What Is Money, Part 4
Picture this: You're standing in an ancient marketplace, trying to trade a basket of eggs for new sandals. The merchant shrugs – he already has enough eggs, but he needs olive oil instead. As you walk away, still barefoot, you're experiencing firsthand the fundamental problem that shaped human commerce: the limitations of barter.
Welcome back to our journey through the history of money. We've explored how early societies moved beyond barter, using shells and beads as early forms of currency. But as civilizations grew more sophisticated, these simple solutions began showing their cracks. After all, shells could be gathered by anyone with a beach and a basket, and beads could be manufactured at will. Something more enduring was needed – enter gold.
Why Gold? Nature's Perfect Money
What makes a substance ideal for use as money? Well, it should last forever, be impossible to fake, be recognized by everyone, and be rare enough to hold its value. When ancient civilizations went shopping for the perfect material to use as currency, gold checked every box on their list.
Think of gold as nature's version of a perfectly engineered currency:
It never rusts or corrodes, lasting literally forever
Its distinctive color and weight make it almost impossible to counterfeit
It's rare enough to be precious, but not so rare it can't be found
It can be melted down and divided without losing value
It's dense enough that significant wealth can be carried in a small pouch
These qualities made gold not just practical, but almost inevitable as humanity's choice for storing and transferring value.
A Golden Secret: The Perfect Growth Rate?
Here's something remarkable: Despite all our modern technology, we still mine gold at a rate surprisingly similar to the rate the global economy grows – on average, approximately 2-3% per year. This demonstrates a correlation between human advancement and gold production. This is by design. How crazy is that? The earth itself has a substance that in character, quality and quantity is ideal for use as money.
The Birth of Coinage: When Metal Became Money
Around 600 BC, in what is now Turkey, the Lydians had a breakthrough moment. Instead of weighing out gold dust or chunks for each transaction (how tedious that would be?), they started minting standardized coins. This was revolutionary – like switching from a sundial to a digital watch.
These first coins were made from electrum, a natural alloy of gold and silver. But what made them special wasn't just the metal – it was the stamp of authority guaranteeing their weight and purity. For the first time in history, you could complete a transaction without breaking out your scale and testing kit.
A Clever Solution to an Age-Old Scam
Speaking of coins, those ridges on the edges of your quarters and dimes aren’t just decoration – they're solving a problem that plagued Isaac Newton. Yes, that Newton – besides discovering gravity and inventing calculus, he also ran Britain's Royal Mint? As they are prone to do, people began shaving tiny amounts of precious metal from coin edges, a practice called "clipping." Imagine being able to snip a sliver off a $100 bill, and the silver is worth $5. Newton's solution? Add ridges that would show immediately if anyone had tampered with the coin. In homage to this practice, this innovation still adorns our modern currency.
From Metal to Paper: The Birth of Modern Money
As trade expanded, lugging around heavy coins became impractical. You'd need a wheelbarrow if you tried to buy a house with gold coins! The Chinese were the first to solve this problem, creating paper money backed primarily by silver and gold. European merchants later adopted this idea, which ultimately led to the birth of modern banking.
This evolution culminated in the gold standard, where paper money was backed by government gold reserves. Each dollar bill was essentially an IOU, promising to pay the bearer in physical gold. This system created unprecedented stability in international trade, as every major currency was anchored to the same golden foundation.
Gold's Modern Legacy: From Currency to Safety Net
Today, while we no longer use gold-backed money, gold hasn't lost its allure. Central banks still hold vast reserves, and people own gold for uncertain times. It's as if we've come full circle – from using gold as everyday currency to viewing it a protection against economic instability.
Gold's journey from ancient coins to its current role in the global economy reveals something profound about human nature: our endless search for stability and trust in our money. As digital currencies emerge and traditional financial systems evolve, gold's core qualities – permanence, scarcity, and universal recognition – continue to make it a benchmark against which we measure value.
Looking Ahead: The Rise of Banking
In our next installment, we'll talk about banks - which believe it or not - led to the transformation of the world’s economy. We'll trace the path from humble counting houses to the powerful financial institutions that shape our modern world, revealing how the management of money became as important as money itself.
The story of banking is one of innovation, crisis, and evolution – a tale that continues to unfold in our own time. Join us as we explore how these institutions emerged to meet society's growing financial needs, and how they fundamentally changed our relationship with money itself.
Though I am required to include the following disclosures, this one is my own: This article is for information purposes because I find the subject-matter interesting and I think the reader may also. While I don’t see how anyone could read it this way, this article should not be considered a recommendation to buy or invest in gold, or any investment product or service. It’s just interesting.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
Read other entries from this series:
What Is Money, Part 1
What Is Money, Part 2
What Is Money, Part 3
