The States vs. The Federal Reserve

by Peter Schiff, Schiff Gold:

Over the last few weeks, three states have moved measures forward that chip away at the Federal Reserve’s monopoly on money by facilitating and encouraging the use of gold and silver.

While Congress will most likely never even audit the Fed, much less end it, this kind of action at the state level can undermine the Federal Reserve. Coupled with individual action, it could effectively erode the central bank’s monopoly on money.
In Arizona, Gov. Doug Ducey signed a bill into law that eliminates states capital gains taxes on gold and silver specie. Rep. Mark Finchem (R-Tucson) sponsored HB2014. The legislation eliminates state capital gains taxes on income “derived from the exchange of one kind of legal tender for another kind of legal tender.” The bill defines legal tender as “a medium of exchange, including specie, that is authorized by the United States Constitution or Congress for the payment of debts, public charges, taxes and dues.” “Specie” means coins having precious metal content.

In effect, passage of HB2014 “legalized the Constitution” by treating gold and silver specie as money.
Important legislation relating to gold and silver also moved forward in Louisiana and North Carolina. The Louisiana House unanimously passed a bill to repeal state sales and use taxes on the purchase of gold and silver. The North Carolina House overwhelmingly approved a similar measure.

Imagine if you asked a grocery clerk to break a $5 bill and he charged you a 35 cent tax. Silly, right? After all, you were only exchanging one form of money for another. Essentially, this is what taxing the “sale” of gold a silver. As Ron Paul said during testimony in favor of the Arizona bill, “We ought not to tax money – and that’s a good idea. It makes no sense to tax money.”

Of course, this is all good news for gold and silver dealers and investors. But it has much broader implications. These bills effectively remove taxes from the exchange of one kind of legal tender for another kind of legal tender – after all, gold and silver are money. In other words, individuals buying gold or silver bullion, or utilizing gold and silver in a transaction, would no longer be subject to state taxes on the exchange. This will encourage and facilitate the use of gold and silver in everyday transactions.

Paul said he considered the Arizona bill to be “very important” because it would also serve as an educational effort for other states. But it will also have a practical effect. Passage of HB2014 in Arizona, and efforts in other states to eliminate sales taxes, mark an important first step toward currency competition. If sound money gains a foothold in the marketplace against Federal Reserve notes, people would be able to choose the time-tested stability of gold and silver over the central bank’s rapidly-depreciating paper currency. The freedom of choice expanded by repealing gold and silver taxes allows residents to secure the purchasing power of their money.

It also sets a foundation for future efforts. In 2011, Utah Gov. Gary Herbert signed the Utah Legal Tender Act making gold and silver legal tender. The following year, the legislature followed up, approving a bill clarifying several tax measures, and more importantly, expanding the definition of specie to include gold and silver coin approved by the state.

With the path clear, the United Precious Metals Association (UPMA) set up the state’s first “gold bank.” It offers publicly available accounts denominated in gold and silver dollars in Utah. According to the UPMA, in the past year it has grown 700 percent in assets under management and made up 2 percent of the market for U.S gold and silver coins. You don’t even have to live in Utah to open an account, and an account-holder can conduct business in gold and silver with any other account-holder across the country.

These “bullion banks” can seriously undermine the Fed’s monopoly on money. They allow for the easy transfer of physical precious metals, meaning everyday people can easily transact business using gold and silver. The option to use sound money can force rapidly depreciating Federal Reserve notes out of the marketplace. Constitutional tender expert Professor William Greene said when people in multiple states actually start using gold and silver instead of Federal Reserve Notes, it would effectively nullify the Federal Reserve and end the federal government’s monopoly on money.

“Over time, as residents of the state use both Federal Reserve notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve notes do will lead to a “reverse Gresham’s Law” effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve notes). As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the state’s treasury, an influx of banking business from outside of the state – as people in other states carry out their desire to bank with sound money – and an eventual outcry against the use of Federal Reserve notes for any transactions.”

This year, Rep. Ken Ivory (R-West Jordan) introduced a bill to facilitate the operation of “gold banks” such as UPMA. The bill didn’t advance this session, but Ivory set the stage to push the issue further next year. Ideally, Utah will pass this bill next session and other states will follow suit.

In Texas, a state-sanctioned bullion depository continues to move closer to completion. Gov. Greg Abbot signed a law creating a state gold bullion and precious metal depository in the summer of 2015. Since then, the state has moved forward in establishing the depository.

Once operational, private individuals and entities will be able to purchase goods and services, using assets in the vault the same way they use cash today. Exemption from taxation of precious metals stored in the vault will further facilitate the use of stored bullion as money. This would incentivize the use the Texas Bullion Depository. If they then start allowing checks and debit cards to be used in conjunction with the bullion accounts – likely the next step – it would essentially create a specie- and bullion-based bank introducing currency competition with Federal Reserve notes.

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