There are many proposals coming out of congress for how to respond to the Coronavirus-induced depression and deliver economic relief to households. Only one however, involves sending and/or delivering a debit card to every single resident of the United States and funding this expenditure by minting a trillion dollar platinum coin. This is Representative Rashida Tlaib’s proposal, co-authored by my colleague at the Modern Money Network, Rohan Grey. Rohan actually wrote his entire job market paper on the Platinum Coin, which I encourage you to read if you’re really interested in the technicalities, but I wanted to cover some basic details
Why a Platinum Coin??
Because there is a provision of the U.S. code known as 5112(k) which lets you mint a platinum coin of any denomination. Other coins have their denomination fixed so there is a limit to how much you can practically finance using other coins.
More generally, it's important for people to understand that government spending is backed by money creation and the simplest way to understand that (far simpler than understanding how the Federal Reserve works) is to see it. The coin is visceral and powerful in a way that other things aren’t, as the hashtag #MintTheCoin shows. The coin was a pre-existing and known tool from the debt ceiling fights in the Obama years and thus is far more familiar (especially to journalists) than a brand new financing mechanism would be.
Does the coin need to be very large?
No. The language of the statute says that “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”.
This means that all the coin needs to have is some quantity of platinum and that quantity’s market value doesn’t bear any relation to the face value of the coin. The mint regularly creates commemorative platinum coins, it would just instead be minting 2 one trillion dollar coins.
Isn’t the coin “printing money” which makes us like Zimbabwe or Venezuela??
No. Using the coin is no more inflationary than issuing bonds. If there is too much liquidity in the banking system as a result of the coin the Federal Reserve will sell treasury securities in its portfolio and “sterilize” the impact. The point of using the platinum coin is to articulate to the public A) we’re using our power of public money creation and B) to avoid the debt ceiling which is suspended until next year but may lead to another set of grueling negotiations. It is also important in order to preempt debates over austerity which inevitably emerge after crisis spending and lending, just like the Tea party emerged in 2009.
More generally, we need to fill the financial hole in people’s pockets. We have no choice but to go big or the economy will collapse far more (and the deficit will grow even bigger regardless).
Will sending 2000 dollars to everyone cause inflation?
Doubtful. The point of this legislation is to help people pay their rent, mortgage, credit card, utility bills and other contractual obligations. People have debts which they need to pay to make ends meet and especially in this time of extraordinary economic uncertainty, are not likely to spend money that they don’t feel is absolutely necessary to spend. It is unlikely that “dollars will go chasing too few goods” more because of this proposal. Even if they do, we need to address them on the production side and not address them by letting the incomes of the most needy collapse.
Doesn’t this interfere with Federal Reserve Independence, which is important for fighting inflation?
While it is debatable that the Federal Reserve’s “independence” is important for responding to inflation, the platinum coin doesn’t interfere with the conduct of Monetary Policy. Even if the Federal Reserve didn’t sell securities to drain liquidity from the banking system (which it can), the fact that it now pays interest on its own liabilities (called “settlement balances”) means the coin can’t prevent the Federal Reserve from setting interest rates. The coin also stays on the Federal Reserve’s balance sheet, so it doesn’t affect the Federal Reserve’s net-worth.
The key to understand the implications of the coin is to recognize that we’re using the Treasury’s power of money creation, not the Federal Reserve’s.The platinum coin is probably better for Federal Reserve independence than other proposals which would entangle fiscal policy with the Federal Reserve’s balance sheet and obligate it to buy treasury securities in order to pursue “money finance”. Using the Treasury’s own power of money creation is cleaner and simpler.
I’ll be covering monetary operations more in the future and get into these kinds of issues in more detail.
Why two coins rather than one coin?
The point of two coins is precedent. We’ve done it not just once, but twice. As Daniel Craig says in the movie Casino Royale, the second one is always the hardest. This moves us over that hump and makes the 3rd, 4th and 5th coin far easier.
Can’t we just have a 100 Trillion dollar coin?
Sure, but it's easier for the public to first get their head around a couple of coins for a specific program, particularly one intended to give universal relief to all.
What Stops the Treasury from just spending 100 Trillion dollars then???
The Treasury doesn’t have the authority to spend whatever money it wants to. It needs congress to authorize spending from some government agency. The Treasury’s job is simply to make sure the spending and lending congress authorizes is financed. We don’t have to be concerned about “overspending” by the treasury. Meanwhile congress can barely agree to spend one Trillion dollars during an economic crisis worse than the great depression.
Let me know if you have more questions and I’ll add them to this post!
Stay Safe,
Nathan