Tuesday, January 8, 2013

The Platinum Trillion-Dollar Coin Trick Explained

The following email was sent to Jimmy Pethokoukis from Philip N. Diehl, the 25th director of the U.S. Mint and publish on his blog on the AEI site.

I am the former US Mint director who in 1996, with Rep. Mike Castle (R-Del.), wrote the law authorizing production of the platinum coin you wrote about on December 5th. I can provide background on the legislative intent of the bill, but I write now to clarify confusion related to how the law might be used in the context of the debt limit.

Contrary to some media reports, minting a trillion dollar platinum coin would not raise the debt limit. Rather, it would add a trillion dollars to the general fund of the treasury without requiring additional borrowing, effectively delaying the date when the debt limit is reached.

The law enables this course by authorizing Treasury to produce the coin in whatever denominations the Secretary chooses. When we passed this law in 1996, it was with full knowledge that it was unprecedented in the history of US coinage. Congress had always specified coin denominations by law.

The accounting treatment of the platinum coin is identical to all other coins. When the Mint ships a coin from its vaults to those of the Fed, it books as profit (or “seigniorage”) an amount equal to the difference between the coin’s face value and its cost of production. This amount is subsequently transferred to the general fund of the treasury where it is available to finance government operations in the same way that tax revenue does. When the Fed returns the coin to the Mint due to damage or wear, the accounting treatment is reversed and the coin is melted. Thus, seigniorage “earned” from the coin is like an interest-free loan over the life of the coin.

So, in the case of a platinum coin, if the coin dies were manufactured ahead of time, the Mint could strike a single trillion dollar coin, ship it to the Fed, immediately book a trillion dollars and transfer that amount to the general fund. This would take a day, maybe two. The coin never has to leave the Fed’s vaults for the general fund to receive this new spending capability.

The law provides Treasury all necessary authority to pursue this course. I know this because I wrote the law and produced the nation’s first platinum coin. I’ve been through the entire process.

Unlike the tenuous case for using the 14th Amendment to circumvent congressional approval of an increase in the debt limit, the legal basis for this alternative is rock solid. Moreover, it is not a means of circumventing congressional authority over the debt limit, at all, but rather a way of delaying the date at which that limit is reached, in the same way a sudden surge of tax revenue flowing into the treasury would do. So GOP claims that the president is circumventing the law would be unfounded. Besides, the law was passed by a GOP Congress.

All the best,

Philip N. Diehl

35th Director

United States Mint

1 comment:

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