Trillion-Dollar Platinum Coins, Treasury Warrants, and the Fundamental “Unseriousness” of Money

So far, a large part of the discussion of whether the Treasury should mint (or convincingly threaten to mint) a trillion-dollar platinum coin in response to the congressional threat to refuse to raise the debt limit (see here for background) hovers around questions of legality or ill-defined “seriousness.”  (On the political front, the administration’s press secretary passed up an opportunity on Wednesday to explicitly rule out the idea.  On the legal front, Matthew Yglesias suggests a theory in which the government is not just permitted but obligated to mint the coin.)

But the platinum coin discussion actually touches on fundamental issues that go beyond legality or political decorum; issues about the understanding (and misunderstanding) of money.  (Recently, both Joe Weisenthal and Paul Krugman moved the conversation in this direction.)

One suspects that some objections to the large-denomination platinum coin on the grounds of “silliness” are motivated by simple incredulity about the nature of money.  Behind a lot of the Dr. Evil-themed snickering there lurks a very common “metallist” conception:  an insistence that money must always be backed by something like gold, or in the case of the trillion-dollar coin, that its value is given by the value of the platinum in the coin; something other than the mere fiat of government.  To those who are moved by the argument that the US government has “run out of money,” the reality of money, as laid bare by the platinum coin discussion, must appear deeply unserious and fantastical (we might as well just grab a bunch of sticks and call those money!).

For many people, these themes take us beyond the realm of reasoned argument and well into what Krugman called “a collision of worldviews.”  Or as Stephanie Kelton put it:  “Money scares the bejesus out of people.”  To Randall Wray, a deeply entrenched misunderstanding of money underlies a host of views about debt and the role of government; successfully confronting this constellation of beliefs and assumptions, he argues, requires an exercise in meme-building.

The platinum coin debate is helping lay bare a set of facts that is proving to be uncomfortable for many observers:  that the debt ceiling, and the rules requiring the US Treasury to issue debt rather than money when it spends more than it raises in revenue, are merely contingent rules, not reflections of the scarcity of some finite commodity.  But moving back to the level of operational end-arounds, we need not fixate on the platinum coin.  As Wray suggests, there is an additional way of getting past debt limit hostage-taking.  Beginning on p. 205 of Modern Money Theory he writes:

There are two … ways to obviate the need to raise the debt limit: Treasury warrants and large denomination platinum coins. Let’s examine each.

When Uncle Sam needs to spend and finds his deposit account at the Fed short, he can replenish it by issuing a nonmarketable “warrant” to be held by the Fed as an asset. With the full faith and credit of Uncle Sam standing behind it, the warrant is a risk-free asset to balance the Fed’s accounts. The warrant is just an internal IOU—from one branch of government to another—really not anything more than internal record keeping. If desired, Congress can mandate a low, fixed interest rate to be earned by the Fed on its holdings of these warrants (to be deducted against the excess profits it normally turns over to the Treasury at the end of each year). In return, the Fed would credit the Treasury’s deposit account to enable government to spend. When the Treasury spends, its account is debited, and the private bank that receives a deposit would have its reserves at the Fed credited.

From the Fed’s perspective it ends up with the Treasury’s warrant as an asset and bank reserves as its liability. The Treasury is able to spend as authorized by Congress, and its deficit is matched by warrants issued to the Fed. Congress would mandate that these warrants would be excluded from debt limits since they are nothing but a record of one branch of government (the Fed) owning claims on another branch (the Treasury). The Fed’s asset is matched by the Treasury’s warrant—so they net out.

And Congress would not need to increase the debt limit when a crisis hits that results in growing budget deficits.

The second method is to return to Treasury creation of currency—on a massive scale, pun intended. Currently the US Treasury has the authority to issue platinum coins in any denomination, so it could for example make large payments for military weapons by stamping large denomination platinum coins. It would thereby skip the Fed and private banks. And since coins (and reserves and Federal Reserve notes) don’t count as government debt for purposes of the debt limit this also allows the Treasury to avoid increasing debt as it spends platinum coins. The coins would be Treasury IOUs but would not be counted among the bills and bonds that total to the government debt. Like currency the coins would be “redeemed” in tax payment, hence demanded by those with taxes due. So that is another finesse to get around arbitrary limits or procedures put on Treasury spending

These proposals just show how silly it is to tie the Treasury’s hands behind its back through imposing debt limits. We already require that a budget is approved before Treasury can spend. That constraint is necessary to impose accountability over the Treasury. But once a budget is approved, why on earth would we want to prevent the Treasury from keystroking the necessary balance sheet entries in accordance with Congress’s approved spending?

The budgeting procedure should take into account projections of the evolution of macroeconomic variables like GDP, unemployment, and inflation. It should try to ensure that government keystroking will not be excessive, stoking inflation. It is certainly possible that Congress might guess wrong—and might want to revise its spending plan in light of developments. Or, it can build in automatic stabilizers to lower spending or raise taxes if inflation is fueled. But it makes no sense to approve a spending path and then to arbitrarily refuse to keystroke spending simply because an arbitrary debt limit is reached.