In May, a bill made it out of a Texas House of Representative Committee to create digital currencies backed by gold and silver stored in a state-run bullion depository. Texans could've purchased the currency with cash, gold or silver if it had passed.
But the bill did not pass. Though it amassed 44 sponsors from both major parties, it did not receive a vote on the house floor before the Texas legislative session ended.
Nevertheless, some have suggested that digital currencies backed by precious metals could be a viable alternative to central bank digital currencies (CBDC), which, like the U.S. dollar after 1971, would be entirely controlled by the federal government and subject to the whims of bureaucrats and politicians.
The popularity of digital currencies like Bitcoin has skyrocketed over the past decade. CBDCs, like cryptocurrencies, are digital, but the main difference is that CBDCs fall under the federal government's control.
President Joe Biden signed an executive order in 2022 urging the research and development of a U.S. CBDC. China has been developing a digital Yuan since 2014 to be issued by the People's Bank of China. The Chinese government experimented with the CBDC in May, first issuing it through public sector paychecks in the eastern Chinese city of Changshu.
Mark Thornton, a senior fellow at the Ludwig Von Mises Institute in Auburn, warned there is a dark side to CBDCs, however.
Rather, Thornton said that CBDCs are about government control.
"It's kind of a hybrid, where you're trying to make everything electronic so everything is traceable and trackable, so it feels a little bit [like] cryptocurrencies and kind of a hybrid between that and just fiat paper dollar bills with registration numbers on them," Thornton said. "So CBDCs will give the government complete control over money. We still have a little bit of wiggle room, but they want to drive cash completely out of the economy, and they want to replace it with something that is trackable in the way that cryptocurrencies have a track record."
CBDCs could also enable federal agencies to punish political dissent by "freezing" transactions for particular groups or individuals.
But to really understand the threat CBDCs pose to freedom and the economy, one must first understand the concept of fiat currency and the business cycle.
A 50-year experiment
"Since we've had human society, we've been using commodities, but for the last several thousand years, we've been using gold, silver and copper coins as money," Thornton explained.
Initially, the U.S. dollar was on a bimetallic standard, meaning that it was backed by both gold and silver. Under the Lincoln administration, the Union government issued over $430 million in paper money known as Greenbacks, which were not backed by precious metals.
But between 1879 and 1933, the U.S. went on a gold standard, meaning its dollar was backed by gold but not by silver.
Through a series of executive orders, President Franklin D. Roosevelt began taking the U.S. off the gold standard. Roosevelt suspended convertibility into gold and even nationalized private gold holdings. The U.S. maintained a quasi-gold standard until the Nixon administration took the dollar entirely off gold in the early 1970s.
Currency not backed by any physical commodity is known as fiat currency. Fiat money relies on the full faith and trust in the government that issues it.
"We've been gradually [pulling] off the gold standard for a long time, but in 1971, President Nixon closed the gold window, which meant closing the last linkage between our currency and gold and silver, and since then a lot of bad things have happened," Thornton said.
Fiat, inflation and wealth redistribution
According to Thornton, the two major problems with fiat currency are price inflation and wealth redistribution.
When precious metals do not back the U.S. dollar, there are fewer obstacles to increasing the money supply. In other words, the Treasury can print however many dollars the Federal Reserve allows them to.
"The main difference between gold as money and fiat money is that it costs you real resources, Thornton said. "You either have to pay for the gold, or you have to go dig it up and process it and mint coins, so you're using land, labor and capital in extremely high amounts for a very small unit of gold … In contrast, fiat money, it's just paper. It's just money by law, by force … They're forcing you [into using it] on the demand side … but there's no constraint on the supply side."
"If there's no constraint on the supply side, then there's the strong potential for whoever has that privilege to just continue to print more and more money," he continued. "Every expense can seemingly be justified when there's no resources involved, whereas when there's real resources involved … that's a real constraint on people's choices and behaviors."
Thornton said when more money enters the supply, each unit of money becomes less valuable. This is visible through rising prices.
"The more money they print, the less valuable each unit is," Thornton explained. "So, when you look at history, you find out that gasoline was less than a quarter and a loaf of bread was maybe 10 cents, and a good cigar was maybe a nickel… If you go into retirement and you're on a pension, or you have bonds to pay for your retirement, that [fixed income], when the dollars are devalued … the check for your pension is going to be less money. Your purchasing powers are declining."
Thornton said that the federal government likes inflation because it allows it to accumulate debt.
Debt authorizes politicians to spend on programs they otherwise couldn't afford, which voters who benefit from the programs at the expense of other citizens may find attractive. It can then pay back that debt in the future with devalued dollars.
However, Thornton said the most severe problem with fiat currency is that it provides an outlet for the government to siphon resources from the productive and reward the political elites and their allies.
"You're taking money from workers and business owners, and you're redistributing that mostly to the wealthy and the political elites and, most importantly, the government itself," he explained. "... Most of it comes at the expense of the productive economy."
Booms and busts
Thornton and many other economists suggest that inflation and redistribution of resources have disastrous consequences for the economy.
According to the late economist Murray Rothbard, pumping large sums of money into the economy to pay for government programs causes a "boom-bust" cycle by encouraging poor investment during the "boom" phase, which must be corrected as those investments liquidate during the "bust" phase, commonly referred to as a "recession" or "depression."
"The inflationary boom hobbles this efficiency and distorts the structure of production, which no longer serves consumers properly," Rothbard explained in an essay. "The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers. In short, and this is a highly important point to grasp, the depression is the "recovery" process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a 'bust."
"The problem that they're causing is really bad for the economy," Thornton explained. "And it's really bad for most Americans, but the flip side of that is that it's great for the Fed. It's great for Congress. It's great for the political elites that have some control over that system."
How would a state gold and silver-backed digital currency work in Alabama?
Article I, Section 10 of the U.S. Constitution restricts states from making anything "but gold and silver Coin a Tender in Payment of Debts."
Thornton said the success of a gold and silver-backed digital currency run by a U.S. state would depend on how it is implemented and how the federal government would react.
He doubted that the Federal Reserve and America's political elite would stand by and allow states to adopt such currencies because that would threaten their political power.
"If Alabama was to [implement one of these currencies], I'm not sure how [the federal government] would react, but if a large state or more than one state did it, and it started to catch on, I think federal prerogative would probably result in them squashing it," Thornton said.
"This is too important to them … to allow alternatives to emerge," Thornton said. "Even with Bitcoin and cryptocurrencies, they started to allow things once everybody conceded that you were going to pay capital gains taxes on your transactions… The Fed and the Congress, they're not going to sit around while a bunch of 'yahoos' from Alabama or a bunch of 'extremists' from Texas try to chip into the goose that laid the golden egg. If Congress had to vote for taxes for everything they spend, it wouldn't really be that much fun for them. They couldn't go into Congress and emerge a millionaire if that was the case."
"I don't expect right now the Fed would allow anything like that, and they would do everything according to the law to prevent, but if that didn't work, they would take extraordinary measures," he continued.
What else can be done?
Thornton said the state could also push back against CBDCs by simply making it easier for Alabamians to purchase gold and silver.
Alabama already removed sales taxes and other restrictions on purchasing precious metals in 2019. In the 2022 legislative session, Alabama Gov. Kay Ivey signed a new bill to further remove restrictions by broadening tax exemptions for bars and coins at least 80% of the precious metal being purchased. It also removed a requirement that demanded those who purchase precious metals to file a report with the Alabama Department of Revenue to gain tax exemptions.
In 2018, Texas opened a 23,000-square-foot gold depository to store gold bullion for citizens. Texas, Louisiana and Utah have legislation recognizing gold and silver as legal tender, which means citizens can make transactions using precious metals instead of cash.
"Alabama could make a statement for sensibility by really standing up for Constitutional money within the state, no matter how it does it," Thornton said.
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