Problems with precious metals as moneyThere is no perfect money, although it is argued that silver or gold may come close to this standard. Gold is too valuable to use for small purchases, and silver is too heavy and bulky in large quantities. Today, since gold is demonetized and forced to compete with paper currencies it does have a spread of about 1-4% to buy and sell in terms of the paper currency, whereas paper money can be exchanged freely. The exchange premium comes from the relative scarcity of people to exchange paper for gold or silver. The scarcity has resulted in having to pay coin dealers a small profit for the service. If silver and gold were remonetized, then there would be no shortage of sources for exchange. Accordingly the premiums charged would drop to nothing in an economy that recognized silver or gold as lawful money. Although gold itself does not decay, gold coins are easily scratched or damaged, and this can reduce their value and fungibility. From 1980 to 2001, gold was a poor store of value, gold prices dropped from a high of $850/oz. to a low of $255/oz. The advantage of gold and silver, however, lies in the fact that, unlike fiat paper currency, the supply cannot be increased arbitrarily by a central bank. On the other hand, gold, silver and other metals are subject to regular and sometimes extraordinary supply increases and decreases. They are virtually created by being dug out of the ground, although there is a cost for this. In the 16th century the Spanish possessions in the Americas produced huge amounts of new money, which produced economic fluctuations throughout the world. Similarly, precious metals are subject to hoarding by individuals, sometimes in the form of jewellery, sometimes as coins or ingots. While this may be rational behaviour for indivduals (as gifts, or savings, or an expression of fear about future circumstances) this results in an increase in the amount of "dead" (i.e. non-circulating) money, a decrease in supply and possibly an increase in the value of the metal. Imbalances between the values of gold, silver and other metals, possibly caused by the fluctuations of such supplies and demands have often led to scarcity of coins in many societies. Shipping coins from one jurisdiction to another so that they could be reminted was sometimes a lucrative trade before the advent of trusted paper money. source: wikipedia.org GNU Free Documentation License |
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