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My two "Gold Is Not Money" articles (HERE
and HERE) provoked numerous disagreeing responses, the
majority of which were polite and well-meaning. Despite presenting various
arguments, these responses had one thing in common: they did not offer a
practical definition of money that gold currently meets. As I mentioned
previously, a practical definition of money cannot avoid the primary economic
role of money, which is to facilitate indirect exchange*. If something is not
generally used to facilitate indirect exchange, then regardless of what other
attributes it has it cannot be money; at least not in the way that money is
commonly understood today and has been commonly understood through the ages.
When people willingly perform logical contortions in an effort to show that
something is money even though it doesn't fulfill the primary role of money,
all they are actually showing is the lengths to which they are prepared to go
to ignore a reality that is not to their liking. Would gold perform the
monetary role far better than the US$ and any of the other monies in common
use in the developed world today? Yes. Would I rather that gold was money
today? Yes. Is gold money today? Unfortunately, no. However, the main purpose
of this post isn't to rehash the reasons that gold can no longer be correctly
viewed as money in any developed economy. It's to consider the claim, which
was made by more than a few of the respondents to my "Gold Is Not
Money" posts, that gold is an economic constant.
Such a claim ignores good economic theory. Gold, like all of the elements,
is a physical constant, but there is no such thing as an economic constant or
yardstick. The reason is that value is always subjective. Every individual
will have his/her own opinion on what gold is worth and these opinions will
change based on circumstances.
Currently, most people in the Western world own no gold and have no
intention of buying gold. This will change, but the reality is that gold is
presently very low on the 'utility scale' of the average person. At the same
time, there are plenty of people who place a high value on gold, which is why
gold's price is what it is.
The market price at any time reflects the collection of all the differing
opinions about value, but the market price is constantly changing. The market
price, therefore, does not measure value in the way that the mass of a
physical quantity can be measured.
The claim that gold is an economic constant also ignores the historical
record. For example, there has been a large decline in gold's
purchasing-power (PP) over the past 4 years. Prior to that, there was a huge
gain in gold's PP during 2001-2011, a huge decline in gold's PP from
January-1980 through to early-2001, and a spectacular rise in gold's PP
during 1971-1980. Over the same period the dollar's PP has been vastly more
stable, although certainly far from constant.
It could be argued that the large swings in gold's PP over the past 45
years are due to changes in the perception of the official monetary system.
This is true - the perceived value of gold as an investment or a speculation
or a vehicle for saving has undergone large oscillations over the past 45
years due to changing perceptions of the US$ (money in the US). These
oscillations are secondary evidence that gold is no longer money in the
world's largest economy, the primary evidence being that it isn't generally
used as a medium of exchange.
It should also be understood that gold was not an economic constant even
when it was money. In general terms, even the best money imaginable would not
be an economic constant, because even if its supply were kept constant its
demand would be continually changing. Again, we stress that there is no such
thing as an economic constant (an UNCHANGING quantity against which
everything else can be measured).
When gold was money neither its supply nor its demand were ever constant
over what most people would consider to be a normal investment timeframe or
holding period, although it still performed admirably in the monetary role.
It would have performed even better - and its reputation would not have been
unfairly tarnished - if fractional-reserve banking had not been permitted.
Fractional-reserve banking was to blame for the financial crises that
occasionally erupted during the Gold Standard era.
Over extremely long periods the swings in gold's PP have evened-out in the
past, but something that starts at a certain level and can be relied on to
return to that level at some unknown point in the distant future cannot be
legitimately called a "constant". Moreover, to be useful as money
it isn't necessary that something maintain relatively stable purchasing power
over centuries; it is necessary that it maintain relatively stable
purchasing-power from one year to the next.
Something won't survive as money if it tends to experience wild swings in
its purchasing-power over periods of a few years or less, but it can survive
as money if its PP can be relied on to change by no more than a few percent
in either direction from one year to the next. There is no need for money to
have constant PP to remain useful as money, which is just as well because
economic constancy is an impossible dream.
*Here's what I mean by "indirect exchange". In an economy
without money a tomato farmer who wanted bread would have to find a baker who
wanted tomatoes. A direct exchange of 'wants' could then take place. However,
in an economy with money a tomato farmer who wanted bread could sell his
tomatoes to anyone in exchange for money and then use the money to buy bread.
This is an indirect exchange of 'wants', with money providing the link.
http://tsi-blog.com/blog/blog-default/
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