Boy, this topic is getting to be right up there with the Presidential election, ain’t it?
Just to further add to everyone’s confusion:
From GQ:
The gold in Fort Knox–what is it for?
Followed by:
Has gold ever been worthless?
And over in Great Debates:
What would happen if massive amounts of gold became available?
I do think gold started out, thousands of years ago, as something with a so-called “intrinsic value”. Just as cattle or goats were valued as a food source, or marble was valued as a building material, or iron was valued as a material from which to make hard, durable tools, gold was valued as an ornamental item. It was just another trade good, specifically a luxury good–a shiny rock that people liked because it they thought it looked pretty, just like other shiny rocks (rubies or jade) or artificial shiny rocks (glass beads) or peacock feathers.
For a variety of reasons gold was ideally suited to become a central trade good in societies of a certain level of technological development:
[ul]
[li]It’s just rare enough; when the human race was getting started out on this whole “civilization” thing, lumps of gold could still be found lying about in the beds of certain rivers, but it wasn’t exactly carpeting the landscape. It was available enough; if your tribe happened to live along the banks of stream in which the pretty shiny heavy yellow rocks were found from time to time, some other tribe, assuming they had a sufficient surplus of foodstuffs and so on, would probably trade for it, just like those rich tribes would trade for other decorative but largely impractical stuff like peacock feathers or the teeth of elephants. It wasn’t like everyone could find the pretty yellow shiny rocks; but on the other hand (unlike aluminum), they were out there if you were willing to spend some time and effort to go find them, even if all you had was a Neolithic or Bronze Age level of technology.[/li][li]Once it enters your Neolithic or Bronze Age economy, it’s not going away–it doesn’t rust or rot, and the uses it’s put to tend not to consume it–even if they don’t rot, people eat meat or grain; and blocks of marble get used up building palaces or temples or bathhouses, making them no longer readily available for further use (although ancient civilizations were not above plundering the mighty works of those who had gone before them for building supplies). Jewelry just sits there, and can be pretty easily passed along or reshaped.[/li][li]It’s very hard to fake, on account of its unique appearance but mostly on account of its density. Tungsten has close to the same density, but nobody back then had the slightest clue of what tungsten was or how to get it, even if they were sitting on a mountain of tungsten ore. Its density also means it’s nicely compact. Cattle are a bit of a pain to haul around with you.[/li][li]Unlike rubies or peacock feathers, it’s divisible and fungible. One ruby may be finer than another (with a more vivid color or fewer imperfections). Rubies are “quantized”–if you chop a one carat ruby in half, even if you got two half-carat rubies (which you wouldn’t), two half-carat rubies aren’t necessarily worth as much as a single one carat ruby; and you can’t moosh two half-carat rubies together to make a single one carat ruby. Gold, on the other hand, can be manipulated with relatively low tech means to form ingots of desired size and purity. If you have 100 ounces of gold, you can make 100 one-ounce ingots, or 200 half-ounce ingots, as needed; and if you have too many half-ounce ingots, you can melt some of them down and make one-ounce or quarter-ounce ingots. There may be some losses in this, but not in the same way you would get if you tried to manipulate rubies this way.[/li][/ul]
So, for all those reasons, gold was suited–in a way bacon or rubies or peacock feathers weren’t–to being made up in standard-size lots of declared purity and quantity, which seems to have started about 2,600 years ago in Asia Minor (what is today Turkey) in the ancient kingdom of Lydia. When that happened, at some point people stopped valuing gold for any “intrinsic value”–which, compared with bacon or flint arrowheads had never been all that much anyway, as gold was basically a “conspicuous consumption” good; “Our tribe is so rich (has so many cattle) that we can trade away perfectly good cows in exchange for shiny rocks, peacock feathers, and the teeth of elephants with which to adorn ourselves.” For at least 2,600 years, gold has been valued not as a trade good, but because people in increasingly large areas of the world believe that Gold Is Money.
Arguing that a gold standard is superior to what we have now because “Gold is really worth something” (unlike pieces of paper with fancy engraving) does miss the point. The demand for gold because it looks pretty (or because it can be used in electronics or whatever) is relatively minor; people want gold because of the idea that Gold Is Money. So long as everyone thinks Gold Is Money, gold is money; if they stopped thinking that, it would be just another trade good, with a practical use more like that of peacock feathers than that of bacon or fishhooks.
Nowadays, U.S. dollars (or euros or Japanese yen or Swiss francs) are money. They are valued for the same reason people have valued gold for two or three thousand years–not because they look pretty, but because they are money. (And really, the pieces of specal paper with the fancy engraving are just as likely to have “real worth” or “intrinsic value” as lumps of shiny yellow metal. Paper money bills tend to be little works of art, and it’s quite possible that an “intrinsicly worthless” piece of paper–one issued by a government that doesn’t exist anymore–might still be worth some amount of bacon or fishhooks to a collector on the basis of rarity, historical interest, and attractiveness. Gold can be made more valuable by shaping it into statues; but a lump of bronze that has been sculpted by a great master may be worth more than a lump of gold that hasn’t, even though as metals gold costs more per ounce than bronze does.)
Gold does have the advantage of not being tied to any particular government. If the U.S. got nuked off the face of the planet tomorrow, then I guess all those greenbacks and symbolic representations of greenbacks (dollar-denominated bank accounts) would no longer be worth much (except, as mentioned, that at least some U.S. money would probably still be worth something in numismatic terms). On the other hand, the supply of U.S. dollars can be controlled by the smart people we’ve hired to run the Federal Reserve Banks, who are ultimately accountable to us; whereas the supply of gold is pretty much at the mercy of gold miners the world over; if someone discovers a mountain of gold in Alberta or mounts an expedition to mine Eros–boom! Instant hyperinflation! (Inflation results when the supply of money increases even though there has been no increase in the amount of actual goods and services people are seeking to buy.)
Gold As Money is a technology. It was a very good technology for its day, but that doesn’t necessarily mean we should go back to it, any more than we should go back to the U.S.S. Constitution for our naval defense needs, even though it may look prettier than an Aegis missile cruiser.