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(This item originally appeared in Forbes.com on August 2, 2012.)
http://www.forbes.com/sites/nathanlewis/2012/08/02/to-achieve-a-successful-gold-standard-you-dont-need-gold-coins/#comments
When most people think of “gold-based currencies,” they think of gold coins.
But, actually, gold coins themselves are probably the least important part.
In fact, they aren’t necessary at all. From 1933 to 1971, the U.S. had a gold
standard system, with the dollar at the Bretton Woods parity of 1/35th oz. of
gold, but there were no gold coins in the currency system.
Just manufacturing gold coins doesn’t accomplish much. Gold coins are already
easy to acquire, from the U.S. Mint, or from foreign producers such as
Krugerrands, Canadian Maples, Chinese Pandas, and so forth. This is a good
start, but there needs to be two more steps: first, to introduce
small-denomination notes and coins; and second, to establish bank accounts
and other instruments based on the gold-based currency.
Some recent efforts, such as the gold dinar manufactured by the state of
Kelantan in Malaysia, have stalled because small denomination notes and coins
have not been introduced. Also, although the Kelantan government declared the
coins legal tender in 2010, the central Malaysian government has not yet
given them the status of legal currency.
A U.S. businessman, Bernard von NotHaus, established Liberty Services which,
in 1998, began issuing an alternative currency based on gold. Although
Liberty Services created gold and silver coins, a far more interesting
development was the issuance of small denomination paper banknotes. These
represented warehouse receipts for gold and silver bullion, held in a vault
in Idaho.
The system was problematic on many levels, including the fact that it was
bimetallic at a time when the value of silver and gold varied wildly.
Bimetallic systems became effectively impossible after the mid-1870s, when
silver, for the first time in centuries, began to vary substantially from the
15-16 ounces of silver per ounce of gold ratio that had held since the
founding of the United States.
Although many have fond feelings for the “silver dollar” – in fact, the
“dollar” was primarily conceived of as silver in the late 18thcentury, with
gold in a secondary role – the fact of the matter is, silver is no longer
usable as a basis for monetary systems today. You could still have silver
coins, but they would be in effect token coins, with a value higher than the
contained metal. Gold is the only remaining metal upon which a monetary
system could be based today, because it is the only metal with the
characteristic we seek above all else: stability of value.
By introducing included small-denomination notes, von NotHaus created a
system with enough utility to conceivably compete with and displace the
existing floating fiat dollar, in some situations. This apparently scared
someone in Washington, because von NotHaus was harshly persecuted by the
federal government. In 2009, he was arrested and charged with numerous crimes
related to counterfeiting, although the Liberty Dollar notes and coins bore
no resemblance to Federal Reserve Notes. In 2011, he was convicted on several
counts, faced up to 15 years of jail time, and was declared a domestic
terrorist by the FBI.
The fact that the FBI relied upon anti-counterfeiting laws to persecute von
NotHaus illustrates that there are, actually, few official legal barriers to
issuing your own currency. In practice, people can use currencies from
foreign governments quite comfortably within the United States. Businesses
near the Canadian border commonly accept Canadian dollars, and some stores in
New York apparently accept euros. Until the late 1930s, thousands of U.S.
private commercial banks issued their own currency, all of them based on gold
of course.
The next step, after creating small-denomination notes and coins, is to
establish banking functions denominated in the gold-based currency. This is
not hard to do. In principle it is no different than having banking functions
in euros or British pounds. Some reports from China indicate that major
state-owned Chinese banks have introduced gold- and silver- denominated bank
accounts. Thus, an account holder could pay another account holder using
today’s common banking tools, such as a debit card, check or clearinghouse
transfer, wire transfer, and so forth. This is a promising step, but a system
of small-denomination notes and coins has not yet appeared in China.
The electronic account system of GoldMoney was designed from the start to
serve as a payment system, denominated in grams of gold. This is functionally
not much different than the system used by Chinese banks (although the
GoldMoney system has strict 100% reserve coverage). GoldMoney is not easy to
use for U.S. citizens, due to various U.S. restrictions, but apparently it is
popular among many users from more lenient jurisdictions.
Thus, we have to give credit where it is due: to Bernard von NotHaus, for
introducing the first, and apparently only, gold-based system of
small-denomination paper banknotes since the end of the world gold standard
in 1971. He doesn’t seem to be well appreciated here in the U.S., but perhaps
those large Chinese banks will learn something from his accomplishment, and
implement it in China.
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