Why Gold, (instead of anything else)?

If you lack understanding about what money is and what it does, you cannot begin to understand why gold is historically the best money. All good money will ideally posses these qualities:

  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.

If you look at the list of hard commodities traded on the Chicago Mercantile Exchange, you will see various commodities that have been used as money over the millenia. For use as money, though, they all have drawbacks of one sort or another. All except for gold.

Silver is closest to gold in usefulness as money, but its main use is industrial which actually 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 uses. Strangely, because Gold is nearly useless as an industrial metal, it is actually more useful as money.

Oil has most of the properties of “good” money 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 was used as money in the past, but it lacks durability. A good rainstorm or flood makes your money literally dissolve before your eyes. Livestock and agricultural commodities have also been used as money, but they all lack one or more of the monetary 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 even more money they create out of thin air. (In other words, exactly what modern governments are doing.) This makes it much easier to do incredibly stupid things, like start crazy wars, support military excursions around the globe, and bail out giant banks that make crazy, risky bets and lose.

1 thought on “Why Gold, (instead of anything else)?”

  1. Gold has one drawback–it loses value with use. Paper money can’t be clipped. Gold can. Just put a bunch of gold coins in a sack, shake it up, and now you have more money that you started with–the face value of the coins, plus the dust.

    The major problem with fiats is most likely their monopoly status in currency zones, not the intrinsic nature of fiat money as such. One thing you’ll notice is that rapidly-melting currencies end up being rather useless for international trades, so governments that inflate their currencies too fast find themselves unable to procure goods and services in the quantities they want. As it so happens, trade ends up being conducted in currencies that are relatively stable over the medium term–even third-world despots are forced to trade in dollars and euros.

    The inflationary pressure comes from the monopoly privilege governments grant to themselves. The temptation is ever present to run a perpetual deficit financed with printed money. They’re able to do this because, while markets may ultimately dictate which currency is used in international trade, the citizens of a country are forced to use the government’s fiat. This allows every government some leeway to inflate. If currency markets existed both domestically *and* internationally, i.e., currency was provided by competing private institutions rather than monopolies, the overwhelming market pressure would be for a currency with a stable value (and there’d be no pressure to buy votes via stealth devaluation). Debtors are hurt by deflation, and lenders are hurt by inflation–so the market demand is for a stable currency.

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