I am still surprised to meet people who will tell me that Gold is Money, aside from the obese and bespectacled fellow with the greasy hair that works at the local coin shop, from whom I would expect such fuzzy logic for no reason other than he does after all have a product to sell.
Often the 'Gold is Money' crew will go so far as to say that Gold is also the only REAL money and that all other types of Money are somehow invalid or fake. A long time ago I was frustrated by these ignorant beliefs, but in my old age they have become a mere source of amusement. Indeed, a midst the popular fog of propaganda along these lines that circulates this false assumption, one could be forgiven for thinking that Gold is Money, but with only a very small understanding of what money is the ignorance of such a claim can be illuminated.
An advocate of the Gold is money concept will often claim that Gold has been used as Money for five thousand years. Is it used as Money now? I usually ask, feigning interest at the source of their misguided assumption but internally excited at the prospect of hearing the source of their defective illogical attempt at justifying this claim.
Then why can't I buy anything with it? Is the follow up question to this. Bewildered and sometimes even angry, whatever justification they attempt to give in their inevitable backpedaling I often take note of in the hopes that I will be able to recall it and laugh to myself about it at a future date.
Pharaohs of ancient Egypt are well known as among the first successful hoarders of Gold, but when the ruling pharaoh sent his servants out to the market to fetch a ceramic amphorae of wine they did not send them with a pocketful of gold to make payment, but a copper coin-like instrument that denominated a set amount of grain, these units were called deben.
Here is one such example of these coins with an illustration of the lighthouse of Alexandria on its face. To be accurate, ancient Egyptians never fully realized the concept of money itself, they functioned on what we would call today a barter system, workers were paid at the time not in coins or units of account denominated in Gold or Money, but with bails of grain. A standard laborer might earn 5 1/2 sacks (400lb) of grain per month, and the price of grain was fixed across the empire to facilitate transactions based on it.
It first glance the Egyptian agrarian based barter economy would appear quite different from our own advanced and complicated modern day system, but one similarity persists, the fact that Gold itself was not used as money. A store of value, sure, the pharaohs did indeed stockpile Gold and perceive it as a significant asset. They even tried to 'take it with them' so to speak by having themselves entombed with large amounts of Gold, but it seems unlikely they believed they would be using Gold as money even in the afterlife. The concept of Money itself was a stranger to them, just as the mathematical concept of zero invented by the Incas was alien to the rest of the western world at the time. The Egyptians used Gold as a store of value and even a measure of account, but still it was not used as a medium of exchange.
Thus we have a pronounced example of Gold being used as a store of wealth, and perhaps even a unit of account without the actual concept of money. Sure, under the barter system Gold could be traded for other things more commonly used for transactions, say one were to trade a given amount of gold for an amount of bushels of grain, and that grain used for other transactions. We have this very same use of Gold in place today as someone might sell their gold for a set amount of, say US federal reserve notes and then in turn use those paper dollars to facilitate and measure transactions as a medium of exchange, but in neither case is the Gold itself used as Money.
In point of fact, the differences between Gold and Money are vast, and belief that they are one and the same indicates one of two things; the individual does not understand what Money is (an easily curable ignorance) or they suffer from true stupidity (for which there is no cure).
Even with a very meager understanding of human history and economics one can see how this subtle but import distinction can be overlooked or misunderstood, the idea that Money, an intangible and abstract concept can relate in some way to a physical element that existed long before humans or the idea of Money came into existence to be confused with it is a nebulous one. On these concepts I will elaborate in a moment, but first lets begin with a simple and commonly accepted definition,
mon·ey
noun /ˈmənē/
moneys, plural
- A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively
- - I counted the money before putting it in my wallet
- - he borrowed money to modernize the store
- Sums of money
- - a statement of all moneys paid into and out of the account
- The assets, property, and resources owned by someone or something; wealth
- - the college is very short of money
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I see no mention of the word Gold anywhere in there, although a brief reference to Money as coins, the metal that makes up the coins is not specified. It is true that coins have been used as Money for a long time, even coins that are made of Gold. In the 1800's the US $20 Gold piece was used as legal tender at face value, not because it was made of Gold, but because it was stamped by the United States Government as having that specific value in monetary terms. If the US government had stamped $20 and "In God we trust" along with a few other related markings on a ceramic brick made only of petrified sand, its value as money would have been the same.
The $20 Gold piece ended its career as a circulating currency as the price of an ounce of Gold exceeded the face value, and its paper substitute became standardized. The Gold itself still had value, and in fact retained its own value independent of the face value of $20 but we still measure that value in terms of Money. The fact that we measure it in terms of Money should by itself indicate that Gold itself is not the same thing as Money!
How can you measure something in terms of Money, and at the same time believe that the thing you are measuring is the same as the units with which you use to measure it? Is a newborn baby's foot twelve inches long? No. Is it still called a foot? Yes. The distinction may be subtle at first glance, but the more familiar you become with the fallacy the wider the difference between the two becomes.
As that same newborn child grows and its feet become larger it is possible that its feet may indeed reach a length of 12 inches and justly deserve the distinction of being a foot in both length and in anatomical reference, but does that somehow make the two concepts one and the same? No it does not. On one hand you have a concept, an abstract, intangible and virtual idea that exists only in the minds of humans for the sake of having a standardized unit of measurement, on the other hand you have a real, tangible, physical appendage that exists in the world. Even if you were to measure its size using the metric system in which the unit of the foot does not exist, the anatomical foot is still a foot.
Lets talk about Gold for a moment, to be fair, a definition is in order;
gold
noun /gōld/
golds, plural
- A yellow precious metal, the chemical element of atomic number 79, valued esp. for use in jewelry and decoration, and to guarantee the value of currencies
- An alloy of this
- A deep lustrous yellow or yellow-brown color
- - her eyes were light green and flecked with gold
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Gold is an element on the periodic table that occurs naturally in the Earths crust and throughout the universe. Gold is a real, tangible solid object that exists in the physical world of at minimum 4 dimensions. Gold is a commodity, and is measured in terms of Money just like beans, rice and crude oil and all other commodities.
Contrast that now to the concept of Money; which has been and always will be intangible, fleeting and virtual. Money is an idea, invented by humans with the sole function of regulating the ways in which other humans interact. As a idea, Money is subject to evolution and transitions throughout time and is no more tangible than the concept of time itself or any other abstract unit of measurement.
When the Chinese first began using paper currency in the form of handwritten banknotes in the 7th century, it is unlikely they could have imagined the evolution the concept of Money would make and is still making.
Imagine what those Chinese bankers might have said if they had looked up from their desks to see the plastic computer cards we now use to incur our debts. As an abstract idea, money itself is free to change and evolve to meet the needs of its human inventors, just as coins have evolved to contain any number of metals including Gold, and many of those coins have indeed been used as money.
To return to my original question, if Gold is Money, why can't you buy anything with it? Sure the Gold $20 piece can in theory still buy $20 worth of goods, but again not because of its metallurgic content. Just as one would be foolish to trade a valuable Gold coin for $20 worth of goods, many still make the mistake of thinking of Gold and Money as the same thing. If you did want to take your $20 gold piece and trade it for its face value in goods the merchant would be required by law to accept the coin at face value, but not because the coin was made from gold. They would be required to accept it at face value because of the laws of the United States and the marking of the coin itself.
To understand why Gold is not Money, it may be helpful to recognize the difference between value and price. Two terms that on the surface appear to be nearly identical and can cause a very similar and common misconception as the one made by the greasy fellow behind the coin display case.
Consider that a cup of coffee at a New York cafe in 1911 might cost you .05 cents, whereas that same coffee today might cost $5.00 as a result of inflation over the 100 years. The cup of coffee is the same, and has the same value it had in 1911 as it does today, a cup of coffee is a cup of coffee. The difference between the two is only the price.
One of the more common fallacies in consumer economics is that value and price are the same, leading one to assume for example that the most expensive version of something must be the best, or that a particular brand is of higher quality simply because it has a higher price when it may in fact be the exact same product with only a different label or packaging. In marketing this is often referred to as the perceived value, and this common fallacy is used to exploit consumers who are ignorant to the actual value of those products with great effectiveness.
Once you are able to recognize and put aside this fallacy that price and value are the same, it follows accordingly that just like coffee, Gold also has both a value and a price, and that just as the cup of coffee retains it value over time, Gold will retain its value and once again the only thing that changes is the price.
Imagine the difficulty if you had to conduct your daily transactions in Gold. Forgetting for a moment the impracticality of carrying around chunks of metal in your pockets heavier than lead, how is the cashier at the checkout counter going to make change for you when your purchase amount does not equal exactly the value of the Gold you have with you? Would the cashier shave off a few flakes and weigh them out on a scale? Would an assayer be on hand to verify the purity and fineness of the Gold? To ever actually use Gold as Money would be a logistical nightmare!
Another easy and logical example can be demonstrated with a few "if then"
statements. If Gold existed on earth before humans, and humans invented the concept of Money, Money and Gold can not be the same thing. If humans were to for some reason disappear from the Universe, then the concept of Money would likewise cease to exist. Being of a fleeting and transitory nature from its inception and existing only in the minds of humans, the concept of Money would exist no more! Barring some alien race who also happened to invent a similar concept, but lets not go there.
By contrast, if the human race were to cease to exist one day, would gold also vanish? No. In this hypothetical scenario, Gold would indeed still exist. It would still be the same, finite amount that existed before humans came into existence to name it and became so arrogant and naive as to say is is the same as the abstract concept they developed called money.
So different are Gold and Money when one peels back the skin that even comparisons become difficult. How much can these things actually have in common when you consider you are attempting to compare a virtual, abstract and nebulous idea that exists only in the human mind to something incontrovertibly real and solid, existing independently of the former to a real tangible metal? One would encounter similar difficulty trying to compare the laws of the state of California that stipulate fines for jaywalking to, say the laws of gravity!
With all due respect of course, the laws of the state of California can easily be broken, at a whim anytime by anyone, and as such represent the nature of ideas made by humans for the goal only of regulating other humans. Someone is probably breaking the law at this very moment, crossing a street against the light and it is certainly not a newsworthy event.
Contrast that now to a person breaking the law of gravity! Now that would be a newsworthy situation, even if the attempt was unsuccessful an entertaining show could almost be assured.
One of the distinguishing characteristics of money is that it is a medium of exchange. By definition gold use in the financial world does satisfy some of the other requirements, gold is indeed a store of value and a unit of account, but where gold fails to meet the requirements is that it is not used as a medium of exchange. Almost nowhere in the world today is gold used in this capacity for the reasons stated above; frankly its just impractical.
One well known example of a person who made the mistake of thinking Gold is money was the Spanish conquistador Francisco Pizarro.
When the spanish conquistador set about concurring the Inca civilization and began stripping south America of its Gold and Silver and sending it back en mass to Spain to be sold to finance their military, he surmised he had "struck it rich".
Pursuing the same lubricious idea that Gold was the same thing as money, he ordered his men to crate it all up and ship it back to Spain thinking the empire had uncovered a nearly unlimited source of wealth.
What neither Pizarro nor the officials of the Spanish government understood at the time was that the flood of all this metal into the economies of Europe served only to decrease the value of gold, as more and more gold entered the European world the price of goods increased as an ever increasing amount of what was previously a store of value chased the same amount of goods and services. The value of Gold denominated in the Spanish currency of the time dropped like a brick, demonstrating for economists and historians that just because you have a larger amount of Gold, does not mean you also have a larger amount of money. Just as the price of goods and services increased in relation to the value of Gold, the amount of money needed to purchase a given amount of Gold went down. More and more Gold and the same amount of money can have no other outcome and thus, one of the key distinctions between the two is illustrated.
With a very small amount of observation the differences between the concept of money and gold quickly become irreconcilable to the belief that they are one and the same. Gold is not money.
When Texas senator Dr. Ron Paul asked the chairman of the federal reserve Ben Bernanke if Gold is money, Bernanke correctly answered no,it is a commodity. Had Dr. Paul given him the chance to elaborate and potentially enlighten him to the subtle but incontrovertible reasons why this is so Dr. Paul might have received a helpful perspective on economics and the flaws inherent in his plans for the United States economy, but instead Dr. Paul demonstrated why politics and economics are two fields of pursuit that should not intermingle.
How crass and arrogant would it be for Bernanke to tell Dr. Paul, a physician by trade, a lecture on the correct procedures involved with delivering a baby? Quite rude and laughable would this behavior be. Though I maintain a highest level of respect for Dr. Paul, he demonstrates why the division between politics and economic policy in the United States needs to be as distinct as the separation between church and state before we will function with any efficiency.
