The Congress shall have Power … To borrow Money on the credit of the United States; … To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States … [and] To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”

U.S. Constitution, Article I, Section 8[1]

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

U.S. Constitution, Article I, Section 10[2]

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

U.S. Constitution, 10th Amendment[3]

[This is Larry, and we’re back to talk more about appropriations, money, debt and cash. Once again Elemental Zoo has me researching the law of things about which I know practically nothing, only this time it’s worse. I don’t know much about economics, either. Nevertheless, I will soldier on, but carefully, by breaking our subject into small pieces, and attempting to make sense of the parts. Hopefully when we’re done the sum of all of them also will make sense.

Last time we discussed federal appropriations – i.e., spending authority – and how our government is required to discontinue operations and send people home when it runs out of the authority to spend to keep things going. But we also noted that, even if our government has authority to continue operations, it may not be able to pay all of its bills. That’s because each year our government operates at a deficit; its revenues are less than expenditures, and it makes up the difference by borrowing from strangers. Unfortunately Congress has put a limit on the government’s total debt, so at some point it may run out of cash and not be able to borrow to make payments as they come due.

At that point I made a bad joke. I suggested that, since Congress had the authority to print money, it should just authorize the government to print a few trillion extra dollars, and tell President Trump to apply that to retiring a large part of the federal debt. All parties could agree that this was a “one-time” maneuver, not to be repeated, so investors shouldn’t worry. After all, they would get their money back. And by the way, Congress already may have authorized the Government to do this, by permitting the Secretary of the Treasury to mint bullion coins of unspecified denomination at his [or her] discretion[4]. Also there are historical precedents for issuing more money when needed, most notably in Weimar Germany[5], but also more recently in Zimbabwe[6] and today possibly in Venezuela.[7]

It’s a bad joke, but raises a good question, to wit: What role does our Congress have in making the physical dollars that you and I spend in our daily lives. Can Congress print more whenever it wants to?]

The Constitution

So what does Article 1, Section 8 of our Constitution say? The relevant parts are quoted above. Congress has the power to “coin” money and regulate the value thereof. The states do not. Article 1, Section 10 says the states can’t “coin” money, “emit” bills of credit, or make any “thing” except gold or silver coin something that can be tendered to satisfy a debt. States can’t make money at their own discretion; they have to use the stuff created by the feds.

So how about paper money? Who can make that? Obviously not the states, but how about Congress? Does the power to “coin” money include the power to print the paper kind? That question was raised, sort of, to the Supreme Court in the early 19th Century. The decision, an opinion authored by John Marshal, our first famous Chief Justice, is McCulloch v, Maryland.[8]

That case involved a central bank – the Second Bank of the United States – created by Congress to move money for the central government. Maryland challenged the constitutionality of the Bank, arguing that Congress had no specific authority to create such a thing, and therefore was barred from doing so by the 10th Amendment. Powers not delegated to the United States were reserved for the “States” or the “People.” And since the Bank wasn’t properly authorized, neither were its works. So said Maryland.

The Court saw it differently. There is no requirement that the Constitution specifically authorize a central bank. The power to raise revenue, and apply it to “national purposes” implied “the power [to convey] money from place to place, as the exigencies of the nation may require, and [to employ] the usual means of conveyance.”[9] In short, if the Government can coin, raise and spend money, it can create a bank if one is “appropriate” to help it do the job.[10] And if that bank needed to issue banknotes on behalf of the federal government, then so be it. The notes issued by the Second Bank weren’t directly in play in McCulloch v, Maryland, but the bank was upheld and, by implication, so was its currency.

I wouldn’t call that an iron-clad legal opinion; it’s more of an educated guess by an amateur; but there’s lots of our paper money out right now and nobody seems to mind. So I’m not losing any sleep over my conclusion.

Paper Money Today

How do we make paper money? Well, the actual printing is complex, in large part because of the security countermeasures governments have to use to foil counterfeiters, hackers and other bad people;[11] but the bureaucracy involved is not too bad. The Federal Bureau of Printing and Engraving [the BPE], an organization within the Department of the Treasury, does the actual work. It prints money – so-called Federal Reserve Notes – to be delivered to the Federal Reserve System, the current version of our central bank. “U.S. currency,” it says, “is used as a medium of exchange and store of value around the world.”[12] Currently there are “approximately $1.43 trillion worth of Federal Reserve notes in circulation.”[13]

These are big numbers, but what do they mean? Well, first that paper money is printed [and destroyed] on the order – or more likely the recommendation – of the Federal Reserve. At the end of the day, the Federal Reserve can’t order the Treasury to do anything.[14] But the Fed is responsible by law for supervising the issuance and retirement of [Federal Reserve] notes – our paper currency.[15] So as a bureaucratic matter I don’t see Treasury’s Bureau of Printing and Engraving turning down many requests from that source.

And how does the Federal Reserve determine how much paper money needs to circulate? Good question. [16] According to the Fed, it looks at “payments of currency to and receipts of currency from circulation and the number of unfit notes destroyed at the Reserve Banks.” Fed staff estimates demand for currency “based on monthly monitoring, forecasts of growth rates for payments of currency to circulation and receipts of currency from circulation, operational factors, and other policy considerations.” Historically, “more than 90 percent of the notes that the Board orders each year replace unfit currency that Reserve Banks receive from circulation.”[17]

There, isn’t that clear? What I get from it is that the Fed looks at the actual ebb and flow of U.S. currency in the world, then throws in “other policy considerations” when deciding how much more to print. Don’t be paranoid, folks, but when bureaucrats start talking about “policy considerations,” we just naturally want to ask more questions. That’s kind of an iron rule with this blog, no matter what the subject; in this case we have yet to find answers; but stay tuned. We haven’t given up.

Conclusion

At the end of the day our most excellent Congress has the final say about how much U.S. paper money circulates in the world. It’s Congress that has the power to “coin money;” granted it has created instrumentalities to help with that, the Federal Reserve and Treasury’s Bureau of Printing and Engraving, but they can be changed by legislation; the Constitution cannot. So “Watch the Skies!” – No, wait, that’s a different movie – “Watch your Congressperson!” to see if he or she begins to preach new or innovative solutions to our budget problems. Pay special attention if the magic solutions involve printing lots of greenbacks.[18] Otherwise, have a nice day.

[1] See U.S. Constitution, Article I, Section 8. We prefer to get the Constitution and the first 10 Amendments [the Bill of Rights] from the National Archives, at https://www.archives.gov/founding-docs . You can find Amendments 11 – 27 at https://www.archives.gov/founding-docs/amendments-11-27

[2] See U.S. Constitution, Article I, Section 10.

[3] See U.S. Constitution, Amendment X, available at https://www.archives.gov/founding-docs/bill-of-rights-transcript

[4] See The Washington Post, Wonkblog, Matthews, Michael Castle: Unsuspecting godfather of the $1 trillion coin solution (2013/01/04), at  http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/04/michael-castle-unsuspecting-godfather-of-the-1-trillion-coin-solution/?wpisrc=nl_showdown . Actually, I wasn’t able to verify the precise quote given, but I found something similar at 31 U.S.C. §5112(k): “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.” You can find 31 U.S.C. §5112 at https://www.gpo.gov/fdsys/pkg/USCODE-2011-title31/pdf/USCODE-2011-title31-subtitleIV-chap51-subchapII-sec5112.pdf

[5] See the blog of 11/12/2010, The Wages of Hyperinflation, at http://elementalzoo.typepad.com/elemental-zoo/2010/11/index.html . That one deals with hyperinflation in Weimar Germany. See also Adam Smith, Paper Money (Summit, 1981) at Ch. 4, The Chilling Symbol: A Wheelbarrow Full of Money, p. 55 – 63.

[6] See CNN World, Zimbabwe to print first $100 trillion note (January 16, 2009), at http://articles.cnn.com/2009-01-16/world/zimbawe.currency_1_zimbabwe-dollar-south-african-rand-dollar-note?_s=PM:WORLD

[7] See Los Angeles Times, Linthicum et al., Roiled by protests and soaring inflation, Venezuela is pushing out foreign companies (April 22, 2017), available at  http://www.latimes.com/world/mexico-americas/la-fg-venezuela-gm-20170420-story.html

[8] See McCulloch v, Maryland, 17 U.S. (4 Wheaton) 316 (1819). [According to the Supreme Court’s website, it was actually decided on March 6, 1819]. If you can’t find an official report, you can get an unofficial version from Justicia at https://supreme.justia.com/cases/federal/us/17/316/case.html .

[9] Id. at 407-408: “Although, among the enumerated powers of Government, we do not find the word “bank” or “incorporation,” we find the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies. The sword and the purse, all the external relations, and no inconsiderable portion of the industry of the nation are intrusted [today, entrusted] to its Government. It can never be pretended that these vast powers draw after them others of inferior importance merely because they are inferior. Such an idea can never be advanced. But it may with great reason be contended that a Government [entrusted] with such ample powers, on the due execution of which the happiness and prosperity of the Nation so vitally depends, must also be [entrusted] with ample means for their execution. The power being given, it is the interest of the Nation to facilitate its execution. It can never be their interest, and cannot be presumed to have been their intention, to clog and embarrass its execution by withholding the most appropriate means.”

[10] The court noted that the decision might have been otherwise under the Articles of Confederation, the compact that preceded our Constitution, and earlier drafts of Article I, Section 8 also required all federal powers, even incidental or minor ones, to be expressly defined. But in the end, that’s not what the Constitution says. Instead, it authorizes Congress to enact all laws that are “necessary and proper” for carrying into execution its powers or any other powers vested in the Government. [That’s in Article I, Section 8]. “The result of the most careful and attentive consideration bestowed upon this clause is, that if it does not enlarge, it cannot be construed to restrain the powers of Congress, or to impair the rights of the legislature to exercise its best judgment in the selection of measures to carry into execution the constitutional powers of the government. If no other motive for its insertion can be suggested, a sufficient one is found in the desire to remove all doubts respecting the right to legislate on that vast mass of incidental powers which must be involved in the constitution, if that instrument be not a splendid bauble.” Id. at 420 – 421.

[11] If you want to know more about how to print money, Wikipedia has an impressive introductory write-up at https://en.wikipedia.org/wiki/Security_printing .

[12] See Department of the Treasury, Bureau of Engraving and Printing, at U.S. Currency, http://moneyfactory.gov/uscurrency.html

[13] Id., citing the Federal Reserve Bank.

[14] See 12 U.S.C. §246: “Nothing in [the Fed’s enabling legislation] shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter 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.”

[15] See 12 U.S.C. §248(d), Supervising and regulating issue and retirement of notes.

[16] To answer this we looked at the 102nd Annual Report of the Board of Governors of the Federal Reserve System (2015), which is the most recent one we could find. We’ll cite it as 102nd Annual Report at __. It’s available at www.federalreserve.gov/publications/default.htm .

[17] See 102nd Annual Report at p. 401, Currency Budget.

[18] I don’t want to be a pest, but do take a look at our blog of 7 years ago. See the blog of 11/12/2010, The Wages of Hyperinflation, at http://elementalzoo.typepad.com/elemental-zoo/2010/11/index.html [Hyperinflation in Weimar Germany]. See also Adam Smith, Paper Money (Summit, 1981) at Ch. 4, The Chilling Symbol: A Wheelbarrow Full of Money, p. 55 – 63.