What Makes Gold and Silver True Money? What About Other Commodities?

cash, wealth, value, moneyQUALIFICATIONS
There are five qualifications a commodity must meet in order to qualify as true money:

  • Scarcity: Things like gold, silver, diamonds, and uranium are all scarce. They have a naturally occurring supply and require labor and other resources to obtain them. Currency is not scarce, because, even though there is a finite amount in circulation at any given time, the central bank can double that amount at any moment.
  • Durability: Gold, silver, and salt are durable, but cattle and seashells would not be. Paper and plastic currencies wear out over time, so they’re not really durable. Currency is durable in digital form, unless the server the bank is using crashes or the digital money data gets corrupted.
  • Portability: Gold and silver are easy to transport, as are dollars and diamonds. Real estate or livestock would be extremely difficult to transport.
  • Divisibility: Gold and silver are easily divisible down to microscopic amounts without changing their essence. Although currency cannot be physically divided, governments have created smaller denominations (down to the penny in the U.S.) to allow for divisibility—and today’s digital currency allows for infinite fractions of a penny as well. Other commodities, like cows for instance, are difficult to divide without losing the essence of the cow.
  • Fungibility: Any two nickels are the same and can be interchanged. Dollar bills have different serial numbers, but are otherwise identical and worth the exact same as any other dollar bill. Precious metals are the same, as are individual shares of a stock. It doesn’t matter which one in particular you get; they’re all the same. By contrast, a diamond is unique and must be priced individually. Thus, diamonds are not suitable as money.

moneyfeatheredThere are also three fundamental roles a commodity must fill in order to be considered money:

  • The item must serve as a medium of exchange. You can trade your goods for currency and then hold on to that currency until you come across something else of equal value. Otherwise, you’d have to cross your fingers that you can find a person who has exactly what you want when you want it and needs exactly what you have when you have it.
  • The item must serve as a store of value. A unit of money must be able to be saved and stored between exchanges—and must maintain its same usefulness and value from the time it is gained to the time it is spent. With the current system of fiat money, currency loses value over time due to inflation and is thus not serving its role as a store of value.
  • The item must be a unit of account. There must be a standard amount that is tied to the value of other goods. You can judge the relative value of an apple to a car by the amount of money (whether U.S. dollars, ounces of silver, etc.) it would take to purchase each. If a cow was being used as money, it would be impossible to identify the units of the cow to correspond to other goods.

Gold and silver, for whatever reason, rose into prominence in the free market environment and have been used as money for thousands of years. They’re both naturally rare, which is why they’ve been sought for jewelry as adornment for millennia. They’re extremely portable. They’re also divisible; one ounce of gold or silver is indistinguishable from another anywhere else in the world, which makes them interchangeable.

Some other metals like tin and zinc are useful for industrial purposes, but they don’t fit the requirements of money. The combination of scarcity, usefulness, and human psychology all contribute to gold’s and silver’s use as money. These two metals have a stronger and longer track record than anything else in history. Anyone can argue that gold and silver are just dumb metal and shouldn’t be valuable, but the market disagrees. The market has been saying gold and silver are money for thousands of years.

gems, jewels, jewelry, value, commoditiesDIAMONDS & GEM STONES
Precious stones are indeed scarce, portable, and durable. But they are not in any way fungible or easy to identify. No two precious stones are alike and equal in value, as opposed to the equality of one ounce of gold compared to another. This alone eliminates stones from serving as a useful money option.

They’re also not divisible. Breaking a diamond in half does not reduce its value exactly in half, but rather reduces its worth dramatically. Plus, it’s impossible to easily identity a stone’s qualities without being an expert. Even the common man can recognize a silver eagle or gold eagle without trouble.

The value of diamonds, pearls, rubies, and other precious stones is highly subjective. They have value, but without being an expert or having a GIA (Gemological Institute of America) appraisal, the lay person would have no idea of the precise or even ballpark value of the stone.

In this way, art is very similar to gem stones. Each piece is unique, and the value is extremely subjective, totally based off of opinions. Both can be rare, beautiful, and super valuable, but how—without being a trained and certified expert—can you tell the value of one piece compared to the next? In addition, most art lacks portability, divisibility and fungibility, making it useless as money.