Gold Is Money: Does It Have A Price?

By Mark Rogers

I recently looked at the question of why there has been no price rise in gold commensurate with Central Banks’ buying? This was raised at this year’s Money Week conference and caused some puzzlement. But perhaps there is another way of looking at the issue, one found in James Turk’s and John Rubino’s The Coming Collapse of the Dollar (see an earlier mention Gold and Permanent Value).

At the very beginning of their book, they insist that gold is money. “Generally, when gold is mentioned in the financial media, people refer to its ‘price’. This is incorrect, because gold is not a commodity like oil or eggs. […] And since we don’t talk about the ‘price’ of euros or yen, but instead discuss their exchange rate, in this book we treat gold in the same way, as in ‘gold’s exchange rate was $410 per ounce on December 31.’”

Gold is not a commodity?

It is often assumed that money has three basic functions: it serves as a store of value, a means of exchange and can itself be exchanged. If this latter function is a true function of money, then this means that money is a commodity along with its other two functions.

Now, it is not true, as Messrs Turk and Rubino claim, that “we don’t talk about the ‘price’ of euros or yen”, because we do. The Money Changers not far from me advertise their wares on electronic price boards, and against the currencies on offer are ranged two columns: “We Buy” and “We Sell”. It is very common to talk of the prices of currencies and to treat them as commodities: it is possible to make money by watching the exchange rates and converting into favorable currencies and back again, making a profit on the way. (It is probably safest to do this in a Swiss bank, as a friend of mine used to do.)

We also speak of cheap money and dear money: what do we mean? Cheap money is when monetary policy is loose, people are exhorted to borrow and encouraged to do so by low interest rates; dear money is when policy is tight and lenders aren’t lending or only cautiously, and interest rates are concomitantly high. Is interest not, therefore, the “price” we pay for the money we have borrowed? While Turk and Rubino assert that we talk of exchange rates rather than prices, it would seem odd, would it not, if we were to talk of the exchange rate of pounds for pounds that we pay for bank loans? And if “the price of money” in terms of interest makes better sense when dealing in and with a domestic currency, and “exchange rate” makes better sense when we are swapping unlike for unlike, even if it is still currency rather than oil or eggs, then where does that leave gold: as a commodity or as not a commodity?

Assets and Exchange

However, this is not to be pedantic; sometimes it pays to split a hair, and in the case of the puzzle referred to in the first paragraph, it may be highly instructive to do so.

For Turk and Rubino point out two other incontestable matters, which throw a lot of light on this vexed problem of what money actually is and therefore how it behaves and we must speak of it. In the first place, if money is not to be considered a commodity, it is indubitably a standard of value – “a generally agreed-upon measurement used to express the price of goods and services.” And this measurement is of the same order as other standard units of measurement: feet and inches, pints and gallons, ells and yards, perches, furlongs and chains. Some of these units have been abolished or fallen into disuse, but as standard units of measurement – and here is the rub – they do not change over time. An ell has ever been an ell, even if no longer used; nor do we change our feet daily.

Now it follows from this that, when it comes to a unit of measurement that is a medium of exchange, that is money, “only money can extinguish an exchange for some good and service. That is, an exchange is extinguished when assets are exchanged for assets. If you accept a money substitute (for instance dollars) when you sell a product, the exchange is not extinguished until you use those money substitutes (those dollars) to purchase some other good or service.”

We begin to get to the heart of the matter: money substitutes. These are what cause the confusion, because by definition they are not money itself only its token or emblem. We take for granted that money takes the form of currency, and are liable in our paper age to therefore confuse “money as currency” with money itself. But currency as such is merely the instrument of exchange unless it also happens to be specie: that is, if gold (and/or silver) is the standard unit of value and gold passes in the form of gold coins, then there is no distinction between the standard of value (gold) and how it is represented (gold coins): the currency IS the money.

Furthermore, if the most important function of money is as a standard of value then it is possible to say that money is not a commodity, though it is still a store of value and a medium of exchange. To illustrate the point about units of measurement (standard of value) Turk and Rubino point out the unchanging nature of gold: “A gram of gold has bought roughly the same amount of wheat since the Middle Ages.” (A similar point is made about ounces of gold, Pharaonic oxen and contemporary oxen in “Gold, A Different Point of View”.)

Gold Is Money

We can begin to see how the question that puzzled the Money Week conference might be viewed, and in particular what gave rise to it, the observation that since the “price” collapse, central banks had been buying gold hand over fist and yet the price hadn’t moved. If gold is not a commodity, but is rather money, is the unit of measurement for value, then to look at gold as having an exchange rate is very fruitful: what it now tells us is just how bad the dollar is. If the unit of measurement doesn’t change, and the number of dollars or pounds that are measured against it is greater or smaller than it was, say, yesterday, or an hour ago, we are being told something about the currency, in this case a money substitute, and not the gold.

It is easy to grasp what is going on when gold goes through the roof, but we need to change our metaphor: gold has stayed where it was, it just takes more dollars or pounds (which, remember, today are money substitutes) to exchange for an ounce. Now, adopting Turk’s and Rubino’s vocabulary, the exchange rate of the dollar against gold fell in April, though it was still high compared to four or eight years ago. In the following weeks, notwithstanding the boom in the purchase of gold coins (away from ETFs) and the purchases of central banks, that exchange rate remained stable: commodities don’t behave like that, especially not scarce ones. So we were instead being told something about the dollar. The unit of measurement wasn’t behaving obdurately. Therefore, was what happened in April, not a calamity for gold, but a respite for the dollar?

Prices versus Exchange Rates

In considering how we speak about value and prices and fiat money and borrowing and cheap and dear money, it might concentrate the mind if we did indeed speak of the “cost” of a loan, the “price” the bank charges us for lending, or perhaps selling, to us. My bank lends me (sells me) £5,000 pounds over three years, with total interest of £760, and everybody commends me on my bank – what a reasonable rate of interest! But if instead I was to boast that I had bought £5,000 for £5,760, well, that wouldn’t seem such a good deal. It is because it is repayable over a term (over which of course, thanks to inflation, the inevitable accompaniment of money substitutes, it will in fact be costing more) that one doesn’t quite realize what has been “exchanged” or “bought”.

This of course raises the intriguing possibility that in getting our nomenclature as much as our metaphors backwards in speaking of money, we are indulging in loose talk, and that this in turn may be a result and feature of fiat money systems.

In What is Money? I raised the issue of the relation between money, value and property:

“The idea that money is a realisation of value inherent in property means currency is the result of a property holding system which, to be realisable, must have clear title. Then, on the basis of that title, the value of the asset can be ascertained and then realised as capital which then has a representational form as currency. That is, money as a representation of value, as a means of realising that value and being a store of that value is the result of a legal system that can render property fungible – that is, that the asset can be more than one thing.

“This, of course, means that property is a form of savings, and that savings are therefore at the root of money. […] The failure to realise the necessity of savings and their wider functions in a workable economy is at the root of the financial crisis.”

And the hostility to savings translates into hostility to gold and the failure to understand it as a unit of measurement. Turk and Rubino are right: gold is not a commodity and in realising this we may start to understand the dense fogs of the currency wars.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

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GOLD IS MONEY: DOES IT HAVE A PRICE? was first posted on May 26, 2013 at 6:01 pm.
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