History of Money

History teaches us very important lessons, without it we cannot understand how to protect our wealth under the economic conditions we find today.

Let’s start with a definition of money: Money is any article or substance used as a medium of exchange, a unit of measure, and most importantly a storehouse of wealth.

Throughout history, mankind has tried many forms of money, from soap chips, to shells, to pieces of iron, beads, bits of glass, gold and silver coinage, and today, fiat paper, and electronic currency.

Some important requirements of money:

• Durable
• Portable
• Divisible
• Scarce - Take note of this last item, as it is the key to understanding where we are today.

Almost all great societies throughout human history at some point adopted gold and silver coinage as its form of money/currency because these two metals have met all of the above requirements.

Most important of all, people could trust in gold in silver, because these two metals have intrinsic value due to their rarity. Governments cannot just conjure gold and silver up out of thin air.
It takes time, effort, and great capital expense to force the earth to yield us its natural treasures of gold and silver. In other words, it takes labour!

Why is this important?
Because if it is possible to by-pass the scarcity requirement of money, then distinct advantages of control of economy and labour go to those who wield the power to create it.

Let us explain by showing you what some societies and economies have done with their money.

A study of history shows us that many great societies, economies, and nations have risen and fallen in tandem with the trust and widespread use of their currency (sound familiar?).

Many of these societies have followed a recurring pattern that looks something like this:

• Create Wealth Through Labour
• Debase the Currency
• Inflate the Currency
• Currency Devalues to the point of failure

History has shown us that many great economies follow this exact pattern, and without fail once an economy reaches a certain stage of inflation, it was only a matter of time before what was built around an inflated currency would come crashing down.

What does Debase the Currency Mean? When a government debases a currency, it removes from it anything of intrinsic value.

In ancient times this took the form of melting down gold and silver coins with a high degree of purity, and recasting them with less gold and silver content alloyed with 'dross' metals, until there was no more gold or silver left in them.

By doing this, the government that was issuing the currency could create more coins than they would have been able to create if they were required to use the original purity, because the dross metals were easier to acquire with a much smaller amount of labour.

Why would a government choose to do such a thing?

Perhaps it is because governments are much better received by their people if they do not pursue spending through greater taxation. If a government can simply create more money instead of raising it through taxes, it can spend how it likes; yet not suffer the wrath of the people.

Which brings us to our next point: Inflating the Currency. Now this is where many get confused, and for good reason.

Most people think that inflation is defined as the cost of things going up. That is not inflation; it is the result of inflation. Inflation is the act of adding more currency to the available pool of currency already in existence.

An important question is why are governments able to do this?

Historically, the ability to do this came from removing intrinsic value from the money, also called debasement of currency.

Let’s walk forward to today and see how this applies.

Following World War II, the governments of the world chose to use the US Dollar as the worlds reserve currency. This was in part due to the power of the US economy at the time, but also, and more importantly, because US Dollars were redeemable in gold. The worlds governments figured it was safe, as they could return US Dollars for gold any time they chose, thus propagating the idea that the US Dollar was 'as good as gold'.

This system worked well for a time, until the US continued to create more and more currency, and countries started trading in ever larger quantities of US Dollars for gold. As the US Treasury saw more and more of its gold reserves dwindle, the Administration of the day was forced to take action.

In 1971, President Nixon made a decision that changed the fate of the global economy; he closed the gold window. Instead of learning from the trouble the world had already experienced with unchecked inflation, and the fact that systems for global trade had grown up around the US Dollar as the Reserve Currency of the world, instead of changing it, the world accepted pure fiat money as the new currency for all transactions. This of course has never happened throughout history, and marked a departure from thousands of years of wisdom. We had entered the age of pure fiat currency, with the entire world trading in currency that is not tied to the discipline of gold or silver.

By removing the US Dollar from the gold standard and completely separating the dollars ties to gold, the US has effectively debased the currency to the point of removing all intrinsic value from it.

This has a similar effect to disconnecting the thermostat of your vehicle. Your engine (inflation) could be going critical as far as heat, and you would never know. At one point the steam comes pouring out from under the hood, but by then it is already too late, the damage has already been done.

You see, without the discipline of currency being able to be redeemed for something of intrinsic value, a government is able to create as much money as it wants, because it answers to nothing.

The important thing we must grasp from this, is that today, the governments of the world have backed themselves into a corner and have no choice but to continue inflating.

Knowing this, we must ask ourselves, what actions can we take to protect ourselves, and is there a way to position ourselves to potentially gain as this unfolds?

Gold and Inflation

Many have often asked the question recently as to why it seems our money just doesn't buy what it used to.

The world today is suffering from a terminal illness. This terminal illness is called inflation. But what is that, really?

The definition of inflation: Most people think inflation is 'prices going up'. Prices going up is not inflation, but it is a symptom of inflation.

The true definition of inflation is the act of adding currency to the amount of available currency. Let us say that again another way, inflation is not prices rising, inflation is when the government adds more dollars to the amount of existing dollars already in circulation.

Why is that bad, you might ask?

Let us go back to the basic law of supply and demand; If we assume consistent demand for a thing, if there is more of something, then it is worth less because it is more abundant. The reverse is also true, if there is less of something, it is worth more.

Put another way, if dollars were as common as rocks lying on the ground, then they wouldn't be worth much, because you could just pick them up. Well those dollars are becoming a lot more common.

The US government has ceased to report M3, which measures the amount of currency being added to the available pool of currency in circulation. We must ask ourselves why they would choose to stop reporting such things.

How much exactly are they printing? Since 1913 and the creation of the Federal Reserve Act, the value of the US Dollar has plummeted by over 96%. Currently, the numbers stands at close to 14.5 trillion USD, and is growing at a rate of almost 19% per annum.

Unfortunately, this inflation applies not only to the US, but to all western nations. As the US continues to inflate, to maintain some semblance of reasonable exchange rates, all countries that trade with the US must also inflate.

We look at the prices of food, fuel, and energy, and often wonder, are things really that much more valuable than a year ago, and therefore more costly? Or perhaps, is it that the very same items simply take more currency to purchase, because the currency is worth that much less?

Perhaps one of the things we should be truly concerned about is how to protect our wealth from the destructive forces of inflation.

An interesting thought, is that gold has been money for over 5000 years of human history. One of the reasons for this is that its 'scarcity' has remained fairly constant throughout time.

Many analysts on television will tell you that gold does not retain its buying power, yet they fail to point out that an ounce of gold thousands of years ago would clothe a person in the finest attire available, and today, and ounce of gold will still clothe a person in the finest attire available.

Contrast this with dollars for a moment. A hundred years ago, $20.00 would buy a person an entire wardrobe, yet today a person would be lucky to buy some undergarments and a pair of socks with that same $20.00.

Why Gold

We hope at this point we are in agreement that Gold and Silver in particular hold great value as a storehouse of wealth in today’s economy.

This leaves us with the perspective of deciding which vehicle best suits our needs.

Out of the many available ways to put our wealth into gold and silver related vehicles, it may behove us to understand the some of the reasons that storing wealth in gold and silver are beneficial:

• Gold is no one’s liability.
• Gold depends on no one’s promise to pay.
• Gold carries no credit risk.

If we are to take advantage of the fact that gold and silver has no counter-party risk, no credit risk, and no liability, we must also understand that by investing in ways that inherit these risks nullifies these values.

For example, by placing money into any investment vehicles related to gold and silver, you do of course gain if gold and silver are re-valued in relation to paper currency and buying power (the motive here is to see a return on your risk), yet you do not actually own the gold or silver, and therefore expose yourself to the same risks as if you had not invested in gold and silver at all.

If these electronic or paper assets are insolvent, you could of course be just another creditor or party in a class action lawsuit, attempting to recover your money.

When we consider these things, perhaps the best ways to own gold and silver is to really own it, physical gold and silver, not paper or electronic.

It is always wise to hold a small portion of precious metals in within easy physical reach (the motive here is insurance), though not necessarily in a bank safe deposit box.

However, when one reaches a point where a larger amount of wealth need be stored, one of the ways possible to do this is outside the jurisdiction you live, as long as you have total ownership of your holdings, total control over its delivery or liquidation, no exposure to counter-party risks, and all of the governance in place to verify the aforementioned.