Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 3)

Bitcoin.me Educational Video by Three Piece Suit Productions LLC, Michael Adamo, Dan Donaldson is licensed under CC-BY-NC 4.0

The Benefits of Gold-Pegged Stablecoins?

Most of the white papers of the existing gold-tied stablecoins exalt the perks of digital currency backed by the world’s most enduring monetary commodity. Many claim the benefits of  1:1 token to gold-backing, low transaction fees, a safe-haven hedge against instability and inflation, low buy-in requirements, low transactional costs for people living in remote areas, and the positive aspects of combing blockchain technology (convenience, decentralization, and honest record keeping) with the enduring value proposition of gold. While all these qualities are maybe enticing, the best way to demonstrate the superiority of golden stablecoins would be to compare them to other similar alternatives. 

Standard Cryptocurrency vs. The Midas of Digital Money

The most notable difference between Bitcoin and a stablecoin like Tether Gold would be the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and internationally fluid payment system conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence. 

Gold-Backed Stablecoins and Gold ETF Funds

Gold Stablecoins are frequently compared to Gold ETF Funds which are the darling of derivatives markets. Despite the criticisms of experts, there are some advantages that gilded Stablecoins hold over ETFs. Gold ETFs are essentially investment funds possessing gold-related assets. One key attribute distinguishing ETFs from their blockchain-based cousins is the fact that “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..”. In terms of liquidity, this may be a bit more simplified than cashing out a share of a gold-backed stablecoin token, as most stablecoins redeem in gold specie. However, if the point is to obtain money of “high intrinsic” value, the ETFs have to trade easy liquid for lesser money (fiat currency), in return. It would be dishonest not to bring up that gold-tied stablecoins do have counterparty risks, but that is a chance anyone takes with any third party holding precious commodities in their care. 

ETFs are purely intended to function as a speculative asset, while in contrast, the smooth settlement and distributed ledger and nationally agnostic nature of blockchain structure make tokens like Pax Gold or Tether Gold better suited for use as a medium of exchange. In all honesty, this will probably best bet for re-establishing a gold standard in the post-Bretton Woods era. The political interests of Federal Reserve officials, banks, and politicians are too embedded in the empty promises of easy money policies of the post-2008 U.S. Monetary regime. The temptation lurks for utilizing Quantitative Easing, bent beyond purely macroeconomic objectives (full employment, price stability), to fund the ends of fiscal policy. (Fiscal QE). The temptation of gesturing such a powerful bargaining chip such as open purse strings would make the idea of a fixed money supply more of an obstacle than a virtue. The number of people who stand to benefit from the current monetary policy of using collateralized debt as money makes a gold standard wide-eyed opium dream. Any transition to gold-backed currency; must come from a private currency; no government would ever revert to such a barbarous relic. It doesn’t matter even if the “End the Fed” crowd gets Ron Paul or Dave Smith in the Whitehouse, a meat grinder of the political process will drown out any monetary reforms. 

The Benefits Over Physical Gold

Beyond the benefits of tokenized gold lending itself as a medium of exchange from blockchain technology, it is worth noting that most transactions are now digital. The ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. 

Time to Restore The Gold Standard- Part I

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August 2021 marks the fiftieth anniversary of the Nixon administration ending the Bretton Woods Agreement. The conferenced strived to establish a stable global monetary regime in the post-World War II era. Through centering fixed exchange rates around a gold-backed U.S. Dollar. The U.S. permanently closed the gold window in 1971. A gold standard made the money supply inflexible, thus making it impossible to fund the Vietnam War and other government initiatives. Instead of tightening spending when faced with a lack of gold reserves. Nixon declared us all  Keynesians, forever divorcing the U.S. dollar from gold for good.

The Bretton Woods Agreement was not flawed. A clear departure from the classical gold standard (1834-1933) in America; it was still better than a pure fiat standard. The fixed supply of gold in the vaults provides hardline constraints on inflation and government spending, a lesson learned by cryptocurrency creators. Limiting the amount of money produced helps it retain its value. Helping us refrain from reducing our currency to being a worthless piece of “Monopoly money” (think Weimar Germany). Some argue that the threat of hyperinflation in the United States is hyperbole; it is crucial to remember how much the dollar has depreciated since eliminating the fixed-gold standard. Since 1971, the dollar has suffered from a rate of cumulative inflation of 570.90%! Now might be the ideal time to start arguing for a return to the gold standard. This argument is not merely a knee-jerk reaction to the 2008 financial crisis.

Bootleggers and Baptists-XVIII- Fiat Currency

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August 15th marks the fiftieth anniversary of the end of the Bretton Woods agreement. An economic treaty was forged in July 1944 with delegates from forty-four countries converging upon Bretton Woods, New Hampshire. Effectively establishing a global monetary regime where the U.S. Dollar was the reserve currency and was backed by gold. However, this was not the same gold standard that existed in the classical gold period ending in 1933 (p.1). A quasi-gold standard where government institutions (central banks) held the price of gold at a fixed amount (p.17). In the efforts of creating a “.. fixed currency exchange rate system..”. Even after this thin attempt to revive the gold standard imploded on itself, its vestiges still exist today. Banking institutes such as the IMF and the World Bank were established to manage this fixed exchange rate system.

In August of 1971, President Richard Nixon forever severed the U.S. Dollar from Gold. By abolishing the Bretton Woods system. Terminating gold convertibility of the dollar. Essentially setting the stage for the modern global monetary landscape; a 100 % fiat currency standard. The Nixon administration panicked by the lack of gold reserves to cover various rounds of foreign aid and wartime spending decided to terminate the agreement. Succinctly expressing this coercive declaration in the infamous proclamation “.. We are all Keynesians now..”. Officially signaling the formal death of the gold standard. Even though some commentators and economists view the end of Bretton Woods as more figurative than literal death as it truly died at the end of the classical period of the American gold standard.

It can be stated that the dollar significantly depreciated in its purchasing power since the end of Bretton Woods. The dollar experienced an approximate cumulative rate of inflation of 570.9% since 1971. One U.S. dollar in 2021 is equal to $6.71 dollars in 1971! These numbers are unquestionably jarring. It is easy to see why there has been a renewed interest in re-establishing a gold standard since the 2008 market crash. An initiative that has led to a modern renaissance for Austrian Economics. Also, has lent itself to supporting the activism of the Tea Party movement and the political career of Ron Paul. Despite the spirited rallying of the pro-gold camp, the Federal Reserve still exists. Our currency is still nothing more than monopoly money. That only continues to plummet in value. There are many defenders of a fiat currency standard within the political establishment. Ranging from journalists to the wonkish economists and experts exalting the virtues of stable money and currency liquidity. Much like another policy prescription, there are always silent beneficiaries lurking around the corner.

The Bootleggers and Baptists of Fiat Currency

The Public Choice economist Bruce Yandle provided us with the perfect framework for analyzing the odd couple coalitions of modern monetary policy. That is the powerful lens of the Bootleggers and Baptists paradigm. One-half of the coalition acts as the moralizing agent, providing a normative defense of the policy position. In contrast, the Bootleggers quietly reap the benefits of the policy’s consequences. In terms of maintaining the status quo of fiat currency, the Bootleggers and Baptists should be quite obvious. The Baptists are clearly the commentators, academics, journalists, etc. stressing the benefits of fiat currency. Conversely, emphasizing the dangers of a gold standard. Some of our fiat currency Baptists include several luminaries in the fields of journalism and economics. Including Ezra Klein (former Washington Post editor and co-founder of Vox) and Tyler Cowen (chairman and faculty director of the Mercatus Center) (p.2 & 6) [1]. Both gentlemen are far from the only detractors when it comes to re-establishing a gold standard for currency. However, they are respected and high-profile dissenters. Carefully pointing out some of the potential hazards of implementing a gold standard. Arguments including price stability, liquidity issues, deflation, and rigidity in the money supply to just name a few concerns (p.3-20). All these concerns (regardless of their veracity)[2] could be classified as normative concerns, despite these arguments being functional in nature. Through adopting a monetary policy that would be detrimental to the economy, it would be placing the livelihoods of people globally in jeopardy. This concern for the wellbeing of others could be categorized as an ethical concern, making both individuals and their like-minded cohorts Baptists.

The Bootleggers would clearly be the federal government and all adjoining agencies. If you remember early, I mentioned that the main reason for ending the Bretton Woods agreement was that a gold standard was too rigid. Effectively placing a firm constraint (at least in theory) on government spending. By its very nature, a gold standard is quantitively tighter than a fiat system because you can only print redemption notes corresponding with the number of gold reserves on hand. While not ideal, even a fractional reserve gold standard would operate as a better limitation [3] than a pure fiat currency. Not having flexibility in the money supply keeps government spending in line, preventing the implementation (or expansion) of federal entitlement programs and unnecessary military conflicts. Through lifting this hardline limitation, the federal government is no ability to have ability to spend more money. This means more jobs/ job security for bureaucrats. This also means greater opportunities for various pork-barrel pet projects and other superfluous initiatives. Not to mention more perks for public sector employees.

Yes, the Federal Reserve has implemented various monetary rules to attempt curtailing inflation. One example being Nominal GDP Targeting, set up in an attempt to narrow the risk of inflationary volatility. However, such a policy does little to improve the overall longitudinal currency debasement that has accumulated over the past five decades. An over 500% loss in purchasing power is a shocking figure to come to terms with. Nominal GDP Targeting only slows down this process, it does not prevent it.

Foot Notes

1. I would have included George Selgin. However, being an exponent Free-Banking, he prefers a centralized monetary system. Selgin has been a longtime critic of the United States returning to a gold standard. Often citing the concern of the inflexibility of the money supply in the event of a supply shock.
2. Free-Banking co-founder Lawrence H. White demolishes these arguments in his paper of the Cato Institute, Recent Arguments against the Gold Standard (2013).
3. This claim would hold true providing the proper monetary rules are implemented. For example, having high reserve ratio requirements. Current reserve requirements are dismally lax. Back in 1992, reserve ratio requirements were lowered to 10 percent.