Sunday, January 13, 2008

Legal tender gold coins

Terje Petersen has proposed legal tender gold coins:

......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.

As I understand it , the coins would be an automatic tool to fight inflation, giving the Reserve Bank less reasons to raise interest rates. I'm no economist but it sounds worth considering. Can we have some silver coins too?

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