The New Republic

Well, I said it first, sort of. The standing arguments are plausible, although I suspect that they would not suffice. On the other hand, the argument that the executive branch can just ignore the limitation on outstanding debt seems to me to be very weak. The argument that the government can issue new debt because it must honor old debt is even weaker. The government has sufficient revenues to pay debts when they come due as a priority. By definition it does not have sufficient revenues to pay what Congress has appropriated because the budget is known to be in deficit. I think the better argument is that the Treasury can continue to write checks, that is to print money, without issuing debt instruments of the kind described in the limitation so long as it is making payments appropriated by Congress. That is what the appropriation is, an authorization to pay. I do not read the debt limit as applying to checks issued in the ordinary course and, under normal rules of construction, if the appropriation conflicts with the debt limit, then the appropriation, being later in time, would govern. In turn, the Federal reserve can give reserve credit for Treasury checks presented to it in the ordinary course. And I think it would. So, I think the executive can go on with business ignoring the debt limit, but not in the way described here.

- roidubouloi

June 24, 2011 at 12:46am

If the government borrows in violation of the debt ceiling, the debt incurred will not have been "authorized by law" -- in fact it will have been issued illegally -- and hence it will not protected by the 14th amendment from being questioned. If the Federal Reserve honors Treasury checks in excess of funds that the Treasury has on account at the Fed, the Fed is loaning money to the Treasury -- i.e., the Treasury is borrowing from the Fed, a violation of the debt ceiling. A good argument can be made that any purported Treasury obligations in violation of law are not enforceable. And thus anyone buying Treasury bonds or otherwise lending money to the Treasury is at risk that the claim for repayment will be denied. Am I absolutely sure that it will be denied, and am I sure that a plaintiff with standing will be found to assert the claim that it is illegal for the Treasury to honor the debt -- no, certainly not. But who (including the Fed officials) will be crazy enough to lend money to the Treasury in of law and thus run the risk of having a legally unenforceable obligation. Beyond that, for the Obama administration to simply say that it is not obligated to obey the law because it thinks that there are no plaintiffs with standing is the same as saying that the presidency is a lawless institution. To test the standing issue, you can be sure that hundreds, perhaps thousands, of suits with different types of plaintiffs (including all sorts of bondholders and state AG's)will be filed. It would take months, perhaps years, for the court system to sort things out -- and in the meanwhile Obama will be seen as violating the law simply on the basis of an asserted technicality ... a law, by the way, whose validity he has never questioned. Any claims of legitimacy -- across the board -- of his actions as president will be out the window in the minds of millions (and not just right wingers) and Obama will be seen as having no respect for the rule of law. And if he loses the standing claim and of the thousands at least one suit is allowed ... the credit markets will be in a shambles, interest rates will go through the ceiling as billions of Treasury debt risk being dishonored, and if you thought that the recession was bad you ain't seen nothing yet. In sum, too clever by half.

- PeteBeck

June 24, 2011 at 3:48am

might want to force all bond traders to be constitutional lawyers first. bond traders rule. they know the US will not default regardless of whether this congress increases the debt ceiling by law. what the bond traders see is that the US has accumulated too much debt to be sustainable. perhaps a satirical skit by Jon Stewart on the Daily Show of, um, perhaps a targeted drone attack on Grover Norquist would be more helpful to breaking the current impasse.

- K2K

June 24, 2011 at 9:47am

Mr. Beck, you have to read the statute, because it does not say what you would like it to say. 31 USC 3101 limits the face amount of obligations issued under chapter 31. Those obligations include bonds, notes, certificates of indebtedness, and Treasury bills. They not include checks written in the ordinary course to make payments appropriated by Congress. The statute simply does not say that. If Congress appropriated the money, then the Treasury can write the checks. Notably, the forms of indebtedness authorized under the Chapter explicitly "may not bear the circulation privilege." They are not money. 12 USC 355 empowers the Fed: "Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market." This is properly understood to prohibit direct purchases of bonds, etc. by the Fed from the Treasury. In that sense, it prohibits "loans" from the Fed to the Treasury. However, loans and "purchases of obligations" are not always the same thing although the distinctions can be blurry. When a bank makes a loan, it is not typically thought of as "purchasing an obligation" and there is a long history in banking and securities law of distinguishing between direct loans and purchases of securities. If a lender makes a jumbo loan on a single note that cannot be subdivided, that is generally not thought to be the purchase of a security or of an obligation. The note evidences the loan which exists and implies an obligation to repay whether there is a note or not. Therefore, it is not at all certain that this provision would prevent the Fed from lending money to the Treasury. On the other hand, it is difficult to find authority for the Fed to do so. However, I think the question is moot, because the Fed can purchase obligations of the United States in the open market and there is no reason at all why that should not include checks. If the Treasury is authorized to issue a check, the Fed is authorized to pay for it, and to pay for it at par. This would not be the purchase of the obligation directly from the Treasury as prohibited by Section 355. The Congress appropriated the money and therefore authorized the Treasury to make payment. If the Congress has authorized the spending, the money can be spent, and when the government spends money, it is printing it. When the government receives money, it is extinguishing it. The provisions regarding the management of the money supply are a different matter than payments and include both borrowing by the Treasury, so that as a matter of monetary policy it does not directly monetize its own payments, and open market purchases by the Fed that then do monetize Treasury payments (or rather undo the currency extinction that occurs when the Treasury borrows to offset the money it prints when it pays). Certainly, we do not in general finance our government by printing money, for very good reason. But I don't see anything at all in the law that prohibits the Federal government from doing so. Not the prohibition on issuance of debt above a face amount and not the prohibition of direct Fed purchases of Treasury securities. For the Treasury to make payments, it must either procure the funds through tax receipts or borrowing or, in effect, print money. Tax receipts and borrowing are directly controlled by Congress. Printing money is too, to the extent that the Congress chooses to do so. But it has not done so. It has confided that authority to the Fed. Would the Fed refuse to honor Treasury checks? Possible, but highly unlikely as long as they are under congressional authority to make payment. If the executive branch decided to pay for things not authorized by Congress, that would be a very different matter, but that is not at all the situation we are facing. What we are seeing now is one house of Congress, controlled by the Republicans, trying to exercise the appropriation authority that belongs to the Congress as a whole by withholding the ability to borrow. But, if it wants to prevent the Treasury from making payments already appropriated and enacted into law by the Congress with the signature of the President, that will require the affirmative vote of both houses. The House of Representatives does not have the power unilaterally to prevent payments authorized by law as it is now attempting to do. No one has ever faced this situation before. Hence there has been no reason to think about what the executive branch is supposed to do under these circumstances. The Republicans might wish that the Treasury and Fed are prohibited from making payment with what amounts to printing money, but they aren't. The Treasury can write checks, the Fed can print the money to pay them. Surprise! Under normal circumstances, the risk of printing money would be inflation. There is very little risk of inflation right now, certainly not from the amounts required to see us through the current budget cycle. And if the outcome were inflation, that would be a very good thing. Might just kick us out of the recession. If nothing else, fear of inflation would probably force the Republicans to authorize new debt to soak up money and protect the rentier class. Either way, we win. If the Republicans want to stick us up (as clearly they do), I think they are going to have to wait for the next budget cycle and shut down the government to try extract the spending cuts they want. And then they are going to get all the credit they deserve.

- roidubouloi

June 24, 2011 at 4:44pm

Roi, here is the operative provision of law: "(a) In this section, the current redemption value of an obligation issued on a discount basis and redeemable before maturity at the option of its holder is deemed to be the face amount of the obligation. (b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $6,400,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process ..." Any obligation to the Fed to repay the amount of a bank overdraft, or in any other manner an obligation to pay the Fed the amount of a check issued by the Treasury and purchased by the Fed, is an obligation whose principal and interest is guaranteed by the United States Government. The total amount of all such obligatiions, including the obligations that may be owed to the Fed, is $6.4 trillion, period. Your scheme would be illegal.

- PeteBeck

June 24, 2011 at 5:27pm

Roi, as a follow up, I think you are overlooking what a Treasury check is. It is not a bond or any other sort of direct obligation or promise to pay. Rather, it is an instruction to the Fed to pay to the person properly presenting it the stated amount. Your personal check works the same way. If there is no money in the account, then the Fed (or your bank) can't pay the check unless an overdraw is authorized. In this case, no overdraws in excess of the debt limit will be allowed, and so any checks drawn after the debt limit is reached will have only a limited value since they will compete for the money in the Treasury's bank accounts funded by current cash flow, mainly tax receipts, and be subject to the priorities imposed by the Treasury.

- PeteBeck

June 24, 2011 at 5:57pm

What I don't understand is that the Republicans don't seem to understand that hey are playing toss and catch with an armed nuclear weapon here. If the debt limit is not raised, Congress in effect hands to Obama unprecedented power (not necessarily authority, but certainly power) to call the shots. He can do a number of things with that power: - He can continue to issue debt, essentially daring the Republicans to find a way to sue him. As this article notes, that is a parlous proposition at best, and means the Republicans put their entire credibility in the hands of the judiciary, and risk a massive slapdown. I don't see the Supreme Court looking at worldwide economic meltdown and deciding for the Republican suitors on any grounds. They'll dodge the the issue by denying standing or review. - He can pay creditors, and stop payments to vendors or on entitlements. Either way, it's hard to see how the Republicans don't come out worse off when Obama goes on national television and explains why grandma isn't getting her Social Security, or why contractors are making massive layoffs can't they aren't receiving payment for their work. - He can the vendors and entitlements, and default on some debts - practically speaking risking worldwide economic meltdown, while we stand by and watch savvy bond traiders rake in a half trillion or so $ by buying marked down debt that we eventually will honor anyway. Again, I don't see how the Republicans avoid the blame. I don't think in practical matters, the legalities will be dispositive here. As we proved in 2008, almost anything that has the practical effect of holding back chaos will get done with the blessing of both the executive branch and the business community. This is a political showdown, and I think one side doesn't even know it's armed with blanks. Any way you cut this, it's a stupid move by the Republican party - not without risks for Obama, but as I said, basically an armed nuke in a game of hot potato for the Republicans.

- IowaBeauty

June 24, 2011 at 6:35pm

PeteBeck, I am not ignoring what a check is. Indeed, a Treasury check is not even technically a check because it is not drawn on any bank (such as the Federal Reserve). Take a look. It is a draft. It just says "pay to the order" and isn't even an instruction to anyone in particular. Anyone can pay a draft and ultimately be paid by the drawer. A bank, even your own bank, has no obligation to the payee to pay a check (a draft drawn on a bank). It has an obligation to the drawer to the extent of the drawer's account or other commitment. And money is not technically "in" an account. It is a debt the bank owes you. To the extent of that debt, or a contractual commitment to extend credit, the bank is obliged to you to honor your draft, but if it dishonors wrongfully, it has no liability to the payee, only to the drawer. The drawer of the draft is also not a guarantor, but principally obligated. If a check or draft is dishonored, the drawer must pay it. Given that a Treasury check isn't even drawn on anyone, there is no drawee bank or other person in the first instance, I suppose that if you showed up and presented it to the Treasury, they would have to give you currency. In practice, this doesn't happen and I don't know if the Treasury even has a place you could present a check and obtain currency. In practice, you assign the check to a bank by endorsing it, the bank gives you credit at face amount, and then the bank presents it to the Fed for credit to the bank's reserve account with the Fed. As the Treasury's fiscal agent (a statutory function of the Fed), the Fed is obliged to the Treasury to honor the check to the extend of the Treasury's balances. But, like any bank, the Fed can choose to honor the check even if you have no bank balance. This is certainly an extension of credit, although not a loan to you unless there is an agreement that it is a loan. None-the-less, because you are principally obligated, you have to make good the check if bank so demands, as it surely will. The questions come down to these: Is the Treasury authorized to issue the check despite the limitation of 31 US 3101, the provision you quote? Is the Fed authorized to pay it? A check is not an obligation or instrument issued under Chapter 31. Hence, it is not an obligation that falls under that debt limit. That limit applies explicitly to obligations issued under that chapter and to obligations guaranteed by the US, because the US does issue guarantees of third-party debt under certain circumstances. I think you are being misled by the caption, "Public Debt Limit." Yes, a check is a debt, but captions do not control the text, and the text is limited to debt issued under the specific chapter, Chapter 31, and to guarantees of third-party debt. It simply does not apply to Treasury checks despite the colloquial meaning of "debt." Therefore, if the Treasury is authorized to make a payment, as it is for appropriated funds, it is authorized to issue the check, notwithstanding the "debt limit" that, by its own terms, does not apply. Can the Fed pay it? The Fed is authorized to buy any US obligation in the open market. It cannot buy the obligation directly from the Treasury. If the obligation is legally issued into the open market, as it would be, then the Fed can buy it and pay face amount for it, issuing reserve credit of Federal Reserve Notes (currency) for it. That's the end of the story. Yes, Congress never anticipated this and so did not write laws that would prevent it. But that's because it is idiotic for Congress to authorize the Treasury to make payments and then for one house of Congress to try and prevent the Treasury from doing so. Congress never anticipated that one house would be controlled by morons and hence made no explicit provision. You can recite that something is illegal as much as you want, but you have to have statute law to apply. By its terms, the debt limit does not apply. Since Congress, both houses with the signature of the president, has authorized the payments, the House of Representatives cannot prevent them. It is at least conceivable that the Fed has sufficient independent power to refuse to give credit for a Treasury check in the absence of a Treasury balance, but I don't think that would happen. And, if the president put the question squarely to the Fed, I don't think the Fed would demur. Nor if presented with a check would it decline. I also suspect that the Treasury can legally sell gold to the Fed and that there is enough to get through the current budget cycle, but I haven't looked at this at all.

- roidubouloi

June 24, 2011 at 7:41pm

I agree with IowaBeauty. My point is the the legally sounder way to call the Republican bluff is to write checks, not to issue bonds in excess of the statutory debt limit. The Republicans would scream and cry if the Treasury kept writing checks and the Fed honored them, but they would really have no recourse, in law or in practice. Their recourse would be to refuse to adopt the next budget and shutdown the government if they dare.

- roidubouloi

June 24, 2011 at 7:47pm

To Iowa - Here's what you said: "- He can continue to issue debt, essentially daring the Republicans to find a way to sue him." You are suggesting that the president should willfully and publicly violate the law and dare people to try to stop him. That's utter nonsense. Equally significant, the bonds sold would very likely be worthless since they will have been issued in violation of law. That's more than nonsense, that's a recipe for total economic disaster. To roi, in all due respect to someone who generally makes sense, you also are writing absolute nonsense. If the debt limit has been reached, the Fed cannot honor Treasury checks beyond the amount of cash in the Treasury's account. In this case, the Fed is in exactly the same position as the bank where you have your checking account if it does not allow overdrafts. If the Fed advances money in excess of the debt limit, it risks not being repaid since it knowingly entered into an illegal and hence unenforceable transaction. It also risks a total loss of credibility, which would be a national economic disaster. Sorry guys, on this one you both are totally out to lunch.

- PeteBeck

June 24, 2011 at 8:29pm

Well, Pete, I don't want to be rude, but you have not cited any authority for the proposition that the Fed cannot honor Treasury checks beyond the amount in the Treasury's account. 12 USC 355 empowers the Fed: "Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States . . . may be bought and sold without regard to maturities but only in the open market." Is a check a direct obligation of the United States? Certainly it is. If it is in payment of an expenditure appropriated by Congress, is it legally issued? It would seem so. Is it debt? Sure. Is it debt as defined in Section 3101? No, not according to the definition in that section. Does Section 3101 even apply to the Fed? No, it plainly does not. Now, that is not to say that a court could not interpret Section 3101 to apply to checks. It might, but it would be interpolating language that is not there based on its view of the "intent" of Congress to limit the printing of money by limiting the issuance of Treasury securities. A bit of a stretch, in my opinion, particularly in light of the fact that Congress has authorized the expenditures in question with full knowledge that tax revenues would be inadequate to support them. This act of Congress is subsequent to the rather ancient debt limit. Should a court decide that when Congress adopted this budget with the knowledge that revenues would not come close to expenditrues that it did not intend the appropriations to be paid? On what basis should a court conclude that? The more important point is that an interpretation that the Treasury can write checks for appropriated funds is not difficult to square with either the literal language of the statute or with the recent acts of Congress. There is no precedent that the Treasury cannot do so because the situation has never before come up. It is a case of first impression. Thus, the president can take this legal position without having to ignore language, precedent, or common sense. By the time the matter is even adjudicated by the courts, it would be moot as we would be into the new budget cycle and the Republicans will have to shut down the government to get what they want, not have the debt ceiling do it for them. Your recitation of banking law as an explanation for your view is simply wrong. A bank, or anyone else, is free to buy negotiable instruments, including checks. It is not illegal. Your bank can honor your overdrafts if it wants to for whatever business reason it sees fit, including retaining your other business. Your economics is also flawed as there is no meaning to the Fed being repaid by the Treasury. It doesn't matter whether it is repaid or not repaid. The only thing affected is the money supply, and if the Fed wanted to pay, or buy, the Treasury's checks without increasing the money supply, it currently holds a couple of trillion of assets it could sell to soak up ("sterilize" in the economic jargon) the additional issue of high-level money. As far as loss of credibility goes, the Fed certainly understands that having the Federal government stop paying its bills has the potential for a real disaster in the financial markets. On the other hand, I have no idea what credibility you think the Fed would lose for doing its job as the US central bank. In the US, the function of managing the money supply and credit has been separated from the fiscal function. So what? Under the circumstances it cannot even be argued that the Treasury is usurping the Fed's function as manager of the money supply since the Fed has more than ample tools available to control the money supply within a couple of trillion, much more than even the annual deficit let alone the remaining deficit in this budget cycle. Lots of governments have paid bills by issuing money. To some extent, the US does this too. It is called seignorage. It is a bad policy if used to more than a small degree because it leads to inflation, but it is not prohibited under our laws, at least none that you have cited, as long as the Fed is not buying obligations directly from the Treasury. And the actual risk of inflation at the moment and through the end of the current budget cycle is virtually nil. So, no, not out to lunch at all. I would stake my years spent in one of the premier commercial banking legal practices in the country, in the heart of Wall Street, on that. If I were writing the memorandum of law to the Federal government, this is exactly what I would say: The matter cannot be free from doubt as it is unprecedented, but there is nothing in statute law that, by its terms, prohibits the Treasury from issuing checks for appropriated expenditures or the Federal Reserve from acquiring those checks in the open market, at face value, including upon presentation through normal banking channels. What expertise do you bring to this question?

- roidubouloi

June 24, 2011 at 10:56pm

Pete, I tend to buy Roi's arguments on the law with respect to printing money being a better approach, and in respect of both that method and with respect to continuing to sell bonds, I would say that in practical political terms there is a difference between the President's power, and his authority. Nothing in the statutes that I can find declares what happens if the public debt of the United States exceeds the statutory limit. It doesn't declare remedies, nor that any particular debt would thereby become invalid. In practical terms the validity of the debt boils down to the governments willingness to honor it. The statute just says the debt "may not" exceed (now), some $14.3 trillion, but doesn't say what happens if it does. Will Congress pass a new statute declaring some particular issues in default? A statute to withdraw authorization to spend appropriations. It won't, because the Republicans in the House lack the political power to do so, and in all likelihood lack the will had they the power. They are playing chicken, and if Obama doesn't blink, I don't see how they can win. There is precedent here. Lincoln suspended habeus corpus in several border states, had that suspension declared unconstitutional by the Supreme Court, and continued to order the military and civil authorities that they need not honor the writs. Lincoln's policy prevailed, with neither judicial nor legislative authorization. The nation rightly continues to revere Lincoln. It is far from obvious to me that should the President declare that degradation of the faith and credit of the United States constitutes an unprecedented national emergency, and that Congress has in effect de facto authorized the debt by passing a budget knowing full well it required issuance of debt, he will therefore continue to sell bonds in excess of the statutory limit, and honor their redemption, that Congress has any recourse. Yes, it's a constitutional showdown, but it's one the House Republicans would almost surely lose. Ditto for the method envisioned by roi.

- IowaBeauty

June 25, 2011 at 9:40am

I agree with Iowa again on how events would unfold in the legal realm if the Treasury simply ignored the debt limit on the perfectly plausible premise that by adopting the budget that unquestionably required debt, it had authorized it. However, I think the method of "printing money" is a much better route to take in practice for a variety of reasons. For one, it is not desirable for the president to be perceived as flouting a statute whether or not it is enforceable. I also think that the printing money approach is on stronger legal ground. If Congress adopted a budget with a large deficit built in, declined to raise additional tax revenues to close it, and declined to raise the ceiling on Treasury securities, the only way to reconcile all of these actions is to infer that it "must have intended" the Treasury to pay the bills in the normal course even though this implies printing money. I also think the response of financial markets to the issuance of debt securities in excess of the nominal limit is unpredictable. There is the possibility that there would be doubt about their enforceability. The issuance of such debt would be a very public event, whereas the process of "printing money" by issuing Treasury checks in the ordinary course would go on unseen. For all we know, it is going on right now. Geithner never explained by what measures he would be able to extend the Treasury's cash resources beyond the point in May when we hit the debt ceiling. Indeed, with whatever shuffling of accounts he is doing in order nominally to be spending money that the Treasury has "on hand," the core reality is that he is writing checks without issuing debt. The economic effects are no different than they would be under the scenario I describe. As or more important, I think the printing money approach puts much, much more pressure on the Republicans simply to give up and publicly admit defeat. They could use a good whuppin'. In a best case, printing money would ignite some inflation, which would be good for the economy. The last thing the Republicans want is an improvement in the economy. More likely, the deflationary pressures are still so strong that that would not occur. The market pretty much yawned at hundreds of billions of "quantitative easing" by the Fed the direct effect of which was printing money. However, even fear of inflation is likely to put fear into holders of financial assets and they are the real source in the Republican party. I think the pressure on the Republicans to fold would be unbearable.

- roidubouloi

June 25, 2011 at 10:39am

No, roi, a check is absolutely not a direct obligation of the United States. It is rather an instruction to the Fed to pay money in satisfaction of an obligation. Here's why the Fed can't pay to banks presenting Treasury checks money in excess of t he amount in the Treasury's bank account: (a) it has no authority to do so under the law -- in fact it has no authority to lend money directly to the Treasury -- such as by purchasing bonds -- under any circumstances. It can only purchase Treasury obligations in the open market. Since checks are not Treasury obligations and in any event there is no market for Treasury checks, the Fed can't pay for them. (b) Any payment by the Fed to the bank presenting a check would be a borrowing by the Treasury to the extent there isn't money deposited in the Treasury's account at the Fed. If the debt limit has been reached, that borrowing would be illegal, and the Fed would not want to get involved. Sorry, that's the way it is, and wishful thinking or a flurry of words (jargon) won't change things. Roi, you can't know everything, and on this one what you think you know just ain't so.

- PeteBeck

June 25, 2011 at 6:57pm

Malahat, I don't know of any specific law about the subject (maybe someone does), but as a general matter I assume that the answer is yes, apart from special circumstances such as secured obligations and mechanics liens. However, as a practical matter, the issue of priorities only comes up in the case of bankruptcy. Do you anticipate that the US Government will be the subject of a bankruptcy proceeding?

- PeteBeck

June 25, 2011 at 7:06pm

Mr. Beck, you simply say nothing whatever, and cite nothing whatever, other than yourself, in support of your claim. First, a check most certainly is an obligation of the drawer. See, for example, Uniform Commercial Code § 3-116. JOINT AND SEVERAL LIABILITY; CONTRIBUTION. (a) Except as otherwise provided in the instrument, two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign. And also, UCC § 3-408. DRAWEE NOT LIABLE ON UNACCEPTED DRAFT. A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it. Further, UCC § 3-414. OBLIGATION OF DRAWER. (a) This section does not apply to cashier's checks or other drafts drawn on the drawer. (b) If an unaccepted draft is dishonored, the drawer is obliged to pay the draft (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder . . . . The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under Section 3-415. This means that, as explained above, the bank is not liable on the check. The only party who has liability on the check is the drawer. The check is the obligation of the party who writes it, and only the party who writes it, even though it is also an order to a third-party to pay it on behalf of the drawer. Therefore, the US Treasury is the only party obligated on a Treasury check, just as you are the only party obligated on your check. Since there is only a single party obligated, it must perforce be the direct obligation of the drawer. I don't think you know what a check is in commercial law. You are relying on a colloquial idea that it is some kind of letter rather than an instrument that represents a legal liability of the drawer. There absolutely is a market for checks. Every time someone, including a bank, takes assignment of a check by endorsement and gives credit for it, there is an exchange of a check in the market. Indeed, every time someone accepts a check as payment there is an exchange of a check in the market. They are instruments (defined as such by the UCC) and they are regularly exchanged for money. A Treasury check is a direct obligation of the Treasury, and only of the Treasury. Therefore, the Federal Reserve is authorized, explicitly, to acquire it in the open market, that is from a third-party, not from the Treasury itself. The fact that this is an extension of credit to the Treasury is irrelevant. The same is the case if the Fed acquires a Treasury bond. If the Treasury issues a bond and the next day the Fed buys it, who is the lender and who is the borrower? Obviously the Fed is the lender and the Treasury is the borrower. But the authority for the Fed to acquire Treasury obligations is not couched in terms of whether there is an extension of credit. That is assumed because EVERY acquisition by the Fed of a Treasury obligation is the extension of credit. One cannot then claim that the Fed has no authority to extend credit to the Treasury. The only restriction is that the Fed may not acquire the obligation directly from the Treasury. It must first be issued into the market and only then acquired by the Fed. If the Treasury issues a check into the market and the Fed accepts assignment of the check by endorsement and pays for it, it has acquired it in the open market. Nowhere does it say that the Fed is obliged to present the check to the Treasury for payment or to charge the check to the Treasury's account, whether there are funds there or not, or that the Treasury's account with the Fed has to have a credit balance and not a debit balance. What can you cite as authority for that proposition? There is none. The debt limit to which you keep referring does not apply to liabilities of the United States in general. If applies, according to its terms, to debt represented by particular types of instruments issued under a particular chapter of the USC. The Treasury is also authorized to issue a relatively small amount of currency notes under a different provision. It no longer does so because Federal Reserve Notes have taken their place. If it did, the Fed could acquire those too. If the Treasury can legally issue a check into the market, then the Fed can legally acquire it. That's what the law says. It says nothing about the state of the Treasury's bank account with the Fed. While the Fed is the Treasury's fiscal agent, and hence acts like the bank at which the Treasury has its checking account, the Fed is also the central bank of the United States. If can do anything it has specific authority to do if it considers it in the interest of the stability and growth of the economy. You could be right that the Fed would not honor checks written by the Treasury, but I highly doubt that you are. Allowing the economy to come to a dead halt when it has the power to keep it running smoothly is not what the Federal Reserve understands its responsibility to be. If there is no other means to allow the government to operate and pay legally appropriated expenditures, it will print money. ___________________ Re your question malahat, there are no distinctions that I am aware of as to priority of US obligations because, as Pete suggests, no one has ever thought about what happens in the event of a US bankruptcy. However, the US has sovereign immunity and thus not all of its liabilities can even be pursued in court. Only to the extent that it has waived immunity. I do not believe there exists any procedure for a court to compel payment by the government as with a private debtor, such as by seizing assets. As a practical matter, if the US were rationing its payments, I do not think a court could do more than declare the government liable on an obligation. I don't see how it could force a particular obligation to be paid in preference to another. If nothing else, this would almost certainly be deemed a political decision not properly the function of a court. The short answer is that no one has ever thought about this sort of thing (the insolvency of the US government). Hence there are no real answers.

- roidubouloi

June 25, 2011 at 11:14pm

To clarify one point, it is possible that a court would construe a check to be an instrument subject to the limitation, the debt limit, of Section 3101. This, however, is not because the instrument is not a direct obligation of the US, but because it IS a direct obligation of the US. This also has nothing whatever to do with the Fed's authority to acquire it or to extend indirect credit to the Treasury. If Treasury bonds held by the Fed are coming due, the Treasury can issue new bonds, pay the Fed, and the Fed can turn around and acquire the bonds the Treasury has just issued, effectively rolling over the debt rather than requiring it to be extinguished. My basic point is in response to this blog is that the Treasury is on much firmer ground taking the position that checks are not subject to the debt limit than it is taking the position it can simply ignore the debt limit and issued bonds, notes, etc. that would exceed the limit.

- roidubouloi

June 25, 2011 at 11:26pm

12 USC § 355 Purchase and sale of obligations of National, State, and municipal governments; open market operations; purchases and sales from or to United States; maximum aggregate amount of obligations acquired directly from or loaned directly to United States Every Federal Reserve bank shall have power: (1) To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 1463 [1] of this title and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market. (2) To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.

- roidubouloi

June 26, 2011 at 12:02am

Roi, some of the points you've made seem to somehow make sense. I'll have to think about them -- not today though, too much else to do. Even if ultimately you are wrong (50/50 chance) you're a great role model for posters here. Quick simple question -- maybe I missed it. If a check is or under some circumstances becomes as a legal matter an obligation just like a bond or note, why is a new check not subject to the debt limit?

- PeteBeck

June 26, 2011 at 8:43am

The only reason is that the debt limit, 12 USC 3101 is written so that it applies to instruments issued under that Chapter of the Code. A check is not issued under that Chapter. The authority to issue them lies elsewhere. The debt limit might have been written asa a generalized limit on debt or liabilities - which is what one would assume it says until you really read it. But it just wasn't written that way. That's why I say a court could construe it to mean all debt, even though it doesn't actually say that, but it is not at all a silly legal position for the administration to say that the section means just what it says and doesn't apply to checks in the prdinary course. Have a good one, whatever is keeping you busy.

- roidubouloi

June 26, 2011 at 10:13am

Roi, Here are the obligations subject to the debt limit: "The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government." It seems to me that if checks are obligations of the US Government, their principal and interest are guaranteed by the US Government. Could someone make a nit-picking argument to the contrary -- of course. But it would be a loser. The debt limit applies to debt in any for for which the Treasury is liable.

- PeteBeck

June 26, 2011 at 7:26pm

That's not right. You are not a guarantor of your own obligation. That clause refers to debt issued by third parties and guaranteed by the US, which is to be treated as if it were US debt because, obviously, the market looks to the guarantee first, not to the credit of the nominal issuer. The clause has no application at all to checks as the only party liable on a check is the drawer. "Guarantee" is a term of art in the world of financial instruments. It does not mean that you guarantee to pay your own debts.

- roidubouloi

June 26, 2011 at 9:43pm

There are a variety of programs, such as the student loan guarantee program, in which the US guarantees the debt of another party. It is this to which the clause refers. This one isn't even a close call, PeteBeck. In the banking world, no one would ever, ever think that an issuer can be a guarantor of an obligation as which the issuer has primary liability, let alone sole liability. If there is sole liability, as on a Treasury check, there is by definition no guarantor and no guarantee.

- roidubouloi

June 26, 2011 at 10:13pm

Roi, OK my last comment. Hardly anyone will accept your argument in the context of limitations on federal debt. It will be seen as a loophole, designed to evade the plain purpose of the statute which is to limit the amount of debt that the federal government can incur. When you interpret a statute, you look at what it was trying to accomplish, even if the words are not as articulate as they should be. And so the word "guarantee" will be read broadly to mean any promise by the government to assure that an obligation is paid, even if it is a check drawn by the Treasury and not a third party obligation. And in anticipation of the strong possibility of that result, no one will accept Treasury checks at face value running the risk that I am right and you are wrong. In short, your proposal is a recipe for financial chaos. Lottsa luck with that. Like the driever who didn't get out of the way of an oncoming truck because he (driver) had the right of way.

- PeteBeck

June 27, 2011 at 12:51am

Halting the government is a recipe for financial chaos. Treasury checks will be accepted without question as long as the Fed gives credit for them. If the Fed undertakes to do that, there will be no chaos and no disruption. And if the Fed does, the courts will not intervene to prevent it. Most likely it would be considered a "political decision" beyond the purview of the judicial system. But, if not, then the courts will not insert language into the statute, going beyond the language that Congress wrote, when the consequences are so extreme. There is barely a judge alive who would dare and the Supreme Court wouldn't dare. Some decisions are too big even for such mighty egos. Bringing the Federal government down is one of them. The only relevant question is whether the Fed is willing to tell the Treasury that it will do what I suggest it can do. If so, then the debt ceiling will go by with no consequence and the Republicans will just have to wait until the next budget cycle, not very far at all, to bring the Federal government to a halt. But then they will have to take all the political heat for doing so. If the Fed will not cooperate with the Treasury, then the administration will either have to fold to the Republicans or start engaging in triage with respect to payments. The latter would bring the Republicans to their knees in a hurry if Obama has the balls to do it. By the way, PeteBeck, you are wrong about the purpose of the statute. The purpose is not to limit the debt as that is purely a function of the taxes and budget adopted by the Congress. It is not as if the administration can just go out and borrow money to spend for a purpose outside of Congressional appropriations. The only reason we borrow is because Congress has authorized spending in excess of tax receipts, as it did again just a few months ago with the interim budget deal. The purpose of the statute is to allocate responsibilities between the Fed and the Treasury for management of the money supply.

- roidubouloi

June 27, 2011 at 10:52am

Or, more to the point, the debt ceiling has no purpose, if it ever did. We are unique in having such a law as deficit or surplus is the necessary consequence of the spending and tax decisions made by the Congress. Obama would be perfectly justified to take the position that the budget adopted this year overrides the statute to the extent that the budget necessarily implies an increase in debt. And the courts won't get in the way for a variety of reasons. My point is that issuing checks in the ordinary course is a much better, smoother, less fraught way to achieve the same thing. But that does require the cooperation of an independent Fed.

- roidubouloi

June 27, 2011 at 11:08am

Roi - my understanding of the origin of the debt ceiling is that it became too unwieldy for congress to consider how the funds were to be raised for expenditure around the first world war. And so they created a debt ceiling (to prevent run-away spending) and delegated the responsibility for raising the funds to the Treasury.

- Nari224

June 28, 2011 at 6:12pm

That may well be, Nari, that Congress got tired of authorizing specific debt issues and so just set a debt limit and delegated to the Treasury. However, it makes one wonder how appropriations were handled at the time. Perhaps revenue forecasting was so imprecise that the Congress adopted budgets knowing very little about how much revenue it would have. In our era, the debt ceiling is clearly superfluous. At the very minimum, Congress, if it wants to continue in this manner, ought to specify what it wants to happen to unspent appropriations if the debt ceiling is reached. This TNR piece was just cited and quoted in the NYT Economix section,

- roidubouloi

June 28, 2011 at 7:29pm

They should have cited the comments, which were far better than the piece! A bit Machiavellian, I think, Roi. Though your argument seems legally sound, and kudos on that, it is clearly against what was intended, a check on the amount of debt our elected officials can saddle the public with, which is why it properly resides in the legislative branches. Don't want to be too clever by half, as you know it can be a dangerous game.

- ds111

June 28, 2011 at 11:19pm

Except that the debt is entirely the result of the decisions made by Congress about taxes and spending. The executive branch has no discretion with respect to either. The executive cannot levy taxes and must collect those that Congress authorizes. It must spend what Congress appropriates (the president cannot impound expenditures authorized by Congress) and cannot spend more. So who is the debt limit a check on? It can only be a check by Congress on itself. I don't think a formal requirement with no obvious purpose would be used to prevent the Treasury from writing checks for appropriated funds. The debt limit makes so little sense that I cannot see a court trying to insert language to turn the senseless into a disaster. By the way, I did look and I am pretty sure the Fed can buy gold from the Treasury, assuming the Treasury owns any. Not clear to me what arm of the Federal government owns the gold supply.

- roidubouloi

June 28, 2011 at 11:53pm

Probably Treasury has the gold, thru the US Mint. I'm not sure that later tax/spend legislation would hold over prior debt ceiling legislation. There was an opportunity to raise the ceiling when the budget was passed, which would have been the proper time to do so. Heck, the rebubs did so many times when they were in charge under Bush. Simply ignoring the ceiling as meaningless, to assume it is, is clearly against all previous congressional intent. Though clearly the plain language suggests it is just that, meaningless, employment of such a technicality would entail great risk to public confidence, and to those who would go down that path. BTW, thanks for the fine detective work.

- ds111

June 29, 2011 at 8:13am

Ok

- roidubouloi

June 29, 2011 at 6:22pm

Standing is in a lot of ways, at least the way it’s often interpreted, a nasty idea. I’m against the debt ceiling; the legislation was already passed to spend this money, but clearly there are parties greatly affected. The American people are greatly affected in how their tax dollars will be spent, and how they will be taxed in the future. They certainly, as a class, should have standing, but the law as interpreted can be ugly on this.

- RHSerlin

July 3, 2011 at 7:09pm

The standing doctrine was originally meant to ensure first a genuine case and controversy between bona fide parties and second that, in a case where many could stand as plaintiffs, that the actual plaintiff has sufficient incentive, sufficient interest, to ensure that the case is pursued aggressively. It would be undesirable for someone with less than a compelling interest to blow the case and set a precedent or establish a decision effectively binding many others with a greater interest. Under conservatives, the standing doctrine has evolved into something else, a means of ensuring that there are rights with no remedies and that there is no practical check on executive power.

- roidubouloi

July 3, 2011 at 7:23pm