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How Money Works

Why Gold Became Money

Ages 10–14 25 min read Intermediate

Of all the elements on the periodic table — 118 of them — why did humans choose gold as the ultimate form of money? Not iron, not copper, not silver. Gold.

The answer involves chemistry, psychology, and thousands of years of human history.

The Process of Elimination

Sanat Kumar, a chemical engineer, worked through the periodic table to explain why gold won. Most elements are eliminated quickly:

  • Gases (helium, neon, etc.) — can't hold a gas as money
  • Liquids (mercury, bromine) — impractical and toxic
  • Radioactive elements (uranium, plutonium) — will kill you
  • Reactive metals (sodium, potassium) — burst into flames in water
  • Too common (iron, copper) — not scarce enough
  • Too rare (osmium, iridium) — too hard to find to be useful

You're left with a small group: gold, silver, platinum. Gold wins because:

  • It doesn't corrode — gold recovered from shipwrecks 400 years old is still shiny
  • It has a low melting point for a precious metal — ancient people could melt and shape it
  • It's beautiful — that yellow colour is unique and attractive
  • It's rare but not too rare — enough to use as money, scarce enough to hold value

The Gold Standard

For centuries, paper money was backed by gold. A banknote was literally a note from the bank promising to pay you that amount in gold. This was called the gold standard.

Under the gold standard, governments couldn't print unlimited money — they could only issue as much as the gold they held. This kept inflation in check but also limited economic flexibility.

Australia and Gold

The Australian gold rushes of the 1850s transformed the country. Gold discovered in Victoria (Ballarat, Bendigo) attracted 500,000 immigrants in a decade, tripling Australia's population. Melbourne briefly became one of the richest cities on Earth.

Australia still holds 79.9 tonnes of gold in reserve (RBA, 2023), worth approximately $7 billion. But this gold no longer backs our currency.

Tonight's Question

"If gold doesn't back our money anymore, what DOES give Australian dollars their value? Why do we accept them?"

The answer is trust — we accept dollars because everyone else does. What would happen if that trust broke down?

Gold Rush Research Project

  1. Research the 1850s Australian gold rush together.
  2. Find out: where was gold discovered? Who came? What happened to Indigenous communities?
  3. If you're in Victoria, plan a visit to Sovereign Hill in Ballarat.
  4. Try panning for gold (kits are available online, or use glitter in sand as a simulation).
  5. Discuss: if gold were discovered in your backyard today, what would happen?

Go Further

  • Video: The periodic table explanation of why gold is money (NPR Planet Money).
  • History: Research the Eureka Stockade (1854) — Australia's gold rush rebellion.
  • Question: Should we return to the gold standard? What would happen to the economy?
  • Book: The Power of Gold by Peter Bernstein (2000).

What We Simplified

  • Silver was often more important. For most of history, silver was the more common monetary metal. China and much of Asia used silver primarily.
  • Gold's value isn't purely rational. Cultural and psychological factors play a huge role — gold is "special" partly because we decided it was.
  • The gold standard had serious problems. It contributed to the severity of the Great Depression by preventing governments from stimulating the economy.

Sources

  • Bernstein, P. (2000). The Power of Gold: The History of an Obsession. John Wiley & Sons.
  • RBA (2023). "Australia's Gold Reserves." RBA
  • National Museum of Australia. "Australian Gold Rush." NMA
  • Eichengreen, B. (2019). Globalizing Capital: A History of the International Monetary System. 3rd ed. Princeton University Press.

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