I know you’re not an economist. In fact, I’ve never come across any AMI-supporter who is. I assume this is the reason for almost total absence of economics arguments in your writings. While I am of the opinion that most economists (keynesians in particular) have negative knowledge about economics, it does seem a bit strange that a movement for monetary reform have so few economists in their ranks. At the end of the day, monetary reform is a matter of economics, and despite it all, economics is best understood by economists. You just need to find the physicians among the witch doctors.

Of course the money supply has an impact on prices, in many cases a very significant impact. I know AMI people advocate “stable purchasing power”, but I’ve never understood why stable purchasing power would be preferable to increasing purchasing power. It is through the increased purchasing power we enjoy the benefits of our increased and more efficient productivity. Keeping the purchasing power table by the means of inflation robs us of the fruits of our labor, in addition to other bad and immoral things. Why is that desirable to you?

The money supply in the US was actually fairly stable during the second part of the 19th century up until 1913. During this period, the American economy grew immensely as the productive capacity and efficiency of the American industry virtually exploded. This resulted in a moderate but steady increase in the purchasing power of the US dollar, and, more importantly, dramatic rise in the standards of living for the broad American public.

Regarding the Monetary Authority, it can’t really correct the first year’s mistake with and adjustment to the increase the next year, because that implies that they can calculate what would have been the exact right amount a year after the fact. This is only very slightly less impossible than calculating the correct amount the first time. This is actually what the Fed has tried to do, more or less, and as we both can agree, it has failed miserably. Looking at the numerous examples of runaway and hyperinflation throughout history, there is absolutely no reason to think the monetary authority would do better, especially not considering that Kucinich’s bill provides for paying off all the obligations of the federal government with printed money. That alone would amount to tens of trillions of dollars, with trillions more created every year.

On a side note, don’t you think it’s just a tad irresponsible to advocate something like Kucinich’s bill, when you don’t have any idea how the most central and key element, the Monetary Authority, would work? My overall impression is that although you probably mean well, none hear seem to have actually thought through the implications of you proposal or given any thought to the economics of it all.

Thanks for the comments.

I am not an economist, so I doubt I can provide a “thorough explanation” for why I say “Any country with a growing economy and a desire for price stability needs new money.” I admit that it is an assumption of mine.

I do understand that inflation and deflation are defined as increases and decreases to the money supply and that such changes do not necessarily cause prices to increase or decrease uniformly across all sectors because the money supply isn’t the only factor in the determination of prices. But the money supply can have a significant effect on prices, and I think I would favor a money system that had a minimal effect on prices—stable buying power as the goal.

I am completely unfamiliar with the notion of a modern economy growing without an increase in the money supply and am interested to hear more about that. I suppose if the money supply stayed the same but the velocity increased, the economy could grow.

Thanks for the additional background on the term “seigniorage”.

The monetary authority conversation is continuing on other threads and videos. All I’ll say is that the monetary authority would never estimate the increase in the money supply perfectly in synch with the growth of the economy but if they over-created one year, they could correct by under-creating the next year. It may not be as optimal as what you’re suggesting, like I say, I’m not that familiar with your ideas, but it sure seems like a heck of a lot better way to stabilize the money supply than adjusting interest rates to try to keep people borrowing.

Good question about who would be on the Monetary Authority. We’ll go into that soon on a Coffee with Joe, but I do share your skepticism about keeping this process from deteriorating into a hyperinflationary vote-buying money pump. So we really need to look at this closely.

I’m not sure how to format this whole conversation. Maybe we can use this somewhat messy comment-reply- video-new comment-reply format (here and on Youtube) to identify the areas of disagreement and then maybe we create a video debate organized around those questions, or a single article that summarizes all of the points, so that it’s easier for visitors to follow.

If you don’t mind, I’ll make a few comments regarding you article.

“Any country with a growing economy and a desire for price stability needs new money.”

Is there anywhere on this blog an argument for this claim, and with argument I mean a thorough explanation of why you think a growing economy needs more money, when history has shown that this is clearly not the case? Also, deflation means a decrease in the actual supply of money, not falling prices. Falling prices -may- be a consequence of a decrease in the money supply, but prices can fall due to other factors. The same holds for inflation.

“If it costs the mint five cents in metal and manufacturing to make a quarter, then the entity with the right to create that quarter gets a twenty cent windfall profit when it spends it the first time!”

This is not really what “seigniorage” means. Historically, seigniorage was derived from coin clipping and coin debasing. The king would collect all gold or silver coins in circulation, melt them down, add lesser metals and make new coins, but with same face value. This resluted in a greater quantity of coins, and the excess was retained by the king as a means of rasing revenue.

In contrast, if a private mint makes coins, the imprint on the coin will tell the users how much (grams, fraction of ounces or some other measure of mass) precious metal the coin contains, e.g. 1/2 ounce of gold. The actual value of the coin will depend on the value of gold relative to other goods and services at any given time.

The cost of producing the coin will consist of costs for raw materials (i.e. gold) plus all other costs of production, e.g. wages, depreciation of assets, admininstration costs and so on, i.e. exactly the same way as with any manufactured good. There wouldn’t be any difference between the production of gold or silver coins and the production of tools, cars, toys etc.

Who would buy the coins and how would the mint makes money? Presumably, banks would commission coins from the mint which would be used in circulation. They would probably order bullion as well. The mint would make money the same way any other manufacturer would, i.e. by selling its product (the coins) at a price exceeding the costs of production.

Why would banks pay more than the value of the gold in the coin?
Because they need to show the public they only deal with high quality coins, that anyone who deposits gold with them will receive high quality gold when they make withdrawls. The banks would pay mints for high quality products. A mint who becomes known for being sloppy and even dishonest would soon go out of business.

“Shouldn’t they get the free lunch? After all, the US Constitution gives it to them in Article 1 Section 8.”

The US Constitution doesn’t give anyone a free lunch. If anything, it does the exact opposite of that.

The “money creation” of the FRB-banks is very different from the money printing of the government, in that the former is an expansion of credit and the latter an expansion of the monetary base. Credit expansions are usually directed into specific sectors of the economy, like housing. This is why credit expansion tends to result in sharply rising prices in some sectors of the economy, while the rest is much less affected.

When the government prints money, however, it has a much broader area of effect as it is spent into circulation instead of concentrated and tied up in specific sectors. This will lead to a more general rise in prices, and the more money the government prints, the more the prices rise. This is what has happened in Zimbabwe. There hasn’t been any speculative bubbles there, raising the prices in specific sectors. Instead, the government has flooded the economy with new money indiscrimantly, which has resulted in all prices rising at about the same rate and time.

This would happen in the US if the Monetary Act became law. The trillions of dollars created by the government would have flooded the economy and raised prices sharply, and with ever rising prices, the need for further money printing is increased. Sooner rather than later, you have hyperinflation on your hands.

When I listened to your video rebuttal of my article, Joe said that this wouldn’t happen because there would be a Monetary Authority to stop it, and to calculate the exact amount of new money needed over time. I’m sorry, but this doesn’t even qualify as an argument.

Any quantity of money is optimal, there is never a need to manipulate it. From this follows that it is impossible to determine what is the right amount of new money to be printed, as the present supply is already the right amount. In addition, there would be absolutely no way of knowing what the right amount of new money would be, because no human or group of humans can possibly gather, much less process, all the information available in the economy.

It is impossible to centrally plan the production of boots. Considering that, it is nigh on impossible to even imagine the impossibility of centrally planning the money supply. You see, central planning has always failed because of very true reasons. It has not failed because the planners of the past have been incompetent, it has failed because it is impossible. Mises explained this in his book “Socialism” and Hayek piled on with h is “Pretense of knowledge”.

That said, I have to ask out of sheer curiosity who you think should/would be on this Monetary Authority, if the Monetary Act would become law tomorrow? Elected politicians or unelected bureaucrats? Which people of today do you think would be up to the task? Bernanke? Kucinich? Ron Paul?

http://www.iiis2010.org/iceme/invitedsession/InvitedSessionPre.asp?vc=32

How about we do this. Starting here.
Pete’s posting has to do with the fact the present system rewards private bankers at the expense of the taxpayers.
That is an unsustainable system.The present system must fail.
We need another system.

My reading of Kitson’s “A Scientific Answer to the Money Question”, and “A Fraudulent Standard”, as well as Soddy’s “Wealth, Virtual Wealth and Debt” and “The Role of Money” convince me that any commodity-backing of any debt-money system are counter purpose contributors to economic stability.

We think the failure of this system is related to its debt-money nature. The debt-money is broke, broken and insolvent.

We propose a new money system, debt-free at issuance by the sovereign government, and thus of a fiat nature.
What do you propose?

Let’s discuss it.
Thanks.

http://www.p2pfoundation.net/Transfinancial_Economics