Currencies and Gold Coverage

Gold has been widely used throughout the world as a vehicle for monetary exchange, either by issuance and recognition of gold coins or other bare metal quantities, or through gold-convertible paper instruments by establishing gold standards in which the total value of issued money is represented in a store of gold reserves.

However, the amount of gold in the world is finite, and production has not grown in relation to the world’s economies. Today, gold mining output is declining. With the sharp growth of economies in the 20th century and the increasing foreign exchange, the world’s gold reserves and their trading market have become a small fraction of all markets, and fixed exchange rates of currencies to gold became unsustainable. At the beginning of World War I, the warring nations moved to a fractional gold standard, inflating their currencies to finance the war effort. After World War II, gold was replaced by a system of convertible currency. Gold standards and the direct convertibility of currencies to gold have been abandoned by world governments, being replaced by fiat currency in their stead.

Answering this question, Dr. Monzer Kahf, scholar of Islamic economics and financial expert, stated,

Do not you notice that all currencies in the world today have no gold coverage, and yet have values? Then a gold coverage is not the thing that gives them value!

The answer is as simple as mentioned! The fact is that what gives value to a currency is the demand and supply of it that is created by export, by import, and by payments across the border of that country. Of course, the policy of the central banks has a lot to do in affecting the demand and supply of a currency too. Gold as a currency is gone, and it has become an industrial metal in the growing nuclear industry.