Why Paper Money (Currency) Not Backed By Gold and Silver Breeds Less Confidence
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- Selling Silver: Cash for Silver, A Difficult Investment Decision - InfoBarrel
To buy or sell for any investment involves the two most critical decisions. Delaying in the decision to sell can create huge losses. Standing by an investment can result in big gains. How does one think about this with respect to silver?
There was a time when United States currency would be exchanged for gold or silver. The United States treasury would make the exchange. Our system of money was referred to as a bimetallic standard. In 1964, our government stopped exchanging silver certificates (dollars) for silver ingots or silver dollars (note, Vietnam). In 1971, the United States went off the gold standard, thus creating a purely fiat currency, a currency backed only by faith in the government's ability to pay debts. In both cases because of inflationary fears the value of gold and silver was rising and the government feared losing a significant portion of its stockpile.
Understanding the basics of a fiat currency is important to all of us. The mismanagement of a fiat currency can lead to very serious problems for the average person, not the least of which is severe inflation. A discussion of how fiat money can affect your life follows.
When our currency was redeemable in gold or silver, a person who was worried about inflationary signs (too many dollars in circulation and rising prices) could take and then hold gold or silver. These commodities have been used for money for hundreds of years. Their value tends to rise as inflation spreads. In this way, a person's gold or silver is money that can keep up with or exceed the rate of inflation, thus preserving the purchasing power for the holder. Holding the currency might result in loss of purchasing power.
When inflation is moderated, the owner can then sell the gold or silver which would have maintained its purchasing power versus the inflation. He would get more currency for the gold or silver than currency given when exchanged. This characteristic enables the buyer to then use the currency to buy the same amount of goods and services (which now sell at a higher price) as before the exchange, or as stated above, to exceed that.
Gold and silver have special "trust characteristics"; gold especially so. Currency backed by gold and silver hasn't experienced the same severe swings in value. Swings in a fiat currency's value come from the ease in which governments can create money to pay for programs and other debts (most frequently wars) - money is essentially printed or created digitally with the average citizen at the bottom of the political heap witnessing his hard-earned money going less far. There needs to be a relationship between the amount of money created and the gross domestic production. When currency is created without regard to the disparity between the two, inflation ensues. But, I don't even understand that relationship. This article is for average people like me.
When money is created based on how much gold or silver is in the treasury, the disparities described above don't occur as severely. People are protected by the precious metal. When Wellington contemplated the Battle of Waterloo, he had to make sure he had a supply of gold coins to pay his soldiers to fight Napoleon. Men were more likely to fight and die for gold than for fiat currency. Experiences with fiat currency, especially in Europe, and France in particular, had taught people to be leery of fiat. Today there is no alternative. All of the world's nations have adopted fiat currencies.
At one time our currency had United States Note or Silver Certificate written at the top. This indicated that something tangible was backing the currency. Now we have Federal Reserve Note printed. This indicates that no tangible asset is associated with the currency.
The trust one must have in fiat currency is based on what is referred to as the "full faith and credit" of the United States of America. To attempt to protect one's wealth, a knowledge of misuse of fiat currency can be very helpful. The Yuan Dynasty of China ended the use of fiat money in 1455 to end hyper-inflation. The "Continental" was a fiat currency issued by the continental congress before the constitution, but it didn't explain how a person was to collect the backed money as there was no gold or silver in the treasury. It eventually traded from 300-1000 Continentals to one unit of backed money! From 1790-1799, the French used Assignats. Assignats were backed by mortgages, but there was no control over printing them. In 1799, they were worthless. Other examples include Germany from 1914 to 1923, Hungary from 1945 to 1946, Zimbabwe from 1980 to April of 2008. For 32 examples of hyper-inflation contributing to or caused by fiat money, google "hyper-inflation examples" and read Wikipedia.
To give you another idea of why gold seems to be the standard for money, one can look at financial transactions. Gold is the only metal central banks accept as payments of debts between government central banks. Gold has a pedigree no other metal has. So lacking some sort of backing of gold or silver, fiat currency raises issues of trust. All fiat currencies (no metallic backing) have ended up hyper-inflated in the past.
In preparing for the future, an individual must think about the behavior of his government and factor it in before making financial decisions. Even with regard to something as simple as a checking account or a simple savings account, inflation needs to be factored in, and an appraisal of the fiat currency's current situation made. For instance, if inflation is running at 5% and government influenced interest-bearing checking account rates are .01%, one can see that to protect purchasing power, a different course may have to be taken. One may opt to keep more money in a savings account and transfer when necessary to checking rather than holding a high balance in the latter. If savings account rates are low, one might consider I bonds (inflation protected savings bonds), or the purchase of gold and silver! These are not exotic investment choices.
I have bought some gold and silver from Ebay, but only from sellers with a sizeable number of transactions, and 100% satisfaction rating. The markup in price is probably the lowest available. It isn't hard to find sellers who fit those criteria. However, I would never recommend any investment. You need to learn more about fiat currency and inflation to make your own decisions, as sleep at night is important. If you are someone with small savings, you are the one who can least tolerate irresponsible government policy.
If the government considers issuing a new currency, you can be pretty sure it is an acknowledgment that the government is concerned about inflation. Unless a scheme for backing currency number two with gold or silver is discussed, you can take that as a warning your savings are at risk.
It may be that a penny saved is a penny earned, but that penny earned may be entirely insufficient. Delving into the financial news (as boring as it may seem to you) and understanding the pitfalls of a fiat currency may be very helpful to your wealth health.
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It is an unfortunate fact of paper money that it tends to become backed by nothing more than empty promises from politicians and the ability of central banks to manipulate prices through inflation.
That is not to say that gold is not without its problems, but the finite supply of the metal does make it very appealing as a form of currency (not to mention its intrinsic value with regards to things such as jewelery)
Even a return to paper currency backed by gold would be a good start. If not, we could soon find ourselves experiencing the "Weimar" effect.
Regards,
Caerleon Team from http://howtoinvestingold.org
Great hub, theirs a lot of valuable information. keep it up ;)
Hello style-of-life,
Yep, this digital age does seem to introduce new puzzles. When numbers are exchanged electronically it is hard for an average person to keep track of. But, eventually those numbers will turn into paper dollars. I once heard an economist say that the money supply was not being affected by all the government spending. Stuff was being paid for by selling "treasury bonds". I think he meant what you imply, that the bonds were digital entries with no increase in money supply. But if that is true, what are the bonds exchanged for? Are they exchanged for more digital inputs? If true, doesn't that mean when people demand money for their bonds there will be an increase in money supply? And if the government goes into default, treasuries on the secondary market will be selling for LESS. I don't pretend to understand the subject. The whole thing can make an average person dizzy. I think that is part of the attraction of gold and silver. There is an assumption that because of its rarity, and in silver's case, industrial needs, the two will always hold their weight as money. Your comment perked my ears, so if this is more like a hub than a comment, I am sorry. Sometime I like to voice what confuses me, and answers from the government frequently confuse me. Thank you for your commment.
Hello againsttheodds,
Your quote is great, and I think it is right on. It seems to me there must be something else besides paper that could be universally accepted for money to keep a check on currency, otherwise, there is no check on politicians and the Fed. They have the power to single-handedly ruin an economy. Thanks for the comment, and I hope things in the U.S. come to fruition better than I expect.
Great article. This is another issue where there is only one honest politician who will attempt to put an end to the US government's wreckless ways. Regarding Ron Paul from wiki: He opposes dependency on paper fiat money, but also says that there "were some shortcomings of the gold standard of the 19th century ... because it was a fixed price and caused confusion." He argues that hard money, such as backed by gold or silver, would prevent inflation, but adds, "I wouldn't exactly go back on the gold standard but I would legalize the constitution where gold and silver should and could be legal tender, which would restrain the Federal Government from spending and then turning that over to the Federal Reserve and letting the Federal Reserve print the money."
Great article. One wonder where it may lead when currency is no longer printed, just virtual money floating somewhere. Not highly unlikely, with NFC (paying with your phone) coming up.
Hello MobyWho
And thanks for the comment. Yes, I do see what you mean. Somehow when I try to think about a collapse and all, my stomach gets involved with the calculation. Perhaps canned beans would be a good currency to hold?
This continues to be a debatable subject. I can remember thinking "you can't eat oil" back in the '70s...and look where oil has gone - Up, up, up. Of course a lot of that increase is taxes. I'd rather try to take care of several bars of gold than an equal value of a perishable item.
That's really great info .Thanks
You state, "My guess is you would do just fine if you had to go out and hunt quail or venison."
Thanks for the comment. Plenty of mule deer and quail around my neck of the woods. Take care.
LOL, I have a completely different opinion as to what is wise if the world economy crashes. Most of my friends are stock piling guns, ammo and food. Me I'm trying to set up a self sufficient life that will provide food and shelter by daily work.
I don't think any amount of guns and ammo will protect a stock pile of food or money for that matter. People have to sleep and who wants to sit on guard for the rest of their life.
On the other hand, how many people are going to be willing to sit by and wait for a fruit to ripen or an elk to be harvested and prepared.
I have no illusions, I know it would be ugly all around but I also know that with today's media and the way the market is manipulated that it is highly unlikely that gold will ever become second or third to food and water.
There's two kinds of hunting, sport hunting and subsistence hunting. Sport hunting requires fine camo clothing, super high powered rifles or bows with superior optics like scopes and binoculars. Basically an investment of anywhere from $5,000 to $20,000. Hunting for food only requires know-how and will almost always be more effective than hunting for sport. Maybe that's only an opinion. My guess is you would do just fine if you had to go out and hunt quail or venison.
Gold is a good worthy business, not to be knocked. I just like people to keep in mind that it only works as long as we are convinced it works.
You have a good point. I personally would stock up on food first before gold or silver. Having said that, even in primitive markets, gold and silver has been used as coinage for goods. I just wanted to put out the most widely accepted theories.
I agree that greed destroys. What a pity with so many greedy people around.
If by hit the fan you mean the entire market system of the world crumbles and we are all living by our wits alone, then paper money will be useful for fire. You sound like someone I would like to know in the event the world turns upside down. You must know how to fish and hunt. I fish, but don't hunt. I figure I could learn fast.
Thanks for your thoughts.
I usually ruffle a lot of feathers when I suggest this but isn't it more practical to put value on paper money instead of metal money.
I also get a little confused as to why someone would want gold or silver if the stuff really hits the fan. You can't eat gold or silver, far as I know you can't burn it for heat where you can start a fire with paper money.
I'm assuming the value of gold is only related to the market and the value we can be convinced to put on it. When there is no electricity or fuels, if it ever happened I would think beans would be more valuable than gold.
Clearly it is all economics which is important when food is plentiful. But for me and my life it is important that people know that nothing is as it seems. It seems gold is really important, but it's not unless people are convinced it is.
It's all very sneaky and the love of money is the root of all evil. Is gold the purest definition of money or is it spice or is it paper?
In the 50's John, the fishing and hunting was much better. The 50's and 60's where the good old days I often hear about and never experienced.
Great hub.
The People's Bank of China (PBOC), the central bank, announced today that it will issue more gold and silver commemorative coins featuring the giant pandas to meet soaring demands for precious metals!
Hello again,
Thanks for the comment.
Silver certificates have some numismatic value. I don't know whether it holds for all of them, or whether just certain ones, but for a generation or two they are an oddity.
Growing up in the 50's and 60's I did not appreciate a lot of things. On reflection, some of the tried and true ways were not so bad, like having your money convertible!
Good timing! Just yesterday I took several saved "Silver Certificates" to my bank, asking for silver dollars. They could not produce them, nor would they try. Those were used ones. I also have ten uncirculated notes in sequence. Maybe I should frame them and add some sarcastic comment or cartoon?
very interesting
I think people's trust in paper money is going down.
theking2020 3 months ago
The two best investments of all time, and forever is gold and silver.