Before talking about gold, it is important to first talk about the concept of money. Nowadays, money has become so essential in our lives that it would be hard to imagine living without it. But what actually is the money that we are talking about? What is ‘real’ money? The present money system has not yet celebrated its 50th birthday, but what we call ‘money’ has existed in the world for thousands of years; therefore, the definition of money is not just banknotes or credit cards in your pocket. So…what is it?
In the old days, before the concept of money was created, people used their produces to exchange with others’. For example, a farmer might go to a tailor to exchange rice for clothes, or a shoe maker might offer shoes to a doctor in return to his service. This way of exchanging things was known as the Barter System. However, this means that the farmer’s need for clothes must be in accordance with the tailor’s need for rice. And how could a barter trade take place if the rice is not fully grown, but the farmer is already in need of a new pair of pants? Moreover, it would be quite inconvenient, and heavy, to carry rice around in order to exchange for clothes or other goods. This led to the idea of creating a medium of exchange, an acceptable medium in exchange for shirts, rice, etc. Problems were then solved. Nevertheless, a good medium of exchange must qualify a wide range of qualities. Not only has the medium itself to be widely accepted, but it also has to be difficult to be duplicated, rare, homogeneous, and has inherent value. Sea shells, tea leaves, salt had been brought into competition; however, the one selected was an inert metal called “gold”.
Despite the complex obsessions it has created, gold is amazingly simple in its essence. This precious metal has had all the rights to be the medium of exchanges since it has no nationality and is eternally and universally accepted as the permanent fiduciary value par excellence. However, carrying gold for transactions is somewhat bulky and inconvenient. This eventually developed into the banking and banknote exchange system. People deposited their gold in the bank and, in return, received gold tickets to represent their gold in the bank. Then they used this gold ticket to exchange for goods and services instead of using the actual gold. Up to this point, what is actually money? Is it the gold ticket or the physical gold that is kept inactively in the bank or both? The answer is gold. Gold is the real money, the real medium of exchange, whereas gold tickets are just the substitute of the real money.
Soon after, gold tickets have become popular and been widely used around the globe. Countries started to create their Gold Standard which was the standardized exchange rate between gold and gold tickets within their countries in order to avoid the confusion of different forms of gold tickets from different banks. Each country had named their standard differently, which eventually became the names of different currencies; for example, the US called its gold ticket ‘dollar’. Then after World War II, the US pushed for the Bretton Woods System, which was created to standardize the global exchange gold rate. However, in addition to standardizing the global exchange gold rate, the Bretton Woods system subdued the role of gold as the world reserve currency as the US Dollar became the world reserve currency instead. The greenback, then, became the centerpiece of the international economy. Still, other currencies were gold-based since the dollar remained its direct convertibility to gold at $35 per 1 ounce of gold. Nothing seemed to be a problem at this point as long as each country produced their gold tickets according to the amount of the gold (or dollar equivalent of gold) they held. For example, if a country has 100 ounces of gold, it can only create $3,500 of gold tickets. However, this is not the case since the gold tickets are like money in the air that can be printed freely without control. So people were holding a gold ticket as if they had gold, which actually hadn’t. This brought about a big change, once again in 1971, which tore up the linkage between paper currencies and gold and made all currencies base purely on the almighty dollar alone. This event was called the Nixon Shock, which was then the beginning of the current money system, the money that could be printed out as much as wanted without any relation to gold. Gold was then set aside as just a precious commodity.
In conclusion, gold, which is the ‘real’ money, had been the world reserve currency up until 1971 when the dollar took control. In the next part, I will discuss how paper currencies are used today regardless of their roots and what role of gold has been developed into. And is it true that no matter what your worries are, either debt crisis or flood, they say the safest haven is gold?
The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.