Why Gold & Silver is Money

Douglas V. Gnazzo
Jun 17, 2006

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:

   1. Medium of exchange
   2. Measure of value
   3. Standard of value
   4. 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.

Besides, the five (5) basic functions listed above, to be honest and sound money, the money-unit must 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:

   1. Mutual coincidence of wants between traders is necessary
   2. Differences between various goods complicates direct exchange
   3. 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 mistate 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, _ ounce coins, _ 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, _ ounce coins, _ 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 Pièce de Résistance

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:

-Douglas V. Gnazzo
email: Douglas V, Gnazzo

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).

In March 2006 Douglas V. Gnazzo started his own Honest Money Gold & Silver Report website. Read the Open Letter to Congress.

©2006 Douglas V. Gnazzo. All Rights Reserved

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