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.
“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.