so I've heard a lot that you can't use gold as money, that there are legal obstacles to using it. can anyone point me to a source that demonstrates and confirms this? I have not been able to find one. thanks
There's no law against bartering, so technically you could trade a piece of gold for something else. The point is legal tender laws force you to accept dollars as payment, regardless of what your contract says. So if you contract to be paid in gold and the other party reneges and pays you in dollars instead, you have no recourse to enforce the contract. The court will say "You got paid in dollars? And you're not happy with that? Look at what it says on the Federal Reserve Notes he gave you. 'This note is legal tender for all debts, public and private'. You got paid. Case dismissed."
^ That, plus capital gains taxes. If you only want to hold gold and use USD notes for all sales/purchases, every USD/gold transaction would be legally viewed as a trade on which you are subject to capital gains taxes (in USD notes, of course).
Also note that gold-denominated contracts were banned in 1933... I think they are no longer banned but I'm not sure on this. At least for a long time, you couldn't even write a contract like, "I agree to pay 4 ounces of gold - or the equivalent market value of 4 ounces of gold in dollars - on such and such date, blah blah blah."
Capital gains taxes means you - perversely - have to pay taxes on gold held simply by virtue of inflation and the "income" you are getting as the dollar price of the gold increases over time. Finally, barter transactions are taxable and, the way the rules are written, they are double-taxed. If you buy a car for $6,000, the person who received the $6,000 is required to report this as income but the person who receives the car is not required to report the car as income. But if you exchange 4 gold coins for a car, then this is a barter transaction and both parties are required to report the "fair market value" of the goods received in the barter transaction as income.
As if that wasn't all bad enough, as John James already noted, Federal Reserve Notes are legal tender which means that someone can default on their contractual monetary obligations by tendering payment in dollars instead of the agreed money (e.g. gold coin).
Clayton -
Despite the legal as well as practicle obstacles, there is nothing to actually prevent a person from using gold in transactions. It is just that the law and actions by the state distort the market. If gold is money (as I believe it would be if we had a free market) then there is a constant pressure upon the market to treat it as such.
For instance, while the state can outlaw the purchase and sale of certain products, all this does is distort the market. People weight the added costs (fines, imprisonment, excecution) with the benefits to be obtained. Some marginal buyers are excluded from the market, others buy goods that they otherwise would not buy (which is a net psychic loss, since they would have preferred to purchase the outlawed product).
The market for money is no different, except to specifics. So long as fiat currencies continue to be useful to individuals in meeting their demand-to-hold them, in hoarding and dishoarding, they will be used. But as they are merely paper and only as valuable as the ability of the states to extract value from citizens in the future, from future taxation, as soon as some number of individuals begin to demand gold instead of fiat currencies the fiat currency regime will be at an end. But for this to occur, the benefits of gold as opposed to fiat currency will have to induce a large number of people to demand gold instead of fiat currency, despite the distortions imposed by the state.
No one will want to hold on to paper when it buys less and less by the hour. Also, individuals will insist on payment in gold even if there are penalties and legal prohibitions against doing so if the alternative is accepting worthless paper. A black market (the real market) in gold payment will develop if that is what the consumers want, and sellers of goods are buyers (or consumers) of money.
Here is one source for you:
"By the 1970's the Federal Government had once again permitted Americans to hold gold, even in the form of commemorative coins. But just to make sure these coins could never circulate and displace the constantly depreciating paper currency printed by the US government, the law required that such coins could circulate only at a value of $50 an ounce. Since gold (as of 2008) sells for about $1,000 an ounce, no one in his right mind would exchange a one-ounce gold coin for a mere $50. The coins are thereby kept out of general circulation."
- Thomas Woods & Kevin Gutzman in Who Killed the Constitution?
thanks Clayton, this helps. when you say in a barter transaction for gold and a car both parties have to report the gain as income, isn't there an offsetting loss too? I'm not exactly sure what you mean.
I appreciate all the responses, thank you. Keep em coming!
So from what I understand there are 3.5 reasons gold "can't" be used as money in the practical sense.
1. when you trade your gold for dollars or widgets you are subject to the capital gains tax. this is made worse by inflation which creates artificial capital gains, and then taxes them- making it a capital tax.
2. when you make a contract to receive gold in payment you cannot legally force the other party to pay in gold- they can pay in dollars. (not sure how the dollar amount would be calculated)
3. when you do a barter transaction, both parties have to report what they trade for as income. (I don't get how that works. especially considering you already have to pay capital gains tax)
3.5 I don't really consider this a reason you couldn't use gold for currency, but because of the legal tender status of the dollar you must accept dollars as payment. its kind of like 2, but also applies where no contract existed such as a retail shop.
with regard to number 2, I believe this is no longer true. according to wikipedia (I have not delved in to the sources) gold contracts were unenforceable from 1933 to 1977, but any gold contract after 1977 is enforceable. does anyone know more about this?
http://en.wikipedia.org/wiki/Gold_Clause_Cases
The limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill legalizing private ownership of gold coins, bars and certificates by an act of Congress codified in Pub.L. 93-373[6] which went into effect December 31, 1974. Pub.L. 93-373 did not repeal the Gold Clause Resolution of 1933, which made unlawful any contracts which specified payment in a fixed amount of money or a fixed amount of gold. That is, contracts remained unenforceable if they used gold monetarily rather than as a commodity of trade. However, the Act of October 28, 1977, Pub.L. 95-147, § 4(c),[7] amended the 1933 Joint Resolution and made it clear that parties could again include so-called gold clauses in contracts formed after 1977.[8]
@P. Lotor: But it is true - if I go bankrupt, all my dischargeable obligations will be settled in dollars. The legal tender status of dollars is no longer relevant since dollars already have a complete monopoly. But until the monopoly was achieved (in 1971 or 1933, depending on how you look at it), the legal tender status served as a massive competitive advantage for dollars - a contract denominated in gold or silver coin (or gold- or silver-backed dollars) could be satisfied in fiat dollars at any time. This sets Gresham's Law into motion, driving the good money into private stashes and leaving only the bad money circulating hand-to-hand.
when you say in a barter transaction for gold and a car both parties have to report the gain as income, isn't there an offsetting loss too? I'm not exactly sure what you mean.
I'm not familiar with all the intricacies of the tax code, but the basic idea is that you have to report bartered items as income at the fair-market value. It appears that certain "bartering exchange" businesses can allow you to report a "gain" or "loss" from barter transactions. Of course, such evaluations must be significantly arbitrary.
You can read more here.
It would be awesome to use gold as money!!! Will this ever be possible?
But it is true - if I go bankrupt, all my dischargeable obligations will be settled in dollars. The legal tender status of dollars is no longer relevant since dollars already have a complete monopoly. But until the monopoly was achieved (in 1971 or 1933, depending on how you look at it), the legal tender status served as a massive competitive advantage for dollars - a contract denominated in gold or silver coin (or gold- or silver-backed dollars) could be satisfied in fiat dollars at any time. This sets Gresham's Law into motion, driving the good money into private stashes and leaving only the bad money circulating hand-to-hand.
I don't believe my point was about bankruptcy laws, although that is certainly a point worth discussing. my point was about specifically forming contracts for payment in gold rather than dollars. and according to the source I cited in the last post, gold contracts have been enforceable since 1977, although from 1933-1977 they were not enforceable.
I agree that the legal tender status of dollars is somewhat of an advantage, but, even so I believe that people would still choose gold if they were not blocked by government from doing so. I am trying to get a complete list of the government obstacles to using gold as money. a contract in gold cannot be satisfied in dollars any longer- since 1977 unless my source is incorrect, so gresham's law is no longer at play.
yea, I was trying to read there a while ago, and to no surprise IRS.GOV was a pita.
it looks like a complicated issue, I'll look in to it some more.