Andy Duncan over at the Cobden Centre website posted today an interesting piece on the proposed Swiss Gold Franc, a new currency that, if created, would be 100% backed by gold and could usher in a new standard for international trade and third-world savings.  It is a remarkable idea, and the wonderful thing about the Swiss government system, is that such an act doesn’t actually require government approval if it can garner the peoples’ votes in an initiative.

One of the main proponents of such a system is a fellow by the name of Thomas Jacob, who wrote about it recently in German.  In order to make this more accessible to the English-speaking world, I am posting below a quick and dirty translation into English… not perfect, but better than Google:

Security and Freedom for Savers – THE SWISS GOLD FRANC

By Thomas Jacob

Throughout human history, in all regions, in all countries, in all cultures, in myths, legends, and fairy tales, gold has stood apart.

Its ownership stands for prosperity, freedom, security, and protection against capricious rulers and tyrants.  Today, the monetary system of developed countries is disturbed and in danger, while tyrants and dictators continue to ravage the world.  Gold could give back to people a lot of security and freedom.  Yet trade in gold is limited to a few people who trade in decorative coins, gold bars, and gold certificates.  Adding to this is the danger that trade in gold could at any time be hindered through regulation, or even completely prohibited.

More Possibilities

The proposal is very simple: Switzerland should create a new, additional currency out of gold – the Swiss Gold Franc.  A currency like this would enable savers in Switzerland and in the whole world to easily and cheaply obtain gold.  Below will describe exactly how the Gold Franc would look and how it could be used in practice.  It should also make clear how the Gold Franc could create more security, protection, and freedom for money-savers worldwide.  The Gold Franc should give rise to nothing less than a revolution in the trade of gold.  The new possibilities for use will bring about additional demand for gold, thus raising and stabilizing the gold price.  These relationships will be illustrated below.  An overview of the effects and advantages of the Gold Franc is available in the “Schweierzeit” [Swiss Times] publication number 8, from the 21st of April this year.

The first step to the Gold Franc was already brought in by politician Ulrich Schüler this year, on the 8th of March.  In the Swiss Parliament, he launched several simple, understandable parliamentary initiatives: “The Constitution should be expanded as follows: The Swiss government creates an official Gold Franc composed of coins with a fixed gold content.  It regulates licensing for the creation of this tax-free instrument by qualified institutions.”

How does this look in practice?

As a practical example, let us consider that the Gold Franc coins were required to have 0.1 grams of gold per Gold Franc in face value. A one franc coin would therefore contain 0.1 grams of gold, a five franc coin 0.5 grams, and a 500 franc coin correspondingly 50 grams.  Since it is impossible to mint a coin using 0.1 grams of gold alone, a second metal would be used.  The center of the coin would consist of the desired quantity of gold.  A ring around it of “normal” coin-metal would give the coin a practical size.  The Euro provides a good example of such a bimetallic coin.  The front side of the coin would have a uniform impression, making the coin easily recognizable as a Swiss Gold Franc.  Any honest Swiss company would be permitted to mint these coins, so long as they contain the proper amount of gold and are minted according to the government standard.  On the back of each coin, the companies will be allowed to mint their company logos.  This is anticipated to sharply lower the sales prices of the coins, so that the price of a Gold franc will quickly approach the market price of gold.

What will change?

The first change will be unproblematic and convenient trade.  Today’s gold trading consists of decorative coins in the exotic unit of mass Troy Ounces, of gold bars, and of gold certificates.  For the average consumer, purchasing gold requires some knowledge of the subject, in addition to sales advice.  In contrast, the Gold Franc is defined in grams, is self-explanatory, cheap, and uniform.  It requires no sales advice – rather, it is easily understood and just as available as any foreign currency of today – at every exchange booth and even at ATMs.

The second difference is the practical denomination.  Only after dividing gold into practically-usable quantities can it be usable once again in daily life.  Today, the buyer of the smallest gold coin available must pay around 100 francs [US$118] and receives for this a coin containing 2 grams of gold.  A Swiss Gold Franc coin would be worth, at the current gold price, around 4 francs.  In a later phase, it is not unthinkable to introduce banknotes and centime-coins [based on the Swiss Gold Franc], naturally 100% backed up by and exchangeable for gold.  This cheap [production] price of the Gold Franc and the various practical denominations open up tremendous new possibilities.  Gold will once again become appropriate as a small or a large gift, and as a way to save [money], even for people in poor regions of the world.  If, for example, the Chinese government were today to encourage its people to buy gold, they would do it in the form of collector’s coins and gold certificates.  The Swiss Gold Franc would present the easiest and best opportunity to these people for buying gold, with corresponding prestige both for Switzerland as well as for the Swiss companies who would have minted their logos on the backside of the coins.

Gold Francs would presumably be used among a community of gold fans in Switzerland, as well as in regions of the world with very serious currency problems.  Hyperinflation implies the destruction of a currency, and with it, the wiping out of savings and fixed incomes.  Hyperinflations often come with absolutely devastating consequences, and one can well imagine that people in, for example, Zimbabwe, might be receptive after their experience to a system of independent, commodity-based money.

The third difference lies in psychology and protection of legal rights.  Only this allows new financial products such as insurance policies, pensions, and annuities.  The problem of long-term financial contracts is well known to current financial advisers.  If today, for example, a young person wanted to create a savings contract with a final payout of a half million francs, forty years in the future, there would be a worry that the half million francs at the time of payout would only retain a fraction of its equivalent purchasing power today.  Even the Swiss franc has lost  value – in the last hundred years, over 90% – and the predictions give much to worry about.  Gold has seen its value over the same time not just be retained, but actually increased.

Thomas Jacob

(translated by Theodore Deden)