Cold Hard Cash, or Funny Money?

[CrowEpistemologist]

OK, well out of that last bit, the only thing I'd care to respond to is your assertion that, "... fixing State level taxes won't do you much good unless you fix the Federal problem ..."  Here you've got this exactly backwards.  The senators and representitives for Congress come from where??

 

I meant Federal-level laws, not State-level laws. Trying to solve what is a Federal-level problem within a State will not accomplish much.

[Devil's Advocate]

I meant Federal-level laws, not State-level laws. Trying to solve what is a Federal-level problem within a State will not accomplish much.

Again, I believe you've got this backwards...

 

Every issue in congress is decided by individuals selected at the state level.  This means that when a majority of states abolish intrastate income or capital gains taxes, taxation at the federal level will follow suit because a majority of senators and representitives will then be mandated by their respective states to do so.  We are currently well shy of the number of states without income or capital gains taxation necessary to effect this kind of change at the federal level, but the fact that 7 states have no income tax and 9 don't tax capital gains is something positive to build on.

 

The bottom line is that trying to solve federal problems at the state level won't accomplish much until a majority of states agree on the solution, but federal problems are unresolvable while a majority of states prefer the status quo.

[CrowEpistemologist]

Again, I believe you've got this backwards...

 

Every issue in congress is decided by individuals selected at the state level.  This means that when a majority of states abolish intrastate income or capital gains taxes, taxation at the federal level will follow suit because a majority of senators and representitives will then be mandated by their respective states to do so.  We are currently well shy of the number of states without income or capital gains taxation necessary to effect this kind of change at the federal level, but the fact that 7 states have no income tax and 9 don't tax capital gains is something positive to build on.

 

The bottom line is that trying to solve federal problems at the state level won't accomplish much until a majority of states agree on the solution, but federal problems are unresolvable while a majority of states prefer the status quo.

 

People will surely vote to kill state-level taxes in exchange for killing state-level benefits. The Federal version of that trade-off is drastically different.

 

Remember when (that former-gov of TX forgot his name) mentioned he wanted the USA to be just like Texas, and then ended his campaign by whispering something negative about Social Security? People might want their state to be like Texas but the very same people may want their Federal government to be like the USA.

 

Individuals vote for all of these things... there's some sort of logical fallacy at work here that I'm currently too lazy to figure out :-)...

[FeatherFall]

If you're thinking of Rick Perry, he's still the governor.

Edited May 22, 2013 by FeatherFall
grammar

[CrowEpistemologist]

If you're thinking of Rick Perry, he's still the governor.

 

Yeah, Rick Perry, And yes, I misspoke: he was attempting to be former gov. by running for president, but yes, still the gov. of Texas...

 

Oops.

[thenelli01]

Hmmm, I was listening to Yaron Brook's Q&A. He actually said the same thing I did about businesses being forced to accept dollars.

 

http://www.peikoff.com/2013/06/24/ybrook-why-does-paper-money-have-any-value/#.UcktgRSJreF.twitter

 

Any response?

Edited June 25, 2013 by thenelli01

[softwareNerd]

Hmmm, I was listening to Yaron Brook's Q&A. He actually said the same thing I did about businesses being forced to accept dollars.

 

http://www.peikoff.com/2013/06/24/ybrook-why-does-paper-money-have-any-value/#.UcktgRSJreF.twitter

 

Any response?

I think Brook is wrong on this. Not sure how one would follow-up with a request for citation and clarification. 

 

Brook is right that the US law considers $ to be legal tender, but it is legal tender for all debts. Barter is still legal. Therefore, Trader Joe can set up a store that only accepts gold.

 

So, what do the legal-tender laws mean? Consider this: if that Trader Joe's store has a "gold credit-card" which must be paid in gold. Suppose someone who can well afford to pay his balance defaults. They go to court. The court will not force the person to make restitution in gold. The court will compute the amount owed in US$. That is the person's debt. Analogously, if someone contracts to fix your plumbing and then reneges, the court will not force him to come fix your plumbing. They will compute how much he owes you: in dollars... for damages,  to get some other person to fix it, etc. 

 

Even if US$ is legal tender for debt, someone who wants to deal in gold alone may not be totally hampered. Consider the Trader Joe example. Let's say the court does make the person pay his due in US$. What is the fair way to compute what is owed? It would be to take the price of gold at the point when the case is resolved and make the debtor pay that amount in $. The creditor could immediately use those $ to buy gold, and it would be just like getting gold from his debtor. Before 1934 some U.S. contracts with payments in the future took this into account. They had a "gold clause", which stated that the creditor could ask for repayment in gold equivalent. Courts would still settle disputes in gold, but this clause ensured that it was settled in the price of gold in the future. When FDR wanted to wipe out a fraction of debts, as one "solution" to the great depression, the gold clause was invalidated. According to the Wiki, was declared valid again in 1977, and confirmed as being so in 2008.

 

Gold and silver (or cigarettes -- now drugs -- in prisons) made for good money, because they were things that lots of people valued very consistently. However, history also shows that once something becomes money, it begins to take on value because it is money. I think the "rational markets" argument tends to discount this aspect. From a certain perspective, money is valuable because everyone accepts it. You accept US$ because you know you can go use it elsewhere. So, money is valuable because it is money. That's pretty dissatisfying, because the obvious question is : why does it become money in the first place? But, that's a different post, I reckon I'll stick to the legality question here.

[thenelli01]

I think Brook is wrong on this. Not sure how one would follow-up with a request for citation and clarification. 

 

This was a good post, thanks.

 

I questioned him on twitter about it (cool thing is that he responds to a lot of tweets). He claimed as I did that the legal tender laws imply that goods and services need to be denominated in dollars. 

 

Here is his response to the example provided by the US Treasury:

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

 

He responded:

"Yes, but they must accept the denomination is $$$. So, they can accept CC instead of cash, but they cannot demand gold or Yen."

 

He then stated that he may have to check into it.

 

But anyways, yeah, I disagree with him on the value of paper currency. My guess is that he said that under the presumption that businesses were forced to accept dollars.

Edited June 29, 2013 by thenelli01

[softwareNerd]

... I questioned him on twitter ...

Thanks for the follow-up.

Legal tender laws are relevant, even as written. Even the folk who barter have to keep accounts in dollars for the tax-man. Anyone who buys and sells in some other medium would still need to translate that into dollars to know how much he owes in taxes. He cannot simply come up with a gold profit at the end of the year and convert that into dollars terms. He would have to treat every transaction in dollar terms. If he is buying and selling in gold, then each transaction would look at the price of gold on the date of the transaction and be expressed in dollar terms as of that date. So, he would need a detailed set of accounts which were expressed in dollar terms. 

 

Since most things a person buys are in dollars, and since the tax he pays is in dollars (not a tiny percentage) and since investments like stocks are going to be in currency, the US$ is the natural "base currency" in the mind of anyone living in the U.S. Today, we would call this the "network effect". It is not easy to get people to switch to another social-network, because they have to do it one by one, and all their friends are on the old one. It is far more difficult to get people to switch to a different money, particularly when there still are laws that make dollars extremely relevant and when there is no obvious advantage of doing so. If a government wants to switch -- like moving from Lira to Euro -- it can do so by saying that all current contracts, bank accounts, etc. which are in Lira will be considered to be Euro (at some exchange rate) as of a particular date. Everyone is forced to redenominate, and they know that everyone else will too. [OTOH, unwinding the Euro is far more difficult, because one has to unwind only a sub-net: e.g. only the Italians, or only the Germans.]

 

Think about this from the viewpoint of a U.S. individual: if one store sells in gold and another in dollars, or if one employer will pay wages in gold and another in dollars, why would the individual prefer one over the other? If he thinks dollars will lose value against gold, he can easily enough hold just enough US$ for transactions, converting to and from gold as he goes along.