Uellue's Blog

Currency backed by gold?

In these economically volatile times with the 2009 financial crisis and the European debt crisis, some people argue that a gold-based currency would be desirable because gold is a "real value", as opposed to pieces of paper with elaborate imprints on them or numbers in a database. But how is gold a value more real than paper money or bank accounts? As such, a piece of gold seems rather useless to me. It can serve as paperweight, blunt weapon or door stopper. I admit that you can make pretty, shiny things out of it, but, lets say, martensitic stainless steel in the shape of a knife is more useful in the daily life. Should we have a currency backed by martensitic stainless steel?

The value of gold, just like paper money, is based on the fact that other people want to have it and that they are willing to trade their work force or posessions for it. The demand for it has always been higher than the production capacity, and mining gold is an expensive and slow process in itself. It is therefore quite suitable as a currency in a primitive society: It's supply is self-limiting and keeps the value of gold at a more or less constant level that is related to it's mining cost. A rising gold price makes gold mining more profitable and increases supply, while a falling gold price discourages mining.

But on the long run and in a growing global economy, a gold-based currency could be fatal for the following reasons:

• Gold mining and refining is bad for the environment.
• Mining gold that is then stored in some safe and "sitting around" wastes all the expenses that went into mining and refining it, because the gold is not doing anything useful. The gold should be used as jewellery or for high-tech products.
• The mining cost of gold is not constant. It could decrease because new technology is developed that decreases the minig cost, or new deposits or production methods are discovered. It could increase if existing deposits are exhausted. Both could disrupt the value of gold.
• The production of gold cannot be increased quickly, which could lead to a deflation if the world economy outgrows the gold production.
• The value of the gold currency would not be under control of central banks, but under the control of mining companies. They would in fact be the new central banks.
• Gold is not distributed evenly around the world. It could create a similar dependency like for fossile fuels.
• Gold is at the moment and will be in the future subject to speculation. It's value is more volatile than good currencies like US-Dollar or Euro. The value of such currencies is under tight control of powerful and highly developed central banks that stabilize them proactively.

There is a good reason for which gold was abandoned as a currency or base of a currency. Gold is not a real value. Real values are the house that you live in, the food that you eat, the tools that you use, the things that you know, and most importantly, the people who you love and who love you. All these don't make a good currency, but definitely a good investment.