In 2011, Congressman Ron Paul questioned Federal Reserve Chairman Ben Bernanke in a U.S. House Financial Services Committee Meeting with a simple query that should have in return, commanded a simple answer. Bernanke didn’t seem all that comfortable with the question, but concluded that no, gold is not money, and consequently opened up the flood gates to economists and historians around the world who had an entirely different opinion the matter.
So is gold really money? To be able to answer that question – we must first clarify what ‘money’ really is and perhaps more importantly, how the need for ‘money’ derived in the first place.
Before Money Existed
In present day, it’s easy to associate money with a bunch of government created pieces of paper that allows you to exchange it for goods or services you wish to purchase. Yet money in the paper form has only been used in a widespread form for several centuries. The need for money developed as people started living in communities and wanted access to a variety of goods they could not create themselves. The concept of barter was born, in which two parties could exchange goods they possessed given they had relatively equal perceived value. Other historical findings have suggested the existence of gift economies, with acquaintances giving each other presents with nothing immediate expected in return. Regardless of the intent, it was clear that a clearer and more consistent method was needed to ascertain the value of goods exchanged, or the reciprocal value needed to be given when returning a gift with a gift.
The History and Birth of Money
The biggest problem with barter was the fact that it required a coincidence of wants which was terrible hard to find, as you can imagine, in a world pre-internet without tools such as Craigslist or Facebook. People therefore gravitated towards trading their excess production for an intermediate commodity that they felt had a greater chance of trading for other things they wanted. The properties of popular intermediate commodities shared some key characteristics with money: high demand and a non-perishable nature. These intermediate commodities were the first types of money and are now referred to as commodity money. Different social, geological, and cultural factors resulted in different types of commodity money across different societies. Livestock, plants, cowrie shells, rice, and different metals all constituted a predominant type of money at one point in history for extended stretches across different societies. Heck, even today, we can see unorthodox items being used as money such as cigarettes in detention facilities or the advent of computer code (Bitcoins) to represent money.
What is Money?
Many types of money have come and gone, and generally this has had to do with the evolution of money and finding better alternatives. So what is money, and what specific attributes should money possess? Three main properties of money are: 1) it should be a store of value, 2) it should serve as a medium of exchange, and 3) it should generally be accepted as payment for goods and services.
Gold as a Store of Value
Money as a store of value is fast losing its identity in the current system of fiat money, with governments able to create money at will and consequently inflate and devalue the money in question. Gold on the other hand is harder to deflate (although many rules in history have tried), because it requires forcing citizens to hand back their gold since gold can’t just be fabricated. Looking back at the past hundred years, gold has done a fine job retaining its value (if it wasn’t confiscated of course) while the almighty U.S. Dollar has lost over 97% of its value during this same stretch. So the first requirement of gold as money is fulfilled beyond doubt.
Gold as a Medium of Exchange
We can identify if gold meets the second requirement by measuring up against 8 key characteristics of a medium of exchange:
1) Valuing Common Assets – Gold is able to value assets of all types in a very reliable manner thanks to its scientifically ingrained elements of rarity, purity and weight.
2) Constant Utility – Gold has been used for thousands of years in jewelry and has unique qualities that also make it useful in fields such as industry, medicine, computers, and electronics.
3) Low Cost of Preservation – Gold can’t be destroyed as it doesn’t oxidize, doesn’t tarnish, it doesn’t rust – there’s literally nothing that is better preserving than gold.
4) Transportability – Gold can be carried in a pocket, wallet, bag, or even worn – and its high value means you don’t even need to carry much of it.
5) Divisibility – Gold is the most malleable and ductile metal of them all and can easily be melted and shaped into coins of different value.
6) High Value/Weight Ratio – Along with platinum, gold is the most valuable of metals.
7) Recognisability – With its unique color and shine, gold is one of the most recognizable items in all the world.
8) Resistance to Counterfeiting – Just like any other form of money, gold is also susceptible to counterfeiting given the right circumstances. Tungsten and other cheaper metals can be used to impersonate gold to a certain extent, but a plethora of tests are available for vigilant individuals to test the authenticity of gold including acid test, visual observation, weight test, ring test, bite test, and official appraisals.
It’s safe to say that gold passes the second test of a type of money with flying colors.
Gold as a Method of Payment
And here lies the crux of the matter, the 800 pound gorilla or the elephant in the room if you will. Gold, in many key parts of the world, is not a widely accepted form of payment. Specifically in the US, specific rules have been set to hinder the use of gold as a method of payment – which is how the Ron Paul vs Ben Bernanke ‘Is Gold Money?’ debacle started in the first place. So what are these legal obstacles of gold as money?
1) Legal tender laws enforce the use of US Dollars and ban gold-denominated contracts
2) US Government requires the payment of taxes in US Dollars
3) Capital gains taxes are applied when using gold for bartering or when exchanged into dollars
These restrictions, especially the capital gains tax, prevent gold from circulating and therefore acting as a form of money in the US. The fact that gold is unable to play by the same rules of other competing currencies like the Euro, Yen, or Sterling severely limit its ability and therefore make gold as a currency very impractical. Even if gold was allowed to compete on equal grounds as other forms of currency, there is no real incentive for gold owners (who already appreciate the value gold has over paper money) to use it as currency because of something called Gresham’s Law that states: “Bad money drives good money out of circulation”. In other words, why use your valuable gold as money when you can simply fork over the paper money you are getting paid with (and therefore have lying around) when you know that it’s essentially a ticking time bomb in terms of loss of value.
Gold Is Money
Having said that, gold is serving as money in certain geographic locations. For example in Turkey, physical gold can be turned into banks, appraised, and then converted into a gold account that can function as a means of payment. In India also banks are accepting gold deposits to secure loans. Even in the US, states such as Utah are beginning to make Gold as a currency legal again and facilitating its everyday use in transactions. In international trade, a lack of trust in the dollar as the reserve currency is fast spreading, and this is opening the door for gold to take its place, like Iran (with sanctions serving as the spark) starting to sell oil in exchange for gold. Central backs have once again turned into net buyers of gold, and this is another signal that gold’s use as money is only growing in magnitude.
So in the theoretical sense gold has enough going for it and fulfills enough requirements that yes, we can call it money. It might not be money in a global, widespread, and omnipresent sense but neither is the Zimbabwe dollar yet it is classified as money and a currency. With the trend of gold as money growing by the day, the answer to the initial question of whether gold is money should become more obvious, but for now this lengthy article should give you enough information to evaluate in your own mind, if gold is indeed money.