I recently wrote a piece on a coming digital currency that will be backed by gold. I believe this was inevitable given today’s technology, along with growing mistrust of fiat currencies.
As pointed out though, one of the problems we face is that it is difficult to use gold as a common form of money due to government-imposed barriers. With capital gains taxes on gold, coupled with legal tender laws, it makes it difficult to legally use gold in everyday trade.
As a side note, it is rather ridiculous having to pay a capital gains tax on the dollar value of gold. The main reason the dollar price of gold rises is because of monetary inflation of the dollar. So your purchasing power may stay the same, yet you will still legally owe taxes on the sale of gold.
While gold no longer serves a function as a common form of money, it is still used as a reserve for central banks around the world, and it is used by investors to hedge against depreciating currencies.
There are also some remnants left of gold being used in contracts.
There is an interesting story that was reported by Salon of a downtown office building in Columbus, Ohio. A federal judge recently upheld a 100-year contract that took effect in 1919. In the lease contract, there is a gold clause that connects the rent payment with the price of gold.
The company currently leasing the building will see its rent jump from $6,000 per year to more than $300,000 based on the current gold price, unless it can win in the appeals court.
Before you start feeling sorry for the lessee, it is currently collecting $900,000 per year from their tenants.
So while this seems to be a victory for the property owners, it really may be more of victory for property owners in general. This gold clause was put into the original contract almost 100 years ago as something of a hedge against inflation.
You could say it was good foresight at the time, especially as the central bank had recently come into effect at that time. Then again, they also didn’t expect that gold would be illegal for over 4 decades from the 1930s to the 1970s.
Paying in Gold
While this may be a small victory for property rights in upholding contracts, it is also nice to see gold coming into play.
The problem we still face is that this rent isn’t going to be paid in gold. It will be paid in dollars. The gold price in dollars will be used to determine the amount of dollars paid.
We still think in terms of dollars, even when we are discussing gold. This makes sense because, whether we like it or not, dollars are what we use as money in the United States. It has been imposed by the government and central bank, but it is money nonetheless.
You can read articles by gold bugs and gold bulls and almost everyone will speak of gold in terms of dollars. I am just as guilty as anyone. We will say that gold is set to go up or that gold may pull back. But again, this is all in terms of dollars.
You will know that gold has turned into a realistic possibility of acting as money again when we speak in terms of gold on its own merits without relation to the dollar.
“Did you know you can rent that nice apartment for just one ounce per month?”
“My gold purchasing power has gone up. I can now buy two week’s worth of groceries for only one-tenth of an ounce.”
So it would have been nice to see the rent paid on this 100-year contract in gold as opposed to gold converted to dollars. But we have to start somewhere.
As technology advances more and digital currencies backed by gold become more popular, we have some hope of getting gold back into the game of competing against the dollar. That is kind of ironic, given that the dollar itself used to represent gold.
We need to repeal the legal tender laws and the taxes on gold. This will allow open competition against the dollar. The Fed would be forced to stabilize the dollar or leave town.
And if the Fed members are still given a pension, I hope they can be paid in dollars and not in gold. I don’t think the Fed members have a gold clause in their pension contract.
