Photo: National Archives & Records Administration
America’s government is full of oddities, and here’s one: it is possible for the government to pass spending and tax bills which lead to an illegal amount of accumulated debt.The government’s borrowing results from all the tax and spending choices made by past and present elected officials and leads to annual deficits that add to a stock of public debt.
Once the tax and spending choices are made, the resulting debt load is a fait accompli, a residual.
Yet said elected officials have also seen fit to pass a law declaring that debt must fall below a specific limit.
From time to time, then, Congress has to pass a law raising the limit—essentially, declaring its past choices legal—or face dire fiscal consequences.
If the limit is reached and not raised government outlays must be cut immediately and dramatically or the government must default on some of its debt-interest payments.
Those are both terrible options, and so until recently the government has simply raised the limit when necessary.
But in 2011 congressional Republicans decided to use the threat of major economic disruption to extract policy concessions, generating a nasty debt-limit stand-off that sent markets into a tailspin and consumer confidence tumbling (while also setting off the process that gave us the fiscal cliff).
After that fiasco, President Obama vowed never to negotiate over a debt-limit increase again, but Republicans, having used the tool effectively once, may be prepared to call his bluff.
That has led to a wave of innovative thinking on how the debt-limit process might be circumvented. And from that wave has emerged the Platinum Coin Solution. Briefly: Treasury produces dollar bills and coins, but the Federal Reserve has control over their use and distribution into the economy.
But an obscure law crafted to allow the Treasury to mint commemorative coins seems to suggest that it could legally produce as much of certain kinds of money as it wants, then deposit that money at the Fed and use it pay bills as necessary. Here’s the language, by the way:
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.
So there you go. Treasury could mint a $1 trillion platinum coin, take it to the Fed, and the problem would be solved. The idea has been enjoying increased prominence lately and has sparked a corresponding amount of commentary. Steve Waldman rounds up some of that here and also makes an effort to rebrand the idea so as to make it seem less like part of James Bond plot.
The most compelling argument for the solution is that while it seems both risky and bonkers it is less risky and bonkers than a continued series of showdowns over the debt limit, any one of which might send America into recession or worse.
The most compelling argument against it is that deployment of the solution would so obviously signal a breakdown in Washington policy-making that really bad things could result. It would represent a large and important change in the nature of monetary policy-making, since an administration that had once opted to take it upon itself to expand the money supply and enjoy the benefits (and eventual inflationary costs) of seignorage might do it again, for any number of reasons.
Executive power, once seized, is rarely surrendered. There is a small chance that global markets would grow scared of America, and would dump exposure to the American economy in chaotic fashion.
My gut reaction to the proposal is to worry that a small risk of an outcome with really nasty results isn’t worth courting unless the alternative is truly horrible. I’d opt for the coin solution before default, but I’m not sure I’d prefer it to forced, rapid austerity. (My assumption is that public outrage in this case would quickly force Republicans to relent.)
On the other hand, debt-limit showdowns are also corrosive of social and governmental norms and will eventually be punished by markets. If it really seems as though Republicans won’t relent in their use of the bargaining chip, and if it looks as though voters won’t strip them of majorities as a result, then perhaps the alternative really is bad enough to justify use of the coin solution, even if a default never is a real threat.
But one thing that’s worth considering in the debate is that there is a proud history of presidents doing monetarily “crazy” things with generally salutary effects. The best examples are the decisions by Presidents Roosevelt and Nixon to suspend gold payments: highly unorthodox choices that struck many observers at the time as terrifically dangerous.
Yet in both cases the outcome was hardly dangerous; Roosevelt’s decision to leave gold helped America’s economy to finally escape the Great Contraction of the early 1930s.
Ideally, Republicans would back down and pass a bill to scrap the debt limit through the good, old-fashioned legislative process. If they won’t the Obama administration should study the coin proposal closely.
One never wants to find oneself in the position of endorsing the use of an obscure, untried, quasi-legal executive power grab to get around what ought to be routine legislative business. On the other hand, the history of the American presidency is a virtually uninterrupted string of quasi-legal power grabs deployed (most of the time) to address or avert serious crisis.
In a pinch, the coin should be wielded as a bargaining chip or outright solution. But America needs to face up to its institutional weaknesses and get serious about legislative reform or expect much more of this stumbling concentration of power in the White House to result.
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