Economics, Pethokoukis

What the guy who helped write the trillion-dollar platinum coin law told me

Image Credit: Shutterstock

Image Credit: Shutterstock

I got an email from one Philip Diehl who says he is the former U.S. Mint director and helped write the law authorizing the trillion-dollar platinum coin. Here it is, in full.

I am the former US Mint director who in 1996, with Rep. Mike Castle (R-Del.), wrote the law authorizing production of the platinum coin you wrote about on December 5th. I can provide background on the legislative intent of the bill, but I write now to clarify confusion related to how the law might be used in the context of the debt limit.

Contrary to some media reports, minting a trillion dollar platinum coin would not raise the debt limit. Rather, it would add a trillion dollars to the general fund of the treasury without requiring additional borrowing, effectively delaying the date when the debt limit is reached.

The law enables this course by authorizing Treasury to produce the coin in whatever denominations the Secretary chooses. When we passed this law in 1996, it was with full knowledge that it was unprecedented in the history of US coinage. Congress had always specified coin denominations by law.

The accounting treatment of the platinum coin is identical to all other coins. When the Mint ships a coin from its vaults to those of the Fed, it books as profit (or “seigniorage”) an amount equal to the difference between the coin’s face value and its cost of production. This amount is subsequently transferred to the general fund of the treasury where it is available to finance government operations in the same way that tax revenue does. When the Fed returns the coin to the Mint due to damage or wear, the accounting treatment is reversed and the coin is melted. Thus, seigniorage “earned” from the coin is like an interest-free loan over the life of the coin.

So, in the case of a platinum coin, if the coin dies were manufactured ahead of time, the Mint could strike a single trillion dollar coin, ship it to the Fed, immediately book a trillion dollars and transfer that amount to the general fund. This would take a day, maybe two. The coin never has to leave the Fed’s vaults for the general fund to receive this new spending capability.

The law provides Treasury all necessary authority to pursue this course. I know this because I wrote the law and produced the nation’s first platinum coin. I’ve been through the entire process.

Unlike the tenuous case for using the 14th Amendment to circumvent congressional approval of an increase in the debt limit, the legal basis for this alternative is rock solid. Moreover, it is not a means of circumventing congressional authority over the debt limit, at all, but rather a way of delaying the date at which that limit is reached, in the same way a sudden surge of tax revenue flowing into the treasury would do. So GOP claims that the president is circumventing the law would be unfounded. Besides, the law was passed by a GOP Congress.

All the best,

Philip N. Diehl

35th Director

United States Mint

For biographical information see:

en.wikipedia.org/wiki/Philip_N._Diehl

Some observations (again, assuming Mr. Diehl is the real deal):

1. So basically this would be a trillion-dollar interest free loan from the Fed for the life of the coin.

2. Let’s be clear, this is the Treasury printing money. Would financial markets view this is a good precedent? I doubt it.

3. Was minting a trillion-dollar platinum coin to evade the debt ceiling the point of the law? I sure don’t get that from the email. And, indeed, it was not. The legislation had to do with collectible coins.

4. Does it allow Washington to evade fiscal responsibility? It does. As a bank analyst at the Washington Research Group told me:

The President could assert that that 14th amendment negates the requirement for Congress to raise the debt ceiling. Or Treasury could mint a $1 trillion platinum coin and deposit it at the Federal Reserve. Neither are great options. We see chaos if the market has to confront Treasuries where the debt is backed by Congress and those where it is not backed by Congress.

And the $1 trillion coin would expand the money supply by a considerable amount, which could spark serious inflation. And it seems like something out of a Simpson’s episode. So we are not even sure anyone would take this as an actual solution. All of this economic chaos could worsen the economic downturn, which would further weaken credit conditions and impose higher losses on banks.

For banks, this might be as bad as an actual default. The economic uncertainty could cause lending to grind to a halt, the disruptions could cause unemployment to spike which means higher loan losses, and interest rates could skyrocket as the market is unsure whether one of these creative solutions is even legal.

5. Should Washington explicitly ban this idea? One GOP representative thinks so:

 U.S. Rep. Greg Walden (R-Ore.) today announced plans to introduce a bill to stop a proposal to mint high-value platinum coins to pay the federal government’s bills.

“Some people are in denial about the need to reduce spending and balance the budget. This scheme to mint trillion dollar platinum coins is absurd and dangerous, and would be laughable if the proponents weren’t so serious about it as a solution. I’m introducing a bill to stop it in its tracks,” Rep. Walden said.

“My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well. My bill will take the coin scheme off the table by disallowing the Treasury to mint platinum coins as a way to pay down the debt. We must reduce spending and get our fiscal house in order,” Rep. Walden said.

 

62 thoughts on “What the guy who helped write the trillion-dollar platinum coin law told me

  1. Why platinum when metallic hopium would be so much more appropriate?

    Can’t wait for the PRC’s reaction when our ambassador plops a poke of hopium coins in his hand and says “There, we’re even-steven now.”

  2. We’ve never not raised the debt ceiling. Why is Congress risking our economy and giving this particular president such a hard time? I like what Ronald Reagan had to say:

    “The country now possesses the strongest credit in the world. The full consequence of a default — or even the serious prospect of default — by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets. The nation can ill afford to allow such a result. The risks, the costs, the disruptions, and the incalculable damage lead me to but one conclusion: The Senate must pass the legislation before the Congress adjourns.”

    • We’ve never not raised the debt ceiling. Why is Congress risking our economy and giving this particular president such a hard time?…

      The raising of the debt ceiling is risking the economy my friend. Why can’t you see that?

  3. It seems it is legal to mint such a coin, but economically I thiink it has to be a very bad idea. From my point of view, (I am and engineer not an economist) a currency is worth only what a market for a particular good says it is, and if I use M2 as my base measure of money, at the end of 2011 there was about 10 trillion dollars in circulation, printing one such trillion dollar coin would produce a dilution of the US currency by 10%, so one could expect 10% of inflation due to such an action. (This ignores how much of the M2 is already due to previous Fed actions, rather than economic value) so I expect overall inflation will be much worse in the long term

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