Sound Money Rings True

I remember when gasoline cost $0.229 per gallon.  My parents bought their first house, a modest, suburban, 4-bedroom tract home, for $22,000.  My father once purchased an Olds 88, used but in excellent condition, for $100.  Of course, wages were similarly lower in the 1960s than they are today, but the point is the inflation caused by the ever-diminishing purchasing power of the US dollar.  Today, you can't buy gas in my neighborhood for less than $2.75; a house not one-half mile from my boyhood home is on the market at $350,000; and my car, a nearly-new mid-sized hatchback, cost me $12,000.

Why?

A quick historical review:

Gold was valued at about $20 per ounce from the 1830s until 1934, when Pres. Roosevelt forbade gold ownership over 5 ounces (via Executive Order 6102).  Congress then set the price at $35 per ounce, where it stayed until 1974, when Congress repealed the limitation.  Its value since then has fluctuated on an upward curve to its present $1350.  Silver's value was less volatile, being the secondary standard, fluctuating around $1 per ounce from the 1790s to the 1970s.  It spiked to $50 in the Hunt brothers' 1980 scheme to corner the market then quickly fell to $4, when the scheme collapsed.  After a slow-but-steady rise lasting almost 20 years, it began a steep rise to its current $28.

Why did this happen?  The price of precious metals reflects the buying power of the US dollar as it compares to those world-recognized standards.  Increasing government regulations, increases in union wage demands that aren't matched by increases in productivity or efficiency, the increasing amount of paper money in circulation, the government's massive debts and total lack of fiscal restraint, and other financial problems combined to drive the dollar's value into the ground.  It is estimated that, since the creation of the Federal Reserve Banks and its fiat money in 1913, the dollar has lost 95% of its value (or buying power), and few diviners of financial futures express any hope in near-term improvement.

So, we have the problem; what is the solution?

A return to the gold standard would be best and quickest.  However, until We the People replace squandering politicians with pinchfist statesmen, they can act independently from the government (what a concept!) and regain a measure of personal control over their finances through the use of sound money.

Legally known as "specie money," and often called "hard money," sound money is coinage in actual precious metals, instead of the Federal Reserve Notes (or fiat notes) that only have value because the government says they do.  It's known as sound money because it has a distinctive, more musical tone than the cupro-nickel alloys in post-1964 US coinage.  It's perfectly legal, even if the federal government hasn't used it for decades.  Article I Section 10 of the US Constitution states, in part:

No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill . . . or Law impairing the Obligation of Contracts. . . .

Suppose, then, that the state passes a law declaring it legal to pay state taxes & fees and to transact general business in sound money.  Suppose coin depositories are organized to hold gold and silver for their clients/members; contracting with merchants to accept sound money in lieu of fiat notes as payment, perhaps via electronic funds transfer (or EFT), just like a bank debit card.  (Let's face it, paying for a $5.00 fast-food meal with 0.185 ounces of silver would be a little inconvenient.)

Crazy you say?  There's a bill being proposed to the Utah Legislature for this session that will create this exact situation.

Impossible, you say!  Quite the opposite, such things are done every day, in slightly different forms.  The manufacturer coupons you use to buy everything from baby formula to car parts are fiat money, they have value only because the manufacturer and the retailer agree that they do, but they are used in place of fiat notes for purchases.  Wikipedia.com (under "local currencies") lists 36 states and territories with communities using local currencies that can be exchanged just like fiat notes.  A few even operate interstate.  The only difference between those currencies and the Utah proposal is the source and the value:

Most existing local currencies are locally printed and must be purchased with fiat notes.  Like Federal Reserve Notes, local currencies have no intrinsic value, and no value at all (except as collectors' items) outside their communities.

Under the Utah proposal, citizens could trade their fiat money for sound money kept in a coin depository, and the ownership of the specie would change hands when purchases are made.  Except for the lack of a VISA or MC logo on the plastic card, a gold or silver sound money card would be indistinguishable from any debit card.  But the real difference would be value.  The money represented by that EFT card would be real, and could be exchanged for actual gold or silver.

Could it work? Would it really be better?

"Competition does nothing if you are already getting the best deal around," says economics professor Michael Thomas.  "The fact that there is both a Burger King and a McDonald's on the corner in my town means that lines are shorter, I get a diversity of options and I have somewhere else to go when McDonald's raises the price of their hamburger. Similarly, when currencies are competitive, you reap the benefit of a more stable currency."

Prof. Thomas continues, "A proposal allowing citizens to contract, pay, and receive payment in gold offers the promise of competition to the Federal Reserve note. Already, gold prices are soaring as people interested in hedging long-term savings against inflation are turning to the precious metal. If nothing else, the ability to pay bills in gold would be a reminder to the Federal Reserve that high inflation will drive people away from using its notes." [1]

The benefits of passing this act could be more varied than its proponents yet realize.  For starters:

1. It is entirely voluntary.  "No person shall have the right to compel any other person to tender or to accept specie currency en lieu of United States dollars . . ." according to Section 2, Paragraph 5 of the proposed bill.  Any businesses or government entity could join the movement, but none will be forced into it.  The proposal also contains specific safeguards for the industry.
2. Pres. Obama recently encouraged Americans to "invent things."  This concept isn't new, but the first State to make this work has the chance of becoming the center of a new industry.  Utah could be the proving ground, the example that others would follow, meaning Utah lawmakers and Utah entrepreneurs become the "pros from Dover," the recognized experts that teach others how to do it.
3. Precious metals are an investment, and some investments rise.  A recent article in Forbes Magazine quotes several pundits who say gold could reach $2,000 or even $3,000 per ounce. [2]  Consumers who buy into sound money with gold at $1500 could realize an increase in buying power, instead of a decrease.
4. "Stick it to the FED," is an idea many Utahns like.  It's not a direct benefit, it adds nothing to Utah's GNP, but anyone using sound money isn't using the Federal Reserve Bank or its fiat money.  They are declaring a brief independence from what many consider an unconstitutional and dangerous organization.

Like everything else in life, this proposal is not perfect.  For example:

1. It's a new business, a new industry.  Investments will be required, and there will be a learning curve.  Mistakes will be made, and some less than honest people will likely try to sneak in a scam or two or three.  Research, education and vigilance will be necessary to make sure it works honestly and to the benefit of all concerned.
2. Not every investment goes up every time; there are no certainties in precious metals any more than in other investments.

Utah is not alone.

Activist Post lauds Rep. Ron Paul (R-TX) for his push in Congress to allow competing currencies:

"The premise of this bill [HR 4248] is that private or public monopolies are naturally destructive to freedom, especially when that monopoly can legally counterfeit the nation's currency with little oversight.  Paul says during his floor statement to introduce the bill that the Federal Reserve is a 'dangerous organization' that 'does not allow competition because they know they can't compete'."

Paul's bill would "essentially do three things: 1) repeal legal tender laws to remove the monopoly control of the Federal Reserve, 2) legalize private mints to issue coins to be controlled by anti-fraud and anti-counterfeit laws and, 3) remove taxes from precious metal coins to ensure fair competition among new currencies." [3]

According to Talking Points Memo, Utah is among almost a dozen states considering sound money legislation.  Colorado, Georgia, Idaho, Indiana, Montana, Missouri, New Hampshire, South Carolina and Washington have considered the measures, though none have passed yet.  The website <www.constitutionaltender.com> tracks and promotes these measures and provides, "a bill template that can be introduced in every state legislature in the nation, returning each of them to adherence to the United States Constitution's actual legal tender provisions."  The Memo concludes, "This idea of using gold and silver as currency has recently enjoyed a bit of a renaissance — Fox Business' Stuart Varney and Andrew Napolitano, for example, recently debated whether the country should return to using gold as everyday currency." [4]

Sound money was the standard, in fact, the only standard, for millennia.  The economic history of America during the 20th Century is a history of increasing government involvement and decreasing consumer power.  People across the nation, and in other countries, are moving away from national currencies and moving to alternatives.

It is time for Utah to have this debate, and, I hope the legislature will agree that the Utah pioneer ingenuity which gave the world stereophonic sound, television, word processing software, the department store, the repeating rifle, synthetic diamonds and the artificial heart (among so many other things) will give the Union its first working sound money system.

For more information, including the text of the draft legislation, visit the Utah Sound Money website, http://utahsoundmoney.org/home, then contact your state senator and state representative and ask them to support Utah's financial independence.

Thanks for listening!  Tune in next week for another rant.

[1] Michael Thomas, "Give the dollar some competition," Deseret Morning News, 21 January 2011;
<www.deseretnews.com/article/700102588/Give-the-dollar-some-competition.html?pg=1>.
[2] Robert Lenzner, "Smart Money Is Long Gold, Silver, Copper, Oil and Zero Coupon Treasuries," Forbes Magazine; 23 December 2010; <blogs.forbes.com/robertlenzner/2010/12/23/smart-money-is-long-gold-silver-copper-oil-and-zero-coupon-treasuries/?boxes=Homepagechannels>.
[3] Eric Blair, "Monetary Revolution Begins with Competing Currencies," Activist Post, 27 December 2010; <www.activistpost.com/2010/12/monetary-revolution-begins-with.html>.
[4] Jillian Rayfield, "At Least 10 States Have Introduced Gold Coins-As-Currency Bills," Talking Points Memo, January 5, 2011; <www.tpmdc.talkingpointsmemo.com/2011/01/at-least-10-states-have-introduced-gold-coins-as-currency-bills.php>.

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