The Coin

The proposal for a high-value platinum coin, to be created by the US Mint and deposited for credit to the USG’s account at the Federal Reserve Bank of NY at face value of $1T or more, gained some currency several years ago.

I first saw the idea in Ellen Brown’s Web of Debt in 2009, but it was popularized by a blogger known as Beowulf in 2013. The proposal had the virtue of getting the balance sheet entries and formal institutional relationships correct. It only had the actual power relationships wrong.

Though considered MMT-adjacent, The Coin violates common MMT principles. MMT maintains there is no money without debt. Yet a sovereign coin is a fiat bearer asset, created by the US Government, its value established by USG’s stamp and seal. It is not a liability of the US Government or of anyone else. Unlike a Note, which is by definition evidence of a debt, a sovereign coin’s bearer value is not extinguished upon redemption to its issuer. USG is obliged to accept the coin in payment, but gains an asset when it does.

Digression on Gift Certificates and Gift Cards

That we’re obliged to accept a financial instrument doesn’t make it our liability; it makes it our obligation.

For example, a gift certificate is virtually certain to be the liability of the establishment whose name is on it. The establishment has obtained something of value in advance in exchange for the gift certificate’s issuance, and will obtain nothing upon its redemption except the certainty that nobody will be using the same certificate, beyond any remaining balance, to claim the establishment’s goods or services a subsequent time.

But shopping malls also sell gift certificates, for redemption at the retail stores within. Such certificates are obligations of these stores, since they’ve agreed to accept them for payment. But upon acceptance they’re assets to the stores, not liabilities, since a store that accepts them is able to redeem them to the mall operator and obtain face value, presumably less a fee.

It follows that a gift card can be either asset or liability of the establishment whose name appears on it in large print. It’s a liability if the establishment has issued the card upon its own books. It’s an asset if a marketing company or creditor or money transfer agent has arranged with the retailer to sell the gift card in the retailer’s name, with the recompense to be obtained from the agent/partner upon redemption by the purchaser. But the card is an obligation of the named establishment in either case.

MMT on the other hand…

MMT, on the other hand, can be shown to assert that USG’s obligation to accept the instrument makes it USG’s liability, and argues that the balance sheet confirms this claim.

We’ve seen on the balance sheet that currency, including coins, is an asset to the US Government even as it is an obligation of the US Government. Outstanding US currency is not a USG liability; it isn’t counted as US Government debt, and augments USG assets on receipt, contra MMT.

But MMT makes a point of calling cash a US Government liability, and of denying that its receipt augments USG assets. Why? Because you can run out of assets. You can’t run out of your own IOUs. It’s an ideological argument.

Thus Randall Wray writes (my emphasis):

“Treasury Money” is now mostly coins; in the past treasuries issued notes (and some still do) and while the US Treasury could issue notes, it now only issues coins. What is a coin? It is stamped evidence of the Treasury’s debt. While the US Treasury accounts for coins as “equity”, equity is of course on the liability side of the balance sheet.

Wray, L. Randall (2016) “Taxes are for Redemption, Not Spending” World Economic Review, 7, pp. 3-11

Of course one could characterize any asset on the balance sheet as a liability on Wray’s flimsy basis. Sovereign coins are shown squarely on the asset side of any balance sheets on which they appear.

A note is perforce the IOU of its issuer. A train ticket, valuable to you as rider, is a liability of the railroad, whose business imperative it is to destroy the claim in the course of its fulfillment. A Reserve Note, a face-value asset of the US Government, can be shredded as an extinguished liability when redeemed to a Reserve Bank. But a sovereign coin is different from all of these. It remains the asset of its owner whether stored in a commercial bank vault, a Treasury vault, a Reserve Bank’s vault, the supermarket’s safe, or our own pocket or coffee can.

Congress has the constitutional prerogative to coin money, and establish the value thereof. Nevertheless, the Reserve Banks were able to reject the trillion dollar coin as an asset deposit. In fact two years earlier they had lobbied for USG to halt the production of Presidential Dollar coins that the Banks determined were being deposited by USG for their seigniorage value rather than issued for circulation.

They had a valid reason for their argument. More than $1B in dollar coins were on deposit with the Reserve Banks, which credited USG at their face value, USG thereby gaining about $700M in seigniorage. But both seigniorage and storage costs, which recur unto eternity, diminish the profits that the Banks can refund to USG from the interest they receive on their holdings of Treasury Bills.

But the Reserve Banks did not base their argument on the net diminishment of their profits and the attendant net loss to the Treasury. Rather, their lobbying campaign, with stenographed news stories like this one of June 2011, represented the government’s seigniorage as a tax on the private sector.

[T]he benefit to the government would come only from the profit it makes by manufacturing each coin for 30 cents and selling it to the public for a dollar.

When this profit, known as seigniorage, is factored out, switching to the dollar coin would actually cost taxpayers money over three decades, according to a Federal Reserve analysis of the GAO’s figures. The cost works out to $3.4 billion.

The Fed’s Louise Roseman wrote to the GAO that seigniorage should not be considered in an analysis of whether the switch would benefit the larger U.S. economy.

The reason, says Roseman, director of the Fed’s Division of Reserve Bank Operations and Payment Systems, is that seigniorage “is a revenue transfer from the private sector to the government.”

So, in other words, a tax? The profit to the government predicted by the GAO assumes that the government would have to issue 1.5 dollar coins for every dollar bill removed from circulation. That’s because people handle coins differently than they do bills.

via The Federal Reserve Stores $1 Billion In Dollar Coins That No One Wants : NPR

In December the Obama administration acceded to its creditors’ wishes, and abated the production of commemorative dollar coins beyond the quantities sought by collectors.

The Obama administration likewise rejected the Trillion Dollar coin in January 2013, even in the face of what he would call the scariest moment of his presidency, the early 2013 debt ceiling brinkmanship.

It is my believe that the Reserve Banks would not have recognized The Coin as an asset or as a deposit, and would have successfully defended its position in court. But they were spared the need to rely on these crude and explicit levers of their power.

MMT proponents tend to believe that transactions between the Reserve Banks and the government are self-imposed formalities rather than substantive and consequential acts of commerce. But the Reserve Banks themselves harbor no such illusions.