Economics in One Lesson

[mmarotta]

In the discussion on the Aluminum Lincoln Cent slabbed by ICG, this came up.

 

Syzygy wrote: Not saying it's not about profit, but if the cent contained more than one cent of copper it would not circulate for long - the aluminum cents might have made good sense.

 

Fermento is not "wrong" of course. It is pretty clear that the matter is as described: if there is more than $20 in gold in a gold $20 coin, the coins disappear. That was the problem in the early 1800s in the USA (and the UK earlier). The US Mint had to keep a dollar's worth of silver in a silver dollar -- even though the price of silver fluctuated. It is also why the Mint went through Arrows and Rays and all that. They were trying to keep gold and silver on par.

 

In inflationary times, when paper promises outstrip the precious metal stocks, metals disappear from circulation. Our clad coins are like the Roman folles of the tetrarchy -- they even look alike, really.

 

Therefore, I am not alone in pointing out that the real problem is that the money has any unit of account attached to it. If the coin only said "0.25 oz 0.925 fine" it would be worth whatever it was worth.

 

Claims that the "money supply" (gold? silver? stocks and bonds? tokens? cows? apples?) must keep "pace" (however defined) with the "economy" (measured how?) are fallacious. If coined precious metal money were only coined precious metals (not "dollars" or whatever), then as more and more goods and services were created, money would be worth more and more over time. A little bit would go a long way.

 

Conveniently enough, we would never be in a situation where coinage disappears.

 

Coined metals are only one kind of money -- a very good kind, but not the only kind. Legal definitions of "dollars" (pounds, francs, whatever) were only bad attempts at a good idea.

 

Fractional Money by Neal Carothers. A classic American numismatic work known to too few. (Reprinted by Bowers and Merena in 1988). Carothers points out that circulating money -- even if backed in gold or whatever -- need not be gold or whatever and probably should not be. There is no way to circulate gold without wearing it down. (We decry "clipping" but mere circulation is only micro-clipping, really.) Make currency out of industrial metals (or kevlar!), but let it be of fixed value: not "Good for One Dollar" but "Good for One Ounce."