When studying monetary theory what we are aware of is that money instituted by force has been an utter failure. Fiat money, as it is called, is an inconvertible medium of exchange that is worth only what the government professes it to be worth.
Allow me to elaborate, according to Mises' Regression Theorem the objective value of money is arrived at through human interchange stated in market prices. The subjective values of individuals, which are scaled within individual ordinal scales of value, will allow the individual to make his choice through his action.
As mentioned in a previous blog post, higher time preference denotes a higher ordinal ranking, while a lower time preference denotes a lower ordinal ranking.
Humans will exchange a good, when both parties within the trade benefit. This idea applies to all human exchanges. Indeed every transaction is subjective. The moment in time when a trade occurs is when contractually both parties arrive at concilliation. This is how a price is set, oftentimes the spot price. A proprietary protocol, or any system adhered to with a signature of some sort, would fortify the terms of the contract.
Preferably those partaking in the contractual agreements favor a third party to enforce the contract. In many cases, this is a person or entity reputable and knowledgeable in adjudicating (they render an opinion). No government need exist, as a contractual agreement is always voluntary.
Due to humans constantly desiring to act, and because of the processes undertaken by people to facilitate life's interactions, new technologies are created. A medium of exchange aids in facilitating the process of exchanging goods.
Ludwig von Mises (and earlier Menger historically alluded to it) deftly simplified the preferences of human actors, claiming and demonstrating theoretically that humans tend to always prefer precious metals as that very medium for it's scarcity and because it is portable, durable and divisible. Other factors were it's uniqueness and because it was ornate. Let us reiterate, choices are subjective yet they coalesce.
Gold or Silver have been the common choices of individuals desiring to accumulate value, whether it be when it became known as a highly desired good at the primitive stages of civilization, or now when investors use it as a hedge (strategically implied to move opposite the market), and some of us describing it as money itself.
The monetary definition ascribed to precious metals is evinced in the actions of investors. As price spreads open, meaning that as prices fall and the possibility of generating a higher rate of return or agio becomes more likely, investors look to move their money into what will aid them to increase their effective cash balances. Hence, Gold prices rise and money is worth more.
Another way of explaining this is that the money stock falls, purchasing power of the monetary unit you hold increases (less bank notes or electronic digits denoting the number of bank notes), and recrudescence is arrived at after time preference schedules readjust. Let us remember, that pulling one's money out of a low returning stage (detracted price spread) would insinuate hoarding or savings (lower time preference for the human actor).
At the individual level, time preference corresponds with the rate of interest, therefore withholding consumption may be higher on one's time preference schedule whilst they continue to consume. This may continue to suggest that the rate of interest is high, yet it will fall over time as quantity of savings increases.
Money is key in aiding individuals to make proper choices in the free market. Of course less resources being allocated improperly would occur more commonly if the price mechanism were properly accorded with a money stock of stable value (precious metal reserves).