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Last week, when Ron Paul asked the question, "Do you think gold is money?" Fed chairman Bernanke's answer was a resounding no. So, what is money, anyway?

In the simplest terms, money is a commonly used medium of exchange — one that is widely accepted and that serves as an intermediary for trade. As I explained in a previous article,

If you are a plumber, you don't really need money to live (you can't eat money); money just makes it possible for you to indirectly exchange your plumbing services for groceries. If money weren't there, each time you needed food you would have to find a grocer that was in need of plumbing services so that you could barter your services for food.

If gold is not our commonly used medium of exchange (and most of us do not think in terms of gold for our day-to-day calculations), then — as amazing as this may seem, given all of his prior inaccurate predictions and statements — Ben Bernanke gave the right answer. I hate to admit it.

It is said that a gold or silver coin will have value and be recognized all over the world; but, frankly, so will a dozen eggs or a beautiful diamond.

Having said that, the only reason Bernanke is right is that there is a difference between free-market money (for example, gold) and legal tender, which is forcibly imposed upon us by the government (for example, all paper currencies). As Ron Paul mentioned, gold has been used as money for more than 6,000 years, so the only reason that the average citizen has never held a gold coin in his hands is that the governments of the entire world have basically outlawed gold as medium of payment for debts, public charges, taxes, and government dues.

You see, without a central bank imposing a legal tender, a barter economy tends to select a certain commodity as money. A strange example of this can be found in our prison system, where paper money is not allowed. There cigarettes have emerged as money, or as a common medium of exchange. I say "strange" because a prison is far from being a free environment, but it is also pretty much the only place today where legal tender does not circulate.

"It seems that our prisoners are far wiser in their choice of money than politicians, central bankers, and mainstream economists all over the world."

The prisoners probably have few goods available to them, and without any knowledge of economics or formal agreement, they chose a good that was very liquid, meaning that most people want it, so it is easily exchanged. In prison, cigarettes are also scarce, which gives them value. They are also relatively nonperishable and homogeneous, which are all characteristics of good money. They are not perfectly divisible, but I guess you can't have it all in that environment. It seems that our prisoners are far wiser in their choice of money than politicians, central bankers, and mainstream economists all over the world.

Using the same mechanism as our savvy prisoners, civilizations all over the world — when left to make their own decisions — have repeatedly chosen gold and silver as forms of money. Well before our time, in a world where a different language might be spoken every 50 miles, somehow gold and silver coordinated all kinds of local and international transactions.

So what's wrong with government-issued paper money? Well, the big danger when you have a printing press is that you will probably keep on printing money for yourself and for your friends. In theory this doesn't have to happen, but in practice it happens every time. (In our "developed" democracies the money printing is not as overt; it is hidden behind all kinds of accounting tricks, confusing terms, and secrecy, but it happens nonetheless.) As much fun as money printing is for the ruling class, its consequences for the population at large are devastating.

One of the other questions Congressman Paul asked Ben Bernanke was why central banks use gold rather than diamonds as a reserve, for example. Chairman Bernanke replied that holding gold was "tradition." Aside from not being aware of the above-mentioned natural-selection process that made gold money in the past, the chairman failed to know that gold is perfectly divisible and completely homogenous.

Perfect divisibility means that you can break up a piece of gold and each little piece will have the same value by weight as it had when it was a big piece. You can also melt it back together. With many other goods (and especially with diamonds), a substantial amount of their value is lost as they are divided, and often you can't piece them back together.

Homogeneity means that an ounce of gold produced in Africa is the same as an ounce of gold produced in America or anywhere else. Ounces of gold are all alike, unlike diamonds, which exist in an infinite variety of colors and grades, making them unsuitable as money.

So why is gold so important to sound economists like Congressman Paul? Because a free-market commodity money such as gold would put an end to — or at least expose — the thefts and power grabs perpetrated by the government. Physical ounces of gold cannot be printed — they are either in the vault or they aren't — and this is the kind of transparency and honesty governments loathe.