How many times have you heard that the Government can only spend money after it raises revenue by either taxing or borrowing? Nearly every time someone talks or writes about the US’s public deficit/debt problem? How come nobody asks why, since Congress has the unlimited authority to create coins and currency, it doesn’t just create money when it deficit spends? The short answer is that Congress in 1913, constrained the Executive Branch from creating currency or bank reserves, delegated its power to do that to the Federal Reserve System, and never looked back when we went off the gold standard in 1971, even though this removed the danger of money-creation outrunning gold reserves, and also created a new monetary system based on fiat currency.
How It Works
But coins, it turns out are different from currency and bank reserves. They’re the province of the Executive. And Congress provided the authority, in legislation passed in 1996, for the US Mint to create one oz. platinum bullion or proof platinum coins with arbitrary fiat face value, having no relationship to the market value of the platinum used in the coins. These coins are legal tender. When the Mint deposits them in its Public Enterprise Fund (PEF) account, the Fed must credit it with the face value of these coins. The difference between the Mint’s costs in producing the coins, and the reserves provided by the Fed is the US Mint’s “coin seigniorage” or profit from the transaction.
The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Fed for profits. These then go into the Treasury General Account (TGA), the spending account of the Treasury, narrowing or eliminating the revenue gap between spending and tax revenues. So, for example, say the Secretary of the Treasury ordered the Director of the Mint to create a $60 Trillion (face value) coin; and deposit it in the PEF account at The NY Federal Reserve Bank. The Fed would credit the PEF with $60 T in reserves, and the Treasury would then “sweep” the seigniorage, nearly $60 T, into its spending account.
Platinum coins with huge face values such as $60 T, can produce seigniorage closing the revenue gap and technically end deficit spending, while still retaining the gap between tax revenues and spending that can add to aggregate demand and produce full employment. Platinum Coin Seigniorage (PCS) is also a way for the Executive to end debt ceiling crises, since the profits could be used to repay debt instruments when they fall due, without the need to issue any more debt.
The seigniorage from a $60 T platinum coin would serve as a potent symbol of the truth that the Federal Government can never involuntarily run out of money. This is one of the central ideas of MMT that the public needs to accept routinely, to understand that the Government’s budget isn’t like their household budget. The presence of the $60 T in the public purse would be a positive enabler of progressive legislation creating benefits that people want now, but austerians say we can’t pass because “we can’t afford it.”
If all debt instruments are re-paid by using PCS, then, eventually the US would have no debt subject to the limit, or presence in the bond market, and would pay no interest to bond holders. No one would worry about the public debt, or use its size to justify blocking legislation that fulfills public purpose and promotes the general welfare.
So, PCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.
Why we need to get it done right now!
It must be done now! If it doesn’t, then people who are against the use of PCS will have time to organize against it and get it repealed by the Congress. Now that the PCS capability is widely known, the FIRE Sector will be gunning for it with all the financial, political and propaganda power it can bring to bear. It will do that because using PCS, especially the $30 T or greater coin, High Value Platinum Coin Seigniorage (HVPCS) I propose, strikes at the domination of the financial and political systems by Wall Street and the big banks. Cullen Roche explains why:
The most interesting thing about the coin idea is that the biggest threat of the coin was to the existence of private banking. I am actually surprised that a major bank hasn’t come out very publicly stating that the coin was ridiculous. Why? Because the coin exposes a potentially enormous change in the way the US monetary system functions. Instead of having a money system that is designed almost entirely around private banks (who issue most of the money) the coin threatened to expose the reality that government could self finance if it wanted to. In other words, the government could become the permanent primary issuer of money (as opposed to choosing to use private bank money).
So the Fed’s role is of particular interest here. And we must again ask ourselves. What is the Fed? Is it a public entity or private entity? It’s a bit of both. The Fed is a strange sort of hybrid public/private entity. But the coin decision has to make one wonder where they stand on this issue and whether the Fed has imposed its will on a potentially important debate. Is this merely a case of the Fed being apolitical and independent? Or is this a case of the Fed siding with its true master – the private banking oligopoly? I don’t know, but one thing we know for sure is that the Fed is not merely serving public purpose at all times. After all, its existence as a support feature for an oligopoly that serves private purpose (banks are slaves to their owners) renders the Fed compromised on public purpose to some degree.
So, HVPCS threatens the banks’ domination of the Fed, and also their role in money creation, and with it some of their income. The more time that passes without using HVPCS, the more likely it is that the Executive Branch will lose this capability to Wall Street’s persistent political efforts at repeal, and become the actual, rather than only the pretended (kabuki) prisoner of debt instruments and austerity once again.
Already, some bloggers in the business press who want to use the TDC to avoid the debt ceiling have proposed and expressed support for the idea that the capability to use PCS could be repealed in a swap for repeal of the debt ceiling legislation. This is a very unequal swap, because the power to use PCS, along with the willingness to use it, already makes the debt limit a dead letter.
The only swap that makes any sense is repeal for legislation giving Treasury the same right as the Fed has now, to create money out of thin air, but only for the purpose of repaying debt subject to the limit and covering deficit spending appropriated by the Congress; because this, and only this, is the equivalent of the PCS power. The only thing that would be more preferable than either of those things is to end the “independent,” really big bank and Wall Street dominated, Fed, and make it accountable by placing it under the direct authority of the Executive Branch and the Secretary of the Treasury with the Fed’s current capabilities to create money intact.
Progressives need to fight for retaining the Executive’s capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose. Removal of the capability would require that austerity politics be ended through change in the Congress. That sort of change, however, is years down the road, whereas the President can make HVPCS happen right now.
(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will deal with objections made to HVPCS and answers to them.)
(Cross-posted from New Economic Perspectives.)