How a bullion coin was nearly to solve the US debt crisis – again

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by Björn Schöpe

January 24, 2013 – One year ago it happened, this year it is happening and next year nobody will be surprised if it happens again. The US are facing one debt crisis after the other because Congress – with a Republican majority – opposes to raising the debt ceiling until the last moment. The hard way is generally the best but, unfortunately, it is hard too. This would mean to work out a real solution to the problems that stand behind this recurrent crisis. Probably that is the reason why everybody is so fascinated by a simple and, at first glance, elegant solution like minting one bullion coin and everything is fixed – at least until next year …
Anyway, this coin will not be minted as spokespersons of Federal Reserve and US Treasury stated. Nevertheless the story is interesting since it put a bullion coin in the centre of attention.

In the 1980s and 1990s the USA were not able to sell their gold bullion coins on the international market because law mandated a fineness inferior to the worldwide standard. In the mid 90s former US Mint Director Philip Diehl proposed to introduce a platinum bullion coin which, indeed, became immediately extremely successful.
The law that empowered the Treasury to order these coins to be minted stated that face value and size of coins were at the Secretary of Treasure’s discretion (the only case of US coins with arbitrary face value) which means that these issues did not have to pass Congress. (And, by the way, it was a Republican Congress to pass this provision against the Democrats’ opposition.)
These coins were, of course, intended as an investment item and not as circulating money. And that leads to an important point. Circulating money is ordered by and after minting shipped to the Fed. The Fed pays to the Treasury the face value which exceeds the productions cost by far (except with the penny). This difference is called seignorage. Bullion coins, however, are sold at the metal’s day rate plus a fee to authorized dealers – not the Fed – who, on their turn, sell the coins to individuals and those who cannot afford or do not wish to invest in whole platinum bars.

It is clear that the Platinum Bullion Eagle was not intended to solve any debts by the seignorage which would be gigantic with high value coins. Currently the US Mint produces Platinum Eagles in 1oz, 1/2oz, 1/4oz and 1/10 oz weight, the heaviest with a $100 face value. Some years ago, though, the idea came up to provide the administration with money by simply minting a platinum bullion coin with the face value of $1 trillion. Technically this would be no problem. Mr Diehl explained the Mint could produce an obverse die to strike such a coin in two days, the reverse would be the same as of all other platinum bullion coins.

Although certain voices replied the amount of platinum to mint such a coin does not exist in the USA and would correspond to 100 Statues of Liberty that argument just missed the point. It is peculiar to the concept of a bullion coin that the face value does not correspond to its intrinsic metal value. To give an example the $100 Platinum Eagle Bullion coin sells currently for some $1,600 since investors hope that in future the platinum price secures this value or will even increase. The face value, hence, is purely symbolic. But. Part of the proposed solution to solve the debts by minting a platinum bullion coin is to deposit this coin – like any circulating coin – at the Fed which would accredit it as part of the State’s assets and therefore transfer the sum matching the coin’s face value to the Treasury’s account. In that case the Treasury would gain nearly $1 trillion.

It is not so clear, however, if this would be the legally prescribed procedure since the Platinum Eagle is no circulation coin and hence, the Fed generally does not buy these coins but they are sold directly to dealers. Circulation coins, on the other hand, must be ordered by the Fed to be minted by the US Mint. Maybe the decision would therefore stay with the Fed and not the Treasury. So the Treasury could mint a bullion coin which the Fed is not forced to ‘buy’.

Of course legal experts disagreed concerning these details and debated whether the plan would work. The same goes for the financial analysis. Experts discussed whether such a coin would cause an inflation or not.

Some days ago the Fed and the Treasury have declared, though, that the Administration is not going to mint a $1 trillion coin. ‘Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,’ the Treasury said. As many involved politicians, experts and journalists stated this way of solving problems would appear laughable and silly to most people. The legal loophole, however, is still risky. Why should the President limit the bullion coins to $1 trillion face value if there is no restriction at all? Why not mint ten or twenty $1 trillion coins making provision for the future, for the next administrations, the next generations …?
This affair seems rather absurd and, above all, thwarts the principle of checks and balances skipping Congress’s control over issuing money. And everybody admits that this was never the idea of the law regarding platinum bullion coins, anyway. To make sure that based on this law no platinum coins will be minted for paying debts Republican Congressman Greg Walden has recently brought in a bill.

Oh, and to the wealthy collectors among our readers: the $1 trillion platinum Eagle was never destined to be sold later on the market but to be melted down again as soon as the Treasury could purchase it back from the Fed!

There is a quite extensive Wikipedia article on the Trillion dollar coin.

The Street’s Joe Deaux gives an excellent article on that topic based on interviews with former US Mint Directors Philip Diehl and Ed Moy.

Politico refers about Greg Walden’s bill.

About the Fed’s and Treasury’s decision to abolish the $1 trillion coin idea and the financial crisis you may read this CNN article

The US Mint informs on its website about the American Eagle Platinum Bullion Coins.