Gold Remains Money

We think we know that gold is no longer money, because Keynesians and monetarists insist it is so. Furthermore, it has been replaced by government currencies, which we use to buy and sell, do our accounts and pay our taxes. While it is undoubtedly true that gold is no longer used for transactions in all but a few places in Asia, this common assumption has no basis in fact.

It is one thing for macroeconomists of all veins to theorise about the contents of the dustbin of history, but the choice people make is what really matters. Humanity has an infinite capacity for adapting and using what is either made available or forced upon them. But just because they have adapted and used government currencies as their circulating media, they have not always given up on gold as the money of choice to retain a store of value.

This article is written in the parochial confines of a welfare state that has advanced beyond regarding gold as money. The views of the people in Britain on this subject are probably similar to those in the other welfare states of Europe, North America and Japan. Those in the finance industries trained in macroeconomics and subscribing hook line and sinker to the relegation of gold to the rank of a plain commodity are relatively few: probably a few million world-wide at most. There are a greater number so dependent on the fiat money system that they would rather dismiss the issue instead of properly considering it, which to a lesser extent must also be true of the wider population which benefits from government welfare and spending.

The welfare system, based as it is on anything other than free markets, conflicts with the concept of sound money. People would rather not pay for everything through taxes, and money and credit inflation as a means of funding are a convenient cop-out. But it is plainly wrong to say the uncaring masses are anti-gold; it is more correct to describe them as not bothered one way or the other. Even most western gold-bugs, which in numbers probably balance the aforementioned macroeconomist establishment, vaguely regard gold as an insurance policy or speculative investment, rather than sound money only driven out of circulation by Gresham's law.

So the combined population of the welfare states is not anti-gold at all, and the argument that progress in economic thinking has reduced its status to a plain commodity is not true. Nor is it true in South and Central America, where the US dollar is regarded as the sound money alternative to local currencies, only because people have adapted to what is available to them. Nor is it true in sub-Saharan Africa, where the majority of the population has its roots in subsistence farming and tribal communities. However, in Asia, where civilisations have long histories, the story is very different.

For centuries ordinary people from all walks of life are painfully aware that government money is ephemeral, and true money is gold. When the cumulative debasement of a currency leads to its replacement by another debasing currency, you continue to dump the government stuff for gold. This is the experience of the Turks, who faced a million-to-one consolidation of the lira in 2005. According to Wikipedia one gold lira coin could be sold for 154,400,000 old paper lira towards the end, and the new lira is still going down. Indian farmers and traders put their savings into gold, a wisdom borne out by the rupee's continual devaluation over the years. Even the Chinese, after decades of communism and the brain-washing of the cultural revolution still persist in accumulating gold as the only sound money to tuck away for a rainy day.

To understand why the belief persists that gold is the ultimate money, you have to look back in time to appreciate its value before it was used as money. Anyone who has not been to Cairo and seen the 3,300 year old gold mask of Tutankhamen, and is unable to understand the feeling of awe that overcomes one's emotions in its presence, must be devoid of all imagination. Not only has it endured an extraordinary length of time, it is in itself timeless, and unchanged from when it was fashioned: that's some store of value.

Max Keiser of the eponymous show on RT told me of an occasion when he joined a debate on BBC Television about this very subject. He argued the case for gold, while an economist representing the prestigious Economist weekly journal argued against. Off-camera after the debate, the young economist was just as eager as anyone else in the studio to touch and feel the gold bar that had been brought into the studio as a prop.

That is the point: despite the theorising of macroeconomists and what governments with a vested interest force us to believe, gold has an enduring fascination for and a value to humanity. The majority of above-ground stocks are still wrought in the form of jewellery and the highest classification of ornaments. Gold's durability and fungibility makes this unique material eminently suitable as the only sound money available to the human race.

The welfare states' denial of this simple fact, and their insistence that their own inflating currencies are superior, is leading them towards economic disaster. They have committed themselves to the destruction of a basic human value, which they will never supress. Asian governments, many of which would undoubtedly like to take this route are forced by their people to be more realistic. Even government officials privately acknowledge the superiority of gold, and in the case of China they have actually encouraged their population to accumulate it.

This matters to us all, because the process of wealth creation is declining in the west, and accelerating in Asia. Furthermore, there are four billion Asians, the majority of which are either directly or indirectly involved in the economic union of the Shanghai Cooperation Organisation, and who have overwhelmingly become the world's savers and wealth creators.

Government currencies come and go while human values endure. The adaptability of the human race will allow it to continue to use whatever is most convenient for day-to-day transactions. But the days of ordinary people in the welfare states blindly accepting fiat currencies as valid for storing the product of their labour, however temporary, are probably drawing to a close. The impossibility of our debt obligations, including the net present value of future welfare commitments, is catching up with us, and the requirement to debase these obligations is becoming paramount.

When this becomes obvious to growing numbers of the public in the welfare states, as it is bound to do, they will switch from no opinion on gold to having one. The derisory term for gold-bugs will disappear as their prescience emerges, and the price of physical metal measured in government currencies will reflect more properly its unique monetary quality.

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Alasdair Macleod | Head of Research

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