Arizona's Hard Currency: How Much Gold Does it Need?

By: Adrian_Ash

Miguel Perez-Santalla writes: How much gold & silver might Arizona, Utah and the other states now involved in hard-currency laws come to need...?

Arizona is moving to allow gold and silver coin to be used to pay debts, and - effectively - go shopping.

This has already been approved in the state of Utah, and there is an assortment of other states that are moving in this direction as well. However, Utah's gold currency law has been on the books for more than a year. But it has not yet made any headway into how to manage gold and silver being used as currency. Nor will payees be obliged to accept bullion as payment. As a result, many pundits are pooh-poohing Arizona's gold idea, acting as obstacles to its possible success.

Though I don't personally believe that physical gold and silver carried around by persons is the future of our country, I do believe that there will be some structural change to come. The small yet actively progressing action in many states is an indicator of the demand for better controls and justification of the value of our money. Concern that the ability to print money without measure will destroy this country is not only just, but is also warranted.

The Federal Reserve - which is not part of the government - is actively in charge of our currency. By injecting capital to the markets to support the banking sector, which irresponsibly lost billions of Dollars in their management of customers' funds, they have instituted an invisible tax on all citizens of the United States of America. It is no surprise that many people who pay close attention to these matters are up in arms. Especially, since they don't participate in the windfall of free capital given by the Federal Reserve to the banks as a safety net.

In essence, every time the government issues money freely and gives it to others it is a promissory note on the ability of the populace to pay, it puts us all more in debt. The people of the United States of America are becoming fed up with the free-flowing funds the government regularly gives away as gifts ofsupposedly humanitarian aid to foreign countries that are not even considered allies. These gifts in the billions of Dollars are on top of expenses needed to support our infrastructure. This creates a mountain of debt that essentially devalues the US Dollar. Our ability to pay is what the citizens are concerned with.

To avoid this many are turning to silver and gold bullion as a reliable asset or marker of value. Of course when you tie up your money in an asset like gold and silver you want the most easily accessible manner to extract that value whenever needed. This is where the effort to make gold and silver accepted as currency is coming from. So let's take a look at what would happen if one state such as Arizona were to convert to a precious metal economy.

Arizona's GDP (Gross Domestic Product) was roughly $258 billion at last count. As a proportion of the United States' entire economy, that's about 1.7%. Which if we apply that number to the total of currency in circulation and bank deposits (known as M2 by the economists) gives Arizona a money supply of somewhere around $180bn. Using today's market prices, in gold that would represent 126,000 ounces which is nearly 143% of the current annual world production, and it would represent over 945% of the world's annual silver production. But of course silver is an extremely bulky and difficult metal to handle.

No one thinks the entire state of Arizona would go to 100% metal-backed currency. People will of course remain free to use fiat (backed only by faith) money, and most would likely choose the same fiat Dollars and bank-account credits we already have. But it's important to understand that - in the proposals as they stand - people could choose to use metal-based currency for all their in-state transactions. So the potential ceiling on the gold or silver needed is much nearer to 100% of that $180bn than it would be under a formal "Gold Standard". There, with Dollars redeemable for gold, full gold-backing wasn't necessary. The Gold Standard instead used precious metals as a standard of value. The last US gold standard was a 25% basis of gold in fact, before it was repealed in 1968.

Applying a classical Gold Standard, and using a 25% basis for gold or silver, Arizona's cash and bank-deposit holdings would occupy 235% of the world's annual silver production at current prices, or 36% of the world's annual gold production. A more logical decision may be a combination of the two, with a 5% silver and 25% gold funding which would represent 30% annual gold production and 39% silver production. This of course would drive the value of the precious metals much higher, as the market adjusted to accommodate Arizona's impact on global demand. But as we just saw, Arizona's proposals go far beyond a Gold Standard, making 100% metal-backed banking and currency a possibility, if highly unlikely.

Note, this is only for one state - and one where barely 2% of the US population now live. The numbers involved are already stupendous. You can imagine what would happen to gold and silver prices if all 18 states currently working on similar "hard currency" laws saw only 10% of their citizens move to holding precious-metals. But that being said, I do not believe at this very moment it is the goal of this legislation.

The new legislation deems to allow transactions to be negotiable and settled in full using gold or silver if the parties involved agree to it. Hence you can sell your car for 4 ounces of gold or buy a house for 10,000 ounces of silver. But to do so without an official government structure you would have to in effect be your own central banker and invest your currency into your own private gold and silver reserves. Hence when you go to enter into a transaction the value of your asset should have been protected from any central banking or government debt fiascos.

Are currencies backed by gold and silver to be the future? This is possible in some form. Had this system not been tried before? The answer to this is yes. But the methods that were used in the 20th century were complicated by the entry of the Federal Reserve System and other Central Bankers. It was prior to central bank machinations that gold and silver brought stability to the financial markets and the economy in general. With the entry of the central bank models, including the Federal Reserve, free spending of the people's money became a possibility and is what eroded the gold standard and derailed a more functional system. Unfortunately most of the spending was used to fund wars. Maybe if wars had to be paid in hard assets they may have ended sooner than later with less loss of human life.

However, there are arguments on both sides of the fence. As I read and study more and more about our modern-day banking system it is a miracle that it has not failed sooner. Of course this is my personal belief. This is also what is driving the current activity in the states to bring in some correlation of currency to gold and silver as hard assets.

The history of the Federal Reserve, which is not a bank, has the US economy since its inception riddled with negative GDP growth. It is peppered with financial calamities. Its primary function was said to be the stabilization of the economy. It has failed and has not performed better than any other prior system. I don't have the answers but I know it doesn't lie in the Federal Reserve System. This is a centralization of power away from capitalism to a form of modern day socialist tendencies of spending without limits within our system.

This indicates to me in the event of a serious economic downturn, which seems to be forthcoming since we already did kick the can down the road as far as we can, we will have serious troubles in the union of these United States of America. But for the time being the general public who are able, are happy buying their gold and silver and keeping it in a safe and secure place for when this situation rears its ugly head. Those that do and are in the states where they have legalized its use as currency stand to have a much more secure environment moving forward as the government is not allowed to take away your money without cause. At least, not at the moment.

By: Miguel Perez-Santalla
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2013

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