-- Published: Wednesday, 7 October 2015 | Print | Disqus
Gold was money in the distant past and it will probably be money in the distant future, but there is no developed economy in which gold is money today. In this post Iíll explain why.
People who argue that gold is money often confuse what should be with what is. They explain why gold-money would be vastly superior to any of todayís fiat currencies and their explanations are probably 100% correct, but they are sidestepping the issue. There is no doubt in my mind that gold is far better suited to being money than something that can be created at whim by commercial banks and central banks, but the fact is that gold is presently not money.
Part of confusing what should be with what is sometimes involves the claim that governments canít determine what is and isnít money. This is akin to someone claiming it canít rain while standing in the middle of a rainstorm.
The hard reality is that governments routinely do many things that they shouldnít be able to do. Governments shouldnít be able to force people into slavery, but they sometimes do it. They call it conscription or the draft. Governments shouldnít be able to steal, but they do it on a grand scale every day and call it taxation. Governments shouldnít be able to monitor almost all financial transactions and most internet communications, but they do. They call it national security or keeping us safe from terrorists and drug traffickers. Governments, either directly or via their agents, shouldnít be able to siphon away the purchasing-power of savings and wages, but they do it under the guise of economic stimulus. Governments shouldnít be able to put obstacles in the way of peaceful, voluntary transactions, in the process greatly increasing the cost of doing business and thus reducing living standards, by they do it every day and call it regulation. One particular government (that of the US) shouldnít be almost continuously intervening militarily in multiple countries around the world, but it is. They call it peace through strength or keeping the world safe for democracy.
So, please donít insult my intelligence by asserting that governments donít have the power to determine what is money!
Another common mistake made by people who argue that gold is money is to emphasise goldís store-of-value (meaning: store of purchasing-power since value is subjective and therefore canít be stored) quality. However, there are many things that have been good stores of value that obviously arenít money, so acting as a store of value clearly isnít the defining characteristic of money.
Which brings me to a critical point: Before you can logically argue whether something is or isnít money, you must first have a definition of money. And since we are dealing with something that affects everyone, the definition must be practical and easily understood.
The only practical definition of money is: the general medium of exchange or a very commonly used means of payment within an economy. By this definition, gold is not money in any developed economy today. By this definition, the US$ is money in the US, the euro is money in the euro-zone, the Yen is money in Japan, the Australian dollar is money in Australia, etc.
Once something is the general medium of exchange it will generally be used as a unit of account. The unit-of-account function stems naturally from the medium-of-exchange function. Also, for something to be good money it should be a good long-term store of purchasing power, but, as noted above, being a good long-term store of purchasing power is clearly not the defining characteristic of money. Being a poor long-term store of purchasing power would almost certainly preclude something from being money in a free market, but we do not currently have a free market. Do not confuse what is with what should be!
Now, I acknowledge that it is possible to concoct definitions of money that lead to the conclusion that gold is money, but such definitions either arenít practical, or are focused on a characteristic of gold that is shared by some obviously non-monetary assets, or are simply wrong.
In conclusion, if something is money then the average person will know it is money because he will be regularly using it as a medium of exchange in his daily life. In other words, money cannot be a secret to which only an elite group is privy. Gold is therefore not money at this time. If it were, we wouldnít be in such a precarious economic situation.
So if gold isnít money, then what is it? Thatís an interesting question that warrants a separate post.
| Digg This Article
-- Published: Wednesday, 7 October 2015 | E-Mail | Print | Source: GoldSeek.com