Whats so great about gold?

[The Anthem]

Ayn Rand obviously prefers gold coins to paper money. I can seem to find a real concrete reason for this. Is it because gold can be uniform and there will be no need to change currency? It can't be due to inflation, gold prices fluctuate too. Can someone please explain this?

[DragonMaci]

Bare in mind the context in which gold value fluctuates, ie, an economy with a dollar ever-changing value. In such a situation, the price of everything will fluctuate with the price of most things going up in the long run.

[khaight]

Ayn Rand obviously prefers gold coins to paper money. I can seem to find a real concrete reason for this. Is it because gold can be uniform and there will be no need to change currency? It can't be due to inflation, gold prices fluctuate too. Can someone please explain this?

The best short reference is Alan Greenspan's article on "Gold and Economic Freedom" in Capitalism: The Unknown Ideal. (This article is also easily found on the web via Google.)

Richard Salsman has written a short book-length treatment entitled Gold and Liberty, which I own but have not read.

George Reisman's book Capitalism: A Treatise on Economics has a chapter discussing the gold standard. (The book is available for free reading on his website.)

[agrippa1]

Ayn Rand obviously prefers gold coins to paper money.

No, she preferred gold coins and gold-backed paper money to unbacked paper money.

I can['t] seem to find a real concrete reason for this.

Gold, itself, has an intrinsic market value (by intrinsic here, I mean a value aside from its value as a trading device). Silk paper printed with dead mens' portraits and strange patterns and symbols, does not.

Is it because gold can be uniform and there will be no need to change currency?

One reason for using a single standard worldwide is for ease of exchange of currencies, and thus cleaner communication of market information, and more efficient exchange of goods and allocation of capital.

It can't be due to inflation, gold prices fluctuate too.

Inflation is caused by government printing and spending currency faster than the growth of the economy warrants. While the supply of gold could exceed the growth of an economy (as it did in Spain with the influx of gold from the new world, and in other cases of major gold finds), this leads only to short-term bouts of "inflation" and is not subject to the manipulations of government bureaucrats.

Inflation is the government's way of stealing your money without you knowing about it.

[DragonMaci]

Inflation is the government's way of stealing your money without you knowing about it.

Indeed it is, which makes me wonder why the NZ Reserve Bank tries to keep inflation down and why the government set that as the bank's main priority. The bank fails of course since it uses Keynesian economics and as such adds fuel to the fire rather than putting water on the fire. But of course it uses Keynesian economics because the anti-concept of the bank is based on Keynesian economics that government controlled currency is the best form of currency.

Anyway, the only reason I can think of to explain the government telling the Reserve Bank to focus on keeping inflation down is that they realise that if inflation rises too high eventually people will wake up and smell the crap.

Edited June 5, 2008 by DragonMaci

[The Anthem]

What value does gold have besides as a trading device?

[gags]

What value does gold have besides as a trading device?

It is a store of value. It also has a lot of industrial uses.

[JMeganSnow]

What value does gold have besides as a trading device?

And, it's pretty. But it's not necessary to use gold. What people want when they are looking for a gold standard is an economy in which money doesn't just represent production. With fiat currency, you have no way of knowing whether the goods "represented" by your money *actually exist*. Just look at hyperinflation scenarios such as in Germany just before Hitler. The government is printing money, that money should be able to buy you stuff, but where's the bread you need to survive?

On a gold (or any other commodity) standard, you're holding the goods *in your hand* when you make the trade. You *know* they exist, and so does the recipient.

The reason most people want to use gold is because it's the best material in a highly-developed economy for a number of reasons: it's a luxury good (high unit value), it's homogenous and divisible (any bit of gold is worth just as much as any other bit of gold and if you cut a gold bar in two pieces, each piece is worth half of the original bar), and it's durable as hell. However, you could use chocolate instead, but on a hot day that'd be kind of messy and you'd need a LOT of chocolate bars to buy anything.

[softwareNerd]

What value does gold have besides as a trading device?

As Jenni notes, before asking "why Gold?" one has to ask another question: "Why replace fiat currency that has no intrinsic value, with something that does?"

Once one answers that question, the next question is: of the various things that have value, what other characteristics make a thing a good basis for money? (Here is some info.)

[gags]

A good piece on the consequences of our move away from gold.

http://online.wsj.com/article_print/SB1212...9780346715.html

[D'kian]

The standards for choosing a material as currency include it being valued for its own sake (aside from being a medium of exchange), being easily divisible, being portable, and being uniform. Gold fits those very well. But other substances fit it as well. Silver, copper, even bronze. And there are many more. Salt was once used as currency along the Mediterranean. Cigarettes were thus used also in Europe post WWII (while a cigarette cannot be divided, a pack of them can easily do so).

It also must exist in a limited supply. While there's no infinite supply of anything, some things are more plentiful than others. Gold is relatively scarce, which is why it is valuable. Diamonds are scarcer, but are not easily divisible nor are they uniform (they vary wildly in quality). Oil is scarce and valuable enough and easy to divide, but it isn't very portable and it's not uniform.

Other things can serve as currency of a sort along gold. Stocks, for example, bonds from reputable companies. And lots of things can serve as "paper money" backed by gold. Bank notes, naturally, when issued by banks rather than governments; letters of credit; checks; credit cards, etc.

Years ago I had a discussion on the subject in the pre-internet message boards. One person reminded me of an edict by a Spanish king to thin the gold currency, thus robbing each coin of its value. The man was positively horrified, and scared of using gold becacsue that could happen any time. I reminded him it did happen all the time with paper money at the government's printing presses, every day in every country.

So in addition of using gold, or some other objective value, as basis for money, we also need a wall of separation between money and the state, because even gold money can be manipulated.

Lastly a question: how did prices fluctuate before the gold standard was done away with? Prices do change constantly on the absis of supply and demand, but also when technological advances make certain thigns obsolete or undesirable. For example, 5 years ago a CRT TV with a flat screen, of any size, was very expensive. Today they are cheap because there's little demand for them. Demand is now for LCD and plasma sets with HD capabilities.

[KevinDW78]

So in addition of using gold, or some other objective value, as basis for money, we also need a wall of separation between money and the state

No kidding. Hell, FDR flat out confiscated people's gold without compensation for the common good of the country.

[ruveyn ben yosef]

Ayn Rand obviously prefers gold coins to paper money. I can seem to find a real concrete reason for this. Is it because gold can be uniform and there will be no need to change currency? It can't be due to inflation, gold prices fluctuate too. Can someone please explain this?

1. Gold is a nearly universal trade good. People are willing to trade in gold. That is because gold is pretty and substantial.

2. Gold is a natural substance and cannot be produced in arbitrary amounts. It is relatively scarce.

3. Gold is durable. It does not wear out, rot, tarnish or evaporate under ordinary handling.

4. Gold is divisible. It can be used in convenient quantities.

Similar things can be said about silver and platinum. At one time aluminum was a precious metal, before it was discovered how to extract the metal from bauxite ore cheaply. The buttons on Napoleons military blouse were made of aluminum. If there were a cheap or inexpensive method of extracting gold from sea water (say) it would cease to be a universal trade good.

ruveyn

[Greebo]

I must confess, I also don't understand the need for a currency being backed. When you back a currency, you're saying that this material object selected for criteria which it may no longer meet one day, will be the measure against which we will value all other things, and so this piece of paper will then represent a certain measure of that object.

So $1.00 = 1/500th of an oz of gold (i'm making up the fraction for example).

And $1.00 = one can of soup

and $1.00 = 1/2 a box of cereal

Money is just a unit of trade to represent the value of material goods. I don't understand why saying that $1.00 = 1/500th oz of gold makes the money more or less stable. And if you base money on gold, and the idea of extracting gold from seawater kicks in, well...whats that due to your money value?

I think what I don't get is the statement:

The standards for choosing a material as currency include it being valued for its own sake (aside from being a medium of exchange), being easily divisible, being portable, and being uniform.

In response to that, I have to ask, "Why?"

[D'kian]

2. Gold is a natural substance and cannot be produced in arbitrary amounts. It is relatively scarce.

Theoretically unlimited amounts of any element can be produced through nuclear fussion. Gold being a rather heavy element, heavier than lead, would be the result of a negative energy reacion. That is, producing gold in a fusion reactor would require more energy than the reaction produces (unlike producing helium, which generates mroe energy than which it's put in). It's unkown whether gold produced in this manner would be cheaper than mined gold.

At one time aluminum was a precious metal, before it was discovered how to extract the metal from bauxite ore cheaply. The buttons on Napoleons military blouse were made of aluminum.

I heard the top of the Washington monument was at one point covered with an alumminum cap, or that plans existed for such a cap.

If there were a cheap or inexpensive method of extracting gold from sea water (say) it would cease to be a universal trade good.

Lots of solids exist in solution in sea water. The vast majority is sodium chloride (NaCl, or common salt), but just about every other element can be found in it. I've no idea how much of that is gold, say how many grams or kilos of gold per cubic kilometer of sea water., or in what form it exists (possibly elemental since gold is a "noble" metal not very apt to react with anything, which is why it doesn't tarnish).

As a rule the universe as a whole contains more light elements than heavy ones. That is, there is more hydrogen, helium, sodium, lithium, iron, etc than gold, lead, silver or uranium. The composition of a planet, though, has as much to do with geology as with the original constituent elements present at its formation. Not to mention that most of a planet's volume is inaccessible to current and most likely future technologies.

So most likely when we start mining other planets we'll find gold, but not very much. Considering the effects of the Moon's tides on the developing Earth, we'll probably expect to find less heavy elements on Mars or Venus than on Earth. I've no idea what the situation will be like in the moons of the gas giants, or even on the Moon itself. We really know very little about the geology of other planets and satellites. And I won't even guess what can be mined from the atmospheres of the giant planets, if anything.

So gold will remain a useful means of exchange, and a valuable material, for some centuries to come (I know, famous last words).

[D'kian]

Money is just a unit of trade to represent the value of material goods. I don't understand why saying that $1.00 = 1/500th oz of gold makes the money more or less stable.

For one because you can't issue more gold by decree the way you can with paper money. Even thinning the coinage, which is a simialr move, would be so obvious as to engender massive protests among the population. Imagine if the government were to say all your $100 bills are to be exchanged for new $90 bills!

And if you base money on gold, and the idea of extracting gold from seawater kicks in, well...whats that due to your money value?

That's a very good question, isn't it?

In response to that, I have to ask, "Why?"

Something valued for its own sake posseses instrinsic value. That is, it's worth something whether it be used as an exchange medium or not. Bills have no intrinsic value.

It must be relatively rare to retain its value. A common substance is, by its commonality, worth very little if anything. What value air? It's essential and everyone needs it, but there's an atmosphere full of it.

Money has to be carried around, ergo the currency must be easily portable.

The divisible part should be self evident. Every monetary system has coins or notes of different values, units and sub-units (dollars and cents).

Finally it must be uniform to ensure any piece is worth as much as any other piece of the same mass. be it a gram coin of gold, a ten gram coin of silver, a tea spoon of salt, etc etc. Diamonds, for example, being of different qualities, would present myriad problems. Which is worth more, a white diamond or a pink one, and of what degree of transparency? If you opted for oil, light crude would be more valuable than heavy crude, sure, but how do you tell them apart at a glance? What about relative mixtures of the two (not to mention how to keep transactions from being messy).

That's why cigarettes were used as currency in post WWII Europe, BTW. They were rare, valued for their own sake, uniform, portable and easy to divide (a pack being the unit, and a twentieth of a pack being the subunit).

[The Anthem]

Okay, I think I'm getting it. The main thing seems to be that a governemtn can just order more paper money to be produced while gold is in limited supply. Thanks for clearing this up.

[ruveyn ben yosef]

Theoretically unlimited amounts of any element can be produced through nuclear fussion. Gold being a rather heavy element, heavier than lead, would be the result of a negative energy reacion. That is, producing gold in a fusion reactor would require more energy than the reaction produces (unlike producing helium, which generates mroe energy than which it's put in). It's unkown whether gold produced in this manner would be cheaper than mined gold.

The cost of making an oz. of gold by transmutation far exceeds its trade value. Furthermore elements heavier than iron cannot be produced by any means of fusion we have. It would require a supernova to produce such a heavy element. Fusion of elements heavier than iron require more energy input, than is produced by the mass defect of the fusion.

ruveyn

[D'kian]

The cost of making an oz. of gold by transmutation far exceeds its trade value. Furthermore elements heavier than iron cannot be produced by any means of fusion we have.

To be fair, we can't even sustain a fusion reaction at the current state of the art. Once we manage that, and after we operate reactors for years, we'll have a clear idea of what can be done and at what cost.

Personally I don't think we'll use transmutation to make raw materials unless it proves to be dirt cheap.

[JMeganSnow]

For one because you can't issue more gold by decree the way you can with paper money. Even thinning the coinage, which is a simialr move, would be so obvious as to engender massive protests among the population. Imagine if the government were to say all your $100 bills are to be exchanged for new $90 bills!

This is done quietly with little or no protest in some circumstances, but it's easily avoided by not letting the government mint money. Banks can mint money, and with different types of currency floating around you have competetion for the most reputably accurate currency value. Or, the banks can print bank notes that are guaranteed to be exchangeable for a certain quantity of gold (or other commodities).

[Steve D'Ippolito]

We had a period of that in the early 1800s here in the US. Problem was so many banks issued so much currency it was hard for anyone to keep track and determine whether a note from East Warthog, Ohio was actually a genuine note; and if it was, was the issuing bank solvent--when you might be a resident of North Seersucker, Georgia, far away from any means of finding out.

Clearly it would have to be private parties *minting precious metal*; for which there are some fairly simple tests that don't require a huge database of knowlege, rather than printing paper!

[D'kian]

Clearly it would have to be private parties *minting precious metal*; for which there are some fairly simple tests that don't require a huge database of knowlege, rather than printing paper!

Not necessarily. Coins are heavy, and they don't store as well as notes, especially when you consider large cash transactions.

Banks can come up with a set of standards every note must adhere to. Location of watermarks, fluorescent strips, micro-printing, etc. They could even standardize the design. Say every $1 note would feature George Washington in the front and a free design on the back. Standardized serial numbers, etc etc.

Even better, an RFID chip (as big as a grain of sand) could be embedded on each note. A scanner could read it and check its authenticity through the internet (and that makes counterfeiting that much more difficult, BTW).

[eficazpensador]

We had a period of that in the early 1800s here in the US. Problem was so many banks issued so much currency it was hard for anyone to keep track and determine whether a note from East Warthog, Ohio was actually a genuine note; and if it was, was the issuing bank solvent--when you might be a resident of North Seersucker, Georgia, far away from any means of finding out.

That's why transactions of that sort required the use of gold. The party making the payment would redeem his gold from the bank and pay with the gold.

Clearly it would have to be private parties *minting precious metal*; for which there are some fairly simple tests that don't require a huge database of knowlege, rather than printing paper!

Why can't we use gold and paper money?

[Steve D'Ippolito]

Oh, I would certainly trust a gold certificate (basically a receipt for gold), I'd even be willing to trust a note from a bank that was solvent. Though I might give a discount for the certificate.

[Dr. Radiaki]

If the entire world economy were to accept a gold standard, would enough gold exist to make trade possible? Aside from direct barter, that is.