[Nettime-bold] In Gold We Trust, part 1

["Julian Dibbell" <jdibbell@yahoo.com>]

While we're on the topic of money, I thought I'd post an article of mine
from last month's Wired, about an online gold-backed currency that in some
ways parallels, in some ways diverges from, and in some ways downright
opposes the model being discussed here as "open money." That the experiment
involves a curious alliance between heartily anti-statist American
libertarians and radically anti-capitalist European Sufi Muslims only adds
to the entertainment value, I trust. (Sorta sounds like some kind of Bizarro
World version of the nettime community, actually.)

So: Are these goldbugs out of their gourds? Is the LETS crowd any less so?
Are they all just fetishists of the token of exchange (as Doug Henwood would
have it) or are they on to something? Compare, contrast, discuss.

HTML available at:

http://www.wired.com/wired/archive/10.01/egold.html

WARNING: 6000 words ahead


In Gold We Trust


>From gun-wielding libertarians to radical Muslims, an unlikely global cabal
is plotting financial revolution. And they're putting their money where the
Web is.

By Julian Dibbell

[part 1]

Thirty miles south of Florida's Cape Canaveral lies the town of Melbourne,
home to the Action Gun pistol range, where, on a balmy Thursday afternoon,
James Ray stands calmly firing round after Glock 9-mm round at a photocopied
image of Adolf Hitler. Ray supplied the target himself. He purchased it on
the Web site of one of his favorite nonprofit organizations (Jews for the
Preservation of Firearms Ownership), and its ideological content is not what
you'd call subtle: Against the background of a standard ring target, the
Führer stands in full Sieg heil mode, his arm up high and his sternum right
in the bull's-eye, above a caption that reads ALL IN FAVOR OF GUN CONTROL
RAISE YOUR RIGHT HAND. By the time Ray has had enough of the Glock, the
target is nicely perforated. Then he picks up his .44 Magnum hand cannon and
blows Adolf pretty much to bits.

Yes, Jim Ray is a gun freak. But as it happens, the purpose of today's visit
to the pistol range is not to huff powder fumes or celebrate the Second
Amendment. He's here to show that there's a type of money you can believe in
without also having to believe in the authority of the state. He's here to
offer a glimpse of a world in which wealth resides ultimately not in flimsy
pieces of government-issue paper but in rock-solid slabs of $279-an-ounce
metal. He's here, in short, to demonstrate the vanguard of monetary
technology: a 5,000-year-old form of cash called gold.

Or in this case, e-gold, the world's first 100 percent precious metal-backed
Internet currency, with which Ray pays for his outings at the gun range and
a lot more besides. The private currency was launched five years ago and is
now operated by two separate but tightly linked companies: e-gold Ltd.,
incorporated in the Caribbean island state of Nevis as a holding company for
the system's assets, and Gold & Silver Reserve, headquartered in Melbourne,
which takes care of everything else. Both are closely held and managed by
e-gold chair Douglas Jackson. In addition, Jackson has forged a partnership
with Islamic entrepreneurs to launch e-dinar, which is foreign owned.

Jim Ray works for G&SR as "lead evangelist." He draws his monthly salary in
e-gold; each gram sitting in his Web-based account gives him title to a gram
of real gold held in vaults in London and the United Arab Emirates.
Sometimes he trades his e-gold for e-silver, e-platinum, or e-palladium -
the other, far less popular, metal-backed currencies offered in the e-gold
system. More often, he trades it for US dollars through G&SR's OmniPay
exchange service or one of the couple dozen independent exchange providers
who make their living selling e-gold for dollars, marks, yen, and other
national currencies at the standard 4 to 6 percent markup over the spot
price of gold. But otherwise, he spends the stuff like cash, giving it
straight to whoever will take it.


And people do. Ray's .44, his Hitler target, the bullets in his Glock - all
were paid for with instant, online transfers to the sellers' e-gold
accounts. And when he settles up today at the Action Gun cash register,
he'll have this afternoon's $18 shooting fee charged to his tab, which he'll
pay in e-gold when he gets back to his desktop. He'll point, he'll click,
he'll type in some account numbers and a password and, in the blink of a
clock cycle, approximately 2 of the 1.7 million grams of solid gold in the
system's reserves - a gleaming hoard of 141 brick-sized ingots - will change
owners.




"It's the only foreign currency without a nationality," says e-gold's
Jackson. On an average day, his company's clients make 8,600 transactions,
trading roughly $1.6 million worth of e-gold for goods, services, and cash
worldwide. Those numbers are more than double what they were 18 months ago,
and so are most other statistics. As of November, there were 287,965
accounts in the system, up from 134,150 at the beginning of 2001, and the
amount of emetal in those accounts, worth more than $16 million, was close
to twice what it had been the previous November. In a sector littered with
the corpses of failed online currencies and other exotic emoney systems -
Beenz, Flooz, DigiCash, CyberCash, CyberCent - e-gold is quietly thriving.

Ray calls it "the little payment system that could" - the operative word, of
course, being little. The company's financials ($5.47 million in revenue;
114,000 funded accounts) are Popsicle-stand caliber compared with the
figures posted by emoney media darling PayPal, with its $80 million to $100
million in revenue and its 10 million customers. But with fewer than two
dozen employees and a marketing budget close to zero, Jackson's corporate
structure runs lean and, as of the summer of 2000, profitable. The company
finally got its first competitors in 2001 - GoldMoney, E-Bullion, 3PGold,
OSGold - attracted to the gold-backed digital currency space by low barriers
to entry and the smell of black ink.

The product's appeal? "Fundamentals," says Ray. For online consumers,
especially those making international purchases, e-gold offers an ease of
use and a degree of anonymity that credit cards can't match. And for some
merchants, of course, the only selling point e-gold needs is that there are
people who want to spend it. After a German customer inquired about e-gold,
Vince Lee, president of TealPoint Software, added the payment option. "It's
not a big part of our business," admits Lee, whose company is probably the
largest of the couple hundred mostly mom-and-pop operations that take e-gold
online. "But in this climate, you can't really afford to turn any customers
away."

Ray argues, though, that the advantages for merchants go further. A
transaction fee of 1 percent, capped at 50 cents per spend, comes in well
under the 2 to 5 percent fees charged by credit card companies. And as for
that bane of online businesses, the credit card chargeback, e-gold is a
silver bullet. Unlike almost any other form of online payment, e-gold clears
instantly and finally, with no chance for the spender to cancel after the
fact. Or as Ray puts it, "When you get paid, you stay paid."

Still, Ray knows better than to pretend that these are the only reasons most
e-gold users have bought into the system. Or even, perhaps, the main ones.
For most consumers, the ability to reverse online credit card charges is
decidedly a feature rather than a bug. And if you're going to pay a nickel
for every dollar you turn into e-gold - as the going rate of exchange
requires - you're probably not doing it because you want to help some online
merchant save the same nickel in transaction fees. More likely, you're doing
it at least in part for the one thing e-gold offers that no other digital
payment system before it ever has. You're doing it for the gold.

Which is to say, you're doing it for any of the complex cultural,
psychological, and above all political reasons that make gold, in Ray's
words, "the most emotional spot on the periodic table - never mind
plutonium."

As a onetime Libertarian candidate for the Florida House of Representatives,
Ray is well aware, for instance, that a large percentage of e-gold's early
adopters come from the ranks of the laissez-faire radicals for whom gold has
long been an icon of economic freedom from government. Others are goldbug
investors, desperately bullish on the metal despite years of declining
prices. Still others come to e-gold via e-dinar, looking to honor Islamic
financial commandments and subvert the Western economic system.

But all the same, Ray insists gold's philosophical baggage doesn't stand in
the way of its being a technically superior currency. It frustrates and
baffles him, for example, that the only advocacy groups currently taking
e-gold donations on their Web sites are outfits like his cherished Jews for
the Preservation of Firearms Ownership or the cyber libertarian Electronic
Frontier Foundation. "I would love," he says, "to go up to some offensive
antifreedom group like Handgun Control Inc. and say, 'Look, you morons:
You're taking plastic. They're taking a percentage out. Take e-gold and sell
it for a profit. It's better money! Even if you're not a libertarian, it's
better money.'"

Ray sighs, as if summoning the patience to wait for civilization to catch up
with him. "Gold," he says, "has always been better money."

***

There are those who would beg to differ - among them, the most influential
economist of the 20th century, John Maynard Keynes, who 78 years ago
declared the gold standard a "barbarous relic," unfit for the complex
monetary demands of modern economies. In Keynes' now widely held view, the
problem with pegging currencies to fixed amounts of gold was that it limited
government's ability to adjust the money supply, which among other things
made economic crashes much more brutal than they had to be. The onset of the
Depression drove the point home, and central banks spent the next 40 years
gradually weaning themselves off gold. Finally, in 1971, President Richard
Nixon pulled the plug on the world's last metallic national currency: the
gold-backed dollar. Ever since, the major currencies have all floated
anchorless, backed only by "the full faith and credit" of their issuing
governments.

Encountering 141 solid bars' worth of gold-backed currency circulating on
the Internet, therefore, is a little like hauling a wriggling, gasping
coelacanth up from the bottom of the sea: It's a financial fossil come to
life, calmly going about its existence despite decades of expert consensus
that it couldn't be anything but dead.

Don't be fooled, though. The convergence of gold and the Net - of the oldest
of low tech and the newest of the high - isn't nearly the freak encounter it
appears. When Douglas Jackson first conceived of e-gold in 1995, he had
barely heard of the Internet. Likewise, when longtime gold-market analyst
James Turk founded GoldMoney last February - Jackson's most serious
competition - he was making good on a concept he'd started thinking about in
1979, back when he still doubted that the technological infrastructure to
support it would exist in his lifetime. But both men knew as soon as they
encountered the Net that their currency belonged there - and not least
because classic gold money and the core mechanisms of the Internet are in
fact strikingly analogous technologies.

The international gold standard was one of the technical wonders of the
highly globalized late-Victorian era - a sophisticated, elegant mechanism
for transmitting value from one end of the civilized world to the other.
National monies existed, of course, but in effect were just local network
protocols running on top of the internetwork layer that connected them all.
Or as the Nobel Prize-winning economist Robert Mundell has put it,
"Currencies were just names for particular weights of gold." The dollar, for
instance, was fixed by statute at 23.22 grains (about one-twentieth of an
ounce), the pound sterling at 113.0016 grains, and so on. Local payments
were made in local units, but all cross-border deals ultimately were settled
through international bank-to-bank shipments of the universal currency -
bullion.

Today, in a world just now returning to Gilded Age levels of economic
interdependence after a century of hot and cold global warfare, the closest
thing we have to a universal money is the US dollar. But as with most
proprietary standards, many argue, the dollar introduces costly
inefficiencies into the system - from the distorting influence of US
monetary policies on non-US markets to the simple fact that final clearance
of dollar payments still takes place only during East Coast banking hours.

Clearly, says Turk, if the Internet is going to become the engine of global
commerce it's cracked up to be, it needs a currency it can call its own - a
currency as nonproprietary and international as the Internet itself. "And
gold seems to be the logical candidate," he says, "because after all, that's
gold's traditional role. It's international money."

But if gold does good things for the Internet, says Jackson, the Internet
does even better things for gold. E-gold isn't your great-grandfather's gold
standard. It's new and improved, Jackson argues, fortified by the rigor of
free-market discipline and the openness of digital networks. And if you
think that's no big deal, well, Jackson - a 45-year-old former oncologist
and entirely self-taught economist - would like you to know that his
invention represents "an epochal change in human destiny" and "probably the
greatest benefit to humanity that's ever been thought of."

How so? Invulnerable to government manipulation and subject to the kinds of
market forces only a worldwide, 24/7, open-ended network can bring to bear,
e-gold promises not simply better money but the best: a money supply kept so
straight and narrow that it has room for neither bubbles nor crashes. And
"this," as Jackson is fond of claiming, "fixes something that's been screwed
up since before the pharaohs." After millennia in which the boom and bust of
the business cycle has washed ceaselessly over human affairs - playing havoc
with the lives of rich and poor and even now blackening capitalism's good
name - e-gold has arrived to still the waters. E-gold is here to bring
capitalism to a kind of perfection.

Not that it's a foregone conclusion. Some of Jackson's closest business
colleagues, after all, like to think e-gold might actually bring capitalism
to its knees.

[end of part 1]


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