Many years ago, before banks, gold circulated as a medium of exchange, but it was heavy and inconvenient from the beginning. Enterprising entrepreneurs opened gold depositories where people could store their gold safely. Depositors received a paper certificate as proof of their deposit.
If a depositor decided to buy a horse and wagon, he would mosey over to the depository to make a withdrawal. Very quickly, everyone got tired of going to a depository just to do a simple transaction. Soon, the paper certificates began to circulate as money instead of the gold.
Very quickly, the people running the depositories began to notice that buyers making withdrawals were followed by sellers making deposits. Then they realized they did not need to keep all of the gold deposits in the vaults to cover their customer withdrawals since withdrawals were followed by deposits. By keeping records of deposits and withdrawals, they learned the maximum percentage, or maximum fraction, of the gold in the vaults they could loan out at interest without jeopardizing their ability to cover withdrawals of their customers.
That was the birth of the modern fractional banking system used by the United States and every other country in the universe. Banks hold a fraction of their reserves to pay on the deposits of their customers. From the beginning there were banking cheats and chiselers who made loans beyond the maximum safe percentage and were unable to cover their customer withdrawals. Banking abuses brought efforts to regulate banks; legal reserve requirements were imposed.
In 1999, the Clinton administration signed off on a banking deregulation bill pushed by the banking industry. The cheats and chiselers returned and, just as before, they were unable to cover their customer account withdrawals and had to be bailed out by the government and the Federal Reserve Bank.
Gold is a commodity and, like any other commodity, it fluctuates in price. When gold is money, changes in the price of gold will ripple through the economy, causing inflation or deflation. From the beginning, it was necessary for the government to stabilize the price of gold by holding large inventories to sell in a shortage or buy in a surplus. Managing gold inventories was subject to the erratic success or failure of mining ventures and the erratic whim of hoarders and speculators.
In 1933, the United States left the gold standard, announcing it would no longer convert dollars to gold at a fixed price. Banks were allowed to designate other assets than gold as reserves, which make it easier to manage the money supply. Other countries followed and, in 1971, the gold exchange standard for international payments ended by mutual agreement of the international community.
Using gold as money creates many problems that have to be solved, but has no benefits of any kind. It does not impose discipline because money is always a human decision. Humans decide what it is and how much of it there will be. Gold as money is dead.
About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com