MONETARY POLICY UPDATE

By Clifford F. Thies

From the Idaho Statesman:

Athol Republican Rep. Phil Hart, the bill's sponsor, wanted to encourage the use of an alternative currency he believes is more stable than the U.S. dollar. He also sought to stimulate the state's languishing silver mining industry with tax breaks to entice a company to build an ore processing plant in the state.

O.K., so the proposal didn’t even make it out of committee. Nevertheless, this year, representative Hart (photo) actually proposed that his state begin issuing silver coins – err, I mean “medallions” – that taxpayers could use to pay their taxes and other dues to the state.

America has a long and varied history with state- and privately-issued coins and paper money. This includes “trade tokens,” issued as change, when government-minted coins were in short supply, and “coal mining scrip,” issued in advance of pay in isolated coal-mining towns which could be used at the company store. Traditionally, these, shall I say “supplemental” forms of money enjoyed only limited circulation relative to government-issued money and bank deposits (and, a long time ago, bank notes). They mostly filled in gaps in the money supply. But, from time to time, they were of macroeconomic importance.

From 1857 to 1907, whenever the banks of the country were temporarily closed due to a financial panic, they, through their “clearing house associations,” issued emergency money, backed by their mutual guarantee. The emergency money kept the economy from totally succumbing to the financial panic and, so, prior to the 1930s, we never experienced anything so much as half as bad as the Great Depression. Then, when we were hit by the Stock Market Crash of 1929, the still new Federal Reserve System said, hey, we’re the ones who are supposed to control the money supply, not you private banks. And, guess what, we wound up with the most awful depression we have ever known.

Nowadays, the problems we face are not merely a moribund economy. We also have the problem of a tremendous budget deficit, humongous debt-guarantees, and ginormous unfunded entitlement obligations. Even Burger King’s Steakhouse Burger pales in comparison. So, the idea of private money is not merely to fill in a gap left by the government’s money system, but to gain some protection against the risk of inflation.

Of course, there were many practical problems with the state of Idaho issuing coins. For one thing, what famous Idahoan (that’s what they’re called) would you put on them? So, I googled famous Idahoans and came up with one: J. R. Simplot, the “French Fry King.”

Dr. Thies is a professor of economics at Shenandoah Univ. in Virginia