Monetary Innovation is the Path Forward

There is no shortage of sound money conferences. They’re regularly put on by think tanks, and dutifully attended by all the free market academics who can get travel budget. But I have a premonition. The move to the gold standard won’t be led, or driven by these events.

Many of their presentations are all but free of free-market money ideas. For example, the Cato Monetary Conference in November, had numerous central bankers promoting updated versions of the same old monetary central planning. Some independent intellectuals promoted new variations. For example, Scott Sumner is widely known for his idea that the dollar should be planned, not by CPI and unemployment, but by nominal GDP. This year he proposed a futures market in nominal GDP forecasting, to help the planners.

The Jackson Hole Summit (at which yours truly spoke about the false alternative to choose between cherry or strawberry flavored cyanide) was notably better. Even so, the marginal utility of such conferences is declining.

For these reasons, I was excited to help put together a different kind of event. The first two Monetary Innovation Conferences (there will hopefully be more events, if we get enough donations) took place, in Washington DC and Phoenix in November. We had support from the National Economics Club, and the Wharton Club. The point of these conferences is not to tell the world that we need the gold standard. The point is for entrepreneurs and innovators to talk about real problems, and their solutions. In Arizona, we had some folks from the government attend, including Representative Mark Finchem who spoke about why he has sponsored gold legal tender legislation. This is how I think we will move to the gold standard.

Adam Trexler talked about one incentive for governments to issue gold and silver coinage: seigniorage. Historically, when most governments issued previous metal coins, they set a legal monetary value above the value of the bullion contained in them. His company, Valaurum, makes a 0.1 gram gold currency that is a thin layer of gold sandwiched in between two layers of plastic. It’s slightly smaller than a dollar bill.

The Aurum
the aurum

Valaurum seeks deals with governments of small countries with gold mining activity. These governments can make a large profit by offering legal tender gold currency. Whereas no one really wants the irredeemable paper currencies issued by such governments, they will eagerly buy up the currency issue because it’s gold. This puts small-denomination gold currency (0.1g gold is worth about $3.75) into the hands of people who would otherwise not own any gold.

Guillermo Barba came up from Mexico to talk about seigniorage in a different light. He spoke about the proposal by Hugo Salinas Price for silver coin circulation in Mexico. There are two key ideas. One, stamp only a weight on each coin, not a legal tender value. This is because the price of the metal is always changing in the market, and generally rising over long periods of time.

Two, the government publishes a legal tender value higher than the metal value in the coin. It has to be higher, otherwise people hoard—this is called Gresham’s Law. It is updated whenever the price of the metal rises. People can get these coins without risk, because if the metal value falls then the government will take them back at face value. If the metal value rises, then the coin is revalued higher in terms of the peso.

At the conference, I talked about a key enabler of the rise of civilization: interest. Without interest, there is no lending. Without lending, there cannot be a business enterprise larger than a family workshop. Unfortunately, we are now at the end of decades of the Fed’s war on interest. The disappearance of interest slams the process of civilization into reverse. I am working to offering investors gold interest on their gold.

Speaking of zero interest, how is someone supposed to live in retirement? There’s a risk of outliving your money, no matter how conservatively you spend. John Skar talked about a simple gold annuity that pools the longevity risk over many individuals. Some people die earlier, and leave their money in the pool for others who live longer. This creates a mortality yield. It works, even if without a gold interest rate.

Josh Crumb and Stefan Wieler spoke about Bitgold. Bitgold makes it easy for people to buy gold in small quantities. Bitgold enables them to spend their gold using the ubiquitous merchant payment network for credit and debit cards. Perhaps more importantly the company is fully compliant, so customers do not have to choose between having gold and staying on the right side of the law. Or, to put it another way, Bitgold is fighting one battle, but not trying to compound the difficulty by fighting another at the same time. They are working towards the use of gold as money (which is the stated purpose of the Gold Standard Institute) without also taking on the regulatory state.

Speaking of the regulatory state, the crisis of 2008 showed us that highly regulated companies, with highly regulated auditors, and credit ratings published by highly regulated agencies can experience Sudden Bankruptcy Syndrome. Every financial intermediary may have to comply with regulations, but that offers you little comfort if you trust the wrong counterparty and lose your deposit. Norbert Michiel at the Heritage Foundation, and Reggie Middleton talked about using the blockchain—this is the secure public ledger technology underlying bitcoin—to offer people new alternatives. Reggie’s company, Veritaseum, is offering a trading platform in which parties need not trust each other. Smart contracts assure that the full amount is paid on all trades.

Adam Stradling talked about a new technology called Provable Solvency. Like a realtime audit, it would allow a company to publish its true current position and net worth. The information could be disclosed to counterparties, allowing them to make informed decisions about trust and risk.

John Mitnick, also at Heritage, talked about a topic I have previously addressed. Texas has recently enacted a law that authorizes the creation of a precious metals depository. There are two interesting features. One is the ability of any metals holder to pay metal to another. The other is that the state of Texas will stand between the metals holders and the federal government, should the latter move to confiscate gold again (as it did in 1933).

Arie Cohen, originally from Venezuela, flew in from New York to talk about the broader theme behind blockchain and smart contracts. His theme was the Golden FinTech (financial technology) revolution. We have seen a pattern play out over and over. Yahoo, then Google, then Facebook, and most recently Uber sprang into multibillion dollar market opportunities. Something happens when a real and urgent human need occurs and at the same time technology is mature and available enough. Entrepreneurs create solutions. Disruptive innovation may displace or commoditize incumbents in the process, but that’s how markets work. If the need is big enough then someone brings the solution to market.

Each of these speakers is doing more to help the world move to the gold standard than all the sound money conferences in the world.

And this brings us full circle. The flaws of the irredeemable dollar—exponentially rising debt and falling interest—create urgent problems for everyone. Jobs, savings, and retirement are not “right wing” issues. They’re of concern to everyone (ironically the richest, who speculate on rising asset prices, are the least interested in gold).

Gold solutions are emerging, and look for more as we go forward.

Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona. In March 2015 he moved his Gold Standard column from Forbes to SNBCHF.com.
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