Gold's True Value
Gold Is Worthless
This sounds strange, doesn't it, that "Gold is worthless." Think for a moment how much gold has affected your life. You can't eat it for nutrition. You can't drink it for thirst. You can't wear it as clothes, except as jewelry. You can't live in it, as a house. You can't burn it for warmth. You can't take it for medicine.
About the only thing gold is actually used for primarily is jewelry. It makes you look pretty and may cause envy, but it certainly is not something you need in order to live. Gold is used in dental work, but more so in the past than now. Gold is used as an ingredient in some electrical equipment. Generally speaking, gold is seldom used productively and hardly affects your life at all.
Then why do investors pay something like $800 an ounce for gold? Let's take two test individuals. Give one $800 and the other an ounce of gold. Each of them are required to live a month on those equivalently-valued items, without converting one to the other. The person with $800 can find a place to live for a month, buy food, water, and clothing. The other would starve in the cold on the streets.
Gold's value comes from implied worth. Two people think an ounce of gold is worth $800 and so they exchange the money for the gold. An ounce of gold is worth $800 when people think an ounce of gold is worth $800.
Nothing else gives gold its value.
Gold is the Standard
People invest in gold, hoping to increase their money, and, over time they do increase their money. The value of money fluctuates up and down, but gold is the standard by which money is measured. Therefore, gold does not and can not increase or decrease in value. An ounce of gold is always worth an ounce of gold. It's the money that changes in value, not the gold.
If you have an ounce of gold that is one day worth $700 and another day is worth $800, your gold did not increase in value; the money decreased in value. It now takes more money to buy the same ounce of gold. But an ounce of gold is always worth an ounce of gold.
What Gives American Money Its Value?
In the beginning, the American Dollar was backed by gold. Valuing a nation's wealth in terms of gold has been the world's practice for thousands of years. However, the world outside the United States began using United States money to buy gold from the United States. Clearly everybody else thought the gold was worth more than the money.
When the United States began losing too much gold, it had nothing to support the number of dollars in circulation, so it went off of gold the gold standard and on to the silver standard. Dollars were then backed by silver and on each dollar it said, "Silver Certificate." But even that was not good enough and shortly thereafter the United States replaced its silver certificates with Federal Reserve Notes. Now, the dollars in your pocket are federal reserve notes, basically IOUs, and not backed by either gold or silver.
So what gives American money its value? A dollar's value comes from implied worth. Two people think a dollar is worth so much and therefore it is. If one person did not accept the value that the other proclaimed, then the business transaction would not be made.
Humans invented money, so clearly humans predate money. Let's imagine how business mush have been transacted in a pre-money world. We'll create four fictional characters: John, Sue, Allen and Tina. John makes straw hats, and he's really good at it. Sue makes bread, and she's an expert at it. Allen makes shoes, and he's the only one who makes shoes in this community. (Tina will enter later.)
Sue is outdoors making bread and the sun is too hot for her, so she thinks she should have a hat. In this case, a hat would give her comfort, stop the headaches and prevent sunstroke. So Sue goes to John to get a wonderful straw hat, made especially for her and her needs. For the hat, Sue gives John a loaf of bread and now John can feed his family one meal.
In the Sue-John economy, one hat is equal in value to one loaf of bread. Now we introduce Allen. John needs shoes for his children and Allen needs hats for his family because his children cultivate the fields. But they both need bread. John lives far away from Allen, but Sue lives about halfway between the two.
Sue trades five loaves of bread for five pairs of shoes. She keeps one pair of shoes for herself and trades the four remaining pairs of shoes for five hats from John. She goes back to Allen and trades four hats (keeping one for herself) and five loaves of bread to Allen for eleven pairs of shoes. And so on.
Well, after awhile Allan takes a trip to town with his shoes and happens to meet John, the hat maker. Allan wants more hats for the workers on his farm, but John is already all-shoed out. His children have already been fitted with shoes by Sue. Allan has nothing that John wants. John wants bread, not shoes, because at this time John's family is hungry again. But Sue has all the hats she needs and doesn't want to trade any more bread for useless hats.
In the bartering story above, we find that the people valued approximately one loaf of bread to equal one hat, which equaled one pair of shoes. But the effort that Sue took to travel from place to place was also worth something. So, she received about twenty percent of the goods as payment for her service. She received one pair of shoes in five and one hat in five.
Sue gets a great idea. She doesn't really need eleven pairs of shoes and has little place to store them. So Sue, John and Allen devise a strategy. The three of them get several pieces of paper and write a big "1" one on each paper. Then they each sign the paper. To them, that piece of paper is now worth one hat, one loaf of bread, or one pair of shoes. If anybody whatsoever hands them that piece of paper, they will in turn deliver to that person a hat, bread or shoes, according to their profession. Sue, John and Allen have just created money.
A new girl arrives in town, the vivacious Tina, who opens a massage parlor. Tina is successful in business. John, Allen and even Sue go to her for massages and each give her in return a signed piece of paper with a big "1" on it. With those papers, Tina can buy the bread she needs to eat and the shoes she needs to wear. She doesn't buy hats because she works indoors. Nevertheless, John can still get a massage and pay her with the paper "1".
Tina's service of massage is like Sue's service of transportation. Neither is a product you can handle, but both have value as attested to by those who use the service.
Money Is a Token of Value
The piece of paper we call "money" is actually a token to represent something else.
Let's use bus tokens as an example. Many years ago people would buy bus tokens for bus rides. The bus ride cost about a fifteen cents but the token cost about ten cents. If you bought tokens, you could ride the bus for less money than paying cash on the bus. However, you had to buy several tokens at a time and the token was good only for bus rides. The token was not the bus ride. The token represented the bus ride.
Likewise, a dollar is not a loaf of bread. It represents a loaf of bread, or a pair of shoes, or a hat. Money, like gold, is valueless in and of itself. Money is only valuable when you can replace it with something else that is useful.
The value of money is determined by products and services, not by gold. The amount of money in circulation (that is, the number of dollars) is determined by commerce (the number of business transactions being made).
The John-Sue-Allen coalition government successfully created a paper that the poplation of John, Sue, Allen and Tina accepted.
The government did not create the value of the money, the hats, bread or shoes. The government did not produce anything that added value to money. The government did not produce any money from its own merit. The only thing the government did was to print a certain amount of dollars by consent and direction of the people, John, Sue and Allen.
Money receives it value from business transactons.
Gold receives it value from assumed worth
© 25 April 2009, J Brown