Bernanke to Ron Paul: Gold Isn't Money

200 paul bernanke REUTERS Mike Theiler.jpgSome part of Federal Reserve Chairman Ben Bernanke must be a little disappointed that Rep. Ron Paul (R-TX) will retire after his current term. No other congressperson may ever challenge him the way Paul, who currently chairs the House subcommittee on monetary policy, has over the past several years. In a hearing today, yet another amusing exchange occurred between the two. The topic was one of Paul's favorite: gold. The discussion got heated when Paul asked Bernanke whether gold is money.

Here's the exchange (video below, for those who prefer to watch instead of read):

Paul: Do you think gold is money?

Bernanke: (pregnant pause) No.

It's not money?

It's a precious metal.

Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

Well, it's an asset. Would you say Treasury bills are money? I don't think they're money either, but they're a financial asset.

Why do central banks hold it?

Well, it's a form of reserves.

Why don't they hold diamonds?

Well it's tradition -- long-term tradition.

Well, some people still think it's money.

In the U.S. anyway, those people are wrong. Here are a couple reasons why.

The Difference Between Money and an Asset

Bernanke's response actually couldn't have been much clearer. Just because something has value -- even great value -- that doesn't make it money. Paul attempts to retort, asking Bernanke why the central banks don't hold diamonds then. But Bernanke's initial response actually anticipates this question when he mentions Treasury bills. Central banks do hold other sorts of financial assets besides gold and currency, such as Treasury bills. Even if something is a financial asset, held by central banks, it isn't necessarily money.

Gold Isn't a Well-Accepted Medium of Exchange

So what is money? It's a commonly circulated medium of exchange. Let's test this with an example. Is an iPad money? Of course not: if you go to the grocery store and hope to buy $500 worth of groceries, unless you get a very strange cashier, the store won't accept your iPad in exchange. If you provide $500 worth of gold, you would see the same result: a sale would not occur. Some people in some places might accept gold as a means of exchange, but that can be true for other things that we wouldn't consider money either.

The Gold Standard Is Dead

A framework could exist under which gold was considered money: a gold standard. If such a monetary system was in place, then your cash would literally be equivalent to some amount of gold. In that case, vendors would likely be somewhat more willing to accept gold as a medium of exchange, if not for the practical difficulties of paying-by-gold. Of course, the gold standard has been dead in the U.S. for some time. At this point, bringing it back would be pretty difficult.

So perhaps Paul would have been a little more satisfied with Bernanke's response if he said. "No, but it could be." As a matter of fact, gold was once money and could be again if the U.S. re-adopts the gold standard. But at this time, gold is not money.

Here's the clip. The gold talk starts at 4:30: