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The 8/30/12 Wall Street Journal had an interesting article about going back to a gold standard. Its thesis is that the gold standard used to be considered kooky but is now mgaining mainstream acceptance.

I am leery of the gold standard. It looks like it can cause depresisions (deflation) when the need for money (GDP) grows faster than the supply.

Repeal legal tender law

I prefer just repealing the legal tender laws. Those say only the U.S. government can say what our money is and that creditors cannot refuse or discount U.S. dollars. There is a sentence on our paper currency that says, “This note is legal tender for all debts public and private.”

If you repeal it, residents of the U.S. can use whatever currency they agree to—including the U.S. dollar—to pay their bills. Existing debts would have to be paid in the currency specified in the contract. Debts owed to the U.S. government, like taxes, would have to be paid in U.S. dollars, but to the extent that the Fed “prints” too many U.S. dollars, the U.S. government, like everyone else, would not want to accept them for taxes if the legal tender laws were repealed.

Let the U.S. dollar compete with other currencies within the U.S. and around the world

If you repeal the legal tender laws, and keep the U.S. dollar for payment of debts to the U.S. and for anyone else who is willing to agree to accept it, then the U.S. government would have to compete with other currencies, like foreign currencies. And if they let the U.S. dollar inflate, the only ones hurt would be the U.S. government itself (and owners of U.S.-dollar-denominated bonds). In other words, there would be less likelihood of the U.S. government inflating the dollar because they would hurt mostly themselves. So repealing the legal tender laws would not end the dollar. Rather, it would increase the life of the dollar by ending the government’s incentive to inflate and force the government to compete with other countries and precious metals like gold and silver as a money supplier.

Metallic commission platform plank

The article points out that Romney has a platform plank calling for a new gold commission—to investigate whether the U.S. should return to a gold standard. I surmise that was demanded by, and given to, Ron Paul. Platform planks are not very meaningful in the grand scheme of things in politics, but it is interesting and not the usual.

Apparently, some now say there should be a target price for gold. That is, the Fed would be encouraged, but not required, to run monetary policy to as to keep the dollar price of gold near the target price. That scares me because the price of gold is set by a bunch of skittish gold bugs and could be manipulated more easily than most securities/commodities prices because there is such a small amount of gold in the world.

The article said Friedrich von Hayek advocated simply repealing the legal tender laws and letting people use U.S. dollars or whatever else they wanted. That makes the most sense to me for the reasons stated above.

Price in gold; pay in dollars

The article also says some would simply price things in weights of gold or silver. You would not have to pay in gold or silver. You would simply pay in however many dollars that much gold equaled at the time of the purchase.

I don’t think that would work because it sort of implies that the value of stuff in gold or silver is constant. I think the gold price jumps up and down for all sorts of reasons. So if you sold, say, Coca Colas for 1/1600 of an ounce of gold that would be about one dollar now, but only 50¢ a couple of years later. A basket of exchange-traded commodities would make more sense and be more stable. Otherwise, there would be a high menu cost—the need to keep changing your prices from 1/1600 to 1/800 and so on.

A Senate bill would remove capital gains tax on gold and silver coins that were declared legal tender by a sate or the federal government. Utah alreay made such coins legal tender. I like that.

Separation of money and state

I believe in separation of money and state. That is, no legal tender law. The U.S. government can specify what currency it will use to pay its bills and what currency it will accept for taxes and other amounts owed to the U.S. It should probably be required by law to pick the same currency for each. But all others, including individuals and the state and local governments, could use whatever currency they wanted and reject or discount U.S. dollars except when they had agreed to accept them in a contract. Essentially, that would make inflation impossible because any time a currency started to inflate, people would stop agreeing to accept it at face value but would try to pay all their bills in it. Any attempts at “printing” too much money would be self-correcting.. All excess money would cancel out its own existence by reducing the value of each note proprotionately to the excess “printing.”

Giving people a way to end inflation fears would have a dramatic salutary effect on the economy and society. Ending inflation fears should make long-term interest rates lower. It would end the existence of the so-called “yield curve.” It would increase savings. Many, many great benefits. It would knock the current price of gold down to about $650 an ounce. It would reduce risk and uncertainty.

I don’t think we need a gold commission. We need a legal tender commission. We don’t need to pick an Exalted Grand Dragon commodity. We need to let the market pick a fiat money in a free-market competition. And change that choice the moment the winner strays from monetary soundness.

John T. Reed