Rationalization and Obligation, Part II: Coins, the 14th, and Consols

By Joe Firestone

This six-part series is a reply to the President’s glossing over the options open to him apart from playing “chicken” with the Republicans over the debt ceiling. Part I, presented the President’s explanation, a summary of the kinds of difficulties characterizing it, and discussed two of seven options, selective default, and the exploding option, the President has to deal with it, apart from the way he seems to have chosen. Part II will discuss his platinum coin, 14th amendment, and consols.

Platinum Coins, the 14th amendment, and Consols

3. Using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars to fill the Treasury General Account (TGA) with enough money to cease issuing debt instruments, and even enough to pay off the existing debt. This option, originating with beowulf (Carlos Mucha)in its Trillion Dollar Coin (TDC) form has gotten a lot of attention. But a variation of it in its High Value Platinum Coin Seigniorage (HVPCS) form, requiring a coin with face value of $60 Trillion for example, has received much less attention, except in my own writing.

The difference in the TDC and HVPCS variations in their political  implications are great. The TDC looks like a temporary expedient to get around debt ceiling problems, whose use can be repeated when needed. But, it doesn’t quickly remove the political problem of “the national debt” from consciousness as one of our most serious political problems. On the other hand, minting a $60 T coin would change the background of politics by providing for relatively rapid payoff of the debt subject to the limit without balanced budget-creating recessions.

There’s been much analysis about the legality of using platinum coins with high face values for seigniorage revenue. There’s no overwhelming consensus on the matter; but most commentators with a legal background including some prominent law school professors and a former Director of the U.S. Mint, who was co-author of the 1996 law seen as providing the authority for PCS believe that its perfectly legal; but there are also law school professors, and the other co-author of the law, on the other side who argue that PCS violates the intent of the law. 

My view is that the consequences of applying both laws and constitutional amendments often go way beyond any reasonable construal of intent; and that the Courts usually weight the plain language of laws more heavily than arguments about intent in determining their legality. In the case of PCS, with one co-author of the enabling law (Philip Diehl) currently writing about his view that PCS is consistent with the intent of the law, and the other co-author (Mike Castle) taking the opposite view, I think the Courts will be disposed to rely on the plain language of the law rather than trying to divine the intent of both Houses of Congress in passing it.

I also think that, with Government fiscal  default at issue if the Courts overturn PCS, and with precedents in place denying standing to individual members of the House and Senate to sue to overturn laws, that it’s very unlikely the Courts would even grant standing to only one House of Congress to sue to overturn the President’s use of PCS. In short, the Supreme Court would not touch this at all if the President used PCS. But, even if they did grant standing to the House, then the explicit language of the law, the bloc of four Democratic justices on the Court, and the threat of default and its probable consequences for the financial system and the world economy, all weigh against overturning any use use of PCS by the President.

Indeed, since I can’t see either Anthony Kennedy or John Roberts doing anything to rock the boat of the financial system, I think any Supreme Court action, if it gets by the standing problem would likely result in a 6-3 vote in favor of PCS. But there’s even a possibility that Alito would align with Roberts, due to his strong corporatist orientation, and that Scalia would also support PCS, due to his love for the Unitary Executive Doctrine, producing a low likelihood, but not completely surprising, final outcome of 8 -1 in favor of PCS.

4. Using the authority of the 14th Amendment to keep issuing conventional debt instruments subject to the debt limit in defiance of the debt ceiling, while declaring that the debt limit legislation was unconstitutional, because it violated the 14th Amendment in the context of Congressional appropriations passed after the debt ceiling mandating deficit spending. While the President mentioned the practical consequences of uncertainty over whether use of the 14th amendment would be declared unconstitutional he didn’t mention the most important point about this option. 

That is, the President can’t validly claim that there’s a conflict between his duty to spend mandated appropriations, his duty to prevent default on US debts, and his duty to uphold the debt limit law, when he has what appear to be several legal options to enable him to spend those appropriations, but is refusing to implement any of them, and use his constitutional authority under the 14th amendment to avoid default, because he’s speculating that the Supreme Court might overturn one or more of the options he can use, if there’s a legal challenge to them. On the contrary, the President is obligated by the 14th amendment to exhaust those options, before he takes action on the basis that the debt ceiling law is preventing him from fulfilling his spending mandates. As long as those options exist and are untried by him; it is not.

So, the relationship of the 14th amendment option  to the others is that it stands behind them in sequence priority, and cannot be invoked with validity unless and until they are exhausted. In addition, the 14th amendment binds the President to try these other options to comply with both his mandated spending obligations and his obligation to obey the debt ceiling law, before he tries to overturn it. So, the President has no free choice among all the options, but, from a legal point of view, must view the 14th amendment/debt ceiling nullification option as a last resort only after all other known options that have not been excluded by the Court have been tried. 

5. Beowulf has offered yet a fifth option for getting around the debt ceiling by issuing consols. Consols are debt instruments that pay a fixed rate on interest in perpetuity, but never promise principal repayment at a maturity date. The debt ceiling law is written in such a way that what counts against the ceiling is the principal repayment guaranteed by the instrument. Since consols provide no principal repayment, one can have unlimited consol issuance without increasing the debt-subject-to-the-limit. 

Consols seem to be a very clean alternative from a legal point of view. The Treasury is not explicitly restricted by law to issuing any particular type of debt instrument. Debt instruments with fixed maturity dates are the US instrument of choice. But, other debt instruments are not excluded from Congress’s grant of borrowing authority to Treasury. Of course, members of Congress can suit the Administration if it chooses to use consols. But, they would, once again, have a standing problem, and since the debt ceiling law is not an issue with consols it is hard to see what kind of argument would be used to challenge them. While consols do have face values, these values don’t constitute an obligation of the Government to ever repay. On the other hand, consols are callable by the issuing authority. So, if the Treasury wanted to buy them back at face value to avoid paying interest on them in perpetuity it could do so.

Update: At the European Tribune, my friend Chris Cook offers the following comment on my post:


Credit to Beowulf for suggesting Consols recently, but the use of Consols to create a National Equity is something I’ve been publicly advocating for over 4 years in the UK (where of course they began, and still exist as an anachronism)

Debt Free or Date Free? What can we do with our National Debt?

Sovereign Equity can revolutionise financing of UK Assets

More recently in the context of solving Cyprus’s € problems

The Case for Cypriot National Equity

I advocate Obama’s Conversion, analogous to Goschen’s Conversion of 1888 when UK Chancellor George Joachim Goschen converted and consolidated existing fragmented classes of stock into a single class of perpetual Consolidated Stock (“Consols”).

A single class of US Consols could be issued and exchanged at a suitable price reflecting the tenor (date of redemption) and nominal rate of interest of all existing classes of US dated credit (mis-named as ‘debt’).

There would be a single market for a single instrument, and the question of default would disappear. The rate of return would literally depend upon the rate at which of taxation is collected by the US government. The market price would depend upon supply and demand.

Obama’s Conversion would literally be a debt/equity swap on a national scale, since undated ‘stock’ was the original form of funding which pre-dated a 300 year aberration into interest-bearing debt (Loan Stock) and distinctly inequitable equity (Common Stock).

The ethical dimension of such a 21st century debt jubilee, could also be thought of as a conversion in more than one way.

18 responses to “Rationalization and Obligation, Part II: Coins, the 14th, and Consols

  1. My fear is that Obama and Ryan have worked out a deal around social security, medicare and Medicaid which they will spring at the last moment to look like heroes to the country. It would require Ryan to be able to maneuver his party around the extreme right crazies who really are a minority. I’m not sure how Boehner would fit into this picture but he has been totally useless anyway.
    Obama has been wanting to cut those programs and the only thing that has stopped him is that the right wing won’t accept anything Obama proposes, even it it’s what they want.

    • Joe Firestone

      Right. I think that’s what’s been happening, too. That’s one reason why I’m writing this series. Obama’s objective is to get the Grand Bargain while avoiding at least the Democratic Party’s responsibility for it. Ryan is trying to get it so he can blame it on the Democratic Party while doing the bidding of his Randian masters the Koch brothers.

  2. I want to say that monetary reform is the topic du jour, and that it is long overdue.

  3. Unfortunately Obama doesn’t appear to have the desire, courage or tactical guile to stand up to the Republican Party and unilaterally take action to resolve the debt limits crisis. This is despite the consensus amongst a substantial majority of the American people readily apparent at social gatherings to take immediate and firm action to ignore the Republican Party with its Tea Party McCarthyite bully faction and get the crisis resolved.

    • Joe Firestone

      You’re assuming he wants to solve it. I think he wants to take it up the point of default and then sell-out the safety net. The guy’s on a mission to kill the New Deal.

  4. joe bongiovanni

    Thanks, Joe,
    Very clear update on the discussion that inevitably comes forward every time it becomes necessary to acknowledge that, somehow, and especially through coin-issuing here, the government has the authority to issue ‘something’ that actually serves as money.
    Today, that which serves as money is bank credit, issued via debt to users of the money system, in the order of their credit-worthiness, therefore a trickle-down money system indeed.
    That the government must borrow THAT bank credit, already privately issued to private persons, in order to pay its Bills, makes the government a second-order “user” of the money system.
    (I know. I know.)
    One would hope that the needs of the people can be met by their government exercising its rights of governing on their behalf.
    Coinage is the preferred solution of the options given, as it does not involve our government with issuing more debt. The Consol-age solution involves debt issuance, although the maturity date is at the option of the issuer.
    Are we sure that US-issued “Consols” would clear the debt hurdle, as under the section cited the ‘face amount’ is the issuing price, even on paper that is not redeemable before maturity at the option of the holder.
    OTOH, as so constituted, such ‘Consols’ could become the ‘safe’ investment for risk-averse Americans to place their savings in the future.
    Of course, the real solution is abandoning the ‘bankers’ school’ debt-based system of money, and its replacement with a ‘currency school’ model.

    • I agree, Joe. Of course, my e-book explains why, I too, think that HVPCS is the best legally available solution to present difficulties. Of course, Congress could always just fold the Fed into the Treasury. That would be even better.

    • Joe Firestone


      “Are we sure that US-issued “Consols” would clear the debt hurdle, as under the section cited the ‘face amount’ is the issuing price, even on paper that is not redeemable before maturity at the option of the holder.”

      Mt reading of the law says that the “face amount” has to be an obligation to count against the debt ceiling. In the case of consols only interest payments are a legal obligation.

  5. “But a variation of it in its High Value Platinum Coin Seigniorage (HVPCS) form, requiring a coin with face value of $60 Trillion for example, has received much less attention, except in my own writing.”

    And that is where it will stay.

  6. Consols might work once for this purpose, and might otherwise be a good idea for the longer term, but the next debt ceiling law passed by Congress would probably include them in “debt subject to the limit”. Still, like the platinum coin, if you issue enough consols to pay off a good chunk of the other debt subject to the limit, the ceiling becomes irrelevant for quite a while. The President (this one or any one after) could even veto a new debt ceiling law and keep issuing consols.

  7. Does the debt ceiling law say that it supersedes the appropriations or continuing resolution laws? Does the President not have the choice, if it is framed that way, to obey the appropriations laws and ignore the debt ceiling law, or vice verse? Put another way, is it not just as illegal for him to fail to spend appropriated funds (the original “sequester” idea from the ’70’s) as it would be to spend them? Hasn’t the Supreme Court already weighed in on that?

    • “Does the debt ceiling law say that it supersedes the appropriations or continuing resolution laws?”

      No, but obviously it may if it is passed later than those bills. On the other hand, if were passed earlier as is often the case. Then I’d argue that later appropriations, if they are for deficit spending exceeding the debt limit, would have to be interpreted as repealing the debt ceiling, provided there were no other ways of implementing the deficit spending appropriation.

      “Does the President not have the choice, if it is framed that way, to obey the appropriations laws and ignore the debt ceiling law, or vice verse?”

      I think he does, provided the situation just above is realized.

      “Put another way, is it not just as illegal for him to fail to spend appropriated funds (the original “sequester” idea from the ’70′s) as it would be to spend them?”

      Yes, in fact it may even be “more” illegal.

      “Hasn’t the Supreme Court already weighed in on that?”

      Yes, the President is mandated to spend appropriations. He has no choice about it.

      • “Does the debt ceiling law say that it supersedes the appropriations or continuing resolution laws?”

        No, but obviously it may if it is passed later than those bills. An important and well settled point – supported by John Marshall down to recent SC cases – is that the US Congress (unlike the UK Parliament) does not always have the power to supersede its earlier acts. If Congress authorizes a debt, a government obligation ( including but not restricted to bonds) it does not have the power to repudiate it, to default on it, under the 5th as well as the 14 amendment. The SC has ruled that the funds need not even be appropriated for a specific purpose for the government to be obliged to pay even non-bond government obligations. (2004 Cherokee Nation case)

        The true repayment (and thus the possibility of true default) of US debt is not the sideshow of exchanging bonds for currency, but the redemption of bonds/currency to pay taxes. Would a court say that a matured Treasury bond could not be used to satisfy tax obligations? Could the IRS win a case and take other property from someone paying taxes that way? I strongly doubt it.

        • Joe Firestone

          Don’t know Cal, but it would certainly require a Court decision, since the Treasury has an obligation to accept cash reserves in payment of taxes, but nothing else. You’re saying that if someone doesn’t have those kinds of assets, but has bonds and various forms of real assets, the Treasury would be obligated to prioritize bonds before real property. But I don’t see any Court precedent for that.

          • Matured bonds. The precedents like Perry, like Marshall, show a quite good understanding of money and obligations, an understanding of MMT embedded in US case law, and the basis in the 5th amendment, not just the 14th. I really, really doubt that a US court would say it is OK for the US to default on its obligations by capriciously enforcing a different obligation on a taxpayer. I do believe the precedents show the courts understand the true meaning of default that Wray and Mitchell-Innes emphasize. The Treasury would accept US notes and coins – not just reserves held at the Fed, I believe.

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