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Gold, especially, only has one valuable property, which is why I believe it was used as a representative "money" - it's an inert metal. It doesn't degrade, eve

Gold, especially, only has one valuable property, which is why I believe it was used as a representative "money" - it's an inert metal. It doesn't degrade, ever, not for thousands of years. The amount of gold in a blob can change/be diluted, but touchstones revolutionised that - people could easily discover what the percentage of real gold was in a given blob. We haven't used gold for currency in centuries, because it's not actually very good as a currency. Why not? Because the amount of gold in circulation doesn't reflect the size of the economy. It's value sharply drops when a new discovery is made. And it's value tracks upwards between discoveries because the economies are growing (when economies collapse the local value of the gold drops too)

eru 4y ago
Your understanding of the classic gold standard is flawed. First, in the long run the value of gold had been rather stable. That's because the supply of gold isn't random: it takes effort to mine gold. If the gold price is higher than usual for a longer time, people will put more effort into mining. (More formally: even more marginal mines will be worked.) Similar for periods of low gold prices. Of course, these adjustments happen over long time periods only. Second, in anything but a very naive gold standard the amount of gold in circulation doesn't need to reflect the size of the economy. At least not directly. Gold was mostly a unit of account, but people seldom exchanged physical gold coins. Which fractional reserve banking, there's no simple relation between the amount of money in an economy and the amount of gold, even if every note is redeemable in gold on demand. During its free banking era, Scotland was famous for having both a very strong and stable banking sector (one of the reasons it manage to mostly catch up with the England during the Industrial Revolution), and also scarcely any gold in the country. In Scotland during that time, typical banks held about 2% of their as assets as gold reserves, the rest was invested in the real economy. However, they also had much thicker equity cushions than was is common today: about 30% instead of 8%. That's equivalent to saying that Scottish banks were much less leveraged.
- imtringued 4y ago
  If people constantly use money substitutes (including fractional banking) then how exactly is gold supposed to be a good basis for money? It sounds like there is a fundamental problem with gold and the fact that it doesn't depreciate that has rubbed off onto the pure fiat model and this is why central banks try to create 2% inflation to make money decay.
  - eru 4y ago
    I'm not sure what you mean by money substitutes? Bank notes that promise to pay gold to the bearer on demand are _money_. Just like today checkable bank deposits are _money_, and your bank promises to pay them out in central bank cash on demand. If you like decaying money, you might like https://en.wikipedia.org/wiki/Freigeld https://en.wikipedia.org/wiki/Freigeld

eru 4y ago

Your understanding of the classic gold standard is flawed. First, in the long run the value of gold had been rather stable. That's because the supply of gold isn't random: it takes effort to mine gold. If the gold price is higher than usual for a longer time, people will put more effort into mining. (More formally: even more marginal mines will be worked.) Similar for periods of low gold prices. Of course, these adjustments happen over long time periods only. Second, in anything but a very naive gold standard the amount of gold in circulation doesn't need to reflect the size of the economy. At least not directly. Gold was mostly a unit of account, but people seldom exchanged physical gold coins. Which fractional reserve banking, there's no simple relation between the amount of money in an economy and the amount of gold, even if every note is redeemable in gold on demand. During its free banking era, Scotland was famous for having both a very strong and stable banking sector (one of the reasons it manage to mostly catch up with the England during the Industrial Revolution), and also scarcely any gold in the country. In Scotland during that time, typical banks held about 2% of their as assets as gold reserves, the rest was invested in the real economy. However, they also had much thicker equity cushions than was is common today: about 30% instead of 8%. That's equivalent to saying that Scottish banks were much less leveraged.

imtringued 4y ago
If people constantly use money substitutes (including fractional banking) then how exactly is gold supposed to be a good basis for money? It sounds like there is a fundamental problem with gold and the fact that it doesn't depreciate that has rubbed off onto the pure fiat model and this is why central banks try to create 2% inflation to make money decay.
- eru 4y ago
  I'm not sure what you mean by money substitutes? Bank notes that promise to pay gold to the bearer on demand are _money_. Just like today checkable bank deposits are _money_, and your bank promises to pay them out in central bank cash on demand. If you like decaying money, you might like https://en.wikipedia.org/wiki/Freigeld https://en.wikipedia.org/wiki/Freigeld