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Thursday, July 07, 2011

Can the President just print money to pay the debt?

Following on my last post, a commentator raised an argument that has also been making the rounds (pioneered by conservative law professor Larry Rosenthal).  The argument is that when Congress appropriates more spending than taxes, it necessarily authorizes borrowing to cover the difference.  And since the most recent appropriation statute came in April, this later statute would supersede the debt limit statute.

This argument is not a section 4 constitutional argument, but rather a statutory one.  It does not say that the President can ignore the debt limit in defiance of Congress, but that Congress has already raised it for him.  While the argument is therefore less extreme and less devastating in its consequences, it seems equally implausible to me.  When Congress appropriates more spending than taxes, there is no reason the difference must be covered by borrowing.  More directly, the difference can simply be covered by printing money, which of course Congress has the power to do.  When Congress is entirely silent between these two choices, I don't see any reason to say that they necessarily chose borrowing over printing.

Of course, printing money to cover a deficit is a really, really bad idea from an economic perspective.  But that is an economic argument, not a statutory interpretation one.

[Update: I have been informed that Professor Rosenthal is a former clerk for Justice Stevens, and that his general views cannot be reliably characterized as conservative.]

Posted by Tun-Jen Chiang on July 7, 2011 at 05:25 PM | Permalink


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I'm not an economist, and I don't play one on TV, but here's what I think. A "fiat" dollar is the same color as a "real" dollar. The country can either print more money to pay it's bills, or it can borrow the money from other nations, investors, whoever. If we borrow money to pay our bills, we have to pay it back, with interest. If we print the money to pay our bills, the value of our bills already in circulation drops - but not as much as you fear. Remember these are United States dollars, and they will, for at least the near term, still be the world's most used currency. The drop in the value of our dollars would be mostly in relation to other nation's currency, and would not necessarily create hyperinflation for us here. We are already a first world nation that pays much more for our goods than other poorer nations do. That devaluation might possibly return jobs to the United States, but if it didn't, at least the relative value of our debt now outstanding would be reduced, since the debt is in U.S. dollars. I'm not ignoring the downside, but I think there's more upside than downside at this point in time.

Posted by: The Dude | Jul 14, 2011 3:18:18 PM

I don't mean to be rude, but this is so wrong that I can't debate with you anymore. Fiat money does not have intrinsic value. But the "disposable income" of your example did have value, because they represented claims to real resources that were external to the system you posited. In contrast, your latest example of the government printing money and putting it in paychecks does not bring new real resources into the system.

Posted by: TJ | Jul 9, 2011 7:28:05 PM

But fiat money doesn't have "real" value anyway. All major currencies have value only because we say they do.

When the government spends money, it goes to people's paychecks one way or another, and that increases the amount of disposable income in the system, right?

Posted by: John Krehbiel | Jul 9, 2011 7:02:51 PM

John Krehbiel, your analogy is definitely wrong, but whether your bottom line conclusion is right or wrong depends very much on a whole bunch of assumptions that one could make or not make. The analogy is wrong because when you put more "disposable income" into the system, that disposable income has real value, unlike printing more money with no intrinsic value.

Posted by: TJ | Jul 9, 2011 3:22:20 PM

I thought of an analogy and wondered if I am correct.

Suppose there is a concert venue that seats 10,000 people. On one day, the Rolling Stones are scheduled to perform there. Tickets are nominally $50, but since the venue is likely to sell out, scalpers buy them up. Lets assume that Rolling Stones fans have lots of disposable income. So prices quickly rise. This represents the economy at full employment with too much money chasing too few goods.

Now suppose The Fluorescent Leech and Eddie are playing the same venue the following week. I'd love to see them in concert and have no problem paying $50 for the ticket. But the venue will never sell out. Flo and Eddie are just not that popular. If a scalper bought up tickets and tried to raise the price, it doesn't matter how rich I am, I have no reason to pay more for the ticket. This is analogous to the economy far below capacity. More money in circulation does not increase the price, but instead stimulates more production. (Schedule another group to play with Flo and Eddie to draw in additional fans, for instance.)

If I am right, then printing money to put people to work when unemployment is very high will put people to work without raising prices very much at all.

Is that right?

Posted by: John Krehbiel | Jul 9, 2011 2:25:45 PM

So "coin of the realm" is the solution, a variation on a beggar's request for "spare change"?

Posted by: Shag from Brookline | Jul 9, 2011 9:00:24 AM

It is true that the mint is only authorized to issue coins, not bills, but 31 U.S.C. 5112(k) allows the Treasury Secretary to mint and issue platinum coins in any denomination he sees fit. It wouldn't take all that many $1 billion coins to meet expenses until the crisis has passed.

As for hyperinflation, in the short and medium term there is no difference between printing money and expanding the Fed's balance sheet. In the long term, the excess liquidity can easily be drained through normal debt operations. By my bank of the envelope calculations the magnitude of the increase in the money supply on a monthly basis would be very similar to the recently finished QE2.

Posted by: Brad | Jul 7, 2011 8:50:05 PM

It may be helpful to realize that 31 USC 5111 is literally about physical coins, which are produced by the US Mint at the direction of the Secretary of the Treasury. Only the Federal Reserve, an independent agency, can authorize an increase in the amount of paper money (Federal Reserve Notes) produced by the Bureau of Engraving and Printing, and obviously only the Fed can expand the money supply in the usual way via the bond market.

Posted by: Jay | Jul 7, 2011 8:30:24 PM

Dear TJ:

I do regard the statutory argument as at least plausible. The appropriations statute directs the executive to spend specified sums, and the Impoundment Control Act requires appropriated sums to be spent, so there is at least plausible an argument that the debt ceiling has been amended by implication if the only way that the executive can practicably raise funds to cover the current appropriations is by issuing debt. That said, I am happy to agree that there are plenty of problems with the argument (although the Post reporter apparently didn't have space to mention any of them) -- there is a presumption against amendment by implication, and there is a longstanding congressional practice of treating appropriations and the debt limit separately. Perhaps most important, if the bond market has significant doubts about the strength of this argument (as it likely would), the resulting risk premium will surely make this an impracticable option for the administration.

Larry Rosenthal
Chapman University School of Law

Posted by: Larry Rosenthal | Jul 7, 2011 8:26:25 PM

Brad, I meant it doesn't "work" in not having any basis in the appropriation statute. If what you are arguing is that, quite regardless of the appropriation statute, 31 USC 5111(a) itself authorizes the Treasury to coin money in unlimited amounts, I don't know whether that is correct or whether there is any other statute that limits the authority of the Treasury to print money. Assuming that the president has unlimited authority to print money, then at least as a legal matter there is nothing to stopping him from printing money as a method of avoiding default. The horribleness of the idea from an economic perspective (hello hyperinflation) need not be stated.

Posted by: TJ | Jul 7, 2011 6:02:16 PM

I can see why you wouldn't think the appropriation statute overrode the debt limit, or the coinage law, but I don't understand why the latter doesn't "work" to solve the legal conundrum the president may face.

I don't mean to come off a kook, but I've posted this on several legal blogs, and no one has responded as to what (legally) prevents the President from coining his way out of this mess.

Posted by: Brad | Jul 7, 2011 5:49:22 PM

Brad, you misunderstand me. I meant that Congress has been silent on this issue in the April appropriation statute. The argument is that the April appropriation statute overrides the debt limit despite saying nothing about that explicitly. My response is that this logic could equally say that they overrode 31 USC 5111(a). Since the latter does not work (at least nobody thinks it works), the former does not, either.

Posted by: TJ | Jul 7, 2011 5:38:30 PM

"More directly, the difference can simply be covered by printing money, which of course Congress has the power to do. When Congress is entirely silent between these two choices, I don't see any reason to say that they necessarily chose borrowing over printing."

What makes you think Congress has been silent? Congress has explicitly set a limit on issuing debt, while explicitly delegating the power to determine the amount of coins to mint and issue to the Treasury Secretary. 31 U.S.C. § 5111(a)

Posted by: Brad | Jul 7, 2011 5:33:02 PM

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