Before the invention of money (long long ago, in a galaxy not so far away), people used barter in order to get the things they didn't have enough of. This became quite cumbersome, so they agreed on a representative unit of wealth. Rather than having to carry around anvils, or fish, or wool whenever you had to buy something, they instead carried around this unit of currency - in many cases, it was gold (today, it might be dollars).

At some point in the history of banking, this unit of currency was no longer used, but was instead replaced by the writing of paper checks from one bank account to another. However the gold remained in the bank, even though it was no longer used - this was an attempt to give some legitimacy to the new paper notes being used - the gold standard.

The problem with this idea is that it is similar to the creation of a "dollar standard" - creating a new currency to use, while holding a reserve of dollars in the bank to give the new currency some legitimacy. The problem is that the commodity held in reserve was merely a unit of exchange and derives its value mainly from its previous use as currency. The original backing of the currency is lost.

The Sumerians, as part of their development of a standard of weights and measures, placed the royal stamp on each piece of gold to guarantee that it was the same amount as every other similarly stamped gold piece. They simply agreed that this was worth a bushel of wheat - the value was never in the gold. For each amount of gold issued by the king, a certain amount of wheat is kept in reserve in order to ensure that gold has some value. This ensures that the value of the gold with respect to wheat did not change - no inflation. When the gold is returned to the king, it is redeemed with the wheat that it represented. This, in effect, is a "wheat standard".

(Thanks to Gritchka for help.)

Comment from thisisby.us by viviktadevi
on Nov. 13, 2007 at 05:06pm
1 Vote

excellent points....the main one being that value in a system of currency is simply arbitrarily declared. i would think that in a larger, modern system of currency value is more tied in with the economy that surrounds it, and other economies that affect it, simply due to the greater level of variables and systems that are involved with it. clinging to an idol called Gold Standard for its own sake is foolish, though.

Why we need to convince the wealthy to invest in gold
Originally written for thisisby.us
May. 07, 2008 at 09:03pm

"Tricking" wealthy investors to put more of their investments into gold (that is, holding gold, not gold futures) helps out everybody else. Imagine if the wealthy decided to hoard grains or oil instead - the result would be that a lot of grain and oil would be sitting around in storage, not getting used, while people around the world starved or went without energy.

If it's only a relatively useless commodity like gold sitting around in storage, what is available for people to consume isn't really affected. Thus the more we can "trick" the wealthy into selling their grains / oil and buying gold instead, the more grains and oil will be available on the market, and make life easier for everyone else.

It only becomes stupid when "tricking" the wealthy results in "tricking" everyone else as well, and they start to trade the grains / oil they've produced for the gold that's been hoarded.

P.S. You can "trick" people into investing in something the same way you "trick" people into buying consumer products: marketing. Play up how great of an investment it is. But the part about actually going about "tricking" wealthy investors was mostly in jest - it was merely used as a tool to point out the lack of inherent value in gold, as compared to other commodities, despite what the marketers say.

Comments from thisisby.us

by edzillion
on May. 08, 2008 at 05:19am
0 Votes

This post should lose the tag 'non-fiction' since it is so patently absurd. For one thing, no-one hoards* grains - they buy grain futures, or speculate on the price movement. The end factor is that the price to the consumer goes up, but it is still on the market.

Aside from my whole problem with 'tricking' people in the first place, lets work through your scenario:
1. Rich people are tricked (or marketed) into buying gold.
2. The price of gold goes up. At a higher rate than it does now since rich people have more money.
3. Faith in fiat currencies is lost (since gold is a bellwether of risk) so inflation rises.
4. Things cost more.
5. Poor people suffer

This scenario is far too simplistic, and many things can intervene, but I wanted to illustrate the errors in your thinking. You need to do some reading on macro-economics. Here are some good articles on the gold price fundamentals if you are interested.

Also, feel free to drop by my blog and tell me what you think.

*interestingly hoarding was an obsession during another very turbulent political and economic situation: the french revolution.

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by seeya
on May. 08, 2008 at 12:02pm
1 Vote

If nobody hoards grains or oil, that would be a good thing. Does anybody hoard gold? If the rich hoard gold, I argue that would also be a good thing (at least for everyone else).

"3. Faith in fiat currencies is lost (since gold is a bellwether of risk) so inflation rises.
4. Things cost more.
5. Poor people suffer"

Your claim that "inflation rises and poor people suffer" is false. When the rich trade fiat currency for gold, only the price of gold relative to the currency is affected. What is not affected, for example, is how many apples you can trade for with one orange.

Assuming the orange producers are producing oranges at the same rate, no matter how the currency fluctuates, they can still sell the oranges and get the same amount of apples they used to get.

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by seeya
on May. 08, 2008 at 12:08pm
1 Vote

"3. Faith in fiat currencies is lost (since gold is a bellwether of risk) so inflation rises."

In fact, inflation would rise if instead the rich traded their fiat currency for grains or oil, and just held it in storage like they might do with gold. More currency on the market, less grains / oil on the market - thus inflation, at least with respect to the price of grains / oil relative to the currency.

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