The history of money and the history of civilization are significantly intertwined because every big step forward in the evolution of money meant an explosion of economic activity and a civilizational leap. Once there was no money. The first form of exchange, before the appearance of money, was barter. Some studies say that there was a system before barter, a system that existed in very small communities, where people remembered who owed what to whom and who did what to whom. Placing it in today's concept, such a way of "remembering" seems incredible, but then the communities were very small. With barter, there is a problem, as the English say, "double coincidence of wants", so that the wishes of the participants in the barter coincide at the same time. And this is where the need for the first function of money, and perhaps the most important, appears, which is a means of exchange.
Money enables us to separate the time moment of acquiring some value and exchanging it for some other value, because money in itself is not a goal. More precisely, money is not kept for the sake of money, but to buy an apartment, a car…. So money is a means of exchange, a means that makes it easier for us to separate the moment when we create some value and when we exchange it for some other value. This is perhaps the most important function of money. Even before coins became established as a medium of exchange, there were various other types of primitive money, but they were of a rather local character. For example, in some communities, seashells were treated as money. The problem with clams is once you leave the tribe, those clams are worthless. All those initial primitive types of money had the problem of being local in character. In one tribe they are worth a fortune, somewhere else they are worth nothing.
As human civilization developed there was more and more interaction between tribes and various groupings, and a medium of exchange that had universal value was needed. This gives rise to another function of money, which is money as a measure of value. Therefore, in order to be able to exchange something, to be able to quantify the value of something, there must be a common standard.
The third important function of money is money as a store of value. The rapid development of agriculture caused the emergence of the function of money as a guardian of value. Until then, people lived from one day to the next, without accumulating a means of survival. At the moment when a serious development of agriculture took place, the need for the accumulation of value in a short time appeared for the first time. So, some value is created that is greater than what needs to be spent at a given moment, the surplus of that value is saved, for one day, two years or one decade.
So those are the three basic functions, medium of exchange, measure of value and keeper of value. And historically speaking, no type of money has yet in human history been perfect in all three functions, and bitcoin and digital currencies are no exception, but more on that in the following texts.
In the seventh century BC, metal money appears, at that time this money was a mixture of silver and gold. It appears in a small kingdom called Lydia on the Mediterranean coast of Turkey and relatively quickly spread throughout the Mediterranean. Relatively fast for the terms of the time. Back then, information traveled slowly, and money traveled even more slowly. The reason for the spread of that coins lies in the fact that it could satisfy all three functions of money.
Often people say that gold has value in itself, but until three thousand years ago it had no value in itself. However, we no longer use gold, that is, metal money went out of use, so it was switched to paper money, and later to electronic money. The problems with gold money, that is, with metal money, is that the common man can hardly tell the difference between real money and fake money. Another problem with metal money is that it is relatively difficult to transfer.
In Europe, at the transition from the 16th to the 17th century, paper money was slowly created. With the creation of the first banks in Europe, banks began to issue deposits, that is, certificates for deposits in gold. So the first banks worked only as safes. Then, out of a need to make life easier for themselves, people slowly began to use those gold deposit certificates as money. The printing of money was not centralized, but practically every bank printed its own money for the gold it has in its safe.
Paper money quickly supplanted metal money from everyday use, due to ease of transfer and divisibility. According to Gresham's Law, bad money will always drive good money out of use. This means that people always prefer to spend money that has less value. People perceive gold as something that has constant value, so they don't spend it, and paper that has a lower value than gold, they spend more, and they keep the gold in safes. When states realized the power of money, they decided to centralize it by introducing the exclusivity of printing money only to central banks. One of the Rothschilds in the 19th century said "give me the power to control the money of a country and I don't care who writes the laws".
Another function of money is distinguished in the financial literature, and that is worldwide money. At one time, central banks printed gold-backed money. However, several times throughout history, states in cases of emergency, usually when they needed to finance a war, printed money without gold backing, but then returned to the gold standard in times of peace. Finally, in 1971, the gold standard was abolished. US President Richard Nixon decided that gold would no longer be pegged to dollars. After the Second World War, the gold standard and the dollar standard were established, because the dollar was convertible to gold, and all world currencies were pegged to the dollar. At that time, each country had the right to demand gold from the US at any time for those dollars it has in its possession. Over time, after World War II, the American economy moved from a large trade surplus to an ever-increasing deficit, and it became impossible to maintain that gold standard. In 1970, France sent a ship full of dollars to the US and asked for gold in return, but they didn't get it. Then it became clear that the gold standard was no longer sustainable.
Advantages of the gold standard
Throughout history, gold has been recognized as a means of preserving asset value. Today's paper money can be issued without restrictions and full control, which makes it risky. And trust in it directly depends on the degree of trust in the country that broadcasts it.
The gold standard limits the arbitrariness of the state by introducing restrictions on the uncontrolled printing of money, thus reducing the power of central banks to manipulate the quantity and value of money issued.
A return to the gold standard would in the long term reduce the danger of unwanted inflation and a large rise in the prices of consumer goods. Historically speaking, the US had the lowest inflation rate during the implementation of the gold standard in monetary policy. From 1880 to 1913, when the dollar had a gold backing, average inflation was only 1.6% annually. In a study conducted on a sample of 15 countries for the period 1820-1994, economists calculated the average annual inflation at the time of the standard's validity of 1.75%, and after its abolition, inflation was 9.17%.
Today's system of issuing money without real coverage gives governments the opportunity to finance foreign trade and budget deficits almost indefinitely. By restoring the system of issuing gold-backed money, it would make it impossible or at least significantly limit that practice.
Money backed by gold as an accounting value would, in the long term, prevent larger amplitudes in the movement of oil and gas prices, reducing them to the level of changes in the price of gold on the market. The risks of economic crises, both global and national, would be significantly reduced.
Gold has the power to self-regulate its own value. Namely, in the event of an increase in the need for gold for the purpose of issuing money, the value of gold will increase and its exploitation from inaccessible mines and from great depths will be more profitable. Which will ultimately result in a larger issue of money in the name of newly produced gold. However, if the newly issued money is not needed, the value of gold will stagnate or even fall, with the same production and supply will be reduced until the new higher demand for the precious metal. With that mechanism, gold self-regulates its value, as well as the value of money.
Even a well-intentioned policy of issuing or printing money to encourage economic growth or consumption can significantly destabilize the country's economy in the long or short term and lead to many counter-effects. With the gold standard, such a scenario is not possible.
Disadvantages of the gold standard
The value of gold is not fixed, therefore, due to these oscillations, price stability, which is necessary for the entire economy, cannot be expected.
The gold standard is characterized by deflation, which can destabilize the economy even more than inflation. Namely, the amount of money in circulation cannot keep pace with economic growth due to the conditioning of the emission of money, by the previous possession of that amount of gold. On the other hand, the gold standard does not really exclude the occurrence of inflation completely. Namely, in the case of an increased volume of supply and possible new deposits, an inflationary scenario is not impossible.
The gold standard caused a large number of financial crises, bank and market crashes, and to a lesser extent influenced the onset of the Great Depression itself. Between 1879 and 1933, the USA had several financial crises: 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. In 1933, about 4,000 banks ceased operations. Many of these crises were caused by the impossibility of adequate and timely issuance of money to the market, all due to restrictions due to the gold standard.
The gold standard would disable the central bank's ability to use its instruments to influence possible shocks and macroeconomic instabilities.
A gold standard would likely threaten the ecology, as it would require the activation of new gold mines and new technologies for mining in inaccessible locations. In the same way, the gold standard requires a lot of time, money and resources due to the mining of a new amount of ore, and today time is the most important factor of liberal capitalism.
The act of returning to the gold standard would be complex. The amount of money in circulation, especially US dollars, exceeds the amount of gold that the US has in Fort Knox several dozen times.