Is Gold the New Black? States Look to Bring Gold Standard Back

While Utah became the first state to recognize gold as legal tender, more than a dozen other states are thinking about following in Utah's footsteps and this is causing a decline in the faith of the US dollar.

By HUMA KHAN
April 15, 2011
ABC News

Utah is First State to Recognize Gold and Silver as Legal Tender; Inflation Worries Loom

Starting in May, Utah residents will be able to shop in a currency other than the dollar -- gold, something that hasn't happened since 1933.

Utah became the first U.S. state last month to recognize gold and silver coins minted by the federal government as legal tender. More than a dozen other states are considering similar measures, and are expected to follow Utah's example. The move, proponents say, is caused by declining faith in the U.S. monetary system and concern about rising inflation.

The gold standard, a monetary system in which the dollar is valued against a certain weight of gold, lasted until the Great Depression, when the Federal Reserve confiscated gold held by the public. President Nixon abolished the conversion of dollars to gold at a fixed rate in 1971.

It doesn't literally mean people would pull out gold coins at the cash register. Instead, the Federal Reserve would be required by law to make their notes redeemable for gold and hold gold coins and bullion as reserves. The printing of U.S. dollars would also be weighed against the value of gold.

The last time the gold standard was seriously considered was during President Ronald Reagan's administration. Reagan appointed a commission in 1981 to study the role of gold in the U.S. monetary system, but the group mostly came out against it -- except for two members, including now-Rep. Ron Paul, R-Texas, a champion of the Tea Party movement.

Despite continued calls by proponents like Paul to consider the gold standard, it had mostly stayed under the radar, until now.

The Tea Party's growing momentum and rising inflation is giving new life to the issue, as evident in Utah.

"We are just now starting to see some interest. These actions by state legislatures are mostly symbolic -- declaring that people can use a one-ounce federally-minted gold coin at its face value of $50 doesn't really give people a reason to do that. But it's a statement by the state legislators that they are concerned by the state of the dollar," said Lawrence H. White, a professor of economics at George Mason University who has published several reports on the topic.

State lawmakers are "concerned about the future of the dollar, worried that [worse] inflation is coming," White said. "People need to have an alternative if the dollar melts down."

Economists Pay Attention

With the exception of Paul, the system has few vocal supporters in Washington, D.C., but it is starting to get more attention from economists amid surging inflation in the United States and around the world.

In February, J.P. Morgan Chase announced it would allow its clients to use gold as collateral for some loans.

Kansas City Federal Reserve President Thomas Hoenig said in January the gold standard is "a very legitimate monetary system" that could provide a longer period of price stability. He said, though, that it wouldn't necessarily prevent a crisis or help boost employment.

Late last year, World Bank president Robert Zoellick said countries should consider "employing gold as an international reference point of market expectations about inflation, deflation and future currency values" to build a more cooperative, international system.

Proponents of the system argue that implementing a gold standard in the United States would lower the risk of the continuing fiscal crisis. The move by Utah, they say, sends a message to the federal government that states have more fear and little confidence in the U.S. monetary system.

"The reason it's more feasible now is that we are running out of answers to the monetary and financial chaos now. In 2008, when huge investment houses and banks started failing, people just couldn't get a loan, the whole system was paralyzed," said Jeff Bell, an adviser to Reagan in his 1976 and 1980 presidential campaigns, and now the policy director for the conservative group American Principles in Action.

Gold Coins as Currency?

The liquidity that the Federal Reserve created caused a bubble that "blew out millions of Americans' investment in their homes," he said. "The system is subject to these continuing crises now, and there's more and more inflation in the economy, so the time is right."

Opponents of the system, however, charge that switching to a gold system would expose countries to financial shocks, an argument that led to the abolition of the system during the Great Depression.

Others argue that switching to a gold standard would be costly for the U.S. government. They say it would be more effective if the Federal Reserve controlled the distribution of dollars instead, to rein in inflation.

No other countries in the world currently use the gold standard, which would also lessen the benefits for the United States and could end up reducing the dollar's value. Experts like White say European nations and Japan would also have to make the switch to make the system work better internationally.

It also limits the role of the central government in directing monetary policy, and would take away some powers from the Federal Reserve, though proponents argue that's the basic premise of the system.

But as the Tea Party, with its push to return to Constitutional values and cut spending, gains clout, and states consider bills like those in Utah, the issue is likely to once again find its way into the spotlight.

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