Mention the term "legal tender"
in polite company and most people will resemble a deer in the headlights. In
simple terms legal tender laws grant monopoly status to money,
usually fiat, produced by government; i.e., the government's money is the sole
medium of LEGAL exchange in the
country. Here in America we buy and sell using dollars. In the United Kingdom,
the British Pound is legal tender. In Japan, it is the Yen. You get the idea.
It isn't impossible to use monies other than legal tender, but using something
else is more akin to private, off the books, barter. For example, perhaps I
want to buy my neighbor's used lawn mower. I have some British Pounds left over
from my last trip. My neighbor is planning a trip to the UK. He agrees to sell
me his used lawn mower for some of my British Pounds. However, if my neighbor
owned a store that sold lawnmowers, used or new, he would be forced by legal
tender laws to use dollars. The revenue and taxing authorities would insist on
it. Now, all this may sound perfectly reasonable, but legal tender laws present
a huge opportunity for those who monopolize its production to manipulate the
currency, primarily to increase spending. Governments suck resources out of the
economy by bypassing the natural constraints of seeking a tax increase, always politically
unpopular, or borrowing honestly in the bond market, which will drive up
interest rates. Government by the people is thwarted, and the increase in the
money supply causes vast harm to the economy.
Why
Repeal Legal Tender Laws?
Naturally, advocates of eliminating legal tender laws have an
obligation to convince the public that it's the right thing to do. Why would any
nation, especially the US, want to use any medium of exchange other than the
dollar? Simply put, debasing the dollar
allows government to steal from the people. The government prints money out of
thin air to balance its ever expanding budget. This leads to vast and dire
economic consequences, such as higher prices, boom/bust credit cycles, and
transfers of wealth from the early receivers of the new money to the later
receivers of the new money. This is the Cantillon
Effect, as described by Emile
Woolf in his latest essay.
The
Path to a Better Money
The next question that the public may ask is what would replace the
dollar. The answer is that the dollar would not necessarily be replaced, but it
would have to compete for the public's patronage in a free monetary market. It
would have to compete not only with other national currencies but also with
recently created mediums of exchange, such as Bitcoin and other crypto
currencies. In addition, we would expect that commodities such as gold and
silver would regain some significant part of the market, especially since these
commodities have been used as mediums of exchange for thousands of years until
the recent experiments with fiat national currencies protected by legal tender
laws.
Alasdair
Macleod of Goldmoney.com has explained why crypto currencies are not
suitable as alternative mediums of exchange, although the distributed ledger
technology may have applications in a sound monetary regime. Rather, it is most
probable that gold and silver would regain their prominence. There is a reason
that the term "gold standard" is still used when describing something
that is of the highest quality. There are many advantages to gold as a medium
of exchange, but the most important are its universal acceptance by people of
every walk of life all over the world, the fact that it cannot be
counterfeited, and that it is rare. Gold specie itself could be exchanged by
private individuals to satisfy major purchases, but for every day transactions the
public would find it advantageous to rely upon a trusted third party to safe
keep the gold and make it redeemable upon demand through any of the modern
methods of money transfer, such as paper check, paper certificates, and digital
means. Of course, the government itself could offer "gold dollars".
After all, it claims to have over eight
thousand tons of gold in its vaults. But government's track record for
issuing more receipts for real money, gold and/or silver, than it has in its
vaults probably would preclude it from gaining the public's acceptance. More
likely, major banks would issue their own gold backed money. The banks could
gain acceptance in the market because they would be subject to ordinary
commercial law that describes a "bailment". A bailment
is a transaction in which someone takes custody but not ownership of a good for
the benefit of another. When we take a suit to the dry cleaners, we have
entered a bailment agreement. The dry cleaning establishment does not own our
suit. It takes temporary custody of it. Likewise when we check a coat at the
theater or restaurant. If the dry cleaning establishment sells our suit or the
restaurant gives our coat to another party, we can sue for damages and possibly
bring criminal charges. Therefore, one's gold dollar account at a major bank
must be legally redeemable in specie upon demand. If the bank does not have the
gold, the customer can take it to court on a charge of fraud. Even the bank
officials and owners could be charged with a crime. Try doing this with the
government!
The
Consequences
Just as a better mousetrap drives less effective ones out of the
market, better money will drive out bad money. Privately issued money will gain
more acceptance over time as the public learns that it can trust the issuers
not to issue more receipts than specie held in reserve. Not so with government
money. Once the public's trust has been lost, it will be impossible for
government to regain it in the face of honest competition. It is most likely
that bank issued fiduciary media (technically the real "money" is
gold or silver in its vault) will be used first for transactions among banks,
bond merchants, and large companies. But over time the public will learn that
modern electronic money transfer methods are just as reliable for retail use.
Then we can expect competition by the big banks to spread rather quickly.
Eventually, government's fiat money will be abandoned for whatever one can get
in, say, gold backed Goldmoney.comDollars, CitibankDollars, BankAmeriDollars, DeutscheMarks,
BarclayPounds, or the like.
The
Necessity of Financial Truth
With the government no longer able to print money to satisfy its
profligate spending, the reckoning will have arrived. Let us not believe that a
reckoning is avoidable. It is not. Nor should we wish it to be. To continue to
print money in massive amounts, as the government does now, will lead to a
financial and economic collapse. Would we want our doctor to tell us that all
is well when his tests say otherwise? Would we want him to recalibrate his
thermometer, blood pressure gauges, etc. so that they gave false indications in
order that we could continue an unhealthy lifestyle right up to the point of collapse?
Of course not. Yet this is a consequence of fiat money; i.e., the true state of
the nation's financial and economic health is hidden. On the other hand, sound
money reveals the true state of our financial affairs, both private and public,
so that we do not unwittingly destroy capital and/or make promises that cannot
be met. Furthermore, let us not give false promises that everyone will be
spared real hardship in a return to sound money. Those who have relied upon the
government to pay their bills will find that not all bills will be paid as in
the past.
Real statesmanship will be required to cut government spending and
explain the reasons to the public. The real villains will not be those who pull
the world back from the financial and economic precipice but those who spent us
into this mess in the first place--the Keynesian economists, the Modern
Monetary Theorists, the Socialists, and especially the feckless politicians who
swallowed the impossible siren songs of these charlatans and forced them on the
public in order to buy votes by promising the moon. Let us have the courage to
demand the truth, no matter how unpalatable it may be. Eliminating legal tender
laws will set the wheels of monetary and economic reform in motion.
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