Here is the original Podcast:
We’ve just explored payment systems across the Atlantic, examining how the US and Europe built their infrastructures differently yet face similar fundamental challenges. We’ve seen how terminology differs, how regulatory philosophies diverge, and how cultural assumptions shape payment behaviors. But beneath all these modern systems lies something more fundamental, something we all think we understand but perhaps don’t appreciate as deeply as we should: gold.
Did you know that all the gold ever mined would fit into a cube just 21 meters wide? So perhaps now you’re thinking Fort Knox or James Bond’s Goldfinger. Try really hard not to think of Spandau Ballet. Oh, too late. Here we go.
When I say gold, you might think about wedding rings or jewellery. But from a payments perspective, gold has played a pivotal role for millennia. For centuries, gold seemed like the perfect foundation for a payment system. Scarce, beautiful, incorruptible, universally valued. It glittered magnificently.
But as we’ll discover, all that glitters is not gold. Sometimes the most perfect-looking solution contains the seeds of its own destruction. Sometimes rigidity masquerades as stability. And sometimes what appears to be an ideal answer turns out to be a beautiful trap.
This is the story of how gold went from being the bedrock of global payments to a relic we keep in vaults, and what that teaches us about evaluating payment innovations that promise too much.
Act 1: The Golden Age
Gold has been a symbol of wealth and power for millennia. Ancient Egyptians, Greeks, and Romans all used gold not only for ornamentation but also as currency. The use of gold as money dates to 600 BC, when the Lydians in present-day Turkey minted the first gold coins. These coins became the standard medium of exchange, making trades happen far more efficiently than barter ever could.
The Romans took this further, minting gold coins called aureus (from which we get AU, gold’s chemical symbol, derived from the Latin aurum meaning “shining dawn”). These coins facilitated trade across Rome’s vast empire. They were trusted and valued because of the intrinsic worth of the gold itself. These coins had value respected across a huge network, not just in countries Rome ruled, but beyond. They were used as currency by other nations. Kind of like the dollar today, as we discussed with Eric Grover.
Why Gold Worked So Well
Gold possessed seemingly magical properties for a payment medium:
Chemical perfection: Gold is a noble metal resistant to corrosion and oxidation. It stays shiny and doesn’t tarnish. It’s very malleable, ideal for crafting coins. It’s one of the densest elements, making it heavy for its size. You can feel its value.
Universal desirability: Everyone wanted gold. Across cultures, across continents, gold commanded respect and desire. You didn’t need to convince someone that your gold coin had value. They already knew.
Scarcity: Gold was rare enough to be valuable but not so rare as to be useless as currency. Finding gold required effort, which meant you couldn’t just make more whenever convenient.
Durability: A gold coin from 600 BC, if you found one today, would still be recognizable as gold. Try that with paper currency or base-metal coins.
For these reasons, gold seemed like nature’s perfect answer to the question: “What should back our money?”
But Even Then, Problems Lurked
Weight: Gold is heavy. Transport significant amounts and you need carts, guards, and considerable effort.
Fraud potential: Coins made of precious metals become targets for fraudsters. They can be clipped, diluted, or mixed with cheaper metals. Roman emperors repeatedly debased their coinage, leading to inflation and economic disruption.
Fixed supply: You couldn’t create gold. You could only mine it, slowly and laboriously. This meant the money supply couldn’t expand to match economic growth. This was a feature that would later prove fatal.
Still, for most of history, these seemed like acceptable trade-offs. The problems were manageable. Gold glittered, and everyone assumed it was indeed gold all the way through.
Act 1.5: From Metal to Paper
We think of gold coins as relics of the past, but before we dismiss them entirely, remember: it wasn’t that long ago that I bought one of those little bars of gold to wear as a necklace. I must have been crazy at the time, but I did. And they’re still around. Gold hasn’t entirely left our consciousness, or our jewelry boxes.
But here’s the thing about gold coins: they’re heavy, cumbersome, and risky to carry in large quantities. Imagine a wealthy merchant in 17th century London needing to make a large payment. Transporting chests of gold coins through the streets invited robbery. There had to be a better way.
Enter the Goldsmiths
London’s goldsmiths had been, since at least 1386, doing more than just crafting jewelry. They had secure vaults. They were trustworthy. They were proto-bankers. By the 16th century, wealthy merchants were depositing their gold and silver coins with goldsmiths for safekeeping.
The goldsmiths would issue receipts for these deposits. Initially, these receipts were made out to specific individuals: “We promise to pay John Smith, or bearer on demand, the sum of...” That phrase “or bearer” turned out to be revolutionary. It meant the receipt could be transferred to someone else.
By the mid-17th century, people realized something remarkable: why bother redeeming the receipts for gold at all? If everyone trusted the goldsmith, you could simply exchange the paper receipts. They were lighter, more convenient, and safer than the gold itself. The goldsmith’s receipt had become, effectively, paper money.
The earliest known goldsmith receipt dates to 1633, issued by Lawrence Hoare. (The Hoare banking family still exists today as C. Hoare & Co., one of Britain’s oldest private banks.) These receipts were the direct ancestors of modern banknotes. You can still see their legacy on every British banknote today: “I promise to pay the bearer on demand the sum of...”
The Bank of England Changes Everything
When the Bank of England was founded in 1694 to raise money for King William III’s war against France, it immediately began issuing notes in return for deposits. Like the goldsmiths’ notes, these promised to pay the bearer in gold or coin on demand.
Initially, these notes were handwritten for the exact amount deposited. Only gradually did the Bank move to pre-printed notes of fixed denominations. By 1745, these standardized notes ranged from £20 to £1,000.
But here’s the crucial point: these were still promises to pay gold. The paper had no intrinsic value. It was merely a convenient way to carry a claim on gold that sat in the Bank’s vaults. The system only worked because people trusted that the Bank would honor that promise.
Why Paper Needed Gold
You might wonder: if paper money was so convenient, why link it to gold at all?
The answer is trust. In an era before strong central governments and stable institutions, how could you trust a mere piece of paper? Gold had intrinsic value, proven over millennia. Paper had only the value someone assigned to it. By making paper convertible into gold, you gave people confidence that the paper actually represented something real.
This was the fundamental bargain of early paper money: convenience without abandoning the security of gold. It seemed like the perfect compromise.
And for a while, it was. But this compromise contained an inherent tension. Paper was useful precisely because it was easier to create than gold. Gold was valuable precisely because it was difficult to create and fixed in supply. Linking the two together meant accepting the constraints of gold while using the flexibility of paper. Eventually, that tension would become unsustainable.
By the 19th century, this system had become so widespread that countries began to formalize it. That formalization became known as the gold standard.
Act 2: The Gold Standard Era
The introduction of the gold standard in the 19th century marked a significant development in monetary systems. Under the gold standard, a country’s currency was directly linked to a specific amount of gold. A pound note wasn’t just paper, it was a claim check for actual gold sitting in a vault somewhere.
But how did it actually work? That’s where things get interesting.
The Mechanics: How It Actually Worked
Each country on the gold standard fixed the price of gold in their local currency. In the United Kingdom, one troy ounce of gold was fixed at £4.25. In the United States, it was $20.67 per ounce. These weren’t market prices, they were legal definitions.
This automatically created fixed exchange rates between currencies. If £1 equaled 1/4.25 ounces of gold, and $1 equaled 1/20.67 ounces, then you could calculate the pound-dollar exchange rate mathematically: approximately $4.87 per pound. No negotiation, no daily fluctuation, just arithmetic.
Could You Actually Exchange Paper for Gold?
Yes, you really could walk into a bank with paper money and demand gold. During the classical gold standard period (roughly 1880 to 1914), holders of Bank of England notes could present them at the Bank and demand immediate payment in gold bullion at the fixed conversion rate.
For ordinary citizens, gold coins circulated alongside paper notes. You might receive wages partly in gold sovereigns (£1 coins containing 7.32238 grams of fine gold) and partly in Bank of England notes. The two were, by law, equivalent and interchangeable.
The Bank of England carefully monitored its “liquidity ratio”, the proportion of gold reserves to outstanding notes. When this ratio fell too low, the Bank would raise interest rates. Higher rates attracted foreign gold into London, restoring the reserve ratio. The Bank adjusted its interest rate almost 200 times between 1880 and 1913, constantly fine-tuning to maintain the gold standard.
The Promise: Stability and Predictability
The gold standard provided what appeared to be a stable and predictable economic environment, fostering international trade and investment. Think about it from a merchant’s perspective: if you’re selling goods to someone in another country, you need to trust their currency. Under the gold standard, you didn’t need to trust the foreign government’s promises, you trusted the gold itself.
The predictability was extraordinary. Prices could remain stable for decades. The period from 1880 to 1914 saw average annual inflation of just 0.1%, essentially zero. The gold standard became the bedrock of international finance for over a century.
The Fatal Flaw: Rigidity
But here’s where that beautiful glitter started revealing itself as something other than solid gold. The very features that made the gold standard attractive, its rigidity, its fixed nature, its inability to be manipulated, also made it potentially catastrophic when economies faced crises.
Countries adhering to the gold standard were constrained in their ability to print money. You couldn’t just create more currency; you needed more gold to back it. When your economy contracted and you needed to stimulate growth, the gold standard said: “Sorry, no. You can’t expand the money supply unless you find more gold.”
The supply of gold depended on mining. Remember that figure from earlier? All the gold ever mined would fit into a cube just 21 meters wide. That’s roughly 244,000 metric tonnes. That fixed supply was supposed to back the world’s entire economic activity. As economies grew, as trade expanded, the supply of gold couldn’t keep pace.
In good times, this restraint seemed wise, a check against government profligacy. In bad times, it became a straitjacket preventing necessary action. When your workers are unemployed, your factories are idle, and your economy is collapsing, being told you can’t expand the money supply because there isn’t enough gold feels less like prudent discipline and more like insanity.
The stability the gold standard provided came at an enormous price: when you needed flexibility most, you had none. And this limitation would prove devastating when the 20th century brought economic shocks unlike anything the Victorian designers of the system had imagined.
Act 3: The Great Abandonment
The gold standard’s rigidity, tolerable in peacetime prosperity, became intolerable under the pressures of war and depression.
World War I: The First Break
During World War I, many countries, including the United Kingdom, suspended the gold standard to print more money to finance the war effort. When you’re fighting for national survival, the theoretical elegance of gold-backed currency matters less than paying for soldiers and weapons. This was supposed to be temporary. After the war, Britain returned to the gold standard in 1925, trying to restore the old order. But the world had changed.
The Great Depression: The Final Straw
The Great Depression of the 1930s put immense pressure on economies worldwide. Fixed exchange rates and gold-backed currencies restricted the ability of countries to respond to economic crisis. Governments needed flexibility, they needed to expand money supply, to devalue currencies to stimulate exports, to do something to address massive unemployment and collapsing demand.
The gold standard said no to all of it.
The UK: First to Jump Ship
The United Kingdom was the first major country to permanently abandon the gold standard on September 19, 1931. This was a political decision driven by severe economic challenges: declining exports, deflation, and high unemployment. Britain’s economy was strangling under the gold standard’s constraints.
Abandoning gold allowed the UK government to devalue the pound, making British goods cheaper for foreign buyers and stimulating exports. It provided flexibility that the rigid gold standard had denied.
The decision was controversial. Some saw it as a betrayal of sound money principles. But others recognized it as necessary pragmatism, the gold standard was killing the patient.
The Domino Effect
If Britain, the very centre of the 19th-century gold standard system, couldn’t make it work, what hope did others have? By the end of the 1930s, most major economies had abandoned the gold standard. The system that had seemed eternal crumbled in less than a decade.
Bretton Woods: One Last Attempt
The Bretton Woods Agreement in 1944 tried to maintain a connection to gold by pegging the US dollar to gold at $35 per ounce and pegging other currencies to the dollar. Countries didn’t need gold reserves; they could hold dollars, which were “as good as gold.”
This system lasted until 1971.
Nixon: The Final Break
In 1971, President Richard Nixon announced a suspension of gold convertibility. Other countries, particularly France, had started demanding gold for their dollars, threatening to drain US gold reserves. Nixon “closed the gold window.”
This was supposed to be temporary. It became permanent. The gold standard was dead. What had glittered for millennia, what had seemed like the perfect foundation for money, had been abandoned by every major economy on Earth.
Act 4: The Fiat Revolution
With gold’s abandonment came something radically new: fiat currencies.
What Is Fiat Currency?
Fiat currencies are money issued by governments that are not backed by any physical commodity such as gold or silver. The value comes from the relationship between supply and demand and the stability of the issuing government rather than the value of any substance that backs it.
With fiat currency, governments are effectively saying: “This piece of paper, this coin, is worth a pound, a dollar, a euro, because I say so.”
The Trust Question
Why should anyone trust government promises over gold’s intrinsic value?
The answer is surprisingly practical: fiat currency works better. It provides the flexibility that gold-backed money denied. When the economy needs stimulus, governments can expand the money supply. When inflation threatens, they can contract it. During crises, they can respond quickly rather than being trapped by how much gold happens to be in the vault.
Of course, this flexibility can be abused. Governments can print too much money, causing inflation or hyperinflation. Zimbabwe, Venezuela, Weimar Germany provide cautionary tales. But the dollar, the euro, the pound sterling have all functioned effectively for decades without gold backing.
The gold standard prevented government abuse by making flexibility impossible. Fiat currency allows abuse but also allows effective policy. Most countries decided that managed flexibility beats rigid perfection.
Inside or Outside the System?
Now, of course, I think we all agree that we can trust governments. Clearly, some people don’t. But this debate will continue because of CBDCs and crypto.
If you want to be inside the system, you trust governments and CBDCs will be their fiat currency of choice moving forward. If you want to be outside the system, crypto provides a way of doing it. And there’s arguably nothing backing crypto, just as there’s arguably nothing backing the pound or the dollar other than the government saying so.
You pays your money and takes your choice. (I’ve been trying to work that line in for a long time, trust me.)
The shift from gold to fiat represents a move from trusting a substance to trusting institutions. From rigidity to flexibility. And while that shift makes some people uncomfortable, the century since Bretton Woods suggests it works.
Act 5: Gold’s Ghost
Even without the gold standard, gold plays a significant role in today’s financial systems. The metal that once backed every major currency now exists in a curious limbo, valuable but not vital, significant but not central.
Central Bank Reserves
Central banks hold vast reserves of gold as a hedge against inflation and economic uncertainty. The Bank of England, the Banque de France, the Federal Reserve all maintain substantial gold holdings, not because they need to back their currencies, but because gold retains psychological and practical value during crises.
In the United States, we think of Fort Knox as the gold repository. Fort Knox has become a metaphor for something very, very secure. In my mind’s eye, I still see Harry Potter’s Gringotts Wizarding Bank as the ultimate image of this, a time when gold was physically moved from one pile to another to reflect settlement processes. Much simpler times.
Modern Gold
Gold remains popular for jewelry and investment. We still think of it as a precious metal, worth approximately $59 per gram (though rhodium is 14 times more expensive, so “precious” is relative). Most towns have advertisements for “Cash for Gold” shops that pop up during economic downturns.
In an interesting modern twist, we’re seeing innovations like gold-backed cryptocurrencies. These digital assets are pegged to gold, combining the stability of precious metals with the flexibility of digital currencies. It’s as if we’re trying to bring gold back into the payment system through the back door. Whether these succeed remains to be seen. They face the same fundamental question the gold standard faced: is the stability worth the rigidity?
Gold remains desirable. Indeed, during medieval times and probably before, alchemists tried to make gold from base metals. That’s what got us to chemistry, which is interesting to me because that’s what I studied at university. I was a pretty poor chemist, to be fair.
We may have abandoned the gold standard, but we haven’t abandoned our fascination with the metal itself.
Closing: The Lesson
Gold’s journey from ancient coins to modern digital assets is a testament to its enduring appeal and historical importance. For thousands of years, it seemed like the perfect foundation for a payment system. It glittered magnificently, beautiful, scarce, incorruptible, universally valued.
But all that glitters is not gold.
The gold standard’s very perfection became its fatal flaw. The stability it provided was built on rigidity. The predictability came from inflexibility. When economies needed to respond to crisis, the gold standard said no. When governments needed to adapt, gold-backed currency trapped them.
Britain abandoned it first in 1931. By the 1930s, most major economies followed. The Bretton Woods attempt to preserve a connection to gold lasted until 1971, when Nixon finally severed the link entirely.
The Payment Lesson
What does this teach us about evaluating payment innovations?
First, beware of solutions that appear perfect. The gold standard seemed ideal, stable, predictable, inflation-proof. Those virtues concealed a catastrophic limitation: when circumstances changed, the system couldn’t adapt. Perfect-looking solutions often have hidden weaknesses that only emerge under stress.
Second, flexibility often beats perfection. Fiat currency is messier than the gold standard. It can be abused. It requires trust in institutions rather than trust in metal. But it works. The messy, imperfect solution that can adapt beats the perfect solution that can’t.
Third, what worked in one era may fail in another. The gold standard functioned reasonably well in the 19th century. It catastrophically failed in the 20th. Conditions change. Payment systems must evolve or die.
Modern Parallels
As we move from physical currency to electronic forms, whether CBDCs or crypto, we’ll encounter new innovations promising perfect solutions. Some will glitter magnificently. Some will seem to solve every problem while creating none.
Remember gold.
Remember that the gold standard seemed perfect until it wasn’t. Remember that rigidity masquerading as stability can become a trap. Remember that the beautiful, elegant solution sometimes conceals fatal flaws.
The shift from gold-backed currency to fiat wasn’t a mistake, it was a recognition that the perfect-seeming system no longer worked. Perhaps in another few decades, we’ll look back at physical fiat currency the same way we now look at the gold standard: a system that worked for its time but had to be superseded.
Gold will remain important, as a store of value, as a hedge against uncertainty, as a metal we find beautiful. But its role in day-to-day payments is probably very limited now. And that’s okay. It served its purpose. It taught us lessons. And now we’ve moved on to systems that work better for our current needs, even if they glitter less brightly.
Either way, most people are very desirous of having more gold than less. Just don’t expect it to back your currency anymore.
Well, there you go. Gold. Did you get the earworm? The Spandau Ballet thing? Oh, it’s in my head, I can tell you.
Gold has a very long history, completely interwoven with payments. And the change from the gold standard to fiat currency may not seem like a big deal, but in fact, it really is. It’s probably a pivotal moment, something that remains extraordinarily current as we move over the next five to ten years toward electronic currencies, whether CBDCs or crypto.
I really hope you enjoyed this episode. The lesson is simple but profound: all that glitters is not gold. Sometimes the most perfect-looking solution contains the seeds of its own failure. And sometimes we need to abandon what glitters to find what actually works.
Coming Next: Compliance, KYC, and All That Stuff. Compliance requirements are why your cross-border payment takes days. Why opening a bank account requires extensive documentation. Why payment providers ask intrusive questions. Why banks sometimes freeze accounts without explanation. These rules exist for good reasons—preventing money laundering, stopping terrorist financing, enforcing sanctions, protecting the financial system. But they’re expensive, they create friction, and they exclude people who can’t provide documentation. Banks face billions in fines for non-compliance. Yet criminals still find ways through. We examine the rules that make payments trustworthy, what they cost, who bears the burden, and whether we’ve found the right balance between security and access.