I think of money as “any item that is universally accepted in trade with anything else in a given geographical area.”
To me, money is a tool that facilitates trade, nothing more. It allows trades to happen that could otherwise never happen.
Before money (per this definition) everything had to be bartered. If I had wheat and I needed shoes – I had to find a shoemaker that needed wheat, which may be a very limited market. My feet may freeze or the wheat may rot before I can find a trade partner.
To alleviate this problem, gold was used as a tool to facilitate the trade, to open up the markets. Yes, gold is a commodity, but it has unique properties which make it useful as a trade facilitation mechanism (i.e. money):
1) It is physically useful.
2) It doesn’t get consumed.
3) There is a limited amount of it in the world.
4) You can’t manufacture it.
5) It is very dense, thus small in size for a given weight.
Items 2, 3, and 4 make it very “stable” as the supply is naturally regulated by the only laws which nobody breaks – the laws of physics.
After a while, some smart guy realizes, you don’t actually have to move the gold around with you. You could store lots of gold in one place and trade pieces of paper which identify the holder of that paper as the owner of a certain amount of the stored commodity. This is real “money” at its best. Money should be a title of ownership to something physical, durable, useful and stable in supply. It is these traits that make money univerally acceptable.
With this concept of money in place, if I have skills to provide a service and I need meat, I don’t have to find a rancher who needs my services. I can find anyone who needs those services, get paid in money, and pass the money onto the rancher in exchange for meat. AND I don’t have to carry the gold from my customer to the ranch.
If a piece of paper gives you title to an ounce of gold, that piece of paper (money, currency) is said to be “backed” by gold. If a currency gives you title to a ton of corn, that currency is “backed” by corn.
Of course, corn is a silly item with which to back currency, but if you wanted to use it – hey, knock yourself out.
So, lets make a distinction between gold as a currency (where you carry it around in your purse and give it to shopkeepers) and gold as a backing for currency (where you carry around paper which gives you title for gold stored somewhere).
Unless the gold storage and/or banking system became un-trustworthy, gold itself may never become popular as money simply because it is heavy and difficult to store securely.
However, pieces of paper backed by gold, silver, diamonds, platinum or some other durable, valuable, and stable commmodity could easily come back. I hope it does.
The mere emergence of a “gold-backed” currency could, in fact, increase the popularity of physical gold as money because you would know exactly how much you were paying with respect to the gold-backed currency. Of course, every store would have to buy a scale, which I just don’t see happening.
