Is Coin Seignorage Obama’s Magic Bullet?

Here’s Felix Salmon on a crazy idea that’s been making the rounds:

Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)

It seems that some of the MMT-types have been pushing this idea, for instance here’s Joe Firestone:

Throughout the next six months, a number of other posts appeared at various sites provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, could close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

So is this a brilliant masterstroke that will solve all of Obama’s problems, or a loony idea that he should avoid touching with a ten foot pole.  Even though I only learned about this idea 30 minutes, ago, I can confidently answer “both.”

Let’s start with the easy part, the idea seems completely nuts.  The public would instinctively recoil from this idea, mainly because the public’s instincts are pretty good.  Roughly 99% of the time this sort of plan would produce hyperinflation.  It doesn’t really matter whether the idea is actually nutty, Presidents simply can’t be seen doing wild and crazy things with the currency.  FDR did something analogous (in a milder form) in 1933.  His policy led to the resignation in protest of a number of his top aides, including Secretary of the Treasury.  In the end FDR was forced to retreat.  And his political position was much stronger than Obama’s.  So if Obama’s political advisers are reading this, tell him to avoid the idea like the plague.

The harder part is whether it would work.  I don’t know if it’s legal, but Firestone seems to think so.  If it is legal it could not only solve Obama’s debt ceiling difficulties, it could also allow him to generate a fast economic recovery (in NGDP, or aggregate demand.)  In other words, he could do an end run around the Fed and run monetary policy right out of the White House, just as FDR did in 1933.  Or he could threaten the Fed to get his way, just as FDR did in 1933.  (FDR devalued the dollar, and basically told the Fed that if they tried to stop him he’d start printing fiat money, which was authorized by Congress in the devaluation bill.)  Of course either of these moves would delight Paul Krugman, and cause heart attacks amongst all the Very Serious People who run the country.  (You know, the ones who don’t understand the distinction between NGDP and RGDP.)  Just as FDR’s decision to torpedo the World Monetary Conference was called “magnificently right” by Keynes, but horrified all the Very Serious People of 1933.

I have to admit that as a contrarian, a quasi-monetarist, and a former coin collector, the idea of minting two $1,000,000,000,000 platinum coins as a way of solving our economic problems fills me with delight.  Remember, I’m the guy who once claimed the recession was caused by too few nickels.  Yes, I am slightly embarrassed to be in with the MMT people.  (Firestone seems to think we have 30% excess capacity, and that we could monetize the entire debt without creating hyperinflation.)  But not so embarrassed that I’m afraid to risk ridicule from the more respectable bloggers who dismiss this idea.

I hope the Fed has a safe place to store those coins—wouldn’t want to “misplace” two trillion dollars.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

17 Comments on Is Coin Seignorage Obama’s Magic Bullet?

  1. “Let’s start with the easy part, the idea seems completely nuts.”

    No more nuts than allowing the Republicans to use the debt ceiling as a hostage.

    And while I certainly am not in the MMT camp, there’s no way this could create inflation.

    • printing money by any other name is still printing money. The more money is printed, the less value that money has because more people then have more money and can afford to spend more money. If everyone on earth deficated gold nuggets then gold would be about as valuable as dirt.

    • Exactly how does this NOT create inflation? It would destroy the pricing structure on everything, in essence making anything worth whatever someone declares they say it is worth. While clever, it is the entire USA and the dollar we’re talking about here, not a children’s card game. This is the dumbest thing I’ve ever heard of.

  2. Unconstitutional. The power to regulate the value of coin is vested in Congress, not in the executive branch. The power to transfer that power to the executive branch belongs to the several States, or to the People.

  3. Great idea. I like it.

    I guess this is why the government likes the artificially low legal tender values of the current gold and silver coins.

    The difference between the legal tender value and the sale price goes to the general fund.

    Currently something like $1400 for every one ounce gold eagle coin sold.

  4. Or am I thinking wrong??

    Because the legal tender value of $50 is less than the $1500 sales price, seignorage is negative?

    How do they do the accounting for this?

  5. This is fucking retarded. You cant create 2 trillion dollars out of thin air. This will completely destroy the currency, the economy, and turn us into Zimbabwe.

    • Well, although I agree that you SHOULDN’T create money out of thin air, it is done on a daily basis. QE1, QE2, fractional reserve banking etc. But the sheeple just sit back and let it happen because we are fed fear on a daily basis. Our currency is devalued, our money buys less, we do nothing about it.

    • That is what the federal reserve does every day. How do you think the money in your pocket came to be? You think it is backed by anything but air and a promise? Think again, it is actually debt, the US borrows all money from the fed, who creates the money (out of the chairmans ass) and gives it to the US as principle for a loan that they an never pay back.

    • Actually, it does come out of thin air…and from a structural design flaw in the way our government is set up. The US government has a debt limit, but an entity within the US government (Federal Reserve) has no such debt limit. What this essentially does is monetize the government debt and transfer it to the Federal Reserve.

      And as Umm… said, there has never been anything backing the value of the money in your pocket since the 70s. That’s when the US dollar was no longer pegged to the gold standard. In fact, there is no currency in the entire world right now backed by anything of real value except investor confidence that its value is what it says it is on the front of it. Currencies simply trade against each other based on their local economies. In reality, the actual value of your dollars are just bits of cotton and ink, barely costing more than 10 cents to print. That’s the whole point of fiat money – its value is whatever it says it is.

  6. I triple dog dare the President to do this. To my knowledge, no one has ever backed down from a TTD and had the guts to show his face in public again.

  7. @Ron Paul –
    WTF do you think the Fed has been doing with QE1/QE2 and soon-to-be QE3??? They “printed” well over 1.5 trillion and there is no sign of stopping. This is all by design so they can collapse the US and our currency. We are the last man standing between them and their NWO

  8. “That is what the federal reserve does every day. How do you think the money in your pocket came to be?”

    Exactly right, if Congress can delegate its power to create money to the Fed, it can certainly delegate it to the Secretary of the Treasury (indeed it already has, beginning with the Coinage Act of 1792). Its not inflationary since the platinum coin (legal tender at whatever denomination the Secretary sets for it per 31 USC 5112(k)) would be used to buy T-bonds held by the Fed, not one additional dollar would be added to the real economy.

    The statutory anomaly this corrects is that the US Govt has a debt ceiling, yet an agency of the US Govt, the Federal Reserve, does not have a debt ceiling. Platinum coinage would simply transfer debt from the constrained whole to the unconstrained part. It makes no logical sense, for that you can thank Congress. But at least they provided a platinum escape hatch from the US defaulting on its obligations, including the $2 trillion it owes itself (again, the Fed is a govt agency; if you don’t believe their own words, internet domain suffixes don’t lie).
    “The Federal Reserve, like many other central banks, is an independent government agency…”

  9. “I hope the Fed has a safe place to store those coins” That shouldn’t be a problem if the coins can specify that they are only usable in intergovernmental accounts like the bonds in the social security trust fund….

    Hey, why not solve the problem by paying social security with derivatives backed by the bonds in the social security trust fund ;) then tell people to call their congressional representative and ask whether those bonds are “real” or “just an accounting fiction.”

  10. the platinum coin idea sounds great but I doubt that the president knows about it. I saw it mentioned on CNN but they also also talked about the 14th amendment idea and another idea at the same time. The platinum coinage idea needs to be told to the president by itself because the president already rejected the 14th amendment idea. Talking about all these ideas at the same time gets confusing. When all these different ideas are talked about together at the same time the ideas seem to run together. They need to start talking about the platinum coin idea by itself because it might actually work. it’s a great idea! the idea needs to be put on the mainstream media all by itself without mentioning other ideas.

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