Gold emerged as money of choice through competition. Many other things (beads, grains, various industrial metals, etc) were tried throughout history. For one reason or another they didn’t work consistently over longer periods of time.
The first gold coins appeared around 560 B.C. Over time it became a practice to store larger amounts of gold in warehouses. Paper receipts were issued certifying that the gold was on deposit. These receipts were negotiable instruments of trade and commerce which could be signed over to others. They were not actual currency but are a presumed forerunner to our modern checking system.
The warehouse proprietors (‘bankers’) decided they needed to find a way to increase their profits. Earning fees from their depository and safekeeping services wasn’t enough. Since most of the gold remained in storage and most transactions involved exchange or transfer of paper receipts for the gold on deposit, they decided to issue ‘loans’ of the gold/money to others and charge interest. The cumulative amounts of gold loaned out could not exceed the amount of gold held in storage. And, hopefully, not too many depositors would ask to redeem their physical gold at the same time.
By this time, there were reasonable indications of just how much gold needed to be kept available to meet the ongoing, day-to-day withdrawal demand. The warehouses (banks) began issuing loans in the form of receipts backed by the gold held on deposit. Which shouldn’t be a problem as long as people continued to trade with their paper receipts. And occasional redemptions of receipts (withdrawals of gold from storage) were met with smiling faces. Business as usual.
It seemed to be a workable system. But apparently the ‘bankers’ were not content. They soon started issuing more loans/receipts for gold which did not exist. Of course they saw no need to inform anyone of their actions and the receipts still stated that they were redeemable in fixed amounts of gold. And when some wanted to take possession of their gold on a physical basis they could still do so. Up to a point.
As late as the early twentieth century, U.S. paper currency was issued with a clear statement specifying that it was redeemable for specific amounts of gold (and silver) at fixed rates. In addition, gold (and silver) circulated concurrently with U.S. paper currency and were interchangeable. One was as good as the other. Supposedly.
Questions arose as to the value of the paper currency. And more and more individuals, companies, and countries opted for real money – gold. There simply wasn’t enough gold to meet the redemption demands. And to whatever extent it was available, the banks and the government didn’t want to release it. So…
In 1933 President Roosevelt issued an executive order “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. In 1964, the United States ended its use of silver in the minting of coins used for legal tender. And, in 1971, President Nixon suspended convertibility of the U.S. dollar into gold by foreign nations.
For the past forty-five years there has been no convertibility of U.S, dollars (i.e. paper) into gold (i.e. money).
What we call money today is really just paper; which we can use to buy real money – gold. If we’re smart.