The Gold Fetish: Why Shiny Metal Is No Better Than Any Other Money

There’s a great deal of confusion about the nature of money: what it actually is and how it works. I often hear people wax lyrical about the days of the gold standard, when the value of currency was tied to an agreed value of gold, in the belief that gold somehow keeps money honest. They seem to think that a return to something like the gold standard would solve the problems that we’re having with money and debt.

People like the fact that gold is a real thing that has historically been highly valued, in contrast to paper or digital money which they feel is a bit of a con, perpetrated on them by venal bankers or incompetent politicians. I can understand the sentiment but the logic is deeply flawed.

Enthusiasts for shiny metal do not appear to be able to grasp that, in currency terms, gold and silver are just the same as bits of paper or numbers in a computer. Gold is just another medium on which a monetary value can be inscribed. It becomes useful as money only because we agree to use it as money, not because it is made of gold.

But, they argue, gold is better than paper or megabytes because there’s a finite amount of it. Politicians and bankers can’t create gold money out of nothing, so if all money was gold (or backed by gold) the value of money would not be eroded by inflation.

Let’s look at what would happen if we tied the value of all the world’s currencies to gold at agreed values while allowing commerce and banking to continue as normal.

You, I and everyone else would continue to try to capture and hoard as much money as possible in order to make ourselves feel more secure, or just for the joy of being fabulously rich, depending how successful we were. Every pound/dollar/euro/yen/etc. that we captured and stashed away would reduce the quantity of money in circulation, which would make it harder for people to buy and sell goods and services.

When people are short of money they borrow from the bank. If you’re up to speed with how our banking system works you’ll be aware that when a bank makes a loan it doesn’t lend out depositors’ money, it merely creates new money into the account of the borrower (see Positive Money for details). This means that every time a new loan is made the quantity of money in the system is increased.

Everyone knows that if you add to the quantity of money in the system then the value of each unit of currency (pound/dollar/yen/etc.) must be reduced, which means inflation: the very thing that the gold lovers want to avoid.

The hard truth is that you cannot use money to increase your hoard of riches and have zero inflation and have a thriving economy all at the same time. You might manage to have any two simultaneously, but not all three. Deciding to use gold as money instead of paper or megabytes doesn’t alter this fact.

Our problem is that we insist on using money as a long term store of value as well as our means of exchange. Hoarding money, whether or not it’s backed up by shiny metal, will always reduce its effectiveness as a tool for keeping our productive economy working properly.

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