the trillion-dollar coin does not exist, but it should.
there's a popular version of the origin story of money that goes like this: you're a potato farmer and you need shoes. in order to get shoes, you go to the cobbler and hope that he needs potatoes. maybe he doesn't! this is annoying and eventually everyone comes up with the idea that you can have little shiny things to represent, broadly, a favor, and so you can give potatoes to someone else for a shiny, and give the shiny to the cobbler and get your shoes. we've invented money!
this never happened. it did not work like this anywhere1. for the long version, i encourage you and everyone forever to read Debt: The First 5000 Years, but the short version is more like this: you're a king and you are ruling over a land. you have some knights who are loyal to you. you want the peasants to give you stuff and it is annoying, to you personally, to have the knights go poke them with spears every time you need something. so you come up with this scheme: you'll give out some shinies in exchange for people giving you potatoes and shoes. then you'll say that a year from now, everyone has to give you some number of shinies or else they get the spear-poking again. it's not just shared faith that gives these things value: it's the taxes and the spears behind them. since everyone has to pay their shiny tax, well, you better get busy finding some shinies. if you aren't doing favors for the king, you've gotta do favors for someone who did. and that's what keeps the shinies going around.
now, let's get back to that wacky coin.
the trillion-dollar coin is a gimmick to resolve the national debt ceiling. the us treasury has a bank account with the federal reserve (hereafter "the fed"), and the balance in that account has to stay positive. when congress passes a law saying "apportion 300 million dollars for lockheed martin widgets", the stroke of the president's pen on it orders the us treasury to print a check to lockheed martin, who takes it to the fed, which takes it and transfers money from treasury's fed account to lockheed's private bank account.
so that's how the balance goes down. how's it go up? well, taxes go into the treasury account, but not enough to cover all of the spending. for the rest, they borrow the money; specifically, they auction off papers that say "the us government will give you $100 in ten years, and $3.43(ish) every year until then". these are treasury bonds2. you are loaning the government money, they pay you interest while the loan is active, and repay you in full at the end. it's a claim on some dollars in that fed account in the future.
the national debt, then, is the sum of all of those future obligations. the debt ceiling is currently $31,381,463 million. the sum of all those future obligations ("total public debt subject to limits"), as of december 31, 2022, is $31,347,311 million. we have $34,152 million left. if we run out, the treasury can no longer issue bonds, and things get bad. the precise ways they will get bad is outside the scope of this post (and, frankly, my knowledge), but we don't have to worry about it anyway, because what i do have is a solution.
in 2010, a poster in the comments section of an economic blog, who went by the name "beowulf" (his real name is known, and on wikipedia, but in posting solidarity i will refer to a fellow poster by his postsona), first posted the idea of a trillion-dollar coin. you see, the us treasury is capped by law to only having 300 million dollars in paper bills in circulation at any given time. another law limits the size, shape, value, etc of coins, with one exception in 31 U.S. Code § 5112 (k):
The Secretary 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.
this was intended to raise money by issuing commemorative or collector's coins, and in fact there is a $100 platinum coin in circulation right now. but if we put all these constraints together, a hole emerges: the treasury, purely at its own discretion, can mint a platinum coin in any arbitrary value it wants. beowulf put all this together and realized that there is nothing stopping this from happening:
- the secretary of treasury directs the mint to create a 1 trillion dollar platinum bullion coin
- the us mint, compelled by this order, physically manufactures a trillion dollar coin
- the us mint walks into the federal reserve. "hello" they might say "this is a platinum coin. its face value is completely up to the whims of the secretary of the treasury and she says it's worth one trillion dollars. deposit this valid us currency into the account of the us treasury, please"
- the fed takes the coin and puts it in a box.
- then they change the number in the computer and they add $1,000,000,000,000 to the balance of the treasury's account.
- the national debt is reduced by one trillion dollars
since the treasury is capable, via the loophole in coin minting, of spontaneously generating money in its bank account, this would take the wind out of the sails of republicans who use the debt ceiling mostly as an excuse to cut spending towards all the benefits the government provides, as they do not want to provide any help to anyone who needs it, as a rule.
so that's the trillion dollar coin. i should note that all of the above should be caveated with "at least i'm pretty sure that's how it works". i am not a banker, i am a, i guess, systems hobbyist, and the complicated network that is the financial system happens to be a big satisfying web to get your head around. nobody posts about finance on cohost (this is the tenth post tagged #finance in the site's entire corpus, and one of the previous nine is me) so i'm going to guess none of you are bankers either, so nobody can tell me i'm wrong (though please do tell me if you happen to know that i am wrong, as i would like to be correct instead).
if this was interesting to you, i recommend matt levine's article on another gimmicky solution: premium bonds, which has a whole different set of pros and cons, and some more math, and also contains a footnote which is the paraphrasal source for my second footnote below.
1 it worked like this in one situation, which was tribes or groups that were hostile or distant from one another. if you're in an old community then you don't really need to think too much about the favors the cobbler owes you or is owed by you, because you are going to live your whole life down the road from the same guy, and you'll have more chances to keep it balanced. if you're at war with the cobbler and you will never see him again, you'll be more inclined to make sure the balance is zeroed out by the end of the meeting. barter happened between communities, not within them, at which point the money solution to barter doesn't really work either.
2 technically i described a note. the treasury issues "bills" with maturity between 4 and 52 weeks, "notes" with maturities of 2, 3, 5, 7, or 10 years, and "bonds" with maturities of 20 or 30 years. but colloquially these are interchangeable terms and i think most people have heard "bonds" before, whereas notes is a little ambiguous, so i'm going with bonds