How does gold affect currencies

Gold as currency

Gold as a means of payment

We have known trading in barter goods since ancient times. Whether cattle, grain or metal coins - every culture and every epoch had its objects of exchange, a kind of money system, so to speak. But the system that has the longest and most consistent history as a means of payment is based on gold.

Croesus, the legendary king of the Lydians, probably had the idea of ​​making money out of gold around 560 BC. The advantages of gold were obvious: the material was stable and it could not be produced and multiplied by anyone at will.

Gold was quickly accepted worldwide as a means of payment and, as a currency metal, it was synonymous with money. And to this day, money is a global measure of all economic transactions. It is a medium of exchange, a unit of account and serves to determine a fixed value.

Gold as a sign of power

The rise and fall of great empires were closely tied to gold or silver-based economies. When states had high gold reserves, this led to prosperity and power.

If they managed their gold reserves carelessly - for example, they used it up for warfare or squandered it for luxury - then they gambled away the basis of their prosperity and thus often ushered in the decline of their empires.

In medieval Europe, coins for the gold standard were at times in short supply - the losses of gold and coins over the centuries had been too great and the number of European mining areas too small.

After conquering America, the Europeans went on a search in South America. The Spaniards in particular found what they were looking for on the new continent. In the course of just ten years, between 1550 and 1560, the southern European country grew by 45,000 kilos of gold.

Spain thus underpinned its status as the leading power of the 16th century. No other colonial power captured so much precious metal in the New World at that time. At that time gold filled the state coffers mainly in unminted form. But the gold standard continued to be a valid means of payment in European countries.

The gold standard

The system of gold currency meant that each currency unit corresponds to a legally specified amount of gold by weight. In 1844 the "Bank of England" was the first central bank to introduce the gold standard, creating the first internationally valid currency system with paper money based on gold.

Established internationally in the 1870s, the gold standard said that the central bank guaranteed citizens to exchange any banknote for gold at a fixed exchange rate. From 1900 onwards, almost all central banks in the industrialized countries guaranteed such a fixed exchange rate.

Until 1914, the world monetary system was based on the gold standard. It was a guarantee for a stable international system, stable prices and full employment. After all, the system forced a balanced balance of payments in every state, because only as much money was allowed to be printed as gold was in the safe of the monetary authorities.

Newer world currency systems

In order to be able to finance the First World War, the gold reserves of many countries were massively attacked and the pure gold standard lost its validity. After 1918 attempts were made to develop a system that combined gold and foreign exchange: the so-called gold-foreign exchange standard.

However, due to the inflation and devaluation of all major world currencies between the world wars, the system was unsuccessful. It was not until 1944 that a fundamental reorganization of the world monetary system was implemented: the US dollar became the main element of the new system and the role of gold was limited.

The US had undertaken to exchange dollars for gold at any time and to buy or sell gold from the central banks. However, the so-called dollar standard became a problem for the USA: After the country's increasing balance of payments deficits in the 1960s, a global currency crisis broke out.

As a result, the exchangeability of gold for the dollar (convertibility) was abolished on August 15, 1971. It was replaced by a currency order based on flexible exchange rates between currencies, which is still valid today.

Gold as an investment

Today gold no longer plays a role as part of the monetary system, but is still traded as a commodity of great value. The prices for precious metals are determined daily on the financial markets - Zurich, London, Hong Kong and New York are the most important marketplaces for gold.

The daily gold price is set almost ceremonially by the representatives of a few British and Swiss banks. The so-called "fixing" is now part of tradition and creates the daily balance between global supply and demand for gold.

And the demand is still high, because the value of gold, unlike many other ways of investing money, is very stable. In the course of the past century - despite all the wars and financial turmoil - gold has not only maintained its value, it has even increased it significantly.