It will come as no surprise to you for us to state that Gold is money. Why? because it fulfills, to an extent unmatched by any other physical commodity (Silver comes closest), all the pre-requisites of a money. It was rare and prized long before the concept of "money" was ever discovered. It has many other unique uses, and always has had. But for nearly three thousand years (since the first Gold coins were struck in Lydia in 700 BC) Gold's primary utility has been recognized as a MEDIUM OF EXCHANGE.
The history of Gold as money in modern coin form spans 2630 years, from 700 BC to about 1930 AD. The history of nothing but paper and base metal and silver coin in circulation spans about 40 years from 1930 to 1970. And the history of paper and base metal coin as "money", with no connection to Gold (or silver) anywhere on earth also spans a period now approaching 40 years - from 1970 to date.
To be more precise, silver coinage in circulation as money vanished from the world between 1963 and 1965. And on August 15, 1971, the world entered the first era in its history in which no circulating paper anywhere was redeemable in Gold by anyone. On that date, U.S. President Richard Nixon "closed the Gold window". This broke the last official tie between Gold and a circulating currency - which also happened to be the world's "Reserve Currency" - the currency held by all other nations as the reserve behind their own currencies.
The result has been the world financial system of our "modern" era - the "floating currency" system.
The founder of Communist China, Mao Tse Tung, is quoted as having said that: "Power grows out of the barrel of a gun". Actually, it doesn't. Political power grows out of the ability to interfere in the voluntary interaction between individuals. In a society in any stage of advanced development, the way to do that has always been to gain control of what the society or nation uses as its money.
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
John Maynard Keynes - The Economic Consequences of the Peace (1919)
Keynes was obviously a much more subtle thinker than Mao. A gun is not a simple product. The ability to produce guns only comes in the later stages of the development of an advanced economy. But money is a pre-requisite of that development starting at all. As has already been stated on these pages, without a functioning money, progress towards an advanced economy is impossible.
Now, it is impossible to "debauch" Gold itself. But debauching money is not difficult at all. Both the Greeks and the Romans "clipped" their Gold and silver coinage - they began to mix more and more base metals with the Gold and Silver in their coins. Marco Polo brought to the West the first stories of paper money, introduced by Kublai Khan and made from the bark of the mulberry tree. Bankers, who were originally Goldsmiths who stored Gold for other people and charged a fee for their services, began to issue paper "receipts" for the Gold. As these receipts became more widely acceptable in exchange, the idea of "paper money" was introduced. Of course, the bankers couldn't resist. They began to issue more "receipts" than they had Gold with which to redeem them. And one of the first things that these bankers did with this "excess paper" was to lend it to Monarchs, and to early governments.
The world's first major Central Bank (the Swedish Central Bank is actually older) was the Bank of England, established as a joint stock company (similar to the East India Company) in 1694. The bank was formed for the express purpose of making a loan in the amount of 1.2 million Pounds to William III, who had been running up huge bills in his Continental wars. The next major Central Bank was the Bank of France, established by Napoleon in 1800. With the exception of the short-lived "Bank of the United States", the U.S. did not have a Central Bank until the formation of the Federal Reserve in 1913.
The Central Banks actually had two purposes. In Europe, they were established to lend to Monarchs (which is one of the main reasons why they were anathema to the Founding Fathers in the U.S.). The other reason, which only evolved over time, was to bail out private bankers when they were caught out in issuing more paper than they had backing in Gold. It was the Bank of England which bailed out the Aristocracy in England after the 1720 paper adventure of the South Sea Bubble.
But the turning point for banking in general, and Central Banks in particular, came in England in 1844. This was the passage of "Peel's Bank Act", the culmination of a long debate between what was called "The Banking School" and "The Currency School". The "Banking School" held, as did the advocates of the Federal Reserve some 70 years later, that there was a need for an "elastic currency", a paper money that could be expanded to "meet the needs of business". The "Currency School", echoing Adam Smith and the U.S. Founding Fathers, abhorred this idea. They held that Banks should NOT be able to issue paper in excess of the Gold held by the banks of issue. Under Peel's Bank Act", the Currency School actually won the debate.
The problem was that there was a fatal flaw in the theory of the Currency school, which became embedded in Peel's Bank Act. The Bank Act failed to take into consideration the simple fact that not all paper circulating as money did so in the form of bank notes. There was also paper issued in the form of cheques, and this form of paper escaped the strictures of the Act. Banks in general, and Central Banks in particular, have been dining out on this mistake ever since.
Up until the Napoleonic era in Europe, the major purpose of debauching the currency was to finance the adventures of the Monarch. Maintaining courts was costly, but supportable. What became unsupportable was the cost of wars. Most of the historical financial collapses prior to Napoleon can be traced home to the expenses of war. The other point to be made here is that "paper money" did not circulate amongst the mass of the people at all, and that few "ordinary people" had ever possessed a gold coin in their lives.
The Nineteenth century was a century of peace and genuine economic growth. This was the century which transformed the life of the "ordinary people". In Britain, the most advanced economy of the 19th century, the life of an ordinary person in 1800 was in many respects markedly inferior to what life had been like under the Romans 1600 years earlier. By 1900, luxuries that neither the Romans nor even the Royal Family of 1800 could have imagined were taken for granted.
All of this was the result of the world's only era of truly free international finance and trade, in which Gold progressively became the world's money. Both of these developments grew naturally out of a century of political freedom. As a corollary, there were no major wars between 1815 and 1914. The world was transformed to a degree which it never had been before, and never will be again. Why "never again"? Because the 19th century was also the end of the "frontier era". By 1900, there were no more blank spaces on the globe. Another such "frontier era" is certainly possible in future, but it will have to take place on another planet. There are no frontiers left on earth.
This closing of physical horizons led to a shrinking of mental horizons, and the result was one of the great tragedies of human history. This statement began to be heard: "The problem of production has been solved, it is now time to work on the problem of distribution". As all ideas do, this one became a physical reality, in Germany in the 1870s, when Otto von Bismark invented the modern welfare state.
"This is the shabby secret of the welfare statists' tirades against Gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism towards the Gold Standard."
Alan Greenspan - Gold and Economic Freedom (1966)
No nation ever goes to war relying only on its taxing power to raise the necessary means to pay for it. The cost of the war is always disguised by debauching the currency. But in times past, there have been many instances when the debt incurred to fight the war has actually been either substantially or completely paid off afterwards. The U.S. did this after their Civil War (1861-65) - the "Greenbacks" issued to fight the ware were redeemed in full - and in Gold - in 1879.
The provision of a welfare state, with cradle to grave "security" regardless of the productiveness of those made "secure", is not financed through taxation. What is, partially, financed through taxation is the gigantic bureaucracy necessary to administer such a state. The actual provision of "security" is made, in its entirety, through borrowing, facilitated through the operations of Central Banks and national Treasuries or Ministries of Finance. The original (and only valid) definition of inflation is an increase in the stock of money. Only comparatively recently has the definition come to be a rise in the general price level. The reason for the change in definition is obvious, it conceals the mechanism through which the welfare state is maintained.
It is the rise of the welfare state in the century just ended which has made politically "necessary" the complete separation of Gold and what circulates as "money" today. This is the process that has led to the total destruction of money. Money is NOT wealth, it is a medium by which wealth can be exchanged between consenting adults. If an adult does not consent, then money cannot produce an exchange. Nothing can produce an exchange if the potential parties to it do not consent. But an expropriation can be produced, by a government with sufficient power. To obtain that power, money must be controlled by government. Today, it is.
And because the money you use is totally controlled by your government, dear reader, so are you. That is the case for Gold as money.