Commodity-based money was always desirable, independent of its usefulness as a medium of exchange. Since the money we are talking about was always a commodity of some sort, an exchange for other goods or services was just that—an exchange. If the money of the day was butter, then whoever “sells” their goods for butter, is also “buying” butter with their goods. They are exchanging one commodity of value for another.
Because increased production leads to increased wealth, and commodity-based money requires production to obtain, an increase in the supply of money directly translates into an increase in wealth. Production can refer to many different forms of work, but to accumulate wealth, one must first produce more than one consumes. Mr. Neanderthal never got wealthy, because whatever he was able to forage (produce) went right into his stomach (consume). At the end of his day, there was no surplus. With the adoption of farming techniques came the ability to increase production to the point where accumulation could occur, and with it, the possibility of wealth. With wealth, came the need for a convenient way to exchange each other’s wealth. Welcome the birth of money.
To properly serve as money, a commodity needs to meet specific requirements. If any of these conditions are missing, it is unlikely that the commodity will endure as money for very long. Some essential requirements are that it be desirable, fungible, evenly divisible, portable and durable. Let’s quickly look at a few examples of things that were formerly used as money to see how this worked.
First, let’s look at diamonds. They are portable, desirable, durable, but not evenly divisible. While we’d happily exchange a $10 bill with someone who has ten $1 bills, no one in possession of a 10-carat diamond would willingly exchange it for ten one-carat diamonds. An intact 10-carat diamond is exponentially more valuable than if it were broken into ten equal pieces.
Cattle—a good steak is certainly desirable, but because it spoils quickly, it doesn’t pass the durability test. Plus if you’ve ever eaten a Kobe beef steak, then you know that the quality between one cow and another can be substantially different. Therefore, a cow as a form of money does not pass the fungible test. Another way to look at it is this: If I borrow one cow from you, it might be your best cow in the prime of its life. But if the cow I return to you is ill or old, I’m not paying you back exactly what I borrowed. Sure I paid back one cow, but not an equivalent-value cow.
Finally, consider oil. Oil is desirable, and even if you don’t have a car, it’s likely your neighbor does. It’s fungible, so one barrel is as valuable as the next. It’s evenly divisible, so if you have a 10-gallon barrel, you could reasonably exchange it for ten one-gallon containers. However, oil isn’t exactly portable, and therein lies the problem. We can’t imagine anyone willingly carrying a barrel of oil to the grocery store for some milk, bread, cheese, and chocolate.
We could—but won’t—dissect a long list of items that were once used as money, but have fallen short on one or more of the requirements. Instead, let’s look at the one commodity that has survived as a form of money for 6000 years. It passes all the tests, which makes it unique. It is fungible, durable, desirable, divisible, malleable, nontoxic, scarce enough but not too scarce, impervious to rot, unaffected by sun, water, or alkalis. It can be melted, frozen, and just one gram of it can be hammered into a full square meter of sheeting. Then the same sheet can be remelted and turned into a piece of jewelry or a circuit board on a cell phone. We’re talking about gold.
To illustrate how durable gold is, let’s follow a specific ounce of it on its journey through human history. While our timeline is a woven tale used to illustrate our point, each example is not.
- 3000 BCE Mined and formed into jewelry in Egypt
- 2900 BCE Sumer Civilization converted it to a golden calf head
- 2500 BCE Converted into a gold chain in the city of UR
- 2000 BCE Brought back to Egypt, pulled into thin wire and embroidered into a garment worn by a member of the Pharoah’s court
- 900 BCE Melted and formed into a tooth by a dentist
- 600 BCE Converted into a coin in Greece
- 100 BCE Melted and converted to a new coin in Rome
- 400 AD Transported by the Barbarians to Germany and encrusted with gemstones.
- 500-1200 Buried in a courtyard of a wealthy merchant’s property where it remained throughout the dark ages
- 1200 Discovered and converted to bullion, held by the Knights Templar
- 1307 Confiscated by the French when the Knights Templar were rounded up and executed
- 1599 Melted and poured down a Spanish governor’s throat during his execution.
- 1650 Transported to the Americas as part of a trade
- 1780 Brought to England by a returning soldier during the Revolutionary War as the spoils of war.
- 1915 Taken to Germany during WW1.
- 1942 Converted into wire, sewn into clothing worn by a family fleeing Hitler’s regime
- Today Melted and repurposed as a wedding ring for a lucky new bride.
It’s rather remarkable to think that the very same piece of gold that is on a bride’s finger today could have taken such a wild route through time to get there. We are not attempting to make a case for a return to a gold standard with this article, we just want to make it clear that in 1971, a major shift took place with our modern monetary system when the dollar’s link to gold officially died. Gold’s history as a “money” is a lot longer and more profound than most of us realize, as illustrated in this article. As a result of that 1971 move, there have been significant consequences, some of which dramatically change how we go about preserving our wealth today (and tomorrow). It’s one of the reasons we are forced to speculate with our savings. Burying our savings, and hoping we remember where it is, no longer works. Now we need to make it grow in order to simply maintain its purchasing power. But more on that next time.