Tuesday, January 8, 2013

Copernicus and the Platinum Coin

Fun fact: Copernicus was a monetary theorist. Yes, the astronomer extraordinaire who worked out a theory of the revolution of celestial spheres also turned his attention back down to earth to consider currency reforms in his native Poland. At the time (early 16th Century), Poland had three different types of currency. All were made of precious metals, but were subject to frequent debasement, since the state could alter their value by decree.

Copernicus explained that Gresham's law was at work. When multiple coins are in circulation, those with cheaper metallic content relative to their value will be used for payment, while those with more expensive metallic content will be melted down for their metal and disappear from circulation. In short, "bad money drives out good." Copernicus also was an early developer of the quantity theory of money, that prices vary directly with the size of the money supply. He thought that the government needed to stop minting so many coins if they wanted to solve the inflation problem. He published his monetary ideas in Monetae cudendae ratio in 1526.

Copernicus focused on coins whose value derived from their metallic content. Today, of course, our paper currency does not get its value based on the value of the paper itself; it is not commodity currency, but fiat currency. What about the trillion dollar platinum coin we keep hearing about in the debt ceiling discussions? It would not get its value from its metallic content either. The government does not actually have a trillion dollars worth of the commodity platinum to mint into a coin. The coin would just use a small amount of platinum, and have its value by fiat. It is just as if the President were allowed to print a trillion dollars of paper money, which he's not. (That's why the platinum coin scenario is called a loophole.)


Unknown said...

I think everyone agrees that the government can stamp out a trillion dollar coin. The real question is should they and if they did what would be the effects?

Benjamin said...

A hello to Carola from another Bear, although many moons ago. LIke the disco era, in my case. At least we knew how to dance!

The platinum coin is fun, but it turns out the US Constitution also allows the states to mint coins, if from silver or gold. No delineations made on the value of the coins relative to content.

So, a state like CA, which could use a boost, could mint up a few billion in coins, with some minor silver or gold content, and set the values of said coins at $50, $100 and $1000.

The state would pay employees and vendors, pensioners in these coins. In turn other in the state would accept the coins as they know they can pay their taxes with the coins.

Of course, this will never happen, along with the platinum coin idea, but it fun to talk about.

And a serious question: The Fed conducts a monetary policy that it believes on average is good for the states---but for some states it will be too loose and for some too tight. Think about the ECB, or if there were a global central bank.

The Fed is way too tight for CA. Should states seek to conduct they own monetary policies?

Think about what a failure the ECB is.

Best of luck at Berkeley!

Carola Binder said...

Thanks for the comment and Go Bears! You might like this paper called "Is the United States an optimum currency area? an empirical analysis of regional business cycles" by Michael Kouparitsas. http://ideas.repec.org/p/fip/fedhwp/wp-01-22.html
He finds that the U.S. in not an optimal currency area, and that having regional monetary policy might be better.

Of course, it would be inconvenient to have to exchange currency when doing business or traveling across state lines.

Also, in the U.S. the states have balanced budget requirements, and the national government can run a debt or surplus. So we have monetary union with fiscal union, unlike the eurozone. Imagine if each state were allowed to run as big a deficit as it wanted and have its own currency. We would all have to keep track of how likely each state was to devalue its currency, etc.