On February 5, 2024, Oklahoma Representative Cody Maynard introduced House Bill 3027, which would eliminate all capital gains taxes on gold and silver and expand legal tender to include not only gold and silver coins issued by the US government, but other specie that an Oklahoma court rules to be within state authority to make or designate as legal tender. While the bill has yet to be debated and passed in the Oklahoma House, this could be a realistic step toward sound money and a model for other states to follow. In the long term, we must also seek the nullification or repeal of all federal taxes and restrictions in order to achieve a free market in gold and private commodity money, but this becomes more plausible with each additional restriction removed at the state level.
Needless to say, there will be no ideal solution as long as central banking and fractional reserve banking persist. But pending the abolition of the Federal Reserve System and the prohibition of fractional reserve banking as fraud, it is worth exploring some of the benefits a free market in gold and silver could bring. To see how we can benefit from the removal of these restrictions, it is helpful to understand how the state reinforces its control of the monetary system by restricting other currencies.
At the outset, we should briefly define sound money. In The Theory of Money and Credit, Ludwig von Mises writes:
[T] he sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system.
Historically, gold was established by the market over centuries as a common medium of exchange. Its supply was subject to market forces and its purchasing power is largely independent of the state. Thus, under a commodity money standard, such as gold and silver, the state’s inflationary power is limited. Under a system of unbacked fiat money, however, there are fewer limitations on the state’s ability to increase government spending by inflating the money supply. In the US, the Federal Reserve can create new money and inject new reserves into the banking system by electronic activities through open market operations simply by buying assets and writing checks on itself. With fractional reserve banking, commercial banks can then extend new loans on top of these reserves.
Nevertheless, the US government would still risk the depreciation of the dollar in terms of harder currencies. Thus, the federal government has put restrictions on other currencies to discourage their use. Taxation is one such way this has been done.
In 1865, the federal government imposed a tax on state banknotes to limit their circulation. This followed the Legal Tender Act of 1862, which empowered the secretary of the treasury to issue inconvertible “greenbacks,” and the National Banking Acts of 1863 and 1864, which created a system of nationally chartered banks. Reflecting the expectations of the Austrian School, the issuance of inconvertible greenbacks quickly led to price inflation. However, the Specie Resumption Act of 1875 would make the US one of many countries to adopt the classical gold standard during the latter part of the nineteenth century when they resumed specie payment in gold four years later. In stark contrast to the inflation of the greenback period, Joe Salerno notes that the wholesale price level fell by about 30 percent while real incomes rose by about 85 percent between 1880 and 1896.
With gold hitherto established by the free market as the best money, it represented the ultimate check on the inflationary power of the US government. Thus, in 1933, Franklin Roosevelt imposed a more severe restriction and prohibited American citizens from owning more than a small amount of monetary gold, initially by executive order. In 1974, after more than 40 years, this prohibition was repealed, but capital gains taxes still limit the use of gold.
If private citizens have an alternative, they will grow dissatisfied with a depreciating dollar and may gradually sell their dollars for harder currencies. As it becomes clear that gold and silver coins maintain their purchasing power better than the dollar, citizens will increasingly shift to gold and silver and depreciation of the dollar will accelerate as demand for dollars decreases. Writing on the German inflation of 1923, Ludwig von Mises explains:
This practice of making and settling domestic transactions in foreign money or in gold, which has already reached substantial proportions in many branches of business, is being increasingly adopted. As a result, to the extent that individuals shift more and more of their cash holdings from German marks to foreign money, still more foreign exchange enters the country.
This could have several obvious benefits. First, a free market in gold and silver coins could reveal the unsoundness of the dollar and the current system of fiat money. Over time, this could lead to a crisis of confidence in the dollar. Second, inflation transfers wealth away from ordinary private citizens and rising prices can obscure this wealth transfer. In recent years, this problem has intensified due to the Fed’s unprecedented policies following the coronavirus panic.
Between March 2020 and December 2021, the Fed increased its assets from about $4.2 trillion to nearly $8.8 trillion. Not surprisingly, price inflation was already nearing a 40-year high by the end of 2021. Freely circulating gold and silver coins would give citizens a form of protection against inflation thereby encouraging savings and a tendency toward a fall in the rate of time preference.
Finally, should the collapse of the dollar and the breakdown of the fiat money system occur, its effects will be softened if it is preceded by a shift to hard money. As Mises points out, the collapse of the “Continental Currency” in the American colonies was followed by a quick transition to the hard money that had been hoarded and brought in by the English and French armies and navies.
The repeal of all taxes and restrictions on gold, silver, and any other alternatives to fiat money is one of the more realistic steps we can take toward sound money in the short term. Indeed, other states have already eliminated the sales tax and other restrictions on gold and silver. Moreover, in his proposal for a return to sound money, the repeal of all restrictions on trading and holding gold is the second step mentioned by Mises.
To be sure, the state is an inherently inflationary institution and is therefore unlikely to adopt a sound monetary reform. However, we have seen that improvement is not impossible under the right circumstances. The repeal of the prohibition on gold represented one such victory for sound money. Likewise, the classical gold standard of the late nineteenth century, while not perfect, was certainly preferable to the nationalized paper currency that preceded it.
The repeal of any—or even all—restrictions on gold and silver will not complete our return to sound money, but it would be a step toward affirming the market’s choice of a medium of exchange.
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