In memory of Dr. Andreas Höfert

Plato’s platinum coin

The US will be hitting its 16.4 trillion US dollar debt ceiling fairly soon, and obviously something needs to be done about it. Like the last time the US bumped up against the ceiling, in mid 2011, some crazy “outside the box” solutions have been proposed. One is the minting of a trillion-dollar platinum coin.

According to the Code of Laws of the United States of America (Title 31, Subtitle IV, Chapter 51, Subchapter II, § 5112, k), this solution would be legal: “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”

The idea is that the US Mint-produced platinum coin would be deposited by the US government at the Federal Reserve. The Fed would then move this money into the account of the US Treasury, which would have a trillion US dollars at its disposal to pay its obligations.

Legal issues aside, the idea is rather bizarre. In fact, after it received a scathing critique from many economists, the US Treasury officially rejected it Sunday, stating: “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.” What is the reasoning behind the Treasury Department rejection and the derisive dismissal of the idea by certain economists?

Some believe that it is simply not feasible to mint a trillion-dollar platinum coin. At its 14 January opening price of USD 1635 per ounce, 17340 tons of a metal whose yearly worldwide production rarely reaches 200 tons would be required for it. But in my view this objection completely misses the point.

First, one has to acknowledge that, if the US Mint undertook the project, demand for and the price of platinum would soar (bear in mind that, within the precious metal space, platinum remains our favorite commodity) and hence less of it would be needed.

Second and more important: Why bother ensuring that the intrinsic (the metal) value of the coin corresponds to its face value? The intrinsic value of the cotton contained in a US 100-dollar bill does not match the face value of it. If that weren’t the case, a US 100-dollar bill, with cotton closing recently at a price of 75 cents per pound, would weigh some 60 kilos and prove cumbersome to carry around.

Here rather is where the biggest risk of the coin solution lies: it could suddenly reveal to the broader public the fact that we live in a world of fiat money, and what this fact means.

One of the most famous metaphors in Western philosophy is the Allegory of the Cave from Plato’s The Republic. Humans are described as prisoners bound since childhood within a cave where they can only see shadows of things and persons on the wall, from which they conclude that the cave itself is the real world. A human who frees himself from the cave by realizing his error becomes…a philosopher, whom the remaining prisoners can no longer understand. Parts of this metaphor can be applied to the “veil of fiat money” that modern societies currently operate under.

Many people still think that money is backed by something of value. It is not. The value of money in the fiat money system lies in the trust we place in our authorities and central bankers to keep and protect it as a means of exchange. Obviously, minting a coin with a trillion-dollar face value would seriously jeopardize this trust and could, in the worst case, spark out-of-control inflation.

To avoid this sudden escape from the Platonic cave of fiat money it is better for the US Congress to vote to lift the debt ceiling once again. Better for the US government to run another trillion-dollar-plus annual deficit in 2013. Better for the Federal Reserve to buy, under its new quantitative easing measures, almost half of it in the form of long-dated US Treasuries. Needless to say, with or without the coin, this scenario might at some stage also reach its limits.