Freeman

ARTICLE

Why Gold Is Money

OCTOBER 01, 1974 by ROBERT L. GUARNIERI

Dr. Guarneri is Vice President and Chief Economist of International Investors, Inc., in New York.

There are those who try to give the impression that money can be created by decree or covenant. They assert that an authority such as the state, or an agreement between individuals can willfully establish a currency unit. The most conspicuous recent example of this was the "creation" of "paper gold" or the SDR’s (Special Drawing Rights) by the International Monetary Fund.

Historical evidence does not support the idea that a new form of money can be created by the mere passage of a law. There is much more to it than that. Money is not the product of a compact or of legislative acts. It evolved in the market. As primitive people became increasingly aware of their business interests, they came to understand the simple fact that exchanging less-marketable goods for others of greater salability brought the trader closer to his ultimate economic goal.

In ancient Greece, as in some parts of Africa today, cattle were the most marketable commodity, and were used in exchange in addition to their use as sources of food and beasts of burden. Domestic animals such as cattle, horses, and sheep constituted the chief sign of wealth among ancient peoples, both nomadic and agricultural. Their marketability extended to all economic men. The lack of roads made transportation difficult, but cattle transported themselves almost without cost. This made them marketable over a wide geographic area and increased the constancy of the demand for them. A cow is a commodity of considerable durability, and its storage costs are negligible where pastures are abundant and cattle are kept outdoors. In societies where a large herd served as a status symbol and also afforded economic security, comparatively few animals would be offered for sale at one time and consequently found a ready market. Because of these factors and the fact that the actual trading in cattle was better developed than trade in any other commodity, cattle emerged as the most marketable commodity in the economy and hence the natural money of the people.

The division of labor and commercial development and the formation of cities with their highly industrial population had the effect of diminishing the marketability of cattle while increasing the salability of other commodities, especially the metals then in use. The city-dwelling manufacturer was not in a position to accept cattle in the course of trade with farmers. Cattle were no longer the most marketable commodity, and finally ceased to be money at all.

Metallic Money

Copper was the first metal from which tools and weapons were made. Along with copper, gold and silver were the earliest materials used for jewelry and ornamentation. Therefore, at the time when the medium of exchange passed from cattle money to metallic money, copper, gold, and silver had become the goods of most general desire, largely because of primitive people’s extensive use of jewelry. The marketability of the metals was greatly enhanced by their usefulness to all people and the fact that they could be readily transported throughout a wide market area. The fact that they were durable and could be stored or held without deteriorating gave them added salability.

As the area of world trade widened and the rate of turnover increased, the precious metals —gold and silver — became more and more desirable because of their high purchasing power per unit of weight. This led to obvious advantages in transportation, handling, and storage and meant that copper would cease to serve as money. With the increasing division of labor, higher turnover of commodities, and trade with all parts of the known world, each individual felt the need for carrying more purchasing power on his person. Under these conditions the precious metals, especially gold, became the most convenient medium of exchange and therefore became the money of the most highly developed economies. Thus money came into being, not as the result of an agreement, legislative compulsion, or mere chance, but as the natural result of voluntary exchanges in the market place. It can only continue to serve as money as long as it proves acceptable under these conditions.

Neither can a newly created currency gain acceptance unless it is backed by something which has already proved itself in the market. The SDR paper met with some acceptance in international finance only because it was linked to gold, of proven monetary qualities. The creation of Special Drawing Rights was claimed to be a new way for the International Monetary Fund to make easy credit loans to countries guilty of monetary mismanagement. But this was not the creation of a new international money. Gold is the only international money. A sound currency cannot be created by the mere passing of a law, and today’s paper money managers would do well to keep this in mind.  

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October 1974

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