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Articles and Commentary

Everybody Wants It
By Peter Degraaf
August 15, 2007

We can't function without it ... Very few people understand it! What is "it"? It is MONEY!

The dictionary defines money as: 'officially issued coins and paper currency that serve as a medium of exchange and a measure of value and may be used as payment for goods and services."

Just what is it that gives a colored piece of paper with the picture of a deceased leader on it 'value'? A piece of paper that motivates people to dig ditches, build bridges, and do thousands of other chores? The simple secret to the value of money is 'blind trust.' By accepting a piece of paper in exchange for goods delivered or services rendered, we TRUST that someone else will exhibit the same level of trust when we pass them the piece of paper.

This trust exists because of tradition. "It's always been this way."

To see if this trust is valid we need to go back in history. Before the Genesis flood, people lived and reproduced for centuries, thanks to the abundance of moisture in the air, (which blocked UV rays), thanks as well to the purity of oxygen in the air. (Air trapped in fossilized rocks has been measured to contain far more oxygen than today's air).

Families became huge, and very diverse in talents. Some became farmers, others turned to fishing. Still others made musical instruments. Heads of communities, and religious leaders had to be supported and they could only use so many chickens or bushels of wheat. A need arose to exchange goods and services. What was needed was an 'interim store of wealth.' It had to be something that would be accepted by the entire community as a temporary unit of value. Over the centuries a number of items have filled this role: salt, rice, tobacco, ornate sea shells, weapons, diamonds, jewelry, wampum, nails, all have served this purpose.

As trade increased, especially between states, two commodities became increasingly more popular as the 'bridge between trading parties.' These were gold and silver. Both are ideal because they are rare (gold) and scarce (silver). Their composition in pure form is identical, the world over. Aristotle (384 322 BC) observed: "Gold is durable, not like wheat, divisible, not like diamonds, convenient, not like lead, constant, not like real estate, and best of all, as jewelry, it has intrinsic value."

Before long rulers began to circulate gold and silver coins with their images stamped upon them. Babylon, Assyria, Medo-Persia, Byzantine, Egypt, Greece, and Rome all used gold and silver coins extensively.



Pictured is a Roman Gold Aureus dated 222-235 AD, in 'mint condition.' Current value in excess of $12,000.00 Courtesy forumancientcoins.com

To avoid having people 'shaving' gold off the edges, the various mints added edge lettering and later milled the edges. Gold and silver coins were ideal for trades, as it allowed the farmer to sell his crops and buy household goods, using the coins as 'in between'.

Financially successful people began to accumulate gold coins, and when they owned more gold than they wanted to carry around, they could take this gold to a warehouse. The warehouse owners would issue a 'warehouse receipt' for the gold. The owner of the receipt could sell the receipt or could loan it out at interest. It wasn't long before the warehouse owners (today we call them bankers), discovered that they could loan at interest, more warehouse receipts than they had gold on deposit, as long as everybody did not claim their gold at the same time. This practice is still with us today, and it is called 'fractional reserve banking.' People trusted these receipts because they were initially backed by gold.

In 1694 some bankers in England wanted to issue even more receipts, and they convinced the government to give them a monopoly over the issuance of money. In exchange they would allow the government to borrow money anytime it wanted (at interest of course). Thus began the Bank of England. Nation after nation has seen the establishment of 'central banks' like the bank of England. The USA resisted for many years but in 1913, on Jekyll Island through some back door maneuvering, the US Federal Reserve came into being. (For more info on the US Fed, visit Google and type in: "The Creature from Jekyll Island").

Ostensibly the 'Fed" was created to protect the integrity of the US dollar. How well has this integrity held up? Since 1913 the US dollar has lost 95% of its purchasing power! The US Fed has issued more money between 2000 and 2006 than all of the money issued in the US between 1776 and 1985! Try this website for actual price comparisons between various years. www.bls.gov (calculator is at top left of page).

I was surprised to learn, while doing research for this article, that the current Federal Reserve Bank is the fourth in US history! Truly, they come and they go!

"The unique power of a central bank, after all, is the power to create money, and ultimately, the power to destroy ..." wrote Paul Volcker, former head of the US Federal Reserve.

Fiat (un-backed) currencies historically lose 90% to 100% of their value in a century.

Canadian readers may be interested to find out about the performance of the Bank of Canada (established in 1935) and whose motto is: "We are Canada's Central Bank; we work to preserve the value of money by keeping inflation low and stable." Does it have a better track record than the US Fed? (Try this website for actual comparisons between various years www.bankofcanada.ca/en/rates/inflation_calc.html. A question I am often asked: "Is our money presently backed by gold?" The answer is no. While every central bank owns some gold, it does not come close to backing even a few percent of the money that is currently circulating.

For most of modern history, people could redeem banknotes for gold but gradually this backing became fragmental, as the sheer volume of new banknotes exceeded the gold that backed it up. Gold redeem-ability ended in Europe in 1914, and in the USA in 1933, when President Roosevelt went so far as to make it illegal for people to own gold. Central banks could still deal in gold, and in 1971 President Nixon stopped the French Central Bank from redeeming dollars for gold, thereby cutting the last link between gold and paper.

"Few economic subjects are more tangled, more confused than money ..." wrote Murray N. Rothbard -- economist, author and lecturer.

The US government claims to have 8,133 tonnes of gold at Fort Knox, but there has not been an independent audit since 1953, and recently this US gold has been referred to as 'deep storage gold', which seems to imply that it has not been dug out of the ground yet. In any event none of this gold is earmarked as a backup for the money supply.

The Canadian government sold its gold (over 1,000 tonnes) a number of years ago and put the proceeds into US dollars (38 billion dollars, that have since steadily depreciated as the US dollar dropped versus the Canadian dollar, while gold has been rising).

We find that the money supply in every country with a central bank is backed only by the government's ability to tax its citizens. The moment this function ceases, the money becomes worthless. When the North in the USA defeated the South, confederate money became worthless.

Another way in which money can become worthless is when the central bank produces too much of it in meeting the desires of politicians. In France between 1789 1799 paper money became worthless as a consequence of over-production and thousands of citizens, including royalty, were beheaded in the resulting chaos. This period of monetary instability in France, set the stage for Napoleon to come to power.



Shown here is a 1793 French Assignat, courtesy katespapermoney.com

In Germany between 1919 and 1923 money was being produced so fast that, towards the end, only one side was printed and it took a wheelbarrow full to buy a loaf of bread. Restaurant menus were printed on chalkboards.

Dozens of nations have seen hyperinflation ruin their currencies. To name a few: Romania, Bulgaria, Hungary, Austria, Greece, Poland, Russia, Bolivia, Brazil, Peru, Ukraine, Zaire, Georgia, Nicaragua, Argentina, and this year Zimbabwe is experiencing price inflation exceeding 1700%/yr.

Monetary inflation is not new. In 1525 Nicolas Copernicus observed: "Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity."

All of the currencies the world has ever seen, started out as coins, or were backed by gold and silver. Paper substitutes gained acceptance because they were backed by precious metal. Every gold or silver coin that was issued before 1980 is today worth more than the day it was minted, whereas every piece of paper money ever issued (except collector's items) is worth less as soon as it is one month old, compared to what it was worth on the day it was issued!

A tongue-in cheek definition of inflation is: "Destroying money without damaging the paper."

The longer people live without 'honest money' the more diverse this fiat money becomes. Currency was followed by checks and money orders, then credit and debit cards and finally computer entries.

What are the benefits of currency backed by gold? Price stability! From 1815 1914, when Europe was tied to the gold standard, consumer prices dropped gradually over the years, due to industrial innovations, and the absence of monetary inflation. Compare that to 2006, when paper money worldwide (including digital money), was being created at rates close to 50 times faster than gold was mined. (The world gold supply increases at roughly 1.5% per year).

Currency inflation spurs the growth of central government. It allows it to grow much larger than it could in a free society with honest money. Inflation via the printing press allows government to tap the property of private citizens without having to obtain their consent.

Two modern methods by which governments can grow, are by raising taxes (which has its limits), or by supplying government bonds to the central bank. The bank then deposits these bonds with the state banks or chartered banks, and there they are treated as an asset. Under fractional reserve banking laws, the bank can then loan out 8 times or 10 times the face value of the bond.

Who benefits from currency dilution? The people closest to the monetary spigot. Those who distribute and regulate the currency, as well as the initial recipients. Another group that benefits are those who understand the process and gear their investments into 'stuff', such as real estate, works of art, rare collectables, gold and silver. Who suffers most from currency dilution? People on a fixed income, without investments such as those mentioned above.

Current money supply growth is running at double digit rates in the following countries: Australia, Great Britain, China (+19%), Canada, Denmark, most of Euro-land, Sweden, Switzerland and USA.

The following example clearly illustrates the effect of 'monetary dilution'. Imagine yourself in an auction hall. The auction is about to start. You have decided which items you are interested in and the price you are willing to pay. Suddenly a man comes in carrying a briefcase. The briefcase is filled with hundred dollar bills. He gives several to everybody in the room. Question: "What is going to happen to the prices realized in that auction room?"

In the history of civilization there is not one country that escaped the destruction of its fiat currency once inflation became part of the process ... not one ... NOT ONE!

We arrive at the conclusion based on 5,000 years of history that MONEY IS A COMMODITY! If it is not a commodity then it cannot be money, it is simply a substitute for money.

About consistency: I am happy to be able to tell you that during the past 50 years I have steadfastly recommended gold as a necessary part of one's investment portfolio. Ever since it was 35.00 an ounce.

I close with a quote from Ayn Rand: "Paper (money) is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce wealth, paper is a check drawn by legal looters upon an account that is not theirs, upon the virtue of the victims. Watch for the day when it bounces, marked 'account overdrawn'."

Recommended reading:
  • Inflation - Fiat Money in France by Andrew Dickson White (available free at www.gutenburg.org/etext/6949)
  • The German Inflation of 1923 by Fritz K. Ringer
  • What has government done to our Money? by Murray N. Rothbard
  • The Law by Frederic Bastiat
  • The Penniless Billionaires by Max Shapiro


PETER DEGRAAF is an online stock trader with over 50 years of investing experience. He sends out a weekly e-mail alert to his subscribers. For a 60 day free trial contact him at itiswell@cogeco.ca or visit his website at www.pdegraaf.com.


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