Ramanan brought to my attention an assertion (by VJK) that the Secretary of the Treasury’s open-ended power to mint platinum jumbo coins doesn’t mean they can deposited with the Federal Reserve, which typically buys coins from the Mint at face value. While looking up the FDIC regulations to prove otherwise, I came across an interesting (if, not surprisingly, inaccurate) comment by Peter Schiff a few days ago:
When the banks fail as a result of higher interest rates, the FDIC will also go bankrupt. Without access to credit, the US Treasury will not be able to bail out the insurance fund – which only contains $9.2 billion as of this writing. So, not only will shareholders and bondholders lose their money next time, but so too will depositors!
VJK argued that because platinum coins are defined as numismatic coins and not circulating coins (such as nickels, dimes, etc.) that means they can only be purchased by collectors (at metal price plus markup) and not the Fed (at face value). This isn’t quite accurate. Remembering that all US Coins are legal tender, he’s thinking about our current stock of numismatic coins where face value is invariably a fraction of metal cost ($50 gold coins, say, or $100 platinum coins). However, if the Min issues a numismatic coin whose face value exceeds metal cost ($1 trillion or any other sum the Secretary wishes) then its a numismatic coin that can circulate– it can be deposited, and thus bought, by the Fed at face value. To cite Regulation D:
(k)(1) Vault cash means United States currency and coin owned and booked as an asset by a depository institution that may, at any time, be used to satisfy claims of that depository institution’s depositors…
(k(4) Silver and gold coin and other currency and coin whose numismatic or bullion value is substantially in excess of face value is not vault cash for purposes of this part.
As General Butler would say, “There is inclusio unius exclusio alterius for the gentleman” (including one thing excludes the other). Since the jumbo coin’s numismatic or bullion value would be LESS than its face value, it would be “vault cash for purposes of this part”.
As an aside, when he wasn’t emancipating slaves or whatnot, Benjamin Butler was quite the monetary reformer. After the above quote, THE VERY NEXT LINE is, “The common idea is that there will be inflation when you issue paper money. It is drawn from the old idea of bank circulation”.
But I digress.
Now, as it happens, Congress has authorized the FDIC to sell its Agency debt (which, of course, the Fed can scoop up from primary dealers) up to “the amount of cash or the equivalent of cash held by the Deposit Insurance Fund”. What’s more, Congress has also authorized the Secretary of the Treasury to designate the FDIC as a “depositary of public moneys”. Combined with the above definition of “vault cash”, this means, though the heavens may fall, the FDIC can never run out of money since the Secretary can create (and then deposit) vault cash without limit. I’m sorry to disappoint Peter Schiff, but FDIC-insured depositors will always be paid.