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Money is the economic good against
which almost all other goods are traded, or, to put it more simply, money is
the general medium of exchange within an economy. The corollary is that if
something is the general medium of exchange within an economy, then that
'thing' is money.
Sound money will retain its value
over time (it will be a good store of value), but something can be money and
not be a good store of value*. Also, there are many things that are good
stores of value but are not money. Again, the test of whether or not
something is money involves asking the question: Is it the general medium of
exchange? If the answer is yes, then it is money, if the answer is no, then
it is not. For example, the US dollar passes this test (and is therefore
"money") within the US and a few "dollarised" countries,
but not elsewhere. For another example, the euro passes the "money"
test throughout much of Europe, but not outside Europe. Where, then, does
that leave gold, an economic good that was money for thousands of years?
Unfortunately, gold no longer
passes the "money" test in any of today's major economies. We say
"unfortunately" because if governments had not forcibly removed
gold from its monetary role, often using the excuse that a more flexible type
of money was needed to prevent financial crises and economic downturns, debt levels
could never have reached the unmanageable proportions of today and the future
would probably look much brighter.
Strangely, stating the FACT that
gold is no longer money is viewed as heresy by some gold bulls. We aren't
sure why, because recognising that gold doesn't perform the monetary role at
this time doesn't devalue the metal in any way. As noted above, we wouldn't
be in this economic mess if the general medium of exchange were gold or
gold-like. Perhaps these gold bulls are confusing what should be with what
is.
In an effort to explain how gold
could still be money even though it is no longer the general medium of
exchange, some people have redefined the terms "money" and
"currency" in an imaginative way. Money, they say, is an abstract
concept, whereas currency is what generally gets exchanged when things are
bought and sold. Using these definitions it can be argued that gold is still
money even though it is no longer widely used as a currency.
People are obviously free to use
whatever definitions they believe make the most sense, but in this case
changes are being made to well-established, precise and useful definitions
solely for the purpose of avoiding a distasteful conclusion. It is better, we
think, to face reality.
The reality is that nowadays gold
is sometimes used as a currency, meaning that there are certain situations
where gold is used to purchase things, but gold is not the currency in
general use throughout the economy. In other words, gold is not money, but it
is occasionally used as a currency.
Looking ahead, is it possible that
gold will, again, be money?
The answer is yes. Gold is
actually better suited to being money today than it ever has been in the
past, thanks to technology that allows gold ownership to simply and instantly
be transferred without the need to physically move bullion. Almost all the
monetary gold could remain locked in vaults, with ownership to a quantity of
gold -- anywhere from a tiny fraction of a gram to many kilograms, depending
on what is being purchased -- being effected electronically.
As an aside, we are discussing the
possibility of a return to using gold as money as opposed to a return to some
form of gold standard where dollars, euros, etc. are money backed by gold. A
gold standard or any other monetary standard managed by government will
always be far from ideal because governments invariably find excuses to
change the rules (an official convertibility rate of X$ per ounce of gold
could, for instance, be changed to 2X$ per ounce of gold with the stroke of a
politician's pen).
But although technology available
today paves the way for the more efficient use of gold as money, it is
extremely improbable that gold will ever again be money unless there is first
a total economic collapse. This is because only a total economic collapse
would be capable of bringing about the sort of political change that would
make sound money feasible. The reality is that the current sizes of the
government and the government's future obligations (social security,
pensions, promised 'free' medical care, deposit insurance, the dole, payments
to bondholders, etc.) are completely and blatantly incompatible with sound
money. Implementing sound money and leaving everything else the same would be
like trying to keep a Ponzi scheme going without sucking in new investment.
So, replacing money that the
government can inflate at will with money that has rigid limitations on its
supply could only occur in parallel with direct default on a massive scale
and the shrinkage of the government to a small fraction of its current size.
It is not realistic to expect that this will happen as long as it remains
possible to 'kick the can down the road' a little further.
*Money
that is not a good store of value will tend to have a relatively short
lifespan, but it will be money as long as it continues to be used in the vast
majority of economic transactions.
Steve Saville
www.speculative-investor.com
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