Wednesday, May 19, 2010

Analysis of potential Idaho Silver Currency

Fascinating happenings in Idaho related to currency reform and local currency. A bill was killed in Senate committee that would have created a silver coin for Idaho that could trade as money. The currency was potentially the real deal in alternative currencies, and met all the requirements that trade tokens require to be considered legitimate and widely used as money.

As I have detailed before, the most important thing about a local currency is that its use should be tied to the health of the local economy, a fact explicitly recognized by the crafters of this money, as the silver mining to create the coins would help the Idaho economy.

The coins have been christened Idaho Gems. Interestingly, the bill will also allow the state treasurer to hedge its silver position in the financial markets. It also defines all state and local taxes as payable in this coin.

According to the bill, the state will sell the one ounce coins at the daily spot price for the one ounce American Eagle. The treasurer will also accept the coins for payment at the daily spot price. The bill guards against too much state loss by allowing the treasurer to suspend acquisition if the daily market price falls below the cost of minting. According to the bill, the state will issue silver as payment to any vendor who requests it.

Unfortunately, the bill appears to have died in a Senate committee:

Alternative money needs to have a buyer of last resort, to guarantee its acceptance as general currency. The problem facing alternative currencies in general is, nobody wants to hold a currency if it is a burden to find someone who accepts it. However, if the state of Idaho accepts the medalions as payment for taxes, that would exactly fit the requirement as a surefire buyer of last resort.

The monetary value of the issue of the coins, at least at first, would be limited by the size of the Idaho budget. Anything beyond that would run the risk of non-redeemability. Especially in the early stages of an alternative currency, it is important to create the expectation of full redeemability, so that people become confident using the new coins. If redeemability became an issue, people would be hesitant to accept the coinage, and it would become little more than a gimmick or collector's item.

After a general confidence in the redeemability of the coins has been established, under the condition of wide circulation and usage in general commerce, the state could produce a excess of coins beyond the limit of the state's financial budget.

The state also faces the potential problem of seasonal deflation, as coins are removed from circulation to pay taxes. Encouraging general circulation and usage in non-tax-related commerce, would allow the state to mint enough coins so that the seasonal redemption would be less noticable.

The ultimate way for the state to overcome the issue of seasonality and limited usage would be for the state to not only take the coins as payment, but also distribute the coins as income, starting with its own state workers and welfare recipients. Afterall, the state's tax receipts exactly match the states outgoing payments. If the state agrees to receive the coins in payment, it has to have a method for redistributing them. Without a regular channel of distribution, the coins again fall into the gimmick/collector item category.

From the wording of the bill, the focus seems to be on silver money as a store of wealth.

And, as always with a commodity-based money, the state would have to be concerned with the value of the underlying commodity. If silver, as a metal, rises in price relative to the US dollar, the silver coins would be hoarded if they are fixed against the dollar.

So, the legislature is in a bit of a bind. In order to issue the money to its own workers, the coins would have to be exchangable for US dollars. If that exchange rate is fixed, hoarding could quickly become a problem. Especially given the problem of the rapidly inflating US dollar, the value of silver can be reasonably expected to rise, dragging the value of the coins up with it.

Lets say the coins are issued on par with dollars. The following year, the dollar inflates by 10%, but the silver coins remain stable. 100 coins originally bought the same as 100 dollars, but now 100 dollars only buys 90 coins. Which would you rather be paid in?

The coins! Think of the converse side: 100 coins now buy 110 dollars. Holding or being paid in coins means you are getting richer in dollars. This would actually increase the value of the coins, exactly as the Idaho legislature hoped, spurring their demand and thereby stimulating the Idaho silver economy. In order to meet the demad, and discourage hoarding, the state could prudently issue more coins.

In short, against the background of an inflating dollar, doing business in Idaho silver gems would naturally increase your own wealth. But this would only work if the silver coin was not fixed versus the dollar. If the Idaho legislature had the discipline to not inflate their supply, the demand would remain strong for their silver coins.

Notice that under these conditions, people would stop paying their taxes in silver coins, preferring to pay them in depreciating dollars.

Of course, if the price of silver fell, the conditions would reverse, and the state would see its monetary position wiped out. Under conditions of falling silver, people would flee the silver coins, as they'd be worth less and less relative to dollars. Citizens would pay their taxes only in the increasingly worthless silver.

The state, as a governmental agency, is thus put in a double bind. No matter which way the currency is going, by giving the citizens a choice in payment, the state will always be paid in the worse currency.

This is the whole point of legal tender laws and capital control laws. Without those expedients, the citizens will always work to make the state the loser in currency arbitrage. With legal tender and capital controls, the state can foist the currency costs off on its beholden citizens.

With only one state representative dissenting, the Idaho House State Affairs committee voted on Monday to endorse HB 633, a bill that would allow Idaho citizens to pay their state taxes with an official state silver medallion.

The news comes just a month after a South Carolina legislator introduced a bill seeking to ban Federal currency altogether, and replace the upstart greenback with gold or silver coins. A half-dozen other states have considered similar legislation, reports the Tenth Amendment Center. But there's a key difference between the Idaho plan and the bills proposed in other states, most of which fall somewhere on a spectrum ranging from Tea Party rage to Ron Paul goldbug-ism. (The South Carolina bill, for example, claims that "the State is experiencing an economic crisis of severe magnitude caused in large part by the unconstitutional substitution of Federal Reserve Notes for silver and gold coin as legal tender in this State.")

In contrast, the sponsor of the Idaho bill, Republican Phil Hart, seems to be marshalling wide support by crafting legislation that is straight out industrial policy aimed at boosting Idaho's silver industry. The text of the bill is quite clear.

The intent of this act is to use the abundant silver resources of the state of Idaho to create a means whereby the people of Idaho can pay their taxes to the state using silver mined from the ground of Idaho, processed in Idaho and finally minted into a medallion in Idaho. It is the intent of the Legislature to create mining jobs in Idaho while giving the people of Idaho a means to store their wealth in a precious metal that is immune from the effects of inflation while complying with the mandates of our federal Constitution.

The Idaho bill therefore incorporates tax incentives for silver processors located in Idaho.

From The Idaho Reporter:

That, Hart believes, could bring hundreds, if not thousands of jobs to the state. In conjunction with the creation of the medallion, Hart's bill would also try to lure silver processing companies to Idaho, and in particular, north Idaho, which, according to Hart, was once called "the silver capital of the world." The bill would give companies that come to Idaho to process silver for the medallion a 10-year exemption from income taxes, as well as property taxes. The exemption would be open for 20 years and would sunset after that period of time.

Hart believes one of the advantages of silver is that it would resist inflationary pressure better than paper money. But since states aren't allowed to mint their own money, the value of the silver medallion will have to fluctuate according to market forces. In just the last ten years, the value of an ounce of silver has zig-zagged between four and twenty dollars.

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