California on the Peso Standard?

MAY 9, 2011

By JOHN SEILER

Californians keep looking for ways to boost our economy, which also would bring in more revenue to the state government. The Legislature still is struggling with a budget deficit of about $15 billion, after $10 billion in cuts were made.

Here’s an idea: Switch to using the Mexican peso as a currency.

Look at the following graph of the Mexican peso’s rise in value, from the x-rates.com site:

It clearly shows the peso rising against the dollar the past six months by about 10 percent. If that trend continues for the next six months, as it likely will, then the increase in the peso’s value for a full year would be about 20 percent.

So, if California were on the peso standard, our economy would be 20 percent larger for all of 2011, than it will be on the dollar. And tax receipts, therefore, would be about 20 percent higher.

With tax receipts anticipated to be about $75 billion this year, moving to the peso would mean collecting about $15 billion more. That’s a number even larger than the $12 billion in tax increases Gov. Jerry Brown is demanding.

It used to be that the peso was the weaker currency, periodically being devalued by its central bank. For example, in 1994, the U.S. government forced Mexico to sharply devalue the peso during what was called the “Mexican peso crisis.”

Now, the roles are reversed, with the Yanqui dollar the weaker currency.

Hayek Explains It

This is why the great economist Friedrich Hayek, a Nobel laureate, recommended that countries end their fixation with having one national currency. He said said people and businesses — and state and local governments — should be allowed to use any currency deemed best, including using commodities such as gold or silver.

His essay, “Choice in Currency: A Way to Stop Inflation,” explains his reasoning. He wrote:

But why should we not let people choose freely what money they want to use? By “people” I mean the individuals who ought to have the right to decide whether they want to buy or sell for francs, pounds, dollars, D-marks, or ounces of gold. I have no objection to governments issuing money, but I believe their claim to a monopoly, or their power to limit the kinds of money in which contracts may be concluded within their territory, or to determine the rates at which monies can be exchanged, to be wholly harmful.

At this moment it seems that the best thing we could wish governments to do is for, say, all the members of the European Economic Community, or, better still, all the governments of the Atlantic Community, to bind themselves mutually not to place any restrictions on the free use within their territories of one another’s—or any other—currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books. This, and not a utopian European Monetary Unit [which turned out to be the Euro], seems to me now both the practicable and the desirable arrangement to aim at.

Legal Tender Laws

Unfortunately, current U.S. legal-tender laws allow only the dollar, which is inflating rapidly, for use in the United States. Current law reads:

“Section 5103 of title 31, United States Code

§ 5103. Legal tender

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”

However, the Tenth Amendment Center points out that this law is unconstitutional:

The 1862 statute conflicted with the Constitution in several ways. In the first place, it was an ex post facto law. It was retrospective or retroactive. It impaired contracts made before the date of the law. Article I, Section 9, which applies to the federal government, says: “No bill of attainder or ex post facto Law shall be passed.” Article I, Section 10, which applies to the states, says: “No state shall…pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts.…

Meanwhile, other states are acting:

Introduced in South Carolina legislature is House Bill 4501 (H4501), which if passed would make Gold and Silver Coin Legal Tender in the state. Cited as authority in the legislation is Article I, Section 10 of the Constitution and the principle of reserved powers under the 10th Amendment.

A number of other states are also considering similar legislation –click here to view the Tenth Amendment Center’s Constitutional Tender Laws Tracking Page.

In Utah in March, the state enacted HB 317, which stipulates:

This bill recognizes gold and silver coins that are issued by the federal government as legal tender in the state and exempts the exchange of the coins from certain types of state tax liability.

California could do the same — as well as extending “legal tender” recognition to the rapidly appreciating Mexican peso.

Mexican Gas

A possible effect of the switch to a Peso Standard for California would be much cheaper gas. And cheaper gas would mean higher living standards for Californians, as well as increased economic activity, a higher tax base and, therefore, higher tax collections for the state.

KHOU.com in Houston reported last Friday:

Mexico’s cheaper gas lures Texas border residents:

HOUSTON — To beat the high cost of gas, some Texans who are living near the border are filling up in Mexico where gas is cheaper.

Shopping for the best gas prices used to be one of the benefits for Americans living near the border, but these days many Mexican border cities with lower gas prices are coping with escalating violent crime.

Despite that fact, one gas station attendant said motorists from the U.S. are still filling up in Juarez, which is Mexico’s murder capital.

All gas stations are full service in Mexico. The government oil monopoly sets the price at the pump nationwide. Right now gas is about a $1 cheaper a gallon in Mexico.

In addition to adopting a California Peso Standard, it may take further legislative action to integrate California’s gasoline industry with that of Mexico. But surely something can be done. That way, you wouldn’ t have to brave the wild streets of Juarez to save money putting gas in your flivver.

Where’s Jerry?

There is a computer game and TV series, “Where In the World Is Carmen San Diego?”

So, I’m wondering: Where in the world is Gov. Jerry Brown? In his first turn as governor, 1975-1982, he was so quirkily innovative he got the monicker “Gov. Moonbeam.” The second time around, he seems determined to prove he’s just an aging union hack.

Well, we need some of the that old Moonbeam magic to seep back into him. He needs to start generating new ideas, good or bad. He needs to be the straw that stirs the drink, as Oakland A’s baseball star Reggie Jackson once said of himself.

The dollar is being wildly inflated by the U.S. Federal Reserve Board — what its chairman, Ben Bernanke, euphemistically calls “quantitative easing.” So, why not switch California to a Peso Standard?