Friday, September 30, 2011

Ron Paul Hoists the Flag of Hayek

By Seth Lipsky
The New York Sun
Thursday, September 29, 2011

The first time I met Friedrich Hayek was in 1980 at California, where he was staying at the home of another economist. Then a young editor for the Wall Street Journal, I’d asked to call on the Nobel laureate for a book review I was writing. His host invited me for dinner. Before the meal, Hayek and I retreated, alone, to the far end of the host’s living room, for a chat.

We were but a few minutes into our conversation when, suddenly, Hayek clapped a hand over his nose and mouth and started coughing convulsively, before slumping onto the couch. I raced back to the host to exclaim that Professor Hayek seemed to be in trouble, only to be told that it was okay, he was just taking his snuff. A jolt of the divine herb, it seems, and the sage was back on his feet.

Hayek died 12 years later at the age of 93. I never came to know him well. But this week I found myself imagining that were his long-ago collapse-into-a-coughing fit to occur in front of me today, I’d whip out a copy of a new bill in Congress, H.R. 1098, called the Free Competition in Currency Act of 2011, and wave that under the great economist’s nose. It’s hard to think of anything, even a pinch of the strongest snuff, being a greater pick-me-up for his spirits.

For Hayek was an advocate of, among other things, private money — competing currencies — and HR 1098 would end a ban on them that has obtained here in America since the Civil War. The new bill in Congress, introduced in March by Rep. Ron Paul, would repeal the legal tender laws, prohibit taxation of certain coins and bullion, and clean up other sections of our coinage laws.

It is not a measure the Congress is going to pass in a hurry. But it is being nursed by advocates of monetary reform, and it would be unwise to discount it entirely. Few, after all, gave Congressman Paul much of a chance to win passage of a measure to audit the Federal Reserve, but when it eventually passed it was with an overwhelming, bipartisan vote. It may yet be enforced by the courts.

The Free Competition in Currency Act is far more important. It comes amid a historic collapse in the value of the dollar to less than a 1,600th of an ounce of gold. The dollar has gained a bit of value in recent days, but it is still worth less than a sixth of what it was worth as recently as, say, the start of President George W. Bush’s first term.

One of the things the government has done in the face of that collapse is seek to enforce a prohibition against private “uttering” — that is, putting into use — of coins of gold, silver, or other metal as current money and making or even possessing likenesses of such coins. H.R. 1098 would end the ban on private uttering of coins and, presumably, stop any current prosecution of such uttering.

The drive for the bill is animated, if only in part, by the case of Bernard von NotHaus, who was convicted in March of issuing a private medallion called the Liberty Dollar. The government prosecuted von NotHaus even though the coins he issued were made of silver and are today worth much more, in terms of Federal Reserve Notes, than when they were issued.

Monday, September 19, 2011

The Free Competition in Currency Act of 2011


SEPTEMBER 13, 2011

Lawrence H. White
Professor of Economics, George Mason University

House Committee on Financial Services
Subcommittee on Domestic Monetary Policy and Technology

Chairman Paul, Ranking Member Clay, and members of the subcommittee: Thank you for the opportunity to discuss my views on HR 1098, the Free Competition in Currency Act of 2011 (hereafter “the Act”). As an economist specializing in monetary systems I have studied and written for many years about the role of free competition in currency. Indeed the second book of my three books on the topic, published in 1989 by New York University Press, was entitled Competition and Currency.

The benefits of currency competition
It is widely understood that competition among private enterprises gives us technological improvements in all kinds of products, delivering higher quality at lower cost. For example, the competition of FedEx and UPS with the US Postal Service in package delivery has been of great benefit to American consumers. Currency users also benefits from competition. My research indicates that currency has been better provided by competing private enterprises than by government monopoly. For example, private gold and silver mints during the American gold rushes provided trustworthy coins until they were suppressed by legislation. Scientific appraisals have found that the privately minted coins were produced even more precisely than the coins of the US Mint. Private bank-issued currency was the most popular form of money around the world until government-sponsored central banks, with few exceptions, gained exclusive note-issuing privileges.

We do not rely on the Treasury or the Federal Reserve, but rather private financial institutions, to provide our checking accounts, credit cards, and traveler’s checks. The consumer benefits from the competition in payment services among banks. Consumers would likewise benefit from free and fair competition among coin issuers. Although Federal Reserve Notes and Treasury coins should of course be protected from counterfeiting, there is no good case for them to enjoy monopoly privileges in the market for currency.

HR 1098 would give currency competition a chance. It would not remove the Federal Reserve from the currency market, but it would give the Fed a stronger incentive to deliver the kind of trustworthy money that consumers want. The dollar already faces salutary international competition from gold, silver, the euro, the Swiss Franc, and other stores of value. HR 1098 would allow salutary domestic competition between the Federal Reserve Note and other media of exchange. The Fed will have little to fear from competition so long as it provides the highest quality product on the market. Continuing to ban competition from the domestic US currency market, or keeping it at a legal disadvantage, limits the options of American consumers who use money, to their disadvantage.

What sort of competition might we see if currency were free from legislated restrictions? Here is one example. In 1998 a non-profit organization launched the “American Liberty Currency,” a private silver-based currency intended to compete with Federal Reserve currency. In the year 2000 I wrote an article about the project, entitled “A Competitor for the Fed?,” published by The Foundation for Economic Education’s magazine The Freeman (vol. 50, July 2000). I was skeptical that the project would attract many users, absent high inflation in the dollar. But I noted then, and I reiterate today, that in a high-inflation environment “silver-backed currency with widespread acceptance would provide a useful alternative to the Federal Reserve’s product. Then, if you don’t like the way the federal government manages (or mismanages) the value of the fiat dollar, you aren’t limited to complaining. You can switch to the private alternative.” If double-digit inflation should unfortunately return to the United States, then the American public, as I wrote, would “find a very practical advantage in a silver-backed alternative to the free-falling Federal Reserve note.”

The Act offers three reforms. I will comment on them in turn.

Section 2 of the Act repeals 31 USC, §5103, which presently declares that “US coins and currency (including Federal Reserve notes …) are legal tender for all debts, public charges, taxes, and dues.”

What are the likely economic consequences of removing legal tender status from US Treasury coins and Federal Reserve notes? The immediate consequences would be minimal. New forms of currency will not be introduced into the market any faster than the public is prepared to accept them. The longer-run consequence will be to enable a more level playing field for competition in the issue of currency.

Legal tender status is more limited in its scope than is sometimes believed. That Federal Reserve notes and Treasure coins have “legal tender” status does not mean that they are the only legal way to pay. Any seller or creditor may (of course) voluntarily accept payment by transfer of bank-account balances, that is, by ordinary bank check, debit-card transfer, direct deposit, or wire transfer. Traveler’s checks or cashier’s checks may be accepted. The seller or creditor may even accept foreign currency or barter. Measured by dollar volume, payments in Federal Reserve notes or coin are a tiny share of all final payments in the United States (less than 20% of consumer payments, nearly 0% of business-to-business and financial payments). The great bulk of payments are electronic transfers of non-legal-tender bank balances.

Nor does legal-tender status mean that acceptance is mandatory when offered at a point of sale in a spot transaction. Large-denomination Federal Reserve notes are refused at many points of sale, and lawfully so. Vending machines refuse pennies. Mail-order sellers may refuse cash of any denomination. Millions of legal-tender one-dollar coins are piling up in the Federal Reserve’s vault in Baltimore because nobody wants them.

Legal tender relates to the discharge of debts. The phrase “Legal tender for all debts” in 31 USC, §5103, quoted above, means that if Smith owes Jones $125, then Smith’s offering Jones $125 in US coins or Federal Reserve notes legally extinguishes the debt, even if Jones would prefer payment in some other form (say, a check). In other words, the creditor is barred from refusing payment in legal tender notes or coins.

There is already an important exception, however. Debts in gold-clause contracts, made since 1977, are not unilaterally discharged by offer of US coin or Federal Reserve notes. 31 U.S.C. §5118(d)(2) reads: “An obligation issued containing a gold clause or governed by a gold clause is discharged on payment (dollar for dollar) in United States coin or currency that is legal tender at the time of payment. This paragraph does not apply to an obligation issued after October 27, 1977.” [emphasis added] That is, the holder of a gold-clause bond is free to insist on receiving payments in gold, or in an amount of dollars indexed to the price of gold, whichever the bond contract specifies.

Removing legal-tender status from US Treasury coins and Federal Reserve notes generally, as Section 2 of the Act does, essentially broadens the gold-clause exception to allow contractual obligations to specify payment in, or indexed to, any medium that is an alternative to Treasury coins and Federal Reserve notes. It opens the competition not just to private checks and banknotes, but also to gold units, silver units, units of foreign currency, Consumer Price Index bundles, wholesale commodity bundles, Bitcoins, and whatever else a lender and a borrower might agree upon. If they prefer a unit for denominating their debt contract other than the Fed or Treasury dollar, they would be free to write a specifically enforceable contract in the unit of their choice.

Hand-to-hand currency does not need legal tender status to make it circulate easily. In jurisdictions where private commercial banks may issue circulating currency notes or “banknotes” (found today in Scotland, Northern Ireland, and Hong Kong), banknotes have the same legal status as checks. That is, they do not have legal tender status. Any creditor might refuse them if he preferred to be paid in another medium. (In Scotland and Northern Ireland, only pound sterling coins are legal tender.) I have spent a fair amount of time in Northern Ireland, visiting the Finance Department at the Queen’s University of Belfast, and have observed the circulation of banknotes there first-hand. There are four private banks that issue notes, and all of their notes are universally accepted. Legal tender status is clearly not necessary to have currency that circulates widely and is commonly accepted for payment of debts. Currency notes do not need legal tender status any more than credit cards, checks, debit cards, or traveler’s checks.

Section 3 of the Act rules out federal or state taxes on precious-metal coins, whether minted by a foreign government or by a private firm. This section would allow precious-metal coins to compete with the US Treasury’s token coins (made of base metals, and denominated in fiat US dollars) without tax disadvantages (sales taxes on acquisition and capital gains taxes on holding, from which Federal Reserve Notes are exempt), and thereby a level playing field for competition among monetary standards.

Section 4 of the Act repeals Title 18 §486 (relating to uttering or passing coins of gold, silver, or other metal) and §489 (making or possessing likeness of coins).

Section 486 is a relic of the Civil War, part of an effort to bolster the use of the wartime paper “greenback” currency by banning competition from the private gold coins I previously mentioned. The repeal of §486, combined with the previous section, would allow silver and gold coins to compete with the Treasury and the Fed on a level playing field.

I previously mentioned the American Liberty Currency project. The mover of that project, Bernard von Not Haus, was convicted in March 2011 of violating §486, and presently awaits sentencing, for the victimless crime of producing one-ounce silver coins, of original design, that he hoped would compete with the Federal Reserve’s currency. Regarding this case I commend to your attention the article by Seth Lipsky, “When Private Money Becomes a Felony Offense,” Wall St. Journal, 31 March 2011.

The repeal of §486 would avoid a repeat of the injustice done to Mr. von Not Haus. I share Mr. Lipky’s view that “it’s a loser’s game to suppress private money that is sound in order to protect government-issued money that is unsound.”

Title 18 §489 of current law outlaws making or possessing “any token, disk, or device in the likeness or similitude as to design, color, or the inscription thereon of any of the coins of the United States or of any foreign country issued as money, either under the authority of the United States or under the authority of any foreign government”. Von NotHaus was also charged with violating this section. In my view §489 is redundant at best and over-reaching at worst. It is redundant at best because if there is any fraudulent intent in making or passing such a device, it is already outlawed under §485, which bans the counterfeiting of US coins. To outlaw “likeness or similitude as to design, color, or the inscription” [emphasis added] in cases where it is not counterfeiting and has no fraudulent intent, is far too sweeping. Taken literally, §489 outlaws all commemorative silver medallions—and if you go on eBay, you’ll find that there are thousands of them for sale—because it says that you are in violation of the law if you make or own any disk that merely has a color similar to that of a US quarter.

Competition in general creates incentives to provide a high quality product by taking business away from low-quality producers. Competition in currency is a practical idea that offers sizable benefits to the public when the quality of the incumbent currency becomes doubtful. In particular, US citizens would benefit from freedom of choice among monetary alternatives though the removal of current legal restrictions and obstacles against currencies that could compete with Federal Reserve Notes and US Treasury coins. HR 1098 would give currency competition a chance.


Thursday, September 15, 2011

U.S. Government — Tracking Cash Cards?

By Kelly Holt
The New American
Thursday, September 8, 2011

The U.S. government has found another way to invade privacy in the name of fighting terrorism by proposing legislation that would track prepaid debit cards. As usual, the real losers would be, not terrorists who won’t comply anyway, but innocent Americans, or travelers, and card issuers burdened with yet another layer of record keeping and compliance procedures. The Financial Crimes Enforcement Network (FinCEN), a branch of the Treasury Department, has drafted rules, taking effect Sep. 27, to establish a “more comprehensive regulatory approach for prepaid access.”

It’s important to distinguish between these prepaid debit cards and the debit cards attached to your bank account. Once known as “stored-value cards” the cards will be renamed “prepaid access cards” — because they aren’t tied to a bank account, the money paid for them in advance could be anywhere, currently outside the reach of monitoring by the government. Which is precisely the point. An assessment of financial security threats in 2005 by the Treasury Department noted that the 9/11 hijackers opened bank accounts, signed signature cards and received wire transfers, which left a financial trail. The assessment noted: “… had the 9/11 terrorists used prepaid … cards to cover their expenses, none of these financial footprints would have been available,” according to last week.

FBI Director Robert Mueller even called the use of prepaid cards a shadow banking system. The Treasury Department's assessment urged action to crack down on misuse of prepaid access cards, saying it was convinced that the shuttling of criminal proceeds across the border, "whether in the form of bulk cash or stored value" (on prepaid cards), poses "a significant threat to national security."

ACI Worldwide of New York creates and manages electronic payment systems for banks and major retailers. Senior product manager Jim Schlegel said the new rules are well-intentioned, but he questioned just how big a problem money laundering through prepaid cards really is. In an interview he said:

It's "such a small percentage of the overall problem, and attempts to propose very heavy legislation and requirements around it put a drag on an otherwise growing and profitable sector."

Agencies and bank regulators claimed that there’s no way to know how much money moves undetected across U.S. borders via the use of these cards, but according to a Government Accountability Office report from October 2010, it’s estimated that criminals smuggle $18 billion to $39 billion a year in bulk cash across the southwest border.

But, according to MSNBC, criminal organizations load prepaid cards with amounts just under the $10,000 minimum that must be reported, then cards are sent across borders and/or to associates who can convert the amounts to cash — effectively a form of money laundering. The Financial Action Task Force (FATF) reported last year in an examination of the cash cards that the United States is the biggest user of prepaid cards and that by 2017 will account for 53 percent of the worldwide market.

The traditional problems of smuggling large amounts of cash are almost eliminated with the use of prepaid access card.

Jasbir Anand, a senior consultant at ACI, said the funds represented on such cards, which you can easily buy online, could:

travel across borders without limitation. The net impact of these rules would be an increase in the overall cost of debit cards for consumers for record-keeping and storage and so on that will eventually trickle down to fees on the debit card and a limitation on features.

MSNBC continued, “Even as it warns about the potential money laundering threat, the [FATF] also acknowledges that tight restrictions on prepaid cards could have a significant impact on lower-income people unable to ‘take full advantage of mainstream financial service providers’ because they have a poor credit record, for example, or because they have no permanent address and can't qualify for a bank account. That's more than 17 million Americans, the Federal Deposit Insurance Corp. says, and for them, prepaid cards can be the only way they can gain "ready access to services."

The new rules could cause another problem. Overseas companies and banks that wish to continue doing business here might comply, but U.S. rules can’t be imposed on the thousands of merchants in other countries.

And what about traveling with large amounts of cash? Three Senators — Amy Klobuchar (D-Minn.), Tom Udall (D-N.M.), and Jeanne Shaheen (D-N.H.) — introduced legislation last month to close that loophole. It would require travelers to declare "prepaid cards totaling more than $10,000" when they enter or leave the United States, just like cash. But then entities issuing prepaid cards are placed at a competitive disadvantage to traditional or other standard bank cards if travelers find the prepaid cards less attractive. And trying to determine a card’s balance while in flight, or at a gate is burdensome.

FinCEN is developing regulations, as required by the Credit CARD Act of 2009, to address gaps in regulations related to the use of stored value for criminal purposes, but much work remains. And even more vigilance on the part of Americans trying to hold on to both their privacy and their cash.