Understanding what money is

Throughout the recent financial crisis, it has become increasingly apparent to the average person that money can be and has been created out of thin air. Although the complexity of the Federal Reserve and central banks around the world is beyond the scope of this article, it is important to obtain an introductory snapshot of what money is.

Our money is debt

In a speech in the Senate in 1833, Daniel Webster stated, “We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.”

All forms of paper currency are pieces of debt. They are obligations of each issuing entity to “make good” on a promise to repay. For example, the Federal Reserve, which is a private entity, prints money or issues electronic currency that it then loans to the U.S. government. This must be repaid with interest. Not many people realize this relationship between the Federal Reserve and the government. Saying “the government is printing more money” is a misinformed statement. As each new stimulus or bailout is signed into existence, the debt level related to money creation becomes an exponentially increasing issue.

Good money

Legal tender legislation has been created to give value to our currency as a medium of exchange. Good money, however, needs no legislation. Coins and forms of bullion made of precious metals have value based on their metal content. For thousands of years, silver and gold have been used as money. Although their value may have short-term fluctuations in relation to dollars, the purchasing power of precious metals remains fairly constant over the long term. Purchasing power is the ability to buy the same goods in the future as you can today. We have been trained to think that inflation is a natural thing, but essentially the increase in prices we see is the purchasing power of our dollars being eroded away.

In the 1950s, all dimes, quarters and half-dollars were made of 90 percent silver. Three dimes would buy a gallon of gas at that time. Did you know those same three 1950s dimes (based on their metal value) would buy a gallon of gas today? That is how good money maintains purchasing power. Even though it is cleverly disguised, our money today contains no silver at all.

Bad money

Even though ancient Rome used silver as money, it still found a way to inflate its money supply. Dishonest money began to circulate because small pieces of silver were clipped off the edges of coins, melted down and used to create new ones. How similar is this to what is occurring today? Since 1933, the dollar has lost over 97 percent of its value, because as more and more is created, value is virtually “clipped” from it. This has accelerated in the past 100 years because there is no connection between the dollar and any kind of valuable commodity.

Gresham’s Law

Under legal tender laws, bad money drives out good money. This means that most of the pre-1964 coins that are 90 percent silver have slowly been hoarded and removed from circulation. It is a rare occurrence to receive change back that contains any silver. If you do, don’t put it in the parking meter downtown!

As the gap continues to widen between good money and bad money, it is important to become aware of the fact that our monetary system affects every one of us every day. Since money affects all of our lives, it would be wise to follow the advice of long-standing federal judge Robert Hemphill, who said, “Money is the most important subject intellectual persons can investigate and reflect upon.” I encourage you to investigate.

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