Every time I post a video about money, people appear claiming only gold is money and that we must go back on the gold standard. Those saying so are economic dinosaurs who do not understand how the modern economy works and would rather we go back to the era that delivered the Great Depression precisely because of the obsession with gold. They really do need to be ignored.
This is the audio version:
This is the transcript:
What is the obsession with gold?
People keep telling me, gold is the only real money there is. That comment turns up on YouTube videos regularly.
And then people ask, If gold doesn't matter, why do central banks own it? After all, the Bank of England does have a vault underneath it, in which there is tons of the stuff. And I literally mean tons of the stuff. Every now and again, you will see a picture of it. And in that one image a great narrative is made available to us.
Did that pile of gold that the Bank of England is quite happy to acknowledge exists help it get through the financial crisis of 2008? No, it didn't whatsoever.
Did it help it get through the Covid crisis? No, again, it didn't whatsoever.
Why is that? Well, that's because money is simply not transferable into gold.
Money can be used to buy gold, and gold can be sold to raise money. But the Bank of England doesn't need to raise money. It makes the stuff, so it doesn't need to sell gold to therefore raise cash.
So, why does it hold it? There is only one logical explanation for that, and it is because historically it always has. There is no other justification for its obsession with gold or anybody else's obsession with gold, let alone the idea that gold is somehow money, which it most definitely is not, because we have a fiat currency, meaning that we do not have an asset-backed monetary system in the UK, and nor has any other country in the world now of any consequence.
So, why is the gold there? Because it supposedly gives us faith in the ability of the Bank of England to make payment, when and if a crisis comes, which is nonsense because we wouldn't accept gold We couldn't take a bar and go down to the shops and say “Here's a bar of gold. Will you accept it?” because, of course, it would be way disproportionate to the value of any transaction that we were going to undertake unless we were going into an estate agent, I guess, to buy a house. And as a consequence, those bars of gold are good for nothing, quite literally.
They are just a token. And the token that they represent is that the Bank can pay.
But the Bank can pay anyway.
So, all the gold does by sitting there is to provide reassurance to those who do not understand the banking system that there is a means to pay even though gold has nothing to do with it.
And the bank can't be bothered to actually tell them the truth.
The gold holdings are just part of the reserves of the Bank of England, which could, if they so wish, be flogged internationally to boost the holdings that they have of dollars, or euros, or krona or whatever other currency you want to talk about.
So yes, in that sense, gold has a value because it can be swapped for the currency of another country because most country's central banks do hold gold to preserve the value of a currency in that way, but again, the number of gold sales for this purpose are tiny.
And if we had wanted to preserve the value of the UK pound, first of all we wouldn't have done Brexit, because that cost us a quarter of the value of the pound at the time.
And secondly, we'd have sold the gold since to support the value of the pound, and we haven't.
So, all in all, that gold does absolutely nothing.
It has nothing to do with the value of our currency, which is backed by the work of the people in the UK, and the value of the transactions that we undertake, and the value of the taxes that we pay, and the value of the goods and services that we can export abroad, which, despite all rumours, actually is quite significant, and, instead, the gold is just there to represent history. A very expensive history lesson, but completely meaningless in the context of the modern economy.
So, whenever anyone says only gold matters and flee for gold because money is going to fall in value, what they're saying is they believe In the economic system that existed when we were on the gold standard about a century ago, which brought us into financial crisis and led to the great depression of the 1930s, and they have no understanding of the way in which the modern economy works. Ignore them.
Gold is not what drives our economic system now, or our monetary system. The obsession with it is just an obsession. And most obsessions of this sort are pretty harmful to well-being.
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Another good blog. Yes it is misleading for the Bank and others to publicise the amount of gold in the reserves, as you said thats not what underpins how the Bank creates money. Its rather like the obsession some people have with thinking of a countries government finances being the same as household finances, incorrect and dangerous, but with the effect of shutting down debate on policy. I am reminded of watching a TV programme years ago about ancient oaks. It was interesting in a way but I realised that it was creating a false narrative about trees and oak trees in particular. There was a picture of an oak which was about 500 years old. An impressive oak to say the least. Then I realised it fed into a false narrative that oak trees take 500 years to grow and are slow growing. This was obviously incorrect as I had found oak trees putting on 8-12 inches of growth in a year. What the picture suggested was that it took 500 years to reach its maximum height. What actually happens is that an oak takes 80-100 years to attain its full height and spread. After that it bulks out. But the myth of slow growth is rather common rather like the economic myths that are so common!
Richard…. because gold is valued by others, rightly or wrongly, is it not still a store of value? Albeit subject to the fluctuations of any other greed and fear driven asset.
Is it a store of value?
Or is it just a speculative tool?
And when people buy gold do they get it, or just an entry on a computer screen? Do they really own gold?
In the USA, unless you are buying gold coins, you are actually buying just an entry on a computer screen.
Gold is traded via entries on a computer screen not by handling actual tangible gold bars.
Owning gold bars is nothing but another “promise to pay” back up by some metal in a vault somewhere being monitored by the person who owns the computer screen and QuickBooks program.
Precisely
And the gold might not even exist
The obsession with gold is for those who don’t have much in the way of analytical thinking abilities. If you match the quantity of mined gold in the world with the daily value of monetary transactions taking place on the planet then if only gold was used as money everybody would have to carry a very high definition microscope around with them, a pint of beer or glass of wine would be worth a very tiny speck of gold!
To some extent gold holdings are a hangover from convertibility; gold in the vault was central to the credibility of convertibility. Whatever anyone may think, it does not serve to give “value” to currency, now.
However, it may make sense to hold gold as part of “FX reserves” – indeed, the US holds nothing but gold as its FX reserves.
So, two questions arise.
First, should we have FX Reserves? Second, in what form should they be held?
If you are Russia the answer is “yes” and “gold”. The economic shock of going to war required extensive use of reserves to stabilise the ruble and reserves held in US dollars have been frozen.
Now, the UK is not Russia so we might answer differently… but reserves are there for “the unthinkable”.
And do nothing to help when the unthinkable happens
I tend to agree.
So lets say that the unthinkable happens and you have to start selling your gold in earnest – because that is what we are saying isn’t it? So there is some sort of crisis or whatever.
How can you be sure that your crisis is not going to be used as leverage to get a poor price for you gold? It’s what I’d call the ‘eBay affect’ where you are selling something out of necessity or because you make a mistake and others can pick up your assets for less than the price they are worth? Would you get a fair price even if you were desperate?
But also, why would a fiat currency producing nation retain its gold for that purpose? It’s says lot about the faith we have in our monetary systems that we hold onto this metal. Is it for use when other systems break down? Do they anticipate that it will break down?
This worse case scenario thinking is also the result of poor foreign policy thinking as well. If we were making the world a safer place to live in and working together I’m damn sure gold would lose its allure as post- Armageddon’s ‘money system’.
Pathetic.
Think that’s more to do with feeling of societal collapse, what is strange is they’re buying shares rather than physically possessing precious metals or gems – their gold and silver only exists on a computer somewhere. Whereas my chickens exist in my back garden and provide eggs every day.
Not golden eggs?
I read Robinson Crusoe as a teenager. In the story he finds a second wreck and in the Captain’s cabinet he finds a bag of gold coins. He threw it down in anger as it was useless. He couldn’t use it to buy anything on the island.
Real wealth, I learnt, is goods and services.
Funnily enough I was mulling over this the other day when trying to explain to an elderly relative who did not understand the workings of fiat currency and the need to tax on the other side of that system to control inflation.
Advocates of a new ‘gold standard’ I think are those who will thrive out of and making money more scarce by tying it to a finite/scarce commodity. I’m sure that this would lead to just more debt and we know what usually follows after that.
These gold standard recidivists stun me really because (1) they must think there is enough money going around already and (2) it is being effectively allocated. Both these statements are not true, particularly (2).
They think that the money system is out of control but are blind to the positive effects of tax for example in controlling it. They also fail to note that at times of great threats ( credit crunches, pandemics) a fiat currency is invaluable and their response to this is reminiscent of Voltaire’s Candide.
It would be helpful if they just shut up.
Most of the gold in the UK belongs to other countries. The Treasury gold holding is small, about $14 billion, and tiny compared to the over £3 trillion of GB £. Technically the gold, and all other FX reserves, belong to HM Treasury. It is BoE policy not to own any FX reserves itself, but it is contracted to manage those owned by HMT.
The gold bugs always ignore that the Long Boom from 1886 to 1914 which they attribute to the Gold Standard was actually down to the Witwatersrand gold discovery adding 2 to 3% every year to the gold supply.
Including some it should return it too.
According to the Bank of England website, the bank owns 2 gold bars the rest are held in custody for the treasury and other central banks. The started purpose is to support the liquidity of the London gold market which is the largest in the world.
You are absolutely right that it is in no way used in place of money.
https://www.bankofengland.co.uk/gold
Am I correct in thinking that most of the worlds gold reserves are held in Fort Knox.
I can sort of understand that rather like Central Bank Reserve Accounts that it might be a convenient way to settle up by transferring reserves between nations if necessary but not otherwise.
I cannot confirm that
And gold does not move: it’s still entries in statements that do.
France sent a warship to pick up gold from the New York Fed (US dollars were convertible into gold) and other countries started to do the same depleting the USA reserves. Shortly after Nixon in 1971 took USA off the gold standard for the US dollar to become a fiat currency. The USA then strong armed Saudi Arabia to only accept US dollars for their oil sales … hence the petro-dollar and continued USA dominance. It seems that a Central Bank Digital Currency (CBDC) may be the next USA self interest play.
https://en.wikipedia.org/wiki/Exorbitant_privilege
https://fr.wikipedia.org/wiki/P%C3%A9trodollar
The US has quite a lot of gold, but definitely not ‘most’. Germany has a huge holding (around €350 billion), so 20 times the UK, as does Russia. Putin, rightly as it turned out, realised the ‘rules based order’ of the West would illegally seize the Russian $ and € reserves the minute it seemed convenient. You can’t move your $ reserves out of the US, nor can you move € out of the Euro zone. But he could quite happily pile up gold in Moscow. It isn’t quite true to say the gold never moves. Germany has actually removed almost all their gold from the New York fed and repatriated it to Germany. They probably don’t trust the US. The big official vaults generally have national cages, so one per country, and debts between countries can be settled by moving the gold a few metres to another country cage. All a bit strange. I suppose somebody checks up occasionally that your national cage actually contains what it is supposed to.
Yes, the personal hoarding gold is also a bit of a German thing. First thing my wife did when she came in to a bit of money was to pop down to the gold shop
Here is the absurdity. You dig the gold out of a hole in the ground. You transport it round the world, where Central Banks take most of it, and place it back in a hole in the ground. Where it remains.
If there was a Gold Standard, it would still stay in a hole in the ground, because it will never stand 1-to-1 behind the currency it would be supposed to guarantee. If there was pressure on any major currency there is only one response; every time: suspend the Gold Standard. Gold does not stop Armageddon, ever in the modern world. Gold would only ever matter, AFTER Armageddon, and there is nothing left but a desert, most of all a desert of trust in authority.
The rest is spin.
From the early eighteenth century to mid twentieth century Britain used a gold standard. Up until the French Revolution gold was used in this way for one reason. The principal use of Government money was fighting wars. Gold (or silver) had been historically the only commonly accepted international basis to measure the relative value of different currencies, when wars were fought across territorial boundaries, requiring . Or in some countries, it was the only basis the public trusted the coinage minted. In the early modern period, and in a relatively modern trading world, it changed sharply. In the Napoleonic Wars Britain suspended the Gold Standard 1799, through to 1821 because they realised it was not relevant. This revealed the flaw in the gold Standard. As soon as there is likely to be any pressure on the currency, the Gold Standard is suspended. The Gold Standard works in a modern world only because it isn’t needed (but nobody realises). As soon as it becomes necessary, it falls apart. It can only work when nobody trusts anybody about anything. And that means you do not have a functioning modern economy.
The Almighty Dollar; was an outcome of the Federal states fighting the Civil War, without relying on a Gold Standard that could only undermine what required to be done to fund the War; they issued the greenback; the rest is hitory.
Here is the irony, and absurdity of it all. When Britain returned to the Gold Standard it immediately ran into banking crises; the worst in 1825 (worse than 2008, it was close to armageddon). The bankers, economists and politicians learned very little. There was an Inquiry. It is hilarious. Nathan Rothschild, who made money shuffling gold bars back and forward from London to Paris for no substantive reason save to stave off the paranoia of British bankers, soothed anxious and perplexed Inquiry members by telling them the BoE had been doing a great job. He would, wouldn’t he? The BoE had nearly bust the country,
The illusion of gold, you might say
@John S. Warren
“The Almighty Dollar; was an outcome of the Federal states fighting the Civil War”
I must respectfully disagree. The beginning of the “The Almighty Dollar” started with the revolutionary war, Alexander Hamilton and the Funding Act of 1790. Hamilton KNEW that in order for the US Federal government to achieve “Full Faith and Credit”, the USA had to issue securities that would trade in NYC (Wall Street) and London (The City). Consolidating state revolutionary war debt united and bonded the new country & new government resulting in much good but was really not the main reason. The real purpose was for establishing “Full Faith and Credit” of “The Almighty Dollar” with world (European) markets.
“The Almighty Dollar” was born in 1790 and has never looked back.
https://en.wikipedia.org/wiki/Funding_Act_of_1790#:~:text=The%20Funding%20Act%20authorized%20the,of%20the%20said%20domestic%20debt.%E2%80%9D
Who am I to argue with an American about his own currency? I hesitate, but nevertheless I feel obliged to point out that financing the War of Independence did little to facilitate trust in paper money. By 1780 it was worth 2.5% its original value. This was the background not resolved until the Civil War for the groundwork, and beyond, the power of the US economy.
“Wartime experience left Americans bitter toward the use of paper money, largely regarded as fraudulent due to extreme depreciation and lack of redemption. To stabilize government expenditures, Alexander Hamilton, as first Secretary of the Treasury, was instrumental in founding the Bank of the United States in 1791 establishing a system of badly-needed credit for the government. This bank, and other pioneering financial institutions chartered by the states, began issuing private currencies to facilitate borrowing and lending.
With the adoption of the Constitution, monetary production was redefined and restricted as a national prerogative. Creation of the United States mint, in Philadelphia, was one of the important accomplishments of President Washington’s first administration. Coinage, though, was wholly inadequate for financing growth. With ever-growing needs for a medium of exchange, numerous banks and other businesses issued quantities of their own paper currency. Although the actual states were constitutionally forbidden to issue their own money, hundreds of private firms circumvented the law by producing what became generally known as “broken-bank notes.” (American Numismatic Society)
I do not think that established the “Almighty Dollar’s” credibility.
“In order to finance the Civil War, Congress authorizes the U.S. Department of the Treasury to issue non-interest-bearing Demand Notes. These notes earn the nickname “greenbacks” because of the green ink on the back. All U.S. currency issued since 1861 remains valid and redeemable at full face value. The first $10 notes issued by the U.S. federal government are Demand Notes, featuring President Abraham Lincoln’s portrait, fine-line engraving, and intricate geometric lathe patterns. Each Demand Note was immediately redeemable in gold or silver “upon demand” at seven specific banks around the nation. The Treasury issued Demand Notes in 1861 and 1862. After the Treasury issued Demand Notes, Congress authorizes a new class of currency known as ‘United States notes’ or ‘Legal Tender notes.’ These notes replace Demand Notes [1862]. They continue to circulate until 1971. Similar to Demand Notes, they are nicknamed ‘greenbacks.’ [they had green backs]. The Treasury seal first appears on currency during the Civil War. The federal government issues the first $1 Legal Tender” notes. These banknotes feature a portrait of Secretary of the Treasury Salmon P. Chase.” (The U.S. Currency Education Program (CEP), Managed by the Federal Reserve Board Website).
“Demands for money in the Civil War rapidly exceeded the availability of specie (gold and silver) and the capacities of the private banking system. The governments in both the North and the South began to print their own currencies as a temporary wartime expedient. Confederate paper money became famously worthless at the end of the war. Likewise, the Federal government never made good on its own promises to retire its paper currency. The strength of the country and its economy stood behind its paper, but there was still serious distrust. A variety of different forms of issues were offered: interest-bearing notes, notes redeemable in gold or silver, notes convertible to silver or gold, notes usable for paying taxes, notes for handling small amounts in the absence of coins, notes representing the collateral assets of nationally chartered banks and, especially, “legal tender” notes (also called “United States notes”)—bills that were legally required to be accepted when presented in payments.” ((American Numismatic Society)
I think we can say the “strength of the country and its economy stood behind its paper” with increasing trust, until it became “the Almighty Dollar”.
I have provided an explanation for my position, drawn carefully from authoritative US sources. I stand to be corrected, of course.
I would add, BayTampaBy has outed her gender so I can acknowledge it
Who am I to argue with an American about her own currency?
Another error, but I am trying, and Americans like a trier.
… requiring money that crossed territorial boundaries.
The BRICS nations old and new appear to be increasing their gold reserves.
Amongst other changes France is going to lose access to its centuries long gold mines (along with modern gold -uranium) in west Africa. Free or extremely subsidised ‘wealth and resources’ stolen from imperialism and slavery.
World trade is undergoing massive transformation with the forthcoming BRICS+ summit.
I guess if countries (the majority of the world excluding G7) refuse to trade in US$, start demanding a ‘new’ representation of value instead – one ‘backed’ by Gold then we are in new paradigm?
I doubt the WB/IMF want to lose control of international economies who refuse to have their loans and reserves being priced in $$ which allows them to be kept in sub-subsistence economies that have to earn $ to pay for loans and buy western supplies food in $$.
I do agree, that for the majority of individuals, physical gold is about as useful as a paper weIght in a digital age! I for the record have NONE.
Gold is of no consequence. Unless you haver a use for it. Its physical qualities – malleability and electrical conductivity and resistance to corrosion are immensely useful, but…….
My bit of gold (complete with inscription for the benefit of dectorists and future archeologists) is in the undergrowth down the Den and has been there for a couple of weeks now. I don’t think my wife has even noticed I’m not wearing it. She certainly hasn’t commented yet.
It’s of no consequence. Sentiment. Tradition. Superstition even.
I suppose I may feel the need someday to replace it, but not this month.
At a BoE Citizens Panel Forum in 2022, an official started it off with a little talk on what the Bank does. Which included storing gold.
I put up my hand and asked why, as gold no longer has any economic significance – to which he quietly and briefly said that it was other countries’ gold.