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Utah Recognizes Gold Coins to Be Money

Mises Daily: Thursday, April 14, 2011 by

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The state of Utah has recently enacted a law by which the gold coins issued by the US Mint are to be considered money and, therefore, not subject to capital-gains taxation. The law does not apply to foreign-issued coins, such as South African Krugerrands, by far the most popular precious-metal coin in the world. Nor does the law apply to privately issued coins, such as the so-called Ron Paul Dollar. Capital gains on the US-issued coins would still be subject to federal taxation.

A stated purpose of the law is to enable people to avoid taxation on those capital gains that are merely due to inflation. Let us say that the rate of inflation rises from something like 2 percent to something like 6 percent. (By the way, this has happened.) In that case, a capital gain of 6 percent on an asset held for one year would represent no increase in purchasing power. Such a capital gain is merely nominal. It only compensates the holder of the asset for the loss of purchasing power in the dollar caused by inflation. But the taxes that may be due on the illusionary capital gain are very real.

The Utah law, in a particular way, protects the holders of coins issued by the US Mint. But the problem is general. Why should the state of Utah favor the holders of certain coins over holders of any other form of property? Indeed, of the many different forms of property to be protected from inflation, why should the state of Utah favor coins issued by an agency of the federal government, which is the very perpetrator of that inflation?

Perhaps the reason is because the US Constitution — which is kept in the National Archives in case anybody is curious as to what it says — gives Congress the power to coin money and regulate the value thereof. Therefore, it might be said, the US Congress, in authorizing the minting of coins made out of gold and inscribed with the value "$20," has regulated the value of these coins, regardless of their real market value.

But were we, for entertainment purposes only, to consider at length what the Constitution says, it says that states are prohibited from making anything other than gold or silver into legal tender. I may be a little naïve about this, but it seems to me that this kind of implies that states can make gold and silver legal tender. The scheme, then, is one involving Congress in coining money and in regulating the value of coins (whether of its mint, a foreign government's mint, or potentially a private mint); and this scheme has the states enforcing debts recognizing only gold and silver as legal tender.

But the story of money doesn't end with a reading of the Constitution. You have to consider how the Supreme Court has "interpreted" that ancient document. In a series of decisions, the Court has decided that the power to "coin money" includes the power to emit unbacked paper money. The court has said that Congress has this power because it is a power exercised by other nations and not prohibited to the Congress — notwithstanding the Ninth and Tenth Amendments, which, if read literally, say the federal government is restricted to its enumerated powers. Of course, I add the "notwithstanding" part because those amendments are so dead that the Supreme Court doesn't bother to excuse itself from obeying them.

The Supreme Court has furthermore decided that the Congress has the power to regulate or outright prohibit any other form of money. In other words, the power to coin money is interpreted to be an exclusive grant of power, removing it from the states and the people thereof. Thus, during the 1930s, the Congress prohibited us from denominating debts in gold or in a foreign currency and prohibited us from using any form of indexation.

Indeed, during the 1930s, Congress made gold into a controlled substance and prohibited us from owning it except under certain conditions. It then started making other things into controlled substances, such as marijuana in 1937. Prior to the 1930s, the only substance that Congress tried to prohibit us from owning was alcohol — and that required a Constitutional amendment.

Fast-forward to the 1970s, when a now-departed US senator from North Carolina named Jesse Helms and an upstart young Congressman from Texas named Ron Paul persuaded Congress to lift the bans on indexation and on the ownership of gold and, furthermore, to authorize the US Mint to emit legal-tender gold coins, albeit at a nominal value. Thus, the coins that the state of Utah is recognizing as money are the true Ron Paul Dollars.

Speaking of the Ron Paul Dollar, I should perhaps comment on the recently concluded trial concerning the self-described "architect" of the privately issued silver Ron Paul Dollar (along with other token coins and warehouse certificates for the same).

The person was found guilty of fraud and of issuing counterfeits of US coinage. While some facts — such as the shape of the Ron Paul Dollar being generally the same as the shape of US coins (which is to say round) — point in the direction of counterfeit, one basic fact seems to have been very badly decided by the jury: there can be no criminal intent in issuing precious-metal coins as imitations of the trash that constitutes US coinage.

Look at the little pieces of junk that constitute the US Coinage. Aside from the penny, they're mostly pieces of zinc polished to look like silver (with the penny being a piece of zinc electro-coated in copper). There can be no criminal intent to pass off real silver coins as zinc coins polished to look like silver.

With regard to the fraud conviction, if the man had been acquitted (and the legality of issuing privately minted coins confirmed) then new companies would enter the business. Then, if the Ron Paul Dollar was being sold at an exorbitant markup, the new companies would drive the price down to a competitive level. But, because the risk of entering this business is that you will go to jail, competition cannot be counted upon to do its job in regulating markups.

Which brings me back to the new Utah law's reference to the gold coins of the US Mint. Is the US Mint counterfeiting when it issues precious metal coins that have the look and feel of the coinage of the United States? Well, no, because "counterfeiting" only applies to one legal entity illegally imitating something belonging to another legal entity. No matter what the brand managers of Coke say, Coke Zero can imitate the taste of Coke. So, it would seem, the state of Utah is standing on solid legal ground recognizing US Mint–issued precious-metal coins as money.

But what if this law in the state of Utah catches on? What if people started regularly to price goods and services on the basis that $20 equals an ounce of gold (just as embodied in the original Ron Paul Dollar) and, in so doing, free themselves from the usually unseen tax called inflation? How long would it be before Congress acted to prevent the fact from being admitted that the emperor has no clothes?