It is difficult to argue with gold. To men everywhere, gold is a desirable economic object. It can be used for the manufacture of jewelry and ornaments. It is a corrosion-resistant element, the most malleable and ductile metal, ideal for plated coating on a wide variety of electrical and mechanical products. It is a good thermal and electrical conductor. It is durable and storable, can be easily hidden from partakers and predators, and readily shipped to other places. Gold is very marketable. In fact, gold may be the most marketable commodity around the globe.
The value of gold is determined by the same considerations as that of all other economic goods. Individuals give it value according to the enjoyment and satisfaction they expect to get from its possession. Economists explain this fact in terms of utility and scarcity. Value rises or falls in accordance with the utility which people ascribe to an object and the scarcity they perceive.
Like that of any other economic good, the value of gold changes according to changing perceptions and situations. This must be emphasized because there are many goldphiles who wax eloquent about the eternal, immovable value of gold. They obviously have never experienced, and cannot think of, a situation in which basic essentials that sustain or safeguard human life do soar in value while that of gold in any form plummets. In fact, in desperate situations people may prefer a pound of bread to an ounce of gold, essential clothing and shelter to a pound of gold and, when their lives are at risk, their lives to a ton of gold.
The supply of gold is plentiful. For thousands of years it has been mined and accumulated; very little is consumed or lost. Existing supplies in the form of coins, jewelry, decoration, and plated coating are greater by far than current production. No matter how much gold is produced in South Africa or Russia, current output is rather negligible when compared to the quantities in individual possession throughout the world. This characteristic, in which it differs from all other metals, reduces the risk of sudden changes in quantity and, therefore, sudden changes in its value. Even silver, which has many characteristics similar to those of gold, is subject to great changes in production and consumption that may affect its value.
The special characteristics which man ascribes to gold have made it the most marketable economic good of all, the popular medium of exchange and unit of economic calculation and account; they have made it man's money. For more than 2500 years, from ancient Greece to modern USA, gold coins have served as money and the standard of calculation and account.
Throughout the ages governments have had a love-hate relationship with gold. Most of the time they sought to amass it in their treasuries and monopolize its use. They claimed and brutally enforced a monopoly of the mint. At other times governments waged war on gold, seeking to ban it under penalty of fine, imprisonment, or even death.
During the French Revolution hundreds of businessmen died on the guillotine because they had dared to calculate prices in gold or ask for gold. In the United States of 1933 to 1975, it was a crime punishable by fine and imprisonment to own standard gold coins. At the present, the U.S. government, while clinging to a sizeable hoard buried in Fort Knox, seeks to disparage it and make little of it as an unimportant metal.
We are living in an age in which all governments, regardless of the system of political and economic organization, whether interventionistic, socialistic, democratic or dictatorial, are occupying an economic command post. Most of them work through central banks issuing legal-tender notes and through government mints manufacturing coins. In 1971, they all suspended gold payments and made the most important and most stable currency, the U.S. dollar, take the place of gold. The world has been on a dollar standard ever since.
For the federal government the dollar standard has been a magical guide to cheerful spending and soaring debt. It released the Federal Reserve System from the shackles of gold and set it free to finance federal deficits no matter how large. In 1971 the federal government deficit amounted to $23.033 billion and the federal debt stood at $409.5 billion. By now, the 2003–2004 federal budget calls for expenditures in excess of $2.1 trillion and a debt of some $7 trillion.
Since 1971, the American dollar has lost almost 70 percent of its purchasing power and is losing more every day. That makes it difficult to project future debts and deficits, but it is likely that the dollar standard will disintegrate if foreign investors should ever lose their confidence in the U.S. dollar.
For the American people the world dollar standard has been, and continues to be, both a welcome boon and a dreaded affliction. It is pleasant and beneficial as it permits the Federal Reserve System to engage in massive credit creation that generates unprecedented trade deficits now running at a rate of over half a trillion dollars a year. At some five percent of gross national product (GNP), the trade deficits actually have lifted the levels of consumption of the American people while they depressed the levels in creditor countries. Moreover, the dollar standard has enabled the U.S. Treasury to place much of its new debt with foreign investors and thereby shift much of the burden of debt to foreigners.
The dollar standard also has been a dreaded affliction as it allowed the Fed to depreciate the American dollar every year and finance a frightful expansion of government functions and powers. Dollar savings have lost some 70 percent of purchasing power while the number of government rules and regulations probably has risen by a similar proportion.
Many economists are convinced that the current pattern of Treasury deficits and Federal Reserve money and credit expansion is not sustainable. They call for large tax increases or drastic spending cuts that would allow the Federal Reserve to decelerate its money fabrication. But they also are aware that large tax increases at this time of economic stagnation and rising unemployment would depress economic activity even further. Spending cuts, on the other hand, probably would bring relief to the ailing economy but undoubtedly would be unacceptable to the political forces that benefit from the spending. They usually cite old notions and theories that advocate deficit spending as a panacea for economic evils and difficulties.
The huge budget deficits may yet be solved in another way: the Federal Reserve may continue to cover them with new money and credit, which may depreciate all dollar debt as fast or faster than it can be added. A five-percent inflation depreciates the purchasing power of a $7 trillion federal debt by $350 billion a year. At the 1980 rate of inflation of 12.5 percent, the federal debt would shrink by $875 billion in purchasing power, and at the 1990 rate of inflation of just 6.1 percent by $427 billion. But such a solution may cause a crisis of confidence in the integrity of the American dollar and precipitate the end of the dollar standard.
For most of a generation the almighty dollar has been a great object of confidence and trust throughout the world. It brought honor, friends, influence, and possession to the United States. As a symbol of power and prestige it answered all things. Although we do not know what the future has in store for us, we are fearful that the age of the world dollar standard may some day draw to a close. Huge federal government deficits and chronic Federal Reserve inflation may destroy it.
The deficits force the Fed to generate ever more money and credit which in turn weaken and erode the dollar's trustworthiness in the eyes of the world. Its present weakness toward many other currencies, such as the euro, the Swiss franc, and the British pound, is an early symptom of the erosion.
No other currency, national or international, can conceivably take the place of the American dollar. They all suffer seriously from the same ideological malady: they are the creation of political concern and authority. Whatever we may think of gold, it always looms in the background, beckoning to be used as money, as it has been since the dawn of civilization.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.