A friend sent me a news article dated March 11, 2014, that began:
“On Monday the Oklahoma State Senate passed a bill that would legalize gold and silver as legal tender, moving the legislation on to the House for consideration.”
The article started me thinking about gold and silver currency. Behind the Oklahoma vote is the implied question, “Without gold backing, what gives our currency value?” The answer is: nothing. The only reason a dollar (or a Euro) has value is because people agree it has value.
But the same is true of gold and silver. Those are just metals, elements in the periodic table. Without people to assign it value, gold would have no more significance than any other element, and quite a bit less significance than some. Oxygen is certainly more important than gold, because it sustains life, whereas, apart from a few industrial purposes, gold is useful only in the making of shiny objects and a certain cinnamon schnapps.
How much is gold worth? It depends on what people think it’s worth at the time you ask the question. In January, 1980, an ounce of gold sold for $1975.* In January, 1985, that same ounce of gold sold for $637, having lost two thirds of its value in five years. In April, 2001, it sold for $333. By February of this year the price had climbed back to $1290. Those fluctuations in price are not because the dollar is going up and down in value. The price of gold goes up and down because people agree on different values at different times. People, and what people think about it, give gold whatever value it possesses.
In theory, the value of a dollar is determined by the Gross Domestic Product (GDP) and the number of dollars in circulation. But in reality, a dollar is worth what people agree it is worth. The upside of gold is that, while people may disagree on what gold is worth, everyone agrees that it is worth something. The same may not always be said about pieces of green paper.
* Gold prices are in 2012 dollars. Price data from Macrotrends.
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