The author is a collaborating editor of FT
The US Mint is a factory. He buys metal, stamps it in coins, then sells those coins to the Federal Reserve at face value. The profit of the Mint is called “seigniorage”. It goes to the person known in Middle English as the lord – the responsible person. Think of Janet Yellen as the Lord of America.
When Congress is in deficit, it asks the Treasury Department to produce new dollars. As a secretary she must understand How? ‘Or’ What.
This fall, America returned to a tedious cycle of threats from Republicans in Congress to prevent Yellen from producing new dollars. After a temporary deal this week, the next threats are now scheduled for December.
The bout once again offered a moment to discuss a fun legal theory: that Yellen could make a trillion new dollars from coinage seigniorage. Behind this conversation, however, lies a much more radical idea. Maybe the dollars are exactly what the Lord says they are.
The Treasury Department spends dollars in the US economy from an account at the Federal Reserve. Normally, it recharges this account in two ways. When citizens pay their taxes, commercial banks transfer dollars. Or the department can sell treasury bills – financial contracts that promise a little interest over time.
To the global financial system, Treasury bills are a kind of dollar. They trade like money. When the department auctions treasury bills, it produces something that is of value to investors and foreign central banks, and then exchanges it for bank dollars that it can actually use to pay wages.
The federal government is not the only place where the money comes from. Commercial banks can also produce dollars, even foreign banks. But the federal government is the only organization in the world that can produce treasury bills. A treasure auction is the dark side of the only gold mine that matters. But this regular threat from Republicans to make Yellen’s life difficult – is to stop any further Treasury auctions.
Hence the option of seigniorage. First, Yellen would have the Mint stamp an ounce of platinum in a proof – a finely crafted, limited-mintage coin. Then she would sell that evidence to the Fed for a face value of $ 1 billion. Yellen, as lord, would bring in around $ 999,999,999,000. She ruled out that, calling the piece a “gimmick” in an interview with CNBC. But the mere fact that she’s now being asked about the play is a tribute to the power of the idea.
Last year, on a face value of $ 1.2 billion of coins, the Mint made $ 550 million in profit, mainly due to high seigniorage over the quarters. Historically, this is not bad for a lord. And in most years, the currency transfers several hundred million dollars of seigniorage to the Treasury Department account at the Fed. Legally, the trillion dollar profit on the platinum-proof coin would be exactly like what the coin earns on quarters. But these are two types of seigniorage in the same way that a gratuitous mistake at an office party and a secret family in another city are the two types of adultery.
Seigniorage has always been a delicate negotiation between lord and subjects. Take too much profit on coins and they can start to lose value. Take too little, and they become too valuable to go around. There are, however, two historical precedents for such high seigniorage: siege coins and tokens.
Under a literal siege, a medieval town could issue scraps of stamped leather, to be exchanged for coins when the siege is lifted. Maybe that’s what the platinum-proof coin would be: a temporary way of dealing with the barbarians. But Yellen could also just decide that the coin is a trillion dollar asset, period, because she says it is. Then, once the Republicans pull out their trebuchets, she would no longer have to sell new Treasuries and redeem the platinum-proof siege coin.
Rohan Gray, assistant professor at Willamette University School of Law in Oregon, has written a thoughtful and comprehensive defense of the play, in which he describes a “constitutional monetary moment” – a chance to fight over the nature of the money. Gray maintains that the dollars are what Yellen says they are. They are valuable because she requires Americans to pay taxes by transferring them to her department’s account at the Fed.
From this point of view, it doesn’t matter how Janet Yellen produces dollars. If she wanted to, she could just say there are dollars in that account, and they would be there. The United States cannot run out of dollars any more, writes Gray, than a bowling alley can run out of tickets. So the coin is a gimmick, but it’s also a way to be honest about dollars.
This way of thinking about dollars, however, doesn’t really have a way of explaining what a treasure is, other than as an accounting relic. The reason the Republican threat is so powerful, however, is precisely because treasury bills are so precious. A Treasury is not just a token, a vague promise of American faith and credit. A Treasury a specific financial contract, sold on the markets.
Maybe all of these buyers are wrong about the nature of money. But they certainly seem to treat treasury bills like an asset, something you hold or trade, like land or gold. Janet Yellen should do whatever she has for the next time she’s under siege. But it’s not at all clear why America needs a new way of making dollars.