Aristotle's Money Criteria Support Gold, Precious Metals

Includes: GLD, PHYS, SLV
by: The Rogue Investor

Aristotle (384 B.C.- 322 B.C.) philosophized about money, a medium of exchange and value in his life. He believed money should be used to commensurate goods and services and act as the ultimate equalizer. He realized the value of money in that it could be used to move away from a bartering society and allow for a more efficient and free flow of goods and services.

For example, if person A has a baked pie and person B has a chicken. If person B wants the pie and person A does NOT want the chicken, the two seem to be in a bit of a stalemate. However, if a form of value exists between the two so that person B can give something of universal value to person A, then they can trade that using a universal value instead. Then, maybe person A can use the universal value from person B to trade something in the future.

At the heart of the idea surrounding money, the purpose is to swap universal value back and forth even when both persons don’t match up on their desired goods and services at that point in time. So, Aristotle came up with 4 characteristics of this universal value (what we call money). The four absolutes of money include:

  1. Durable- the medium of exchange must not weather, fall apart, or become unusable. It must be able to stand the test of time.
  2. Portable- relative to its size, it must be easily moveable and hold a large amount of universal value relative to its size.
  3. Divisible- should be relatively easy to separate and put back together without ruining its basic characteristics.
  4. Intrinsically Valuable- should be valuable in of itself, and its value should be totally independent of any other object. Essentially, the item must be rare.

Here are a few example of perceived valuable items and how they stack against Aristotle’s concepts []:

Above are a few options for stores of value and wealth that have been used past and present. But, how do they stack up against Aristotle’s characteristics? Gold and silver have been used for thousands of years, but just as of the last 50 years or so have lost their elite status as the universal money.

The other options are more questionable as forms of money for various reasons. A business could not be used as money since it is not everlasting. But, arguably it could be divisible through shares of stock. It also has an intrinsic value as a source of revenue or cash flow. However, it unquestionably violates the “durable” aspect to be considered money as a business is not everlasting.

Other options are REITs, Oil ETFs and S&P 500 ETFs. All have an intrinsic value but as forms of money they become questionable as far as being portable. Yes, you can exchange them for other goods and services easily by converting into dollars or other fiat currency. But, the underlying assets (businesses or oil) violate durability and portability issues. Naturally, these vehicles are becoming increasingly popular for storing wealth and do store value, but, strictly as money defined by Aristotle, they are not 100% sound in my opinion.

Finally, Fiat paper currencies (digital of course is included) are convenient for stabilizing economies and redistributing wealth. But, fiat currencies miserably fail Aristotle’s fourth and most important principle, the intrinsic value principle. No fiat currency is intrinsically valuable and all are at the mercy of its issuer. History tells us time and time again that these currencies tend to be produced more and more and the supply rarely contracts. It comes as no surprise that no fiat currency has ever lasted more than a few hundred years at best.

The Denarius (Rome’s currency) slowly reduced its coinage from 94% to .05% silver content over a period of about 170 years. By the time the Roman Empire collapsed, no one accepted the Denarius as a medium of exchange.

The French have also had several very unsuccessful attempts at fiat currency as well. John Law first introduced paper money to France called “Livres”. In short, the new paper currency rapidly became oversupplied until, yet again, people demanded coinage instead of paper money. John Law became the most hated man in France and was forced to flee to Italy.

By the 18th century, the French government, again, tried to give paper money a shot with “assignats”. By 1795, inflation erupted to around 13,000%.

In more recent times, we’ve seen similar stories. I won’t go into in depth details on all of these, and I encourage you to research them on your own, but here are a few of the other stories on fiat currency.

  1. Weimar Germany (1913-1923)- The “mark” currency eventually ended in hyperinflation that completely collapsed any resemblance of an economy.
  2. Argentina (1932)- The world’s 8th largest economy eventually experienced considerable inflation.
  3. “Tequila Hangover” (1994)- The Mexican Peso tumbled and Latin America suffered for the better part of a decade.
  4. Zimbabwe (2008-2008)- hyperinflation.

What Aristotle described as money several thousand years ago still holds true today. The lesson is simple. Fiat currencies do not work as a long term store of value, and eventually, all of them collapse. It makes no difference whether the currency is digital or paper. Fiat money has not worked in the past, and our currencies of today are no different. While our technology of ETFs and other financial instruments have made it easier to store value in oil, land, and other valuables, none of them measures up completely to the 4 characteristics of money as described by Aristotle. What I find most interesting is through all of our technological advances, not one innovation has been created that matches up to the 4 criteria of money. We’ve sent people to the moon, and created weapons of mass destruction that can wipe out entire cities in seconds. But, nothing to match Aristotle’s sound money theories.

Admittedly, I’m as big of a gold bug as anyone. However, I try to maintain an open mind with regards to investing. I think it's important to be adaptable and mobile in today’s investing environment.

With that being said, yes, I’m a huge gold bug. Moreover, I believe that the current monetary crisis leaves gaping holes of opportunity and I spend much of my time trying to capitalize on those opportunities for the future.

If any innovation or technology was created that met these four principles absolutely, then I would certainly reevaluate my position on gold and silver being the only stable currency. But, until then, I’ll stick with my precious metals and gold mining stocks.

Disclosure: I have positions in PHYS, SLW, & CEF.