Why do we use gold to back up our currency?

This is one thing I've never understood. Does gold have some intrinsic value? Is it somehow useful?

Let's say alliens beamed down 100 million tons of gold into the streets of every major city, or if they beamed away every ounce of gold on earth, there would be economic meltdown.

But there shouldn't be. As far as I know, we won't have a lot of jewellery and Rolexes will have to alter their product line. But how else will it affect our everyday lives?

So why are we basing our entire economic structure on something that has no real value?

 

We Americans haven't based our currencies on gold -- or silver, or any precious metal, or any solid thing of value -- since the days of FDR.

(To our detriment: going off a standard has directly caused inflation.)

But why gold? In both the ancient and modern worlds, gold is a precious metal, valued, rare but no so rare that it couldn't be used as a currency.

It's easy to purify, and its purity is easy to determine. And it's easily made into bars and coins.

One could certainly argue that some other commodity should be the current standard, but one must remember that it should be:

- lasting, which rules out crops
- easy to measure, divide and transport, which rules out oil
- not too rare, which rules out uranium

 

Gold, and silver in some cases, actually has quite a few unique combinations of qualities.

It is an excellent conductor of thermal energy.

It is an excellent conductor of electrical energy.

It resists oxidization under normal conditions, thus it never rusts or tarnishes at those conditions.

It has is unusually ductile and is extremely malleable for a metal, making it easy to form.

High purity gold also almost completely reflects thermal (infrared) radiation.

I'm sure most of these reasons have no play in making gold valuable. I would tend to believe that people just thought it was pretty.

 

Who said anything about the standard? Governments still keep reserves of gold because it is valuable. The EU holds about 15% in reserve.

I'm not an economist, but I think it has to do with stability. Having money in gold is like having it invested in capital which I think is less vulnerable to inflation and such. So if the dollar goes down in value, the dollar value of the gold increases in the market, essencialy covering the losses incured due to inflation.

 

The main thing is that gold is flashy, and used in the early economies. After banking got it's way some 5-6 hundred years ago, they still used paper bills as mirrors for gold stored in the banks. In reality, one paper bill dollar signifies stored gold of equal value. Not all ancient economies did that though. The chinese currency is still related to kilos of rice.

Right now we still use it because it's a lot more reliable than anything else. It's chemical abilities make it literaly indestructible. You can melt it and mix it and do whatever you want with it, but you can still recover it easily, something that can't be said about burning oil for example.

 

The use of the gold standard as well as leaving it have good and bad points. Many countries still maintain some gold reserves but there is no true "gold standard" anymore. Interestingly the US Dollar is used as a reserve currency by many countries and is pretty much the standard now.

A gold standard has some negatives in regards to dealing with trade. One of the causes of runs on banks was due to gold and trade deficits. Also IIRC the use of gold for currency also could create shortages of money in some cases due to the limited supply. Paper money altered this, but you now have inflation problems. Gold does help with deflation.

Also we did not leave the gold standard until Nixon in 71.

Edit: Just recalled something, back in the 1700s silver was the standard, and there were massive inflation problems. Gold helped reduce this. Our system now is called "floating currency".

 

I believe the value of gold usually rises in times of global turbulence (major wars, etc.).

Is this true or not? I have no idea, although it would make sense - nobody seems more panicky than investors.

 

At the very least, it is true that gold has been one of the items most universally recognized as having value to serve as currency. Thus, when things began to self-destruct or fall apart, people often turn back to gold. So keeping gold is kind of like "insurance" in case of everything going crazy, I suppose.

But yes, it has obvious problems, and there hasn't been any gold standard for decades now.

 

Doesnt the idea that the US government will not fail keep our currency valuable?

Because if it failed, the money would be literally worthless

 

Part of the calue of the us dollar is derived from the strength of the belief that the us gov't will be stable and soluble. The weakened dollar and the fact some russian banks are reducing their us dollar cash reserves has caused some fear actually.

As for gold, well it's a double edged sword in that is is a vlauble metal. The fact it is a finite amount means you can have shortages from things like runs on the bank or when tax revenues are large.

 

The real reason that prompted me to ask this question is Transformers the cartoon series.

In that series, the robots all use energy cells as currency. That makes a lot of sense since they cannot function without energy cells.

I couldn't think of a human equivalent. But it certainly isn't gold. I mean if there was a nuclear holocaust and earth became a lawless wasteland, gold would be the most useless thing. It won't keep you alive, it won't help rebuild cities.

 

Hey JarJar Slayer,

I was just thinking that myself the other day. I think most people in this thread have gotten caught up in the explanation of why gold is used as a standard when you seem to be asking why is gold valuable.

Seems kinda strange that we should apply a value to something that, intrinsically at least, has none. But that's what we humans do. We make value judgments. If it weren't gold, it would be something just as useless.

 

Actually, it makes the most sense to use something that has no intrinsic value as currency.

Why? Here's the brief explanation.

Okay, say you pick something with intrinsic value as currency. Next, assume that its your goal to keep the economy healthy, and thus kepe a good amount of currency in circulation. However, we need to think logically about people's behavior. If the value of the currency ever dropped beneath the intrinsic value of the thing used as currency, people would stop using it as such. In that situation, there wouldn't be any more currency, and so the economy would collapse. Bad deal.

Or for instance with money, there's lots of motivation to save up your money so you can use it later. However, what is the motive for saving up, say--grain? It (or another foodstuff used as food) might go bad while your trying to save it. Now, that's really a kicker when you start thinking about trying to pass down inter-generational wealth from father to son, and so on.

Also, you need to consider convenience of carrying it and divisibility of the currency. Most things that have intrinsic value don't meet either requirement. For instance, let's say we are a culture of herders, and cows are currency. It would be hard to make prices for stuff, because you can only deal in whole cows--any less than a whole cow is dead or maimed, and thus worthless. Or again, how would I buy a computer so that I could carry on this conversation on an Internet message board? Give Dell 2,000 cows all at once?

Overall, my favorite reference ot this issue is from Futurama. One character, Zoidberg, sells all his company stock for an old sandwich. Over the course of the episode, the stocks rise so high that everyone on the show would have been billionaires, but then at the last minute the stocks plummet till they're worthless. While they're moping about Zoidberg comes out triumphant.

Here is the punchline, and the important part. He declares "Once again, the conservative, sandwich heavy portfolio triumphs!" A second later, he eats the sandwich and then starts crying as he screams, "Oh no, I'm ruined!"

That's a brief, over-simplfied (and probably wrong in some particulars) explanation of it.

 

we use gold 'cuz it's shiny and rare

no really, it's scary how we don't back up our currency. may come back to haunt us... Rome stood for so long, but what comes up must come down.

 

Well considering there isn't enough gold in the world to back up all the US dollars, we kind of had to let go of the gold standard. I was pretty sure it was R. Nixon who ended the gold standard. Heck, today a large portion (I'm not sure how large a portion) of US money is not even in bill or coin form, but in computer transactions. I've been told at one time or another if everyone were to withdraw their money from their banks there would not be enough currancy to cash out. Is this a tenious situation? I think not as much as one might expect.

Reguardless, in the event that the US does fall having money that won't be backed by gold will be the very least of our problems.

 

Great post Jabba-wocky,

Clears up the currency thing, but I personally still don't understand why we value gold. It does absolutely nothing for us. Why not Quartz? Or rocks or whatever. I'm inclined to believe that we value it simply becaue it is shiny. We really are that dumb.

 

Two reasons why gold:

One is it doesn't tarnish. All other metals rust given time and conditions. It kind of sucks when the material you trade with decays. Your assess are continually diminishing. Gold is cool like that.

The second is history. Back when the Phoenician began trade it was all through barter. Some jewels were used, but there was a limited supply of those. Basically you needed a material had a high specific value to be the first currency. Metals couldn't be used because there was no way to easily determine what the purity of the metal you had was. Then some one discovered when you rub gold across a black sort of flint it left a distinctive streak who's color was based on how pure the gold was. This was the touchstone. Suddenly people could, in the middle of trade, determine how pure the gold was. This was the first important jump from barter to commerce.

 

Exactly, Neo-Paladin.

As to money existing more in electronic records than in actual currency, I'm not sure. However, I have heard that within the next 10-20 years, checks (in their current form) are going to disappear. Instead, they'll move to something more along the style of a debit/credit card, where everything is electronic. So we are definitely moving in that direction.

However, with that said, I don't think it should be any more dangerous than our current situation. That is, once we've convinced poeple to believe in the value of glorified green toilet paper, it's not that big of a leap to numbers on a computer screen. I mean, neither one has very much intrinsic value, if things were really to collapse.

 

J-W is right, IMO.

And when paper money is gone, it may have an effect on crime.

What would you be mugged for?

What would someone hold up a Circle K for?

How would someone pay for sex or illegal drugs?

Interesting questions that can only be answered when we more about how a paperless money system would work.

 

I don't understand economics very well, but a thought has crossed my mind many times. Value is in the mind of the beholder, and it seems t hat the world's economic systems are basically built on the illusion that we HAVE to sell when things get bad and whatnot. If people never sold their stock and only bought, wouldn't the economy never have a bad day? It seems like people feel the need to throw themselves in danger by selling. You know the economy has it's ups and downs, so why not just keep your money in there through the bad times and benefit when things get good?

 

If people never sold their stock and only bought, wouldn't the economy never have a bad day?

For the most part, that is a true statement.

 

This reminds me of a joke I saw in a comic strip called "The wizard of Id" years ago. The king is on the balcony of his castle listening to the greviances of his subjects,one of them asks "What are you going to do about inflation?",and the king says "Print more money",then one of the king's knights whispers to him "We can't do that,sire.Because there is no more gold to back it up." The king replies "Boy,that's a relief.I thought you were going to say we are out of paper!"

 

I wonder if there's any psychology experiments that show if gold universally has any sort of intrinic value to humans everywhere (considering that pretty much all the civilizations that had gold valued it) or was that just coincidence?

 

I wonder if there's any psychology experiments that show if gold universally has any sort of intrinic value to humans everywhere (considering that pretty much all the civilizations that had gold valued it) or was that just coincidence?


All civilizations feeling that gold has value, even civilizations that never met, shows that Gold does have intrinsic value. No further testing needed.

 

This discussion concludes that energon cubes should be used as currency. The sooner they are invented the better. Or the shazuma drive.