You can not have two competing currencies, one backed by gold and one backed by faith in the American government. As long there exists even a trivial probability of a dollar collapse, everyone would simply hold the gold backed currency, which would necessarily precipitate a dollar collapse.[From The worst idea ever | Free exchange | Economist.com]
Now, “worst idea ever” sounds a little over the top, especially to anyone who has ever watched “Britain’s Got Talent”, but you can see the reasoning. If the average person in the street thinks that their government is printing money round the clock so that it will inevitably lose its value, then they would naturally want to hold gold or some other asset that might hold value against inflation. Does that mean we would go back to using gold doubloons in Tesco? No: using gold as a hedge against inflation means using gold as money that is a store of value, not as a medium of exchange. I could envisage, for example, having a gold account. But I couldn’t imagine going to an ATM and drawing out gold: I’d still be drawing out Sterling, but I’d only be drawing enough to support transactions and I wouldn’t be stuffing it under the bed. That would reduce the demand for Sterling, but not eradicate it: currency is partly a means of exchange and partly a store of value (in less inflationary times). The world’s most attractive currency for criminals is the euro: if criminals abandoned the euro for gold, then perhaps half of the euros out there would disappear (substantially reducing the seigniorage income to the central banks of the euro zone). But I digress. Is digital gold the future?
At Conde Nast’s Portfolio they just had a feature about the Future of Money that looked, amongst other things, at the use of gold through electronic currency.
The legitimate users of gold-backed e-currencies see them as part of a hybrid monetary future: Digital gold’s unique efficiencies as a payment system make it particularly suited to international transactions. Gold-backed cash automatically evens out currency fluctuations that can play havoc with price points and profit margins in cross-border trade. Already GoldMoney allows for faster, cheaper online transfers of funds than the existing banking system does—particularly from one country to another, where standard bank wire fees of $20 or more look almost prohibitive next to GoldMoney’s maximum transfer fee of about $3.[From The Return of the Gold Standard – Dual Perspectives – Portfolio.com]
I would have thought that a rather obvious, and overlooked, driver for electronic gold is the Islamic market. A non-interest bearing 100% gold-backed electronic currency ought to be rather attractive, although I have to say that my previous attempts to persuade some of our financial services clients to launch such a currency didn’t get anywhere. I’m sure there would be many non-Islamic persons who would also like to hold part of their wealth in gold since, as is well-known, at times of economic uncertainty the value of gold tends to go up. Incidentally, this was illustrated rather well last year when the price of oil on international markets fell sharply on the unpleasantries between Russia and Georgia.
Many commentators seem puzzled that the dollar price of oil is dropping while Russia threatens vital oil and gas pipelines in Georgia. The conundrum is resolved by observing that since the invasion the price of oil in gold has in fact increased significantly. The drop in dollars per barrel of oil has been accompanied by an even greater percentage drop in dollars per ounce of gold.[From Unenumerated: Inflation expectations, gold, and oil]
A return to the gold standard may be impractical or even undesirable, but the idea of new technology monetising the store of value that is gold seems altogether a different proposition. For an “ordinary” person to be able to decide to hold Sterling, gold or Telefonica minutes simply by choosing a different menu on their phone does indeed, as far as I can see, mean practical choice, and surely choice is always a good thing. Given free choice, however, would people really opt for dollars or precious metal? Perhaps they might instead prefer to opt for more regional, “local” or even personal currencies. There a plenty of reasons to believe that the next generation of money may be about so-called “alternative currency” rather than about a return to the money of past. These are the sort of ideas that I hope to explore with the audience at the Financial Services Club on 21st April 2009: they have kindly invited me along to talk about the future of money and this interplay between technology-enabled monetisation and economic circumstances will be one of the key themes.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]