A couple of weeks ago I took notice here of the trial balloon coming out of the White House about how the debt ceiling might be unconstitutional, based on a strained reading of a clause in the 14th Amendment, and therefore simply ignored by President Obama and the Treasury Department. Lots of lefty law profs rushed in to give the idea credence, several Democrat senators declared the idea “intriguing,” and The New Republic magazine was all over the idea for the better part of a week. Word around town last week was that the White House had dropped the idea.
But this might not be the end of their possible bag of tricks. At lunch today my AEI colleague Alex Pollock, who once served as president of the Federal Home Loan Bank of Chicago, laid out a possible means by which the Treasury could circumvent the statutory debt ceiling. He dilated the idea to me in an e-mail just now as follows:
Every Federal Reserve Bank owns gold certificates issued by the U.S. Treasury (and has since 1933). My notion is to have the Treasury issue more gold certificates to the Fed, for which the Fed would credit the Treasury’s account, giving it the use of cash with no issuance of a Treasury bond or bill involved.
Treasury owns more than 8,000 tons of gold. At a market price of $1,600/ounce, this is something like $419 billion in value. If Treasury kept a 25% actual gold reserve against its certificates, this would add financing of over $1.6 trillion. The 25% used here is the historic gold reserve required of the Fed under the act of 1945 until its gold requirement was abolished. (We might have to net out the existing $11 billion in gold certificates from this calculation—not sure. Also not sure what to do about the “official” though meaningless bookkeeping price of gold of $42.22/ounce.)
I don’t know what still-governing statutes would be involved in all this, but as a matter of applying historical banking ideas to our present situation, it might work. (If it did, the political reaction should give you something to write about.)
Note that the government would be using its gold, without selling any.
While the Treasury might well do this, one can imagine that the political reaction will be volcanic. But beyond the hue and cry in Congress and among the public, imagine what would probably happen to the price of gold. On the other hand, maybe this would be a de facto first step back toward a gold standard, which is one reason Obama might be genuinely terrified of trying this.
And in an even more mischievous twist, Alex explained how Fannie Mae could also sell bonds on behalf of the Treasury, since their debt obligations are off the government’s books, and therefore not subject to the debt ceiling. Great: just what we need–Fannie Mae in the middle of our financial crisis. Think of it as a variation of the government’s Franking privilege–as in Barney Frank.
By the way, while I am on the subject of Alex Pollock, he points out that it is completely wrong to say that the United States has never defaulted on its obligations. It did so in 1933 when it devalued the redemption value of gold and cancelled fixed price private contracts denominated in gold. A more recent default was the ending of redemption of silver certificates in the 1960s. The photo you see here is a silver certificate I have in my possession, which promises to pay me $1 in silver on demand. Except that the U.S. Treasury will not honor that promise today. Best they will do is give me a new crisp, rapidly depreciating $1 bill.
UPDATE: Alex Pollock e-mails this morning: “In 1953, the Treasury issued $500 million in gold certificates against gold in the general fund to redeem government securities held by the Federal Reserve System.”