When Greece defaults on its debt, one or two predictable things will happen to the big banks in Europe, and to the government of Greece. One of the things that will not happen will be the collapse of the euro currency, nor the breakup of the European Union.

Greece is a socialist country, probably to a greater degree than any other in Europe. The recent Greek elections demonstrate it, and the new elections coming in June 2012 will not “solve” its current crisis.

Socialism has always been a “magic wand” theory of economics and government. Disregarding the logic of human action and the self-interested behavior not only of businessmen but also workers and government bureaucrats, socialists believe wishful thinking can make things happen. (When that doesn’t work, socialists historically have resorted to the whip – but even that doesn’t work anymore.)

Greek voters have clearly rejected “austerity,” which the Germans and bureaucrats in Brussels have negotiated, as a condition to bail out the failing state. It is unlikely Greek voters next month will change their minds. Meanwhile, thousands of Greeks are running to their banks and withdrawing cash, in euro paper money. The people with money saved are worried the Greek government will one day soon declare bank balances denominated in euro accounting units will suddenly be converted into “drachma” accounting units, which will rapidly become worthless.

That is no surprise. Legal tender laws don’t work when people don’t want to use the government’s money. Since the euro will remain the money in Germany, smart Greek people will keep on using it even if their government doesn’t like it. Greece is heading toward a Zimbabwe solution to its fiscal problems and just like in that African socialist paradise, the people will use U.S. dollars and other stronger currencies to carry on trade.

But as the Greek state founders and attempts to maintain some control, you will start to see (1) emigration from Greece, (2) rising unemployment and (3) shortages of everything that has to be imported. The pension payments for retired Greeks and welfare subsidies will be cut down and maybe even ended. The salaries of police and soldiers will be raised, and perhaps even paid in euros after the “drachma” reform.

Greece is a deficit government; it spends more than it collects in taxes. After the pretended monetary “reform,” tax revenues will dry up, and spending will have to dry up also. The socialist government elected next month will not be able to wave a magic wand and fix this problem.

The Banking Bailout

Meanwhile, a large number of big banks in the rest of Europe will find they have Greek bonds, payable in euro, which are in default. The junk bond position of European banks today makes the junk mortgage bonds of recent memory look like solid investments. So, the other governments in Europe will bail out their banks, just as Ireland did. The new socialist president of France is in for a surprise when he faces the choice of bailing out his banking system or paying his own French retirees and welfare subsidies.

On the bright side, Americans will be temporarily rescued from the looming consequences of the Federal Reserve’s inflationary “quantitative easing” and massive increases in U.S. bank reserves. It is not the supply of money that matters so much as the demand for how much is available. The demand for U.S. dollars by Europeans is already increasing, as you can see if you watch the foreign exchange rates and the price of gold. The more trouble Europe gets into, the more the dollar will strengthen and gold prices will rise.

U.S. exports to Europe will fall as the EU economy weakens under its fiscal crisis, but the euro as a currency may strengthen if the Germans, and the European Central Bank, hold fast to the idea of avoiding bailouts and inflation. The failing EU economy may drag down the world economy, perhaps even into a new recession, but runaway inflation is impossible – until or unless the government central banks surrender to the politicians.

Then everyone will rush to dump weaker currencies and buy stronger assets.

The economic strength of the European Union is based on its free trade zone. Even most silly socialists today understand that breaking up a free trade zone into smaller and smaller “protected” areas will only bring poverty to the smaller areas. Thus, the EU will not fall apart. It is not clear even Greece would want to withdraw, and the EU has no method in its charter to expel a member state.

The big bankers in Europe are screaming for the European Central Bank to inflate the euro and buy up the junk bonds that are polluting their balance sheets, but it is not obvious the Germans and other EU governments will yield on this.

Certainly the Germans know that inflation is not a solution, and all of the world knows that Keynesian “economic stimulus” doesn’t work. So, the future of the euro is not in jeopardy, the U.S. dollar and gold will get stronger, and the collapse of Greece and France may prove as wonderful for the rest of us as the collapse of the Berlin Wall and the Soviet Union.

The logic of free trade and a strong currency will be further validated by all these events. Wishful thinking will not help the socialists of Greece, but when they jump off the cliff the whole world will be watching.

(This essay was published today in American Breaking Point, hosted by my friend Charles Goyette, whose ideas on money and tax policy I share entirely.)

Until early in the 20th century, gold played a central role in the world of money. Gold had an incredible run – almost three thousand years. And why not? After all, Professor Roy Jastram convincingly documents in The Golden Constant just how gold maintains its purchasing power over long periods of time.

But, since President Richard Nixon closed the gold window in August 1971, gold has not played a formal role in the international monetary regime. Today, the “regime” is characterized by many as a chaotic non-system. In the past decade, gold prices have surged and there have been noises in some quarters that gold’s formal role should be re-established in the sphere of international money. Nobelist Robert Mundell has gone so far as to predict that “Gold will be part of the structure of the international monetary system in the twenty-first century.”

Automatic Currency Boards versus Central Banks

Gold-based currency boards could transform Professor Mundell’s prediction into a reality. Currency boards have existed in more than 70 countries and a number are still in operation today. Countries with such monetary institutions have experienced more fiscal discipline, superior price stability, and higher growth rates than comparable countries with central banks. An orthodox currency board is a monetary institution that issues notes and coins (some currency boards have, however, also accepted deposits).

Its monetary liabilities are freely convertible into a reserve currency (also called the anchor currency) at a fixed rate on demand. The reserve currency is a convertible foreign currency or a commodity chosen for its expected stability. For reserves, such a currency board holds low-risk, interest-earning securities and other assets payable in the reserve currency. Its reserves equal 100 percent or slightly more of its notes and coins in circulation, as set by law.

An orthodox currency board has no active role in determining the monetary base. A fixed exchange rate with the reserve currency and the requirement that the currency board hold foreign reserves equal to 100 percent of the monetary base prevents it from increasing or decreasing the monetary base at its own discretion. Nor does a typical currency board influence the relationship between the monetary base and the money supply by imposing reserve ratios or otherwise regulating commercial banks. An orthodox currency board system is passive and is characterized by automaticity. Regardless of the metric used, the money supply in a typical currency board system, therefore, is determined entirely by market forces — that is, the demands of money users who bring reserve currency to swap for local currency determine the amount of notes and coins that the currency board supplies.

In a currency board system and in a central banking system alike, commercial banks are entrepreneurs of credit. A commercial bank cannot lend more to borrowers than it can borrow from depositors (or credit markets), in the form of deposits held instead of spent. If a commercial bank lends excessively, the borrowers spend the excess, for instance, by writing cheques. In the payments system, more funds flow out of the bank than flow into the bank. To prevent the outflow from bankrupting it, a commercial bank holds reserves. The loans of commercial banks are limited by their need to maintain sufficient reserves to enable depositors to convert deposits into cash (or reserves) on demand and to withstand outflows of reserves through the payments system.

A typical central bank, in contrast, can at its discretion increase or decrease the monetary base. It can lend to commercial banks, creating reserves for them, even if its foreign reserves are decreasing. More reserves tend to enable commercial banks to make more loans, which they do by creating deposits for borrowers. The money supply then increases. Decreasing the monetary base tends to have the opposite effect. Besides changing the monetary base, a typical central bank can also influence the supply of commercial bank loans by changing the reserve requirements for commercial banks.

Despite the inability of an orthodox currency board to create reserves for commercial banks at its own discretion, the money supply in a typical currency board system is quite elastic (responsive) to changes in demand, because the system can acquire foreign reserves. The rules governing a currency board merely prevent it from creating reserves for commercial banks in an inflationary manner, as a central bank can. Other sources of elasticity in the money supply are variability in commercial banks’ ratio of reserves to deposits, the pooling of reserves among branches of commercial banks in the currency board country and the reserve country, interbank lending, and variability in the public’s deposit-to-cash ratio.

In the past, currency boards have issued monetary liabilities that were fully backed by gold and were fully convertible into gold at a fixed rate on demand. The following gold-based currency board law is presented to indicate how a modern, independent, gold-based currency board could be established and would operate. As drafted, the law would allow for the creation of a publically-owned entity. But, with slight amendments, the draft law could support the establishment of a purely private currency board.

(See the proposed text [Here].)

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.

This article appeared in the May 2012 issue of Globe Asia and the version here is from the Cato Institute Web site, April 24, 2012
http://www.cato.org/publications/commentary/goldbased-currency-board-please.

.

Most people believe in conspiracy theories, particularly when trying to understand why something bad is happening. In the news language of social Democrats, the term for conspiracy is “corporations.” Big corporations run the world.

Whether it is corporations, or capitalism, or the Illuminati, the idea that teams of people out there are organized to surround you and bend your life to their (profit-seeking) willpower is scary. If you are a person concerned with justice or liberty, it should be scary to think gangs of bad people are working to defeat what you believe are good values.

I think that conspiracies are everywhere. Yes, they are in every corporation. But the good detail is that so many conspiracies are working to get their profit that none of them has a monopoly. Competition is good.

So, I look for the monopoly conspiracies. I have found one.

Monopoly Conspiracy

When I think about a monopoly, I look at the meaning of the concept. It means there is one producer – not two or three. Where can we see that today? Inside the United States, there is one Federal government. For each person, there is one state government to live under. There may be two, but they cohabitate. The State government can do some police things and the Federal government gives it extra money to do them.

We live today in a web of controls, mostly based around payments. Your employer pays your wages, but he also tells the IRS and gives you a W-2 in January. Your bank processes your paycheck and your bills, gives you a debit card and makes you an auto loan and mortgage. You are caught in the web.

In every country, there is one payments system and one tax system. They are connected with computers and reporting systems, like the W-2, to make sure you cannot escape. Just last November, the IRS created the new 1099-K reporting form, so credit cards and payments through PayPal will be reported to the IRS. The noose tightens.

The Obama plan for medical payments is the most frightening system of control that has come forward, since life and death, health care, and the safety of your family is at stake. If the Obamacare system were fully implemented, about five years from now, you would not be able to get medical care without being registered in the system. Go die in the gutter, you anarchist!

But do most people think they are being trapped in a web of control by some conspiracy? Is this a topic that is discussed at backyard barbeques in this mild springtime weather? Surprisingly, if you bring up the subject, several people will agree with you. Gasoline prices are rising. Obama suggests this is a conspiracy by oil companies and speculators. Rich people pay higher tax rates than you do, but if you listen to the media, you would think they pay no taxes at all. Are the rich people in a conspiracy, or is the media?

The Ron Paul campaign has been remarkable in its two years of effort to recruit a growing number of young people. His message about the Federal Reserve and the military-industrial complex is that profits from the wars in Afghanistan and Iraq-Iran-Yemen are clear. Young people find that message interesting. Are they catching onto the idea that their future is mortgaged to some Establishment conspiracy?

The interesting detail about the youth movement that follows Ron Paul is that it does not particularly understand free banking vs. central banking. They might endorse “the gold standard” but they have no specific ideas about currency reform. But they do seem to understand that the Federal Reserve is part of the web that ties them into Social Security and the Income Tax.

Looking for an Escape

Young people who worry about becoming enslaved for life to a web of society that will drain their economic productivity, sap their savings to pay the debts of Lyndon Johnson, Richard Nixon, George Bush, and Barack Obama, are not happy about it.

What might be an escape?

In the first place, there is the “parent trap” of Social Security and Medicare – not to mention the future of Obamacare. Do you want your parents to die? Do you want to cut them off from expensive end-of-life hospital services? The vice grip of the welfare state is screwed tightly by the generation-to-generation financial responsibility problem. Nobody today over age 25 has saved enough to pay for the last 20 years of their life, particularly with the rising costs of modern, miracle medicine.

But the idea is out there, today, among young people that the current system is a trap – a blood-sucking trap. And that young people today have no exit. The current system is tightly tied to the “payments system” based on the Federal Reserve. That is why they love Ron Paul’s message about abolishing the Federal Reserve.

(This essay was published today in American Breaking Point, hosted by my friend Charles Goyette, whose ideas on money and tax policy I share entirely.)

Many Americans would not consider their civil liberties to be a laughing matter, but a monument displaying the Bill of Rights scheduled to be constructed and dedicated in Wesley Bolin Plaza by the end of this year began as a joke in comedian Chris Bliss’ standup act approximately five years ago.

In the bit, Bliss proposes “putting up Bill of Rights monuments next to the Ten Commandments so people can comparison shop.”

The gag evolved into real ambition after Bliss researched to see whether any such monuments existed in the country. He realized there were none and soon thereafter set up MyBillofRights.org, an organization dedicated to erecting monuments to the document in all 50 states, beginning with Arizona.

The humor belies Bliss’s commitment to communicating the importance of the Bill of Rights, which he credits as the foundation of civil liberties in the United States and around the world.

His faith in the power of public symbols also drives him.

“I grew up in Washington, D.C., and anyone who has visited there either as or with a child can tell you the impact of monuments in making history visible, tangible, and unforgettable, especially for kids,” he said.

Bliss hopes that the planned Arizona monument will give children an opportunity to get in touch with their identities as citizens of the United States. It will compensate for what Bliss sees as a lack of civics education in schools, which he believes has left children unaware of the historical basis of their civil liberties.

Children are not the only ones who could use political enlightenment, Bliss said. He also feels discouraged by the “vitriol” in today’s political discourse. He hopes the monument will help dispel the sense of division between conservative and liberal values.

“You know, we have the ACLU and the NRA both under this umbrella called the Bill of Rights,” Bliss said. “This is the perfect thing to be rising up again and say, ‘Look, our common ground is our strongest ground.’ Our greatest accomplishments have been when we’ve lived up to these principles, and our greatest failures have been when we ignored
them as a nation.”

The organization has approximately 25 percent of the $400,000 estimated price tag for construction and of the monument, Bliss said.

That figure includes a donation of the service to install the monument from Sundt Construction, whose CEO Doug Pruitt serves on the organization’s executive committee.

Bliss plans on raising the lion’s share of the construction costs through an event, The Phoenix Comedy Festival, scheduled for May 13 at Phoenix Symphony Hall. Several well-known comedians are slated to perform, including Lewis Black, Bill Engvall, Bobcat Goldthwait, Kathleen Madigan and Don Novello, who plays Father Guido Sarducci.

The monument will share the plaza with other memorials, including one to Vietnam veterans. The Vietnam monument sits on the same hill where Bliss’ Bill of Rights Monument — comprised of several large limestone tablets — will stand. The monument will put those memorials in a new context, Bliss said.

“We honor those people’s sacrifice because we say that they died for our freedom,” he said. “Well, here’s the document the freedom comes from.”

The monument, funded entirely by private contributions, is scheduled to be finished and dedicated on Dec. 15, Bill of Rights Day.

Published: April 16, 2012 at 9:35 am in The Capitol Times ]]> http://joecobb.com/2012/04/17/arizona-bill-of-rights-monument/feed/ 0 http://joecobb.com/2012/04/13/the-real-reason-for-the-tragedy-of-the-titanic/ http://joecobb.com/2012/04/13/the-real-reason-for-the-tragedy-of-the-titanic/#comments Fri, 13 Apr 2012 15:23:00 +0000 Joe Cobb http://joecobb.com/?p=1254 by Chris Berg

Mr. Berg is a fellow at the Institute of Public Affairs in Melbourne, Australia. This op-ed originally appeared on the Australian Broadcasting Corporation’s website (The Drum www.abc.net.au) on April 11. Reprinted from The Wall Street Journal, April 13, 2012.

“There can be no capitalism, as distinguished from select capitalist practices, without a culture of capitalism, and there is no culture of capitalism until the principal forms of traditional society have been challenged and overcome.

“But it must be said – and is not often enough said – that the mores of a more traditional organization of society do not die out with the dominance of capitalism. Rather they regroup to fight again with new leaders and new causes.

“Any history of capitalism must contain the shadow history of anticapitalism, sometimes carried out in the name of a new theory, but often as a reexpression of values that prevailed before the eighteenth century.”

From historian Joyce Appleby’s “The Relentless Revolution: A History of Capitalism” (2011).
Reprinted in The Wall Street Journal, April 10, 2012.

One of the most desired reforms of the libertarian movement would be to abolish the Internal Revenue Service. The IRS is perhaps the most despised Federal government agency, not only because it symbolizes the hated income tax but also because it is a spy center. Every employer and anyone who pays you more than $600 per year is supposed to “rat you out” to the IRS with a 1099 form (banks and brokerages do it at $10).

Although the IRS is mostly concerned with the collection of personal and business income taxes, the agency was not created in 1913 with the 16th Amendment. It was established during the Civil War and persisted even after the war ended, although the war income tax expired after 1871. The Internal Revenue Service collects revenue from inside the county, while the older Customs Service collects tariffs at the ports of entry. Before the IRS, the Treasury department had been running a bureau since 1791 to collect Alexander Hamilton’s whisky excise tax.

When president Richard Nixon imposed wage and price controls in 1971, the enforcement agency was the IRS. In my 1982 book, “The Income Tax Must Go,” the label that seemed most to fit the agency was America’s Secret Police. Although they like to trumpet the slogan that the filing of income tax returns is voluntary, and failing to file is only a civil violation of law, the force of guns and police are not absent. When you sign a tax return, the criminal penalty for perjury is attached to your signature. The IRS publicizes its enforcement powers every spring, as April comes, to use fear as a stimulant for people to file tax returns.

Misleading Proposals to Abolish the IRS

There are several misleading proposals to abolish the IRS floating in the blogosphere. One of the most prominent is the so-called Fairtax, which would eliminate the personal income tax and replace it with a national sales tax, combined with a socialist proposal first advocated by presidential candidate George McGovern in 1972 – the “prebate” to give money to everyone in advance, so they can pay the sales tax at the grocery store and gas station.

It seems the most popular part of the national sales tax idea is that individuals would be liberated from reporting to the IRS every year. But there are a number of questions about this “magic wand” interpretation of the Fairtax.

One of the questions about a retail sales tax is whether it covers the price paid for services. Many states do not tax services, and it is always a controversy whether their sales taxes, or “retail privilege tax” as in Arizona, should extend to cover the sale of services. One service a typical family might offer would be a yard sale or a garage sale. Would the Fairtax cover those activities? Would a family putting old clothes and used toys or furniture on their driveway in the spring have to register with the (what shall we call it?) the new IRS to collect the national sales tax?

The Fairtax is riddled with gimmicks to answer this question. For example, newly constructed houses would have to pay the national sales tax, but used houses would not? Maybe the yard sales are only selling used stuff, but what about the pottery or the quilting that is sold at local arts and crafts shows? What about the kids who mow lawns in the summer? Would they have to register with the IRS to collect the national sales tax? It seems the issue about collecting the tax is something the advocates of the Fairtax have some problems to explain. A government agency would be asking questions to anyone who creates a product with new labor.

Not least among the victims of the Fairtax revenue enforcement agency would be the retail stores, particularly the small retailers. Mom and pop have a small convenience store franchise. Today they submit monthly reporting tax returns to their local state sales tax agency, in most states, and sometimes they are audited. The national retail sales tax would dramatically increase the amount of money and the importance of auditing these tax collections. With every point-of-sale in the United States becoming the starting point for collecting the trillions of Federal revenue our over-sized government needs, it is hard to believe something as big and powerful as today’s IRS would not exist. The spy agency would still be there in some form, although its victims might be mom and pop instead of wage earners.

The IRS today is also the collection agency for the Social Security Administration. One of my critics from an earlier article critical of the Fairtax idea celebrated the Social Security Administration, saying it would be the agency paying the McGovern “prebate” to citizens. It was not lost on me the emphasis on “citizens,” because many of the supporters of the Fairtax prebate idea want to stress the detail it would not be paid to non-citizens, even if they are legal residents and family members of Americans. Where does this particular concern come from? Maybe from the Ku Klux Klan inspired 1924 immigration quota law? But immigration reform is another topic.

The Only Way to Abolish the IRS

The only way to abolish the IRS for real is to abolish centralized Federal taxation. Now we are getting into serious political issues about the role of federalism in the United States Constitution. The 16th Amendment and the income tax has seriously crippled the relationship between the states and the Federal government, by giving the central government more power to collect more money, and to subdue the state governments with bribery. Barry Goldwater in his famous book, “Conscience of a Conservative” (1960), devoted more pages to the destruction of federalism under the New Deal, and years since, than he devoted to a discussion of the principles of limited government at the state and local level.

As part of the Compromise of 1787, the Founding Fathers set up the House of Representatives on a population-proportional basis. The House of Representatives was the part of Congress that wrote tax and spending laws, and the Senate was only allowed to amend those enactments. This is Article I, Section 2, of the Constitution, which is most famous for setting the tax rate on slaves at 60% of the tax rate on white people. Times have changed, of course, and now the Senate is in the driver’s seat, and deal making in conference committees is where the action happens. But the original idea of the Founding Fathers deserves a new look. There are not supposed to be any slaves any more. The census mandated every 10 years was the original basis for collecting Federal taxes, and the state legislatures were supposed to decide how to collect the money.

The proponents of a national retail sales tax are trying to get rid of the income tax with something that I think is worse, instead of trying to restore federalism and to really, really abolish the IRS. The Fairtax will not abolish some agency in the U.S. Treasury with police powers to collect taxes – if not from you, then from the Mom and Pop grocery or the neighbor boy who mows lawns. There will be no escape from the federal tax police as long as the Feds have the power to tax individuals and businesses. The constitution says “No capitation, or other direct tax” and that should be restored as the general rule. The national retail sales tax is a direct tax on Mom and Pop grocery and the neighbor boy who mows lawns.

Let us stop the deception about the Fairtax and its phony claim about abolishing the IRS. It is hardly a fair tax. It is reshuffling the chairs on the Titanic as the last great hope of mankind drifts on the waters of debt and totalitarianism.

(Published in American Breaking Point, Feb.21, 2012)

NEW YORK (CNNMoney.com) — A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

“In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency – as long as it is easily distinguishable from U.S. dollars – the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.”

To the state legislators who are proposing state-issued currencies, that means gold and silver are fair game, said Edwin Vieira, an alternative currency proponent and attorney specializing in Constitutional law. And since gold has grown exponentially more valuable, while the U.S. dollar continues to lose ground, the notion has become increasingly appealing to state lawmakers, he said.

The state gold rush: Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins – which include American Gold and Silver Eagles – are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.

Since the face value of some U.S.-minted gold and silver coins – like the one-ounce, $50 American Gold Eagle coin – is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law allows the coins to be exchanged at their market value, based on weight and fineness.

Local Currencies:
In the U.S., We Don’t Trust

“A Utah citizen, for example, could contract with another to sell his car for 10 one-ounce gold coins (approximately $17,000), or an independent contractor could arrange to be compensated in gold coins,” said Rich Danker, a project director at the American Principles Project, a conservative public policy group in Washington, D.C.

South Carolina Republican Representative Mike Pitts proposed a currency system that would allow people to use any kind of silver or gold coin – whether it’s a Philippine Peso or a South African Krugerrand – based on weight and fineness. Pitts said in the bill, which currently has 12 co-sponsors, that the state is facing “an economic crisis of severe magnitude.”

Republican representatives from Washington State followed suit in January, introducing a bill that would also allow any gold and silver coins to be considered legal tender based on metal values. Minnesota, Iowa, Georgia, Idaho and Indiana are also considering similar proposals.

Many of the bills would make it possible for residents to exchange the physical coins for goods and services, so you could use coins to buy anything from groceries to a car as long as the store chooses to accept them.

However, most people aren’t going to walk around with such valuable coins in their pockets, said Vieira. Plus, calculating the value of the coins – especially if they come from different parts of the globe and are of different sizes and shapes – will get tricky.

It’s more likely that the states will create electronic depositories and accounts for the coins to make transactions easier, when and if the initial bills are passed, he said.

Utah Gold & Silver Depository is already developing a system where customers could use debit cards linked to their gold holdings. When customers swipe their debit cards to make transactions, physical gold and silver coins would be transferred between accounts in privately-owned depositories (or vaults) based on the market value of the metals.

Before deciding on a specific form of currency, some states – including Minnesota, Tennessee, Virginia and North Carolina – are considering proposals that would first require a committee to review their alternative currency plan.

The future of U.S. currency: The states’ proposals have been gaining steam among Tea Partyers and Republicans, many of whom also endorse a nationwide return to the gold standard, which would require the U.S. dollar to be backed by gold reserves.

Tea Party “father” Ron Paul is sponsoring the “Free Competition in Currency Act,” which would allow states to introduce their own currencies, and rival Newt Gingrich is calling for a commission to look at how the country can get back to the gold standard.

But it will be the individual states that could really get the ball rolling, said Vieira. Even if several of the current proposals get killed, the introduction of so many bills at the state level is drawing national attention to the issue, he said.

Funny Money: 11 Local Currencies

Of all the state proposals circulating right now, Republican-controlled states including South Carolina, Georgia, Idaho and Indiana have the best chance of passing their proposed bills this year, said American Principles Project’s Danker. If just one or two states implement an alternative currency, it could have a Domino effect, he said.

“I think we could get a couple passed in this legislative session, and that would show this is mainstream, popular and it would be a justification for more of the risk-averse states for doing this,” he said.

There are, of course, many people who think the recent push for alternative state currencies should be stopped in its tracks. David Parsley, a professor of economics and finance at Vanderbilt University, said he thinks state-issued currencies are a “terrible” idea.

“Having 50 Feds” could debase the U.S. dollar and even potentially lead the country into default, he said. “The single currency in the United States is working just fine,” said Parsley. “I have no idea why anyone would want to destroy something so successful – unless they actually wanted to destroy the country.” [Or just wanted to destroy the monopoly of the Federal Reserve - Joe Cobb]

Copyright by CNNMoney.com, published February 3, 2012.

I was only 14 as a boy living in Kansas in 1958. My best friend and I were walking home from school and on a lawn in our suburban neighborhood was a sign that said, “Vote Yes” on the Kansas ballot proposition to put a Right to Work law into the state constitution. I said to my friend, “That’s a good idea.” My buddy responded angrily, “No, it would make workers into slaves of their bosses.”

I had no idea what he was talking about, but his father was the local steward of the Otis Elevator workers’ union, and his son had heard him comment to his family about the ballot proposition. His son was repeating what he had heard, as a loyal 14-year son perhaps ought to do.

I was very frustrated. My best friend and I had never disagreed on anything, so this was a real challenge. I told him, “But freedom of choice is in the Constitution!” I went immediately home to read the Constitution.

It is not there.

What was a young boy of 14 to do? I decided I had to work for freedom of choice. The ballot proposition said, “No one shall be forced, as a condition of employment, to join or not to join a labor union.” The issue was “union shop” agreements, which unions need to get employers to deduct union dues from every worker, regardless of the worker’s dissent. I encountered a number of adults in the political campaign who introduced me to the publications of the Foundation for Economic Education. I wrote one letter to the newspaper. My mother was delighted when she received a phone call from a reader who wanted to talk to “Mr. Cobb, who had written the excellent letter.” As a 9th grader, this was exciting.

That was the beginning of my political awakening. I went on to read Frederic Bastiat’s The Law (1850), which is still available from the Foundation for Economic Education. I found there also the works of Ludwig von Mises and Nobel laureate F.A. Hayek. I learned from my new adult friends about Milton Friedman at the Unversity of Chicago, and I went off to college seeking him out when I finished high school.

An Idea Changed My Life

My life changed because of a negative comment by a good friend, based on his father’s belief in Marxism and the myth of employer exploitation, the myth of the Industrial Revolution as some kind of disaster for poor people, and the general failure of Americans – and everyone else in most countries – to understand how the “invisible hand” that Adam Smith described leads to the greatest freedom and the greatest health, prosperity, and social good that mankind has ever known.

My parent’s values made me a libertarian, but they didn’t understand why I was enthusiastic about Barry Goldwater in 1960. They voted for Johnson in 1964, but by the Reagan era they were also with me. I thank them for teaching me my values and not their political misjudgments about F.D.R. and Johnson. But they grew up in north Texas in the 1930s and had no other information; Hoover was a bad man.

Such a small thing, a disagreement with my best friend, opened my mind to a world of new ideas.

I still wonder why the U.S. Constitution doesn’t have a simple clause that guarantees freedom of choice.

But perhaps it does, the “Privileges and Immunities” clause of the 14th Amendment.

Of course, the crony capitalists of 1873 shut that small declaration of economic freedom of choice down with the Supreme Court “Slaughter House Cases.” Clint Bolick of Arizona’s Goldwater Institute has recently published an excellent book on the 14th Amendment and its priveleges and immunities clause: Death Grip; loosening the law’s stranglehold over economic liberty (Hoover Institution Press, 2011). He argues the Court gutted the economic freedom of both ex-slaves and all the rest of us by protecting instead the police powers of local governments to ban economic activity, in the name of any “reasonable basis” for restricting competition.

The flood of government economic regulation that has swept over America in the ensuing century was declared perfectly constitutional, and freedom of choice returned to its classic status, in the Middle Ages, as subject to the approval of the masters. And some people wonder why “crony capitalism” is the norm today.

Mitt Romney released his tax returns and they showed he paid a lower income tax rate than Warren Buffet’s secretary. What a shame. And he lost the South Carolina primary election, and was challenged in the Florida primary election, as a result of this misleading “fact.”

Romney is a rich man. His wealth is mostly in financial assets, which he trades and sells. He gets the long-term capital gains flat tax rate, 15%, when he sells and has gains from the sale of his property.

Warren Buffet’s secretary sells her labor. She falls into the “progressive income tax” category. The tax on labor is not a flat tax. The more she makes, the higher her tax rates go up. If Warren Buffet paid her more for her work, her tax rates might go up to 35% under current law and up to 39% under President Clinton’s law – not to mention Social Security taxes.

Mitt Romney doesn’t sell his labor. He sells his property, which he acquired with his labor some years ago, and gets the income (gains) from its value. If he doesn’t gain, he just gets some of his money back. The key detail is the “basis” of his property. That is what he paid for it, or originally invested to obtain it. If he sells his property for more than its basis, he has a gain. If he sells for less than he originally invested to obtain it, he has a deductible loss.

The Capital Gains Tax Rate

Back in the early 1920s, the Congress discovered the income tax was unfair to people who invested and held assets for many years, and then sold them for a gain. The income tax took all of the sales price and put it into their highest tax bracket the year they sold. This was especially unfair to people who had held their assets for many years, and for whom the inflation – depreciation of the “dollar” – meant their original basis was an irrelevant valuation in a unit of money that had gotten smaller.

If you paid a silver dollar for an asset in 1901 and sold the asset for $20.00 (paper) in 1946, did you make a real gain or not? The “dollar” had been depreciated to less than half its earlier value, possibly faster than the asset’s real value had gained. In the past 45 years the “dollar” has been reduced to about one-seventh of its value in 1966.

This is called “money illusion” and most people are fooled by it. A yardstick and a scale will measure weights and measures, with honest calibration. A bank account or an asset price, are floating on the sea of uncertainty because nobody knows what a “dollar” will buy next year. The measurement of value in “dollars” is a floating exchange rate with the future.

But the basis of an asset you purchased is fixed in time by the rules of accounting. Your capital “gains” might be fictional, and the real picture is that you lost value. Too bad. The current law is against you. They will tax your imaginary “gain.”

But there is a solution: “indexing” your basis for loss of value, measured in the accounting units of money. The tax code uses indexing each year to adjust for inflation (depreciation of the dollar). The tax brackets for labor are widened and the standard deductions and personal exemptions are numerically increased, which really just keeps them the same. For example, if you earmed $10,000 in 2005 and $12,800 in 2011 you would be earning the same real income, and the income tax recognizes this with indexing.

But the U.S. Treasury opposes putting something like “indexing of basis” into the tax code. They say it would “cost too much revenue.” The government wants to confiscate the phony “gains” from inflation when people sell property. This reminds me of an imaginary conversation between Hitler and Goebbels in 1943. Imagine if one of them had said, “Yes, I know it is wrong; but we need the labor.” When the government uses inflation to confiscate the value of your property, it is just like using phony tax accounting to confiscate your life’s work.

We don’t know if Mitt Romney came out ahead or behind, because we don’t know the inflation-adjusted value of his sales, from which he got his taxable income. But he paid the legal rate, which is 15%. Of course it is smaller than what would be his tax rate if the income was from punching a time clock, like Warren Buffett’s secretary. But is it “unfair”?

Stupid Idea: Flat Capital Gains Tax *

The tax rate on capital gains should be the same as the tax rate on labor, but the way capital gains are measured should be changed.

In the beginning, 1920s, the tax writers in Congress granted capital gains a special 40% tax exclusion as a concession to the idea that holding an asset for several years is a different thing than earning the same amount of income from current labor. It was current labor income, interest and dividends that the income tax was supposed to focus on.

Capital gains were an odd-ball factor that had to be treated differently, since several years were accrued in the capital gain. The tax on income is one year at a time. Congress realized there had been inflation during World War I and the capital gains exclusion was a “fix” for the accounting problems. Whatever your gain from the sale of property, held for more than a year, might be, you would only pay 60% of the top marginal tax rate on your gains.

Today there is not any “exclusion” for capital gains, but there is a special lower tax rate of 15% for that income. As Mitt Romney’s problem illustrates, there should be tax reform to have capital gains pay the same tax rate as labor income, but there should be an adjustment for the money illusion, the accounting value of the basis of the property that is sold. It should be indexed for inflation for all the years it was held.

Since the rate of inflation, the depreciation of the “dollar,” is an uncertain and variable thing, a far better idea would be to allow owners of assets to adjust their bookkeeping. If you purchase something for $100 you should be able to compute the inflation factor on that original amount when you sell it. If you held the asset for 10 years and the dollar shrank to half its value, you should be able to claim a basis deduction from your sales price of $200, and pay tax only on the real gain.

Does the Treasury department really “need” the revenue more than Americans need justice in the tax system?

Published in American Breaking Point, Feb.6, 2012
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* A flat tax is not stupid, it is smarter than a “progressive” tax, but it is stupid to have a different tax system for labor. It only incites envy. I advocate dividing the issue and having a single tax rate for both labor and capital gains, and then to have a decentralized Federal system for them both. See my book in this web site.