This document summarizes the editorial of issue #43 of The Gold Standard, the journal of The Gold Standard Institute. The editorial argues that advocates of central banking and fiat currency rely on force rather than economic arguments, and that this use of force is their Achilles heel. It claims they must justify both the theory of central banking and the use of force against people who do not want to participate. The editorial says we should confront opponents' economic errors but also emphasize their need to force participation, which shows fiat currency is not truly superior if it requires compulsion.
This document summarizes the editorial of issue #43 of The Gold Standard, the journal of The Gold Standard Institute. The editorial argues that advocates of central banking and fiat currency rely on force rather than economic arguments, and that this use of force is their Achilles heel. It claims they must justify both the theory of central banking and the use of force against people who do not want to participate. The editorial says we should confront opponents' economic errors but also emphasize their need to force participation, which shows fiat currency is not truly superior if it requires compulsion.
This document summarizes the editorial of issue #43 of The Gold Standard, the journal of The Gold Standard Institute. The editorial argues that advocates of central banking and fiat currency rely on force rather than economic arguments, and that this use of force is their Achilles heel. It claims they must justify both the theory of central banking and the use of force against people who do not want to participate. The editorial says we should confront opponents' economic errors but also emphasize their need to force participation, which shows fiat currency is not truly superior if it requires compulsion.
The Gold Standard The journal of The Gold Standard Institute
Editor Philip Barton Regular contributors Rudy Fritsch Keith Weiner Sebastian Younan Occasional contributors Thomas Bachheimer Ronald Stoeferle Publius John Butler Charles Vollum
The Gold Standard Institute
The purpose of the Institute is to promote an unadulterated Gold Standard
www.goldstandardinstitute.net
President Philip Barton President Europe Thomas Bachheimer President USA Keith Weiner President Australia Sebastian Younan Editor-in-Chief Rudy Fritsch
Membership Levels
Annual Member US$100 per year Lifetime Member US$3,500 Gold Member US$15,000 Gold Knight US$350,000 Annual Corporate Member US$2,000 Contents Editorial ........................................................................... 1 News ................................................................................. 2 Part II: A Regulatory Model for a Free Gold Standard ........................................................................... 2 A Drawing-Board Currency as Ersatz Constitution . 5 Comments on a Free Gold Standard .......................... 6
Editorial Fans of Central Banking Have an Achilles Heel Most of my writing about the gold standard is about how it works, and how the paper dollar standard doesnt. A casual conversation I had with someone recently underscored that there is an even stronger argument. Our opponents, those who support central banking and irredeemable paper money, have to make two cases. One is to defend the theory and practice of central banking, that central bankers are wise and honest and that their debt-based paper money works. They have to argue that the dollar does everything you want money to do, such as hold its value, enable proper accounting, encourage savings, support a stable economy, etc. Well, they can go through the motions and fool the ignorant. The other is that they have to defend the use of force against innocent people. Central planners constantly run into the problem that people are not willing cogs. We dont want to be jammed into the machine where directed. The central planners never have our best interest at heart. Quite the contrary, they seek to sacrifice our property, liberty, goals, and well-being. Supposedly it serves some sort of public good, though its never the good of any particular member of the public. Anyways, no one ever goes along voluntarily. Central planners have to pass laws, in order to do whatever good to us that they feel needs doing. Safely backed by the law, they need not worry about our petty little concerns. They can force the unwilling to obey, under threat of loss of property, liberty, and ultimately life. If you dont agree with this, think about what will happen if you refuse to pay your taxes. It may take a few years, but sooner or later, armed agents of the government will come to arrest you. If you dont want to be arrested, they will force you into handcuffs. If you are able to fight that off, at some point they will shoot you dead. The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 2
In the case of irredeemable paper money, there are several ways that the government forces people to use it. One is the capital gains tax on gold. Another is the legal tender law. There are others. The economic arguments for irredeemable paper and central banking are fallacious and often frivolous. We can and should confront every falsehood, every logical error, every misrepresentation of the gold standard and its defenders. We must also make the affirmative case for the benefits of the unadulterated gold standard. However, we have one more weapon. It demands to be used, when the context is appropriate. Our adversaries are confessing to the very failures of their system. If paper scrip were truly superior to gold, people wouldnt need to be forced to use it. When a bully cant prevail in an argument using reason, he becomes violent. Our monetary opponents are bullies. They resort to force, which is their moral failing. This is their Achilles heel, and its even more important than their economic errors. At best, central bank advocates are Machiavellians, seeking to use people as a means to their own ends. At worst, they are little Hitlers and Stalins, rationalizing their actions with the tired clich you have to break a few eggs to make an omelette. We need to strip their veneer of respectability. Many people will get that, even if they dont understand monetary economics. Keith Weiner News Forbes: Your personal debt is not entirely your fault.
Mining.com: Donald Duck Gold coins sell out in 10 minutes. Scrooge McDuck the heroic accumulator would have been more appropriate.
Forbes: America needs the Gold standard more than ever. Keith Weiner on Financial Sense.
RT.com: The Americans are taking good care of our gold, we have no reasons for mistrust, Nobert Barthle, the German Parliament Budget spokesman, told RT
Business Standard: $15b of Chinese loans backed by Gold that does not exist
Digital Journal: Gold at the turn of a tap in Montana
Mineweb: Malis first Gold refinery (first since Mansa Musa)
Bullion Street: Deutsche Bank opens 1500 tons Gold vault in London Part II: A Regulatory Model for a Free Gold Standard The primary pitfall that led to the demise of the first generation of digital gold currency was the lack of a regulatory model. Most of the early digital gold companies incorporated as regular companies without obtaining special licenses for financial services. After they grew large enough to warrant government attention, they found it difficult to obtain financial services licenses, and most of them were prosecuted and shut down. Most governments did not have license categories for fully reserved digital payment systems in the late 1990s, so those companies that applied for licenses were in most cases denied them. The Regulatory Problem For the Free Gold Standard vision set forth in Part I, we need a digital gold transaction system as well as one or more financial exchanges to efficiently trade our gold issuance against foreign currency. Those The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 3
roles fit the definition of regulated financial institutions. Instead of asking governments to create new regulations or categories for digital gold systems, lets look at the existing landscape of regulated institutions. Most countries have a pyramid of financial institutions with a central bank at the apex: Central Bank Capital Markets (stocks, commodities, bullion & forex exchanges) Commercial Banks, Savings & Loans E-money Issuers Non-bank Financial Institution(s) Money Service Businesses & Agent Networks (eg. Western Union) Stock Brokers Forex Bureaus Credit Unions Cooperative Societies (Secondary) Cooperative Self Help Groups (SHGs) These financial institutions often fall under different regulatory agencies, and in some cases multiple agencies. Pathways to Licensed Digital Gold Business 1. Set up a Bank The safest way to set up a digital gold currency system from a regulatory perspective is to simply buy a regular banking license and set up a gold bank. However, this is also the most expensive and highly regulated option. 2. E-Money License The European Union has an E-money Directive 1
that allows for e-money licenses for non-bank financial institutions. An e-money license costs almost the same as a banking license, and is more limited in scope. There are limits on total transaction size and volume per account, which may be detrimental to our goals.
3. Money Service Business Some countries may allow digital gold companies to be licensed as Money Service Businesses; however that is far from certain. Money services regulations were designed around remittance services, and bureaucrats may not easily accept the idea of gold money remittances. 4. Credit Union A credit union is a special kind of cooperative society, which hold interesting possibilities. A cooperative society is a special kind of corporation where each shareholder only has only one vote, no matter how many shares they hold. Cooperatives are for-profit entities that in most cases pay dividends to the shareholders. A credit union is a special kind of bank that is organized as a cooperative society and serves a limited field of membership - often the members of a cooperative society, or employees of a certain company, or an association of people holding a common interest. In many countries credit unions have lower capital requirements and regulatory costs than banks. Credit unions grew out of the Great Depression and have historically been seen as ways for communities to organize and help themselves for savings, checking and getting loans. Consequently, credit unions often enjoy a kind of sacred political status and reduced regulatory burden. In some jurisdictions, such as Hong Kong, credit unions have explicit authority to trade in bills of exchange. 2 Credit unions may also issue debit cards, which means they have access to the global ATM/debit network. Access to the ATM network will be important for our goals. 5. General Cooperative Society A general cooperative society, or self help group, can offer savings and investment services to its members. Whereas a credit union offers checking accounts (front office services) to members, a
2 Bills of exchange are critical to enable supply chains to perform invoicing and accounting in gold. The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 4
cooperative society is limited to back end services, meaning savings, securities and lending, but not checking (demand deposits). Obviously, this may vary from one country to another. Cooperatives may issue and trade their own shares, as well as internal investment funds, amongst their members. In most countries cooperatives fall under a different regulatory agency than banks or capital markets. Given the significant freedom and power that cooperatives have to offer financial services to members, this can be a safe regulatory cocoon in which to nurture the Free Gold Standard until we have grown large enough to apply for public banking and capital exchange licenses. Cooperative societies also have another special advantage - they can form branches or chapters even in other countries. A branch is considered to be a cooperative society itself, as well as being a regulated institution. This means that the headquarters chapter may legally rely upon the assurances of other chapters with regard to the identity of their members. This could prove to be quite helpful with regard to Know Your Customer (KYC) requirements, because it would enable foreign members of the Society to open a financial account with our digital gold issuer without having to appear in person in that country. A cooperative society coupled with a credit union hits the sweet spot for our needs: Cooperatives can have a global field of membership with local chapters. A cooperative chapter can be relied upon as a regulated institution for KYC. Cooperatives can issue and trade internal securities (ie, private equity) A credit union has all the powers of a bank for money transfers. Credit unions may gain access to the global ATM networks. Credit unions may support a market in foreign exchange.
A Long-Term Strategy As a community of outsiders trying to bootstrap a Free Gold Standard in a world of fiat money, we need to use our capital wisely. We need time and freedom to build and test our systems, make our mistakes and correct them, before we reach for a more public market. Creating a cooperative society, The Gold Standard Society, coupled with a credit union that serves the members of that Society, I believe that we can achieve the regulatory model that we need to operate at low cost without running afoul of government authorities. The credit union can act as the first digital gold issuer, if need be, as well as host the first digital gold forex exchange - giving us breathing room to grow our user base as well as our technology and market. The Society may establish procedures for identity verification so that the credit union may rely upon the assurance of a local chapter that Bob is really Bob - and still satisfy the regulator. Once the Society has all of its systems working smoothly, we can apply for banking, securities and forex exchange licenses in the countries where that makes the most sense. As we grow, banks, credit unions and other financial institutions may join the Society as digital gold issuers. This seems to me to be the least expensive and lowest risk regulatory path to creating the Free Gold Standard and Digital Gold 2.0. My company, Dinero Limited, has created a pilot institution in Kenya as a cooperative society that issues gold accounts to its members and uses our software to do it. We met with the central bank there and they affirmed that so long as the cooperative only offers accounts to members, it is minimally regulated. We have not yet created a credit union, but we have demonstrated that this approach can be effective. 3
3 Due to high corruption and weak rule of law, Kenya is not a suitable jurisdiction to act as a base for a worldwide society, which is why we are looking at other jurisdictions for the Gold Standard Society. The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 5
Conclusions Lack of a viable regulatory model and domiciling in a hostile jurisdiction were the primary causes of the demise of the first generation of peer to peer, digital gold currency systems. There are multiple regulatory pathways to create an institution that has the power to issue peer to peer, digital gold accounts. Of those pathways, a bank, a credit union, and a savings cooperative are the three institutions that offer the most regulatory protection and would still leave us the freedom to pursue our business model and goals. The combination of a cooperative society with a credit union seems likely to offer the greatest benefit to us at the lowest cost. The primary mission of the Gold Standard Society will be to create a contractual framework to allow many digital gold issuers to be interoperable. The special powers of cooperative societies and credit unions will enable the Society to set up the first digital gold issuer, as well as a digital bullion market. Ken Griffith 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. A Drawing-Board Currency as Ersatz Constitution Twelve years have passed since politicians introduced the artificial currency euro to half of Europe without bothering to ask the electorate. These were turbulent times indeed: the new money had to be rescued several times, no other currency before has faced such massive criticism. The amount of propaganda on behalf of the euro is unprecedented in history, and the public debate continues still. Why this should be the case will be discussed in this article. The Inception Right from the beginning, this drawing-board currency was different from its predecessors. In the past, all participants in the marketplace introduced money from the bottom-up. Usually, it emerged victorious from a variety of competing alternatives and was subsequently officially endorsed by the political elites of the day. In stark contrast, the euro was construed by politics and introduced in a top-down manner. On January 1, 2002 after a rather short planning and preparation phase (given the complexity of the project) humankinds biggest currency experiment began. Never before was a currency introduced: across such diverse countries and regions, with such varied cultures and ways of life, with such different economic systems, and at such different stages in their economic cycle. Why the haste, one might ask. After all, it was commonly known that the different countries had not converged economically or culturally to an extent that would have made such a monetary union feasible. The mindboggling haste was due to the fact that EU did not manage to agree on a constitution. Without a constitution, though, the conglomerate would have become an ever closer union at a much slower pace, if at all. Uniting Peoples and Cultures in Four Steps The failure to create a constitution is not due to administrative incompetence but rather to the very nature of the problem. Historically, societies have united in a set sequence of steps. The process takes several centuries and includes the following phases:
The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 6
1. Trade It all starts with an interest in other peoples goods. Merchant routes and market places are established to facilitate trade. 2. Foreign trade and military alliances Military forces safeguard these trading routes. Military alliances are founded to secure peace. 3. Language, cultural exchange Travelling merchants bring back home knowledge of different customs, languages, cuisine and cultures; these are partially adopted by the people at home. The exchange of cultures and habits as a major foundation of unity has begun. 4. Sense of justice/legal system At the very last moment, societies begin to adopt or even unify legal habits. The legal system (which in essence is a codification of prevailing moral standards) is vital to the identity of individuals therefore, they are loath to change it. With this historical background in mind, it is obvious that people could not follow politicians visions with their hearts and minds. Despite their pretty names, the constitution substitutes (Maastricht and Lisbon treaties) are of only limited use. Without a proper constitution, the vision of a unified Europe was doomed to fail. Haste then created the monster called the euro, which was supposed to be a medium for European integration and cohesion. Function Shift In order to make a political vision come true, legal procedures were circumvented in a nimble way. An ersatz medium in the shape of a currency was created and we cannot even picture where this will all end. The consequences of the shift from moneys original function as a medium of exchange and store of value towards constitution substitute can be already felt everywhere. While money (just about!) still works as a medium of exchange, it cannot fulfil its role as a store of value any more. The massive loss of purchasing power people suffered since the euro introduction was unimaginable in times of national currencies. One might even suspect that this effect was not altogether unintentional but rather part of the creeping monetary dispossession of the people of Europe. Thomas Bachheimer President of the Gold Standard Institute Europe Comments on a Free Gold Standard Last month Ken Griffith discussed the seven elements needed for a new Free Gold Standard, a Digital Gold 2.0. The early digital gold system Ken discussed was of particular interest to me at the time because of its possible strategic implications for the Perth Mint. As a result, I recorded their weekly reported balances for many years to understand how this new market was developing. The chart below shows these early years, 4 with GoldMoney surviving while the others closed. Understanding why is crucial to a successful Digital Gold 2.0.
Based on my experience watching Digital Gold 1.0 form, and providing one of them custodial services for a period, below are some comments on Kens seven elements in the spirit of constructive criticism. 1. Jurisdiction I agree with Ken that a friendly jurisdiction is necessary for a successful Digital Gold 2.0 ecosystem to develop. However, the location of the system is not as important as the location of the users.
4 Gaps occur where figures were not available; e-Bullion stopped reporting its balances in early 2005 but the business continued. The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 7
A capital gains tax on gold in the jurisdiction of the user is a huge impediment to people in that country using gold as money. As the value of fiat currencies fluctuates around gold it creates gains and losses that have to be accounted for (software can help with this burden) and paid, something that does not apply to the local currency. While I would not argue that a capital gains tax is so fatal to a Free Gold Standard that no one should spend time developing the systems and institutions for it, I would argue that the prime objective of organisations such as the Gold Standard Institute and those involved in digital gold systems should be the repeal of capital gains taxes on gold in all jurisdictions. As a side note, I would argue that any person or organisation that does not advocate for the abolishment of such taxes would reveal themselves as an advocate of a statist Gold Standard rather than a Free Gold Standard. 2. Primary Specie for Contracts I disagree with Kens recommendation that we need a standardized specie for gold contracts that is small enough to be practical for daily transactions. In his article on digital gold 1.0, Ken states that it was a flaw that these systems used the spot price of 400 oz gold bars on the London market, and their contracts were deliverable at that spot price. To cause physical gold to circulate the digital gold must be contractually deliverable in the smallest specie, not the the largest one. These days the public is increasingly moving to digital payments and away from physical cash, as noted at a recent Mint Director's Conference. Therefore I do not see that there will be much demand for physical gold to circulate: why should one need to cause it to circulate if the public does not demand it? If the gold backing digital gold systems is likely to sit still in a vault and rarely circulate physically, then the objective should be to minimize the cost of acquiring such gold. Mandating the use of 1 gram bars or a similar small size will add an excessive premium to the gold money unit, a cost which paper currency does not have. To obtain as wide an adoption as possible, one needs to reduce friction costs between the digital gold system and fiat currencies (which people will have to move between for some time). If people will lose a significant percentage of their wealth converting into and out of digital gold because it has to be backed by small forms of gold it will prevent adoption. The lowest cost form of gold is the internationally accepted 400oz bar. Unlike small bars, the 400oz bar is numbered, which will facilitate auditing and transparency. It is a lot less costly to audit one 400oz bar than 12,441 one gram bars. In addition, the 400oz bar has the greatest trading liquidity, ensuring that a digital gold system is connected into the wider gold market in the most efficient manner possible. A digital gold system will face a fluctuating demand for its money, as fiat currencies do. When there is a surge in demand for gold, mandating one gram bars will place a digital gold system at risk of an inability to source product due to limited production capacity in the industry, as we saw in 2008 following the global financial crisis 5 . In periods when demand reduces significantly and the gold behind a system needs to be liquidated, small size bars or coins will incur a cost to be melted into 400oz bars, resulting in the gold money unit trading at a discount. Potential users will see such systems as unstable in value with a wide bid/ask spread relative to fiat currencies. A further argument for the use of 400oz bars is that each region has different preferences Asia often works in gram bars while the US prefers ounce coins. Whatever form is chosen it is unlikely to have worldwide appeal. It would be far more effective for any users wishing to convert into physical forms to be serviced by the existing network of bullion dealers, and choose whatever form or size they wish, rather than a mandated standard. By leaving convertibility to the free market a digital gold system is likely to get enthusiastic engagement from existing bullion dealers, which will go a long way to attracting consumer use. Such dealers could also easily use a
5 http://goldchat.blogspot.com.au/2014/01/coin-shortages- and-rationing-are-in-our.html The Gold Standard The Gold Standard Institute Issue #43 15 July 2014 8
100% backed digital gold system as an alternative to the London unallocated metal account system for payment settlement with mints and distributors for new stocks of small bar or coin. 3. Digital Gold Payments & Accounting Inter-system clearing is essential for a viable digital gold ecosystem. It is unlikely that digital gold system operators in different countries would be willing to use one global firm as a clearer and would prefer to trust a local existing precious metal operator like a refiner or mint, from whom their agent networks and bullion dealers would source gold locally. The use of 400oz bars would enable such local or regional clearers to co-ordinate globally and at least initially, piggy back off the existing London Precious Metal Clearing Limited system. 4. Agent Network To bootstrap a digital gold system existing bullion dealers and FX operators will need to be accessed. Even new operators will use existing over-the- counter trading networks to hedge their transactions. All of these ultimately settle gold into 400oz bars, another reason why this should be the standard for a digital gold system. 5. Electronic Exchanges In his article, Ken claimed that we need efficient foreign exchange between gold and fiat currencies. Therefore we eventually need an electronic trading market giving the example of Bitcoin, which has developed its own exchanges. In the case of Bitcoin, this was necessary because Bitcoin had no prior history of value or exchange rates with other currencies. This is not the case with gold, which has a highly liquid market quoted in all major currencies, and an extensive over-the-counter network of traders, on which to draw. In operation, consumers will value a 100% gold backed digital gold system off existing gold market pricing, so integration with the current market is unavoidable. I am not sure of the advantages of incurring costs in constructing new exchange(s) when its prices and activity will be arbitraged back to existing exchanges and the over-the-counter market by traders in any case. I would suggest that it would be better to use the existing system and save the cost and headache of trying to duplicate it. 6. Dispute Resolution System I agree with Ken that an arbitration or dispute system voluntarily implemented by the digital gold operators is essential. It will go a long way to assuaging Government and regulators that this is a responsible industry and will minimize the chance of them taking a negative view of it. 7. Regulatory Model Ken is correct that complying with existing regulations is essential but I do not necessarily see regulators as well-meaning parasites. While it can be argued that regulations can often be excessive in areas, many just encode good corporate governance practices and consumer expectations. As Ken notes, e-gold and the other systems were overwhelmed with a wave of digital crime from 2001 onwards. Hackers, auction fraud and Ponzi schemes were the primary pathogens infecting the digital gold systems - facilitated by no or little identity verification for accounts. Whether the US Government waged a jihad against these digital gold systems, or was just validly trying to shut down the extensive criminal activity they allowed, it is clear from the earlier chart that the two major players at the time were losing market share to GoldMoney (which enforced know your customer rules) well before any regulatory crack down by the US Government. This indicates that the public voted for an operation that complied with regulatory rules, even if not required to do so. For me this is the key lesson from the Digital Gold 1.0 experience: being a leader in governance and self- regulation makes commercial sense as it is what the mainstream consumer wants and goes a long way to favourable regulatory treatment. Bron Suchecki Bron Suchecki writes in a personal capacity and the views expressed do not represent those of the Perth Mint.