Austrian Economists and the Value of Gold or Sound Money
Austrian economists provide a comprehensive explanation for the value of gold and sound money, emphasizing subjective value, historical context, and essential monetary principles.
By rejecting the notion of intrinsic value and highlighting gold’s unique properties and historical use as money, Austrian economists illustrate how gold meets the seven criteria of sound money — durability, divisibility, portability, uniformity, limited supply, acceptability, and stability.
This perspective is further supported by the U.S. Constitution’s mandate for gold and silver as legal tender, the Cantillon Effect, and the role of market forces, ultimately positioning gold as a reliable store of wealth and medium of exchange.
This article will explain the value of gold and sound money from the perspective of Austrian economists, emphasizing subjective value, historical context, and essential monetary principles.
It will demonstrate how gold’s unique properties and historical use align with the criteria of sound money and highlight the relevance of the U.S. Constitution, the Cantillon Effect, and market forces in reinforcing gold’s role as a reliable store of wealth and medium of exchange.
Subjective Theory of Value vs. Intrinsic Value
A key distinction in Austrian economics is the rejection of the concept of “intrinsic value.” Austrian economists argue that value is not intrinsic to any good but is assigned based on individual preferences and circumstances. This contrasts with the notion of intrinsic value, which suggests that certain goods have inherent worth regardless of human perception.
Carl Menger, the founder of the Austrian School, articulated this clearly:
“Value is… nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, i.e., to our lives and well-being.”
Expanding on this, Ludwig von Mises stated, “Value is not intrinsic; it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.”
The concept of intrinsic value is often applied to gold, suggesting that gold has an inherent worth due to its physical and chemical properties.
However, Austrian economists contend that gold’s value arises from the subjective valuations of individuals who recognize its various uses, such as in jewelry, industry, and as a monetary asset.
Therefore, the market price of gold is determined by these subjective assessments rather than any intrinsic properties.
Historical Context and Monetary Use
Gold’s value is deeply rooted in its historical use as money. Austrian economists argue that gold has emerged as a preferred medium of exchange due to its distinct properties: durability, divisibility, portability, uniformity, and limited supply.
These characteristics make gold an efficient and reliable store of value and medium of exchange, which has led to its widespread acceptance and use in trade over centuries.
Ludwig von Mises, a key figure in Austrian economics, introduced the regression theorem to explain the origin of money. According to this theorem, money must have originated as a commodity with pre-existing value in direct exchange (barter).
Mises wrote, “Money cannot originate in any other way than by evolving out of a commodity which was previously bought and sold for its own sake.”
What are the 7 Components of Sound Money?
Austrian economists advocate for sound money — money that maintains its purchasing power over time and is not subject to excessive inflation or manipulation by governments.
According to Jp Cortez of the Sound Money Defense League, the 7 key components of sound money include the following:
- Durability: Money must withstand physical wear and tear over time. Gold, being a non-reactive metal, is highly durable.
- Divisibility: Money must be easily divisible into smaller units to facilitate transactions of varying sizes. Gold can be minted into coins of various denominations.
- Portability: Money must be easy to transport and exchange. Gold’s high value-to-weight ratio makes it relatively portable.
- Uniformity: Each unit of money must be uniform and recognizable, ensuring that all units are accepted equally. Gold coins and bars are standardized in terms of weight and purity.
- Limited Supply: The supply of money must be limited to prevent inflation. Gold’s scarcity ensures that it cannot be easily inflated.
- Acceptability: Money must be widely accepted by people in exchange for goods and services. Gold has a long history of acceptance as a medium of exchange.
- Stability of Value: Money should maintain its value over time, providing a reliable store of wealth. Gold’s historical role as a stable store of value makes it attractive for this purpose.
Murray Rothbard emphasized this point, stating, “In the entire history of the world, no fiat paper money has ever succeeded in maintaining its value. It is always subject to destruction through hyperinflation and depreciation.”
Gold’s stability and resistance to inflation make it an attractive option for preserving wealth. Austrian economists argue that fiat money systems, where currency is not backed by a physical commodity, are prone to inflation and devaluation due to government policies and central bank actions. In contrast, a gold standard provides a check on these tendencies, promoting economic stability and trust in the currency.
Why is Sound Money Important?
The importance of sound money is found in the implications for economic stability, personal wealth preservation, and the broader monetary system, significantly impacting people’s day-to-day lives.
Understanding the principles of sound money helps prevent excessive inflation, which erodes purchasing power. When a currency is stable, prices for goods and services remain more predictable, making it easier for individuals and businesses to plan for the future. Additionally, gold and other forms of sound money maintain their value over time, protecting individuals’ savings from the detrimental effects of inflation and currency devaluation.
Knowledge of gold’s value and its role as sound money informs better investment decisions. People can diversify their portfolios with gold and other precious metals to hedge against economic uncertainty and market volatility. In times of economic crisis or hyperinflation, understanding the value of gold and silver as money can be crucial. These metals can be used in barter and trade, ensuring people can still procure essential goods and services.
By advocating for sound money principles, these findings encourage more responsible fiscal and monetary policies. This can lead to more disciplined government spending and less manipulation of the money supply, fostering a healthier economy. A monetary system based on sound money principles builds trust and confidence among consumers and investors. When people trust that their money will hold its value, they are more likely to engage in economic activities, driving growth and prosperity.
Stable money means a more stable cost of living. People do not have to worry about sudden spikes in prices for everyday goods and services, making it easier to budget and save. Understanding these principles allows individuals to make more informed decisions about retirement savings, education funds, and other long-term financial goals, ensuring their money retains value over the decades.
These findings emphasize the crucial role of sound money in fostering economic stability, preserving personal wealth, and ensuring responsible government policies. By understanding and applying these principles, individuals can better navigate financial decisions and protect their economic well-being, both in times of stability and uncertainty.
The Cantillon Effect
The Cantillon Effect, named after the 18th-century economist Richard Cantillon, describes how the introduction of new money into an economy affects different sectors and individuals unevenly. Cantillon explained that those who receive the new money first have the advantage of spending it before prices have increased, benefiting at the expense of those who receive the new money later, after prices have risen.
Richard Cantillon stated, “The abundance of money is followed by a higher price of labor, land, and goods, and the scarcity of money by lower prices.”
David Hume, an Enlightenment philosopher, echoed this concept by noting the non-neutrality of money: “It is not with gold and silver, as with other commodities. These may perish in the using. But gold and silver, when they encrease too much, may be returned upon us in the shape of commodities, and lose more by the enhancement of prices, than they gain by the commerce.”
The U.S. Constitution and Sound Money
The U.S. Constitution also underscores the importance of sound money. Article I, Section 10, explicitly states, “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.”
This provision reflects the framers’ intent to ensure that the U.S. monetary system would be based on stable and reliable currency, specifically gold and silver, to prevent the economic instability associated with fiat money and excessive inflation.
This constitutional mandate aligns with the Austrian economists’ advocacy for sound money, reinforcing the importance of gold and silver as reliable stores of value and mediums of exchange. The historical precedent set by the Constitution emphasizes the enduring significance of precious metals in maintaining economic stability and trust in the currency.
The Role of Market Forces
The value of gold, like any other good, is ultimately determined by market forces. Supply and demand dynamics, influenced by factors such as mining output, technological advancements, and geopolitical stability, affect gold’s price. Additionally, investor sentiment, economic uncertainty, and inflation expectations can drive demand for gold as a safe-haven asset.
Walter Block, an Austrian economist, noted, “The market is the most efficient institution in human history for determining prices because it takes into account the vast, dispersed knowledge and preferences of individuals.”
Austrian economists emphasize that these market interactions reflect the aggregate of individual subjective valuations. The decentralized decision-making process of millions of individuals ensures that the value of gold is constantly adjusted based on real-time information and preferences.
Robert P. Murphy adds, “Market prices, including those of gold, emerge from the complex interplay of countless subjective valuations, and thus they convey critical information that helps coordinate economic activities.”
Conclusion
In summary, Austrian economists provide a robust framework for understanding the value of gold and the principles of sound money.
By emphasizing subjective value, historical context, and essential monetary principles, they illustrate how gold meets the criteria for sound money — durability, divisibility, portability, uniformity, limited supply, acceptability, and stability of value.
The insights from the Cantillon Effect and the mandates of the U.S. Constitution further reinforce the importance of gold as a reliable store of wealth and medium of exchange. Market forces, driven by individual subjective valuations, continue to play a crucial role in determining gold’s value.
Ultimately, the Austrian perspective highlights the enduring significance of gold in maintaining economic stability, preserving personal wealth, and promoting responsible fiscal and monetary policies, thereby ensuring a more predictable and secure financial environment for individuals and economies alike.
Written by ChatGPT and edited by a human.
Originally Published on LinkedIn.
