I'm generally very interested in economics matters, although i'm not an economist nor have in depth knowledge on the subject. I have a question about how money is shared throughout the world.

I'm thinking on a primitive level. Say there are 10 countries in a world. I understand that each country can have a specific deposit of gold. But, money is not gold. It's representation of gold (and what bankers love as i understand :P).

Now, if we operate on money, which represent gold, what are the needed operations held in order to make sure that each country has a beginning wealth described by its natural gold possession. Imagine that this question is asked for day 0 of the newly operated economy for this example. A world that just rises and 10 countries have y amounts of gold each.

Moreover, i suppose that what makes gold valuable is scarcity(kind of demand/supply primitive). But why gold ? Why not diamonds or other minerals ?

Who creates the procedures and who supervises them in modern worldwide economy ?


3 Answers 3


Money is no longer backed by gold. It's backed by the faith and credit of the issuing government. A new country,say, will first trade goods for dollars or other currency, so its ownership of gold is irrelevant. Its currency will trade at a value based on supply/demand for that currency. If it's an unstable currency, inflating too quickly, the exchange rate will reflect that as well.

More than that your question kind of mixes a number of issues, loosely related. First is the gold question, second, the question of currency exchange rates and they are derived, with an example of a new country. Both interesting, but distinct processes.

  • +1 luckily someone clarifying things! Hopefully, op understands from this answer that the so-called question is bloated.
    – user1770
    Commented Jun 23, 2011 at 23:58
  • 3
    @hhh Please be courteous. Your own questions aren't perfect. Commented Jun 24, 2011 at 0:57
  • @Chris W. Rea: just let me know which of my questions need attention and I will surely fix them :)
    – user1770
    Commented Jun 24, 2011 at 10:02

You might want to read about about the Coase Theorem.

"In law and economics, the Coase theorem, attributed to Ronald Coase, describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining."

This is similar to what you are asking. Each country has an endowment of gold, and they must create a set amount of money to represent their endowment of gold. This will establish an exchange rate. If I have 5 tons of gold and you have 5 tons, and I print 10 dollars and you print 20, then one of my dollars is worth two of your dollars.

Thus, the amount of money is not relevant- it's the exchange rate between the countries. If all the nations know each other's gold endowment, then we will have a perfect exchange rate. If we don't, then currency printing will vary but arbitrage should drive it to an accurate price.

Gold and diamonds are both valuable in part due to scarcity, but gold has been used as a measure of value because it's been historically used as a medium of exchange. People just realized that swapping paper was safer and cheaper than physically transporting gold, but the idea of gold as a measure of value is present because "that's how it's always been."

Nobody "creates/supervises" these procedures, but organizations like the IMF, ECB, Fed Reserve, etc implement monetary policy to regulate the money supply and arbitrage drives exchange rates to fair values.

  • "Each country has an endowment of gold, and they must create a set amount of money to represent their endowment of gold.", please, give me the source! "must"? What are you saying here? Please, clarify. Variety of things jammed together again - to confuse? Where is gold standard? Where is historical perspective? Please, focus.
    – user1770
    Commented Jun 23, 2011 at 23:54
  • can you explain how Coase theorem has something to do with the question? This answer has some good points such as the last paragraph. Then again, the third paragraph is a naive example -- valuation depends on other things, not just of gold. Such factors are the velocity of equity, liquidity, speculation and many other factors. If you think about current situation where countries want to keep valuations stable by increasing speed, you get a good counter-example to your valuation based on gold, the amount of gold has changed at all (or very little) then again equity vals have.
    – user1770
    Commented Jun 24, 2011 at 10:12

I think you are asking a few questions here.

Why is gold chosen as money?

In a free market there are five characteristics of a good money:

  1. Acceptability - Everyone must accept it to purchase goods and services
  2. Durability - It should last a long time
  3. Portability - Easy to carry around
  4. Scarcity - Scarce enough to be valuable, not common such as paper or digital bits
  5. Divisibility - Can be divided into small units

Gold and silver meet all five characteristics. Diamonds are not easily divisible which is why they are not normally used as money. Copper, Iron, and lead are not scarce enough - you would need a lot of these metals to make weekly or daily purchases. Paper is also way too plentiful to be used as money.

By the way, historically silver has been used for money more than gold.

How does international trade work with gold as money (is this what you are asking with your hypothetical example of 10 countries each with y amount of gold?)

Typically a government will issue a currency that is backed by gold. This means you can redeem your currency for actual gold. Then when an American spends 5 US dollars (USD) to purchase a Chinese good the Chinese man now owns 5 USDs. The Chinese man can either redeem the 5 USD for gold or spend the 5 USD in the US. If a government issues more currency then they have gold for then the gold will start to flow from that country to other countries as the citizens of the other countries redeem the over-issued currency for gold. This outflow of gold restricts governments from over-issuing paper currency.

Who creates the procedures and who supervises them in modern worldwide economy?

The Federal Reserve, IMF, and Bank of International Settlements all are involved in the current system where the US dollar (see Bretton Woods agreement) is the reserve currency used by central banks throughout the world. Some think this system is coming to an end. I tend to agree.

  • 1
    I think #3 carries some extra baggage in the 21st century. It is difficult to transport gold 3000 miles for me to buy something from California, but there are still other mechanisms for me to make buy something online from California. I think this is an added dimension, but currently this is usually done by invoking 3rd party payment processors. Commented Jun 24, 2011 at 16:36
  • As to #4, paper or digital bits might not be scarce, but we would really be interested in paper or digital bits endowed with some special properties. Paper might be fairly common, but special green paper with Benjamin Franklin's face on the front is more scarce (although a central authority can make these less scarce if it sees fit). Similarly, digital bits with special mathematical properties that are accepted by say the Bitcoin network are also scarce (but no central authority can lessen the scarcity of such bits). Commented Jun 24, 2011 at 16:42
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    Gold accounts could easily be created in the 21st century. No reason to carry it around.
    – Muro
    Commented Jun 24, 2011 at 16:49
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    @Muro: +1, could you explain the reasons you "tend to agree" about this system coming to an end (your last snetence) Commented May 14, 2012 at 11:38

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