The Gold Standard, Part 1

As noted, the gold standard has appeared in three different incarnations in our history and many conservatives are advocating a return to it in some form.  Are any of them practical?  Let’s take a look.

We will call the first of these “the purist gold standard with no fiat money.”

One could say that this system is a refined form of bartering, for before there was any standardized money system people exchanged goods through this system of exchange. In our early history individuals had to garner some type of product that was in demand so they could trade for other essentials.  If a family raised cattle they may trade a cow, meat or milk for grain, tools, gold, or even a wife for the kid.

This system proved awkward, for many of the products exchanged had a low shelf life.  If you had an expensive chariot to sell you just couldn’t exchange it for a silo full of grain for several reasons.  First, you had no means of storing a large quantity and secondly it would rot before you could use even half of it.

What to do…  You could find ten other people who need grain, but then five out of the ten may not have anything you want so you may wind up with materials worthless to you that you have to spend days bartering away rather than spending time making more chariots.

In parts of the ancient world precious metals, particular gold and silver, became very useful in making the bartering process work.  They had the advantage in that they did not decay, did not take up much space and were recognized as having value.  This meant that our chariot maker could trade his vehicle for an agreed upon amount of gold and then divide it up and trade it to ten different individuals who had items he actually needed.

Some believe that gold was universally used as a medium of exchange since the beginning of civilization, but such has not been the case.  Some parts of the ancient world had very little gold so its use was not practical.  Other parts had gold but did not assign that much value to it.

The Aztecs are a prime example of this.  Gold didn’t have much value to them until it was made into something beautiful and even then only those of high rank could use it making it fairly useless to the common citizen.  In its raw form jade was more valuable.  Other items used in exchange were corn, amaranth, beans, cotton armor, obsidian knives, copper bells, sandals, shields, feathered capes, cacao, shells and feathers.  They just couldn’t understand why the Spaniards were so obsessed with gold and considered cheap glass beads to be just as valuable unless the gold were made into something beautiful. ¹

The Mayans used gold less than the Aztecs and the closest thing they had to money was cocoa beans.

The Incas had a lot of gold but didn’t use it for money.  Most of these ancient American civilizations relied on trade and barter and had no standardized money.

In our past then gold has fallen into three categories.

(1) An interesting yellow metal that is useful for art and jewelry.

(2) A valuable metal useful in barter.

(3) Money.

So, what’s the difference between 1 and 2?

To understand this we must ask another question.  Exactly what is money?

The simplest answer to this is that it is a medium of exchange. This is a simplistic definition that is not complete.  For instance, most items used in barter and mediums of exchange are not considered money.  A plumber can exchange his labor for potatoes, but the potato farmer will not state he received money from the plumber.  He will merely say he received his services.

Similarly, there have been many times in our history, such as the British Isles after the fall of Rome, that gold was considered valuable, but used for barter instead of money.

So what makes pieces of metal, paper, shells or tally sticks money?

Now some argue that gold has always been money because it has intrinsic recognized value but so does food, shelter, fuel and tools.  What is the difference?

In a barter system there is none for they are all mediums of exchange.

So then a substance is not seen by society as money merely because it is can be used for exchange, but because of something else.  What is that something else?

Perhaps Aristotle was the first to identify this:

“All goods must therefore be measured by some one thing…now this unit is in truth, demand, which holds all things together…but money has become by convention a sort of representative of demand; and this is why it has the name nomisma – because it exists not by nature, but by law (nomos) and it is in our power to change it and make it useless.”

And he continues: “Now the same thing happens to money itself as to goods – it is not always worth the same; yet it tends to be steadier…money then acting as a measure makes goods commensurate and equates them… There must then be a unit, and that fixed by agreement” ²

Many years later Abraham Lincoln said it with greater simplicity: “Money is the creature of law.” ³

Gold did not just magically appear as money but some decree of law has always made it so.  For instance, the Coinage Act of 1792 decreed that gold as money would have its value based on the Spanish silver dollar, or 27 grams of silver. This made an ounce of gold valued at $19.44 at the time. ⁴

Then in 1834 a new coinage act set the value of an ounce of gold at $20.67 and it stayed there until it was again changed again by law. Through The Gold Reserve Act of 1934 FDR decreed the new value to be $35 an ounce.

So one day $20.67 was worth an ounce of gold and the next it was worth only worth .59 ounces, a loss of 41 cents on the dollar.

By law then gold remained at $35 an ounce until world demand forced changes in the Seventies.  Then in 1973 the value was rest to $44 and the following year it was decreed by law that the dollar would no longer be tied to gold at all.

Since that time gold has had a floating value established by the free market and has fluctuated greatly.  It can still be used as a medium of exchange.  Mt neighbor would sell me his car if I gave him enough gold, but it is not considered money for it is not currently defined as such by law.

So, during the 142 years that gold was valued at about $20 an ounce was it’s value consistent just because the law said it was?

No.  During this period one ounce of gold or the $20 fluctuated in value and the amount of goods and services it could buy varied considerably.  California during the gold rush was a prime example.

Then from 1934-1970 when the value of an ounce of gold was decreed to be $35, was the value of that ounce always the same during this period?  No.  The amount of goods and services you could buy for $35 again varied considerably, especially during World War II.

Conclusion:  Money is a medium of exchange which is established by law.  Law forces acceptance but the value of that medium will vary according to its supply, velocity of circulation, stability of the government, supply and demand for products and services and other factors.

Notes

1. The History of Money; Crown Publishers, Inc., 1997 by Jack Weatherford, Page 18

2. From Aristoltle (Ethics 1133), Quoted in The Lost Science of Money By Stephen Zarlenga; Page 34

3. Abraham Lincoln, Senate document 23, p. 91, 1865

4. http://en.wikipedia.org/wiki/Spanish_dollar

Read This entire series. Here are the links.

• The Economy – One Last Chapter
• Creating Sound Money
• The Gold Standard, Part 1
• The Gold Standard, Part 2
• The Gold Standard, Part 3
• The Gold Standard, Part 4
• The Gold Standard, Part 5
• The Gold Standard, Part 6
• The Gold Standard, Part 7
• The Fed and Common Sense
• Additional Points
• Alternative Currency
• Giving Away Our Power
• Parable of Money Systems
• To Fiat or Not Fiat
• Fiat Money of the Past, Part 1
• Fiat Money of the Past, Part 2
• Fiat Money of the Past, Part 3
• Fiat Money of the Past, Part 4
• Fiat Money of the Past, Part 5
• Fiat Money of the Past, Part 6
• Examining Fiat Money
• A Flawed Money System
• The Ideal Money
• A Time for All Things
• The New Greenback
• Narrowing the Focus
• People Taking Charge
• Creating Wealth

Copyright 2011 by J J Dewey

Copyright by J J Dewey

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