Federal Reserve Chairman Ben Bernanke may think he has everything under control, but the truth is the monetary ground is literally shifting beneath our feet.
That's why his loose monetary policy has some U.S. states looking to get into the gold coin business.
As I'll explain later, it's why my gold Double Eagles are becoming even more valuable.
Because while the U.S. Constitution bans states from printing their own paper money, it does allow states to make "gold and silver Coin a Tender in Payment of Debts."
Now, no fewer than 13 states are seeking approval from their state legislatures either to issue their own currency, or to explore it as an option as the Fed's printing presses spin out of control.
So why is there this big rush by states to move into gold as an alternative currency?
It's simple really.
The Trouble with Fiat Money
Fiat money, created by central banks, possesses no intrinsic value. Paper money only works as long as governments don't create too much of it.
For pieces of paper to have value, we all have to believe there won't be too many of them and that the authority creating them has the preservation of their value as its top priority.
When that confidence vanishes, the fiat currency returns to being just paper—as it did famously in Weimar Germany in 1923. Or even more catastrophically in post-war Hungary, where the last stable symbol of value, the 1931 gold pengo, became worth 1.5 octillion 1946 paper pengos.
Of course, central banks do occasionally compete for foreign depositors by offering paper currencies with more stability.
In fact, before 2000, the U.S. dollar benefited from these flows that came from all over the world, including Europe.
Now, apart from the eccentrics who swear by the Japanese yen or the Chinese yuan, flight capital is largely confined to the Swiss franc.
Since Switzerland is a small economy, the Swiss National Bank has drawn a hard line. It refuses to allow the franc to rise above 1.20 against the euro, so even that refuge has been made less attractive.
The Attractiveness of Gold
As you would expect, the private sector and some governments have begun to look further afield, and are beginning to focus on gold in particular.
Gold is attractive because it has historically been the premier unit of money. Therefore, gold combines the support from all the possible alternatives to fiat currencies.
Recently, Iran and China signed an oil deal, breaking U.S./EU sanctions, which allows China to pay in gold. As you know, China has secretly been accumulating gold reserves for the last couple of years.
It's now likely that more private companies will begin invoicing each other in gold, as individual currencies become less attractive owing to over-production by central banks.
Since Bernanke has committed to keeping U.S. interest rates at ultralow levels until late 2014, it's likely that inflation will accelerate, both here and around the world.
In turn, increasing amounts of trade and investment transactions will be done via payments in gold.
In the long run, that could lead to an unofficial but universal gold standard, with a huge proportion of the world's larger transactions being carried out in gold, and paper currencies reserved only for the small fry and the unsophisticated.
Central banks and governments will resist this strongly because it would deprive them of the very profitable "seigniorage" from issuing currencies.
However, if gold usage develops far enough, they may find they no longer have control of the world's monetary system.
The Advantages of Gold Double Eagles
The states recognize this and are moving towards the shiny metal themselves.
So far, Utah has led the way, not by issuing its own currency, but by allowing gold and silver coins issued by the U.S. Mint to be used as payment in Utah transactions.
In this case, the value of the coins is determined by the current price of gold, not by the face value of the coin itself.
That's important because the gold Double Eagle, minted from 1850 to 1933, has a face value of $20, but—containing 0.9675 ounces of gold—has a current value of $1,650. Since 1986, the U.S. Mint has issued bullion Gold Eagles, the largest denomination being $50 and containing 1 ounce of gold—making the coin worth about $1,700 today.
So check local regulations, but in states such as Utah where gold payment is recognized, take along some gold eagles if you have any substantial business to transact.
You'll find an increasing enthusiasm for your real money!
Martin Hutchinson, Money Morning