Last week, Senate Minority Leader Mitch McConnell blinked, allowing congressional Democrats to vote to increase the debt ceiling sufficiently to delay the looming global financial crisis until the beginning of December, when the U.S. government will simultaneously run out of money for ongoing operations and borrowing authority to pay for past commitments. If that sounds like damning by faint praise, it is. Having manufactured a completely unnecessary crisis, McConnell and every other Republican in Congress deserve no gratitude for allowing an all-too-temporary sigh of relief.
Nonetheless, the less-than-two-month reprieve provides an opportunity to think through some of the measures that have been proposed for addressing the next debt ceiling impasse. Thus, for example, writing in the New York Times last week, Peter Coy examined the implications of one of the more exotic options that has been periodically floated in the decade since congressional Republicans began using the threat of default to extort first President Obama and now President Biden—the suggestion that the Treasury might instruct the Mint to create very high-value platinum coins, which would be credited to the federal government and thus used to pay federal obligations.
As Professor Neil Buchanan explained in his column here on Verdict last week, the platinum coin gimmick is a terrible idea, mostly because there are much more straightforward means by which the President could address a shortfall in government borrowing authority. In addition, as I argued in 2013, it is not even clear that the platinum coin gambit is legal in the way its proponents claim. Meanwhile, Professor Buchanan and I have emphasized in our joint and individual works that the prospect of the government circumventing a limit on its borrowing authority by minting a coin worth something like a trillion dollars is so cartoonish that it risks undermining popular faith in money.
Mr. Coy explored our criticism of the platinum coin proposal in his Times essay. In the balance of this column, I’ll add to the response that Professor Buchanan and I offered to a critic of ours quoted in the Coy column. Doing so will lead me into a deep dive into the nature of money and of law.
What is Money?
Suppose you are a potato farmer living in a society with a barter economy. You would like to obtain a new wheelbarrow from your neighbor the cooper. Unfortunately, the cooper has all the potatoes he wants, so you trade some of your potatoes for grapes, which you provide to a vintner in exchange for wine, which you give to a tailor for a shirt, which you finally trade with the cooper for the wheelbarrow. Now think of how much simpler life would be with a universal medium of economic exchange. You could go to the market and sell twenty pounds of potatoes for a piece of paper with a picture of Alexander Hamilton on it. You could then use such pieces of paper to buy a wheelbarrow. Money facilitates commerce.
But suppose that one day people start to doubt the utility of money. Perhaps they do so because inflation devalues it faster than they can spend it. Or maybe there are so many realistic-looking counterfeit bills in circulation that now a substantial effort is needed to discern real from fake money. Or perhaps everyone suddenly realizes that the pieces of paper lack inherent value and start demanding some genuinely useful commodity, like potatoes. Money operates the way that momentum does in the old Roadrunner cartoons. So long as Wile E. Coyote doesn’t look down and realize that he has gone past the edge of the cliff, he can keep moving forward. However, once enough people look down, as it were, money crashes and we are back to bartering our potatoes.
One risk of depositing ultra-high-value platinum coins in the Treasury’s account, Professor Buchanan and I have argued, is that doing so makes apparent to the average person that there is nothing more substantial backing money than everyone’s acceptance of it as legal tender. That realization, in turn, could erode confidence in the very idea that money has value, which would thereby undermine the psychological basis of the financial system and with it the real economy.
Is Money a Noble Lie?
But wait! Citing an article by Willamette law professor Rohan Grey, the Times article points out that money’s value is not simply a matter of everyone expecting everyone else to accept money. The law gives dollars value because the law imposes taxes and allows people to pay their taxes in dollars. Money is thus backed by law, not just group psychology, right?
Not quite. As the Times article goes on to say—quoting both Professor Buchanan and me—while Professor Grey is right that the law gives dollars some reality, that is not sufficient to instill confidence in money.
For example, Argentina repeatedly experienced hyperinflation in the last quarter of the twentieth century. The country eventually stabilized its currency but has recently seen an annualized inflation rate of over fifty percent. During all of that time, the government accepted tax payments in Argentine pesos, but in the rest of the economy, when inflation soars, many merchants, banks, and individuals turn to more stable alternatives, including U.S. dollars and lately even cryptocurrencies. Government can create some demand for money, but for it to serve its core function as a medium of exchange throughout the economy, people need to have confidence in it.
So much for taxes as the foundation of monetary stability. Professor Grey appeared to register a further objection to the Buchanan/Dorf worry about the social psychological impact of high-value platinum coins. In a system with “electorally accountable politics,” he said, it is “extremely dangerous” if the general public cannot be trusted to handle the truth. As Professor Buchanan explained last week on my blog, Professor Grey was most naturally read to be accusing us of elitism.
That is also how I understood Professor Grey’s position. Thus, the Times story quoted me as pondering whether the social psychological roots of money are disguised by a kind of noble lie—a claim that our leaders know to be false but that they encourage in the masses to promote some social interest. I noted that, like Professor Grey, I also think that noble lies sit in tension with democratic values, but that they nonetheless may be necessary in some circumstances.
Can We Handle the Truth?
The undemocratic character of noble lies can be traced to the most famous discussion of the subject, which appears in Book III of Plato’s Republic. Building on the mythic origin stories of most civilizations, Socrates proposes that in the ideal polity the rulers should instruct the ruled and the enslaved that their place in the social status hierarchy is ordained by the gods, as persons of different classes are made of different stuff. To Socrates and Plato, the deception was noble because it promoted civil peace and the kind of political order they favored. To modern readers, of course, the deception is odious.
Yet what if belief in some false idea promotes the overall social good without unduly advantaging the powerful? False belief in the inherent value of dollars may be necessary to ensure their continued use and thereby avert the kind of catastrophe that would result if instead people turned to hoarding precious metal (which also, by the way, has no inherent value as a medium of exchange) or insisted on barter. False (or at best untestable) belief in the punishment of sinners in an afterlife may induce virtuous behavior in people with defective consciences whose misdeeds will likely escape detection by law enforcement. Indeed, law itself may be seen as a kind of noble lie.
In saying that law may be a lie I do not mean to deny that acts in violation of the law, if detected, often lead to arrest, prosecution, and punishment. Our very real prisons prove the contrary. Yet in democratic societies, legitimate governmental authority does not rest solely on the state’s willingness to use force. Rather, we believe that, as the Declaration of Independence proclaims, “governments . . . deriv[e] their just powers from the consent of the governed.”
Do our laws have democratic legitimacy? The answer is not a simple yes or no. On one hand, we have elections for federal, state, and local officials who are at least somewhat responsive to public opinion. On the other hand, our Constitution, as written and construed by the courts, gives disproportionate power to white rural voters and to the rich and powerful. Does that render the law’s legitimacy a lie? And if so, should our government obscure the truth?
An appropriately subtle answer to these questions must balance competing risks. If the consequence of people understanding that our laws lack full democratic legitimacy would be anarchy, then a bit of lying might be useful. Currently, however, the greater danger lies in the other direction—that people will be too complacent because they believe that our political system is more representative than it in fact is. Increasingly, the notion that the United States has a representative government looks like a lie, and an ignoble one at that.