|
"Although
gold and silver are not by nature money,
money is by nature – gold and silver."
Abstract
In
the recent series of papers on Honest Money
– What It Is & What It Isn’t – we have covered much
ground. The last two articles were a synopsis of the first eight
articles.
In
this paper, we are going to discuss why gold and silver are the best
mediums of exchange commonly known as money.
Money has four (4) basic economic functions:
- Medium
of exchange
- Measure
of value
- Standard
of value
- Store
of value
Besides
the above four economic functions of money, money also has a legal or
juristic function:
5. Legally accepted means for the payment of debt (especially to
the State as taxes)
The
earlier papers discussed all of these functions in detail; consequently,
no further elucidation is required at this time. Refer to earlier papers
for a complete explanation if needed. See Honest
Money: What It Is and What It Isn't - Part 1 Money
Besides,
the five (5) basic functions listed above, to be honest and sound money,
the money-unit most also perform the following two additional
functions:
6. Unit-of weight
7.
Unit-of-Account
Weaknesses
of Barter
Barter
or direct exchange has three (3) basic weaknesses:
- Mutual
coincidence of wants between traders is necessarY
- Differences
between various goods complicates direct exchange
- Properly
dividing and distributing different goods between parties is
problematic
Indirect
exchange and the use of money overcomes the above three (3) defects of
barter, which is why it is used – it is a more efficient means of
exchange. A sound monetary system is one in which the money-unit
performs all of the above seven (7) functions.
Value
and Price
In
any exchange a definite quantity of one commodity or service exchanges
for a definite quantity of another. Thus in every exchange there is a
ratio of two numbers or quantities. This ratio represents, and is: what
some call value, and others call price.
Utility
and value are not intrinsic qualities within any specific commodity. If
such were the case, we would always want more of that particular
commodity, regardless of what supply of it we already had in our
possession. Utility and value are extrinsic qualities.
The
usefulness of a good is not the same thing as the physical qualities
upon which one derives the usefulness accorded. All acts of exchange
involve the ratio of the two items exchanged. A number of units of one
item are exchanged for a specific number of units of another item.
To
determine the value and utility of any given good, man uses subjective
valuation comparisons of one commodity to another. Man desires certain
goods, and he compares those that he wants to those that he has, to
determine which afford the most utility.
Marginal
Utility
The
degree of utility that a good has is an expression of the value of the
good desired by any individual consumer. Utility varies in constantly
changing degrees. Man exchanges those goods that he possesses that are
of lesser utility, for other goods, he believes to be of greater
utility. Some refer to this as the theory of marginal utility.
Accordingly,
within all exchanges there has been a valuation of the utility of the
goods under consideration for exchange. The valuation is a number – a
number of units of one good for another – a ratio of two numbers.
For
example – say that one ounce of gold exchanges for fifty ounces of
silver. As measured by honest weights and measures, gold is valued fifty
times more than the equivalent weight of silver. Gold is by comparison
of more value (according to measure by weight) than silver.
Properties
of Money
We
have seen that sound money must perform several different functions.
This gives occasion to different properties that money must have in
order to fulfill the many different functions at any given time – especially
at the same time.
The
consensus of all market participants determines what is to be money. We
have seen the several different functions it must be able to fulfill.
According to subjective value theory, as well as that of marginal
utility, we see that money will be that commodity that has the least
declining marginal utility or the most constant
utility.
In
other words, money must be the most marketable or saleable commodity. It
must be readily acceptable in exchange for ALL goods in the market.
Throughout
history, gold and silver are the two commodities that man has most often
used and designated as money. If gold and silver only exchange by weight
– and weight alone – they can and do perform all seven basic
functions of money.
This
multi-faceted utility is one of the main reasons gold and silver are
money. However, there are also some physical qualities or attributes as
well.
No
other commodity can fulfill all these multi-complex functions, and
possess the requisite physical attributes, which collectively determine
that which is best qualified – as money.
Physical Attributes
- Portable
- Divisible
- Indestructible
- Fungible
- Recognizable
Portable
If
money is to be a measure of value over and through time, it must be
portable or transferable through time and space, from one place to
another. Nevertheless, there is an even a more important consideration
regarding “portability”.
Money
must be a commodity that has a high value according to its weight and or
bulk. In other words, money must represent value in a concentrated form
or weight.
For
instance – copper has value, but one would require tons of copper
(quantity/supply) to conduct business (fulfill demand) – even on a
private and personal level.
Many
purposefully misuse and misstate this attribute of portability, trying
in vain to tarnish gold by using the inconvenience of portability, as a
reason that gold should not, or cannot be, the circulating currency.
They say that it will be inconvenient to carry around on one’s person
the weight of gold necessary to use as the circulating currency.
Hogwash.
Convenience
How
much money, as expressed in dollar bills, does the average person carry
around with them daily? One hundred or two hundred dollars – or could
it be perhaps five hundred dollars?
We do
not agree that gold should be valued in dollar bills: see
Gold's
Hidden Secret: The Moral Hazard of Fiat Money
for details; however, for the sake of the discussion under review
we will go along with the present state of pricing everything in dollar
bills.
We
will pick $200 dollars as the average amount of money that one carries
about with them daily (and this is being quite generous). If gold and
silver coin were the currency, how much weight would be required to
carry on one’s person to equal the $200 of purchasing power?
One
ounce of gold is presently valued at over $500. A tenth ounce coin is
worth $50 dollars – it is almost the same size and weight as the
current penny. Silver is worth about $9.00 an ounce.
Just
a couple of tenth ounce gold coins and a few silver ounces is all one
would need upon their person. Furthermore, to carry a couple one-ounce
coins of gold is of no effort, yet they would have the purchasing power
of $1000.00 dollar bills.
Don’t
Buck The System
The
excuse that gold and silver would be too heavy or bulky is just that –
an excuse to circumvent the use of Honest Money.
Daily
children go to school carrying backpacks that weigh 20 lbs. or more –
enough weight to do damage to a young and developing body, yet no one
seems concerned or cares.
Why
is that? Perhaps it is because it is all part of the training: the
indoctrination to grow up and become good little workers that borrow
money and pay taxes. Tow that line comes to mind: but for who sir –
why who else but me child – all good collectivists reply.
Larger
Purchases
What
of larger purchases such as cars or houses? How can one pay for those in
gold and silver coin? Further to the point – what about foreign
exchange and international trade, how can that be done with gold and
silver coin?
Good
questions – I am glad you asked. These issues are just more propaganda
for the elite collectivists to meet their agenda, which is to collect
more and more stuff – your stuff.
Back
to the topic in question. Say you are going to buy a house. The house
costs $500,000.00 dollar bills. The bank wants you to put down
$50,000.00 as a deposit.
That
would be about 100 one-ounce coins of gold at the present market price.
A briefcase would suffice – and it would still weigh less than what
our kids haul to school every day.
However,
in today’s modern world one would not have to transact business as
outlined above. I believe that physical accounts of gold can be on
deposit at the proper institutions (note I’m not saying banks) of
one’s choosing; and be accessible as a debit account presently is at
the banks.
Physical
gold can be electronically moved from one account to another, if done
properly. Moreover, this can take place internationally, and in whatever
sums are required to conduct international business and foreign trade.
Businesses and nations would have bars of bullion on deposit to transact
their dealings. The common man would have ounces on deposit.
Heck
– that is even easier than carrying around paper money – and it is a
lot more honest and sound.
Divisible
Divisibility
was one of the main problems that direct exchange or barter could not
overcome. It was very difficult to trade one half a cow, or one half of
a new roof, or one half of a new handmade dress. This was especially
true for goods that were alive or perishable.
Money
should be easily divisible to facilitate the differences of values being
traded. Gold and silver fit the bill to a tee. For gold, there are
one-ounce coins, ½ ounce coins, ¼ ounce coins, and 1/10th
ounce coins.
Further
division is unnecessary, as silver coins will provide for smaller sums.
Larger amounts will be provided by bars of bullion and or electronically
traded gold that are on account.
Silver
can be coined to be available in one-ounce coins, ½ ounce coins, ¼
ounce coins, and 1/10th ounce coins. For the smallest of sums
copper pennies will suffice. If a demand for further divisions arose –
a forthcoming supply would fill the demand.
Fungible
By
fungible, what is meant is that an ounce of gold in England is the same
as an ounce of gold in Australia, which is the same as an ounce of gold
in Japan. In other words, gold is homogeneous – an ounce of gold is
the same as any other ounce of gold.
This
attribute fits perfectly with the above attribute of divisibility. It
would be quite difficult to try to divide a commodity that was not
homogeneous or fungible. Because gold and silver have this attribute,
they are perfect choices for money.
Indestructible
If
gold and silver are to be money, it is necessary for them to be
reasonably indestructible. Money must not be subject to decay or rot. It
must not tarnish and be impervious to the elements. Gold and silver once
again fit the bill par excellence.
You
can bury a one ounce gold coin, and dig it up 100 years later, and with
a bit of a polish it would shine as it did the day it was buried.
Recognizable
If
a good is to be money, it must be easily recognized wherever it is
employed. Because of all the above attributes, gold and silver are
easily distinguishable around the world.
The
shine and luster of gold and silver has been recognized since the days
of the ancients. Once again, this is another testament to its use as
money – since the dawn of man.
We
know of no other commodity that can simultaneously fulfill the seven (7)
basic functions of sound money, as well as possess the above physical
attributes. Gold and silver are two amazingly unique and sought after a
commodity, which is why they are: precious metals.
La
Piece de Resistance
Lastly,
we have gold’s most unique quality: its stocks to flow ratio.
Most think that the reason gold is valued so dearly is because it is
rare or hard to find. This involves a bit of a misunderstanding. We will
try to explain.
All
commodities have a stocks to flow ratio. What this means is that there
is a certain amount (quantity) of any given commodity above ground or
available for consumption at any given point in time. This is its stocks
or supply – a measurable quantity (amount).
Goods
also have a flow ratio, which is the amount of the commodity that is
produced each year – its yearly production or supply number. For items
such as vegetables, it is usually one (1) year or less, for other
commodities, it can be a couple to a few years.
Gold’s
stocks to flow ratio is approximately 75 to 1. This means that at the
present yearly rate of production of gold, it would take 75 years to
produce the presently existing above ground supply of gold. No other
commodity even comes close to this ratio.
This
is what makes gold so valuable.
This is what gives gold its near constant state of marginal utility.
Man
throughout the ages has given his support and acceptance to gold as
money, which has cumulatively taken thousands of years of subjective
valuation and processed it into an objective exchange value for the
commodity most often used as money – gold. As the great, Carl Menger
put it:
“Under
such circumstances it became the leading idea in the minds of the more
intelligent bargainers, and then, as the situation came to be more
generally understood, in the mind of every one, that the stock of goods
destined to be exchanged for other goods must in the first instance be
laid out in precious metals, or must be converted into them, or had
already supplied his wants in that direction.
But
in and by this function, the precious metals are already constituted
generally current media of exchange. In other words, they hereby
function as commodities for which every one seeks to exchange his
market-goods, not, as a rule, in order to consumption but entirely
because of their special saleableness, in the intention of exchanging
them subsequently for other goods directly profitable to him.
No
accident, nor the consequence of state compulsion, nor voluntary
convention of traders affected this. It was the just apprehending of
their individual self-interest, which brought it to pass, that all the
more economically advanced nations accepted the precious metals as money
as soon as a sufficient supply of them had been collected and introduced
into commerce. The advance from less to more costly money-stuffs depends
upon analogous causes.”
This
is how a truly free market works – by the free choice of all market
participants, as they collectively are the market. The State has no
business in intervening within the markets, as the State is not in
business – it does not produce goods for consumption.
The
State should not be in control of the money power – the market should
be in control of the money power. It is the sum total of all
participants in the market that produces, brings to market, exchanges,
and supplies, and thus fulfills, the varied wants of consumption.
Perhaps
the question that should be asked is not why gold and silver, but why
not gold and silver. Perhaps it is true that:
"Although
gold and silver are not by nature money,
money is by nature – gold and silver."
Come
visit our new website: Honest
Money Gold & Silver Report
And read the Open
Letter to Congress
© 2006 Douglas V. Gnazzo
Editorial Archive
All
rights reserved. Any republication without written permission
of author
and Financial Sense prohibited.
CONTACT
INFORMATION
Douglas V. Gnazzo
Honest Money Gold & Silver Report, LLC
Canton Center, CT USA
Email
| Website
About
the author: Douglas V.
Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor
that specializes in restoring older buildings that are vintage historic
landmarks. He writes for numerous websites and his work appears both
here and abroad. Just recently he was honored by being chosen as a Foundation
Scholar for the Foundation for the Advancement of Monetary Education
(FAME).
Disclaimer:
The contents of this article represent the opinions of Douglas V.
Gnazzo. Nothing contained herein is intended as investment advice or
recommendations for specific investment decisions, and you should not
rely on it as such. Douglas V. Gnazzo is not a registered investment
advisor. Information and analysis above are derived from sources and
using methods believed to be reliable, but Douglas. V. Gnazzo cannot
accept responsibility for any trading losses you may incur as a result
of your reliance on this analysis and will not be held liable for the
consequence of reliance upon any opinion or statement contained herein
or any omission. Individuals should consult with their broker and
personal financial advisors before engaging in any trading activities.
Do your own due diligence regarding personal investment decisions. This
article may contain information that is confidential and/or protected by
law. The purpose of this article is intended to be used as an
educational discussion of the issues involved. Douglas V. Gnazzo is not
a lawyer or a legal scholar. Information and analysis derived from the
quoted sources are believed to be reliable and are offered in good
faith. Only a highly trained and certified and registered legal
professional should be regarded as an authority on the issues involved;
and all those seeking such an authoritative opinion should do their own
due diligence and seek out the advice of a legal professional. Lastly
Douglas V. Gnazzo believes that The United States of America is the
greatest country on Earth, but that it can yet become greater. This
article is written to help facilitate that greater becoming. God Bless
America.
|
