Throughout the 19th and early 20th centuries, much of the world used gold standards for its monetary systems. Sometimes, this was in the form of physical gold coins that were circulated through the economy. The rise of paper banknotes made the concept of carrying actual gold around less common, however.
Many governments switched to what’s called a fiat gold standard. The US, for instance, held that individual banknotes corresponded to a certain amount of actual gold stored in the federal government’s vaults. Then the effects of the Great Depression and World War II caused the US to abandon this system.
While the US still has sizable gold investments, namely in the Bullion Depository near Fort Knox in Kentucky, the gold standard is a relic of a bygone era. But what caused the US to give up on this system in favor of more abstract value determinations?
Gold Is Hard to Use as Currency
The first issue with using gold as the physical representation of value in a given economic system is that it’s extremely heavy in large quantities. This is the exact reason that the older system of “commodity money,” where the only legal tender is actually made from valuable materials like gold, was abandoned by most countries.
The second issue with a gold standard is that the precious metal is significantly limited. The sheer physical quantity required for bigger transactions just doesn’t exist on our planet. Roughly 174,000 metric tons of gold have ever been mined. That might seem like a lot, but given that we’re talking about all the gold ever, it’s not nearly enough to support global economies that use gold as currency.
By divorcing money from a gold standard, the Treasury is free to expand supply as they choose and regulate inflation. Gold standards are often responsible for the kinds of pressure that can result in deflation since there is a lower ceiling on how much money can be in the economy. While inflation is usually seen as a bad thing, deflation can be just as damaging.
That doesn’t mean that people don’t still place value on gold. If you have a considerable quantity of gold in your possession, you’re probably pretty rich. That being said, you can’t just walk into a grocery store and pay for your food with a gold bar! The modern version of carrying a pocket full of bullion is investing in gold commodities on the stock market.