You’ve probably heard about the ‘gold standard’ at some point, maybe in school, maybe in the news, but have you ever wondered what makes gold so special? Why would gold be the standard?
In order for money to work it has to possess certain characteristics:
- It must be difficult to produce, or scarce. Commodities (such as crude oil, steel, iron, corn, copper, etc.) fail as vehicles of value because of their producibility. When a commodity becomes more valuable, production of the commodity ramps up (enriching the producers) which drives the value back down to normal levels. Commodities are relatively easy to produce, and that keeps their value in check. The fact is that commodities have more value for their practical purposes (building, eating, etc.) than as a value holder (money).
Gold has thrived through history because it’s scarce and impossible to re-create. The only way to infuse more gold into an economy is to find it and dig it up from the ground, a costly and arduous process. Gold also doesn’t have many practical applications as a commodity (not great for building things because it’s soft, and tastes terrible, useful for jewelry though).
- It must be durable. Monetary units that can corrode and rot cannot maintain their value over time (even silver is a victim of this problem).
Gold is one of the purest and durable resources on the planet. It doesn’t oxidize or corrode regardless of its surroundings, you could even find some at the bottom of the ocean in a hundreds-of-years-old shipwreck, still in perfect condition. Since it’s so durable, the supply never goes down. If a person in history found the gold, it’s likely that a person still owns that gold. This is an important point. It means that even if a bunch of people became gold miners and found a bunch of gold one year, the total infusion of gold would still be a very small percentage of the total gold available. The largest infusion of gold into a modern economy was in 1940 when the total stockpile increased by only 2.6%, it hasn’t increased by over 2% in one year since.
These interesting facts about gold have made it the most popular currency throughout history. It doesn’t inherently hold any value, but it makes for a great global unit of account.