“Is your money actually worth the paper it is printed upon ? ” ~Anon
- I PROMISE TO PAY THE BEARER ON DEMAND THE SUM OF TEN POUNDS
The Gold Standard
Modern currencies were at one time backed by the physical gold held in the treasury vaults of all the major nations. The understanding was that any currency unit could ultimately be exchanged for an appropriate weight of bullion and that the amount of money in circulation bore a direct relationship to the quantity of gold actually in a nation’s vaults. This so-called ‘gold standard’ was dropped in the second half of the 20th century and today all currencies are now called ‘fiat’. more on gold standard
Fiat Currency
The term ’fiat’ is the Latin word for edict – literally meaning ‘make happen’ - or ‘create’.Fiat currencies are not backed by anything tangible, such as gold or silver, but are brought into being (created) and put out into circulation by government edict. This cosy monetary arrangement works just fine - as long as everyone buys wholeheartedly into the system and there is continued faith in the ability and integrity of the central banks to act responsibly and maintain appropriate safeguards for protecting the value of the currency units.
In fact there was some justification for dropping the gold standard. In a time of rapid growth of economies, rising standards of living and expanding world trade, as in the latter half of the 20th century, there is a great need for liquidity to fund capital expansion. Rigidly maintaining the gold standard would have cramped the capital growth needed to fund the necessary expansion of the infrastructure. But many economists believe a compromise could have been sought that would at least have kept some aspect of a strong ”gold anchor” in place for bolstering stability in any future financial storms.
Regardless of these concerns, the gold standard was completely abandoned and consequently it must now be realised that none of our modern fiat currencies actually has any intrinsic worth. We must depend solely on our faith in the issuing governments that they will continue to maintain the tradeable value. Like the ”billon” coins of ancient times, currency units now have only a notional value, which is supposedly set in terms of an implied, but ill-defined, theoretical purchasing power, however this value may fluctuate widely in terms of exchange rates against other currency units . Consequently the stability and perceived worth of these currencies can alter significantly. Sadly in terms of purchasing power the trend is invariably downward – giving rise to the ever present threat of inflation.
IN GOD WE TRUST - BUT CAN YOU TRUST ME?
When it comes to currencies trust is everything and should be maintained at all costs. Unfortunately the manipulation of these modern fiat currencies, by playing complex games with interest rates, or just by shifting numbers around on computers and ultimately the liberal use of the printing press, is just far too easy. Many believe that the movement of the central banks out of the gold standard into these purely ”fiat” currencies has already destroyed much of the necessary store of trust and is directly responsible for the repeated bouts of inflation, unemployment and societal instability we have seen in recent years. The evidence of growing financial malaise is already on the table.
Financial Malaise
As in Roman times, short term expediency, rather than adherence to supposedly sacrosanct ideals of long term stability, has too often been used to justify deviation from fundamental principles and controls. Long-standing guidelines for economic stability, have simply been bypassed by executive order. Notably the spiraling public debt of the world’s largest economy has not been restrained by serious expenditure cuts and increased taxation, as would be expected from a responsible government, but the lid has been kept firmly on the kettle and the growing pressure alleviated (for the time being) by meddling with the dollar money supply.
Witness the amazing recent action of simply dumping huge amounts of money directly into the system through so-called method of ‘quantitative easing’. A process, whereby the US government creates money out of thin air by ‘buying’ its own treasury bonds. This is in reality just fraud on a grand scale – effectively stealing the value out of the hard-earned savings of its citizens and the funds of foreign investors, by a simple stroke of the pen.
The failure of resolve, by the exchequers and central banks of most major countries, in not holding up the value of their currencies (by grasping the nettle of reducing deficits and imposing unpopular fiscal constraints) has revealed a multitude of chinks in the global economy. Furthermore, a growing loss of confidence in the integrity of banks and bankers has provoked widespread questioning of the fundamentals of the entire financial system. There is a very real fear that a catastrophic financial collapse may be immanent.
The warning signs are already there. Almost daily we hear of increasingly serious crises, such as the “US Housing Collapse” and the “Sovereign Debt Debacle”. There has been a loss of economic growth and rising unemployment on a worldwide basis. The amount of debt held by the largest economy – the USA – has reached truly frightening proportions (budget deficit approaching $15 trillion) and there is little prospect of it ever being paid back. The truth is that we simply haven’t learned the lessons of the past and when the fall comes it is going to be a very big one this time. Roman emperors paid with their lives for financial mismanagement – we give executives of failed banks hefty bonuses!
DOLLAR IN CRISIS
Pessimism? Maybe – but even as we conclude this rather unedifying final chapter in the brave history of money, you can be sure that the emperor is still frantically firing up the furnaces to put even more ‘copper’ into our long suffering ‘coinage’. It would be interesting to know just what euphemism Caracalla used for describing his version of ‘Quantitative Easing’.
Concluding advice –
If you can’t sort out your problems with a sharp sword . . . . BUY BULLION NOW!
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