Why Gold?

Lacking an understanding what money is and does, you cannot begin to understand why gold is historically the best money. The qualities that all good money will ideally posses are:

  1. Durability – does it rust? rot? corrode? melt?
  2. Divisibility – does its value change when divided into smaller units? Two halves of one cow is not nearly as valuable as one whole cow.
  3. Portability – Can it be easily transported?
  4. Non-counterfeit-ability – the reason for this attribute should be obvious
  5. Homogeneity – are different units of the same size essentially identical? Not all oranges are identical, nor are all cows. OTOH, gold is gold is gold is gold.

Gold has been the preferred form of money for 5000 years because it is a commodity that possesses all of these qualities.

All fiat currencies are portable, homogenous and divisible. But they are easily counterfeit-able, (just crank up the printing press and make more!), and not remotely durable.

Look at the list of hard commodities traded on the Chicago Mercantile Exchange and you will see things that have been used as money over the millenia. They all have drawbacks of one sort or another, except for gold.

Silver is closest, but it has industrial as well as monetary uses. This dilutes its value as money. Platinum is similar to silver, but much rarer than gold. In fact, all the industrial and rare-earth metals share gold’s qualities, but they all have significant industrial use. Gold is nearly useless as an industrial metal. Strangely, that lack of industrial value actually increases its usefulness as money.

Oil is very close as well. It doesn’t degrade over time, is very easily divisible, and impossible to counterfeit. But because it is a liquid, it tends to be difficult to transport. And of course, like silver, it also has great industrial use.

Salt used to be money, but it lacks durability. Get a good rainstorm or flood and your money literally dissolves before your eyes. Livestock and agricultural commodities have also been used as money, but they all lack one or more of the qualities that gold possesses.
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Commodity-based monies impose fiscal discipline on governments. If a government wants to run a deficit, they have to come up with a way to collect actual money. They can take it from the people by force, but they cannot create it out of thin air.

Imagination-based monies, (fiat), impose no such discipline. With a fiat money, government is free to run up huge debts, and then pay them off with money they create out themselves. This makes it much easier to do incredibly stupid things, like start crazy wars, support military bases in 159 countries around the globe, and bail out giant banks that make crazy, risky bets and lose.

3 thoughts on “Why Gold?”

  1. Aristotle defined the characteristics of a good form of money as durability, portability, divisibility and intrinsic value, which essentially means rarity, i.e., the value of money should be contained in the money itself. Aristotle’s concept of divisibility incorporated consistency – money should be easy to divide and recombine without modifying its basic characteristics.

  2. Actually, the industrial utility of silver increases its value. It’s lost monetary value because at the turn of the last century, governments began demonetizing it, not because of its usefulness in other pursuits. In fact, something that has no value as a commodity is unlikely to succeed as money without the force of government behind it. Gold’s utility is primarily as a luxury good (i.e., an ornament), which is why its value never falls to zero.

    Gold also has one significant problem as money–coins made of purse specie lose value with use, and they can be clipped. Paper bills do not have this problem. Banking partially alleviates this problem, since bullion stored in a vault doesn’t wear.

  3. Maybe I was unclear: I’m not arguing that silver is less valuable per se, just that gold’s unique set of attributes make it particularly useful as money.

    The problem of clipping coins is addressed by scoring the edges of the coins. The US does it with the quarter and the 50 cent piece; the UK does it with the 2 pound coin.

    It’s not necessary to actually circulate the coins; Notes are sufficient as long as Notes are 100% convertible to gold on demand.

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