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Gold coins - A brief history

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Most people are aware that gold is a good way to protect your investment portfolio, but few know that particular collectable gold coins could be a much better option. I am releasing a number of articles where I will provide you with the necessary information, along with examples of which coins to buy, in order to successfully invest in collectable gold coins.

Gold coins have been minted for over 2000 years. The colour and the precious metal’s relatively rare occurrence in the earth explain why humans have ascribed value to it for as long as we have known of its existence. The Greeks invented and later the Romans perfected the concept of coinage as a practical medium of exchange, an easy way to pay for goods and store wealth. Both these civilizations understood the fundamental need for a stable currency in order to prosper.

The Roman Empire started its decline when rulers started tampering with the gold content in their coinage.

Unfortunately, greed has crept into monetary policy of rulers and bankers since money was invented, in the form of debasement of their coinage. In early days rulers would debase the coinage by adding tin, copper or other base metal to the precious metal in order to mint more coin. Henry VIII of England is famous (or infamous) for the Great Debasement, started in 1544, when heavily debased testoons were struck to pay for his war campaign in France.

During the 1715-19 crisis in Sweden, King Charles XII ordered his minister von Görtz to confiscate all silver and copper coin and mint small copper tokens with the nominal value of 1 Daler Silver Coin (equivalent to a crown or silver dollar, i.e. a large silver coin). Similar attempts to inflate the monetary base or using fiat money are numerous in history and have had only one outcome – they brought havoc and long-term economic hardship.

The fundamental need for stable currency caused the gold standard to evolve, first adopted by Isaac Newton in 1717 who was Master of the Mint. The gold standard effectively pegged a currency to the gold price, making it exchangeable to gold. Hence the holder of currency (not just silver currency but also paper currency) was owed that amount in gold. This is why notes to this day bear the text “We promise to pay the bearer on demand…”

Further reading (opens pdf in new window): This paper by Richard N. Cooper at Harvard University offers a more comprehensive analysis of the gold standard.

Gold sovereign 1817 - important first date. Image courtesy of Colin Cooke Coins: Click here for link

Countries all over the world adopted the stabile Gold Standard at an increasing pace in the second half of the 19th century. Follow this link for a complete list of countries on the standard and between which years. Up to the outbreak of the 1st world war these countries experienced economic and monetary stability with close to zero inflation. With the outbreak of the war countries could no longer pin their currencies to the metal as they accumulated massive deficits. This meant the end to the classical gold standard.

Both the wars, interrupted by the hyperinflationary 1920s and subsequent Great depression in the 1930s, led to governments taking to larger deficits. Although a half-hearted attempt to reinstate the gold standard was undertaken, monetary connection with tangible value had been broken. In 1933 President Roosevelt made ownership of gold illegal with the Trading with the Enemy Act. Shortly after all gold in the US had been confiscated the peg from gold was lifted and gold price quickly soared to $35/oz., up from $20.67/oz.

This article on GoldSeek.com offers more detail to the events around the 1933 confiscation of gold in the US.

President Nixon officially abolished US dollar convertibility to gold with the introduction of the New Economy in 1970 and the rest of the world followed suit. Without a connection to something tangible there is no limitation to debt other than the moral obligation to one day pay it back. Unfortunately the sense of a moral obligation to repay debts has eroded just as quickly as people forgot about the concept of the gold standard.

Hope you enjoyed this article, the next one will be out next week. If you have any questions or comments you are welcome to leave them here or contact us.


 

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