At the dawn of history, bartering was the mean of trading goods and services; that is exchanging goods for goods. But exchanging commodities by barter was inconvenient and costly. By the essence of time, people were convinced to put on a common thing through which it becomes more convenient and flowing to purchase or sell goods necessary for leading their diurnal life; thus is the beginning of money. The first form of money currency was coin. The first known currency was created by King Alyattes in Lydia, now part of Turkey, in 600 BC, which was coin currency. Some Instances of coin currency are- a stable high-value gold currency (the dinar) in Islamic golden age, a silver coin called a ‘rupiya’, introduced by sher shah shuri in the Indian subcontinent (1540–1545) also used by the Mughal rulers and so on. Introduction of paper currency was in china from need for credit and medium of exchange during the reign of Tang dynasty (618–907) to the Song dynasty (960–1279). Then the travel of Marco Polo to china introduced the idea of paper currency to Europeans in 1290 AD. In modern days, the most common currencies are US dollar of USA, euro of European Union, Japanese yen of Japan. About 88.3% of daily international trade is conducted by the transaction of USD out of 200%, whereas that of euro and Japanese yen is 32.3% and 16.8% respectively.
Therefore, the currencies, broadly, can be classified into two groups: one is commodity standard and another is legal tender. The best example of commodity standard is Gold standard while example of legal tender is conventional currencies like dollar, euro, Japanese yen etc. these currencies are also example of fiat currency. Fiat currency is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money gains its value from the perception of the people on it. Say, $1.00 has the value of $1.00 because of its value printed on it, and the people trusts the authority of such print.
Gold was used as backup of fiat currency, also used as the world reserve currency up through most of the 20th century; the United States used the gold standard until 1971 when President Nixon discontinued it. It is important to define gold standard. Gold standard is where a country’s currency or paper money has a value directly linked to gold. With the gold standard, a country can convert paper money into a fixed amount of gold. If central bank sets the price of gold at $500 an ounce, the value of the dollar would be 1/$500 of an ounce of gold.
However, gold is not used as currency in modern economy: government can press paper currency without any costs that could be circulated among economies as the part of trades among them. Any country can increase and decrease their money supply by buying and selling currencies in foreign exchange market or by pressing using technology. Increasing money supply makes own currency depreciate against any other foreign currencies thus making domestic goods cheaper and foreign goods dearer. Thus monetary policies,in the presence of paper currency, can have impact on export, import and international competitiveness of any economy. While paper currencies do not have its own physical value. Government also can devaluate or evaluate its currency against any other currency by announcing a new exchange rate from the strategical point of international trade, say, to attract importers from other countries or anything else. In the case of fiat currency, any country can exchange currencies for others in foreign exchange market. So in today’s non-gold standard is this really worth that you will buy dollars or euros or pounds for your currency? Since fiat currency is subjected to central bank and politicians who participate in government, they eventually manipulate the value of fiat currency that can have devastating impact on citizens.
While gold has its own value: Government cannot press it just like paper currency Rather it has to be imported from foreign country in order to increase its supply. It is also not possible to evaluate or devaluate gold; only the price of gold can be raised but it is not the case that gold’s value has increased rather value of your currency is going down. It is general tendency for a currency to appreciate when a country has a greater volume of export than import. On the other hand, when a country has net export deficit its currency depreciates against other currencies. So, a country with higher reserve of gold can have a huge amount of net export surplus so that value of its currency gets higher. Also by a rise of gold price that contributes to at large net trade value, the currency might appreciate. Thus, gold has a continuous impact on fiat currency.
The world is experiencing an extensive volatility of fiat currencies in modern economy. An indebted economy can monetarize its debt by printing money to pay interest incurred by foreign debt and can devaluate the currency to alleviate the extent of pain associated with debt. As a part of alleviating foreign indebtedness when central bank adopts a monetary policy of pressing currency it is most likely to result in an inflationary condition that is the situation of having an economy an excess supply of money than its production of real output. On the other hand, since government cannot press gold currency whenever they want, they have to import it or mine it, which is a costly method and have to go through a production process involving labor employment, this would not result into inflation. Rather gold has strong positive correlation with net export; produced gold can be exported that would contribute to importing other goods.
Because of stability in value of gold it is used to barrage against inflation. Investors, therefore, purchase gold by large amount during their inflationary periods. This is one of the reason why demand for gold increases during inflationary period due to its instinctive nature. As a matter of fact, Gold Purchasers Tend to reduce the value of the currency used to purchase it due to the fact that central bank relies on printing more money to purchase gold which in turn creates inflation. This might be one of the reasons why USA disconnected with gold by not maintaining gold standard. US government devaluated their currency along with discontinuing gold standard after the great inflation of 1970. Recently in Cyprus and Argentina volatility of fiat currency have demonstrated that not only are the actual currencies at risk for loss, but the banks themselves can be, too.
From this analysis, we can conclude that Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. For these reasons, many economists feel that we should return to gold standard due to the volatility of the fiat currencies; they suggest allow only limited amount of money to print. Many countries like China, Malaysia and Russia are already discussing the creation of a new gold-backed currency to trade in. Dr. Mahtir Muhammad, the current president of Malaysia, proposed in several years ago that all Muslim country put on a common coin currency that could have significant impact on trades among Muslim world that also could bring efficiency. Several years ago, nearby Abu Dhabi installed one of the world’s first gold ATMs, allowing customers to withdraw fiat currency in term of everything from one-gram gold nuggets to larger gold bars.
So it is worth of thinking about reforming the volatile fiat currency system and fetching back gold currency that has its own metal value rather than perceptional value that is artificially established among people.
The author is a student of the Department of Economics at the University of Dhaka.