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Source link: http://archive.mises.org/19274/central-banks-gold-is-money/

Central Banks: “Gold Is Money”

November 17, 2011 by

No, you didn’t hear them actually say it. In fact, Bernanke says quite clearly “no” – gold is not money. But their actions speak much louder than words. The Financial Times reports that central bank gold buying is at a 40-year high. In other words, whereas central banks have primarily been net sellers of gold since the crash of the Bretton Woods system, they are now net buyers – and quite heavily so.

This is especially the case in rapidly growing economies such as the People’s Republic of China. So while European and American central banks are (still) selling gold and “investing” in paper currencies/fiat monies, the developing world is going heavy on what used to be the world accepted means of exchange. As the West goes down the tubes, the “new” economies are not only growing in terms of wealth and prosperity, but they are also adopting sound money. Meanwhile, we are getting rid of paper money for the sake of saving money – and replace it with digital ones and zeroes. (But at least we have “more money” than they do!)

So if we look to what central banks do and not to what they say, then Bernanke was quite obviously lying. In case anyone thought differently…

{ 37 comments }

Chris Rhodes November 17, 2011 at 10:50 am

“There is absolutely no truth to the rumors of a European crisis [so please keep the prices up a little longer so I can reduce my exposure without taking a huge loss]!”
“Gold is a barbaric relic of the past and is totally not money [so you should sell yours to me]!”
“The future is looking bright, and this would be a great time to buy Netflix [which I conveniently have for sale]!”

Chris Rossini November 17, 2011 at 11:14 am

When Bernanke says that gold is not money, he really means: ‘Gold for me…not for thee.’

Pedro November 17, 2011 at 12:20 pm

Maybe gold should be money, but it’s not. Money is the commonly accepted medium of exchange. Gold is not that. The fact that the Fed is buying gold does not mean that gold is the commonly accepted medium of exchange i.e. money. So, Bernanke is not lying. Your article says as much by referring to gold as the “what used to be the world accepted means of exchange”.

Per Bylund November 17, 2011 at 12:31 pm

I think you misunderstood me, Pedro. I did not mention the Fed purchasing gold – I mentioned that central banks (plural form) buy gold more than ever (well, 40 years). This suggests that they consider it to be money to a greater degree than the paper currencies they usually hold in stock as “security.” (And I mean “money” broadly, as a record of account, store of value, etc.)

What you quote is completely irrelevant to your point. My mentioning that central banks act as though they believe gold is money (and it IS a generally accepted means of exchange for central banks and the traders they deal with) does not necessarily apply to THE WORLD (which to a great extent is subject to repressive legal tender laws). The original reasoning in the post still holds.

Pedro November 17, 2011 at 12:53 pm

I know you mentioned the central banks in plural. But the one central bank whose actions might enable you to call Bernanke a liar is the Fed, not the other ones. I agree that the fact that they are buying gold means they consider it a good store of value. But by the definition preferred by Austrians, money is the commonly accepted medium of exchange. Of course, it’s permissible to use other, broader definitions. But the fact that something is used as a “store of value” can hardly be sufficient to consider it money.

Maybe central banks and those who trade with them use gold as a medium of exchange. But that hardly means that gold is the commonly accepted medium of exchange. You won’t go to a store to buy a bottle of Coca-Cola with gold coins. I think that’s what Bernanke was referring in the discussion with Ron Paul.

Still, you might say gold is money, because of the definition you are using. But that doesn’t mean Bernanke is lying, if he is using another definition. My objection to your post is that you accuse Bernanke of lying i.e. you are assuming he is telling something he knows not to be true. I don’t think that is necessarily the case. He might genuinely have a different opinion. Claiming gold is not money is not sufficiently absurd as to hold that the only way one could claim it is if one is a liar.

I’m sure I agree with you on most of these issues, and disagree with Bernanke. However, I think one should generally treat other opinions as genuinely held opinions. There is a very strong chance that he really thinks gold is not money. He doesn’t have to be a liar to hold that.

Per Bylund November 17, 2011 at 1:01 pm

Actually, I don’t think Bernanke was using the Austrian definition of money when he answered in the negative to the question of whether gold is money. So he wouldn’t be a liar if it is not a money according to his definition while a money according to another. But he WOULD be a liar if his buddies the central bankers of the world act as if gold is money according to Bernanke’s definition.

Thanks for the clarifying statements on what Austrians think, though.

Pedro November 17, 2011 at 1:18 pm

He says gold is an asset. I think buying gold as a store of value is consistent with that.

jmorris84 November 17, 2011 at 1:33 pm

Pedro makes some good points. I’d have to agree with him on this one.

Sione November 17, 2011 at 4:49 pm

Pedro

Ben said gold was being purchased for reasons of tradition, not because it was money. Interestingly enough traditionally gold was and is money.

In the end, Ben’s twisting and turning has served to ensnare him within his own erroneous fantasies and willful fibs. He is wriggly and inconsisitent to the point where he manages to deceive himself. What foolishness.

Sione

Per Bylund November 17, 2011 at 7:22 pm

Interesting. But I don’t see central banks holding other “assets” like real estate to back up their currencies. They always seem to stick to highly liquid assets: paper money or financial instruments – or gold.

A. November 19, 2011 at 7:47 am

You are right. I’m afraid this post is just wishful thinking. Buying gold is not “adopting sound money.” You can say they are making a bet on the value of gold, but that is not the same thing.

Bongstar420 November 17, 2011 at 3:40 pm

By 2050 there will be .7-1.2 troy ounces per person. This is not much better than today’s ~.5 troy oz per person. Aside from the impractical nature of metallic currencies (they are heavy, expensive, and will permanently degrade over time if it is actually used), this is reason enough for Gold never being a currency. Without technology, Gold will not command the prices that it is. From the perspective of a commoner, there is much more utility in spending a month’s wage on a computer or television than on a piece of metal that will do nothing but serve as a collection piece. Why is Gold so heavily advertised if it’s value is “a priori”? People ask how many Greenbacks can I get for this Gold not how much Gold can I get for these Greenbacks.

Eliminate jewelery and closets from the Gold spreadsheet and it’s value is substantially reduced for decades. It will not gain to actual value until most of the entire world lives at the standard of the average 1970′s American middle class when that .7-1.2 troy ounce per person will be required simply to generate the devices that they need and want for their lifetime.

Sione November 17, 2011 at 4:56 pm

Bongstar

You are living in a fantasy world if what you posted is what you really believe. Gold has been used as money for a very long time. We still use it. Funny how your “degradation”of gold has ended up with the value increasing so far in so little time. Perhaps you hadn’t noticed, but it is the fiat currencies that are degrading, not gold….

Sione

Bongstar420 November 17, 2011 at 8:46 pm

It is what we say it is. You think a little money with a lot of people is good. I think a lot of money with a lot of people is good. In no case will Gold be the top currency of the commoner. It might be for rich people who believe in it, but .7-1.7 oz per person will not suffice as the monetary standard of the world.

I don’t know what you think I am saying here. It doesn’t matter if I think Gold serves as a good currency. All that matters is that people believe that it will. Most people through out time have subscribed to some form of religion or spirituality throughout time, but that does not mean their beliefs were accurate or reasonable. It doesn’t mean that I’m going to believe in it either.

If you think currency scarcity is good for growth, then by all means, keep chanting your mantra. I project that it will make my pockets fatter with USD or what ever other currency is in vogue in whatever region I’d like to do business in. At this point, if you didn’t believe what you were saying, then I wouldn’t be on the market to go prospectin- wait, yes I would since I find value in technology and the market will mature around the same time I will coincidentally. Technology and increasing standards of living are what we call inflexible.

Gil November 18, 2011 at 12:34 am

Donkeys were used for a very long time too. That doesn’t mean it should always be that way.

Pedro November 17, 2011 at 5:05 pm

Bongstar, metals might be impractical from many points of view, but from others, they are not. If they were so impractical, why were they used for so long as money? They were at least more practical than other things. In some circumstances, they may be impractical. Often these impracticalities can be solved or minimized by methods that have evolved together with money: clearing houses, checks, etc.

Whether the utility of TV sets is greater than gold is beside the point. Utility is subjective, and it’s evaluated only when a choice is made, according to the circumstances, the opinion of the one that is making the choice, and the quantities involved. The fact that something is money causes it to be more valued by people. You can’t use a TV set as money.

You seem to be describing the Austrian position as “the value of gold is ‘a priori’”. I’m not sure what that means, and that phrase doesn’t accurately describe the Austrian position, which is that gold emerged naturally as money in the market.

Gil November 18, 2011 at 12:36 am

Why were family farms the norm for so long? Because they’re superior to modern farming methods?

Pedro November 18, 2011 at 6:02 am

Good point, Gil. But whereas family farms gave way to other, more industrial forms of farming, through a natural process, gold ceased to be money because of government restrictions. Of course, it’s impossible to know whether gold would still be used as money if government had let it alone. But that’s not really the point. The point is that money should be whatever emerged in the free market. Fiat money is not that, and has many problems. Many think gold would still be in use if it were not for legal tender laws and other interventions.

Ricky Cochran November 17, 2011 at 3:45 pm

In saying gold is not money, Bernanke is departing from thousands of years of human history. If he is not lying, he is clearly delusional. Years of playing with monopoly money has probably affected his views.

Bongstar420 November 17, 2011 at 4:07 pm

Thousands of years of monarchies, aristocracies, oligarchies, monopolies, theocracies, and tribalism with low population sizes and low standards for average people. None of those systems have served my interests (the same as the vast majority of people) aside from being examples of what not to do. Gold as money serves the interests of the “old system” types.

I suppose we ought to go back to King’s and Queens since it has such a long standing history which testifies to the validity of its structures. The same goes for slavery since it has been in practice for far longer than it hasn’t. Traditionalism is for the mindless

integral November 17, 2011 at 4:20 pm

Then go ahead and cling to your tradition of fiat currency.

Bongstar420 November 17, 2011 at 6:57 pm

How traditional is 70 years to several thousand? DIdn’t some group of people use sea shells as currency?

Tim November 19, 2011 at 2:22 pm

Bongstar, equating the use of gold standard with tyrannic and oppressive theocratic or royal regimes, displays your gross ignorance of history and reliance on outdated and discredited Marxist canards. A stable gold standard, as von Mises demonstrated many times in Human Action, was a serious check on the state’s expenditures and it’s ability to tax and spend. In other words, it served to protect the people from the exuberance of the ruling class. Historically, when rulers found themselves short of funds, they resorted to debasing the currency or issuing fiat, using arguments not too different from “modern” Keynesianism (that it was for the national good, that there wasn’t of it to maintain domestic demand, etc).

Under a gold standard, it would not be necessary for everyone to actually own and barter in physical quantities of gold. There would still be “paper” or digital currency in existence which would be exchangeable for a nominal quantity of gold. In this case, the quantity of gold that exists in the world would be irrelevant, as its price would, absent government interference, reflect supply and demand conditions in the market.

Ricky Cochran November 17, 2011 at 4:34 pm

Don’t throw the baby out with the bath water.

Are you in support of paper money given it’s value by government fiat? This is the new [monetary] system. It serves those who create paper money and those who get to use it first, namely, government. It is at the expense of savers.

Gold was considered money in this country until the 1940′s and silver was in coin until 1964. Are you suggesting that America (and by extension the Industrialized West) was a throwback to the “old system” until these dates?

Gold and its value as money are shown through history. To discard this as mindless (despite being based on the voluntary decisions of countless human beings) puts you at a disadvantage in your investment portfolio, among other things.

Bongstar420 November 17, 2011 at 8:15 pm

I’ll be sure to have a fat pile of Gold and Silver for you to buy from me, so will the banks. You have USD right? I currently do my business in the United States.

Did you not read the .7-1.2 ounces per person. How will we divide those units to the degree necessary to run ones life? Gold will certainly be kept in a safe and traded as a certificate. This is essentially the same as a fiat currency except that you believe you can get some metal from the currency vendor.

Are you saying that most of the people in the past were very knowledgeable and not at the feet of some overlord?

We do not invest because it is reasonable, we invest because it is profitable! I do not believe that the Gold market is objectively reasonable outside of people’s psychology, well at least until around 2030-2050….But hey, without these speculative prices in the Gold market, prospecting would be totally useless to me. There are no legal jobs that would pay me 100k a year for working 6 months since I wasn’t born to the in crowd. In any case, I’m betting Gold prices will sustain despite strengthening USD. Not for it’s monetary value, but for it’s speculative value. After all, Gold scarcity is 15-20 years away and people want their computers and cell phones. I consider it a necessity. The price of Gold will increase substantially as the actual supply dwindles against mounting industrial demands. The drive to harvest an asteroid will be initiated if the jewelery and money markets refuse to give which they likely will refuse with awesome magnitude!

Pedro is right by the way, but my statement on practicality is that there is simply not enough to serve its purpose to the commoner. .7-1.2 ounces cannot be handled in a way to manage ones finances unless one is using extremely small units of weight. On top of this, metal is expensive to produce and it does wear if it is actually used. Papers are not expensive to produce, nor is there any limit to the total amount of units available-therefore ware and scarcity are not problems to growth. If we use a Gold denominated note, in effect it is the same as a fiat currency since it is the belief there is Gold not actually having it as most people will not bother to collect the Gold. Notes would be digitally inflated to increase the private holdings of the brokers they way the Gold market works now (in my belief). They sell Gold notes that will never be redeemed and therefore they sell more notes than they hold. Accounting for legitimate holdings is very cumbersome.

If we were to have Gold as currency, people would spend their Gold on items that will not function with out the Gold (>2020). Which is more useful to them; the Gold or the item they bought with the Gold that was made with an albeit small amount. If you want scarcity and permanence, Platinum is your bet since there is less, its harder to get, and it wears better. Oh, wait…That won’t work, people don’t believe in it. They thought it was garbage until industry came along- it was too “difficult” and wasn’t “yellow” as well as being more scarce.

Mindless consumption is an opportunity for me that would otherwise not exist…The same goes for all the Gold and Silver bugs out there. While you may not like my characterization of Gold as currency as mindless, one has to consider the objective nature of reality. In no case will Gold surpass the USD as currency. It may serve as a portion of currency, but it is impossible to handle .7-1.7 oz per person for their life as a currency. Should we issue .00000001oz Gold coins? That would wear off really quick and be several times more expensive than printing something. It is mindless because no one is considering that Gold cannot serve the majority of people. The future serves the majority of people and therefore I would not bet on Gold as money but Gold as a commodity that can be used as a form of money in some cases increasing its over all demand.

I’m saying Gold is a good bet because people are both retarded and demanding of stuff. Gold will be much more profitable because of this. Otherwise, you have a few people sitting on a pile of virtually useless metal since industry (excluding status symbols like jewelery) is only ~10% of the market atm. By 2050, I figure it will be 50% of the market and asteroids will be in prospect since we don’t want to dredge the ocean or till up Antarctica.

How many times do I have to say .7-1.7 oz per person without mining the ocean or asteroids to any large degree.

Tim November 19, 2011 at 2:59 pm

Your argument rests on the assumption that certificates backed by gold have the same effect as fiat currency. But an issuer will have a hard time issuing certificates in excess of the supply of gold he holds in store, unless he resorts to something akin to fractional reserve banking, wherein he assumes a risk of default for the unbacked reserves in order to realize a profit. Thus he has a strong incentive to minimize and avert the chance of a default. In the current monetary system no such incentive for financial self regulation exists. The issuer-monopolist (central bank) can arbitrarily issue as much debt based fiat to over-leveraged banks as he wants simply by typing numbers in a machine. The recipients of the newly issued fiat, the banks, are hesitant to lend out their reserves out of fear of monetary inflation.

Gold by itself has no inherent value. The “price” of a 1 oz of gold isn’t inherent to the process by which a certain quantity of it is extracted from the ground and minted into coins. Rather it is the fact that consumers in the market demand it as a medium of exchange which determines whether gold is mined at all, hence it’s value and price. This insight comes from the marginal theory of value that is the cornerstone of Austrian economics. But even a simple mainstream economic analysis of supply and demand curves will demonstrate that if demand for gold is high and supply of it is low, the corresponding price equilibrium per a certain exchangeable quantity would be high. Thus if a certain weight of gold has so much value that it can buy you, as Ned Netterville said, a luxury car, then it’s irrelevant how much of it exists in the world, as long as it’s infinitely divisible, a quality gold possesses. Furthermore, because the supply of gold in the world is relatively fixed (given the rate at which it is extracted), and because of it’s relative “uselessness” in consumption, the long term price of gold remains stable, and thus underlines its utility as a unit of exchange.

That said, what I truly oppose isn’t necessarily fractional reserve banking (something that is arguably the result of currency laws which guarantee arbitrary value to unbacked reserves) as much as central monetary planning, and the authority of the government to decide what is permitted to be used as money. It is of no importance whether a scarce, easily divisible commodity which can maintain its value in the long run will actually be gold or some other good or a combination of thereof. What’s important is that the state needs to get out of the money business altogether and permit currency competition.

Pedro November 17, 2011 at 4:59 pm

Why? You don’t go to the store with a gold coin to buy a pound of apples. It’s not commonly accepted as a medium of exchange. Just because gold used to be money for thousands of years it doesn’t mean it still is. The fact that this is so because of legal tender laws and other restrictions doesn’t make it less true. Maybe you think gold should be money, or that it would be money in a free market. But that doesn’t mean it is money right now. Bernanke’s opinion is valid.

Ned Netterville November 17, 2011 at 9:37 pm

Gold’s price increase in terms of dollars and all of the other fiat currencies reflects increased demand for it as a store of value if not a medium of exchange, although some people are lately using. it for both purposes. I describe this worldwide demand as gold reasserting itself as the people’s choice in money after their fail flirtation with fiats cost ‘em a bundle.

Bongo, stop smoking that stuff for long enough to think straight and cease with the soothsaying and prophesying. Your insight into the future of money, gold or anything else amounts to diddlesquat. It worth just what you’re paid to dispense it around here, which is nothing. If you’d had the foresight to have traded you U.S. dollars for gold coins ten years ago you could be basking in the sun on a tropical isle sipping cool ones instead of running around the worldwide web trolling for dollars.

Oh, and by the way, 7.5 ounces of gold per individual American is more than enough money to sustain a booming economy. For your information “Gold is extraordinarily ductile (degree of extension which takes place before failure of a material in tension). One ounce can be drawn into 80 km (50 miles) of thin gold wire (5 microns diameter) to make electrical contacts.” And if each American had 7.5 ounces, or whatever that figure might be, and the price of a new Mercedes Benz was 0.05 ounces of gold, why by golly we’d all be rich, wouldn’t we?

Bongstar420 November 17, 2011 at 10:03 pm

You are excluding people. The world currency has to do work for all people. 1.7 ounces per person in 2050 is double what the authorities project. You are assuming it is reasonable for only Americans to have Gold money while everyone else has no money.

I will bet you that Gold will be worth a lot of cash, but it will not be the world currency that most people actually use.

Where do you get that “the price of a new Mercedes Benz was 0.05 ounces of gold?” The point is that people cannot handle the actual possession of such minute quantities of Gold. It would simply wear off in their pockets- certificates would inevitably result otherwise you would have coins that were diluted with base metals.

Look, why arn’t you screaming Platinum. There is less of it (sort of), its harder to get, it lasts a lot longer in ones pocket, rich people do not already have a vault full of the stuff at large, and we won’t need much once gasoline cars are off the list. I personally would rather hold and prospect Platinum, but people hardly believe in it as a currency and they don’t take to its brilliant white color so much (jewelery).

I’ve been waiting for someone to make a comment like, “Bongo, stop smoking that stuff for long enough to think straight…” That’s what the handle is for. Statements like that are revealing.

feudalredux November 18, 2011 at 12:40 am

“The point is that people cannot handle the actual possession of such minute quantities of Gold.”

The point is that you are completely ignorant of current market options such as goldmoney.com, or the gold-backed credit card available to non-Americans via certain offshore banks.

Gil November 18, 2011 at 12:42 am

Not to mention few people would know that they’re actually looking at a platinum or palladium and instead presume it was silver.

Ned Netterville November 18, 2011 at 5:51 pm

No I’m not assuming anything. What ever the total quantity of gold is divided by the total population of the world, it is sufficient. As you imply, individuals would probably use their gold in exchange transactions in the form of paper or electronic credits, just as they exchange dollars today without ever actually handling the cash.

The point of the seemingly cheap Mercedes is that with it essentially impossible to counterfeit gold, the money supply would be exceedingly stable versus the situation with fiats where the nations of the world can print more (inflate) at will, and prices will adjust themselves to the supply of money available.

I’m not screaming. I didn’t choose gold, the people of the world chose it (and sometimes silver), and they would be using it today as a matter of course if governments had not used the law backed up by force and violence to restrict or rescind people’s human right to use whatever they chose as money.

Did my comment reveal that I’m a Voluntaryist who doesn’t buy and has long fought the concocted, stupid, evil superstition that anyone–constitutional democratic governments included–has “authority” to rule others and tell them what they can smoke, eat, use as money, or force them to do or not to do anything.

Gil November 18, 2011 at 12:40 am

In other words u want to literally see gold coins as currency and not a gold standard paper money?

Ned Netterville November 18, 2011 at 5:58 pm

Me? I just want freedom in the choice of money as in all other areas. A gold standard implies, although it need not necessarily mean, that government would design and implement it, when the only constructive thing government can do regarding money is to butt out, drop dead, vanish, poof, and sound money would emerge and prevail.

Ricky Cochran November 17, 2011 at 11:49 pm

I am all in favor of competing currencies. Part of a currency’s value, however, is based on its history as a currency. This is why, as far as precious metals are concerned, platinum is not performing as well as gold. Platinum does not have history as a currency on its side.

As far as having a “fat pile of gold and sliver” to sell to me, rickycochran@gmail.com. I don’t know you so I assume you, as the good buisnessman you are, will find some way to assuage my concerns of the risk. Put up or shut up.

Mushindo November 22, 2011 at 4:27 am

Platinums value is largely underpinned by its industrial and commercial uses in the first instance, and it had its its own double bubble in the runup to the crash of 2008. A big chunk of the demand for platinum is driven not by consumer choice, but by environmental regulation of vehicle emissions. boom plus regulation = doubly artificially stimulated demand. The regulation is still there, even if the boomtime auto demand has subsided, so the platinum price is still artificially held higher than it would otherwise be.

Mushindo November 22, 2011 at 4:17 am

Unfortunately gold’s essential moneyness has been legislated away. I dont believe in gold as an investment as it is not in itself productive, but I would very much like to use it in lieu of cash , to restore the now-obsolete ‘store of value’ function of money. B ut if I shift my liquid fiat cash holdings into gold to protect it form the ravages of inflation, when I convert it back to fiat cash later , when the ‘gold price’ is higher ( because the fiat currency was further debased), so I can spend it at the I-store, I get taxed on what the receiver of revenue deems to be the ‘gain’ on my ‘investment’ into gold, and the tax assessment ignores the decline in the value of th emoney.

That’s the criminal part of it.

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