Six thousand years of gold

History2 October 20269 min readDiamond Palace Pvt. Ltd.

Gold is unusual among metals in that civilisations which never met each other reached the same conclusion about it. Egypt, Mesopotamia, the Andes, West Africa, China, India — each found gold, and each decided it was the material of kings, gods and the dead. That near-universal agreement is not a coincidence of taste. It follows from the metal itself.

Gold does not corrode. A gold ornament pulled from a tomb after three thousand years comes out bright, while iron has become rust and silver has blackened. It is soft enough to be worked with simple tools, yet dense enough that a small piece is unmistakably heavy in the hand. It is rare, but not so rare that no one ever sees it. And it is the only common metal that is naturally yellow, so it cannot be confused with anything else. A material that is beautiful, permanent, workable and scarce is going to be valued by whoever finds it.

Egypt and the first gold economy

The earliest large-scale gold working we know of belongs to Egypt, which drew its supply from the deserts east of the Nile and from Nubia to the south — a region whose very name is linked to the Egyptian word for gold. Egyptian craftsmen were beating gold into leaf thinner than paper by the third millennium BCE, and the funerary mask and coffins of Tutankhamun, a comparatively minor pharaoh, together account for well over a hundred kilograms of the metal.

But Egyptian gold was treasure rather than currency. It was given as diplomatic gifts, buried with the dead, and hoarded in temples. The idea of gold as a unit anyone could transact in came later, and from a different place.

Lydia, and the invention of the coin

Around 600 BCE, in Lydia in what is now western Turkey, someone began stamping standardised lumps of electrum — a natural alloy of gold and silver washed out of local rivers — with a mark guaranteeing their weight. This was the decisive step. A stamped piece did not have to be weighed and assayed by both parties to every transaction; the stamp carried that work already done.

Within a generation the Lydian king Croesus was issuing separate gold and silver coinage of controlled purity, and the practice spread through the Greek world with remarkable speed, because it solved a problem every trader had. The Persians adopted it, the Greeks refined it, and Rome industrialised it.

Rome, Byzantium, and a coin that lasted seven centuries

Rome struck the aureus, and later Constantine introduced the solidus — a gold coin of fixed weight that the Eastern Roman Empire kept at a consistent standard for something approaching seven hundred years. In an age when rulers routinely debased their silver to pay armies, a gold coin that did not change was extraordinary. The solidus became the reference currency of the medieval Mediterranean, accepted far beyond the borders of the empire that minted it, simply because merchants had learned they could trust it.

That is the recurring pattern in monetary history. Trust is expensive to build and cheap to destroy, and gold has repeatedly been the thing people fall back on when trust in everything else fails.

The debasement problem is why fineness matters so much at a bullion counter. A stamp is only as good as the house behind it — which is why every bar should be weighed in front of you, whatever the stamp says.

Conquest, and the first global inflation

The Spanish conquest of the Americas sent an unprecedented volume of gold and silver across the Atlantic through the sixteenth and seventeenth centuries. The result was not the permanent enrichment of Spain that the crown expected, but a long rise in prices across Europe — an early and painful demonstration that money is not wealth, and that increasing the quantity of it does not increase the quantity of goods.

The gold standard

By the nineteenth century the major trading economies had converged on gold as the formal anchor of their currencies. Britain moved to a gold standard in the early 1800s, and from roughly the 1870s to 1914 most of the industrial world operated on a classical gold standard in which a national currency was a claim on a defined weight of the metal. Exchange rates were, in effect, fixed by arithmetic.

That system did not survive the First World War, was patched back together unconvincingly between the wars, and was finally replaced in 1944 at Bretton Woods, where the US dollar was fixed to gold at thirty-five dollars an ounce and other currencies were fixed to the dollar. Gold still sat underneath everything, one step further removed.

1971, and what came after

On 15 August 1971 the United States suspended the convertibility of dollars into gold, and the last formal link between the world's money and the metal was cut. Every currency in use today floats free of it.

What is interesting is what did not happen next. Gold did not become irrelevant. Freed from a fixed price, it became a traded asset in its own right — and central banks, having spent the 1990s selling it, have been net buyers again for well over a decade. Institutions with the power to print money continue to hold a metal that pays no interest. They do so for the same reason households in Kathmandu do: it is the asset that is nobody else's liability.

Why the demand is not only monetary

Unlike silver, which is consumed in enormous quantities by industry, most of the gold ever mined still exists — in vaults, in jewellery boxes, around necks and wrists. Estimates put the total above two hundred thousand tonnes, which, remarkably, would form a cube only around twenty-two metres on each side. All the gold humanity has ever recovered would fit comfortably inside a modest building.

That scarcity is the whole argument. New supply from mining adds a small percentage to the existing stock each year, and no process has ever been found to make more of it cheaply. A government can create currency at will. Nobody can create gold.

Six thousand years after the first Egyptian goldsmith beat a nugget into leaf, the metal is still doing the job it was first given: holding value across time, in a form you can carry in your hand and verify with a scale.

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