Moving towards Sound Money

Wednesday, June 29, 2011

The New York Sun endorses a recently-introduced bill that would prevent gold and silver coins that have been declared legal tender from being taxed in the event of an increase in their fiat-money value. This is intriguing, but the bill offers no challenge to the government's ability to forbid the use of gold and silver as money in certain circumstances. (That is what would ultimately be needed to impose fiscal restraint on the state.) I am sure the government could still find a way to tax such coins, but this bill would, as I see it, make it much more difficult to do so, so I offer my very qualified support for it on those grounds.

I find the impetus for this bill much more interesting and encouraging than the bill itself:

... Utah was the first state in our modern time to exercise its constitutional power to make gold and silver coins legal tender. It did so earlier this year, ahead of as many as a dozen states that are at various stages of looking in to the question of how to protect themselves against the collapse of the United States dollars that are being issued by the Federal Reserve. They are all being energized by the fact that the value of the dollar has collapsed to barely a fifth of what it was, if that, at the start of the 21st century. [link added]
My misgivings aside, I think the bill would help us move sightly towards using actual money again. More important, I think, the bill and the actions of the various states mentioned above are an encouraging sign that the idea of abandoning fiat money is becoming more widely regarded as worthy of serious consideration. If we are to adopt a gold standard without enduring a very ugly economic collapse along the way, the pendulum of public opinion will need to swing much further before anyone will successfully challenge the idea that the government should be in charge of the currency. This is, perhaps, a sign that that swing has started.

-- CAV


Jennifer Snow said...

Gus, I read that Wikipedia entry you linked to, could you give me a hand in determining whether I've understood it properly:

According to the Federal Statute, gold and silver coins are not "legal tender" if they're proffered as payment for debts in a jurisdiction that doesn't assign a fiat value to said gold and silver coins. So if the gold and silver coins are valued in a commodity fashion (by weight, say), they're not legal tender. But if they're stamped with some kind of official "this is how much this coin is worth" thing, and the jurisdiction recognizes that stamp, it IS legal tender? (Even if the stamp bears absolutely no connection to the weight of the coin and it's actual commodity value.)

So what this basically amounts to is the declaration that ALL money must be fiat no matter what it's made of--it's the *stamp* that makes it money, not its value as a commodity. Do I have that right?

This of course would act to *discourage* the use of anything that has actual commodity value (e.g. gold) as money because, depending on the fluctuations of commodity values, your gold coins, melted down, may be worth way, way more than the stamp says they are. Or less, even. Do I have that correct?

Sorry, but I don't really know a whole lot about the details of this subject, so I want to be sure I'm understanding it.

Gus Van Horn said...

Yes, you do understand this properly, and you name the crucial flaw in this law (i.e., that the gold or silver has to be stamped.

That said, if some states do stamps coins in this way, it would, as far as I can tell, render them exempt from commodity taxation.

It's silly mumbo-jumbo, I know, but it's an accident of the law that might being gold back into circulation in some states -- at least until and unless someone pulls an FDR.

Whatever very limited good this law might accomplish will be undone without a more principled case being made for real money, and, ultimately, better laws based on such principles.

Jennifer Snow said...

Yes, but if some states do stamp coins in this way, with inflation the way it is the coins would very shortly be worth more by weight than they are by face value, and people would just melt them down so they'd go out of circulation again. As it stands, it's really a Catch 22 that doesn't *actually* allow for people to bypass the "legal tender" legislation without either breaking the law or throwing money away.

I think it might be useful for arguing against this sort of thing to understand how this whole "legal tender" business might have arisen in the first place, and while I was trying to digest it I came up with a thought on the matter.

The idea of "Legal Tender" does seem intended to solve a legitimate difficulty that must be resolved if people are going to trade rationally with each other on a large scale: what happens if someone just plain won't accept something as payment? If you're trading in commodities, for instance, say I've grown a large quantity of wheat, and I want to trade it for the other things I need to live. Being an intelligent person, I first made sure that there was a market for my wheat--I can trade it to someone in a nearby town for a commodity they produce.

So far so good. However, I don't just need the commodity that person produces. So buying and selling becomes an enormous and hugely complicated swap meet as I try to find and obtain things that other people will accept in non-bulk amounts the non-bulk goods I need. It'd be a disorganized mess. Clearly swapping *all* commodities directly in this way would be a serious detriment to division-of-labor.

So you need a commodity that EVERYONE will accept in the certain knowledge that they will later be able to swap it for pretty much ANYTHING, or at least close enough that it won't be a huge hassle in order to do it. Now, since this is a totally rational solution to the problem that benefits everyone, your standard free-market person would say "well obviously some enterprising people would create a commodity clearinghouse system that would enable this to work". That system being banks, who would very rapidly find it in their interest to settle on swap commodities that they could all use, which would naturally be gold or silver or platinum due to the qualities of those metals.

There would of course be a shakedown period while all of this was getting organized, and no doubt some confusion if this bank or that bank decided to use silver instead of gold or didn't want to accept platinum or whatever.

So in steps some well-meaning government official who says, "this is completely unacceptable. My little old granny took her silver notes to the bank nearest her house and they wouldn't take it!" (completely ignoring the fact that she *could* go to the bank further down the street and work up a deal there). "We've got to *require* people to accept those notes!"

Thus, you get "legal tender" laws, which do seem to be complicating the issue of going back to gold.

I don't recall anyone addressing this issue in Objectivist literature anywhere. So it might be a useful note to add to your arsenal if anyone ever brings up this "legal tender" thing as a reason why you *can't* use a commodity as currency. Does that make sense to you, Gus?

Gus Van Horn said...

Gah. Pressed for time...

I agree with your first paragraph -- and that further dampens what little enthusiasm I was able to muster for that bill. I also agree that understanding the rationale (or pretext?) for legal tender laws could be useful for intellectual activism.

I have to agree that legal tender laws seem intended to solve a difficulty, but am skeptical that such a difficulty is even really that plausible: Only an isolated crank (who would quickly suffer from becoming known as such) would refuse to trade for something like gold.

Jennifer Snow said...

Sorry, and thanks for replying. And I agree about the isolated crank, but a lot of people just don't seem to understand that there's negative and positive feedback in place to make these systems self-correcting.

And, well, if it's the government itself finding things a bit inconvenient (which seems to be the way the actual legal tender thing got started, during the Civil War), too freakin' bad. Wasn't the Constitution written with the purpose of making government rather an inconvenient practice in the hopes of preventing too much of the stuff from accumulating?

Gus Van Horn said...

Not too much, so much as the wrong kind.

Your comments have me thinking now that, at best, this bill might get the idea of a gold standard "out there" a little more, although not necessarily in a congenial context -- so maybe not even in the way we'd want.