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Christian Schneider

Any day is good to raise a cold glass full of spirits, but enjoying a stiff drink on December 5 is especially apt, given it is the day alcohol prohibition was repealed in 1933.

The benefits of ending Prohibition immediately became evident: People stopped poisoning themselves with alcohol mixed with paint thinner in their bathtubs, organized crime lost much of its clout, and breweries once again were able to provide jobs for local workers.

But even today, we are sporadically reminded of the downsides of restricting alcohol consumption. For instance, many colleges still ban the sale of alcohol at their sporting events, leading to some unintended consequences. In a National Review Online column in May of last year, I identified one of these downsides by telling the tale of two football stadiums in the state of Wisconsin:

On November 26 of last year, the Wisconsin Badgers football team played their final game of the season against their hated rivals, the Minnesota Golden Gophers. The game saw 54 people ejected (27 of whom were students), 16 people arrested, and another 16 cited (one for the overly polite-sounding charge of “disposing of human waste”).

Compare that crowd to the one that gathered the previous weekend at Lambeau Field, home of the Green Bay Packers and the mecca of professional drinking in America. Despite the doctoral levels of inebriation among fans watching the Packers defeat the Dallas Cowboys, there were only five arrests and eleven ejections. (If you are designated “the drunk” at a Packers game, you have achieved bacchanalian immortality.)

These are two stadiums, around the same size, in the same state, with the same drinking culture. And yet, according to numbers provided to me by UW-Madison police, more arrests and ejections occur among the Badgers devotees than among the seasoned NFL crowd. When the college team played Washington State, 45 people were ejected, 36 of whom were students. During the game against New Mexico, 66 people were ejected, 24 of whom were students. By contrast, the numbers for Packers games hovered in the single digits—during the final game of the year against the Detroit Lions, there were only four arrests and eight ejections.

These stats may confuse people, considering that alcohol is actually served at Packers games. How is it that a college crowd can be so much more sauced despite the lack of beer flowing at the concession stands?

The answer is simple. Knowing there’ll be no chance to get their hands on a cold one during the game, under-21s pound as much as they can outside the stadium before the game begins. The kids get themselves good and hammered, knowing the buzz is going to have to last three hours.

This is all perfectly evident to anyone who has ever attended a sporting event—if you know you won’t be able to drink while sitting in the stands for the length of a football game, you are going to do one of two things: You’ll either drink as much as humanly possible before the game, or you’ll sneak in hard alcohol somewhere on your person.

In the piece, I point out that at Lambeau Field, home to both a professional football team and stands full of professional drinkers, arrests were a small fraction of what they were at the college stadium down the road in Madison. That isn’t in spite of beer being sold in the stadium, it is because of it.

Before this season, the University of Wisconsin–Madison took my advice and decided to start selling beer during its football games.

“The option to purchase alcohol is common at collegiate athletic venues all over the country and we’re glad that we can now offer it as part of the fan experience at Camp Randall,” said Chancellor Jennifer Mnookin at the time, adding that the plan combined “opportunity with public safety.”

Well, the numbers are in, and they are entirely predictable. This year at Badger football games, beer and wine consumption was up and arrests were down.

From the Milwaukee Journal Sentinel:

According to University of Wisconsin–Madison Police Department interim police chief Brent Plisch, alcohol-related police contacts decreased by about 25%, from 118 incidents in 2021 to 89 incidents this year.

Although it might seem counterintuitive, Plisch said this is a phenomenon across college athletics in general: After allowing alcohol to be served inside the stadiums, universities tend to see a reduction in police contacts for alcohol-related offenses.

Except that it’s not counterintuitive at all. Allowing people the opportunity to drink freely in public teaches them to be more responsible and spread their drinking out rather than getting hammered before the game. The school shouldn’t be taking credit for the drop in arrests; it should be taking the blame for waiting too long to see what was plainly obvious.

So enjoy a pleasant beverage today. And if you do so at a sporting event, even better.

Jennifer Huddleston

Vanessa Brown Calder

The Department of Housing and Urban Development (HUD) is a good place to start for an administration with an appetite for change. Failed programs like public housing should be abandoned permanently, and unfocused programs with mostly unmeasurable results, like Community Development Block Grants (CDBG), should be eliminated, while other HUD functions can be devolved to state governments.

The CDBG program is a more than $3 billion federal program that provides city, county, and state governments with control over federal revenue for community development, neighborhood revitalization, and housing spending. Communities use funds for 27 categories of eligible activities and are given broad discretion in selecting funded activities.

There are a variety of issues with CDBG, including a broad, ambiguous mission and funding ill-targeted to low-income people. Policymakers designed CDBG as a flexible program, and “community development” is a broad goal. However, the program’s flexibility has resulted in spending on various disparate activities that have little to do with meeting low-income people’s needs or even critical community needs.

Recent reporting indicates that policymakers used CDBG to develop a plaza to host a Best of Beer and Wine Festival, fund the New York city of Newburgh’s summer film festival, expand a brewery in Montana, and support five failed restaurants in Toledo, Ohio. The most recent HUD data indicate that some of the highest per capita CDBG spending is on nonresidential historic preservation. Past years’ CDBG projects included corporate subsidies, funding a cinema that later foreclosed, and nearly half a million dollars on hull repair for a steamship.

CDBG Funding Is Poorly Targeted

Given CDBG funds festivals and breweries, it shouldn’t be any wonder that the funding is generally ill-targeted to those most in need. A recent study found that neighborhoods with the largest portion of low- and moderate-income families were not the most likely to receive CDBG funds. As the authors noted, local governments have a lot of latitude in distributing CDBG funding, and local incentives are not necessarily aligned with program goals.

Complicating matters further, the allocation formula used to allocate federal dollars has a shaky relationship with need to begin with. Research finds the relationship has deteriorated nationally and locally over time. One study found that in Chicago, “relatively poorer council districts receive lower funding than predicted by their share of the [low and moderate income] population.”

Considering the types of projects that CDBG funds and the tenuous relationship between program funding and need, it’s not surprising that CDBG’s outcomes are hard to measure. Following the program’s creation in the 1970s, one analyst characterized it as “more of a grab bag than a plan, a loose collection of unrelated ways to spend money rather than a unified approach to solving the city’s most acute problems.”

As economist Eileen Norcross described the problem, “claims of [CDBG] effectiveness tend to rest on intermediate measures, such as the number of jobs created, houses built, or dollars leveraged. These metrics are not evidence of success. They indicate how funds were spent, not the objectives achieved by the program.”

Left-leaning research groups and government agencies have also recognized these issues. An Urban Institute analysis acknowledges that “impact evaluations [for CDBG] have been even more limited and have been completely absent in recent years.… It is indeed difficult to estimate the effects of CDBG because the funds can be used for such a wide range of activities.” The Government Accountability Office found “few comprehensive studies on the impact of the CDBG and HOME programs exist.”

CDBG Is Poorly Designed

One of the primary purposes of CDBG was to allow local governments more discretionary decisionmaking authority surrounding what community development projects to fund. The idea was that local decisionmakers would have more localized information and act accordingly.

However, research finding that local decisionmakers make effective funding decisions is lacking. Urban expert Margaret E. Dewar observed that “programs aimed at specific distressed geographic areas show almost no effects on the [economic] growth of these areas.”

Ultimately, CDBG is designed to subsidize places and structures rather than needy people, reducing utility as a result. Analysts have suggested updating the allocation formula in various ways, but simply revising the formula would not solve the problem. 

As urban economist Edward Glaeser noted, “Investing in building instead of people in places where prices were already low may have been the biggest mistake of urban policy over the past sixty years” and “building is the result, not the cause of success.… people, not structures, determine a city’s success.”

CDBG’s design presumes that people should stay in declining places rather than move to areas of greater opportunity where they may be better off. As David Schleicher argues, “Unless place-based subsidies fundamentally alter the structure of local economies, they ultimately encourage people to stay in declining places.… From a cynical perspective, subsidies to declining regions sometimes can appear to be policies designed to serve the interests of rich areas—as efforts to keep the riffraff out—rather than genuine efforts to reduce poverty.”

Local elected officials arguably desire visible and quick results that will bolster their reelection prospects, and visible projects are a distraction from making genuine and often challenging improvements in other areas. CDBG provides ribbon-cutting ceremonies and news items that meet local policymakers’ needs for media exposure and speedy results, whether or not they meaningfully improve the prospects of disadvantaged residents.

CDBG also allows federal policymakers to claim credit for local development. Chris Edwards reports that “the purpose of more than one-third of press releases from US senators is to claim credit for federal spending in their states.” Policymakers could do more to improve local community and economic conditions by reforming zoning regulation, education policy, taxes, and occupational licensing, but these reform efforts would entail more effort.

Conclusion

If CDBG genuinely served low-income people’s needs, spending would be allocated based on individual characteristics rather than tenuously related location-based characteristics like population size, population growth lag, or housing stock age. Officials would direct funds to needy people rather than politicians, businesses, and buildings, and officials would require funding to produce clear and measurable results. 

But this isn’t the CDBG program we know. Given the program’s questionable efficacy, flawed design, and state and local government’s proper responsibility for community and economic development activities, eliminating the program is the best course of action. 

To its credit, the White House proposed doing just that during President Trump’s first term. This proposal generated predictable resistance from activists and local policymakers, but the Trump administration was right to target the program then, and the administration and its Department of Government Efficiency should see the proposal through now.

Neal McCluskey

This morning, Americans woke up to the latest scores from the Trends in International Mathematics and Science Study (TIMSS), tests taken by students in 63 countries and other jurisdictions in fourth grade and 45 in eighth grade. The United States has participated since the exams began in 1995.

In fourth-grade math, the US average hit its lowest level in the history of the exam: 517, dipping below the previous 1995 and 2003 low of 518.

In eighth-grade math, the average hit its lowest point: 488, dipping below the previous low of 492. Note, however, that the United States did not hit the TIMSS guidelines for sample participation rates, so the results should be taken with a grain of salt.

The country hit another low in fourth-grade science, with an average score of 532.

Finally, in eighth-grade science, the country tied its previous low of 513, set again at the very beginning of TIMSS testing. As with math, these results should be viewed with caution due to low participation rates.

In terms of international standing, the United States is middling. Looking at eighth grade, which accounts for students having spent more time in the American education system than fourth, the country finished below nations such as Italy and Romania but above Israel and France. The top performers (not shown) were Singapore, Chinese Taipei—not all of China—and South Korea. The United States scored above 18 systems and below 19.

In science, the United States was closer to the top, below countries such as Ireland and Sweden, and above Austria and Italy. The top performers (again, not shown) were Singapore, Chinese Taipei, and Japan. US students scored better than 27 systems and below 11.

All things equal, we do not want to see US scores go down—indeed, hitting near 30-year lows. This is especially the case when we look at public school per-pupil spending, which, adjusted for inflation, rose from $12,366 in the 1994–95 school year to $18,614 in 2020–21, a 51 percent increase.

But things are not always equal. The most likely explanation for the country’s major drop is the COVID-19 epidemic, especially the long lockdowns of some schools. But our scores have been dropping largely since 2015, when the No Child Left Behind Act, which focused the entire public schooling system on standardized testing, was replaced by the Every Student Succeeds Act. The country’s decreased emphasis on standardized testing generally could be reflected in this particular standardized test. And a diminished focus on standardized testing might not necessarily be bad. Much of what people want from education—fostering creative thinking, building character, and more—is not well captured by standardized tests. And if rising scores reflected standardized testing strategies more than rising knowledge, they might have given us false signals.

Of course, we would like to see test scores rise. But we should not panic: We need to investigate these scores more deeply to understand what produced them, and standardized tests are limited in what they can tell us about education quality.

Andrew M. Grossman

Don’t say that debanking is back, because it never went away. But with close allies of the new administration focused on the issue, reform may finally be in the offing. Three basic steps are needed, the first two of which can be done in no time at all: (1) block regulators from pressuring financial providers to drop disfavored customers; (2) require government officials to report and publicly disclose actions targeting protected speech and association; and (3) dial back anti-money laundering law, “the world’s least effective policy experiment.” 

Credit venture capitalist Marc Andreessen for putting debanking in the spotlight. If his aim was to raise awareness by bringing it up in a discussion with Joe Rogan and a series of X posts, then it worked. The minor backlash of doubters prompted a wave of start-up founders, crypto enthusiasts, and others with…interesting (but lawful!) financial situations to share their experiences. 

It’s harrowing stuff: credit cards and ATM cards all going dead at once, losing access to one’s own money with no way to pay the bills, purposefully vague termination letters and refusal to explain, and the fear that speaking out will make one permanently unbankable. The experience is a bit like being “unpersoned” in a party-state or getting caught up in the “social credit” systems of science fiction or, as some have it, current-day China.

But it’s the United States, and we’ve been doing this for a while. It began with the rise of anti-money laundering law, which gradually transformed banks and other financial institutions into pawns of the state. That coincided with the proliferation of financial regulation and supervisory regulators’ expanding power and discretion over their charges. It speaks well of human nature, or poorly of bureaucrats, that it still took another decade or so for regulators to realize what they had: unchecked power to debank practically anyone. This was, as they say, a “strategic driver of policy outcomes”—specifically, making life hard for firearms dealers, tobacconists, and other lawful-but-officially-disfavored businesses.

That was Operation Choke Point in 2014, and now we’re dealing with “Choke Point 2.0.” The target is new: crypto, from blockchain startups to exchanges to, apparently, ordinary HODLers. But the mechanism, by and large, is the same old jawboning—that is, officials wielding the force of their authority to exert informal pressure.

The general problems with jawboning are well-understood: officials can use it to exercise extra-legal authority or to exercise their authority in inappropriate ways, and that often happens in the shadows, without accountability. That understanding points the way to reforms that address the three key elements: the extra-legal authority, which can be restricted or prohibited; the legal authority being abused, which can be cabined; and transparency and accountability. With that in mind, the policy response to debanking nearly suggests itself.

First, restrict jawboning by financial regulators through an executive order and personnel changes. As noted, the most widespread abuses don’t come from regulations, published guidance, or enforcement actions. They’re informal: regulators expressing concerns, raising eyebrows, etc. These concerns can come cloaked in many guises, like “reputational risk” and “red flags.” For closely regulated businesses like banks, a wink is as good as a nod, or a regulation for that matter, because their regulators wield so much power and have extremely broad discretion. 

Drawing a perfect line to separate valid concerns about compliance from abusive requests is hard or even impossible. But two narrower fixes are easy. First, the president can issue an executive order requiring financial regulators to prohibit their personnel from requesting or encouraging the denial of services based solely on an account holder’s First Amendment-protected speech or associations, use of crypto, or status as a business in any lawful industry, including crypto, firearms, etc. Second, the president should appoint financial regulators willing to investigate ongoing and past abuses, clean house, and put new personnel on the job who won’t abuse their stations. These may be temporary fixes, but they’ll work and, over the longer term, begin to change the culture.

[For the legal nerds, yes, the executive order raises a potential issue with financial regulators being so-called “independent” agencies. But it is unclear how much that matters under recent Supreme Court decisions like Seila Law v. CFPB (2020) and Collins v. Yellen (2021). In any event, the president can and should choose appointees willing—really, eager—to coordinate with the administration and right the wrongs of their predecessors.]

Second, require all government officials and employees to disclose jawboning activities, with penalties for non-compliance. For a variety of practical reasons it’s not feasible to extend the executive order discussed above beyond the financial regulators to reach, for example, the Department of Homeland Security, the Department of Justice, White House personnel, etc. But that’s not to say that personnel outside of the financial regulatory agencies can’t misuse their power and influence to the same ends or that nothing can be done about it. It can: all executive branch personnel should be required to publicly disclose jawboning that targets First Amendment-protected speech and association. That can also be done by executive order, backed by penalties. And this wouldn’t just address debanking; it would also go a long way toward addressing the government’s role in social-media censorship.

Kristin Shapiro and I spelled out the details of how this would work in a Cato paper last year, and the thumbnail-sketch version appeared in the Wall Street Journal last month. Both pieces discuss social media censorship, but the proposal was designed to address, among other things, the sort of debanking and de-insurancing (?) abuses carried out by New York financial regulators against the National Rifle Association.

Third, turn the dial way back on anti-money laundering law (AML). AML is the legal basis for most anti-crypto pressure and actions. Banks face enormous penalties for non-compliance, and regulators wield enormous discretion over how to enforce it. As journalist Matt Levine has often described it, banks and other financial institutions effectively have a dial that they can use to turn up or down their AML (and Know Your Customer) programs, based on the pressure they get from regulators. Turn down the dial, and a bank might get hit with massive fines and even see its executives threatened with jail-time. Turn up the dial, and there will be a lot more false positives—innocent people and businesses excluded or ejected from the banking system. The pain imposed on them is enormous; the pain on regulators and the banks is essentially nil.

The problem is that, with pressure from regulators and law enforcement for “compliance” and a series of headline-grabbing fines and penalties, the dial is turned up to 11, or higher. It’s easy to understand why. The banks don’t have much choice in the matter; while they might prefer to do a bit more business, getting crossways with the government is a non-starter. For the regulators and especially law enforcement, ratcheting up AML activities is all gain, with no downside. The broader public interest, however, doesn’t get a seat at the table, and so there’s little or no accounting for AML’s costs, including the concentrated ones borne by the debanked. 

Sure, money laundering is bad, but the pertinent question is whether it’s worse than AML as it’s practiced today. The best evidence says the answer is no.

Economist Ronald Pol calls AML “the world’s least effective policy experiment.” In a 2020 paper, Pol estimated that AML “helps authorities intercept about $3 billion of an estimated $3 trillion in criminal funds generated annually (0.1 percent success rate), and costs banks and other businesses more than $300 billion in compliance costs, more than a hundred times the amounts recovered from criminals.”

Keep in mind that this only accounts for compliance costs. It excludes the costs and burdens imposed on individuals and businesses from being unfairly caught up in the AML dragnet. And it excludes the incalculably large forgone benefits of businesses and business activities that do not manage to overcome the AML-compliance tax.

Before AML took hold, money laundering itself was a crime, but banks were largely treated as neutral intermediaries. AML enlists them in law enforcement without subjecting them to protections like due process that apply when the government acts directly. Extending those protections to financial intermediaries like banks would drive up costs and sap innovation across the financial sector, including in the crypto space and, ultimately, the whole economy. But that’s what would be necessary to legitimize the role they’re currently being forced to play. The far better course is to return to the older arrangement or, at the least, reform AML to narrow and clarify its scope so that there’s less discretion to be abused.

Dialing back AML will take time. Some progress can be made through executive action—including compliance reforms and instituting new enforcement policies—but fundamental and durable reform likely requires legislation. The benefits are worth it, and ending debanking is just the start. 

David Inserra

Chris Edwards

My National Review op-ed today examines subsidies for wind power, solar power, lithium batteries, and electric vehicles (EVs). The 2022 Inflation Reduction Act (IRA) included about $1 trillion in subsidies for these and other ostensibly green technologies. Next year, the Republicans will aim to cut these subsidies to trim deficits and level the playing field in the energy industry.

There is another reason why Republicans should reassess the IRA subsidies: the environmental damage that wind, solar, battery, and EVs may impose if their footprints continue to expand. In the mad dash to limit CO2 emissions, traditional environmental concerns seem to have been pushed aside. Congressional Republicans should hold hearings next year on the anti-green effects of the IRA’s green subsidies.

I was surprised to find, for example, that the Biden administration finalized a plan this year to cover 538,000 football fields of public lands in the West with metal-and-glass solar panel structures. That would be an extraordinary imposition on the natural environment that deserves more scrutiny by Congress and the public.

Another issue my op-ed discusses is that solar panels, wind turbines, and lithium batteries may cause massive trash problems. Scientists are working on these issues, but they loom large because of the short lifespans of these energy technologies.

EVs are much heavier than gas-powered vehicles, which increases damage from accidents, wears tires faster, and increases particulate emissions. Wind turbines currently kill about 1 million birds annually in the United States and more than 1 million bats, and the Biden administration plans vast increases in wind installations.

Solar panel and lithium battery manufacturing have very problematic supply chains. The Biden administration, for example, is subsidizing water-intensive lithium mining in arid regions of the West, which will cause added stress on already tapped-out rivers and aquifers.

The NRO piece discusses these and other concerns. The incoming Congress should thoroughly review both the costs and green impacts of the IRA subsidies.

David Inserra, Jennifer Huddleston, Jack Solowey, Travis Fisher, & Erec Smith

Andrew Gillen

Note: This post updates last month’s post. The biggest changes from last month include: Split the HEA plan into two parts to account for the newly proposed hardship plan, and adding the latest batch of loans forgiven, $4.5B via the Public Service Loan Forgiveness plan.

Mass student loan forgiveness is terrible policy (see this report for a comprehensive list of reasons), but that hasn’t stopped the Biden administration from trying to forge ahead. While the Supreme Court overturned the administration’s student loan forgiveness plan, every few weeks the administration announces another batch of loans that have been forgiven. The administration recently celebrated that, since taking office, it has succeeded in forgiving $180 billion of student loans for 4.8 million borrowers by transferring the financial burden from the students who took out the loans to taxpayers who did not. And they aren’t going to stop—the administration’s spokeswoman declared, “President Biden has vowed to use every tool available to cancel student debt for as many borrowers as possible, as quickly as possible.” Biden himself stated, “I will never stop working to cancel student debt— no matter how many times Republican elected officials try to stop us.”

But if student loan forgiveness lost in the Supreme Court, how are so many student loans still being forgiven? The answer is that there isn’t a student loan forgiveness plan. There are many plans, some of which are already up and running. Previous laws had already left numerous methods to forgive student loans, and many of those laws may give the Secretary of Education the ability to expand those programs. 

The administration is also claiming that existing law gives it the authority to create new ways to forgive student loans. So the student loans the Biden administration already has or wants to forgive are a combination of existing programs, existing programs the Biden administration has expanded, and new programs the administration is seeking to implement.

Here’s a rundown of the administration’s student loan forgiveness plans and actions, which I’ll update monthly.

HEROES (new plan, overturned in court)

This was the big plan that got a lot of attention in 2022 and 2023. The plan was to forgive $10,000 for borrowers making less than $125,000, and $20,000 for borrowers who received a Pell Grant, at a total cost of $469 billion to $519 billion. The alleged authority for the plan was the 2003 HEROES Act. While designed to alleviate loan-related hardships for soldiers and reservists serving in Iraq and Afghanistan, the law also covered national emergencies, and the Biden administration argued the COVID-19 emergency gave it the authority to forgive virtually everyone’s loans. 

Most observers were skeptical of this supposed authority, but it was not clear who had standing to sue (standing is the requirement that those filing the suit have a concrete injury from the policy). The companies that service student loans would be the most obvious injured party. But there was a perception that the Biden administration would punish any servicer that challenged the policy in court, a perception that now appears accurate.

Fortunately, the Supreme Court ruled that Missouri had standing to sue (due to a quasi-public student loan servicer that would lose revenue under the plan) and that the plan violated the major questions doctrine (which holds that there needs to be clear congressional authorization for programs of substantial economic or political significance), preventing the policy from being implemented.

Higher Education Act (new plan—forthcoming, partially paused by courts)

Immediately after losing on HEROES, the Biden administration announced a new effort that would use authority under the Higher Education Act. The administration announced the new plan split into two parts.

HEA Plan Part 1

The first part would

Waive unpaid interest;
Forgive debt for those who have repaid for 20 years (25 years if there is debt for graduate school);
Forgive debt for those who attended a low-financial value program (e.g., programs or colleges that fail the Cohort Default Rate or Gainful Employment); and, 
There is also a plan to release additional regulations soon that will forgive debt for those undergoing financial hardship.

There are a several problems with this plan, which the Penn Wharton Budget Model estimates will cost $84 billion. The public comment window on the proposed regulations recently concluded, and the administration is now considering those comments and will issue final regulations, with a goal to start forgiving debt this fall. Once finalized, this plan will likely be overturned by the courts for two main reasons. First, it is likely to run afoul of the major questions doctrine, just as the HEROES plan did. Second, the Supreme Court recently overturned Chevron deference, which held that courts should defer to executive agencies when a statute was ambiguous. 

With major questions and no Chevron deference, it is hard to imagine the courts allowing the administration to stretch vague clauses in old laws into vast new powers authorizing billions of dollars in forgiveness.

However, much of this forgiveness is easy to implement, so a key question was whether a court injunction would come fast enough to prevent the administration from forgiving billions of debt before the courts can determine whether the regulations are legal. The Biden administration was preparing to move quickly to present the plan as a fait accompli the moment the final plan was released by immediately forgiving billions in loans, but fortunately, several state attorney generals saw what was happening and filed lawsuits to stop it. There has been some legal back and forth. But as things stand right now, a court injunction prevents the Department from forgiving any loans under the new regulations until the courts have ruled on their legality. 

HEA Plan Part 2

The second part of the plan focuses on forgiveness for students experiencing economic hardship. The administration’s proposed plan involves two pathways to forgiveness.

Under the first pathway, the Department would forgive loans for any borrower that it estimates is likely (80 percent chance or greater) to default on their loans within the next two years. This raises several new problems, in addition to the standard arguments against student loan forgiveness. One, the Department would be forgiving loans today based on what it thinks will happen in the future. This Minority Report approach to spending billions of dollars is a bad idea. Two, if their crystal ball is wrong, there could be lots of debt forgiven that shouldn’t be, and lots of debt that should be forgiven that isn’t. Three, to estimate the likelihood of default, the Department would use 17 data points. Most of these are already known before the student even takes out the loan. As Jason Delisle notes, the estimate is “based on many factors known when the loan is made, taken right from the FAFSA and school’s data … people will now ask if those loans should be made in the first place. It’s like the Biden admin is saying ‘We can look at the FAFSA and the school and program you’re attending and determine if you qualify for our new loan forgiveness program before you even borrow $1.’” If that’s the case, shouldn’t the government stop making those loans?

Under the second pathway, students could apply for forgiveness by claiming hardship, and the Secretary could approve forgiveness based on a holistic assessment. The current Secretary would likely approve any application, given that the administration’s stated goal is to “cancel student debt for as many borrowers as possible, as quickly as possible.”

The Committee for a Responsible Federal Budget estimates that part two of the HEA plan could cost up to $600 billion.

The proposed rules are still open to public comment until early December. After that, it will be a race against the clock to see if the Department can finalize the rule before President Biden leaves office in January. Much like the part one, much of this forgiveness can be done very quickly once the rule is finalized, so state attorney generals need to be ready to sue immediately upon finalization (or like with part one, before finalization if the Department again appears to be trying to forgive debt the day the rule is finalized).

SAVE (new plan, paused by the courts)

Before diving into this one, it is important to understand the concept of income driven repayment (IDR). Under traditional (mortgage) style loan repayment, the amount and length of repayment are fixed (e.g., $200 a month for 10 years). For the past few decades, the federal government has been introducing IDR plans in which the amount repaid each month varies based on the borrower’s current income and the length of repayment varies based on how fast they repay their loan. The key features of an income driven repayment plan are:

the share of income owed each month (e.g., 20 percent);
the income exemption that is protected from any repayment obligation (e.g., the poverty line); and,
the cap on length of repayment (e.g., 25 years).

IDR is a great idea, providing borrowers with better consumption-smoothing across their lifetime and flexible repayment, which helps avoid defaults due to short-term liquidity constraints.

But we’ve also botched the implementation. To begin with, a cap on the length of repayment is completely inappropriate. Income driven repayment ensures that payments are always affordable, and borrowers who make so little they do not repay will receive de facto forgiveness even without the cap, so there is no justification for a cap on the length of repayment.

The other problem with how we’ve implemented income driven repayment is political: the plans are tailor-made to allow politicians to give constituents big benefits today while sticking future taxpayers with the bill. It is, therefore, no surprise that these plans have grown more generous over time. The first IDR plan, introduced in 1994, had an income exemption equal to the poverty line, a share of income owed of 20%, and a cap on length of 25 years. Very few borrowers would receive forgiveness under these terms, and of those who did, they really wouldn’t have been able to repay regardless of whether they received forgiveness. The Obama administration introduced plans with an income exemption of 150% of the poverty line, a share of income owed of 10%, and a cap on length of payment of 20 years.

The Biden administration’s Saving on a Valuable Education (SAVE) plan took an existing plan (the REPAYE plan) and made it much more generous. It changes the share of income owed from 10% to 5%; increases the income exemption from 150% of the poverty line to 225%; and caps the length of repayment at as little as 10 years for some borrowers. By cranking every possible lever to the most generous settings in history, this plan would impose massive costs on taxpayers, estimated at $475 billion for just the next 10 years.

The legal questions facing this plan are the reverse of the HEROES plan. For the HEROES plan, the main obstacle was standing. Once that hurdle was cleared, it was fairly obvious that the plan was well beyond what Congress had authorized. But for the SAVE lawsuits, this is reversed. Standing is easily established (for Missouri at least), but the plan does have a much stronger argument of being within the parameters of the law. 

Mark Kantrowitz thinks SAVE will be upheld, while Michael Brickman did yeoman’s work digging up details on page 18,909 of the 1993 Congressional Record that may lead to SAVE being scrapped. Jason Delisle also recently released a fascinating report on the legal foundation of SAVE. He argues that “the Biden administration has claimed legal authority far outside what Congress intended when it enacted the law.” In particular, he argues that

“Lawmakers assumed that the IDR plan the secretary would create would entail minimal or no budget costs” whereas SAVE may cost up to half a trillion dollars over 10 years.
“Lawmakers assumed that the secretary would set loan forgiveness at 20 or 25 years, but not earlier as SAVE does. Moreover, loan forgiveness was clearly an afterthought in the original debates” whereas it is the central feature of SAVE.
“Lawmakers believed that appropriate monthly payments in an IDR plan should be much higher than those in the SAVE plan.” 

The Supreme Court’s overturning of Chevron deference is also likely to affect these cases in a major way. Now that courts are no longer required to defer to executive agencies when statutory language is ambiguous, it will be much harder to convince courts that the president spending close to half a trillion dollars over the next ten years on this plan is consistent with congressional intent.

Parts of the SAVE plan have already been implemented, and full implementation was scheduled for July 2024. The plan has already forgiven “$5.5 billion for 414,000 borrowers.” However, there are two lawsuits that seek to overturn the plan, one by Kansas and ten other states (though a court ruled that only three of the states had standing to sue), and another by Missouri and six other states. An injunction from the 8th Circuit Court of Appeals (in the Missouri case) has paused implementation of the entire SAVE plan pending resolution of the case.

In sum, the chances of SAVE surviving the court challenges have declined dramatically over the past year. When it was first introduced, many analysts thought it had the best chance of being upheld in court, but the recent injunction, the overturning of Chevron deference, and the work by Brickman and Delisle on congressional intent leave SAVE much more vulnerable legally than most thought would be the case a year ago.

Student Loan Payment Pause (Existing and extended plan, now expired)

When COVID-19 hit in March 2020, student loan payments were paused. The pause was supposed to last two months but ended up lasting three-and-a-half years after Trump extended it once and Biden extended it six times.

The payment pause resulted in two costs to taxpayers.

First, while no interest accrued on student loans (around $208 billion of interest was waived), the government had to borrow more money to make up for the lack of payments (recall that the government is the lender for student loans) and the government paid interest on that extra borrowing. Thus, even if students eventually repay everything, there is still a cost for taxpayers.

Second, recall that IDR plans (unnecessarily) cap the length of repayment, and the pause counted towards that cap. In other words, for any student that does not fully repay before they hit the length of repayment cap, payments weren’t paused, they were waived. We won’t know for many years how many students had their payments forgiven rather than postponed.

New research from Sylvain Catherine, Mark Pérez Clanton, and Constantine Yannelis finds that the substantial inflation and counting of the pause towards the cap on repayment reduced the present value of future student repayments by around 25%.

There is virtually no chance for this burden on the taxpayer to be reversed. The only good news is that the payment pause ended, with most borrowers restarting payments in October 2023.

Public Service Loan Forgiveness (Existing and extended plan, still active)

The Public Service Loan Forgiveness (PSLF) program was established during the George W. Bush administration and allowed for public and nonprofit workers to receive forgiveness after 10 years of repayment when they used an IDR plan. While I object to PSLF in principle (as a distorting and non-transparent subsidy for the government and nonprofit sectors) and due to the windfalls these borrowers receive (an average of over $70,000 per beneficiary), because PSLF legally exists, it should operate as seamlessly as possible. 

The Biden administration granted many waivers and other changes to increase the number of borrowers who could benefit under PSLF. For example, the administration introduced a waiver that allowed for payments made under non-IDR plans to count toward the payment limit (previously, only payments made while enrolled in an IDR plan counted). Some of these changes were good in the sense that they more faithfully implemented the law, but the administration crossed some lines too. 

In particular, it started counting some types of deferment as payments (borrowers can get deferment when they cannot afford to make payments, which generally allows the borrower to temporarily postpone payments though interest continues to accrue). The whole point of deferment is to temporarily avoid making payments. So for the Biden administration to give borrowers credit for making payments when they were in deferment is logically, morally, and potentially legally wrong (Cato was part of lawsuit seeking to end this abuse, but the case was thrown out when a court ruled the policy didn’t directly affect Cato enough to satisfy standing requirements). The administration also waived income requirements, making more people eligible for the program. 

The Biden administration has forgiven $79 billion for one million borrowers under these programs, which works out to around $73,000 per borrower. By comparison, a formerly homeless student who receives the maximum Pell Grant for four years would get less than $30,000 in Pell Grants. Some of this would have been forgiven even if the administration hadn’t made any changes to the program, but not all of it. In the future, these burdens on the taxpayer can be reduced by rolling back some of the administrative changes, but eliminating the program entirely would require legislation. 

Borrower defense to repayment (Existing and extended plan, still active, though recent changes are paused during a court case)

When a college engages in fraud or severely misleads students, borrowers can have their debt forgiven under “borrower defense to repayment.” This is reasonable, as victims of fraud should have some recourse. It is also extremely rare because a college would not just need to dupe a student but would also need to fool a state, an accreditor, and the US Department of Education, as all three are required to sign off on the legitimacy of a college before its students can take out student loans. As the House Committee on Education & the Workforce noted, “for the first 20 years of the rule, there were 59 claims.”

However, the federal government can claw back debt forgiven from the responsible college. This makes borrower defense to repayment an incredibly powerful tool for progressives in their war on for-profit colleges. If a for-profit college can be declared to have substantially misled students, they can be ruined financially by the claw backs. Indeed, new regulations from the Biden administration would make it much easier to conclude a college engaged in misconduct. As the White House gloated, “Less than $600 million in debt relief had been approved through borrower defense, closed school discharges, and related court settlements from all prior administrations combined, compared to the $22.5 billion approved under the Biden-Harris Administration alone.” Some of this was done outside the law. For example, $5.8 billion of debt for Corinthian College’s students was forgiven even if students didn’t submit a borrower defense claim. The administration has promised to forgo claw backs on much of it (likely in part to avoid giving affected colleges standing to oppose the changes in court).

The good news is that any further forgiveness under the new regulation is on hold due to an injunction from the 5th Circuit Court of Appeals (this injunction applies to the closed school discharge plan as well).

Closed School Discharge (Existing and extended plan, still active though recent changes are paused during a court case)

Borrowers whose school closes while they are still enrolled or shortly after they have withdrawn can have their student loans forgiven. The Biden administration imposed new regulations that loosened the requirements and has used this as an excuse to forgive other loans as well. For example, Biden forgave $1.5 billion in debt for students from ITT Technical Institute, even if they didn’t qualify for a discharge. Further forgiveness under the new regulations has been paused by the 5th Circuit Court of Appeals until courts determine whether the new regulations are legal. However, the administration can still forgive loans under the previous iteration of these regulations.

Total and Permanent Disability Discharge (Existing and extended plan, active)

Borrowers who are unable to work due to a permanent disability can have their loans forgiven. Historically this was very rare. And to protect against fraud, the income of borrowers who had their debt forgiven was monitored to ensure that they really couldn’t work. The Biden administration both expanded eligibility and dropped fraud detection efforts. In particular, in 2021, regulations were introduced that “provided automatic forgiveness for borrowers who were identified as eligible for a total and permanent disability discharge through a data match with the Social Security Administration. The Department had been using such a match for years to identify eligible borrowers but required them to opt in to receive relief.” Switching to the opt-out model dramatically increased the number of borrowers receiving forgiveness. As a result of these changes, forgiveness under total and permanent disability discharge to spike from negligible amounts to $16.2 billion for 572,000 borrowers.

Waiving Interest

Another method the Biden administration is using to forgive loans is to waive interest. This plan is somewhat unique in that it is usually a component of another forgiveness plan, but the goal and methods are unique enough to warrant its own category.

Waiving interest has been implemented primarily through three mechanisms. The first was the student loan payment pause, which as noted above waived interest for three-and-a-half years. The second were regulations that took effect in July 2023 that “ceased capitalizing interest in all situations where it is not required by statute (87 FR 65904). This includes when a borrower enters repayment, exits a forbearance, leaves any IDR plan besides Income-Based Repayment (IBR), and enters default.” And the third is the SAVE repayment plan, which waives any unpaid interest.

Conclusion

In sum, the Biden administration has been the most aggressive in history regarding student loan forgiveness. Despite many setbacks, the administration has cancelled a massive amount of debt ($180 billion and counting), with most of the burden on taxpayers still to come from future repayments that will no longer be made. And while many of its attempts to forgive student loans have been stymied, there are still many active plans in play, with more on the horizon. 

George Selgin

This summer witnessed a major new plot twist in the Bitcoin saga. Originally conceived of as a revolutionary grass-roots alternative to established fiat currencies, including the US dollar, the twist has Bitcoin serving not to counter but to fortify the US dollar’s status as the world’s most popular exchange medium.

Although it has somewhat earlier roots, the new vision for Bitcoin gained prominence at this July’s Bitcoin 2024 conference in Nashville, where no fewer than three speakers, including then-presidential candidates Robert F. Kennedy, Jr. and Donald Trump, made proposals based on it. 

Like Goldilocks’ Three Bears, the proposals came in three sizes. Trump’s, the most modest, would have the federal government use all of the 210,000 Bitcoins it already possesses—most of them seized by law enforcement agencies—to form “the core” of a “Strategic National Bitcoin Stockpile” that would supposedly “benefit all Americans.” 

Kennedy’s plan—the papa bear—would start with Trump’s core and add 550 Bitcoin to it daily until the Treasury held at least four million Bitcoin, or more than a fifth of today’s outstanding stock. According to Kennedy, his plan, which would equip the Treasury with Bitcoin worth more, at today’s market prices, than its gold reserves, would put the United States “at a position of dominance that no other country will be able to usurp.”

The mama bear, finally, was unveiled by Senator Cynthia Lummis (R‑WY) just after Trump’s keynote speech. It would have the US Treasury establish a “Bitcoin Strategic Reserve” consisting of one million coins purchased over five years. Unlike the other proposals, Lummis’s has taken shape in actual legislation, The BITCOIN Act of 2024 (the acronym stands for “Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide”) introduced by Lummis a few days after the Nashville event. The proposed reserve’s purposes include “strengthening the position of the United States dollar in the global financial system.”

Were the idea of creating an official US Bitcoin stockpile only popular with politicians, it might be brushed off as a cynical attempt to tap Bitcoin’s popularity for votes. But to judge not just from the rounds of applause the three proposals garnered in Nashville, but from commentary afterward, whether or not Satoshi Nakamoto himself would have approved of them, many Bitcoin fans are convinced that the proposed Bitcoin stockpiles really will do the US dollar, and the US economy as a whole, a lot of good.

Politicians are not the only ones calling for the U.S. government to jump on the Bitcoin bandwagon. In a recent brief, Digital Gold: Evaluating a Strategic Bitcoin Reserve for the United States, the Bitcoin Policy Institute also recommends that the United States establish a Bitcoin Strategic Reserve to serve as “a unique complement to traditional monetary reserve assets such as gold and Treasury securities” that will help ensure “continued dollar dominance.”

Why Reserve Assets?

So it’s goodbye Bitcoin, dollar “terminator”; hello Bitcoin, dollar “supercharger”!

Or is it? Arguments suggesting that an official Bitcoin stockpile can strengthen the US dollar are distinct from those that liken Bitcoin to strategic commodities like petroleum and silicon chips or those that would have the US government include Bitcoin in a Sovereign Wealth Fund. Although calls for a Strategic Bitcoin Reserve tend to conflate these different arguments, I’m only concerned here with the “currency reserve” argument. Would having the government stock up on Bitcoin really “supercharge” the dollar? Would a Strategic Bitcoin Reserve serve the same purpose gold reserves serve in the U.S., or anywhere else? Is it even the case that the dollar needs “supercharging” to preserve its global status?

To answer these questions one must understand the general role that non-domestic reserves play in supporting today’s fiat monies, and the US dollar in particular. Official reserve assets consist of financial assets held by fiscal or monetary authorities that can’t be created by those authorities themselves. In practice today that means foreign exchange (foreign currency itself plus foreign-currency-denominated bank deposits and securities) and gold. As of mid-2024, according to the IMF’s reckoning, the world’s monetary and fiscal authorities held $12,347 billion in foreign exchange assets and 29,030 metric tons of gold, worth around $2.2 trillion.

Why do governments hold reserves? In the days of commodity-based monies, both central and commercial banks needed reserves of the money commodity to meet redemption requests of their customers and other banks. When many nations’ monetary systems are based on the same standard commodity, as was the case during the gold-standard era prior to the Great Depression, reserves are also needed to cover international payment deficits, meaning any positive difference between nations’ net foreign capital outflows, exclusive of reserve transfers, and their current account earnings (exports minus imports and net foreign transfer payments). 

In today’s irredeemable fiat money systems, reserve assets obviously aren’t needed to redeem either central or commercial bank liabilities. Commercial bank deposits are instead claims to central bank paper currency or, in interbank settlements, central bank reserve credits. Provided they’re willing to let their currencies’ exchange rates vary freely, nations can rely on exchange rate adjustments to eliminate balance of payments deficits instead of having to meet deficits with foreign exchange kept on hand for that purpose.

In practice, however, even nations that issue their own fiat monies often seek to “peg” their currencies’ value to that of another nation’s currency. Small, open economies, for example, often prefer to peg their currency to that of their main trade partner to avoid exposing traders to exchange rate risk. In such cases, foreign exchange once again becomes necessary for meeting the balance of payments deficits. Other countries seek to limit movements in their currencies’ otherwise flexible exchange rates—that is, they prefer “managed” or “dirty” floats to either pegged or freely floating exchange rates. Those countries must also keep stocks of one or more foreign currencies on hand for the purpose.

Gold reserves, on the other hand, no longer serve to settle international accounts. Yet they make up roughly 15 percent of global reserve assets. The main reason for this is that gold is a good hedge against exchange-rate or “currency” risk, meaning the risk monetary authorities incur by holding reserves of foreign exchange. When kept at home, as bullion, rather than with foreign custodians, gold is also free from the political risk to which foreign exchange holdings may be subject, meaning the risk of having foreign exchange consisting of deposits in foreign banks or foreign-government securities frozen or expropriated by foreign governments.

But as we’ll see, a big chunk of the world’s official gold reserves is held for no better reason than sheer inertia. That consists of the 8,133 metric tons of gold—about two-sevenths of the world’s total—held by the United States, almost all of which is left over from a much larger pile the US accumulated during the days when the dollar was still tied to gold.

The US Dollar as a Global Reserve Asset

Although global foreign exchange holdings include the currencies of many countries, US dollars lord over the rest, comprising over 58 percent of the total. Euros run a distant second, at 20 percent. As can be seen from the following Federal Reserve chart, a handful of currencies—the Japanese yen, British pound, Australian and Canadian dollars, and Swiss franc—account for most of the rest. Other currencies, if they’re held in reserve at all, are held in insignificant amounts.

The dollar’s dominant role is no mystery. According to a recent Brookings Commentary, dollars are also used in 58 percent of all cross-currency-jurisdiction payments, meaning international payments minus those among Eurozone nations, as well as in most foreign exchange trading. 64 percent of world debt is also denominated in dollars, including some $13 trillion in US dollar credits to nonbank borrowers outside the US. These statistics also explain why so many foreign governments prefer to peg, or at least limit movements in, their currencies’ exchange rates with the US dollar, though doing so obliges them to hold substantial US dollar reserves.

If the dollar’s status is so secure, why are people saying that it needs shoring up? That belief rests upon the fact that since the late 1990s the dollar’s share of total international reserve assets has fallen by a dozen percentage points. Were that decline matched by a corresponding increase in the share made up of euros, yen, or even British pounds—the only other serious contenders for the “dominant currency” crown—and were the shift likely to continue, it might eventually spell trouble for the dollar’s reserve-currency ranking. And were the decline a reflection of a reduced volume of USD-invoiced trade, it might suggest that the dollar is also becoming a less popular medium of exchange. But neither of those things is happening. Instead, the dollar has been losing ground not to the euro or the yen, it’s only serious if still distant rivals, but to various “nontraditional” reserve currencies, including Canadian dollars and Chinese renminbi, and gold. And it is losing not so much because a lot more trade is being invoiced in nontraditional currencies and gold—cross-border renminbi payments, for example, are still dwarfed by USD payments—but for other reasons, including the US government’s “weaponization” of the dollar, meaning its resort to sanctions involving the freezing, if not outright confiscation, of foreign governments’ dollar reserves kept in US financial institutions or in financial institutions in other countries that cooperate with the US authorities.

It should be obvious that building a Strategic Bitcoin Reserve won’t relieve foreign governments of the risk of having their US dollar reserves sequestered. What’s perhaps less obvious is the fact that such a reserve would do nothing at all to shore up the dollar’s value or otherwise enhance its popularity.

U.S. Reserve Assets

As of October 2024, the United States Treasury and Federal Reserve System held $245 billion in reserve assets. Besides foreign exchange (over $37 billion worth, of which roughly two-thirds are Euros and the rest Japanese yen), and those 8,133 metric tons of gold (worth $11,041 million according to gold’s official price of just $42.22 per troy ounce, and about $691 billion at its present market price), this sum includes the United States’ IMF reserve position (not quite $29 billion) and its quota of IMF-created Standard Drawing Rights (SDRs) (a bit under $170 billion).

To judge by this total sum, the United States’ reserve asset stockpile puts it in the minor leagues. Despite being the world’s largest economy, that stockpile is only the world’s 15th largest, behind those of Hong Kong, Singapore, and Italy, among others.

Unimpressive as that raw ranking is, because it takes account of IMF reserves and SDRs, which make up over 80 percent of the United States’ total reserve assets, it greatly exaggerates the importance the US government attaches to those assets. For while the Treasury and Fed together decide how much foreign exchange and gold to have on hand, the United States IMF reserve position and SDR holdings are set by IMF rules. For example, the IMF periodically sets the total SDR allocation for all of its members, which it then parcels out to them according to their quota shares of the Fund. 

The United States’ large SDR stockpile mostly reflects the IMF’s recent total allocation of over 660 billion SDRs (worth about $890 billion) and the United States’ hefty IMF quota share of 17.42 percent. The United States’ IMF reserve position is likewise an obligatory amount, representing a portion of each IMF member’s total mandatory contribution to the fund. Ranking nations’ reserve asset holdings after deducting both their SDR holdings and their IMF reserve positions puts the US in 45th place, below Vietnam, Romania, Columbia and Qatar! And as we’ll see, because it depends on the United States’ outsize gold holdings, even this ranking exaggerates the significance of the United States’ international reserve holdings, for unlike the gold held by most central banks, the US gold stock (which, incidentally, belongs not to the Federal Reserve but to the Treasury) serves no strategic purpose.

That the United States’ reserve assets, and particularly its foreign exchange holdings, are so modest is a reflection of the US dollar’s unique status as the freest of free-floating currencies: other governments may tie their currencies to it, whether tightly or loosely; but so far as the United States government is concerned, maintaining those ties has mostly been, and for some time now has exclusively been, those other governments’ problem.

That the US government can generally afford to let its currency float is one aspect of the “exorbitant privilege” it enjoys as a result of the dollar’s status as both a national and a global exchange medium. As I’ve noted, about 58 percent of all international trade is invoiced in dollars, and dollars make up a corresponding share of official global foreign exchange holdings. A number of countries besides the United States use actual US dollars as their domestic currency. The worldwide demand for dollars, both official and private, makes it unnecessary for the United States government to borrow in other currencies, while the dollar’s free-floating status rules out any need for foreign currency to settle U.S. payments imbalances.

The Exchange Stabilization Fund: A Poor Precedent

The status of the US dollar means that it really isn’t necessary for the US government to hold foreign exchange at all. Since the collapse of the Bretton-Woods System in 1973, the United States hasn’t been under any obligation to take part in the maintenance of any international fixed exchange rate arrangement. And while the Federal Reserve has long been authorized to buy and sell foreign exchange, its mandate, as set forth in the Federal Reserve Act, calls for it to promote “maximum employment, stable prices, and moderate long-term interest rates,” but says nothing about stabilizing or otherwise regulating exchange rates.

Even before the collapse of Bretton Woods, responsibility for US exchange rate policy has mainly rested with the US Treasury rather than the Fed, with the Fed assisting the Treasury’s efforts in its capacity as its fiscal agent. (The traditionally joint nature of Treasury-Fed exchange market operations is reflected in the roughly equal division of the nation’s foreign exchange reserves between the two.) This arrangement dates from the January 1934 passage of the Gold Reserve Act, which called for the Fed to surrender its gold reserves to the Treasury in exchange for gold “certificates” in anticipation of gold’s official revaluation from $20.67 per fine troy ounce to $35 per ounce, which continued to be gold’s official price until December 1972, when it was raised to $38. (Some months later it was raised again, to its current level of $42.22 per fine troy ounce.) Of the $2.8 billion nominal profit the Treasury gained by this exchange, $2 billion went to establish an “Exchange Stabilization Fund” (ESF) “for the purpose of stabilizing the exchange value of the US dollar.” Importantly, instead of being subject to the congressional appropriations process, or to any sort of congressional scrutiny, the ESF was to be self-financing and under the exclusive control of the Secretary of the Treasury.

In Digital Gold, the Bitcoin Policy Institute rests its case for a Strategic Bitcoin Reserve partly on the precedent set by the ESF. “The ESF,” it says, “provides the US Treasury with a tool to stabilize currency markets during periods of exchange rate volatility, helping to ensure that the US dollar maintains its value relative to other currencies. This enables the US to intervene in foreign exchange markets, mitigate speculative attacks, and prevent sharp devaluations or appreciations that could disrupt trade balances or financial stability.”

But while the ESF was indeed established for the purpose of “stabilizing the exchange value of the dollar,” its exchange market interventions, almost always undertaken jointly with the Fed, have been quite limited since 1995, and it hasn’t intervened at all since March 2011. Why not? First, as we’ve seen, foreign exchange operations haven’t been necessary since the dollar was set afloat in March 1973—a fact officially (if belatedly) recognized by legislation enacted in 1976 that struck out the Gold Reserve Act’s reference to stabilizing the dollar’s value and instead made the ESF responsible for undertaking whatever operations the Treasury Secretary deemed “necessary to and consistent with the United States obligations in the International Monetary Fund.”

Although, as the FRED chart below shows, the ESF took advantage of its new—and much vaguer—mandate to intervene frequently in foreign exchange markets between the late 1970s and the mid-1990s, after 1980 its interventions were, more often than not, aimed at weakening rather than strengthening the dollar. But whether they had any lasting effect on the dollar’s exchange value is doubtful, both because the interventions were too mall relative to the sizes of the markets involved to have mattered much, and because even large-scale interventions could only have a lasting effect if the Federal Reserve allowed the Treasury’s exchange-rate goals to dictate the overall course of monetary policy.

And the Fed did no such thing. Instead, its determination to clamp down on inflation during the 1980s ruled out any such subservience. So it happened that, by the 1990s, the US government’s exchange rate interventions were mainly undertaken “out of a spirit of cooperation” with other governments, as when the US intervened to satisfy its part in the Plaza and Louvre Accords of 1985 and 1987, rather than in pursuit of any of US government exchange-rate targets. 

Since the mid-1990s, even such “cooperative” interventions have been rare: the US intervened to support the yen in 1998, to support the Euro in 2000, and to stabilize the yen following Japan’s 2011 earthquake and tsunami. But it hasn’t intervened since. In 2013 the United States took part in an agreement among the G7 nations to devote their monetary and fiscal policies to meeting domestic policy objectives instead of targeting exchange rates, and today it seems less likely than ever to change its mind. Far from serving any strategic purpose, the United States’ present foreign exchange holdings are mere leftovers from its earlier interventions.

Despite what one might expect, these developments haven’t caused the ESF—which seems to have more lives than a cat—to give up the ghost. Long before it gave up trying to influence the dollar’s exchange rate with other major currencies, the Treasury found another use for it, namely aiding less developed nations, particularly in Latin America. 

The ESF’s constitution, its vague post-Bretton-Woods mandate, and its ability to “monetize” its SDR and FX holdings (that is, to have them temporarily converted into US dollars at short notice), allow it to make substantial emergency short-term loans without congressional approval. By the 1990s such lending had become the ESF’s principal undertaking. Because the ESF typically made loans by temporarily “swapping” US dollars for foreign currency, they qualified as foreign exchange operations. But stabilizing exchange rates wasn’t their main purpose, and in many cases wasn’t their purpose at all.

That Congress should have taken a dim view of the Treasury’s use of the ESF as a source of “backdoor” foreign aid is hardly surprising. Matters came to a head in 1995 when Bill Clinton used the ESF to finance a $20 billion Mexican aid package. Afterward, Congress tried but failed to substantially reduce the ESF’s capacity to fund foreign governments. But the public outcry raised by the Mexican intervention was itself enough to convince the Treasury to avoid any further, substantial use of the ESF for foreign loans. So the fund died yet again. And yet again it lived, for the Treasury found still another use for it, namely as a source of rapidly mobilized funds to deal with domestic emergencies. In 2008 it was used to insure money market fund balances, and during the COVID-19 crisis it was used both to backstop the Federal Reserve’s risky emergency lending programs and to finance the CARES Act. Inspired by these examples, the Bitcoin Policy Institute has suggested using the ESF to fund its proposed Strategic Bitcoin Reserve.

Needless to say, an ESF that serves mainly as a rapid-fire way to pay for domestic rescue operations, or to occasionally purchase Bitcoin, or oriental carpets, or Japanese real estate, doesn’t need to stockpile foreign exchange. And an agency that has no need for foreign exchange also doesn’t have to hedge against the risks that go hand-in-hand with holding on to substantial amounts of foreign exchange. If the US government wants to avoid losing money on its foreign exchange holdings, the sensible way for it to do so is by disposing of those holdings, gradually or otherwise, not by accumulating some other risky asset.

A Golden Relic

If the United States government has no need for foreign exchange, what, if any, need has it for gold? According to the Bitcoin Policy Institute, besides having “historically…been an important part of US global financial strategy, supporting confidence in the dollar and serving as a hedge against inflation or currency crises,” the US gold stockpile serves “as a last resort financial asset that can be quickly re-monetized in extreme circumstances, providing the US with a historically reliable source of liquidity to address severe financial or geopolitical challenges that disrupt the global monetary order.” Finally, gold reserves allow the government “to subtly influence precious metal markets, ensuring price stability during periods of significant monetary or geopolitical upheaval.”

To each of these claims regarding the benefits of the United States’ gold stock there’s an obvious riposte. Concerning supporting the dollar: “historically” is doing all the lifting: the dollar’s value hasn’t depended on the Treasury’s gold holdings since 1971 when it became inconvertible fiat money. (The value of a free-floating fiat currency, like the value of Bitcoin, is a function of the real demand for it and the quantity supplied, not the assets its creators possess). Concerning gold’s liquidity: nothing is more “liquid” than dollars themselves, which the US can create without it. Concerning helping precious metal markets: here, for once, is something a gold stockpile does. But then the question becomes, what reason is there for the government to prop up the gold market, other than to enrich gold miners and investors at others’ expense?

Far from having been deliberately acquired to serve some strategic purpose, the Treasury’s current gold stock is a legacy of the days, subsequent to the dollar’s devaluation in January 1934, when the US was perceived as a uniquely safe haven for the precious metal. As the FRED chart below shows, between the passage of the Gold Reserve Act and the 1950s the US gold stockpile grew more than six-fold—passively, if not to officials’ dismay—to a peak of more than 20,000 metric tons. During the 1950s, and especially after the Bretton-Woods System became operational in 1958, the flow reversed. 

When Nixon closed the gold window in August 1971, the US gold stock was under 8,700 metric tons. Since then, despite serving no obvious purpose, it has changed very little. Yet no statute keeps the Treasury from auctioning off its gold, provided that it redeems a corresponding nominal value of gold certificates held by the Fed. In fact, the Treasury has sold some gold, including about 491 metric tons it disposed of during the late 1970s to take advantage of gold’s then-record price. But when, in June 2011, some proposed selling more to get around that year’s debt-ceiling crisis, the FOMC threw cold water on the plan saying it might disturb not only the gold market but “broader financial markets.” Similar considerations appear to have kept the US government from selling gold ever since.

Who Needs Another Unnecessary Reserve Asset?

While the US government has resisted reducing its gold stockpile, it has never entertained the idea of adding to it. After all, if the 8,133-plus tons of gold now kept in deep storage in Fort Knox and elsewhere is merely a vestige of the gold-standard and Bretton-Woods days, proposing that the US acquire more gold is like proposing that, because they have coccyxes, human beings would benefit by growing tails.

So what about a Strategic Bitcoin Reserve? If there’s no reason save inertia for the government’s vast gold stockpile, there’s no reason at all for it to acquire Bitcoin. (A “second-best” argument for having it do so—that adding Bitcoin to its portfolio might lower the risk associated with those gold holdings—founders on the fact that Bitcoin isn’t a particularly good gold hedge.) No reason, that is, unless it’s “to [not so] subtly influence the market” for that virtual precious metal, specifically by driving up its price. 

And—let’s be honest—although some Bitcoin fans may sincerely believe that a Strategic Bitcoin Reserve will strengthen the US dollar, many more favor it despite not caring a fig about the dollar’s future because they expect it to make them richer, and don’t mind if it does so at others’ expense.