With a pair of articles under the above title, Steve Saville poked a wasp nest of Kitco.com readers urging them to get real about whether gold literally functions as money in any modern economy. He says the stinging replies made…
…the popular claim that there’s a difference between currency and money, and that although gold is no longer a currency it is still money. The line of thinking here appears to be that currency is the medium that changes hands to complete a transaction whereas money is some sort of esoteric concept. This is hardly a practical way of thinking about currency and money. Instead, it appears to be an attempt to avoid reality.
For a reactionary, Saville’s oeuvre at Kitco does a fairly good job of quoting and summarizing—if only to dismiss—great economic thoughts. In the present case he sustains a spirit of exasperation with those who cannot simply accept that ‘it is what it is’ when it comes to money. Alternative definitions, he says, are “esoteric”: a charge devoid of logical content. He rounds up an impressive army of convincing strawmen as his opposition, some easier to slay than others. By his own account he has upset a deep hive of gold-backed wasps (maybe a few GS readers?).
I’ll first answer Saville’s opening challenge “where does gold circulate?” with the romantic answer “anywhere free men cooperate”; but no place today protects their freedom by foreswearing legal-tender laws and the related impediments that drive gold out of circulation.
But there’s a pragmatic answer too: World Gold Council’s 2010 estimate that around 80 million ounces of gold change hands worldwide every day. If it were a country, such a gold market would rank as the 60th largest economy, well above the median. Regarded as a corporation, gold’s market capitalization is ten times Apple’s. Only the US and Japan dare to run national debts (in large part monetized!) that exceed—indeed are large multiples of—the world gold stock or the market cap of their one hundred largest corporations. This much gold on the the move can only be fulfilling some monetary function.
There is a very real and practical difference between
- a clearing instrument and
- the economic value it controls.
Values trade in every currency; we each account for those values in units of whatever we personally treat as money. Units of account are a mathematical tool that we deploy along the price-axes of analytic charts or in our own internal price judgments; mathematicians would say money defines a metric space. In the business books we may keep, the convention is to denominate in the prevailing legal tender. But internally we adjust—the usual rationale being ‘money isn’t everything’.
Modern currencies float in value against each other hour by hour. In each currency, price charts look a little different—even for the same goods at the same time at a fixed delivery port. The variety of these intangible “monies” and the market effort that goes into balancing them against each other and against the flows between their trade zones belies the claim that these embody the ideal form of money. Foreign exchange market trades, weighing 4.4 billion ounces of gold, must clear every day to align these currencies, fifty five times any one day’s trading in actual gold money.
Kitco posts a different gold ‘price’ chart in each major currency. If gold was the standard money, Kitco would be reduced to one monotonous flat price line! This issue might be existential for them—is that a conflict of interest?
In a clearing instrument we seek a means of indirect exchange through which we’ll suffer the smallest loss of value. Indirect exchange always extracts a cost in the form of an ask-bid spread as we sell what we produce and buy what we consume. Paper-mediated credit lowers, and legal tender laws socialize, such costs; but the costs are non-zero (TNSTAAFL).
If rapid local exchanges constituted the entire economy, modern currency would be the solution, without a doubt. But the equivalence or identity between money and currency breaks down when some currency must be held for any extended time in place of the economic goods it tries to control, and when it crosses trade zone boundaries.
Arcana in Dispute
Measuring values with money is a direct expression of the economic concept constant marginal utility, an arcane idea which Saville considers “invalid” (his swat back at my sting). Marginal utility is a bit esoteric, so let’s review.
In the Austrian Theory of subjective valuation Carl Menger observed that successive units of an economic good diminish in utility to their owner as they pile up in her storehouse. This principle of declining marginal utility of goods is very well known; but its limiting case (a good with the slowest such decline in utility) is easily overlooked.
Any thing where the utility of the millionth unit you acquire equals that of your thousandth unit (i.e. hasn’t noticeably declined) is potentially money. It proves useful to you, subjectively, as a measuring stick for any other thing whose value must be judged economically—whether or not you physically stack coins or tally notes to make your choices.
Does any thing with constant marginal utility exist? As much as mathematical ideals can ever be said to exist, gold and silver served this role for billions of humans over most of recorded history—undiminished in utility as successive units came, and alas unimproved as they grew scarce in one’s purse. Possession being nine tenths of the law, commodity money flourished wherever good law did not.
Mr. Saville writes:
A more practical way of thinking about the difference between currency and money is that almost anything can be a currency whereas money is a very commonly-used currency. In other words, currency is a medium of exchange whereas money is the general medium of exchange. The fact is that gold is sometimes used as a currency, but it is currently not money.
Sure, one defining characteristic is that money circulates, which he concedes gold will do. I see no reason to believe or to require that it also be the most-circulated thing. On the contrary, gold’s high inertia prefers a lower energy state, and amply rewards those who are able to use circulation credits wisely. Even in historical gold standard markets, gold substitutes circulated more efficiently than physical gold while conditions were stable. A foundation may be smaller than the skyscraper it supports. In this sense money, its currencies, and the most liquid of its derivatives form the root structures of Capital.
When we follow Antal Fekete’s description of indirect exchange (between income and wealth over an expanse of time), the most important characteristic of the money in question becomes that its utility be the most constant thing in each party’s subjective valuation.
Parties to a long-term agreement insure themselves against external shocks to its economic value by choosing a money of proven physical or legal stability—its stock being demonstrably insensitive to its flow over comparable time spans. They insure against changing internal needs and wants by denominating the bond in something they both can agree has constant marginal utility.
By using credit and legal coercions, it is possible to cut down the ask-bid spread of clearing instruments by an order of magnitude compared to physical monies. Simply compare spot gold’s spread (<0.1%) to a 1-month US T-bill (>0.01%) on most days. But on the rare day (10/16/2013 and 10/15/2014 were notable examples) that advantage can suddenly vanish. So, your liquidity may vary. Making the same comparison with bitcoin (BTC) spreads informs that debate as well; but its liquidity varies in different markets and currencies, only infrequently rivaling spot gold.
I’ll concede that dollars circulate more than gold, but I must warn that this is an apples and oranges comparison until the full socialized costs of dollar-denominating come home to roost some day. It is a gnawing dread of that disaster, as threatened by the central bankers themselves, that makes the proper ‘definition of money’ a high-priority topic.
Greg Jaxon is an American software architect who builds silicon compilers for microchip-designers. He has studied New Austrian economics for over a decade, in part by boldly exchanging emails with the best authors on any side in a good debate, Steve Saville being one of the many who’ve replied with new or improved thoughts.