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The Free Competition in Currency Act of 2011

Below is the written version of the testimony I gave this afternoon before the House or Representatives subcommittee chaired by Rep. Ron Paul. Q&A followed–when a transcript becomes available, I'll post the link here. The text of the Act I spoke about, which is quite brief, is here. UPDATE: Audio/video of today's hearing is here.


Lawrence H. White
Professor of Economics, George Mason University

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

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.

  • How wonderful to hear sound money expounded in the belly of the beast. Could you also tell us your personal impressions of testifying? Was anyone listening? Any cameras or reporters?


    • Larry White

      It's a odd form of political theater, in this case to a very small audience. Only Ron Paul and one other congressman, Walter B. Jones, R-NC, attended. Maybe 20 in the audience. No camera crews. A little surprising, given that Rep. Paul is a presidential candidate. Someone who seemed to be a reporter asked questions of the one other witness, Dr. Lawrence Parks of FAME, after the hearing adjourned. For me, it was good to chat with Rep. Paul again after many years. The committee staff were also very friendly.

      • Chuck Moulton

        Wow! Subcommittee hearings usually are much more active. I've been to 3 of Congressman Paul's hearings before and there were always at least 3 Democrats and 5 Republicans.

        Sorry I wasn't able to make it to the hearing (to increase the audience by 5%). I very much wanted to go, but course preparation is leaving me with zero free time. I look forward to watching the video over the weekend.

  • Bill Stepp

    Assuming this bill passes and becomes law, how long do you think it would take for America's only Native criminal class to start taxing privately issued bank notes, in violation of Section 3?
    And I hope you were wearing an "In Gold We Trust" and/or an "End the Fed" button.

  • Kudos Professor White! Thanks for doing so much to help promote the cause of freedom. Here's a link to the archived webcast (awful sound quality).

    • Larry White

      Thanks for the link. Yes, the sound quality is disappointing. Neither Dr. Parks nor I actually speaks with a lisp, contrary to what it sounds like.

      • What else can you expect when it's produced by the federal government?

  • Casey Bowman

    Thank you for sharing the text. It was remarkable to watch this hearing today, whether it has a chance or not, but I do hope that when money is freed–I'm sure it will be someday–, it's freed without any favoritism. I fear Section 3 favors a subset of monies, precious-metal monies, in its protections against taxes. A bill with such a dreamy hayekian title ought to be general in this respect regarding monies in order to ensure "a level playing field for competition among monetary standards". Do you agree with these concerns about Section 3? I'm glad you mentioned other free monies that might arise or have arisen.

  • Warren

    This would be awesome if it passed.

    However what are the chances that some or many of the states will burden local banks with the same idiotic regulations that caused all the problems in the 19th century?

  • Paul Marks

    An honest govenment (well to counter cries of "there is no such thing" I should say "a non utterly out of control dishonest government") has nothing to fear from currency competition. People are naturally conservative and will not change the currency they trade in without strong reason – of course if the government is planning massive inflation (whilst pretending it is not) well then…….

    As with every choice, there is danger and responsibility in choice of currency. An obvious example is Hungary where a lot of people took out mortgages in Euros (granted by Austrian and other banks) whilst continuing to get paid in local currency. So when the local currency declined in value against the Euro…..

    However, as stated above, there is danger in any choice – any freedom. Either people are to be treated as human BEINGS (reasoning agents capable of freedom – and, thus, entitled to it) or they are to be treated as non beings (just tools of the state).

    And even the case of Hungary can be contested. Many would argue that the real problem was not the choice in currency – but the wild spending (and corrupt) nature of the Hungarian government of the time (undermining the domestic financial system in a classic boom-bust). The Socialist Party Prime Minister, when he did not know his words were being broadcast, even boasted about how he and his friends had lied to the people – and mocked the voters for being so stupid.

    Oddly enough the Socialist Party lost the next general election.

  • MichaelM

    Why do you think so few people attended, Dr White?

    • Larry White

      One reason for the small public audience may have been that Peter Schiff and John Taylor were testifying at the same time in a different hearing room. As for the no-show by Democrat subcommittee members, they may have thought the silent treatment the best way to bury the issues raised.

  • Aloha … How great is it to hear such testimony before the House! I very much appreciate your efforts and Ron Paul's. I was saddened to hear that Ron Paul would leave Congress after his bid for the Presidency as he was one of the main players in the effort to bring not only SOUND MONEY to America, but he was also prominent in challenging the various Fed Chairmen to provide fair and honest banking and investment products. What comes to mind is derivitives and their regulation and the deaf ears of the Greenspan era.

    Speaking of Greenspan, there you go Alan gold does pay interest! The gold-clause bonds go back to Sec Treasury Chase in 1864 during the "greenback" days when the Supreme Court ruled that gold clause bonds were exempt from legal tender laws. I have a question regarding 5118(d)2: Can you or someone here give me an example of a current gold-clause bond now in force? Since you use it as an exception to legal tender in the discharge of debts after 1977, I was wondering about such contract usage today.

    Also just curious about the Subcomittee on Domestic Monetary Policy and Technology. How does the "Technology" part refer to SOUND MONEY specifically? Seems like the old 1980s video signal addage of "garbage in-garbage out" would apply to monetary policy no matter the technology used.

    I see only one other Rep in attendance and not a Democrat. Too bad "monetary issues" related to competition are so sparsely attended even by the public. Seems like there would be more than 20 people living in the DC area interested in such topics.

    So we can put a man on the moon and the best money we can produce is this barbarous IOU relic! Also thanks for bringing up the von Not Haus case. A clear waste of taxpayer's funds, no doubt! Yes, competition indeed. Mahalo for your testimony!

  • RickDiMare

    Great effort, Larry! … But I'd like to give my opinion as to why there are likely to be problems with Section 3:

    There is a widespread misconception that the 1787 Constitution restrains Congress' taxing powers, but to the contrary, the Constitution INCREASED taxing powers that had been allowed under the Articles of Confederation.

    About the only tax restraints on Congress are that (1) the tax must not conflict with other Constitutional powers, e.g., Congress can't tax Article 3 courts, military bases, Post Office real estate, etc.; and (2) whenever a tax falls directly on a person because of his/her ownership of property, the tax must be apportioned and proportional under the Direct Tax Clauses, e.g., a federal tax on our personal real estate, cars, bank accounts, etc. would need to follow these 2 rules.

    Before being involved in this blog, I used to think that the personal income tax–originally authorized by the Supreme Court in Helvering v. Davis (1937)–was based on the privileged use of Federal Reserve Notes, which among many other things, limits our liability when we have various problems with identity theft, lost or stolen credit cards, forged checks, etc.

    However, what's become clear to me (again, after being tested in this blog) is that the original New Deal income tax on the use of what I call "Knapp/Keynes money" is not binding on us merely because we use money that is issued by the Federal Reserve, but BECAUSE WE USE CURRENCY THAT IS NOT CONSTITUTIONAL COIN. (This probably makes no sense to anyone, but it was a big revelation for me.)

    In short, Congress is highly unlikely to exempt any alternative competing currency from taxation that Congress is not Constitutionally required to exempt, and the only money Congress is Constitutionally required to exempt from taxation is its own current coin.

    I think that as soon as a number of other people begin to understand this, we can begin making constructive changes to our free banking model, changes that will be met with minimal resistance from Congress (not because Congress is reasonable and listening to our complaints and suggestions, but because Congress IS BOUND BY LAW to abide by the document that created it).

  • Martin Brock

    I don't expect Bitcoins to succeed ultimately, but they illustrate more potential technological improvement than Liberty Dollars. Freeing privately issued coins from sales tax and permitting contracts to require payment in this tender is progress, but it's not much progress by your reckoning, because coins account for a vanishing share of transactions. So do FRNs for that matter. Digital currency is where the action is.

    Even if the FCCA is adopted, software patents and similar IP could suffocate any emerging digital currency, challenging the state system, in its crib. The recent patent reform makes the prospect all the more likely. Don't you think?

    • RickDiMare

      Martin, when you say "coins account for a vanishing share of transactions," I think you're referring to a trend that would quickly reverse itself if (some would say "when") a collapse begins.

      Also, I agree with your comment about digital currency being preferred, but only in the sense that I'd like to see a Treasury-Direct version of Bitcoin, a real coin-based system that is redeemable on demand (for the few that are likely to want physical possession of current U.S. coin).

      The reason I personally believe a collapse is imminent is that the current Knapp/Keynes system relies on ever-increasing levels of force (which is the only thing gov't is really good at) to imbue the currency with "value."

      • Martin Brock

        I don't really expect a collapse. The dollar looks skaky, but compared to what? And if it's so shaky, why does the price of the 10 year Treasury note keep going up? The Fed has something to do with it, but QE2 is supposedly over. Seriously, if you have answers to these questions, I'd like to hear them.

        I'm a died-in-the-wool libertarian but not the sort of Rothbardian that Selgin likes to combat. I oppose a central bank on principle, but I don't blame the Fed for everything. Greenspan makes a decent case that the housing bubble wasn't all his fault. The demographic transition merits a lot more attention as a factor in "the crisis", seems to me. This transition is not limited to the U.S and neither is the crisis.

        Malinvestment is a crucial factor in the business cycle, but inflationary monetary policy by a central bank is not the only possible cause of malinvestment. When the largest lot of would-be retirees in the history of the universe all try to shift from growth to income at the same time, all following the same conventional financial advice, what do I expect to happen? I expect exactly what's happening now. Does that mean the Fed is blameless? No. It means that Fed policy exists in a larger context.

        Something else is happening too, globalization and related dollarization. One world market suggests one world currency ultimately, even if competing interests issue the currency. Sorry as the U.S. dollar seems to you and me right now, a lot of people still bet it'll win this race. It looks a hell of a lot better than the Euro, right now.

        I also agree that a little inflation bodes well for the success of a currency. It is a currency and a medium of exchange, after all. When the current value of something is rising, I don't trade it. I hold it. I trade something else. Where currencies truly compete, "appreciating currency" seems a contradiction in terms. Rothbardians hate me for saying it, but until someone debunks the idea effectively for me, I must go on saying it.

        A currency is not a store of value. I'm disputing a standard definition here, but some standard definitions make no sense to me.

      • Martin Brock

        Among countries with a population over 5 million, here are the eleven with the lowest Total Fertility Rate.

        Greece 1.37
        Italy 1.31
        Spain 1.31
        Poland 1.28
        Ukraine 1.26
        Czech Republic 1.24
        Belarus 1.24
        Japan 1.21
        Korea, South 1.21
        Taiwan 1.14
        Hong Kong 1.02

        Here's the same list with former Soviet block countries removed.

        Greece 1.37
        Italy 1.31
        Spain 1.31
        Japan 1.21
        Korea, South 1.21
        Taiwan 1.14
        Hong Kong 1.02

        Here's same list with Asian Tigers removed.

        Greece 1.37
        Italy 1.31
        Spain 1.31
        Japan 1.21

        Don't tell me it's all about monetary policy.

  • Richard Schulman

    I'm going to call my congressman's office in D.C. and urge him to support this bill. I'm also going to ask my friends to do the same. I urge Free Banking blog members to do the same.

  • Excellent summary, Larry. I realize that it's political theater but still very necessary. Cheers.