The Incas have referred to gold as tears of the Sun. We almost intuitively place a higher value on gold, equating it with power, beauty and the cultural elite. Early civilizations reserved gold as objects of luxury deemed worthy of only Gods and rulers. Hence gold was sought in their name and dedicated to their glorification. However gold soon lost its divine appeal when extraction/mining became a science and metallurgy an art.
As in all other things, though the Greeks did a lot of mining (from the Pillars of Hercules, Gibraltar right up to Asia Minor and Egypt) it was the Romans who advanced the science and furthered the quest for gold. As gold became common it gained the reputation of being a commodity, a measurable unit and hence a monetary unit. In Troy land, Greece and Rome gold coins were being increasingly used as currency around the mid 2000 B.C. Even in India the ancient Cowrie shells (3000 B.C.) were eventually given up and replaced by gold coins.
A monetary standard made the world economy possible. The concept of money, (i.e., gold and silver in standard weight and fineness coins) allowed the World's economies to expand and prosper. During the Classic period of Greek and Roman rule in the western world, gold and silver both flowed to India for spices and to China for silk. At the height of the Empire (A.D. 98-160), Roman gold and silver coins reigned from Britain to North Africa and Egypt.
Money had been invented. Its name was gold.
We have seen how trade has popularized the use of gold. We will now see how gold has influenced directed and shaped trade. We will also see the place and importance held by gold in economics.
The exact century when this marvelous system originated cannot be ascertained for in some countries such as China it came into existence (though in a very crude form) as early as the 9th century. But what we are sure of is that it gained importance only around the 16th -17th century.
The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price.
There was however a number of problems associated with the gold standard. One of the chief problems being that a country could not control its economy according to the current scenario as it was solidly bound by a commodity. It restricts the manipulation allowed in other systems and hence gives centralized banks fewer options of tailoring the economy in case of a crisis. Fluctuations in the amount of gold that is mined moreover could cause upsets in the economy.
The Second World War saw a number of nations damaged economically and financially. Though the gold standard assured stability it could not promote fast growth or recovery.
That is why the fixed exchanges system (a derivative of the gold standard) enacted in 1946, in Bretton woods; U.S.A was unanimously adopted and followed until 1971.The Bretton Woods pact also saw the creation of several relief aid and fund organizations such as the I.M.F. and the World Bank. These institutions are also known as Bretton Woods institutions.
Under this system all countries pegged their currencies directly to the dollar and the dollar in turn to gold. Thus all currencies could then be traded with the dollar which in turn could be exchanged for gold. Needless to say this gave the U.S. unquestionable financial power and muscle.
Almost all countries since then have switched to the fiat ratio, a paradox of sorts of the gold standard. This is the current system followed in most countries (including India) where trade (exports-imports) determines the prosperity and currency rate of a country.
Fiat ratio is intrinsically useless and is only a medium of exchange.
The term “fiat” money has been used to distinguish such money from representative money, which is pegged or fixed to a quantity or mass of precious metal. While representative money is often associated with a legal requirement that the bank of issue pay in fixed weights of a given precious metal or (in theory) fixed amount of any other precious good, fiat money's value is fixed only to its value in transactions controlled by government authority, such as taxation.
Fiat money now allows governments more control over the economy, though it is subject to irregularities and inflations which was never the case with the gold standard. The period from 1880 to 1914 is known as the classical gold standard. During that time the majority of countries adhered (in varying degrees) to gold. It was also a period of unprecedented economic growth with relatively free trade in goods, labor, and capital. During this period the United States for instance only witnessed an inflation rate of 0.1% per annum.
Though gold is not as prominent as it once was, countries still maintain a reserve of bullion for emergencies. Though gold prices have been falling in the past few weeks I think they will make a speedy recovery for the demand of 3,300 tons far outstrips current mining capacity of 2,400 tons and the deficit I believe will push the prices up.