Cicadas are back and so is the debt ceiling

Joe Firestone writes a piece over at Correntewire to report that strange doings are afoot at the Circle K House of Representatives.

On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part:

(a) In General- In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.
(b) Obligations Described- For purposes of this subsection, obligations described in this subsection are obligations which are–
(1) held by the public, or
(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

The idea here is to keep the US govt from defaulting on T-bonds, but it has a few flaws.

1. Starting w/ subsection (b); the duty of the govt to pay its debts is broader than just Treasury bonds. Wages of federal employees, pensions of disabled vets, payment on Medicare invoices, among many other things, are all obligations of the federal government that must be paid out. If they aren’t, claimants can go to the Court of Federal Claims to seek payment. A court judgment too is an obligation to pay. Congress has already granted DOJ a permanent, open-ended appropriation for the Judgment Fund.

2. Jumping back to Subsection (a), as the House of Representatives seems curiously unaware that “the debt of the United States Government, as defined in section 3101 of title 31, United States Code” has a rather large loophole. If Tsy issued T-bonds without a maturity date (and it has before) there is no “face amount” of T-bond principal to count against the statutory debt limit.
“The essential feature of the debtor-creditor relation is the presence of a fixed maturity date at which time… [the creditor] bound itself to pay on a fixed and certain date the face amount of the instrument together with all accumulated and/or accrued and unpaid interest at the designated rate.” Commissioner of Internal Revenue v. HP Hood & Sons, 141 F. 2d 467, 471 (1st Cir. 1944).

Tsy could step up to the statutory debt ceiling and never cross it simply by using its existing bonding authority (31 USC 3102 has no shot clock for T-bonds) to issue perpetual consols. For more on this, see Don’t take consol in your fears.

3. Of course, Tsy could always issue the Trillion Dollar Coin (which is so January 2013, I know). The Fed doesn’t actually have the power to refuse a Tsy deposit of legal tender because of the Federal Reserve Act’s “tie goes to the runner” clause.
…and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary and every knee shall bend. 12 USC 246.

OK just kidding with the “every knee shall bend” part, but that’s kind of the subtext here. The dispute resolution mechanism is rather one-sided in Tsy’s favor. More on that here, Did the Fed have a legal basis for rejecting the Coin?

4. I’m an optimist, I believe the falcon CAN hear the falconer; Things DON’T fall apart; the centre CAN hold. But let’s assume the worst, HR 807 becomes law and the Administration ignores points 1 through 3. I’ll just point out the bill’s curious phrase, “to pay with legal tender”.

I’m skeptical the term “legal tender” is inclusive of Tsy drafts, or only means coins and currency. If the latter, that’d mean an awful lot of armored trucks going hither and thither.

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. 31 USC 510


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64 Comments on "Cicadas are back and so is the debt ceiling"

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4 years 3 months ago

An obligation to pay in legal tender is not the same as legal tender

i.e. includes drafts, etc.

4 years 3 months ago

One way to think about it more generally is the distinction between issuing legal tender (i.e. as does the central bank) and issuing an obligation to make payment in legal tender.

When I receive a cheque in payment of some transaction, it says “pay to the order of” – which essentially means I hold an obligation for a chartered/ licenced bank to pay me the value of the cheque in legal tender, if that’s what I want.

The fact that I may choose to deposit that cheque instead of demanding legal tender simply means I’m exercising an alternative option that’s available to me. But the bank that accepts the cheque is obligated to pay me in legal tender, if that’s what I want.

And the cheque writer’s bank has in effect authorized him to make payment from his account, using an obligation (the cheque) issued by that bank requiring another licensed bank to make payment in legal tender.

It’s the same with the government. The government issues obligations (cheques/drafts) to make payment in legal tender. That obligation must be met – if demanded by the customer holding the cheque – assuming the customer has suitable identification, etc.

Can you refer to a cheque or bank draft or bank money order as money? I suppose so – but every such instrument directs an underlying transfer of funds from a payer account. You just have to be careful not to double count the payment instrument and the underlying account source.

Dan Kervick
4 years 3 months ago

Right, that’s the way I understood it too. The law just gives the Treasurer the right to issue IOU’s – like California did.

However, if these obligations are negotiable then they are effectively a kind of money, no?