May 17, 2011 -- In a move that reflects growing anxiety over rising inflation and a weak economy, South Carolina became the newest state to propose a bill that would make gold and silver coins a form of legal tender in the state.
Utah started the trend, becoming the first state on May 9 to recognize gold and silver coins minted by the U.S. government as legal tender. More than a dozen other states are considering similar moves.
"A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills," Forbes said in a recent interview with conservative web site Human Events. "What seems astonishing today could become conventional wisdom in a short period of time."
Some conservative economists, as reported by the Washington Post, suggest that the United States sell its gold reserve at Fort Knox to pay off its hefty debt.
Gold is increasingly coming into the limelight because of fears about inflation ballooning to unsustainable levels and the lack of confidence in the Federal Reserve, a position pushed by high-profile lawmakers such as presidential candidate Rep. Ron Paul, R-Texas, considered by many to be the father of the Tea Party movement. Some argue that reverting to a gold standard would restrain spending and keep the central bank's power in check.
What's surprising, experts say, is that the momentum is building at the state level, not the national level, which can in part be attributed to the 2010 midterm election that turned many state legislatures red.
Resurrecting the gold standard is an issue that's close to the heart of many Tea Party groups, which played a crucial role in bringing Republicans to power, both at the state and federal level.
"I think they're sending a message that reflects the opinion of the people that elected them," said Gerald P. O'Driscoll Jr., a former vice president of the Federal Reserve Bank in Dallas and a senior fellow at the Cato Institute. "By doing it at the state level, it's kind of trying to push, force the federal government to pay attention to this. Let's call it a symbolic act of sending a message."
But it also creates problems, because monetary policy is the realm of the federal government, not the state. Nevertheless, proponents of the policy say this is a result of a lack of action from Washington and rising worry over the devaluation of the dollar.
"With the federal government clearly abdicating its responsibility to regulate the value of money, states across the country are moving to exercise this constitutional power," said American Principles in Action, a conservative group that is pushing for a gold standard, in a statement.
Economist Peter Morici, a professor at the University of Maryland, argued that as international investors look toward the Chinese yuan or Indian rupee, the dollar will lose its value, hence signaling a natural shift toward gold.
"If private investors continue to doubt the dollar and bet on gold, central banks will be forced into gold. Investors won't trust currencies backed by dollars, and central banks would be just as foolish as private investors to trust yuan denominated bonds," wrote Morici, a former director at the International Trade Commission. "Unless the United States gets its economic house in order, gold will become money again, and national currencies will only be money if backed by gold."
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 altogether in 1971.
The last time the gold standard was seriously considered was during President Reagan's administration, when economists raised alarm bells over rising inflation.
President Reagan Raised Role of Gold
But economic uncertainty has once again resurrected the topic.
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.
In the United States, economists have been sounding a similar message but in reality, such a move is unlikely to take shape soon.
"There's a growing realization that the system does not work. The rest of the world is increasingly angry, upset at that policy because it has huge effects in other countries, mostly in the developing world," O'Driscoll said. "Both domestically and internationally, there's a sense there is a need for a new monetary system, but I don't think there has been any consensus or coalescing on a particular idea, including gold."