It is assumed that before the most primitive currencies emerged, civilizations sustained themselves through subsistence and barter. This meant that most people either, produced all they needed by themselves, and later, exchanged basic goods like vegetables, livestock, tools, and weapons to meet needs.
As civilizations grew, and more efficient systems were needed, gradual change began, towards a world of currency.
First emerging in China, a system where miniature replicas of weapons and tools were used as a medium of exchange, became dominant for a brief period, around 1100 B.C. This laid the foundations for one of the first coin based currencies as Investopedia explains:
Nobody wants to reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny daggers, spades and hoes were abandoned for the less prickly shape of a circle, which became some of the first coins.
The Coining of Coins
In 600 (B.C.), the King of Lydia began minting one of the earliest coin currencies, ushering in an era of immense prosperity and growth. Lydian coins are believed to be the world’s first official currency, by many historians. Having been made from electrum (an alloy of gold and silver), the coins had an intrinsic value, off which to base their relative purchasing power.
Interestingly, one British Pound (in the currency’s inception) was defined as a store of value that equalled one pound of Silver. This in itself was derived from the early Roman denominations of Libra, Solidus, and Denarius (£sd), where Solidus, was a relatively pure gold coin.
Paper for Your Gold
The first paper money usage recorded, was from around the 10th Century in China. The ‘Jiaozi’ minted by the Song Dynasty, originated from ‘promissory notes,’ which were a form of receipt that acknowledged the holdings of copper coins of an individual.
Almost a thousand years later, the establishment of the Bank of England, brought with it, the use of bank notes. These were notes issued by the bank in return for deposits of gold. The notes could be exchanged at any time at the bank for gold. A similar system prevailed across Europe in the 17th Century, facilitated by banks and private institutions. Thus, gold and other precious metals, persevered as the ultimate store of value in economies across the world for over a millennium.
End of the Gold Standard
Periods of gold shortages, and runs on banks, marked the first signs of weakness in the system.
A combination of factors, from funding wars, to stimulating growth in the midst of depleted gold reserves, throughout the period from the 18th to the 20th century, caused banks across the world to gradually establish fiduciary systems, which in some periods, supplanted the gold standard.
While the gold standard did exist, by and large, across many countries well into the 20th century, Britain abandoned the system as early as 1931. The United States took the same avenue, in the midst of deflation, and stagnation during the great depression.
A Return to Gold?
The desire to inflate economies by increasing money supply, brought the appeal for fiat currency. It is this very aspect of fiat currency, that is now threatening the stability of economies across the world. The ability to almost arbitrarily inflate currency to stimulate growth is in fact a severe vulnerability, which gold is never prone to.
Perhaps this is the reason that gold persevered through the ages, and still has our trust as a source of stability. With the right checks and balances against supply shocks, we may see a possibility for the return to a gold standard.