Changing to a Silver Economy

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A libertarian
in Columbia, South Carolina sent me a message recently. He works
at a convenience store. He was interested in introducing silver
as a means of payment or currency at this store. His specific ideas
I thought would not work because of the taxes on silver. The government
treats silver as a collectible subject to income taxes at ordinary
rates. He had some ideas of buying bullion and then setting up a
market in it by buying at a small discount to the spot price and
selling at a small premium, thereby creating a bid-ask spread. He
had some idea of getting people to transact in silver.

Instead I spun
out the following proposal. It too has the fatal flaw that taxes
on silver dealings occur, but thinking about this process is very
useful anyway. It shows how stores might become 100% reserve banks
and how the economy might transition from paper and slug coin currency
to silver money. And, if this skeletal proposal has flaws, others
can possibly improve on it. I merely want to demonstrate a degree
of feasibility, so that the possibilities become more tangible.

The basic idea
is that silver is the unit of account, but silver is not necessarily
used as the medium that is used for redemptions.

Step 1. Make
silver the unit of account. Price everything in the store in silver.
This means price it in units of a known weight of silver. Each item
costs so many grams of silver. If people prefer something with a
name, then choose a name like the Ag. Set 1 Ag = some number of
grams of silver. Then price everything in Ags.

Step 2. When
customers pay in Federal Reserve dollars or U.S. slug coins, translate
the amount into silver or Ags at the going rate of exchange. Those
who want dollars and U.S. coins for change, give them that.

Step 3. After
receiving any dollars or slug coins that people want to be in the
Ag unit, convert them right away into physical silver. Store this

Step 3. Offer
to “give” people their change in silver units, but not physical
silver. (This can be changed if this company or some other wants
to mint silver coins.) This avoids taxation at this step.

Step 4. The
store doesn't hand over silver. It credits people with Ag units.
These units are good for future shopping at the store. If several
merchants got together, then the units could be used at any of them.
This widens their circulation.

Step 5. Set
up a deposit account for people who want this account in Ag units.
When this is done, the store needs physically to set aside silver
in the amounts being credited to people. It gets this silver by
using the dollars that have been given to it that are in excess
of the purchase prices, i.e., the change that the store owes people.
This means there is no fractional reserve banking going on at all.

Step 6. Whenever
a person with an account wants to spend out of it, the store deducts
Ag units from their account using the silver prices in the store.

Step 7. The
circulation of Ag units can be enhanced, at some cost, by allowing
people with them to write checks to others that are denominated
in Ag units.

Step 8. Do
not allow any overdrafts. Make no Ag loans, for if that were done,
it introduces fractional reserve banking. The store explicitly makes
the account of the person a bailment owned by that person. The store
will not lend what it does not have.

Step 9. If
the store does wish to make Ag loans or allow people to buy on credit,
it has to do that in a separate and segregated account that is financed
by the store's own capital.

Step 10. Have
a daily audit of the silver under storage that is in the store's
bank. The amount in the bank should equal the debits on it that
are outstanding. Post this audit for public view.

Step 11. If
possible have a secure vault that’s open to audit or inspection
or sight so that people can see the silver. Another possibility
that’s perhaps less costly is that the store post a bond for the
amount, or get insured for it. There can be several layers of protection
for deposits.

Suppose that
people decide to take their business elsewhere. They want to withdraw
their deposits. The store is obligated to redeem them. In our existing
world of taxes, the store could avoid burdening the customer with
tax records and payments on silver transactions by letting them
withdraw their deposits in merchandise. If they take silver, they
are forced into a taxable transaction if they resell it.

The store then
finds that it has excess silver in storage. When it sells it, it
will be subject to taxes in our existing world. This is one sure
flaw in this whole scheme. But it shows clearly how the taxation
of silver transactions acts as a severe impediment to anyone starting
up an alternative currency in silver. Maybe if the whole scheme
were done in units of Jack Daniel’s liquor, this could be circumvented;
but it wouldn't be long before the Feds brought a law suit and argued
that it was evading taxes.

bottom line here is that alternative currencies arranged in the
manner described are being seriously thwarted by existing tax laws
that treat silver and gold as collectibles and tax them at ordinary
income rates. These laws should be abolished.

The main bottom
line is that if the laws are altered, this opens up all sorts of
possible alternative currencies in all sorts of situations where
currency is now used. There would be nothing to stop manufacturers
who supply stores with retail goods from paying their employees
in Ag units that the employees then use to buy goods from the stores.
The free market economy can quite easily transition to a silver
economy or to an economy with multiple currencies based on other
units of account or redemption, and they can all be on a 100% deposit
or 100% fractional-reserve basis.

14, 2011

S. Rozeff [send him mail]
is a retired Professor of Finance living in East Amherst, New York.
He is the author of the free e-book Essays on American Empire: Liberty
vs. Domination and the free e-book The
U.S. Constitution and Money: Corruption and Decline
and the
free e-book Essays
on American Empire

Best of Michael S. Rozeff

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