Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile.
-- Canadian Prime Minister William Lyon Mackenzie King, 1935
On November 3rd, the US government will again run out of money due to a debt ceiling artificially imposed by Congress. This is the third time in four years that a radical faction has taken the country to the brink of default to extort concessions that are at best only marginally related to the budget.
The debt ceiling is an unconstitutional gimmick that violates the 14th amendment, which says the validity of the government's debt shall not be questioned. The debt was incurred by Congress when it passed the budget, and the money has been borrowed and spent. Congress cannot now refuse to pay.
One good gimmick deserves another. The debt ceiling could be eliminated for good, by restoring to the government its constitutional authority to create money. Article 1, Section 8, provides: "The Congress shall have the power to coin money [and] regulate the value thereof . . . ." The president could pay the government's bills by issuing some large denomination coins by executive order.
When the Constitution was ratified, coins were the only officially recognized legal tender. By 1850, coins made up only about half the currency. Today, they make up less than one-half of one percent of the money supply -- about 50 billion out of a $12 trillion circulating money supply (M2). These coins, along with about $25 million in US Notes or Greenbacks originally issued during the Civil War, are all that is left of the Treasury's money-creating power.
As the Bank of England recently acknowledged, the vast majority of the money supply is now created privately by banks as deposits when they make loans. The power to issue the national money supply needs to be returned to the people from whom it has been deceptively usurped. As Thomas Edison observed in the 1920s:
It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.
In Lincoln's Footsteps
In the early days of his presidency, Barack Obama claimed Abraham Lincoln as his role model. One of Lincoln's less well known achievements was to avoid a massive debt to private banks at usurious interest rates by restoring an earlier form of government-issued money, the paper scrip of the American colonists. In the 1860s, these US Notes or Greenbacks constituted 40% of the national currency. Today, 40% of the circulating money supply would be $5 trillion.
This massive money-printing during the Civil War did not lead to hyperinflation. US Notes suffered a drop in value as against gold, but according to Milton Friedman and Anna Schwarz in A Monetary History of the United States, 1867-1960, this was not due to "just printing money" but was caused by trade imbalances with foreign trading partners on the gold standard.
The Greenbacks aided the Union not only in winning the war but in funding a period of unprecedented economic expansion. Lincoln's government created the greatest industrial giant the world had yet seen. The steel industry was launched, a continental railroad system was created, a new era of farm machinery and cheap tools was promoted, free higher education was established, government support was provided to all branches of science, the Bureau of Mines was organized, and labor productivity was increased by 50 to 75 percent.
President Obama could follow the lead of his mentor and beat the debt ceiling by calling for a new issue of debt-free US Notes. The problem with that alternative is that it would require legislation, an impossibility before the looming November 3rd debt ceiling deadline.
Another way to solve the crisis with government-issued money was proposed by Republican presidential candidate Ron Paul and endorsed by Democratic Representative Alan Grayson during the last debt ceiling crisis: the Federal Reserve could be ordered to transfer to the Treasury the federal securities it has purchased with accounting entries through "quantitative easing." The Treasury could then just void out this part of the debt, which currently tallies in at $2.7 trillion. That alternative too would be legal, but it would require persuading the Federal Reserve to act.