(Article reprinted from The New York Times, Aug. 2, 2011.)
Private investors and central banks have scrambled in recent years to stock up on gold. This summer, they drove the price over $1,600 an ounce for the first time ever.
For millennia, people have killed and died in pursuit of gold. In the recent downturn, so many investors have been eager to buy gold that it is sold in vending machines. Governments are as captivated by it as individuals are: for nearly a century, many nations’ central banks have stashed hoards of gold bullion in a vault at the New York Federal Reserve.
When asked recently why central banks hold gold rather than, for instance, diamonds, Ben Bernanke said “tradition.” Given the long history of humans considering gold valuable, does it make sense to continue this tradition, or should central banks focus on other assets with more intrinsic value?
Debater 1: It Had to Be Gold
Anyone trying to think of some other element or compound to take the role of gold should consider why it has been used as a currency since time immemorial. If we are looking for something to be useful as currency, we need a commodity that meets a few requirements: First, its composition must be easy to define. It should also be relatively immutable, but not so inert that it cannot be purified into the form that is acceptable as an asset. It should be rare but not so rare that it is impossible to find. It is easy to see how ancient civilizations came to consider gold a magical, mythical material: it satisfied all these demands.
Gold is relatively unreactive, but it has a low enough melting point that it could be processed easily by past civilizations. In contrast, something like platinum, which is also relatively inert chemically, has a melting point of 3,000 degrees Celsius. This made platinum almost impossible to process until relatively recently. Similarly, gold is rare in the earth’s crust, but there is enough of it to go around.
Still, times have changed. Let us consider the issue today: Processing is no longer a problem. We can readily purify elements like platinum, rhodium and others, or we can synthesize any desired compound to practically any degree of purity. The issue of contamination is also no longer germane.
Thus the only modern requirements for an asset are rarity and immutability — and a suite of compounds and elements would qualify. So gold is no longer the one and only thing that could be used as an asset. Indeed, Ben Bernanke is correct — the argument for it is simply tradition. The value placed on gold comes from an emotional attachment handed down to us from our ancestors.
Debater 2: A Proven Asset
By Ron Paul, a United States representative from Texas who is running for president for the third time, is the founder of Campaign for Liberty. He is the author of “The Revolution: A Manifesto” and “End the Fed.”
No asset has intrinsic value. An object is only valuable insofar as it is able to satisfy the wants and needs of individuals, and its value is determined by the subjective judgments of individuals. No other commodity has been as universally valued over time and across as many societies as gold.
Gold satisfies all the properties of money. It is durable, portable and easily divisible into bars and coins that share uniform properties. It is easily recognizable through visual, tactile, chemical and other means. Gold’s value and purchasing power are stable over time, as its supply grows slowly and it cannot be created ad infinitum as paper or digital currency can be.
Because of these properties, gold has always been considered an ideal store of value and medium of exchange, and central banks have always sought to hold it because it is the ultimate monetary backstop. When society and the monetary system break down, even if nothing else is accepted as a medium of exchange, gold still will be.
The Federal Reserve does not actually own gold; it only holds gold certificates as an asset. It is the Treasury Department that claims ownership of United States gold reserves. Historically, gold itself circulated as money, in the form of coins. Paper currency began to circulate for the sake of convenience, but these were only promissory notes that could be redeemed in “lawful money,” i.e. gold, on demand. Once the use of paper currency was established and most gold was held in bank vaults, the government seized the gold and left the people holding paper that could no longer be redeemed for gold. The paper currency was immediately devalued by 40 percent, reducing Americans’ purchasing power by an equal amount.
I would prefer to see the government not hold the gold it does. It should be returned to the people from whom it was taken. There is no need for the government to hoard gold or to keep gold in vaults as backing for currency; gold itself should be the currency that circulates.
Debater 3: Gold Fever Is a Symptom of Inflation Fears
By Allan H. Meltzer, a visiting scholar at the American Enterprise Institute and the Allan H. Meltzer University Professor of Political Economy at the Tepper School of Business at Carnegie Mellon University, is the author of “History of the Federal Reserve, Volume I: 1913-1951” and “Volume II: 1951-1986.”
Gold was money through most of our history, although after 1934 it was restricted to settlements between central banks. Its role in international payment settlements was further restricted in 1968, and it ended in 1971 when President Richard M. Nixon embargoed gold sales and floated the dollar exchange rate. After 1971, several central banks sold some of their gold stocks because the only revenue from holding gold is the speculative return if the gold price rises. After all, gold is no longer money, and holding it earns no interest.
Gold is a commodity with a unique history. It allows individuals to readily transport large monetary values, so it has long been favored by refugees. People who fear inflation or confiscation of wealth buy gold, expecting it will be stable or rise enough to protect the holder. That was true for European refugees in the 1930s, and French and Indian citizens have long been famous for holding gold.
Today, uncertainty about the future financing of large U.S. budget deficits and inflationary Federal Reserve policy are increasing the demand for gold. People in China and other nations with inflationary policies are also stocking up on it. Saudi Arabian sheiks protect part of their wealth by holding gold.
The modern frenzy for gold is a symptom of a fundamental concern: inflation. The world would benefit from an agreement by major central banks in Europe, Japan and the United States to maintain zero inflation. China could join after it removed its exchange controls. That agreement would allow other countries to fix their exchange rates and “import” low inflation. The world would have both more stable prices and more stable exchange rates.
The unrestrained U.S. monetary policy since we abandoned gold has not provided stability.
(End of reprint)
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