In the short video below, Ron Paul explains the properties of gold and silver that led humanity to spontaneously and naturally select them as money. Because gold and silver are rare elements, the rate at which the supply increases is limited.
This limit to supply is what separates currency from money. Currency is everything money is, except a store of value over a long period. That is the difference between currency and money. Money is a stable store of value and maintains consistent purchasing power over time. But how does money conserve value and maintain a consistent purchasing power considering the world’s growing populations and economic activity over time?
In Bacteria that Poop Gold to Boost Supply? we report that the economic rate of growth is 2.2% according to Deutsche Bank analysts Daniel Brebner and Xiao Fu. The two go on to say that gold is seriously misunderstood, and in their report they update their target projection for gold to $2,000 per ounce for sometime in the first half of 2013, explaining that "gold is not really a commodity at all."
According to the Deutsche Bank analysts: “We see gold as an officially recognized form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves.”
As Ron Paul mentions in our featured video clip, the analysts differentiate between "good money" (gold) and "bad money" (fiat paper currency):
We would go further, however, and argue that gold could be characterized as “good” money, as opposed to “bad” money, which would be represented by many of today’s fiat currencies.
In describing gold as such we refer to Gresham’s Law: when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.
We have drawn the parallel in our past writings to the logical actions taken by Americans when they are presented with a silver dollar and a paper dollar: they always seek to spend the paper and keep the silver dollar.
What's interesting is that all of the arguments against gold propagated by those against gold–that it's not really a consumption good, that it serves no industrial purpose, etc.–are all the exact reasons why Brebner and Xiao call gold "good money."
Boesler makes a good point rarely made regarding the virtues of the gold, silver and paper systems of money we as humans self-selected. The analysts again:
In our view the ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. There are very few media which can do this. Fiat currencies physically have no use other than that which is prescribed to them by government and accepted by the public.
Gold is neither production good nor consumption good. Jewelry we see as a form of storage or hoarding (the people of Portugal have all but exhausted their personal gold stores—hoarded in the form of jewelry—having converted them to survive the crisis). If gold did have a meaningful commercial use we believe that it would make the metal less attractive as a medium of exchange, as the value of the metal in whatever market it was used in could periodically interfere with its medium-of-exchange role...
In the same way that a medium of exchange is to one extent or another also a store of value, stores of value are also to one extent or another media of exchange. The question is one of degree, and this is how, through market forces, we end up with "two monies." Being the focal store of value does not make something the best medium of exchange, and vice versa.
Milton Friedman explained that he found in his study that “the major monetary metal in history is silver, not gold.” History shows silver was used in trade and as a medium of exchange more readily than gold. This is because gold is stored, saved, and the quantity allocated to the Earth’s crust reflects this.
Ron Paul explains in the video the characteristics of currency:
Fiat money is not good money because it can be issued without limit and therefore cannot act as a stable store of value. A fiat monetary system gives complete discretion to those who run the printing press, allowing governments to spend money without having to suffer the political consequences of raising taxes. Fiat money benefits those who create it and receive it first, enriching government and its cronies. And the negative effects of fiat money are disguised so that people do not realize that money the Fed creates today is the reason for the busts, rising prices and unemployment, and diminished standard of living tomorrow.
This is why it is so important to allow people the freedom to choose stable money. Earlier this Congress I introduced the Free Competition in Currency Act (H.R. 1098) to permit people to use gold as money again. By eliminating taxes on gold and other precious metals and repealing legal tender laws, people are given the option between using good money or fiat money. See: Free Competition in Currency Act Gives Americans Freedom of Choice.
As ex-Federal Reserve Chairman, Alan Greenspan knew early on:
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense—perhaps more clearly and subtly than many consistent defenders of laissez-faire—that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
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