BY DAVID NICKLAUS •| Posted: Tuesday, April 24, 2012 12:16 am
When the dreaded hyperinflation arrives, the Missouri House wants Missourians to be ready.
Last week, the legislative body passed the Missouri Sound Money Act Of 2012, which declares U.S. gold and silver coins to be legal tender in the state.
That sounds a bit odd, especially since the federal government already recognizes its Bullion Coins As Legal Tender. It’s just that nobody’s going to pull out a $50 gold piece to pay for snacks at QuikTrip, because the ounce of gold in the coin is really worth $1,600.
Backers of the Sound Money Act envision a system in which you could deposit gold and silver coins in a vault and get a debit card tied to their metal value. If the Federal Reserve debases the value of the dollar – a favorite prediction among the gold-bug set – gold and silver would rise in value, and prescient Missourians could brag about their enhanced purchasing power.
Utah passed a legal-tender law last year, and South Carolina’s legislature is considering one this year.
Rich Danker, economics director of conservative lobbying group American Principles in Action, said a couple of institutions in Utah are working to create the gold debit-card system. Until that’s in place, sound-money advocates have to spend out of bank accounts denominated in dollars, just like the rest of us.
Missouri’s legal-tender bill would benefit precious metals investors by eliminating state capital gains taxes on U.S.-minted coins. A fiscal note says the state treasury could lose more than $370,000 a year.
That’s a small price to pay, backers argue, for monetary freedom.
“It’s about giving citizens of Missouri an alternative to the dollar that is not affected by the monetary policies undertaken in Washington,” Danker said.
Washington, of course, is the real target of the sound-money movement, because a patchwork of state laws is not going to move the nation any closer to a gold standard. Even the gold debit-card system wouldn’t work well without a change in federal law: Each transaction would subject card users to a 28 percent federal capital gains tax on the underlying coins.
The Sound Money Act, then, isn’t really about creating an alternative currency for Missouri; it’s about sending a protest to Washington.
“I don’t think this has any practical implications,” says David Rapach, associate professor of economics at St. Louis University. “This could be a combination of nostalgia toward both states’ rights and the gold standard, but we moved away from those types of models for good reasons.”
The era of the classical gold standard, in the late 19th and early 20th centuries, was marked by frequent financial panics. In the 1930s, the U.S. and other nations didn’t begin to recover from the Great Depression until they abandoned gold.
In the financial crisis of 2008-09, a strict gold standard probably would have made things worse. The Fed couldn’t have provided enough emergency liquidity if it had been required to back each dollar with gold.
For all those reasons, nostalgia doesn’t make for good monetary policy. Putting a big chunk of one’s assets into a gold-based transaction account may not be wise personal financial policy either.
If hyperinflation does happen, Missourians may be glad to have a tax break on gold and silver coins. If it doesn’t, as is far more likely, future historians will wonder why any state ever passed such an odd piece of legislation.