Mint the Coin. By Pwnallthings

Mint the Coin

Matt Tait — Read time: 15 minutes

Mint the Coin

And why the President's 14th Amendment Plan is the wrong tool for the job

A picture of a platinum dollar coin, marked "one trillion dollars" and featuring a picture of Dr Evil laughing from the movie Austin Powers

For the past few weeks, the biggest problem facing D.C. has been the debt ceiling. It’s a uniquely D.C. problem: a completely avoidable catastrophe unless a deal is reached, but—if we’re lucky—perhaps at the eleventh-hour the whole shebang will go away and we’ll scrape through with the U.S. having laudably decided not to detonate its own economy.

As with many of these recent artificial crises, this negotiation seems, at least from the outside, to be going rather badly. President Biden has signaled that he’s open to looking at ways to dodge the issue—namely by using the 14th Amendment to declare the debt ceiling unconstitutional and to ignore it. Several prominent Democrats are also loudly pushing this plan.

Biden is right to want to circumvent the debt ceiling—especially if the alternative is a national default. But, unfortunately, the plan to do it via the 14th Amendment is a very bad one—especially compared to alternative plans like the trillion dollar coin.

Understanding the difference in those two plans is a bit involved, so I figured it might be useful to go into them in detail, and why they aren’t, well, two sides of the same coin. Yes, superficially both seek to neutralize the debt-ceiling. But one does so in a way that trips through a dozen legal and economic minefields, and the other, while superficially very gimmicky, is actually a very straightforward approach that avoids virtually all of the problems inherent in the President’s 14th Amendment plan.

So, without further ado: what is the debt ceiling? Why does it even exist? What is the President’s 14th Amendment plan, and why is it problematic? What is the mint the coin strategy, and how does it work legally and monetarily? And finally, let’s look at why minting the coin isn’t merely a better plan, but also avoids separation-of-powers issues and renormalizes government back towards a healthy approach to governance where major changes to the status-quo require active legislation rather than having to constantly try and dodge crash-by-default timebombs. In fact, those final points mean I think the President should mint the coin whether or not he gets an agreement to raise the debt ceiling. But we’ll get to that in due course.

The debt ceiling is a legislative limit on the total public national debt held by the US Treasury. In the United States, the power to raise debt belongs to Congress and not the Executive Branch, thanks to Article I Section 8: “[The Congress shall have power] to borrow money on the credit of the United States”. Congress delegates that power by statute to the US Treasury, up to a defined limit. The limit was first set in 1917, and has been updated several times since.

The debt ceiling was most recently lifted in December 2021 to its current limit of $31.4tn, and the United States hit this limit around January 19th this year. The U.S. government is now operating solely on its remaining cash balance. It can no longer borrow to get new cash because of the debt ceiling, and its next infusion of tax revenue will occur at the end of June, which will be too late.

At the end of April, the US federal account stood at about $350bn. As of yesterday, it’s about $57bn. In a few days it will simply run out. The exact day is unclear, but on one of the days in the week 5-9th of June, the US will be unable to clear its overnight debt payments for the day, and the US will, for the first time ever, be in actual default.

If this happens, US debt will lose its trusted status in the market and the cost of all future borrowing will price in this new reality. The US’ total debt is very large, so even very small spikes in the cost of borrowing quickly add up to hundreds of billions of dollars a year. A rise in the base cost of borrowing of even just one quarter of one percent translates to about $50bn a year of direct additional debt payments.

Basically everyone agrees that this would be terrible. But that raises the pretty obvious question: why do we even have a debt ceiling at all?

The debt ceiling is, after all, a completely arbitrary figure. It has no intrinsic economic purpose or significance—increasing the ceiling by $100tn does not incur $100tn of new debt, or have any effect on the wider economy whatsoever. The ceiling’s value, rather, only determines when the next debt-ceiling fight happens. And this is its point: The debt ceiling forces Congress to take another look at the issue, and provides an artificial negotiating advantage to those who want to extract concessions from the governing party. That’s because maintaining the status-quo necessarily requires passing new legislation.

Notice that this is an inversion of the traditional “schoolbook” model of US governance. Under that model, major changes to the status-quo would normally require legislation passed by the Congress and signed by the President to take effect. Legislative timebomb clauses and the debt-ceiling invert that normal ordering. Here, instead, the status quo changes unless the President, House, and Senate can all bang heads together and kick the can down the road. When the President, House and Senate are not all controlled by the same party (and, for issues subject to filibuster rules, even then without a supermajority) this forces a negotiation that is advantageous to the minority party: They get to hold the country hostage.

These timebomb-style games-of-chicken have always been structurally bad. Passing legislation in the United States is constitutionally hard on purpose, because it is normatively good for big changes in the governance status-quo to require debate and agreement in the political branches. Sunset clauses and debt-ceilings invert this so that maintaining the status-quo and avoiding catastrophe is hard, and requires debate and agreement in the political branches. That’s a perversion even under the best of times. In a time when the political branches are dysfunctional and can barely agree on anything, it’s wildly irresponsible.

All of which is to say: the debt ceiling is not only bad because defaulting would be bad, it’s also structurally bad because it inverts the traditional model of decision-making, and sets the country up to periodically try and disarm a timebomb that the political branches self-evidently are now too dysfunctional to reliably defuse.

The administration, for its part, seems to be leaning towards the 14th Amendment solution, so let’s start with that one. The claimed authority here comes from the 14th Amendment’s Section 4, which reads:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. […]

Here, the argument is that the debt ceiling is inherently unconstitutional, because the debt ceiling legislation means that the US government would be unable to pay its debts. The theory states that since the 14th Amendment ensures that public debt shall not be questioned, that implies a conflict between the 14th Amendment and the debt ceiling legislation. As all schoolchildren know, if there’s a dispute between legislation and the constitution, the constitution wins. So under this theory, the executive branch can declare the debt ceiling unconstitutional and borrow straight past the limit.

Hurrah!

The problem is the plan doesn’t work.

The first, and most obvious defect in this strategy is that the US government doesn’t just need money in order to service its existing debt. It also needs money for, well, everything else. If the 14th Amendment permits borrowing to avoid a default—and that is not at all clear—it definitely doesn’t cover borrowing to cover non-debt obligations like, say, paying government employees, its invoices, or social security.

Even when it comes to the very narrow issue of just raising debts to avoid a default, it’s not at all obvious that the 14th Amendment permits even it.

First, let’s dispense with the idea that this is a statute-disagrees-with-constitution issue, because it’s just not. It’s a separation-of-powers dispute. To execute the 14th Amendment plan, the President would need to borrow against the credit of the United States. That’s a power given to Congress in Article I Section 8. Congress has only given a limited delegation of that authority to the Treasury—and worse—that limitation is very explicit that the President must not exceed the specified ceiling.

Secondly, while the 14th Amendment says that public debt shall not be questioned, it doesn’t say how the government must raise money to service those debts. It doesn’t follow at all from the 14th Amendment that honoring the United States’ debts requires the President to raise some other debts, absent a grant of authority by Congress to do so.

That might not be obvious, but here’s an extreme example to make the point: if the President decided that a different way to honor the debts was to invade Denmark and steal all of the gold in their Treasury, everyone would agree that’s pretty obviously not authorized by the 14th Amendment. Similarly, another way to raise money to honor the debt would be for the President to unilaterally issue a one-off emergency tax on the public without consulting Congress. Again: nobody would think the 14th Amendment authorizes the President to do this just because the 14th Amendment says that public debt must be honored. The same would go for selling federal land, or exports of military equipment against Congress’ express prohibition.

And this is the crux of the problem: it doesn’t follow from the 14th Amendment that the President can raise debt independent of Congress, even if it states that debts must be honored.

But wait! It gets worse. Not only does the 14th Amendment fight get the president into a separation-of-powers fight with Congress where he might not succeed—and does so in order to get money that doesn’t even keep most of the government operational—the legal status of all debt incurred past the ceiling under this plan has a very unclear legal status.

Will that new debt be honored? Maybe. Probably. I don’t know. Nor do you. But most importantly: the markets don’t know. And the 14th Amendment won’t guarantee it either: Debt past the ceiling isn’t public debt authorized by law—in fact, it’s explicitly not authorized by law!

In other words, when the President raises debt past the ceiling under this plan, that new borrowing is qualitatively different to existing borrowing, and comes with all sorts of new risks to the financial institutions purchasing it. And—as night follows day—financial instruments that carry more risk charge higher premiums. So, despite all the trouble and limitations of this plan to bypass the ceiling, we still somehow ended up with basically all the problems we were trying to avoid anyway: the government still shuts down; social security still doesn’t get paid; and the markets lose trust in the U.S.’ debt anyway and so we still see a massive surge in debt interest rates and increased debt payments.

So, yes, it’s fine—admirable, even—to find ways to creatively ignore the debt ceiling.

But—I’m sorry—the 14th Amendment plan to do it is bad. It’s the wrong way to do it.

The right way to do it is the coin.

The Mint the Coin strategy, or “31 USC 5112(k) Treasury seigniorage plan” if we want to be very boring about it, is very different, both technically and legally. Here, rather than trying to argue that Congress’ debt ceiling is unconstitutional, it takes a radically different approach rooted in the inspired observation that, from the government’s perspective, money and debt are the same.

This is perhaps not obvious, but here’s why: If you buy $20 worth of Treasury debt, the US government definitionally has a debt obligation to you in the sum of $20 (plus interest). But if you have a $20 bill in your wallet, the US also has an obligation to you in the sum of $20. It says so right on the bill. They’re both a Treasury-backed financial obligation, just in different forms.

So let’s walk through this plan and see how it works.

As with debt-raising, Congress has the ultimate authority in deciding how the US issues hard currency: “[The Congress shall have power] To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”. This authority is separately delegated to the Treasury (which sub-delegates it to the Mint for coins and to the Bureau of Engraving and Printing for notes) under a limited grant that precisely defines the types of currency that the Treasury can create, as well as their form, and, in most cases, their denomination and maximum circulation.

But there is one exception, described in 31 USC 5112(k): The Platinum Coin.

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.

The breadth of delegation here is not an accident of drafting. The clause is designed to permit the Secretary to mint special-edition coins at any value or design without needing to bother Congress with the specifics. While its drafters expected that to be for collectable coins, the Secretary can absolutely choose to make high value coins—yes, even trillion dollar coins—if she wants to. She doesn’t even need any particular reason. She just can: Congress gave her that power. The only restriction she faces is that the coin must be made of platinum, and that it must otherwise operate like any other coin.

So why does minting a trillion dollar coin help with the debt ceiling? It all comes down to the way hard currency is accounted for inside the federal government.

Once the Secretary authorizes the creation of a trillion dollar coin, the Mint creates the physical coin itself, probably with a lightly-modified commemorative coin design and an existing platinum coin blank. The Mint then takes that physical coin across town and deposits it at the Federal Reserve. As with all other coins deposited there, the Mint is then credited with the coin’s seigniorage, i.e., the face-value of the coin minus any costs incurred creating it. The Fed then holds the coin as an asset.

Notice that in economic terms, nothing has really happened here yet—at least beyond the small-dollar costs of the metal and the bureaucracy in processing it. But in accounting terms, the Mint has just been credited with $1tn into its account by the Fed, and the Fed balances its balance sheet by holding the $1tn coin as an asset alongside all of its other multi-trillion dollar assets.

That $1tn payment to the Mint is operating surplus for the Mint, which, like all government department operating surpluses, is deposited back to the Treasury General Fund. Armed with this new money, the Treasury can spend it to keep the government operating and to satisfy its debts, invoices, wages, and other obligations.

There’s two easy mistakes to make with this plan if you’re not careful, so let’s tackle those now. Because this plan doesn’t give the executive branch free rein with the money, and it doesn’t have a direct inflationary impact.

On spending authority, this doesn’t touch or upend Congress’ budget power. The new $1tn ends up in the Treasury General Fund, but it isn’t the Executive Branch’s money to spend as it pleases—that still requires Congressional appropriations. This plan lets the executive branch dodge the debt ceiling. It doesn’t let it dodge the federal budget.

On inflation, isn’t this a case of “printing money” that will trigger hyperinflation?

No. And not just because it’s stamping the money, not printing it.

When countries that perform unchecked currency printing spiral into hyperinflation, the proximate cause of the spiral isn’t printing the money. It’s spending it. Here that’s not the case. Counter-intuitively, even if the government is making new currency, its total spending after minting the coin is identical to what its spending would have been with just a vanilla debt-ceiling increase. It’s inflation-neutral.

This is more visible if we use an extreme example. Suppose the government were to mint a $999tn coin, and not just a $1tn coin. Here the practical result is that the Federal account will have a very large number in a database. But no other economic effects are occurring anywhere else: it doesn’t impact anyone else’s money. The coin isn’t in circulation, and it doesn’t change the budget—at least compared with simply raising the debt-ceiling by any other means—and so it is no more or less inflationary than any other mechanism of raising the debt ceiling and spending at the current budget rate. Of course, if Congress decided to start spending the $999tn money through gigappropriations, then, yes, sure, that would be hyperinflationary. But that’d be inflationary whether it’s funded by seigniorage or by external debt; it’s the spending not the financing that triggers the inflation. And, just as importantly, that’s not something the executive branch can do independently of a Congressional appropriation.

In short, the whole Mint the Coin scheme is just a very elaborate accounting mechanism to restructure some of the debt to be Fed-managed rather than Treasury-managed. That’s because one of those debt piles has a Congressionally-imposed maximum, and the other has a Congressional grant to the Treasury Secretary to mint coins with an unlimited upper value.

That’s all it is. It’s fancy accounting wrapped around a physical coin. It’s not got any wider economic significance beyond that.

But while minting the coin feels a bit, well, gimmicky and undignified—and it is—it serves several very important purposes that the President’s 14th Amendment plan does not. First, and most importantly, it uses a delegated power from Congress in a way that is explicitly authorized, in contrast to using a Congressional power in a way that is explicitly unauthorized. That side-steps the separation-of-powers fight that the 14th Amendment plan would otherwise involve entirely.

The second great thing is that it’s very limited in scope. Congress can, if it chooses, amend the law to withdraw the authorization from the Treasury Secretary to mint trillion dollar coins. A bill to withdraw that authorization—perhaps in exchange for repealing the debt ceiling—for example, is entirely possible. And even if Congress does not withdraw the authorization, there is no opportunity for executive misbehavior here: Federal spending is still firmly limited by Congressional appropriations. This isn’t magic money for the president to use as he pleases, and has no effect on the rest of the economy beyond what would be the case if the same spending were debt-financed rather than money-financed.

The third great thing is that it stabilizes the national economy by defusing the national-debt timebomb permanently. Changes to the status-quo, whether for better or for worse, can and should always be done through affirmative legislation. It is bad enough that Congress puts timebombs in its legislation. It certainly should not put one under the economy as a whole. This defuses that bomb forever.

The next benefit is the delegation of authority to the Secretary of the Treasury’s total discretion means there are very few avenues to appeal her decision. It’s fully hers to make; the executive branch doesn’t stamp on anyone else’s toes to do it. It’s not only plainly lawful: it also doesn’t implicate anyone else’s interests. It is not clear who, if anyone, would have standing to oppose it.

And the final great thing about this plan is it simply doesn’t involve the markets at all. All existing debt is honored, and no new debt is created with any type of uncertain legality. There’s no new uncertainties for the markets, and nothing for them to reprice or to price-gouge to take advantage of the crisis. It just averts it.

Finally, if anyone in Congress happens to be upset that neutering the debt ceiling undermines their ability to re-debate the topic of total federal debt, then on that, too, I have happy news: Both chambers of Congress independently have the power, if they wish, to create new standing committees or rules in their respective chambers, or to periodically compel new debate on the topic within their respective bodies through Congressional rules. They don’t need a timebomb under the economy to force internal debates about overall spending.

In short, ending the debt-ceiling is a very good idea. Defaulting would be catastrophic. But the 14th Amendment is the wrong tool for this job.

It is true that when you’re trying to defuse a bomb, you sometimes have to turn a few screws. But that doesn’t mean you have to use a spoon to do it—especially if there’s a screwdriver lying next to you.

If a deal cannot be reached before zero-hour—and honestly, even then—the right answer is clear: You just gotta mint the coin.

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