Anyone who has followed the debate about money and gold knows that one of the key arguments used for the gold standard is that it is stable in value. Stable money is considered a virtue because it stabilizes the economy and removes inflationary and deflationary distortions in the economy. After this lecture on the virtues of stable value money, gold is often declared to be historically proven as the most stable money ever invented. Graphs are shown that the price of some commodity a few hundred years ago is the same as the price today. Everyone is happy and the case is closed.

Except one problem that has kept bothering me. I agree that gold is stable in value, but what is value? What is gold stable in relation to? What is the standard of value? Gold proponents will answer that gold has proven to be the standard of value, the measure of stability, but I don’t buy that. If gold is stable in value then it should be possible to define stability without gold, and to measure the stability of gold in some other standard. If not, then gold has some properties pretty much close to voodoo. The value of gold needs to be grounded in something. But what? I will try to answer that question in this article.

First let us look upon a case of price stability which is often used to argue for the stable value of gold. Historical prices of wheat and other commodities have, when measured in gold, varied quite little. So stable prices tend to argue for the stability of gold. However, at the same time it is also acknowledged that a sudden increase in productivity resulting in a drop in wheat prices, measured in gold, does not imply that gold is unstable. So somehow, changes in productivity allow prices to change without questioning the stability of gold value. How can we reconcile that notion?

The answer is that some things do remain fairly stable during a productivity increase: wages. A doubling in productivity means essentially that you are able to get roughly twice as much products out of the same amount of labor cost. The underlying assumption is that the labor cost per hour is roughly stable. That’s why the price of the product drops in the wake of a productivity increase.

So if we look at wages measured in gold we find that apart from two major bubbles the underlying trend is a stable wage of roughly 0.5 grams of gold per hour. (Minimum wages showed in the graph because they extend back to the 1940s) These were roughly the wages in America in the 19th century during the gold standard era.


So it is true that gold is stable in value when compared to average wages in a free economy. The question then immediately becomes: why? Is labor the standard of value? And if so, does this imply that the labor theory of value is correct?

I will first argue that labor is indeed the standard of all economic value, but at the same time I dismiss the labor theory of value.

Labor is the standard of economic value

We humans are producers. We have to work (mentally or physically) to sustain ourselves. This labor is the source of all our economic goods, and thus to all economic value. Therefore, ultimately when we want to measure the economic value of something to us it is most useful to us to measure it in terms of how much we need to work in order to acquire it. Furthermore, the amount of work hours in a lifetime is roughly stable across generations. I therefore argue that the source of economic value (labor) also makes sense as the standard of economic value. Notice that this is for purely metric purposes, as a way for the individual to have a useful measure of value.

Labor as the standard of value enables each producer to ask himself “how long do I need to work to purchase X?” And even more importantly, he can make predictions and plans into the future. Suppose an average worker works one hour in 1960 under a stable value currency. Then 60 years later that worker can use that salary to acquire one hour worth of average work in 2020 for that money, under stable money.

Now, for a lot of stuff he can get a lot more for that hour’s worth of labor. Anything that has experienced great increases in productivity will probably have fallen in price. However, any kind of service will remain the same. A haircut will cost roughly the same because it takes the same amount of labor. The same is true for the service at a restaurant, and a doctor’s appointment. The prices of all labor intensive goods and services will remain stable.

Labor as the standard of value has utility to the individual because it allows him to see and understand productivity. He will make roughly the same salary from year to year (if he stays in the same job), and he will see that some prices remain very stable (like haircuts), whereas everything that undergoes technological development and automation (like cell phones and computers) will drop staggeringly in price.

Labor as the standard of value allows the consumer to cut through all the FUD about raises. There are no raises. Salaries remain roughly stable. People then understand that increases in wealth comes from price drops due to productivity increases, not from strikes and labor union collusion.

The labor theory of value?

Many people will react to this and think that I am endorsing a labor theory of value. This is absolutely not the case. The labor theory of value in its Marxian incarnation is a moral theory, a theory of what the correct price should be and how each individual should be rewarded. Using average labor price in a society as the standard of value is not a moral theory or a prescriptive theory, but a theory of utility. It is useful to the individual to measure and store value in something that is strongly correlated with labor, and the reason for this is that in the long run in a free market there will tend to be a strong correlation between labor costs and prices.

I will not make a very lengthy proof of this except to say that the price of a good or service in the free market will tend towards labor costs + profit margin, and the profit margin will tend to be equal for all areas. Hence the correlation between prices and labor costs will be very high in a free market. That’s why labor as the standard of value is useful in exchanges, not because of an intrinsic labor value.

Stable money only in a truly free market

One immediate consequence of this is that truly stable money can only exist in a truly free market. Today there are myriads of national boundaries where the price equalization of the free market is not allowed to operate between the nations. As a consequence, a haircut in Cambodia costs only a fraction of a haircut in Denmark. For the same reason each nation has a different level of productivity and a different wage level, and hence there is no meaningful global average wage rate. And hence true monetary stability is not possible. Only when the market forces in a free market are allowed to even out wage and price differences will a common stable average wage rate arise.

A strange consequence of this is that in the current unfree economic environment there is some merit to national currencies linked to the average national wage. It shouldn’t be like that in a borderless society, but when the rules are the way they are with massively different trends in productivity and wages in one area over another, it makes sense to have locally stable currencies.

Gold and stable value

Gold has a proven track record of being stable in value. Yet, if my analysis in this article is correct it is possible to create an artificial (managed) currency which is even more stable in value by linking it to the National Average Wage Index. (NAWI)


So let’s see how that stacks up. In 1950 the average wage was 2,500 USD and today it is in excess of 40,000 USD. This means that since 1950 the US Dollar has lost about 95% of its value compared to a NAWI linked currency. This compares well to gold, despite the fact that gold has experienced two major bubbles in that same period.

Notice also how in the period from 1950 until 1973 when the US went off the gold standard, the NAWI index tripled from 2500 to 7500. This implies that there was strong underlying inflation in this period, even if the price of dollar remained linked to gold in the phony Bretton Woods. This underlying inflation was what ultimately led the link to gold to snap.

Obviously it is possible to construct an artificial managed currency that is linked to something akin to the NAWI, but this will always be a mere legal construct and as such can easily be confiscated and/or manipulated. Gold has the upper hand because it stores the value of the money in the actual coins. So even if it is possible to construct money that is even more stable in value than gold, gold money certainly will still play an important role. Nevertheless, while we are waiting for a new era of free banking and sound money we can use the NAWI to keep track of the true long-term rate of inflation in society. (Note however that in the short term the NAWI can be inaccurate because of economic cycles.)