For people of Europe and Asia before the Greek and Roman empires, the cow was the standard of exchange. With the Egyptians and the Greeks, gold starts to be used for exchanges, though it is valued or "backed" in cows. Gold was more portable than a cow, and it could be divided less messily than a cow. This allowed for taxes to be collected by leaders over larger areas, which became a key in the formation of greater civilizations.
Gold left European scene of exchange at the end of Roman empire, but reemerged as trade picked up around the Mediterranean at the end of the Middle Ages. An interesting historical artifact is the passion with which the Spanish pursued gold in the New World from 1492 through the sixteenth century. Columbus and those that followed after did everything they could to find gold, plunder it, or demand gold in tribute from natives, often in cruel ways. At this point in Europe, gold was the preferred currency, so if the Spanish could find it, it was like picking up money from the ground. (inflation due to oversupply wasn't a concern for them).
Beyond its use as currency, at this time there was growing competition between nations in Europe, and gold was the metric by which they measured success. The name for the economic system of the time is Mercantilism, of which bullionism (ascribing intrinsic value to precious metals) was a component. Nations in Europe believed that there was a fixed sum of wealth, and competed with each other to get a bigger share of that wealth. This resulted in the erection of trade barriers and laws governing the export of gold and silver to other nations. It is the system that Adam Smith would condemn with his 1776 book "The Wealth of Nations", helping to usher in a free-market economy. As we will see in future blog posts, bullionism took a while to be discounted.
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