By Alex Levin
Gold wasn’t always as sought after as it is today. Although gold was first used as jewelry in approximately 4000 B.C., it took more than 2,000 years for societies to start using gold as a primary means of exchange.
The Early Years
Gold became the standard unit of currency in two separate regions of the world sometime around 1500 B.C.: Egypt and the Middle East.
• Egypt — Egypt’s gold-rich Nubia region allowed the nation to gain power in international trade. The nation became extremely wealthy in ancient times as gold began to gain recognition as a standard medium used for international trade.
• Middle East — In the Middle East, the coin known as a Shekel became a standard medium used for trade at this time. The Shekel was not made entirely from gold; A Shekel is a combination of approximately one-third silver, one-third gold and one-third other metals.
Early gold use continued to be prevalent in Asia, the Middle East and Europe. The Greek and Roman Empires relied heavily on the use of gold for trade.
Great Britain first established the use of precious metals as currency with the introduction of the pound in 1066 A.D. The pound is so named because it was literally made of a pound of sterling silver.
In 1284 A.D., Great Britain introduced its first gold coin to be used as currency. The coin was known as a Florin, and more gold coins were introduced shortly after the Florin. Even though the Florin was introduced in 1284 A.D., the country did not establish a monetary system using gold and silver until 1377 A.D.
Great Britain ended its gold standard in 1931 because of supply issues connected to gold being sent overseas.
The United States
Paper currency used in the United States used to be closely tied to gold. In fact, people owning paper money were able to trade paper currency for gold between 1870 and 1933. While people were not able to directly trade paper currency for gold starting in 1933, it was still backed by gold until 1971.
The purpose of ending the exchange of paper currency for gold in 1933 can be linked to the Great Depression. President Franklin Roosevelt observed that banks were struggling to stay in business as people lost confidence in paper currency and traded it in for gold at an alarming rate. Because of this issue, Roosevelt decided that the United States government would need to be in control of all of the gold. People were no longer able to trade paper money for gold, and households were not permitted to own gold.
Although people could no longer trade paper currency for gold, currency was still backed by gold until President Richard Nixon ended the gold standard completely in 1971. The decision was made because Nixon was concerned about a major problem involving cash flow in the country.
Modern Global Use
Currently, there are no countries that are using the gold standard. Paper and coin currency is used in developed nations. Most countries keep a reserve of gold, but none allow people to trade paper currency for gold.
Should the Gold Standard Return?
A question that is asked time and time again is whether the United States and other developed countries should return to the gold standard. There are many arguments for and against reestablishing a gold standard.
– Consumers would be more confident in national currency because it would be backed by an actual commodity.
– An international gold standard could lead to stability in the markets. Because all world currencies would be reliant on gold, stability in relation to other currencies would be constant. Supporters of the gold standard suggest that adopting an international gold standard would cut down on the possibility of conflict and war.
– If one country decided to return to the gold standard while others remained reliant on paper currency, there is a real possibility that the country would suffer from deflation if the price of gold rose. The global economy does not allow for the gold standard to be observed only in select countries. These countries would have major issues with exports in the case of a rise in the price of gold. Eventually, deflation would lead to a recession.
– The gold standard also limits the supply of currency. The government would not be able to regulate the flow of cash because gold would be needed to back up any currency that is released into the economy. Gold miners would hold more power than the government regarding cash flow in the nation.
– Although many proponents of returning to a gold standard claim that gold is a stable investment, gold has actually lost value in recent history.
Although countries no longer use gold as a form of currency, many people have chosen to personally invest in the gold market as part of a larger investment portfolio. While gold values constantly fluctuate, economists agree that gold will never be deemed completely worthless.
Alex Levin is a writer for The DuMouchelle Silver & Gold Exchange, cash for gold appraisal and auction specialists for over 80 years.
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