History Of Gold As Money

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HISTORY OF GOLD

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.

Questions arose, however, as to the value of the paper currency. 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.

GOLD IN THE 20TH CENTIURY

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.

In 1933 President Roosevelt issued an executive order “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”.  Then, in 1971, President Nixon suspended convertibility of the U.S. dollar into gold by foreign nations.

For the past fifty years there has been no fixed 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.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold Is Real Money

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Lots of things have been used as money during five thousand years of recorded history.  Only one has stood the test of time – GOLD. And its role as money was brought about by its practical and convenient use over time. Gold has it own special characteristics which lend themselves to its role as money quite well.

First, it is scarce.  Nearly all of the gold that has ever been mined is still available above ground.  And production of new gold averages only (approximately) one percent annually of existing supply. Hence, we are not likely (ever) to see any large or unusual changes in existing supply that would affect its value in a substantial way.

Second, it is malleable (workable).  One ounce of pure gold can be hammered into a sheet thin enough to cover a football field.

Third, it is indestructible.  It does not rust or corrode and it is not consumable.

Fourth, it is beautiful.

REQUIREMENTS OF MONEY

In order to be functional and reliable over time, money must meet three specific requirements: 1) a medium of exchange, 2) a measure of value, 3) a store of value.

A medium of exchange needs to be liquid and portable; and it needs to be accepted on a universal basis.

To be a measure of value, money needs to be easily incorporated into recognizable forms and amounts for use within various standards of weight and measure.

The most important requirement, though, is that money must be a store of value.

GOLD MEETS THE TEST

The Federal Reserve Bank of the United States was established in 1913.  At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.67) dollars to the ounce.  You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government.  Gold in other forms (dust, flakes, nuggets, etc) also had circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established.

Fast forward one hundred years. The U.S. dollar has lost 99% of its purchasing power over the last century.  In other words, it takes one hundred dollars to buy today what one dollar would buy a hundred years ago.  Whereas one ounce of gold will still buy today what it would a hundred years ago.

GOLD IS MONEY; STOCKS ARE INVESTMENTS

Astute readers will likely be quick to point out that stocks or real estate have appreciated considerably more in U.S. dollars than gold over that same time period.  And they would be correct.  But that entirely misses the point of this article – gold is real money. The U.S. dollar is a substitute for real money; stocks and real estate are investments.

When someone states that “gold is too volatile to be used as money” they are being perfectly logical – in reverse.  It is the U.S. dollar that is volatile and which continues to depreciate in value. Gold is the constant.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!