Most people are totally confused about money and have all sorts of ideas about how it’s created. Most believe it’s governments, some believe it’s central banks, others — who think they are a little more sophisticated than the average guy — think that ordinary high street banks actually create money out of thin air when they create a credit balance to a customer. (The last don’t. They create a temporary phenomenon which may or may not keep its value as real money when the loan plus interest is paid off.)
They’re all wrong. Nobody creates money — real money, that is. It creates itself. Or, rather, it is created by word of mouth and the valuation we put on different things according to one’s feelings about the standard of life at the time.
At any moment, money happens to be a consumer good with a precise intrinsic value according to what most people think it is at that moment. A small gold coin fits the bill precisely. Essentially, money is no different from a grand piano or a television set. It just so happens, however, that money is more convenient to carry around when buying or selling things.
However, it’s only convenient in principle. In practice if you had just bought a tram ride in Manchester in 1830 for a farthing — a quarter of a penny — a suitable gold coin would be so small as to be hardly visible. It would blow away if you breathed too closely. But also, if you were on your way to buy George Stephenson’s Rocket for, say £500, you couldn’t walk straight carrying the weight of the coins. Or you might easily be robbed on your way.
So this led to surrogate gold — promissory notes, banknotes, personal cheques and, today, digits in your credit or debit card or in your smartphone. The point is, however, that every single digital unit of account of your earthly monetary wealth is represented somewhere in a portion of a gold bar in your friendly central bank vault.
You don’t believe me? Are you saying that we are no longer on the gold-standard? If not then why are all central banks of advanced countries trying as hard as they can to retain gold in their vaults? On the other hand, why are China and Russia gradually buying up all the free market gold in the West and will soon, probably, be nibbling away at the public gold in the central banks?
The answer is that China and Russia, besides being the two largest miners of ‘new’ gold out of the ground, are buying as much of the ‘old’ gold as possible because they know that another monetary catastrophe will be hitting us sooner or later. They fully intend to survive by basing the yuan and the rouble on a gold standard at a sensible price.
This is to be compared with the advanced countries of the West. We are already on a gold standard — though governments pretend to their electorates that they’re not — but at an inflated banknote/digital price that is way in the sky. It will only come down to earth when the next monetary crash occurs.
By then it will strongly to be hoped that America will agree with what China has been proposing for years — a joint dollar-yuan trading currency that will be gold-backed and thus stable for all monetary purposes in future years.