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My Own 2 Cents Concerning Trillion-Dollar Coins

Posted By George Selgin On January 11, 2013 @ 12:11 pm In Uncategorized | 11 Comments

[Note: This is a revised and amended version of an original post which, as several critics pointed out, failed to address the legal argument for using platinum.]

The only sort of coin that can address the debt problem is, of course, a fiduciary or token coin, worth more than its cost of production; moreover, any unnecessary expense incurred in making such a coin, by making it out of a precious metal or otherwise, merely serves to reduce the difference between its nominal value and its cost, detracting correspondingly from the profit or seigniorage the Treasury might gain by depositing it at the Fed.

True, if the coin were intended to circulate along with many others of the same sort, its cost of production would serve as a deterrent to counterfeiters, though the deterrent would still be small in proportion to the coin's fiduciary component. No one, however, imagines that a trillion-dollar coin will actually circulate; and even if it did it would do so only after the most exacting of inspections determined that it was the real McCoy rather than some aftermarket fake. In short, for the Treasury to bother making it out of anything so precious--and so intractable--as Platinum (the high melting point and hardness of which make it a very difficult material for fashioning high-quality and therefore counterfeit-resistant engravings) would be perfectly foolish. Given the coin's purpose, it would be far wiser to fashion it out of the same junk now used to make pennies, or for that matter out of plastic, or out of cardboard made from recycled copies of the Congressional Record.

Indeed, if the thing is never to leave the Federal Reserve's vault, it might as well consist of nothing more than a cover from one of those little ice-cream tubs--you know, the ones with the wooden spoon underneath--on which Congressman Walden Nadler has scribbled the words "$1 Trillion" along with some appropriate legend. In case the good Congressman is reading this, perhaps he will consider my proposal for such. It is: "In Idiots We Trust."

Addendum: On Facebook Jacob Levy observes that the proposal to use platinum is solely due to the fact that enabling legislation already exists for making a trillion-dollar coin using that metal. That is of course true; but the significance of this "loophole" seems to me much exaggerated, for it only allows the Treasury to "mint and issue platinum bullion coins and proof platinum coins." The rub is this: a "bullion coin"" is, according to the U.S. Mint's own glossary [1], a "precious metal coin traded at current bullion prices," which is to say, traded at its bullion value rather than its face value, whatever the latter may be. So the Treasury could not gain much if any seigniorage by exploiting the "bullion coin" component of 31 USC 5112. A "proof platinum coin" might, on the other hand, be made of any sort of platinum alloy, which needn't correspond to that of circulating coins of which the proofs are special representatives. So far, so good. The rub here is that a proof coin itself is not a circulating coin, and hence is not legal tender, so that the Fed would again have no business crediting it at its (arbitrary) face value assuming that it finds a way to give any credit for it at all.

On the other hand, the Fed might conceivably purchase, and the Mint might sell it, a cardboard commemorative or proof piece just as readily as it might a platinum (or platinum-alloy) one, and do so for an arbitrarily high price--just as the Fed has purchased all kinds of securities for more than their presumed market value. The specific denomination of the piece needn't matter; indeed it needn't even bear such. And neither need the Fed deal directly with the Treasury: the Treasury might, for instance, sell the commemorative to a private person--say, a large financial firm or insurance company or auto manufacturer--which could in turn seek Fed support on the grounds that it is Too Big To Fail and that the purchase, although it seemed like a good idea at the time, will otherwise force it into bankruptcy.

So far as I know, there is no rule concerning what prices the Mint may accept in outright sales of its commemorative and proof pieces, whatever those may be made from. As for the rest, the precedents are perfectly well established. :) (Smiley face added to assist the humor-impaired.)


11 Comments (Open | Close)

11 Comments To "My Own 2 Cents Concerning Trillion-Dollar Coins"

#1 Comment By Pacioli On January 11, 2013 @ 1:01 pm

"anyone who proposes that the Treasury solve its debt problem by making a $1 trillion coin..."

Of course, no one (worth listening to) is proposing that the debt problem would be solved by the coin. The coin (while not desirable) is just a workaround for the exponentially more idiotic debt ceiling.

Remove the laughably horrendous debt ceiling, and there is no need for the coin.

#2 Comment By W.E. Heasley On January 11, 2013 @ 1:16 pm

‘--on which Congressman Walden Nadler has scribbled the words "$1 Trillion" along with some appropriate legend. In case the good Congressman is reading this, perhaps he will consider my proposal for such. It is: "In Idiots We Trust."‘ - G. Selgin

-Or-

The front of the coin dawns: “Political dupery through political nitwitery and in government mysticism we trust”. Rear of coin sports: “Other people’s money is the root of all evil”.

#3 Comment By Gobanian On January 11, 2013 @ 2:19 pm

The INTENSITY of the ignorance in this post is breathtaking. Not knowing that the platinum coin needs contain only the smallest amount of platinum. Not knowing that the reason it has to be platinum is that only Congress can authorise currency. Not knowing that without this legitimacy the Fed would refuse to credit it to the government's account. And all this in a post accusing others of knowing diddly. Astonishing. Though not as antonishing as the nerve in trying to charge TWO cents for this pile of nonsense. Only if they can be made out if used beer bottle tops.

#4 Comment By David Johnson On January 11, 2013 @ 2:19 pm

Why is a debt ceiling idiotic? Granted I'm just a layman without the wisdom that getting elected to congress bestows, but please explain the arithmetic that demonstrates the idiocy of a debt ceiling.

Of course the debt ceiling is arbitrary, but the idea that there should be a limit to the how much congress can borrow is very sound. I would much rather like to see a more objective means to set that limit besides merely voting to continue the borrowing, but given the current profligacy of the Federal Government, even a badly set limit is better than no limit at all.

Not raising the debt ceiling will of course cause a shock to the market. But it's like a businessman who tries to keep his shop running with more and more debt. Eventually the bank says no and the employees get laid off. Damage to the employees of course, but it's not the fault of bank stinginess, it's the fault of a badly run business.

#5 Comment By BillWoolsey On January 11, 2013 @ 2:20 pm

According to the Mint, all coins have to the authorized by Congress.

Congress would have to pass a law allowing trillion dollar cardboard coins.

The "problem" here is that the Republican-controlled House would not pass the law.

Congress has authorized all sorts of coins. Generally, it specifies their size, denomination, and
composition.

The Mint could issue 1.4 trillion $1 coins, which would provide (at least) $1 trillion to spend.

By my reading, there is a provision in the code that allows gold coins to be made how they want. (There are lots of specific gold coins, but there is a provision hidden in there to let the Mint make them like they want.)

The platinum coin provision is unuusal in that it says nothing about denomination, size, or weight. It is all up to the Secretary of the Treasury.

While making a copper-nickel $1 trillion coin would be cheaper making lots of one dollar coins, Congress hasn't approved a $1 trillion dollar copper nickel coin.

Now, getting the Fed to pay more than an asset is worth for the benefit of the Treasury is possible. But that would require the Fed to go along.

It would be fraud by the Fed. They know the asset is worth $5, but they say it is worth $1 Trillion matching the $1 trillion in liabililities (the Treasury deposit.) If the Treasury promised to buy it back, it would be borrowing by the Treasury and would violate the debt limit.

I don't know if it illegal for the Fed to just give the Teasury money. This would make the Fed insolvent (if it just gave away $1 trillion.)

Anyway, surely you can see that it might be hard to convince the Board of Governors or FOMC to do these things.

The $1 trillion coiin is legal tender. The Treasury is creating the money it wants to spend but rather than mint lots of $1,000 coins or even more $1 coin, and spend them, they are depositing it at the Fed and then writing checks.

Today, the Fed tells the Mint when it wants coins and then pays for them. This is the Mint telling the Fed to take the coin and pay for it. The payment and bookeeping for the Fed is the same, it is just who initiates the transaction.

And if the Fed balks, and makes the Treasury actually mint of the coins and spend them, they will end up deposited in the Fed anyway.

Congress has given the Treasury the power to fund spending by minting coins.

When a silver dollar had a dollar's worth of silver in it, this wouldn't work. And when the Mint was instructed to mint silver for the general public, it won't work.

I don't know when they finally went to fractional quarters and dimes, but I don't think the seignorage on those silver coins was really that much.

Congress can limit all spending by not voting to approve it, of course.

But the 80% seignorage on dollar coins (in my view) is enough.

The ability to make small platinum (and I think gold) coins with really high denominations just increases the segniorage.

The Treasury doesn't have to use the shell game of selling bonds to the Fed. It can just mint coins and spend them. And the shell game is subject to the statuatory debt limit.

This proposal is all about the Senate and President going around the Republican-conrolled House.

If you assume all of the government wants to borrow or create money, then the platinum coin gambit is silly.

It is a way to reduce the bargaining power of the Republicans in the House.

#6 Comment By Pacioli On January 11, 2013 @ 2:31 pm

The debt ceiling is idiotic because the spending (that results in the debt issuance) has already been authorized by Congress. If additional debt is unacceptable, then Congress needs to cut spending. But hopefully you see the idiocy in Congress saying "we direct you to spend $X.XX" while simultaneously saying "we direct you to spend no more than $Y.YY".

"But it's like a businessman..." Absolutely wrong. The mechanics of the public sector monetary construct are not comparable at all to a private business/household. This is a widely promulgated and disastrous misunderstanding.

#7 Comment By George Selgin On January 11, 2013 @ 4:52 pm

Darn harsh, but the first version asked for it. Perhaps the revision is worth three bottle caps.

#8 Comment By Bill Stepp On January 11, 2013 @ 9:04 pm

Here's another take on this:

[2]

The words "Fed" with either "independent" or "independence" is always cause for a good horselaugh.

#9 Comment By JP Koning On January 11, 2013 @ 9:28 pm

"On the other hand, the Fed might conceivably purchase, and the Mint might sell it, a cardboard commemorative or proof piece just as readily as it might a platinum (or platinum-alloy) one, and do so for an arbitrarily high price--just as the Fed has purchased all kinds of securities for more than their presumed market value."

I tend to agree with Bill W., it would be difficult to get the Fed to accept the coin transaction.

While I am a big fan of free banking, I've grudgingly accepted the fact that most of the Fed's transactions during the crisis have been successfully wound down and that they did end up making money... or at least not losing much. See the [3] as well as [4]. The Fed, it would seem, did in fact do a fair job of purchasing securities at market value.

This is part of its mandate, since the Federal Reserve Act requires that the note issue be properly collateralized. Given this law, I find it hard to believe that Bernanke would accept the platinum coin at face value rather than at intrinsic value. The Fed's actions during the credit crisis would tend to give me more confidence in this statement.

#10 Comment By BK On January 17, 2013 @ 7:10 pm

How is minting a $1 Trillion coin a workaround for raising the debt ceiling? Wouldn't the former just increase the money supply and devalue the dollar slightly, whereas the latter would be the government spending private dollars already outstanding and paying it back later, with interest?

#11 Comment By AMAREcon1b On January 21, 2013 @ 3:15 am

Now granted I'm just a college student, I don't think making a trillion dollar coin is going to solve the U.S. National Debt. If we sell it to the Federal Reserve it just makes them a stronger institution. I don't think we need a private institution telling the Federal Government what to do. We are in a fragile recover phase after the Great Recession and cutting spending might send us into a double dip recession. Balancing the budget is the best way of dealing with the debt. At this point we shouldn't even be having a debate about raising the debt ceiling, it has to be done.


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URLs in this post:

[1] according to the U.S. Mint's own glossary: http://www.usmint.gov/about_the_mint/collectors_corner/index.cfm?action=glossary

[2] : http://www.economist.com/news/finance-and-economics/21569413-crackpot-idea-circumvent-americas-debt-ceiling-gains-currency-toss-coin

[3] : http://www.newyorkfed.org/markets/maidenlane.html

[4] : http://jpkoning.blogspot.ca/2012/10/a-visual-review-of-lending-facilities.html

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