Gold holds a special place in mankind's history. Aside from its function for adornment, it serves for thousands of years, across many cultures, as money. Its usefulness as a medium of exchange has been realized, before the existence of the Gold Standard, at other non-European culture. As an illustration, the Chinese language for cash, jin, literally means gold.
Modern science endows us with more insights about the yellow metal.
Gold is rare. It constitutes only about five parts per billion of earth.
Gold is malleable. Merchants can make it into all kinds of shape and divide it into any amount for ease of transport and facilitating transactions.
Gold is chemically inactive. It's unaffected by air, heat, moisture, and most solvents. Therefore, it does not tarnish, nor decay, which serves as a good storage of value for indirect transactions.
Gold is very dense. So that it has a large range of divisibility, or fungibility. One can manufacture an alloy-specie that contains various weights of gold to designate different denomination of money required for different amount of payment. One can also carry a large sum, in gold, without occupying too much space.
Gold supply is controlled. This characteristic serves as an anchor against state inflationism, thereby protecting people from random wealth confiscation.
How did Gold Became Money?
Our ancestors came to use gold as money through the process of elimination when bartering. Since not all goods are equally marketable, some goods will be more preferable and thus has greater probability of resulting in successful trade. Overtime, goods of highest marketability attain the status of common media of exchange. This status, in turn, makes everyone want them. Thus, a self-reinforcing circle begins, which further strengthen the position of such goods as common media of exchange. (2)
Meanwhile, the process of elimination continues in search of the best money. As Mises pointed out, "[t]he group of commodities from which these [goods] were drawn was originally large, and differed from country to country; but it has more and more contracted." (3) Gold distinguished itself in this contraction. With the benefit of modern science - gold's chemical and physical properties mentioned above - we can further validate this choice, gold, is the best commodity for money.
Except silver.
And platinum. And palladium. Science had shown that all these three precious metals (and four other platinum-group precious metals) share all, or close to all, the chemical and physical properties of gold. The fact that the metals are precious points to their similarities to gold's properties. Several decades ago, Mises had stated the difficulty in further narrowing, between gold and silver, as the most suitable form of money:
"In quite early times, sooner in some places than in others, the extension of indirect exchange led to the employment of the two precious metals gold and silver as common media of exchange... For hundreds, even thousands, of years the choice of mankind has wavered undecided between gold and silver. The chief cause of this remarkable phenomenon is to be found in the natural qualities of the two metals. Being physically and chemically very similar, they are almost equally serviceable for the satisfaction of human wants... In isolated communities, the employment of one or the other metal as sole common medium of exchange has occasionally been achieved, but this short-lived unity has always been lost again as soon as the isolation of the community has succumbed to participation in international trade. [emphasis added]" (4)
The following table is a summary of the four metals' properties:
| Precious Metals | Gold | Silver | Platinum | Palladium |
| 2002 World Mine Supply (in Kilograms) | 2,550,000 | 20,000,000 | 184,000 | 181,000 |
| Malleability | Highest | High | Fair (but Platinum Eagle coin available) | High |
| Chemical Properties | Never decay; never tarnish | Never decay; only tarnish with sulfur over time | Never decay; never tarnish | Never decay; only tarnish with sulfur over time |
| Density (in cubic centimeters per gram) | 19.3 | 10.5 | 21.4 | 12.0 |
Source: CRB Commodity Year Book 2004;
Despite the difficulty of selecting, among the four precious metals, the most suitable to function as money, Mises had expressed the desire for a unified monetary system. He confidently argued that "[t]he simultaneous use of several kinds of money involves so many disadvantages and so complicates the technique of exchange that the endeavor to unify the monetary system would certainly have been made in any case." (5)
This paper is an endeavor for a unified monetary system. However, this is where the author departs from Mises. I believe that a monetary system, with multiple (not just two) precious metals simultaneously serving as media of exchange, will function well if appropriately structured.
How Not to Structure Bi-(or Multi-)Metallism
In a word, regulation.
Mises had argued against government authorized bimetallism on the basis of its eventual breakdown due to the affects of Gresham's Law:
"[T]he impossibility of modifying the monetary system merely by the exercise of authority may be illustrated by the ill success of bimetallistic legislation. This was once thought to offer a simple solution of a big problem. For thousands of years, gold and silver had been employed side by side as commodity money; but the continuance of this practice had constantly grown more burdensome, for the parallel standard, or simultaneous employment as currency of two kinds of commodity, has many disadvantages. Since no spontaneous assistance was to be expected from the individuals engaged in business, the state decided to intervene in the hope of cutting the Gordian knot...[I]t now proceeded to establish a fixed ratio between the two different precious metals. Debts payable in silver, for instance, could be discharged by payment of 1:15.5 times the same weight of gold." (6)
Gresham's Law soon asserts its affect.
"[T]he official regulation, which in declaring the reciprocal substitutability of gold and silver money overestimated the market ratio of the one in terms of the other, merely succeeded in differentiating the utility of the two for monetary purposes. The consequence was the increased employment of one of the metals and the disappearance of the other." (7)
How to Cut "the Gordian Knot" Tying Gold and Silver
Fast forward to 2004. The four precious metals are actively traded in spot and futures market. Even retail investors can buy them on-line through Kitco. All four futures trade with good liquidity on NYMEX and at least one other market (TOCOM or LME).
The burden of this "parallel system," as Mises puts it, is to be alleviated by advancement in modern information and (especially) telecommunication technology. The gold fixing scheme employed at
The ratio can then be communicated through internet to merchants all over the world. Prices then adjust daily, taking the new ratio of relative value into consideration. Buyers can then pay for the goods in four kinds of specie. Depending on the relative value of a particular specie (made with a particular metal), the payments are honored with an appropriate number of coins which sum up to an amount that the seller charges for his/her product. An assortment of different kinds of specie that sums up to the product price may also affect the transaction, as long as both buyers and sellers are willing to agree.
For example, on January 1, 20XX, the relative ratio of gold-silver, gold-platinum, and gold-palladium are 1:15, 2:1, and 1:1.5. In this case, a widget with price of two ounces of platinum can be paid with 30 ounces of silver, four ounces of gold, six ounces of palladium, three ounces of palladium plus 15 ounces of silver, two ounces of gold plus three ounces of palladium, or any other combinations...
Note that the governments' role in this "dynamic" multi-metallism is to deregulate, specifically, to authorize the use of all four precious metals for monetary purposes. The free market will regulate the ratio through arbitrage, much like the present day foreign exchange traders' activities among currency cross-rates. The daily fixes ensure price continuity, and to protect merchants from the burden of changing price too frequently. Advanced telecommunication technology combined with omnipresent semiconductor (in the form of chips embedded in the product or package) can transmit the appropriate pricing of merchandize efficiently and accurately.
Overtime, prices may stabilize as paper money becomes extinct and state-sponsored inflation is no longer possible. When one precious metal's supply and demand situation changes, the free market forces will ensure new market-clearing price will be reached as soon as possible. In reality, large mine discovery is a relatively rare event. So are events that drastically alter the demand of a precious metal. Therefore, the monetary value of the metals will not frequently experience large price swings.
What if I'm Wrong?
This would mean one, or more, of the four metals can be manufactured with little or no costs. This would be a system very much like paper money. Gresham's Law will assert itself. Eventually, the manufactured metal will drive the expensive, thus valuable, metals out of the circulation. The system will break down. "Bad" money will take over.
However, I am not aware of such technology for any of the four metals. Please inform me if I am wrong, as I am not a chemical engineer.
Furthermore, the multi-metallic monetary system is based on free-market. If there is a large supply increase in one of the metals, the relative ratio will be adjusted to reflect the new clearing price. The adjustments are daily and gradual. Hence, the prices that sellers charge for their products and services will increase, for the abundantly supplied metal, to the appropriate level, but held relatively constant for the other metals. In a truly free-market system, the effects of Gresham's Law can be mitigated, if not eliminated. The daily, gradual adjustments of the relative value among the four metals (instead of state-dictated bimetallic ratio) can alleviate the pressure of over-supplied metal driving the highly valued metals out of circulation.
Conclusion
For economic purpose, a rare, malleable, decay-resistant, and dense precious metal with limited supply is highly suitable to function as a medium of exchange. This is because these five properties will enable the metal to be easily stored, transported, and to anchor the monetary system against state inflation. It may or may not have industrial value. But overtime, the free market will discover its monetary value. It is this implicit recognition of monetary value of silver that creates burdensome "parallel system" that so puzzled Mises. We are blessed with modern technology. Luckily, we can deploy such technology to structure a multi-metal specie monetary system that can provide the world with media of exchange that are immune to inflationism and supply-demand shock of a single metal standard.
Bibliography:
1. Landis, Bob. "
2. Mises, Ludwig von.
3. Ibid. I.1.11.
4. Ibid. I.1.12.
5. Ibid. I.1.14.
6. Ibid. I.4.19.
7. Ibid. I.4.20.
