Skip to content Skip to content
Logo: Wesleyan University

Unsettled Account

Banking's Past, Present, and Future

Unsettled Account
  • Home
  • Richard Grossman
  • Unsettled Account: The Book
    • Buy it!
    • Reviews
    • Endorsements
  • WRONG: Nine Economic Policy Disaters and What We Can Learn from Them

Drat you, Obama Administration!

January 14, 2013 by rgrossman

The following (now mildly edited) op-ed was slated to appear in a major US news outlet on January 15.  Unfortunately for me, but good for the country, an announcement by the Obama Administration rendered the op-ed obsolete.  The main point–that we should not resort to gimmicks in dealing with our serious fiscal issues–stands.

Happy reading!

“A Tale of Two Coins”

Until the Administration publicly nixed the idea a few days ago, speculation had run rampant that the Treasury would mint a $1 trillion platinum coin to bypass Republican opposition in Congress during the upcoming fight over the debt ceiling.

Although avoiding a divisive political battle was no doubt tempting, the Administration was wise pass up this particular opportunity to make history.

The idea behind the platinum coin frenzy was simple.  Current law gives the Secretary of the Treasury permission to mint coins.  For small change and commemorative gold and silver coins, the statute law defines the dimensions, weight, and face value in excruciating detail.  The law also allows the Secretary to issue platinum coins, but does not specify which denominations are permitted.

Hence, it appears that there was no legal obstacle to the Secretary issuing a $1 trillion platinum coin.

Because the coin would be legal tender, the Secretary could have deposited it at the Federal Reserve, used the proceeds to pay down the government’s debt, and avoid our collision with the debt ceiling.

Although minting a single coin could have prevented us from repeating the embarrassing spectacle of our elected leaders demonstrating that are more interested in getting their way than in governing.

Minting a $1 trillion coin was clearly not the right thing to do.  History provides many examples of the havoc that can result from playing fast and loose with the currency.

A government that issues a $10 gold coin produced with $6 worth of gold can make a profit of $4 on every coin.  With an incentive like that, it is not surprising that medieval rulers periodically swamped their countries with coins that had a lot less gold in them than advertised on their faces.  This debasement, in turn, led to severe inflation.

Owing huge reparations payments to the Allies after their defeat in World War I, the German government printed so much money that before the inflation ended a 100 trillion mark note had been issued.  Prices rose so quickly during the German hyperinflation that bar patrons ordered two beers at once, since by the time they had finished the first the cost of the second had already increased.

Other twentieth century examples of hyperinflation brought about by reckless monetary policy, from Argentina to Zimbabwe, abound.

A policy adopted by King Gustavus II Adolphus of Sweden in the early 1600s led to one of the strangest monetary phenomena ever.  Sweden was Europe’s preeminent copper producer at the time and the king, hoping to increase the demand for—and price of—copper, decided to make copper legal tender alongside silver.

The law soon led to the widespread use of copper in transactions, while silver disappeared from circulation.  This is an example of Gresham’s famous law, under which “bad” (cheap) money drives out “good” (expensive) money.  Because silver was nearly 100 times as valuable, the copper coins used place of silver had to be massive.  The 10 daler piece weighed 43 pounds.  Large scale transactions became impossible without the assistance of a horse and cart.

No wonder the Swedes were the first Europeans to make extensive use of paper money!

Issuing a $1 trillion coin would not have not forced Americans to bring truckloads of copper money on routine shopping trips.

Issuing a $1 trillion coin would not have led to hyperinflation, at least not initially.  Had the procedure been repeated, it could have.

Issuing a $1 trillion coin would have demonstrated—yet again—that our politicians are unable to do the job for which they have been elected.  In the long run, it would have further weakened the credibility of the US government by marking it as willing to substitute gimmicks for fundamental reforms.

The country remains on a collision course with the debt ceiling.  As it draws closer, politicians of both parties will be tempted to resort to various tricks to get around the debt ceiling, the other side, or both.

Instead of issuing a magic coin or resorting to other gimmicks, Congress and the Administration need to reform the tax system, make some hard choices about entitlements, and set clear spending priorities.  It’s not as flashy as a $1 trillion coin, but it will put us firmly on the path to solvency.  And be less likely to get lost in the washing machine.

Categories Financial Crisis, government budget, subprime crisis, Unsettled Account Tags copper standard, debt ceiling, fiscal cliff, Gresham's Law, Gustavus II Adolphus, platinum, Sweden, trillion dollar coin
Post navigation
Talking about the mortgage settlement and Basel Accords
Your cheatin’ Alma Mater
© Richard S. Grossman and Unsettled Account, 2010-14. Unauthorized use and/or duplication of this material without express and written permission from Richard S. Grossman is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard S. Grossman and Unsettled Account with appropriate and specific direction to the original content.
Subscribe by Email

Pages

  • Unsettled Account: The Book
    • Endorsements
    • Reviews
    • Buy it!
  • Richard Grossman
  • WRONG: Nine Economic Policy Disaters and What We Can Learn from Them

Archives

  • November 2018
  • May 2018
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • July 2013
  • June 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • October 2012
  • August 2012
  • June 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010

Tags

Alan Greenspan Angela Merkel bailouts bank capital Bank of England Barry Eichengreen Basel accords Ben Bernanke Bernie Sanders Bill Clinton Brexit China debt ceiling Dodd-Frank Donald Trump double liability euro European Central Bank European Union Federal Open Market Committee (FOMC) Federal Reserve financial deregulation financial lockdown George H. W. Bush George W. Bush Glenn Hubbard gold standard Greece Japan Jeremy Corbyn John Taylor Libor Marco Rubio Mark Carney Mitt Romney monetary policy Patrick Honohan Paul Volcker quantitative easing ratings agencies regulation Ronald Reagan Stanley Fischer Subprime crisis Theresa May

Meta

  • Log in
  • Entries feed
  • Comments feed
  • WordPress.org
© 2023 Wesleyan University