Gold is Money
And God created the two precious metals, gold and silver, to serve as the measure of value of all commodities. They are also generally used by men as a store or treasure. For although other goods are sometimes stored it is only with the intention of acquiring gold or silver. For other goods are subject to the fluctuations of the market, from which they (gold and silver) are immune.
Ibn Khaldun, Al Muquaddimah (circa 1379)
A recent article stated that Gold cannot be considered money because money is whatever circulates as the medium of exchange. This error is common and long-standing and it is time that it was laid to rest.
Money’s use as a medium of exchange is a secondary function. Just about anything can pass muster as a medium of exchange – even paper debt notes in the short term.
Only Gold can perform the senior function of money, which is to store a stable value over indefinite time. Note that there is a world of difference between storing a stable value over indefinite time and being ‘a good store of value’. Salt and copper are good stores of value, but those values are hardly stable.
Storing a stable value over indefinite time should not be confused with storing a stable purchasing power; there is no stability to the perception of any good’s value.
To demand that money hold a ‘stable purchasing power’ is to attempt to measure money’s value using goods – a reversion of reality. Money is the tool that each person uses to quantify his or her perception of a good’s value at any point in time – to measure value. Money has a stable value; goods have an unstable value. In any science it is the most stable value that is used as the measure; the monetary science is no exception.
After so many decades using junk paper and coins as the medium of exchange, it is hard for some to grasp that there is nothing that can measure Gold’s value. If we ever did find something, then that would become the new money and Gold’s multi-millennia monetary role would be at an end.
The unique circumstances that brought about Gold’s stability of value ensure that this will not happen.
The article goes on to repeat the careless claim that all value is subjective. Some values are objective; it is the quantity of value that is always subjective. Water is undeniably of objective value to a human, but the amount of value is perceived to be non-existent when the person is drowning.
Only Gold can stably hold its value over time; only Gold has ever been able to do that, and that is why only Gold is money. It is this quality that causes Gold (or its surrogate silver) to be preferred in the marketplace, but it is not essential. When some other medium of exchange has been forced into circulation, prudent people just swap any surplus for money.
What circulates as the medium of exchange is of little importance, as long as it can be freely swapped for money. When it cannot and its stability of value is called into question, then its days are numbered. The legitimacy of all media of exchange is derived from money.
At the root of some, but not all, of the article’s errors is the concept of money being ‘the most marketable good’; this was a best guess by the estimable Carl Menger. In its favour it can be stated that it was far more logical than Georg Knapp’s dismal guess that governments invented money. No matter, history shows unequivocally that both were wrong. In the 21st century we no longer have to rely on guesswork.
Money did not evolve over thousands of years; money entered the marketplace at one quite precise point in time and space. Its unique characteristic of holding a stable value initiated the world’s first recorded Golden Age and set humanity on its path to the modern world.
If ever an Egyptologist and an economist had gone to the bar for a beer together that would have become evident a long time ago.
But therein may lie the problem – who would want to go for a beer with an economist?
Philip Barton 9th October 2015