Money: Gold and Silver, or Paper and Plastic?

“Money” of any kind obviously represents the fruit of our labors, because we trade our labors to get it. Of course, most of us really could not care less what form the money comes in, as long as we can spend it. However, when it comes to savings-or storing the “fruit” of our labors for future consumption-its form surely does matter.

The Modern Two

There are only two choices of currency today. In fact, the same question faces us about money as it often does regarding the packaging of our groceries: Paper or plastic?

“Paper” money is the printed kind. We could even include today’s common coins within this category, as they are used to make change for the other. This is “physical” currency (though it is not real money). We can hold these currencies in our hands.

At one time, these currencies represented specific claims on real money-gold and silver. The government-issued coins that people used in daily commerce were even made from these precious metals. Nevertheless, neither of these two facts are presently true.

There is another interesting form for modern currencies. The most common way our governments create “money” today is digitally. Nearly 98% of most Western national currencies are merely computer-based. They can be “created” infinitely by central banks with a few keystrokes. We “spend” such digital currencies using our computers, charge cards, and debit cards. So I call this the “plastic” form of a currency.

So whether we are talking “paper or plastic” we find that there is no real substance to any of today’s currencies. In short: Modern “money” is actually virtual, and not real.

The Historical Two

On the other hand, there are the historical monies: Gold and silver (and copper alloys for small change). More than 5,000 years of human history has proven these tangible forms of money to be true stores of value over time-and the reason is quite simple.

Unlike modern paper and plastic types of money, gold and silver bullion are themselves the fruits of someone else’s work. These metals have intrinsic value because they are scarce and very labor intensive to produce. In other words, they are real. They have substance. People have to work hard in order to find, refine, and then fabricate them into usable forms (e.g. coins, bars, jewelry, etc.). Thus, they are true money because they are also marketable commodities in and of themselves.

That is why bullion has been trusted to reliably store value (i.e. the fruits of labor) for thousands of years. In fact, at various times and in various places, people have dug up treasure caches that were hundreds and even thousands of years old. They have found to their delight that the gold and silver that they unearthed can actually buy MORE goods and services than when their original owners buried them.

In truth: No other earthly “money” can hold its value like these precious metals.

Inflation: An Unusual Phenomenon

Throughout all known monetary history, the bullion-based monetary systems were typically very stable. This created a situation where general “price inflation” was almost unheard of. The only exceptions were during times of natural disaster and war, or when governments reduced the size and/or purity of its precious metal coins.

Moreover, while labor rates typically remained stable silver bowl over time, prices for goods typically declined due to technological developments and improvements in business practices. For example, according to historical data from the U.S. Census Bureau, from about the year 1810 A.D. (when the U.S. dollar was backed by silver) to 1910 (when it was backed by gold) the U.S. price index fell by about 40%. In other words, what cost $1 in 1810 would have typically sold for about 60 cents in 1910.

Again, this savings was due mainly to the combination of the soundness of the monetary system, and the constant improvements of manufacturing and production efficiency, and other advancements in business. It is not that the value of gold and silver rose, but rather that the prices of other things in relation to gold and silver fell. The improved efficiency that new technologies and production methods brought to the productive segments of the economy (manufacturing, farming, etc.) provided most of this price “discount.”

Gold and silver simply held their value. Consequently, those that stored their labors in gold and silver found that they could eventually buy more products as, over time, the general prices dropped. Their cost of living fell over time, and thus, their standard of living increased.

However, the next century was a different story entirely as the United States “money” greatly devalued from 1910 to 2010. Because of this, general price inflation became so widespread that people today actually think that it is “normal.”

Turn that around, however. Could a 100-year phenomenon truly be “normal” when considered within the context of over 5,000-years of history? No. The “abnormal” conditions are those that we live in today.

In other words: We are supposed to be enjoying the same stable monetary systems-and corresponding cost of living decreases with standard of living increases-that our forefathers enjoyed for several millennia before us.

Leaky Stores of Value

So how bad has the U.S. dollar declined? The numbers will tell the grim story. However, before I show them, let me encourage you to be of good cheer. I will give you some time-tested suggestions afterwards.

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