-- Posted 14 January, 2011 | | Discuss This Article - Comments:

A libertarian in Columbus, 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 silver.

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 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 Daniels 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.

One 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.

January 14, 2011

Michael 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.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.