Minting a Way Around the Debt Ceiling

You may have heard about a recent proposal to get around the debt ceiling by issuing a trillion dollar platinum coin. Some are calling this bizarre or crazy, however, it has gained a lot of traction in the media and the White House has so far not ruled it out.

Under an obscure section of U.S. code, the Treasury has the authority to mint platinum coins of any denomination. The whole idea came to light as a result of a comment left on the blog of economist Warren Mosler, back in January 2011. Mosler happens to be a good friend of mine and he is one of the founders of the Modern Monetary Theory movement (MMT). The comment was left by a reader who goes by the name of Beowulf.

The Treasury would issue the coin and deposit it in its account at the Fed, giving it the ability to either buy back outstanding debt and bring the level of debt below the limit or, make necessary payments up to $1 trillion out of its account.

While legal scholars have been debating the legality of the use of the coin, some experts, such as Constitutional law professor Laurence Tribe and former U.S. Mint director, Phillip Diehl said use of the coin in this fashion would be completely legal. Others see the coin as a “crazy” idea, which would equate to nothing more than printing money, which would cause inflation or a run on the dollar.

It’s important to understand that the act of creating money out of “thin air” is something that all sovereign currency issuing nations like the United States have, so this is not unusual or bizarre in any way. Moreover, the value above the intrinsic value of any note or coin created is called seigniorage, and it’s a powerful feature of currency issuing nations. Seignorage is the value brought to the government above the cost of producing and distributing its own money. A $100 bill, for example, only has about 8 cents worth of intrinsic value (paper, ink, etc) but it’s given a face value of $100. In other words, despite the fact that it only has an intrinsic value of a few pennies, it can be used to purchase $100 worth of goods and services or, satisfy a tax liability in that amount. The trillion dollar platinum coin is no different; it just has a much larger in face value.

Nor is it inflationary or bearish for the dollar if the Treasury were to decide to go this route. Once minted, the coin sits in a vault at the Federal Reserve and does not circulate. Meanwhile, government payments are made on items that have already been appropriated. Furthermore, since the Treasury would not be issuing new securities, interest payments to the private sector would not be incurred (with the exception of marginal interest on reserves, paid by the Fed).

It’s true that this is an unusual proposal and for many people it seems unsettling. However, it would be highly unsettling to the markets and the U.S. economy if the government were to renege on its promises and default on its debts because of the debt ceiling. The United States is the only country that has such an irrational and self imposed constraint. It’s time to get rid of it.

The law was originally intended for the purpose of commemorative issues, however, there is a strong legal case