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opinion | Winning: Coins and Credibility

Franklin Roosevelt lifted the United States from the gold standard shortly after his inauguration as president in 1933. It was a necessary step: The nation was in the midst of a banking crisis, and the Federal Reserve needed the freedom to print money in order to end that crisis. as needed. But some of Roosevelt’s own colleagues disagreed: his budget director, Lewis Douglas, reportedly spit, “This is the end of Western civilization.”

Last time I checked, civilization was still here. But some discussions echo the gold standard debate over how to deal with Republican brickmanship over the debt ceiling. As I mentioned in my newsletter last week, one possible approach would be to take advantage of an obvious legal loophole. platinum coin With a huge face value, say $1 trillion, depositing that coin into an account at the Fed, then paying government bills from that account.

Let me say right away that there are some good reasons to be uneasy about coin minting. The Fed, which is semi-autonomous, may not agree to play along. The strategy could face legal challenges. And by resorting to this gimmick, we may be sending a signal to the world that we are a messed up nation with great problems controlling ourselves – although the truth is that we Huh A messed up nation thanks to the nihilism of one of our two major parties, so coining arguably has to be accepted outright.

But I’m told that some senior administration officials are making another argument against Coinage or any similar strategy, one that echoes Lewis Douglas — namely, that going that route would undermine the credibility of the dollar. And it’s all wrong.

First things first: the coin has to be minted No Amount for financing the budget deficit by printing money.

When we talk about “printing currency” we really mean an increase in the monetary base – the sum of cash in circulation and reserves held by private banks, mainly in the form of deposits with the Fed. The Fed’s economic impact comes from its ability to increase the monetary base at will, typically by purchasing federal loans from banks and paying for those purchases by crediting banks’ accounts with money that has essentially been created out of thin air. .

So wouldn’t allowing the Treasury to pay its bills on an account created out of thin air – upon accepting the coin, the Fed would simply declare that the Treasury had a $1 trillion account – which would mean increasing the monetary base? No if the Fed didn’t want it.

You see, past monetary actions have left the Fed in possession of a huge portfolio, including more than $5 trillion in US government debt. And the Fed can certainly “sterile” any impact of federal withdrawals on a monetary basis by selling some of that portfolio.

Think of the Treasury and the Fed — which have some policy independence but are financially a part of the federal government — as one entity. At present, the consolidated entity is paying some of its bills by selling bonds to the private sector. If we mint the coin, it will still be doing the same thing; The only change would be that instead of selling newly issued bonds, it would sell existing bonds currently owned by the Fed. From an economic point of view, it won’t matter.

So what are people talking about credibility worried about? An argument exposed the other day by my Times colleague peter coy, the claim is that fiat money – money that is not backed by gold or any other asset – is basically a con game and that minting the coin will take away the con. That is, according to this logic, money has value only because people expect others to accept its value, and difficult financial maneuvering can break the spell.

But as many people have pointed out, fiat money isn’t valuable simply because of meeting one’s own expectations; This is what we use to pay taxes, which gives it a substantial basis for reality.

And as a practical matter, money never falls because people lose faith in its value. Hyperinflation, in which the purchasing power of money falls, does happen – but it almost always happens because other governments are willing to print money to cover their deficits, which the US government will not do.

(Aside: If you want to look at assets that have value primarily because everyone expects everyone to consider them valuable, the best historical example is … it is valuable because of its traditional monetary role – a role that no longer plays. And let’s not even talk about cryptocurrencies.)

So as long as the US government does not rely on wealth creation to pay its bills, the dollar will not collapse. But wouldn’t coin minting create the temptation to do so?

Well, governments sometimes cause high inflation by relying on the printing press. Right now, for example, is the case of Venezuela and… well, actually, Venezuela is the only example right now, and has been for a while.

The truth is that governments rarely start printing money, simply because they can’t resist the temptation. Hyperinflation is usually a byproduct of excessive political dysfunction, which renders governments unable to increase revenue or limit spending. I wish I could say America is safe from that kind of extreme dysfunction – but the problems facing our democracy have nothing to do with budget mechanics and cannot be solved by banning creative finance.

In general, credibility is overestimated as a factor that should guide policy. If we get the actual policies right, the credibility will remain; If we don’t, attempting to be admittedly conservative won’t matter.

For now, the right thing to do is to find a way to pay the government’s bills in the event of political sabotage, even if it involves gimmicks that take advantage of legal loopholes. Sometimes doing things that may seem silly is the only responsible course of action.

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