The writer is an FT contributing editor
The US Mint is a factory. It buys metal, stamps it into coins, then sells those coins to the Federal Reserve at face value. The mint’s profit is called “seigniorage.” It goes to the person known in Middle English as the seigneur — the person in charge. Think of Janet Yellen as America’s seigneur.
When Congress runs a deficit, it is instructing the Treasury Department to produce new dollars. As secretary, she has to figure out how.
This fall, America returned to a tedious cycle of threats from Republicans in Congress to make it difficult for Yellen to produce new dollars. After a temporary deal this week, the next threats are now scheduled for December.
The fight has again offered a moment to discuss a fun legal theory: that Yellen could manufacture a trillion new dollars through seigniorage at the mint. Behind that conversation, however, lies a much more radical idea. Maybe dollars are just whatever the seigneur says they are.
The Treasury Department spends dollars into the US economy from an account at the Federal Reserve. Normally, it tops up this account in two ways. When citizens pay their taxes, commercial banks transfer dollars in. Or the department can sell Treasuries — financial contracts that promise a little bit of interest over time.
To the global financial system, Treasuries are a kind of dollar. They trade like money. When the department auctions Treasuries, it’s producing something that’s valuable to investors and foreign central banks, then swapping it for the bank dollars that it can actually use to pay salaries.
The federal government is not the only place dollars come from. Commercial banks can produce dollars, too — even foreign banks. But the federal government is the only organisation in the world that can produce Treasuries. A Treasury auction is the pit face of the only gold mine that matters. But that regular threat from Republicans to make Yellen’s life difficult — it’s to halt any new Treasury auctions.
Hence, the seigniorage option. First, Yellen would direct the mint to stamp an ounce of platinum into a proof — a limited-run, finely made coin. Next, she would sell that proof to the Fed at a face value of $1tn. Yellen, as seigneur, would net about $999,999,999,000. She has ruled this out, calling the coin a “gimmick” in an interview with CNBC. But the simple fact that she’s now being asked about the coin is a tribute to the power of the idea.
Last year on a face value of $1.2bn in coins, the mint took $550m in profit, mostly from the high seigniorage on quarters. Historically, that’s not bad for a seigneur. And most years, the mint transfers several hundred million dollars of seigniorage to the Treasury Department’s account at the Fed. Legally, the trillion-dollar profit on the platinum proof coin would be just like what the mint earns on quarters. But these are both types of seigniorage in the way that a wanton mistake at an office party and a secret family in another city are both types of adultery.
Seigniorage has always been a delicate negotiation between seigneur and subjects. Take too much profit on coins, and they can begin to lose value. Take too little, and they become too valuable to circulate. There are, however, two historical precedents for seigniorage that high: siege coins, and tokens.
Under a literal siege, a medieval city could issue scraps of stamped leather, to be redeemed for coins when the siege lifted. Perhaps this is what the platinum proof coin would be: a temporary way to deal with barbarians. But Yellen could also just decide that the coin is a trillion-dollar asset, full stop, because she says it is. Then, after the Republicans roll away their trebuchets, she wouldn’t have to sell any new Treasuries and buy back the platinum proof siege coin.
Rohan Grey, an assistant professor at the Willamette University School of Law in Oregon, has written a thoughtful and exhaustive defence of the coin, in which he describes a “constitutional monetary moment” — a chance to fight over the nature of money. Grey argues that dollars are what Yellen says they are. They have value because she demands that Americans pay taxes by transferring them back into her department’s account at the Fed.
In this view, how Janet Yellen produces dollars is irrelevant. If she wanted, she could just say there are dollars in that account, and they would be there. The US can no more run out of dollars, writes Grey, than a bowling alley can run out of tickets. The coin is a gimmick, then, but it’s also a way to be honest about dollars.
This way of thinking about dollars, though, doesn’t really have a way to explain what a Treasury is, other than as an accounting relic. The reason the Republican threat is so powerful, though, is precisely because Treasuries are so valuable. A Treasury isn’t just a token, a vague promise of American faith and credit. A Treasury a specific financial contract, sold in markets.
Perhaps all those buyers are misguided about the nature of money. But they sure seem to treat Treasuries like an asset, something you hold or trade, like land or gold. Janet Yellen should do whatever she has to the next time she’s under siege. But it’s not at all clear why America needs a new way to manufacture dollars.