The issue of whether the Fed can really refuse to accept and credit a deposit of a platinum coin with its face value, is being raised frequently on blog posts about Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin (TDC). In the past, I’ve argued that the Fed cannot; and the final decision on taking the TDC off the table was actually made by the President, and not by Chairman Bernanke.
Ellen Brown, the well-known author of The Web of Debt, and also of this recent post on fiat money, direct financing of federal spending, and using platinum coin seigniorage made this comment in a discussion thread at Monetary Realism:
Per the Fed’s website (or maybe it was the Treasury’s), a gas station can reject a $100 bill before the gas has been pumped. You only have to accept legal tender after the service has been rendered or good delivered. The Van Nuys Flyaway won’t take dollar bills. Apparently then the Fed can reject a tender before it has rendered the banking services involved. It’s a privately-owned bank, after all!
Here’s my reply to this comment.
The coin being presented to the Fed isn’t tendered as payment for services, or for a product. It’s a coin being tendered as a deposit into the Treasury General Account (TGA). Also, note these three considerations.
First, the Treasury Department is mandated to deposit its money into Fed accounts if it wants to enter the banking system. So unlike the gas station; the Treasury can’t find another bank; and it needs a bank to spend and implement Congressional appropriations. A Fed regional bank, such as the New York Fed, in turning down a coin, would be refusing to perform a duty it contracted for to serve as the depository of the funds of the Treasury Department and the US Mint. I don’t think it can do that and remain a regional Fed bank.
Second, even though the regional Feds are privately owned banks; they cannot behave in ways that contravene the policy of the Board of Governors, a Federal Agency, and they are very tightly regulated by that Board. So, the regional NY Fed, the bank that has the Treasury General Account (TGA) will not be making any such decisions on its own authority. Additionally, in agreeing to house the TGA, the New York Fed has contracted to serve as the sole banking agent of the Treasury Department with respect to its spending account.
Somehow I don’t think the sole banking agent of the United States Treasury Department has the legal right to turn down a deposit of legal tender, and refuse to credit its face value in the Treasury’s own checking account. Imagine what the liability of that “private” bank would be to the US Government, if as a result of any such action, the US would be forced into defaulting on some of its payments and decided to sue the NY Fed for consequential damages. Not a pretty picture, and not a risk that the NY Fed would want to take w/o an explicit and specific instruction from the Board of Governors.
And third, consider the Board of Governors and the Chairperson of the Fed. What would they do? Well, they’ll tell the Secretary that they don’t want to do it. But if they say no; and the Treasury Secretary orders them to accept and credit the coin; then what? Then this:
12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”
So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve system was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242)
And as beowulf has pointed out, the Fed really doesn’t want to go to Court over this because they risk a Supreme Court finding of unconstitutionality due to the Unitary Executive theory, which, in this case, may well have the support of some of the most conservative justices. My own view here, is that the Fed would not even make it to the Court because they’d be denied standing under 12 USC 246, if the Treasury Secretary also ordered them not to contest his order legally.
If you read through the discussion thread where Ellen Brown left her comment, you’ll see that both Philip Diehl, former Director of the US Mint under President Clinton, and Carlos Mucha (beowulf, or beo), the lawyer who first proposed the use of PCS and the TDC, and the author of the blog post, believe that no Secretary would treat the Fed this way. But what if the Secretary were ordered by the President to do it? And what if the President were somebody like FDR or LBJ? Then I think it could happen; and depending on how tough things get in the next few years who knows what Obama will do?
After all he’s the guy with the drones. And the guy who throws people under the bus when he thinks he has to. So, why wouldn’t he throw Bernanke under the bus too, if he thought he needed to? Just sayin’!
Thank you for such a great post. Please anyone that reads it should share it over and over again.
Joe, I think there is fairly large consensus at this point the TDC option if implemented would be legit and legal for the exact reasons you/beo/pd all state. It’s going to take someone with the stones to do it!
My thought is there should be a sort of framing document that we could all use as a reference to make a sort of business case for the coin and addresses the potential objections as well. Then we need to start hitting other mainstream blogs or media sites drawing reference to this TDC business case doc.
I personally will leave one post on every Krugman blog referencing the point of using the TDC and ask for further comments from him. I’ve noticed a couple of others continuing to pipe in as well. But people will need to go to other media blog sites to keep the conversation in play.
I am surprised no follow posts up from Joe W. or S.kelton though.
The TDC will have to be used sooner or later, so why wait!
Hi Jack, I think many people aren’t following up because they view PCS as politically dead and would rather devote their time to spreading the news about MMT. I think that’s fine. In the long-term MMT economics with its emphasis on fiat money and what you can do with it is much more important than the TDC or PCS.
For me it’s different, I’ve been the primary promoter of PCS on the web. Beo’s the originator; but I’ve put in far more time than he has in developing the idea, the PCS options, and the political implications of PCS. So given my background and previous investment, it falls to me to keep doing what I need to to keep PCS alive until the issue seems relevant to the MSM bloggers once again.
On the “framing document,” I think you’re proposing a good idea; but I’m not entirely sure about what you mean. Here’s a framing document for MMT generally. Is it the kind of thing you had in mind?
Joe, all I can say is I’m with ya! to me, PCS/TDC is the solution to enable all the good things in MMT. Like I said, I’ll be dropping the posts on other blogs to help keep the discussion going, hope others will do the same.
I’m just in shock how fast and far PCS/TDC got dropped out of the mainstream, even from those who were supporting it like Krugman/Joe W/kelton/chis hayes, etc. Not a single peep from those folks on it since. You almost have to scratch your head and wonder…..”conspiracy theory?”
As for a framing document, sort of like a ready made business case, that’s fairly brief but easy to understand by avg folks. Something like: here’s the concept, here’s how it works, here’s why it’s legal, here’s the benefits, here’s what opponets will say and why they are wrong, here’s why we need to get it done now!, here’s why the special interest will object and what they will do to prevent it. This document should then be the central focal point of reference for the whole pcs/tdc cause and endorsed by all the top mmt contributors and others like beo & dhiel.
This just a thought for a start.
Once a document has been framed, it should be set up to be downloadable by folks so an email list can be obtained. I mean there was almost 12k signatures on the white house petition, so there is a fair amount of people out there who want to see more of this if we can reach them and who will support the effort if it can be organized. Imagine if you had the email addresses of those 12k petition signers how that can be grown. maybe even a website dedicated to just the PCS/TDC cause for supporters. These are ideas that get past just blogging about it and move into organizing it.
I don’t know if it’s possible get everybody on board. The problem is that there are now three approaches to PCS: the incrementalist approach, the TDC approach, and the HVPCS approach. Beo and Philip Diehl and some others who contributed over at the MR thread want an incrementalist approach. Most of the mainstream bloggers are fixated on using the TDC or maybe two or three of them to get avoid the debt ceiling problem. And some people here, at Correntewire, at MyFDL, and at DailyKos, favor HVPCS. The differences in approach reflect how people feel about feasibility, about continuing debt instrument sales, and about Fed independence.
My support for HVPCS and only HVPCS is pretty hard at this point. It is based on my political assessment that any use of PCS by the President will be met with an attempt to repeal the legislation backed by an outrageous and hysterical propaganda campaign paid for the people and corporations that stand to lose from PCS becoming an accepted practice. I think it is essential that the opposition should not be given enough time to run that propaganda campaign before HVPCS is implemented with a high enough face value, that it will not matter whether that campaign succeeds or not, because the TGA will be filled with enough dollars that the debt can be paid, deficits can be covered for a number of years, long enough for the MMT view of the world to get accepted, and for the Fed to be merged into the Treasury Department where it will be accountable and where it therefore belongs.
Implementing HVPCS first and then persuading people that it is good will be far easier than trying to convince people about it in the abstract, for the simple reason that the all people who pay attention to the News will learn that the debt is being paid off, very quickly and successfully due to the coin seigniorage move. Add to that the shift in politics away from austerity, due to the coverage of the deficit by seigniorage, and I think a heavy majority of voters will realize that HVPCS was the right thing to do in the first year after it is implemented.
In contrast, I think that neither the TDC approach nor the incremental approach can show such unambiguously good results in a short time, so both of those approaches will be vulnerable to the opposition’s propaganda blitz and scare tactics, and, in fact, will not survive these, so that the chances for demonstrating that MMT ideas about fiat currencies and the constructive use of them are true will be lost. I don’t want to chance that, so I oppose either the TDC or incremental approaches to PCS and will not join in a generalized campaign supporting PCS that is vague about what kind of PCS will work and what kind will not.
You may remember two recent efforts to get people behind political initiatives. First, there was the campaign for getting people behind the stimulus in early 2009, and soon after the attempt to get people behind health care reform. Both efforts were failures in my view because they were too vague. The stimulus mobilization should have been around a program that would have worked to create full employment; not one that would still leave us with disemployment of 17% after the stimulus was over. And the hacr campaign should have been organized around Medicare for All to be immediately implemented as soon as the legislation was passed.
If that had been done either or both of these initiatives may not have passed. But, it’s also true that the next election could have been fought in 2010 based on Republican opposition to what would have worked; and then there would have no Republican sweep throughout the country saving both the damage at the national level to fiscal policy and the incredible damage that occurred at the State level because the Democratic Party brand had been so badly damaged by the perceptions people had of both the stimulus’s effects and the HCR bill with its bailout of private insurance companies and mandates for the rest of us.
In any case, I don’t want another failure of that kind with respect to PCS. We have to be sure that the first time it is used it is a spectacular success. Otherwise we will just lose it before we’ve been able to put enough USD into the TGA account.
Bottom line: I like the idea of a campaign; but I want it organized around the idea of immediate minting of a $60 or $100 T or an even higher coin. I don’t care how ridiculous minting it looks at first blush. That impression will be blown out of the water in the first week when the President pays down $6.5 T in Intragovernmental and Fed-held debt. Once that happens, very big coins will no longer be a laughing matter. Their use will be a very serious matter, indeed!
Joe, since it would make hardly an iota’s difference to the Mint, would it be easier to sell 60 to 100 trillion dollar coins rather than one $60T coin?
Sell to the public.
Joe, I must agree with you that there are “adversarial risks” from using the incremental approach. The incremental approach is also suseptable to market aggression against it.
Slamming down 60 or 100TDC’s says to the market: You can’t mess with me!….because I have WAY more than you do…which is the way it should be.
I think @ 1T, the program can get shoved around and manipulated.
What concerns me at this point is, even though the debt ceiling has been temporarily suspended, the “forced” cuts from sequestration seems like they will happen and there is nothing on the table to prevent it from happening unless they deliver some PCS relief.
Jack, I took your proposal seriously and have written a framing document. I’ll blog it here and in other places in six parts. The first is already up; the remaining 5 all deal with objections to HVPCS.
I think Ellen was being sarcastic. Sounds like her sense of sarcasm to me.
Her point here really seems to be in pointing out the Fed is private and not a governmental entity. Of course that begs the question of what the Federal Reserve System really is. The System, by case law has been held to be a consortium of private banks.
But the Board of Governors is a much more difficult and convoluted legal issue. I had a long argument one time on another blog about the Fed Board of Governors being an “independent agency” of the government. In law, independence and agency are mutually exclusive terms. An agency requires the existence of a principal and no agent can be independent of its principal. The board of Governors is probably the most unique “agency” of the government as it is not part of the executive, legislative or judicial branch of the government. It is an agency without a principal and the only apparent control that I can see the government has over this “independent agency” is to pick the members of the board from a list of applicants selected by the banks.
I would sure like to know more on this issue.
I think last week’s announcement by the Treasury spokesman had to have been approved by the WH so reflected Obama’s opinion. I tried appealing directly to Obama but got nowhere. Perhaps an appeal to Michelle could reach BHO. FDR was often influenced through appeals to Elinor. A flood of emails might loosen the grip of austerity.
Maybe you should have mentioned your a friend Beowolf’s, that probably would have opened the door to the oval office for ya!….:-)
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I’m surprised that no one commented on this nonsense by Ellen Brown…
“Many people believe that the U.S. government creates its own money. This is not true. Today, the Federal Reserve creates trillions of dollars on its books and lends them at near-zero interest to private banks, which then lend them back to the government and the people at market rates.”
Ms. Brown offers no proof for this silly claim.
In reality the Treasury is only required to sell enough T-securities to equal the deficit in a given year. For FY 2013 the deficit will be $901 billion, which leaves $2.9 trillion the US Treasury will create on its keyboards and dispense with no connection to the selling of T-securities. That $2.9 trillion will not be lent by any bank, or by any other party. The Treasury will create it out of nothing. Over $700 billion of it will be Social Security benefits sent out via direct deposit into average Americans’ bank accounts.
But try explaining this to Ms. Brown. She and her devotees will reject it. In claiming that private banks are omnipotent, they not only excuse politicians, they favor austerity, since they think austerity will reign in the banks.
Ms. Brown and her groupies are as stubborn as are people who reject MMT altogether.
But for that additional $2.9 trillion created by Treasury spending, there is $2.9 trillion destroyed by federal taxation. So there is no net creation there.
The net creation of private sector financial assets in the current setup is all coming from the emission and repurchase of government debt, and the payment of interest on reserve balances.
Mark, I think ellens point would go something like this (using round numbers):
Govt budget = $4T
Govt taxes collected = $3T
Govt deficit spend = $1T
So, where does the $1T deficit spend money come from? The govt issues $1T in treasuries to the “open market”.
If I am a fed member bank, I can borrow, for example, $10B @ .25% (out of thin air)
I then turn around and use that $10B borrowed from the fed @ .25% to buy $10B in treasuries (at a discount to face value) that pays 3% and thereby collect a nice 2.75% on $10B for letting the govt borrow it’s own money.
Or in other words, I can collect net $275M/yr from the u.s. Govt for being a middleman to them using their own $10B in money.
Is this not the greatest gig in the history of the world? does this not upset you as a tax payer?
Isn’t this how the fed has reflated the banks profits post 2008?
Yeah, the whole thing is an infuriating [bleep]ing scam.
“The Best Things in Life are FEE!“
Here’s an even nicer feature. If the primary purchaser doesn’t have the reserves, no problem. The FR bank creates temporary reserves for the Tres. auction, which are either destroyed if unused or offset by the Treas. notes that the primary purchases. Just like getting your bank to loan you the money interest free to purchases a house, then paying you interest on the mortgage value of the house. That’s my understanding of how it works anyway.
Not sure whether you got any support on your comment or not.
Not sure whether MMT believes that what Ellen said was accurate or not.
Apparently, there are more ways to looking at this than either the Ellen Brown route or the MMT route.
While Ellen does, as the situation advantages her own positions, occasionally discover the debt-free-issuance bandwagon, she never has supported any measure, like the Kucinich Bill, that has actually been advanced to do that, nor any research, like that of Dr. Yamaguchi or the Benes-Kumhof work at the IMF, that has found the economic advantages of so doing.
According to tadit’s comment of a week or so ago, Ellen has been brought in to UMKC(?) and educated in MMT so as to broaden the money-as-debt network.
Actually, I don’t think that what Ellen has written here (your comment) is accurate, but not for any reason that anyone who adheres to MMT has stated.
It’s because those reserves that are created represent an asset swap, and assets are not real income or real capital to those banks. Reserves THEMSELVES are never lent to anyone. They only allow those banks to expand their balance sheets, and to earn income by making other loans.
It’s interesting how this matter of who is creating the nation’s money fulfills so well what Dr. Bernd Senf calls “The Fog Around The Money”.
The Platinum Coin solution advanced so heartily by Joe F, shows that the money-IS-debt paradigm has obvious flaws.
Where it gets foggy is around the “well, then, money is a liability” construct.
Which only has ‘currency’ in the double-entry-bookkeeping accounting model of the system of money.
But I too was surprised that this Ellen Brown comment went right on by the local intelligencia.
For the Money System Common.
Not-available-for-general-circulation 1 million pound and 10 million pound notes are routinely deposited at the Bank of England
Are they issued from bond sales that pay interest? That’s the real question.
The Federal Reserve’s (Fed) monetary policy is critical to understanding the gravity of this imminent financial crisis. Government debt together with the Fed’s creation of money has kept the U.S. economy from collapsing to this point, but all American’s must ask themselves if they are truly better off today or if the problems were only escalating problems to monstrous proportions, and deferring them to future generations.
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