Gold is Not Money

[mmissinglink]

Maybe the more interesting question actually is: as was a long time ago, can gold ever again be treated as money by most of the world? And what about silver....even less likely, same, or more likely?



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[sterling-nz]

Maybe the more interesting question actually is: as was a long time ago, can gold ever again be treated as money by most of the world? And what about silver....even less likely, same, or more likely?



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This is an interesting question.
I do not personally believe the powers that be will ever bring back gold and silver.
The cost of production is prohibitive and the few of us in the west that do understand the value of these metals would abuse the system and accumulate like mad.
We have gone to steel and alloy for our coinage as this is currently the cheapest option.
I see us using some form of plastic coins in the future.
It may well be that our plastic coins are embedded with some sort of tracer element to avoid counterfeiting.
It will be some element that is difficult to acquire and can be detected through technology in the cash registers of the day.
From a psychological point of view we will have a "hard currency" for a long time to come, as people are not ready to allow for electronic living.
As worthless as a polymer note or plastic coin is , people still believe they hold "real value" when they can hold it in hand.

 

[mmissinglink]

Maybe the more interesting question actually is: as was a long time ago, can gold ever again be treated as money by most of the world? And what about silver....even less likely, same, or more likely?



.

This is an interesting question.
I do not personally believe the powers that be will ever bring back gold and silver.
The cost of production is prohibitive and the few of us in the west that do understand the value of these metals would abuse the system and accumulate like mad.
We have gone to steel and alloy for our coinage as this is currently the cheapest option.
I see us using some form of plastic coins in the future.
It may well be that our plastic coins are embedded with some sort of tracer element to avoid counterfeiting.
It will be some element that is difficult to acquire and can be detected through technology in the cash registers of the day.
From a psychological point of view we will have a "hard currency" for a long time to come, as people are not ready to allow for electronic living.
As worthless as a polymer note or plastic coin is , people still believe they hold "real value" when they can hold it in hand.

Agreed with everything and just to clarify "real value" I would add that any physical thing attains 100% of it's value by us collectively or individually attaching some value to it. Specifically, for something to function as money whether it is cotton/flax based ("paper") or petro-based (plastic) notes, or coins comprised of clad metals, silver, gold, or red squirrel feces it is irrelevant....what is important is that collectively we attach significant value to it. Currently, in terms of physical money, much of the world attaches significant value to cotton/flax-based Fed notes.

gold money (though, as the exception to the rule, it can function as money in certain places and for certain transactions)

money physical currency (though a currency can function as money but not all currencies do)


Bottom line is whatever it is we attach value to, only then does that thing have any real value. Red squirrel feces, gold, silver, rare blue diamonds, and anything else we can dream of has no intrinsic value. Long before humans ever attached value to aluminum, corn, iron, coffee, palladium, pine lumber, platinum, linen, gold, rubber, silver, petroleum, copper, pretty sea shells, etc, etc, etc, etc they all had the same intrinsic value as they have today in 2015 or as they had in 657 A.D. - zero. The only thing that changed about these items in terms of value is that we, collectively, attached different values at different times to these things.




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[Luker]

Gold Is Not Money, Part 2
Steve Saville
email: [email protected]
Oct 13, 2015

I opened a blog post on 7th October with the statement that gold was money in the distant past and might again be money in the future, but isn't money in any developed economy today. I then explained this statement. The post stirred up a veritable hornet's nest, in that over the ensuing 24 hours my inbox was inundated with dozens of messages arguing that I was wrong and a couple of messages thanking me for pointing out the obvious (that gold is not money today). The negative responses were mostly polite *, but in many cases went off on a tangent. Rather than trying to respond individually, this post is my attempt to rebut or otherwise address some of the comments provoked by the earlier post on the same topic.

In general, the responders to my earlier "Gold Is Not Money" post made the same old mistakes of arguing that gold is an excellent long-term store of value, which is true but has nothing to do with whether gold is money today, or confusing what should be with what is. Some responders simply asserted that gold is money becauseit is. Not a single responder provided a practical definition of money and explained how gold fit this definition. That's despite my emphasis in the earlier post that before you can logically argue whether something is or isn't money, you must first have a definition of money.

Due to the fact that many different things (salt, tally sticks, beads, shells, stones, gold, silver, whiskey, pieces of paper, etc.) have been money in the past, a reasonable definition of money MUST be based on money's function. Also, the definition must be unique to money. In other words, when defining money you must start with the question: What function does money perform that nothing other than money performs?

"General medium of exchange", meaning the general enabler of indirect exchange, is the function performed by money and only by money within a particular economy. Now, there are certainly pockets of the world in which gold and other items that we don't normally use as money in our daily lives do, indeed, perform the monetary function. For example, there are prisons in which cigarettes are the most commonly-used medium of exchange. It is certainly fair to say that cigarettes are money within the confines of such a prison, but I want a definition that applies throughout the economy of a developed country. Gold is not money in the economy of any developed country today, although there could well be small communities in which gold is money.

I'll now address some of the specific comments received in response to my earlier post, starting with the popular claim that there's a difference between currency and money, and that although gold is no longer a currency it is still money. The line of thinking here appears to be that currency is the medium that changes hands to complete a transaction whereas money is some sort of esoteric concept. This is hardly a practical way of thinking about currency and money. Instead, it appears to be an attempt to avoid reality.

A more practical way of thinking about the difference between currency and money is that almost anything can be a currency whereas money is a very commonly-used currency. In other words, "currency" is a medium of exchange whereas "money" is the general medium of exchange. The fact is that gold is sometimes used as a currency, but it is currently not money.

Moving on, some people clearly believe that gold is money because the US Constitution says so. Actually, the US Constitution doesn't say so, as the only mention of gold is in the section that limits the powers of states and is specifically about the payment of debts, but in any case this line of argument is just another example of confusing what should be with what is. The bulk of what the US Federal Government does these days is contrary to the intent of the Constitution.

Some people apparently believe that gold is money (or money is gold) because JP Morgan said so way back in 1912. My response is that JP Morgan was absolutely correct. When he made that statement gold was definitely money because at that time it was the general medium of exchange in the US. However, today's monetary system bears almost no resemblance to the monetary system of 1912. For example, when JP Morgan said "Money is gold" the US was on a Gold Standard and the Federal Reserve didn't exist.

Several people informed me that gold must be money because some central banks are buying it or holding it in large quantities. OK, does this mean that something is money if central banks are buying/holding it regardless of whether or not it is being used as money throughout the economy? If so, then Mortgage-Backed Securities (MBSs) must now be money in the US because the Fed has bought a huge pile of MBSs over the past few years, and T-Bonds must now be money throughout the world because most CBs hold a lot of T-Bonds. Obviously, something does not become money simply because CBs hold/buy it.

A similar mistake is to claim that gold must be money because major clearing houses accept gold as collateral. The fact is that the same clearing houses also accept the government bonds of most developed countries as collateral. General acceptance as collateral clearly does not make something money.

Lastly, some readers came back at us with the tired old claim that gold has intrinsic value whereas the US$ and the rest of today's fiat currencies don't. At the risk of seeming arrogant, you can only make such a claim if you are not well-versed in good economic theory. All value is subjective, which means that no value is "intrinsic". Most people subjectively assign a high value to gold today, but they also subjectively assign a high value to the US$. In any case, even if the "intrinsic value" statement had merit it wouldn't be a valid argument that gold is money.

In conclusion, gold is something that is widely perceived to have substantial value. Furthermore, good arguments can be made that its perceived value will be a lot higher in a few years' time. However, it is currently not money.

*Those that weren't polite have had the honour of being added to my "blocked senders" list.

###

Steve Saville
email: [email protected]
Hong Kong

http://www.321gold.com/editorials/saville/saville101315.html

 

[Porcello]

.
I see us using some form of plastic coins in the future.
It may well be that our plastic coins are embedded with some sort of tracer element to avoid counterfeiting.

....and they will call them "debit cards".

 

[Porcello]

"Time is money, and nothing else"
Porcello 2015

 

[sterling-nz]

.
I see us using some form of plastic coins in the future.
It may well be that our plastic coins are embedded with some sort of tracer element to avoid counterfeiting.

....and they will call them "debit cards".

I know we are using plastic via Credit Cards already, but i was leaning more towards coinage made of plastic.
I do not think the vast majority of individuals are happy to rely on a card for living and this majority will want to have actual notes and coins they can hold.
We here in NZ have already gone to steel coins with some copper plating and i see the next step as plastic coins with may be a copper or silver colouring.
The main factor i see in coins over the years is they need to be as cheap as possible to produce and plastic appears to be the next logical step.

 

[Ag bullet]

I do not personally believe the powers that be will ever bring back gold and silver.

sadly, i think that when this corrupt system fails it will be replaced with another corrupt system. they got rid of gold because it limited them. they won't self impose it again.

 

[monopolize]

If governments had their way the future will be a cashless society. It's already in motion.

http://www.forbes.com/sites/markhendrickson/2015/05/28/farewell-to-cash/

 

[Luker]

Maybe the more interesting question actually is: as was a long time ago, can gold ever again be treated as money by most of the world? And what about silver....even less likely, same, or more likely?



.

Silver as money

https://www.goldmoney.com/silver-as-money

By Alasdair Macleod
Market Updates October 15, 2015


Gold is money, admittedly not often circulating as such today. Fiat currencies issued by governments have driven gold out of circulation. But where does this leave silver?

Money-substitutes, bank notes and bank deposits, were originally backed by physical silver, and were switched in favour of gold-backed money-substitutes over the last two centuries. It was a process that happened first in England, starting with Isaac Newton's declaration in 1717 that silver would be exchanged at the Royal Mint in the ratio of fifteen and a half ounces to one of gold. While Newton was a towering genius in physical science, he didn't understand markets, and that an inflexible bimetallic standard not adjusting for the subjectivity of prices would be problematic.

Market preferences in subsequent years deemed gold preferable to silver at Newton's exchange ratio, because British merchants tended to pay for imports from the Continent with silver while hoarding gold. This might have been due to the convenience of gold for merchants' dealings, or it could equally have been due to price arbitrage. For whatever reason, Britain moved towards gold and finally adopted it as the government's preferred money when the first sovereigns were issued in 1821.

In was not a market vote against silver: it was the result of an attempt at bimetallism that failed, and a government that decided to switch from its centuries-old sterling silver standard. Other countries followed later falling into line with Britain, with Germany and the United States eventually accepting gold as the leading metallic money in the 1870s. And as Von Mises records in his Theory of Money and Credit, "The sharp decline in the price of silver since 1873 is recognised as largely due to the demonetisation of this metal in most countries."1

This is an important point, obvious perhaps on reflection. The move from Newton's gold-to-silver ratio of 15.5:1 to today's 70:1 can be put down largely to silver's demonetisation. Today, the price of silver measured in the world's reserve currency, by which it trades, is heavily influenced by a cartel of industrial users and their banks through the financial markets.

History tells us that silver, and not gold, was coinage for the masses, continuing in this role until relatively recently, before silver coins were completely debased. The question now to be considered is whether or not silver will ever be remonetised. If so, we can expect the ratio to fall towards Newton's formula, implying the silver price will rise significantly relative to that of gold.

The base case for gold returning into circulation for transactions is that it becomes superior again to fiat currencies as money. Clearly, this is most likely to happen in the event of a serious dislocation of the current monetary system, and the failure by governments to come up with a convincing alternative. We can all have our views on this matter, but assuming for a moment that this is a possibility, it is worth understanding the differences between gold and silver as monetary metals today.

As a rule of thumb the silver price is twice as volatile as that of gold and the underlying price dynamics are different. Nearly all the gold mined throughout history has accumulated as above-ground stock, and current mine production is adding to it at a rate of less than two per cent annually, approximately matching global population growth. However with silver, according to The Silver Institute, roughly sixty per cent of consumption is industrial, the balance of forty per cent going into silverware, coins and bars, and jewellery.

This means about 400 million ounces (12,400 tonnes) is accumulating annually in public hands. During the last twenty years the US Geological Survey estimates over 400,000 tonnes of silver have been mined worldwide, so it is likely that approximately 160,000 tonnes of this total is publicly owned, based on a 60/40 split, in addition to stocks previously accumulated. We have no credible estimates for gold accumulation over the same period, beyond mine output of about 50,000 tonnes, much of which has disappeared into secret, wealthy and relatively concentrated ownership. By way of contrast, most households around the world possess some silver in one form or another.

The advantage silver offers the masses as money is partly psychological: you can acquire a lot more of it for less government currency. This obvious fact has led commentators to deride it as poor man's gold. Both metals of course are infinitely divisible; but what matters more for ordinary people is that gold today costs $1170 per ounce, while silver costs only $16. Even if the silver price rises, the disparity will never close for the common man.

If gold does return to its historic status as transaction money, it is therefore certain that silver will as well. Given both metals have a long-run history of acceptability as money, it is hard to imagine otherwise. But silver has a further advantage: the US Government set a precedent by confiscating and banning ownership of gold in 1933, while silver, the people's money circulating in coins, was left alone.

The thought that the US Government might at a future date implement such a policy is, frankly, daft. It would be ironic that having denied gold has any role as money, banning its use in this role and confiscating it would amount to an acceptance that it is, after all, money. But governments do daft things when their backs are against the wall. You only have to recall the price and wage controls that were introduced in a number of jurisdictions during the 1970s, including America, in a forlorn attempt to cap price inflation. Under pressure, a future US Government, in conjunction with other like-minded states, would almost certainly consider restricting their citizens' rights to gold ownership, with or without confiscation. It may be politically expedient to clobber the rich who own gold, but it would be difficult to extend these restrictions to silver, because of its industrial applications and the widespread public outcry that would surely follow.

However, the likelihood of a catastrophic failure of fiat currencies, with or without attempts to outlaw possession of gold or silver, is currently beyond the consideration of all but a small fringe of economists and financial commentators. This is now changing, due to the failure of monetary and economic policies in the advanced economies. As concerns over increasing economic and financial instability mount, and with them the risk to confidence in government currencies being maintained, attention should move towards the potential for gold to mitigate these risks. What is not generally appreciated, even among many sound money advocates, is that silver historically fulfilled the role as the people's money ever since coins were invented, with gold being preferred only for larger transactions.

No doubt the principal focus will always be on gold as the ultimate metallic money, but the temptation to overlook silver's monetary credentials is a mistake. Arguably, it could even have a greater claim than gold to be the people's money, because for all of commercial history it has been more widely circulating for that mundane purpose.


1. Part 2: The Value of Money, page.106, translation by H E Batson, Yale University Press 1953.

 

[Porcello]

Silver as money
https://www.goldmoney.com/silver-as-money
By Alasdair Macleod
Market Updates October 15, 2015
............
............
If gold does return to its historic status as transaction money, it is therefore certain that silver will as well.

What a shame! He was going quite well up to this point..... then he drops this huge BS bomb!

 

[FlashInThePan]

What is the value of currency at zero interest rates generated on a computer screen as digits may be a better question

 

[Porcello]

What is the value of currency at zero interest rates generated on a computer screen as digits may be a better question

The same value a pet rock has: whatever people are willing to give it and exchange tangible goods and services for it.

 

[FlashInThePan]

Bad money has driven out the good and that is the world we are in ATM.

The other day when at the bank, the teller asked me on taking some money out, "how I would like" and I replied "in $100 notes thanks or on second thoughts those $200 coins will do fine".
She responded with a grin, "sometimes we get those but we have a directive to send them back to the central bank"

So the remaining good money that may turn up in the system is by directive by the issuer to be returned. They want the money and the people can have the notes and digits thanks.

The interesting thing is that in china the opposite position is promoted.

 

[FlashInThePan]

What is the value of currency at zero interest rates generated on a computer screen as digits may be a better question

The same value a pet rock has: whatever people are willing to give it and exchange tangible goods and services for it.

Yes, until one day when the psych-op is seen for what it really is by the market.

 

[Skyrocket]

Gold is money

Gold is genuine Wealth, it is real money

Throughout history no paper currency has survived in its original form. Paper currencies are normally inflated away until they are worthless. The purchasing power of the US dollar has declined by 90% since 1950. The situation is the same for most currencies. When governments come under financial pressure they can never resist printing money to pay for debts, be they war debts or just excessive spending.
Gold is the only currency which has no liability attached to it.

So far no paper currency has survived intact over a longer period whilst gold has represented real money for several thousand years. When paper money fails investors who own gold still have a currency which holds its value despite the fact that banks may be bankrupt. Iceland is a recent example of how paper money can lose its value over night. With the massive debt levels and money printing in many countries including the USA and the UK the risk of a similar default in other countries is very high.

Gold has at all times represented real wealth as well as being a medium of exchange. "Old money" has always maintained a percentage of its wealth in gold since the specific characteristics of gold make it probably the safest and most attractive investment for storing and preserving wealth.

Gold stored outside the banking system should be the foundation of the wealth pyramid for high net worth individuals. Therefore, physical gold or silver should not be considered as an asset which is valued or traded on a daily basis.

http://matterhornassetmanagement.com/gold-is-money/

 

[Porcello]

What is the value of currency at zero interest rates generated on a computer screen as digits may be a better question

The same value a pet rock has: whatever people are willing to give it and exchange tangible goods and services for it.

Yes, until one day when the psych-op is seen for what it really is by the market.

Of course! Fiat money is a promise based on trust, and trust is expendable only once.

Edit: Trust or coercion... a big army helps a lot.

 

[mmissinglink]

What is the value of currency at zero interest rates generated on a computer screen as digits may be a better question

The same value a pet rock has: whatever people are willing to give it and exchange tangible goods and services for it.

Yes, Porcello, that is exactly correct. Money can be pet rocks, cigarettes, red squirrel feces, boogers, or virtually anything. Money is simply that which is widely accepted by a group of individuals as a medium of exchange. If a group of people inside a prison have consensus that cigarettes are an excellent and acceptable medium of exchange (which is quite reasonable actually), then cigarettes is money for them.

The truth is, today, neither gold nor silver is money for the vast majority of the people on earth - and yet US$$ is money for possibly the majority of people on earth...regardless if we stackers like it or not....that we do or don't is largely irrelevant.



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[Porcello]

red squirrel feces, boogers

Not sure this two can really be money... they look a bit problematic to me as medium of exchange. I guess they are also not so nice to carry around and the fact that they are organic and extremely perishable doesn't make them a good store of value.

 

[Golightly]

True, the govt(s) gets to determine what money is, but they are all stacking gold as well, which shouldn't go unnoticed.

Nah, If I offer you something like gold to purchase a car off you and you accept, It is money.
The less the Gov have to do with it the better. Let them keep giving billions to the RBA instead