The platinum coin died yesterday, the casualty of a Treasury Department statement that says that—among other things—the Federal Reserve views the platinum tactic as illegitimate.
In operational terms, that’s the ballgame. If the Fed won’t play ball then it doesn’t really work. An administration determined to finance the government via platinum coin seigniorage over the objections of the Federal Reserve Board could probably find a way to do it, but a high-profile fight with the Fed would drastically undermine any market reassuring properties of this means of avoiding default.
A lot of the ensuing discussion has focused on political tactics. Some feel that by ruling out the coin, the administration has weakened its bargaining position. Administration officials argue, persuasively, that this is backwards. Platinum would have given an out to Republicans. Obama had two choices, one was to cut spending and the other was to resort to this goofy seeming gimmick. He went for gimmickry because that’s how determined he is to spend spend spend. With no alternatives on the table, Obama has the upper-hand in a high-stakes game of chicken. That said, the platinum coin was never about giving Obama a stronger tactical political position. Even if platinum worked extremely well, there would just be a March fight with congressional Republicans over the appropriations bills. The idea of the platinum coin was to avoid a high-stakes game of chicken whose mere existence is bad for America and the world.
That’s now not going to happen.
All that said, I’m glad we had this conversation. Direct discussion of the platinum coin was a good reminder that many people, including influential media figures, appear to have no idea what money is or how the monetary system works. Apart from the shockingly widespread view that the value of coins is determined by their metallic content, there was a lot of insistence that creating money was somehow an act of “magic.” In fact, the way all legal currency is created is that a government agency creates the money. Typically that’s the Federal Reserve accommodating bank demand for base money. But all kinds of things can happen. Forget “Quantitative Easing.” When the Fed does the thing that reporters call “raising interest rates” it doesn’t pull an interest rate lever. It sells bonds on the open market in exchange for money. And when that money enters the Fed, it vanishes. When they “lower interest rates” they buy bonds on the open market in exchange for money. Where do they get the money? From nowhere. They just make it. That’s money. Whether the electronic process of attributing more or less money to an account is accompanied by a little piece of platinum or not is wholly irrelevant.