A History of Gold
Gold’s unique physical properties, its luster, easy workability, and virtual indestructibility have given it a special place in the history of the world. Over centuries, gold has been prized for its rarity and beauty. One of the earliest records of gold used as money dates from 560 BC, when King Croesus of Lydia, today’s western Turkey, created a coin emblazoned with his own image.
Before coinage, many commodities were used as a medium of exchange cattle, cocoa beans, shells and hides, to name but a few. As the idea of the guaranteed gold coin gained gradual acceptance, gold became the formalized basis of economic life.
Like ancient cultures, our modern society still recognizes the value and beauty of gold. Gold jewelry continues to adorn us. Gold is used as an industrial metal in electronics, dentistry and other applications as well as an investment vehicle in the form of coins and bars. Gold is an internationally recognized monetary and financial asset.
What Is a Gold Standard?
A gold standard uses gold directly or indirectly as money. In a pure gold standard, gold itself is used in transactions, with all prices in essence expressed in terms of the amount of gold needed for purchase.
Because gold may be alloyed with baser metals, and its weight impossible to ascertain without proper scales, it became common to mint it into coins so that its purity and weight were certified by an authority (usually the government).
Such coins typically also become a unit of account, so that instead of being specified in the number of grains of gold of a certain purity, prices are expressed in terms of dollars, guineas, doubloons, drachma, etc.
A monetary system can also be regarded as a gold standard if representations of gold are used in exchange. For example, paper notes can be part of a gold standard if they represent a claim to gold. However, “claim” can be ambiguous.
Typically, people think of paper currency as part of a gold standard if the notes are “backed” by gold, that is, if there is for every note outstanding a certain quantity of gold stored as “cover.”
Backing, however, may be largely irrelevant. For paper to represent gold, it must be regarded as equivalent to a given quantity and purity of gold. In general, this equivalence is achieved by “convertibility,” the commitment to exchange the notes for gold on demand.
A paper money system in which notes are convertible on demand by the issuer into gold of a given weight and purity is regarded as a gold standard.