Written by John Lounsbury
Paul Krugman took another shot at creating some mayhem in the economic and political blogosphere Monday. In a short column entitled “The Taper Versus the Crazy” the Princeton professor, Nobel Prize winner and widely read blogger discussed the upcoming debt ceiling fight. He seconded a recent opinion by Joe Weisenthal that Wall Street was overly focused on the prospective slowing of the Fed asset purchase program known as QE3 (or QE4 or QE∞, although infinity has fallen into less and less usage of late) and not paying enough attention to the looming debt ceiling struggle.
Click on cartoon to see larger view and read article at the University of Sydney.
Krugman has returned to an idea that he supported back at the beginning of the year when the last debt ceiling impasse occurred: The President should simply issue an executive order to the Secretary of the Treasury to create a platinum coin, declare the value of the coin to be $1 trillion and present the coin for deposit in the U.S. Treasury account at the Federal Reserve. Such action is fully authorized by U.S. law as enacted in 1996.
Krugman did not originate this idea. It was first proposed to my best knowledge by an attorney in Atlanta named Carlos Mucha who blogs under the pseudonom Beowulf. Many have posted articles about the platinum coin seigniorage issue, probably no one more than Joe Firestone who discussed a summary of the history and legal opinions in a 06 January 2013 article “Trillion Dollar Coin: Posts on Legality and Constitutionality“. Two years before that Beowulf posted a lengthy legal issues review “
The idea is that Section 8 of the U.S. Constitution authorizes the Congress:
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;“
And a law enacted in 1996:
“The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”
The following is a letter from Philip Diehl, the former U.S. Mint director who helped write the law (excerpt from The American Enterprise Institute):
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
So, back to Paul Krugman’s short Op Ed. The good professor suggests that ideological crazies may not be able to come to a debt ceiling agreement and that:
“Default looks like a real risk.”
And then he suggests there is still an option (his picture):
Here we go again, and on this round of coin seigniorage proposals Krugman may have struck the first blow.
