Some responses to common objections about the use of gold as money:
1. There simply is not enough gold for it to be used as money.
This is just like saying “we cannot possibly measure the size of microbes because inches are too large”. An excellent counterpoint to this line of thinking is to ask “what amount of gold will make it acceptable for use as money?”
Hoppe writes:
Once a money is established, any stock of money becomes compatible with any amount of employment and real income. There is never any need for more money since any amount will perform the same maximum extent of needed money work: that is, to provide a general medium of exchange and a means of economic calculation by entrepreneurs. [Source]
The total amount of gold that has ever been mined is 142,000 tonnes. If half of that gold disappeared, it would still be viable to use as money, and prices of goods would simply adjust downward to fit the quantity of money.
However, one could ask the question, "Could one ounce of gold serve as the monetary base?", or "If gold became as common as aluminum, would it still be useful as money?" Certainly the effort you'd have to put into buying a car (microscopes, nanotubes in the first case, perhaps a crane in the second) would change, and whatever means you are using to store your own money would have to adjust, but clearly, the answer is yes.
Similarly, if gold, which is a useful commodity is found to cure cancer, the non-monetary value of gold would cause a shift in the desirability to use it as currency... rather than a life saving cure.
A fundamental tenet to the Austrian analysis is an understanding of the origin of money. Gold became the most useful commodity to use as currency because of its particular characterisitcs. No one decided to use gold, it was just the best thing available at the time, and perhaps it still is.
The suitability of gold as a monetary base is the result of a number of different market factors. One of the factors is the value per weight. If it falls to that of aluminum or lead, then storage costs alone will undercut the usefulness of this element as currency. Silver may take its place. The fundamental truth, however, is that the commodity chosen by the market should be the one in use as currency.
The market seems to choose gold, and the shifts in its supply and value over the generations have not deterred them. One thing that people trust about gold is the relatively stable supply of it. It makes the value of gold somewhat predictable. A large shift SHOULD result in a market evaluation, but historically, these shifts have been fairly stable.
However, saying that "ANY" amount of gold will be enough to act as a medium of exchange misses the point. The market is fully capable of running on gold, but it wouldn't have evolved that way if gold did not have the characteristics that make it ideal for monetary exchange. If you posit a RADICAL change to those characteristics, such as supply, you will cause the market to re-evaluate its usefulness.
If India acquired ALL of the gold, that wouldn't mean we had no alternatives for a monetary base. All land and capital can serve as money, because money is just a type of capital. Indeed, land or commodity baskets may be preferred by the market outside an environment of market interference. Gold is a fantastic currency base, but it is far from the only one.
2. At current market prices, all the mined gold on earth is worth $4.5 trillion. This is much less that all the currency that has been printed in the whole world!
The price of gold in terms of pieces of paper is irrelevant. After all, fiat currency notes can be printed with very little effort at all. As gold catches on as money again, its usefulness and therefore its value will rise. The 4.5 trillion number is now dated, and perhaps 9 trillion is more accurate, and this is because more and more people are realizing that gold makes a better currency than fiat currency.
3.What’s stopping you from using gold as money now?
Legal tender laws. Central bank money is legal tender for all debts, public and private. Your taxes are payable in central bank money. Contracts in gold coins will not be defended in the same way as contracts in dollars or euros (e.g. if somebody defaults on a gold contract, compensation may be payable in central bank money)
4. The money supply must grow at the same rate as the economy.
No it doesn’t. Prices are not independent of the money supply. The quantity of the money supply overall does not matter (See 1.). If the amount of goods and services increases, while the money supply stays fixed, prices of all goods and services will fall.
5. But deflation is bad, isn’t it? If the purchasing power of money constantly rises, doesn’t that mean an end to investment? Entrepreneurs will surely prefer to safely hide their money under the matress instead of taking the risk of investing.
Falling prices are surely a good thing!
The answer to the second question is no. While it is certainly “risk-free” to keep your money under the bed, it comes with a very real opportunity cost. Investors have a peculiar trait: they prefer goods in the future to goods in the present.. In other words they forego consumption today and prefer a larger return later.
If in a deflationary economy, a nominal investment (i.e., $1) becomes $1.10, when it is repaid it compounds the real return (i.e., the purchasing power of $1.10 is now $1.21)
The desire for future goods will increase the desire for investment.
6. When did falling prices ever coincide with economic prosperity?
The period between 1873 and 1896 in Germany and the United States was a time of deflation. Prices for goods fell at an annualised rate of 1.6%. Gross Domestic Product grew at an annualised rate of 3.6%.
Innovations in manufacturing, chemistry and railroads made the 1880s the most productive decade in the history of the United States - and one of the most prosperous.
Further Reading
Rothbard, Murray N.; The Case for a 100 Percent Gold Dollar
Hulsmann, J. G.; Deflation and Liberty
Sources
Hoppe, Hans-Hermann; The Misesian Case Against Keynes
Measuringworth.com (charts and figures)
Hat tip to Graham of the Irish Liberty Forum for his insights here.
Cheers to David Z for his insghts here.
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