Is gold money? Many
would say so, including owners of the top-level domains GoldIsMoney.com and GoldIsMoney.info. A web search
returns 18,000 additional affirmative responses. If you want to start a fight
with a gold bug, take the opposite
But is it so?
To answer the
question of whether gold is money requires a definition. This one, from Wikipedia, is typical:
Money is anything
that is generally accepted in payment for goods and services and in repayment
of debts. The main uses of money are as a medium of exchange, a unit of
account, and a store of value.
Wikipedia refers to
three properties of money. However, according to the Austrian economist Carl
Menger, its acceptability in trade is the defining property. While money
undoubtedly does serve as a store of value and a unit of account, these
properties are derivative, not definitional properties. The reason that a
medium of exchange necessarily is also a store of value is the anticipation
of its exchange value in the future.
On this point Menger wrote,
[I]t appears to me to
be just as certain that the functions of being a "measure of value"
and a "store of value" must not be attributed to money as such,
since these functions are of a merely accidental nature and are not an
essential part of the concept of money.
Using the above
definition, the question of whether any particular good is or is not money,
can be posed in this way: is the good
in question accepted as the final means of payment for transactions?
At present, in the
developed world, nearly every nation has its own money or belongs to a currency union, such as the EU. Some nations in the developing
world use the US dollar. In highly
inflationary environments, the local currency is often spontaneously rejected
in favor of the dollar or another foreign currency. Hardly anywhere do we
find gold generally accepted as a means of payment. So gold must fail the
definitional test of moneyness.
Is this the end of
the argument (and so the end of a very short article)? Not quite. Gold is not
money, but it has most of the desirable properties of money, and the process
by which it became money in the past gives some clues about how it may become
money once again.
A store of value is
not necessarily a medium of exchange. As Menger says, a nonmonetary commodity
can serve as a store of value:
But the notion that
attributes to money as such the function of also transferring
"values" from the present into the future must be designated as
erroneous. Although metallic money, because of its durability and low cost of
preservation, is doubtless suitable for this purpose also, it is nevertheless
clear that other commodities are still better suited for it.
Analyst Paul van
Eeden has shown that gold has maintained its purchasing power relative to the
time that the gold standard ended. In "Is Gold an Inflation
Hedge?" I have provided links to van Eeden's articles and a more detailed
discussion. I will summarize his analysis here. A theoretical gold price
equivalent which would give gold the same purchasing power as it had at the
end of the gold standard is calculated by taking the convertibility ratio of
$35 in 1933, and then multiplying by a factor representing the growth in the
quantity of fiat money from that time. Under the classical gold standard,
gold was the entire world's money. By counting worldwide growth in currency
(not only US dollars) and comparing it to a worldwide price currency index of
the gold price, van Eeden avoids the pitfalls of looking only at gold's
dollar price, which can experience significant volatility due to the dollar's
exchange rate against other national currencies.
Van Eeden's research
shows that, since the end of the gold standard, the price of gold in units of
fiat currency has tracked its purchasing-power-equivalent price fairly well,
oscillating in a band around its theoretical value. In essence, the
purchasing power of gold has been reasonably stable in the time since the end
of the gold standard, which is only another way of saying that gold has
served as a store of value.
Even today most of the demand for gold is not for direct use, but
demand to hold. In the developed world, people purchase coins and bars for
storage in vaults. In other areas, people save by accumulating bullion
jewelry. Distinct from ornamental jewelry, bullion jewelry has low
workmanship value added. Its price is not much greater than the melt value of
its metal content.
I wrote the following
in "The Myth of the
Gold Supply Deficit":
The World Gold
Council estimates that 52% of
gold is held as jewelry. James Turk subdivides jewelry holdings into low carat
and high carat. The former is purchased mainly for the gold value, as an
alternative to buying bars and coins. The latter is purchased mostly for
fashion. According to Turk's estimate (which was published
in 1996), monetary jewelry at that time accounted for about 60% of jewelry with
fashion jewelry accounting for the remaining 40%. However, even when made
into jewelry, the gold is not destroyed and can come back into the market as
scrap. The WGC figures show significant recovery from scrap.
That gold continued
to be a store of value post gold standard was unexpected by many economists. In
the early 1970s, when the dollar's
link to gold was cut, economist Milton Friedman predicted that the price of
gold would collapse. The Nobel laureate
believed that the gold derived its value from its relationship with the
dollar; without gold backing, there would be far less demand for gold. There
would, of course, continue to be industrial demand for the metal, but without
monetary demand provided by the dollar, the vast supply that had been
accumulated during the preceding centuries would overhand the market,
depressing the gold price for the foreseeable future. Friedman could not have
been more wrong. It was the dollar that collapsed in the 1970s, while the
gold price in dollars began a bull run that was not eclipsed in nominal terms
until late last year.
A similar and still
widely held view in the world of mainstream financial analysts is that gold
has been "demonetized." The argument goes like this:
central banks decide what money is; central banks have determined that gold
is not money; therefore gold is not money. Only the stupid gold investors
haven't figured this out. This view of the gold market sees the price of gold
as determined primarily by central banks (who own an estimated 10–17%
of above-ground supply). The critical variable is how they will time the
sales of their gold hoards without causing a selling panic as market
participants realized that their gold coins and bars have no monetary value.
But why is gold a
better store of value than most any of a vast number other nonmonetary goods?
Why were Milton Friedman and the other
economists wrong? Their error was the assumption that political institutions
have the final say over what is and is not money. But this is not so: the
market has final say. Looking at the process by which money originated from
barter helps to understand why. According to Menger, money came into being
through the efforts of individuals to expand the range of goods they could
acquire through exchange beyond the possibilities available. Some individuals in a barter
economy begin by bartering their goods for a commodity that they do not need
but is generally in demand throughout the market, with the intention of later exchanging that commodity for
other goods. This strategy is called indirect
exchange. These astute traders realize that "the acquisition
by trade of the consumption goods that he needs … can proceed …
much more quickly, more economically, and with a greatly enhanced probability
As societies moved
from barter to monetary economies, different goods were in competition with
each other for use as money. Over time, as monetary exchange expanded in
proportion to barter, some commodities were found to work better as money
than others, until only a handful of them became "acceptable to everyone
in trade." Those were gold and
What qualities have
made gold (and silver) the winners of the monetary competition in centuries
past? The qualities most often cited by monetary historians are durability,
divisibility, recognizability, portability, scarcity (the difficulty of
producing more of it), and a value-to-weight ratio that is neither too high
nor too low. Too low a ratio would make it hard to carry enough for spending,
while too high a ratio would make small transactions difficult and prevent
the commodity from being sufficiently widely owned in the prior barter
economy. Gold still has these qualities today. While fiat money has some of
them, it fails the scarcity test: it is too easy to create more of it.
The result of market
competition is not necessarily permanent. Market competition is an ongoing
process. Even when one commodity emerged as money, there continued to be
competition from other nonmonetary commodities. Once the world's money, even
gold could have lost its place had a superior alternative emerged. But that
is not the reason we no longer use it. Political money did not prove its superiority through a
market process. What happened instead was a politically imposed change from a
better system to a worse system.
Although the central
bankers have used political means to replace gold with paper, they do not
have the power to end the competition between their money and commodity
money. The "demonetization" of gold by central banks has rigged the
competition — but not ended it.
Gold as money may not
be over for all time. As the monetary system melts down, gold functions as
"shadow money," an alternative that competes with the political
money. It remains a store of value because of its potential to become money
again. There is continuing demand for gold as a hedge against the breakdown
of the fiat system.
force people to use their money beyond a point. The market will only continue
to accept fiat money as long as it works well enough (or even, not too
badly). If governments debase their currency beyond a point where it
maintains some value over time, people will stop using government currency
and switch to something else.
suffering hyperinflation (or even just excessive inflation), people typically
start quoting prices and accepting in trade in the more stable currencies of
other countries. Earlier this year, VietnamNet reported that land
prices are being quoted in gold rather than the local currency,
The world is lurching
through a serious monetary disorder. The proximate cause is the collapse of
the housing bubble and the subprime-credit crisis, but the ultimate cause is
the inherently unstable monetary system foisted upon us by a banking cartel. Central
bankers are called upon to act as lenders of last resort, but in their
efforts to inflate
their way out of the credit collapse, they risk igniting a
hyperinflationary bonfire that will destroy the world's major fiat
was money once, and could become so again.
Robert Blumen is an independent
software developer based in San Francisco, California