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I opened a blog post with the statement that
gold was money in the distant past and might again be money in the future,
but isn't money in any developed economy today. I then explained this
statement. The post stirred up a veritable hornet's nest, in that over the
ensuing 24 hours my inbox was inundated with dozens of messages arguing that
I was wrong and a couple of messages thanking me for pointing out the obvious
(that gold is not money today). The negative responses were mostly polite*,
but in many cases went off on a tangent. Rather than trying to respond
individually, this post is my attempt to rebut or otherwise address some of
the comments provoked by the earlier post on the same topic.
In general, the responders to my earlier "Gold Is
Not Money" post made the same old mistakes of arguing that gold is an
excellent long-term store of value, which is true but has nothing to do with
whether gold is money today, or confusing what should be with what is. Some
responders simply asserted that gold is money because.it is. Not a
single responder provided a practical definition of money and explained how
gold fit this definition. That's despite my emphasis in the earlier post that
before you can logically argue whether something is or isn't money, you must
first have a definition of money.
Due to the fact that many different things (salt, tally sticks, beads,
shells, stones, gold, silver, whiskey, pieces of paper, etc.) have been money
in the past, a reasonable definition of money MUST be based on money's
function. Also, the definition must be unique to money. In other words, when
defining money you must start with the question: What function does money
perform that nothing other than money performs?
"General medium of exchange", meaning the general enabler of
indirect exchange, is the function performed by money and only by money
within a particular economy. Now, there are certainly pockets of the world in
which gold and other items that we don't normally use as money in our daily
lives do, indeed, perform the monetary function. For example, there are
prisons in which cigarettes are the most commonly-used medium of exchange. It
is certainly fair to say that cigarettes are money within the confines of
such a prison, but I want a definition that applies throughout the economy of
a developed country. Gold is not money in the economy of any developed country
today, although there could well be small communities in which gold is money.
I'll now address some of the specific comments received in response to my
earlier post, starting with the popular claim that there's a difference
between currency and money, and that although gold is no longer a currency it
is still money. The line of thinking here appears to be that currency is the
medium that changes hands to complete a transaction whereas money is some
sort of esoteric concept. This is hardly a practical way of thinking about
currency and money. Instead, it appears to be an attempt to avoid reality.
A more practical way of thinking about the difference between currency and
money is that almost anything can be a currency whereas money is a very
commonly-used currency. In other words, "currency" is a medium of
exchange whereas "money" in the general medium of exchange. The
fact is that gold is sometimes used as a currency, but it is currently not
money.
Moving on, some people clearly believe that gold is money because the US
Constitution says so. Actually, the US Constitution doesn't say so, as the
only mention of gold is in the section that limits the powers of states and
is specifically about the payment of debts, but in any case this line of
argument is just another example of confusing what should be with what is.
The bulk of what the US Federal Government does these days is contrary to the
intent of the Constitution.
Some people apparently believe that gold is money (or money is gold)
because JP Morgan said so way back in 1912. My response is that JP Morgan was
absolutely correct. When he made that statement gold was definitely money
because at that time it was the general medium of exchange in the US.
However, today's monetary system bears almost no resemblance to the monetary
system of 1912. For example, when JP Morgan said "Money is gold"
the US was on a Gold Standard and the Federal Reserve didn't exist.
Several people informed me that gold must be money because some central
banks are buying it or holding it in large quantities. OK, does this mean
that something is money if central banks are buying/holding it regardless of
whether or not it is being used as money throughout the economy? If so, then
Mortgage-Backed Securities (MBSs) must now be money in the US because the Fed
has bought a huge pile of MBSs over the past few years, and T-Bonds must now
be money throughout the world because most CBs hold a lot of T-Bonds.
Obviously, something does not become money simply because CBs hold/buy it.
A similar mistake is to claim that gold must be money because major
clearing houses accept gold as collateral. The fact is that the same clearing
houses also accept the government bonds of most developed countries as
collateral. General acceptance as collateral clearly does not make something
money.
Lastly, some readers came back at us with the tired old claim that gold
has intrinsic value whereas the US$ and the rest of today's fiat currencies
don't. At the risk of seeming arrogant, you can only make such a claim if you
are not well-versed in good economic theory. All value is subjective, which
means that no value is "intrinsic". Most people subjectively assign
a high value to gold today, but they also subjectively assign a high value to
the US$. In any case, even if the "intrinsic value" statement had
merit it wouldn't be a valid argument that gold is money.
In conclusion, gold is something that is widely perceived to have
substantial value. Furthermore, good arguments can be made that its perceived
value will be a lot higher in a few years' time. However, it is currently not
money.
*Those that weren't polite have had the honour of being added to my
"blocked senders" list.
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