Gold: The Most Precious of Metals

Gold | A History of Obsession

People most likely first discovered gold in streams and rivers all over the world with its beauty and luster catching the eye. The known history of gold goes back a long way, so far back that, according to the National Mining Association, it was first used by cultures in modern day Eastern Europe in 4000 BC to make decorative objects. Gold was generally used for a couple thousand years solely to create things such as jewelry and idols for worship. This was until around 1500 BC when the ancient empire of Egypt, which benefited greatly from its gold-bearing region, Nubia, made gold the first official medium of exchange for international trade.

Egypt created what was called the Shekel, a coin which weighed 11.3 grams, and became the standard unit of measure in the Middle East. It was made from a naturally occurring alloy called electrum which was about two-thirds gold and one-third silver. It was also around this time that the Babylonians discovered a method called the fire assay, one of the most effective ways to test gold purity, which is still used to this day. A few centuries later, around 1200 BC, the Egyptians discovered they could alloy gold with other metals in order to make it stronger and give it different color pigments. Egyptians also began experimenting at this time with a casting method called lost-wax casting in which a duplicate gold sculpture is cast from an original wax sculpture, a process that can be used to create wonderfully-intricate sculptures, so much so that it is also still used to this day.



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A couple hundred years later, in Lydia, a kingdom in Asia Minor, the first minting of pure gold coins began around 560 BC. In 50 BC the Romans began issuing a gold coin called the Aureus, which comes from the Latin word for gold, Aurum. This is where the gold chemical symbol of Au comes from to represent gold on the periodic table of elements. A little over a thousand years later, in 1066 AD, William the Conqueror of Normandy became the first Norman King of England, and with his conquest began a new metallic coin-based-system of currency in England.

With the new coin-based-system of currency came the establishment of the familiar “pounds,” “shillings” and “pence” with pounds being literally a pound of sterling silver. By 1284, about one hundred years later, Great Britain issued its first gold coin, the Florin while across Europe in modern day Italy, the Republic of Florence issued the first gold Ducat, which soon became the most popular gold currency in the world and remained so for another five centuries. In 1787, the first U.S. gold coin was struck by a goldsmith named Ephraim Brasher and a few years later in 1792 the infant U.S. government passed the Coinage Act, placing the country on a bi-metallic silver-gold standard, which stood in one form or another until 1976, when the U.S. finally abandoned the gold standard to be entirely based on fiat money. Backtracking a bit to 1848, a man named John Marshall found gold flakes in a stream in California, thus beginning the California Gold Rush. The California Gold Rush not only hastened the settlement of the American West, but it also was the basis for the classic computer game of which so many generations of Americans are fond, The Oregon Trail. A few short years later, in 1868, George Harrison, a man from South Africa, discovered gold in his backyard, and since then 40% of the world’s mined gold has come from the African nation.

A Brief History of the Gold Standard

Clearly gold has a long and storied history of obsession for over 6,000 years. The interesting thing about gold is that for reasons unknown, its mysterious ability to attract people all over the world independently of each other allowed it to become a medium of exchange accepted anywhere in the world. At various points throughout history, gold coins were minted, however, many coins were not minted by any central authority, but were simply hammered by regular people. This ability to make homemade coins, so to speak, that were accepted as legal tender made them irregularly shaped. Obviously, this homemade coinage was hard to regulate and a method called clipping was a common issue with gold and silver coins. The irregular shapes allowed people to clip small bits off of the coins and eventually accumulate enough to melt the bits down to create more coins. Unfortunately, the clipping of hammered coins made it so that the weight of the coin was less than the actual value of the coin making it no longer valuable tender, especially abroad. Another issue was that the minted coins, which were protected from clipping by a special engraving, were easily counterfeited by casting with counterfeit molds or stamped with counterfeit dies.

The Great Recoinage of 1696 was an attempt by the English Government to fix the issue with new minting technology, however, that was largely a failure. Issues like this were what lead to the adoption of paper money, also known as “fiat money”, which actually began earlier in the 16th Century, and was based on the gold standard. The complete history of gold would not be possible without a discussion on the gold standard.

The Rise of the Gold Standard

The gold standard was a monetary system in which the standard economic unit of account, for example the U.S. Dollar, was based on a fixed quantity of gold. With this monetary system, an individual holding some amount of paper money could go to a bank and exchange that money for a fixed amount of gold. The gold standard has been abandoned completely by all countries; a process of abandonment that gradually began around the end of World War I.

Issues such as the coinage problem described above and the introduction of paper money began to create problems for nations, especially since many were based on a bi-metallic standard of gold and silver. Paper money began to be valued too highly in gold, while there were also constant problems of supply imbalances between both gold and silver to back the paper money. As a result, one metal was chosen to back the value of money, which was gold, thus beginning the gold standard.

The process of colonization and globalization of other parts of the world by the developed world made new discoveries of gold common place and with that came a great influx of supply of the metal, meaning that the gold standard was able to flourish. In 1871, a new international gold standard began when England and Germany officially adopted the gold standard and by 1900 most developed nations had followed suit. The period from 1871 to 1914 was a fairly stable period in the world politically, which enabled governments to work very well with each other in establishing a stable gold standard. It was the golden age of the gold standard, if you will, but it all came crashing down starting with World War I in 1914.

The Collapse of the Gold Standard

Under the gold standard, the money supply is tied directly to the supply of gold, meaning that during World War I, many nations decided to temporarily suspend the gold standard so that they could print money to pay for their military involvement in the war. Unfortunately, this wild printing of money created hyperinflation.

Once the war had ended, countries began to appreciate the stabilization that the gold standard had provided for their currencies and international trade. However, once strong political ties between nations had changed, international indebtedness skyrocketed, and government finances were, to put it lightly, strained. It became apparent that the gold standard was unable to hold up during tumultuous times, which created negative sentiment and low confidence in it going forward, worsening economic conditions. Yet, nations were still unwilling to abandon the gold standard all-together, reinstating it while holding out hope that a renewed era of international gold standard stability would return, but it never really happened.

The Great Depression was the straw that broke the camel’s back for many countries. After the stock market crash in 1929, European countries’ currencies were misaligned completely, while some, especially Germany, were still recovering from World War I. As people began to lose confidence in banks and paper money, gold hoarding became common place and the prices of commodities, especially gold prices, were rising. Bank rushes and gold hoarding eventually meant that banks had to close. Countries began to raise interest rates in an attempt to entice people to keep deposits intact rather than converting their fiat currency into gold, however this exacerbated problems because it made the cost of doing business much higher. Eventually this led to many nations finally suspending or abandoning the gold standard all-together in the early 1930s, including Great Britain. Interestingly, many of the countries that left the gold standard earlier, were able to recover from the depression sooner than those that stayed under the gold standard. 

At this point the only major nations still under the gold standard with major gold reserves were the US and France. In the US, President Franklin Delano Roosevelt instituted a number of measures in an attempt to prevent the hoarding of gold including making banks turn all their gold holdings in to the Federal Reserve, not allowing them to redeem dollars for gold, and also prohibiting any exporting of gold. In 1934, the Gold Reserve Act was instituted, which prohibited the private ownership of gold. All gold was given to the government, which is where much of the gold a Fort Knox came from. This allowed the US to pay off its debts with dollars instead of gold. Eventually the US basically cornered the global market for gold.

Finally with the outbreak of World War II, the depression had ended, and some countries eventually went back on the gold standard, again. In an attempt to create a framework for all international currencies backed by gold, the Bretton Woods Agreement was created in 1944. Soon after, the US Dollar became a sort of de facto currency for the rest of the world, as the US held most of the world’s gold reserves. Most countries’ central banks began pegging their own currencies to the US dollar instead of gold, buying and selling their own currencies in the foreign exchange market to maintain their exchange rates stable.



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By the 1960s, inflation was high and US gold reserves had been heavily reduced to help pay for the rebuilding of Europe and other parts of the world after the destruction of World War II. In 1968, a number of countries that dominated the global supply of gold decided to stop selling gold on the London Market, which allowed the price of gold to be determined by the market. In 1971, US President Richard Nixon changed the price of an ounce of gold to USD 38 and no longer allowed the Federal Reserve to exchange dollars for gold. This was essentially the end of the gold standard, but it wasn’t until 1976 that the gold standard was abandoned completely and gold was officially free.

Advantages & Disadvantages: Would the gold standard work today?

Although the gold standard seems as though it was largely a failure, there are advantages to the system. The inability for governments to inflate the value of money because it is tied to the supply of gold make it difficult for inflation to increase significantly, while a globally accepted gold standard fixes exchange rates, reducing economic uncertainty. However, high inflation can occur when war destroys large parts of economies, which was exemplified in the aftermath of World War I.

The inability to increase the money supply is often cited as the key issue under the gold standard. Many blamed the gold standard for prolonging the Great Depression, as the money supply was unable to be increased to mitigate the effects of the depression. As mentioned earlier, this led many countries to finally abandon the gold standard all together and never look back.

Some economists also believe that the inability to increase the money supply under the gold standard puts a limit on the amount an economy can grow. This is because as an economy’s productive capacity grows, then so too should its money supply, but since the money supply is limited by the amount of gold that an economy has at a given time, then the ability for an economy to produce more and grow is also constrained.

The gold standard tends to restrict central banks from taking measures to correct issues within an economy. According to Nouriel Roubini in an interview in 2010, “a gold standard would make central banks unable to fight inflation or deflation, much less do anything to combat persistent unemployment.”

Angie Picardo, of NerdWallet, believes that a perfect current example of the perils of the gold standard could be seen during the global financial crisis in the Eurozone, especially Greece. Although the Euro is not pegged to gold, the nature of the fixed Euro exchange rate across the Eurozone made it very difficult for struggling economies to get out of the crisis. The necessity to maintain a fixed exchange rate with other stronger economies in the Eurozone made it difficult to manipulate the Euro as well as the money supply to combat effects of the crisis.

Roubini argues that the gold standard and other fixed exchange rate regimes also exacerbate shifts in the business cycle.

Roubini stated, “When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis.”

Some have cited that another disadvantage of the gold standard is that countries with less reserves are at a significant disadvantage to those with more gold reserves. Roubini cautioned that the gold standard always leaves the door open to a potential gold run, which can lead to massive problems and ripple effects if those countries don’t have enough gold to exchange for paper currency.

There are still advocates for the gold standard, many coming out during the global financial crisis citing, among other advantages, that the gold standard would create greater price stability than issuing fiat money based solely on confidence. 

Austrian Economic Theory is famed for favoring the gold standard. Proponents of Austrian economics believe that manipulating the money supply after the gold standard abandonment is what has actually led to instability in global financial markets over the years.

The Mises Institute, which describes itself as “the worldwide epicenter of the Austrian economic movement,” states that restoring the convertibility of the dollar for a fixed weight in gold would be a move in the right direction and would help to remove monetary policy from politics to “reduce special-interest corruption.”

“The purpose of repegging the dollar to gold would be to remove what is euphemistically called ‘monetary policy’ from politics and special-interest corruption as much as possible. People laud the current Fed as being ‘independent,’ but of course that is absurd. The Fed as it currently operates is clearly a cartelization device that shoves new money into the pockets of rich bankers, and that allows the government to finance massive deficits much more cheaply than would otherwise be possible.”

Having presented the advantages and disadvantages above, there is no doubt that the mainstream economic view is that the gold standard is not a feasible way forward. However, it must be said, as with many things in this world, there are two sides to every coin.


If you have made it this far, you will know that gold has a long history of human obsession dating back over 5000 years. From the very first time that mankind laid eyes on gold, it has led to an insatiable desire for the metal that has never wavered. That mutual desire for gold that captivated civilizations all over the world independently of each other facilitated the global adoption of gold as a medium of exchange and later, of course, the gold standard. Since the end of the gold standard the price and production of gold has skyrocketed globally and along with it, so has demand. Judging by the last 5000 years or so, it seems unlikely that our obsession with the precious metal will change any time soon.

Make sure to catch the rest of this FocusEconomics blog series on gold in which we will seek to convey why gold is such a precious metal. In part two we describe the mining and production processes of gold, the specifications and tests for gold purity, gold’s uses outside of jewelry and international reserves, as well as gold’s role as a safe haven and preserver of wealth. Part three will cover the top economic gold producers in the world and their economic outlooks for 2016.



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Author: Brian Dowd

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