The concept of money has existed since humans reached the level of civilization. Historical records suggest that barter was the first form of an exchange system that we had, although it cannot be called a currency it was and is the closest alternative. Historical records suggest that mankind used different metals at various points in time as currency; we have evidence that metals such as iron, bronze, copper, gold, and silver were all used as currency.
In the recorded history of almost 6000 years, we find Greek, Roman, Persian and Egyptian civilizations used gold and silver most extensively as currency. Since then, mankind has used and discarded various forms of money but gold has remained as the anchor at the heart of the financial system throughout history. The reasons for the timeless acceptance of gold are its properties and usefulness. Gold is durable, portable, divisible and most importantly it fulfills all the functions of money. It is an accounting unit that stores value, can be used to delay payments, and can be used as a medium of exchange.
Gold has sustained itself and proven its worth through wars and famines, through booms and recessions. At present, the dollar is the reserve currency of the world. Before the 1970s however, this was not the case. At some point in history the British pound, Arabian dinar and dirham, Spanish peseta and Portuguese escudo have al been as powerful as the dollar today.
For the greater part of the last 200 years, the world had been on a gold standard, the last 40 – 50 years have been very unique in the sense that this is probably the first time in history that humans are living in a financial system sustained entirely through fiat currencies.
In 1971, Richard Nixon announced a cut in the price of gold, which basically broke the gold standard and entered the era of no currency conversion, which happened. The currency is supported, but the country cannot print the required amount. To print currency, you must buy gold, but the Fiji currency allows the country to print more currency when needed. And increase world debt The debt of the United States alone is a stupendous $23 trillion, this equals around $70,000 debt burden per person in the United States. The debt of the United States is growing at the rate of over $1 trillion per year and similarly, global debt is over $250 trillion.
This would not have been possible if the gold standard was still in place but the rapid expansion of the global economy would also not have been possible with the gold standard, it was the abolishment of the gold standard that allowed economies to stack on huge amounts of debt for mega-development projects. Indeed many economists and politicians alike, have the opinion that going back to the gold standard now is impossible. Why though? What was the gold standard and why is it impossible to go back to it?
The gold rate refers to a system where every penny in issue, every pound, every dollar or any other currency in issue is backed by an equal amount of gold. In other words, every note of currency in use was redeemable for gold at a fixed rate. Now if every country had a gold-backed currency, redeemable at a fixed rate that would mean that every currency would be convertible at the fixed rate of gold
Let us compare the gold-backed and fiat monetary system side by side for a few moments. In a gold-backed economy, the only way to increase the money supply is to buy more gold, and the only way to reduce the money supply is to reduce the amount of gold. In other words, if a trade or budget deficit occurs, the government must pay to reduce the money supply. As a result, the economy is weak and competitive. The opposite would happen in a trade surplus thus effectively making the economy run on a simple principle instead of bureaucratic intervention.
In contrast to this if we look at the modern fiat currency governed system. If there is a trade or budget deficit, the government will have to borrow money from the central bank to make up the deficit, so taxpayers will eventually repay the loan and increase debt every year.
Do you see the problem with the fiat system now? With a gold-backed financial system, the system is not only self-correcting but it also has a limiting factor that prevents unbridled growth. Why is unbridled growth bad? Growth is good but growth based entirely on debt is not. The gold-guaranteed financial system initially built on a foundation to achieve sustainable growth, but modern healthcare systems have not created the foundation for global debt growth, which is the first time that debt financing has provided the foundation for growth. This is why most developing countries and some developing countries owe at the same time. As long as the gold standard was there, the world did not face any major financial crisis.
Yes, there were depressions in the first half of the last century but these were artificially created because of the two world wars. The world wars created a need for rapid expansion in military-industrial production and this ran against the fundamental principles of the gold-backed monetary system. One can see that in the past, ancient civilizations faced gold or financing for that matter as a limiting factor and our monetary economic system faced the same problem during the world wars, but instead of accepting the limitation and creating the required ground fundamentals to power growth and expansion, we found a way to override the limiting factor by abolishing it altogether and bringing in fiat currency that allowed debt financing to finance rapid unbridled growth and expansion.
Today, we see investors all over the United States invest in gold and other precious metals en masse with their retirement accounts. It is not uncommon to see people rollover their 401ks into gold-backed IRAs for the safety of their retirement money.