(This item originally appeared at Forbes.com on November 7, 2023.)
This has been a great year for fans of gold-based money. As part of their migration 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 government of India has begun issuing gold-based government bonds. International megabank HSBC just said that it is launching a “tokenized gold” platform, making gold-based transactions possible among HSBC’s many clients worldwide. Of course there is no evidence that the Federal Reserve is going to jump on this bandwagon anytime soon. However, at the State level, many US States — actually, most of them — are tiptoeing toward creating an alternative gold-based currency platform.
Following the lead of the Utah Legal Tender Act of 2011, already 43 US States have adopted legislation that simplifies the use of gold and silver coins as money. This comes straight from Article I Section 10 of the Constitution, which states: “No State shall … make any thing but gold and silver coin a tender in payment of debts.” Mostly, in practice, this has meant removing 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 been developing a legislative platform that creates State precious metals depositories (as Texas has already done), and even goes so far as to create the basis for new State-issued currencies — mostly on digital platforms, but nevertheless linked to gold coin as the underlaying asset.
These are all promising developments, and play a part in the “feeling our way in the dark” pattern that is now happening worldwide as people grasp at a new international monetary system based on gold.
My take on these recent developments is this: Governments are not really very good at “asset backed digital currencies.” This is a lot more complicated than it may sound, as evidenced by the fact that no very good platform yet exists. (Coro Global was the best, in my opinion, but it ran into problems and had to be shuttered.) There are layers of security, processing speed, reliability, and even customer service that all have to be perfected. Basically, it has to be usable, and also not hackable. I don’t think governments can do this. In the past, it was always handled by the private market, specifically commercial banks. Even the Federal Reserve got started as basically a system among private commercial banks, and is still mostly one today.
I think there might be a role for State depositories. You are going to have to trust someone to store gold, and that someone is going to be either a government or private entity. There are reasons to distrust either, so unfortunately no perfect solution exists. But, a government solution, at a certain time and place, might be a very good one. Also, it is a very simple business of the sort that the government can actually do, well. State depositories might serve as the vault for digital systems mostly run 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. But, this could exist alongside an effective gold coinage system, that would provide a real-world analogue just as banknotes and coins provide a real-world analogue for our mostly-digital fiat dollar payments today.
The problem with gold coins, historically, is the “problem of denomination.” Gold is very good for big transactions (light and compact), but too valuable for small transactions. This created a need for smaller silver or copper coins. “Bimetallic” systems of gold and silver coinage 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 far too large for the smallest-denomination coin in a coinage system.
But we have new technologies today that can resolve a lot of these issues. The first is plastic casing. Coin wear, and “intentional wear” such as clipping, was a big problem in the past. Coins wouldn’t have the metals of their face value. This can be avoided by putting them in plastic cases. Already the US Mint’s 1 oz. Buffalo gold coin comes in a clear plastic case. This eliminates all wear issues. Counterfeits today are easily identified using cheap “gold guns” that use non-invasive XRF technology.
I suggest a 10 gram gold coin encased in plastic, which would be worth about $650, and actually is not far from the size of the original British gold sovereign (a one-pound coin). Then, you can add a plastic-cased 1 gram “coin” (Worth about $65.) In the past, this was way too small, but today it is easy to do. Then, you can add a 100 milligram “gold foil note,” which actually has 100mg of gold impregnated in the plastic. These would be worth about $6.50, and are available from Valarum and others. You could do even smaller gold foil notes, but common token coins might be the best solution for denominations around the 10mg ($0.65) level, or less. (The original US penny was actually worth more than this.)
I have heard from friends in Russia that these “gold foil notes” are now being issued by the Central Bank of Russia, and also the Central Bank of Uzbekistan.
With all the talk of “central bank digital currencies,” a lot of people are looking for physical-world alternatives. Of course, in this “cashless society” scenario, paper dollar banknotes will be no refuge. States are also banned from making their own coinage, in the Constitution. But, a transactable physical coinage could be part of States’ path to an alternative to fiat-dollar or CBDC tyranny.
