Gold vs The Dollar? Papers and Weights

Economics is confusing. On the surface, it seems to be nothing more than a swirling system of exchanges, winks and nods, and shady agreements between powerful governments and big corporations. To a degree, this is true, but it by no means describes economics as it should be described. There are certain “rules” of the game that govern transactions between large and small participants.

In our time, there is an increasingly complex question about which is more “real”, gold or the American Dollar. This complex question has a fairly complex answer, and one that doesn’t necessarily leave you feeling that either one is any more real than the other. However, there is a simple way to understand the basics.

In a sense, neither gold nor the American Dollar is “real” money. Neither of them has a standardized value the way they have had during certain points of history. Between 1946 and 1972, the two forms of money were tied together under the Bretton Woods system that defined for the world the value of gold in American Dollars. 1 ounce of gold was worth $35 dollars, no matter where in the world you went. This gold standard enabled other countries to measure their currency’s value against the dollar, and therefore against gold.

Since the collapse of the Bretton Woods system in 1972, these two forms of money do not define each other anymore. They both still have specific uses and values, however.

Gold is valuable because it remains an unofficial standard. Major banks of the world typically keep a reserve of gold that they do not trade. They keep it as a security measure against destructive fluctuations in the value of paper currencies.

The dollar is valuable because of its liquidity. It is still the main currency of world trade, and what major banks use to make transactions with. While it is not backed by anything, it is still valuable and much more practical for use in transactions.

So which currency is more “real”? Well, neither and both. It’s may be better to think about them in terms of their individual uses. Gold is more useful for saving and securing yourself, but dollars are more useful for buying and selling.