Money: Medium of Exchange and Store of Value

An astute commentator in the UK, Dominic Frisby, presents a wonderful analysis of why the gold standard works so well.  Paper money is an excellent medium of exchange but "a rotten store of wealth."  Gold coins are an excellent store of wealth but an inefficient medium of exchange.  Hence the beauty of the classical gold standard, in which paper money, very convenient for making purchases, is legally convertible, at a defined weight, into gold, an excellent store of value.  Best of both worlds!  Mr. Frisby in his own words:

Broadly speaking, money has two main uses. One is as a medium of exchange. The other is as a store of wealth. (You might find other characteristics in an economics textbook, but these are the crucial ones.)

Our modern fiat system of money is a quite brilliant medium of exchange. Thanks to the internet, you can buy almost anything anywhere in the world and pay the seller instantly. Short of a single global currency that eliminates the need for foreign exchange, it's hard to see how you can improve on modern money as a medium of exchange.

But it's a rotten store of wealth. Every year it buys you less and less.


Gold has, of course, proved to be a wonderful store of wealth. It lasts pretty much forever. And it buys you as much as it ever did – as much energy, clothing, bread and meat as it did 50, 500 or even 5,000 years ago. It's why, in this era of negative real interest rates (ie rates are negative once you adjust for inflation), more and more people are choosing gold as a means to store their wealth.

But as a medium of exchange, it's been found wanting.

From about 1700 on, people began to prefer to use paper certificates representing gold – which eventually became bank notes – in the marketplace to gold itself.

And the chances of my going to Tesco's some time in the not-too-distant future and doing my weekly shop with a gold sovereign are, at best, remote.


So gold has re-emerged as a reliable store of wealth. And it is starting to re-emerge as a currency. It's certainly not impossible – in fact to my mind it's probable – that it will eventually regain some kind of 'official' currency status at some stage.

The classical gold standard: combining the convenience of paper with the integrity of gold.  And the sooner it is restored as the official monetary policy of the United States, the United Kingdom, and the world, the better off every country that adopts it, and the world, will be.

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