We all have seen the shiny wedding
rings of our parents, some families even have pieces of jewelry with
a story spanning multiple generations – the precious metal of gold
is the most ancient material associated with wealth. More to that, it
was the foundation of the monetary system for thousands of years –
and abandoning it was the biggest change in the way we think about
wealth since the introduction of banknotes. But why did that happen?
Read our two-post long series to discover the complete history of the
gold standard.
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Picture from mint.com |
The role of trust
Do you remember our earlier post, where
we stated that money doesn't have value on it's own? It is a medium
of exchange, a symbol of the promise that f.e. if you hand over a
piece of green paper with George Washington on it, your bartender
will give you a cold drink we all long for in this late Indian
summer. You may not realise it, but this requires a huge amount of
trust from both sides – the bartender has to trust you are not
forging the green paper, while you have to trust him that he will
indeed give you the drink for your money.
What is the gold standard?
Nowadays the value of money is granted
by promise – the government assures you that every citizen
will and shall accept it, as well as they will as an equivalent of
wealth – it didn't always work this way. Well into the 1970's, the
value of money was granted by gold – the
government still assured you that the money would be usable as a
medium of exchange nationwide, but they also said that you could
exchange your paper money at them for a fixed amount of gold. This is
called the gold standard –
and it is the successor of systems such as the bimetal
standard, where the value
of currency was granted by gold and silver,
the silver standard
(granted by silver)
and
the "age of coins", when money was made
from gold or silver.
Origins
When
money was invented, people realised that it was easier to have an
universally accepted guarantee of wealth than having to barter
individually for goods and services – in the Bronze Age, the
aforementioned example would likely have taken place by you handing
over a goat in exchange for a keg of beer, possibly complicated by a
likely differing language. But what could this medium be? It had to
be easily movable – imagine if banks had to feed cows! -, but
precious and rarely found – otherwise you could get a drink in
exchange for a muddy pebble you picked up somewhere.
So
the natural choice was gold and silver – they were easily
shapeable, rarely found, and they had a real value – people always
had a fascination for shiny jewelry so these two metals didn't
receive their value out of nowhere. This was the age of coins – for
around 2500 years, it worked just fine, from 1200 BC until around the
1600's.
The change to paper money
Then
things changed, however. Europe has been suffering from a metal
shortage since the Crusades – they were paying with gold in
exchange for spices, silk and other fancy stuff from the other side
of the Silk Road -, but when Europeans discovered America, they
discovered their gold mines as well – so Europe all of a sudden was
drowning in gold. The economy boomed, the banking system
revolutionised, and people realised that they didn't actually have
to hold the gold and silver coins – banks, and later rulers issued bills of exchange, promising the holder to get back their money
anytime. Soon, so much of these bills were in circulation that they
became an important form of exchange, and to make administration easier, the bills became certificates, and then notes – paper money was born.
Rise of the standard
What does that have to do with
gold, or standards, or whatever, you might ask? The answer is easier than you think.
Firstly, paper money was monopolised – governments had the most
money, so their bills of exchange became the most widely accepted,
eventually the only accepted. Simultaneously, it was standardised –
instead of issuing individual bills, governments issued fixed
denominations – so one bill meant 5 gold pounds, another 10 and so
on. Through monopolising bills, governments established a de facto
metal
standard – and
during the 19th
century, practice became theory with independent central bank's
treasuries providing the guarantee behind money. In
other words, gold standard countries pegged their currencies to gold.
Gold, my precious
By
the 19th
century, the age of imperialism, the USA and the UK – countries which by then solely used
gold as a guarantee, (which
simplified things compared to the gold-silver bimetal
standard
not having to convert between the two metals)
– became such economic powerhouses, that many countries pegged
their currencies to the dollar and the pound, adapting their monetary
policy – while others, seeing their success and liking the idea of
providing a sound basis for their money, adopted on their own.
Hence
starting from the 1870's, gold standard became the worldwide ruling
monetary policy – from the Austria-Hungary to Denmark, from Germany
to Sweden, countries adopted the "crown" as their currency,
adopted gold standard – and given the fact that all currencies were
pegged to gold, they were in turn pegged to each other as well,
bolstering international trade with calculable prices.
So
what happened then? Why is it that you can't exchange your "pound
sterlings" for a pound of silver or gold anymore? If you want to
know, then do come back for our next post to discover the fall of the
gold standard.
Other posts of the series:
Rise and Fall of The Gold Standard, 1.5 - Intriguing Facts about Gold You Didn't Know Before
Rise and Fall of The Gold Standard, II. - The Fall of the Gold Standard
Other posts of the series:
Rise and Fall of The Gold Standard, 1.5 - Intriguing Facts about Gold You Didn't Know Before
Rise and Fall of The Gold Standard, II. - The Fall of the Gold Standard
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