Why gold is money

Why gold is money

  • 18 Dicembre 2017
  • by Alberto Gregorio

The  7  features of good money

Before understanding gold, one first needs to understand money. Money is one of the most important discoveries of mankind.

For thousands of years, it has played a central role in our social and economic progress, in improving our quality of life and it has facilitated and incentivized the exchange of goods, services, ideas and innovations. These days, we hardly think about it, but without money we would still be hunter-gatherers, divided into tribes struggling for food and survival.
Thus, it is very important to understand what money really is, and even more so, to identify the key features that make it work best; the characteristics of good money.

Before money was introduced to the marketplace, people used to barter. They exchanged goods and services directly for other goods and services. The problem with this system is that it required what is known as a “double coincidence of wants” in order to function. For example, to be able to trade your cow for three goats in a barter economy, you must first find someone who wants a cow, has three goats and is willing to exchange them with your cow.

The concept of money, however, frees all the market participants from this burden and eliminates such inefficiencies: it offers the possibility to use a commodity of widely recognised and accepted value, that serves “to fill the gap” of non-coinciding wants. Now, you can simply sell your cow for the corresponding amount of this commodity and simply use your payment to buy the three goats you wanted.

Throughout human history, many different things have served as money, such as cattle, salt, tobacco leaves, seashells and other goods or resources. Even today, we use words that originate from these times and derive from Latin, such as “pecuniary” (from pecus=cattle) or “salary”, that comes from salt, which was used as a medium of payment during the Roman Empire.

However, over thousands of years, precious metals, and especially gold and silver, have emerged as the best form of money, with gold eventually prevailing in the market.
Gold was therefore chosen organically, as a result of a natural selection process. It has withstood the test of time, after countless challenges and competition with other goods or resources that failed to solve the problem of money as comprehensively as gold did.

Gold prevailed because, out of all other natural elements, it was the only one that had all 7 of the characteristics required in order to serve and function as good money:

1DURABLE

Good money should be indestructible.

2Divisible

Good money must be convertible into larger and smaller parts without losing its value, in order to facilitate a transaction of any size

3Recognizable

Good money is something that always looks the same, so that it can be easy to recognize, with each piece identical to another.

4store of Value

Good money should retain its purchasing power and it should be able to be saved and spent at a later date without penalty. It should have the capacity to be exchanged for the same quality and quantity of any good or service in the future, as it would be today.

5EaSIly portable

Good money should contain a lot of value in a small “package” and should thus be easy to carry or transfer.

Until about a century ago, these were the only properties necessary for good money.
Today, however, good money needs two additional characteristics:

 

6Possession = Property

Good money should be the exclusive, direct and unconditional property of whomever earns and owns it. It might seem like an obvious consideration, but it is not.

7not reproducible

Nowadays, this is the most important feature. Good money should not have the capacity to be created out of thin air, by printing paper or pressing a button and adding some zeroes on a computer.

These are the reasons why gold is still the best “candidate” for good money, as it was a thousand years ago. It is merely the result of the market itself seeking the best means of storing value, facilitating exchanges and establishing a stable unit of account.

This point becomes all the more apparent, when we compare gold with fiat money:
 

           Features Fiat currency Gold Gold by Auromoney
1Durable
Yes (moderately) Yes Yes
2Divisible
Yes Yes (moderately) Yes (down to 0.001g)
3Recognizable
Yes Yes Yes
4store of Value 
No Yes Yes
5easily portable
Yes Yes (moderately) Yes (gold account)
6Possession = Property
No Yes Yes
7not reproducible
No Yes Yes


All things can be money, but only one is good money.  And it’s not fiat currency!

So, if gold has been accepted and established as the best possible money for centuries, why has it been pushed aside and replaced by the fiat currencies issued by the central banks?
This is the secret of the Philosopher's Stone and we'll explore it in our next post.

In the meantime, back to using the real good money.

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