jasc15 wrote:Or was there something else valuable about gold?
I was thinking about this while reading The Great Depression: A Diary, when the author constantly worried about the US going off the gold standard, and reducing the dollar's gold content. This, combined with compelling arguments from folks like Warren Buffett that gold has no intrinsic value, made me wonder why the dollar ever was backed by gold, and what use it was.
It seems to me that it is a hold-over from the transition from a barter-based economy to a currency-based economy. The currency had to be something not easily replicated, which in the past meant something relatively scarce like gold. The "value" in using gold for currency wasn't that some quantity of gold was of equivalent value as so many goods, but that it could be universally recognized that it represented a certain value of goods since its supply was controlled.
With the invention of paper money which is relatively hard to reproduce, all of the features that made gold useful as currency can now be applied to this paper. However, since people are resistant to change, these notes needed to continue to represent some quantity of gold, which in turn represented the value of goods. It seems redundant to have one currency to represent another currency which in turn represents some value of goods. Cut out the middle man that is gold, and just substitute one fiat currency for another.
Trust, especially in governments, was low.
Most countries when they got under financial and military stress, would devalue the amount of silver in the coinage (gold coins were always fairly rare). Thus leading to inflation. Many Roman Emperors did this, as well as many medieval kings and some early modern rulers.
Gold had the advantages of:
- being relatively rare
- being highly dense
- being an important and attractive decorative metal
Now in the New World, where they didn't have a concept of money, AFAIK it was just decorative for the Aztecs, Incas, etc.
The hunger for gold is in other words an Old World thing, spread presumably by the various migrations too and fro across the Central Asian Steppes between Europe, India, the Middle East and China.
But there was an alternative to gold which grew up in Early Modern Europe with the Rothschild banker family etc.
Bills. Bills of Exchange,
theoretically exchangeable for gold or silver (or English currency) in London were used by merchants all over Europe and even into the Middle East and beyond.
The Bills would be settled by the Rothschild bank in London. You knew you could trust the Rothschilds in Frankfurt or Paris or Lisbon because the Rothschilds in London would always make good on the debt when the Bill came due.
After a while people stopped encashing the bills into precious metals or currency, and treated them as being "as good as".
Periodically there were banking panics, as there was in the summer of 1914 due to the onset of WW1. At that moment the Bank of England had to step in to stabilize markets, usually by quietly organizing a bailout of the affected bank (the Barings Crisis).