Monetary Realism

Understanding The Modern Monetary System…

The Coin is Dead! Long Live the Coin!

Noah Smith asks a funny question on Twitter:

 “Hey, anyone remember the trillion dollar coin? ^_^  “

I’d say Paul Krugman and Steve Waldman remember the trillion dollar coin quite well. So do all of the people listed by Steve Waldman in the beginning (and the end, Frances and Ashwin!) of his post.

The coin was only an idea, only supposed to spark a debate about the ability of the government to issue money directly. It was a big, shiny lure dangling in front of fish.

Then, the debt ceiling came along and changed the coin from “funny and interesting idea” to “necessary if we want to avoid an economic meltdown“. That debate catapulted the coin to fame, and fortunately kickstarted the debate Paul K, Steve W and others are having now.

The coin is fun, and preposterous, but it should raise questions for the smart set. And it did. There are many parts of this debate, and not all of them are simple to understand. One of the more complex aspects of the coin has to do with what is known as Excess Reserves.

If you remember, the coin acts almost exactly like Quantitative Easing. And QE has to deal with the problem of those reserves.We here at MR don’t think QE has much impact on the real world – anyone who reads Cullen Roche knows our take on it. Scott Fullwiler says:

“So, what do the banks do with all their new vault cash that is well in excess of what they expect their customers to withdraw?  They sell it back to the Fed in exchange for reserve balances, and the currency is now out of circulation.  But now there is a large excess of reserve balances—what does the Fed do about that?  As above in Figures 2 and 3, it either accepts a zero interest rate or pays interest on reserve balances at its target rate if it wants a non-zero rate.  And now we’re right back to points 1 and 2 that are the very things neoclassicals agree stop QE in its tracks.  Or, the Fed can sterilize by selling securities to drain the reserve balances, which again just reverses the QE.

What does all this mean?

First, the quantity of currency circulating—“dead presidents”—can never be exogenously controlled in a world in which we have banks (!) that costlessly convert currency to deposits, savings, and so forth, effectively taking the currency out of circulation, which banks then convert to reserve balances.  There is no hot potato effect for currency in the real world.”

This debate goes to the heart of our economic system. Noah, the coin was a trojan horse to bring this debate into the fortress of people who could understand there even could be a debate.\

For example, Joshua Wojnilower (Woj) gets it right away:

First, does financing the deficit by making a deposit at the Fed add to the monetary base? Second, what impact on the economy does the coin have that requires ‘sterilizing’? Third, if the monetary base expands, will the expansion mainly end up in currency form?

Answer(s): When the Treasury deposits a $1 trillion platinum coin at the Fed, the Fed credits the Treasury’s account with $1 trillion in reserves. These reserves, however, are not counted in the monetary base since the Treasury’s account does not count as reserve balances in circulation. The simple action of depositing a platinum coin at the Fed therefore has no direct impact on the economy that would require sterilization*. In fact, the primary (sole?) purpose of this exchange is to allow the Treasury (Congress) to spend without requiring debt sales that would exceed the debt limit. This seemingly harmless subversion of federal spending requirements actually holds great significance regarding the roles of private banking and the Fed in our current monetary system.

While the Fed’s role and independence is diminished by these actions, the role of private banks could potentially be reduced by far more. With government spending unconstrained by debt sales (and a compliant Fed), the government could subvert the reign of private banks as primary issuers of money. This would drastically reduce the profitability of banks and their power to influence government actions. Recognition of these potentially dramatic changes to the financial system may have provided the impetus for the Fed’s decision to shoot down the “platinum coin.”” [bold from Mike]

Yes, that’s the heart of this debate. How do we want our monetary system to operate? Do we want a private or public banking system, or something in between? Note the link to Cullen, right smack in the middle of Joshua’s post.

So Noah, yes, the Trillion Dollar Coin is being discussed, and will be discussed. 😉


(Update: fixed the lack of a link to Woj. Sorry about that Joshua!)



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23 Responses

  1. JP Koning says

    Why are you MMR guys so adamant on the platinum coin? Pretend the debt ceiling doesn’t exist. Would you still advocate it? The platinum coin would effectively combine the Fed and Treasury. I understand why MMTers advocate amalgamation – it provides the resources for a jobs guaranty program. But if you don’t see much in the jobs guaranty (and apparently you don’t), what’s the point of amalgamation?

    • Michael Sankowski says

      Hi JP,

      I am not a huge supporter of the coin except it does a few things:

      1. workaround for the debt ceiling (ok now pretend the DC doesn’t exist)
      2. (Possibly) addresses interest payment induced austerity when bond yields go back up.
      3. (Possibly) Addresses balance sheet recession problems arising using real estate to create credit/money in economy
      4. (Kinda) shows the government can and should create money in some circumstances
      5. Acts as a unparalleled educational tool/image.
      6. The coin points out the fed/treasury are linked instutions through the similarity of QE and Platinum Coin Easing
      7. It kick started the Paul Krugman/Steve Waldman discussion

      The entire discussion over the coin pushed forward how money works more than 40 years of PK jabbering. That alone was worth it, because we could use more PK thinking in our mainstream economic discourse.

      At some point, bond yields will go up, and there will be some new round of panic over “paying for the debt”. The coin could save us then, too.

      I wrote a bit about the idea we’re on a real estate monetary standard, and the government could use the coin to help sidestep the balance sheet recession.

      We are not huge supporters of the coin, but we are supporters of having a strong economy. The coin could help us get there – heck, the ideas behind the coin (the government can just print money without borrowing if we allowed it) is powerful.

      The entire world knows the government has the potential power to print money without borrowing. And it knows the effect will be similar to QE. Today, QE isnt’ doing much or anything at all, but at some point, that impact will change.

      This is a huge power, and one we’re going to have to use in the future if we recognize the fundamental truth of Godley/Christ. I want this power to be used wisely.

      Beo, Cullen, and JKH probably have other points they want to add, and we’re not a hive mind at MR, so take all of this as my opinion.

      • Michael Sankowski says

        I see I didn’t address your point of amalgamation very well, and it’s a good point.

        We don’t see the point of the JG ( and please, please MMTers don’t go any farther with this), but we’re not austerians by any means. We want a strong economy, we want jobs, jobs, jobs, we want prosperity.

        For example, I came up with the strong economy rule (which uses inflation rate, unemployment rate, and population growth) to give a suggested deficit size.

        If we’re going to have a strong economy, we need some ways to make sure we even know how much is enough. We need to recognize – as a society – that monetary and fiscal policy should be used to help our country be prosperous.

        Some large amount of our economic debate revolves around there not being enough money to pay for things, while massive amounts of personal and capital resources sit unused. It’s this mismatch the coin can help to address. We don’t have enough money? Mint some. We have plenty of money.

        Yes, we can disagree over how this money is spent. But we shouldn’t be claiming money poverty while men and women are sitting on their ass instead of working.

        Hope this helps a bit. :)

        • JP Koning says

          Thanks for the response.

          I definitely agree that the coin has been great fuel for dialogue, and it is an excellent tool for understanding all the intricacies of the Fed-Treasury connection too.

          I’m not alone in attributing the MMT desire for amalgamation to the jobs guarantee. Read Lavoie for instance: “It is my understanding that the emphasis on the analysis of the way in which central governments could finance their expenditures, thus on the analysis of the mechanics of clearing and settlement systems, arose because of the desire to demonstrate that ELR programs could always be financed.”

          It sounds to me that you support the idea of amalgamation for pragmatic reason — it buys flexibility given various eventualities. I don’t want to cause any problems between yourself and your MMT cousins, so I won’t probe too much and if I do, just ignore me. But given the fact that you don’t see the need for a job guarantee, would I be correct in assuming that you don’t have as pressing a desire as Wray et al to see an amalgamation? They’re 110% gung ho, but you’re more like “sound good”… or am I mis-characterizing things? [this is assuming no debt ceiling, of course]. Or is the motivation for amalgamation still a work in progress with you? That’s a fair answer too.

        • JP Koning says

          This tells me your a little more reticent than them.

  2. beowulf says

    Thanks Woj. If there aren’t any football teams, how can we be rivals?
    St. Louis has possibly the radio station in the country. Great playlist and no commercials. A pity its run by Lindenwood U. and not Wash U. :o)

  3. Joshua Wojnilower says

    Mike – Thanks for sharing my post and all you work here at MR,

    Beowulf – I went to Wash U. Hopefully that doesn’t make us rivals.

    While the debt ceiling may be a silly relic of days gone be, it has brought the platinum coin to light with all the corresponding debate about modern money. If somehow this discussion ultimately helps other better understand our monetary system then the debt ceiling may have served a purpose. (Sadly this may just be wishful thinking)

  4. MMTdebtkiller says

    I should add to my posts above, that while I think the Treasury issuing the money directly instead of the Fed is more elegant, I would not insist on changing to that system because of the institutional inertia of a current system that achieves equivalent results. Treasury would also have to develop mechanisms for controlling for inflation and deflation, which the Fed’s open market operations acccomplish now using securities.

  5. MMTdebtkiller says

    As you can see from my post preceding this, I think it is time to move on from the platinum coin to challenge directly the existence of the national debt. That will take not so much an economic argument but a legal one, and I hope Beowulf will give us some his thoughts on this. What I believe it will accomplish for MMT is a realization that our current system, if there is no unredeemed debt in the securities at the Fed, is essentially an equivalent system to one some have said should/could be established at the Treasury with the Treasury issuing debt-free fiat money. In that system when Congress wishes to deficit spend, the Treasury simply issues new money created out of thin air to cover the deficit. The money supply is increased by the new money. Banks retain the original money plus any that drifts into to them from the Treasury’s new spending. No taxpayer money is needed to repay the Treasury for its money creation. Keep in mind, however, it is all done by Treasury as an agent of the United States.
    In our current system we get debt free money entered into the system in a more indirect manner. Congress wants to deficit-spend. Treasury issues securities (IOU’s promising repayment to holder at a later date), and these are sold at public auction to banks. Banks have diminished reserves and want to restore them so they can lend more, so they put the securities back up for sale at the auction and the Fed buys them with money it creates out of thin air (government money). This purchase effectively redeems the debt of the United States to the banks. This makes the money being spent by the Fed debt-free. It also adds new money to the money in circulation, via the banks. The Fed acquires the securities from the banks and adds them to its pile of purchased securities. But the ownership of this pile is not the Fed but the United States. The Fed is just the servant, the agent of the United States. So, neither the Treasury nor the taxpayers owe the Fed for these purchases. There is no national debt at the Fed. The Fed is the issuer of money and the redeemer of federal debt, making the money obtained by the Treasury for deficit spending, debt free. This makes deficit spending money creation with spending. (We should describe it like this). The Fed is free to continue buying and selling securities as before in the endeavor of managing the money supply and inflations and deflations. These operations happen over and over.
    Do not forget that the Fed gets (one time) a transaction fee of 6% of the interest on each security it buys–as per law, to fund its operations. There should be no roll-overs at the Fed. But currently Fed and Treasury swap mature securities for new securities. That does not require money changing hands. It just serves the Fed’s purpose of having new securities to sell to banks to drain money from their reserves. There is a triangle here between Treasury, banks and Fed. Treasury exchanges securities with banks for money; banks exchange securities with the Fed for new money. And Fed redeems the debt between Treasury and banks. So in the end Treasury has debt-free money, banks have new money, but money being fungible, we might say that the Treasury has the new money and the banks are just restored to what they were before. But that is just a fictive shift in our thinking about it.

  6. Jack Foster says

    great headline! great post!

  7. Frances Coppola says

    I’d say the “dork debate” will run for a good while yet. Are we going to have that convention you suggested?

    • Michael Sankowski says

      I 1/2 suggested that as a joke! But I’ve also had other fellow dorks be interested in this convention.

      We need to get Paul Krugman there so we can yell at him and pelt him with tomatoes. He’d be up for that, right?

  8. wh10 says
    • Michael Sankowski says

      The coin cannot fail, we can only fail the coin.

      • Oilfield Trash says


        It seems to me like the FED is taking the position that Reserves are irredeemable unless they can set the price.

  9. beowulf says

    Great post Mike. I’m looking forward to reading the comments on this one, so I’ll reserve my time. :O)

    • MMTdebtkiller says

      The following is from a letter I sent today to a Democratic member of Congress:
      I am a retired Professor Emeritus of Quantitative Psychology at the Georgia Institute of Technology. That has given me time to pursue new interests. For the past year I have become interested in Modern Monetary Theory, MMT, which is the theory of fiat money systems and their management. Much of my motivation has been to acquire a framework of thought that would allow progressive goals to be achieved. MMT provides that. In 2011 when the debt ceiling first became an issue I was attracted to the trillion dollar platinum coin idea as a way to buy back the securities at the Fed and eliminate the national debt without using taxpayer money. But this past summer I began to have my doubts about this.
      Could the Secy of Treasury use the $1 trillion coins to buy back the securities if the securities were already redeemed for the United States? No, there would be no authorization for such a purchase because it would amount to buying the securities for the government a second time, and while the first was authorized, Congress would not have authorized a second purchase.
      So, I looked more closely at why the securities at the Fed might be redeemed already for the United States.
      Most economists are familiar with how the Treasury issues securities to borrow money from banks for deficit spending via a public auction. Banks buy the securities and Treasury gets the money. The securities are a debt of the United States to the banks at this point. But later the banks put the securities back up for sale at the auction because their reserves were diminished by lending to the Treasury. The Fed comes and buys them with money it creates out of thin air. It is not generally acknowledged that with this act the Fed has redeemed the debt of the United States to the banks.
      But then it is generally assumed that the debt has now shifted to the Fed. This I regard as the Emperor’s New Clothes aspect of this debt. Everyone believes it exists. Now, early on I realized that the Fed was a creation of the United States Congress, and further its use of money created out of thin air was an exercise of Constitutionally granted Congressional power to create money delegated to the Fed. But it didn’t come all together for me until a few days ago when I realized that the Fed is an agent, a servant of the United States, and that it was buying the securities not with Fed money but with government money. And then an analogy made it clear why there is no debt.
      Does the Fed have a claim for the Treasury or the taxpayers to pay it the full cost of the securities it has acquired? No. It has no more claim than a bank clerk would have to be paid for the purchase of a security from a customer using bank money. The Fed is an agent, a servant of the United States that is authorized by the United States in the FRA of 1913 as amended to buy and sell securities in the open market. This is just like a bank clerk authorized by the bank to purchase securities from customers for the bank.
      So, just as the bank clerk doesn’t own the securities it has bought and thus can claim a debt be paid it for them, the Fed doesn’t own the securities it has acquired with government money (money created out of thin air). The United States owns the securities at the Fed.
      But the United States allows the Fed to retain them and to draw upon them for sales of securities to banks to drain money from the banks during inflations. It allows the Fed to purchase securities from banks to augment its pile of securities and also because this introduces newly created money out of thin air into the banking system, to be used to fight deflations.
      The United States does not owe itself the debt obligation in possessing the securities, because the debt obligation is between the United States and someone else, and at the Fed, there is no someone else that the securities are being used with. They would have to be sold again (if not mature) to create a new debt. I also realized that the Fed’s possessing the securities gives it no more claim to the debt obligation of the securities than would the Treasury have on the securities in its possession. Both are servants and agents of the United States in these matters. Their job is to work with securities and money but it is not theirs but the United States’. There is no debt from deficit spending.
      Seen in this light one wonders why the Fed has not realized this also. Why has it not informed the Treasury and the Public of this fact? Maybe they don’t really realize it, thinking of themselves as independent entities apart from the government, which they are only in certain ways, but not ultimately. But their FAQ’s state that they are within the government but established to be independent of political influence.
      The Treasury has been rolling over the securities since forever it seems, certainly since 1971 when Nixon took the dollar off of gold backing. Each time the Fed buys a Treasury security it is owed by law a transaction fee of 6% of the interest on the security. The Treasury pays this. (It could issue new securities for sufficient funds to pay these fees some time into the future. Fed would buy them, and redeem their debt). This has become a kind of cash cow for the Fed, since its operations are funded from these fees.
      So, perhaps they have taken the position that if the Treasury doesn’t know any better, we’ll assume that they do, and just let them pay us these transaction fees each time the securities become mature and rolled over. Furthermore, since with each Congressional deficit new securities are issued, and accumulated, and rolled over, the budget has to take into account these fees, and they add up, and are adding further with passage of time. So, there is a problem here that has to be looked into.
      It would seem to me that if the Secretary of the Treasury recognizes now that there is no national debt at the Fed, that he would stop the roll overs after paying the transaction fees the first time on a new security acquired by the Fed. That should get the Fed’s attention. I’m not so sure they would want to take the Secretary to court on the matter. My inclination would be to let all those “illegal” roll overs and transaction fees be byegones as long as the Fed publicly announces that there is no debt at the Fed (except on resold securities). (I am also ignoring time deposits of investors that buy securities for interest and a safe haven for dollars. These do not fund government operations, contrary to the belief of many Tea Party followers who think China is funding our government’s operations. The Fed regularly redeems these debts by paying off the investors when their bonds/securities mature. And the Fed will never be incapable of paying.)
      To me, getting the Fed to announce that there is no national debt at the Fed that is not being routinely redeemed by the Fed, would be sufficient to pay for all the stress and anxiety we have had over the national debt and the debt-ceiling. If we can break the logjam over the idea of this debt, take it out of the national dialogue and recognize the reality of our monetary system and allow Congress to move forward in funding our numerous needed projects, that is more than enough a recompense. The dialogue can then move from “Can we afford it?’ to “Should we do it?”
      I hope you recognize the importance of determining whether there is a national debt at the Fed or not. It is not merely an economical question but a legal question. I know your plate is full, but I would hope you would be able to add this to your list of things to look into. As I have written above, my view is that “There is no national debt at the Fed”.

      • beowulf says

        Professor, I went to Emory so naturally I know all the GA Tech jokes (“Before I got to Tech, I didn’t know how to spell engineer. Now I are one!”). But, in truth, the students you taught were much smarter than the average bear (or congressional staffer). My point is I’m glad you are making the effort to spread the word, but this letter is going is so far over their heads its leaving contrails. You need it to keep things simple… like Food Good, Fire Bad simple.

        Also, the Federal Reserve Act is pretty explicit that debt bought by the Fed is segregated from the Treasury . If Congress was going to start taking debt out of the public debt limit, they’d start with the Social Security Act trust funds. Tsy owes them trillions of dollars and their managing trustee is… the Secretary of the Treasury. However, the law is clear that they too are segregated from the Treasury.

        But again, I appreciate you writing the letter because you’ll likely send whoever reads it to Google to look up stuff they didn’t understand.

        • MMTdebtkiller says

          Emory is a good school. My wife was on the faculty there until she retired. We at Tech don’t have so many jokes about Emory as we do about U of Georgia.
          And you are right. Students at Tech are very bright. When I first came to Tech I had to get over thinking that someone who spoke like a redneck , or Gomer Pyle, was an idiot. I learned to judge a book not by its cover but what is in it.
          It is not clear what you mean by “… the Federal Reserve Act is pretty explicit that debt bought by the Fed is segregated from the Treasury .” Could you give me quotes or where to look? I was just going on my layman’s understanding of securities. The Treasury is not in debt, it is the United States, no? Are the securities not between the United States and the banks? What does it say on the face of the security? And if you have issued a security and someone has bought it, and someone else comes along and buys it from them, doesn’t that eliminate the debt between you and the first person, because they no longer possess the security and got paid for it?
          That’s what I meant about redeeming the debt between the United States and the banks. Is that the wrong legal term? (I’m no lawyer, obviously).
          The next issue was whether the debt now shifted to the Fed, i.e. does the United States now owe the Fed the debt obligation on the security?
          That depends on what/who the Fed is. Ordinarily if the Fed were totally independent of the United States, not a creation of it, not an agent of it, then the debt obligation on the security passes to the Fed. But if the Fed is a creation, an agent of the United States, then the Fed has merely purchased the security FOR the United States. The United States now owns it. That being the case we can go back to the purchase by the Fed from the banks. If the United States buys the security from the banks, that redeems the debt between the United States and the banks, no? And the agent, the Fed, merely stores the securities for the United States in its place, and even has authorization by the United States to sell them for purposes of the United States to manage inflation. And it has authorization to buy more securities from banks and use those purchases to put new government money (created out of thin air) into the banking system to fight deflation.
          I grant that I am very wordy, suffering from logorrhea. I learned touch typing at 8 and went to summer business school to learn typing at 12 and after two summers was up to 81 wpm. And I write like an academic, which I am. And I see a number of other academics on these blogs.
          What about my simple analogy: the Fed no more has a valid claim to the debt of the securities by merely possessing them after buying them with government money (created out of thin air) than does a bank clerk who buys securities and claims to be owed for the value of the securities that it bought with bank money.
          That’s for the staffers, but the person I addressed my message to had been a professor and lawyer at a major university. No Tea Party member could follow the argument, I’m sure. Their eyes would glaze over a third of the way in.

        • beowulf says

          Well, the Social Security Act Trust Fund own T-bonds and those are against the public debt limit and the best way to think of the Federal Reserve is as a trust fund. The US Govt is the originator, has a present interest (in income) and a vested remainder future interest (Congress can abolish the Fed anytime in the future and take over its assets).

          And while clearly Uncle Sam has equitable title to Fed assets (just as it does, really, to Social Security trust fund assets), Congress has written the debt ceiling law in such a way that equitable title isn’t good enough, because legal title the trust fund and Fed assets are held in legally separate accounts, the T-bonds they hold must be counted against the debt ceiling. Is it a stupid rule, sure. But then the debt ceiling itself is a really stupid rule. Unless Congress changes the law (ideally by abolishing the debt ceiling), we’re stuck with it. But there are other angles of attack available. :o)

        • MMTdebtkiller says

          So, you are saying that despite my claim that there is no debt at the Fed, the way the debt-ceiling law is written, it counts the number or value of securities held at the Fed as a way of limiting deficit spending.
          It seems to me that if my argument is valid, that there is no debt at the Fed, then
          we would need to argue in the court of public opinion that the debt-ceiling is a meaningless and artificial obstruction to Congress’s exercise of its powers to spend. Why limit deficit spending if it does not truly produce debt? Getting an admission from the Fed that there is no debt would greatly help the case. We probably could afford the current levels of defense spending and entitlements without inflation. No need to cut any of it,.
          BTW, why hasn’t the Social Security Administrator, or the President, had the securities at the Trust Fund put up for sale at public auction? They are several trillions of dollars in value. Is the interest to be earned on them worth the price of governmental paralysis? It would not immediately be potentially inflationary because most of the dollars would just sit untouched in the Fund for several years and would be dribbled out to supplement benefits paid from FICA taxes..
          Anyway, I think it is essential for us to establish once and for all that there is no enduring debt in all the securities at the Fed. I think the Administration needs to be encouraged to stop rolling over the securities to provoke the issue with the Fed. How soon and how often does roll-over occur?
          Unless a crisis leads the GOP to eliminate the debt-ceiling, this is going to take a bit longer to resolve this issue of the national debt. But they won’t do it if there is indeed a debt.
          But again for those who still hang their hopes on the tera-coins, you must consider whether you can buy those securities without further Congressional authorization, if there is no national debt at the Fed. Suppose the Fed concedes there is no debt. You would definitely not get Congressional authorization to buy the securities with coin money. So, you would have to move to financing the government on Treasury tera-coins, and this would create problems if there is
          an eventual inflation and the Fed does not have immature securities to sell.
          Could the Fed simply return most of the securities to the Treasury, if it acknowledges that there is no debt (just to reduce the pile considerably below the debt-limit? How long are these securities “live” i.e. not past their maturity dates? The securities retained would be for purposes of fighting inflation should it develop. Treasury could swap a few of the mature securities at the Fed for new securities (they do it all the time now), just to leave enough on hand for dealing with inflation.

        • beowulf says

          Could the Fed simply return most of the securities to the Treasury, if it acknowledges that there is no debt (just to reduce the pile considerably below the debt-limit?”

          Yes, but they will never “acknowledges that there is no debt” because without Congress changing the law it is debt. In theory the Fed governors could go into the philanthropy business (but it completely fouls up their books so its less likely than just accepting a TDC).

    • Michael Sankowski says

      I bet this one heats up over the next week or so. Wait until Noah reads it once or twice.