Gold deposit accounts, debit cards etc...

Economics Economics Questions
1

The recent implosion of balance sheet and credibility alike among the banks of my country(Iceland), not to mention our currency has gotten me thinking about what the average person can do to protect his wealth. Much has been said about the gold standard, it’s benefits etc. I do not dispute that at all, but as long as there is no political will in my nation for any such reform(such ideas are considered quite crazy by the academic and financial elites of course), I have recently been turning more and more towards a private solution.

A few facts about Iceland:

  1. We are one of most wired nations in the world. Internet usage, 3G cell phones, etc…we are suckers for hi-tech.

  2. We are also one of the most cashless economy in the world. Everybody uses debit cards and card machines are basically everywhere. We sure love to swipe our cards, debit and kredit.

  3. The Icelandic public both hates and distrusts the banking system right now. Intensely.

  4. The ability of the Icelandic government to repay it’s debts in the future is very much in doubt, which also means that our currency is vulnerable.

What I propose is a new bank, but unlike any other. It would act like the banks of old, as a storehouse of value and a clearing house of settling payments between parties - and nothing more. A 100% reserve bank that would voluntarily operate outside the deposit insurance scheme, and actively market itself as an “anti-bank”.

Here’s how I imagine it could work. A customer wants to convert a portion of his money to gold, but still retain convenient everyday access to it. He can then go to the “anti-bank”, and deposit his fiat money. The anti-bank serves as an intermediary and purchases gold from the Perth Mint in Australia, or some other such trusted gold producer(I have the Perth Mint in mind mainly because Peter Schiff has spoken highly of it). This way gold certificates can be bought in bulk, pooling the resources of the depositors.

Now here’s the tricky bit - the gold is your deposit - as a depositor, your account is denominated in gold. Should you choose to apply for the anti-banks patented(yeah right!) Gold Card, you can make transactions, same as with any othe credit or debit card at your local grocery store or wherever. The deduction from your account would work in the exact same way as when you use your credit card in foreign countries - the exchange rate between gold and the fiat currency in question at the time of the transaction.

It is quite possible to offer the exact same thing with silver, with a seperate account and therefore a seperate debit card. Or even some kind of commodity basket thingy.

The main deal is that these deposit accounts do not accumulate interest. Remember, a 100% reserve bank. The deposit accounts only yield the bank a small handling fee(denominated in gold9. If people want interest, they have to put their money into time-deposit accounts.The bank may extend loans for investment, but only using it’s own pool of money obtained from the handling fees, and the time deposit accounts. Ergo, no bank runs, no liquidity problems. The cardinal rule would be that, if neccesary for some reason, the whole bank can be shut down at any time and accounts settled, in gold, with all customers.

The difference between this kind of banking establishment, and the horrendous clusterf**k of a banking system we currently have in place could be used as an agressive marketing strategy. Being able to confidently, unequivocally state that “we will never need government assistance”, “we don’t do derivatives” or “if you want help getting into debt, go somewhere else” could be used to carve out a niche in the market.

So three questions:

A) Would you deal with such a bank, and would you use such a “gold debit card” if it was available to you?

B) Do you think the “common man” would be willing to do so? The purchasing power of his account would fluctuate with the price of gold of course, and he would earn no interest on his demand deposits…

C) Is there some fatal flaw in this plan that renders it unworkable(short of government legislation against such a thing)?

2

Einar,

I am not familiar with Iceland. You country seems to be a victim of “cheap” credit and fiscal irresponsibility. Due to the size and importance of your country in the international economy…I doubt i would have a happy way out.

Unfortunately your plan for any type of gold bank and market would not work…it is simply too costly and out of market in today’s world economy. “Bad money drives out good money”. And there is a lot …a lot…a lot of bad money out there.

3

That’s what I´ve been thinking, but I´m not so sure. I am familiar with Gresham’s law, and I do not dispute it. But I´m not talking about trying to get gold into general circulation. I´m talking about combining owning gold(protection against inflation/being able to have the same purchasing power across borders) with the convenience of a credit/debit card.

If you go to the grocery store, the grocer is getting his payment in ISK. You are subtracting from your savings in gold. The internatinal exchange rate at the time governs how expensive the purchase is to you, but the grocer doesn’t have to worry about gold or even care about it. Same as when you use your VISA or Mastercard abroad, except there is no extension of credit involved. And you don’t have to depend on widespread popularity of this arrangement to make it work. Providers of goods and services don’t have to desire gold, or even think about this arrangement - they will receive identical amounts of ISK, or USD or whatever at the end of the month from the payment company(in Iceland’s case that would be Valitor).

Therefore I think Gresham’s law doesn’t really apply. Well, not so much that it doesn’t apply, but that the payment mechanism allows you to sort of “sidestep” it. And I do not think this arrangment should have to be too costly…at least not much more costly than standard electronic commerce.

Also, the more bad money there is out there, the higher the rate of inflation, and the higher the price of gold. So even if the “anti-bank” offers no interest on demand deposits, in the long run the value of your assets will increase.

If you think I am mistaken, I would appreciate a more in-depth explanation of why Gresham’s Law applies here.

4

Such success depends a lot on Iceland gold stock. I do know that it would be much easier for South Africa (world’s #1 producer of gold) to carry on such an adventure.

I am not sure but I think it would be safer (if your country has the necessary amount of gold) if iceland currency is pegged to the value of gold or some other stable currency or a basket of currencies.

As I told you…I am unfamiliar with Iceland’s economy. But you do have to consider two things here:

1- Icelands gold resourses to back up such monetary system.

2-The right time and plan to do it. This is a 180 degree turn. Very…very hard thing to do even if you have 50% of the world’s gold.

5

I think you are misunderstanding me. What I am suggesting is not a government-backed venture, nor am I discussing an official or semi-official gold standard or a peg of ISK to gold.

What I am suggesting is setting up a small private comany which would act as an intermediary for private gold purchases by individuals in Iceland from some outfit like the Perth Mint in Australia, or other reliable provider and storer of bullion. These kinds of services are available today for the specialist investor, but it is not convenient for the general public to use, especially if they want to be able to spend the money in daily life. An electronic debit card denominated in gold would make gold ownership by small, private actors fesible.

This kind of system should be able to work even if there were only a handful of customers, although there would probably be economies of scale involved in terms of dealing with the electronic payment infrastructure and the mint.

So in a nutshell, a small, private, 100% reserve bank that allows people to buy and spend gold without the counterparties to those transactions being in any way interested in gold. Make sense now?

6

Negative. China is the number one producer now. [;)]

7

Sorry I misunderstood. Well in my modest opinion such an enterprise would be suicidal due to Iceland’s current economic situation. Any monetary or fiscal collapse would undoubtedly affect what you are proposing.

Even if able to circulate and used as currency it would carry high transaction costs because of the environments riskiness. Few individuals would find it worth to do.

You mentioned that such a system is available to a selected group of individuals. Well…i there is a market for high liquid investors…not citizens whose revenues come from their wages paid for in Iceland’s currency. Basically no real collateral. You also mentioned how everyone is full of debt.

I hope I can help you to reason this out. I am not familiar with Iceland bro.

8

A) Yes.

B) Yes.

C) Legal tender laws. The government will charge your clients capital gains/loss taxes on each currency/gold trade you do in their name. Finally, if you become too successful, laws will be changed to make those transactions just costly enough to drive you out of business (via new transaction taxes). Your only hope is that the public – being burned by the current collapse – would accept your scheme in large enough numbers thus prevent the government from driving you out of business.

9

"What I propose is a new bank, but unlike any other. It would act like the banks of old, as a storehouse of value and a clearing house of settling payments between parties - and nothing more. A 100% reserve bank that would voluntarily operate outside the deposit insurance scheme, and actively market itself as an “anti-bank”. "

what did banks do before the FDIC???

were banks originally designed to warehouse money? was it only later that they began issuing fraudulent claims for sitting gold??

i believe what you say you are proposing (if you really live in iceland) has already been conceived of…thought of anyway. good luck. send your plan to the icelandic parilment.

10

That’s the kind of input I was looking for. I had not thought of this. Gold is of course considered an investment, not money in today’s world.

So one of the prerequisites of this system would be to get the government of Iceland to exempt these gold accounts from capital gains taxes? That might be doable in today’s climate.

11

You would also have to get them to repeal their legal tender laws. Otherwise any contract agreed to in gold could be paid in fiat currency instead. No one would be willing to lend gold, so there could be no gold based credit/debit cards.

12

Yes. I’m not familiar with the Icelander’s frame of mind these days but I would guess that if there ever would be a good time for launching this system, it would be today – after all they’ve gone through over the last few years. Seems to me a lot of people there must be asking questions about money/currency. But, as I said, exempting gold accounts from capital gains taxes would hugely undermine the status quo.

I think the system, as described, would still be viable even without repealing legal tender laws. Loans, contracts, and prices would still all be in fiat currency, but I don’t see how that would undermine the viability of the proposed card system. Or I could be missing something.

Z.

13

Good to hear. I think that now, with a massive currency debate going, mostly centered about whether we should stick with the krona(ISK) or gear up to join the Eurozone, the alternative idea to introduce gold to the mix should people choose so would be something that at least couldn’t be entirely dismissed out of hand. Nothing warms people up to the idea of gold like a huge currency crash!

The way I imagine it, for the customers of this proposed “anti-bank”, ISK would basically become a veil for gold. You would still make contracts denominated in ISK, and pay prices in ISK, but once you get your hand on the money you can convert it to gold and store it there. Essentially, it allows those who want to store their value in gold to do so without having to rely on counterparties being interested in gold at all. Outwardly you still participate in the ISK system - you just don’t store your assets in a fiat money-denominated account.

Of course, to maintain the ease of use, transaction costs for the frequent ISK-to-gold and gold-to-ISK would have to be minimized, such as by exempting the possible profits from rising gold prices from capital gains taxes.

14

Are you aware of the story of E-Gold?

15

Ouch. That’s a downer right there. Must research further.

It’s hard to tell whether these guys were actually facilitating fraud and money laundering knowingly, or just being harassed by the government. A big issue seems to be the non-reversibility of the transactions. I had not thought much about that. If they were really marking people as “scammers” and “CC fraud” in their accounts, then they obviously were not much interested in libertarianism, fraud being (in my mind at least) the only true crime along with violation of property rights.

16

This article should help expand upon your concerns.

17

Einar: Welcome to mises.org forum. I have batted around an idea similar to this and would love to chat with you via email. You can email me at bkzxsnmja@gmail.com where the portion preceding the ‘@’ is a Caeasar cipher (a->b, b->c… z->a, etc.) Please feel free to email me and we can discuss.

Clayton -