Tag: Gold as money

Why Gold?

Nat posted this question:

Really, as an investment right now, any commodity is a good buy. I would say gold, guns and bullets are pretty valuable. So your second question is really the one i am asking about. Why should we peg the dollar to gold and not some other natural resource? Gold has no true value. Its pretty, is used in some manufacturing, has a history, but other than that, useless.

I would again recommend that anyone who has this question read Murray Rothbard’s essay Case for the 100% Gold Dollar. It succinctly answers this very question. So as to not just rehash what Rothbard argues, I’d like to make this a hypothetical exercise. 

Pretend for a moment that the government had no power to issue money or to declare legal tender. A lot of people have a hard time with this because they feel that money inherently comes from the government, but they are wrong. As I say in my book, money is a self-organizing principle of a community. So at the beginning we would see various communities using different commodities as money. Perhaps the East Coast would settle on using gold as their money, but let’s say Nevada preferred Silver, except for this one town in Nevada which has decided to use cigarettes. 

So we had those three commodities being used as money in three different places. That may seem crazy, but it’s not in any way different that the situation we have today with different countries standardizing on different fiat monies with no backing whatsoever. When I go to Canada in a couple of weeks I an going to exchange some of my American Dollars for some Canadian Dollars; returning to our hypothetical example, if you were visiting the East Coast, you would exchange your silver currency for gold. In this way, the free market would determine both the exchange rates of all of the commodities used as money. In addition, each person in a given community would be allowed to chose what form they wanted to store their wealth in. 

So you can think of this hypothetical exercise as a grand social experiment regarding money. As the communities began to trade more and more with each other, there would be a tendency to standardize on one particular money so that trade could be normalized across more communities. Whatever this grand money would have to be would have to meet certain criteria:

1. People would need to value it. 
2. It would need to be scare. (So oxygen is out until the air is so polluted we can’t breathe it anymore).
3. It would need to be easily transported.
4. It would need to be rendered into standardized units.  
5. It would need to be a store of value across time. So it would need to not be easily perishable. 

Ok, let’s come back from the hypothetical experiment for now. In this thought experiment we learned that money is a self-organizing principle and that as communities traded with each other there would be a tendency towards adopting the same money as your trading partners.

Now here’s the kicker. This experiment has been run already- more than once. Precious metals always seem to become the desired money upon which communities settle. I can’t tell you why it is that humans value precious metals, but we do. So the reason I’m saying we should return to gold now is because it the money that societies have always gravitated towards for at least the last 4000 years or so.

Now I’m not saying that gold will be the money of the human race for the next 4000 years.  Perhaps in the future we will develop a Star Trek fabricator that, in addition to piping hot Earl Gray tea, will render as much gold as you could possibly ask for. The commodity of choice in the Star Trek Universe might be Dilithium crystals or antimatter, because that’s what makes society go. But that world won’t evolve over night, and if and when it does evolve, gold will be tradable as a commodity for these dilithium crystals right up until we technology got to the point where we had complete control over all matter. 

In the meantime, if you are still not convinced that gold should serve as our money, and Article I, Section 10 of the US Constitution which reads that “No state shall… emit bills of credit; make anything but gold and silver coin a tender in payment of debts” still hasn’t convinced you, then know that I as a free market person respect your right to call for any form of money you wish. We can it is conceivable that we could always start the experiment over and allow all communities to start trading in their own money, but I’d be prepared to put a heavy wager on precious metals coming out on top. 

In terms of the world we live in today, you are correct in saying that any natural resource can conceivably be used as a money to back a currency, but bankers are still partial to things they can put in their vault. Even in today’s world, where every effort has been made to demonetize gold, every central banker in the world will still show and accept it to be shown on a balance sheet as asset. That’s saying something. So if gold is still used as a money amongst central bankers today, despite all of the efforts to the world’s governments to deny it’s use as money, then that’s really saying something.

The one final thing I want to point to is that virtually all commodities in the world are lower today than they were a year ago, except gold. It is the commodity that people have fled to as they have lost faith in the system. So much so that many bullion dealers haven’t been able to keep gold coins in stock. What do you think the odds are that people are going to suddenly stop valuing it?

So, my question to you is, “Why not gold?”

Answering Nat’s Questions

Nat, good friend and now a blog reader, asks two questions:

BTW, Preston, I am about halfway through you book. It’s a good read, especially considering the recent economic catastrophe. I am curious why you think gold should be the standard of monetary policy as opposed to some other commodity. Though problem: If gold were still the standard and in the future we discovered gold on another planet…how would that affect the economy? Supply and demand would dictate that gold would immediately see a reduction in value because of increased supply. I am curious as to your opinion on owning land.

I just read an article that suggested that due to the U.S. making a deal with OPEC to only accept the dollar back in the day that technically, the U.S. dollar is backed by oil…i.e. the OIL STANDARD. What’s your take on that theory?

Let’s take gold first. A lot of what I’m going to say was already well argued by Dr. Murray Rothbard in What Has Government Done to Our Money. As Rothbard argues, the advantages regarding gold is that it has intrinsic value. To argue otherwise is to go against at least 4000 years of human history. Human’s like gold. Always have, always will. Now they also value a lot of other things (real estate, diamonds, art, oil) but the advantages of using gold as money is that it is reasonably easy to transport (unlike real estate), is a dense way to store wealth (unlike oil), can be stored for long periods of time without loss, and can be broken down into fundamental units of accounting to make exchange easy (unlike diamonds). There are few other forms of wealth that meet all of these requirements. 

Now how much people value gold changes over time. Some estimate put the “gold to dollar” exchange ration at about $3000 in the Middle Ages. The entire European What happened next should help to answer Nat’s next question about what if we suddenly found a source of gold that would drop gold’s value relative to everything else, because that’s exactly what happened. The New World was discovered and with it the vast golden wealth of the Incas and Aztecs. The value of gold suddenly dropped to roughly $800 or so. This caused inflation as the cost of goods and services went up in comparison to gold because of this sudden increase in supply, but after this happened the economy went right on about it’s business. There was no calamity. 

Now in regards to your other question, yes I do feel that the US government has made deal with Middle Eastern governments. In fact, John Perkins discusses exactly how the United States got third world governments to play along with our economic wishes in his two books, Confessions of an Economic Hitman and his followup book The Secret History of the American Empire. Perkins books are fascinating because they are basically an inside account of how the American empire was build coming from someone who was involved from the inside. I believe that the CIA engineered the Shah’s rise to power. Similarly, it is common knowledge that we the US government has long been an ally of the Saudi Royal family. That is why the so many of the 9/11 hijackers were Saudis: the Saudi citizens hate the ruling family but feel that they can not get rid of them unless the United States allows it.