Question

Why is Gold important in economics?

Answer 1

Gold has had a major impact on the U.S. economy, from the gold standard to the gold price. Compared to other investments, its value depends on its relative safety. Based on how secure other investments are, the effect of gold on the economy waxes and wanes. Gold still looks like a good hedge when other investments seem too risky. In reality, from the gold price, you can tell how safe the economy is. The precious metal had an even greater significance when the U.S. was on the gold standard.

Gold was used as a standard for the first time in 643 B.C. When the coins were made of metal. Wealth was strictly defined by how much gold you had. Gold as money evolved from coins to paper that could be redeemed through coins to a concept that was only loosely linked to its gold value.The gold standard contributed to creating the Great Depression. It was modified to make the U.S. dollar the de facto currency of the world after World War II. But it was dismantled by President Nixon in the 1970s.

The gold standard is when countries bind their currency's value to gold. They are willing to redeem the currency because of its gold value. The gold standard allowed for commercial use of lightweight paper currency instead of heavy gold bullion. Besides making lighter purses and pockets, the gold standard enabled global trade. Some wanted a return to the gold standard during the 2008 financial crisis. Money seemed to have lost its connection to something real. But the very forces that pried America away from the gold standard also meant major inflation would be caused by return. Throwing the global economy into another depression would be enough.