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May 6, 2015
Monetary Sovereignty? Give Me A Break! (Part I)
By Clifford Johnson
The TPP's failure to set a standard for deciding in which currency to award lost profit damages against governments is a grave threat to the public fisc, but not to monetary sovereignty. Joe Firestone et alia do disservice by affirming that the United States now exercises full monetary sovereignty by issuing its own currency.
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1. The TPP's ISDS Provisions Are A Grave Threat To The Public Fisc, But Not To Monetary Sovereignty [1]
Another Danger of the TPP: It Sacrifices Monetary Sovereignty , by Joe Firestone (JF), defines monetary sovereignty as follows: [2]
Right now, the US [3] fulfills the three essential conditions for monetary sovereignty: 1) it issues its own non-convertible [fiat] currency, 2) which it allows to float on international currency markets; and 3) it owes no debts in any currency other than dollars.
JF's thesis is (boldface in orig.):
Passing the TPP would compromise the monetary sovereignty of the United States and subject us to the influence of currency markets on the prices we may have to pay for foreign currency under a plausible scenario allowed by the Agreement. Specifically, I don't see anything in the TPP investment chapter requiring that damages be awarded by the Investor State Dispute Settlement (ISDS) tribunals in the sovereign currency of nations incurring damage awards for lost profits, but only that they be awarded in a "freely usable currency" as specified by the IMF.
The link references a January 20, 2015 "working" draft of the TPP's Advanced Investment chapter, which on page 3 incorporates by reference IMF Article XXX(f) :
A freely usable currency means a member's currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.
JF clarified his position in replying to my comment on the New Economics Perspectives blog :
No, I don't seriously think that the IMF will decide that the dollar isn't a freely usable currency in international trade. But that's not the issue. The issue is whether an ISDS Court can decide to award damages to a multinational denominated in a currency different from the currency of the nation having to pay the damages.
Given that the US can pay any such damages using equivalent US dollars, JF inveighs against a distinction without a difference. His monetary sovereignty broadside is frivolous.
Substantively, JF raises concerns only re the potentially adverse effect of currency exchange and interest rate variations over a limited period, in the event of an award against the US in a foreign currency, pursuant to the assessment of damages at (TPP draft, page 12) "fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation."
For sure, US fiscal sovereignty would be overarchingly sacrificed by blindly enacting swathing claims against governments for lost corporate profits, opaquely decided by sweetheart courts. JF's proposed rule--that damages be awarded in the liable government's currency--should be added to the TPP, but only because (1) damages would naturally accrue in that currency, and (2) risks due to exchange and interest rate changes are properly allocated to the investing corporations, under basic free market principles.
The TPP's sub silentio lack of any such standard threatens to palm off this risk on governments. However, I see no hidden agenda encroaching upon monetary sovereignty. On the contrary, ordering payment in SDRs--which could be construed as creep in a mission to impose an international currency, like the Euro--is affirmatively excluded by the IMF's definition of a freely usable currency as a "member's currency."
2. Terminological Inexactitudes And Ye Olde Seigniorage WarJF's article begins with the announcement that:
Right now the US fulfills the three essential conditions for monetary sovereignty: 1) it issues its own non-convertible [fiat] currency...
But by statute, the US does not issue the bulk of the nation's currency--not even if the Federal Reserve Board is construed as a government agency. Under Title 12 of the US code, Federal Reserve bank notes and digital bank reserves are issued by the privately owned Federal Reserve banks, and only to a limited degree as directed by the Board. [4] In particular, Fed notes (versus digital reserves) are issued automatically, to meet the public's demand for cash. The US Bureau of Engraving and Printing merely prints Fed notes, which the Fed banks buy at cost. The Fed banks now issue essentially all currency as digital reserves, in exchange for assets at face value. When Fed notes are issued per public demand, digital bank reserves are docked by that amount.
Under Title 31 of the US code, the US does issue the nation's coins, and it can issue United States (versus Federal Reserve) notes, albeit only to a paltry total of $300 million, per 31 U.S.C. 5115(b):
The amount of United States currency notes outstanding and in circulation-- (1) may not be more than $300,000,000; and (2) may not be held or used for a reserve.
Why do JF and dominant economic powerhouses--including the Fed--insist that the US government issues Federal Reserve notes, knowing that this language is against longstanding legal and professional usage? As monetary policy bloggers well know, the justification given is that Fed banks are part of the government, being chartered creatures of statute, whose commercial owners lack ordinary voting rights. The statutory dividend of 6% is awkwardly brushed aside, as negligible. Whatever the reason for inexactitude, the effect is to preempt and even ridicule the very idea that the US might start issuing more (if not all) of the currency.
This suppression is consistent with the FAQ "What are United States Notes and how are they different from Federal Reserve notes?" on a Treasury website that boasts top priorities of integrity, transparency, and public education:
United States Notes serve no function that is not already adequately served by Federal Reserve Notes.
In fact, United States notes, but not Federal Reserve notes, can enable: (1) large, direct, prompt debt reduction; (2) interest-free financing; (3) exact economic tailoring; and (4) pay-as-you-go, collection-free, flat-tax funding. The vast differences suppressed by the Treasury are manifested in Iceland's proposed switch to a "Sovereign Money System." See A Better Monetary System For Iceland. See also the Sovereign Money section in Scott Baker's new book, America Is Not Broke!
Such terminological inexactitudes enforce the mantra that governments cannot conceivably be trusted to print their own money. This is an absurd article of faithlessness, up against the facially more credible proposition that an open government is more trustworthy than relatively opaque private banks. Yet such a mindset thrives in and drives the banking world, looking backward (e.g. Frank L. Lee III in the March 2010 Bank Note Reporter: "During the U.S. Civil War, the federal government grabbed a monopoly on the money-issuing power within the United States [by] issuing legal tender Treasury notes"") and forward (e.g. Ben Bernanke, May 25, 2010 speech at Institute for Monetary and Economic Studies International Conference: "giving the government the ability to demand the monetization of its debt [is] an outcome that should be avoided at all costs").
3. Cognitive Impairment Already Sacrifices Monetary SovereigntyIt is facile to argue that the statutory delegation of the power to issue the currency--together with the power of repeal--is per se sufficient to show monetary sovereignty. At best, it keeps the monetary power within the nation's business sector. To some degree, the delegation sacrifices the capacity of the US to exercise its sovereign=people power to issue the nation's fiat currency. In particular, wide ignorance as to the distinct option and advantages of directly issued government currency per se sacrifices the power to issue it. As JF points out "giving up monetary sovereignty is a monumentally risky thing to do."
JF contends that the US "cannot be forced into insolvency by external financial or economic factors that are beyond the control of the Federal Government (including the Congress)," because the statutory limits on government money borrowing or issuance can be repealed, and because the 14th amendment's public debt clause obliges the executive to unilaterally issue money sufficient to avoid imminent default. [5] Thus, US insolvency is possible only if Congress and/or the executive willfully fail to act. But that which is not comprehended is beyond control; and re monetary sovereignty the Congress is cognitively impaired.
What JF glosses over is the fact that a government captured by private interests may de facto lack the capacity to properly or fully exercise monetary sovereignty, e.g. by rescinding delegations, in which case there is an ongoing diminution, with or without a risk of default. JF's gloss is completely at odds with his own emphatic recognition that the exercise of sovereignty rests on the intelligent consent of the governed.
On the New Economic Perspectives blog, JF gave his article the rhetorical title How Can Our Senators and Representatives Vote for Giving Away Our Monetary Sovereignty? [6] The TPP's ISDS provisions don't give it away. JF himself gives it away, by burying the fact that it is already sacrificed by the ignorance of senators and reps. Under the intelligent consent standard that JF otherwise insists on, right now the monetary sovereignty of the US is a joke.
Part II of this article makes this point by showing how, due to decades of Fed resistance and GAO financial misinformation, the US is not capable of exercising monetary sovereignty even over its very own one dollar coin, let alone of intelligently overseeing and authenticating currency creation per the Fed's passe (R.I.P. 2008) structurally deficient "structural deficiency" regime, and ongoing "excess reserves" regime. [7]
[1] Of course, unleaked sections of the TPP could contain financing constraints that usurp monetary sovereignty.
[2] Insofar as the general concept of monetary sovereignty embraces public banking/state financing, the TPP poses a huge threat, due to ideological provisions against "state owned enterprises," defined in terms that could outlaw, for example, the highly successful Bank of North Dakota. See Is the Trans-Pacific Partnership a Danger to Public Banks? By Matthew Stannard. I deem this a threat to fiscal rather than to monetary sovereignty. It is not addressed in JF's article, or herein. Likewise, rules against capital controls are not discussed.
[3] Herein (and as used by JF), "US" means the United States government.
[4] See Scott v. Federal Reserve Bank Of Kansas, 406 F.3d 532 (8th Cir. 2005): "The Bank is considered a separate corporation owned solely by commercial banks within its district, distinct from the Board of Governors. See 12 U.S.C. 282, 287, and 341. The United States does not own stock in the Bank. Id.; see also Lewis v. United States, 680 F.2d 1239, 1241 (9th Cir.1982) (explaining the structure of Federal Reserve Banks)." See also Fox News Network, LLC v. Bd. of Governors of the Fed. Reserve Sys, 601 F.3d 158, 160 (2nd cir. 2010): "[S]ome records at the Federal Reserve Banks -- those kept at the Federal Reserve Banks under certain conditions for 'administrative reasons' -- are records of the Board; these [only] must be searched [in response to a FOIA request.]"the lending activities of the Federal Reserve Banks do not take place 'on behalf of' or under the 'delegated authority' of the Board. The Board itself has no power to make a loan to any bank, and does not authorize each loan made by the Federal Reserve Banks. The power to make loans is explicitly granted by statute only to the Federal Reserve Banks themselves. 12 U.S.C. 347b(a). In that way, 'Congress divided the powers of the Federal Reserve System between the Board, which is a federal agency, and the [Federal Reserve Banks], which were established as regional banks.' "
[5] Because constitutional mandates trump statutes, the executive could issue very large denomination United States notes in the required amount. This would seem both more expedient and more diplomatic than minting platinum coins and trying to pretend that Congress had intentionally authorized such an issue.
[6] In a follow-up article, Fast Track/TPP: The Death of National Sovereignty, State Sovereignty, Separation of Powers, and Democracy, JF vaguely worries that the TPP could "prevent the Treasury from replacing the practice of issuing Treasury debt with other funding methods." But again, he contemplates more Treasury-issued money (versus debt) only under the 14th amendment, to avoid default. The option of routinely issued Treasury money--i.e. the most fundamental exercise of monetary sovereignty--is entirely glossed over. Again, JF's various arguments (which I wholly endorse) are against inherently fiscal invasions of sovereignty.
[7] These regimes are explained in Open Market Operations and Why Are Banks Holding So Many Excess Reserves?
(Article changed on May 6, 2015 at 19:28)