Most Americans regard the federal deficit and the national debt as a single problem. In reality, they are two separate but related problems. Let’s decouple them and discover whether the widely disparaged idea of a “trillion dollar coin” would actually be an improvement over the practice of continuous borrowing to cover the federal government’s deficit.
Hard money is money backed by a tangible good, typically gold or silver. Fiat money is money backed only by the “good faith and credit” of the government issuing it. In the United States, fiat money comes in two flavors. The vast majority of US currency consists of Federal Reserve Notes and their electronic equivalents, backed by government bonds sold to the public and various central banks. These bonds pay interest that is booked as an expense within the government’s annual budget. For fiscal year 2016 interest payments on these bonds totaled $432 billion, or more than $2,800 for each income tax return filed.
Trump needs no additional congressional authority to mint the coin, since the enabling legislation is already in place.
The second type of US fiat money consists of all coinage and a small amount of paper money with the designation “United States Note” rather than “Federal Reserve Note.” This type of paper money, issued mostly in $2 and $5 denominations, circulated alongside Federal Reserve Notes until the 1970s, and is still occasionally found in circulation today. Coins and US notes are not backed by government debt and pay no interest.
A few years ago, when Republicans in Congress were refusing to raise the national debt ceiling, an idea was floated for minting a platinum coin with a face value of one trillion dollars. This was and still is technically legal, thanks to a 1996 law authorizing the minting of platinum bullion and proof coins. The law empowers the Secretary of the Treasury to strike platinum coins in any denomination that he or she deems appropriate. The idea was that the trillion dollar coin would be minted and deposited at the Federal Reserve, which would then credit the government’s account with a trillion dollars. The government could then spend this newly created money by “writing checks” on this account without having to increase the national debt ceiling or issue additional interest-paying bonds.
The idea died when Republicans caved in and agreed to raise the national debt ceiling. Fast forward to 2017, and now it’s the Democrats who are playing budget brinksmanship in an effort to force President Trump to restore funding for many of their pet causes, such as environmental projects and Planned Parenthood. Currently the fight is over the legislation needed to avoid a government “shutdown” by the end of April. Shortly thereafter, Congress must deal with raising the national debt ceiling. Many Democrats can be expected to oppose such an increase if Trump is unwilling to fund their most critical spending priorities. By teaming up with conservative Republicans who oppose on principle any increase in the national debt, congressional Democrats would likely have the votes to block any debt ceiling increase and thus threaten another government “shutdown.”
However, President Trump has the option to do an end run around the Democrats’ plan by dusting off the “trillion dollar coin” idea and actually implementing it. He needs no additional congressional authority to do so, since the enabling legislation is already in place. This would be a bold move with far-reaching consequences, most of them good.
More importantly, the “trillion dollar coin” would sever the link between mounting federal deficits and ever-higher interest payments on the national debt.
For starters, it would deprive the Democrats of their most potent legislative weapon in their drive to maintain and increase spending on programs that subsidize and empower their core constituencies. Defeating the Democrats’ plans would not eliminate the deficit, but it would lead to less government spending than any plan forged by a “bipartisan consensus.”
More importantly, the “trillion dollar coin” would sever the link between mounting federal deficits and ever-higher interest payments on the national debt. Freezing and then lowering these interest payments are essential to the nation’s economic health, as this interest is a substantial drain on disposable income and productivity.
All government-created fiat money is inflationary, and money backed by hard assets would be preferable. But fiat money backed by “trillion dollar coins” is neither more nor less inflationary than fiat money backed by interest-paying bonds. Of the two choices, the “trillion dollar coin” option is better for both taxpayers’ pocketbooks and the nation’s economic health.