The Evolution of Gold to Modern Cryptocurrency

The Evolution of Gold

While a few hundred years ago bartering was still taking place with livestock, shells, stones or other things, gold revolutionized it. The reason for this was simple: the things just listed could not fulfill the functions of money. How should e.g. B. long-term value stored in mussels or a pig? Gold was and is finite and unchangeable and therefore fulfills the criterion of a store of value. Furthermore, gold was a suitable unit of account: 500g of gold is always worth exactly the same as 500g of other gold. In addition to the fact that gold could always be exchanged with increasing acceptance and trust, it also brought the advantage of transport. A little gold was easier to transport than umpteen sacks of flour and/or other means of exchange. It also fulfilled an exchange and transport function. Perhaps the most important factor, however, was confidence in gold. People were sure that if they exchanged their goods for gold, they could exchange this gold for other goods in the next trade. There was general confidence that all barter partners would accept it, which we all still benefit from today, just with fiat money. It is estimated that gold was used as the primary medium of exchange and payment for over 3000 years. In such a long period of time, the disadvantages of gold became noticeable at some point, which eventually became too much for people. Just as gold got the functions of money right, at one point it also got them wrong. For example, gold was initially a great alternative for light transportation, but eventually it became too heavy and people started looking for a lighter alternative. The function of the computing unit was only optimal to a limited extent, because when gold first had to be divided, it always involved a bit of work. Arguably the most significant criticism was that of store of value. Over time, counterfeiters found ways to “stretch” this by mixing in different things. Since very few people were gold experts at that time, it was easy to fall victim to counterfeit or impure gold. One side exchanged for little value, while the other side was able to increase their gold.

The evolution from gold to cash

Despite these disadvantages, gold did not suddenly become worthless, because as we all know, gold is still in demand today, rare & valuable. Gold was still of great value, only it no longer functioned as money. The successor to gold was paper money, which we still know and use today as a form of cash, but which will most likely not continue to prevail in the future. The precise origin of paper money can be traced back to 11th century China, while it can generally be said that it became more widespread among people between the 14th and 15th centuries. The reason for this was logical: paper is many times lighter than gold and does not take up more space, which is why it was a better means of transport. It also fulfilled the function of the unit of account a lot better than gold, since the value could be distributed and spent on different individual pieces of paper very easily. Only the point of store of value was a little different. Not because the paper was easier to forge, as one might think, but because even then features that were difficult to forge provided a certain level of security. But precisely because gold continued to cover it and thus still represented its actual value. If you wanted to trade with paper money at that time, you first had to bring your gold to the bank, which could cover it. If you met this criterion, you received a so-called promissory note, which served as a kind of confirmation of ownership of the respective amount of gold. So gold continued to act as a store of value, while the promissory note facilitated the functions of money and was an early version of what we now call cash. With gold as a backing and the trust it created, people could still be sure that their “piece of paper” would really be accepted by everyone.

In the previous paragraph, I deliberately made the comparison to today’s cash, because In that sense, paper money still exists today, albeit with a huge difference from what it was a few centuries ago. The main reason for this huge difference is the abolition of the gold standard, which came into effect in the early twentieth century, in the 1920s to be precise. You may have heard of this standard before, but if you haven’t, I’ll briefly explain it to you again in two sentences: Basically, the gold standard is nothing more than a form of currency in which gold plays the central role. So gold either represents the currency itself (usually in the form of coins) or functions as a version of paper or banknotes, which in turn are only covered by gold. In the second variant, paper currencies are exchanged, but gold is still the real currency, since the bank guarantees that these notes can be exchanged for gold again at any time. However, very few people put this into practice, which is why all the big banks gradually came up with the common idea of ​​only agreeing on paper money without backing in the form of gold. After all, the vast majority of people only traded paper and trusted it blindly without even considering the gold behind it. Since the abolition of this gold standard, so-called fiat money was born, which is still used today. The word “fiat” can be roughly translated from Latin into “let there be”. This meaning really applies, because without the backing of a physical value like gold, central banks can still print money as often as they like – “Let there be money”.

Conclusion

So the big difference is that for some time now, gold has no longer represented trust in our money, but the promised acceptance of the respective central bank behind it. Gold, then, went from being the main factor of confidence in relation to money to something that today can only gain the trust of most people in times of inflationary threats, but still enjoys great value. The role of trust in currencies has declined sharply over the last century, which is why, in times of rising inflation, people are rightly looking for new ways to keep real value for their wealth.