History of the Gold Standard

Gold is one of the oldest and most consistently used forms of currency that we have. It was used in jewelry, which was gifted and traded, by the Egyptians since 3000 BC, contributing to Egypt’s invasion and colonization of gold-rich Nubia. Square tablets of gold were used as currency in China as early as 1091 BC, but it wasn’t until 560 BC that all-gold coins were produced and put into circulation.

Gold was a useful currency for merchants because it was easily liquidated in different cultures and countries. It retained its value through the rise and fall of various empires, but it was also easy to carry and transfer. Today, savvy investors like to diversify their portfolio with gold for the same reasons.

The Gold Standard as Global Currency

Many major world currencies today were built on metal backings. British pounds actually refer to pounds of sterling silver in order to determine their value. This system was established in 1066. American money was also metal-based, using silver and gold to back each dollar. In 1792, when the American dollar was established, 24.75 grains of gold equalled a dollar.

From the 1870’s to the early 1900’s (during the time of the highest levels of colonialism) most countries of the world used the gold standard to back their paper money. In 1900, barring China and some Central American countries, everyone worked off of the gold standard, sometimes depending on gold coins for easily transferrable currency around the world. Gold provided an easy reference point to determine value across currency systems, since almost every country had their currency pinned to a certain amount of gold, having an agreed-upon-amount that each note of paper money was worth in gold.

The gold standard unraveled in the global conflict of the first World War. Although some attempts were made to re-establish it, the closest that summit leaders came was to pin the value of gold to US dollars, which were the most stable currency in the wake of the wreckage of WWII. In 1934, gold coins were taken out of circulation in America, but it wasn’t until 1971 that America stopped exchanging dollars for gold at a fixed amount.

Value is Determined by Supply and Demand

Many of the same principles of gold that made it a valuable currency thousands of years ago still apply today. It can cross borders and liquidate easily. It’s less subject to inflation and economic depression than most forms of money. However, it’s important to remember that, like every currency, service, and item, gold’s value is ultimately determined by supply and demand. For more about the trends in gold’s increase and decrease in value, check out next week’s post.