Problems with gold and resulting centralization

There were, however, issues with using gold as money, with the biggest problems being its susceptibility to theft or loss, and susceptibility to forgery. Using gold to settle payments over longer distances as well as carrying it during travel was incredibly risky, something particularly evident with transferring gold overseas. Such an oversea voyage was not merely a scary undertaking for those onboard but also for those waiting for their money to arrive, praying it would not sink to the bottom of the ocean or get seized by pirates.

Forgery was another big problem as verifying the authenticity of gold being traded was not an easy task. Even to this day it requires specialized devices that are very expensive making it impractical for individuals. As mentioned in the previous section, every time something was commonly used as money, there was no shortage of those who tried to create more of it, or at least something that would be accepted as identical; forgeries of nuggets, coins, and bars with different gold compositions that could not be verified. As the scope and speed of commerce increased over time with improvements in communication technology, this friction associated with using gold as money would become more and more limiting.

In search of a solution, gold slowly got aggregated and centralized in vaults of private institutions. They would protect the gold for you from theft and loss, and would take it on them to perform rigorous audits on the validity of the gold entering their vaults. In return, they would issue paper notes that could be redeemed for gold, and these notes became an accepted, more convenient form of money. As these notes started to be traded as money - backed by their redeemability for gold - the issuers of these notes found most owners would hardly ever come in to claim their gold. They realized they had obtained the ability to create new money by creating more notes than they had gold in reserves.

Whereas initially these notes where issued by many different central parties with different reputations and levels of credibility, slowly but surely these stockpiles of gold got centralized in only a handful of the biggest and most trustworthy banks. More than not, governments would take it upon themselves to bear that responsibility. This, conveniently, gave them the ability to create money out of thin air, allowing them to finance expenditures their actual reserves would normally not allow them to.

This process of attempting to eliminate the issues physical gold had essentially led to centralized banks, often but not always controlled or working in tandem with a government, which became the issuer of money. The most important take-away here is that there was and is a real need for centralization of gold and issuance of paper notes as money - and nowadays just banks maintaining digital balances - because there is too much friction with using physical gold as money to keep up with the pace of our commerce. The auditability and portability of gold was quite frankly too bad as our communications technology improved and speed and distance of commerce increased. This was already the case as telegram, radio, and telephone networks expanded across the world but would be insurmountable in a world with the internet we have today. However, the massive trade-off of this abstraction of gold with paper or digital claims on it was that a centralized institution could start to debase the money by simply creating more of those claims.