Econ 201: Everything You Need to Know about Gold

Daniel Altman: Everybody’s talking about gold these days.  And I wish I had some to show you, but I don’t own any, so sorry.  The thing about gold is it is a very important part of our financial system when we’re looking at the expectation of inflation because even though inflation can mean that the value of currencies goes down, gold is supposed to hold its value.  And that’s because people will always accept gold in trade for other things, so we hope. Gold has intrinsic value, gold is nice to look at and it’s useful in a lot of commercial products.  But it’s also accepted and has been symbolically for hundreds of years as a medium of exchange, as a unit of account, and as a store of value.  

There could have been another focal point.  Perhaps it could have been quartz.  Quartz would have been seen as a great store of value.  But traditionally quartz doesn’t have that role even though, like gold, there’s probably a limited supply of quartz crystals in the world.  Gold is where it’s at.  And everybody sort of accepts gold; that’s what makes it valuable.  

The problem is, if we were to base our monetary system on gold, as some people like Ron Paul had proposed, we would have a fixed amount of gold equal to one dollar and every time we wanted to issue more currency, we would have to make sure that we had that much more gold in our treasury.   What happens then though? Think about what would happen if somebody discovered a huge amount of new gold that we didn’t know about in the world.  All the sudden, the supply of gold would be much higher and that would probably mean that the price of gold would go down in world markets.  But that would have a profound effect on our own currency too because each of our dollars would now be worth less, through no fault of our own.  

So we would have a devalued currency simply as a result of this discovery of gold.  That’s not something that we want to mess around with because it means that other people and other events can control our monetary policy, which is one of our most basic tools for affecting our economy and our economic cycle.  So if you want to use gold as part of our monetary system, you have to think very hard about the fluctuations that we’d be exposing ourselves to. 

Directed / Produced by

Jonathan Fowler & Elizabeth Rodd

 

Economist Daniel Altman on gold's economic stability and why we shouldn't return to the gold standard.

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