Posted in Finance Articles, Total Reads: 4290
, Published on 03 November 2011
Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment. Thus we could list down few properties of money as defined by Monetary authorities across the Globe: -
A. Universally acceptable.
B. Store of value.
C. Unit of Account.
D. Standard of deferred payment.
The acceptance of gold (real asset) as a universal currency is evident in written history from 7th century BC to 20th century AD. Strong and successful nation such as that of Solon of Athens (594 BC), Alexander of Macedonia (early 4th century BC), Julius Caesar (54 BC), Augustus (31 BC), Mongols (1275 AD), Ming government (1455 AD), Holland (1609 AD), Britain (From 1698 AD – 20th century), US (From 1792 AD – 20th century), Napoleon (1804 AD), and excellent recovery of European nations in 1920’s proves this.
On the other hand the case of Lydia ( 7th century BC ), failure of Plato’s suggestion to Dionysius (387 BC ), failure of Roman empire from 54 AD to mid 4th century AD, problems of China from early 9th century to 14th century, fall off Ming dynasty (1644 AD) shows the non acceptance of general public to floating currencies.
It is worth mentioning here that paper is not universally accepted! It is the real asset backed currency which people accepted. Once you remove real asset backing from currencies it no longer remains universally accepted. No one exchanges a piece of paper for something. A piece of paper is as cheap as a stone lying on road. Rather what now remains is just FORCED ACCEPTANCE. Many classical economists and analysts like John Stuart Mill, Nicolas Copernicus and modern analysts like J.P.Morgan and Alan Greenspan believe in this to a large extent. If given a choice people will still conduct trade in gold backed currencies because universal acceptance arises due to intrinsic value of element and not by force.
Thus in the words of Karl Marx, Capital, 1867, “The first chief function of Money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and qualitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money”.
Store of value
No person in this world would agree that today’s so called, “Money” has store of value. Value of money continuously goes on depreciating due to over issue of currency by government. C.Rangarajan in his book ‘India: Monetary Policy Financial Stability and other Essays’ mentions that India is issuing about 20% currencies annually; and thus reducing the ‘store in value’ of money effectively by about 9%. So does anyone still think that our current money has store in value?
However a real asset backed currency is seen to be very constant. Between 1900 and 1995 purchasing power of Gold increased by just 15% while Sterling one of the most stable currencies fell to less than one fortieth part of the purchasing power. Growth of global gold stock in 1915-1997 amounted to 2.17% per year. That is close to net real growth rate of the economy. From 1833-1930 (period when gold currency was attached to gold) the maximum and minimum of Gold value in US Dollars had a difference of just 75 cents. That is, for 97 years gold remained between the ranges of 75 cents.
To have a graphical representation of stability of gold (real asset) Jill Leyland (World Gold Council) updated Professor Roy Jastram’s report (Golden Constant) until 2009 and presented following graphs taking purchasing power of gold in various periods: -
Unit of account
Money in general has always been unit of account. However the current fiat money system was never really given this status. Let’s take an example, suppose a business in terms of current units of money (in India Rupees) earns 10% Profit; and in the same year government depreciated currency by net 12%. So the business actually will be in an illusion of earning profits however in reality it is as good as a loss.
Thus in the words of Nicholas Copernicus, Treatise on Debasement, 1517, “Coinage is imprinted gold or silver, by which the prices of things brought and sold are reckoned… It is therefore a measure of values. A measure, however, must always preserve a fixed and constant standard. Otherwise, public order is necessarily disturbed, with buyers and sellers being cheated in many ways, just as if the yard, bushel, or pound did not maintain an invariable magnitude.”
Standard of Deferred Payment
There is really no way in which one could call something like Euro, Rupees or Dollars anywhere close to a standard for deferred payment. Suppose I took 100 rupees from someone in 1950s and I have to return it to him now. In no ways will I be doing justice if I return today’s 100 rupees back. In fact, the whole concept of ‘time value of money’ deals with this.
Thus money as defined by various monetary authorities definitely is very vague when compared to the current fiat money system. For thousands of years humanity has used real asset backed money which in different proportions satisfied the above characteristics; among which ‘Gold’ is considered the best. Thus gold has proved itself as ‘money’ rather than people forcing it to be used. I can’t estimate the pros and cons of gold standard if adopted again; but I could surely say “Gold has been, is and most likely be the ultimate form of money”.