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Monday message board

May 15th, 2006

It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.

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  1. Bring Back EP at LP
    May 15th, 2006 at 09:41 | #1

    I am fairly upbeat about how Australia will perform in the World Cup.

    I think the easiest match to predict is the first.

    We will easily best Japan. Japan has enormous expectations on them following the last World Cup and history shows previous hosts do badly in the following World Cup. ( Same for south Korea of course).

    Brazil will be very hard however they have now two quite slow fullbacks and their defence overall is not as sound as last time.
    however they do have more attacking power than the rest of the teams put together.
    Brazil are traditionally slow starters. Last time Turkey should have beaten them.

    Croatia will be a grudge match given they have three players who received their training in Australia.
    This match will be won by the team with the greater guts and determination and the coach hence my confidence.
    Uruguay gave us tremendous confidence and self-will.

    Onto the second round where we beat Italy!!!

  2. avaroo
    May 15th, 2006 at 10:06 | #2

    EP at LP, why is the World Cup event held only every four years? It’s got to be a huge money maker for the teams. Wouldn’t it be a big financial plus to have it every year?

  3. Razor
    May 15th, 2006 at 13:08 | #3

    Who cares?

  4. Bring Back EP at LP
    May 15th, 2006 at 13:30 | #4

    Razor is a xenophobe!

    can’t have it every year. It takes one year some times longer to qualify.
    The football calendar is long enough already.
    Can’t do it every two years as present FIFA boss wanted as the euro championships are on in the Olympic year.
    the world Cup is the biggest sporting event.
    The Olympics is next because of football and the euro=s is the next after that.

  5. Razor
    May 15th, 2006 at 14:06 | #5

    Homer – xenophobe my arse!!

    Had Dim Dum for Mothers Day Lunch. The out-laws are off to the Czech Rep. to meet all the rels. I follow cycling as an equal second after AFL with Super14 (Basso to win Giro and Tour!!). I like to see a comparison of Aussies performing at the top level in cycling v soccer – Cycling would kick arse and yet the coverage here is pathetic compered to soccer.

    Soccer is boring,boring, boring . . . grew up playing hockey – soccer needs to do what hockey has done – get rid of offside rule, get rid of throw ins and allow kick ins from the side. Fell asleep at half time in the FA Cup! Despite being a Liverpool supporter since I was 6 and Craig Johnson played for them (same colours as South Fremantle). And the A-league – what a joke!

    Took a relative visiting from Europe to an AFL match a couple of weeks ago – they couldn’t believe how much runnning occurs, how free flowing the game is and how the supporters are free to sit where they want. Brilliant! was the verdict on the experince – despite not understanding fully the rules.

  6. paul
    May 15th, 2006 at 14:18 | #6

    The Aussie Econ Bloggers; You all know John Quiggin; I once tried following his ‘what am I reading’ posts, I came to conclusion he must be speed reading champion economist. Other Aussie bloggers worth visiting regularly Harry Clarke, Andrew Leigh, Joshua Gans and group blog Catallaxy.

    http://truckandbarter.com/mt/archives/2006/05/introducing_som.html

  7. May 15th, 2006 at 21:09 | #7

    http://www.theage.com.au/news/national/kim-beazleys-speech/2006/05/11/1146940673201.html

    So, Mr Speaker, my Pact with Middle Australia has, at its core, one promise. Through you, Mr Speaker, it is this:

    Under a Beazley Labor government: When you put in, you get back.

    It would be good if they didn’t take it in the first place, however giving it back is a starting point. It sure beats the response the ALP had to last years budget.

  8. May 15th, 2006 at 22:35 | #8

    For most legal tender coins the value of the metal in the coin is less than the legal tender face value. So for example if you take a 50 cent coin and melt it down and then sell the metal at the current spot price it will be worth less than 50 cents.

    Yet the opposite is true with our legal tender gold bullion coins. The A$100 legal tender coin for instance contains 1 troy oz. of 24 carat gold. Currently in the gold markets 1 troy oz. fetches about A$900. So if you take a A$100 gold coin and melt it down and then sell the metal at the current spot price it will be worth more than A$100.

    Lets say they decided to issue a 1 troy oz. gold coin and gave it a legal tender face value of $1000. Then like the 50 cent piece the coin would be worth more than the metal. And such a coin might actually circulate.

    Of course over time inflation would catch up and such coins would get yanked from circulation. Imagine a system where inflation causes part of the base money supply to be taken out of circulation. What would be the monetary implications?

    Regards,
    Terje.

    P.S. 10 points go to the first person who figures out how a A$100 coin can be fabricated using A$900 worth of gold and still be brought to market at a profit.

    http://www.perthmint.com.au/imagelist/Normal/1ozNuggetobverse .jpg

  9. Kevin K
    May 15th, 2006 at 22:40 | #9

    Fell asleep at half time in the FA Cup!

    Odd. I thought it was one of the best cup final games played in a long while. It wasn’t a pretty game to watch but what a dramatic see-sawing contest it was! Near the end the players were dropping to the ground like flies one by one, and you had to feel for Marlon Harewood, who was limping around with a ligament injury, and then, of course, got presented with the best chance of the game but understandbly couldn’t take it.

    Shame about the result though.

  10. SJ
    May 15th, 2006 at 23:25 | #10

    Terje says:

    Of course over time inflation would catch up and such coins would get yanked from circulation. Imagine a system where inflation causes part of the base money supply to be taken out of circulation. What would be the monetary implications?

    It’s not hard to imagine.

    Zimbabwe’s prices rise 900%, turning staples into luxuries

    By Michael Wines The New York Times

    TUESDAY, MAY 2, 2006
    HARARE, Zimbabwe- How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417.

    No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 – in American currency, about 69 cents.

    The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe’s $500 bill, now the smallest in circulation.

    Look up hyperinflation for the implications. Duh.

    P.S. 10 points go to the first person who figures out how a A$100 coin can be fabricated using A$900 worth of gold and still be brought to market at a profit.

    Another “duh”. The answer is that you sell it at a price greater than $900.

    Next question from Terje: How is it that a 1904 penny can be worth more than one penny?

  11. dave
    May 16th, 2006 at 03:54 | #11

    Razor,

    If you don’t like football, you don’t have to watch. But the vast majority of the world loves it, and the world cup can be a wonderful tournament (like any sport, there have been dud games and dud tournaments). I can’t wait, and neither can Homer by the sounds of it.

    And if you missed the second half of the FA Cup final, you missed two truly superlative goals from Gerrard, and a freak from Konchesky. As a Liverpool supporter from the early eighties, I was enthralled (and quite shattered for the Hammers in the end too).

    Anyway, perhaps you’d better go live in a box for the next two months. Because Homer and I and four billion others will be football-mad for a while, and we will bring it up in conversation. You might hear us – you don’t have to listen.

  12. Bring Back EP at LP
    May 16th, 2006 at 08:31 | #12

    Dave,

    oley, oley ,oley oley. oley oleyo

  13. May 16th, 2006 at 12:46 | #13

    Dave said:

    But the vast majority of the world loves it

    …Only because they haven’t been properly introduced to cricket.

    Terje appears to have found another way to control monetary inflation… spend the money on buying the gold to make the coin, then make the coin worth less than the gold (on the assumption that destroying currency is illegal).

  14. May 16th, 2006 at 13:32 | #14

    I am pretty sure that in Australia destroying currency is not illegal.

    However our currency laws do make lots of things unnecessarily illegal. For example the Australian ban on private coins:-

    http://www.austlii.edu.au/au/legis/cth/consol_act/ca1965120/s22.html

  15. Katz
    May 16th, 2006 at 13:53 | #15

    CRIMES (CURRENCY) ACT 1981 – SECT 16
    Defacing or destroying current coins or current paper money

    A person shall not, without the consent, in writing, of an authorized person, intentionally deface, disfigure, mutilate or destroy any coin or paper money that is lawfully current in Australia.

    Penalty:

    (a)
    in the case of a person, not being a body corporate—$5,000 or imprisonment for 2 years, or both; or
    (b)
    in the case of a person, being a body corporate—$10,000.

  16. May 16th, 2006 at 14:46 | #16

    Katz,

    Another dumb law. Why can’t you destroy your own property? It would make it criminal to melting down gold coins. However it would probably not actually stop people doing it.

    So the question remains. If Australia had a 1 troy oz coin made from 24 carat gold (currently worth A$900) with a legal tender face value of A$1000 (instead of A$100) then what would be the monetary impact of the gold price rising above A$1000 per ounce?

    And here is another party rhetorical question (ie I do know the answer) for those that are interested in monetary puzzles. If the authorities slowly and secretly drained the supply of 50 cent pieces from the economy would it be possible for the market exchange rate between 50 cent pieces and $1 coins to change.

    Regards,
    Terje.

  17. Razor
    May 16th, 2006 at 17:36 | #17

    Dave – saving my sleep deficit for July. Hopefully Cadel Evans can improve on last year.

  18. SJ
    May 16th, 2006 at 22:24 | #18

    Terje Says:

    ie I do know the answer

    No, you don’t. You’ve amply demonstrated in just a handful of posts in this one thread that you’re completely clueless on the very topic that you profess is your personal obsession.

  19. May 16th, 2006 at 22:44 | #19

    SJ,

    I ask a set of direct questions and in your mind that makes me clueless? An interesting process of logic. It is amazing how you know ahead of time that my answer to the latest question is wrong even before I give it. So please correct my answer and impress all the learned colleges. I have not had a good floggin for some weeks. And I am sure the spectators will enjoy it too.
    :)

    While we are flogging Terje for being a clueless imbasile can you explain why exactly we need section 22 of the Currency Act. What heinous crime does it prevent? Shouldn’t we ban usury whilst we are at it?

    Regards,
    Terje.

  20. SJ
    May 16th, 2006 at 23:03 | #20

    Terje, when you say things like “I am pretty sure that in Australia destroying currency is not illegal”, then have it shown to you that it is, in fact illegal, and you then whine “Another dumb law”, I interpret that as total cluelessness.

    You haven’t said anything about hyperinflation yet, either.

    Forgive me for thinking in advance that whatever you’re going to say is probably going to be worthless.

  21. James Farrell
    May 16th, 2006 at 23:21 | #21

    “If Australia had a 1 troy oz coin made from 24 carat gold (currently worth A$900) with a legal tender face value of A$1000 (instead of A$100) then what would be the monetary impact of the gold price rising above A$1000 per ounce?”

    People would melt them down and sell the gold, abroad if necessary, at its face value. This is always the fate of coins. But what’s your point?

  22. May 16th, 2006 at 23:43 | #22

    I though that the term “pretty sure” was fairly loose and inquisitive rather than authoritive. Next time I will say something more along the lines of “are you sure” to reduce the chance of appearing clueless to you.

    In any case I am happy to have Katz set me straight. He was very direct and very polite about it. The exchange with Katz was productive because one of us learnt something. I am glad that I had it. It seems some people can make a technical point without getting personal.

    I would address your point about hyper-inflation in Zimbabwe. However I didn’t know Zimbabwe previously had gold coins with a legal tender face value higher than the market price of the gold content. So I can’t see how it relates to my question. Hence I don’t really know what point I am meant to address. Perhaps you could rephrase your point in terms of a question, kind of like that used in the Socratic tradition.

    Regards,
    Terje.

    P.S. for more than a decade I have carried half a torn paper A$5 note in my wallet. A friend still has the other half. Please feel free to inform the authorities (the tearing was most deliberate). Now that I am less ignorant of the law I doubt it would stop me doing the same thing again.

    P.P.S. Your advance request for forgiveness is granted.

  23. Bring Back EP at LP
    May 17th, 2006 at 09:40 | #23

    Razor, despite you obvious lack of appreciation for decent sport you are still my favourite financial planner!!!

  24. gordon
    May 17th, 2006 at 10:52 | #24

    Some readers may be interested in an Economist’s View post (16/5/06) on the nature and history of hedge funds here

  25. Razor
    May 17th, 2006 at 13:54 | #25

    Ta BBEP – remember – fee for service (and I don’t use managed funds – I am the fund manager)

    I hate being called a Financial Planner – I prefer Financial Adviser.

    Regards

    Oh, and I might sneek a peek at the Soccer World Cup, it’s just that without the Young Lions of Cameroon to support I just don’t feel the passion.

  26. Bring Back EP at LP
    May 17th, 2006 at 14:08 | #26

    Razor,

    I will call you anything you wish !!!!

  27. May 17th, 2006 at 15:11 | #27

    And here is another party rhetorical question (ie I do know the answer) for those that are interested in monetary puzzles.

    Anything to get out of studying for tomorrow’s test…

    If the authorities slowly and secretly drained the supply of 50 cent pieces from the economy would it be possible for the market exchange rate between 50 cent pieces and $1 coins to change.

    Well my response (which is probably totally wrong) would go something like this: We can pay for goods using different commodities (barter system) or currencies (currency system). In theory-land, If we treat 50c and $1 as different currencies, then an increases scarcity in 50c could mean that they’re value would increase (so that 50c is worth more than half of $1).

    In reality-land though, they aren’t different currencies, and there are substitutes for 50c coins (such as 5, 10 and 20c coins) whose scarcity has not changed, relative to the $1 coins. In the long run there ‘might’ be change in the valuation of currency, but this would be reflected in prices, rather than in the exchange between the different coins themselves.

    After all, what’s the difference between taking all the 50c coins out of circulation and taking all the $50 notes out of circulation? Both are deflationary.

  28. StephenL
    May 17th, 2006 at 17:40 | #28

    I too was puzzled when I first leant about it being illegal to destroy currency. Either it was explained to me, or I eventually concluded (having exhausted other explanations) that the reason was that most people who were destroying the currency were doing it in order to learn more about how to counterfeit it.

    In order to conduct experiments to learn the chemical make up of a paper note you would probably have to destroy it (or at least part of it – in a mass spectrometer a very small part).

    Not sure if its a good reason for the law, but its a reason.

  29. Terje
    May 17th, 2006 at 18:23 | #29

    Your theory land idea was a good start. Lets assume for the moment that the 50 cent coins and the $1 coins are different currencies and then consider why they might (or might not) continue to have a market exchange ratio of 2:1.

    It should be noted that the legal ratio is 2:1. The 50 cent coin is “defined” to be worth half of one dollar by virtue of legal tender laws. However the legal exchange ratio and the true market exchange ratio need not coincide. Certainly the legal ratio will have a significant influence on expectations about future values and hence it will to some extent drive the market exchange ratio. One would expect government action if the market ratio and legal ratio fell out of alignment and this expectation is a powerful influence.

    It should also be noted that 50 cent coins are not entirely fungible. Certain commerative 50 cent coins have higher market worth than run of the mill 50 cent coins.

    It should also be noted that the market in which coins are exchanged is often indirect. The newsagent may accept a $1 coin for a newspaper or 2 fifty cent pieces for the same newspaper but they may not be willing to change a $1 coin for a 50 cent coin.

    However putting aside the commerative coins and other technicalities the question is essentially about what is it that keeps the market exchange ratio and the legal exchange ratio broadly in alignment.

    When China had a fixed exchange rate between the Yuan and the US dollar the mechanism for fixing the market exchange ratio was open market operations. The Chinese central bank essentially operated in the market by acting as a buyer and seller of last resort to keep the ratio fixed. In essence the RBA does this with coins.

    In Australia coins are created by the mint, however they are put into circulation by the RBA. The RBA provides the coins (and notes) to commercial banks in the quantities requested. So if the commercial banks started requesting less $1 coins and more 50 cent coins (due in turn to customer demand) then the RBA would accomodate.

    If the RBA had a program of draining 50 cent pieces by stealth through some back door mechanism it would in effect create a higher level of demand for 50 cent pieces at the front door (where it sell coins according to the legal value ratio of 2:1 but in the quantities dictated by the market). It could only really effect the market exchange rate if it were to stop operating the front door according to policy. This might be force on it if the production process for 50 cent coins was unexpectedly disrupted and reserves ran short.

    In essence the market exchange rate between 50 cent coins and one dollar coins is fixed by essentially the same market mechanism that the exchange rate between foreign currencies gets fixed (when such a policy applies).

    The central authority can fix the price of the 50 cent piece or it could fix the quantity but it can not have its own way on both.

    There are real world examples of what we might call broken ratios.

    As already mention in Australia the $100 coin sells for about $1500 in the market place. So the market ratio is significantly different to the legal ratio. The reason is that the $100 coin is not “managed” by the RBA according to the legal exchange ratio but rather it is sold by the perth mint on licence.

    When the USA operated the bimetalic monetary system they in essence guaranteed the exchange rate between silver and gold within the USA. This caused huge flows of gold and silver in and out of the country as the world market price of the two commodities shifted reative to eachother and traders engaged in arbitrage.

    I’ll try and dig up some other references.

    As an aside I noticed in an article earlier this month that the US mint now says that producing 1 cent and 5 cent pieces costs more than the face value of these coins. No doubt a result of commodities inflation.

    Other articles of interest:-

    http://www.pennies.org/history/six.html
    http://en.wikipedia.org/wiki/Gresham's_Law

  30. James Farrell
    May 17th, 2006 at 19:00 | #30

    Still don’t know what your point is, Terje. Is this last comment meant to answer your original challenge (about what happens when the commodity value of a coin exceeds it face value)? Is there some widespraed misconception about coins that you are endevouring to rectify? Is there anything in your above analysis of coins that doesn’t apply to notes as well?

    I’m not trying to be smart – I’m genuinely curious.

  31. Terje
    May 17th, 2006 at 21:56 | #31

    James,

    My latest comment was in response to Alpaca who in turn was responding to my supplementary question. The analysis applies equally to notes as it does to coins.

    My original question on May 15th, 2006 at 10:35 pm was part and parcel of an inquistive interest in how these things work. In practice it is mostly limited to coins because notes almost never have a material value higher than their legal tender face value (or their monetary use market value).

    I do have views on how money and the associated laws should be structured. And I could outline a long series of reforms that I think would provide incremental improvements. However that was not really the point of my challenge here. I merely discuss the mechanics because they are interesting. In the same way that we might dicuss the mechanics of a helicopter without necessarily using it to push a policy agenda. My opening was not really normative in nature.

    As to whether there are widespread misconceptions about coins (or more broadly about money), I think it would be safer to simply say that there is widespread indifference.

    Regards,
    Terje.

    P.S. I find this fascinating also:-

    http://en.wikipedia.org/wiki/Swiss_dinar

    P.P.S. I forgot to mention that SJ won the 10 points. The A$100 coin sells new for about A$1500. As paradoxical as this should seem.

  32. James Farrell
    May 17th, 2006 at 22:35 | #32

    So, when SJ said,

    ‘Another “duhâ€?. The answer is that you sell it at a price greater than $900.’,

    that was the correct answer that earned him ten points ?

    And the paradox is that

    (1) coins stop being minted when their metallic value exceeds their face value, or

    (2) coins become collector’s items when they’re no longer minted, or

    (3) you can make money producing forgeries of collector’s items?

  33. Terje
    May 17th, 2006 at 22:55 | #33

    Yes that was the answer that earned him ten points.

    And the paradox is not any of the points you offered. The paradox is that A$100 = A$1500.

  34. James Farrell
    May 17th, 2006 at 23:12 | #34

    Now I can’t tell whether you’re serious.

  35. SJ
    May 17th, 2006 at 23:29 | #35

    Of course he’s serious. You may recall that I offered a (correct) prediction as to the worth of what he was going to say.

  36. James Farrell
    May 17th, 2006 at 23:45 | #36

    At least he could have awarded ten pieces of eight instead of ten points.

  37. Terje
    May 17th, 2006 at 23:52 | #37

    James it is not an overly serious point (even if SJ insists otherwise). My original phrasology was “as paradoxical as this should seem”. In other words it should seem paradoxical for a A$100 coin to be worth A$1500 but of course there are good reasons why it is the case and in fact there is no paradox at all.

    If there has to be a serious point then it is the one that explains why there is no paradox. And it can be summed up by a comment I made earlier:-

    “the legal exchange ratio and the true market exchange ratio need not coincide.”

  38. Terje
    May 17th, 2006 at 23:59 | #38

    An interesting website relating to the difference between a coins legal worth, metalic worth and market worth:-

    http://www.coinflation.com/

  39. James Farrell
    May 18th, 2006 at 00:10 | #39

    “the legal exchange ratio and the true market exchange ratio need not coincide.�

    But if the $100 is legal tender that only means that a merchant is obliged to accept it at face value, not that a buyer is obliged to spend it.

    Anyway I’ll look at your website tomorrow over my morning coffee .

  40. Terje
    May 18th, 2006 at 00:32 | #40

    Actually legal tender laws don’t compel merchants to accept the coin either. They only compel creditors to accept it as a payment for debt. A merchant is free to insist on whatever form of payment they prefer because the transaction does not involve the settlement of a debt.

    From the RBA website:-

    http://www.rba.gov.au/CurrencyNotes/LegalFrameWork/legal_tender.html

    It is the Bank’s understanding that, although Australian currency has legal tender status, it does not necessarily have to be used in transactions. Under the legal tender provisions of the Currency Act 1965 and the Reserve Bank Act 1959, refusal to accept payment in legal tender notes and coins is not unlawful. This is the case even where an existing debt is involved. However, a refusal to accept legal tender in payment of an existing debt, where no other means of payment/settlement has been specified in advance, conceivably could have consequences in legal proceedings, i.e. the creditor may be unable to enforce payment in any other form.

  41. SJ
    May 18th, 2006 at 00:44 | #41

    The full quote is:

    LEGAL TENDER

    The Concise Oxford Dictionary defines legal tender as “currency that cannot legally be refused in payment of debt (usually up to a limited amount for baser coins, etc.)”.

    It is the Bank’s understanding that, although Australian currency has legal tender status, it does not necessarily have to be used in transactions. Under the legal tender provisions of the Currency Act 1965 and the Reserve Bank Act 1959, refusal to accept payment in legal tender notes and coins is not unlawful. This is the case even where an existing debt is involved. However, a refusal to accept legal tender in payment of an existing debt, where no other means of payment/settlement has been specified in advance, conceivably could have consequences in legal proceedings, i.e. the creditor may be unable to enforce payment in any other form.

    It appears that the provider of goods or services is at liberty to set the commercial terms upon which payment will take place before the “contract” is entered into. For example, some toll collection points indicate by signs that they will not accept low denomination coins. If a provider of goods or services specifies other means of payment prior to the contract, then there is usually no obligation for legal tender to be accepted as payment.

    James is correct for present purposes, and your quibble that there might be some exceptions is irrelevant.

  42. May 18th, 2006 at 21:40 | #42

    SJ,

    If you read carefully you would have seen that I was expanding on James point not attempting to disagree with the substance of it. You seem to be blinded by your own intellectual hostility. Which is a pity.

    Regards,
    Terje.

  43. SJ
    May 18th, 2006 at 22:20 | #43

    Terje, I’m just calling it as I see it. If you really don’t think that what you said should be read as an attempt to disagree, I’d suggest that you have serious problems with the English language.

  44. May 18th, 2006 at 23:44 | #44

    SJ,

    Yes I suspect that you do call it as you “see it”. Which is what led me to assert that you seem to be “blind”.

    So that I can be really clear and hopefully we can move forward from this point the key part of what James said on “May 18th, 2006 at 12:10 am” was:-

    not that a buyer is obliged to spend it.

    I did not refute this point and I don’t refute it. I agree with it. If you have a A$100 gold coin you are not obliged to spend it. In the USA since the 1930s you may be forced to forfeit gold coins (as happened recently) however in Australia there is no such law (that I am aware of).

    I endeavoured to add to James point by correcting his subordinant assertion that implied that merchants were forced by the law to accept such a coin. They are not. And the RBA quote I gave was sufficient to justify such a claim and the section I quoted in isolation did not suffer from any contextural distortion. I am happy that you quoted the full text but it really adds nothing substantial that was not in the section I had already quoted.

    You are of course free to suggest that I have serious problems with the english language. However I don’t believe it is at all accurate (not withstanding my frequent failure to spell correctly).

    Regards,
    Terje.

    P.S. Further to my statement on “May 16th, 2006 at 11:43 pm” you have not clarified what it is about hyper-inflation in Zimbabwe that requires a response.

  45. SJ
    May 19th, 2006 at 00:00 | #45

    Terje, perhaps the best way to clear this up is to ask: what’s your overall point? Forget the quibbles, what exactly is the point you were trying to make in this thread?

  46. James Farrell
    May 19th, 2006 at 00:32 | #46

    This is getting a bit out of hand.

    Terje repeated his statement that

    “the legal exchange ratio and the true market exchange ratio need not coincide.â€?

    which again suggests that there some is puzzle or inconsistency that needs sorting out. I was just trying to make the point again that there isn’t any puzzle. The coin’s market value is what people are prepared to pay for it. The face value is just an accident of history and is irrelevant – calling it a ‘legal value’ is misleading, because the law is not imposing any obligation that conflicts with (or has the potential conflict with) any voluntary exchange.

    If the coin’s owner is not legally guaranteed the right to use it as payment for groceries, but rather only to repay debt, this further weakens a point that was already totally irrelevant — since the shopkeeper would hardly refuse it anyway, while owner would have no desire to use it for either of those purposes.

  47. May 19th, 2006 at 09:43 | #47

    All I want to know is: if I take my gold $100 coin and use it to buy stuff to make a cheesecake to the value of $15, will I get $85 or $885 change? :)

  48. May 19th, 2006 at 11:40 | #48

    Alpaca,
    At Coles, $85. At a licensed gold dealer, $885. Not many gold dealers sell Philadelphia cheese and granita biscuits, though.
    The interesting question is what happens when you try to pay your tax bill with it. Will the government accept its value as legal tender or its intrinsic value? My guess would be its legal tender value.

  49. May 19th, 2006 at 11:48 | #49

    As for the idea that debts need only be paid in legal tender, consider corn rents (first brought in during the era of New World silver inflation). Where a corn rent was in place, the tenant could be obliged to pay a proportion of the rent in kind assessed at a statutory price.

  50. May 19th, 2006 at 11:57 | #50

    PML,
    All that does is to make corn legal tender for rent purposes.
    .
    Even coins are not always legal tender. In Australia, for example, copper coins (remember them?) were only ever legal tender up to the amount of $2 (a hangover from the days of the old Pound – they were legal tender up to 1 Pound) and silver coins are only legal tender up to (if I remember correctly) $5. I am not sure on ‘gold’ coins ($1 and $2). The only money that is legal tender, for all debts public and private, (to use the phrase on US notes) is the folding stuff.

  51. May 19th, 2006 at 12:48 | #51

    No – not all rents became corn rents. It varied according to the specifics of the rent agreement and the enabling legislation. What I was trying to show was that the concept “legal tender” wasn’t hard and fast but admitted of exceptions and variations. (“Peppercorn rents” were an extreme case.)

    The point isn’t that corn was acceptable as part payment of rent, which would have been an option for the tenant. It’s that otherwise legal tender was not acceptable for all debt payments, sometimes giving the landlord an option to refuse cash. (“Peppercorn rents” didn’t offer either party an option.)

    There’s also the history of tithes, which weren’t commuted for cash payments until quite late (e.g. the local vicar in England could not require cash until the late 19th century – tithes in Palestine were commuted as late as the mandate period).

  52. Ernestine Gross
    May 19th, 2006 at 15:30 | #52

    And there are ‘debt-equity’ swapps. I don’t know when they have been first used but I do know they have been used during my time. Not all of the contemporary conversions involved contracts where a debt-equity swapp was written in the original debt-contract.

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