Gold - Is It Currency?

The main reason which led to the invention of money was the need for an easy-to-use commercial exchange tool and for a "real value" repository

. The term "real value" in this context refers to a value which is backed-up by or has a direct equivalent in goods (and later on, services). From this perspective, money is a representation of economic value, or in other words - a convention adopted by people with the purpose of facilitating the circulation of value and the economic exchange.

As electronic money was thousands of years away, in its initial form money needed physical representation in order to circulate. The physical representation of money is called currency. History has seen many forms of currency - not necessarily coin-shaped.For instance, medieval Japan used the koku - a weight measurement unit for rice. This came from the fact that rice was perceived in Japan as the good with the highest value. In a similar manner, Europe perceived precious metals - gold, silver and copper - as the most valuable good and used them to fabricate its own currency in the form of coins bearing the names and faces of the political leaders who issued them.

Some examples of precious metal currencies circulating in Europe are the Sovereign in Great Britain, the Louis in France, the Mark in Germany and the Doubloon in Spain. These currencies were accepted for payment everywhere in Europe, because their value derived from being made of gold, not from being issued by a certain economic area, as is the case with modern currencies.

The system using the value of gold as reference is called "the gold standard". Its main characteristic was that national currencies could be at anytime converted into gold at a fixed ratio. Great Britain was the first to adopt the gold standard in 1717, followed by the other European powers over the next century. United States and Canada adopted the gold standard in 1853 and 1873 respectively.

This system lasted, with modifications and brief interruptions, until 1971. US, under the presidency of Richard Nixon, was the first state to end the convertibility of the national currency into Gold, marking the beginning of the end for the gold standard and the rise of a fiat currencies era. Fiat currency represent paper money which are not convertible into anything else and whose value is only back-up by public trust. This also leads to the answer to the initial question - is gold currency? And the answer is no.

This was the beginning of the end for the gold standard and the moment which saw the rise of fiat currencies, or paper money without any intrinsic value and which are not back-up by any asset. This is where the answer to our initial question becomes evident. No, gold is not currency. Not any more, at least. Today gold is a commodity. A very expensive one, whose value continues to grow, in spite of difficult economic climate. Gold represents an excellent investment for everyone in search of safe haven against inflation - which is seen as the major drawback of all fiat currencies.

by: Paul James Harrison.

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