A Gold Currency for North Carolina?

In a recent N&O article (found here), it is reported that a state legislator, Glen Bradley-R Youngsville, has introduced a bill to create a State currency backed by gold and silver.  The reporter is perplexed by such an odd bill, and he basically ridicules the sponsor.  In the article, he talked to an economist at the State University, the Democratic State Treasurer and a Democratic State Legislator.  (I guess that's "Fair and Balanced.")

While I know that this bill is going nowhere today, it is worth thinking about.  What would happen if a state decided to go on the gold standard without the rest of the nation?  (I know that the bill says gold and silver, but bimetalism is a whole different set of problems, so let's just focus on the gold standard.)

The advantages of a gold standard, at least nationally, is that it forces the government to live within its means and is a brake on hyperinflation.  Additionally, it reduces the ability of the Federal Government to grow the Welfare/Warfare state.  While it might not eliminate the business cycle, it does help reduce the artificial bubble (boom) the preceeds the painful, but necessary, liquidation process.

Why should a State like North Carolina consider it?  The benefit of owning a currency that is not depreciating is obvious to the guy who has the gold coins in his pocket.  In fact, I'd rather be paid in such a currency.  Furthermore, the adoption of a sound currency would mean a big positive jump in investment into the NC economy.  If the people of the state adopt the gold currency, then it would attract businesses the world over who are afraid of doing business in a coming hyperinflation.  (While those in power cannot forsee a collapse of the US dollar, does not mean that such a thing is all that far off.  I doubt the Germans in 1922 forsaw the inflation awaiting them in the next year.)  And finally, since the State already has a balanced budget rule, the impact on the budgetary process would be small. 

The problem of going it alone, when we have legal tender issues, is that of Gresham's Law.  The law says that with legal tender laws, bad money drives out good money.  (It also says, but is less commonly known, that good money drives out bad money in a competitive market.)

So, unfortunately, Gresham's Law will fully apply to North Carolina.  Why?  Suppose that Bradley is correct on the dollar's purchasing power falling through the floor.  Now to pay my taxes I have the choice of choosing between using a state gold coin or a depreciated dollar.  I will always choose to pay in the least valuable currency.  So I will hoard the state gold coins and spend the increasingly devalued fiat dollars. 

Unless...

The only way that the Gresham's Law will work to the advantage of the state gold coins is if it is allowed to compete with the US paper dollar.  If the paper dollar and state gold coins value are fixed, then the paper money will drive out the gold.  However, if value of the state gold coin was allowed to float against the paper dollar, then it would, indeed, drive out the use of the paper money.  Not entirely, of course, but to the extent that residents of North Carolina can demand payment in gold coins, it would. 

And that is the catch.  The paper dollar says that it is good for all debts public and private.  So that means you have to accept it.  If the buyer can force the seller to accept the paper, then there is no chance of its success.