Know More About the Gold Standard

Gold Investing Strategies

Know More About the Gold Standard

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Money as we know it today is nothing more than a note of debt issued by a government. Money's value is derived only on the trust that people put on the government that issues it. Should an entire community or country decide that it will not honor the currency anymore, this will be of no use, causing a big blow to the issuing government and potential impact to its reputation. This the reason why everyone's eyes are on the US economy. The US dollar is the world's reserve currency, and any depreciation of the dollar could mean depreciation in the wealth of the dollar-holding nations, most notably China.

There was a time, however, when money was not debt and was actually backed by something of actual value. Before that, barter was the dominant economic system but this was inefficient as a way for paying goods and services. So instead of actual goods, what was needed was a universal commodity that has actual value--and that is gold.

Gold has always been used as a store of value throughout history, and it was only fitting that it was used as money. When money was newly invented, actual gold coins were used, but this proved to be difficult later on because of the weight. Hence, paper money and non-gold coins were used as money, with the assumption that they are backed by actual gold. During those days, one could actually go to a bank and have his/her money converted to gold.

There is a problem here. So little gold is mined every year. Economic expansion is difficult. Nations would not want to have any trade deficit because that would mean having to give away their gold reserves to the country. When you give away your gold reserves, this leads to economic contraction. Everybody would want to be a seller but without any buyer, it's futile.

Now that a lot of nations especially in the developed world are facing debt problems, there have been suggestions of going back to the gold standard or any commodity standard. But for the reasons cited above, it won't be going anywhere.

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Tags: • commodity • history • coins • barter • something • wealth • depreciation • trust • value • debt • gold • gold reserves • trade deficit • economic expansion • paper money • gold coins • economic system • reserve currency • us dollar • us economy • gold standard •

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