Money – The Beginning
In the distant past, man used bartering and trading as acceptable forms of payment for goods and services. Many items traded included sea shells, salt, tobacco, herd animals, beaded belts, gem stones and gold. This worked well at the time, however there needed to be a better more convenient way to make transactions.
Coins became the first answer to make the exchange of goods and services more convenient. In 600 B.C. the first minted coins appeared, they were minted from an alloy called electrum. This was a combination of gold and silver. Each coin had a specific weight of 4.7 grams and acted as a medium of exchange, division of payment and was also capable of maintaining its value. From the time coins were first minted they gained popularity becoming the best form of money all the way into modern times.
What is Sound Money
In 400 B.C. Aristotle defined what sound money was and what characteristics were necessary to insure sound money. He said that sound money must incorporate all 7 of the following properties.
• Be very hard to falsify
• Be easy to store
• Easy to transport
Sound money can be considered real money because it is backed by a real and substantial asset such as gold. Gold is a commodity that for thousands of years has been used and traded as a form of money. Furthermore gold meets all the characteristics that Aristotle set to define what makes up sound money. A dollar that has been backed by gold is also defined as paper currency. Paper currency must join mechanisms that will control it from debasement. One way of achieving this is to peg the currency against an exact amount or percentage of tangible assets like gold or silver.
In more modern times the United States had used this system of sound money, an example being from 1880 through 1914. During this 34 year period the value of the US dollar never dropped. It maintained its value because we were on a sound money system and the US dollar was backed by 40% gold which kept inflation in check. Another more recent example was during the Bretton Woods Agreement which ran from 1944 until 1971. During these 27 years the US dollar was backed by 10% gold and the sound money system kept inflation in check throughout this time.
During this time the US dollar also became the World’s Reserve Currency. The dollar was pegged to gold at 10 percent. The US Federal Reserve was allowed to print dollars at 90 percent value or a 90:1 dollar/gold ratio with the 10 additional percent held in gold reserves at Fort Knox in Kentucky. Because there was a portion of gold actually backing the dollar, the gold acted like a big check valve not allowing inflation to go forward. This is a monetary system that throughout the history of sound money has been solidly proven.
It was in 1971 when then President Richard M. Nixon ended the Bretton Woods Agreement which closed the “gold window” severing the US dollar from its attachment to gold. At this point the US currency (dollar) became what is known as fiat currency.
What is Fiat Currency
Fiat currency is what the United States and just about every nation on the planet use today. Some of the worlds Fiat currencies include the US dollar, euros, British pounds, Japanese yen, Australian dollars, and so on. A fiat currency is unique, because it does not have any requirements to be pegged or backed by any tangible assets. Governments that use their respective fiat currencies can print them at will. The only thing that keeps a fiat currency alive is the promise and good faith of the country printing it and the faith of the country’s citizens that use it. Once a country’s citizens and the markets faith in the fiat currency are broken, the currency will quickly fail and die.
Throughout history every civilization has used a fiat currency system in one form or another when not using a paper currency system. Fact is that 100% of the hundreds of fiat currencies that have ever been used throughout time have all failed. The average life-span of any fiat currency has been 30 to 40 years. The United States dollar became a fiat currency in 1971. That makes the US dollar 41 years old in 2012. This should ring alarm bells that the dollar is coming to the end of its fiscal life.
With the exception of a few investors and economists the subject of sound money never has been challenged or debated upon. There is a direct relationship that links sound money, unsound (fiat) money and the economy together, however it is essential to comprehend what the real meaning of sound money is. The dollar we use today can be created out of thin air. However sound money cannot. Using paper currency forces the government and politicians to become fiscally accountable. The chance of funding more and more government programs and projects becomes much less likely because unlike the dollar we have today paper currency cannot be created out of thin air. Sound money truly is at the heart of a free market society and the individual freedoms within it.
Tom Genot –