So exactly how would Utah's sound money system work? In many respects, the day to day shopping experience would remain unchanged. People could still use credit/debit cards and checks denominated in U.S. dollars for their purchases and payments. The only difference would be that the Utah bank account associated with the card would be linked to a coin account at a Utah coin depository -- a new type of financial institution authorized under the Utah Sound Money Act. Coin ("specie") currency would be exchanged for dollars on either a real-time or periodic basis to replenish depleted bank accounts and pay off accrued card balances.
Because transactions would be denominated in U.S. dollars, these Utah bank issued cards and checks could be used anywhere in the country, or the world for that matter. So depositors could hold a portion of their wealth in an inflation-proof gold or silver currency, but still use dollars for their daily purchases.
Think of the system as a way to "inflation-proof" your dollars. Even though the value of gold money, silver money and dollars would float against each other on a daily basis, historically, money backed by precious metals has retained its purchasing power. By contrast, unbacked fiat currencies always lose value to inflation caused by money creation. For example, over the last century the U.S. dollar has lost over 95% of its purchasing power, while gold and silver haven't lost any.
Day to day exchange rate fluctuations would also present opportunities for savvy depositors to benefit from arbitrage opportunities. In other words, Utah depositors could aim to swap out of a given currency at the height of its strength to buy into a relatively weaker currency before that one starts an upwards climb in relative value. Innovative depositories could even offer currency exchange programs managed by experts in the field.
Essentially, Utah depositors will have three different currencies to choose from, gold, silver and dollars. Dr. Michael Thomas, who teaches economics at Utah State University, explained the benefits of competing currencies in a recent Op-Ed piece published in the Deseret News:
When businesses compete for your patronage, you win. The fact that there is both a Burger King and a McDonald's on the corner in my town means that lines are shorter, I get a diversity of options and I have somewhere else to go when McDonald's raises the price of their hamburger. Similarly, when currencies are competitive, you reap the benefit of a more stable currency. ... The offer of competition in currency can benefit the Utah consumer. It might also make businesses more confident in investing locally.
Deposits into coin depositories could be made in a couple of different ways. Depositors could simply do an on-line transfer of funds from their Utah bank account to their linked coin account which would be credited for a specified amount of gold or silver coin. That amount would be calculated according to whatever the prevailing exchange rate is on the date of transfer. Conversely, a deposit in coin could be made directly to the depository.
Only coin which qualifies under federal law to be held in an Individual Retirement Account ("IRA") would be acceptable for deposit. This provision insures that coin depository accounts could be used as IRAs, if desired.
The monetary unit for both gold and silver Utah money would be the troy ounce and grain -- there being 480 grains to an ounce. Withdrawals from depositories are to be paid out in distinctive intrastate coin privately minted in Utah to bear the ounce/grain denominations. This intrastate currency would be authorized for use as money within the state. Such coin is to be produced according to specific standards and specifications spelled out in the bill. In addition, the act calls for the establishment of a Utah Coinage Advisory Council to adopt uniform designs for the various denominations. Although such coin will be legal tender in Utah, its use is not to be mandatory. Because mutual consent would be required, retailers could choose whether or not to accept it.
Intrastate coin would only be issued into circulation by authorized coin depositories which would be responsible to verify that the coin complies with all statutory requirements. Intrastate coin is to be rechecked every time it passes through any depository's possession.
As regulated financial institutions, coin depositories would be required to file regular reports with the Utah commissioner of financial institutions. This would require periodic independent audits of the depositories operations and holdings. In addition, the act contains important provisions regarding privacy and property rights as pertaining to coin deposit accounts.
Unlike banks, coin depositories would be required to hold reserves equaling 100% of deposits. So, depositories would always be able to satisfy withdrawal requests, even if every depositor wanted to withdraw everything at once. Banks, on the other hand, typically hold as little as 10% in reserve. This practice is authorized under "fractional reserve" banking laws and creates a situation where a "run on the bank" can occur. Because depositories would have 100% reserves and no interest income, their fees would necessarily be higher than those of banks.
Utah is recognized as a leader in banking innovation. This act will continue that trend, enhancing Utah's reputation in the industry. Several analysts have observed that implementation of The Utah Sound Money Act would likely attract significant additional capital into Utah financial institutions. Some commentators have gone so far as to say that this act, if fully implemented, would likely propel Utah into becoming the preeminent financial center of the United States.