Digital Gold

The Federal Reserve has debased the U.S. dollar on an almost continual basis since it came into existence just over 100 years ago. While the dollar has been more reliable than most other currencies around the world, it has still lost 96% of its purchasing power over the course of a century.

As a big critic of the Fed, my main issue with the central bank is that it has a government-granted monopoly over the supply of money. Considering that money makes up at least half of nearly every transaction in our modern-day economy, it is an important topic. 

If the government grants a monopoly on the supply of apples in the United States, it will only affect apples. Maybe it will affect the availability of apples or cause the price to rise, but it won’t affect the entire economy.

But when the Fed creates money out of thin air and artificially lowers interest rates, it affects the entire economy. It distorts savings and investment, it redistributes wealth, and it misallocates resources. Over time, it leads to an overall rise of prices in the economy, assuming that increased production is not enough to compensate for the increased supply of money.

Despite central banking and increased government involvement in our lives, technology has luckily continued to flourish. It also has a way of quietly replacing certain government programs.

Take the Post Office as an example. With email and cell phones, along with shipping companies such as FedEx and UPS, the Post Office is becoming less and less necessary. This is actually one of the few things the federal government does that is inarguably constitutional. But it doesn’t make it worthwhile.

While the Post Office is still running, it is becoming more obsolete by the day. At some point, someone with a platform and some power is going to ask why the Post Office has a monopoly over the delivery of first-class mail. People will quickly realize there is no reason there shouldn’t be competition for the Post Office. It has already been mostly replaced anyway.

Replacing the Fed

While most in the Establishment fully support the Fed and its functions, there are critics on the other side that call for an end to the Fed.

Politically speaking, it is not realistic to end the Fed overnight.

However, it is realistic that technology could do to the Fed what it is already doing to the Post Office. The Fed doesn’t need to be ended overnight. It can simply be replaced, even if gradually.

A few years ago, Bitcoin came on to the scene quickly. Many people still have no idea what a bitcoin is — and most who do don’t know how it works.

For a while, it looked as though Bitcoin may actually be a competitor in the currency world. But the excitement over Bitcoin was its rise in price in terms of dollars. 

To function as a form of money, it has to be widely sought-after. You can’t just declare that something is money and make it so, unless you are a government or central bank that can enforce a legal monopoly.

One of the main characteristics of money is that it is not obtained just for its functional use as a commodity, but because people will know it is widely acceptable for other goods and services.

Gold and silver became money thousands of years ago, as determined by the marketplace. Instead of obtaining the metals just for their industrial uses or for jewelry, they were sought after because they could be used to buy almost any other good available.

While a few businesses did begin to accept bitcoins for payment for their products, it was not widespread. In this sense, bitcoins were never money. You can’t walk into Wal-Mart or Target and pay with bitcoins. Perhaps one day this will be a reality, but it isn’t right now.

I believe one of the main problems with Bitcoin is that it really isn’t that much different from a typical fiat currency. It is better in the sense that the supply is limited and it can’t be created out of thin air for political purposes, but it still isn’t backed by anything real. This limits its appeal, and for good reason.

Digital Gold

Now Business Insider is reporting of a new cryptocurrency that will be making its way onto the scene. Anthem Vault, a company that specializes in precious metals and technology, is launching a new “coin” later this month.

This digital currency is similar to Bitcoin, except it will supposedly be fully backed by gold.

According to the company, a coin will be valued at one gram of gold at the day’s market price. The name of the coin will be the Hayek, named after the Austrian school economist. Friedrich Hayek was an advocate for free market policies, and he won the Nobel Prize in Economics in 1974.

Since the new digital currency will have a gold backing, unlike Bitcoin and other digital currencies, it will work differently, too. While the details are still not clear, it seems that in order to obtain Hayek coins, you would have to purchase the amount of gold in terms of the number of digital coins you want to obtain.

The metal would then be maintained in an Anthem Vault account, and a customer could convert the metal into the digital currency in exchange.

On the part of Anthem Vault, this is a brilliant strategy, assuming it can keep the government off its back. The company will likely gain a lot of new customers with this new service.

Of course, the new plan is not without its critics. The obvious objection, particularly from gold bugs, is that you would be relying on the company to maintain the gold in its possession. In this sense, it is similar to an exchange-traded fund (ETF).

The difference here is that you can’t use your gold ETF as money. You would have to sell it, similar to a stock, and then use the proceeds in dollars to buy whatever you want to buy.

This isn’t to say the new Hayek coins will be useful as money right away. Just like Bitcoin, you won’t be able to walk into Wal-Mart or Target and pay with your Hayek coins… at least not yet. 

There is also the problem of government rules, regulations, and taxes. How will the government treat transactions using a gold-backed digital currency? Will you be expected to calculate possible capital gains in terms of dollars?

Fed Competition

I really have no idea if this particular idea is going to take off. I believe it is actually more promising than Bitcoin because more people will understand it and there will be something behind the digital currency.

If I own one Hayek coin, it represents a particular amount of gold. This is what we can envision in the future if there is a freer market in money. 

There is no reason you can’t have gold or some other commodity serve as a form of money without actually using it in day-to-day transactions. You could just as easily have credit cards and bank accounts with digits backed by gold.

This idea of a gold-backed digital currency was inevitable. It was inevitable with today’s technology, combined with crazy central bank policies throughout the world. There is no reason you could not have multiple digital currencies backed by gold.

In fact, this would actually make sense. Then you would not be depending on one particular company or vault. You could have many different vaults with their own currencies. When you walk into Wal-Mart or Target, instead of choosing between which credit cards to pay with, perhaps you will choose which gold currency to pay with. 

This will be a slow process to develop at first. Perhaps it will be more popular in other parts of the world with currencies that are even less stable than the dollar.

But over time, this gives some competition to central bankers. It gives them a warning to not go overboard with their money creation. If they do, they may find people seeking out different forms of money that do not continually lose purchasing power.

While gold-backed digital currencies become more developed, you will still have to deal with the Fed’s inflationary policies. For this reason, it is always a good idea to have your own gold. You don’t need to have a digital currency to do this.

While you can’t walk into most stores and pay with a gold coin, at least a gold coin can protect your purchasing power over time.

Until next time,

Geoffrey Pike for Wealth Daily