07/21/11 Buenos Aires, Argentina – Gold is not money. So says Ben S. Bernanke, the maker of “money”…at least as he defines it…and at least for now.
If gold is not money, then, what is?
First, let us look briefly at why we desire money in the first place. Before cash, credit cards and PayPal, before money itself, there was barter. A barter system is one of direct exchange. It does not require money to function.
But the barter arrangement is primitive, at best – suitable only for relatively simple transactions in which both buyer and seller desire the exact good offered by the other. Therefore, in a complex economy, “my three pigs for your one cow” is not a viable monetary system.
Enter the need for money, a medium of exchange…the “great facilitator.”
But how can we tell good money from bad? What qualifies and what doesn’t?
As Ludwig von Mises puts it in his Human Action, “[Money is] the most marketable good which people accept because they want to offer it in later acts of impersonal exchange.”
The simple fact of the matter is that money can be whatever people want it to be…although that’s not to say it will be good or sound money. Some folk may agree to settle their payments in rounds at the pub, denominate debts and credits in lean hogs and pork bellies, or count their savings in gold, guns and secure places to hide them both. And good luck to them all.
Obviously, you’re going to want to arrive at some kind of consensus among those with whom you wish to trade…something approaching Mises’ “most marketable good.” You might want eucalyptus leaves to be money, for example, but you’d be hard pressed to find someone willing to accept them as a reliable store of value, given their relative abundance. One of the key characteristics of a good money is that it does not, literally or metaphorically, grow on trees.
Of course, being the only person on the block to accept eucalyptus leaves as payment has additional drawbacks. Think of it like being the first person on the planet to own a telephone. Who do you call? The true value of a money – any money – comes with its ability to perform the various and necessary roles of money, the primary one being as a medium fit for exchange (which, again, implies more than one person accepting it…hopefully many more). The more widely accepted a money is, the more goods and services you will be able to trade with it.
Let us pretend, for example’s sake, you wanted to create a currency from scratch. Let’s make some money, in other words, literally…and hypothetically. First we need to determine what innate characteristics might lend your product the best “marketability”?
In no particular order…
Most people want – and, in turn, will come to demand – a money that is durable, so that its store of wealth does not rot, erode or find itself otherwise subjected to the fickle whims of Mother Nature. (Dear readers might like to, at this juncture, rule out sandcastles, for example. Desert-wandering Bedouins might likewise wish to exclude cartons of unpasteurized milk from their list of potential monies.) Gold certainly seems to satisfy the durability demand. Paper too, though perhaps not to the same extent.
We might also fairly assume people will demand some form of basic, “intrinsic consistency.” This quality is closely related to “durability” and, for a similar reason, disqualifies caterpillars with “Monarchial aspirations.” Metamorphosis, at least where money is concerned, is not good. It may be said that, when it comes to measuring tools, predictability is priceless. And, for the same reason, gold here trumps paper.
Thirdly, most individuals require of money a high degree of convenience. It is, after all, one advantage money has over, say, the barter system. We want a money that is easily transportable, something we can carry around in our back pocket, preferably; something we don’t need to bring into town on the back of a donkey. Gold, in this sense, is not quite as suitable as paper, though it may still suffice.
Next, and this is related to convenience, we want ease of divisibility. This is because, quite obviously, we assign different values to different goods and services. We want a money that is capable of “making change,” something we can dissect into the denominations necessary to make buying a Mercedes Maybach and a kitchen mop both transactions of equal ease. Here again we see that gold, ostensibly divisible down to a single atom, fits the bill nicely. So too does paper money, with its infinite possible denominations.
Faithful Fellow Reckoners will have already recognized the above prerequisites as the first four of Aristotle’s “five characteristics of sound money.” The fifth, that it must have “intrinsic value,” is a bit trickier…
Until now, both gold and paper have managed to satisfy – to varying degrees – Aristotle’s demands. But let us reckon further on his fifth point for a moment. What is “intrinsic value”?
Value, as Mises described it, is not determined by the nature of objects themselves, but through our interactions with and appreciation for them. “Value is not intrinsic, it is not in things,” he wrote, again in Human Action. “It is within us; it is the way in which man reacts to the conditions of his environment.”
In this way, gold has value, not because it is intrinsically bestowed…but because we give it value through our interaction with and appreciation for it. Since Aristotle’s time, humans have accorded gold value because of its monetary properties, not the least of which being that it remained largely immune to the inflationary whims of those who would seek to undermine its relative scarcity. (To be sure, gold also has certain industrial applications, though these are mostly niche and, in some cases, likely to be replaced with newer and better technology in the future.)
What, then, is this “intrinsic value” to which Aristotle refers? Does it even exist? This editor, with due deference to the Father of Philosophy, has his doubts. Take the humble bife de chorizo, for example…known variously outside Argentina as top loin steak or sirloin. How do we account for the difference in assigned value given to this sumptuous slice by, say, a practicing Hindu and a hungry Porteño, other than the fact that value may well reside in us, and not the object in question? For one, the steak represents the sad remains of a slain God. For the other, a tasty meal. Man – not meat, as in this case – is truly the measure of all things.
Similarly, how do we account for the difference in values accorded to a fur coat by one, an animal rights protestor, and two, a shivering Inuit? And what if the coat has a Gucci label…and we throw a catwalk model’s value judgment into the mix? What then? What if “intrinsic value” really is nothing more than a fancy phrase for the collective whims of famished carnivores and capricious fashionistas?
The point here, returning to the question of sound money, is not that gold doesn’t have value…or that paper does; only that we assign value to them based on their relative utility, the degree to which we find them useful. As forms of money, both are useful…until such time as they are not. Importantly, as the example of plentiful eucalyptus leaves illustrates above, a money’s utility as a medium of exchange is directly proportionate to the amount of people who assign it value and, thereby, accept it as a store of wealth and facilitator of trade. To the extent that a money is easily reproducible, to the extent that it may be printed at whim or otherwise debased by the actions of central bankers, it loses its claim on the value to which we assign it.
Unfortunately for paper money – and fortunately for gold – those who ultimately approve or disapprove of a money, “the market,” tend only to assign it value if it doesn’t readily grow on Gum trees…or fall from helicopters.
Joel Bowman
for The Daily Reckoning
Joel Bowman
Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.
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Dear Joel, Your readers may be interested to know that the first Aussie Pound note had printed on it, ” The Treasurer of The Commonwealth Bank of Australia promises to pay the Bearer one pound in GOLD COIN on DEMAND” (my capitals.)
So the gold was the money and the pound was the receipt for the money.
Cheers
Should we have a free market we would have been able to find already which is the most efficient currency. Since we lack that privilege and thus any free competition of currencies, we carry the infinite burden of the opportunity cost of research, experience and empirical evidence, which would flourish in a non-coercive environment. Just as it is an impossibility to know, in advance, the preference of people (thus the futility of government, not to mention its immorality), it is out of our reach to know what is the best form of money; we just lack the conditions to discover it. We can only content ourselves with having what it is allowed for us to have and hope that the artificial whims of those who rule us won’t affect our decision too much.
The only reason why the fine author (and correctly so) mentions paper money is because the iron fist is held way up high, eager to crush any sign of voluntary value that might endanger it’s artifices (such as an unbacked piece of paper). But wit and creativity live on higher grounds, and from time to time they´ll have a glance at the brute force below and, indifferent, they’ll move ahead. Often, and from the heights of human potential, a brilliant idea sprouts from a healthy and unaware (of the threats) mind. And in these cases the rust and the incompetence of the violent machinery expose themselves as what they are: the obsolete stain in the history of virtue vs. coercion. So is the case of today’s finest example: bitcoin. Maybe one of the thousands of possible options a free market would offer, but even the dimmest shine in freedom is brighter than the biggest fire of destruction. Value IS subjective, as our fellow reckoner fairly states, and only exists if its given voluntarily. Bitcoin is the solution of a free mind to force, and governments won’t be able to steal or destroy this one, it’s beyond its grasp, intangible and valuable as the idea which created it.
A bright article from a mind on the highest grounds, it’s great to know they’re around, alive and well.
“Faithful Fellow Reckoners…”
Your readers had better be “Full of Faith” if they’re going to swallow the clap trap in this article.
Read E.C.Riegel for a Non-Faith Based understanding of money.
Great read, second time today I have stumpled upon the idea of intrinsic worth and Mises.
Nice one.
Eric…bitcoin doesn’t exist in physical form. It’s a computer generated imagination. How will you spend your bitcoin if a power grid goes out?
Paycheck…E.C. Riegel, reading his philosophy is a free trader which is what we have now in the US. I don’t believe in free trade but I believe in free market…i.e.; If you sell your ware in my venue then you pay the rent or if you import your goods then you pay tariff.
@Ray: With all due respect and following your logic, your comment doesn’t exist in physical form, so I’ll just assume it’s a computer generated imagination.
For others who might be genuinely interested: if the entire power grid of the world goes out, and assuming generators don’t exist and every computer using bitcoin shuts down AND you forgot to charge your cellphones and so forth… as soon as the power comes back up again, everything will be just as it was before. And yeah, if that doomy scenario persists for a long time (months, or years say) it will suck not to be able to perform transactions in a split second without fees, without regulations, without geographical limits, with as much anonymity as you want, with as much divisibility as you want, no matter who or where you are; you would just have to conform to the other obsolete options (like direct exchange or your favourite “forced tender”). But I guess currency will be the least of our problems if we find ourselves in that situation. Be an early adopter and buy bitcoins at today’s bargain price. Thank me later.