From: positron@engin.umich.edu (Jonathan Scott Haas)
Subject: Gold v. Oil: Backed Currency
Date: Mon, 14 Dec 92 05:00:33 EST
Organization: University of Michigan Engineering, Ann Arbor

Here's why gold makes a better store of value than oil.

Firstly, what does it mean to have currency "backed"? It means
that the issuing party guarantees that it will exchange a fixed
amount of a certain commodity for that currency. This is why
private (and even competing) currencies could work, as long as they
were backed. If I give you 100 Haasbucks in exchange for something,
and I assure you that you can at any time redeem those hundred Haasbucks
with me for 200 eggs of Silly Putty, that gives those Haasbucks a
definite value. And, if there's someone else who either wants Silly
Putty, or believes that Silly Putty has a value, and believes my
word that the Haasbucks are redeemable, they can accept the Haasbucks
from you as payment for something of theirs. That's how money circulates.

When money was backed by gold, it had a definite value. Backed currency
had two big advantages: First, it had a strong foundation. People were
confident that they could always trade their money for a fixed quantity
of gold. Now, they have no such assurance. Our money system is like
a skyscraper built on a foundation of sand. Secondly, it wasn't
easily inflatable. Government couldn't just print more money... because
for every dollar they printed, they had to have an equivalent amount
of gold in storage, in case the bearer demanded it. Now, if the government
wants more money, they can just print some... to the detriment of anyone
who has cash. Inflation is the cruelest tax.

For this reason, it doesn't really matter if someone controls the supply
of whatever commodity is backing currency... as long as whoever stands
behind the currency (in this case, the government) has an equivalent amount
in storage to back all outstanding currency.

This brings me to why gold is a much better storer of value than oil. Firstly,
oil decays. You can't stockpile it and hold it in storage for 50 years...
it loses potency after, I believe, 5 years. Secondly, oil's value comes
from its usefulness... and after it's used, it's destroyed. Gold's value
comes from its beauty, its rareness, and the fact that people have faith
in the value of gold. Thirdly (and this is a biggie), gold is much, much
smaller than oil. A barrel (42 gallons) of crude oil goes for about $20.
A bar of gold goes for about $50,000. Now, suppose you've got $100,000,
and for whatever reason, you're uneasy about the stability of the government,
so you'd like to convert it to the commodity, to keep it safe. If oil
is backing the currency, you'd better bring a fleet of tanker trucks.
If gold is backing the currency, you can get it in two bars that you can
easily carry with one hand. Not only that, but to stockpile billions of
dollars of gold, government needs Fort Knox. To stockpile billions of
dollars of oil would require unbelievably HUGE tanks.

-- 
__/\__  Jonathan S. Haas         | Jake liked his women the way he liked
\    /  University of Michigan   | his kiwi fruit: sweet yet tart, firm-
/_  _\  positron@engin.umich.edu | fleshed yet yielding to the touch, and
  \/                             | covered with short brown fuzzy hair.