The History of Gold

Gold has been used as the currency of choice throughout history. The earliest known use was in 643 B.C. in Lydia (present-day Turkey). Gold was part of a naturally occurring compound known as electrum, which the Lydians used to make coins. By 560 B.C., the Lydians had figured out how to separate the gold from the silver, and so created the first truly gold coin.

The Persians and the Greeks followed with production of gold, silver and bronze coins and then the Romans. It was coinage of gold and silver that greatly expanded commerce and economics. In Roman times one gold piece would pay a soldier for a month. Today this amount would be more than the vast majority of the world laborers earn in a month. In fact that amount of gold (a Roman Aureus) approximately 7 grams is worth $305, which is nearly twice the monthly income in China ($175 per month), 5 times that on average of a laborer in India and 2.5 times the world average ($123 a month) (as per UN labor statistics). This illustrates the store of value in human terms that gold provides.

The great banking empire of the Rothschild’s was started as gold, silver and collectable coin trading. Gold has been the standard of world currency since the time of the Greeks and has retained its value for thousands of years, while appreciating greatly against other assets in times of inflation or financial crisis. Even with today’s modern technology gold still remains a rarity. In fact, all of the gold ever mined could fit in a cube 21 meters per side or essentially on a basketball court!

Introduction of Gold Standard

In 1717 Sir Isaac Newton (who was the master of the Royal English Mint) by establishing a favorable ratio of gold to silver put Great Britain on the Gold Standard which lead to Britain’s domination of world economy until World War I when the British Empire came off the Gold Standard. In 1833, England began issuing currency but it was fully backed by gold! When England deviated from this standard its citizens suffered the consequences.

The U.S. first authorized the issuance of coinage in 1792 with the Mint and Coinage Act, and set the official price of gold at $19.75 per ounce. The first gold coins however were not struck until 1795. Based on the original standard, the first $5 and $10 coins issued actually had $5.09 and $10.18 in gold respectively in each. By 1834 the price of gold rose to $20.67 per ounce. This even further increased the metal value over the face value of the coins. (It is novel to think that early on, America’s money was worth more than its face value, unlike today and for much of many nations’ history.) The result was mass hoarding and melting of the coinage until the weight of coins was lowered to approximately 99% of the metal value (This also explains the extreme rarity of pre-1834 United States gold coins.)

The nation was formed on a strict gold standard which maintained its stability and balance of payments. In 1848 when gold was found in Suttor’s Mill, it further strengthened the integrity of the U.S. monetary system. This corresponds with the passage of the Independent Treasury Act of 1848 which required strictly gold and silver to do business with the United States. No better illustration of our nation’s dependence on the gold standard was with the sinking of the USS Central America during a hurricane. The ship was carrying substantial gold from California and its loss caused the bank “Panic of 1857”.

In 1861 U.S. Treasury Secretary, Salmon Chase printed the first official paper currency despite the tremendous failures of numerous banks that had issued currency during the 1830-1860 period. Later these came to be known as Broken Bank Notes as most of these banks went bust.

In 1913 the Federal Reserve was created to theoretically stabilize and currency values. It took more than a year to accumulate enough reserves to maintain the gold standard and for the Federal Reserve to be activated. (Graph) The reality is that the formation of the Federal Reserve actually caused the opposite effect–the smallest and largest period of devaluation of the dollar began.

With the outbreak of World War I, nations like Germany whose currency was not backed by gold suffered hyperinflation whereby wheel barrels full of currency were needed to buy a loaf of bread. As a result most Nations returned to a modified gold standard. After World War I most European nations financing the War decoupled from a strict gold standard, the results for Germany as stated earlier were catastrophic. The1920s hyperinflation in Germany decimated the middle class and ultimately aided to the rise of Hitler. Even for the victors price levels doubled for goods and services in the U.S. and Great Britain, tripled in France, and quadrupled in Italy.

On January 30, 1934, Congress passed the “Gold Reserve Act”. This nationalized all gold. All gold held by banks and private individuals must be turned over to the U.S. Treasury. It prohibited private ownership of gold except under license. (Executive order 6102 made it a crime for U.S. citizens to own or trade gold anywhere in the world.) (A significant key point–coins for collectors and jewelry were exempt.) If one considers the tremendous outcry in past years when a nation nationalized any industrial assets (oil, copper mines, gold mines, etc.) it’s nearly inconceivable that F.D. Roosevelt (the chief architect) was able to pull this off.

It allowed the government to pay its debts in dollars, not gold and paved the way for the future of our Government printing its way out of financial messes. The President was authorized to devalue the gold dollar by 40%. He increased the price of gold, which had been $20.67 per ounce for 100 years, to $35 per ounce. The government’s gold reserves increased in value from $4.033 billion to $7.348 billion. This effectively devalued the dollar by 60%.

End of the Gold Standard

By 1970, the U.S. only held $14.5 billion in gold against foreign dollar holdings of $45.7 billion. On August 15, 1971, President Nixon changed the dollar/gold relationship to $38 per ounce. More importantly, the Fed stopped redeeming dollars with gold. The U.S. government repriced gold to $42 per ounce in 1973, and then uncoupled the value of the dollar from gold altogether. The price of gold quickly shot up to $120 per ounce in the free market. The European Countries who had pegged their future to the dollar felt betrayed.

By 1971 more and more dollars were being printed in Washington, then pumped overseas, to pay for government expenditure on military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on 15 August 1971, Nixon issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970, unilaterally making the dollar unconvertible to gold directly. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock.

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