Ever since the Pharaohs of Egypt and Emperors of Rome first said “ooh shiny” gold has always been one of the planet’s most tradeable commodities.
From El Dorado to the Gold Rush of the Wild West (and a slew of boring cowboy movies), even our very own Johannesburg was born of the pursuit of those little nuggets of joy.
This is all very well and good, but how does this influence the Gold Standard. What is it?
There are things that money people say. “Gold is trading at this much or that much to the dollar” and we are supposed to know why that is relevant.
To understand this we have to understand how money kind of evolved from a system of bartering and trading to actual paper, that we so love – but can’t actually do anything with, in itself.
Unless maybe you wanted to light it to make a fire.
In the Wild West, when there were cops, robbers and towns that “weren’t big enough” for two cowboys.
The Banks would keep the gold bars for people and give them a piece of paper that said something to the effect of: “Joe is a lovely fellow, and he has 4 bars of gold with us, so if you take this piece of paper, YOU will have the gold”.
Essentially, this was the first paper money. Based on gold.
How much gold did your piece of paper say you had?
As time went on and more and more trees started losing their lives to make paper for money, money started to represent gold on a more hypothetical level. And this is the ‘Gold Standard’.
The easiest way I can explain it to myself, is when you travel you have the ‘Beer Standard’ whereby you compare the price of a single beer from country to country. How many Rands would a beer cost you in Vietnam or America.
Then, based on that assumption you can sort of figure out how much everything else is going to cost. The logic kind of works as follows. If, for example: In Vietnam it’s one USD a beer, in America it’s 5. So America is 5 times more expensive. You could also do the ‘Coke Standard’ (and I mean the drink not the Columbian export) or the ‘Big Mac Standard’.
Similarly, the Gold Standard functions where each country’s currency is compared to how much gold it could buy. Because gold is a fixed, agreed upon tradeable thing.
America dropped the Gold Standard in the 1930s when they hit a depression, because it made their money pretty useless.
However, the cost of gold is still largely agreed as one of the most stable things, especially in today’s recession. Big contracts are written up saying “On completion contractor will be paid X amount of Dollars when it was equivalent to X amount of Gold.
Just in case the dollar crashes before the completion of said contract, then the ‘Gold Standard’ would be observed so that they would be paid out the amount in gold equivalent. The more the world currencies crash, the more dollars it takes to buy gold.
Just remember that next time you see Kanye West, decked out in all his chains of bling, and gold teeth.
Maybe he’s just investing in his future.
I know I love my gold jewellery a little bit more now that I know all that. So should you.