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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 I'll 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 today's
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 can't determine what is and isn't money. This is akin to
someone claiming it can't rain while standing in the middle of a rainstorm.
The hard reality is that governments routinely do many things that they
shouldn't be able to do. Governments shouldn't be able to force people into
slavery, but they sometimes do it. They call it conscription or the draft.
Governments shouldn't be able to steal, but they do it on a grand scale every
day and call it taxation. Governments shouldn't 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, shouldn't be
able to siphon away the purchasing-power of savings and wages, but they do it
under the guise of economic stimulus. Governments shouldn't 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) shouldn't 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 don't insult my intelligence by asserting that governments
don't have the power to determine what is money!
Another common mistake made by people who argue that gold is money is to
emphasise gold's store-of-value (meaning: store of purchasing-power since
value is subjective and therefore can't be stored) quality. However, there
are many things that have been good stores of value that obviously aren't
money, so acting as a store of value clearly isn't the defining
characteristic of money.
Which brings me to a critical point: Before you can logically argue
whether something is or isn't 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
aren't 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
wouldn't be in such a precarious economic situation.
So if gold isn't money, then what is it? That's an interesting question
that warrants a separate post.
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