Written by CPEG’s Ron Baiman
Though Congressional Republicans have apparently backed off of their plan to immediately take the federal government hostage by temporarily extending the federal debt limit, the threat remains.
As many of you probably have heard by now a blogger with the screen name of Beowulf has come up with a unique and apparently perfectly legal method for the Treasury to do an end-run around (questionably legal) Congressional debt limit extortionism.1 Beowulf proposes to take advantage of a 1995 act that apparently gives the U.S. Mint the ability to assign any value to platinum coins that it mints and transfer these coins, or more to the point, their value, to a U.S. Treasury account at the Federal Reserve. The Treasury could then use these funds to pay its bills. Readers will recognize that this is effectively a form of “coin seigniorage,” that is a creation of money by fiat using platinum coins.2 Beowulf proposes that the Treasury mint a few platinum coins and value them at $ 1 trillion dollars each.3
I agree with Firestone and others that this is a brilliant and apparently perfectly legal way to avoid a potential constitutional crises that is no less hokey or out of line than threatening to not allow the U.S. government to pay for spending that Congress has already authorized.4 But I think there’s, at least potentially, a lot more to this proposal than a clever legal means to defang the extortionist and unconstitutional tactics of a deeply misguided Tea Party/Republican Party political fringe. Bleowulf’s proposal could also serve to: A) undermine, or at least ideologically delegitimize, the current direct and indirect (through its agent the Federal Reserve) monopoly that private finance enjoys over the creation of money and support long-standing calls for a democratization of the Fed5, B) similarly deflate the current hysteria over the federal deficit, and C) show that the almost exclusive right now given to the private sector to finance, and thus “create,” jobs, is a special privilege that we grant to private finance that can easily be changed.
A) Why does a democracy grant private finance a near monopoly over money creation?
In the 1980’s one of my political mentors, John Stephens, a radical Sociologist (now at UNC) gave a talk at a Democratic Socialist of America Youth Section (now YDS) retreat on the ultimate sources of power under capitalism: Money or “Capital” vs. People or “Organization,” an insight that probably goes back to the first democratic and democratic socialist activists. John E. Roemer, a well known Marxist economist and philosopher, has in fact reconfigured the “Labor Theory of Value” making inequality, and in particular the “class monopoly” over wealth, or capital, the key factor underlying capitalist exploitation, making direct “point of production” labor exploitation one of many (instead of the only) possible methods of exploitation and surplus value extraction under capitalism.6 Needless to say, this is a position that many more orthodox Marxist economist vehemently disagree with, but for argument’s sake, let’s assume that Roemer is right.
Boewulf’s idea then has the potential to undermine one of, if not the, key sources of power of capital. There is no reason to limit the use of this new found ability of the public to circumvent artificially created Congressional Debt limit extortionism. This power to take back the control over public money that we have ceded to private finance via it’s agent the Federal Reserve could be used for example to finance affordable housing and bailouts for deserving foreclosed and underwater homeowners. This would be analogous to the Fed’s swapping out of “toxic,” or simply “risky,” assets for private finance.
An expanded list ways to spend “coin seignoirage” funds in ways that would broadly benefit the public and not just private finance can easily be drawn up. Political campaigns could be publicly funded, thereby dramatically reducing the power of private money, including corporate money, in elections. A large scale public jobs program that would rebuild our infrastructure, vastly expand public services, and create a true full employment economy, could be funded from these funds.7 A fully socialized pension system (at least doubling Social Security and expanding its scope to include all U.S. citizens including a grandfathering in of all existing private, state, and local pension systems) could be established. Free free public transit systems could be made available. A national single-payer national health care system could be set up, etc., etc. And though these forms of spending would require direct Congressional approval, as is argued below, the ability of the Treasury to create money for public purposes should make this kind of expanded public spending more politically palatable.
Is this a “pie in the sky” “free lunch” utopian thinking? Yes. There are, of course, limits to how many “dollars” the world will accept before the value of the dollar as a safe claim on real goods and services begins to be questioned. The need to put limits on the ability of governments to create money is in fact the ostensible reason for supposedly “independent” Central Banks. But why should a democracy tolerate issuing the power to create trillions of dollars of money to an agency (the Fed) that overwhelming serves the interests of a tiny group of private financial institutions and their billionaire and millionaire investors, and not use this power to serve the interests of the broader public?8 So yes, there are limits to even the ability of the United States to print dollars but doesn’t it makes sense until these limits are reached to use our “rentier” ability as the “fiat” issuer of the world’s currency to create claims on goods and services for the public rather than for the exclusive benefit of the “rentiers”.9
Money is being created anyway to inflate financial and commodity asset prices to benefit rentiers. Why shouldn’t the power to create money be used instead to restructure and revive the real economy for benefit of everyone else? Because the real economy is currently operating at 21.6% below capacity, there is no current inflationary danger.10 The power to create money should be serving public not private interests. In the long run the U.S. needs to transform itself away from its current rentier structure back to an advanced “unequal exchange” economy using our (hopefully, diminishing in the future) “rentier” capacity to do this rather than using this same capacity to continue to prop up the existing rentier structure as we have been doing.11
B) Expanded “Coin Seignoirage” would deflate “deficit hysteria”
Even if, in contrast to the expansive uses proposed above, the $ trillions of dollars of public funds created by the Treasury in Beowulf’s proposal were only used to pay back government debt, having this option will serve to deflate hysteria over the national debt. This would be the case as Coin Seignoirage would demonstrate to all who are paying attention that deficit cutting, which is absolutely the wrong thing to do in a depressed economy that is dependent on public or private deficit spending, is not necessary.12 The federal government can pay all of its bills without having to engage in the really absurd practice of borrowing U.S. dollars from private parties or other national governments. As Firestone has pointed out not having to borrow would in itself save he Treasury trillions of dollars in projected interest costs.13 Popping the deficit hysteria balloon in this way would support a shift of attention to the kind of employment generating deep structural changes that we should be focused on. At the very least, a one-time implementation, or even “credible threat,” of expanded “coin seignoirage” by the Treasury, might induce a long-overdue democratization of the Federal Reserve.14
C) Expanded “Coin Seignoirage” would undermine “job creator” mythology
In addition, by providing substantive confirmation that “money” is a public and not a private good, Beowulf’s proposal effective undermines the “job creator” ideology so prevalent among conservatives. It shows that we really don’t need private wealth to create savings or investment and the real “job creators” are either private (or socialized as in the Mondragon cooperatives) entrepreneurs who find ways to use productive work to produce goods and services that are useful to people, or public efforts to do the same for valuable goods and services that can be more efficiently provided through public funding. In either case rich people or “investors” who simply loan out or invest their claims on goods and services are “capitalists” or “rentiers” (or social parasites) not “job creators”. By showing that private control of money is a social arrangement that can be readily changed, Beowulf’s proposal, effectively lifts the veil on the extreme late capitalist form of “commodity fetishism”15, that identifies the folks who have been given the extraordinary privilege and power to amass great pools of claims on goods and services and live off the rent from this concentrated financial capital, “job creators.” It’s hard to imagine that public development banks funded by platinum coin “fiat” money could not do a better job a funding true “job creating initiatives” than the wealthy and the private sector in the U.S. which, like Bain capital, has excelled at profit extraction through domestic job destruction.
1. See for example this 1/10/2013 NYTimes article. I first heard this on Thom’s Hartmann’s, almost always, excellent talk show.
2. This is normally done almost exclusively by the Fed with Federal Reserve notes or “dollars,” as the face value of new coins produced by the U.S. Mint (a branch of the Treasury) is so small relative to new dollars creasted by the Fed. Though as Beowulf notes, there appears to be an effort in current legislative language to distinguish between Federal Reserve “seignoirage” from the creation of Reserve notes or dollars, and U.S. Mint seignoirage from the production of coins, in practice it seems pretty clear that the “profits” (i.e. the difference between the face value of bills or coins and the physical costs of their production and distribution) from both activities end up accruing to the federal government either as current “miscellaneous receipts” in federal government accounts, or as a credit against the overall federal deficit – see discussion in Beowulf link above.
3. This is Beowulf’s original (as far as I know) 1/3/2011 proposal: http://my.firedoglake.com/beowulf/2011/01/03/coin-seigniorage-and-the-irrelevance-of-the-debt-limit/.
4. Here is some good commentary on it and responses to it by Joe Firestone in the Naked Capitalism blog: http://www.nakedcapitalism.com/2011/07/why-matt-yglesias-and-felix-salmon-are-wrong-about-a-legal-way-to-circumvent-the-debt-ceiling-impasse.html.
5. See for example: Greider, 1989, Secrets of the Temple , or Dymski et. al., 1993, Transforming the U.S. Financial System.
6. John E. Roemer, 1988, Free to Lose.
7. See: http://www.cpegonline.org/reports/jobs.pdf.
8. See for example this July 2011 $ 16 Trillion GAO estimate: http://www.scribd.com/doc/60553686/GAO-Fed-Investigation.
9. See conclusion of: http://www.cpegonline.org/workingpapers/CPEGWP2011-3.pdf.
10. As of 11/12/2012, see St. Louis Fed G.17 Industrial Production and Capacity Utilization Series.
12. See: http://www.cpegonline.org/multimedia/DeficitLinkages.ppt and http://www.cpegonline.org/documents/MayDayManifesto.pdf.
14. See for example: Greider, 1989, Secrets of the Temple , or Dymski et. al., 1993, Transforming the U.S. Financial System
15. See: Marx, Karl, Capital, Vol. 1, Chap. 1, Section 4.