A cohort of bloggers has been flogging
the idea that, to sidestep the legislative obstacles to increasing the debt
ceiling and operate the government and avoid default in the face of the ceiling,
the Secretary of the Treasury should cause the U.S. Mint to mint a
"trillion dollar coin" out of platinum (which I will refer to as a
"$1T Coin" for brevity's sake), the denomination being roughly equal
to the anticipated sum of net debt the Treasury would otherwise have issued to
fund the projected deficit over the next year.
The coin would not contain a trillion dollars worth of platinum at
market prices, which would require so many tons it is practically impossible,
but would simply have a platinum content and be assigned a nominal value by the
Secretary of "one trillion dollars"
on its face.
The Secretary is then to deposit the
coin in a bank -- necessarily one of the Federal Reserve Banks, as opposed to a
commercial or savings bank, because 1) no commercial bank could take such a
deposit without its capital ratios being driven to impermissibly low levels and
2) no commercial bank has enough disbursable money to honor checks and withdrawals
in the size contemplated. Then, having
created a deposit account of $1,000,000,000,000, write checks against it to
meet the obligations of the US over the course of the next year.
There are two versions of what happens then.
In one scenario, the Republicans recognize they have been outfoxed and drop
their opposition to the debt ceiling, at which point the Secretary returns to
issuing debt and, once a trillion dollars of proceeds have come in, redeems the
coin and directs the Mint to melt it down, restoring the status quo. In another, the Fed, concerned about the
inflationary impact of one trillion dollars of new money being injected into
the economy without an offsetting withdrawal of liquidity from the issuance of
new Treasuries, sells Treasuries from its own, recently expanded balance sheet
to effectuate the offset. The latter variation puts in place a remarkable role
reversal, in which the Fed takes over the Treasury's historical function of
selling Treasury debt to the markets and the Treasury takes over the Fed's historical
role as the creator of money. Equally
remarkably, it causes the Fed to perform a 180-degree pivot and switch from
deflation fighter to inflation fighter overnight,
The gist of the argument economically
is that the United States has a fiat currency and all money it creates has that
nominal value assigned by "the gubmint" so this is just a larger denomination
of an unquestioned principle: this is just what money is.
These blog posts give you some basic background on the idea, and the history of its dissemination and identify
its most breathless advocates in the blogosphere.
http://my.firedoglake.com/beowulf/2011/01/03/coin-seigniorage-and-the-irrelevance-of-the-debt-limit/
A good portion of the argument in favor
of the idea has been legal in nature, seeking to convince the reader that the
Treasury Secretary can do this as a legal matter. Having time on my hands and liking this
kind of outside the box proposition, I spent some time looking at the issue, although I
don't claim to be an expert in this topic, either before or after my study of
it. I conclude that
1) there are a variety of rules or
guidelines in statutory construction and there is at least a plausible "plain
language" argument that the Secretary can direct the Mint to mint a $1T
Coin;
2) the
Treasury Secretary's willingness to exercise such presumed authority is a
necessary but not sufficient
condition to the practical implementation of the gambit; the cooperation of the
Federal Reserve System is also required;
3) under the same "plain
language" approach to statutory interpretation that supports the Secretary
having power to create a $1T Coin, the Fed has a similar discretion not to
cooperate; it may conceivably be required to take the deposit but it is not
obligated to create the amount of money needed to turn the single coin into
usable denominations of money; and
4)
an overlooked provision of Federal law prohibits the Fed and Treasury
from collusion in monetizing the federal deficit, and should apply to this proposal as well.
1.
Under a plain language reading of the statutes on coinage prerogatives,
the Treasury Secretary is authorized to create platinum coins in whatever
denomination s/he deems appropriate. Section
5111(a)(1) plainly authorizes the Secretary to mint coins in amounts "necessary
to meet the needs of the United States.” 31
U.S.C. § 5112(k) in its entirety says
"The Secretary may mint and
issue platinum bullion coins 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."
Objections have been levied that the
creation of a $1T Coin was not plausibly intended by subsection (k), which, the
objectors say, was meant only to authorize commemorative coins in amounts too
small to impact the money supply or the fisc. Indeed, the bill that incorporated 5112(k),
Pub L 104-280, was mostly but not entirely focused on commemorative coins and
there is no evidence of any Congressional discussion about conferring unlimited
money-making power on the Treasury Secretary. Common sense suggests such a shift would have
engendered some discussion, so, along the lines of Sherlock Holmes's "the
dog that didn't bark", it is rational to read the statute in a less radical fashion.
The coin’s proponents have responded at length, and have managed to evoke an
endorsement of their interpretation from Professor Laurence Tribe at Harvard
Law School, who is indisputably one of the leading Constitutional scholars,
living or dead, although it must be note that the analysis does not
involve any Constitutional interpretation, but simple statutory construction,
and Tribe has elsewhere vigorously argued against literalism in interpretation (that's the main theme of his book
"The Invisible Constitution"). And elsewhere in this blog I have noted how Tribe's views have seemed to switch polarity depending on which party controls the law-making arms of government.
Although I think it flies in the face of common sense to argue that two houses of Congress intended to effect a fundamental and historic change to decades of Federal Reserve control over the monetary policy of the United States via a commemorative coin law without any public debate of the policy change, I won’t dwell on that arguments any
further as I have something different to offer on the topic.
Section 5111(b) says that the Treasury
has a “coinage profit fund”, which the Secretary shall credit
“with the amount by which the nominal value of the coins minted from the metal
exceeds the cost of the metal.” So, the “coinage profit fund” grows by a
trillion dollars less the cost of minting the $1T Coin. That cost would be very
small -- the coin would contain a small amount of platinum, not a trillion
dollars worth at market prices (if such an amount could even be mined and
smelted). So there would be a very large “coinage profit”or what economists call "seignorage". 5111(b) goes
on to say that “The Secretary shall deposit in the Treasury as miscellaneous
receipts excess amounts in the coinage profit fund.”. So the “coinage
profit fund” is just a bookkeeping entry; the Treasury now grows by $1T.
2.
Title 31 has nothing more to tell us about the next step in the
proposal, the deposit of the $1T Coin into an account of the Treasury at a
Federal Reserve bank. The Secretary has to do that because, the $1T is
made up of millions of smaller expenditures and the Secretary needs to be able
to write lots of checks and make lots of payments out of the $1T sum, all for
smaller sums than $1T.
The basics of the depository
relationship are promulgated in 12 U.S.C. § 391: “The moneys held in the general fund of
the Treasury … may, upon the direction of the Secretary of the Treasury, be
deposited in Federal reserve banks, which banks, when required by the Secretary
of the Treasury, shall act as fiscal agents of the United States; and the
revenues of the Government or any part thereof may be deposited in such banks,
and disbursements may be made by checks drawn against such deposits.”
Similar language, from the perspective
of the Federal Reserve Banks, appears in 12 U.S.C. § 342: “Any Federal Reserve
bank may receive from any of its member banks, or other depository
institutions, and from the Unites States, deposits of current funds in lawful
money…” Assuming the $1T Coin is lawful money, the Federal Reserve Banks
are clearly authorized to take it in deposit.
Some may note the repeated use of the
word “may” in each of these statutes, which posits some sort of discretion is
reserved to the actors involved. Is it the Secretary alone who has
discretion or do the Federal Reserve Banks as well? I think there are enough references to the
"direction of" and "required by" the Secretary to suggest
that the Federal Reserve Banks are
obligated to take the $1T Coin in deposit.
However, note that a semicolon separates the parts of 342 that contain those
phrases and the final text which refers to disbursements by check. The semicolon certainly quashes any
implication that the references to the Secretary directing and requiring the
Fed carry into the statement about honoring disbursements by check. (I'm not going to bother with case citations;
this is a blog post not a brief or law review article and there is enough law
on this kind of close reading of statutes that any trained lawyer knows the
statement I just made is as supportable as any legal argument in support of the
$1T Coin gambit).
3.
Since the creation of the Federal Reserve System in 1913, the creation
of money for purposes of circulation has been principally within the control of
the Fed. The physical currency that people have in their wallets or mattresses
and call "cash" is what Federal law refers to as Federal Reserve
notes. Given the denominations that have been used heretofore, the vast
bulk of money in circulation in the US is in the form of Federal Reserve notes,
not coins.
The process by which the Fed money is
creates money is too detailed for this post; for these purposes, only two
points needs to be understood: 1) The Fed, not the Treasury creates money
in the form of Federal Reserve notes, and 2) the Fed is indisputably intended
to be an independent decision-maker when it comes to creating money.
Title 12, Chapter 3, subchapter XII of
the US Code governs the creation of Federal Reserve Notes and makes these
points very clear: first, Section 411
provides: “Federal
reserve notes, to be issued at the discretion of the Board of Governors of the
Federal Reserve System for the purpose of making advances to Federal reserve
banks through the Federal reserve agents as hereinafter set forth and for no
other purpose, are authorized...."
Second, Section 412 defines the process
leading to any such issuance: “Any Federal Reserve bank may make application to the local
Federal Reserve agent for such amount of the Federal Reserve notes hereinbefore
provided for as it may require .…”
Finally,
Section 414 provides: “The Board of
Governors of the Federal Reserve System shall have the right, acting through
the Federal Reserve agent, to grant in whole or in part, or to reject
entirely the application of any Federal Reserve bank for Federal Reserve
notes….”
The
italics in those quotes are, of course, mine to show the discretion of the Fed
in creating money. But don't just note (1)
the discretion of the Board of Governors to reject any application from one of
the Federal Reserve Banks for the issuance of Federal Reserve Notes, or (2) the
discretion of the individual Federal Reserve Banks not to apply for $1T in
Federal Reserve Notes in the first place, but the complete absence of the Treasury from the process. The Treasury
has no power to compel any Federal Reserve Bank to create Federal Reserve
notes, and thus no power to break the $1T coin into smaller, usable amounts
over the objection of the Fed. It may have a deposit at a Federal Reserve
Bank in the amount of $1T but it has no power to make that bank issue money in
smaller amounts on account thereof. The deposit of the $1T Coin and the
transformation of that sum into $1T of usable denominations are legally two
different things and the latter is completely controlled by the Fed, beyond
Treasury’s fiat.
4. The last sentence of 12 U.S.C. § 355(1)
provides a clear statement of policy prohibiting the Fed from monetizing
Federal debts except through open market purchases. Section 355 lists the “Powers and Duties of
Federal Reserve Banks”. The last sentence of 355(1) however contains a
limitation on one type of transaction:
"Notwithstanding
any other provision of this chapter, any bonds, notes, or other obligations
which are direct obligations of the United States or which are fully guaranteed
by the United States as to principal and interest may be bought and sold
without regard to maturities but only in the open market."
That prohibits non-open market transactions
between the Fed and a counterparty in obligations of the US. That counterparty
could be a member bank, getting a sweetheart price, but it equally bans the Fed from buying new Treasuries directly
from the government. Treasury and the
Fed are not allowed to get together and collusively monetize Federal debt, each
of them has to go to the capital markets and take market prices. This is
an important form of discipline on them both and on the ability of the
political branches to control the Fed and the money supply for political
purposes.
While
the $1T Coin is not itself a Treasury instrument, it is obviously the
functional substitute for one in this context. This is one of the basic tenets of monetary
theory regarding a fiat currency -- the sovereign's currency is just the same
as a demand note on the sovereign. There
is no basis to distinguish between a coin issued by the Treasury denominated in
X dollars and a demand note issued by the Treasury in the same amount. In a fiat currency, they are identical.
If there were no debt ceiling, Treasury would raise cash
to deposit in its accounts at a Federal Reserve Bank by issuing debt
instruments at market prices. In the proposal, it simply substitutes the
$1T coin for the Treasury issuance as a matter of form, then goes to the Fed --
with something for which there is no evidence of any market price, of any
transaction with any third party – and says “this is worth $1T”. It’s
completely collusive if the Fed accepts that at face value and functionally and
substantively what the last section of section 355 is meant to prohibit.
******
Why
should the Fed say no? I will offer two reasons, one institutional, the
other economic.
Institutionally,
the Fed has historically presented itself as independent of the political
branches in the management of the money supply. Such a perception is
considered vital to a sound currency, i.e.,
one that retains its purchasing power reasonably well against other currencies
and against domestic assets and liabilities, and a sound currency is generally
considered vital to a sound economy. There are ample instances throughout
history of a currency controlled by the sovereign being debased for political
ends, and high inflation and economic peril resulting shortly thereupon. Keynes
wrote in "The Economic Consequences of the Peace" that "Lenin was
surely right. There is no subtler, no surer means of overturning the existing
basis of society than to debauch the currency". And, proving the accuracy of Keynes's
statement, within a decade after he wrote that, Germany had its hyper-inflation
and the Nazis began their rise.
By
cooperating with the $1T Coin strategy, the Fed would be surrendering its
institutional independence concerning the creation of money to Treasury (and,
given that Treasury Secretaries serve at the will of the President, to the
President). In succeeding years, President Obama and his Treasury
Secretary could repeat the practice; succeeding administrations could do so as
well. There is no reason future resorts to the gambit would be limited to just
the amount necessary to cover a deficit; it could be used in any amount. (Already, one of the blogger proponents on firedoglake says $1T is "small ball" and the coin should be $16T, the size of all federal debt, or even $100T). The Fed’s role in creating money would be reduced to a largely mechanical,
passive, subordinate agent of the executive branch, like a dog waiting for its
master to come and take it for a walk on a leash. One would expect the
individuals who would make the decision to cooperate or not to feel strongly
about this radical diminution of the role of their institution.
Economically,
look at two things: the money supply and the Fed balance sheet. There are
several competing and overlapping concepts of what a nation’s “money supply“
is. For this purpose, I will refer to the “monetary base” of the United States,
which the St Louis Fed tells us “is the sum of
currency (including coin) in circulation outside Federal Reserve Banks and the
U.S. Treasury, plus deposits held by depository institutions at Federal Reserve
Banks” and with a reasonable degree of accuracy captures the money everyone in
the economy owns at a given time; presently it’s approximately $2.6T, according
again to the St Louis Fed. So the injection of $1T in new money into the
economy through Treasury spending over the course of the year, without some
action to offset that, would increase the monetary base by about 38%, which is
a dramatic increase likely to produce inflation in some amount.
Now the response to this is obvious: It
doesn’t go into the monetary base and the economy all at once, but only as it
is disbursed over a year and Treasury is supposed to disburse that money over
the year anyway, because it’s Federal spending in the normal course, so it’s
not per se inflationary. It’s just a question of how you manage its injection
over the course of the year and what steps you take to withdraw a more or less
comparable amount of money from the economy over the same time; and, since the
supply of new Treasuries will be far below the demand that is customarily
present, the Fed can sell old Treasuries from its balance sheet to meet that
demand and you wind up in the same place.
So we turn to the Fed’s balance sheet
to see how this is so.
The
Fed published its consolidated balance sheet weekly and you can see the latest
one at Item 8 on this webpage. It shows the Fed has $2.9T in total
assets, of which $1.68T are Treasuries. So it is true – for one year and some portion of a second – that the Fed could offset the monetization of
the $1T Coin. But the strategy would either become outright
inflationary in the second year or have to be abandoned, with the political
process reverting to the standoff / technical default risk that exists
today. However, I think it is reasonable to predict that, as the market
realized the Fed’s supply of Treasuries would be exhausted in the second year,
rates would rise and the value of Treasuries would fall on account of the
expectations of either default from an end to the gambit or inflation on
account of continued use of the gambit without any means to offset the
monetization of the deficit.
So
based on these reasons, I think the Fed would have a sound basis to decline to
cooperate with Treasury in the $1T Coin gambit. The Fed would say in
effect, it can’t work for more than a year; we’ll all be back here in a worse
position; we’re not going to compromise our independence and if we did it would
have detrimental long term effects on the soundness of our currency; and we are
legally within our rights to decline to do so and in deed we may be prohibited
from doing this.
I
am inclined to think a sensible administration would take this into account and
not go down such a road in the first place, notwithstanding the way its allies
in the blogosphere are pounding the drum for it.
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