April 2, 2010

Why Gold?

Each commodity has its own advantages as money. Goats and cattle are still used occasionally as money; they will transport themselves to the marketplace, but it was not practical to spend a fraction of a goat. You had to use something else for “small change”.

Grains were easily divided down to the smallest fraction for small purchases. However, grains would eventually spoil, and very quickly if they got wet and turned moldy. For large purchases, transporting enough grain for trade became difficult.

People soon decided that metals were the most convenient form of money. Precious metals made it possible to carry enough money for large purchases. Cheaper metals made it convenient to make smaller purchases. Gold, silver, and copper coins became the commonest form of money.

This was the free choice of the marketplace, made many times in many places, and the choice withstood the test of time. Of the 3 metals, the subjective value of gold has long proven to be the most stable. Thus in the case of the circulation of coins of all three metals, coins of silver and copper can be treated as token coins. Token coins can be made of even cheaper metals, or of paper. They circulate on faith that they can be redeemed in gold.

The physical and chemical properties of gold make them useful for many things. Gold doesn’t corrode in the way that iron rusts, and copper and silver tarnish. For this reason, gold makes excellent jewelry. This would make it a best choice for many purposes, but its scarcity makes it too expensive for many purposes, so other more common and cheaper materials are usually used.

Gold is an excellent electrical conductor. It is used in microcircuit chips in very small quantities, but for distributing electric power cheaper metals are used.

For whatever reason, the free market, through many centuries, has chosen gold as the best material to use as money.

As money, the scarcity of gold is an advantage. Millions of people over thousands of years have searched the earth for gold. There is little chance that anyone will ever find a source of gold, easily enough extracted, that it will make a sudden big addition to the gold already mined and refined.

So the available stock of gold in the world increases very only slowly. This means that the price of gold depends primarily on the demand, and the value of the money used to buy it. It is not subject to the whims of banks or politicians. They can’t create gold to rob us by counterfeiting.


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