How much Gold should be minted every year?

JRM wrote:Hi Keith,

RFC has constructed the best of all possible worlds economically speaking. We know that productivity can grow explosively when you can skip steps in the normal evolution of production. We have seen that in Japan, the Asian Tigers, and even China. As long as they were skipping steps in business processing, they could grow twice as fast as the U.S. When they finally achieved parity in technology, their growth slowed down as their productivity was limited by technology that is being created.

The reason that I mentioned that is because the Inner Circle knows what new technology is being developed, and Owl can calculate the growth in productivity. That is on immediate critical technology that the EOC needs. The EOC has also created the academic basis to make new technology available to an open economy. Whether the EOC needs the products the technology make possible or not, investors can decide to use the technology if they believe that they can profit from it.

All of that means that the growth in the GDP should be in the double digits, and stay there as long as the money supply is growing, as long as new products are being produced as older products achieve market saturation, and the consumer spending is based on increases in take home pay verses increases in consumer debt.

In the immediate future some of those condition are not too critical as the government of the EOC is the largest consumer, and the EOC doesn't have to use deficit spending, or increased taxes to pay for goods and services. In fact, the EOC is now in a position make major reduction in taxes that will improve the profitability of all EOC businesses.

So the answer to the gold question would be as much as possible to promote GDP growth without consumer inflation, and/or asset inflation.

James

I believe I will follow Friedman's advice here. He supported the idea of constant and predictable expansion of the money supply. Decide how quickly the gold can be mined and establish a pace for when additional gold coins will be available to the crown.

I would recommend addressing actually supplying economic growth with currency via facilitating increasing the velocity of money. That is improve how quickly money can change hands. The easiest way to do this would be to increase the use of bullion backed notes. So, the House of Ahrmahk would issue zero coupon bonds payable by future gold production. The bonds would be sold at a discount to face value and be redeemed at some future date. Since the pace of gold production is known, the amount of bonds issued can be compared to the future production. This makes it easier to evaluate the Writ's fair measure requirement. How far into the future production Cayleb wants to issue bonds against depends on the growth rate of the economy.

One thing that doing this does is to facilitate circulating currency. The Bank of Ahrmahk auctions the bonds to other banks or investors with sufficient capital to purchase the minimum lot size. Those banks or investors can issue their own, smaller denominated, notes or shares of the purchase. These smaller denominations are easier to use by more people as payments or transfer wealth. The gold will tend to sit in accounts or safes storing wealth while these paper notes will circulate. Gresham's Law suggests this will happen.

The difference between the needs of this fast growing economy will fall mainly on these notes. The more demand for capital the economy engenders, the more quickly these notes will circulate or the more quickly the velocity of money circulates. As the economy slows to accommodate and digest a series of changes, the velocity of money slows. The market does this by increasing/decreasing the interest rate of the discount used to calculate the present value of the bond's face value at maturity. Another benefit for this approach is that as bonds are issued at later maturities, the interest rate associated with the discounts of those zero coupon bonds will form a interest rate yield curve for essentially no risk securities. In this way, by separating the two monetary functions of currency from bullion coins, Charis can make their economy more efficient. That is support a larger economy with a smaller monetary base. The mechanisms for maintaining adjustments will be the velocity of money and the market interest rates.

Gold is just another commodity. Silver is just a commodity. Both are commodities which in a standard form and purity are accepted by the public for all services and goods. Increase production of either commodity will increase supply. Demand for the commodity may or may not increase.

Inflation is the market signaling excess supply to the markets demand. This is only true of an unadulterated species. The new world supplies of Spanish silver caused inflation in the 1500's. But there are very few examples of this type of monetary inflation.

Normally inflation of a currency is a results of political entities debasing their coinage.

So the answer is mine as much gold and silver as the market can handle.

Alistair wrote:I'm not an economist so does anyone have an idea on how much Gold/silver should be dumped into the market ever year from the new mines that will come on line soon?

Tonto Silerheels wrote:Alistair wrote:

I'm not an economist so does anyone have an idea on how much Gold/silver should be dumped into the market ever year from the new mines that will come on line soon?
[SNIP]
However, none of that was your question, because you were really asking about gold's monetary uses. The answer to the monetary question is counter-intuitive. It's: none. No additional gold need be produced for monetary purposes.

Now, realize that I'm giving you my impression of an economist, so I can't leave the answer there. No economist would, so let me expand.
[SNIP]
~Tonto

Your answer may be correct for a gold backed currency, but Charis currency is not gold backed. Its (still) minted from gold, so no gold would mean no money.

In an ideal economy there would be no inflation, no unemployment, and productivity and population increases would be the only way in which growth occurred.

In the real world, for a variety of reasons, at zero inflation there is always unemployment.
Charis can't afford to have idle hands right now, so they should be looking to have inflation sufficient to reach full employment; at a guess this is probably achievable at somewhere below 5% inflation per annum. Bluntly if the Inner Circle are smart they should keep inflation at that level almost indefinitely, because they're going to go straight from fighting this war, to preparing for the next war, to fighting the next war, to preparing to go into space, to preparing to fight the Gbaba, and wasting any of the limited manpower that Charis has to offer is not a good idea. The ill effects of inflation at that level are fairly manageable, especially if it's predictable, and once you've got over the initial hurdle that some rents, contracts and so on will be written for fixed amounts.
Given the level of information the Inner Circle have on the economy of Charis (both conventionally in what things cost the government, and unconventionally from the SNARCs), and the amount of power they have in the economy due to taxation and government spending, they should be able to hit any reasonable inflation target.

Keith_w wrote:(Gotta add that to the nitpick list - how do people who use roman numerals know what a percentage is, much less calculate it?)

A Roman would have said per centum. (parts in a hundred)
The Romans were quite comfortable with base 10. After all they invented decimation (the killing of one soldier in ten as punishment). It wasn't until the late empire that base 12 superseded base 10 in currency. (The Babylonians were of course big on base 12 and base 60, which is why we measure time in 12's and 60's...)

The Florentine bankers would have been on top of it too (and used the same terminology).

also, despite clynthan's hate for them the arabic numerals make life so much easier that dunchain will have adopted them. he is trying to save any money he can and having his clerks spend 3 times as long and 3 times as much paper on record keeping then they have to will be a small (compared to the arms contracts etc) but non-trival saving.

chrisd wrote:

Keith_w wrote:" . . . .Gotta add that to the nitpick list - how do people who use roman numerals know what a percentage is, much less calculate it?"

A Roman goes into a bar and holds up two fingers
"Five beers, please"


Another, rather superior Roman, walks into a club and says to the waiter "Bring me a Martinus"
"Don't you mean a Martini" asks the waiter?
"If I wanted a double I'd have asked for one" comes the response.

I seem to recall that per centum (parts per hundred) is Latin, and has kept its original meaning. As the Roman system was decimal, parts per hundred was not that difficult.

Incognitia wrote:

In an ideal economy there would be no inflation, no unemployment, and productivity and population increases would be the only way in which growth occurred.

Weeks and weeks ago my teacher told me that it should raise a red flag whenever someone used the word, "optimum." You have to ask, "optimum in what sense?" Are you trying to minimise travel time? Fuel consumption? Travel over dangerous routes? Each of those could be considered optimum.

I suppose the same is true of the use of the word, "ideal." You see, you allowed that productivity and population increases can occur in an ideal economy, but those conflict with your statement that there can be no unemployment because productivity and population increases can cause unemployment.

Take for example the Charisian invention of the cotton-silk gin. That invention allows much more cotton-silk to be produced with fewer employees. In a vibrant economy, those people would be unemployed until they can find other employment. The quintessential example is the way the invention of the automobile made buggy-whip manufacturing superfluous. In similar fashion, when population growth produces newly-minted employable people, those are unemployed until they find their first employment.

Inflation can't stop that.

Charis can't afford to have idle hands right now, so they should be looking to have inflation sufficient to reach full employment;

To be precise, they need high production, not full employment. Production is output; employment is input. High input can mean high output, but they aren't synonymous. Furthermore, you need to consider both the costs and benefits of inflation, not just the benefits. The benefit of inflation is a time-shifting of production (and lowered costs to debtors), not an absolute increase in production. That means that you can use inflation to give you more production today at the expense of less production later (sans later and increasing infusions of monetary inflation). But it's also at the expense of sometimes-unwanted changes to existing contracts; at the expense of increased negotiating costs for contracts as people attempt to mitigate the costs on price inflation by, say, including COLA- and corn-clauses in them; and at the expense of other costs I haven't mentioned. Of course, if more production today is needed in order to enable you to exist later then you might be willing to pay that price.

~Tonto

All of this is theoretically interesting, but I think it's a bit off the mark (no pun intended) as far as Safehold goes.

We - nowdays - no longer have currency that's "backed" by anything of given material value. The paper money - and the "virtual" money that is essentially "credit" - isn't actually *tied* to anything. At one time it was - back in the silver and gold certificate days one could go demand the equivalent amount of gold or silver from the government in exchange for the printed paper money. We went off the "gold standard" quite some time ago, however - when we couldn't find/obtain/keep enough "precious metals" to back all the paper money we "needed" in circulation.

The government "regulates" the money supply by printing new currency and/or removing some from circulation. But there aren't any real limits on this, other than the limit of how much paper and ink the various mints can obtain.

Safeholdian money isn't like this. Each person who has money has the actual backing material right there in his hand or purse. A "mark" - whether Charisian or from elsewhere - is it's own currency base in gold or silver. It's actual intrinsic value is fixed.

That said, it's effective buying *power* does obviously change, but that's the "simple" feature of supply and demand. If there's a "glut" in availability of something, the price tends to go down, simply so the product "moves". If there's a scarcity, then the price tends to go up, since there has to be an added incentive to sell it to a particular person over the others clamoring for it. There may also be a "favoritism effect"; namely that for personal reasons someone may prefer one nation's currency over anothers; even if the actual denomination - and the amount of metal backing it - is the same.

Realistically, mining gold and silver on Silverlode Island and minting new coins isn't going to really affect *prices* per se. For one thing, it's not like a host of private folks minting their own; it's the government. The government is going to be using that money to buy things, or to support various ventures. It's just going to be able to do so without raising additional taxes (which, if they had been necessary to impose, *would* have probably caused price increases as the various internal costs increased) or, possibly, doing without what it needed (in which case it could lose the war).

The intrinsic value of a "based" currency really depends on whose hands the supply of the currency base is *in*. That person, or group, sets the value. Even in the "Gold Rush" days, the maximum value of gold was fixed. A gold nugget the same weight as a $20 gold coin was worth $20 at most; though the store owner taking it in in trade for goods might discount that a bit, since it wasn't actual "official" currency.

I'm no proponent of inflation, and theoretically in an economy whose currency is based on precious metals with the government controlling how much new currency is injected into the system, inflation isn't inevitable, and with careful management, can largely be avoided.

Charis has HUGE deposits of silver available and doesn't need to issue government notes that pay interest. Yes, it will take a while for the silver to roll in, but it's going to roll in for literally decades (if not longer) and the Emperor owns all of it! So with Nahrmahn and OWL's help, along with Howsmyn's aid in cutting-edge manufacturing, calculating how much silver should be injected into the economy for reasons other than paying the bills for the war while keeping inflation at a minimum should be a definite possibility.

Keep in mind, most of the weapons manufacturing and obtaining the the raw materials to create them are largely controlled by members of the inner circle. Howsmyn can also negotiate contracts to provide the food, supplies, and luxuries his employees need and want, which keeps prices down since he buys in bulk.

Unlike the CoGA, which threw vast sums of money into its building program for the NoG in highly concentrated locations, Charis can take a more measured and gradual approach, which ought to reduce inflation in the company towns Howsmyn has set up at Delthak, as well as in Tellesberg where lots of manufacturies exist. Productivity per employee is exploding, and theoretically those people put out of work by new inventions and processes are needed elsewhere and will find new employment which is more productive than their previous jobs. A certain amount of the population is always in this state of flux, which is why in the U.S., the Fed (may it be cursed forever!) considers 5% unemployment to be full employment.

With the ham-fisted "throw money at the problem" approach the CoGA used, inflation in the cities where the ships were being built was rampant, as huge amounts of money were injected into the local economy which allowed shopkeepers, food suppliers, etc. to raise their prices and basically gouge the workers of their abnormally high pay. Production had increased, but not efficiency - it can be argued that the church's approach was about as inefficient in economic turns as it possibly could have been. There was also the problem of the church paying in script, which was quickly discounted in value since it soon ran out of the precious metals to back it, which was extremely inflationary.

While I'll admit I lack the expertise on economics that some posters in this thread clearly possess, I have studied the real-world effects of monetary policy over the past few decades, and I've learned a few things over the years. Bad money chases away good. That's why the gold and silver in the CoGA territories isn't used as currency whenever possible, since it holds its value, while the church script (which has the power of the Inquisition ensuring that it's accepted as legal tender!) is widely used in business transactions, with the resulting problem of calculating inflation into every contract. Charis doesn't have that problem, nor is it going to go bankrupt, while the CoGA will! (And that is gonna be fun to watch!)

So while inflation is rampant where the CoGA is using its heavily discounted (and getting worse) script to pay for the weapons and supplies to outfit its armies, the EoC can keep inflation to a minimum since its currency isn't discounted - in fact it's gaining against other currencies, which normally could pose a problem down the road in its balance of payments. Since it's going to be the sole source for many new inventions and more efficient harvesting equipment, for example, the EoC may never have a trade deficit. Once the holy war is called off and the ports of the world are open to EoC goods again, the flow of money to Charis from the mainland will be worse than it was before the war began. Ka-ching!

I'm sure I've overly simplified the forces involved and exaggerated the degree to which the EoC can avoid inflation, but I think it's valid to expect that it will suffer from much less inflation than the CoGA will.