In the olden days when four-legged beasts were the best mode of land transportation, gold was money. Everyday transactions involved gold and other precious metals as the medium of exchange then, just as paper money now dominates transactions in the modern economy. Gold had a very special position in human culture then due to its fundamental functions. It is still special today, but only because of vestigial reasons.

During the European Age of Exploration, Portuguese and Spanish explorers crossed the seas under the guises of God, Gold and Glory. The truth is that it was never really about god and religion. It was about the gold more than anything else. When Hernán Cortés and Francisco Pizarro first set for the heart of Aztec and Inca separately, they were dreaming of the glittering yellow metal for themselves.

As other European powers rose to take their place in history, the search for gold became less explicit. The new explorers, traders and later colonialists did not go out in search of El Dorado but it was still about amassing wealth through commerce. It was less explicitly about gold but yet, wealth was very much denominated in gold still.

Sometime during the industrial era, gold and other precious metals lost their function as the medium of exchange. They were no longer circulated as widely as they were during pre-industrial period. It was all papers and coins by the time motorcars, trains and steamboats were crisscrossing the world. By the 20th century, the dominance of papers was almost absolute.

Nevertheless, all money was still backed by gold and other precious metals.  Papers and coins struck out of cheaper materials were merely claims to those precious metals. All issuers promised to convert those papers and coins to gold upon demand. So, gold may have lost its role as a medium of exchange during industrial times but it was still the ultimate arbiter of the value of money.

That last real function of gold ended in the 1970s. The United States government ended the direct convertibility of the US dollar to gold as a reaction to an economic crisis. Soon after, the world followed in ditching the convertibility and thus, gold stopped being special.

Many continued to believe that money, even in Malaysia, is backed by gold but the truth is that all economies in the world today run on fiat currency. That is, money today has value only because its issuers say so and the market believes the words of the issuers.

To put it in clearer terms, gold has no importance to modern central banking.

Of value instead to the modern central banking system — and the wider economic system — as far as money is concerned is trust. Indeed, at the heart of capitalism, is trust but not gold. Capitalism can survive without gold—it is running affirmatively better without gold—but it cannot survive without trust.

So, gold has no fundamental economic function to play anymore in our modern world. Gold is neither a medium of exchange nor does it back any money. Because of this, gold really does not deserve the reputation it enjoys now.

The reputation of gold lives on only because of humanity’s vestigial attitude towards gold.

The phenomenon is much like in the case of Pavlov’s dog. The dog learned that a ringing bell meant food. The dog then began salivating at the sound of the ringing bell instead of at the food per se. It did so even when food was not present. At the end of the day, the dog had been conditioned to salivate to something else entirely. In some ways, the dog had been tricked.

In the same way the dog had been conditioned, humanity has been conditioned to think favorably of gold. Gold has seeped into our consciousness regardless of the fact that gold now has no fundamental economic function anymore. So persistent in fact the favorable predisposition towards gold that too many laypersons still believe that money today is backed by gold, despite the abolition of such a system more than four decades ago.

The momentum of history is huge and it takes time for humanity as a whole to adapt to the new reality of fiat currency.

The failure to adapt can exert cost especially on the gullible. The case of Genneva is one example where individuals were cheated out of their vestigial sentiment for gold.

Believing that gold had a special place in the modern world, they too eagerly bought the metal from Genneva while not realizing that they were being manipulated. It is only too bad that reality had to set in and the scam had to end. Actions by the authority in both Malaysia and Singapore only hastened the inevitable collapse of Genneva, just as any large-scale scam eventually will under of its own weight.

Of course, financial scams come in so many other ways and gold is not an exclusive tool for scams. Old-styled Ponzi scheme relies on just money, plain old greed and some doses of gullibility. Still, the obsession with gold is unhealthy. The sooner we all realize that there is nothing special about gold anymore, better we all will be.

After the learning is complete then perhaps we may start to put our money into something more productive than the vestige of gold.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on November 23 2012.

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