Mad Money

Eric Palma

In January 2011, the advocacy group Utah Sound Money released a 30-second ad designed to stir up support for a new bill in the state legislature. “The almighty dollar’s not looking so almighty these days,” the announcer intones as storm clouds fill the screen. “The feds have us tap-dancing at the edge of financial ruin.” A small map of the U.S. totters along a rising red graph of debt. Suddenly, blue skies open as a giant gold coin floats down, using the Constitution as a parachute. “Restoring an inflation-proof, sound-money option offers a time-tested option,” the announcer concludes over the laughter of children at play. Viewers are then urged to support the Utah Sound Money Act. 

Sponsored by Representative Brad Galvez, a Republican, the bill would make gold and silver coins from the U.S. Mint legal tender in the state. Although no businesses or individuals are compelled to use them, Galvez’s bill requires the state to accept the coins for tax payments or any government fees. Galvez says he was motivated by a fear that the nation’s mounting debt could lead to a loss of faith in the dollar, resulting in hyperinflation and possibly a currency collapse. He wanted to protect Utah, he says, from this calamity by creating an alternative to “fiat” currency, under which the dollar is backed by the “faith and credit” of the U.S.—not, as it once was, by gold reserves. 

The Utah measure might sound like one of the many thousands of fringe bills that get filed in state legislatures and then are never heard of again—except occasionally as a punch line on late-night TV. But Galvez’s bill became law last year. Now he’s working on new proposals to make silver and gold easier to use. While Utah is the first state to pass such a law, others are trying. In the 2011–2012 legislative cycle, bills were introduced in 17 states to either recognize gold and silver coins or study the options for alternative currencies. 

Ian Millhiser, a policy analyst for the liberal Center for American Progress (CAP), says that these bills come not from an organized national effort but from “people who are sympathetic with the Ron Paul vision of the world going out on their own.” 

For years, Paul—the long-serving Texas congressman and three-time presidential candidate—has claimed that the Federal Reserve and its paper currency will eventually doom the U.S. to insolvency. Reviving silver and gold was long a concept relegated to conspiracy theorists, survivalists, and extreme free-marketeers. But the 2008 financial crisis, along with the bank bailout and stimulus bills, lent further credence in far-right circles to the idea that the U.S. was dashing headlong toward financial ruin. The hard right turn of the Republican Party, combined with the Tea Party surge in statehouses in 2010, has further inflamed Fed hysteria. 

Paul’s persistent warnings of an unchecked Federal Reserve recklessly printing too much money—the grand theme of his campaigns for president—have found a growing audience. At least six of the state legislators sponsoring gold bills have endorsed him for president. While Paul has focused on auditing (or abolishing) the Federal Reserve, these measures assume its eventual demise and offer, according to their sponsors, a survival plan. 

The believers paint a scary picture. “If the value of the dollar falls precipitously, society in a sense becomes unglued, and it can even result in riots and chaos,” says Mark Thornton, a senior fellow at the Alabama-based Ludwig von Mises Institute, a libertarian think tank where Paul has lectured. “You can really destroy a civilization very, very quickly.” 

To mainstream economists, the notion of returning to the gold standard is not only laughably impractical but also economically perilous. James K. Galbraith, a professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas, dismisses gold-standard talk as “nonsense.” For one thing, the economy has simply grown too large to be tied to precious metals. The total amount of gold mined in history amounts to approximately $8 trillion. The U.S. gross domestic product in 2011 was about $15 trillion, and the national debt amounts to $15 trillion as well. As CAP’s Millhiser points out, a gold standard leaves the government with little ability to respond to economic fluctuations. “A big reason why we don’t have a gold standard,” he says, “is because it’s really important that we are able to react to the nature of the economic market by expanding or retracting the money supply.” 

Like most countries, the U.S. relies on a central bank to control monetary policy. The Federal Reserve was created in 1913 and has the power to expand or contract the amount of currency in circulation. In 1933, during the throes of the Great Depression, the U.S. began to leave the gold standard when President Franklin Roosevelt and Congress outlawed private ownership of gold coins. Over the next four decades, the government cut the remaining strings connecting the value of the dollar to gold.

 

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To the modern-day Gold Bugs, though, the Federal Reserve is the gravest threat to the nation’s economic health. Minnesota and Idaho have almost identical bills, which begin by justifying the need for gold and silver tender. “Because it is based entirely on debt and not redeemable in gold or silver coin, the currency emitted by the Federal Reserve System has created and threatens to create increasing instability in the governmental finances and private economy of the state,” both read. 

“What the Federal Reserve is doing with our monetary policy is catastrophic,” says Georgia state Representative Jason Spencer. “They are killing the very thing that Americans work hard for, and that’s our money,” he says. “If we got back on a true gold standard … it would keep government spending in check.” 

Spencer was a secondary sponsor of one of the most extreme bills this legislative cycle, authored by Representative Bobby Franklin. While most bills, like Utah’s, would not compel anyone to use gold and silver coins, Franklin’s measure required state taxes to be paid in the precious metals. That would be tricky, of course, for the many Georgians who don’t have the coins, and the bill included no plan to make them widely available. Franklin died last year with his bill still languishing in committee, and Spencer has decided not to pursue it further. But he’s not giving up. Next session, he plans to introduce Utah-style legislation.  

Like other proponents of gold-backed currency, Spencer feels a sense of urgency to protect the wealth of his state’s residents in the event of a Fed collapse. “Fiat currencies, if you study them through history, always end bad,” he says. He points to the demise of the Argentine peso and the Russian ruble and to Zimbabwe’s problems with hyperinflation. “You got old women and children out there panning for gold,” he says. “The United States is not immune to a currency crisis.” 

Saving the state from economic catastrophe isn’t the only motivating factor for the likes of Spencer and Galvez. This is also, they say, a matter of adhering to the Constitution. Since Article I, Section 10, of the document gives states the right to make “gold and silver Coin a Tender in Payment of Debts,” Galvez believes it’s what the founders wanted states to do. “States have been violating the Constitution” by not recognizing the coins, says Michael Boldin, who heads the Tenth Amendment Center, a Los Angeles–based group that advocates state sovereignty and supports the gold and silver laws. 

Constitutional scholars say that states do indeed have the right to recognize gold and silver. They must, however, recognize the U.S. dollar as well—no exceptions—which likely invalidates bills like Georgia’s requiring tax payments to be made in gold or silver. Utah’s bill, however, does appear to pass constitutional muster, says Gerard Magliocca, a law professor at Indiana University and authority on William Jennings Bryan, whose 1896 presidential campaign centered on bringing silver back as a money standard. States have the right to allow coins as legal tender. But, Magliocca notes, the Constitution limits how much influence state currency policies can have, and states cannot negate the status of federal dollars.

University of Delaware economist Farley Grubb concurs: “As long as states can’t abrogate the legal--tender power of Congress, anything they do is irrelevant.” Only a few true believers would use gold rather than the U.S. dollar, he says, no matter what laws are passed. If people believe gold is undervalued, those who have it will hoard it rather than spend it. For example, no one wants to spend an ounce of gold (worth about $1,700 at press time) on a trip to the grocery store, especially if they can simply use dollars and wait for the gold to be worth more. In effect, everybody would be playing the market. Economists have a name for this: Gresham’s Law, which states that when you have two currencies circulating simultaneously, people tend to hoard the dear one.

The economic realities, combined with the limited amount of gold out there, mean that this is “something that can be safely ignored since nobody would do it,” according to Galbraith. “The notion that we’re going to see a significant part of the population using gold coins is far-fetched.”

Such logic is shrugged off by those who see alternative currencies as a panacea. Already the Utah Gold and Silver Depository has opened shop; it will offer debit-like gold cards so people will not have to carry the metal around. If the Fed collapses, Representative Galvez says, the state will have the alternative infrastructure to keep chugging along. “We’ll be set, ready to go,” he says. “We’ll already have a system in place that will allow us to continue.”

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