To most people, gold and silver are synonymous with wealth, value and luxury. For thousands of years, gold and silver were the source of an individual’s or empire’s wealth.
But what is it that gave gold and silver value and why were they used as a means of exchange?
Why Gold & Silver?
The economy is a social domain that emphasizes the practices, discourses, and material expressions associated with the production, use, and management of resources.
Anywhere bartering, trading or exchanging occurs, some sort of economy is in effect. As economies became more complex and developed past the point of exchanging commodity for commodity, the need for a common unit of exchange presented itself. Hence, the necessity for a value holder was born!
So what do you pick as your tangible material of value exchange? This is a tougher question than you might initially consider. Sure, there are a countless number of materials in the world, but what’s the best one to use as currency?
From a pragmatic standpoint, you would prefer your currency to be a solid as opposed to a liquid or a gas – liquid is hard to contain and a gas is usually impossible to see! It can’t be something too small or too big. Furthermore, it can’t be something organic; ensuring that your currency will stick around for a while is of the utmost importance.
All things considered, metals fit the bill pretty well. But which one do you pick? Iron rusts quickly and when placed in an atmosphere with high moisture content, an iron currency would be destroyed quickly. Steel is too heavy. Copper oxidizes and can be reactive. Aluminum is too soft and difficult to extract…
Another problem with these metals is that they’re all fairly common. Having too much of your currency occurring organically in the natural world isn’t a good thing because it drives down its value…imagine if money quite literally grew on trees, it would be utterly worthless! This follows the basic logic of supply and demand.
After all of these things are taken into consideration, gold and silver begin to emerge as the top contenders. Rare enough, malleable enough, durable enough, unreactive, appealing to the eye and with melting points low enough to be easily manipulated, gold and silver became standards of exchange.
Gold & Silver as Currency
Now we know why gold and silver were chosen as mediums of exchange. Let’s examine these two elements in the contemporary world. Why are gold and silver still sought after?
Well, up until 1971 United States Dollars essentially represented promissory notes that were backed in gold and silver…for every dollar in circulation, there was federal gold and silver held in reserve somewhere. Put simply, the dollar made trade an easier and simpler endeavor, acting as a substitute for carrying gold around in your pocket.
Up until 1971, you could turn in your paper currency for the same amount in precious metals!
This came to an end during the Nixon administration. Rapid inflation and the potential threat of something happening to federal gold reserves contributed to the transition of the U.S. dollar from gold standard to a fiat currency (unbacked by physical assets).
If a physical asset does not back it, what gives the U.S. dollar value now?
That’s an amazing question…one that economists still debate today. The U.S. dollar is strictly a piece of paper (mostly cotton, actually) but it’s still marked as legal tender. This means that the government forces businesses and individuals to accept the U.S. dollar as payment. Its value is represented more largely by the American economy as a whole.
This might sound confusing, but that’s only because…well…it is.
Gold & Silver in the Contemporary Economy
Gold and silver have worth today for a multitude of reasons. From a more reasoned perspective, these metals provide value for a large variety of practical and industrial applications.
Gold is used for:
- Electronic devices
Silver is used for:
- Electronic devices
Once again, low supply and high demand result in an increase in cost. Gold and silver create their own value because they’re finite resources and sought after for an assortment of applications.
Fun fact: If you took all the gold ever found throughout history, melted it down and created a cube, it would only be 70’ x 70’!
Gold & Silver: Worth Investing In?
Interested to see if gold and silver make solid investments as commodites, futures or ETF's?