THE NEW BANKNOTE CONTAINING ONE GRAM OF GOLD.

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The work of the Gold Unit Center is focused on overcoming of dependence of the Russian economy on foreign currency. The Center’s main goal has been the development of new forms of money backed by gold and other precious metals, thus reestablishing the connection abolished in 1971 after the cancellation of the Bretton Woods agreements. This work has resulted in the creation of a new paper banknote containing a fixed amount of precious metal (1 gram) with no par value that can circulate freely alongside the established currencies and be converted into them through the free market exchange.

The new gold banknote can serve as a measure of value of the soft currencies and express their value in gold according to the decimal system of measures. Introduction of the new banknote will create the conditions for the rapid expansion (up to 30% per year) of the presently artificially compressed monetary base of Russia when backed solely by the gold produced in the country (currently third in the world in gold mining with the output of over 250 tons per year). This innovation will also provide the country with the best prices for the mined precious metals and help prevent capital flight.

 

 Keywords:  gold, the Bretton Woods agreement, currency backing, a measure of value, the gold standard.

 

  

 UNIVERSAL GOLD UNIT

OBJECTIVE DETERMINATION OF VALUE

1. IDENTIFYING A STANDARD 

    Gold has long been acknowledged by people as the main, ultimate money or the essence of money.  And portions of its mass—coins—became the basis of the “gold monopoly” recognized at the end of the 19th century by all the biggest countries in the world.

     However, due to the limited possibilities of minting coins a significant mass of the expensive and rare metal was required.  For instance, the first gold coin known, the one issued by the Persian King Darius, weighed 5.5 grams.  The tsars’ “gold ten”—the imperial—weighed 7.74 grams, and the English pound sterling—a sovereign coin—weighed 7.32 grams.

     Such coins had quite a high value, but were not convenient for making payments in everyday life.  However, the technology of minting alone to make a monetary form of a metal was insufficient for achieving a greater reduction of its circulating mass. 

    Though gold was acknowledged the most convenient metal for determining value, the world still could not find a way to turn it into a single and universal form of value equivalent.

    A universal unit of value.

    Society acknowledged gold as a world money, or the ultimate center of all circulating money in the world. And by the end of the 19th century most countries accepted the system of the “gold monopolism”.  However, the presence of coins in circulation that were different in form and weight meant that this problem was far from being solved and their best physical and technically perfect form remained to be found. 

     So, more unconsciously than consciously, the question arose of one gram of gold as a unit of mass which could simultaneously become a unit of value and a unit for determining the value of all money, a kind of counting point in the system of the value coordinates that has existed since time immemorial in all the vital spheres of humankind.

      If such a unit of money, based on one gram of gold, could establish a new decimal system of determining value, the value of money, real money, the world would be able to finally overcome the obsolete forms of earlier ways of determining value.

     The traditional minting continued to create an obstacle to such a solution.  And the task was put off to a later and technically more advanced and equipped time.  And now such a time, which witnessed a global crisis, has finally come.

    This article is devoted to this problem.


2. GOLD UNIT 

Today it is no longer difficult to solve such a problem.

One gram of this very dense metal of the Earth is hardly noticeable to the eyes and hands of man. Thus the American gold dollars of the 19th century minted as coins weighed only 1.672 grams and they easily got lost because of their small size—they were only 13 mm in diameter.  It was clear that one gram of gold badly needed to be attached to something that would make it more noticeable and significant and convenient in circulation without any loss of its real value.

 That goal, it turns out, can be achieved with the help of classical paper banknote which possess, according to the established traditions, sufficient surface to print any information on it (Fig.1).
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Fig.1. The concept of the Universal Gold Unit of Value

    The metal can be introduced into the paper base of the banknote at any stage of making it.

    To do this many different physical and chemical methods of printing a banknote can be used.  The gold can be put on the paper base as foil, a thread, a finely dispersed powder, or a chemical salt or its colloidal solution.  The introduction of the gold onto the base can be done with the help of an electrolyte precipitate, vacuum dusting, soldering or with the help of any other technologies that have become available and are able to provide a worthy and reliable level of protection of the new banknotes from being counterfeited.

     Of course, on the condition that any of these methods, or a combination of them, reliably fix the precious metal to the paper base.

     In the variant we are proposing (see Fig. 2-3), we used the method already worked out at the Russian mint Gosznak— broaching a gold thread on the paper base of the banknote.  The thread is protected from abrasion by a polymer and a corona discharge soldered into it.
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Fig. 2. The new banknote containing 1 gram of pure gold. Classic style of the note


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Fig.3. The gold thread on the banknote is protected from abrasion by a polymer and a corona discharge soldered into it.
  

 In our variant such a gold unit in the form of one gram of gold placed on a paper base has been given the working name GOLD UNIT.  For the first time, as an independent and objective unit of value, it was registered and has the Russian patent No. 2121442 dated 20.01.1998 describing the new unit or equivalent of value in the form of 1 gram of chemically pure gold (or a smaller portion) placed on any convenient to carry information base.

    The banknote itself, which already has a weight of around 1 gram, will become two times heavier as a result of such an operation.  But the metal introduced, as we see in Fig.3, takes up a very insignificant part of the surface.  So, the gold thread on the surface of the banknote will serve only as an additional element of the design.

    Any such technical solution, one solving the problem by putting a gram of a precious metal on a paper base of a metal-paper banknote, is, in certain conditions of its introduction into circulation, capable of qualitatively changing the functionality of the whole monetary system that would be based on the direct participation of a new form of gold.

    First of all, the union of gold, a unit of its mass, and a paper banknote makes it possible, finally, to chose a value equivalent for all the paper currencies in circulation, or, if I may say so, to establish their universal “money center”.  

     The physical metal gold will make up no less than 50% of the mass of the new gold-containing banknote.  Thus we will be dealing not with an empty paper base, but with real or actual money, directly secured by the 1 gram of metal put in it.

    We see that going from gold in the inconvenient form of high value metal coins in circulation to being in light gold-paper banknote won’t in any way lead to the dramatic lowering of its value in the end item.  Just the opposite, gold in such a form and in such a portion in the banknote will become much more accessible to people.

     The expected value of the new GOLD UNIT in the conditions of free and legitimate circulation, if one proceeds from the current prices for metal on the world market, would be around 2 thousand rubles or, if in dollars, then no less than 50.

     That is, such a gold-containing banknote proves to be in the very center of the value niche answering the demand of the population to acquire “money savings”. Therefore the GOLD UNIT fills the current lack in the monetary system of the hoarding sector, the sector of real monetary wealth, which faded into the past after the use of gold coins was forbidden during the “counter-revolution” against gold that took place at the beginning of the 20th century.

3. DIAGNOSIS OF THE PROBLEM 

    Coins made of the noble metal were forbidden by the government to be in circulation during the Great Depression in America. Instead of them, only paper currency were proposed for use.  Thus paper or fiat money invented back in the 8th century in the birthplace of paper—in China--were introduced.

     So, in the absence of gold and silver or real money in circulation, the dollar and later, in the 21st century, the Euro took the top two places in operations for determining value. But these currencies are just some kind of temporary notes of the central banks on which there already long hasn’t been, and actually never was, a trace of the noble metal to give them real value.

    However, it must be noted that all these currencies, having become “soft money” for the international market, is anything other than a clear achievement of the 20th century and an important stage in the evolution of money.  Their service in the world of trade and international exchange was able to solve many problems of the market and economic relations between countries.

     Nevertheless, in spite of all their merits and convenience, the dollar and the Euro are only fiat money system, private currency without intrinsic value, they aren’t real money.  They are not that “center of money” that would always be objective and independent from the will of parties and governments and possess absolute and timeless stability and have their own and unchanging consumer properties—those properties that money or coins of noble metals carried in themselves for centuries and millenniums.  Those properties that gold and silver, first of all, possess.

     Both the dollar and the Euro have only some of the functions of money.  Of course, they are convenient for the world market and for short term and medium term investments and exchange, but neither the dollar nor the Euro, nor any other kind of currency possesses the most important property of true or real money—the ability to fix value and to always keep that value no matter the changing circumstances of life.

    The dollar and the Euro will always be only temporary or conditional – fiat units of value.  And when the well known Jamaican Agreement was adopted in 1976-78 on the initiative and will of the IMF and it forbid its members to fix national currency units in gold, the prices for the metal taken off the money pedestal immediately went up.  And the American dollar, made the main reserve currency in the world, began to rapidly go down in value.  In the decades after that act the dollar has lost 40 times its value!

     The world has gone still further from the goal which it so strove for earlier—for unity of the world of money based on one metal, the goal of gold monopolism, the goal of the objective determination of the world’s wealth.

    All currencies in the world have forgotten about it.

4. THE “CENTER OF MONEY”.  NEW FREE GOLD   

    And so, one gram.

    One gram of gold put on a classic paper banknote and laying claim to the role of the “center of money” is a very big step in achieving the goal, but one gram by itself still does not solve all the problems.

     In order for that gram to work as the “center of money”, or as the “starting point of counting value” it is necessary to first of all guarantee the “nominal purity” of the banknote containing it and free them from any kind of numbers or indications of value expressed in other currencies. The value of the new gold unit should not be expressed in rubles, dollars, Euros or any other scale of current monetary units.

     On the gold-containing banknote there should be only the number “1” signifying the presence of one gram of chemically and physically pure gold on the paper base. 

     Moreover, such a gold banknote not burdened with any nominal obligation given it by some unstable earthly power, should not, unlike gold coins, directly take part in fulfilling the basic functions of payment as this was done during the times of the Gold Standard. It is a primary, independent and objective unit of monetary value or a new free gold which will act totally differently than in the era of the Gold Standard.

     Such gold in the form of a freely circulating unit of mass will take on only some of the functions of money.  First of all, the form of a classical paper banknote and the main function—to determine value.

     And it will effectively fulfill this function only when there is a free and legitimate exchange rate for the usual soft paper currencies, leaving them the daily obligations in making the separate and elastic payments.

     Only then and under this condition can gold offer monetary system  its new services.  Those services which metal coins or the former forms of the Gold Standard that were strictly tied to its nominal value and traditionally used by the population as a means of payment were not capable of.   And that was what led the world to the reign of unbacked currencies and all the consequences that manifested themselves in the recent crisis.

     Such gold, freed from the nominal limitations and obligations of making payments can completely serve in its new role—the role of identifying and determining the value of all paper currencies in circulation now in the conditions of their free market exchange, free choice and evaluation of people.

     We will enumerate the main advantages of the banknote containing it. 

5. THE GLOBAL  BENEFITS OF THE GOLD UNIT.
GU-SYSTEM FOR DETERMINATION OF MONETARY VALUE

      First of all, the GOLD UNIT (GU) containing one gram of gold, which will account for no less than 50 % of its overall weight, will serve as an universal standard of value when in legitimate and parallel circulation with the other, already existing, monetary units.

    Such parallel circulation of the GOLD UNIT will exclude any kind of risk to the already achieved balance of currencies.  But its introduction, as a minimum, will immediately increase the volume of the money supply in the country due to the increase in its real value.

     Secondly, the greater, than in the former gold coins, price accessibility of the gold in metal-paper banknote (around 2000 rubles or a bit more than 50-60 dollars), will satisfy the demand of the population for money for savings.

     The new gold-containing banknote will lower the demand of the internal market for external currencies not circulating in the country, which is the main and universally recognized condition for achieving a healthy financial state of the countries that are entering the world market.

     Thirdly, when the soft paper currencies circulating in the country acquire the ability to be freely exchanged for the GOLD UNIT containing gold, they will have its real value determined in “gold units” (GU) according to real market rate of exchange (Fig.4).

 


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Fig.4. GU-system for objective determination of monetary value

That is, into that very gold value that the leaders of countries back in 1920 strove for when they called for the creation of a single and universal “determiner of value”[1].

     Fourthly, any currency getting the value of its exchange rate in relation to the new freely circulating GOLD UNIT will, as in the times of the Gold Standard, be able to be freely and automatically converted in accordance with their “gold rate” into the other currency that can freely be exchanged inside the country where their value is being determined.

      Fifthly, the GOLD UNIT, opening the way to the return of real money into the monetary system, will make it possible to technically overcome the unhealthy currency unipolarity or single polarity of the current financial world having given it an Independent International and Objective Unit for determining the worth of any currency in circulation now. 

  In other words, such a unit will make it possible to take the idea of the Gold Standard to its logical conclusion, i.e. the idea of having a unity of money and the creation of their universal form for determining value which technical problems of minting and giving gold the function of payment had hindered.

     Sixthly, the freely sold and acquired unit will establish an exchange rate of the national currency to GOLD UNIT that absolutely excludes its fixation in metal, which is the main reason for the global rejection of gold that is juridically fixed in the Jamaica agreement of the IMF on dropping the Gold Standard.

     It is this freedom of acquiring and selling GOLD UNIT that gives them the status of the most attractive investment means for all strata of the population and for investing their incomes in the new liquid gold.  Thus it creates the conditions for the participation of the population in making a profit from the exchange rate by selling the GU-banknotes if the price of gold goes up (Fig.5).

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Fig.5. Investment in the liquid gold for all strata of the population

     This participation in the selling and purchase of the GU-banknotes will become a mechanism of regulation and containing inflation, of stabilizing the monetary system, of the natural monitoring and control by the society over the whole financial state of the country. And this automatically decreases the demand for gold in its physical mass necessary for stabilization of the monetary system.

Seventh, the new gold-containing banknotes, unlike the gold coins, won’t go into deep hoarding, for they promise their possessors participation in the income from exchange rates in correspondence to the changing prices for gold on the domestic, union and world markets. The new form of gold, having been freed from the former payment functions and gone over to the more worthy and prestigious role of determiner and identifier, will make it possible for a state to get a working soft paper currency that is safe from inflation and worth 6-7 times more than the mass of the gold that will be invited to being on the GOLD UNIT[2].

For us, the residents of Russia, this soft currency is the common ruble which will be additionally printed and put into circulation so that we can buy these gold units on them.

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Fig.6.The GOLD UNIT and means for payment in the ratio 1/6.

The real correlation between the demand for the “hard gold” and the demand for soft currency will open the way to the quick and forced reestablishment of the monetary base in the country. And it will be money able to work not on the foreign, but on the domestic market of the country. 

It is here that the mechanism and law of the “gold multiplying of money” or the law of their “multiplication” lies.   The objective law of the growth of money supply in the country.

The former forms of the gold standard kept us from seeing such prospects and possibilities of gold freed from the functions of payment and only serving as a determiner of value.  The Gold Standard, connecting currencies and gold nominally and fixing the relations between them, couldn’t count on such a “multiplication” of money being carried out without the risk of Inflation, and without the issuing of a devaluated national currency.

    Now this problem can be solved.

     Finally, eighthly, the free conversion of usual money into gold and back will make for more well-adapted and equal financing of the spheres of the economy—of both short (trade), and longer cycles of the reproduction of capital (industry, agriculture, the timber industry, etc.).  It is this condition that will create a reliable economic platform for getting people to leave the big cities and make the quality of life in the cities and rural areas more equal.

This is far from all the advantages and merits of the monetary system in which there will be the GOLD UNIT able to fulfill the role of a universal determiner of value.  However, advantages enumerated above are enough to appreciate its superiority over ordinary gold coins, the more so over the fiat money and their temporary and conditional units.

 HOW MUCH GOLD IS NEEDED FOR RUSSIA? >>>


[1] Brussels Financial Conference. The Recommendation and their application. A Review after Two Years. 1920. League of Nations.

[2] The practice of the free circulation of gold and paper currency in the country after the reforms of the minister of tsarist Russia S.Yu. Vitte and the minister of the revolutionary republic of the Soviets G. Ya. Sokolnikov, and the current monetary crediting of the population make it possible to get these orienteers and figures.

   It shows that the population is willing to set aside no more than 1/6 or 1/7 of its income for savings.  The traditional interest rate of the banks in the Russian Federation on loans, 14-15%, corresponds to this amount.