Why platinum is fool’s gold

12th January, 2013

In the context of a small round coin, the stakes are surprisingly high, writes Tim Harford

What’s all this I hear about a trillion-dollar platinum coin?

It’s brilliant, isn’t it? Here’s the background. The US Congress has, over the years, voted to collect less in taxes than it has decided to spend. In order to carry out Congress’s instructions the US Treasury has to borrow extra money. The Treasury’s power to do that is limited by a debt ceiling, and it’s likely to run out of cash shortly after Valentine’s day.

So who has the authority to raise the debt ceiling, and thus enable the Treasury to carry out Congress’s instructions?

Oh, that’s easy. Congress does.

Wait – so in February we’ll find out whether Congress will allow the Treasury to obey Congress or not?

We will indeed.

I suppose this is how checks and balances work.

Checks and balances are one thing, but this is about the US government’s right to punch itself repeatedly in the face. If Congress doesn’t allow the Treasury to obey Congress then the US might even be forced to default on its debt obligations, which would be less of a punch in the face and more a baseball bat swung firmly into the groin of the world economy. I suspect that somehow the administration will find a way to stave off such a default, which would – unlike the inaptly-titled “fiscal cliff” – be a sudden and near-catastrophic event.


Yes, unless that. Actually there are various ways in which the US Treasury might find an escape hatch through the debt ceiling, but coin seignorage is by far the most eye-catching. A law passed back in 1997 gives the US Treasury secretary the authority to mint platinum commemorative coins in any denomination. And coins aren’t government bonds, so they don’t count against the debt ceiling and the Treasury could simply pay for Congress’s spending programmes with the trillion-dollar coin. Or less comically, a big pile of hundred million dollar coins.

I now have so many questions I don’t know where to start. Like – where would the Treasury get a trillion dollars’ worth of platinum?

It doesn’t need to, any more than the Federal Reserve is obliged to put a hundred dollars’ worth of paper and rag into every hundred dollar bill. A small coin with “One Trillion Dollars” stamped on it will do.

And the face of Dr Evil, little finger cocked to mouth, I suppose?

Tim Geithner, the Treasury secretary, can choose any design he wants but we can all see that Dr Evil would be the only reasonable choice.

A bit unwieldy, though?

The Treasury could deposit the coin with the Federal Reserve. The Federal Reserve would then credit a trillion dollars to the Treasury’s bank account, and the Treasury would start spending the money in the traditional fashion.

Wouldn’t that be catastrophically inflationary?

The Fed should ensure that it isn’t. The value of notes and coins in circulation is $2.6tn, so an extra trillion would be a big deal. But currency in circulation can vary hugely without necessarily causing inflation – it depends what else is going on in the financial system. In this case, as the Treasury spent the trillion dollars, the Fed could sell a trillion dollars’ worth of US government bonds, absorbing the extra currency.

So the overall effect would be an extra trillion dollars of bonds in private hands, exactly as though the Treasury had borrowed money in the first place?

Yes. The economics of this are surprisingly tame. It’s the politics that are up for grabs, and there are really two questions here. The tactical issue is who would look stupider – Republicans in Congress for using the debt ceiling to prevent the Treasury carrying out Congress’s instructions, or the Obama administration for responding to that threat by using a trillion-dollar coin. It’s a variant on the old philosophical paradox: the infinitely ridiculous force meets the infinitely ludicrous obstacle.

Is there a real policy judgment to be made, too?

Yes. It’s whether America’s economic reputation would be more damaged by another debt-ceiling crisis, or by the executive seizing the authority to create new money. Very sensibly, the administration is trying to rise above the whole argument.

So there won’t be a trillion- dollar coin?

I strongly doubt it. But then again, Tim Geithner is expected to step down soon. Someone should check his pockets on the way out.

Also published at ft.com.

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