Can Treasury Issue Coinage to Meet Congress’ Spending? (Yes)

Steve Randy Waldman writes about finance and economics at interfluidity.com

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Rebranding the “trillion-dollar coin”

So, hopefully you know about the whole #MintTheCoin thing. If you need to get up to speed, Ryan Cooper has a roundup of recent commentary, and the indefatigable Joe Wiesenthal has fanned a white-hot social-media flame over the idea. For a longer-term history, see Joe Firestone, and note that all of this began with remarkable blog commenter beowulf. See also Josh Barro, Paul Krugman, Dylan Matthews, Michael Sankowski, Randy Wray among many, many others. Also, there’s a White House petition.

Basically, an obscure bit of law gives the Secretary of the Treasury carte blanche to create US currency of any denomination, as long as the money is made of platinum. So, if Congress won’t raise the debt ceiling, the Treasury could strike a one-trillion-dollar platinum coin, deposit the currency in its account at the Fed, and use the funds to pay the people’s bills for a while.

Kevin Drum and John Carney argue (not persuasively) that courts might find this illegal or even unconstitutional, despite clear textual authorization. For an executive that claims the 2001 “authorization to use military force” permits it to covertly assassinate anyone anywhere and no one has standing to sue, making the case for platinum coins should be easy-peasy. Plus (like assassination, I suppose), money really can’t be undone. What’s the remedy if a court invalidates coinage after the fact? The US government would no doubt be asked to make holders of the invalidated currency whole, creating ipso facto a form of government obligation not constrained by the debt ceiling.

I think Heidi Moore and Adam Ozimek are more honest in their objection. The problem with having the US Mint produce a single, one-trillion-dollar platinum coin so Timothy Geithner can deposit it at the Federal Reserve is that it seems plain ridiculous. Yes, much of the commentariat believes that the debt ceiling itself is ridiculous, but two colliding ridiculousses don’t make a serious. We are all accustomed to sighing in a world-weary way over what a banana republic the US has become. But, individually and in our roles as institutional investors and foreign sovereigns, we don’t actually act as if the United States is a rinky-dink bad joke with nukes. As a polity, we’d probably prefer that the US-as-banana-republic meme remain more a status marker for intellectuals than a driver of financial market behavior. Probably.

The economics of “coin seigniorage” are not, in fact, rinky-dink. Having a trillion dollar coin at the Fed and a trillion dollars in reserves for the government to spend is substantively indistinguishable from having a trillion dollars in US Treasury bills at the Fed and the same level of deposits with the Federal Reserve. The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling. The cost of the plan is that it would inflame US politics, and there is a slim chance that it would make Paul Krugman’s “confidence fairies” suddenly become real. But note that both of these costs are matters of perception. Perception depends not only on what you do, but also on how you do it.

The Treasury won’t and shouldn’t mint a single, one-trillion-dollar platinum coin and deposit it with the Federal Reserve. That’s fun to talk about but dumb to do. It just sounds too crazy. But the Treasury might still plan for coin seigniorage. The Treasury Secretary would announce that he is obliged by law to make certain payments, but that the debt ceiling prevents him from borrowing to meet those obligations. Although current institutional practice makes the Federal Reserve the nation’s primary issuer of currency, Congress in its foresight gave this power to the US Treasury as well. Following a review of the matter, the Secretary would tell us, Treasury lawyers have determined that once the capacity to make expenditures by conventional means has been exhausted, issuing currency will be the only way Treasury can reconcile its legal obligation simultaneously to make payments and respect the debt ceiling. Therefore, Treasury will reluctantly issue currency in large denominations (as it has in the past) in order to pay its bills. In practice, that would mean million-, not trillion-, dollar coins, which would be produced on an “as-needed” basis to meet the government’s expenses until borrowing authority has been restored. On the same day, the Federal Reserve would announce that it is aware of the exigencies facing the Treasury, and that, in order to fulfill its legal mandate to promote stable prices, it will “sterilize” any issue of currency by the Treasury, selling assets from its own balance sheet one-for-one. The Chairman of the Federal Reserve would hold a press conference and reassure the public that he foresees no difficulty whatsoever in preventing inflation, that the Federal Reserve has the capacity to “hoover up” nearly three trillion dollars of currency and reserves at will.

That would be it. There would be no farcical march by the Secretary to the central bank. The coins would actually circulate (collectors’ items for billionaires!), but most of them would find their way back to the Fed via the private banking system. The net effect of the operation would be equivalent to borrowing by the Treasury: instead of paying interest directly to creditors, Treasury would forgo revenue that it otherwise would have received from the Fed, revenue the Fed would have earned on the assets it would sell to the public to sterilize the new currency. The whole thing would be a big nothingburger, except to the people who had hoped to use debt-ceiling chicken as leverage to achieve political goals.

Some legal background: here’s the law, the relevant bit of which—subsection (k)—was originally added in 1996 then slightly modified in 2000; here is appropriations committee report from 1996, see p. 35; and legislative discussion of the 2000 modification.

Huge thanks to @d_embee and @akammer for digging up this stuff.

originally published at Intefluidity