Metal as money

Throughout history, various metals, some of which are considered precious today, appear to have been used as a form of currency. The Bretton Woods system, under which all major currencies were theoretically exchangeable for gold, was abolished in 1971.

Other metals to have been used as money include silver, copper, and platinum.

Currently, metal coins are nickels, dimes, and quarters.

Commodity money and coins

See also: Commodity money

In daily conversation the term 'money' is used without academic preciseness by distinguishing between money, money substitutes or currency. Money must be a tangible asset while a money substitute may be only a claim on a tangible asset. Either money or a money substitute may circulate as currency. The reason money must be a tangible asset is so that transactions are extinguished (value traded for value). When a money substitute is used as currency the transaction is not extinguished until the money substitute is passed on in another transaction and value is received. Currency is merely a tool that allows humans to engage in the mental calculation of value.

When money substitutes, bills of credit, circulate as currency then payment risk is introduced to transactions. Occasionally, the payment risk becomes completely unmanageable with hyperinflation or other currency crisis like Weimar Germany, Argentina or Zimbabwe. The only similar experience where this happened with gold was when the conquistadors returned to Europe from America with the gold hoards.

Gold has been considered valuable since prehistoric times^[who?]. While it might originally have been used in barter for its value in ornamentation and rituals^{[citation needed]}, gold and silver became established as a form of commodity money and were first minted by the Lydian king Croesus around 560 BC^{[citation needed]}. For all of recorded history at all times and in all circumstances gold remains money^[who?]. Thus Gold is the ultimate form of payment^{[citation needed]}. Interestingly, as evidence of its monetary nature gold is the only commodity produced by humans to be hoarded^{[citation needed]}.

Around 500 BC, the touchstone became available, allowing relatively easy detection of forgeries, and in the third century BC, Archimedes invented a method of determining an object's density. Since gold was the densest substance then known, this could be used to verify an object was made of pure gold without destroying it.

History

Early gold-coin standards

See also: History of the English penny

Gold coin of Alexander the Great, ca. 330 BC

Coins were first used in ancient Lydia and some of the Greek cities on the coast of Ionia in the late 7th century B.C. They were first struck in a natural alloy (perhaps diluted a little) of gold and silver which we call electrum. Later, coins of pure gold and silver were produced in Lydia, although it was a long time before any of the Greek cities issued coinage in gold. The city-states of Classical Greece and some of the tribes in northern Greece which had access to silver soon thereafter introduced silver coinage, which rapidly spread westward to most of the city-states' republics, including Rome. In the heyday of the Athenian empire, the city's silver tetradrachm was the first coin to achieve "international standard" status in Mediterranean trade. Silver remained the most common monetary metal used in ordinary transactions until the 20th century.

Aureus minted in 193 by Septimius Severus

The Persian Empire collected taxes in gold and minted its own gold coin, known as the dareikos (δαρεικός) in Greek. When Persia was conquered by Alexander the Great, this gold became the basis for the gold coinage of Alexander's Macedon empire and those of his Diadochi. The vast gold hoard of the Persian kings was put into monetary circulation, triggering the first known "worldwide" inflation event.

Ancient Rome minted two important gold coins: the aureus, which was approximately 7 grams of gold alloyed with silver, and the smaller solidus, which weighed 4.4 grams, of which 4.2 was gold. Roman and Byzantine coins were frequently alloyed with other metals of much lower value to create the seigniorage necessary for a rational system of government money.

Solidus of Justinian II, ca. 705

The Roman Emperor Gallienus, who ruled from 253 to 268, introduced a monetary reform in which surface-overvalued coins were no longer accepted for tax payments^{[citation needed]}, resulting in inflation: for the surface overvaluation of an emergency coinage would soon degenerate to the point where the coinage simply traded for its metallic value, thereby eliminating the ability of the senate-constrained government to collect seigniorage at critical times. Remarkably, the position was not remedied until after the fall of the Empire and the times of Justinian in the East and Theodoric the Great, the first of the Ostrogothic kings of Italy.

The dinar and dirham were gold and silver coins, respectively, originally minted by the Persians. The Caliphates in the Islamic world adopted these coins, starting with Caliph Abd al-Malik (685–705).

Sequin (Venetian ducat), 1382

In 1284 the Republic of Venice coined the ducat, its first solid gold coin. Other coins, the florin, noble, grosh, złoty, and guinea, were also introduced at this time by other European states to facilitate growing trade.

Beginning with the conquest of the Aztec and Inca Empires, Spain had access to stocks of new gold for coinage in addition to silver. The wide availability of milled and cob gold coins made it possible for the West Indies to make gold the only legal tender in 1704. The circulation of Spanish coins led to the creation of the unit of account for the United States, the "dollar", based on the Spanish silver real, and Philadelphia's currency market later traded in Spanish colonial coins.

The crisis of silver currency and bank notes (1750–1870)

In the late 18th century wars and trade with China, which sold many trade goods to Europe but had little use for European goods, drained silver from the economies of Western Europe and the United States. Coins were struck in smaller and smaller amounts, and there was a proliferation of bank and Demand Notes used as money.^{[citation needed]}

In the 1790s Britain suffered a massive shortage of silver coinage and ceased to mint larger silver coins. It issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, Britain began a massive recoinage program that created standard gold sovereigns and circulating crowns, half-crowns, and eventually copper farthings in 1821. In 1833, Bank of England notes were made legal tender, and redemption by other banks was discouraged. In 1844 the Bank Charter Act established that Bank of England notes, fully backed by gold, were the legal standard. According to the strict interpretation of the gold standard, this 1844 Act marks the establishment of a full gold standard for British money.^{[citation needed]}

There were 113.00159 grains (7.32g) of gold to one pound sterling. The exact equivalent was that 1869 sovereigns could be minted from 40 pounds troy of crown gold (11/12 fine).^{[citation needed]}

The U.S. adopted a silver standard based on the "Spanish milled dollar" in July 1785. This was codified in the 1792 Mint and Coinage Act. This began a long series of attempts for United States to create a bimetallic standard for the US Dollar, which was to continue until the 1930s. Because of the huge debt taken on by the US Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins. The US Treasury was put on a strict "hard money" standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1846, which legally separated the accounts of the Federal Government from the banking system. Following Gresham's law, silver poured into the US, which traded with other silver nations, and gold moved out. In 1853, the US reduced the silver weight of coins, to keep them in circulation.^{[citation needed]}

Representative money

Main article: Representative money

Drafts for metal held on account were first issued in the first century BC in Egypt.

In modern times, it was Stockholms Banco that in 1661 first issued banknotes that were intended to be fully redeemable for copper coins; while initially popular, the bank eventually could not redeem all the notes it had printed, and ceased operations in 1664 after a bank run.

National banks later guaranteed the redeemability of representative banknotes put into circulation, though rarely to the extent of having the promised amount of metal on hand for all currency in circulation.

By 1865, however, the system appeared sufficiently stable to create the Latin Monetary Union, establishing a common system for gold and silver coins used in several European countries.

Gold standard

Main article: Gold standard

After the Bank of England collapsed in 1696 the Queen sought for a solution and commissioned Isaac Newton to solve the currency problem. As a result of his analysis of the situation he developed the gold standard. This was a voluntary system eventually abandoned in 1971 when President Nixon closed the gold window in response redemptions of US$ for gold.

The newly unified German Empire introduced a common currency, the German Goldmark, beginning in 1873; this currency was based on a strict gold standard, with banknotes redeemable for gold coins. Other countries rapidly followed suit, and by 1900 was accepted by all major economies.

Digital metal currencies

See also: Digital gold currency

In the Information Age a whole new level of digital gold currency has developed centered around gold.

External links

• E-Gold
• Global Digital Currency Association
• The Indomitus Report - Digital gold currency special report
• Strike the Root - Interview with Jim Davidson (August 2002)
• What is digital gold?