Government Has Always Had The Power To Pay Its Bills

Until the idea of minting a $1 trillion platinum coin entered the mainstream consciousness, most people probably never gave much thought to the mechanics of government finance. Sure, everyone knew the government spent a lot of money and that money had to come from "somewhere", but most people assumed there were limits to how much the government could afford to spend. After all, money doesn't grow on trees.

Here's the usual narrative. Like anyone else, the U.S. government must live within its means. It can spend more than it takes in, temporarily, if it can convince others to lend their money on affordable terms. But borrow too much, and your creditors will grow weary. You could even end up with debts you can't afford to pay back.

Enter the coin. An idea so simple the mind is repelled. Through an obscure loophole, we find out that the secretary of the U.S. Treasury has the legal authority to conjure up its own money simply by handing over a coin and instructing the Federal Reserve to increase the balance in its account—in this case, by a cool trillion.

The idea sent chills throughout the financial world.

Opponents dismissed the coin in a hyperbolic tirade, calling it "silly" and likening such a move to the last refuge of a Banana Republic. Others claimed that the mere crediting of the Treasury's account would somehow cause hyperinflation, despite the fact that the Treasury couldn't spend a penny more than Congress had already intended.

And this is the real issue. The United States has made financial commitments to bondholders, retirees, the sick and disabled, its military personnel, etc. Some members of the GOP seem prepared to risk the full faith and credit of the nation by reneging on at least some of these commitments. What these Republicans either don't know or don't want anyone else to discover is that the United States is already the issuer of the currency. It isn't like a household or a private business. It can always pay.

The coin appears to remove the constraints on government finance by allowing the government to just "print" money. But like Dorothy with her ruby slippers, that power has existed all along.

"[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit," said Alan Greenspan in 1997.

If the coin reminds us of that power, it will have done its job.

*Originially published in US News

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Currency
Debt