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?