A Short History of Gold as Money

by Investing School on February 24, 2010

For centuries, people from all over the world have dealt in one central currency. Though dollars, pounds, euros, and yen are all relatively different in terms of their value, gold has been the standard by which the world’s economies derived their values. Looking back on the history of gold as money, we see a few very important events that have shaped the way we view it today. The most recent of those happened in 1971, but tracking gold to its fullest requires that we look back much further than that. We must look back to 700 BC, when the first goldsmiths started the trend of using precious metals for valuable currency. Since then, things have evolved slowly to the point where we are today.

The first gold coins

Back in 700 BC, the world saw its first gold coins and they were an immediate hit. It has been a more than 2600 year love affair between banks, consumers, and gold which has helped to shape the global economy as we know it today. Back then, the scarcity of gold as a physical resource made it the perfect means for trading. If you had gold, then you had value and it only made sense that you might be able to trade gold coins for other items within the economy. This early trade was quite rudimentary and there was no type of gold coin that was immediately the standard.

Turning physical gold into paper money

One of the most important changes in the history of gold came when some goldsmiths decided to turn gold into paper money. These individuals saw that the value of precious metals was pretty fluid in time and they also saw the need for some practical storage measures for people who owned this gold. Since consumers did not feel comfortable keeping their gold around the house, they needed a place where it would be safe. Enter goldsmiths, who would store this gold in their safes and their early vaults for a small fee. These were the first banks and they issued “gold receipts” to those people who deposited their valuable bars and coins.

These receipts were the first pieces of paper currency and over time, people became more comfortable carrying around those. People of that time became much more comfortable with these receipts, because it took away all of the risk of carrying gold and it was just a more convenient means of acknowledging your wealth. As individuals became more comfortable with the process of holding paper money, this practice became the standard. The early goldsmiths saw an opportunity, as well, and most of them transformed their businesses into rudimentary bank operations in the early going.

1971 and the big change for gold

All throughout time until 1971, people who owned gold could go back to their bank or their goldsmith (in the early days) and exchange the paper money for gold again. Though this did not happen all that often, it was an option that people had at their disposal if they felt the value of paper money was in question. President Richard Nixon changed all of that in 1971 when he closed what was known as the gold window. He changed the system and consumers were no longer allowed to convert their money back into gold. This changed the course of history for gold and helped to shape its value, as well.

When Nixon did this, gold and precious metals in general were taken out of the currency exchange for good. People were forced to start using paper money, and the banks were forced to adopt regulations. It became law that banks had to have as much gold in reserve as they had money on hand. That became common practice after a long period where banks would hand out more “receipts” than they had gold reserves, causing serious problems with the value of money throughout the global economy.

Nixon’s move shaping gold’s future

The closing of the gold window caused the price of gold to shoot up from around $35 to levels above $300. Since then, it has gone up to more than $1,000 and looks to be rising again. Today, gold’s role in the money exchange is as a guarantor. It backs up, or is supposed to back up, every dollar that is printed and every bank transaction that is completed. It has gone from being the chief item in the currency exchange to being the backbone of an exchange that now deals in paper money.

About the Author: Shaun Connell enjoys studying the history of economics of gold coins, and does so at his gold coins website. If you’re new to gold, check out Ways to Invest in Gold.

This is part of a comprehensive series on gold as an investment. Check out the other articles and learn more about gold to see if this is a right investment for you.

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