Econintersect: A proposal to remove the problem of government spending adding to the mounting national debt by issuing a platinum coin of large nominal value (say $1 trillion) and depositing it in the government account at the Federal Reserve is gaining traction in some circles. A petition is being prepared to present to the White House and some Congressmen are talking seriously about it. Articles are appearing in main stream media, such as Bloomberg and The New York Times (although Paul Krugman does express reservations).
While some are treating seriously the idea of solving the artificially created debt ceiling problem with the creation of debt free money, other are treating it as a joke. The Huffington Post called it a "magic coin." Capital New York called it a "trick." Bankers are likely cheering those deriding the idea; creation of debt free money is bad for the banking business. It removes the federal government as a nurse cow for the suckling bankers.
Most Americans likely don't know how the money in the country is created. Econintersect would hazard a guess that more than half (and likely way more than half) would say the government creates the money. Americans would be surprised to learn that most of the money actually exists only as bank credits created when the banks make loans. The U.S. government mints the coins in circulation but hasn't printed any paper money for more than 30 years, and hasn't printed significant amounts of paper money since the 19th century.
So if the government is widely believed to print money why would Americans consider the trillion dollar coin issuance a trick, a magic coin or a joke? Because that is what media personages are telling them.
Actually the creation of coinage is prescribed as a government function by the U.S. Constitution and the act of platinum coin seigniorage is authorized under an 1996 law. The law was intended to authorize the issuance of commemorative coins the value of which would be whatever the Treasury declared them to be.
For more than two years monetarists have been discussing the use of platinum coin seigniorage as a way to create debt-free money. The act of minting such coins and depositing them with the Federal reserve would have no impact whatsoever on the amount of money in circulation. It would have no impact in any way on inflation.
Why no inflation?
None of the money represented by the coin could be spent until appropriations were passed by Congress and signed by the President. If the Congress were to appropriate expenditures that were more than was needed to run the economy inflation could (probably would) become a problem. That condition would occur only when the economy was operating a or near full potential and there was full or nearly full employment. No one thinks those conditions are anywhere near realization now.
Kevin Drum at Mother Jones says the issuance of a trillion dollar coin would not pass muster if subjected to a court challenge. But he concludes by saying that he is not a lawyer and
"...if someone with actual legal training in the appropriate area of the law says I'm wrong, then I guess I'm wrong."
Econintersect would suggest that if such a court challenge were to occur an even stronger counter suit would be to declare unconstitutional an act of Congress that would enable them to forbid payment for items they had approved appropriations for. That is exactly what the Debt Ceiling Act is - an opportunity to spend money and then refuse to pay the bill.
- Looking to the next debt-ceiling fight, Nadler proposes a trillion-dollar coin trick (Reid Pillant, Capital New York)
- Can We Avert The Coming Debt Ceiling Crisis With A Magic Coin? (Jason Linkins and Zach Carter, The Huffington Post)
- Debt in a Time of Zero (Paul Krugman, The New York Times)
- Why We Must Go Off the Platinum Coin Cliff (Joseph Barro, Bloomberg)