Preparations Being Made For Using Gold And Silver In Utah

Now that the Utah Legal Tender Act of 2011 is law, some preparations are being made to use gold and silver as money. Craig Franco, a coin dealer, is making arrangements with a bank to set up a debit system so people can use gold and silver to make purchases. The Old Glory Mint, in Spanish Fork, Utah, has issued a commemorative silver round featuring a depiction of the Mormon "Miracle of the Seagulls."

So far, there hasn't been much of a rush to use gold or silver. Part of the reason is the presence of the federal capital gains tax on gold and silver.

But here in Farr West, about 40 miles north of Salt Lake City, there is at least some precedent for such transactions.

Decades ago, the rambling Smith and Edwards store, a kind of giant 7-Eleven from the Old West that sells everything from survival kits to sporting goods and copies of the Constitution, had a special sale, offering a very favorable rate if people made purchases with “junk silver” dollars and half dollars. In the 1980s, the store sold a man a $1,200 air compressor for a little less than 4 ounces of gold, recalled Bert Smith, one of the owners, who is now 91.

Mr. Smith said that he liked the new law, and that he was ready to accept silver and gold. But he does not expect to see much brought to his registers.

“I don’t suppose there’s going to be a big run on it,” Mr. Smith said, “because people are going to hang on to their gold and silver more than ever.”

And, of course, the federal capital gains tax encourages them to do so.

Four Reasons Why Gold Makes For Good Collateral

On the heels of the European Parliament’s Committee on Economic and Monetary Affairs' unanimous decision to allow central counterparties to use gold as collateral, Commodity Online has published an article giving four reasons why they made the right decision. Those reasons are:

1. Unlike sovereign paper, gold has no credit risk attached to it. As Doug Casey is fond of saying, it's the only (money-related) asset that is not someone else's liability.
2. Pricing is transparent. Most transactions are done in over-the-counter markets, and trading is done almost twenty-four hours in every weekday. From Monday to Friday, various market makers are expected to put up bids and asks throughout the day.
3. There's a deep and liquid market in gold. The total gold stock has been estimated by metal consulting firm GFMS to be 166,600 tonnes: at current prices, that's a value of about $8.2 trillion. About 38% of that gold is in private hands and the official sector.
   
4. Other uses for gold, particularly jewelry, gives a diverse and robust character to the demand for it.

As the end of the piece points out:

Market demand for gold to be used as a high quality liquid asset and as collateral has been building for some time. In late 2010, ICE Clear Europe, a leading European derivatives clearing house, became the first clearing house in Europe to accept gold as collateral.

In February 2011, JP Morgan became the first bank to accept gold bullion as collateral via its tri-party collateral management arm....

So, it's no wonder that the committee approved.

Gold Standard By 2014?

In a wide-ranging interview with The Gold Report, Ian Gordon - a user of long-wave analysis as pioneered by Nikolai Kondratiev - predicts that the world will go back to the gold standard by 2014. He sees 2011 as a danger year, like 1931 proved to be. Only this time, instead of a major bank failure resulting in the world going off the gold standard, a major crisis - likely with the Euro - will induce the world to go back on it.

In 2011, we see parallels to 1931 because we're 80 years beyond that time. We believe 20-year cycles are important anniversaries, and this is just four twenties. In 1931, the whole world monetary system effectively collapsed. We've been long anticipating a collapse in the current world monetary system based on the collapse of 1931. However, we see that the current collapse is going to have far more significant and devastating implications than the collapse between 1931 and 1933 simply because it's the collapse of the paper-money system now.

Essentially, paper money is credit money. When paper money fails, credit fails. Effectively, the economy will fail on credit....

I'm pretty sure that we will go back to a gold standard system. Paper-money systems have never survived throughout history. Generally, they've been set around a one-country experiment. And when those have failed, as in France after John Law's paper-money scheme failed in 1720 or the Assignat failed in about 1798, there was tremendous upheaval. And, following these failures, the country resumed gold as the backing for its currency.

So, I think we have to go back to something like that because, in essence, gold enforces discipline on governments. We've seen a complete lack of discipline in the paper-money system that's been ongoing since the 1931 collapse of the world monetary system. Paper-money printing has just gotten out of control; and now, parallel to the paper-money printing is the debt. They go hand in hand.

He says he's been recommending full exposure in gold since 2001, and he recommends full exposure now.

Utah Gold Depository Opens On Heels Of Gold-Standard Law

Now that Utah has recognized gold and silver as legal tender in the state, entrepreneur Craig Franco is opening up the Utah Gold and Silver Depository to tap in to the anticipated demand to use gold and silver as money.

The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings.

He plans to open for business June 1, likely the first of its kind in the country.

"Because we're dealing with something so forward thinking, I expect a wait-and-see attitude," Franco said. "Once the depository is executed and transactions can occur, then I think people will move into the marketplace."

The Minnesota legislature has already set up a committee to study the issue, and there's a push to have the U.S. government drop the caital-gains tax on gold and silver.


The latter would go a long way to facilitating the use of gold and silver as money, as capital-gains taxes inhibit the circulation (buying and selling) of the metals. Should the feds do so, gold and silver tender will take off.

Gold Currency For Zimbabwe Proposal Has Legs, But Long Way To Go

Reserve Bank of Zimbabwe governor Gideon Gono stirred up a lot of discussion, and some support, for his proposal to resurrect the Zimbabwean dollar as a gold-backed currency. There's also some opposition:

An economist with a financial institution shot down the idea of introducing a gold-backed Zimbabwe dollar as an ambitious task saying the country does not have any stock piles.

“The country does not have any reserves, the only gold to talk about are untamed gold fields with no exact figures of deposits. The production side, if being optimistic for 2011, could just total 18 000kgs which translates to about $600 million dollars,” he said.

So far, the Reserve Bank is not stockpiling any gold in anticipation of Gov. Gono's proposal being accepted.


One proposal to meet the shortfall has already been floated by Gov. Gono: selling diamonds for gold.

The Zimbabwean dollar is effectively in limbo now; several currencies, including the South African rand and the U.S. dollar, are now used. One possibility for a gold dollar would be for the Zimbabwean central bank (once it gets its hands on some gold) to issue the number of Zimbabwean dollars that would match the gold cover, stop there, and let Zimbabweans keep using foreign currencies if they so choose. That way, the gold Zim could be grown over the number of years needed for the Zimbabwean economy without a money shortage being caused. In Zimbabwe's case, a legal-tender law would restrict the money supply too much if the gold Zim gets off the ground.

Unfortunately, Zimbabwe doesn't have a stable banking sector with a tradition of secrecy like the Cayman Islands do. Had they, the Zimbabwean economy could get a huge boost from depositors all over the world who want to stash their funds in a gold-backed currency.

South Carolina Legislature Follows In Utah's Wake, Making For Trend

As explained in an ABC News report by Huma Kahn, the South Carolina legislature is approaching the same bridge Utah already crossed by proposing a bill that would make U.S.-minted gold and silver coins legal tender in the state. Gold standard restoration is a movement whose time has come; it's been energized by widespread distrust of the Federal Reserve and, more broadly, distrust of the federal government's monetary policy. That's why the action has been taking place at the states, although it's been facilitated by Tea Party candidates running and winning in state elections. Restoration of the gold standard was considered in the 1980s at the federal level, when Ronald Reagan was President, but it came to naught.

"I think they're sending a message that reflects the opinion of the people that elected them," said Gerald P. O'Driscoll Jr., a former vice president of the Federal Reserve Bank in Dallas and a senior fellow at the Cato Institute. "By doing it at the state level, it's kind of trying to push, force the federal government to pay attention to this. Let's call it a symbolic act of sending a message."...

"There's a growing realization that the system does not work. The rest of the world is increasingly angry, upset at that policy because it has huge effects in other countries, mostly in the developing world," O'Driscoll said. "Both domestically and internationally, there's a sense there is a need for a new monetary system, but I don't think there has been any consensus or coalescing on a particular idea, including gold."

Peter Morici is quoted as saying that the gold standard will come unless the U.S. government gets its fiscal and monetary house in order. Gold is more trustworthy than, say, the renminbi.


If you're interested in the gold standard, you should go to The Gold Standard Now. It's not only an advocacy Site, but it's also a good resource.

Zimbabwe-Born Entrepreneur Endorses Zimbabwe Gold Standard

Gilbert Muponda now lives in North America, but he was born in Zimbabwe. He thinks the idea of backing the Zimbabwean dollar is great. Now that the allowance of multiple currencies has stabilized the Zimbabwean economy, he argues, a gold-backed currency will lead to growth. Moreover, it will lower interest rates considerably and get around the blockage to international capital markets that Zimbabwe has had to endure.

Zimbabwe has systematically been excluded from the international credit system, specifically because of the ZIDERA Act passed by the United States in 2001. The Act makes it illegal for any US national or entity do transactions with certain companies or individuals in Zimbabwe. This affects various institutions such as the World Bank, IMF, IFC and ADB where US representatives cannot vote in favour of any credit to Zimbabwe. This creates a huge political risk premium which makes international banks hesitant to grant lines of credit to Zimbabwe and Zimbabwean institutions.

This situation effectively blocks these institutions from doing any meaningful business with Zimbabwe as the country’s political risk is magnified. This lack of access to international credit markets has become very clear throughout the economy with banks failing to grant any medium to long term loans. This is partly causing the mini-financial crisis rocking Zimbabwe’s banks as they fail to access reasonably-priced funding.

A gold-backed currency, Muponda suggests, will attract international loan capital because gold backing would provide assurance that the capital won't depreciate.


Actually, Zimbabwe seems a fitting country for a gold standard. Not only does it have a thriving gold industry, but also its citizens have experienced the ravages of inflation fully. They're ready for gold in a way that people inhabiting other countries aren't as of yet. Moreover, a gold-backed Zimbawean dollar would make for a national currrency that isn't subject to the risk of inflation.

A Counterintuitive Convert: Gold Standard Supported By Governor Of Central Bak Of Zimbabwe

Yes, Zimbabwe: the same country whose name is synonymous with hyperinflation in our times. The Zimbabwean central bank ended up destroying the currency outright; the U.S. dollar became the de facto money in the country.

Now, in part because of worries about the greenback, the central bank's Governor, Dr. Gideon Gono, is arguing for a new Zimbabwean currency backed by gold.

“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

“We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”

Gono said the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries to leading to a resistance of the green back as a base currency.

“The events of the 2008 Global Financial Crisis demand a new approach to self reliance and a stable mineral-backed currency and to me, Gold has proven over the years that it is a stable and most desired precious metal,” Gono said.

“Zimbabwe is sitting on trillions worth of gold-reserves and it is time we start thinking outside the box, for our survival and prosperity.”

Granted that it's easy to scoff at this proposal, as many commenters did over at the Free Republic, but there's a good reason why the gold standard would be a good fit for Zimbabwe. Zimbabweans, including the authorities, have learned the dangers of fiat money the hard way. Offtimes, we don't mend our ways until we've hit a real low.

Steve Forbes Predicts Gold Standard Restored In Five Years

There's only one Republican candidate promising a return to the gold standard, namely Ron Paul, and no Democrat contender is promising any such thing. Nevertheless, former candidate Steve Forbes is predicting a return to the gold standard within five years.

"What seems astonishing today could become conventional wisdom in a short period of time," Forbes said in an interview with Human Events magazine, a conservative publication.

Returning to the gold standard would mean stabilizing the U.S. dollar, restoring foreign confidence among foreign investors in U.S. government bonds and dissuade lawmakers from engaging in reckless spending habits, Forbes told the magazine.

If the standard had remained in place, Forbes said, the dollar would not be under assault now and federal spending would have been curbed.

"When it comes to exchange rates and monetary policy, people often don’t grasp” what is at stake for the economy, he said. "If the dollar was as good as gold, other countries would want to buy it."

Nevertheless, there are a lot of powerful vested interests that would block a return to the gold standard. The only way public opinion could shift in such a short time would be if the U.S. undergoes the throes of a debt crisis, which would act as a more powerful wake-up call signalling the long-term damage done by fiat money. It should be remembered that Ron Paul's audit-the-Fed bill had well over three hundred co-sponsors, yet it was quashed for a tepid substitute.

Call For South African Currency Board

Back on February 17th of 2009, Eustace Davie called for the South African government to show leadership in the post-crisis world by tying the rand to gold. He didn't advocate a gold standard, as he believes conversion to gold money would be too difficult to implement. Instead, he advocated a gold-linked currency board: each rand issued would have to be backed by reserve gold held by the South Afrcian central bank. The currency itself would not be convertible to the metal, and the link would only apply to coins and bills in circulation.

While the Currency Board would be compelled to maintain precisely correct gold holdings at the fixed weight of gold per rand to cover notes and coins in issue, it would not undertake to part with any of its gold in exchange for notes and coins. The reason is that the gold holdings of the Currency Board would represent a control mechanism to prevent excessive printing of money, not a return to gold as money, which would be something vastly different and more difficult to implement. For all new rand notes or coins issued, other than for replacing damaged notes, the Currency Board would have to purchase gold so it would have no incentive to unnecessarily increase the quantity of rands in circulation.”

Since South Africa is moving into economic alliance with the BRIC countries, Mr. Davie has reintroduced the proposal as a means of fostering regional trade in a low-inflation environment. He seems to have the idea of cutting those countries' dependance on the U.S. dollar.


It's not a bad idea, but failing to include bank reserves leaves a gap that would lead to inflation in a fractional-reserve banking system. Demand deposits are not covered, probably because doing so would require way too much gold. The trouble with his currency-board system is, a flight to currency would oblige the central bank to buy a whole lot more gold or else refuse to issue the bills and coins. The end result is that demand deposits would not be convertible into physical currency over and above the gold-backed float. That lack of convertibility could lead to a two-tier money system, as coins and bills could not be inflated without additional reserves but bank deposits could.

Still the currency-board idea is a step towards a real gold standard.

David Stockman Provides Six Reasons Why The Gold Standard Beats Fiat

In a talk delivered to the New York Historical Society on May 8, 2011, David Stockman says that the gold standard isn't a perfect system but it beats fiat hands-down. His six reasons why, are:

1. The gold standard would have prevented the U.S. current account deficit from getting out of hand over the last forty years. There were no chronic trade deficits when the gold standard was in operation.
   
2. Because the gold standard does not allow the creation of imaginary capital, it keeps debt levels from bloating up. Total (public-sector and private-sector) debt was 1.6 times GDP under the gold standard; it's now more than double that ratio.
3. The gold standard takes away the 'flexibility' that permits moral hazard to grow and Wall Street bailouts to be effected. Back in the gold standard days, financiers had to be less imprudent than they are now.
   
4. The gold standard kept fractional-reserve banking from imploding by limiting leverage. Under fiat money, the only limits are statutory and judgmental. These, 'flexibility' tends to erode.
5. The gold standard provided negative reinforcement when chronic budget deficits were resorted to. With fiat money, even perpetual deficits can be monetized by the fiat-issung central bank.
6. The gold standard also moderated business cycles. Look at how volatile U.S. inflation and economy have been since the United States went to full fiat in 1971.
   

The last point deserves a little emphasis. As we now know, fiat money does not provide immunity to new Great Depressions. If it did, then why all the panic in the official sector in the crisis of '08? Why Japan's continued troubles?

A lot of the criticism of the gold standard amounts to it not being perfect, not matching up to a hypothetical standard. That worked when fiat money was new. But now, fiat has a 40-year track record. We now have to periods that can be compared, and the fiat-money period does seem wanting.

Argument For A Gold-Exchange Standard

In Forbes, Nathan Lewis argues that a 100%-reserve gold standard is a bad idea. His main reason is that a full gold standard is antiquarian and "wastes" gold. He notes that a gold-exchange standard was in existence for a few centuries prior to the fiat revolution in the 1930s, and worked well enough in that timeframe. Normally, only 40% of reserves of countries observing the gold standard were in gold proper. A lot of those reserves were in bonds of other countries that also observed a gold standard.

In the past, the mechanism of supply adjustment typically involved redeemability. The owner of a banknote could redeem it for gold bullion. This was somewhat in the nature of a bank deposit today: a bank does not hold bank reserves in a 100% ratio to deposits, but it must hold some reserves to accommodate its obligation to repay depositors.

Thus, banks held some gold bullion as a reserve. By the end of the 19th century, banks no longer held this reserve themselves. They mostly held U.S. government bonds, and the Treasury held the bullion reserve. From 1880 to 1920, this reserve fluctuated between about 10% and 40% of banknotes outstanding. It was never 100%.

The 100% mark was reached for a short while in the late 1930s and early 1940s....

The trouble with this argument is that the gold-exchange standard was subject to boom and bust, as are economies with fractional-reserve banking. That gold-exchange standard fell apart in the 1930s, and its malfunctioning is the reason why we have fiat money today. The best argument for a 100%-reserve gold standard is that it removes a major source of instability in the economy, perhaps at the cost of some growth, and doesn't share the gold-exchange standard's brittleness.

The Gold Standard Now is a Website that explains why a full gold standard is the better way to go.


[Oddly, proponents of a gold-exchange standard sometimes seem to waver between "the full gold standard is antiquated" and "the full gold standard is merely theoretical." If it's merely theoretical, it hasn't been tried in the past.]

New In India: A Gold Account That's A Vertiable Gold Bank

Restoration of a gold standard, even as an unofficial para-money, requires two things: gold being used as both money and credit. Despite current unpopularity, the digital infrastructure for using gold as money is set up. Goldmoney, for example, allows payment to be made in gold.

Now, an Indian firm called RiddhiSiddhi Bullions Ltd. (RSBL) allows its high net-worth customers not only to buy gold but also to lend their holdings out. That service allows gold to be lent, and borrowed.

According to RSBL, ‘Bullion Plus Plus’ will involve a hassle free process of buying pure gold and silver from RSBL at wholesale market prices quoted on RSBL Spot. Also, the storage will be in secured vaults (LBMA accredited) and will be insured - an added advantage to the investors. Additionally, if the investor wants to put the gold or silver to actual use – like jewelry or utensils, he/she may withdraw his/her holdings at any time.

The investors will have to purchase gold or silver from RSBL and the same will be transferred to the vault. The investors will appoint RSBL Commodities Pvt Ltd, an RSBL Group company, to act on their behalf and lend gold and silver to third parties against adequate security. Investors’ risks are only limited to the extent of any price depreciation in gold or silver.

RSBL Commodities will act as the management company for the investors and charge a nominal management fee. RSBL Commodities will lend the gold and silver to various professional bullion market participants against adequate security and after thorough know your customer (KYC). The borrower will pay a certain lending income to RSBL Commodities Pvt Ltd, and the income thereof will be passed to the investors as stipulated.

On the face of it, this account doesn't look like much of an innovation. The loans made will likely be to mining companies looking to sell their gold forward, for which there's already an active gold market. Until now, bullion banks have been supplying the gold for these loans.

It is, though, the crossing of a threshold. Back in the aulden days, a lot of banks stuck to short-term commercial credit. Loaning long-term was seen as both risky and inappropriate, and consumer loans were anathema. Mortgages were left to building-and-loan societies (trust companies in Canada.) Long-term loans were left to the bond market.

So, this innovation represents the first steps to an all-out gold bank catering to high-net-worth individual depositors. In a way, it's fitting that India would be at the forefront of pushing gold into the money-and-credit system.

Utah's Gold-Standard Law May Set Precedent

As reported by ABC News, the Utah law has now made it possible to buy and sell using gold. U.S. Eagles are now recognized as legal tender in the state. As of now, more than twelve other state legislatures are considering similar bills. It's expected that at least one will follow Utah's example.

There's also momentum building for a federal gold standard.

It doesn't literally mean people would pull out gold coins at the cash register. Instead, the Federal Reserve would be required by law to make their notes redeemable for gold and hold gold coins and bullion as reserves. The printing of U.S. dollars would also be weighed against the value of gold.

The last time the gold standard was seriously considered was during President Ronald Reagan's administration. Reagan appointed a commission in 1981 to study the role of gold in the U.S. monetary system, but the group mostly came out against it -- except for two members, including now-Rep. Ron Paul, R-Texas, a champion of the Tea Party movement.

Despite continued calls by proponents like Paul to consider the gold standard, it had mostly stayed under the radar, until now.

The Tea Party's growing momentum and rising inflation is giving new life to the issue, as evident in Utah....

Other, more mainstream, figures have some nice things to say about the gold standard. The '08 crisis, which brought the spectre of another Great Depression even though the monetary systems of the world are pure fiat, has helped relegitimize the gold standard. Skeptics point to what they consider the drawback of the system, which proponents consider a virtue: discretionary power to change the money supply would be taken out of the hands of the Federal Reserve. Some commenters have reservations about the U.S. going it alone, saying that it would lead to an untoward rise in the greenback. They believe that the U.S. has to be one of several nations to restore the gold standard before it could be made to work.


Yes, the gold standard is an idea whose time has come. If you want information on it, this Website is a good resource. [Disclosure: they excerpted two of my own articles on the subject.]

One From Me On The New Utah Gold-Standard Law

It may be little more than self-promotion on my part, but an opinion piece I wrote for this week's Enter Stage Right made its appearance in the set of articles I choose from. So, here it is.

In this piece, "Palimpsest of a gold standard," I expand upon some themes that I've posted here and there on this blog. I tied it all together by casting the move to Big Government as a revolution from above.

The shift was largely effected by people that conservatives called "limousine liberals" or "parlour pinks." Nowadays, they're known as über-liberals. If you want to see the process in miniature, the mayoralty of Michael Bloomberg will do.

Getting rid of the gold standard, successfully impugned by the Great Depression, has been successful enough to make fiat money completely mainstream. Historically, this state of affairs is unusual. Back in the olden days, ordinary folks were more suspicious of those in power than we are today. Any suggestion that fiat money would be better than gold, would have been dismissed out of hand as a plot against the public – as white-collar coin-clipping. Two centuries ago, "they just want to steal our gold" would have received a huzzah in almost any pub.

There's a paradoxical pairing of facts when it comes to the gold standard's demise. Critics of fiat money, except for the excitable ones, have been proven right about the inflationary effects of fiat money. When the gold standard still prevailed, overall price stability was enjoyed for a hundred years. A dollar was a lot of money. There was still penny candy. Newspapers typically went for 2 cents on weekdays and 5 cents for the weekend edition. A cup of coffee cost a dime and the dollar stores of the time were five-and-dimes. A good suit could be had for twenty dollars.

Yes, fiat's critics have proved to be right about inflation. Juxtaposed, though, is the plain fact that ordinary people aren't up in arms about it. Had it not been for a surprise passage of a law in Utah, there wouldn't be any need to qualify the second statement. Fiat money is inflationary; people don't seem to care....

I end by saying that the Utah law has put the gold standard in the qualifying heats for the big-issue racetracks.


I have to say, again, that hardcore goldbugs who believe the public will never accept a gold standard until hyperinflation makes them change their ways have been somewhat rebutted by that bill. Hard as it is for some to believe, a step towards a gold standard can win popular support from the masses.

Ron Paul Adds To Gold Standard Movement With New Bill

Inspired by the success of the Utah law, Ron Paul has introduced a new bill to Congress that will alter the federal legal-tender laws to allow states to make their own gold and silver coins. As of now, it has no co-sponsors and was referred to committee.

Given a short title of “Free Competition in Currency Act of 2011,” it has the dual goal “to repeal the legal tender laws, to prohibit taxation on certain coins and bullion and to repeal superfluous sections related to coinage.”

The bill would repeal section 5103 of title 31 of the U.S. Code, the heart of the legal tender provisions of American coin and currency law. The section says that “United States coins and currency (including Federal Reserve Notes” and other items, “are legal tender for all debts, public charges, taxes and dues,” and then goes on to declare that “Foreign gold or silver coins are not legal tender for debts.”

Paul says he is concerned with individual rights and thus the bill provides that “no tax may be imposed on (or with respect to the sale, exchange, or other disposition of) any coin, medal, token, or gold, silver, platinum, palladium, or rhodium bullion, whether issued by a state, the United States, a foreign government, or any other person.”

There's also an interesting subsection that includes retroactive amnesty for anyone convicted under the provsions to be repealed. If the bill manages to pass, that amnesty would free Bernard von NotHous.


Sad to say, the lack of co-sponsors and referral to committee means the bill has next to no chance of passing. It's even a long-shot for a floor vote. Still, it's a test to see if a gold standard can be pushed.

Not Every Goldbug Agrees With Murray N. Rothbard...

Nathan Lewis is defintely one of them. He has little more than scorn for Rothbard's plan to restore the gold standard by revaluing gold in terms of the greenback and then mandating 100% conversion between one and the other. His six objections to the Rothbardian plan are:

1. Neither the US or British gold standards of the last 300 years, nor many of the others around the world, worked like this. Rothbard is just making stuff up.

2. A gold standard is NOT dependent on the amount of bullion in a vault. We saw that this was never the case. There were a few exceptions – China used Silver Bullion exclusively as money into the 20th century – but in the Western European world that was the rule.

3. "Defining the Dollar" at [Lewis' hypothetical value of] $1555 per ounce (from perhaps $350 per ounce when Rothbard was writing) is a devaluation. It's just the same as when Roosevelt "changed the definition of the Dollar" from $20.67 per ounce to $35 per ounce in 1933. You would think this would be what Rothbard and the other hard money types would want to prevent. (In fact the result of this devaluation was to make the US's gold holdings worth more than the monetary base, for a little while.)

4. This "100% backing" would be very brief. The normal operation of a gold standard would soon cause base money to diverge from whatever the bullion inventory happened to be. If you kept base money stable, then its value would diverge from the gold target. You only get to target one thing, value or volume, and the other is a residual. A gold standard is a value target, not a bullion reserves/volume target.

5. Although a small country, like Fiji, could implement some sort of "100% backing" system, there isn't enough gold in the world to do this on a global basis. That is why goverments tended toward "economizing on gold" for centuries. People who argue that it is possible that you could do it by "revaluing gold" fail to notice that this would be a devaluation. For example, let's say you "revalued gold" at $14,000 per ounce today. That would be a 10x devaluation of the Dollar. Eventually, prices would rise by about 10x. Then, you would need ten times as many Dollars to do your business. So, the amount of Dollars in circulation would have to rise, which would mean that you wouldn't have "100% backing" anymore.

6. What if the gold isn't there anymore?

Lewis prefers a Currency Board, like the one established by David Ricardo that revalued the pound in 1821 to its pre-Napoleonic-War parity. In Ricardo's own words, "it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be the standard." 100% convertibility isn't needed. Interestingly, one of Lewis' further objections to the Rothbard plan is that it isn't stable enough! The initial target would have to be followed by a bout of floating as the called-forth supply of gold equilibrates with the new demand for it as a medium of exchange. Lewis pegs that as a devaluation if gold risies higher.


The trouble with Lewis' plan is that he's arguing in a circle. How is the value of gold determined? By the market price. How would the convertibility ratio be determined? By reference to gold's market price. What if that market price changes once the Currency Board sets its own price? What then? How would a gold drainage be prevented, except by setting the price higher than the ratio warranted? Doesn't that mean a last one-shot burst of inflation? And what's to stop Gresham's Law from asserting itself if the inflation carries over after the Board begins operating? Since Gresham's Law applies to currencies whose prices are fixed, what will happen once it asserts itself? Will the Board have to outlaw the private possession of specie? If so, then what kind of gold standard can it be?

There's only one way to break the circle: redefine the currency to be a fixed weight of gold and nothing other. That approach, though, leaves the rather large issue of what will happen to the extant greenbacks.

Utah Gold Standard Bill Becomes Law, But May Be Less Than It Seems

Utah's governor has signed the gold-standard bill into law. But, according to a CNN Money report, he did so largely because it enacted tax relief and took a politically popular swipe at the Federal Reserve. U.S.-minted gold and silver coins are legal tender, but only at face value - not market value. Presumably, one of the tasks that the study committee the law authorizes will be how to adjust legal-tender tax rates to the market price of the metals. As for the capital-gains elimination, it does not nullify federal taxes. Those still apply, at collectible rates.

According to a person close to Herbert, the governor signed the bill because it eliminates capital gains taxes on a popular investment. The other stuff, not so much.

"If somebody is stupid enough that they want to buy a Snickers bar at 7-Eleven with a gold coin worth thousands of dollars, they will be able to do that," the source said.

The same source threw cold water on the idea that the study committee will go all the way in setting up gold and silver as full-fledged alternative currencies, claiming that there would be major constitutional issues that would get in the way.


Desite its limitations, it's still an important symbol and milestone. It certainly shows how much political gain can be mined by bearding Ben Bernanke. Given the passion behind the bill in the House, I think a sneak was pulled to get the Governor to sign. That source may scoff, but it's still law. How broad the study committee's mandate will be, is going to be the next political battle for the gold standard. Once the idea spreads, those limitations should largely dissolve.

Can't Win 'Em All, Even Though Won In One

Given the decades-long headwinds that the gold standard has faced, it was a real breakthough to see the Utahan legislature approve of gold-standard legislation and Utah's Governor sign the bill into law. Once the law is enacted, the state capital gains tax on the metals will be eliminated. Utahans will be able to buy and sell using U.S.-minted gold coins voluntarily. A committee will be set up that will determine how they can pay state taxes in gold and silver, and look at other means by which the metals can be used as money. The bill explicitly recognizes gold and silver Eagles as legal tender in the state.

In so doing, the Utahan goverment has rolled back an "advance" that has been in place since 1933. Believe it or not, it was illegal for U.S. citizens to buy and keep gold until 1975.

An important precedent at the state level has been set, but that doesn't mean other states are going to be following anytime soon. In Montana, House bill 513, which would have established a state reserve in gold and silver using the tobacco tax revenue stream and required dealing in gold and silver with some contractors and/or taxpayers, was defeated in a close vote of 52 to 48. Democrats, and many Republicans, voted against the measure. Amendments to include coal and copper were soundly defeated.


A shame, but Rome was not rebuilt in a day. The fact that the Montana house was close to approving it shows that state restoration of the gold standard is an idea whose time has come. The article indicates the kind of scare-talk that such initiatives call up: one Democrat intimated that the gold-standard bill was part of a secret plot pushing Montana to secession.

[Interesting role reversal, that. How does it feel to be on the inside of a purported conspiracy?]

Utah Remonetization Bill Rebuke To Federal Reserve

The bill remonetizing gold and silver is still being reviewed by Utah's governor, but it has passed both the House and Senate by healthy margins. It may survive a veto. Once it becomes law, Utahans will be able to use U.S. Eagles as money in shops. Since the bill is in conformance with a strict reading of the U.S. Constitution, no foreign gold bullion coins will be authorized as money. As an article in the Globe and Mail explains, this bill is a rebuke to the Fed.

“They’ve been a disaster,” says Jeff Bell, policy director of the American Principles Project, a conservative lobby group that has helped the Utah legislators and favours a return to the gold standard. “Mr [Ben] Bernanke, ever since he got on to the Fed, has been a force for fighting deflation and bringing interest rates down to the disappearing point.”...

The Fed is unpopular with the US public, and several other states have recently been considering – with varying degrees of seriousness – similar legislation to Utah’s.

From 2003 to 2009 the percentage of people saying the Fed does a “good” or “excellent” job fell from 53 to 30 per cent, according to Gallup. A Bloomberg opinion poll last year found that 16 per cent of Americans want to abolish the central bank outright – although it did ask a leading question.

The Fed's unpopularity may not matter, because it's designed to be an independent institution that takes the political fallout for bad economic times.


Thus, Congress will be reluctant to end the Fed even if a majority of voters approve abolition. Still, point man Ron Paul shouldn't be counted out: he's been continually underestimated, and has turned into quite the folk hero. He may have the clout someday.