Demonetization of gold is a gradual process of gold losing its monetary functions: causes, stages and consequences

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

Demonetization of gold is when gold ceases or has ceased to be used as a means of payment. This is a natural process, since many of the properties of gold, which previously gave it significance, have become inconvenient for many. Gold has not ceased to be highly valued, but it has lost its former value.

Early stage of development of commodity-money relations. First use of gold as money

The exchange of products of labor existed in primitive times. Neighboring tribes exchanged surplus products, but such an exchange was not always equal. Some goods took more time, labor, and resources to produce than others. The tribes somehow tried to agree on the proportions of the exchange, but another situation appeared - the formation of surpluses of the purchased product. Everything changed when people mastered metal smelting.

Gold was the first mastered metal. It was easier to find - pieces of gold in the riveror in the cave were visible immediately. You didn’t have to have exceptional knowledge of its processing or dig deep to find it. Today it sounds crazy, but gold was used to make household items, tools and weapons.

From gold they made tips for the teeth of the plow, knives, swords, cups, jewelry. It was used everywhere, and there was always a need for it. Then people learned to extract and use other metals, but the habit of paying with gold remained. It was convenient: gold did not rust, did not lose its luster, it could be divided. In addition, deposits of copper, tin, silver or iron were not everywhere, and gold by that time was ubiquitous. Both finished products and ingots were used for payment. The main measure of value was the weight of the metal.

The appearance of coins

The first gold coins appeared in Ancient Rome. They were minted in the backyard of the temple of the goddess of trust - Coins, hence the name. On one side of the product, its weight was minted, on the other - the face of the emperor in profile. Along with money circulation, barter was widespread at the same time. Barter is the exchange of goods for goods. But this was not the demonetization of gold. There was simply not enough gold even then, and besides, money circulation was still in its infancy. For the poor, it was easier to exchange thing for thing than to first exchange it for money (a person with money still needs to be found), and then buy the goods he needs with money.

Middle Ages, appearance of bills

The most widespread gold as a means of paymentacquired in the Middle Ages. Any more or less self-respecting monarch considered it his duty to mint his own coin. However, the affairs of the autocrats did not always go well, and many of them "spoiled" their coins, reducing their weight. Damage to gold coins was not only done by kings and lords. Merchants and money changers also contributed. Coins were cut into pieces, they were erased, they were melted down and re-minted. But this was not the reason for the demonetization of gold.

In the Middle Ages, the risk of losing gold coins and ingots during their transportation was higher than getting a damaged coin. Robbers and knights were operating on the roads. It was dangerous to transport gold. Merchants and the first bankers came up with a new way to make payment without transporting coins - a bill of exchange. A bill of exchange is a payment order that gives its owner the right to receive gold coins from a certain person. Soon bills began to be used on a par with coins. In essence, the promissory note was a gold-backed security. It was the bill that became the prototype of the first paper money - banknotes.

Growth in manufacturing production

With the development of production, manufactories and the first factories began to produce more goods, mostly for mass consumption. Gold production could not keep up with the overall growth, there was a sharp need for replacement, as the resulting cash shortage hampered economic development. The growth in production and the increase in trade is one of the main reasons why gold was demonetized.

Appearance of paper money

At the same time, bills of exchange existed, and then banknotes appeared. A banknote is a security issued by a bank against gold backing. The bank was obliged to carry out the exchange on demand. Initially, the rate was set at one to one, but soon, due to excessive abuse of the printing press, the rate of paper money began to decline. There were calls to return everything back as it was, but no one was ready to return to the previous level of production and consumption.

The Industrial Revolution and the Gold Standard Era

The industrial revolution led to an increase in labor productivity and cheaper goods. There are more goods, they have become more diverse and, no less important, more accessible even to the lowest strata of society. There was an urgent need for large amounts of money, but their release should be normalized so as not to lead to their complete depreciation. Thus, a new function of gold appeared, replacing the lost one. Gold coins ceased to be a means of circulation, but became a means of security and a factor restraining the uncontrolled issue of banknotes.

The gold standard became widespread at the end of the 19th century. By that time, gold was used in international settlements as a standard of value, less often as a means of payment. Although it was transported on trains or ships, the transportation of gold was the exception rather than the rule. If it was possible to get by with a check or a bill of exchange, they used them. Gold coins and bars were transported onlyin exceptional cases.

Consequences of two world wars for gold circulation

The biggest blow to the Gold Standard came from the First and Second World Wars. The gradual process of gold losing its monetary functions became inevitable given the fact that the participating countries lost their gold and foreign exchange reserves. By the end of World War II, there were practically no gold reserves left in Europe, or any reserves of gold at all. The United States, the country with the most gold reserves at that time, took the unprecedented step of providing assistance to European countries in exchange for some privileges. In the summer of 1944, the Bretton Woods Agreement was signed, according to which the dollar became the world's currency. It was pegged to gold at a fixed rate of $31 per third ounce (approximately 31.1 grams). It was possible to exchange dollars for the precious metal on demand.

However, this state of affairs did not suit everyone. The first country to decide to bring gold back to Europe was France. Charles de Gaulle sent a plane loaded with $1.5 billion to the US to buy gold. Following France, Germany decided to return its gold, but did not have time. The US leadership urgently held a conference in Jamaica in the summer of 1976, as a result of which the Bretton Woods agreement was annulled and a new one was adopted, according to which the US dollar did not have a hard peg to gold. The rest of the currencies were also recommended to float freely.

Our days

Demonetization of gold completed or not? Nowadays, this question can be safely answered in the affirmative. And although the IMF does not prohibit international settlements in gold coins and bullion, the precious metal is practically not used in international settlements. Gold is considered as an object for long-term investment or speculation, and not as a means of payment. Gold and gold coins do not circulate as freely as they did several centuries ago. They are not accepted for settlements between individuals and legal entities. However, this does not mean that precious metals are only used to make jewelry.

Gold bullion and gold coins can be purchased at Sberbank branches (not all). Any citizen can open a metal bank account. For those who want to invest in a reliable asset and for the long term, gold is one of the most convenient instruments. Sberbank publishes gold quotes along with dollar and euro quotes.

Stock Exchange

In the stock market, gold is one of the most curious instruments. On the one hand, it is a separate commodity, on the other hand, its relationship with the currencies of different countries, and especially with the dollar, is obvious. When investors are unsure about the US dollar, they turn their money into gold and vice versa. Gold does not lose its value over time, which can be verified by looking at Sberbank's gold quotes.

Excess precious metal national banks put in special vaults. These reserves are treasures, on the one handmake it possible to maintain a high exchange rate of the precious metal, on the other hand, to use it as a "safety cushion" if it is necessary to support the national currency.

Consequences of demonetization

Demonetization of gold is a process of gradual transition of monetary circulation from the value embodied in the means of payment itself to its abstract form, when money has completely lost its material form. Today, the economy uses a new form of money - electronic. Loan money has become widespread. You can borrow money and pay it back after a while. Most money is backed not by precious metals, but by manufactured goods and services.

True, some economists still believe that the rejection of the gold backing is a mistake. The reason for such skepticism towards paper and electronic money is that there is a risk of losing control over the issue of money.

The concept of inflation appeared along with the demonetization of gold. This problem did not arise because people stopped using gold coins and bars as a medium of exchange. The fact is that not all countries have gone through all the stages of monetary development.

In some countries where the mechanisms of monetary relations have not developed historically, local rulers print banknotes uncontrollably, which leads to their rapid depreciation. If there is no production of goods and services in the country, then even if they introduce gold into circulation on their territory,this will not solve the problem of providing the population with everything necessary, and gold will flow away to where it will find a more useful use.