Nathan Tankus is the research director of the Modern Money Network. He also writes the Notes on the Crises newsletter.
The US is approaching yet another self-inflicted debt-ceiling crisis, and that means it’s time to revisit a proposal to circumvent the entire contrived drama by minting a $1tn coin and depositing it with the Federal Reserve.
I’ve written about the basics of this idea before, which have been extensively covered by many news media outlets. You can read my summary of it here. Today I want to focus on potential reason(s) the White House is not pursuing the “coin option”.
Word is that the Biden administration has one core objection: they do not believe the Fed will accept the coin. This is consistent with comments from a White House spokesperson in 2021. Without the Fed’s co-operation, the argument goes, there is no way to turn the coin into funds to make bank payments.
So why wouldn’t the Fed accept the coin? This is not actually a simple question.
The platinum coin would be legal tender when issued, and the Fed is a fiscal agent to the Treasury. Being a fiscal agent means making payments, accepting deposits and providing other payment-related services to the Treasury. Thus, the Fed would appear to be obliged to accept the coin. But there’s one catch: coins are only “issued” and monetised when they are purchased.
As a result, if the Treasury were to try to deposit the coin at the Fed, the Fed could claim they don’t have an obligation to accept it and credit Treasury’s accounts, because it has not yet been “issued”. In other words, the central bank would decide that the round chunk of platinum from the US Mint is not yet a coin. (This makes the catch we cite above more of a Catch-22, as the Fed’s acceptance is what would “issue” it as a coin.)
There are a few important things to notice about this argument. First, it implicitly accepts that it would be legal for the Treasury to mint and seek to deposit the coin. In other words, the idea is that the Fed would interfere with the Treasury making payments and avoiding a default on its debts for non-legal reasons. This, in and of itself, would be an abrogation of the Fed’s obligations as a fiscal agent of the Treasury, a relationship defined by regulations and legislation.
There is also no documented historical precedent for a fiscal agent rejecting the deposit of any coin on this basis, or any other for that matter. As the Second Circuit determined in 2019, “Congress specified the fiscal agency relationship for the purpose of putting the [Federal Reserve Banks] under the direction of the Treasury Department in certain limited circumstances”.
By claiming that the coin has not been issued yet, then refusing to accept it, the Federal Reserve is also interfering with the issuance of a coin. Indeed, that would be the purpose of not accepting it; if Fed officials thought the coin would be successfully issued no matter what, there would be no point to their refusal.
This is important because the Fed does not have the authority to interfere with the Treasury using its congressionally granted powers. As my colleague Rohan Grey has pointed out in his work, the Federal Reserve Act explicitly says:
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal Reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
And remember, the Coinage Act gives the Treasury the authority to mint platinum coins of any denomination. It follows that the Fed would likely be violating the Federal Reserve Act if it were to interfere with the issuance of a $1tn platinum coin.
Why, then, have Federal Reserve officials claimed to Treasury and White House officials — both in the past and today — that they would not accept the coin? I think this is simply a matter of administrative agency politics. They do not like the $1tn platinum coin, and it is not costly for them to claim in meetings that they wouldn’t accept it. These sorts of claims dissuade other government officials without putting the Fed under legal scrutiny.
Nevertheless, we can’t completely rule out the possibility that the Fed would indeed try to interfere with the coin’s issuance by refusing to accept it. The Treasury would then have to get an injunction against the Federal Reserve. The potential delays in receiving that injunction from legal debate and the like are not the kind of uncertainty the Treasury wants to deal with.
In that sense, it was worthwhile to mint and deposit a $1mn coin a year ago in order to have this legal fight in advance and set precedents for today. Since that didn’t happen, does that mean the platinum coin is not a useful option for today?
Not at all. The Treasury has more fiscal agents than the Fed. All it needs to do is find a chartered bank willing to accept the coin in deposit. That bank could then turn around and deposit the coin in its account at the Federal Reserve, and the Treasury can either make payments from that bank account, or transfer the funds to its own account with the Fed.
The coin, having already been issued, would be legal tender, and the Fed would have no basis for refusing it. Even so, I don’t think the Fed would force the Treasury to seek alternatives. So the Biden administration should call the Fed’s bluff. Avoiding catastrophic default — or needless austerity — is on the line.
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January 18, 2023 at 08:31PM
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The Fed will have to accept the $1tn platinum coin - Financial Times
"accept" - Google News
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