You guys wanna critique me?

This is going to be a bit rambling, but I actually wrote this as an email to my dad. We rarely get into economics, but we corresponded a bit on the subject of the gold standard, and this was what I came up with. I was trying my best to touch on what I felt were the important philosophical points, without going overboard and making it unreadable. Not sure how well I succeeded :-/  Anyway what do you guys think?

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I'm still trying to wrap my head around the arguments in favor of an "elastic" money supply, but I'll try to set forth the "subjectivist" argument, which I believe leads to the conclusion that the time-tested, market-chosen money, i.e., gold, should be allowed to function.

It's true, paper currency is just the modern form of alchemy, and just as effective as the medieval version ever was.

I believe that the most important idea to understanding this view is that wealth is an entirely subjective matter. Value is not "within" things; rather, it is a measure with which individuals assess items in their environments. Each item is deemed valuable based on its ability to satisfy an individual's particular desire at a given moment. However, each person will value an item differently than other individuals will, and even a single individual's valuations will vary from one time to another. Oil, for example, is widely regarded as a valuable good, due to its physical and chemical properties which lend it to aiding human beings in performing complex tasks. While these properties are objective and "within" oil, we can't say that oil derives its value from them, because hundreds of years ago, before the invention of the internal combustion engine, though oil was still objectively the same, it was not regarded as valuable to very many people. Similarly, if I'm alone on a deserted island and I contract some horrible, life-threatening illness, yet right next to me is an herb which could cure me, I will not regard it as valuable, as a "good," unless I am aware of its life-saving properties. If I don't know what it can do, it's nothing more than an irrelevant item.

With that in mind, one could analyze a common, superficial understanding of wealth as "having a lot of money." But I think that that is neither a necessary nor a sufficient description of wealth. Before the fall Adam and Eve, in a material sense, were fabulously wealthy, though they had no money; and in Zimbabwe the average citizen may have trillions of dollars, but he is hopelessly poor. Instead, I think it is fair to say that wealthiness is simply a description of the state of affairs in which an individual is able to obtain from his environment an abundance of such services (whether from goods or from other people) as would make him, to a certain degree, satisfied.

The reason, then, that gold, as with anything, is valuable, is because people deem it as such; they do so for two reasons: 1) Like any other good on earth, gold either directly or indirectly satisfies consumers' desires (e.g., jewelry, industrial purposes, fillings etc.); 2) Gold happens also to be extremely marketable, not for personal use, but for indirect exchange. Certain objects, due to certain qualities, lend themselves to indirect exchange. Some of these qualities include durability, divisibility, and portability. Throughout recorded history various items have been used as general media of exchange; some of these include cattle, shells, cigarettes, grains, potatoes, and even slaves. However, overwhelmingly chosen, where available, have been the precious metals gold and silver. Some may attribute this fact to a mystical or an intrinsic value which these metals have, but I don't like that at all, given that I don't think there is such a thing in human affairs as Objective Value (CS Lewis and I may disagree, though I don't know for sure). I think it's much better to say that the reason these metals are so often used as money is that people recognize that they are the objects which have the best "money-ish" qualities. They are extremely durable; portable; they can be divided even to shavings and still retain their value (try doing that with livestock!). Over time, people flocked to these so-called precious metals, which became all-the-more-precious as they became more desired for use in indirect exchange. Even if I have no personal use for gold, and even I might prefer something like corn since I can use it to feed my family, I will accept gold in a trade because I know that it's valuable to many people and that also its durability, portability etc make it all the more valuable as a medium of exchange. 

Okay great. I know that was wordy and probably not new for you, but I feel like it's a necessary part of the argument as to why gold should be money, rather than paper. So really the argument is not that gold should be money, so much as it is "money is a necessary part of a complex society based on private property and the division of labor; given the specific circumstances of that society, the widely accepted medium of exchange, i.e., the money, will be whatever commodity is deemed to be the most appropriate by the market. It just so happens to be that in our situation, based on supply and demand, the market has consistently, for thousands of years, chosen gold (sometimes supplemented by silver)."

So (obviously the following is my opinion, based on what I understand):

1) Fixed value for gold? Absolutely not. If gold were the money, the prices of all the goods and services bought and sold with gold would fluctuate, based on the interplay of the supply of and demand for both the good in question as well as gold. If for example, all else held constant, the supply of wheat was reduced, the price of wheat, expressed in gold would go up; conversely, if, all else held constant, the supply of gold was reduced, the wheat-price of gold would go up, or in more familiar terms, the price of wheat would decrease. You can manipulate this scenario with demand on both sides as well. If people's demand to hold more gold (generally referred to as "hoarding") increases, that will tend to drive down prices. And so on.

2) Digging up gold increases global wealth? To a certain extent, yes. As an economic good in its own right, gold has various industrial and personal uses; to the extent that the new gold goes to these ends, whether they be fillings, wiring, or jewelry, wealth is certainly created. It is the same as any other production of any other useful service. To the extent, however, that the newly mined gold is used as a medium of exchange, global, aggregate wealth is not augmented. Rather, there is a sort of transfer of wealth from all holders of gold to the new holders (we'll call them '49ers). An ounce of gold in 1848 has a certain purchasing power in terms of real goods and services it can obtain on the market. In 1850, with the increased supply of money, assuming that there is no change in people's demand to hold cash reserves on hand (as opposed to investing it), the purchasing power of an ounce of gold, of the money, will have diminished. Then again, when a pirate ship attacks a galleon of the Queen of Spain and the ship sinks to the ocean floor, the supply of gold will diminish, and the purchasing power of a unit of gold will increase. Obviously, the other side of that is the demand to hold gold or to purchase other commodities with that gold. It's like anything else, really, except again, more marketable ("liquid").

3) Country with the best mines makes the most currency? This one I think is the most problematic given the "real world." It isn't so much that I think it can only work in theory, but not in practice. Instead, I think people tend to think too much in terms of national borders. Politically, culturally, sure, there is obviously a difference between say Germany and France. But economically speaking, those borders are little more than imaginary lines. Given all the changes in national borders even in the last few decades, that truth is in stark relief. As I understand it, the various monetary units used by European powers over the last few hundred years (before the Euro), while not quite the same, all denoted definite weights of a definite metal of definite purity. The Dollar, for example, was named for a particular noble family of Germanic descent, the Counts of Schlick. They were quite wealthy and were known for minting coins (Joachimsthalers, they were called). Don't ask me for the specifics in terms of weight and purity, but the name Joachimsthaler-->Thaler-->Dollar was not simply the name of a country's currency, but rather the name for a certain amount of metal, privately minted as a guarantee on the good name of the Counts of Schlick, to be a certain purity. The story is the same for the Pound (sterling, of course), the Franc, the Mark, and so on. 

The various exchange rates of each of these currencies (at least in theory) was not so much a matter of determining the monetary policy of each of the governments, as much as it was a simple matter of saying "Oh, a US dollar is, by definition, equal to so many pounds, so many francs, and so on." It would be akin to determining the "exchange rate" between 6 inches and, say, 2 feet. Provided that the definitions of inch, foot, and yard don't change, neither will the exchange rates. In the same way, provided that there is no debasement of the coin, no "change in the definition" of these various currencies, neither will their exchange rates change.

All that is to say that if, for example, South Africa mines a lot of gold, it would be largely unimportant (to the extent that there is no funny business *ahem fraud* going on with the definition of a Kruggerand) that the gold came from South Africa, any more than it's important where toothpicks, basketballs, nuts and bolts, or cars come from: what's important is the quality of the good. Of course, most people have the expectation that it wouldn't be private companies minting and regulating currencies, but governments, which doesn't qualitatively change anything, except to make things more complicated. 

I think the final point that a supporter of gold would stress is that whatever fluctuations might occur as a result of changes in the supply of gold are laughably negligible when compared to the theoretical limits of paper currencies as well as the track record of governments and their self-restraint in using paper money. The US Dollar, for example, has lost something like 98% of its purchasing power since 1907, when the Federal Reserve was formed to allegedly protect the currency. Where a Keynesian might tremble at the prospect of a money supply limited by "external" (read: real) factors, supporters of gold would say that its limited nature is perhaps its greatest virtue.

Anyway, that's what a gold supporter might say. Who knows what I believe :)

Also note that Austrian theory is not dogmatic about gold for gold's sake. The only reason that gold and silver are of note is that they have been selected by the market. So, in terms of policy recommendations, Austrians do not necessarily recommend a gold standard. Better than a gold standard would simply be to end the government monopoly on currency issue and permit private competitors to issue their own currency and let the chips fall where they may. Many people predict that gold or a gold-based currency would quickly emerge as the winner. But maybe we're wrong... the important thing is that we should let the market decide.

Clayton -

About point 3. Whatever country has gold will need to eat and drink and watch television. So whatever countries are producing the food and drink and televisions will sell them to the gold rich country, and get their gold. Just because there is a gold standard does not mean that the measure of wealth is gold. The real wealth is the food and drink and TV sets.