Trillion-dollar coin

The trillion dollar coin is a concept that emerged during the United States debt-ceiling crisis in 2011, as a proposed way to bypass any necessity for the United States Congress to raise the country's borrowing limit, through the minting of very high value platinum coins. The concept gained more mainstream attention by late 2012 during the debates over the United States fiscal cliff negotiations and renewed debt-ceiling discussions. After reaching the headlines during the week of January 7, 2013, use of the trillion dollar coin concept was ultimately rejected by the Federal Reserve and the Treasury. Five days later, Senate Minority Whip John Cornyn announced that Senate Republicans would end their threat to block an increase in the debt ceiling.

Legal basis

Common obverse of American Platinum Eagle coins, a platinum commemorative United States coin that has been issued in denominations of up to $100 under the authority of 31 U.S.C. Section 5112.

The issuance of paper currency is subject to various accounting and quantity restrictions that platinum coinage is not. According to the United States Mint, coinage is accounted for as follows:

Since Fiscal Year (FY) 1996, the Mint has operated under the United States Mint Public Enterprise Fund (PEF). As authorized by Public Law 104-52 (codified at 31 U.S.C. § 5136), the PEF eliminates the need for appropriations. Proceeds from the sales of circulating coins to the Federal Reserve Banks (FRB), bullion coins to authorized purchasers, and numismatic items to the public and other customers are paid into the PEF and provide the funding for Mint operations. All circulating, bullion and numismatic operating expenses and capital investments incurred for the Mint's operations and programs are paid out of the PEF. By law, all funds in the PEF are available without fiscal year limitation. Revenues determined to be in excess of the amount required by the PEF are transferred to the United States Treasury General Fund as offbudget and on-budget receipts. Off-budget receipts consist of seigniorage, the difference between the receipts from the Federal Reserve System from the sale of circulating coins at face value and the full costs of minting and distributing circulating coins. Seigniorage is deposited periodically to the General Fund where it reduces the government's need to borrow.

The concept of striking a trillion dollar coin that would generate one trillion dollars in seigniorage, which would be off-budget, or numismatic profit, which would be on-budget, and be transferred to the Treasury, is based on the authority granted by Section 31 U.S.C. § 5112 of the United States Code for the Treasury Department to "mint and issue platinum bullion coins" in any denominations the Secretary of the Treasury may choose. Thus, if the Treasury were to mint one trillion dollar coins, it could deposit such coins at the Federal Reserve's Treasury account instead of issuing new debt.

31 U.S.C. 5112(k) as originally enacted by Public Law 104-208 in 1996:

The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time.

In 2000, the word "bullion" was replaced with "platinum bullion coins".

Philip N. Diehl, former director of the United States Mint and with Republican Congressman Michael Castle co-author of the platinum coin law, has said the procedure would be permitted by the statute. However, Castle says he never intended such a use. The platinum coinage provision was eventually passed by a Republican Congress over the objections of a Democratic Treasury in 1996.

Laurence Tribe, a prominent liberal constitutional law professor at Harvard Law School, said the legal basis of the trillion dollar coin is sound and that the coin could not be challenged in court as no one would have standing to do so. Conservative law professor Jonathan H. Adler has said that he believes the legality of the trillion dollar coin to be dubious.

Emergence of the concept

The idea for the Treasury Department to mint a coin and send it to the Federal Reserve in order to pay off the debt was first popularized by Populist Presidential Candidate Bo Gritz in 1992. As a standard part of his stump speeches, he would hold up a 5" example coin. The specific concept was first introduced by Carlos Mucha, a lawyer who commented under the name "beowulf" on various blogs. "Beowulf" outlined the idea in a series of comments on Warren Mosler's blog in May 2010, noting that "Congress has already delegated to Tsy [Treasury] all the seinorage power authority it needs to mint a $1 trillion coin...." Beowulf also drew attention to the concept on the blog of economist Brad Delong in July 2010 and in a legal analysis blogpost of his own in January 2011 but it wasn't until July 2011 that the use of the concept as an unorthodox method of resolving the debt-ceiling crisis came to the attention of the financial press and in mainstream media blogs. At that time the idea also found some support from legal academics such as Yale Law School's Jack Balkin. Once the debt ceiling crisis of the summer of 2011 was resolved, however, attention to the concept faded.

The concept gained renewed, and more mainstream, attention by late 2012 as the debt-ceiling limit was being approached once again. In early January the widely read economist Paul Krugman endorsed the idea and asserted that opposition to the idea was coming from people unwilling to admit the truth that "money is a social contrivance". His endorsement attracted considerable media attention. Former Mint director Diehl was widely cited in the media debunking criticisms of the coin and its basis in law. Congressman Jerry Nadler endorsed the idea and it was featured in the international press by January 4, 2013.

"Beowulf" would later tell Wired magazine that the coin idea came from a December 2009 Wall Street Journal article that talked about how several people were able to generate frequent-flyer miles at no cost by ordering coins from the U.S. Mint with a credit card offering mileage rewards and then depositing the coins at a bank to pay off the credit card debt. He also said that he was inspired by a 2008 book, Web of Debt, by Ellen Brown, which quoted a former Treasury official who said the government could order the printing of large coins to pay off the national debt. "Beowulf" said the trillion dollar coin idea is more rightly attributed to a small discussion group than to an individual, adding that the group was "just in it for the lulz" (for personal amusement).

Analysis and reaction

Some commentators have argued that although the concept may be strictly legal, it would weaken the checks and balances system of U.S. government even if the spending that the minting of the coin would allow has already been authorized by Congress. Journalist Megan McArdle wrote that "minting a $1 trillion coin neatly end-runs GOP obstructionists, but only by proving that the president himself has little respect for the institutional restraints on his office." Another journalist, Felix Salmon, wrote that the concept "would effectively mark the demise of the three-branch system of government, by allowing the executive branch to simply steamroller the rights and privileges of the legislative branch". Salmon went on to explain that he does not agree with what Congressional Republicans are doing, but they have a right to do that, and the president should not use the trillion dollar coin option to circumvent them. In Salmon's words, "Yes, the legislature is behaving like a bunch of utter morons if they think that driving the US government into default is a good idea. But it's their right to behave like a bunch of utter morons."

Michael Steel, spokesperson of House Speaker John Boehner, dismissed the concept by comparing it to a Simpsons episode called "The Trouble with Trillions", which aired 13 years before the United States debt-ceiling crisis, in which Homer Simpson is on a mission in search of a missing trillion dollar bill.

On the other hand, many economists and business analysts endorsed the coin as a way to counter threats by congressional Republicans to force the country into default by refusing to raise the debt limit. Paul Krugman, a Nobel Prize winning economist, said, "So minting the coin would be undignified, but so what? At the same time, it would be economically harmless — and would both avoid catastrophic economic developments and help head off government by blackmail." He also declared the trillion dollar coin debate to be "the most important fiscal policy debate of our lifetimes".

On January 7, 2013, Republican congressman Greg Walden announced he would introduce a bill to close the platinum coin loophole. Rep. Walden said that the intention is to "take the proposal off the table". The bill is opposed by New York representative Jerry Nadler, who says that the idea remains a valid option.

On January 12, 2013, the Treasury and Federal Reserve announced they would not mint a platinum coin, and five days later, Senate Minority Whip John Cornyn (R-Texas) announced that Senate Republicans would end their threat to block an increase in the debt ceiling.

Inflation risks

See also: Quantitative easing § Risks

The Federal Reserve's purchase of the trillion dollar coin would be largely analogous to the securities purchases that are part of Quantitative easing (QE), in both cases adding to the monetary base, which is the sum of currency in circulation and bank reserves. In the case of the coin, commercial bank reserves would increase as the Treasury spent the proceeds from the coin's purchase by the Federal Reserve. If banks loan out these reserves, the money supply increases and if the money supply increases too rapidly, the economy could overheat, adding to inflation and increasing expectations of future inflation. In April 2011 a paper published by the St Louis Federal Reserve Bank said "some believe QE will sharply increase inflation rates; however, these fears are not consistent with economic theory and empirical evidence — assuming the Federal Reserve is both willing and able to reverse QE as the recovery gains momentum." The paper added that "if the public trusts that the increase in the monetary base QE creates is only temporary, then they will not expect rapid inflation in the near future. These expectations collectively influence actual pricing behavior and, in turn, actual inflation." The Federal Reserve could ensure that commercial banks do not lend out excess reserves by paying interest on their reserves at the Fed so that the return commercial banks receive on them is greater than they could receive from alternative uses. Finally, in the case of the coin, the Federal Reserve could also sterilize the government's spending of the coin by selling other assets from its balance sheet on a dollar-for-dollar basis, in which case the effect on the monetary base should net to zero. If the debt ceiling were lifted, the Treasury could use borrowing to buy the coin back from the Federal Reserve and return it to the Mint to be melted.

Independence of the Federal Reserve

Although the Federal Reserve had already indicated on December 12, 2012 that it wished to expand its balance sheet by another $1.02 trillion throughout 2013 via its ongoing purchases of U.S. Treasuries and government-sponsored mortgage-backed securities, Greg Ip has argued that if the Fed's balance sheet were expanded for ostensibly fiscal policy reasons instead of monetary policy reasons that could constitute an imposition on independence of the central bank. Ip suggested that any such imposition could be avoided if the additional trillion in coinage were issued directly to the public (in more useful smaller denominations) instead of deposited with the Fed. In May 2010 there was $40.4 billion in coin in circulation and about another $900 billion in banknotes.

Former U.S. Mint Director Edmund C. Moy voiced doubts about whether the Federal Reserve could buy the coin to TheStreet.com, which also noted that under the current system for initiating orders for coinage, the order might have to be placed by Fed Chair Ben Bernanke or one of the 12 Presidents of the regional Federal Reserve Banks. Former Director Diehl disagreed with Moy concerning a platinum bullion coin but agreed with Moy that a proof platinum coin would be a problem for the Fed. Diehl reiterated his view that "I certainly think [minting a trillion dollar coin] is inferior to raising or eliminating the [debt] limit but it's far better than defaulting and suffering the consequences of doing so."

See also

• Seigniorage
• Possible methods of bypassing the debt ceiling