This has been a great year for lovers of gold-based money. As part of their move away from the fiat dollar-based international financial system, Russia has reportedly introduced widespread “gold-based checking accounts” at major commercial banks — a simple and effective form of “digital gold” — while the the government of India has started issuing government bonds backed by gold. International megabank HSBC
HBA
A gold leaf from Russia.
Following their lead Utah Legal Tender Act of 2011already 43 USA have adopted legislation simplifying the use of gold and silver coins as money. This comes directly from Article I, Section 10 of the Constitution, which states: “No State shall make anything but gold and silver coin in tender for the payment of debts.” Mainly, in practice, this meant abolishing taxes on gold transactions at the state level, including sales taxes or capital gains taxes. Since federal taxes remain, it has not led to revolutionary changes.
However, some recent efforts go beyond this. Citizens for Sound Money has developed a legislative platform that creates state repositories of precious metals (as Texas has already done), and even goes so far as to create the basis for new coins issued by the state — mostly on digital platforms, but nevertheless linked to gold coin as an underlying asset.
These are all hopeful developments and play into the “feeling our way in the dark” pattern now occurring worldwide as people come to terms with a new international monetary system based on gold.
My take on these recent developments is this: governments really aren’t very good at “asset-backed digital currencies”. This is a lot more complicated than it sounds, as evidenced by the fact that there isn’t a very good platform yet. (Coro Global was the best, in my opinion, but ran into problems and had to shut down.) There are levels of security, processing speed, reliability, and even customer service that all need to be perfected. Basically, it should be usable and also not hackable. I don’t think governments can do that. In the past, it was always managed by the private market, specifically commercial banks. Even the Federal Reserve Bank started out as basically a system between private commercial banks, and still mostly is today.
I think there might be a role for government stockists. You will need to trust someone to store gold and this will either be a public or private entity. There are reasons for mistrust, so unfortunately there is no perfect solution. But a government solution, in a certain time and place, can be very good. Also, it is a very simple business of the kind that government can actually do. Government repositories may serve as a vault for digital systems managed primarily by the private market.
A “digital gold” platform would basically be Venmo, or China’s Alipay, but transactions could be in grams and milligrams of gold. However, this could co-exist alongside an efficient gold coin system, which would provide a real-world analogue just as banknotes and coins provide a real-world analogue for our mostly digital dollar payments today.
The problem with gold coins, historically, is the “denomination problem”. Gold is great for large transactions (light and compact), but too valuable for small transactions. This created the need for smaller silver or copper coins. “Bimetallic” gold and silver coinage systems together are not really possible since silver became much more volatile in the 1870s.
For example, about the smallest functional gold coin in history was about 4 grams. This is quite small. Today, it would be worth about $250, which is a lot for the lowest value coin in a currency system.
But we have new technologies today that can solve many of these issues. The first is a plastic casing. Coin wear and “intentional wear” such as clipping was a big problem in the past. The coins would not have the metals of their face value. This can be avoided by putting them in plastic cases. Already it US Mint’s 1 oz. Buffalo gold coin comes in a clear plastic case. This eliminates all wear problems. Counterfeits today are easily detected using cheap “gold guns’ using non-invasive XRF technology.
I suggest a 10 gram gold coin encased in plastic, which would be worth about $650, and it’s actually not far off the size of original British gold sovereign (a one pound coin). Then you can add a 1 gram “coin” with a plastic case (Worth about $65.) In the past, this was very small, but today it is easy to do. Then you can add a 100 milligram “gold leaf note” which actually has 100 mg of gold infused into the plastic. That would be it worth about $6.50 and are available from Valarum and others. You could make even smaller notes out of gold foil, but common coins may be the best solution for denominations around 10mg ($0.65) or less. (The original US penny was actually worth more than that.)
I have heard from friends in Russia that these “gold foil notes” are now being issued by the Central Bank of Russia, as well as the Central Bank of Uzbekistan.
With all the talk of “central bank digital currencies,” many people are looking for alternatives in the physical world. Of course, in this “cashless society” scenario, dollar bills will not be a safe haven. States are also prohibited from minting their own coins, according to the Constitution. However, a tradable physical currency could be part of states’ path towards an alternative to the tyranny of the fiat dollar or CBDC.
