Progress Report – There might be a word for a proposition that is jokingly serious. As we stream down the “river of no return” heading towards a fiscal-cliff waterfall — monster tax increases combined with sharp cuts in government spending — a comic proposal has popped up.

While the Federal Reserve system has been the engine of money expansion for the past hundred years, the U.S. Treasury still has the authority to issue money as coins. The minting of coins expands the money supply, but currency in metal disks plays a minor role in the economy. However, the U.S. federal government could issue coins in large denominations.

The U.S. Treasury is legally limited in coining gold and silver, but the law has no limitation for coins made of platinum. It has been suggested, whether as a joke or seriously, that the U.S. treasury mint platinum coins with a denomination of $1 trillion. The coin could have just an ounce of platinum, but have a legal-tender value of $1 trillion. The Treasury would deposit the coin in its account at the Federal Reserve, and then spend money from its account. The U.S. government would thus be able to spend money without adding to its deficit.

The creation of a trillion dollar platinum coin would have the same effect as a purchase of $1 trillion in U.S. bonds by the Fed, as the Fed would create $1 trillion of money to pay for the bonds. But money creation by the Fed would not enable the government to overcome the legal debt ceiling. Hence the proposal to have the money creation done by the Treasury.

The Treasury could similarly issue a thousand platinum coins with a value of $1 billion each. Alternatively, Congress could authorize the printing of United States Notes, paper currency issued by the U.S. government from the time of the Civil War until 1971.

The creation of a trillion dollars of money would be a monetary inflation that would result in price inflation. However, when half of the U.S. government debt is already being borrowed from abroad, that too creates inflation. Suppose a foreigner buys a $1000 U.S. bond. He lends $1000 to the U.S. government, which transfers it to a U.S. person receiving Social Security, and that person spends the $1000 to buy a TV. The sale of the bond to a foreigner has increased the amount of money in the U.S. by $1000. The total demand for goods has increased by $1000, putting pressure on prices to increase. The effect is the same as if the Treasury had created $1000 in coins and spent it.

Since the creation of money is a substitute for borrowing funds from abroad, the inflation effect would be less than the money creation, but to the extent that the U.S. government borrows domestically, from U.S. persons, then the creation of money, as a substitute, is monetary inflation.

Inflation today has benefits as well as costs. Savers are penalized by higher inflation, as price inflation is a tax on money holdings. But lenders, including the U.S. government, benefit from being able to pay their debts in money that has less value. Such a forced transfer of wealth from savers to borrowers is disruptive and harmful to the economy, and also morally bad.

Some monetary “reformers” have advocated replacing the Federal Reserve, which they mistakenly think is a private company, with the creation of money by the U.S. Treasury, as was the case prior to 1913. They seriously want the U.S. government to replace borrowing with money creation. They don’t believe that monetary inflation results in price inflation. Perhaps they also believe that rivers flow uphill.

Hence the proposal for the U.S. Treasury to issue $1 trillion in platinum coin is both comic and serious, as it is similar in effect to not-a-joke proposals to replace borrowing with fiat money creation by the Treasury.

All of this evades the only sound solution to the fiscal cliff: greater growth, more government revenue, and less government spending from an optimal tax shift, the replacement of taxes that punish the economy with revenue sources that help the environment and the economy, levies on pollution and land value. These revenue sources are not taxes in substance, but payments that prevent subsidies, that make polluters pay the social cost of their emissions, and make landowners pay back the rent generated by public goods.

There is no other effective solution to our economic woes. Either do an optimal tax shift, or else fall down the fiscal cliff, if not now, then a decade from now. If theory alone does not convince you, the Crash of 2008 provides the evidence, as there would have been no real estate bubble prior to 2008 if land values were zero and stayed at zero because of the complete collection of the economic rent. But, as Hegel observed, people don’t learn the right lessons from history, so hang on tight because even trillion-dollar platinum coins would treat only the symptoms and not cure the cause of our economic strokes.