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.
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 very modest 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 pratice 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.
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.
* This article was first published in January 2007 on my private blog. This version includes a few very minor edits.
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I’m a bit reticent about making the first comment on your post, the last time I did that I got in the shit with you.
I think that with the volatility of the gold market the real value of any gold based currency would have to work alongside its native currency base and internationally in a similar way to foreign exchange, that is for example if the gold value of a $1000 coin was $1100 one would only tend to trade it for goods and change of that value, ie. $1.00 gold = 1.10 paper.
Still you make sense with the idea of high value gold coin which is legal tender. I think the current setup is designed without the real thought of a real legal tender gold coin in mind. Still it gets gold coins out in the market place and that isn’t a bad thing.
Jim,
I may disagree with you on some things but you are not in the shit with me. Far from it.
If a series of gold coins were trading merely at commodity value then they would have to be treated as volatile relative to the existing national currency, unless of course we were also on a gold standard. However the coins I recommend above would, just after issue, trade at legal tender value which at that time would be above their commodity value (just as $10 notes today trade above their commodity value). Commodity value would still fluctuate but it would in general fluctuate below the legal tender value and be of little immediate consequence.
The real point of the coins is to provide holders of cash with an inbuilt hedge against inflation. Those that hold the coin can know that if inflation drives down the legal tender buying power of the coin then the gold commodity value will come into play and the coin can be melted and value salvaged. As such the impact of inflation is confined for those that hold such coins. Those that hold paper alternatives on the other hand will know that at critical stages in any serious inflation cycle a proportion of M0 will be melted down and disappear from circulation. Although in practice the coins would simply be more tightly held as their nominal commodity value increased so the effect would in fact be quite smooth.
Of course the RBA would for the time being still retain the power to adjust M0 via the notes issue, however the additional automatic stabilising effect introduced via gold coins would mitigate the need for harsh interest rate adjustments. Like power steering in a car the gold coins would assist the RBA in steering the economy towards low inflation.
Regards,
Terje.
I was only kidding about the first sentence, its not a problem, we are bound to disagree from time to time. On economics I trust your judgement, on Ron Paul I have strong reservations.
Kruger rand always sold at a premium to the gold price, however they had no face value other than 1oz of pure gold, so this is a different thing, but its possible that a legal tender gold coin would still have the same premium, which would cover the cost of production etc.
Libertarians in the States way back when, not uncommonly quoted money in both $US and KR, but this was probably only understood by them and not by the public at large. ‘Real money’ has only the value of the perception we understand, where gold has a real commodity value to back it.
The $10 note as you say trades above its real commodity value, which would be quoted in cents per Kg.
Where is everybody today? I have been waiting for them to get to work and start blogging, maybe they are on holidays like me.
You might have a daily legal tender value just rounded up from its value as per its weight. It would be a matter of having a nominated standardised market. Maybe New York at midnight. And then its legal tender value might be set as some morning chore by someone in the Reserve Bank.
Like if you had a one ounce coin right now its quoted at 847.47USD you might multiply that by the current exchange rate and then the treasury guy could round it up to the next ten dollars and perhaps thats legal tender for that day.
Graeme,
What you describe may have merit but it is a different proposal. What you describe is not what I’m suggesting here. What I describe here is not the optimal system that I would like to see implemented but rather:-
a) A very modest reform that points in the right direction.
b) A thinking exercise.
It is based on the assumption that overturning the current monetary system in one step is politically unlikely but modest reform around the edges may be achievable and wholesale reform can in fact be achieved in stages each one of which can in fact be quite modest.
I’m suggesting that the legal tender value is marked on the face of the coin when it is minted and it remains the legal tender value for the life of the coin. The legal tender value at the time of issue would be 10-20% higher than the commodity value at the time of issue. So for example:-
1. The coin contains $900 worth of gold.
2. The face of the coin is stamped with a mark saying $1000.
If inflation drives up the commodity price of the gold content at some future date the coin will become more tightly held (decreasing the velocity of this part of the money supply somewhat). If inflation drives the commodity price of the gold content so high that it now exceeds $1000 then obviously the coin is going to trade at commodity value and it will no longer circulate (just as the $200 coin pictured above refuses to circulate because commodity value exceeds legal tender value).
Obviously the 2008 issue of the coin may be different in gold content to the 2009 issue of the coin. I’m okay with this so long as each series is visually distinct.
I am an advocate of a full gold standard but this is not a gold standard. This is a modest reform that does two things:-
1. It reintroduces gold to the monetary system so that cautious people can relearn the tacit knowledge about how gold behavies.
2. It dampens inflationary impulses within the economy.
Regards,
Terje.
I think you both have merit, that is until people do relearn the tacit knowledge about how gold behaves they will tend to treat legal tender gold coins as a commodity. As time goes by they will start to recognize the extra benefit of easy exchange for goods and services, then the idea will take off.
I think that a parallel gold currency would tend to hold a premium after acceptance owing to the attractiveness (I just love the stuff), and the stability that would come from it, although it is hard to predict consumer sentiment.
As I said the KR sold at a premium to bullion (I know its a different proposition), but KRs as a (1 Oz fine gold} coin did have that certain something that an ounce bar didn’t.
Interestingly, once when I was selling a dealer tried persuading me that as it was necessary to melt them down and refine them back into bullion they were selling at a depreciated rate. I offered to buy some of them at that rate, but he wasn’t interested in selling. The next one was honest.
Jim – gold is a lousy “medium of exchange”. Which is why the market has always readily adopted paper, plastic and electronic substitutes. It’s merit lies in the fact that it is a fine “unit of account”.
The gold coins that I have outlined would be popular and the mint would have to work hard to keep up with demand. People and institutions would be keen to swap their holding of notes for the gold alternative. However these coins would always be more tightly held than notes as per greshams law. Notes would always circulate more readily.
The market value of money does not generally derive from it’s commodity content. Those that think otherwise have their work cut out describing how the Swiss Dinar held value for so long:-
http://en.wikipedia.org/wiki/Swiss_dinar
Thanks for the link to that I was unaware of it. I would imagine it held its value owing to the fact that no more were being printed, although what prevented deflation is something I can only guess at.
Could it be the effect of the use as well of other currencies?
Your scheme is too problematic Terje. Because you are trying to fix one price against another via force. You don’t want one price fixed against another. You will wind up invoking Greshams law and not just have these coins dissapear from ciruclation. But they will likely dissapear from the country.
If you keep the Gold revaluing against the crap-fiat-paper people will begin to see that its this paper-money that is the problem behind inflation as the Gold is always trading at a premium to its issue value.
The best thing you can do is have a situation where METALLIC OR HYBRID LOAN CONTRACTS CARRY NO TAX WHATSOEVER.
What I mean by a hybrid contract is you might have Silver as the principle and AUD as interest. Or AUD as principle and Gold as interest and so forth.
Having this tax exemption and getting a few silver coins in everyones hands will immediately boost the savings rates, and create an incentive for a lot more coining beyond a bit of government seeding.
After the initial drive to get silver in peoples hands and getting folks lending them out on deposit. After that the best thing might simply be to require taxation to be paid in Gold.
But during this process you want to be slowly increasing the RAR up to 100%. That way by the time most of your cash is out of the picture you could likely have trashed the central bank without any monetary instability.
Graeme,
It is not more problematic than the status quo. We already have coins that have a legal tender value higher than their commodity value. And we also have notes with a legal tender value higher than their commodity value. And in fact the $200 gold coin depicted with the Cockatoo on it is a case of a coin with a legal tender value below the commodity value. So this idea of coins with a legal tender value different from commodity value is not something new that I am seeking to impose or introduce. As such it is a poor criteria for evaluating the proposed reform because it is not representative of any change over the status quo. Your criticising the part of my reform that involves no reform at all.
Regards,
Terje.
It may not be more problematic than the status quo. Because the status quo is a disgrace. You’ll still lose the gold, under your legal tender rule, unless you make it what people must use for their tax liability. Because ultimately thats where our paper gets its value. Its worthless and the legal tender laws would drive a better money out of circulation. But its tax liability will give it priority as the better money in this equation.
This is one area where we ought not go for second best ever. Because thats where the Keynesians and inflationists jump in and discredit Gold for another 3 generations.
Find the very best way of doing things then push it. Nothing half-assed.
Jim,
Your comment about the Kruger always selling at a premium to gold content motivated me to dig up some old info and think a little harder. You are right about the Kruger and indeed all the cold coin series on issue around the world whether they be legal tender gold coins from the Australian Mint, coins from the Perth Mint, Krugers, Gold Eagles or Liberty Dollars all retail at a price above commodity value. This makes perfect sense because the motivation for creating them is the profit motive. Of these coins only one seems to circulate (The Liberty Dollar) and ironically it has the recommended retail price stamped on the front of the coin. It seems that its value in circulation is the RRP. In other words people accept it at face value even though face value is higher than gold content value.
Liberty dollars seem to be issued in enough volume to finance the private business that produces and markets them. They sell at a 5-10% premium over the value of the gold content but they are stamped with an RRP that is typically about 20% above gold content value (along with a stamp indicating purity and weight). The more I look at the Liberty dollar they do seem to represent a good model for offering competition to an incumbant national currency. The way they put it the Liberty Dollar is to Federal notes like FedEx is to the US Postal service. They also seem like an interesting mix of both social and business entrepreneurial insight. Now I’m pondering the legal obstacles to such an approach in Australia.
Regards,
Terje.
http://www.libertydollar.org/ld/spend-liberty-dollars/success-stories.htm
I don’t know what to say Terje, your agreeing with me?
Not seriously, I am glad I can help sometimes.
You see Terje. My idea of making it legal tender to a rounded up value of the silver content on a daily basis… Well I figure that would work. Ultimately, and within a few short years, you want to be rid of all legal tender.
But to get a lot of silver coins out there quickly and every bugger using them for both purchases and loans I’d reccomend a daily floating peg with legal tender backing as one way to go.
Once we are proudly taking these silver coins and lending them at interest… and every gentleman is noticing how much better they retain their value as compared to paper, well the rest is smooth sailing and we could bring Gold over the top of that.
Graeme,
If a coin had a commodity value approaching legal tender value then it would be more tightly held than all the alternatives. It would be so popular that it wouldn’t generally circulate.
Imagine you have a note with a legal tender value of $10 and a gold coin with a legal tender value of $10. Which one would you part with first? Logically you part with the lowest quality one first which is the note. Hence the notes circulate and the gold coins tend not to stay home.
Greshams law 101.
Regards,
Terje.
Yeah but thats counter-productive. Since you’ll lose the coins overseas as well or they’ll get melted down and thats a waste of production costs of coining them in the first place.
You want money in the hands of people to buy stuff OR ALSO THE LEND OUT. And if you have compulsion which doesn’t reflect true free market exchange value you are hindering the workings of the market.
See if we get silver coins into the hands of people, well they can hoard them. Hoardings good. Nothing wrong with hoarding. But we want them also for lending and buying. It would be a bit of a waste of resources if we issued silver coins only to have them hoarded. Not that there is anything wrong with hoarding or melting stuff down but we can do better.
We could in fact have an hourly devaluation of the paper against the Silver, Gold and Platinum. An hourly devaluation so slight there is no incentive to bring conversions either forward or back.
But you don’t want to compel a price that is not based on a slight rounding up of the market price.
So what Graeme, you’re arguing against Gresham’s law because it is “counter productive”???
Terje appears to be arguing that Greshams law is a good thing.
I don’t think we need Greshams law as an integral part of our monetary policy. I think we ought to not try and bring it about.
Do you have a different point of view?
Don’t try and gainsay me Mark when you have no idea what you are talking about. You’ll just start wrecking threads like the old days.
Graeme,
The coins you suggest, if introduced in parallel with existing currency, will not circulate because of Greshams law. If you have found a way to remove Greshams law from operating in the rhelm of monetary economics please let me know how it is done.
Regards,
Terje.
The way you stop Greshams law from happening is to not fix prices between the coins and the paper. So the coins should be revaluing in terms of the paper. I already told you about that. I said that your way of doing things would lead to Greshams law being invoked. But if the price between the crap paper and the silver coins were allowed to move in relation to eachother and there was no fractional reserve then Greshams law would not enter into itg.
So I had already shown you how to stop Greshams law operating in the realm of money. Thats the whole point. You don’t want bad money driving out the good. You want good money outcompeting the bad just like in any other product.
I’ve never understood people’s desire to tie money to , with one exception; it makes it very difficult for the central bank to inflate the money supply. However, it makes nations rich in commodity X rich for no good reason.
I’m quite happy with fiat currency as long as the central bank has a decent measure of inflation, and is disciplined enough to keep its issue of new money such that inflation remains low. I feel that this is the situation in Australia.
I personally dislike gold as a currency. Sure, it has portability, divisibility, scarcity, durability, and uniformity, but a well managed fiat currency possesses those attributes in abundance.
You may find the work of http://www.professorfekete.com/default.asp of interest.
I like Fekete. He actually understands real bills and gives them a fair hearing.
Seems to me that the valuations surrounding gold is inverted.
I fail to see what a $1000 minted gold coin is supposed to achieve? Are you implying by default a return to a gold standard where money is as good as gold or to make gold as worth-less as money?
Gold carries within itself real value; money is only a paper receipt, even then only a promise, as means of exchange and promises are being broken.
Forget about viewing the price of gold in terms of dollars and do the opposite, view the price of money in terms of gold. Don’t even think one ounce of gold should have any $??? Figure assigned it. The fact is gold is valued by it weight, always has been and if we are to be honest about it and admit it, the reality is, the world still values and trades in gold according to its weight, regardless of whatever face value mints wish to assign coins. The value of gold is far too stable to carry a wildly unstable currency dollar face value. And therein lays the highly esteemed beauty of gold. If gold coins were to be minted with a gold content valued of $1000; then expect a new coin of a new weight or alloy (as the Romans Empire did) to be minted every day that the price of gold changed. Obviously this would result in thousands of new coins all with wildly different real gold valuations all carrying the same farcical face value of $1000 whose real purchasing power could vary anywhere from the early1900s value of US$25 to a forecast future value of say US$5,000. or more. Since gold has changed from $25 per/ounce to $1000, money has lost 95% of its purchasing power, the purchasing power of gold measured by weight has retained its purchasing power over the millenniums.
I agree that we ought to value money in terms of gold rather than gold in terms of money. However I think you are assuming that gold and a gold coin are the same thing. Clearly they are not. If they were then by the same reasoning copper coins would be worth no more than copper, but in fact the market place has disagreed with this view almost forever. Either you insist that markets are completely wrong or you accept that metal that is minted and branded is valued more highly than metal that is not. Likewise a gold ring sells for more than the commodity value of the gold within it.
Those that wish to monetise gold should wish to see gold coins worth more than gold. If they insist on parity then they destroy the entire profit motive that brings such coins into being. There is no future in a business without profit and to wish for an industry to be growing and unprofitable at the same time is an untenable set of desires.
p.s. It is wrong to say that gold is valued by weight. It is weighed by weight. It is valued by value. The unit dimensions in such matters are important. The fact that a given weight of gold has historically had a fairly stable value that allows for an easy form of accounting (called a gold standard) doesn’t change this. Likewise the volume of gold and the weight of gold are highly correlated (more so in fact) however weight and volume are still different things and gold will not change this.
I did not say “gold is valued by weight”
And yet you stated that we ought to valued money in terms of gold. How then ought we to value gold?
What I said was gold is valued by its weight, which I’ll admit is not grammatically correct. The gold priced is typically expressed in dollars (a unit of value) per ounce (by weight). Gold is also expressed in the element term au; I admit au is no gold coins or bullion.
However I believe we are talking about the use of a commodity in this case producing coins containing gold as a means of exchange, by extension, a means of account and a store of value, thus forming all the attributes conforming money?
I’ll take it as a given that the market place varies the values between both commodities and money on a daily basis with the intention of gain and or otherwise advantage. There fore even the value and therefore purchasing power of money itself is in a permanent state of flux. This is in spite of our desire to acquire nirvana where money acts as a perfect store of absolute stability.
“It is valued by value” I’ll take value to mean in practical terms, purchasing power.
All of which provokes the question, what is the ultimate means of storing value as in wealth which maintains purchasing power come what may (inflation, taxes, war, currency collapses, etc) frankly in my mind money rates poorly and gold highly. However money rates higher as a means of exchange. Without a gold standard in place gold minted coins logically attempts to combine both.
Interesting; one might ask what is, and what was, the meaning of “One Pound Sterling”? Is it weight volume or value as in money? I don’t know the correct answer I suspect it once mean one pound (mass) of sterling silver as opposed to a present time One Pound British note?
http://en.wikipedia.org/wiki/British_pound_sterling
Quote
There is some uncertainty as to the origin of the term “pound sterling”. Some sources say it dates back to Anglo-Saxon times, when coins called sterlings were minted from silver; 240 of these sterlings weighed one pound, and large payments came to be made in “pounds of sterlings”.[
End Quote
Seems to me that silver and gold was once, the real money, central banks by contact have exchanged (their paper) money for silver and gold then terminated the contract by reissuing new notes with new terms. If it assists you, I purchased an Australian one ounce gold coin last year about the time US banks were closing down the coin cost $1020 AUD it has a face value of $200, just recently the gold content alone exceeded $1572 AUD, the coin recently, if you could find one, was quoted at $1643. I don’t say gold and gold coin is the same thing, for example, gold coin trades at a premium to the gold spot price? I can only imagine my present economic situation had I been working and saving for the last 30 years for retirement using practically any type or gold or gold coins as opposed to super funds or cash investments.
To reiterate, the value attributed to any given measure of gold is inherent within its weight, so long as the gold exists in a form that can be traded, be it coin, bullion or otherwise is irrelevant.
Danny,
Just to back track to my article and use your recent purchase as an example. The coin you acquired was never going to circulate as money because it’s face value was so much lower than it’s commodity value. It was a good investment and a useful hedge against inflation but not stable in fiat currency terms. If the legal tender value had instead been set at A$1100 you would have had a coin with a lot of upside potential and very little downside. My point is simply that such a coin would be extremely popular and yet still profitable to produce. And unlike the coin you actually bought it would have had a chance of circulating (although not once the commodity value of the coin exceeded it’s legal tender value). Besides being popular issuing such coins would alter the dynamics of the money supply as any inflation would automatically tend to take this component of the money supply out of circulation (ie the velocity of such coins would decline). This in my view would be a good thing.
I don’t accept the idea of intrinsic value. I think it is just as flawed as the Marxist labour theory of value. Value is a market phenomena that emerges on the basis of relative utility. The utility of gold and the dynamics that surround that do allow in the right circumstances for gold to be a stable reference. It is those circumstances that I would like to see restored. I would like us to go back to a gold standard but it has nothing to do with the notion of intrinsic value. Unlike mass or charge their are no subatomic particles for value inate to a given object.
Why can’t we use the current face value of a gold coin eg. gold Canadian Maple Leaf coins ($50 face value)?
When you visit your supplier of whatever, negotiate in contract terms what the amount of consideration and in what form it shall be.
Contract
Supply of widgets
1-2 weeks delivery
Deposit of $50 in silver Canadian Maple Leaf coins
Payment of $50 in gold Canadian Maple Leaf coins upon delivery.
Or form a relationship with a food supplier and contract with him in gold and silver coin for their face values.
CRA (Canadian Revenue Agency) says the income is to be based on their face values since they are legal tender.
IRS is similar in their approach … look up Muckracker Report for Ed Haas’ report on this issue.
[...] don’t want it to circulate as currency otherwise they would give it a higher face value. As detailed previously legal tender gold coins only circulate when face value exceeds gold [...]
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Gold coins have been a great investment over the past few years. They have definately outperformed the stock market and real estate. I dont see why gold couldnt hit $2000 oer ounce over the next year or 2 especially with the current financial mess this country is in
Is the price of gold jewelry different than the price of gold bars?
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