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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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Capitalism and Freeedom
  • Republican Monetary Reform 0 comments
    Aug 20, 2013 3:51 PM

    "A separate idea of Ron Paul's is being promoted by a Republican congressman from Georgia, Paul Broun. It is a bill called the Free Competition in Currency Act, which is brilliant in its simplicity. It is but a page long and would repeal the legal tender laws and end any capital gains taxes on gold and silver coins. All currencies, government- or privately-issued, would be allowed to compete...

    The states are stirring. At least 13 of them are considering laws to grant legal tender status to gold or silver coins."

    --Seth Lipsky, "Fed Up Yet?", Am. Spectator, September 2013

    On the 100th anniversary of the Federal Reserve, the GOP's monetary alchemists are hard at work on "monetary reform", which generally means:

    1. End the Fed.

    2. Return to the metallic standard.

    3. Allow free coinage and competitive currencies.

    4. Execute Bernanke for treason, or something.

    Their latest brainstorms are embodied in various bills languishing in committee, and in state legislatures. One of the funniest of these proposals is to make gold and silver coins into legal tender, as a parallel currency alongside the greenback.

    I enjoy thinking through stupid ideas like this.

    In a fiat money world, commodity prices fluctuate in their value in fiat money. The prices of gold and silver fluctuate hourly (just take a peek at GLD and SLV). Gold and silver coins are valued by their weight, fineness and the current price of gold and silver. A law that transform bits of metal into legal tender would be difficult to implement. Such coins could not have a face value, only a statement (or assertion) of weight and fineness. Businesses, banks and private citizens dealing in the myriad of private, state and foreign coins would require a mass spectrometer and an online source of real-time price quotations for every coin. This would be quite cumbersome, unless you already own a mass spectrometer and are familiar with its use. And what if our spectrometers disagree?

    If coins are legal tender and valued by metallic content, perhaps they could be deposited into a bank account whose value would fluctuate, and against which "gold checks" could be written. The value of such checks would, of course, fluctuate with the prices of the coins in your account. The merchant would have to take the risk that the check will be worth the same amount of dollars when presented to your bank, but it would obviate the need to carry around a lot of metal in your pocket. Would your bank pay interest on your coin collection? Unlikely: they are more likely to charge a custodial fee.

    So long as coins have no face value in fiat money, the old problem of bimetallism is obviated, because there would be no fixed parity between the two metals. When gold and silver coins and certificates were legal tender, there was a constant problem of over and under valuation, because of the fixed parity. Many books (and speeches) have been written on the challenges of bimetallism.

    Another drawback to a metallic co-currency is that we might also have a problem of "Gresham's Law in Reverse". The law would suggest a generalized preference for receiving gold and paying with paper. But my hunch is that your local gas station and dry cleaner will refuse to accept your Krugerrands, and will desire a credit card or a $20 bill instead.

    The whole exercise of parallel currencies is entertaining to contemplate. The problem that a metallic currency is supposed to solve is the fluctuating value of the paper dollar. It solves this problem by giving you a coin with no face value, which fluctuates in value every minute, and which would make the business of purse-snatching considerably more lucrative. Let's try it.

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