Return to the gold standard? It's just crazy enough for some state legislators to propose it.
Imagine it's April 15 a few years from now. You need to pay your state taxes, and fast. So, you check out the latest official state exchange rate, and then reweigh your bars. You're over—thank goodness—so you hope the tax office has some ingots to change out. It's such a pain when they run out of ingots. After you pay your taxes, you need to pick up a few groceries. Luckily, you have some spare silver ore on hand and decide to use the home mint in the basement to pop out a few coins. Voilà—restocked pantry!
It sounds ridiculous. It is ridiculous. But in the past few months, a few state legislators have considered letting you do something like that: Trade in gold and silver in addition to dollars. The country as a whole is not moving closer to adopting a gold or commodity-price standard, though there are some national-level proposals. And state legislatures have a long and honorable history of proposing, debating, and sometimes even passing silly laws.
Now some state politicians, mistrustful of the Federal Reserve and juiced by the general anti-Fed climate, are trying to wrest a bit of currency control into their own hands. The first proposals emerged in 2009 and have been floated thus far in Montana, Missouri, Colorado, Idaho, Indiana, New Hampshire, and Washington, among other states. In Georgia, for instance, state Rep. Bobby Franklin has introduced the Constitutional Tender Act, requiring "the exclusive use of gold and silver coin as tender in payment of debts by or to the state." Which gold and silver coins, you might ask? "Pre-1965 silver coins, silver eagles, and gold eagles." Those "shall be the exclusive medium which the state shall use to make any payments whatsoever to any person or entity," the bill says, adding "such coins shall be the exclusive medium which the state shall accept from any person or entity as payment." It notes "other forms of currency may be used in all other transactions within the state upon mutual consent of the parties of any such transaction."
In Virginia, Republican Delegate Bob Marshall has also considered creating an alternative to the dollar for his constituents. "Many widely recognized experts predict the inevitable destruction of the Federal Reserve System's currency through hyperinflation in the foreseeable future," his joint resolution reads. So he has asked a subcommittee to study what would happen and what Virginia should do in case of a monetary crisis. And he has plans to submit a bill asking the Commonwealth to start minting its own gold and silver coins, as an alternative to the dollar.
A legislator in Utah has gone even further. At the urging of a constituent, Rep. John Dougall has promised to put forth legislation permitting citizens to run their own mints, pumping out their own gold and silver coins for use in the state. The Utah Sound Money Act exempts the commodities from state sales and capital-gains taxes, lets taxpayers remit funds to the states in dollars or gold or silver coins, and establishes cooperatives to promote the use of the new coinage. Because the plan may reap the state so much gold, the proposal also revives the Utah Defense Force, to help protect the cache.
What is behind the spate of make-your-own-money proposals? Mistrust of the Federal Reserve and worries about the value of the dollar. In a much-cited July 2009 Gallup poll, Americans rated the Federal Reserve Board as doing the worst job out of nine major federal agencies. The sentiment has apparently stuck. Just last month, a majority of Americans said the Federal Reserve should be "reined in or abolished." These politicians are reacting to this anti-central-bank sentiment.
The concerns over inflation and the value of the dollar are especially strong on the right. As the argument goes, the Fed's easy money policies and rounds of quantitative easing will inevitably cause massive inflation. People with their savings all in dollars will be hurt. "Since the founding of the Federal Reserve Bank system in 1913, Federal Reserve Notes have lost more than 95 percent of their purchasing power," the Utah act notes. "During that same period of time, from 1913 to the present, as well as through the entire course of recorded human history, gold and silver coin have reliably retained their purchasing power, although subject to periodic fluctuations in value."
Concerns about inflation and the purpose of the central bank may or may not be valid. Either way, a return to the gold standard—on the state level, no less—is probably not going to help matters much. First, there are the not inconsiderable logistical hurdles. To state an obvious point: Dollars are ubiquitous, liquid, and stable. It's easy to use them to pay your car registration fees or taxes. But consider paying your taxes in gold coins, as the Georgia * law would require. At tax time, every Georgian would need to scramble to find gold or silver coins that are, well, in very limited supply. The pre-1965 coins, obviously, haven't been minted in nearly a half-century, and the eagles are collector's items. There aren't a lot of them, and many are in private hands. Every year as April 15 approached and Georgians' tax bill were due, there would be extraordinary demand for the coins, pushing prices through the roof. The result? Chaos. Likewise with the Utah proposal. Would the state need to weigh and test every single payment before accepting it? What if it got scammed? How to deal with counterfeiting?
Second, there are more theoretical reasons that allowing a gold or silver alternative within a state might not be good. Most notably, it ties that state's fortunes to the supply and the price of the commodity. If a South African mine dramatically boosts gold production, that would not bode well for a state that has just taken in a year's worth of income taxes in gold. (And imagine if someone figured out alchemy: free taxes forever!) Moreover, it is increasingly investors, not supply, that are determining commodity price fluctuations.
Speaking of the recent run-up in gold prices, for instance, investor George Soros called gold the "ultimate bubble," driven entirely by speculation, with prices unmoored from any underlying, tangible value. Other investors disagree. And dollars, of course—as Soros well knows—are not immune to speculative pressure. Still, for a state and its citizens, the question becomes: Why expose an economy to the whims of an unstable commodity market?
Annie Lowrey, formerly Slate’s Moneybox columnist, is economic policy reporter for the New York Times.
Photograph of gold bars and bank notes by Stockbyte/Thinkstock.