Earlier this year, the Utah state legislature passed a law making gold and silver coins legal tender. Now, a Salt Lake City-area numismatist hopes to set up a system that will allow Utahans to use those precious metals to pay for anything they want.
Craig Franco, CEO and president of Pacific Rarities, specializes in the evaluation, purchase and resale of rare U.S. coins and collectibles, and plans to open the Utah Gold and Silver Depository on June 1. His business model, according to the Associated Press: "Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings."
"With the state of Utah monetizing gold and silver," Franco told DailyFinance, "the question then became, how do we provide a common vehicle for commerce to transact?"
Franco says he has encountered "a profound amount of interest" in his new service, "coming nationally, not just locally. We have received, in the last 48 hours since the AP article broke, inquiries from the East Coast to the West Coast, from private investors to asset managers."
Some details remain to be decided, including the exact fee schedule the depository will charge. Franco says clients will have 30 days to clear their accounts following transactions. When debiting, he'll use the spot price of the metal in question on the day a transaction is settled. "But the value of the account fluctuates on an hourly basis," Franco explained, "based upon the global market."
Less a Useful Law, More a Libertarian Protest
When it was passed in March, the Utah law was derided as an example of right-wing fringe thinking run amok. Political columnist Dana Milbank denounced it as one of several "curious formulas" mixed by "tea party chemists," akin to a Montana bill celebrating global warming, or an attempt to mandate gun ownership for all adults in South Dakota. Even its backers seemed to admit that its significance was largely symbolic: Rich Danker, a think tank project director who supported the bill, told the AP that it would send "a strong signal to Congress and the Federal Reserve that their monetary policy is failing" -- assuming that Ben Bernanke and the rest of the Fed's Board of Governors care what the Utah state legislature thinks.
And yet a dozen other states, from Virginia to Idaho, are said to be considering similar legislation, though the practical effects are limited: The Utah law, for instance, exempts the sale of gold and silver coins from state taxes, thereby removing one barrier to their increased circulation. But it can't compel businesses or individuals to accept precious metals in lieu of paper money -- or, as its detractors are likely to call it (with contempt), fiat currency.
As a form of libertarian protest, however, such laws make sense: One Florida op-ed writer, urging his fellow Floridians to support a "legal tender reform law" of their own, listed the reasons: "Out-of-control federal budget deficits, costly new entitlement programs (such as health care reform), printing trillions of dollars to prop up the central banking system, and three overseas wars -- all causing mounting inflation."
What's Gold Really Worth?
Whether gold is actually a wise addition to the portfolios of retail investors remains controversial, even as a hedge against inflation: According to The New York Times, an investor holding gold since 1980 would actually be "operating at a loss, without even counting the cost of storing and protecting the gold." But this objection misses the point of the true gold bugs' argument: Like the Floridian cited above, they believe that a period of especially bad inflation is in the offing -- or even a return to 1970s-era stagflation. And they can point to a nearly sixfold increase in the price of gold in U.S. dollars over the last decade.
Hence the popularity, in some quarters, of precious metals as legal tender. As the Utah bill's sponsor, Rep. Brad J. Galvez (R-West Haven), explained, "If the dollar continues to fall, what this [legislation] will do will help stabilize the value of the dollar in Utah, so it helps stabilize the economy."
The argument sounds simplistic, even naive, but Utah attorney Larry Hilton, who drafted early versions of the bill, hopes that his state's innovation will prove the beginning of national movement: "I think if we see more states acting in concert with what we've done, that will probably be a bigger blip on the radar screen."
Hilton thinks of the legislation in terms of the Constitution, in which the states reserve to themselves the right to declare gold and silver legal tender. "There is a very important role for states to play in stabilizing the national monetary system," he says. "When the dollar was backed by precious metals, it maintained its purchasing power over a period of 150 years."
Those days are gone, he says, the gold standard having been eroded by pressures such as world wars and the dollar's status as the international reserve currency. With nothing backing the dollar up -- except the increasingly strained full faith and credit of the U.S. government -- some citizens fear a calamitous drop in its value, potentially touched off by a sudden loss of reserve currency status. For Hilton, the proper exercise of the states' constitutional power could help check the federal government's undermining of its own currency on the international stage through domestically-directed programs like the stimulus and quantitative easing. "By doing so," he adds, "states can essentially create localized stimulus by expanding the monetary base without dollar inflation."
Franco, denying any ideological motivation, explains the bill's importance in practical terms. "The purpose, as I understand it, has never been to send a message to the Fed. It's really all about this state being prepared to have an alternative currency if it's needed, for whatever reason. What happens if there is some kind of catastrophic event that shuts down the financial system? The citizens here want to be in a position to conduct commerce."
Whether gold and silver coin accounts can fill that role remains to be seen. A formal signing ceremony, and informal sound money summit, is planned at the state house on June 2.