Gold Standard of dumb ideas

The Legislature is working on HB 317, a bill to put Utah on the gold standard and do away with all danger of inflation, or so the sponsors say.

You can read the story here (click) but the premise of the bill — that gold is more stable and inflation-proof than paper money — is simply wrong.

Gold is a commodity. All money is a commodity. The value of gold relative to other commodities — potatoes, bread, BMWs — is determined by the amount of gold floating around relative to the amount of potatoes, bread and BMWs floating around. The bill asks Utah to let people pay taxes in gold coin, which would put Utah in the sticky position of trying to figure out how much gold to take.

Will we all have to start carrying around pokes of gold dust? Reminds me of the movie “North To Alaska.”

Alaska is a good example of how gold does cause inflation, and its value is far from stable. Miners with pokes of gold had to pay $1 a dozen for eggs back on the Klondike. It was supply and demand, and store-keepers (who made the real money during the Gold Rush) knew how to work it.

Spain went through a period of inflation after 1492 when it started importing all that gold from the New World without increasing the manufacturing base in Spain. More gold chasing the same amount of commodities (probably not BMWs) meant the price of those things went up. Good for you if you had the gold, not so good if you didn’t.

Money is a way to trade my potatoes for your BMW without having to haul around sacks of potatoes. Paper money is, it is true, not gold, but neither is the check you write when you buy a BMW.

The government can print all the money wants, just as you can write all the checks you want, but you are both  foolish to write or print more than the value of goods and produce your checks, or the government’s money, is supposed to represent.

People worry about too much paper money, but what if someone discovers a huge amount of gold somewhere? Suddenly gold would be as common as peanuts. Not for nothing does DeBeers keep tons of diamonds locked up solid: If that hoard ever got loose, diamonds would be as valuable as paper dollars. As it is, I’m amazed they’re still valuable — after all, darn near every bride has one.

Judging by the amount of inflation we’re seeing right now — less than 1 percent except for gasoline — I’d say the goverment is doing a better job than some people I know handle their checking accounts.

The only real effect I see of this silly bill is that it will cost the state of Utah several hundred thousand dollars because it exempts gold coins from capital gains tax.

Makes me wonder if the real goal of the bill is to help people who have gold coins make a killing in the currently highly inflated gold market without having to pay taxes on their profits.

That’s the age-old conundrum: What do you sell gold for? When they sell their gold, they’ll most likely be paid in paper.

I bet they take it, too.

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12 Responses to Gold Standard of dumb ideas

  1. Howard Ratcliffe says:

    Recipe for Revolution: Dress as Indians, leave Green Dragon Tavern for Boston Harbor. Dump Tea in protest of Tax, incite colonists to revolt; tell King George III to require payment in Gold knowing colonists had at most $12 Million in gold. Same Revolutionary plan only 235 years later. We just never seem to learn “Our enemies are the men of our own house” Mat 10:36 and Micah 7:6
    Mayer Amschel Rothschild “He who has the gold makes the rules”

  2. robert ganz says:

    My ounce of gold was worth about $300 prior to Y2K Now my ounce of gold ( see coininfo.com) is worth over $1,400 Looks like I’ll be holding on to my gold a little longer. Your are sooo correct that you can always sell gold for (fiat money) paper, but you could no always sell paper for gold. If you want to see some paper money that became worthless throughout U.S. History go to http://www.flagguys.com/money.html

  3. ctrentelman says:

    my coin collection has some lovely examples of confederate currency, german notgeld, german inflationary notes and there’s even an East Germany Mark or two in there.

    Paper, like gold, is only worth what you can get for it. If the US ever decides to sell off Fort Knox (currently valued, on paper, at $35 an ounce) your ounce will change…

  4. Erick says:

    The gold standard has no literal effect on inflation protection; it just appears that way because people buy it out fear. Prior to currency trading through technology, the Gold Standard was the means for international trade, but it had measurable inflationary effects in domestic economies. Gold is a non-productive asset, and it is used for almost nothing – some jewelry, but people now have better things to buy than that. BTW, historically they didn’t – which was a key factor driving Gold demand in previous centuries. As an investment vehicle, gold should be worthless (or nearly), but it’s not because people have this emotional fixation on a false notion that gold, for some reason, has inherent value. So people buy it out of fear, and that drives the prices. It also doesn’t hurt that Glenn Beck, and others like him, are pounding the idea that country is headed for collapse, and we’ll be trading gold out of our trunks, because if the world ends, “people are going to want gold”. Theoretically, if Becks apocalypse did happen, it wouldn’t take more than a transaction or two, before people realized that selling that shovel for a small rock was a really bad idea. Once economic fears subside, so will gold prices. It has no more practical value than money (worse, because it doesn’t burn), so it only has exchange value – and exchange value is related to output/production.

  5. Charles Trentelman says:

    Erik — The Onion actually said the same thing as you, only funnier:

    http://www.theonion.com/articles/us-economy-grinds-to-halt-as-nation-realizes-money,2912/

  6. Jim Hutchins says:

    If the Apocalypse comes, I’m willing to bet that my restaurant-size can of green beans is worth more than your ounce of gold.

    Which is Charlie’s point, if you care to listen to it.

  7. hawg says:

    I’m betting that when the world collapses, the “metal” of value will be copper jacketed lead.

  8. Erick says:

    The onion is funny:)

    The sideways smiley face is proper etiquette now, right?

  9. Midwinter says:

    Planet Money did two excellent podcasts on the Gold Standard. Part one is here and part two is here.

  10. Trevor Goodchild says:

    The strange thing about this bill is that the proponents say that dollars are subject to inflation and so we need an alternative currency, preferably back by gold.

    However, there is nothing preventing them from buying gold right now. If they don’t want to hold dollars, they can buy gold. So, what’s the problem exactly?

    Most people don’t hold dollars. They hold stocks, bonds, real estate and even gold if they want. They get paid in dollars. Are the proponents saying every should get paid in gold instead of dollars?

    Good luck having employers sign on to that one.

    Getting rid of taxation at the state level doesn’t do anything about the collectible tax for gold and silver at the federal level (28% regardless of term).

    So, what exactly is the point of this legislation? An attempt by gold hoarders to push gold prices higher? An attempt to decrease state revenue? It seems entirely pointless.

    If you couldn’t purchase gold right now, I could understand the legislation. But if you haven’t seen the barrage of ads from places where you can buy gold, you’ve probably been living under a rock. It isn’t like it is difficult to find some to buy and they keep digging more out of the ground so you really don’t have to worry about the supply going away.

  11. Steven Douglas says:

    I am loving this. Even the “I don’t get it” remarks on the Internet by people who scratch their heads and point out that you can already “buy” gold (both the commodity and the coins), and remain willfully blind to the reality that some people don’t see gold and silver as mere commodities to be “bought” – as if paper-debt-fiat-thin-air money was the only money. Some see themselves given the option, the right, to convert what they perceive to be an untrustworthy fiat currency into a more sound currency of choice (and choice being the operative word here), without having its value artificially, legislatively devalued, or savaged (“fiat” by an another name).

    The problem I see here is not that this legislation is a “waste of time”, or even whether or not gold or silver is a “good investment”. If you think something is a stinker of an “investment” – even if that stinker is precious metals – or even a constantly devalued fiat currency – DON’T DEAL IN IT! But for that to be an option, an option must be provided.

    And that’s where the humor of this all comes in for yours truly. For some the only paradigm for “money” is as a form of credit or debt, which excludes anything of intrinsic value. Things having intrinsic value are mere commodities, doncha know – things which you may “buy” with your money (read=debt notes).

    That is all irrelevant, however, as are theories about whether a gold/silver standard is “workable”, which doesn’t matter either — that is, unless you reckon everything as an all-inclusive, “we’re-all-in-this-together” mindset; one that insists that a single one-size-fits-all option must be established and agreed upon, declared compulsory to everyone by fiat, with no competing options. That’s over and done with, at least at the state level, at least with one state.

    Gresham’s law won’t take place in Utah, as I have heard some claim, given that there is no compulsory requirement for the acceptance or remittance of the “bad” money alongside the “good” money, as if they were the same value (e.g., base metal coins drove precious metal coins out of circulation in a hurry).

    Thiers law, on the other hand, is a genuine threat (to the fiat dollar, at least). If there is no requirement to accept “bad” money either, the good money can (and should always) serve, in the long run especially, to drive out the bad. I think that will happen, and when it does, it will be the engine that turns mockery into genuine anger for some. And I look forward to the day when that happens.

  12. Steven Douglas says:

    One more thing. A fallacious paradigm that needs to be exposed for the outright lie that it is.
    Despite speculation, booms and busts, gold and silver do not really go up or down in value by all that much. And by value I don’t mean “price per unit of fiat currency”, which is not the same thing as “value”. By value I mean actual purchasing power.
    The silver content in a Barber, Mercury head, or pre-1964 Roosevelt dime (90% silver, 10% copper) could buy two 1 lb. loafs of bread in 1915. Today that same dime (the silver one, after fiat conversion) can buy about the same amount of bread, and tracks quite well with other commodities of like (intrinsic) value.
    So let’s go back in time, to 1953. I have worked hard and earned wages. I paid income taxes on those wages, and managed to save $35. I was paid in “cash”. Silver Certificates, to be exact. Not “lawful money” at that time, but only “redeemable in lawful money”, which was silver, as stated on those certificates. My Silver Certificates were promises to pay – backed by the government, no less. But I had already learned by sad experience not to trust my government. I already had my gold savings confiscated (illegally, it was later determined) by FDR, and given my government’s absolutely deplorable track record anyway when it comes to honoring its obligations, promises, treaties, etc.,. I demanded silver coin for my certificates. I predicted even then that my government would one day default on its promise to pay even silver, and in 1964, thirteen years later, my prediction came true; the U.S. government officially defaulted on its promise to redeem, even in silver.
    Fast forward to 2011. I still have that same $35 in silver coin that I had worked hard for, and managed to save. The intrinsic value, or purchasing power of that money has not changed in the intervening years. For me to spend it, however (not barter or “sell”, but SPEND), I must first convert it into the fiat currency, with dollars which are now backed by nothing but “the good faith and credit of the United States”.
    When I convert my silver coins (all circulated, no numismatic value) to the fiat currency, the Federal Government will INCORRECTLY state that my silver has GAINED in value (as if price and value were interchangeable terms). That is the outright LIE, for which I will be required to pay a “capital gains” tax — on money that was already taxed (part of my savings after taxes).
    The value (read=purchasing power) of my money did not “gain” in any way. It stayed the same, as it should have. But I will be (re)taxed nonetheless; punished – albeit only at the federal level only now, for the LOSS in purchasing power of the paper fiat dollar (over which NO AMERICAN has control or representation), relative to the silver that I had worked so hard to save.
    TO SUM IT ALL UP:
    By design, the federal government has the power to tax “price increases” on anything, even though the intrinsic value of whatever is considered did not change. In other words, we can be taxed, in perpetuity, for nothing more than the “decreasing value” of the currency. It is, at minimum, a double tax, based on a LIE. First, we must be taxed to pay for deficit spending. That’s fine. We need things, we need to pay for them. But deficit spending with low interest rates devalues the currency already in circulation. This in turn causes inflation, meaning that the price, NOT THE VALUE, of everything will go UP, as the VALUE of the dollar goes DOWN (only). So when you buy at one price, and inflation causes that PRICE to go up, you will be subject to a “capital gains” tax, even though the ONLY thing that happened was that the VALUE of the currency went down.
    What a scheme. Ponzi would be so proud.
    The most horrible and potentially good news combined is that these days are coming to an end. We can now no longer afford the even interest on our debts. That means that the Fed MUST print more money to buy more government securities, and MUST continue to keep interest rates low — even as other nations (China, Japan, et al) are divesting themselves, and crying out, just like many Utahns are, for a responsible, alternate “reserve currency”.
    A day of reckoning will hit the U.S., of that I have no doubt, with an economic drought that is far more potent and devastating than all prior depressions combined when that comes to fruition.

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