The « platinum coin idea » is a concept that has recently been circulating in parts of the economic blogosphere. The idea is simple but remains mainly conceptual. Let’s outline it before explaining it in detail: the US Treasury (in other words, the government) could create a coin of very high value, put it into circulation, and thus benefit from the resulting seigniorage, thereby reducing its debt by the same amount. Krugman, for example, talks about a coin with a face value of $1 trillion. It should be remembered that in the United States, it is the government that has the power to create money in the form of coins. If the government were to create a $1 trillion coin, which would cost almost nothing to produce, it could either use it to pay for an expense or deposit it with the Fed in exchange for cash. This induced profit (known as « seigniorage ») would thus prevent the government from resorting to debt. It is therefore understandable why this idea was invoked recently during the « fiscal cliff » period, as well as in 2011 when Democrats and Republicans could not reach an agreement to avoid exceeding the maximum debt threshold set by the US Constitution (note Paul Krugman’s amusing touch of humor in this regard, when he suggested putting the face of the Republican spokesperson on the coin…).
It should be noted that the idea is appealing at first glance, but remains mainly theoretical, almost too good to be true. In particular, it would set a damaging precedent for the government’s reputation in managing its public finances.
J.P.
