Cliff Droke Rebutted
Bill Haynes
In his article The Coming Currency Devaluation, which can be found at www.gold-eagle.com/gold_digest_03/droke101003.html, Clif Droke proclaims that the introduction of the new colored (rainbow) currency signals a devaluation for the dollar and an implementation of a two-tier monetary system for Americans. It has been a long time since an Internet
article has caused CMI's phone to ring so much. Sadly, the article misfires on many points.
Droke starts by saying that the Bureau of Engraving and Printing needs to spend $33 million "to let the world know of the new bills and to acclimate the public to their strange new appearance." To me, the bills do not have a "strange new appearance." They now have colors in addition to green.
When I saw the new bills at the ANA annual convention in August, I gave them a hasty inspection and moved on. Most paper currencies of the world have multiple colors. Actually, many foreigners laugh at the greenback's archaic look. In addition to multiple colors, our new paper bills use the latest technology to make them more difficult to counterfeit. (In reality, counterfeits will still be produced, but they will be easier for the layman to recognize.)
It would lunacy for the government to change the design of its paper currency without a publicity campaign. Otherwise, how would the public know the new bills were for real? The $50 Grant gets a face-lift next year,
and the $100 Franklin will be redesigned in 2005. Over the next five years, some $53 million will be spent to make sure everyone knows the new bills are "official."
The last time the government changed its currency's look--the significant change being Franklin and the presidents getting larger heads--the government spent something like $35 million to let the public know the
new bills were for real. When you enjoy the privilege of printing the world's reserve currency, which is redeemable in nothing, it is very important that you keep the public informed as to the latest design on your bills!
Half of Droke's article quotes Lawrence Patterson, who, according to Droke, "authored the 1994 monograph titled Currency Recall, which accurately forecast the new multicolored notes." Droke failed to mention that the recall, which Patterson wrote about nearly ten years ago, has yet to happen.
Again according to Droke, Patterson asserts that the new bills will circulate domestically while greenbacks will circulate offshore all over the globe. "With the coming two-tiered currency system," Droke writes, "foreigners will continue to be allowed [sic] to use the greenbacks while U.S. citizens will be stuck with the 'crayola currency' which cannot be exchanged."
"Patterson forecasts the coming use of foreign exchange controls for the U.S. dollar domestically, which would prohibit Americans from transferring capital to any other world currency." Hello, has anyone ever heard of globalization, the important part of which is the dollar being the world's currency?
If Americans are "stuck" with the new currency, then foreigners are stuck with using the old greenbacks. Interestingly, the old bills will no longer be printed, which means that the supply of greenbacks cannot grow
around the world. The primary benefit of being able to print the world's fiat reserve currency is that foreigners really are stuck with it. Is the US about to give up the lofty privilege of buying the world's goods with cheaply printed paper? Not hardly.
Supposedly, Patterson sees the value of the new dollar being cut as much as 50%, when convertibility to the old greenbacks is suspended. While I agree that the dollar will probably suffer horribly over the next few years, the loss will more likely come from the Fed's excessive printing and our FedGov's reckless spending. Everyone holding dollars, Americans and foreigners, will share the loss.
However, the worst part of Droke's piece is where he quotes Patterson's patently inaccurate statements about reporting requirements on gold coin sales. "He (Patterson) further maintains that coin dealers are under a strict Treasury regulation and must report your sales of some coins but not others. The rule is as follows: Coins with a premium above 15% do not have to be reported. In addition to the 1099 report, filed by the coin dealers, you have to declare any capital gains as well." Let's dissect this scary statement.
First, there is no 15% rule. Reporting applies to only three gold coins: 1-oz Krugerrands, 1-oz Gold Maple Leafs, and 1-oz Mexican Onzas, and only when sold in quantities of 25 or more. The prices received for the coins are not a factor. In the early 1980s, when the IRS first asserted that sales of coins had to be reported, a 15% rule was discussed, but it never went into effect.
Many investors are surprised to learn that the reporting requirements do not apply to American Gold Eagles. Gold Eagles did not exist when the rules came into effect in 1985. But, more important, Gold Eagles never have been approved for trading on futures exchanges.
The IRS claimed that liquidations of Rands, Mapes, and Onzas had to be reported on 1099s because those three coins were approved for trading on futures exchanges. Very little (if any) trading took place because in the mid-1980s the gold bullion coin market was suffering a lack of investor interest. Frankly, it is unlikely that the coins are still approved by the CFTC for trading, which means that the IRS probably would have a tough time making their reporting requirements stick in a court of law. (But, who wants to challenge them?)
But, here is where Droke's article gets really dangerous: "The existence of this rule, I (Patterson) believe, indicates an intent to outlaw the ownership of bullion coins altogether! However, the rule will not remain at 15% necessarily and could be changed to a higher percentage, which is unknown at this time. Obviously, you do not want to own any investment coins with a premium of 15% or less and better stay at the 25% or 30% level to be safe."
Droke finishes that paragraph with: "He advises staying in the 'safe zone' and exchanging bullion coins not needed for emergencies (such as food or gasoline shortage, et al) for numismatic coins with higher premiums."
This article is dangerous not only because it is inaccurate, but it scares the hell of most readers. It says that a two-tier currency system is about to be foisted upon us, yet the new $20 bills already circulate in Phoenix--without any warnings that they cannot be taken abroad or exchanged for old greenbacks.
When the last big changes in our paper money were made, the same apocalyptic warnings rapidly spread through the precious metals industry--and without the benefit of the Internet. But, we still have a "one-tier"
money system, and it will remain that way for a long time. Our FedGov will do nothing deliberately to cause the world to lose faith in the dollar. You can count on that.
No reader should take this rebuttal as a defense of paper money, for it is not. The massive printing of paper money has caused more misery in the world than anything except war. However, readers need to keep in mind that the dollar is still the world's primary reserve currency. It is the world's de facto currency. In most countries, dollars can be spent without being converted to local currencies. The change to a multi-colored, higher tech paper currency is to reassure the world that the dollar is still number one. A move to a two-tier system is nowhere on the horizon.
When the day comes-and it will-when Americans are buying other currencies to avoid holding dollars, then we can expect foreign exchange controls, some of which may be draconian, maybe even a two-tier system. Before that happens, we will see the results of massive inflation: rapidly rising prices and huge quantities of dollars flowing abroad. We are not there yet. Meanwhile, investors can be assured, that gold and silver will protect against the ravages of paper money, regardless of its color, when that day does arrive.
Bill Haynes
October 14, 2003
Bill has been a precious metals dealer since 1973.
He can be emailed at bill@certifiedmint.com
His primary website is www.certifiedmint.com
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