-- Posted by Neil H. Buchanan
After a frenzied week of discussion about minting trillion-dollar platinum coins, what I called the Big Coin gambit is now officially off the table. The Treasury Department issued a statement yesterday saying that it will not walk down that path. That is great news, and we can all breathe a sigh of relief. In my posts this past Thursday and Friday, I argued that the gambit was not only terrible policy, but that it was not even what it purported to be: a "clearly legal" end-run around the debt ceiling that would allow the President to avoid having to choose the least unconstitutional option.
The gambit would, I argued, simply be a different way to violate the debt ceiling. Now, given that I think that we should violate the debt ceiling when the spending and taxing laws otherwise call for issuing additional debt, my objection is clearly not that big coins would usurp Congress's power to authorize borrowing. It is, instead, that the gambit was the worst possible way to do so, because it would have severely undermined the U.S. and global financial systems and deeply damaged the economy (and, by the way, millions of people's lives).
Today, in a rare weekend Dorf on Law post, I want to discuss further the logic of "big coins as debt," partly as a simple post mortem, but more importantly because it is important to understand the debt ceiling law itself at a deeper level. If we do reach the point where we hit the ceiling, and the White House agrees with Professor Dorf and me that defaulting on appropriated spending is too unconstitutional (compared to the alternatives), then we need to know whether there are possibly other ways to proceed. Even if big coins are not the gambit of choice, others might come along.
My legal argument in Thursday's and Friday's posts was based on the debt ceiling law, 31 USC 3101(b), which limits the sum of "obligations" in two categories: (1) traditional Treasury securities, and (2) other obligations of the government. My argument was that big coins would actually be debt under the second category, because they would (by the conscious design of those who advocated the gambit) obligate the government to pay back the $2 trillion as soon as the debt ceiling was lifted. That, I argued, made the coins simply a different way for the government to borrow money, and thus was debt subject to the ceiling.
While there are some important questions about this argument that I address further below, two objections are easily dismissed. First, minting these coins would not have been the same as minting commemorative coins of smaller donations, for sale to collectors. The gambit was not designed to sell items to willing buyers who wished to own them (allowing the government to keep and use the proceeds as it saw fit), but rather to use the coins as temporary placeholders in the Federal Reserve's vault, to be returned and destroyed later. That is not a sale to generate revenue. It is a loan to gain access to spendable cash.
Second, my definition of the second category of debt under section 3101(b) would not sweep all coins and currency (or, even more broadly, all future obligations of the federal government under, for example, Social Security) under the purview of the debt ceiling. The proper definition of obligation is still limited, because it simply says that this proposed way to use coins to memorialize debt is no different from using traditional Treasuries. By contrast, for example, when people present a $5 bill to the government, they can demand five $1 bills in return.
That latter objection to the analysis that I offered last week, however, does present an opportunity to explain more clearly what makes Big Coins debt, and therefore how to delimit the definition of debt in the debt ceiling statute. The basic idea is classic substance over form. The wording of section 3101(b) is clearly designed, by the inclusion of the second category, to make it impossible to simply borrow money by deciding not to call the instrument of that borrowing a bond, bill, or note. In other words, even though the purpose of the debt ceiling law is absurd and unconstitutional, it is a well-drafted law. It says, in essence: "We limit total debt to $X, whether you borrow money through traditional or other means."
The Big Coin gambit is, in substance, merely another means to borrow money. It is, in fact, supposed to be nothing but such an alternative means. Had we used it, we would have allowed the federal government to continue to spend more than it took in from tax revenues (under the duly-enacted laws governing appropriations and taxes), and obtained the necessary additional funds from the Fed in exchange for the coins, on the understanding that those coins would be replaced as soon as possible with traditional Treasury securities. The coins were simply to be used as temporary placeholders, soon to be replaced by documents that "look more like" debt, but which are simply a different way of memorializing a debt that was incurred by the exchange of coins for spending in the first place.
One might object, however, that the Treasury was not obligated to take the coins back later. Under that view, the Treasury's stated intent to make this a temporary arrangement could be viewed as less than legally binding, and therefore not obligating the federal government in a way that rises to the level of section 3101(b) debt.
This, however, is where the Federal Reserve comes in. As yesterday's Ezra Klein post announcing the Treasury's decision not to mint platinum coins notes, the big coin gambit not only required the Treasury to mint the coins and walk them over to the Fed's vaults, but it required the Fed to accept the coins and allow the Treasury to spend from a properly-credited federal "checking account." In other words, while my analysis last week (and in this blog post thus far) looked only at the Treasury, the analysis requires looking at the debt-creation process from both sides. For every borrower, there is a lender. For every party, there is a counter-party. In the Big Coin gambit, the Fed would be the Treasury's counter-party.
Had the Fed agreed to go along with the gambit, however, it would not have done so without making sure that the gambit would be temporary. How could it do so? The most straightforward possibility, of course, is that the Fed could simply have stated as a term of the agreement that the coins would be withdrawn and melted down after the debt ceiling was ultimately increased. Even if it did not do so, however, and even if the Fed allowed the Treasury to "change its mind" and leave the coins on deposit forever, with spending credited against the coins, the Fed's legal duties would have required it to treat the coins as the equivalent of traditional Treasury securities. This is based on the Fed's most fundamental responsibilities in regulating the supply of money.
The reason that the Fed buys and sells traditional Treasury securities is to change the "monetary base," which then has the effect of changing the interest rates that the Fed can control. That is true of "quantitative easing," but it is also true under plain-vanilla Fed operations on a day-to-day basis. The reason that people like Krugman were right that minting and depositing the coin would not have run the danger of creating inflation (even after the economy recovers, when interest rates can be non-zero again) is that the Fed could either require the coins to be withdrawn after the standoff ends, or it could simply negate the effect of having the coins on its balance sheet by holding fewer traditional Treasury securities.
For example, if the Fed had an extra $2 trillion on its balance sheet (above what it would otherwise want, as part of taking care of its statutory duties), it could either sell $2 trillion of the Treasuries that it already holds, or it could simply not buy the first $2 trillion of Treasuries that it would have otherwise bought going forward. The coins would either have been replaced with Treasuries, or they would have had the same effect as Treasuries (replacing Treasuries, dollar for dollar). The Treasury would thereby have obligated the government to the same additional $2 trillion that it would have owed if there had been no debt ceiling.
The coins, therefore, would either be debt by a different name, to be replaced when we could admit that there was debt by the standard name, or they would permanently allow the government to spend and tax as planned, substituting for the standard debt that would otherwise have come into existence.
In short, Treasury's intent in the transaction is not necessarily the story. In fact, it is not even the Fed's intent in the gambit that necessarily matters, but rather the actions that we know it would be required to follow after accepting the coins as deposits. The Fed's holdings of Treasuries (or the equivalent in platinum coins) are determined by the Fed's decisions to regulate the supply of money. Enabling a temporary debt-ceiling workaround might have been acceptable to them (although, as we now know, it was not), but that would not -- and could not -- have changed its net balance sheet going forward.
Again, this is all a bit odd, because I am arguing that there is substance and integrity to the debt ceiling law, when I think that the law itself is absurd and damaging, and that the people who are using it for political advantage are hostage-takers. To repeat, my argument is not that we should not breach the debt ceiling. It is that we should realize that we are doing it as we do it, rather than convincing ourselves that we have figured out a formal way not to call debt debt.