Without even trying very hard, TheTom shows why he has too many dots for mortal men:
The value of gold (and silver) is as psychological as the value of green paper (or some other piece of paper 'backed' by gold). It's only worth what someone will pay for it. The idea of being 'backed' by a chunk of metal is only as good as the individuals in the organization controlling the backing...Nope, it's not just you. The value of *everything* is psychological and subjective. And with that little truism you have completely undercut the entire philosophical superstucture of communism and welfarism. Not bad for a day's work. But there's far more to it than that.
But thats just me.
The important question is not, "is value subjective?" but "why have certain things maintained that subjective value over millennia, and why have certain things lost that value consistently in much shorter periods?" In answering that, one can understand the reason the dollar will die, the reason gold (or silver or sea shells) is better for money than paper, and why the existence of the Federal Reserve is the only real political problem that threatens the existence of America. But since there is neither time nor room to blab about them all, let me just enlarge on the most valuable clause in TT..'s statement, that the backing is only as good as the backer.
That, of course, is the real problem when dealing with governments: they are no good at keeping their promises. When one examines the promises embossed on either a gold certificate or a silver certificate, one realizes that a government that once promised to redeem its debts with real metal not only broke the promises but in the case of gold outlawed the personal ownership of that metal, making it impossible for the citizen to collect a debt owed. The government committed a fraud and stands by it today with their irredeemable paper money. One must then come to the inescapable conclusion that the paper promises of government are worthless, that Ten Bears (Outlaw Josey Wales) was correct when he said governments are chiefed by the double-tongues. And because their promises are worthless, the paper representations of those promises eventually become so.
But what of the backing itself? Terrymum asks (same thread), "Why does gold continue to be so valuable to human beings?"
The short, smartass answer is that from a monetary perspective it doesn't matter. Gold always and everywhere has value that is innate because people agree, always and everywhere, that it is desireable. It continues to be valuable for no other reason than that people continue to desire it.
The longer monetary answer is that gold is uniquely suited to act as money because of its innate properties: it is rare, divisible, permanent, transportable, and useful.
The first four are obvious, somewhat in contradistinction to paper money which, while it is divisible and transportable, is neither rare nor permanent. But the last attribute is most important.
All trade, if it is to be fair and honest, gives value for value. You trade x to me, I give y to you, and we are both happy. And gold, unlike paper dollars whose only use is in trade, has value in other than monetary applications. Gold can be used in electronics, woven into threads, used in dentistry and medicine. In other words, I can use my money for something other than money. When I'm done with it, I can use it again as money. It maintains its value outside of its monetary use.
But gold's most valuable application - and not coincidentally its most widespread application - is for jewelry. It is both malleable and beautiful, and it makes the wearer more beautiful (or at least makes her feel more beautiful). And if gold's only use in this world was to make women more beautiful, it would still have more utility than all the paper money ever printed.
Tom is correct that the backing is only as good as the backer, and that is precisely why I don't believe in 'backing' currency, at least by the double-tongues. For trade to be just and for money to keep its value, it must not be denominated in paper promises to provide gold or wheat or anything else. It must be the value - gold or silver or copper - itself. That way, there is no need of a government promise that will, soon or later, be broken.