Blogs: Lewis E. Lehrman
Despite legal tender paper money, and the disabilities presently imposed on gold by the political authorities, gold retains the same inherent properties which make it still the least imperfect monetary standard of the market. Indeed, all inconvertible paper money systems, based on fractional reserve banking, use the vestigial forms but not the substance of their original convertible currency systems.
In sum, gold is natural money—not least because it combines in a single, indestructible substance the primary functions of money—a standard unit of account, a stable medium of exchange, a stable store of value, a stable deferred means of payment. By combining the essential functions of money into one stable, real, and imperishable monetary token, the market guided the authorities over time to bestow on gold coin the status of an official monetary standard. As a global monetary standard gold money was, moreover, endowed by nature with the profound-but-simple national and international networking effects by which digital free prices could be globally communicated. Thus, the gold standard exhibited natural economies of global information scale, a necessary virtue in the present electronic age of global digital standards.
Today's global stock of above ground gold in all its forms approximates five- to six-billion ounces—close to one ounce per capita of the world population. This is similar to the ratio of the gold stock to population in past centuries. Because of gold’s lasting value from time immemorial, and the human incentive to conserve all scarce resources, these five- to six-billion ounces of aboveground gold represent most of the gold ever produced. So densely packed is the value of gold that the aboveground gold stock today may be enclosed in a cube of approximately seventy (70) feet on each side. This fact makes it clear that gold money, en masse, is easily converted to valuable monetary coin for exchange in the market, and efficiently stored at very low cost as private and public reserves.
Moreover, the empirical data of monetary history demonstrate that the stock of aboveground gold has grown for centuries in direct proportion to the growth of population and output per capita. As with all desired goods and services offered at free prices in the market it requires discovery, intelligence, and work to produce sufficient growth of the desired gold stock by which to accommodate economic growth and to maintain a stable, long-term price level. Most important, the average, annual, long-run growth of the stock of gold in the modern world approximates 1.5% of the total aboveground stock of gold. This fact accounts for the unique, long-run stability of the purchasing power of gold. New output of gold money, joined to its rate of turnover (MV), is sufficient for both economic growth and long-run stability of the general price level; but not so much new output as to affect the relative value of the existing stock of gold. In a word, the steady, modest, long-run growth of the gold stock paralleled the growth of population and economic output per capita. This hidden-but-crucial equation was a fundamental reason why the true gold standard, i.e., gold-based money, became the foundation of the stable monetary institutions of modern civilization. Gold-based money not only stabilized the long-term price level but it also integrated and compounded the growth of the advanced, competitive trading nations of the Western world during the vast, free market, Industrial Revolution of the 19th century. For the purpose of global trade and exchange, currencies convertible to the universally acceptable gold monetary standard had engirdled the earth by the beginning of the 20th century.
As the technology and productivity of the payments mechanism evolved—bringing banknotes and checking account deposits (among other credit and monetary transfer mechanisms) into monetary circulation—these substitute monetary tokens, convertible to gold, gradually economized the use of the gold monetary standard. But these banknotes and checks derived and sustained their value and acceptability because, at the time of their origin and subsequently, all knew they were convertible to gold.
The high value but relatively low melting point of gold, compared to other precious metals, made it the most practical, readily available, monetary coin of enduring, efficient, modern, commercial utility. A single ounce of gold is one of the most densely packed elemental values drawn from the earth’s crust. Its relative scarcity, imperishability, and aesthetic desirability sustain it in the market as money, not least because of the cost of real factors of production required to produce it for the purpose of market exchange—or saving, or adornment (a form of durable saving). Through a process of long-term economic evolution in tribal, interregional, and national trading markets, gold’s natural properties account for the fact that gold became universally acceptable as the optimum, long-term store of value and a uniform standard of commercial measure. Universal acceptability is a hallmark of global money. Silver was the sub-optimal monetary metal of civilization, exhibiting as it does many but not all of the properties of gold.
Merchants, bankers, farmers, and laborers may not have self-consciously considered these facts, but over the long run they behaved as if they did. Desired by everyone, trading peoples observed that gold was the most marketable article of wealth in the market. Thus, for the purpose of indirect exchange, gold emerged over the long run as the least imperfect medium of exchange. People, even hostile nations, freely accepted gold from one another, in exchange for other goods because gold was a non-national, universally accepted money which could be held as reserves, and passed on as a store of stable future purchasing power. All who cherished the value and purchasing power of their saved labor came to rely on the gold monetary standard as a stable, long-term proxy for a standard assortment of goods and services to be purchased later, perhaps much later.
Consider the natural properties of gold. Gold is durable, homogenous, and fungible. Indeed, by its intrinsic scientific nature, gold is imperishable, indestructible, and malleable. Gold has a relatively low melting point, facilitating coinage. Gold is portable and can be readily transported from place to place in exchange for other articles of wealth. Large and small quantities of gold can be safely stored at low cost and then exchanged for redeemable, convertible and convenient monetary certificates, bank deposits, and notes. Like paper, gold is almost infinitely divisible into smaller denominations. But, unlike the near-zero marginal cost of producing paper money, gold—like other articles of wealth in the market—requires real labor and capital to be produced. The real labor and capital invested in producing a unit of gold is, therefore, an objective value proportional to the objective labor and capital invested in producing a unit of all other products and services in the market for which real money, gold, might be exchanged. A mutual exchange between the gold monetary unit and other goods and services is therefore a transparent, equitable exchange among producers and consumers, between owners of capital and owners of labor. But almost no marginal labor and capital is required to produce an additional unit of paper money. Thus, legal tender paper money is overproduced—tending always toward depreciation and inflation. Over the long run, the exchange of forced and spurious paper money for the products of real labor and capital has not maintained equitable exchanges between labor and capital in the market. Market exchanges based on depreciating paper money and floating paper currencies lead to speculative privilege, thus to injustice in exchange—whereas the gold monetary standard sustains equitable exchange by maintaining its constant purchasing power over centuries against a standard assortment of goods.
Because of its imperishability and density of value per weight unit, gold can be held and stored (saved) permanently—at incidental carrying costs per unit of value. Precious metal monetary tokens (gold and silver) survived millennia of monetary experiments with inferior or perishable alternatives such as shells, grains, cattle, tobacco, base metals, and many other monetary tokens which are either consumed, perishable, bulky or of insufficient value for large-scale exchange over long distances. For example, perishables are not storable for long periods at very low cost; nor are they portable over long distances to exchange for other goods; nor are they useful and efficient to settle debts promptly.
Gold is a fundamental, metallic element of the earth’s chemical constitution. Its essential chemical composition reveals perfect integrity, homogeneity, and fungibility. Gold exhibits unique properties which have enabled it, during two millennia of market testing, to emerge as a universally accepted store of value, and throughout history to sustain stable purchasing power. Rarely considered in monetary debates, the natural properties of gold enabled it to prevail over the long run as a stable monetary standard by means of which trading peoples worldwide could make trustworthy exchanges for all other articles of wealth. The preference of tribal cultures, as well as ancient and modern civilizations, to use gold as money was no mere accident of history. Nor has this natural, historic, and global preference for gold — as a store of value and standard of measure — been easily purged by academic theories and government fiat.
By Lewis E. Lehrman: