Gold and Monetary Systems Evolution

Banknotes System

Gold has a long history with the evolution of the economic system. Even in our contemporary era, gold haven’t left the game yet. In order to understand the precious metal role in modern monetary system, we need to take a few steps back and take a quick look on gold relation with money through history.

Starting from the very basics, economy is defined as; production, distribution, trading and consumption of goods and services. Now, let’s apply this to gold. It’s a “commodity” produced, consumed, traded and distributed by mankind all over the world throughout the history. By consuming, we mean using it for any purpose, for instance, coating and shielding electronics, medical uses, making ornaments, and so on. Gold contributed in a bit different way to our economic system. It acts as “money” and it has money features, according to the feds.

How economy came to what it is today? It is a must-know answer. It started when man built the first civilizations. After discovering agriculture, man settled down and societies grew larger and more complex. In the bronze age, and man discovered the secrets of metal casting and the first form of money appeared, commodity money. It was something that has a value, besides its value for bartering and trading. Iron, copper, silver and gold was the first form of money. Then, cities grew larger and formed kingdoms and empires. A need for regulating trade arises, thus metal coins appeared, with gold as the most valued for its rarity and durability. It didn’t rust and it had such a beautiful luster. Almost each civilization constructed legends and myths on this precious metal. That’s how the first formal monetary system was formed.

This ancient story of metal coins that started around 1,000 BC in China continued till the emergence of paper money as a mainstream. This invention was imported from Asia and developed by Italian traders and English goldsmiths bankers. The first bank to issue banknotes was Stockholms Banko in 1661. These notes were written promises to pay the holder in copper, silver and gold coins.

When the banking system grew larger, a new rule was implanted. All countries that issue banknotes should fix the rates of their currencies to a specified amount of gold or to another currency that uses this new monetary system, and that was the Gold Standard. This system was devised to support long-term stability of prices and economic growth. The price and the risk of this system was deflation if the economic growth was too fast to be sustainable.

After the U.S. abolished the gold standard in 1971, gold standard became old news and the world head towards a new policy, the free market. Each country’s currency was valued on the basis of supply and demand. Central Banks kept gold reserves in their vaults along with other assets, like foreign currencies. Still, gold makes more than 13% of the official reserves. Private investors and banks invested in gold too to back ETFs, making 16% of the gold held. By summing up, gold as investment makes around 29% of the gold we use.

Another approach for gold investment, and it’s rather a very old approach, is to buy gold jewelry. Since ancient times, housewives accumulated gold for its beauty and value. And in the times of needs, they sell some of their gold, or buy some more if it was cheap enough. These simple women realized with pure instinct the value of this precious metal and became the ministries of finance in their respective houses. Successful households, the smallest financial unit in the economic cycle, were managed by this concept in the Far-East, the Middle-East and Europe. It is still the base of the families financial management.

After this overview on gold in the monetary system through history, from the smallest household to the greatest nation and world largest corporations, we conclude that gold was the base of monetary system, either subtly on the individual levels, or globally on the nation’s level.

The world needs to re-think the current system. It is not working well anymore, and the past system, the gold standard, is an excellent transitional alternative till economists research and develop and new system that can avoid the flaws of both.