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Commodity Money - Part II

INTRINSIC VALUES

Some will ignorantly claim that gold has little or no intrinsic value; you can’t eat it, you can’t wear it, and you can’t live in it (although the latter two are obviously false assertions). According to Merriam-Webster, intrinsic is defined as, “belonging to the essential nature or constitution of a thing”. In other words, the value of an object is derived from the object itself and has nothing to do with subjective perception. The problem with this viewpoint is that value itself is a purely subjective concept.

How much a particular good is valued is based solely on an individual’s perspective. I might place enormous value on a drawing which my son created while most others would place very little or no value on the drawing as a piece of art. Similarly, I might place very little value on a bottle of water while I am in my home and yet would place much value on the same bottle if stranded in the desert. Value is determined completely and solely due to the perspective and situation of each individual. Prices, subsequently, are derived from the subjective valuations of many individuals considered in the whole.

GOVERNMENT INTERVENTION

As mentioned previously, many nations throughout history have produced a commodity-backed currency with abysmal results. This leads many would-be economists to believe that any attempt to create a commodity money will result in failure. These naysayers ignore the intensive meddling in market prices which would be nonexistent in a free-market alternative. Let us consider the U.S. Dollar as an example.

The Coinage Act of 1792 authorized the U.S. Mint to product a wide variety of coins, all of which were denominated in dollar units. The problem was that they not only attempted to establish the official price of certain weights of silver and gold, but that they also created a de facto exchange rate between the metals. For instance, the Dollar itself was defined as 371 4/16 grains of pure silver. So, $1 = 24.06 g silver or $1.38 per ounce. But they also defined the $10 Eagle as 247 4/8 grains of pure gold. So, $10 = 16.04 g gold or $17.68 per ounce. This gives an official exchange rate of silver to gold at 1:12.8. As you can see already, a person would be able to accumulate silver Dollars and exchange them for gold Eagles and profit $2.80 per exchange.

The proper (and free-market) method of commodity money creation would be to specify the value of each bill in mass alone while allowing the market to establish exact prices. In this manner, Acme Bank could produce a wide assortment of Acme Notes which customers could use as the market fluctuations found most efficient. They could perhaps produce 1 ounce gold notes, 1 ounce silver notes, 1 grain gold notes, 1 grain platinum notes, et cetera. However, with exception to the brand (i.e. bank name) imprinted on the note, it would be devoid of any specific price because it is the market which values commodities. In this manner, market prices would be indirectly based off of commodities which are absolutely limited in quantity by the laws of nature, and thus much less volatile and uncertain than fiat currency.

CONCLUSION

Despite claims of commodity money being an “archaic theory” and “antiquated method”, gold and silver have been the hands-down primary choices in money for thousands of years. The attempts to control the laws of economics by contemporary economists aside, gold and silver will continue to be the primary selection for “honest” money for years to come.
 
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