Monetary Realism

Understanding The Modern Monetary System…

The Best Time to have a Debate about the Coin

The current debate about the coin is really a debate about the power of government to create money out of thin air at any time it wishes. Out government has outsourced the creation of money to the private banking system, through the specific  laws we’ve put in place over the last 100 years or so.

The coin is a loophole which allows the government to directly create money. This was not an intentional loophole. It was not a designed part of the larger monetary system of the United States. But this loophole exists – the government can create money directly by miniting large denomination Platinum Coins.

As John Carney pointed out in a twitter comment, there should be something like a “coin ceiling” which gives some structure to this power for the government to directly create money. Prior to the discovery of the coin, it was thought we had entirely stripped the power away from the U.S. government. There was no need to constrain or structure this power. We thought we had taken away the power entirely and given it to the private banking system, so why was there a need to elaborate?

I don’t think a hard-number ceiling on the amount of money the U.S. government can directly create is a good idea. But leaving the power completely without structure isn’t a good idea either. It’s time for a democratic debate on this power.

Additionally, as JKH points out in several posts, using the coin is almost exactly the same as Quantitative easing. Directly creating money acts almost exactly like a real-world tested policy. We know the impact of quantitative easing. We can estimate using the coin will be nearly exactly the same as Quantitative easing. We can even call it Platinum Coin easing, it’s that close in impact.

It turns out today is probably the best time to have a debate over the power of the government to directly create money without incurring debt. Why? Because the U.S. government can borrow all the money it wants in 2013. We don’t need to print money – the U.S. government could easily borrow it instead. In fact, it would be cheaper for the U.S. government to borrow money created by private banks than it would be to mint a coin.

Creating money without incurring debt is likely to have a positive impact on the economy – because the economy is begging for more money and more low risk assets to be created.

So, we can mint the coin and pay for goods and services with little fear creating money will harm the economy. In fact, we can expect it to help the economy. We can debate the power of direct money creation, we can hash out the new structure of our monetary system under ideal conditions.

We can imagine other conditions to have this debate. We could be having this debate when the credit markets are shutting off lending to the United States, and the U.S. would be forced to print money just to continue paying the bills it has incurred. This is unlikely to ever happen, but not completely impossible.

But we are nowhere near that negative scenario right now. The U.S. government does not have a problem borrowing money.

Many people point out that directly creating money by the government overturns long standing norms about out monetary system. Yes, it does. This is a huge change. The coin gives the government the power to spend money without borrowing, and provides an entirely new channel for money creation. That’s a massive change.

But we’re lucky enough to be debating this power today, right now, during a manufactured debt ceiling crisis. It’s essentially the ideal conditions for this debate to happen. We can mint a coin right now with little fear the economy will spin out of control.

We can then have a debate about this power for the government to create money under nearly ideal conditions. What should those constraints be? How much is too much – and how much is too little?




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13 Responses

  1. wh10 says

    Wow guys:

    “Bottom Line: The platinum coin idea was ultimately doomed to failure because neither the Federal Reserve nor the Treasury could allow for even the remote possibility it might be successful. Its success would not just alter the political dynamic by removing the the debt ceiling as a threat. The success of a platinum coin would fundamentally alter the conventional wisdom about the proper separation of fiscal and monetary policy and the need to control the debt immediately.”

    • Cullen Roche says

      It’s sad. You would have hoped that something so public like this would have made a lot more people go – “wait, maybe our govt balance sheet is different than mine is?” Instead, it looks like we’re back to business as usual. The coin scared some people. Scared them stupid.

      • Michael Sankowski says

        It’s not over. It’s not over at all. Think about it, the trillion dollar coin still exists in our minds and in the minds of everyone. The smart people know it’s a threat. Read that post from Tim Duy.

        “This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending?”

        He isn’t the only one with this realization. The coin was a wild success.

        • wh10 says

          But this is a fairly mainstream New Keynesian position, right? It’s the liquidity trap.

          There’s still the whole issue of ‘just printing’ when you’re not at the zero lower bound. Krugman isn’t comfortable with that.

          But Greg Ip – he’s a price, not quantity, kind of guy. I think he gets it.

        • wh10 says

          Here’s what I don’t get about Ip. Hopefully someone can help me out. (

          He spends 3/4 of the piece making the point that the Fed controls inflation not by controlling the money supply but by setting interest rates, and that therefore, TPC need not ever be inflationary due to its impact on the money supply. In his opinion, the economic consequences are remarkably benign.

          But for some reason that I cannot fully appreciate, Ip believes the political consequences are overwhelmingly concerning. He says it threatens the independence of the Fed, and the Fed would appear to be taking the White House’s side in the debt ceiling debate. But what’s the practical implication of this for the Fed’s independence in making monetary policy decisions going forward? The power of the Fed’s ability to impact the economy, by setting interest rates, and to do so according to their own discretion, is still intact, according to the first 3/4 of Ip’s article.

          He then writes: “it would set a precedent future presidents will happily exploit and feed the perception that America’s economic institutions are in terminal decline. America has had debt ceiling crises before (in 1957, 1985, 1996 and 2011) and survived; are the unknown risks of the platinum coin option obviously preferable to the known risks of hitting the debt ceiling?”

          I find much of this to be the sententious, unsubstantiated, poorly thought-out theorizing that Krugman laments. And I am surprised how much weight he gives the ‘unknown risks’ of TPC. Almost every major economic commentator has agreed that TPC is preferable to default. I also don’t know what he’s talking about regarding ‘hitting the debt ceiling’ – we haven’t defaulted in the modern age before. Perhaps he writes all this in order to promote his proposal – selling the coin to the public. But his main justification for this idea remains Fed independence, and I just don’t see the big deal.

    • wh10 says

      “Ip argues that interest on reserves gives the Fed the power to control interest rates, and consequently the power to control inflation, regardless of the size of the balance sheet. If you follow Ip’s analysis through to its logical conclusion, then why should the Treasury issue debt at all? Why not just issue platinum coins? Could cash and government debt combine to serve the same functions together that they serve separately? Consider the disruptiveness of that outcome to the status quo.”

  2. JKH says


    I think the debate needs to be compartmentalized formally into two different components in space and time:

    a) The use of the coin in the case of the debt ceiling impasse – in this case, my view is that the prospective use of this instrument of financing should be fully integrated with the Fed’s quantitative easing policy – with a prescribed exit plan for both components of QE jointly viewed. This is short term. The exit plan is an acknowledgement that it is not feasible to conduct the second debate and resolve it successfully as part of the first. It is an expression of discipline in this regard.

    b) The more general debate as you’ve indicated. This is long term. The first debate and its resolution should feed into the second.

    The problem I see is that in blending these two approaches together as if they were one, the first is more likely to fail due to the commotion of attempting to conduct the second as part of the same discussion. It is a diffusion risk that will probably end up bolstering the opposition and derailing the first case use of this idea.

    With sufficient focus on the first case use, it can be used as a sort of ‘test run’ for the bigger debate.

    • JKH says

      Another way of saying … in the real world, in a democracy, you have to work within the existing institutional framework (broadly speaking) in order to change the institutional framework

      Cut the other guy’s point of view a bit of slack … none of us fully understands how the financial system works … not in total

      That’s why I favor a controlled approach to solving the upfront operational problem with the coin – if necessary

      The second bigger debate is strategic – much beyond the current operational problem

      • Nigel B says
        • JKH says

          thx – yes, quite similar

          doesn’t need saying, but can be said that MMT favors leveraging one off the other, as indicated by Stephanie K. on Hayes this a.m.; that’s a foot shoot risk …

        • Michael Sankowski says

          Yes, it was a great discussion,but then bringing up 100tn seems a bit crazy. overall, what to do? What do we favor, what do we supress?

          That’s the point of the post after this one. Even if that rule is wrong on an epic scale, the discussion is what is important.

    • JKH says


      its what the CI approach is all about, IMO – experimenting with different dials on the configuration for the monetary system, and enabling flexibility of approach in the long run

      also that’s why I like QE integration in the short run – its a seamless way of introducing this idea at a “measured pace” (remember that one?) while dealing with the real world problem of urgent debt and spending dysfunction

    • Michael Sankowski says

      I agree 100%. The coin is a loophole/gimmick, but it provides us with a teachable moment.

      It seems like the wider economic community is seeing this pretty clearly. I am in the process of another post which uses this comment from Stephen Williamson:

      “As has become more clear in the last few years, monetary and fiscal policy are closely intertwined. It’s hard to tell where fiscal policy stops and monetary policy starts. When the Fed swaps short-maturity government debt for long-maturity government debt, or purchases mortgage-backed securities with reserves, are those monetary policy actions or fiscal policy actions? You tell me.”

      #mintthecoin has already been so much more successful than the wildest dreams of anyone who knew about the coin 20 months ago. Heck back over at Mosler’s place, the coin was just part of the water everyone knew about. Did any of us ever expect it to actually be talked about by more than a few hundred people? I sure didn’t. Beo is a genius for seeing the irresistible hook of a Trillion Dollar coin.

      We are having this discussion in a time where the impact of being wrong from printing too much money is almost impossible, and the potential good from printing money is very high. That’s a best case scenario.

      Do you think the debate can really switch over to talking about the CI approach? It seems like it easily could go there among the economists. They get it.