The History of Gold
Gold has occupied a unique social status for millennia. It has a long history as a valuable metal and its history is far from over.From the ancient Egyptians to the modern U.S. Treasury, there are few metals that have had such an influential role in human history as gold.Why is gold so important? What inherent value is held by gold? Will gold continue to be valuable in the future? Today, I’m going to answer those questions and share with you the history of gold
Ancient civilizations and their love of gold
Human fascination with gold is as old as recorded history. We don’t know for sure when the first human picked up a gold nugget and thought, “Hey, this is pretty cool.” However, flakes of gold have been found in Paleolithic caves dating back as far as 40,000 B.C.Most archaeological evidence shows that humans who came into contact with gold were impressed by the metal. Since gold is found all over the world, it has been mentioned numerous times throughout ancient historical texts.
Use of Gold in India as ancient as recorded history. There were indeed gold mines in ancient India. Of the three Karnataka gold mines in operation, two of them, Kolar and Hatti, have been in operation for thousands of years. Hatti is pre-Ashokan and Kolar gold has turned up in gold objects found at Harappa and Mohenjo-Daro (Indus Valley Civilization cities). The gold was identified by impurities assay, Kolar gold is 11% silver.
With a 5,000 mile coastline, India had adventurous seafaring merchants, who took great risks. A recurring theme in this history was a constant flow of gold and silver into India. The reason was that people in the West hankered after Indian goods — spices, cotton textiles, and jewellery — but Indians were uninterested in Western wares. To balance the books, Western merchants had to pay for the difference in gold and silver.
Roman senators complained that their women used too many Indian spices and luxuries, which drained the Roman Empire of precious metal. Pliny the Elder, in 77 CE, called India “the sink of the world's gold!” In the 16th century, Portugal protested that its hard-won silver from South America was being lost to India. The British Parliament echoed this lament in the 17th century and exhorted the East India Company to interest Indians in English goods. It was only in the early 19th century that the bullion flow changed direction when machine-made textiles from England's industrial revolution made Indian handlooms obsolete. Indians had finally found something they wanted from the West.”
Introduction of the Gold Standard
The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. When gold was found at Sutter's Ranch in 1848, it inspired the Gold Rush to California. That helped unify western America. In 1861, Treasury Secretary Salmon Chase printed the first U.S. paper currency. The Gold Standard Act established gold as the only metal for redeeming paper currency. It set the value of gold at $20.67 an ounce.
By the mid-1800s, most countries wanted to standardize transactions in the booming world trade market. They adopted the gold standard. It guaranteed that the government would redeem any amount of paper money for its value in gold. That meant transactions no longer had to be done with heavy gold bullion or coins. It also increased the trust needed for successful global trade. Paper currency now had guaranteed value tied to something real. Unfortunately, gold prices and currency values dropped every time miners found large new gold deposits.
In 1913, Congress created the Federal Reserve to stabilize gold and currency values. Before it could get up and running, World War I broke out. European countries suspended the gold standard so they could print enough money to pay for their military involvement. Unfortunately, printing money created hyperinflation. After the war, countries realized the value of tying their currency to a guaranteed value in gold. For that reason, most countries returned to a modified gold standard. Below you can see a timeline of key events from the beginning to the end of the gold standard in the United States.gold standard in the United States
How the Gold Standard Made the Great Depression Worse
Once the Great Depression hit with full force, countries once again had to abandon the gold standard. When the stock market crashed in 1929, investors began trading in currencies and commodities. As the price of gold rose, people exchanged their dollars for gold. It worsened when banks began failing. People began hoarding gold because they didn't trust any financial institution.
The Federal Reserve kept raising interest rates. It was trying to make dollars more valuable and dissuade people from further depleting the U.S. gold reserves. These higher rates worsened the Depression by making the cost of doing business more expensive. Many companies went bankrupt, creating record levels of unemployment.
On March 3, 1933, the newly-elected President Franklin D. Roosevelt closed the banks. He was responding to a run on the gold reserves at the Federal Reserve Bank of New York. By the time banks re-opened on March 13, they had turned in all their gold to the Federal Reserve. They could no longer redeem dollars for gold. Furthermore, no one could export gold.On April 5, FDR ordered Americans to turn in their gold in exchange for dollars. He did this to prohibit hoarding of gold and the redemption of gold by other countries. This created the gold reserves at Fort Knox. The United States soon held the world's largest supply of gold.
On January 30, 1934, the Gold Reserve Act prohibited private ownership of gold except under license. It allowed the government to pay its debts in dollars, not gold. It authorized FDR to devalue the gold dollar by 40 percent. He did this by increasing the price of gold, which had been $20.67 per ounce for 100 years, to $35 per ounce. The government's gold reserves increased in value from $4.033 billion to $7.348 billion. This effectively devalued the dollar by 60 percent.
The Depression ended in 1939. That allowed countries to go back on a modified gold standard.
The 1944 Bretton Woods Agreement set the exchange value for all currencies in terms of gold. It obligated member countries to convert foreign official holdings of their currencies into gold at these par values. Gold was set at $35 per ounce. Track the price of gold from 30 B.C. to the present through the gold price history.
The United States held most of the world's gold. As a result, most countries simply pegged the value of their currency to the dollar instead of to gold. Central banks maintained fixed exchange rates between their currencies and the dollar. They did this by buying their own country's currency in foreign exchange markets if their currency became too low relative to the dollar. If it became too high, they'd print more of their currency and sell it. It became more convenient for countries to trade when they peg to the dollar.
As a result, most countries no longer needed to exchange their currency for gold. The dollar had replaced it. As a result, the value of the dollar increased even though its worth in gold remained the same. This made the U.S. dollar the de facto world currency.
End of the Gold Standard
In 1960, the United States held $19.4 billion in gold reserves, including $1.6 billion in the International Monetary Fund. That was enough to cover the $18.7 billion in foreign dollars outstanding.But as the U.S. economy prospered, Americans bought more imported goods, paying in dollars. This large balance of payments deficit worried foreign governments that the United States would no longer back up the dollar in gold.
Also, the Soviet Union had become a large oil producer. It was accumulating U.S. dollars in its foreign reserves since oil is priced in dollars. It was afraid that the United States would seize its bank accounts as a tactic in the Cold War. So, the Soviet Union deposited its dollar reserves in European banks. These became known as eurodollars. By 1970, the United States only held $14.5 billion in gold against foreign dollar holdings of $45.7 billion. At the same time, President Nixon's economic policies had created stagflation. This double-digit inflation reduced the eurodollar's value. More and more banks started redeeming their holdings for gold. The United States could no longer meet this growing obligation.
The gold standard ended on August 15, 1971. That's when Nixon changed the dollar/gold relationship to $38 per ounce. He no longer allowed the Fed to redeem dollars with gold. That made the gold standard meaningless. The U.S. government repriced gold to $42 per ounce in 1973 and then decoupled the value of the dollar from gold altogether in 1976. The price of gold quickly shot up to $120 per ounce in the free market.
Once the gold standard was dropped, countries began printing more of their own currency. Inflation resulted. But for the most part, abandoning the gold standard created more economic growth.Gold, though, has never lost its appeal as an asset of real value. Whenever a recession or inflation looms, investors return to gold as a safe haven. It reached its record high of $1,895 an ounce on September 5, 2011.