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Why Gold Really Is Money

Guest post by: Michael Farrell

Article Overview: It is an unfortunate historical anomaly where people think the paper in their wallets is money, suggests Mike Farrell with aspenIbiz. Read this short post to understand that money is something that holds value over time and is not subject to devaluation and loss of purchasing power as a result of overspending and a runaway supply of the currency that the government and central banking systems mandates be used as a substitute for money. Also learn about strategies to reduce the risk of further loss of purchasing power.

Why Gold Really Is Money

Since there is an unfortunate historical anomaly, where people think the paper in their wallets is money, it is worth a brief discussion about Why Gold Really Is Money.

Historically many things have been used as money. Cattle have been used as money in many societies including the Roman society. Salt has been used as money also during Roman times and it is the origin of the word, salary.

The North American Indians used seashells and during World War II, cigarettes were used as money. Money is simply a medium of exchange and a store of value.

Using this simple definition, almost anything could be used as money however if it is hard to exchange and does not store value very well, people don't want it and will not use it, given a choice.

Over thousands of years, precious metals have emerged as the best form of money with gold and silver being the best. In addition, silver has many industrial uses so this has lead to gold being used the most as the best store of value.

There are very good reasons for this and they are not new reasons. Aristotle, in the fourth century BC, defined why gold is money and the reasons are listed here.

First, it is durable. You can't have money disintegrating in your pocket or in bank vaults; this is why wheat or other grains are not used for money. If it can rot, or be eaten by insects, it will not last and will not store value.

Second, it is divisible. This is the reason diamonds are not used because if you split it into pieces, you destroy the value of the whole.

Next, it is consistent. Real estate or land is not used because one piece is always different from another piece.

Another reason that gold is money is that it is convenient. Other metals like lead or copper are not used because coins, of sufficient value, made of these metals would be too large to easily handle.

The final reason that gold is money is that it can not be created out of thin air. I invite you to read another post on this blog about John Law and previous attempts to create gold out of paper by central banking systems in modern times. The blog post can be read here.

These are the reasons why gold really is the best money ... it is the result of the market process that is seeking an optimum means of storing value and making exchanges. It is not a gold bug type of religion or a barbaric superstition; it is just good, common sense.

Over time the market has identified, as a result of many transactions, the best use of various items. It has determined aluminum is good for making aircraft; steel is good for the structures of buildings; uranium is good for nuclear power plants; and it has determined paper is good for making books, magazines, and newspapers. If you try to make airplanes out of lead, or money out of paper, you are in for a crash.

But using gold as money is not something that suits governments of sovereign countries. They have learned they can only directly tax people, to obtain money for their pet projects, so much before the citizens revolt and throw them out of office. Paper money gives governments the ability to print as much money as they want for their pet projects, as the cost is indirectly passed on to the citizens in the form of a hidden tax called inflation.

Until recently, the paper money you carried in your wallet was a Gold, or Silver Certificate, which was a receipt for real money like gold on deposit at your bank or a central storage location. People carried and used these receipts as a medium of exchange for goods and services because it was more convenient than carrying chests of gold.

Today's dollars say Federal Reserve Note because they are not redeemable for anything besides more Federal Reserve Notes and they are not linked to any real money, like gold or silver, stored at a central location. These money substitutes are called fiat currencies and have zero intrinsic value because they are not redeemable for anything. They are accepted as a medium of exchange for goods and services because the issuing government says you must accept them or else the government will put you in jail if you do not use them.

After the current system collapses, and it will as all previous paper money systems in the past have collapsed, something will have to replace it and the replacement will almost certainly will be related to a digital gold currency. These will be updated versions of previously used Bank Notes with digital receipts that represent the amount of gold you have on deposit in some centralized warehouse location and these digital receipts will be electronically transferrable. This way they will meet the definition of money for the reasons defined by Aristotle and provided earlier in this post; essentially the new money, the digital gold currency, will be linked to something that stores value and be easy to use as a medium of exchange for goods and services.

If you prepare and implement a multiple flags strategy, you can have accounts with digital gold currency providers outside of the US and diversify your risk of continued devaluation of the currency and loss of purchasing power. The digital gold currency providers will be an excellent alternative to storing large amounts of gold in a safe deposit box within the US.

Since the central banking system, with a fiat currency, and a runaway money supply, is the only game in town (so to speak), it is wise to be savvy like the insiders in order to reduce the impact of this continuing loss of purchasing power that will significantly decrease our standard of living.

I favor a quote from Steve Forbes ... Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to being savvy with our money and using alternative wealth creating strategies; this will be they key to resolving our financial crisis.

To gain the necessary financial education, it is best to pursue association with, access to, and membership in, a wealth creation community. As a result, you will learn about alternative wealth creating strategies and consider investments in non dollar- denominated assets ... perhaps emerging markets ... perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants ... perhaps precious metals, rare earths, water rights, oil, natural gas, potash mines, or gold mines ... things hard to build, difficult to replace, and costly to substitute ... definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

For those wanting protection of their purchasing power in gold, there are several ways that may be appropriate to obtain this protection. These include direct ownership in minted coins, use of gold exchange-traded funds, gold mutual funds, and junior gold stocks. Many are investigating having part of their IRAs in gold, silver, precious metals, and non-dollar denominated currencies.

In addition, for those that truly believe sovereign risk is the greatest risk we all face, it is wise to learn how to implement a multiple flag strategy to diversify this risk or provide protection against higher taxes, capital controls, hyper-inflation, civil unrest, erosion of personal liberty, and the rise of a police state. With a multiple flag system, you consider taking preparations like, but not limited to, establishing a foreign bank account, purchasing some real estate overseas, seeking alternate sources of income, dual citizenship, and carrying multiple passports.

I trust this article provides a little more insight into the unfortunate historical anomaly where people think the paper in their wallet is money. The paper in their wallet is a currency which is a government substitute for money. It is not linked to anything and its value is only what the issuer, ie the US government for the US Dollar, says it is worth. As a reference point, the purchasing power of today's (circa 2010) US Dollar has been reduced to pennies compared to the value of the US Dollar in 1913 which is when this version of the central banking system was established. This loss of purchasing power is a result of the runaway supply of money provided by the Federal Reserve Bank so the US Government can continue to spend more money than it takes in from tax collections. If we remain ignorant of history, we are doomed to repeating its mistakes.

I will continue to provide examples of things we need to learn, the secrets of the insiders, as part of being savvy with our money, and introduce alternative wealth creating strategies, in future articles and updates at my blog over the next few weeks.

In addition, a good book to read would be the "The Creature from Jekyll Island" by G Edward Griffin; it is A Second Look at the Federal Reserve.

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Article Tags: Central Banking System, Federal Reserve Bank, Fiat Currency, Financial Education, Gold, Mike Farrell aspenIbiz



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