At the root of the common objections raised to the Utah Legal Tender Act lie misperceptions about what the act really does. Consider the following:
- Not Enough. This objection essentially postulates that the world's gold supply is insufficient to support a global precious metal monetary system. For that reason, so the argument goes, the U.S. had to abandon the gold standard in order to fund its expanding economy with a monetary base which could be inflated at will. Let's consider several responses to this flawed line of reasoning:
- "Scarcity" is one of the essential qualities of sound money. It guards against the devastating currency debasement caused by the rampant money creation Americans have witnessed over the past 100 years. It should require capital, not governmental whim, to expand the monetary base.
- Even so, most of the world's gold supply is still in the ground. Historically, the above ground supply of gold has grown by approximately 6% annually, which corresponds quite well to a good growth rate for an expanding economy.
- The Utah Legal Tender Act contemplates monetizing not only gold but the more plentiful silver as well. In addition, the act would not pull any dollars out of circulation. Therefore, the act would actually increase the money supply, but without debasing the dollar. This would create a localized economic stimulus.
- The Act is not intended to create a new "world-wide" monetary system, only one for Utah which, fortunately, has substantial gold and silver deposits. This is not to say, however, that other states lacking such mineral deposits could not implement a similar system. Whether precious metals are mined or purchased, capital is required to expand monetary holdings -- and this is a good thing.
- The act is designed to introduce competition in currency. Thus, with respect to intrastate commerce, instead of a single option, Utahns would have three currency choices: gold coin, silver coin or dollars, the value of each floating independent of the other. Ultimately, breaking the Federal Reserve's monopoly over the money supply benefits the public and the economy as a whole because money goes where it is treated best.
- Finally, if demand for precious metals outstrips supply, the worst thing that could happen would be that the purchasing power of gold and silver coin would rise -- not a bad thing. Our current inflationary fiat system rewards debtors and punishes savers. A sound money system would reverse that dysfunctional dynamic.
- Gresham's Law. Simply put, Gresham's Law holds that bad money drives out good. Based on this maxim, critics argue that a sound money system cannot function along side a fiat one. People will always want to use their depreciating fiat currency en lieu of precious metal coins. However, this argument ignores the fact that in all cases where Gresham's law has been observed in practice the precious metal coins were undervalued by law. In other words, since a paper dollar and a gold dollar legally had the same value people would choose to spend their paper dollar and keep their gold one. Under the Utah Legal Tender Act, exchange rates are market driven.
- Credit Contraction. Some fear that a flight from dollar-denominated bank holdings into coin-denominated depository holdings could create a state-wide credit crunch. Since banks have to hold 10% reserves against their loans, a reduction in dollars reserves would admittedly reduce dollar lending capacity. At present, this fear is more theoretical than real. Utah banks currently have significant untapped loan capacity since, given today's difficult economic conditions, people are moving more towards being savers than debtors. Even so, monetizing gold and silver would have the immediate effect of expanding Utah's monetary base, which would actually tend to stimulate economic activity within the state. Many believe as well that implementation of the Utah Legal Tender Act would attract significant additional capital into the state. So while this fear appears to be quite unfounded, if a contraction were to occur, fractional reserve banking practices could be authorized with respect to gold and silver deposits, just like dollar deposits, thus immediately expanding available credit.
- Lost Tax Revenue. The spectre of lost capital gains tax revenue has been raised as well. Even though the state's fiscal analyst forecasts some “foregone” revenue, he readily concedes that the estimate is based on conjecture and guesswork, there being little evidence that such taxes are actually being collected at present. It is important to understand that most precious metal coin sales are effectuated through coin dealers who are exempt from capital gains taxation. As a practical matter, the only federal capital gains reporting which is likely occurring is on the sale of coins by private individuals back to coin dealers who then issue the seller a 1099. This would, in turn, trigger capital gains reporting on Schedule "D" of the seller's tax return. However, this rarely occurs under current market conditions where investors are in much more of a "buy and hold" mode than in previous years because of the dollar's current precarious condition, being seriously at risk of losing its world reserve currency status.
Also, the tax credit proposed under the Utah Legal Tender Act would only apply to United States issued gold and silver coinage. Such coinage represents only a small fraction of all bullion sales which include many different types of foreign, tribal and private coin and medallions.
Finally, with the passage of the 2009 amendments to Chapter 32A of the Utah Code, entitled, "Pawnshop and Secondhand Merchandise Transaction Information Act", Utah has been mandated to keep meticulous records of all precious metal sales to Utah coin dealers and pawnshops. The state's fiscal analyst checked this database and found little evidence of any coin sales to coin dealers and pawnshops at all. This simply underscores the fact that the state is not collecting any significant capital gains taxes based on the sale of U.S. minted gold or silver coin.
- No Existing System. Another criticism is that there is no current system for using sound money. That's exactly the point. We want to create the necessary commercial and legal framework to allow sound money to flow freely in the economy. Having said that, all that's really required to put the system in place is the establishment of coin depositories. This step would impose no additional cost or burden on government or the existing banking system. All the expense would be borne by entrepreneurs willing to establish such institutions in the state. Such depositories would allow people to continue to transact in dollars but settle their accounts using gold and silver holdings.
- Subject to Manipulation. Some argue that precious metal markets can be subject to manipulation. That is certainly true, but it is also true that the U.S. dollar has been subjected to much more manipulation than gold or silver ever has. In addition, because under the Legal Tender Act, Utahns would have currency choices, they could switch holdings from one type of money to another as desired, thus mitigating against the effects of market manipulations and fluctuations.
- Too Old-Fashioned or Weird. Finally, pundits have argued that gold is a "relic of the past". This is not an argument based in reason, but rather an emotional ploy to essentially shame the populace into clinging to the status quo. Do we really want to allow ourselves to be shunned into monopolistic monetary servitude which impacts the poorest citizens the worst?