Gold isn’t money, we’re incessantly told. To which we reply, “Oh, yeah?”
But the argument keeps coming back, unchanging, unwavering. It’s a metal, and a barbaric one at that, reason the commodity’s adversaries. Yes, they concede, it was once used as a medium of exchange, but those days are gone. We know better now. This is the age of fiat money, which has more or less prevailed for more than three decades since the Nixon administration completely severed the dollar’s link with gold.
Government sanctioned or not, gold just won’t go away, finding a raison d’etre in poking its finger in the eye of paper money, which has long been promoted as a replacement for the metal that refuses to go away quietly. Indeed, some predicted in 1971 that freeing the dollar from gold would cause the metal to drop to $7 from its then-official price of $35. In fact, the opposite struck, with gold confounding the paper pushers by rising in price.
Today, of course, gold has again crossed above $500 of late, for the first time since the early 1980s. The cries still go out that gold isn’t money; it’s just another commodity. But defining money isn’t necessarily cut and dry in the 21st century. In fact, it’s a task that can be downright perplexing. We can’t help but notice, for example, that the United States Mint openly advises that it produces “legal tender” gold coins with face values ranging up to $50 for the one-ounce American Eagle. Some might call this money. Legal tender? Gold? Say it ain’t so. Alas, who are we to argue with the United States government on the definition of money?
In fact, the feds are a clever bunch when it comes to marketing, selling their legal tender $50 gold pieces at the going rate for (gasp!) gold and then som, which is to say at steep premiums over the face value of the legal tender coins. Lest any one think this is a great scam, rest assured, that no matter what you pay for the American Eagle, it will be accepted for payment by the good folks at Wal-Mart, 7-Eleven, and other fine merchants across the land. The law requires no less. Yes, dear readers, gold is in fact legal tender money by decree of the United States government, and must be received if given in exchange for Junior Mints and Chuckles candies. But in a not-so-surprising development, the coins’ use as legal tender money amounts to a perfect record of failure as a means of exchange.
No one in their right mind would spend a $50 American Eagle as $50, given that the gold content is worth ten times that. You might think that the feds have stumbled when it comes to devising denominations of money that will find work for the employment at which the coins were intended. But don’t be too hasty here. In fact, we suspect that all is going exactly as planned. As we noted, the government is a clever bunch, and the $50 American Eagle’s face value is purposely assigned a value below what the gold content of the coin is worth in the open market. What’s more, people are happily paying the premium. It’s a win-win situation between government and adoring public. And since the U.S. sits atop the single-largest horde of gold in the world, it’s a strategy with legs.
This government’s current policy of minting gold coins with severely discounted face values stands in contrast to the past, when Washington stopped minting gold coins with face values that were severely discounted to the underlying gold’s value. Minting of the original St. Gaudens $20 gold coins were suspended in 1933. But there too the government has a plan for purging past monetary demons by selling the old “Double Eagles” at prices well above face value.
So, let’s review. The government used to mint legal tender gold coins for general circulation but ended the policy when it was clear that the face value didn’t keep pace with the rising value of the underlying commodity. More recently, the government began minting gold coins again, this time embracing the strategy of severely underpricing the face value so as to insure (we’re speculating here) that no one spend the legal tender gold. What’s old is new…again.
The logic in all of this is debatable in discussions of the prudence of design and deployment of a national monetary system. But when it comes to the claim that gold isn’t money, there’s a large institution that suggests otherwise…sort of.