Gold¶
"Gold is money. Everything else is credit." --J.P. Morgan
Gold represents the most enduring and successful form of money in human history, serving as currency, a store of wealth, and a unit of account for over 5,000 years. Its unique physical and chemical properties make it the ultimate embodiment of the five properties of good money.
Gold Is Money¶
John Pierpont Morgan was an American financier who invested heavily in infrastructure in the early 1900s. J.P. Morgan's companies sold steel to railroads, invested in General Electric just as electricity was coming online, and sold gold to the U.S. Government in 1895 to keep the Federal Treasury solvent. Financial firms bearing his family name include JP Morgan Chase Bank; Morgan, Harjes & Company of Paris; Morgan, Grenfell & Company of London; Morgan Guaranty Trust; and Morgan Stanley.
Morgan once told Congress, "Gold is Money. Everything else is credit." This concise statement profoundly captures the nature of the modern banking system. Gold, because of its unique qualities, has been the one material universally accepted in exchange for goods and services for millennia. As a store of value, gold began serving as backing for paper currency systems when they became widespread in the 19th century. From the 1870s until World War I, the gold standard was the basis for the world's currencies. Although gold's official role in the international monetary system ended by the 1970s, the metal remains a highly regarded reserve asset, and approximately 45 percent of all the world's gold is held by governments and central banks. Gold is still accepted by all nations as a medium of exchange for international payment.
The Five Properties of Good Money¶
Good money must meet certain criteria. Of all the naturally occurring elements on earth, gold alone possesses the ideal combination of characteristics.
Durable: Durability means unchanging. Eggs crack. Wood rots. Iron rusts and ice melts. Even stone wears down and loses mass over time. Gold does not corrode, rust, tarnish, or decay. It can sit on a shelf for centuries without changing. It can be handed back and forth thousands of times, carried long distances, and not break, tear, dissolve, or diminish in size or weight. Money must be durable to be an effective medium of exchange -- perishable goods like fruits or meat would rot before they could be used. Durability also contributes to fungibility: if the material were not durable, individual units would wear differently and become distinguishable from one another. Durability is the single thing that gives money its ability to be used as a store of value.
Divisible: Gold's softness allows it to be easily divided into smaller units without loss of value. It can be melted, cast, stamped, and engraved. The sum of the pieces always equals the original whole. Aristotle argued that money must be divisible to facilitate transactions of different sizes, but the requirement goes further: a small part of money must have all the properties of good money itself. Cattle, feathers, and teeth may have some good attributes, but they are not divisible.
Portable: Gold's high density means significant value can be carried in a relatively small, transportable form. Imagine carrying a barrel of crude oil every time you went to lunch -- oil is durable, divisible, and scarce, but not portable. Money exists for convenience, and to be convenient it must be carried from place to place without much trouble.
Scarce: Gold meets all four criteria of scarcity. It is not easily obtained -- while nuggets can sometimes be found lying on the ground in places like Western Australia, gold typically must be dug up, leeched, and smelted, requiring considerable work. It is useful in its own right, having been used for jewelry, decoration, and industrial applications throughout history. It is counterfeit-resistant, with unique density and properties that cannot be easily replicated (though people have tried -- tungsten slugs wrapped in gold represent one modern attempt). And it requires an economic choice to acquire, involving sacrifice and opportunity cost.
Accepted: Gold has been universally accepted across civilizations and throughout history. Even today, gold is accepted by all nations as a medium of exchange for international payment. In 2023, over 80% of international transactions were conducted in U.S. dollars -- but the dollar's dominance rests on network effects and the petrodollar system, not intrinsic properties. Gold's acceptance rests on 5,000 years of demonstrated utility.
The Process of Elimination¶
When examining the periodic table of elements for suitability as money, nearly all fail one or more criteria. Gases like hydrogen and noble gases are not portable. Organic materials are not durable. Common metals like iron rust, and aluminum is too easily obtained. Reactive metals like sodium are dangerous. Toxic materials like asbestos and mercury are health hazards. Brittle metals like tungsten are not easily divisible. High-melting-point metals like titanium are impractical for coinage.
Only the noble metals remain viable -- metallic elements that show outstanding resistance to chemical attack even at high temperatures. The shortlist includes ruthenium, rhodium, palladium, osmium, iridium, platinum, gold, and silver, known as the platinum group. Some lists also include copper and nickel, known as the coinage group. Of the metals in both groups, palladium and platinum are too rare for practical widespread coinage. This leaves just gold and silver.
Gold is less abundant than silver. It is more malleable, even at room temperature, making striking coins much easier. Silver tarnishes, but gold never does. Gold's characteristics give it a slight advantage over silver -- its softness makes it divisible, which makes it portable. Its density gives it weight, making it feel valuable. It is easily melted into jewelry and re-cast into coins without much heat. So unique and valuable is gold that alchemists tried for centuries to turn lead into gold.
Price Volatility vs. Store of Value¶
Critics often claim gold is not a good store of value because of price volatility. This misunderstands what "store of value" means. It refers to durability and the ability to preserve wealth over time, not stable pricing. Price stability has never been a required feature of money, but admittedly it helps.
Gold's price has been volatile throughout history. It was so volatile in the U.S. that the price was fixed by law for over 100 years. Since 1971, the one-year change in the price of gold has typically varied from a loss of -25% to a gain of +120%. From 1980 to 2001, gold prices declined over 50%, taking 27 years to recover the 1980 high of $698 -- losing 60% of its real value to inflation during that period. From 2012 to 2016, gold lost 30%.
Real estate is also used as a store of value, yet in any given year U.S. home prices have lost -20% or gained +10%. From 1894 to 1919, average U.S. home prices declined by over 50% in real terms. "Store of value" means more than just a steady price -- it encompasses integrity and durability that prevent decay, wear, or corrosion through time. Despite all price fluctuations, gold is still gold, land is still land, and one Bitcoin is still one Bitcoin.
Gold and Government Debt¶
The continued issuance of government debt impacts gold's price. When governments issue bonds, they increase the money supply. If this increase doesn't correspond to economic output growth, the value of debt-created money declines relative to gold. The price of gold rises as it represents a viable savings vehicle to preserve wealth for the future.
The Gold Standard¶
Gold was the most widely used form of money in history. As countries and economic markets matured, they implemented a uniform currency regime known as the gold standard -- a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was widely used in the 19th and early 20th century.
The U.S. Constitution specifically mandated gold and silver coin as the only acceptable currency states could use: "No State shall... coin Money... [or] make any Thing but gold and silver Coin a Tender in Payment of Debts" (Article 1, Section 10). The Coinage Act of 1792 established the United States Mint and included the "Debasement Clause" in Section 19. Having learned from Rome, Byzantium, England, and Prussia, the Founding Fathers understood the dangers of currency debasement and prescribed death for anyone who debased the national coinage.
By 1900, the United States formally adopted the gold standard, which remained in place until the 1930s. Gold brought stability and growth to the U.S. economy. However, the gold standard also had limitations -- a limited money supply and inflexibility in responding to economic downturns. The principal problem with gold as money is that there is simply not enough of it to support the size of the global economy. It cannot expand enough to match economic growth. Consequently, gold suffers as a medium of exchange but excels as a long-term store of wealth.
The End of the Gold Standard Era¶
After reigning supreme for 5,000 years, gold is no longer significantly used as a medium of exchange anywhere in the world. The success of metal money came with a hidden cost -- rulers realized they could enrich themselves by debasing coins, slimming them down and mixing them with cheaper base metals. Could you spot the difference between a 4-ounce coin and a 5-ounce coin without a scale? Or a solid gold coin and one that was 80% gold and 20% tin? If they both had the King's face on them and were roughly the same size, you would not notice. Neither did the ancients.
The First World War caused many countries to abandon the gold standard. There was simply not enough gold in their treasuries to pay for a war they were legally obligated to undertake. By 1927, many countries had returned to the gold standard. However, because of World War I, the United States had moved from being a net debtor to a net creditor. From 1915 to 1935, the United States tripled its gold reserves. So large were the post-war holdings that in 1935 the government rushed to build a secure vault in Kentucky -- Fort Knox.
The Bretton Woods system (1944) established the U.S. dollar as the world's reserve currency, pegged to gold at $35 per ounce. This system collapsed in 1971 when President Nixon announced the U.S. would no longer convert dollars into gold, effectively ending the gold standard and allowing the government to print money without gold backing.
Price Manipulation¶
Two notable bubbles in gold's price -- in 1980 and 2011 -- were caused primarily by market manipulation rather than inflation. In 1980, the Hunt brothers attempted to corner the silver market, with speculative demand spilling into gold. Between 2008 and 2016, JPMorgan engaged in "spoofing" -- placing orders they never intended to execute to create false impressions of supply and demand. In 2020, JPMorgan agreed to pay over $920 million and admitted to wrongdoing to settle federal market manipulation probes.
Modern Role¶
Though no longer used as currency, gold remains:
- A reserve asset held by central banks (approximately 45% of all gold)
- A hedge against inflation and currency debasement
- A safe haven during economic and political turmoil
- The standard against which Bitcoin -- often called "digital gold" -- is measured
Gold's 5,000-year track record demonstrates that its unique combination of physical properties, combined with universal acceptance, makes it the ultimate form of commodity money. Not coincidentally, Bitcoin also meets each of the five properties of good money, which is why it is sometimes referred to as digital gold. To understand that Bitcoin is money, you must first understand that gold is money.