Give some of that paper currency to this guy if you want a change in policy!
Posted on 08/17/2002 8:21:32 AM PDT by christine
Gold Isn't Money Until People Use it that Way
Kenneth C. Griffith
In recent times some in the gold community have made great efforts to educate the public to the fact that gold is money and therefore should be used in investment portfolios. While these efforts are laudable the approach has missed one particularly important point.
Money is not by definition a store of wealth. That function is a byproduct of the core property of money. The true definition of money, according to economist, Ludwig von Mises, is "that commodity that is most commonly exchanged in trade for other goods and services."
In other words money is a medium of exchange. Over thousands of years of human experience money has come to be defined by both civil and ecclesiastical law as gold and silver bullion coin. For some reason known only to our Creator these two metals are sufficiently similar in quality and rarity that they have alternated back and forth as the preferred money during different eras; but in most times have circulated side by side.
From Real Money to Tokens
Though paper currency was invented centuries ago, it was not until the twentieth century that it came into mass circulation as a money-substitute. Currency has many properties that make it superior to physical money as a medium of exchange. However, currency is a derivative of physical gold and silver coin. Currency is defined as a "claim for money on demand." When the gold and silver reserve supporting a currency system are removed along with the ability to redeem the currency for precious metal then it is no longer a currency. Paper notes not redeemable for anything are merely tokens, though they may be called "currency" in the vernacular. Given time, paper token currencies inevitably fail.
During the first two thirds of the twentieth century most nations gradually weaned their populace from the use of gold and silver to paper currency; and from paper currency to paper tokens. Every country that has done this has suffered repeated bouts of varying degrees of inflation. After smaller nations suffered repeated currency failures, several started using the US Dollar as the de facto reserve backing their national currency.
Since the United States went off of the gold standard in 1971 all the currencies of the world have floated relative to gold and silver. As a result of this policy, gold and silver have almost completely ceased to be used as media of exchange. It only took two decades of floating paper currency for investors and financial institutions virtually cease from using gold and silver for investment purposes. The slump in demand was accompanied by a decrease in price that created a vicious cycle reducing the value of gold and silver in the eyes of the public.
Investment is Not Money
Today, there are many in the gold industry are pushing the slogan, "Gold is money," as a means of educating financial institutions and private investors that they should have precious metals in their investment portfolio. However, this approach is putting the cart before the horse. In order for gold to truly regain its once-famed status as the ultimate safe-haven investment, it first needs to come back into circulation as money.
Nick Barisheff of the Millennium Bullion Fund has pointed out that if a mere five percent of the pension plans of one country like Canada were to be invested in gold the increased demand would probably cause the gold price to double or triple. While Mr. Barisheff is certainly correct, think of the implications if all paper money were to be replaced with gold and silver coin or currency. The demand for gold and silver could increase so much as to make the purchasing power of the metals increase by ten fold.
Two of the most commonly repeated objections to using gold and silver as money are that "bullion coins are too heavy and cumbersome," and "there isn't enough bullion to go around."
Gold Is Too Heavy?
The first objection is a pure fiction. At the price of $320 per ounce of gold, US $1 bills are 5% heavier than an equivalent value of gold bullion! At a gold price of $2700 per ounce, gold becomes lighter than US $100 bills. The average three ounces of change in most people's pockets after a day of shopping weighs roughly the same as US $1,000 worth of gold coin. Even though people used pure silver coins in the United States until 1964, to the best of my knowledge there were no reported cases of back injuries caused by pocket change. The objection that gold and silver are "too heavy" is simply a myth that was probably started by someone who wanted people to exchange their gold and silver for his paper.
Even so, most transactions are not conducted in cash or coin, but with checks and credit cards, which are considered to be "deposit currency." Writing a check for 124.796 grams of gold is just as easy as writing one for $1247.96. In the future, e-currency will eventually replace checks and credit cards for most consumer transactions. E-currency can be denominated in gold or silver as easily as national currencies.
Not Enough Gold To Go Around?
The second objection is that there is not enough gold and silver in existence to replace fiat currency. This objection does not consider the fact that as the demand for gold and silver rise, their purchasing power rises relative to other goods and services.
If gold money is adopted by the world then prices of goods and services will drop as measured in gold and silver until equilibrium is reached. If gold and silver return to worldwide use as money, then their purchasing value will tend to grow at the same rate as world population growth, which is roughly two percent per year. This means that under a bullion money economy the prices of goods and services will tend to decrease year over year rather than increasing as they do under the present inflationary system.
New Units of Account
The fact that all forms of currency, paper or electronic, can be denominated in the values most commonly used in transactions means that fractional weights of gold and silver are perfectly acceptable and usable as currency. All we need to do is create a new unit that reflects the purchasing power of gold. If .020 grams of gold will buy a cup of coffee, then we come up with a new unit for 1 milligram of gold and just call it a "mil". The cup of coffee costs 20 mils of gold. "Put it on my debit card, please."
If you imagined gold demand as a pyramid, then in a healthy economy gold money would be the broad base supporting the pyramid, gold jewelry would be the center, and gold investment would be the top. Today, the pyramid is atrophied on the bottom and most of the top. Central banks do hold a large percentage of the world's gold, so there is still some monetary function. But it is only a fraction of what it would be if all currency were fully redeemable for a fixed amount of gold.
Free Market versus Political Solutions
In order to bring back gold as an investment it must first make a comeback as money. Most libertarian and hard money writers have been calling for a return to "the gold standard" ever since 1971. However, politics usually follows economics (when it isn't interfering) not the other way around.
If people started voluntarily using gold and silver as currency we wouldn't need the state to make it happen. Private gold and silver currencies would be much more reliable than government issued currencies with regard to 100% backing and redeemability.
The state won't make it official until it is an undeniable fact of life. Then, like the Internet, politicians will be lined up to take credit for passing the bill to establish the "gold money act." Russia and China have recently begun encouraging their citizens to use gold bullion coins for their savings instead of US $100 bills. If the communists can do it, surely the "capitalist" countries can and will.
The mints of the United States, Canada, South Africa, Australia, and China have conveniently minted high quality standardized gold and silver coins that are available to the public. E-Currencies such as E-Bullion have recently made gold and silver deposit currency available to the public.
There is now an increasing plethora of merchants that accept gold and silver e-currency in payment for goods and services. The E-Bullion Debit Card allows people to use their gold or silver bullion account to buy groceries at Walmart or any other store with a POS terminal. This year over 200 metric tons of gold bullion transactions will take place using gold e-currencies.
Conclusion
The private sector is now doing what governments will not or cannot do. It has created a field of competitive, viable, 100% gold-redeemable currencies. The widespread use of gold and silver as money will do far more for the price of precious metals in the long run than any investment program ever could. At the same time it will make precious metals an even better investment. Yes, Gold is Money; if people use it that way. What are you waiting for?
Hello! Is this true? Is there an independant source for this info? That's a whole lot of people who might be deciding they want to own gold. Hmmmm.
Excellent post.
Give some of that paper currency to this guy if you want a change in policy!
Money is just a contract -- nothing more, nothing less. If Farmer Bob and Farmer Joe wanted to trade a bushel of peaches for a bushel of apples, we would thank it strange if they demanded that the contract be written on a gold bar. Yet that is, in effect, what the gold standard people wish. Most strange.
As the demand for liquidity rises, the fed buys bonds pushing "money" into the system to keep the price of gold from declining (deflation). As less liquidity is needed the fed sells bonds to take "money" out of the system to keep gold from rising in price (inflation).
The result is that the dollar remains a stable unit of currency. Prices rise and fall because of changes in the pattern of demand and supply, of changes in relative scarcity of commodities, not because there is excess money chasing the same or even a reduced amount of goods.
Have you ever asked yourself why? The only answer I can come up with is: "It's THEIR money. The pieces of colored paper they print up is YOUR money. They have the GOLD and they make the rules ... you have those pieces of paper and are their subject."
Options on gold are a speculation and are not in the same class of investment as owning actual gold.
There was also a gold-response in Japan a few months ago when the government decided that it would not insure accounts above $20,000. People began withdrawing the excess and buying gold - the Japanese government quickly revoked the law ... citizens with gold are no longer beholden to government paper.
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