A monetary system based on gold requires collaboration in the gold industry
One way people could use gold as money is gold cash. The reality is that with the current technology, producing any bill or coin containing small decimals of gold grams is several times more expensive than the gold content. By intensive R&D, low-cost, low gold content cash may be achieved anywhere in future but now we have to look for an alternate system of gold exchange. One solution is a world network of gold banks providing pool-allocated and segregated accounts.
The gold monetary system can be imagined only with the client requirements in mind:
- Clients want trust: clients would not keep their money with depositories that they don't trust. Clients need to recognize the name of a depository as a certified gold dealer or refiner, a well-known brand, a trustful financial services business etc.
- Clients want proximity: people need to know that they can walk, drive or take a short-distance bus or train to their depository to redeem their physical gold any time they need. You don't have to ask clients a reason for wanting proximity, nor to convince them that the gold location is not that important. Take it as it is, serve them what they want. Proximity adds to trust: a local business is more trusted than an foreign company.
- Clients want allocated accounts: it's not that the clients want the same bar or coin that they put in the depository (the same serial number). Gold is fungible. But they want to redeem preferably the same number of coins and bars, with the same weights and from the same refiners. Again, don't ask for reason. Take that as it is.
Just as gold depositories (banks) are constraint by client needs, clients are also constraint by nature and by… other clients:
- Clients have a strong incentive not to redeem physical gold (except in extreme cases of natural disasters, government nationalization, war, bank runs). As long as the gold bars and coins stay with trusted gold dealers, gold depositories and secure transportation, the gold assayed certification remains valid and the gold is accepted not only by any gold industry player, but also by any client in the world. When a person redeems physical gold, he or she will have to re-assay it for a cost in order to deposit it again. A person will have difficulties exchanging physical gold with another person, by lack of trust. Though clients will very rarely redeem gold for the above reason, clients still need to know that they can redeem any time. It's one of those situations when you suffer for not being able to do something though when you can, you'll most probably not doing it. All the thing is to know that you can.
- Clients have a strong incentive to deposit small coins and bars. If clients want to exchange gold for goods and services, they need to deposit gold in the most fragmented possible way: deposit many 0.5 gram and 1 gram coins and bars, keep a few large size bars for long term savings. This incentive helps depositories since the demand for small weight coins and bars comes from the clients and it is served by the gold refiners and dealers. The depository may need sometimes to recast gold in other weights for daily operations but this shall not be a main activity.
How the system works?
John in Saskatoon has 1.5 grams of gold registered with the local gold depository of Goldmoney in Saskatoon (he deposited 1 coins of 1 gram and 0.5 grams respectively).
Endel has 1 gram of gold in the books of the GVS Bullion, deposited in the local depository of Tallin, Estonia.
John buys a photoshop image created by Endel as a freelancer, for 0.3 grams of gold, by completing an exchange on Gold'N'Roll.
In the books of Goldmoney, the account John will have 1.2 grams of gold in the Saskatoon vault. In the inter-bank clearing table, Goldmoney will have -0.3 grams in relation to GVS Bullion.
In the books of GVS bullion, Endel will have 1.5 grams in the Tallin vault, and another 0.3 grams stored at Goldmoney. In the clearing table, GVS will have +0.3 grams in relation to Goldmoney.
There is no need for GVS to redeem the bullion from Goldmoney. Clearings will be applied at the end of each day between gold depositories. There are situations when a depository may consider necessary to redeem gold from another depository:
- When a depository faces an increased number of redemptions from clients or other banks;
- When there is a high imbalance between two depositories.
The clearance of accounts with less than 0.5 grams of gold could be done in nature (until economically feasible low weight gold cash will be invented). From a movie ticket to a dinner in a restaurant, banks could find solutions to compensate. As long as the system works and the people have a strong incentive not to redeem because of lost of trust, these situations should not be very frequent.
Finally, for such a system to work, the gold industry should make a list of globally acceptable assayed coins and bars, and to use a common notation of accounts (e.g. in the form of IBAN numbers).
I hope the gold industry will work together for the creation of a gold monetary system, otherwise we'll never see it happen.