MMT's Big Coin Gambit

Modern Monetary Theory, Trillion Dollar Coin, government deficits, monetary policy, fiscal policy

Modern Monetary Theory has been accused, not always fairly, of more serious shortcomings than you can shake a stick at. Among other things, critics have faulted it for not being all that modern, for passing-off tautologies as profundities, for wrongly assuming that the value of fiat money rests upon the government's power to levy taxes, and for misunderstanding the causes of inflation while being grotesquely overconfident in fiscal authorities' ability to control it.

But a shortcoming of Modern Monetary theorists seems to me more irksome than any of the flaws in their theories. I mean their habit of confounding things they would like government officials to do with things those officials are both able and willing to do. They acknowledge legal constraints on public policy options, though only according to their own often strained interpretations of what existing laws allow.  As for other sorts of constraints—political, ethical, psychological, etc.—they brush them aside altogether. Because they wish that policymakers would play by different rules, they claim that the rules are in fact those they'd prefer. In other words, they mix-up normative with positive economics. Then, to add insult to injury, they heap scorn upon their critics for having the brass gall to note particular ways in which the real world stubbornly refuses to conform to their desires.

In a previous Alt-M post, I offered as an example of these habits Stephanie Kelton's suggestion, in her article "We Can Pay for a Green New Deal," that Congress can write checks willy-nilly, without ever having to worry about them bouncing, because (she claims) the Federal Reserve is bound to create new money to cover any difference between what Congress spends and the funds it raises though taxation and borrowing. In effect, Professor Kelton assumes that the Treasury has unlimited Fed overdraft privileges. Yet the truth, I pointed out, is that the Treasury has been altogether prohibited from overdrawing its Fed account since 1980. Nor, I added, is there any other mechanism by which the Fed would be automatically compelled to accommodate the Treasury's needs.

It's Baaaack!

Not surprisingly, my criticism elicited numerous replies from other MMTs, several  of whom claimed that I had overlooked a way in which the Treasury could compel the Fed to top-up its Treasury General Account (TGA) balance. How? By dusting-off and implementing an old MMT idea that captured headlines some years ago. I refer, in case you haven't guessed, to the Trillion Dollar Coin.

For those of you who don't recall it, the idea, first proposed by an MMT blogger and blog commentator styling himself "beowulf," would have allowed the Secretary of the Treasury to thumb his nose at the debt ceiling by taking advantage of a loophole in the 1996 Coinage Act. That Act granted the Secretary permission to "mint and issue platinum bullion coins and proof coins." The loophole consisted of the fact that, unlike other Coinage Acts, this one left the face values to be stamped on the Mint's platinum products entirely to the Secretary's discretion. Because those values didn't have to correspond with the coins' metallic worth, the Treasury might produce a trillion-dollar platinum coin containing, say, one ounce of platinum.

When "beowulf" first proposed the idea, an ounce of platinum cost just over $1500. This meant that, by minting just one trillion-dollar platinum coin and depositing it in its own Public Enterprise Fund at the Fed, the Mint could book close to $999,999, 998,500 in seigniorage, a tidy profit that the Treasury could then sweep into the TGA, to use in paying that many more bills. Today, with platinum selling for just $833 per ounce, the scheme would be even more profitable.

To many, "beowolf's" plan seemed bulletproof. Several prominent lawyers, including Harvard's Lawrence Tribe, could discover no flaws in it. A Nobel-Prize winning economist (who is also one of MMT's more caustic critics) thought it an excellent idea. The plan even managed to garner something close to an endorsement by a former Director of the U.S. Mint. In fine, nothing stood in the way of its being put into practice.

Nothing, that is, apart from…reality. For here, as in their suggestion that the Treasury might overdraw its Fed account with impunity, Modern Monetary Theorists failed to see the yawning gap between policy actions they deemed lawful and desirable from ones considered so by policymakers themselves.

Legal Hurdles

For the trillion-dollar-coin gambit to work, two things must happen. First, the Mint must actually strike the coin in question. Second, the Fed must accept that coin on deposit, and accept it at its face rather than its metallic ("bullion") value, crediting the Mint's Public Enterprise Fund accordingly.

The feasibility of each of these actions depends only partly on its potential legality. It also depends on whether real human beings—with reputations to maintain, jobs they'd rather keep, friendships they'd rather not forfeit, innate feelings of right and wrong worrying their consciences, and the "tradition of all dead generations" weighing on their brains—would dare to act according to the law so interpreted.

Let's first consider the legal hurdles. The least significant concerns striking the controversial coin. That the letter of the 1996 law allows the Mint to do this seems indisputable, not withstanding all the ink spilled disputing it. (It was on this point alone that Professor Tribe declared the trillion-dollar coin plan to be perfectly kosher.) The bigger hurdle, which has received far less attention, concerns whether the Fed could be compelled to accept such a coin on deposit, and accept it for its face rather than its bullion value. As the Treasury itself notes, there is

no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise.

Since the New York Fed, like all the Federal Reserve banks, is a private corporation, it would appear to be as free to refuse a trillion dollar coin as a taxi driver is free to refuse a hundred-dollar bill.

But some Modern Monetary Theorists disagree. Here is Joe Firestone on the subject:

A Fed regional bank, such as the New York Fed, in turning down a coin, would be refusing to perform a duty it contracted for to serve as the depository of the funds of the Treasury Department and the US Mint. I don’t think it can do that and remain a regional Fed bank.

…Even though the regional Feds are privately owned banks; they cannot behave in ways that contravene the policy of the Board of Governors, a Federal Agency, and they are very tightly regulated by that Board. So, the regional NY Fed, the bank that has the Treasury General Account (TGA) will not be making any such decisions on its own authority. Additionally, in agreeing to house the TGA, the New York Fed has contracted to serve as the sole banking agent of the Treasury Department with respect to its spending account.

Somehow I don’t think the sole banking agent of the United States Treasury Department has the legal right to turn down a deposit of legal tender, and refuse to credit its face value in the Treasury’s own checking account. Imagine what the liability of that “private” bank would be to the US Government, if as a result of any such action, the US would be forced into defaulting on some of its payments and decided to sue the NY Fed for consequential damages. Not a pretty picture, and not a risk that the NY Fed would want to take w/o an explicit and specific instruction from the Board of Governors.

And if the Board of Governors itself sided with the New York Fed? According to Joe, the Treasury Secretary could pull rank because, according to the Federal Reserve Act,

wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

A Load of Bullion

Could the coin caper come off as Firestone says? Nothing doing. Even if he wanted to, it's doubtful that a Treasury Secretary could legally compel the Fed to accept a trillion-dollar platinum coin, let alone compel it to "credit the Treasury's account for the coin's full face value."

Here the difference between platinum bullion coins, which the 1996 law authorizes, and platinum circulating coins, for which it makes no provision, becomes crucial. Both bullion and circulating coins are legal tender; but the legal tender status of bullion coins merely serves as "proof of their authenticity as official U.S. coinage," while their face value "is largely symbolic." As Edmund Moy, another former U.S. Mint Director, explains, this mean that, although "it may be legal to mint a platinum bullion coin with a $1 trillion face value…it's not legal to pass it off as actually worth $1 trillion if there isn't $1 trillion of platinum in it."

It follows that the New York Fed couldn't legally be forced to value a platinum coin beyond its bullion value. Nor would it wish to do so voluntarily, as that would erode its capital, violating the spirit—if not the letter—of Section 16.2 of the Federal Reserve Act. As for the Fed's obligation "to serve as the depository of the funds of the Treasury Department and the US Mint," that no more obliges it to accept a platinum bullion coin than it obliges it to accept a platinum bar, or a diamond, or a side of beef: like these other things, a platinum coin would be, not a generally accepted medium of exchange, but a mere commodity, albeit one produced by the U.S. Mint.

Because the 1996 Act authorizes not just platinum bullion coins but "platinum bullion coins and proof coins" (subsequently amended to "platinum bullion coins and proof platinum coins"), some MMTs claim the Treasury could avoid these snags  by striking a trillion-dollar proof coin, while declaring it a proof, not of a platinum bullion coin, but of a platinum circulating coin. They maintain, in other words, that while the statute doesn't provide for actual circulating platinum coins, it allows for proof versions of such coins that might themselves circulate! To point out that there is no precedent for the Mint's making a proof of a coin it isn't authorized to make is to offer only the most polite of many reasonable responses to this desperate argument.

Extra-Legal Hurdles

If the legal case for the trillion-dollar coin is flimsy, the psychological one is even flimsier. Even granting Firestone's assumption that Fed officials would simply roll-over when threatened by the Treasury, as if they always did so, would even the most hard-bitten Secretary of the Treasury go so far as to try either to compel Fed officials to overlook the statutory distinction between a bullion and a circulating coin, or to brazenly ignore the 1996 Act's clear intent to limit the Mint's platinum output to bullion coins, including proofs thereof?

It's here that those extra-legal constraints I spoke of come in. Firestone simply assumes the existence of government officials untroubled by such constraints, in the way that a castaway economist, according to the old joke, assumes a can opener when confronted by the need to open a tin can. He also fails to consider the likely public response to officials behaving as he imagines. In a reply to Firestone Philip Wallach, then at Brookings, hit the nail squarely on its head:

Even if you think that minting the coin would be legally legitimate in the sense of having a defensible statutory pedigree … there is no reason to think that the American public would be inclined to accept it as substantively legitimate. … To state the blindingly obvious, the platinum coin strategy is really weird. It asks Americans to reject all of their most basic intuitions about the government and money. Former Representative Mike Castle (R-DE), who played the biggest role in putting the platinum coin law on the books [said that] the plan is “so far-fetched and so black helicopter-ish a type of methodology of trying to resolve something like this that I think the public would totally scoff at it…It would be an artificial way of trying to create money and I think everybody will see that."

The scoffing to which Mr. Castle refers, if not the workings of his own conscience, would surely make any flesh-and-blood Treasury Secretary think twice before attempting a trillion-dollar-coin coup. But Mr. Firestone's Treasury Secretary isn't a flesh-and-blood human being. He's a monster: a frightening creature, like the bogeyman, that doesn't actually exist.

The Proof of the Pudding

Nor need you take my word for it. On January 12, 2013, a Treasury spokesman issued a statement declaring that "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit” (my emphasis). And that was that. Government officials failed to interpret the laws as MMTs thought they should. And even had they done so, they wouldn't have gone along with the trillion-dollar-coin scheme. The extra-legal hurdles in the way of that scheme proved to be no less a hindrance than the legal ones.

Both sorts of impediments are, presumably, still in place today. So when Modern Monetary theorists claim that the Treasury could always mint platinum coins to replenish its TGA account, while accusing those of us who fail to recognize this of making "factually disprovable claims," they have things precisely backwards. It's Modern Monetary theorists' own ideals which, for all their cleverness, clash with the facts of reality.

Bottom line: if there's to be a Green New Deal, paying for it won't be as easy as striking a coin.