Aurum Potestas Est

We as a race and a culture have a massive love affair with gold. It is the basis of our currency, the definitive mark of wealth and status, in some ways the bedrock of our society. We hoard it, we covet it, we hide it away except for special occasions, but we never really use it.

This is perhaps the strangest thing about gold; for something around which we have based our economy on, it is remarkably useless. To be sure, gold has many advantageous properties; it is the best thermal and electrical conductor and is pretty easy to shape, leading it to be used widely in contacts for computing and on the engine cover for the McLaren F1 supercar. But other than these, relatively minor, uses, gold is something we keep safe rather than make use of; it has none of the ubiquity nor usefulness of such metals as steel or copper. So why are we on the gold standard? Why not base our economy around iron, around copper, around praseodymium (a long shot, I will admit), something a bit more functional? What makes gold so special?

In part we can blame gold’s chemical nature; as a transition metal it is hard, tough, and a solid at room temperature, making it able to be mined, extracted, transported and used with ease and without degenerating and breaking too easily. It is also very malleable, meaning it can be shaped easily to form coins and jewellery; shaping into coins is especially important in order to standardise the weight of meta worth a particular amount. However, by far its most defining chemical feature is its reactivity; gold is very chemically stable in its pure, unionised, ‘native’ form, meaning it is unreactive, particularly with such common substances as; for this reason it is often referred to as a noble metal. This means gold is usually found native, making it easier to identify and mine, but is also means that gold products take millennia to oxidise and tarnish, if they do so at all. Therefore, gold holds its purity like no other chemical (shush, helium & co.), and this means it holds its value like nothing else. Even silver, another noble and comparatively precious metal, will blacken eventually and lose its perfection, but not gold. To an economist, gold is eternal, and this makes it the most stable and safe of all potential investments. Nothing can replace it, it is always a safe bet; a fine thing to base an economy on.

However, just as important as gold’s refusal to tarnish and protect is beauty is the simple presence of a beauty to protect. This is partly put down to the uniqueness of its colour; in the world around us there are many greens, blues, blacks, browns and whites, as well as the odd purple. However, red and yellow are (fire and a few types of fish and flower excepted) comparatively rare, and only four chemical elements that we commonly come across are red or yellow in colour; phosphorus, sulphur, copper and gold. And rusty iron but… just no. Of the others, phosphorus (red) is rather dangerous given its propensity to burst into flames, is also commonly found as a boring old white element, and is rather reactive, meaning it is not often found in its reddish form. Sulphur is also reactive, also burns and also readily forms compounds; but these compounds have the added bonus of stinking to high heaven. It is partly for this reason, and partly for the fact that it turns blood-red when molten, that brimstone (aka sulphur) is heavily associated with hell, punishment and general sinfulness in the Bible and that it would be rather an unpopular choice to base an economy on. In any case, the two non-metals do not have any of the properties that the transition metals of copper and gold do; those of being malleable, hard, having a high melting point, and being shiny and pwettiful. Gold edged out over copper partly for its unreactivity as explored above (after time copper loses its reddish beauty and takes on a, but also because of its deep, beautiful, lustrous finish. That beauty made it precious to us, made it something we desired and lusted after, and (combined with gold’s relative rarity, which could be an entire section of its own) made it valuable. This value allows relatively small amounts of gold to represent large quantities of worth and value, and justifies its use as coinage, bullion and an economic standard.

However, for me the key feature of gold’s place as our defining scale of value concerns its relative uselessness. Consider the following scenario; in the years preceding the birth of Christ, the technology, warfare and overall political situation of the day was governed by one material, bronze. It was used to make swords, armour, jewellery, the lot; until one day some smartarse figured out how to smelt iron. Iron was easier to work than bronze, allowing better stuff to be made, and with some skill it could be turned into steel. Steel was stronger as well as more malleable than bronze, and could be tempered to change its properties; over time, skilled metalsmiths even learned how to make the edge of a sword blade harder than the centre, making it better at cutting whilst the core absorbed the impact. This was all several hundred years in the future, but in the end the result was the same; bronze fell from grace and its societal value slumped. It is still around today, but it will never again enjoy its place as the metal that ruled the world.

Now, consider if that metal had, instead of bronze, been gold. Something that had been ultra-precious, the king of all metals, reduced to something that was merely valuable. It had been trumped by iron, and iron would have this connotation of being better than it; gold’s value would have dropped. In any economic system, even a primitive one, having the value of the substance around which your economy is based change in value would be catastrophic; when Mansa Musa travelled from Mali on a pilgrimage to Mecca, he stopped off in Cairo, then the home of the world’s foremost gold trade, and spent so much gold that the non-Malian world had never known about that the price of gold collapsed and it took more than a decade for the Egyptian economy to recover. If gold were to have a purpose, it could be usurped; we might find something better, we might decide we don’t need that any more, and thus gold’s value, once supported by those wishing to buy it for this purpose, would drop. Gold is used so little that this simply doesn’t happen, making it the most economically stable substance; it is valuable precisely and solely because we want it to be and, strange though it may seem, gold is always in fashion. Economically as well as chemically, gold is uniquely stable- the perfect choice around which to base a global economy.

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Money- what the &*$!?

Money is a funny old thing- the cornerstone of our way of existence, the bedrock of modern-day life, and the cause of, and solution to, 99% of all life’s problems. But… well, why? When you think about it, money doesn’t actually mean anything- it is an arbitrary creation brought in for convenience’s sake, and yet it as an entity has spiralled into so much more than a mere tool. Now how on earth did that happen?

Before about two and a half thousand (ish) years ago, money just about not exist. To the best of my knowledge, coinage only became commonplace in Europe with the rise of the Roman Empire- indeed, when they left Britain in the 5th century AD, much of the country went back to simply bartering- trading goods and services for other goods and services. This began to change as time went on however, and by the time of William the Conqueror’s invasion, the monetary system was firmly established across Europe. Coins were a far more efficient system than bartering- trading stuff for one another is a highly subjective process, and it can be hard to get a sense of value and to what extent you were being ripped off. By giving everything a fixed, arbitrary value (ie a price), everything suddenly had a value relative to one another. More importantly, this allowed for goods and services to be traded for the potential to buy more goods and services of equal value in coin form, rather than the things themselves, which was both easier and more efficient (there was now no risk of carrying a lampshade to the supermarket to exchange for a pint of milk, because a wallet is far easier to carry). The idea of money representing the potential to buy things can be seen by anyone looking on a British note, where it reads “I promise to pay the bearer on demand the sum of…” however many pounds (this is in fact a callback to the days when banks stuck to the gold standard, when you could theoretically walk into the Bank of England and ask for five pound’s worth of gold for your fiver).

However, with coins representing potential to buy things, they instantly took on a value of their own, and here things start to get confusing. Because, when money itself takes on a value, it instantly becomes a commodity just like any other- just as people trade in gold bullion, oil and bits of companies, so people trade with money itself. And this… actually, I’ve got ahead of myself- let me take a step backward.

The input of human effort can be used to increase the value of various bits of the world we live in. For example- a heap of planks may be bought for £50 from a sawmill, but once you have gone home and spent 6 hours swearing at a hammer, you may now have a bench or something worth £500 or more. The materials themselves have not changed, but since a bench is more useful, better looking, and is better appreciated by people than a few planks, people set more value by it. Because more value is set by it, so it is worth more money.

This, at a base level, is how the economic system works- human effort is used to turn raw materials, which we don’t want, into products, which we do. Because people want these products, they pay money for them, and because they need this money to pay for them, they get a job. Because they are providing human effort to their boss (which itself has a value for its ability to raise the value of raw materials), their boss pays them the money they need. The boss gets the money he uses to pay his employees from selling things to people, which makes money because the human effort put in to make his final product raises the value of his final product above that of the raw materials he bought in order to make it- and thus we are back at the beginning of the cycle.

If we study this process, we can see that the only way the boss can make any money out of it is if the value of his final product (F) is greater than the value of its raw materials (M) plus however much he pays his employees for the effort they input (E)- ie, F>M+E. However, pretty much by definition, F should equal M+E- thereby the only way he can make money is by paying his workers less than their human effort is actually worth in the context of the product (A communist would seize on this as evidence of corporations exploiting the masses, but I refuse to go into this argument here- it is far too messy). This is the only way that any money actually gets produced in an economy, and the result is inflation. If inflation did not exist, then the only way anyone could make any money would be by spending less- but this automatically means that somebody else will not be getting your money, and so will be losing some. Thus inflation is vital to ensure that everybody in an economy gains money, and although this does lead to the gentle devaluation of currency, it allows the human race to stay one step ahead of a potential vicious cycle of decline- and inflation can only be generated by an economy manufacturing things.

But why do we need our level of money to continually rise? Well, imagine you have a steak worth £5 (It’s just an example, don’t judge me on my figures). When you eat that steak, something of value £5 has been turned into the contents of your gut, and ultimately into what comes out the other end- which is clearly worth a lot less than the steak. Thus, the human race consuming resources  reduces the overall value of planet earth, just as making stuff increases it. Nature in fact has an inbuilt system to prevent this from turning into a cycle of endless decline- reproduction. If the cow you ate your steak from had had a calf, then nature has ensured that your consumption of the steak has not, in the long run, decreased the overall steak value of the world due to the steak potential existing in the calf (I’ve just realised I’m making all these terms up on the fly- my apologies). I could go into the whole energy from calf <- energy from grass <- energy from sun <- universe in general etc. thing here, but this is extrapolating the economic problem somewhat. However, suffice it to say that ensuring our overall monetary value continues to rise via inflation is our version, from an economic perspective, of reproduction, balancing out our consumption of finite resources in terms of value.

Phew- this is getting longer than I anticipated. My apologies once again for it turning into a semi-coherent ramble, I only hope you could follow it. There is still quite a lot more to get through, so I think I’ll try to wind this all up on Wednesday (after another Six Nations post Monday- COME ON ENGLAND!). If you have been able to follow all of that then congratulations- you now understand core economics. If you haven’t then also congratulations- you are sufficiently normal to not understand my way of thinking.