappeared and debt ceiling space would have been created.
While the idea received much support from heavyweights such as Nobel Prize Winner and New York Times Columnist Economics Professor Paul Krugman, along with numerous other economics and business analysts, the idea was also viciously attacked as an end-run around the separation of powers between the legislative and executive branches of government. The minting of the coin, however, was stated to be unambiguously legal by Harvard Constitutional Law Professor Lawrence Tribe.
More recently, Rashida Tlaib, U.S. House Representative from Michigan’s 13th Congressional district has proposed the “Automatic BOOST to Communities Act”. This Act would grant an upfront $2000 payment to every U.S. resident followed by a monthly $1000 Universal Basic Income (UBI) for the length of the virus plus one year. While this all seems very ambitious and possibly inflationary without some degree of corresponding money destruction , i.e., taxation, the important consideration for our purposes is that the additional spending within the proposed legislation, would be funded through the minting of two $1 trillion coins which would be paid to the Federal Reserve in return for $2 trillion which would meander its way to the Treasury Department’s account at the Federal Reserve Bank of New York. The Fed would maintain possession of the coins on its balance sheet in perpetuity.
Undoubtedly, much of the attack against the idea was that the elimination of $1 trillion of U.S. debt through the mere minting of a coin would expose the mythical value of money to be but a mere social contract of which the working class needs to get a better deal. This burst of enlightenment would cast deep shadows on the establishment’s narrative that money is a limited resource best left managed by the private sector. The public recognition of the ease with which public sector investment could be facilitated through responsible public money creation is a threat to the current balance of power between public and private sector.
The printing of these coins, in the minds of the established powers, would set a bad precedent and if not adequately offset though other measures would potentially deflate the currency value of their assets. Unfortunately for the well-off, those other measures would be increased taxation which would rein-in inflationary spending. The end result of all this is that the government will have expanded: which is the thing most desired to be avoided by the ruling elite.
The trillion dollar coin idea makes clear that money, in a nation with its own currency, is a creature of the state. Its creation and destruction is a choice made by the state. While most money creation in the U.S. has been delegated to the Federal Reserve and the commercial banking system, the U.S. Treasury Department has the ability to create as much money as it is directed to create. The Federal government’s spending choices are to be determined in the political realm: taxation and spending are not necessary to fund this spending. Taxation and spending, however, are important policy tools to be utilized for inflation control, interest rate targeting, the provisioning of safe assets for financial sector stability, and the elimination of outsized wealth which skews power away from the democratic process towards an oligarchic elite. Taxation and borrowing are not necessary in order to fund Federal spending. The $1 trillion platinum coin demonstrates this point