. . . isn’t gold.
But why not? Why shouldn’t any durable object that glitters be just as valuable as gold?
Larry White directed me to an amusing headline from The Onion:
U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion.
Is that also true of gold?
What would happen if people woke up tomorrow and realized that there was nothing particularly special about gold? Might its value also fall to a far lower level?
All of the gold held by central banks and private investors is based on the “shared illusion” of value. Jewelry is the largest industrial use, but why is gold so valuable in jewelry? Because it’s rare? If silver were much scarcer than gold, I suspect that silver would be the more valuable metal. And even if the beauty of gold exceeds that of other metals, beauty is only “skin deep”, i.e. gold leaf deep. A gold plated necklace is just as pretty a solid gold necklace. By weight, almost all of a solid gold necklace is simply an investment; the inside of the necklace is much like a bar of gold in your safe that no one ever sees. And gold is less and less often used to fill cavities. To be sure, a small portion of gold is used in areas such as electronics, which would assure that the metal has some value even without any “shared illusion”.
I suspect that on pure “utilitarian” grounds (I use scare quotes as I mean practical, not philosophically utilitarian), gold would have a far lower value. Its value comes primarily from the fact that other people think it’s valuable. This is sort of like Bitcoin, which does have a modest practical use as a way of transferring wealth without attracting the attention of authorities, but is mostly used as an investment vehicle. BTW, fiat currency is mostly used to hide wealth, not to make purchases.
Gold differs from fiat currency in one sense; the “shared illusion” is global. If an asteroid destroyed New Zealand tomorrow, then New Zealand dollars held outside the country might lose all value, just as confederate money became worthless after the U.S. Civil War. And again, gold does have a few practical uses that would give it some value without any shared illusion, without its mystique.
PS. Over the past decade, gold has not done well as an investment (especially relative to stocks, crypto and real estate). Is the younger generation shifting its “shared illusion” from gold to crypto and GameStop? Is gold becoming seen as an old fashioned shared illusion, held mostly by boring boomers like me? Perhaps, but it is a long lasting shared illusion, as the chain below is from Ur, 2500 BCE.
READER COMMENTS
Billt
Apr 3 2022 at 3:57pm
Gold has real value in jewelry. It is very malleable and corrosion resistant. An iron chain like the gold one from Ur would have been more difficult to make. Copper would have been easier to make, but both would have rusted beyond recognition long ago. Platinum has similar properties as gold and is also used in jewelry.
Note that none of this invalidates your thesis.
Billy Kaubashine
Apr 3 2022 at 9:43pm
What if people woke up tomorrow and realized that anyone can create the next crypto currency using the same well respected, trusted, and accepted blockchain methods as the others?
Why should one crypto currency be worth more than the last or the next? And the next? And the next?
Scott Sumner
Apr 4 2022 at 1:56am
Network effects?
Alexander Otero
Apr 4 2022 at 2:46pm
That’s correct. Bitcoin Cash is an offshoot of Bitcoin but is far less valuable. If the shared illusion is what gives value to currency, then established currencies have a competitive moat. Any duplication would have an insurmountable hurdle as it is a new player offering nothing different from the brand name. The solution is to offer different currencies with different functions, but then you run into the problem of your currency not offering enough or not solving the right stuff to warrant adoption.
Oscar Cunningham
Apr 4 2022 at 5:16am
Is there any ‘rational expectations’ model of gold and bitcoin, where such currencies’ value is equal to the time-and-risk-discounted future value?
Presumably part of the value would come from expectation that fluctuations will be uncorrelated or anticorrelated to the market?
Jose Pablo
Apr 4 2022 at 10:22pm
Gold (as “money”) and Bitcoin have no “value”. Afterall, it does not make any sense to talk about the “monetary value of money”. When you say that one ounce of gold has changed its “value” from $2,000 to $2,100, which has changed value, gold or the US$?
“Money” can’t produce anything, so there is no “future value” to be discounted.
Thomas Lee Hutcheson
Apr 4 2022 at 8:35am
Gold’s main symbolic value is to be held up as a mythical “Gold Standard” that could restrain “Keynesian” spending by governments.
Michael Rulle
Apr 4 2022 at 11:11am
Observing history, it appears that “something” must be money. It is simply easier than not having to perform barter. So I would not call any form of money an “illusion”, but a utilitarian vehicle that somehow we come to an agreement on. But, it turns out that we can still screw things up by having too much or not enough money relative to our rate of production, no matter what it’s form.
But do some forms of money have more “intrinsic” value than others? What does intrinsic even mean? To me it could mean there are other uses for it. For example, why couldn’t computer chips be money? Or Gold. But does it have to have intrinsic value? Does our fiat dollar have “intrinsic value”? I do not think so—-although it does represent our productive capability.
It appears that cryptocurrencies have become “money by agreement”——although not as firmly as fiat money. It is also “gold-like”.
Money should be the easy part of economics. But, the problem is we have so many types of Government oddities (inconsistent tax laws, expenditures that are huge and or useless, outlawing of a variety of real things which should not be, rules changing daily—etc. etc.), that require “monetary offset”, thus making it complex.
Mankind does not appear to be advancing, it appears to be creating random whirlwinds in which we are trapping ourselves with increasing probability of no exit.
Spencer Bradley Hall
Apr 4 2022 at 3:15pm
The so-called legal link to gold, or the “gold standard”, prior to the “gold cover” bill of March 19, 1968, was fictional, the economic tie tenuous, and its protection was another myth.
Jose Pablo
Apr 4 2022 at 10:36pm
“Money” is, indeed, a “mutually shared convention” or as Jesus Fernandez Villaverde likes to explain: “Money” is “memory”: a socially accepted way of keeping track of the difference between the “market value” of goods and services an individual has produced and the “market value” of the good and services that this very same individual has consumed.
Which “money” is better performing this role, conceptually easy but very complicated in practice, is something that can be discussed at length. But has nothing to do with the “value” of any particular form of “money” (which can only be assessed in relation to other forms of “money”).
Jim Glass
Apr 7 2022 at 9:27pm
Why shouldn’t any durable object that glitters be just as valuable as gold?
Or that don’t glitter. Before the Berlin Wall came down East Germans rode around in dreadful cars called Trabants. The owners called them their “washing machines”, as in riding inside a washing machine. Reputedly a million of them were junked the day the wall fell.
Some years later a market developed for canned exhaust fumes from Trabant engines. (“Trabant exhaust fumes sold online“)
I’ve never understood the endless questioning over what’s the “backing” of money, or why some “illusion” must account for its value. If something exists in finite amount and enough people want to own it, it will have a market value. Period.
My refrigerator has a market value above that of its component parts that “back” it, and that excess does not depend on an illusion. Refrigerators are finite in number and perform a useful function so people want to own them, paying for their functionality, not their parts.
Fiat currency and bitcoin and gold coins are designed to have a useful function in given markets so people want to own them. No illusion of any kind involved. Confederate dollars and New Zealand dollars post-NZ Apocalypse don’t lose their value because some mass illusion has been dispelled, but because the markets they were designed to function in no longer exist, so they are no longer useful.
Universally, economies need an item to serve the very valuable functions of money. Whether it’s wampum, gold, fiat currency, cigarettes, bitcoin, the Great Stones of Yap, or whatever, depends on which one is best fit to those functions under the circumstances. The rest become commodities of greater or lesser value, like Trabant fumes. That seems pretty empirical to me. I don’t see any illusions about it – but then … that may just be me.
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