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The dollar is not directly supported by oil. It suits the oil industry to trade in a single currency. So oil from Kazakhstan or Nigeria or wherever is sold in dollars. This stabilises oil trading and oil production. But the dollar is not backed by oil in the way it used to be by gold. Oil almost hit $200 dollars a barrel last year (an insaneprice) and it did not directly reflect on the value of the dollar. If they were directly linked, then dollars would have been 'pumping on steroids', but they stayed low.

I feel sure that the only thing which supports any currrency is peoples' faith in the economy in which it operates. The value of the dollar (or Euro or Yen or Outer Mongolian Weasel Teeth) cannot be shored up by bolting it to another traded good. There is no possible way to artificially prop it up.

OK, when times are rough the price of gold goes up. That's just because of human behaviour. It's not because gold is solid or special. It is a ''lemming'' reaction to bad times. Everyone ''knows'' that people put their cash into gold during recessions, so the smart money does too. It is a self-fulfilling prophecy.

The sea is full of minute particles of gold. A vast vast supply, but nobody knows how to extract it efficiently. If I invented a machine tomorrow that could cheaply remove the gold from the oceans, the gold market would take a permanent sky-dive and gold would lose its magic lustre.

Everyone ''knows'' that people put their cash into gold during recessions, so the smart money does too.

That sort of begs the question, doesn't it? Are people really so mindless that they just buy gold during tough times because everyone else is? Might there be something else behind it?

Our government is attempting to deal with a vicious bear market -- one created by massive debts and inflation -- by printing ever more paper and pumping billions of dollars into the economy, creating ever more debt and inflation.  People will wonder if this will work; their confidence is being shaken and the market is showing that.  There is an underlying fear that the monetary system we've created, where we create limitless amount of fiat paper, cannot continue to function.

As one writer put it, the whole system is illogical and based on a contradiction:

The real contradiction is that we are forced to use a command money -- which can be produced in unlimited quantities by central bankers -- as the medium of exchange in a free market in which goods and services are scarce.

Before we left the gold standard the arguments against it were instructive. This, from 1892:

"If the Government can create money why should not it create all that everybody wants? Why should anybody work for a living?  Why should we have any limit put to the volume of our currency?"

Even if we did mine all the gold from the ocean, gold would still be scarce, and it would be the most likely candidate to replace or anchor fiat paper.  Sure, we could use any scarce good as the medium of exchange, whale teeth or diamonds or bear skins, but it's gold that has been used for thousand of years.

we could use any scarce good as the medium of exchange, whale teeth or diamonds or bear skins, but it's gold that has been used for thousand of years.

Forgive me, this will sound a little rude, but what you wrote seems a little mixed up. There is 'monetary value' and there is 'practical value'. Many things have great practical value. Quick example: If you had to spend a night in the open, in winter, in Alaska, would you rather have ten bear skins or 100 hundred-dollar bills? Many things have practical value and they are traded as goods. Bear skins are traded goods. You can swap goods (and services) for other goods (and services)...

"I'll wash your car, if you cook me dinner."

"If you fix my broken sink, I'll give you this guitar."

"Will you give me 'Psycho Killer' on PS3, for this pair of Allstars."

etc

But batering traded goods is really difficult. Finding perfect matches and people who want to swap etc. Very slow. So some genius in Lydia, 3000 years ago, invented an abstract concept called 'money'...

Imagine you have a car and I want it. Would you swap it for a slip of paper if I wrote "This slip is worth one car" on it? Probably not. Because nobody else will aknowledge its value. The slip is theoretically money, but it has no 'weight', no 'reassurance', no 'background'.

In the old days, money was real gold and silver because they were small valuable traded goods. With old, gold money you are basically still bartering.

cont...

Gold has a practical value. It is easy to shape and makes nice jewellery. People want nice jewellery, you can trade that. But it is no different from lead or magnesium or molybdenum. They are all bartered goods. But gold was chosen to make coins (because it's soft and shapeable, reasonably scarce and is found as a metal not an ore).

Old gold coins were produced in mints (money factories) and were ruthlessly controlled. People gradually began to believe 'gold' is 'money'. But this is a false association. Gold is only a traded good. There is no more 'monetary value' in a 10 dollar gold coin than a 10 dollar plastic one. They both represent the theoretical concept, '10 dollars'. I said it in my first post, I'll repeat it now... Gold has no inherent monetary value. It isn't money. Money doesn't exist. Money is a mental concept. There is no real physical thing that is 'a dollar'. You can't anchor it, prop it, support it or standardise it. Because it doesn't exist. The only thing you can do is have faith in it.

(((in the post above I said, 'Money was real gold'. That is lazy writing. I should have written, 'Coins were made from real gold')))

I think we can agree that nothing has a value, until a value is placed upon it.  Gold has been a very good commodity upon which people throughout history and around the world have placed a value.  However, this is completely changeable, as the assignation of value may change.  Aluminum was once rarer than gold, so much so that none was available to be used as a medium of exchange. Now it's a container for soft drinks. Certainly, one would assign a huge value to 10 bear skins during an Alaskan winter night, trading $10,000 worth of Alaskan gold for their use.  But having the same 10 bear skins during a Manhattan summer day might be less than worthless, and might get you shot from some animal activist.  Value is relative; the assignation of value is arbitrary, and is best left between the two parties that wish to consummate a transaction.

But to get to the original intent of this post -- by having the world trade for oil in dollars, has that kept the value of a dollar higher than it would otherwise be?  Is the convertibility of the currency, the ability to exchange it from one medium to another, like used to be done in the US with dollars and gold, now done with dollars and oil?