I've read elsewhere that one of gold's biggest virtues as a store of value on planet earth is that it isn't so rare as to be useless, but it's rare enough that it functions as currency or high value storage. A goldilocks material for the purpose of wealth transfer and storage.
Gold never really served as a currency, rather as collateral. If gold is a currency than any marketable asset is. A good definition of "currency" or "money" would be one that distinguishes its characteristics from commodities and the only useful one I know of is the "credit theory of money". Money is a promissory note, an accounting device and that is true for at least 5000 years of monetary history tracking it back all the way to ancient babylonia. Throughout that history money has taken many forms reaching from clay tablets, metal coins, tally sticks, paper money all the way to digital currency but all those share a common principle which is that they are all records of indebtness, promises to pay. Barter is not and has never been the default mode of commerce at all or a anthropologist Caroline Humphrey put it:
“no example of a barter economy, pure and simple, has ever been
described… all available ethnography suggests there has never been such a thing”.
Barter as a form of commerce pre-dating monetary economies is a myth, a post-hoc rationalization of how money might have came about from the perspective of somebody that already lives in a monetary economy and it's entirely an armchair theory that does not rest on any historical and anthropological evidence.
What is true is that between parties that do not have an established relationship barter occurred and it is true that people seek to hold assets and demand tradable collateral during periods of unrest. But barter has never been a primary way to do commerce between parties that had a long-standing relationship. A theory of credit-money is way more useful to explain real world behavor than a metalist approach is. Gold isn't used in daily transactions, it primarily sits in basements and is also is not an input to allmost all of production. What makes us rich in real terms is not gold but knowledge, machines and technology.
It is interesting that gold was able to retain its value after the industrial revolution. It could have gone the way of aluminum, once twice as valuable as gold, but now used in disposable drink containers. At the time of the alchemists, there was no way to know that some metals were actually distillable from common rocks and others genuinely rare and impossible to manufacture with even quite advanced technology.
EDIT: Aluminum itself may not be the best counterexample to gold as it was not discovered until the industrial revolution was well underway.
Gold is popular as jewellery. The price is determined largely by the cost of mining it and so has remained somewhat stable compared to the cost of things like houses for centuries, far more so than other money like things.
Why is everything "wild" and "cooked" and "dead" these days? It seems that every title or text I see has those words. I guess it's the Claudeification of everything.
I have mentioned this in the past, we are on an "energy" standard as opposed to a "gold" standard and to me, in reality, we have been since the industrial revolution. Just Gold and Currency is a means for people to access energy.
Until recently it was an "Oil Standard". But now we are in transition from Oil to Renewals. I think that transition is causing some if not most of the political issues we are having now.
With renewals, the source is always available and everyone just needs to purchase the means of accessing it once. With Oil, you need to constantly "pay" someone to get that energy, so many people/companies know their gravy train is ending and they are doing all the can to keep us using fossil fuels.
Also there is an on-going struggle on who produces the items needed to access sun and wind power. Right now China is easily winning that struggle.
“Mr Bond, all my life I have been in love. I have been in love with gold. I love its colour, its brilliance, its divine heaviness. I love the texture of gold, that soft sliminess that I have learnt to gauge so accurately by touch that I can estimate the fineness of a bar to within one carat. And I love the warm tang it exudes when I melt it down into a true golden syrup. But, above all, Mr Bond, I love the power that gold alone gives to its owner — the magic of controlling energy, exacting labour, fulfilling one’s every wish and whim and, when need be, purchasing bodies, minds, even souls. Yes, Mr Bond, I have worked all my life for gold and, in return, gold has worked for me and for those enterprises that I have espoused. I ask you,’ Goldfinger gazed earnestly at Bond, ‘is there any other substance on earth that so rewards its owner?’”
> Its well-documented contributions to deflationary and financial crises, including the Depression, go curiously undiscussed in this book.
Why is deflation viewed as such a bad thing? If you've got savings in a deflationary time, your money becomes more valuable, not less. Don't we want to encourage savings?
Actually no. Money is probably the most misunderstood thing in the world. While saving money seems logical from an individual perspective on the macro level of the economy it can be a huge problem because everybodies income depends on money constantly being spent. This is a classic case of a "fallacy of composition".
To illustrate that it's often helpful to think in extreme scenarios. Imagine every household starts to save 100% of its monetary income. What does that mean? It means that nothing is sold anymore and companies have 0 revenue which will soon lead to a complete collapse of the economy and everybody becoming unemployed and loosing all their income as well unless the companies will take on debt to keep paying the wages/profits (which they will not do when there is no demand for their products).
Money needs to be spent or else demand will drop and the economy can enter a vicious downward spiral (a deflationary collapse / debt deflation). The most impressive example of that was the great depression.
If some sector of the economy wants to net save (usually those are the households) to keep the same level of economic activity (and therefore jobs and income) somebody else needs to spend money they don't have, i.e. they need to go into debt.
The main issue is that in a society with division of labor there is no mechanism that keeps saving and investing in line so that employment and income is kept on a stable level. The mainstream neoclassical economic theory claims that the interest rate is always and automatically making sure that for every dollar saved someone else will invest it but this is based on the assumption that investors have infinite and complete knowledge about what everybody else will do in the future and that the economy will always and necessarily tend towards an equilibrium state of full employment. They are obsessed with "equilibrium" which is why in mainstream publications you will find that word everywhere. But in reality the economy is a non-equilibrium complex system with pro-cyclical feedback loops and all the interesting characteristics worth studying are non-equilibrium behaviors of the system.
Some recommended literature regarding that topic:
- The two essays "What is money?" and "The credit theory of money" by Alfred Mitchell-Innes
- "The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle" by Joseph Schumpeter
- "Debunking economics" by Steve Keen
- "Can it happen again?" by Hyman Minsky
- "Debt: The first 5000 years" by David Graeber
Money is credit. It's not an asset. Gold or Bitcoin are not money, they are an asset. The economy is credit-based, it's not a barter economy.
The main issue with mainstream economics is that it is some cargo-cult fairytale of a world that doesn't exist where everybody individually behaves rationally and that is supposed to lead to a desired outcome overall. But this is simply a fallacy of composition because individual behavior (especially if it involves spending/saving/investment decisions) is always liked to others through balance sheets, basically simple accounting.
A simple illustration of the fallacy of composition: One person can stand up in the cinema to improve their view. But it would be a mistake to think that therefore if everybody in the cinema stood up everybody improved their view. In fact already the first person standing up, while improving their view, did impair the view of the person behind them. This is the fallacy of composition and when it comes to saving money it's known as the "paradox of thrift" which states that an economy as a whole can not save any money.
Saving by definition means that you spend less than your income in any given period which necessarily requires one or more other entities to spend more than their income to make the math work. Therefore savings and debt are the same thing, the two sides of the same coin.
Instead of just looking at a single individual you can divide the economy into sectors and watch the flows between those sectors which always have to add up to 0 (this is called sectoral balances or stock-flow-consistent modeling). If we take a simple closed economy (so not considering the government and there is no foreign sector) and divide it into households and companies and we also assume that the household sector as a whole wants to net save 5% of their income in every period (which is empirically about correct) that means to keep income for the households steady the companies have to run a deficit of equal size in every period (i.e. spend more than they earn). What that means is that savings always and necessarily equal investment which is usually stated as I = S. But if households try to save more than the companies expected and which will lead to less sales than expected companies are forced into a deficit in p1 which they will likely react to by decreasing their investment in the following period p2 even when the interest rate dropped because any investment is pointless if there is no demand for the products to invest in producing. So the propensity of companies to invest is mainly influenced by their expectations of future sales and this is genuinely uncertain. If companies do not invest at least as much as households save the economy will inevitably shrink and both income and investment will drop together in the following period. Of course when we consider a government it could also run a deficit to compensate for the gap (the US would be a prime example for that) and/or a country could run a trade surplus (Germany, China).
The main issue is that other than neoclassical mainstream economists think we are not living in a world where there is only Robinson Crusoe on a lonely island that knows when he saves some fish it's because he wants to manufacture a fishing rod. But that is essentially what neoclassical models model, they pretend that everybody is basically acting like a hive mind that knows all future spending and saving decisions in the future and where money is merely an infrastructure to facilitate barter. This is entirely wrong. Money is non-neutral and it is not just another commodity. It is created when somebody incurs a debt (e.g. by taking a loan from a bank) and it is destroyed when the debt is repaid. Banks create money, they are not acting as intermediaries between savers and borrowers. This has long been argued by Post-Keynesians and is well known for at least 100 years but mainstream economists only admitted that publicly just a few years ago.
See "Money creation in the modern economy" by the Bank of England (2014) for an example of that recognition.
I'm amazed noone has quoted Warren Buffet on this subject:
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
The principle point being: "It has no utility".
Like crypto, it's primary function in the modern economy is financial crime...
22 comments
[ 2.4 ms ] story [ 50.4 ms ] thread“no example of a barter economy, pure and simple, has ever been described… all available ethnography suggests there has never been such a thing”.
Barter as a form of commerce pre-dating monetary economies is a myth, a post-hoc rationalization of how money might have came about from the perspective of somebody that already lives in a monetary economy and it's entirely an armchair theory that does not rest on any historical and anthropological evidence.
What is true is that between parties that do not have an established relationship barter occurred and it is true that people seek to hold assets and demand tradable collateral during periods of unrest. But barter has never been a primary way to do commerce between parties that had a long-standing relationship. A theory of credit-money is way more useful to explain real world behavor than a metalist approach is. Gold isn't used in daily transactions, it primarily sits in basements and is also is not an input to allmost all of production. What makes us rich in real terms is not gold but knowledge, machines and technology.
Article is a brief review of the book "The Secret History of Gold" by Dominic Frisby.
Time.
EDIT: Aluminum itself may not be the best counterexample to gold as it was not discovered until the industrial revolution was well underway.
Until recently it was an "Oil Standard". But now we are in transition from Oil to Renewals. I think that transition is causing some if not most of the political issues we are having now.
With renewals, the source is always available and everyone just needs to purchase the means of accessing it once. With Oil, you need to constantly "pay" someone to get that energy, so many people/companies know their gravy train is ending and they are doing all the can to keep us using fossil fuels.
Also there is an on-going struggle on who produces the items needed to access sun and wind power. Right now China is easily winning that struggle.
Why is deflation viewed as such a bad thing? If you've got savings in a deflationary time, your money becomes more valuable, not less. Don't we want to encourage savings?
To illustrate that it's often helpful to think in extreme scenarios. Imagine every household starts to save 100% of its monetary income. What does that mean? It means that nothing is sold anymore and companies have 0 revenue which will soon lead to a complete collapse of the economy and everybody becoming unemployed and loosing all their income as well unless the companies will take on debt to keep paying the wages/profits (which they will not do when there is no demand for their products).
Money needs to be spent or else demand will drop and the economy can enter a vicious downward spiral (a deflationary collapse / debt deflation). The most impressive example of that was the great depression.
If some sector of the economy wants to net save (usually those are the households) to keep the same level of economic activity (and therefore jobs and income) somebody else needs to spend money they don't have, i.e. they need to go into debt.
The main issue is that in a society with division of labor there is no mechanism that keeps saving and investing in line so that employment and income is kept on a stable level. The mainstream neoclassical economic theory claims that the interest rate is always and automatically making sure that for every dollar saved someone else will invest it but this is based on the assumption that investors have infinite and complete knowledge about what everybody else will do in the future and that the economy will always and necessarily tend towards an equilibrium state of full employment. They are obsessed with "equilibrium" which is why in mainstream publications you will find that word everywhere. But in reality the economy is a non-equilibrium complex system with pro-cyclical feedback loops and all the interesting characteristics worth studying are non-equilibrium behaviors of the system.
Some recommended literature regarding that topic:
- The two essays "What is money?" and "The credit theory of money" by Alfred Mitchell-Innes - "The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle" by Joseph Schumpeter - "Debunking economics" by Steve Keen - "Can it happen again?" by Hyman Minsky - "Debt: The first 5000 years" by David Graeber
Money is credit. It's not an asset. Gold or Bitcoin are not money, they are an asset. The economy is credit-based, it's not a barter economy.
The main issue with mainstream economics is that it is some cargo-cult fairytale of a world that doesn't exist where everybody individually behaves rationally and that is supposed to lead to a desired outcome overall. But this is simply a fallacy of composition because individual behavior (especially if it involves spending/saving/investment decisions) is always liked to others through balance sheets, basically simple accounting.
A simple illustration of the fallacy of composition: One person can stand up in the cinema to improve their view. But it would be a mistake to think that therefore if everybody in the cinema stood up everybody improved their view. In fact already the first person standing up, while improving their view, did impair the view of the person behind them. This is the fallacy of composition and when it comes to saving money it's known as the "paradox of thrift" which states that an economy as a whole can not save any money.
Saving by definition means that you spend less than your income in any given period which necessarily requires one or more other entities to spend more than their income to make the math work. Therefore savings and debt are the same thing, the two sides of the same coin.
Instead of just looking at a single individual you can divide the economy into sectors and watch the flows between those sectors which always have to add up to 0 (this is called sectoral balances or stock-flow-consistent modeling). If we take a simple closed economy (so not considering the government and there is no foreign sector) and divide it into households and companies and we also assume that the household sector as a whole wants to net save 5% of their income in every period (which is empirically about correct) that means to keep income for the households steady the companies have to run a deficit of equal size in every period (i.e. spend more than they earn). What that means is that savings always and necessarily equal investment which is usually stated as I = S. But if households try to save more than the companies expected and which will lead to less sales than expected companies are forced into a deficit in p1 which they will likely react to by decreasing their investment in the following period p2 even when the interest rate dropped because any investment is pointless if there is no demand for the products to invest in producing. So the propensity of companies to invest is mainly influenced by their expectations of future sales and this is genuinely uncertain. If companies do not invest at least as much as households save the economy will inevitably shrink and both income and investment will drop together in the following period. Of course when we consider a government it could also run a deficit to compensate for the gap (the US would be a prime example for that) and/or a country could run a trade surplus (Germany, China).
The main issue is that other than neoclassical mainstream economists think we are not living in a world where there is only Robinson Crusoe on a lonely island that knows when he saves some fish it's because he wants to manufacture a fishing rod. But that is essentially what neoclassical models model, they pretend that everybody is basically acting like a hive mind that knows all future spending and saving decisions in the future and where money is merely an infrastructure to facilitate barter. This is entirely wrong. Money is non-neutral and it is not just another commodity. It is created when somebody incurs a debt (e.g. by taking a loan from a bank) and it is destroyed when the debt is repaid. Banks create money, they are not acting as intermediaries between savers and borrowers. This has long been argued by Post-Keynesians and is well known for at least 100 years but mainstream economists only admitted that publicly just a few years ago.
See "Money creation in the modern economy" by the Bank of England (2014) for an example of that recognition.
Closing with to quotes:...
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
The principle point being: "It has no utility".
Like crypto, it's primary function in the modern economy is financial crime...