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January 10, 2013

On the Platinum Coin Trick

I really didn't want to write about this. When we first heard about it a year ago, everybody laughed. When it came up again last week, there were snickers, contemptuous really of the idea that the government of the United States would have to pull a trillion dollar coin out of its ass to keep paying its bills.

Well, nobody's laughing anymore. "Serious thinkers" on both the right and the left are seriously thinking about whether the platinum coin trick is something the government can or should do to avoid a debt default if we blow through the debt ceiling.

There are actually three questions tied up in the platinum coin trick. Is it constitutional? Is it legal? Is it a good idea? Actually, there's a fourth question, and we'll start there: Is it even necessary?

The answer to this fourth question, of course, is "no, it is not necessary, at least, not in the short term." If we hit the debt ceiling, it will require that Treasury start prioritizing its payments. Normally, Treasury would have to pay our creditors first, in order to keep our national credit rating from dropping, and pay for federal spending out of what remains. Hitting the debt ceiling would mean that some federal spending would have to be curtailed since there wouldn't be enough money left after making our debt payments. We're not in a normal situation, though, because the Democrats in the White House claim that they would rather continue spending money than make principle and interest payments on what the U.S. owes.

There are some things Treasury can do to make funds stretch, but none of that is a long-term solution. The long-term solution is to reduce spending and, given current spending obligations, the medium-term solution is to raise the debt ceiling. That's why the GOP leadership is demanding spending cuts in an amount equal to or greater than the amount Obama and the Democrats want to raise the debt ceiling.

Which brings us back to the platinum coin trick. As I wrote above, some "serious thinkers" don't like the concept of a debt ceiling. They thing it's silly and they'd like to avoid it forever. Since they know Congress won't repeal the debt ceiling, and even Obama has rejected the pathetically errant idea that he can simply ignore it, the platinum coin trick is one way of putting off dealing with it. By minting a $1 trillion coin and depositing it with the Fed, the government would be credited with enough money to put off a collision with the debt ceiling for another year.

Before I get into constitutionality or legality, though, here's what we're talking about. 31 U.S.C. § 5112(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.

So, is the platinum coin constitutional?

Some interesting folks have suggested that it is not, including John Carney in two posts here and here. His argument is that Congress cannot delegate to the Secretary of the Treasury the authority to mint platinum coins without some "intelligible principle" to guide the Secretary's discretion.

In fact, Congress has placed some constraints on the Secretary's authority to issue platinum coins, including whether or not they must be legal tender (they must), whether or not they are numismatic items (they are not), and how the Secretary must account for the difference between the amount the nominal value of a coin minted from platinum exceeds the cost of the metal used to mint it (in short: creative accounting).

Congress has also set on the Secretary a guiding principle for the minting of all coins: "The Secretary of the Treasury . . . shall mint and issue coins . . . in amounts the Secretary decides are necessary to meet the needs of the United States." Note the word "shall" in the preceding mandate. Congress has also set on the Secretary some discretionary authority, namely he may borrow on the credit of the United States, but not more than the debt ceiling. And he is obligated to transfer to federal agency sub-accounts amounts appropriated by Congress in its occasional appropriations bills.

Carney thinks this isn't enough of an "intelligible principle" to guide the Secretary's discretion when it comes to the platinum coin. I am here to tell you that if it went to the Supreme Court, the justices would say this was more than enough (with Justice Thomas dissenting). The Supreme Court has upheld broad grants of generalized authority to executive agencies for sixty years now and this is no different. See, for example, the FDA, the IRS, and HHS.

Is the platinum coin legal?

Several folks on the left have taken the lead claiming that the platinum coin trick is illegal. Kevin Drum over at Mother Jones and Tom Maguire at Just One Minute are in that camp, but this argument takes two flavors.

Drum argues that the platinum coin trick is illegal because it's not what Congress intended by the platinum coin statute. I'm not sure where Drum has been living all these years, though, because what Congress intends and what the laws actually accomplish do not generally have much to do with each other. Certainly there is no legal requirement that laws accomplish Congress' purpose in passing them. Look no further than the so-called Affordable Care Act.

Legally, if statutory text is unambiguous on its face, there is no reason to look outside the text -- at either the context or at congressional intent -- to determine its meaning. In short, if the text is clear, we already know its meaning. It is irrelevant what one, two, or even a hundred legislators intended when they passed something if the text is clear.

In the case of the platinum coin statute, the language is simple and direct. There is no ambiguity and it therefore doesn't matter a lick what Congress thought it was doing when it passed the law.

Maguire raises a different objection. He says the platinum coin must be a "bullion" coin and claims that the value of a bullion platinum coin can only equal the market value of platinum at the time of minting plus the costs of manufacture and distribution. He is wrong about this.

Congress very specifically stated in the statute that bullion gold and silver coins must be valued at the market value of the metal plus costs. That is extensively prescribed by statute. Congress placed no similar restriction on the value of a bullion platinum coin and, in fact, Congress dropped from the proposed statute such a provision when it considered it in 1995. In short, unlike for gold and silver bullion coins, Congress left the value of a bullion platinum coin up to the Secretary.

(A side note for numismatists: a separate section of the statute requires that "[t]he bullion coins minted under this Act shall be issued in both proof and uncirculated qualities." Again note the obligatory "shall." I read that as meaning Treasury would have to issue proof and uncirculated versions of the $1 trillion coin. What they would be valued at, I have no idea and the statute provides little guidance on that.)

Is the platinum coin a good idea?

The final question is probably the easiest: no, it's not a good idea.

Some economists, Paul Krugman foremost among them, insist it will not lead to debilitating inflation because QE 1, 2, and 3 didn't lead to bad inflation. That's not so much a guiding economic principle, but an admission that they're not sure what's happening, but it hasn't been that bad yet. But there's more to consider than just inflation.

Pulling a platinum coin out of thin air is likely to lead to a credit rating downgrade whether we continue to pay our creditors or not because it signals a serious problem with U.S. government finances. It also sets a terrible precedent. And, of course, the very point of the platinum coin trick is to push our day of reckoning further into the future when we're going to be less likely to deal successfully with our spending problem.

Megan McArdle had a particularly noteworthy rant about the merits of the platinum coin trick yesterday. I encourage you to read it.

In short, the platinum coin trick an unnecessary idea and a bad one, but it is not, as some have argued, unconstitutional or illegal.

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posted by Gabriel Malor at 11:18 AM

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