What governs the amount of money a country mints? I have heard it has something to do with keeping gold or other precious metals in a reserve (e.g.: 1000 dollars for every gram of gold), possibly as insurance. Is this true? It would explain why South Africa, the leading gold producer in the world, has a low exchange rate for the ZAR.

Prior to the advent of paper notes (paper money) all money was coins made of a precious metal. The metal had an established value and the coin represented that value by weight. Gold, silver, copper and nickel were the most common. There was no need to keep precious metals in reserve because the coin was the precious metal. The governments of individual countries could establish the value by weight of the precious metals used to make coins. If a government devalued its coinage, the precious metal of the coin would buy less.

The first bank to issue paper notes as currency was established in France in 1716 under the name of Law and Company, whose proprietor, John Law, was actually Scottish, not French, and the notes of which would be received in payment of the taxes. This was during the reign of the extravagant Louis the Fourteenth. Branches of this Bank were almost simultaneously established at Lyons, Rochelle, Tours, Amiens, and Orleans. Letters patent were issued to incorporate the Company in August 1717. This Bank’s notes were not backed under the gold standard as are ours today, but were backed by real estate: that is, the value of all of the lands in France at the time. This was perhaps the first-ever land bank.

Paper currency is supposed to be backed by a substance of value existing as a resource within the country issuing the currency. Ours is presumably backed by gold. The paper notes issued by Law and company in France in 1716 were backed by real estate. Any paper currency must be backed by a precious resource or it will be worthless.

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