States Try To Ditch The Fed With Silver and Gold

You don't have to sift through business and economic headlines to see strong reactions to the Federal Reserve's quantitative easing.

On one side, you have companies, banks and equity traders that are hooked on the easy money. On the other, you have strong apprehension regarding the massive monetary base increase and inflation fears:

FRED USD Adj Monetary Base

With the current stance of the Fed, QE supporters don't have much to worry about these days. Announcements from the Fed hardly even show up on Wall St.'s collective radar anymore because Bernanke repeatedly reinforces that interest rates will essentially be nonexistant for at least another year, if not more.

For people concerned about QE it is the exact opposite. There is plenty to worry about but little that can be done about it.

Well Intentioned, but Half Baked

One compelling idea has been popping up recently though that may put a twist on the entire situation. Lawmakers in more than a dozen states are pushing bills that will allow gold and silver bullion to be used as legal tender within their borders.

The U.S. Constitution explicitly bars states from issuing paper money. However, it allows states to create gold and silver coin tender for paying debts. That opens the door for the states to use bullion as legal tender within their borders.

Unfortunately, no one seems to have figured out exactly how it will work...

Utah passed a law allowing gold and silver to be used as legal tender in March of 2011. However, it is basically unused and was not well-constructed. In an particularly embarassing moment, the State government had to reject a man's attempt to pay his taxes with silver.

Utah's State Treasurer pointed out that any attempt to follow the law regarding bullion as legal tender could potentially violate another state law that prohibits agencies from holding precious metals as assets because of the volatility of the commodity.

A task force is looking into how to implement the law. At least Utah's law eliminated state capital gains or other taxes on the coins for now.

More on the Horizon

The troubles of their compatriots to the north hasn't slowed the progress of a similar law in Arizona. A bill authorizing gold and silver coins as legal tender just passed the state's House Rules Committee 7 to 2 last week.

Similar laws have been proposed in Kansas, South Carolina, Missouri, Montana, Colorado, Idaho, Indiana, New Hampshire, Georgia, Washington, Minnesota, Tennessee, and Virginia. They vary in small ways, such as if foreign minted coins will be acceptable, but all of the bills focus on accepting gold and silver payments.

Other efforts to promote gold and silver on the state level shouldn't be ignored either. Texas has proposed pulling its gold back from the Fed and setting up a state-backed depository that will be accept deposits from its citizens.

Time will tell how successful these measures will be. There is a lot more to implementing gold and silver as legal tender than passing a law, but the pressure will stay on as long as the Fed is willing to continue pushing the money supply into the stratosphere.

The laws and measures give“people the option of using money that won’t lose any purchasing power to inflation,” said Rich Danker, economics director at the American Principles Project. “People in these states find the idea of having the option to use hard currencies appealing over these policies they have no control over.”