The BBC has a good article on why we use gold for money. It turns out that there's nothing magical about gold that makes it "real" money. Personally, I think it boils down to the fact certain types animals like primates and corvids like to hoard shiny stuff, and our brains are pretty much wired similarly (corvids are among the most intelligent species of birds - crows, ravens, magpies, etc.).
Anyway, it seems gold is just about the only element that will do the trick. It's kind of a goldilocks metal. The article runs down why all the other elements don't work.
1.) Many elements are gaseous at normal temperatures - gas-based currencies carried around in vials would not be a good idea.(argon, krypton, helium)
2.) Some elements are liquid at normal temperatures - and poisonous to boot (mercury, bromine).
3.) Some elements are radioactive. You don't want your currency to give you cancer (uranium, thorium, plutonium).
4.) Some elements are highly reactive with water or the atmosphere. Many decay over time like iron rusting or copper turning green.
6.) Some are very hard to smelt and require higher temperatures than ancients could produce - titanium, platinum, zirconium. Although not mentioned in the article, the smelting of aluminum from bauxite uses electrolysis, a process which was only discovered in 1886 (the Hall–Héroult process). Otherwise aluminum would probably work well - most buildings today are clad with aluminum and glass curtain walls.
7.) Some elements are way too rare or way too common.
8.) Some are hard to chemically distinguish from one another.
Of the 118 elements we are now down to just eight contenders: platinum, palladium, rhodium, iridium, osmium and ruthenium, along with the old familiars, gold and silver.These are known as the noble metals, "noble" because they stand apart, barely reacting with the other elements.They are also all pretty rare, another important criterion for a currency.Why do we value gold? (BBC)
Even if iron didn't rust, it wouldn't make a good basis for money because there's just too much of it around. You would end up having to carry some very big coins about.With all the noble metals except silver and gold, you have the opposite problem. They are so rare that you would have to cast some very tiny coins, which you might easily lose.They are also very hard to extract. The melting point of platinum is 1,768C.
That leaves just two elements - silver and gold.
Both are scarce but not impossibly rare. Both also have a relatively low melting point, and are therefore easy to turn into coins, ingots or jewellery.Silver tarnishes - it reacts with minute amounts of sulphur in the air. That's why we place particular value on gold.It turns out then, that the reason gold is precious is precisely that it is so chemically uninteresting. Gold's relative inertness means you can create an elaborate golden jaguar and be confident that 1,000 years later it can be found in a museum display case in central London, still in pristine condition.
So, really, the selection of gold is entirely arbitrary. It was just the only element that had all the stuff we needed it to do. But there's no magic to it - it's just a cultural thing. Gold is relatively useless, in fact. It's very softness is a plus - it's soft enough that you can bite it to tell if it's real, and people frequently do. And it's a store of value because it doesn't chemically break down. Coins made of other metals decay over time.
But, like the goldbugs confidently declare, it is "real" money? Let's see:
First off, it doesn't have to have any intrinsic value. A currency only has value because we, as a society, decide that it does.On that last point, see this: Gold Was a Horrible Investment from 1500 to 1965 (The Atlantic)
As we've seen, it also needs to be stable, portable and non-toxic. And it needs to be fairly rare - you might be surprised just how little gold there is in the world. If you were to collect together every earring, every gold sovereign, the tiny traces gold in every computer chip, every pre-Columbian statuette, every wedding ring and melt it down, it's guesstimated that you'd be left with just one 20-metre cube, or thereabouts.
But scarcity and stability aren't the whole story. Gold has one other quality that makes it the stand-out contender for currency in the periodic table. Gold is... golden. All the other metals in the periodic table are silvery-coloured except for copper - and as we've already seen, copper corrodes, turning green when exposed to moist air. That makes gold very distinctive.
But how come no-one actually uses gold as a currency any more?
The seminal moment came in 1973, when Richard Nixon decided to sever the US dollar's tie to gold. Since then, every major currency has been backed by no more than legal "fiat" - the law of the land says you must accept it as payment.Nixon made his decision for the simple reason that the US was running out of the necessary gold to back all the dollars it had printed.
And here lies the problem with gold. Its supply bears no relation to the needs of the economy. The supply of gold depends on what can be mined. In the 16th Century, the discovery of South America and its vast gold deposits led to an enormous fall in the value of gold - and therefore an enormous increase in the price of everything else. Since then, the problem has typically been the opposite - the supply of gold has been too rigid. For example, many countries escaped the Great Depression in the 1930s by unhitching their currencies from the Gold Standard. Doing so freed them up to print more money and reflate their economies.
The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price. Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently. That is hardly the behaviour of a stable store of value.
So, to paraphrase Churchill, out of all the elements, gold makes the worst possible currency.
Ron Paul thinks gold could go to "infinity", which would certainly be a lot of dollars. But it won't be an easy ride into Buzz Lightyear territory for the shiny metal: gold has fallen 8.5 percent since Ben Bernanke started talking about tapering the Fed's bond-buying a month ago.
Of course, that's nothing compared to gold's looong bear market from 1500 to 1965. As you can see in the chart below from Goldman Sachs (via Zerohedge), it lost over 80 percent of its value compared to inflation-adjusted British pounds over those four-and-a-half centuries. That's a lot less than infinity.For some more fascinating gold history, see: What is Gold Worth? (Engines of our Ingenuity)
Why has gold been such an abysmal investment, if you can even call it that? Well, gold doesn't have any earnings; it doesn't pay out any dividends; and it costs money to store. As Paul Krugman points out, it's only worth piling money into the shiny metal when the opportunity cost of doing so is low -- when real interest rates are negative. Now, that can happen when rates are high, but inflation is higher still, or when rates are low, and inflation isn't quite as low. Britain didn't have negative inflation-adjusted rates for most of the past millennium, because it was on a silver standard from the mid-1200s through the early 1700s, and a de facto, and later de jure, gold standard up until 1931.
Just the other day, Forbes magazine displayed a graph that put those old Saxons in a new light. It showed the price of gold in present-day dollars. The graph starts in the 14th century, when the stuff went for what would be two thousand dollars an ounce today.And A history of the world in 100 objects - Episode 25, gold coin of Croesus (BBC)
Immediately after, the Plague killed off half of Europe's population, and the value of gold fell to a little over one thousand dollars. What gold there was now belonged to half as many people, doubling the amount available. Then, with a shortage of labor, new technologies arose, and capital became important. The price of gold began rising until Columbus claimed the West Indies for Spain. It reached its all-time high of 2500 dollars an ounce.
The Americas became a rich source of gold. As Europe plundered the New World, the price dropped until 1600, where it settled out at about 500 dollars an ounce. It stayed there until the industrial revolution. Then something strange happened.
Gold prices began oscillating wildly, seeking out new lows. Each depression brought the value back up. In the late 1970s, gold rocketed to a brief high of 1400, 1999 dollars. But, by then, we'd separated gold from money. That brief spike represented short-term horse-trading. Gold had reached its all-time low of 200 dollars an ounce just before that. And at this writing it's worth around 300 dollars an ounce.
We've all grown so accustomed to using little round pieces of metal to buy things, that it's easy to forget that coins arrived quite late in the history of the world. For over two thousand years, states ran complex economies and international trading networks without a coin to hand. The Egyptians, for example, used a sophisticated system that measured value against standard weights of copper and gold, but as new states and new ways of organising trade emerged, coinage began to make an appearance, and fascinatingly, it happened independently in two different parts of the world at almost the same time. In China they began using miniature spades and knives in very much the same way that we would now use coins, and virtually simultaneously in the Mediterranean world, the Lydians started making actual coins as we would recognise them today - round shapes in precious metals.
"There is a continuity between this coin of Croesus and today, and when you look at it, it has concealed in it the entire future, including the bonuses at Goldman Sachs and the career of Sir Fred Goodwin.
"In modern times, what money does is it incorporates a wish, and displays that wish to the world. And in the way that human beings are, they tend to become fascinated by the potential of objects, and certainly it's a feature of the present day that people accumulate fortunes that nobody could possibly spend, and yet people still compete to accumulate ever larger fortunes. But what makes this inequality of fortune possible is having money.
"There is nothing either natural or God-given about the use of money. It's just a historical process, quite a complicated one, that's built up over time. Over that period, money has worked pretty well and has played a very important role in the triumphs of humanity - and also of course in its miseries. But it's allowed the population of the world to expand beyond limits that were thought possible. Since even a few years ago, it's raised the standards of living. All these possibilities are in this little object."
In small societies, there isn't really a great need for money, because you can generally trust your friends and neighbours to return any labour, food or goods in kind. The need for money, as we understand it, grows when you are dealing with strangers you may never see again and can't necessarily trust - that is, when you're trading in a cosmopolitan city like Sardis.
Before the first Lydian coins, payments were made mostly in precious metal - effectively just lumps of gold and silver. It didn't really matter what shape the metal was, just how much it weighed and how pure it was. But there's a difficulty; in their natural state, gold and silver were often found mixed with each other and, indeed, mixed with other metals. Checking a metal's purity was a tedious task - likely to hold up every business transaction, and even when the Lydians and their neighbours invented coinage, about a hundred years before Croesus, this problem still remained. They used the naturally occurring mixture of gold and silver, not the pure forms of the metals.
The Lydians eventually solved this problem, speeded up the market and, in the process, became hugely rich. They realised that the answer was for the state to mint coins of pure gold and pure silver, of consistent weights that would have absolutely reliable value. It was the currency that you could trust in completely and, without any checking, spend, spend, spend!
[...] It was thanks to that wealth that Croesus was able to build one of the Seven Wonders of the World - the great Temple of Artemis at Ephesus. Because people could trust Croesus's coins, they used them far beyond the boundaries of Lydia itself, giving him a new kind of influence - financial power. Trust is of course a key component of any coinage - you've got to be able to rely on the stated value of the coin, and on the guarantee that it implies. It was Croesus who gave the world its first reliable currency - the gold standard starts here
It's an intriguing fact that coinage was invented at pretty well the same time in both China and in Turkey, and it's probably not a coincidence. Rather, I think, they're both responses to the fundamental changes seen across the world around three thousand years ago from the Mediterranean to the Pacific. There were military, political and economic upheavals that brought us not only modern coinage, but something else that's resonated till the present day - new ideas about how people and their rulers saw themselves, in short, the beginning of modern political thinking, the world of Confucius and Classical Athens.