James K. Galbraith has written a strange piece for the New York Times, where he muses on the debt ceiling. He argues that the necessity for government to borrow money is an “anachronism,” product of the gold standard. In answering why the government doesn’t just create new money, he claims that “to do so would expose the “public debt” as a fiction, and the debt ceiling as a sham” — as if the constraint on debt monetization is nonsensical or ideological. Galbraith, however, gets his history wrong, and as a result gets the answer to his question wrong. Governments have tried to get around borrowing constraints throughout history, and the reason we toughen these constraints is exactly because unconstrained governments have misused the power to debase their currency.
Prior to the 20th century, it was often that governments attempted to avoid their financial constraints. The Roman Empire, for example, frequently underwent currency debasement to pay for growing bureaucratic and military expenses (Bartlett ). The Spanish Empire also relied on seigniorage for financing (Motomura ), on top of the new silver and gold it imported from its colonies — this lead to the “European price revolution,” as the value of money fell sharply. Governments don’t need paper money to spend without borrowing. In the era of metallic currencies, all government had to do was lower the content of the precious metal in the coin — replacing it with a less valuable substitute (e.g. copper) —, and encourage acceptance at par.
Contra Galbraith, there were (and remain — after all, economic laws are immutable) economic constraints on seigniorage. By lowering the value of money, and redistributing resources away from non-government market participants, significant and sustained currency debasement leads to the deterioration of exchange. It is no accident that, ultimately, the most successful imperial government that emerged from the pre-modern milieu was England, which made use of a growing finance industry to borrow larger sums of money than rival governments could. English society had learned from a multitude of previous experiences that currency debasement is not a permanent solution to financial constraints, and that over the long run inflationary expenditure is more harmful than anything else.
It could be argued that modern, democratic governments have constraints of other types that would limit the extent of seigniorage. Perhaps, but it wasn’t too long ago that modern governments resorted to the printing press to get around financial constraints. This led to the great inflations and hyperinflations that followed the First World War. Similar to pre-modern experiences, this public finance technique led to the deterioration of European markets, and ultimately the only viable solution was to place a ceiling on public budgets. Now, I do think that we learned “too much” from this experience, making monetary policy more rigid than it really needs to be: case-in-point, the Great Depression. But, there is a big difference between constrained, but flexible-enough monetary policy, and unconstrained inflationary fiscal expenditure.
Increasing the quantity supplied of money is not always a bad thing. When there is a demand shortage increasing the quantity supplied of money is oftentimes a superior alternative to waiting for the price level to fall, because many individual prices do not always fall to their market-clearing level. Maybe what we need today is more money (although, given that the price level has been rising I’m skeptical of the idea that a demand shortage is currently the most important deterrent to economic recovery). But, lifting the constraints on public finance is not a solution. Maybe the current administration, and even many administrations to follow, can be trusted, but political institutions can deteriorate, especially when government is under financial pressure. The reason we don’t voluntarily dismantle them voluntarily is because the risk of gratuitous inflationary public finance is very real, and it has been something governments have resorted to since the beginning of governed civilization.