Turning Gold to Paper and Beyond : A Look at Currency

At the most basic, realistic level, a five dollar bill is no more valuable than a one dollar bill. From a practical perspective, any paper currency is arguably less useful than a single penny, though we still value those bills hundreds of times more. In the modern world, enough people recognize the perceived value of paper money over that of a single penny, but this wasn't always the case. On the grand scheme of things, currency is a relatively new invention.

How new? Well, mankind has had spoken language for nearly 100,000 and written language for the better part of 5,000 years. The earliest known currency, Chinese Cowry shells were first given as a gift a mere 3,300 years ago. And coins of precious metal? Those are a spry 2,600 years old. This of course, brings up the question, what did people do before money?

The Pre-Monetary Era

The answer to that question is arguing. Well, arguing in the form of bartering. In the time before money, most people produced a fair amount of what they themselves needed. Extras were traded for items that an individual or family might want. However, the trading of those extras was dependent on someone actually wanting what was being traded. This system heightened the concept of supply and demand to an extreme where demand itself was a form of supply. Such a system highlighted a very important concept - value should be inherent and directly related to the objects being traded. However, value is entirely dependent on the wants and needs of those doing the trading.

The Dawn of Valuable Currency

For an economy to develop, a standard method of measuring supply and demand needed to be adopted. The standard came in the form of a universally approved third party in the form of early currency. The basis for this early money was that the currency typically had scarcity value in and of itself - be it Cowry shells, feathers, or weights. These early currencies often lacked a central issuing body and values could easily drift based on location, but their inherent value still created a more stable third party negotiating platform than simple bartering. Beyond that, it was still easier to carry around a bag of coins than it was to schlep about a cart of animal hides. Precious gold, silver, and electrum, ended up creating the early happy medium, scarce enough to be valuable even in small amounts, but common enough to be used in daily life.

The Shift Towards Fiduciary Currency

For a few thousand years, and longer in some places, that's exactly how currency worked. Yes, it grew more standardized. Nations establishing official monies and the dawn of international currency exchanges moved the early simple coins into massive and expansive offerings. Even with all these advances, currency with inherent value still created a few problems. First, carrying large quantities of coins could be quite the task, precious ones typically weigh a great deal. And second, storing of coins presented a security risk, with large targets of valuable coins presenting a prime target for thieves.

It didn't take long for enterprising groups to start storing people's coins for them and in the process creating the first de facto banks. These banks would issue promissory notes to their customers, which could then be redeemed for coin at the bank or one of its representatives. Soon after the notes themselves became recognizes as valuable. The system slowly started to shift towards notes being offered in various denominations, hashing out the rough ideas behind paper currency.

Following suit of those in the private sector, governments began to replace individually valuable currency with those backed by valuable deposits - typically gold or silver - in the 19th century. This allowed governments to trade with each other, and created a de facto universal currency in gold, the Gold Standard, if you will.

Dropping the Gold Standard

Backing currency with a set amount of gold seems to be a solid answer to the subject of currency value. After all, said paper money might not have any value of its own, but something valuable could be gotten with it. However, using a gold standard has some downsides. First, the size of the economy as measured by the total amount of currency in circulation is limited. That sounds like it could be a good thing – helping to restrict inflation and deflation by keeping the overall economy at roughly the same size. In reality, though, economies need to be flexible. In times of uncertainty, rapid growth or shrinking can be used to offset inflation, and to prevent a recession becoming a depression.

One common example of this is war, and during the latter half of the 19th and most of the 20th centuries, there were a fair number of wars going on. Governments, needing to spark a great deal of production from their economies, frequently stopped allowing citizens to trade government currency in for gold. Other times, governments would temporarily abandon the gold-backed currency for what's known as fiat currency - where the value of the currency is derived not from gold, but from the strength of the government.

During the same time period, rapid growth in the private sector saw the rise of corporations and international trade which benefited from fiat currencies like the "green back" dollar. One by one, governments made the switch from fiduciary, gold standard currency to fiat systems. By 1971, no government was supporting the gold standard. It was a new mark for currency – where entire economies were operating using money that had no inherent value other that everyone believed it to be so. True to form, the economies of the world grew collectively larger than any time in the past.

Beyond Paper

Today, paper money is itself getting phased out, at least in unofficial day-to-day life. Several alternatives, from adding small purchases onto cell phone bills in Japan and Australia, to the ever-present credit and debit cards in the western world have taken cash out of many people's lives. As currency has moved us further away from the actual value of goods by attributing a third-party value system, the removal of such system can be seen as the illogical conclusion. Today, valuable currency is no longer used to represent actual value; instead value is encompassed with largely imaginary currency. Entire pockets of the economy exist where money exists only in electronic theory.

As currency has moved from something solid and real like gold, towards its current theoretical state, it has had the opposite impact on the gold market. In the last few years, the price of gold has quite literally exploded, jumping from around three hundred dollars per troy ounce to around a thousand. While some of this is certainly due to a desire for a universally standardized currency, others are from the perceived drop in supply. Now that currency is no longer physically tied to the amount of gold that nations have, the perceived supply has decreased. The end of the cycle is almost bittersweet. Whereas gold was first used to create third party value between merchants, it is no longer used. However, as a valuable commodity, gold has never been worth more.