Coin Seigniorage: A Legal Alternative and Maybe the President's Duty

[girl gone mad]

From http://neweconomicperspectives.blogspot.com/2011/07/coin-seigniorage-legal-alternative-and.html">New Economic Perspectives:

Well, the debt limit crisis is upon us. Treasury Secretary Geithner says the US Government will not be able to meet all its obligations on August 3, unless the debt ceiling is increased by Congress. The Secretary says he is out of moves to extend this date. I don't think that's true. I think he can use proof platinum coin seigniorage to supply all the money needed to spend Congressional Appropriations. I do not know if the Administration knows about this idea yet. It may, and it may simply have been unwilling to mention it for its own reasons. But just in case it doesn't know, and also for the sake of the rest of us, I'm making another attempt to state the case for using coin seigniorage, so that as many people as possible know that the President has an alternative to the “shock doctrine,” make a deal approach to cutting essential spending and services including the social safety net, in return for getting $2.6 Trillion more in debt issuance authority.

The idea of using coin seigniorage to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf. He first presented the idea in comments and then posted http://my.firedoglake.com/beowulf/2011/01/03/coin-seigniorage-and-the-irrelevance-of-the-debt-limit/">the seminal blog on coin seigniorage.

(snip)

Congress http://www.law.cornell.edu/uscode/31/usc_sec_31_00005112----000-.html">provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint's costs in producing the coins and the credit provided by the Fed is the US Mint's profit. http://www.law.cornell.edu/uscode/31/usc_sec_31_00005136----000-.html">The US code also provides for the Treasury to periodically “sweep” the Mint's account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, could close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

To the inevitable complaint that coin seignorage is “monetization” (thus will cause inflation):

Here's how coin seignorage works: Legal tender, money, in the form of http://www.coinnews.net/2007/09/14/proof-coins-what-are-they-what-should-you-know-about-them-3572">proof platinum coins, not legally viewed as debt, is being exchanged for USD credits in the US Mint's Public Enterprise Fund account. The money goes into the Fed vaults, the USD credits go into the Mint's account. The profits from seigniorage go into the TGA. This is an asset swap, between the Fed and the US Mint, of money in the form of a coin, for money in the form of bank reserves. Both sides of the swap are money; so there is no “monetization of debt” involved.

[lumberjack_jeff]

1. K&R. Given the choice between the possibility of inflation maybe, and default, I pick the former.

[WhiteTara]

2. K & R and Calling Rachel Maddow or Keith Olbermann!

Clean up on Aisle 3!

[dixiegrrrrl]

3. Since the Fed ( the banks) make a fortune from selling us our money back,

why would they want to buy into this idea?

[girl gone mad]

7. By law, the Fed would be required..

to credit the Mint's Public Enterprise Fund account at the coins' face value.

[formercia]

4. Why Platinum, when Toilet Tissue would work just as well.

No point in casting Pearls after Swine.

[SlipperySlope]

6. Because the treasury does not have the authority to mint toilet paper.

Toilet paper is not a serious proposal. The treasury has no authority to "mint" coins out of anything other than the metals that Congress has authorized.

Congress has authorized the Treasury to mint platinum coins and set the face value however it sees fit. That makes this option unique. Almost every other authorized coin has its face value defined by congress.

[SlipperySlope]

5. Unlike the 14th, this idea will work. I would argue that it is Obama's duty.

I absolutely hated that stupid "14th amendment" plan that was going around. The whole proposal fell apart with just the slightest inspection.

This plan, however, I've ran through several times. Quite simply, the treasury has the authority to mint these coins and pocket the seigniorage. As long as the Administration has a legal option like this to pay the bills, I would argue they are required to follow through.

[girl gone mad]

8. Yes, it looks ironclad.

Some of the mainstream economic commentators have finally begun to take notice.

The President can choose to ignore this option, but he cannot then claim that his hands were tied. If he opts for a monetarily net destructive plan, that will have been his choice.

[Fool Count]

11. In fact, the very existence of this option invalidates

all by itself the "14th amendment" argument. It provides a clear way to keep honoring all prior debts without having to borrow more money.
So it shoots the argument for constitutionality of extra-congressional debt limit increase by the President straight out of the water.

[baldguy]

9. Canada did it.

[girl gone mad]

10. That's a beautiful coin.