Gold is an excellent money.
Money is arguably one of the greatest inventions of humankind; it liberates us from the need to be self-sufficient to survive and allows us to specialize in the fields of our choice. This specialization leads to other inventions that improve our quality of life. However, if history has proven one thing, it is that not all monies have had a positive impact on humanity. Thanks to economics, it is easy to see why some monies have failed us miserably, while others have not. Over thousands of years, gold has proven to be the best kind of money, and here’s my attempt at explaining why.
The function of money:
Economies are made up of many markets with thousands of daily transactions between people; the first and most basic way for a transaction to happen is through a direct exchange of goods and services. For example, a shoemaker looking for milk must find a farmer that wants shoes; once he finds such a farmer, he can directly exchange a pair of shoes for milk. Here lies our first, inevitable problem with direct exchanges: The coincidence of wants.
In the real world, a shoemaker could go days without finding a farmer that wants shoes, and the same can be said for the farmer. Additionally, the goods and services being directly exchanged must also coincide in:
- Scale:
How many shoes is one chocolate bar worth? A fraction of a shoe? How do we divide the shoe?
2. Space:
If the shoemaker has a factory in Vancouver and wants a better factory located in Toronto, does he pick up the old one and take it to Toronto to exchange it for the better one?
3. Time:
If the farmer wants to buy the shoemaker’s delivery truck with milk, by the time the farmer has enough milk to buy the truck, some of it would’ve gone bad.
Another way in which a transaction can take place is through indirect exchanges. The shoemaker doesn’t need to find a farmer that wants shoes in order to get milk; he merely needs to know what the farmer wants at that moment and go get it. For example:
If the farmer wants bread and the shoemaker is able to find a baker that wants shoes, he can exchange the shoes for bread and then exchange the bread for the farmer’s milk. In this way, the shoemaker exchanged his shoes for a product he didn’t need, (i.e., bread is an indirect product) to then exchange it for the product he desired, milk.
In this example, the bread was used as a medium of exchange. However, we now encounter the problem with indirect exchanges; we would be very unproductive if we had to find what our local grocery shops, coffee shop, doctors and schools needed in order to get what they offered.
This predictably leads to the need for a widely accepted medium of exchange. In other words, we need some kind of money.
Essential qualities of money:
Lots of things can serve the purpose of money, but only a few can do it correctly. The right money should be able to:
1. Scale into different sizes.
2. Move around easily through space.
3. Pass the test of time.
In order to see how only a few things can work as money, let’s pretend lumber is used as money. Lumber can be divided into small pieces for smaller transactions and bundled together for larger transactions. Small pieces of lumber could potentially fit in our pockets and be easy to carry across space, and with the right care, lumber can last a pretty long time without decaying. So, how does lumber fail as money?
Lumber is easy to produce, and if it was used as money, lumber-producers would flood markets with it to buy our economy’s valuable resources; this would inflate prices (in terms of lumber) in the economy. After selling their resources for lumber, the owners of those resources would be left holding a money that is being mass produced and thus, losing value rapidly, a phenomenon known as “inflation”. It wouldn’t be long before this ‘lumber-money’ became worthless pieces of wood that are better off used in fires to keep warm than for paying utility bills.
How gold meets money’s essential qualities:
Although gold can scale into different sizes and move around easily (in small quantities), it became a lot easier to do so when people started exchanging gold-deposit receipts. This paper-money backed by gold allowed for easier and safer transportation, while less laborious scalability (i.e., no need to melt the gold and weigh it). Furthermore, gold’s chemical and physical qualities allow it to be extremely durable over time.
In terms of its supply, even though gold miners would be incentivized to produce more gold if it was used as money, as time proves, gold has become more difficult and expensive to mine; Gold’s supply can’t be tampered with as easily as anything else out there and is therefore a great store of value.
I believe the failure in gold-money took place in the centralization of gold. A bank’s issuance of paper-money backed by gold allowed it to recklessly expand the supply of these papers. It also gave them the freedom to choose when their money could be on or off the gold standard. I guess after all this, I have come to the conclusion that immunity to centralization and people’s complete sovereignty over their own money are necessary for money to work; if these qualities are not instituted in the monies chosen, free markets will eventually push them out of their economies in exchange for a money that does have these qualities.
