Quoted value gold and silver coins as money

Economics Economics Questions
1

I like the idea of Hugo Salinas-Price regarding a silver coin with a quoted price.

http://www.plata.com.mx/mplata/articulos/articles.asp

The basic idea is that the national mint would make coins of a known weight but no engraved face value. The monetary value would be published and could be changed upwards whenever inflation caused the cost of the metal to become higher than the previous number. But the coins would not be treated as bullion because the monetary value would never be decreased. The coins would be money.

This idea is nice because it is conservative. No great changes need to be made to the existing order. The current US dollar works well as money in every way except as a long-term store of value. The failure of the US dollar to preseve purchasing power is a huge defect to be sure and if it is not corrected, will result in the failure of this type of money. However, I think that the defect can be corrected.

Suppose that a quoted value coin system were established. First let us examine an inflationary senario. If the market price of metal goes up, instead of ceasing production as must be the case with fixed value coins, the Mint/Treasury just publishes a new higher value. The Mint then distributes new coins at the new value. Holders of the coins are also protected as their coins will also have an increased value. So inflation will not hurt the holders of these coins and they will never go obsolete because the Mint will always be able to economically produce them. These coins will be “good” money and will be held on to while the inferior money is traded.

What if there should be deflation? In this case, the coins still retain their monetary value even though their bullion value is lower than before. So the holders of the coins are again protected against loss. The Mint is happier than ever to distribute the coins because their cost of obtaining the metal at market price is lower and they would have more profit as the coins are distributed at the quoted value.

In this situation, some people may speculate and decide to purchase bullion at the market price with the hope that it will go up. But notice that these people are speculators and not savers. This distinction is hard to see at this point of history because we have had inflation for so long that we all have the mind-set of speculators now. Previously, savers and speculators were two entirely seperate classes of people.

As I read things on this site, the basic argument is that the only way to have a gold standard is to declare a dollar to be a certain amount of gold.

Well, that is one way to do it. But that kind of approach had been tried in the past and had certain problems. One was that gold is not the only precious metal. There is silver also and copper and so on. All of these have been part of the money supply. It has been a problem in the past to regulate the exchange ratios between these metals. The regulation was done by the government and it always lagged the market and was thus inefficient.

The other huge defect in the previous precious metal standards was that paper money circulated in tandem with the metallic coinage. While that paper money was in general supposed to be kind of a warehouse receipt for metal, in practice there was no way to really enforce this idea. The factional reserve banking amplified the effect of paper creation and destruction. The expansion and collapse of the amount of paper in circulation was the basic cause of the business cycles.

With a quoted value coin system, there is no problem if paper alternatives circulate along with the precious metal coinage. If the amount of paper increases to a significant degree or if the velocity of circulation increases, markets will notice and prices will go up. Eventually this will be reflected in increase in the quoted value of the coins. It is the market that dictates the change, not the governement so long as the government follows the rule that the quoted value coins must continue to be supplied as the public demands.

So also, the relative value of the gold, silver and copper coins are regluated by market forces. Any time things get too out of balance, one of the quoted values will go up and balance will be restored.

So my belief is that a quoted value system would be superior to any of the metallic coinages which have existed previously. It would tend to stabilize and limit the amount of fluctuation in the paper and notational monies and there would be no longer a way to steal from the savers. It would again establish savers as a distinct class from speculators.

In posting this, I am hoping that someone at the university level will see this and subject the idea to a doctoral level analysis. I would appreciate reading this kind of analysis. Best regards to all.

2

  1. I didn’t know how to find the article based on the link you provided. In any case, I will give you an analysis using doctoral level ideas, but using a writing style accesible to all who might read this humble post.

  2. You keep saying how the Mint will make new coins.

Why? Do you realize the consequences of making new coins?

  1. “Inflation will not hurt the holders of these coins.”

Do you know that inflation does not make all things go up in price equally? So thatthe coins rise in price may not correspond to the rise in price of,say, food and energy? Do you know the cause of inflation?

  1. “These coins will be “good” money and will be held on to while the inferior money is traded.”

Why do you think people will keep on accepting the inferior money, and not insist on getting paid in good money? Which money would you prefer to be paid in?

  1. “so long as the government follows the rule that the quoted value coins must continue to be supplied as the public demands.”

Why do you think the govt will follow this rule, when they have violated every other rule that was to its disadvantage?

  1. “so long as the government follows the rule that the quoted value coins must continue to be supplied as the public demands.”

What if the govt prints so much paper money there is not enough gold to meet the public demand, a la the weimar republic?

6.“so long as the government follows the rule that the quoted value coins must continue to be supplied as the public demands.”

Where will the govt get the money to supply the public with these coins?

  1. “It has been a problem in the past to regulate the exchange ratios between these metals.”

You do not explain how you will solve this problem. If the govt was lazy and or submitted to political pressures in regulating exchange ratios, why won’t they be lazy with doing the same with these unmarked coins? After all, you write that it’s the govt that publishes the values of the coins. “…the Mint/Treasury just publishes a new higher value…”

  1. “In practice there was no way to really enforce this idea.”

I think you are saying the govt lied and did not keep its promise to redeem the paper for gold. So again, why do you think they will obey you and do as you wish?

  1. “With a quoted value coin system, there is no problem if paper alternatives circulate along with the precious metal coinage. If the amount of paper increases to a significant degree or if the velocity of circulation increases, markets will notice and prices will go up. Eventually this will be reflected in increase in the quoted value of the coins.”

If A borrows $10,000 from B for five years, and in those five years inflation has halved the value of the dollar, how does the existence of these coins save the day for B? A will just pay him in paper money. After all, it’s still legal tender, right? And in your system, the price of things will be in dollars, as you give the coins a dollar value.

  1. I suspect you do not have a doctoral level understanding of Austrian Economics, and thus did not see the various flaws in this system from an Austrian viewpoint. Hit the books, my son.
3

Dave,

Thanks for welcoming me to your community and for taking the time to respond to my post.

I did some reading and found an interesting quote: " Unlike economics as taught in the universities, AE is but distilled common sense. So whenever you see some statement, ask yourself if it makes sense to a layman. "

So perhaps the question is whether or not I have lived on this earth long enough to have obtained common sense. Probably not but at least give me the benefit of the doubt.

I think you and both agree that gold and silver coins have value. That it is better to hold savings in the form of gold and silver rather than Federal Reserve denominated forms. Quoting again, on the subject of the best method of saving $5000 dollars, “1. Gold coins, meaning American eagles, canadian maple leafs, south african krugerands. Find a reputable coin shop that will sell you with as little tax, paperwork, and comission over spot price as possible. Shop around. For silver, pre 1965 dollars, half dollars, quarters, and dimes. They are called junk silver, and they are fantastic.”

The items recommended above have value and will retain their value over time. They are not however money at the present time. If my grandson is sick, I can not take these things to Walmart and exchange them for medicine.

The modest proposal being advanced is that there should be gold and silver coins in circulation that are money.

You assume, correctly, that this will eventually be the case. I agree but would like to see it sooner rather than later.

Again, best regards.

4

sls,

Welcome indeed to the forums. I’m flattered by your quoting me, and glad that we seem to agree in many basic areas.

5

Dave,

No harm, no foul as they say. I came to have a discussion and you have obliged me. Thanks.

When I read the tracts on money referenced to on this site, I observe that the universal feeling is that we have lost our way. That all of the current monies of the world are based on fraud and are a means of taxing the poor for the benefit of the powerful.

The honest US money of my childhood is now called junk. There is no money at all that has any reference to traditional commodity based things of worth. Obviously, this is a historical abberation and will eventually be corrected. The question is whether the mess can be fixed with an evolutionary process or if a revolution will be required. Revolutions are to be avoided at all costs. They rarely succeed and they usually produce as much mess as they clean up.

The idea of Mr. Salinas-Price is an evolutionary type of proposal. He has observed that the failure and debasement of all previous coinages has been due to the conflation of monetary values with weights and purities of coinage. His proposal is to separate these two ideas.

Instead of a coin declaring its value on its face, an honest coin should only state its weight and purity. I also like the idea of a coin including its dimensions. With these numbers, anyone with calipers and a scale can pretty much determine if a coin is legitimate.

Is there any reason for such a coin to go obsolete? Not really. The only reason that coins go obsolete is when their market or bullion value begins to exceed their imputed monetary value.

Inversely, for a coin to circulate as money, it must have an imputed value somewhat higher than its bullion value. So by definition, circulating coinage is a form of fiat money. Since honest circulating coinage has been traditionally considered a good thing, it follows that there are good forms of fiat money and bad forms of fiat money. The difference apparently being the ratio between the market value of the material and the imputed value. Should these diverge too much, the money is bad.

Why do people tolerate fiat money? Because it is a time saving convience. In a barter exchange, both sides of the exchange must evaluated. In a monetary transaction, the value of the tender can more or less be ignored.

So we like money and it fact, the money of today works pretty well. I can get on eBay, push a few buttons, pay with PayPal and stuff shows up at my house, sometimes in just a matter of days. This is great and much better than how things worked 50 years ago.

The only problem with the money of today that that by holding it, one is assured to lose purchasing power over time. So the game is to get rid of the money as fast as possible and hopefully put it somewhere or in something that will return greater purchasing power in the future.

This is speculation pure and simple and the word has traditionally had a bad reputation because of the zero-sum nature of the game. Those with less skills and intelligence tend to lose more often than not and these are the least able to afford the loss.

So saving has traditionally be associated with virtue. Except that now, saving is a foolish waste of time.

So the idea of Mr. Salinas-Price is a way to have a quoted value associated with coins of known and stable weights and purities. The coins are fiat money with a value higher than their bullion value. The quoted value can be increased to deal with inflation.

Has the idea been altogether figured out? Probably not. But it is not a stupid idea either.

I would like to try to figure out how to have honest money without waiting for the total collapse or waiting for a revolution.

6

The idea of Mr. Salinas-Price is an evolutionary type of proposal.

It may well be, but it will take a revolution to get it accepted. Because as you so aptly say, the current system taxes the poor for the benefit of the powerful.

And they will not give up this gold mine without a fight. Who would?

Inversely, for a coin to circulate as money, it must have an imputed value somewhat higher than its bullion value.

I don’t see why this must be true. Historically, govts granted themselves a monopoly on coinage, and promptly proceeded to debase their coins, but this doesn’t have to be the case. First of all, there have been privately minted coins at various times and places that did very well. Of course they charged a small fee to cover their expenses, but that fee was fair value. Meaning people would rather pay a little more to get a coin with the stamp from the mint verifying its weight and content than having to deal with some lump made of who knows what. But in theory, if someone , from the goodness of his heart, say Sant Claus, decided to mint coins for free, selling his coins at bullion value, there is nothing to stop those coins from being totally successful.

Have you read up on what Austrians think about money? There is a short free readable book, What has Govt Done to Our Money, that lays it all out. Look for it on this site.

Why do people tolerate fiat money? Because it is a time saving convience.

The Austrain view is that all money is a time saving convenience. Fiat money is but one form of money,…but I think we can understand each other more after you read up a bit.

Once again, I find myself agreeing with many of your insights, such as our current system leading to speculation pure and simple, and that it is a zero sum game, with someone left holding the bag.

As for Mr Salinas Price and his idea, once again I must reccomend you see where I’m coming from before we can discuss it, because it will take a short book to fully explain why I see his plan as fundamentally flawed, not just a good idea with a few kinks that have to be worked out.

I can tell you the bottom line, though. The good is that he is introducing a commodity money. The bad is that he hands this money over to govt manipulation [the whole point of not giving a numerical value, right?], which will ruin things.

7

Thank for pointing me in the direction of this particular book. Mr. Rothbard’s writing here is much concise and directed than in some other things of his that I had read.

Now that I can understand you, I am ready for your response. Just so you have something conrete to work from, here is a distillation of Mr. Salinas-Price’s ideas that I came up with. It is in the form of a bill for the US Congress. Mr. Salinas-Price is a citizen of Mexico and his formulation is shaped by the fact that the Mexican mint already makes a coin with a weight and not an impressed value. So this is my idea of how ths could work in the US.

A BILL

To establish a series of precious metal circulating coins
with a published rather than an engraved monetary value
and to provide a means of savings for low income Americans.

Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Quoted Value Coin Act’.

SECTION 2. FINDINGS; PURPOSES.

(a) Findings- The Congress finds the following:

(1) Silver and gold coins have been part of the monetary system
of the United States in the past but these coins no longer
circulate because the face value of the coins is less than
the market value of the metal in the coins.

(2) The Constitution of the United States requires that the Federal
government provide gold and silver coins as part of the circulating
money of the United States.

(3) Given the history of inflation over the period of the last 100
years and the likelihood of continuing inflation, any engraved
dollar amount on a coin is likely to render the coin obsolete
and cause it to not circulate as described in Item 1 above.

(4) A coin with published value where the value could increase with the effects
of inflation would render the coin immune to the effects of inflation
and the coin could continue to circulate despite the effects of
inflation.

(5) The current rate of return provided by banks to savings account
holders is less than the rate of inflation and savers therefore
lose purchasing power by holding their money in bank accounts.

(6) Holding money in the form of cash also results in a loss of
purchasing power over time as a result of inflation.

(7) Other options for investing such as stocks and bonds require
more knowledge, sophistication and accumulated funds than
may be possessed by low income persons and such people risk
loss of their saved money should they choose to so invest.

(8) A precious metal coin could provide a means for low-income citizens to save
money in a form that would maintain purchasing power over time.

(b) Purposes- The purpose of Section 3 of this Act is to establish precious metal
coins as circulating money of the United States of America.

SECTION 3. QUOTED VALUE COIN ACT

(a) The US Treasury shall cause the US Mint to issue coins of gold, silver, and
other precious metals.

(1) The series of coins may be referenced as the “Quoted Value Coin” series.

(2) The coins shall be offered in metals, sizes, and weights as the public
demands except that once offered, the metallic composition, size, and
weight of the coin may not be altered.

(3) The metallic composition of the coins in the series shall be consistent
with the requirements for circulating money.

(i) Each coin must be recognizable by the public.

(ii) Each coin must be recognizable by mechanical devices.

(iii) No individual coin may be uniquely identified so as to result
in a loss of anonymity in commerce.

(iv) Each coin must have characteristics of durability and resistance
to counterfeiting.

(4) The initial coin in the series shall contain one troy ounce of silver
to be followed immediately by a coin containing one troy ounce of gold.

(5) The artistic design of the coins shall be the responsibility of the
US Mint subject to the following requirements.

(i) The coins must be recognizable by the public as legal money of
the United States and as part of the “Quoted Value Coin” series.

(ii) The coins must state the predominate metal contained in the coin,
the weight in grams of the predominate metal contained in the coin,
and the total weight of the coin in grams with precision sufficient
to aid in the detection of counterfeits.

(iii) The coins must contain words or markings to indicate the following,
“This coin has a quoted legal tender value published by US Treasury”.

(6) The coins shall be produced and distributed by the US Mint in quantities
and qualities sufficient to meet public demand.

(7) The coins may be sold in bulk by the US Mint at a discount from the legal
tender monetary value.

(8) Collectable versions of these coins may be produced and sold by the US Mint
at a higher price than the legal tender monetary value of the coins.

(b) The US Treasury shall establish a legal tender monetary value and publish the
current legal tender monetary value of the coins of the “Quoted Value Coin” series.

(1) The legal tender monetary value of a coin shall be established by the market
value of the precious metal plus the other costs of coin production which may
include materials, equipment, labor, management and distribution costs plus a
two percent markup with the total amount being rounded up to an even dollar
amount.

(2) The legal tender monetary value of a coin shall be increased from time to time
as needed to maintain the legal tender monetary value above the costs of the
precious metal content and the other costs of coin production.

(3) An increase of the legal tender monetary value shall apply both to newly minted
coins and to all existing or circulating instances of a coin and all coins of the
same composition and weight shall have the same legal tender monetary value.

(4) The legal tender monetary value of the coins shall never be decreased.

(c) Excess profits from the sale of the coins shall be applied.

(1) First, to a subsidy of the production of the uneconomic, circulating, minor
coins such as the nickel so as to postpone the need to change the metallic
composition of such coins as such a change of materials would impose costs
on the public and in particular, on the manufacturers, owners, and operators
of mechanical coin recognizing devices.

(2) Secondly, to the reduction of the debts of the United States of America.

(d) Possession of these coins shall never be prohibited.

(e) The confiscation of these coins by any government agency shall never be allowed
except as a result of conviction of a criminal act.

(f) Possession of these coins shall never be the basis of suspicion of a criminal act.

(g) An increase of legal tender monetary value of these coins shall not be considered
a taxable gain to the holders of the coins.

SECTION 4. TIME FOR COMPLIANCE

(a) Coins meeting the requirements of this Act must be made available to the public
within six months of the passage of the Act.