The writer is an FT contributing editor
I have been covering the debates in the US Congress over the debt ceiling for a decade. For only slightly less time, I have been covering the suggestion to have the White House end those debates by instructing the US Mint to issue a $1tn platinum coin. These conversations have been going on for so long that since they began I have lost one dog and had two more children, one of whom is already old enough to play ice hockey. The ceiling and the coin are as familiar to me as the five-year conversation with my wife over whether to share our to-do lists in an app.
I miss the dog. Hockey rinks are cold. I prefer a shared to-do list. The debt ceiling is a dangerous waste of everyone’s time. And I still worry about the coin, for the most small-c conservative of reasons: it is a radical departure from the way we have manufactured money in the past.
I have gone through what I think of as stages of resignation about the coin. The first stage is legal doubt. Can they even do this? They can. The Secretary of the Treasury may tell the mint to issue platinum proof coins — high-quality samples — in denominations entirely of the Secretary’s choosing. The mint would buy platinum, make a beautiful platinum coin and then deposit it at the Federal Reserve for a massive profit. The profit is called seigniorage, the power of the sovereign to demand a return from the mint.
The second stage is that the coin is silly. It is silly. But a lot of things about the Treasury and the Federal Reserve are silly. After the financial crisis, the Fed bought so much US debt that it had to build new policy tools to maintain its influence over interest rates. Now the Fed uses some of those treasuries as security to borrow cash from banks, overnight, at a loss. This operation is called a reverse repo. It sets a floor on interest rates, but it’s only necessary because the Fed convinced itself that its only non-political choice for stimulus was to buy treasuries and hope something good happened. Reverse repos are silly. They are also policy.
The third stage is where I’m stuck. We just don’t know what will happen. The Fed might not co-operate. There would likely be lawsuits and a period of uncertainty as the coin moved through the courts. And the coin is just not at all comparable with any way we’ve made money before. That doesn’t mean the coin is wrong. But we shouldn’t pretend that the coin isn’t novel.
The platinum coiners argue that seigniorage is an ancient right. It is. But not at nearly the scale that the coin would require. The US Mint’s margin on coins for collectors last year was 19 per cent; most years it runs in the low single digits. For the coins that circulate, the mint took a loss on pennies and nickels and a profit on quarters and dimes for an overall seigniorage of 37 per cent.
We have good historical data on mints back to the late Middle Ages, and it’s difficult to find a precedent for seigniorage anywhere near what the platinum coin would bring in, even among the most ambitious sovereigns. The coin is just seigniorage in the same way that a tiger is a just a house cat. They’re both felids, but the difference in scale does present some challenges.
The coiners also argue that the Treasury already just prints what it needs, but in an unnecessarily convoluted way. This is even harder to get behind. Investors and citizens hold dollars as deposits at commercial banks, backed by financial assets at those banks. They transfer those bank dollars into the government’s general account at the Fed for two reasons: to pay taxes, and to buy treasuries. Those treasuries have value because investors believe that there will be dollars in the general account to pay interest and redeem on schedule. The federal government then spends from that account.
OK, they’re right: it’s convoluted. But it’s not sleight of hand, waiting to be revealed by the honest money-minting of a big coin. The United States doesn’t just say “Hey, the dollars in this account are really valuable.” A several-hundred-year process of trial and error produced this method. There could be better ways of manufacturing money. There are definitely fairer ways. But this is the one we came up with, and it sits at the bottom of almost every financial asset in the world.
The problem with my reservations, of course, is that there are no good options in a debt ceiling fight. These fights are never about reform. They always come down to the same thing: Republicans in Congress want to force a Democrat in the White House to accept austerity, humiliation or both. The threat works precisely because treasuries are so valuable, arguably America’s most important export. The proposal to mint the coin is a response with uncertain consequences to a threat with known and catastrophic consequences.
I don’t know. Check back with me the next time we go through this pointless and infuriating fight. Maybe my wife and I will agree on a to-do app. Maybe the hockey will grow on me. Maybe I’ll get over my worry about the coin because everything is ridiculous and dangerous so, you know, why not. I will definitely still miss that dog.
