Business Insider has a piece from Dylan Grice about gold and whether it is money. I’ve talked about this recently, but I keep seeing the topic come up a lot so I thought I’d reiterate what seems (at least to me!) like a pretty logical position. Basically, gold is money, but it’s a crappy form of money:
“Gold is definitely money. Remember, anything that is accepted as a means of final payment can serve as a form of money (see my paper on the monetary system for more on this). Gold is definitely accepted as a means of final payment so it serves as a reliable medium of exchange. But gold has a number of characteristics that make it a bad form of money. First, gold isn’t accepted for payment in many places. So that’s a big problem. It’s also very difficult to transport. So gold is money, but it’s a crappy form of money.”
That’s the quick and dirty view. Obviously, gold has some inherent value as a commodity and it’s money because people will still accept it as a medium of exchange (in some places) and a store of value (central banks in particular). So I would never say gold is not money. But I think Dylan Grice made a good example in his story when he asked:
“But inhabitants of Norway can’t use Japanese Yen to buy things either. Does that mean Yen isn’t money?”
Yen is definitely money. Even in Norway. But it’s a crappy form of money for most Norwegians because it has to be converted into Krone before it can be used to buy most goods and services. Gold is similar. Yes, it’s money in the USA and in any other country, but it has to be converted into notes, coins or deposits before it can be used to buy goods and services. So it’s money, but it’s a crappy form of money for all practical purposes.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.