In the nineteenth century the U.S. economy was based on currency backed by gold and silver. Any individual could deposit precious metals in private banks, which would then distribute paper bank notes denominated in ounces of gold or silver. Currency was thus a product of the free market and would fluctuate in value according to the supply and demand of its commodity base.
In 1913, the U.S. government created the Federal Reserve and effectively nationalized money production. For two decades, the U.S. dollar remained tied to gold, but during the Great Depression President Roosevelt severed the link and converted the dollar into a fiat currency, backed only by the federal government’s promise of value. As a result, the Fed could control the currency industry by controlling interest rates and money production. A tenuous tie to gold was reestablished in 1944 but broken fully in 1971.
Recently several states have proposed making gold and silver legal tender. In 2011, Utah became the first state to take the leap. Proposals also have been introduced in sixteen other states, including Colorado, Georgia, Iowa, South Carolina, and Tennessee.
Opponents of such proposals claim the market cannot be trusted to produce and regulate currency reliably. Keynesian and monetarist economists argue for fiat currencies so the government can manipulate the money supply in pursuit of economic stability. They argue nineteenth century banking panics and deflationary episodes prove commodity-based currencies are inherently unstable. They also express concerns that declaring gold and silver legal tender could undermine the legitimacy of the paper dollar and thereby harm the economy.
Proponents of the proposals argue the Fed has failed to conduct a responsible monetary policy. Under its management the dollar has lost more than 95 percent of its value due to inflation, contributing to numerous economic recessions. The dollar has lost 82 percent of its value just since 1971, when President Richard Nixon made it a pure fiat currency, and the recent recession was the most severe since the Great Depression. The pre-Fed era experienced more growth, fewer crashes, and less severe recessions.
Permitting gold and silver to compete with the dollar will enable consumers to choose the best currency for their needs. This will lead to a more stable currency, higher savings, and higher economic growth. The government should legalize alternative currencies such as gold and silver at the state and federal levels.
The following documents provide additional information about gold and silver currency and their effects.
Utah Legislature Goes for Gold, Silver as Currency Options
Stephen Dinan of the Washington Times reports on Utah’s decision to declare gold and silver legal tender. Investors in Utah see the move as a hedge against the dollar and possible inflation as a result of the Fed’s quantitative easing. The act’s chief sponsor said the policy will strengthen Utah’s business climate.
Taxing Gold and Silver Investments
Tradersgame.com explains how gold and silver are taxed in the United States. The IRS categorizes precious metals as “collectibles,” which means purchasing gold or silver qualifies as an investment and is subject to the capital gains tax. Thus an individual attempting to use gold as a currency today would be forced to pay a substantial tax (usually 10–15 percent depending upon the state) if gold increased in value between receiving and spending the metal. No currency is viable if it is subject to transaction taxes, given the frequency of currency transfers. Declaring precious metals to be legal tender would exempt gold and silver from the capital gains tax and allow them to function as currency.
The Gold Standard Myths and Lies
Robert Murphy of the Mises Institute challenges many of the common views of the gold standard. Murphy notes opposition to the gold standard is not ubiquitous among professional economists. The Austrian School of Economics has always recognized currency competition (which often takes the form of a market gold standard) as superior to central banking. Murphy denies the gold standard caused the pre-fiat currency economic panics such as the Great Depression, and he notes economic crashes became far worse after the abandonment of gold.
Is Gold the New Black? States Look to Bring Gold Standard Back
ABC News reporter Huma Khan notes the small but rising support for alternative currencies in the United States. Former Texas Rep. Ron Paul (R) was the best-known supporter in the government, but currency competition has become a popular topic in Tea Party circles. Even some analysts in the private financial sector and the World Bank have begun to consider the efficacy of the gold standard in light of recent currency volatility.
Private Currency Competition Is the Monetary Answer
Wendy Milling of Forbes advocates currency competition. She examines the arguments of F.A. Hayek for currency competition, including both commodity-backed and fiat varieties. Such competition would eliminate the errors made by the Fed today in attempting to smooth out monetary volatility. In addition, Milling writes, the value of monetary stability itself could be determined by market forces as more and less stable forms of money compete against each other.
The Rise and Fall of the Gold Standard in the United States
Banking expert George Selgin examines the history of gold-backed money in the United States. Selgin starts with the establishment of the bimetallic standard in the 1700s and follows the state’s management of money up through the 1970s and the end of Bretton Woods. He also documents the influence of foreign monetary standards, such as Europe’s abandonment of silver in the 1870s and abandonment of gold during World War I, on U.S. decisions regarding the gold standard.
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If you have any questions about this issue or The Heartland Institute, contact Heartland Senior Policy Analyst Matthew Glans at 312-377-4000 or [email protected].