Could we mint a $31 trillion coin to pay the national debt?

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Listener and reader Christopher Lynn from Greendale, Wisconsin, asks: 

What would happen if the U.S. Treasury issued a coin in the exact amount of the current federal debt and paid it off?

Treasury Secretary Janet Yellen has warned that the U.S. could default as soon as June 1 if Congress doesn’t raise the debt ceiling, which she said could lead to an “economic catastrophe.”

Earlier this year, the Treasury reached the debt limit of $31.4 trillion, and Republicans have refused to raise it without negotiating government spending cuts. 

The debt ceiling is the amount of money the U.S. government can borrow to fulfill existing debt obligations, including military salaries, Social Security benefits and tax refunds. Defaulting could mean a delay in those payments, along with a downgrade in the country’s credit rating and a rise in interest rates.

For consumers, this means that the borrowing rate for auto loans and mortgages could increase. 

With default edging closer, economists and legal experts have proposed unorthodox workarounds to the debt ceiling, including an invocation of the 14th Amendment and the creation of a trillion-dollar coin.   

Origins of the coin idea 

In 1997, Congress passed legislation that allowed the U.S. Mint to create platinum coins of any denomination — including $1 trillion or $31 trillion, explained Reilly White, an associate professor of finance at the University of New Mexico.

The purpose was to help the mint generate revenue from coin collectors through the sale of platinum coins, White noted. 

“It wasn’t perceived at that time as being a potential workaround to this debt ceiling crisis,” White said.

The idea for a $1 trillion coin began gaining traction amid the 2011 debt ceiling crisis, when Republicans similarly demanded spending cuts before agreeing to increase the debt limit. 

In theory, the mint would create the coin under the direction of the president and deposit it into the Treasury’s account at the Federal Reserve, according to White. And this coin could be any size. 

“It doesn’t have to be comically large. It’s not like somebody’s gonna roll it in,” he said. “It can be a nickel-sized coin that happens to be worth a trillion dollars.”

What if the national debt was paid? 

While defaulting on debt is a serious problem, carrying debt isn’t always a bad thing for individuals or countries, according to financial experts. 

“It’s almost like our credit rating that we have personally,” White said. “Let’s say we graduate high school, and we have no debt whatsoever, and it’s sunshine and rainbows.” Well, that also means we have no credit score.

A good credit score means you may get lower interest rates on credit cards and loans. Essentially, you’re trusted to borrow money.

“Similarly, with sovereign debt across the world, our ability to be a creditor state depends on our ability to take out credit and be good on that credit,” White said. “We’ve had a very dollar-denominated international monetary system. And a lot of that is due to the perceived faith and credit of the United States.” 

Because using a trillion-dollar coin to pay off the debt is an untested idea, we also don’t know how the financial markets would react to such a plan, White added. 

Thomas Kahn, a faculty fellow and adjunct professorial lecturer at American University, is also concerned that paying off the debt would trigger massive inflation. 

“You would be putting an enormous amount of money into the economy,” Kahn said. 

Rohan Grey, an assistant professor at Willamette University’s College of Law, advocates for a special coin to solve the debt ceiling crisis, but he said government bondholders might feel differently.

That’s because Treasury securities make up part of the national debt, and if that debt was paid off, investors would end up with a lump of cash instead of their profitable investments.

“Most people that are holding government debt are holding government debt because they want to. They like the fact that it earns interest. They like the fact that they have a 30-year maturity that they can hold onto in their portfolio,” Grey said. 

People left with cash instead of bonds wouldn’t be able to take advantage of those interest rates. 

And some may be left with a hefty amount of money — say, $1 million — which may not be safe to hold at a bank, Grey pointed out. 

“Individuals and institutions can hold Treasuries in large values without any default risk, whereas they can only hold $250,000 in a bank account and enjoy FDIC [Federal Deposit Insurance Corp.] protection,” he said. (Although there are ways to skirt the limit.) 

People perceive national debt as a negative, Grey said. But instead, he argues, you can think of it as a savings account, because people are earning interest through the bonds that they hold. 

That said, Grey wants the national debt to be paid off in one fell swoop since it’s such a divisive issue. A national debt clock constantly reminding us of our debt is “terrible for our politics,” he said.

However, he thinks that after using a coin to pay off the national debt, the Federal Reserve should come in and immediately issue its own bonds as an investment device for capital markets.

“Just to maintain the securities market functioning the way that they’re currently functioning. So people would wake up tomorrow, and they would get an email saying your Treasury bond is now a Federal Reserve bond. It’s still guaranteed by the United States, it’s still paying the same amount of interest, it still has the same duration, it still has the same portal and website and payment system,” Grey said. “It’s just that we’ve used white-out to take away the name Treasury at the top and written in Federal Reserve.” 

Grey calls it an accounting trick, sure, but it would stop the fixation on the amount of debt that we have. 

How plausible is a $1 trillion or $31 trillion coin?

The ability to mint a $1 trillion coin (or $31 trillion, for that matter) is one thing. The political appetite to actually do it is another.

While advocates continue to bring up the idea during debt ceiling crises, Yellen has dismissed the idea as “a gimmick,” noting that the Federal Reserve might not even accept the coin.

And at a press conference with President Joe Biden this week, using such a coin didn’t seem in the cards.

“I don’t think anybody has studied the minting of the coin issue,” Biden said.  

But Grey said the traditional means of paying the bills has been derailed.

“If the regular budget process was working, we wouldn’t do this. But because it’s completely broken, we have to look at alternatives to honor the spending commitments that Congress has made,” Grey said.