How the US trillion-dollar coin would work

As noted on last week, some Americans are floating the idea of minting a trillion-dollar coin out of platinum to solve some of the US debt woes.

Many people are probably wondering how the coin could work.

Today, former US Mint director Philip Diehl explained in a comment on the Pragamatic Capitalism blog how the proposed trillion-dollar coin of platinum would come about.

  1. The US Congress authorized the Treasury Secretary more than 220 years ago to handle money. In particular, the Secretary has complete discretion to produce all platinum coins, including the denominations.
  2. The accounting treatment for this coin is the same as all others:
  • the US Mint makes the coin
  • the coin is shipped to the Federal Reserve
  • the Fed books $1 trillion and transfers that amount to the Treasury’s general fund
  • the general fund can then be applied to finance government operations
  • 25-cent coins are handled in the same way

3. Once the US federal debt limit is raised:

  •  the Treasury sells more bonds to bring in more money for the government
  • the Federal Reserve ships back the trillion-dollar coin to the US Mint
  • the accounting treatment for the trillion-dollar coin is reversed
  • the trillion-dollar coin would be melted and it never would be circulated

Diehl said this works like additional tax revenue or borrowing under a higher debt limit so there are no negative macroeconomic effects. Moreover, the trillion-dollar coin doesn’t circumvent congressional power nor raise the debt limit, it delays when the debt limit is reached.

He also said any court challenge would likely be dismissed quickly because:

  1. authority to mint the coin is firmly rooted in law that is grounded in the expressed constitutional powers of Congress
  2. Treasury has routinely exercised this authority since the US formed as a country
  3. its a routine accounting treatment for a coin

“Yes, this is an unintended consequence of the platinum coin bill, but how many other pieces of legislation have had unintended consequences? Most, I’d guess,” said Diehl in wrapping up his comment.

Image courtesy DonkeyHotey, Flickr