The Platinum Coin: The Legal Wrinkle That Killed It
Senior Editor, CNBC.com
So what was it that made the Obama administration strike the death knell of the platinum coin idea?
Many of us assumed it was killed as part of the political strategy of the White House. Perhaps the idea of minting a high-value platinum coin registered with internal polls as repulsive to the public. Or perhaps the administration shot down the idea in order to make it clear to Republicans that refusing to raise the debt ceiling would lead to a government shutdown.
Zeke Miller at Buzzfeed says that neither of these ideas is right. Instead, the idea was quietly put to rest by the Federal Reserve. Miller reports that a "senior administration official" claims that the "independent central bank would not have credited the Treasury's accounts for the vast sum for depositing the coin."
This is interesting. As Greg Ip pointed out, the platinum coin idea always was a challenge to the independence of the Fed. If it were undertaken, the Fed would basically be ordered by the Treasury to engage in monetary expansion. The Fed might even have to alter its open markets operations in order to sterilize the monetary impact.
But what legal authority could the Fed cite in refusing to honor the deposit of a high-value platinum coin?
The answer may lie in Section 15 of the Federal Reserve Act. Subsection 1 of the Act reads:
The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.
So the first question is whether a newly minted coin counts as "moneys held in the general fund of the Treasury." I haven't been able to find any statutory guidance on what this phrase means. But let us grant for a moment that the coin would count as money in the general account. This would mean it could be deposited at the Fed.
But it wouldn't necessarily mean that it could be spent. The second phrase of Subsection 1 describes what creates deposits against which the government can draw checks. It says that "revenues of the Government or any part thereof may be deposited." Is the platinum coin revenue?
The term "revenue" is not defined in the Federal Reserve Act. Our starting place then is the plain meaning of revenue. In our every day discourse, this usually refers to funds raised through taxes, duties, or fees. When the Obama administration debates Republicans about whether additional revenues are still on the table, everyone knows they mean taxes.
The General Accounting Office also offers this definition of revenues:
Either of the following:
(1) As used in the congressional budget process, a synonym for governmental receipts. Revenues result from amounts that result from the government's exercise of its sovereign power to tax or otherwise compel payment or from gifts to the government. Article I, Section 7, of the U.S. Constitution requires that revenue bills originate in the House of Representatives
(2) As used in federal proprietary accounting, an inflow of resources that the government demands, earns, or receives by donation. Revenue comes from two sources: exchange transactions and nonexchange transactions. Exchange revenues arise when a government entity provides goods and services to the public or to another government entity for a price. Another term for exchange revenue is "earned revenue." Nonexchange revenues arise primarily from exercise of the government's power to demand payments from the public (e.g., taxes, duties, fines, and penalties) but also include donations. The term "revenue" does not encompass all financing sources of government reporting entities, such as most of the appropriations they receive. Revenues result from (1) services performed by the federal government and (2) goods and other property delivered to purchasers.
The Constitution employs the term "revenue" in the so-called "Origination Clause" of Article I, Section 7, which requires that "All Bills for raising Revenue shall originate in the House of Representatives." Students of history might want to read up on how the Senate, the House and the Supreme Court have interpreted this rule in this report from the Congressional Research Service. But one constant theme is that revenue refers to raising funds through taxes and duties. The issuance of debt, or changing the debt ceiling, is not considered a "revenue bill," for example.
If the Treasury is limited to drawing on deposits made from revenue, it may not be able to draw from a platinum coin deposit. That at least indicates a source of legal support for the Fed denying that it platinum coin plan would work. (Presumably this could be cured by having the Treasury sell high-value coins rather than deposit them directly at the Fed.)
One oddity about this reading of the law: it would seem to exclude the Fed from allowing the Treasury to draw on deposits made from bond proceeds. Clearly, that's not the way the law is interpreted—even though that's what a consistent reading of the term "revenue" would demand. Perhaps the Fed interprets revenue broadly enough to include receipts from bond sales but not money produced out of thin air by the government.
Would the Federal Reserve be correct in this reading of the law? That's not clear. Profiting from the difference between the nominal value of a coin and the cost of manufacturing it has often been considered a valid form of government revenue. The U.S. code requires the Treasury to book as a receipt the difference between the cost of the metal and the face value of the coin, and to book as an expense any associated costs of shipping or waste. The profit is then supposed to be deposited into the "coinage profit fund."
The coinage profit fund, however, was long ago phased out. In its place is something called the U.S. Public Mint Enterprise Fund, which was created with the aim of having the Mint work more like a business. Basically, the idea with this fund is that Mint revenues first go to pay for the Mint. The Treasury Secretary is authorized to transfer amounts in the Enterprise Fund into the Treasury's general fund if he determines it has fund in excess of what it needs.
Funds transfered in the general fund could be deposited at the Federal Reserve. But the question of whether or not they count as revenue for the purposes of the statute remains unclear.
Hopefully we'll one day understand exactly what the Fed really did tell the White House about the platinum coin. Maybe someone should just FOIA the documents.
The platinum coin began as a way to exploit a legal loophole to avoid the authority of Congress on the budget ceiling. Fitting that it may have died because of another legal technicality.
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