When I first started this site, like most finance-economics-type bloggers, I spent a fair bit of time obsessing with gold. Only I sat on the other side of the divide, and disliked it. Over the weekend, I came across this excerpt from a book by Claudia Hammond. The book is called “Mind over Money: The Psychology of Money”. And here’s the excerpt:
To this day, a British £10 note is printed with the words ‘I promise to pay the bearer on demand the sum of ten pounds’ – a promise which used to mean you could exchange it in a bank for gold to the same value, literally ten gold sovereigns. It was long thought that without that written guarantee there would be no confidence in national currencies.
Indeed the ‘gold standard’, as it became known, underpinned even advanced economic systems until well into the twentieth century, with the United States only abandoning altogether as recently as 1971. But there was a big problem with the gold standard. It was too rigid for complex, dynamic economies – and strict adherence to it led to the miseries of the Great Depression of the 1920s and ’30s.
Even so, coming off gold proved to be a protracted business, and to this day central banks retain large stocks of gold as a bulwark to other confidence measures.
Assuming you were able to succeed in exchanging the money in your bank account for gold, would you know what to do with it? You can’t eat gold after all. And as a metal, it’s not even one of the most useful. Its value lies partly in its relative rarity and the fact that we like the look of it, but largely because we have collectively invested it with a sense of preciousness. Again, it is essentially a psychological thing. If we all decided that gold was dross, it would become so.
We imbue money with its value.
So that part about our obsession with gold being a psychological thing – that was exactly what got me so concerned the first time around. I mean, we’re a few generations away from the gold standard now. Even the passage above presents the idea of the gold standard as something anachronistic: “Indeed the ‘gold standard’, as it became known, underpinned even advanced economic systems until well into the twentieth century, with the United States only abandoning altogether as recently as 1971.“
Given that, how long before the millennials and their offspring collectively dis-invest gold of its sense of preciousness? After all, it’s no longer a psychological construct that gets reinforced every time you pull a bank note out of your pocket.
Weirdly though, as time has gone on, I’ve actually become less disturbed by gold. Yes, its value is a psychological construct – but why should that be such a problem? Almost everything is a psychological construct: democracy, patriotism, identity, love… And that includes money.
The historian Yuval Noah Hariri (of ‘Sapiens’ and ‘Homo Deus’ fame) describes money as:
“the most universal and most efficient system of mutual trust ever devised.”
It’s okay to panic about our money system sometimes. When people stop believing in the trust part, and that feeling of distrust is mutual, you get an equally swift and efficient economic collapse.
But we’ve also had millennia of this psychological marvel: occurring every day, in almost every thing. And that should give us some comfort.
Also, it probably means that gold will never really be dross. Because we’ve all sort of mutually agreed that it isn’t. And now that it doesn’t play such an important role in our monetary system, there’s perhaps less of a reason for that mutual agreement to break down.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.