Monetary Realism

Understanding The Modern Monetary System…

Obama Will be Forced to Issue the Coin

Felix Salmon has an excellent post up today about how Obama won’t issue the coin (h/t reader Kris Smith):

 “There’s a reason why the proponents of the platinum-coin approach are generally economists, or at least economically-minded. The idea makes gloriously elegant economic sense, and attempts to shoot it down on economic grounds generally fail miserably. You can try a legal tack instead, but that doesn’t work much better: the coin is as logically robust as it is Constitutionally stupid.

No one in the executive branch has any real desire to mint a trillion-dollar coin — you can be sure of that. But the coin-minting advocates are OK with that: they just want to use the threat of the coin to persuade Congress that it should just go ahead and allow Treasury to pay for all the spending that Congress has, after all, already mandated. As a result, while no one intends to actually mint a coin, any statement to that effect would constitute unilateral disarmament in the war between the executive and the legislature.”

But this thinking runs counter to what the Secretary of the Treasury will be forced to do. Obama doesn’t have any legal standing to avoid using the coin, especially now that he knows about the coin. Here is beowulf on how the Treasury must act:

“…the Secretary has no legal discretion in this matter whatsoever. His path is laid out by Congress like he’s the mechanical rabbit at a dog race. 

  1. Congress tells the Secretary (as supervisor of the IRS) how much to collect in tax receipts and (with somewhat less effort) in miscellaneous receipts.
  2. Congress tells the Secretary as signatory of every single appropriation warrant how much money to transfer to federal agency sub-accounts (called “appropriation symbols” for some obscure reason).
  3. Congress tells the Secretary he MAY borrow on the credit of the United State to fund expenditures but not for one penny more than the debt ceiling.
  4. Congress tells the Secretary he SHALL mint coins such coins as he decides are necessary to meet the needs of the United States.

When Congress orders the Secretary to spend appropriations in excess of the receipts they’ve ordered him to collect, the unavoidable budget deficit must be filled by the combination of the Secretary’s powers to borrow (debt limit-constrained) money and to mint (debt-free) money. If Congress refuses to increase receipts or cut appropriations or extend the debt limit, the Secretary has only one and only one path to comply with all of his legal duties. Maybe I’m naive, but I’m confident the path to salvation will never be ruled unconstitutional by any United States Court. [Bold Mine]

Wow! That’s interesting. The legal path gets even tighter because of John Roberts, and his ruling on Obamacare. In this Justice Roberts lays out if a law has more than one possible meaning, the Court must choose the meaning which follows the Constitution:

Chief Justice Roberts wrote that if there two possible meanings of a law— one path constitutional and the other unconstitutional, the court must pick the meaning that prevents a breach of the Constitution. I’d extend the point to when there’s two possible meanings of a combination of laws (after all, Obamacare itself is actually a combination of two separate Acts of Congress), the Court must choose the path of salvation. To coin a term, we can call this the razor’s edge doctrine.

“The text of a statute can sometimes have more than one possible meaning. To take a familiar example, a law that reads “no vehicles in the park” might, or might not, ban bicycles in the park. And it is well established that if a statute has two possible meanings, one of which violates the Constitution, courts should adopt the meaning that does not do so. Justice Story said that 180 years ago: “No court ought, unless the terms of an act rendered it unavoidable, to give a construction to it which should involve a violation, however unintentional, of the constitution.” Parsons v. Bedford, 3 Pet. 433, 448-449, 7 L.Ed. 732 (1830). Justice Holmes made the same point a century later: “[T]he rule is settled that as between two possible interpretations of a statute, by one of which it would be unconstitutional and by the other valid, our plain duty is to adopt that which will save the Act.” Blodgett v. Holden, 275 U.S. 142, 148, 48 S.Ct. 105, 72 L.Ed. 206 (1927) (concurring opinion).”

Taking these two into account, the path for the Secretary of Treasury is crystal clear – he must mint the coin to fulfill his legal duties under the law. The court must rule these actions constitutional.

So while Felix might not want the coin to be minted, and heck – I have some reservations about the coin myself – it appears we are compelled to issue the coin.



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281 Responses

  1. inside Sales says

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  2. Philip Diehl says

    Fed Up January 12, 2013 at 3:15 pm
    “The economy seems to be set up so all NEW medium of exchange (MOE) & medium of account (MOA) have to be “borrowed” into existence using the hedge fund/banking model. Why???

    Nathanael January 13, 2013 at 10:50 pm
    “In order to give money to evil bank CEOs. Seriously, that’s the purpose. Look up the history.”

    Fed Up and Nathanael,

    Here’s an interesting fact I ran across yesterday re the historical use of coinage to weaken the grip of the banks: after a 32 year hiatus in the Mint’s production of dollar coins, Andrew Jackson, who vowed and tried to crush the corrupt banks of the era, called for the Mint to resume producing a silver dollar which it did in 1836. In doing so, he was attempting to self-fund the government as an alternative to paying interest to his political enemies.

    That coin, the Gobrecht dollar, is particularly significant for our purposes in that it was struck, as I understand, as a CIRCULATING PROOF coin. Thus, the Gobrecht dollar provides a precedent that the reference in the platinum coin law to “proof” coins cannot be read as requiring a TDC to be treated exclusively as a numismatic coin (i.e., sold outside the usual Fed-to-bank distribution channel) but could alternatively be treated as a circulating coin and therefore be ordered and shipped to the Fed as if it were a quarter.

  3. Philip Diehl says

    I’m already pretty certain the answer to 1) is yes and the answer to 2) is no. But re 2), the answer doesn’t really matter. A Treasury Secretary is about 100% certain not to try to force a Fed chairman to accept a TDC. The TDC will only happen if the WH, Treasury and Fed come to an agreement to make it happen. The only other way is for Congress to pass legislation to mandate it, which is highly unlikely, even with a solid Dem majority in the House, considering the supermajority requirement in the Senate. .

    However, there are circumstances where we could have another shot at putting the TDC in the policy discussion. One is when the debt ceiling crisis comes up, maybe during the summer before the 2014 elections.

    The second opportunity is when economic growth in the EU, Japan, and BRIC countries accelerates. Investors who fled to the safe haven of US Treasuries will begin to take their money elsewhere causing the carrying cost of the debt to rise rapidly. This will set up another fight over the debt as it devours more of the budget.

    So, the question will be more cuts, higher taxes, more debt or, as a way out of the cycle of austerity, tax hikes and rising debt, the TDC.

  4. beowulf says

    That looks good Philip. Nothing there I would think to change.

    I think the two big legal questions coming out of this (and I know they’d come later in your paper) is 1. Could the Fed accept the TDC? and 2. Could Tsy (or the WH) order the Fed to accept the TDC?

    Since we’re headed to default and because America loves a scapegoat, If the answer is yes to 1 and no to 2, the villain is Chairman Bernanke. If the answer is yes to 1 and yes to 2, the villain is President Obama.
    If the answer is no to 1 (and necessarily 2), the villain is still Obama, but with less justification. :o)

  5. beowulf says

    Simply making the point that numismatic coin deposits are something Fed has considered within the realm of the possible enough that they mention it in Regulation D, its not something completely from outer space.

  6. Philip Diehl says

    I’ve written the opening section of an article re the legal foundations of the TDC. It provides background on the proposal and sets the stage for considering the legal questions. Obviously, you know the history of the TDC concept better than anyone. Would you mind taking a look at this and giving me any comments that come to mind? Thanks.
    The Statutory Foundation of the Trillion Dollar Platinum Coin

    In early January 2013, a proposal to mint a trillion dollar coin (TDC) drew intense and widespread media attention. The TDC was proposed as a means to enable the Treasury Department to continue paying the government’s bills if Congress failed to increase the debt limit before the limit was reached.

    The proposal had circulated and been refined over two years within a small group of monetary policy wonks and had briefly receive modest attention during the debt limit crisis of 2011.

    By January 1, 2013, Treasury had reached the debt limit and began taking extraordinary measures to avoid default. At the time, estimates were that these measures would provide another six to twelve weeks before the government began to default on its obligations or make extraordinary cuts in entitlement, defense, and discretionary spending.

    As they had during the 2011 debt limit crisis, many Republicans in Congress threatened to block legislation that would raise the debt limit unless the President and congressional Democrats agreed to large cuts in government spending. Since the Republican were largely opposed to cuts in defense spending, the cuts they proposed were in entitlement and domestic discretionary spending.

    Thus, the TDC proposal arose as a way to allow Treasury to continue paying the bills while avoiding both default and drastic cuts in spending without unilaterally raising the debt ceiling or encroaching on congressional authority over the debt limit. The proposal also posed no threat to the “power of the purse” granted to Congress in the Constitution in that it enabled Treasury to pay only the bills related to expenditures Congress had previously appropriated and did not provide authority to spend that had not been appropriated by Congress.

    In other words, in the event Congress failed to raise the debt limit, the TDC would allow Treasury to pay the bills for expenditures Congress had already approved but had denied Treasury the authority to pay. In other words, the TDC was proposed as a way to cut the Gordian Knot Congress had tied itself, and the nation, into.

    In the meantime, the TDC proponents had staged the proposal in anticipation of the 2013 debt limit redux, and in early January 2013, the proposal became the focus of a media frenzy. On January 12th, the frenzy ended with statements by the Treasury and the White House that the administration would not use the TDC to counter GOP threats to take the country into default.

    The discussion surrounding the TDC generated many questions and much confusion about how money is created, the implications of creating money, the economic and political consequences of implementing the TDC proposal, and the legal foundation for the TDC proposal. This paper addresses questions about the legal foundation of the TDC.

  7. Philip Diehl says

    “The Fed mentions numismatic coins in Regulation D (reserve requirements of depositary institutions).” Its definition of “vault cash” includes,
    “(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.”
    Presumably then, “Other currency and coin” whose face value exceeds numismatic or bullion value IS vault cash for purposes of this part.”

    I don’t follow you. Since “depository institutions” refers to private banks, I don’t understand how whether these numismatic and bullion items are treated as vault cash or not is relevant to the Fed’s treatment of numismatic and bullion it holds.

    I must have missed a shift in the subject.

  8. beowulf says

    Mint’s 2011 Annual Report has seigniorage still booked the same way you did it… “Seigniorage is recognized when coins are shipped to the FRB in return for deposits to the PEF.”
    That Treasury Financial Manual section I was quoting at the link (Tsy website but could be from the Johnson Admin for all I know) is:
    Section 5040.15 – U.S. Mint Monetary Asset Transactions

    The Fed mentions numismatic coins in Regulation D (reserve requirements of depositary institutions). Its definition of “vault cash” includes,
    “(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.”
    Presumably then, “Other currency and coin” whose face value exceeds numismatic or bullion value IS vault cash for purposes of this part. :o)

  9. Philip Diehl says

    When I was director we changed the accounting so that seigniorage was booked when the coin went out the door to the Fed. I really doubt it has changed since then, because this accounting adjustment was seen as a way of reducing any incentive for the Mint to over-produce.

    Can you provide me the Section cite you’re referencing here:

    “Transaction N… Coins are shipped to cashier and seigniorage is realized.”

    Also, you, JKH and others might find the follow section interesting. I sure did.

    Vol 1 – Part 2 – Chapter 5000 (T/L 543)




    5025.60 – Federal Reserve Banks (FRBs)

    FRBs and branches hold Gold bullion, coins, and/or certificates for display or *NUMISMATIC* purposes. Changes in the FRBs’ monetary asset holdings are also reported to FMS through the Automated Transcript System (ATS). Procedures for FRBs’ reporting are included in II TFM 5-3000.

    While this section relates to gold, not platinum, it’s the first time I’ve seen reference to the Fed receiving or holding bullion or numismatic coins. This might be an opening to the on-budget numismatic coin scenario we’ve been discussing here, though I have misgivings about this approach.

  10. Philip Diehl says

    Yes, bank lobbying might have come into play, but I think three factors determined the outcome:

    1) The WH and Treasury came to the conclusion it was too tough of a sell, and grew concerned about the ridicule the TDC would bring down on them. We saw just a taste of that over the last two weeks. It would have become much worse for them, and would have changed the narrative from “those crazy, irresponsible Republicans” to “the ridiculous President”.

    2) The WH feared pursuing the TDC would create a huge, extended distraction and would poison the water on the Hill such that other items on their agenda (immigration reform and gun control, next) would be endangered. It’s no accident that immediately after the announcement that nixed the TDC, the WH announced their plans to move immigration reform quickly.

    3) IMO, the WH is convinced the House GOP has once again set themselves up for a big defeat by the President. As with the 2011 debt limit deal and the 2012 fiscal cliff deal, I think the WH believes the Senate GOP will seek a last-minute compromise, then they’ll force Boehner to eat it with a minority of the GOP conference voting for it.

    Moreover, the WH may be looking ahead to this approach being a semi-viable governing strategy, especially with immigration reform coming up next: strike a deal in the Senate that gains some GOP support, then send it to the House and let the Republicans argue among themselves over the value of Hispanic support in future elections.

    It’s a good wedge issue strategy, if that’s what they’re thinking.

    But they’re counting on the Senate GOP to blink.

  11. beowulf says

    Philip, question for you. Is seigniorage realized when coin is shipped to Fed or a step before that, when its shipped to Mint cashier? This FMS manual use of “cashier” is a bit ambiguous though I think they mean Mint (and not bank) cashier.
    “Transaction N… Coins are shipped to cashier and seigniorage is realized.”

    If seigniorage is recognized at Mint level then, then depositing coinage is the deposit of Mint’s seigniorage revenue. Since the Mint is a part of the govt, it could be put to the Fed (“Federal reserve banks… when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks.”).
    If seigniorage isn’t realized until its purchased by customer, I suppose we’d have to downshift the TDC to a series $100B coins and start calling friendly countries and ask them to redeem Tsy debt or dollar reserves in exchange for jumbo coins. The Fed would have a harder time turning a way a holder in due course wanting to deposit platinum coinage (especially in so far as it’d impinge on President’s power to set foreign policy). Sovereign money laundering. :o)

  12. Oilfield Trash says


    Do you have an opinion if the TDC option is within the Treasury’s discrection to redeem the special issue Treasury bonds of the Social Security Trust Fund?

  13. Philip Diehl says

    Maybe I missed it, but I didn’t see any mention of this in our discussions. Pimco’s Mohamed El-Erian gave the TDC a partial endorsement. Somewhat helpful and better than a kick in the head.

  14. beowulf says

    Morgan, I take your point that the SS trust fund bonds aren’t real (the Secretary of the Treasury is both lender and borrower– he’s managing trustee of SS Funds), but Congress does not. Tsy can’t unilaterally reverse Congress’s position that these bonds actually are part of the public debt subject to limit.

  15. beowulf says

    Thanks Philip, I guess you’d know these things. :o)
    I can remember discussing this before with Ramanan, and he took exactly the same position on this as you do– the Fed has to order the coins.

    Then we’re back to the FRA section I mentioned in Bataan update (Fed/Tsy conflicting power resolved in favor of Tsy), but that’s such a B-52 raid of a legal position its hard to imagine a President or a Fed Chairman ever letting things get that far.

    I think Cullen’s speculation there was some bank lobbying to kill this is all too plausible. After all, if Tsy and the Fed agree that the Fed must order the coin, it could be used to avoid default without taking away any of the Fed’s money creation powers. Does the Fed really think default is a preferable outcome to that?

  16. Joe Firestone (LetsGetitDone) says

    I’ve been waiting for you to pull that one out of your back pocket. -:) -:) -:)

  17. Oilfield Trash says


    What would be your opinion of the ability of the Treasury using the TDC option to redeem the special issue Treasury bonds of the Social Security Trust Fund?

  18. Philip Diehl says

    Here’s how I read these provisions:

    The Fed influences the production of coins through its ordering process, but the actual booking of seigniorage occurs when the Mint responds to instructions from the Fed and ships the coin accordingly. This I know from direct experience with the law and in practice.

    I read the second part of this language as requiring the Fed to accept legal tender in payment or as a deposit. But, if the coin has not been shipped to the Mint and the seigniorage has not been booked–in other words, if the Fed had not previously ordered the coin and put it into circulation, tendering the coin to the Fed couldn’t happen.

    Of course, the latter assessment is not based on experience since there’s no precedent for this scenario.

  19. beowulf says

    According to the Fed…
    “The Federal Reserve’s role in coin operations is more limited than its role in currency operations. As the issuing authority for coins, the United States Mint determines annual coin production. The Reserve Banks, however, influence the process by providing the Mint with monthly coin orders and a 12-month rolling coin-order forecast. The Mint transports the coin from its production facilities for circulating coin in Philadelphia and Denver to all of the Reserve Banks and the Reserve Banks’ coin terminal locations.”

    “Any Federal reserve bank may receive from any of its member banks, or other depository institutions, and from the United States, deposits of current funds in lawful money…”12 USC 342
    “Federal reserve banks… when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks.” 12 USC 391
    “No public funds of the postal savings, or any Government funds, shall be deposited in the continental United States in any bank not belonging to the system established by this chapter: Provided, however, That nothing in this chapter [12 USC Chapter 3 – FEDERAL RESERVE SYSTEM] shall be construed to deny the right of the Secretary of the Treasury to use member banks as depositaries.” 12 USC 392

  20. Morgan Warstler says

    I’d still like to get an answer… if the Treasury Dept. declares that the SS trust fund bonds aren’t really real, does that create room under debt ceiling.

  21. Philip Diehl says

    My Comment on Ezra Klein’s blog post this morning:

    Ezra, it’s worth noting that the arc of innovation you cite (Greenbacks, going off the gold standard, and I’d add the transition from precious metal to base metal coins and the Fed’s current QE policy) is toward imcreasingly intangible forms of money. That has happened in the physical world of money as well, where checks, credit/debt cards, and ETFs are innovations that.follow the same path. Imagine the reaction if 100 years ago you had presented in payment to a shopkeeper a piece of paper or plastic or offered to transfer some electrons from your account to hers.

    The platinum coin is actually a step back in this evolution of money in that the value is held in a precious metal coin rather than in some set of electrons that somehow become a temporary media of exchange. In this way, the platinum coin is an echo of the days of circulating gold and silver coinage.

    I think selling the concept of the platinum coin to the open-minded (as opposed to ideologues and partisan opponents) is less of a hurdle than you imagine. At base, minting the platinum coin creates money in exactly the same way as minting a quarter does; there are just more zeros involved. And the benefits for the country, some of which you champion, are great in minting the coin.

    Opposition to the platinum coin is rooted in one or more of the following: confusion about how money is created from time immemorial, an ideological attachment to hard money, or partisan opposition to the use of the coin as a viable way to neutralize the threat to block an increase in the debt limit and drive the country into default.

  22. Philip Diehl says

    No, the Treasury (Mint) can produce only the coins specifically authorized by law and must do so to the precise specifications expressly stated in the law. These specs are remarkably detailed. That’s what makes the platinum coin provisions so unique: they give the Secretary total discretion regarding the specs.

    As to your second point, the Treasury cannot force the Fed to order a coin. (Even if they had the authority to do so, in the real world, they wouldn’t.) If the Fed doesn’t order the coin the Mint would not, maybe could not, ship the coin to the Fed. If the Mint doesn’t ship the coin to the Fed, the seigniorage can’t be booked and transferred to the TGA.

    The bottom line is that the Fed and Treasury have to be on the same page for the TDC plan to work.

  23. Philip Diehl says

    I think the minting itself and the lawful issuance of the coin from the Mint (through the Fed or by direct sales to customers) makes the coin legal tender. I’m not certain, but its possible the coin is not considered legal tender if, for example, it were stolen out of the Mint. Probably would be, but there are some complicated scenarios that aren’t worth exploring here.

  24. Philip Diehl says

    Here’s how I understand how things work:

    The Fed is not required to order a coin from the Mint; that’s at their discretion. If the Fed doesn’t order the coin, the Mint won’t, probably can’t, ship it to them. And if the Mint can’t ship the TDC to the Fed, the seigniorage can’t be booked and transferred to the TGA. In the real world, the TDC game plan requires cooperation between Treasury and the Fed.

  25. Philip Diehl says

    Here’s how I think the accounting works in my layman’s terms:

    The cost of production is self-funded within the Mint’s books through a portion of the face value, and the rest of that value, the seigniorage, is shipped off to the TGA. When the coin comes back, the seigniorage, not the face value, comes out of the TGA. Just as the physical coin comes back to the Mint and is destroyed, the money that was created and sent to the TGA comes back and is destroyed. In other words, I think the Mint’s costs do not directly effect the deficit, but only indirectly by reducing the transfers into the TGA.

    I think the upshot of all this is that the net effect on the deficit is the same as what you describe. but the accounting is different.

    Now, there’s a difference in the accounting of numismatic products that reflects the fact that they are sold for MORE than their face value. This profit (not seigniorage) is on-budget. I don’t know for certain, but for the accounting to be consistent the difference between the face value and the cost of production (the seigniorage) would be treated the same way as with a circulating coin. Except for one wrinkle: for some numismatic coins, the cost of production is more than the face value, in which case, there is, of course, no seigniorage.

    If the TDA were produced as a numismatic product, since its face value exceeds its cost of productions, I think its accounting treatment would be the same as for a circulating coin, i.e., the difference would be booked as seigniorage and not as numismatic profit.

    But, caveat emptor, I’m not certain about this; I’m just following a chain of logic, and we know how useful that can be in analyzing government practices of about any kind. It’s possible that by law or policy the TDC’s seigniorage would be treated as profit and go on-budget. I could check this out with a former Mint CFO if it would be useful, but I don’t like to go back to him too often to pick his brain. I don’t want to wear out my welcome.

    If my tentative conclusion is correct, the only advantage I see in making the TDC a numismatic coin is that it is anchored a little more securely in the law. The law’s reference to proof coins implies a numismatic coin, but as I’ve said in another Comment, it does not IMO preclude minting a circulating proof coin.

    But the trade-off is that the Fed doesn’t order numismatic coins. I know no reason why they couldn’t and good reason why and how they could. If the Fed and Treasury were on board for the TDC, I wouldn’t think this would be a problem.

  26. Nathanael says

    “why isn’t the Treasury already creating coins and depositing them into its General Account to fund Congressional spending? Why hasn’t it be doing this all along? ”

    The banking lobby (formerly known as the “Money Trust”), and a bunch of right-wing economists, have discouraged the government from doing it.

    Look up your history. That’s the only reason why it hasn’t been done.

  27. Nathanael says

    Wrong. The Treasury can mint whatever coins the Treasury Secretary wants, regardless of what the Fed suggests.

    Furthermore, the Treasury can force the Fed to accept any and all coins as payments for expiring T-bills and T-bonds. That’s what legal tender means.

    Yeah, that may be unconventional… but it works.

  28. Nathanael says

    In order to give money to evil bank CEOs.

    Seriously, that’s the purpose. Look up the history.

  29. Nathanael says

    You are wrong.
    It’s a US coin. It’s legal tender automatically upon minting.

    31 USC 5013: United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.

    31 USC 5111:
    (a) The Secretary of the Treasury—
    (1) 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;

    (b) The Department of the Treasury has a coinage metal fund and a coinage profit fund. The Secretary may use the coinage metal fund to buy metal to mint coins. The Secretary shall credit the coinage profit fund with the amount by which the nominal value of the coins minted from the metal exceeds the cost of the metal.

    There you go. The law says that the seignorage profits are booked *immediately upon minting*, actually, as miscellaneous receipts.

  30. Nathanael says

    The Fed has no discretion to refuse a legal tender coin *as payment for debt*. Does the Fed own any T-bills which are coming due? The Fed is legally obliged to accept US legal tender as payment for those.

  31. Michael Sankowski says

    lol totally perfect.