Back in 1971 Nixon severed the last of the ties of gold to the after that fiat currencies. After the Nixon shock, the dollar stopped being as good as gold. And because all other currencies were backed by the dollar, it being the world reserve currency, that decision did not only create a fiat dollar but in effect made all currencies worthless. Worthless in the sense that where they used to represent value, they now represent the promise of value and therefore are debt!
What is money
Money is something really special. And although we tend to revere to currencies like dollars, euro’s, yen and yuan as money, they are far from what actually IS money. Money actually has characteristics that can be defined and it might be good to go through a couple of the characteristics of what we call money.
The characteristics of real money
Money must bedurable. You can throw a bill into the ocean and it will quickly lose all value as it dissolves. Do the same to gold and even a thousand years later it will not change.
Money must be divisible. A 100 dollar bill is worth a 100 dollars only in when it is complete. You cannot tear a part of the bill and pay for something. Gold and silver however can be used in grams, ounces, pounds, kilograms, tons and they will never lose their value.
Money must be convenient. If you want to pay a house in ten, fifty or even hundred dollar bills you will need suitcases full. That same house could be paid for in a few pounds of gold that could easily be carried in a small bag or even on your person. A gram of gold represents a value of 50 dollars and a ounce of silver 18 dollars. Both are universally recognisable and very liquid all over the world. This makes them very convenient.
Money must be limited in quantity. One of the main reasons currencies fail is the ability to cheaply produce more of them. Currencies have been and are printed into existence and (mis)used by governments for thousands of years. Increasing the quantity of currency always creates inflation or the devaluation of the supply of currency already in existence. Gold and silver are very rare and have finite supplies.
Money must have a history and universalacceptance. Currencies work in countries, on continents during specific periods of time. A euro was unacceptable in 2001 and a Dutch gulden became unacceptable after the introduction of the euro. You cannot pay with a dollar in Europe and with a euro in the United States. All currencies are bound by geographic location and a specific point in time. The average currency lifespan is 27 years making them very risky. Gold and silver are universally accepted and known and have been used for thousands of years by all peoples and in all countries on all continents.
Money must be consistent. Not only do currencies lose value overtime due to inflation. All currencies that have ever existed, with exception of the ones we use currently, have eventually reverted to their intrinsic value of zero. Gold and silver however have been valuable for five thousand years and continue to be.
Money must have intrinsic value. Currencies never cost more than the paper they are printed on or the metal they are formed from. And currencies represent a promise of future value or debt. Gold and silver represent intrinsic value due to the effort it takes to produce them and the applications they can be used for.
Why does real money matter?
Money is used as a means of exchanging value. That starts with payment for labour but applies to almost every transaction in life. Everybody who works does this for a form of payment. The reason we accept payment in currency is because we trust that when we exchange our currency for things or services that we need or want, we receive value equal to, or in excess of the labour we put into earning that currency. As soon as trust in a currency or the return of investment if labour into value wains, we change our behaviour. When we distrust the means of exchange a complete failure of system is inevitable. That is why money matters and why gold and silver will always carry value. The main reason this trust has been solid for 5000 years is simple. You can’t print gold!
Why are some crypto’s the next best thing?
Were gold and silver are the only two elements that can be called money, some, and some is important to emphasize, but some cryptocurrencies like bitcoin and litecoin are actually closer to real money than most fiat currencies. Like fiat there are some characteristics that they don’t adhere to like consistency, durability and intrinsic value, but other than fiat, some crypto’s are limited in quantity and for example bitcoin is almost universally accepted.
Gold vs Bitcoin or great combination?
The important point here is that some cryptocurrencies might be interesting investments and that even though they have a fairly short history, the innovation that they have delivered, is real. The conclusion is that other than a choice for either precious metals or cryptocurrencies, a combination of both might be the way to go to protect purchasing power.