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What Happens When States Use Precious Metals as Legal Tender

Legal tender is a form of payment that meets a financial obligation, such as extinguishing a debt, and the medium is recognized by a legal system. In many countries, legal tender is paper currency and coins.

In the United States as a whole, legal tender includes various denominations of paper dollar bills and coins, giving the Federal Reserve a monopoly on the American money it prints. In Forbes, Nathan Lewis writes that the present legal tender law, Section 5103 of title 31 of the United States code, “does not ban people from using other forms of currency. It simply defines what a “dollar” is, in a contract or obligation that is denominated in dollars. You could make a contract denominated in Bitcoin, if you want to. You could make a contract denominated in euros. You could even make a contract defined in “gold dollars”, or something of that sort.”

During the recession, some states began to distrust this control over currency and inflation and began to act on the U.S. Constitution Article 1, Section 10 that says, “No State shall ... make anything but gold and silver coin a tender in payment in debts.” Utah passed a law in 2011 to make gold and silver coins legal tender in Utah, the first state to do so in over 80 years. Arizona is another state with a legal tender law passed. Other states with legislation in the works include Texas, Idaho, Wyoming, and more. The wild west seems ready to return to its gold rush roots.

Free From Taxation

Many of the legal tender laws in states remove the capital gains tax on precious metals, because currency is not taxed. Investments are always taxed somehow, but if precious metals are considered money and not investments, taxation would be unjust.

Face value vs market value of coins

Back in 2012, CNNMoney wrote the problem of the face value of U.S. minted coins valued at a lot less than the market value of the metal, such as a $50 one-ounce gold coin worth $50 face value, but one ounce of gold is currently worth around $1,300. The new laws account for this problem and allow an exchange of the coins for market value based on weight. One other concern is that the average person may not want to walk around with a $1,300 gold coin in their pocket, and most stores may not have scales to weigh and inspect the gold to calculate the value. Therefore, states may create electronic depositories to make transactions easier - but that may bring about the safe haven security concerns of electronic money in banks vs. physical gold in hand.

Effect on the Dollar and the Country

The CNNMoney article also mentioned that state-issued currencies would create in essence 50 Federal Reserves (one for each state) having  a negative effect on the dollar possibly leading the country into default. This seems like a drastic view, far into the future. Who knows what will happen in the meantime?


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