It turns out, warns Tyler Watts, that the penny is an economic bellwether — an indicator of the long-term course of the US dollar and of the soundness of US monetary policy. The penny does have a story to tell. Like a canary in the coal mine of America’s monetary system, the penny can warn of lurking inflationary troubles. The lowly penny indeed has economic relevance far beyond its size and value. FULL ARTICLE
Source link: http://blog.mises.org/8416/two-cent-pennies-a-window-on-inflation/
Two-Cent Pennies: a Window on Inflation
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Good Article.
However what the author fails to mention is that monetary inflation is a form of Counterfeiting.
Also not mentioned is that the Ethics involved is the same as theft. Governments inflate their currency in a number of insidious ways. The public at large who are savers of this currency become victims of theft.
The beneficiaries of this theft are the Banks and the first recipients of the inflationary policy. The process is deliberately convoluted so as to hide from the public in general how they are sheared into impoverishment.
Unfortunately this process also applies the brakes to the process of the production of goods and services
as one business after another fails to function at its optimum. It’s sand in the motors that generate wealth.
I just read an article about the Ford Model A selling for $495 in 1928, so I used an online adjustor that said the same car would sell for $5864.46 in 2007. Then I used $35 for the price of gold in 1928 and $900 for today and the price came out to $12,728.57. My daughter just bought a Ford Focus for just over $14,000. She got all the extra quality for a mere $2,000 extra in real dollars. Seems that the official deflator may be lying to us, but also that we’re making a much better car for not much more money in real dollars. That’s progress!
Hayek defends fractional banking in his “Monetary Theory and the Trade Cycleâ€. Roughly, his argument goes like this:
1. Starting from a point of equilibrium, new demand for loanable funds may come from a variety of sources—new technology or a natural disaster that destroys capital, such as a drought or flood.
2. Banks who do business with those seeking new loans will get the request for new loans first. Those banks have two choices—a) raise its interest rate for loans so it can attract new savings to fund the loan or b) reduce its reserve ratio and fund the loan at the existing rate.
3. If the bank chooses to raise its rate, it’s likely to lose the business to competitors who are willing to reduce reserve ratios, so the first bank is likely to make the loan from reserves at the same interest rate.
4. Of course, when the borrower deposits his new money in his bank, that deposit becomes reserves for another bank and the process of monetary inflation takes off.
5. By the time the Feds figure out what has happened, it’s too late, especially if the Feds are focused on prices.
The only way this could be stopped is by severe punishments for reducing the reserve ratio, which I think is around 1%. Hayek suggests learning to live with it since we’re never going to change it.
Since fractional banking transfers wealth from the poor to the wealthy, does that justify redistribution by the state from the wealthy to the poor, assuming we’re not anarchists?
“assuming we’re not anarchists?”
Speak for yourself.
The more I learn, the more “anarchist” I become.
I suppose that individuals and entities could decide whether they wanted to deal with a fractional reserve bank through upfront contractual stipulations. Banks/companies could have policy in this regard. Some could allow business with fractional reserve institutions that met a certain range of reserves and/or supplemental insurances…. As long as there is no central government dictating the terms then, over the long run, the mass of consumers will decide what they want.
Book ‘em,
You have identified the crux of the matter. If depositors desire evidence of insurance (which I expect to be true) and insurance companies charge premiums based upon the risk (which I also expect) then there will be a point at which the fractional-reserve business model becomes unprofitable. This point will be identified through a market process without a moral point of view.
That is why the phrase used by Ron Paul of ‘competing currencies’ is also a reference to free banking.
If a ‘bank’ wants to practice fractional reserve then it will have to do it in a competitive environment.
Brian, I’m not sure that being responsible to ones contracts is somehow _not_ a moral point of view.
A very a-moral person might lie to their insurance company and depositors, then skip town when the house of cards came crashing down, so “bad things” can still happen.
But without government to bail such people out, they cannot flourish. “Moral” people are simply better to do business with.
This article manages to miss the point of the small change issue.
This issue arises even under a gold standard, or perhaps especially under a gold standard, since the smallest gold coin would probably be about 2 grams which is worth about USD50 today.
There are several solutions to the small change issue:
a) multi-metalism, whereby multiple metals, typically gold and silver, are both unlimited leval tender, however this effectively amounts to fixing the relative value of the two metals and this can result in demonetisation of one of the metals, and a de-facto monometallic standard.
b) composite standard, whereby gold is unlimited legal tender, and silver and copper coins are legal tender for limited aggregate amounts, and over-valued so that they are not worth hoarding or melting.
c) low value bank notes can serve as small change, typically in the form of base metal tokens, however they could also be in the form of regular paper/polymer bank notes. These notes, while not legal tender, may be commercially acceptible payment media, and be de facto legal tender or equitable tender.
David,
With modern technology, you could perfectly have 1microgram gold coins, encased in plastic and laser verifiable to avoid fakes. The tech-level involved is no more complicated than that involved in paper money security measures and can be completely automated.
Flix,
Although it is possible to make small microcoins, as you describe, is it likely to be economic or viable to do so, when alternatives such as small notes/tokens are available?
Most bank notes today are for values less than one regular sized gold coin, e.g. a 5 gram gold coin, quite a small coin, is worth USD132, and the largest bank note in use in the USA (as far as I know) is the $100 note.
So it would appear to me that where bank notes can be freely issued and redeemed, and there is freedom to form financially big and strong banks (free branching and free banking), most of the transactional media in bearer form would be bank notes, with gold coin being only a final redemption/settlement standard. Small change would, on that view, probably be low value bank notes in the form of standardised tokens made of base metal (or any other form that gained acceptance). The costs of minting, verifying and melting microcoins would probably be worse than for micronotes.
It is quite interesting that bank notes have traditionally been restricted from being issued in small denominations ‘small’ was defined as actually quite large (e.g. less than 5 pounds, 1 pound (about 1000 or 200 USD respectively at today’s prices)).
However the small change problem at the penny end of the scale has actually seen some toleration of private micronotes, the ‘traders tokens’ issued in the form of copper or base metal discs bearing wording such as ’1 penny, payable at the india tea warehouse’ typically as change. These kind of tokens were issued by numerous typically ‘non-bank’ local businesses until the government coinage improved sufficiently to enable the government to enforce its monopoly policy. However, government small change coinage has long been in the form of quasi-notes, i.e. the government mint effectively undertakes to redeem its small coins in gold or other money worth a lot more than the metal content of the small coins.
So, it would appear to me, both government and private producers, and transactors of small items, seem to favour micronotes ahead of microcoins.
to fundamentalist:
have you read de soto’s pdf “money, bank credit and economic cycles”?
i think it’s particularly worthwhile to have a look at the first three chapters, and then compare his rationale with someone from the free-banking camp (here’s one from yeager, which only convinced me more of the coherency of the 100% reservers:
http://mises.org/journals/qjae/pdf/qjae3_1_5.pdf)
Just think about it! The U.S. is now a country with a perfectly sound currency. Except the sound currency is the copper penny!
Of course, with a bit more inflation, even the zinc pennies will become “sound currency” and, after that, the steel ones.
The whole idea of small-denomination coins is that they’re tokens of very small “intrinsic” value simply representing a stored equivalent–thus economizing
costs of more-valuable-metal wear. When they (through inflation) actually become ‘worth” their assigned value, they’re no longer fulfilling their economizing role. (And what we know as Gresham’s Law will work its way at this level, too.)
There’s nothing wrong with legal tender paper (or even “electronic”) money but that governments and banks have never been able to resist the urge to compete head-to-head with counterfeiters (they even get to put their competition in jail, if they catch ‘em.)
David Hillary (and flix):
Essentially, flix is correct. Very small-denomination
“real money” is technically feasible (and would be, in my view, a very desirable development on any road to a sound monetary system). As he says, even microgram units could be produced, though I can’t see why they would–even at $1000/t.o. gold, the microgram would be worth only a small fraction of one cent. My own view is that the small denominations of a sound (precious-metal) monetary regime need go no lower than a milligram and, quite possibly, even 5 X or 10 X that value as a lower bound. I disagree with flix as to the ease and practicality of verifying such a currency, however.
In addition to whatever technical problems might exist–and there are some–the plain fact is that, at some level, the cost of verification itself approaches the potential loss of passing counterfeit. (“Mr. 88″
got away with doing–bad–phony $1s for about 25 years simply because it was beneath Treasury’s purview to apprehend and prosecute someone who, over 25 years, only counterfeited a total of 88 $1
bills–thus the name for the case-file).
But you both miss the large point. And that is that, as the U,S. and its government exists presently (and as completely legitimized under the Constitution), there is simply no possible compatibility between any sound money and the legal role of government.
Sound money cannot abide “legal tender” laws nor a system which permits majorities and their mandataries to define and establish the value of money (or to prohibit, restrict, or tax its free exchange, whether in domestic or international trade).
The founders were wise and somewhat prescient–but by no means did they have the advantage conferred on our age by the advent of subjectivist (and especially Austrian) economic theory. But, even in our own time (and with the enormous expansion of sound-economics appreciation due to efforts of such as this very institute), the proper view have little chance of becoming actual. The public is, by and large, vociferously opposed (and their view is probably more reflected in the legislature and executive than even among the population at large.
I cannot help taking a pessimistic view, despite my opinion that a really sound monetary system in any major nation would be one of the greatest possible advances to all of the civilized world.
Excellent article. My website takes this a step further and compares copper to gold, silver, and the stock market as an investment vehicle/inflationary hedge. Check out http://www.pennybullion.com for more info.
Excellent article. My website takes this a step further and compares copper to gold, silver, and the stock market as an investment vehicle/inflationary hedge. Check out http://www.pennybullion.com for more info.
“However what the author fails to mention is that monetary inflation is a form of Counterfeiting.”
Matt
Counterfeiting may results in monetary inflation, but monetary inflation is not necessarily counterfeiting.
For example, in Spain and western Europa during the sixteen century, there was a monetary inflation due to the important arrival of silver and gold coming from the Americas: there was no counterfeiting in this!
Secondly, nowadays, the monetary inflation comes firstly from the banks and the banking system, due to their fractional reserve scheme. The government, as it, don’t play any role in the monetary inflation, except to let the banks do their scheme at their convenience.
Nice blog post. Thanks for a good sharing.
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