The origin and history of gold as a means of payment

Around 3,000 years ago, gold was first used as a means of payment. Since then, gold has always played a significant role in the economy. Today, there is sometimes confusion about whether gold can still be used as money, especially because many gold coins exist that are recognized as legal tender.
This article takes a brief journey through the history of gold as money and examines its current role in the economy.
 

Origin of golden coins

Around 1,000 years before Christ, gold was first used as a means of payment in Asia in the form of small ingots. King Croesus of Lydia (present-day Turkey) was the first ruler to mint gold into coins. Gold coins then played an important role in both the Greek and Roman empires. The Roman emperors introduced the tradition of depicting the head of state on coins.
 

The role of the gold standard

As more and more countries used gold as a means of payment and the economy grew, there was an increasing demand for gold as a raw material for coins. This led to a rise in both the demand and the price of gold. As a result, many countries reformed their monetary systems and adopted the gold standard. Under the gold standard, the value of currency is tied to a specific amount of gold. For example, in the U.S. in 1879, with the introduction of the gold standard, $20.67 could be exchanged for one ounce of gold. The gold standard also meant that the exchange rates of different currencies were fixed.
 
The gold standard brought stability on the one hand, as it made it impossible for countries to print money at will. On the other hand, a drawback of the gold standard was that during economically difficult times, it was not possible to print extra money to support the economy. When World War I broke out, many countries abandoned the gold standard to stimulate their economies. After the war, many countries reinstated the gold standard. However, with the onset of the economic crisis in the 1920s and 1930s, many countries soon abandoned the gold standard. In 1936, the Netherlands, as one of the last countries, also abandoned the gold standard.
 

Introduction Bretton Woods

In 1944, shortly after D-Day, 44 countries gathered in Bretton Woods to establish a new international monetary system aimed at promoting international trade after World War II. Lessons were learned from the Great Depression following World War I, and it was decided to peg the U.S. dollar to a fixed value in gold. For other currencies, a fixed exchange rate with the dollar was determined. During this conference, the International Monetary Fund (IMF) and the World Bank were also established.
 

Collapse Bretton Woods

During the Vietnam War, the United States began printing more dollars to finance the costs of the war. Due to the U.S. monetary policy combined with dollar inflation, confidence in the dollar declined. More and more countries decided to abandon the fixed exchange rate with the dollar and exchanged their dollars for gold. In 1971, then-President Nixon decided to end the dollar's peg to gold. As a result, the price of gold rose.
 

Current role of gold in the monetary system

Today, there is no country in the world that links the value of its currency to gold. As a result, a country's gold reserves do not affect the amount of money a central bank can circulate. However, many central banks, including De Nederlandsche Bank, maintain gold reserves because gold is seen as a cornerstone of trust for the financial system.
 

Use gold as money

Many gold coins are recognized as legal tender with a nominal value. However, in practice, no one pays with gold coins. This is because the value of the gold in a gold coin is much higher than its nominal value. Although gold coins are never used for payments in stores, there are still similarities between gold and money. Both are used to preserve one's wealth for a longer period. However, gold is a better medium for this purpose because it does not lose value due to inflation. As a result, the value of gold has remained constant throughout history. Additionally, gold has the advantage of being universally desired and can be exchanged worldwide for other currencies.
 
Disclaimer: The Silver Mountain does not provide investment advice, and this article should not be considered as such. Past performance is no guarantee of future results.