Gold has a long history and has been used as money for several thousand years.
While not formally part of the money system today, central banks still hold gold, giving it a proximate shadow status in the current system.
Of all the elements of the periodic table, gold is the one best suited for use as money. It is:
Gold’s key attribute is that it is a store of value over a long period of time. It can fluctuate in the short term but over decades, centuries and millennia, it preserves wealth.
As the saying goes, you don’t buy gold to get rich, you buy gold to stay rich.
Often people think of gold as an investment. In our current fiat system that may be true but this is not quite the most accurate way to think about gold.
It should be thought of as money. It is a superior and longer lasting equivalent of currencies such as the US Dollar, the British Pound and the Euro.
Gold is used to buy and sell things and, more importantly today, it is used as a form of savings that is immune to debasement.
Gold as Money in the Ancient World
Uncoined gold circulated as a medium of exchange in the ancient world as people found it a superior form of commodity money to the various alternatives such as shells, beads and livestock.
However in a non-standardised form trade with gold was inefficient as you needed to assess the weight and purity.
The first record of standardised coined gold, the stater comes from Ancient Lydia around 600BC. The Lydian empire predated the Persians in what is modern day Turkey.
King Alyattes minted coins out of electrum (a gold-silver alloy), while his son, King Croesus, minted the world’s first gold coinage.
The unique development was that commerce was facilitated by a standardised weight and purity which was guaranteed by the sovereign.
This practice soon spread all over the ancient world, particularly in Persia, Greece and Rome.
Silver was more abundant and more commonly used than gold. As it is today, gold is scarcer and more highly valued than silver.
Thus, gold was mainly used for larger transactions by the wealthy, while silver could be used for smaller transactions by the general population.
While gold was used on occasion during the Roman Kingdom and the Roman Republic, it was Julius Caesar, the last leader of the Republic between 49BC – 44BC who instituted the use of gold coins in greater quantities with the minting of the 8 gram gold aureus.
The aureus circulated alongside the silver denarius and, during the time of Julius Caesar, 1 aureus was worth 25 denarii.
Successive Roman emperors debased the silver currency over the next several hundred years leading to rising prices, price controls and general economic chaos.
Emperor Constantine attempted to right the ship in 312AD by issuing a massive amount of gold coin.
His gold solidus permanently replaced the aureus.
It was smaller at 4.55 grams of gold.
Constantine maintained the fixed weight of the solidus without debasement and managed to restore some short to medium term stability to the Roman economy.
The damage, however, was done and a combination of military overextension along with economic decline led to the demise of Rome and its eventual fall in 476AD.
Yet the gold solidus survived the fall of the Western Roman Empire and continued to circulate for hundreds of years in the Eastern Roman or Byzantine Empire.
Gold as Money in the Middle Ages and Early Modern Period
With the fall of Rome, wealth, power and influenced shifted East. First to the Byzantine Empire and then the the Ottoman Empire.
As the Byzantines continued to use gold coin in the form of the solidus, this practice influenced developments in the Arab world.
The Ottomans adopted the gold dinar and the silver dirham.
Gold as money did not return to Europe until 1252 with the introduction of the Florentine florin.
Italian city states had grown wealthy from trade with India and China which enabled them to adopt gold as their monetary standard.
This was a decision which enabled Florence to thrive as gold provided a more stable foundation for savings and investment.
Very soon the florin was the dominant currency in Europe and much of the known world. Venice and many other European cities and states followed by minting their own gold coins modelled on the florin.
When Spanish and Portuguese explorers discovered the New World, they found an abundance of easily mined gold and silver. The Aztecs, Incas and Mayans used precious metals but not as money.
This led to a huge amount of new supply of gold and silver flowing through to both Europe and Asia.
In 1497, the Spanish started to issue a silver dollar, called the real de a ocho or pieces of eight which became a challenger to the florin for the dominant currency of Europe.
Gold as Money in the Modern World
Britain was the first country in the modern world to adopt the gold standard, although it was essentially an accident.
Silver and gold both circulated as money and the Royal Mint was charged with setting the exchange rate between the two.
In 1717 Isaac Newton, who at the time was master of the mint, set the exchange rate such that gold was overvalued relative to silver and silver was undervalued relative to gold.
In Europe silver was valued more highly than it was in Britain and this led to a silver flight from Britain to the continent. Correspondingly gold flowed into Britain from Europe since it was valued more highly there.
While Britain was not formally on a gold standard in 1717, Newton’s move effectively placed them on one.
David Orrell explains:
“The result was that the pound sterling switched de facto from a bimetallic standard to a gold standard, with the Mint price of gold set at £3 17s 10½d an ounce (which made a guinea 21 shillings). There it remained, with wartime interruptions, for the next 200 years; a frozen Newtonian accident.”
Britain formally acknowledged this reality in law in 1816. The 1816 Coinage Act defined the Pound as a weight in gold, 7.32238 g to be precise, rather than a weight in silver.
The United States began her existence on a bimetallic standard. Alexander Hamilton’s 1792 Coinage Act set the silver/gold ratio at 15:1.
The 1792 Coinage Act also allowed for the free coinage of gold and silver. That is, anyone could present gold and silver bullion to the US mint and have it coined into United States money.
15:1 was an accurate ratio at the time as it was very close to the market rate between the two metals. But an increase in the supply of silver over the next few decades meant that the market rate of silver declined and the government peg was overvalued.
So in 1834, the US adjusted the ratio to just over 16:1. This time they overcompensated the other way and undervalued silver, as the market rate was 15.625:1.
While this was still a bimetallic standard the 1834 adjustment also put the USA on a de facto gold standard. That was because silver flowed out of the country into foreign markets where it was closer to a fair market rate.
In 1873 the USA discontinued the coinage of silver dollars that had been authorised in 1792. This in effect created a de facto gold standard, although it wasn’t until the Gold Standard Act of 1900 that this became fully formalised in law.
Although there was heavy resistance to the demonetisation of silver by a vocal pocket of American society, the move to gold prevailed.
Another major power to adopt the gold standard in 1873 was Germany. Having just defeated France in war and newly unified, Germany sought to emulate Britain’s economic and imperial might and decided that the gold standard was the best way forward.
At that point Britain, the USA and Germany were all on the gold standard.
Given the strength of their economies, other nations followed along in adopting gold.
By 1912 there were 49 countries on the gold standard.
If a country wasn’t on the gold standard themselves then they likely held British Pounds as reserves, meaning their currencies were still effectively tied to gold.
This monetary era from the 1870s to the outbreak of World War One in 1914 is known as the classical gold standard.
Under the classical gold standard a nation’s currency was determined as a fixed weight in gold. Gold was the real money and paper was merely a substitute for the real thing.
Paper money was freely redeemable in gold, which kept the system honest as governments were restricted in how much paper money they could create.
This sound money system was a glorious era for commerce and trade as gold functioned as global money. It also encouraged high savings rates which in turn allowed for the accumulation of capital and investment in industrial expansion, financed not by debt but by real growth.
Michael Bordo describes the era:
“The period from 1880 to 1914, known as the heyday of the gold standard, was a remarkable period in world economic history. It was characterized by rapid economic growth, the free flow of labor and capital across political borders, virtually free trade and, in general, world peace.”
Gold as Money in the Early 20th Century
The outbreak of World War One was the end for the classical gold standard, as the belligerent powers abandoned the mechanism that restrained their currency creation.
Rather than finance the war through taxation, where their citizens might resist, governments preferred to use the inflation tax instead and print the money needed to cover the deficits that financed the war.
Of the major powers, only the USA remained on the pre-war gold standard.
Four years of war caused economic devastation for those involved and the monetary policy used to finance the war left the participants’ currencies heavily devalued.
The British pound had lost 35% of its 1914 value by 1920. The Italian Lira lost 71%, the French Franc 64% and the German mark 96%.
In 1922 a conference was held at Genoa, where the European powers determined a new monetary system for the post-war environment. Plans were set in place for a return to gold.
In 1925, Britain was the first to return to gold, with other major powers following over the next few years.
However, this was a very different system to the classical gold standard. It was known as the gold-exchange standard.
Gold was in the name, but it was not really a true gold standard.
Instead of full convertibility into gold, pounds could only be exchanged for gold by foreigners and only for a minimum of 400oz of gold bars.
Small exchanges into gold coins were prohibited.
Murray Rothbard explains:
“Under the old gold standard, the nominal currency, whether issued by government or banks, was redeemable in gold coin at the defined weight. The fact that people were able to redeem in and use gold for their daily transactions kept a strict check on the overissue of paper. But under the new gold standard, British pounds would not be redeemable in gold coin at all but only in “bullion” in the form of bars worth many thousands of pounds. Such a gold standard meant that little gold would be redeemed domestically at all. Gold bars could not circulate for daily transactions. They could be used solely by wealthy international traders.”
Rothbard elaborates on why this was done:
“The purpose of redemption in gold bullion, and only to foreigners, was to take control of the money supply away from the public and to place it in the hands of the government and central bankers, permitting them to pyramid monetary expansion upon the gold centralized in their hands.”
To make matters worse, not only was it not a true gold standard but Britain returned to gold at the wrong price.
They tied their currency to gold at the pre-war price, not taking into account the massive expansion of the money supply since then.
This of course did not work.
The only way that price would have worked would have been if Britain had allowed a currency contraction.
But she did not and continued an inflationary policy.
The abandonment of the classical gold standard, the wartime inflation and the disastrous post-war return to gold all set the scene for a a crisis that would unfold in the late 1920s culminating in the Wall St Crash of 1929 and the ensuing Great Depression.
Gold has often been blamed for causing the Great Depression and the end of the gold standard has often been credited for helping with the recovery.
But these are faulty arguments.
Jim Rickards explains:
“Gold did not cause the Great Depression; a politically calculated gold price, and incompetent discretionary monetary policy, did. For a functional gold standard, gold cannot be undervalued (the United Kingdom in 1925, and the world today). When gold is undervalued, central bank money is overvalued, and the result is deflation. A gold standard can work fine, so long as governments set gold’s price on an analytic rather than political basis…The Great Depression was then prolonged by experimental policy interventions [that gave rise to] “regime uncertainty,” which meant that large corporations and wealthy individuals refused to commit capital because they were uncertain about regulatory, tax, and labor policy costs. Capital went to the sidelines and growth languished.”
Gold as Money From FDR to Nixon
The Federal Reserve tried to inflate its way out of the Depression that was caused by Britain.
Nervous Americans did what was their right and began to withdraw their savings from banks in gold.
A bank run began in the United States and there were bank runs in Germany and Austria as well. Gold was money and people wanted the security of physical possession.
In 1931 Germany and Austria abandoned the new gold standard. Britain also abandoned it in 1931 as did 25 other countries.
Under new President Franklin D. Roosevelt, the USA, who had stuck to the classical gold standard in 1914, finally gave in.
Roosevelt put an embargo on the export of gold, made it illegal for private citizens to hold gold and raised the price from $20.67 to $35 per ounce.
It is more accurate to say that Roosevelt dramatically devalued the dollar rather than raised the price of gold.
This was still a gold standard in a loose sense, since the US dollar was still tied to gold, but since there was no free convertibility and citizens could not hold gold it was not a true gold standard.
Gold was not considered money but essentially became a reserve asset only.
The world’s monetary system changed again as a result of World War Two.
The USA’s economic standing in the world had risen after the First World War, and by the end of the Second War World they were the sole economic superpower.
The USSR was a dominant political and military force but they were financially devastated and their economy was closed.
This meant the US could essentially dictate the new rules of the game.
At the Bretton Woods conference in 1944 it was decided that foreign currencies would be tied to the US dollar at fixed rates.
This formally made the US Dollar the world’s reserve currency.
Gold still played an important role in the global monetary system because foreign governments were still free to redeem their US dollars for gold at $35 per ounce.
This meant that by holding US dollars as reserves foreign governments still had a tie to gold even if they had abandoned the gold standard themselves.
For this Bretton Woods system to work it required a lot of trust in the United States government.
Foreign governments, holding US Dollar reserves, had to trust that the US would keep their money supply stable so that the fixed rate of $35 per ounce reflected the actual market price of gold in dollars.
Unsurprisingly the US abused their monetary privilege and heavily inflated their currency in the decades following the war. Had gold traded freely on the market, the price would have been much higher than $35 per ounce.
However, the US government had pledged at Bretton Woods to redeem one ounce of gold for $35 dollars.
So canny European governments who realised that their US Dollar reserves were falling in value decided to take up this standing offer and redeem their USD for gold.
After all if the market price of gold were higher, buying at $35 made perfect sense.
This was a problem for the United States. They couldn’t accept such significant outflows of gold. But this option to redeem dollars for gold hindered their ability to print money.
They had two choices. Either they could contract the money supply and be disciplined or they could just stop allowing foreign governments to redeem their dollars for gold.
They chose the latter.
In 1968 President Lyndon B. Johnson ended the existing requirement for 25% of the money supply to be held as gold reserves. In 1971 President Nixon then ended the convertibility of dollars into gold and thus severed the last formal tie between the dollar and gold.
Nixon also devalued the dollar further by adjusting the price from $35 per ounce to $38 and then to $42.22 by 1973. That is the still the price at which gold is valued on the government books despite the fact that gold trades freely at market prices significantly higher.
Gold as Money in the Post 1971 Era
The ability to own gold was restored to Americans in 1974 and gold now trades freely at market prices.
The removal of gold from the monetary system contributed to massive inflation in the late 1970s and early 1980s.
As the value of the dollar declined there was a corresponding bull market in the precious metals.
The Fed managed to bring inflation under control in the 1980s, which resulted in a prolonged bear market in gold that lasted until the late 1990s.
A new secular bull market began in the early 2000s, which has had a few ups and downs, but which we are still living through now.
While it seems that gold has been completely removed from the monetary system, Jim Rickards argues that we in fact on a “shadow gold standard.”
This is because many of the world’s central banks hold gold as a reserve asset. This in effect backs their currency with gold in an informal way. The price on the Fed’s balance sheet is still $42.22, which makes it seem insignificant, but when priced by the market these holdings are substantial.
Rickards explains the significance of gold in the current monetary system:
“Countries around the world are acquiring gold at an accelerated rate in order to diversify their reserve positions. This trend, combined with the huge reserves held by the United States, the Eurozone, and the IMF, amounts to a shadow gold standard. The best way to evaluate the shadow gold standard among various countries is to use the ratio of gold to the gross domestic product (GDP). This gold-to-GDP ratio can easily be calculated using official figures and compared across countries to see where real gold power resides.”
Rickards convincingly argues that gold has never gone away as a monetary asset and is primed to make a comeback if the public loses faith in central banks and faith in fiat currencies.
“The confidence of the entire global financial system rests on the U.S. dollar. Confidence in the dollar rests on the solvency of the Fed’s balance sheet. And that solvency rests on a thin sliver of … gold. This is not a condition anyone at the Fed wants to acknowledge or discuss publicly. Even a passing reference to the importance of gold to the Fed’s solvency could start a debate on gold-to money ratios and related topics the Fed left behind in the 1970s. Nevertheless, gold still matters in the international monetary system. This is why central banks and governments keep gold in their vaults despite their public disparagement of its role.”
Gold has a long history and has been money for thousands of years. It is a stable asset that retains its purchasing power despite the debasement of paper currency.
Despite the shifting sands of human civilization and the rise and fall of empires, gold has retained an important role as money.
In today’s monetary system gold is almost forgotten, but it is still there. Our fiat system, with the US dollar at its centre, was built off the back of the classical gold standard as gradually the role of gold was reduced and fiat took its place.
However, central banks and governments have not abandoned gold and they retain it as monetary reserves.
As our post-1971 system runs its course and the time comes for a new system to replace it, gold will likely play a significant role.
Of course you can get ahead of the curve by putting yourself on your own gold standard by holding some of your savings in the yellow metal.
Bordo, Michael D. 1981. “The Classical Gold Standard: Some Lessons for Today.” Review 63.
Orrell, David, and Chlupatý Roman. The Evolution of Money. New York: Columbia University Press, 2016.
Rickards, James. The New Case for Gold. London, Penguin Business, 2019.
Rothbard, Murray N. A History of Money and Banking in the United States : The Colonial Era to World War II. Auburn, Ala.: Ludwig Von Mises Institute, 2005.
US $50 Gold Coin is in the public domain
Gold Aureus is in the public domain
Genoa Conference is in the public domain
Inflation Chart by St Louis Fed
Gold Chart by Trading View