Commodity Gold is Not Money in the USA

Note: This article is a follow-up to a previous article I wrote called “No, Africa Is Not Moving Toward a Gold-Backed Currency, and Neither Is Anyone Else.” Reader comments suggested that people had a lot of questions about how commodity gold is not money or currency, and this article will address some of them.

While the U.S. federal government does not mandate gold as legal tender for general transactions, several states have laws that recognize gold as legal tender. These laws typically apply to government-minted gold coins, not commodity gold. States like Utah, Texas, and Louisiana have enacted legislation allowing U.S. Mint gold and silver coins to be used in transactions and exempting them from state capital gains taxes. However, this does not establish nationwide legal tender status for gold and silver.

Even in states where gold and silver coins are recognized as legal tender, they are not practical for everyday purchases like gas or groceries. These laws mainly prevent certain types of taxation on transactions involving precious metals, rather than establishing a practical framework for their use in daily commerce.

Under federal law, American Eagle Bullion Coins are considered legal tender, but their face value is largely symbolic and serves to prove their authenticity as official U.S. coins. Gold and silver coins issued by the U.S. Mint are primarily used as investment vehicles rather than currency for day-to-day transactions. The lack of infrastructure for such transactions and the volatility of precious metal values hinder their use as a regular medium of exchange.

The distinction between currency and money is that to be money, a commodity must fulfill four primary functions.

Medium of Exchange: Money must be widely accepted for goods and services, facilitating trade without direct barter. For instance, you can sell your labor and receive money to buy goods and services. Offering a gold bar or necklace in exchange for labor is barter, as the value is based on weight and purity, fluctuating with global markets, not face value.

In contrast, money has a constant face value and is always traded at that value, regardless of inflation. Under federal law, government-minted gold and silver coins have a face value but are typically traded based on their higher metal content. For example, American Eagle Gold Bullion Coins weighing one ounce have a face value of $20 but are sold for their gold value, around $2,413. This shows that even government-minted gold coins may not fully meet the medium of exchange function, as they are rarely used at their face value in everyday transactions. In a stable economy like the US, prices generally do not change hour to hour, though commodity values might fluctuate minute to minute.

The second use of money is to serve as a store of value, a criterion which gold generally meets due to its intrinsic worth and limited supply. While the value of gold fluctuates over time, it is considered to hold its value. Unlike traditional money, which can be invested or deposited to earn interest, gold itself does not generate interest and cannot be invested directly.

Investors can purchase gold ETFs as an investment vehicle, but they cannot put their own gold into an ETF; they must purchase ETF shares with cash. These ETFs hold physical gold or gold-related assets, and the value of the shares reflects the value of the gold held by the ETF. Although ETF shareholders do not directly own the underlying gold, they benefit from its price movements. Investors can also buy ETFs holding natural gas, corn, or soybeans, so there is nothing unique about gold ETFs.

The third use of money is often misunderstood, but it underpins the entire capitalist system. Money serves as a unit of account, providing a standard measure of value. This function allows for the valuation of goods and services, making it easier to compare prices and record financial transactions. For example, prices of goods and services are expressed in terms of money, simplifying comparison and accounting.

You know that a car is worth more than an orange, but you can only quantify the difference by comparing their prices. Pricing goods and services in grains of gold would be extremely cumbersome, and because the value of gold fluctuates constantly, prices would be changing continuously. Interestingly, gold itself is priced in dollars, and the value of your gold holdings are recorded in dollars.

The fourth use of money is as a standard of deferred payment, meaning it is used to settle debts payable in the future. Loans and credit arrangements are typically denominated and repaid in money, which is crucial for credit markets and long-term financial planning. Credit exists because lenders can earn interest, which requires a unit of account to assess and charge interest accurately.

In 2019, gold was $1,393.34 per ounce; today it is $2,413.90. This 73.25% price increase highlights gold’s volatility, compared to cumulative inflation of 22% since 2019. Lenders set interest rates based on anticipated inflation to ensure returns. Borrowers agree to these rates in advance, ensuring transparent transactions. However, gold’s unpredictable price makes it impossible for lenders or borrowers to determine appropriate interest rates for future payments.

Commodity Gold may be an excellent investment or a speculative asset, but it is not money in the United States.

The post Commodity Gold is Not Money in the USA appeared first on The Gateway Pundit.