In the wake of the U.S financial crisis and the continuing European debt crisis, the price of gold has climbed to all-time highs and the slightest dip in prices creates significant demand. The recent financial turmoil has led governments, central bankers, and investors to turn to gold as a safe haven for investment and protection against volatile financial markets. After years of decreases in gold reserve holdings (gold held by a central bank or nation intended as a store of value), global reserves are steadily on the rise. Despite the high price of gold, concerns about the global economy continue to drive investor demand.
Some U.S. state legislatures are echoing the concern, as thirteen states are exploring the possibility of introducing gold and silver coin currencies as alternatives to the U.S. dollar. Four years of economic turmoil coupled with the threat of spillover from the European debt crisis has generated a lack of confidence in the U.S financial system leading several states to explore alternative currency options. Legislatures have taken this unusual step to protect local economies in the event of a collapse of the Federal Reserve or the U.S. dollar. The argument in favor of gold and silver coin currency is rooted in the value of the metals themselves rather than a paper currency which derives its value from the guarantee of the issuing country.
Although the U.S. Constitution prohibits states from issuing or printing their own currency, they are expressly permitted to make “gold and silver Coin a Tender in Payment of Debts." Last year, Utah became the first state to introduce an alternative currency by making gold and silver coins issued by the U.S. mint acceptable forms of payment. The law provides that the coins may be exchanged at market value, rather than the face value (for example, a $50 American Eagle gold coin is worth approximately $1700). Several states have since followed Utah’s lead and seven states are considering broadening the scope of alternative currencies by introducing legislation that would allow the use of any gold or silver coin to be tendered based on market value.
Proponents of the legislation point to ongoing economic problems, lack of federal intervention, and—although highly improbable—the potential breakdown of the Federal Reserve System. State lawmakers further cite their obligation to protect their constituents’ economic interests where the federal government is unable to do so. However, those opposed to the legislation claim that alternative state currencies would debase the U.S. dollar by decentralizing U.S. monetary policy-making decisions and shifting power from the Federal Reserve System to individual states. Opponents claim that states are not in a position to replace or compete with the U.S. Federal Reserve System, which is a highly-evolved, complex oversight mechanism of U.S. monetary policy. While the practicality and outcome of recent state legislation remains to be seen, the issue is one with broad implications for the U.S. economy and currency.