What it means
The idea rests on an unusual feature of US coinage law. A provision allows the Treasury to mint platinum coins in any denomination it chooses, and some commentators noticed that this wording does not set a limit on the face value of such a coin.
The proposal works like this. The Treasury would mint a coin stamped $1 trillion, deposit it at the Federal Reserve, and receive a $1 trillion credit in the Treasury's account that it could use to pay bills.
In effect, it would create money without issuing debt, so the debt ceiling would not be reached. Supporters see it as a technical fix that avoids a damaging political standoff over the borrowing limit.
Critics say it is a gimmick that could damage trust in the currency and the independence of the central bank, and that it blurs the line between taxing, borrowing and printing money. For finance professionals, the proposal is a useful case study in how legal wording, fiscal rules and monetary policy interact.
It also illustrates seigniorage, the profit a government makes from issuing money, because the face value of the coin far exceeds its cost to produce. So far the coin has remained a proposal.
Treasury and Federal Reserve officials have raised legal and practical doubts about it, and lawmakers have usually resolved debt ceiling disputes through legislation instead, so it works best as a thought experiment about how the system is built. The debate also shows why the debt ceiling itself is controversial.
Congress has already approved the spending and tax laws that create the need to borrow, so critics say the cap forces the Treasury to choose between defaulting and finding a workaround, and the coin is the most dramatic example of the second option.
In practice
Real-world examples.
Example
During a standoff over the borrowing limit, a policy blogger argues that the Treasury could simply mint a coin to keep paying its bills. Economists reply that the move would be legally contested and could unsettle bond markets.
Example
A bond fund manager models a scenario in which the government stops paying some bills because it has reached its cap. She stress-tests her holdings, and the trillion dollar coin appears in her note only as a remote option.
Example
A university economics class uses the coin to explain the difference between fiscal policy, which covers government spending and taxes, and monetary policy, which covers the money supply and interest rates. Students debate which of the two the coin really belongs to.
Formula
Calculation
Seigniorage = Face value of the coin - Cost of producing the coin
Suppose, purely for illustration, that the metal and minting of one platinum coin cost $5,000. The face value is $1,000,000,000,000.
Seigniorage = 1,000,000,000,000 - 5,000 = $999,999,995,000. If the government then needed to fund a $400,000,000,000 shortfall under a borrowing cap, the single coin would cover it 1,000,000,000,000 / 400,000,000,000 = 2.5 times over.Case study
Seen in the real world.
Aldermoor is an illustrative, fictional republic that reached its statutory borrowing cap with a $120,000,000,000 payment due. The fictional finance minister was urged by a commentator to mint a platinum coin with an enormous face value to meet the bill.
The minister's advisers set out three concerns. Lenders might demand higher interest because they feared a loss of confidence, the central bank might refuse to accept the coin, and courts could rule the move unlawful. The government instead negotiated a temporary increase in the cap.
The illustrative lesson is that a legal loophole can exist without being wise to use. The cost of damaged credibility, measured in a higher borrowing rate across a large national debt, can exceed any money saved by avoiding a political compromise. Even a rise of one percentage point on $2,000,000,000,000 of debt would add $20,000,000,000 of interest a year, far more than the bill the coin was meant to pay.
Watch out
Common mistakes.
- Thinking the coin has been minted, when it has stayed a proposal.
- Assuming it would be a physical $1 trillion payment, when the idea is an accounting credit at the central bank.
- Confusing the debt ceiling with the budget deficit, when the first is a legal borrowing limit and the second is the gap between spending and revenue.
Questions
People also ask.
Would the coin cause inflation?
It might if spending financed by newly created money pushed demand beyond supply, but the effect would depend on how much was created and how it was spent.
Why platinum?
The relevant provision covers platinum coins and sets no ceiling on their face value, unlike the rules for other coins, which is why it attracted attention.
Who would decide to mint it?
The Treasury Secretary holds the minting authority, but any use would almost certainly involve the central bank and the courts.
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