Monetary Realism

Understanding The Modern Monetary System…

Did the Fed have a legal basis for rejecting the Coin? (updated)

12 USC § 246Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

John Carney reported yesterday that it was the Federal Reserve that vetoed the trillion dollar coin. Tsy and WH statements announcing a joint decision apparently were face-saving exercises. Its a fascinating decision, and even if we don’t dive into the unitary executive constitutional issue (Article II vests the executive power in a president of the United States of America, the Fed’s independence is predicated on ignoring this fact), there doesn’t appear to be any legal basis for it.

Riddle me this, how come the Fed can be required to take dollar coins that banks haven’t ordered but cannot be required to take other denomination coins banks haven’t ordered?

$1 Billion That Nobody Wants

NPR June 28, 2011 – Politicians in Washington hardly let a few minutes go by without mentioning how broke the government is. So, it’s a little surprising that they’ve created a stash of more than $1 billion that almost no one wants.
Unused dollar coins have been quietly piling up in Federal Reserve vaults in breathtaking numbers, thanks to a government program that has required their production since 2007.
And even though the neglected mountain of money recently grew past the $1 billion mark, the U.S. Mint will keep making more and more of the coins under a congressional mandate.

They’re referring to a presidential dollar coin statute sponsored by Philip’s old buddy Mike Castle. My point is whatever legal authority Congress had to mint Castle’s “circulating and numismatic”* dollar coins was delegated to the Tsy Secretary’s discretion for platinum coins. So if Tsy can put a billion unwanted $1 dollar coins to the Fed then why can’t Tsy likewise put an unwanted $1 billion platinum coin to the Fed?

Whatever power Congress has to set dollar coin output is delegated to the Secretary to set platinum coin output. Remember, discretion to “mint and issue” platinum isn’t just for denomination and design but quantity as well.
(31 USC 5112(k))
Remember too, Congress also said the Secretary “shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States”.
(31 USC 5111(a)(1))
If the Fed thinks the Secretary exercising these powers would be compatible with its own powers, well, all’s right in the forest. And if the Fed thinks it would create a conflict with its own powers…. that’s even better. See statute at the top of this page. The “chapter” it refers to is 12 USC Chapter 3 – Federal Reserve System. There is no authority in the Federal Reserve Act nor anywhere else in the US Code for the Federal Reserve to override a decision by the Secretary of the Treasury to mint and issue coins necessary to meet the needs of the United States.
I think the President of the United States just got bluffed by a bunch of eggheads. I suppose it’ll be a good warmup for caving to Mitch McConnell again. :o)

UPDATE: OK this is hilarious. Fed banks were required to order those $1 coins because of Mike Castle’s Presidential $1 Coin Act which required Fed banks to, “make quantities of each new design [4 a year] available to depository institutions in unmixed quantities during an introductory period. This requirement caused the Reserve Banks to place orders for each new design with the United States Mint, which in turn based production on these orders.” OK, so this congressional mandate is the reason the Fed was required to order and hold $1 billion (actually closer to $1.4B) in $1 coins in excess of demand. However at the end of 2011 Treasury suspended this congressional mandate because the Fed already had a decade’s worth of $1 coins stored in its vaults (no doubt the Fed egged Tsy on in this action). Here’s the funny part, would you like to guess how Tsy justified suspending the mandate to put $1 coins to the Fed? Let’s quote the press release, “Under existing law, the Secretary of the Treasury has the authority to “mint and issue coins . . . in amounts the Secretary decides are necessary to meet the needs of the United States.” My point exactly!
If Castle’s $1 Coin Act congressional mandate can override the Fed’s coin ordering discretion and then the Secretary’s Sect. 5111 authority can override the $1 Coin Act mandate, clearly the Secretary can use his Sect. 5111 “needs of the United States” authority to override the Fed’s coin ordering discretion. Now personally I’m dubious his authority is quite as broad as Tsy thinks it is (Geithner overrided an Act of Congress?!?), but that’s easy for me to say. On the other hand, neither the Fed nor Tsy can argue for a narrow reading of 5111 without admitting they’ve been in violation of the law since 2011 by failing to comply (or enforce) the $1 Coin Act mandate. So we’ll just let sleeping dogs lie and assume the Secretary’s authority IS that broad. :o)


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256 Responses

  1. Tom Hickey says

    Joe, I encourage you to deep pushing on the big one. No reason for there not to be many proposals on the table, from very incremental to the big one.

    Where I see a potential problem arising in going to no-bonds is the wrench that will throw into the gears of financial markets, which have come to depend on safe assets and benchmark yields. Of course, they could be forced to change, but that creates an obstacle that I think is needless.

    Treasury could still issue iaw demand securities at par wo/ interest and let the yield be determined at auction through discount from par if justification in terms of public purpose is found for the subsidy, or just at par wi no discount as a way for those not having access to reserve accounts to hold govt liabilities as assets rather than deposit accounts unless the account were fully insured by govt. Govt could also expand its E/EE bond program for “retail” savers.

    In other words, there are workarounds instead of going to no-bonds cold turkey and getting a mountain of pushback.

  2. Joe Firestone (LetsGetitDone) says

    Unless you think that the authority to create that buffer stock might be removed before you had a chance to use it!

  3. Joe Firestone (LetsGetitDone) says

    Phil, I’m focusing on a scenario that is unlikely to happen, because I want it to happen, and think it ought to happen. How else can I increase the likelihood of its happening if I don’t blog about it. When I first started mentioning PCS in in November of 2010, and wrote my first blog post focused primarily on it January of 2011 there seemed little likelihood that it would ever break the mainstream barrier; but it did get there in July 2011, and again in December of 2012 – January 2013. I think I had some influence on that.

    Now I’m in the same position with respect to the $60 T coin. I think the following is true. It takes the decision of only one person to ram this through, so our assessments of likelihood have to be based on his capacity to think outside the box and how that capacity is likely to interact with the situations he’s likely to encounter. I think he’s got some tough situations coming up, and also that he can think outside of the box. So, I think there’s some likelihood he may embrace this.

  4. Joe Firestone (LetsGetitDone) says

    Sorry, Katie. Expand in what direction? Have you a more specific question?

  5. Clonal Antibody says

    Exactly my point. So France could well have been the stalking horse. After all, Nixon did end the Vietnam War after signing the “Paris Peace Accords” – could not have been done without French help!