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Changing the World, One (Platinum) Coin at a Time

by on January 14, 2013

“(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.” – 31 USC § 5112 – Denominations, specifications, and design of coins (http://www.law.cornell.edu/uscode/text/31/5112)

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That’s it. That’s the law that’s got the potential to change the world. It’s a loophole- yes, a loophole- which allows the Secretary of the Treasury, currently Timothy Geithner, to not only mint platinum coins of immense denominations to his heart’s content (he doesn’t actually even need the President’s permission to do so), but to shake the foundations of how most Americans (and citizens of the world) think about where money comes from, what it is, and where governments get it (hint- they don’t). It’s the law- not Tim Geithner- that’s so important.  Even if it is never used (which, it appears, it won’t be), either to mint coins or as a bargaining chip, the world now knows of its existence, and will slowly come to realize what it really means.

Allow me to provide a little more background. There is an idea floating around out there in the mediasphere based on the above law and which originated from the mind of one ‘Beowulf’, a prolific commenter among a community of heterodox economics blogs (heterodox is a fancy word for ‘non-mainstream’). A couple of years ago, he noticed the particular wording of the above paragraph, and realized that it allowed the Treasury Secretary to mint coins of literally ANY denomination, which could then be deposited at the Federal Reserve and result in a very large credit to the Treasury General Funds account, the Federal government’s checking account. Literally, the Treasury possesses the ability to legally fund itself (which really means to comply with the laws that govern its cash-flow), indefinitely, and requires no additional authority to do so. This renders the statutory debt limit (‘debt ceiling’) moot, as well as the ‘need’ (which is only a legal requirement) to sell government debt equal to the Federal budget deficit.

Let all that sink in.

The Treasury can fund itself. The Treasury can fund itself. The Treasury can fund itself.

It keeps sounding better and better. Of course, there are deeper implications here. If some accidental loophole can ‘allow’ the Treasury to fund itself, then doesn’t that kind of imply that the only thing that would ever prevent the Treasury from funding itself would be if the law explicitly or implicitly forbade it? And doesn’t that mean that the law also could *empower* the Treasury to fund itself, intentionally and without the use of loopholes?

There are huge implications to this (of which some economists and enthusiasts have been aware for years or decades), and this ‘platinum coin solution’ is forcing the media and the public to begin to think critically about where money really comes from, and its relationship with government. Any government that operates autonomously and is capable of securing its borders and enforcing its laws can successfully issue its own currency and create private demand for it. Since government is the highest legal authority in the land, it gets to set the rules of how the currency and monetary system work, as well as universal accounting standards. The most fundamental aspect of any successful accounting standards system is double-entry bookkeeping. Double-entry bookkeeping just means that everything must come from somewhere and everything must have come from somewhere, with regards to financial assets and liabilities. Double-entry bookkeeping says that you can’t just make up money and add it to your balance sheet to make yourself richer; you must acquire that credit as the result of someone else’s equal and offsetting debit. Simple, right? It’s this system that helps to keep money changing hands throughout the economic system, and which helps to lubricate the proverbial wheels of commerce. Without it, money would be worthless and meaningless because everyone would declare themselves gazillionaires immediately. Double-entry bookkeeping sets up the basest rules which allow the system to function in a logical manner. Credits always must equal debits.

Since government sets up double-entry bookkeeping by declaration of law, then it also possesses the inherent power to violate this system. Government can create credits without debits, and debits without credits, if it gives itself permission to do so. The former means that government can create new money, and the latter that it can destroy existing money. Government bestows this power up its ‘fiscal agents’- private banks, which it coordinates through the central bank- in America, the Federal Reserve System. Government allows banks to create credits, on the condition that they later destroy them, and in exchange for banks facilitating the government and private payments systems, a critically important function. So in America, and nearly all other modern economies, banks create money when they lend, and destroy it when it is repaid, retaining the interest as their fee and profit.

You want proof that banks create money? It’s been right in front of your face probably your whole life. When you deposit cash into your bank account, what happens? The easy answer is that the bank takes your cash and credits your account by that amount. But the cash doesn’t cease to exist, or cease to have value- so what’s happened? The bank has the cash now, and you have a deposit. Wait a second- there was just the cash at first, but after the deposit, it has doubled! There’s now your deposit and the bank’s cash, in equal amounts.

How did this happen?

The bank created money. Out of thin air, as you might say. Ex nihilo as economic theorists would say. So there you have it- banks do, in fact, create money. Now that I’ve convinced you, you should find it relatively palatable to believe that they also do this when they issue loans. Loans create new deposits, and therefore, new money. Loans therefore expand the money supply, and add income to the private sector.

The process of depositing cash with your bank, which creates a new deposit and thus doubles the amount of money in question is called balance sheet expansion. The bank gets away with this because to the bank, the deposit is a liability, while to you, it’s an asset. The bank has added the cash you deposited to its balance sheet as an asset, and added the deposit as a liability. They are equal and offsetting- they don’t make the bank any richer (no new net worth), though a new asset is created (with a twin- a new liability). The reverse is true when cash is withdrawn from a bank. A withdrawal results in the transfer of the cash-as-an-asset from the bank to the customer, and the destruction of the deposit, which is an asset to you (but you come out even because you get the cash), and a liability to the bank (which comes out even because it loses the cash).

Government grants banks the ability to create money, on the condition that it is later destroyed (when loans are repaid), but government itself can create money without any such condition, since it is the institution which sets the conditions in the first place. The gold standard constrains the government’s creation of new money, but this is a choice the government makes for itself. That same government can always choose to switch to a fiat system, issuing its own currency under political restraint rather than self-imposed legal constraint. Any sovereign government throughout all of human history has had this ability, if it so chose to use it. The American government has this ability, and currently exercises it already, but in an inobvious way.

The platinum coin solution is actually just a slightly different way to do what the Treasury already does everyday, but what’s different about it makes the reality of it much more obvious, and renders almost inescapable for the onlooking citizens the notion, nay- the FACT, that the government creates money.

The cat is most definitely out of the bag.

That is why the platinum coin solution is so important. Full comprehension of this fact forces us to reconsider government finance, the nature of fiscal deficits and federal debt, and the so-called debt or deficit ‘crisis’. Citizens will begin to think, “If the government can just mint coins and suddenly have as much money as it wants, then why should we be freaked out about the budget deficit? Why should we worry so much about the federal debt? What’s with all this talk about ‘shared sacrifice’? Why should anyone sacrifice?” and so on and so forth. And these are the right questions to be asking. These are part of the next echelon of major quasi-existential issues with which we, as a society, must and will grapple.

That is why the platinum coin solution is so important.

 

 

Sources/Further Reading:

Firestone, Joseph. “Origin and Early History of Platinum Coin Seigniorage in the Blogosphere” New Economic Perspectives. accessed 1/13/13. <http://neweconomicperspectives.org/2012/12/origin-and-early-history-of-platinum-coin-seigniorage-in-the-blogosphere.html>

Tate, Ryan. “Meet the Genius Behind the Trillion-Dollar Coin and the Plot to Breach the Debt Ceiling” Wired Magazine (online). accessed 1/13/13. <http://www.wired.com/business/2013/01/trillion-dollar-coin-inventor>

Weisenthal, Joe. “Why the Fight Over the $1 Trillion Coin is the Most Important Fiscal Policy Debate You’ll Ever See in Your Life” Business Insider. accessed 1/13/13. <http://www.businessinsider.com/why-the-mint-the-coin-debate-could-be-the-most-important-fiscal-policy-debate-youll-ever-see-in-your-life-2013-1>

Wray, Randall. “Functional Finance and Government Budget Surpluses in the New Millennium” Coalition of Economic Policy Institutions. accessed 1/13/13. <http://www.epicoalition.org/docs/functional_finance.htm>

 

 

photo credit: kevin dooley via photopin cc

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