• Is Gold Money?

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    As someone
    who has been interested in gold for the last forty years, I have
    always been interested in the definitions which can be applied to
    gold. Is gold money? It often has been, but it is not at present.
    I suspect it may become money again. Is gold a commodity? I think
    the answer to that question is “yes”. Gold used in chemical
    reactions, or in jewellery, is plainly a commodity which can sometimes
    be replaced by another commodity.

    However, the
    question I find most interesting is whether gold is a real asset.
    One of the problems of investment is that there are two variables,
    reality and liquidity. Land or property are relatively illiquid,
    but are also real, in that they have a use which does not depend
    on their value in exchange. Gold is highly liquid, indeed it is
    more liquid than paper money. In extreme circumstances, paper money
    can lose all its value, when gold is still acceptable as payment.
    In 1940, when the French Army was defeated, many French people took
    to their automobiles to escape the advancing Germans. They found
    that petrol stations would not accept paper francs, but would sell
    their petrol in exchange for gold coins.

    Gold also remains
    an acceptable currency in periods of high inflation, when paper
    money can lose all its value.

    What does “reality”
    mean, when applied to an investment? Obviously we talk about “real
    estate” to describe the legal possession of property. I think
    that means property with a permanent character and at least a potential
    use. In the same way, the traditional theorists of the gold standard
    would say that gold was a real currency, because it has permanence
    and a potential non-monetary use.

    I accept that
    reality in an asset is a relative factor. In an ideal world, we
    would all like to hold our financial needs in a currency with a
    high degree of permanence, strong alternative uses and high liquidity.
    We have to make do with currencies which fall short of perfect “reality”,
    and fall short of perfect liquidity as well. We make do with imperfect
    currencies because we have no choice.

    Gold makes
    one think about these issues, but it makes one even more uneasy
    about electronic money. In book publishing, I am well aware of the
    library demand for archival books which can reasonably be expected
    to last for centuries, like the printed works of earlier centuries.
    We need also to have permanent money, which can be relied upon to
    survive, even though its value may decline over time. The historic
    value of gold has been astonishingly stable over centuries.

    In an extreme
    example, one could be worried about the issue of money and about
    its preservation. Mr. Madoff has shown that fraud can reach the
    unbelievable level of $50 billion. Might there not be still larger
    frauds, so large as to achieve what the wartime German operation
    attempted, a complete takeover of a targeted currency?

    is already operating on a huge scale. Suppose that Al Qaeda, instead
    of attacking the twin towers, had attacked the electronic systems
    which record all the monetary holdings of New York. No lives might
    have been lost, but an electronic pulse might have erased one of
    the central counting houses of world finance. The world might have
    been ruined.

    Is there not
    some element of this cybercatastrophe in the present world crisis?
    Reality may be a variable concept, with nothing 100 per cent real
    and hardly anything zero per cent. When I was born, in 1928, gold
    was money, and gold was over 90 per cent real. In 1970, when I was
    in my forties, money was paper, and even the convertibility into
    gold of the Bretton Woods Agreement was breaking up. Now money is
    a largely unidentifiable electronic pulse, itself vulnerable to
    attack by electronic means. Virtual money has very low reality,
    much lower than paper.

    Surely this
    is a system which could be blown away because there is nothing in
    it to gain confidence. Even a return to paper money would raise
    the level of reality attached to world currencies. There is a problem
    of raising the reality level of all currencies – a problem
    which nineteenth century economists solved by convertibility to

    10, 2009

    Rees-Mogg is former editor-in-chief for The Times and a member
    of the House of Lords. He has been credited with accurately forecasting
    glasnost and the fall of the Berlin Wall — as well as the 1987 crash.
    His political commentary appears in The Times every Monday.
    His financial insights can only be found in the Fleet Street
    Letter, the UK’s longest-running investment newsletter.

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