The Thing That Should Not Be

I magine it’s the evening of October 17 . . .

The dark of night engulfs the District of Columbia, and Congress has yet to fix the debt limit. Officials gather in the belly of the Beltway beast, and all those present know what is to come: Tomorrow morning, as predicted, the U.S. Treasury will default on the government’s obligations. Time has run out. A desperate President Biden instructs the U.S. Treasury to deposit a secretly minted coin at the Federal Reserve Board. Although having implied to Congress weeks earlier that she would not do so, Secretary Yellen quietly resolves to do whatever it takes to save the dollar. She walks the 1 trillion-dollar-stamped platinum specie through the White House grounds, past the Ellipse, and down C street to Fed headquarters, where Chairman Powell is waiting outside in the cold autumn rain to greet his predecessor with grim resignation and a phalanx of the agency’s uniformed police. He slips the numismatic monstrosity into his coat like a bellhop collecting a two-bit gratuity.

Depending on your perspective, this made-for-television drama either excites or terrifies you. For those calling on President Biden to #MintTheCoin, this scene is a display of unconventional heroism. As they correctly observe, should the U.S. government default on its obligations, the consequences would be catastrophic. No longer considered the world’s wealth haven, the U.S. would witness dollar interest rates rise and exchange rates devalue. There would be a financial crisis, a deep recession, and an end to the dollar’s dominance.

The coin purportedly averts such a grim outcome. After a decade of politicians playing footsie on the edge of a fiscal cliff, those advocating this stratagem see it as a clever workaround to end our never-ending cycles of “fake crises.” This movie ends with Chairman Powell accepting the coin, as a ray of sunlight bursts through the clouds.

Yet, for those terrified by this scene, it is only the beginning . . .

Lightning claps as Chairman Powell walks the coin to the central bank’s basement vault. He quietly apologizes to the building’s namesake, former Fed chairman Marriner Eccles, who struck the 1951 Treasury–Fed Accord that freed the central bank from Treasury’s shackles.

Prior to the accord, the Fed was merely a creature of the U.S. Treasury, setting interest rates near zero to finance the government’s tremendous debt from World War II. The leadership and moxie of Eccles secured the Fed’s political independence. For 70 years, the central bank relied instead on interest rates to rein in inflation and moderate recessions.

Although the Fed was far from perfect, policy-makers learned from past errors. Where the Fed had once been too timid on combating high unemployment or high inflation, policy-makers learned to act decisively when circumstances required. At times, they may have even overlearned their lesson, stepping beyond the bounds of monetary policy in times of urgent crisis. And the Fed weathered constant attacks on its independence by Democrats and Republicans alike. Nevertheless, that hard-fought independence evaporates as the coin enters the Fed’s vault . . .

Far from the printing-press imagery of Zimbabweification, Chairman Powell merely opens the Treasury’s account on his Fed computer. He overwrites the near-zero balance with an entry of $1 trillion. The new electronic dollars will pay the government’s bills — most urgently, the all-important bond interest — all without any printers going brrrrr. “It will only be this one time,” Powell tells himself. The news leaks the next day. To the horror of everyone, but only to the surprise of politicos and the commentariat, the result is much the same as a default: a financial crisis, a deep recession, and an end to the dollar’s dominance.

Even though the bills were paid, people around the world would realize that the “rules of the game” have changed forever. To accept the coin is to allow the purchase of the Fed’s independence. Households, firms, and investors would react accordingly. Through their change in expectations, the fallout of the Fed’s total loss of credibility would be felt now, not later.

How might we think about that change? Economists often talk about markets in “economic equilibrium.” Essentially, this term refers to the outcome produced by markets when households and firms are allowed to plan and pursue their own interests. By no means are markets perfect — far from it. But there is a kind of stable prosperity when we rationally expect the butcher, brewer, and baker to provide our dinner out of their self-interest, and those expectations are fulfilled.

As explained by economists such as Nobel laureate Douglass North, society’s institutions — “rules of the game” — are themselves a kind of economic equilibrium. They emerge and persist over time because they play an essential role in coordinating our social fabric. As individuals living our daily lives, we might not even recognize these institutions in this way. We might not understand how they work or why they came about, though we always expect them to be there. And whether it’s private-property rights, the Senate’s filibuster, or an independent central bank, these institutions exist for a reason. When we knock them down out of expediency or the pursuit of progress, we destabilize society.

Yet there is a third way the story can — and must — end. Before the U.S. Treasury is needlessly forced to default on the government’s obligations, Congress should raise or suspend the debt limit. And having again nearly faltered over the edge of a fiscal cliff, both Democrats and Republicans need to finally put aside factionalism to fix the debt limit. I’ve suggested wedding a permanent suspension of the ceiling with long-term budget fixes and reforms to increase economic growth. Whatever the solution, it will require compromise to get stable, long-term political support. Indeed, it will require refining our existing institutions, not knocking them down.