Since 1913, the dollar has lost over 95 percent of its purchasing power. Why? Because the Federal Reserve, which Congress established that year, has printed more money than necessary.
Or so skeptics claim. Many tea partiers agree — so much so that they’re spearheading an effort to introduce two competing currencies into the money supply: gold and silver.
The Constitution forbids states to coin money. In Article I, Section 10, however, it reads, “No state shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts.” Jeff Bell, policy director of American Principles in Action, argues that this passage authorizes states to recognize gold and silver as legal tender.
Colorado was the last state to do so, in 1893. But Utah, taking “a precaution against further deterioration in the dollar,” has revived the endeavor, Bell says.
In March, Gov. Gary Herbert (R.) signed into law the “Utah Sound Money Act.” Drafted by attorney Larry Hilton, the statute declares gold and silver legal tender in the Beehive State, makes trading in these metals strictly voluntary (i.e., the state can’t force anyone to accept payment in them), and eliminates state capital-gains taxes on gold and silver coins used as currency. Now, Iowa and South Carolina are considering similar legislation.
The hard-money movement made its first leap into national politics a few weeks ago, when Sens. Jim DeMint (R., S.C.), Mike Lee (R., Utah), and Rand Paul (R., Ky.) introduced the “Sound Money Promotion Act.” The bill would eradicate federal capital-gains taxes on gold and silver coins declared legal tender by the feds or by state governments.
“We’re losing credibility in our money,” DeMint tells National Review Online. He contends the bill “might create a little accountability” by fostering competition with the dollar.
Hilton fears the dollar’s decline even more. “President Obama’s administration authorized more new money in its first eight months than had been created in the entire history of the United States,” he says. “There’s a hidden, insidious inflation tax that we’ve become so accustomed to. We need a currency that maintains its purchasing power.”
Crucially, Utah’s law assesses gold and silver at market value — not face value. Thus, as the New York Times’s William Yardley explains, “while the one-ounce American Eagle coin produced by the Mint says ‘One Dollar,’ it is actually worth more like $38 based on the current price of silver.” An ounce of gold, meanwhile, is worth over $1,500.
But this setup poses challenges. If gold and silver trade at market value, vendors will have to measure coins’ weight and purity to determine their worth. Will McDonald’s have a scale in every drive-through?
No, thankfully. Bell says private interests are starting banks in which members can leave their gold and silver deposits. They then can use those deposits as backing for debit cards: “You could pay any bill or your taxes with a Visa debit card that would then be assessed against the valued coins — and they may be revalued all the time.”
But they also may be devalued. Generally, gold prices move against market conditions. When the economy tanks, people put their money in gold because they feel it’s a safe investment. But when the economy booms, people put their money into more lucrative options such as stocks and real estate, and gold prices plummet. For example, in January 1981, during a recession, gold prices averaged $557.81 per ounce. In December 1999, however, during the dot-com fervor, they averaged $278.86 per ounce.
Hilton, however, argues that as more states recognize gold and silver as legal tender, their values will be less susceptible to investors’ whims: “Hopefully, that will flatten out the demand curve and you won’t see the wild gyrations in value because there will be this constant demand.” At the same time, he maintains, “I don’t think you can challenge a currency that has maintained its purchasing power as well as gold has.”
But Mark Blyth, a professor of political economy at Brown University, wonders if a paper currency is easier to keep clean. “With a paper standard, you better be telling the truth, because your credit will be shot. And with two keystrokes, I can tell you how much debt there is in the country. With gold, you can fudge it. It can be opaque how much gold you’ve actually got.”
Nonetheless, sound-money advocates see this legislation as a warning shot for the Fed. “My sense is that the Utah legislators believed they were sending a signal to Washington,” says Lewis Lehrman, an adviser to GoldStandardNow.org. “The signal was ‘stop depreciating the dollar.’”
— Brian Bolduc is a William F. Buckley Fellow at the National Review Institute.