America’s Money: From Good Money to Bad Money
Too Much Debt, Not Enough Money
Spanish-milled one-half real (silver) used in Colonial America
By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some.…The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose. John Maynard Keynes, Economic Consequences of the Peace, 1920.
Economists use the term create when speaking of the process by which money comes into existence. For most countries, money is created as debt. A central bank, such as the U.S. Federal Reserve Bank, creates money (debt), which is loaned to the U.S. Treasury at interest. Depending on what numbers are printed on the piece of paper, a person can buy a candy bar or a new computer. The value of the piece of paper has been created out of nothing, in the truest sense of the word.
With the establishment of the Federal Reserve Bank in 1913 and abandonment of the gold standard in 1971, America has embarked on what Alan Greenspan has at times referred to as the great experiment. What the central bankers will not tell you is that this experiment has been tried before throughout history. The record is one of complete failure. As the famous philosopher Voltaire (1694–1778) once said, “Paper money eventually returns to its intrinsic value—zero.”
Our founding fathers understood what could happen to paper money. They used Continental currency (notes) to help finance the American Revolution. Have you ever heard the phrase “not worth a Continental”? That is where it came from. Here is a picture of Continental paper money.
The Continental money became essentially worthless. Perhaps that is why our founding fathers put the following language into the U.S. Constitution:
“No state shall…make anything but gold and silver coin a tender in payment of debts.” Article 1, Section 10
Un-backed paper money simply isn’t sound. What characteristics constitute sound money? For sound money, we need the following characteristics:
- recognized medium of exchange
- divisible into units
- trustworthy store of value
Of course, it is this last point where un-backed paper currencies inevitably fail. When people realize that their paper money is continually losing value, they search for alternatives, such as precious metals, which cannot be printed up out of thin air. With this in mind, we need to realize our unsound financial system today is not one that rewards the traditional values of honesty and integrity (like saving money). Inflation is a loss of purchasing power of money and a transfer of wealth from savers and lenders to borrowers. Understanding this fact is important when it comes to saving and investing. The ultimate test of purchasing power is gold.
