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I wrote what I thought was a fairly simple article for Forbes on Tuesday. I noticed that some people really got it, and they were very excited. However, others were skeptical or asking questions that went into the weeds. The former tells me that I said something important, but the latter says that I said it in a way that not everyone could relate to.
I started with the observation that many people argue (vehemently) that money should be defined as the medium of exchange. In the US, the dollar is used to purchase everything. Therefore the dollar circulates as the medium of exchange. Therefore the dollar is money. Q.E.D.
The catch is that the dollar only circulates because the government forces it to circulate, and forces gold not to. This means that the very concept of money is under the control of the government.
Ayn Rand noted that force is not essentially about a physical push, or a bullet hitting flesh. She said, “Force and mind are opposites…” She added, “To force a man to drop his own mind and to accept your will as a substitute, with a gun in place of a syllogism, with terror in place of proof, and death as the final argument—is to attempt to exist in defiance of reality.”
She showed that force is an attack on the mind. Literally, the gun takes away your ability to see reality clearly and use logic to arrive at the best possible outcome. Instead, you must think and do as you are told. The insidious process she described is at work with the concept of money. The very concept of money has been perverted.
In most cases, people can see that government has no power to change reality, or alter the laws of physics. But in this case—by the leverage of a broken concept—many people assume that government has indeed the power to make concepts into what it wishes.
George Orwell once wrote about this.
Debt paper is not money, no matter who issues it. The government has no power to transform water into wine, or debt paper into money. I don’t think anyone is explicitly arguing that it has this power. I think their error is to gloss over why the dollar circulates, and just insist that, “well, it circulates therefore it is money.”
Thus, the government is granted the power to turn paper into gold, though the mind skitters away from openly admitting this conclusion.
The consequence to accepting the dollar as money is to think that gold goes up. As I often say, in reality, gold is going nowhere. It’s the dollar that is going down. But if the dollar is money, then the prices of all things are measured in dollars. And so, we think gold goes up. Because that’s the only way to frame it if the dollar is money.
If gold goes up, then one has made a profit. That’s right, one makes money for doing nothing, just holding a lump of metal. Where does such a free lunch come from? No time to explore that contradiction today. Let’s stay focused.
It may not be fair, but we have a capital gains tax that applies when an investment, commodity, or asset goes up. If you buy something for $1,000 and sell it for $1,500, then you have a $500 profit. You must pay tax on that income. There are no exceptions that I am aware of: antique Ferraris, stocks, bonds, bitcoin, copper, houses, etc.
And this is where the concept of money gets real.
The government has several ways of forcing gold not to circulate, of making us use their debt paper as if it were money. One of them is the capital gains tax on gold. You see, if you barter—remember, gold is not money, just a commodity—gold for a car then the government considers that to be a sale of gold at the current market price. If that is higher than what you paid when you bought, then you owe capital gains tax.
This tax makes it far too expensive to use gold in transactions, not to mention the ledger you would have to keep. So gold is forced out of circulation (and into private hoards). Gold is for holding, not for using as money.
I have been arguing that this bad tax provision ought to be repealed. And that’s the crux of the problem.
Am I just a crony, like every other crony, asking the government for a special favor and preferential treatment? Is the whole point of repealing the tax on gold so that gold speculators can make more money on their gold trades?
This was essentially the allegation of one Arizona legislator, who asked why gold should be treated differently than other investments.
If the dollar is money, then there is no good answer to this question.
To advocate for special privileges that benefit one’s own purse is to fight for cronyism (also known by its older name, fascism). This is not a principled position. Nor is it a sympathetic one. Everyone has a mental picture of a fat cats, seeking to engorge himself as public expense. Once we’re into that box, once we’re perceived that way, we’re doomed. No matter what “blah blah blah” comes out of our mouths, it will be seen as self-serving and hypocritical. And rightfully so.
Huh? Rightfully so?!? Yes. If we concede that the dollar is money, gold is a commodity, and if we concede that gold is going up, which means we make a profit, and if we demand not to be taxed on that profit, then we are no different than any other special interest group seeking favoritism. We are no different than any other rent seekers.
What is a principled free marketer to do? Well, if you cling to the notion that the dollar is money, then you are disarmed. You have to concede that gold should be taxed just like other assets. You can lobby to eliminate all capital gains tax, but that’s about it. Good luck with that. I will cheer you, but don’t expect victory any time soon.
I remind you of two things. One, tax keeps gold from circulating. In other words, the gold tax is the key to socialized money. We can never have a free market in money if gold is penalized with a tax every time the dollar loses value. Two, as Ayn Rand showed, the moral is the practical. Your belief in this bad definition of money is what keeps you from effectively fighting for a free market in money.
There is much more to say about the topic of money and credit, to support the case that gold is money. In this article, I just wanted to focus on this one issue, because I think the error is an important one. I expect gold’s enemies, as they begin to mobilize and organize, will be cunning enough to see the vulnerability and go for the jugular.
If we want to win, we will need to be armed properly for the fight. This is a battle for ideas, and the most important weapons we can wield are concepts. Preferably razor sharp concepts. Let’s get it right, starting with a clear understanding of the dollar and of gold.
At least that’s a more convenient definition when one is lobbying that holders should not incur a capital gain tax.
When the price of gold falls, dollar-denominated asset holders incur a capital gain, too.
Wouldn’t it be quaint if they owed capital gain tax in gold on their speculative windfall?
I say stick with Menger and focus on marketability (liquidity). Just be sure to insist that the Good itself be present (not latent) in the payment amount.
Great article, and as usual, your writing style is clear and straightforward.
I agree that we need to focus on re-establishing a free market in money.
The only way to do that is eliminating the punitive tax on transactions involving gold and silver, and eliminating the monopoly advantage for paper money conveyed by legal tender laws.
Would it help to point to the U.S. Constitution’s gold and silver clauses?
We’re not looking for special privilege, just our Constitutional rights.
Article 1, section 10: “No State shall … make any Thing but gold and silver Coin a Tender in Payment of Debts;” I think this is the line of argument to follow.
In addition, we should argue that people wish to use gold as money, and that in a free country they should have that right.
I accept the argument that gold is money and a store of value and I hope the day comes when gold is accepted as money. However, it seems that you are arguing that all the debt notes currencies (USD, Euro, Jyen etc.) must be redefined so they are not considered money. As long as governments make the rules, with the help of bankers, than a redefinition is practically impossible. Your point about taxation is interesting; are you arguing that taxation as an asset prevents gold from being considered money? I am not a forex trader but I think USD gains on forex trading is taxable, so wouldn’t this mean all the “foreign currencies” also fail the definition of money?
Thanks for the comments.
Greg: In Mengerian terms, the 28% tax on phantom “gains” makes gold far less marketable than it would be. Are you really saying that my article did not make it clear why we shouldn’t define money as “whatever happens to circulate”? Do you agree with the Democrat legislator who sees this as a special interest group lobbying for crony favors?
jrskar: It may help in discussions with people who are interested, but skeptical, such as Greg above. From what I have observed, it is not helpful with legislators. We have sunk so far as a culture, that voters put candidates in office who have little regard for the Constitution. I think most voters have little regard. When I was in junior high school, they attempted to indoctrinate us with the “living, breathing” document. I assume by now they are inundating students with “it’s over 100 years old” (as Joe Klein said in Newsweek). I prefer to focus on the damage that the dollar is doing to people.
zhkth1: Yes, that’s right. An irredeemable debt note is not money. It has none of the attributes of money, which is why the government has to use force to make it circulate. I agree that it is very difficult for people to form concepts based on an abstract–when the government is forcing an alternative reality on us.
That’s true but in belgium there is not capital gains on gold and it is exactly the same situation than elsewhere in the west where there are capital gains.
One other primary factor is taxes are to be paid in dollars, euros and so on and that public servants are paid in the same fiat.
Keith, As a practical matter gold ETFs can be held in a Roth IRA. This would theoretically offer a way around your objection as to why gold cannot be money because of capital gains tax when the gold is ‘spent’.
If we succeed in eliminating 28% gains tax on transactions in gold, as well as the legal tender laws, why won’t others argue for eliminating cap gains on “collectibles” like diamonds, fine art, vintage cars, etc.? How do we make the case that only gold and silver are money? I thought that is why the old white guys bothered to put those words in that out-dated document, anyway. Seems like we need some legal argument for claiming that only gold and silver are money, so not subject to capital gains. No?
BTW, I would be happy paying taxes in FRNs, as long as I could use gold and silver for everything else. Have you worked through the impact on the income tax laws if gold and silver were allowed to circulate as money? Any articles on that?
RD: I don’t know enough about Belgium to comment. Is it just the small size? Or are there other legal or regulatory problems? I don’t know.
As to tax, I would be happy to sell some gold on April 14 to pay whatever tax is due! Gold is readily exchangeable for dollars so tax as such does not keep gold out of circulation.
Dave: Can you pull gold out of a Roth IRA every day for groceries and gas? How many people have such an account?
jrskar: I argue that only gold and silver are money for a number of reasons, including bid-ask spread. But most visibly is the high stocks to flows ratios. No other good even comes close.
I have thought about how the tax law must change. One change is that the taxpayer must have the right to make an election to change numeraire to gold, silver, or a compound of the two. Suppose you have a shoe store. At the start of the year, you have 100oz gold capital. You buy 100oz worth of shoes. Sell them. Buy shoes. Sell. At the end of the year, you have 110oz. Your profit is 10oz, and you pay your income tax on that (i.e. probably 3oz). No one wants to pay tax, but I think the shoe store owner would not be too upset about this. Vs. today the government will say you started with 100oz X 1200 = $120,000. Suppose the gold price goes up to $1,500. At the end of the year, you have 110 X 1500 = $165,000. Pay tax on $165,000, or $49,500. At $1,500 per ounce, this is 33oz. Your tax is 3.3X greater than your profit!
In acit I am quite sure it is the same thing in Luxembourg but also in switzerland !
Currently the problem with gold for physical quantities even of about 1 million euros is that the bid/ask is still 1% or more.
Gold will stay as a hedge for wealth preservation and maybe trans boder money transfer but into each states, fiat will reign supreme while states decide to do so.
If current fiat system fails, and other one will emerge… until it fails again !
Maybe I’m not understanding, but wouldn’t the capital gains in your scenario be $165,000 – $120,000 or $45,000. At a .3 tax rate that would result in tax of $13,500 or 9 oz. Still unfair, to be sure, but not as catastrophically bad as you presented.
They are your readers, so I would expect them to be more in tune with the reality of the government fraud. (fraud in everything).
But some still don’t get it. If it’s not gold or silver then it’s NOT money. It doesn’t matter how common it is, or how it’s presented (spun), if it’s not gold/silver it’s NOT money.
You may be able to use paper dollars “as if it were money” but you will always come out on the short end in anything that has time as a factor. (like savings)
I have been fighting the wrong headed view about the Federal Reserve since the late 1950’s and it’s going downhill all along.
Some of the arguments are so far out that they are not even wrong.
Keith, Lord No! I’m not arguing for capital gains (or any) taxation. Yes, that not only widens the spread for gold transactions, it also ruins the constancy of its marginal utility. If we took that law literally you’d have to decide which “lot” of gold you’d just bought or sold to figure its profit.
No. I’m a huge fan of yours. Like you I suspect, my ears prick up whenever some tries to “define” what is Money. It’s the root of the matter. Please keep at it. For me the argument from first principles decided the question, and Menger is so badly overlooked by the QTM crowd that I have a reflex to keep mentioning him just to keep his name in circulation. But I really see how everyone needs to come to this insight on their own road. Your articles can make a huge impact.
I dropped back in this evening just to appreciate another of your quotes (from the Gold4Dems article):
“Gold doesn’t give the rich free money. Under the gold standard, the rich have to do what everyone else does to make their money. Work for it.”
I don’t know, it seems to me that if dollar currency is valued only against other currencies, and all the currencies are I.O.U.s backed only by their respective governments ability to tax I.O.U.s, and those I.O.Us can only come from creating evermore I.O.U.s etc.… Eventually the I.O.U.s would have no purchasing power, because nobody will want to be at the bottom actually producing something to exchange for them.
It astounds me that many can’t see that the math won’t allow debt to work as money for long, mainly because the parasitic masters must limit their numbers in order to not kill the slaves through sustenance depravation.
Gold-based money is the only way to keep the freeloading parasitic masters to slave ratio balanced, and humming along for any real length of time. I think the best way of convincing folks to quit going along with reality defiance is to educate with focus on the math, and stress the importance to correct it now while the slaves are still barely hanging on. The math is the best chance of getting through to folks?
Your long rates getting down to zero ending the show writings are doing it for me. I just would really like to see something on what about the math keeps the Fed from just zeroing out the debts on their balance sheet, because it seems consequences are nil since they print from thin air unlike the lesser banks. Also what keeps them from controlling interest rates through paying interest on excess reserves (why buy a zero rate bond if you can park money at the fed and get paid)? Does the fact they pay that interest out of funds that are normally remitted back to the treasury causing ever-bigger deficits have anything to do with it ending in failure? How does that math work? I too am a huge fan of yours, and your writings really help me on figuring stuff out, hopefully I will smarten up and quit asking dumb questions if I follow you long enough.
P.S.
Thanks for all you write!