Circulating Legal Tender Gold Coins
2 January 2007
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.
Setting the legal tender value.
In order for the mint to avoid making a loss the retail price of the coin must be more than the gold value in the coin (ie the material cost of production). And in order for the mint to avoid being inundated with arbitrage driven demand then the legal tender value must be equal or less than the retail price. However with both these conditions met it is possible for the legal tender value to be more or less than the gold value in the coin and it is the orientation of these two values with respect to eachother that will determine if the coin circulates.
Non circulating coins: Retail Price > Gold Value > Legal Tender
Circulating coins: Retail Price > Legal Tender > Gold Value
So if the coin illustrated above was struck exactly as it is at the moment with the slight modification that the legal tender value was A$500 then the coin would stand a chance of circulating. And if the legal tender value was set closer to $650 then the coin would definitely circulate, although it would still be more tightly held relative to other forms of the currency (in keeping with Greshams law).
Monetary reform.
As a monetary reform I would propose that the mint be required to always have on issue a coin series with a legal tender value of A$1000 and a retail price of A$1000 (plus handling costs as per the normal coins issue to banks) and a gold content value of at least A$800. As the gold price changes over time they would be free to adjust the design and weight of the coin to stay within these parameters so long as each new series was distinguishable from the last. In practive this would mean most designs include A$900 worth of gold so that any shift up or down in the gold price did not mean that the issue had to be immediately replaced redesigned.
The effect of having such high value coins in circulation would be evident over time as inflation pushes up the price of gold. If the gold price went up such that the gold content of circulating coins was worth more than the legal tender value then these coins would ultimately disappear from circulation (and eventually be melted down, collected or sold abroad for their gold content) and the monterary base (M0) would in essence notionally contract. Of course Reserve Bank Policy and the notes issue would of course be the final determinent of inflation. Under such a reform the community would once again get a practical feel for how gold operates as a monetary entity. And it can hardly be argued that such a reform would cause any harm.
19 January 2007 at 4:31 am
That’s not a bad idea. Of course, the same thing could be accomplished by making all currency an option on gold held in vaults. Then the government would not be able to inflate the money base without either holding more reserves or risking going bankrupt. Wait a minute… I’m sure i’ve heard of that somewhere before.
But seriously. Your scheme relies on broad price inflation increasing the price of gold. If prices increase while the gold price decreases (possible) demand for gold coins decreases and the money supply suddenly increases. Also, if the price of gold ever gets close to the retail price you have people buying up gold coins by the bucketload and sharply contracting the money supply.
Personally I think M0 should grow at exactly 2% per year by random drops from helicopters.
19 January 2007 at 7:52 pm
Joseph,
Thanks for your response.
I don’t agree with a static growth approach to M0. As I see it the most important function money performs is as a “unit of account” to allow the construction of commercial contracts (eg lease agreements, job contracts, trade accounts with suppliers, morgages etc). The actually quantity of currency in circulation is of secondary importance to the actual value of that currency. In a closed economy a stable value would generally implies a stable quantity but most economies are not closed (North Korea comes close). There are many substitutes for currency and fluctations in demand for currency from both domestic and foreign sources will mean that a static growth in M0 is not consistent with a stable value. For instance a foreign central bank, or foreign speculators might decide to buy large amounts of your currency as a reserve leaving your domestic economy in a highly deflationary state if M0 grows statically (eg witness Japan and the Yen in the early 1990s).
The reform that I advocate in this article is designed to be very modest. In essence I am just asking for legal tender gold coins (already in production in Australia) to circulate much the way other metalic coins do (ie with a face value higher than the metal value, and essentally equal to the issue price). The gold content may then provide a form of insurance against future inflation for the holder but it will not of itself cure the possibility of central bank induced inflation.
When it comes to gold as money there are those that are dead against the idea, those that don’t see the point, those that merely want a bigger role for commodities and fixed currencies and those that are hard core gold advocates. The intention of this reform is to allow our society to play with gold as money and experiment in the market place without offending anybody (a tall order). The hard core advocates should see it as a step in the right direction (ie gold coins will circulate) whilst others can feel assured that the current monetary enviroment will be essentially unchanged (ie so nobody should really object to the reform).
Regards,
Terje.
28 January 2007 at 11:38 am
I was just reading another story recently how the US has outlawed the melting down or bulk export of coins. The reason being, that in the case of nickels and pennies, the value of the metal is worth more than the legal tender value.
They’re talking about changing the composition of the coins, but frankly they should just get rid of pennies.
29 January 2007 at 5:37 am
The current US situation is not at all unique. Such situations have occured previously. As you identify the most appropriate responce would be to issue a new series of pennies with a different composition or else discontinue the penny.
The US dollar price of gold has more than doubled in the last few years along with a general rise in commodity prices. The commodity prices all indicate that more restraint should have been applied to M0.
19 March 2007 at 7:03 pm
A similar situation happened here around 1980 with the 50c coin, which was originally round wnth significant silver content.As they became more valuable the government could not keep up with the people hoarding them, and changed to the current type.
Our old currency coins were silver in the 3d, 6d, 1s,and 2s denominations and apart from antique value, would probably be worth more than face value.
(Shows what an old fart I am dosent it?)
20 March 2007 at 12:07 pm
I assume that you’re talking about the USA.
20 March 2007 at 9:31 pm
No, Australia changed from Pounds, Shillings and pence (LSD) to decimal currency in 1966 and at that time or shortly afterward a 50c coin was introduced,which was round and about the same size as the current one, and had a fair silver content.
As inflation took its effect, people hoarded these, as they were obviously going to be worth more than their face value. Eventually the govenment changed to the current coin, either because they could’nt keep up to demand, or because they became uneconomical to produce.
Either way they have never used coinage of any genuine value since.
I am not old enough to remember the pre-decimal currency in the USA.
21 March 2007 at 8:56 am
I knew that the Australian 50 cent coin was originally round but my understanding was that the modern 12 sided variety was introduced quite soon after decimalisation. I have some 1970 coins with twelve sides (ie not round). I also have a round 50 cent piece, although it is stuffed in a box somewhere and I can’t locate it.
If the silver content was only ever in the round version of the coin then I think that it was discontinued much earlier than you imply.
http://en.wikipedia.org/wiki/Australian_50_cent_coin
21 March 2007 at 5:33 pm
You are probably right, about the time, it dind’nt hold a great deal of significance to me at the time, so i’m a bit vague on when it happened, although I did’nt think it was so soon.
I do remember though, talking to a mate who was a bullion dealer, in about 1983, when a guy came in with a couple of bags of 50c peices, for sale and he got a nice price for them. I dont ramember how much now but it was probably over a couple of dollars each.
I wished I had stashed mine.
Regards Jim
22 March 2007 at 6:45 pm
Given that inflation between 1966 and 1983 was quite significant I imagine that rather than profiting significantly by holding them he was mostly just preserving his wealth. Most of the profit was merely relative to what he would have got if he had held $1 notes instead. Today a 50 cent coin buys about as much as a 2 cent coin did in 1966. However 2 cent coins were a lot easier on the pocket lining. Or to work it the other way a 50 cent coin in 1966 bought more than you can get with $10 today. Given their value today my feeling is that our coins are too bulky.
23 March 2007 at 5:51 pm
You are probably right again,- annoying bugger.
To retrieve something I will just make the point that if the old ones did not have a silver content they would have still been worth only 50cents
23 March 2007 at 11:19 pm
Yes. Which kind of dove tails nicely back to one of the points of my proposed reform. Such coins are a medium with some built in insurance against future inflationary policies.
18 September 2009 at 12:26 pm
Hey Terje,
I just ran into this on the interweb tubes.
I would like to cover a couple of points:
There is no way to convert gold into fiat currency units. While both have historic and faith value, only gold has a minimum value at least equal to the cost of producing the gold. Fiat currency, without faith, has no value – particularly in the case of digital representation of that currency.
All else follows from this.
Clearly then the Dollar value marked on notes and coins other than gold is a falsehood and a fraud. Dollar markings on gold are truth, and the unit is circulatable currency.
If a group of people, say in a small somewhat self-sufficient town, choose to go with constitutional money (and yes, it is in the australian constitution too) then all they would need to do is hold a town meeting agreeing to use that as their local standard of measure, and to get a gold bank set up to handle savings and loans, and issues of gold-guaranteed paper contracts (claim chits for gold, otherwise known as paper currency).
Ideally it would be best to deal in a coin that was designed for circulation, ensuring that the buy-in cost was lower (valueless fiat still has to be worked for, and why work for paper money you will only exchange for numismatic value?) The US has just suck a coin in its gold eagle issues – marked with a nominal dollar value, and designed as circulating currency, the US government is constitutionally bound to produce as many gold coins out of US mined gold as are demanded by the public. Incidentally, from recollection the last year of minting they produced as many coins as the previous three years added together, or something like that.
Back on track… If this little town were able to go on a gold coin standard, even though the fiat value of the metal is much higher than the marked value, then they would have the added benefit of lowered property values and lowered wages. Most would not even have declarable wages.
I know the Robert Kahre case did not end well (and I am writing an article about this), they did it all wrong.
The individuals charged and later convicted were declaring their wages in gold coin face value, but they were declaring income for loans in the sale value of those coins – in other words they didn’t trade in the coins. If they traded in the coins they would have both protected themselves from punishment, and they would have been advancing the case of liberty and proper, constitutional money.
Kahre himself declared that he was paying wages in gold coin, but in fact never held sufficient coin to properly cover payroll obligations – so this too was a falsehood.
A small town with a gold bank would solve these problems.
Ideally, the town would have no way of redeeming fiat for gold or vice-versa (no other traditional bank) – anyone who did so (or at least if they switch gold for fiat without declaring the fiat value as income or capital gains), would be opening themselves up to taxation issues.
If the town has no way of redeeming coin, they could legitimately turn down fiat notes since there is no local banking institution that will handle them (I am not sure how this sits with the law… legal tender is horrible).
In the US, acquiring coin is easy, and poses no risk. The buyer simply redeems a set dollar value in legal tender fiat notes in exchange for a gold coin with a much lesser dollar value. If that coin is then exchanged at face value for goods and services, then no harm is done.
Clearly then the larger risk is in cashing out of a gold system, so long as the dollar value on the coin is always lower than the fiat value of the coin.
Finally, I must further highlight the impossibility of maintaining a gold coin with face-value exchangability with fiat. Since fiat is always inflating, the value of gold in fiat notes will also always increase. Any dollar value stamped on the face of a coin will be too low in very short order.
For this reason it is important for the coin to at least be of a known fineness and weight. If this is the case, there is no harm in also stamping the fineness and weight on the face of the coin – thereby forever linking the physical properties of the coin to a dollar representation – as it is/was in the US Constitution.
My rant here is incomplete, was not edited before posting, and is probably riddled with inaccuracies, typos, gramatical errors, etc, but I believe this system would work, and possibly spread.
Users of the system would be protected from property taxes, rates, income tax, payroll tax, would pay about the same GST, wouldn’t have to worry about inflation, would be wealthier, and would likely attract business back into their area – if it is done carefully and properly.
Criticism welcome.
8 October 2009 at 9:53 pm
This assumes that value is a product of the labour effort expended during production. This is a Marxist fallacy. In practise you will generally be correct but only because if the value of gold drops below the cost of production then production will cease until the situation changes. Gold can however drop dramatically in real value. It did during the plagues of medieval Europe when large quantities of the population died and the economy shrunk relative to the gold in circulation.
How is it impossible? The coin will still exist whatever is stamped on it. The real issue is whether it circulates as money or resides in a locker as bullion. Gold coins stamped with a higher fiat value will be good insurance against subsequent fiat inflation. This should make them popular coins relative to alternatives. The more the fiat value drops the more popular such coins will be until finally they don’t circulate at all because people hold onto them (Greshams law). Gold coins that are stamped with a monetary value below or equal to their commodity value won’t circulate. Which means they make a lousy medium of exchange. The reason paper money circulates is because nobody wants to keep the stuff. It’s like a game of hot potato. Which means paper money makes a super medium of exchange.
Gold is a great unit of account. Paper is a great medium of exchange. A gold standard brings both together to form a product that is a superb unit of account and a superb medium of exchange.