Anything but the dollar
Last week, in a much publicised exchange, Congressman Ron Paul asked Chairman Ben Bernanke if he would consider the circulation of gold and silver coins as legal tender. At The Real Asset Co we often write about how gold and silver are money, as history has repeatedly shown. In this article Jan Skoyles looks at why the introduction of silver coins into an economy is a good idea and a widely held view.
‘That’s preservation value!’ exclaimed Congressman Ron Paul at Federal Reserve Chairman Ben Bernanke last week. The Congressman was waving a silver ounce coin at his nemesis. He had just finished giving him a brief lesson on the ability of silver to maintain its value and purchasing power, i.e. the inability of the dollar to do the same.
As many of you will have read by now Dr. Paul’s exchange with Mr Bernanke was the most recent of many lessons for the Chairman in sound economics and how not to run the Fed. It was entertaining watching Dr Paul ask Bernanke if he did his own shopping before launching into a campaign speech focussed on the reckless behaviour of the Federal Reserve.
Dr Paul felt it necessary to remind Mr Bernanke that the Federal Reserve has a responsibility to protect the dollar.
Dr Paul stated that there is no longer a definition of a dollar, is it whatever it buys? He asked. The dollar, a fiat currency, is worth less and less each day. He stated that there is no other measure where one could get away with changing it as the Fed do with the dollar “You can’t have a yardstick which changes value everyday” he exclaimed, “otherwise the whole building would be out of sync!”
Dr Paul brought up the subject of introducing competing currencies. He asked Mr Bernanke if he would consider making alternative currencies, i.e. gold and silver, legal tender. He demonstrated, whilst holding up a silver coin, silver’s ability to hold its value. When Bernanke came into power in 2006 that ounce of silver bought 4 gallons of gas, today it buys just less than 11.
At the moment nothing, as Mr Bernanke quite rightly pointed out, is stopping individuals from saving in gold and silver. But that’s not what Ron Paul wants; he wants people to be able to pay their bills in silver – their taxes, their legal settlements. He wants silver to circulate alongside the dollar, as two currencies, as currencies do across the world.
It’s not just Dr Paul who has thought about this in the US. As CNN reported last month:
Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.
“In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.
As Dr Paul argued, the single currency of the dollar is stealing from the American people; silver would give individuals the freedom to choose honest money or un-backed paper money.
‘The major monetary metal in history is silver, not gold,’ (Friedman, 1993).
Historically, silver was the first metallic standard as it was more accessible to the common man while gold tended to be reserved for royalty or religion. Lips (2001) and Jaitly (2010) both acknowledge that the loss of silver from the monetary system was due to a desire by the government for control. Silver’s vast distribution throughout the population meant that it was harder to control by governments and therefore over time silver was removed and gold became the legal monetary metal and base for the British Pound.
The introduction of silver coins into an economy is not a radical proposal in the modern world. It is as widely discussed as the introduction of the gold standard, but is seen as a more time relevant solution to today’s monetary problem. Lips sees silver’s monetary role as ‘the gold of the “little man”’.
The introduction of a silver coin is an idea proposed by Hugo Salinas-Price, President of the Mexican Civic Association for Silver. He is currently passing a bill through Mexican Congress to monetize the Silver Libertad ounce coin and circulate it alongside the Mexican peso.
As Dr Paul regularly states, inflation has been prevalent since the introduction of paper money, the introduction of silver coins would be ‘an effective instrument to assist in dealing with inflation,’ (Salinas-Price, 2010). The circulation of silver coins would ‘create refuge for popular savings, offering the population an instrument with no devaluation, which is not impacted by inflation, that is not subject to errors due to monetary policies or bank collapses,’ (Salinas-Price, 2011). There is one caveat however, because inflation is now a global phenomenon, which has affected silver’s price, the monetary value of the coin must be quoted rather than engraved, so as to ensure it will circulate permanently.
Whilst Dr Paul sees the introduction of silver coins as a threat to the dollar and protection against inflation; it will allow people to choose money with real value, for Mr Salinas-Price it can also be seen as a savings vehicle.
This will assist countries which are suffering from inflation. Mr Salinas-Price states that as silver coins are issued and the paper currency of equivalent value is withdrawn, the silver coins will have zero velocity as they will be ‘treasured up’ by the population. Therefore the inflationary effect on the economy will be zero, ‘this is the correct way to fight inflation…saving these coins will amount to voluntary austerity…’ (Salinas-Price, 2010).
Competition to national currency
Dr Paul would like to see the introduction of gold and silver coins as a competing currency. In the UK we have politicians of our own who also recommend competing currencies.
One of them is Douglas Carswell, a Conservative MP, who we interviewed recently. Whilst his proposals do not focus on the introduction of precious metals in the economy, he is interested in idea of legal tender laws being repealed in order to allow competing currencies to circulate.
His argument is simple; at the moment the cost of devaluing the pound, as done by the Bank of England, is a cost not only incurred by the bank and the government but also us, the people of the economy. By removing legal tender laws we would be able to choose which currencies we could spend in and thereby present competition to the British pound (which may make Governor Mervyn King think twice about recommending further rounds of quantitative easing).
The beauty of Mr Carswell’s proposal is that this would operate entirely electronically, there would be no need for you to go to the bureau de change each day if you decided that you wanted to change the currency you were operating in. As Will Bancroft wrote about earlier this month, we know longer need to physically carry money around with us; there is digital money and digital gold and silver. This is currently in development in Utah; the Utah Gold and Silver Depository are hoping to allow customers to spend their gold and silver via a debit card which is linked to your gold and silver coin holdings.
There is little reason why you would have to walk around with a few coins of silver in your pocket. Instead you would spend on a card which is linked to your silver account, as you do now with the national currency. However, in contrast to the national currency, you would be safe in the knowledge that your silver was safe in the bank and would maintain its purchasing power.
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