Rethinking Money, Pt 4: Having Sound Money with the Currency We Already Have

This is the last of a four-part series.  The previous installments were:

To recap – the basic idea is that the US government actually has issued silver currency (American Silver Eagles, Morgan Silver Dollars, most change before 1965, etc.).  This money is deemed by the government to have the same value as the worthless paper dollars.  Therefore, you are free to transact with others in silver.  This leads to several practical benefits.  If someone only accepted silver, then their prices would be reduced by about 1/20.  You can then use the government’s dollar devaluation for your own benefit by making purchases with silver but paying taxes with paper money.  You are benefitted doubly if you are paid your salary in silver, because you probably would not have enough income to necessitate filing a tax return.  If you earned $100,000, but were payed in silver dollars, you would only receive $5,000 and fall well short of the taxable income necessary to file a tax return!
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Link Dump September 2013

I’ll get back to my series on rethinking the money supply soon, but first I need to do a link dump. I often save links that I want to share or comment on, but never do. Anyway, this is just a listing of tabs that I have open that you all might be interested in (NOTE – inclusion on this list does not imply endorsement/agreement, just interest – many of them I haven’t even read yet):

Rethinking Money, Pt. 3: Inverting Gresham’s Law

This is the third part of a series on reorienting our monetary policy from the citizenry rather than the government. See Part 1 and Part 2 first. UPDATEpart 4 has now been posted.

IMPORTANT NOTE: This is not tax or investment advice. These are my thoughts, and I certainly could use input on them. I have not yet implemented any of these things myself, as I am still contemplating them.

What we have discovered is that there is still sound currency (i.e. money based on precious metals) being produced by the US Treasury through their American Eagle program. But why is nobody using it?

The answer to this is called Gresham’s Law, which we have discussed here before. In short, Gresham’s Law states that if the government misvalues one type of currency over another, the undervalued currency will go eventually out of circulation. The reason is that, given the choice, we would rather keep the one that is more valuable, and trade the one that is less valuable. So, eventually, the valuable currency becomes an investment piece rather than a tradable good. Therefore, because eagles are at least 20x more valuable than their face value, they never enter circulation.

However, there is a flip side to this. If the government is recognizing the different units of money as being equal, then using the undervalued money in trade can be a huge savings for taxes, if it is done correctly.

Think of it this way. Let’s say that you went to a store which only accepted silver eagles for payment. However, their prices were 1/20 of that of normal prices. So, rather than pay $200 for a lawn mower, I would pay 10 silver eagles, which have the marked value of $1 each, or $10 total. Now, when I pay tax (assuming a 10% tax rate), the tax is $1, but the merchant only takes silver eagles, so that is one silver eagle.

If such merchants existed, we could switch to sound money by just using eagles instead of Federal Reserve notes! Thus, those who wanted to use a sound money system could, and those who didn’t want to use a sound money system could keep on with business as usual. Note that this can be done without a single change in government policy.

But wait! There’s more! It would be nice to have a way to encourage other people to partake in this system. It turns out that there is a built-in tax advantage to running a business this way. In fact, there’s two! First of all, let’s go back to purchasing that lawnmower. Remember that this is a $200 lawnmower (in Federal Reserve notes), but since the merchant is only taking eagles, he has the price listed as $10. Now, let’s say that although he only takes eagles for purchases, he will accept any form of currency for the tax. So now, to purchase the lawnmower, I pay $10 in silver eagles, but I use a Federal Reserve note to pay the tax! Thus, since the Federal Reserve note is only worth 1/20 of the silver eagle, my sales tax bill is reduced by 95%!

So, in one swoop, we fix the currency and tax system together.

But there is more! Now let’s think about getting paid for our work. Let’s say you make $100,000. What is your tax rate right now? It is between 25% and 28%. What happens if, instead of being paid in Federal Reserve notes, you were paid in silver dollars? What would your income be? It would be around $5,000. This is less than the amount the IRS requires for making a tax return! That’s right, if you were paid in silver eagles rather than in Federal Reserve notes, you would not have to even file a tax return.

So, you can fix the income tax, sales tax, and monetary policy just by switching to silver eagles for your currency!

Now, of course, if many people did this, the government would eventually respond in some way. But, since we are using the money according to how the US Treasury themselves are stamping the money, the only real response would be to do something that made the monetary system closer to sound money, and that is a win for everyone! With citizen’s acting in accordance with the law!

So, if the government does nothing, a small segment of society will have sound money and better tax policies. If the government intervenes, then everybody will have sounder money. A win for everyone!

Now the problem is implementation, and the next post will discuss that issue.

Rethinking Money, Pt. 2: The Two Currency Systems in the United States

NOTEPart 3 and Part 4 of this series are now available.

In the previous post, I offered a riddle – is there any part of the US monetary system that still uses gold and silver? The answer is yes.

Before we cover gold and silver, it is first important to realize that there are actually two separate authorities for printing money in the United States – the federal reserve and the United States Treasury. The federal reserve is in charge of creating “federal reserve notes”, which we normally refer to as “dollars”. This is what we normally carry in our wallets:

Budgeting-Tips

Notice on the top it says, “Federal Reserve Note”. This is because it comes from the Federal Reserve, and represents “1 dollar” of money, whatever that is. Just as a reminder, the federal reserve is not part of the government, although they are linked in several places. So, this comes from the federal reserve. As a side note, they are printed by the government, through the US Bureau of Engraving and Printing (BEP). However, the federal reserve is in charge of issuing them, and simply asks the BEP to print them when it needs them. I believe the federal reserve has to pay a small fee (a few cents) per bill for the printing charge. Nonetheless, the point is that the authority in charge of issuing these types of bills is the Federal Reserve, and not the US Treasury.

However, the US Treasury is responsible for issuing another type of money. Take a look at this quarter:

flip-a-quarter

Do you see the words “federal reserve” anywhere on this coin? As a matter of fact, it doesn’t appear anywhere. That is because coins are issued, not by the Federal Reserve (which is a private bank), but rather by the US Treasury.

So, already you can see that there are some cracks in this scheme – namely, how are the values of the coins and the bills coordinated? The fact is, there is no coordination. Each has the value assigned to it simply because the government printed the value on it. In fact, one economist once suggested that the US government solve its debt problem by simply minting a coin that it declares is worth $1 trillion dollars.

Now, a problem arises if the declared value of the coin is less than its intrinsic worth. For instance, the metal in a nickel is currently worth 6 cents. So, if you were to take all of your change as nickels, then melt them down, and then sell the result, you would profit 20%. For this reason, the government forbids doing this, or even moving these coins offshore in large amounts.

Hopefully you are starting to see the picture – our money supply has a lot of different sources and intrinsic values. The only thing linking them together is the declaration of the US government.

So was it always like this? Nope, not at all. It used to be that the Federal Reserve and the treasury used the same money. It was standardized on silver. A “dollar” was not a bill, but an amount of silver, hence the term “silver dollar”. Modern Federal Reserve notes today just say “one dollar” or “five dollars” or whatever, but older Federal Reserve notes say, “will pay to the bearer upon demand five dollars”. Look at the bottom here:

5_28abf

In other words, the reason why these notes were the same value as silver dollars is because they were measured in terms of silver dollars. In other words, it wasn’t the government that provided the value for the currency, it was the intrinsic value of silver which did – even in the paper money. The treasury also issued similar bills, which were actually labelled as “Silver Certificates” instead of “Federal Reserve note”. The only difference between the two was who was responsible for giving you the silver.

So what did these silver dollars look like? Silver dollars have been produced several times in the US, with the most well-known being the Morgan silver dollar:

1879S_Morgan_Dollar_500

So, historically, a dollar has mean “an ounce of silver”. Since leaving the precious metals standard, however, the value of the dollar has become disconnected from the value of silver. How much does an ounce of silver cost today? Answer – between $20 and $30. That’s what has become of our paper money – it is now worth 1/20 of what it used to be worth.

So, as you can see, our money has many sources, and they aren’t all equally-valued. Wouldn’t it be nice if some part of the monetary system still originated with gold and silver? Well, as a matter of fact, it does. The US Treasury, in addition to minting coins made of various base metals like copper and nickel, also continue to mint coins made out of silver and gold! And, in fact, they have a dollar amount marked right on them! These are called “American Eagles”, usually “Eagles” for short. Here is a silver, 1-ounce Eagle coin:

2006_AESilver_Proof_Obv 2006_AESilver_Proof_Rev

What does that say on the back? It says “one dollar”! That’s right – the US Treasury actually mints silver coins denominated in dollars! Likewise for gold, the gold eagles have “50 dollars” printed on the one-ounce coins.

In other words, while most US dollars are not backed by gold and silver, there are a number of coins that the US Treasury mints and affixes a value to which are denominated in dollars. These coins are never in circulation, because their investment value far outweighs their purchasing power. If I used a silver eagle, I would have to pay $25 to get the eagle, but it would only buy me $1 worth of goods at the local market.

So, there is the answer to the riddle – silver and gold eagles are the part of the monetary system which is still based on precious metals. It is obvious when you think about it, but few people ever think about silver dollars as real money, but only as investments.

In the next part of the series, we will look to see if there is any way to make use of this fact to restore our country’s economy.

Rethinking Money, Pt. 1: Did We Ever Actually Leave the Gold Standard?

NOTEPart 2, part 3, and part 4 of this series is now available.

Dear reader, I have been thinking on a subject for quite some time, and I think it is time to share with you all. Like the rest of MicroSecession, the idea is simultaneously radical in conception and moderate in practice. The goal is to rethink the way that we deal with money on a daily basis in order to effect the changes ourselves which we wish to see in Washington. I’m not talking about bartering, I’m simply talking about using regular money in a different way.

For today, I just have a riddle for you – did we leave the gold standard?

The answer seems obvious – yes, we left the gold standard in 1971. But did we totally leave the gold standard? Is there a piece of our monetary system that is still based on gold and silver?

I’ll leave you this to think about. Tomorrow, I’ll give you my answer to this riddle.

NOTE – see the answer now in part 2 of this series

JP Morgan Getting out of Student Loans

Saw this on ZeroHedge – apparently JP Morgan is going to stop issuing student loans. As I said previously, student loans are a bad idea for quite a number of reasons, and the next financial crisis will probably highly involve the student loan market.

It looks like JP Morgan saw the writing on the wall, and is getting out. Will others do the same? What will the US government do when bankers refuse to finance their loans? Will the government offer them by themselves? Guys, this is a no-win situation. This is bad for both education and our monetary system.

UPDATE (2013-09-09) – looks like CNBC is finding this really ominous, too.