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Why is Gold a Better Form of Money Then Paper?

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You’ve probably heard people say gold is real money, but what does that actually mean? Is there some fundamental difference between gold and the green pieces of paper stuffed in your wallet that we call money? As investment guru Doug Casey put it, “The dollar is, technically, a currency. A currency is a government substitute for money. But gold is money.” So, what is money? Simply put, it is a medium of exchange and a store of value.

Almost anything can be used as money, and, in fact, many things have served the purpose. Cattle, salt, cigarettes, and even seashells have been used as money throughout history. But as Casey points out, some things work better  others. You can’t just exchange things nobody wants; there are other practical considerations. Over the last millennium, precious metals – primarily gold and silver – have evolved into the best form of money in existence.

“These are the reasons why gold is the best money. It’s not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.”

Aristotle listed five properties that make something suitable for use as money. Casey outlines them in his article:

Durability

You don’t want your money to fall apart, or dissolve when it gets wet. It has to last over time.

Divisibility

You need to be able to split it into smaller increments without it losing value. That’s why a painting doesn’t make good money. Half a Van Gogh isn’t worth a whole lot!

Convenience

At one time cattle were used as money. But it’s not very convenient to haul cows with you everywhere. Good money packs high value into a small package and is easily portable.

Consistency

Money should be easily recognizable, with each piece identical to the next. This property is sometimes referred to as fungibility.

Intrinsically Valuable

Good money should be something a lot of people want or can use. In other words, it has a useful purpose and value based on something other than its role as money.

When you look over this list of Aristotle’s criteria, it becomes clear why gold and silver have taken on the role of money for hundreds of year. Both precious metals are durable, divisible, convenient, consistent, and posses intrinsic value.

It also becomes clear why paper really doesn’t make good money. It meets the first four criteria, but it fails utterly at number five. Paper has no intrinsic value. Gold can be made into beautiful jewelry, and it is increasingly being used in environmental, scientific and healthcare applications. Dollar bills aren’t good for anything  – unless you just happen to like pictures of dead presidents.

We can also add a sixth property to Aristotle’s list: scarcity. Money should be rare and hard to fine. You can’t use gravel for money because you can pick it up everywhere. Everybody could get as much as they want. Gravel money makes for a fun fantasy, but it certainly wouldn’t work in practice, despite the Federal Reserve’s attempts to make the dollar just as plentiful through money printing.

Herein lies one of the biggest problems with paper money. Yes, it’s scarce, but that scarcity is artificially created. The government can print more paper money on a whim, as much as it wants, whenever it wants. From the government’s perspective, paper money is just like gravel. But gold is real money.
 

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