Why Gold is Money; R. Guarnieri

Historical evidence does not support the idea that a new form of money can be created by the mere passage of a law. There is much more to it than that. Money is not the product of a compact or of legislative acts. It evolved in the market. As primitive peo ple became increasingly aware of their business interests, they came to understand the simple Dr. Guarnieri is Vice President and Chief Econ omist of International Investors, Inc., in New York. 592 fact that exchanging less-market able goods for others of greater salability brought the trader closer to his ultimate economic goal. In ancient Greece, as in some parts of Africa today, cattle were the most marketable commodity, and were used in exchange in addition to their use as sources of food and beasts of burden. Do mestic animals such as cattle, horses, and sheep constituted the chief sign of wealth among an cient peoples, both nomadic and agricultural. Their marketability extended to all economic men.

The lack of roads made transpor tation difficult, but cattle trans ported themselves almost without cost. This made them marketable over a wide geographic area and increased the constancy of the demand for them. A cow is a commodity of considerable dura bility, and its storage costs are 1974 WHY GOLD IS MONEY 593 negligible where pastures are abundant and cattle are kept out doors. In societies where a large herd served as a status symbol and also afforded economic secur ity, comparatively few animals would be offered for sale at one time and consequently found a ready market. Because of these factors and the fact tha t the actual trading in cattle was better developed than trade in any other commodity, cattle emerged a.s the most marketable commodity in the economy and hence the natural money of the people. The division of labor and com mercial development and the for mation of cities with their highly industrial population had the ef fect of diminishing the marketa bility of cattle while increasing the salability of other commodi ties, especially the metals then in use. The city-dwelling manufac turer was not in a position to accept cattle in the course of trade with farmers. Cattle were no longer the most marketable commodity, and finally ceased to be money at all.

Metallic Money Copper was the first metal from which tools and weapons were made. Along with copper, gold and silver were the earliest ma terials used for jewelry and orna mentation. Therefore, at the time when the medium of exchange passed from cattle money to me tallic money, copper, gold, and silver had become the goods of most general desire, largely be cause of primitive people's ex tensi ve use of jewelry. The mar ketability of the metals was greatly enhanced by their useful ness to all people and the fact that they could be readily trans ported throughout a wide market area. The fact that they were durable and could be stored or held without deteriorating gave them added salability. As the area of wor ld trade widened and the rate of turnover increased, the precious metals gold and silver ~ became more and more desirable because of their high purchasing power per unit of weight. This led to obvious advantages in transportation, handling, and storage and meant that copper would cease to serve as money. With the increasing division of labor, higher turnover of commodities, and trade with all parts of the known world, each individual felt the need for car rying more purchasing power on his person. Under these conditions the precious metals, especially gold, became the most convenient medi um of exchange and there fore became the money of the most highly developed economies.

Thus money came into being, not 594 THE FREEMAN October as the result of an agreement, legislative compulsion, or mere chance, but as the natural result of voluntary exchanges in the market place. It can only continue to serve as money as long as it proves acceptable under these conditions. Neither can a newly created currency gain acceptance unless it is backed by something which has already proved itself in the market. The SDR paper met with some acceptance in international finance only because it was linked The Money Supply to gold, of proven monetary qual ities. The creation of Special Drawing Rights was claimed to be a new way for the Interna tional Monetary Fund to make easy credit loans to countries guilty of monetary mismanage ment. But this was not the cre ation of a new international money. Gold is the only interna tional money. A sound currency cannot be created by the mere passing of a law, and today's paper money managers would do well to keep this in mind. ~ IDEAS ON LIBERTY WHILE AN increase in the money supply, like an increase: in the supply of any good, lowers its price, the change does not - unlike other goods - confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices - i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange-value. Other goods have various "real" utilities, so that an increase in their supply satisfies, more consumer wants. Money has only utility for prospective exchange; or "purchasing-power." Our law - that an increase in money does not confer a social benefit - stems from its unique use as a medium of exchange.

MURRAY N. ROTHBARD What Has Government Done to Our Money?