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Definition
Before the advent of banking and paper money, collateral and money were one and the same. The coinage used as payment for goods and services was made of a particular species of metal that represented a value. By separating the money from the collateral, banks and governments realized that the paper money representing the collateral in the reserve did not derive its value necessarily from the specie it represented, but the value of goods and services that it could obtain in the market economy.
It is only due to the “belief of value” that gold and other species of metal are considered collateral in the first place. There is no use for gold that would place it in a position where it is held as the world’s collateral other than its properties as a suitable vessel of collateral. Although it is a good conductor, it isn't its physical properties that make it a good store of value. Indeed, it is durable, malleable, unreactive, and qualitatively shiny, but collateral only has value because it was endowed that status by the humans that use it. The recognition of wealth determined by those that hold much gold is only an illusion bestowed by all others that share the same belief in its value.
Last modified 5mo ago
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