Fiat Money, Governments, Banks, and Corporations

September 29, 2011 · Posted in Monetary Economics · Comment

Utah’s Gold & Legal Tender Laws

May 28, 2011 · Posted in Monetary Economics · Comment

Fiat currency is demanded by individuals in exchange transactions because its acceptance in payments of debts is enforced by the state, because it is required in tax payments, and because reproducing the same currency without state approval is prevented via the threat or use of aggression. This ensures that there will always be some kind of demand for it.

(You can find some more information on the specific history of fiat money in the US in my post Government Power, Gold, Fiat Money, and the U.S. Constitution.)

The government also discourages the use of alternate media of exchange, e.g. in the case of gold in the US, through the imposition of capital gains taxes, but even without such additional hurdles there would be little to no threat to the enforceability of the fiat money system.

In fact, the US Treasury itself still mints gold and silver coins that it officially recognizes as legal tender for all debts public and private. For example, a 1 Oz American Eagle gold coin, is recognized as a $50 legal tender.

Mind you, the current value of 1Oz of gold on the open market is priced at around $1,500. So in other words you’d have to be a complete idiot were you to use that coin to buy, say, a concert ticket worth $50 or pay your taxes by supplying a commensurate number of such coins to the IRS, when you could just as well use paper money that you ascribe a much lower value to.

Recently there have been some developments in Utah toward recognizing gold and silver as legal tender for the metal value and NOT the amount minted on the coins:

The Utah Legislature on Thursday passed a bill allowing gold and silver coins to be used as legal tender in the state — and for the value of their precious metal, not just the face value of the coins.

State backers said they hope the move will help insulate Utah from a potential monetary slide as countries question the value of the dollar. Others, casting their eye nationwide, said it could spur a broader move by Congress or states to readopt a gold standard.

“Utah, if the governor signs this particularly, they’re going to change the national debate on monetary policy and get us back to basics,” said Jeffrey Bell, policy director for Washington-based American Principles in Action. Mr. Bell has been in Utah to help shepherd the legislation through.

Utah’s bill allows stores to accept gold and silver coins as legal tender. It also exempts gold and silver transactions from the state’s capital gains tax, though that does not shield exchanges from federal taxes.

It is true that merchants in Utah can now also accept a smaller amount of gold in payments, reflecting the open market price of gold, rather than its legal tender amount. But they would still be required by federal law to accept fiat currency. Individuals would also still be required to pay federal capital gains taxes on their realized gold gains.

I would say that, by and large, Gresham’s Law applies here as much as anywhere else. So long as the government aggressively enforces the use of its fiat currency and in fact requires its use in the settlement of tax debts, people will be inclined to push those paper dollars back into circulation, while hoarding the “better” money: gold and silver coins.

Thus I view the recent laws passed in the US state of Utah as a mere recognition of what already is. The exemption of gold from capital gains taxation on the state level may make it lucrative to sell gold in Utah, but that’s about the extent of the impact of this law as far as I can tell.

Tags: Amercian Gold Eagle, fiat money, gold, gold money, legal tender, utah

Government Power, Gold, Fiat Money, and the U.S. Constitution

December 26, 2010 · Posted in Government, Monetary Economics · Comment

When we repeat again and again, like a broken record, that pieces of paper with words on them, that is Constitutions, Bills of Rights, Amendments, and the like, have no power to sustainably constrain aggressive gangs, such as governments, then we do that for a reason.

When we say that if such revered and supposedly binding scripture can’t even do the trick, that then surely it is even more deranged to fall prey to the illusion that rather non-binding check marks in polling booths will do the job, then we do that because we have sound syllogistic reasoning to back it up and on top of that have observed centuries of historical evidence.

Those who scoff at such propositions are free to do so. They can mistakenly call the ideas nihilistic, defeatist, and cynical. But in doing such things, they are unfortunately missing something: That is, that such accusations are not arguments against the logical and empirical truth-content of the propositions made; that they are emotional knee jerk reactions that arise out of childhood scar tissue and a deliberate disregard for knowledge in fields where that knowledge hurts them. If they have counter-evidence, then by all means, present it!

When we propose Voluntaryism, then it is out of a deep desire for meaningful change and the conviction that we can no longer afford repeating the same mistakes over and over again, expecting different results; the definition, by the way, of insanity.

And a better case couldn’t have been made in the lab of human society than that of the formation of the United States: A small central government, granting significant rights to states and localities, limited in its powers to tax and imprison, constrained by a Constitution whose spirit and words expressly and virtually unmistakably limit the potential for arbitrariness on the part of those in power, a Bill of Rights that grants to every citizen the due process of law before depriving him of his freedoms and property as punishment for crimes, a clear separation of Executive, Legislative, and Judiciary, all imbued with the Enlightenment spirit of the time, highly secular, and highly in favor of the protection of every individual’s equal rights to Life, Liberty, and Property.

Granted, the American Republic from the outset denied certain rights to certain minorities, but so did the rest of the world! The fact doesn’t change that in comparison there hasn’t been a better example for the deliberate establishment of a limited, constrained, republican form of government, born out of reason, and not passed down through traditions of hegemonic power structures.

Seriously, those who believe that it is possible to have a sustainable limited form of government could not ask for a more ideal example to go ahead and make their case!

The case of Gold, Money, and the U.S Constitution is yet another prime example of how all such Constitutions, Articles, Bills of Rights present nothing but a minor roadblock in the way of bureaucrats’ never ceasing quest for oppression, abuse, and aggression.

It clearly lays out how the spirit and the original intent of such well meaning documents can be turned upside down completely and 100%, giving the abusers the great and far reaching benefit of depredations under the appearance of due process and legitimacy – a far more destructive and longer lasting form of tyranny than outright brute force.

Attorney Eugene C. Holloway lays out the case in 4 parts. I will just provide a quick summary and noteworthy references, but the whole thing is well worth a read.

PART 1 – THE CONSTITUTIONALITY OF PAPER MONEY

The basic case for the unconstitutionality of fiat money in the US arises out of Article 1, Section 8, clause 5, which states that Congress shall have the power …

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

When the Constitution was drafted to replace the Articles of Confederation, some people wanted to include a power that used to be granted as per the Articles, and add “to emit bills of credit” as an enumerated power of Congress.

Bills of credit are essentially paper money bills that, however, grant the holder the right to redeem them for gold or silver money at a future date. They are in that sense fiat money “light”.

So one can argue that if even such a highly constrained form of paper money was struck out upon drafting the US Constitution, then surely it should be clear that an outright fiat money regime was most definitely not desired by the majority of the founders whose experience of the depredations caused by the Continental Dollar was all to vivid at the time.

The Delegate Luther Martin’s statement, albeit for the wrong reasons, provides a stellar case to support the notion that it is fiat money that makes large scale war and murder possible in the first place, of course imbued with all the typical, juicy and fear-mongering language of a true early-day neocon:

(…) a motion was made to strike out the words “to emit bills of credit.” Against the motion we urged, that it would be improper to deprive the Congress of that power; that it would be a novelty unprecedented to establish a government which should not have such authority; that it was impossible to look forward into futurity so far as to decide that events might not happen that should render the exercise of such a power absolutely necessary; and that we doubted whether, if a war should take place, it would be possible for this country to defend itself without having recourse to paper credit, in which case there would be a necessity of becoming a prey to our enemies (…)

In conjunction with the 10th Amendment it should be clear that, as per the Constitution, the U.S. Congress should not be allowed to print or delegate the printing of fiat money:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

And as we all know, bureaucrats will always stick with passion and consistency to the application of laws that are passed to constrain their own power, right? Well …

PART 2 — THE LEGAL TENDER LAWS

This part documents the three big legal tender cases and the Supreme Court’s step by step perversion of the obvious intent of the US Constitution:

Treasury Secretary Salmon P. Chase, proponent of a national currency, but opposed to making it legal tender, was by his own admission forced by the exigencies of the Civil War to accept the 1862 program of New York Congressman Eldridge G. Spaulding and the House Ways and Mean Committee to issue the federal government’s first legal tender notes and suspend the right to redeem the notes in specie. The scheme worked insofar as it succeeded as a means of financing the war without crushing the fragile Northern economy with excessive direct taxes. In the second Legal Tender cases Justice Bradley explained in salutary terms how the device works as an “imperceptible tax” to finance war by invisibly spreading the financial pain:

Particularly eye-opening to me was the ease with which such legal tender laws could be enforced with minimal effort:

Some scoff at the statement that the legal tender laws are coercive. The answer to those skeptics appears in Andrew Dickson White’s monograph Fiat Money Inflation in France. In 1793, failure to accept the French paper money was made punishable by death and the punishment was actually imposed as demonstrated by the lists of those condemned to the guillotine. In contrast to the Draconian measures taken after the French revolution, the import of the U.S. legal tender laws has been merely to allow private and public debtors to legally discharge their debts by payment of legal tender currency. But this form of interference by the state in private transactions to appropriate the wealth of creditors is coercive nevertheless; and the French experience illustrates the direction that any kind of state coercion can take once the state’s authority to act is established.

The following statement from the Attorney General and the subsequent note by the author illustrate the maddening logic used to literally turn the US Constitution upside down:

[Opposing] counsel quotes from the debates in the Federal Convention of 1787 to show that members of that body were opposed to making paper a legal tender. The very quotations prove that the members considered that the power to emit bills of credit involved the power to make them a legal tender, and hence they struck out of the draft of the Constitution the power to emit bills. But it is no uncommon experience that the words of a constitution or statute are found, in their fairest interpretation, to import more than their authors distinctly designed. It is not given to man, when framing a constitution, to foresee all the cases to which the conferred powers will properly extend. And in this very matter, notwithstanding that the power to emit bills of credit was struck out, this court has held that the power exists; and why, then, does it not exist with all that in 1787 was supposed the belong to it? [Note the logic here: The Constitutional Convention struck the authority to emit bills of credit because they were opposed to paper money as a legal tender, but inasmuch as the authority to emit bills of credit has now been recognized, legal tender ought to come along as well because the founders felt that they went hand in glove!]

PART 3 – CONFISCATION AND THE GOLD CLAUSE

Even knowing that it actually happened, it still is almost unthinkable that the United States government would nationalize the personal assets of its citizens, give paper in exchange at 60% of the value of the assets – and book a profit. The public begrudgingly recognizes that the government can take private property as long as the taking is accomplished by due process (such as an eminent domain proceeding) and the owner receives just compensation. However, we expect those cases to be relatively isolated and infrequent. In 1933, the U.S. government devalued the dollar by 40% in less than eight months, but not before it ordered a docile population to exchange their gold for paper and banned gold ownership and transactions in gold to keep citizens from escaping the devaluation. The combined actions operated as a confiscation of the property of every citizen, all at once, with no compensation.

The constitutional validation of these actions followed a similar pattern to the validation of the legal tender laws: (1) unchallenged legislative precedent falling into accepted custom, (2) incremental changes in constitutional interpretations over a period of time and (3) the precipitation of a major crisis that the government chose to address by assuming theretofore unexercised and unauthorized power.

It was now finally time to see if plain and outright Orwellian measures would bode well with the American public, WW1 was a welcome guinea pig:

During the First World War Congress passed a number of war measures, including the 1917 Trading With the Enemy Act, that were designed to marshal the economy to support the war effort. The laws gave much power to the executive branch and were generally acknowledged to be authorized under the constitutional war powers. As originally enacted, Section 5(b) of the Trading With the Enemy Act, 40 Stat. 411, provided:

That the President may investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency, transfers of credit in any form (other than credits relating solely to transactions to be executed wholly within the United States), and transfers of evidences of indebtedness or of the ownership of property between the United States and any foreign country, whether enemy, ally of enemy or otherwise, or between residents of one or more foreign countries, by any person within the United States; and he may require any such person engaged in any such transaction to furnish, under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody or control of such person, either before or after such transaction is completed.

As if that wasn’t enough, this law was amended shortly thereafter to read:

During time of war or during any other period of national emergency declared by the President, the President may, through any agency that he may designate, or otherwise investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, transfers of credit between or payments by banking institutions as defined by the President, and export, hoarding, melting, or earmarking of gold, or silver coin or bullion or currency, by any person within the United States or any place subject to the jurisdiction thereof; and the President may require any person engaged in any transaction referred to in this subdivision to furnish under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody of or control of such person, either before or after such transaction is completed. Whoever willfully violates any of the provisions of this subdivision or of any license, order, rule or regulation thereunder, shall, upon conviction, be fined not more than $10,000, or, if a natural person, may be imprisoned for not more than ten years, or both; and any officer, director, or agent of any corporation who knowingly participates in such violation may be punished by a like fine, imprisonment, or both. As used in this subdivision the term ‘person’ means an individual, partnership, association, or corporation. [Emphasis added.]

Thus, what was solely a wartime measure that many believed had expired was converted into a statute granting war time powers to the President in times of “national emergency,” a term which was not defined in the law (and which, if such an emergency existed in 1933, itself had been precipitated by government mismanagement). This law identified a new “enemy” – domestic “hoarders” who would be subject to imprisonment for violating any rule laid down by the President at any future time during a period of national emergency declared by him based on undefined criteria. Professor Henry Mark Holzer’s monograph “How Americans Lost Their Right To Own Gold And Became Criminals in the Process” catalogues the events of 1933, and more; and it should be read as an adjunct to this article, which despite its appearances is a relatively superficial treatment of the subject.

All hail the mighty Fuerer!!

PART 4 – SEARCHING FOR AMERICA — A COMMENTARY

As many political libertarians, they get this kind of stuff so right in the analysis, and so wrong in the very final conclusions, when they still think that somehow it is possible to establish a “good” government.

Thus Holloways final statements here are brilliant up to the point where he urges to not abandon that ideal. This is, in my humble opinion, but a minor blemish on an otherwise excellent treatise:

[T]he complaints against the gold standard were, and are in actuality, complaints against the unyielding discipline of objective value. The goal of stable prices is inherently inconsistent with a standard that allows gold to circulate as money. If the money supply is inelastic, as it likely would be in the case of gold, normal improvements in technology and productivity naturally ought to cause prices to decline. Businesses have proven throughout history to have a remarkable ability to adapt individually to market conditions (or to go out of business). If they knew that there would be no inflation to negate the natural decline in prices, sooner or later they would figure out how to adjust their business processes to adapt for declining prices – for example, by using strategic product pricing techniques. Surely we must have learned by now that there are grave risks associated with a fiat money system and that the market’s call to be relieved of its function and obligation to deal with objective value is no justification for the government to saddle its citizens with that risk.

Runs on banks arose when depositors were worried about the safety of their deposits. Come now, that cannot be the fault of the monetary system. The banks either had the gold or they did not. But, it is said, they lent the money to finance farms and businesses and mortgages. OK, they must have lent too much and did not keep adequate reserves or failed to arrange privately to be covered by other banks or insurance companies. Anyway, even if depositors gave express or tacit permission for the banks to lend out their money, if a bank promises to redeem bank notes in gold on demand, the bank ought to be managed to be able to do that. To avoid subjecting the bankers to punishment for mismanagement and to avoid causing depositors to have a healthy skepticism about bank trustworthiness, the Federal Reserve System was chartered to insulate the banks from the market’s preference for trustworthiness and to give the depositors a sense of security by government fiat. The Fed was created to bail out irresponsible banks and foster price stability by the expansion of money and credit – a most dangerous game, one that has been played with almost universal failure ever since the first coin was debased.

Instead of allowing the market to fix the problem of declining prices and irresponsible banks, the new System in 1913 allowed the problem to be assumed by the Fed. But in spreading the risk over the entire system and theoretically lowering it, the government created a broader risk, a risk that was national in its scope rather than isolated to individual banks and businesses. When the Fed realized that its expansion of credit in the 1920’s had created a stock market bubble without raising prices, it was faced with a paralyzing dilemma: it could not keep a deflation of the stock market bubble from spilling over into the general economy. The Fed found that it had no precise control over what sectors of the economy would be impacted first by a credit contraction and no way to engineer a deflation so that it did not permeate the economy. Bubbles usually appear at the fountainhead of inflation and then begin to permeate the economy. Bursting the bubble cannot be accomplished surgically – at least no one has figured it out yet, as the internet bubble illustrates. The Fed, despite nine decades of experience, has yet to devise a way to exercise better long term control over the money supply than the gold standard accomlished. I suspect that it is this obvious fact that Mr. Greenspan was referring to in his remarks on December 19.

War and other crises provide pretexts for increases in government power. Once it is acquired, rarely does the assumption of that power completely relent when the crisis subsides. The departure from the discipline of gold money in 1862 with the greenback and in 1933 with gold prohibition was attended by crises that added measurably – by step-functions – to the U.S. government’s control over the economy and its ability to confiscate the fruits of the individual’s labor through inflation. In both cases, there were later repeals, but the repeals represented two steps forward and one step back. The 1879 Resumption Act did not eliminate the legal tender laws, which remain in effect today. Likewise the restoration of gold ownership rights in 1974 and the legalization of gold clauses in 1977 did not resurrect the gold standard or put gold coins back into circulation as money.

We do not know how the government will respond to the upcoming financial difficulties that appear inevitable. But the history of gold money in the U.S. and the increased sophistication and technology available to the government indicate that one may find it difficult to escape the solutions that are handed down. It will not be enough to understand the benefits that the discipline of gold creates for long-term political and economic stability if the vast majority of citizens do not appreciate the political value of a gold standard. It will not be enough to buy gold while it is legal and hide it before the next prohibition occurs. Where, other than the black market, will it be useful? It will not be enough to hope that confiscatory laws and regulations will not be enforced. As will be demonstrated in a later article, the 1933-1974 regulations were enforced. It will not be enough to draft new gold clauses in an attempt to predict what loopholes might be overlooked in the next law. The loopholes eventually will be closed both by the legislature and in the courts. And it will not be acceptable, for me at least, to leave my home in a vain attempt to find a place where I can have greater social, political and economic freedom. I doubt that there is such a place; and even if there were, why should I allow myself to be driven from my home? Some of us have now lived long enough to know that despite Lord Keynes’ famous comment, when the long run has run its course, we will still be here; and even if we are not, our children certainly will be. So the long run is important.

Many of us do not care to evade the law or become exiles or fugitives. We prefer to live and remain in a country where our daily affairs can be conducted freely, in private or in the open, without any concern that, some day, those charged with our protection will turn on us, confiscate our meager savings and forbid us from engaging in prudent and honest trade with our fellow citizens. That is the country that Thomas Jefferson and James Madison thought they had created. I like the idea of living in their country. It is the America that I want to leave to my children and I will continue to search for it.

It is becoming increasingly apparent that the fiat system is entering an unstable, perhaps uncontrollable, phase at precisely the time when a major crisis is brewing. Government budgetary and fiscal policies promoting guns and butter and lower taxes, and monetary policies designed to fight deflation, “stimulate the economy” and monetize historically high mountains of debt are classic signals that the worst fears of the founders are being realized on a scale that they could not have imagined. The accumulation of government power over the individual in such an environment will be, and is, accelerating. Privacy is almost a thing of the past and the movement of assets will join the transfer of money as a carefully regulated activity.

The general population today, unlike the citizenry in 1862 and 1933, has no understanding of monetary economics. Moreover, huge portions of the population (including large and small business enterprises) are in one form or another feeding at the trough of government largesse with absolutely no regard for or understanding of the source of the government’s revenues or how a nation’s wealth is created and what is required to sustain it. They see government money as a kind of natural resource. It is an easy trap to fall into. Just the other night I listened to President Bush commit a substantial sum to fight AIDS in Africa and caught myself saying, “Finally, we are going do something to fight that awful epidemic,” without the least thought about where the money will come from. But if we do not think about where the money comes from, except to oppose direct taxes that affect us, we are digging our own financial graves.

Many people apparently believe, vaguely, that their financial well being is somehow threatened by those seeking lower taxes and less government. (If they are feeding at the trough, perhaps they are right.) And they make no connection whatsoever between monetary policy and their financial security. This wholesale ignorance facilitates, with no serious main stream criticism, the appropriation of wealth from one citizen through inflation and taxes and the redistribution of it to others in the form of government benefits, contracts and programs. I am reminded of the Roman Emperors who taxed the people and then tossed out bread and gold during parades and pageants to curry the favor of the masses. The system will not change until we improve the understanding of the citizens whose votes influence policy.

A libertarian society protected from, and by, a limited government may have been an ideal that the founders sought; but it has never been achieved. Even so, that fact, and the fact that the contrary direction appears to have been generally taken, does not mean that the ideal should be abandoned. If you understand the economic risks posed by the fiduciary (”trust me”) monetary standard and the moral dimensions of its inevitable consequences, you should attempt at a minimum to educate the people around you about the history, the respectability and the security that can be found in the gold standard and encourage them to pass the word. Changing popular understanding begins in your neighborhood, in your business circles and in your associations. It is a daunting undertaking, but it most certainly will not be accomplished if those who understand its importance shrink from the task or retreat into cynicism.

In The Regulation Game, a treatise on government’s regulation of enterprise, authors Bruce M. Owen and Ronald Braeutigam questioned the wisdom of using government power to achieve economic security and justice rather than allowing the market to work. They concluded, “We do not know the answers to these questions. Nevertheless, we are reminded of Edward Gibbon’s comment on the fall of Athenian democracy: ‘In the end they valued security more than they valued freedom, and they lost both.’”

Tags: fiat money, gold, money

The Federal Reserve, IRS & Legal Tender Laws – A Criminal Racket

May 27, 2009 · Posted in Government, Monetary Economics · Comment

Robert Kahre, standing up for sound money, freedom of choice, and the rule of law, paid his contractors in gold:

Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison.

But attorney William Cohan paints Kahre as an American “hero” who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance.

A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins’ face value — rather than the much higher market value of their precious metal content — for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.

Judge David Ezra is presiding over the criminal trial, which began May 19 in U.S. District Court. Joining Kahre as defendants are his longtime girlfriend, a sister who works in his businesses, and a former business assistant.

Three of the four present defendants were among the nine people tried on similar charges two years ago, but no convictions resulted. In the 2007 trial, four others of the nine defendants, including Kahre’s mother, were entirely acquitted. Two individuals were only partially acquitted, but dropped from the indictment that forms the basis for the trial before Ezra.

This time around, the only new defendant is Danille Cline, Kahre’s girlfriend of 19 years, and the stay-at-home mother of his four children. The government claims she obstructed the Internal Revenue Service by allowing Kahre to place several homes in her name, thus attempting to conceal his assets.

Cline’s former brother-in-law, Thomas Browne, also was indicted this time, for his role as broker in some of the real estate transactions, but has since reached a plea bargain. He is expected to testify against the defendants.

“This is a case about money, greed and fraud.” The line appeared on screen in court during the government’s opening statement by Christopher Maietta, a trial lawyer from the Washington, D.C., office of the Department of Justice.

My comment: From the point of view of a dull and uneducated person there exists of course no other way to “describe” this case. I would more appropriately title it a case about freedom, sound money, and legal tender injustice.

It is obvious that the IRS is terrified about this completely legal way to avoid income taxation. Their indoctrination of the public about the immorality of supposed tax evasion has indeed permeated the minds of the clueless masses.

But before they have the right to attempt even the slightest attack on people like Kahre, they themselves should first of all do their best to justify the current US fiat money system.

Now, anybody who is confronted with any of the age old lies regarding the legality of the US fiat money system can politely point the ignorant blabbermouth to some very simple paragraphs in the US constitution.

It is commonly held that Congress rightfully delegated the powers to print fiat money to the Federal Reserve Bank, based upon the following paragraph in Article I, Section 8:

The Congress shall have power…
To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

The problem here is obviously that this section clearly talks about coining money. There is nothing else that could be read into this. Based on this Congress has no right to create fiat money, be it directly or indirectly.

Now, one could argue that the states independently could be allowed to enforce legal tenders other than gold and silver. But there is one problem: The Constitution states explicitly in Article I, Section 10:

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

The 10th Amendment clarifies what powers the Federal government does NOT have:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Nowhere does the Constitution delegate to the Federal government the power to print paper money and make it legal tender. Not only that. On top of that it even strictly prohibits this practice to the states. How much more obvious did the founders of the United States have to make their unconditional opposition to the use of fiat money?

And they didn’t do it just for the heck of it. They were well aware of the problems caused by fiat money. They had lived through the disasters caused by the Continental Dollar:

With no solid backing and being easily counterfeited, the continentals quickly lost their value, giving voice to the phrase “not worth a continental”.

The painful experience of the runaway inflation and collapse of the Continental dollar prompted the delegates to the Constitutional Convention to include the gold and silver clause into the United States Constitution so that the individual states could not issue bills of credit.

… so long as people are ignorant and forget, history will repeat itself.

Tags: fiat money, gold, gold money, silver, silver money

Ron Paul on Gold

February 3, 2009 · Posted in Monetary Economics · Comment

Tags: fiat money, gold, gold money, ron paul

Money, Banking and the Federal Reserve

February 2, 2009 · Posted in Monetary Economics · Comment

Thomas Jefferson and Andrew Jackson understood the dangers of central banking. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.

Watch it, and you’ll understand why. This is economics and history as they are meant to be: fascinating, informative, and motivating. This movie could change America:

Tags: federal reserve bank, fiat money, money, Murray Rothbard

Use Gold Money

November 25, 2008 · Posted in Monetary Economics · 1 Comment

A fiat money can only function when forced upon the people via aggression or threat thereof. As a tendency, a government, the bigger and more powerful it gets, will more and more take advantage of the system. The monopoly over money creation tempts those in charge to produce money and spend it for the government’s own projects.

In the United States this happens in the form of government bonds issued by the Department of Treasury. Those bonds are bought up by the Federal Reserve Bank. The government gets to spend the newly printed money first and hence gets to purchase goods before everyone else sees their prices rise. They hence benefit from the inflation and effectively impose a tax on those who get to use the money later, the workers who earn wages in businesses.

In 1971, $28 would buy one ounce of gold. Today $813 are needed. $29 are needed today for what $1 would have bought back then. This trend will continue. Inflation always causes misallocations, disturbs a smooth functioning of the market, and reduces prosperity below the level that could be achieved without it. It transfers wealth from those who receive the newly injected money later to those who get it earlier.

But as a certain amount of inflation becomes acceptable to a conditioned populace, the government will push the boundaries toward more inflation and debt with no end in sight. Those who run the state apparatus won’t owe money to anyone when they jump ship. They have no incentive to be prudent. It is the future taxpayer who will foot the bill. A hyperinflation will wipe out enormous sums of wealth for the common man, before the currency is finally destroyed completely. Those who understand the historical relevance of gold money, and act accordingly, will be the winners of this development.

Last Saturday, at the San Francisco “End the Fed” rally organized by the “Campaign for Liberty“, a man on the podium was holding up a Silver Dollar and an American Gold Eagle. To his left the mighty San Francisco Federal Reserve Bank, to his right the US Bank tower. “I hold here in my hand more money than these banks have ever owned … one Silver dollar buys me 2 popcorn, 2 sodas, and 2 movie tickets. My rent is $40 per month.” I presume he is self employed and demands payment in gold and silver Dollars from his customers as much as possible. He said he uses the money in grocery stores, cleaners, and restaurants who gladly accept sound money.

Now the incredible part: When he earns 50 Gold Dollars, he declares $50 on his income tax return for an asset that has a price of currently about $900. So long as he doesn’t cash it in he owes no income tax on its fair value. An American Gold/Silver coin is considered legal tender over the amount that is imprinted on it. This is, in fact, the law: After hearing him speak, I did my research:

Article 31 U.S.C. § 5112 outlines the details of the arrangement of minting American Eagle coins. The law makes them legal tender for all debts private and public.

As per wikipedia.org, another important decision was made by a court in 1877:

The case of Thompson v. Butler establishes that the law makes no legal distinction between the values of coin and paper money used as legal tender:

A coin dollar is worth no more for the purposes of tender in payment of an ordinary debt than a note dollar. The law has not made the note a standard of value any more than coin. It is true that in the market, as an article of merchandise, one is of greater value than the other; but as money, that is to say, as a medium of exchange, the law knows no difference between them.

I encourage everyone to read this:

It is an article about a Nevada businessman who applied the concept I explained above throughout the 1990s. The most notable sections:

…Kahre hadn’t committed a crime. He had upset the Internal Revenue Service by paying his workers based on the face value of gold and silver coins, versus the market value in the Federal Reserve system (the value of the coins in U.S. paper dollars)…

…The IRS expected Kahre to report his workers’ earnings based on the coins’ market value in the Federal Reserve system. Instead, he didn’t report or pay anything at all because the face value of the coins fell below the reporting threshold. The IRS alleged that Kahre and the other defendants paid at least $114 million (based on the Federal Reserve system) to workers. The use of these coins in trade is a direct challenge to the fiat money system now in place…

…In 1985, Ron Paul and other congressmen challenged our country’s currency system, which was monopolized by Federal Reserve Notes (FRNs) the familiar greenbacks in American wallets. The congressmen successfully pursued the Gold Bullion Coin Act, which required the U.S. government to mint and place gold coins in denominations of $50, $25, $10 and $5 into circulation based on demand. The coins are made of 91.67 percent pure gold….

…[the] jurors delivered zero guilty verdicts. Three defendants, all workers, were acquitted as well as Kahre’s mother, who worked as a runner for her son’s businesses. Two other defendants were partly acquitted, the jury hung on one count each. The jury also hung on all counts faced by Kahre, Loglia and Kahre’s sister, resulting in mistrials…

…The outcome of this case is a magnificent victory for those of us who believe that the United States of America should have an honest monetary system.

I expect to see more cases like this in the near future. As the quality of the US Dollar diminishes people will be forced to look for a better money. What better option is there than using precious metals which the country’s highest federal legislator has made legal tender. The tax savings are a convenient side effect but the practice will certainly be legislated away and violently punished once the government becomes desperate. But at least it would be a means to put an end to the fraudulent Federal Reserve System that has been plaguing this country for 95 years, and once and for all do away with the inflation tax.

Tags: Amercian Gold Eagle, fiat money, gold, gold money, IRS, tax treatment of gold payments

Abolish the Fed?

November 19, 2008 · Posted in Monetary Economics, Politics · Comment

I think the easiest, and most convincing proposal toward sound money is the following: Don’t abolish the Fed. Leave it in place. But allow other individuals to compete in the business of money production. Don’t prosecute them for producing their own money. Don’t force individuals to accept paper fiat money via legal tender laws. Leave it up to them to decide which money to accept and which not to accept. Let the consumers decide whose money they prefer. Don’t tax them when a high quality money that they are using becomes more expensive in terms of another, inferior money. Get rid of capital gains taxes on gold and silver.

The crucial problem that is rarely ever discussed is not the money printing by the fed. It is the fact that this money is forced upon the people, and that competing with it is outlawed. Let the Fed suffer the humiliation of going out of business for its inability to compete…

Abolish counterfeiting laws.
Abolish legal tender laws.
Abolish capital gains taxes on gold and silver.

Tags: abolish the fed, central bank, federal reserve bank, fiat money

History of Money

November 15, 2008 · Posted in Monetary Economics · 1 Comment

The history of money doesn’t need to be confined to one specific country or time period. It is rather expedient to outline the role money has played and the changes it has gone through in virtually all countries over time. Some events might have occurred earlier or later in one nation or another. However, the general trend to date has been the same. Understanding this trend is of major importance when it comes to understanding money today. This article describes the imaginary story of a country that went from no money at all to a fiat money, paper money. It is conceptually applicable to any country on earth.

The demand for money arose with the appearance of division of labor, when individuals began producing for others rather than for themselves. This was of course a direct outcome of the law of comparative advantage and the corresponding specialization of labor. If individual A transforms land and produces a good that individual B demands, but B has nothing to offer that A demands for consumption, A might still consider receiving a product M in exchange that he can then give to individual C. C happens to demand B’s product for consumption AND offers something that A also demands for consumption. In this case, from A’s point of view M is a medium of exchange, a money.

With division of labor spreading, different goods would be used as money, such as tea, coffee, beans, salt, or cattle. There are numerous accounts of the usage of these goods as money in history. However, there are goods that are better and goods that are worse than others for usage as a medium of exchange. A medium of exchange needs to fulfill criteria such as durability, divisibility, homogeneity, measurability, sufficient but limited availability and broad acceptance. The metals gold and silver emerged as goods that best fulfilled these criteria when used on the market.

Consumers, entrepreneurs, capitalists, landowners, and workers dug up and/or used gold and silver as money in exchange and credit transactions on the market. Decentralized, competing gold mines would channel gold into the market, part of which was used as money. For a fee, some entrepreneurs began offering the service of depositing money in warehouses, also known as deposit banks, so the owners of the money wouldn’t have to carry it with them. They would issue receipts for the money deposited. Soon the receipts themselves, rather than the deposited gold, would be used as money, hence gaining value as media of exchange.

Some of the gold would not be redeemed but rather stay in the warehouses. Thus the entrepreneurs issuing the receipts started offering their own receipts in exchange and credit transactions which were not backed by their own gold. However, they had to be careful not to issue too many uncovered receipts. Because as the price of their additional receipts would drop, their customers would begin redeeming them in exchange for gold again. If there were too many uncovered receipts issued, the warehouse would ultimately lose all its deposits and hence go out of business.

Thus in the long run those deposit banks who managed their deposits most prudently would be the most successful and profitable ones.

But some of the depositors had loaned receipts to the government and hence accumulated public debt. When they faced the threat of going out of business, due to a massive drain upon their gold reserves they sought help with the government.

The government used its police force in order to prevent the deposit banks from having to redeem their customers’ receipts for gold. It declared the receipts of the banks a legal tender, which means that they became a fiat money, a money that people are forced to accept or face government force if they don’t. The operations of different banks were consolidated within one central bank and numerous fractional reserve banks with the exclusive authority to produce fiat money. In addition, the government forcefully confiscated private gold holdings and declared private ownership of gold illegal.

This central bank was no longer under the constraints that the deposit banks used to face. It didn’t depend upon gold deposits and it could inflate the money supply at will. Without voluntary competition within the country, the result was that the quality of the money produced was low. Inflation became a common phenomenon.

Just as seen in the example of the production of cars in the Soviet Union, the more monopolized and centralized the production of a good, the less competition exists, and the less the consumer is given a choice, the lower the quality of the good produced will be from the point of view of those consuming the good.

Roughly, this has been the History of Money and Banking in the United States and the course of events that led to the establishment of the Federal Reserve Bank.

Tags: banking, central bank, deposit banks, federal reserve bank, fiat money, gold, history of money, money, sound money

Inflation & Deflation

November 11, 2008 · Posted in Monetary Economics · Comment

Inflation and deflation are market phenomena whose occurrence only becomes important under a fiat money system. Under a voluntary money system in which individuals are given the immediate choice to choose what they in fact prefer as the best money, goods that are limited in supply will naturally prevail and inflation will be modest and negligible. It is a historical fact that over time the precious metals gold and silver outstripped all other goods as media of exchange for their limited supply, durability, uniformity, divisibility, and aesthetic appeal. In the Untied States it was of course the compulsory intervention by a cash strapped government that outlawed the non-acceptance of the paper dollar, a fiat money, and on top of that outlawed any private ownership of gold.

Inflation

Inflation is defined as an increase in the money supply, the nominal amount of money units held by all individuals within a certain territory.

Inflation occurs in a fiat money system when the central bank or fractional reserve banks produce additional money to be used in a certain territory and use it to buy goods or to perform credit transactions with other individuals on the market.

Since the marginal value preference assigned by individuals to each additional unit of money will be lower the more money they hold, the price of goods expressed in terms of money will be more likely to rise over time, if the money growth exceeds the growth of other goods.

The fundamental issue with inflation is not that prices go up. If the newly created money was distributed evenly across society, all incomes would rise in lockstep with prices. The entire operation would be a zero sum game. The fundamental issue is that inflation in a fiat money system occurs through creation of new money that certain individuals receive earlier than others. Wealth is thus shifted from those who receive the money later (after prices have already gone up) to those who receive it earlier (before prices have gone up). Typically this means a shift of wealth from workers to the government and to owners of fractional reserve banks and the central bank. It lowers the general standard of living insofar as it becomes less desirable to perform work that fulfills voluntary value preferences and more desirable to perform work based on bureaucratic government decisions that involve theft and compulsory action.

Deflation

Deflation is defined as a drop in the money supply. It occurs when the central bank or fractional reserve banks reduce the money supply by reversing their inflation by selling goods other than money, thus withdrawing money out of circulation, or when individuals make more re-payments as part of credit transactions (which they entered into with the central banks or fractional reserve bank) than additional money is produced.

As the money supply declines, the price of other goods in terms of money is more likely to drop over time.

Deflation is in essence a correction of the previous misallocations created by inflation.

Addendum: What I was referring to above is monetary inflation. Please see more details in Inflation & Deflation Revisited.

Tags: central bank, deflation, fiat money, gold, inflation