by Bill Buckler

Ever heard of "fools' gold"? It actually does look a lot like Gold - until you examine it closely and see that what you thought was Gold is actually a bunch of small, square crystals - often found with quartz. If you don't examine it closely, you might think it really is Gold, until you take it to an assayer.

But mistaking "fools' Gold" (iron pyrites) for real Gold is comparatively harmless. Most people only do it once. Besides, iron pyrites are a useful mineral in their own right.

There is a much more serious - and foolish - mistake; one that seems impossible to make. That is mistaking Gold for paper! Or, to put it another way, mistaking paper for money! An assayer, or anyone who has ever seen real Gold in its natural state, would never mistake it for any other metal. Unfortunately, the only people who have seen Gold as money in its "natural state" are very old indeed. In the U.S., no one has carried Gold in his or her pocket as spending money since 1933. That memory grows dim.

What is urgently needed is a new kind of "Assayer", not one that can tell the difference between fools' gold and real Gold, but one that can tell the difference between paper (or plastic) and money. The need becomes obvious when we consider the "modern" attitude to Gold - and money.

Gold As Money - What A Ridiculous Notion!
  • There's not enough of it!
  • It doesn't allow for the "flexibility" so necessary for modern monetary policy to be utilised properly.
  • There's not enough of it!
  • It is too rigid to meet the often rapidly changing needs of business and trade.
  • There's not enough of it!
  • It would confer an inordinate and unacceptable amount of economic "power" upon those nations which are lucky enough to have large deposits within their borders.
  • There's not enough of it!
  • It would stifle "economic growth" by drastically interfering with and even curtailing the present finely-tuned lending practices of Central and commercial banks.
  • Besides - there's not enough of it!
Gold - The Barbarous Relic

See! There is no place for Gold in the modern financial system. The most frightening thing about this argument is that it is true! There really is no place for Gold - in the modern financial system. That leads us, however, to a further question:

What does that say about the modern financial system?

To answer that, we are going to have to examine one of the greatest intellectual breakthroughs in human history, the discovery of the concept of money. History has shown conclusively that the physical substance best suited to be used as money is Gold (and silver). Yes, Gold IS money. But why has it proven itself to be the best substance to translate the idea of money into physical reality?

What Is Money?

Most people don't spend much time wondering what money is, their major concern is how much they have, and how to get more. Usually, the question of what money IS arises only when money ceases to function properly. In economics (properly understood), the answer to the question - what is money? - consists of three words:

Money is a "medium of exchange"

That's all. Yet the conception of a "medium of exchange" ranks below only language (with its corollaries - speech and the written word) as the greatest intellectual discovery in history. Without language, the exchange of anything but the most rudimentary ideas is impossible. Without money, the production and exchange of anything but the most rudimentary goods and services is impossible. It is not difficult, or time consuming, or inefficient, it is IMPOSSIBLE!


Animals don't exchange (or trade) amongst one another. They are self-sufficient, or they take from each other, or they exercise the prerogative of superior strength and/or cunning. There are some human beings who get along in a very similar fashion, but the overwhelming majority recognise the benefits of voluntary exchange. Strictly speaking, the use of the word "voluntary" in this context is redundant. The phrase "your money or your life" is not the precursor to an exchange, whether the person uttering it brandishes a gun or a government identity card.

The first rule of any voluntary exchange is simplicity itself. If two people are willing to exchange, each must view the results of the exchange as being beneficial. If either of them is not of that view, the exchange will not take place.

Direct And Indirect Exchange

Direct exchange, or barter, is exactly that - my good or service for your good or service. The problem is that I might want what you have to offer, but you might not want what I offer in exchange. With no "medium" of exchange, there is no deal. Indirect exchange takes place when one party has a "medium" that is always acceptable, not for what it is, but for what can be done with it. If you offer me money, I will accept it, because I know that I can exchange it for what I want, whenever I want it.

Indirect exchange involves the use of MONEY - the "medium" of exchange. Money is the universal key, it fits all locks. And the world it has unlocked is the world we live in today. Money has made the division of labour possible. It has made specialisation possible. It has made the accumulation of wealth over periods which exceed a human lifetime possible. Perhaps most important of all, it has hugely advanced the potential for amicable interaction between people. To survive as such, and to prosper, a rational animal must exchange. He or she has language, to exchange ideas, and money, to exchange the fruits of ideas. From that foundation, everything else we see around us has been built.

What Should Be Used As Money?

What is money? It is a medium of exchange. What does it do? It ensures the success of exchange by being the one item on offer that is ALWAYS acceptable. Why is it necessary? Because human beings must exchange to live together in peace, and to prosper. How important was the discovery of the idea of money? Look around you.

That covers the concept or idea of money. But an idea, as such, does not exist as a physical entity. Money must be a physical entity. Neither the "electronic" money of today nor the notes and coin which circulate as cash has any official or legal connection with Gold and Silver. But they once did, and most people think that they still do. As long as that situation persists, the modern monetary system will function.

Now, how does one go about choosing what is to be used as money? Simple, one looks for the most tradeable good, the good which is in highest demand, the good that has begun to be accepted, not as an end in itself, but as a means to an end. Money is the good that people do not want to consume, but want to use to make further exchanges easier.

Human beings have lived together for more than two million years. Money in its modern form - coin of fixed weight and denomination - came into use less than three thousand years ago. It took a long time to discover the physical good which best serves the purpose of a medium of exchange.

The Evolution Of Money

In separate places, under different cultures, all over the world, the concept of a "medium of exchange" grew. People noticed that some goods were easier to trade than others. And people also noticed that these "more tradeable goods" had similar properties:

  • They were durable
  • They were easily divisible into larger or smaller amounts.
  • They were comparatively scarce, procuring them required effort.
  • They were "homogeneous". Every item of the commodity was exactly like every other item.
  • They were convenient. It was easy to carry enough around to made trades for other commodities.

Over time, a shorter and shorter list of commodities passed all these tests. These select commodities began to exhibit a sixth property, all important in the evolution of money.

This short list of commodities (most of them metals) had one thing in common with all other commodities. They were useful and commanded an exchange value in their own right. But because they were easier to trade than any other goods, they came to be perceived as having a value over and above their basic utility. They came to have a value as a "most (easily) tradeable good". They came to have a value as a MEDIUM OF EXCHANGE.

Once this value became widely recognized, the commodity in question was no longer "consumed" for any but the most vital purposes. Instead, it was used in exchange. It had become a MONEY.

The Myth Of "Intrinsic Value"

intrinsic (adj.) Of or relating to the essential nature of a thing, inherent.

In economics, there is no such thing as "intrinsic" value. This is true for the simple reason that value does not reside in the atoms, molecules, chemical composition, or structure of an economic good. It resides, always, in the MIND of the individual perceiving the good. When looking to acquire an economic good, an individual must decide how much time, or effort, or other economic goods he or she is willing to offer in exchange. That decision determines the value of that economic good, at that particular time, to that unique individual.

This is a crucial distinction. Value is not in what is beheld, it is in the eye (and mind) of the beholder. The reason why some goods evolve into money while most others do not has nothing to do with the "intrinsic value" of the goods so favoured. It is because a large number of individuals have realised that goods used as money have a unique usefulness. Unlike all other goods, they can be exchanged easily, and at any time, for anything.

The Structure Of An Economy

Whatever its complexity, an economy stands or falls upon very basic foundation stones. Individuals must be free to think and act on their decisions. They must be able to gain the rewards of being right and must bear the cost of being wrong. They must be able to concentrate on what they do best, and what they most enjoy doing, instead of spending their time providing for their immediate wants. They must be able to make provision for the future by preserving a portion of what they have produced. In short, they must think, they must produce, they must save. And to do that to the greatest and most efficient extent possible, they must trade with each other.

A man or woman alone in nature can certainly think, act, and gain the rewards of being right or bear the cost of being wrong. He or she can also, by means of great effort, put aside savings, but only for a limited period of time. Indeed, any man or woman alone in nature has no choice but to do these things, if he or she is to survive at all.

In an advanced economy, physical survival is not often an issue. But all the imperatives which confronted Robinson Crusoe still apply. The extent to which individuals can think, work, produce and trade freely determines the potential of the economy. The confidence with which individuals can save and invest long term determines the prosperity of the economy. To save, invest, and plan for the long term is a luxury not granted to a man and woman alone in nature. It is the exclusive preserve of those living in an advanced economy.

Finally, an advanced economy must, by its nature, be one in which there is indirect exchange, using money. In the place of the seed corn and the week's supply of food, there is money. In the place of labouring all day to procure one's immediate needs for food and shelter, there is money. In the place of never being able to rest on the fruits of past effort, there is money. In the place of being at the mercy of nature or dependent on the nature of mercy, there is money.

That is what money does. The evolution of any civilized society is dependent on the discovery of the idea of money, and on the discovery of something that can be used as money. The future of any civilized society is dependent on the quality of what IS used as money.

The Case For Gold

It will come as no surprise to you for us to state that Gold is money. Why? because it fulfills, to an extent unmatched by any other physical commodity (Silver comes closest), all the pre-requisites of a money. It was rare and prized long before the concept of "money" was ever discovered. It has many other unique uses, and always has had. But for nearly three thousand years (since the first Gold coins were struck in Lydia in 700 BC) Gold's primary utility has been recognized as a MEDIUM OF EXCHANGE.

The history of Gold as money in modern coin form spans 2630 years, from 700 BC to about 1930 AD. The history of nothing but paper and base metal and silver coin in circulation spans about 40 years from 1930 to 1970. And the history of paper and base metal coin as "money", with no connection to Gold (or silver) anywhere on earth also spans about 30 years from 1970 to date.

To be more precise, silver coinage in circulation as money vanished from the world between 1963 and 1965. And on August 15, 1971, the world entered the first era in its history in which no circulating paper anywhere was redeemable in Gold by anyone. On that date, U.S. President Richard Nixon "closed the Gold window". This broke the last official tie between Gold and a circulating currency - which also happened to be the world's "Reserve Currency" - the currency held by all other nations as the reserve behind their own currencies.

The result has been the world financial system of our "modern" era - the "floating currency" system.

Gold And Freedom

The founder of Communist China, Mao Tse Tung, is quoted as having said that: "Power grows out of the barrel of a gun". Actually, it doesn't. Political power grows out of the ability to interfere in the voluntary interaction between individuals. In a society in any stage of advanced development, the way to do that has always been to gain control of what the society or nation uses as its money.

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
John Maynard Keynes - The Economic Consequences of the Peace (1919)

Keynes was obviously a much more subtle thinker than Mao. A gun is not a simple product. The ability to produce guns only comes in the later stages of the development of an advanced economy. But money is a pre-requisite of that development starting at all. As has already been stated on these pages, without a functioning money, progress towards an advanced economy is impossible.

Now, it is impossible to "debauch" Gold itself. But debauching money is not difficult at all. Both the Greeks and the Romans "clipped" their Gold and silver coinage - they began to mix more and more base metals with the Gold and Silver in their coins. Marco Polo brought to the West the first stories of paper money, introduced by Kublai Khan and made from the bark of the mulberry tree. Bankers, who were originally Goldsmiths who stored Gold for other people and charged a fee for their services, began to issue paper "receipts" for the Gold. As these receipts became more widely acceptable in exchange, the idea of "paper money" was introduced. Of course, the bankers couldn't resist. They began to issue more "receipts" than they had Gold with which to redeem them. And one of the first things that these bankers did with this "excess paper" was to lend it to Monarchs, and to early governments.

The Development Of Central Banks

The world's first Central Bank was the Bank of England, established as a joint stock company (similar to the East India Company) in 1694. The bank was formed for the express purpose of making a loan in the amount of 1.2 million Pounds to William III, who had been running up huge bills in his Continental wars. The next major Central Bank was the Bank of France, established by Napoleon in 1800. With the exception of the short-lived "Bank of the United States", the U.S. did not have a Central Bank until the formation of the Federal Reserve in 1913.

The Central Banks actually had two purposes. In Europe, they were established to lend to Monarchs (which is one of the main reasons why they were anathema to the Founding Fathers in the U.S.). The other reason, which only evolved over time, was to bail out private bankers when they were caught out in issuing more paper than they had backing in Gold. It was the Bank of England which bailed out the Aristocracy in England after the 1720 paper adventure of the South Sea Bubble.

But the turning point for banking in general, and Central Banks in particular, came in England in 1844. This was the passage of "Peel's Bank Act", the culmination of a long debate between what was called "The Banking School" and "The Currency School". The "Banking School" held, as did the advocates of the Federal Reserve some 70 years later, that there was a need for an "elastic currency", a paper money that could be expanded to "meet the needs of business". The "Currency School", echoing Adam Smith and the U.S. Founding Fathers, abhorred this idea. They held that Banks should NOT be able to issue paper in excess of the Gold held by the banks of issue. Under Peel's Bank Act", the Currency School actually won the debate.

The problem was that there was a fatal flaw in the theory of the Currency school, which became embedded in Peel's Bank Act. The Bank Act failed to take into consideration the simple fact that not all paper circulating as money did so in the form of bank notes. There was also paper issued in the form of cheques, and this form of paper escaped the strictures of the Act. Banks in general, and Central Banks in particular, have been dining out on this mistake ever since.

The Transition - The Nineteenth Century

Up until the Napoleonic era in Europe, the major purpose of debauching the currency was to finance the adventures of the Monarch. Maintaining courts was costly, but supportable. What became unsupportable was the cost of wars. Most of the historical financial collapses prior to Napoleon can be traced home to the expenses of war. The other point to be made here is that "paper money" did not circulate amongst the mass of the people at all, and that few "ordinary people" had ever possessed a gold coin in their lives.

The Nineteenth century was a century of peace and genuine economic growth. This was the century which transformed the life of the "ordinary people". In Britain, the most advanced economy of the 19th century, the life of an ordinary person in 1800 was in many respects markedly inferior to what life had been like under the Romans 1600 years earlier. By 1900, luxuries that neither the Romans nor even the Royal Family of 1800 could have imagined were taken for granted.

All of this was the result of the world's only era of truly free international finance and trade, in which Gold progressively became the world's money. Both of these developments grew naturally out of a century of political freedom. As a corollary, there were no major wars between 1815 and 1914. The world was transformed to a degree which it never had been before, and never will be again. Why "never again"? Because the 19th century was also the end of the "frontier era". By 1900, there were no more blank spaces on the globe. Another such "frontier era" is certainly possible in future, but it will have to take place on another planet. There are no frontiers left on earth.

This closing of physical horizons led to a shrinking of mental horizons, and the result was one of the great tragedies of human history. This statement began to be heard: "The problem of production has been solved, it is now time to work on the problem of distribution". As all ideas do, this one became a physical reality, in Germany in the 1870s, when Otto von Bismark invented the modern welfare state.

The Century Of The Welfare State

"This is the shabby secret of the welfare statists' tirades against Gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism towards the Gold Standard."
Alan Greenspan - Gold and Economic Freedom (1966)

No nation ever goes to war relying only on its taxing power to raise the necessary means to pay for it. The cost of the war is always disguised by debauching the currency. But in times past, there have been many instances when the debt incurred to fight the war has actually been either substantially or completely paid off afterwards. The U.S. did this after their Civil War (1861-65) - the "Greenbacks" issued to fight the ware were redeemed in full - and in Gold - in 1879.

The provision of a welfare state, with cradle to grave "security" regardless of the productiveness of those made "secure", is not financed through taxation. What is, partially, financed through taxation is the gigantic bureaucracy necessary to administer such a state. The actual provision of "security" is made, in its entirety, through borrowing, facilitated through the operations of Central Banks and national Treasuries or Ministries of Finance. The original (and only valid) definition of inflation is an increase in the stock of money. Only comparatively recently has the definition come to be a rise in the general price level. The reason for the change in definition is obvious, it conceals the mechanism through which the welfare state is maintained.

It is the rise of the welfare state in the century just ended which has made politically "necessary" the complete separation of Gold and what circulates as "money" today. This is the process that has led to the total destruction of money. Money is NOT wealth, it is a medium by which wealth can be exchanged between consenting adults. If an adult does not consent, then money cannot produce an exchange. Nothing can produce an exchange if the potential parties to it do not consent. But an expropriation can be produced, by a government with sufficient power. To obtain that power, money must be controlled by government. Today, it is.

And because the money you use is totally controlled by your government, dear reader, so are you. That is the case for Gold as money.

Money - The Real Thing

A Note on Weights: Gold and silver are measured in troy ounces.
1 troy oz. = 480 grains or 31.1 grams.

The Ancient World

330 BC: A Gold stater weighing 8.2 grams (0.2637 troy oz.) from the time of Alexander The Great of Macedon (died 323 BC). The portrait is not of Alexander, but of Athena, Greek Goddess of Wisdom. The coin was struck at the mint a Sardeis - where they did beautiful work. This coin is more than 2,300 years old!

70 AD: A Roman Aureus weighing 7.2 grams (0.2315 troy oz.) from the time of the Emperor Vespasian. The head on the coin is of Domitian, one of Vespasian's supreme Legion commanders. Minted at the start of the great age of the Roman Empire - 75 to 180 AD.

440 AD: A Roman Solidus weighing 4.7 grams (0.1511 troy oz.) from the waning days of the Western Empire. Note the crudity of the stamping compared to earlier coins, especially the Greek coin. This was the Roman Empire's last gasp before the final collapse.

690 AD: A "Bezant", minted in the East Roman (or Byzantine) Empire. The Bezant remained pure and unadulterated for almost 800 years, making it the longest lasting example of sound money in history. This particular coin is reputed to be the first to portray Christ.

The Modern World

1794 AD: A Golden Guinea - 21 shillings. This one is from the reign of George III. In 1717, Sir Isaac Newton, as Master of the Mint, fixed the weight of the Guinea at 129.4 grains (0.2461 troy oz.) of Gold. With the exception of two short wartime periods, that weight was the unvarying benchmark for British circulating coinage and currency until 1931.

1899 AD: The St. George & The Dragon Sovereign - 20 shillings. The British Sovereign was first struck in 1489, during the Reign of Henry VIII. These coins, which contain 0.2354 troy oz. of Gold, circulated under various names for nearly 450 years. They are still in demand today as a quasi "bullion coin" - they're worth a lot more than "20 shillings"!

1907 AD: The magnificent "St Gaudens" U.S. $20 Gold piece - the "Double Eagle" - widely regarded as the most beautiful Gold coin ever struck. From 1837 to 1934, one U.S. Dollar was fixed at 23.22 grains of Gold. This coin therefore contains 464.4 grains or 0.9675 troy oz. of Gold. The St. Gaudens was in general circulation in the U.S. from 1907 to 1933.

2000 AD: The "Millennium Sovereign". In sharp distinction to all the coins above, this coin is NOT meant to circulate as money. It is a "bullion coin". The original sovereigns were equivalent to 20 shillings, or One Pound.

by Bill Buckler / The Privateer -- The Private Market Letter for the Individual Capitalist
Summer 2001

The Privateer market letter
Publisher: William (Bill) Buckler
P.O. Box 2004, Noosa Heads, Queensland, 4567 Australia
Phone +61 7 5471 1960 - Fax +61 7 5471 1959
Australian Business Number (ABN): 99 805 118 934

This overview series was excerpted from The Privateer's Gold Pages.

Copyright ©2001 The Privateer Market Letter. All Rights Reserved.

Investing in Precious Metals

Many Investment advisors recommend precious metals as part of a properly diversified portfolio to provide capital appreciation, liquidity, and a hedge against conventional paper assets. Because precious metals are counter-cyclical to paper assets, a diversification into gold, silver, and platinum can therefore reduce the total risk of your overall portfolio and preserve your wealth. History supports the premise that investment in precious metals is the best protection against uncertainties in the future.

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