The History Of Gold And Money (Guide)

The history of gold is synonymous with the story of wealth and money. The first official declaration of gold as money came around 600 BC, where King Alyattes of Lydia, an ancient kingdom in modern-day Turkey, oversaw the first recorded mint. 

Around 3,100 BC, the Egyptian ruler Menes laid the foundation for incorporating gold into the Egyptian economy and decreed that “one part of gold is equal to two and one-half parts of silver in value”.

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. Three types can be distinguished: specie, bullion, and exchange. In the gold specie standard the monetary unit is associated with the value of circulating gold coins, or the monetary unit has the value of a certain circulating gold coin, but other coins may be made of less valuable metal.

The gold bullion standard is a system in which gold coins do not circulate, but the authorities agree to sell gold bullion on demand at a fixed price in exchange for the circulating currency. The gold exchange standard usually does not involve the circulation of gold coins.

The main feature of the gold exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses a gold standard (specie or bullion), regardless of what type of notes or coins are used as a means of exchange. This creates a de facto gold standard, where the value of the means of exchange has a fixed external value in terms of gold that is independent of the inherent value of the means of exchange itself. 

Most nations abandoned the gold standard as the basis of their monetary systems at some point in the 20th century. The UK came off the gold standard under Ramsay MacDonald in 1931. In the early modern era, the United States of America had used various amalgamations of both metal and paper currency options, but in 1792 the coinage act saw the birth of the United States mint and the US dollar. 

The ‘classic’ gold standard was adopted in 1879 and was further solidified in 1900, whilst the UK officially defined the pound sterling relative to gold in 1816. Major powers would periodically abandon gold to finance wars throughout the 20th century, and it was finally abandoned by the UK in 1931 and by the USA in 1971, having been slowly eroded by the Federal government since the Great Depression. 

Although many central banks still maintain substantial gold reserves, no current modern monetary system officially backs its currency by gold.

Why And When To Hold Gold Bullion?

Gold is the proven, quality, long-term wealth store during a slide into deep crisis - the one which everyone else comes to in a bit of a panic. The early buyers bought gold purely to protect their wealth. They still tend to multiply their money, because they are subconsciously anticipating future demand.

Gold is not consumed in any meaningful sense. A tiny amount finds some use as false teeth because of its inertness, and some is used in electronics because of its non-corrosive nature and excellent conductivity. 

But currently well over 95% of the world's gold is held as a wealth store - either in bullion vaults or as jewelry, which is generally considered a private monetary reserve (particularly in India, the world's biggest gold customer).

This stock of gold isn't disappearing, and its supply is growing at a very slow rate (1.6%) compared to its overall stock. This feature of a nearly fixed above ground quantity, growing slowly, has been true for about 4,000 years. So you can now see that there exists a large, but not too large, and almost fixed quantity of gold in the world, almost all of which is held by its owners as a tangible store of wealth. That is something which is true of nothing else.

By contrast to gold's restricted supply our money systems are currently expanding out of control. Modern loose monetary policies - designed to keep the factories busy - are expanding the supply of currency, under political direction, by at least 11% per annum; and that's for the Euro, the most hawkishly managed of the modern world's major currencies.

In such circumstances gold's reliable rarity is again noticed by savers. Its great use is as a money proxy when artificial forms of money (which are far more common) are not being properly restricted in supply. In such times gold's unexpandable supply causes it to be a much more reliable store of purchasing power than currency. 

Nothing does this job so reliably and so well as gold, because nothing matches the unimpeachable rarity and stability of gold's above ground supply.

Better still, as people come to remember and appreciate this unique quality their demand for gold causes not just a retention of purchasing power, but a multiplication of it. What is different about gold and other forms of money is the way they disappear, and why. Because its natural qualities recommend it as a high quality form of money. 

Gold suffers from Gresham’s Law, a common sense law in economics which states that “bad money drives good money out of circulation”. Think about it for a moment and you’ll see that given a choice of spending good money (gold) or bad money (inflating paper) you’d spend the paper and keep the gold as a store of value.

So in an economy where economic and political considerations have combined to produce a paper currency running in parallel with gold, and where that currency is showing the early signs of being dangerously expanded in supply, then people will elect to hold on to gold and spend paper.

While paper money forms disappear permanently, and lose all their value, gold disappears temporarily, and retains its value over the very long term. Every few years, and when circumstances are right, gold returns. It has a history of doing so which has lasted those 4,000 years.

The trick with gold is to understand the causes for these rolling phases, to recognise them, and to act appropriately. If you own gold at the right time you will own a fast appreciating asset when normal business assets, and money itself, are tumbling in value.

Owning gold in good phase is very profitable. In the 5 years after the 1929 crash gold's investment purchasing power rose 17 times. In the decade of the 1970s gold's investment purchasing power rose 15 times. So far in gold's current re-emergence, with the economic situation looking every bit as hostile as the 30s and the 70s, gold's price has multiplied by about 3 times. 

By comparison with those previous cycles it is still nearer the bottom than the top. Throughout history, gold has been seen as a special and valuable commodity. Unlike other commodities, gold does not get used up or consumed, imbuing the precious metal with a sense of everlasting value. Today, owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier.

Many investors are considering gold an alternative asset and a way of safeguarding their wealth. As a global store of value, gold can also provide financial cover during macroeconomic uncertainty.

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