Article I, section 8 of the Constitution states that Congress “shall have the power…to coin money, regulate the value thereof, and of foreign coin.” Let’s look at the historical origin of this clause.
The recent revival of import tariffs by the U.S. has created a puzzle. Why, in the midst of this “trade war,” has China not used the weakness in its exchange rate to offset the effects of President Trump’s tariffs?
Since the financial crisis, households have de-levered while federal debt has marched upwards. But the net cost of the combined debt, measured as the “cost of carry,” is at a level that historically signals an oncoming recession.
We take for granted the Federal Reserve’s unique powers that, like that of other central banks, include being the sole issuer of currency. But those powers were not always so, and their origin traces to the foresight of Alexander Hamilton.
Central banks use a common set of policy tools to achieve their inflation and employment goals – regulating the money supply and interest rates, and occasionally implementing measures such as quantitative easing. That toolkit can trace its origins to the intellectual contributions of David Ricardo, one of the earliest opponents of a gold standard.
If the debt of the public or private sector were viewed the same way we measure that of a corporation, no alarms would be sounded. Given its low cost of carry, that debt is unobjectionable.
Critics of the federal deficit should recognize the imperfect nature of the debt-to-GDP ratio. By a more reasonable measure, our fiscal indebtedness is not high by historical standards.