October 6, 1997 – It is a great pleasure to announce that the above referenced patent, which has just been published, has been awarded to me. I have invented a process which creates a new form of electronic currency, and as you might expect from me given my pro-bullion views, this process involves Gold. The story of this patent is an interesting one, and it begins twenty-three years ago.
On my birthday in June 1974, I received an unusual present. I was appointed the Acting General Manager of the branch of a major New York City bank in Bangkok, Thailand, where I had been living and working for three years. The bank of course was not aware of the personal significance of the day, and though the appointment was just a temporary assignment to fill the 6-month gap that would occur between the departing and newly appointed GM’s, I accepted the present with some apprehension.
It was indeed a distinction to be given the responsibility for $150 million in assets (nearly $2 billion in 1997 Dollars), 70 employees, and the banking relationships maintained with more than 2,500 customers, including many of Thailand’s largest companies. But it was also a frightening proposition. What if something went wrong? At 27 years old, my 6-year banking career was flashing before my eyes.
If you recall the summer of 1974, the international banking system was reeling. Foremost among the reasons for this perilous state of affairs was the failure of the Herstatt Bank in Germany, but other factors were also contributing to the doomful banking environment. Interest rates worldwide were rising rapidly due to surging inflation and a credit crunch, and in the United States, the on-going political uncertainty from Watergate and that summer’s collapse of Franklin National Bank, until then the largest bank failure in the United States, added to the monetary and banking woes.
To make a long story short, I survived those six months and in December 1974 handed the branch over to the newly appointed General Manager. For my efforts, I received a nice promotion with new responsibilities in the bank’s operation in another country. But as important as that promotion was, I received from that 6-month experience something even more valuable. It was the deep, hands-on knowledge of a seemingly intractable problem that still haunts banks and the international monetary system today — a nemesis that has come to be known as “Herstatt risk”.
When the Herstatt Bank failed, it nearly brought down with it a large part of the international banking system because banks throughout the world had clearing relationships with Herstatt. It was an important focal point for the countless thousands of money transfers made daily into and out of Germany. For example, Japanese companies paying German suppliers would use their Japanese banks to route their payments through Herstatt. Similarly, Herstatt had relationships with many important German companies and banks that would use Herstatt to pay their suppliers in the United States and elsewhere through the banks in those countries. As a result, Herstatt received a huge volume of international payments, and it was the banking interrelationships that arose from these money transfers that caused so many problems when Herstatt failed.
The day it failed, German companies being unaware of the bank’s dire financial condition, paid millions into Herstatt and instructed the bank to make payments elsewhere in the world, on their behalf including the United States. At the close of business in Germany, Herstatt announced its insolvency. The problem was that business was just beginning in the United States, New York being some six hours behind German time. Consequently, the money that Herstatt transferred to New York on behalf of its German customers had not yet been paid out. Therefore, when Herstatt closed its doors, this money was frozen, and a payments nightmare was created.
Herstatt risk has not disappeared. It was a problem when the BCCI failed several years ago, and despite the best efforts of banks to solve this problem, every bank dealing in any national currency is every day exposed to Herstatt risk. It is unavoidable because of what currency has become, and after years of studying and thinking about the problem, I finally realized in 1979 how Herstatt risk could be overcome — change the essential nature of currency. An example will explain this point.
If you go into a store and purchase a product with a Gold coin on the basis of weight, there is no Herstatt risk. The reason is that substance (the product being purchased) is paid for with substance (the weight of Gold, not the nominal currency noted on the face value of the coin). However, if you purchase that same product with Dollars, regardless whether you pay in cash, check, credit card or wire transfer, you have created Herstatt risk for the seller of that product. He is giving you substance (i.e., the product) and is only receiving an IOU in return. Currency today in any form in which it circulates is a liability. When the seller accepts your Dollar currency, he is accepting the liability of the bank issuing that Dollar currency. Consequently, Herstatt risk is an unavoidable consequence of banking today because all currency today is someone’s debt. And not all debts are good quality; it is inevitable that some debts will be reneged, just like Herstatt and BCCI reneged on their debts.
Consequently, banks today spend countless hours and untold millions trying to minimize Herstatt risk. They do this by speeding up the clearing of payments, better monitoring credit risks, etc. However, because all currency today is a liability, Herstatt risk cannot be avoided. Therefore, to eliminate Herstatt risk, the nature of currency must change. This objective is accomplished by my patent.
Though the basis for my patent was conceived in 1979, I did nothing about the idea at that time. It was impractical, given the prevailing state of communications and computing. PC’s back then were a novelty, and transatlantic telephone calls were rare and expensive. However, by the late 1980’s the computer revolution and increased competition in telephony were beginning to make my idea practical. Consequently, I hired a patent attorney in 1992 and filed my patent application in February 1993. The correspondence and discussions with the patent office made a long and arduous process, but it was successful in the end. The patent officer recognized that my idea was another step forward in the development of currency, which has evolved and changed dramatically over the years.
At first currency consisted of precious metal coin, which itself went through many stages to make coins circulate more efficiently (for example, improving designs, placing milling on the edges, etc.). However, coin was largely supplanted by paper, which was easier to carry long distances, could be cheaply replaced when worn out, etc. But currency kept evolving, as new technologies and new ideas were applied in order to make payments even more efficient and less risky.
In time, checks became more widely used then paper, and eventually wire transfers became even more widely used than checks in transferring large value payments. In recent years, credit/debit cards have become another acceptable form of currency, and the use of smart cards is just around the corner.
However, as these later forms of currency evolved, money’s essential nature was forgotten. As currency got further and further away from the use of precious metal — as currencies came to be considered just a bookkeeping unit of account instead of a specific weight of metal — IOU’s increasingly replaced substance in currency transactions, creating Herstatt risk and all of its accompanying problems. Until now.
I hope to use my patent to build a business over time based on the premise that Gold is money, and it can once again circulate as currency. I do not mean to use the word circulate as Gold coins once circulated. Gold coins are currency of the past. I’m talking about Gold currency of the future.
With the use of modern communications and computing technology, the ideas embodied in my patent will enable Gold and Silver in storage in a safe and secure depository to ‘circulate’ current as if the weight of metal used in the transaction was a coin being passed from hand-to-hand. There is no liability being created by this process, so Herstatt risk and its accompanying problems (and ‘float’ too for that matter) are eliminated. The transaction can be completed in which payments of substance (i.e., metal) are made essentially instantaneously in exchange for substance (i.e., the product being purchased).
If I am right in my thinking, the inherent advantages that have made Gold money over thousands of years will once more work to Gold’s favor and enable it to circulate as currency. In the carefully chosen words of the patent officer — precisely echoing my thinking — explaining why my patent application was allowed:
“Payment risk is eliminated when the medium of exchange is a tangible asset (Gold) instead of a liability (national currencies). Unlike national currencies, the value of Gold is not dependent upon the creditworthiness of a bank or government. Payment risk is eliminated when the payee receives ownership of the Gold…regardless where the transacting parties are physically located.”
Sir Thomas Gresham, confidant and financial advisor to Queen Elizabeth I, postulated a theory about money and currency in the 16th century that came to be known as Gresham’s Law: Bad money drives out good money in a currency system fixed by government impositions. I hope to prove the opposite in the new business I am now establishing. My proposition is: When given a free choice of alternative currencies, good money drives out bad money. If I am right, and Gold once again circulates supplanting national currency, perhaps my proposition may come to be known as Turk’s Law.
I promise to keep you informed about the development of my new business. And if you would like the ability to use Gold as currency to make and receive payments, once my currency system is available, I will welcome you as a client.
The impact of Gold currency will be profound. No longer will you need to sell Gold to realize its value by obtaining in exchange a spendable national currency. When Gold again circulates as currency, you will be able to spend it, skipping national currency and Herstatt risk entirely.