Home > Fiscal Policy, Monetary Policy > A Trillion Dollar Coin

A Trillion Dollar Coin

A new economics story making the rounds of blogs and even coming up at a White House press conference is the idea that the government could mint a trillion dollar platinum coin, thus circumventing the need to engage in any contentious debt ceiling negotiations. Indeed, this is such a hot topic that I was confronted with this possibility by the guys at the gym where I exercise (these guys know I am an economist and so I get to answer every economics question that occurs to them).  Here is the answer that I gave them.

We operate what is known as a fiat money monetary system. The coin and currency which we all use and carry around in our pockets is money because the government says that it is money. The value of the goods and services bought by a piece of paper currency is much greater than the cost of producing that piece of paper.

The coin-printing story seems to have originated on some left-wing blogs (see this New York Times article) where the originator(s) came up with the bright idea that printing a coin eliminates the need to argue over the debt ceiling. The fact that a government can print money to cover a government deficit is not news to economists (it is well known to economists that it has been done by governments in the past). But my reaction to these bloggers is that they probably do not realize that if the U.S. were to do this, two things would now be true.

One is that the U.S. would be making a public statement that it has now degraded itself to the status of a banana republic where the government prints money because it cannot or will not raise tax revenue to pay for its spending.

Second, if the government were to do this (and there seems to be no serious chance that it will), the U.S. will experience an enormous inflation in the prices of all goods and services produced in its economy. In fact, to continually print money would ultimately lead to a hyperinflation (defined to be an enormously hight inflation rate) and, eventually, people would no longer use money for economic transactions. People would revert to barter. This would generate a staggering loss of economic welfare.

My guess is that the bloggers who came up with what they thought was a bright and clever idea have no clue about the damage that could be done to the U.S. if their idea were actually the policy of the U.S. government. Fortunately, even the politicians in this country seem to know that we should not be printing money to cover government deficits. At least I hope they know.

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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