Mark Kleiman calls Coin Seigniorage a “phony solution” to a “phony problem”
On Wednesday 7/20, Mark Kleiman posted a very lucid article entitled “Phony problem, phony solution” on his blog, The Reality-Based Community:
Fortunately, the Debt Ceiling is not the only stupid law the Congress has passed. It turns out that, back in 1996, the platinum lobby managed to get the following section written into law:
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.
Now, arguably a “bullion coin” is distinct from a “fiat coin” in that its face value is supposed to reflect its precious-metal content. But the law doesn’t say that.
So what if the Mint produces three platinum coins with face values of $1 trillion each? … The Treasury deposits the coins with the Fed; they’re legal tender, so the Fed exchanges them for $3T of Treasury bonds now in its reserves. And the coins are not debt: they’re money. … Problem solved.
Of course … If we print too many dollars, their value compared to other currencies will fall. So eventually public services need to be supported with revenues rather than printing presses. But it can solve the imaginary problem of hitting the debt ceiling.
Is it legal? Arguably, it would be illegal not to do it. The President is bound by the Constitution and his oath of office to “take care that the laws be faithfully executed.” Appropriations bills are laws; he’s not allowed to impound appropriated funds, but must expend them. If the debt ceiling isn’t raised – won’t have the cash to do so unless he issues the trillion-dollar coins. And if that’s the only way to carry out his Constitutional duties, then he is not just allowed, but required, to do precisely that.
In practical terms, this would be identical to repealing the debt ceiling, so it’s hard to see why the financial markets would have a problem with it; after all, no one but a few gold bugs minds the fact that the government can convert a few cents’ worth of paper and ink into $100 by stamping on it “Legal Tender for All Debts, Public and Private.” (The sensible approach of printing bills is foreclosed because bill issue is also limited by law.)
Mark is a professor of public policy at UCLA, and his article links to another excellent article on coin seigniorage by Jack Balkin, a law professor at Yale.
I like Mark’s article but want to put some context around his claim that this solution is “phony.”
Per the U.S. Constitution (Article I, section 9, clause 7) states that “[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law …” Ultimately, money is drawn from the Treasury’s account at the Federal Reserve via the checks that the Treasury issues to settle the government’s accounts payable. Note, however, that an appropriation is permission to withdraw money from the Treasury’s account; it does not put money into that account. Rather, the Treasury deposits U.S. taxes into that account and makes up any shortfall by borrowing, i.e., selling bonds at auction and depositing the receipts into that account.
There is a myth among economists that the Treasury or the Fed has a (possibly virtual) printing press that can generate an unlimited number of large-denomination bills and deposit them into the Treasury’s account at the Fed. In such a case, the Treasury could avoid the printing and sale of bonds, the expense of paying interest on them, and most importantly (now) the debt limit. But, unfortunately, (1) the amount of currency in circulation is limited by law to $300B, and (2) so far as I can tell, the Fed does not have authority to gratuitously credit the Treasury’s account. .
The Treasury does, however, own the Mint and, as Mark explained, it can mint arbitrarily large coins and deposit them into its account to make up for taxation shortfalls. Yes, we need to worry about inflation but that’s a longer term and very concrete problem, not a bullshit problem like “We need to get our fiscal house in order.” It’s a measurable problem, whose consequences are very easy to predict and explain. It’s a real problem, not a phony one.
Also, the MMT folks make a very good case that in terms of inflation it makes no significant difference whether the Treasury gets credit into its account at the Fed by minting coins or by printing and selling bonds. The cash-for-bonds swap neither increases nor decreases the private wealth, and there is a highly efficient bond market that facilitates the transfer of wealth from one form to the other.
So, in short, coin seigniorage gives the Treasury a capability that most economists seem to think it already has, but doesn’t. And that capability not only makes the debt-limit crisis go away, it gets rid of the need to pay interest on unnecessary borrowing.
That said, phoniness is an asethetic judgement that I will not dispute.