It is clear that Western capital markets no longer generally regard gold as money. It has been relegated to the status of a risk asset, useful collateral, or simply a commodity with a history of being used as money. This is a mistake.
The great Austrian economist, von Mises, wrote that true money had to survive the regression test. Put simply, it must be established whether or not money had value before it was used as money; otherwise it is only a money-substitute which ultimately depends for its value on confidence. So we need to ask ourselves two questions: what value did gold have before it was used as money, and what value did modern currencies have before they were used as money?
The answer to the first question is clear. Anyone who has seen the Alfred jewel in the Ashmolean Museum in Oxford (over 1,000 years old), the Snettisham torc in the British Museum (over 2,000 years old), or Tutankhamen’s gold mask in the Cairo Museum (over 3,000 years old), regard these fabulous items with astonishment. They are simply priceless, being desirable beyond reckoning. There is therefore no doubt that gold, the major element in all these objects, survives von Mises’s regression test. Furthermore the Aztecs and Incas in the New World, completely isolated from Eurasian values, held the same human view.
Paper currencies do not survive this test. They started as money-substitutes for gold or silver and over time lost all their convertibility. As a result they now depend for their value on confidence alone.
Traders and investors in capital markets are unconcerned about this distinction. Instead of realising that Gresham’s Law applies, that bad money has driven out the good, they regard currency as the only money for modern times. This is understandable, because they draw up their accounts and pay their taxes in currency. They invest to make a profit in currency. And so long as they can hedge currency risk by acquiring capital assets, they can manage investment portfolios without recourse to gold.
For these practical reasons mainstream opinion holds that gold is no longer money; but this complacency is likely to be undermined by events. We already see the four major central banks committed to issuing their confidence-based currency in increasing quantities, to finance their governments and to prop up the banks. We have yet to see how they intend to stop doing so.
The effect of monetary inflation was usually predictable. It raised asset prices first, which we are already seeing. It then raised prices of raw materials and manufactured goods, as people started to spend encouraged by low interest rates, leading inevitably to rising prices and rising interest rates. The sequence of credit-fuelled economic cycles is all too familiar.
This time, given the likelihood of a financial and collateral crisis from falling asset prices, the economic cycle is in grave danger of a short circuit. Rising prices for raw materials and goods are likely to be driven by falling confidence in fiat currencies, instead of rising confidence in the economic outlook.
It will be the ultimate test for unbacked currencies. Everyone wedded to modern currencies will then wish they had been aware of von Mises’s regression theorem.
This article was previously published at GoldMoney.com.
Although I have the greatest respect for von Mises, I think the Regression Theorem is nonsense. Money is whatever people are prepared to accept as money. Having a grounding in non-monetary value certainly helps, but it isn’t necessary (see Bitcoin).
The Regression Theorem is actually from Carl Menger – and it was both a logical and historical truth.
Money always starts as something real (a commodity) – only later does the “backing” or “standard” stage getting under way (the government backed fraud really kicks in), later still is pure fiat (“fiat” command, edict, whim) money (backed by the threat of violence from the state).
Of course pro freedom people should reject fiat money, but we should reject “backing” and “standard” also. Either the gold is the money or it is not – no “standard” no “backing” for something else that is the money.
As for Bitcoin – if some people value this commodity (as some people value gold and some people value silver and…..) then good luck to them.
Personally I do not value Bitcoin and will not, therefore, accept Bitcoin as payment for goods or services.
However, if someone is prepared to pay me in gold (or silver, or….) then I am happy to accept such payment. The discussion then turns to how much (in weight) gold (of a certin purity) they are prepared to pay me.
By the way I am no more interested in “paper gold” than I am in Bitcoin (indeed even less intereted – as “paper gold” is an obvious fraud, as recent antics on the “gold market” have shown).
Unless you have the PHYSICAL gold, I am not interested in trading with you.
I would hesitate before accepting Bitcoin or other similar ‘currencies’ as payment as the overregulatory crowd is now casting the greedy eyeball upon them. Of course this is only to protect us from the creepy criminals.
The regression theorum was formulated in a time when money could only have been a commodity with intrinsic value prior to it becoming money. Long before the mathematics and computers.
I prefer Archimedes definition of money having certain properties. Mostly common sense eg. portable, durable, fungible, divisible, and non-counterfeitable etc. The latter makes paper money bad money, it is counterfeited as a matter of routine by the central banks.
Crypto-currencies such as bitcoin satisfy all of Archimedes properties without having any prior use as a commodity. That is why it is spontaneously circulating as money. Some people say bitcoins do have intrinsic value in that there are hardware and electrical costs to create them, but for me that is secondary. They are money because they are widely accepted as money and they are accepted as money because they satisfy all of Archimedes’ properties of money.
They are money because they are widely accepted as money and they are accepted as money because they satisfy all of Archimedes’ properties of money.
They are accepted because they are easily convertible to dollars. Paper dollars trace their value back to gold; people had become so accustomed to using them for everyday transactions, that once the gold link was severed, hardly anyone noticed [at first].
But Bitcoins are dependent on the goodwill of government regulators. They can and probably will be shut down soon.
The beauty of peer to peer networks is that they are almost impossible to stop. The govt has been trying for years to shut down bittorrent file sharing without success.
I don’t understand why it is so difficult. Money is a medium of xchange. Paper money was the successor to gold so long as the Central Banks were willing its maintain its affinity to its attributes .
The temptation was too great so where do we go now? Obvously back to gold. Where else?
I very much doubt that many people would accept paper money if were not for two factors – legal tender laws and tax demands.
Even with “backed” paper money – Rothbard was correct in pointing out that the National Banking Acts of the 19th century actually made it ILLEGAL for local banks to “discount” the (supposedly “backed”) debt paper of the big “National Banks”. Why would a straight system need such force and fear?
Gold does not need it – and it does not need tax demands and legal tender laws to make it money.
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