Secession and Legal Tender Laws: Washington and Bankers Win, You Lose

We talk a lot here about monetary policy, most specifically the concept of sound money backed by gold and silver. When gold and silver are the only form of money, there is NO inflation…EVER. Inflation cannot occur with a “hard money” system. (For more, go to the Archive section and dig around.)

Dream for one moment what it would be like if there was no inflation. I bought my first house in 1972. One story and 1,000 square feet for $21,500. If there was no inflation, it would still cost $21,500 for that house, now nearly 40 years later. If you saved money for retirement throughout your earning lifetime, you would be certain that the money you saved at age 25 would still have the same buying power when you reached age 65.

But no person alive in America has experienced hard money with no inflation. It almost sounds too good to be true.

Hard money prevents governments from spending more money than they take in by taxation, which controls the size and scope of government. That is why governments throughout history have loved legal tender laws. Legal tender laws facilitate government counterfeiting and wild uncontrolled spending.

Ever heard of Gresham’s Law?

It is an axiom about money attributed to Sir Thomas Gresham, a 16th Century English financier. It is generally stated that “bad money drives out good money.” But a more accurate statement is “Fiat money drives out real money.” I’ll explain the differences.

Why should you care at all about this?

You should care because legal tender laws have been robbing you blind for your entire lifetime.

Legal tender laws state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions. That means that you are forced by law to accept a certain kind of currency as settlement of a debt, even if you know that the currency has either lost value or is worthless.

Consequently, human nature dictates that people will first use the money that is devaluing, and the real money will be removed from circulation and stuffed under mattresses and placed in safes as a store of value.

Legal tender laws mostly benefit the government (or their central bank, like the Federal Reserve) who issues the currency and the bankers who practice fractional-reserve banking. When governments issue currency backed by nothing, the value of the currency drips away over time. Sometimes, the value evaporates quickly, like it occurred in Weimar Germany, Argentina and Zimbabwe. But when dollars are legal tender, why wouldn’t a government borrow a bunch of money, then pay it off with debased dollars?

Because it’s immoral? Because it’s theft? Because counterfeiting is illegal? Nope…the answer is that morality, theft and illegal acts are perpetrated by government on a daily basis. So there is really nothing restraining them.

One of the greatest mistakes the Founding Fathers made was to allow the new Federal Government…the united States of America…to “coin money and regulate the value thereof.” (Article I, Section 8). That privilege should have stayed with the States. That way, the only way the US could have spent money is to receive payments from the states. This is the Power of the Purse…the first weapon of control for any state or nation.

Gold and silver have value other than money. They are used in industrial applications and jewelry, among other uses. However, paper currency has no other value than the value ascribed to it through government’s legal tender laws.

Onlookers see government perpetuating this fraud, and they try to mimic the behavior. So people borrow money for large-ticket items, knowing that years down the road, the lender will be forced to accept depreciated dollars as payment of the debt. And the lenders also know that the dollars they are receiving are devaluing, so they build in higher interest rates to make up for the devaluation.

(The interest rates happening in the USA right now are a price control bubble controlled by the government and the Federal Reserve. They have no basis in reality.)

Bankers love legal tender laws because they facilitate “fractional reserve” banking. For those not familiar with that term, it simply means that the bank only has to maintain a small cash reserve, and can therefore lend out the other assets at interest. Further, through accounting skullduggery, banks can literally create money out of thin air and lend it out, also.

Compare fractional reserve banking with honest banking under a gold/silver money system. Banks could only issue IOUs…paper deposit tickets to represent the actual amounts of gold and silver in their vaults. Those IOUs can be used as currency to facilitate commercial transactions. Electronic accounts could also be created for electronic transactions in tiny amounts of gold. Further, the IOUs would represent the WEIGHT OF GOLD OR SILVER, not its monetary value, since in a free market, the value of the precious metal would fluctuate. But banks would have to maintain 100% reserves. If a bank wanted to lend money, it would have two ways: (1) lend out some of its own profits, and (2) borrow money from its own depositors and lend it at a higher interest rate.

When legal tender laws do not exist, people have the freedom to accept the medium of exchange of their choice, not the government’s dictates. In those transactions, people will likely choose to be paid with a medium that has actual value.

A state that plans to secede would be best served by resisting the temptation to enact legal tender laws. That should be one of the bellwethers of how honest your new government is. If the new nation enacts legal tender laws, you know up front that they intend to issue counterfeit currencies, inflate the currencies and facilitate fractional reserve banking. Period.

Gold and silver are “Real Money.” Currencies are not. People should be free to conduct commerce in any form they choose and with any medium of exchange they choose…whether gold, silver, cowboy hats, chickens or anything else THEY choose. While media other than gold and silver money may add a layer of additional complexity to commerce through the exchange rate, it adds total freedom to all transactions as it prevents governments and banks from stealing from you. Seems a small price to pay to prevent governmental plunder.

To learn more about legal tender laws, check out the excellent article written by Jorg Guido Hulsmann, a Senior Fellow at the Mises Institute, a free-market think tank in Auburn, Alabama. He wrote Legal Tender Laws and Fractional Reserve Banking. For those of this audience who desire an in-depth analysis of this topic, click on the link in the previous sentence.

Secession is the hope for humanity. Who will be first?

DumpDC. Six Letters That Can Change History.

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

6 Responses to Secession and Legal Tender Laws: Washington and Bankers Win, You Lose

  1. Just a little observation. The sticker price on my 2010 Ford Flex was about $39,000.00. Had I paid with the silver metal value of real 90% silver dollars, it would have cost me less than 3000 of those silver dollars.

    A comparable vehicle purchased in 1960 would have cost less than $3000.00.

    With this in mind, the cost, in real dollars, of cars made 50 years apart is virtually unchanged.

  2. […] and Legal Tender Laws Posted on June 25, 2010 by Bill Miller This article by Russell D. Longcore on DumpDC.com. A state that plans to secede would be best served by resisting the temptation to enact legal […]

  3. Bill Miller says:

    Russell,

    You have written long and well on this subject during the past year—and correctly so. There are many reasons why flat money inflation is beneficial for governments, including the following simple example:

    I purchase $100,000 of stock in 1985 and this year I sell the stock for $200,000—a nice little profit. I then realize I haven’t had any gain at all since the purchasing power of my $200,000 now is exactly the same as it was for my initial $100,000 in 1985. That is, it was until I send the feds $15,000 for their “fair share” of my “profit.”

    Bill

  4. yardbird says:

    it is illegal to use gold and silver as money in the USA. just look at what happened to the liberty dollar. the US government did not like americans using real gold and silver money, so they stole all of it, and put people in jail for violating legal tender laws! ahh America, land of the free.

  5. […] Russell Longcore: Secession and Legal Tender […]

  6. […] Secession and Legal Tender Laws: Washington and Bankers Win, You … […]

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