[ThrustVectoring]

You're confusing what money represents with what it is. Money represents an obligation for society to provide you with something of value. Money itself is simply a measure of accounting. Gold isn't money, and many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.

[jwallaceparker]

> Money represents an obligation for society to provide you with something of value.

What does that mean?

> many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.

This is how commodity money works. The dollar (as well as almost all paper currencies) originated as commodity money. The paper dollar was backed by and convertible to gold.

[ThrustVectoring]

> Money represents an obligation for society to provide you with something of value.

It means that the important part is the obligation and the real value, not the units which get used to track this obligation. Under market-based social norms, if you give someone an awesome massage, then they now "owe you" for it. Perhaps this is in terms of making a website, or cooking lunch, or whatever. The most general form of this is a promise of a favor-not-yet-specified - but that concept needs some unit to measure whether or not you're "even" after making that promise.

The benefit of this is that lots of people like to receive a favor-not-yet-specified, because it can be turned into whatever sort of thing they need most in the future.

In short, that is what money represents - a promise that someone made to provide something of value to whoever winds up with that money.

Now, not any old promise will work well, since the other party wants some kind of guarantee that it can be redeemed later for something of value. This is where the banking system come into play: it creates money by convincing debtors to sign believable contracts to pay the bank back. In the past, it used gold and silver. Notes were convertible to hard currency at banks, and there was a general expectation that you could trade those for the things you wanted at a later point of time. But again, it was that expectation that was important, not the note, and not the commodity backing it.

[dragonwriter]

> > many things would work exactly the same if people agreed to pretend that gold was moved from one vault to another instead of actually physically moving gold around.

> This is how commodity money works.

No, its how representative (or commodity-backed money) works, as distinct from commodity money.

> The dollar (as well as almost all paper currencies) originated as commodity money.

The dollar (whether you mean the US dollar or its Spanish predecessor) originated as commodity money -- actual silver coins -- true. But most paper currencies (including the -- later -- paper dollars) originated as representative, commodity-backed, money.

> The paper dollar was backed by and convertible to gold.

The original dollar was silver. The original paper dollar was ... a trickier question. If you count the 1861 demand notes as "paper dollars", then, as they were initially redeemable for gold (as the US had switched from a silver to a gold standard) money, they were convertible to (redeemable for) gold -- but they were not backed by gold (and redemption was soon suspended.)

If you mean the first legal tender paper dollars (U.S. Notes) issued soon after the 1861 demand notes, they were pure fiat currency, not backed by or convertible to anything.

[bcg1]

If gold isn't money, then why do central banks have so much of it in their vaults?

[scrupulusalbion]

Strictly speaking, money (as opposed to currency) is whatever is the most commonly used currency in a given region. Gold is not generally used as a medium of exchange anymore (i.e. it is not a currency), so it is merely a valuable commodity.

[ThrustVectoring]

They reasonably expect to be able to trade it for money, should they need to.

[bcg1]

Why don't they have stocks, diamonds, or any other types of valuables in their vaults?

[ThrustVectoring]

Uh, what? They do. The Chinese government owns approximately $60 billion worth of gold, and $1.2 trillion worth of US treasury bonds.

[bcg1]

Let me rephrase... why don't they have anything other than gold or cash equivalents?

[ThrustVectoring]

They're very much risk-adverse (for good reason). In exceptional circumstances, they will take on other assets, though. See - the US Treasury's stake in General Motors.