On June 2, hours after he presided over a ceremonial signing of Utah’s Legal Tender Act of 2011, Republican Gov. Gary Herbert was called by an out-of-state newsman for his comments on the day’s events. Herbert sent word to the reporter that he is proud that Utah has emerged as “a leader in sound money policy.”
This was an understatement. Ever since the Utah House passed the bill by a 47-to-26 vote following a half-hour debate on March 4—and well before the Legal Tender Act became law on May 10—Utah’s drive to define U.S.-minted gold and silver coins as official in-state currency has attracted attention in the national and international media—including respectful front-page coverage in the New York Times on Memorial Day, three days before Gov. Herbert’s ceremonial signing.
More important, at least a dozen other states have seen the introduction of similar legislation. South Carolina’s legal tender bill has 10 sponsors in the state house, including the Republican majority leader, Kenny Bingham. Its lead sponsor in the state senate is David Thomas, chairman of the banking and insurance committee. At its annual convention in mid-May, the South Carolina Republican Party passed a resolution endorsing the bill.
In Iowa, Kent Sorenson, a young, politically gifted conservative leader who ousted seemingly entrenched Democratic incumbents in races for the state house (2008) and state senate (2010), introduced a legal tender bill as soon as he learned what Utah was doing. Sorenson supports returning the United States to a gold-backed dollar. The sponsor in the Iowa House is Kim Pearson, another articulate newcomer.
So what is the nature of what Herbert described as Utah’s sound-money leadership? Is the Legal Tender Act of 2011 a pro-gold protest against the weak dollar/stagflation economy on offer from the Obama administration and the Federal Reserve under Chairman Ben Bernanke?
Or quite apart from any national political impact, will it have a favorable effect on the economy of Utah, or, for that matter, other states looking to enact similar laws?
The answer, at least potentially, is both of the above. Washington-based reporters covering the Fed say that that body, though so far offering no public comment, has cast a jaundiced eye on the Utah legislation as well as the spread of the hard-money movement to other states. The fact that two of the movement’s most active states, South Carolina and Iowa, happen to be two of the first three states to vote in the contest for the Republican presidential nomination could also prove significant.
As for the future of hard money in Utah, two public forums were held in the state’s capitol building the day of Herbert’s ceremonial signing. It was evident that much preparation and thought concerning the new law has already taken place, on the part of Utah business leaders as well as Tea Party activists led by attorney Larry Hilton, who pushed so effectively for passage of the legislation.
Active preparations are under way for a mechanism under which residents of Utah will be able to make purchases or pay their state taxes using a gold-backed Visa debit card issued by a major national bank. This could come about through establishment and activation of a privately owned state depository that will accept (and value on a continual basis) gold and silver coins, including coins with high numismatic value. The holdings of an individual or business at the depository will provide the backing for dollar purchases run through the Visa debit card, but could work equally well for precious-metal-backed Visa purchases abroad, denominated in foreign currencies.
Utah, or any other state enacting such a law, could very quickly become a user-friendly environment for those wishing to hold their wealth and/or make purchases via a money not subject to the steady meltdown brought on by the Fed’s record-shattering printing of dollars, which in recent months it has been referring to as “quantitative easing.” With the kind of self-marketing most governors are well-equipped to carry out, such a state could rather quickly become a magnet for American capital. So much for comical horror stories of Utahns asking for change of a 1900 $20 gold piece at the local 7-Eleven.
Why has this remarkable movement for sound money sprung up among political leaders at the state level, rather than from Congress?
It may be a cliché, but is no less a fact that state officials are closer to the people. As one pertinent example, they are more likely to be aware of the plight today of small business, always in the U.S. the main engine of job creation and economic growth.
This plight is directly related to the Fed’s zero-interest-rate policy, now well into its third year, which has closed down most lending by the small and medium-sized banks that small business depends on—to the point where, according to Stanford University economist Ronald McKinnon in a recent Wall Street Journal analysis, even a profitable small business has difficulty finding a bank willing to make available a line of credit—a tool both badly needed for expansion and easily obtainable in a normal-interest-rate environment.
The passivity of Congress is due not only to its greater remoteness from the people, but also its greater intimacy with the Fed. Congress and the Fed have become operational co-dependents.
When Congress runs a budget deficit, the Fed in effect prints dollars to finance it. As recently as the 1960s, the Fed had to put some limits on this activity because the international monetary system hinged on the United States’ obligation to maintain the price of gold at $35 an ounce. But once President Nixon removed the last link of the dollar to gold in 1971, all bets were off. The demand of the world economy for dollars as final money—especially foreign governments using dollar-denominated debt as a monetary base standing behind their own currencies—means that Congress can spend huge amounts of money, and the Fed can print huge numbers of dollars to facilitate the resulting budget deficits. All this can be done without the immediate spike in interest rates other countries would experience if they tried to do the same thing.
Nominally, of course, the Fed was created by Congress (in 1913) and is still subordinate. The Senate confirms the Fed chairman and other top officials of the central bank who have been nominated for set terms by the President. (Bernanke is in the second year of his second four-year term.)
But in terms of raw economic power, the Fed has become the real senior partner. As initially founded, the Fed would be subject both to the need to maintain the price of gold and by the regional economic interests represented by 12 subsidiary banks based around the country. But subsequent developments, mainly involving the decoupling of U. S. monetary policy from gold and from remaining constraints by trading partners, left the regional banks as bit players and the Fed chairman with hardly any constitutional or institutional restraints.
In a recent private conversation with our organization, a senior conservative lawmaker went down a list of other lawmakers and listed the reasons each of them would be reluctant to speak out directly on gold or on monetary policy. The impression left was that more than a few members of Congress are conscious of the fact that the Fed today is an 800-pound gorilla, and that this knowledge is a significant factor in Congress’ reluctance to question a Fed policy (zero interest rates for multiple years) that is both unprecedented and highly risky. The bottom line was that this legislator and most of his colleagues do not feel comfortable talking about monetary policy, interest rates, etc. They feel they have neither the standing nor the expertise.
The politics of the current situation are quite fragile. Having announced the early end of “quantitative easing,” the Fed is nervous about the impact on markets of withdrawing the liquidity that has been artificially elevating both the bond and stock markets. Grassroots small business, which has close ties to the Tea Party, knows that the disappearance of interest rates has left much of business on hold. The success of the hard-money movement in state politics, and its coming linkage to the Republican presidential battle in the early caucus and primary states, will leave Congress’ comparative silence on monetary policy less and less sustainable.
The nature of democratic, especially American, politics is that large results often come from small beginnings. Whether the policy activism of a handful of innovative states led by Utah has a chance to cause another of these historic shifts may become evident before almost anyone expects.