History News Network puts current events into historical perspective. Subscribe to our newsletter for new perspectives on the ways history continues to resonate in the present. Explore our archive of thousands of original op-eds and curated stories from around the web. Join us to learn more about the past, now.
Paul's ideas on competitive money were quite a hit with Kudlow and the rest of the panel.
I refreshed my memory on some of this stuff and here's the deal:
When, during the Civil War, the federal government first offered federal charters for banks, they quickly discovered that no one was interested in obtaining one because it offered no marginal advantage over a state charter. The feds wanted to charter banks because the regulations required federally chartered banks who wished to issue currency to purchase 2% US gov't bonds as collateral, and thereby finance the Civil War. When they found no takers, they did what government usually does and taxed the substitute: they imposed a 10% tax on the currency issues of state chartered banks. Well guess what happened? All kinds of banks wanted federal charters. Eventually Congress prohibited state chartered banks from issuing notes at all a few years later.
http://www.econlib.org/library/Features/feature3.html
On the federal level, I believe, and I'm not positive, that no law explicitly prevents nationally-chartered banks from issuing notes. The problem is that if the 1863 legislation is still in place, the required bonds no longer exist! If I'm right about that, the change needed in the law is to amend that law to allow federally-chartered banks to issue notes back by the asset of their choice (gold perhaps, but maybe something else). And a quick look at a footnote in Selgin's *The Theory of Free Banking* suggests this is exactly the case.
I had thought that post-Federal Reserve, some sort of additional barrier had been erected to note issue, but it appears not. Selgin does say in the 1988 book that state bank note issue is only taxed not made illegal, as he and White do in the later piece linked above. If the later piece is right, addition legislation would be required to restore the right of state banks to issue notes, and to repeal the 10% tax.
Oh...that's it. There isn't a specific tax on note issue as such?
How important is the tax? I didn't even know there was one.
The tax Paul refers to is the capital gains tax. If, for example, one holds his cash balances in American Gold Eagles and then exchanges them for the medium of exchange -- the fiat Dollar -- any depreciation of the Dollar against gold is considered to be a captial gain for the person doing this and is taxed.
The idea of allowing people to use gold & silver if they so wish is excellent: Paul is saying (in effect) get rid of the legal tender legislation. That is what really underpins govt money.
Given the venue and the complexities of the issues, he got the ideas across well. I think the idea of legalizing competing currencies (by getting rid of the tax on private note issue) while not eliminating the Fed right away is a pretty good step forward.