Why The Fight Over The $1 Trillion Coin Is The Most Important Fiscal Policy Debate You'll Ever See In Your Life

The campaign to circumvent the debt ceiling by having the Treasury mint a trillion dollar platinum coin continues to infiltrate the minds of elite thinkers in Washington.

Paul Krugman has come out in favor of it. Congressman Jerry Nadler is in favor of it. Pretty much every major news organization is discussing it. Even Stephen Colbert talked about it last night.

As Jonathan Chait at NYMag observes, what's interesting is that there are very few good arguments, legal or economic, against minting the coin.

Most of the critics' arguments basically boil down to: It's just not serious, and it would make the US monetary and political system look like a farce.

Here are some representative examples:

Here's Reuters' Felix Salmon: "If you believe that the country is best run by grown-ups, you can’t believe in #mintthecoin, because it simply isn’t a grown-up strategy."

And here's The Guardian's Heidi Moore: "A small but relentless group of impish bloggers and columnists – including Joe Weisenthal of Business Insider and Josh Barro of Bloomberg, as well as hapless Congressman Jerry Nadler – have created a large-scale trolling project that is meant to pressure the US Treasury into creating a trillion-dollar platinum coin to solve this problem."

And here's CNBC's Eamon Javers on Twitter: "...reason not to do the coin is it makes mockery of US financial system and risks shaking confidence in it."

But contrary to all these people who say that this is a childish, non-adult proposal put forth by impish trolls, it's actually quite the opposite. It may be the most important fiscal policy debate you'll ever seen in your lifetime, because it gets right to the nature of what is money.

This question is central to any discussion about a country's monetary and fiscal policy, and yet it's almost never discussed, and virtually nobody understands it.

Almost everyone talking about fiscal policy imagines money to be a commodity of sorts that we can "run out" of if we don't spend it carefully. In this sense, although we've long gotten rid of the gold standard, we're still shackled with a gold standard mentality, where we think of money as a scarce natural resource that we need to husband carefully, lest one day the bond vigilantes show up at our door, causing us to go broke.

The critics of #MintTheCoin are very forthright in attacking the proposal from this view.

When GOP Congressman Greg Walden introduced his bill proposing a ban on minting a trillion dollar coin, he specifically likened a government to a small business: "

“My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well. My bill will take the coin scheme off the table by disallowing the Treasury to mint platinum coins as a way to pay down the debt. We must reduce spending and get our fiscal house in order."

Judson Berger at Fox News uses a similar analogy to describe why minting the coin would be "absurd":

"Imagine sitting around the kitchen table, trying to figure out how you're going to pay off that next-generation HDTV you just bought.  Then someone has an idea. Brush off one of the old checker pieces in the attic, assign it a value of, say, $2,000 -- and use that newly minted "coin" to pay the credit card. Such an absurd idea is, pun intended, gaining currency as a technically legal way for Washington to avert a looming fight over the debt ceiling."

But these complaints actually get at the crux of the matter. Creating money is exactly what government does. What's absurd for a private business is not absurd for the government.

As John Maynard Keynes simply put it a long time ago: "Money is the creation of the state."

That the state creates the money we use is actually known to just about everyone, but people have a hard time making the key leap, which is that once the state is in the business of creating money, then the old gold standard notions of monetary scarcity don't apply in the same way.

You can see this flawed thinking all the time.

It's because people think that money is scarce that they think that gigantic government debts and deficits will lead to surging interest rates, because our lenders worry that we might not be good for it.

And yet, as this chart shows, as the national debt has surged (red line) the interest that the government pays on the debt (blue line) has gone down.

And it's because people think that money is a finite good (the gold standard mentality) that many people assumed that the Fed "creating money" (by expanding the money supply through quantitative easing) would cause hyperinflation to happen.

In fact, as the chart shows, the explosion of the money supply (red line) has coincided with muted inflation (blue line).

 Clearly, economic predictions that were predicted on money being finite have proven to be wrong.

This is why the coin debate is so crucial. Whereas most fiscal policy debates talk about what we're going to do with our money, or why we need to be careful not to run out, the coin gets right to the heart of the matter.

Stephanie Kelton, an economics professor at the University of Missouri Kansas City and one of the earliest defenders of the coin, explained via email:

Until the idea of minting a $1 trillion coin became a reality, most people probably never gave much thought to the government’s financial operations.  We understood that the government spent money, and we knew the money had to come from “somewhere”, but we assumed there were limits to how much the government could afford to spend.  

Like a household, we were told that the government could spend more than it takes in, but only as long as private lenders remained willing to extend credit.  Borrow too much, and your credit rating will suffer.  From there, it’s a hop, skip and a jump to “shared sacrifice” and “tough choices” to avoid becoming the next Greece.   

Enter the coin.  An idea so simple the mind recoils.  The Treasury has the power to end-run the process by cutting out the middlemen – taxpayers and bond markets –simply directing the Federal Reserve to add some numbers to its balance sheet.  Saints preserve us!   People are freaking out because the coin appears to remove the constraints on government finance by allowing the government to just “print” money.  The truth is, the government is already the issuer of the currency.  It is already not revenue constrained.  The coin doesn’t change anything fundamental, but most people don’t realize this because   they don’t know anything about the mechanics of the way the government currently gets numbers into its account at the Fed.

Cullen Roche, who blogs at Pragmatic Capitalist, and whose blog it was where we first came across the Trillion Dollar Coin idea put it similarly:

...the big lesson from all of this is that the coin proves an autonomous govt has no solvency constraint if it so chooses.  A prolonged and permanent financing of govt expenditure literally changes the way our system works though.  So it's important to understand the distinction between our current design (which privatizes money to the banking system) and a permanent coin solution which gives the power to the govt.  But it still highlights the power of an autonomous govt in its ability to fund its spending. 

In addition to exploding the myth about government being artificially constrained by an "amount" of money, the debate re-kindles the notion of seigniorage, the process by which governments make money via the creation of money.

Philip Diehl, the former head of the US Mint that helped draft the law enabling the platinum coin explained to us via email how funding the government via the creation of money is a history going back thousands of years.

What is seignorage?  Seigniorage is the difference between the face value of a coin and its cost of production. Say a quarter costs 11 cents to produce; banks pay 25 cents for the coin and the government books 14 cents in seignorage . When (more often, if) the coin is returned to the Mint damaged or worn out, the seigniorage is reversed on the books and the coin melted.  In this way seigniorage is like an interest-free loan for the life of the coin, and if the coin is never returned to the Mint, it is an interest-free loan in perpetuity.  

The history of seignorage dates back more than 2000 years, to the earliest days when governments issued coinage. When precious metals were used, the intrinsic value of the coin was slightly less than the face value, providing a means of financing the government . If the precious metal content were reduced, the currency was said to have been "debased". If this were done by the Crown, so be it. If it were done by the Mint director, he was hanged. 

The history of American coinage is more interesting than one might expect. Thomas Jefferson and Alexander Hamilton, otherwise bitter political antagonists, cooperated in creating the nation's coinage and founding the U.S. Mint. Jefferson had been thinking about an American system of coinage since the days he was writing the Declaration of Independence. He was intent on avoiding the non-decimal systems of Europe in order to simply commercial transactions and democratize the nation's economy, especially for the illiterate and innumerate. The first Mint was located in Philadelphia in a converted brewery, down the street from the home of the new president. Martha Washington is said to have donated some of the family silverware for the minting of the nation's first coins.  The institution of an American coinage system was a remarkable achievement. At the time, coinage from multiple countries was used in commerce. These competing means of exchange had to be gradually crowded out by the new American coinage and finally demonetized. We might think of this as an early 19th century American version of the introduction of the Euro.

In order to have a "serious" debate about fiscal policy, as so many pundits claim to want, we must first understand what money is, and how governments get it.

The answer is that they have always created it, and any notion of the government "running out" are illogical.

Remember, money is a fiction. Real wealth is capital assets, our infrastructure, our cars, our houses, and most importantly the potential human ingenuity and cooperation. Money is just something that the government creates to facilitate the trade in all of those things.

The #MintTheCoin debate, more than any other fiscal debate we can remember, gets right to this matter.

Find out everything you need to know about the trillion dollar coin below:

Please enable Javascript to watch this video

SEE ALSO: 3 myths about the mint the coin debate >

More From Business Insider


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • Deutsche Bank worries hit US stocks
    Deutsche Bank worries hit US stocks AFP News - 6 minutes ago

    US stocks tumbled Thursday after a report on withdrawals from Deutsche Bank revived worries about the health of one of the world's largest banks. News of the withdrawals sent a shudder through Wall Street, where trade had been muted earlier in the … More »

  • Senator: Education Dept. mishandling Corinthian student debt
    Senator: Education Dept. mishandling Corinthian student debt Associated Press - 19 minutes ago

    The Education Department is pursuing debt collection — rather than debt relief — for nearly 80,000 former students of Corinthian Colleges, despite federal and state findings that the now-defunct for-profit ... … More »

  • ECB's Nowotny says Europe not facing new banking crisis
    ECB's Nowotny says Europe not facing new banking crisis Reuters - 21 minutes ago

    European Central Bank Governing Council member Ewald Nowotny said on Thursday he did not believe that Europe faced a new banking crisis similar to that seen in 2007 and 2008, but the financial sector was clearly in a transitional phase. During the … More »

  • MSCI Still Monitoring China A Shares After ‘Positive’ Signs Bloomberg - 39 minutes ago

    MSCI said it has seen a “marginal” drop in the number of suspended mainland shares after Shanghai and Shenzhen exchanges released stock suspension rules in late May. The announcement comes after MSCI in June cited accessibility issues among the … More »

  • Oil rises close to $50/bbl; doubts on OPEC plan cap gains
    Oil rises close to $50/bbl; doubts on OPEC plan cap gains Reuters - 44 minutes ago

    Oil jumped more than 1 percent on Thursday, with Brent nearing $50 a barrel on optimism over OPEC's first planned output cut in eight years, although gains were limited by doubts the reduction would make a substantial dent in the global crude glut. … More »

  • Oil rises close to $50/barrel; doubts on OPEC plan cap gains
    Oil rises close to $50/barrel; doubts on OPEC plan cap gains Reuters - 46 minutes ago

    Oil jumped more than 1 percent on Thursday, with Brent nearing $50 (39 pounds) a barrel on optimism over OPEC's first planned output cut in eight years, although gains were limited by doubts the reduction would make a substantial dent in the global … More »

  • Stocks Fall as Deutsche Bank Woes Roil Lenders; Treasuries Climb Bloomberg - 48 minutes ago

    Equities erased gains after Bloomberg News reported about 10 hedge funds that do business with the German lender have moved to reduce their financial exposure. Traders pushed down the value of equities after the report on Deutsche Bank rekindled … More »

  • ECB's Lautenschlaeger says bank needs to craft exit from stimulus  Reuters - 49 minutes ago

    FRANKFURT (Reuters) - The European Central Bank should not provide further stimulus, including through stock or bond purchases, but needs to carefully craft its exit from asset buys to avoid turbulence, ... … More »

  • Nutanix IPO shows risks of 'unicorn' valuations Reuters - 50 minutes ago

    In the run-up to its initial public offering, cloud computing company Nutanix scrambled to avoid a situation that has increasingly marred technology IPOs: a price that's below the most recent private funding round. After bumping up its price … More »

  • US stocks tumble on worries about Deutsche Bank AFP - 50 minutes ago

    Wall Street stocks tumbled Thursday on renewed worries about banks following a report on withdrawals from Deutsche Bank and a bruising Capitol Hill hearing with the head of Wells Fargo. The Dow Jones Industrial ... … More »

  • $1 Coal Mines Turn to Jackpots as China’s Cuts Power Price Rally Bloomberg - 1 hour 5 minutes ago

    Stanmore Coal Ltd. bought the Isaac Plains metallurgical coal mine in Australia for A$1 in July 2015 from Brazilian miner Vale SA and Japan’s Sumitomo Corp. when the price of met coal, used to make steel, averaged the lowest in about a decade and … More »

  • With Deal Done, OPEC Faces Hurdles in Making Output Cuts Work Bloomberg - 1 hour 5 minutes ago

    In an angry and sometimes incoherent briefing, Iraq’s oil minister railed against the journalists and analysts who estimate the amount of crude each member produces. Iraq’s minister, Jabbar al-Luaibi, complained in Algiers that published estimates … More »

  • PBOC Seen Switching to Broad Monetary Tightening as Soon as 2017 Bloomberg - 1 hour 5 minutes ago

    Seven expect the PBOC will make its next broad policy move by guiding interests in a corridor using changes to short, medium and longer-term lending facilities. Just one economist forecasts the next policy move will be a change to benchmark … More »

  • Indonesia Raids Google Office After Warning on Tax Audit Refusal Bloomberg - 1 hour 5 minutes ago

    Officers visited Google’s office in central Jakarta “many times” in the past two weeks to collect data and repeatedly sought meetings with senior company officials, Muhammad Haniv, the head of special taxpayers at the Finance Ministry, said in a … More »

  • Singapore’s ‘Golden Week’ Courts China Tourists as Retail Falls Bloomberg - 1 hour 5 minutes ago

    Brands from Estee Lauder to Nike to Samsonite are offering discounts in the city-state starting Friday, coinciding with China’s National Day public holidays. Singapore is trying to revive its flagging retail industry, where sales excluding motor … More »

  • ECB's Nowotny says expects Austria to resolve Heta crisis
    ECB's Nowotny says expects Austria to resolve Heta crisis Reuters - 1 hour 9 minutes ago

    European Central Bank Governing Council member Ewald Nowotny said on Thursday he expected Austria to resolve a crisis surrounding the "bad bank" Heta Asset Resolution (HAABI.UL). Nowotny told Reuters he expected Austrian Finance Minister Hans Joerg … More »

  • Oil gains, Deutsche Bank weighs on stocks; yen cuts losses
    Oil gains, Deutsche Bank weighs on stocks; yen cuts losses Reuters - 1 hour 14 minutes ago

    By Rodrigo Campos NEW YORK (Reuters) - Crude oil futures rose on Thursday, adding to the previous session's rally on optimism over an OPEC plan to curb output, while stocks fell as Deutsche Bank tumbled ... … More »

  • Oil prices rise despite doubts over OPEC output deal
    Oil prices rise despite doubts over OPEC output deal AFP News - 1 hour 18 minutes ago

    Oil prices added Thursday to steep gains fuelled by OPEC's deal to cut crude output, but analysts doubted the cartel's ability to seriously tackle a supply glut. Following a meeting that included Russia, the Organization of the Petroleum Exporting … More »

  • How the Dow Jones industrial average fared on Thursday Associated Press - 1 hour 23 minutes ago

    U.S. stocks skidded Thursday as drug companies and banks absorbed large losses. Drugmakers faced scrutiny over price increases, while banks fell as investors worried about the stability of Deutsche Bank ... … More »

  • 'Farmville' creator Zynga names former EA executive CFO
    'Farmville' creator Zynga names former EA executive CFO Reuters - 1 hour 30 minutes ago

    Zynga in March named EA veteran Frank Gibeau its chief executive, as part of efforts to transition into a mobile games-focused company. Griffin, a gaming industry veteran, spent more than 10 years at the "FIFA" videogame publisher. Zynga, once one … More »

  • Deutsche Bank admits 'perception issue' as U.S. shares slide
    Deutsche Bank admits 'perception issue' as U.S. shares slide Reuters - 1 hour 32 minutes ago

    Deutsche Bank (DBKGn.DE) admitted on Thursday it had an image problem with investors as fresh concerns over the stability of Germany's largest lender pushed its U.S.-listed shares to a record low. The latest lurch came after Bloomberg reported that … More »

  • U.S. energy envoy says OPEC deal likely to be self defeating Reuters - 1 hour 41 minutes ago

    The top U.S. energy diplomat said he has little faith an OPEC deal would raise world crude prices for long because America's drilling revolution and global efficiency gains mean energy markets are resilient to producer cuts. Details are to be … More »

  • US hedge fund to pay $400 million in African bribery case Associated Press - 1 hour 42 minutes ago

    Authorities in New York say a major U.S. hedge fund has agreed to pay more than $400 million to settle charges accusing it of using a web of middlemen to pay bribes to African officials. The Securities ... … More »

  • Markets Right Now: Stocks end lower on Wall Street Associated Press - 1 hour 59 minutes ago

    The latest on developments in global financial markets (all times local): 4:00 p.m. Stocks are ending lower on Wall Street, led by drops in drugmakers and banks. Mylan slumped 4 percent Thursday after ... … More »

  • Boss of UK's John Lewis selected to run for West Midlands mayor
    Boss of UK's John Lewis selected to run for West Midlands mayor Reuters - 2 hours 4 minutes ago

    LONDON (Reuters) - British department store chain John Lewis will have to appoint a new leader after Managing Director Andy Street was chosen by the ruling Conservative Party as its ... … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • % Gainers
    % Gainers
    NamePriceChange% Chg
  • % Losers
    % Losers
    NamePriceChange% Chg

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg
  • Bonds
    TreasuryYield (%)Yield Change