(Mike Maharrey, Money Metals News Service) A Texas Republican has introduced bills that would create transactional currencies backed 100 percent by gold and silver. The passage of this legislation would open the door for people to easily use sound money in everyday transactions and create competition for rapidly depreciating fiat dollars.
Rep. Mark Dorazio filed HB1049 and HB1056. The language in both bills is nearly identical, but they add the provisions to different sections of the Texas code.
Under the proposed law, the Texas Comptroller would issue gold and silver specie (coins) through the Texas Bullion Depository and establish gold and silver transactional currency defined as “the representation of gold and silver specie and bullion held in the pooled depository account.”
The Texas legislature established the Texas Bullion Depository in 2015. The depository received its first deposits in the summer of 2018. The following year, the state exempted precious metals in these depositories from taxation.
Under HB1049 or HB1056, the depository would be required to hold enough gold and silver to back 100 percent of the issued transactional currency.
Holders of gold and silver specie and currency would be able to use it as “legal tender in payment of debt” in the state of Texas. The gold and silver-backed currency would be electronically transferable to another person.
Gold and silver-backed currency would be redeemable in specie or at the spot price of gold in U.S. dollars minus applicable fees.
In practice, the passage of HB1049 or HB1056 would allow anyone to conduct business transactions using gold or silver.
Practical Impact
The passage of this legislation would create a sound money alternative to U.S. dollars in both physical and electronic form.
Using gold and silver-backed transactional currency, any person or entity would be able to do business using a debit card that seamlessly converts gold and silver to fiat currency in the background. Private individuals and businesses would be able to purchase goods and services using assets held in the Texas Gold Depository in the same way they use dollars held in a bank today.
Gold and silver-backed transactional currency would give people a way to shield themselves from the rapid loss of purchasing power inherent in the fiat dollar.
In most states, citizens must pay debts and taxes with Federal Reserve Notes (dollars), authorized as legal tender by Congress, or with coins issued by the U.S. Treasury — very few of which have gold or silver in them.
But the United States Constitution states in Article I, Section 10, “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts.”
The creation of a transactional gold and silver currency would take another step toward that constitutional requirement, ignored for decades in every state. It could also set the stage to undermine the Federal Reserve’s monopoly on money by introducing competition into the monetary system.
Private gold transactional currencies already exist. For instance, Goldbacks are notes made embedding a small amount of pure gold in a polymer sheet. But unlike the proposed state-issued Texas transactional currency, Goldbacks don’t have any legal standing, despite state names printed on the notes. They are not considered legal tender. Using Goldbacks is essentially a voluntary barter transaction.
Reversing the Gresham Effect
Could the injection of sound money into the Texas economy begin to drive out bad money, i.e., dollars that are losing purchasing power at a dizzying pace?
Gresham’s Law is an economic maxim that states “good money” drives out “bad money.”
But under the right circumstances, it might be possible to reverse Gresham.
Named in 1857 by economist Henry Dunning Macleod after Sir Thomas Gresham, an English financier during the Tudor dynasty, Gresham’s law is technically a theory that people tend to hoard money that has higher intrinsic value, such as gold or silver, and spend money with lower intrinsic value, like devaluing fiat paper dollars.
In effect, people spend what they don’t want to keep.
This played out in practice when the federal government removed silver from quarters and dimes in 1964. Today, it is nearly impossible to find silver coinage in circulation.
In a paper for the Mises Institute, Professor William Greene argued that the injection of easily usable sound money into the economy could create a reverse Gresham effect.
“Over time, as residents of the state use both Federal Reserve notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve notes do will lead to a ‘reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve notes).
This would happen as people become aware of the fact that gold and silver purchasing power remains relatively constant, while it takes more and more fiat money to buy the same basket of goods.
“As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the state’s treasury, an influx of banking business from outside of the state – as people in other states carry out their desire to bank with sound money – and an eventual outcry against the use of Federal Reserve notes for any transactions.”
In effect, government fiat money would fall out of use, breaking the Fed’s monopoly on money.
The key is to make it easier to use gold and silver in everyday transactions. The reason bad money drives out good is that governments put up barriers to using sound money in day-to-day life. That makes it more costly to spend gold and silver and incentivizes hoarding. When you remove legal and tax barriers, you level the playing field and allow gold and silver to compete head-to-head with Federal Reserve notes. On an even playing field, gold and silver beat fiat money every time.
Next Steps
HB1049 and HB1056 will be assigned to House committees when the 2025 legislative session begins on Jan. 14. Once in committee, they will need to get a hearing and pass the committee by a majority vote before moving forward in the legislative process.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
