When Roman emperor Flavius Valerius Constantinus, better known as Constantine the Great, introduced a gold coin named Solidus, he accomplished something that no one else had ever managed before. Was he the first to introduce a gold coin standardised in size and purity? No, that honour belongs to the Lydian king Croesus, who had succeeded in doing so much earlier, around 560 BC. Was the Solidus perhaps considered an early form of reserve currency far beyond the borders of the Roman Empire? No again, someone else was quicker: the gold coin Aureus, which had already been in circulation since 82 BC, was declared the standard gold currency in 27 AD by the first Roman emperor, Augustus. Nevertheless, Constantine the Great achieved something very unique in 309 AD, as the Solidus he introduced was to remain in circulation until 1453 AD. It served as an official means of payment for more than 1.000 years.

The gold coin Solidus – the “euro of the Middle Ages”

It was in the city of Trier, Germany, a placid university town these days, where the Solidus first saw the light of day. With a diameter of about 20 millimetres and a weight of only 4.5 grams, the gold coin fit in every pocket, but as a so-called par-value coin it was also very valuable. The fine gold content determined the purchasing power of the solidus, of which 4 to 5 coins were sufficient to cover the annual salary of a Roman soldier in the 5th and 6th centuries AD. The Solidus was conceived as the successor to the Aureus and to bypass its disadvantages, as later mintings of the Aureus, from the 3rd century onwards, contained less and less fine gold, thus decreasing its par-value. After the two types of gold coins had circulated side by side for a while, the Solidus, being the “more reliable Aureus”, became the universal gold coin of the Roman Empire from 324. A few years later, it was firmly established as the key currency across Europe and into the neighbouring Mediterranean states. This was not to change before the early 12th century. From the 11th century onwards, the value and thus the importance of the Solidus suffered from the same “disease” as its predecessor: newly minted coins contained less and less gold. The Solidus lost its supremacy and, after various attempts to reform the currency with new names such as Histamenon, Tetarteron and finally Hyperpyron, it was abolished when the Ottomans conquered Constantinople. However, the importance of gold as an anchor of stability in transnational monetary systems did not end there.

From the Gold Standard to the Bretton Woods system

Since many countries had already used gold at the national level as protection against devaluation of their currencies, the classical Gold Standard became the predominant monetary system from 1870, in which all participating countries, under the leadership of the British Empire, which dominated the world economy at the time, backed their national currencies with gold at a fixed exchange rate. As a consequence, the respective currencies’ exchange rates amongst each other were also fixed. In addition, the backing of each currency with gold required a nationally highly restrictive monetary policy, which only worked as long as no major expansion of the money supply was necessary. This, however, is exactly what happened with the outbreak of WWI.

Various post-war attempts by a number of states to re-establish the gold standard did not have the desired outcome and were considered a failure by the time the Great Depression started with the New York stock market crash in October 1929. The US had developed the so-called Bretton Woods system by 1944, a world monetary architecture also based on the stability of gold, this time with the now dominant US dollar as the reserve currency to replace the pound sterling. The individual currencies’ exchange rates of the initially 44 participating states were fixed to the US dollar, which in turn was tied to the troy ounce of gold at a rate of US$35. Although much more flexible than the Gold Standard, the Bretton Woods system also suffered from the impossibility of adequately backing large money supply expansions with gold. The system officially ended in 1976.

Still, most countries retain gold holdings as part of their foreign currency reserves to secure their solvency. For some nations, such as the US at 78 per cent, Germany at 75 per cent, Italy at 69.5 per cent and France at 65.1 per cent, they even account for the majority of the respective countries’ total reserves.

Arnulf Hinkel
Financial journalist

^{Gold reserves data as of June 2021, source: World Gold Council}