By Matthew Chancey
5 August 2002
I first heard of James Turk several years ago from Franklin Sanders, a mutual friend and hard money man. (By the way, Franklin publishes an excellent newsletter, 'The Moneychanger,' tracking metals and the market – www.the-moneychanger.com.) Franklin told me about James's patent on digital gold currency. However, it was only recently that I finally had the opportunity to meet James in person.
James is soft-spoken, intelligent and obviously very talented in the world of international finance. It was evident from our conversation that a tremendous amount of thought and planning has gone into GoldMoney's business model. For this reason alone, I expect good things to come from GoldMoney and believe many of the company's policies and practices will become industry standards for competing businesses.
TGE: Your family is from Austria, correct?
Turk: My father was born in Austria. I am a first generation American. A lot of my thinking about sound money actually goes back to what I learned from my father. My father was a craftsman. He made precision machine parts, which is what my grandfather did as well. After the Austrian hyperinflation and devastation following WWI, my grandfather decided to come to America and start over. My father was 12 years old at the time. They settled in Ohio, and my father began to work in the same field as my grandfather. They had a very successful business.
My father was a brilliant man. He spoke several languages but never had a college education. He always used to say to me and my sisters that in order to complete our education we would have to go to the University—and we all did.
At an early age I became interested in banking and finance and working internationally, so I chose George Washington University, because at the time it was one of the best schools in the country for international economics. Professors worked at the Treasury Department, the International Monetary Fund, etc. I earned my degree in International Economics in 1969. I was taught that gold was the 'barbarous relic of the past.' In the early 1970s, when the gold price started rising, it rose to what back then was considered to be the 'ridiculous' price of $50 an ounce. I realized that what I had learned at school was either wrong or gold was extremely over valued. So, essentially, what I did was step back and start looking around at what was going on and started reading everything I could get my hands on. That's when I stumbled upon the Austrian school of economic theory, and over a period of years I essentially re-educated myself.
Unfortunately, my father died before then, so I never had the opportunity to tell him that I really did not need to go to the University to complete my education! What I learned at school was actually complete nonsense in terms of how the world really works—at least as it relates to economics. Ivory tower theorizing was one thing, but the practical reality of real-life economic activity is something entirely different.
When I graduated, I joined Chase Manhattan Bank right away. I went to Thailand in 1971 as the manager of the bank's commercial loan portfolio. This was when I was in the process of re-educating myself. In 1974, Herstatt Bank collapsed and it literally brought the international monetary system to its knees. Herstatt Bank was a medium-sized West German bank. I thought to myself, 'How could a medium-sized West-German bank do this to banking giants around the world?' On my own time, I decided to study how this happened and if possible, to devise a solution. This was all taking place during my 're-programming' from college. I was studying first-hand how the world really works—what money is, how banking works, how money is put into the system, etc. And for me, going to Thailand was a great opportunity. When I first went through the training program at Chase, they would ask students who did very well to stay behind and teach the next group coming in. Fortunately, I was chosen to stay behind. The quid pro quo for staying behind was that you received your choice of assignments upon completion.
When I was ready to go overseas, I had two options. I could go to London and be number 16 or 20 on the totem pole, or I could go to Thailand and be number two. It was a very good decision, because I was able to see how banking interacted with a smaller economy. In Thailand, I could see the impact of the central bank and banking decisions on the local economy. When Herstatt happened at the same time, I was able to see the various factors leading to the bank's collapse.
So, over those few years, I continued reading and developing my thinking in terms of what 'Herstatt Risk' is, what sound money is, etc. I stumbled across some very good books at that time. I read Harry Brown's You Can Profit from the Monetary Crisis. That got me interested in some of the other newsletter writers. I stumbled across Richard Russell and started reading him in 1974. I also started reading Harry Schultz.
TGE: I also understand that Harry is still making about $gazillion an hour for investment advice.
Turk: Yes. All of these guys are still around for a reason: they're good and they know what they are talking about. So, I learned a lot from them. I read a lot of Ludwig Von Mises. I think he was one of the most brilliant minds of the 20th century. I also read a lot of the others. Murray Rothbard was another genius in terms of economic thought. I realized back in the 70s that Austrian economics was working more with the continental European concept of banking rather than the Anglo-Saxon view of banking. For example, in European banking there was a big focus on cash currency, as opposed to deposit currency, which had become more important with Anglo-Saxon banking.
By February of 1979, I came up with the beginnings of an answer to solving Herstatt risk. The answer is what has basically become GoldMoney's business model. To solve Herstatt risk, a currency would have to be circulating as an asset as opposed to a liability of some financial institution. The way this could happen is if the asset's ownership could change instantaneously through a high-speed communication network. At the time, I thought to myself 'What a wonderful idea—too bad it will never happen in my lifetime, because the technology doesn't exist.' Even though I was only 32 at the time, I never thought it would be possible.
However, by the late 1980s, the technology was moving more rapidly than I had conceived possible even a few years before. I had not let go of my idea because it was powerful, and in the 1980's I continued to refine and develop it. By 1990 I realized that I should start carving out the intellectual property, because it seemed to me that it was not only a good idea but the next logical step in the way currency was going to evolve. If you look at the history of money, it's really the history of currency. Currency became and is continuing to become more and more efficient. The cheaper and more efficient currency becomes, the better the economy is going to be, because money is the essential ingredient of society. It enables us to communicate value with one another. That's what brings about the whole opportunity for voluntary, mutually beneficial exchanges, which is the nature of the free market itself.
Anyway, by 1990, I realized that this currency evolution was going to happen sooner than I thought. So I began to carve out the intellectual property rights with the idea to create a business if the technology did develop. I began researching patent law. I realized that it was a patentable idea, because we were creating a new type of currency. We were 'advancing the prior art,' as they say in patent law. I hired a patent attorney in 1992 and filed my first patent application in February of 1993. Even then, it was long before the commercial possibilities of the Internet were understood. We obtained our patent in 1997. In 1999, we began developing the business, which finally launched in January of 2001.
TGE: What is 'GoldMoney?'
Turk: I take it that you mean the concept, not the company. Before GoldMoney launched, the term being used was 'gold-backed currency' (GBC). Right after we launched, I explained that GBC was not the correct terminology and that, in fact, what we were talking about was 'DGC'– digital gold currency. There is paper gold currency and coined gold currency. What we are offering is digital gold currency. The reason why GBC was not the correct term is that it was a throw-back to the past. When you talk about 'backing,' you are talking about a liability circulating as currency that is backed by some asset. It is an I.O.U. In GoldMoney, your currency is not 'backed' -- it's the gold itself that circulates as currency. It remains in the vault and the ownership of grams of gold and fractions of grams are transferred with the ‘click' of your mouse.
TGE: You are hitting on the most difficult aspect of the Gold Economy—that of introducing our product to the average consumer. It is very difficult to get people thinking in terms of Austrian economic theory or currency as circulating liabilities, etc. There is a principle in politics that once you start explaining, you're dead. In other words, you have to speak the people's language. If you try to get them to think in terms of your language, you will lose them—and consequently the election.
Turk: That's an interesting observation, because the trends in my mind are changing. The last century was a century of increasing centralization, increasing unification. This century, we are already seeing the exact opposite. We are seeing decentralization—even in the political parties. People want their own specific views to be felt and heard. The Internet is the medium that's enabling that change to occur. It's not too surprising then that the Internet is also providing currency—the most fundamental thing to society.
It's interesting that when I talk about DGC to a lot of 'gold guys,' they still don't get it. However, when I talk to Internet guys, they may ask 'Why gold?' But when you explain to them what it accomplishes, the light comes on and they respond 'Wow, you solve all the problems we are trying to deal with!' In my mind it is inevitable that DGC is going to become a predominant currency in the 21st century, but not because it is gold per se, but because it is a more efficient, low-cost form of currency, and it solves problems for online commerce that national currencies cannot solve.
TGE: You're right. The computer guys are the ones who know what the Internet is. They know what it is capable of doing. They were the ones who first tried to buy something online and dealt with the fraud issues, the security issues, the privacy issues, the compatibility issues, etc. For me, I didn't know anything about gold. But I knew one thing: I loved E-bay. I began using E-bay when there were less than 2,000 auctions. I encountered all the problems with trying to transact business over the Net. I knew that something better had to come along—although I did not know what it was at the time.
Turk: Exactly. The need for a more efficient currency is there. DGC fills that need.
TGE: What do you see as GoldMoney's strengths over the competitors?
Turk: We put GoldMoney together in a way that reflects the many years of business experience of the people who formed GoldMoney. We conceptualized some key issues from day one: Who owns the gold? How do you minimize the costs? What impediments should be eliminated? What are the vulnerabilities that people will be looking at and how do you overcome them?
For example, the governance procedures that we have established in GoldMoney are unmatched. In this regard, we have already noted in the past that we are prepared to license the patent technology for anyone else that meets our standards. So far, no one has done that. But we are still quite amenable to pursuing that course of action—provided the standards are met. So we think we have built the better product. We think we have the better vision. We bring a lot more experience to the table. We have brought first class partners to the table: VIA MAT, Dimension Data, etc. At the end of the day, we think that our resources combined with our vision are ultimately going to ensure our success as the leading digital gold currency.
TGE: If I'm not mistaken, GoldMoney is the only DGC company with an extensive background in banking and finance. Everybody else seems to have gotten in the business because they saw a literal 'golden opportunity.'
Turk: That is probably right.
TGE: Tell me about the opportunities that have recently developed between GoldMoney and several gold mining companies.
Turk: I have been spending a lot of time in Toronto to make it happen. When you are doing something new, there are a lot of hurdles to overcome. We are taking down those hurdles one at a time. We have met with the Toronto Stock Exchange; we've met with the Canadian Depository Services, which is the equivalent of the Depository Trust Company here in the States. Our objective has always been to make payment of a dividend in gold through GoldMoney possible by the end of 2002. From where we stand today, I think it is still a reasonable expectation. What that does is provide a wonderful mechanism for the gold industry to satisfy the requirements of their shareholders. Their shareholders want dividends in gold, and GoldMoney will make that happen. So, we are talking about potentially millions of dollars of dividends and thousands of shareholders.
TGE: Given current market conditions, it's a good time for it.
Turk: Yes. We've got the wind in our sails. But I don't think this positive environment is going to end anytime soon. I think gold is at the beginning of a multi-year move.
TGE: That brings me to the next question: where do you see the Gold Economy in five years? What should we expect?
Turk: I'll address the question in two ways. First, I will deal with DGC in five years and then talk about what that means for the Gold Economy. If we were sitting here in 1977 and I told you that Corporate IT departments are going to be turned on their head in ten years, you would say it would never happen. But by the late 1980s, the personal computer had gone from a hobby to a corporate tool, and IT departments were forever changed. IT departments are still around today, but they are not at all like what they were back in the 1970s.
So if we flash forward to today and say that in ten years, bank payment systems are going to be turned on their head, you will probably say it's not going to happen. But the reality is technology is changing bank payment systems today, and DGC is at the forefront in what is causing those payment systems to change. So, in ten years, we will still have bank payment systems, but they will be forever altered by the technology that is only now becoming available.
If you look at the first 'cars' that were invented, they look more like a carriage without a horse than they do a modern automobile. Those first cars look that way for a reason: that's what transportation was conceived as being up until that moment in time. Over a period of years, the modern automobile started to emerge with fenders, roofs, glass, etc. The cars were primitive looking, but they had the basic components of the modern automobile.
Flash forward to the Internet. Making plastic credit-cards circulate as currency on the Internet is no different from those first 'cars.' People are looking backward as to what currency has been, rather than forward as to what the Internet makes possible and what as a result currency will evolve to be. People do not understand what the invention is and that they don't have to worry about the previous constraints. Several cyber-cash companies tried to make what they thought as currency work on the Internet. They failed. But what GoldMoney has done, even before the advent of the Internet, was predict the next step in currency evolution—looking beyond the technological and other limitations that constrained currency to what it was at that moment in time.
Now, what does this mean for the Gold Economy? Over the next ten years, digital gold currency will play a major role in cross-border transactions. Banking systems will still do clearing within countries, but they will lose international transactions to DGC. The implications for the Gold Economy will be profound. This is where the gold-mining industry dividend program becomes so important. What will happen is that as the mining companies pay dividends in gold, they put gold into people's hands. This GoldMoney will then make the Gold Economy grow. Growing the Gold Economy is not about finding merchants and getting people to buy gold at 5% over spot in order to buy something online. That's not the way it's going to work. The way it's going to work is that you get the mining companies to put a lot of DGC into the system, and when merchants see the purchasing power sitting out there, plus all the other advantages of DGC, that's what is going to cause the Gold Economy to grow and GoldMoney will grow along with it. The GoldMoney dividend payment by the gold mining companies is, in my mind, the most important step for the development of the Gold Economy. That's why we are committed to making it happen and putting all of our resources towards making it happen by the end of the year.
TGE: What do you see as the major challenges facing the Gold Economy?
Turk: I am very concerned about the collapse of Standard Reserve. Back in the early days of time-sharing, dishonest businessmen gave the industry a bad reputation. It has taken 20 or 30 years for time-sharing to become a respectable business proposition. In the same manner, the collapse of Standard Reserve and apparent weaknesses in at least one other operator, can give the industry a black eye even before it hardly gets started. That's one of the reasons why GoldMoney emphasizes standards and governance issues, so that people know the serious competitor out there is doing things the right way.
TGE: You mentioned that GoldMoney has the best governance in the industry. Would you mind elaborating more on why you believe that to be the case (i.e. what are some of the things you are doing that competitors are not)?
Turk: It's not just a question of what we are doing now, but also what we have done in the past. For example, GoldMoney was designed and built by Dimension Data, one of the world's leading software firms. Who built the software of the other providers? Is their software reliable? Is their software secure? Also, our auditor has audited our system, so we know our customers are protected. Who else has done that? No one that I am aware of.
The most important governance control is to separate ‘minting' from the storage and bookkeeping. The recent collapse of Standard Reserve clearly highlights the risks that users are taking when the ‘minting' function is not completed by an independent third party. We are the only firm that uses an independent third party to control this important task. We use an established commercial trust firm to make sure that GoldGrams are always equal to the weight of gold in the vault. They are our ‘Comptroller of the Currency'. No one else has a Comptroller of the Currency.
TGE: I understand that GoldMoney stores the bullion belonging to your customers with VIA MAT. Do your quarterly audits include a bullion assay?--By that I mean a random full melt bar assay to ensure that the bars are of the actual purity and weight printed.
Turk: We do even better than that. All of the gold within GoldMoney meets the standards of the London Bullion Market Association. The LBMA has a rigorous control procedure. So in addition to conducting periodic assay checks of all bullion within the LBMA chain of integrity, LBMA rules require its members to make good on any bar that does not meet the weight or purity measures stamped on to the bar. It is widely accepted within the gold industry that the LBMA is the premier standard for physical gold worldwide.
TGE: Along those same lines, what are the terms of the London Bullion Market Association's chain of integrity? If one of the GoldMoney bars were found to be counterfeit, who is legally and fiscally responsible for the loss?
Turk: I don't think there has ever been a counterfeit bar in the history of the LBMA. But if an underweight bar were detected, LBMA rules require the LBMA member who refined the bar to stand behind it and make good on it, and we are talking here about the largest gold refiners in the world. But if for any reason they didn't perform, we would make good on the bar. But given the LBMA's history and high standards, you have to keep in mind the extremely small possibility of there being an underweight bar, which highlights an important reason we use LBMA bars – they offer real consumer protection. Consumers are at far greater risk with non-LBMA bars, which makes periodic assaying of non-LBMA not only a good policy, but essential. But what happens if one of those non-LBMA bars is underweight or counterfeit? I don't know whether the other operators have policy to make good on those bars, or whether their users are at risk.
TGE: Regarding the GoldMoney suit against e-gold, Planet Gold recently published a letter from one of e-gold's attorneys to your patent attorney suggesting that if GoldMoney does not produce a patent analysis showing infringement that e-gold may bring a Title 11 motion against GoldMoney for filing a frivolous suit. Do you plan on conducting a patent analysis showing how e-gold is in violation?
Turk: Our defense of our property rights is still ongoing, so I can't make any comment except to say that our case is clear and we remain confident that we will prevail in this matter.