Why a $1-Trillion Coin Is a Terrible Idea

CC BY 2.0 2013, by DonkeyHotey

 

Minting a $1-trillion coin would undermine the rule of law and the Fed’s ability to guarantee a stable currency and prices. Congress should just do its job—by abolishing the filibuster if necessary.

During the debt ceiling battles of the Great Recession, an idea was floated: the $1-trllion platinum coin. The debt ceiling battle has returned—as has the $1-trillion-coin idea.

What is it? It’s a coin—made of platinum, not a metal the US Mint currently uses—that can be deposited with the Federal Reserve. How would it work? By minting this coin, the US Government would suddenly have $1 trillion to spend, and it wouldn’t have to borrow any money to do so.

If this sounds like a gimmick or like cheating in some way, that’s because it is. The $1-trillion coin would undermine the independence of the US Federal Reserve as well as the rule of law, by using a technicality to get around the bank and Congress—which the spirit of the law says the government should not. It is a terrible idea.

 

The $1-trillion coin and the Federal Reserve

Why would the coin undermine the Federal Reserve’s independence and authority? US law gives the Fed the power to decide over monetary policy—broadly, anything having to do with the money supply, inflation, and interest rates. That is why the proposed coin would be made of platinum: The law gives the Fed the authority to tell the US Mint how much paper money and coins made of certain, standard metals to create each year based on careful economic assessments. Platinum is not one of those metals, so the US Treasury could theoretically order the Mint to create a $1-trillion coin for it to do with as it pleases. This is technically legal, but it violates the spirit of the law, which gives the Fed the authority to manage the money supply and minting/printing.

Why should you care if the coin would undermine the Federal Reserve’s independence? By wading into monetary policy, minting the coin would weaken the Fed’s control over the money supply and thus monetary policy itself. The reason the Fed has this independence in the first place is because politicians are notoriously bad at managing monetary policy themselves. They are always tempted to print money to support their favored programs. History is littered with the cautionary tales of hyperinflation that ensues when this happens.

For that reason, banks throughout the rich world have followed Germany and New Zealand’s examples and adopted central bank independence, handing off monetary policy decisions to non-partisan experts with a mandate to ensure a stable currency and prices. Politicians taking that authority back through legal loopholes is a bad idea, as the history of hyperinflation illustrates clearly.

 

The $1-trillion coin and the rule of law

What about the rule of law? Using technicalities to get around the Fed’s authority itself violates the rule of law, since Congress granted the Fed that authority in the first place. Using technicalities to get around the Congressionally imposed debt ceiling also violates the rule of law more by contravening laws passed by Congress head-on. Congress has the Constitutional authority to set budgets. If Congress wishes the government to spend more money, it has the power to grant that wish. Presidents able to create money and spend with abandon run the same risks of hyperinflation noted above. In fact, when one person can decide this unilaterally, the risk is even higher.

But it’s worse than just inflation. Yes, the debt ceiling makes no sense (why pass a budget allowing spending, but then have a debt ceiling that prohibits it?), but it is the law, and we are a nation of laws. When presidents continually find loopholes to get around Congress and/or the Judiciary, this is, at best, a sign of poorly functioning government; at worst, it is a sign of a decaying republic.

 

The coin is a worse option than all but the very worst alternatives

Is minting a $1-trillion coin better than defaulting on the country’s debts? Perhaps, but only just and only because such a default would be absolutely catastrophic. The instability the coin could unleash would have nearly as bad an effect on the US’s monetary credibility, while the burst of inflation it could cause would be tantamount to a stealth default—as inflation reduced the value of creditors’ debts held by the US government.

Is minting a $1-trillion coin better than abolishing the Senate filibuster? No. For reasons better explained here than I could do so myself, the time for the filibuster has arguably come to an end. Abolishing it would certainly be less harmful than such a crazy fiscal and monetary experiment or defaulting on the national debt. The Constitution gives Congress authority over fiscal policy. That separation of powers is essential. Congress must simply do its job—whatever it takes.