2014- Facts about Gold

Many a (more or less) big philosopher has racked his brain as to why money has value.  Aristotle was of the opinion that good money should come with very high production costs so as to induce people to attach value to it.  He claimed that everybody would have to accept it as means of payment, value store, and value benchmark.  Along those lines presented by Aristotle, basically an ancient gold bug, the only materials that would fit this description were gold and silver.  Marxists would hail the reference to production costs, but Plato found a better explanation: from his point of view, money had no intrinsic value except the one that it was given by people.  This reminds us of the marginal theory of value proposed by the Austrian School of Economics…..

People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.” (Robert Murphy)

Carl Menger explained the emergence of money as result of a historical-evolutionary process derived from barter trade.  In his Principles of Economics (1871) he writes: “Money is not the product of agreement of economic individuals, or even the product of a legislative act. It is no invention made by the people. Gaining an ever greater insight into their economic interests, the economic individuals in countries everywhere at the same time also realised that by relinquishing goods of lower marketable value for those of higher marketable value they would further their own economic end significantly. This is how money was created at many independent cultural centres along the ongoing development of the economy.”

In his habilitation treatise “The Theory of Money and Credit,” Ludwig von Mises managed to resolve a persistent circular argument of economics in an a priori, deductive way.  The circular argument was: “The people demand money because it has purchasing power, and it has purchasing power, because the people demand it.” This statement is of course a tautology.  Therefore, Mises introduced the time factor into his concept.  According to him, the expectation of future purchasing power of money crucially depends on the knowledge about today’s purchasing power.  Today’s purchasing power in turn can be explained by yesterday’s purchasing power.  At the end of the regression we therefore have to find a good that was generally needed and came with an industrial use.  This means that money has developed from a tangible good.  This also includes the demand for jewelry and thus gold.  According to Mises only goods with a generally accepted utility value can turn into generally accepted, natural money.  Gold and silver were already used as jewelry before they assumed their monetary functions.

According to Mises, past experience is the decisive factor for future trust in monetary stability.  The trust in the stability and future purchasing power is essential for the value measurement of money.  According to the regression theorem people only trust in money as long as it offers a certain degree of safety with regard to its future supply and thus to its future purchasing power.

“Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium.” Murray Rothbard

Why have gold and silver come out on top as money after all those centuries?  In his explanation, Roy Jastram refers to two (also anthropologically provable) basic human needs: the appreciation of beauty and the human will to survive.  The two metals therefore satisfy two requirements that are situated at the very bottom and at the very top ofMaslow’s hierarchy of needs.

These two needs are today as strong as they used to be thousands of years ago.  Dr. Bernard Pacella, former President of the American Psychoanalytic Society, points out that the will to survive is the most important driver in nature.  According to Pacella personal survival (and in turn the survival of the species) dominates everything else. Continuing along this train of thought, the protection of one’s savings and the expectation of receiving a reward for this deferral of consumption also constitute elementary motives.  This also explains the need for a stable means of saving.

What are the central requirements for money?

* It has to be easily divisible into standardised units
* It has to be negotiable
* It has to be easily transportable
* It has to be durable and practically indestructible
* It has to come with a long track record of universal acceptance
* It has to be easily recognisable and fulfill certain criteria that can be easily verified – it has to have a high value density (i.e. high value / weight and volume)

* The existing holdings have to be large relative to the annual increments (high stock-to-flow ratio)
* It has to come with low storage costs
* It has to come with low transportation costs

* and last but not least, it must defy random replication

There are numerous goods that satisfy some of these criteria, but only gold and silver satisfy all of them.