Thursday, August 23, 2012

King Midas Misunderstood

In response to the efforts by the GOP to add a return to the gold standard to their 2012 Convention Platform, I think it's useful to reflect on an article Paul Krugman penned back in 1996.
The legend of King Midas has been generally misunderstood. Most people think the curse that turned everything the old miser touched into gold, leaving him unable to eat or drink, was a lesson in the perils of avarice. But Midas' true sin was his failure to understand monetary economics. What the gods were really telling him is that gold is just a metal. If it sometimes seems to be more, that is only because society has found it convenient to use gold as a medium of exchange--a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.
 I find it an ongoing source of amusement that the gold bugs don't get this simple idea: gold is only valuable because we agree that it's valuable.  It has some marginal industrial uses, but beyond that, and making pretty baubles, it's pretty useless.  It's heavy, hard to move around.  Compare the cost of moving $1BN worth of gold versus $1BN worth of dollars in electronic form and you'll get what I mean, $1BN of gold weighs about 37,000 pounds or around 19 tons.  Even in a gold reserve system, you eventually have to move the gold around.  From a value store perspective, you can achieve the same result using dollars, yen or very small rocks.  We just have to agree on it.

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