Wednesday, January 9, 2013

The Myth of the $1 Trillion Coin

As the United States federal government once again nears the maximum level of borrowing currently authorized by Congress, placing the task of authorizing new borrowing in a deeply divided Congress, a number of ideas to delay or bypass the crisis have emerged. This time around, one idea that has gained particular traction, including numerous articles and a White House petition, is that the U.S. Mint should produce a $1 trillion dollar coin, which it would then deposit with the Federal Reserve, buying back that amount of U.S. debt, and keeping the federal government under the debt limit.

The genesis of this idea is a (formerly) little-known provision of U.S. law which controls the manufacture of official U.S. coins. This law explicitly defines the face-value of every coin that can be minted, except for one: the platinum eagle. With regards to platinum coins, the law says simply:
The Secretary [of Treasury] 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.
31 U.S.C § 5112 (k)

The statute's failure to define one single permissible denomination for platinum coins has led some to the conclusion that the President could simply direct the Treasury Secretary to mint a platinum coin in the denomination of one trillion dollars, averting the debt crisis before it begins. Is this a correct reading of the law? In a word: no.

I attribute this sort of legal reading to a general public which increasingly takes its interpretation skills from the technique employed in fiction by evil genies, cursed monkey paws, and hell's lawyers. And the $1 trillion coin reading bears all the hallmarks of the evil genie canon of legal interpretation: it gives words with established legal meanings new meanings (or no meaning at all); it flatly contradicts the clear intentions of the drafters; and, if applied, would almost certainly render the law unconstitutional.

Plain Meaning

The major limit on the platinum coins that the mint can produce is that, by the terms of the law, they must be either "platinum bullion coins" or "proof platinum coins." As an explanation of these terms shows, a $1 trillion coin simply can't be either one of these.

All coins have three potential sources of value: their face value, which is the denomination of the coin; their intrinsic, or metallic, value, which is the value of the materials contained in the coin; and their numismatic value, which is their value as rare collectors items.

"A bullion coin is a coin, the selling price of which is based on the value of the [metalic] content of that coin rather than its collector value, as with a numismatic coin." U.S. Gold & Silver Invs. v. Dir., U.S. Mint, 682 F. Supp. 484, 485 (D. Or. 1987); A.G. Berman, Warman's Coins And Paper Money 98 (4th ed. 2008) ("A bullion coin is a coin with a value in precious metal intended to be higher than its face value."); ("Precious metal . . . coins valued according to their metal content . . . in contrast to the numismatic value of rare coins."); ("Metal coins . . . [whose] price is directly connected to the underlying price of their metal."); see also ("A simple definition of a bullion coin is one in which there is little premium above the metal value of the coin, in other words, you are buying the coin for the commodity it contains."); ([E]arlier gold coins . . . metamorphosed into bullion coins with their withdrawal from circulation, which was probably because their intrinsic metal value had increased beyond that of their face value.").

Because its value is based on its metallic content, a bullion coin, like bullion itself, can be traded to capitalize on changes in the price of the base metal. Cf. Peterman v. Coleman, 764 F.2d 1416, 1422 (11th Cir. 1985) ("[T]ransactions in gold or silver bullion coin [provide] the opportunity to take advantage of changes in precious metal prices. . . .").

A bullion coin, therefore, does not take its value from its face value. It takes its value from its metallic value, which therefore must be higher than its face value. As the U.S. Mint itself describes this:
American Eagle Platinum Bullion Coins give investors an easy way to take advantage of platinum as a precious metal investment. . . . All American Eagles are legal tender coins, with their face value imprinted in U.S. dollars. Although their face value is largely symbolic, it provides proof of their authenticity as official U.S. coinage.
U.S. Mint: American Platinum Eagle

A platinum coin with a face value higher than its metallic value would not be a "bullion coin." Rather, it would be fiat money, backed by legal tender laws, just like the small change used in everyday transactions. This limit -- that a bullion coin must have a metallic value higher than its face value -- effectively forecloses on the $1 trillion coin. First, because, the mint would have to purchase that much platinum, preventing the scheme from working, and second, because such a coin would weigh several tons and have difficulty fitting in a room.

The other option given by the statute, besides a "bullion coin," is a "proof coin," but this provides no more flexibility. "Proof coins" originated as high quality samples of a broader coin run, used to test the dies and archive the images. In modern times, they are produced in greater numbers and sold to collectors, but they retain their relationship with the larger run.

Here is how the U.S. Mint describes its proof coins:
The term "proof" refers to a specialized minting process that begins by manually feeding burnished coin blanks into presses fitted with special dies. Each coin is struck multiple times so the softly frosted, yet detailed images seem to float above a mirror-like field.
U.S. Mint: Proofs

As far as I can tell, "proof coins" always have the same denomination and metallic content as the non-proof series of which they are a part. In other words, the authorization to make platinum bullion and proof coins, includes only an authorization to make proof coins that themselves have the qualities of otherwise-existing bullion coins. Thus, the proof coins must also have a metallic value higher than their face value.

(UPDATE: Tom Maguire of JustOneMinute goes through the U.S. Code to demonstrate this very relationship -- that proof coins are always attached to a permissible run of bullion or circulating coins.)

In short, 31 U.S.C § 5112 (k) does not really give the U.S. Mint authority to make coins of any denomination, so long as they are platinum. Rather, it gives the U.S. Mint the authority to make a particular kind of product -- platinum bullion pressed into a coin shape and vouched for by the U.S. Mint -- and to make versions of that product in various weights, and therefore, values.

Intent of the Drafters

All of this is confirmed by the intent of the drafters of 31 U.S.C § 5112 (k). The provision was passed as part of an omnibus spending bill, but it began life as the Commemorative Coin Authorization and Reform Act of 1995, introduced by Rep. Mike Castle (R-Delaware). The provision accompanied other legislation concerning coins valued for their value to collectors, and both of the Representatives who spoke in favor of it referred to this purpose. The motivating desire behind the alteration was the high price of current bullion coins, and the desire of some collectors to be able to buy lighter-weight (and thus less expensive) platinum bullion coins. There was also a concern that specifying the coins to be manufactured would leave the mint holding coins it could not sell easily. The legislation addressed both concerns by letting the Secretary set production weights based on market demands.

Rep. Castle's comments introducing the bill confirm his understanding that the coins would be valued based on metallic content, and not face value. Of the relevant language he says:
Title II permits the issuance of platinum and gold bullion coins by amending section 5112 of U.S.C. title 31. The Secretary of the Treasury would have the authority to determine the quantity, variety, and physical specifications of these coins. The price would be that of the bullion plus cost of manufacture, with a reasonable profit added for proof versions.
H13948 (House of Representatives Dec. 05, 1995).

Castle's discussion of the price of a bullion coin confirms our understanding of what a bullion coin is. The government would not "sell" a coin with a face value greater than its metallic content -- it would "spend" it -- and it certainly would not sell it for a price lower than its face value. When a reporter recently contacted Castle, he confirmed that a $1 trillion coin is a complete perversion of his intent.

The Constitution

If all this were not enough to confine its meaning, reading 31 U.S.C § 5112 (k) the wrong way would render it unconstitutional. This is because the power to coin money is a power assigned to Congress, which it cannot simply hand over to the Executive branch. Congress can give the executive branch some discretion, but it cannot delegate the power wholesale. This means that if the Congress directs the executive to exercise some discretion, it has to specify what purpose is to be pursued, and what the limits of its authority are. As the Supreme Court has said:
Article I, § 1, of the Constitution vests all legislative Powers herein granted in a Congress of the United States. This text permits no delegation of those powers. [So] when Congress confers decision-making authority upon agencies Congress must "lay down by legislative act an intelligible principle to which the person or body authorized to act is directed to conform."
Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 472 (2001) (quoting J. W. Hampton, Jr., & Co. v. United States, 276 U.S. 394, 409 (1928)) (internal alterations omitted). And
[T]his Court has deemed it "constitutionally sufficient" if Congress [1] clearly delineates the general policy, [2] the public agency which is to apply it, and [3] the boundaries of this delegated authority.
Mistretta v. United States, 488 U.S. 361 (1989) (enumeration added).

When read correctly, 31 U.S.C § 5112 (k) presents no constitutional problems. The general policy is clear: the mint should produce "bullion coins" and corresponding "proof coins" for public consumption in accordance with the demand and marketability of such coins. (And this it does.) The decision-maker is clear. And the limits on the mint are real: because they are "bullion coins" the coins must have symbolic face values, and so the mint must buy precious metal (which is regulated elsewhere in the code) in order to produce coins.

But when read incorrectly, as granting the mint unlimited authority to make any platinum coin of any size, shape, and denomination, without limit, 31 U.S.C § 5112 (k) does present a constitutional problem. The "policy" to be pursued is entirely undefined and open-ended: the mint can make whatever coin it wants for whatever reason it wants. Indeed, the point of this interpretation is to allow the Executive branch to pursue a heretofore unimagined policy of skirting Congressional authority of the debt limit. And the substantive limits on this delegated authority are entirely lacking. If the mint can make one $1 trillion coin, it can make thousands of them; or it could make a $1 quintillion coin; or it could make none. It has effectively unlimited authority of U.S. money creation, so long as it possesses just a bit of platinum.

Though the occasions for striking down unconstitutional have been rare, courts routinely "giv[e] narrow constructions to statutory delegations that might otherwise be thought to be unconstitutional." Mistretta, 488 U.S. at 373 n.7; compare S. Dakota v. U.S. Dep't of Interior, 69 F.3d 878 (8th Cir. 1995) vacc'd 519 U.S. 919 (1996) (unconstitutional delegation without narrowing construction), with S. Dakota v. U.S. Dep't of Interior, 423 F.3d 790 (8th Cir. 2005) (adopting narrowing construction).

This means that even if the plain language of 31 U.S.C § 5112 (k) gave the executive branch unfettered authority to create whatever value of coinage, without a guiding and restricting purpose, a court would infer such a limiting purpose by looking to the larger context of the statute, which was to facilitate creation of "commemorative coins" to be sold to collectors. See S. Dakota v. U.S. Dep't of Interior, 423 F.3d at 795. ("The Court has made such narrow constructions by rejecting overly broad interpretations of certain words and giving the words content 'by their surroundings.'" (quoting Whitman, 531 U.S. at 474-75)).


In short, the $1 trillion coin violates the plain meaning of 31 U.S.C § 5112 (k), its drafters intent, and the limits of the Constitution. It began as a search for a magical loophole, and it finds this loophole only by ignoring key words of the statute. Plainly, it would never be upheld by any Court.

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