Using Gold/Silver As Alternative Currency

[stevo_dubc]

I’m not sure if this has been covered before, so if it has please forgive me and just point me in the right direction. I have a practical question about alternative currencies.

It seems to me that it really isn’t possible to have an alternative currency as long as federal reserve notes (FRNs) enjoy legal tender status; changes in price between FRNs and precious metals are considered capital gains; and there is no legal definition of “dollar” in terms of gold or silver.

I’m having a dialog on the subject of money and I’m trying to address the following response:

Ah, the metal standard. I see several problems.

Practically, if you allow private minting of coins, the fraud problem will outstrip the ability of the government, or anyone else, to enforce it very, very quickly. Another area of technology that has advanced considerably is metallurgy.

More on the theoretical side, what is the point in tying a commodity (the U.S. dollar) to another commodity (silver, or whatever you choose). All you would achieve would be a second-order effect of jerking the price of silver around based on the current condition of the U.S. economy and budget. Please not what I said above. The U.S. dollar IS a commodity, and its value fluctuates according to all the same rules and factors by which commodity prices fluctuate. And the price of the dollar is actually a valuable piece of information in setting our economic, fiscal, and monetary policies. If you tie the dollar to silver, a number of things could happen that would affect the value of the dollar because they affect the value of silver.

And that’s the final point. By tying the dollar to silver, you would be constraining the U.S. economy by the value of silver. Silver has no inherent value (there are some significant industrial and scientific uses, but the real value of silver is “Ooooh, shiny!”). What happens if the U.S. economy is roaring along, growing at 7% per year, but silver deposit discovery and exploitation is only growing at 2% per year? Conversely, what happens if someone comes up with a revolutionary new industrial, scientific, or commercial use for silver that skyrockets its value? Or if world fashion trends turn massively away from silver, depressing its value? The whole U.S. monetary system would not be a measure of U.S. wealth and economic activitiy, it would be a measure of the current value of silver in the world. It is to avoid this problem that some have suggested tying the value of the dollar to a “basket of commodities,” so that swings in one commodity wouldn’t have a drastic effect on the dollar. But the key to understanding why there is little use, and many downsides, to tying the dollar to a commodity is understanding that the dollar is a commodity. Tying it to silver, or gold, or platinum, or anything makes as much sense as tying canteloupes to diamonds.

Ah, right. One last problem. Most of the “money” in the system doesn’t exist AT ALL in the form of coin or notes. The U.S. GDP is about fourteen billion dollars, but there is only about 1.75 trillion dollars in coin and paper in circulation. Source If you were to insist that the only “money” is silver coin, our economy would collapse. If you were to insist that only hard coin could be used as money, and forbid the “air money” that represents about 85% of the economy, it would stay collapsed.

I understand the emotional value of having hard money, but I hope I’ve demonstrated that if our money is stamped in precious metal, cheap metal, on paper, or on the backs of small rodents, it really has little to do with “money” in the 21st century.

I would like to suggest that we somehow change the law so as to allow consumers to decide which form of money they want to use. My argument would be that if given the alternative people would prefer real money, eventually only accepting FRNs at a discount or not at all.

I realize that there are proposals (such as Rothbard’s) that would orchestrate a revaluation of FRNs in terms of gold and reestablish redemmability, but are there any simpler steps that could be taken that would allow precious metals to be used in a parallel system?

[Snowflake]

*Practically, if you allow private minting of coins, the fraud problem will outstrip the ability of the government, or anyone else, to enforce it very, very quickly. Another area of technology that has advanced considerably is metallurgy.

Its pretty hard to counterfeit silver. It was never a problem in the past. Governments don’t have any advantage in stopping counterfeiters. Regardless, there are nifty ways to fight counterfeits. See Bitcoin’s unique encryption currency.

*More on the theoretical side, what is the point in tying a commodity (the U.S. dollar) to another commodity (silver, or whatever you choose). All you would achieve would be a second-order effect of jerking the price of silver around based on the current condition of the U.S. economy and budget. Please not what I said above. The U.S. dollar IS a commodity, and its value fluctuates according to all the same rules and factors by which commodity prices fluctuate. And the price of the dollar is actually a valuable piece of information in setting our economic, fiscal, and monetary policies. If you tie the dollar to silver, a number of things could happen that would affect the value of the dollar because they affect the value of silver.

• We don’t want to tie the dollar to anything. It can float free, or it can be like the liberty dollar (see wiki) etc etc. We want competing, free market currencies, of which there are many historical examples. For a more concrete modern example, consider that if I asked you to buy me mcdonalds, you would certainly accept an ounce of silver (worth $22.40) in exchange.

Hell. My friends and I play monopoly on fridays after class. Sometimes I borrow paper from them. If they grumble too much I offer to give them a hundred bucks next time we play monopoly. That’s currency too

We just can’t use these on large scales for corporate transactions.

**What happens if the U.S. economy is roaring along, growing at 7% per year, but silver deposit discovery and exploitation is only growing at 2% per year?

Nominal prices fall, while real prices do their own thing. Its predictable.*

**Conversely, what happens if someone comes up with a revolutionary new industrial, scientific, or commercial use for silver that skyrockets its value? Or if world fashion trends turn massively away from silver, depressing its value? The whole U.S. monetary system would not be a measure of U.S. wealth and economic activitiy, it would be a measure of the current value of silver in the world.

You mean what if everyone is so stupid that they don’t switch out of silver? Or that they choose a currency that can basically be printed up? Well that’s what we have now :P. I think in real life, silver would be relatively stable. I also think it would exist alongside MANY competing currencies, like gold, platinum, oil, a basket of goods, dow stock. I mean think about it - we do everything electronically and the market is so massive that almost every commodity is liquid.*

• *Source If you were to insist that the only “money” is silver coin, our economy would collapse. If you were to insist that only hard coin could be used as money, and forbid the “air money” that represents about 85% of the economy, it would stay collapsed.

This is a transitionary point… it is immaterial.*

Here’s a transitionary plan I’ve been toying with. Every 6 years, split the USA in half (along predetermined borders). At the 4 year mark, determine if things have gotten better or worse. If they have, wait 2 more years, and split again (in a very controlled, clear fashion, so the market and government can adjust). This is as scientific as you’re gonna get. It reduces anarchism to the claim that the more splits you have, the better. Not so radical.

[stevo_dubc]

Sieben, I agree with you regarding counterfeiting. The government has no special advantage there.

I just ran across the Free Competition in Currency Act. This certainly proposes changes along the lines of what I was thinking.

But I have one nagging question. Even if the FedGov allows competing currencies, doesn’t everything ultimately have to be converted back to dollars for the purpose of paying taxes? And if everything ultimately has to be reckoned in dollars, doesn’t that really lock everyone into using dollars?

[limitgov]

you mean using silver as a currency…

no average person can use gold as a currency…not unless he’s a big ol balla…shot calla…

[ClaytonB]

Just because someone has a hard time envisioning what sort of money products consumers would demand and how entrepreneurs would solve the problems of supplying consumers’ demands in a natural money economy is irrelevant to the question of whether fiat money inescapably distorts the processes of capital formation, investment and even consumption itself.

Clayton -

[Snowflake]

If you define taxes as a % of income, I don’t see any problem.

[stevo_dubc]

Yes, if tax calculations were strictly percentage based, then it wouldn’t matter. But take a look at basic income tax accounting. I first must determine my taxable income. Let’s say I’ve been paid in FRNs by one client, and paid in gold-grams by another. For the purposes of declaring my income for the year do I express it in FRNs? In gold-grams? Both?

Then there are things like income tax brackets. These are expressed in dollar (FRN) ranges. 0-10,000 dollars, 10,001-30,000 dollars, etc. (Yes, I know these are not the actual values…)

My point is that the concept of FRN-dollars is built into at least our income tax system, and probably also in our sales tax system. In many states, sales taxes rates are tiered, which mean from 0-100 dollars there is a 6% tax and then everything over that is exempt. Again, FRN-dollars are built in.

If there are competing currencies, conversions will have to be made from the various currencies into dollars. These conversion will have to be based upon the relative prices of each of the currencies (at a particular point in time). What will be the implications as the FRN-dollar continues to slide into worthlessness?

Perhaps my questions are not insurmountable. These issues must already exist for people who do international business and derive income in multiple currencies. Ultimately, they must provide FRN-dollars as payment to the fedGov, right?

[NicholasF]

I had thoroughly read an article entitled Alternative currency proposals increasing. It says that more states and places are dealing with growing insecurity concerning the American dollar and are proposing an alternative currency. Whether there is value to the notion or it’s just political grandstanding remains to be seen, but an increasing number of proposals are being put forth for alternative currencies.

[slider123456]

I had an idea for a competitive currency that would be legal and beneficial to the general population and to companies. If many stores created a currency that was redeemable for their goods, that appreciated in value and that was exchangeable with other stores certificates, that were also redeemable for their goods, on a digital currency exchange it would be completely legal and if it was done right it would be a win/win proposition for companies and consumers. Instead of getting commercial loans companies could split the cost of the loan paying those who bought their “coupons” half of the cost of their commercial loans through appreciation of the coupons, over time, while saving the other half of the cost for themselves as profit. A digital currency exchange where these coupons could be traded with each other would create the liquidity that is a necessity for any currency while the appreciating value would create an increasing store of value in opposition to devaluing fiat money. This would also serve to decrease barriers to investment by lowering the costs of investment owing to the fact there would be no broker middlemen, government regulations and the investment costs would be extremely low due to it being divisible, the same as U.S. dollars, and it would also be extremely liquid in case goods/services were required for an emergency while also retaining a cash value. If trust in this type of currency increased to a high degree because companies proved themselves to be trustworthy they could begin paying employees and suppliers with their currency which could then be redeemed for goods or exchanged for other coupons that were exchanged for that stores respective goods/services or just saved in order to take advantage of appreciation. Automatic digital exchange to the currency that was accepted by the store from competing currencies upon payment would keep shopping simple. Insurance companies could also insure people for losses, increasing transparency and ensuring proper business practices in issuing bills of credit, if it was to take off. This would be an asset backed currency that appreciated in value, was legal, liquid and if it were implemented it would not be hard to imagine precious metals coming into the fray as an alternative measure for determining the respective value of the competing currencies as an alternative baseline to devaluing fiat money, mainly due to the infrastructure that this system would create, namely, a digital competitive currency exchange.
An example of how lucrative this could be is WalMart. Their net profit was 15.36 billion in 2011 and interest expenses were 2.21 billion, making the interest expenses roughly %14 of net profits. If they could offset even 1/4 of that through an alternative currency it would increase their profits half of 550 million, so 275 million dollars, a yearly profit increase of roughly %1.75 plus a $275 million increase in sales when the coupons/currency are redeemed for goods. If half of the interest expenses could be offset it would be roughly a %3.5 savings per year and a $550 mllion increase in sales upon redemption of the coupons/currency, while offsetting all the costs would be roughly a %7 increase in net profits and a $1.1 billion increase in sales upon redemption of the coupons/currency, each of which equates to a massive increase in yearly profits especially when it is considered that the effect is cumulative and would compound year over year.