Price Fixing and Credit

Most people with a reasonable grasp of economics understand the basic issues associated with price fixing. Fix the price of bananas and there will be either a glut of bananas (if you fix too high) or a shortage of bananas (if you fix too low). Alternatively with a less fungible product you might get a shift in quality instead of quantity. So for instance if the price of cars is fixed too low then you might get a decline in quality rather than a shortage, although probably in practice you would get a bit of both (or maybe a lot of both). Free Market types generally agree that you shouldn’t fix prices but rather you should allow the market price to signal to consumers and producers the relative scarcity of a given good for a given quality. Behaviour can then adjust accordingly.

Of course there is more than one way to fix a price. Generally price fixing is achieved by laws and regulations. However what if the price of bananas was fixed high by governments going to market and buying bananas to force the price up? We have seen such interventions previously with governments buying wheat to ensure that the price of wheat wouldn’t fall below some benchmark. Gluts would follow but the government would own the excess and perhaps dump it at sea. And in fact given that they would be leading the market on price it would be the best quality grain that got dumped at sea.

Now what if the latter form of price fixing was applied to a more esoteric market such as the credit markets. What if the price of credit (ie the rate of interest) was fixed using some market intervention in the way that the price of grain has at times been fixed by market intervention. Perhaps a commitee of wise officials would meet every few months and decide the right price for credit and then use some form of market intervention to fix the price. Would we see gluts and shortages? Would we see a shift in quality away from what might be natural or optimal. For instance if the price was fixed low for a long time is it possible that we would see both a shortage of credit and a decline in the quality of credit. Or do such laws of economics only apply to wheat, bananas and cars? And is a freely adjusting price signal only relevant to those that consume or produce the likes of wheat, bananas and cars?

British Deflation – 1800s

Too often it is claimed that economic growth is inflationary. The following chart should shatter that myth (but probably won’t). During the 1800s when the British economy expanded massively the price level actually halved.

The Bank Notes Act of 1910

Some recent discussion here on the ALS blog has centred around the issue of private currency, fractional reserve banking (FRB) and the historical role of gold within monetary systems. Whilst some of the associated questions will no doubt get rehashed again and again I would like to focus this article on what I think is the key obstacle to freedom when it comes to the question of private currency.

Currency comes in a multitude of forms. Some alternate categorisations that we might apply to currencies are:-

- Privately issued or Government issued.
- Fiat or Promisory
- Tangible or Electronic
- Paper or metallic

Circulating Legal Tender Gold Coins

Gold coins (ie coins made mostly of gold metal) that are legal tender in Australia are certainly available. The image to the left shows a recent issue of legal tender gold coin from the Royal Australian Mint. However the legal tender value assigned to such coins ensures that they will never circulate (as opposed to being hoarded in collections).

The coin shown has a legal tender value of A$200. The Royal Australian Mint retails this coin for A$650. And with 0.5 troy ounces of gold in the coin it has a market value of around A$403 at todays gold price. The relative orientation of these three numbers is most significant.

Price stability and commodities

Over the fold is a price chart that I made a few years ago. In it I have charted the US dollar price of gold (shown in red) and of oil (shown in blue) with both prices normalised so that in both instances the price is 100 unit in the base year (1955). They are shown on a log scale so that relative volatility during different eras is more easily compared.

Observations, notes and comments:-

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