Why The Gold Standard?

[RationalRationale]

In Atlas Shrugged, the Midas mint is stocked with Gold, and Gold coins are the currency in Galt's Gulch.

My question is this, why should gold be considered the optimal standard for currency, I am not proposing that our current Fed backed system of paper money is better. Instead I am asking "Why gold" as opposed to silver, or wheat, or steel, or coal, or oil.

Gold is a curiosity to me because it is valued so highly, and while I understand that it is a rare and precious metal. I wonder how much gold it would take to feed a starving man on a desert island. Gold has some productive uses, as a conductor in electrical systems for example. But aren't their other materials that are far more valuable in terms on their usefulness to me. Of course it is impractical to envision walking around with a wallet full of wheat or crude oil, but so are bars of gold. When I envision a gold standard economy, I don't imagine that all coins and bank notes will be made of gold, but that there will be a store of gold of equal value in the vaults of the currency issuing bank. So I am wondering why gold is the best material for this purpose, If I cash in my productive efforts and receive in return a wheel barrow full of gold, my only hope of putting that gold to use is to sell it back to someone else. Since gold is rarely used in production, I would be left with only Jewelers and a few other industries to sell to (excluding the banks themselves).

An illustration.

If I dig a mine and take from it a large sum of copper or iron, I can easily find uses for these metals. I can also find a large number of businessmen who wish to buy my copper to make wire, or iron to make tools. But if instead I mine for gold, the general consensus is that I have procured something even more valuable, yet how many uses are their for gold? What if instead of a gold standard, we had an arrowhead standard. Arrowheads from the native american era are rare, yet like gold, they have few uses other than the aesthetic.

Can anybody help me understand from where the value of gold comes?

-RR

[Jake_Ellison]

I might be wrong but I believe gold is the substance which, if used as currency, is the least prone to allow for someone to cause inflation by, some way some how, getting more of it. What I mean is that out of everything (platinum, silver, steel) the Obtainable/Available ratio is the smallest, therefor the people in the business of mining gold are going to cause less inflation then if any other metal or substance were chosen.

That of course is the reason why many Objectivists believe the market will end up choosing gold as the main currency. People will choose to use it as an objective currency, because it is least likely to change its value too much.

However, no one is suggesting that gold ought to be chosen as a currency by the government, so it really is irrelevant what experts or Objectivists think the currency will be, or "ought" to be. The market will determine that, or more exactly the people who have values to trade.

Can anybody help me understand from where the value of gold comes?

There will be better answers, from the students of Economics out there, but here's mine:

It comes from most people willing to treat it as something of value, because, historically, it has always been a desirable substance. That is, in my opinion, for most people the only thing on which the expectation that it will stay valuable is based on. (Those in the know can give further reasons as to why this prediction (that gold will stay valuable) will come true, I'll leave that to them)

This is, btw, a far more solid base than what the US dollar rests on: the expectation that the government will have enough people to loot from in the future, to pay for all the excess they indulge in currently.

[Sarrisan]

I think one reason why gold has always been so popular it because of it's material properties, as well. It won't tarnish, it can be split over and over, it's very soft, etc. It's simply one of the best sources of value for trade (Though I am definitely a layman in this area, so take what I say with a bit of salt).

[softwareNerd]

As Jake said, it isn not about gold so much as it is about the principle of having something of real value as money. Ofcourse, gold has great properties if we also assume it is something of value. I think you probably agree with that, but are asking whether gold does have objective value.

Most gold is used for jewelery (about 60%-70%). Another 10% or so is used for industrial, electronic and dental uses, all put together. The rest, (about 20%-30%) is bought as an investment. So, the primary value would appear to come from its use as jewelery, combined with its limited supply. Does a copper pipe have more objective value than a gold ring or a diamond solitaire? I don't think so, not as such; i.e., not as a general principle. For a particular individual, it might be quite rational to want a gold ring and a slightly smaller car, rather than driving a larger car, with more steel, in a steel-for-gold trade-off.

Edited January 20, 2009 by softwareNerd

[Zip]

At this point economically I think it might not be possible to have gold, and only gold as a standard. It would make it ridiculously expensive when you consider the amount of currency in circulation today and the relative value of gold today. I have no way of knowing just how expensive gold would be under a gold standard. The total amount of gold ever mined is only 142,000 tonnes, which at $1000/ounce only accounts for 4.5trillion dollars, nowhere near the cash and credit the US (by itself) has in circulation.

Perhaps a precious metals standard (including copper, silver, gold and platinum) might be more viable? And then only D&D players will find this system intuitive!

[RationalRationale]

Most gold is used for jewelery (about 60%-70%). Another 10% or so is used for industrial, electronic and dental uses, all put together. The rest, (about 20%-30%) is bought as an investment.

Well it seems I should have spent a little more time checking my premises, I have always imagined the majority of the worlds gold supply sitting on shelves collecting gold dust in vaults like Fort Knox. It seems I made quite an error, one which seems to undermine my entire analysis of gold as a currency.

At this point economically I think it might not be possible to have gold, and only gold as a standard. It would make it ridiculously expensive when you consider the amount of currency in circulation today and the relative value of gold today. I have no way of knowing just how expensive gold would be under a gold standard. The total amount of gold ever mined is only 142,000 tonnes, which at $1000/ounce only accounts for 4.5trillion dollars, nowhere near the cash and credit the US (by itself) has in circulation.

This may raise a more valid issue than my original query. If gold is too finite a resource, it could never serve alone as a currency for a steadily increasing population. As more people enter society, the money supply would effectively deflate.

I think Jake had it right when he said that a free market would choose it's own currency, or perhaps a combination of different currencies.

It also occurs to me that my "gold on a desert island" scenario is a little unfair to gold, I certainly wouldn't be any less hungry with a treasure chest full of copper. There are other currencies that we trade today, if you consider corporate stock a form of currency. I buy stock in a company that I expect to retain (and hopefully increase) it's value. The share price is an exchange rate between US Dollars and the corporate stock. I suppose that no form of currency such as gold, or paper bills, or stock, would do anyone much good in my doomsday desert island scenario. So perhaps what gives currency a value is not much more than our universal agreement to honor it's value in accordance with civil law. From there it's just a question of what serves as a more reliable form of currency, and even if it's not gold... gold seems a whole lot better than an unlimited supply of green paper, or a bouncing balance sheet on a computer.

That being said, how do you reconcile a gold (or other material) standard with an electronic economy? After all, if I sell a product on ebay, and receive electronic payment... no gold has changed hands. Wouldn't the gold supply inevitably fall out of step with the flow of electronic money. If I make a 10$ profit on a sale, who is going to put aside 10$ worth of gold for me when the entire transaction was nothing more than bytes in a database?

-RR

[brian0918]

I wonder how much gold it would take to feed a starving man on a desert island.

This is context-dropping. A man on a deserted island has only himself. He has no use for a substituting factor to make trade easier (ie, "money"), because he has nobody with whom to trade. Of course gold is worthless to him, but that's outside the context of this discussion. If another man comes along, they'll likely barter. But, as soon as a small population exists on that island, the barter system becomes too cumbersome and time-consuming, and so they need an agreed-upon currency - something that exists in a finite quantity on the island, and can easily be given from one person to another in exchange for goods. Gold is such a finite quantity - you can't produce any more of it. If no gold is available to them, shells would also be good. Water would be a bad choice, as it is infinite for the purposes of that society. This is also why fiat paper currency is disruptive. Paper is ubiquitous, and can be mass-produced on a whim.

Edited January 20, 2009 by brian0918

[Zip]

Well it seems I should have spent a little more time checking my premises, I have always imagined the majority of the worlds gold supply sitting on shelves collecting gold dust in vaults like Fort Knox. It seems I made quite an error, one which seems to undermine my entire analysis of gold as a currency.

This may raise a more valid issue than my original query. If gold is too finite a resource, it could never serve alone as a currency for a steadily increasing population. As more people enter society, the money supply would effectively deflate.

I think Jake had it right when he said that a free market would choose it's own currency, or perhaps a combination of different currencies.

It also occurs to me that my "gold on a desert island" scenario is a little unfair to gold, I certainly wouldn't be any less hungry with a treasure chest full of copper. There are other currencies that we trade today, if you consider corporate stock a form of currency. I buy stock in a company that I expect to retain (and hopefully increase) it's value. The share price is an exchange rate between US Dollars and the corporate stock. I suppose that no form of currency such as gold, or paper bills, or stock, would do anyone much good in my doomsday desert island scenario. So perhaps what gives currency a value is not much more than our universal agreement to honor it's value in accordance with civil law. From there it's just a question of what serves as a more reliable form of currency, and even if it's not gold... gold seems a whole lot better than an unlimited supply of green paper, or a bouncing balance sheet on a computer.

That being said, how do you reconcile a gold (or other material) standard with an electronic economy? After all, if I sell a product on ebay, and receive electronic payment... no gold has changed hands. Wouldn't the gold supply inevitably fall out of step with the flow of electronic money. If I make a 10$ profit on a sale, who is going to put aside 10$ worth of gold for me when the entire transaction was nothing more than bytes in a database?

-RR

But paper currency as such is an arbitrary construct of government or business. The idea behind gold, or at least how I understand it is that it allows the individual to be free of arbitrary valuations of his own wealth.

"Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state."

William F. Rickenbacker

[Steve D'Ippolito]

At this point economically I think it might not be possible to have gold, and only gold as a standard. It would make it ridiculously expensive when you consider the amount of currency in circulation today and the relative value of gold today. I have no way of knowing just how expensive gold would be under a gold standard. The total amount of gold ever mined is only 142,000 tonnes, which at $1000/ounce only accounts for 4.5trillion dollars, nowhere near the cash and credit the US (by itself) has in circulation.

$863 at the present moment. (It's up almost 30 bucks today, about 3.6%.) (All prices in the United Statesian Buck; I fear I don't know the conversion rate to the Canuckistani Loonie.)

Perhaps a precious metals standard (including copper, silver, gold and platinum) might be more viable? And then only D&D players will find this system intuitive!

Platinum happens to be down five bucks to $950 today, silver is up 21 cents to 11.37. The fact that these metal prices can move at different percentage rates and even in different directions shows the problem with such a scheme. It plagued countries during the 1700s and 1800s as well. When the ratio of the values of gold and silver changes, your currency system is basically screwed. The ratio was 14:1 for much of the 1700s, went to 15:1 in the early 1800s, and got greater and greater from that point forward. (I've seen it at 100:1 though that's obviously not the case today.) In essence when the ratio decreases, the silver coinage becomes worth more as a melted ingot than as a coin (you can buy more gold with the ingot), which makes it uneconomical to mint. When the ratio increases the silver becomes subsidiary (worth more as a coin than as metal) and subject to counterfeiting. [Or alternatively, the gold becomes subsidiary in the first case, and meltable/uneconomical to mint in the second. It depends on whether gold or silver is the primary standard of value in that country.] Most countries decided to pick gold as the standard by the late 1800s (subsidiary silver being preferable to having the existing silver coinage get melted down, and/or losing money minting more).

The only way a multiple metal standard would work, long term, is if the coinage metals were allowed to float relative to each other. This is feasible now in a day of electronic calculators. (It would become a matter of, "That gold ounce is was worth 87.5 silver ounces yesterday, but it's worth 87 silver ounces today. You should have bought that big-screen television yesterday.") It also implies that you wouldn't have gold and silver denominated in dollars though there could be a "gold dollar" and a "silver dollar" with it being necessary to specify which one all the time. If you don't want to use full-blown noun phrases, we should have separate terms for the gold and silver coinage. Historically the dollar (from taler) is actually a silver denomination, so to be completely accurate dollars should be silver. (Ducats, guilders and florins are traditionally gold.) (Another alternative, of course, is to give a weight, "gold gram" vs. "silver gram".)

(And I have not yet discussed the possibility that it might be easier to make such weight based units the weight of a specific alloy of gold or silver, since they are rarely minted pure--the metals are too soft. E.g., a gram of "coin silver" which is generally 90% pure.)

[D'kian]

There are reasonable rules for what makes a good currency:

1) It must be valued for its own sake.

2) It must be compact so it can be carried around.

3) It must be easily divisible.

4) It must be relatively rare.

5) It must be durable and constant (it shoulnd't change over time)

6) It must be easily distinguishable

Gold fills all these criteria. To be sure it's not the only commodity that does. In ancient Rome salt wasn't as easy to get as it is now, so it was used as a kind of currency (the word "salary" derives from this pracitce). In early post-WWII Europe cigarettes were used as currency. Salt, however, has become too common and cheap. Cigarettes are no longer valued much. Other things like copper, iron and even silver are not as rare as gold. Platinum can be easily confused with other metals (it would be easy to counterfit). Diamonds are as valuable, durable, identifiable, rare and compact, but are not easily divisible.

Why is gold valued? Because it's beautiful when used for jewlery and other types of decoration (such as gold leaf), in a way that other substances can match. Also because it's durable and constant.

Finally here's an old SF idea overlooked by most SF writers:

Atomic fusion creates energy by smashing atoms togerther. It also creates bigger atoms. Thus the Sun fuses hydrogen into helium, and helium into heavier elements. More massive stars can make heavier elements still. A fusion reactor would acomplish the same thing, effectively changing, say, helium into lithium into carbon and so on.

So we could fuse atoms into any element we want. What if we could make gold that easily in a fusion reactor?

Well, there's the matter of the energy released by a nuclear reaction...

[Ordr]

Atomic fusion creates energy by smashing atoms togerther. It also creates bigger atoms. Thus the Sun fuses hydrogen into helium, and helium into heavier elements. More massive stars can make heavier elements still. A fusion reactor would acomplish the same thing, effectively changing, say, helium into lithium into carbon and so on.

So we could fuse atoms into any element we want. What if we could make gold that easily in a fusion reactor?

Well, there's the matter of the energy released by a nuclear reaction...

The transmutation of lead into gold has been done but the expense of it drastically outweighs any benefit that might be gained from the actual transmutation.

According to wikipedia ( ), it is far easier to go the other way and turn gold into lead, if one were so inclined:

197Au + n → 198Au (halflife 2.7 days) → 198Hg + n → 199Hg + n → 200Hg + n → 201Hg + n → 202Hg + n → 203Hg (halflife 47 days) → 203Tl + n → 204Tl (halflife 3.8 years) → 204Pb (halflife 1.4x10^17 years)

Edited January 23, 2009 by Ordr

[Zip]

According to Wiki the total amount of gold ever mined = 142,000 tonnes or 5,008,902,596.8 ounces

According to this site http://www.federalreserve.gov/paymentsyste...rrcircvalue.htm as of Dec 31 2007 there was a total of $792,200,000,000,000 US dollars in circulation

Making each ounce of gold worth about $158,158.39

Or each gram of gold worth $5580.74

Wow.

Edited January 23, 2009 by Zip

[Ordr]

According to this site http://www.federalreserve.gov/paymentsyste...rrcircvalue.htm as of Dec 31 2007 there was a total of $792,200,000,000,000 US dollars in circulation

You added 3-too-many zeroes onto your total .

Though the totals on that site are in billions of dollars, the separator between the first three and final digits is a decimal point, not a comma.

Edited January 23, 2009 by Ordr

[Zip]

You're right it should read $158.15, which doesn't make much sense until you realize that number represents currency only, not credit.

Realizing that the US government has released over a trillion dollars to "help" with the financial "crisis" makes me think my original estimate might not be that far off the mark.

[Steve D'Ippolito]

Platinum can be easily confused with other metals (it would be easy to counterfit).

Actually with a good enough scale and size measurement it's almost impossible to counterfeit. It has a specific gravity of 21.45 (water 1.0, lead 11.9, gold 19.3; gold was the densest substance known to the ancients). Only osmium and iridium are higher, and though they tend to cost less in today's market, it's *extremely* difficult to get those into a solid mass and work them so as to make a counterfeit coin; the counterfeiter would find it uneconomical. Rhenium is close at 21.02, but very rare and also difficult to melt.

In point of fact without a specific gravity test it's difficult to detect fake gold since anyone can plate a bit of lead. If they were to gold-plate tungsten the specific gravity test would not work. Tungsten is fairly cheap and has the same specific gravity. The true acid test is to scratch the gold, and put some acid there (that's where the term "acid test" comes from). If it bubbles, it's not gold, but you've damaged your valuable.

In point of fact when platinum was cheaper than gold, it was sometimes used to counterfeit gold coinage. Even before we had the technology to melt it in pure form, it could be alloyed with gold--an unscruplous mint worker or government (both have happened) could take out some percentage of the gold stock, replace it with an equal weight of platinum then melt the mix to prepare for coinage, and no one would be the wiser. Platinum passes the acid and density tests for gold quite handily.

[agrippa1]

You're right it should read $158.15, which doesn't make much sense until you realize that number represents currency only, not credit.

Realizing that the US government has released over a trillion dollars to "help" with the financial "crisis" makes me think my original estimate might not be that far off the mark.

The U.S. holds 8133.5 tonnes of gold (as of 2008), or about 261.5M oz. There are currently $821.4B in currency in circulation (as of 1/5/9)

That puts gold at $3141/oz.

On edit:

Here's the piece by Greenspan on gold, "Gold and Economic Freedom," published in Capitalism, the Unknown Ideal (1966)

Edited January 23, 2009 by agrippa1

[D'kian]

Actually with a good enough scale and size measurement it's almost impossible to counterfeit. It has a specific gravity of 21.45 (water 1.0, lead 11.9, gold 19.3; gold was the densest substance known to the ancients).

That's not the kind of test most people would even think of doing, or even know how. A silvery coin, as far the average person is concerned, could be silver or platinum, or titanium or aluminum for that matter.

In point of fact without a specific gravity test it's difficult to detect fake gold since anyone can plate a bit of lead.

How well does gold stick when plated? Gold leaf is very delicate and easily scratched.

[Steve D'Ippolito]

That's not the kind of test most people would even think of doing, or even know how. A silvery coin, as far the average person is concerned, could be silver or platinum, or titanium or aluminum for that matter.

Ah, but people have come up with a solution. A little metal tool that lets you weigh the coin, and check its size. If it is too light or too big, reject it. Pretty clever actually

How well does gold stick when plated? Gold leaf is very delicate and easily scratched.

Quite well, there is plenty of cheap jewelry out there.

[luckyboys]

it's easy. Most everyone likes gold because well, not really for many reasons except for it's prettiness or something like that.

So, if you have trouble, don't think for a really really really long time!

So, what i feel is, that it fascinates people and well, it's rare, shiny and impossible to make. For example, many others have this and that and you can find it or smelt if using others. But, for gold, chemists have tried for years and still haven't found a way to make gold. Also, if just a few pirates or people kept wanting gold, then demand might go up. Maybe once upon a time, gold was just the thing found everywhere so it was the smallest currency ever. maybe milleniums ago, gold was made everywhere and there really was an el dorado or maybe even several. Then, they decided a lot of gold was worth a penny. Either way, gold's demand just went up. There's nothing gold can do (except look glowy and expensive) (oo and prove that you love someone) and then, everyone still doesn't care much.

[Tordmor]

I think there are some misconceptions here. When calculating the value of gold you can't just devide the amount of money in exchange by the amount of gold available. Because a lot of this money is only circulated because we have a fiat money system. There is money that only circulates in the financial sector without it ever getting into the real goods market. The amount of credit asked or given would also drastically decline when the credit money actually is worth something to someone which in turn will reduce the amount of intrest payed. So it's more like the amount of money in circulation will adapt to the value of gold and not the other way round. Instead of still thinking in terms of current dollar values think about the value of gold: If I were to take my 1/10th US eagle and go into a bakery, what amount of bread would I get for it? At the current gold price I should be getting about 25 kg of bread. I don't think that's too far from the truth. Even if it were twice as much, it still would mean gold will not rise above about twice the price it has today. I think that's within a reasonable range.

Edited February 26, 2009 by Tordmor