l-g,
Gold has been money and a primary reservoir of value for most of man's history. The concept of the lack of value of gold is new & unproven.
Money historically has had three functions, a medium of exchange, a unit of goods pricing for economic calculation and a store of future purchasing power.
In the beginning, the majority of the utility of money derived from its use as a medium of exchange, a smaller and increasing amount as a store of value, and to a still smaller degree as a pricing unit.
As economies gradually evolved into the highly complex, but still evolving, system we see today, the relative importance of the three utilities of money has changed greatly.
The most important use of money today is as a pricing unit to coordinate an infinitely complex economy. However, this function doesn't require actual money to be effective, but rather just price records and schedules.
The least important use of actual physical money today is as a medium of exchange. With all kinds of credit, grace periods, and electronic accounts, there is little reason for income to precede spending, and a limited amount of money can support a wide range of monthly spending. For example, if your checking account contains $5K at the beginning of the month and still contains $5K at the end of the month, there is little variation in the amount of money needed for $100K of income and spending vs $100 of earning and spending.
The most important use of money in the most advanced economies today is as a store of future purchasing power. This also is what determines the purchasing power of money as the degree of tightness with which an individual holds a marginal dollar is what determines its ability to purchase goods. When someone is given an additional $10K of cash, the law of diminishing (subjective) marginal utility predicts that the marginal dollar will now be held less tightly, reducing its purchasing power. This is why an increasing money supply, the sum of everyones' holdings of money, results in increased money prices of goods.
However, as the primary function of money has increasingly become a store of purchasing power, money has started to lose its special character as compared with all other economic goods. Every economic good, including gold, can be held with the intent of funding future purchasing power. As all economic values are subjective, it is now becoming more and more true that exactly what is to serve this function of money is a subjective choice of each individual, and that there will be multiple choices for every individual, a form of diversification.
The test for whether a given good represents money in a store of value sense for a given individual is whether and to what degree holding the good reduces the individual's marginal utility of actual money. If instead of adding $10K in cash to someone's holdings as above, 10,000 euro's could be added, or 30 ounces of gold, or 10 tons of chicken feathers. These have the property of money to the given individual if, and only if, their holding reduces that individual's subjective marginal utility of the dollar and the degree of tightness with which he holds a dollar.
So, you are correct about gold being money, but the evolution in the meaning of money means that while gold used to be primarily a medium of exchange, it is now almost entirely a store of purchasing power, and it must potentially share that distinction with virtually every other economic good.
Regards, Don |
