Forbes -- Discussions about the U.S. going back to the “gold standard” are floating in the media and with politicians. Gold is trading at historically high levels fueled in part by inflation fears and recent actions of the Federal Reserve.
Precious metal ETFs like the SPDR Gold Trust (GLD) or the iShares Silver Trust (SLV) have seen dramatic annualized gains, as have mining ETFs, such as the Market Vectors Gold Miner ETF (GDX) and the Global X Silver Miners (SIL).
Aside from the stunning investment gains, what substance is there behind gold standard chatter?
First, if we seriously believe we need to return to a gold standard, which one are we supposed to go back to? And, will this really help? Economists agree that of all the gold standard adaptations, the pre-1914 classical gold standard worked best: when the price of an ounce of gold was tied to a specific amount in a nation’s currency.
This was the case in Britain, where the Pound Sterling was tied to gold as early as the eighteenth century. Since Britain was the world’s center of finance at the time, it was in the best interest of other nations to tie their currencies to a specific weight of gold as well, if they wanted to do business with Britain.
Trade flourished with this free market international monetary standard. When it came time to settle accounts, nations settled in gold. It was the international currency. If one country started to inflate its currency, the natural effect would be that other countries would be drawing down the inflating country’s gold reserve. It would compel the offending country to turn off the printing press or face the loss of its gold reserve or go off the gold standard altogether and lose business with Britian.
No doubt the pre-1914 classical gold standard is the gold standard to invoke, if we can, but even if the U.S. were to tie the dollar to a specific weight of gold, how would we get the rest of the world to follow? And even if they do, would we blow up the dollar in the process? The classical gold standard seems to have worked because virtually all nations adopted it and settlements between nations seemed to have been one of the big factors in keeping them from debasing their own currencies. The pre-1914 gold standard would require a lot of international cooperation to get going again.
The new Utah currency law sidesteps this international problem while providing State residents with a choice that could avert a disaster in local trade for products and services, and it accomplishes this swiftly and safely. The Utah currency law does not fix the dollar to any weight of gold or silver. Each would stand as a separate currency. If the dollar starts to inflate it won’t affect the precious metals since there is no direct tie. This also means that inflation of the dollar now has a check in the form of State monetary competition. Instead of a foreign currency tied to gold as a check, we have a check against federal monetary abuse by the States.
Utah’s currency law won’t require additional nations to get involved to make it work since the new currency is a competitor to the dollar on the dollar’s own ground. If the Federal Reserve and the Treasury inflate the paper dollar beyond usability, citizens will simply shift to the precious metal legal tender alternative. Life goes on. Moreover, trade goes on. Having an alternative to our paper dollar when risks seem to be growing almost daily is reassuring.
Also, either the dollar or the precious metal can be redeemed at any time for one another at the market price anywhere in the state. This puts them in competition with one another without either replacing the other, except as freely used by the public. There will be no massive currency changeover or mind boggling convoluted monetary issues.
You want to spend paper dollars? Fine. You want to spend precious metals? Fine. Transactions in gold or silver can occur using a credit card. Just hand your card to the store clerk like you do now. Technology would allow for as smooth and efficient transaction handling as we have right now with dollars.
If this concept is adopted by the other States -- and at least twelve are considering it right now – over time it would make precious metal coins more stable in relation to anything we buy. Gold and silver prices would begin to stabilize in relation to goods and services. Merchants could begin pricing in both dollars and the precious metals. Americans would become arbitrators between the dollar and the metals by just living their lives and buying and selling on a day-to-day basis.
Moreover, the Utah currency is a 100% backed. Redeemability is 100% at any time because there is nothing to redeem to. Unlike the gold standards prior to 1971, when the public was actually prohibited from redeeming paper dollars for precious metal, this currency is the precious metal. There is no issuance of paper currency tied, or as it were, untied to gold or silver somewhere in a vault.
Finally, the new Utah currency law comports with the U.S. Constitution, whose framers authorized the states to make gold and silver coins legal tender, as well as authorized the federal government to do the same plus issue paper money. The door was left open for paper currency in the event of a national crisis, such as the War for Independence.
Authorizing gold or silver and paper currency as legal tender within states creates balance between state and federal monetary authority, note Larry Hilton, a consulting attorney to Utah gold currency proponents, with Rich Danker, economics director for the Washington-based American Principles in Action. Having states authorize gold and silver coins in addition to the national government actually fits more closely the intent of the founders than money solely being issued by the Federal Reserve.
It’s hard finding any significant fault with the direction Utah is taking with the passage of this law, which is why other States are considering following Utah. Congress is now considering complementary legislation supporting Utah’s move with the DeMint/Lee bill to remove federal taxes on gold and silver legal tender.
Sometimes big things start with little beginnings. This might be one of them.