Money = Gold
Money is gold, nothing else." - J. P. Morgan in a 1912 testimony before Congress
Currency |
Money |
Medium of exchange |
Medium of exchange |
Unit of account |
Unit of account |
Portable |
Portable |
Durable |
Durable |
Divisible |
Divisible |
Fungible |
Fungible |
- |
Store of value |
Gold and silver are the best form of money because: they're an easy medium of exchange, since these store a lot of value in a small quantity; they're units of account because gold and silver have the same value all over the globe; they're durable, for even the gold that was used 5,000 years ago is still with us; one can make change with it, so they're divisible; theyre very portable because you can carry them around easily; glod and silver are the same everywhere in the universe, therefore they're fungible; and they're supply is very limited, which keeps their purchasing power stable (governments cannot print them), making them excelent stores of value.
Before August 15 of 1971, when President Nixon ended the US dollar convertibility to gold, all currencies, at least in the developed world, were money. There had always been some sort of gold and/or silver standard, where currencies had a fixed value in terms of those precious metals, making them hard money. Only at wartimes did the governments stop backing their currencies, so as to be able to support the war expenses, by turning on the printing presses. In this day and age, no currency in the world is backed by gold or silver, turning them into fiat money.
Moreover, the reason governments hate hard money and love the fiat one is very simple. In a hard money system, individuals and/or other central banks can convert that country's currency into gold or silver. Hence, governments or central banks have to keep in their vaults enough gold or silver to cover all the claims to redeem the precious metal. If a government wants to increase its expenditures. but not the taxes to pay for those expenditures, the government will incur in budget deficits. This means that the government's debt will increase (by the amount of the deficit). In theory, this debt has to be paid in the future, which means that the government has to increase taxes on its citizens, considering that the amount of expenditures hasn't come down. Yet, if the politicians don't want to do the right, but unpopular action of raising taxes, then the debt has to be monetized (learn more here).
Thus, monetizing the debt will increase the amount of currency circulating in the economy. In other words, in a hard money system, more currency means more claims to reddem the gold or silver kept at the government's or central bank's vaults. Therefore, if the budget deficits and resulting inflation go on, individuals and other countries' central banks will keep losing confidence that will manage to convert the currency into gold or silver, until the day a run to be the first to reclaim the precious metals will ensue.
When this day arrives, governments always suspend their currencies' convertibility to the hard asset, turning them in fiat money. Throughout human History, there have been thousands of fiat currencies and they've all failed. The fiat money circulating nowadays will be no exception.
Then, why has the fiat money system been present for so long?
Before August 15 of 1971, when President Nixon ended the US dollar convertibility to gold, all currencies, at least in the developed world, were money. There had always been some sort of gold and/or silver standard, where currencies had a fixed value in terms of those precious metals, making them hard money. Only at wartimes did the governments stop backing their currencies, so as to be able to support the war expenses, by turning on the printing presses. In this day and age, no currency in the world is backed by gold or silver, turning them into fiat money.
Moreover, the reason governments hate hard money and love the fiat one is very simple. In a hard money system, individuals and/or other central banks can convert that country's currency into gold or silver. Hence, governments or central banks have to keep in their vaults enough gold or silver to cover all the claims to redeem the precious metal. If a government wants to increase its expenditures. but not the taxes to pay for those expenditures, the government will incur in budget deficits. This means that the government's debt will increase (by the amount of the deficit). In theory, this debt has to be paid in the future, which means that the government has to increase taxes on its citizens, considering that the amount of expenditures hasn't come down. Yet, if the politicians don't want to do the right, but unpopular action of raising taxes, then the debt has to be monetized (learn more here).
Thus, monetizing the debt will increase the amount of currency circulating in the economy. In other words, in a hard money system, more currency means more claims to reddem the gold or silver kept at the government's or central bank's vaults. Therefore, if the budget deficits and resulting inflation go on, individuals and other countries' central banks will keep losing confidence that will manage to convert the currency into gold or silver, until the day a run to be the first to reclaim the precious metals will ensue.
When this day arrives, governments always suspend their currencies' convertibility to the hard asset, turning them in fiat money. Throughout human History, there have been thousands of fiat currencies and they've all failed. The fiat money circulating nowadays will be no exception.
Then, why has the fiat money system been present for so long?