Can’t the government, at the end of the day, just print money, with the unfortunate downside being inflation? It turns out that it isn’t actually that simple, because the framers of our financial system were pretty farsighted. And that, in turn, sheds light on why the debt ceiling is non-trivial. The Grumpy Economist, John Cochrane of the University of Chicago and the Hoover Institution, explains:

First, just to be clear, let me clarify the playlist:

* Debt: US government bonds, issued by the Treasury. Promises to pay for your healthcare is not “debt,” and if the government reneges on that promise it’s not a “default.”

* Cash: Bills and coins.

* Reserves: Essentially checking accounts at the Fed. Banks may freely obtain cash in return for reserves and vice versa.We often say “the Fed prints money” when in fact what it does is to create reserves.

In the first debt-limit debate, I was initially puzzled that it was a problem at all. The “debt limit” does not include currency or reserves, though both are functionally US government debt. That seems like an unfortunate oversight: Why can’t the government just pay its bills by printing money, i.e. creating reserves? Sure, you might worry about inflation sooner or later, but this is a legal question. The government can print money to pay its bills, no?

Well, no, which is really interesting.

For the Fed to “print money,” meaning to create reserves, it has to buy some other asset. Though the Fed can manufacture money costlessly, it legally can only do so by buying assets. The Fed cannot engage in fiscal policy, and printing up checks and sending them to taxpayers — or even dropping cash from helicopters — is fiscal, not monetary policy.

And the debt limit applies to all Federal debt outstanding, including debt held by the Fed. So, as long as the Fed buys only Treasury bills, the debt limit does, in fact, stop the government as a whole from “printing money” (creating reserves) to pay bills. To do so, the Treasury has to issue debt, borrowing the money, pay its bills, and then get the Fed to buy the debt, so that in the end there is more money outstanding. But a debt limit stops this operation.

Well, the Treasury has the actual printing presses that make good old fashioned cash. Why can’t the Treasury just print up money and use it to pay bills? (Or, deposit the cash at the Fed, thereby get reserves, and transfer the reserves by writing checks.) No, that’s illegal too. The Treasury prints the bills, but they can only be issued by the Fed, and in return for already-created reserves.

So the architects of our monetary system and debt limit weren’t so dumb after all. Though we have a fiat money system, and, drawing a circle around the whole government, it should be able just to print money and give it to people (social security) or buy tanks and stuff with the printed money, the debt limit does pretty well constrain the government budget.

To emphasize, this isn’t about a fight between Treasury and Fed. They can agree they want to print money to evade the debt limit. But they still can’t do it. It’s a limit on what the government as a whole can do.