Money, Currency, and Foreign Trade
One of the qualities that money requires is that it be scarce. If it were not, it would have no value as money. For instance, if ordinary stones were money, then anyone could just pick some up off the ground and pay a merchant for his goods. But why would a merchant accept stones when he could just stoop down to pick up stones, too. He wouldn't need to sell merchandise, or do anything at all, if he could just pick up some stones and use it for money. Everyone else would think similarly, hence, there would be no economy, and nothing to buy with the stones.
Although many different items were used for money in the past, people eventually discovered that gold was the ideal material for money. It could not be manufactured or printed, it was not easily mined, and it was difficult to find new sources for gold. That it was also the most ductile and malleable of metals made it easy to fashion into coins. But gold was heavy, and how much a person could carry is severely limited, since a 10 dollar gold piece would be 10 times heavier than a 1 dollar gold piece.
So governments decided that printed currency, usually called bills or notes, was the solution. A 10 dollar bill, for instance, weighs just as much as 1 dollar bill or a 100 dollar bill. This was a good solution, except for a few little problems. What would prevent anybody from just printing money? Governments solved that problem by using secret methods of printing and passing harsh laws to punish anyone who would try. But what would prevent the government from just printing more money to pay itself and others? Governments have done that—Germany, after World War I, for instance. Consequently, their currency become worthless. It took a wheelbarrow of cash to buy a loaf of bread. Germans were literally burning money to keep warm in the winter. Oftentimes, people in such economies turn to hard currency, which is a trusted currency of a stable country, because nobody wants to buy or sell using currency that is continually devaluing. So obviously, there has to be some way to prevent governments from just printing money, and the way that was done was to make it equal, by law, to something else that couldn't be easily made, printed, or found—gold.
The advantages of using money backed by gold were numerous:
* Since every country had gold, a natural material, and most people were familiar with it, it provided a common measure of value.
* It helped keep inflation in check by keeping the money supply based on the gold standard limited, thus stabilizing economies. Inflation is the result of increasing supplies of money for a given economic state. More money causes the price of everything to go up because it increases the demand for goods and services before the economy has time enough to expand its available goods and services—so prices go up. By tying the amount of currency to the amount of gold that a country possesses, it limits the amount of currency that can be printed.
* Low inflation allows long-term planning. There are many large projects that must be paid for over a period of time. It would be almost impossible to project future costs without knowing what future prices were going to be.
