Birmingham private coinage, inflation, and fixed money supply

Economics Economics Questions
1

the story of Birmingham’s private coinage business http://mises.org/daily/3072 is peculiar for Austrian theory of the money supply

Selgin claims:

Making money was a business in demand. The needs of business for small denominations were changing. Merchants needed small-denomination coins in copper and silver.

The Royal Mint couldn’t be bothered. It made coins to serve the elites, not the new and burgeoning working class. Free enterprise stepped in with a new industry that truly saved the day — before the Crown cruelly stamped it out and ended one of the most beautiful experiences with private money in world history.

isn’t a fixed money supply enough for any economy according to the Austrian school? Why would merchants need small denominations, couldn’t they just use the existing money?

since when is it required to to ‘make coins for the new burgeoning working class’?? Isn’t this inflationary? What ever happened to the adequacy of a fixed money supply?

Selgin also claims the Royal Mint made coins to serve the elites, as if private coinage can’t make new coins to serve the elite and cause inflation?

The small-denomination-coin industry had developed to the point at which 20 independent mints were involved in making coins. These private coins served the merchants and the workers, while the government’s currency served only the landed rich. The new industry was like capitalism itself: it was designed for everyone to the benefit of everyone.

how can an inflationary money supply brought about by private coinage be for the benefit of everyone?

The private coins tended to be better quality than the government’s coins. Why? Because private merchants could refuse them — and consumers could too. There was competitive control over them and an inexorable tendency for currency to improve in every way. That’s why the book is called Good Money.

improve in what way exactly? Making new private coins in the first place is determined to set an inflationary process. The only ‘improvement’ I see of a currency is for it to remain fixed, not to continuously make new coins. Even if they are backed by gold making new gold coins is still inflationary

the article mentions nothing about the supposed adequacy of a fixed money supply or the inflationary effects of private coinage. So what’s going on? Why would merchants need more coins, isn’t the existing money supply ‘good enough’ as the Austrian school says?

2

Why would the consumers need more bread, isn’t the existing bread supply ‘good enough’?

3

This money didnt come out of nowhere, it was minted from already existing metals. It was really just a change of the use of the resource to meet the consumers needs. Government fiat money or the deliberate defacement of coins is not a shift of resources, rather it is a form of fraud and redristibution of wealth.

4

Minting gold coins is inflationary ? I don’t think so.

Because commodity money is not the same thing as fiat money ?

5

no alot of the coin can be made from new mined gold, that’s new money being injected into the supply. You will debase gold coins if you make enough of them and use them in localized areas. It’s law of supply and demand, make alot of gold coins and the value will drop

6

bread supplies aren’t eliminated after consuming them, money supplies usually remain in the system once they’re injected, so the supply gradually increases

7

minting enough gold coins is very much inflationary, it’s subject to the same laws of supply and demand, and your silly “I don’t think so” is not an argument

commodity money? lol, what is this a joke? Doesn’t matter if you label it the arbitrary ‘commodity’ or not, regularly increasing the supply of gold coins in the system will devalue it, it’s happened before under a Gold Standard, such as in the California Gold Rush

8

You mean, you don’t know what commodity money is ?

9

Minting new coins is indeed inflationary. Everything is a trade-off though. The merchants of the day needed new coins because the existing coins were too valuable to be used for small commercial transactions. A bit of inflation was therefore preferable to having to trade through barter.

Very large increases in the gold supply due to mining discoveries happen very rarely. Recessions due to monetary expansion happen every four or five years. Another worthwhile trade-off. At any given time there is a certain demand for coinage and a countervailing demand for base gold and silver. If allowed to do so the market will determine the best ratio.

Austrians have never claimed that there will be no fluctuations in prices or in the supply of money under a gold standard. We only claim that the free market and private money will result in the most efficient allocation of resources - including gold and silver.

10

Well, so what if new coins devaluate the currency? Is the supply of a good not supposed to change given an increase in demand and its price adjust accordingly?

11

Minting new coins does not increase the supply of gold so it doesn’t affect the price/value of gold.

12

Too bad there’s a world wide market for gold so your ‘localized areas’ argument is not valid. Unless we’re talking about an island where people are forced to use gold as money and can’t trade their gold with people from the outside world.

13

No, it isn’t a joke. No, it isn’t “arbitrary”. Money based on a commodity is, commodity money. For its supply to be increased, it must be produced. It is only inflationary when claims to a given amount of gold can be multiplied in excess of the actual amount of gold any given claim can give rise to. Otherwise it is indeed a simple commodity, subject to the laws of supply and demand, meaning any increase in the money supply will simply be consonant with consumer demand, if the mints want to remain profitable.

-Jon

14

but there’s no end to that though. Why would existing coins be “too valuable”? Because it was a fixed amount. A bit of inflation here sure, and then it’ll keep going, later on they’ll do it again when they ‘need’ it, and so on and so on

why would they happen rarely? Plenty of mining companies are mining gold right now, they can easily just take those millions of tons and make coins out of them and create an inflationary cycle

this makes no sense. Mining companies can easily create an inflationary cycle by making more coins than demand wants and thus raising prices. You just admitted that creating gold coins in a free market will result in recessions due to monetary expansion every 4 or 5 years, and I don’t think it’s only ‘4 or 5 years’ either

from what I remember reading “Mises on Money” by Gary North, Mises advocated a fixed money supply

but this allows for market manipulation and inflationary cycles, eventually more and more coins will be injected into the system

15

what??? Minting new coins increases the supply of gold coins in the monetary system, thus devaluing the currency

16

it’s perfectly valid. Birmingham had a very much localized economy with its gold coin production. A boom in new gold coins in Birmingham would cause an initial inflation in that area since that’s where the money is first made and used

this is irrelevant. Whatever private currency it is, the more gold coins that are made in that currency, the more it will be devalued and the world market will react to the inflation

17

I don’t understand what you mean here. Are you saying here that it’s inflationary when demand exceeds supply? That’s deflationary isn’t it? Where the value of the coins become worth more?

that’s meaningless. That’s like saying continuously printing fiat money is consonant with consumer demand, because who wouldn’t accept more new money? That’s the thing with the Birmingham episode. Merchants supposedly ‘needed’ new money, but how is this determined? When will they not need ‘new money’? That’s what I don’t understand about the Birmingham episode, if the present supply of money isn’t enough, when will it ever be? Gold merchants continuously minting gold coins will eventually inflate the currency, that would imply that eventually they would need the supply to be fixed wouldn’t they? But then if it’s fixed, why would they need to create new money in the first place?

18

A money substitute is a claim to actual money, stored in the bank… it might be a note, for instance.

Not really, as money follows the same laws as every other good. Profitability is the determinant of whether to produce, or not.

No, the point is that mining more gold will only occur when doing so is profitable, i.e. satisfies consumer demand. If FRB worked on market principles, the same would apply to it. The only way to demand more coin is to produce more on the market.

How could they possibly? Minting coins/mining gold is not costless, in the least… and if consumers do not presently need more money, all they are doing is harming their own profitability.

-Jon

19

but the Birmingham article said gold coins were being produced because merchants needed new money, Mises advocated a fixed money supply, and how are you going to control for inflation, if we continuously “need more money.”

you don’t have to mine gold to make new coins, you can melt gold you already have and mint them, couldn’t that easily create market-driven inflation?

how? That’s like saying the way to demand more paper money is to print more of it

it’s relatively cheaper if you already have the gold. Rich people who have bought lots of gold, can just take that gold and make new coins and create an inflationary cycle. Not all minted gold has to be mined, you can take existing gold and mint it. Also, even if it is costly, that won’t stop inflation once new gold coins are made, hell even printing money takes a few million dollars to do, have to get the ink, get workers to gather the paper, run the machines, need electricity, etc…

when do consumers actually need more new money? where’s the limit? How would you control for inflation if gold coins are continuously being made like Birmingham? Whatever happened to a fixed money supply?

20

OK. Where is the problem?

Where?

No. It is simply redirecting gold to more profitable uses. The value of a coin relies strictly on the value of gold.

Indeed. Except paper money not backed by a commodity is not in demand on a market where the government does not impose it by law. So the analogy is weak.

How does that differ from merely selling gold objects for money? Except in this case they would melt them down into coins. So they’d lose the objects in question and put them to a more profitable (and thus consumer-satisfying) use. I fail to see the problem.

I do not think you understand monetary theory. The value inscribed on fiat notes is significantly higher than the cost of producing them. Gold coins, OTOH, that are worth much less than the value inscribed on them will trade at a discount. So again, the analogy is non-existent.

Why do they “need” anything? To fulfill whatever ends they have. They may want more money to have greater certainty in future transactions. The only way to acquire gold coins is a) for them to be gifted to you or b) to purchase them, implying a necessary increase in one’s productivity.

-Jon