Although gold prices hit a new high in mid-January, Americans, by and large, are still reluctant about gold. They don’t quite “get it.” This incomprehension is different than that of Americans not “getting,” for example, bitcoin (as few seem to). They may understand gold as a safe haven that has always stood the test of time, war, crises, inflation, etc. Some also understand that no gold proponent advocates harkening back to a mythical 19th century gold hey-day (one that did not exist — certainly not consistently), or recommends re-issuing gold minted currency, or reverting to any kind of bimetallism (the 19th century norm).

That said, the “barbarous relic” view tends to persist. Overall, it is thought that gold simply has no place in a modernized (read: central bank-controlled) economy. Making matters more complex is the question of what is gold and what is not. The recent proliferation of gold derivatives, “paper gold,” ETFs, certificates, bogus gold; the Chinese, the Russians, depleted reserves, actual supply make its study opaque and abstract. In light of this confusion, a basic overview of the role of gold in an economy, both in classic and modern terms, is in order: 

The Complexity of the Age of Gold Standards

In the beginning of the modern economic era of the later 19th century, a pure “gold standard” was never consistent. However, its rise to preeminence as ‘the’ pillar of sound economic theory was that of gold’s role as a hedge against inflation and against Unsound Money — paper money easily manipulated to reckless credit whims. In this regard, the European central banks of the day were excellent watchdogs.

Great Britain led the charge on this score. The country was on a full gold standard from 1816 onwards, but de facto (the nuance is important) since 1717. Ironically, this was after Sir Isaac Newton, Master of the Mint, did not depreciate gold enough when the country was on a bimetallic standard, like most of the world. According to the legend, Newton had set the official silver price of gold guinea at twenty-one shillings and inadvertently drove what were newly re-minted full-bodied silver coins out of Britain — an illustration of Gresham’s law. This left only worn silver coins to circulate as a means of payment along with overvalued gold coins. Yet, this error in judgment established the gold standard in practice in the country, later codified into law following the Napoleonic wars. This, in turn influenced other nations, especially Germany and Japan, to turn to the gold standard — a means of trying to emulate British success.