Tuesday, May 09, 2023

Platinum Coins are Islamic Finance, While "Premium" and "Consol" Bonds are Shabbos Goys

 by Michael C. Dorf

The holy texts of the Abrahamic religions condemn the charging of interest on loans, but it is impossible to run even a modestly sophisticated economy without debt-finance. Accordingly, people who accept the authority of their holy books but also hope to enjoy the fruits of a functioning economy find workarounds.

In medieval Europe, Christian rulers permitted Jews but not Christians to lend money at interest (even as they forbade Jews from earning a living in many other ways). This arrangement was permissible for Jews, for whom the prohibition on interest runs only between transactions in which both lender and borrower are Jewish. For loans between (very observant) Jews, the rabbis circumvent the interest prohibition through a form of partnership that reproduces some of the features of lending. To this day, banks in Israel offer use of this formality to customers who want it.

In majority-Muslim countries that officially follow Shari'ah, very clever lawyers and economists have developed an elaborate system of Islamic finance to substitute for interest on loans. Some of the resulting instruments and structures of Islamic banks differ from conventional banks; that is to say, Islamic finance is not entirely about creating legal fictions to disguise what are in substance interest-bearing loans. But that's certainly an important part of what's going on.

To state the obvious, I am not an expert in Shari'ah in general or Islamic finance in particular. I therefore won't venture an opinion about whether the arrangements offered by Islamic banks that are functionally equivalent to lending with interest thereby violate (any particular version of) Shari'ah (a somewhat fraught question helpfully explored by Prof Hamoudi here). Whether any particular attempt to circumvent a rule should be deemed impermissible on function-over-form grounds is highly contextual.

Instead, I mean only to use Islamic finance and a similar move employed by some orthodox Jews as a launching point for thinking about another context in which clever people are looking for means of circumventing a legal prohibition through financial legerdemain: two families of gimmicks being floated to circumvent the debt ceiling. As I'll explain, these gimmicks are pretty obviously ineffective.

(1) In two Verdict columns and two accompanying essays on this blog (in chronological order, here, here, here, and here) Prof Buchanan and I explained why the proposal to have the Treasury mint and deposit with the Federal Reserve a multi-trillion-dollar platinum coin would not be a lawful means of raising revenue without exceeding the debt ceiling. An important part of our argument rested on a standard move in statutory interpretation. We identified an absurd consequence of the claim that trillion-dollar platinum coins can be used to fund the government during a debt-ceiling crisis: if so, then they can be used at any and all times to completely displace the tax code and borrowing as a means of funding the government; and because Congress could not possibly have intended that result (Congress does not hide elephants in mouse holes, as the Supreme Court has said), the claim must be false. We then pointed to another sub-provision of the statute and the legislative history to show that context and purpose give the platinum coin provision a much narrower scope.

I stand by our analysis of the platinum-coin gimmick if it is to be interpreted in the way that statutes are interpreted in U.S. law. That said, I acknowledge that our analysis rests on the rejection of the sort of hyper-formalism that characterizes Islamic finance and Jewish banking that elevate form over substance to allow the circumvention of the interest prohibition. I find it odd that people who believe their holy texts were written by God treat those texts as having no spirit, only letter. But I'm not here to argue against Islamic finance or the like. My point is only that its methods are very different from the methods of statutory interpretation in U.S. law, and so the fact that one can squeeze some juice out of the platinum coin statute by using the methods some people use to circumvent religious obligations is hardly a defense of the coin gimmick.

(2) As bad as the argument for the legality of multi-trillion-dollar platinum coins is, another family of gimmicks is even worse. Some pundits have suggested that the Treasury could auction off bonds for substantially more money than the face value printed on the bonds. There are a number of variations of this approach. "Premium" bonds pay a very high rate of interest. "Consol" bonds pay interest in perpetuity and never repay the principal. However packaged, the idea is that the government could print a substantially smaller dollar number on the bond (as low as zero in the case of a consol bond) than on a conventional bond but sell it for the same price.

Too good to be true? Of course it is. As Prof Buchanan and I explain in our latest Verdict column, subsection (b) of the debt ceiling statute counts as relevant debt the "face amount" of various government obligations, but subsection (c) then defines "face amount" to equal "the original issue price of the obligation" (plus a small increment concerning the timing of payments due). The original issue price is simply what the government sells the bond for, which, of course, depends on its market value. If the grossed-up and discounted-to-present-value income stream from some specially denominated bond is $100, then the issue price of the bond will be $100, even if the government stamps $50 on it but pays a very high interest premium or denominates it as a never-maturing consol bond.

So premium bonds, consol bonds, and all of their variations fail. Indeed, they don't even make it to the level of Islamic finance. There is no statutory loophole to exploit even using a hyper-technical reading of the statutory language.

Put differently, premium bonds and their variations are like the "Shabbos goy." Jews are forbidden from doing various forms of work on the Sabbath. Among the prohibited activity is lighting a fire, which observant Jews in the modern era understand to include turning on an electric light. In some places and times, observant Jews have sought to circumvent the prohibition on turning on lights and other electrical appliances on the Sabbath by delegating the task to a non-Jew (a "goy" in Yiddish) to whom the prohibition does not apply. They employ a person who has been called a "Shabbos goy."

But here's the thing. Actually employing a Shabbos goy is a completely ineffective workaround because it violates the text of the commandment it is supposed to circumvent (found in Exodus, Chapter 20): "you shall perform no labor, neither you, your son, your daughter, your manservant, your maidservant, your beast, nor your stranger who is in your cities." If it is sinful to turn on a light because it counts as labor, it is sinful to employ someone to do it for you.

I suppose an extreme formalist might try to evade that reading by distinguishing between a servant and an employee, but that distinction was not really known in Biblical times. Another workaround one sees by observant Jews who recognize that employing a Shabbos goy violates the requirement of rest for servants is to accept but not ask for assistance from non-Jews. I'm not sure how this jibes with the portion of the "stranger . . . in your cities" portion of the commandment. Perhaps that applies only in places in which there is a Jewish theocracy.

In any event, even if one can find some tiny wiggle room to justify the shabbos goy or its variants, there is no wiggle room in the definition of "face amount." Manipulating the number placed on the face of a bond is totally ineffective as a means of circumventing the debt ceiling.