Highs and lows: the price of gold throughout history

Since ancient times, gold has always played a major role as a valuable asset and means of payment. Over a long period of time, however, uniform standards to measure the value of gold did not exist – at least not until around 560 BC when under the reign of the Lydian King Croesus gold coins were introduced as a currency, with embossed stamp and uniform size, therefore providing a certain quality standard. Although even then the value of gold was distinguished by a high stability, the price tended to change constantly and rapidly: a bad harvest, armed conflict or weaker gold production rates would cause the gold price to rise quickly and sharply. Even then, gold proved to be the primary hard currency in times of crisis.

In the ever-expanding Roman Empire the first gold coin – the 'Aureus' – was introduced around 225 BC as a standardized means of payment. The Aureus weighed around 7.8 grams, which would give it a value of more than EUR 260 by today's standards. At that time, gold was much too rare – and gold coins therefore far too precious – to prevail as a general means of payment. Therefore, coins made of the much easier to obtain commodity silver took over this essential role. However, the constant production flow of new silver coins to finance government spending flooded the market and led to sustained inflation. At the same time, silver coins also lost value substantially and continually because they contained less and less silver. Finally, during the 3rd century, this caused a complete collapse of the silver currency, whereupon Emperor Constantine the Great replaced it with the 'Solidus', a gold coin of extremely stable value, since attention was paid not only to a uniform size, but – for the first time – to a high gold content.

Gold as leading currency for the first time in late antiquity

The higher standardization requirements regarding size and purity led to a hitherto unmatched stability of the new gold currency, and as a consequence the solidus quickly prevailed as the leading currency in Europe, North Africa and the Middle East, defending this position successfully until the 12th century. The solidus weighed 4.55 grams, equalling a present value of approximately EUR 161. With the decline of the Eastern Roman Empire, Byzantium, the Solidus lost importance and finally disappeared altogether. The gold circulation in government institutions decreased significantly, and gold became less and less a means of payment but much more of an investment. Only with the first crusade from 1095 and the increase of the free trade new gold currencies were re-introduced, and would be widely used as international currency reserves for the very first time. Among these new currencies were the Florentine “Florin”, the “Ducat” of Venice and the “Genovino” from Genoa.

Over a long period of time, these gold-based currencies proved extremely stable in price, until in the early 14th century a continuous increase in value of the commodity gold occurred, lasting nearly 200 years. The reasons for this were manifold: on the one hand, gold production decreased continuously, due to the general decline of mining and the lack of progress regarding recovery methods. On the other hand, Europe's population had been decimated by wars, plagues and famines so significantly that the output of new gold coins could no longer keep up with demand due to the lack of manpower. This state of permanent deflation changed only with the discovery of America in 1492, and the subsequent exploitation by the Spanish 'Conquistadores'.

Inflation due to explosive growth of gold supply

With the discovery of America and the plundering of the gold treasures of the Incas and other Central American nations, previously unimaginable amounts of gold flooded Europe within a short space of time. As a consequence, the very same thing happened that happens when governments fire up the money printing presses: inflation – this time on a Europe-wide level, since the gold currencies were transnational. The steady inflation in the 16th century caused a price increase of 400 percent in Spain, the – besides Portugal –politically and economically dominating world power, translating to roughly 1.6 percent pa, which might be nothing out of the ordinary today, but then seemed an inflation of unknown proportions, which was experienced as a 'price revolution'.

Gold coins then suffered further devaluation by a continuing deterioration of the coin quality due to the reduction of gold content, the result of massive fraudulent manipulations, such as admixture of copper during refounding of gold coins. This could be seen as an early evidence of the dual function of gold as both a currency and a valuable commodity. The inflation due to the deterioration of gold coins culminated during the Seven Years' War in the 18th century.

From bimetallism to classical gold standard

Once the glut of gold, triggered by the exploitation of the Central American peoples, had dried up and the price of gold was subject to steady and strong fluctuations, silver – in addition to gold – regained importance as a key currency in many countries. During the age of the so-called bimetallism the value ratio of gold and silver was fixed and given a legal foundation. This way the volume of internationally accepted means of payment could be increased without diluting the value of gold.

As the first country worldwide the British Empire, which had taken over as the leading world and colonial power, introduced the gold standard with the so-called 'Coin Act': on 22 June 1816, Great Britain declared the gold standard officially as their national currency. Indirectly, this meant the introduction of the gold standard for other countries, too, since an increasing number of countries had pegged their currencies to the pound sterling, due to the leading role of the Empire in international economic relations and fiscal policy. The official introduction of the gold standard in most countries, however, did not happen until much later: in 1871 in Germany, in 1874 in France and Switzerland, and in 1897 in Russia and Japan. The United States of America kept to bimetallism for a long time, but also introduced the gold standard in 1879, after the precious metal was evaluated higher and higher in comparison to silver during the California Gold Rush.
Gold, incidentally, was also the trigger for the very first Black Friday on the New York Stock Exchange on 24 September 1869: while trying to get control of the gold market, and thus to control the price of gold, the two speculators James Fisk and Jay Gould caused the market to collapse, since the price of gold exploded.
However, one of the most extreme increases of the gold price happened in Germany during the Great Depression in the early 1920s: while the price of gold marks tripled in comparison to paper marks from the end of 1920 to the end of 1921, it increased almost forty times until December 1922, equalling 1807.83 paper marks, and eventually peaked at almost incomprehensible 1000,494,971,000.00 paper marks by the end of the following year.

After the end of World War I, the return to the temporarily suspended gold standard was only partly successful: the Great Depression and the banking crisis in the US in the early 1930s caused numerous countries to abandon the gold standard. Not before 1944, due to the introduction of the Bretton Woods system, an international monetary system based on the gold standard was re-established – this time with the US dollar as a reserve currency. As opposed to Great Britain’s 'Coin Act' this time exchange rates were not fixed, but possessed a certain bandwidth. In 1973, the Bretton Woods system was abolished, and exchange rates became flexible again. This affected the gold price very quickly: while it had developed rather slowly – but steadily upward – over several decades in the 20th century, the gold price rose significantly in the post-Bretton Woods era and reached a provisional record level of more than USD 600 per fine troy ounce in the early 1980s, which was, however, surpassed during the global financial crisis. By 2010, the record established in 1980 had been doubled and has remained on a – historically – unique level until today.

Arnulf Hinkel
Financial journalist