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Virginia Seeks Own Gold Backed Currency

Written By Briton Ryle

Posted February 26, 2013

Have you ever put too much ice in your lemonade? After a while you are not drinking lemonade anymore, but water with a little lemon flavouring to it.

This is what many are worried about in regards to the U.S. dollar. They worry that the dollar’s buying power will be steadily diluted and weakened, resulting in crippling inflation that will see Americans paying more for less and ultimately losing a good deal of their wealth to a rising cost of living.

As The Atlantic explains it, they are “worried the Federal Reserve’s expanding balance sheet could eventually stoke Weimar-style hyperinflation.”

In the simplest of terms, this “expanding balance sheet” simply means the U.S. government is putting more money into circulation, allowing more businesses and people to get their hands on it more easily, more cheaply, and thereby stimulate the economy.

One way the government does this is by keeping interest rates extremely low, which weakens the U.S. dollar and could eventually make products and services more expensive; there’s your inflation.

Another way the government expands the money supply is by buying back bonds.

When the government first sells bonds to the public, it collects money from investors and gives them a piece of paper for it. Essentially, the government is taking cash out of the system, making the remaining dollars in circulation more potent, like taking some of the water out of lemonade would make its lemony taste stronger.

But when the government buys back bonds—as the U.S. has been doing for some time now to the tune of $85 billion every month—the government ends up putting cash back into the hands of the people, back into circulation. With all this extra money floating around, the dollar’s value eventually drops, like pouring more water into your lemonade would make its lemony taste fainter.

Yet pumping more money into the economy is not necessarily a bad thing if the economy can grow fast enough through industrial production and other economic activity to absorb all that extra wealth in the now-larger money supply.

So while the government keeps adding water to the lemonade, a growing industrial and economic output would be adding more lemon juice to the lemonade—and that sweet lemonade taste you have come to enjoy would remain in perfect balance.

But what if the economy cannot grow fast enough to absorb all those extra dollars flooding the marketplace? What if the government’s water increases at a faster rate than industry’s lemon juice? Well in this case, the dollar will weaken even more, making everything more expensive again; and there’s your hyperinflation.

This is the concern causing division among not just economists but politicians as well. Despite some strong economic figures here and there, the overall picture still looks unstable. Unemployment is still high, debt is still growing, and the deficit is still out of control.

So what’s the solution? “A proposal to study whether the state [of Virginia] should adopt its own currency is gaining traction in the state legislature from a number of lawmakers as well as conservative economists. The state House voted 65-32 earlier this week to approve the measure, and it will now go to the Senate,” reported Fox News.

What?! You mean, print your own money?

“We’re not going to be printing money with Dave Matthews or Jeff Davis on the front of it,” Virginia Republican Del. Robert Marshall told Fox News.

“Marshall said he wants to inject competition into the national economy and force the federal government to change its current policy – one he believes will lead to hyperinflation and instability,” the report elaborated.

And Virginia is not alone in this. “Four other states,” the report continues, “are considering similar proposals. In 2011, Utah passed a law that recognizes gold and silver coins issued by the federal government as tender and requires a study on adopting other forms of legal currency.”

So what some are calling for, then, is some kind of asset—such as physical gold or silver—to be used as the basis for determining the value of the money in circulation, thereby allowing the metals to be used as currency themselves.

The idea here is that people will trust money more if they know there is a tangible, exchangeable, accessible asset behind it. It’s a lot like a bank trusting you more if you have a house to your name.

And since this store of metals would be stable, the value of the currency based on that store of wealth would likewise be stable.

But others contend a move back to a “gold standard”—whether total or partial—would severely limit the government’s ability to steer the economy this-way and that-way in times of turmoil.

Speaking at George Washing University last year, Federal Reserve Chairman Ben Bernanke explained that “since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy.”

By this he means that with a gold-based currency, the government would not be able to pump money into the economy when needed, since it would be required to have enough physical gold to back its paper money, and you can’t simply create more gold at will. When making its lemonade, the government wouldn’t be able to control its consistency and would be stuck with just what the lemon gives.

Governments do not like this at all. They like the ability to add or remove dollars to control the potency of their money. And this was proven some 80 years ago back in the era of the Great Depression.

As the U.S. was dealt two clobbering blows from falling stock markets and no falling rain, crops failed in the fields and banks failed in the cities. Everything started grinding to a halt—fewer banks, less lending, closing factories, fewer jobs. And less money in the hands of businesses and ordinary people meant less money circulating throughout the economy.

Yet there was still the same amount of gold in the government’s vaults, which increased the dollar’s value to the point where money became too expensive for people to get their hands on. They would have to sell everything they owned just to get a few dollars.

Products and possessions were deflating in value, eroding wealth, and making people poorer.

To remedy the problem, President F. D. Roosevelt took two very drastic steps. First, in April 1933, he issued Executive Order 6102, making it illegal for Americans to own more than $100 worth of gold and forcing them to sell all gold in excess of that amount to the Federal Reserve at the then current price of $20.67.

Second, once most of the gold in the U.S. was out of the public domain and in government ownership, President Roosevelt issued The Gold Reserve Act in January 1934, increasing the price of gold from $20.67 to $35 an ounce. With this one act alone, the value of the U.S. dollar was reduced by almost 70%.

With more gold in government’s possession and a cheaper value for the dollar, there was now room to expand the money supply and put more dollars into circulation.

The cheaper and more abundant dollar enabled banks to start lending again—and at lower rates. Factories reopened and businesses hired again. Money returned to the hands of the people.

Now easier to acquire, money began circulating at a faster pace as people were earning and spending. Even though the value of the money was cheaper, there was more of it going around, and gradually people were able to rebuild their savings and grow their personal wealth.

The devalued dollar also made American goods cheaper for other countries to buy, and the gears of industry started turning again, providing a means for the entire nation to manufacture and export its way out of the Great Depression.

This is why many today oppose all this talk of returning to the gold standard. They really like the government’s hand on the faucet, controlling the amount of water going into the lemonade, which needs to be periodically adjusted to balance the lemon juice from the sometimes growing and sometimes shrinking economic activity.

But the debate lingers. While those who oppose a return to the gold standard cite FDR’s use of monetary control to get the U.S. out of the depression of the 1930’s, those who support the return to some form of metals-backed standard say, “Wait a second… It wasn’t monetary manipulation that got the U.S. out of the depression at all.”

When asked by the reporter of The Atlantic if FDR’s heavy-handed intervention didn’t spur the U.S. recovery out of the depression, Virginia representative Bob Marshall answered:

“’Recovery’ is not exactly the word I would use to describe the U.S. economy in the latter half of the 1930s, nor was the rest of the world in healthy recovery mode. About 18 months ago I read a book by Amity Shlaes, The Forgotten Man: A New History of the Great Depression, for a compelling refutation of the premise that FDR’s policies had a wholly positive effect and got us out of the Great Depression.

“Shlaes concludes,” Marshall zeros-in, “that it was not the economic impact of New Deal professors and their policies, but rather the outbreak of World War II that brought an end to the Depression.”

How the current 4-year-long global economic crisis—which many have compared to the Great Depression of the 1930’s—plays out still remains to be seen. Any hyperinflation caused by the pouring out of easy money by the Fed also remains to be seen.

And whether the U.S. returns to a gold-standard in whole or in part… you guessed it… remains to be seen.

But one thing that can certainly be seen in abundance is a growing division among analysts and politicians over the course of action to take. So far, no side has enough proof to convince the other. It looks like it is up to the economy to provide proof one way, or inflation to provide proof the other.

Joseph Cafariello