Saturday, July 2, 2011
Law and the so-called Debt Ceiling
The above image should appear odd to you. First, the red ink does not appear on Federal Reserve Notes, our usual form of money. Second, the bill is denominated a "United States Note" not a Federal Reserve Note. The difference is that the United States Notes are issued by the US Treasury (rather than the Fed under section 11 and section 16 of the Federal Reserve Act) as legal tender--that is as money. The Treasury issued currency like this for over 100 years and placed the last US notes in circulation in 1971.
This power to issue money gives the Obama Administration the perfect response to the GOP's power play to threaten default on US obligations. Essentially the GOP is using the debt ceiling to jam its ideology down the throats of the American people by holding our nation's credit rating and ultimately entire economy hostage, as discussed in greater detail by Paul Krugman, here. Economists generally agree that the GOP's game-playing with the debt ceiling risks huge economic costs for the entire nation.
But GOP recklessness and irresponsibility (making the government default on bills is simply inexcusable) need not cause financial catastrophe. Economist Peter Morici proposes that the government--specifically the Treasury--simply issue more currency to pay its bills. He correctly points out that the Fed could easily prevent this method of paying our bills from becoming inflationary through off-setting sales of its $2.6 trillion of government bonds. However, the Administration and the Fed could simply decide to use the opportunity to stimulate the economy through a kind of fiscal stimulus/QE III. From a political perspective issuing US Notes in mass quantities one year before the election certainly would not harm President Obama's prospects because the economy would no doubt respond positively to additional money in circulation.
Congress already delegated the power to both "manage the debt" and "print currency" to the Treasury in 31 U.S.C. section 321. This power is not reduced by the concurrent power of the Federal Reserve to issue Federal Reserve Notes, and both currency issued by the Fed as well currency issued by the Treasury are deemed legal tender in 31 U.S.C. section 5103. This can hardly be termed a debt obligation, as the only obligation assumed from the issuance of such notes is to maintain their status as legal tender which section 5103 does by force of law. Thus, the GOP could only fulfill their dreams of economic suicide by amending existing law, which would have to clear the Senate and be signed by President Obama. Let me be clear: under existing law the Treasury can simply expand the money supply to avert the debt ceiling.
I would take this position one step further: Secretary Geithner is legally obligated to print money if necessary to avoid default on any federal obligation. The 14th Amendment of the Constitution requires that the validity of all US government obligations "not be questioned." Thus, the Treasury Secretary must use all his powers to assure the payment of all US government obligations under the Constitution.
This point is crucial because technically the issuance of "United States currency notes" is limited by 31 U.S.C. section 5115 to $300,000,000. Unfortunately, Congress left the meaning of "United States currency notes" unclear at best. 31 U.S.C. section 5119 appears to limit the term to currency issued under certain statutory sections. Apparently there is no specific statutory limitation applicable to anything denominated United States Notes (or a similar denomination), like that pictured above. Clear judicial authority holds that statutes should be construed to avoid a conflict with the Constitution.
In ordinary times, the Treasury Secretary would not be well advised to exploit this clear seam in the statutory scheme governing his conduct. The reckless GOP stratagem to pursue ideological goals that they cannot achieve through normal democratic channels has taken the nation to extraordinary times. In order to avoid a default, as commanded by the Constitution, Secretary Geithner would be well advised to print United States Notes as needed.