Two-thousand miles away from Washington, Utah sent a strong message yesterday that the nation’s monetary system is dysfunctional. A bill authorizing gold and silver as legal tender passed the statehouse and with the governor’s signature will become law. This pushback against the Federal Reserve was truly a bottom-up effort, initiated by a group of activists and two freshman legislators keenly aware that the debt-based dollar is a significant drag on the U.S. economy. And it paves the way for more grassroots efforts to challenge the status quo and Ben Bernanke, something previously unthinkable.
In addition to recognizing gold and silver coins as money, the Utah Sound Money Act provides a credit against their capital gains tax liability and instructs a legislative committee to study the establishment of an alternative legal tender system in the state. This legislation is not only a response to the decline of the dollar, but also rooted in the founders’ idea about money which was inscribed in Article I, Section 10 of the Constitution: no state shall “make any thing but gold and silver coin a tender in payment of debts.”
The federal government abided by this for most of the nation’s history, using hard money in one form or another. The last breaking point was Richard Nixon’s 1971’s measure to suspend the international convertibility of the dollar to gold, a move of desperation that was supposed to be temporary but grew into a policy in its own right defined by the economic micromanagement of the Federal Reserve. Since then, the Fed rather than the marketplace has effectively determined the money supply, leaving a slew of misjudgments that you would expect from a board of economists trying to do the market’s job for it. The paper money system has thus produced lower economic growth, higher unemployment, and higher interest rates.
Gold has historically been the top-ranked monetary commodity for the U.S. and the rest of the world because it lends itself so well to the ideal characteristics of money: limited in supply, recognizable as wealth, and indestructible. Its production tends to be in sync with long-term economic growth, making it the most appropriate constraint on money creation. Currency backed by gold fulfills money’s uses as a medium of exchange, unit of account, and store of value.
History and practicality aside, journalists and policymakers are not below mocking gold as quaint or trivial. Running underneath that is a relatively new interpretation of money as just a mysterious thing rather than a sacred idea. The volatility of the dollar’s value since gold was demonetized has helped strip out the notion of integrity in money. Now it is just another commodity, a market variable, and even a political weapon. Workers, consumers and savers are left to figure out how to manage its fluctuating value with only the assurance of the Fed. The FDIC estimates that more than 25 percent of households in this country are unbanked or underbanked, leaving them with no financial protection against inflation.
With this in mind, Utah took the first step in doing what it could to protect itself against further deterioration of the dollar. The bill’s House sponsor, Republican Brad Galvez, called it “a step in preparedness, a step in security that allows us to be able to hold up our economy as the dollar continues to shrink.” Larry Hilton, a lawyer who drafted the proposal and championed it, said, “Even if our nation is fortunate enough to sidestep the really calamitous consequences our current fiscal and monetary policies engender, sound money just makes sense for Utahns, and all Americans for that matter. It provides the means to opt out of the insidious ‘inflation tax’ that has deprived so many globally of vast amounts of personal wealth.”
The bill has implications across the country. Utah is the first state to pass legislation to counter the Fed, but a dozen others have already proposed similar bills, including Iowa and South Carolina. If more of these states seize on the traction Utah is providing, it would show a groundswell of support for reforming the monetary system. Tea party activists, many of whom are new to politics, have immersed themselves in study of the values of the American founding and the principles of classical economics. Gold-backed money is rooted in both spheres, which is why it is starting to bubble up to the surface of American politics. So used to accepting the deeply-flawed monetary system as beyond the reach of reform, Washington should pay close attention.
Rich Danker is Project Director for Economics at American Principles Project, a Washington-based political organization
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