Tag Archives: ancient greeks

Money: Where it Comes From

Most people like money. They either collect it, or simply view it as a means to buy their next meal. The fact remains: money is useful. But why do we used money and where did it come from?

It is commonly thought that money arose as a result of the need to barter. This isn’t necessarily the case. There isn’t any society that we know of run completely on barter, even in ancient times. However people did barter a little, and the rest they either gifted or gave away as a form of debt.

At some point the use of debt was coupled with the use of commodity currency. Depending on the people group or the time period in which it was traded, money could be shells, wheat, precious metals, and eventually physical coins. It was after this first occurrence of coins around 600 B.C. by the Lydians that coins started to become more commonly used.

As time progressed, and more and more groups of people used coins, a representative form of money emerged. This was basically paper or some other useless thing, that was available to trade for something of value, like gold. These “certificates” became more and more widespread.

Other societies have since gone back and forth between representative money and actual commodity currencies. The U.S. started out with gold and silver coins as its money. At some point it started a gold certificate or what’s known as “the gold standard”. These could be traded in for a physical amount of gold. Then, with the actions of President Nixon, the gold standard was abolished and we have since been using what’s called fiat currency.

Fiat Currency is just paper, or electronic money, that can’t be turned in for any amount of gold or silver. The only way it has value is because the government says it does. The very nature of fiat currency, as with most currencies, is one of inflation. Since we have gone off the gold standard, prices have “gradually” gone up. What used to cost $1 now costs $10.

The beauty of our current system is that instead of bartering or becoming indebted every time we want something, we are able to trade currency for things of value. In giving someone a dollar, we are giving them something that is widely able to be “traded” for something else of value.

While our system of money in the U.S. certainly isn’t perfect, it has done a great job in facilitating the transfer of assets, resources and services from one side of the economy to the other.

Investing in Gold: Should You do It?

There are usually two camps to the gold issue. One group says that gold has always been a medium of exchange and that, as a physical resource, the demand for gold will never go away. The second group argues that gold isn’t really worth much except what people are going to pay for it. It just sits there, collecting dust, not producing income or ROI.

So which is it? Is gold a legitimate investment or should we consider it a gamble? Well first let’s look at a brief (very brief) history of gold and how it has been used.

For thousands of years gold has been seen as a valuable resource. The ancient greeks at around 700 B.C. valued it enough to issue the first gold coins. This was under the reign of King Croesus of Mermnadae, who was a ruler of Lydia. They formed coins using a mixture of gold and silver that is called electrum.

As time progressed, more and more civilizations recognized the value of gold as a medium of exchange. For example the use of gold spread to Asia Minor as well as Egypt. The next big champion of gold were the Romans. They developed more technology that helped mine it in their vast empire.

As China and Indian economies developed, they began trading their valuables like silk and spices to the western countries for gold and silver. Gold continued to be used by civilizations for trade. It was always seen as a “precious metal.”

Fast forward a bit and we come to the early U.S.. The largest advancement in the case for gold occurred in 1792 when the U.S. adapted gold and silver as our currency standard. For decades after the U.S. used these two forms as money until paper currency was adapted in the United States. However even when we adapted paper, the backing behind it continued to be gold.

Eventually in the late 20th century, the gold standard was ended and fiat money took over as the form of currency for our country. Ever since gold’s price has moved up and down with demand and supply.

So, has it been a good investment?

The answer depends on what time frame you look at. For example after the crash of 08 and 09 gold skyrocketed in price. However recently the price has been dwindling. Overall, since we went off the gold standard, gold has gone up around 3% per year. How does that compare to stocks? Pretty poorly. Stocks have produced around a 6% return above inflation during that period.

So, does gold have any place in a portfolio? The answer is maybe. Looking at how modern successful investors view this resource, we can see that gold is best used as a small percentage of any portfolio. It can balance out times of panic when the stock markets plummet. Ray Dalio, a successful hedge fund manager and billionaire, has invested in gold only as a small portion of his overall investments.

Finally, the choice is really up to you. Talk to your investment advisor and do some research on your own. You may find that a 10% allocation of gold can significantly reduce the risk for your retirement account. Or maybe you decide not to because you realize you can produce better returns without it. Either way, don’t consider gold a true investment for any meaningful percentage of your investments.