Thoughts on Gold

Why Gold Became Money

Various things have been used as money in the past. Salt was used to pay Roman soldiers (where we get the word salary). Even cows were used amongst peasants (where we get the word pecuniary). In recent centuries (during the Gilded Age), gold was the money of choice. Gold is better money than salt and cows for several reasons.

1/ Gold is a commodity – it is made available by Nature, not a bank, company, or government. This means no one controls it and anyone can acquire it by mining. Salt and cows are commodities, too.

2/ Gold is scarce. Tree leaves and gravel do not make good money because they are plentiful. Salt and cows are also rather plentiful, which makes them bad money.

3/ Gold is hard to acquire. It takes a lot of effort to mine gold. The effort that goes into mining is important because it sets a default value for the money. Forgive me for putting this in dollar terms, but our brains are currently programmed to think in dollars: If it takes $1000 dollars to mine one ounce of gold, then gold is valued at roughly $1000/oz. (Note: mining is not what sets the price of gold today because gold has a monetary premium due to our current fiat monetary system.)

4/ Gold is durable. You can store gold bars or gold coins for literally centuries without rust or degradation. Gravel and salt are durable, but tree leaves and cows are not.

For these reasons, gold became the best money. Silver was a close second, but silver is more plentiful than gold, and it has more use cases. The more use cases for a thing, the less desirable that thing is as money.

Why Gold Failed

Good money solves three problems: it is a store of value, a medium of exchange, and a unit of account. Gold solved two of these problems really well. It quickly became a unit of account (people could price things in ounces of gold), and it was the best store of value available. For example, in 1850, one ounce of gold could buy a high-end suit. Today, one once of gold can still buy a high-end suit.

But gold failed as a medium of exchange. The reason is because gold is a metal; a heavy metal. Carrying gold was both difficult and dangerous. Also, verifying the authenticity of gold is difficult and expensive. For these reasons, banks sprang into existence. Bankers would hold your gold safely in a vault and give you paper receipts in exchange. Carrying paper was much easier and trading paper for sales was safer and more convenient. Paper could also be easily denominated into small and large values. Thus, paper claims on gold became the medium of exchange, rather than gold itself. Although you could theoretically trade in your paper receipts for actual gold at any time, bankers realized they could cheat because few people ever did. They cheated by creating fractional reserve banking, where bankers printed more receipts than they actually held in gold reserves, then they loaned out those receipts – with interest. This created at least two problems: first, they inflated the receipt supply, reducing the scarcity of receipts relative to gold and devaluing the receipts, and they enriched themselves by creating new money out of thin air, which had to be paid back with real money earned by the sweat and tears of borrowers. (BTW, for most of our banking history in the US, the fraction held in reserve was 10%, but that was dropped to zero during Covid).

To summarize, the main problem with gold is that it’s heavy, and thus difficult and dangerous to use. This led to centralization of gold in banks, and banks issuing paper instead. This led to fractional reserve banking even when the paper was backed by gold, and eventually to fiat paper money backed by nothing at all. Fiat money can be printed to infinity, and eventually it always is. This leads to hyperinflation and complete destruction of the monetary system. From Germany to Venezuela to Argentina to Lebanon to Zimbabwe, every fiat money has died the same death. The US Dollar will not be the exception to the rule.

So, gold has failed as money, and gold-backed paper has failed as money, and fiat paper has failed as money. Where does this leave us? Since the dollar is the global reserve currency, the entire planet will be thrust into chaos if (when) it fails. Thankfully, there is a new and better form of money, and if we play our cards right, we can transition to this new money without much pain. All it takes from us (the People) and our government is education, understanding, and determination.

My Prediction

In the near term, I think stable coins will be encouraged by the federal government. This is because the dollar is a pyramid scheme, and pyramid schemes need a constant inflow of new entrants to feed the system. Tether is a stable coin backed by dollars, and currently Tether Inc. is one of the largest buyers of US treasury bonds. Tether expands the base of the pyramid by giving people in developing countries access to dollars – even if their government made dollars illegal. All it takes is downloading an app and BOOM you have access to dollars via Tether. Tether is extremely popular already in Central and South America.

Using Tether or some other stable coin, the US can once again kick the can down the road and make the dollar last another decade or two. After that? Well, that’s why we need the Strategic Bitcoin Reserve.