Fun with platinum coins, FDIC edition

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!



Scary stuff, but this actually ties into VJK equally… interesting point (To be fair VJK wrote at the above link last year, he may hold a different view today).

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.

Comments
  • Ramanan March 19, 2012 at 5:29 pm

    Beowulf,

    Some questions.

    Is it true that the platinum coin is numismatic? Any law which says that or otherwise/opposite?

    It is stated that if the Fed buys a numismatic from the Treasury or the Mint, it has to be recorded at the face value? As in, does it buy it at face value or bullion value?

    I guess in your post you are saying that while the relevant coin is not categorized as vault cash, it does not mean x…y…z…

    • beowulf March 19, 2012 at 6:52 pm

      No my point was jumbo coins would indeed be vault cash.

      Circulating coins are the pennies, nickels, dimes, quarters (plus half-dollar and dollar coins, but you don’t see those too often) we carry in our pockets. Numismatic coins are precious metal coins typically sold to collectors.

      But its a blurry line because the Mint also sells circulating coins to collectors and, as I’ve mentioned above, all US Coins are legal tender at their face value (which is set by Congress or the Secretary, not metal market prices) so numismatic coins are indeed fiat money.
      Under Regulation D, the jumbo coin (face value > metal value) would count as vault cash since what it declares not vault cash is the opposite case (metal value > face value). Banks could certainly accept numismatic coins in that circumstance, say, 1 oz $50 gold coins whose metal value is over $1600, I imagine most would steer the customer towards putting it in a safe deposit box.

  • Ramanan March 19, 2012 at 5:30 pm

    As in I had earlier assumed that it buys the $1T coin (if required) at $1T.

    • beowulf March 19, 2012 at 6:57 pm

      That’s correct. Coins are legal tender for no more or less than their face value.
      Of course, the Mint may a license to print money but they’re not stupid about it. If the metal is worth more than face value, they’ll markup the sales price over and above market price.. If face value is worth more than the metal (a dollar coin costs, last I read, 12 cents to mint) they simply charge you face value– and sometimes even throw in free postage– since the seigniorage is their markup.