Updated with a comment from Philip DiehlNEW YORK ( TheStreet) -- It's not Timothy Geithner's choice to order a $1 trillion coin. In fact, it may not be an option. Calls for the minting of a platinum (bullion platinum, to be precise) $1 trillion coin so as to avoid a debt ceiling clash have emerged from legitimate corners of the Web. Matt Yglesias at Slate, Joe Weisenthal at Business Insider and Nobel Prize-winning economist Paul Krugman at The New York Times are among many who have shed light on the possibility for Treasury Secretary Timothy Geithner to print a $1 trillion platinum coin, walk it over to the Federal Reserve and deposit it in the Treasury's account. The bizarre action, first noted during the 2011 debt ceiling debate by a reader of Cullen Roche's Pragmatic Capitalism finance blog, has gone viral in the past week. In interviews with two former U.S. Mint directors, TheStreet learned two differing interpretations on the U.S. code that has sparked a national conversation.
Why Does a Law Like This Exist?"(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." This is the legal language driving the discussion as to whether Geithner may mint the $1 trillion coin. The U.S. Mint is part of the Treasury Department. Former U.S. Mint Director Philip Diehl (1994 - 2000) said he helped author the law with the intent to allow the United States to print coinage for investment purposes. Essentially, Diehl said he, along with the aid of former Rep. Mike Castle (R., Del.), wanted to create platinum bullion coins for the expansion of the United States' investor market from silver and gold into platinum. "We
Quick Pit Stop to Explain SeigniorageSeigniorage is the amount difference between how much it costs the U.S. Mint to produce a coin and how much the coin costs at face value. Simply, a U.S. quarter costs about 11 cents to make, according to Diehl, but the Fed "buys" it from the Treasury for 25 cents in order to distribute it to financial institutions that then dispense the coins into public circulation. The 14-cent difference goes to the general fund of the Treasury.
Who Are the 13 People Who Can Order a $1 Trillion Coin?Diehl argued that Geithner would authorize the production of a new coin die -- an engraved stamp used to impress a design on a blank piece of metal to make a coin, according to the U.S. Mint's Web site -- which would create the $1 trillion obverse side (think the "heads" side of a coin) that the Mint would need to put on the new coin. Interestingly, Diehl said the Treasury could initiate and finish this process in about a two-day time span and it could simply use the current American Platinum Eagle's reverse die to print the standard "tails" side of the coin.
Here's Where Many People Have Missed a Critical Part of ProcessThe Treasury doesn't receive seigniorage for having simply created the platinum coin. In other words, Geithner can't avoid the debt-ceiling limit by minting the coin into existence. Seigniorage would occur when the Mint ships the coin, according to Diehl. Diehl said the old rules allowed for the seigniorage transaction when the Mint struck the coin, but he said he proposed to Congress to change that rule because he thought the incentives for it were wrong. "We thought ... that it encouraged overproduction of coinage. In fact, we'd had that problem in years past, so we proposed to Congress and they passed the change in the accounting treatment," said Diehl. Based on Diehl's explanation that coins are "booked" the moment they ship to the Reserve Banks, and the Fed's explanation that the Mint transports coins after the Reserve Banks have provided it with monthly coin orders, the decision to order the $1 trillion coin would be left to the Reserve Bank presidents. Initially, Diehl argued that the Mint could strike the coin and deliver it to the Fed without the central bank needing to place an order, but when TheStreet pointed out to Diehl the role of the Fed according to its own explanation about the coin-ordering process, the former Mint director pivoted.
Here's Why the Treasury Can't Mint a $1 Trillion CoinEd Moy, former director of the U.S. Mint from 2006 to 2011, said he doesn't believe the United States can avoid its looming debt-ceiling crisis with a $1 trillion coin because the Fed doesn't purchase bullion. "So with the bullion coin you can put any face value you want on it, because the bullion coin value is not related to the face value, it's related to the metal content," said Moy. "The only way you generate seigniorage is when you are forced to accept the face value of the coin as what the coin is worth, and the only way you can do that is via a circulating coin." Moy's argument is that platinum bullion coins are not circulating coinage and that by practice the Fed only distributes circulating currency. Diehl, as noted earlier in this story, said the intent for platinum bullion coins was to create a type of investment that would use authorized purchasers as a two-way intermediary to pass along the coins to private investors. Moy said his stricter reading of the law found that the Fed would not purchase the bullion coins because they are not circulating currency.
What About the Proof Platinum Coin?A glance back at this law shows that the Treasury secretary also reserves the right to issue proof platinum coins. This gives the secretary the authority to mint circulating coins as collectors' items. Diehl and Moy agreed that the Treasury would not attempt to exercise the $1 trillion coin option through this avenue.
Will Bernanke Order a $1 Trillion Coin and Will Geithner Mint It?Despite their conflicting interpretations of the law, Moy and Diehl stressed that they believed it was a terrible option to solve the looming debt-ceiling debate. "In the end, I don't think the Treasury is going to be put in a position where it has to actually strike the coin," said Diehl. "I think the reason why I've seen a lot of chatter on this over the last couple days is ... everyone is out of easy solutions, the only solutions that are left are really tough solutions that have big negative consequences both politically and economically," said Moy. The Federal Reserve, U.S. Treasury and U.S. Mint for this article declined to comment specifically about the $1 trillion coin option In response to this article, Philip Diehl forwarded the following response in an email to TheStreet:
"The use of 'mandated' in paragraph #10 could be misconstrued as meaning 'determined by law' when, of course, the decision as to platinum coins is left to the Secretary. And he can change the face value as he chooses, so 'mandated' doesn't really fit. We say the face value is mandated when it is written in law as it is for all coins other than the platinum coins. "I don't think this is a terrible option for resolving the debt limit problem. I certainly think it is inferior to raising or eliminating the limit but it's far better than defaulting and suffering the consequences of doing so."-- Written by Joe Deaux in New York. >Contact by Email. Follow @JoeDeaux