February 19, 2012

Gold is money..NOT!

Across the internet we often are confronted with the following sentence: "Gold is money".
This is brought up as a reason for people to buy gold. There are numerous of people seriously thinking our next monetary system will use gold (and silver) as some kind of money.
Because these commodities today aren't used as money there should be a big, big price advantage for the clever guy to step in and buy these commodities.
As I also believe there are once in a lifetime opportunities here, it's not because of this money reason. This post should try to clarify the current situation. How do people come to this thought of gold is money?
Will it eventually make things functioning better than they are today, and is it even possible to happen?

For me to come to an answer at these questions I think it's important to define what is meant by the term "money". Ludwig von Mises describes it this way: Money is a medium of exchange. This is a view from the Austrian School. My take on this is a little different, but  instead of making this subject even more difficult let's stick to this definition. The next time I use the word money I hope we can agree on the fact that we mean the medium of exchange.

Today the money we use are Euro's, Dollars and all kind of other currencies. The reason we use them is to lubricate the flow of value between the participants of the economy.
For example, instead of bartering a cow against a sheep, it is possible to exchange the cow for money somewhere, and with that money go out and buy a sheep elsewhere. This is Mises' sole function of money, facilitate a smooth running system called economy.
Does this function of money not work properly nowadays?
In my opinion it does very well! Better said, the evolution now going on, from paper notes into digital currencies, is making moneys' function as a lubricator performing even better.
The globalisation of trade is forcing us to seek for solutions of making this trade taking place in the most convenient way. Otherwise it would throw up barriers, which would affect the trade. Imagine yourself, how could you ever buy yourself a book from an other country if you had to barter something physical against it?

Back to my question: How do people come to this thought?
Although it's always better to ask it themselves I think I've got an explanation.
If you let me.
Today we use money not only for the medium of exchange function. We also keep our short-term savings in it, and even our long-term savings (pensions).
The fact that we are almost everyday confronted with media showing us central banks bringing more and more, out of thin air, created money in circulation, we feel cheated.
We as the people have to work for our money, and what we don't consume we save. Our savings are loosing more and more purchasing power due to this printing. By calling for gold as money my guess is that people simply want to ensure the purchasing power of their savings in the future.

Gold can't be printed, this will learn that bastards! But, because people disuse money as a store of value, should we than completely change the medium of exchange function in a more "hard to print" variant? Doesn't this seem the other way around for you also?
As Ludwig von Mises describes a medium of exchange as money's sole function, wouldn't it be very difficult to explain that in the future we are going to make this function subordinate to an other less important function, which can be fulfilled by something else?
Not only subordinate, we are also going to let it perform it's function worse as before. Nobody can advocate this as THE solution to our monetary problems, can you?

So would it be possible for this scenario to happen?  The Mayans were convinced the world would stop turning at the end of 2012, this isn't very likely though. In my opinion we can also look in this way at the gold-money thing. It's not likely to happen.
I'd like to go even further with my statement: "We should hope for god sake this won't happen because it would throw us back a century at least. We will have almost a barter economy, with devastating results for our trade worldwide."
Will things stay how they are today? No, definitely not.
There will take place major changes in the perception of  people regarding saving in a medium of exchange. More and more people already see the need to separate the functions of money. Currency as the medium of exchange, and gold as the store of value. Acting independent from each other.
Will this shift of perception imply big changes in the future value of gold? It will take indeed gold out of the commodity sphere and place it where it belongs, already described here.
The Euro-concept already adapted to this "new normal", which I described in the this previous post.

What I would like to achieve with this little effort is for people to simply think about what they're actually meaning when it comes down to gold is money. Do they want the sole function of money to be fulfilled by gold, or just the store of value function. In the last case, fiat won't be a problem any more. No backing, completely independent. Try to stick to facts and when facts don't support your view, think.
Like Ayn Rand once said: "Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong."


Warren James said...

This is a good bite-size version of some of FOFOA's work, well done :)

The store of value function is the one which hits a nerve with people and clarifying (along with separating it), invariably identifies the speaker as either a debtor or saver.

I would comment that the unholy mashing-together of the store of value and transactional role of currency appears to be the cause of many ills in the world (although many have taken full advantage of this flaw over our modern history).

I would look forward to many more of your digestible summaries ;) The more of this education out there on the internet, the faster the pace of this monetary evolution.

Warren James said...

Anyone with doubts as to the direction of things (described well in the article above), need only provide analysis on why GoldMoney is failing in the bid to provide "Gold Money". It's not for lack of trying - they have a business and have some very smart minds on the task.

i.e. largely impossible to successfully integrate the two functions, when their evolution is being pushed in separate directions.

Boefke said...

"largely impossible to successfully integrate the two functions, when their evolution is being pushed in separate directions."

The integration of these two functions has never worked. Not for Fiat-money nor for gold/silver or anything else. This has everything to do with the different functions of both.
It is in our Western mind that money can fulfil al those functions properly, but you can't fool the Easterners. As the shift of economic power is occurring before our eyes from the West to the East, we simply have no choice. Adapt to the new normal.....or keep living our Western dream.
Like always with dreams, they end. Nobody knows when, but they end.

Ref Goldmoney, I really don't understand why people put their savings in the hands of this crooks. Maybe they're even more to blame as the common commercial banker doing what's he always has been doing for all his life.

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