Now that the Treasury has ruled out the scheme of minting a $1 trillion platinum coin as a means to circumvent the gimmicky debt limit, it is instructive to take a closeer. For the scheme could have metamorphosed into far more than one-time political trick to avoid the debt limit. In fact it was an implicit challenge to the much vaunted and sacrosanct “independence” of the Fed. That is why the Fed worshippers among the media mercilessly mocked, denigrated, and dismissed the plan as grossly irresponsible, although they dared not spell out its full implications.
No doubt the Fed was acutely aware of the threat posed to its independence by the coin gimmick. As senior administration official revealed, had the Treasury minted and tried to deposit the coin, the Fed would have refused to credit the Treasury’s account for the trillion dollars. This indicates the overweening arrogance of the Fed--as well as its desperation--because the Fed was threatening an illegal action. Even though they are not intended for circulation, all U.S. commemorative coins are legal tender for the full amount of their face value.
One of the few commentators to fully aticulate the anti-Fed implication of the trillion-dollar coin was Michael Sandler, a left-wing populist blogger and self-described “Political Economist, Climate Change Professional, and Sustainability Advocate.” Although his article is mostly nonsense on stilts, he does recognize that the coin scheme provides an entree to wrest control of the money supply away from the unelected bureaucrats at the Fed and return it to Congress and the Treasury.
Sandler supports a monetary reform program based on the template developed by the anti-Fed American Monetary Institute. He welcomes the minting of the trillion dollar coin as a step toward the following element of this program:
Repeal the congressional mandate for the Treasury to issue debt when it deficit spends. Instead, the Treasury could be allowed to spend money into circulation directly, or use debt-free instruments (of which the coin is one example) in its money creation process (with or without the Federal Reserve)
A common objection to such a proposal is that if money were under the control of the Treasury, monetary policy would become a political football, inflation would be rampant, the U.S. would founder in a sea of red ink, blah, blah, blah. But how much more inflationary would monetary policy become than it is right now?
The unelected and unaccountable bureaucrats at the Fed have fastened on the U.S. economy a regime of zero interest rates, indefinite quantitative easing, and the targeting of a real variable (the unemployment rate) by nominal variables (i.e., the money supply, nominal interest rates), which is a reversion to Stone Age Keynesianism. Indeed Fed policy has enabled a fiscal policy of high deficits and rapidly mounting national debt, anyway. But let us grant for the sake of argument that Congressional control of monetary policy alters the mix of financing government spending from taxation to deficits financed by money creation. From the point of view of Austrian public finance theory, the method of governmental “revenue extraction” does not matter nearly as much as the total amount. The amount of what Rothbard calls “government depredation on the private product” is normally reflected in government spending (including on transfer payments.)
For Austrians, the method of financing government depredation, whether it be taxation, borrowing from the public, or money creation is of secondary importance. Thus, at a given level of government spending, revenues extracted from the private economy via deficits financed by money creation are no worse than an equal amount of taxe. Indeed they may even be preferable because of the detrimental effect of the naked coercion involved in taxation on the direct utility of private individuals. As Rothbard put it,
[W]hy should anyone believe that a tax is better than a higher price? It is true that inflation is a form of taxation, in which the government and other early receivers of the new money are able to expropriate the members of the public whose income rises later in the process of inflation. But at least with inflation people are still reaping some of the benefits of exchange. If bread rises to $10 a loaf, this is unfortunate but at least you can still eat the bread. But if taxes go up, your money is expropriated for the benefit of politicians and bureaucrats, and you are left with no service or benefit.
Needless to say, if Austrians economists were asked to choose between an annual U.S. government budget of $2 trillion with an inflation-financed deficit of $1 trillion and a balanced budget at $4 trillion, they would without hesitation choose the former as less disruptive of the market process and less injurious to the welfare of private producers. Obviously, Congressional control of the fiat money supply is far from the ideal monetary system, which involves the complete separation of government and money via a commodity money whose quantity is controlled exclusively by market forces. Nonetheless, there is much merit in replacing the opaque and pseudo-scientific control of “the money supply process” by the entrenched bureaucrats of the Fed with nakedly political control of money by elected officials and partisan Administration appointees.
Another important benefit of having the Treasury create money by writing out checks to finance government spending rather than issue debt that is later monetized by the Fed, is that it completely cuts out the fractional-reserve bank cartel from the money-creation process. In so doing, it shuts the Fed out of financial markets and prevents it from distorting interest rates and generating boom-bust cycles. When the Treasury writes checks to vendors to pay its purchases, it engages in what Mises calls “simple inflation.”
