President Donald Trump is currently trying to loot the federal Treasury.

On Monday, May 18th, Trump settled a lawsuit he’d filed in his personal capacity against the Internal Revenue Service for $1.776 billion. (1776 – these people, I swear.) Trump had demanded the I.R.S. pay him money damages over (1) an agency contractor leaking his tax returns to the press, (2) the FBI’s 2022 Mar-a-Lago raid, and (3) his frustrations over the first-term Mueller investigation. Basically, Trump claimed the government he wronged him by daring to treat him as a co-equal citizen capable of breaking its laws. This is part-and-parcel with Trump running the government like a family business, which Melinda Cooper has observed so brilliantly. 

The settlement came down just before a judge was set to rule on whether a President demanding cash from a division of the Treasury he oversees is even cognizable before a court. Trump has also forced the IRS to drop tax audits on himself, his family, and his businesses. He says he’ll shunt the settlement money into a compensation fund for individuals he deems victims of “weaponization and lawfare,” the same terms he used to describe his alleged “suffering” from audits and investigations.

There was a whole non-scandal in the Obama years about the IRS having the gall to sometimes audit conservative political non-profits. The right-wing grievance machine treated this as “lawfare.” Thus, there’s a good change right-wing megadonors and their propaganda arms get some of the money, if this fund ever materializes. Even more concerning are the potential payouts to January 6th insurrectionists. 

All of this means that onlookers, correctly, are pissed. The President is openly looting the country’s fiscal agent. It’s classic failed-state stuff.

However, a lot of the coverage, quotes, and takes about this looting have (completely understandably) invoked the idea that “taxpayer money” is going into the President’s new slush fund. The implication is that your taxes – property taken from you, the hardworking American people – is being stolen and put toward this corrupt payout. “Taxpayer money” is a common rhetorical tactic because it invokes personal stakes for the listener, including low-info, mostly apolitical listeners. Even if one somehow doesn’t care that Trump is robbing the government, one ought at least be mad that he’s robbing your money.

The problem is that the payout is not coming from taxpayer funds. If Trump is to be believed, the $1.776 billion is allegedly going to come from the Judgment Fund, which is the Treasury’s unlimited backstop for settlement payments in lawsuits. Basically, if an agency’s appropriated funds are insufficient to cover a payout ordered by a court, then the Judgment Fund fills in the gap, period. 

(I do wonder if payment for this settlement satisfies the Judgment Fund’s regulatory and statutory requirements for no alternative, first source of agency funds. The New York Times quoted an ex-DOJer saying this all looks on the up-and-up, but if I ran an anti-Trump group with legal research capacity, that’s what I’d be digging into right now.)

There’s two important things to understand here. First, the Judgment Fund is administered by the Bureau of the Fiscal Service. That’s the federal government’s accounting department, and it’s located within the Treasury, not the Federal Reserve. This means that the Judgment Fund is financed by direct Congressional appropriation – in other words, the money isn’t borrowed from a bank. Second, the Judgment Fund has no size constraint: Congress has enacted that there is as much money to settle lawsuits as the Judgment Fund needs for there to be. In the words of the statute, “necessary amounts are appropriated,” no ifs, ands, or buts.

How is that possible? The Times seems a bit baffled, huffing that “Congress has long neglected to more tightly control how money from the Judgment Fund was used.” As the macroeconomics social media star (yes, there is such a thing) Kyla Scanlon put it, Trump seems to have found an Infinite Money Glitch. 

That’s basically correct. But Scanlon unfortunately doesn’t take the necessary next step of asking how such a glitch exists in the first place. “You, as a citizen, you pay taxes. Your representatives decide how that money gets spent,” Scanlon pleads. “That feedback loop is what makes all of this democratically legitimate.”

Well, uh…no. I’m sorry, and I know this is strange to say, but the reason the Judgment Fund is possible is precisely because the federal government does not spend your tax dollars. In fact, in the modern day, there is no feedback loop between federal taxation and spending, whether democratically legitimate or not. 

Where Does Federal Spending Come From?

What do you mean, the feds don’t spend my tax dollars? Isn’t that why I pay taxes? Doesn’t the government need tax revenue to spend on…whatever it spends on?

At the state and local levels, yes. Sub-federal governments impose taxes to finance their activities because they can’t create money for themselves. That’s in the U.S. Constitution, Art. 1, Sec. 10, Cl. 1: “No State shall…coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts…” 

But the Constitution does not prohibit the federal government from emitting Bills of Credit. That’s what the dollar bills in your wallet are. They’re basically IOUs for gold coin, except the Federal Reserve never actually redeems those bills for coin. If you walk into your local Federal Reserve Bank and try to redeem the bills in your wallet, the clerk will hand you back…other dollar bills. This prohibition on redemption for gold is what people are referring to when they talk about the U.S. leaving the gold standard, first domestically during the Great Depression and then internationally via the Nixon Shock. 

Because no one can redeem their Bills of Credit for gold, the quantity of U.S. money today is effectively unrelated to any independent physical resource. There may be only so much gold in the world, but there are as many IOUs for gold as an IOU-for-gold writer – in this case, Congress, via its creation, the Fed – wants to write. What matters is whether other people believe the IOU-for-gold writer is good for it. 

And Americans don’t really have a choice but to treat Congress like they’re good for it. Anyone who has tried to call Congress’ bluff and demand their gold for the last 90-odd years has been swatted down by the courts. Moreover, you need Congress’ IOUs to pay your tax obligations, or you risk going to jail. Effectively, if you don’t treat Congress like they’re good for it, then come tax day, you will have committed a federal crime.

So: the money we trade around is really promises-to-pay that Congress has bound itself to honor, even if it never actually does. That’s what it means to say that the dollar is backed by “the full faith and credit of the United States.” Arguably, the whole thing is kind of a workaround for some old 1787 Constitutional language, but it’s a workaround backed by a century and a half of Supreme Court precedent, and which has enabled the United States to become the monetary sovereign of the Earth. 

But if money is just an IOU that Congress (in theory) is obligated to satisfy, that implies something else. If a dollar is just a promise made by Congress, then when a taxpayer returns such a promise to Congress via paying their taxes, the taxpayer is not provisioning Congress with anything it did not already have an infinite quantity of. In other words, paying your federal taxes does not replenish Congress’ supply of money. Congress is the original source of the modern U.S. dollar. It can never run out of its own promises to pay.

Indeed, paying your federal taxes actually diminishes the amount of money in circulation. Congress imposes a tax obligation by statute; you satisfy that obligation by giving Congress back its own IOU. This offsets your tax obligation down to nothing, and means that fewer outstanding obligations by Congress are in circulation. Taxes serve numerous policy functions, but one of the more important ones is inflation management. 

At best, the idea of taxpayer dollars financing government spending is an accounting fiction. You can trace the inflows and outflows of taxpayer fund accounts and you’ll reach the same conclusion: money creation and money destruction occur, by function of law, at every part of the fiscal policy process. It’s more coherent to just recognize that if A agrees to honor an IOU held by B (whether A wrote it themselves or gave someone else permission to write it), then B hands that IOU back to A, and finally A hands that same IOU off again to C, this has exactly the same effect as if A had torn up the IOU the minute they they received it from B, and wrote a new IOU for C from scratch. In this analogy, Congress is A, taxpayers are B, and the beneficiaries of fiscal policy are C. 

Put it all together, and we see something that’s confusing at first, but makes the whole fiscal policy process much more comprehensible once you grasp it: Congress spends money first and then taxes it back. After all, for a dollar to enter circulation, someone must create it and put it into the stream of commerce in the first instance. While multiple entities under U.S. law can create dollars in the first instance, the ones whose liabilities are generally recognized as money do it under the consent of Congress.

Congress’ credibility is what backstops the dollar, so Congress cannot run out of dollars. Congress appropriates the funds spent by the federal government, so there will be enough money to spend on whatever Congress wants to spend on, even if Congress puts an infinity sign next to the funds available for some project — like, say, paying court settlements. The power of money creation is what it means, in the modern day, to have the power of the purse. 

The Implications For The I.R.S. Looting

And that, in turn, is why it’s important to see this I.R.S. looting spree as one part of Trump 2.0’s ongoing efforts to seize Congress’ power of the purse. This goes back to DOGE – an entirely unappointed, unelected, unaccountable group of political loyalists – who granted themselves the power to cancel Congressionally-appropriated payments. Importantly, they did this by controlling the Bureau of the Fiscal Service, the same Treasury accounting arm that administers the Judgment Fund.

DOGE said they were cancelling payments they found inconsistent with the President’s agenda (in effect, any and all payments to Black women, queer people, and the neediest people around the world.) But this justification was itself an appeal to authoritarianism. It doesn’t matter if Congress enacts payments inconsistent with a President’s agenda. Congress does that all the time. That’s what it means to have separate legislative and executive bodies. When Congress let DOGE decide for itself what the government would fund, Congress functionally ceased to be an independent and co-equal branch of government. 

Congress’ delegate, the Federal Reserve, also wields money creation power. On Friday, Trump’s nominee Kevin Warsh will get sworn in as the next Fed Chairman. Regardless of whether Warsh preserves formalistic central bank independence by not literally taking orders from the President, it seems like Trump basically trusts Warsh to do whatever he publicly declares he wants Warsh to do. That is what liberal-leaning onlookers expect anyway.

Put it all together, and Trump has precedents for seizing parts of both the fiscal power via the Bureau of the Fiscal Service, and potentially the monetary power via his ally at the Fed. He’s seriously weakening the walls meant to prohibit the President — or any chief executive in the common law tradition — from creating money.

This matters not because Trump might take “your taxpayer dollars.” Definitionally, these actions are not taking “your taxpayer dollars.” They are creating new dollars from nothing, and putting them in Trump’s own bank account.

It matters because no one man should have all of that power. In the words of Christine Desan, “the power to make money is the power to rule.” To let just one man create money as he wishes and spend it as he wishes is, in many ways, what it means to be ruled by a king.

The objection to concentrated power certainly applies to a single person controlling the federal government’s monetary infinity sign in the sky. But it also applies to people who’ve accrued so much financial wealth, through singular control of crucial social infrastructure, that they too can functionally can do whatever they want. In other words, it also applies to the billionaires and oligarchs for whose benefit Trump is governing, so that he can finally be socially accepted into their maniacal class. Keeping a clear focus on exactly what’s wrong here is crucial to figuring out what to do about it.

In the short term, Congress has to remember how to be a co-equal and powerful branch, on money and everything else. In the long term, the United States needs to take a long, hard look at what parts of its psyche, social systems, and legal mechanisms allowed it all to get this bad in the first place. To be clear, I absolutely am NOT a “sound money” person — it is a very good thing that the dollar is no longer linked to the gold supply. The issue is democratic control, on money and everything else.