Solving The Debt Crisis With The Flip Of A Coin

It is a rare day when Paul Krugman endorses a position held by former congressman Ron Paul, but that day is here. In his weekly blog, the Nobel prize winner came out in favor of a switch, of sorts. What he did was come out for what some are calling the trillion-dollar coin. The way it works is simple: using a provision of the law, the Treasury secretary, Tim Geithner, can print platinum coins of any denomination desired and deposit that in the Federal Reserve, enabling the federal government to continue running without increasing the debt load.

In a single move, the “Paul-bots” would have the metal-backed currency they want.

The U.S. government already prints platinum coins, such as this American Eagle, so this is nothing new for the government:
Now, to understand how this works, you first need to understand the Federal Reserve system. As covered by Addicting Info earlier, the Federal Reserve is a branch of the federal government which has several functions, one of which being the printing of money. The only way in which the Reserve can print money, however, is when the U.S. government puts deposits in to the Reserve, after which the Reserve prints money backed by this deposit. The government deposits are made up of t-bills, bonds, and precious metal coins. Until Nixon closed the gold window, the only thing deposited into the Reserve system was precious metal coins. This meant, in order to issue the money which the government has already spent, via the budget approved by the Republican-controlled House last year, the government needs deposits made to this account large enough to cover these bills.

The new coin, should it be struck, would not be new debt in the strictest sense. If we measured it as debt, then we should add the gold, platinum and silver coins already held by the Reserve as debt as well, which would add several trillion more to the debt total. And who would we owe this debt to? Absolutely nobody.

From a technical standpoint, this coin would reduce the federal debt load, replacing it with precious metal coins as was done pre-Nixon. While Ron Paul specifically called for a return to the gold standard, the U.S. was not on the gold standard for more than 16 years, and was on a silver standard for the majority of its history. Even our term “dollar” refers to the “Spanish Minted Dollar,” which was a fixed weight of silver, also commonly called “pieces of eight,” which is also the origin of “two bits” or a “quarter.” One of these “dollars” was equal to 8 of these smaller pieces, called bits. Two bits, ergo, was a “quarter” of the “dollar.”

The reason for the silver standard, instead of the bimetal standard which Britain held at that time, or a pure gold standard, was simple: silver was the hardest metal to manipulate on the trading market. This gave the United States a stable economy in an era when instability was normal. And, as the Republicans in Congress continue to take the U.S. Credit rating hostage, and with our debt involving currency under the current system, this is a form of currency manipulation, just as plagued Britain for its bimetal era.

Some have felt that it would cause inflation, which is also false. Inflation is caused not by debt, but by spending. The money which this coin would be backing has already been spent. If you compared inflation before and after the migration from metal-based to debt-backed currency, the coin would, if history holds true, slow the rate of inflation, not increase it. Debt could be retired safely and securely without adding further debt to the system. If a significant portionĀ of the U.S. debt were replaced with precious metals, the cost to support that debt would eliminate billions from the federal budget as well, further helping with the deficit issue.

Some would ask: why not just make a coin for far more than a trillion dollars, eliminating the entire debt, or, even more ludicrously, print a $100 trillion coin? There needs to be some debt due to the U.S. trade deficit; t-bills and treasury bonds cover a significant part of the shortfall there, another issue which dates back to Nixon. Until we resolve our trade issues, through higher tariffs and trade restrictions, we will continue to maintain debt. Also, t-bills are considered a safe investment and we want investment, so debt will continue.

What the trillion-dollar coin would do, however, is shore up shaky financial markets, a concern of many regarding the financial stability of the U.S. Government; or perhaps it is the mental stability of the Republican Party they question. Regardless, this move would eliminate the bargaining position of the opposition party, while simultaneously reinforcing the federal government’s financial situation. It is a win-win situation which even a Paul-bot would appreciate.

Nathaniel Downes is the son of a former state representative of New Hampshire, now living in Seattle Washington.
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