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If a five-cent coin is a nickel, 10-center a dime, and 25 cents a quarter, what is a $1 trillion coin?
Call it an emergency plan. The minting of such mammoth mammon isn’t just a thought experiment—it’s an actual draft bill being floated in Congress. Rep. Rashida Tlaib, a Democrat representing Michigan’s 13th district, put forward a plan that would have the U.S. Treasury strike two $1 trillion coins to raise funds for a stimulus package designed to provide economic relief from the devastation of the coronavirus pandemic.
Under the plan, the Treasury would mint the two $1 trillion coins, then deposit them at the Federal Reserve. Forced by law to recognize the coins as legal tender, the Fed would add $2 trillion to the Treasury’s account. The Treasury would then use this money, under Congress’s direction, for stimulus.
If the government wants money, why doesn’t it just—poof!—make the money? In this case, the $2 trillion would fund prepaid debit cards for “every person in America,” as Rep. Tlaib’s so-called Automatic BOOST to Communities Act says. The cards would come loaded with $2,000 and be topped up with another $1,000 every month until a year after the end of the crisis. Problem solved, right?
That $2 trillion isn’t an invented number. The White House and Senate overnight reached an agreement on a coronavirus aid package that would cost at least that. A lot is unknown with that plan, including how will it be financed.
The $1 trillion coin solution seems so simple, so obvious, so frankly silly, surely there must be a catch. Surely, some restriction prevents the government from creating as much money as it likes out of thin air all willy-nilly. Isn’t this why the U.S. has protracted political battles over debt ceilings and fund appropriations and allocations?
Yet there is a legal basis for the idea.
Laying down the law
While trillion-dollar coins may sound fanciful, their legitimacy is rooted in reality. “We’re not proposing something fictional or utopian,” says Rohan Grey, a Cornell Law School PhD student who coauthored the bill. “It already exists in the law.”
Grey points to a provision in the arcane bylaws of the U.S. Mint. The statute—31 U.S. Code § 5112—allows the Treasury to create platinum coins of any denomination. While strict rules set limits on the amount of paper currency that can be in circulation as well as the denominations of coins made of other metals, platinum, for whatever reason, has no cap. A platinum coin can be worth a penny, a sum equivalent to the gross domestic product of Indonesia (roughly $1 trillion), or anything else. It’s fully up to the Treasury Secretary’s “discretion,” per the code.
Detractors of the trillion-dollar coin idea view this interpretation as an absurd loophole with dangerous repercussions rather than as a legitimate policy proposal. George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute, a libertarian think tank based in Washington, D.C., is one such opponent.
Selgin argues that Rep. Tlaib’s plan jeopardizes the independence, autonomy, and stability of the Fed. As the Treasury “forces coins down the Fed’s throat at a trillion dollars a shot,” Selgin says, it’s loading the Fed’s balance sheet with lame duck assets that earn no income, threatening the organization’s ability to self-finance. At least bonds, the Fed’s usual coin of the realm, accrue interest and can be bought or sold, yielding earnings.
The problems compound from there. After the Treasury disburses that $2 trillion to Americans, whatever doesn’t get spent will likely wind up in people’s bank accounts, Selgin wagers. Since the Fed must pay interest on commercial banks’ reserves, that means it will become saddled with interest-paying liabilities. While this wouldn’t do much harm in the short-term, with interest rates at near-zero, it could eventually become an existential threat that causes irreparable damage down the line.
The trillion-dollar coin gambit “could gut the Fed if it were abused,” Selgin warns. And it may set a perilous precedent, allowing governments to raise unlimited funds for whatever pet projects they please in the future.
Yet even Selgin concedes “there’s no question this couldn’t be made legal.” Congress has the power of the purse, after all.
Breaking the debt ceiling
Rep. Tlaib’s proposal, while innovative, is not new.
The trillion-dollar coin idea first arose during the 2011 debt ceiling crisis. The option was devised as a way for the U.S. government to secure funding and avoid default. Congress won’t sign off on the budget? Go around it.
While just about everyone acknowledged the idea’s zaniness, it gained currency nevertheless. As Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, put it, “Why not?” Or as Neil Irwin, a journalist then at the Washington Post, once framed the situation: it “is an idiotic solution to an idiotic problem,” but it “may indeed be less bad than the alternatives.”
Even Philip Diehl, the former Mint director and Treasury chief of staff who helped to write the law containing the unintentional loophole, endorsed the idea. “It’s an ingenious use of the law to avoid a ridiculous and irresponsible situation, in which the country would be driven to default,” he told Wired in 2013.
Ultimately, the Treasury opted not to go the platinum route. Democrats and Republicans struck a deal that staved off economic ruin, albeit temporarily. That deal laid the groundwork for future disputes over government spending and ballooning debt to erupt.
Why is today any different?
When the Obama administration was considering the trillion-dollar coin, it was intending to circumvent Congress. Rep. Tlaib’s version of the idea, on the other hand, puts Congress front and center.
In her bill, Congress would mandate that the Treasury takes action, basically forcing the Treasury and the Fed to do this transaction, like a parent forcing fighting siblings to kiss and makeup. Neither the Federal Reserve Board nor the Treasury Department responded to Fortune’s request for comment.
Why go this route at all? Cato’s Selgin notes that effectively the same outcome can be achieved through the usual route: the Treasury selling debt as bonds to be bought by the Federal Reserve. That would avoid all of the complications and uncertain ramifications of trillion-dollar coins. If Congress can agree on the stimulus, no jumbo-coins are necessary to make it happen behind the scenes.
Grey, the bill’s co-author, sees things differently. He notes that the last time the government funded a large scale bailout with debt, a reactionary movement, the so-called Tea Party, sprouted up in opposition. The group rallied together calling for a reining in of national debt. Grey believes the trillion-dollar coin idea could be a palatable alternative to laypeople, shifting the conversation away from talk of austerity and toward an acknowledgment that the government effectively, at the end of the day, has unlimited funds.
“It’s designed to make the point to people that the Treasury really does have an infinity sign” on its budget, Grey says. He counters that the typical means of federal funding is far more befuddling and even damaging. “The real gimmick is where the Treasury issues debt to sell to a primary dealer that sells it to the Fed, which holds that debt indefinitely. That’s confusing. That’s the wizardry,” he says.
The trillion-dollar question
Given a Republican-controlled Senate, Rep. Tlaib’s plan trillion-dollar coin seems unlikely to move forward. (The odds were further dashed when Senate Democrats and Republicans hammered out a deal of their own late on Tuesday.) But the bill does signal that the proposal isn’t going away anytime soon. As long as that strange, platinum loophole remains on the books, enterprising legislators will continue to consider exploiting it.
Nathan Tankus, a colleague of Grey’s at the Modern Money Network, a student-driven economics initiative, hopes the trillion-dollar coin idea will eventually win approval. He says the effect on inflation would be no different than the Treasury issuing bonds, a point he also makes in a recent blog post.
Why two coins and not just one worth $2 trillion? The proposal specifically opts for two in order to establish a legal precedent, legitimizing the maneuver as a valid funding option, Tankus notes. One can imagine the premise being invoked by future administrations to cover the cost of ambitious, expensive projects, like the Green New Deal or Democratic presidential contender Bernie Sanders’ Medicare for All plan.
It’s exactly this kind of thinking that worries Selgin so. “They think this is free money, a free lunch,” he says of the trillion-dollar coins’ backers. “Overall, the bottom line is this is not a necessary idea, it doesn’t accomplish anything for the current crisis, and it could ultimately be the start of something that does a lot of harm.”
Grey, for his part, is focusing on the here and now. “We’re not proposing unlimited spending on anything all the time—we’re not trying to be ridiculous here,” he says. “We’re trying to provide emergency cash relief at the depths of a crisis.”
The competing ideologies boil down to those of hard-nosed accountants versus modern monetary theorists, a school of economic thought that believes the sky is the limit when it comes to government spending. It’s a battle, in other words, between flinty bean-counters and farmers of magic beans.
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