Reviving a Free Market Gold Standard

This is an article from the most recent The Gold Standard Journal. Subscribe for free on the Gold Standard Institute website.

I was born in 1971, three months after Richard Nixon used an executive order to abandon the gold standard for the US Dollar. For my entire life I have heard gold bugs and Austrian economists lament the demise of the gold standard and clamour for a return to it. The purpose of this article is to ask whether a new gold standard can be achieved through private action. I will refer to this goal as the “Free Gold Standard.”

Over many years of reading and thinking about this I have come to the conclusion that a governmentimposed gold standard run by a central bank is not likely to solve the money problem. Politicians and honest money are like (snake) oil and water – they don’t mix. The politicians and central bankers can be relied upon to debase the currency if they control it. No nation that has monopolized the creation of money has ever resisted this temptation for long. I expect the only way the world will ever see a true gold standard again is if it can be achieved through the free market without state intervention.

My gold bug friends used to hope for the US Government to return to the gold standard. Lately they’ve turned to the more realistic thought that the US Government is likely to go bankrupt. But that still doesn’t solve the problem. If we wait for governments to solve this problem, we shall wait until the end of time.

First Try: The e-gold Era

You may not be aware that we had a brief freemarket gold money system that arose on the Internet which lasted from 1996 until 2008. Led by egold.com, the “gold economy” of the Internet grew to the point that it was doing 80 metric tonnes per year of person to person gold transactions. At its peak there were seven digital gold issuers and an international network of exchange agents, and over two million account holders. Egold was the fastest and cheapest way to move money around the globe. The gold was changing hands at the rate of 78 turnovers per year.

The egold era came to a tragic end, however. From 2006 to 2009 agents from the US Treasury department indicted and closed down all of the digital gold companies based on American soil. Their crime was not having state issued money transmitter licenses as required by the USA PATRIOT Act. Some of them had applied for money service business licenses but were told in at least one case2 by state regulators that they did not qualify as money service businesses, because gold was not money. Likewise, egold petitioned the US Treasury to rule that egold was currency, but the Treasury ruled that it was not currency and then indicted them for not having a money transmitter license.

The EU’s Emoney Directive was at that time too restrictive and prevented the American digital gold system from simply being transplanted to Europe. With 80% of the market seized and frozen by Uncle Sam the digital gold movement simply died.

You may read more about that decade of digital gold and why it ultimately failed here: Why The First Round of Digital Gold Companies Failed to Achieve a Free Gold Standard.

Egold and friends collided headon with the evergrowing regulatory bureaucracy that grew out of the wars on drugs and terrorism. The digital gold companies were Internet startups, bootstrapped on an idea and founder’s life savings. The financial regulators did not have a category for these types of businesses (today Bitcoin is facing the same problem).

So government did what government does best it crushed the industry by prosecuting those involved for not having the right licenses.

While the digital gold movement ended tragically, we should take a moment to look at the remarkable accomplishment that egold and their competitors achieved together. They succeeded in getting a market of over a million people to use gold as money. That gold money was turning over so fast that the velocity was 78 times per year on a base of about 64,000 troy ounces of gold (roughly $25 million in 2002 dollars). They succeeded in building a gold money system with multiple institutions and agents around the world.

The most remarkable thing about egold and friends was that they defeated Gresham’s Law! More accurately, they showed that Gresham’s Law only applies under certain conditions. They proved that it is possible for gold to vibrantly circulate as private money in today’s economy.

Digital Gold 2.0

In the intervening years Bitcoin has stepped into the gap left by egold. However, I would argue that it does not serve the role of international electronic payments nearly as well as egold did. While technophiles may love Bitcoin, those of us who are true gold bugs know that in the long run it cannot replace gold as money. I would very much like to see the gold community raise up an answer to Bitcoin.

Given the decade of success of the first generation of digital gold, it should be possible to create a new Free Gold Standard if we take care to avoid the mistakes that were made by our predecessors.

I believe the following seven elements are needed (though not necessarily all at once) to create a new Free Gold Standard.

1. Jurisdiction

First, we must recognize that we need to be based in jurisdictions that do not penalize the use of gold as money. The users and customers can be anywhere in the world, but the financial institutions at the heart of a Free Gold Standard must be in friendly jurisdictions. This means we need countries that:

  • Have no VAT or sales tax on monetary gold.
  • Have no capital gains tax on monetary gold.
  • Have no law against free minting of gold specie.
  • Have no major conflicts of interest against gold as money (eg. the US Treasury)

These requirements rule out the USA, but a surprisingly large list of countries meet the first three conditions, including even the European Union.3 Our safest course would be to make our initial strongholds in a few jurisdictions that have a vested interest in the use of gold as money, along with strong rule of law, and enough muscle not to resist bullying by the antigold powers.4 Switzerland, Hong Kong, Singapore and Dubai are top jurisdictions that fit our requirements.

2. Primary Specie for Contracts

Second, we need a standardized specie for gold contracts that is small enough to be practical for daily transactions. There are many manufacturers of small bars and wafers. One in particular, Valaurum, has a highly promising product onetenth gram and onetwentieth gram gold wafers in the same size and flexibility as paper currency. However, Valaurum is expensive with a premium above 80%, and there are many manufacturers of 1 gram wafers that could be used instead.

3. Digital Gold Payments & Accounting

Third, we need a peer to peer (P2P) digital gold payments and accounting system5 that allows for multiple issuers of digital gold to clear payments between each other. We need a way for gold payments to clear between institutions in the same way that Alice can write a check from Bank of America and Bob can deposit it at Wells Fargo. Ideally this electronic payments software should work on smart phones. We would prefer to see a decentralized system with dozens and eventually hundreds of digital gold issuers who are compatible with each other. We don’t want a system with only one company that can be easily targeted and shut down, like egold was.

4. Agent Network

Fourth, we need an international network of exchange agents, who will trade digital gold for physical specie as well as fiat. These can be bullion dealers, pawn shops, remittance providers, grocers, forex bureaus, mobile money agents, and ATM machines. The agent network is the most important element to achieve mass adoption by the public.

5. Electronic Exchanges

Fifth, we need electronic exchanges to make the markets efficient and help us discover exchange rates. Gold is our currency, and we need efficient foreign exchange between gold and fiat currencies. Therefore we eventually need an electronic trading market.

6. Dispute Resolution System

Sixth, we need a way to rapidly and efficiently settle disputes across borders between users of our Free Gold Standard. Crime, fraud and disputes between users brought egold and friends to the attention of the jaundiced eye of the US authorities. It is essential to have a uniform “rule of law” that works worldwide for our members and users. For this reason, we need an arbitration forum and a contract that binds every member and user of our services to settle any disputes in our arbitration forum.

7. Regulatory Model

Lastly, but most importantly, we need regulatory model that fits into the existing legal environment

and doesn’t require governments to pass new laws or make new categories for us. I do not mean we need government to make rules for us (as that never helps). Viewing regulators as wellmeaning parasites, we need a roadmap for how to use currently regulated entities as issuers of digital gold money, in order to avoid running afoul of government laws and regulations, and to minimize the regulatory drain on our resources.
The regulatory model is the most important element to avoid a repeat of the egold fiasco. For this reason I will devote the next article to that issue.

Conclusion

The first generation of digital gold currency systems proved that Gresham’s Law can be overcome and there is a market for using gold money in today’s economy. That early gold system failed primarily for lack of a strong regulatory model and because they were domiciled in the USA. The USA, as the issuer of the global reserve currency (USD) has the greatest reason to fear and discourage the use of gold as money.

Unsurprisingly, the US Treasury acted in their own interest and carried out a jihad against digital gold on American soil ending the movement, for a time.
The time is ripe for a Free Gold Standard. I believe this can be achieved if we take care to avoid the mistakes of our forbearers. The Free Gold Standard requires seven elements:

  1. Friendly Jurisdictions(s)
  2. Standard Specie size for contracts
  3. Digital Gold Payments & Accounting System
  4. A network of exchange agents
  5. Electronic market(s)
  6. Efficient Dispute Resolution
  7. A strong regulatory model

If we who believe in the gold standard continue to wait for government to create it for us, it will never arrive. If we wait until the current global financial system fractures and collapses, we may find it too late, or we may find that IMF SDR’s become the new de facto world currency.

If we want to see a gold standard, ever, we need to do it ourselves. In this series of articles I endeavor to lay out a roadmap of how to get there.

 

About the author: Ken Griffith can be contacted at ken@dineroltd.com. Ken was editor of The Gold Economy Magazine, VP Marketing at e-Bullion.com, and later started web consulting company Cottage Networks, LLC to develop quality websites for small companies. Ken has served on the Dev Team at CMS Made Simple, and was a founding member of the International Association for Financial Cryptography in 1998. Ken’s current project is Dinero Limited, a social savings platform for smart phones that works with social savings groups to improve financial inclusion in Africa

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