The Gold Standard: A Fundamental Understanding

Listen to the radio, watch cable news, drive down a commercial area of town, or talk to a supporter of Ron Paul and you will most certainly have heard about the value and virtues of gold.  If you own it, then they will buy it (below market value), if you want it they will sell it to you (above market value), and if you believe people like Texas Congressman Ron Paul and his adherents, gold will fix the nation’s financial woes. This may inspire one to ask…Why gold? What is gold and why is it so treasured to the point that someone might see it as the single most important commodity. Why is gold so important that ownership of this metal is seen to be almost the sole indicator of wealth? 

Nations and people hoard gold but have few practical uses for it

Gold is, of course, a chemical element with the symbol AU and the atomic number of 79. It is a very dense, malleable, shiny metal that is highly resistant to corrosion. Its relative rarity and its properties make it impractical for most of the purposes man has historically used metal such as tools or weapons. Gold is believed to be one of the first metals discovered and utilized by prehistoric man who used it to make idols and adornments. Gold as currency came much later and billions have died fighting for possession of this metal ever since. Although this metal is so treasured by man, there have been historically very few practical uses for gold and those few practical uses are relatively new, having to do with electronics and modern medicine.  From its prehistoric discovery by man until modern times, there have been only two major uses for gold: Decoration and a representation of wealth.

There are many people who very vocally lament the removal of precious metals from our money and the fact that our monetary system was removed from the gold standard. They believe that true wealth is only represented by these metals and the paper money we use today is worthless.  Ironically paper is made from a commodity we have far more practical uses for than we do gold: Lumber. There are millions of practical uses for wood, so many that most people can look around right now and see something made of it.  Metal, wood, paper, plastic; it simply doesn’t matter what we use to represent wealth. Money is simply a unit of measurement representing wealth. What we use to represent wealth is not, and never has been, the real wealth.

Golds main uses are adornment and the representation of wealth

At best gold is just another resource, a commodity to be bought and sold like any other. It has been the foremost metal chosen to represent wealth because it is shiny, pretty, rare, and has so few other practical uses.  Still people will assert that currency should contain precious metal or that our monetary system should be based on it. These days the ‘Gold Standard’ is best left as a rating for good service or high quality and not as a monetary policy. To put precious metal into money would be disastrous and to base the worth of a nation on how much stores of a relatively useless metal it has is unrealistic and would preface serious worldwide upheaval and conflict

In modern times gold has crossed over to a true commodity with real practical value in industry as well as its value as a luxury good. It is bought and sold on by speculators and its value fluctuates like any other commodity. If precious metal were reintroduced as currency, it would simply be melted and sold when the market value of that metal was higher than its face value. It would not be the first time US currency made of precious metal was melted and shipped out of the country to be sold for high profits in foreign markets. The only other alternative would be to required weighing and testing the metal and valuing it at current market rates at the point of transaction which would be unrealistic. Even now the US will mint a copper 1 cent coin at a loss as the value of the copper as a commodity, which is significantly lower than that of gold, may be greater than the face value of the coin.

Basing a monetary system on gold, that is backing the worth of currency on the value and amount of gold held by the issuer, is no less unwise. The true value of a currency is the resource that backs it, precious metals being just one of many commodities and resources that factor into evaluating the worth of a nation.  Basing a monetary system on one finite resource that a country must produce or accumulate ignores all other valuable, and far more essential, resources and commodities that nation may produce. A nation’s wealth and economy just becomes an exercise of accumulating and storing the most of a relatively useless element.  Holding the Gold Standard up as a cure to inflation is like holding up Humorism as the cure to all human ills. It’s outdated, discredited and shows a fundamental misunderstanding of the subject of currency and its purpose in an economic system.

Gold is a commodity and as such, it has worth and it can be profitable to trade in it as an investment. Its worth is derived from the current market prices and the profits or losses incurred when it changes hands. Like any investment it is only good as long as the value is lower at the time you buy it then it is at the time you sell. For the average individual it is a good long term investment as the price for gold, like any commodity, fluctuates depending on market conditions. Like any investment it should be bought with the knowledge that tomorrow the price might go down and you may have to hold onto the gold until the prices rise again.

Then there are those people who make a living buying and selling gold. If you buy gold from them there will be a markup over spot and they will make money, if you sell to them they will buy below spot thus when they sell again, it will be at a profit. They will often use cheap scare tactics like the idea of the inherent value of gold as protection from a bad economy, assured currency devaluation, and inevitable hyper-inflation. When referring to national paper currency they often use the word ‘fiat’ as if it is a synonym for worthless. They will preach economic doom and gloom and the collapse of the economic system and how only gold will protect you. They say these things all the while trying to get you to trade that worthless currency for their gold…at a profit of course. The Liberty Dollar is a good example of a for profit company using such tactics to sell gold..

If indeed there is hyperinflation or the economy collapses, you may find that you would be better off sitting on a cache of guns, grain, land, livestock, gasoline, or almost anything other than gold. You can’t eat gold, you can’t build shelter with gold, and you can’t fuel your vehicle with gold. One may find that gold will be just as useless as paper currency when there is no economy supporting its inflated value. To say a nation can avoid inflation, the devaluation of currency, or economic collapse by having a currency and economy based on precious metal is discarding all historic evidence to the contrary. 

The currency of the Roman Empire was, from its beginning until is end, based on precious metals and this did not save them from economic decline and collapse. The currency of the empire began a long slow decline and by the third century the currency was debased time and time again starting with the introduction of the antoninianus in 215. Referred to as the ‘double denarius’, it was valued at two denarii but actually contained the silver weight of one and a half denarii. Roman currency continued to debase as the empire shrank and faltered until there were mainly only gold coins used by the wealthy, a much smaller amount of silver, and a proliferation of small, nearly worthless bronze coins used by the masses. In the end, Rome’s deep seated financial problems could not be cured by precious metals in its currency simply because it lacked the real elements of wealth and power that metal was supposed to represent, that being a firm control of land and resources, industry, and social, political and military stability. 

Gold and silver will always be valuable commodities that will certainly lend that value to the over all assessment of a nations wealth but there is no practical need, or realistic way, for these metals to be present in our actual currency or to base the value of that currency on it. Money is just a representation of a realistic assessment of wealth whether that money is silver, paper, plastic or data in a computer. The lack of precious metals in our currency, or our currency not being backed by gold is not a root cause of inflation, devaluation, or any other monetary or economic woes and in fact to return to these practices would probably cause far more problems then they would cure. Not having REAL wealth to back a currency is the real underlying factor. Currency need not represent gold but it MUST represent something of true value otherwise it is truly fiat and of little worth.