Constitution of the United States grants to Congress the exclusive
power "To coin Money, regulate the Value thereof, and of foreign
Coin, and fix the Standard of Weights and Measures." Nowhere in
the entire Constitution is paper money mentioned, so one reasonable
interpretation of this clause is that it was the intention of the
Founding Fathers to place power over fiscal policy in the hands of
That's not how things have developed historically. Lincoln's (successful) experiment with the Greenback during the Civil War represented the only time in our history when a substantial portion of our currency was directly created by the US Government. Since the Federal Reserve was authorized in 1913, that semi-private consortium has created the lion's share of our money supply, and its board has been in charge of the all-important "regulat[ing] the value thereof."
Ellen Brown has for several years played the role of the boy who tells the Emperor he has no clothes. An outsider to economic orthodoxy, yet thoroughly knowledgeable in the history and practice of money creation, she has written a book and an ongoing stream of articles calling for a return of the power of fiscal policy from private banks and the Fed to public banks and the Congress. In the 2007 book, she proposed, only half in jest, that Congress might begin to take back the power that was given away in 1913 within the letter of current law by issuing a trillion-dollar coin .
The most direct solution to the debt problem is for the government to fund its budget with government-issued money. One alternative would be for the Treasury to issue U.S. Notes, as was done in the Civil War by President Lincoln.
Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins. Congress has the Constitutional power to "coin money," and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.
This week, as we retreat from the fiscal cliff, suddenly the idea of the trillion dollar coin is gaining currency in mainstream circles. Paul Krugman blogged about it favorably. The Huffington Post has featured an article taking the subject seriously. And the Market Watch blog of the venerable Wall St Journal has raised the subject. Today, there was a NYTimes Op-Ed on the subject.
The idea is being floated as a way to avoid a repeat of Republican blackmail when the perennial debt ceiling legislation comes up again this spring. Two years ago, Republicans in Congress demanded and got a number unrelated policy concessions in exchange for a vote that should have been routine.
But the idea is really much more than a political ploy -- it is solid, common-sense, wide-eyed radicalism with the deep conservative roots of the U.S. Constitution. It is the first proposed step toward taking our economy back from the bankers, and placing it under democratic control.
As the economy expands from year to year, more money must be placed into circulation just to avoid choking economic activity. The amount that needs to be added is large, just because the economy is large. But it is even larger than the expansion of the US economy, because the dollar is the world's reserve currency, the medium of exchange for more than half of all world trade. How much could be added without inflation if the Federal government simply printed it? Here's a rough estimate: the M2 money supply is about $10 trillion, and the year-over-year growth has fluctuated widely, averaging 8-10% by some measures. So that comes to almost a trillion a year - more than the (on-the-books) defense budget, or about half of total income tax receipts.
For the last century, the Federal government has been putting this money into circulation in the form of debt, increasing the National Debt each time we run a deficit. This means that every dollar that goes into circulation is backed by a promise to "pay back" the money in the future. I put "pay back" in quotes, because this is traditionally done simply by issuing another, larger volume of bonds. Some would call this "kicking the can down the road."
Would the economic system collapse in a fit of rebellious distrust if Congress simply printed money instead of going through the charade of borrowing? Clearly not. Would it be more inflationary to print money, clear of debt? Experts differ on this. There is presently about $3 trillion less in circulation than there was in 2008, so there is a gauge of how much money might be printed without triggering inflation.
Here's one thing everyone agrees: the consequence of not putting more money into circulation is to create de flation and this is unhealthy for the economy because it stifles investment. (Why would anyone invest money in something risky when you could get a good return just stuffing bills in your mattress?)
One more thing should be said in favor of the direct approach to creating money: chronic borrowing by the government has led to a Federal budget weighed down by a growing burden of interest. The proportion of the Federal budget devoted to interest has grown to be a national worry.
It's a system that works for Brazil, China, Russia, Sweden and other countries. In America, we haven't used it since Lincoln's Greenbacks. But maybe this is the year to give it a try - in a modest, $1 trillion experiment.
Government possessing the power to create and issue currency and credit as money and enjoying the right to withdraw both currency and credit from circulation by taxation and otherwise, need not and should not borrow capital at interest as the means of financing governmental work and public enterprise. The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of government and the buying power of consumers. The privilege of creating and issuing of money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity.
- Gerald McGeer: Lincoln, Practical Economist (1935)
The author acknowledges arguments and facts collected by Scott Baker and Christapher Cogswell, based on the pioneering vision of Ellen Brown. All errors are the sole responsibility of the author.