| GOLD IN THE NEW ECONOMY
By James Turk
We are reprinting this article with
James Turk’s permission from the 1/8/01 Freemarket Gold and Money
Report, P.O. Box 5002, North Conway, New Hampshire 0386. 24gg or
$220 yearly, 20 e-Letters per year. It announces what may well be a
monetary revolution. – F. Sanders
On December 3rd, the Sunday Telegraph,
which is one of London's leading newspapers, published an article
about my new Internet venture, GoldMoney.com. The article read in
part:
"The oldest medium of exchange moves
online ...[in January 2001] with the launch of GoldMoney.com,
an Internet currency provider that will allow users to pay for
products anywhere.
"GoldMoney, based in the Isle of Man,
says it has developed an e-commerce payment system that enables
global buyers and sellers to make and accept instantaneous payments
in weights of gold called GoldGrams. A GoldGram represents a gram of
gold [31.1034 grams = one troy ounce] held in
vaults with the system working on the principle that users transfer
gold from buyer to seller without it leaving the vault.
"The current price of a GoldGram can
be checked on the web site in various currencies. The gold price has
been falling, but the company points out that while a GoldGram would
have fallen in value against the yen, it would have risen in value
against the euro over the past year.
"The system, aimed at corporations and
cross-border traders, is designed to eliminate payment risk as there
is no possibility of default on payment and it uses high strength
encryption software, downloaded by account holders. Payments are
processed in real time with funds transferred instantly. It also
offers low transaction fees ...[that are] much less than bank fees
for wiring currency.
"James Turk, founder of GoldMoney,
said: `We are taking the world's oldest money, gold, and using 21st
century technology to enable its circulation as a currency in global
commerce.’ He aims to make it the common currency of global
commerce."
The story behind GoldMoney is an
interesting one over twenty years in the making. Along the way I
secured two US patents on a unique process that enables gold to
circulate electronically as currency.
THE STORY BEHIND THE STORY
I conceived the idea behind the
patents and GoldMoney in February 1979 as a solution to Herstatt
risk. I was the Assistant Manager of the Chase Manhattan Bank in
Bangkok, Thailand when the Herstatt Bank failed in June 1974, so I
witnessed first-hand the devastating impact on international
commerce from this collapse. It seemed absurd that the failure of
one medium sized bank in what was then West Germany could have such
a crippling effect, but it did bring many banks around the world to
their knees, severely impairing the global economy. So in my spare
time I set about learning more about the nature of currency in order
to seek a solution to Herstatt risk.
Over the 26 years since Herstatt
failed, the big banks have spent hundreds of millions trying to
solve Herstatt risk, but given the nature of their currency, that
task is impossible. They can reduce/minimize Herstatt risk, but they
cannot eliminate it. This recognition eventually led to my solution
in February 1979, and that solution is embodied in GoldMoney.
MONEY: LIABILITY OR ASSET
Simply put, currency today is a
liability on the balance sheet of banks. Cash currency is a
liability of central banks; deposit currency — the money in checking
and savings accounts — is a liability of commercial banks. These
central/commercial bank liabilities circulate as currency only
because they are backed by assets with value. If these assets become
value impaired, the liabilities backed by the assets become impaired
as well, creating Herstatt risk and other currency distress. And
these problems can only be solved if assets, as opposed to
liabilities, circulate as currency. This point can be explained with
a simple example.
A gold coin passed from the hand of
the buyer of some good or service to the hand of the seller is an
asset circulating as currency. The gold coin is not issued by a
bank, nor is it backed by any asset — IT IS the asset. Compare this
example with a Gold Certificate circulating as cash currency. The
Gold Certificate is a liability of a bank, backed by the assets of
that bank. To use two historical definitions not often seen today,
gold is money, but any currency that is a liability of a bank
is only a money-substitute. It perforce is not
money.
While gold over the centuries has
proven to be good money, it has also been an inconvenient and
inefficient currency, which explains why money-substitutes — like
paper currency and bank deposits — were created. It was more
efficient to leave the gold in a bank, and accept that bank's note
for use in commerce. But what worked well in the 18th and 19th
centuries began to break down in the 20th, largely because the
monetary process was increasingly usurped by government for
political objectives. As a result, money-substitutes became
increasingly unsound, causing governments to attack their
competition, namely, money/gold. But this policy of government is I
believe doomed to fail.
COMPETITION ARRIVES
Even back in 1979 it seemed to me that
when viewed within the sweep of history, money-substitutes — the
currency of today's nation states — would in time face increasing
competition from new sources, particularly in cross-border commerce
because these transactions are beyond the scope of any one country.
That new competition in my view would be 'electronic' asset
currency, which was the essence of my idea. But though I was only 32
at the time, I never thought this idea could be put to use in my
lifetime. The technology just didn't exist back then. PC's were a
hobby, not the necessity they've become; no one ever heard of the
Internet; and transatlantic telephone calls cost a small fortune, if
you were actually fortunate enough to make the connection.
In September 1979, I bought my first
personal computer, an Apple II, and while I recognized the potential
of the PC, even then I did not think that the technology would move
forward fast enough to make GoldMoney a practical reality. But by
the late 1980's, I began to sense that the technology was developing
quickly enough so that maybe my earlier assessment was incorrect,
and that GoldMoney might soon be possible/practical.
PATENTING THE NEW MONEY
Because I recognized in the late
1980's that I was still early in my thinking, I set about
researching how best to protect this new currency solution to solve
Herstatt risk. By 1990 I was studying patent law to see whether I
could secure the idea, with a view to turning it into a business
when the technology was ready. In 1992 I hired a patent attorney,
and filed the first application in February 1993. Even back then the
Internet was still more a vision than a reality, but it seemed that
we were getting close to the technology I required.
The first patent was finally awarded
4½ years later in September 1997. By this time my son, Geoffrey,
joined me to develop this business opportunity. We jointly filed the
second patent application which was awarded in November 1999. A
third patent application we again filed jointly is still
pending.
My patent attorney says that the 4½
years it took for my first patent to be awarded was the longest time
he ever saw an application pending. In the end though the patent was
granted because it advanced the 'prior art'. In other words, I
created a new form of currency that was better than existing
currency. The proof of this statement is that it eliminates Herstatt
risk.
Nobel Laureate Robert Mundell, in a
paper about Gresham's law http://www.columbia.edu/~ram15/grash.html,
makes an interesting and I think accurate observation about the
history of currency: "Among the precious metals, gold drove out
others...because it was more efficient from the standpoint of
effecting transactions at the least cost. The dollar became the
dominant international money in a world of paper
currencies...because, among the alternatives, it best satisfied the
characteristics of an international money."
AFTER BRETTON WOODS,
AFTER THE INTERNET
Note the use of his qualifier, "among
the alternatives". The world today is much different from when the
Dollar became international money at the Bretton Woods Conference in
1944. And most importantly, we today have alternatives, made
possible in part by technology. Moreover, we have the incentive to
search for these alternatives because the Dollar today is not the
pillar of monetary stability that it was in 1944. In short, the
Dollar today is no longer 'as good as gold,' the popular phrase at
the time that characterized the Dollar's unchallenged
position.
I think we are moving full circle back
to gold, but gold will circulate as currency in a way that overcomes
the impediments that stopped it from circulating as currency in the
past. GoldMoney aims to deliver a currency that is more efficient
than any currencies now existing.
GOLDMONEY:
HOW IT WORKS
With GoldMoney, owners of GoldGrams
(one gram of gold, and the unit of account of GoldMoney) always own
their metal. GoldMoney never takes possession of it. The metal is
placed in vaults around the world (we use the term Storage
Sites), and is always held in the name of the customer, until it
is spent. At the moment the GoldGrams are spent, the ownership of
those GoldGrams changes. The weight of gold remains in the Storage
Site, but the ownership changes the instant the GoldGrams are spent.
It's the electronic equivalent of a gold coin passing from one hand
to another, but the gold always remains in the vault. A couple of
points of explanation will be useful here.
1) GoldMoney is not a fractional
reserve system. The total quantity of GoldGrams in circulation is
always exactly equal to the weight of gold in the different Storage
Sites.
2) One GoldGram is composed of 1000
mils for precision in transactions. At $311 per ounce, one GoldGram
exchanges for $10, and one mil exchanges for 1¢. At the current
price of $268 per ounce, one GoldGram exchanges for $8.62.
3) Access to GoldMoney is provided
anywhere in the world through a standard web browser, with 24/7
availability and access to your money.
4) All payments are made in real-time,
so there is no float, clearing, etc. Therefore, GoldMoney avoids the
problems these processes create, ranging from the niggling, such as
lost wire transfers, to the catastrophic, like Herstatt risk.
The above explanations are not meant
to be all encompassing, but rather, they highlight some basic
attributes of GoldMoney. I think it also shows that GoldMoney is
well thought out, which shouldn't be too surprising because I've
been thinking about it and working on it for 21 years now.
MONEY FOR THE 21ST
CENTURY
I think that with GoldGrams we are
creating the currency of the 21st century. That may sound
presumptuous, but it seems logical to me. After all, all we are
doing is taking the world's oldest money, and enabling it to
circulate as currency in a way that overcomes those impediments that
stopped gold from circulating as currency in the past. Even though
many of gold's fundamental attributes as money have been forgotten,
they have not disappeared. GoldMoney will see whether those
attributes remain important, and if they do, then the market will
prove whether or not GoldMoney will be commercially
successful.
Finally, the Internet today — when it
comes to money and currency — is very much like the automobile
'industry' at the beginning of the 20th century. When the car was
first invented, it was a horse-carriage (a 'buck-board') without the
horse, a guy sitting up top, trying to drive this new contraption
with a stick. Those early inventors/entrepreneurs did not realize
the invention of the automobile was so profound that they no longer
had to think of transportation as what it was conceived to be up
until that moment in time. New ideas about power, weight and comfort
evolved slowly, so it took a few years before an automobile that we
could recognize as 'modern' emerged with fenders, doors, glass and a
roof.
Attempts to make plastic credit/debit
cards circulate today on the Internet are not unlike those first
automobiles which look better suited to being pulled by a horse than
having any similarity to what we now consider to be a car. Just like
those early automobile inventors/entrepreneurs, those who have
'created' the early versions of Internet 'currency' are merely
transpositions of what currency is conceived to be today — mainly
plastic. These early Internet currency promoters have not generally
recognized that the invention of the Internet is so profound, we are
not restricted to thinking narrowly about what currency will be or
should be on the Internet in the future. Currency will evolve in
ecommerce like those first automobiles evolved, with trial and
error. And given gold's historical role as money, I expect that
GoldMoney will become an important currency on the Internet. It is
our objective to make GoldMoney the common currency of global
commerce. Of course only time will tell whether we will be
successful, but that result is the beauty of an unfettered market
and the outcome of competition.
I hope this information is of
interest. In the meantime, you may want to visit http://www.goldmoney.com/
and record your email address to receive updates on our progress as
we approach the launch date.
In summary, GoldMoney is creating a
currency that is more efficient — it is better — than the currencies
that exist today. I am therefore hopeful that GoldMoney will benefit
its users, thereby making GoldGrams essential in the new economy of
global ecommerce. ¤
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