the shift away from using gold coins as currency is due to a combination of economic factors, practicality concerns, and changes in monetary systems. Modern economies rely on fiat currencies that are backed by the trust and confidence of the government issuing them.
- Abandonment of the Gold Standard: Many countries, including the United States, abandoned the gold standard in the 20th century. The gold standard was a monetary system where the value of a country’s currency was directly linked to a fixed amount of gold. However, this system was abandoned to curb inflation and provide more flexibility in monetary policy.
- Monetary circulation: For gold coins to function as money, they must circulate—exchanged for goods and services. However, if productivity grows faster than the gold supply, hoarding increases, reducing the available gold further. This scarcity encourages the search for alternative currencies. People realize the gold’s inherent value exceeds its denomination. Melting coins becomes tempting; selling the gold content often earns more than the coin’s purchasing power. Gold and silver endure, allowing long-term storage without deterioration. Interestingly, modern gold production includes recycled gold, possibly from ancient times. Governments would struggle to sustain this. Gold/silver coins couldn’t circulate without being melted for greater value. Eventually, fiat money emerged. It adjusts supply to productivity, surpassing gold as functional currency.
- Economic growth: The gold standard proved detrimental, evident in its 150-year history of 30 severe recessions (up to 10%) and 30 instances of high inflation (over 12%). This system needlessly constrained growth, causing economic pain and underutilization 75% of the time. Like other countries, leaving the gold standard was inevitable to enable expansive economic growth. The gold standard limits an economy’s size—$100 in gold yields a $100 economy. Comparing the post-gold standard growth, the appeal of a larger economy is evident.
- Expense and Practicality: Minting gold coins is expensive, and they are easily lost or stolen. Gold coins also tend to be stockpiled rather than circulated, which limits their usefulness as a medium of exchange.
- Clipping and Counterfeiting: In the past, gold coins were susceptible to clipping, where people would shave off small amounts of gold from the edges of the coins. This practice allowed individuals to accumulate enough gold to be melted down into bullion. Additionally, gold coins were easily counterfeited in the pre-industrial era.
- Capital Gains Tax: There are tax implications associated with using gold and silver coins as currency. Capital gains tax may apply when using gold and silver coins due to their potential increase in value over time.