Texas & the Gold Standard

Texas is apparently launching a gold-backed bank, much to the scorn of its enemies.
Texas lawyers are so unbelievably stupid.


Though this does bring us to the actual reason for the bill: a symbolic gesture to convince morons that Texas is an independent realm instead of a wasteful drain on U.S. tax dollars. Having their own money bin and currency system — writing checks based off stockpiled metals creates, for all intents and purposes, an independent, gold-backed currency — goes a long way toward fluffing the illusion that Texas holds sway over the rest of America. It’s also why the law includes this provision:

And in case the Fed or Obama wants to confiscate Texas’s gold, nice try Fed and Obama! In keeping with this suspicion of the Fed and Washington, the new law also explicitly declares that no “governmental or quasi-governmental authority other than an authority of [Texas]” will be allowed to confiscate or freeze an account inside the depository. Gold that’s entrusted to Texas will stay in Texas.

Nope. Not how it works. “Don’t Mess With Texas” does not supersede the “Supremacy Clause.”
The Tenth Amendment Center doesn't agree with this analysis, nor does the Ludwig von Mises Institute.
Tenth Amendment Center chief Michael Boldin, whose organization promotes states’ rights to rein in the feds under the 10th Amendment to the U.S. Constitution, called the law “an important first step towards gold and silver as commonly-used legal tender in the state.” He said the move has the potential to open the market to sound money, even in day-to-day transactions. “By making gold and silver available for regular, daily transactions by the general public, the new law has the potential for wide-reaching effect,” Boldin added.

The Tenth Amendment Center also highlighted the constitutional implications. Noting that Article I, Section 10, of the U.S. Constitution prohibits state governments from making anything other than gold and silver a tender in payment of debts, Boldin said the bill takes Texas a step toward fulfilling that long-ignored constitutional obligation. “Such a tactic would undermine the monopoly the Federal Reserve system by introducing competition into the monetary system,” he said.

Other experts also highlighted those effects. “Over time, as residents of the state use both Federal Reserve notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve notes do will lead to a ‘reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve notes),” explained constitutional-tender expert William Greene in a paper for the market-oriented Ludwig von Mises Institute.

“As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the state’s treasury, an influx of banking business from outside of the state — as people in other states carry out their desire to bank with sound money — and an eventual outcry against the use of Federal Reserve notes for any transactions,” added Greene, who also testified in favor of the law in his capacity as a private citizen.
It does look as if there is an explicit Constitutional warrant for gold and silver tender, as long as Texas does not undertake to "coin money." In any case, the advantages of a gold-backed system in an age of soaring national debts are explored by Forbes magazine. If we're looking for an exit from the Greece problem that the USA is definitely going to face sooner or later, maybe this is one.


E Hines said...

There's exactly zero non-economic problem with Texas setting up a gold-backed bank. I just hope for two things:

1) Texas successfully takes physical possession of its gold holdings currently residing in Federal "custody"

2) All concerned understand that gold-backing has no more economic validity than fiat currency.

And there's the exchange rate involved in gold-back checks written to pay creditors.

On the other hand, such a bank will add to the competition in markets for trading metals.

Eric Hines

MikeD said...

2) All concerned understand that gold-backing has no more economic validity than fiat currency.

Oh good lord, yes! It drives me 100% batty when people get on the "gold standard" train. "But it's the only currency that holds its value!" What is the price of gold today? As of July 20th, it's $1,110 an ounce. A month ago it was $1,204 an ounce. In January it was $1,302 an ounce. Does that sound stable? It's lost 15% of its value in half a year. That's not stable. That's not "holding its value". There is nothing magical about gold! Like every other currency standard (yes, including fiat) it is worth precisely what someone else will give you for it. Nothing more, nothing less. As the demand for it fluctuates, the value of it fluctuates.

Grim said...

I think the concept is more that it serves as a measuring stick. Let's say I own a ton of gold, and I issue 2,000 certificates of equal value. Now they're all worth a pound of gold. If I inflate my currency by 16x, your certificates are now worth an ounce of gold. How valuable is the currency? Well, it's pretty much worth what an ounce of gold is worth in exchange value.

That gives you one more sense of whether the inflation has gone overboard. It's like how it's easier to navigate if you can triangulate than if you have only one point of reference.

E Hines said...

Gold-backed currency has the value the issuing [government] says it has, not the value the market says gold has. Just try to take your gold-certificate, that FDR says is worth $35/oz (after he stole--I mean confiscated everyone's privately held, market-valued $20/oz gold and repriced it) to the Chicago Merc and collect some of that $1125/oz gold.

Metals-backed currency, seashells-backed, handsful of sand-backed currency has all the value and stability of fiat currency.

Eric Hines