I hear some economics arguing that currency should be pegged to gold as a way of ensuring that its value isn’t arbitrary / volatile but I don’t understand how this would solve the problem. I understand that gold is a scarce resource that is difficult to mine but is it this alone that gives it intrinsic value ?
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Lots of almost-but-not-quite-right answers in this thread. It’s inherently valuable because of its use in electronics, automotive, aerospace, and medical equipment. But I get the feeling that is not what you’re asking. Answers of “it’s pretty” are also not quite correct.
Gold is subjectively valuable because human beings have chosen it as a fungible store of value. Fungible means it can be exchanged with others, and store of value means its value is relatively stable over time. Imagine you are a member of a neolithic tribe. Every day, the people in your tribe need to decide how to best organize their limited labor capacity to best ensure the tribe’s survival. You are Albert, and you are really good at building fences, but you’re bad at hunting. Your friend Bill is bad at building fences, but he’s a great shepherd. You build Bill a pen for his sheep, and in return he gives you 1 sheep to eat. Congratulations, you’ve invented bartering.
But now let’s say, you don’t need a sheep now, you need one in the winter when animals are even tougher to hunt. But you can’t build a fence in the winter because the ground will be frozen then. Bill can’t give you the pig now because you’re no good at animal husbandry–the pig will die by wintertime under your care, or if you slaughter it now, it will rot. So, you and Bill agree that you’ll build a fence for him now in the springtime, and he’ll give you a pig in the wintertime in return. He owes you 1 pig. Congratulations, you’ve invented debt.
But now say, you need to buy a bow and arrows from Charlie from the tribe over the hill. This is much more expensive. You can build Charlie a fence, but that’s not enough. He also wants a pig come wintertime. What if you could transfer your debt to Charlie–tell Bill to give half that pig to Charlie in the winter. But Charlie doesn’t know Bill–why should he trust that he’ll give him a pig in the winter? You trust Bill as a member of your tribe, but Charlie does not. The debt is not fungible. To surmount this problem, you need to invent a universal store of value, also known as money.
Money needs to have two characteristics:
1. It needs to hold its value over time (i.e., not decay).
2. It needs to be rare.
Recall that one problem you had with taking a pig now is that a pig doesn’t hold its value over time. If you butcher that pig now, it will rot. Likewise, the fence you build will gradually deteriorate. Neither of those things that you bartered with are particularly good at staying the same over a long period of time. Ideally, money solves this problem by staying the same so that you can use it now, or in the winter, or 3 years from now.
Second, it needs to be rare. Specifically, it needs to be at least as difficult to obtain more (in this case, mine from the earth) as the labor a given quantity represents. So it needs to be more difficult to mine new gold and add to the money supply than it is to build a fence or raise a pig. This makes sense, because if it were easier to mine gold than do the work of what it represents, everybody would simply choose to mine gold instead. This is why we can’t use sticks or rocks as money.
This is where gold comes in. [Look at the periodic table](https://www.thoughtco.com/difference-between-element-family-element-group-606682). All elements heavier than Iron, that is with an atomic number higher than 26, are made inside exploding stars. And the heavier it is (higher the number), the rarer it is. So, gold meets Criterion 2: it is rare. Now, look at gold, atomic number 79. Each family (column) in the periodic table is comprised of elements with similar properties; this has to do with the way electron orbitals are filled. Look above gold and see silver, and then copper. Three metals we associate with coinage, increasing in value as atomic number (i.e., rarity) increases. This is not a coincidence. Metals of Family IB are extremely non-reactive, they tend to not react to the environment. So these metals also meet Criterion 1: whereas your fence decays and the pig rots, gold is going to stay the same over time.
This is why gold is valuable. Because groups of humans chose it to be money, it has intrinsic characteristics that make it work well as money, but it’s not those intrinsic characteristics that make it valuable, it’s the fact that it’s a fungible store for what’s ACTUALLY valuable–the labor of your fellow members of your tribe–that it is so.
TL;DR: Gold is valuable because it’s rare and doesn’t decay, which allows it to stand in as currency to allow human beings to trade goods and services with one another, even if they personally don’t know each other.
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