posted on May, 7 2010 @ 11:50 PM
Put simply for easier understanding.
In the ancient past, mankind bartered. I bushel of wheat for I fish. The exchange was informal and often subject to controversy. Then they discovered
gold. Gold is the only known metal that last forever back them. It's value remain always.
The Chinese invented the cheque book - a piece of paper certifying the amount of gold you can take at a central depositry in exchange for goods or
services. It was built up over time and trust in these paper documents. It was also more efficient and safer than lugging heavy bags of gold to buy
Marco Polo who visited China brought such innovations to Europe. And thus born the gold standard - paper notes called dollars backed by gold deposits,
which US govt holds the most after WW2, paid by other nations to rebuild their war wrecked countries.
Even as the world moved from the gold standard and made use of the US dollar as a standard, that dollar is still backed by gold and other resource
assets such as mineral, infrastructure and more critically - stability. Instead of holding dollars, other nations are holding US dollars, which was
confidently believe that it can be exchanged anytime if so required. That was the trust of holding the US dollar.
But back on topic, any resource can be used as a backing for the dollar note. The only problem is:-
a.) Can it last forever as a collateral?
Simply because if if you backed eg: 1 barrel of oil with a dollar note, then when the oil is used up, that dollar note becomes worthless. If one day
there is no more oil in this world, the notes printed and held as savings would become worthless.
b. ) Is that resource a rare and valued commodity ?
If trees are used a backing for the dollar, then those dollar notes printed will be devalued easily, because anyone can plant and grow trees anywhere
and print more dollar notes, flooding the market with paper and causing skyhigh inflation.
If diamonds are used, then the dollar notes printed would be scarce, because there is not much so quartz on our planet. With little money printed and
circulated, many will starve instead.
Having determined gold as a better commerce resource, and as long as the world is at peace and people have needs and desires to be met, gold will
remain the standard.
But a question will remain - what do we do with so much gold? Suppose Mutually Aided Destruction happened, and you are the only few left alive. What
are you going to do with all the gold that remains? Can you buy food or water with it? Or, more scary, if there was no war, what if there was no gold
in the vaults?
Just my 2cts.