In 2011, Virginia Delegate Bob Marshall (R-Prince William) came up with a very radical idea: the Commonwealth should mint its own gold and silver coinage as an alternative to the U.S. dollar. Marshall argued that the idea of an alternative currency should be examined “in the event of a major breakdown of the Federal Reserve System.”
The bill was dismissed as being too extreme. Last week, however, a subcommittee in the Virginia House moved, by a 2-to-1 majority, to recommend a study based on Marshall’s suggestion. “This is a serious study about a serious topic,” Marshall said Tuesday. “We’re not completely powerless.”
Marshall believes that the Fed, in its current mode of operation, can lead the United States into a situation similar to that of the Weimar Republic of Germany — an over-inflated economy, worthless currency and an inept, collapsing government. Most feel that this is an exaggeration. Inflation has held at less than two percent, despite a tripling of the available currency in circulation since 2008, and the dollar is still the investment currency of choice globally, particularly since the European austerity crisis.
Marshall also fears the possibility of cyber-attack on the nation’s financial systems. The Fed has recently acknowledged that the hacktivist organization Anonymous has attacked Federal Reserve computers. Federal reserve spokesman Jim Strader made the acknowledgement in a statement released last Tuesday — “The Federal Reserve system is aware that information was obtained by exploiting a temporary vulnerability in a website vendor product. The exposure was fixed shortly after discovery. It is no longer an issue. This incident did not affect critical operations of the Federal Reserve system.”
Anonymous performed the intrusion as part of its continuing protest against federal computer crime law. The protest was initiated after the death of Aaron Swartz, who pending prosecution for illegally obtaining and distributing scholarly articles is thought to be the leading reason why he took his own life.
Lack of faith in the dollar
Virginia Delegate Mark Sickles (D-Fairfax), the state’s Democratic caucus chair, responded to the subcommittee’s ruling in regard to Marshall’s bill: “It can cost tens of thousands of dollars. Are we seriously going to spend taxpayer resources studying a replacement to the world’s backbone currency? Are we descending into la la land?”
Marshall’s bill caps the cost of the study at $22,560.
Marshall’s bill expresses concern about “hyperinflation.” It states that “from our nation’s founding, there has been concern regarding the country’s monetary and banking systems and their potential to harm the citizenry,” and that Thomas Jefferson himself “expressed deep concern about the social instability that may ultimately result from bank-issued paper money.”
Marshall has stated in the 2011 introduction of his proposal: “State legislatures have to get a little more creative and savvy to counter the buffoonery that’s been plaguing Washington.”
The ability to print and coin money, according to the U.S. Constitution, is reserved to Congress. However, the Constitution does allow individual states to tender gold and silver coins for the sake of paying debts. The values of these coins would be directly linked to the value of the metal used to make them.
Concerns of a second economic collapse, fears that the Federal Reserve’s artificial suppression of the loan interest rate and its manipulation of the security market by buying short-term securities and recent stories of corporate malpractice from the financial sector have convinced legislators from 13 states — including Minnesota, Tennessee, Iowa, South Carolina and Georgia — to introduce bills that will allow for the exploration of an alternative currency option.
Currently, only Utah has a law that recognizes nontraditional currency as legal tender. In 2012, Gov. Gary Herbert (R-Utah) signed into law a bill that recognizes gold and silver coins from the U.S. Mint as legal tender. Under the law, the coins — including Gold and Silver Eagles — bear the same weight as dollars for tax purposes. So, an inheritance in Utah transferred in gold and silver coins would be exempt from capital gain taxes.
The coins’ monetary value would be based at their fair market price, and not their face value, according to the Utah law. So, a $50 American Gold eagle would be worth more than $1,700 in stated value in the state.
Republicans in South Carolina, Washington State, Minnesota, Iowa, Georgia, Idaho and Indiana are pushing for a similar law that would monetize any gold or silver coin of any nationality — whether it be a Philippine Peso or a South African Krugerrand. Such a move would create a de facto gold standard for these states, as private citizens would be able to deposit gold in a depository, receive currency directly linked to the value of the stored gold and withdraw the gold upon surrender of the deposit instrument.
Under such a construct, the state itself is not using the gold or silver to pay off a debt or to extend credit. As such, this type of system is unconstitutional. However, this is not stopping organizations — such as the Utah Gold & Silver Depository, in which customers can deposit gold and silver and receive a debit card based on the stored metal’s value to use for transactions —from opening.
This move is widely supported by the Tea Party, which supports a return to the gold standard. Former Rep. Ron Paul (R-Texas) and former Speaker of the House Newt Gingrich (R-Ga.) have both come forward in support of a restoration of the gold standard.
A history of funny money
While the notion of a secondary currency is hypothetical at this time, the existence of the concept represents serious doubt about the strength and vitality of the financial backbone for most of the world.
Since the 1971 collapse of the Bretton Woods system of international financial exchange under President Nixon and the introduction of the dollar as a fiat currency, the value of the dollar has always been pegged to the ability of the federal government to back it up. Doubts about this directly affects the dollar’s value.
This was seen after the 2011 credit downgrade. Even though the value of the dollar rose, it rose in response to the euro and the British pound, which were sinking under the weight of the European debt crisis. In light of this, the dollar’s real value was stagnant or even in decline at this period of time.
A lack of confidence in the dollar can trigger inflation. When merchants second-guess the spending ability of currency, they charge more for goods, which forces the consumer to pay more. This can quickly spiral out of control. Marshall’s suggestion that the economy could collapse may be self-actuating, as the presence of an alternative currency that can replace the dollar represents the distrust in the dollar.
David Parsley, a professor of economics and finance at Vanderbilt University, believes that state-based currencies are a “terrible” idea. “Having 50 Feds” could devalue the U.S. dollar and even potentially lead the country into default, he said. “The single currency in the United States is working just fine. I have no idea why anyone would want to destroy something so successful — unless they actually wanted to destroy the country.”
However, Marshall’s idea is neither novel nor unique.
Since the National Banking Act of 1863 — which introduced the dollar as the nation’s only currency — alternatives have existed. Some were created to spur local economic growth, others were from need. During the Great Depression, over 400 local communities — including the Upstate New York communities of Syracuse, Seneca Falls, Norwich, Ithaca and Binghamton, and major cities like Philadelphia and Detroit — printed local currency to keep their local economies moving in light of the banks’ shutdown. More than 100 of these currencies exist today, including the Ithaca Hours and the Detroit Community Scrip.
Most local currencies follow the BerkShares model. BerkShares are complementary currency (currency designed to be funded by and valued to an existing currency — in this case, the U.S. dollar) that are used in the Berkshires region of Massachusetts. The currency encourages the local economy, as only enrolled local businesses can redeem them. It also ensure that a higher percentage of the money that enters the community does not leave via the purchase of goods and services not based in the community. This increases the local wealth.
The Internal Revenue Service recognizes complementary currency as an equivalent to a gift card. However, there have been discussions of pegging BerkShares and similar currencies to the value of local goods in an attempt to insulate the currency from the fluctuations of the dollar.
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