On 13 July 2011, Congressman Ron Paul of the House Financial Services Subcommittee on Monetary Policy had an interesting exchange with Fed Chairman Ben Bernanke which led to the question, “Do you think gold is money?”. I think Ron Paul raised a very good question. In a world where people have readily accepted fiat currencies as money, we should stop and think why then do central banks still hold gold? They are still the largest institutions buying gold by the tonnes today. It can’t be for tradition that they accumulate gold at such large amounts.
See the hesitance of Bernanke to that question and his subsequent terrible answer.
Paul: “When you wake up in the morning, do you care about the price of gold?”
Bernanke: “I pay attention to the price of gold. The reason people hold gold is as protection against tail risk, really … bad outcomes. And to the extent the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”
Paul: “Do you think gold is money?”
Bernanke: “No. It’s a precious metal.”
Paul: “Even if it’s been money for six thousand years? Somebody reversed that and eliminated that economic law.”
Bernanke: “Well… it’s an asset. It’s the same as with Treasury bills. I don’t think they’re money either. But they are a financial asset.”
Paul: “Why do central banks hold it?”
Bernanke: “It’s a form of reserves.”
Paul: “Why don’t they hold diamonds?”
Bernanke: “Well… it’s tradition. Long term tradition.”
Paul: “Well, some people still think it is money.”