Reported by Joanne Lu.
South Carolina could have avoided some of its money troubles if it had taken an old-fashioned approach to investing and legal tender—-very old fashioned. According to state Representative Mike Pitts (R-Laurens), adopting gold and silver currency is the first step to getting our economy back on track.
I put an amendment during the budget on the table two years ago that would have allowed the state of South Carolina to invest reserve revenue into gold and silver. Had we done it when I put that on the table, we would not have had a budget shortfall this year, because of the rise in gold and silver prices.
This issue, which Pitts championed this year through House Bill 4128, is not new. In fact, as of last month, gold and silver coins minted by the U.S. government are considered legal tender in Utah. Purchases of the coins are exempt from sales tax, and a tax credit also partially reimburses residents who have to pay a federal capital gains tax for profits from the holdings. Pitts says, “It’s going to be a big advantage Utah, because people are going to invest in Utah that could have been investing in South Carolina.”
While neither Utah nor Pitts’ bill reinstate the gold standard, it seems that is the eventual goal. According to Pitts–
That’s where inflation started to spiral and run away, was when the gold standard was lifted. One statement that was made by an economist during the budget hearings before when I put that amendment up was very clear. He said, “There’s not enough gold in the country to cover the money already printed.” And I said, “Bingo! You’re absolutely right. Bingo.”
Dr. John McDermott, chairman of the economics department in USC’s Moore School of Business, agrees that gold is very good for keeping inflation under control. However, he says there’s a foe other than inflation of which we must be wary:
Gold is pretty good. That’s the one thing a gold standard would do–it would stabilize price levels. At least, it does stop inflation. Unfortunately, it can sometimes lead to deflation. And if you look at the history of the United States, especially in 1870 to 1900 the United States had considerable deflation when we were the last on a gold standard.
McDermott explains that deflation was especially miserable in the West and in agricultural communities, where prices of farm commodities went down even more than prices in general.
For a small state like South Carolina, McDermott says a gold standard simply would not be practical.
The market for gold in U.S. dollars is huge. And we’re such a small state, we couldn’t offer to buy and sell unlimited quantities of gold in terms of dollars–we couldn’t set the dollar price of gold….It’s possible for the United States to go on a gold standard–I don’t think it’s advisable, but it’s possible. For South Carolina…we’d have to create a new currency, and then use what gold we had to stabilize or fix the price of that currency, and then allow it to fluctuate with respect to the U.S. currency.
Pitts says gold and silver tender would not be as impractical as carrying around a sack of gold, though. He says the gold would be stored and purchases made with a debit card–“Although, it wouldn’t take a very big sack of gold to make most purchases.”
However, McDermott says the impracticality of gold currency would fall more on merchants who would have to calculate the gold price of products everyday. “It’s hard for me to see what this would accomplish, besides just being very costly for merchants to have two sets of prices.”
And while many people see gold as a more stable investment–something tangible that will never lose value–McDermott warns that gold might be a bubble that will eventually pop:
Some people think that there’s been a lot of heavy speculation in gold that’s not warranted by the underlying fundamentals–that this is sort of a bubble, like housing was a bubble, where people just bought it because they expected prices to go up, and they see other people doing it, but that the relative price of gold is above its long-run equilibrium value.
House Bill 4128, “Gold and Silver as Legal Tender” was proposed, but not passed in this year’s legislative session.