[svs]

Sorry but this theory is completely wrong.

Gold has value because it is a currency (medium of exchange) and money (store of value) due to the following properties:

a) Indestructible - bury it in your garden for fifty years, still the same.

b) Infinitely divisible - use it to buy a goat or the neighbouring kingdom.

c) Easy to detect adulteration

d) Stable supply (around 2% growth in supply annually since time immemorial)

e) No other use - Gold is terrible for most other things (swords, stirrups, axes....) so demand for it is purely for its value as a currency.

This is why rich people had a lot of gold - rich people have money and gold is money

There is one other very precious thing and that is diamond, basically the same except not divisible. Silver also caught on but not as much as gold. Pretty much every other metal lacked on one or more of the above properties.

Bitcoin is exactly the same, except you can send it over the wire.

Over the millenia, the properties people have looked for in currency have not changed.

[privong]

> There is one other very precious thing and that is diamond, basically the same except not divisible

Diamons are a bit more complicated than that, owing to the monopolies on mining/cutting/selling (which likely artificially inflates prices) and general inability to re-sell diamonds near the cost at which they were purchased (which also keeps prices high).

https://en.wikipedia.org/wiki/Diamonds_as_an_investment

[pzone]

The monopoly aspect of the diamond market is a pretty outdated claim. It is not currently possible to synthesize large, flawless clear diamonds. The supply side (mining/cutting/selling) is largely constrained by the ability to unearth the rarest high-quality gemstones.

http://www.resourceinvestor.com/2013/04/09/diamonds-driven-m...

[VT_Drew]

>e) No other use - Gold is terrible for most other things

Not true, Gold is one of the best conductors of electricity and is used in electronics and wiring.

[Symmetry]

Right. Gold has lots of practical uses and if it was valued according to them it would be worth at least as much as Bismuth at $25 per kg. But of course gold is $40,000 per kg.

[svs]

Yes, but not at the time gold rose to prominence as a currency. In those days people needed mostly swords and axes.

[DanBC]

Gold's not a great conductor. It's used because unlike copper or silver it doesn't tarnish.

And because it's shiny so it looks good in adverts.

[vox_mollis]

This. Also, you can durably plate other metals with gold only tens-to-hundreds of atoms thick, so actual mass usage is kept very very small for these applications.

[tclmeelmo]

> e) No other use - Gold is terrible for most other things (swords, stirrups, axes....) so demand for it is purely for its value as a currency.

I don't think that's fair, unless ornamentation isn't considered a "use". Gold is pretty close to ideal for a primitive (and contemporary) jeweler/artisan because it's atypically easy to work with: it can take intricate detailing, it takes a high polish, it doesn't tarnish, it has a pleasing unusual color and unusual density, and it's forgiving (can be melted down). If gold were as common as dirt, it'd still be a preferred medium for ornamental purposes.

[svs]

granted, but gold can be used as an ornament and money at the same time. use as an ornament does not detract from its use as money.

[NTDF9]

This.

Coming from a line of ancestors in India who basically lived a primitive lifestyle until 1950s, I have the knowledge passed down.

Gold is durable. It will last for generations. In a world without digital currency and modern safeguards, real wealth used to be: - Land - House - Cattle - Slaves - Stuff

None of the above (besides land) was durable for multiple decades (or even generations)

So, they created whole social systems around gold, preservation and transfer.

[forgetsusername]

>This is why rich people had a lot of gold - rich people have money and gold is money

It's my understanding that the richest people in America think gold a barberous relic.

I agree that gold has some interesting properties, but so much of the value-of-gold argument seems to stem from its historical uses. But we've used all kinds of things as currency. Using a metal we have to dig out of the ground seems so backwards to me.

[vegabook]

Because they belong to the class of people who have been able to create an alternative, the dollar, which has no intrinsic rarity value and can be printed at will, and these seignorage rights have made them wealthy. Clearly they have every incentive to dismiss their primary foe, gold.

[svs]

Yes, all of these are reasons why gold got started. A gold backed system is perhaps not even possible anymore let alone desirable.

Please see http://svs.io/post/69301254342/bitcoin-fud There are only two things we've used as money (metals and state power)

[spacecowboy_lon]

One of the Rothschild's investment vehicles (RIT) listed on the FTSE still holds some gold - thats why I brought some shares for my ISA last Year

[kaonashi]

Neither of these things is money. Money is by definition a purely financial asset, a liability on somebody's balance sheet.

Gold (and bitcoin for that matter) is a real asset, it is nobody's liability.

[dzeanah]

> Money is by definition a purely financial asset, a liability on somebody's balance sheet.

Maybe Econ 101 has changed, but I remember learning that "money" was:

- A medium of exchange

- A store of value

- A unit of account

When we were on the gold standard these were all true. Now that we're off the gold standard gold is no longer a medium of exchange or a unit of account, but one could argue pretty effectively that it's a better store of value than dollars have been, and it's done so for throughout history. (I'm talking time periods of decades, not the post 2008 crisis volatility here.)

The fact that the system we're using now is debt-based rather than based on precious metals should't change the definition of money, however.

[barrkel]

> - A medium of exchange

> - A store of value

> - A unit of account

Note that these are all social attributes. They are true because and only because society treats them so. A medium of exchange works because counterparties to the exchange accept the medium. A store of value works because counterparties in the near future will accept the currency at something similar to its current value - its value isn't heavily fluctuating. And a unit of account works because people physically write up accounts using the currency as a unit, issue invoices and demand payment using the unit, issue debt and demand interest, borrow and pay interest, all using the unit.

It's all a social construct.

(Gold's value is a social construct too, of course.)

[RobertoG]

During the gold standard the government promised a fixed quantity of gold in exchange for the money that they created.

Money was a liability like now. It's just that the associated promise was different. Gold was not money then more than it is now.

[tomp]

> Money was a liability like now. It's just that the associated promise was different.

Is there any promise associated with money now (except "you don't go to jail if you pay enough taxes in government's money")? If not, then I can't see money as a liability, only as an investment (i.e. the government prints money, sells it for other assets (FX, bonds, stocks, etc.).

[RobertoG]

You can only pay yours debts with the government with money created by the government. And this is not something new.

Government money is, also, a liability in a very real accounting sense too.

When the government creates money (by crediting the accounts of their providers, for instance) it is also registered as a liability for itself.

This same money always will be accepted back as a payment. That's the promise.

[kaonashi]

The promise is to accept for settlement of tax obligations.

[Turing_Machine]

No, they actually issued gold and silver currency, which was called "money" and was used directly as a medium of exchange. Money wasn't just exchangeable for gold, it was gold (and silver).

The widespread use of paper money is actually quite a recent innovation, compared to the millennia of history for gold and silver coinage. People didn't trust paper for a long time (and still don't, when times get troubled).

The Constitution of the United States (quite a recent document, historically speaking) invariably refers to "coining" money, not printing it.

[RobertoG]

'issued gold and silver currency, which was called "money"'

If the value of the coin comes from the material, why issue coins in the first place?

[Turing_Machine]

Because it's harder to make a counterfeit coin than an counterfeit irregular lump of metal.

[bubuga]

> Gold was not money then more than it is now.

Actually, once the state stopped recognizing gold as the standard economic unit of account, it ceases to be money. It becomes just another commodity, like corn or platinum.

Another natural consequence of gold having become a commodity is that monetary policies cease to cover the value of gold, thus it fluctuates naturally in the market just like any product, and is also subjected to economic bubbles.

The price fluctuation alone makes gold unsuited to be used as money, as it is no longer suited to store value.

[21]

If I hold a $100 bill in my hand, who is the someone else with the liability on it's balance sheet? The government?

[RobertoG]

Yes, money is a government liability (the USA government in your example).

If you don't believe that, try to pay your taxes with gold and see what happens.

[logfromblammo]

Not quite. A Federal Reserve Note is a debt instrument issued by the Federal Reserve Bank, which is as much "government" as the Post Office, Fannie Mae, or Amtrak--a tiny bit government, but mostly independent.

In theory, a Federal Reserve Note should be redeemable in United States Notes or in coins stamped by the U.S. Mint, but thanks to legal tender laws, the note is a debt instrument, which means it may be discharged by tendering Federal Reserve Notes in place of whatever the debt actually calls for.

So you go to the Fed and ask to redeem a $100 bill, and they will hand it right back to you. Technically speaking, they should give you a different $100 bill, other than the one you are trying to redeem, but really, if you get that far, you're already lucky they aren't physically throwing you out of the building.

This is one of those "laws and sausages" things. You're far better off not looking at it too closely if you want to continue to enjoy the benefits unburdened by unnecessary knowledge.

[RobertoG]

Well, you have a point about the nature of the Fed, but it's not the normal case. Most governments own their National Banks.

In any case, I don't think that changes the essence of what we were discussing.

[simonh]

In practice I don't think it's useful to think about it in terms of liability. That $100 bill is a share in the net wealth of the nation. This is why when a country prints a lot if its currency to fund government spending, the relative value of that currency goes down. There are more 'shares' in the economy now, so each one represents a smaller slice of the pie than it did before. So if there is any liability, it's distributed across everyone else holding that currency.

Of course the value of anything is only relative to what anyone is prepared to pay for it, it's a matter of sentiment, so the value of an economy can go up or down depending on perceived risks, liabilities or opportunities and thus is reflected in the value of the currency compared to other assets or currencies.

[marvy]

I think so.

[mistermann]

http://lesswrong.com/lw/nz/arguing_by_definition/

[nwah1]

Relatedly: http://squid314.livejournal.com/323694.html

[yoha]

Next on the line: http://slatestarcodex.com/2014/11/21/the-categories-were-mad...

[dsr_]

(c) easy to detect adulteration

http://www.popsci.com/diy/article/2008-03/how-make-convincin...

(tungsten. Same density as gold. Wrap a tungsten bar in gold, and you pass weight, density, and surface chemical tests. W is much, much cheaper than gold most of the time.)

[svs]

Tungsten was first isolated in 18th century. Gold was already established by then.

[iofj]

Testing a gold bar's electrical conductivity will easily tell the difference between a real and tungsten filled gold bar. So will it's capacitance. Given the simplicity of this test (touch one or two wires to the bar and measure) this doesn't seem a very good technique.

[Mikeb85]

And it's much, much harder to process (harder than most metals, highest melt point). The effort alone would make it at least as valuable as gold in the 19th century.

[AnimalMuppet]

Gold has been a currency. It isn't really any longer. Now it's almost an anti-currency.

If the dollar is a good medium of exchange and store of value, I have no need of gold. Dollars are considerably more convenient. But if the dollar isn't a good store of value (or I suspect it won't be in the future), then I can use gold as a store of value, for the reasons you stated. Gold therefore becomes my alternative to currency. Functionally, it's almost a short on currency.

But the currency has to be fairly bad for this to work. Example: Gold was $1700 maybe five years ago. (Can't get exact dates from Yahoo Finance's current site, so I'm working from memory.) It fell to $1050 maybe a year ago. Now it's $1200. That makes the dollar look like a pillar of stability.

[mamon]

You are taking this from the wrong angle: the fact that gold price changed from $1700 to $1050 to $1200 says nothing about value of gold - instead it says everything about the value of dollar. Simple example:

in 1915, or so, Henry Ford released Model T, first mass produced car. The price of Model T at that time was about $300 dollars, which was equal to 20 ounces of gold. Now, 100 years later, 20 ounces of gold still can buy you a brand new car, while 300$ only buys you set of tires and some gas.

[bubuga]

> You are taking this from the wrong angle: the fact that gold price changed from $1700 to $1050 to $1200 says nothing about value of gold - instead it says everything about the value of dollar.

If what you say was true, how would you explain the fact that gold prices also fluctuated wildly with regards to all currencies used in the world?

> in 1915, or so, Henry Ford released Model T, first mass produced car. The price of Model T at that time was about $300 dollars, which was equal to 20 ounces of gold. Now, 100 years later, 20 ounces of gold still can buy you a brand new car, while 300$ only buys you set of tires and some gas.

You need to discover what inflation is. Adjusted to inflation, $300 in 1915 are equivalent to around $7k in 2016.

Furthermore, prices are dictated by the purchasing power of the target market which also varied significantly since 1915.

[AnimalMuppet]

> the fact that gold price changed from $1700 to $1050 to $1200 says nothing about value of gold - instead it says everything about the value of dollar.

No. The value of the dollar did not change to that degree in the past five years. The only way you can define that as being changes in the value of the dollar is to define the value of the dollar in terms of gold. Then you're correct, by definition, but your argument is circular.

Your example over the last 100 years may be valid. For the last five years (or even 40), though, the change in the value of gold has been a reflection of peoples' fears about paper currency, rather than an actual measure of the value of that currency.

[mamon]

The point is that, unlike gold, dollar (or any fiat currency for that matter) has no intrinsic value, only the value we give it in our minds as average of our greed and fear.

Exercise for the reader: take a look at this plot [1] and this plot [2] and guess which year US government stopped using gold standard for dollar.

[1] http://stooq.pl/q/?s=xauusd&c=100y&t=l&a=lg&b=0

[2] http://static4.businessinsider.com/image/50e77df8ecad049b560...

[AnimalMuppet]

Define "intrinsic".

Gold doesn't have intrinsic value either, except for it's industrial value. Gold's value as a currency is also "only the value we give it in our minds as average of our greed and fear."

[JoeAltmaier]

Be fair; that Consumer Price Index rise also corresponds to the beginning of consumerism. Lots more changed than just a currency basis. That was probably the least important?

[tomp]

> Functionally, it's almost a short on currency.

Every currency (except the one you have to pay taxes/debts in) is a "short on currency" - all FX crosses are long one currency and short the other.

[daxfohl]

I think there's a problem with this ((d) in particular) because you don't need a stable supply of gold per se, but a stable supply of all things fulfilling the other four properties, plus (d) independently.

So if you start finding smold or plold or frold (or creating bitcoin or smitcoin or whatever) that each has those five properties, currency-wise they're in essence all the same thing.

If they're all the same thing, just call them all "gold", (d) for this aggregate no longer holds. However there's no property that distinguishes one from the other as a currency, so you can't just "pick one" and move on. So essentially currency no longer exists.

[svs]

The value of gold depends on the supply of it. The value of silver depends on the supply of it. The value of gold does not depend on the supply of silver. The two are separate currencies.

So for a currency to be stable, its supply has to be stable. The supply of other things need not be.

[gutnor]

The article covers how it started. If you are in currency-less barter only hunter gatherer society, it is not yet a medium of exchange. You would have better luck trading with food than anything else in those societies, as covered in the article.

Also diamond wasn't and still isn't used as a currency. Only in the last 10 years, it became a somewhat semi-serious investment grade material.

[svs]

Yes and at some point you need a token of value. Imagine the plight of the itinerant tradesman as he herds his chickens through the forest from village to village simply so he can trade.

No no, food is far too cumbersome to be a token of value. Much better to slip a tiny token into ones waistband and exchange it in the markets. Gold was an exceedingly good token of value.

Diamonds are not currency because they are not easily divisible. But they have been a store of value for centuries now, and that makes them money.

[DanBC]

> food is far too cumbersome to be a token of value. Much better to slip a tiny token into ones waistband and exchange it in the markets.

Or massive stones? https://en.wikipedia.org/wiki/Rai_stones

http://www.npr.org/sections/money/2011/02/15/131934618/the-i...

[DanBC]

Have any societies actually used barter?

[smaddox]

Not as their main form of trade. See "Debt: the first 5000 years". That book also has an interesting discussion of the various theories about the origin of money, and the evidence supporting different ones.

[vegabook]

You missed the point completely. Indeed you need to reverse the order of your underlying axiom, completely. That gold has value because it serves as money is obvious. The real question, which the author does a very good job at least at beginning to broach, is why did it, and not some other material or scarce human creation, become money in the first place.

[svs]

because of those five properties of gold.

[vegabook]

That was a rhetorical question.

[pzone]

Gold is also superior to silver for jewellery. It is more malleable, more tarnish resistant, and less reactive for those with sensitive skin. (People had allergic reactions back in the stone age too.)

[snowwrestler]

Is d) actually desirable? I think what we really want is a stable representation of value. These days that means actively managing the money supply in response to movements in the economy.

[ucaetano]

a) necessary but not sufficient

b) necessary but not sufficient

c) not when trading coins

d) no, see spanish price revolution

e) no, see jewelry and ornaments