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. “Booking” $1T does not actually produce cash, which is Federal Reserve Notes and US coins.

    Yes, none of this matters in the real world (setting aside expectations) until cash is actually needed, at which point either the Mint or, more likely, the Fed creates the cash for the USG to spend, and that will dilute the money supply as it enters circulation.

    After all, with the trivial exception of (normal) coins, our cash is Federal Reserve Notes, which are banknotes backed by specie (a relatively small amount; “backed by” but not redeemable) and Treasury debt held by the Fed (a lot).

    • So the Treasury would have an extra $1T under this scheme. How do they spend it without authorization from Congress? I know the Constitution doesn’t mean much to this group, but doesn’t Congress have the power of the purse? That this idea is even being considered does not portend well for the next 4 years.

      • Mike, Treasury already has the authority to spending these funds through the appropriations bill passed by Congress. What the platinum coin proposal would do is allow Treasury to pay the bills for what Congress has already spent.

        Marty, the money supply is not “diluted”. The coin is never circulated like a trillion dollars in quarters would circulate. Instead, the coin would perform in the same way new debt proceeds going into the treasury would. The coin is essentially a placeholder, giving Treasury room to continue to pay its bills until it can issue debt and remove the $1 trillion from the books.

        • Those are the talking points being chatted up, anyway.

          It would allow Treasury to pay the bills for what Congress has authorized, but has not yet spent.

          It does dilute the money supply, because, unlike debt, it’s merely an entry in the positive side of the balance sheet, with no corresponding negative entry. Your contention that it absolutely would be removed from the books later is a perfect-world fantasy. Because it’s FREE MONEY! Congress would not raise the debt ceiling again. Mint another coin! We’re going on a spending spree!

          Tell me that Congress is more responsible than that.

          • I’d agree with everything you say, but you’re wrong to blame Congress for this – it’s the executive branch that’s acting here to “mint” Coinage in a bald attempt to circumvent Congress’ power of the purse.

            Its yet another farce from the most reckless and economically ruinous administration in American history, and it’s clear that Congress’ legislative intent was to authorize coinage that would actually circulate. Claiming the power to mint 1T coinage that does not circulate because Congress could not foresee an administration so fiscally reckless and indifferent to economic harm (not to mention the rule of law) as this one is the crowning absurdity of the Obama administration. I’m sure there will worse usurpations to come…

  2. “And it seems like something out of a Simpson’s episode.”

    Indeed. If we go down this road, the “full faith and credit” of our government will mean nothing to international financial markets, nor should it. That such gadgetry is even being seriously considered is damning evidence of this Administration’s economic irresponsibility. We have a serious spending problem in this country, and nothing other than cutting spending will solve our problems. It’s that simple.

  3. If this is such a good idea why stop at one trillion? Have the Treasury mint a one quadrillion dollar coin, that will fund the entire country for a century, and we can lower taxes to zero.

    • With the right incentives I am sure that the US can hire Gideon Gono to oversee the operations. Look at the great job he did in Zimbabwe.

  4. If you are finally worried about the future of fiat money Jimmy it is time that you looked to money that the Fed and Treasury cannot print. Buy gold and your financial future is insured against the type of stupidity that is certain to come. Of course, if you do that you might want to consider holding it outside of your national borders just in case Obama tries confiscation just as FDR did.

  5. Two things have me concerned: The potential for increased inflation is one thing (I’m not an economist… just a squirrel). But the second, our spending, isn’t something that Washington is serious about addressing. Any person who has ever run a business understands the P&L and the importance of balancing income and expenses. The government doesn’t care about any of that and just keeps spending without the requisite income. Taxes and fees only go so far, as does class warfare and the vilification of “The Rich”. These are ALL diversions. We still do not have the money to pay for it and are drowning in debt. Personally, I don’t see how these jokers in Washington can even sleep at night. The one thing I am sure of: None of our current leaders will be alive when our fiscal problems are substantively addressed. They’ll kick the can down the road with gimmicks and accounting tricks like trillion dollar coins and we live large on our great-grandchildren’s tab. I guess the answer is to stop caring and enjoy the party… Thanks kids!!

  6. How is the concept of coin minting not the same as check kiting? All this does is borrow money from ourselves to put in our checking account to pretend like we have more money.

  7. If I may, a rebuttal:

    * The intent of the law was to enable the Mint to compete with the Canadian Maple Leaf in U.S. and Japanese platinum bullion markets. Therefore, the coin was designed to sell to investors, not collectors. Congress gave the Mint authority to mint a collector version as well, but that was a side product.

    * The broad authority granted Treasury to determine denominations and all other specifications is probably unprecedented, and we knew it when we wrote the law. The authority to set any denomination is not a bug but a feature.

    * The coin does not allow the government to evade its fiscal responsibilities–it allows the government to meet its responsibilities. Appropriating trillion of dollars in spending then denying the government the ability to pay the bills, forcing the government to default, that’s fiscal irresponsibility.

    * The coin would not “spark inflation”. In fact, it would have no macroeconomic effect whatsoever. The Mint would strike the coin, ship it to the Fed, record $1 trillion on its book, and transfer $1 trillion to the treasury’s general fund where the money would be immediately available to finance government operations.

    * When the debt limit is eventually raised and new debt issued, the coin would be shipped back to the Mint, the $1 trillion reversed on the books, and the coin melted. Other than when it’s in transit, the coin would never leave the Fed and Mint vaults, i.e., it would never enter the money supply, and no bonds would need to be issued to back the coin.

    * Perhaps Rep. Walden can move his bill through the House. What do you think his chances are in the Senate? Nil, and everyone knows it. This is just the latest, flailing attempt by the House GOP to find some leverage, any leverage, to force its will upon the Senate and the President, the cost to the country be damned.

    • A thought experiment.

      Let’s say Greece passed a similar law and then did this accounting trick, and thus lowered its debts on the books.

      How would investor’s feel about that?

      And why raise the debt limit, if every day we can stamp out 17 coins, then 18, then 19 and ship them back and forth?

      The best ceiling is analogous to a credit card limit. Its designed to make the pols have some small amount of shame when running up debt.

      Running deficits of 5-10% of GDP per year for years in a row is not facing up to fiscal responsibilities. You can promise whatever you want, but when circumstances change, and you can no longer deliver, you have to face reality.

      At some point the debt will have to get smaller. Perhaps we can be like Japan and get to 200% of GDP. I am doubtful The claim that its responsible to keep raising the debt ceiling or to have none at all and ignore the fiscal issues is insane. The debt limit is like cutting up your credit cards, except for one for emergency use. Its a purposeful action to limit the temptation to borrow.

    • Not raising the debt ceiling would require the government to cancel projects, not default. We’ve got an income stream to service the existing debt, and to fund maybe 2/3 of scheduled spending. So you defund a bunch of projects to avoid default.

      I love the absolute certainty that the coin would be subtracted once the debt ceiling is raised. What’s the incentive to raise the debt ceiling?

      • As I said to Alice, in my youth I could believe six impossible things before breakfast. When referring to “the government” above, you mean the executive branch. The three inconsistent laws provided by Congress the executive must follow:
        1. observe the debt ceiling;
        2. you cannot sequester funds — all that we approve must be spent;
        3. you cannot collect more in tax money than we specify by law.
        The platinum coin may be the only legal way out of this conundrum. The President cannot legally, as you suggest “defund a bunch of projects.” That is up to the House and Senate. Good luck with that.

        • Mr. Queen – defunding projects actually depends on the president. It’s called bicameralism and presentment: the house, which has the power of the purse but depends on senate assent, can only pass legislation (the bicameralism part) but it’s not a law until the president assents (assuming no veto override) – the presentment part. If the deficit spending exceeds the amount of debt authorized, it’s up to the executive, I.e. The president, to figure out what expenses not to incur (such as closing national parks).

          The battle over the debt ceiling and this 1T coin fatuousness is just another skirmish between the House with a mandate to cut deficit spending and pursue economic revival and a President hell bent on protecting the grossly expanded federal spending he engineered, principally as the stimulus (by not passing a budget, he prolongs indefinitely his stimulus because its part of the “continuing resolutions” the settlement of these debt fights produces.

          This unseriousness about a 1T coin is nothing more than the Obama administration’s feeble attempt to acquire leverage in the upcoming negotiations over the debt ceiling – he fears, with tax raises off the table, the republican House will force the end of his inflated non-budgeted spending.

    • The coin will not have a macroeconomic effect because the debt ceiling will be raised and the coin transfer reversed, but it isn’t an end-round around raising the debt ceiling? Your entire argument is based on the assumption that Congress will raise the debt ceiling, which may be a fair assessment, but certainly makes clear that this would be a circumvention of congressional authority over the debt limit.

      And, pray tell, how does this fall within your stated intent of the law as an investment? Who wants to invest in a $1T platinum coin?

      Finally, just because your intent (assuming you are who you say you are for the sake of argument) of writing this feature into the bill was one thing doesn’t mean that was the intent of the legislators who voted on it. Or even that they were aware of your possibly nefarious intent.

  8. There is nothing illegal, unconstitutional or inherently inflationary about the $1 trillion coin. The fed has been printing money for four years and has increased it’s balance sheet by almost $2 trillion through this process. Where’s the inflation? There is non because, as Paul Krugman explained, we are at the zero bound and are experiencing basically negative real interest rates.

    The attackers of the #MintTheCoin idea are pushing the “uncertainty” about it’s legality and inflation, etc in order to rile markets and create a self-fulfilling prophecy.

    And, not coincidentally, most of them are also Austerians who believe the Republican BS about deficit spending. When I hear someone talk about dealing with our deficit spending and debt problem ahead of pushing for economic growth, I pretty much tune them out as either massive idiots, or people with a vested interest in the economic status quo.

    • “When I hear someone talk about dealing with our deficit spending and debt problem ahead of pushing for economic growth”

      Those are related, you know. Once you get past 80% of GDP debt levels, you lose around 0.5% of growth.

      This is not some fantasyland where Japan spends 200% of GDP over 2 decades and acheived amazing growth – they have got very little from all that “infrastructure” they built.

    • Krugman?!?! You have got to be kidding!

      BTW, where would the US get the money to buy $1T worth of platinum? If the coin was denominated more than the metal we would still have fiat.

      • The Mint wouldn’t need a trillion dollars worth of platinum for the coin. It could be one ounce, even less, at a price of about $1600 an ounce. The law gives the Secretary discretion as to the amount of metal to use.

        • True, like the current “gold” Presidential dollar’s face value far exceeds the metal’s value of @$0.07. But that is still fiat. Debasement of currency is stealing.

  9. If the U.S. Mint creates two coins per year then we should abolish the IRS! As we stare at the absolute absurdity of fiat currency in the hands of men who are predisposed to do evil, it’s easy to imagine that the true intentions of our current immoral government is to forcibly ‘sell’ these coins to our banking institutions for the purpose to completely loot the American people … and the government reassures us that all is compliant with accounting principles, of course.

  10. RE: interest free coin trick

    Since this Trillion Dollar Coin would never circulate within the marketplace, would never be traded hand to hand, bank vault to bank vault, it would never ‘wear out’. Thus, once minted, that coin would remain in the Fed’s bank vault forever.

    So why stop at just one coin? Mint as many as you need; five, twenty, a thousand.

    • Incorrect. A coin does not have to “wear out” to be returned from the Fed and melted by the Mint. This can be done for any reason.

      • Incorrect. A coin does not have to “wear out” to be returned from the Fed and melted by the Mint. This can be done for any reason.

        Who cares? The point of the posting was the question, “why stop there?” Why not strike a coin for each person in the US? How great that everyone was a trillionaire. Imagine all of the things that everyone could buy without sparking inflation? We can get together with the Wizard, Dorothy, and the Cowardly Lion and have a tea party to celebrate.

          • Of course, who cares that the facts are wrong. We’ll ignore that inconvenience and move on.

            The ‘fact’ that you were hung up was immaterial. Minting a $trillion coin and pretending that it isn’t a problem isn’t immaterial. A bit of perspective and sanity is in order but this seems to be the wrong place for it.

  11. @Philip Diehl: I respect that you’re quite invested in this idea, but you’re being a bit disingenuous:

    “The coin would not ‘spark inflation’. In fact, it would have no macroeconomic effect whatsoever. The Mint would strike the coin, ship it to the Fed, record $1 trillion on its book, and transfer $1 trillion to the treasury’s general fund where the money would be immediately available to finance government operations.”

    You must realize that when the money is used to “finance government operations” that necessarily means that the money will be spent — i.e. circulated — in the economy. THAT is what causes inflation (along with velocity, of course). To say that it will have no effect whatsoever is simply not true. Indeed, if we disregard the difference between relative size and numeracy, this coin trick is no different than printing $1 Trillion dollar bills and handing them to the Treasury to fund government operations. Either way the money supply expands.

    • You must realize that when the money is used to “finance government operations” that necessarily means that the money will be spent — i.e. circulated — in the economy. THAT is what causes inflation (along with velocity, of course). To say that it will have no effect whatsoever is simply not true. Indeed, if we disregard the difference between relative size and numeracy, this coin trick is no different than printing $1 Trillion dollar bills and handing them to the Treasury to fund government operations. Either way the money supply expands.

      Someone is putting us on. People can’t be this stupid and can’t accept such bogus arguments seriously. Phil is probably some troll having a bit of fun.

  12. The only purpose of the debt ceiling is to force congress to control spending. The trillion doller coin trick removes that break…and reduces investor confidence. Expect moody’s and other credit agencies to immediately downgrade our credit rating. Thus interest rates rise. Given our huge debt any increase in borrowing costs will force us to the debt ceiling even faster…requiring minting another trillion dollar coin…and another.

    It is insanity to expect this stunt to have no consequence. Anyone seriously advocating it should be run out of office.

    Here is a thought. Reduce spending. Now.

  13. “* Perhaps Rep. Walden can move his bill through the House. What do you think his chances are in the Senate? Nil, and everyone knows it. This is just the latest, flailing attempt by the House GOP to find some leverage, any leverage, to force its will upon the Senate and the President, the cost to the country be damned.”

    So what is the cost of the country of adding trillions of more dollars in debt, not authorized by Congress?

    Obviously from what I quoted, you are another leftist, partisan hack. I suppose it never crossed your mind that Obama would be imposing his will upon the House? You, know, the “people’s house.”

    Sad, we are supposed to be a limited government. Yet, this would give unbounded power to the executive branch.

    • Facts have no partisan bent, despite what the Fox News-loving, make-your-own- reality ideologues believe. Continuing to live in your bubble is why you’ll keep losing elections and be shocked at the results. But you can always console yourself with the myth the elections are stolen.

      The platinum coin adds not a penny to the national debt. It simply allows the government to pay the bills Congress has already racked up.

      And imposing the President’s will on the House? No, it’s a counter to the House attempting to impose its will on the Senate and the President irrespective of the cost to the country.

      Limited government, heh? Jefferson and all the founders would have been appalled by an attempt to hold the government hostage with a threat to bring the country to default.

      And Washington would have brought out the troop like he did with the anti-tax, states rights Whiskey Rebellion insurrectionists.

      • Limited government, heh? Jefferson and all the founders would have been appalled by an attempt to hold the government hostage with a threat to bring the country to default.

        Really? They would never have voted for more debt when cutting spending was an option. You might try to learn a bit about your own history before posting on a subject you clearly know so little about.

      • Limited government, heh? Jefferson and all the founders would have been appalled by an attempt to hold the government hostage with a threat to bring the country to default.

        Really? The founders would never have voted for more debt when cutting spending was an option. You might try to learn a bit about your own history before posting on a subject you clearly know so little about.

      • Thomas Jefferson and the founders would not have let the government grow into such a bloated behemoth. The Constitution strictly (and literally) prohibits much of what our politicians (particularly the present administration) are doing. By this point in time, were he alive, I’m quite certain that Thomas Jefferson and the founders would have been busy watering the tree of Liberty.
        PS. If you’re not familiar with the tree of Liberty quote, look it up.

      • when the government was building the washington monument (the big white pointed thing) it sat halfway done for several years because the government ran out of money to fund it. Back then they didnt print money out of thin air, no magic trillion dollar coin. No money government shut down. Washington, Jefferson would shut the government down. Democrats live in fantasy land to even take this platinum coin seriously. You dont believe in god but do believe in unicorns.

      • You get called out on your fallacies and resort to assumptions and insults (“fox news loving”). You’ve revealed yourself as a partisan shill, and it obviously colors your purportedly unbiased “facts”. I sure hope you’re not representative of the caliber of bureaucrat we have at the federal level, although that would explain much of why the federal government is so dysfunctional.

  14. How about we make 17 Trillion-dollar coins and pay off all our debt in a single day? Somehow I think the Chinese would be really upset……

  15. This is absolutely stunning. People who appear to be reasonably intelligent are defending the absolute insanity of limitless deficit spending. Then to top it off, zealously defending a practice of minting a coin which would still essentially only be backed by the good faith and credit of the US TAXPAYER (more likely their future generations) to balance the books at some fantasy date in the future.

    Are you people seriously not on some psychotropic drugs of some kind? Does borrowing trillions of dollars at interest from China without even attempting to create a plan to pay it back on some type of schedule that can be relied upon not seem like a good idea? Do seriously believe we can tax our way our way out of it without cutting spending? Or print or mint our way out of it?

    You liberals are too smart by half and utterly insane in your arrogance.

    Please tell me the plan when we very shortly get to the place where we cannot generate enough revenue to pay the interest on the debt? Do we just print a 30 trillion dollar coin and give it to China?

    No impact on the economy UNLESS we cut spending? You people on the left are certifiable.

  16. It may be that I am not educated enough on the details of our financial predicament, yet our auditor may say the same thing. Just read the footnotes of the audit statements on the government, like the department of defense. However, I believe that we should practice some good basic accounting principles which are, to increase income, cut expenditures and increase revenue. We all need to work together on this to make it work!

    • However, I believe that we should practice some good basic accounting principles which are, to increase income, cut expenditures and increase revenue. We all need to work together on this to make it work!

      Given the explosion in the size of government the last thing that is needed is more revenue to feed it.

  17. I think we can all be assured that Diehl in the comment section is not the real Diehl (no pun intended) as evidenced by his last comment.

    As someone mentioned earlier, the coin action would increase the money supply. Adding digital zeros is the same thing…

    It is dishonest to suggest that any debt limit agreement should not come with debate over spending. The two are inextricably linked. The disagreements over spending have resulted in more than 3 years of continuing resolutions instead of a serious look at the budget. And so, here we are.

  18. Vangel – good to see you in form. Perhaps you remember me from postings years ago. Hope all is well with you and yours. All best regards =

    Popeye the Sailor

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