The Dawn of Gold as Currency
Ancient civilizations have treasured gold for its beauty and as a symbol of wealth and power. However, its transition from a symbol to a medium of exchange profoundly changed economic history, starting with the first use of gold as money in the Kingdom of Lydia (present-day Turkey) in 600 BC.
The concept of gold as legal tender blossomed during the era of gold standard systems. England officially adopted a gold standard in 1821, fixing the value of the British pound to a specific quantity of gold. This system gained international traction, with many countries, like the U.S., pegging their currencies to gold. Before the gold-backed British pound, silver and gold currencies like the Spanish dollar and Dutch guilder had served as reserve currencies.
Gold is Money. Everything Else is Credit.
J.P. Morgan famously said this in his testimony before Congress in 1912: “Gold is money. Everything else is credit.”
Gold is considered money because it possesses the following five key properties that define true money:
- Store of Value: Gold can retain its purchasing power over long periods, unlike fiat currencies which constantly lose value due to inflation.
- Durability: Gold does not corrode or decay, giving it an infinite lifespan.
- Divisibility: Gold can be divided into smaller units without losing its value.
- Portability: Gold has a high value relative to its weight and size, making it easy to transport.
- Scarcity: The total amount of gold in the world is limited, preventing debasement through excessive production.
- Fungibility: One ounce of pure gold is equivalent to any other ounce of pure gold.
Many argue that throughout history, only gold and silver have possessed these necessary characteristics of money.
The Reserve Currency Era and Beyond
Gold reached its zenith as the reserve currency with the Bretton Woods Agreement in 1944, which established the gold-backed U.S. dollar as the world's primary reserve currency. This lasted until 1971, when President Nixon announced the suspension of the dollar's convertibility into gold and thereby the end of the gold standard and fixed exchange rates that facilitated global trade.
The cessation of the U.S. gold standard birthed a new era of fiat money, or money not backed by a physical commodity (i.e., by government ‘fiat’), marking the beginning of floating exchange rates and a significant change in gold's role. Gold no longer was the backing for currencies; instead, it competed with them. Ever since it’s been recognized as a hedge against inflation. Why? Because gold tends to retain its purchasing power over time, unlike fiat currencies that can lose value quickly due to government overspending on wars, foreign aid, social welfare programs, surveillance, and expanded bureaucracies.
Today, gold continues to hold immense value within national reserves, central banks, sovereign wealth funds, and as an investment asset for private investors looking to diversify their portfolio in the quintessential ‘safe-haven’ given its low correlation with stocks and bonds.