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
The catch is that the printed face value of these platinum bullion coins doesn't represent the real value as the coin actually is worth the weight of the spot price of platinum (We'll return to this point later). For example: Tuesday's closing platinum spot price was about $1,586 an ounce, according to Kitco's index, which means an authorized purchaser would buy a 1-ounce American Platinum Eagle coin on Wednesday from the Treasury at about that price -- including a fee for the transaction -- and then sell that coin to a private purchaser at an agreed price. Platinum bullion coins have a face value as mandated by the U.S. government, Diehl said, but when you choose to cash in the coin you likely would receive a return equal to the spot price of the weight of the precious metal. To note: The standard sale of physical gold and platinum comes in bars, which is an expensive purchase for the average individual. Bullion coins make purchasing precious metal assets more affordable.
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.
After the Treasury has minted the coin, it must deliver the coin to a Reserve Bank in order to receive seigniorage, Diehl said. The Fed's Web site said its Reserve Banks provide the Mint with monthly coin orders, and then the Mint transports the coins from one of its production facilities to the Reserve Bank locations. "The Federal Reserve's role in coin operations is more limited than its role in currency operations. As the issuing authority for coins, the United States Mint determines annual coin production. The Reserve Banks, however, influence the process by providing the Mint with monthly coin orders and a 12-month rolling coin-order forecast. The Mint transports the coin from its production facilities for circulating coin in Philadelphia and Denver to all of the Reserve Banks and the Reserve Banks' coin terminal locations," the Fed has explained.
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.
"You know, you're getting into an area that is pretty murky, at least for me," said Diehl. A spokesperson for the Fed said the process of ordering coinage ultimately is at the discretion of the 12 Reserve Bank presidents. Diehl added, "I think it could be the presidents or it could be Bernanke himself." In this scenerio, just one of the 12 presidents -- Eric Rosengren, William Dudley, Charles Plosser, Sandra Pianalto, Jeffrey Lacker, Dennis Lockhart, Charles Evans, James Bullard, Narayana Kocherlakota, Esther George, Richard Fisher or John Williams -- would have to initiate an order to the Mint for the $1 trillion coin. Or, if Bernanke wanted final say in the matter, he may place the order himself. At that point, the Mint would ship the coin and the Treasury would receive approximately a cool $1 trillion for its general spending budget. Though this scenario still supports Diehl's belief that the action is possible, it understands that the ordering of the coin rests with 13 people in the Federal Reserve system. Coupled with the Fed's years of quantitative easing programs, and its recent implementation of open-ended, monthly purchases of mortgage-backed securities and longer-term Treasury bonds, the central bank would play another critical intermediary role in an unprecedented economic move.
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.
"So in this case, you're going to have to have somebody out there saying, 'Hey, listen, business is so good that I don't have enough change to break a $10 trillion bill, so I need to order nine $1 trillion coins so I can make change,'" Moy joked. Diehl said it doesn't matter what the intent of the bullion coin is, because the accounting is exactly the same as circulating coins. "Yes, it's not a circulating coin, in fact the coin would never circulate. It would sit in the Fed vaults until it was returned to the Mint and melted," said Diehl. "The face value, minus the cost of production would be booked by the Mint and transferred to the Treasury. So the fact that it's not a circulating coin is irrelevant." Diehl's point is that if the Mint created a standard 1-ounce platinum bullion coin and put the face value of $1 trillion on it, then the seigniorage would roughly equate to $1 trillion, minus the spot price of an ounce of platinum. But what about Moy's case that authorized purchasers handle platinum bullion coin distribution and not the Fed? Diehl said he believed the Treasury secretary and the Mint could easily change the rules. "I believe that one option among those would be certifying the Federal Reserve as an authorized purchaser," said Diehl. "It may be entirely possible ... for the secretary to simply allow the Federal Reserve to purchase the coin without making them an authorized purchaser." Diehl and Moy have been friendly for years and independently expressed their immense respect for each other. Ultimately, Moy said he and his predecessor had different interpretations of this unusual law -- that Diehl takes a more aggressive view, while he takes a stricter approach.
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