Once in a while, I find myself looking at a universal truth that the rest of the world holds dear, and for the life of me I just can’t sign on to it. Everybody is cooing about the unicorn in the pasture, but it sure looks like a rhinoceros to me; and when I ask people to explain it, I get blank stares or a defensive, “It is TOO a unicorn!” before the cooing begins again. And then I find myself no further along the path of understanding.
So it is with this “intrinsic value” thing. Alan Greenspan was on Bloomberg TV to talk about Bitcoin, among other things (a topic that frankly I’m pretty tired of hearing about these days), and he said this: “When we were on the gold standard, gold and silver had intrinsic value.”
I must be the only person on planet Earth that didn’t just now nod wisely, but I’m telling you, there’s no such thing as intrinsic value. Intrinsic value does not mean, “Something that people have prized highly for a long time,” nor does it mean, “A thing that governments use to back their currencies.” It means that a thing possesses its own innate, inherent worth. And that makes the term an oxymoron.
“Value” is not an essential, integral part of the nature of anything; it’s a fluid and abstract concept that is dynamically defined and assigned by humans. When one person has a thing, in order for it to have a value another person must agree that it has a symbolic worth (based on rarity, desirability, utility – the reason for its worth is irrelevant). And in order for value to be a sticky concept that lasts for more than one transaction, the larger community must also broadly agree that the value exists, AND that it will persist.
But that’s not intrinsic value; that’s a trust-based system. “Fiat” – ooh, bad word, right? No, it’s not; it’s just how things work. Currencies can function that way, and in some cases they do. Lots of them today are backed up by nothing tangible, and they survive simply on the trust of the population that they will continue to endure.
Sure; there are places, such as options valuation, where the term intrinsic value has a real meaning – for an in-the-money option it is the difference between the strike price and the market price. But an option’s intrinsic value can exist because the value of the underlying is predetermined. In other words, in options theory, intrinsic value is a mathematical identity. That is quite a different animal.
But even when currencies are backed up by something tangible like gold reserves, we STILL have to trust that the value of gold will endure, and not revert to being a pretty metal that isn’t prized. And I can think of plenty of scenarios, both good and bad, where gold could lose its “prized” status (for example, finding an asteroid near Earth or Mars with half a million tons of it just waiting to be scooped up and brought back to Earth relatively cheaply).
In other words, a gold-backed currency is very much a fiat system. It’s just that it comes with two layers for extra protection, to use a nice advertising phrase, and that extra level of abstraction seems to fool some very clever people, for some reason, into thinking that unicorns exist.
Sorry, did I say “unicorns”? I meant, “intrinsic value.”