StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



It Takes Two To Buy And Sell A Platinum Coin

03 Dec 2013
Posted by Stan Collender

One of the ideas discussed during the fiscal cliff debacle in late 2012 and early 2013 to deal with the GOP's intransigence on raising the federal debt ceiling was the platinum coin trick.

The idea was pure genius. Using previously-granted legal authority, the Treasury would mint a platinum coin with a face value of $1 trillion and would sell that coin to the Federal Reserve which would then credit the U.S. government with the cash. That would eliminate the need for additional government borrowing any time soon and...presto...the White House's debt ceiling problem would go away.

The White House eventually said no to the platinum coin trick by saying that it didn't have legal authority to do the sale. It also became apparent when the administration rejected the other debt ceiling escape hatches like the 14th amendment that the White House's political strategy was to keep the pressure on congressional Republicans by making them deal with the one and only debt ceiling process: voting on it.

Ryan Reilly at the Huffington Post today posted a story based on documents obtained through a Freedom of Information Act request that the White House had a memo from the Justice Department saying that the platinum coin trick was legal. The implication of Reilly's piece is that the administration's decision not to go with the coin was purely political.

That's missing one key point. The trick doesn't work if all you have is a platinum coin to sell; you also have to have a buyer and the Federal Reserve said at the time that it wasn't interested.

The administration could have said it wanted to do the coin trick but the Fed wouldn't let it, but that would have created some public animosity between the White House and congressional Democrats and the Federal Reserve at a time when they both needed monetary policy to help the economy. It also would have poured fuel on the political fire that existed at the time between the Fed and congressional Republicans.

So the administration decided to take the blame itself. It claimed that there was no legal authority to do the coin trick and in the process protected the Fed.

This isn't really news. Here's

what I said about this on January 13

:

Does the Fed Actually Have that Authority?

This may be outside your wheelhouse or just your interest, but have you any opinion as to whether the Fed was justified in taking that position?

Yglesias made the argument -- https://twitter.com/mattyglesias/status/383642638077161472 -- and it seems legit that the coin would have been "Legal tender for all debts, public and private" so on what basis would they be choosing which types of cash to accept?


appearances

If the Coin were at all contentious, then it could still spook investors. By voting, Congress shows it is still responsible enough to do what needs to be done. Failure of Congress would send a clear message that Congress is too irresponsible to be trusted.


The law is clear that

The law is clear that platinum coins can be accepted by the federal reserve. This wasn't the intention of the law, but the letter is clear, and Bernanke has to follow the letter, not try to discern the intention. As such, the federal reserve has no legal standing to refuse to accept the coin. I think Matt Yglesias is right.


It's not a sale, exactly

First, as a matter of accounting the face value of the coin is booked when it leaves the dock at the Mint to go to the New York Fed.

Second, the coin is legal tender.

Third, the New York Fed is the exclusive banking agent of the US Mint by law. It has a special account there called the Public Enterprise Fund (PEF) Account.

Fourth, when the Mint sends the coin to the NY Fed for deposit, the NY Fed has an obligation as the banking agent of the Mint to accept and credit legal tender especially if the Fed Chair tells it to do so. If the Fed Chair refuses to do so, then when he sends that information to the Mint and copies the Secretary of the Treasury, the Secretary can reply by saying that his interpretation of the Fed's obligation with respect to the coin differs from the Chair's and that he insists that the Chair order the New York Fed to accept and credit the coin. When the Secretary does this he will cite 12 USC 246, which says that in cases of disagreement over financial matters between the two the opinion of the Secretary will prevail. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242), so it's doubtful the Chair would continue to refuse to accept the Secretary's interpretation.

Nor could the Chair take the Treasury to Court and get standing, because 1) the Fed can't be a 4th branch of Government; and 2) the law is clear that the Fed Chair is subordinate to the Treasury Secretary in matters of interpretation.

Fifth, once the coin is credited to the Mint's account, the Treasury can "sweep" the PEF for the seigniorage which is the difference between the cost of creating and transporting the coin to the Fed, and its face value. So,

Sixth, in the case of a $60 T coin, the seigniorage would be very nearly $60 T going into the Treasury General Account (TGA), which can be used to cover deficit spending and to pay back debt instruments as they fall due without issuing new ones.

Seventh, I've used the example of a $60 T platinum coin because it's relevant to your point that the Executive needed the Fed to continue to run a friendly monetary policy for the sake of the economy. Had the Administration minted a $60 T coin, friendliness would not have been necessary because the presence of many, many Trillions in the public purse would have made further deficit hawkism untenable, and would have led to very activist fiscal policy, if not before then certainly in the new Congress in 2015, assuming a populist campaign by Democrats now freed from the shackles of the need for deficit reduction.

The austerity program would have been killed right there. And as support built for progressive economic measures funded by deficit spending the US could easily afford, fiscal policy would have become very aggressive causing full recovery at last, and the Fed would have to raise interest rates anyway. My kindle e-book provides comprehensive treatment of economic, legal, institutional, and political issues issues surrounding the platinum coin, and also grounds the coin in Modern Money Theory (MMT). It's here: http://amzn.to/Z7kG5q

Eighth, I don't agree that the President protected the Fed. I think he put the blame on the Fed, since the Fed didn't have the freedom to refuse to credit the coin, as I've just pointed out. And he did that because he didn't want continuous further pressure from progressives demanding that he use the coin to de-fang the Republicans.

At that time, and perhaps to this very day, the President was seeking a “Grand Bargain” with the Republicans. If he had used the coin, that would have blown his rationale for the GB out of the water. On the other hand, if he were seen and understood to have killed it, he would have gotten all kinds of anger and rage from the progressive blogosphere whose fund raising efforts would have been accelerated and whose anger at the President’s “cave” to the Republicans would have known no bounds.

The President needed to maintain the balance of power between the Democrats and the Republicans to get his Grand Bargain. He did not want to defeat the Republicans completely so that his neoliberal, "bipartisan", "purple," Petersonian agenda would be swamped by resurgent progressivism.

So, it was very convenient for the President to have his people put out the story that it was really the Fed who ought to be blamed for vetoing the coin, and that the Administration was just giving the Fed some cover. That way he got the dutiful village media to quit talking about the coin, and he kept the pressure on for the Grand Bargain by arranging for the crises in the Fall of 2013 that he hoped would finally create the conditions that would facilitate the GB.

Unfortunately for his agenda, the rapid deficit reduction this year, accompanied by the discrediting of the intellectual basis of austerity (the Reinhart-Rogoff work), the trauma caused by the shutdown and debt ceiling fight, and finally, the slowing of the economy caused by deficit reduction and the sequester biting the economy, removed the appetite for the GB on both sides of the aisle. Now no one wants any hard games played before the elections next year, and they certainly don't want to alienate seniors before that election. So, the GB is dead until after the election and perhaps until 2017 if the election works out well.

But all the news isn't good, because the compromise that is likely to result from the negotiations of Patty Murray and Paul Ryan will still produce far less deficit than we need to for full economic recovery. So we will continue with high unemployment, increasing economic inequality, economic stagnation, and general lack of progress on our many economic and social problems.


People understand,

People understand, intuitively, that the platinum coin is a trick. And they don’t so readily understand that the debt limit has become a trick Congress plays on itself.

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