thing to invest in gold. It’s another to understand the logic
of gold in a free economy. You should do both. But understanding
the economic logic of is more important than investing in gold.
One of my
goals is to make the economics of gold clearer to people. If you
don’t understand why I recommend gold as an investment, you may
decide to buy gold just because you take my word for it. Don’t
do this. Buy gold or gold-related investments such as North American
gold shares only when you understand the economics behind gold.
ago, the Foundation for Economic Education (FEE), published a
series of essays that were later assembled into a book, Clichés
of Socialism. (It was later updated as Clichés
of Politics.) They were standard accusations against the
free market. They were wrong-headed, but initially they sounded
plausible. One by one, these essays refuted them.
I think it’s
worthwhile to assemble a few of the standard clichés against
gold, and then offer answers.
#1: "Gold Is Just Another Commodity"
This is the
equivalent of saying "Warren Buffett is just another stock
market investor." In my day (and, I would argue, still),
it would have been like saying, "Sophia Loren is just another
woman." Or, in 1990, "Michael Jordan is just another
Gold is a
commodity. That’s why it has functioned as money for thousands
of years. Ludwig von Mises argued in his book, The
Theory of Money and Credit (1912) that money is the most
marketable commodity. This is another way of saying that money
is the most liquid asset.
consists of the following:
Instant sale without offering a discount
Instant sale without advertising costs
Instant sale without paying a commission
gold functioned as money. It no longer does. Gold is not liquid
any longer. The general public has gotten used to credit money
issued by banks. It is used to pieces of paper with dead politicians’
pictures on them (United States) or live politicians’ pictures
(Third World countries), or a missing politician’s picture (Iraq).
World War I led to the universal confiscation of depositors’ gold
by commercial banks, followed by the gold’s confiscation from
the commercial banks by the central banks, gold was money.
gold had four crucial characteristics:
High value in relation to volume and weight
possesses these features, but it has lower value in relation to
volume and weight. It was used for smaller transactions.
Here is the
ultimate fact of gold as money: it is cheaper to print pieces
of paper than it is to mine gold. It is easier still to create
digits in a computer.
commodities are consumed in use. Gold, in its monetary function,
is not consumed. Most of the world’s above-ground gold is in vaults.
It is used in exchange, but it is not used up.
commodities wear out. Gold doesn’t. It doesn’t tarnish. An acid,
aqua regia, destroys it, but nothing else does. Gold coins and
bars at the bottom of the ocean can be salvaged and instantly
put back into the economy. There is a ready market for these coins.
commodities are not the objects of nearly universal demand. The
Spanish conquistadores found that gold was highly prized by the
monarchs of the Indian empires in Mexico and South America.
commodities do not have a "track record" of thousands
of years. Gold does. It has been in high demand for as long as
societies based on extensive trade have left records.
commodities have not been political metals. Gold has. This is
why the Roman emperors put their images and slogans on the empire’s
"it’s as good as copper," let alone "it’s as good
as pork bellies."
says, "And Abram was very rich in cattle, in silver, and
in gold" (Genesis 13:2). It did not mention platinum. As
for the Bible’s assessment of the value of wisdom,
shall wisdom be found? and where is the place of understanding?
Man knoweth not the price thereof; neither is it found in the
land of the living. The depth saith, It is not in me: and the
sea saith, It is not with me. It cannot be gotten for gold,
neither shall silver be weighed for the price thereof. It cannot
be valued with the gold of Ophir, with the precious onyx, or
the sapphire. The gold and the crystal cannot equal it: and
the exchange of it shall not be for jewels of fine gold (Job
Not one reference
to soybean oil!
Gold is used
as jewelry. It is used for ornaments of great value. It is used
in art, especially religious art. It is associated with God in
many religions, probably because of the characteristics already
mentioned, plus this one: it’s brightness and color. It is associated
with the sun, just as silver is associated with the moon.
why gold and silver became money. Both metals were highly valued
for reasons other than their use in exchange. They became valuable
in exchange because they possessed value prior to their circulation
as money. This was the insight of Professor Mises, his "regression
theorem" of money. This is why money was created by the market
itself, not by kings.
as money, gold extended the market across borders. People on both
sides of a border desired gold, irrespective of the image on the
bar or coin (after 700 B.C.). It could be melted down and re-cast.
Someone else’s image could be stamped on it.
voluntary exchanges became possible because there was a ready
market for gold. Thus, because gold was not just another commodity,
it facilitated the extension of the division of labor. Men’s productivity
rose because they could specialize in their work. They got better
at whatever it was that they did for a living.
If gold is
just another commodity, why do the world’s central bankers use
it to settle final accounts? Why aren’t bars of some other commodity
stored in the vault of the Federal Reserve Bank of New York? Why
didn’t they make "Diehard III" about a heist of, say,
hard red winter wheat?
don’t trust each other. They know how easy it is to create money
out of nothing. They hold dollar-denominated assets, such as U.S.
Treasury-bills, because they can earn interest — not much these
days — but they settle their final accounts with each other in
If gold were
just another commodity, there would be greater flexibility in
settling accounts. They could choose a different commodity. But
they choose gold. They did throughout the 20th century,
even during World War II. That’s why they created the Bank for
International Settlements in Basle, Switzerland. Western and Nazi
bankers met with each other because each side knew that without
a money economy, it could not win the war. Gold is the base of
the money economy in international trade.
talk about replacing the dollar with some other currency as the
unit of account, i.e., the world’s reserve currency. But in the
final settlements, gold is the world’s reserve currency. For central
bankers gold is money. It has liquidity.
believe that there will be a voluntary return to the use of gold
by the general public. The computerized technology now exists
to create private money systems based on gold — digital gold. There
can be 100% reserve banking. The digits allow us to make exchanges
in the range of one dollar’s purchasing power.
mean that the public will necessarily adopt "gold cards,"
i.e., debit cards in gold — to conduct their common economic
affairs. It will probably take a breakdown of the present debt-based
monetary system to persuade the average Joe or Mitsuo to make
the switch. The problem is, such a breakdown could involve the
destruction of the entire credit system and therefore the exchange
system, i.e., a vast contraction of the economy, which would drastically
shrink the division of labor and with it, specialization of production.
This would involve gridlock: Bank A could not settle accounts
with Bank B until Banks C and D settled with Bank A. Greenspan
calls this disaster "cascading cross defaults."
major country, such as China, will restore currency convertibility
into gold. This would surely make China’s currency the world’s
new reserve currency. But it would place people at risk, since
the government could suspend convertibility at any time. This
is what governments invariably do when gold runs begin.
I do not
expect a return to a gold coin standard in my lifetime, but I
do expect it eventually. The free market can offer a better product
than any government can. This is as true of money as it is of
any other mass-produced product. The money of preference historically
has been a commodity, and gold has been the favored commodity
for large transactions. Silver and copper are in second and third
says that gold is just another commodity is ignorant of the history
of money. He is spouting a cliché, not making an argument.