As noted in a prior post, the purchasing power of various types of U.S. currency has increasingly diverged over the past several decades. This growing disparity between precious metal legal tender and paper/base metal U.S. currencies creates hazards as well as opportunities for individuals, businesses, and governmental entities alike.

The anomaly created by the federal government’s failure to maintain the equal purchasing power of each kind of currency, coupled with the absence of any legal distinction between them, provides planning opportunities for transacting parties to tender or accept the dollar type best suited to their respective economic interests.

Specifying the type of currency to be used in a particular transaction is unquestionably permitted by law. While the federal government has expressly withdrawn its consent to obligations requiring tender of a particular type of dollar (31 U.S.C. § 5118(b)), since October 27, 1977, contracting parties within the United States have been legally authorized to require that contractual obligations between them be paid in “a particular United States coin or currency”, including specie legal tender. 31 U.S.C. § 5118(c)(2).

Exercising Intelligent Choice in Currency includes a variety of considerations. For example, the Federal Reserve Note (FRN) has lost approximately 98% of its purchasing power since it was first introduced. Consequently, when incurring long-term debt, a borrower would be wise to insure that repayment can be made in a depreciating currency, such as the FRN. By contrast, when acquiring property that may ultimately be subject to capital gains tax, prudence would dictate use gold or silver (specie) legal tender, which as a long history of maintaining its purchasing power over time. By setting the tax basis in such a currency, the purchaser can better assure that any taxable capital gain will not be exaggerated by depreciation of the currency itself.

For savers, specie legal tender can work much like a Roth IRA, but without any contribution limits or required holding periods. When contributing to an account denominated in gold or silver dollars, such as those offered by UPMA, the amount of dollars contributed does not grow over time. Accordingly, no capital gain is incurred when such funds are withdrawn to acquire goods or services, because the nominal amount of dollars has not increased.

That said, specie legal tender maintains its purchasing power much more reliably than FRNs. To maintain paper dollar purchasing power, one must realize an investment gain large enough, not only to beat inflation, but also to cover the resulting capital gains taxes. Understanding this dynamic equips one to exercise truly Intelligent Choice in Currency.