Tuesday, April 5, 2016

THE VALUE OF THE CENT

     Often in collectors' circles they'll take about returning to real money, that is, coins comprised of gold and silver and following a gold standard. It's one of those little dreams we have, to possess coins whose value is not inextricably tied to the well-being of the country within which we reside. Fiat coins and currency are, in effect, value suicide pacts. If the United States (or country you live in) fails, all your coins and especially your paper money, is now worthless.
     The coins only mostly so as copper and nickel do have some scrap value...though very little compared to its present face.

     But I don't think a return to gold and silver coinage is either feasible or even possible anymore. Plus the metals have too much volatility. I can't imagine gold holding a steady value for a hundred years like it did when valued at $20.67 per troy ounce. Surely its value rose above that during the Civil War and World War I, but the nation held firm to it from 1834-1933. After that it was revalued at $35 per troy ounce but without accompanying gold coins for economic use and that only lasted a few decades (and the second World War) before rising again to $38/tr.oz. and finally to $42.22/tr.oz. before Congress gave up the gold window ghost in 1971.
     Silver's value has been too unstable to make properly valued coins with, fluctuating from $1.29 per troy ounce to almost $50 per troy ounce between 1964 and 1980. The metal has been on a second wild ride since 2006, spiking as high as almost $40/tr.oz. back in 2011 (something I failed to take advantage of, though I did sell a bit of my holdings in 2008 when silver briefly topped $20/tr.oz.) before dropping back down to around $15/tr.oz. today. That kind of volatility would make it impossible to keep coin values stable enough to prevent hoarding.

     But what if instead of pegging the value of our money to a metal or other commodity, we peg its value to an idea?

     One thing that really bugs me about money today is just how worthless it is, especially our coins. We have cents, nickels, dimes, and arguably quarters, which have no purchasing power at all.
     Presently the quarter-dollar is at its breaking point. A single quarter can purchase only a single hollowed-out gumball from a vending machine, a brick of Ramen soup, or a package of seeds in my local supermarket. I'm not even sure if arcade games will let you play a game for a single quarter anymore.

     Why is it like that? Coins used to have real purchasing power so why can't they still?

     If we're going to have cents, nickels, and dimes floating around, shouldn't they be able to buy things? Shouldn't the lowest value coin of the republic be able to buy something? And that's what I'm proposing. Not a gold standard, but a purchasing standard.

     We go about that the standard by which our coin and currency is to be valued is that the lowliest coin is to have purchasing power. The smallest coin must be able to buy a certain non-zero number of things and the money supply must be kept in line in order to preserve that.
     The advantage such a system would have is that the money supply would be able to expand in response to a growing population whereas under a gold standard, the money supply can only increase by adding additional gold to the treasury. Birth and death records are compiled annually and the Constitution requires a decennial census so we should have a good idea of what the money supply ought to be in order to have the one cent coin be able to purchase a certain non-zero number of things.

     As things stand right now, it is arguable that our money supply is 20 to 25 times too large at minimum. If the quarter has reached its purchasing limit (and I did give three examples), then its role should be assumed by the cent thus allowing all the coins of the realm to reacquire purpose.

     I wouldn't expect the change to happen overnight but I suspect the Federal Reserve Banking System could be employed to contract the money supply accordingly using its prime interest rate. The money it collects using that rate after subtracting its necessary uses like salary and maintenance, instead of being turned over to Congress and added to the general fund, would be destroyed.
     The rate of this destruction would be only a few percentage points a year so deflation would be modest but over time, the money supply would have its value restored.

     I'm sure there are faults in this idea. I wouldn't mind knowing what they are but I will reject any fault that basically reads like "it's bad because it hurts the wealthy". Deflation is whispered about as though it were a harbinger of the apocalypse. Deflation would benefit the poor and savers. Deflation only hurts the wealthy and I suspect that is why there is such opposition to it. As I've heard it said, if inflation were bad for the already rich, there wouldn't be any.

     Besides, the only other way is to eliminate all coins below the half-dollar or to issue a revaluation whereby fifty dollars ($50) equals one new dollar (N$1) and I don't think anyone in Congress is willing to admit our money has become just that worthless yet...

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