So Utah's new gold & silver law marks a step towards a Gold Standard...?

IT'S NOT QUITE an April Fool's, but it's close enough.

"Gold, silver coins now officially legal tender in Utah," reports MineWeb, along with pretty much everyone else.

"Utah's tax code says US Mint-issued gold and silver coins are currency, rather than assets taxable by the state." Which means - far as we can tell - no sales tax, and goodbye to Utah's 7% capital-gains tax too. Federal US capital-gains tax still applies. But it's a start, right

"If one state recognizes gold as a valid currency, I think it would embolden people not just in other states but in Washington," says one Gold Standard advocate.

"Utah has now become the first State on our list to actually enact a sound money bill into law," says another. Start typing "Utah gold" into Google, in fact, and "Utah Gold Standard" pops up as a suggested search, returning some 1.6 million results.

Now, there a many good reasons to consider buying gold today. But a looming return to a Gold Standard ain't one of them. First because it ain't gonna happen. Second because, even if it did (which it won't), an official US Gold Standard would not deliver the rapture of $5,000 or $7,500 gold which all-too many people are starting to imagine (or promise, depending on which side of the coin-dealer's counter they stand).

Utah's "first step", for instance, sees the nominal face value of US Mint gold and silver coins now worth...well...just their nominal face value. Same applies whether you're settling your local-state taxes or buying, say, an $8 ice cream. Hand over eight $1-face coins, and your trat will in fact cost you nearer $217-worth of silver in today's paper bucks. Which hardly solves inflation in prices. It would only gift you a giveaway profit if the metals had slumped so low, each coin traded below its nominal face value...rather than many times above.

"There is nobody - not one single person" who seems to understand what a Gold Standard would in truth involve, writes Nathan Lewis in his New World Economics blog. Most bluntly, because a precious-metals standard means pegging the value of money to gold or silver, not the other way round. Bullion set the standard. The volume of cash didn't.

Great Britain's long-running Gold Standard, for example, first set the value of each Pound as a certain quantity of silver (hence the name Sterling). Over time, and through use, it came to represent a certain quantity of money per ounce of gold - some £3 17s 10½d to be precise. Over time again, and thanks to the United States' Dollar usurping the Pound's role as the world's No.1 currency, it then came to mean $4.86 per Pound. But only because the Dollar retained its Gold Standard through WWI, thereby coming to represent a gold-value peg in itself.

To repeat: Pricing Great Britain's gold to match the volume of Pounds in circulation was never the deal. The aim was to keep a lid (and floor) on the value of each Pound in circulation. Because the ultimate aim was to maintain the value of cash across time...value set by gold and silver. Their value was of course eternal. It was not bestowed by the money of the day.

"From the middle of the [19th] century" and as global trade volumes leapt, "the previous concern about internal drains of gold from the Bank [of England] was replaced by a more single-minded concern with external drains," explains monetary historian Glyn Davies in his History of Money. "By means of trial and error, the Bank experimented with various devices for safeguarding its gold reserves, the most effective of which turned out eventually to be the combined use of bank [interest] rate with open-market operations."

Defending the Bank's gold reserves, in other words - and thus ensuring that the Pound's ultimate value in gold could be met by redeeming paper notes for bullion - meant defending it against traders (or foreigners or "speculators", depending on the day's politics) who would swap Pounds for gold bullion (or gold for paper) whenever the gold-price of Sterling slipped below (or above) its official value. Speculators overseas would of course need to cover the cost of shipping out (or in) their bullion. So the Pound did in fact enjoy a little breathing space - bounded by what became known as the "export" and "import points". And the Bank of England's primary tools for keeping the Pound close enough to its official value were open-market operations - where it bought/sold Pounds or metal as necessary - plus its interest rate.

That latter tool - the rate of interest paid to money - decided the longer-term direction of bullion flows, of couse. Just as it decides the longer-term direction of currency value today. Because low rates would encourage gold owners to seek better returns elsewhere, pulling metal out of London and thus nudging the Pound lower. Raising rates, in contrast, would encourage metal into Great Britain, buoying the currency in precisely that way which central banks everywhere today are loathe to do.

Part II to follow...