“Money is gold and nothing else,” observed J.P. Morgan in 1912, meaning nothing else is money. Everything else is credit.
The principles of liquidity deduced by Carl Menger mandate that money be the most liquid commodity, that is, the one with the least amount of transaction costs both in time and through time.1 Money thus began as grain and cattle, then as copper, then silver, then gold. And there it ends. There is no element that has greater liquidity.
The story of liquidity does not end with gold, however. Fully reserved bank notes improve liquidity further by eliminating the need to weigh gold for quantity and assay it for quality, as long as the market has trust in the issuing institution—this is why every great banking system begins with banknotes fully redeemable into gold.
The inevitable corruption of banking: after its proper function of liquefying gold and monetizing commercial bills, activities that the free market supports, legal tender laws arrive and allow banks to monetize assets, then debt, then debt of ever greater quantity and ever worse quality.
Footnotes
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Spatial liquidity, costs in time, is determined by the elements of recognizability, uniformity, divisibility, distribution, scarcity, and settlement costs; temporal liquidity, costs through time, refers to the expense of holding a commodity over time, including rate of decay, storage costs, long-term stability, and shortterm volatility. Source. ↩