Money is usually credited with three essential functions :
- Means of exchange
- Value storage
- Value measure
Gold fulfils these three central functions without a problem. Gold is universally accepted money. People from all sorts of races, classes, cultures, and religions regard gold as money. Sometimes the terms money and currency are confused with each other. People have needed a stable medium of exchange for as long as people have existed. Cigarettes, seashells, salt, or dried fish have all fulfilled this role temporarily, but in the long run gold and silver asserted themselves. Murray Rothbard realised that the market had chosen gold and silver as money over the centuries. Currencies are by definition mediums of exchange, but do not store value nor do they come with an intrinsic value.
Further essential functions of money:
- It has to be easily divided into standardised units
- It has to be negotiable
- It has to be durable and practically indestructible
- It has to be easily recognisable and fulfil standards that can be easily validated
- It has to have a high ratio of value per weight and volume unit
- It must defy random multiplication
- Aggregate supplies have to be high in relation to annual increase
- It has to be mobile, and storage costs have to be low
- Transaction costs have to be low
The advantages of a gold standard
In his highly recommended essay “Gold and Economic Freedom” from 1966, Alan Greenspan pointed out that without a gold standard there was no way of protecting savings from the devaluation caused by inflation, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Currencies covered by gold should also contribute decisively to economic, political, and social stability. Many eras (the Roman Empire, the Republic of Venice) experienced centuries of price stability. It was only when they reduced the content of precious metal in their coins that the decline began.
England introduced a gold standard in 1815, and 50 nations followed the example over the next decades. The period of 1880 to 1914 is sometimes literally called the “Golden Era” . The time of the classic gold standard was characterised by continuous economic growth, free flows of capital across country borders, peace in the largest part of the world, political and economic democracy, and cultural and social progress. The standard of living of the working class increased massively. Slavery and serfdom were abolished. Gold and freedom were inseparably linked. In 1914 the world ended up leaving the gold standard as the European governments could not afford to fight a world war under its limitations.
A gold standard would also help regulate the public budget – it basically forces the government into producing balanced budgets. This is probably also why politicians hate it so much. And a gold standard is also independent of the varying economic opinions of the governments. Gold means freedom – a notion also highlighted by the fact that Lenin, Mussolini, and Hitler banned private gold ownership at the outset of their dictatorships.
By. Ronald Stoeferle of Erste Group
Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%.