Ever since the United States broke off from the gold standard, economists have been wondering whether that was the right choice. Fiat currencies are based on a promise by the government that they have an idea of what’s going on.
If you’ve ever dealt with the inexhaustible bureaucracies of the government, you probably don’t have that much faith in their institutions. So, if you don’t have faith in their institutions and the people that work there, how can you have faith in their monetary promises? Click here to read more.
For that reason, we’re going to need to go back and explain the story of money. Starting from the basics, which is called barter or direct trade. When early humans wanted something that another person had, they had to perform a trade of seemingly equal value.
If person A has an apple, then person B can trade it for a pear. That makes sense. It’s the earliest, and the simplest form of exchange since only a small number of people can trade a small number of items. The number of people in these groups is often 150, which is represented in Dunbar’s numbers.
Whenever the number of people crosses over 150, then specialization starts to occur. Someone that’s good at making swords will keep making swords, and another person will make boots and shields. This increases the overall prosperity of the tribe.
The whole point of trading is that it allows people to generate more products in a given unit of time rather than everyone trying to make everything. It’s the bedrock of economics. But, this basic method has a couple of flaws. Follow this link for more info https://www.cnbc.com/2021/09/10/gold-markets-dollar-federal-reserve-european-central-bank.html.
What are the flaws of direct exchange?
The first flaw of barter is that there isn’t always a coincidence in the scale of things that need to be exchanged. Imagine if you attempted to trade apples for a hut. You can’t divide the hut, and the owner might not need as many apples as you want to give them.
That’s problem number one. On the other hand, there’s also the problem with locations. You might want to trade your house for someone else’s, but if they’re near the sea or by the ocean, they might not want to leave the place.
Even if they’re completely identical, the exchange wouldn’t be of equal value. The final problem is with time. In the first example, you could trade apples for a hut, but the other side wouldn’t agree to it. The fruits can get eaten by pests, or they could rot before the person can eat all of them. Money emerged as a solution for all of these problems, and the best possible option for it came in the instance of gold.
Why is gold so important?
Leveling up above direct trade is using a medium for exchange. That is the foundational use case for the money. It serves as an intermediary between people to make trading easier and to solve the problems that barter has by definition.
If the legality is covered, anything can be used as money. That could be glass beads, seashells, bottle caps, paper banknotes, and precious metals. The crucial thing is that the medium needs to be generally recognized as a means of trade. Using it gives everyone more flexibility since you can exchange it for anything on the market.
Since gold has been used for millennia, it’s the best asset that has the maximum salability, and it has the least amount of price loss. It also effectively solves all of the problems of barter. First of all, you can split bullion into smaller units like ounces.
Multiple ounces can have the same weight as a single bar, which makes it scalable. It can also be transported from one place to another, which means it can be a global currency. Finally, gold is one of the metals which don’t rust, and that makes it worth indefinitely since it can never decay. The properties of the precious metal make it impossible to counterfeit, and it’s limited, which means that it has deflationary properties.
Why should you own it?
Prices are always going up. This wasn’t the case a hundred years ago. Even though times were hard, inflation wasn’t hitting society as hard as it’s doing now. One of the main utilities of money is that it needs to function as a store of value.
If you hoard more of it, the worth shouldn’t deprecate. At the moment, the entire world is in an economic bubble. Fiat currencies are not based on anything specific. They’re based on faith, and faith has a limit. When enough people get into a tight spot, the government sends handouts to bail the situation and keep things under control.
Instead of leveling the playing field, this makes matters worse since it speeds up the rate of decay of the money that was issued out. The rate of inflation increases more and more, which postpones the problem to another day. It’s like hitting the snooze button on your alarm and then sleeping in for work.
Postponing the problem always makes it worse. One of the critical properties of gold is that it protects value against inflation. It’s essential to the development of thriving networks, even though central banks are claiming that it isn’t. Keeping a part of your portfolio in precious metals is one of the best things to do at the moment, as a new financial crisis is approaching.