In the new case for Gold, American Lawyer and Author James Rickards argue that gold is money, that monetary standards based on gold are possible, even desirable, and that in the absence of an official gold standard, individuals should go on a personal gold standard, by buying gold, to preserve wealth. James makes the case for gold as money in the twenty-first-century, gold’s role in cyber financial warfare, gold’s importance in economic sanctions on nations such as Iran, and gold’s future as a competitor to the world money called special drawing rights (SDRs) issued by the International Monetary Fund.
The Case against Gold
Gold is a “barbarous relic,” according to John Maynard Keynes.
There is not enough gold to support finance and commerce.
Gold supply does not grow fast enough to support world growth.
Gold caused the Great Depression.
Gold has no yield.
Gold has no intrinsic value.
James Rickards makes the case for Gold by clarifying the above statements.
“Gold Is a “Barbarous Relic,” According to John Maynard Keynes”
What he did say was more interesting. In his book Monetary Reform (1924), Keynes wrote, “In truth, the gold standard is already a barbarous relic.” Keynes was not discussing gold but rather a gold standard, and in the 1924 context he was right. The notoriously flawed gold exchange standard that prevailed in various forms from 1922 to 1939 should never have been adopted, and should have been abandoned long before it died with the outbreak of the Second World War.
“There Is Not Enough Gold to Support Finance and Commerce”
The amount of gold in the world is always fixed at a level, subject to an increase through mining. Currently, the world has about 170,000 metric tons in total, of which about 35,000 metric tons are official gold held by central banks, finance ministries, and sovereign wealth funds.
That gold can support any amount of world finance and commerce under a gold standard at a price. The price can be determined by calculating the simple ratio of physical gold to money supply.
When critics say “there’s not enough gold” what they really mean is that there isn’t enough gold at current prices. That is not an objection to a gold standard. It is an objection to a candid confrontation with the real value of paper money relative to physical gold.
“Gold Supply Does Not Grow Fast Enough to Support World Growth”
A critic who advances this argument fails to distinguish between stocks of official gold and total gold. Official gold is owned by the government and available to support a money supply. Total gold includes official gold plus all the gold held privately as bullion or used in jewelry or for decorative purposes.
Official gold is only about 20 percent of the total gold stock, which leaves ample room for governments to acquire gold.
There is no reason why a gold standard cannot be combined with discretionary monetary policy. A combination of gold and central bank money was the norm from 1815 to 1971 except during war. Central banks acted as a lender of last resort and expanded or contracted the money supply as they saw fit even under the gold standard. In fact, gold’s main purpose was to signal the proper monetary policy based on bullion inflows and outflows.
Gold Caused the Great Depression
Actually, the Great Depression was caused by incompetent discretionary monetary policy conducted by the U.S. Federal Reserve from 1927 to 1931, a fact documented by a long line of monetary scholars including Anna Schwartz, Milton Friedman, and more recently, Ben Bernanke. The Great Depression was then prolonged by experimental policy interventions launched by Herbert Hoover and Franklin Roosevelt.
Gold Has No Yield
“This statement is true, and it is one of the strongest arguments in favor of gold.”
Gold has no yield or return because it is not supposed to. Gold is money, and money has no yield because it has no risk. Money can be a medium of exchange, a store of value, and a unit of account, but true money is not a risk asset.
Yield comes from putting the dollar in the bank. But then it’s not money anymore; it’s a bank deposit.
A bank deposit is not money; it’s a bank’s unsecured liability. The largest banks in the United States would have collapsed in 2008 if not for government bailouts in the form of expanded deposit insurance, guaranteed money market funds, zero interest rates, quantitative easing, foreign central bank swap lines, and other monetary gymnastics.
A gold coin, a dollar bill, and bitcoin are three forms of money. One is metal, one is paper, and one is digital. None of them has a yield. They’re not supposed to—they’re money.
Gold Has No Intrinsic Value
The intrinsic value theory is an extension of the labor theory of value first advanced by David Ricardo in 1811, and later adopted by Karl Marx in The Communist Manifesto (1848) and Das Kapital (1867, 1885, 1894), among other writings. The idea is that the value of a good derives from the combination of labor and capital that went into its production.
Of these six best-known objections to gold as money, five are empirically, analytically, or historically incorrect, and one—gold has no yield—is correct, yet it’s not a critique, it’s a truism, and consistent with the view that gold is money.
A classic definition of money has three parts: medium of exchange, store of value, and unit of account. If all three of those criteria are met, you have money of a sort.
Once the process of elimination is complete, there are only eight candidates for use as money. These are the so-called noble metals, situated about in the center of the table, consisting of iridium, osmium, ruthenium, platinum, palladium, rhodium, silver, and gold. All of these are rare. Still, only silver and gold are available in sufficient quantities to comprise a practical money supply.
Gold is the only element that has all the requisite physical characteristics—scarcity, malleability, inertness, durability, and uniformity—to serve as a reliable and practical physical store of value. Wiser societies than ours knew what they were doing.
Just because money is “digital” doesn’t mean it’s not part of the physical world. There is no escape from the periodic table of the elements. Digital money exists as charged subatomic particles stored on silicon (Si) chips. Those charges can be hacked and erased. Gold atoms (atomic number 79) are stable and cannot be erased by Chinese and Russian cyberbrigades. Even in the cyber age, gold still stands out as money nonpareil.
Shadow Gold Standard
Countries around the world are acquiring gold at an accelerated rate in order to diversify their reserve positions. This trend, combined with the huge reserves held by the United States, the Eurozone, and the IMF, amounts to a shadow gold standard.
Gold Is Insurance
Gold is not an investment, it’s not a commodity, it’s not a paper contract, and it’s not digital. Gold is simple, an element, atomic number 79; it is the opposite of complex. It is robust in the face of international monetary collapse and financial market complexity. Owning gold is insurance against the current economic climate and unstable monetary system.
Where to Buy Gold
- Physical Gold Fund
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