The First US Money Was Fiat, Not Gold; The “Gold Standard” Is A Fiat Money System With A State Fixed Gold Price

We know from anthropological records that the first money in world history was credit money, in particular state credit money, aka fiat money, which is money introduced by a violent authority that imposes a tax in its currency and then proceeds to spend the currency into existence to move resources and labor into the public sector, as I’ve explained before, and as you can read in books like London School of Economics anthropology professor David Graeber’s Debt – The First 5000 Years.

Even the barter economy that supposedly preceded the advent of gold as money has never existed outside the minds of many “gold standard” theorists. This compounding effect of piling unproven falsehoods upon more unproven falsehoods has had absolutely disastrous consequences in the realm of economic thinking.

Recently I’ve encountered some arguments from people suggesting that while I may be correct as far as world history goes, surely at least in the United States money was initially gold & silver coins, before the advent of fiat money issued on top.

This is also a made up claim.

Here are some relevant, documented, referenced excerpts in the Wikipedia post on Early American currency:

One by one, colonies began to issue their own paper money to serve as a convenient medium of exchange. In 1690, the Province of Massachusetts Bay created “the first authorized paper money issued by any government in the Western World.”[3] This paper money was issued to pay for a military expedition during King William’s War. Other colonies followed the example of Massachusetts Bay by issuing their own paper currency in subsequent military conflicts.[3]

The paper bills issued by the colonies were known as “bills of credit.” Bills of credit were usually fiat money: they could not be exchanged for a fixed amount of gold or silver coins upon demand.[2][4] Bills of credit were usually issued by colonial governments to pay debts. The governments would then retire the currency by accepting the bills for payment of taxes. When colonial governments issued too many bills of credit or failed to tax them out of circulation, inflation resulted.

After the American Revolutionary War began in 1775, the Continental Congress began issuing paper money known as Continental currency, or Continentals. Continental currency was denominated in dollars from $​1⁄6 to $80, including many odd denominations in between. During the Revolution, Congress issued $241,552,780 in Continental currency.[46]

Continental currency depreciated badly during the war, giving rise to the famous phrase “not worth a continental”.[47] A primary problem was that monetary policy was not coordinated between Congress and the states, which continued to issue bills of credit.[48] “Some think that the rebel bills depreciated because people lost confidence in them or because they were not backed by tangible assets,” writes financial historian Robert E. Wright. “Not so. There were simply too many of them.”[49] Congress and the states lacked the will or the means to retire the bills from circulation through taxation or the sale of bonds.[50]

Another problem was that the British successfully waged economic warfare by counterfeiting Continentals on a large scale. Benjamin Franklin later wrote:

States have fixed prices of certain things throughout history, always to please certain special interest groups. The so called gold standard is nothing but a fiat money system with a gold price fixed by the state, a policy supported by special interest groups for various reasons, and suspended whenever expedient to the plans of other powerful groups.

The people who claim the “natural” gold money came first, and then was replaced by fiat money issued on top of it, have it precisely backwards. Fiat money came first, and was at times off and on accompanied by a government policy of fixing the gold price at a certain level.

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Utah’s Gold & Legal Tender Laws

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.

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

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.

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Ron Paul on Gold

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Use Gold Money

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.

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